Public Disclosure Authorized Report on the Republika Srpska part of the Public Disclosure Authorized PROJECT FINANCIAL STATEMENTS of the ENHANCING SMALL AND MEDIUM ENTERPRISES ACCESS TO FINANCE PROJECT of the Ministry of Finance and Treasury of Bosnia and Herzegovina Public Disclosure Authorized financed by: - IBRD Loan No. 7839-BA - IBRD Loan No. 81670-BA FOR THE YEAR ENDED DECEMBER 31, 2015 Public Disclosure Authorized ENHANCING SMALL AND MEDIUM ENTERPRISES ACCESS TO FINANCE PROJECT of the Ministry of Finance and Treasury of Bosnia and Herzegovina CONTENTS 1 Introduction 1 2 Independent Auditor's Report 4 3 Project financial statements for the year 2015 6 4 Notes to the project financial statements 11 APPENDICES A Designated account statement - IBRD Loan No. 81670-BA 12 B.1 SoE Withdrawal Schedule of IBRD Loan No. 7839-BA 13 B.2 SoE Withdrawal Schedule of IBRD Loan No. 81670-BA 14 C.1 Reconciliation between World Bank's disbursement statements in EUR and IBRD Loan account in EUR according to the balance sheet; SoE Withdrawal Schedule of IBRD Loan No. 7839-BA 15 C.2 Reconciliation between World Bank's disbursement statements in EUR and IBRD Loan account in EUR according to the balance sheet; SoE Withdrawal Schedule of IBRD Loan No. 81670- BA 16 ENHANCING SMALL AND MEDIUM ENTERPRISES ACCESS TO FINANCE PROJECT of the Ministry of Finance and Treasury of Bosnia and Herzegovina 1. Introduction 1.1 Objectives and activities of the Project The State of Bosnia and Herzegovina (the "State"), through its Ministry of Finance and Treasury obtained a loan from the International Bank for Reconstruction and Development (IBRD) - the World Bank Group towards the costs of the Enhancing SMEs Access to Finance Project (the "Project"), Although there are long term structural issues that to be addressed to improve the business environment and competitiveness of the enterprise sector, the current global financial instability implies a focus on dealing with the access to term finance, as the most critical short-term vulnerability for the SME sector. The project development objective is to enhance access to finance for small and medium enterprises in Bosnia and Herzegovina in the context of global financial crisis. Primary beneficiaries of the project would be small and medium enterprise contributing to growth of regional economy and export, which would benefit from improved access to finance. The project would also help the banking sector in Bosnia and Herzegovina to withstand the global economic downturn that has triggered financing difficulties for the enterprise sector, In general, the outcomes of the Project will be measured by two groups of key indicators: (i) number of loans and the amount of medium and long-term credit extended to SMEs in Bosnia and Herzegovina, including exporters, (ii) the payment performance of the sub-borrowers in the project - the number and volume of non-performing sub-toans, and (iii) the investment and export performance of the sub- borrowers, and the impact on their employment level. Performance indicators of SMEs - final beneficiaries would be monitored throughout the project to offer lessons which may be helpful in designing future crisis response schemes for SMEs in Bosnia and Herzegovina and elsewhere. 1.2 Components and activities of the Project The project has one component: A. Credit Line Component B, Project Management and Monitoring Component (the Federation of Bosnia and Herzegovina only) A. Credit Line Component The Credit Line Component will include funding through PFIs to creditworthy private enterprises for viable projects. The eligible financing will cover investments and/or incremental working capital in industry, agro-processing and the related service sectors. Loan funds will be on-lent by the Entities' MoFs via their respective PlUs to participating financial institutions (PFIs). The sub-loans to PFIs will be extended back-to-back to PFIs loans to final borrowers and under the similar terms and conditions. The decision to extend a sub-loan to final borrowers will be left to PFIs. The PFIs will bear the full credit risk. The credit decisions would be based on thorough financial appraisal of borrower's financial condition and prospects. The sub-loans would be available in EUR or in BAM referenced to EUR. 1 ENHANCING SMALL AND MEDIUM ENTERPRISES ACCESS TO FINANCE PROJECT of the Ministry of Finance and Treasury of Bosnia and Herzegovina 1. Introduction 1.2 Objectives and activities of the Project (continued) A. Credit Line Component (continued) Subsidiary financing to PFIs will be extended on variable interest rate basis adjusted semi-annually. Interest rates will be market determined, based on preceding six-months LIBOR rates plus a spread for a selected IBRD loan product. The entities' Ministries of Finance will add a spread needed to cover the cost of project implementation and the related risks which will be reflected in Subsidiary Financing Agreements with PFIs. The spread will be reviewed, from time-to-time, and could be adjusted in line with market dynamics. PFIs will determine the principal, amortization and interest payment schedules for sub-loans to final borrowers on a case-by-case basis, based on cash-flow projections. PFI sub-loans to final borrowers will be extended at domestic credit market rates, and will include a by borrowers to PFIs would generally be made according to typical repayment schedules used by the respective PFI. There will be no sub-loan prepayment penalties, and interest will be charged on a declining balance formula. The final beneficiaries must be privately owned and duly licensed and registered with the tax authorities. They should be active in manufacturing, food production or agro-processing, or in related services. Enterprises will be required to demonstrate prior operating experience in the activity to be financed and should be in a sound financial condition. The creditworthiness of final borrowers will be assessed by the PFIs. Sub-loans would finance investments, repair or modernization, and/or incremental working capital. Sub-loans proceeds could be used for the equipment and raw materials, repairs to facilities and only minor construction. Each credit application would be accompanied by a viable business plan, financial statements before and after the project, and cash-flow projections. B. Project Management and MonitoringComponent The Project Management and Monitoring Component finances costs of the project management and monitoring, including financial management, audits, procurement, environmental compliance supervision and other activities related to a project management and coordination in the Federation of Bosnia and Herzegovina ("FB&H"). 2 ENHANCING SMALL AND MEDIUM ENTERPRISES ACCESS TO FINANCE PROJECT of the Ministry of Finance and Treasury of Bosnia and Herzegovina 1. Introduction (continued) 1.3 Financing of the Project 1.3.1 IBRD Loan No. 7839-BA The State is the borrower of the International Bank for Reconstruction and Development (IBRD) Credit No. 7839-BA, amounting to the equivalent of EUR 47,800,000. Under the terms of a subsidiary finance agreement between the State and Republika Srpska ("RS"), funds of the equivalent of EUR 19,120,000 have been lent to RS. Categories of cost items to be financed out of the proceeds of the Credit, the allocation of the amounts of the Credit to each category and the percentage of expenditure for cost items so to be financed in each category are as follows: Amount of the Item Loan allocated % of expenditure to be (in EUR) financed (4) Sub-loans under Part 2.B of the Project 19,072,200 100% Amount payable pursuant to Section (5) Front-end fee 47,800 2.03 of this Agreement in accordance with Section 2.07 (b)of the General Conditions Subtotal 19,120,000 1.3.2 IBRD Loan No. 81670-BA The State is the borrower of the International Bank for Reconstruction and Development (IBRD) Credit No. 81670-BA, amounting to the equivalent of EUR 90,100,000. Under the terms of a project agreement between the State and RS, funds of the equivalent of EUR 36,040,000 have been lent to RS. Categories of cost items to be financed out of the proceeds of the Credit, the allocation of the amounts of the Credit to each category and the percentage of expenditure for cost items so to be financed in each category are as follows: Amount of the % of expenditure to be Item Loan allocated fiped (in EUR) financed (2) Sub-loans under Part 2.B of the Project 35,949,900 100% Amount payable pursuant to Section (3) Frnonenfe 90,100 2.03 of this Agreement in accordance with Section 2.07 (b) of the General Conditions Subtotal 36,040,000 3 Deloitte d.o.o. Deloitte Jadranska bb 71000 Sarajevo Bosnia and Herzegovina Tel +387 (0)33 277 560 Fax +387 (0)33 277 561 www.delolite.com/ba 2. Independent Auditor's Report To the State of Bosnia and Herzegovina, Ministry of Finance and Treasury Attn. of Minister of Finance and Treasury H.E. Mr. Vjekostav Bevanda Report on the project financial statements We have audited the accompanying project financial statements of the Republika Srpska part of the Enhancing Small and Medium Enterprises Access to Finance Project (the "Project"), which comprise of Summary of sources and uses of funds, Balance sheet, Designated account statement, Statements of Credit withdrawals as of and for the year ended December 31, 2015 and a summary of significant accounting policies and other explanatory notes for the years then ended, financed under IBRD Loan No. 7839-BA and IBRD Loan No. 81670-BA. These project financial statements have been prepared on the cash basis of accounting based on International Public Sector Accounting Standard ("IPSAS"), as described in Note 4.1. Responsibility for the project financial statements The State of Bosnia and Herzegovina, i.e. the management of the project implementation unit (the "Management") is responsible for the preparation and fair presentation of these project financial statements on the cash basis of accounting based on IPSAS, as described in Note 41, and on "Guidelines: Annual Financial Reporting and Auditing for World Bank - Financed Activities" issued by Financial Management Sector Board ("FMSB"), and for such internal control as the Management determines is necessary to enable the preparation of the project financial statements that are free from material misstatement, whether due to fraud or error, Auditor's responsibility Our responsibility is to express an opinion on the project financial statements based on our audit. We conducted our audit in accordance with the International Standards on Auditing and "Guidelines: Annual Financial Reporting and Auditing for World Bank - Financed Activities" issued by FM SB, Those Standards and Guidelines require that we plan and perform the audit to obtain reasonable assurance about whether the project financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the special purpose project financial statements. An audit also includes assessing of the accounting principles used and significant estimates made by the Management, as well as evaluating the overall statement presentation. We believe that our audit provides a reasonable basis for our opinion. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see http://www.deloite.com1ba for a detailed descrption of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Member of Deloitte Touche Tohmatsu Limited Report on the project financial statements (continued) Opinion In our opinion, the accompanying project financial statements present fairly, in all material aspects, the financial position of the Project as of December 31, 2015 and of the funds received and disbursed during the years then ended, in accordance with basis of accounting described in Note 4.1. Report on other requirements In addition, with respect to the Statements of Expenditure, adequate supporting documentation has been maintained to support claims to the World Bank for reimbursements of expenditures incurred; and all expenditures included in withdrawal applications and reimbursed against are eligible for financing under the Project. Deloitte d.o.o. Sead Batanovid, director and licensed auditor N. Mirza Bihorac, licersed auditor - K De0otteI Sarajevo, Bosnia and Herzegovina May 6, 2016 5 ENHANCING SMALL AND MEDIUM ENTERPRISES ACCESS TO FINANCE PROJECT of the Ministry of Finance and Treasury of Bosnia and Herzegovina Project financial statements for the year ended December 31, 2015 (all amounts in EUR, unless otherwise stated) 3. Project financial statements for the year 2015 3.1 Summary of sources and uses of funds under the IBRD Loan No. 7839-BA, IBRD Loan No. 81670-BA and Government contribution Actual Cumulative Cumulative Cumulative Cumulative Ref. 2015 2015 2014 budget variance FINANCING IBRD Loan No. 7839-BA 3.1.1 - 19,120,000 19,120,000 - IBRD Loan No. 81670-BA 3.1.2 4,997,909 19,980,899 36,040,000 16,059,101 Government contribution - IBRD Loan No. 7839-BA 3.1.3 - 6,496 - (6496) TOTAL FINANCING 3.2 4,997,909 39,107,395 55,160,000 16,052,605 PROJECT EXPENDITURE By Category Sub-loans under Part 2.B of the Project 4,003,822 37,966,820 55,022,100 17,055,280 Front-end fee - 137,900 137,900 Bank charges 257 7,776 - (7,776) TOTAL EXPENDITURE 3.2 4,004,079 38,112,496 55,160,000 17,047,504 PROJECT EXPENDITURE By Component Credit line component 4,003,822 38,104,720 55,160,000 17,055,280 Project management and monitoring coordination 257 7,776 (7,776) TOTAL EXPENDITURE 3.2 4,004,079 38,112,496 55,160,000 17,047,504 6 ENHANCING SMALL AND MEDIUM ENTERPRISES ACCESS TO FINANCE PROJECT of the Ministry of Finance and Treasury of Bosnia and Herzegovina Project financial statements for the year ended December 31 2015 (all amounts in EUR, unless otherwise stated) 3. Project financial statements for the year 2015 (continued) 3.1.1 Summary of sources and uses of funds under the IBRD Loan agreement No. 7839-BA Actual Cumulative Cumulative Cumulative Cumulative Ref. 2015 2015 2014 budget variance FINANCING IBRD Loan No. 7839-BA 19,120,000 Initial deposit - 2,500,000 2,500,000 Direct payments - 10,713,652 10,713,652 SoE replenishments - 5,858,548 5,858,548 Front-end fee - 47,800 47,800 TOTAL FINANCING 3.1 - 19,120,000 19,120,000 19,120,000 PROJECT EXPENDITURE By Category Sub-loans under Part 2.8 of the Project - 19,072,200 19,072,200 19,072,200 Front-end fee - 47,800 47,800 47,800 TOTAL EXPENDITURE 3.2 - 19,120,000 19,120,000 19,120,000 7 ENHANCING SMALL AND MEDIUM ENTERPRISES ACCESS TO FINANCE PROJECT of the Ministry of Finance and Treasury of Bosnia and Herzegovina Project financial statements for the year ended December 31, 2015 (all amounts in EUR, unless otherwise stated) 3. Project financial statements for the year 2015 (continued) 3.1.2 Summary of sources and uses of funds under the IBRD Loan agreement No. 81670-BA Actual Cumulative Cumulative Cumulative Cumulative Ref. 2015 2015 2014 budget variance FINANCING IBRD Loan No. 81670-BA 36,040,000 Initial deposit - 5,000,000 5,000,000 Direct payments - - - SoE replenishments 4,997,909 14,890,799 9,892,890 Front-end fee - 90,100 90,100 TOTAL FINANCING 3.1 4,997,909 19,980,899 14,982,990 36,040,000 16,059,101 PROJECT EXPENDITURE By Category Sub-loans under Part 2.B of the Project * 4,003,822 18,894,620 14,890,798 35,949,900 17,055,280 Front-end fee - 90,100 90,100 90,100 - Bank charges 257 1,280 1.023 - (1.280 TOTAL EXPENDITURE 3.2 4,004,079 18,986,000 14,981,921 36,040,000 17,054,000 * Difference of EUR 4,033,822 for cost category 'Sub-loans under Part 2.B of the Project", between Actual 2015 and Cumulative 2015 in Note 3.1.2, and Total 2015 and Cumulative 2014 in Appendix B.2, relates to the expenditure made in 2015, but not claimed through SoE applications until the date of this report. These bank charges were not claimed from the World Bank as they are illegible expenses that should be reimbursed from the Government of Republika Srpska. 8 ENHANCING SMALL AND MEDIUM ENTERPRISES ACCESS TO FINANCE PROJECT of the Ministry of Finance and Treasury of Bosnia and Herzegovina Project financial statements for the year ended December 31, 2015 (all amounts in EUR, unless otherwise stated) 3. Project financial statements for the year 2015 (continued) 3.1.3 Summary of sources and uses of funds under Government contribution (IBRD Loan No. 7839-BA) Actual Cumulative Cumulative Cumulative Cumulative Ref. 2015 2015 2014 budget variance FINANCING Government contribution - 6,496 6,496 - (6,496) TOTAL FINANCING 31 - 6,496 6,496 - (6,496) PROJECT EXPENDITURE By Category Bank charges 6,496 6,496 - (6496) TOTAL EXPENDITURE 3.2 - 6,496 6,496 - 6,496 9 ENHANCING SMALL AND MEDIUM ENTERPRISES ACCESS TO FINANCE PROJECT of the Ministry of Finance and Treasury of Bosnia and Herzegovina Project financial statements for the year ended December 31, 2015 (all amounts in EUR, unless otherwise stated) 3. Project financial statements for the year 2015 (continued) 3.2 Balance sheet as of December 31, 2015 showing accumulated funds of the Project and bank balances concerning World Bank funding December 31, December 31, Ref. 2015 2014 ASSETS Project expenditure under IBRD Loan No. 7839-BA 3.1.1 19,120,000 19,120,000 Project expenditure under IBRD Loan No. 81670-BA 3.1.2 18,986,000 14,981,921 Project expenditure under Government contribution 3.1.3, 6,496 6,496 38,112,496 34,108,417 Designated account - 1BRD Loan No. 81670-BA A 994,899 1,069 994,899 1,069 Total assets 39,107,395 34,109,486 LIABILITIES 1BRD Loan No. 7839-BA C1 19,120,000 19,120,000 IBRD Loan No. 81670-BA C.2 19,980,899 14,982,990 Government contribution - IBRO Loan No. 7839-BA 6,496 6,496 Total liabilities 39,107,395 34,109,486 Signed and authorised by: nen VMJni Duiko qKmc Director of Investment-Development Project Manager Bank of Republika Srpska Banja Luka, May 6, 2016 10 ENHANCING SMALL AND MEDIUM ENTERPRISES ACCESS TO FINANCE PROJECT of the Ministry of Finance and Treasury of Bosnia and Herzegovina Project financial statements for the year ended December 31, 2015 (all amounts in EUR, unless otherwise stated) 4. Notes to the project financial statements 4.1 Basis of preparation and accounting records These project financial statements have been with the International Public Sector Accounting Standard: "Financial Reporting under the Cash Basis of Accounting" issued by the Public Sector Committee of the International Federation of Accountants, and incorporate the accounting policies below, which have been consistently followed in all material respects and comply with the "Guidelines: Annual Financial Reporting and Auditing for World Bank - Financed Activities", issued by the Financial Management Sector Board. 4.2 Accounting policies The Project's fiscal year is January 1 to December 31 for the recording of all transactions. Cash basis of accounting All receipts and expenses under IBRD Loan are recorded on actual receipt and payment basis of accounting as per approved categories. Project expenditure is stated at original cost on the balance sheet Direct payments Direct payments concern the amounts paid directly from the IBRD Loan accounts of the World Bank. Statement of Expenditure (SoE) Statements of Expenditure are used to state the expenditure under IBRD Loans during a certain period. These statements are sent to the World Bank's disbursement department who authorises the payment of the expenditure through the Designated accounts. Currency conversions The reporting currency is Euro (EUR). Sources and use of funds (payments to suppliers and contractors) in currencies other than EUR have been converted to EUR using the currency rate at the moment of the transaction. Bank balances, recorded on the balance sheet at year-end, have been converted at year-end rate. Designated accounts This is the total amount of the withdrawals from the IBRD Loan accounts for the Project. IBRD Loan accounts are in EUR. Interest on Designated account Interest earned on the Designated account belongs to the Borrower. 11 ENHANCING SMALL AND MEDIUM ENTERPRISES ACCESS TO FINANCE PROJECT of the Ministry of Finance and Treasury of Bosnia and Herzegovina Project financial statements for the year ended December 31, 2015 (all amounts in EUR, unless otherwise stated) APPENDIX A DESIGNATED ACCOUNT STATEMENT Account owned by: Ministry of Finance and Treasury of Bosnia and Herzegovina Account No.: 5551101010451873 Depository Bank: Nova Banka a.d. Address: Kralja Alfonsa XIII 37 a Related Credit: IBRD Loan No. 81670-BA Currency: EUR Ref. EUR Opening balance January 1, 2015 1,089 Add: World Bank replenishments B.2 4,997,909 4,997,909 Deduct: Payments to suppliers - Expenditure under IBRD Loan No. 81670-BA 4,003,822 Bank charges 257 4,004,079 Ending balance December 31, 2015 3.2 994,899 12 ENHANCING SMALL AND MEDIUM ENTERPRISES ACCESS TO FINANCE PROJECT of the Ministry of Finance and Treasury of Bosnia and Herzegovina Project financial statements for the year ended December 31, 2015 (all amounts in EUR, unless otherwise stated) APPENDIX B.1 SoE Withdrawal Schedule of IBRD Loan No. 7839-BA Sub-loans Initial under Part 2.B Front-end Total Total deposit of the Project fee application replenished Previous years - 19,072,200 47,800 19,120,000 19,120,000 Cumulative 2015 - 19,072,200 47,800 19,120,000 19,120,000 13 ENHANCING SMALL AND MEDIUM ENTERPRISES ACCESS TO FINANCE PROJECT of the Ministry of Finance and Treasury of Bosnia and Herzegovina Project financial statements for the year ended December 31, 2015 (all amounts in EUR, unless otherwise stated) APPENDIX B.2 SoE Withdrawal Schedule of IBRD Loan No. 816700 Sub-loans Initial under Part 2.B Front-end Total Total deposit of the Project fee application replenished Previous years 5,000,000 14,890,798 90,100 14,980,898 14,982,990 Total Direct payments - Application 5 * - - - 4,997,909 Total SoE applications - - 4,997,909 Total 2015 - - - 4,997,909 Cumulative 2015 5,000,000 14,890,798 " 90,100 18.984.720 19,980,899 * Application No.5 was replenished in 2015, but expenses were made in 2014. " Difference of EUR 4,033,822 for cost category "Sub-loans under Part 2.8 of the Project; between Actual 2015 and Cumulative 2015 in Note 3.1.2, and Total 2015 and Cumulative 2014 in Appendix 8.2, relates to the expenditure made in 2015, but not claimed through SoE applications until the date of this report. 14 ENHANCING SMALL AND MEDIUM ENTERPRISES ACCESS TO FINANCE PROJECT of the Ministry of Finance and Treasury of Bosnia and Herzegovina Project financial statements for the year ended December 31, 2015 (all amounts in EUR unless otherwise stated) APPENDIX 0.1 Reconciliation between World Bank's disbursement statements in EUR and IBRD Loan account in EUR according to the balance sheet; SoE Withdrawal Schedule of IBRD Loan No. 7839-BA Changes in IBRD Loan (in EUR) Original amount 19,120,000 Disbursed in previous years 19,120,000 Total disbursed in 2015 Cumulative disbursements as of December 31, 2015 19,120,000 Calculated undisbursed balance as of December 31, 2015 . Undisbursed balance as per World Bank Summary for December 2015 - 15 ENHANCING SMALL AND MEDIUM ENTERPRISES ACCESS TO FINANCE PROJECT of the Ministry of Finance and Treasury of Bosnia and Herzegovina Project financial statements for the year ended December 31, 2015 (all amounts in EUR, unless otherwise stated) APPENDIX C.2 Reconciliation between World Bank's disbursement statements in EUR and IBRD Loan account in EUR according to the balance sheet; SoE Withdrawal Schedule of IBRD Loan No. 81670-BA Changes in IBRD Loan (in EUR) Original amount 36,040,000 Disbursed in previous years 14,982,990 Withdrawal 5 4,997,909 Total disbursed in 2015 4,997,909 Cumulative disbursements as of December 31, 2015 19,980,899 Calculated undisbursed balance as of December 31, 2015 16,059,101 Undisbursed balance as per World Bank Summary for December 2015 16,059,101 16