Project "Fostering Productive Innovation", financed under Agreement No. 8463-KZ between the government of the Republic of Kazakhstan and International Bank of Reconstruction and Development Financial Statement for the Year ended December 31, 2016 And Report of Independent Auditors Table of Content Independent Audit report Financial Statement Statement of receipts and disbursements of fund... ..........................1-2 Notes to financial statement ........................................... 3-7 Ten.: +7 727 331 31 34 TOO "BDO Kazakhstan" I aOc: +7 727 331 31 35 yn. ra6AynnHa, 6 info@bdokz.com AnmaTbi, Ka3aXCTaH www.bdokz.com A15H4E3 Tel: +7 727 331 31 34 BDO Kazakhstan LLP Fax: +7 727 331 31 35 6 Gabdulin Street info@bdokz.com ALmaty, Kazakhstan www.bdokz.com A15H4E3 INDEPENDENT AUDITORS' REPORT To the Management of the Project "Fostering Productive Innovation", financed under Agreement No. 8463-KZ between the International Bank of Reconstruction and Development and the government of the Republic of Kazakhstan Opinion We have audited the financial statements of the Project "Fostering Productive Innovation", financed under Agreement No. 8463-KZ between the International Bank of Reconstruction and Development and the government of the Republic of Kazakhstan (hereinafter, "Project ), which consist of the statement of receipts and disbursements for the year then ended 31 December 2016, as well as a summary of significant accounting policies and other explanatory notes. In our opinion, the accompanying financial statements fairly present, in all material respects, the cash receipts and disbursements for the year then ended 31 December 2016 and cash position as at 31 December 2016 in accordance with the International Public Sector Accounting Standard (IPSAS) "Financial Reporting under the Cash Basis of Accounting" published by the International Federation of Accountants (IFAC) and in accordance with the requirements of the International Bank of Reconstruction and Development. Basis for Opinion We have performed our audit in accordance with the International Standards on Auditing. Our responsibilities under those standards are described in the section Auditor's Responsibility for the Audit of the Financial Statements herein. We are independent in relation to the Company, as required by the Code of Ethics for Professional Accountants of the International Ethics Standards Boards for Accountants (Code of IESBA) and the ethical requirements applicable to our audit of the financial statements in Kazakhstan, and we performed other ethical responsibilities of ours in compliance with those requirements and the Code of Ethics for Professional Accountants. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Responsibility of the Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with the IPSAS "Financial Reporting under the Cash Basis of Accounting" published by the International Federation of Accountants (IFAC) and in accordance with the requirements of the International Bank of Reconstruction and Development, and for such internal control as management determines is necessary to enable preparation of the financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing as applicable, matters relating to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternatives but to do so. Those charged with governance are responsible for overseeing the Company's financial reporting process. ToaspHiento C orpaHm4eHHoi OTueTcrueHHOCTWO "BO Kazakhstan", 3apertcTpposaHHOe B COOTBeTCTBHm C 3aHOHOAaTelbCTBOM Pecny6iaH a3aaxCTaH, nawerca yMaCTHXKOM meWAyHapoAHoro 06beAHHeHHa BDO International Limited, 6psraHcKoro o6ulecIa C OTeTCreHiocTbio, orpaHmeeHoR rapaHTmeH era yacrTHHKOB, HMAnReTCR 4aCTbM MemAyHapoAHo4 ceTH He3aaBCHMbK HOMinaHMA BDO. BDO Kazakhstan, a limited liability partnership, registered under the laws of the Republic of Kazakhstan, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms, INDEPENDENT AUDITORS' REPORT (continued) Auditor's Responsibility for the Audit of the Financial Statements Our objective are to obtain reasonable assurance about whether the financial statements are free of material misstatement whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high degree of assurance, but is not a guarantee that an audit conducted in accordance with the International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or errors and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of the audit in accordance with the International Standards on Auditing, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: * Identify and assess the risks of material misstatement in the financial statements, whether due to fraud or errors; design and perform audit procedures responsive to those risks; and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting risk of material misstatement resulting from fraud is higher than the detection risk of material misstatement due to errors, since fraud can involve collusion, forgery, intentional omissions, misrepresentations of information or override of internal controls; * Obtain understanding of the internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. * Evaluate the appropriateness of accounting policies used, and the reasonableness of accounting estimates, and appropriateness of disclosures prepared by management; . Evaluate the overall presentation of the financial statements, its structure and content, including disclosures, we also evaluate whether the financial statements present the underlying transactions and events so as to ensure their fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit finding, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them aLL relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements for the current period and, therefore, the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. INDEPENDENT AUDITORS' REPORT (continued) The engagement partner on the audit resulting in the independent auditor's report is Igoshina Natalia. . K LLP -BDO Kazakhstan>> State audit license for audit activities on the territory of the republic of Kazakhstan: N2l 50003448 issued by the Ministry of Finance of the Republic of Kazakhstan on 19 of February 2015 Dire rT.A. <29>> may 2017 Auditor N.Igosh' Auditor Qualification c f b MD-0000040, issued by the Qualificati e for certification of auditors of the Republic of Kazakhstan 08.08.2011 Republic of Kazakhstan, ALmaty GabdulLina, 6 Project "Fostering Productive Innovation" financed under Agreement No. 8463-KZ between the Government of the Republic of Kazakhstan and the International Bank of Reconstruction and Development Financial statement STATEMENT OF RECEIPTS AND DISBURSMENTS OF FUNDS For the year ended 31 December 2016 2016 2015 Notes Proceeds from Proceeds from IBRD loan the Government Total IBRD loan the Government Total of the RK of the RK US dollars The cash balances as of 1V of January - - Receipts Cash receipts to special account 3,000,000 - 3,000,000 Direct payments 5,381,036 301,480 5,682,516 Refunds Total receipts under the project 5 8,381,036 301,480 8,682,516 Expenses Part 1: Development of the Knowledge Base for Innovation JRG Grants and SSG Grants under Part 1 of the 7,982,411 - 7,982,411 - Project Consulting services 99,770 - 99,770 - Taxes and fees 22,492 - 22,492 - 8,104,673 - 8,104,673 - Part 2: Innovation Consortia Part 3: Consolidation of the Technology Commercialization Cycle Part 4: Strengthening Coordination of the National Innovation System; Enhancing the Capacity of the Existing Institutional Structures Notes on pages from 3 to 7 form an integral part of the financial statements 1 4e o E L- . E N 00 en0 '4- C~~~ mn o o onn% o i l l .'") i co i i i 0.N 0 E rZ ý r C ' 6> 4c: E o o m m 0r Q> .44-- =e z u :D c_- 0 S EO -O -. C - E u c I 0 e z ze c> wa c> - '- 0tth z- 4* 4-14 > ID - o- .' 4-- W LU 0 o 4;- 4 o . X - .v- 0 cu - 4.Ju .0 C5 V Q - c> CLt .. v>~ - . --3 2 t a c. - w -u Q? × u o. E - Se eE . ±:«<æs.a ---2cw u.- 03, '-,i.co *.4 0 ae a S> o r. W ul - - 04 r-a 4 0- o006 CL C2 ILLå (. I tnC Project "Fostering Productive Innovation" financed under Agreement No. 8463-KZ between the Government of the Republic of Kazakhstan and the International Bank of Reconstruction and Development NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2016 1. GENERAL PROVISIONS Kazakhstan business environment Operating environment in the Republic of Kazakhstan Project activities are carried out in Kazakhstan. Accordingly, the project is exposed to risks incidental to economic and financial markets of Kazakhstan, which demonstrate characteristics of a country with developing market economy. The legal system, tax system and legislative base continue developing but are subject to various interpretations and frequent changes, which together with other legal and financial impediments intensify the problems encountered by the entities operating in Kazakhstan. Nature of business Project "Fostering Productive Innovation" (hereinafter, >) is financed by International Bank of Reconstruction and Development (hereinafter, "IBRD") and Government of the Republic of Kazakhstan ("the Government"). Loan agreement No. 8463-KZ (the "Agreement") between the Government of the Republic of Kazakhstan ("the Government") and International Bank of Reconstruction and Development ("IBRD") was signed on 9 June 2015 roga and ratified on 2 February 2016 ("Project inception date"). In accordance with the Agreement, IBRD provides a loan in the amount of USD 88,000,000 (hereinafter, "the Loan") for the purpose of realization of Project ""Fostering Productive Innovation" (hereinafter, >), which is repayable by the Government on 15 June and 15 December of each year starting from 15 June 2021 till 15 December 2035. The closing date of funds withdrawal under the Agreement is 31 December 2020. The implementation of the project started in 2016. In accordance with the approved budget for 2016, the proceeds and expenditures of the Project funds from the proceeds of the IBRD loan and from the co-financing of the external loan from Government in the amount of 9,863 US dollars and 610 US dollars, respectively. The planned budget amounts are taken at the conditional exchange rate established by the Government of the Republic of Kazakhstan. The purpose of the Project is a promotion of a high-quality, relevant research and commercialization of technologies. The project is carried out by the Ministry of Education and Science of the Republic of Kazakhstan that acts as an Executive Agent on behalf of the Republic of Kazakhstan. The Project comprises the following components: Part 1: Development of the Knowledge Base for Innovation Promoting high-quality, nationally relevant research and development and advance human capital activities through the provision of Junior Researcher Group Grants, Senior Scientist Group Grants, and PhD Research and Training Grants. Part 2: Innovative Consortia Promoting collaboration among existing scientific research institutes and design bureaus and scientific and engineering profile Laboratories in Kazakhstan: (a) in respect of research and development; activities for purposes of improving the productive sectors of the Borrower's economy, through the provision of Productive Sector Consortia Grants; and (b) in respect of the deliver / of social services, including improving the livelihood of the urban and rural population, through the provision of Inclusive Innovation Consortia Grants. 3 Project "Fostering Productive Innovation" financed under Agreement No. 8463-KZ between the Government of the Republic of Kazakhstan and the International Bank of Reconstruction and Development NOTES TO THE FINANCIAL STATEMENTS (continued) Part 3: Consolidation of the Technology Commercialization Cycle Promoting the development of start-up companies through: A. Establishment of the Early Stage Venture Capital Fund ("ESVC Fund") for purposes of providing ESVC Investments to finance ESVC Subprojects, including provision of management support; B. Provision of consultants' services to develop technology and innovation ideas into viable commercial projects, through innovation brokerage and deal flow generation activities, pursuant to criteria set forth in the POM; C. Establishment and operation of Technology Acceleration Offices outside of Kazakhstan; and D. Establishing; the capacity of existing Technology Transfer Offices at major Kazakh universities and enhancing their capacity through the provision of Training. Part 4: Strengthening Coordination of the National Innovation System: Enhancing the Capacity of the Existing Institutional Structures Promoting better coordination among key stakeholders and relevant authorities and ministries of the Borrower in the National Innovation System, by designing and establishing an innovation observatory, consisting of a formal framework to monitor innovation performance of the public and private sectors, through provision of goods, consultants' services, all pursuant to criteria set forth in the POM. Part 5: Support Project Implementation Support the PMU in carrying out the Project management, monitoring and evaluation, awareness raising activities and capacity development. Allocation of expenses by components in the statement of disbursements is carried out on the basis of comparison of work description in the Agreement and work description in primary documents. 2. BASIS OF PREPARATION These financial statements have been prepared in accordance with the International Public Sector Accounting Standard (IPSAS) "Financial Reporting under the Cash Basis of Accounting" published by the International Federation of Accountants (IFAC), and in accordance with requirements of International Bank of Reconstruction and Development. The approved Project budget broken down by categories of expenses under the loan agreement does not represent public information and accordingly comparison of the budget with the actual amounts is not presented. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies described below have been consistently applied in the reporting periods presented in these financial statements. Cash method of accounting Cash method of accounting recognizes transactions and events when cash under the Project is received or paid. Presentation currency of the financial statements These financial statements are presented in US dollars (hereinafter, the "US dollars"). Foreign currency transactions Transactions in foreign currency are translated into the reporting currency at the rate of exchange ruling at the date of such transactions. Direct payments from IBRD are translated into USD at the rate of exchange established by IBRD at the date of reconversion. Receipts from the 4 Project "Fostering Productive Innovation" financed under Agreement No. 8463-KZ between the Government of the Republic of Kazakhstan and the International Bank of Reconstruction and Development NOTES TO THE FINANCIAL STATEMENTS (continued) Government of the Republic of Kazakhstan are translated to US dollars at the foreign exchange rates established by the National Bank of the Republic of Kazakhstan at the date of reconversion. The foreign exchange differences arising upon translation of transactions denominated in other currencies in US dollars are presented as a net value from a change in foreign exchange rates. Categories of expenses The agreement determines the main categories of Expenditures financed by the loan, quantity for each category as wel as a share of financing for each category. In accordance with the Agreement, there are the following categories of expenses: * JRG Grants and SSG Grants under Part I of the Project * PhD Research and Training Grants under Pari 1 of the Project; * PSC Grants, 11C Grants, and consultants' services under Part 2 of the Project; * Establishment of the ESVC Fund, ESVC Investments, and management fees, and audits, under Part 3.A of the Project; * Consultants' services under Part 3.B of the Project; * Operating Costs under Part 3.C of the Project; * Consultants' services under Part 3.C of the Project. Cash receipt Based on the terms and conditions of the Agreement, the Government of the Republic of Kazakhstan is obliged to repay interest and principal of the Loan. These payments are recorded in the Government accounts and are not reflected in these financial statements. 15 December 2035 is the date of the last payment of the Government under the Loan. Allocation of expenses The distribution of expenses by components in the report on receipt and expenditure of funds is made on the basis of a comparison of the description of work in the Agreement and the description of work in the primary documents. 4. CASH To conduct operations on Loan No.8463-KZ special accounts have been opened in the Department of the Treasury, Astana, for making cash payments to suppliers: * KZ10125USD1002300142 US dollars * KZ190702012250023001 KZT The cash balances as at 31 December and the special account transactions for the year ended 31 December 2016 are as follows: US dollars 2016 2015 Balance at 31 December 276,363 Including balances denominated in: US dollars 276,363 Tenge - 5 Project "Fostering Productive Innovation" financed under Agreement No. 8463-KZ between the Government of the Republic of Kazakhstan and the International Bank of Reconstruction and Development NOTES TO THE FINANCIAL STATEMENTS (continued) 5. DIRECT PAYMENTS AND REPLENISHMENT OF ACCOUNT Direct payments under the Project are made by IBRD and the Government of the Republic of Kazakhstan directly to suppliers, which are determined in accordance with the terms and conditions of the Agreement. Direct payments for Suppliers and cash replenishment of Project for the year ended 31 December 2016, according to following withdrawal application: US dollars No. of withdrawal Date of Replenishment Direct Total application withdrawal of account payments 1 21 October 2016 50,000 50,000 2 4 November 2016 2,950,000 2,950,000 3 13 December 2016 456,621 456,621 4 13 December 2016 456,621 456,621 5 13 December 2016 456,621 456,621 6 13 December 2016 395,738 395,738 7 13 December 2016 385,845 385,845 8 13 December 2016 365,297 365,297 9 13 December 2016 365,297 365,297 10 13 December 2016 365,297 365,297 11 13 December 2016 456,621 456,621 12 13 December 2016 426,180 426,180 13 13 December 2016 426,180 426,180 14 13 December 2016 456,621 456,621 15 14 December 2016 368,097 368,097 Total 3,000,000 5,381,036 8,381,036 6. UNUSED PORTION OF LOAN As at 31 December 2016 the unused portion of loan from IBRD amounts to USD 79,618,964. 7. PROJECT RECEIPTS AND EXPENSES FOR CUMULATIVE TOTALS Statement of cash distribution of Project receipts and expenses for cumulative totals are as follows: Cumulative from the inception date of Cumulative disbursements from the inception date the project through 31 December 2015 of the project through 31 December 2016 Proceeds from Proceeds from the US Dollars IBRD loan the Total IBRD loan Government of Total Government of the RK the RK Receipts Cash receipts to special IBRD - - 3,000,000 - 3,000,000 account Returning from special account - - - - - - Direct payments from IbRD - - - 5,381,036 - 5,381,036 Direct payments from the Government - 301,480 301,480 of the Republic of Kazakhstan Total receipts under the project - - - 8,381,036 301,480 8,682,516 6 Project "Fostering Productive Innovation" financed under Agreement No. 8463-KZ between the Government of the Republic of Kazakhstan and the International Bank of Reconstruction and Development NOTES TO THE FINANCIAL STATEMENTS (continued) Cumulative from the inception date of theCumulative disbursements from the inception date project through 31 December 2015 of the project through 31 December 2016 US Dollars Proceeds from Proceeds from the IBRD loan the Government Total IBRD loan Government of the Total of the RK RK EXPENSES Part 1: Development of the Knowledge Base for Innovation JRG Grants and SSG Grants under Part 1 of the Project --- 79241- 79244 Consulting services 99,770 - 99,770 Taxes and fees 22,492 - 22,492 8,104,673 - 8,104,673 Part 2: Innovation Consortia Part 3: Consolidation of the Technology Commercialization Cycle Part 4: Strengthening Coordination of the National Innovation System; Enhancing the Capacity of the Existing Institutional Structures Part 5: Support Project Implementation Goods - - - 21,217 21,217 Consulting services 183,013 183,013 - - - -97,250 97,250 Operational expenses97207,5 Taxes and fees - 301,480 301,480 Total payment under the - 8,104,673 301,480 8,406,153 program Other expenses I (income) Commission withheld at replenishment of special account Net expenses from change in foreign exchange rates Total other expenses - - Total payment under the- 8,104,673 301,480 8,406,153 program 8. DATE OF ISSUE These financial statements have been approved for issue by the Vice-Minister of the Ministry of Education and Science of the Republic of Kazakhstan on 29 may 2017. 7 BDO Kazakhstan LLP BDO Kazakhstan, a limited liability partnership, registered 6 Gabdullin Street under the laws of the Republic of Kazakhstan, is a member Almaty,of BD International Limited, a UK company limited by Almat, Al H4E3guarantee, and forms part of the international BDO network of Kazakhstan independent member firms. TeL: +7 727 33131 34 BDO is the brand name for the BDO network and for each of Fax: +7727 331 31i35 the BDO Member Firms. www.bdokz.com