MUNICIPAL DEVELU PMENT FUND OF GEORGIA CREDIT NO.5178-GE LOAN NO.8607-GE (SECOND REGIONAL DEVELOPMENT PRO)ECT) Special Purpose Project Financial Statements and Independent Auditor's Report For the Year Ended 31 December 2018 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL DEVELOPMENT PROJECT CREDIT NO.5178-GE LOAN NO. 8607-GE TABLE OF CONTENTS Page STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS 1 INDEPENDENT AUDITOR'S REPORT 2-3 SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018: Summary of sources and uses of funds 4 Statement of financial position 5 Summary of expenditure by activity 6 Statement of expenditure ("SOE") 7 Statement of designated account 8 Notes to the special purpose project financial statements 9-13 1 . B a ckg ro u nd ............ ................... .............................. ........................ . -9 2. Accounting policies...............................iies....................... ......... 9 3. Designated accountoun.............................................. ,.........................................10 4 . B a sis of fu nd in g .......................................................................................................... 10 5 . M ethods of w ithd raw al..................................................................................................10 6. Statem ent of expenditure............................................................................................11 7 . Pre pay m e nts .............................................................................................................1 1 8 . Project expenditure by fund............................................, .............................................11 9. Reconciliation of desingated account...................1 ...................................................... . 12 10. Com m itm ents and contingencies....................................................................................13 11. O perating environm ent..................................... ...................................................... 13 12. Events subsequent to the balance sheet date .................................................................. 13 13. Approval of special purpose project financial statements ................................................... 13 MUNICIPAL DEVELOPMENT FUND OF GEORGIA STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 Management of the Second Regional Development Project (the "Project"), financed under the Credit Agreement No. 5178-GE dated 9 November 2012 and Loan Agreement No. 8607-GE dated 7 May 2016, implemented by the Municipal Development Fund of Georgia ("MDF") is responsible for the preparation of the special purpose project financial statements that present the financial position of the Project as at 31 December 2018, the summary of sources and uses of funds, summary of expenditure by activity, statement of expenditure ("SOE"), statement of designated account in accordance with the World Bank's Financial Management Sector Board's "Guidelines: Annual Financial Reporting and Auditing for World Bank Financed Activities" (the "World Bank Guidelines"). In preparing the financial statements, management is responsible for: * Properly selecting and applying accounting policies; * Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; * Providing additional disclosures that enable users to understand the impact of particular transactions, other events and conditions on the Project, financial position and its sources and uses of funds and movements in designated accounts; Management is also responsible for: * Designing, implementing and maintaining an effective and sound system of internal controls, throughout the Project; * Maintaining adequate accounting records that are sufficient to show and explain the Project's transactions and disclose with reasonable accuracy at any time the financial position of the Project, and which enable them to ensure that the special purpose project financial statements to comply with the Guidelines on Annual Financial Reporting and Auditing for World Bank Financed Activities issued by the World Bank's Financial Management Sector Board; " Maintaining statutory accounting records in compliance with Georgian legislation; * Taking such steps that are reasonably available to them to safeguard the assets of the Project; and * Preventing and detecting fraud and other irregularities. The special purpose project financial statements for the year ended 31 December 2018 were authorised for issue on 28 June 2019 by the Management. On behalf of Management: GeeSoe 0e6 Levan Shfrvadz Exec uti Director Deputy Direct Chief Financial Officer 28 June 2019 28 June 2019 1 Deloitte & Touche LLC King David Business Center 12 Merab Aleksidze Sreet Tbilisi, 0171, Georgia Tel: +995 (32) 224 45 66 Fax: +995 (32) 224 45 69 deloitte.ge INDEPENDENT AUDITOR'S REPORT To the management of the Municipal Development Fund of Georgia: Opinion We have audited the accompanying special purpose project financial statements of the Second Regional Development Project (the "Project") financed under the Credit Agreement No. 5178-GE dated 9 November 2012 and Loan Agreement No. 8607-GE dated 7 May 2016 (the "Agreements"), implemented by the Municipal Development Fund of Georgia, which comprise the Project's summary of sources and uses of funds for the year ended 31 December 2018, statement of financial position as at 31 December 2018, summary of expenditure by activity, statement of expenditure ("SOE") and designated account statements for the year ended 31 December 2018 and a summary of significant accounting policies and other explanatory notes (collectively referred to as the "special purpose project financial statements"). In our opinion, the accompanying special purpose project financial statements for the year ended 31 December 2018 are prepared, in all material respects, in accordance the World Bank's Financial Management Sector Board's Guidelines: Annual Financial Reporting and Auditing for World Bank Financed Activities" (the "World Bank Guidelines"). Basis for Opinion We conducted our audit in accordance with International Standards of Auditing ("ISAs"). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Fund in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (the "IESBA Code") together with the ethical requirements that are relevant to our audit of the financial statements in Georgia, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Emphasis of Matter Basis of Accounting and Restriction on Distribution and Use We draw attention to Note 2 to the special purpose project financial statements, which describes the basis of accounting. The special purpose project financial statements are prepared to assist the Project's management to comply with the financial reporting provisions of the Agreement, which requires the special purpose project financial statements to comply with the World Bank Guidelines. As a result, the special purpose project financial statements may not be suitable for another purpose. This report is intended solely for use by the Project's management in reporting the information to the Government of Georgia and International Bank for Reconstruction and Development. This report is not intended for the benefit of any other third parties and we accept no responsibility or liability to any party other than the Project's management in respect of the report. Should any third party take decisions based on the contents of the report, the responsibility for such decisions shall remain with those third parties. Our opinion is not modified in respect of this matter. Delote refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ('DTTL"), its network of member firms, and their related entities, DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as "Deloitte Global") does not provide services to clients. Please see for a more detailed description of DTTL and its member firms. S2019 Deloitte & Touche LLC. All rights reserved. 2 Project Completion Date We draw your attention to note 1 of these special purpose project financial statements, which discloses that on 2 April 2018 the closing date of the loan and credit has been prolonged to 31 December 2019. Our opinion is not modified in respect of this matter. Responsibility of Management and Those Charged with Governance for the Financial Statements Management is responsible for the preparation of these special purpose project financial statements in accordance with the basis of accounting described in Note 2 and in conformity with the World Bank's Financial Management Manual for World Bank Financed Investment Operations and for such internal control as management determines is necessary to enable the preparation of special purpose project financial statements that are free from material misstatement, whether due to fraud or error. Those charged with governance are responsible for overseeing the Project's financial reporting process. Auditor's Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the special purpose project financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error 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 an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: * Identify and access the risks of material misstatement of the financial statements, whether due to fraud or error, 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 a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. * Obtain an understanding of 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 Organisation's internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Stuart Le hton On behalf of Deloitte and Touche LLC 28 June 2019 Tbilisi, Georgia 3 о о о ��� � гv w� �о �д �р �.'. о о в р н to о® и оо© � г. м иА df _ ,b й� б о О ® � tЛ N� PU Ва Q7 i о о«T й дl И � С �+ й � "} � � � `r � г и ® ы ы ,�� и� +-� ® Q С � � И � � � � L д Ш UI �' И д � 64 G и N '"� ^ ' @1 б! иар �-rn� � Е и� � а ® а., н й �''� � � 9Nц` VN" � �т V@ �+у � гл И �� го w _ � � j т Ет й с �� � � � �� � � .✓ с '® йi �И О r^ � � � . у��ъ ат� q� � °; �м .+л-гйм р' v-� ar ry -° v м" � й � W С н � С � М � г!J О N s. N � и ц)� О'� М т [,� чМ Е �� Q� ri С71 {71 о т1 М Н lfI 61 и М V Ь 9� � �ооп �n � t] '� г+ PJ b' lV И N М t� м •-� `� �� С гслч и' м� т tЭ Е м � "� ш т_ м и �о С � � N � G � � x�i с го � � 19 � �' � Е �'ос4 оо ���® Q� г ы д' W v-1 Ъ о 4 � t9 GN� О ++О � N 'а о 04 � � И . а L t57 �'� t м (�г Q�� � g � �м � v rn� � сл с � 4= Е � ,` 'i '+_ о"� т .с� ° 'ь'' С � U1 .�, ,у v � , F h0003 И� Г�Мшм о р1 f�н �9 j пз � ��Э а р и� � � �О С7 ,--1 р qQ�. V т rt Oi о �у. д W о N et © t1 f6 ®. п б_ �н т-�+5тит.. rnишсл Иtр. д У�� g� g Ф оо ш g М г+i N,--ё о�. 99 oJ' t7 и rv ,® � м й� ip'� ��- г J С N И И N М(�l 1� л n3 h N � О д' f6 .ь� О �� N U+O.� � том М�' ry�N ha а-�+ А� а Fi �' д� Nнй7 т гVW Ш' �� N �у С='О 0. (� Е М ш� а� � т � � и � g �.� � ^ гС ��CV � а т и � � � U 11�6] � а] Д �у и ,ч и �� � т��1 vн н � олr* е иvи �� и м r,-, w '� �� � � LL• � 'р в� .-, т v,,.� о о оо � и n. еo- N а� ш о rv � Е .�, ~ W® Фм ошао � о но у rчм,� qq д' v и� р� о�'+� � . �� 44,� CN Nти� о©о� й�,°П, а' м о�а'� �`�°о` Q � G Q W ь � О�'� й r� м о v м � о �n ,а � � ^i nч ,.`°,i г^а � > .�-, .. � . . . ''�° �� и т т �+ N "1 ~ г1 ~ " `� � р И сЛ с А � �.� � � � � � Г+1 � ® � {1 q�i '� т ��.. � �. � � Я Ш С �� гв та� �� � ьи а ,� �о � � Е д � � М J и д) ��� U W к с h � 7� Б .� � М �грΡqООС� �Z 6Д1 � � й ?-�� a�i �_ � W Vы � �q � Ui � IЛ � С tn� � w � � ` � � � г С] '� О F ц�� С ( . ��{�а U1 �� l� ЬL �� г v v �И, М �,а и 10 1,`� V сл ���� Ош � G�G � � ��о•`-'уо а, � �о�v � �' `_ а а � �,�+ О и, о �°ош иь�'.� т го® 'лд [п 6.::> �Q � с М В�� 1�LLЗ� r.� С с� FrnиQ�� �� � Fц;� ®"�°_ .�� �р �� н �1-1 �i� � �и ш�°зЁ� ®m�Fw � т � Е'^ �с� � ? а � Q® е� �F �, �v и а га сч-Jг "++-ш� � н >-а= ди.+N N а ��а с � �(� 1� � �L f� � г L го л tr�' и ы� Q ш,`� й г�о � . Д т И� го � Д r.с �ч � ` ,� _ �1JJ�® �Q.� 6��>' `�¢а �r1-а�сши сю � Gи°-дН +-,F-� k�'ц си �(�}6J..! U1W Qvaa г�hа0°С�О®w�tЭO�ii� i' ŭUa`а� ��.г О С7ш � 1�- MUFJMV.,- . DEVELOPM ENT FUND OF GEORGIA SLCOWT DEVELOPMENT PROJECT CRUZLXXI'V p .; A.L78-GE LOAN NO . 607-GE STATEMENT OF FINANCIAL POSITION FOR THE YEAR ENDED 31 DECEMBER 2018 (in US Dollars) 31 December 31 December Note 2018 2017 ASSETS IDA designated account 3,9 1,201,487 2,982,014 IBRD designated account 3,9 1,000,000 - Prepayments 7 844,601 583,§81 TOTAL ASSETS 3,046,088 3,565,695 LIABILITIES Payables 269,142 359,284 TOTAL LIABILITIES 269,142 359,284 NET ASSETS 2,776,946 3,206,411 Funds received: IDA credit 28,953,467 28,953,467 IBRD loan 1,022,500 22,500 Government of Georgia 8,162,418 7,731, Total funds received 38,138,385 36,707,675 Expenditure: Project expenditure 35,320,639 33,470,813 Total Expenditures 35,320,639 33,470,813 Foreign exchange loss, net (40,800) (30,451) TOTAL NET ASSETS 2,776,946 3f206 411 On behalf of Management: 4'orioe $6 00eli Levan Sharvadze' Executive Director Deputy Director - Chief /ncial Off icer 28 June 2019 28 June 2019 The notes on pages 9 to 13 form an integral part of these special purpose project financial statements. 5 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL DEVELOPEMENT PROJECT CREDIT NO.5178-GE LOAN NO 8607-GE SUMMARY OF EXPENDITURE BY ACTIVITY FOR THE YEAR ENDED 31 DECEMBER 2018 (in US Dollars) Actual Planned* Variance Project Cumulative Cumulative activities Year ended as at Year ended Cumulative as Year ended as at 31.12.2018 31.12.2018 31.12.2018 at 31.12.2018 31.12.2018 31.12.2018 Unaudited Unaudited Unaudited Unaudited Component 1 Infrastructure investment 1,066,267 28,954,940 1,000,000 28,888,673 (66,267) (66,267) Component 2: Institutional development 783,559 6,343,199 400,000 5,959,639 (383,559) (383,559) Front end fee - 22,500 - 22,500 - TOTAL EXPENDITURES 1,849,826 35,320,639 1,400,000 34,870,813 (449826) (449,826) * The initial budgeted figures are updated several times during the year. Planned figures for the year ended 31 December 2018 included in the financial statements represent the final budgeted figures reflected in the State Budget for FY2018 adjusted to the accrual model. On behalf of Management: Geo esh i Levan Sharvadze Execut ve Dir r Deputy Director -A ief Fip ncial Officer 28 June 2019 28 June 2019 The notes on pages 9 to 13 form an integral palt of these special purpose project financial statements. 6 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL DEVELOPEMENT PROJECT CREDIT NO.5178-GE STATEMENT OF EXPENDITURE ("SOE") FOR THE YEAR ENDED 31 DECEMBER 2018 (in US Dollars) Works and goods Withdrawal and consulting Withdrawal No. application date Total SOE services Operating costs 15 08.01.2018 480,182 480,182 16 27.07.2018 410,824 410,824 - 17 25.12.2018 803,776 733,228 70,548 1,694,782 1,624,234 70,548 The total expenditure under withdrawal application No. 15 is attributable to 2017 and recorded as expenditure in the 2017 financial statements respectively. The withdrawal application for these expenses were submitted to International Bank for Reconstruction and Development in 2018. On behalf of Management* Geoige h Levan Sharvadze Executive rector Deputy Director - ef Fip ncial Officer 28 June 2019 28 June 2019 The notes on pages 9 to 13 form an integral part of these special purpose project financial statements. 7 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL DEVELOPMENT PROJECT CREDIT NO.5178-GE LOAN NO 8607-GE STATEMENT OF DESIGNATED ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2018 (in US Dollars) Account No. 202250947 Depository Bank State Treasury Address 16 V. Gorgasali street Tbilisi, 0114 Georgia Opening Balance 2,982,014 Funds received from IDA - Present outstanding amount advanced to DA 2,982,014 DA closing balance as at 31 December 2018 1,201,487 Add: Amount of eligible expenditure paid 9 1,780,527 Total advance accounted for 2,982,014 Account No. 202260947 Depository Bank State Treasury Address 16 V. Gorgasali street Tbilisi, 0114 Georgia Opening Balance - Funds Received From IBRD 1,000,000 Present outstanding amount advanced to DA 1,000,000 DA closing balance as at 31 December 2018 1,000,000 Add: Amount of eligible expenditure paid 9 - Total advance accounted for 1,000,000 On behalf of Management: Glqo e E.evan Sharvadze Extutiv Diiector Deputy Director - Cef Fina al Officer 28 June 2019 28 June 2019 The notes on pages 9 to 13 form an integral part of these special purpose project financial statements. 8 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL DEVELOPMENT PROJECT CREDIT NO.5178-GE LOAN NO 8607-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in US Dollars) 1. BACKGROUND Municipal Development Fund ("MDF") was established by the Government of Georgia by Presidential Decree # 294 of June 7, 1997 to manage allocated credits/loans received from the International Development Association ("IDA"), the International Bank for Reconstruction and Development ("IBRD"), the Asian Development Bank ("ADB") and the European Investment Bank ("EIB") and monitor the implementation of infrastructure sector projects. The International Development Association Credit Agreement No. 5178-GE (the "Agreement") in the amount of 19.8 million Special Drawing Rights ("SDR") was signed between the Government of Georgia ("GoG") and International Development Association ("IDA") on 9 November 2012 ("inception"). Loan Agreement No.8607-GE on additional financing in the amount of USD 9 million was signed between the Government of Georgia ("GoG"), International Bank for Reconstruction and Development ("IBRD") and International Development Association ("IDA") on 7 May 2016. The main objectives of the loans are: to provide financing for investment subprojects for the urban regeneration of Tskaltubo including the rehabilitation of municipal infrastructure and utilities in the central area, upgrading of public spaces and parks, restoration of public buildings, refurbishment of the exterior and interior of the Vani museum; enhance the institutional capacity and performance of the National Tourism Administration of Georgia, the Agency for Culture Heritage Preservation of Georgia, the National Museum, MDF and other local and regional entities, The initial closing date of the loans was 30 December 2018. On 2nd April 2018, the closing date of the loans has been prolonged to 31 December 2019. 2. ACCOUNTING POLICIES Basis of accounting - These special purpose project financial statements have been prepared in accordance with the World Bank's Financial Management Sector Board's "Guidelines: Annual Financial Reporting and Auditing for World Bank Financed Activities" and the accounting policies set out below. The special purpose project financial statements have been prepared on the accrual basis of accounting. These special purpose project financial statements, in accordance with the provisions of the Agreement, are prepared to report the information to the Government of Georgia and International Bank for Reconstruction and Development. As a result these special purpose project financial statements may not be suitable for another purpose. Funds received - Project financing is recognised as sources of funds in the period when the cash inflow can be reasonably estimated and they become available and measurable. Expenditure - Expenditure is recognised on an accruals basis as a use of project funds when liabilities are incurred. Functional currency - The functional currency of the project and its presentational currency is United States Dollars ("US Dollar" or "USD"). Transactions in other currencies - Transactions in currencies other than the reporting currency are converted to US Dollars at the exchange rate prevailing at the date of the transaction. Monetary items are translated into US Dollars at the National Bank of Georgia ("NBG") official exchange rate at the reporting date. Cash - Cash comprises balances with State Treasury. 9 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL DEVELOPMENT PROJECT CREDIT NO.5178-GE LOAN NO 8607-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in US Dollars) 3. DESIGNATED ACCOUNT Designated account is a special disbursement account of the Project maintained in US Dollars at the State Treasury to ensure the payment of eligible expenditures, within defined limits, which do not require individual authorisation from IDA/IBRD in accordance with the Agreement. 4. BASIS OF FUNDING According to the terms of the Credit Agreement NO.5178-GE, the expenditure is co-financed by proceeds received from IDA and the Government of Georgia ("GoG") at a proportional rate of 80% and 20%, respectively. According to the Project Appraisal Document original signed amount of this loan is equivalent USD 30,000,000. SDR IDA GoG Total Special Drawing USD USD USD Rights Equivalent Equivalent Equivalent Works and goods, consulting services and trainings 19,600,000 29,696,970 7,424,242 37,121,212 Operating costs 200,000 303,030 75,758 378,788 Total: 19,800,000 30,000,000 7,500,000 37,500,000 According to the terms of the Loan Agreement NO 8607-GE, the expenditure is fully financed by IBRD. IBRD Total USD USD Works and goods, consulting services and trainings 8,797,500 8,797,500 Operating costs 180,000 180,000 Front end fee 22,500 22,500 Total: 9,000,000 9,000,000 5. METHODS OF WITHDRAWAL The methods of withdrawal used from the inception of the loan to 31 December 2018 were as follows: (a) Designated Account Municipal Development Fund withdraws the eligible amounts from the designated account and prepares and sends replenishment requests to the World Bank with authorised signatures. The replenishment requests and respective documentation are reviewed by the World Bank and an approved amount is transferred to the designated account. (b) Direct Payment Available amounts are drawn from time to time within limits determined under the loan agreement for direct payments of eligible expenditures for sub-projects. Direct payments are made by the World Bank directly to third parties. MDF forms withdrawal applications for request of direct payments and sends it to the World Bank, for settlement. 10 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL DEVELOPMENT PROJECT CREDIT NO.5178-GE LOAN NO 8607-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in US Dollars) (c) GoG Current Account The Project maintains a separate account where funds from the Government of Georgia are accumulated. The funds are further disbursed to sub-contractors based on the share of expenditures to be incurred. 6. STATEMENT OF EXPENDITURE Withdrawals are to be made on the basis of SOEs for expenses on contracts within the following contractual limits: (i) All expenditures for works valued at less than USD 4,000,000; (ii) Consultant services contracts (firms) valued at less than USD 200,000; (iii) Consultant services contracts (individuals) valued at less than USD 50,000; and (iv) All expenditures for goods and non-consulting services valued at less than USD 300,000; 7. PREPAYMENTS 31 December 31 December 2018 2017 Prepayments to contractors 844,601 583,681 Total: 844,601 583,681 Payments of advances to contractors are made at the beginning of the contract in amount of 10%-20% of total contract amount. Retention of advance is done periodically upon submission of works completed certificates by contractors. 8. PROJECT EXPENDITURE BY FUND Actual Year to Cumulative Project activities Date to date Works and goods, consulting services and trainings 1,390,070 25,857,869 Operating costs 91,898 255,003 IDA TOTAL 1,481,968 26,112,872 Front end fee - 22,500 IBRD TOTAL - 22,500 Works and goods, consulting services and trainings 344,570 7,539,946 Operating costs 23,288 69,613 Resettlement costs - 75,993 GoG TOTAL 367,858 7,685,552 Works and goods, non-consulting services, consulting services and training - 1,499,715 OTHER SOURCES TOTAL - 1,499,715 TOTAL PROJECT EXPENDITURE 1,849,826 35,320,639 11 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL DEVELOPMENT PROJECT CREDIT NO.5178-GE LOAN NO 8607-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in US Dollars) The Project consists of the following main components: Component 1 - Infrastructure investment * Urban regeneration in Tskaltubo * Tourism services and infrastructure in six cultural heritage sites * Vani museum rehabilitation Component 2 - Institutional development * Tourism related institutional development activities o Tskaltubo destination management and development office * Performance monitoring and evaluation * Procurement, safeguards, financial management, disbursement and supervision of all project Activities 9. RECONCILIATION OF DESINGATED ACCOUNT IDA IBRD GoG Total Expenditures incurred during the year 1,481,968 - 367,858 1,849,826 Change in prepayments 247,081 - 13,839 260,920 Change in payables 68,823 - 21,319 90,142 Foreign exchange (14,171) - 24,520 10,349 Received money from penalties and budget (3,174) (27,436) (30,610) Amount of eligible expenditure paid 1,780,527 - 400,100 2,180,627 12 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL DEVELOPMENT PROJECT CREDIT NO.5178-GE LOAN NO 8607-GE NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in US Dollars) 10. COMMITMENTS AND CONTINGENCIES Legal proceedings - As at 31 December 2018 the Fund had the outstanding claim raised by supplier where the Fund is acting as a defendant: "Sani" LLC requested to return the penalty and payments for terminated contracts in the amount of GEL 7,262,263. The requested amount has been adjusted subsequent to year end and amounts GEL 14,123,157. Based on negotiations to date, the management believes that probability to win these cases is more than 50%, therefore no provision has been accrued by the Fund. Management is not aware of any other commitments and contingencies which would have a material impact on the financial position of the Project and the Special Account Statement as at 31 December 2018 and on the funds received and disbursed during the year then ended. 11. OPERATING ENVIRONMENT Emerging markets such as Georgia are subject to different risks than more developed markets, including economic, political and social, and legal and legislative risks. Laws and regulations affecting businesses in Georgia continue to change rapidly, tax and regulatory frameworks are subject to varying interpretations. The future economic direction of Georgia is heavily influenced by the fiscal and monetary policies adopted by the government, together with developments in the legal, regulatory, and political environment. For the last three years Georgia has experienced a number of legislative changes, which have been largely related to the European Union Association Agreement. Whilst the legislative changes implemented during 2016, 2017 and 2018 paved the way, more can be expected as Georgia's action plan for achieving accession to the European Union continues to develop. 12. EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE Except the matters, disclosed in the Note 1, there were no other significant events subsequent to the balance sheet date that would require adjustment or disclosure in these special purpose project financial statements. 13. APPROVAL OF SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS These special purpose financial statements were authorised for issue by the Management of MDF on 28 June 2019. 13