MUNICIPAL DVELOPMENT FUND OF GEOR IA LOAN NO.8380-GE GRANT NO.TF018090 (SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT) Special Purpose Project Financial Statements and Independent Auditor's Report For the Year Ended 31 December 2018 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 TABLE OF CONTENTS Page STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SPECIAL PURPOSE PRO3ECT 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 4-5 Statement of financial position 6 Summary of expenditure by activity 7 Statement of expenditure ("SOE") 8 Statements of designated account 9-10 Notes to the special purpose project financial statements 11-16 1 . B ackg ro u nd ............................................................................. .................................1 1 2 . A cco u nting po licies .................................................. ................................................. 1 1 3 . D esignated account................. ........................... ................... ................................... 1 1 4 . B asis of fu nd ing .......................... ........................................................................... 12 5 . M ethods of w ithd raw al................................................................................................... 12 6. Statem ent of expenditure........................it.................................................................. 13 7 . Pre pay m e nts ...................... .............................................. ......................................... 13 8 . C a shs...h..................................................................... ............................................. 1 3 9. Project expenditure by fund ..... ... ............... ...4................................................ ........... 14 10. Reconciliation of designated account.............................................................................. 15 11. Com m itm ents and contingencies.................................................................................... 15 12. O perating environm ent ........................................................ ........................................ 15 13. Events subsequent to the balance sheet date at...................................... ...................... 16 14. Approval of financial statem ents ............. ...................................................................... 16 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 and Municipal Infrastructure Development Project (the "Project"), financed under the Loan Agreement No. 8380-GE dated 18 August 2014 and Grant Agreement No. TF018090 dated 1 May 2015, implemented by the Municipal Development Fund of Georgia ("MDF") is responsible for the preparation of the special purpose project financial statements that present the Project's statement of financial position as at 31 December 2018, the summary of sources and uses of funds, summary of expenditure by activity, statement of expenditure ("SOE") and designated account statements, 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 special purpose project 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; and 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: GaQC e' hdneli Lev harv'dze Executi Director Dep y Direftor - Chief Financial Officer 28 June 2019 28 June 2019 1 Deloitte & Touche LLC King David Business Center 12 Merab Aleksidze Street J 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 Second Regional and Municipal Infrastructure Development Project (the "Project") financed under the Loan Agreement No. 8380-GE dated 18 August 2014 and Grant Agreement No. TF018090 dated 1 May 2015, 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 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"). 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. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ("DTL"), 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 v .for a more detailed description of DTTL and its member firms, @ 2019 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 disclose that the closing date of the loan and grant is 30 April 2021. 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 Special Purpose Project 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 special purpose project 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 special purpose project 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 Leighton On behalf of Deloitte and Touche LLC 28 June 2019 Tbilisi, Georgia 3 .г, tu оооао � � о воо q 4д Й_ 4i� �, бi3с�оО � в С]tuФ � � � � �W® 41' о0UИо � Сз ОоИ �у '® �� � 6� �� О iCJ (V д7 h ��, Ц? 4П 1'� � � @. ��w тИN�00 �. � N W � � � � � � i ��, � т 4ио on � +�ч1 :'.' - �' �tV � ш ой � � +w го т �r г� � �т� � и� з � ы �э � с � ,� � �� � т �° ' � � N '`' �л ,� о � � rч го о`по ¢ п � � � �а � � �м �� м ,wг�� � .-+ о г. о �у �N � � Иоо р� д• �t д' �п r, 's' tV 'в` io м а� t� � м! � м Г�J .Ч � � # � [�} � N м И �. ,,: � # � Фь М ,,.� ш � (,1 а4 А С ®...г L бfi _� ' ®` � �. U1 � 'сз N о О � (+�J �+ '� � г�i N о CJ р� . 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О � � � U1 � а '= � «� �' �+ +сз ш 'гв v-о т е у .� °1 fj =�Вшf1д� �ш г•аi .д- °�а Е � ® QO � � •G т а� L ® �° �j 7� � � Z 7 � г� �у 61 � � ч-1 р��� ц�l� � � Е Уш�'- с � �'i а J ш М 1® f.� �� �у ОО О�, С � � Г' .�.iai. 1О � � � � О ш - Ь�д и �- �, ''- ''- w ; _, `�_ аг Gt � а ч4 и � С +� ш ® �` �.ш л о U� �� дг� г Ё�ш J ��с t��u � аг:м "� ш Ч Z� � F- {Л � оа .; � � �'H й у L, й � о �4J'�� ��� � � ш ш�го � +��-'Н� � �i�( ^ aCi ш О а�.� С7 U а г� eL 1- Q� ш С {9 и.� оо L � (91 � (:3 [Л 1L �к � L � г� 1- MUNT-ICIPAL DEWELOPMENT FUND , ,)ZCOND REC,11ONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LUAN NO.8360-GE GRANT NO.TF018090 STATEMENT OF FINANCIAL POSITION FOR THE YEAR EDNED 31 DECEMBER 2018 (in US Dollars) 31 December 31 December Note 2018 2017 ASSETS Cash 3,8 1,028,878 1,210,549 Prepayments 7 926,104 1,664,526 Receivables from Municipalities 155,810 1,580,032 Other assets - TOTAL ASSETS 2,110,792 4,455,107 LIABILITIES Payables (448,712) (827,62 ) Total liabilities (448,71D_ (827,625) NET ASSETS 1,662,080 3,627,482 Cumulative funds received: IBRD loan 8380-GE 17,968,578 15,870,907 SDC grant 2,811,373 1,222,209 Government of Georgia 5,532,324 4,891,369 MDF funds 3,711,687 2,807,424 Funds from Municipalities 4,361,284 4,684,530 Other income 426,056 251,728 Total funds received 34,811,302 29,728,167 Cumulative expenditures: Cumulative project expenditure 9 32,849,506 25,734,762 32,849,506 25,734,762 Foreign exchange loss, net (299,716) (365,92 ) TOTAL NET ASSETS 1,662,080 3,627,482 On behalf of Management; Levarl SVrvadze/ Exec -ai girecto'r Deputy Directo/K- Chief Financial Off icer 28 June 2019 28 June 2019 The notes on pages 11 to 16 form an integral part of these special purpose project financial statements. 6 MUNICIPAL DEVELOPMENT FUND SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 STATEMENT OF EXPENDITURE BY ACTIVITIES FOR THE YEAR EDNED 31 DECEMBER 2018 (in US Dollars) Actual Planned* Variance Project activities Cumulative Cumulative Cumulative Year ended as at Year ended as at Year ended as at 31.12.2018 31.12.2018 31.12.2018 31.12.2018 31.12.2018 31.12.2018 Unaudited Unaudited Unaudited Unaudited Component 1: Infrastructure investment 4,864,935 28,330,620 6,133,229 29,598,914 1,268,294 1,268,294 Component 2: Institutional development 2,249,809 4,443,886 3,000,000 5,194,077 750,191 750,191 Front end fee - 75,000 - 75,000 - - TOTAL EXPENDITURES 7,114,744 32,849,506 9,133,229 34,867,991 2,018,485 2,018,485 * The budget 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 figures reflected in the State Budget for FY2018 adjusted to the accrual model. On behalf of Management: Get f gli Levad Sh rvadze Exic ive Irector Deputy Directo - Chief Financial Officer 28 June 2019 28 June 2019 The notes on pages 11 to 16 form an integral part of these special purpose project financial statements. 7 MUNICIPAL DEVELOPMENT FUND SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 STATEMENT OF EXPENDITURE (SOE) FOR THE YEAR EDNED 31 DECEMBER 2018 (in US Dollars) Withdrawal applications for Loan: Category Category 3: ConsultantsCaeoy: service, Training and Goods, Withdrawal Category Category Incremental Consulting application la: Works 1b: Works operating costs Service, Training Withdrawal No. date Total SOE and Goods and Goods under Part A2 under B2 13 13.04.2018 709,548 479,350 230,198 - 14 01.06.2018 374,276 235,596 34,237 104,443 15 19.10.2018 433,425 433,425 - - - 16 13.12.2018 12,416 - - 6,073 6,343 1,529,665 1,148,371 264,435 110,516 6,343 Total expenditure in amount of USD 709,548 under withdrawal application No. 13 is attributable to 2017 and recorded as expenditure in the 2017 special purpose project financial statements respectively. The withdrawal application for these expenses were submitted to International Bank for Reconstruction and Development in 2018. Withdrawal applications for Grant: Goods, Consulting Withdrawal service, Training Withdrawal No. application date Total SOE under B2 13 19.10.2018 4,199 4,199 4,199 On behalf of Management: Geolge he Levan Sharvad Execufte Di eckor Deputy Direc r - Chief Financial Officer 28 June 2019 28 June 2019 The notes on pages 11 to 16 form an integral part of these special purpose project financial statements. 8 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 STATEMENT OF DESIGNATED ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2018 fin US Dollars) Account No. 202250160 Depository Bank State Treasury Address 16 V. Gorgasali street Tbilisi, 0114 Georgia Opening balance 704,896 Funds received from IBRD (Loan) 2,097,671 Present outstanding amount advanced to Designated Account ("DA") 2,802,567 DA closing balance as at 31 December 2018 8 192,124 Add: Amount of eligible expenditures paid 10 2,610,443 Total advance accounted for 21802,567 On behalf of Management: Georoeh I Levah S rvadz Execitive Diec Deputy Direct Chief Financial Officer 28 June 2019 28 June 2019 The notes on pages 11 to 16 form an integral part of these special purpose project financial statements, 9 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 STATEMENT OF DESIGNATED ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in US Dollars) Account No. 202230160 Depository Bank State Treasury Address 16 V. Gorgasali street Tbilisi, 0114 Georgia Opening balance 254,751 Funds received from 11RD (Grant) 806,675 Present outstanding amount advanced to DA 1,061,426 DA closing balance as at 31 December 2018 8 322,556 Add: Amount of eligible expenditures paid 10 738,870 Total advance accounted for 1,061,426 On behalf of Management: GeofS 1Lev Slrvadz Execuve ior Deput irect - Chief Financial Officer 28 June 2019 28 June 2019 The notes on pages 11 to 16 form an integral part of these special purpose project financial statements. 10 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 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 Bank for Reconstruction and Development Loan Agreement No. 8380-GE (the "Agreement") in the amount of 30 million United States Dollars ("USD") was signed between the Government of Georgia ("GoG") and International Bank for Reconstruction and Development ("IBRD") on 18 August 2014 ("inception"). Swiss Grant Agreement No. TF018090 (the "Agreement") in the amount of 5 million United States Dollars ("USD") was signed between the Government of Georgia ("GoG") and International Bank for Reconstruction and Development ("IBRD") on 1 May 2015. The main objectives of the loan/grant are: providing finance on the credit and grant basis to selected Local self-governments ("LSG") to finance investment sub-projects related to municipal services; preparation of feasibility studies, construction supervision, monitoring and evaluation activities for investment subprojects; enhancing the institutional capacity and performance of LSGs and MDF. In May 2019, the closing date of the loan and grant has been prolonged to 30 April 2021. 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. 3. DESIGNATED ACCOUNT The 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 IBRD in accordance with the Agreement. 11 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in US Dollars) 4. BASIS OF FUNDING According to the terms of the Agreement, expenditure is co-financed by proceeds received from IBRD, Swiss Grant (SDC), the Government of Georgia ("GoG"), MDF and Municipalities. The financing is provided from the following sources: * Goods and Works under part A.1 (a) - IBRD, MDF and Municipalities: 40%/c, 40% and 20%, respectively; o Goods and Works under part A.1 (b) - IBRD and Municipalities: 85% and 15%, respectively; o Consultants' services, training under Part A.2 of the Project and Incremental Operating Costs - IBRD and GoG: 80% and 20%, respectively; and * Goods, consultants' services and training under Part B of the Project - IBRD, Swiss Grant and GoG: 22.8%, 57.2% and 20%, respectively. Swiss Municipali IBRD Grant GoG MDF ties Total Goods and Works under part A.1 (a) 12,925,000 - - 12,925,000 6,465,000 32,315,000 Goods and Works under part A.1 (b) 13,000,000 - - - 2,295,000 15,295,000 Consultants' services, training under Part A.2 of the Project and Incremental Operating Costs 2,000,000 - 500,000 - - 2,500,000 Goods, consultants' services and training under Part B of the Project 2,000,000 5,000,000 1,750,000 - - 8,750,000 Front-end fee 75,000 - - - - 75,000 Total: 30,000,000 5,000,000 2,250,000 12,925,000 8,760,000 58,935,000 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. (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. 12 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in US Dollars) 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 Advances to contractors 926,104 1,664,526 Total: 926,104 1,664,526 Payments of advances to contractors are made at the beginning of the contract in amount of 10%-30% of total contract amount. Retention of advance is done periodically upon submission of works completed certificates by contractors. 8. CASH 31 December 31 December 2018 2017 Balance on designated account (Loan) 192,124 704,896 Balance on designated account (Grant) 322,556 254,751 Local account 514,198 250,902 Total: 1,028,878 1,210,549 13 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in US Dollars) 9. PROJECT EXPENDITURE BY FUND Actual Year to Cumulative to Project activities date date Works and Goods under Part A.1 (a) 1,404,096 6,804,073 Works and Goods under Part A.1 (b) 642,195 7,392,899 Consulting services, training and incremental operating costs under Part A.2 478,376 2,247,167 Goods, consultants and training under Part B 591,714 1,093,112 Front-end fee - 75,000 IBRD TOTAL 3,116,381 17,612,251 Works and Goods under Part A.1 (a) - - Works and Goods under Part A.1 (b) Consulting services, training and incremental operating costs under Part A.2 - 24,522 Goods, consultants and training under Part B 1,212,885 2,467,857 GRANT TOTAL 1,212,885 2,492,379 Works and Goods under Part A.1 (a) 1,124 569,312 Works and Goods under Part A.1 (b) - 70,283 Consulting services, training and incremental operating costs under Part A.2 119,672 560,859 Goods, consultants and training under Part B 430,954 868,661 GoG TOTAL 551,750 2,069,115 Works and Goods under Part A.1 (a) 1,404,096 6,655,498 Works and Goods under Part A.1 (b) - Consulting services, training and incremental operating costs under Part A.2 Goods, consultants and training under Part B - - MDF TOTAL 1,404,096 6,655,498 Works and Goods under Part A.1 (a) 702,048 2,771,361 Works and Goods under Part A.1 (b) 113,328 1,234,645 Consulting services, training and incremental operating costs under Part A.2 - 1 Goods, consultants and training under Part 8 14,256 14,256 MUNICIPALITIES TOTAL 829,632 4,020,263 TOTAL PROJECT EXPENDITURES 7,114,744 32,849,506 The Project consists of the following main components: Component 1 - Infrastructure investment Provision of financial resources to local self-governments to carry out investment sub- projects for Urban regeneration: an integrated approach for renewal of Telavi Kvareli and the heritage village of Dartio; 14 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (in US Dollars) * Tourism circuit development: Integrated approach to culture heritage site upgrading and improved management in the most attractive 11 cultural heritage sites located along the main tourism circuit/route in Kakheti; and o Provision of financial resources to local self-governments to carry out investment subprojects for public infrastructure to attract private sector investments in tourism and agro-processing. Component 2 - Institutional development Enhancing the institutional capacity and performance of the Georgia National Tourism Administration ("GNTA"), the Agency for Culture Heritage Preservation of Georgia (ACHP), the Project Implementing Entity (MDF), and other local and regional entities to carry out the following activities: * Destination management and promotion, including local outreach campaign; o Geo-tourism routes and tourism portal; " Skilled workforce development and capacity building; * Construction supervision and sustainable site management of cultural heritage; and * Performance monitoring and evaluation activities. 10. RECONCILIATION OF DESIGNATED ACCOUNT Other (GoG, IBRD IBRD MDF, (Loan) (Grant) Municipalities) Total Expenditures incurred during the year 3,116,381 1,212,885 2,785,478 7,114,744 Direct payment - (783,640) - (783,640) Change in prepayments (373,983) 23,739 (388,178) (738,422) Change in payables (38,917) 301,997 115,833 378,913 Change in receivables - (1,424,222) (1,424,222) Foreign exchange (29,849) (16,111) (20,247) (66,207) Penalties (63,189) - (94,783) (157,972) Amount of eligible expenditure paid 2,610,443 738,870 973,881 4,323,194 11. COMMITMENTS AND CONTINGENCIES Management is not aware of any commitments and contingencies which would have a material impact on the special purpose project financial statements as at 31 December 2018 and on the funds received and disbursed during the year then ended. 12. 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 and 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. 15 MUNICIPAL DEVELOPMENT FUND OF GEORGIA SECOND REGIONAL AND MUNICIPAL INFRASTRUCTURE DEVELOPMENT PROJECT LOAN NO.8380-GE GRANT NO.TF018090 NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED) (in US Dollars) 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. 13. EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE In May 2019, the closing dates of the loan and grant have been prolonged to 30 April 2021. There were no other significant events subsequent to the balance sheet date that require adjustment or disclosure in these special purpose project financial statements. 14. APPROVAL OF FINANCIAL STATEMENTS These special purpose projects financial statements were authorised for issue by the Management of MDF on 28 June 2019. 16