eloitte ROAD REHABILITATION AND SAFETY PROJECT IBRD Project ID: P1 27876 IBRD Loan No. 8255-YF EIB Loan No. 82.640 EBRD Loan No.44750 Statement of Sources and Uses of Funds, Statement of Expenditures and Statements of Designated Accounts For the Year Ended December 31, 2016 and Independent Auditors' Report Deoet d,tt e .o Beograd QelotteTeraztje 8 1 1000 Belgrade Republic of Serbia Tax identification Number: 100048772 Registration Number: 07770413 Tel: +381 (0)11 3812 100 Fax: +381 (0)11 3812 112 www.deloitte.com/rs INDEPENDENT AUDITORS' REPORT To the Management of the Project Implementation Team within the Public Enterprise "Roads of Serbia" Opinion We have audiled the accompanying Statement of Sources and Uses of Funds, Statement of Expenditures and the Staiernent of Desianated Accounts of the Project entitled "Road Rehabilitation and Safety Project" (the "Project" or -RSP I financed under International Bank for Reconstruction and Development ("IBRD") Loan No. 8255 - YF, European Bank for Reconstruction and Development ("EBRD") Loan No.44750, European Investment Bank ("EIB") Loan I Jo 82 640 and tLinds contributed by the Republic of Serbia ("RoS") for the year ended December 31, 2016. The Statement ol Sources and Uses of Funds, Statement of Expenditures and Statement of Designated Accounts Ithe Statements I rave been prepared by the Project Implementation Team ("PIT") of the Public Enterprise "Roads Cf Serbia I PERS I on the cash receipt and disbursement basis. In our opinion the Statement of Sources and Uses of Funds, the Statement of Expenditures and the Statement of Designated Accounts referred to above, present fairly, in all material respects, the sources and application of funds and ependiture details, as well as the movements on the Designated Accounts of the Project, financed under IBRD Loan fho 8255 - YF, EBRD Loan No.44750, EIB Loan No.82.640 and funds contributed by RoS as of December 31 2016 and for the year then ended, in accordance with the cash receipt and disbursement basis as described in Note 3 Basis for Opinion We conducted our audit in accordance with the International Standards on Auditing (ISAs). Our responsibilities under inc-se standards are further described in the Auditor's Responsibilities for the Audit of the Statements section of our report '.le are independent of PIT in accordance with the ethical requirements and we have fulfilled our olh-r ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have oblained Is sufficient and appropriate to provide a basis for our opinion. Emphasis of Matter and Basis of Accounting and Restriction on Distribution We draw attention ro the following matters: a) -i disclosed in Note 1 to the Statements, Operation Manual for the implementation of the Project defines components aid subcomponents of the Project as well as agreed contribution by each co-financing source of the sub-prolects but without detailed split per components, In addition, detailed categories of expenditures defined in loan agreements with EBRD and IBRD (as disclosed in Note 2 to the Statements), have not been aligned var tie components of the subprojects, as defined by the Operation Manual. Based on the information received [romi the Management of PIT, there were no requests from any of the co-financing parties (IBRD, EBRD ElB and RoS) for such alignment during this phase of the Project, and up to the date of our report such a request has 1101 been received. The Management of PIT believes that the aforesaid inconsistency between the Operation Manual and categories of expenditures in loan agreements does not pose any risks to the sources of financing and that it will not have any impact to the Project implementation. bi .-.; disclosed in I-lote 2.5 to the Statements and Statement of Expenditures, the total amount disbursed during years ended December 31, 2015 and 2016 of EUR 50.65 million does not represent the total spending of the Projecl As disclosed in Note 2.5 to the Statements, the undisbursed approved funding of the Project (excluding F ront-end lee, as at December 31, 2016 amounted to EUR 338.1655 million. B3Si of A'. :int:ag and Restriction on Distribution We draw altention to Note 3.2 to the Statements, which describes the basis of accounting. The Statements have beer, prepared far the information and use of PIT, lBRD, EIB, EBRD and RoS and may not be suitable for another Purpose ii report rill not be disclosed to any third parties other than those mentioned above and we accept no hsrspisibilt; for any such action. Our opinion is noti modified in respect of these matters. (Continued) +ii r..., Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally rr...1 .wr..r .-,r.r, f.- _e see www.deloitte.comfrs/about for a detailed description of the legal structure of Deloitte Touche TOmatsu Limited and its INDEPENDENT AUDITORS' REPORT To the Management of the Project Implementation Team within the Public Enterprise "Roads of Serbia" (Continued) Responsibilities of Management for the Statements . The Management of PIT is responsible for the preparation of these Statements in accordance with the cash receipt and disbursement basis, and for such internal control as Management determines is necessary to enable the preparation of Statements that are free from material misstatement, whether due to fraud or error. In preparing the Statements, Management of PIT is responsible for assessing the ability to continue the Project operations 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 discontinue the Project operations, or has no realistic alternative but to do so. Auditor's Responsibilities for the Audit of the Statements Our objectives are to obtain reasonable assurance about whether the 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 the International Standards on Auditing (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 Statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: * Identify and assess the risks of material misstatement of the 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 PIT internal control. * Conclude on the appropriateness of Management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the ability to continue the Project operations as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the Statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Project operations to cease as a going concern. * Evaluate the appropriateness of cash basis of accounting policies used and related disclosures made by PIT Management. We communicate with PIT Management regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in the internal control that we identify during our audit. April 6, 2017 0 0 ' eloit e do,o. Belgrade 2 ROAD REHABILITATION AND SAFETY PROJECT IBRD Project ID: PI 27876 IBRD Loan No. 8255-YF EIB Loan No. 82.640 EBRD Loan No.44750 STATEMENT OF SOURCES AND USES OF FUNDS For the Year Ended December 31, 2016 (In EUR) Year Ended December 31, December 31, 2016 2015 PROJECT FINANCING Opening balance on designated accounts at beginning of the period 17,926,337 - Proceeds from RoS: Transfer into the Designated Account 869,863 71,847 869,863 71,847 Proceeds from IBRD Transfer into the Designated Account 6,569,000 18,500,000 6,569,000 18,500,000 Proceeds from EIB Transfer into the Designated Account 11,000,000 10,000,000 11,000,000 10,000,000 Proceeds from EBRD Direct payments 10,644,481 3,181,000 10,644,481 3,181,000 TOTAL PROJECT FINANCING 47,009,681 31,752,847 PROJECT EXPENDITURES Financed by RoS: Component 3 - Project Detailed Design, Supervision, Management and Monitoring 238,387 - 238,387 Financed by IBRD: Component 1 - Road Rehabilitation and Safety 6,553,122 9,471,296 Component 2 - Institutional Strengthening 5,880 14,519 Component 3 - Project Detailed Design, Supervision, Management and Monitoring 694,763 1,159,695 7,253,765 10,645,510 Financed by EIB: Component 1 - Road Rehabilitation and Safety 18,034,791 - Component 3 - Project Detailed Design, Supervision, Management and Monitoring 648,182 - 18,682,973 Financed by EBRD: Component 1 - Road Rehabilitation and Safety 10,644,481 3,181,000 10,644,481 3,181,000 TOTAL PROJECT EXPENDITURES 36,819,606 13,826,510 Cash,talni at the end of the period 10,190,075 17,926,337 Approved on"April 6, 2017 by: Goldana Suboti6ki Bytdevid Project Coordinator 3 RO)AD REHABILUTATION AND SAqFYV FROaIeC1 IBRD Project ID: P127876 IBRD Loan No. 8255-YF EiB Loan No. 82.640 EBRD Loan No. 44750 STATEMENT OF EXPENDITURES For the Year Ended December 31, 2016 (In EUR) Budgeted Disbursements (updated) Cumulative Disbursements Budgeted but Undisbursed (in total) RoS IBRD* E(B EBRD- Tots! RoS IBRD EIB EBRD Total RoS IBRD EBB EBRD Total Sub- Project 1: Comoient 1- Road Rehabilitation andSafe -Emergencyworks - 22,973000 22,973,000 - 45,946,000 - 16,024,418 18,034,791 - 34,059,209 - 6,948,582 4,938,209 - 11,886,791 Component 2 - Instiufional Strengthaning- Training and workshops - 250,000 - - 250,000 - 20,399 - - 20,399 - 229,601 - - 229,601 Compronent 3 - Project Deteiled Design, Supervision, Management and Monitoring - Technical Control of Designs and Supervision of Road Emergency works and Environmental Monitoring 842,644 1,739,366 1,753,600 - 4,335,610 238,387 1,854,458 648,182 - 2,741,027 604,257 (115,092) 1,105.418 _ 1,594,583 Total:Sub-Proect1: 842,644 24,962,366 24,726,600 50,531,610 238,387 17,899,27E 18,682,973 - 36,820,635 604,257 7,063,091 6,043,627 - 13,710,975 Sub- Project 2: Component 1 - Road Rehabilitation andSafe -Emergencyworks - - - 25,034,940 25,034,940 - - 13825,481 13,825,481 - - - 11,209,459 11,209,459 Total: Sub- Project 2: - - - 25,034,940 25,034,940 -- - 13,825,481 13,825,481 - - - 11.209,459 11,209,459 Total Projects Expenditures: 842,644 24,962.366 24,726,600 25,034,940 75,566,550 238,387 17,899,275 18,682,973 13,825,481 50,646,116 604,257 7,063,091 6,043,627 11,209,459 24,920,434 Disbursements for the Period Disbursements for the Period Ended December 31, 2015 Ended December 31, 2016 Cumulative Disbursements RoS IBRD* EB EBRD- Total RoS IBRD EIB EBRD Total ROS IBRD EIB EBRD Total Sub- Proect 1: CoMponent 1 - Road Rehabiltation and Safen-Emergencyworks - 9,471,296 - - 9,471,296 - 6,553,122 18,034,791 - 24,587,913 - 16,024,418 18,034,791 - 34,059,209 Component 2 - Institutional Strengthening- Training and workshops - 14,519 - 14,519 - 5,880 - - 5,860 - 20,399 - - 20,399 CoMgonent 3 - Proect Detailed Design, Supervision, Management.and Monitoring - Technical Control of Designs and Supervison of Road Emergency works and Environmenta Monitoring - 1,159,695 - - 1,159,695 238,387 694,763 648,182 - 1,581,332 238,387 1,854,458 648,182 - 2,741,027 Total:Srb-Prolect1: 10,645,510 - - 10,645,510 238387 7,253,765 18,682,973 26,175,125 238,387 17,899,275 18,682,973 - 36,820,635 Sub- Project 2: Component I - Road Rehabilitation andSafet-Emergencyworks - - 3 181,000 3,181,000 - - - 10,644,481 10,644,481 _ - - 13,825,481 13,825,481 Total:Sub-Project2: - 10,645,510 - 3181,000 13,826,510 - - - 10,644,481 10,644,481 _ _ - 13,825,481 13,825,481 Total Projects Expenditures: 10,645,510 - 3 181,000 13,826,510 238,387 7,263,765 18,682,973 10,644,481 36,819,606 238,367 17,899,275 18,682,973 13,825,481 50,646,116 4 ROAD REHABILTATON AD AET PPROaCT IBRD Project ID: P127876 IBRD Loan No. 8255-YF EIB Loan No. 82.640 EBRD Loan No. 44750 STATEMENT OF EXPENDITURES (Continued) For the Year Ended December 31, 2015 (in EUR) Disbursements for the Period Budgeted Disbursements (as it was previously reported l Ended December 31, 2014 Committed but undisbursed RoS IBRD* EIB EBRD Total RoS IRD EIB EBRD Total RoS IBRD EB EBRO Total Sub- Project 1: Component 1 - Road Rehabilitation and Safey- Emergency works - 22,973,000 22,973,000. - 45,946,000 - 9,471,296 - - ,471,296 -13,501,704 22,973,000 - 36,474,704 Cmponent 2 - Institutional Stranqthening - Training and workshops - 250,000 - 250,000 14,519 , - 14,519 - 235,481 - - 235,481 Component 3 - Protect Detailed Design, Supervision, Managerentand Monitcring- Technical Control of Designs and Supervision of Read Emergency works and Environmental Monitoring 730,400 1,571,000 1,753,600 - 4,055,000 - 1,159,695 - - 1,159,695 730,400 411.305 1,753,600 - 2,895,305 Total: Sub- Project 1: 730,400 24,794,000 24,726,600 - 50,251,000 - 10,645,510 - - 10,645,510 730,400 14,148,490 24,726,600 - 39,605,490 Sub- Project 2: Component I - Road Rehabilaon andSafe -Emargancy works - - - 22,191,000 22,191,000 - - 3,181,000 3,181,000 - - _ 19,010,000 19,010,000 Total:Sub-Project2: - - _ 22,191,000 22,191,000 - - 3,181,000 3,181,000 - - - 19,010,000 19,010,000 Total Projects Expenditures: 730,400 24,794,000 24,726,600 22,191,000 72,442,000 - 10,645,510 - 3,181,000 13,826,510 730,400 14,148,490 24,726,600 19,010,000 58,615,490 *Budgeted amounts refer to the Procurement Plan budget amounts for EIB/IBRDIRoS contracts. -Budgeted amounts for EBRD contracts refer to the cash-flow budget amounts. 5 STATEMENTi OFl1LT DES0iGNATEDSp. ACCOUNTSEC IBRD Project 1t P127816 IBRD Loan No. 8255-YF EIB Loan No. 82.640 EBRD Loan No. 44750 STATEMENT OF DESIGNATED ACCOUNTS For the Year Ended December 31, 2015 (In EUR) Designated Sub- Designated account No Designated Account No Designated Account No: Sub-account No: 840-3960721-77 504626-100193230 504627-100193230 840-3956721-49 - Source of financing: Source of financing: Source of financing: Source of financing: RoS IBRD EIB EIB and IBRD Depository Bank: Depository Bank: Administration of the National Bank of Serbia, National Bank of Serbia, Administration of the Treasury, Branch Ministry of Finance - Ministry of Finance - Treasury, Branch Palilula Treasury Treasury Palilula Currency: RSD Currency: EUR Currency: EUR Currency: RSD Total Balance at beginning of the period January 1, 2015 Inflows Replenishment during the period 71,847 18,500,000 10,000,000 - 28,571,847 Total Inflows: 71,847 18,500,000 10,000,000 - 28,571,847 Outflows Transfers to RSD accounts/from EUR accounts - (12,000,000) (2,000,000) 14,000,000 - Payments for Project expenditures - (105,840) ( 10,539,670) (10,645,510) Total Outflows: - (12,105,840) (2,000,000) 3,460,330 (10,645,510) Balance at the end of the period December 31, 2015 71,847 6,394,160 8,000,000 3,460,330 17,926,337 Reconciliation for Project expenditures: - disbursements from designated Accounts (10,645,510) - direct payments from EBRD (3,181,000) TOTAL PROJECT EXPENDITURES (13,826,510) 6 rIBRD Project ID. P127876 IBRD Loan No. 8255-YF ElB Loan No. 82.640 EBRD Loan No. 44750 STATEMENT OF DESIGNATED ACCOUNTS (Continued) For the Year Ended December 31, 2016 (in EUR) Designated Sub- Designated account No Sub-account No: 840-1407764-22 Designated Account No Designated Account No: 840-1406764-15 (old No 840-3960721-77) 504626-100193230 504627-100193230 (old No 840-3956721-49) Source of financing: Source of financing: Source of financing: Source of financing: RoS IBRD ElB EIB and IBRD Depository Bank: Depository Bank: Administration of the National Bank of Serbia, National Bank of Serbia, Administration of the Treasury, Branch Ministry of Finance - Ministry of Finance - Treasury, Branch Palilula Treasury Treasury Palilula Currency: RSD Currency: EUR Currency: EUR Currency: RSD Total Balance at beginning of the period January 1, 2016 71,847 6,394,160 8,000,000 3,460,330 17,926,337 Inflows Replenishment during the period 869,863 6,569,000 11,000,000 - 18,438,863 Total Inflows: 869,863 6,569,000 11,000,000 - 18,438,863 Outflows Transfers to RSD accounts/from EUR accounts - (8,000,000) (16,635,343) 24,635,343 - Payments for Project expenditures (238,387) (197,881) (164,657) (25,574,200) (26,175,125) Total Outflows: (238,387) (8,197,881) (16,800,000) (938,857) (26,175,125) Balance at the end of the period December 31, 2016 703,323 4,765,279 2,200,000 2,521,473 10,190,075 Reconciliation for Project expenditures: - disbursements from designated Accounts (26,175,125) - direct payments from EBRD (10,644,481) TOTAL PROJECT EXPENDITURES (36,819,606) 7 [...~ ~ ------------- _ _ ROAD REHABILITATION AND SAFETY PROJECT IBRD Project ID: P127876 IBRD Loan No. 8255-YF EIB Loan No. 82.640 EBRD Loan No. 44750 NOTES TO THE STATEMENTS For the Year Ended December 31, 2016 1 . BACKGROUND For purposes of realization of the Road Rehabilitation and Safety Project, the Republic of Serbia ("RoS") entered into contract agreements on loans with three International Financial Institutions (IFIs) on November 27, 2013, as follows: Loan Agreement with IBRD, EIB and EBRD, the National Assembly ratified all three agreements by adopting the Law on Confirmation of the Agreements (Official Gazette of RS - International Agreements No. 6/14 dated 20 June 2014). By Subsidiary Loan Agreements executed by and between the RoS and PERS, regarding IBRD loan on September 19, 2014 and regarding EBRD loan on November 28, 2014 the funds of these loans have been made available to PERS for implementation of the Project pursuant to the Project Agreement signed between PERS and IBRD as well as Project Agreement signed between PERS and EBRD, both on December 9, 2013. The Road Rehabilitation and Safety Project ("Project") is a part of a larger IFI's coordinated effort to support RoS in the implementation of the first phase of the National Road Network Rehabilitation Program (NRNRP). The Project refers to two sub-projects: (i) the sub-project co-financed by IBRD, EIB and RoS (ii) the sub-project financed in parallel solely by EBRD. Over the implementation period the Project is designed to cover the following: * improvement of condition on the state road network by means of rehabilitation of approximately 1,100 km of the existing roads; * increase of road safety condition through appliance of measures for improvement of road safety in all phases of the Project implementation; * strengthening capacity and development of institutional coordination in the field of road and traffic safety through implementation of a number of various services. The Project is designed, as per Operation manual, to use, for the most part, results-based features and will include three components: 1. Component 1: Road Rehabilitation and Saft will cover emergency works and regular works: periodic maintenance and rehabilitation works, partial pavement widening, works concerning traffic signalization improvement and structure renewal as well ancillary road connections. This component will also support the incorporation of road safety measures as recommended by road safety audits in the design of the Project's road sections and their subsequent implementation as a way to institutionalize these practices for all road works; 2. Component 2: Institutional Strenqthening will cover the fol iAn: a) Subcomponent 2A: Support to road safety will cover road safety inspections and the implementation of low cost road safety measures such as signage, traffic calming measures and road furniture for an additional 1,000 km of national roads beyond what is covered in Project. The implementation of these measures will be covered out of PERS's annual maintenance budget. The subcomponent will also include road safety awareness campaigns, strengthening enforcement on the Project-improved roads and training on road safety audits and inspections, b) Subcomponent 2B: Strengthen road rehabilitation and planning processes will cover a road condition survey for the entire National Road Network, an update of the national road database, institutionalization of the development of multi-year maintenance plans based on clearly-defined economic, social and regional criteria; and the adoption and implementation of updated design standards for maintenance and rehabilitation; c) Subcomponent 2C: Strengthening maintenance management will cover the development of a strategic plan for Performance-based maintenance contracts ("PBMC"), preparation of model bidding documents for PBMC, training staff and contractors on PBMC, and provision of implementation support. 3. Component 3: Project Detailed Design, Supervision, Management and Monitoring will cover the following: a) Subcomponent 3A: Supervision and Technical Control for emergency works and for regular works. This subcomponent covers the design and supervision costs for all the roads covered by the Project. ROAD REHABILITATION AND SAFETY PROJECT IBRD Project ID: P127876 IBRD Loan No. 8255-YF EIB Loan No. 82.640 EBRD Loan No. 44750 NOTES TO THE STATEMENTS For the Year Ended December 31, 2016 1. BACKGROUND (Continued) b) Subcomponent 3B: Project management support. This includes project management support and capacity building to PIT as may be necessary in procurement, financial management, environmental and social safeguards and annual program planning. c) Subcomponent 3C: Project Audits. This includes: (i) the Integrated Performance Audit which will review engineering designs, management of social and environmental issues, procurement, quality assurance, contract management and compliance to agreed conditions, quality of project supervision, review of traffic safety implementation, and achievement of disbursement-linked indicators ("DLis") to trigger disbursement. Works on the rehabilitation of the road network are expected to be executed on 55 sections under the Project, with wide geographic distribution and by implementing the specific measures to improve the road safety, environmental protection and to enhance social aspects in the works execution area, pursuant to policies and procedures stipulated by IFIs. In order to provide proceeds to remedy the damage occurred to the Serbian road network, sections under the Project, due to the floods and heavy rains from May 2014, a framework for the inclusion of the Emergency works component has been established in cooperation with IFIs in the period May - June 2015 and the restructuring of the financial arrangements commenced. Implementation of the Emergency works component is in progress and it covers execution of the works on repair and rehabilitation of 10 road sections (based on design and build contract conditions) as well as implementation of Consulting Services for technical control of designs and supervision of road emergency works and environmental monitoring. Original one-year implementation period for the Emergency works was extended for additional 6 months for contracts financed by the EIB/IBRD, with June 30, 2016 as new expected completion date. Four contracts for Emergency works financed by the EBRD should have been completed in the period May - July 2016, in addition, Deadlines for execution of emergency works as defined by the relevant contracts executed with contractors (ten contracts) and annexes thereto expired in 2016. As disclosed in Note 4, according to the evidence of the inspection authority, the percentage of completion of emergency works after the reporting date varied from 80% to 100%. Namely, out of total, for five contracts emergency works have not been fully completed yet. One of the aforesaid contracts was annexed in 2016 to extend the term for completion of emergency works, while for the remaining four contracts the process of annex execution is in progress. As it was disclosed in Statement of expenditures, total budgeted disbursements for the completion of emergency works financed by EBRD amounted to EUR 25,034,940. Out of total, EBRD disbursed to vendors the amount of EUR 13,825,481 through direct payments, for the expenditures with respect to the emergency works completed in 2015 and 2016. In terms of financing, the Project is composed of two sub-projects: 1. Sub-project co-financed by RoS, EIB and IBRD proceeds, which, in addition to the road rehabilitation works, will cover all other activities and services envisioned by the Project in the total amount of approximately EUR 290 million (where the Project payments are effected from disbursed proceeds pursuant to the terms of financial agreements) and 2. Sub-project financed by funds of EBRD, which includes only the road rehabilitation works in the amount of EUR 100 million (where payments are to be made directly by EBRD to the Contractors' account). According to the Operational Manual for the implementation of the Project, dated October 31, 2014 respective individual shares in financing are as follows: Loan Amount % Total Funds of % of Sub - Description (EUR million) the Project Project EIB/IBRDIRoS Sub - Project IBRD 73.8 19% 25% EIB 100.0 26% 35% RoS 116.2 29% 40% Sub Total: . 290.0 74% 100% EBRD Sub- Project EBRD 1000 26% 100% 100.0 26%_ - Total RRSP 390.0 100% 100% 9 ROAD REHABILITATION AND SAFETY PROJECT IBRD Project ID: P1 27876 IBRD Loan No. 8255-YF EIB Loan No. 82.640 EBRD Loan No. 44750 NOTES TO THE STATEMENTS For the Year Ended December 31, 2016 1. BACKGROUND (Continued) The Loan Agreements executed with IBRD and EBRD define distribution of expenditures according to the respective categories being financed, while the Financial Contract executed with EIB does not define distribution of expenditures. The Operation Manual for the Implementation of the Project, uniting and aligning the policies of all three IFIs, defines classification of expenditures across the Project components since it is this expenditure classification per components that is relevant for subsequent assessment of the Project' performance. For the purpose of unification of the terminology applied in financial reporting on the Project expenditures, expenditures under the Sub-project 1 will be recorded through all three components, while total expenditures financed from the EBRD loan funds will be recorded through Sub-project 2 and component 1. Not one of the creditors (IFIs) have so far issued specific approval of the expenditure classification per components nor have they delivered any comments on the interim financial statements submitted up to date suggesting any weaknesses in the expenditure classification applied. During Project restructuring, it was accepted that the Emergency works were to be treated as part of category I under the IBRD Loan Agreement and as a constituting element of category 1 of the EBRD Loan Agreement. These expenditures within Sub-project 1 and Sub-project 2 are treated under component 1. Since this category of expenditures is not financed by RoS, the agreement of IFls was that the principle of financing shall be 50% from the IBRD and 50% from the EB funds within Sub-project 1. This principle is applied during disbursement of tranches, but due to non-harmonized payments and different policies of IFis in respect of conditions for disbursement of tranches, the applied principle is not mandatory and strict in final distribution of expenditures under this category. The principle of share in financing under Sub-project 1 with the general share of IBRD 25%, EIB 35% and RoS 40% is of higher significance for IFIs. In addition, although within the classification of expenditures, the Services of Supervision and Technical Control for Emergency works do not belong to component 1, given the type of the works for which the Services were contracted, the principle of financing was planned as with the Emergency works, i.e. RoS was also excluded from financing of these Services. Additionally, for all categories of expenditures that are not recognized as eligible expenditures in EIB's procedures, the general approach (25%:35%:40%) could not be applied. The example of such approach is training under the Project which is fully (100%) funded from the IBRD loan, as well as design services procured through CQS method (60% funded form IBRD loan and 40% funded by RoS). Due to relatively low level of transactions in the first and second year of the Project, the management of PIT believes that the aforesaid do not rise any risks to the sources of financing or will have any impact to the Project implementation. 2. LOAN AGREEMENT 2.1, A brief description of the Loan Agreement - IBRD Loan No. 8255 - YF IBRD and the RoS executed Loan Agreement No. 8255 on November 27, 2013. An Amendment to the Loan Agreement was signed on February 3, 2015. According to the provisions of the Loan Agreement, the total loan amounts to EUR 73,800,000. On September 19,. 2014, the Supplementary Agreement was signed on the transfer of loan proceeds stipulating the commitment of IBRD to transfer to PERS the right to use funds in the amount of EUR 73,615,500, i.e. the agreed Loan amount reduced by the amount of front - end fee. The following table specifies the categories of eligible expenditures that may be financed out of the proceeds of the Loan ("category"), the allocation of the amounts of the Loan to each category, and the percentage of expenditures to be financed for eligible expenditures in each category. Amount of the Loan Percentage of Expenditures Category Allocated to be financed (expressed in EUR) (exclusive of Taxes) (1) Goods, works; non-consulting services, and consultant services for Part I and Part 2 of the Project 100% (2) Goods, consultants' services, training, incremental operating costs for Part 3 of the Project, and audit 4,855,000 100% Fee payable by RoS equal to 0.25% of the Loan amount for (3e Front-end fee 184500 draw-down of Loan funds TOTAL LOAN AMOUNT 73,800,000 10 ROAD REHABILITATION AND SAFETY PROJECT IBRD Project 10: P1 27876 IBRD Loan No. 8255-YF EIB Loan No. 82.640 EBRD Loan No. 44750 NOTES TO THE STATEMENTS For the Year Ended December 31, 2016 2, LOAN AGREEMENT (Continued) 2.1. A brief description of the Loan Agreement - IBRD Loan No. 8255 - YF (Continued) The main terms and conditions of the Loan Agreement are described below: 1. The final Loan availability date is December 31, 2019 and by that time Loan funds may be drawn. 2. After conditions for the Loan effectiveness in the amount of the estimated expenditures for the Project Year 1 are met, the Loan repayment is scheduled in semi-annual installments payable on each June 15 and December 15 for each year. 3. The first tranche was drawn in the amount of EUR 18,500,000 in 2015, while the second tranche was drown in the amount of EUR 6,569,000 in 2016. The Minister of Finance and Assistant Minister of Finance are signatories of the requests for tranche draw/down, which are sent to the National Bank of Serbia ("NBS"). 4. The method of disbursement applied is advance payment (based on the procedures of IBRD). 5. The Procurement Plan defines certain road sections on which works will be conducted. 6. During the 5-month period between the date of the Loan Agreement effectiveness and the date of availability of the proceeds, IBRD and the RoS completed all necessary activities to finalize the operational procedures for the withdrawal of the first tranche and first requests for payments were submitted under the concluded contracts 7. For the purposes of the Project and according to the Operational Manual for the implementation of the Project, PERS' obligation was to initiate opening of designated account with NBS, one for IBRD and EIB, each. These two separate designated accounts are accounts to which the funds drawn from IBRD and EIB are placed (deposited). Funds from these accounts needed for payments in local currency are thereafter transferred to PERS' sub-account in Serbian dinars with the Treasury as frequently as necessary (possibly on a daily basis) at the exchange rate effective as of the transfer date. These designated accounts are to be used to ensure effective implementation of the Project and utilization of IBRD and EIB financing. 2.2. A brief description of the Financial Contract - EIB Loan No. 82.640 EIB and RoS executed Loan Agreement No. 82.640 on November 27, 2013. An Amendment to the Financial Contract was signed on July 17, 2015. According to the provisions of the Financial Contract, the total loan amounts to EUR 100,000,000. The main terms and conditions of the Financial Contract are described below: 1. The final Loan availability date is November 30, 2018 and by that time Loan funds may be drawn. 2, EIB shall disburse the Loan in up to 20 tranches. The amount of each tranche, if not being the undrawn balance of the Loan, shall be in a minimum amount of EUR 5,000,000, 3. The Loan proceeds were made available on July 17, 2015, but the first tranche of the Loan totaling EUR 10 million was effected on December 7, 2015. Payment of the first tranche was delayed as the procedure for application for disbursement had to be repeated and re-certified to fulfil the conditions for payment by EIB. Meanwhile, payments under the Emergency works were effected out of IBRD Loan proceeds. No payments were effected out of EIB Loan in 2015. The first payments from these funds were made in 2016. 4, .As already described under IBRD Loan, point 7, for the purpose of the Project two separate designated accounts were opened with NBS. 5. The Financial Contract do not set forth the categories, the amounts of loan funds allocated to each category and the percentages of expenditures to be financed in each category. 11 ROAD REHABILITATION AND SAFETY PROJECT IBRD Project ID: P127876 IBRD Loan No. 8255-YF EIB Loan No. 82.640 EBRD Loan No. 44750 NOTES TO THE STATEMENTS For the Year Ended December 31, 2016 2. LOAN AGREEMENT (Continued) 2.3. A brief description of the loan agreement - EBRD Loan No. 44750 EBRD and RoS executed Loan Agreement No. 44750 on November 27, 2013. An Amendment to the Loan Agreement was signed on October14, 2015. According to the provisions of the Loan Agreement, the total loan amounts to EUR 100,000,000. The following table sets forth the categories, the amounts of the Loan allocated to each category and the percentages of expenditures to be financed in each category. Amount of the Loan % of Allocated Expenditures to Category Description (epesedinEUR) be financed 100% (excluding Category 1 Civil Works for Part A - Road Section 1 27,853,000 taxes & duties) 100% (excluding Category 2 Civil Works for Part A - Road Section 2 20,053,000 taxes & duties) 100% (excluding Category 3 Civil Works for Part A - Road Section 3 41,260,000 taxes & duties 100% (excluding Category 4 Civil Works for Part A - Road Section 4 9,834,000 taxes & duties Category 5 Front-End Fee 1,000,000 100% Total Loan Amount 100,000,000 _______ EThe main terms and conditions of the Loan Agreement are described below: 1 The final Loan availability date is June 30, 2018 and by that time Loan funds may be drawn. 2. RoS shall repay the Loan in 24 equal semi-annual instalments on June 15 and December 15 of each year, the first Loan repayment date being the interest payment date falling on or immediately after the third anniversary of this Loan Agreement, Thq minimum drawdown amount shall be EUR 100,000, the minimum prepayment amount shall be EUR 5,000,000 and the minimum cancellation amount shall be EUR 5,000,000. The interest payment dates shall be 15 June and 15 December of each year. The rate of the commitment charge shall be 0.5% per annum. 3. The method of disbursement applied is direct payment (based on the procedures of EBRD). 4. The Loan is subject to a variable interest rate. RoS may, as an alternative to paying interest at a variable interest rate on all or any portion of the loan then outstanding, elect to pay interest at a fixed interest rate on such a portion of the loan as per the standard terms and conditions. 5. The Loan became effective on May 13, 2015, but the Loan funds were not available for expenditures of the Emergency works until the effectiveness of Amendment 1 to the Loan Agreement. Delayed payments with two to five months of delay have been recorded in 2015. No delayed payments were recorded in 2016. 6. A designated account has not been open for the proceeds from EBRD because EBRD pays contractors directly in the amount of costs. 2.4t A brief description of the Contribution of RoS RoS's share in the total financing of the Project equals 29% (40% in the total financial of the subproject 1) and amounts to approximately EUR 116.2 million. There are no detailed allocation of the contribution of RoS to each category and the percentages of expenditures to be financed in each category. However, on the basis of [he Project dynamics and Project cash-flow covering whole life of the Project which does include detailed allocation of the contribution of RoS to each particularly contract, the budget for financing the participation of the Republic of Serbia shall be determined annually through PERS business plan The restructuring of the Project through incorporation of the Emergency works component and rescheduling dynamics of works from the regular part of the Project program to the later period of implementation, excluded the RoS contribution from the Emergency works financing. Therefore, the percentage of the national co-financing share will be increased in the following years to attain the amount of RoS total contribution at the overall Project level 12 1ITefnlLa viablt aei ue3, 08adb httmKLa ud a edan ROAD REHABILITATION AND SAFETY PROJECT IBRD Project ID: P1 27876 IBRD Loan No. 8255-YF EIB Loan No. 82.640 EBRD Loan No. 44750 NOTES TO THE STATEMENTS For the Year Ended December 31, 2016 2. LOAN AGREEMENT (Continued) 2.4. A brief description of the Contribution of RoS (Continued) No funds were spent out of this source of the Project financing for the year ended December 31, 2015, while for the year ended December 31, 2016 the contribution of RoS in the Project financing (Component 3 - Project Detailed Design, Supervision, Management and Monitoring) amounted to EUR 238.387. 2.5. Breakdown of unspent funds for approved credit lines The following table presents the breakdown of unspent funds per each co-financing party as at December 31, 2016: (EUR million) Disbursed Undisbursed Description Loan Amount* expenditures funds EIB/IBRDIRoS Sub - Project IBRD 73.6155 17.90 55.7155 EIB 100,0 18.68 81.32 RoS 116.2 0.24 115.96 Sub Total: 289.8155 36.82 252.9955 EBRD Sub - Project EBRD 99.0 13.83 85.17 99.0 13.83 85.17 Total RRSP 388.8155 50.65 338.1655 * Loan Amounts for IBRD and EBRD are stated in the net amounts without Front-end fee amounting to EUR 184,500 and EUR 1,000,000 respectively, 2.6. Breakdown of committed but undisbursed funds per components and sub projects The following table presents the breakdown of corhmitted but undisbursed funds per components and sub projects as at December 31, 2016: (EUR) Disbursed Committed but Description Contracted* expenditures undisbursed EIBIBRDIRoS Sub - Project Component 1 - Road Rehabilitation and Safety - Emergency works 45,554,722 34,059,209 11,495,513 CoMponent 2 - Institutional Strenthen - Training and workshops 20,399 20,399 - Component 3 - Project Detailed Desim, Supervision, Management and Monitorinq Technical Control of Designs and Supervision of Road Emergency works and Environmental Monitoring 5,868,263 2,741,027 3,127,236 Sub Total: 51,443,384 36,820,635 14,622,749 EBRD Sub - Project Component I - Road Rehabilitation and Safety - Emergency works 25,034,940 13,825,481 11,209,459 25,034,940 13,825,481 11,209,459 Total 76,478,324 50,646,116 25,832,208 Contracted values originally expressed in Serbian dinars were translated into EUR at the NBS middle exchange rate effective as of the contract execution date 13 ROAD REHABILITATION AND SAFETY PROJECT IBRD Project ID: P127876 IBRD Loan No. 8255-YF EIB Loan No. 82.640 NOTES TO THE STATEMENTS EBRD Loan No. 44750 For the Year Ended December 31, 2016 3. BASIS OF PREPARATION OF THE STATEMENTS AND ACCOUNTING CONVENTION 3.1. General The accompanying Statements have been prepared for the purposes of reporting to IFIs and RoS on the activities of the Project with respect to the funding received for the completion of the Project objectives in accordance with the respective Loan Agreements. In the records of IBRD, EIB and EBRD, Loans are stated in EUR, which is the contractually defined currency. Consequently, as per the adopted accounting policy, PIT accounts for and reports all the transactions in EUR amounts as well. As requested by Operational Manual for the implementation of the Project, these Statements include all Project-related expenditures incurred, which are financed by IBRD Loan No. 7463 YF, EIB Loan No. 82.640, EBRD Loan No. 44750, as well as the expenditures financed by RoS, 3.2. Accounting Records and Basis of Presentation All funds originated from Loans are accounted for using the cash receipt and disbursement basis. On this basis, funds are recognized by PIT within PERS when actually received on the designated accounts in the case of IBRD, EIB and RoS and expenses are recognized when they are paid, rather than when incurred. Considering that the model applied by EBRD is direct payment, the Project costs are recorded when the payments are made. 3.3. Exchange Rates Expenditures paid in Serbian dinars from the sub- account for uses of IBRD and EIB funds were translated into EUR at the exchange rate effective at the date of conversion from EUR designated accounts. The exchange rates of those conversions are stated by NBS in its official letter at the conversion date. NBS uses the buying exchange rate at the date of each conversion. For the purpose of presenting the use of funds converted to the sub-account in Serbian dinars and for identification of the source of funds (Loan), PIT applies the exchange rate specified by NBS for converting the expenditures paid from the sub-account in Serbian dinars. Inflows from IBRD/EIB funds were translated into EUR using the NBS buying exchange rate at the date of each conversion. Expenditures paid in Serbian dinars from the sub- account for uses of RoS funds were translated into EUR at the NBS middle exchange rate effective at the date of payment. Expenditures paid in EUR were translated into EUR at the NBS selling rate at the date of purchase, Inflows from RoS funds were translated into EUR using the NBS middle exc. rate at the date of inflow. The funds disbursed in Serbian dinars under EBRD Loan were translated into EUR at the exchange rate stated in Disbursement Advice issued by EBRD for every payment. 4. EVENTS AFTER THE REPORTING DATE Deadlines for execution of emergency works as defined by the relevant contracts executed with contractors (the total of ten contracts) and annexes thereto expired in 2016. According to the evidence of the inspection authority, the percentage of completion of emergency works after the reporting date varied from 80% to 100%. Namely, out of total, for five contracts emergency works have not been fully completed yet. One of the,aforesaid contracts was annexed in 2016 to extend the term for completion of emergency works, while for the remaining four contracts the process of annex execution is in progress. 14 ROAD REHABILITATION AND SAFETY PROJECT IBRD Project ID: P127876 IBRD Loan No. 8255-YF EIB Loan No. 82.640 EBRD Loan No. 44750 NOTES TO THE STATEMENTS For the Year Ended December 31, 2016 4. EVENTS AFTER THE REPORTING DATE (Continued) The detailed breakdown of percentages of emergency works completion per sub-projects and roads sections (contracts) is presented in the following table: % of the emergency Contracted works Road sections/contract value in EUR completion EIB/IBRDIRoS Sub - Project Component 1 - Road Rehabilitation and Safety - Emergency works Arandjelovac (Ora§ac) - Kr6evac 3,516,921 100% Lazarevac 4 - Arandelovac 6,190,183 100% Zavlaka 2 - Pritevi6i 8,662,820 99% Krst - Zavlaka 2 6,031,206 99% Mali Zvornik - Gradanica 11,036,887 100% Banja Koviljada - Mali Zvornik Mali Zvornik -- Ljubovija 1 10,116,705 90% Sub Total: 45,554,722 EBRD Sub - Project Component I - Road Rehabilitation and Safety -Emergency works Topola 1 - Buin Grob 9,606,625 80% Ra6ka 2 - Jarinje 4,563,957 100% Roga6ica 2 - Bajina Ba§ta 4,595,753 95% Mr6ajevci - Kraljevo 1 6,268,604 100% 25,034,940 Total 70,589,662 15 115