Local Government Units Development and Lending Fund Multi-Donor Trust Fund )TF0A1061( 2nd Additional Contribution into Municipal Development Program Phase II (Cycle II), through the International Development Association (IDA) Financial Statements For the Year Ended December 31, 2017 Together With Independent Auditors’ Report Local Government Units Develo ment and Lendin Fund MDTF 2nd Additional Contribution into ~uni~ipal Developf!!enj Progra~ :- Phase II C de II Statement of Asse ts, Liabilities and Net Assets As at Decemb er 3;L 2011 (Currency: USIJ) N ote 2017 2016 Assets Current Assets Cash at bank 4 677,551 1,465,354 Pledges receivable 5 3,471,229 T otal Assets 677,551 4,936,583 ~ = =: Liabilities and Net-Assets Current Liabilities Due to contractors 357,251 1,402,901 Due to LGCDLF 64,840 T otal Liabilities 357,251 1,467,741 .:'(et Assets Lnrestricted 213,757 (174,413) Temporarily restricte d 6 106,543 3,643,255 Total Net Assets 320,300 3,468,842 -- - - Total Liabilities and Net Assets 677,551 4,936,583 ==- -~ - These financial s tatements w e re authorized for issuance by LGL:'DLF management on Ylarch 1S, 2018 and were signc on its behalf by: The accmnpanying notes form an integral part of these financia l statements 4 Local Government Units Development and Lending Fund MDTF 2nd Additional Contribution into Municipal Development Program – Phase II (Cycle II) Statement of Revenues and Expenses and Changes in Net Assets For the Year Ended December 31, 2017 (Currency: USD) Period from Year Ended April 14, 2016 to December 31, December 31, Note 2017 2016 Changes in unrestricted net assets: Revenues Released from temporarily restricted net assets 6 3,536,712 3,256,745 Interest income 12,272 546 Currency variance gain (loss) 377,610 (174,959) Total unrestricted revenues 3,926,594 3,082,332 Expenses Project’s expenses 7 3,536,712 3,256,745 Transfer of interest revenue accumulated balance to LGUDLF general fund 1,712 - Total expenses 3,538,424 3,256,745 Net change in unrestricted net assets 388,170 (174,413) Changes in temporarily restricted net assets: Grants and donations - 6,900,000 Net assets released from restriction 6 (3,536,712) (3,256,745) Net change in temporarily restricted net assets (3,536,712) 3,643,255 Change in net assets (3,148,542) 3,468,842 Net assets, beginning of year /period 3,468,842 - Net assets, end of year /period 320,300 3,468,842 The accompanying notes form an integral part of these financial statements 5 Local Government Units Development and Lending Fund MDTF 2nd Additional Contribution into Municipal Development Program – Phase II (Cycle II) Cash Flows Statement For the Year Ended December 31, 2017 (Currency: USD) Period from Year Ended April 14, 2016 December 31, to December 2017 31, 2016 Cash Flow from Operating Activities Change in net assets (3,148,542) 3,468,842 Adjustments to reconcile change in net assets to net cash flow from operating activities: Decrease (increase) in pledges receivable 3,471,229 (3,471,229) (Decrease) increase in due to contractors (1,045,650) 1,402,901 (Decrease) increase in due to LGUDLF (64,840) 64,840 Net cash flow (used in) provided by operating activities (787,803) 1,465,354 Net (decrease) increase in cash at bank (787,803) 1,465,354 Cash at bank, beginning of year / period 1,465,354 - Cash at bank, end of year / period 677,551 1,465,354 The accompanying notes form an integral part of these financial statements 6 Local Government Units Development and Lending Fund MDTF 2nd Additional Contribution into Municipal Development Program – Phase II (Cycle II) Designated Bank Account Statement For the Year Ended December 31, 2017 IBAN number PS84TNBC000000000001003301466 Account number * 1003301466 Depository bank * The National Bank Address Ramallah Currency EUR Year Ended December 31, Period from April 14, 2016 2017 to December 31, 2016 Equivalent in Equivalent in EUR USD EUR USD Balance, beginning of year/period 1,401,180 1,465,354 - - Add: Receipts during the year/period 3,330,489 3,678,388 3,029,753 3,428,771 Interest income 10,618 12,272 522 546 Currency variance gain (loss) - 170,451 - (174,959) 3,341,107 3,861,111 3,030,275 3,254,358 Deduct: Payments during the year/period** 4,176,064 4,647,202 1,629,095 1,789,004 Transfer of interest revenue accumulated balance to LGUDLF general fund 1,503 1,712 - - 4,177,567 4,648,914 1,629,095 1,789,004 Balance, end of year/period 564,720 677,551 1,401,180 1,465,354 ** Reconciliation of expenses presented in the designated bank account statement with expenses presented in the statement of revenues, expenses and changes in net assets: USD Period from Year Ended April 14, 2016 to December 31, December 31, 2017 2016 Expenses per the statement of revenues, expenses and changes in net assets 3,536,712 3,256,745 Changes on due to contractors 1,045,650 (1,402,901) Changes on due to LGUDLF 64,840 (64,840) Expenses per designated bank account statement 4,647,202 1,789,004 * The designated bank account has been moved on February 21, 2017 from Bank of Palestine, account number 0471/0607303/033/3001/002, to the National Bank, account number 1003301466. The accompanying notes form an integral part of these financial statements 7 Local Government Units Development and Lending Fund MDTF 2nd Additional Contribution into Municipal Development Program – Phase II (Cycle II) Notes to the Financial Statements For the Year Ended December 31, 2017 (Currency: USD) 1. LGUDLF and its Activities The Local Government Units Development and Lending Fund (LGUDLF) had been established under the name of the Municipal Development and Lending Fund (MDLF) according to Cabinet Decree No. 05/13/12 dated August 2007. As of November 10, 2016, Decree by Law No. 25 has been issued which changed the name of MDLF to the Local Government Units Development and Lending Fund (LGUDLF). LGUDLF is a semi-governmental juridical independent organization aiming at accelerating Palestine’s drive toward self-sustained, decentralized, prosperous and creditworthy local government units. The main objective of LGUDLF is to encourage the flow of financial resources to Local Government Units (LGU). According to Decree by Law No. 25 dated November 10, 2016, LGUDLF shall undertake the following missions: - • Management of funds received through support from the Palestinian National Authority (PNA) or provided by donor countries or any other sources in compliance with the terms and conditions specified in LGUDLF's internal bylaws. • Assist local authorities develop their capacities in compliance with the bases of modern management practices to help them provide better services to the public. • Guide assistance from donor countries and provide modern fiscal services to support and develop the services offered to local authorities and to improve their credit abilities. • Encourage local authorities to adopt developmental projects to expand their geographic jurisdiction so as to serve their developmental plans. • Facilitate and provide loans to local authorities and follow up the expenditures thereof from their revenues. LGUDLF is structured to ensure an efficient, transparent, and professional institution capable of fulfilling its mission and objectives. LGUDLF comprises of Board of Directors, executive departments, and other advisory committees. 2. MDTF 2nd Additional Contribution into MDP II On April 14, 2016 an agreement was signed between the International Development Association (IDA), acting as an administrator of the Partnership for Infrastructure Development in the West Bank and Gaza Multi-Donor Trust Fund (MDTF), and the Palestinian Liberation Organization, for the benefit of Palestinian National Authority, 8 to extend an additional grant (MDTF 2nd Additional Contribution), into the finance of Phase II (cycle II) of the Municipal Development Program (MDP II), (the Project), in the amount of USD 6,900,000. The following table specifies the windows/ budget categories to be financed by MDTF 2nd Additional Contribution: Budget in USD Window 1: Municipal Grants for Capital Investments 6,417,000 Window 4: (a) Local Technical Consultant - (b) LGUDLF Management Fee 483,000 6,900,000 The accompanying financial statements pertain to MDTF 2nd Additional Contribution into MDP II. In addition, MDP II is supported by PNA along with the World Bank, Kreditanstalt für Wiederaufbau (KfW), the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), the Netherlands (through VNG International), the Switzerland (through the Swiss Federal Department of Foreign Affairs (FDFA)), the Agence Française de Development (AFD), the Belgian Development Agency (Enabel, formerly BTC) through its program (Local Government Reform and Development Programme – LGRDP) and the European Union (EU) through the KfW. Separate financing agreements were signed with these donors where separate financial statements are being issued for each agreement. MDP II was planned to be implemented over a period of 3 years in two cycles of approximately 18 months each starting in March 2014. However, the implementation of MDP II cycle II is still ongoing as of the date of these financial statements. MDP II has five windows/components as follows: Window 1 - Provides municipalities with performance-based grants for municipal service delivery per mandate of municipalities defined in the Local Councils Law No. 1 of 1997, for sectors described as eligible in the Operations Manual as well as for operating expenditures for municipalities in Gaza. The municipalities’ allocation for this window will be calculated using the newly created Grant Allocation Mechanism. Municipalities decide on how to use the funds based on their Strategic Development and Investment Plans (SDIP) and consultation with citizens. Window 2 - pilots learning and innovation for municipal development, including implementation of the Ministry of Local Government (MoLG) policy decisions. This window finances goods, works and consultant services for capacity building and capital investments, including: (a) Strengthening Newly Amalgamated Municipalities that will support newly amalgamated municipalities towards achieving service levels in existing municipalities through financing small-scale social infrastructure and demand driven municipal capacity building packages. It will finance goods, works and consultant services. (b) Piloting Innovations for improved municipal responsiveness that will support: • Introduction of E-governance in four selected municipalities for more 9 responsive service provision. • Renewable Energy that will assist municipalities in piloting sub-projects with a focus on solar energy for public buildings. • Support to Local Economic Development initiatives that will develop a municipal approach to LED and pilot the approach in 12 municipalities (6 per each cycle). Window 3 - Helps municipalities to improve their performance rankings in accordance to the new Grants Allocation Mechanism. It provides technical assistance to improve financial management, planning capacities and technical capabilities, particularly in operations and maintenance. This component would finance goods, works and consultants’ services and would be implemented in two cycles of approximately 18 months each. Window 4 - This component will finance goods and consultants’ services for monitoring and evaluation, outreach and communication and local technical consultants for the engineering supervision of sub-projects under window 1 and the LGUDLF management fee. Window 5 - This window was designed under MDP II in response to Gaza emergency needs following the 51-day war in the summer of 2014 to restore municipal services in the Gaza Strip. 3. Summary of Significant Accounting Policies The financial statements have been prepared under the historical cost convention, the significant accounting policies follow: a. General Net assets, revenues, expenses, and gains and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets and changes therein are classified as unrestricted, temporarily restricted and permanently restricted. Unrestricted net assets are those whose use by LGUDLF is not subject to donor-imposed stipulations. Temporarily restricted net assets are those whose use by LGUDLF has been limited by donors’ specific time period or purpose. Permanently restricted net assets are those restricted by donors to be maintained by LGUDLF in perpetuity. During the year, LGUDLF had no permanently restricted net assets. b. Temporarily Restricted Net Assets Unconditional promises to give cash, with no donor-imposed restriction on use, are recognized as revenues at the date promises to give are made. Unconditional promises to give cash, with temporarily donor-imposed restriction on use, are recorded as temporarily restricted net assets at the date promises to give are made, and recognized as revenues when the related costs are incurred. Unconditional promises with temporarily donor-imposed restriction are promises that depend only on passage of time and certain performance requested by the promising donors. Conditional promises to give and indications of intention to give are recorded at the fair market value at the date contribution is received by LGUDLF. c. Pledges Receivable Pledges receivable are stated at the original amount of the signed agreement less the amount received, uncollectable amount (if any) and currency variances 10 resulting from the fact that original agreements with the donors may be in currencies other than USD. d. Revenue Recognition Donations and contributions are recorded as pledges receivable and temporarily restricted net assets upon signing of the agreement with the donor. During the yearly close out process, the amount of expenses incurred is recognized as revenue under net assets released from restrictions and the temporarily restricted net assets account is reduced thereof. e. Accruals and Other Current Liabilities Accruals and other current liabilities are recognized for the amounts to be paid in the future for goods and services received, whether a bill is received from the supplier or not. f. Expenses Expenses are recorded by LGUDLF when incurred in accordance with the accrual basis of accounting, regardless of the date of actual payment. g. Foreign Currencies LGUDLF’s basic functional currency is the U.S. Dollar (USD). Transactions which are expressed or denominated in other currencies were translated to USD using exchange rates in effect at the time of each transaction. Assets and liabilities which are denominated in other currencies are translated to USD using exchange rates prevailing at the date of the statement of assets, liabilities and net assets. Gains and losses arising from the translation are reflected in the statement of revenues, expenses and changes in net assets. Foreign currency exchange rates against USD at December 31, 2017 and 2016 were as follow: 2017 2016 One EUR 1.200 1.046 4. Cash at Bank The Project’s designated bank for MDTF 2nd Additional Contribution account showed the following balance as of December 31, 2017 and 2016: 2017 2016 EUR 564,720 1,401,180 Equivalent in USD 677,551 1,465,354 5. Pledges Receivable Pledges receivable as of December 31, 2017 and movement thereon during the Year follow: Amount Balance, Addition Received Beginning of During During the Currency Balance, Year the Year Year Variance End of Year Pledges receivable 3,471,229 - (3,678,388) 207,159 - 11 6. Temporarily Restricted Net Assets Temporarily restricted net assets as of December 31, 2017 and movement thereon during the Year follow: Balance, Additions Net Assets Beginning (Grants and Released from Balance, of Year Donations) Restriction End of Year Temporarily restricted net assets 3,643,255 - (3,536,712) 106,543 7. Project’s Expenses Project’s expenses related to MDTF 2nd Additional Contribution and comparison with budget follow: USD Actual Period from Year April 14, Cumulative Ended 2016 to up to December December December Remaining Budget 31, 2017 31, 2016 31, 2017 Budget Window 1: Municipal Grants for Capital Investments 6,417,000 3,300,124 3,034,386 6,334,510 82,490 Window 4: (a) Local Technical Consultant - - - - - (b) LGUDLF Management Fee 483,000 236,588 222,359 458,947 24,053 6,900,000 3,536,712 3,256,745 6,793,457 106,543 12