U U U SECOND COMPETITIVENESS ENHANCEMENT PROJECT MPROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 N N N U N N N N U . . StatementofFinanC-aIPOSitiO· 1 summary of sources and uses of FundS Z 뻐 뻐 . 뻐 · - Deloitte & Touche SRL Bid. $tefan cel Mare, 65, Deloitte Office 300 Chi ingu, MD-2001 Moldova Tel: + 373 222 70310 Fax: + 373 222 70311 www.deloitte.md To the Management of Second Competitiveness Enhancement Project (CEP II) Chisinau, Republic of Moldova INDEPENDENT AUDITORS' REPORT Opinion 1. We have audited the accompanying special purpose financial statements of Second Competitiveness Enhancement Project (the "Project"), which comprise the balance sheet as at 31 December 2016, the summary of sources and uses of funds and the statements of designated accounts for the year ended 31 December 2016, and a summary of significant accounting policies and other explanatory notes. 2. In our opinion, the special purpose financial statements of the Project as at 31 December 2016 and for the year then ended are prepared, in all material respects, in accordance with the requirements of cash accounting and the financial reporting provisions of the financing agreements referred to in the paragraph 6. Basis for Opinion 3. We conducted our audit in accordance with the International Standards on Auditing (ISAs). Our responsibilities under this law and regulation are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Project in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with 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, Restriction on Use 4. We draw attention to Note 2 to the special purpose financial statements, which describes that these financial statements are prepared on a basis of cash accounting according to which income and expenditures are recognized when cash is actually received or paid out rather than incurred. Our opinion is not modified in respect to this matter. 5. These special purpose financial statements are prepared to assist the Second Competitiveness Enhancement Project to comply with the financial reporting provisions of the financing agreements referred to in paragraph 6 and may not be suitable for another purpose. Our report is intended solely for the Project and the World Bank, and should not be used by any other party not familiar with the financial reporting provisions of the financing agreements referred to in paragraph 6. Our opinion is not modified in respect to this matter 1 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see . for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. * Deloitte Management's Responsibility for the Financial Statements 6. Management is responsible for the preparation of these special purpose financial statements in accordance with the financial reporting provisions of the financing agreement 5509-MD signed between the Republic of Moldova and International Development Association on 15 July 2014 and loan agreement 8400-MD signed between the Republic of Moldova and International Bank for Reconstruction and Development on 15 July 2014 and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. 7. In preparing the special purpose financial statements, management is responsible for assessing the Project's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Project or to cease operations, or has no realistic alternative but to do so. 8. Those charged with governance are responsible for overseeing the Project's financial reporting process. Auditor's Responsibility 9. Our objectives are to obtain reasonable assurance about whether the special purpose financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: a Identify and assess the risks of material misstatement of the special purpose 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 Project's internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. * 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 Project's ability to continue 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 financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date 2 U Deloitte of our auditor's report. However, future events or conditions may cause the Project to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. 10. 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. Deloitte & Touche S.R.L. Chisinau, Moldova 15 June 2017 SECOND COMPETITIVENESS ENHANCEMENT PROJECT BALANCE SHEET AS AT 31 DECEMBER 2016 (all amounts are expressed in USD, unless otherwise mentioned) December 31, December 31, Notes 2016 2015 ASSETS Cash and cash equivalents Designated account IBRD 1,500,000 270,247 Designated account IDA 195,907 433,133 Total cash and cash equivalents 1,695,907 703,380 Undisbursed balance Undisbursed balance IBRD 18,789,724 22,271:559 Undisbursed balance IDA 9,693,301 12,016,191 Total undisbursed balance 28,483,025 34,287,750 Cumulative project expenses Spent IBRD 4, 5, 6 9,710,275 7,458,194 Spent IDA 4, 5, 6 3,279,796 1,006,738 Total cumulative project expenses 12,990,071 8,464,932 Exchange rate differences 7 (129,002) (14,481) TOTAL ASSETS 43,040,001 43,441,581 FUNDS AND LIABILITIES Funding Loan agreement IBRD 30,000,000 30,000,000 Financing agreement IDA 13,040,001 13,441,581 Total funds 43,040,001 43,441,581 TOTAL FUNDS AND LIABILITIES 43,040,001 43,441,581 The financial sta ements and accompanying notes on pages 5 to 12 were signed and approved on beh-alf of the roject's management on 15 June 2017 by: Aureliu Casia Tatiana Rodideal Project Execitive Director Accountant SECOND COMPETITIVENESS ENHANCEMENT PROJECT SUMMARY OF SOURCES AND USES OF FUNDS FOR THE YEAR ENDED 31 DECEMBER 2016 (all amounts are expressed in USD, unless otherwise mentioned) For the year ended Cumulative Notes December 31, 2016 to date Opening cash balances Designated account 8400-MD 270,247 Designated account 5509-MD 433,133 - Total opening cash balances 703,380 - Add: Sources of funds IBRD 8400-MD 3 3,481,834 11,210,275 IDA 5509-MD 3 2,035,832 3,475,703 Total Sources of Funds 5,517,666 14,685,978 Less: Uses of Funds IBRD 8400-MD (1) Sub-loans under Part 3(a) of the Project 4, 5, 6 2,244,521 9,694,509 (2) Goods, non-consulting services, consultants' services (including audits), training and incremental operating costs under Parts 3(b) and 3(c) of the Project; and audits under 4,5,6 Part 3(a) of the Project 7,560 15,766 IDA 5509-MD (1) Goods, non-consulting services, consultants' services (including audits), training and incremental operating costs under Parts 1(a), 1(b), 2(a) and 2(b)(i) of the project and audits under Parts 1(c), 2(b)(ii) and 4,5,6 2(c) of the project 45,61,277,562 2,284,300 (2) Matching grants under Part 2(b)(ii) of the project 93,356 93,356 (3) Payments for EEPs under Parts 1(c) and 2(c) of the project 902,140 902,140 Total uses of funds 4,5,6 4,525,139 12,990,071 Closing cash balances Designated account 8400-MD 1,500,000 1,500,000 Designated account 5509-MD 195,907 195,907 Total closing cash balances 1,695,907 1,695,907 The financial state ents and accompanying notes on pages 5 to 12 were signed and approved on beh of the Project's management on 15 June 2017 by: Aureliu Casian Tatiana Rodideal Project Executive Director Accountant 2 SECOND COMPETITIVENESS ENHANCEMENT PROJECT STATEMENT OF DESIGNATED ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2016 (all amounts are expressed in USD, unless otherwise mentioned) For the period ended 31 December 2016 Accountno. 3261884032 Depository Bank Ministry of Finance - State Treasury SWIFT code TREZMD2X International Bank for Reconstruction and Development For the year ended Notes 31 December 2016 Opening balance, 01 January 2016 270,247 N Add: D Sources of funds 3 3,481,834 Deduct: _ _ _ Uses of funds 4,5.6 2,252,081 Closing balance, 31 December 2016 1,500,000 The financial state ents and accompanying notes on pages 5 to 12 were signed and approved on beha of the Project's management on 15 June 2017 by: Aureliu Casiani Tatiana Rodideal Project Executive Director Accountant N3 SECOND COMPETITIVENESS ENHANCEMENT PROJECT STATEMENT OF DESIGNATED ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2016 (all amounts are expressed in USD, unless otherwise mentioned) For the period ended 31 December 2016 Account no. 3261184033 Depository Bank Ministry of Finance - State Treasury SWIFT code TREZMD2X International Development Association For the year ended Notes 31 December 2016 Opening balance, 01 January 2016 433,133 N Add: D Sources of funds 3 1,133,692 Deduct: _ _ _ Uses of funds 4,5.6 1,370,918 N Closing balance, 31 December 2016 195,907 The financial stater nts and accompanying notes on pages 5 to 12 were signed and approved.,on behalf of the Project's management on 15 June 2017 by: Aureliu Casian Tatiana Rodideal Project Execufive Director Accountant I4 SECOND COMPETITIVENESS ENHANCEMENT PROJECT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (all amounts are expressed in USD, unless otherwise mentioned) 1. GENERAL INFORMATION Project description The Second Competitiveness Enhancement Project is regulated by the Loan Agreement 8400-MD between International Bank for Reconstruction and Development and Republic of Moldova in amount of USD 30,000,000 signed on July 15. 2014 and by the Financing Agreement 5509-MD between International Development Association and Republic of Moldova in amount of SDR 9,700,000 signed on July 15, 2014. The objective of the Project is to increase the export competitiveness of the Recipient's enterprises and decrease the regulatory burden they face. The Project consists of the following parts: Part 1: Regulatory Reform Provision of support for: (a) Improving the timely delivery of the Recipient's business regulatory reform strategies and the quality of the business enabling environment; and (b) Implementing priority reforms to improve export competitiveness; and (c) Provision of financing of payments under the Eligible Expenditure Program (EEP) in support of the business regulatory reform. Part 2: SME Development Provision of support for: (a) Strengthening the institutional capacity of ODIMM and MIEPO to facilitate business sophistication and integration into global supply chains for SMEs and exporters; and (b) Establishing a Matching Grant Facility (MGF) to assist Matching Grant Beneficiaries in the implementation of business improvement plans focused on export competitiveness and (c) Provision of financing of payments under the Eligible Expenditure Program (EEP) to support the institutional strengthening of ODIMM and MIEPO Part 3: Access to Finance Provision of support for: (a) Provision of sub-loans by eligible PFIs to support investment and working capital financing needs of Beneficiary Enterprises; and (b) Providing support to ODIMM to revise and implement its credit guarantee scheme; and (c) Provision of technical assistance to MOE, MOF, other relevant Recipient's public authorities and financial institutions in the Recipient's territory on developing value chain financing models. I 5 SECOND COMPETITIVENESS ENHANCEMENT PROJECT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (all amounts are expressed in USD, unless otherwise mentioned) Results Based Financing (RBF) The project includes an innovative US$3 million performance - based lending (PBL) funding element, in the reform of results-based financing. There are four Disbursement Linked Indicators (DLIs) related to activities from "Regulatory Reform" and "SME Development" components. These indicators will be evaluated by the World Bank in three steps, throughout the project implementation period, i.e. April 2015, December 2017 and December 2019. Each DLI payment values US$ 250,000, thus the total annual amount of DLls represents US$ 1 million. RBF portion of the loan will be disbursed to the treasury account of the Ministry of Finance, against (and will reimburse) priority Ministry of Economy budget expenditures (EEPs) conditioned upon achievement of Disbursement-Linked Indicators (DLIs) for the respective time period. EEPs have been identified as staff compensation costs for the institution whose mandate is core to achieving the project's objectives and results: the Ministry of Economy. The project supports achievement of MoE's reform objectives and the mandate that it has been given by the government: to advance regulatory reform. SME development, exports, access to finance, and ensuring a sound enabling environment for business operations. Project management Project Implementation Unit Preparation of Competitiveness Enhancement Project II (CEP II) Executive Director - Aureliu Casian 180, Stefan cel Mare bd., off. 815 Chisinau, Republic of Moldova I I I6 SECOND COMPETITIVENESS ENHANCEMENT PROJECT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (all amounts are expressed in USD, unless otherwise mentioned) 2. SIGNIFICANT ACCOUNTING POLICIES Basis of accounting The Project Financial Statements have been prepared in accordance with generally accepted accounting principle and practices and relevant World Bank guidelines. The cash basis of accounting was used in the preparation of these Project Financial Statements since the recording of cash receipts and payments is the primary interest- Under the cash basis system income (or expenditure) is recognized when cash is received (or paid) irrespective of when goods or services are received. The amounts are expressed in USD and financial statements are prepared for the year ended 31 December 2016. Designated account The designated account opened by the Treasury at the Nationall Bank of Moldova is the account through which the replenishments are drawn. All payments for eligible expenses are made from this designated account and if the payment is in local currency it is made through transitory account. Transitory accounts The transitory accounts are held at State Treasury for the converted amount in MDL, since the payments within the country can be done only in the local currency (MDL). Exchange rates The Exchange rate used to convert the USD amounts in MDL is the official exchange rate of National Bank of Moldova on the date of payment. Sources of funds The sources of funds are the amounts transferred by the World Bank from the loan account, to the Designated Account of the Project. Uses of funds The uses of funds are the amounts spent for covering eligible expenditures for the needs of the Project. Consultants' services Consultants' services consist of short and long-term assignments to be contracted to firms and/or individuals (national and/or international) depending on the nature and duration of the assignments. Selection procedures will be generally through competition among qualified short listed consultants. Goods Goods required under the project are of nature of information technology (IT) systems and office equipment. 7 SECOND COMPETITIVENESS ENHANCEMENT PROJECT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (all amounts are expressed in USD, unless otherwise mentioned) Foreign expenditures Foreign expenditures means expenditures in the currency of any country other than that of the Borrower for goods or services supplied from the territory of any country other than that of the Borrower, Local expenditures Local expenditure means any expenditure in the currency of the Borrower or for goods or services supplied from the territory of the Borrower. Operating Costs Operating costs means the expenditures incurred by the PlU on account of Project, including minor office equipment, furniture and supplies, utilities, communications and internet fees, copying, reproduction and publication costs, travel and per diem costs of PIU and governmental staff directly associated with the implementation of the Project activities, and such other expenditures as may be agreed upon by the Bank. Matching Grants Grants provided by the Ministry of Economy through the Matching Grant Facility Administrator out of the Matching Grant Facility to Matching Grant Beneficiaries. Training Training means training activities (other than consultants' services) to be carried out under the Project, as approved by the Association on the basis of the annual training and study tour plans acceptable to the Association- Foreign currency Transactions denominated in currencies other than US Dollar are translated at the National Bank of Moldova established rates ruling at the date when they occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at last day of the reporting period. Foreign currency non-monetary assets and liabilities are translated at historical rates. I SECOND COMPETITIVENESS ENHANCEMENT PROJECT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (all amounts are expressed in USD, unless otherwise mentioned) 3. WITHDRAWAL SCHEDULE W/D Number (1) Goods, works, non- consulting services, consultants' services, (2) Results-based training and operating financing (RBF) Total costs for the Project 8400-MD Apl. 7 1,229,753 - 1,229,753 Apl 8 334,488 - 334,488 Apl. 9 352,440 - 352,440 Apl. 10 995,493 - 995,493 Apl. 11 569,660 - 569,660 Total 3,481,834 - 3,481,834 5509-MD Apl. 8 383,107 - 383,107 Apl. 9 323,658 - 323,658 Apl. 10 426,927 - 426,927 Apl. MF 1 - 113,680 113,680 Apl. MF 2 - 450,708 450,708 Apl. MF 3 - 337,752 337,752 1Total 1,133,692 902,140 2,035,832 Grand total 4,615,526 902,140 5,517,666 9 SECOND COMPETITIVENESS ENHANCEMENT PROJECT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (all amounts are expressed in USD, unless otherwise mentioned) 4. SOE SCHEDULE Goods, non- Goods, non- consulting consulting services, services, consultants' services consultants' (including audits), services (including training and Sub-loans audits), training incremental WID under Part and incremental operating costs Total Number 3(a) of the operating costs under Parts 1(a), Project under Parts 3(b) 1(b), 2(a) and 2(b)(i) and 3(c) of the of the project and Project; and audits audits under Parts under Part 3(a) of 1(c), 2(b)(ii) and 2(c) the Project of the project 8400-MD SOE 8 333,228 1,260 - 334,488 SOE 9 350,760 1,680 - 352,440 SOE 10 994,163 1,330 - 995,493 SOE 11 566,370 3,290 - 569,660 Total 2,244,521 7,560 - 2,252,081 5509-MD SOE 8 - - 316,240 316.240 (partially) SOE 9 - - 323,658 323,658 SOE 10 - - 426,927 426,927 SOE 11 - - 304,093 304,093 Total __ - 1,370,918 1,370,918 Grand total 2,244,521 7,560 1,370,918 3,622,999 10 SECOND COMPETITIVENESS ENHANCEMENT PROJECT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (all amounts are expressed in USD, unless otherwise mentioned) 5. EXPENDITURES BY SUBCATEGORIES For the year ended Cumulative 31 December 2016 to date 5509-MD (1) Goods. non-consulting services, consultants' services (including audits), training and incremental operating costs under Parts 1(a), 1(b), 2(a) and 2(b)(i) of the project and audits under Parts 1(c), 1.277,562 2.284,300 2(b)(ii) and 2(c) of the project (2) Matching grants under Part 2(b)(ii) of the 93,356 93,356 project (3) Payments for EEPs under Parts 1(c) and 902,140 902,140 2(c) of the project Total 2,273.058 3,279,796 8400-MD (1) Sub-loans under Part 3(a) of the Project 2,244,521 9,694,509 (2) Goods, non-consulting services, consultants' services (including audits), training and incremental operating costs under Parts 3(b) and 3(c) of the Project; and audits under Part 3(a) of the Project 7,560 15.766 Total 2,252,081 9,710,275 4,525,139 12,990,071 I ' SECOND COMPETITIVENESS ENHANCEMENT PROJECT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (all amounts are expressed in USD, unless otherwise mentioned) 6. EXPENDITURE BY PROJECT ACTIVITY For the year ended Cumulative 31 December 2016 to date 5509-MD Part I Regulatory Reform Capacity Building 954,245 1,374,797 - la. Reform Governance 362,746 666,431 - lb. Reform Implementation Support 140,067 256,934 - 1c. Results-Based Financing (RBF) 451,432 451,432 Part II SME Development 1,191,642 1,659,004 - 2a. Institutional Strengthening 517.959 856,317 - 2b(i). MGF Management Cost 129,619 258,623 - 2b(ii). Matching Grant Facility (MGF) 93,356 93,356 - 2c. Results-Based Financing (RBF) 450,708 450,708 Part IV Project Management 127,171 245,995 Total 5509-MD 2,273,058 3,279,796 8400-MD Part III Access to Finance - 3a. Line of Credit Sub-Loan 2,244,521 9,694,509 - 3c. TA to MoE and banks on developing 7,560 15,766 value chain financing model Total 8400-MD 2,252,081 9,710,275 GRAND TOTAL 4,525,139 12,990,071 7. EXCHANGE RATE DIFFERENCES In the balance sheet, there is an exchange rate difference in amount of 129,002 USD. The difference incurs because at the granting date the exchange rate of SDR was of 1.4783 USD; at the reporting date 31 December 2016 was 1.34433 USD. I1 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity, Please see www.deloitte.com/md/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. 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