Second Irrigation and Drainage Improvement Project Funded under Loan Agreement No. 8277-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development Financial Statements for the Year Ended December 31, 2018 And Independent Auditors' Report CONTENTS Independent Auditors' Report Financial Statements Statement of Receipts and Disbursements of Funds ............................................. 1 Statement of Comparison of Budget and Actual Amounts.....................................2-3 Statement of Disbursements by Component..................................................... 4-5 Notes to the Financial Statements................................................................ 6-9 Ten1., +7 727 331 31 34 TOO "BDO Kazakhstan" IB D Oc: 7 727 331 31 3r5 yn. a6AynnHHa, 6 Z.comn AnMaTb, Ka3aXCTaH w.b n A15H4E3 Tel., +7 727 331 31 34 BDO Kazakhstan LLP Fax: +7 727 331 31 35 6 Gabdultin Street info k.Comn Airnaty, Kazakhstan w.bzcom A15H4E3 Independent Auditors' Report To Management of the Second Irrigation and Drainage Improvement Project funded under Loan Agreement No. 8277-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development Opinion We have audited the accompanying financial statements of the Second Irrigation and Drainage Improvement Project (hereinafter the "Project") funded under Loan Agreement No. 8277-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development, which comprise the statement of receipts and disbursements of funds for the year ended December 31, 2018, statement of comparison of budget and actual amounts for the year ended December 31, 2018, statement of disbursements by component for the year ended December 31, 2018, and a summary of significant accounting policies and other explanatory notes (hereinafter the "financial statements"). In our opinion, the accompanying financial statements present fairly, in all material respects, the Project's receipts and disbursements for the year ended December 31, 2018 and the cash position as at December 31, 2018 in accordance with the International Public Sector Accounting Standard (IPSAS) "Financial Reporting under the Cash Basis of Accounting" published by the International Federation of Accountants (IFAC), as well as in accordance with the requirements of the International Bank for Reconstruction and Development. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing. 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 Project in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in Kazakhstan, 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. Management's Responsibilities for the Financial Statements Management of the Project is responsible for the preparation and fair presentation of these financial statements in accordance with IPSAS "Financial Reporting under the Cash Basis of Accounting" published by the International Federation of Accountants (IFAC) and in accordance with the requirements of the International Bank for Reconstruction and Development, and for such internal control as management determines is necessary to enable preparation of the financial statements that are free from material misstatement, whether due to fraud or error. Independent Auditors' Report (continued) In preparing the 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 alternatives but to do so. Those charged with governance are responsible for overseeing the Project financial reporting process. Auditor's Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the 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 international Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or errors 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: * Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; * Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the 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 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. Independent Auditors' Report (continued) We communicate with those responsible for managing the Project 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. 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GENERAL PROVISIONS Kazakhstan Business Environment The Project activities are carried out in Kazakhstan. Accordingly, the Project is exposed to risks specific to economic and financial markets of Kazakhstan, whose economy shows specific features of an emerging economy. The legal, tax and regulatory frameworks continue to develop, but are subject to varying interpretations and frequent changes which together with other legal and financial impediments contribute to the challenges faced by entities operating in Kazakhstan. Nature of Operations Loan agreement No. 8277-KZ (hereinafter the "Agreement") between the Government of the Republic of Kazakhstan (the "Government") and the International Bank for Reconstruction and Development ("IBIRD") was signed on April 29, 2014 and ratified on December 26, 2014 (the "Project start date"). Pursuant to the Agreement, the IBRD provides a loan amounting to 102,902,440 US dollars (the "Loan") for the purpose of implementation of the Second Irrigation and Drainage Improvement Project (the "Project") that shall be repaid by the Government on June 15 and December 15 of each year starting from December 15, 2021 through June 15, 2031. Pursuant to the approved budget for 2018, the Project receipts and disbursements financed out of the proceeds of the IBRD Loan and co-financing of the external loan by the Government of Kazakhstan were estimated to amount to 4,549,871 US dollars and 10,616,368 US dollars, respectively (2017: 784,807 US dollars and 1,831,218 US dollars, respectively). The planned budget amounts were taken at a conditional exchange rate established by the Government of the Republic of Kazakhstan. The objective of the Project is to improve irrigation and drainage service delivery to support farmers in the project areas. The Project is implemented by the Republican State Enterprise, the Committee on Water Resources of the Ministry of Agriculture of the Republic of Kazakhstan that acts as an Implementing Agency on behalf of the Government of the Republic of Kazakhstan. The closing date for withdrawal of funds under the Agreement is December 31, 2021. The Project consists of the following components: Component 1: Rehabilitation and Modernization of Irrigation and Drainage Systems Infrastructure (a) Rehabilitation and modernization of existing irrigation and drainage infrastructure on approximately 113,000 ha; (b) Support for the design and supervision associated with the rehabilitation and modernization of irrigation and drainage infrastructure, including preparing Site-specific Dam Safety Plans. Component 2: Sustainable management, Operation and Maintenance of Irrigation and Drainage Systems (a) Developing and strengthening rural consumer cooperatives and water- management organizations through: (i) supporting the establishment of the enabling training and support units; (H) supporting Participatory Irrigation Development and Management activities including related water-sector studies and access to credit and leasing resources; and 6 Second Irrigation and Drainage Improvement Project Funded under Loan Agreement No. 8277-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development NOTES TO THE FINANCIAL STATEMENTS (continued) (iii) enhancing management, operation and maintenance activities including water-monitoring tools. (b) To contribute to the modernization and strengthening of the system of on-farm water management at the level of rural consumer cooperatives. (c) Support for modernizing and strengthening management, operation and maintenance of the main irrigation and drainage system. Component 3: Agricultural Development (a) Strengthen the capacity of farmers through: (i) improving farm management and land use; (ii) supporting knowledge transfer on innovative agro-techniques; (iii) supporting agrocooperatives, including establishing and strengthening the enabling farmers services centers. (b) Support farming and irrigation mechanization through: (i) development of water-saving technologies; (ii) facilitating access to maintenance equipment for the on-form irrigation systems, and; (iii) further strengthening the related advisory facilities. Component 4: Project Management, Technical Assistance and Training Support for the Project Management Unit in project management, administration, coordination, procurement and financial management, including monitoring and evaluation of the Project impact, preparation and implementation of environmental impact assessment, and audits. This component will finance goods, consultants' services and training and operating costs of the Project Management Unit at the Committee on Water Resources for management, implementation, monitoring and evaluation of the Project. 2. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS These financial statements have been prepared in accordance with International Public Sector Accounting Standard (IPSAS) "Financial Reporting under the Cash Basis of Accounting" as published by the International Federation of Accountants, and in compliance with the requirements of the international Bank for Reconstruction and Development. 3. SIGNIFICANT ACCOUNTING POLICIES The accounting policies described below have been consistently applied in the reporting periods presented in these financial statements. Cash Method of Accounting Cash method of accounting recognizes transactions and events only when funds under the Project are received or paid. Presentation Currency These financial statements are presented in United States dollars ("US dollars"). Transactions in Foreign Currencies Transactions in foreign currencies are translated to the presentation currency at the exchange rates prevailing at the reconversion dates. Direct payments from the IBRD are translated into US dollars at the exchange rates established by the National Bank of the Republic of Kazakhstan at the date of transaction. 7 Second Irrigation and Drainage Improvement Project Funded under Loan Agreement No. 8277-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development NOTES TO THE FINANCIAL STATEMENTS (continued) Proceeds from the Government of the Republic of Kazakhstan are translated into US dollars at the exchange rates established by the National Bank of the Republic of Kazakhstan at the date of payment. Exchange differences arising from translation of transactions denominated in other currencies into US dollars are reported as a net value from changes in exchange rates. Expenditure Categories The Agreement specifies the main categories of expenditures financed by the Loan, the amount for each category, as well as the percentage of expenditures to be financed in each category. According to the Agreement, there are the following categories of expenditures 1) Works under Part 1 of the Project 2) Goods, consultants' services, non-consulting services, Training and Operating Costs under Parts 1, 2, 3 and 4 of the Project Cash Receipts As per the terms of the Agreement, the Government of the Republic of Kazakhstan shall pay interest and the principal amount of the Loan. Those payments are recorded on the accounts of the Government and are not reported in these financial statements. The last installment on the Loan shall be paid by the Government on June 15, 2031. Allocation of Expenditures Expenditures are allocated between the components in the statement of receipts and disbursements of funds based on the comparison of work description in the Agreement with the work description in source documents. 4. CASH To conduct transactions on Loan No. 8277-KZ, the following designated accounts have been opened with the Committee of Treasury of the Ministry of Finance of the Republic of Kazakhstan, the city of Nur-Sultan, for making cash payments to suppliers: * 01.6201.000000000.Z08277.001.2120360.2.0000.0000 in US dollars; * KZ080702012120360001 in KZT. Cash balances as at December 31, as well as the transactions of the account for the year ended December 31, 2018 are detailed below: US dollars 2018 2017 Balance at January 1 5,596 1,619 RECEIPTS Replenishment of account 4,469,525 408,905 4,469,525 408,905 EXPENDITURES Project expenditures 4,432,224 404,930 Net foreign exchange loss (gains) 2 (2) 4,432,226 404,928 Balance at December 31 42,895 5,596 Including those denominated: In US dollars 42,895 5,596 In KZT - 8 Second Irrigation and Drainage Improvement Project Funded under Loan Agreement No. 8277-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development NOTES TO THE FINANCIAL STATEMENTS (continued) 5. DIRECT PAYMENTS AND REPLENISHMENT OF ACCOUNT Direct payments under the Project are made by IBRD and the Government of the Republic of Kazakhstan directly to suppliers chosen in accordance with the terms and conditions of the Agreement. Direct payments to Suppliers and replenishment of the designated account by IBRD under the Project for the year ended December 31, 2018 were made based on the following withdrawal applications: US dollars No. of application Date of withdrawal Direct Replenishment payments of account 15 26.02.2018 - 15,494 15,494 16 14.05.2018 - 16,252 16,252 17 17.08.2018 - 19,400 19,400 18 04.09.2018 - 172,882 172,882 19 10.10.2018 - 335,000 335,000 20 29.11.2018 - 845,000 845,000 22 13.12.2018 - 3,065,497 3,065,497 Total - 4,469,525 4,469,525 Statement of Expenditures (SQE) US dollars Actual expenditures by categories No. Total (2) Goods, consultants' of amount of (1) Works under services, non-consulting appi Value date the Part 1 of the services, Training and Total icati application Project Operating Costs under on oj Parts 1, 2, 3 and 4 of the Project 15 26.02.2018 15,494 - 16 14.05.2018 16,252 - - - 17 17.08.2018 19,400 - 384,227 384,227 18 04.09.2018 172,882 - - - 19 10.10.2018 335,000 - 20 29.11.2018 845,000 22 13.12.2018 3,065,497 - Total 4,469,525 - 384,227 *) Statement of expenditures No. 17 dated August 17, 2018 includes Project expenditures for 2017. 6. UNUSED PORTION OF THE LOAN As at December 31, 2018, the unused portion of the IBRD loan totaled 95,972,915 US dollars (2017: 100,442,440). 7. DATE OF ISSUE These financial statements were approved for issue by the Acting Chairman of the Republican State Enterprise the -Committee on Water Resources of the Ministry of Agriculture of the Republic of Kazakhstan.. and Acting Head of Department of Economy, Budget Planning and Accounting of the Republican State Enterprise the -Committee on Water Resources of the Ministry of Agriculture of the Republic of Kazakhstan, on June 03, 2019. 9 Second Irrigation and Drainage Improvement Project Funded under Loan Agreement No. 8277-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development Appendix No. 1 Reconciliation between the data provided by Project Management Unit and World Bank payments data US dollars Date of application Application for As per PMU As per WB Variance withdrawal 26.02.2018 15 15,494 15,494 '- 14.05.2018 16 16,252 16,252 17.08.2018 17 19,400 19,400 04.09.2018 18 172,882 172,882 10.10.2018 19 335,000 335,000 29.11.2018 20 845,000 845,000 13.12.2018 22 3,065,497 3,065,497 Total 4,469,525 4,469,525 10