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, 2017 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 Statement of disbursements by component ..................................................... 3-4 Notes to the financial statements ................................................................5-8 Teu.: +7 727 331 31 34 TOO "BDO Kazakhstan" DaKC: +7 727 331 31 35 yn. ra69yAnHHa, 6 _B D O info@bdokz.com AAmaTbl, Ka3aXCTaH www.bdokz.com A1 5H4E3 Tel: +7 727 331 31 34 BDO Kazakhstan LLP Fax: +7 727 331 31 35 6 Gabdullin Street info@bdokz.com Atmaty, Kazakhstan www.bdokz.com Al 5H4E3 Independent Auditors' Report To the 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 financial statements of the Second Irrigation and Drainage Improvement Project funded under Agreement No. 8277-KZ between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development (hereinafter the "Project"), which comprise the statement of receipts and disbursements of funds for the year ended December 31, 2017, statement of comparison of budget and actual amounts for the year ended December 31, 2017, statement of disbursements by component for the year ended December 31, 2017, and a summary of significant accounting policies and other explanatory notes (the "Financial Statements"). In our opinion, the accompanying financial statements fairly present, in all material respects, the Project's receipts and disbursements for the year ended Decemer 31, 2017 and the cash position as at December 31, 2017 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 Audit 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 below. We are independent of the Project in accordance with the Code of Ethics for Professional Accountants of the International Ethics Standards Board for Accountants (IESBA Code) and with the ethical requirements that are relevant to our audit of the financial statements in Kazakhstcn, 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. Responsibility of the Management for the Financial Statements Management is responsible for the preparation and fair presentation -f the 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 cf the financial statements that are free from material misstatement, whether due to fraud or error. TosapiuiecTso c orpaHH4eHHOA OTeTcTeHHOCTWO "BDO Kazakhstan", 3apermerpwposaHHoe a cooTBecTis"w C 3aKoOAaTeACTSOM Pecny6mimm Ka3aXCTan, anAeTCa yRHaCTHHKoM Me*AyHapoHoro o6bAMHens BDO international Limited, 6pmTaHnoro o6lAeCTea C OTrecTemCTbo, orpaHenoA rapaHneA ero y4aCTHHKce, & aiaeTCR 4aCTWo meApyHapoAHoAl ceTH He3aBHONMbiX KoMnaHA BDO BDO Kazakhstan, a limited liability partnership, registered under the laws of the Republic of Kazakhstan, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. 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 reLating 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 Responsibility for the Audit of the Financial Statements Our objective is 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 overall presentation 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 statement, 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; * evaluate the overaLL presentation, structure and content of the financial statement, including the disclosures, and whether the financial statement represents 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 (the "Agreement") between the Government of the Republic of Kazakhstan (the "Government") and the International Bank for Reconstruction and Development ("IBRD") was signed on August 29, 2014 and ratified on December 26, 2014 ("Project Start Date"). Pursuant to the Agreement, the IBRD provides a loan for the amount of 102,902,440 US dollars ("Loan") for the purpose of implementing the Second Irrigation and Drainage Improvement Project (the "Project") that shall be repayable by the Government on June 15and December 15of each year starting from December 15, 2021 through June 15, 2031. Pursuant to the approved budget for 2017, the cash receipts and disbursements under the Project from the funds of the IBRD loan and from co-financing of the external Loan by the Government were estimated to amount to 784,807 US dollars and 1,831,218 US dollars, respectively (2016: 849,535 US dollars and 2,024,523 US dollars, respectively). The planned budget amounts are 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 Committee for Water Resources of the Ministry of Agriculture of the Republic of Kazakhstan that acts as the Executing Agency on the part of the Republic of Kazakhstan. The closing date for withdrawal of funds 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; 5 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) (ii) supporting Participatory Irrigation Development and Management activities including related water-sector studies and access to credit and leasing resources; and (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-farm 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 incremental operating costs of the Project Management Unit at the Committee for 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"). 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) Transactions in foreign currency Transactions in foreign currencies are translated to the presentation currency at the exchange rates prevailing at the reconversion dates. Proceeds 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 payment. 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 as 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: Goods, consultants' services, operating costs, and training under 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 15 October 2031. Allocation of costs The distribution of expenditures by components in the statement of cash receipts and disbursements is based on matching of the descriptions of works as indicated in the Agreement and the descriptions in primary documents. 4. CASH To conduct operations on Loan No.8277-KZ, the following accounts have been opened at the Committee of Treasury of the Ministry of Finance of the Republic of Kazakhstan, the city of Astana, for making cash payments to suppliers: * 01.6201.000000000.ZO8277.001.2120360.2.0000.0000 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, 2017 are detailed below: US Dollars 2017 2016 Balance as at January 01 1,619 1,918 RECEIPTS Cash receipts to account 408,905 53,470 408,905 53,470 EXPENDITURES Expenditures under the Project 404,930 53,769 Net foreign exchange loss (gain) (2) - 404,928 53,769 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) US Dollars 2017 2016 Balance as at December 31 5,596 1,619 Including those denominated: US Dollars 5,596 1,113 in tenge - 506 5. DIRECT PAYMENTS AND REPLENISHMENT OF THE ACCOUNT Direct payments under the Project are made by IBRD and the Government of the Republic of Kazakhstan to suppliers chosen in accordance with the terms of the Agreement. Direct payments to Suppliers and funds added by IBRD to the account under the Project for the year ended December 31, 2017 were made based on the following withdrawal applications: US Dollars No. of withdrawal Date of withdrawal Direct Replenishment Total application payments of account 10 11.04.2017 - 17,300 17,300 11 18.05.2017 - 19,290 19,290 12 03.08.2017 - 25,274 25,274 13 05.12.2017 - 347,041 347,041 14 11.12.2017 371,797 - 371,797 Total 371,797 408,905 780,702 Statement of Expenditures US Dollars Actual expenditures by categories Total (2) Goods, consultants' No. of amount of (1) Works services, non-consulting Applic. Value date the under Part 1 services, Training and Total application of the Operating Costs under Parts Project 1, 2, 3 and 4 of the Project 10 11.04.2017 17,300 48,358 48,358 11 18.05.2017 19,290 - 12 03.08.2017 25,274 - 13 05.12.2017 347,041 - 51,597 51,597 14 11.12.2017 371,797 - 371,797 371,797 Total 780,702 - 471,752 471,752 6. UNUSED PORTION OF THE LOAN As of December 31, 2017 the unused portion of the IBRD loan totalled 100,442,440 US dollars (2016: 101,223,142). 7. DATE OF ISSUE These financial statements were approved for release by Vice-Chairman of the republican State Enterprise, the Committee for Water Resources of the Ministry of Agriculture of the Republic of Kazakhstan and the Head of the Department for Economy, Budget Planning and Accounting of the Committee for Water Resources of the Ministry of Agriculture of the Republic of Kazakhstan on May 31, 2018. 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 Appendix No. 1 Reconciliation between the data provided by Project Management Unit and World Bank payments data US Dollars Date of withdrawal Application for As per PMU As per WB Variance withdrawal 11.04.2017 10 17,300 17,300 18.05.2017 11 19,290 19,290 03.08.2017 12 25,274 25,274 05.12.2017 13 347,041 347,041 11.12.2017 14 371,797 371,797 Total 780,702 780,702 9