90255 The State Road Agency of Ukraine Special financial statements and Independent Auditor's Report For the year ended 31 December 2013 Page Independent auditor's report 3 Summary of sources and use of funds 6 Use of International Bank for Reconstruction and Development funds by the Project components 7 Statement of withdrawals from the Loan account 8 Statement of the Special account 9 Statement of withdrawals from the Special Account 10 Statement of funds withdrawal through the statement of expenditures procedure 11 Reconciliation between Project Implementation Unit and International Bank for Reconstruction and Development 12 Notes to the Special financial statements 13 1. Project description 13 2. Basic accounting principles 14 3. Expenditures by categories and sources of financing 15 4. Civil works 15 5. Supervision services 16 6. Subsequent events 16 7. Economic environment 17 World Bank Audit Documentation Checklist 18 Grant Thornton TOB «fPAHT TOPHTOH II EriC• Byn., Tepell(8HKiBCbKa, 11-A K~>~ls, 01004. YKpaiHa T + 380 44 461 97 21 F +380 44 461 97 20 www.grantthornton.ua GRANT THORNTON LEGIS LLC To the State Road ">\gency of Ukraine 11-A Tereschenkivska str. Fizkultury str., 9, Kyiv, 01004, Ukraine T + 380 44 461 97 21 Kyiv, 03680 Ukraine F +380 44 461 97 20 www.grantthornton.ua \Ve have audited special financial statements of the State Road Agency of Ukraine (hereinafter Ukravtodor) for the year ended 31 December 2013 related to the Second Roads and Safety Improvement Project 01ereinafter- Project) financed from the funds of the Loan of the International Bank for Reconstruction and Development (hereinafter IBRD) J'\!2 8195-UA and prepared by the management of the State Road Agency of Ukraine (Ukravtodor) according to the requirements, set forth in the Loan .Agreement between Ukraine and International Bank for Reconstruction and Development (hereinafter -Loan Agreement), the accounting principles, disclosed in Note 2 to these special fmancial statements and in accordance \Vith regulations of the \v'orld Bank. Special financial statements include: • Summary of sources and use of funds as at 31 December 2013; • Statement of expenditures for 2013; • Statement of Special Account for the year ended 31 December 2013; • Notes to the special financial statements. A1anagement 'J Management 1s responsible for the preparation and fair presentation of these special financial statements, which are prepared in accordance with the Loan A.greement and the accounting principles, disclosed in Note 2 to these statements and in accordance with regulations of the \Vorld Bank. Management's responsibility includes: compilation, implementation and maintenance of internal control relevant to the preparation and fair presentation of special financial statements that are free from material misstatements, whether due to fraud or error; selection and use of appropriate accounting policies; and accounting estimates for particular circumstances. Auditor'J Rnpomibili(y Our responsibility is to express an opinion on these special Bnancial statements based on our audit. \\!e conducted our audit in accordance with International Standards on A.uditing. Those standards require to obtain reasonable assurance on whether special t1nancial statements are free from material misstatements. Audit, Tax, Advisory, Law Member of Grant Thornton International Ud Subject to local regulations Grant Thornton Audit in•wlves performance of procedures in order to obtain audit evidence about the amounts and disclosures in the special financial statements. Selected procedures depend on auditor's judgment and include the assessment of the risk of material misstatement of special financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the special financial statements in order to design audit procedures that are appropriate in particular circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes assessment of the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the management, as well as assessment of the overall presentation of special financial statements. \X1e believe that the audit eYidence we haYe obtained 1s sufficient and appropriate to proYide a basis for our audit opinion. Opinion a.r to Financial Statements In our opinion, the special financial statements of the State Road Agency of Ukraine (Ukravtodor), related to the Second Roads and Safety Improvement Project, financed from the funds of the International Bank for Reconstruction and Development .N"g 8195-UA as for the year ended 31 December 2013 give a true and fair view of performance of the State Road Agency of Ukraine (Ukravtodor) under the contract requirements, set forth in the Loan "1\greement, the accounting principles, disclosed in Note 2 to these statements and in accordance with regulations of the \Vorld Bank. Opinion as to Statements ~/Expenditures In our opinion, with respect to the statements of expenditures for the whole period of the Project implementation, adequate supporting documentation was maintained to support applications to the Bank for reimbursement of expenditures incurred as well as expenditures stated in applications, are subject to financing in accordance with conditions of the Loan of the International Bank for Reconstruction and Development NQ 8195-UA. Opinion as to Statement of Special Account In our opinion, financial statements on Special account give a true and fair view of the financial position on the Special Account of the Loan of the International Bank for Reconstruction and Development _N'g 8195-UA as at 31 December 2013 and up to the indicated date, in accordance with regulations of the \'Forld Bank. BaJi.r for presmtation of the Jinattcial statemettt and restridiott on distribution \Vithout qualifying our opinion, we draw attention that special financial statements of State Road Agency of Ukraine (Ukravtodor), related to the Second Roads and Safety Improvement Project, financed from the funds of the International Bank for Reconstruction and Development Loan .N"g 8195-UA, for the year ended 31 December 2013, are prepared in order to comply with the requirements, set forth in the Loan Agreement, the accounting principles, disclosed in the Note 2 to these statements and in accordance 'W1.th regulations of the World Bank and shall not be used for other purposes. Audit. Tax, Advisory. Law Member of Grant Thornton lnternaliona! L!a Subject to !oca! regulations Grant Thornton Afatter.r \Vithout qualifying our opmwn, we draw attention to Note 1 to the special financial statements, wh~tethe last availability date under the International Bank for Reconstruction and Development Loan N!!8195:.UA is 31 April2017. 27 June 2014 GRj\NT THORNTON LEGIS LLC Audit, Tax, Advisory, law Member of Grant Thornton International Ud Subject to local regu!ahons 6 Second Roads and Safety Improvement Project SUMMARY OF SOURCES AND USE OF FUNDS For the year ended 31 December 2013 For the year For the whole Unused ended 31 period of the Budget Loan December Project balance 2013 OPENING BALANCE Special account with NTSU Transit account with Ukreximbank (multicurrency) Transit account with OPERU STSU (UAH) TOTAL SOURCES OF FUNDS: Loan of the World Bank 81,016,363 82,141,363 450,000,000 367,858,637 TOTAL FINANCING 88,101,311 89,226,311 457,084,948 367,858,637 PROJECT EXPENDITURES: Category 1: Goods, works, non-consulting services, consultants' services and training 87,374,296 87,374,296 455,959,948 368,585,652 TOTAL PROJECT EXPENDITURES 87,374,296 88,499,296 457,084,948 368,585,652 CLOSING BALANCE Special account with STSU Transit account with Ukreximbank (multicurrency) Transit account with OPERU STSU (UAH) TOTAL 727,015 Note (*) - financing of Ukravtodor for the entire period of the Project realization comprises 7,084,948 UAH. The methodology of the translation from the national currency into the loan currency is disclosed in Note 4 on page 15. Notes on pages 13-17 are an integral part of these financial statements. 7 Second Roads and Safety Improvement Project USE OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT FUNDS BY THE PROJECT COMPONENTS ended 31 December 2013 For the whole For the year period of the Unused Loan ended 31 Budget Project balance December 2013 Use of the World Bank funds by the Project components 450,000,000 369,710,652 Part 1. Rehabilitation of M03 road 1.1. Civil works 79,016,363 79,016,363 1.2. Supervision services 1,258,687 1,258,687 1.3. Bank fee 14,298 14,298 Total in Part 1 80,289,348 80,289,348 80,289,348 81,414,348 450,000,000 368,585,652 Use of Ukravtodor's funds by the Project zcomponents 7,084,948 Part 1. Rehabilitation of M03 road Total in Part 1 7,084,948 7,084,948 7,084,948 TOTAL PROJECT EXPENDITURES 87,374,296 88,499,296 457,084,948 368,585,652 SUMMURY STATEMENT BY SUB- CATEGORIES: Civil works 86,101,311 86,101,311 Supervision services 1,258,687 1,258,687 455,949,948 368,585,652 Bank fee 14,298 14,298 fee TOTAL PROJECT EXPENDITURES 87,374,296 88,499,296 457,084,948 368,585,652 Notes on pages 13-17 are an integral part of these financial statements. 8 Second Roads and Safety Improvement Project STATEMENT OF WITHDRAWALS FROM THE LOAN ACCOUNT ended 31 December 2013 Application Date of Withdrawals USD Category N2 withdrawal Currency Equivalent Equivalent 12.03.13 USD 7,263,850 7,263,850 2 15.03.13 EUR 3,733,387 4,855,270 3 12.03.13 USD 6,955,699 6,955,699 4 15.03.13 EUR 3,575,007 4,649,296 5 DA-B 14.03.13 USD 1,000,000 1,000,000 6 1 19.06.13 USD 2,029,876 2,029,876 7 24.07.13 EUR 1,043,292 1,376,519 8 19.06.13 USD 1,460,455 1,460,455 9 24.06.13 EUR 750,627 990,378 11 20.08.13 USD 2,328,142 2,328,142 12 23.08.13 EUR 1,196,591 1,601,996 13 20.08.13 USD 1,216,822 1,216,822 14 23.08.13 EUR 625,408 837,296 15 30.08.13 USD 2,324,406 2,324,406 16 04.09.13 EUR 1,194,670 1,581,624 17 03.09.13 USD 1,215,622 1,215,622 18 06.09.13 EUR 624,791 823,537 19 03.10.13 USD 1,903,335 1,903,335 20 08.10.13 EUR 978,253 1,329,935 21 1 03.10.13 USD 1,256,397 1,256,397 22 1 08.10.13 EUR 645,748 877,894 23 DA-B 29.10.13 USD 1,000,000 1,000,000 24 29.10.13 USD 3,590,351 3,590,351 25 01.11.13 EUR 1,845,326 2,538,983 26 29.10.13 USD 1,788,840 1,788,840 27 01.11.13 EUR 919,406 1,265,011 28 19.11.13 USD 3,619,030 3,619,030 29 22.11.13 EUR 1,860,066 2,515,925 30 18.11.13 USD 3,214,407 3,214,407 31 21.11.13 EUR 1,652,102 2,229,182 32 18.12.13 USD 3,231,098 3,231,098 33 23.12.13 EUR 1,660,681 2,272,975 34 18.12.13 USD 3,447,210 3,447,210 Summary by categories: Total by category 1 79,016,363 Notes on pages 13-17 are an integral part of these financial statements. 9 Second Roads and Safety Improvement Project STATEMENT OF THE SPECIAL ACCOUNT ended 31 December 2013 THE STATE EXPORT-IMPORT BANK OF UKRAINE Ace. No DA·B-25136080055000 Project: P127156 -Second Road And Safety Improvement Project Related Loan: TF 56961 OPENING BALANCE Earnings: Funds received Replenishment of the World Bank 2,000,000 TOTAL FUNDS RECEIVED 2,000,000 Deduction: expenditures Transfer offunds to the transit account (1 ,289,472) TOTAL EXPENDITURES (1,289,472) RETURN OF FUNDS FROM THE TRANSIT ACCOUNT Notes on pages 13-17 are an integral part of these financial statements. 10 Second Roads and Safety Improvement Project STATEMENT OF WITHDRAWALS FROM THE SPECIAL ACCOUNT For the year ended 31 December 2013 Withdrawal USD Date of withdrawal Ukraine 02.04.13 USD 752,474 752,474 Ukraine 16.04.13 USD 7,762 7,762 Ukraine 03.07.13 USD 16,480 16,480 Ukraine 31.07.13 USD 23,770 23,770 Ukraine 09.08.13 USD 321 321 Ukraine 14.08.13 USD 651 651 Ukraine 11.10.13 USD 143,407 143,407 Ukraine 08.11.13 USD 339,043 339,043 Ukraine 13.11.13 USD 1,686 1,686 Total for 2013: Summary by categories Advances to the transit accounts 1,289,472 Notes on pages 13-17 are an integral part of these financial statements. 11 Second Roads and Safety Improvement Project STATEMENT OF FUNDS WITHDRAWAL THROUGH THE STATEMENT OF EXPENDITURES PROCEDURE ended 31 December 2013 Category Total 1 Expenditures reported to the IBRD during the reporting period, in accordance with the Part of expenditures to be reported to the Bank during subsequent reporting periods 20,365 20,365 Factual expenditures paid, according to the LIST OF STATEMENTS OF EXPENDITURES PROVIDED BY THE PROJECT IMPLEMENTATION UNIT TO THE BANK DURING 2013 For the year ended 31 December 2013 Number of application Category Total 1 10 722,750 722,750 Total for the reporting period: 1,269,107 1,269,107 Notes on pages 13-17 are an integral part of these financial statements. 12 Second Roads and Safety Improvement Project RECONCILIATION BETWEEN PROJECT IMPLEMENTATION UNIT AND INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT For the year ended 31 December 2013 loan amount in accordance with the Agreement 450,000,000 Expenditures : Project expenditure Category 1: Goods, works, non-consulting services, consultants' services and training 80,289,348 Category 2: Front-end fee 1,125,000 Total expenditure (81 ,414,348) Balance on the Special account 710,528 Balance on the Transit account 16,487 Total funds available (727,015) Total deductions: Balance as at 31 December 2013 Notes on pages 13-17 are an integral part of these financial statements, 13 Second Roads and Safety Improvement Project NOTES TO THE SPECIAL FINANCIAL STATEMENTS ended 31 December 2013 1. PROJECT DESCRIPTION According to the Loan Agreement dated 11 October 2012 between Ukraine and International Bank for Reconstruction and Development (hereinafter the Bank), the Bank agreed to pro,,ide Ukraine with the Loan in amount of 450 million USD in order to assist in financing the Second Roads and Safety Improvement Project. According to Section 3.()1 Article III of the Loan Agreement, Ukraine declared its commitment to the objectives of the Project. To this end, Ukraine shall cause the Project to be carried out in accordance '"~th the provisions of Article V of the General Conditions, the Subsidiary Agreement dated 11 October 2012 and the Project Agreement dated 11 October 2012. Per the Project Agreement between Ukraine and the Bank dated 11 October 2012 (hereinafter- the Project Agreement), the Project shall be carried out by the State Road Agency of Ukraine (hereinafter -Ukravtodor). The objectives of the Project are to improve the condition and quality of sections of the l\1-03 road Kyiv - Kharkiv - Dov:zhansky and to increase safety on roads. The Project consists of the follmving parts: Part 1: Road Rehabilitation Rehabilitation of about 108 kilometers of the Kyiv - KharkiY Dov:zhansky road, including civil works for the rehabilitation and strengthening of the existing road, \v~dening of certain sections from two lanes to four lanes, and building thxee bypasses around populated areas. Part 2: Road Safety Improvement Improving road safety along various road corridors or sections in Ukraine. Part 3: Institutional Support and Strengthening Provision of technical advisory services, training and equipment to enhance road management within the territory of the Borrower according to international practice, including: a) in the areas of road safety, an assessment of approximately 12,000-15,000 kilometers of main road, including the coding of data based on the iRAP methodology, data analysis and road safety "star rating" of road sections, identification of the most suitable and appropriate road safety measures and interventions for each road, and detailed design of road safety measures for the high-priority sections of corridors; and b) the support for the development of a Strategic Investment Program for Road Sector Development until 203(). Categories of appropriate expenditures to be financed from the Loan funds: Share of expenditures to be financed, Category Amount, US dollars(*) except for taxes services, consultants' services and training 448,875,000 100% 0.25% of the Loan amount according to 2. Front-end Fee 1,125,000 Section 2.03 of the Loan Agreement According to Section 2.07 of the Loan 14 Second Roads and Safety Improvement Project NOTES TO THE SPECIAL FINANCIAL STATEMENTS For the year ended 31 December 2013 The closing date of the Project is 31 December, 2016. All payments must be completed until 31 April2017. For the purpose of the Project implementation, Ukravtodor has established the Project Implementation Unit (PILl) acting \Vithin the State Enterprise "Ukrainian road investments" and has respective resources and staff with appropriate skills, according to the authorities acceptable for the Bank. By letter dated December 24, 2012 Bank informed the Ministry of Finance of Ukraine and Ukravtodor of the fulfillment of the previous conditions of the Loan Agreement becoming effective. By letter dated 11 March 2013 the \\'orld Bank declared that reasonable costs of currency conversion can be financed by the proceeds of the Loan. Herewith, they arc considered as eligible costs and can be financed under the r~r••cn•,,.'P of the expenditures of this project, namely under the category of «Goods, works, non~ consulting services, consultants· sen·ices and training». 2. BASIC ACCOUNTING PRINCIPLES Special Bank Account According to the terms of the Subsidiary Agreement and in order to facilitate the Project performance, the National Treasury of Ukraine has opened and maintains Special account in US dollars with the State Expordmport Bank on conditions approved by IBRD. IBRD has set the minimum application amount that can be paid directly from the Loan account of 800,000 US dollars (or equivalent of that amount in a specific payment currency). All other payments made according to applications with amounts lower than the above limit, should be paid from the special account. According to the limit set by the IBRD the amount exceeding 4,000,000 US dollars cannot be deposited on the special account at one time. Receipts and Expenditures Recognition The Project keeps its records and prepares its financial statements under the cash method. The receipts arc shown when they arc performed on bank accounts, which are supported by the advances from IBRD. The expenses arc registered at the date when there is funds withdrawal. Foreign Currency Transactions The accompanying financial statements are presented in US dollars. Transactions performed in other currencies are recalculated in US dollars at the effective exchange rate on the date of transaction, unless otherwise stated. Statements ofExpenditures Statements of expenditure arc used for recognition of expenses under the Loan paid from the Special account during a calendar quarter. According to additional instructions of funds withdrawal set by the IBRD in the letter dated 11 October 2012, all expenditures paid from the Special account should be included in statements of expenditures for corresponding periods and submitted to the IBRD. 15 Second Roads and Safety Improvement Project NOTES TO THE SPECIAL FINANCIAL STATEMENTS ended 31 December 2013 Together \v:ith statements of expenditure primary documents arc submitted (counterfoils, invoices, works acts, etc.) regarding the following payments: goods and consultancy services as regards the contracts cost not less than 200,000 in USD equivalent, contractual works at cost not less than 2,000,000 in l;SD equivalent, contractual services of individual consultants at cost not less than 100,000 in USD equivalent. 3. EXPENDITURES BY CATEGORIES AND SOURCES OF FINANCING The Project expenditures are carried out through the two accounts opened in the Ukrainian banks. Transit mulricurrency account in the OJSC State Export-Import Bank of Ukraine was opened in order to pay for the Project related works and services in all currencies, except for payments in national currency. To make payments in the national currency, UAH account was opened in the State Treasury Service of Ukraine (further STSU). 4. CIVIL WORKS Rehabilitation of the road M-03 on the section M-03 Kyiv - Kharkiv- Dovzhansky Civil contract works at the expense of the IBRD funds were performed based on two Contracts entered in during the year 2013. The Contracts provide for the defects liability period of the Contractors for damages that lasts 730 days upon signing the road section acceptance certificate. During the period the Contractors undertake to remedy all damages appeared due to the fault of the Contractors during the construction, as well as to complete all insignificant works in progress at the acceptance date. Performance rime under the Contracts No1.1 and No1.2- 540 davs. 1. Contract .\i\!2.1 between Ukravtodor and Todini Costruzioni S.p.A (hereinafter- Contract .\!.>1.1) was signed on 4 January 2013. The Contract provides for civil works for capital repair of M03 Kyiv- Kharkiv-Do"\'Zhansky road on the sections from 210+000 km to 220+782 krn (Lot 2.1), from 228+000 km to 239+ 317 krn (Lot 2.2), from 258+000 to AO 27 5+000 krn (Lot 2.3). 2. Contract .\i\!2.2 between Ukravtodor and Todini Costruzioni S.p.A. (hereinafter Contract .\i\!1.1) was signed on 4 January 2013. The Contract provides for civil works for capital repair of M03 KyiY- KharkiY-Dovzhansky road on the sections from 282+000 km to 300+550 km (Lot 2.4), from 300+550 km to 323+000 krn (Lot 2.5), from 329+050 km to 333+250 krn (Lot 2.5). Civil works under Contract .\i\!1.1 commenced on 4 April 2013 in accordance with the Engineer's Letter dated 3 April 2013. Civil works under Contract .N\!1.2 commenced on 4 April 2013 in accordance \Vi.th the Engineer's Letter dated 3 April2013. 16 Second Roads and Safety Improvement Project NOTES TO THE SPECIAL FINANCIAL STATEMENTS For the year ended 31 December 2013 Summary of perfonnance of Contracts .NI? 1.1-1.2 Initial full Contractual Financed from lncludina VAT Financina of contractual Cost of cost with the World payment at civil works cost {without addition~ I additional from all Bank's Loan the expense of VAT)* works** works Ukravtodor sources Contract N21.1 121,064,170 44,363,316 3,873,956 48,237,272 Total during the Project realization 236,992,478 79,016,363 7,048,948 86,101,311 Note (*)- in this and other tables the initial contractual cost, the cost of additional works and the VAT amount paid by Ukravtodor were translated from the national currency into the Loan currency at fixed rates of the National Bank of Ukraine used when assessing bid proposals for the comparison of total contractual amounts in single currency. Relevant works estimate basis when entering into contracts is determined in the World Bank's guidances. Note (**) - additional works are the cost of civil (road, bridge, earth) works, other expenses of organization and performance of construction by the Contractors. All additional works increasing the initial contractual cost were previously agreed between the Contractor, Supervision Engineer and Ukravtodor. The Bank's consents were previously obtained for the Contractual initial cost increase by Ukravtodor (where required by corresponding procurement guidances of the World Bank). 5. SUPERVISION SERVICES In order to appoint Engineers for the engmeermg supervtston of the contract ciYil works under Parts 1 within the Second Road and Safety ImproYement Project realization, the State Road Agency of Ukraine concluded two contracts for consultancy services pr