89394 WATER USERS ASSOCIATION DEVELOPMENT SUPPORT PROJECT IBRD LOAN AGREEMENT 8039-AZ AND RELEVANT FINANCING AGREEMENT IDA CREDIT 4913-AZ Special purpose project financial statements for the year ended December 31, 2013 WATER USERS ASSOCIATION DEVELOPMENT SUPPORT PROJECT IBRD LOAN AGREEMENT 8039-AZ AND RELEVANT FINANCING AGREEMENT IDA CREDIT 4913-AZ TABLE OF CONTENTS Page STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS 1 INDEPENDENT AUDITOR'S REPORT 2-3 SPECIAL PURPOSE PROJECT STATEMENT OF CASH RECEIPTS AND PAYMENTS 4 SPECIAL PURPOSE PROJECT STATEMENT OF FINANCIAL POSITION 5 NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS 6-11 WATER USERS ASSOCIATION DEVELOPMENT SUPPORT PROJECT IBRD LOAN AGREEMENT 8039-AZ AND RELEVANT FINANCING AGREEMENT IDA CREDIT 4913-AZ STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2013 Project management is responsible for the preparation of the special purpose project financial statements that present fairly the financial position of the Water Users Association Development Support Project (the "Project") as at December 31, 2013, the related cash receipts and payments for the year ended December 31, 2013, in accordance with the International Public Sector Accounting Standards ("IPSAS -Cash Basis"). In preparing the special purpose project financial statements, project management is responsible for: • properly selecting and applying accounting policies; • presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and • stating whether the IPSAS have been followed, subject to any material departures disclosed and explained in the special purpose project financial statements. Project management is also responsible for: • designing, implementing and maintaining an effective and sound system of internal controls; • maintaining proper accounting records that disclose, with reasonable accuracy at any time, the financial position of the Project, and which enable them to ensure that the special purpose project financial statements of the Project comply with the IPSAS- Cash Basis; • maintaining statutory accounting records in compliance with Azerbaijani legislation; • taking those actions as are reasonably available to them to safeguard the assets of the Project; and • preventing and detecting fraud and other irregularities. The special purpose project financial statements for the year ended December 31, 2013 were approved by management on June 25, 2014. A kif Gulbahar Ma~ Chief Accountant Baku, the RepuJJ/ic of Az rbaijan Baku, the Republic of Azerbaijan June 25, 2014 June 25, 2014 Deloitte De/oitte & Touche LLC 96 Nizami St. Baku, AZ1010 Azerbaijan Tel: +994 (12) 404 2110 Fax: +994 (12) 404 2111 www.deloitte.az INDEPENDENT AUDITOR'S REPORT To the Management of the Water Users Association Development Support Project: We have audited the accompanying special purpose project financial statements of the Water Users Association Development Support Project (the "Project"), financed under the International Bank for Reconstruction and Development ("IBRD") Loan agreement 8039-AZ, between the IBRD and Government of Republic of Azerbaijan ("GOA") dated October 25, 2011, and relevant financing agreement of International Development Association ("IDA") Credit 4913-AZ agreement, between the IDA and Government of Republic of Azerbaijan ("GOA") dated October 25, 2011, which comprise the special purpose project statement of financial position as at December 31 , 2013 and the related special purpose project statement of cash receipts and payments for the year ended December 31 , 2013 and cumulatively through December 31, 2013, and a summary of significant accounting policies and other explanatory information (collectively referred to as the "special purpose project financial statements"). The special purpose project financial statement has been prepared by management using the International Public Sector Accounting Standards ("IPSAS- Cash Basis") . Management's responsibility for the special purpose project financial statements Management is responsible for the preparation and fair presentation of these special purpose project financial statements with the basis of accounting described in Note 2. This includes determining that the IPSAS- Cash Basis of accounting is an acceptable basis for the preparation of the financial statement in the circumstances, and for such internal control as management determines is necessary to enable the preparation of the special purpose project financial statements that are free from material misstatement, whether due to fraud or error. Auditors' responsibility Our responsibility is to express an opinion on these special purpose project financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing . Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the special purpose project financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the special purpose project financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the special purpose project financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity's preparation and fair presentation of the special purpose project financial statements 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 entity's internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the special purpose project financial statements. Delo1tte refers to one or more of Delo1tte Touche Tohmatsu Llmrted, a UK pnvate company limited by guarantee, and rts network of member firms. each of which 1s a legally separate and Independent ent1ty Please see www delortte com/about for a detailed descn1Xion of the legal structure of Delo1tte Touche Tohmatsu L1mrted and rts member firms Please see www deloitte comlru/about for a detailed description of the legal structure of Delo1tte C IS ~ 2014 "Delortte & Touche LLC" All nghts reserved We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the accompanying special purpose project financial statements present, in all material respects, the financial position of the Project as at December 31, 2013 and the related cash receipts and payments for the year ended December 31, 2013, in accordance with the IPSAS- Cash Basis, as further detailed in note 2. Paragraph of emphasis and limitation of use Without modifying our opinion, we draw your attention to Note 2 to the special purpose project financial statements which describe the basis of accounting. The special purpose project financial statements are prepared to assist the Project to comply with the requirements of IBRD and IDA. As a result, the special purpose project financial statements may not be suitable for other purposes. Our report is intended solely for the use of management of the Project, IBRD, IDA and GOA and should not be distributed or used by anyone other than these specified parties. ~~\MC\wtL . June 25, 2014 Baku, the Republic of Azerbaijan 3 WATER USERS ASSOCIATION DEVELOPMENT SUPPORT PROJECT IBRD LOAN AGREEMENT 8039-AZ AND RELEVANT FINANCING AGREEMENT IDA CREDIT 4913-AZ SPECIAL PURPOSE PROJECT STATEMENT OF CASH RECEIPTS AND PAYMENTS FOR THE YEAR ENDED DECEMBER 31,2013 AND CUMULATIVE THROUGH THE YEAR ENDED DECEMBER 31,2013 (in US Dollars) Note Direct IDA Direct IDA Total Total Direct IDA Direct IDA Total Total payments for payments project for project payments payments project for project the year cumulative the year cumulative for the year cumulative the year cumulative ended to ended to ended to ended to December 31, December December December December December December December 2013 31,2013 31,2013 31,2013 31,2012 31,2012 31,2012 31,2012 FINANCING: IDA funds: - designated account advances 3,000,000 3,000,000 3,000,000 - designated account replenishment 4, 7 - 17,662,671 21,903,274 4,240,603 4,240,603 - SOE reimbursement 4,6 1,680,505 2,535,290 854,785 854,785 -direct payments 1,438,506 2,630,930 1,438,506 2,630,930 1'192,424 1'192,424 1'192,424 1,192,424 Total IDA funds 1,438,506 2,630,930 20,781,682 30,069,494 1,192,424 1'192,424 9,287,812 9,287,812 IBRD funds: - front-end fee 8,000 8,000 TotaiiBRD funds 8,000 8,000 Azerbaijan government funds 9,253,065 13,896,792 3,325,866 4,643,727 TOTAL FINANCING - 30,034,747 43,974,286 - 12,613,678 13,939,539 LESS PROJECT EXPENDITURES: Works, goods, consulting services, training and operating cost 1,438,506 2,630,930 29,862,758 42,932,276 1'192,424 1'192,424 11,750,179 13,069,518 Front-end fee 8,000 8,000 Foreign exchange difference (401) (2,923) 1,085 (2,522) TOTAL PROJECT EXPENDITURES 1,438,506 2,630,930 29,862,357 42,937,353 1,192,424 1,192,424 11,751,264 13,074,996 Advances to region support units 16,265 16,265 16,265 Excess of financing over expenditures 172,390 1,020,668 846,149 848,278 Guibaha' Ma~ Chief Accountant Baku, the Republic of Azerbaijan Baku, the Republic of Azerbaijan June 25, 2014 June 25, 2014 The notes on pages 6 to 11 form an integral part of these special purpose project financial statements. 4 WATER USERS ASSOCIATION DEVELOPMENT SUPPORT PROJECT IBRD LOAN AGREEMENT 8039-AZ AND RELEVANT FINANCING AGREEMENT IDA CREDIT 4913-AZ SPECIAL PURPOSE PROJECT STATEMENT OF FINANCIAL POSITION AS AT DECEMBER 31,2013 (in US Dollars) Note December 31, December 31, 2013 2012 ASSETS Cash at bank: IDA designated account 4 8,853 55,041 Project account 1,011,815 793,237 Advances to region support units 16,265 16,265 Cumulative Project Expenditures 42,937,353 13,074,996 TOTAL ASSETS 43,974,286 13,939,539 LIABILITIES AND FUNDS Project financing IDA 30,069,494 9,287,812 Project financing IBRD 8,000 8,000 Project financing GOA 13,896,792 4,643,727 TOTAL LIABILITIES AND FUNDS 43,974,286 13,939,539 Mamm~ 7 Gulbahar Chief Accountant Baku, the Republic of Azerbaijan Baku, the Republic of Azerbaijan June 25, 2014 June 25, 2014 The notes on pages 6 to 11 form an integral part of these special purpose project financial statements. 5 WATER USERS ASSOCIATION DEVELOPMENT SUPPORT PROJECT IBRD LOAN AGREEMENT 8039-AZ AND RELEVANT FINANCING AGREEMENT IDA CREDIT 4913-AZ NOTES TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,2013 (in US Dollars) 1. BACKGROUND The objectives of the Water Users Association Development Support Project (the "Project") are to improve the effectiveness and financial viability of on-farm irrigation water distribution and management of the project area. The Project is financed by the International Bank for Reconstruction and Development ("IBRD") Loan 8039-AZ and relevant financing agreement of International Development Association ("IDA") Credit 4913-AZ (collectively referred to as the "Agreement") between the IBRD, IDA and Government of Republic of Azerbaijan ("GOA") dated October 25, 2011 for USD 3,200,000 and Special Drawing Rights ("SDR") 48,900,000, respectively. The Project has three components: i) Institutional strengthening and capacity building, ii) On-farm irrigation and drainage rehabilitation, iii) Project management, monitoring and evaluation. The Institutional strengthening and capacity building provides provision of: - finance institutional strengthening and capacity building of Azerbaijan Amelioration and Irrigation Open Joint Stock Company ("AIOJSC"), the Central Support Unit, the Region water users associations support units ("WUA"s) in 27 regions, and the regional support centres through the provision of goods, consultants' services; - capacity building and provision of operational and maintenance equipment and management facilities to eligible WUAs activities pursuant to the Law on "Amelioration and Irrigation" through the provision of goods, consultants' services and training; - strengthening of the capacity of AIOJSC for the state supervision of the activities of water users associations; and - preparation of selected studies, research and demonstration pilots in irrigation and drainage, integrated water resource management and related institutional areas. The On-farm component provides finance on rehabilitation of on-farm irrigation and drainage systems for about 34 eligible WUAs in 15 regions, selected on irrigated area and agricultural production potential through the carrying out of works and the provision of consultants' services. The Project management, monitoring and evaluation component finances project management and implementation activities, including monitoring and evaluation through the provision of goods, consultants' services and training by a Project implementation unit established within AIOJSC. According to the contract the expected Project completion date is June 30, 2016. 2. BASIS OF PRESENTATION Accounting basis These special purpose project financial statements are prepared on the cash basis of accounting based on International Public Sector Accounting Standards Financial Reporting under the Cash Basis of Accounting issued by the International Public Sector Accounting Standards Board and incorporate the following principal accounting policies, which have been consistently followed in all material respects. Project financing is recognised as a source of project funds when the cash is received. Project expenditures are recognised as a use of project funds when the payments are made. The reporting currency is United States dollars ("US dollars" or "USD"). Items included in the special purpose project financial statements are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (the "functional currency"). The functional currency of the Project is United States dollars ("US dollars" or "USD"). 6 The exchange rates used by the Project management in the preparation of the financial statements as at year-end are as follows: December 31, December 31, 2013 2012 AZN/1 USD 0.7845 0.7850 SDR/1 USD 1.5452 1.5361 3. ACCOUNTING POLICIES Reporting entity The special purpose project financial statements are only for the Water Users Association Development Support Project financed under the International Bank for Reconstruction and Development ("IBRD") and International Development Association ("IDA"). Cash Cash comprises cash on the Designated and Project Accounts. The Designated account is a disbursement account of the Project maintained in US Dollars at the International Bank of the Republic of Azerbaijan. The Project Account is maintained by the Project in local currency (Azerbaijan Manat) and to be used for financing the Government contribution to the Project's expenditures. Recognition of funding and expense Project financing is recognized as a source of funds when the cash is received. Project expenditure is recognized as a use of funds when payment is made. Foreign currency translation Transactions in other currencies are converted to US dollars at the exchange rate prevailing at the date of the transaction. Cash balances in other currencies are converted to US dollars at the period end exchange rate. The resulting foreign exchange gain/losses are recorded separately in the special purpose statement of cash receipts and payments. 4. FINANCING AND EXPENDITURES THROUGH THE DESIGNATED ACCOUNT Financing Financing consists of the contributions made by the IBRD and IDA either in the form of direct payments made to the contractors, suppliers and consultants or in the form of designated account replenishments. The Project periodically requests withdrawal of loan proceeds through submission of a statement indicating expenditures for certain items referred to in the Agreement. Expenditures Payments out of the designated account are made for eligible expenditures in accordance with the provisions of the Agreement. Disbursements from designated account are made either for direct payments or to reimburse for project expenditures already paid by the Project. The IDA then replenishes the designated bank account on the basis of appropriate withdrawal applications submitted for these disbursements as described in the preceding paragraph. The designated account is a disbursement account for the Project, denominated in US dollars, maintained at the International Bank of Azerbaijan (Account# AZ331BAZ381 90028409330119120 USD, address: 67 Nizami street, Azerbaijan, Baku AZ1 005) during the year ended December 31, 2013, so as to ensure the payment of eligible expenditures, as defined by the Agreement. 7 The summary of the movements of the designated account were as follows: Balance as at January 1, 2012 ADD receipts: - Designated account advance 3,000,000 -Advance replenishments* (Note 7) 3,515,716 - SOE reimbursements* (Note 6) 611,929 Total cash receipt 7,127,645 DEDUCT disbursements: Amount of eligible expenditures paid (7,059,104) Advances to region support units (13,500) Balance as at December 31, 2012 55,041 ADD receipts: - Advance replenishments (Note 7) 17,662,671 - SOE reimbursements (Note 6) 1,680,505 Total cash receipt 19,398,217 DEDUCT disbursements: Amount of eligible expenditures paid (19,389,364) Balance as at December 31, 2013 8,853 *Applications# 1 and 3 in amount of USD 967,743 were submitted for expenditures occurred and paid in year 2011 from funds obtained from the Government of Republic of Azeraijan and subsequently reimbursed in 2012 by IDA through Project account. No withdrawal on International Bank for Reconstruction and Development ("IBRD") Loan 8039-AZ and relevant financing agreement of International Development Association ("IDA") Credit 4913-AZ agreement was made from the start of project activities till January 1, 2013 (Note 6, 7). 5. BUDGET AND BASIS OF FUNDING According to the terms of the Agreement with the IBRD and IDA, the Project is financed by proceeds received from different sources of finance as follows: IBRD loan agreement 8039-AZ: Category Description Budget, Financed by Financed by USD IBRD Loan, GOA Funds, % % Works, Goods, Consultants' services including Audit, Training and Operating Costs 3,192,000 83% 17% 2 Front-end fee 8,000 TOTAL 3,200,000 8 IDA credit 4913-AZ: Category Description Budget, Financed by Financed by USD* IDA Loan, GOA Funds, % % Works, Goods, Consultants' services including Audit, Training and Operating Costs 77,301,120 83% 17% TOTAL 77,301,120 *Total budget of the Project finance comprises SDR 48,900,000 equivalent of USD 77,301,120 as at agreement date October 25, 2011 per official exchange rate as of Central Bank of Azerbaijan USD/1 SDR 1.5808. 6. STATEMENT OF EXPENDITURES WITHDRAWAL SCHEDULE The IDA has disbursed advance payments to the Designated Account of the Project of USD 3,000,000 for the year ended December 31, 2012. The following funds were disbursed through the Statement of Expenditures ("SOE"): For the year ended December 31, 2013: Application # SOE Works, goods, Reimbursed Balance reimbursement consulting expenditures services, (Note 4) training and operating cost 15 74,730 74,730 (74,730) 16 522,556 522,556 (522,556) 17 211,797 211,797 (211 ,797) 18 197,855 197,855 (197,855) 19 179,355 179,355 (179,355) 21 146,266 146,266 (146,266) 22 63,397 63,397 (63,397) 25* 165,976 165,976 165,976 26* 55,962 55,962 55,962 Total 1,617,894 1,617,894 (1 ,395,956) 221,938 *Applications # 25 and 26 were submitted for expenditures occurred and paid in year 2013 and reimbursed subsequent to reporting period in year 2014 by IDA. For the year ended December 31, 2012: Application # SOE Works, goods, Reimbursed Balance reimbursement consulting expenditures services, training and operating cost 4 103,872 103,872 (103,872) 6 101,761 101,761 (101,761) 9 152,741 152,741 (152,741) 10 102,177 102,177 (102,177) 11 151,378 151,378 (151,378) 12** 72,930 72,930 72,930 14** 211,619 211,619 211,619 Total 896,478 896,478 (611,929) 284,549 9 **Applications# 12 and 14 were submitted for expenditures occurred and paid in year 2012 and subsequently reimbursed in 2013 by IDA. 7. DESIGNATED ACCOUNT EXPENDITURE REPLENISHMENT SCHEDULE The following funds for expenditures were disbursed through replenishment of Designated account for the year ended December 31, 2013: Application # Designated Works, goods, Reimbursed Balance account consulting expenditures expenditure services, (Note 4) reimbursement training and oeerating cost 15 2,658,871 2,658,871 (2,658,871) 16 1,677,575 1,677,575 (1,677,575) 17 1,494,519 1,494,519 (1,494,519) 18 2,355,188 2,355,188 (2,355, 188) 19 2,161,586 2,161,586 (2,161,586) 21 2,822,865 2,822,865 (2,822,865) 22 1,845,157 1,845,157 (1,845, 157) 25* 2,116,545 2,116,545 2,116,545 26* 639,164 639,164 639,164 Total 17,771,470 17,771,470 (15,015,761) 2,755,709 *Applications # 25 and 26 were submitted for expenditures occurred and paid in year 2013 and reimbursed subsequent to reporting period in year 2014 by IDA. For the year ended December 31, 2012: Application # Designated Works, Reimbursed Balance account goods, expenditures expenditure consulting reimbursement services, training and operating cost 4 396,104 396,104 (396,104) 6 546,530 546,530 (546,530) 9 844,967 844,967 (844,967) 10 822,276 822,276 (822,276) 11 905,839 905,839 (905,839) 12** 837,117 837,117 837,117 14** 1,809,793 1,809,793 1,809,793 Total 6,162,626 6,162,626 (3,515,716) 2,646,910 **Applications# 12 and 14 were submitted for expenditures occurred and paid in year 2012 and subsequently reimbursed in 2013 by IDA. 8. TOTAL AMOUNTS PAID BY IDA The total direct disbursements by IDA on behalf of the Project were USD 1 ,438,506 and USD 1,192,424 for the year ended December 31, 2013 and for the year ended December 31, 2012, respectively. Payments controlled and paid by IDA to the Project for the year ended December 31, 2013 and for the year ended December 31, 2012 were USD 22,320,823 and USD 8,026,847, respectively. 10 9. OPERATING ENVIRONMENT Country risk Emerging markets such as Azerbaijan are subject to different risks than more developed markets, including economic, political and social, and legal and legislative risks. Laws and regulations affecting businesses in Azerbaijan continue to change rapidly; tax and regulatory frameworks are subject to varying interpretations. The future economic direction of Azerbaijan is heavily influenced by the fiscal and monetary policies adopted by the government, together with developments in the legal, regulatory, and political environment. Because Azerbaijan produces and exports large volumes of oil and gas, its economy is particularly sensitive to the price of oil and gas on the world market. 10. EVENTS SUBSEQUENT TO THE SPECIAL PURPOSE PROJECT FINANCIAL STATEMENTS DATE Subsequent to reporting period amount of expenditures relating to application # 26 increased by USD 1,594,339. IDA reimbursed applications # 25 and 26 in amount of USD 2,282,521 and USD 2,289,465, respectively (Note 6, 7). As of June 10, 2014 the Project raised additional funds from IDA and Government of the Republic of Azerbaijan in amount of USD 11,772,332 and USD 3,01 0, 720, respectively. 10. APPROVAL OF FINANCIAL STATEMENTS These special purpose project financial statements were authorised for issue by the Management of the Project on June 25, 2014. 11