89600 Special Purpose Project Financial Statements and Independent Auditor's Report SA “Transport PIU” MoTC RA Lifeline Road Network Improvement Project IBRD Loan Number 8229-AM As of and for the year ended December 31, 2013 Lifeline Road Network Improvement Project Special purpose project financial statements As of and for the year ended December 31, 2013 Contents Page Independent auditor’s report 1 Statement of financial position 3 Statement of the Project sources and uses of funds 4 Statement of uses of funds by Project activities 5 SOE withdrawal schedule 6 Designated account statement 7 Notes to the special purpose project financial statements 8 Independent auditor’s report ¶ñ³Ýà ÂáñÝÃáÝ ö´À ÐÐ, ù. ºñ»õ³Ý 0012 ì³Õ³ñßÛ³Ý 8/1 Ð. + 374 10 260 964 ü.+ 374 10 260 961 Grant Thornton CJSC 8/1 Vagharshyan str. 0012 Yerevan, Armenia T + 374 10 260 964 F + 374 10 260 961 www.grantthornton.am To the Government of the Republic of Armenia We have audited the accompanying special purpose project financial statements of the Lifeline Road Network Improvement Project (the “Project”), financed by the International Bank for Reconstruction and Development Loan Agreement 8229-AM, which comprise the statement of financial position as of December 31, 2013, the statement of the Project sources and uses of funds, the statement of uses of funds by Project activities, the designated account statement as of and for the year ended December 31, 2013, as well as the statement of expenditures (“SOE”) submitted to the World Bank for the year ended December 31, 2013 in support of the Loan Agreement 8229-AM withdrawals, and a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Special Purpose Project Financial Statements Management of the State Agency “Transport PIU” of the Ministry of Transport and Communication of the Republic of Armenia is responsible for the preparation and fair presentation of these special purpose project financial statements in accordance with the accounting policies described in the note 2 to the special purpose project financial statements, the World Bank guidelines, and the relevant points of the Loan Agreement 8229-AM, and for such internal control as management determines is necessary to enable the preparation of these special purpose project financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s 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 about whether the special purpose project financial statements are free from material misstatement. ²áõ¹Çï, гñÏ»ñ, ÊáñÑñ¹³ïíáõÃÛáõÝ Audit, Tax, Advisory ¶ñ³Ýà ÂáñÝÃáÝ ÆÝûñÝ»ßÝÉÇ ³Ý¹³Ù Member of Grant Thornton International Ltd An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s 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 control relevant to the entity’s preparation and fair presentation of the 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 control. 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 financial statements. 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 special purpose project financial statements give a true and fair view of the financial position of the Lifeline Road Network Improvement Project as of December 31, 2013, and of the funds received and expenses incurred for the year then ended, in accordance with the accounting policies described in the note 2 to the special purpose project financial statements, the World Bank guidelines, and the relevant points of the Loan Agreement 8229-AM. In addition, in our opinion, the SOEs submitted together with the internal controls and procedures involved in their preparation can be relied upon to support the applications for the Loan Agreement 8229-AM withdrawals. May 15, 2014 Gagik Gyulbudaghyan Emil Vassilyan, FCCA Managing Partner Engagement Partner ²áõ¹Çï, гñÏ»ñ, ÊáñÑñ¹³ïíáõÃÛáõÝ Audit, Tax, Advisory ¶ñ³Ýà ÂáñÝÃáÝ ÆÝûñÝ»ßÝÉÇ ³Ý¹³Ù Member of Grant Thornton International Ltd Lifeline Road Network Improvement Project 3 Special purpose project financial statements As of and for the year ended December 31, 2013 Statement of financial position In US dollars As of December Note 31, 2013 Assets Non-current assets Accumulated Project expenses 16,221,054 16,221,054 Current assets Advances 4 426,652 Bank balances 5 265,806 692,458 Total assets 16,913,512 Funds and liabilities Funds Accumulated Project financing 16,273,105 Exchange rate difference 27,005 16,300,110 Current liabilities Accounts payable 6 613,402 613,402 Total funds and liabilities 16,913,512 The special purpose project financial statements were approved on March 25, 2014 by: The statement of financial position is to be read in conjunction with the notes to and forming part of the special purpose project financial statements set out on pages 8 to 13. Lifeline Road Network Improvement Project 4 Special purpose project financial statements As of and for the year ended December 31, 2013 Statement of the Project sources and uses of funds As of and for the year ended December 31, 2013 In US dollars Actual Planned Variance As of As of As of December December December Life of For the year 31, 2013 For the year 31, 2013 For the year 31, 2013 Project Sources of funds IBRD Loan Number 8229-AM (note 7) 13,088,567 13,088,567 Government co-financing (note 8) 3,184,538 3,184,538 Total 16,273,105 16,273,105 Exchange rate difference 27,005 27,005 Less: Uses of funds Goods, works, non-consulting services, consultants' services, and Operating Costs under the Project (note 9) 16,108,554 16,108,554 16,086,700 16,086,700 21,854 21,854 56,109,375 Front-end Fee (note 9) 112,500 112,500 112,500 112,500 - - 112,500 Total 16,221,054 16,221,054 16,199,200 16,199,200 21,854 21,854 56,221,875 Net increase in working capital (note 10) 79,056 79,056 The statement of the Project sources and uses of funds is to be read in conjunction with the notes to and forming part of the special purpose project financial statements set out on pages 8 to 13. Lifeline Road Network Improvement Project 5 Special purpose project financial statements As of and for the year ended December 31, 2013 Statement of uses of funds by Project activities As of and for the year ended December 31, 2013 In US dollars Actual Planned Variance As of As of As of December December December Life of For the year 31, 2013 For the year 31, 2013 For the year 31, 2013 Project Part 1: Lifeline Road Improvement 16,093,079 16,093,079 16,071,200 16,071,200 21,879 21,879 52,390,000 Road Rehabilitation Works 11,961,083 11,961,083 11,967,200 11,967,200 (6,117) (6,117) 41,510,000 Pilot on Rehabilitation and Maintenance Contract 3,434,663 3,434,663 3,406,900 3,406,900 27,763 27,763 6,760,000 Pilot for Routine Maintenance through Microenterprises - - - - - - 170,000 Supervision and Technical Designs 697,333 697,333 697,100 697,100 233 233 3,700,000 Road Safety Engineering and Black Spot Improvement - - - - - - 250,000 Part 2: Project Management and Institutional Strengthening 15,475 15,475 15,500 15,500 (25) (25) 3,719,375 Project Management and Implementation, including audits 184 184 200 200 (16) (16) 1,109,375 Road Asset Management System and Survey Equipment - - - - - - 500,000 Road Safety Technical Assistance - - - - - - 250,000 Technical Assistance 15,291 15,291 15,300 15,300 (9) (9) 1,860,000 Total 16,108,554 16,108,554 16,086,700 16,086,700 21,854 21,854 56,109,375 The Statement of uses of funds by Project activities does not include the Front-end Fee at the amount of US dollars 112,500 as of December 31, 2013. The statement of uses of funds by Project activities is to be read in conjunction with the notes to and forming part of the special purpose project financial statements set out on pages 8 to 13. Lifeline Road Network Improvement Project 6 Special purpose project financial statements As of and for the year ended December 31, 2013 SOE withdrawal schedule IBRD Loan Number 8229-AM For the year ended December 31, 2013 In US dollars Category Application No. Goods, works, non-consulting services, consultants' services, and Operating Costs under the Project 3-DA 4,054 4-DA 8,179 Total 12,233 The SOE withdrawal schedule is to be read in conjunction with the notes to and forming part of the special purpose project financial statements set out on pages 8 to 13. Lifeline Road Network Improvement Project 7 Special purpose project financial statements As of and for the year ended December 31, 2013 Designated account statement IBRD Loan Number 8229-AM As of and for the year ended December 31, 2013 In US dollars Opening balance as of January 1, 2013 - Add: Cumulative unexplained discrepancy - Loan replenishment during the year 12,976,067 12,976,067 12,976,067 Less: Refund to the World Bank from the designated account during the year - Present outstanding amount advanced to the designated account (1) 12,976,067 Closing balance as of December 31, 2013 257,164 Add: Amount of eligible expenditures paid during the year 12,718,903 Service charges (if applicable) - 12,718,903 12,718,903 Less: Interest earned (if credited into the designated account) - Total advance accounted for (2) 12,976,067 Discrepancy (1) – (2) to be explained - The designated account statement is to be read in conjunction with the notes to and forming part of the special purpose project financial statements set out on pages 8 to 13. Lifeline Road Network Improvement Project 8 Special purpose project financial statements As of and for the year ended December 31, 2013 Notes to the special purpose project financial statements 1 Activity The State Agency “Transport Projects Implementation Unit” of the Ministry of Transport and Communication of the Republic of Armenia (the “PIU”) was established as a state institution by the Resolution No 1930-N of the Government of the Republic of Armenia dated December 28, 2006. The PIU implements the Lifeline Road Network Improvement Project (the “Project”), which is financed under the Loan Agreement 8229-AM signed between the International Bank for Reconstruction and Development (the “IBRD”) and the Government of the Republic of Armenia on February 11, 2013. The objective of the Project is to improve access of rural communities to markets and services through the upgrading of selected Lifeline Roads, and to strengthen the capacity of the PIU to manage the Lifeline Road Network. The Project consists of the following parts: Part 1: Lifeline Road Improvement • Carrying out improvement works for approximately 147 kilometres of selected roads within the Lifeline Road Network. • Carrying out, on a pilot basis, rehabilitation and routine maintenance works of approximately 23 kilometres of selected segments of the Lifeline Road Network, under the terms of a Rehabilitation and Maintenance Contract. • Carrying out, on a pilot basis, routine maintenance of selected sections of the Lifeline Road Network using Microenterprises. • Carrying out detailed design studies, related technical supervision activities and independent technical audits for rehabilitation activities under the Project. • Carrying out road safety improvement works, including Black Spots improvements. Part 2: Project Management and Institutional Strengthening • Provision of support for Project coordination and implementation through, the financing of operating costs required for Project administration and monitoring (including financial audits). Lifeline Road Network Improvement Project 9 Special purpose project financial statements As of and for the year ended December 31, 2013 • Acquisition of a road asset management system database, including installation and training to ARD personnel for the use of said database, together with road survey equipment for surveying road conditions and traffic. • Carrying out a road safety program, including, inter alia, (i) the detailed design for carrying out of Black Spots improvement works; (ii) the provision of training programs for ARD personnel; (iii) road safety educational practices in Safe Villages schools, and (iv) carrying out of road safety campaigns linked to the Lifeline Road Network . • Provision of technical assistance for, inter alia, the: (i) carrying out of a feasibility study for the rehabilitation and maintenance of roads using a performance-based approach, including the identification of at least one road section ; (ii) carrying out of studies on social monitoring and evaluation related to the Project, as well as road sector financial sustainability; (iii) provision of training to MOTC staff and local contractors on the new concepts introduced by the Project, including design and implementation of multi-year performance based contracts, efficient design standards, and planning and contract monitoring for MOTC and ARD staff; and (iv) carrying out of technical studies and detailed designs required for the preparation of potential future investments in the road sector. In accordance with the Loan Agreement 8229-AM dated February 11, 2013, the financing of the Project is implemented through the following categories: Category Percentage of expenditures Amount of the Loan to be financed allocated (inclusive of taxes) (in USD) Goods, works, non-consulting services, consultants' services, and Operating Costs under the Project 80 % 44,887,500 Front-end Fee 112,500 Total 45,000,000 Front-end Fee The Front-end Fee payable by the Republic of Armenia (RA) shall be equal to one quarter of one percent (0.25%) of the Loan amount. The Project’s amounts are allocated to the following components: Summary by components Bank financing Government (in USD) financing Total Cost (inclusive of taxes) (in USD) (in USD) Lifeline Road Improvement 41,912,000 10,478,000 52,390,000 Project Management and Institutional Strengthening 2,975,500 743,875 3,719,375 Total Project Costs 44,887,500 11,221,875 56,109,375 Front end fee 112,500 - 112,500 Total 45,000,000 11,221,875 56,221,875 The legal address of the PIU is Nalbandyan 28, Yerevan, Armenia. The average number of the PIU’s staff during the reporting year was 25. Lifeline Road Network Improvement Project 10 Special purpose project financial statements As of and for the year ended December 31, 2013 2 Significant accounting policies 2.1 Basis of preparation The special purpose project financial statements were prepared in accordance with the accrual basis of accounting as well as the World Bank guidelines and the relevant points of the Loan Agreement 8229-AM. Significant accounting policies are disclosed below. 2.2 Functional and presentation currency The national currency of the Republic of Armenia is Armenian dram. These special purpose project financial statements are presented in US dollars (presentation currency). In preparing the special purpose project financial statements, transactions in currencies other than US dollar are recorded at the rates of exchange defined by the Central Bank of Armenia prevailing on the dates of the transactions. At each reporting date, monetary items denominated in foreign currencies are retranslated at the rate defined by the Central Bank of Armenia prevailing on that date, which is 405.64 Armenian drams for 1 US dollar as of December 31, 2013. Any exchange rate differences are recognized in the statement of the Project sources and uses of funds and the accumulated figure of exchange rate difference is disclosed in the Statement of financial position under “Funds”. 2.3 Project financing The financing received in the framework of the Loan Agreement 8229-AM is recorded in the statement of financial position as “Accumulated Project financing” and is recognized at each replenishment. In addition, the current year funds received are disclosed in the statement of Project sources and uses of funds, showing the sources of funds. 2.4 Project expenses The Project expenses are recognized on the accrual basis of accounting. The accumulated Project expenses are disclosed in the statement of financial position under non-current assets. In addition, current year expenses are disclosed in the statement of Project sources and uses of funds and statement of uses of funds by Project activities. Additionally, a further breakdown of expenses by categories is disclosed in note 9. 2.5 Advances Advances, which comprise amounts paid for services and goods not yet received are stated at nominal value. 2.6 Accounts payable Payables comprise the amounts to be paid and are stated at nominal value. 2.7 The World Bank financing To finance eligible expenditures for the Loan Agreement 8229-AM, the World Bank disburses proceeds from the Project account using one or more of the disbursement methods, which are stated below: a. Reimbursement The Bank may reimburse the borrower to finance eligible expenditures that the borrower has prefinanced from its own resources. Lifeline Road Network Improvement Project 11 Special purpose project financial statements As of and for the year ended December 31, 2013 b. Advance The Bank may advance loan proceeds into a designated account of the borrower to finance eligible expenditures as they are incurred and for which supporting documents will be provided at a later date. c. Direct payments The Bank may make payments, at the borrower’s request, directly to a third party for eligible expenditures. d. Special commitment The Bank may pay amounts to a third party for eligible expenditures under special commitments entered into, in writing, at the borrower’s request and on terms and conditions agreed between the Bank and the borrower. 2.8 Planned annual expenses “Planned Project Expenses” for the year were accounted for based on the planned works and data reflected in the procurement plan. 3 Closing date of the Project According to the Loan Agreement 8229-AM, the Project closing date was defined as June 30, 2017. 4 Advances Advances comprise amounts paid to contractors for construction works which are presented below. In US dollars As of December 31, 2013 Khachhar LLC and Kapavor LLC (contract number CW-ICB-LRNIP-2013/4) 251,954 Kapavor LLC (contract number CW-ICB-LRNIP-2013/2, lot 1) 174,698 426,652 5 Bank balances In US dollars As of December 31, 2013 Designated account 257,164 Local account 8,642 265,806 6 Accounts payable In US dollars As of December 31, 2013 Payables to contractors 610,999 Other 2,403 613,402 Lifeline Road Network Improvement Project 12 Special purpose project financial statements As of and for the year ended December 31, 2013 Payables to contractors comprise of retention amount which are presented below. In US dollars As of December 31, 2013 Khachhar LLC and Kapavor LLC (contract number CW-ICB-LRNIP-2013/4) 342,962 Kapavor LLC (contract number CW-ICB-LRNIP-2013/2, lot 1) 147,017 Sisian FPAT LLC (contract number CW-ICB-LRNIP-2013/1, lot 2) 121,020 610,999 7 IBRD Loan Number 8229-AM For the year ended December 31, In US dollars 2013 Other procedures 7,963,834 SOE procedures 12,233 Designated account advance 5,000,000 Front-end fee 112,500 13,088,567 Under the method of “Other procedures” of financing, the PIU requests advance to and documentation of designated account accompanied by the records evidencing eligible expenditures for payments against contracts valued at more than the amounts in accordance with the Disbursement Letter and contracts that are subject to the World Bank's prior review. Under the method of “SOE procedures” of financing, the PIU requests advance to and documentation of designated account accompanied by the statement of expenditure (SOE). 8 Government co-financing For all expenses under the World Bank Loan Agreement 8229-AM, there is a 20% Government co- financing. During the reporting year there was Government co-financing at the amount of US dollars 3,184,538. 9 Uses of funds by category descriptions The Statement of the Project sources and uses of funds discloses the expenses in two categories, one of which combines a number of subcategories as reflected in the Loan Agreement 8229-AM. For the convenience of certain users, the breakdown of the uses of funds according to subcategories is disclosed in the table below. In US dollars For the year ended December 31, 2013 Works 15,395,746 Consultants’ services 712,624 Operating Costs 184 Front-end Fee 112,500 16,221,054 Lifeline Road Network Improvement Project 13 Special purpose project financial statements As of and for the year ended December 31, 2013 10 Net increase in working capital In US dollars For the year ended December 31, 2013 Increase in bank balances 265,806 Increase in advances 426,652 Increase in accounts payable (613,402) 79,056 11 Reconciliation between the amounts received by the PIU and disbursed by the World Bank IBRD Loan Number 8229-AM For the year ended December 31, 2013 In US dollars Category Appl. PIU WB Difference Goods, works, non-consulting services, consultants' services, and Operating Costs under the Project 3-DA 3,803,600 3,803,600 - 4-DA 4,172,467 4,172,467 - 7,976,067 7,976,067 - Designated account advance 1-DA 3,000,000 3,000,000 - 2-DA 2,000,000 2,000,000 - 5,000,000 5,000,000 - Front-end fee 112,500 112,500 - Total 13,088,567 13,088,567 - www.grantthornton.am