SOCIAL FUND FOR THE DEVELOPMENT OF INTERNALLY DISPLACED PEOPLE OF AZERBAIJAN REPORT OF INDEPENDENT AUDITORS AND COMBINED SPECIAL PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 SOCIAL FUND FOR THE DEVELOPMENT OF INTERNALLY DISPLACED PEOPLE TABLE OF CONTENTS Page Statement of Management Responsibilities 3 Report of Independent Auditors 4-5 Combined Balance Sheet 6-7 Combined Statement of Sources and Uses of Funds 8-11 Notes to the Combined Special Purpose Financial Statements 12-20 STATEMENT OF MANAGEMENT RESPONSIBILITIES Management has prepared and is responsible for the combined special purpose financial statements and related notes of the Social Fund for the Development of Internally Displaced People ("SFDI"). They have been prepared in accordance with the basis of accounting described in Note 2 of the accompanying combined special purpose financial statements. SFDf maintains internal accounting control systems and related policies and procedures designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorisation and properly recorded, and that accounting records may be relied upon for the preparation of financial statements and other financial information. The system contains self-monitoring mechanisms that aliow management to be reasonably confident that controls, as well as the SFDI's administrative procedures and internal reporting requirements operate effectively. There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error or the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statements preparation. Sabir Ahmadov Lala Shikhaliyeva General Manager, SF Chief Accountant, SFDI 28 June 2016 Baku, Azerbaijan 3 MOORE STEPHENS Moore Stephens Azerbaijan Limited 13, Zeynalabdin Taghiyev Street Baku AZ1005, Azerbaijan +994 12 490 77 47/48/49 +994 12 490 77 50 REPORT OF INDEPENDENT AUDITORS To the Supervisory Board of the Social Fund for the Development of internally Displaced People of Azerbaijan: 1. We have audited the accompanying combined special purpose financial statements of the Social Fund for the Development of Internally Displaced People of Azerbaijan ("SFDI") which comprise the combined balance sheet at 31 December 2015, and the related combined statement of sources and uses of funds for the year then ended, and a summary of significant accounting policies and other explanatory notes (collectively referred to as the "combined special purpose financial statements"). We have also audited SFDI's compliance with the requirements and conditions of the World Bank's Guidelines, Credit Agreements and laws and regulations of the Republic of Azerbaijan. Management's responsibility for the financial statements 2. Management is responsible for the preparation and fair presentation of these special purpose financial statements in accordance with the International Public Sector Accounting Standard ("IPSAS") "Financial Reporting under the Cash Basis of Accounting" issued by the International Public Sector Accounting Standards Board ("IPSASB") of the International Federation of Accountants ("IFAC") and the "Guidelines: Annual Financial Reporting and Audit for World Bank Financed Activities" as described in Note 2 of the special purpose financial statements. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors'responsibility 3. Our responsibility is to express an opinion on these combined special purpose financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing ("ISA") with special reference to ISA 800 "The independent Auditors' Report on Special Purpose Audit Engagements" and to relevant World Bank Guidelines, Credit Agreements and laws and regulations of the Republic of Azerbaijan applicable to the audit of financial statements and to compliance auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the special purpose financial statements are free from material misstatement and about whether SFDI has complied with relevant guidelines, agreements, laws and regulations. 4 MOORE STEPHENS 4. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements and about whether SFDI has complied with relevant guidelines, agreements, laws and regulations. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to SFDI's preparation and fair presentation of the combined special purpose 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 SFDI'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. 5. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion 6. In our opinion: a) the accompanying combined special purpose financial statements present fairly, in all material respects, the financial position of SFDI referred to above at 31 December 2015 and its sources and uses of funds for the year then ended in accordance with the basis of accounting described in Note 2 to the accompanying combined special purpose financial statements; and b) SFDI was, in all material respects, in compliance with the requirements and conditions of the World Bank Guidelines, Development Credit Agreement and laws and regulations of the Republic of Azerbaijan during the year ended 31 December 2015. 28 June 2016 5 SOCIAL FUND FOR THE DEVELOPMENT OF INTERNALLY DISPLACED PEOPLE OF AZERBAIJAN COMBINED BALANCE SHEET AS AT 31 DECEMBER 2015 (Expressed in US dollars) 2015 2014 ASSETS AND CUMULATIVE EXPENDITURE Cash and bank - World Bank Project Bank account - Government of Azerbaijan 4 10 Project Bank account - Community 75,979 28,102 Project Bank account- Microcredit (interest) 116,967 122,519 International Development Association ("IDA") Special Account - - International Bank for Reconstruction and Development ("IBRD") Special Account 28,715 93,681 221,665 244,312 Cash and bank - State Oil Fund of the AzerbaUan Republic ("SOFAZ") Project Bank accounts 1,577 2,963 Bank accounts operated through the Treasury of the Ministry of Finance 131,984 223,856 Petty cash 1 1 133,562 226,820 Cash and bank - State Oil Company of Azerbaian Republic (SOCAR") Project Bank account Bank accounts operated through the Treasury of the Ministry of Finance 9,764 19,396 9,764 19,396 Cash and bank - Islamic Development Bank ("IDB) Project Bank accounts - - Cash and bank - Micro-credits Bank accounts 130,844 198,199 Cash and bank - Tender 130,844 198,199 Bank accounts 11,992 19,484 11,992 19,484 Cash and bank - Japan Social Development Fund ("JSDF") Project Bank account - - Cash and bank- the Government of Azerbaijan ('GoA") Bank accounts operated through the Treasury of the Ministry of Finance 5,379 28,222 5,379 26,222 Total Assets 513,200 736,433 Cumulative Project expenditure - World Bank 105,449,628 79,747,890* Cumulative Project expenditure - SOFAZ 2,212,089,302 2,063,625,304 Cumulative Project expenditure - SOCAR 9,444,872 9,444,872 Cumulative Project expenditure - IDB 13,321,101 13,321,101 Cumulative Project expenditure - Micro-credits 3,783,852 3,675,916 Cumulative Project expenditure - Tender 213,025 182,149 Cumulative Project expenditure - JSDF 1,943,224 1,943,224 Cumulative Project expenditure - GoA 108,366,784 97,390,171 Total Cumulative Project Expenditure 2,454,611,768 2,269,330,627 TOTAL ASSETS AND CUMULATIVE EXPENDITURE 2,455,124,974 2,270,067,060 *The expenditure on works and goods amounting USD 16,296 expensed in the year ended 31 December 2009 out of Government share under IDA 4034-AZ agreement was omitted from cumulative project expenditure by an error. The amount of front end fee USD 125,000 has been included in the cumulative expenditure of the Project. The notes set out on pages 12-20 form an integral part of these financial statements 6 SOCIAL FUND FOR THE DEVELOPMENT OF INTERNALLY DISPLACED PEOPLE OF AZERBAIJAN COMBINED BALANCE SHEET (CONTINUED) AS AT 31 DECEMBER 2015 (Expressed in US dollars) SOURCES OF FUNDS Cumulative sources of funds - World Bank 106,058,022 79,967,814 Cumulative sources of funds - SOFAZ Cumulative sources of funds - SOCAR 2,213,434,590 2,063,615,728 Cuultie ouce o fnd -SOAR9,481,941 9,481,941 Cumulative sources of funds - IDB 13,320,587 13,320,587 Cumulative sources of funds - Micro-credits 4,137,306 3,978,542 Cumulative sources of funds - Tender 235,022 201,031 Cumulative sources of funds - JSDF 1,943,224 1,943,224 Cumulative sources of funds - GoA 108,404,932 97,428,052 Total sources of funds 2,457,015,624 2,269,936,919 Accumulated foreign exchange difference - World Bank (386,729) 24,388 Accumulated foreign exchange difference - SOFAZ Accumulated foreign exchange difference - SOCAR (2,725) 2363 Accumulated foreign exchange difference - IDB (73 (13 Accumulated foreign exchange difference - Micro-credits 513 Accumulated foreign exchange difference - Tender02 Accumulated foreign exchange difference - JSDF ( Accumulated foreign exchange difference - GoA Total accumulated foreign exchange difference (1,890,650) 130,141 TOTAL SOURCES OF FUNDS 2,455,124,974 2,20,067,060 Sabir Ahmadov Lala Shikhaliyeva C _ General Manager, SFD1 Chief Accountant, SFDI The notes set out on pa s 12-20 form an integral part of these financial statements 7 SOCIAL FUND FOR THE DEVELOPMENT OF INTERNALLY DISPLACED PEOPLE OF AZERBAIJAN COMBINED STATEMENT OF SOURCES AND USES OF FUNDS FOR THE YEAR ENDED 31 DECEMBER 2015 (Expressed in US dollars) 2015 2014 OPENING BALANCES World Bank Project Bank accounts - International Bank of Azerbaijan Republic ("IBAR") 150,631 257,229 IDA Special account - IBAR 93,681 81,889 244,312 339,118 SOFAZ Project Bank accounts - IBAR 2,963 2,963 Treasury accounts - IBAR 223,856 83,419 Petty cash 1 1 SOCAR 226,820 86,383 Project Bank account - Kapital Bank Bank accounts operated through the Treasury of the Ministry of Finance 19,396 19,389 19,396 19,369 1DB Project Bank accounts - Kapital Bank - - Micro-credits Project Bank accounts - IBAR 169,042 121,414 Project Bank accounts - Kapital Bank 29,157 17,091 198,199 138,505 Tender Project Bank account - IBAR 19,484 4,229 JSDF 19,484 4,229 Project Bank account - ]BAR - - GoA Bank accounts operated through the Treasury of the Ministry of Finance 28,222 19,667 28,222 19,667 TOTAL OPENING BALANCES 736,433 607,271 LESS: ACCUMULATED OPENING FOREIGN EXCHANGE DIFFERENCE World Bank 24,388 24,777 SOFAZ 236,397 236,772 SOCAR (17,673) (17,700) IDS 513 513 Micro-credits (104,427) (104,437) Tender 602 602 JSDF GoA (9,659) (9,659) Total accumulated opening foreign exchange difference 130,141 130,868 The notes set out on pages 12-20 form an integral part of these financial statements SOCIAL FUND FOR THE DEVELOPMENT OF INTERNALLY DISPLACED PEOPLE OF AZERBAIJAN COMBINED STATEMENT OF SOURCES AND USES OF FUNDS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2015 (Expressed in US dollars) 2015 2014 Cumulative ADD: FUNDS RECEIVED BY SOURCES World Bank IDA funds - - 26,344,394 IBRD funds 17,804,681 15,214,177 43,371,942 Government funds 7,804,892 11,124,364 34,130,838 Community funds 393,278 267,567 1,808,167 Microcredits (interest) 87,357 142,232 402,681 26,090,208 26,748,340 106,058,022 SOFAZ 149,818,862 384,494,489 2,213,434,590 149,818,862 384,494,489 2,213,434,590 SOCAR - - 9,481,941 - - 9,481,941 1DB Government funds - - 3,936,617 IDB funds - - 9,383,970 - 13,320,587 Micro-credits 158,764 376,413 4,137,306 158,764 376,413 4,137,306 Tender 33,991 36,718 235,022 33,991 36,718 235,022 JSDF - - 1,943,224 - 1,943,224 GoA 10,976,880 14,114,573 108,404,932 10,976,880 14,114,573 108,404,932 TOTAL FUNDS RECEIVED 187,078,705 425,770,533 2,457,015,624 LESS: EXPENDITURE World Bank Works and goods 8,050,011 4,598,904 50,139,904 Housing Renovation 12,176,849 14,594,856 29,206,029 Youth Support 2,058,021 3,322,022 6,455,218 Income Generating Activities 1,430,009 2,112,616 4,335,046 Consultant services and training 1,070,465 938,195 4,538,793 Operating costs 916,383 1,083,930 6,363,579 Micro-credit financed by WB-8096 - 192,234 4,286,059 Front end fee - - 125,000 25,701,738 26,842,757 105,449,628 SOFAZ Engineering structures 49,244,578 100,358,833 663,851,138 Public service objects 18,372,281 36,308,089 195,411,816 Private houses 66,399,209 237,692,486 1,273,431,293 Other 14,447,930 9,994,269 79,395,055 148,463,998 384,353,677 2,212,089,302 SOCAR Construction - - 9,061,778 Office - 107,997 Project - 249,638 Other - - 25,459 - 9,444,872 The notes set out on pages 12-20 form an integral part of these financial statements 9 SOCIAL FUND FOR THE DEVELOPMENT OF INTERNALLY DISPLACED PEOPLE OF AZERBAIJAN COMBINED STATEMENT OF SOURCES AND USES OF FUNDS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2015 (Expressed in US dollars) 2015 2014 Cumulative IDB Civil Works - 12,900,762 Consultants' services - 244,724 Project - 148,076 Salaries and office _ - 27,539 - 13,321,101 Micro-credits Micro-credits 83,406 281,050 3,493,160 Salaries and office 24,530 35,679 290,692 107,936 316,729 3,783,852 Tender 30,876 21,463 213,025 30,876 21,403 213,025 JSDF - - 1,943,224 - 1,943,224 GoA 10,976,593 14,106,018 108,366,764 10,976,593 14,106,018 108,366,764 TOTAL EXPENDITURE 185,281,141 425,640,644 2,454,611,768 ADD: ACCUMULATED CLOSING FOREIGN EXCHANGE DIFFERENCE World Bank (386,729) 24,388 (386,729) SOFAZ (1,211,725) 236,397 (1,211,725) SOCAR (27,305) (17,673) (27,305) IDB 513 513 513 Micro-credits (222,610) (104,427) (222,610) Tender (10005) 602 (10,005) JSDF - GoA (32,789) (,659% 32,789L Total accumulated closing foreign exchange difference (1,890,650) 130,141 (1,890,650) The notes set out on pages 12-20 form an integral part of these financial statements 10 SOCIAL FUND FOR THE DEVELOPMENT OF INTERNALLY DISPLACED PEOPLE OF AZERBAIJAN COMBINED STATEMENT OF SOURCES AND USES OF FUNDS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2015 (Expressed in US dollars) CLOSING BALANCES 2015 2014 World Bank Project Bank accounts - IBAR 192,950 150,631 IDA Special account - 1BAR IBRD Special account - IBAR 28,715 93,681 SOFAZ 221,665 244,312 Project Bank accounts - IBAR 1,577 2,963 Bank accounts operated through the Treasury 131,984 223,856 Petty cash 1 1 SOCAR 133,562 226,820 Project Bank account - Kapital Bank Bank accounts operated through the Treasury 9,764 19,396 IDB 9,764 19,396 Project Bank accounts - Kapital Bank Micro-credits Project Bank accounts - IBAR 112,235 169,042 Project Bank accounts - Kapital Bank 18,609 29,157 Tender 130,844 198,199 Project Bank accounts - IBAR 11,992 19,484 JSDF 11,992 19,484 Project Bank account - IBAR GoA Bank account operated through the Treasury 5,379 28,222 5,379 28,222 TOTAL CLOSING BALANCES 513,206 736,433 Sabir Ahmadov Lala Shikhaliyeva General Manager, SF I Chief Accountant, SFDI The notes set out on pages 12-20 form an integral part of these financial statements 11 SOCIAL FUND FOR THE DEVELOPMENT OF INTERNALLY DISPLACED PEOPLE OF AZERBAIJAN NOTES TO THE COMBINED SPECIAL PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 (Amounts are expressed in US dollars unless otherwise indicated) NOTE 1. BACKGROUND The separatist action in Upper Garabagh together with external aggression resulted in about 900,000 Internally Displaced People ("IDP") and refugees living in the Republic of Azerbaijan. Facing the declining international support for humanitarian assistance and unrealistic prospects for early peace settlement that would permit the return of IDP's to their former homes, the Government of Azerbaijan ("the Government") has decided to take steps that would reduce dependence of IDP on humanitarian aid and at the same time improve their living conditions and living standards. This involved the development of a system of realistic arrangements and the organisation of new possibilities for the destitute families in an adequate socio- economic situation with provision of conditions for self-life support based on attraction of donors by the Government. For the achievement of these goals the Government has started the construction of new "compact" settlements with the required infrastructure and repatriation to these settlements of IDP's living in the worst conditions. The strategy of the Government was officially sanctioned by issuance of the Presidential Decree # 895 of 17 September 1998 and confirmed with the international organisations in a Memorandum of Understanding signed by the Government of Azerbaijan and UNDP, UNHCR and the World Bank on 23 February 1999. Subsequently, the Government has issued a number of orders for the realisation of the new strategy. Objectives of the state strategy were detailed by the Decree # 298 of 1 July 2004 of President of Azerbaijan. The accepted strategy targets transition from humanitarian assistance to the development programmes. However, this problem cannot be solved in a conventional way within a short time and consequently innovative and realistic methods are required. To address these issues the Government of Azerbaijan has decided to set up the Social Fund for the Development of IDP's ("SFDI") with the assistance of the World Bank and other donors by Presidential Decree on 6 December 1999. SFDI is an integral part of the Government of Azerbaijan's strategy to improve the living conditions of iDP's. It is a social development agency that manages funds allocated for needs of IDP's in a sustainable manner. SFDI is an autonomous organisation reporting to a Supervisory Board which is headed by the Chairman of the Azerbaijan Republic's Committee for Refugees and IDP's and consists of the representatives of various state agencies such as the Deputy Minister of Finance and representatives from various international agencies. SFDI has an independent financial and management system and is a non-profit organisation. The legal address of SFDI is 57 Tbilisi Avenue, Baku, Azerbaijan, the actual address is 65 Fuzuli Street, Baku, Azerbaijan. According to its Charter SFDI has two key objectives: i. raising the living standards of IDP's by providing required funding for the rehabilitation of small-scale social and economic infrastructure; ii. implementation of actions ensuring creation of new work places, increasing the employment rate of the population and providing opportunities for income-generating activities through the financing of various community micro-projects and the implementation of microfinance programmes. SFDI finances the programmes in two main directions: Community Micro - Projects (CMP) CMPs address community needs rather than individual needs. CMPs subdivide into (i) infrastructure and (ii) services (non-infrastructure) micro-projects. Infrastructure micro-projects (IMP) include rehabilitation/construction of various infrastructures. Service micro-projects (SMP) consist of cleaning of garbage, waste disposal or support to cultural centres or community activities. Micro - Finance Programmes (MFP) MFPs are income generating programmes for the assistance to the poor IDP's directed to overcome poverty, improve their living standards, increase their income and provide assistance in employment generation in their micro-enterprises through participation of financial intermediaries. 12 SOCIAL FUND FOR THE DEVELOPMENT OF INTERNALLY DISPLACED PEOPLE OF AZERBAIJAN NOTES TO THE COMBINED SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2015 (Amounts are expressed in US dollars unless otherwise indicated) NOTE 1. BACKGROUND (CONTINUED) The main sources of finance for SFDI activities are described below: World Bank To finance this Project, in August 1998 the World Bank approved a USD 20 million equivalent IDA credit (cr.31090-AZ) for a "Pilot Reconstruction Project". The credit was complemented by the World Bank financing from different sources such as the United Nations Development Programme ("UNOP"), the United Nations High Commissioner for Refugees ("UNHCR") and the European Union ("EU") and supported by a Government contribution of USD 9.5 million. The purpose of the Programme was to help Azerbaijan rebuild economic and social infrastructure in the war ravaged regions and allow as many IDP as possible to return to their places of origin. To address the needs and help improve the living conditions of IDP from other regions, the World Bank agreed in June 1999 to provide a USD 10 million equivalent "Supplemental Credit" to the "Pilot Reconstruction Project" (Cr.31091-AZ). The Supplemental Credit was to finance the Programme micro-projects with social and economic objectives and to provide micro-credits to enhance the economic opportunities of IDP. The "Pilot Reconstruction Project" closed on 30 June 2005. On 3 June 2005, the World Bank and the Government signed the Project Agreement and the Development Credit Agreement "lDP Economic Development Support Project" ('IDP-EDS") with credit number 4034-AZ whereby IDA agreed to lend to the Government an amount in various currencies equivalent to SDR 7.5 million (seven million five hundred thousand Special Drawing Rights) or USD 11.5 million. This is a "repeater project" that replicates part of the "Pilot Reconstruction Project" (Cr. 31090/31091-AZ), and its objective, like that of its predecessor is to help improve the living conditions of IDP's and enhance their economic opportunities and prospects for social integration. On 15 May 2008, IDA and the Government signed the Project Agreement and the Additional Financing Agreement (credit number 4395-AZ) for the purpose of providing additional financing for the activities related to the Original Project - IDP Economic Development Support Project. IDA agreed to extend a credit of SDR 9.6 million (USD 15.5 million). The credit agreement 4395-AZ provides that the Project is financed by the proceeds received from IDA in the following proportions: Amount of credit Percentage of Category allocated Expenditure to be (SDR) Financed (%) (1) Works and Goods 8,250,000 72% (2) Consultants' services including audit 575,000 75% (3) Training 10,000 75% (4) Operating Costs 765,000 75% (5) Unallocated - - 9,600,000 On 16November 2011, IBRD and the Government signed the Project Agreement and the Financing Agreement (credit number 8096-AZ) for the purpose of providing financing for activities related to the IDP Living Standards and Livelihoods Project. IBRD agreed to extend a credit for an amount equivalent to USD 50 million. The closing date is 30 June 2016. 13 SOCIAL FUND FOR THE DEVELOPMENT OF INTERNALLY DISPLACED PEOPLE OF AZERBAIJAN NOTES TO THE COMBINED SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2015 (Amounts are expressed in US dollars unless otherwise indicated) NOTE 1. BACKGROUND (CONTINUED) The Project consists of the following parts: PartA: Micro-Projects Provision of works, goods and services for: (1) community mobilization and outreach for micro-project proposal development; (2) repair or rehabilitation of basic infrastructure (e.g. water supply, power supply, access roads, drainage systems); and (3) repair or rehabilitation of social infrastructure such as schools and community centres. Part B: Housing Renovation Provision of works, goods and services for the rehabilitation and full scale repair of about 95 IDP collective accommodation centers including improvement of common space areas (bathrooms, corridors, kitchens, etc.), enhancement of structural features (such as sewerage, roofing and water systems) as well as improvement of conditions in individual apartments such as replacement of windows, doors, and electricity to improve the overall living conditions including safety and efficiency. Part C: Livelihood Support 1. Provision of vocational training and financial and technical support for small business development to lDP youth. 2. Provision of: (a) technical support and mobilization in selected communities leading to the establishment of about 200 self-help groups and formulation by such self-help groups of proposals for income generating activities; and (b) Small Grants to eligible self-help groups with approved proposals for income generating activities to set up small businesses and micro-enterprises. 3. Financing of Micro-credits for IDPs through eligible credit unions. Part D: Proiect Management and Capacity Building Provision of goods, consultants' services and Training for the proper management, implementation, supervision and monitoring and evaluation of the Project and capacity building of the Project Implementing Entity. The following table specifies the categories of Eligible Expenditures that may be financed out of the proceeds of the credit agreement 8096-AZ ("Category"), the allocation of the amounts of the Loan to each Category, and the percentage of expenditures to be financed for Eligible Expenditures in each Category: Amount of the Loan Percentages of Category Allocated Expenditures to be (expressed in USD) financed 1) Goods, works, non-consulting services, and consultants' services including audit, Small Grants, Micro-Credits 49,875,000 75% Training and Operating Costs for the Project 2) Front-end fee 125,000 3) Interest Rate Cap or Interest Rate Collar premium USD) 50,000,000- Effective from 2008 the funding of international financial institutions is subject to the Value Added Tax ("VAT") and customs duties. This is applicable to the both financings received under credit agreement 4395 - AZ and 8096-AZ. 14 SOCIAL FUND FOR THE DEVELOPMENT OF INTERNALLY DISPLACED PEOPLE OF AZERBAIJAN NOTES TO THE COMBINED SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2018 (Amounts are expressed in US dollars unless otherwise indicated) NOTE 1. BACKGROUND (CONTINUED) Japan Social Development Fund ("JSDF") On 13 August 2007 IDA, as administrator of grant funds provided by Japan Government under the Japan Social Development Fund Grant for IDP Youth Support Project provided the grant in an amount not exceeding USD 1,945,800 (JSDF Grant No. TRO90489). The objective of the funding is to enhance the social inclusion of, and promote economic opportunities for young IDP. The Funding consists of the following parts: - Component A: Community Grants for Youth in New Settlements - Component B: IDP Youth Skills and Business development - Component C: Partnerships between Municipal/IDP Schools in Major Urban Settlements to increase Social Inclusion among Students - Component D: Management, Monitoring and Evaluation The allocation of the amounts of the Grant to each category and the percentage of expenditure to be financed for eligible expenditure in each category is as follows: Amount of grant Percentage of AmountExpenditure to be Category allocated Fianed (USD) Financed (1) Works 80,000 100% (2) Goods 222,200 100% (3) Services including audits 317,800 100% (4) Operational costs 135,800 100% (5) Small grants 1,190,000 100% 1,945,800 State Oil Fund of Azerbaijan ("SOFAZ") The implementation of the works on raising the living standards and rehabilitation of social infrastructure of IDP communities has been carried out through the Programme since 2002 based on the following Presidential Decrees: 1. Decree # 577 of7 September 2001 "Accommodation of IDP's from the occupied regions of Agdam and Fuzuli living in temporary camps" 2. Decree #700 ofl3 May 2002 "Improvement of the living standards of IDP's living in temporary camps in the Bilasuvar region" 3. Decree # 80 of4 February 2004 "Improvement of living standards and employment of IDP's living in temporary camps and railway carriages in Barda and Agcabadi regions" 4. Decree #298 ofl July 2004 "State Programme on the improvement of living conditions of lDP and refugees and employment promotion" In the frameworks of Decrees #577 and #700 the State Refugees Committee (the "Committee") has been appointed as the state agency responsible for the supervision of the construction of buildings in 500 districts in the Agdam region, 800 districts in the Fuzuli region and 19 districts in the Bilasuvar region. To finance the works under each of the Decrees the State Oil Fund transferred Azerbaijani old manats ("AZM") 84 billion and AZM 192 billion to the bank account of the Committee respectively. The detailed work plan was issued by the Resolution of the Cabinet of Ministers #171 on 27 September 2001. SFDI was selected to act as the main Executor under the Decree. The contractors were selected by a bidding Committee which included the Programme Director and representatives of the Ministry of Finance and other State Agencies. All payments to the contractors were made through Project bank accounts. The completed construction works were accepted by a special State Committee comprising the representatives of SFDI, the Cabinet of Ministers, the State Refugees Committee and other State agencies. For the execution of Presidential Decrees #80 and #298 the State Oil Fund has elected to process all payments to contractors through the bank accounts of the State Treasury regulated by the Ministry of Finance. The construction of buildings under the Decree started in 2004 and continued through 2007. The bidding and final acceptance procedures remained similar to those followed at the time of the execution of previous Decrees. 15 SOCIAL FUND FOR THE DEVELOPMENT OF INTERNALLY DISPLACED PEOPLE OF AZERBAIJAN NOTES TO THE COMBINED SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2015 (Amounts are expressed in US dollars unless otherwise indicated) NOTE 1. BACKGROUND (CONTINUED) On 9 October 2007 Ministry of Finance issued Resolution # 303 to improve living conditions of IDP's in different districts of Baku, Absheron, Qabalaand Goy Gol (ex. Xanlar) regions by construction of new buildings and repair of existing ones. State Oil Company of Azerbaijan ("SOCAR") Following the Resolution of the Cabinet of Ministers of Azerbaijan # 197s dated 18 July 2005, the State Oil Company financed the renovation of 77 dormitories for the accommodation of IDP's located in Baku. At the inception of these works in 2005 SFD1 acted as the main Executor and received funds via the State Refugees Committee. Subsequently and throughout2007, the Programme bank account in Kapital Bank was used for processing of all the settlements under this source of funding. On 10 June 2008, the Cabinet of Ministers of Azerbaijan issued resolution # 211 where the State Oil Company finances the renovation of 130 dormitories for the accommodation of IDP's located in Baku. Islamic Development Bank ("IDB") The construction of social infrastructure facilities for IDP's is financed through a Loan Agreement signed between the Government of Azerbaijan and the Islamic Development Bank ("IDB") on 10 December 2005 corresponding to 8 Dhu al-Qi'dah 1426H. The main objective of the financing arrangement was to improve the living standards of lDP's by contributing to the construction of the education and health systems as well as the drinking water supply in new settlements for IDP's in the Bilasuvar region. Education infrastructure for all schooling levels was provided through construction of 5 schools and provision of basic furniture and laboratory equipment. The financing arrangement also aims at the construction of 5 medical units to provide health facilities for the new settlements and provision of modern medical equipment which facilitates quality diagnosis of health conditions of lDP's. The drinking water supply system comprises boring of wells, water storage and a distribution network. The overall scope of the financing arrangement includes civil works for schools, health facilities and water supply network, procurement and installation of the latest medical equipment, furniture, consultancy services, financial auditing and a Project Management Unit. The total cost was estimated at US$ 14.543 million. The Fund financing was for an amount not exceeding Islamic dinars (ID) 7 million (approximately equivalent to USD 10.272 million). 16 SOCIAL FUND FOR THE DEVELOPMENT OF INTERNALLY DISPLACED PEOPLE OF AZERBAIJAN NOTES TO THE COMBINED SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2015 (Amounts are expressed in US dollars unless otherwise indicated) NOTE 1. BACKGROUND (CONTINUED) Islamic Development Bank ("IDB") (Continued) According to the terms of the Loan Agreement between the Government and the Islamic Development Bank, the Programme is financed by proceeds in the following proportions for relevant programme components (in millions US dollars): IDB IDB% GOA GOA% Total A. Civil works, furniture & equipment i. Education facilities School type - A (198 students) 1.955 70 0,838 30 2.793 School type - 8 (150 students) 1.450 70 0.621 30 2.071 4.864 Ni. Health facilities Hospital (25 beds) 0.336 70 0.144 30 0,480 Health clinics 0.383 70 0.164 30 0.547 Health centres 0.294 70 0.126 30 0.420 1.447 iii. Drinking water supply 4.095 70 1.755 30 5.850 Sub-Total (A) 8.513 70 3.648 12.161 B. SITE DEVELOPMENT - - 0.100 100 0.100 C. CONSULTANCY SERVICIES Detailed design & tender document - - 0.060 100 0.060 Design review & supervision 0.610 100 - - 0.610 D. FINANCIAL AUDITING 0.045 100 - - 0.045 E. PROJECT IMPLEMENTATION UNIT Furniture, office expenses - - 0.075 100 0.075 Salaries & office equipment 0.150 100 - - 0.150 Familiarisation visits of EA & start-up workshop 0.020 100 - - 0.020 Sub-Total 9.338 3.883 13.221 F.CONTINGENCIES (10%) 0.934 - 0.388 - 1.322 GRANT TOTAL 10.272 70.60% 4.271 29.40% 14.543 The Government of Azerbaijan ("GoA") In the frameworks of Presidential Decree # 298 dated 1 July 2004 and the resolution of the Cabinet of Ministers of Azerbaijan # 44s dated 6 February 2008, Appendix # 1, SFDI was granted additional funds for the remaining construction works at the SFDI administrative building of AZN 1 million (USD 1.2 million). Presidential Decree #298 dated 1 July 2004 and the resolution of the Cabinet of Ministers #211s dated 10 June 2008 SFDI was appointed as the state agency responsible for urgent repair of 130 hostels in Baku, Sumgait and other cities and regions; construction of a sports complex in the Fuzuli region and construction of an administrative building for the Executive Government of Jabrail region. A resolution of the Cabinet of Ministers of Azerbaijan #356s dated 3 October 2008 appointed SFDI an Executor of the construction of 58 buildings in Baku (Sabunchu region and Azadlig metro station). For the construction of these buildings the Government granted AZN 2 million (USD 2.5 million). Presidential Decree #2707 dated 6 March 2008 and the resolution of the Cabinet of Ministers of Azerbaijan #325s dated 4 December 2009 appointed SFDI as the state agency responsible for construction of a 5-storey building in Goranboy city. 17 SOCIAL FUND FOR THE DEVELOPMENT OF INTERNALLY DISPLACED PEOPLE OF AZERBAIJAN NOTES TO THE COMBINED SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2015 (Amounts are expressed in US dollars unless otherwise indicated) NOTE 1. BACKGROUND (CONTINUED) Presidential Decree # 37 dated 10 December 2008 and the resolution of the Cabinet of Ministers of Azerbaijan # 22 dated 2 February 2009granted SFD1 AZN 0.5 million for the remaining construction works at the SFDi administrative building, equivalent to USD 0.6 million; AZN 3 million for the construction complex in Fizu1i region, (USD 3-7 million) and; AZN 1 million for the construction works at the administrative building of the Executive Government in Jabrail region, (USD 1.3 million). NOTE 2. ACCOUNTING POLICIES Basis of Accounting These combined special purpose financial statements are prepared in accordance with the international Public Sector Accounting Standard ("IPSAS") Financial Reporting under the Cash Basis of Accounting issued by the International Public Sector Accounting Standards Board ("IPSASB"), an independent standard-setting body within the International Federation of Accountants ("IFAC") and incorporate the following principal accounting policies, which have been consistently followed in all material respects and comply with the World Bank's Guidelines. These combined special purpose financial statements have been prepared under the historical cost convention. Programme financing is recognised as a source of funds when the cash is received. Programme expenditure is recognised as a use of funds when payment is made. Transactions in foreign currency The Project is domiciled in the Republic of Azerbaijan where the local currency is the Azerbaijani manat ("AZN"). Because the majority of the Project's transactions are funded and expended in United States dollars and in accordance with the requirements of the World Bank, these special purpose financial statements are presented in United States dollars ("US dollar", "USD" or "US$"), which is the reporting currency of the Project. Transactions in other currencies are treated as transactions in foreign currencies. Cash receipts and payments arising from transactions in a foreign currency are recorded in the Project's reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of receipt and payment. Cash balances held in a foreign currency are reported using the closing rate, which is the spot exchange rate at the reporting date, Unrealised gains and losses arising from changes in foreign currency exchange rates are not cash receipts and payments. However, the effect of exchange rate changes on cash held in a foreign currency is reported in the statement of sources and uses of funds and other statements in order to reconcile cash at the beginning and the end of the period. These amounts are presented separately from cash receipts and payments and include the differences, if any, had those cash receipts and payments and balances been reported at end-of-period exchange rates. At 31 December 2015 the official AZN/USD exchange rates set by the Central Bank of Azerbaijan ("CBAR") were 1.5594 and comparative 31 December 2014 were as 0.7844. NOTE 3. METHODS OF WITHDRAWAL The methods of withdrawal for each component are as follows: World Bank component (a) IBRD account Certain disbursements were made directly to third parties following the submission of an Application for Withdrawal, with the relevant supporting documents. (b) Special account Available amounts were drawn down within the limits determined by the relevant loan agreements for the direct payment of eligible expenditure for sub-projects from the Special Account. (c) Statement of expenditure (SOE) Under the SOE method, the IDP-EDS Project forwards to the Bank an application for reimbursement of payments already made using an Application for Withdrawal, with SOE forms as the only documentation. (d) Programme account IDP-EDS project maintains a separate account where the Government funds are accumulated. The funds are further disbursed to sub-contractors based on its share of the expenditure incurred. 18 SOCIAL FUND FOR THE DEVELOPMENT OF INTERNALLY DISPLACED PEOPLE OF AZERBAIJAN NOTES TO THE COMBINED SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2015 (Amounts are expressed in US dollars unless otherwise indicated) NOTE 3. METHODS OF WITHDRAWAL (CONTINUED) SOFAZ component (a) Programme accounts The SOFAZ funds extended through the State Refugees Committee are accumulated on the Programme bank accounts in AZN. The funds are further disbursed to contractors based on the results of the bids and further construction work performed. (b) Bank accounts operated through the Treasury of the Ministry of Finance These accounts are used to accumulate funds provided by SOFAZ for financing the Programme activities. Disbursements from the Treasury accounts are initiated by SOFAZ with the Programme acting as an intermediary between SOFAZ and the contractors. SOCAR component (a) Programme accounts The Programme bank account is used to accumulate the funds provided by SOCAR for financing of the rehabilitation of dormitories. (b) Bank accounts operated through the Treasury of the Ministry of Finance These accounts are used to accumulate funds provided by SOCAR for financing the Programme activities. Disbursements from the Treasury accounts are initiated by SOCAR with the Programme acting as an intermediary between SOCAR and the contractors. Islamic Development Bank component (a) Programme bank account in USD Available amounts are drawn from this account for payment of the portion of expenses financed by IDB in accordance with the terms of the Loan Agreement. (b) Programme bank account in AZN The Programme maintains a separate account where the Government funds are accumulated. The funds are further disbursed to sub-contractors based on the share to be financed by the Government in accordance with the terms of the Loan Agreement. Micro-credits and tender components The Programme maintains several accounts in AZN for these Programme components. The accounts are used for the accumulation of funds reimbursed by the micro-credit institutions in the form of repayment of principal and interest amounts of previously issued loans. The accumulated funds are then repeatedly extended by the Programme to the loan institutions for further lending to IDP communities. A separate bank account is maintained by the Programme to accumulate tender fees received from the bid participants. The Government of Azerbaijan component This component uses bank accounts operated through the Treasury of the Ministry of Finance, which are used to accumulate funds provided by the Government of Azerbaijan for financing the Programme activities- Disbursements from the Treasury accounts are initiated by SFDI. 19 SOCIAL FUND FOR THE DEVELOPMENT OF INTERNALLY DISPLACED PEOPLE OF AZERBAIJAN NOTES TO THE COMBINED SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2015 (Amounts are expressed in US dollars unless otherwise indicated) NOTE 4. EXPENSES BY SOURCE OF FINANCE World Bank component: For the year ended 31 December 2015: Source of Works & Consultants' Operating Housing Youth Income finance goods services and oti Microcredit Housin Yot Generating Total fiac trainin casts Renovation Support Atvte IBRD 8096- AZ 5,114,993 720,448 703,935 - 8,659,654 1,555,107 1,115,510 17,869,647 Government 2,743,882 350,017 212,170 - 3,436,904 502,914 314,499 7,560,386 Community 191,136 - 278 - 80,291 - - 271,705 % of Mcr - - - - - - Total 8,050,011 1,070,465 916,383 - 12,176,849 12,08,021 1,430,009 25,701,738 For the year ended 31 December 2014: Consultants' Icm Source of Works & services and Operating Microcredit Housing Youth income servcesandMicocrditGenerating Total finance goods training costs Renovation Support Activities IBRD 8096- AZ 2,498,681 581,196 818,213 - 7,811,818 1,886,860 1,605,617 15,202,385 Government 1,965,053 357,001 265,410 - 6,629,456 1,435,162 506,853 11,158,935 Community 135,169 - 306 - 153,582 - - 289,057 % of Mar - - - 192,234 - - 146 192,380 Total 4,598,903 938,197 1,083,929 192,234 14,594,856 3,322,022 2,112,616 26,842,757 The other Project components are financed by a single source as specified in the combined statement of sources and uses of funds on pages 8-11. NOTE 5. LIABILITIES ACCRUED AS AT THE YEAR END The standard terms of contacts signed by SFDI for undertaking construction works or purchasing equipment under the Works & Goods category of the World Bank Credit Agreement are such that 5% of the total contract fee is paid to a supplier subsequent to the expiration of a three month period provided that no deficiencies were revealed in connection with the works done or goods supplied. As a result, the Programme's total amount outstanding as payable to suppliers under World Bank Component at 31 December 2015 was USD1,140,902 (2014: USD 5,628,788). The same structure is applied to the SOFAZ component and the total outstanding at 31 December 2015 was USD 27,685,778 (2014: USD 35,094,171). NOTE 6. OPERATING ENVIRONMENT SFDI's principal activities are within the Azerbaijan Republic Laws and regulations affecting organisations operating in Azerbaijan are subject to rapid changes and SFDI's assets and operations could be at risk due to negative changes in the political and economic environment. 20