Project Financial Statements and Independent Auditor's Report State Agency "Healthcare Project Implementation Unit" of the Ministry of Health of the Republic of Armenia Disease Prevention and Control Project Credit number 5222-AM As of and for the year ended 31 December 2018 Independent auditor's report 3 Statement of cash receipts and payments 6 Statement of uses of funds by Project activities 7 Notes to the Project financial statements 8 F sesirvnto n otroPrac As of and fortya r ne 1Deebr21 GrantThornton ctpwbraOrpbarib OPC~ Independent auditor's - p.bpLLwlj 0012 a4rtpp2Jual 8/1 :1. + 374 10 260 964 report a).+ 37410260961 Grant Thornton CJSC 8/1 Vagharshyan Str. 0012 Yerevan, Armenia T + 374 10 260 964 F + 374 10 260 961 To the State Agency "Healthcare Project Implementation Unit" of the Ministry of Health of the Republic of Armenia, Qualified Opinion We have audited the accompanying project financial statements of the Disease Prevention and Control Project (the "Project"), financed by the International Development Association Credit number 5222-AM, which comprise the statement of cash receipts and payments, the statement of uses of funds by Project activities as of and for the year ended 31 December 2018, and a summary of significant accounting policies and other explanatory information. In our opinion, except for the possible effects of the matters described in the Basis for Qualified Opinion section of our report, the project financial statements present fairly, in all material respects, the cash balance of the Disease Prevention and Control Project as of 31 December 2018 and the cash received and cash paid for the year then ended in accordance with the International Public Sector Accounting Standards ("IPSAS") Financial Reporting Under the Cash Basis of Accounting issued by the International Public Sector Accounting Standards Board of the International Federation of Accountants, the World Bank guidelines and the relevant points of Credit number 5222-AM. Basis for Qualified Opinion According to the order of the Minster of Health of the Republic of Armenia, hospitals providing screening services to the general public become eligible for receiving Performance - Based incentive remunerations, which are calculated based on a formula of indicators approved by this order. The detailed data in relation to the components and indicators of the formula has not been made available to us from State Health Agency due to the fact that for the second half of 2017 the records submitted to us were not automatic (instead, the records were maintained manually). Accordingly, we were unable to determine whether any adjustments to the item "Performance - Based Financing Scheme under Part 1 (a) of the Project" for the year ended 31 December 2018 were necessary. We conducted our audit in accordance with International Standards on Auditing ("ISAs"). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Project Financial Statements section of our report. We are independent of the State Agency "Healthcare Project Implementation Unit" of the Ministry of Health of the Republic of Armenia (the "HPIU") in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (the "IESBA Code") together with the ethical requirements that are relevant to our audit of the financial statements in the Republic of Armenia, and we have fulfilled our other ethical responsibilities in accordance with those ethical requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. www.grantthornton.am GrantThornton Emphasis of Matter We draw attention to note 2 to the project financial statements, which describes the basis of accounting. The project financial statements are prepared to assist the management of the State Agency "Healthcare Project Implementation Unit" of the Ministry of Health of the Republic of Armenia to meet the requirements of the financial reporting of the World Bank. As a result, the project financial statements may not be suitable for another purpose. Our opinion is not modified in respect of this matter. Responsibilities of Management and Those Charged with Governance for the Project Financial Statements Management of the State Agency "Healthcare Project Implementation Unit" of the Ministry of Health of the Republic of Armenia (the "HPIU") is responsible for the preparation and fair presentation of the project financial statements in accordance with IPSAS Financial Reporting Under the Cash Basis of Accounting, the World Bank guidelines and the relevant points of Credit number 5222-AM, and for such internal control as management determines is necessary to enable the preparation of project financial statements that are free from material misstatement, whether due to fraud or error. Those charged with governance are responsible for overseeing the Project's financial reporting process. Auditor's Responsibilities for the Audit of the Project Financial Statements Our objectives are to obtain reasonable assurance about whether the project financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these project financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: * Identify and assess the risks of material misstatement of the project financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. * Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the HPIU's internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. * Evaluate the overall presentation, structure and content of the project financial statements, including the disclosures, and whether the project financial statements represent the underlying transactions and events in a manner that achieves fair presentation. www.grantthomton.am GrantThornton We communicate with the management, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal cont 91 that we identify during our audit. Gagik Gyulbudaghyan Emil Vassilyan, FCCA Managing Partner Engagement Partner 26 June 2019 www.grantthornton.am nt of ca receipts and pants As of and for the year ended 31 December 2018 In US dollars Actual Planned Variance Year ended Year ended Year ended 31 As of 31 31 As of 31 31 As of 31 December December December December December December Life of 2018 2018 2018 2018 2018 2018 Project Cash balance as of 1 January 2018 (note 4) 131,524 Add: cash receipts IDA Fund (note 5) 5,061,749 26,491,841 Government co-financing 944,022 5,881,579 Total cash receipts 6,005,771 32,373,420 Exchange rate difference (1,765) (4,865) Less: cash payments (1) Goods, works, non- consulting services, Operating Costs, Training and consultants' services for the Project, including audits (note 7) 4,403,856 29,649,738 5,288,172 30,534,054 (884,316) (884,316) 41,327,621 (2) Performance-Based Financing Scheme under Part 1 (a) of the Project 150,851 1,137,994 376,348 1,363,491 (225,497) (225,497) 1,937,903 Total cash payments 4,554,707 30,787,732 5,664,520 31,897,545 (1,109,813) (1,109,813) 43,265,524 Cash balance as of 31 December 2018 (note 4) 1,580,823 The project financial statements were approved on 26 June 2019 by: Kristine S Artur Stepanyan Acting Financial manager This 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 15. Di Prventn and Contro Projet Cdit number 5222-AI As of and for the year ended 31 Decembe 2018 6 Statement of uses of funds by Project activities As of and for the year ended 31 December 2018 In US dollars Actual Planned Variance Yearended As of 31 Yearended As of 31 Yearended As of 31 31 December December 31 December December 31 December December 2018 2018 2018 2018 2018 2018 Project life Part 1: Performance-Based Financing to Improve MCH Services and NCD Services in PHC Facilities 225,038 2,118,041 445,296 2,338,299 (220,258) (220,258) 2,640,524 Al - Performance-based Payments for MCH and NCD: 150,851 1,134,500 376,348 1,359,997 (225,497) (225,497) 1,937,903 a - Cost for lab and PAP smear tests implementation 65,998 687,121 216,573 837,696 (150,575) (150,575) 1,197,107 b - Performance-based incentives for an agreed list of performance indicators 84,853 447,379 159,775 522,301 (74,922) (74,922) 740,796 A2 - Performance-based financing program implementation and capacity building 74,187 983,541 68,948 978,302 5,239 5,239 702,621 Part 2: Improving Efficiency and Quality of Selected Hospitals 4,145,997 27,223,553 4,980,575 28,058,131 (834,578) (834,578) 38,900,800 BI- Modernization of Lon Marz Hospital Network 950,084 5,361,478 1,032,791 5,444,185 (82,707) (82,707) 13,307,000 B2 - Modernization of "Center of Hematology named after Professor Yeolyan" CJSC - 13,347,891 - 13,347,891 - - 13,023,000 B3 - Modernization Cancer Treatment Services in Armenia - 298,796 - 298,796 - - 12,440,000 B4 - Hospital Quality Improvement 3,195,913 8,215,388 3,947,784 8,967,259 (751,871) (751,871) 130,800 Part 3: Project Management 183,672 1,446,138 238,649 1,501,115 (54,977) (54,977) 1,724,200 Total 4,554,707 30,787,732 5,664,520 31,897,545 (1,109,813) (1,109,813) 43,265,524 This statement is to be read in conjunction with the notes to and forming part of the project financial statements set out on pages 8 to 15. Disease Prevention and Control Project Credit number 5222-AM As of and for the year ended 31 December 2018 7 Notes to the Project financial statements 1 Activity The Financing Agreement (Credit number 5222-AM) of the Disease Prevention and Control Project (the "Project") was signed on 17 May 2013 between the Republic of Armenia and the International Development Association (the "IDA"). The total amount of the Loan was agreed to be 22,800,000 SDR. The amendment of the agreement was signed on 4 March 2015. The objective of the Project is to improve: (a) MCH services and the prevention, early detection, and management of selected NCD at the PHC level; and (b) the efficiency and quality of selected hospitals in the Recipient's territory. The Project consists of the following parts: Part 1: Performance-based financing to improve MCH services and NCD services in PHC facilities. a) Implementation of the Performance-Based Financing Scheme, through: (a) the reimbursement for Eligible Screening Tests performed at Eligible PHC Facilities; and (b) the provision of Performance- Based Incentives to Eligible PHC Facilities against their level of performance achieved. b) Provision of: (a) Operating Costs to SHA for the carrying out the Performance-Based Financing Scheme; (b) training and capacity building activities to key stakeholders on the implementation of the Performance- Based Financing Scheme; (c) essential equipment for screening programs in PHC facilities; and (d) provision of support for the carrying out of health promotion activities, including a national public information campaign focused on promotion of healthy lifestyles, aimed at increasing population's awareness on major risks associated with NCDs. Part 2: Improving efficiency and quality of selected hospitals. a) Provision of support for the modernization of the Lori Marz Hospital Network, through, inter alia: (a) the design and carrying out of civil works and provision of medical and waste management equipment for the upgrading and refurbishing of the Vanadzor medical center; (b) the carrying out of training activities aimed at improving the management system of the Vanadzor medical center, as well as improving professional skills and competencies of medical staff; and (c) the financing of angiographs at the Gyumri hospital and Nork-Marash specialized cardiology and cardiac surgery center. b) Improvement of the quality of specialized in-patient and out-patient hematological services offered by the center of hematology "Professor Yeolyan", through, inter alia: (a) the preparation of the designs needed for the reconstruction of the center of hematology and the creation of a bone marrow transplant center; (b) the carrying out of the necessary civil works for the renovation and reconstruction of the center; (c) the provision of the necessary medical equipment, furniture and supplies; (d) the provision of training to clinical staff and hospital administration; and (e) the development and implementation of treatment standards (in accordance with international standards) for treatment of blood diseases. c) Provision of support for the establishment of a new oncology center aimed at providing integrated oncology services to the Recipient's population, through, inter alia: (a) the provision of technical assistance for the design of the oncology center; (b) the carrying out of civil works for the construction of a radiation therapy facility; (c) provision of the necessary diagnostics and treatment equipment; and (d) the development of clinical protocols and treatment standards for the oncology center. d) Provision of support for the improvement of hospital quality, through, inter alia: (a) the development of a comprehensive cancer registry system; provision of training to hospital personnel on epidemiology and statistics; and the necessary IT equipment to the statistical department of the oncology center Disease Prevention and Control Project Credit number 5222-AM As of and for the year ended 31 December 2018 8 referred to in (c) above; (b) the provision of technical assistance to NIH for the development of clinical guidelines and standards for all hospitals in the Recipient's territory; and (c) the scaling up of the Quality Improvement Program in all Marzes, through, inter alia, the provision of: (a) training for: (A) hospital staff in clinical guidelines and standards; (B) managers and hospital quality control committees in quality management mechanisms and tools; and (C) hospital managers in budget management; and (b) technical assistance to hospitals to implement the Quality Improvement Program tools and mechanisms. Part 3: Project management Provision of support to the Ministry of Health for the technical and administrative management of the Project, including the financing of the necessary Operating Costs and audits. In accordance with the amendment to the Financing Agreement (Credit number 5222-AM), financing of the Project is implemented through the following categories: Percentage of Expenditures Amount of the to be financed Credit Allocated (inclusive of Category (In SDR) Taxes) (1) Goods, works, non-consulting services, Operating Costs, Training and consultants' services for the Project, including audits 21,003,000 80% (2) Performance-Based Financing Scheme under Part 1 (a) of the 100% Project 1,797,000 22,800,000 The Project is co-financed by the Republic of Armenia, as well as by the IDA under the HRITF Grant No TF014138 letter agreement in an amount of USD 1,800,000, which was signed on 27 September 2013, for the financing of Part 1 of the Project. The financing of works, goods, consultants' services, training and operating expenses within the scope of the Project is implemented by 80% from loan sources and 20% from Government of Armenia (the "GoA") sources, and the financing of non-consultants' services is implemented by 48% from loan sources, 13% from GoA sources and 39% from grant sources. Performance-Based Financing Scheme under Part 1 (a) of the Project is financed by 55% from loan sources and 45% from grant sources. The Project is implemented by the State Agency "Healthcare Project Implementation Unit" of the Ministry of Health of the Republic of Armenia (the "HPIU"). The HPIU was established as a state agency by the Minister of Health of the Republic of Armenia decree number 22 dated 17 January 2000, on the basis of the Govemment of Armenia decision number N765. The legal address of HPIU is Komitas Street 49/4, 0051, Yerevan, Republic of Armenia. The average number of the HPIU staff in 2018 was 16 (2017:16). 2 Significant accounting policies Statement of compliance The project financial statements are prepared in accordance with IPSAS Financial Reporting Under the Cash Basis of Accounting, the World Bank guidelines and the relevant points of the Financing Agreement (Credit number 5222-AM). Alternatively, the HPIU presents a statement of financial position of the Project as of the reporting date as an encouraged additional disclosure, as prescribed in the part 2 of IPSAS Financial Reporting Under the Cash Basis of Accounting (refer to note 10). Disease Prevention and Control Project Credit number 5222-AM As of and for the year ended 31 December 2018 9 Project financial statements The project financial statements include: a) The statement of cash receipts and payments of the Project for the year ended 31 December 2018, showing the World Bank and counterpart funds separately, and the statement of uses of funds by Project activities. b) Accounting policies and explanatory notes (including additional accounting policies and disclosures), covering * Summary of summary reports or SOEs used as the basis for the submission of withdrawal applications in the notes, as appropriate; * Statement of designated account in the notes, as appropriate; * Statement of financial position showing accumulated funds of the Project, bank balances, other assets of the Project, and liabilities, if any, as described in the note 10. Functional and presentation currency The national currency of the Republic of Armenia is Armenian dram. These project financial statements are presented in US dollars (presentation currency). In preparing the 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 483.75 for US dollar 1 as of 31 December 2018 (31 December 2017: drams 484.10 for US dollar 1). Any exchange rate differences are recognized in the statement of the statement of cash receipts and payments and the accumulated figure of exchange rate difference is disclosed in the Statement of financial position under "Exchange rate difference" (refer to note 10). For the presentation of the statement of financial position in the note 10 the balances of bank accounts, advances and accounts payable denominated in foreign currencies are retranslated at the rate defined by the Central Bank of Armenia prevailing on reporting date. Expenses Expenses incurred in the framework of the Project are recognized on the cash basis of accounting, i.e. when the relevant cash is paid. The expenses are recognized in the statement of cash receipts and payments under the caption "cash payments". Additionally, the Project expenses are disclosed in the statement of uses of funds by Project activities. Project financing Financing received in the framework of the Financing Agreement (Credit number 5222-AM) is recorded in the statement of cash receipts and payments as "cash receipts" and is recognized at each replenishment. In addition, the Project funds received are disclosed in the Statement of financial position (refer to note 9). The World Bank financing To finance eligible expenditures under the Financing Agreement, the World Bank disburses proceeds from the Credit 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 refinanced from its own resources. Disease Prevention and Control Project Credit number 5222-AM As of and for the year ended 31 December 2018 10 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. Planned annual expenses As of the end of the year "Planned Project Expenses" comprise the sum of the amount of "Actual Project Expenses" as of the end of the previous period and the annual budgeted expenses of the reporting year. 3. Closing date of the project According to the amendment of Financing Agreement (Credit number 5222-AM) dated on 17 May 2013, the closing date of the Project was defined as 30 June 2021. 4. Cash In US dollars As of 31 As of 31 December 2018 December 2017 Designated account 1,580,074 131,524 Government co-financing account 749 - 1,580,823 131,524 5. IDA Fund In US dollars Year ended As of 31 31 December December 2018 2018 SOE and other procedures 5,061,749 23,991,841 Designated account advance - 2,500,000 5,061,749 26,491,841 Under the method of "SOE procedures" of financing, the HPIU requests advance to and documentation of designated account accompanied by the statement of expenditure (SOE). Under the method of "Other procedures" of financing, the HPIU 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. Disease Prevention and Control Project Credit number 5222-AM As of and for the year ended 31 December 2018 11 6. SOE withdrawal schedule For the year ended 31 December 2018 In US dollars Category Application No. (1) Goods, works, non- consulting services, Operating Costs, Training and consultants' services (2) Performance-Based for the Project, including Financing Scheme under audits Part 1(a) of the Project Total NCDP-24 43,747 97,567 141,314 NCDP-25 48,519 99,546 148,065 NCDP-26 455,488 107,319 562,807 NCDP-27 93,931 43,532 137,463 Total 641,685 347,964 989,649 7. Uses of funds by "(1) Goods, works, non-consulting services, Operating Costs, Training and consultants' services for the Project, including audits" category descriptions The statement of cash receipts and payments discloses the expenses in two categories, one of which is combined category, as depicted in the Financing Agreement (Credit number 5222-AM). However, for the convenience of certain users, the breakdown of the uses of funds is disclosed in the table below. In US dollars Year ended As of 31 31 December December 2018 2018 Works 1,466,587 8,657,465 Goods 2,609,569 18,064,372 Consultants' services 149,651 1,566,207 Trainings - 136,021 Operating costs 178,049 1,225,673 4,403,856 29,649,738 Disease Prevention and Control Project Credit number 5222-AM As of and for the year ended 31 December 2018 12 8. Designated account statement As of and for the year ended 31 December 2018 In US dollars Opening balance as of 1 January 2018 131,524 Add: Cumulative unexplained discrepancy . Credit replenishment during the year 5,061,749 5,061,749 5,061,749 Less: Refund to the IDA from the designated account during the year Present outstanding amount advanced to the designated account (1) 5,193,273 Closing balance as of 31 December 2018 1,580,074 Add: Amount of eligible expenditures paid during the year 3,613,199 Amount of ineligible expenditures paid during the year _ 3,613,199 3,613,199 Less: Interest earned (if credited into the designated account) Total advance accounted for (2) 5,193,273 Discrepancy (1) - (2) to be explained Disease Prevention and Control Project Credit number 5222-AM As of and for the year ended 31 December 2018 13 10. Statement of financial position As described in the note 2, the policy of the HPIU is to prepare the project financial statements in accordance with IPSAS Financial Reporting Under the Cash Basis of Accounting. However, the HPIU also has presented a separate statement of financial position as a disclosure encouraged under IPSAS Financial Reporting Under the Cash Basis of Accounting. In US dollars As of 31 As of 31 December 2018 December 2017 Assets Current assets Balances in bank accounts Designated account 1,580,823 131,524 Advances and prepayments 159 199,528 1,580,982 331,052 Non-current assets Project expenditures 30,957,915 26,759,842 30,957,915 26,759,842 Total assets 32,538,897 27,090,894 Funds and liabilities IDA Fund 26,491,841 21,430,092 Government co-financing 5,881,579 4,937,557 Other 8,387 2,911 Exchange rate difference (37,311) (38,857) 32,344,496 26,331,703 Current liabilities Accounts payable 194,401 759,191 194,401 759,191 Total net assets 32,538,897 27,090,894 Disease Prevention and Control Project Credit number 5222-AM As of and for the year ended 31 December 2018 15