Auditing Consulting Company MARKA AUDIT BISHKEK · auditing & consulting company marka ~ audit bishkek emergency recovery project grant/loan of the international development association

Auditing & Consulting Company

MARKA ~ AUDIT BISHKEK

EMERGENCY RECOVERY PROJECT GRANT/LOAN OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION NO. H 618- KG 14825-KG

SPECIAL-PURPOSE FINANCIAL REPORT AND INDEPENDENT AUDITOR'S REPORT FOR THE PERIOD FROM OCTOBER 01,2010 TO JUNE 30,2011

Bishkek 2011

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TABLE OF CONTENTS

Independent Anditor's Report Management's confirmation of its responsibility for preparation and approval of the special purpose financial statement Financial statements for tile period from 01.10.2010 to 30.06.2011:

Statement of Sources and Application of Funds Statement of Special Account Notes to the Financial Statements

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5

6 7

9-15

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INDEPENDENT AUDITOR'S REPORT By Marka Audit Bishkek Ltd

On financial statements of the Emergency Recovery Project IDA Loan 4825-KG and Grant H 618- KG

MINISTRY OF FINANCE OF THE KYRGYZ REPUBLIC

We have audited the accompanying Statements of Sources and Application of Funds and Special Account Statement of the Emergency Recovery Project IDA Loan 4825-KG and Grant H 618- KG (hereinafter referred to as the Project) for the period from 0l.l0.201O to 30.06.2001, as well as a brief description of significant elements of the accounting policy and other explanatory notes. The Financial statements were prepared by the Project management using a method of receipts and expenditure of cash assets, described in Note 2.

Project Management's responsibility for the financial statements

The Project management bears the responsibility for preparation and fair representation of these financial statements in accordance with the Procedures on financial management regarding investing activities, financed by the World Bank and a method of receipts and expenditure of cash assets, described in Note 2 (this includes the establishment of the fact that the method of receipts and expenditure is an acceptable basis for preparation of this financial reporting under the existing conditions), as well as for assurance of internal control system, which Project management considers sufficient for preparation the financial reporting that does not contain significant distortions caused by fraud or mistake.

Auditor's responsibility

Our responsibility is to express our opinion regarding financial statements based on audit conducted by us. Our audit has been conducted in accordance with the International Standards on Auditing and the Procedures on financial management regarding investing activities, financed by the World Bank. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. 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 the entity's preparation and fair presentation of the financial statements of the Project Management in order to design audit procedures that are appropriate for the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. The audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by Project 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 financial statements, in all material respects, fairly presents receipts and expenditure of cash assets and cash flows of funds of special account of the Emergency Recovery Project IDA Loan 4835-KG and Grant H 618-KG for the period from 0l.l0.201O to 30.06.2011 in accordance with the guidelines of the World Bank and the method of receipts and expenditure, described in Note 2.

In addition: (a) All the provided external funds were used in accordance with the conditions of respective general conditions, corresponding Financing Agreement between KR and the International Development Association of October 01, 2010 with due attention on the economy and efficiency and only on the purposes of financing;

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(b) Goods and services of financing were purchased and provided in accordance with the general conditions, corresponding Financing Agreements, including certain norms of Procurement Guidelines of the World Bank; (c) Cash flow statement of special account, as well as supporting documents and information, submitted with the report, may be truly supported by the withdrawal applications in accordance with the requirements envisaged in the Financing Agreement between the Kyrgyz Republic aud the International Development association of October 01, 20 I 0; (d) as it is stated in Note 2.2 the internal control system includes the whole policy and procedures adopted by

the Project management for assistance in implementation of the Project's aims, stipulating regulated and efficient implementation of the Project including assurance of assets integrity, prevention and revelation of frauds and errors, accuracy and completeness of accounting records, as well as timely preparation of specialpurpose financial reporting.

Accouuting Method

Not making a qualified opinion, we pay your attention on the Note 2 to the financial statements, describing the accounting basic principles. The Financial statements were prepared with the purpose to provide thc information to the Ministry of finance of the Kyrgyz Republic. Therefore, the reporting should not another purpose.

Other issues claimiug your attention

We have audited the execution of conditions specified in the Financing Agreement between the Kyrgyz Republic and the International Development association of October 01, 20]0.

The Financing Agreement of October 01, 2010 envisages financing by the IDA grant in the amount ofUSD 31,829,000 and loan in the amount ofUSD 38,171,000. According to Annex No.2, Section 4, A-2 the obligatory condition of the Agrcement is that the Loan funds will be provided after taking out the Grant funds. As stated in the Project Financial Statements expenditures were incurred at the expense of the Loan funds, in the amount ofUSD 2,942. Therefore, expenditures in the amount ofUSD 2,942, paid at the expense of the Loan funds, should have been paid at the expense of the Graut funds.

October 25, 2011

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MARKA AUDIT BISHKEK lTD. License No.0018 (GC) of Sept ember 06. 2004 Registration certificateNo. 4850-3301-000 by the Kyrgyz Republic Ministry of Justice ~fNovember 08, 2007. 38, Professor Bishkek, Kyrgyz Republic

L.G. Certificate iVa. v"''''

4

Emergency Recovery Project IDA Loan 4825-KG and Grant H 618- KG

MANAGEMENT'S RESPONSIBILITY FOR PREPARATION AND APPROVAL OF FINANCIAL STATEMENTS

The statement below, which should be considered together with the description of obligations of independent auditors, accompanied the report of independent auditors, is made with the purpose to delimit obligations of auditors and the management in regard to the financial statements of the Project The management of the Emergency Recovery Project Loan 4825-KG and Grant H 618-KG, financed by the International Development Association, is responsible for preparation of the financial statements that fairly reflect, in all material respects, the sources and application of the Project funds for the period from October 01, 2010 to June 30, 20 II, in accordance with the International Public Sector Accounting Standards (lPSAS) and Financial management procedures regarding investing activities, financed by the World Bank.

While preparing financial statements Management is responsible for:

• applying appropriate accounting principles and their consistent use; • use of valid evaluation and estimations; • compliance with the requirements of International Public Sector Accounting Standards (lPSAS) and

Financial management procedures regarding investing activities, financed by the World Bank and disclosure of all material variances from the aforesaid standards in comments to the special-purpose financial statement

Management is also responsible for:

• development, implementation and maintenance of effective and reliable system of internal control of the Project;

• maintenance of accounting system that permits to provide information on expenditures of the Project with the specified degree of accuracy at any given time and assure financial statements compliance with the requirements of International Public Sector Accounting Standards (IPSAS) and Financial management procedures regarding investing activities, financed by the World Bank;

• taking measures within its terms of reference to assure the integrity of Project assets; • revelation and prevention of any fraud or other abuse.

These financial statements for the period covering October I, 2010 to June 30,2011 were approved by the Project Management on 25 th October 2011.

On behalf of the Project:

B. SIl. Musakojoeva Director Project Implementation Unit

25th October 2011

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Statement of Sources and Application of Funds For the period from October 1, 2010 to June 30, 2011 (Amounts in tables are shown in USD)

RECEIPT OF FUNDS IDA funds Grant Loan TOTAL RECEIPT APPLICATION OF FUNDS:

1. Goods, works and services of consultants (including audit), operating expenses on audit

Including at the expenses of: Grant funds Loan funds

Total Project expenses

Closing balance of cash assets Grant funds 618-K G Loan funds 4825-KG

BShM~ Director, Project Implementation Unit

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Note Fact

4

5

3

14,093,332 16,743,173 30,836,505

28,860,261

13,114,146 15,746,115 28,860,261

1,976,244 979,186 997,058

Budget

17,927,300

9,825,800 8,101,500

Variance

(10,932,961 )

(3,288,346) (7,644,615)

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Statement of Special Account For the period from October 1, 2010 to June 30, 2011 (Amounts in tables are shown in USD)

Bank acconnt nnmber Bank

Bank location

Financing Agreement Curreucy

Part 1: Summary Advauce deposit Minus: Amonnt of eligible expenses paid in current period

Closing balance as of 30.06.2011 Variance Part 2: Reconciliation

I Opening balance as of 01.10.2010 2 Minus: Previous variance 3 Plus: Account replenishment during the period 4 Minus: Interests received (if the special account is

credited) 5 Actually unpaid amount of advance 6 Special account Closing balance as of30.06.2011

transferred to the next period 7 Plus: Amount of eligible expenses paid during the

period 8 Minus: Interests received (if the special account is

credited) 9 Total 10 Variance (5) - (9)

B.Sh. Musakojoeva

1180000028122328 "Demir Kyrgyz International Bank" CJSC Kyrgyz Repnblic, Bishkek, 245 Chni Avenne Grant H 618-KG usn

20,814

0

0 1,000,000

20,814

1,000,000

979,186 979,186

0

1,000,000

979,186

1,000,000 o

Director, Project Implementation Unit Financial Manager

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Statement of Special Account For the period from October 1, 2010 to June 30, 2011 (Amounts in tables are shown in USO)

Bank account nnmber Bank

Bank location

Financing Agreement Cnrrency

Part 1: Summary Advance deposit Minus: Amount of eligible expenses paid in current period

Closing balance as of 30.06.2011 Variance Part 2: Reconciliation

I Opening balance as of 01.10.2010 2 Minus: Previous variance 3 Pins: Account replenishment during the period 4 Minus: Interests received (if the special account is

credited) 5 Actually unpaid amount of advance 6 Special account Closing balance as of30.06.2011

transferred to the next period 7 Plus: Amount of eligible expenses paid during the period 8 Minus: Interests received (if the special account is

credited) 9 Total 10 Variance (5) - (9)

1180000028122429 "Demir Kyrgyz International Bank" CJSC Kyrgyz Republic, Bishkek, 245 Chui Avenue Loan No. 4825-KG

USDCIDA

2,942

0

0 1,000,000

2,942

1,000,000

997,058 997,058

0

1,000,000

997,058

1,000,000

o

B.Sh. Musakojoev~ Director, Project Implementation Unit

M.T. Davle![o Financial Manager

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Notes to the Special-Purpose Financial Statements (For the period from October 1, 2010 to June 30, 2011 (Amounts in tables are shown in USD)

1. Project Background

The Project is being implemented in accordance with the Agreement, signed between the International Development Association (IDA) and Government of the Kyrgyz Republic, represented by the Minister of Finance of the Kyrgyz Republic, on 01" October 2010.

The project's main purpose is to provide assistance to the Government oftlle Kyrgyz Republic in:

(a) Strengthening the prospects for macroeconomic stability and financial sustainability of the Government with the purpose to fulfill the priority program tasks on urgent rehabilitation and (35,0 million USD);

(b) Restoring and ensuring uninterrupted rendering of main power supplying services (power, heat and gas), special attention should be given to affected areas, with the purpose to render assistance in rehabilitation production volumes and to supply the population with the demanded level of heating during winter period (35,0 million USDl:

Date of Project completion - December 31, 2012

Financing is provided by the IDA:

Grant: 31,829,000 USD Credit: 38,171,000 USD Total Project financing is 70,000,000 USD or 46,300,000 of Special Drawing Rights (SDR).

The following category of expenses may be paid at the expense of the IDA funds on the implementation purposes of the specified types of activities:

Category Allocated amount of Allocated amount of % of expenses Grant fnnds in SDR Loan funds in SDR for financing

Eligible required goods according to List 4, Goods, Works, Consulting Services (including audit), o])erating; eXEenses 21,000,000 25,300,000 lOa

The Ministry of Finance of the Kyrgyz Republic is the Executing Agency, responsible for implementatiou of Project component I. The Project has an office, located in Bishkek, the Kyrgyz RepUblic. The Office staff: Project Implementation Unit (PIU). The Ministry of Energy is the Executing Agency on Component 2.

As at June 30, 2011 the number of the PIU staff is 5 employees.

2. Accounting policy

2.1. Principles of special-purpose financial statements presentation

The present special-purpose financial statements are prepared on the basis of the historical cost and include the following basic accounting policies that afe consistently followed in all material respects and performed in accordauce with the International Public Sector Accounting Standards (IPSAS) and Procedures on financial management regarding investing activities, financed by the World Bank. These special-purpose financial statements reflect the period covering October 01,2010 to June 30, 2011.

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Notes to the Special-Purpose Financial Statements (For the period from October 1, 2010 to June 30, 2011 (Amounts in tables are shown in USO)

Accounting method

These financial statements have been prepared on the cash basis accounting as follows:

• All timds, regardless of their source (World Bank or other donors), which are on the special account in USD equivalent or on the settlement account in the national currency and which are reflected in the statements as received.

• Expenditures arc the funds targcted at payment for works, goods and services and which are reflected in the statement as paid.

Reporting currency and transactions currency

These financial statements are expressed in US dollars; this fact allows carrying out reconciliation between the credit and IDA records. Initial accounting of the Project is maintained in the national currency (KGS). Income and expenses, denominated into the US dollars, were translated at actual exchange rate.

Project expenses

For expending the Project funds, the procedure of submission the expenditures statement with indication of expenditure categories specified in the Financing Agreement was used. The statements of expenditures were prepared on the basis of' source documents confirming the funds expenditure.

In accordance with the method of Statements of Expenditures, the Project submitted to the World Bank a Withdrawal Application ill accordance with the established form.

Withdrawal Applications were used for the following purposes:

Entering advance funds on the special account; Reimbursement of payments made by the Project from the advance amount; Direct payments; Repayment - retrospective financing; Letter of credits.

Cash assets

Cash are monetary assets on settlement accounts in banks.

According to the Financing Agreement, in order to speed up the process of payment of the loan and grant proceeds to assure efficient financing of the expenses required for the Project implementation, the Ministry of Finance of the Kyrgyz Republic has opened a special account with the Demir Kyrgyz International Bank, acceptable for the World Bank.

The Special Account included:

• Deposits and replenishments received from the World Bank, • Paymcnts supported by withdrawal applications. • Letter of credit.

Procurement of goods, works and services

Procurement of goods and works are made in accordance with the provisions of Guidelines: Procurement under lBRD Loans and IDA Credits, issued in May 2004 and revised in October 2006 and May 2010 (Procurement Guidelines); Notes to the Guidelines: Facilitated (simplified) procurement procedures (June 2009), as well as conditions envisaged by the Financing Agreement.

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When purchasing goods there were used bidding documents of the World Bank and procurement procedures were performed using the following methods:

International Competitive Bidding

- When concluding contracts on procurement of goods with the assessed value more than 500,000 USD, m equivalent.

Shopping

- When concluding contracts on procurement of goods with the assessed value more than 500,000 USD, 111

equivalent.

Direct contracts

- Bidding documents of the World Bank are used when purchasing goods and procurement procedures are performed using the following methods:

National Competitive Bidding


equivalent.

Shopping


equivalent.

Direct contracting

Procurement of consulting services

Procurement of consulting services was carried out in accordance with Guidelines: Selection and Recruitment of Consultants by World Bank Borrowers published by the World Bank in May 2004 and amendments dated October 2006 and May 20 I 0 and requirements stipulated in the Agreement.

For procurement of consulting services the Project uses standard applications and standard contract forms for consultants.

Procurement procedures are carried out by the following methods:

Selection based on qualification criteria Used for fulfillment of assignments with the assessed value less than 200,000 USD.

Single-source Procurement Procurement of services from single source, preliminary agreed with the IDA.

Individual Consultants

Each of contracts on consulting services with the value equivalent to or more than 100,000 USD, as well as each of contracts for individual consultants with the value equivalent to 50,000 USD should be preliminary agreed with the World Bank.

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Taxes

In accordance with the Financing Agreement the IDA finances the Project including the payment of taxes.

The PIU is not obliged to pay income tax regardiug funds received from financing organizations.

Based on the Kyrgyz Republic Government Resolution No.I33 of 19 February 2009 income taxes and social contributions paid to Social Fund of the Kyrgyz Republic are deducted from salaries of hired local employees at a source of payment (withholding tax).

Fees to the social fund recognized as the Project's expenses, at the rate of 17.25% of accrued salaries of employees and Project's consultants are paid by the PIU at the expense of the IDA financing.

2.2. Internal Control System

Project budget

The Project budgct is detailed enough to be compared with actual data of the Project. To ensure efficiency, the information about operational results is timely analyzed. Software allows entering budget data and comparing them with accounting data. Upon users calling for the system it shows a budget balance by expenses categories, i.e. varianccs of actual figures from planned ones.

Cash assets

1. Withdrawal of cash from the settlement account and receipt of cash on hand are regularly checked by reconciling cashier's book records and bank statements.

2. Any cash payment is fixed by means of numbering cash vouchers in sequential order. 3. The cash assets are kept in a safe with a restricted access. The cashier is forbidden to pay for personal

bills or employee's debts.

Procurements and expending funds

Expending funds are recorded on corresponding accounts and only on eligible purposes according to the Project budget lines.

Expenses are approved by the PlU Director in accordance with contracts, vouchers, and receipts.

Controlling procedures are adopted over timeliness of payments and in accordance with the issued bills and contracts.

Conducting procurement tender: Procurement shall be conducted in compliance with the methods provided for in the Agreement for each kind of categories.

To ensure that expenses are well grounded and properly reflected, the following documents are used in the accounting:

• Invoices with a receipt to a cash receipt; • A receipt to the pay-in voucher on payment; • Sale receipts bearing a seal "paid in petty cash"; • Cash voucher (if an amount is approved by the Project Director).

When purchasing inventories by the advance holders from a physical person it is obligatory to provide the following documents:

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Notes to the Special-Purpose Financial Statements (For the period from October 1, 2010 to June 3D, 2011 (Amounts in tables are shown in USD)

J. Procurement act with receipts that the physical person received the amount; 2. Copy of effective patent (on the date of cash payment).

When an employee goes on a business trip, the Project guarantees reimbursement of his/her transport expenses to and fro, living accommodation expenses (hotel expenses) and per diem expenses, which are calculated in accordance with the norms estahlished by the Kyrgyz Republic Government Resolution No.47l dated 26.08.2008.

Salary

• The Office manager keeps tracks of working hours, paid and unpaid vacations; • Accounting records are kept in separate files with definite rights of access. • All changes in salary payment status, pay rates were approved by the Director and the Ministry of

finance and properly documented.

Control over the computerized program system

Financial statements are copied to separate can'iers and will be kept up to Project completion. Accounting statements and other accounting information are kept in a printed out form up to Project completion. Accounting information is copied to the hard carrier on a monthly basis. In case of any problems with the accounting software an IT specialist should be called for; The access to the system is limited. Only the Financial Manager, Payment specialist and the IT specialist have an access to it; The system has a password to secure it from unauthorized access; Any changes in accounting data in software must be additionally documented (to trace adjustments).

3. Cash Assets

Grant Special account Loan Special account Total cash assets

4. Financing

Currency

USD USD

30.06.2011

979,186 997,058

1,976,244

Payment of expenses at the expense of Grant and Loan funds are effected based on traditional payment methods:

• From the Special account with replenishment of funds, transferred on the basis of Withdrawal Applications (WP);

• Direct payments from Grant/Loan accounts;

Grant Loan Total for the period from

1.10.2010 to 30.06.2011

IDA Advances 1,000,000 1,000,000 2,000,000 Retroactive financing 13.093,332 15,743,173 28,836,505 Total IDA financing 14,093,332 16,743,173 30,836,505

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The Government of the Kyrgyz Republic is a guarantor of the loan repayment. The repayment of the Loan should be made by half-year payments, beginning from January 15, 2021 to July 15, 2050.

5. Expenses by Categories

Expenditurcs

Goods and products Retroactive financing - gas Wire Consnlting services, inclnding training and audit Salary of procurement consultants Operating expenses Banking services Salary of personnel Deductions to Social Fund Stationeries Ads published in newspapers Sub-total Total loan and grant

6. Expenditures by components

1 . Priority expenses connected with urgent rehabilitation and reconstruction Including at the expenses of:

Grant· Loan

2. Rehabilitation and repair of energy infrastructure and power supply networks Including at the expenses of:

Grant Loan

Total expenditures

7. Withdrawal applications - retroactive financing

Fact

Actual data from 01.10.2010-30.06.2011

Grant 13,107,851 13,093,332

14,519 715 715

5,580 14

3,528 1,108

577 353

13,114,146 28,860,261

Loan 15,743,173 15,743,173

2,942 II

2,250 681

15,746,115

Budget Variance

28,844,098

13,097,982 15,746,116

16,164

16,164 o

28,860,261 17,927,300 (10,932,961)

There were issued the following Withdrawal Applications on withdrawal grant and loan funds within the retroactive financing and in accordance with paragraph B, Section IV Graph 2 ofPIU Financing Agreement:

No.WA Date Amount Purpose Docume Amount of Cate Payment Payment nl document gory date amount

Grant Retroactive Summar

I-A 13.10.200 7,500,000 financing y Sheet 7,500,000 05.11.20 I 0 7,500,000 Retroactive Summar

2 25.10.200 5,593,332 financing y sheet 5,593,332 05.11.2010 5,593,332 Total grant 13,093,332 13,093,332 13,093,332

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I-B 13.10.200 Total loan

8. Budget Execution

Retroactive 15,743,173 financing 15,743,173

Summar y sheet 15,743,173

15,743,173 05.11.20 I 0 15,743,173

15,743,173

As at 30.06.2011 (for nine months of Project implementation - total implementation period is 27 months) made np 41 %, including:

Fact Total budget Variance % Reason ofvariance

1 2 (2-1) (112*%) Long competitive

bidding process on component 2 in connection with a big

Eligible necessary goods volume of procurement according to List 4, and specificity of Goods, Works, purchased goods, as Consulting services well as shortage of staff (including audit), in the Operating expenses

28,860,261 70,000,000 41,139,739 41% Joint Emergency Project Implementation Group under the Ministry of Energy.

6. Event after the Reporting Date

After the reporting date and to the date of approval of the financial statements no events occurred which would affect amounts in the provided financial statements.

M.T. Davl a Director, Project Implementation Unit Financial Manager

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Auditing Consulting Company MARKA AUDIT BISHKEK · auditing & consulting company marka ~ audit bishkek emergency recovery project grant/loan of the international development association