FOREIGN FINANCING PROJECTS MANAGEMENT CENTRE

TRADE PROMOTION AND QUALITY INFRASTRUCTURE PROJECT

LOAN No. 8390-AM

SPECIAL PURPOSE FINANCIAL STATEMENTS

AND

INDEPENDENT AUDITORS' REPORT

For the year ended 31 December 2017

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CONTENTS

Independent Auditors' Report 3

Statement of Project Sources and Uses of Funds 6Statement of Uses of Funds by Project Activity SNotes to the Special Purpose Financial Statements 9

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INDEPENDENT AUDITORS' REPORT

To the Director of Foreign Financing Projects Management Centre

We have audited the accompanying special purpose financial statements of the Trade Promotion andQuality Infrastructure Project (hereinafter the TPQIP), implemented by Foreign Financing ProjectsManagement Center State Institution (hereinafter the FFPMC), which comprise Statement of ProjectSources and Uses of Funds, Statement of Uses of Funds by Project Activity, Reconciliation Statementof Withdrawal Applications, Statement of Designated Account and Government Co-financed Accountfor the year ended 3 1 December 2017, and Statement of Financial Position as at 31 December 2017and a summary of significant accounting policies and other explanatory notes.

In our opinion, the special purpose financial statements present fairly in all material respects theproject sources and uses of funds., uses of funds by project activity and its ca.sh flows for the yearended 31 December 2017 in accordance with the cash basis of accounting in line with InternationalPublic Sector Accounting Standard (IPSAS): Financial Reporting under the Cash Basis of Accountingand Financing Agreement between the Republic of Armenia and International Bank forReconstruction and Development dated 6 August. 2014 (Loan #8390-AM).

Ba'sisfor Opinion

We conducted our audit in accordance with international Standards on Auditing (ISAs). Ourresponsibilities under those standards are further described in the Auditors Responsibilities for theAudit f the Special Purpose Financial Statements section of our report. We are independent of theUnion in accordance with the International Ethics Standards Board for Accountants' Code of Ethics

.for Pro/essional Accountants (IESBA Code) and we have fulfilled our other ethical responsibilities maccordance with these reqtiirements. We believe that the audit evidence we have obtained is sufficientappropriate to provide a basis for our opinion.

Material Uhncertainty Related to Going Concern

We draw attention to Note 1(c) in the special purpose financial statements, which indicates that theMinistry of Economic Development and Investments, who is responsible for the entire project and hasthe overall project coordination role., did not initiate activities to be implemented in the scope of PartB: Promoting Investment and Exports and Part C: Modernizing the National Quality Infrastructure inthe volume provided by the Project Operational Manual. Lack of such activities indicate that amaterial uncertainty exists that may cast significant doubt on the TPQIP's ability to continue as aYom concern. Our opinion is not modified in respect of this matter.

Emphasis ofMatter - Restriction on Distribution or Use

We draw attention to Note 2(a) to the special purpose financial statements, which describes the basisof accounting. The special purpose tinancial statements have been prepared for providing informationto the Government of the Republic of Armenia and the International Development Association toassist them in evaluating the TPQIP's implementation. As a result, the special purpose financialstatements may not be suitable for another purpose. Our opinion is not modified in respect of thismatter.

3

Independen A uditois' ReportPage 2

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance inour audit of the special purpose financial statements of the current period. These matters wereaddressed in the context of our audit of the special purpose financial statements as a whole, and informing our opinion thereon, and we do not provide a separate opinion on these matters. In addition tothe matter described in the Material Uncertainty Related to Going Concern section, we havedetermined the matters described below to be key audit matters to be Communicated in our report.

-Results Based Financing (RBF)

In the scope of implementation of TPQIP's objectives, PIP Audit CJSC was selected as anindependent auditor for validation of the actual level of Eligible Expenditure Programs (EEPs) in thescope of agreed upon procedures. Validation of the actual EEPs covered in the financial statements isfor the year ended 31 December 2016. The validated amount by the auditor is USD 2,929,336.

Our audit procedures in this area included:

* reconciling report on validation of the actual level of Eligible Expenditure Programs in thescope of agreed upon procedures to the payment made to the Government of the Republic ofArmenia;

* reviewing the application of the withdrawal for any discrepancies.

As result of our audit procedures, we concluded that the World Bank accepted evidence submitted inthe fulfillment of DLIs and approved payment for the total amount of USD 2,000,000 as defined bythe loan agreement schedule and authorized payment of USD 2,000,000 based on withdrawalapplication. No any discrepancies were noted.

-Procurements

In the scope of implementation of TPQIP's objectives, the procurements incurred for receipt ofconsulting services, works and supply of goods amounted to USD 39,337. The proCLrements shall beperformed in line with applicable procurement guidelines designated by World Bank.

Our audit procedures in this area included, among other:

* Corroborating with management the process of procurement and compliance to applicableprocurement guidelines designated by World Bank;

* Analysing the procurement plan, conditions associated to each procurement, correspondencewith the World Bank, method of procurement and discussing compliance of these conditionsto applicable procurement guidelines designated by World Bank;

* On sample basis, reviewing compliance of procurement packages to applicable procurementguidelines designated by World Bank;

* On sample basis, reviewing the documentation supporting the procurement as well asavailability of deliverables designated by the procurement contracts.

As result of our audit procedures, we concluded that procurements were performed in line withapplicable procurement guidelines designated by World Bank,

Responsibilities ofManagement and Tho se Charged with Governance for the Spoecial PrwloseFinancial Statements

Management is responsible for the preparation and fair presentation of the special purpose financialstatements in accordance with accrual basis of accounting as described in Note 2(a), and for suchinternal control as management determine is necessary to enable the preparation of the special purposefinancial statements that are free from material misstatement whether due to fraud or error.

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Independent Azditors' ReportPage 3

In preparing the special purpose financial statements, management is responsible for assessing theTPQIP's ability to continue as a going concern, disclosing, as applicable, matters related to goingconcern and using the going concern basis of accounting unless management either intends to liquidatethe FFPMC or to cease operations of TPQIP, or has no realistic alternative but to do so.

Auditor's Responsibilitiesfbr the Audit of the Special Purpose Financial Statements

Our objectives are to obtain reasonable assurance about whether the special purpose financialstatements as a whole are free from material misstatement, whether due to fraud or error, and to issuean auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but isnot a guarantee that an audit conducted in accordance with ISAs will always detect a materialmisstatement when it exists. Misstatements can arise from fraud or error and are considered materialif, individually or in the aggregate, they could reasonably be expected to influence the economicdecisions of users taken on the basis of these special purpose financial statements.

Davit Yedigaryan Lilit MinasyanDirector Manager, Audit Department

PHP Audit cjsc27 June 2018

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Trade Promotion and Quafli), b?ftusirucalre ProjeciNotes to the Special Purpose Financial Stal6ajents

for the year ended 31 Deceinher 2017

Background

(a) Organisation and opeirations

The Foreign Financing Projects Management Centre (FFPMC) State 11IStitUtiOn was established 1)),RoA Minister of Economy Decree No. 37, dated 29 March 2000. Within the scope of its operation tileFFPMC is guided by local legal acts and Loan and Grant Agreements, signed bctween tileGovernment or Armenia and the International Batik for RecollStl-Lletion and Development (WorldBatik). The main objective of operation of FFPMC is to implement projects on the aCCOLInt of loan In(]grant proceeds allocated to the RepUblic of Armenia by the World Bank.

According to the financing agreement concluded between the International Bank for RecollStrUCtiOlland Development and Republic of Armenia dated 6 ALIgUst 2014 (Loan Agreement) a loan ill allarnount eClLlivalent to fifty million United States Dollars ($50,000,000) was extended for tileimplementation of Trade Promotion and Quality InfrastrUCtUre Project to finance procureinQtit ofgoods, C011SUItants' services and incremental operating expenses. The Project Management Unit isformed within the Ministry of Fconornic Development and Investments of the Republic of Armenia.

Tax consequences arising from the proCUred goods, consultants' set-vices and inCUrred operatingexpenses are paid form the proceeds of the co-financing received frorn the Government of theRepUblic of Armenia. Total amount of Government co-financing approximates to USD 9,500,000.

The Project's objective is to strengthen the Borrower's capacity to provide export promotion.investment attraction and qLiality management services to Firms.

The Project consists of the following components:

" Part A: Improving the Effectiveness of the Trade Promotion and Quality SystemThe objective of this Component is to promote reforms aimed at improving the tradepromotion and qUality infrastrLiCtUre system.

" Part B: Promoting Investment and ExportsThe objective of this component is to strengthen the capacity of local exporters to compete inforeign markets, facilitate cluster development, and attract efficiency seeking FI)I (Forcl(fllDirect Investment).

" Part C: Modernizing the National QUality Infrasti-LICtUreThe objective of this component is to modernize metrological, accreditation and standardsservices in order to provide relevant quality asSlArance services to industry,

" Part D: Project Management and Monitoring and EvaluationThe objective of this component is to finance project implementation and monitoring.

Closing date of the Project is 30 June 2020.

(c) TPQ111's going concet-ri

In the scope of TPQIP the Ministry of Economic Development and Investments, who is responsiblefor the entire project and has the overall project coordination role, did not initiate activities to beimplemented in the scope of Part B: Promoting Investment and Exports and Part C: Moclornizim, theNational QUality InfraStRiCtUre ill the volume provided by the Project Operational MallUal.Accordingly, the going concern of the TPQIP is highly dependent on the ability and willingness oCMinistry of Economic Development and Investments to initiate abovernentioned activities,

9

Trade Promotion and Quality njiastructure ProjectNotes to the Special Purpose Financial Staements

fbr the year ended 31 December 2017

(d) Results Based Financing (RBF)

In the scope of Part A "Improving the Effectiveness of the Trade Promotion and Quality System" ofthe Project, the World Bank has made Results Based Financing subject to validation by independentauditor.

This RBF component disburses loan funds to the Government of Armenia (GoA) for agreed-uponactions, outputs and outcomes ("Disbursement-Linked Indicators" or DLIs) that result inimprovements to the trade promotion and quality system. The GoA receives disbursements based onestablished amounts allocated to the achieved DLls to the extent there are sufficient EligibleExpenditure Programs (EEPs) incurred by the Government.

The Project Management Unit reports the achievement of the DLIs by providing documentation Of theachievement of the given DLI and the EEPs.

2 Basis of preparation

(a) Statement of compliance

The special purpose financial statements are prepared in accordance with the cash basis of accountingin line with the International Public Sector Accounting Standard (IPSAS): Financial Reporting underthe Cash Basis of the Accounting.

The special purpose project financial statements consist of:

- Project Sources and Uses of Funds,- Uses of Funds by Project Activity,- Statement of Financial Position,- Statement of Designated Accounts,- Statement of Project Account.

Cash basis of accounting recognizes transactions and other events only when cash is received or paid.

(b) Reporting currency

The reporting currency of special purpose financial statements is US dollar (USD). All financialinformation presented in USD has been rounded to the nearest USD.

3 Significant accounting policies

(a) Foreign currency transactions

In the scope of the Project IBRD makes disbursements in USD on the designated account900000900408 for the project. Payment of eligible and accepted expenditires (goods, services andother) should be made by the FFPMC out of designated account, or FFPMC will submit withdrawalapplications to the Bank for payments to contractors, suppliers and consultants directly from loanaccount. FFPMC converts the amounts received and transfers to contractors, suppliers and consultants.

The outstanding balances of the project account are translated to USD based on the USD exchangerate defined by the Central Bank of the Republic of Armenia as at 31 December 2017 equaling toAMD 484.10.

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Trade Promotion and Quality lnfiastructire ProjccNotes to the Special Purpose Financial Statements

for the year ended 31 December 201/7

(b) Taxes

All the applicable tax liabilities are calculated and paid in accordance to tax regulations of theRepublic of Armenia.

(c) Funds for the Project

Funds for the Project are received from the International Bank for Reconstruction and Developmentand from Government of Armenia.

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Trade Promotion and Quality Infrastructare ProjectNotes to the Special Purpose Financial Satements

for the year ended 31 December 2017

4 Reconciliation statement of withdrawal applications

2017Withdrawal Amount Amount PaidApplication Application Type Requested by by World DifferenceReference FFPMC Bank

USD USD - USDReimbursement/Results Based

EEP-DA 4 Financing 2,000,000 2,000,000

2,000,000 2,000,000 -

2016Withdrawal Amount Amount PaidApplication Application Type Requested by by World DifferenceReference FFPMC Bank

USD USD USDAdvance to Designated

EEP-DA 2 Account 325,000 325,000Reimbursement/ Results

EEP-DA 3 Based Financing 2,000,000 2,000,000 -2,325,000 2,325,000 -

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Trade Promotion and Quality In/fi astrucure ProjectNotes to the Special Purpose Financial Statements

for the year ended 31 December 2017

5 Statement of Designated Account and Government Co-financed Account

USD 2017 2016

Opening balance 381,703 470,832Add:Advance/replenishment received from World Bank during thecurrent periodPresent outstanding amount advanced to the designatedaccount 381,703 470,832Closing balance carried forward to next period 335,777 381,703Add: Amount of eligible expenditures paid during the currentperiod 45,926 89.129Total advance 381,703 470,832

USD 2017 2016

Opening balance 482 -Add:Government co-financing during the current period 19,617 31,860Less: Foreing exchange difference (2) 210Present outstanding amount advanced to project account 20,097 ----- 32,070Closing balance carried forvard to next period - 482Add: Amount of eligible expenditures paid during the currentperiod 20,097 31,588Total advance 20,097 32,070

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Trade Promotion and Quality Infrastructure ProjectNotes to the Special Purpose Financial Statements

for the year ended 31 December 2017

6 Statement of Financial Position

USD 2017 2016ASSETSCurrent assetsCash and cash equivalentsGovernment co-financing account for credit - 482Designated Account for credit (World Bank financing) 335,777 381,703Total current assets 335 382,185

Non-current assetsCunudative Project ExpenditureGovernment co-financed cumulative expenditure 60,939 40,843Credit financed cumulative expenditure 5,789,223 3,743,297Total non-current assets 5,850,162 3,784,140Total assets 6,185,939 4,166,325

FUNDS

Project financingGovernment co-financing account for credit 60,747 41,130Designated Account for credit (World Bank financing) 6,125,000 4,125,000Total funds 6,185,747 4,166,130

Foreign exchange differenceGovernment co-financing account for credit 192 195Designated Account for credit (World Bank financing)Total foreign exchange difference 192 195Total net assets and liabilities 6,185,939 4,166,325

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