PHRD Grant No. TF014855

IMPLEMENTED BYMOLDOVA SOCIAL INVESTMENT FUND

SPECIAL PURPOSE FINANCIAL STATEMENTS

AND

INDEPENDENT AUDITOR'S REPORT

For the year ended 31 December 2016

CHISINAUMarch 2017

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CONTENT

Page

INDEPENDENT AUDITORS' REPORT........................3..... ............. 3

STATEMENT OF SOURCES AND USES OF FUND S.......... ................... 5

STATEMENT OF EXPENDITURE BY PROJECT ACTIVITY. ................ .......... 6

STATEMENT OF SOES..................................................... 7

STATEMENT OF DESIGNATED ACCOUNT ...................................... 8

NOTES TO THE PROJECT SPECIAL PURPOSE FINANCIAL STATEMENTS ... .............. 9

Special Purpose Financial Statemients-PHRD Technical Assistance fo the Integratlion ofC 'hildr-en With Disabilities into lainstream Schools Project

PHRD Grant No. TF014855for the r ended 31 Deconber 2016 2 1

BAKER TILLYICS Baker Tilly Klitou and Partners SRL65 Stefan cel Mare si Sfant Blvd

5th Floor, office 507MD-2001, Chisinau- Moldova

Tel: +37322233003Fax: +373 22 234044

INDEPENDENT AUDITORS' REPORTEmail: info@bakertilly.mdWebsite: www.bakertilly.md

To the Management of PHRD Technical Assistance for the Integration of Children with Disabilities intoMainstream Schools Project

Report on the Special Purpose Project Financial Statements

Opinion

[1] We have audited the special purpose project financial statements of "PHRD Technical Assistance

for the Integration of Children with Disabilities into Mainstream Schools" project (the "Project"),under the Moldova Social Investment Fund project partially financed by PHRD Grant No.

TF014855 which comprise the statement of financial position, the statement of sources and uses

of funds, the statement of expenditure by project activity, the statement of SOEs, the statement of

designated account for the year ended 31 December 2016 and a summary of significant accountingpolicies and other explanatory information (notes to the special purpose project financial

statements).

In our opinion, the accompanying special purpose project financial statements of the project for

the year ended 31 December 2016 present fairly in all material respects the financial position and

sources and uses of funds for the year then ended in accordance with International Public Sector

Accounting Standard "Financial Reporting Under the Cash Basis of Accounting" (the "IPSAS")issued by the International Public Sector Accounting Standards Board of the International

Federation of Accountants and the Financial Management Manual for World Bank's Financed

Investment Operations.

Basis for Opinion

[2] We conducted our audit in accordance with International Standards on Auditing. Our

responsibility under those standards are further described in the Auditors' Responsibility for the

Audit of special purpose project financial statements section of our report. We are independent

from the Project in accordance with ethical requirements that are relevant to our audit of the

financial statements in the Republic of Moldova, and we have fulfilled our other ethical

responsibilities in accordance with these requirements. We believe that the audit evidence we have

obtained is sufficient and appropriate to provide a basis for our audit opinion.

Emphasis of Matter - Basis of Accounting and restriction on Distribution and Use

[3] We draw attention to Note 2 to the special purpose project financial statements, which describes

the basis of accounting. The special purpose project financial statements were prepared to assist

the project in complying with the financial reporting provisions of the World Bank Guidelines and

Grant agreement requirements. As a result, may not be suitable for another purpose.

Associated offices:Cyprus: Nicosia T: +357 22 458500, Cyprus: Limassol T: +357 25 591515, Cyprus: Larnaca T: +357 24 663299Greece: Athens T:+30 215 5006060, Romania: Bucharest T: +40 213156100, Bulgaria: Sofia T: +359 2 9580980, Moldova: Chisinau T: +373 22 233003Registered in Moldova (Reg. No.10076o0043180) List of directors can be found at the Company's registered Office. Cyprus

An independent member of Baker Tilly International 3

BAKER TILLY

Responsibilities of Those Charged with Governance for the special purpose project financialstatements

[4] Management is responsible for the preparation of the special purpose project financial statementsin accordance with International Public Sector Accounting Standard "Financial Reporting Underthe Cash Basis of Accounting" (the "IPSAS") issued by the International Public Sector AccountingStandards Board of the International Federation of Accountants, and Financial ManagementManual for World Bank Financed Investment Operations, and for such internal control asmanagement determines is necessary to enable the preparation of the special purpose projectfinancial statements that are free from material misstatement, whether due to fraud or error.

In preparing the special purpose financial statements, management is responsible for assessing theProject ability to continue as a going concern, disclosing as applicable, matters relating to goingconcern and using the going concern basis of accounting unless management intends to ceaseoperations of the Project or has no realistic alternative but to do so.

Those charged with Governance are responsible for overseeing the Project's financial reportingprocess.

Responsibilities for the Audit of the Special Purpose Project Financial Statements

[5] Our objective is to obtain reasonable assurance about whether the special purpose project financialstatements as a whole are free from material misstatement, whether due to fraud or error, and toissue an auditor's report that includes our opinion. Reasonable assurance is a high level ofassurance, but is not a guarantee that an audit conducted in accordance with International Standardson Auditing will always detect a material misstatement when it exists. Misstatements can arisefrom fraud or error and are considered material if, individually or in the aggregate, they couldreasonably be expected to influence the economic decisions of users taken on the basis of thesespecial purpose project financial statements.

Baker Tilly Klitou and Partners SRL ,

Chisinau, R. MoldovaMarch 30, 2017

4

STATEMENT OF SOURCES AND USES OF FUNDS

"PHRD Technical Assistance for the Integration of Children with Disabilities into Mainstream Schools" ProjectFinanced by PHRD Grant No. TF014855For the period from 1 October 2014 to 31 December 2016Amounts are in USD

Year ended Cumulative Year ended Cumulative31 Dec 2016 as at 31 Dec 2015 as at

31 Dec 2016 31 Dec 2015

TOTAL OPENING CASH 249,986 - - -

Sources of Funds 5

PHRD Grant No. TF014855 143,228 697,739 554,511 554,511

Community Contribution 45,808 45,808 - -

TOTAL FUNDS 189,036 743,547 554,511 554,511

Project Expenditures 6(1) Goods, consultants' services,Training and Operating Costs underPart 1 and Part 3 of the Project 182,568 487,079 304,512 304,512(2) Goods, consultants' services,Training and Operating Costs underPart 2 of the Project 7,852 7,852 - -TOTAL PROJECTEXPENDITURES 190,419 494,931 304,512 304,512

Foreign currency gain/(loss) 516 503 (13) (13)

TOTAL CLOSING CASH 4 249,119 249,119 249,986 249,986

The project special purpose financial statements were approved by the management of the Moldova SocialInvestment Fund on 30 March 2017 and signed on its behalf The accompanying notes form an integral part ofthese project special purpose financial statements.

Mircea Esanu Ludmila NitaMSIF Executive Director MSIF Financial Director

Special Purpose Financial Statements"PHRI) 7echnical Assistance for the itegrationi of Children with Disabilities into Mainstream Schools" Project

PHRD Grant No. TF014855fbr the wear ended 31 December 2016 5/14

STATEMENT OF EXPENDITURE BY PROJECT ACTIVITY

"PHRD Technical Assistance for the Integration of Children with Disabilities into Mainstream Schools" ProjectFinanced by PHRD Grant No. TF014855For the year ended 31 December 2016Amounts are in USD

Year ended Cumulative Year ended CumulativeComponents 31 Dec 2016 as at 31 Dec 2015 as at

31 Dec 2016 31 Dec 2015

Part 1. District-Level Planninga. Trainings - - -b. Consulting services - 279,292 279,292 279,292

- 279,292 279,292 279,292Part 2. Demonstration Pilot Sub-project

a. Civil works 7,852 7,852 - -b. C/S Design 12,455 12,455 - -c. C/S Supervision of 10,186 10,186 - -

Constructiond. Estimator of Civil works 2,750 2,750 - -e. C/S Educational Programs 60,099 60,099 - -f. C/S Development of modules, 92,550 92,550 - -

training on child-centerg. C/S Monitoring Follow-up 4,527 4,527 - -

Engineer190,419 190,419 - -

Part 3. Project Management,Monitoring and Evaluation, andDissemination

a. Expenditure verifications -

b. Evaluation costs - - - -

c. Baseline study - '25,220 25,220 25,220d. Training - - - -

- 25,220 25,220 25,220TOTAL 190,419 494,931 304,512 304,512

The project special purpose financial statements were approved by the management of the Moldova SocialInvestment Fund on 30 March 2017 and signed on its behalf The accompanying notes form an integra part ofthese project special purpose financial statements.

Mircea Esanu Ludmila NitaMSIF Executive Director MSIF Financial Director

Special Purpose Financial Statements'PHRD Technical A ssistance /or the Integration olhildren iith Disabilities into Mainstrean Schools'' Project

PHRD Grant No. TF1 14855jor the year ended 31 December 20/6 6/14

STATEMENT OF SOES

"PHRD Technical Assistance for the Integration of Children with Disabilities into Mainstream Schools" ProjectFinanced by PHRD Grant No. TF014855For the year ended 31 December 2016Amounts are in USD

App. Value date Expenditure category TotalGoods, consultants' services, Goods, consultants' services,Training and Operating Costs Training and Operating Costsunder Part I and Part 3 of the under Part 2 of the Project

Project1 2

MF7 23-Sep-2016 69,524 - 69,524

MF8 09-Nov-2016 73,660 45 73,705

Total 143,183 45 143,228

The project special purpose financial statements were approved by the management of the Moldova SocialInvestment Fund on 30 March 2017 and signed on its behalf The accompanying notes form an integral part ofthese project special purpose financial statements.

Mircea Esanu Ludmila NitaMSIF Executive Director MSIF Financial Director

Special Purpose Financial StatementsPHRD lechnical A4ssistance for the Integration ol'hildren with Disabilities into M ainstrean Schools Project

PHRD Grant No. TF0 14855jbr the year ended 31 December 2016 7/14

STATEMENT OF DESIGNATED ACCOUNT

"PHRD Technical Assistance for the Integration of Children with Disabilities into Mainstream Schools" ProjectUnder the Moldova Social Investment Fund ProjectFinanced by PHRD Grant No. TF014855For the year ended 31 December 2016

MD83NB0000000 227101/131121C0Account No. 03261884029 0498AACurrency USD* MDL**

National Bank ofDepository Bank Moldova State Treasury

1 Grigore VieruAvenue, C. Tanase Street 7,

Address Chisinau, Moldova Chisnau, Moldova

Year ended Year ended31 Dec 2016 31 Dec 2016 Total

USD USD USD1. Opening balance as at01.01.2016 249,986 249,9862. Add: opening discrepancy - -

3. IDA advance/replenishment 143,228 - 143,228

4. Community Contribution - 45,808 45,808

5. Present outstanding amountadvanced to DA 393,214 45,808 439,022

6. DA closing balance as at31.12.2016 202,795 46,324 249,119

7. Add: Amount of eligible

expenditures paid 190,419 - 190,419

8. Less: interest earned (ifcredited to DA)

9. Total advance accounted for 393,214 46,324 439,538

10. Closing discrepancy *** - 516 516

(*) Payments in MDL are performed through local currency account No. 268129102024901 at the State Treasure(C. Tanase Street 7, Chisnau, Moldova).(**) Account No. 227101/131121C00498AA at the State Treasure (C. Tanase Street 7, Chisnau, Moldova) is alsobeing used for the "Social Infrastructure and Energy Efficiency" project (KfW). Amounts related to KfW are notpresented in the above table. All amounts relate only to PHRD project.(***) FX loss gain or (loss)

The project special purpose financial statements were approved by the management of the Moldova SocialInvestment Fund on 30 March 2017 and signed on its behalf The accompanying notes form an integr part ofthese project special purpose financial statements.

Mircea Esanu Ludmila NitaMSIF Executiv Director MSIF Financial Director

Special Purpose Financial Sitements"PHRD Technical -Issistance for the Integration ofChildren with Disabilities into Aainstream Schools ProjectPHRD Grant No. TF014855Jor the year ended 31 December 2016 814

NOTES TO THE PROJECT SPECIAL PURPOSE FINANCIAL STATEMENTS

"PHRD Technical Assistance for the Integration of Children with Disabilities into Mainstream Schools" ProjectFinanced by PHRD Grant No. TF014855For the year ended 31 December 2016

1. General information

1.1. The Financing and Project Agreement

According to the Letter Agreement dated 6 August 2013 between the Republic of Moldova andInternational Development Association (the IDA), the IDA, acting as administrator of grantfunds provided by Japan under the Policy and Human Resources Development (PHRD),provided PHRD Grant No. TF014855 in the amount of 2,860,000 USD (United States dollars)to the Republic of Moldova.The grant was provided for implementation of "PHRD Technical Assistance for the Integrationof Children with Disabilities into Mainstream Schools" project (hereinafter Project).The closing date for grant disbursement was initially set at 30 July 2016. According to the firstamendment of the contract, dated 2 June 2016, the closing date for grant disbursement wasextended to 31 January 2018.

The Grace Period for submitting withdrawal application for expenditures incurred before theClosing date is four months following the Closing date.

1.2. The Project objective

The objective of the Project is to demonstrate through pilot activities that local governmentscan successfully apply national policies that promote integration of children with disabilitiesinto the mainstream education system (NPDIE).

The project consists of the following parts:

Part 1: District-Level Planning(a) Carrying out and information campaign of NPDIE;(b) Preparing plans for the implementation of the NPDIE;(c) Preparing list of criteria for selecting Beneficiaries.

Part 2: Demonstration Pilot Sub-projectsCarrying out Pilot Sub-projects, aimed at integrating children with disabilities into mainstreamschools.

Part 3: Project Management, Monitoring and Evaluation, and Dissemination.

Special Purpose Financial Statements"PHRD Technical Assistance for the Integration ol'Children with Disabilities into Aainstream Schools "ProjectPHRD Grant Vo. TF014855for the Ycar ended 31 December 2016 9/14

1.3. The Budget

The Project is financed by PHRD Grant No. TF014855, inclusive of taxes and no less than 3%by community contributions. According to the first amendment of the contract, dated 2 June2016, the budget was modified as follows:

PHRD Grant No.# Category TF014855

USD(1) Goods, consultants' services, Training and Operating Costs under Part 1

1 and Part 3 of the Project 1,020,000(2) Goods, consultants' services, Training and Operating Costs under Part 2

2 of the Project 1,840,000

2,860,000

1.4.Project Implementation

The Project is implemented by Moldova Social Investment Fund (MSIF), established by aDecree of the Government of Moldova, as an autonomous public institution.The address of the registered office of the Project is 124, Stefan cel Mare str., Chisinau,Republic of Moldova.

2. Accounting policy

2.1 Preparation and presentation offinancial statements

The special purpose financial statements are prepared in accordance with the InternationalPublic Sector Accounting Standard: Financial Reporting Under the Cash Basis ofAccounting(IPSAS-Cash Basis), issued by the International Public Sector Accounting Standards Board(IPSASB) within the International Federation of Accountants (IFAC), and presented inaccordance with Financial Management Manual for World Bank Financed InvestmentOperations (March 2010): RM 3 - Financial Reporting and Auditing.

The Management policy is to prepare and present special purpose financial statements underthe cash basis of accounting, which recognizes transactions and events only when cash(including cash equivalents) are received or paid by the entity.

Financial Statements prepared under the cash basis provide readers with information about thesources of cash raised during the period, the purpose for which cash was used and the cashbalances at the reporting date.

The project special purpose financial statements consist of:- Statement of sources and uses of funds,- Statement of expenditure by project activity,- Statement of SOEs,- Statement of Designated accounts,- Significant accounting policies and other explanatory notes.

Reporting currency of special purpose financial statements is United States dollars (USD).

Special Purpose Financial Statements-PHRD 7echnical Assistance lor the Integration oChildren with Disabilities into Mainstream SChols" ProjectPHRD Grant No. TF014855lbr the year ended 31 December 20/6 10/14

2.2 Foreign currency transactions

Project accounts are maintained and transactions are made in USD and Moldavian Leu (MDL).Transactions denominated in local currency are translated into USD as follows:

- Payments in MDL are translated into USD at the conversion rate determined by theNational Bank of Moldova (BNM).

- As at reporting date, cash balances denominated in MDL are translated into USD at theexchange rate established by BNM at that date.

- Transaction and translation exchange rate differences (gain/loss) are reflected in theProject Sources and Uses of Funds.

The exchange rate established by BNM as at 31 December 2016 is USD 1 = 19.9814 MDL.The average exchange rate established by BNM for the year 2016 is USD 1 = 19.9238 MDL.The exchange rate established by BNM as at 31 December 2015 is USD 1 = 19.6585 MDL.The average exchange rate established by BNM for the year 2015 is USD 1 = 18.8161 MDL.

2.3 Taxes

According to tax code of the Republic of Moldova, all the goods and services designed for theimplementation of MSIF sub-projects are to be delivered/rendered with application of zeroVAT.

2.4 Accounting System

MSIF has adequate written statements and explanations of its accounting policies andprocedures such as:

* Chart of accounts,* Specification of accounting records,* Accounting procedures and the required supporting documents,* Assignment of responsibilities and delegation of authority,* Documentation and approval requirements for recording transactions and making

journal entries.

2.5 Internal Control System

MSIF internal control system is able to ensure that financial records are reliable and complete.In particular, the internal control system ensures proper recording and safeguarding of assetsand resources, adherence to financial management policies and orderly and efficient conduct ofoperations.

Special Purpose Financial Statements"PHRD Technical Assistance/for the Integration ofChildren with Disabilities into Aainstrean Schools" ProjectPHRD Grant aNo. TFO14855for the year ended 31 December 20/16 11/14

3. Statement of Financial Position

The Statement of Financial Position discloses assets, liabilities and net assets of the Projects as atreporting date. It is prepared in accrual basis that is transactions are recognized when they occur (andnot only when cash is received or paid).

Note 31 Dec 2016 31 Dec 2015USD USD

ASSETSCash 4 249,119 249,986Advances to contractors - -

Total assets 249,119 249,986

LIABILITIESPayables to contractorsTotal liabilities ___

NET ASSETSCumulative incomePHRD Grant No. TF014855 5 743,547 554,511

743,547 554,511

Cumulative expenses

Project expenses 6 494,931 304,512

494,931 304,512

Foreign exchange gain/(loss) 503 (13)

Total net assets 249,119 249,985

4. Cash

Account held at Underlying 31 Dec 2016 31 Dec 2015Currency USD USD

State Treasure ofDesignated Account Moldova USD 202,789 249,981

State Treasure ofDesignated Account Moldova MDL 6 5Community contribution State Treasure ofaccount Moldova MDL 46,324 -

249,119 249,986

Special Pirpose Financial Statements'PHRD Technical4 ssistance for the Integration ol Children with Disabilities into. lainstream Schools Project

PHRD Grant No. TF0/4855Jor the Year ended 31 December 20/0 1214

5. Project Financing

5.1. PHRD Grant No. TF014855

Financing was provided through the following disbursement methods:

Year ended Cumulative as at31 Dec 2016 31 Dec 2016

USD USDAdvance - 250,000Statement of Expenditures (SOEs) 190,419 494,931Total 190,419 744,931

Total budget 2,860,000

Percentage of finance provided 26%as at 31 Dec 2016

6. Project Expenditure Budget Execution

CumulativeExpenditures

as at 31 Dec 2016 Total budget ExecutionCategory USD USD %(1) Goods, consultants' services, Training and 487,079 1,020,000 48%Operating Costs under Part 1 and Part 3 of theProject(2) Goods, consultants' services, Training and 7,852 1,840,000 0%Operating Costs under Part 2 of the Project

Total 494,931 2,860,000 17%

Though the grant was signed on Aug 2013 (Note 1.1.), it became effective only on Feb 2014.Then the management of MSIF was changed and the Project commenced in summer 2014.However, the reform in education sector took place and MSIF had to wait for the decision onthe hub-schools that in future won't be closed and where the investment would be sustainable,as well as there was need to coordinate with WB's other multi-million project related toreconstruction of schools.

Currently, MSIF has finished the development of technical drawings and is in the process ofprocuring civil works for 19 Sub-projects, as they have already transferred their contribution toMSIF accounts. One sub-project is under implementation since November 2016.

Based on the amendment letter from the World Bank dated 2 June 2016, the closing date of theproject was extended till 31 January 2018.

Special Pirpose Financial StaiemeitPHRD Technical Assistance for the Integrationi olfChildren wit/I Disabilities into A fainstream Schools " Project

PHRD Grant No. TF014855/to the Year ended 31 December 2016 13/14

ANNEX 1. RECONCILIATION BETWEEN THE AMOUNTS SUBMITTED BY THEMSIF AND DISBURSED BY THE WORLD BANK

"PHRD Technical Assistance for the Integration of Children with Disabilities into MainstreamSchools" ProjectFor the year ended 31 December 2016Amounts are in USD

PHRD Grant No. TF014855

Expenditure Category Application Date MSIF WB DifferenceAdvance (recovery)

MF1 10/10/2014 250,000 250,000 -(1) Goods, consultants' MF2 2/23/2015 59,402 59,402 -services, Training andOperating Costs under MF3 4/10/2015 71,282 71,282 -Part 1 and Part3 of the MF4 8/20/2015 75,013 75,013 -Project

5 12/14/2015 48,980 48,980 -

6 12/22/2015 49,835 49,835 -

7 9/23/2016 69,524 69,524 -

8 11/9/2016 73,705 73,705 -

447,741 447,741 -(2) Goods, consultants'services, Training andOperating Costs underPart 2 of the Project MF4 8/20/2015 17,654 - (17,654)*Total 715,395 697,741 (17,648)

(*) The expenditures were submitted under the wrong category in withdrawal application No.MF4; then they were included in withdrawal application No.5 and approved by the WB.

7. Events after the reporting date

During 2017 until the date of issue of these special purpose project financial statements, theWorld Bank has replenished the special account of the Project on 17 January 2017 in amountof USD 47,191.

Special Purpose Financial Statements"PHRI) Technical Assistance for the Integration of Children iwith Disabilities into Alainstream Schools- ProjectPHRD Grant No. TF014855for the iar ended 31 Deceiber 20/6 14/14