Local Government Units Development and Lending Fund Multi-Donor Trust Fund )TF018378( Additional Contribution into Municipal Development Program Phase II (Cycle I) – Window 5, through the International Development Association (IDA) Financial Statements For the Year Ended December 31, 2017 Together With Independent Auditors’ Report Local Government Units Develo ment and Lendin Fund am- Statement of Assets, Liabilities and N et Assets As at December 31 2017 (Currency: USD) N ote 2017 2016 Assets Current Assets Cash at bank 4 1,077,644 731,123 Pled ges r eceivable 5 446,051 2,469,868 A d v a11ces to LG C s 7,673 T otal Assets 1,523,695 3,208,664 Liabilities and Net A sset s Current Li abilities Due to contractors 642,477 697,389 Total Liabilities 642,477 697,389 .:\et Assets C nrestricted 53,114 (31,980) Temporarily rest-ricted 6 828,104 2,543,255 T otal Net Assets 881,218 2,511,275 Total Liabilities and N et Assets 1,523,695 3,208,664 =-= = = - These financial statements ere authori zed for issuance by LGCDLF management on \1arch 15, 2018 and wer 'igned on its behalf by: he accompanying notes form an integral part of these financial statements 4 Local Government Units Development and Lending Fund MDTF Additional Contribution into Municipal Development Program – Phase II (Cycle I) – Window 5 Statement of Revenues, Expenses and Changes in Net Assets For the Year Ended December 31, 2017 (Currency: USD) Note 2017 2016 Changes in unrestricted net assets: Revenues Released from temporarily restricted net assets 6 1,715,151 1,804,262 Interest income 6,050 5,580 Currency variance gain (loss) 82,448 (8,635) Total unrestricted revenues 1,803,649 1,801,207 Expenses Project’s expenses 7 1,715,151 1,804,262 Transfer of interest revenue accumulated balance to LGUDLF general fund 3,404 6,951 Total expenses 1,718,555 1,811,213 Net change in unrestricted net assets 85,094 (10,006) Changes in temporarily restricted net assets: Net assets released from restriction 6 (1,715,151) (1,804,262) Net change in temporarily restricted net assets (1,715,151) (1,804,262) Change in net assets (1,630,057) (1,814,268) Net assets, beginning of year 2,511,275 4,325,543 Net assets, end of year 881,218 2,511,275 The accompanying notes form an integral part of these financial statements 5 Local Government Units Development and Lending Fund MDTF Additional Contribution into Municipal Development Program – Phase II (Cycle I) – Window 5 Cash Flows Statement For the Year Ended December 31, 2017 (Currency: USD) 2017 2016 Cash Flow from Operating Activities Change in net assets (1,630,057) (1,814,268) Adjustments to reconcile change in net assets to net cash flow from operating activities: Decrease in pledges receivable 2,023,817 12,021 Decrease (increase) in advances to LGUs 7,673 (7,673) (Decrease) increase in due to contractors (54,912) 37,193 (Decrease) in due to other grants - (25,444) Net cash flow provided by (used in) operating activities 346,521 (1,798,171) Net change in cash at bank 346,521 (1,798,171) Cash at bank, beginning of year 731,123 2,529,294 Cash at bank, end of year 1,077,644 731,123 The accompanying notes form an integral part of these financial statements 6 Local Government Units Development and Lending Fund MDTF Additional Contribution into Municipal Development Program – Phase II (Cycle I) – Window 5 Designated Bank Account Statement For the Year Ended December 31, 2017 IBAN number PS70TNBC000000000001002333658 Account number 1002333658 Depository bank The National Bank Address Ramallah Currency Euro 2017 2016 Equivalent in Equivalent in Note Euro USD Euro USD Balance, beginning of year 699,104 731,123 2,313,873 2,529,294 Add: Receipts during the year 5 1,802,432 2,023,817 10,769 12,021 Interest income 5,187 6,050 5,014 5,580 Currency variance gain (loss) - 82,448 - (8,635) 1,807,619 2,112,315 15,783 8,966 Deduct: Payments during the year * 1,605,371 1,762,390 1,624,462 1,800,186 Transfer of interest revenue accumulated balance to LGUDLF general fund 3,166 3,404 6,090 6,951 1,608,537 1,765,794 1,630,552 1,807,137 Balance, end of year 898,186 1,077,644 699,104 731,123 * Reconciliation of expenses presented in the designated bank account statement with expenses presented in the statement of revenues, expenses and changes in net assets: USD 2017 2016 Expenses per the statement of revenues, expenses and changes in net assets 1,715,151 1,804,262 Changes on due to contractors 54,912 (37,193) Changes on advances to LGUs (7,673) 7,673 Changes on due to other grants - 25,444 Expenses per designated bank account statement 1,762,390 1,800,186 The accompanying notes form an integral part of these financial statements 7 Local Government Units Development and Lending Fund MDTF Additional Contribution into Municipal Development Program – Phase II (Cycle I) – Window 5 Notes to the Financial Statements For the Year Ended December 31, 2017 (Currency: USD) 1. LGUDLF and its Activities The Local Government Units Development and Lending Fund (LGUDLF) had been established under the name of the Municipal Development and Lending Fund (MDLF) according to Cabinet Decree No. 05/13/12 dated August 2007. As of November 10, 2016, Decree by Law No. 25 has been issued which changed the name of MDLF to the Local Government Units Development and Lending Fund (LGUDLF). LGUDLF is a semi- governmental juridical independent organization aiming at accelerating Palestine’s drive toward self-sustained, decentralized, prosperous and creditworthy local government units. The main objective of LGUDLF is to encourage the flow of financial resources to Local Government Units (LGU). According to Decree by Law No. 25 dated November 10, 2016, LGUDLF shall undertake the following missions: - • Management of funds received through support from the Palestinian National Authority (PNA) or provided by donor countries or any other sources in compliance with the terms and conditions specified in LGUDLF's internal bylaws. • Assist local authorities develop their capacities in compliance with the bases of modern management practices to help them provide better services to the public. • Guide assistance from donor countries and provide modern fiscal services to support and develop the services offered to local authorities and to improve their credit abilities. • Encourage local authorities to adopt developmental projects to expand their geographic jurisdiction so as to serve their developmental plans. • Facilitate and provide loans to local authorities and follow up the expenditures thereof from their revenues. LGUDLF is structured to ensure an efficient, transparent, and professional institution capable of fulfilling its mission and objectives. LGUDLF comprises of Board of Directors, executive departments, and other advisory committees. 2. MDTF Additional Contribution into MDP II On December 7, 2014 an agreement was signed between the International Development Association (IDA), acting as an administrator of the Partnership for Infrastructure Development in the West Bank and Gaza Multi-Donor Trust Fund (MDTF), and the Palestinian Liberation Organization, for the benefit of Palestinian National Authority, to extend an additional grant (MDTF Additional Contribution), into the finance of Phase II 8 (cycle I) of the Municipal Development Program (MDP II), (the Project), in the amount of USD 12,000,000 to fund Window 5 - Gaza Municipal Emergency Grants. The following table specifies the windows/ budget categories to be financed by MDTF Additional Contribution: Budget in USD Window 4: Project Implementation Support and Management Costs 840,000 Window 5: Gaza Municipal Emergency Grants 11,160,000 12,000,000 The closing date of the Agreement with IDA is February 28, 2018. The accompanying financial statements pertain to MDTF Additional Contribution into MDP II. In addition, MDP II is supported by PNA along with the World Bank, Kreditanstalt für Wiederaufbau (KfW), the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), the Netherlands (through VNG International), the Switzerland (through the Swiss Federal Department of Foreign Affairs (FDFA)), the Agence Française de Development (AFD), the Belgian Development Agency (Enabel, formerly BTC) through its program (Local Government Reform and Development Programme – LGRDP) and the European Union (EU) through the KfW. Separate financing agreements were signed with these donors where separate financial statements are being issued for each agreement. MDP II was planned to be implemented over a period of 3 years in two cycles of approximately 18 months each starting in March 2014. However, the implementation of MDP II cycle II is still ongoing as of the date of these financial statements. MDP II has five windows/components as follows: Window 1 - Provides municipalities with performance-based grants for municipal service delivery per mandate of municipalities defined in the Local Councils Law No. 1 of 1997, for sectors described as eligible in the Operations Manual as well as for operating expenditures for municipalities in Gaza. The municipalities’ allocation for this window will be calculated using the newly created Grant Allocation Mechanism. Municipalities decide on how to use the funds based on their Strategic Development and Investment Plans (SDIP) and consultation with citizens. Window 2 - pilots learning and innovation for municipal development, including implementation of the Ministry of Local Government (MoLG) policy decisions. This window finances goods, works and consultant services for capacity building and capital investments, including: (a) Strengthening Newly Amalgamated Municipalities that will support newly amalgamated municipalities towards achieving service levels in existing municipalities through financing small-scale social infrastructure and demand driven municipal capacity building packages. It will finance goods, works and consultant services. (b) Piloting Innovations for improved municipal responsiveness that will support: • Introduction of E-governance in four selected municipalities for more responsive 9 service provision. • Renewable Energy that will assist municipalities in piloting sub-projects with a focus on solar energy for public buildings. • Support to Local Economic Development initiatives that will develop a municipal approach to LED and pilot the approach in 12 municipalities (6 per each cycle). Window 3 - Helps municipalities to improve their performance rankings in accordance to the new Grants Allocation Mechanism. It provides technical assistance to improve financial management, planning capacities and technical capabilities, particularly in operations and maintenance. This component would finance goods, works and consultants’ services and would be implemented in two cycles of approximately 18 months each. Window 4 - This component will finance goods and consultants’ services for monitoring and evaluation, outreach and communication and local technical consultants for the engineering supervision of sub-projects under window 1 and the LGUDLF management fee. Window 5 - This window was designed under MDP II in response to Gaza emergency needs following the 51-day war in the summer of 2014 to restore municipal services in the Gaza Strip. 3. Summary of Significant Accounting Policies The financial statements have been prepared under the historical cost convention, the significant accounting policies follow: a. General Net assets, revenues, expenses, and gains and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets and changes therein are classified as unrestricted, temporarily restricted and permanently restricted. Unrestricted net assets are those whose use by LGUDLF is not subject to donor-imposed stipulations. Temporarily restricted net assets are those whose use by LGUDLF has been limited by donors’ specific time period or purpose. Permanently restricted net assets are those restricted by donors to be maintained by LGUDLF in perpetuity. During the year 2017, LGUDLF had no permanently restricted net assets. b. Temporarily Restricted Net Assets Unconditional promises to give cash, with no donor-imposed restriction on use, are recognized as revenues at the date promises to give are made. Unconditional promises to give cash, with temporarily donor-imposed restriction on use, are recorded as temporarily restricted net assets at the date promises to give are made, and recognized as revenues when the related costs are incurred. Unconditional promises with temporarily donor-imposed restriction are promises that depend only on passage of time and certain performance requested by the promising donors. Conditional promises to give and indications of intention to give are recorded at the fair market value at the date contribution is received by LGUDLF. c. Pledges Receivable Pledges receivable are stated at the original amount of the signed agreement less the amount received, uncollectable amount (if any) and currency variances resulting from the fact that original agreements with the donors may be in currencies other than USD. 10 d. Revenue Recognition Donations and contributions are recorded as pledges receivable and temporarily restricted net assets upon signing of the agreement with the donor. During the yearly close out process, the amount of expenses incurred is recognized as revenue under net assets released from restrictions and the temporarily restricted net assets account is reduced thereof. e. Accruals and Other Current Liabilities Accruals and other current liabilities are recognized for the amounts to be paid in the future for goods and services received, whether a bill is received from the supplier or not. f. Expenses Expenses are recorded by LGUDLF when incurred in accordance with the accrual basis of accounting, regardless of the date of actual payment. g. Foreign Currencies LGUDLF’s basic functional currency is the U.S. Dollar (USD). Transactions which are expressed or denominated in other currencies were translated to USD using exchange rates in effect at the time of each transaction. Assets and liabilities which are denominated in other currencies are translated to USD using exchange rates prevailing at the date of the statement of assets, liabilities and net assets. Gains and losses arising from the translation are reflected in the statement of revenues, expenses and changes in net assets. Foreign currency exchange rates against USD at December 31, 2017 and 2016 were as follow: - 2017 2016 One EUR 1.200 1.046 4. Cash at Bank The Project’s designated bank account for MDTF Additional Contribution showed the following balances as of December 31, 2017 and 2016: 2017 2016 EUR 898,186 699,104 Equivalent in USD 1,077,644 731,123 5. Pledges Receivable Pledges receivable as of December 31, 2017 and movement thereon during the year follow: USD Balance, Addition Amount Beginning of During Received During Balance, Year the Year the Year End of Year Pledges receivable 2,469,868 - (2,023,817) 446,051 11 6. Temporarily Restricted Net Assets Temporarily restricted net assets as of December 31, 2017 and movement thereon during the year follow: USD Balance, Additions Net Assets Beginning of (Grants and Released from Balance, Year Donations) Restriction End of Year Temporarily restricted net assets 2,543,255 - (1,715,151) 828,104 7. Project’s Expenses Project’s expenses related to MDTF Additional Contribution and comparison with budget follow: USD Actual Cumulative Year Ended Year Ended up to December December 31, December Remaining Budget 31, 2017 2016 31, 2017 Budget Window 4: (a) Local Technical Consultant - - - - - (b) LGUDLF Management Fee 840,000 130,341 187,118 829,176 10,824 (c) Monitoring and Evaluation - - - - - (d) Outreach and Communication - - - - - Window 5: Gaza Municipal Emergency Grants 11,160,000 1,584,810 1,617,144 10,342,720 817,280 12,000,000 1,715,151 1,804,262 11,171,896 828,104 12