Kazakhstan Energy Efficiency Project Financed as part of the Grant Agreement No. TF014185 dated 18 June 2014 concluded between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development Special Purpose Financial Statements for the year ended 31 December 2017, and Independent Auditors’ Report Kazakhstan Energy Efficiency Project GRANT No. TF014185 Contents Page Statement of management’s responsibility for the preparation and approval of the special purpose financial statements for the year ended 31 December 2017 ................................................. 3 Independent auditor's report ..................................................................................... 4-6 Special purpose financial statements for the years ended 31 December 2017 Statement of cash receipts and disbursements ................................................................ 7 Statement of expenditures per components ..................................................................... 8 Notes to the special purpose financial statements ........................................................ 9-14 ANNEX 1. RECONCILIATION BETWEEN THE AMOUNTS SUBMITTED BY KAZAKHENERGYEXPERTISE JSC AND DISBURSED BY THE WORLD BANK .................................... 15 2 Тел.: +7 727 331 31 34 ТОО “BDO Kazakhstan” Факс: +7 727 331 31 35 ул. Габдуллина, 6 info@bdokz.com Алматы, Казахстан www.bdokz.com 050013 Tel: +7 727 331 31 34 BDO Kazakhstan LLP Fax: +7 727 331 31 35 6 Gabdullin Street info@bdokz.com Almaty, Kazakhstan www.bdokz.com 050013 INDEPENDENT AUDITORS' REPORT To management of Kazakhstan Energy Efficiency Project financed as part of the Grant Agreement No. TF014185 concluded between Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development. Conclusion Based on the Audit Results We have audited the accompanying special purpose financial statements of Kazakhstan Energy Efficiency Project financed under the Trust Fund Grant Agreement No. TF014185 between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development (the “Project"), and implemented by Electric power and energy saving development institute JSC (Kazakhenergyexpertise), which include a statement of cash receipts and disbursements for the year ended 31 December 2017, statement of expenditure by components for the year ended 31 December 2017, as well as a summary of accounting policy and other explanatory notes (the "Financial Statements"). In our opinion: 1. The special purpose financial statements fairly present, in all material respects, cash receipts and disbursements of the Project for the year ended 31 December 2017, in accordance with International Public Sector Accounting Standards (IPSASs) Financial Reporting under the Cash Basis of Accounting issued by the International Federation of Accountants, and requirements under the Trust Fund Grant Agreement No. TF014185 between Kazakhstan Government and the International Bank for Reconstruction and Development. 2. All external funds have been used in accordance with the terms of the Grant Agreement TF014185 of 18 June 2014 between the Government of the Republic of Kazakhstan and the International Bank for Reconstruction and Development, the Project Agreement of 18 June 2014 between the International Bank for Reconstruction and Development (“World Bank”) and Electric power and energy saving development institute JSC (Kazenergyexpertise), and Subsidy Agreement of 30 October 2014 between the Ministry for Investments and Development of the Republic of Kazakhstan and Electric power and energy saving development institute JSC (Kazenergyexpertise) )», letter on expenditure dated 18 June 2014,with due regard to the principles of economy and efficiency, and only for the purposes for which financing was provided; 3. All necessary supporting documents, records and accounts have been maintained in respect of all Project activities, including expenses under expenditure statements (SOE). Statements for the period correspond to accounting books. 4. The Designated account used has been maintained in accordance with the provision of the Agreement, and World Bank related guidelines. 5. Goods and services financed have been procured in accordance with the Agreement and World Bank related guidelines; 4 Basis for Opinion We conducted our audit in accordance with International Standards on Auditing. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Project and Electric power and energy saving development institute (Kazakhenergyexpertise) in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in Kazakhstan and have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Emphasis of Matter (a) We draw your attention to Note 7 of these special purpose financial statements disclosing the reasons of slow progress of the Project implementation. Our opinion is not modified in this respect. (b) We draw your attention to Note 10 to the special purpose financial statements, where we have disclosed the circumstances connected with recognition of school No. 1 in Atyrau as in disrepair. Important circumstances - Аccounting principles We draw attention to the following information outlined in Note 2 to the Special Purpose Financial Statements, which describes the accounting principles. The special purpose financial statements have been prepared to assist the Executive Agency in meeting the requirements of the World Bank. As a consequence, these special purpose financial statements may not be suitable for another purpose. We do not express a modified opinion on this matter. Management responsibility for the financial statements Project management is responsible for the preparation and fair presentation of the special purpose financial statements in accordance with International Public Sector Accounting Standards (IPSAS) Financial Reporting under the Cash Basis issued by the International Public Sector Accounting Standards Board (IPSASB) of the IFAC, and in accordance with the provisions of the Grant Agreement No. TF014185 between Government of the Republic of Kazakhstan and International Bank for Reconstruction and Development, as well as for such internal control as management determines is necessary to enable the preparation of special purpose financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibilities for the Audit of the Financial Statements Our objective is to obtain reasonable assurance about whether the special purpose financial statements are free from material misstatement, due to fraud or errors, and to express our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with International Standards on Auditing 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 affect the presentation of these financial statements in general. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. In addition, we have performed the following: • Identified and assessed the risks of material misstatement in the financial statements, whether due to fraud or errors; designed and performed audit procedures in response to the risks; obtained 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. • Obtained 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 internal control of the Project. 5 Auditor's Responsibilities for the Audit of the Financial Statements (continued) . Evatuated the appropriateness of accounting policies used and the reasonabteness of accounting estimates and retated disctosures made by management. . Evatuated the overatl presentation, structure and content of the financial statements, inctuding the disctosur-es, and whether the financiaI statements represent the undertying transactions and events in a manner that achieves fair presentation. We communicate with those charged with funding the Project regarding, among other matters, the ptanned scope and timing of the audit and significant audit findings, including any significant deficiencies in internat control that we identify during our audi BDO Kazakhstan LLP State License No. 15003448, issued February 2015 by the Committee for Control of the Ministry of Finance of the Repubtic of Kazakhstan, Astana. Director 26 June 2018 Auditor N. Auditor quatifying lssued by the Qual for Auditors' Certif Kazakhstan 6 Gabduttin St. Atmaty, Kazakhstan Kazakhstan Energy Efficiency Project Notes to the special purpose financial statements Trust Fund Grant No. TF014185 for the year ended 31 December 2017 (US dollars) NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2017 (all amounts are presented in US dollars) 1. GENERAL INFORMATION 1.1. The Project The Grant Agreement No.TF014185 (“Agreement” ) between Government of the Republic of Kazakhstan and International Bank for Reconstruction and Development acting as administrator of the Single Donor Trust Fund for the Energy Efficiency and Youth Corps Program (“World Bank”) was concluded on 18 June 2014 and ratified on 19 March 2015 (“Project commencement date”). Under the Agreement, the Trust Fund extends a grant in an amount equal to 21,763,000 (twenty-one million seven hundred sixty- three thousand) US dollars ("Grant") for the implementation of the Kazakhstan Energy Efficiency Project (“Project") carried out by the Executive Agency Electric power and energy saving development institute (Kazakhenergyexpertise) (“Executive Agency”). Grant funds may be withdrawn in US dollars, and paid out in US dollars and Kazakhstani tenge. The Grant Agreement expires on 31 March 2019. 1.2. Objectives of the Project Objectives of the Project are to enhance: (i) Energy efficiency of public and socially significant facilities (ii) Favourable environment for sustainable energy financing. The Project consists of the following parts: • Part 1: Preparation and implementation of demonstration sub-projects in public and socially significant facilities Implementation of eligible subprojects to reduce energy consumption in public buildings pursuant to the criteria set forth in the Project Operations Manual. • Part 2: Technical assistance to the Recipient and Executive Agency of the Project (i) Enhance potential of the Ministry of Industry and New Technologies and the Executive Agency for Project coordination, implementation and evaluation. (ii) Carry out technical studies in the field of energy efficiency. (iii) Conduct information and awareness-raising campaigns related to the sub-projects financed under part 1 of the Project. (iv) Development of legal, institutional and regulatory documents to support sustainable energy financing mechanisms. (v) Development of detailed financing mechanisms and implementation of economically feasible schemes for financing the investments in energy efficiency, including making a list of energy efficiency investment projects ready for financing. 1.3. Project Implementation The Project is coordinated in controlled by the Ministry for Investment and Development of the Republic of Kazakhstan (“Recipient”) over the Project implementation term. The Recipient insures implementation the Project through the Executive Agency, in accordance with the provisions of a manual satisfactory to the World Bank, which shall include, inter alia, the following: a) Implementation mechanisms, procurement procedures and financial management for the Project; b) Operating and administrative procedures for the Project; c) The criteria and procedural arrangements for the selection, evaluation, implementation, and supervision of subprojects; 9 Kazakhstan Energy Efficiency Project Notes to the special purpose financial statements Trust Fund Grant No. TF014185 for the year ended 31 December 2017 (US dollars) 1. GENERAL INFORMATION (CONTINUED) 1.3. Project Implementation (continued) d) Procedural arrangements for implementation of environmental management Plans to carry out subprojects in accordance with the environmental management framework document; e) Mechanisms for monitoring, evaluation, management and reporting on the Project; as well as f) Operating procedures and functions of the Project Management Committee. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1. Preparation and presentation of the financial statements The special purpose financial statements have been prepared in accordance with International Public Sector Accounting Standards (IPSASs) Financial Reporting under the Cash Basis of Accounting issued by International Public Sector Accounting Standards Boards of the International Federation of Accountants, and in accordance with the provision of Trust Fund Grant Agreement No.TF014185 between Kazakhstan Government and the International Bank for Reconstruction and Development acting as administrator of the Single Donor Trust Fund. Accounting policies set out below have been applied consistently in reporting periods presented in these financial statements. 2.2. Cash basis of accounting The financial statements are presented under the cash basis of accounting. Transactions and events are recognised when Project funds are received or paid. 2.3. Reporting currency These financial statements are presented in US dollars. Foreign currency transactions are translated to presentation currency at exchange rates at transaction dates. VAT recovered from the State budget is translated to US dollars at exchange rates at the date when payment is made by a second-tier bank. Exchange differences arising from the restatement of transactions denominated in other currencies to US dollars are accounted for as a net change in exchange rates. Official exchange rate of USD at 31 December 2017 is KZT 332,33. 2.4. Taxes Taxes are accrued and paid in accordance with the tax legislation of the Republic of Kazakhstan. In 2016, in accordance with the tax legislation of the Republic of Kazakhstan, corporate income tax of 17,929 US dollars was paid in. This amount was not included in the expenditure report because of the pending confirmation from the World Bank on the legality of attributing to expenses at on account of the Grant funds. In 2017 payment of corporate income tax amounted to USD 69,052. 2.5. Budget Expenditure budget is created based on the development plan of the Executive Agency. The development plan is created based on the procurement plan and concluded contracts. 10 Kazakhstan Energy Efficiency Project Notes to the special purpose financial statements Trust Fund Grant No. TF014185 for the year ended 31 December 2017 (US dollars) 3. STATEMENT OF EXPENDITURE Amount based Total Recovery of The application Application Date of on the Amount after application VAT from the amount after No. withdrawal preliminary the review amount State budget VAT recovery review 17 11.05.2017 372,283 348,015 24,268 - 372,283 21 25.07.2017 936,596 366,238 570,358 37,778 898,818 22 11.09.2017 1,185,989 - 1,185,989 - 1,185,989 25 03.11.2017 945,960 - 945,960 - 945,960 27* 21.11.2017 74,022 31,318 42,704 - 74,022 31 23.02.2018 901,231 - 901,231 - 901,231 34 10.05.2018 374,822 36,760 338,062 65,043 309,779 35** 22.05.2018 - - - 174,762 (174,762) Total 4,790,903 782,331 4,008,572 277,583 4,513,320 *In request No. 27 CIT payment for 2016 is recorded in the amount of USD 17,929 **In request No. 35 dated 22.05.2018 VAT refund for 2017 for a component 1 is given 4. INFORMATION ON DESIGNATED ACCOUNTS The following accounts were opened in Kazkommertsbank JSC for transactions under Grant No. 014185: • Designated account KZ89926150119M225001, in US dollars; • Account KZ19926150119M225000 in tenge, to the designated account. 2017 год 2016 год Opening balance at 1 January 1,941 71,662 Add: Replenishment 4,750,000 1,000,000 Less: Refunds to the designated account (252,000) (456,000) Add: VAT recovery from Kazakhstan State budget 277,583 40,564 Plus: Other proceeds (supplier guarantee contribution) 14,528 - Minus: Other payments (supplier guarantee contribution) (14,528) - The current outstanding balance 4,777,524 656,226 Closing balance at 31 December 2,154 1,941 Add: Amount of expenditures paid 4,772,974 654,285 Less: Interest accrued - - Plus: Exchange rate difference 2,396 - Total advance 4,777,524 656,226 11 Kazakhstan Energy Efficiency Project Notes to the special purpose financial statements Trust Fund Grant No. TF014185 for the year ended 31 December 2017 (US dollars) 5. STATEMENT OF FINANCIAL POSITION The Statement of Financial Position discloses assets, liabilities and net assets of the Project as of 31 December 2017. This statement has been prepared on an accrual basis. 31.12.2017 31.12.2016 Items Note US Dollars US Dollars ASSETS Cash 6 2,154 1,941 Prepayments (i) 1,049 4,695 Current tax asset on CIT (ii) 24,117 - Total assets 27,320 6,636 LIABILITIES Accounts payable (iii) 81,955 - Total liabilities 81,955 - NET ASSETS (54,635) 6,636 Cumulative income 4 Grant - SDTF GRANT No. TF014185 (replenishment of the designated account SDC 6,120,000 1,370,000 Trust Fund) Return of funds from the designated account (708,000) (456,000) VAT recovery from Kazakhstan State budget 318,147 40,564 Other proceeds 14,528 - Total income 5,744,675 954,564 Cumulative expenses 7 Repairs, construction work 3,708,414 - Goods 72,262 72,262 Consulting services 1,799,435 802,098 Training 26,278 26,279 Operating expenses 175,997 47,298 Exchange rate difference 2,396 - Other payments 14,528 - Total expenses 5,799,310 947,928 NET ASSETS (54,635) 6,636 (i) At the end of 2017 advances issued were represented by advances for major repairs to improve the energy efficiency. (ii) . In 2017 accruals of corporate income tax amounted to USD 46,842 (2016: 16,022). (iii) Accounts payable in the amount of USD 81,955 are represented by the debt for construction and installation works in the amount of USD 64,261, the debt for consulting services in the amount of USD 14,746, the debt for other operating services in the amount of USD 2,948. 6. CASH Cash as of 31 December: US Dollars 2017 год 2016 год Cash balances at banks 2,154 1,941 Including cash denominated in: US Dollars - - Kazakhstani tenge 2,154 1,941 12 Kazakhstan Energy Efficiency Project Notes to the special purpose financial statements Trust Fund Grant No. TF014185 for the year ended 31 December 2017 (US dollars) 7. PROJECT EXPENDITURES a. Project expenditures funded by the Trust Fund (in US dollars) for the year 2017 As of 31 December Cumulative as of 31 Project expenditures 2017 December 2017 Components 1: Goods, non-consulting services, consultants’ 3,645,202 3,645,202 services, and training under Part 1 of the Project Components 2: Goods, non-consulting services, consultants’ 1,127,772 2,080,395 services, and training under Part 2 of the Project TOTAL 4,772,974 5,725,597 b. Project expenditure budget execution (US dollars) for the year 2017 Cumulative as of 31 Expenditure Expenditure category Execution (a) December 2017 budget Components 1: Goods, non-consulting services, consultants’ services, and training under Part 1 of 3,645,202 4,050,950 90% the Project Components 2: Goods, non-consulting services, consultants’ services, and training under Part 2 of 2,080,395 2,704,581 77% the Project TOTAL 5,725,597 6,755,531 85% а) In 2017 a delay in project implementation took place due to the following : • need to obtain a repeated report on design and estimated documentation for 13 sub -projects; • failed tenders for procurement of the works; • duration of development and coordination of a technical assignment inside the Executive Agency and obtaining the approval from international technical specialist Nenad Pavlovic. 8. PROJECT FINANCING As of 31 December Cumulative as of 31 2017 December 2017 Direct payments - - Payments from designated accounts (SOE) 4,772,974 5,725,597 TOTAL 4,772,974 5,725,597 Total budget of Grant No. TF014185 21,763,000 Drawdown percentage of Grant No. TF014185 26.31% 31.12.2017 Available part of Grant No. TF014185 as at 31.12.2017 16,037,403 13 Kazakhstan Energy Efficiency Project Notes to the special purpose financial statements Trust Fund Grant No. TF014185 for the year ended 31 December 2017 (US dollars) 9. PROPERTY, PLANT AND EQUIPMENT, AND INTANGIBLE ASSETS Property, plant and equipment, and intangible assets purchased (US dollars): Item Balance Proceeds Disposals Balance 01.01.2017 31.12.2017 Office equipment 16,304 - - 16,304 Server hardware 52,816 - - 52,816 Office furniture 2,884 - - 2,884 Software (i) 342 147,734 - 148,076 TOTAL 72,346 147,734 - 220,080 (i) In 2017, the software of ‘State energy register’ automated information system for the amount of USD 147,734 was put into operation. 10. SUBSEQUENT EVENTS (a) Requests No. 31, 34, 35 for the total amount of USD 1,036,248 include the expenses incurred and met in 2017 in the amount of USD 1,036,248, which were submitted to the World Bank and approved in 2018. (b) According to a resolution of akimat of Atyrau region, State Institution Secondary School No. 1 in Atyrau, included in I group of sub-projects, was recognised as in disrepair and was to be demolished. In the course of the Project implementation, there were the expenses for energy audit, development of design and estimate documentation, state expertise, technical part of tender documentation for this school. (с) At school No. 82 in Karaganda there was a flooding of the basement due to the break of heating main. 11. LITIGATIONS There are no pending litigations brought by or against the Executive Agency as at the date of approval of the special purpose financial statements. 12. ISSUE DATE These financial statements have been authorised for issue on 26 June 2018 by the Deputy Chairman of the Board of Electric power and energy saving development institute JSC (Kazenergyexpertise). 14 Kazakhstan Energy Efficiency Project Notes to the special purpose financial statements Trust Fund Grant No. TF014185 for the year ended 31 December 2017 (US dollars) Annex 1. Reconciliation between the amounts submitted by the Executive Agency and disbursed by the World Bank Withdrawal Project expenditures Executive Agency World Bank Deviation application 17 79,201 79,201 - 21 532,821 532,821 - Components 1: Goods, non-consulting 22 1,185,989 1,185,989 - services, consultants’ services, and training under Part 1 of the Project 25 945,960 945,960 - 31 901,231 901,231 - 35 (174,762) (174,762) - 17 293,082 293,082 - Components 2: Goods, non-consulting 21 365,997 365,997 - services, consultants’ services, and 27 74,022 74,022 - training under Part 2 of the Project 34 309,779 309,779 - TOTAL 4,513,320 4,513,320 - 15