Local Government Units Development and Lending Fund Multi-Donor Trust Fund )TF0A1061( 2nd Additional Contribution into Municipal Development Program Phase II (Cycle II), through the International Development Association (IDA) Financial Statements For the Period from January 1, 2018 to June 30, 2018 Together With Independent Auditors’ Report Local Government Units Development and Lending Fund MDTF 2nd Additional Contribution into Municipal Development Program – Phase II (Cycle II) Statement of Revenues and Expenses and Changes in Net Assets For the Period from January 1, 2018 to June 30, 2018 (Currency: USD) Period from Year Ended January 1, 2018 December 31, Note to June 30, 2018 2017 Changes in unrestricted net assets: Revenues Released from temporarily restricted net assets 5 106,543 3,536,712 Interest income 961 12,272 Other revenue 6 22,856 - Currency variance gain 7,042 377,610 Total unrestricted revenues 137,402 3,926,594 Expenses Project’s expenses 7 338,504 3,536,712 Transfer of interest revenue accumulated balance to LGUDLF general fund 12,655 1,712 Total expenses 351,159 3,538,424 Net change in unrestricted net assets (213,757) 388,170 Changes in temporarily restricted net assets: Net assets released from restriction 5 (106,543) (3,536,712) Net change in temporarily restricted net assets (106,543) (3,536,712) Change in net assets (320,300) (3,148,542) Net assets, beginning of period /year 320,300 3,468,842 Net assets, end of period /year - 320,300 The accompanying notes form an integral part of these financial statements 5 Local Government Units Development and Lending Fund MDTF 2nd Additional Contribution into Municipal Development Program – Phase II (Cycle II) Cash Flows Statement For the period from January 1, 2018 to June 30, 2018 (Currency: USD) Period from Year Ended January 1, 2018 December 31, to June 30, 2018 2017 Cash Flow from Operating Activities Change in net assets (320,300) (3,148,542) Adjustments to reconcile change in net assets to net cash flow from operating activities: Decrease in pledges receivable - 3,471,229 (Decrease) in due to contractors (357,251) (1,045,650) (Decrease) in due to LGUDLF - (64,840) Net cash flow (used in) operating activities (677,551) (787,803) Net (decrease) in cash at bank (677,551) (787,803) Cash at bank, beginning of period / year 677,551 1,465,354 Cash at bank, end of period / year - 677,551 The accompanying notes form an integral part of these financial statements 6 Local Government Units Development and Lending Fund MDTF 2nd Additional Contribution into Municipal Development Program – Phase II (Cycle II) Designated Bank Account Statement For the Period from January 1, 2018 to June 30, 2018 IBAN number PS84TNBC000000000001003301466 Account number 1003301466 Depository bank The National Bank Address Ramallah Currency EUR Period from January 1, Year Ended December Note 2018 to June 30, 2018 31, 2017 Equivalent Equivalent in EUR in USD EUR USD Balance, beginning of period/year 564,720 677,551 1,401,180 1,465,354 Add: Receipts during the period/year 6 19,601 22,856 3,330,489 3,678,388 Interest income 778 961 10,618 12,272 Currency variance gain - 7,042 - 170,451 20,379 30,859 3,341,107 3,861,111 Deduct: Payments during the period/year * 574,684 695,755 4,176,064 4,647,202 Transfer of interest revenue accumulated balance to LGUDLF general fund 10,415 12,655 1,503 1,712 585,099 708,410 4,177,567 4,648,914 Balance, end of period/year - - 564,720 677,551 * 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 Period from Year Ended January 1, 2018 December 31, to June 30, 2018 2017 Expenses per the statement of revenues, expenses and changes in net assets 338,504 3,536,712 Changes on due to contractors 357,251 1,045,650 Changes on due to LGUDLF - 64,840 Expenses per designated bank account statement 695,755 4,647,202 The accompanying notes form an integral part of these financial statements 7 Local Government Units Development and Lending Fund MDTF 2nd Additional Contribution into Municipal Development Program – Phase II (Cycle II) Notes to the Financial Statements For the period from January 1, 2018 to June 30, 2018 (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 2nd Additional Contribution into MDP II On April 14, 2016 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 2nd Additional Contribution), into the finance of 8 Phase II (cycle II) of the Municipal Development Program (MDP II), (the Project), in the amount of USD 6,900,000. The following table specifies the windows/ budget categories to be financed by MDTF 2nd Additional Contribution: Budget in USD Window 1: Municipal Grants for Capital Investments 6,417,000 Window 4: (a) Local Technical Consultant - (b) LGUDLF Management Fee 483,000 6,900,000 The accompanying financial statements pertain to MDTF 2nd 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. The implementation of MDP II cycle II has been completed as of June 30, 2018. 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 service provision. • Renewable Energy that will assist municipalities in piloting sub-projects with 9 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 Audit Period, 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 June 30, 2018 and December 31, 2017 were as follow: June 30, December 31, 2018 2017 One EUR 1.169 1.200 4. Cash at Bank The Project’s designated bank for MDTF 2nd Additional Contribution account showed the following balance as of June 30, 2018 and December 31, 2017: June 30, December 31, 2018 2017 EUR - 564,720 Equivalent in USD - 677,551 5. Temporarily Restricted Net Assets Temporarily restricted net assets as of June 30, 2018 and movement thereon during the Period follow: Balance, Additions Net Assets Balance, Beginning (Grants and Released from End of of Period Donations) Restriction Period Temporarily restricted net assets 106,543 - (106,543) - 11 6. Other Revenue Other revenue represents an amount of EUR 19,601, equivalent to USD 22,856, received from IDA in excess of related budget. 7. Project’s Expenses Project’s expenses related to MDTF 2nd Additional Contribution and comparison with budget follow: USD Actual Period from Year January 1, Ended Cumulative Under/ 2018 to June December up to June (Over) Budget 30, 2018 31, 2017 30, 2018 Budget Window 1: Municipal Grants for Capital Investments 6,417,000 - 3,300,124 6,334,510 82,490 Window 3: Capacity Building for (a) Municipalities - 322,762 - 322,762 (322,762) Window 4: (a) Local Technical Consultant - - - - - (b) LGUDLF Management Fee 483,000 15,742 236,588 474,689 8,311 6,900,000 338,504 3,536,712 7,131,961 *(231,961) * This amount represents expenses covered by unrestricted net assets. 12