89090




   SECOND RURAL INVESTMENT PROJECT
INTERNATIONAL BANK FOR RECONSTRUCTION
        AND DEVELOPMENT (IBRD)
             LOAN 8189- AZ

    REPORT OF INDEPENDENT AUDITORS
                  AND
 SPECIAL PURPOSE FINANCIAL STATEMENTS
          FOR THE YEAR ENDED
           31 DECEMBER 2013
                          SECOND RURAL INVESTMENT PROJECT


                                           CONTENTS
                                                            'I




                                                                 Page

Statement of Management Responsibilities                            3

Report of Independent Auditors                                    4-5

Balance Sheet                                                       6

Statement of Sources and Uses of Funds                              7

Statement of Uses of Funds by Project Activities                    8

Statement of Designated Account                                     9

Statement of IBRD Expenditure Withdrawal Schedule                  10

Notes to the Special Purpose Financial Statements                11-14
STATEMENT OF MANAGEMENT RESPONSIBILITIES

Management has prepared and is responsible for the special purpose financial statements and re lated
notes of the Second Rural Investment Project, (the "Project") financed by the International Bank for
Reconstruction and Development Loan 8189-AZ and the Government of Azerba ijan . They have been
prepared in accordance with the basis of accounting described in Note 2 of the accompanying special
purpose financial statements.

The Project maintains internal accounting control systems and related policies and procedures designed
to provide reasonable assurance that assets are safeguarded , that transactions are executed in
accordance with management's authorisation and properly recorded , and that accounting records may be
rel ied upon for the preparation of financial statements and other financial information. The system contains
self-monitoring mechanisms that allow management to be reasonably confident that controls, as well as
the Project's administrative procedures and internal reporting requirements operate effectively. There are
inherent limitations in the effectiveness of any system of internal control , including the possibility of human
error or the circumvention or overriding of controls. Accordingly, even an effective internal control system
can provide on ly reasonable assurance with respect to financial statements preparation .




                                                                   Khayal Zaidov     ~
                                                                   PMU Finance Manager




17 June 2014

Baku , Azerbaijan




                                                      3
                                                                                                                            MOORE STEPHENS



                                                                                                                            Moore Stephens Azerbaijan Limited
                                                                                                                            2/2, Basti Bagirova Street
                                                                                                                            Baku AZ1065, Azerbaijan

                                                                                                                            T   +99412 490 77 47/48/49
                                                                                                                            F   +994 12 490 77 SO

                                                                                                                            baku@moorestephens.az
                                                                                                                            www.moorestephens.az



         REPORT OF INDEPENDENT AUDITORS

         To the management of the Second Rural Investment Project

      Report on the Financial Statements




Regist<:re~ In fngland No. 041137465 Reg.>tered office .as 3bove
Ar   ·nc~p~ndent me~ber   f1rrn of Moore Stept-t-ns n:ernationa    'mited- members <n ppnc1oa• nttes /1rougrout •re world




                                                                                                               4
                                                                                                                 MOORE STEPHENS




5. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
   basis for our audit opinion .

Opinion

6.    In our opinion:

      a) the accompanying special purpose financial statements referred to above present fairly, in all
         material respects, the financial position of the Project and of the Special Account as of 31
         December 2013 and the Project's related sources and uses of funds, movements in
         designated accounts and statement of expenditure for the year ended 31 December 2013 in
         accordance with the basis of accounting described in Note 2 to the accompanying speCial
         purpose financial statements; and

      b) the Project was, in all material respects, in compliance with the conditions of the relevant
         Loan Agreements and the World Bank guidelines and laws and regulations of the Azerbaijan ' ·
         Republic during the year ended 31 December 2013.                                             '

Emphasis of Matter

      Without qualifying our opinion we draw attention to the following matter. Our audit disclosed the
      following noncompliance with the conditions of the World Bank guidelines applicable to the Project
      during the year ende-d 31 December 2013. The Project made additional disbursements amounting
      to USD 382,853 that exceeded the total contract value, without obtaining an approval from the
      World Bank. These additional disbursements have been transferred to IBRD bank account in
      2014 .




     17 June 2014




                                    Sn..:   t'i   L0r.dnn EC1 ;, '!Af:i UK
                                                                        tit~:.   •h·vuc;:t1:J,,t th(· N;.: rid




                                                                                           5
SECOND RURAL INVESTMENT PROJECT
IBRD LOAN 8189-AZ
BALANCE SHEET
AS AT 31 DECEMBER 2013
(Expressed in US dollars)



                                                            Note            2013                 2012
ASSETS AND CUMULATIVE EXPENDITURE

Cash at bank
- Government Project Account                                  4              563,102             234,612
- IBRD Loan Designated Account                                4              422,482             437 ,520
                                                                             985,584             672,132

Cumulative project expenditure                                            19,961,613         1,?52,231

TOTAL ASSETS AND CUMULATIVE EXPENDITURE                                   20,947,197         2;424,363

SOURCES OF FUNDS
                                                                                                    ' ·;
 -IBRD Loan                                                               13,295,753         1,075,000
 - Government Counterpart Financing                                        6,421,817         1,322,884
- Communities' Contribution                                                1,228,936            26,191
- Other Inco me                                                                  204
                                                                          20,946,710         2,424,075

                  ' exchange difference
Accumulated foreign                                                                487                  288

TOTALSOURCESOFFUNDS                                                       20,947,197         2,424,363




                                                              Khayal Zaidov    ~
                                                              PMU Finance Manager




          The notes set out on pages 11-14 form an integral part of these financial statements
                                                   6
SECOND RURAL INVESTMENT PROJECT
IBRD LOAN 8189-AZ
STATEMENT OF SOURCES AND USES OF FUNDS
FOR THE YEAR ENDED 31 DECEMBER 2013
(Expressed in US dollars)


                                            Note         2013              2012            Cumulative
OPENING BALANCES
  Government Project Account                             234,612
  IBRD Loan Designated Account                           437,520
                                                         672,132


ADD: FUNDS RECEIVED BY SOURCES
  IBRD Loan                                            12,220,753          1,075,000            1 ~, 295 , 753
  Government Counterpart Financing                      5,098,933          1,322,884             6,421 ,8,1 7
  Communities' Contribution                             1,202,745             26 ,191          '
                                                                                                 1,228,936
  Other Income                                                204                                       204

                                                       18,522,635          2,424,075
                                                                                                       '·
                                                                                                20,946',710

LESS: EXPENDITURE BY
CATEGORIES
  Grants                                               15,180,374           336,423             15,516,797
  Consultant Servi~es                                   1,141,337           609,735              1,751 ,072
  Incremental Operating Costs                           1,247,327           461,219              1,708,546
  Goods                                                   367,717           121,419                489,136
  Training                                                246,240           137,300                383,540
  Civil Works                                              26,387            11,135                 37,522
  Front-end-fee                                                              75,000                 75,000

TOTAL EXPENDITURE                                      18,209,382          1,752,231            19,961,613


ADJUSTMENTS
  Foreign exchange gain(+)/loss(-)                           199                  288                       487

                                                             199                  288                       487


CLOSING BALANCES
  Government Project Account                 4           563,102            234,612
  IBRD Loan Designated Account               4           422 ,482           437,520
                                                         985,584            672,132




        The notes set out on pages 11-14 form an integral part of these financial statements
                                                   7
SECOND RURAL INVESTMENT PROJECT
IBRD LOAN 8189-AZ
STATEMENT OF USES OF FUNDS BY PROJECT ACTIVITIES
FOR THE YEAR ENDED 31 DECEMBER 2013
(Expressed in US dollars)

For the year ended 31 December 2013

                                                    Project             Technical
                                  Rural
                                                  Management           Services for
                              Community                                                         Total
                                                  and Results              Rural
                             Infrastructure
                                                   Monitoring         Infrastructure


 Communites' Contribution         1,202,745                                                     1,202,745

 Government Counterpart           5,769,418              11,292               20,780         5;801,490
 IBRD Loan 8189                   8,208,211           2,175,342              821,594        11,205,147

 Total                           15,180,374           2,186,634              842,374        '18,209,382
                                                                                                     '·
For the year ended 31 December 2012

                                                    Project             Technical
                                  Rural
                                                  Management           Services for
                              Community                                                         Total
                    ,-                            and Results              Rural
                             Infrastructure
                                                   Monitoring         Infrastructure


 Communites' Contribution            26,191                                                       26,191

 Government Counterpart              28 ,352             26,871                2,693               57,916
 IBRD Loan 8189                     281 ,880          1,001,232              385,012            1,668,124

 Total                              336,423           1,028,103              387,705            1,752;231




 Cumulative to 31 December 2013

 Communites' Contribution         1,228,936                                                     1,228,936

 Government Counterpart           5,797,770              38,162               23,473         5,859,405
 IBRD Loan 8189                   8,490,091           3,176,574            1,206,607        12,873,272

 Total                           15,516,797           3,214,736            1,230,080        19,961,613




Subhan Asgerov
PMU Director /
             {_
                  ~      /




         The notes set out on pages 11-14 form an integral part of these financial statements
                                                  8
SECOND RURAL INVESTMENT PROJECT
IBRD LOAN 8189-AZ
STATEMENT OF DESIGNATED ACCOUNT
FOR THE YEAR ENDED 31 DECEMBER 2013
(Expressed in US dollars)


                                                                                          IBRD-8189DA:
 Account number                                                           AZ381BAZ38190038409330164120
                                                                             International Bank of Azerbaijan
 Depository Bank



                                                           2013                  2012           Cumulative
                                                                                                   ,,
 Balance at the beginning of reporting period

                                                              437,520

                                                                                                          '··;
 ADD:
 Advances and replenishments                              12,220,753           1,075,000          13,295,753

 DEDUCT:
 Eligible expenditure                                    (11 ,082,060)        (1 ,588,033)      (12,670,093)
                      ,-
 Bank charges                                                 (80,200)            (79,940)         (160, 140)
 Transaction loss                                             {42,887}               {151}           {43,038}
 Total expenditures                                      (11 ,205, 147)       (1,668,124)       (12,873,271)

 ADJUST:
 Foreign Exchange gain                                           (476)             (645)                (1, 121)
 Due to Government Counterpart funds*                     {1 ,030, 168}       1,031,289*                  j   '121


 Balance at the end of reporting period                       422,482            437,520                422,482




*In accordance to IBRD Loan agreement 8189-AZ to mm1m1ze delays in project implementation the
Azerbaijani Government agreed to contribute up to US$20 million to finance project expenditures. The
funds will be disbursed from budget allocations through the Treasury system of the Ministry of Finance, and
managed by the PMU . Funds will be released to the project to finance project expenditures as expenditures
are incurred , and the Project Account shall be replenished regularly. The World Bank has reimbursed
funds amounting to USD 1,031 ,203 used for eligible expenditure during the retroactive period.




            The notes set out on pages 11-14 form an integral part of these financial statements
                                                     9
SECOND RURAL INVESTMENT PROJECT
IBRD LOAN 8189-AZ
STATEMENT OF EXPENDITURE WITHDRAWAL SCHEDULE
FOR THE YEAR ENDED 31 DECEMBER 2013
(Expressed in US dollars)

Year ended                            31         December 2013




       "''"'""'"'m"'..,"'"""'""'""""'''"''''""-·-~-.}.;..,_,,,,,,,,,,,,,,,,.,,,,,,,,,,                                                                        ·-r·-·•··~£1J::"!. .....~.". J".~ . . . . . . . .'""""'"            .            .,~im.nnoi.·n.,;,.,.,,~ .........onoooono.,;;,;

   AZRIP2/IBRD- 01                                                                                                                                      '                   323,155 :                                        - : 136,400                      1,031,203
  AZRIP2/IBRD- 03                                                                                                                                       1                   12'7,621 ' ''''' ' ' ' ' ' ' ' 11 ,135 )                                960 ) ' 561,921
  AZRIP2/IBRD- 05                                                                                                                                  __ 1                     121.600 '                       24.509 r 63,660 t · 1;435;311
  AZRIP2/IBRD- 04                                                                           1,000,000                                                ~T                            -T                                        ~ !                       =: · 1;ooo;ooo
  AZRIP2/IBRD- 06                                                                                                                           265,435 1                       101,365 1                                        ~ t                 49,600 )' 557;457
  AZRIP2/IBRD- 07                                                                                                                                  ··· ····                 160,174 1                            1,877 ' 66,704 ; 1;542;913
  AZRIP2/IBRD- --                                                                                                                                                            ?$.4~$ :                                        =. r                      :J : $~j;?.IQ.
  AZRIP2/IBRD- 09                                                                                                                                                           125,046 i                                        -:                        -!       752,997
  AZRIP2/IBRD                                                   -10                                                                                                         120,9oo·r                  · · · · · · · · · · · ~ :- 3:oaa·r ... 881;·189
 ···························-·-··········-···--········
  AZRIP2/IBRD-
 ..............................................................
                                                                  11                                                                                                         87.493 !·· ·                                    ~ r                 52::zoo1____1 ,o93,2s:z                                                                                           1

   AZRIP2/IBRD- 12                                                                                                                                                          137:693 1               · ···                    ~ --···············  5,600 1 ·1;319;1o·   1·                                                                                         ·1

   AZRIP2/IBRD- 13                                                                                                                                                          ~94 . 491         J ..... . ···································~····:!.                       $.~??                  I. . . . . . . . .~~~?~!QQ.~. . .i
                                                                                            1,000,000          1,573,196       468,574 7,274,587                        1,484,084                                         37,521                                382,791                                           12,220,753
Year ended                            31         December                   2012
                                                                                                                                                                                                                                           "' ~ ; •• u' "" ""'""" ' ~ " "" ""'""' ...,' ~ ' - ' ' 0 ' ''_"_' '' '""-""' ' "' ' ' "' ' ''''''''''"'""'"~ '- ' "~




     AzRIP2/IBRD-02                                                                                                                                                                                                                                                                                                  ~.QQQ~QQQ
      Front end fee                                                                                                                                                                                                                                                                                                        . . . .!~~QQQ
                                                                                                                                                                                                                        75,000                                                                                       1,075,000
                                                                       :J
Subhan Asgerov                                                    /             / ' ! ,:7                                          Khayal Zaidov   ~(,6..- 4 * C
                                                                                                                                                              1
PMU Director                                                                                                                       PMU Finance Manager                                                                                ~




                                                                                                 The notes set out on pages   11-14 form an integral part of these financial statements
                                                                                                                                          10
SECOND RURAL INVESTMENT PROJECT
NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2013
(Amounts are expressed in US dollars unless otherwise indicated)

NOTE1.BACKGROUND

Second Rural Investment Project ("AzRIP-2" or "the Project") is a project established and Projected by the
Government of Azerbaijan and World Bank and implemented by the State Agency on Agricultural Credits
under the Ministry of Agriculture of Azerbaijan RepubiLc for rural communities to organize and build
infrastructure projects in five areas of our country.   ·

The Project Development Objective is to improve access to and use of community-driven rural
infrastructure and expand economic activities for rural households. This would be achieved through : (i)
financing demand-driven, community-identified priority rural infrastructure investments; (ii) strengthening
the capacity of communities in partnership with municipalities and local support institutions to effectively
identify, plan and implement their development priorities; (iii) building opportunities for rural employment
and livelihood support services; and, (iv) supporting project management capacity in order to coordinate,
plan , monitor, program and supervise a wide range of community driven activities.

The project is a multi-sector investment loan with a total investment cost estimated at $53,6 million, of
which $30 million will be financed by IBRD. It will scale up AzRIP-2 both geographically into currently{m-
serviced rayons and vertically through the inclusion of pilot livelihood support services and second
generation institutional support in current AzRIP-2 active project areas. The Project has three
components:

Component A - Rural Community Infrastructure
Three categories of micro-project grants will be supported under Component A: (i) micro projects in
previously un-serviced rayons which meet eligibility criteria set out in the Operational Manual (OM); (ii)
second generation micro-projects in active AzRIP-2 communities with high performance ratings from
previous micro-project implementation and which meet elig ibility criteria set out in the OM , and ; (iii) micro-
projects submitted by Common Interest Groups supported under the pilot scheme in Component B which
meet eligibility criteria as established in the OM.

Component B -Technical Assistance for Rural Infrastructure
This component will fund technical support services for micro-project implementation and pilot livelihood
support services. There are two sub-components, namely: (i) sub-component 81 on Supporting Micro-
Project (MP) Development and (ii) sub-component 82 on Piloting Livelihood Support Services.

Component C - Project Management and Results Monitoring
This component will finance the administrative and operational project implementation and management
costs, including overheads of Project Management Unit (PMU) professional staff as well as PMU and
Regional Operations Office (ROO) support staff, project outreach and support to Regional Grant Approval
Committees (RGACs) . The withdrawal of proceeds from the IBRD loan will be made in accordance with
the following schedule:




 ( 1) Goods, works, non-consulting
 services, and consultants" services,
                                                   8,925,000                             100%
 Training , and Incremental Operating
 Costs for the Pro·ect
  (2) Grants                                       21,000,000                            90%
                                                                            Amount payable pursuant to
                                                                             Section 2.03 of the Loan
  (3) Front-end Fee                                  75,000                  Agreement in accordance
                                                                            with Section 2.07 (b) of the
                                                                                General Conditions
                                                                              Amount due pursuant to
  (4) Interest Rate Cap or Interest
                                                        0                   Section 2.07(c) of the Loan
  Rate Collar premium
                                                                                    A reement
  TOTAL AMOUNT                                     30,000,000



                                                       11
SECOND RURAL INVESTMENT PROJECT
NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2013
(Amounts are expressed in US dollars unless otherwise indicated)

NOTE 1. BACKGROUND (CONTINIUED)

Government Contribution. The Government's contribution of US$20 million to finance project
expenditures will be disbursed from budget allocations through the Treasury system of the MoF and
managed by the PMU . Funds will be released to the project to finance project expenditures as
expenditures are incurred and the Project Account shall be replenished regularly to minimize delays in
project implementation.                              '

Beneficiary Contribution. The beneficiary contribution to finance project expenditures is US$3.6 million.

Retroactive financing. Withdrawals up to an aggregate amount not to exceed US$4.2 million equivalent
might be made for payments made on or after April1, 2012, for eligible expenditures.        ••

The registered address of the Project is 80 U.Hajibeyli Street, Government House, Baku, Azerbaijan.
                                                                                                I


NOTE 2. ACCOUNTING POLICIES                                                                            ., .
    a) Basis of Accounting

These special purpose financial statements are prepared in accordance with the International Public
Sector Accounting Standard ("IPSAS") Financial Reporting under the Cash Basis of Accounting issued by
the International Public Sector Accounting Standards Board ("IPSASB"), an independent standard-setting
body within the International Federation of Accountants ("IFAC") and incorporate the following principal
accounting policies, which have been consistently followed in all material respects and comply with the
"Guidelines: Annual Financial Reporting and Auditing for World Bank - Financed Activities" issued by the
World Bank's Financial Management Sector Board. Project financing is recognised as a source of project
funds when the cash is received . Project expenditure is recognised as a use of project funds when
payment is made.

    b) Period of accounts

These special purpose financial statements cover year ended 31 December 2013.

    c) Transactions and balances in foreign currencies

The Project is domiciled in the Republic of Azerbaijan where the local currency is the Azerbaijani manat
("AZN"). Because the majority of the Project's transactions are funded and expended in United States
dollars and in accordance with the requirements of the World Bank, these special purpose financial
statements are presented in United States dollars ("US dollar", "USD" or "US$"), which is the reporting
currency of the Project. Transactions in other currencies are treated as transactions in foreign currencies.
Cash receipts and payments arising from transactions in a foreign currency are recorded in the Project's
reporting currency by applying to the foreign currency amount the exchange rate between the reporting
currency and the foreign currency at the date of receipt and payment. Cash balances held in a foreign
currency are reported using the closing rate, which is the spot exchange rate at the reporting date.
Unrealised gains and losses arising from changes in foreign currency exchange rates are not cash
receipts and payments. However, the effect of exchange rate changes on cash held in a foreign currency
is reported in the statement of sources and uses of funds and other statements in order to reconcile cash
at the beginning and the end of the period. These amounts are presented separately from cash receipts
and payments and include the differences, if any, had those cash receipts and payments and balances
been reported at end-of-period exchange rates. At 31 December 2013 the official AZN/USD exchange
rates set by the Central Bank of Azerbaijan ("CBAR") were 0.7845 and comparative 31 December 2012
were as 0. 7856.




                                                    12
SECOND RURAL INVESTMENT PROJECT
NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2013
(Amounts are expressed in US dollars unless otherwise indicated)

NOTE 3. DESIGNATED ACCOUNT

The Designated Account is a disbursement account of the Project maintained in US dollars with the
International Bank of Azerbaijan in order to effect payment of eligible expenditure within defined limits, which
do not require individual authorisation from IBRD, in accorda:nce with the Agreement.

NOTE 4. CASH IN BANK

                                                                                 2013                   2012
    IBRD Loan 8189 AZ Designated, US$                                            563,102                437,520
    GoA Project Account, US$                                                     422,482                234.,612

                                                                                 985,584                 672,132

NOTE 5. EXPENSES BY SOURCES OF FINANCING                                                                          ., ,
Year ended 31 December 2013


                                                                                               •••               ..
 IBRD Loan 8189
 -AZ                 8,208,211      26,387      1,117,447         1,239,145      246,240      367,717      11,205,147
 Government
 Counter art         5,769,418                    23,889              8,183                                    5,801,490
 Communites'
 Contribution        1,202,745                                                                                 1,202,745

 Total             15,180,374       26,387      1,141,336         1,247,328      246,240      367,717      18,269,382


Year ended 31 December 2012


         ..                                                                                                      ..
 IBRD Loan
 8189-AZ           281,880       11 '135     609,735        450,177    137,300      102,897     75,000         1,668,124
 Government
 Counter art        28,352                                   11,042                  18,522                      57,916
 Communites'
 Contribution       26,191                                                                                       26,191

 Total             336,423       11 '135     609,735        461,219    137,300      121,419     75,000         1,752,231




                                                       13
SECOND RURAL INVESTMENT PROJECT
NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2013
(Amounts are expressed in US dollars unless otherwise indicated)

NOTE 6. METHODS OF WITHDRAWAL

The methods of withdrawal used from the inception of the IBRD Loan up to 31 December 2013 were as
follows:

        (a)     Designated account

Available amounts were drawn from time to time within limits determined by the loan agreements for the
direct payment of eligible expenditure for sub-projects from the designated account.

        (b)     Project account

The Project maintains a separate account where the Government counterpart funds are accum,ulated. The
funds are further disbursed to contractors based on the shares of expenditure to be incurred by each
contractor.

        (c)     Statement of expenditure (SOE)

Under the SOE method, the Project submits to the World Bank an application for reimbursement of
payments already made using an Application for Withdrawal (Form 2380 E) with SOE forms, bank
reconciliation forms anQ. the bank account statement.


NOTE 7. OPERATING ENVIRONMENT

The Project's principal activities are within the Azerbaijan Republic. Laws and regulations affecting entities
operating in Azerbaijan are subject to rapid changes and the Project's assets and operations cou ld be at risk
due to negative changes in the political and economic environment.




                                                     14