SECOND COMPETITIVENESS ENHANCEMENT PROJECT PROJECT FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 CONTENTS PAGE independent Auditor's Report Statement of Financial Position 1 Summary of Sources and Uses of Funds 2 Statement of Designated Accounts 3-4 Notes to the Project Financial Statements 5- 12 Deloitte & Touche SRL D e o i tel Bd. $tefan cel Mare, 65, Office 300 Chi$inAu, MD-2001 Moldova Tel: + 373 222 70310 Fax: + 373 222 70311 www.deloitte.md INDEPENDENT AUDITORS' REPORT To the Management of Second Competitiveness Enhancement Project (CEP II) Chisinau, Republic of Moldova Opinion 1. We have audited the accompanying special purpose financial statements of Second Competitiveness Enhancement Project (the "Project"), which comprise the balance sheet as at 31 December 2018, the summary of sources and uses of funds and the statements of designated accounts for the year ended 31 December 2018, and a summary of significant accounting policies and other explanatory notes. 2. In our opinion, the special purpose financial statements of the Project as at 31 December 2018 and for the year then ended are prepared, in all material respects, In accordance with the requirements of cash accounting and the financial reporting provisions of the financing agreements referred to in the paragraph 6. Basis for Opinion 3. We conducted our audit in accordance with the International Standards on Auditing (ISAs). Our responsibilities under this law and regulation 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 in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Emphasis of Matter - Basis of accounting, Restriction on Use 4. We draw attention to Note 2 to the special purpose financial statements, which describes that these financial statements are prepared on a basis of cash accounting according to which income and expenditures are recognized when cash is actually received or paid out rather than incurred. Our opinion is not modified in respect to this matter. 5. These special purpose financial statements are prepared to assist the Second Competitiveness Enhancement Project to comply with the financial reporting provisions of the financing agreements referred to in paragraph 6 and may not be suitable for another purpose. Our report is intended solely for the Project and the World Bank, and should not be used by any other party not familiar with the financial reporting provisions of the financing agreements referred to in paragraph 6. Our opinion is not modified in respect to this matter. Management's Responsibility for the Financial Statements 6. Management is responsible for the preparation of these special purpose financial statements in accordance with the financial reporting provisions of the financing agreement 5509-MD signed between the Republic of Moldova and International Development Association on 15 July 2014 and loan agreement 8400-MD signed between the Republic of Moldova and International Bank for Reconstruction and Development on 15 July 2014 and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Deloitte refers to one or more of Deloitte Touche Tohmatsu Unilted, a UK private company limited by guarantee, and its network of member firms, each of which Is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu United and its member firms. Deloitte 7. In preparing the special purpose financial statements, management Is responsible for assessing the Project's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Project or to cease operations, or has no realistic alternative but to do so. 8. Those charged with governance are responsible for overseeing the Project's financial reporting process. Auditor's Responsibility for the Audit of the Financial Statements 9. Our objectives are to obtain reasonable assurance about whether the special purpose financial statements as a whole are free from material misstatement, whether due to fraud or error, and to Issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs 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 influence the economic decisions of users taken on the basis of these financial statements. 10. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: * Identify and assess the risks of material misstatement of the special purpose financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain 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. * Obtain 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 the Project's internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. * Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Project's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Project to cease to continue as a going concern. 11. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Deloitte & Touche S.R-L. Chisinau, Moldova 31 May 2019 SECOND COMPETITIVENESS ENHANCEMENT PROJECT BALANCE SHEET AS AT 31 DECEMBER 2018 (all amounts are expressed in USD, unless otherwise mentioned) December 31, December 31, Notes 2018 2017 ASSETS Cash and cash equivalents Designated account IBRD 563,866 700000 Designated account IDA 228,008 375,177 Total cash and cash equivalents 791,874 1,075,177 Undisbursed balance Undisbursed balance IBRD 8,814,807 13,830,240 Undisbursed balance IDA 6,251,800 8,445,694 Total undisbursed balance 15,066,607 22,275,934 Cumulative project expenses Spent IBRD 4,5,6 20,621,327 15,469,760 Spent IDA 4, 5, 6 7,065,225 4,882,526 Total cumulative project expenses 27,686,552 20,352,286 Exchange rate differences 110,664 TOTAL ASSETS 43,545,033 43,814,061 FUNDS AND LIABILITIES Funding Loan agreement IBRD 30,000,000 30,000,000 Financing agreement IDA 13,545,033 13,814,061 Total funds 43,545,033 43,814,061 TOTAL FUNDS AND LIABILITIES 43,545,033 43,814,061 The financial stzements and accompanying notes on pages 5 to 12 were signed and approved on be roject's management on 31 May 2019 by: Aureliu Casin Marina rie Project Execttive Director Accou ant 1 SECOND COMPETITIVENESS ENHANCEMENT PROJECT SUMMARY OF SOURCES AND USES OF FUNDS FOR THE YEAR ENDED 31 DECEMBER 2018 (all amounts are expressed in USD, unless otherwise mentioned) For the year ended Cumulative Notes December 31, 2018 to date Opening cash balances Designated account 8400-MD 700,000 Designated account 5509-MD 375,177 Total opening cash balances 1,075,177 Add: Sources of funds IBRD 8400-MD 3 5,015,433 21,185,193 IDA 5509-MD 3 2,035,529 7,293,233 Total Sources of Funds 7,050,962 28,478,426 Less: Uses of Funds IBRD 8400-MD (1) Sub-loans under Part 3(a) of the Project 4,5,6 5,145,617 20,590,511 (2) Goods, non-consulting services, consultants' services (including audits), training and incremental operating costs under Parts 3(b) and 3(c) of the Project; and audits under 4, 5, 6 Part 3(a) of the Project 5,950 30,816 IDA 5509-MD (1) Goods, non-consulting services, consultants' services (including audits), training and incremental operating costs under Parts 1(a), 1(b), 2(a) and 2(b)(i) of the project and audits under Parts 1(c). 2(b)(ii) and 4,5 6 2(c) of the project 1,247,141 4,731,743 (2) Matching grants under Part 2(b)(ii) of the project 355,066 736,297 (3) Payments for EEPs under Parts 1(c) and 2(c) of the project 580,491 1,597,184 Total uses of funds 4, 5, 6 7,334,265 27,686,552 Closing cash balances Designated account 8400-MD 563,866 563,866 Designated account 5509-MD 228,008 228,008 Total closing cash balances 791,874 791,874 The financial stat ments and accompanying notes on pages 5 to 12 were signed and approved on_ beh If of the Project's management on 31 May 2019 by: Aureliu Casija Marina D e Project ExecUtive Director Account nt 2 SECOND COMPETITIVENESS ENHANCEMENT PROJECT STATEMENT OF DESIGNATED ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2018 (all amounts are expressed in USD, unless otherwise mentioned) For the period ended 31 December 2018 Account no. 3261884032 Depository Bank Ministry of Finance - State Treasury SWIFT code TREZMD2X International Bank for Reconstruction and Development For the year ended Notes 31 December 2018 Opening balance, 01 January 2018 700,000 Add: Sources of funds 3 5,015,433 Deduct: Uses of funds 4,5,6 5,151,567 Closing balance, 31 December 2018 563,866 The financial statep ents and accompanying notes on pages 5 to 12 were signed and approved ef of the Project's management on 31 May 2019 by: Aureliu Casia`i Manna, ne Project Execbtive Director Accou ant 3 SECOND COMPETITIVENESS ENHANCEMENT PROJECT STATEMENT OF DESIGNATED ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2018 (all amounts are expressed in USD, unless otherwise mentioned) For the period ended 31 December 2018 Account no. 3261184033 Depository Bank Ministry of Finance - State Treasury SWIFT code TREZMD2X International Development Association For the year ended Notes 31 December 2018 Opening balance, 01 January 2018 375,177 Add: Sources of funds 3 1,455,039 Deduct: Uses of funds 4,5,6 1,602,208 Closing balance, 31 December 2018 228,008 The financial stat ents and accompanying notes on pages 5 to 12 were signed and approve dIf of the Project's management on 31 May 2019 by: Aureliu Cas n ari arie Project Executive Director Acc ntant 4 SECOND COMPETITIVENESS ENHANCEMENT PROJECT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (all amounts are expressed in USD, unless otherwise mentioned) 1. GENERAL INFORMATION Project description The Second Competitiveness Enhancement Project is regulated by the Loan Agreement 8400-MD between International Bank for Reconstruction and Development and Republic of Moldova in amount of USD 30,000,000 signed on July 15, 2014 and by the Financing Agreement 5509-MD between International Development Association and Republic of Moldova in amount of SDR 9,700,000 signed on July 15, 2014. The objective of the Project is to enhance the export competitiveness of the moldovan enterprises through increasing links with sales markets, reducing the regulatory burden on the business environment and improving the access to medium- and long-term funding. The Project consists of the following parts: Part 1: Regulatory Reform Provision of support for: (a) Improving the timely delivery of the Recipient's business regulatory reform strategies and the quality of the business enabling environment; and (b) Implementing priority policy reforms to improve export competitiveness, investment attraction and access to finance; and (c) Provision of result based financing (RBF) under the Eligible Expenditure Program (EEP) in support of the business regulatory reform. Part 2: SME Development Provision of support for: (a) Strengthening the institutional capacity of ODIMM and MIEPO to facilitate business sophistication and integration into global supply chains for SMEs and exporters; and (b) Establishing a Matching Grant Facility (MGF) to assist Matching Grant Beneficiaries in the implementation of business improvement plans focused on export competitiveness; and (c) Provision of result based financing under the Eligible Expenditure Program (EEP) to support the institutional strengthening of ODIMM and MIEPO. Part 3: Access to Finance Provision of support for: (a) Provision of sub-loans by eligible PFIs to support investment and working capital financing needs of Beneficiary Enterprises; and (b) Providing support to ODIMM to revise and implement its credit guarantee scheme; and (c) Provision of technical assistance to MEl, other relevant Recipient's public authorities and financial institutions in the Recipient's territory on developing value chain financing models. SECOND COMPETITIVENESS ENHANCEMENT PROJECT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (all amounts are expressed in USD, unless otherwise mentioned) Results Based Financing (RBF) The project includes an innovative US$3 million performance - based lending (PBL) funding element, in the reform of results-based financing. There are four Disbursement Linked Indicators (DLls) related to activities from "Regulatory Reform" and "SME Development" components. These indicators are evaluated by the World Bank in three steps, throughout the project implementation period, i.e. April 2015, December 2017 and December 2019. Each DLI payment values US$ 250,000, thus the total annual amount of DLIs represents US$ 1 million. RBF portion of the loan will be disbursed to the treasury account of the Ministry of Finance, against priority Ministry of Economy and Infrastructure budget expenditures (EEPs) conditioned upon achievement of Disbursement-Linked Indicators (DLIs) for the respective time period. EEPs have been identified as staff compensation costs for the institution whose mandate is core to achieving the project's objectives and results: the Ministry of Economy and Infrastructure. The project supports achievement of MEI's reform objectives and the mandate that it has been given by the government: to advance regulatory reform, SME development, exports, access to finance, and ensuring a sound enabling environment for business operations. Project management The Competitiveness Enhancement II project is managed by the Project Implementation Unit, a public institution subordinated to the Ministry of Economy and Infrastructure. The Unit operates in accordance with the legislation of the Republic of Moldova, loan / development credit and / or grant agreements, World Bank directives and standards, and the Statute approved by Government Decision no.895 of 25.08.2005. Executive Director - Aureliu Casian 180, Stefan cel Mare si Sfant bd., off. 815 Chisinau, Republic of Moldova SECOND COMPETITIVENESS ENHANCEMENT PROJECT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (all amounts are expressed in USD, unless otherwise mentioned) 2. SIGNIFICANT ACCOUNTING POLICIES Basis of accounting The Project Financial Statements have been prepared in accordance with generally accepted accounting principle and practices and relevant World Bank guidelines. The cash basis of accounting was used in the preparation of these Project Financial Statements since the recording of cash receipts and payments is the primary interest. Under the cash basis, system income (or expenditure) is recognized when cash is received (or paid) irrespective of when goods or services are received. The amounts are expressed in USD and financial statements are prepared for the year ended 31 December 2018. Designated account The designated accounts opened by the Treasury at the National Bank of Moldova are the accounts through which the replenishments are drawn. All payments for eligible expenses are made from these designated accounts and if the payment is in local currency it is made through transitory account. For this Project there are two designated accounts opened separately for IDA 5509-MD and IBRD 8400-MD resources. Transitory account The transitory account is held at State Treasury for the converted amount in MDL, since the payments within the country can be done only in the national currency (MDL). Exchange rates The Exchange rate used to convert the USD amounts in MDL is the official exchange rate of National Bank of Moldova on the date of payment. Sources of funds The sources of funds are the amounts transferred by the World Bank from the loan account, to the Designated Accounts of the Project. Uses of funds The uses of funds are the amounts spent for covering eligible expenditures for the needs of the Project. Consultants' services Consultants' services consist of short and long-term assignments to be contracted to firms and/or individuals (national and/or international) depending on the nature and duration of the assignments. Selection procedures will be generally through competition among qualified short listed consultants. Goods Goods required under the project are of nature of information technology (IT) systems and office equipment. 7 SECOND COMPETITIVENESS ENHANCEMENT PROJECT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (all amounts are expressed in USD, unless otherwise mentioned) Foreign expenditures Foreign expenditures means expenditures in the currency of any country other than that of the Borrower for goods or services supplied from the territory of any country other than that of the Borrower. Local expenditures Local expenditure means any expenditure in the national currency of the Borrower or for goods or services supplied from the territory of the Borrower. Operating Costs Operating costs means the expenditures incurred by the PIU on account of Project, including minor office equipment, furniture and supplies, utilities, communications and internet fees, copying, reproduction and publication costs, travel and per diem costs of PlU and governmental staff directly associated with the implementation of the Project activities, and such other expenditures as may be agreed upon by the Bank. Matching Grants Co-financing grants are provided for consultancy services and minor equipment in business development for beneficiaries to strengthen their export capacity and competitiveness. Training Training means training activities (other than consultants' services) carried out under the Project, as approved by the Association on the basis of the annual training and study tour plans acceptable to the Association. Foreign currency Transactions denominated in currencies other than US Dollar are translated at the National Bank of Moldova established rates ruling at the date when they occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at last day of the reporting period. Foreign currency non-monetary assets and liabilities are translated at historical rates. SECOND COMPETITIVENESS ENHANCEMENT PROJECT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (all amounts are expressed in USD, unless otherwise mentioned) 3. WITHDRAWAL SCHEDULE WID Number (1) Goods, works, non- consulting services, consultants' services, (2) Results-based training and operating financing (RBF) Total costs for the Project 8400-MD Apl 18 868,608 - 868,608 Apl 19 794,302 - 794,302 ApI. 20 1,339,798 1,339,798 Apl. 21 1,028,509 - 1,028,509 Apl. 22 984,216 - 984,216 Total 5,015,433 - 5,015,433 5509-MD Apl. 16 382,932 - 382,932 Apl. 17 280,639 - 280,639 Apl. 18 319,669 - 319,669 Apl. 19 208,373 208,373 Apl. 20 263,425 - 263,425 Apl. MF 5 - 234,889 234,889 Apl. MF 6 232,205 232,205 Apl MF 7 - 113,397 113,397 Total 1,455,038 580,491 2,035,529 Grand total 6,470,471 580,491 7,050,962 g SECOND COMPETITIVENESS ENHANCEMENT PROJECT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (all amounts are expressed in USD, unless otherwise mentioned) 4. SOE SCHEDULE Goods, non- Goods, non- consulting consulting services, services, consultants' services consultants' (including audits), services (including training and Sub-loans audits), training incremental WID under Part and incremental operating costs Total Number 3(a) of the operating costs under Parts 1(a), Project under Parts 3(b) 1(b), 2(a) and 2(b)(i) and 3(c) of the of the project and Project; and audits audits under Parts under Part 3(a) of 1(c), 2(b)(ii) and 2(c) the Project of the project 8400-MD SOE 18 568,608 350 - 568,958 SOE 19 792,832 1,120 - 793,952 SOE 20 839,027 770 - 839,797 SOE 21 1,027,529 980 - 1,028,509 SOE 22 983,586 630 - 984,216 SOE 23 934,035 2,100 - 936,135 Total 5,145,617 5,950 - 5,151,567 5509-MD SOE 16 - - 258,109 258.109 (partially) SOE 17 - 280,639 280,639 SOE 18 - 319,669 319,669 SOE 19 - 208,373 208,373 SOE 20 - 263,425 263,425 SOE 21 271,993 271,993 Total - 1,602,208 1,602,208 Grand total 5,145,617 5,950 1,602,208 6,753,775 10- SECOND COMPETITIVENESS ENHANCEMENT PROJECT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (all amounts are expressed in USD, unless otherwise mentioned) 5. EXPENDITURES BY SUBCATEGORIES For the year ended Cumulative 31 December 2018 to date 5509-MD (1) Goods, non-consulting services, consultants' services (including audits), training and incremental operating costs under Parts 1(a), 1(b), 2(a) and 2(b)(i) of the project and audits under Parts 1(c). 1,247,141 4,731,744 2(b)(ii) and 2(c) of the project (2) Matching grants under Pad 2(b)(ii) of the 355,066 736,297 project (3) Payments for EEPs under Parts 1(c) and 580,491 1,597,184 2(c) of the project Total 2,182,698 7,065,225 8400-MD (1) Sub-loans under Part 3(a) of the Project 5,145,617 20,590,511 (2) Goods, non-consulting services, consultants' services (including audits), training and incremental operating costs under Parts 3(b) and 3(c) of the Project; and audits under Part 3(a) of the Project 5,950 30,816 Total 5,151,567 20,621,327 Grand total 7,334,265 27,686,552 SECOND COMPETITIVENESS ENHANCEMENT PROJECT NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 (all amounts are expressed in USD, unless otherwise mentioned) 6. EXPENDITURE BY PROJECT ACTIVITY For the year ended Cumulative 31 December 2018 to date 5509-MD Part I Regulatory Reform Capacity Building 874,857 2,884,103 la. Reform Governance 252,315 1,159,284 - lb. Reform Implementation Support 509,145 1,045,436 - 1c. Results-Based Financing (RBF) 113,397 679,383 Part II SME Development 1,199,087 3,706,961 2a. Institutional Strengthening 212,011 1,452,723 - 2b(i). MGF Management Cost 164,916 600,139 - 2b(ii). Matching Grant Facility (MGF) 355,066 736,297 - 2c. Results-Based Financing (RBF) 467,094 917,802 Part IV Project Management 108,754 474,161 Total 5509-MD 2,182,698 7,065,225 8400-MD Part III Access to Finance - 3a. Line of Credit Sub-Loan 5.145,617 20,590,511 - 3c. TA to MoEl and banks on developing 5,950 30,816 value chain financing model Total 8400-MD 5,151,567 20,621,327 GRAND TOTAL 7,334,265 27,686,552 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/md/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte has in the region of 200,000 professionals, all committed to becoming the standard of excellence. @ 2019 Deloitte & Touche S.R.L.