Local Government Units Development and Lending Fund Multi-Donor Trust Fund )TF0A6154) Contribution into Municipal Development Program – Phase III Financial Statements For the Year Ended December 31, 2018 Together with Independent Auditors’ Report Local Government Units Development and Lending Fund The Multi-Donor Trust Fund (MDTF) Contribution into Municipal Development Program – Phase III Statement of Revenues, Expenses and Changes in Net Assets For the Year Ended December 31, 2018 (Currency: USD) Note 2018 2017 Changes in unrestricted net assets: Revenues Released from restricted net assets 6 3,183,300 - Interest revenue 7,432 - Total unrestricted revenues 3,190,732 - Expenses Project’s expenses 7 3,183,300 - Currency variance loss 61,390 Total expenses 3,244,690 61,390 3,183,300 - Net change in unrestricted net assets (53,958) - Changes in restricted net assets: Grants and donations - 20,000,000 Net assets released from restriction 6 (3,183,300) - Net change in restricted net assets (3,183,300) 20,000,000 Change in net assets (3,237,258) 20,000,000 Net assets, beginning of year 20,000,000 - Net assets, end of year 16,762,742 20,000,000 The accompanying notes form an integral part of these financial statements 5 Local Government Units Development and Lending Fund The Multi-Donor Trust Fund (MDTF) Contribution into Municipal Development Program – Phase III Cash Flows Statement For the Year Ended December 31, 2018 (Currency: USD) 2018 2017 Cash Flow from Operating Activities Change in net assets (3,237,258) 20,000,000 Adjustments to reconcile change in net assets to net cash flow from operating activities: Decrease (increase) in pledges receivable 2,288,345 (20,000,000) (Increase) in advances to LGUs (627,933) - (Increase) in advances to contractors (127,071) - Increase in due to contractors 1,797,980 - Increase in due to LGUDLF – management fees 213,853 - Increase in due to others 214,822 - Net cash flow from operating activities 522,738 - Net increase in cash at bank 522,738 - Cash at bank, beginning of year - - Cash at bank, end of year 522,738 - The accompanying notes form an integral part of these financial statements 6 Local Government Units Development and Lending Fund The Multi-Donor Trust Fund (MDTF) Contribution into Municipal Development Program – Phase III Designated Bank Account Statement For the Year Ended December 31, 2018 IBAN number PS08TNBC000000000001003958457 Account number 1003958457 Depository bank The National Bank Address Ramallah Currency EUR 2018 Equivalent in EUR USD Balance, beginning of year - - Add: Receipts during the year 1,947,859 2,288,345 Interest income 6,434 7,432 1,954,293 2,295,777 Deduct: Payments during the year* 1,497,488 1,711,985 Currency variance loss - 61,390 1,497,488 1,773,375 Balance, end of year 456,805 522,402 * Reconciliation of expenses presented in the designated bank account statement with related expenses presented in the statement of revenues, expenses and changes in net assets: 2018 Equivalent in EUR USD Expenses per the statement of revenues, expenses and changes in net assets 2,784,053 3,183,300 Change on advance to LGUs 549,084 627,933 Change on advance to contractors 111,116 127,071 Change on due to contractors (1,572,211) (1,797,980) Change on due to LGUDLF – management fees (187,000) (213,853) Change on due to others (187,848) (214,822) Outstanding payments (75) (86) Payment return (returned by the bank subsequently) 288 329 Bank charges (refunded by the bank subsequently) 81 93 Expenses per designated bank account statement 1,497,488 1,711,985 The accompanying notes form an integral part of these financial statements 7 Local Government Units Development and Lending Fund The Multi-Donor Trust Fund (MDTF) Contribution into Municipal Development Program – Phase III Notes to the Financial Statements For the Year Ended December 31, 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 Contribution into MDP III On November 27, 2017 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 (PNA), to contribute into the finance of Phase III of the Municipal Development Program (MDP III), in the amount of USD 20,000,000. 8 The following table specifies the components of eligible expenditure that can be financed out of the proceeds of the grant and the allocations of the amounts of the grant to each component: Budget USD Component 1: Municipal Performance and Service Delivery 16,642,553 Component 2: Capacity Development 531,915 Component 4: Project Implementation Support and Management Cost 2,825,532 20,000,000 The accompanying financial statements pertain to MDTF Contribution into MDP III. In addition, MDP III is supported by the PNA along with the International Development Association (IDA), the Agence Française de Development (AFD), Kreditanstalt für Wiederaufbau (KfW), the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), the Netherlands (through VNG International), and the Switzerland (through the Swiss Federal Department of Foreign Affairs (FDFA)). Further, it has been agreed with AFD that the savings from AFD contribution in MDP II in the amount of EUR 875,000 be invested in Component 1 of the MDP III. The PNA contribution was committed to be 10% of the total fund plus the residual fund from PNA contribution in MDP II. MDP III has four components as follows: Component 1 - Municipal Performance and Service Delivery Previous MDP phases financed municipal infrastructure and service delivery through the provision of basic block and performance-based grants, and provided demand-driven capacity development support for municipalities. This approach was very innovative at design and has shown to be highly effective. The MDP III will continue this overall approach while focusing more on improving financial sustainability and accountability in municipal service provision. Component 2 - Capacity Development This component will continue to strengthen municipal capacity in project’s three performance areas: (i) financial sustainability, ii) institutional performance and iii) transparency, accountability and participation. In addition, specific attention will be paid to higher order needs of municipalities that will enable them to improve their financial sustainability and credit worthiness, strengthening other core municipal functions as well as strengthening of their social accountability to their citizens and stakeholders. Municipal capacity development activities will continue to be identified by municipalities and LGUDLF to enable municipalities to achieve results and improve their performance. The performance measuring system will be applied to identify relevant capacity building activities to the municipality, which will be delivered to improve capacity and sustain results achieved. Component 3 - Municipal Partnership Projects This component will provide technical assistance and project financing to municipalities to engage more effectively with the private sector, and work across administrative boundaries to develop joint and/or innovative investments for municipal service delivery and local economic development. 9 • Sub -Component A: Private Sector Partnership Support. In order to better leverage private sector engagement, this component will support municipalities to identify, develop, and structure opportunities for private sector participation in municipal service delivery and local economic development on a demand-driven basis. • Sub-Component B: This sub-component will finance top-up payments complementary to the grant allocations under Component 1 to incentivize municipal joint and/or innovative investments based on municipal demands to leverage economies of scale for municipal investments and facilitate financially sustainable municipal investments. Component 4: Project Implementation Support and Management This component will finance goods and consultant services for monitoring and evaluation, outreach and communication and local technical consultants for the engineering supervision of Component 1 and the LGUDLF management fee. 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 and restricted. Unrestricted net assets are those whose use by LGUDLF is not subject to donor-imposed stipulations. Restricted net assets are those whose use by LGUDLF has been limited by donors’ specific time period or purpose. b. 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 donor-imposed restriction on use, are recorded as restricted net assets at the date promises to give are made, and recognized as revenues when the related costs are incurred. Unconditional promises with 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. d. Revenue Recognition Donations and contributions are recorded as pledges receivable and 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 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. 10 f. Expenses Expenses are recorded by LGUDLF when incurred in accordance with the accrual basis of accounting, regardless of the date of actual payment. g. Foreign Currencies LGUDLF’s basic functional currency is the U.S. Dollar (USD). Transactions which are expressed or denominated in other currencies were translated to USD using exchange rates in effect at the time of each transaction. Assets and liabilities which are denominated in other currencies are translated to USD using exchange rates prevailing at the date of the statement of assets, liabilities and net assets. Gains and losses arising from the translation are reflected in the statement of revenues, expenses and changes in net assets. Foreign currency exchange rates against USD at December 31, 2018 and 2017 were as follows: USD 2018 2017 One EUR 1.144 1.200 4. Cash at Bank The Project’s designated bank account for MDTF Contribution showed the following balances as of December 31, 2018 and 2017: 2018 2017 EUR (a) 457,099 - Equivalent in USD (a) 522,738 - (a) Reconciliation of bank balance per designated bank account statement and the statement of assets, liabilities and net assets follows: Equivalent EUR in USD Cash at bank as at December 31, 2018 (as per designated bank account statement) 456,805 522,402 Add: Bank charges (refunded by the bank subsequently) 81 93 Payment return (returned by the bank subsequently) 288 329 Less: Outstanding payment (75) (86) Cash at bank as at December 31, 2018 (as per statement of assets, liabilities and net assets) 457,099 522,738 5. Pledges Receivable Pledges receivable as of December 31, 2018 and movement thereon during the year follow: USD Balance, Addition Amount Beginning of During the Received During Currency Balance, Year Year the Year Variance End of Year Pledges receivable 20,000,000 - (2,288,345) - 17,711,655 11 6. Restricted Net Assets Restricted net assets as of December 31, 2018 and movement thereon during the year follow: USD Balance, Additions Net Assets Beginning of (Grants and Released from Currency Balance, Year Donations) Restriction Variance End of Year Restricted net assets 20,000,000 - (3,183,300) - 16,816,700 7. Project’s Expenses Project’s expenses related to MDTF Contribution and comparison with budget presented in USD follow: USD Actual Cumulative up to December Remaining Budget 2018 2017 31, 2018 Budget Component 1: Municipal Performance and Service Delivery 16,642,553 2,739,471 - 2,739,471 13,903,082 Component 2: Capacity Development 531,915 5,969 - 5,969 525,946 Component 4: Project Implementation Support and Management Cost 2,825,532 437,860 - 437,860 2,387,672 20,000,000 3,183,300 - 3,183,300 16,816,700 12