PUBLIC ENTERPRISE FOR STATE ROADS Independent Auditors report, Project Financial Statements for the period ending 31 December 2018 and Management Letter for ROAD UPGRADING AND DEVELOPMENT PROJECT (LOAN NUMBER 8525 MK) Skopje, June 2019 PUBLIC ENTERPRISE FOR STATE ROADS ROAD UPGRADING AND DEVELOPMENT PROJECT CONTENTS Page Independent Auditors' Report 1-2 Project Financial Statements (PFS) Statement of Sources and Uses of Funds 3 Statement of Uses of Funds by Project Activity 4 Statement of Expenditure (SOE) Withdrawals 5 Statement of Designated Account 6 Notes to the Project Financial Statements 7-10 Management Letter MOORE STEPHENS SKOPJE Sv.Kiril i Metodij 20, 1000 Skopje, Republic of Macedonia Tel: +389 (2) 32 14 706 Fax: +389 (2) 32 14 707 www.mooretsephens.mk www.moorestephens.com INDEPENDENT AUDITOR'S REPORT TO THE PROJECT COORDINATION UNIT (IBRD LOAN 8525 MK) OF THE PUBLIC ENTERPRISE FOR STATE ROADS We have audited the accompanying Project Financial Statements of the Road Upgrading and Development Project ("the Project"), financed under IBRD Loan 8525 MK, for the year ended 31 December 2018 and prepared by the Public Enterprise for State Roads ("furthermore the Public Enterprise for State Roads"). The Project Financial Statements which comprise Statement of Sources and Uses of Funds, Statement of Uses of Funds by Project Acftivity, Statement of Expenditure Withdrawals and Statement of Designated Account are prepared in accordance with the International Bank for Reconstruction and Development (IBRD) Guidelines. Management's Responsibility for the Project Financial Statements The Public Enterprise for State Roads management is responsible for the preparation and fair presentation of these Project Financial Statements. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the International Standards on Auditing accepted in the Republic of Macedonia. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements 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 entity's internal control. An audit also includes evaluating the appropriateness of accounting polices used and the reasonableness of accounting estimates made by the management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. An independent member finn ofMoore Stephens Intemational Limited - members in principal cities throughout the world MOORE STEPHENS SKOP;E INDEPENDENT AUDITOR'S REPORT (Continued) TO THE PROJECT COORDINATION UNIT (IBRD LOAN 8525 MK) OF THE PUBLIC ENTERPRISE FOR STATE ROADS Opinion In our opinion, the project financial statements for the year ended 31 December 2018, prepared by the Public Enterprise for State Roads, give true and fair view of sources and uses of funds of the Project, in accordance with the IBRD Guidelines, which are financed under IBRD Loan 8525 MK. In our opinion, the project financial statements as at 31 December 2018, prepared by the Public Enterprise for State Roads, give true and fair view of the financial position of the Designated Account, in accordance with the IBRD Guidelines, which are financed under IBRD Loan 8525 MK. In addition, with respect to SOEs, adequate supporting documentation has been maintained to support claims to the World Bank for reimbursements of expenditures incurred, and which expenditures are eligible for financing under IBRD Loan 8525 MK. Skopje, 28 June 2019 Certified Auditor Manager and Crtified Auditor G Hristov Ant iVel7ov 3 2 PUBLIC ENTERPRISE FOR STATE ROADS ROAD UPGRADING AND DEVELOPMENT PROJECT STATEMENT OF SOURCES AND USES OF FUNDS IBRD LOAN 8525 MK During the Years Ended 2018 and 2017 and Accumulated up to 31 December 2018 (Expressed in EUR) Accumulated During the Year Ended up Note 31 December to 31 December 2018 2017 2018 SOURCES OF FUNDS IBRD Loan 8525 MK Initial advance to Designated Account (DA) 4,500,000.00 - 4,500,000.00 Replenishments on the DA 5 836,362.63 - 5,836,362.63 Reimbursements Direct Payments 2,935,826.61 - 2 935,826.61 IBRD front-end fee - - 207,500.00 Return of funds to IBRD Total IBRD Loan 8525 MK 13,272,189.24 - 13,479,689.24 TOTAL FUNDS RECEIVED 13,272,189.24 - 13,479,689.24 USES OF FUNDS Financed from IBRD Loan 8525 MK Construction of Corridor 8 9,936,954.44 - 9.936,954.44 Establishment of Bridge Management System and institutional support 6,280.44 - 6,280.44 IBRD front-end fee 70.00 - 207,570.00 Total Financed from IBRD Loan 8525 MK 9,943,304.88 - 10,150,804.88 TOTAL PROJECT EXPENDITURES 9,943,304.88 - 10,150,804.88 Net increase (decrease) in cash flow 3,328,884.36 - 3,328,884.36 Cash at Beginning of the Period - - Cash at End of the Period 3,328,884.36 - 3,328,884.36 Public enterpri Wt or Notes comprise an integral part to the Project Financial Statements Auditors' report is on pages 1 and 2. 3 PUBLIC ENTERPRISE FOR STATE ROADS ROAD UPGRADING AND DEVELOPMENT PROJECT STATEMENT OF USES OF FUNDS BY PROJECT ACTIVITY IBRD LOAN 8525 MK During the Years Ended 2018 and 2017 and Accumulated up to 31 December 2018 (Expressed in EUR) Accumulated up During the Year Ended to 31 31 December December 2018 2017 2018 A. Financed from IBRD Loan 8525 MK 1. Construction of Corridor 8 Construction of Express Road Lot 1: Construction of section Dlabocica-Catal 4,455,664.83 - 4,455,664.83 Construction of Express Road A2, Lot 2: Section Kriva Palanka- Dlabocica 5,481,289.61 - 5,481,289.61 Total 9,936,954.44 - 9,936,954.44 II. Establishment of Bridge Management System and institutional support Consultative services 6,280.44 - 6,280.44 Total 6,280.44 - 6,280.44 Ill. IBRD fee IBRD front-end fee 70.00 - 207,570.00 Total 70.00 - 207,570.00 Total financed from IBRD Loan 8525 MK 9,943,304.89 - 10,150,804.89 Total Project Expenditures 9,943,304.89 - 10,150,804.89 Notes comprise an integral part to the Project Financial Statements. Auditors' report is on pages 1 and 2. 4 PUBLIC ENTERPRISE FOR STATE ROADS ROAD UPGRADING AND DEVELOPMENT PROJECT STATEMENT OF EXPENDITURE (SOE) WITHDRAWALS IBRD LOAN 8525MK Year Ended 31 December 2018 (Expressed in EUR) Year Ended 31 December 2018 Disbursement Categories Application # Goods and Consultant Initial Advance Note Works Services on DA Total Disbursed Difference 1 1 - - 4,500,000.00 4,500,000.00 4,499,930.00 70.00 1-direct payment 2,935,826.61 - - 2,935,826.61 2,935,826.61 - 2 4,493,649.56 6,280.44 - 4,499,930.00 4,499,930.00 3 1,336,432.63 - - 1,336,432.63 1,336,432.63 - Total: 8,765,908.80 6,280.44 4,500,000.00 13,272,189.24 13,272,119.24 70.00 1 The difference in amount of 70 EUR is bank fee on transfer of the funds from the initial advance. Notes comprise an integral part to the Project Financial Statements. Auditors' report is on pages 1 and 2. 5 PUBLIC ENTERPRISE FOR STATE ROADS ROAD UPGRADING AND DEVELOPMENT PROJECT STATEMENT OF DESIGNATED ACCOUNT IBRD LOAN 8525 MK During the Years Ended 2018 and 2017 and Accumulated up to 31 December 2018 (Expressed in EUR) For the year ended 31 December 2018 and 2017 Account number 700100000-6839673 Depository Bank Halk banka AD Skopje Address "Sv.Kiril i Metodij No.54" Credit Number 8525 MK Currency EUR 2018 2017 Cumulative Opening Balance as at 1 January - - Additions: Initial advance to Designated Account 4,499,930.00 - 4,499,930.00 World Bank Replenishments 8,772,189.24 - 8,772,189.24 Return of funds to IBRD - - - Total additions 13,272,119.24 - 13,272,119.24 Deductions: Construction of Corridor 8 (9,936,954.44) - (9,936,954.44) Establishment of Bridge Management System and institutional support (6,280.44) - (6,280.44) IBRD fee - - - Total deductions (9,943,234.88) - (9,943,234.88) Closing Balance as at 31 December 3,328,884.36 - 3,328,884.36 Notes comprise an integral part to the Project Financial Statements. Auditors' report is on pages 1 and 2. 6 PUBLIC ENTERPRISE FOR STATE ROADS ROAD UPGRADING AND DEVELOPMENT PROJECT NOTES TO THE FINANCIAL STATEMENTS 1. GENERAL INFORMATION On October 6 2015, the Public enterprise for State Roads of the Republic of Macedonia ("the Borrower") entered into the Loan Agreement with the International Bank For Reconstruction and Development ("IBRD") for the amount of EUR 83 million. According to the Section I. of Project Execution of the Loan Agreement, the Borrower is responsible for day-to-day Project implementation and for procurement, financial management, disbursement and monitoring and reporting for the entire Project. The Borrower may withdraw the proceeds of the Loan in accordance with the provisions of Article II of the General conditions of the Loan agreement and such additional instructions as the IBRD shall specify by notice to the Borrower to finance Eligible Expenditures as set forth in the table below. The table below sets forth the categories of Eligible Expenditures that may be financed out of the proceeds of the Loan, the allocation of the amounts of the Loan to each category and the percentage of expenditures to be financed for Eligible Expenditures in each Category: Amount of the Loan Percentage of Allocated Expenditures to be financed (Exclusive of Category taxes) (1) Goods, Works, Non-Consulting 82,792,500 100% Services Consultants' Services, Training and Operating Costs for the project (2) Front-end Fee 207,500 (3) Interest Rate Cap or Interest Rate Collar premium 0 Total Amount 83,000,000 The Borrower may withdraw the proceeds of the Loan in accordance with Section IV of Schedule 2 of the Loan Agreement. The Closing Date for withdrawals is December 31, 2020. The Borrower shall pay interest on the principal amount of the Loan withdrawn and outstanding from time to time, at a rate for each interest period equal to The Reference rate for the Loan Currency plus the Variable Spread. The Borrower shall pay front-end Fee equal to one quarter of one percent (0.25%) of the Loan amount. Interest and other charges shall be payable semiannually on May 15 and November 15 in each year. According to the amortization schedule of the Agreement, the Borrower shall repay the principal amount of the credit in semi-annually installments payable each May 15 and November 15, commencing November 15, 2023 and ending May 15, 2043. The installment share is 2.5%. 2018 Project Financial Statements 7 PUBLIC ENTERPRISE FOR STATE ROADS ROAD UPGRADING AND DEVELOPMENT PROJECT NOTES TO THE FINANCIAL STATEMENTS 2. OBJECTIVES AND NATURE OF THE PROJECT 2.1. Project Objectives The objectives of the Project are: (i) transport connectivity for road users along Corridor VIII between Skopje and Deve Bair; and (ii) the Borrower's asset management and planning function. The Project consists of the following parts: Part 1: Construction of Corridor VIII Part II: Establishment of Bridge Management System and Institutional Support The objectives of Part I are: * Construction of express road along the east section of Corridor VIII between Rankovce and Kriva Palanka. The objectives of Part II are: * Strengthening of the Borrower's institutional capacity to manage and maintain the Guarantor's bridge assets through, inter alia, the creation of bridge management system, including the development of a bridge maintenance and investment plan. * Support to the Borrower's capacity development and Project implementation through, inter alia: (a) Provision of technical assistance to strengthen the technical capacity of PMT; and (b) the carrying out of: (i) independent technical audits of the civil works carried out under Part I of the Project; (ii) a beneficiary satisfaction survey; and (iii) mid-term and impact evaluation surveys. 2.2. Project Management The overall responsibility for carrying out the Project is assigned to the Public enterprise for state roads. 2018 Project Financial Statements 8 PUBLIC ENTERPRISE FOR STATE ROADS ROAD UPGRADING AND DEVELOPMENT PROJECT NOTES TO THE FINANCIAL STATEMENTS 2. OBJECTIVES AND NATURE OF THE PROJECT (Continued) 2.3. Project Execution The Borrower shall operate and maintain at all time during Project implementation a Project Management Team ("PMT") with competent staff in adequate numbers, and with qualifications, experience, functions, responsibilities ( including responsibilities for the Project's overall management), funs, facilities, services and resources acceptable to the Bank. The Borrower shall operate and maintain the investments supported under Part I of the project, with due diligence and efficiency, and in conformity with appropriate administrative, technical, financial, economic, environmental and social standards and practices, and the applicable provisions of this Agreement. 3. BASIS FOR PREPARATION OF THE PROJECT FINANCIAL STATEMENTS 3.1. General The accompanying financial statements have been prepared for the purposes of reporting to the World Bank on the activities of the Project related to funding received for the completion of the Project's objectives in accordance with the respective Loan Agreement. These financial statements include all project-related expenditures incurred, which are financed by the IBRD Loan 8525 MK. a. Accounting Convention The Project Financial Statements have been prepared, in all material respects, in accordance with World Bank Guidelines. Such Guidelines generally comply with International Financial Reporting Standards with the exception that Project expenditures are accounted for on a cash basis. Certain accounts which are required to be maintained under Macedonian accounting regulations have been adjusted or reclassified and, in some cases, combined in order to comply with World Bank Guidelines. b. Comparative figures The Financial statements have been prepared for the year ended 31 December 2018 and accumulated up to 31 December 2018. Comparative figures are not presented as this is first year for reporting. 3.4. Reporting Currency The Project accounts are kept in local currency i.e. in Macedonian Denars ("MKD or "Denars") for the Government's part of financing of the Project. The Project accounts comprising the part financed by IBRD Loan are kept in local currency i.e. in Macedonian Denars and in Euros. The Project Financial Statements are prepared in EUR as this is the reporting currency of the Project. 2018 Project Financial Statements 9 PUBLIC ENTERPRISE FOR STATE ROADS ROAD UPGRADING AND DEVELOPMENT PROJECT NOTES TO THE FINANCIAL STATEMENTS 3. BASIS FOR PREPARATION OF THE PROJECT FINANCIAL STATEMENTS (Continued) 3.4. Reporting Currency (Continued) The Project Financial Statements are translated from Macedonian Denars into Euros as it follows: * The amounts shown in Euro (EUR) are calculated by the exchange rate of IBRD for the currency of payment, on the date of payment. * The amounts shown in Macedonian Denars (MKD) are calculated by the exchange rate of the Halk Bank AD Skopje for the currency of payment, on the date of payment. * The amounts shown in MKD as at 31 December 2018 are calculated by the exchange rate of the Halk Bank AD Skopje on the specified date. The exchange rates used for translation were as follows: 2018 2017 (MKD) (MKD) As at 31 December 1 EUR 61.40 61.40 2018 Project Financial Statements 10