integrated solid waste management project credit number...

INTEGRATED SOLID WASTEMANAGEMENT PROJECTCREDIT NUMBER 7549-AZAND LOAN NUMBER 8274-AZ

Special-Purpose Financial Statements andIndependent Auditors' ReportFor the Year Ended December 31, 2016

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INTEGRATED SOLID WASTE MANAGEMENT PROJECT

TABLE OF CONTENTS

Page

INDEPENDENT AUDITORS' REPORT 1-2

SPECIAL-PURPOSE FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 2016:

Special-purpose balance sheet 3

Statement of sunnary of sources and uses of funds 4-7

Statement of uses of funds by project components 8-10

Statement of designated account 11-12

Statement of letter of credit account 13

Statement of expenditure and summary sheet withdrawal schedule 14-15

Notes to the special-purpose financial statements 17-22

BAKER TILLY 19A-YEARSAZERBAI JAN OF EXCELLENCE

Audit, Tax and ConsultingDemirchi Tower, 16th floorKhojaly Avenue, 37AZ1025, BakuAzerbaijan

T:+ 994 (12) 404 7 666F:+ 994 (12) 404 7 667

[email protected]

INDEPENDENT AUDITORS' REPORT

To the Management of the Project Management Team of the Integrated Solid Waste Management Project:

Opinion

We have audited the Special-Purpose Financial Statements of the Integrated Solid Waste Management

Project (the "Project"), which comprise the Special-Purpose Balance Sheet as at December 31, 2016, and

the Statement of Summary of Sources and Uses of Funds, the Statement of Uses of Funds by Project

Components, the Statement of Designated Account, the Statement of Letter of Credit Account and the

Statement of Expenditure and Summary Sheet Withdrawal Schedule ("SOE and SSWS") for the year ended

December 31, 2016 and a sunnary of basis of accounting and other explanatory notes (hereafter collectively

referred to as the "Special-Purpose Financial Statements") financed under the International Bank for

Reconstruction and Development (the "IBRD") through credit number 7549-AZ and loan number 8274-AZ

(hereafter collectively referred to as the "Loan Agreements").

In our opinion, the accompanying Special-Purpose Financial Statements present fairly, in all material

respects, the financial position of the Project as at December 31, 2016 the cash receipts, and disbursements

on behalf of the Project and transactions passed through the Project's Designated Account and the Letter of

Credit Account for the year ended December 31, 2016 in accordance with IPSAS "Financial Reporting under

the Cash Basis of Accounting" and basis of accounting of the Loan Agreements as described in Note 2 of the

Special-Purpose Financial Statements.

In addition, with respect to the SOE and SSWS, all payments reported are eligible for financing under the

respective Loan Agreements and adequate documentation have been maintained to support the claims for

withdrawal.

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities

under those standards are further described in the Auditors' Responsibilities for the Audit of the Special-

Purpose 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 these requirements

and 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 ofAccounting and Restriction on Distribution and Use

We draw attention to Note 2 to the Special-Purpose Financial Statements, which describes the basis of

accounting. The Special-Purpose Financial Statements are prepared to assist the Project's Implementation

Unit in complying with the financial reporting provisions of the Loan Agreements referred to above. As a

result, the Special-Purpose Financial Statements may not be suitable for any other purpose. Our report is

intended solely for the Project Management Team, the Government of the Republic of Azerbaijan and the

IBRD and should not be distributed to or used by parties other than Project's Implementation Unit and the

IBRD. Our opinion is not modified in respect of this matter.

An independent member of Baker Tilly International

BAKERTILLYAZERBAlJAN

Responsibilities of Management for the Special-Purpose Financial Statements

Management is responsible for the preparation and fair presentation of the Special-Purpose Financial Statementsin accordance with IPSAS and relevant provisions of the Loan Agreements as described in Note 2 to the Special-Purpose Financial Statements, and for such internal control as management determines is necessary to enable thepreparation of Special-Purpose Financial Statements that are free form material misstatement, whether due tofraud or error.

Auditor's Responsibilities for the Audit of the Special-Purpose Financial Statements

Our objectives are to obtain reasonable assurance about whether the Special-Purpose Financial Statementsas a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' reportthat includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that anaudit 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 theseSpecial-Purpose Financial Statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professionalskepticism 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 obtainaudit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of notdetecting a material misstatement resulting from fraud is higher than for one resulting from error, asfraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override ofinternal control;

* Obtain an understanding of internal control relevant to the audit in order to design audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Project's internal control;

* Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimatesand related disclosures made by management;

* We communicate with those charged with governance regarding, among other matters, the plannedscope and timing of the audit and significant audit findings, including any significant deficiencies ininternal control that we identify during our audit.

May 30, 2017Baku, the Republic of Azerbaijan


SPECIAL-PURPOSE BALANCE SHEETAS AT DECEMBER 31, 2016(Amounts expressed in the United States Dollars unless otherwise indicated)

Notes December 31, December 31,2016 2015

ASSETS AND CUMULATIVE USES OF FUNDS

Cash at bank 3 357,365 2,431,485Cumulative uses of funds 4 93,025,727 82,091,461Due from Project Account 3,665 -Due from IBRD Designated Account 8274-AZ - 1,469Discrepancy 225 393

TOTAL ASSETS AND CUMULATIVE USES OF FUNDS 93,386,982 84,524,808

SOURCES OF FUNDS

Cumulative IBRD Funds 73,994,565 66,747,396Cumulative Government Funds 19,719,739 18,094,218Due to Project Account - 1,469Due to IBRD Designated Account 8274-AZ 3,665 -Accumulated exchange rate differences (330,987) (318,275)

TOTAL SOURCES OF FUNDS 93,386,982 84,524,808

Approved and signed on be I0 Ro Management Team:

Sahil Babayev Emil Husfynov

Project Direct Finance Specialist

May 30, 2017 May 30, 2017Baku, the Republic of Azerbaija ' Baku, the Republic of Azerbaijan

The notes on pages 17-22 form an integral part of these Special-Purpose Financial Statements.

3


STATEMENT OF SUMMARY OF SOURCES AND USES OF FUNDSFOR THE YEAR ENDED DECEMBER 31, 2016(Amounts expressed in the United States Dollars unless otherwise indicated)

December 31, December 31, Cumulative2016 2015 to date

December 31,2016

OPENING BALANCE

IBRD Designated Account 7549-AZ 1,644,863 2,145,323IBRD Designated Account 8274-AZ 772,582 276,282Project Account 13,890 64,711Letter of Credit USD Account 150 150

TOTAL OPENING BALANCE 2,431,485 2,486,466

ADD: FUNDS RECEIVED

IBRD Credit Number 7549-AZDesignated Account advances - - 5,300,000SOE and SSWS replenishment - - 24,126,251Front-end fee - - 73,750

Other receipts - - 4,279

Subtotal IBRD Credit funds - - 29,504,280

IBRD Loan Number 8274-AZDesignated Account advances - 500,000 1,000,000Direct payment 6,747,549 25,561,139 40,682,454SOE and SSWS replenishment 499,620 2,190,461 2,690,081Front-end fee - - 117,750

Subtotal IBRD Loan funds 7,247,169 28,251,600 44,490,285

Total IBRD Loan funds 7,247,169 28,251,600 73,994,565

Government of Azerbaijan 7549-AZProject Account Advance 21,847 51,649 11,288,422Other receipts - - 8,565

Subtotal Government of Azerbaijan funds 21,847 51,649 11,296,987

Government of Azerbaijan 8274-AZProject Account Advance 1,603,674 5,301,117 8,418,608Other receipts - - 4,144

Subtotal Government of Azerbaijan funds 1,603,674 5,301,117 8,422,752

Total Government of Azerbaijan funds 1,625,521 5,352,766 19,719,739

TOTAL FUNDS RECEIVED 8,872,690 33,604,366 93,714,304

4


STATEMENT OF SUMMARY OF SOURCES AND USES OF FUNDSFOR THE YEAR ENDED DECEMBER 31, 2016 (Continued)(Amounts expressed in the United States Dollars unless otherwise indicated)


December 31,2016

DUE FROM/(DUE TO) ACCOUNTS

Due to Project Account - (1,469)Due from IBRD Designated Account 8274-AZ - 1,469Due from Project Account 3,665 -Due to IBRD Designated Account 8274-AZ (3,665) -

Total net due from/(due to) accounts

NET TRANSFERS BETWEEN ACCOUNTS ANDCASH WITHDRAWALS

Transfer from the IBRD Designated Account 7549-AZto the Project Account - (23,700)

Transfer to the Project Account from the IBRDDesignated Account 7549-AZ - 23,700

Transfer from the IBRD Designated Account to theLetter of Credit USD Account - (941,181)

Transfer to the Letter of Credit USD Account from theIBRD Designated Account - 941,181

Transfer from the Project Account to the IBRDDesignated Account - (3,089,603)

Transfer to the IBRD Designated Account from theProject Account - 3,089,603

Transfer from the Project Account to the Letter ofCredit USD Account - (1,302,752)

Transfer to the Letter of Credit USD Account from theProject Account - 1,302,752

Transfer from the IBRD Designated Account 7549-AZto IBRD Designated Account 8274-AZ (1,488,114) - (1,488,114)

Transfer to the IBRD Designated Account 8274-AZfrom the IBRD Designated Account 7549-AZ 1,488,114 - 1,488,114

Transfer from the IBRD Designated Account 7549-AZto the Project Account (5,629) - (5,629)

Transfer to the Project Account from the IBRDDesignated Account 7549-AZ 5,629 - 5,629

Total net transfers between accounts -

5




December 31,2016

LESS: EXPENDITURE

Expenditures paid through IBRD DesignatedAccount 7549-AZ1. Consultants' services (112,137) (497,467) (9,346,931)2. Goods - (2,083,413)3. Incremental Operating Costs (41,099) (3,059) (794,394)4. Civil works - (14,678,114)5. Training - - (82,556)

Subtotal expenditures paid through IBRDDesignated Account 7549-AZ (153,236) (500,526) (26,985,408)

Front-end fee 7549-AZ - - (73,750)

Expenditures paid through Letter of Credit USDAccount1. Goods - - (941,181)

Total expenditures paid through Letter of CreditUSD Account - - (941,181)

Expenditures paid through Letter of Credit USDAccount1. Goods - (1,302,752)

Expenditures paid through Letter of Credit EURAccount1. Goods - (3,149,623)

Expenditures paid through Project Account 7549-AZ

1. Goods - (1,091,966)

Government of Azerbaijan 7549-AZVAT expenses (20,179) (87,932) (5,773,238)

Total Government of Azerbaijan expenditure (20,179) (87,932) (11,317,579)

Subtotal IBRD Credit 7549-AZ expenditures (173,415) (588,458) (39,317,918)

Expenditures paid through IBRD DesignatedAccount 8274-AZ1. Consultants' services (1,293,102) (2,098,344) (3,494,684)2. Goods - (67,300)3. Incremental Operating Costs (63,512) (96,601) (211,518)4. Civil works (7,792,743) (25,561,139) (41,727,648)5. Training (2,982) (795) (7,625)

Subtotal expenditures paid through IBRDDesignated Account 8274-AZ (9,152,339) (27,756,879) (45,508,775)

Front-end fee 8274-AZ - - (117,750)

6




December 31,2016

Government of Azerbaijan 8274-AZVAT expenses (1,608,512) (4,953,045) (8,081,284)

Total Government of Azerbaijan expenditure (1,608,512) (4,953,045) (8,081,284)

Subtotal IBRD Loan 8274-AZ expenditures (10,760,851) (32,709,924) (53,707,809)

TOTAL EXPENDITURE (10,934,266) (33,298,382) (93,025,727)

DISCREPANCYIBRD Designated Account 7549-AZ 168 66 673IBRD Designated Account 8274-AZ - 110 77Project Account - (193) (975)

TOTAL DISCREPANCY 168 (17) (225)

FOREIGN EXCHANGE RATE DIFFERENCES

IBRD Designated Account 7549-AZ 2,117 - (15,312)IBRD Designated Account 8274-AZ - (1,165)Letter of Credit EUR Account - 60,020Government of Azerbaijan AF (797)Project Account (14,829) (360,948) (373,733)

TOTAL FOREIGN EXCHANGE RATEDIFFERENCES (12,712) (360,948) (330,987)

CLOSING BALANCE

IBRD Designated Account 7549-AZ 169 1,644,863IBRD Designated Account 8274-AZ 351,861 772,582Project Account 5,185 13,890Letter of Credit USD Account 150 150

TOTAL CLOSING BALANCE 357,365 2,431,485

Approved and signed t ct Management Team:

Sahil Babayev Emil iuseynovProject Direct rFinance Specialist

May 30, 2017 o May 30, 2017Baku, the Republic of Azerbaijan Baku, the Republic of Azerbaijan


7


STATEMENT OF USES OF FUNDS BY PROJECT COMPONENTSFOR THE YEAR ENDED DECEMBER 31, 2016 (Continued)(Amounts expressed in the United States Dollars unless otherwise indicated)

December 31, December 31, Cumulative IBRD Government2016 2015 to date budget for of Azerbaijan

December 31, total project budget for2016 life** total project

(revised) life

Project Components

IBRD Credit Number 7549-AZ

Component A: InstitutionalReform, Capacity Buildingand Project Management

Analytical work andaction/implementation plan forsector restructuring andestablishment of the TamizShahar JSC - - 1,847,707

Capacity Building for NewTamiz Shahar JSC 33,049 167,256 2,140,676

Public Awareness and Outreach - 179,824 899,120Consultants' services 66,998 20,910 1,362,298Goods - - 229,775Training - - 82,556

Incremental operating costs 41,100 3,059 794,395VAT* 18,003 64,630 1,057,374

Total Component A 159,150 435,679 8,413,901 7,876,653 1,124,888

Component B: BalakhaniLandfill Rehabilitation andManagement

Procurement of LandfillEquipment for Balakhani - 511,481

Site investigations, design ofrehabilitation and (partial)closure works, site operationsplanning - - 1,245,011

Mobile equipment (bulldozers,etc) - - 664,983

Fencing of Balakhani Landfill - 312,353Environmental assessment - - 299,980Urgent procurement of landfill

equipment for BalakhaniLandfill - - 1,618,356

Contract Supervision 12,089 129,477 799,764VAT* 2,176 23,302 991,204

Total Component B 14,265 152,779 6,443,132 5,625,500 1,012,590

Component C: Closure andManagement of Other Dumps

Closure of unauthoriseddumpsites in Greater Baku area - - 8,981,250

Rehabilitation of Garadag andSurakhani landfills - - 5,384,511

VAT* - - 2,585,837

Total Component C - - 16,951,598 14,369,835 2,586,570

8





(revised) lifeComponent D: Urgent

Collection Equipment forOuter Baku District

Bins and containers - 1,628,441Trucks - 3,915,900VAT* - 1,003,415

Total Component D - 6,547,756 - 5,900,000

Component E: TechnicalPreparation of Post-ProjectInvestments

Environmental assessment fortransfer stations - - 302,379

Site investigations and design fortransfer stations and newlandfill sites - - 449,995

VAT* - 135,407

Total Component E - - 887,781 1,554,262 279,767

Front End Fee - - 73,750 73,750 -

Price Contingencies _ _ - 1,096,185

Total IBRD Credit Number7549-AZ 173,415 588,458 39,317,918 29,500,000 12,000,000

IBRD Loan Number 8274-AZ

Component A: InstitutionalReform, Capacity Buildingand Project Management

Consultants' services 191,975 186,579 481,791Goods - - 67,300Training 2,982 795 7,625Incremental operating costs 63,574 96,601 211,580VAT* 9,213 14,570 38,155

Total Component A 267,744 298,545 806,451 1,482,250 104,220

Component B: BalakhaniLandfill Rehabilitation andManagement

Rehabilitation of Balakhanilandfill 7,792,744 25,561,139 41,727,648

Contract Supervision 232,505 - 232,505VAT* 1,443,171 4,594,361 7,542,888

Total Component B 9,468,420 30,155,500 49,503,041 41,000,000 7,380,000

9





(revised) lifeComponent E: TechnicalPreparation of Post-ProjectInvestments

Preparation of National Strategyfor Waste Management 868,623 1,564,046 2,432,669

Preparation of Legal Frameworkfor Waste Management - 347,719 347,719

VAT* 156,064 344,114 500,179

Total Component E 1,024,687 2,255,879 3,280,567 4,500,000 810,000

Front End Fee - - 117,750 117,750

Total IBRD Loan Number8274-AZ 10,760,851 32,709,925 53,707,809 47,100,000 8,294,220

Total Uses of Funds by ProjectComponents 10,934,266 33,298,382 93,025,727 76,600,000 20,294,220

* VAT is accrued and paid on total invoice value of goods imported, rather than all goods acquired during the period.

** On April 19, 2016 IBRD responded by "no objection" to the revised procurement plan represented by PMT

related to IBRD Credit Number 7549-AZ. On March 8, 2016 IBRD responded by "no objection" to the revised

procurement plan represented by PMT related to IBRD Loan Number 8274-AZ Subsequently, IBRD responded by"no objection" to the further amendments made to the contracts and PMT made relevant revised adjustments to the

procurement plan.

Approved and signed on f e nagement Team:

Sahil Babayev Emil HuseynovProject Direct Finance Specialist

May 30, 2017 May 30, 2017Baku, the Republic of Azerbaijan Baku, the Republic of Azerbaijan


10


STATEMENT OF DESIGNATED ACCOUNTAS AT DECEMBER 31, 2016(Amounts expressed in the United States Dollars unless otherwise indicated)

IBRD Credit Number 7549-AZ

Account held at: International Bank of Azerbaijan OJSC

Account no: 33318018401100442120USD

Opening IBRD Designated Account 7549-AZ balance as at January 1, 2016 1,644,863

Add:Foreign exchange difference 2,117

Total outstanding amount advanced to IBRD Designated Account 7549-AZ 1,646,980

Less:Closing Designated Account balance as at December 31, 2016 carried forward

to the next period 169Transfer to IBRD Designated Account 8274-AZ 1,488,114Transfer to Project account 5,629Amount of eligible expenditures paid through designated account during the

year 153,236

Total advanced amount during 2016 1,647,148

Discrepancy 168

Opening IBRD Designated Account 7549-AZ balance as at January 1, 2015 2,145,323

Add:IBRD advances during the period from January 1, 2015 to December 31, 2015 -IBRD replenishments during the period from January 1, 2015 to

December 31, 2015

Total outstanding amount advanced to IBRD Designated Account 7549-AZ 2,145,323

Less:Closing Designated Account balance as at December 31, 2015 carried forward

to next period 1,644,863Amount of eligible expenditures paid through designated account during the

year 500,526


Discrepancy 66

11


STATEMENT OF DESIGNATED ACCOUNTAS AT DECEMBER 31, 2016 (Continued)(Amounts expressed in the United States Dollars unless otherwise indicated)

IBRD Loan Number 8274-AZ

Account held at: International Bank of Azerbaijan OJSC

Account no: 38190028401100442120USD

Opening IBRD Designated Account 8274-AZ balance as at January 1, 2016 772,582

Add:IBRD replenishments during the period from January 1, 2016 to

December 31, 2016 499,620Transfer from IBRD Designated Account 7549-AZ 1,488,114

Total outstanding amount advanced to IBRD Designated Account8274-AZ 2,760,316

Less:Closing IBRD Designated Account 8274-AZ balance as at December 31,

2016 carried forward to next period 351,861Due to Project Account 3,665Amount of eligible expenditures paid through designated account during

the year 2,404,790


Discrepancy -

Opening IBRD Designated Account 8274-AZ balance as at January 1, 2015 276,282-

Add:IBRD advances during the period from January 1, 2015 to December 31,

2015 500,000IBRD replenishments during the period from January 1, 2016 to

December 31, 2016 2,190,461

Total outstanding amount advanced to IBRD Designated Account8274-AZ 2,966,743

Less:Closing IBRD Designated Account 8274-AZ balance as at December 31,

2015 carried forward to next period 772,582Due to Project Account (1,469)

Amount of eligible expenditures paid through designated account during

the year 2,195,740

Total advanced amount duri 2,6,5

Approved and signed h of ec ngmn em

2,966,853

110

nagement Team:

Emil HuseynovProject Directr Finance Specialist



12


STATEMENT OF LETTER OF CREDIT ACCOUNTAS AT DECEMBER 31, 2016(Amounts expressed in the United States Dollars unless otherwise indicated)

Accounts held at: International Bank of Azerbaijan OJSC

Account no: 33511018401100442120USD

1. Opening Letter of Credit Account balance as at January 1, 2016 150

Add:Transfer from IBRD Designated Account -

Total outstanding amount advanced to Letter of Credit Account 150

Less:Closing Letter of Credit Account balance as at December 31, 2016

carried forward to next period 150

Total advanced amount during 2016 150

Discrepancy -

1. Opening Letter of Credit Account balance as at January 1, 2015 150

Add:Transfer from IBRD Designated Account -

Total outstanding amount advanced to Letter of Credit Account 150

Less:Closing Letter of Credit Account balance as at December 31, 2015

carried forward to next period 150

Total advanced amount during 2015 150

Discrepancy -

Approved and signed on beh ement Team:

Sahil Babayev Emil HuseynovProject Director/ Finance Specialist



13


STATEMENT OF EXPENDITURE AND SUMMARY SHEET WITHDRAWAL SCHEDULEFOR THE YEAR ENDED DECEMBER 31, 2016(Amounts expressed in the United States Dollars unless otherwise indicated)

Advance Consul- Civil Goods Incre- Train- Total Totalpayment tants' works mental ing required Replenished/

services operating Advancecosts payment

Total applicationsreimbursed andadvance paidduring the sixmonths periodended December 31,2009 500,000 - - 500,000 500,000

ISWMP/2010/01 - 194,030 - 133,771 94,444 11,330 433,575 417,775ISWMP/2010/02 - 94,768 159,165 161,836 20,890 - 436,659 436,659

ISWMP/2010/03 500,000 - - - - - 500,000 500,000ISWMP/2010/05 1,300,000 - - - - - 1,300,000 1,300,000

Total applicationsreimbursed andadvance paidduring the yearended December 31,2010 1,800,000 288,798 159,165 295,607 115,334 11,330 2,670,234 2,654,434

ISWMP/2011/011 - 616,163 121,837 5,008 29,319 - 772,327 772,327ISWMP/2011/02 - 402,473 31,351 - 74,100 2,490 510,414 510,414ISWMP/2011/04 - 707,208 - - 13,594 9,609 730,411 730,411

Total applicationsreimbursed duringthe year endedDecember 31, 2011 - 1,725,844 153,188 5,008 117,013 12,099 2,013,152 2,013,152

ISWMP/2012/01 - 813,858 - 161,836 16,486 552 992,732 992,731ISWMP/2012/02 - 803,384 - - 13,803 5,533 822,720 822,703

ISWMP/2012/03 - 637,328 - - 61,034 966 699,328 699,329ISWMP/2012/04 2,000,000 - - - - - 2,000,000 2,000,000

ISWMP/2012/05 1,000,000 - - - - - 1,000,000 1,000,000ISWMP/2012/06 - 704,471 1,795,95 - 15,083 31,656 2,547,168 2,547,168

ISWMP/2012/07 - 281,659 1,812,83 549,205 33,164 - 2,676,866 2,676,867

Total applicationsreimbursed andadvance paidduring the yearended December 31,2012 3,000,000 3,240,700 3,608,796 711,041 139,570 38,707 10,738,814 10,738,798

14


STATEMENT OF EXPENDITURE AND SUMMARY SHEET WITHDRAWAL SCHEDULEFOR THE YEAR ENDED DECEMBER 31, 2016 (Continued)(Amounts expressed in the United States Dollars unless otherwise indicated)

Advance Consultants' Civil Goods Incre- Train- Total Totalpayment services works mental ing required Replenished/

operating Advancecosts payment

ISWMP/2012/08 - 127,754 3,021,482 53,261 36,891 - 3,239,388 3,239,388ISWMP/2013/01 - 733,121 1,337,347 664,983 96,700 3,762 2,835,913 1,900,913ISWMP/2013/02 - 871,023 1,013,626 - 20,141 - 1,904,790 2,839,790

Total applicationsreimbursed duringthe year endedDecember 31, 2013 - 1,731,898 5,372,455 718,244 153,732 3,762 7,980,091 7,980,091

ISWMP/AF/2014/01 500,000 - - - - - 500,000 500,000ISWMP/2014/01 - 889,777 2,083,178 - 115,342 1,447 3,089,744 3,089,745ISWMP/2014/02 - 664,767 2,183,080 - 100,561 - 2,948,408 2,450,031

Total applicationsreimbursed andadvance paidduring the yearended December 31,2014 500,000 1,554,544 4,266,258 - 215,903 1,447 6,538,152 6,039,776

ISWMP/AF/2015/01 - 118,337 - 67,300 78,974 3,848 268,459 268,459ISWMP/AF/2015/02 500,000 - - - - - 500,000 500,000ISWMP/AF/2015/06 - 577,469 - - 24,690 795 602,954 602,954ISWMP/AF/2015/10 - 599,162 - - 27,272 - 626,434 626,434ISWMP/AF/2015/11 - 521,365 - - 790 - 522,155 790ISWMP/AF/2015/13 - 684,396 - - 7,428 - 691,824 691,824

Total applicationsreimbursed andadvance paidduring the yearended December 31,2015 500,000 2,500,729 - 67,300 139,154 4,643 3,211,826 2,690,461

15


STATEMENT OF EXPENDITURE AND SUMMARY SHEET WITHDRAWAL SCHEDULEFOR THE YEAR ENDED DECEMBER 31, 2016 (Continued)(Amounts expressed in the United States Dollars unless otherwise indicated)

Advance Consul- Civil Goods Incre- Train- Total Totalpayment tants' works mental ing required Replenished/

services operating Advancecosts payment

ISWMP/AF/2016/ - 295,450 - - - - 295,450 205,450ISWMP/AF/2016/ - 188,168 - - 13,248 2,754 204,170 294,170

Totalapplicationsreimbursed andadvance paidduring the yearendedDecember 31,2016 - 483,618 - - 13,248 2,754 499,620 499,620

Totalapplicationsreimbursedand advancepayment as atDecember 31,2016 6,300,000 11,526,131 13,559,862 1,797,200 893,954 74,742 34,151,889 33,116,332

Approved and signed on be 9 e anagement Team:

Sahil BabayevEmlAsyo

May 30, 2016 May30, 2016Baku, the Republic of Azerbaijan Baku, the Republic of Azerbaijan


16


NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 2016(Amounts expressed in the United States Dollars unless otherwise indicated)

1. DESCRIPTION OF THE PROJECT

Integrated Solid Waste Management Project (the "Project") was formed between the Government ofthe Republic of Azerbaijan (the "Recipient") and the International Bank for Reconstruction andDevelopment ("1BRD") under a financing agreement Credit Number 7549-AZ dated May 20, 2009 inthe amount of USD 29,500,000. In addition to the financing agreement, additional financing (USD12,000,000) is provided by the Government of the Republic of Azerbaijan. The Project's originalcompletion date of September 30, 2013 has been extended to March 31, 2018. On January 10, 2014,the IBRD and the Government of Republic of Azerbaijan have signed loan agreement 8274-AZregarding the additional financing for the Project in the amount of USD 47,100,000.

The overall project objective is to support the reform of the "Greater Baku" solid waste collection anddisposal operations into an effective and sustainable system in the fields of (i) data collection andstrategic planning, (ii) build-up of operational, management and communication capabilities of theresponsible agency, (iii) the rollout of collection services, (iv) the improvement of environmentalconditions at the existing waste disposal sites, (v) improving solid waste disposal management, (vi)increasing waste collection coverage, and (vii) enhancing waste data information and financialmanagement capacity in the Greater Baku area.

The Project consists of the following components:

Component A: Institutional Reform, Capacity Building and Project Management

The component supports (1) finalization of a strategic plan for the sector, which includes: (a) analyticalwork to assess the existing systems, institutional reform, sector financing, funding and cash flowmanagement; (b) development of legal framework and institutional structure; (c) development of roll-out plans for waste collection services and involvement of private sector; (d) tariff and tariff collectionreforms; (e) development of accounting and data systems; and (f) strategy for dealing with 3 municipaland nonhazardous waste, planning for rehabilitation of disposal sites and closure of informal dumps.The component also finances (2) provision of capacity building and management support programsfor practical management and operational skills in solid waste collection and disposal; (3) provision ofgoods and consultants' services for public awareness campaigns and communication program; and (4)strengthening of the management capacity of the PMT to monitor and administer implementation ofthe Project.

Component B: Balakhani Landfill Rehabilitation and Management

The component finances improvement of the capacity of an existing landfill for continuation ofdisposal activities in an operationally and environmentally sound manner through the rehabilitation ofthe Balakhani landfill site, including: (1) full remediation and closure of the old waste disposal partsof the site; (2) installation of water and leachate controls; (3) opening of new waste cells at the existingsite; and (4) introduction of a methane gas capture system.

Component C: Closure and Management of Informal Dumps

This component finances closure and cleanup of informal dumps through removal and thetransportation of waste from wild dumps, as well as the improvement of management of formal sites,in order to minimize the negative environmental effects associated with informal or non-sanitary wastedisposal.

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NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 2016 (Continued)(Amounts expressed in the United States Dollars unless otherwise indicated)

Component D: Urgent Collection Equipment

This component supports provision of goods in order to increase the service quality and availability ofsolid waste collection coverage and service efficiency.

Component E: Technical Preparation of Post-Project Investments

The component finances (1) preparation of feasibility studies and environmental impact assessmentsneeded to develop new landfill capacity and introduce transfer stations to maintain an effectiveenhanced waste collection and disposal system including for waste management systems and regionallandfills outside the Greater Baku area; (2) preparation of a national waste management strategy andimplementation roll-out plan; (3) preparation of a national legal framework to improve solid wastemanagement.

2. BASIS OF ACCOUNTING

Statement of compliance

The Special-Purpose Financial Statements have been prepared on the cash basis of accounting inconformity with International Public Sector Accounting Standards ("IPSAS") "Financial Reportingunder the Cash Basis of Accounting" issued by the International Public Sector Accounting StandardsBoard of the International Federation of Accountants and incorporate the principal accounting policiesfrom the "Guidelines: Annual Financial Reporting and Auditing for World Bank Financed Activities".

Other basis of preparation criteria

The Special-Purpose Financial Statements are prepared under the historical cost basis of accounting.Source funding and government contributions are recognized when the related cash is received or paidout on the Project's behalf. Expenditures are accounted for on the basis of actual disbursement of fundsfrom the Project's accounts.

Foreign currency transactions and translation

The Project uses the United States Dollar ("USD") as its functional currency for the following reasons:

a) The IBRD's funding is received in USD;b) Budgets and financial reports for the Project are prepared in USD.

Balance sheet monetary items denominated in currencies other than USD have been translated intoUSD using the exchange rate of the Central Bank of the Republic of Azerbaijan ("CBAR") effectiveas at appropriate date. All income and expense transactions denominated in currencies other than USDare converted into USD using the exchange rate of the CBAR prevailing on the date of transaction.

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3. CASH AT BANK

As at December 31, 2016 and 2015 the Project had cash at bank balances with International Bank ofAzerbaijan CJSC ("IBA") as follows:

December 31, December 31,2016 2015

IBRD Designated Account in USD 7549-AZ 169 1,644,863IBRD Designated Account in USD 8274-AZ 351,861 772,582IBRD Letter of Credit Account in USD 150 150Project Account in AZN 5,185 13,890

Total cash at bank 357,365 2,431,485

4. CUMULATIVE USES OF FUNDS

Cumulative uses of funds comprise the following:

December 31, December 31,2016 2015

IBRD share 73,626,864 64,321,289Government of Azerbaijan share 19,398,863 17,770,172

Total cumulative uses of funds 93,025,727 82,091,461

5. DESIGNATED ACCOUNT

The Recipient has established a Designated Account at a commercial bank acceptable to the IBRD inaccordance with the Loan Agreement. Designated Account is established, managed, replenished andliquidated in accordance with the IBRD's "Project's Operations Manual" and detailed arrangementsagreed upon between the Recipient and the IBRD.

The Designated Account of the Project is maintained in USD with IBA.

6. LETTER OF CREDIT ACCOUNT

The Recipient has established a Letter of Credit Account at a commercial bank acceptable to the IBRDin accordance with the Loan Agreement. Letter of Credit Account is established, managed, replenishedand liquidated in accordance with the IBRD's "Project's Operations Manual" and detailedarrangements agreed upon between the Recipient and the IBRD.

The Letter of Credit Account of the Project is maintained in USD and EUJR with IBA.

Contract securities may be provided in the form of a bank guarantee, irrevocable letter of credit, or asurety issued by a financial institution. Retention money on the other hand is a portion of paymentsdue under the contract, which is retained to ensure performance by the supplier/contractor. When usedas a guarantee, it should not exceed 5% of the contract value. Instead of the Borrower retaining part ofthe due payments, the supplier/contractor may also provide a money retention security in form of abank guarantee or irrevocable letter of credit.

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7. METHOD OF DISBURSEMENT

The methods of disbursements were as follows:

Advance - the IBRD may advance proceeds in accordance with the Loan Agreement into a DesignatedAccount of the Recipient to finance eligible expenditure as they are incurred and for which supportingdocuments will be provided at a later date.

Direct funding - the IBRD may make payments, at the Recipient's request, directly to a third partyfor eligible expenditure.

Reimbursement procedure - the IBRD may reimburse the Recipient for expenditure eligible forfinancing pursuant to the Loan Agreement that the Recipient has pre-financed from its own resources.

Commitment procedure - the IBRD may pay amounts to a third party for eligible expenditure underspecial commitments entered into, in writing, at the Recipient's request and on terms and conditionsagreed between the IBRD and the Recipient.

8. METHOD OF WITHDRAWAL

This procedure involves two distinct disbursement procedures used for withdrawing funds under theLoan Agreement:

Withdrawal Procedure

The World Bank forn of Application for Withdrawal shall be used for the followings:

* Advance to the Designated Account;

* Replenishment of the Designated Account;

* Reimbursements of eligible payments already made by the Borrower from its own resources (ifany) - pooling and disbursements made on a basis of Statements of Expenditure (SOE);

* Direct Payments to a third party.

The financial specialist should prepare the Application for Withdrawal, SOE and SSWS forms,Designated Account reconciliation as required. Any supporting documentation should be attached.

These documents should be reviewed by the Project Director. The documents (original) should bepassed on to the Ministry of Economy of the Republic of Azerbaijan (the "MOE") and then to theMinistry of Finance of the Republic of Azerbaijan (the "MOF") to be reviewed and signed by theirauthorized representatives if required. The documents then should be returned (within 7 working days)to the Project Management Team for sending by courier to the IBRD.

The financial specialist should keep an Invoices Voucher List ("IVL") to record the invoices approvalvoucher numbers of transactions included in the application for withdrawal. The IVL should beprepared by the financial specialist, reviewed and approved by the Project Director and filed. If thespace available on the application for withdrawal is insufficient to provide all the necessary data,summary sheets should be used.

Applications for withdrawal must be submitted in duplicate and should be sequentially numbered. Anymajor alterations or changes made on the form should be initialled by the authorized representativesto verify that the changes are valid.

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Special Commitment Procedure

To finance the purchase of goods under a project from foreign suppliers, the Borrower frequently needsto open a letter of credit. If commercial bank is unwilling to open or confirm the letter of credit withoutsome guarantee or security, the World Bank at the request of the Borrower, can provide the commercialbank with the guarantee it requires in the form of a special comnitment. This procedure normallycovers major contracts for imported goods.

The fonns will be prepared by the financial specialist, reviewed by the Project Director and given tothe MOE and the MOF for their review and signature of authorized representatives and returned to theProject Management Team. The financial specialist should check that the documents have been signedby the authorized signatories (specimen signatures of which have been previously advised to theIBRD) before sending the documents by courier to the IBRD.

9. OPERATING ENVIRONMENT

The Project's principal business activities are conducted in the Republic of Azerbaijan. As an emergingmarket, at the present time the Republic of Azerbaijan is developing business and regulatoryinfrastructure that would generally exist in a more mature market economy.

Major indicators of the Azerbaijan economy were influenced by a number of negative factors.Considering significant drop in crude oil prices starting from the second half of 2014, there continuesto be uncertainty regarding the economic growth, access to capital and cost of capital in the Republicof Azerbaijan, because Azerbaijan produces and exports large volumes of oil and gas, its economy isparticularly dependent on the price of oil and gas. Economic growth slowed down in 2014 and 2015approximately 2% and 1.1%, respectively and turned negative 3% in 2016. These factors resulted inthe economic slowdown to shift from prosperity to recession economy with high inflation andunemployment and decreasing GDP.

The future economic direction of the Republic of Azerbaijan is largely dependent upon theeffectiveness of economic, financial and monetary measures undertaken by the Government, togetherwith tax, legal, regulatory and political developments. The Management is unable to predict, alldevelopments in the economic environment which would have an impact on the Project's operationsand consequently what effect, if any, they could have on the financial position of the Project.

Decreasing revenues from oil exports made the Central Bank of the Republic of Azerbaijan abandonits peg policy to the basket of US dollars and Euros. In addition, CBRA devalued the AzerbaijaniManat by approximately 34% on February 21, 2015 and further on December 21, 2015 introduced afloating exchange rate that resulted in one-time devaluation of the AZN against US dollars and othermajor currencies by approximately 48%. The devaluation of Azerbaijani Manat continued in 2016 andresulted in 14% fall against US dollars and 9% fall against Euro by December 31, 2016. In January2016, Standard & Poor's, international credit agency, downgraded long-term and short-term foreignand national currency sovereign rating to the speculative level. Starting from February, 2016 theCentral Bank of the Republic of Azerbaijan has gradually increased refinancing rate from 3 to 15%and the minimum capital adequacy ratio was lowered from 12% to 10%. In addition, CBRA preventedspeculations in the currency market by setting a limit on the currency exchange rate corridor within4% of the official rate which was revoked in 2017 and introduced limits on the amount of foreigncurrency exchange.

The Azerbaijani economy is vulnerable to market downturns and economic slowdowns elsewhere inthe world. While the Government has introduced a range of stabilization measures and plans toexpedite reforms and support to banking system in response to current economic challenges.

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Amidst the ongoing crisis, the government of Azerbaijan shifted its oil-oriented economic policy,dominated for two decades, to the diversification of the economy. For that purpose, a "nationalstrategic roadmap" was adopted to formulate a correct development strategy. The implementation ofthe "national strategic roadmap" was assigned to the newly formed "Center for Analysis of EconomicReforms and Communications," the aim of which is analyzing the effectiveness of conducted reformsand making new proposals.

It is expected that recession to be short-lived, recovering to economic growth in 2017, partly due topositive effects of investments in gas projects. It is expected the GDP will growth 1.4% and the non-oil sector about 2.4%. Over the long term, Azerbaijan will benefit from production from the new gasfields, which is expected to come online in 2018.

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