AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECT

INTERNATIONAL BANK FOR RECONSTRUCTIONAND DEVELOPMENT (IBRD)

LOAN No. 8286-AZ

REPORT OF INDEPENDENT AUDITORSAND

SPECIAL PURPOSE FINANCIAL STATEMENTS

FOR THE YEAR ENDED31 DECEMBER 2017

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AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECT

CONTENTS

Page

Statement of Management Responsibilities 3

Report of Independent Auditors 4-5

Balance Sheet 6

Statement of Sources and Uses of Funds 7-8

Statement of Uses of Funds by Project Activities 9

Statement of Designated Account 10

Notes to the Special Purpose Financial Statements 11-15

STATEMENT OF MANAGEMENT RESPONSIBILITIES

Management has prepared and is responsible for the special purpose financial statements and relatednotes of the Agricultural Competitiveness Improvement Project, (the "Project") financed by theInternational Bank for Reconstruction and Development Loan No. 8286-AZ, and the Government ofAzerbaijan. They have been prepared in accordance with the basis of accounting described in Note 2 ofthe accompanying special purpose financial statements.

The Project maintains internal accounting control systems and related policies and procedures designedto provide reasonable assurance that assets are safeguarded, that transactions are executed inaccordance with management's authorisation and properly recorded, and that accounting records may berelied upon for the preparation of financial statements and other financial information. The system containsself-monitoring mechanisms that allow management to be reasonably confident that controls, as well asthe Project's administrative procedures and internal reporting requirements operate effectively. There areinherent limitations in the effectiveness of any system of internal control, including the possibility of humanerror or the circumvention or overriding of controls. Accordingly, even an effective internal control systemcan provide only reasonable assurance with respect to financial statements preparation.

Anar Azimov ' 7< Fariz HuseynovPMU Director PMU Financial specialist

29 May 2018

Baku, Azerbaijan

3

MOORE STEPHENS

Moore Stephens Azerbaijan Limited13, Zeynalabdin Taghlyev StreetBaku AZ1005, Azerbaijan

+994 12 490 77 47/48/49+994 12 490 7750

REPORT OF INDEPENDENT AUDITORS

To the management of the Agricultural Competitiveness Improvement Project

Opinion

We have audited the accompanying special purpose financial statements of the AgriculturalCompetitiveness Improvement Project (the "Project") financed under the International Bank forReconstruction and Development ("IBRD") Loan No. 8286-AZ which comprise the balance sheets as of31 December 2017, statements of sources and uses of funds, statements of uses of funds by projectactivities, statements of designated account, statements of expenditure ("SOE") withdrawal schedules forthe year then ended and a summary of significant accounting policies and other explanatory notes. Wehave also audited the Project's compliance with conditions of the relevant Loan Agreements, the WorldBank guidelines, laws and regulations of the Azerbaijan Republic.

In our opinion, the accompanying special purpose financial statements referred to above, present fairly, inall material respects, the financial position of the Project and of the special and project accounts as of 31December 2017 and related sources and uses of funds, Project activities by components and movementsin special and project accounts for the year then ended, in accordance with the basis of accountingdescribed in Note 2 to the accompanying special purpose financial statements and the Project is in allmaterial respects, in compliance with the conditions of the relevant Loan Agreement and the World Bankguidelines and laws of the Republic of Azerbaijan during the year ended 31 December 2017.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs) applicable to theaudit of financial statements and to compliance auditing, with special reference to ISA 800. Ourresponsibilities under those standards are further described in the Auditor's Responsibilities for the Auditof the Financial Statements section of our report. We are independent of the Company in accordance withthe ethical requirements that are relevant to our audit of the financial statements in Azerbaijan, and wehave fulfilled our other ethical responsibilities in accordance with these requirements. We believe that theaudit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion

Management's responsibility for the financial statements

Management is responsible for the preparation and fair presentation of the financial statements inaccordance with the basis of accounting described in Note 2 of the accompanying special purposefinancial statements. This responsibility includes: designing, implementing and maintaining internalcontrols relevant to the preparation and fair presentation of financial statements that are free frommaterial misstatement, whether due to fraud or error; selecting and applying appropriate accountingpolicies; and making accounting estimates that are reasonable in the circumstances.

In preparing the financial statements, management is responsible for assessing the Company's ability tocontinue as a going concern, disclosing, as applicable, matters related to going concern and using thegoing concern basis of accounting unless management either intends to liquidate the Company or tocease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company's financial reportingprocess.

4

MOORE STEPHENS

- Auditor's responsibility for the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a wholeare free from material misstatement, whether due to fraud or error, and to issue an auditor's reportthat includes our opinion. Reasonable assurance is a high level of assurance, but is not a guaranteethat an audit conducted in accordance with ISAs will always detect a material misstatement when itexists. Misstatements can arise from fraud or error and are considered material if, individually or inthe aggregate, they could reasonably be expected to influence the economic decisions of users takenon the basis of these financial statements.

29 May 2018

5

AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECTIBRD LOAN 8286-AZBALANCE SHEETAS AT 31 DECEMBER 2017(Expressed in US dollars)

Note 2017 2016

ASSETS AND CUMULATIVE EXPENDITURE

Cash in bank 4 5,715,508 3,531,508Cumulative Project expenditures 21,348,607 15,939,203

27,064,115 19,470,711

SOURCES OF FUNDS

Project financing 27,283,157 19,638,574Accumulated foreign exchange difference (219,042) (167,863)

27,064,115 19,470,711

Anar Azimov 1 Fariz HuseynovPMU Director PMU Financial specialist

The notes set out on pages 11-15 form an integral part of these financial statements

AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECTIBRD LOAN 8286-AZSTATEMENT OF SOURCES AND USES OF FUNDSFOR THE YEAR ENDED 31 DECEMBER 2017(Expressed in US dollars)

Note 2017 2016 CumulativeOPENING BALANCES

IBRD Loan Designated Account No. 8286 4 3,305,544 2,825,703Government of Azerbaijan 4 225,964 72,200

3,531,508 2,897,903ADD: FUNDS RECEIVED BY SOURCES

IBRD Loan Designated Account No. 8286 3,538,434 7,541,647 17,915,483IBRD Loan Designated Account No. 8286(front-end fee) - - 86,250

3,538,434 7,541,647 18,001,733

Government of the Republic of Azerbaijan 4,104,680 3,233,012 9,274,585Tender fee 1,469 3,790 6,839

L644,583 10,778,449 27,283,157TRANSFERS BETWEEN ACCOUNTS

Special account 55,774Project account _ - (55,774)

ADDILESS:EXCHANGE DIFFERENCEIBRD Loan Designated Account No. 8286 (66,893) 52,269 (37,717)Government of the Republic of Azerbaijan 15,714 (74,948) (181,325)

L E (51,179) (22,679) (219,042)LESS: EXPENDITUREIBRD Loan Designated Account No. 8286

Consultants Services including Audit 362,656 600,847 1,038,820Incremental operating costs 381,113 500,756 1,329,206Serological Survey Fees 70,790 56,713 165,927Sub- loans and lease financing - 5,210,121 8,017,336Front-end fee - - 86,250Goods 2,030,536 126,403 2,783,126Grants 62,329 - 62,329Trainings 52,335 55,502 155,737Vaccination fees 528,446 544,317 1,072,763Non-consulting services 4,625 6,924 11,549Works 105,777 12,492 118,269

3,598,607 7,114,075 14,841,312Government of the Republic of Azerbaijan

Consultants Services including Audit 223,192 369,402 626,654Incremental operating costs 152,245 158,861 423,251Serological Survey Fees 27,343 22,048 66,424Sub- loans and lease financing - 2,026,315 3,160,880Goods 1,088,995 56,760 1,517,739Grants 24,239 - 24,239Trainings 19,897 21,581 60,099Vaccination fees 205,507 345,572 551,079Non-consulting services 1,799 2,693 4,492Works 67.580 4,858 72,438

1,810,797 3,008,090 6,507,295

TOTAL EXPENDITURE 5,409,404 10,122,165 21,348,607

The notes set out on pages 11-15 form an integral part of these financial statements7

AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECTIBRD LOAN 8286-AZSTATEMENT OF SOURCES AND USES OF FUNDS (CONTINUED)FOR THE YEAR ENDED 31 DECEMBER 2017(Expressed in US dollars)

Note 2017 2016 CumulativeCLOSING BALANCES

IBRD Loan Designated Account No. 8286 4 3,178,478 3,305,544Government of the Republic of Azerbaijan 4 2,537,030 225,964

5,715,508 3,531,508

REVOLVING FUND* 2017 Cumulative

OPENING BALANCE 143,986

ADD/(LESS)Interest collection 292,042 353,979Principal collection 317,128 399,177

609,170 753,156

CLOSING BALANCE 753,156 753,156

The Revolving Fund ("RF") was set up for the specific purpose of providing microloans to ruralbusinesses. It is a financing tool that recycles funds by providing loan repayment, and thenproviding further loans. In 2017, RF balances, receipts and expenditure are segregated from theProject and a separate set of financial statements is presented.

Anar Azimov Fariz Huseynov_______PMU Director / PMU Financial specialist

The notes set out on pages 11-15 form an integral part of these financial statements8

AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECTIBRD LOAN 8286-AZSTATEMENT OF USES OF FUNDS BY PROJECT ACTIVITIESFOR THE YEAR ENDED 31 DECEMBER 2017(Expressed in US dollars)

Project Component/Activity 2017 2016 Cumulative

A: Support for sanitary and phytosanitaryservices

Al. Food Safety Capacity Building 18,043 - 18,043A2. Upgrading Plant Health and PhytosanitarianSys 43,613 78,627 167,993A3. Animal Health and Veterinary Services 1,768,157 1,716,091 4,655,055

1,829,813 1,794,718 4,841,091B. Agribusiness value chain development

Bl. Agribusiness value chain development 602,284 470,460 1,143,573B2. Seeds Sector Development 2,516,212 24,407 2,540,619

3,118,496 494,867 3,684,192

C. Financial Services to Agribusiness 71,854 7,237,033 11,293,513

D. Project Management 389,241 595,547 1,443,561

Front-end-Fee (IBRD) - - 86,250

5,409,404 10,122,165 21,348,607

Anar Azimov Fariz Huseynovv2 KAPMU Director PMU Financial specialist

The notes set out on pages 11-15 form an integral part of these financial statements9

AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECTIBRD LOAN 8286-AZSTATEMENT OF DESIGNATED ACCOUNTFOR THE YEAR ENDED 31 DECEMBER 2017(Expressed in US dollars)

IBRD-8286DA:Account number AZ731BAZ38190078409330335120

t BInternational Bank of AzerbaijanDepository Bank

2017 2016 Cumulative

Balance at the beginning ofreporting period

3,305,544 2,825,703 -3,305,544 2,825,703 -

ADD:Advances and replenishments 3,538,434 7,541,577 18,001,733

3,538,434 7,541,577 18,001,733DEDUCT:

Eligible expenditure (3,598,607) (7,114,075) (14,735,841)Bank charges (19,221)Front-end fee - - (86,250)

Total expenditures (3,598,607) (7,114,075) (14,841,312)

ADJUSTMENTS:Foreign Exchange gain/loss (66,893) 52,339 (37,717)

(66,893) 52,339 (37,717)Transfers between accounts

Transfers between accounts - - 55,774- - 55,774

Balance at the end of reporting period 3,178,478 3,305,544 3,178,478

Anar Azimov Fariz Huseynov_______PMU Director PMU Financial specialist

The notes set out on pages 11-15 form an integral part of these financial statements

AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECTIBRD LOAN 8286-AZNOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTSFOR THE YEAR ENDED 31 DECEMBER 2017(Amounts are expressed in US dollars unless otherwise indicated)

NOTE 1. BACKGROUND

IBRD Loan Designated Account No. 8286Agricultural Competitiveness Improvement Project (the "Project") is a project established and projected bythe Government of Azerbaijan and World Bank and implemented by the State Service on Management ofAgricultural Projects and Credits under the Ministry of Agriculture of Azerbaijan Republic to facilitate theaccess of agricultural producers to markets by strengthening sanitary and phytosanitary services,enhancing selected value chains and providing financial services to agribusiness enterprises.

The Project consists of the following parts:

Part A: Support for sanitary and phytosanitary services

Strengthening the efficiency and effectiveness of sanitary and phytosanitary services in order to reduceexisting obstacles to agricultural and food trade:

1. Food safety capacity building through the establishment of a national food safety training centerand implementing comprehensive training program.

2. Upgrading the State Phytosanitary Control Services (SPCS) by: (a) strengthening pest diagnosticcapacity through provision of equipment for SPCS laboratories and Training; (b) enhancing pestcontrol and pest risk analysis capacity through the provision of goods, consultants' services andTraining; and (c) supporting biological control program and promoting integrated pest managementthrough the provision of goods, consultants' services and Training.

3. Enhancing animal health and veterinary services by: (a) enhancing access to quality-assuredveterinary services to strengthen the State Veterinary Service (SVS) field units and promotion of acomplimentary private veterinary service; (b) strengthening the disease surveillance andpreparedness functions of the SVS by implementing animal disease control programs anddevelopment of an animal disease control information system; and (c) providing support toveterinary education, including upgrading the veterinary faculty of the Azerbaijan State AgriculturalUniversity, all through the provision of goods, consultants' services and Training.

Part B: Agribusiness value chain development

1. Development of the agribusiness value chain through: (a) provision of Training, consultants'services, workshops and awareness campaigns for value chain participants to assist them inestablishing productive partnerships and preparing Value-chain Sub-project proposals; and (b)provision of Grants to finance eligible demand-driven Individual Investments under Value-chainSub-projects for the development of value chains in accordance with the Operational Manual.

2. Provision of goods, consultants' services and Training to support: (a) seed research and varietydevelopment program; (b) seed production and processing capabilities; (c) state seed inspectionand variety testing services and seed testing laboratories; and (d) private seed growers.

Part C: Financial services to agribusiness

Enhancing the financial services to agribusiness through:

1. The expansion of access to rural financial services provided by eligible PFIs through the provisionof Sub-loans and Lease Financing to agribusiness enterprises (Sub-loan Beneficiaries and/orLease Financing Beneficiaries) in accordance with the AIG.

2. The implementation of a capacity building program to improve skills in agricultural lending throughprovision of consultants' service and Training.3. Support to the development of the agricultural insurance program through the provision ofconsultants' services and Training.

Part D: Proiect Management

Support of the PMU for the effective implementation of the Project, through provision of goods, works,consultants' services, Training and Operating Costs.

AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECTIBRD LOAN 8286-AZNOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED)FOR THE YEAR ENDED 31 DECEMBER 2017(Amounts are expressed in US dollars unless otherwise indicated)

NOTE 1. BACKGROUND (CONTINIUED)

The following table specifies the categories of Eligible Expenditures that may be financed out of theproceeds of the Loan ("Category"), the allocation of the amounts of the Loan to each Category, and thepercentage of expenditures to be financed for Eligible Expenditures in each Category.

(1) Goods, works, non-consultingservices, consultants' services includingaudit, Training, Incremental Operating 34,413,750Costs, Serological Survey Fees, 3,1,5 2Vaccination Fees, Grants, LeaseFinancing and Sub-loans

Amount payable pursuant to(2) Front-end Fee 86,250 Section 2.03 of this Agreement in

accordance with Section 2.07 (b)of the General Conditions

- (3) Interest Rate Cap or Interest Rate Amount due pursuant to SectionCollar premium 2.07(c) of this AgreementTOTAL AMOUNT 34,500 000

Government Contribution. The Government's contribution of USD 18.75 million to finance projectexpenditures will be disbursed from budget allocations through the treasury system of the Ministry ofFinance of the Republic of Azerbaijan and managed by the PMU. Funds will be released to the project tofinance project expenditures as expenditures are incurred and the Project Account shall be replenishedregularly to minimize delays in project implementation.

The Closing Date of the Project is December 31, 2018.

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

NOTE 2. ACCOUNTING POLICIES

a) Basis of Accounting

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

b) Period of accounts

These special purpose financial statements cover year ended 31 December 2017.

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AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECTIBRD LOAN 8286-AZNOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED)FOR THE YEAR ENDED 31 DECEMBER 2017(Amounts are expressed in US dollars unless otherwise indicated)

NOTE 2. ACCOUNTING POUCIES (CONTINUED)

C) Transactions and balances in foreign currencies

The Project is domiciled in the Republic of Azerbaijan where the local currency is the Azerbaijani manat("AZN"). Because the majority of the Project's transactions are funded and expended in United Statesdollars and in accordance with the requirements of the World Bank, these special purpose financialstatements are presented in United States dollars ("US dollar", "USD" or "US$"), which is the reportingcurrency of the Project. Transactions in other currencies are treated as transactions in foreign currencies.Cash receipts and payments arising from transactions in a foreign currency are recorded in the Project'sreporting currency by applying to the foreign currency amount the exchange rate between the reportingcurrency and the foreign currency at the date of receipt and payment. Cash balances held in a foreigncurrency are reported using the closing rate, which is the spot exchange rate at the reporting date.Unrealised gains and losses arising from changes in foreign currency exchange rates are not cashreceipts and payments. However, the effect of exchange rate changes on cash held in a foreign currencyis reported in the statement of sources and uses of funds and other statements in order to reconcile cashat the beginning and the end of the period. These amounts are presented separately from cash receiptsand payments and include the differences, if any, had those cash receipts and payments and balancesbeen reported at end-of-period exchange rates. At 31 December 2017, the official AZN/USD exchangerate set by the Central Bank of Azerbaijan (CBAR") was 1.7001 (31 December 2016: 1,7707).

NOTE 3. DESIGNATED ACCOUNT

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

NOTE 4. CASH IN BANK

2017 2016IBRD Loan 8286 AZ Designated, US$ 3,178,478 3305,544Government Project Account, US$ 2537,030 225,964

5,71 5,508 3,531,508NOTE 5. METHODS OF WITHDRAWAL

The methods of withdrawal used from the inception of the IBRD Loan up to 31 December 2017 were asfollows:

(a) Designated account

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

(b) Project account

The Project maintains a separate account where the Government counterpart funds are accumulated. Thefunds are further disbursed to contractors based on the shares of expenditure to be incurred by eachcontractor.

(c) Statement of expenditure (SOE)

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

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AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECTIBRD LOAN 8286-AZNOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS (CONTINUED)FOR THE YEAR ENDED 31 DECEMBER 2017(Amounts are expressed in US dollars unless otherwise indicated)

NOTE 7. OPERATING ENVIRONMENT

The Project's principal activities are within the Azerbaijan Republic. Laws and regulations affecting entitiesoperating in Azerbaijan are subject to rapid changes and the Project's assets and operations could be atrisk due to negative changes in the political and economic environment.

NOTE 8. POST BALANCE SHEET EVENTS

There were not any adjusting or significant non-adjusting events that occurred between the reporting dateand the date of authorization of these financial statements,

16