JUDICIAL SERVICES AND SMART …documents.worldbank.org/curated/en/504601500557741066/...JUDICIAL SERVICES AND SMART INFRASTRUCTURE PROJECT OF THE REPUBLIC OF AZERBAIJAN TABLE OF CONTENTS

JUDICIAL SERVICES AND SMARTINFRASTRUCTURE PROJECT OFTHE REPUBLIC OF AZERBAIJANLOAN NUMBER 8407 AZ

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

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JUDICIAL SERVICES AND SMART INFRASTRUCTURE PROJECT OFTHE REPUBLIC OF AZERBAIJAN

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 cash receipts and payments 4-5

Statement of project activities 6-9

Statement of designated and project accounts 10

Statement of expenditure and summary sheet withdrawal schedule 11

Notes to the special-purpose financial statements 12-17

-'WBAKER TILLY 19-YEARS

AZERBAIJAN OFEXCELLENCE

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 Judicial Services and Smart Infrastructure Project of the Republic of Azerbaijan:

Opinion

We have audited the Special-Purpose Financial Statements of the Judicial Services and Smart Infrastructure

Project of the Republic of Azerbaijan (the "Project"), which comprise the Special-Purpose Balance Sheet as

at December 31, 2016, and the Statement of Cash Receipts and Payments, the Statement of Project Activities,

the Statement of Designated and Project Accounts and the Statement of Expenditure and Summary Sheet

Withdrawal Schedule ("SOE and SSWS") for the year ended December 31, 2016, and a summary of basis of

accounting and other explanatory notes (collectively referred to as the "Special-Purpose Financial Statements")

financed under the International Bank for Reconstruction and Development (the "IBRD") through loan

agreement 8407 AZ (the "Loan Agreement").

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 special accounts for the year ended December 31,

2016 in accordance with IPSAS "Financial Reporting under the Cash Basis of Accounting" and relevant

provisions of the Loan Agreement 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 Agreement 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.

An independent member of Baker Tilly International

BAKERTILLYAZERBAIJAN

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 Agreement 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.

Responsibilities of Management for the Special-Purpose Financial Statements

Management is responsible for the preparation and fair presentation of the Special-Purpose Financial Statements

in 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 the

preparation of Special-Purpose Financial Statements that are free form material misstatement, whether due to

fraud 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 Statements as

a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report

that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an

audit conducted in accordance with ISAs will always detect a material misstatement when it exists.

Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,they could reasonably be expected to influence the economic decisions of users taken on the basis of these

Special-Purpose Financial Statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional

skepticism throughout the audit. We also:

* Identify and assess the risks of material misstatement of the Special-Purpose Financial Statements,whether due to fraud or error, design and perform audit procedures responsive to those risks, and

obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of

not detecting a material misstatement resulting from fraud is higher than for one resulting from error,as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of

internal control;

* Obtain an understanding of internal control relevant to the audit in order to design audit procedures

that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the

effectiveness of the Project's internal control;

* Evaluate the appropriateness of accounting policies used and the reasonableness of accounting

estimates and related disclosures made by management.

We communicate with those charged with governance regarding, among other matters, the planned scope and

timing of the audit and significant audit findings, including any significant deficiencies in internal control that

we identify during our audit.

A2,,June 14, 2017Baku, the Republic of Azerbaijan


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

Note December 31, December 31,2016 2015

ASSETS AND CUMULATIVE USES OF FUNDS

Cash and cash equivalents 3 108,693 3,496,236Project expenditure 66,339,692 27,975,778Accumulated foreign exchange rate differences 26,395 47,108

TOTAL ASSETS AND CUMULATIVE USES OF FUNDS 66,474,780 31,519,122

SOURCES OF FUNDS

Cumulative IBRD Funds 34,408,469 20,854,141Cumulative Government Funds 32,064,638 10,664,749Other Funds 1,673 232

TOTAL SOURCES OF FUNDS 66,474,780 31,519,122

Approved and signed on behalf of the Judicial Services and Smart Infrastructure Team:

Azer Jafarov Zaur NasrullayJProject Director Finance Manager

June 14, 2017 June 17, 2017Baku, the Republic of Azerbaijan Baku, the Republic of Azerbaijan

The notes on pages 12-17 form an integral part of these Special-Purpose Financial Statements.

3


STATEMENT OF CASH RECEIPTS AND PAYMENTSFOR THE YEAR ENDED DECEMBER 31, 2016(Amounts expressed in the United States Dollars unless otherwise indicated)

Year ended Year ended CumulativeDecember 31, December 31, December 31,

2016 2015 2016

OPENING BALANCEIBRD Designated Account 3,496,236 1,829,033

TOTAL OPENING BALANCE 3,496,236 1,829,033

ADD: FUNDS RECEIVED

IBRD Loan Number 8407 AZInitial deposit to the IBRD Designated Account - 3,000,000 5,000,000Direct funding 1,012,014 6,677,275 7,689,289SOE replenishment 12,542,315 8,926,866 21,469,180Front-end fee - - 250,000

Subtotal IBRD Loan funds 13,554,329 18,604,141 34,408,469

Government funding for Loan Number 8407 AZAdvances to the Project Account 21,399,889 4,290,450 32,064,638

Subtotal Government of Azerbaijan funds 21,399,889 4,290,450 32,064,638

Other fundsTender fees accumulated in the IBRD Designated Account 1,441 232 1,673

Subtotal other funds 1,441 232 1,673

TOTAL FUNDS RECEIVED 34,955,659 22,894,823 66,474,780

Cash withdrawals/IBRD Loan Number 8407 AZCash withdrawn from the IBRD Designated Account (535,455) (955,530) (1,507,985)

Total cash withdrawals (535,455) (955,530) (1,507,985)

LESS: EXPENDITURE

IBRD Loan Number 8407 AZ (bank payments)Civil works (4,288,090) (7,599,793) (11,887,883)Goods (5,213,075) (1,668,858) (6,881,933)Consultants' services (6,130,589) (6,124,868) (12,351,060)Training (120,202) (56,073) (176,274)Incremental operating costs (656,253) (532,013) (1,246,624)Front-end fee - - (250,000)

Subtotal IBRD Loan expenditure (bank payments) (16,408,209) (15,981,605) (32,793,774)

IBRD Loan Number 8407 AZ (cash payments)

Consultants' services (131,784) (101,084) (232,868)Training (8,090) (4,088) (12,178)Incremental operating costs (415,942) (831,853) (1,264,795)

Subtotal IBRD Loan expenditure (cash payments) (555,816) (937,025) (1,509,841)

Total IBRD Loan expenditure (16,964,025) (16,918,630) (34,303,615)

4


STATEMENT OF CASH RECEIPTS AND PAYMENTS (Continued)FOR THE YEAR ENDED DECEMBER 31, 2016(Amounts expressed in the United States Dollars unless otherwise indicated)

Year ended Year ended CumulativeDecember 31, December 31, December 31,

2016 2015 2016Government of Azerbaijan expenditure for IBRD

Loan Number 8407 AZ (bank payments)

Civil works (13,241,734) (1,359,458) (20,975,491)Goods (6,440,642) (2,071,601) (8,512,243)Consultants' services (1,138,835) (534,979) (1,673,814)Training (110,001) (2,100) (112,101)Incremental operating costs (16,050) (40,985) (57,035)Other costs financed fully by the Government (452,627) (252,766) (705,393)

Total Government of Azerbaijan expenditure (21,399,889) (4,261,889) (32,036,077)

TOTAL EXPENDITURE (38,363,914) (21,180,519) (66,339,692)

FOREIGN EXCHANGE DIFFERENCE

Cash on hand 20,733 (18,505) 2,230Project Account - (28,561) (28,561)IBRD Designated Account (21) (35) (64)

TOTAL FOREIGN EXCHANGE DIFFERENCE 20,712 (47,101) (26,395)

CLOSING BALANCEIBRD Designated Account 108,321 3,496,236Cash on hand 372 -

TOTAL CLOSING BALANCE 108,693 3,496,236


Azer Jafarov Zaur NasrullayevProject Director Finance Manager



5


STATEMENT OF PROJECT ACTIVITIESFOR THE YEAR ENDED DECEMBER 31, 2016(Amounts expressed in the United States Dollars unless otherwise indicated)

PROJECT COMPONENTS/ACTIVITIES Year ended Year ended CumulativeDecember 31, December 31, December 31,

2016 2015 20161 Judicial Service Delivery Improvements

1.1 Expanding Access to Justice for All

Consultants' servicesBarriers to access to justice for internally displaced persons,

women, juveniles, minorities and other vulnerable groups -policy and operational analysis and recommendations forimprovement 67,834 147,419 215,253

Legal aid: needs analysis, review of policy options andtechnical support for improving policy and institutionalframework and policy capacity 146,553 139,245 285,798

Removing barriers to expansion of alternative disputeresolution: (a) needs analysis, (b) review of policy optionsand (c) technical support for improving policy andoperational framework and institutional capacity 26,284 212,555 238,839

Analysis of the extent and causes of gender based violence andpreparation of a national strategy and action plan forimproving support for victims of such violence 66,215 180,669 246,884

Juvenile justice: introducing a legal and institutionalframework: (a) needs analysis, (b) review of policy options,(c) preparation of national strategy for prevention of offencesby juveniles - 40,000 40,000

Subtotal 306,886 719,888 1,026,774

1.2 Expanding e-justice services across the Republic ofAzerbaijan

GoodsAccelerating electronic filing in selected high-volume courts

and court complexes through digitization 377,790 1,048,378 1,426,168

Subtotal 377,790 1,048,378 1,426,168

Consultants' servicesUpgrading and modernizing court web portal 136,641 45,667 182,308Electronic Document Management System (DMS) and Case

Management System (CMS) software in selected Phase 1,057,859 - 1,057,859Consultancy services for location-specific site surveys ofjudicial infrastructure in Baku city Bine 35,812 - 35,812

E-library services - design and implementation of a pilot e-library under the Supreme Court 23,438 192,038 215,476

Consultancy services for location-specific site surveys ofjudicial infrastructure 101,108 784,792 885,900

Subtotal 1,354,858 1,022,497 2,377,355

Total Judicial Service Delivery Improvements 2,039,534 2,790,763 4,830,297

6


STATEMENT OF PROJECT ACTIVITIES (Continued)FOR THE YEAR ENDED DECEMBER 31, 2016(Amounts expressed in the United States Dollars unless otherwise indicated)


2016 2015 2016

2 Strengthening Institutional Capacity, Efficiency andMonitoring and Evaluation ("M&E")

2.1 Improving Sector Efficiency, Performance and M&E

Consultants' servicesDevelopment of the key performance indicators and pilot

management dashboard for e-court system 173,956 43,504 217,460Design and conduct of user surveys 105,428 - 105,428Senior judicial information systems advisor 138,832 64,431 203,263

Subtotal 418,216 107,935 526,151

2.2 Strengthening IT Management and OperationalCapacity

GoodsProcurement of Information Technology Service Management

(ITSM) software solutions for MOJ IT Helpdesk 93,080 - 93,080

Subtotal 93,080 - 93,080

Consultants' servicesPolicy analysis and options for sourcing and employment of

skilled IT professionals as Ministry of Justice ("MOJ")personnel 50,041 271,347 321,388

ICT* Development and capacity building manager 16,633 - 16,633ICT Infrastructure specialist 14,415 - 14,415ICT Operation Head 11,867 - 11,867Project Controller (Deputy Project Manager) 16,670 - 16,670IT Trainer and support specialist 8,274 - 8,274ICT support specialists 20,041 - 20,041Interim chief information officer for MOJ 268,606 212,648 481,254

Subtotal 406,547 483,995 890,542

2.3 Communications, Outreach and Change Management

Consultants' services

Audio-Visual Media Preparation 45,353 - 45,353

Subtotal 45,353 - 45,353

2.4 Strengthening Professionalization and Knowledge

Consultants' services

ICT training for judges, court staff and staff of other justiceinstitutions, Phase 3 700,672 - 700,672

Subtotal 700,672 - 700,672

Total Strengthening Institutional Capacity, Efficiency andMonitoring and Evaluation 1,663,868 591,930 2,255,798

7




2016 2015 2016

3 Expansion and Modernization of Justice Infrastructure

Civil WorksConstruction of Sumgait Court Complex 6,852,202 5,247,087 12,099,289Construction of Baku City Narimanov District Court 2,854,096 2,153,817 5,007,913Construction of Surakhani District Court 2,231,159 1,108,653 3,339,812Construction of Masalli District Court 2,075,053 - 2,075,053Construction of annex in Sheki Court Complex and capital

repair of current Sheki District Court building for furtherlocation of the Sheki City Bailiff department 3,517,314 449,694 10,341,308

Subtotal 17,529,824 8,959,251 32,863,375

GoodsICT and other technical equipment for Sumgait Court Complex 2,280,145 - 2,280,145Office equipment and furniture for Baku City Narimanov 1,377,826 - 1,377,826Office equipment and furniture for Baku City Surakhani

District Courts 1,249,281 - 1,249,281ICT and other technical equipment for Imishli District Court 105,193 - 105,193ICT and other technical equipment for Zagatala District Court 106,425 - 106,425Office equipment and furniture for Baku City Binagadi District

Court 796,037 - 796,037Office equipment and furniture for Imishli District Court 120,361 - 120,361Office equipment and furniture for Zagatala District Court 163,665 - 163,665Office equipment and furniture for Gabala District Court 140,103 - 140,103ICT and other technical equipment for Masalli District Court 188,570 - 188,570ICT and other technical equipment for Baku City Narimanov 946,373 - 946,373ICT and other technical equipment for Baku Surakhani District

Courts 860,194 - 860,194Office equipment and furniture for Sumgait Court Complex 2,278,830 - 2,278,830Information computer technologies and other technical

equipments for annexes in Sheki Court Complex - 885,658 885,658Office equipment and furniture for Masalli District Court 569,844 1,771,412 2,341,255

Subtotal 11,182,847 2,657,070 13,839,916

Consultants' servicesUpdating and refinement of courthouse and justice institution

buildings designs 1,102,360 3,133,159 4,235,519Author supervision of courts to be constructed 291,473 283,505 574,978Independent technical review of technical designs for selected

courts 1,573,162 340,123 1,913,285Independent Technical Review (ITR) of JSSIP civil works for

Baku Grave Crimes Courts 452,821 - 452,821Technical supervision of courthouse construction 106,587 137,337 266,411

Subtotal 3,526,403 3,894,124 7,443,014

Total Expansion and Modernization of JusticeInfrastructure 32,239,074 15,510,445 54,146,305

8




2016 2015 2016

4 Project Management and Coordination

GoodsVehicle for Project Implementation Unit ("PIU") - 35,011 35,011

Subtotal - 35,011 35,011

Consultants' servicesRemunerations 748,929 532,492 1,354,537

Subtotal 748,929 532,492 1,354,537

TrainingTraining for PIU and MOJ staff and relevant government

officials 131,637 62,261 193,898

Subtotal 131,637 62,261 193,898

Incremental operating costsOperating costs 1,066,417 1,380,163 2,516,690Salaries of the employees 21,828 24,688 51,763

Subtotal 1,088,245 1,404,851 2,568,453

Other costs financed fully by the Government 452,627 252,766 705,393

Total Project Management and Coordination 2,421,438 2,287,381 4,857,292

5 Front-end-fee - - 250,000

TOTAL PROJECT ACTIVITIES 38,363,914 21,180,519 66,339,692

* ICT- Information and Communications Technology.

Approved and signed on behalf of the Judcial Services and Smart Infrastructure Team:




9


STATEMENT OF DESIGNATED AND PROJECT ACCOUNTSFOR THE YEAR ENDED DECEMBER 31, 2016(Amounts expressed in the United States Dollars unless otherwise indicated)

Project Account, Designated Account Cash onMain State IBRD USD- Hand

Treasury Account AZ491BAZ38160018402016559205

International Bank ofAzerbaijan OJSC,Nagliyyat branch

Opening balance as at January 1, 2015 - 1,829,033 -

Add:Project funds received 4,290,450 11,926,866Other funds received - 232

Cash received - - 955,530

Total receipts 4,290,450 11,927,098 955,530

Deduct:Project eligible expenditure (4,261,889) (9,304,330) -

Cash withdrawn (955,530)

Cash expenditure - - (937,025)

Total deductions (4,261,889) (10,259,860) (937,025)

Effect of foreign exchange rate

IBRD share (35)

Government share (28,561) -

Cash on hand - - (18,505)

Total effect of foreign exchange rate (28,561) (35) (18,505)

Closing balance as at December 31, 2015 - 3,496,236 -

Add:Project funds received 21,399,889 12,542,315

Other funds received - 1,441

Cash received from the IBRD Designated Account 8407 AZ - - 535,455

Total receipts 21,399,889 12,543,756 535,455

Deduct:Project eligible expenditure (21,399,889) (15,396,195) -Cash withdrawn from the IBRD Designated Account (535,455)

Cash expenditure - - (555,816)

Total deductions (21,399,889) (15,931,650) (555,816)

Effect of foreign exchange rate

IBRD share - (21)

Government share - -

Cash on hand - - 20,733

Total effect of foreign exchange rate - (21) 20,733

Closing balance as at December 31, 2016 - 108,321 372





10


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

Category 1 Category 2 Category 3 Category 4 Category 5 Total TotalAdvance Required Replenished

Application No. pame Civil Consultants' Training R lCpayment wrs Goods sevcs Training IOCworks Gosservices

Total applicationsreimbursed as atthe inception date* - - -

2,000,000 2,000,000 2,000,000

Total applicationsreimbursed duringthe year endedDecember 31, 2014 2,000,000 2,000,000 2,000,000

3 3,000,000 - - - - - 3,000,000 3,000,000

4 - - - 95,603 - 110,140 205,743 205,743

5 - - 785,918 689,840 - 103,941 1,579,699 1,579,699

11 - 472,543 382,141 2,338,565 30,781 463,536 3,687,566 3,687,566

13 - 770,230 376,204 1,749,031 16,076 559,209 3,470,750 3,453,857

Total applicationsreimbursed duringthe year endedDecember 31, 2015 3,000,000 1,242,773 1,544,263 4,873,039 46,857 1,236,826 11,943,758 11,926,865

Total applicationsreimbursed as atDecember 31, 2015 5,000,000 1,242,773 1,544,263 4,873,039 46,857 1,236,826 13,943,758 13,926,865

14 - 322,104 - 2,438,675 30,805 693,058 3,484,642 3,484,642

15 - 347,564 1,868,465 1,816,190 15,456 230,252 4,277,927 4,277,927

16 - 1,175,728 2,135,964 1,238,920 23,987 205,147 4,779,746 4,779,746

Total applicationsreimbursed duringthe year endedDecember 31, 2016 - 1,845,396 4,004,429 5,493,785 70,248 1,128,457 12,542,315 12,542,315

Total applicationsreimbursed as atDecember 31, 2016 5,000,000 3,088,169 5,548,692 10,366,824 117,105 2,365.283 26,486,073 26,469,180

* The inception date of the Project is October 22, 2014.




The notes on pages 12-17 form an integral part of these special-purpose financial statements.

11


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

On October 22, 2014 the Republic of Azerbaijan (the "Recipient") has concluded loan agreement withthe International Bank for Reconstruction and Development (the "IBRD") in the amount of USD100,000,000 (the "Loan") to assist in improvement of the access, transparency and efficiency ofdelivery of selected justice services (the "Project"). The maturity date of the loan agreement isDecember 31, 2018.

The Project consists of the following components:

Component 1: Judicial Service Delivery Improvements

- Improving access to justice through: (a) piloting innovative, participatory and more efficient waysto provide legal aid services to the vulnerable and marginalized through the provision of goods,consultant services and training to the Ministry of Justice; and (b) analytic and diagnostic studiesfocusing on: (i) the legal aid system, in particular for vulnerable groups; (ii) the development ofalternative dispute resolution systems; (iii) the policies and institutional arrangements on access tojustice particularly for vulnerable groups and on gender issues related to justice; and (iv) thedevelopment of specific interventions to support access to justice for the Internally DisplacedPersons, refugees and other vulnerable groups through the provision of consultant services andtraining.

- Expanding the provision of electronic access to selected justice services through: (a) thedevelopment and rollout of selected justice e-services; (b) the improvement of the infrastructurefor the justice sector information and communications technology; and (c) the construction of adata center and the rehabilitation and upgrading of a facility for disaster recovery center, throughthe provision of goods, consultant services and training and the carrying out of works.

Component 2: Strengthening Institutional Capacity, Efficiency and Monitoring and Evaluation

- Improving justice sector performance through, interalia: (a) a sector efficiency and expenditurereview including analyses of court case backlogs, efficiency, justice system revenues; (b)strengthening justice sector monitoring and evaluation capacity and quality including through thedevelopment of a justice sector performance monitoring framework and performance indicatorsand the preparation of a strategy and action plan to improve such capacity; (c) strengthening sectorcapacity to undertake and apply poverty and social impact analysis to improve service delivery toeconomically and socially vulnerable groups such as Internally Displaced Persons; and (d) thecarrying out of periodic surveys of, inter alia, court users, lawyers, judges, court staff, notaries,and other justice sector service providers all through the provision of goods, consultant servicesand training.

- Strengthening the information systems management and operational capability of the Ministry ofJustice to support the provision of selected justice services through the provision of goods,consultant services and training.

- Carrying out communications, outreach and change management activities aimed at facilitatingstakeholder engagement in the justice sector reforms, including but not limited to: (a) thedevelopment and implementation of a communications, outreach and change managementstrategy; and (b) the conduct of stakeholder workshops, roundtables, public awareness campaigns,radio, television and print media/internet programs, all through the provision of consultant servicesand training.

12


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

- Strengthening the professional capacity of judges, staff of courts and the Ministry of Justice andthe Justice Academy through, inter alia: (a) the preparation of a justice sector gender strategy andaction plan based on an assessment of gender-based barriers to employment for judges, lawyersand other justice professionals and an analysis of training and sensitization needs on gender issuesfor justice professionals; (b) the development of training courses and curricula and the delivery oftraining for judges and other justice professionals aimed at, but not limited, to improving thequality ofjudicial decisions in economic and commercial disputes and in first-instance courts; and(c) the carrying out of knowledge-sharing activities between judges and other justice sectorprofessionals in Azerbaijan and between Azerbaijan and other judiciaries, justice traininginstitutions and professional networks, through the provision of goods, consultant services andtraining.

Component 3: Expansion and Modernization of Justice Infrastructure

- Construction and rehabilitation of about six courthouses and court complexes at the locationsselected in accordance with criteria set forth in the Operational Manual through the carrying outof works and the provision of goods, consultant services and training.

Component 4: Project Management and Coordination

- Strengthening the capacity of the Ministry of Justice in Project management, monitoring andcoordination including audits of: (1) Project financial statements, (2) environmental and socialsafeguard compliance; and (3) implementation of infonnation and communications technologyactivities under the Project, all through the provision of goods, consultants' services, and training,and financing of incremental operating costs.

The Loan agreement 8407 AZ was intended to finance building of about six modem court buildingsarea (Sumgait Court Complex, Baku City Narimanov Court, Surakhani District Court, Baku GraveCrime Courts Complex, Masalli District Court, Annexes in Sheki Court Complex).

2. BASIS OF ACCOUNTING

Statement of compliance

The Special-Purpose Financial Statements have been prepared on the cash basis of accounting inconformity with the International Public Sector Accounting Standards ("IPSAS") "Financial Reportingunder the Cash Basis of Accounting" issued by the Public Sector Committee of the InternationalFederation of Accountants ("IFAC-PSC") and incorporate the principal accounting policies from 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. Expenditure is accounted for on the basis of actual disbursement of fundsfrom the Project accounts.

13



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) A substantial share of the Project's expenditure is denominated in USD; and

c) 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 ("CBRA") effectiveas at appropriate date. All income and expense transactions denominated in currencies other than USDare converted into USD using the exchange rate of the CBRA prevailing on the date of transaction.

3. CASH AND CASH EQUIVALENTS

Cash and cash equivalents included in the Special-Purpose Financial Statements comprise balance withresident financial institution.

December 31, December 31,2016 2015

IBRD Loan Number 8407 AZCash on hand 372 -IBRD Designated Account USD 108,321 3,496,236

Total cash and cash equivalents 108,693 3,496,236

4. DESIGNATED ACCOUNT

The Recipient has established 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 World Bank's "Disbursement Guidelines for Projects" datedSeptember 2006 and detailed arrangements agreed upon between the Recipient and the IBRD.

The Project maintains its Designated Account in USD with the International Bank of Azerbaijan OJSC(located in the Republic of Azerbaijan).

5. CONTRACTUAL COMMITMENTS

As at December 31, 2016 total contractual commitments amounted to USD 14,496,769 (2015:USD 26,535,493). The contractual commitments per expenditure categories were as follows:

December 31, December 31,2016 2015

Category

(1) Civil Works 10,814,542 24,086,502(2) Consultants' services 3,483,515 2,146,102(3) Goods 198,712 302,889

Total contractual commitments 14,496,769 26,535,493

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6. BASIS OF FUNDING AND ELIGIBLE EXPENDITURE

The following table specifies the categories of eligible expenditure that may be financed out of theallocations of the amounts indicated in the Loan to each category, and the percentage of expenditureto be financed for eligible expenditure in each category:

Category December 31, 2015Amount of the Percentage of expenditureLoan allocated to be financed (Net of VAT)

(expressed in USD)

(1) Goods, works and non-consulting services for theProject 65,734,738 49%

(2) Consultants' services including audits, training andincremental operating costs for the Project 31,340,359 100%

(3) Unallocated 2,674,903(4) Front-end fee 250,000 0.25% of the Loan amount(5) Interest Rate Cap or Interest Rate Collar Premium to be paid out of the

premium - proceeds of the Loan

Total eligible expenditure 100,000,000

During the year ended December 31, 2016 other costs in the amount of USD 265,572, USD 125,465and USD 61,590 were financed fully by the Government of the Republic of Azerbaijan regarding"purchase of firefighting equipment", "cleaning of ecological wastage and establishment of technicalwater drainage" and "safety gates for front doors of courts", respectively.

During the year ended December 31, 2015 other costs in the amount of USD 133,682, USD 53,627and USD 65,457 were financed fully by the Govermtnent of the Republic of Azerbaijan regarding"billboard and fencing for courts under construction", "blind lanes" and "program software forimplementation of e-court", respectively.

On November 25, 2014, the IBRD responded by "no objection" to request of government to financethe construction of Annexes in Sheki Court Complex using 100% funding from the Government of theRepublic of Azerbaijan. The procurement plan was revised accordingly.

7. METHODS OF DISBURSEMENT

The methods of disbursement used from the inception of the financing up to and includingDecember 31, 2016 were as follows:

Advance - the IBRD may advance loan proceeds into the Designated Account of the Recipient tofinance eligible expenditure as they are incurred and for which supporting documents will be providedat 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 ("eligible expenditure") that the Recipient has pre-financedfrom its own resources.

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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 EBRD and the Recipient.

8. METHOD OF WITHDRAWAL

IBRD Designated Account

Designated Account is designated disbursement account of the Project to effect the payment of eligibleexpenditure, within defined limits, which do not require individual authorization from the IBRD.Available amounts were drawn down within the limits determined by the relevant loan agreement forthe payment of eligible expenditure for sub-contractors from the Designated Account.

Direct payments from the IBRD Designated Account

Under this method, the Project management prepares applications based on supporting documentswhich are submitted to the IBRD. Payments are made from the Loan Account directly to thecontractors.

Project Account

The Project maintains a separate account in the State Treasury Agency where the Govermnent fundsare accumulated. The funds are further disbursed to sub-contractors based on the shares of expenditureto be incurred by each funding source.

Statement of expenditure ("SOE")

Under the SOE method, the Project forwards to the IBRD an application for reimbursement ofpayments already made using an application for withdrawal with SOE forms as the onlydocumentation.

Cash on hand

For the year ended December 31, 2016, the Project management has withdrawn cash in the amountof USD 555,816 from IBRD Loan Number 8407 AZ (2015: USD 937,025) to cover miscellaneousexpenditures. The withdrawn amounts have been converted into AZN and disbursed further to fundthe Project expenditures. The mentioned transactions were segregated from the other transactions.The cash balance was USD 372 as at December 31, 2016 and nil as at 2015.

9. OPERATING ENVIRONMENT

The Project's operations are conducted in the Republic of Azerbaijan. As an emerging market, at thepresent time the Republic of Azerbaijan is developing business and regulatory infrastructure that wouldgenerally 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.

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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.

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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