Public Disclosure Authorized

AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECT

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (IBRD)

LOAN No. 8286-AZ

REPORT OF INDEPENDENT AUDITORS AND SPECIAL PURPOSE FINANCIAL STATEMENTS

FOR THE YEAR ENDED Public Disclosure Authorized 31 DECEMBER 2017 Public Disclosure Authorized Public Disclosure Authorized 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 related notes of the Agricultural Competitiveness Improvement Project, (the "Project") financed by the International Bank for Reconstruction and Development Loan No. 8286-AZ, and the Government of Azerbaijan. They have been prepared in accordance with the basis of accounting described in Note 2 of the accompanying special purpose financial statements. The Project maintains internal accounting control systems and related policies and procedures designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorisation and properly recorded, and that accounting records may relied be upon for the preparation of financial statements and other financial information. The system contains self-monitoring mechanisms that allow management to be reasonably confident that controls, as well as the Project's administrative procedures and internal reporting requirements operate effectively. There inherent are limitations in the effectiveness of any system of internal control, including the possibility of human error or the circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statements preparation.

Anar ' Azimov 7< Fariz Huseynov PMU Director PMU Financial specialist

29 May 2018

Baku, Azerbaijan

3 MOORE STEPHENS

Moore Stephens Azerbaijan Limited 13, Zeynalabdin Taghlyev Street Baku 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 Agricultural Competitiveness Improvement Project (the "Project") financed under the International Bank for Reconstruction and Development ("IBRD") Loan No. 8286-AZ which comprise the balance sheets as of 31 December 2017, statements of sources and uses of funds, statements of uses of funds by project activities, statements of designated account, statements of expenditure ("SOE") withdrawal schedules for the year then ended and a summary of significant accounting policies and other explanatory notes. We have also audited the Project's compliance with conditions of the relevant Loan Agreements, the World Bank guidelines, laws and regulations of the Azerbaijan Republic.

In our opinion, the accompanying special purpose financial statements referred to above, present fairly, in all material respects, the financial position of the Project and of the special and project accounts as of 31 December 2017 and related sources and uses of funds, Project activities by components and movements in special and project accounts for the year then ended, in accordance with the basis of accounting described in Note 2 to the accompanying special purpose financial statements and the Project is in all material respects, in compliance with the conditions of the relevant Loan Agreement and the World Bank guidelines 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 the audit of financial statements and to compliance auditing, with special reference to ISA 800. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Azerbaijan, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit 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 in accordance with the basis of accounting described in Note 2 of the accompanying special purpose financial statements. This responsibility includes: designing, implementing and maintaining internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

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

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

4 MOORE STEPHENS

- Auditor's responsibility for the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's 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 financial statements.

29 May 2018

5 AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECT IBRD LOAN 8286-AZ BALANCE SHEET AS AT 31 DECEMBER 2017 (Expressed in US dollars)

Note 2017 2016

ASSETS AND CUMULATIVE EXPENDITURE

Cash in bank 4 5,715,508 3,531,508 Cumulative Project expenditures 21,348,607 15,939,203 27,064,115 19,470,711

SOURCES OF FUNDS

Project financing 27,283,157 19,638,574 Accumulated foreign exchange difference (219,042) (167,863) 27,064,115 19,470,711

Anar Azimov 1 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 PROJECT IBRD LOAN 8286-AZ STATEMENT OF SOURCES AND USES OF FUNDS FOR THE YEAR ENDED 31 DECEMBER 2017 (Expressed in US dollars)

Note 2017 2016 Cumulative OPENING BALANCES IBRD Loan Designated Account No. 8286 4 3,305,544 2,825,703 Government of Azerbaijan 4 225,964 72,200 3,531,508 2,897,903 ADD: FUNDS RECEIVED BY SOURCES IBRD Loan Designated Account No. 8286 3,538,434 7,541,647 17,915,483 IBRD 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 9,274,585 fee Tender 1,469 3,790 6,839 L644,583 10,778,449 27,283,157 TRANSFERS BETWEEN ACCOUNTS Special account 55,774 Project account _ - (55,774)

ADDILESS:EXCHANGE DIFFERENCE IBRD Loan Designated Account No. 8286 (66,893) 52,269 (37,717) Government of the Republic of Azerbaijan 15,714 (74,948) (181,325) E (22,679) (219,042) LESS: EXPENDITURE L (51,179) IBRD Loan Designated Account No. 8286 Consultants Services including Audit 362,656 600,847 1,038,820 Incremental operating costs 381,113 500,756 1,329,206 Serological Survey Fees 70,790 56,713 165,927 Sub- loans and lease financing - 5,210,121 8,017,336 Front-end fee - - 86,250 Goods 2,030,536 126,403 2,783,126 Grants 62,329 - 62,329 Trainings 52,335 55,502 155,737 Vaccination fees 528,446 544,317 1,072,763 Non-consulting services 4,625 6,924 11,549 Works 105,777 12,492 118,269 3,598,607 7,114,075 14,841,312 Government of the Republic of Azerbaijan Consultants Services including Audit 223,192 369,402 626,654 Incremental operating costs 152,245 158,861 423,251 Serological Survey Fees 27,343 22,048 66,424 Sub- loans and lease financing - 2,026,315 3,160,880 Goods 1,088,995 56,760 1,517,739 Grants 24,239 - 24,239 Trainings 19,897 21,581 60,099 Vaccination fees 205,507 345,572 551,079 Non-consulting services 1,799 2,693 4,492 Works 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 statements 7 AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECT IBRD LOAN 8286-AZ STATEMENT OF SOURCES AND USES OF FUNDS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2017 (Expressed in US dollars)

Note 2017 2016 Cumulative CLOSING BALANCES IBRD Loan Designated Account No. 8286 4 3,178,478 3,305,544 Government 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 292,042 353,979 Principal 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 rural businesses. It is a financing tool that recycles funds by providing loan repayment, and then providing further loans. In 2017, RF balances, receipts and expenditure are segregated from the Project 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 statements 8 AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECT IBRD LOAN 8286-AZ STATEMENT OF USES OF FUNDS BY PROJECT ACTIVITIES FOR THE YEAR ENDED 31 DECEMBER 2017 (Expressed in US dollars)

Project Component/Activity 2017 2016 Cumulative

A: Support for sanitary and phytosanitary services Al. Food Safety Capacity Building 18,043 - 18,043 A2. Upgrading Plant Health and Phytosanitarian Sys 43,613 78,627 167,993 A3. Animal Health and Veterinary Services 1,768,157 1,716,091 4,655,055 1,829,813 1,794,718 4,841,091 B. Agribusiness value chain development Bl. Agribusiness value chain development 602,284 470,460 1,143,573 B2. 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 KA PMU Director PMU Financial specialist

The notes set out on pages 11-15 form an integral part of these financial statements 9 AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECT IBRD LOAN 8286-AZ STATEMENT OF DESIGNATED ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2017 (Expressed in US dollars)

IBRD-8286DA: Account number AZ731BAZ38190078409330335120 t BInternational Bank of Azerbaijan Depository Bank

2017 2016 Cumulative Balance at the beginning of reporting 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 18,001,733 DEDUCT: 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 PROJECT IBRD LOAN 8286-AZ NOTES TO THE SPECIAL PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2017 (Amounts are expressed in US dollars unless otherwise indicated) NOTE 1. BACKGROUND

IBRD Loan Designated Account No. 8286 Agricultural Competitiveness Improvement Project (the "Project") is a project established and projected by the Government of Azerbaijan and World Bank and implemented by the State Service on Management of Agricultural Projects and Credits under the Ministry of Agriculture of Azerbaijan Republic to facilitate the access 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 reduce existing obstacles to agricultural and food trade:

1. Food safety capacity building through the establishment of a national food safety training center and implementing comprehensive training program. 2. Upgrading the State Phytosanitary Control Services (SPCS) by: (a) strengthening pest diagnostic capacity through provision of equipment for SPCS laboratories and Training; (b) enhancing pest control and pest risk analysis capacity through the provision of goods, consultants' services and Training; and (c) supporting biological control program and promoting integrated pest management through the provision of goods, consultants' services and Training. 3. Enhancing animal health and veterinary services by: (a) enhancing access to quality-assured veterinary services to strengthen the State Veterinary Service (SVS) field units and promotion of a complimentary private veterinary service; (b) strengthening the disease surveillance and preparedness functions of the SVS by implementing animal disease control programs and development of an animal disease control information system; and (c) providing support to veterinary education, including upgrading the veterinary faculty of the Azerbaijan State Agricultural University, 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 in establishing productive partnerships and preparing Value-chain Sub-project proposals; and (b) provision of Grants to finance eligible demand-driven Individual Investments under Value-chain Sub-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 variety development program; (b) seed production and processing capabilities; (c) state seed inspection and 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 provision of Sub-loans and Lease Financing to agribusiness enterprises (Sub-loan Beneficiaries and/or Lease Financing Beneficiaries) in accordance with the AIG. 2. The implementation of a capacity building program to improve skills in agricultural lending through provision of consultants' service and Training. 3. Support to the development of the agricultural insurance program through the provision of consultants' 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 PROJECT IBRD LOAN 8286-AZ NOTES 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 the proceeds of the Loan ("Category"), the allocation of the amounts of the Loan to each Category, and the percentage of expenditures to be financed for Eligible Expenditures in each Category.

(1) Goods, works, non-consulting services, consultants' services including audit, Training, Incremental Operating 34,413,750 Costs, Serological Survey Fees, 3,1,5 2 Vaccination Fees, Grants, Lease Financing 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 Section Collar premium 2.07(c) of this Agreement TOTAL AMOUNT 34,500 000

Government Contribution. The Government's contribution of USD 18.75 million to finance project expenditures will be disbursed from budget allocations through the treasury system of the Ministry of Finance of the Republic of Azerbaijan and managed by the PMU. Funds will be released to the project to finance project expenditures as expenditures are incurred and the Project Account shall be replenished regularly 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 Public Sector Accounting Standard ("IPSAS") Financial Reporting under the Cash Basis of Accounting issued by the International Public Sector Accounting Standards Board ("IPSASB"), an independent standard-setting body within the International Federation of Accountants ("IFAC") and incorporate the following principal accounting 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 the World Bank's Financial Management Sector Board. Project financing is recognised as a source of project funds when the cash is received. Project expenditure is recognised as a use of project funds when payment is made.

b) Period of accounts

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

12 AGRICULTURAL COMPETITIVENESS IMPROVEMENT PROJECT IBRD LOAN 8286-AZ NOTES 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 States dollars and in accordance with the requirements of the World Bank, these special purpose financial statements are presented in United States dollars ("US dollar", "USD" or "US$"), which is the reporting currency 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's reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of receipt and payment. Cash balances held in a foreign currency 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 cash receipts and payments. However, the effect of exchange rate changes on cash held in a foreign currency is reported in the statement of sources and uses of funds and other statements in order to reconcile cash at the beginning and the end of the period. These amounts are presented separately from cash receipts and payments and include the differences, if any, had those cash receipts and payments and balances been reported at end-of-period exchange rates. At 31 December 2017, the official AZN/USD exchange rate 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 International the 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 2016 IBRD Loan 8286 AZ Designated, US$ 3,178,478 3305,544 Government Project Account, US$ 2537,030 225,964 5,71 5,508 3,531,508 NOTE 5. METHODS OF WITHDRAWAL

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

(a) Designated account

Available amounts were drawn from time to time within limits determined by the loan agreements for the direct 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. The funds are further disbursed to contractors based on the shares of expenditure to be incurred by each contractor.

(c) Statement of expenditure (SOE)

Under the SOE method, the Project submits to the World Bank an application for reimbursement of payments already made using an Application for Withdrawal (Form 2380 E) with SOE forms, bank reconciliation forms and the bank account statement. .-'_ .

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NOTE 7. OPERATING ENVIRONMENT

The Project's principal activities are within the Azerbaijan Republic. Laws and regulations affecting entities operating in Azerbaijan are subject to rapid changes and the Project's assets and operations could be at risk 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 date and the date of authorization of these financial statements,

16