Public Disclosure Authorized

ADRIATIC SEA POLLUTION CONTROL PROJECT I GEF GRANT TF 017706 PROJECT FINANCIAL STATEMENTS, DESIGNATED ACCOUNTS STATEMENT AND INDEPENDENT AUDITORS REPORT for the period from I January 2016 to 31 December 2016 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized POLLUTION CONTROL PROJECT I GEF Grant TF 017706

CONTENTS

Project Financial Statements and Independent Auditor's Report: Independent Auditor's Report Statement of Assets and Liabilities 2 Statements of Sources and Uses of Funds 3-5 Statement of Uses of Funds by Activities of the Project 6 Summary Statement of Expenditure (SOE) - Application for Loan Withdrawal 7 - 9 Notes to the Project Financial Statements - 10 -12 Payments made into Designated Grant Account 13 Designated Grant Account Statement 14 Auditing Documentation Checklist MOORE STEPHEN5 ALTDIT AUDIT ZAOREB REVIZilSKE TSLUGE.

Audit d.o.o. za revizijske usluge Radni6ka cesta 54 10000 Zagreb HRVATSKA Tel:+385 (0) 1 3667 994 Fax:+395 (0) 1 3667 997 E-mail:[email protected]

INDEPENDENT AUDITOR'S REPORT

1. We have audited the accompanying Financial Statements of the ADRIATIC SEA POLLUTION CONTROL PROJECT I (hereinafter: the "Project") financed under GEF Grant No. TF 017706, which comprise: the Statement of Assets and Liabilities of the Project as of 31 December 2016, the Statements of Sources and Uses of Funds of the Project and the Statement of Uses of Funds by Activities of the Project for the period since 1 January 2016 till 31 December 2016 (all together: the "Project Financial Statements"). 2. The Project Financial Statements are the responsibility of the Project's management. Our responsibility is to express an opinion on the Project Financial Statements based on our audit.

3. We conducted our audit in accordance with International Standards of Auditing and International Bank for Reconstruction and Development Guidelines. Those standards and guidelines require that we plan and perform audit to obtain reasonable assurance about whether the Project Financial Statements are free of material misstatements. An audit also includes assessing the accounting principles used and significant estimates made by Project's management, as well as evaluating the overall Project Financial Statements presentation. We believe that our audit provides a reasonable basis for our opinion. 4. In our opinion, the Financial Statements of the ADRIATIC SEA POLLUTION CONTROL PROJECT 1, in all significant terms of reference, truthfully and fairly present, assets and liabilities of the Project as of 31 December 2016, sources and uses of funds of the Project and uses of funds by activities of the Project, and cash receipts and payments of the Project in the Designated Account for the year ended 31 December 2016, in accordance with International Accounting Standards for public sector and International Bank for Reconstruction and Development Guidelines.

9 5. With respect to Summary Statement of Expenditure ("SOE") - Application for Loan Withdrawal: (a) adequate supporting documentation has been maintained to support claims for reimbursements of expenditures incurred; (b) the Summary Statement of Expenditure has been reconciled to the other Project Financial Statements without exception and (c) the expenditure disbursements underlying the Summary Statement of Expenditure have been made in accordance with International Bank for Reconstruction and Development requirements.

Zagreb, 2 May 2017

Audit d.o.o. Radni6ka cesta 54 10000 Zagreb k

Marijana Pranji, director Marijana Pr (j6,certified auditor

th.ore tephensfnternan-al Lankedn- mehers'bn prncipedni,audzestru 1 1 hewor/ld I1 ADRIATIC SEA POLLITION CONTROL PROJECT I GEF Grant TF 017706

STATEMENT OF ASSETS AND LIABILITIES

(in IIRK At 31 At 31 At 31 December December December Notes 2016 2015') 2014

ASSETS Cash assets - Designated Grant Account 3 1,105,357 1,732,121 Paid from the Grant Account 8 February 2016 0 (390,000) Eligible costs of the Project 4 5,684,752 3,254,466 706,710 Project Expenditures - Environmental Protection and Energy Efficiency Fund 1,414,281 813,617 176,677 Fees - Designated Grant Account 3 2,356 1,156 - 8,206,746 5,411,360 883,387 SOURCES Grant 5/i/ 6,766,475 4,583,324 706,710 Environmental Protection and Energy Efficiency Fund 5/ii/ 1,414,281 813,617 176,677 8,180,756 5,396,941 883,387 NET ASSETS2 ) 6 25,990 14,419 -

1) The first costs associated with the Project were created in 2014, but they are reimbursed from the proceeds of the Grant in 2015 when there has been a first deposit into the Designated Grants Account and when the preparation of the financial statements of the Project have been started 2) Net assets represents interest on the Designated Grant Account

Notes from page 10 to 12 form an integral part of these Project Financial Statements. Independent Auditor's Report - page 1.

2 ADRIATIC SEA POLLUTION CONTROL PROJECT I GEF Grant TF 017706

STATEMENTS OF SOURCES AND USES OF FUNDS OF THE PROJECT

I STATEMENT OF SOURCES AND USES OF FUNDS OF THE PROJECT - GRANT FUNDS

(in HRK) Cumulative 2016 2015 2014 until 31 Plan until Variance December 2019 2016 1 2 3 4 5 6(5 minus 4) FINANCING From Designated Account 2,431,486 2,191,554 - 4,623,040 - From Bank Account of FZOEU - refunded from the Grant - 357,358 706,710 1,064,068 - 2,431,486 2,548,912 706,710 5,687,108 27,306,500 21,619,392 EXPENDITURE Consultants' Services in the Project 2,430,286 2,547,756 706,710 5,684,752 27,306,500 21,621,748 Fees - Designated Grant Account 1,200 1,156 - 2,356 - (2,356) 2,431,486 2,548,912 706,710 5,687,108 27,306,500 21,619,392

* 1) The first expenses associated with the Project were created in 2014, when they are paid to the Fund, but they are reimbursed from the proceeds of the Grant in 2015.

II STATEMENT OF SOURCES AND USES FUNDS OF THE PROJECT - RESOURCES OF ENVIRONMENTAL PROTECTION AND ENERGY EFFICIENCY FUND

(in HJRK) Cumulative until 31 2014 December 2016 2015 December 2016 1 2 3 4 FINANCING Environmental Protection And Energy Efficiency Fund 600,664 636,940 176,677 813,617 600,664 636,940 176,677 813,617 EXPENDITURE Consultants' Services in the project 600,664 636,940 176,677 813,617 600,664 636,940 176,677 813,617

Resources of Environmental Protection and Energy Efficiency Fund were used for payment of VAT invoices received from suppliers.

Notes from page 10 to 12 form an integral part of these Project Financial Statements. Independent Auditor's Report - page 1. 3 ADRIATIC SEA POLLUTION CONTROL PROJECT I GEF Grant TF 017706

STATEMENTS OF SOURCES AND USES OF FUNDS - continued

/i/ Adriatic Sea POLLUTION CONTROL PROJECT (Project) is a regional project, which is designed as part of the wider Adriatic program for the environment. The project includes activities in two riparian countries of the Adriatic Sea, in and in Bosnia and Herzegovina.

Project objectives are:

(A) reduce the discharge of pollutants from the cross-border character, especially nitrogen, in selected "black spots" in the Croatian coast of the Adriatic Sea; and

(B) improve the capacity of the Republic of Croatia and Bosnia and Herzegovina for the preparation of . pollution control projects in selected localities in Croatian coast of the Adriatic Sea and Herzegovina and strengthen the capacity for monitoring sea water quality.

The project consists of the following parts:

Part 1. Demonstrative investments to reduce nutrient discharges and improve the ability of monitoring the quality of sea

and - (a) Design and construction works of integrated system with purpose of leachate collection management on landfill Sitnica.

. (b) Purchase and installation of equipment for monitoring sea water quality and strengthening regional capacity for monitoring sea water quality.

Part 2. Technical assistance

(a) support for (i) performing evaluation of sources of nutrients, including spot and non-spot sources in two sensitive areas / "black spots" in Croatian coast of the Adriatic Sea ( Neretva County) and in the Neretva's delta, and (ii) preparing policy analysis, legislative and / or institutional reforms needed . to address the problems related to water quality.

(b) Technical assistance for the preparation of conceptual design and design documentation, including the preparation of tender documents for access to EU funds for investments in the processing and management of leachate in accordance with the requirements of the EU in selected places in Croatian coast of the Adriatic Sea.

Notes from page 10 to 12 form an integral part of these Project Financial Statements. Independent Auditor's Report - page . 4 ADRIATIC SEA POLLUTION CONTROL PROJECT I GEF Grant TF 017706

STATEMENTS OF SOURCES AND USES OF FUNDS - continued

It was agreed that for the implementation of these objectives and monitoring the implementation of the Project in the Republic of Croatia as the implementing agency Fund for Environmental Protection and Energy Efficiency Fund (the "Fund") is appointed. For those parts of the Project in the Republic of Croatia is planned financing from the grant from the Global Environment Facility (Global Environment Fund - GEF) in the amount of USD 4,330,000.

In accordance with the concluded Grant Agreement dated 8 September 2014, the Closing Date was 15 March 2017, but in accordance with Amendment of the Grant Agreement as of 26 September 2016 the Closing Date was extended until 15 February 2019, as well as the use of funds and the reallocation of demonstrative investments funds. Consequently, a restructuring of the Project was carried out, in which the rehabilitation of the landfill site of Sitnica on Kor6ula was included in the Project, instead of the Diklo landfill in Zadar.

The first costs related to the project were made in July 2014 and have been paid from the Fund's bank . account. In 2015 these costs have been reimbursed to the Fund after the opening of the Designated Account.

Notes from page 10 to 12 form an integral part of these Project Financial Statements. Independent Auditor's Report - page 1. 5 ADRIATIC SEA POLLUTION CONTROL PROJECT I GEF Grant TF 017706

STATEMENT OF USES OF FUNDS BY ACTIVITIES OF THE PROJECT

(in HRK) Cumulative 201620152014until 31 201620152014 December 2016 2 3 4 Part 1. Demonstrative investments to reduce nutrient discharges and improve the ability of monitoring the quality of sea (a) Design and construction works of integrated system with purpose of leachate collection and management on landfill Sitnica. - (b) Purchase and installation of equipment for monitoring sea water quality and strengthening regional capacity for monitoring sea water quality. ______

Part 2. Technical assistance (a) support for (i) performing evaluation of sources of nutrients, including spot and non-spot sources in two sensitive areas / "black * spots" in the Croatian coast of the Adriatic Sea (Dubrovnik - Neretva County) and the Neretva's delta, and (ii) preparing policy analysis, legislative and I or institutional reforms needed to address the problems. related to water quality. -- * (b) Technical assistance for the preparation of conceptual design and design documentation, including the preparation of tender documents for access to EU funds for investments in the processing and management of leachate in accordance with the * requirements of the EU in the Croatian coast of the Adriatic Sea. 2,430,286 2,547,756 706,710_ 5,684,752 2,430,286 2,547,756 706,710 5,684,752

TOTAL EXPENDITURE 2,430,286 2,547,756 706,710 5,684,752

Notes from page 10 to 12 form an integral part of these Project Financial Statements. 206 ADRIATIC SEA POLLUTION CONTROL PROJECT 1 GEF Grant TF 017706

SUMMARY STATEMENT OF EXPENDITURE ("SOE") - APPLICATION FOR LOAN WITHDRAWAL

Amount of Amount paid Payment date Invoice eligible from the from the Type of amount expense - account of account of Application No. 1 - Refunding expenditure HRK HRK Fund - HRK Fund

Summary sheetNo. 1 Consulting 440,136 352,109 352,109 25 July 2014 Total Application No.1 440,136 352,109 352,109

Amount of Amount paid Payment date Account eligible from the from the Type of amount expense - account of account of Application No. 2 - Refunding expense HRK HRK Fund - HRK Fund 26 January Summary sheet No. 1 Consulting 443,251 354,601 354,601 2015 06 March Summary sheet No. 1 Consulting 446,698 357,358 357,358 2015 Total Application No.2 889,949 711,959 711,959

Application No. 3 is related to the request for pre-financing payment to the Designated Grant Account and there are no expenses reported in the Summary sheet.

Amount of Amount paid Invoice eligible from the Exchange Type of amount expense - Designated Date of rate USD Application No. 4 expenditure HRK H4RK account - USD payment /HRK 10 August Summary sheet No. I Consulting 441,487 353,190 51,561 2015 6.850 I1 September Summary sheet No. I Consulting 487,500 390,000 59,252 2015 6.582 Total Application No.4 928,987 743,190 110,813

Notes from page 10 to 12 form an integral part of these Project Financial Statements. Independent Auditor's Report - page 1. 7 ADRIATIC SEA POLLUTION CONTROL PROJECT I GEF Grant TF 017706

SUMMARY STATEMENT OF EXPENDITURE ("SOE") - APPLICATION FOR LOAN WITHDRAWAL - continued

Amount of Amount paid Invoice eligible from the Exchange Type of amount expense - Designated Date of rate USD Application No. 5 expenditure HRK HRK account - USD payment /HRK 25 September Summary sheet No. I Consulting 438,623 350,898 52,608 2015 6.670 25 September Summary sheet No. 1 Fees - 1,156 170 2015 6.670

Total Application No.5 438,623 352,054 52,778

Amount paid Amount of from the Invoice eligible Designated Exchange Type of amount expense - account - Date of rate USD Application No. 6 expenditure HRK HRK USD payment /HRK 28 December Summary sheet No. I Consulting 882,888 706,310 102,661 2015 6.880 8 February Summary sheet No. I Consulting 487,500 390,000 58,036 2016 6.720 Total AppLication No.6 1,370,388 1,096,310 160,697

Project, modified 1) In accordance with generally accepted accounting policies in the Operations Manual of the accrual principle was applied where the costs are recognized when incurred and revenue when they become available. This transaction occurred in December 2015 and paid in February 2016

Amount paid Amount of from the Invoice eligible Designated Exchange Type of amount expense- account- Date of rate USD Appliction o. 7 expenitre HRK H1RK USD payment /HRK Summary sheet No. 1 Consulting 441,488 353,190 53,660 30 March 2016 6.582 Summary sheet No. 1 Consulting 441,488 353,190 54,505 24 June 2016 6.480 Srilanka March, April Summary sheet No. 2 Conference 27,628 4,016 and June 2016 No.7 882,976 734,008 112,181 Total Application HRK SD pymen /HR

Notes from page 10 to 12 form an integral part of these Project Financial Statements. Independent Auditor's Report - page 1. ADRIATIC SEA POLLUTION CONTROL PROJECT I GEF Grant TF 017706

Amount paid Amount of from the Invoice eligible Designated Exchange Type of amount expense - account - Date of rate USD Application No. 8 expenditure HRK HRK USD payment /HRK Summary sheet No. 1 Consulting 487,500 390,000 59,091 22 July 2016 6.600 02 September Summary sheet No. I Consulting 487,500 390,000 59,289 2016 6.578 Fees - 1,200 - 18 July 2016 Total Application No.8 975,000 781,200 118,380

Amount paid Amount of from the Invoice eligible Designated Exchange Type of amount expense - account - rate USD Application No. 9 xpenditure HRK HRK USD Date of payment /HRK Summary sheet No. I Consulting 216,359 173,088 25,582 31 October 2016 6.600 Summary sheet No. I Consulting 487,500 390,000 55,319 20 December 2016 7.050 Summary sheet No. 1 Consulting 441,487 353,190 49,977 29 December 2016 7.067 STotal Application No.9 1,145,346 916,278 130,878

Notes from page 10 to 12 form an integral part of these Project Financial Statements. Independent Auditor's Report - page 1. 9 ADRIATIC SEA POLLUTION CONTROL PROJECT I GEF Grant TF 017706

NOTES TO THE PROJECT FINANCIAL STATEMENTS

1. GENERAL

The Republic of Croatia signed the Agreement on the grant with the International Bank for Reconstruction and Development (IBRD) for the implementation of the GEF Project control pollution of the Adriatic Sea I. Grant is available to the Environmental Protection and Energy Efficiency Fund ("Fund") as the body responsible for implementation of the Project. Project implementation unit (PIU) was established in the Fund with the employees of the Fund.

2. BASIS FOR PREPARATION OF THE PROJECT FINANCIAL STATEMENTS AND THE ACCOUNTING POLICIES

2.1. Accounting policies and the basis for reporting

The financial statements of the Project have been prepared in accordance with generally accepted accounting policies in the Operations Manual Project, applying the modified accrual principle according to which the costs are recognized when incurred and revenue when they become available, and in accordance with the International Bank for Reconstruction and Development Guidelines which are harmonized with International Accounting Standards for the public sector.

2.2. Currency used in reporting

Accounting records of the Project are maintained in local currency - ("HRK") and US dollars ( "USD"). The amounts in Project Financial Statements are stated in HRK.

3. CASH ASSETS

For the implementation needs of the Project, the Fund as a project Implementation Entity (PIE) has opened with Hrvatska pogtanska banka d.d., Zagreb, as the Agent bank, Designated Grant Account where the inflow of funds and payment of the Project's expenditures are recorded.

(in USD) At 31 December 2016

Designated Grant Account Balance 154,195.60

Notes from page 10 to 12 form an integral part of these Project Financial Statements. Independent Auditor's Report - page 1. 10 ADRIATIC SE1 POLLUTION CONTROL PROJECT I GEF Grant TF 017706

NOTES TO THE PROJECT FINANCIAL STATEMENTS - continued

Designated Grant Account balance as of 31 December 2016 is confirmed by the bank statement of Hrvatska pogtanska banka d.d., Zagreb.

The balance on Designated Account as of 31 December 2016 stated in HRK in the amount of HRK 1,105,356,71 represents equivalent value of USD balance using the middle exchange rate of Croatian National Bank as of31 December 2016 in the amount of I USD =7.169 HRK.

4. PROJECT EXPENDITURE

Project expenditure comprises of: (in HRK) 2016 2015 2014 Review by categories Consultants' Services in the Project 7,099,033 4,068,083 883,387 Fees - Designated Grant Account 2,356 1,156 -

Total 7,101,389 4,069,239 883,387

Notes from page 10 to 12 form an integral part of these Project Financial Statements. Independent Auditor's Report - page 1. 11 ADRIATIC SEA POLLUTION CONTROL PROJECT I CEF Grant TF 017706

NOTES TO THE PROJECT FINANCIAL STATEMENTS - continued

5. LIABILITIES / SOURCES li/ Grant

On 08 September 2014, the Republic of Croatia signed the Agreement on the grant from the International Bank for Reconstruction and Development (IBRD) for the implementation of the GEF Project control pollution of the Adriatic Sea l.

through the By this Agreement, GEF supported control environmental pollution in the Adriatic Sea financing of projects in Croatia and Bosnia and Herzegovina. Based on this Agreement the IBRD has granted the Republic of Croatia, a grant in the amount of USD 4,330,000 to assist in financing the Project.

The Agreement entered into force on 5 December 2014 and the Closing Date is 15 February 2019.

In order to facilitate the implementation of the project, the Republic of Croatia on 1 December 2014 entered into a supplemental agreement with the Fund as a body for the implementation of the project, which sets out the tasks the Fund in the implementation of the project.

Given the ineligibility of remediation of landfill Diklo as demonstration investment under the Project, the new location was identified that is eligible for co-financing from the Grant - landfill Sitnica, Municipality of Blato and Municipality of Vela Luka, on island Kor6ula. Accordingly, the Project was restructured whereby remediation of landfill Sitnica on Kor6ula was included in the Project.

/ii/ Other sources

Since the value-added tax, customs duties and excise duties do not fall into the category of eligible expenditure and not financed from the proceeds of the Grant, these costs will be settled by the Fund.

6. NET ASSETS

Net assets at 31 December 2016 in the'amount of HRK 25,990 relate to interest accrued on the funds in the Designated account of the Grant.

Notes from page 10 to 12 form an integral part of these Project Financial Statements. Independent Auditor's Report - page 1. 12 ADRIATIC SEA POLLUTION CONTROL PROJECT I GEF Crant TF 017706

PAYMENTS MADE INTO DESIGNATED GRANT ACCOUNT

Account No. HR6623900011500090782 (USD) Depository Bank Hrvatska pogtanska banka d.d., Zagreb Address Jurigi6eva 4, Zagreb Related Grant GEF Grant No. TF 017706

Exchange Amount in Amount in rae Date HKUDrate HIRK USD HRKIUSD 27 March 2015, 2,780,090 400,000 6.95 16 September 2015. 739,066 110,813 6.67 2015. 3,519,156 510,813

18 July 2016 2,192,432 325,697 6.73 2016 2,192,432 325,697 Total 5,711,588 836,510

Payments calculated according to the mean rate of the Croatian National Bank.

Notes from page 10 to 12 form an integral part of these Project Financial Statements. Independent Auditor's Report - page 1. 13 ADRIATIC SEA POLLUTION CONTROL PROJECT I GEFGrani TF017706

DESIGNATED GRANT ACCOUNT STATEMENT

Account No. HR6623900011500090782 (USD) Depository Bank Hrvatska po tanska banka d.d., Zagreb Address Jurigi6eva 4, Zagreb Related Grant GEF Grant No. TF 017706

(in HRK) Balance of Designated Account at 31 December 2015. 1,732,021

Add:

Withdrawal of the Grant to the Designated Grant Account 2,192,432 2,192,432 Total 3,924,453

Balance of the Designated account at 31 December 2016 1,105,357

Add: The costs reported in the statement of sources and use of proceeds of the Grant - Paid from the Designated Account 2,430,286 Fees 1,200 The cost paid from the Designated Account in 2016 390,000 Exchange rate differences 9,181 2,830,667 Deduct: Interest in the Designated Account (11,571) (11,571)

Total 3,924,453

Note 1: The Designated Account is recorded in USD. Balance as of 31 December 2016 in the amount of USD 154,195.60 USD is confirmed by the bank statement of Hrvatska pogtanska banka d.d., Zagreb. The balance in the USD is stated in HRK using the middle exchange rate of Croatian National Bank as of 31 December 2016 in the amount of I USD = 7.169 HRK and amounts to HRK 1,105,356.71

Notes from page 10 to 12 form an integral part of these Project Financial Statements. Independent Auditor's Report - page 1. 14 ADRIATIC SEA POLLUTION CONTROL PROJECT I GEF Grant TF 017706

AUDIT DOCUMENTATION CHECKLIST

Name of Project Adriatic Sea Pollution control Project I Grant GEF: TF 017706

Check if Check included if N/A

I Audit Report (Opinion) A. Applicable accounting standards noted B. Applicable auditing standards noted C. Opinion rendered on all forms of withdrawals 1. Summary Statement of Expenditure ("SOE") - Application for Loan Withdrawal D. All sources of financing for the Project are noted

II Financial Reports: A. Revenue Earning Entity 1. Balance Sheet 2. Cash Flow Statement 3. Income Statement B. Non-Revenue Earning entity 1. Statement of Assets and Liabilities 2. Statements of Sources and Uses of Funds C. If applicable (refer to Grant) 1. Statement of Uses of Funds by Activities of the Projects 2. Summary Statement of Expenditure ("SOE") - Application for Loan Withdrawal 4 3. Designated Accounts' Statements

III Notes to the Financial Statements

IV Management Letter