JUDICIAL SERVICES AND SMART INFRASTRUCTURE PROJECT …€¦ · Construction of annex in Sheki Court...

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

Special-Purpose Financial Statements andIndependent Auditors' ReportFor the Year Ended December 31, 2015

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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, 2015:

Special-purpose balance sheet 3

Statement of cash receipts and payments 4-5

Statement of project activities 6-8

Statement of designated and project accounts 9

Statement of expenditure and summary sheet withdrawal schedule 10

Notes to the special-purpose financial statements 11-16

BAKERTILLYAZERBAIJAN

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:

We have audited the accompanying Special-Purpose Financial Statements of the Judicial Services and SmartInfrastructure Project of the Republic of Azerbaijan (the "Project"), which comprise the Special-PurposeBalance Sheet as at December 31, 2015, and the Statement of Cash Receipts and Payments, the Statement ofProject Activities, the Statement of Designated and Project Accounts and the Statement of Expenditure andSummary Sheet Withdrawal Schedule ("SOE and SSWS") for the year then ended, and a summary of significantaccounting policies and other explanatory notes (collectively referred to as the "Special-Purpose FinancialStatements") financed under the International Bank for Reconstruction and Development (the "IBRD")through loan agreement 8407 AZ (the "Loan Agreement").

Management's Responsibility for the Special-Purpose Financial Statements

Management is responsible for the preparation and fair presentation of these Special-Purpose FinancialStatements in accordance with International Public Sector Accounting Standards ("IPSAS"), "FinancialReporting under the Cash Basis of Accounting" issued by the International Public Sector AccountingStandards Board of the International Federation of Accountants and relevant provisions of the financingagreements as described in Note 2 to the Special-Purpose Financial Statements and for such internal controlas management determines is necessary to enable the preparation of the Special-Purpose FinancialStatements that are free from material misstatement, whether due to fraud or error.

Auditors'Responsibility

Our responsibility is to express an opinion on these Special-Purpose Financial Statements based on ouraudit. We conducted our audit in accordance with International Standards on Auditing. Those standardsrequire that we comply with ethical requirements and plan and perform the audit to obtain reasonableassurance whether the Special-Purpose Financial Statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures inthese Special-Purpose Financial Statements. The procedures selected depend on the auditors' judgement,including the assessment of the risks of material misstatement of the Special-Purpose Financial Statements,whether due to fraud or error. In making those risk assessments, the auditor considers internal controlrelevant to the Project management's preparation and fair presentation of the Special-Purpose FinancialStatements in order to design audit procedures that are appropriate in the circumstances, but not for thepurpose of expressing an opinion on the effectiveness of the Project's internal control,

An independent member of Baker Tilly International

BAKERTILLYAZERBAIJAN

An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness ofaccounting estimates made by management, as well as evaluating the overall presentation of the Special-Purpose Financial Statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for ouraudit opinion.

Opinion

In our opinion, the Special-Purpose Financial Statements present fairly, in all material respects, the financialposition of the Project as at December 31, 2015, the cash receipts and disbursements on behalf of the Projectand transactions passed through the Project's special accounts for the year then ended in accordance withIPSAS "Financial Reporting under the Cash Basis of Accounting" and relevant provisions of the LoanAgreement 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 therespective Loan Agreement and adequate documentation have been maintained to support the claims forwithdrawal.

May 18, 2016Baku, the Republic of Azerbaijan

JUDICIAL SERVICES AND SMART INFRASTRUCTURE PROJECT OF THEREPUBLIC OF AZERBAIJAN

SPECIAL-PURPOSE BALANCE SHEETAS AT DECEMBER 31, 2015(Amounts expressed in the United States Dollars unless otherwise indicated)

Note December 31, December 31,2015 2014

ASSETS AND CUMULATIVE USES OF FUNDS

Cash and cash equivalents 3 3,496,236 1,829,033Project expenditure 27,975,778 6,795,259Accumulated foreign exchange rate differences 47,108 7

TOTAL ASSETS AND CUMULATIVE USES OF FUNDS 31,519,122 8624,299

SOURCES OF FUNDS

Cumulative IBRD Funds 20,854,141 2,250,000Cumulative Government Funds 10,664,749 6,374,299Other Funds 232 -

TOTAL SOURCES OF FUNDS 31,519,122 8,624,299

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

Azer Jafarov Zaur Nasrull evProject Director Finance Manager

May 18,2016 May 18, 2016Baku, the Republic of Azerbaijan Baku, the Republic of Azerbaijan

The notes on pages 11-16 form an integral part of these Special-Purpose Financial Statements.

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STATEMENT OF CASH RECEIPTS AND PAYMENTSFOR THE YEAR ENDED DECEMBER 31, 2015(Amounts expressed in the United States Dollars unless otherwise indicated)

Year ended Period since CumulativeDecember 31, inception date to December 31,

2015 December 31, 20152014*

OPENING BALANCEIBRD Designated Account 1,829,033 -

TOTAL OPENING BALANCE 1,829,033 -

ADD: FUNDS RECEIVED

IBRD Loan Number 8407 AZInitial deposit to the IBRD Designated Account 3,000,000 2,000,000 5,000,000Direct funding 6,677,275 - 6,677,275SOF replenishment 8,926,866 - 8,926,866Front-end fee - 250,000 250,000

Subtotal IBRD Loan funds 18,604,141 2,250,000 20,854,141

Government funding for Loan Number 8407 AZAdvances to the Project Account 4,290,450 6,374,299 10,664,749

Subtotal Government of Azerbaijan funds 4,290,450 6,374,299 10,664,749

Other fundsTender fees accumulated in the IBRD Designated Account 232 - 232

Subtotal other funds 232 - 232

TOTAL FUNDS RECEIVED 22,894,823 8,624,299 31,519,122

Cash withdrawals/IBRD Loan Number 8407 AZCash withdrawn from the IBRD Designated Account (955,530) (17,000) (972,530)

Total cash withdrawals (955,530) (17,000) (972,530)

LESS: EXPENDITURE

IBRD Loan Number 8407 AZ (bank payments)Civil works (7,599,793) - (7,599,793)Goods (1,668,858) - (1,668,858)Consultants' services (6,124,868) (95,603) (6,220,471)Training (56,073) - (56,073)Incremental operating costs (532,013) (58,357) (590,370)Front-end fee - (250,000) (250,000)

Subtotal IBRD Loan expenditure (bank payments) (15,981,605) (403,960) (16,385,565)

IBRD Loan Number 8407 AZ (cash payments)

Consultants' services (101,084) - (101,084)Training (4,088) - (4,088)Incremental operating costs (831,853) (17,000) (848,853)

Subtotal IBRD Loan expenditure (cash payments) (937,025) (17,000) (954,025)Total IBRD Loan expenditure (16,918,630) (420,960) (17,339,590)

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STATEMENT OF CASH RECEIPTS AND PAYMENTS (Continued)FOR THE YEAR ENDED DECEMBER 31, 2015(Amounts expressed in the United States Dollars unless otherwise indicated)

Year ended Period since CumulativeDecember 31, inception date December 31,

2015 to December 31, 20152014*

Government of Azerbaijan expenditure for IBRDLoan Number 8407 AZ (bank payments)

Civil works (1,359,458) (6,374,299) (7,733,757)Goods (2,071,601) - (2,071,601)Consultants' services (534,979) - (534,979)Training (2,100) - (2,100)Incremental operating costs (293,751) - (293,751)

Total Government of Azerbaijan expenditure (4,261,889) (6,374,299) (10,636,188)

TOTAL EXPENDITURE (21,180,519) (6,795,259) (27,975,778)

FOREIGN EXCHANGE DIFFERENCE

Cash on hand (18,505) - (18,505)Project Account (28,561) - (28,561)IBRD Designated Account (35) (7) (42)

TOTAL FOREIGN EXCHANGE DIFFERENCE (47,101) (7) (47,108)

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

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

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


Azer Jafarov Zaur Nasrulla evProject Director Finance Manager

May 18, 2016 May 18, 2016Baku, the Republic of Azerbaijan Baku, the Republic of Azerbaijan


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STATEMENT OF PROJECT ACTIVITIESFOR THE YEAR ENDED DECEMBER 31, 2015(Amounts expressed in the United States Dollars unless otherwise indicated)

PROJECT COMPONENTS/ACTIVITIES Year ended Period since CumulativeDecember 31, inception date to December 31,

2015 December31, 201520015

1 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 147,419 147,419

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

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 212,555 212,555

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 180,669 180,669

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 719,888 719,8881.2 Expanding e-justice services across the Republic ofAzerbaijan

GoodsAccelerating electronic filing in selected high-volume courts

and court complexes through digitization 1,048,378 - 1,048,378Subtotal 1,048,378 - 1,048,378Consultants' servicesUpgrading and modernizing court web portal 45,667 - 45,667E-library services - design and implementation of a pilot e-

library under the Supreme Court 192,038 - 192,038Consultancy services for location-specific site surveys ofjudicial infrastructure 784,792 - 784,792

Subtotal 1,022,497 - 1,022,497Total Judicial Service Delivery Improvements 2,790,763 - 2,790,763

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 43,504 43,504Senior judicial information systems advisor 64,431 64,431Subtotal 107,935 17,9

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STATEMENT OF PROJECT ACTIVITIESFOR THE YEAR ENDED DECEMBER 31, 2015 (Continued)(Amounts expressed in the United States Dollars unless otherwise indicated)


2015 December 31, 2015

2.2 Strengthening IT Management and Operational 2014*

Capacity

Consultants' servicesPolicy analysis and options for sourcing and employment of

skilled IT professionals as Ministry of Justice ("MOJ")personnel 271,347 - 271,347

Interim chief information officer for MOJ 212,648 - 212,648

Subtotal 483,995 - 483,995

Total Strengthening Institutional Capacity, Efficiency andMonitoring and Evaluation 591,930 - 591,930

3 Expansion and Modernization of Justice Infrastructure

Civil WorksConstruction of Sumgait Court Complex 5,247,087 - 5,247,087Construction of Baku City Narimanov District Court 2,153,817 - 2,153,817Construction of Surakhani District Court 1,108,653 - 1,108,653Construction of annex in Sheki Court Complex and capital

repair of current Sheki District Court building for furtherlocation of the Sheki City Bailiff department 449,694 6,374,299 6,823,994

Subtotal 8,959,251 6,374,299 15,333,551

GoodsInformation computer technologies and other technical equipments

for annexes in Sheki Court Complex 885,658 - 885,658Office equipment and furniture for Masalli District Court 1,771,412 - 1,771,411

Subtotal 2,657,070 - 2,657,069

Consultants' servicesUpdating and refinement of courthouse and justice institution

buildings designs 3,133,159 - 3,133,159Author supervision of courts to be constructed 283,505 - 283,505Independent technical review of technical designs for selected

courts 340,123 - 340,123Technical supervision of courthouse construction 137,337 22,487 159,824

Subtotal 3,894,124 22,487 3,916,611

Total Expansion and Modernization of JusticeInfrastructure 15,510,445 6,396,786 21,907,231

4 Project Management and Coordination

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

Subtotal 35,011 - 35,011

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STATEMENT OF PROJECT ACTIVITIESFOR THE YEAR ENDED DECEMBER 31, 2015 (Continued)(Amounts expressed in the United States Dollars unless otherwise indicated)


2015 December 31, 20152014*

Consultants' servicesRemunerations 532,492 73,116 605,608

Subtotal 532,492 73,116 605,608

TrainingTraining for PlU and MOJ staff and relevant government

officials 62,261 - 62,261

Subtotal 62,261 - 62,261

Incremental operating costsOperating costs 1,632,929 70,110 1,703,039Salaries of the employees 24,688 5,247 29,935

Subtotal 1,657,617 75,357 1,732,974

Total Project Management and Coordination 2,287,381 148,473 2,435,854

5 Front-end-fee - 250,000 250,000

TOTAL PROJECT ACTIVITIES 21,180,519 6,795,259 27,975,778



JAzer JafarovAa evProject Director Finance Manager



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STATEMENT OF DESIGNATED AND PROJECT ACCOUNTSFOR THE YEAR ENDED DECEMBER 31, 2015(Amounts expressed in the United States Dollars unless otherwise indicated)

Project Designated Account Cash onAccount, Main IBRD USD- HandState Treasury AZ491BAZ38160018

Account 402016559205International Bank

ofAzerbayan OJSC,Nagliyyat branch

Opening balance as at inception date* - - -

Add:Project funds received 6,374,299 2,000,000Cash received - - 17,000

Total receipts 6,374,299 2,000,000 17,000

Deduct:Project eligible expenditure (6,374,299) (153,960) -Cash withdrawn (17,000)Cash expenditure - - (17,000)

Total deductions (6,374,299) (170,960) (17,000)Effect of foreign exchange rateIBRD share - (7) -

Total effect of foreign exchange rate - (7) -

Closing balance as at December 31, 2014 - 1,829,033 -

Add:Project funds received 4,290,450 11,926,866Other funds received - 232 -Cash received from the IBRD Designated Account - - 955,530

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

Deduct:Project eligible expenditure (4,261,889) (9,304,330) -Cash withdrawn from the IBRD Designated Account (955,530)Cash expenditure - - (937,025)

Total deductions (4,261,889) (10,259,860) (937,025)Effect of foreign exchange rate

IBRD share s (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 -



Azer JafarovProject Director Finance Manager



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STATEMENT OF EXPENDITURE AND SUMMARY SHEET WITHDRAWAL SCHEDULEFOR THE YEAR ENDED DECEMBER 31, 2015(Amounts expressed in the United States Dollars unless otherwise indicated)

Category 1 Category 2 Category 3 Category 4 Category 5 Total Total

Application No. Advance Civil Consultants' Required Replenishedpayment works Goods services Training IOC

Total applicationsreimbursed as atthe inception date* --

1 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 3,000,0004 - - - 95,603 - 110,140 205,743 205,7435 - - 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 3,687,56613 - 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



Azer Jafarov Zaur Nasrul yevProject Director Finance Manager


The notes on pages 11-16 form an integral part of these special-purpose financial statements.

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NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 2015(Amounts expressed in the United States Dollars unless otherwise indicated)

1. DESCRIPTION OF TILE PROJECT

On October 22, 2014 the Republic of Azerbaijan (the "Recipient") has concluded loan agreementwith the International Bank for Reconstruction and Development (the "IBRD") in the amount ofUSD 100,000,000 (the "Loan") to assist in improvement of the access, transparency and efficiencyof delivery 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 efficientways to provide legal aid services to the vulnerable and marginalized through the provision ofgoods, consultant services and training to the Ministry of Justice; and (b) analytic and diagnosticstudies focusing on: (i) the legal aid system, in particular for vulnerable groups; (ii) thedevelopment of alternative dispute resolution systems; (iii) the policies and institutionalarrangements on access to justice particularly for vulnerable groups and on gender issues relatedto justice; and (iv) the development of specific interventions to support access to justice for theInternally Displaced Persons, refugees and other vulnerable groups through the provision ofconsultant services and training.

- 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

- huproving justice sector perfornance 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) strengtheningsector capacity to undertake and apply poverty and social impact analysis to improve servicedelivery to economically and socially vulnerable groups such as Internally Displaced Persons;and (d) the carrying 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, consultantservices and 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 awarenesscampaigns, radio, television and print media/internet programs, all through the provision ofconsultant services and training.

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NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 2015 (Continued)(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 genderissues for justice professionals; (b) the development of training courses and curricula and thedelivery of training for judges and other justice professionals aimed at, but not limited, toimproving the quality of judicial decisions in economic and commercial disputes and in first-instance courts; and (c) the carrying out of knowledge-sharing activities between judges andother justice sector professionals in Azerbaijan and between Azerbaijan and other judiciaries,justice training institutions and professional networks, through the provision of goods, consultantservices and training.

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 information and communications technologyactivities under the Project, all through the provision of goods, consultants' services, andtraining, and financing of incremental operating costs.

The Loan agreement 8407 AZ was intended to finance building of about six modern 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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") "FinancialReporting under the Cash Basis of Accounting" issued by the Public Sector Committee of theInternational Federation of Accountants ("IFAC-PSC") and incorporate the principal accountingpolicies from the "Guidelines: Annual Financial Reporting and Auditing for World Bank FinancedActivities".

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 orpaid out on the Project's behalf. Expenditure is accounted for on the basis of actual disbursement offunds from the Project accounts.

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Foreign currency transactions and translation

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

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 ("CBAR") effectiveas at appropriate date. All income and expense transactions denominated in currencies other thanUSD are converted into USD using the exchange rate of the CBAR prevailing on the date oftransaction.

On February 21, 2015 the CBAR devalued the Azerbaijani Manat (AZN). As a result, the officialexchange rates of AZN to the US dollar fell to AZN 1.05 per US dollar, and the official exchangerate of AZN to the EUR fell to AZN 1.19 per Euro, i.e. by approximately 34% from the exchangerates at the effective date of devaluation.

On December 21, 2015 the CBAR introduced a floating exchange rate that resulted in one-timedevaluation of AZN against US dollar and other major currencies by approximately 48%.

3. CASH AND CASH EQUIVALENTS

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

December 31, December 31,2015 2014

IBRD Loan Number 8407 AZIBRD Designated Account USD 3,496,236 1,829,033

Total cash and cash equivalents 3,496,236 1,829,033

4. DESIGNATED ACCOUNT

The Recipient has established Designated Account at a commercial bank acceptable to the 1BRD 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 AzerbaijanOJSC (located in the Republic of Azerbaijan).

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5. CONTRACTUAL COMMITMENTS

As at December 31, 2015 total contractual commitments amounted to USD 26,535,493 (2014: USD4,419,350). The contractual commitments per expenditure categories were as follows:

December 31, December 31,2015 2014

Category

(1) Civil Works 24,086,502 3,923,824(2) Consultants' services 2,146,102 495,526(3) Goods 302,889 -

Total contractual commitments 26,535,493 4,419,350

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

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

During the year ended December 31, 2015 incremental operating costs in the amount of USD133,682, USD 53,627 and USD 65,457 using 100% funding from the Government of the Republic ofAzerbaijan regarding "billboard and fencing for courts under construction", "blind lanes" and"program software for implementation of e-court", respectively.

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7. METHODS OF DISBURSEMENT

The methods of disbursement used from the inception of the financing up to and includingDecember 31, 2015 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 beprovided at a later date.

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

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

Commitment procedure - the F_BRD may pay amounts to a third party for eligible expenditureunder special commitments entered into, in writing, at the Recipient's request and on terms andconditions agreed between the IBRD and the Recipient.

8. METHOD OF WITHDRAWAL

IBRD Designated Account

Designated Account is designated disbursement account of the Project to effect the payment ofeligible expenditure, within defined limits, which do not require individual authorization from theIBRD. Available amounts were drawn down within the limits determined by the relevant loanagreement for the 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 Government fundsare accumulated. The funds are further disbursed to sub-contractors based on the shares ofexpenditure to 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.

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Cash on hand

For the year ended December 31, 2015 to cover certain expenditures, the Project management haswithdrawn cash in the amount of USD 955,530 from IBRD Loan Number 8407 AZ (2014: USD17,000). The withdrawn amounts have been converted into AZN and disbursed further to fund theProject expenditures. The mentioned transactions were segregated from the other transactions. Thecash balance was nil as at December 31, 2015 and 2014.

9. OPERATING ENVIRONMENT

The Project's principal business activities are within the Republic of Azerbaijan. Laws andregulations affecting projects operating in the Republic of Azerbaijan are subject to rapid changesand the Project's operations could be at certain level of risk due to changes in the political andbusiness environment.

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