capital markets modernization...

CAPITAL MARKETSMODERNIZATION PROJECTIMPLEMENTED BY THE STATECOMMITTEE FOR SECURITIESLOAN NUMBER 8024-AZ

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

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CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BYTHE STATE COMMITTEE FOR SECURITIES

TABLE OF CONTENTS

Page

INDEPENDENT AUDITORS' REPORT 1-2

SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,2015:

Special-purpose balance sheet 3

Statement of summary of sources and uses of funds 4-5

Statement of uses of funds by project components 6-7

Statement of designated account 8

Statement of expenditure and summary sheet withdrawal schedule 9

Notes to the special-purpose financial statements 10-15

BAKER TILLYAZERBAIJAN

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 Project Implementation Unit of the Capital Markets Modernization Projectimplemented by the State Committee for Securities of the Republic of Azerbaijan:

We have audited the accompanying Special-Purpose Financial Statements of the Capital MarketsModernization Project implemented by the State Comnittee for Securities of the Republic of Azerbaijan(the "Project"), which comprise the Special-Purpose Balance Sheet as at December 31, 2015 and theStatement of Summary of Sources and Uses of Funds, the Statement of Uses of Funds by ProjectComponents, the Statement of Designated Account and the Statement of Expenditure and Summary SheetWithdrawal 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 number 8024-AZ (the "Loan Agreement") and the Government of the SwissConfederation ("SECO") through Grant 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 Standard ("IPSAS") "FinancialReporting under the Cash Basis of Accounting" issued by the International Public Sector AccountingStandards Board of the International Federation of Accountants ("IFAC-PSC") and relevant provisions ofthe financing agreements as described in Note 2 to the Special-Purpose Financial Statements and for suchinternal control as management determines is necessary to enable the preparation of the Special-PurposeFinancial Statements 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 about 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' judgment,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 entity's preparation and fair presentation of the Special-Purpose Financial Statements inorder to design audit procedures that are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the entity's internal control,

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

An independent member of Baker Tilly International

BAKERTILLYAZERBAIJAN

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, theSpecial-Purpose Balance Sheet of the Project as at December 31, 2015, the cash receipts anddisbursements on behalf of the Project and transactions passed through the Project's Designated Accountfor the year then ended in accordance with IPSAS "Financial Reporting under the Cash Basis ofAccounting" and relevant provisions of the loan agreement as described in Note 2 of the Special-PurposeFinancial 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.

Emphasis of Matter

Without qualifying our opinion, we draw attention to Note 1 to the accompanying Special-PurposeFinancial Statements. The original completion date of the Project was December 31, 2015. As a result ofnegotiations between the Ministry of Finance of the Republic of Azerbaijan and the IBRD the completiondate of the Project has been prolonged to July 1, 2016.

Without qualifying our opinion, we also draw attention to Note 9 to the Special-Purpose FinancialStatements. According to the decree of the President of the Republic of Azerbaijan on February 3, 2016upon the establishment of Financial Markets Monitoring Board public legal entity, the State Committeefor Securities ceases its operations and the functions of the State Committee for Securities are transferredto the new established public legal entity.

Restriction on Distribution

These Special-Purpose Financial Statements and Auditors' Report thereon are intended solely for theinformation and use of the Project Implementation Unit, the Government of the Republic of Azerbaijan,the IBRD and SECO, and are not intended to be and should not be used by anyone other than thesespecified parties.

April 5, 2016Baku, the Republic of Azerbaijan

CAPITAL MARKETS MODERNIZATION PROJECT IMPLEMENTED BY THE STATECOMMITTEE FOR SECURITIES

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

Notes December 31, December 31,2015 2014

ASSETS AND CUMULATIVE USES OF FUNDS

Cash at bank 3 176,626 255,698Cumulative uses of funds I 1,949,018 7,044,158Accumulated exchange rate differences 665 103

TOTAL ASSETS AND CUMULATIVE USES OF FUNDS 12,126,309 7,299,959

SOURCES OF FUNDS

Cumulative IBRD Funds 8,961,453 5,133,101Cumulative SECO Funds 1,600,000 1,280,901Cumulative Government Funds 1,533,585 854,686Cumulative Other Receipts 1,271 1,271Front-end-Fee 30,000 30,000

TOTAL SOURCES OF FUNDS 12,126,309 7,299,959

Approved and signeti-n belhalf of the Project Implementation Unit:

Bakhtiyar A&izo# Azulla HuseyikovPIU Direct4_ Head of Financial Division

April 5, 2016 April 5, 2016Baku, the Republcbf0A7prbaijan Baku, the Republic of Azerbaijan

The notes on pages 10- 15 form an integral part of these Special-Purpose Financial Statements.

1 -3


STATEMENT OF SUMMARY OF SOURCES AND USES OF FUNDSFOR THE YEAR ENDED DECEMBER 31,2015(Amounts expressed in the United States Dollars unless otherwise indicated)

December 31, December 31, Cumulative2015 2014 to date

December 31,

OPENING BALANCE 2015

IBRD Designated Account 255,559 235,195Project Account 139 14

TOTAL OPENING BALANCE 255,698 235,209ADD: FUNDS RECEIVED

IBRD Loan Number 8024-AZDesignated Account advances - - 450,000SOE and SSWS replenishment 328,784 201,845 789,952Direct payments 3,499,568 963,825 7,721,501Front-end fee - - 30,000

Subtotal IBRD Loan funds 3,828,352 1,165,670 8,991,453SECO Grant Number TF011975Direct payments 319,099 1,066,718 1,600,000Subtotal SECO Grant funds 319,099 1,066,718 1,600,000

Government of AzerbaijanAdvance to Project Account 678,899 196,841 1,533,445Other Receipts - 140 140

Subtotal Government of Azerbaijan funds 678,899 196,981 1,533,585

Other Receipts - 1,271 1,271

Subtotal Other Receipts - 1,271 1,271TOTAL FUNDS RECEIVED 4,826,350 2,430,640 12,126,309LESS: EXPENDITURE

IBRD Loan Number 8024-AZ1. Goods 2,065,331 - 2,065,3312. Consultant's services including audit and training 1,833,063 1,105,289 6,634,5593. Incremental operating costs 8,918 41,288 86,235Subtotal IBRD Loan expenditure 3,907,312 1,146,577 8,786,125

Front-end fee - - 30,000

SECO Grant Number TF0119752. Consultant's services including audit and training 319,099 1,066,718 1,600,000

Subtotal SECO Grant expenditure 319,099 1,066,718 1,600,000

Government of AzerbaijanVAT expenses 677,926 196,831 1,532,352Other expenses 523 - 541

Subtotal Government of Azerbaijan expenditure 678,449 196,831 1,532,893

TOTAL EXPENDITURE 4,904,860 2,410,126 11,949,018

FOREIGN EXCHANGE LOSS

Project Account 562 25 665TOTAL FOREIGN EXCHANGE LOSS 562 25 665

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STATEMENT OF SUMMARY OF SOURCES AND USES OF FUNDSFOR THE YEAR ENDED DECEMBER 31, 2015 (Continued)(Amounts expressed in the United States Dollars unless otherwise indicated)

December 31, December 31,2015 2014

CLOSING BALANCE

IBRD Designated Account 176,599 255,559Project Account 27 139

TOTAL CLOSING BALANCE 176,626 255,698

Approved and signed on behalf of the Project Implementation Unit:

Bakhtiyar Azizov.: Azulla HdseynovPIU Director Head of Financial Division

April 5, 2016 April 5, 2016Baku, the Republi f A a Baku, the Republic of Azerbaijan

The notes on pages 10-15 fo4 n an integral part of these Special-Purpose Financial Statements.

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STATEMENT OF USES OF FUNDS BY PROJECT COMPONENTSFOR THE YEAR ENDED DECEMBER 31, 2015(Amounts expressed in United States Dollars unless otherwise indicated)

December 31, December 31, Cumulative to2015 2014 date

December 31,2015

Project Components

Component A: Streamlining and Automating MarketInfrastructure

1.1 Establish Market Participant Advisory Groups - 71,394 267,3891.2 Establish a Single Central Securities Depository 69,597 142,752 532,6291.3 Expand access to and functionality of the Depository 351,586 278,401 789,1331.4 Increase automation of the Market 69,597 - 384,7941.5 Establish an appropriate Market guarantee mechanism 140,993 142,752 532,6311.6 Reduce off-Market transactions - 142,752 445,3491.7 Provision for Clearing and Settlement systems 2,065,331 - 2,065,331

Total Component A 2,697,104 778,051 5,017,256

Component B: Updating and Strengthening the Legaland Regulatory Framework

2.1 Support adaptation of a New Law on Securities - - 178,3122.2 Drafting implementing Regulations - 71,394 267,3112.3 Evaluate Banks' participation in the Securities Market 142,788 71,394 267,2312.4 Promote revised, supporting Tax Policies - 285,578 356,3092.5 Allow Pooled Investments by Insurance Companies - 71,394 89,0772.6 Minimum Capital Adequacy and risk assessment

methods for Market - 71,394 267,232

Total Component B 142,788 571,154 1,425,472

Component C: Stimulating Supply

3.1 Create appropriate environment for raising capital/BSE' listing - 71,394 178,154

3.2 Develop the Government securities market 142,790 - 195,8393.3 Encourage development of the Corporate Debt Market 142,788 - 178,1543.4 Conduct corporate education 71,395 142,789 267,2333.5 Develop other products 142,793 209,985 458,8753.6 Enhance and promote funding of the State companies

and Projects 213,234 - 266,2833.7 Enhance support to private sector and SME2 - 71,394 89,077

Total Component C 713,000 495,562 1,633,615

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STATEMENT OF USES OF FUNDS BY PROJECT COMPONENTSFOR THE YEAR ENDED DECEMBER 31, 2015 (Continued)(Amounts expressed in United States Dollars unless otherwise indicated)

December 31, December 31, Cumulative to2015 2014 date

December 31,

Component D: Capacity Building 2015

4.1 Strengthen SCS's3 Knowledge Management 142,788 64,255 527,4024.2 Strengthen SCS's3 internal systems and operating 71,399 71,357 178,1224.3 Strengthen public information system 214,178 - 373,9864.4 Promote the Azerbaijani Market to international

investors - 21,318 109,9244.5 Improve public awareness of the Capital Market 69,597 64,255 275,9774.6 Create a Capital Market Training Centre 142,786 71,357 623,501

Total Component D 640,748 292,542 2,088,912

Component E: Project management

PIU4 staff costs 9,156 23,141 85,393Conversion charges 1,845 829 5,106Bank charges 2,390 1,073 6,292PIU4 support costs 3,608 25,073 37,986FMS' development costs - - 9,647Translation fees 1,949 1,098 7,461Training costs - 11,208 25,158Audit fees 14,346 13,564 44,368

Total Component E 33,294 75,986 221,411

Front-end fee - - 30,000

VAT (Government of Azerbaijan) 677,926 196,831 1,532,352

Total Uses of Funds by Project Components 4,904,860 2,410,126 11,949,018

1. BSE - Baku Stock Exchange2. SME - Small and Medium Enterprises3. SCS - State Committee for Securities4. PIU - Project Implementation Unit5. FMS - Financial Management System


Bakhtiyar Azov Azulla HuseynovPI Directolf Head of Financial division

April 5, 2016 April 5, 2016Baku, the Republic, o Aerbiw Baku, the Republic of Azerbaijan

The notes on pages 10-15 form an integral part of these Special-Purpose Financial Statements.

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STATEMENT OF DESIGNATED ACCOUNTAS AT DECEMBER 31,2015(Amounts expressed in United States Dollars unless otherwise indicated)

IBRD Loan Number 8024-AZ

Account held at: International Bank of Azerbaijan OJSC

Account no: 33317018401841605204USD

Opening Designated Account balance as at January 1, 2015 255,559

Add:IBRD advances during the year ended December 31, 2015 328,784Other Receipts

Total outstanding amount advanced to Designated Account 584,343

Less:Closing Designated Account balance as at December 31, 2015 carried

forward to the next period (176,599)Amount of eligible expenditures paid during the year (407,744)

Total advanced amount during 2015 584,343)

Discrepancy

Opening Designated Account balance as at January 1, 2014 235,195

Add:IBRD advances during the year ended December 31, 2014 201,845Other Receipts 1,271

Total outstanding amount advanced to Designated Account 438,311

Less:Closing Designated Account balance as at December 31, 2014 carried

forward to the next period (255,559)Amount of eligible expenditures paid during the year (182,752)

Total advanced amount during 2014 (438,311)

Discrepancy

Approved and siwn oIm*alf of the Project Implementation Unit:

Bakbtiyq4z Azwovt Azulla HuseynovPIU Director Head of Financial Division

April 5,2016ApriBaku th Reu6Icof*k_zrbajanBaku, the Republic of Azerbaijan

The notes on pages 10- 15 form an integral part of these Special-Purpose Financial Statements.

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CAPITAL MARKETS MODERNIZATION PROJECT OF THE STATE COMMITTEEFOR SECURITIES

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

IBRD Loan Number 8024-AZ AND SECO GRANT NUMBER TF011975

Advance Replenishment Direct Payments Total Totalpayment account for Consultants' application application

services including amounts amountsaudit and training submitted received

CMMP/2012/01 150,000 - - 150,000 150,000CMMP/2012/02 300,000 - - 300,000 300,000CMMP/2012/03 - - 33,942 -CMMP/2012/04 - - 1,511,883 1,511,883 1,511,883

Total applications reimbursed duringthe period since inception date toDecember 31, 2012 450,000 1,511,883 1,995,825 1,961,883

CMMP/2013/05 - - 415,768 415,768 415,768CMMP/2013/06 - 259,323 - 259,323 259,323CMMP/2013/07 - - 771,060 771,060 771,060CMMP/2013/08 - - 559,397 559,397 559,397SCS-01 - - 214,183 214,183 214,183

Total applications reimbursed duringthe year ended December 31, 2013 - 259,323 1,960,408 2,219,731 2,219,731

CMMP/2014/09 - 84,606 - 109,604 84,606CMMP/2014/10 - - 192,765 192,765 192,765CMMP/2014/11 - 117,239 - 117,239 117,239CMMP/2014/12 - - 385,530 385,530 385,530CMMP/2014/13 - - 385,530 385,530 385,530SCS-02 - - 356,972 356,972 356,972SCS-03 - - 424,167 424,167 424,167SCS-04 - - 285,579 285,579 285,579


CMMP/2015/23 - - 584,706 584,706 584,706CMMP/2015/22 - - 321,275 321,275 321,275CMMP/2015/21 - 193,039 - 193,039 193,039CMMP/2015/20 - - 321,275 321,275 321,275CMMP/2015/19 - 611,550 611,550 611,550CMMP/2015/18 - - 239,850 239,850 239,850CMMP/2015/17 - - 514,041 514,041 514,041CMMP/2015/16 - - 423,000 423,000 423,000CMMP/2015/15 - - 483,871 483,871 483,871CMMP/2015/14 - 135,745 - 135,745 135,745SCS-05 - - 319,099 319,099 319,099


TOTAL APPLICATIONSREIMBURSED AS ATDECEMBER 31, 2015 450,000 789,952 9,321,501 10,620,393 10,561,453


Bakhtiyat Azizov Azulla Hus ynovPIU Director Head of Financial Division

April 5, 2016 April 5, 2016Baku, the Republic of Azerbatjan Baku, the Republic of Azerbaijan

The notes on pages 1I0-15 form an integral part of these Special-Purpose Financial Statements.9


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 THE PROJECT

Capital Markets Modernization Project implemented by the State Committee for Securities of theRepublic of Azerbaijan (the "Project") was formed under the loan agreement number 8024-AZ datedSeptember 22, 2011 (the "Loan agreement") between the Republic of Azerbaijan (the "Recipient")and the International Bank for Reconstruction and Development ("IBRD") in the amount of USD12,000,000. In addition to the Loan agreement, additional non-reimbursable contribution of up to amaximum amount of USD 1,600,000 will be provided by the Government of the SwissConfederation ("SECO") according to the agreement between the SECO and the Government of theRepublic of Azerbaijan dated September 13, 2012 (the "Grant agreement") for the financing of theinternational labor for components B "Updating and Strengthening the Legal and RegulatoryFramework" and component C "Stimulating Supply" of the Project. According to the Trust FundAdministration Agreement (the "Administration agreement") concluded between the SECO andIBRD dated December 13, 2011, the Grant is co-ordinated and administered by IBRD. In addition tothe Loan agreement and the Grant agreement, additional financing in the amount of USD 2,300,400will be provided by the Government of the Republic of Azerbaijan. The Project's originalcompletion date of December 31, 2015 has been extended to July 1, 2016.

The overall Project objective is to assist the Recipient in increasing the use of equity and corporatedebt as financing and/or investment instruments, through the adoption of an effective capital marketsregulatory framework and infrastructure.

The Project consists of the following components:

Component A: Streamlining and Automating Market Infrastructure

This component will support:

i. Establishing capital market participant advisory groups;ii. Establishing a single central independent national depository and consolidated clearance and

settlement systems for all securities transactions in Azerbaijan;iii. Expanding access to and functionality of the national depository by preparing and issuing

new rules and procedures for a participant structure that allows custodians' access alongsidebroker-dealer participants;

iv. Increasing automation of the capital market by adopting modern and efficient trading, riskmanagement, clearance, settlement and depository systems;

v. Establishing an appropriate capital market guarantee mechanism to ensure timely clearingand settlement of trades;

vi. Revision of the rules governing the national depository to reduce off-market transactions.vii. Provision of Information and Communication Technology for Clearing and Settlement

systems.

Component B: Updating and Strengthening the Legal and Regulatory Framework

This component will provide:

i. Conducting a comprehensive review of the existing legal and regulatory framework forcapital market and preparing a new capital market law;

ii. Preparing the executive regulations for the new capital market law and the operating rules ofthe stock exchange, central depository and the clearing house;

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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)

iii. Adopting new licensing regimes for capital market participants in line with the new capitalmarket law;

iv. Supporting the SCS and the tax authorities in the development of a policy for a favourabletax environment to attract capital market participants and transactions, through the provisionof consultants' services;

V. Supporting the SCS and the relevant competent authorities in the development of a policyand regulatory framework to allow pooled investments by insurance companies;

vi. Introducing appropriate capital market adequacy and risk assessment methods for capitalmarket participants.

Component C: Stimulating Supplv

This component will provide:

i. Conducting a strategic assessment on the modality of attracting local and foreign issuers tolist on the Baku Stock Exchange;

ii. Supporting the SCS and the Ministry of Finance to develop the government securitiesmarket;

iii. Developing the policy and regulatory framework to improve the corporate debt market;iv. Supporting the SCS in developing a corporate education and outreach program on the

business advantages of raising funds in the Azerbaijani capital market;V. Supporting the SCS in developing a corporate education and outreach program on the

business advantages of raising funds in the Azerbaijani capital market;vi. Conducting: (a) an assessment of the impediments in the capital market and demands for

introducing public- private partnerships to finance large infrastructure projects; and (b) ananalysis of how the Azerbaijani capital market may support privatization by providingorganized mechanisms for the bids and sales of shares.

Component D: Capacity Building

This component will support:

i. Conducting a training needs assessment and designing a training program to strengthen thecapacity of SCS staff as well as developing a knowledge management system for the SCS;

ii. Revising SCS's internal systems, policies, structures and procedures in light of the newcapital market law and adopting an action plan to strengthen the SCS's systems andoperations;

iii, Strengthening surveillance, enforcement and reporting systems of SCS;iv. Supporting the SCS in the development of investment conferences domestically and

internationally to attract investors;v. Undertaking a nationwide capital market public awareness campaign;vi. Establishing a capital market training centre to provide continuous professional training for

SCS staff and licensed capital market participants,

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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 International Public Sector Accounting Standards ("IPSAS") "Financial Reportingunder the Cash Basis of Accounting" issued by the International Public Sector Accounting Standards

Board of the International Federation of Accountants ("IFAC-PSC") and incorporate the principalaccounting policies from the "Guidelines: Annual Financial Reporting and Auditing for World BankFinanced 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 orpaid out on the Project's behalf. Expenditures are accounted for on the basis of actual disbursementof funds from the Project's accounts.

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) 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 USD fell to AZN 1.05 per USD, and the official exchange rate of AZNto the EUR fell to AZN 1.19 per EUR, i.e. by approximately 34% from the exchange rates at theeffective date of devaluation.

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

3. CASH AT BANK

As at December 31, 2015 and 2014 the Project had cash at bank balances with International Bank ofAzerbaijan ("BA") as follows:

December 31, December 31,2015 2014

IBRD Designated Account in USD 176,599 255,559Project Account in AZN 27 139

Total cash at bank 176,626 255,698

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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)

4. DESIGNATED ACCOUNT

The Recipient has established a 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 IBRD's "Project's Operations Manual" and detailed arrangementsagreed upon between the Recipient and the IBRD.

The Designated Account of the Project is maintained in USD with IBA (located in the Republic ofAzerbaijan).

5. 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 Agreement to each category, and the percentage ofexpenditure to be financed for eligible expenditure in each category:

Amount of the Percentage ofloan allocated expenditures to(expressed in be financed

USD) by IBRD (Net of VAT)

(1) Goods 4,300,000 100%

(2) Consultants' services including audit and training 7,600,000 100%

(3) Incremental Operating Costs 70,000 100%

(4) Front-end fee 0.25% of the total30,000 disbursement

TOTAL 12,000,000

Amount of the Percentage ofgrant allocated expenditures to(expressed in be financed

USD) by SECO


TOTAL 1,600,000

On March 4, 2015, the Recipient and 3RD agreed to extend the closing date of the captioned loan toJuly 1, 2016, and additionally the parties agreed on reallocation of the existing loan disbursementcategories as follows:

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Amount of Percentage ofthe loan expenditures to

reallocated be financed(expressed in (Net of VAT)

USD) byIBRD

(1) Goods 4,700,000 100%


(3) Incremental Operating Costs 110,000 100%

0.25% of the total(4) Front-end fee 30,000 disbursement

TOTAL 12,000,000

Amount of the Percentage ofgrant allocated expenditures to(expressed in be financed

USD) by SECO

(2) Consultants' services including audit and training 1,600,000 100%TOTAL 1,600,000

6. METHOD 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 1BRD 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 that the Recipient has pre-financed from its ownresources.

Commitment procedure - the IBRD 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.

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7. METHOD OF WITHDRAWAL

IBRD Designated Account

Designated Accounts are designated disbursement accounts 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 Accounts.

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 where the Government funds are accumulated. The fundsare further disbursed to sub-contractors based on the shares of expenditure to be incurred by eachfunding 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.

8. OPERATING ENVIRONMENT

The Project's principal business activities are within the Republic of Azerbaijan. Laws andregulations affecting entities operating in the Republic of Azerbaijan are subject to rapid changes andthe Project's operations could be at risk due to negative changes in the political and businessenvironment.

9. EVENTS AFTER THE REPORTING DATE

On February 3, 2016 the President of the Republic of Azerbaijan signed a decree on theestablishment of a public legal entity of the Financial Markets Monitoring Board in the Republic ofAzerbaijan. The establishment of a public legal entity of the Financial Markets Monitoring Boardaims to license, regulate and control the securities market, investment funds, insurance companies,credit organizations (banks, non-banking credit organizations and operator of postal communication)and payment systems, as well as improve control system over the money laundering preventionactivities. The State Committee for Securities ceases its operations and the functions of the StateCommittee for Securities are transferred to the Financial Markets Monitoring Board public legalentity upon establishment of this entity.

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