SOCIAL PROTECTION ADMINISTRATION II PROJECT

CREDIT NUMBER 5398-AM

IMPLEMENTED BY FOREIGN FINANCING PROJECTS MANAGEMENT CENTEROF THE MINISTRY OF FINANCE OF THE REPUBLIC OF ARMENIA

Special Purpose Project Financial Statementsand

Independent Auditor's Report

for the year ended 31 December 2016

YEREVANMay 2017

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SOCIAL PROTECTION ADMINISTRATION II PROJECT

CREDIT NUMBER 5398-AM

TABLE OF CONTENTS

Page

INDEPENDENT AUDITOR'S REPORT 3-4

SPECIAL PURPOSE FINANCIAL STATEMENTSfor the year ended 31 December 2016:

Statement of cash receipts and payments 5

Statement of uses of funds by Project activity 6

Notes to the special purpose financial statements 7-14

ANNEX 1. RECONCILIATION BETWEEN THE AMOUNTS SUBMITED BY THE PROJECTAND DISBURSED BY THE WORLD BANK 15

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INDEPENDENT AUDITOR'S REPORT

To the Management of the Foreign Financing Projects Management Center

Opinion

We have audited the accompanying special purpose financial statements of the "Social ProtectionAdministration II Project" (Project) financed by the IDA Credit No. 5398-AM dated 23 May 2014(Credit Agreement) and implemented by the "Management of the Foreign Financing ProjectsManagement Center" (FFPMC), which comprise the statement of cash receipts and payments, thestatement of uses of funds by Project activity for the year ended 31 December 2016, and a summary ofsignificant accounting policies and other explanatory notes.

In our opinion,1. the special purpose financial statements present fairly in all material respects the cash receipts

and payments of the Project for the year ended 31 December 2016 in accordance withInternational Public Sector Accounting Standard: Financial Reporting Under the Cash BasisofAccounting, (IPSAS-Cash Basis);

2. funds have been used in accordance with the conditions of the Credit Agreement concludedbetween the International Development Association (IDA) and the Republic of Armenia, andWorld Bank related guidelines, with due attention to economy and efficiency, and only for thepurposes for which the financing was provided;

3. supporting documents, records and accounts have been maintained to support expendituresincurred. Expenditures included in the withdrawal applications and reimbursed against areeligible for financing under the Credit Agreement; Interim Unaudited Financial Statements(IFSs) issued by FFPMC during the Reporting year are in agreement with the underlyingbooks of account;

4. The Designated account used have been maintained in accordance with the provision of theCredit Agreement, and World Bank related guidelines;

5. Works, Goods and Services financed have been procured in accordance with the CreditAgreement and World Bank related guidelines.

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs) as issued byInternational Auditing and Assurance Standards Board (IAASB) of the International Federation ofAccountants (IFAC). Our responsibilities under those standards are further described in the Auditor'sResponsibilities for the Audit of the Financial Statements section of our report.We are independent of the Project and FFPMC in accordance with the International Ethics StandardsBoard for Accountants' Code of Ethics for Professional Accountants (IESBA Code), and we havefulfilled out other ethical requirements in accordance with IESBA Code. We believe that the auditevidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Emphasis of matter-Slow Progress the Project implementation

Without qualifying our opinion, we draw your attention to Note 7.2 of these special purpose financialstatements disclosing slow progress of the Project implementation and the measures taken by themanagement of the FFPMC.

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Management's Responsibility for the Special Purpose Financial Statements

The management of FFPMC is responsible for the preparation and fair presentation of these specialpurpose financial statements in accordance with IPSAS-Cash Basis issued by the International PublicSector Accounting Standards Board (IPSASB) within the International Federation of Accountants(IFAC), and Financial Management Manual for World Bank Financed Investment Operations (WBGuidelines), and for such internal control as management determines is necessary to enable thepreparation of special purpose financial statements that are free from material misstatements, whetherdue to fraud or error.

Auditor's Responsibility for the Audit of the Special Purpose Financial Statements

Our objectives are to obtain reasonable assurance about whether the special purpose financialstatements as a whole are free from material misstatement, whether due to fraud or error, and to issuean auditor's report that includes our opinion. Reasonable assurance is high level of assurance, but isnot a guaranty that an audit conducted in accordance with ISAs will always detect a materialmisstatement when it exists. Misstatements arise from fraud and error and are considered material if,individually or in the aggregate, they could reasonably be expected to influence the economicdecisions of users taken on the basis of these special purpose financial statements.As part of an audit in accordance with ISAs, we exercise professional judgment and maintainprofessional skepticism throughout the audit. We also:

* Identify and assess the risks of material misstatement of the special purpose financialstatements, whether due to fraud or error, design and perform audit procedures responsive tothose risks, and obtain audit evidence that is sufficient and appropriate to provide a basis forour opinion. The risk of not detecting a material misstatement resulting from fraud is higherthan for one resulting from error, as fraud may involve collusion, forgery, intentionalomissions, misrepresentations, or the override of internal control.

* Obtain an understanding of internal control relevant to the audit in order to design auditprocedures that are appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the internal control.

* Evaluate the appropriateness of accounting policies used and the reasonableness of accountingestimates and related disclosures made by management.

* Evaluate the overall presentation, structure and content of the special purpose financialstatements, including the disclosures, and whether the special purpose financial statementsrepresent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with management regarding, among other matters, the planned scope and timing ofthe audit and significant audit findings, including any significant deficiencies in internal control thatwe identify during our audit.

"SOS-Audit" LLC22 May 2017

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Social Protection Administration 11 ProjectIDA Credit No. 5398-AM

Notes to the special purpose financial statementsFor the year ended 31 December 2016

1. General information

1. 1. The Project

The Credit Agreement No. 5398-AM was concluded on 23 May 2014 between the Republic ofArmenia and the International Development Association (IDA), according to which IDA provided acredit in an amount of 13,900,000 Special Drawing Rights (SDR).The Credit Agreement becomes effective on October 29, 2014.

The payment currency of the Credit is United States dollars (USD).

The credit is provided for the purpose of implementation of Social Protection Administration 11 Project(the Project).

The Closing Date of the financing under IDA Credit No. 5398-AM is set on 31 December 201 S. TheGrace Period for submitting withdrawal applications for the expenditures incurred before the Closingdate is four months following the Closing date.

Financial transactions under the Project commenced since March 2015.

1.2 The Project objectives

The objectives of the Project are to improve social protection service delivery and strengthenanalytical and monitoring and evaluation functions of the agencies delivering social protection benefitsand services.

The Project consists of the following parts:

Part 1. Rolling-out of integrated social protection service delivery,Part 11. Supporting the implementation of the recipient's new employment strategy,Part H L Modernization of the pension system,Part IV. Strengthening MLSI's analitical capacity and monitoring and evaluation systems,Pan V. Project management.

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Social Protection Administration II ProjectIDA Credit No. 5398-AM

Notes to the special purpose financial statementsFor the year ended 31 December 2016

1.3. The Project Budget and Financing

The Project is being financed by the following sources:- IDA Credit No. 5398-AM - 100% exclusive of taxes,- The Government of the Republic of Armenia (Government of RoA) - taxes.

IDA Credit No. 5398-AM Government Totalof the RoA

Category USD USD USDequivalent equivalent equivalent

SDR (Original) (Updated") USD(1) Goods, works, non-consulting services,consultants' services,Training and IncrementalOperating Costs under theProject except for activitiesunder Part 11.2. of the Project 12,800,000 19,600,000 18,237,732 4,559,433 22,797,165(2) Cash Grants andConsultant Services underPart 11.2. of the Project 1,100,000 1,600,000 1,478,763 369,691 1,848,454

Total 13,900,000 21,200,000 19,716,495 4.929,124 24,645,619

(*) Budget USD equivalent of SDR underlined loan is calculated based on cumulative funds received in USD,plus USD equivalent of undisbursed funds (if any) in SDR as at reporting date. SDR/USD rate at 31.12.2016 isset 1 SDR=1.34433 USD (in 31.12.2015 1.3857).

(**) Government of the RoA financing budget covering the taxes is updated as 20% of the total budget.

1.4. Project Implementation

The Project is implemented by Ministry of Labor and Social Issues (MLSI) and Foreign FinancingProjects Management Center (FFPMC).

The address of the FFPMC is: Government House No.], Republic Square,Yerevan 10, Republic ofArmenia.

Social Protection Administration II ProjectIDA Credit No. 5398-AM

Notes to the special purpose financial statementsFor the year ended 31 December 2016

2. Summary of significant accounting policies

2.1. Preparation and presentation offinancial statements

The special purpose financial statements are prepared in accordance with the International PublicSector Accounting Standard: Financial Reporting Under the Cash Basis of Accounting (IPSAS-CashBasis), issued by the International Public Sector Accounting Standards Board (IPSASB) within theInternational Federation of Accountants (IFAC), and presented in accordance with FinancialManagement Manual for World Bank Financed Investment Operations (March 2010): RM 3 -Financial Reporting and Auditing.

The special purpose project financial statements consist of:

- Statement of cash receipts and payments,- Statement of uses of funds by project activity,- Summary of significant accounting policies and other explanatory notes.

The principal accounting policies applied in the preparation of these special purpose financialstatements are set out below. These policies have been consistently applied to all the periodspresented.

2.2 Cash basis of accounting

Project financing is recognised as a source of project funds when the cash is received. Projectexpenditures are recognised as a use of project funds when the payments are made.

2.3 Reporting currency

The reporting currency of these special purpose financial statements is United States dollar (USD).The contribution of the Government of RA and expenditures made in local currency, Armenian Dram(AMD), are translated into USD based at the exchange rate defined by the Central Bank of theRepublic of Armenia (CBA) at the date of the transaction.The effect of exchange rate changes on cash held on local currency is reported as separate line item inthe statement of cash receipts and payments.

The average exchange rate at currency market issued by the CBA as at 31 December 2015 is I USD-483.75 AMDThe average exchange rate at currency market issued by the CBA as at 31 December 2016 is I USD=483.94 AMD.

2.4. Taxes

Taxes are paid in accordance with the tax regulations of the Republic of Armenia.

2.5. Budget

Expenditure budget is created based on actual accumulated expenditures for the last period plus theupdated procurement plans for the reporting period.

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Social Protection Administration II ProjectIDA Credit No. 5398-AM

Notes to the special purpose financial statementsFor the year ended 31 December 2016

3. Summary of Summary Reports and SOEs

For the year ended 31 December 2016

Payment categoriesWithdrawal Withdrawal Payment categories

No application 1. Goods, works, non-consultingvalue date services, consultants' services,

Trainings and IncrementalOperating costs under the Project

except for activities under PartII.2. of the Project

USD3DA 27-Jul-2016 242,416.48

4DA 25-Aug-2016 402,310.62

Total 644,727.10

4. Statement of Designated Account

Bank account number 900000900382Bank Central TreasuryBank location 4 Tigran Mets str., I-st floor, Yerevan, 0010

Republic of ArmeniaCurrency USD

IDA Credit No. 5398-AMYear ended 31 Dec 2016

1. Opening balance 485,696.442. Add: opening discrepancy .3. IDA advance/replenishment 1,144,727.104. Less: Refund to IDA from DA

5. Present outstanding amount advanced to DA 1,630,423.54

6. DA closing balance 159,603.357. Add: Amount of eligible expenditures paid 1,470,820.198. Less: interest earned (if credited to DA)

9. Total advance accounted for 1,630,423.54

10. Closing discrepancy (5)-(9)

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Social Protection Administration li ProjectIDA Credit No. 5398-AM

Notes to the special purpose financial statementsFor the year ended 31 December 2016

5. Statement of financial position

The Statement of financial position discloses assets, liabilities and net assets of the Project as atreporting date. It is prepared in accrual basis that is transactions are recognized when they occur (andnot only when cash is received or paid).

note 31.12.2016 31.12.2015USD USD

ASSETSCash 6 167,824.85 485,696.44Prepayments 306,853.39 -Total assets 474,678.24 485,696.44

LIABILITIESPayables 29,804.12 -

Total liabilities 29,804.12 -

NET ASSETSCumulative income 8IDA Credit No. 5398-AM 1,833,357.67 688,630.57Government of RoA 363,303.96 59,145.79

2,196,661.63 747,776.36Cumulative expensesProject expenses (1,753,278.84) (262,676.26)

(1,753,278.84) (262,676.26)

Foreign exchange gain/(loss) 1,491.33 596.34

Total net assets 444,874.12 485,696.44

6. Cash

Account Underlying 31.12.2016 31.12.2015held at Currency USD USD

Designated account (IDA CreditNo. 5398-AM) Treasury USD 159,603.35 485,696.44Project account (Government ofRoA) Treasury AMD 8,221.50 -

Total 167,824.85 485,696.44

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Social Protection Administration 11 ProjectIDA Credit No. 5398-AM

Notes to the special purpose financial statementsFor the year ended 31 December 2016

U Project expenditure budget execution

Cumulative

Category Expendituresas at 31 Dec 2016 Total budget Execution

USD USD %(1) Goods, works, non-consulting services,consultants' services, Training and IncrementalOperating Costs under the Project except foractivities under Part 11.2. of the PLoject 2,029,981.18 22,797,165.00 90A(2) Cash Grants and Consultant Services underPart 11.2. of the Project. 1,848,454.00 -

Total 2,0291981.18 24 645 619.00 8%

(*) The Credit Agreement is concluded on 23 May 2014 and became effective on 29 October 2014. Asat 31 December 2016 only 8% of the expenditure budget is implemented.The slow progress of the Project implementation is due to reports submitted during August- September2015 by the designing organizations regarding 13 buildings' structural and seismic condition,recommending that while most of buildings require enhancement, but others enhancement isconsidered as not reasonable, as it would require more financing than if constructed newly. Additionalresearch is conducted. During 2016, discussions were held at the Republic of Armenia Government onProject further progress. The Projects needs revision and it is expected to reallocate 4.9 million USDon 21 procurements into developing unified information system of constructions and social services.Also, it is expected to discuss with Republic of Armenia Government and WB the possibility to extentthe Project implementation by two years. As at December 2016 the construction of 7 constructionobjects are in the progress.

8. Financing

8. L IDA Credit No. 5398-AM

Yearended Cumulative as31 Dec 2016 at 31 Dec 2016

USD USDAdvances/ (advance recovery) 500,000.00 1,000,000.00SOE and Summary Report 644,727.10_ 833,357.67Total 1,144,727.10 1,833,357.67

Total financing budget 19,716,495.00Percentage of finance provided as at 31 Dec2016 9%

13

Social Protection Administration i[ ProjectIDA Credit No. 5398-AM

Notes to the special purpose financial statementsFor the year ended 31 December 2016

8.2. Government of RoA

Year ended Cumulative as31 Dec 2016 at 31 Dec 2016

USD USDFinanced 304,158.17 363,303.96Total 304,158.17 363,303.96

Total financing budget 4,929,124.00Percentage of finance provided as at 31 Dec2016 7%

9. Events after the reporting date

The Project expenditures for the reporting period at the total amount of USD 840,396.65 registered atthe application # 5DA were submitted to WB on 10 February 2017 and approved on 21 February2017.

14

Social Protection Administration II ProjectIDA Credit No. 5398-AM

ANNEX 1. RECONCILIATION BETWEEN THE AMOUNTS SUBMITTED BY THE PROJECT ANDDISBURSED BY THE WORLD BANKFor the year ended 31 December 2016(Amounts are shown in US dollars)

Expenditure Category Appl. Project WB DifferenceAdvance 3DA 500,000.00 500,000.00

500,000.00 500,000.001. Goods, works, non-consulting services, 3DA 242,416.48 242,416.48consultants' services, Trainings and IncrementalOperating costs under the Project except for 4DA 402,310.62 402,310.62activities under Part 11.2. of the Project 644,727.10 644,727.10

Total 1,144,727.10 1,144,727.10