Small and Medium EnterprisesCompetitiveness Project funded under LoanAgreement No. 8477-KZ between theGovernment of the Republic of Kazakhstanand the International Bank forReconstruction and Development

Financial Statements for the year endedDecember 31, 2017

and Independent Auditors' Report

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CONTENTS

Independent Auditors' Report

Financial statements

Statement of receipts and disbursements of funds............................................... 1

Statement of comparison of budget and actual amounts ..................................... 2-3

Statement of disbursements by component.....................................................4-5

Notes to the financial statements .............................................................. 6-11

Ten.: +7 727 331 31 34 TOO "BDO Kazakhstan"DaKc: +7 727 331 31 35 yn. Fa6gynHa, 6B D O info@bdokz.com AnmaThi, Ka3aXCTaHwww.bdokz.com Al15H4E3

Tel: +7 727 331 31 34 BDO Kazakhstan LLPFax: +7 727 331 31 35 6 Gabdullin Streetinfo@bdokz.com ALmaty, Kazakhstanwww.bdokz.com Al 5H4E3

Independent Auditors' Report

To the Management of the Small and Medium Enterprises Competitiveness Projectfunded under Loan Agreement No. 8477-KZ, between the Government of the Republicof Kazakhstan and the International Bank for Reconstruction and Development

Opinion

We have audited the financial statements of the Small and Medium EnterprisesCompetitiveness Project funded under Loan Agreement No. 8477-KZ between theGovernment of the Republic of Kazakhstan and the International Bank for Reconstructionand Development (hereinafter the "Project"), which comprise the statement of receiptsand disbursements of funds for the year ended December 31, 2017, statement ofcomparison of budget and actual amounts for the year ended December 31, 2017,statement of disbursements by component for the year ended December 31, 2017, and asummary of significant accounting policies and other explanatory notes ("FinancialStatements").

In our opinion, the accompanying financial statements fairly present, in all materialrespects, the Project receipts and disbursements for the year ended December 31, 2017and the cash position as at December 31, 2017 in accordance with the International PublicSector Accounting Standard (IPSAS) Financial Reporting under the Cash Basis of Accountingpublished by the International Federation of Accountants (IFAC), as well as in accordancewith the requirements of the International Bank for Reconstruction and Development.

Basis for Audit Opinion

We conducted our audit in accordance with International Standards on Auditing. Ourresponsibilities under those standards are further described in the Auditor's responsibilitiesfor the audit of the financial statements section of our report below. We are independentof the Project in accordance with the Code of Ethics for Professional Accountants of theInternational Ethics Standards Board for Accountants (IESBA Code) and with the ethicalrequirements that are relevant to our audit of the financial statements in Kazakhstan, andwe have fulfilled our other ethical responsibilities in accordance with these requirementsand the IESBA Code. We believe that the audit evidence we have obtained is sufficient andappropriate to provide a basis for our opinion.

BDOKazkhsan,a lmitd labiityparnerhip reistredundr te lws f te Rpubic f Kzaksta, i a member of BDO International Limited, a UKcopayliiedbygarnee ndfom pr o teinenai na BD ewr o needetmme firms.

INDEPENDENT AUDITORS' REPORT (continued)

Emphasis of Matter

We draw attention to Note 7 Corporate Income Tax Expenditures in which the Projectmanagement discloses information on the corporate income tax paid for a non-resident byco-financing from the republican budget. Our opinion is not modified with respect to thismatter.

Responsibility of the Management for the Financial Statements

Management is responsible for the preparation and fair presentation of the financialstatements in accordance with IPSAS Financial Reporting under the Cash Basis ofAccounting published by the International Federation of Accountants (IFAC) and inaccordance with the requirements of the International Bank for Reconstruction andDevelopment, and for such internal control as management determines is necessary to

enable preparation of the financial statements that are free from material misstatement,whether due to fraud or error.In preparing the financial statements, management is responsible for assessing theProject's ability to continue as a going concern, disclosing as applicable, matters relating

to going concern and using the going concern basis of accounting unless management eitherintends to liquidate the Project or to cease operations, or has no realistic alternatives but

to do so.Those charged with governance are responsible for overseeing the Project financialreporting process.

Auditor's Responsibility for the Audit of the Financial Statements

Our objective is to obtain reasonable assurance about whether the financial statements as

a whole are free from material misstatement, whether due to fraud or error, and to issue

an auditor's report that includes our opinion. Reasonable assurance is a high level of

assurance, but is not a guarantee that an audit conducted in accordance with International

Standards on Auditing will always detect a material misstatement when it exists.

Misstatements can arise from fraud or errors and are considered material if, individuallyor in the aggregate, they could reasonably be expected to influence the overallpresentation of these financial statements.As part of an audit in accordance with ISAs, we exercise professional judgment and

maintain professional skepticism throughout the audit. We also:

* identify and assess the risks of material misstatement of the financial statement,

whether due to fraud or error, design and perform audit procedures responsive to those

risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for

our opinion.

The risk of not detecting a material misstatement resulting from fraud is higher than forone resulting from error, as fraud may involve collusion, forgery, intentional omissions,misrepresentations, or the override of internal control;

* obtain an understanding of internal control relevant to the audit in order to designaudit procedures that are appropriate in the circumstances, but not for the purpose of

expressing an opinion on the effectiveness of the Project's internal control;

INDEPENDENT AUDITORS' REPORT (continued)

* evaluate the appropriateness of accounting policies used and the reasonableness ofaccounting estimates, and related disclosures made by management;

* evaluate the overall presentation, structure and content of the financial statement,including the disclosures, and whether the financial statement represents the underlyingtransactions and events in a manner that achieves fair presentation.

We communicate with those responsible for managing the Project regarding, among othermatters, the planned scope and timing of the audit and significant audit findings, includingany significant deficiencies in internal control that we identify during our audit.

BDO Kazakhstan LLP

State License for Auditing ActivitiesNo.15003448 issued by the Committeefor Financial Control under the Ministryof Finance of the Republic of ,-Kazakhstan on February 19, 2015 D

Director

May 28, 2018

Auoftr- Kia)uandykov

Audr Qualification Certificate No. M0-0000490, issued by the QualificationCommission for Certification of Auditors of theRepublic of Kazakhstan on October 10, 2017

6 Gabdullin St.Almaty, Kazakhstan

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Small and Medium Enterprises Competitiveness Project funded under Loan Agreement No. 8477-KZ,between the Government of the Republic of Kazakhstan and the International Bank for Reconstructionand Development

NOTES TO THE FINANCIAL STATEMENTS

for the year ended December 31, 2017

1. GENERAL PROVISIONS

Kazakhstan Business Environment

The Project activities are carried out in Kazakhstan. Accordingly, the Project is exposed to

risks specific to economic and financial markets of Kazakhstan, whose economy shows specific

features of a developing market economy. The legal, tax and regulatory frameworks continue

developing but are subject to varying interpretations and frequent changes which together

with other legal and financial impediments contribute to the challenges faced by entities

operating in Kazakhstan.

Nature of operations

Loan Agreement No. 8477-KZ ("Agreement") between the Government of the Republic of

Kazakhstan ("Government") and the International Bank for Reconstruction and Development

("IBRY) was signed on August 20, 2015 and ratified on December 2, 2015 ("Project Start

Date"). Pursuant to the Agreement, IBRD [ends the amount of 40,000,000 US dollars ("Loan")

and the Government provides co-financing of 6,000,000 US dollars from the republican budget

("Co-financing") for the purpose of implementing the Small and Medium Enterprises

Competitiveness Project ("Project"). The Loan shall be repayable by the Government on May

15 and November 15 in each year, beginning May 15, 2020 through November 15, 2031.

As per the approved budget for 2017, the Project receipts and disbursements financed out of

the proceeds of the Loan and from co-financing of the external loan by the Government of

Kazakhstan were estimated to amount to 1,111,521 US dollars and 88,424 US dollars,

respectively (2016: 677,777 US dollars and 3,916 US dollars, respectively).

Project Description

The Project objective is to enhance the competitiveness and management capacity of

targeted small and medium sized enterprises in Kazakhstan.

The Project consists of the following components:

Component 1: SME Capacity Building Program

Strengthen and expand the existing consulting programs for SMEs, as indicated in the project

implementation guidelines, including the Business Advisors network, by providing goods,

training, and consulting services.

Component 2: SME Linkages in Competitive Sectors

I . Supplier Development Activities: Implementing supplier development activities

designed to increase the ability of SMEs to supply inputs into the local operations of

multinational corporations, large local firms and state-owned enterprises by, inter

atia, upgrading skills of suppliers, improving business and management practices,

facilitating communication and relationships between potential SME suppliers and

major buyers, and establishment of a supplier development office, all through the

provision of goods, Training and consultants' services.

6

Small and Medium Enterprises Competitiveness Project funded under Loan Agreement No. 8477-KZ,between the Government of the Republic of Kazakhstan and the International Bank for Reconstructionand Development

NOTES TO THE FINANCIAL STATEMENTS (continued)

2. Competitive Sectors: Developing higher value-added production and increasedcompetitiveness of SMEs in non-extractive sectors in and around priority geographicareas by institutional capacity strengthening, through the provision of Training andconsultants' services.

3. Factoring Strategic Assessment: Conducting a detailed assessment for development offactoring and reverse-factoring in the territory of the Borrower, including an onlineplatform for SMEs to register and verify their accounts receivables.

Component 3: Impact Evaluation Et Monitoring of SME Programs

Strengthening monitoring and evaluation frameworks, public-private sector dialogue, andtransparency of SME policy making through the provision of Training and consultants' services.

Component 4: Project Management

Provision of consultants' services and Training and payment of Operating Costs to implement,manage, and coordinate the Project.

The Loan closing date is June 30, 2020.

2. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS

These financial statements have been prepared in accordance with International Public SectorAccounting Standard (IPSAS) Financial Reporting under the Cash Basis of Accounting aspublished by the International Federation of Accountants, and in compliance with therequirements of the International Bank for Reconstruction and Development.

3. SIGNIFICANT ACCOUNTING POLICIES

The accounting policies described below have been consistently applied in the reportingperiods presented in these financial statements.

Cash method of accounting

Cash method of accounting recognizes transactions and events only when funds under theProject are received or paid.

Presentation currency

These financial statements are presented in United States dollars ("US dollars").

Transactions in foreign currency

Transactions in foreign currencies are translated to the presentation currency at the exchangerates prevailing at the reconversion dates. Proceeds from the IBRD are translated into USdollars at the exchange rates established by the National Bank of the Republic of Kazakhstanat the date of payment. Proceeds from the Government of the Republic of Kazakhstan aretranslated into US dollars at the exchange rates established by the National Bank of theRepublic of Kazakhstan as at the date of payment. Exchange differences arising fromtranslation of transactions denominated in other currencies into US dollars are reported asa net value from changes in exchange rates.

7

Small and Medium Enterprises Competitiveness Project funded under Loan Agreement No. 8477-KZ,between the Government of the Republic of Kazakhstan and the International Bank for Reconstructionand Development

NOTES TO THE FINANCIAL STATEMENTS (continued)

Expenditure Categories

The Agreement specifies the main categories of expenditures financed by the Loan, theamount for each category, as well as the percentage of expenditures to be financed in eachcategory.According to the Agreement, there are the following categories of expenditures:

1) Goods, non-consulting services, consultants' services, and Training for Component 1of the Project (percentage of expenditures to be financed (exclusive of taxes): 85%);and

2) Goods, non-consulting services, consultants' services, and Training for Components 2,3, and 4 of the Project (percentage of expenditures to be financed (exclusive of taxes):100%).

Funds received

Subject to the terms and conditions of the Agreement, the Government of the Republic ofKazakhstan shall pay the interest and the principal amount of the Loan. Those payments arerecorded in the accounts of the Government and are not recognized in these financialstatements. The last installment on the Loan shall be payable by the Government onNovember 15, 2031.

Allocation of expenditures

In the Statement of disbursements by component the expenditures are broken down basedon matching the descriptions of works, as set forth in the Agreement, against thoseindicated in the primary documents.

4. CASH

To perform transactions on Loan No. 8477-KZ, the following accounts have been opened atthe Committee of Treasury of the Ministry of Finance of the Republic of Kazakhstan, thecity of Astana, for making cash payments to suppliers:

* No. 01.6201.000000000.ZO8477.001.2430001.2 in US dollars;* No. KZ120702012430001001 in KZT.

Cash balances as at December 31, as well as the transactions of the account for the yearended December 31, 2017 are detailed below:

in US Dollars 2017 2016

Balance as at January 01 179 -

RECEIPTS

Replenishment of account 1,058,300 160,000

1,058,300 160,000

EXPENDITURES

Expenditures under the Project 1,057,822 159,821

Net foreign exchange loss - -

1,057,822 159,821

Balance as at December 31 657 179

Including those denominated in:

US Dollars 631 179

tenge 26 -

8

Small and Medium Enterprises Competitiveness Project funded under Loan Agreement No. 8477-KZ,between the Government of the Republic of Kazakhstan and the International Bank for Reconstructionand Development

NOTES TO THE FINANCIAL STATEMENTS (continued)

5. DIRECT PAYMENTS AND REPLENISHMENT OF THE ACCOUNTDirect payments under the Project are made by IBRD and the Government of Kazakhstandirectly to the suppliers chosen in accordance with the terms and conditions of theAgreement.

Direct payments to Suppliers and replenishment of the account under the Project for theyear ended December 31, 2017 were based on the following withdrawal applications:

US Dollars

No. of withdrawal Date of withdrawal Direct Replenishment Totalapplication payments of account

MNE-08 07.04.2017 - 71,000 71,000MNE-09 15.05.2017 - 16,000 16,000MNE-10 12.07.2017 - 406,800 406,800MNE-11 13.08.2017 - 22,000 22,000MNE-12 02.10.2017 - 10,000 10,000MNE-13 10.11.2017 - 430,000 430,000MNE-14 04.12.2017 - 102,500 102,500Total - 1,058,300 1,058,300

Statement of Expenditures

US Dollars

Actual expenditures by category

Goods,non- Goods, non-

Tta consulting consultingNo of Total services,No. of amount of services,sevc,

withdrawal Value date the consultants' consultants'application services, and services, and Total

Application Training for Training for

Component I of Components 2, 3,and 4 of thethe ProjectPrec

ProjectMNE-08 07.04.2017 71,000 - 37,670 37,670MNE-09 15.05.2017 16,000 - - -MNE-10 12.07.2017 406,800 -MNE-11 13.08.2017 22,000 -MNE-12 02.10.2017 10,000 - - -MNE-13 10.11.2017 430,000 - 508,735 508,735MNE-14 04.12.2017 102,500 - - -

Total 1,058,300 - 546,405 546,405

6. UNUSED PORTION OF THE LOAN

As of December 31, 2017 the unused portion of the IBRD loan totaled 38,374,249 US dollars(2016: 39,432,549 US dollars).

7. CORPORATE INCOME TAX EXPENDITURES

For Component 2 SME Linkages in Competitive Sectors: under the Consultants' servicescategory the corporate income tax to the value of 13,280 US dollars (4,387,944 tenge) for anon-resident (PLANET SA under Contract-KZ/SMEC/CQS-01 of March 15, 2017) is incorrectlycalculated and overpaid through co-financing from the republican budget. This amount wasreturned to the budget on April 6, 2018, as per Payment Order No. 73836399 and on April 14,2018, as per Payment Order No. 74002843.

9

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Small and Medium Enterprises Competitiveness Project funded under Loan Agreement No. 8477-KZ,between the Government of the Republic of Kazakhstan and the International Bank for Reconstructionand Development

NOTES TO THE FINANCIAL STATEMENTS (continued)

9. DATE OF ISSUE

These financial statements were approved for issuance by the Vice Minister of the Ministryof National Economy of the Republic of Kazakhstan on May 28, 2018.

Small and Medium Enterprises Competitiveness Project funded under Loan Agreement No. 8477-KZ,between the Government of the Republic of Kazakhstan and the International Bank for Reconstructionand Development

Appendix No. 1Reconciliation between the data provided by Project Management Unit and World Bankpayments data

US DollarsApplication for Date of

withdrawal withdrawal As per PMU As per WB Variance

MNE-08 07.04.2017 71,000 71,000

MNE-09 15.05.2017 16,000 16,000

MNE-10 12.07.2017 406,800 406,800

MNE-11 13.08.2017 22,000 22,000

MNE-12 02.10.2017 10,000 10,000

MNE-13 10.11.2017 430,000 430,000

MNE-14 04.12.2017 102,500 102,500

Total 1,058,300 1,058,300 -

12