contents of 43rd stcu governing board folder

43rd Governing BoardMeeting7 December, 2016Tbilisi, Georgia

Draft as of November 23, 2016 Page 1 of 1

SCHEDULE AS OF NOVEMBER 11, ‘16

STCU 43rd GOVERNING BOARD MEETING Tbilisi, Georgia

7 December, 2016

Tuesday the 6th of December Arrival of Delegates (some delegates will have already arrived earlier in order to attend ISTC GB) 19:00 21:00 Reception hosted by ISTC and STCU at restaurant “Old Metekhi” (3 Metekhi slope) Wednesday the 7th of December STCU 43rd Governing Board Meeting Venue: Shota Rostaveli National Science Foundation Conference-room Aleksidze Str. #1 09:00 – 13:30 Start of the 43rd STCU Governing Board 11:00 – 11:15 Coffee break 11:15 – 13:30 Meeting Concludes 13:30 – 14:00 Lunch 14:00 – 17:00 Visit to EU CBRN Center of Excellence or Georgian National Museum or delegates choice 18:30 21:00 Reception hosted by Shota Rostaveli National Science Foundation at Restaurant Tsiskvili (Address: Beliashvili St, Tbilisi; Tel: +99532 2 00 55 55) Thursday the 8th of December Departure of delegates

Draft as of Nov. 11, ‘16 Page 1 of 1

AGENDA

43rd Meeting of the STCU Governing Board December 7th, 2016

Shota Rostaveli National Science Foundation Tbilisi, Georgia

1. Opening Session 1.1 Opening Remarks from the GB Chair (Chairman, Governing Board) 1.2 Welcome from the Executive Director (Curtis “B.J.” Bjelajac) 1.3 Opening Remarks from other GB Members/Invited Guests (GB Members/Other Officials) 2. Administrative Topics

2.1 Adoption of the Agenda Tab 1 3. Morning Session 3.1. Review and Approval of minutes 42nd GB held on April 5/6th (GB Members) Tab 2 3.2. Review of 43rd Draft Record of Decisions, Funding Sheets (GB Members) Tab 3, 4, & 5

& Press Release 3.3. Executive Director Report (Curtis “B.J.” Bjelajac) Tab 6 3.4. Presentation of 2015 Annual Report (Curtis “B.J.” Bjelajac) Tab 7 4. Late Morning Session 4.1 Presentation of Dec. 31, 2015 Financial Statements (Anthony Nichol) Tab 8

& Management Letter 4.2 Update on 2016 AOB/SB Expenditures (For / Discussion) (Anthony Nichol) Tab 9 4.3 2017 AOB and SB Budget Request (Anthony Nichol) Tab 10 4.4 Update on 2016 Financial Audit Tender (Anthony Nichol) Tab 11 4.5 Approve 44th & 45th GB schedules (Curtis “B.J.” Bjelajac) Tab 12 4.6 Approve 1 year Contract Extensions of STCU (GB Members) Tab 13 ED and Senior DED-UA 4.7 Sign 43rd GB Record of Decisions and Funding Sheets (GB Members) 5. Closing Session 7.1 Final Issues/Statements from GB Members (GB Members) 7.2 Closing Remarks/Adjournment (Chairman, Governing Board) Lunch

Version as of Nov. 30, ’16 Page 1 of 2

STCU Governing Board 43 7 December 2016

List of Participants

CHAIR: Mr. Eddie MAIER, European Commission

Azerbaijan

Esmira Alirzayeva Head of Department of International Relations Azerbaijan National Academy of Sciences

European Union

Sorin POPA Programme Manager

European Commission

Georgia

Marine CHITASHVILI

Director General Shota Rustaveli National Science Foundation

Nikloz BAKRADZE

Office of International Relations and Fundraising Shota Rustaveli National Science Foundation

Moldova

Viorica BOAGHI Director of Agency for Research and Development Academy of Sciences of Moldova

Ukraine

Maksym STRIKHA Board Member

Deputy Minister Ministry of Education and Science of Ukraine

Dmytro CHEBERKUS Head of S&T Department Ministry of Education and Science of Ukraine


United States of America

Simon LIMAGE Board Member Head of Delegation, Deputy Assistant Secretary of State for International Security and Nonproliferation U.S. Department of State

Scott BRUCE

Deputy Team Chief, Acting Office of Cooperative Threat Reduction U.S. Department of State

Jeffrey Scott WALDO Office of Cooperative Threat Reduction U.S. Department of State

Andrew HOOD

Director, Strategic Planning and Integration Office of Defense Nuclear Nonproliferation National Nuclear Security Administration U.S. Department of Energy

Regina CARTER Program Director National Nuclear Security Administration U.S. Department of Energy

Luke KLUCHKO Program Manager Defense Threat Reduction Agency U.S. Department of Defense

ISTC

Ronald LEHMAN Chairman of the Governing Board

International Science and Technology Center

David CLEAVE Executive Director International Science and Technology Center

Sonya VEKSTEIN Chief Financial Officer International Science and Technology Center

OBSERVERS

George SHARVASHIDZE Rector

Ivane Javakhishvili Tbilisi State University Mikheil CHKHENKELI Vice-Rector

Ivane Javakhishvili Tbilisi State University Archil PRANGISHVILI Rector

Georgian Technical University Giga ZEDANIA Rector

Ilia State University Rima BERIASHVILI Vice-Rector

Tbilisi State Medical University

Secretariat STCU

Curtis “B.J.” BJELAJAC Igor LYTVYNOV Anthony NICHOL Olga PANCHENKO Akaki PEIKRISHVILI

Final Version Page 1 of 12

Draft Summary of the STCU 42nd GOVERNING BOARD MEETING

April 5-6, 2016 Kyiv, Ukraine

List of Participants

CHAIR: Mr. Eddie MAIER, European Commission Azerbaijan: Mr. Ibrahim GULIYEV Academician and the Vice-President of the Azerbaijan National Academy of Sciences European Union: Mr. Sorin POPA Programme Manager European Commission Georgia: Ms. Marine CHITASHVILI Director General Shota Rustaveli National Science Foundation Mr. Nikoloz BAKRADZE Consultant in International Affairs Shota Rustaveli National Science Foundation Moldova: Mr. Leonid CULIUC Academician Academy of Sciences of Moldova Ukraine: Mr. Maksym STRIKHA Board Member Deputy Minister Ministry of Education and Science of Ukraine Mr. Dmytro CHEBERKUS Head of S&T Department Ministry of Education and Science of Ukraine Ms. Sofiia ZHEREBCHUK Chief specialist of the Development of S&T Infrastructure Department of Scientific and Technological Development Ministry of Education and Science of Ukraine Mr. Volodymyr VOLKODAV Chief Specialist of the Department of Economic Cooperation Ministry of Foreign Affairs of Ukraine United States of America: Mr. Simon LIMAGE Board Member Head of Delegation, Deputy Assistant Secretary of State for International Security and Nonproliferation U.S. Department of State Mr. Ryan TAUGHER Acting Team Leader Office of Cooperative Threat Reduction U.S. Department of State Mr. Jeffrey Scott WALDO Office of Cooperative Threat Reduction U.S. Department of State Mr. Andrew HOOD Director, Strategic Planning and Integration Office of Defense Nuclear Nonproliferation National Nuclear Security Administration U.S. Department of Energy Ms. Regina CARTER Program Director National Nuclear Security Administration U.S. Department of Energy Ms. Julie MIDDLETON National Nuclear Security Administration U.S. Department of Energy Mr. Miles DUDLEY, Political Section, U.S. Embassy to Ukraine ISTC: Mr. Ronald LEHMAN Chairman of the Governing Board International Science and Technology Center Secretariat STCU: Mr. Curtis “B.J.” BJELAJAC Mr. Igor LYTVYNOV Mr. Anthony NICHOL


Ms. Olga PANCHENKO Ms. Elena TABERKO Ms. Iryna TOMASHEVSKA 1. Opening Session

1.1 Eddie Maier opened the session of the 42nd STCU GB meeting, by welcoming all to Kyiv. Mr. Maier emphasized

the importance of this GB Meeting not only because of the 20th Anniversary celebration, but in terms of a number of important decisions that should be taken related to the STCU future. He continued by thanking the Ukrainian Government for its hospitality, as well as the Ministry of Education and Science of Ukraine for hosting the Meeting. Mr. Maier underlined that during the GB Meeting the issue of STCU and ISTC cooperation would be discussed, and in that respect welcomed ISTC Chairmen Lehman to the meeting.

1.2 On behalf of the Secretariat, the Executive Director welcomed the GB members and guests to Kyiv, and also

thanked the Ukrainian government for their assistance in setting up and accommodating this GB Meeting at the premises of the Ministry of Education and Science of Ukraine. Mr. Bjelajac agreed with Mr. Maier that a number of important decisions should be taken, especially related to the 2015 Target Initiatives, and any impact on the 2016 TIs due to delays in 2015.

1.3 Mr. Bjelajac opened the floor for opening statements by the other Governing Board representatives and invited

guests:

• Deputy Minister Strikha thanked the Chairman and the Executive Director, and welcomed the diplomatic community and distinguished guests to the Ministry of Education and Science of Ukraine. Underlined that STCU was as excellent tool for non-proliferation efforts for the last 20 years, and is really a unique success story in this region. Mr. Strikha emphasized his belief that the STCU needed to extend its activities, because the main historical goal of the STCU (non-proliferation) in large part was already fulfilled. Mr. Strikah highlighted the fact that the Ukrainian government considers the STCU a very important tool for the support of all activities related to research and security problems in the CBRN areas. Mr. Strikha looks forward to the discussion about changing the definition of “Category 1” scientists, as this is very important, as it gives the possibility to extend STCU activities. Mr. Strikha stressed that the Ukrainian government and the President of Ukraine treat the STCU as a very important tool, and are doing their collective best to ensure that the STCU functions smoothly within Ukraine, and are working very hard to obtain the ratification of the Verhovna Rada of the Protocol for the Accession of the European Union. Mr. Strikha closed by stating that the Government of Ukraine is very proud of the cooperation and accomplishments achieved over the last twenty years in working closely with the European Union, USA, and other partners in the framework of the STCU to make the world a safer and more peaceful place.

• Marine Chitashvili welcomed all and expressed her pleasure to be able to participate in the 42rd GBM. Ms. Chitashvili stressed that the Georgian government would be happy to enhance the cooperation not only with Ukraine, Azerbaijan and Moldova, but also with western partners in such key topics as biosafety and biosecurity.

• Nikoloz Bakradze expressed gratitude to STCU and ISTC for tangible support of public sources and scientific Georgian community during the last twenty years. Mr. Bakradze stated that Georgian side was ready to work closely with the STCU and ISTC in order to find new approaches for cooperation.

• On behalf of the United States Party, Deputy Assistant Secretary of State Simon Limage expressed his gratitude for the possibility to participate at the 42nd GBM and thanked all parties for their great work, especially the Government of Ukraine for agreeing to host the meeting. Mr. Limage highlighted the U.S. government activities at the STCU over the past twenty years including: 21 U.S. government and 77 U.S. non-government partners which supported over 1,100 projects for a total of just $166 million. Participation within those projects included approximately 9,000 former weapon scientists and 6,500 non-weapon scientists. In Ukraine alone, the U.S. Department of State funded 610 projects which involved approximately 5,800 FWS and 3,600 non-weapon scientists. Mr. Limage went on to highlight that together the STCU Parties collaborated in building regional (GUAM) nuclear forensics response capability, and wrapped up his comments by highlighting the collaborative effort to adapt long-term monitoring in radiation technologies from Chernobyl for application in Fukushima.


• Andrew Hood agreed with Deputy Minister Strikha on the importance of moving past the historical non-proliferation focus of the Center and agreed that the STCU is already addressing a world beyond non-proliferation when dealing with CBRN security issues.

• Sorin Popa informed the GB meeting participants that in the future European Union funds would no longer be tied to FWS redirection. Beginning in 2016, the European Commission would commit funds from a new instrument entitled, “The Instrument Contributing to Stability and Peace” and activities under this instrument would go beyond the traditional redirection of FWS. Mr. Popa stressed that on this point, the European Commission is very much in sync with its colleagues and partners around the table.

• Leonid Culiuc highlighted the fact that in Moldova the STCU has existed for the last 11 years, and expressed his sincere gratitude on behalf of the Government of Moldova for the cooperation achieved within the STCU framework. He wrapped up his remarks by expressing his hope for continued cooperation in the future.

• ISTC Chairmen Mr. Ronald Lehman stressed that even from the earliest days there was always cooperation between the STCU and the ISTC. Given the amount the world is changing, the two science centers will have to change as well, and help each other to adapt. Mr. Lehman concluded by wishing all the best to the meeting participants and hoped that next 20 years will be better than the first 20 years.

2. Administrative Topics 2.1 Adoption of the Agenda

• Mr. Curtis Bjelajac mentioned that in point 4.2 “Presentation of the Draft of 2015 Annual Report (if available), that Draft of 2015 Annual Report is not available. Informed the meeting participants that the draft 2015 Annual Report would be sent electronically to the parties for review by the end of April.

• Mr. Eddie Maier confirmed adoption of Agenda with the deletion of the point about the presentation of the draft 2015 Annual Report.

2.2. Review and Approval of minutes of Oct. 29, ’15 teleconference

The Minutes of AC/GB Teleconference October 29, 2015 were approved without changes.

2.3 Review of Draft Record of Decisions, Project Funding Sheet, and GB Press Release

Mr. Bjelajac called the Board’s attention to the draft draft of Record of Decisions that is scheduled for approval by the GB at the end of the two days of meetings. Mr. Bjelajac indicated that there were some small changes to the document that was sent out on March 4th, and that the following point was added to the document:

Approved the tasking of the STCU Secretariat to collaborate with the ISTC Secretariat to analyze the IT platforms and other services at the STCU and ISTC and provide a report in June at ISTC GB62 on ways to optimize and share administrative and technical infrastructure and software programs, and the associated cost implications. STCU Secretariat should consult with the ISTC Secretariat and draft a written report to the GB before the June ISTC GB so the two boards may have time to consider the analysis.

Mr. Bjelajac also called the GB’s attention so some minor changes that were made to the draft GB press release. All changes to the Record of Decision and Press Release were accepted as presented. Mr. Strikha thanked BJ for his personal contribution to the development of international S&T cooperation, especially the continued development of R&D in Ukraine. Went on to state that he believes that the problems related to Host Government Concurrence (HGC) which occurred last year are now solved and and that there should be no further delays in the future. Mr. Strikha stressed that the Government of Ukraine will continue to support the activities of the STCU; however, he called attention to the fact that STCU activity will not be as effective without corresponding funding from the Partners side, and requested his US and EU partners to continue to look at ways of ensuring proper funding for the STCU . 2.4 Executive Director Report Mr. Bjelajac submitted his report that covered the period from last September 19th 2015 until March 4th, 2016. Mr. Bjelajac briefed the Board on the following outstanding issues:


Situation in Ukraine As per the decision of the 39th Governing Board on December 9, 2014, the STCU initiated procedures to terminate all projects in the Autonomous Republic of Crimea. At the time of occupation of Republic of Crimea STCU had 50 projects, about 10% of all STCU projects that were ongoing and active at the time 2014. In the second half of 2015, the STCU terminated all projects in the Autonomous Republic of Crimea. Thus, the STCU no longer has any activity in this region of Ukraine, and will not resume future activities until instructed by the STCU Governing Board.

Mr. Bjelajac called the GB’s attention to the fact that in recent weeks Ukraine has seen some issues with the stability of the current coalition in parliament, and that some have speculated on possible reshuffling of the Cabinet of Ministers of Ukraine.

Mr. Strikha stressed that any changes in the Government of Ukraine would not impact on relations with the STCU. He went on to stress that the ratification of the Protocol of EU Accession was now in its last stages. The President of Ukraine forwarded the draft law to Parliament, and various Parliament committees had approved the Protocol. The next step is for the Verhovna Rada to vote on the protocol. Mr. Strikha concluded by mentioning that there was a discussion in the Parliament Committee on Foreign Affairs regarding the STCU’s future, because it's quite obvious to all that the initial goal of non-proliferation of former weapon scientists of the Soviet Union was largely achieved. Therefore the upcoming GB discussion about the expansion of the definition of Category 1 scientists as well as the widening of activities in CBRN security related problems were welcome subjects to the Government of Ukraine.

Project Accreditation in Azerbaijan

Mr. Bjelajac mentioned that in 2015 the STCU had some issues with the registering projects in Azerbaijan. During 2015, the STCU worked with the US Embassy in Baku as well as with the EU Delegation in Baku, to try to move these projects forward. As of today, all projects were successfully started and are receiving their grant payments. Mr. Bjelajac did call the Board’s attention to Partner partner project P663 which was with the French partner Agence Francais d’Expertise Technique Internationale (AFETI), and was terminated by the STCU at the request of the Azeri Republic Antiplague Station. The STCU received a letter from the management of the Antiplague station, informing the STCU that the Ministry of Health of Azerbaijan “does not consider the project as possible”. No further explanation was given. STCU discussed situation with AFETI and mutually agreed to terminate the project. However, there is some good news, in that the same partner (AFETI) has a project in Georgia that is proceeding without issue.

STCU Staffing Issues

In October 2015, one (1) of the finance specialist of the STCU resigned because of personal reasons. The position is vacant, and management is considering terminating the position in the 2017 budget request.

On January 1, 2016, six (6) full-time staff positions were eliminated, and one (1) full-time staff was converted to part-time. The STCU is currently assisting the redundant staff to find other employment. As of today, the STCU has twenty-five (25) local full-time staff and two (2) expatriate staff (ED & CFO). The mentioned vacant position is included in the twenty-five full-time positions, thus the STCU actually has twenty-four occupied local positions.

In Azerbaijan the Regional Officer was replaced, and the STCU successfully hired a replacement, Mr. Gulam Babaev, who started his duties on April 1, 2016.

Other Party Issues

EU Ukrainian and Moldovan Border Guard Project

On September 30, 2014 the STCU signed a contribution agreement (Agreement # IFS/2014/348-211) with the EU which provides 4.1M EUR of funding to buy equipment and materials for the Ukrainian and Moldovan border guards. The project was scheduled for completion on September 30, 2015, but was extended and should be finished at the


end of April 2016. On Thursday, April 7, 2016, STCU Executive Director and Chairmen Eddie Maier are scheduled to attend a handover ceremony, where a large portion of the equipment would be handed over to the State Border Guards of Ukraine.

New EU Project to test the STCU’s ability to work in new regions.

Mr. Bjelajac informed the Board of the new project initiatied by the EU within which 1.7 mln EUR was budgeted to buy equipment and materials for first responders in the SEE CoE Region. The project foresees purchases for the following countries: Albania, Armenia, Bosnia and Herzegovina, the Former Yugoslav Republic of Macedonia, Georgia, Moldova, Montenegro, Serbia, and Ukraine. The STCU see this project as a good litmus test for the STCU’s ability to operate in countries outside of its traditional focus.

Mr. Limage stated that the US Party welcomed this project, as it clearly shows a change in the STCU’s focus and shows that the Parties are looking for ways to make STCU more relevant for current challenges. Mr. Limage noted that the U.S. and other countries including member states of the EU have active bilateral assistance programs in this area and it would be important to coordinate assistance to make sure that money is spent wisely.

Mr. Bjelajac agreed with Mr. Limage’s comments, and went on to explain that the STCU can facilitate coordination work with colleagues from the Embassies, U.S. Department of Energy, U.S. Department of Defense, and other donors. He provided the example of the the Department of Energy’s Second Line of Defense (SLD) program, and its work with the State Border Guard Service of Ukraine (SBGS). The STCU works very closely with DOE/SLD to ensure that they are aware of STCU’s activities with the SBGS, and vice versa, so as to ensure compatibility with equipment purchased, as well as to avoid duplication of effort.

Ms. Chitashvili asked what was the budget foreseen for Georgia in this project and requested more details be provided to her about the project. Mr. Bjelajac confirmed that within the budgeted 1.7 mln EUR, there are funds foreseen for Georgia and that he will request that the STCU Regional Officer in Georgia to provide the requested information.

Date of Next STCU GB meeting

Mr. Bjelajac thanked Ms. Chitashvili and the Government of Georgia for offering to host the “back- to –back” ISTC/STCU Governing Board Meetings in December 2016. As of today, the following are the proposed dates:

ISTC GB = December 6th and 7th

STCU GB = December 8th

Current Secretariat Activities

Targeted R&D Initiatives Activity Update

Mr. Bjelajac informed the GB participants that in the summer of 2015, 96 project proposals were received from the Academies of Science of Azerbaijan, Moldova, and Ukraine, as well as the Shota Rostaveli National Science Foundation. The proposals were submitted to the EU and US technical reviewers, with the hope that funding decisions would be taken at the end of November 2015. In mid-November 2015, the US Party requested the STCU work with the other Parties to delay the funding decisions until late January or early February 2016, due to process issues that had to be resolved before approval of funding could be made by the U.S. Party. All parties agreed to this revised schedule, and looked to the early part of 2016 as the timeframe to make decisions about funding for co-funded projects with the Academies of Science and SRNSF. As of today, the U.S. Party indicated that they would be able to identify in the the Board documents (i.e. funding sheet, record of decisions, etc.) the projects that they desire to fund, but because they still do not have the required approvals, the documents would need to indicate that they are still subject to U.S. approval for its funding indicated. Thus, as of today, the Record of Decisions and the Funding


Sheet are written in such way as to indicate that the U.S. Party funding is still subject to additional approval. That is where the situation stands as of today.

Finally, the STCU is a bit behind schedule for the 2016 TIs because it is the STCU’s belief that the decision regarding availability of funding for 2015 TIs should be made before announcing calls for proposals for the 2016 TIs. Mr. Bjelajac stopped there and asked his US colleagues if they would like to add anything to his assessment of the situation.

Mr. Limage confirmed that the US party was prepared to provisionally announce its readiness to co-fund with EU, Ukraine, Moldova, Georgia and Azerbaijan 17 Projects for a total amount of funding of $492,200, but emphasized that the U.S. Party still must receive additional approval from colleagues in Washington.

Ms. Chitashvili thanked Mr. Limage for his update, but pointed out that her organization as a co-funder of the Georgian TIs is experiencing serious difficulties brought about by the delay in funding decisions from November 2015 to now (and possibly later, because of the U.S. Party’s need for additional approvals). She went on to highlight that without project approvals by May 1st of this year, the SRNSF may lose the funds that it needs in order to fund the selected projects 50/50. Ms. Chitashvili asked if it was possible for all approvals to be obtained so that Georgian TI could be started by the aforementioned fiscal deadline of May 1, 2016.

Mr. Limage thanked Ms. Chitashvili for her comments, but stated that unfortunately the US party is not able to move as quickly as she hoped. Mr. Limage then turned to his EU colleagues, to see if they may have a proposed solution that might help in this situation.

Mr. Popa proposed to work offline in order to further discuss ways to facilitate the presented Georgian deadlines. One possibility is for the EU to finance all of the Georgian projects, as the EU does not have the same constraints on its funds as faced by our US colleagues.

Mr. Bjelajac thanked the EU party for this suggestion, but highlighted that if a project is funded 100% by the EU party, the projects budgets would be in Euros and we would lose the ability to go back and finance them 50/50 with the United States.

Mr. Maier seconded the idea that the EU party could fund 100% of all Georgian projects, with the US party possibly replacing EU funds on other non-Georgian projects.

Mr. Bjelajac confirmed that proposed scheme would work for STCU and asked if it was acceptable to the non-Georgian parties. He turned to his Azeri colleague and asked if this approach was comfortable for the Academy of Science of Azerbaijan.

Mr. Guliev confirmed that the Academy of Science of Azerbaijan could work with the delays experienced by the US party, and thus could accommodate additional delays.

Mr. Bjelajac then asked Mr. Culiuc if the proposed approach would work for the Academy of Science of Moldova.

Mr. Culiuc commented that Moldova is currently undergoing a period of reorganization of the academic and educational systems, a result of which will be a change in the resposibilities of the Academy of Science. Given these changes, Mr. Culiuc preferred not to provide an answer right now, but promised to consult with colleagues back in Chisinau and then inform the Governing Board as quickly as possible.

Mr. Bjelajac stated that he understood Mr. Culiuc’s difficult position, and thus requested him to contact the Academy of Science of the Moldova directly to confirm if they too could wait for a final decision.

Mr. Strikha confirmed that from the side of the Ukrainian Party there is not such strict deadlines as in Georgia, thus Ukraine could wait as well. However, he went on to mention that the sooner funding decisions are made, the better.


Mr. Bjelajac thanked everyone for their understanding and proactive approach to working together to find a solution that accommodated all Parties deadlines and constraints. Upon conclusion of this meeting, he mentioned that he would work with all Parties to revise the funding sheet in order to accommodate this new approach (100% funding of GE projects by EU, and all other projects adjusted accordingly). Once re-drafted, the funding sheet would be circulated electronically for approval by all before final signature.

Ms. Chitashvili thanked the GB members for their understanding and support of the Georgian Party in accommodating its fiscal deadlines for the 2015 TI projects.

Mr. Bjelajac then turned the Board’s attention to the 2016 Targeted Initiatives and asked for their thoughts on when the STCU could launch the call for proposals (in previous years the calls were already launched by March). He went on to mention that it is his understanding that Ukraine, Georgia, Moldova, and Azerbaijan would like to move forward now with the 2016 call, and asked if his EU and US were comfortable with this timing.

Mr. Maier confirmed that from EU the side, the 2016 TI could be launched now, as the budget is already available.

Mr. Lamaige confirmed that US is ready to move forward with the new call as well.

Mr. Bjelajac proposed to open the call by May 1st 2016, with the goal of receiving all proposals by September 1st 2016. He asked if the proposed dates were too tight for the Academies and SRNSF to accomodate.

Ms. Chitashvili confirmed that the proposed deadlines were fine for the Georgian Party.

Mr. Strikha confirmed that Ukraine supported the announced dates and was ready to open the call on the 1st of May as well.

Mr. Bjelajac proposed that the Secretariat will contact each of the Academies, as well as the SRNSF and Ministry of Education and Science of Ukraine to confirm with each of them the dates for their calls.

All agreed with this approach.

Mr. Bjelajac again thanked all the governing board participants for their very constructive discussions on such an important topic.

Mr. Bjelajac concluded the discussions on TIs by calling the Governing Board’s attention to the fact that the 2016 Targeted Initiatives with Ukraine will for the first time include institutions which report to the Ministry of Education and Science of Ukraine (MESU). Thus, these institutions will submit proposals which will compete together with those submitted by institutions of the National Academy of Science of Ukraine (NASU). Mr. Bjelajac went on to stress that no additional funds for Ukrainian TIs will be provided by the US and EU and that the proposals from each entity (MESU and NASU) will be considered “Ukrainian” proposals.

Mr. Strikha commented that the main purpose of expanding the Ukrainian TI program to include Ukrainian Universities is not to increase competition between the two entities (MESU and NASU), but to increase the competitiveness of all Ukrainian organizations in their pursuit of all international grants, including but not limited to the Ukrainian TI with the STCU, DG Research’s Horizon 2020 program, etc., etc..

Partner Program/Sustainability Activity

Mr. Bjelajac briefed the Board regarding the amount of partner project funding since the 41 GB Meeting. Mr. Bjelajac stated that, Partner funding is extremely volatile, especially non-governmental partner funding (i.e. the private sector).

Mr. Bjelajac thanked Deputy Minister Strikha for his assistance in resolving the issue with Ukrainian Host Government Concurrence that was raised in the ED report for the period ended September 18, 2015.


Mr. Strikha confirmed to the members of the Board a new legal solution for the issue of HGC was established and the Government of Ukraine does not anticipate any problems with this matter in the future.

Trends in Projects

Mr. Bjelajac highlighted the following trends in project funding: the number of active projects has dropped considerably over the last few years (from an average of 228 active projects in 2012, and Board approved funding of about 17-18 million USD per year, to 120 active projects in 2015 and 4.72 million USD in Board approved funding). Furthermore, the average number of active projects for 2015 was approximately 120, with that number expected to drop down to 110 in the first quarter of 2016. Mr. Bjelajac stressed that the decline in funding at the STCU has seemed to have “bottomed out”, and he hopes that funding for the near term (1 -2 years) will stay at about 8.0 to 10.00 million USD per year.

Mr. Strikha stressed that the decrease in funding in recent years is very worrying for the Ukrainian Party. Mr. Strikha requested that the EU and U.S. parties revisit their funding of S&T as he strongly believes that the price of Ukrainian researchers is very affordable now, and that Ukrainian researchers can provide solutions to security issues that are faced by the world today in the CBRN areas. Mr. Strikha once again requested the U.S. and EU to revisit any possibility for improving the funding situation of the STCU.

Mr. Limage thanked Mr. Bjelajac for his effective stewardship of STCU resources, his ability to look forward at the obstacles facing the organization, and Mr. Limage encouraged the rest of the GB Members to also think ahead not just one fiscal year but multiple cycles ahead in order to address the challenges facing the STCU. Mr Limage highlighted that the decision to provide funding for projects and activities of the STCU can't be viewed in isolation, as the EU and US have a number of different programs devoted to a range of security activities, one of which is the science centers (both ISTC and STCU). Mr. Limage went on to add that the STCU should continue to attract funding from other parties (both governmental and non-governmental), and not look solely to the U.S. and EU for funding. Mr. Limage went on to highlight the STCU’s initiative to partner with MESIS, an international, non-governmental organization based in Amman, Jordan, as it may provide some attractive and useful synergies across the Eastern European and Middle East/North Africa which may attract more investment. Finally, the STCU should be able to explain what its added value is and its comparative advantage when it searches for new ways to attract the interest of the private sector.

Mr. Popa mentioned that the EU annual contribution remains steady (~2M EUR per year) and may possibly go up although only slightly. Mr. Popa highlighted that the STCU is already making itself much more useful by its involvement in the implementation of some EU CBRN Centers of Excellence (COE) activities (i.e. the 1.7M EUR project mentioned earlier for buying equipment and materials for countries of the former Yugoslavia). Mr. Popa stressed that a new trend that is providing challenges for EU member states is the requirement to hire local expertise for its project. The STCU can become a very interesting partner for the member states’ agencies because of this requirement, and could help them to implement their COE projects as well. Mr. Popa called attention to the fact that at the STCU the EU has approximately 3M EUR of undesignated funds which could be used for big regional projects when identified.

Mr. Maier mentioned that both the US and EU can continue to work with their decision-makers back in Brussels and Washington D.C. to show that the STCU is an efficient mechanism for implementing programs, which may bring more funding from various other programs.

Important Visitors/Meetings/Events

Mr. Bjelajac briefed the GB meetings participants on the main important meetings and events that have been held during reporting period.

3.1. Look Ahead to 2017 Budget

Mr. Bjelajac called to the Board’s attention the main trends in project funding observed since 2004:


• Non-governmental partners funding has declined in recent years, more than likely as a result of the political situation in Ukraine. Unfortunately, until the situation improves in Ukraine, the STCU does not see this trend reversing in the near future.

• As of today, the Secretariat is looking at a budget reduction of approximately $100,000 USD 2017 AOB request, as compared with the approved 2016 AOB (which totaled $950.00 USD).

• Line-by-Line reductions will be considered, but the largest AOB line is staffing related and thus this is usually the most realistic way of achieving required reductions. As it was mentioned in the ED Report, at the end of 2015, six (6) full-time positions were eliminated and in 2017 management envisions another cut of approximately 2-3 full-time staff will be needed.

• Management will continue to work with the ISTC in order to achieve the consolidation of costs for both Centers. For example, management sees the consolidation of the two Regional Offices in Tbilisi as a way of rationalizing costs. Currently both Centers have offices and staff in Tbilisi. STCU management suggests closing one office and consolidating all staff into one office at the beginning of 2017. Finally, a workload assessment should be made to determine the required number of staff for both Centers in the consolidated office.

Ms. Chitashvili commented that it is first necessary to determine the strategic goals of the regional offices in Georgia before the issue of merging and staff reduction should be considered.

Mr. Limage welcomed Ms. Chitashvili comments and highlighted that at the ISTC, the Governing Board there requested that member states consider financing positions above those required by workload, as U.S. and EU resources will more than likely not be sufficient going forward in order to sustain multiple person offices.

Mr. Strikha commented that the proposal of local staff reduction is the most obvious proposal, however he called attention to the fact that the change of rate between UAH and USD made the situation in Ukraine quite different. He proposed to consider the possibility of reducing staff salaries in line with the change in the USD/UAH exchange rate, as an alternative to the reduction of staff number directly.

Mr. Bjelajac answered that from the STCU side it would be more preferable to not consider reducing salaries, as STCU salaries (grants) are denominated in USD (which is the operating currency of the USD) regardless of fluctuations in currency rates (which often go in different directions). The STCU has maintained this consistent approach throughout the years, even in 2008 when the UAH strengthened versus the USD (went from 5.3 UAH to 1.00 USD to 4.90 UAH to 1.00 USD). Management believes that the STCU should continue to be consistent.

Mr. Hood mentioned that in previous years, it was much simpler for STCU management to determine the number and makeup of staff needed as the project funding was relatively stable. Mr. Hood asked the the Secretariat to expand on the numbers and kind of staff it sees as needed in order to manage the new kinds of activities currently under management by the STCU. For example, what are the requirements of the new EU projects that are much more focused on procurement and less so on paying of grants.

Mr. Bjelajac answered that the STCU Secretariat has been working internally in order to “right size” the organization. For example, in order to achieve the right mix of staff, dictated by the changes in the types of projects, the STCU made changes in the staffing levels within the finance and administrative departments. In short, the STCU shifted a finance person over to administrative department in order to address the increased workload in procurement there. Furthermore, the STCU management believes that the STCU will need to consider hiring specialists that will work only on certain projects, and will not be considered permanent staff. When the project ends, the specialst will also end his/her tenure with the STCU.

3.2. Approval of New Grantee Definition and Eligibility Requirements

Mr. Bjelajac briefed the GB meetings participants about current definition and eligibility requirements of STCU Category 1 Participants and noticed that in keeping with the desire to synchronize the policies and procedures of the two Centers, the STCU Secretariat recommends that GB members consider instructing the STCU to adopt the ISTC’s approach to the definition and eligibility of Category 1 Specialists for all targeted initiative and partner projects.


Partners that require a more stringent eligibility requirement may do so (i.e. in the past DOE/IPP had a requirement of 60%), as per their instructions. If the Governing Board is uncomfortable with the “one-size fits all” approach for projects, a decision could be made to break down grantee requirements by the three types of project category that currently exist at the STCU – Targeted Initiative, Government Partner, and Non-Government Partner.

Mr. Maier commented that he was happy to see the continued exchanges between the ISTC and STCU not only at the Secretariat level, but also at the working procedures level. He went on to add that he supported broadening, the system to make it more flexible.

Mr. Popa agreed that there should be definitional flexibility, but also wanted to make it clear that funds coming from DG DEVCO are not for research, but instead are for security. The EU would like to have the flexibility to target scientists or projects that have the highest CBRN safety and security impact. Mr. Popa wrapped up his comments by adding that EU would also like to leave more flexibility for governmental and non-governmental partners so as to increase the possibility for the STCU to find other projects that don’t necessarily have a security aspect.

Mr. Limage stressed that any new broader category definition of grantee should still include FWS, because the traditional non-proliferation mission of the ISTC and STCU may still be pertinent for mid-level and senior experts, engineers, weapon scientists that were a part of state programs for example in Middle East countries (referring to the MESIS discussion earlier). As for TI Project funding, the U.S. Department of State resources are still very much focused on non-proliferation and security. However, having said that, other U.S. agencies (i.e. the U.S. Department of Energy) may have broader requirements, and thus may be more liberal.

Ms. Chitashvili added that a broader definition of eligible grantee can always be reduced to a more specific/targeted definition in specific calls for proposals.

Mr. Strikha supported the Georgian position that in the cases of focused calls for proposals, additional requirements could be included, and that a broader definition gives the STCU a greater scale of flexibility. Mr. Strikha also added that in the context of closer STCU and ISTC cooperation the regulation should be more or less the same.

Mr. Bjelajac wrapped up the discussion by stating that this point is included in the 42nd Governing Board Record of Decisions for signature by the Board at the conclusion of the GB meetings.

3.3 New DOE Targeted Initiatives and SB Line

Mr. Bjelajac informed the GB Meeting participants that that the U.S. party proposed to create additional targeted initiatives and a new supplemental budget line in order to accommodate those TI's that will be initially funded by the U.S. Department of Energy but would be open to other volunteer funding. Mr. Bejalac mentioned that if Board approves the creation of a new supplemental budget line, the decision will be included in the Record of Decisions, and any party could choose to finance that budget line at a later date (at the time, only the U.S. Department of Energy expressed an interest in funding the new SB).

Mrs. Carter highlighted for the Board the U.S. Department of Energy’s fifteen years of excellent cooperation with the STCU, including successes in the ISTC and STCU Fukushima initiative, as well as the Nuclear Forensics initiative which brought together funding from the EU and a number of different U.S. government agencies. Mrs. Carter requested the STCU Governing Board to consider approving the proposed target initiatives, which were already approved at the December ’15 ISTC governing board. Mrs. Carter mentioned that DOE is prepared to commit up 2 million USD in these areas at this time, but expects significant additional funding to be provided in the near future. Mrs. Carter welcomed the participation of other parties if interested in these initiatives. Mr. Bjelajac wrapped up the discussion by stating that this point is included in the 42nd Governing Board Record of Decisions for signature by the Board at the conclusion of the GB meetings. Mr. Maier proposed to merge common EU and US activities in the field of export control in a new proposed Target Initiatives on Export Control. Such an approach would enable coordination of the efforts and creation of common


policy. Currently the EU and US have joint outreach programs that mainly focused on dealing with legislation, law enforcement, licensing of explore control activities, and control of dual-use exports, transits or imports. However, these activities did not address the academic dimension like universities, where engineers, lawyers or economic scientists could be trained to understand the importance of the dual-use aspects of technologies. Mr. Maier continued by mentioning that the STCU and ISTC could assist in the development of such programs for the academic sector across regions in order to highlight the importance of this issue. Mr. Maier continued by saying that Georgia, Moldova and Ukraine could prepare together proposals for which universities could be selected, the type of training provided, etc., etc.. Mr. Maier highlighted that for this initiative a budget of 1.5 million EUR already has been allocated for the export control TI at the ISTC. The EU would then consider providing additional funds on a year by year basis, in order to ensure that the proper systems and approaches to export control are implemented on a regular basis. The EU is currently working on the Terms of Reference for the Export Control TI in close collaboration with their US colleagues. The plan is for these documents to be ready for the upcoming ISTC GB Meeting in June. Mr. Maier concluced by stating that at the EU level a list of dual-use technologies and goods is already in hand, and revised on a semi-annual basis. However, Mr. Maier also noted that the U.S. may have a different approach to this issue. In the end, each country should adjust to take into consideration its own particular needs.

Mr. Limage thanked his EU colleagues for their new Export Control TI proposal. Mr. Liamage confirmed that the U.S. party is interested in collaboration with the EU to make sure that this is solving a real problem and supplementing alredy existing bilateral initiatives. Mr. Limage highlighted that the United States and the EU have active export control capacity building projects with many Eastern-Europe countries, including here in Ukraine (the Fiscal Service of the Ministry of Finance and the State Border Guards of Ukraine). Mr. Limage asked that any export control TI take the existing US and EU programs into consideration so as not to duplicate efforts.

4. Closing Session

4.1 Request to Update STCU Financial Regulations

Mr. Anthony Nichol mentioned that to enable the STCU to manage certain projects under direct agreement with the EU it is required that the STCU successfully complete a 7-Pillar Audit. During this audit the internal systems of financial control, accounting, and procurement were audited by an external auditor in accordance with guidleines provided by the European Commission. The audit was conducted in 2014/15 and a short list of recommendations was issued. One of the auditor’s recommendations requested a change in the STCU’s Financial Regulations in order avoid any possible misunderstandings in the future. The auditors proposed to remove the words “whenever practical” from the Financial Regulations related to open tenders. The STCU agrees with the auditor recommendation and thus asks the Governing Board to approve the revised STCU Financial Regulations with these two words removed.

The request was approved as presented.

Mr. Popa mentioned that the new agreement which is utilized now by the European Commission (known by its acronym PAGODA) foresee the use of sub-delegation by the STCU. Unfortunately, at the time, the STCU was not audited for this capability (as the STCU had never sub-delegated tasks before) and thus the STCU is unable to sub-delegate to the ISTC. Mr. Popa asked that the STCU consider auditing this pillar in the future, so as to have this capability of sub-delegating to the ISTC.

Mr. Bjelajac confirmed that the Secretariat will revisit this issue.

4.3 Proposed 43rd STCU Governing Board Meeting (Tbilisi, Dec. 8)

Mr. Bjelajac mentioned that the next Governing Board meeting (43rd) is tentatively scheduled for December 8th in Tbilisi, Georgia. The idea is that the ISTC would have its meetings on Dec. 6th and 7th in Tbilisi as well.

Ms. Chitashvili confirmed that Georgian side is prepared to host both the ISTC and STCI GB Meetings in Tbilisi and asked that the Boards confirm the dates by no later than the beginning of November. All agreed to the tentative date of December 8th in Tbilisi, with confirmations to come after the upcoming June ISTC Governming Board meeting.


4.4 Sign 42nd GB Record of Decisions and Funding Sheet

Mr. Bjelajac highlighted the changes that would be made to the Joint Statement and Record of Decisions. All changes were agreed to by the Governing Board. Mr. Bjelajac mentioned that both the 42nd Governing Board Record of Decisions and Funding Sheet would be circulated circulated to the Board members for signature via post.

4.5 Logistics for 20th Anniversary Event

The logistics for 20th Anniversary Event were approved as presented.

4.6 Final Issues/Statements from GB Members

Mr. Bjelajac thanked the Governing Parties for the fruitful meeting, and for the discussion about the future of the STCU. Mr. Bjelajac stressed that the issues that were discussed were difficult but very important for STCU the future. The Chairman thanked the STCU Secretariat for good organization of the meeting and Ukrainian colleagues for hosting the 42 GB Meeting.

The 42nd GBM was then closed.


Executive Director Report

(Reporting Period: March 5, 2016 – November 11, 2016) Major Issues Situation in Ukraine As expected, shortly after the 42nd Governing Board in April ‘16, the Prime Minister and most of the cabinet was changed with a number of new ministers taking positions that work closely with the STCU. In the case of the Ministry of Education and Science, Minister Kvit was replaced by Minister Hrynevych, and in the case of the Ministry of Health, Minister Kvitashvili was replaced eventually (August 1, 2016) by acting Minister Suprun. The transition to the new minister in the case of the Ministry of Education and Science has been seamless – we are still fortunate to have Deputy Minister Strikha as the Governing Board member representing Ukraine. However, the transition to the new Minister of Health was problematic for the STCU and played a role in the decision to not extend the EU-funded Odessa Ukrainian Anti-Plague Research Institute (UAPRI) Biosecurity Improvement project (see also under Other Party Issues below). Aside from the Odessa project, the STCU’s operations have not been impacted by the April ’16 changes in the Government of Ukraine. As mentioned above, the transition to the new Minister of Education and Science was seamless, and on June 15, 2016 as timetabled, the Verkhovna Rada of Ukraine ratified the 1997 Protocol amending the Agreement to establish the Science and Technology Center in Ukraine. Final approval of four (4) 2015 co-funded projects with UA Academy of Science (formerly known as TI projects) funded by the United States As of the writing of this report, the STCU has yet to receive final approval for four (4) 2015 co-funded projects with UA Academy of Science (formerly known as TI projects) funded by the United States. The STCU has worked closely with the US Party to address this issue, and the US Party has assured the Ukrainian Academy of Science that it is doing everything possible to move this process along as quickly as possible. The final U.S. approval for four (4) U.S. funded projects occurred quite quickly in May ’16. However, the process slowed down and the next additional five U.S. funded projects received final approval in the first week of November. With the four (4) projects mentioned in the paragraph still pending approval, it is possible that final approval can be quite substantially delayed (>6 months). Moving forward in the event of continued delays in U.S. approvals of projects A possible resolution for any U.S. funded proposal at the upcoming 43rd STCU Governing Board Meeting that is delayed to such an extent to put AZ, GE, MO, or UA funding in jeopardy (i.e. for example a GE proposal that does not receive U.S. final approval by May 2017) that the proposal be pushed into the 2018 AZ, GE, MO, or UA funding year. For example, In the case of GE, this would mean pushing the project to start in 2018, instead of 2017. The same approach could be suggested for AZ, MO, and UA.


STCU Staffing Issues In August 2016, the Deputy CFO resigned in order to emigrate from Ukraine. The position was filled internally, and the vacant position this created has been addressed and is covered in the 2017 AOB request. Other Party Issues Odessa Ukrainian Anti-Plague Research Institute (UAPRI) Biosecurity Improvement Initiative During the Chairman of the Governing Board’s visit to Kyiv in early April ’16 to attend the 42nd Governing Board Meeting and 20th Anniversary celebration, a meeting was held with representatives of the Ministry of Health (Mr. Svyatoslav Protas), the Director of UAPRI (Mr. Dikyy), EC (Mr. Maier), and the STCU. At that meeting the Ministry of Health expressed its continued support for the project and its intention to continue its investigations into the viability of the two proposed locations (Vorobyova St. and Yadova St.). Unfortunately, as mentioned above, the cabinet of Ukraine was reshuffled shortly afterwards, and the Minister of Health of Ukraine (Minister Kvitashvili) was removed from office. A new Minister of Health was not named in April ’16 (the only Ministerial position to remain unfilled), and at the time a current Deputy Minister (Mr. Shafranskyi) was elevated to Acting Minister of Health. Shortly after the cabinet reshuffle, Deputy Minister Perehinets (the point of contact for the EC and STCU for this project) resigned as well. Given the approaching deadline for the project (scheduled to finish in late August ’16), and the significant change in Ministry of Health personnel, the EC advised the STCU on June 15, 2016 that the project would not be extended, and asked the STCU to initiate all steps to close the project. On June 16, 2016, a letter was sent by the STCU to the Acting Minister of Health informing him that the project would not be extended and that funds on hand at the STCU were to be returned to the EU. EU Ukrainian and Moldovan Border Guard Project On September 30, 2014 the STCU signed a contribution agreement (Agreement # IFS/2014/348-211) with the EU which provided 4.1M EUR of funding to buy equipment and materials for the Ukrainian and Moldovan border guards. The project was scheduled for completion on September 30, 2015, but was extended to May 31, 2016 in early July ‘15 in order to accommodate the delivery of additional chemical detection units utilized for training purposes. As of the writing of this report, all items have been delivered and this project was successfully closed. Project to assist the U.S. DOS with the extinguishing of fires near Mosul, Iraq In mid-October, the Islamic State in Iraq and the Levant (ISIL) ignited stockpiles of sulfur to hinder Iraqi and coalition advances near Mosul, Iraq. According to press and diplomatic reporting at the time, the fires and associated smoke killed at least two, hospitalized 80, and negatively affected coalition forces. The Department of State’s Global Threat Reduction program contacted the STCU on October 24, 2016 to rapidly procure and freight up to 375,000 of an overall total of 500,000 liters of foam


capable of extinguishing the fires as soon as possible. The STCU worked with U.S. DOS and designated vendors to procure and freight the required foam in the amount of $2,558,688 within ten (10) days of first contact on Oct. 24th. New EU Project to test the STCU’s ability to work in new regions On December 11, 2015 the STCU signed a contribution agreement (Agreement # IFS/2015/365-540) with the EU which provides 1.7M EUR of funding to buy equipment and materials for first responders in the SEE CoE Region. This project is unique in that it will test the STCU’s ability to purchase equipment and materials for countries outside of STCU’s traditional region (i.e. GUAM). The project foresees purchases for the following countries: Albania, Armenia, Bosnia and Herzegovina, the Former Yugoslav Republic of Macedonia, Georgia, Moldova, Montenegro, Serbia, and Ukraine. As of the printing of this report, the tender for all budgeted items was completed in July ’16; however, a number of line items were priced above the budgeted prices and thus the STCU procurement department is working to resolve these discrepancies. As of today, the STCU does not expect this issue to cause any issue related to the June ’17 deadline of this project. However, the STCU will monitor the issue closely, and work with its EU counterparts if difficulties arise that may impact the deadline. Finally, other delays may also be due to the recipients not responding quickly enough with end user certificates etc Signed BOA (Basic Ordering Agreement) with U.S. DoD-DTRA On July 14, 2016 the STCU signed a basic ordering agreement (BOA) with the U.S. DoD-DTRA which has an ordering period of five (5) years and a maximum ceiling of $10M. The ISTC signed a similar BOA with the U.S. DoD-DTRA as well in July. The agreement allows DTRA to possibly use the Centers to manage its Cooperative Threat Reduction (CTR) program in the countries that the two Centers operate. Next steps are for both the ISTC and STCU to investigate projects that may be suitable for DTRA to put through the Centers utilizing the BOA mechanism. ISTC/STCU IT synchronization At the 42nd STCU GB the secretariat was tasked with working with the ISTC Secretariat in order to produce a report on ways to optimize and share administrative and technical infrastructure and software programs, and the associated cost implications. As a result of this analysis, the ISTC recommended to its Governing Board to discontinue purchasing of Norton license (used for its project database, e-mail, etc.) and to utilize its current Norton license for the foreseeable future (3 – 5 years) at no cost to the ISTC. This decision allowed the ISTC to reduce its 2017 AOB request for IT software budget funds significantly. STCU is currently working with the ISTC to assess the next steps in replacing Norton with a combination of Navision and Google Mail and will report on this at the next ISTC GB on December 6, 2016.


Current Secretariat Activities Targeted R&D Initiatives Activity Update The 2016 Targeted Initiatives request for proposals resulted in the following numbers of proposals for each country: Azerbaijan = 19 Georgia = 25 Moldova = 22 Ukraine = 30 (15 from Min. of Science and Education & 15 from Acad. of Sciences) Total # of 2016 TI proposals = 96 Due to delays in completing all reviews, the final selection of projects is now scheduled for shortly after the 43rd Governing Board Meeting scheduled for December 7, 2016. The final selection of projects will be documented in an out-of-cycle funding sheet to be signed in early 2017. Partner Program/Sustainability Activity The 42nd GB approved a total of three (3) new partner projects totaling roughly $120K, as well as nine (9) new partner project extensions totaling roughly $700K ($550,227 and €132,226). Couple this with the partner projects expected to be approved at the 43rd GB in December 2016 (~$4.7M) and 2016 should see approximately $5.5 million of new partner project funding received. Partner project funding in 2015 was $4.3, so 2016 saw a slight increase in partner funding year-on-year. The STCU expects that going forward partner project funding will be in a band of approximately $4M - $6M per year. Contrast this with a few years ago, when the band was approximately $8M - $12M. The decrease was a result almost exclusively because of a drop in government partner projects (especially DOE/GIPP). Trends in Projects As the table below indicates, the STCU has seen the number of active projects drop considerably over the last few years (from an average of 228 active projects in 2012 to 125 active projects in 2014). Furthermore, as you can see in the table below, the average number of active projects for 2015 was approximately 120. However, given the board approved funding in 2015 (see table below, the number highlighted in red), the STCU anticipates a continued drop off in the number of active projects for 2016 (down to ~100-110). Pair this with a continued decline in the number of Partner Projects (as described above), and the STCU anticipates seeing the number of active projects track downwards even more towards 90 – 100 at the beginning of 2017.


The large increase in funding for 2016 to $11.1M is due in large part to the one-time funding ($2.6M) of the Mosul, Iraq project described earlier in this report. Without this one-time funding, the STCU would have expected a funding year of about $9.5M for 2016.

2009 2010 2011 2012 2013 2014 2015 Nov. 2016

Avg # of Active Projects 219 220 227 228 179 125 120 115

Board Approved Project Funding (USD) $13.2M $12.9M $18.2M $17.7M $12.7M $14.1M $4.72M $11.1M*

* $11.1M is the amount of funding received for the period of Jan. 1 – Nov. 11, 2016 Important Visitors/Meetings/Events ED attends Day of Science in Ukraine (20th May, 2016, Kyiv). STCU Executive Director participated in the Science Day in Ukraine organized by the Ministry of Education and Science of Ukraine. During the event the Executive Director delivered short remarks, congratulating all Ukrainian scientists and educators on this important day. The event was attended by high level officials such as the Vice Prime Minister of Ukraine Vyacheslav Kyrylenko, the new Minister of Education and Science of Ukraine Liliya Hrynevych, and the Deputy Minister of Education and Science and STCU Governing Board Member Maxim Strikha. ED, CFO, and Senior Specialist travel to Kamianske (formerly Dniprodzerzhynsk) to visit Pridnirpovsky Chemical Plant (PCP) (23rd and 24th May, 2016, Kamianske). The STCU ED, CFO, and Senior Specialist traveled to Kamianske to view the PCP site and hold initial consultations about the proposed 3.5M EUR project to implement emergency measures for securing the site. Meeting with Kevin Garrett, International Project Manager, DTRA (9th June 2016, Kyiv). The STCU Executive Director met with Kevin Garrett to discuss each others efforts in the area of bio-safety and bio-security in Ukraine. The Cooperative Biological Engagement Program (CBEP) managed by Mr. Garrett is looking at the possibility of utilizing the STCU in order to facilitate some of its future research projects. ED Attendance of ISTC 62nd GB meeting (20th – 21st June, 2016, Astana). The STCU ED attended the ISTC 62nd GB meeting in Astana. Meeting with DOE and PNNL Delegation and Deputy Head of Presidential Administration of Ukraine (13th July, 2016, Kyiv). The STCU ED met with Mr. Paul Tumminia (Senior Advisor, Office of International Affairs, Office of Russian and Eurasian Affairs, DOE), Robert Steele (Project Manager at PNNL), and Dmytro Shymkiv (Deputy Head of the Presidential Administration of Ukraine, National Reforms Council Secretary) to discuss the possibility of establishing a cyber-security degree program in Ukraine. The STCU ED was invited by Mr. Tumminia to attend, as DOE may consider utilizing the STCU to implement the project if the project is initiated. As of the printing of this report, it appears that this project will not move forward.


Meeting with DOE/NNSA, DG DEVCO, ISTC, and MESIS (20th July, 2016, London). The STCU ED met with Anne Harrington (Deputy Administrator for Defense Nuclear Nonproliferation), Art Atkins (Assistant Deputy Administrator for Global Material Security), Andy Hood (Director of Strategic Planning/Integration, DOE/NNSA), Adriaan van der Meer (Head of Unit, DG DEVCO), Francesca Nieto (Programme Manager, DG DEVCO), Jose Mota (Programme Manager, DG DEVCO), Ron Lehman (Chairman, ISTC), David Cleave (ED, ISTC), and Al-Sharif Nasser bin Nasser (Managing Director, MESIS) to discuss potential initiatives that the three Centers could collaborate on in the future. Meeting with Charles Streeper, Senior Advisor, Norwegian Radiation Protection Authority (29th July 2016, Kyiv). The STCU Executive Director met with Charles Streeper to continue discussions for possible future cooperation on projects implemented by NRPA in Ukraine. Attendance of Global Partnership Meetings (7th, 8th, and 9th September, 2016, Tokyo). The STCU Executive Director traveled to Tokyo and met with representatives of global partnership programs (i.e. Germany, U.S., Norway, etc.) to discuss ways the STCU may act as an implementing organization for their activities in Ukraine. Meeting with DOE/NNSA Delegation, PNNL, and Energoatom (15th September, 2016, Kyiv). The STCU ED and Senior Specilaist met with Connie McAninch (Project Team Lead, NNSA/DOE), Emily Eng (Foreign Affairs Specialist, NNSA/DOE), Garl Bultz (Senior Security Specialist, Gregg Protection Services/PNNL), Richard Latorre (Project Team Lead, PNNL), and representatives of Energoatom to discuss a potential $2.5M project to upgrade the physical security at the South Ukraine Nuclear Power Plant. Meeting with DOE/NNSA Delegation (16th September, 2016, Kyiv). The STCU ED and Senior Specialist met with Jerry Davydov (Nuclear Smuggling Detection and Deterrence Program Officer, NNSA/DOE) and Deborah Dale (Senior Technical Advisor, NNSA/DOE) to discuss potential follow-on projects in the Nuclear Forensics program. Meeting with Luke Kluchko and Kevin Garrett, DTRA (30th September 2016, Kyiv). The STCU Executive Director met with Luke Kluchko and Kevin Garrett to discuss each others efforts in the area of bio-safety and bio-security in Ukraine. Both sides also discussed preparation for the ED’s attendance in the next week’s tri-lateral meeting with Ukraine, Poland, and the US on regional collaboration on biological security, safety, and surveillance. ED and Senior Specialist attend Trilateral Meeting with Ukraine, Poland, and the US (3rd and 4th of October 2016, Lviv). The STCU Executive Director and Senior Specialist (Pashynska) attended the tri-lateral meeting with Ukraine, Poland, and the US on regional collaboration on biological security, safety, and surveillance. The STCU presented the benefits of implementing biosafety/biosecurity projects through the STCU. ED Attendance of STCU CEC meeting (19th October, 2016, Brussels). The STCU ED and CFO attended the ISTC CEC meeting in Brussels.


ED Meeting with Luke Kluchko, Kevin Garrett, and other DTRA representatives in Fort Belvoir Headquarters (21st October, Fort Belvoir). The STCU Executive Director met with Luke Kluchko, Kevin Garrett, and other DTRA representatives to discuss possible ways to work via the STCU. Currently, DTRA is considering putting a project based in Jordan through the STCU, which would allow the STCU to use its partnership with MESIS. ED Meeting with DOE/NPAC Senior Staff (24th October, Washington D.C.). The STCU Executive Director met with Kasia Mendelsohn, Anne Philips, and others to discuss ways that the STCU and ISTC can assist NPAC with delivering its programs. ED Meeting with DOS/WMDT (25th October, Washington D.C.). The STCU Executive Director met with Heather Von Behren, Kathleen Lowe, Sarah Fendrich, and other to discuss ways that the Centers can assist WMDT with delivering its programs. ED Meeting with DOE/GMS Staff (26th October, Washington D.C.). The STCU Executive Director met with Art Atkins, Katie Vogler, Emily Eng, Kristina Hirsch and others to discuss ways that the STCU and ISTC can assist GMS with delivering its programs. The ED spoke with Emily Eng at the end of the meeting about approaches to implementing the $2.5M physical protection upgrade at South Ukraine Nuclear Power Plant which is currently under discussion with DOE/GMS and Energoatom. ED Meeting with Anne Harrington, Deputy Administrator, Defense Nuclear Non-proliferation, DOE/NNSA (27th October, Washington D.C.). The STCU Executive Director met with Anne Harrington to brief her on the multiple NNSA meetings held over the course of the past few days and discuss new ways of cooperating with the Centers. Sr. DED Meeting with South Korean Delegation (3rd November, Kyiv). The STCU Senior Deputy Executive Director met with representatives of the Ministry of Unification of the Republic of South Korea and a representative of the Embassy of the Republic of South Korea to Ukraine to discuss the STCU’s experiences over its 20 year history. In preparation for possible reunification of the Korean peninsula, the government of South Korea is working with both the ISTC and STCU to determine best practices in establishing a Center for redirection of FWS of the Democratic People’s Republic of Korea. Curtis “B.J.” Bjelajac Executive Director

SCIENCE AND TECHNOLOGY CENTER IN UKRAINE

Financial Statements for the Year ended 31 December 2015

SCIENCE AND TECHNOLOGY CENTER IN UKRAINE TABLE OF CONTENTS

Page

Auditors’ Report 1 to 2 Accounting Policies 3 to 11 Statement of Revenues and Expenditure 12 Statement of Financial Position 13 Statement of Cash Flows 14 Statement of Movements in Capital Contributions 15 to 16

Notes to the Financial Statements 17 to 32

KPMG Baltics SIAVesetas iela 7Riga, LV-'10'13

Latviâ

Telephone +37167038000Telefax +371 67038002kpmg.com/lv

lndependent Auditors' Report

To the Governing Board of Science and Technology Centerin Ukraine

Report on the Financial Statements

We have audited the accompanying financial statements of the Science and TechnologyCenter in Ukraine (hereinafter "STCU"), which comprise the statement of financial positionas at 31 December 2015, the statements of revenues and expenditure, movements in capitalcontributions and cash flows for the year then ended, as set out on pages 12 Io 16, andnotes, comprising a summary of significant accounting policies, as set out on pages 3 to 11,and other explanatory notes, as set out on pages i 7 Lo 32.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financialstatements in accordance with lnternational Financial Reporting Standards and for suchinternal controls as management determines are necessary to enable the preparation off inancial statements that are f ree f rom material misstatement, whether due to f raud or error.

Aud ito rs' Re s pon si bi lity

Our responsibility is to express an opinion on these financial statements based on our audit,We conducted our audit in accordance with lnternational Standards on Auditing. Thosestandards require that we comply with relevant ethical requirements and plan and performthe audit to obtain reasonable assurance whether these financial statements are free ofmaterial misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts anddisclosures in the financial statements. The procedures selected depend on our judgment,including the assessment of the risks of material misstatement of these financial statements,whether due to fraud or error. ln making those risk assessments, we consider internalcontrols relevant to the STCU's preparation and fair presentation of these financialstatements in order to design audit procedures that are appropriate in the cìrcumstances,but not for the purpose of expressing an opinion on the effectiveness of the STCU's internalcontrols. An audit also includes evaluating the appropriateness of accounting principles usedand the reasonableness of accounting estimates made by the STCU management, as wellas evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to providea basis for our qualified opinion.

KPMG Baltics SlA, a Latvian limited liability company and amember firm of the KPMG network of independent memberfirms aff¡l¡ated wìth KPMG lnternational Cooperative ('KPMGlnlernational'), a Swiss entily.

Basis for Oualified Opinion

The terms of the project agreements, concluded between the Science and TechnologyCenter in Ukraine and the recipient institutes, state that grant costs for a specific period oftime may not be claimed by the recipient institutes if they are receiving reimbursementsfrom other funding sources for the same period of time. Due to our inability to accessappropriate records of the recipient institutes we were unable to satisfy ourselves as towhether the grant claims made by the recipient institutes include amounts for which theymay have received reimbursements from other funding sources. There were no alternativeaudit procedures that we could adopt to confirm this.

Oualified Opinion

ln our opinion, except for the effects of such adjustments, if any, as might have beendetermined to be necessary had we been able to satisfy ourselves as to funding frommultiple resources, the financial statements give a true and fair view of the financial positionof the Science and Technology Center in Ukraine as at 31 December 2015, and of its financialperformance and its cash flows for the year then ended in accordance with InternationalFinancial Reportìng Standards.

Emphases of Matter

Without further qualifying our opinion we draw attention to accounting policies on Propertyand equipment disclosed on page 7 of these financial statements. Property and equipmentused for both the STCU administrat¡ve purposes and the projects f unded by the STCU, whichhave useful lives extendrng beyond the current year, were expensed immediately onacquisitìon to the statement of revenues and expenditure. The management of the Scienceand Technology Center in Ukraine believe that because of the unusual nature andcircumstances of its activities thìs treatment properly matches the revenues specificallycontributed by the Funding Parties with the related expenditure, despite departing from therequirements of lnternational Accounting Standard 16 Property, plant and equipment.

We also draw attention to section Political and Economic Situation in Ukraine of the summaryof significant accounting policies, which describes the significant deterioration in Ukraine'spolitical and economic situation, and management's assessment of potential impact of theevents in Ukraine on the STCU's operating activities, its ability to continue as a goingconcern, and the financial statements as at and for the year ended 31 December 2015.

KPMG Baltics SIALicence No 55

Armine MovsisjanaChairperson of the Board ofKPMG Baltics SIALatvian certified auditorCertificate No 178Riga, Latvia

28 April 2016


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Overview of the Science and Technology Center in Ukraine (STCU) The Science and Technology Center in Ukraine (STCU) is an intergovernmental organization dedicated to non-proliferation of technologies and expertise related to weapons of mass destruction, including nuclear, biological and chemical weapons, and their delivery systems. The United States, Canada, Sweden and Ukraine signed the agreement establishing the Science and Technology Center in Ukraine on 25 October 1993 (referred to as “the STCU agreement”). The European Union acceded to the STCU agreement on 26 November, 1998 and in so doing, replaced Sweden as a party to the STCU agreement. Canada withdrew from the Agreement to Establish the STCU in 2013 and their unutilised funds were returned in 2014. The STCU helps develop, finance and monitor science and technology projects that engage the former Soviet weapons community in Ukraine, Azerbaijan, Uzbekistan, Georgia, and Moldova in peaceful civilian activities. The Funding Parties of STCU projects include: the signatories to the STCU agreement, Japan as a sponsor of the STCU agreement and Partners (government and non-government) approved by the Governing Board. The STCU is a legal entity and has been registered by the Ministry of Foreign Affairs of Ukraine as an intergovernmental organization with its headquarters in 7a Metalistiv Street Kyiv 03057. During the financial year STCU had international staff of 35 (2014 – 40) full time scientific, financial and administrative experts.

Political and Economic Situation in Ukraine

Ukraine’s political and economic situation has deteriorated significantly since the Government’s decision not to sign the Association Agreement and the Deep and Comprehensive Free Trade Agreement with the European Union in late November 2013. Political and social unrest combined with rising regional tensions has deepened the ongoing economic crisis and has resulted in a widening of the state budget deficit and a depletion of the National Bank of Ukraine’s foreign currency reserves and, as a result, a further downgrading of the Ukrainian sovereign debt credit ratings.

In February 2014, following the devaluation of the national currency, the National Bank of Ukraine introduced certain administrative restrictions on currency conversion transactions and also announced a transition to a floating foreign exchange rate regime. In March 2014, various events in Crimea led to the accession of the Republic of Crimea to the Russian Federation. This event resulted in a significant deterioration of the relationship between Ukraine and the Russian Federation.

Following a decision taken at the 39th Governing Board meeting, STCU ceased to fund activities in occupied Crimea and started the process of termination of the current projects in Crimea, in accordance with the terms of their respective project agreements. At 31 December 2015 all projects in Crimea have been terminated (at 31 December 2014, all projects had ceased operations with four


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projects having remaining balances of accounts receivable, accounts payable and capital) see Note 17 for further details.

During 2015, the economic situation in Ukraine continued to be negative. This economic downturn is primarily attributed to the rapid fall of the Ukrainian national currency, the Hryvnia, against the US dollar, which had an adverse impact on the financial sector and consumption. The Ukrainian economy is also impacted by trade disagreements with Russia, and the decline in the export prices for wheat and steel in the world. According to the World Bank forecasts for 2015, compared to the previous year, the Ukrainian GDP shrank by 12%. As concerns growth, GDP is forecast to grow by 1% in 2016 and by 2% in 2017. In February 2015, the second Minsk Protocol was signed and since then vast military operations have not been observed; however, there are frequent reports of provocations, which makes it difficult to forecast the outcome of the political and economic crisis and its impact on Ukraine.

Whilst management believes it is taking appropriate measures to support the sustainability of the STCU’s operations in the current circumstances, a continuation of the current unstable environment could negatively affect the STCU’s results and financial position in a manner not currently determinable. These financial statements reflect management’s current assessment of the impact of the Ukrainian economic and political environment on the operations and the financial position of the STCU. The future economic and political environment may differ from management’s assessment.

Basis of Preparation The financial statements represent the results of the STCU as an individual entity and have been prepared under the historic cost convention and in accordance with applicable International Financial Reporting Standards (IFRS) taking into consideration the departure from International Accounting Standard (IAS) 16 relating to Property, plant and equipment as explained in the policy for Property and equipment. These financial statements were approved by the management of the STCU on 18 April 2016. The Governing Board of the Science and Technology Center in Ukraine will approve the financial statements at the next Governing Board meeting and have the power to amend the financial statements after issue or request the preparation of new financial statements. Functional and Presentation Currency, Foreign Currency Transactions The U.S. dollar is the functional currency for the STCU. Accordingly, these financial statements have been prepared using U.S. dollars as the presentation currency. Use of the U.S. dollar best reflects the economic substance of the transactions and circumstances of the STCU.


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All foreign currency transactions are converted into USD at the exchange rates prevailing at the date of the transaction. Foreign currency gains and losses resulting from movements in the exchange rates between the date of the transactions and the date of settlement are charged to the Statement of Revenues and Expenditure under the administrative operating budget in the period incurred. Activities in Azerbaijan, Uzbekistan, Georgia, and Moldova are transacted in USD or Euros and, therefore do not result in any gains or losses from currency exchanges except those arising from USD to Euro exchange differences. Assets, liabilities and capital denominated in foreign currencies are translated into USD at the rates of exchange ruling at the balance sheet date. The net revaluation (losses)/gains principally relate to amounts contributed or receivable from Funding Parties in currencies other than USD which are held in the source currency of the original contribution. These notional cash (losses)/gains are fully offset by revaluations of Funding Parties capital accounts held in a source currency other than USD. Revaluation (losses)/gains are not actual cash movements but a reflection of the changing value of the source currency. Revaluation gains or losses are recognized in Administrative operating budget expenditure. Effect of revaluation of Funding Parties capital accounts held in a source currency other than USD is reflected through other comprehensive income. Foreign currency risk is managed as set out in the Note 15.

European Union Funded Projects Project agreements are concluded in Euros if solely funded by the European Union and in USD if projects are jointly funded.

For project agreements concluded in USD (jointly funded), the European Union provides funding in Euros, before the projects are signed by the STCU Executive Director. The STCU immediately converts the Euros upon receipt into USD. The total amount of USD provided by the European Union is therefore known before the start of the project, and thus the project agreements are written to match the amounts of USD received.

Project Activity The STCU authorizes and funds scientific projects which are performed at institutions within Ukraine, Azerbaijan, Uzbekistan, Georgia, and Moldova. Projects are financed by the Funding Parties either individually or jointly. All project agreements include a maximum amount of funding to be provided by the Funding Parties. The project activity is accounted in the financial statements as follows:


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Project Recognition The projects are only recognized after signature of the project agreement between the STCU and the recipient institutes. Upon signature, the total project value is credited to the relevant Funding Parties Designated Capital Account in proportion to the level of funding agreed by each party. To the extent that the value of the signed projects are not covered by advance payments from the respective Funding Parties, a receivable is set up in the financial statements, which is subsequently covered by either transfers from Undesignated Capital Contributions Accounts or direct disbursement by the Funding Parties. Project Expenditure Project costs consist of three main components: grants to scientists, equipment and overhead. The STCU, being a non-profit making inter-governmental organization, does not envisage that any economic benefits will accrue to it in the foreseeable future from the financing of these projects. Accordingly all project costs incurred, including the purchase of project equipment, are charged immediately to the Statement of Revenues and Expenditure. Projects are performed on a cost reimbursable basis, with a ceiling of funds specified in the project agreements. The STCU temporarily retains 50 percent of the allowable overhead for the individual projects, in accordance with the project agreements, until the submission, and acceptance of, the financial and technical reports prepared by the project recipients. The overhead retainage is recognized as part of amounts payable – projects. When a project has been completed or terminated, any funds committed in excess of actual costs are credited back to the relevant Funding Parties’ Undesignated Capital Contributions Account in the same proportion as the initial contributions from the Funding Parties. Project Revenues Project revenues recognized during the year in the Statement of Revenues and Expenditure are amounts equal to the total value of project expenditure incurred and expensed during the year. These revenues are transferred from the Funding Parties Designated Capital Accounts for Projects to the Statement of Revenues and Expenditure.

Administrative and Supplemental Revenues and Expenditure

Administrative Operating Budget Administrative Revenues recognized in the Statement of Revenues and Expenditure during the year equate to the amounts approved by the Governing Board for the Administrative Operating Budget for the year. The budget is set and agreed at meetings of the Governing Board in the previous financial year. The agreed budgeted amounts are transferred from the


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Designated Capital Accounts for Administrative Expenses of the United States and the European Union.

Administrative Expenses are charged to the Statement of Revenues and Expenditure when incurred and are matched against the Administrative Revenues for the year.

Any surplus/(deficit) Administrative Revenues arising during the year are re-allocated to the Undesignated Capital Contributions Accounts of the United States and the European Union in the same ratio as the Administrative Revenues contributions. Supplemental Budget Supplemental Budgets are approved by the Governing Board to provide funding for activities that are outside the scope of the Administrative Operating Budget and not directly related to the implementation of projects. Upon agreement of the Supplemental Budgets at Governing Board Meetings the total amount of such budgets approved are credited to the relevant Funding Parties’ Designated Capital Accounts for Supplemental Budgets in proportion to the level of funding agreed by each party. Supplemental Budget expenses are charged to the Statement of Revenues and Expenditure when incurred. Supplemental Budget revenues recognized in the year are amounts equal to the value of the Supplemental Budget expenditure incurred in the year. These revenues are transferred to the Statement of Revenues and Expenditure from the Funding Parties’ Designated Capital Accounts for Supplemental Budgets.

Partner Fees and Interest Partner projects may be charged a fee, usually 5% of the total project cost, for the services provided by the STCU to administer the project, which are recognized in the Statement of Revenues and Expenditure proportionally to the initially deferred and subsequently recognised expenses incurred during the reporting period. The surplus partner fees are allocated to the Undesignated Capital Contributions Accounts of the United States and the European Union in the same ratio as their Administrative Revenues contributions. Interest earned on Funding Party bank accounts is recognized in the Statement of Revenues and Expenditure as finance income. Surplus interest earned is allocated to the Funding Parties Undesignated Capital Contributions Accounts, with the exception of Partner interest earned, which is allocated to the Undesignated Capital Contributions Accounts of the United States and the European Union in the same ratio as their Administrative Revenues contributions. Interest earned on administrative and supplemental bank accounts is allocated to the Undesignated Capital Contributions Accounts of the United States and the European Union in the same ratio as their Administrative Revenues contributions.


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Property and Equipment Property and equipment are acquired either for the STCU’s own use or for the projects and comprises of the following:

Center Property and equipment acquired by the STCU for administrative operations consist of vehicles, office furniture and equipment, including computer hardware and software and communications devices. All commitments and expenditures for administrative equipment are made in accordance with the Board’s approved annual budget. The cost of the STCU equipment is charged to the Statement of Revenues and Expenditure when acquired.

Project Equipment

Under the terms of the individual project agreements signed, title to equipment costing less than USD 2,500 is vested with the recipient institutes upon acquisition. The title to all other equipment provided to projects will remain with the STCU until termination or completion of the project, at which time the title will be vested in the recipient institutes unless prior to, or on that date, the STCU informs the project of its intention to retain title. Since the STCU does not expect to derive any foreseeable economic benefits from the ownership of project equipment, the expenditure incurred during the year on equipment under each project, is written off to the Statement of Revenues and Expenditure.

IAS 16 “Property, Plant and Equipment” requires non-current assets to be capitalized and depreciated over their useful economic lives. Due to the project-based nature of STCU’s operations, management believes the application of these requirements would result in improper matching between the revenues contributed by the Funding Parties with the related expenses, and, accordingly conflict with the fair presentation objective of these financial statements. As a result, non-current assets acquired for use by participating institutes as part of the projects are charged to the Statement of Revenues and Expenditure upon acquisition. Based on the management assessment, the average useful life of such non-current assets is 5 years. Total purchases of non-current assets over the last years were as follows:

2015 USD 2010 1,605,175 2011 1,082,115 2012 1,725,653 2013 717,196 2014 1,139,536 2015 2,207,502 8,477,177


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Grantee Benefits All individuals providing services to the STCU as part of their employment agreements are considered grantees. Short term grantees benefits, including staff grants, bonuses, vacations and other benefits are included in expenses on an accrual basis. The STCU has no obligations to pay further contributions relating to grantee services in respect to payroll taxes and any pensions on the retirement of grantees.

Taxation

Under the terms of the agreement establishing the STCU and also the Statute approved by the Governing Board, the STCU is exempted from any form of taxation. However, only since December 1999 has the relevant legal framework been implemented in Ukraine, allowing the STCU to recover its VAT only on administrative expenditures.

The VAT incurred on project expenditures has been charged to the Statement of Revenues and Expenditure as part of the project costs because, for the time being there is no practical process in place for the recovery of VAT for project purchases within Ukraine, Georgia, Uzbekistan, Moldova, and Azerbaijan. Management of the STCU continues discussions with the Governments of Ukraine, Georgia, Moldova, and Azerbaijan to investigate the possibility of establishing a procedure to recover project VAT for purchases made within these respective countries. However, the management of the STCU does not expect to recover the amounts incurred to date. Project items purchased abroad by the STCU and imported into Ukraine, Georgia, Uzbekistan, Moldova, and Azerbaijan are exempt from VAT and import duties. Certain projects have been registered with the respective Ministry of Economy as development aid projects and are exempt from VAT on purchases within Ukraine and Moldova. Financial Instruments The STCU uses only non-derivative financial instruments as part of its normal operations. These financial instruments include bank accounts, certificates of deposit, receivables and amounts payable. All financial assets are classified as loans and receivables and all financial liabilities are classified as other liabilities accounted for at amortized cost.

Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially on the date that they are originated at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset. When calculating the effective interest rate, STCU estimates future cash flows considering all contractual terms of the financial instruments.

STCU derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are


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transferred. Any interest in transferred financial assets that is created or retained by STCU is recognized as a separate asset or liability.

Financial liabilities are recognized initially on the trade date at which STCU becomes a party to the contractual provisions of the instrument at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortized cost using the effective interest method.

STCU derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire.

Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, STCU has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

Cash and Cash Equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less. Capital Management The capital of the STCU is represented by the net assets attributable to Funding Parties. The STCU’s objectives in managing capital are to safeguard the assets of the Funding Parties to enable the STCU to continue as a going concern and enable the future funding of project expenditure. All significant capital decisions such as project funding, transfers of capital, investment of capital and returns of capital to Funding Parties, require approval by the Funding Parties at six-monthly meetings of the governing board or otherwise. As such, the management of the STCU does not actively manage its capital on a day-to-day basis. Use of Estimates The preparation of financial statements in conformity with IFRSs requires management to make judgments, estimates and assumption that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Although these estimates are based on management’s best knowledge of current events and actions, actual results ultimately may differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period, in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.


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Key sources of estimation uncertainty: Accounting policy applied to Property and equipment: Please refer to accounting policy applied to Property and equipment, as described above.

Valuation of loans and receivables: There are a number of significant risks and uncertainties inherent in the process of monitoring financial assets and determining if impairment exists. These risks and uncertainties include the risk that STCU’s assessment of funding party’s or borrower’s ability to meet all of its contractual obligations will change based on changes in the credit characteristics or that the risk that the economic outlook will be worse than expected or have more of an impact on the counterparty than anticipated.

Loans and receivables are valued according to the principle of prudence and recognized at net amount due less allowances for doubtful loans and receivables.

Doubtful debt allowances are recognized based on an individual management assessment of the recoverability of each receivable. Given the nature of the STCU funding providers, at the reporting date there was no direct exposure to potential impairment to be recognized in the Statement of Revenues and Expenditure. Credit risk exposures are summarized in Note 15 and Fair values are calculated as set out in Note 16.

New Standards and Interpretations not yet adopted

A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2016, and have not been applied in preparing these financial statements.

(i) IFRS 9 Financial Instruments (2014) (Effective for annual periods beginning on or after 1 January 2018; to be applied retrospectively with some exemptions. The restatement of prior periods is not required, and is permitted only if information is available without the use of hindsight. Early application is permitted.);

(ii) IFRS 14 Regulatory deferral accounts (Effective for annual periods beginning on or after 1 January 2016. Earlier application is permitted.)

(iii) IFRS 15 Revenue from contracts with customers (Effective for annual periods beginning on or after 1 January 2018. Earlier application is permitted.)

(iv) Amendments to IAS 1 (Effective for annual periods beginning on or after 1 January 2016. Early application is permitted.)

(v) Annual improvements. Annual improvements to IFRSs 2012-2014 cycle were issued on 25 September 2014 and introduces five amendments to four standards that result in accounting changes for presentation, recognition or measurement purposes. The amendments are effective for annual periods beginning on or after 1 January 2016. Earlier application is permitted.

None of these amendments are expected to have a significant impact on the financial statements of the STCU. Furthermore, there were no new or revised standards and interpretations that came into force for financial years ending 31 December 2015 that had a material impact on the STCU.


STATEMENT OF REVENUES AND EXPENDITURE FOR THE YEAR ENDED 31 DECEMBER 2015

Page 12

2015 2014 Note USD USD Revenues Project Revenue 9,383,840 11,723,405 Administrative Revenue

0

0

- Administrative Operating Budget 1,182,240 1,309,827 - Supplemental Budget 629,411 1,082,530 Partner Fees 74,625 227,108 Finance Income 105,131 162,845 11,375,247 14,505,715 Expenditure Project Expenditure 1 9,383,840 11,723,405 Administrative Expenditure 2

0

0

- Administrative Operating Budget 1,187,749 1,183,668 - Supplemental Budget 629,411 1,082,530 11,201,000 13,989,603 Net Surplus 3 174,247 516,112 Other Comprehensive Result

Revaluation result of capital contributions

(1,920,297)

(2,092,722)

Net Surplus and Other Comprehensive Result

(1,746,050)

(1,576,610)

There are no recognised gains or losses other than the results for the year as set out above. Accompanying summary of accounting policies, as set out on pages 3 – 11 and notes, as set out on pages 17 – 32, form an integral part of these financial statements.


STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2015

Page 14

2015 2014 Note USD USD

Cash Flows from Operations

Cash Inflows

Net Cash Received from Funding Parties 13 10,191,832 10,258,951 0 0 Partner Fees Received 196,864 227,108 0 0 Interest Received 144,891 177,793 0 0

Total Cash Inflows 10,533,587 10,663,852 Cash Outflows Project Expenditure (9,493,299) (11,596,187) Administrative and Supplemental Expenditure (1,808,470) (2,361,670) Total Cash Outflows (11,301,769) (13,957,857) Net Cash Outflows from Operations (768,182) (3,294,005) Net Revaluation Losses (1,610,507) (1,764,535) Cash and Cash Equivalents at 1 January 26,853,995 31,912,535 Cash and Cash Equivalents at 31 December 7 24,475,306 26,853,995

Accompanying summary of accounting policies, as set out on pages 3 – 11 and notes, as set out on pages 17 – 32, form an integral part of these financial statements.


STATEMENT OF MOVEMENTS IN CAPITAL CONTRIBUTIONS FOR THE YEAR ENDED 31 DECEMBER 2015

Page 15

Designated

Capital Contributions

– Projects (Note 9)

Designated Capital

Contributions – Administrative

(Note 10)

Designated Capital

Contributions – Supplemental

(Note 11)

Undesignated Capital

Contributions (Note 12)

Total

USD USD USD USD USD

Balance at 1 January 2015 18,215,796 1,182,240 1,595,261 13,293,572 34,286,869 Advances Received from Funding Parties - - - 10,248,871 10,248,871 Budgets Approved 8,491,102 949,500 908,131 - 10,348,733

Surplus of supplemental budget transferred to Undesignated Capital Contributions - - (885,353) 885,353 -

Adjustments for Closed Projects (36,696) - - 36,696 - Transfers from Advances Received to offset the amounts due & Designated Capital Contributions - - - (11,680,768) (11,680,768)

Adjustments for Closed Projects to offset the amounts due (540,310) - - - (540,310) Funds Repaid to Funding Parties - - - (92,934) (92,934) Transfers to Statement of Revenues and Expenditure (9,383,840) (1,182,240) (629,411) - (11,195,491) Allocation of Net Surplus - - - 174,247 174,247 Revaluation Result of Capital Contributions (1,281,611) - (46,682) (592,004) (1,920,297)

Balance at 31 December 2015 15,464,441 949,500 941,946 12,273,033 29,628,920 Accompanying summary of accounting policies, as set out on pages 3 – 11 and notes, as set out on pages 17 – 32, form an integral part of these financial statements.


STATEMENT OF MOVEMENTS IN CAPITAL CONTRIBUTIONS FOR THE YEAR ENDED 31 DECEMBER 2015

Page 16

Designated Capital

Contributions – Projects

(Note 9)

Designated Capital

Contributions – Administrative

(Note 10)

Designated Capital

Contributions – Supplemental

(Note 11)

Undesignated Capital

Contributions (Note 12)

Total

USD USD USD USD USD

Balance at 1 January 2014 18,833,716 1,309,827 2,037,412 15,924,682 38,105,637 Advances Received from Funding Parties - - - 10,326,904 10,326,904 Budgets Approved 17,835,207 1,182,240 1,110,493 - 20,127,940

Surplus of supplemental budget transferred to Undesignated Capital Contributions - - (513,250) 513,250 - Adjustments for Closed Projects (4,325,728) - 4,325,728 - Transfers from Advances Received to offset the amounts due & Designated Capital Contributions - - 80,645 (17,475,530) (17,394,885) Adjustments for Closed Projects to offset the amounts due (1,118,402) - - - (1,118,402) Funds Repaid to Funding Parties - - - (67,953) (67,953) Transfers to Statement of Revenues and Expenditure (11,723,405) (1,309,827) (1,082,530) - (14,115,762) Allocation of Net Surplus - - - 516,112 516,112 Revaluation Result of Capital Contributions (1,285,592) - (37,509) (769,621) (2,092,722)

Balance at 31 December 2014 18,215,796 1,182,240 1,595,261 13,293,572 34,286,869 Accompanying summary of accounting policies, as set out on pages 3 – 11 and notes, as set out on pages 17 – 32, form an integral part of these financial statements.

SCIENCE AND TECHNOLOGY CENTER IN UKRAINE NOTES TO THE FINANCIAL STATEMENTS

Page 17

1. Project Expenditure USD

Amounts charged to the Statement of Revenues and Expenditure: 2015 9,383,840 2014 11,723,405 2013 12,969,568 2012 14,919,329 2011 13,256,863 2010 14,938,320 2009 15,902,171 2008 18,657,918 2007 19,305,482 2006 17,434,164 2005 16,291,450 2004 17,675,237 2003 17,937,532 2002 12,317,194 2001 10,100,633 2000 7,096,198 1999 7,904,566 1998 7,351,641 1997 4,987,540 1996 1,339,245 1995 - Cumulative Project Costs incurred to 31 December 2015 251,492,296

Project expenditure comprises of grants to scientists, equipment costs, travel costs and overhead costs.

2. Administrative Expenditure

2015 2014 USD USD a) Administrative Operating Budget Business Operations 103,777 153,319 Public Affairs 4,780 6,979 Personnel 613,073 660,125 Personnel Support and Development 124,832 139,041 Legal, Auditing and Banking 107,276 137,462 Property and Equipment 35,375 13,638 Net Foreign Exchange Losses/(Gains) 176,365 48,437 Headquarters and Branch Offices 22,271 24,667 1,187,749 1,183,668


Page 18

2. Administrative Expenditure (continued) Personnel costs comprise grants made to the grantees in the STCU headquarters and four regional offices located in Kharkiv, Baku, Chisinau, and Tbilisi. From March 2009, the STCU have occupied offices provided by the Ukrainian government for which the STCU does not pay rental or utility charges. In 2015 the estimated fair value of the rent, utility and security benefit is USD 92,348 (2014 – USD 158,770). 2015 2014 USD USD b) Supplemental Budget Technical, Collaborator and Contractor Travel Support 5,321 13,519 Business Training/ Sustainability Group Support 12,985 69,414 Patent Support (46) (1,942) Travel and Mobility Support 172,469 136,956 Expert Review and Advisors 16,723 20,410 Seminars/ Workshops Support - 417 Service Contracts (Key management remuneration) 353,087 585,227 Partner Promotion and Support 61,972 144,856 Consulting Projects 6,900 113,673 629,411 1,082,530

3. Net Surplus Revenues over Expenditure

The net surplus comprises the following:

2015 2014 USD USD

Surplus Administrative Budget Revenues (5,509) 126,159 Finance Income 105,131 162,845 Partner Fees 74,625 227,108

174,247 516,112

The net surplus set out above has been allocated to the Funding Parties in accordance with the accounting policies and agreed responsibilities.


Page 19

4. Amounts Due from Funding Parties – Due within One Year

2015 2014 USD USD European Union 3,078,099 3,427,846

Partners 2,002,681 3,165,756 5,080,780 6,593,602

Amounts Due from Funding Parties – Due after One Year

2015 2014 USD USD European Union 143,514 299,605

Partners 1,689,359 2,238,477 1,832,873 2,538,082 Total due from Funding Parties 6,913,653 9,131,684

There are no Amounts Due from Funding Parties at 31 December 2015 relating to the Crimean projects in termination process (2014 - USD 105,915). Please refer to Note 17 for further details.

5. Other Receivables

2015 2014 USD USD VAT Recoverable 4,931 11,262 Other Receivables 5,040 12,132 9,971 23,394

6. Prepayments and Accrued Income

2015 2014 USD USD Prepayments 6,449 7,173 Accrued Interest 86,751 126,511 93,200 133,684


Page 20

7. Cash and Cash Equivalents

2015 2014 USD USD Cash on Hand 6,026 7,331 Non-interest Bearing Accounts 115,633 319,854 Short-term Deposits 24,353,647 26,526,810 24,475,306 26,853,995

Interest bearing cash and cash equivalents are placed in foreign banks. Interest rates earned on interest bearing deposits is 0.10%.

8. Amounts Payable – Projects

2015 2014 USD USD Grants Payable 1,171,754 1,146,389 Overhead Payable 39,029 51,479 Overhead Retainage 370,224 492,598 1,581,007 1,690,466 Overhead Retainage includes amounts which may be due for payment after one year depending on when the financial and technical reports are prepared and submitted by the project recipients and accepted by the STCU. Included within Overhead Retainage is USD 95,825 (2014 – USD 112,666) in relation to projects with a completion date after more than one year from the balance sheet date.

There are no Amounts payable - projects at 31 December 2015 relating to the Crimean projects in termination process (2014 – USD 99,783). Please refer to Note 17 for further details.


Page 21

9. Designated Capital Contributions – Projects

Designated Capital Contributions (DCC) Projects represent the amounts committed on signed projects net of project expenditures incurred to date.

United States

European Union

Partners Total

USD USD USD USD

Balance at 1 January 2015 293,837 10,066,976 7,854,983 18,215,796

New Projects Signed During 2015 757,500 3,714,917 4,018,685 8,491,102

Adjustment for Closed Projects (5) (1,602) (575,399) (577,006)

Transfer to Statement of Revenues and Expenditure

Expenditure Incurred on Projects in 2015 (593,458) (3,363,392) (5,426,990) (9,383,840)

Revaluation of Project Agreements - (976,148) (305,463) (1,281,611)

Balance at 31 December 2015 457,874 9,440,751 5,565,816 15,464,441

Included in DCC projects is USD 3,556,679 (2014: USD 4,019,473) relating to a project the completion of which before its August 2016 termination date is uncertain. In case of inability to complete the project the STCU has plenty cash resources to return cash to the funding party or allocate this cash to other projects; however management are of the opinion that the project’s implementation period will be extended by the funding party.


Page 22

9. Designated Capital Contributions – Projects (continued)

Designated Capital Contributions (DCC) Projects represent the amounts committed on signed projects net of project expenditures incurred to date.

United States European Union

Partners Total

USD USD USD USD

Balance at 1 January 2014 176,602 6,165,810 12,491,304 18,833,716

New Projects Signed During 2014 553,438 10,788,657 6,493,112 17,835,207

Adjustment for Closed Projects (812) (4,231,149) (1,212,169) (5,444,130)

Transfer to Statement of Revenues and Expenditure

Expenditure Incurred on Projects in 2014 (435,391) (1,776,715) (9,511,299) (11,723,405)

Revaluation of Project Agreements - (879,627) (405,965) (1,285,592)

Balance at 31 December 2014 293,837 10,066,976 7,854,983 18,215,796

Included within DCC - projects at 31 December 2014 is USD 2,313 relating to the Crimean projects in termination process (no balances at 31 December 2015). Please refer to Note 17 for further details.


Page 23

10. Designated Capital Contributions – Administration

United States European Union

Total

USD USD USD

Balance at 1 January 2014 753,579 556,248 1,309,827

Transfer to Statement of Revenues and Expenditure (753,579) (556,248) (1,309,827)

Administrative Budget 2014 426,880 755,360 1,182,240

Balance at 1 January 2015 426,880 755,360 1,182,240

Transfer to Statement of Revenues and Expenditure (426,880) (755,360) (1,182,240)

Administrative Budget 2015 323,885 625,615 949,500

Balance at 31 December 2015 323,885 625,615 949,500


Page 24

11. Designated Capital Contributions – Supplemental United States European

Union Partners Total

USD USD USD USD

Balance at 1 January 2014 560,000 633,323 844,089 2,037,412

Supplemental Budgets Approved 565,000 446,744 98,749 1,110,493

Transfer to Undesignated Capital Contributions (270,771) (182,365) (60,114) (513,250)

Transfer from Undesignated Capital Contributions - 18,527 62,118 80,645

Transfer to Statement of Revenues and Expenditure (289,229) (433,657) (359,644) (1,082,530)

Adjustment for Revaluation - (35,828) (1,681) (37,509)

Balance at 1 January 2015 565,000 446,744 583,517 1,595,261 Supplemental Budgets Approved 420,000 342,561 145,570 908,131

Transfer to Undesignated Capital Contributions (328,509) (162,008) (394,836) (885,353)

Transfer to Statement of Revenues and Expenditure (236,491) (239,911) (153,009) (629,411)

Adjustment for Revaluation - (44,825) (1,857) (46,682)

Balance at 31 December 2015 420,000 342,561 179,385 941,946


Page 25

12. Undesignated Capital Contributions

United States European Union Partners Total USD USD USD USD

Balance at 1 January 2015 6,063,575 5,774,854 1,455,143 13,293,572

Advances Received from Funding Parties - 4,361,516 5,887,355 10,248,871

Transfer of result of Closed Projects 5 1,602 35,089 36,696

Transfer from Designated Capital – Supplemental Budget 328,509 162,008 394,836 885,353

Transfer to Designated Capital for Signed Projects (757,500) (3,953,857) (5,025,244) (9,736,601)

Transfer to Designated Capital – Supplemental Budget (420,000) (345,998) (160,295) (926,293)

Transfer to Designated Capital - Administrative Budget (323,885) (693,989) - (1,017,874)

Returned to Funding Parties - - (92,934) (92,934)

Transferred Between Funding Parties - 15,812 (15,812) -

Allocation of Surplus Income for 2015 37,467 136,780 - 174,247

Adjustment for Revaluation - (591,268) (736) (592,004)

Balance at 31 December 2015 4,928,171 4,867,460 2,477,402 12,273,033


Page 26

Undesignated Capital Contributions (continued) United States European Union Partners Total

USD USD USD USD Balance at 1 January 2014 6,701,676 7,269,407 1,953,599 15,924,682 Advances Received from Funding Parties 1,372,275 2,944,010 6,010,619 10,326,904 Transfer of result of Closed Projects 812 3,977,417 347,499 4,325,728 Transfer from Designated Capital – Supplemental Budget 270,771 182,365 60,114 513,250 Transfer to Designated Capital for Signed Projects (553,438) (7,821,857) (6,644,545) (15,019,840) Transfer to Designated Capital – Supplemental Budget (1,125,000) (92,906) (179,220) (1,397,126) Transfer to Designated Capital - Administrative Budget (902,392) (156,172) - (1,058,564) Returned to Funding Parties - - (67,953) (67,953) Transferred Between Funding Parties 25,147 - (25,147) - Allocation of Surplus Income for 2014 273,724 242,388 - 516,112 Adjustment for Revaluation - (769,798) 177 (769,621) Balance at 31 December 2014 6,063,575 5,774,854 1,455,143 13,293,572


Page 27

13. Net Cash Received from Funding Parties

2015 2014 USD USD Partners 5,830,316 5,942,666 United States - 1,372,275 European Union 4,361,516 2,944,010 10,191,832 10,258,951

14. Financial Commitments

a) Science and Technology Center in Ukraine No material commitments existed at 31 December 2015 or 2014. b) Funding Parties At 31 December 2015 the Funding Parties had approved but not signed project with a total funding of USD 437,256 (2014 – USD 2,608,563). The agreement for this project is signed in 2016.

15. Financial Risks

The STCU’s financial instruments comprise:

Cash, liquid resources and receivables and payables that arise directly from the STCU’s operations:

2015 2014 USD USD Financial Assets

Amounts due from Funding Parties 6,913,653 9,131,684 Cash and Cash Equivalents 24,475,306 26,853,995

Financial Liabilities

Amounts Payable 1,740,971 1,855,888 The main risks arising from the STCU’s financial instruments are liquidity risk, credit risk, and foreign currency risk. The STCU management reviews and agrees policies for managing each of these risks and they are summarised below.


Page 28

15. Financial Risks (continued)

a) Liquidity Risk Liquidity risk is the risk that the STCU will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. STCU’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses, and maintain net working capital surplus.The STCU’s assets comprise mainly of cash and bank deposits which are readily realisable to meet funding commitments.

b) Credit Risk The STCU manage credit risk by only paying project expenses up to the amount of cash received from the relevant Funding Party. The credit risk is therefore limited to project expenses incurred in excess of cash received from the relevant Funding Party. At 31 December 2015 the maximum credit risk represented by the net amount of receivables due from Funding Parties and the related Designated Capital Contributions received was USD 393,031 (2014 – USD 919,237).

The ageing of accounts receivable due from Funding Parties at the reporting date is as follows:

2015 2014 USD USD Not past due 6,477,385 8,190,205 Past due < 1 year 393,285 759,298 Past due > 1 year 42,983 182,181 6,913,653 9,131,684

Amounts past due include funds receivable under contracts without set payment dates before the project completion but not fully settled in the reporting year. The STCU expects to receive all amounts due in due course and as such has made no impairment allowance against these receivables. c) Foreign Currency Risk The STCU’s income and expenditure and net assets could be affected by currency translation movement as some of the STCU’s assets and revenues are denominated in currencies other than USD. The STCU manages foreign currency risk through keeping funds in the currency of commitment (USD or Euros) and minimizing funds held in local currency.


Page 29


At the year end, financial assets and liabilities held by the STCU in currencies other than USD were as follows:

2015 Amounts due

from Funding Parties

Cash and cash

equivalents

Amounts

payable USD USD USD Euros 4,138,695 14,216,075 926,632 Ukrainian Hryvnia - 1,270 6,527 Other - 6 16 4,138,695 14,217,351 933,175

2014 Amounts due

from Funding Parties

Cash and cash

equivalents

Amounts

payable USD USD USD Euros 5,288,189 14,029,812 556,104 Ukrainian Hryvnia - 17,394 48,488 Other - 54 - 5,288,189 14,047,260 604,592

The following table details the effect on the Net Surplus and Other Comprehensive Result at 31 December 2015 from a 10% change in US dollar exchange rates against the exposed currencies listed above, with all other variables held constant.

2015 2014

Effect on Net Surplus

Effect on Other Comprehensive

Result

Effect on Net

Surplus

Effect on Other Comprehensive

Result USD USD USD USD USD strengthening by 10% against: Euros (54,743) (1,688,071) (25,651) (1,850,539) Ukrainian Hryvnia 526 - 3,109 -

Other 1 - (6) - (54,216) (1,688,071) (22,548) (1,850,539) USD weakening by 10% against Euros 54,743 1,688,071 25,651 1,850,539 Ukrainian Hryvnia (526) - (3,109) - Other (1) - 6 - 54,216 1,688,071 22,548 1,850,539


Page 30


c) Foreign Currency Risk (continued) The method used to arrive at the possible risk of 10% was based on both statistical and non-statistical analyses. The statistical analysis has been based on currency movement for the last five years. This information is then revised and adjusted for reasonableness under the current economic circumstances. A standard rate of 10% is considered possible given past volatility trends.

During 2014 and 2015 significant divergences in the growth rate of the Eurozone countries compared with other economies, particularly the United States, together with the European Central Bank’s programme of Quantitative Easing has resulted in a significant strengthening of the Dollar against the Euro. This has required a significant revaluation of the capital contributions. These notional losses are reflected through Other Comprehensive Income (see Accounting Policies on pages 4 and 5).

d) Concentrations of Risk Management has determined that the only significant concentration of risk arises in respect of the holding of the majority of cash and cash equivalents at a small number of financial institutions at the balance sheet date as follows:

2015

2014

Location USD USD Deutsche Bank USA 10,157,495 12,469,673 BNP Paribas Belgium 14,196,152 13,983,073 OTP Bank Ukraine 61,403 324,064 Other Various 60,256 77,185 24,475,306 26,853,995 Management does not consider the risk exposure suffered as a result of this concentration of assets to be significant. The cash funds placed with credit institutions in Ukraine are current accounts in nature and are used for everyday operations only. 16. Fair Values

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal market or, in its absence, the most advantageous market to which STCU has access at that date. The fair value of a liability reflects its non-performance risk.

When measuring the fair value of an asset or a liability, STCU uses market observable data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:


Page 31

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value hierarchy, the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.

STCU recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.

The STCU has performed an assessment of its financial instruments, as required by IFRS 7 Financial Instruments: Disclosures, to determine whether it is practicable within the constraints of timeliness and cost to determine their fair values with sufficient reliability. The estimated fair values of all financial assets and liabilities are calculated using discounted cash flow techniques based on estimated future cash flows and discount rates for a similar instrument at the reporting date and are classified in Level 3 of fair value hierarchy. Due to the mostly short-term nature of the STCU financial assets and liabilities and minimal prevailing funds placement interest rates, the estimated fair values of all financial instruments of the STCU do not differ materially from their carrying amounts as at 31 December 2015 and 2014. 17. Terminated Operations

Due to Ukraine's political and economic situation and the annexation of the Ukrainian territory of Crimea Governing Board decided that STCU should cease all project activities in occupied Crimea and started the process of termination of the current projects in Crimea, in accordance with the terms of their respective project agreements. At 31 December 2015 all projects in Crimea have been terminated (at 31 December 2014, all projects had ceased operations with four projects having remaining balances of accounts receivable, accounts payable and capital), and as at 31 December 2015 STCU had no operations or financial exposure in the annexed territory of Crimea:


Page 32

2015 2014 USD USD ASSETS

Amounts due from Funding Parties - 105,915 LIABILITIES

Amounts Payable - 99,783

CAPITAL CONTRIBUTIONS Designated Capital – Projects - 2,313

18. Related Parties

Other than the parties to the agreement (The United States, Ukraine and the European Union), there are no related parties (2014 - None). All transactions with related parties have been undertaken on arm’s length terms and are disclosed within capital contributions movements. 19. Contingent Liabilities

There are no contingent liabilities to report in 2015 (2014 – None).

Science Technology

Centre rn Ukraine

Managernent Letler

For the year ended 31 December 2015

KPMG Baltics SIAVesetas iela 7Riga, LV-1013Latvia

Telephone +371 67038000Telefax +371 67038002kpmg.com/lv

Private and confidential

28 April 2016

Dear Mr. Curtis M. Bjelajac and Mr. Anthony Nichol,

We have audited the financial statements of the Science and Technology Center in Ukraine(hereinafter "STCU") as at and for the year ended 31 December 2015.

Our audit procedures are designed primarily to enable us to provide an opinion on the financialstatements, and therefore will not bring to light all weaknesses in policies or procedures thatmay exist. We aim, however, to use our knowledge of the STCU gained during our work tomake comments and suggestions that we hope will be useful to you.

During the performance of our audit, we noted certa¡n matters that are presented for yourconsideration. Our comments and recommendations, all of which have been discussed withthe appropriate members of management, are intended to improve the internal controlstructure or result in other operating efficiencies and are noted in the attached appendix. Thismanagement letter also includes the responses by management to our recommendations.

We would like to express our appreciation to the management and employees of the STCUfor their cooperation during the audit.

We would be pleased to discuss these comments and recommendations with you at any time.This report is intended solely for the information and use of the management.

Yours sincerely,KPMG Baltics SIA

Armine MovsisjanaPartner

KPMG Baltics SlA, a Latvian limited liability company and amember firm of the KPMG network of ¡ndependent memberf¡rms affiliated w¡th KPMG lnternational Cooperative ('KPMGlnternationâl'), a Swiss ent¡ty.

2

3

Gontents

1 Procurement procedure

Expense periodisation

Bank charges

2

3

4

wÆ

1 Procurement procedure

Observation

The standard STCU procurement process implies that where individual expenditure in excess of 10 000USD is incurred on projects the lnstitute should provide several informal written quotations for analysisand determination of price reasonableness.

During the audit we noticed that on the project P003p there were purchases from the same supplierTOB'TEXEflEMEHT" on 30 March 2015 and 7 April 2015 where expenses of individual purchaseinvoices were below 10 000 USD, but by aggregating these purchase invoices expense amount wouldexceed 10000 USD. The STCU has obtained written quotation onlyforthe one supplier; while as perprocurrement police - a contract including an invoice over 10 000 USD should obtain direct placement(2-3 informal written quotation should be obtained for analysis).

lmplication

The instance noted above contradict the STCU procurement policies. Additionally, while the currentprocurement policy introduces measures against "splitting" - entering into a number of directcontracting deals with the same supplier for amounts individually not exceeding the threshold of 10 000USD, while in substance all represent one procurement and are subject to additional controls andapprovals.

Recommendation

We recommend project managers and internal audit to ensure that established procurement policy isclosely followed and instances of splitting are avoided.

Management response

STCU will endeavour to be more observant of instances such as this where Project managers have notcorrectly applied STCU procurement procedures. We emphasize that there is only one instance notedby the auditors for the whole year.

2aFEEI

2 Expense periodisation

Observation

During the course of audit we have discovered instances when expenses are not recorded based onaccrual basis. For example there were no accruals made for travel expenses occurred during 2014 f orproject P552. Travelling expenses were recognised in the Statement of Revenues and Expenditure in2015. There was also expense for Professional training which occur partly in 2014 and 2015 for projectP552; however full expense amount was recognised in 2015.

We have also discovered that unrecoverable Partner fee for projects P542, P610, recognised in the yearof the project commencement, is written off in the Statement of Revenues and Expenditure when thePartner project is terminated.

Implications

IAS 'l requires that an entity prepare its financial statements, using the accrual basis of accounting.Recognising expenses in different financial period from when these expenses incurred diagree withaccruals accouting basis.

Recommendation

We suggest to the Company to establ¡sh control procedure to monitor the timing of expenserecognition. lmplementation of the controlwould ensure accurate expense recognition and matching itwith goods or services received and income recognized.

Management response

Ageed STCU needs to be more attentive in identifying expenditures that require accrual at the year end.

Having changed the accounting policy for partner fee recognition in 2015, to bring it ¡nto line with IFRSthis mismatch should not occur in the future.

3rFiME

3 Bank charges

Observation

During the course of audit we have discovered inappropriate accounting recognition for the differencearising between cash received from the Partner in the STCU bank's account and the amount sent bythe Partner. The full amount of funding is stated in the Project agreement; therefore the Partner doesnot separately account for bank charges. lnstead the STCU should have treated these bank charges asexpenses and recognised in the Statement of Revenues and Expenditure upon cash receiving. Forexample, for projects P620 and P613 there are difference between account receivables as of 31December 2015 stated by Partners and the STCU records. The difference arose due to bank chargesfor which the STCU has not accounted for.

Furthermore, we have discovered that there was an instance when bank charges for cash received forproject P572, P572a were covered with unspent cash resources of closed project P468.

lmplications

Bank charges are not budgeted separatly in the Project agreement; therefore the STCU should treatbank charges as expenses and recognise in the Statement of Revenues and Expenditure as soon astransaction arises.

Without having a clause on action regarding unspent cash resources of closed projects, the STCU putsitself into risk.

RecommendationWe suggest to the STCU to establish control over reporting to unspent amount from the project to theProject Partner andlor the STCU can add a condition in the Project agreement stating that after certainperiod of time after project closure all unspent cash resources are redirected to UndesignatedContribution capital and the STCU can decide how to allocate these resources.We also suggest to establish weekly/monthly control over bank charges recognition in the Statementof Revenues and Expenditure.

Management response

Agreed bank charges incurred on receipt of payments from partners will be charged only to income andexpenditure in future.The amounts involved are usually minimal and partners consider that once monies are paid to STCUthat those monies are the total expenditure and do not request refunds. The exception to this is forprojects that are terminated early or do not start for various reasons in which case the full amount ofunspent monies are refunded. Management are of the opinion that for the amounts involved change tothe partner agreement and paying refunds is not cost effective.

4f(FEtE

Contact us

KPMG Baltics SIAT +371 67038000E [email protected]

kpmg.com/lv

O 2016 KPMG Baltics SlA, a Latvian limited liability company and a member firm of the KPMGnetwork of independent member firms affiliated with KPMG lnternat¡onal Cooperative ('KPMGlnternational'), a Swiss entity. All rights reserved. Printed in Latvia.

The KPMG name and logo are registered trademarks or trademarks of KPMGlnternational.

5wÆ

STCU

Administrative Operating Budget 2016

Actual to Budget Comparison

Administrative Operating Expenses Budget

Actual 10

months to 31

October

Forecast

remaining 2

months

Forecast for

Year

Percentage

utilisation

$ $ $ $ %

Non‐Recurring ExpensesFacility Improvements 6,000 3,308 2,600 5,908 98.5%

Office Equipment 2,000 0 0 0 0.0%

Computer Hardware 2,000 290 0 290 14.5%

Computer Software 11,500 10,335 1,100 11,435 99.4%

Subtotal Non‐Recurring Expenses 21,500 13,933 3,700 17,633 82.0%

Contingency ‐ Non‐Recurring 12,000 0 0 0 0.0%

Recurring Expenses

Personnel 558,000 454,544 101,294 555,838 99.6%Local Grant Payments 445,000 376,491 75,298 451,789 101.5%

Staff Education & Training 44,000 25,994 8,665 34,658 78.8%

Employee Morale & Welfare 25,000 14,398 9,799 24,197 96.8%

Medical Plan 44,000 37,661 7,532 45,194 102.7%

Travel 92,500 39,317 17,106 56,423 61.0%International Travel 25,000 10,368 3,456 13,824 55.3%

Travel withing the CIS 57,500 25,492 12,497 37,989 66.1%

Local Travel 10,000 3,457 1,152 4,609 46.1%

Office Operations 167,000 72,101 28,537 100,639 60.3%Representation 5,000 2,038 2,000 4,038 80.8%

Postage & Delivery 6,000 2,163 721 2,883 48.1%

Customs Facilitations 1,500 0 0 0 0.0%

General Office Supplies 12,000 3,182 1,061 4,242 35.4%

Office Equipment Repair & Maintenance 3,000 67 22 89 3.0%

Vehicle Operations 16,000 6,255 2,085 8,340 52.1%

Printing & Reproduction 8,000 356 119 475 5.9%

Telecommunications Services 30,000 8,109 2,703 10,812 36.0%

Business Meetings 13,000 8,451 3,000 11,451 88.1%

Subscriptions & Publications 2,500 1,286 429 1,715 68.6%

Building Supplies 8,000 1,946 649 2,595 32.4%

Insurance 9,000 3,207 1,069 4,276 47.5%

Bank Fees ‐ Offshore 33,000 23,357 10,786 34,143 103.5%

Bank Fees ‐ Onshore 20,000 11,685 3,895 15,580 77.9%

Branch Offices 21,500 14,218 4,739 18,958 88.2%Branch Offices ‐ Kharkiv 2,000 952 317 1,270 63.5%

Branch Offices ‐ Baku 7,000 4,177 1,392 5,569 79.6%

Branch Offices ‐ Chisinau 5,500 3,746 1,249 4,994 90.8%

Branch Offices ‐ Tbilisi 7,000 5,343 1,781 7,124 101.8%

Contracted Services 68,000 5,381 42,432 47,812 70.3%Legal Services 5,000 63 0 63 1.3%

Accounting & Auditing 43,000 1,728 41,235 42,963 99.9%

Other Professional Services 20,000 3,590 1,197 4,787 23.9%

Subtotal Recurring Costs 907,000 585,561 194,108 779,670 86.0%

Contingency ‐ Recurring 9,000 0 0 0 0.0%

Total Administrative Expenses 949,500 599,494 197,808 797,303 84.0%

STCU

EU funded Supplementary Budget 2016


Budget

Actual 10

months to

31 October

Forecast

remaining 2

months

Forecast for

Year

Percentage

utilisation

€ € € € %

7015 EU Designated Technical Collaboration 25,000 945 0 945 3.8%7415 EU Patent Support 9,000 0 0 0 0.0%7515 EU Designated Travelers & Partner Promotion 20,000 1,982 0 1,982 9.9%7705 EU Expert Review and Advisors 20,000 8,000 8,000 40.0%7815 EU Designated Seminars & Workshops 2,500 0 0 0 0.0%8410 Partner Promotion & Support ‐ EU 100,000 26,138 0 26,138 26.1%

Solely Funded EU Programs (SB) 176,500 37,065 0 37,065 21.0%

7910 Service Contracts ‐ EU 137,000 109,192 20,834 130,026 94.9%

Total SB EURO 313,500 146,257 20,834 167,091 53.3%

TECHEP Lviv 0 6,846 0 6,846 n/a

EU Partner Programs (SB) 0 6,846 0 6,846 n/a

STCU

US funded Supplementary Budget 2016


Budget

Actual 10

months to 31

October

Forecast

remaining 2

months

Forecast for

Year

Percentage

utilisation

$ $ $ $ %

7010 Techncal Collaboration Con Travel USA 30,000 0 0 0 0.0%7310 Business Training/Sustainability Group Support USA 30,000 0 0 0 0.0%7410 Patent Fund ‐ USA 10,000 0 0 0 0.0%7510 Travel & Mobility Support ‐ US 50,000 2,879 0 2,879 5.8%7810 Seminars & Workshops Support ‐ US 75,000 0 0 0 0.0%7905 Service Contracts ‐ US 225,000 178,602 37,698 216,300 96.1%

Party Specific Supp. Budget Programs 420,000 181,481 37,698 219,179 52.2%

Travel and Mobility Support ‐ USDA 60,824 17,132 0 17,132 28.2%Travel and Mobility Support ‐ UK MOD 51,886 0 0 0 0.0%Travel and Mobility Support ‐ EOARD 30,502 28,538 0 28,538 93.6%Travel and Mobility Support ‐ DOE/IPP Program 100,000 8,979 0 8,979 9.0%Travel and Mobility Support ‐ National Cancer Ins. 2,949 2,872 0 2,872 97.4%Travel and Mobility Support ‐ Argonne NL 88,683 58,948 0 58,948 66.5%

7535 Governmental partners support 334,844 116,469 0 116,469 34.8%

STCU

2016


1 All AOB budget lines are forecast to be within budget and there will be no

overspends that require approval

2 Forecast for remaining two months based on current levels of expenditure plus

any known expenses

3 SB forecast for remaining two months is only for known expenditure

4 Personnel costs, capital expenditure (non‐recurring costs), audit costs are fixed

and so utilisation is closee to 100%

5 Other costs for travel and office operations are more variable and are mostly well

below budget

6 Legal fees and other professional costs are well below budget as we have not had

need to deal with any leagal matters or reqire outsources assistance particularly

7 SB expenditures are low as there has not been much call from recipients of

funding parties for SB activities during the year

Commentary

1

1

Annual Operating Budget Request

for the year ending 31 December 2017

2

Assumptions l  2017 figures are all estimates l  2016 figures are the latest available forecasts for the

full year l  Project Expenditures do not include Projects to be

approved at upcoming Governing Board Meeting l  Funding Party project expenditure includes Non-Fee

Paying Government Partners (eg GIPP, UK MoD, etc.)

l  Exchange rate used €1 = $1.12

2

3

Background l  The budget is determined by our level of

activities: l  Traditional Projects

l  Co-Financing with the Academies (formerly known as TIs)

l  Partner Projects l  New style Projects (eg Border Guards) l  Supplementary Budget activities

l  Level of activities has been declining over recent years

4

Project Volumes Project Revenue

0

50

100

150

200

250

300

1995199619971998199920002001200220032004200520062007200820092010201120122013201420152016

Year

$ millions

3

5

Becoming More Efficient Overhead Percentage

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Year

$M

0

5

10

15

20

25

%

Project expenditure AOB percentage Total overhead percentage

6

Efficiency Drivers l  Strong core team l  Stable workforce and therefore substantial

corporate knowledge l  Multi skilled staff l  Better use of technology l  Less travelling l  Sharing ideas and resources with ISTC

4

7

Summary of 2017 AOB

2016 $’000

2017 $’000

Decrease %

Recurring 916 858 6

Non recurring 33 18 45

Total AOB 949 876 7

8

Non Recurring Costs

2016 $’000

2017 $’000

Decrease %

Facility improvements & office equipment

8 5 37

Computer hardware & software

13.5 13.5 -

Non recurring contingency 12 - 100

Total 33.5 18.5 45

5

9

2016 $’000

2017 $’000

2017 % of total

Personnel 558 531 62

Travel 93 98 11

Office operations 167 149 17

Contracted services 68 68 8

Contingency 9 12 2

Total 895 858 100

Recurring Costs

10

Personnel

l  STCU’s operations dictate that personnel costs are the major part of the operating budget estimated at 62% for 2017 (60% - 2016)

l  Reduction to be achieved by being more efficient

l  However we are reaching a minimum core level

6

11

Personnel 2 Staffing v Projects

0

5

10

15

20

25

2005 2007 2008 2009 2010 2012 2013 2014 2015 2016 2017

Year

Project Expenses

$M

0

10

20

30

40

50

60

70

80

StaffNumbers

Project expenditure Local staff Expat staff Total Staff

12

Personnel 3 Staff Numbers

0

10

20

30

40

50

60

70

2005 2007 2008 2009 2010 2012 2013 2014 2015 2016 2017

Year

Local staff

0

1

2

3

4

5

6

7

8

9

Expats

Local staff Expats

7

13

Vehicle and Driver Costs Actual costs in 2015 $

Vehicle operating costs 14,234

Insurance 1,650

Cost of driver (including salary, medical, morale and welfare costs)

14,710

Depreciation 5,300

Total 35,894

l  Change in environment l  Organisations no longer

have internal drivers l  More reputable taxi

companies available

l  Decreased volumes l  Car and driver not fully

utilised

$ Estimated additional taxi and van hire costs 15,000

14

Staff Numbers 2016 2017

Full time 23* 20*

Part time 3 3

SDED 1 1

Local 27 24

Expat 2 2

Total 29 26

* - includes 4 outside of Kyiv in Azerbaijan, Georgia, Moldova and Kharkiv

8

15

Other Costs l  Telecommunications

l  Decrease of $ 15,000 l  Motor vehicle costs

l  As discussed earlier l  Decrease of $ 11,000 rising to $ 19,000

l  Audit l  No change following the call for proposals l  STCU reaching a minimum core level

16

AOB to be shared between the Parties

2017 $’000

Recurring costs 858

Non recurring costs 18

Total AOB 876

9

17

AOB Sharing Formula l  In December 2000 the Funding Parties

agreed to the following: l  Parties would equally share 20% of the Administrative

Operating Budget. l  Currently this is 10% each for the EU and US

l  The remaining 80% will be allocated according to the projected next year’s expenditure for the Party's projects

18

AOB Funding Share Calculation

US EU Total Estimated project / SB expenditure

$ 877,404 $ 1,956,229 $ 2,833,633

% % % % share of project / SB expenditure

30.96 69.04 100

Distribution of variable portion

24.77 55.23 80 Distribution of fixed portion

10 10 20

Calculated sharing ratio

34.77 65.23 100

10

19

Who pays what

US EU Total

Share of AOB $ 304,595 $ 571,405 $ 876,000

(in Euros) € 510,183

% % %

Calculated sharing ratio

34.77 65.23 100

20

Questions

11

21

Supplementary Budget Request

for the year ending 31 December 2017

22

SB Estimates for 2017 Supplemental Programs Budget Request 2017 as of September '16

BUDGET ITEM 2016 Approved

2016 Forecast

Spent 2016

Approved 2016

Forecast Spent

2017 Requested

2017 Requested

$ $ € € $ € 1.01 Technic., Collabor., Cont. Travel Supp. -

US 30,000 0 30,000 1.02 Technic., Collabor., Cont. Travel Supp. -

EU 25,000 2,818 15,000 4.01 Bus. Training/Sustainability Supp - US 30,000 0 30,000 5.02 Patent Support - US 10,000 0 10,000 5.03 Patent Support - EU 9,000 0 8,000 6.02 Travel and Mobility Support - US 50,000 2,879 25,000 6.03 Travel and Mobility Support - EU 20,000 1,982 15,000 6.04 Travel and Mobility Support - PA 164,335 97,049 0 0 08.01 Expert Review & Advisors - EU 20,000 10,000 10,000 9.02 Seminars/Workshops - EU 2,500 0 2,000 9.03 Seminars/Workshops - US 75,000 0 75,000 10.01 Service Contracts - US 225,000 216,300 225,000 16.01 Partner Promotion Support - EU 100,000 24,062 30,000 17.01 Consulting Projects - PA 21,136 0 0 TOTAL CONTRIBUTION 584,335 316,228 197,636 38,862 395,000 80,000 For the EU these costs are associated with Contribution Agreement 2014 Annex III - Projects and Supplemental

12

23

SB Estimates for 2017 - 2 BUDGET ITEM 2016

Approved 2016

Forecast Spent 2016

Approved 2016

Forecast Spent

2017 Requested

$ $ € € € 10.02 Service Contracts - EU 137,000 129,954 134,000

TOTAL CONTRIBUTION 0 0 137,000 129,954 0 134,000

For the EU these costs are associated with Contribution Agreement 2014 Annex III - Administrative

$ $ € € $ €

TOTAL CONTRIBUTION 584,335 316,228 334,636 168,816 395,000 214,000

Note: For the purposes of this spreadsheet a € 1 : $ 1.12 Euro to Dollar ratio is assumed

24

Questions

13

25

AOB and SB for 2017

Notes and supporting calculations

26

Notes to AOB – Line by line

1. Local Grant Payments 21 full-time 3 part time local staff (0% raise, 0% bonus)

$ 435,000

2. Staff Education & Training: ED and his direct reports; SDED and his direct reports; CFO/CAO and his direct reports. Reduction in line with reduction in staff, split by numbers in each department.

$ 40,000 $ 4,000

$ 18,000 $ 18,000

3.

Employee Morale and Welfare Center subsidizes 100% of the cost of lunch for staff members. Furthermore, includes cost of bereavement contributions, Christmas and birthday activities, family functions, and special occasions. Reduction in line with reduction in staff numbers.

$22,500

4.

Medical & Dental Plans STCU pays medical insurance and dental bills for all staff. Reduction in line with reduction in staff numbers.

$43,000

5.

International Travel Senior STCU staff travel as required and approved by the Executive Director. Continued reduced travel outside the region is foreseen.

$25,000

14

27

Line by line 2 6. Travel within the CIS

Monitoring in Azerbaijan, Ukraine, Georgia, and Moldova Secretariat trips to non-Kyiv cities in Ukraine, as well as travel to Georgia, Moldova, and Azerbaijan. Maintained at 2016 level as fewer projects to monitor, fewer other activities to administer requiring less travel than in previous years.

$ 57,500 $ 32,500 $ 25,000

7. Local Travel Consists of taxis utilized by STCU staff when STCU vehicles are unavailable. Also, includes cost of providing secured cash transport to and from the STCU’s bank (as per the auditor’s recommendation to the Governing Board). Increase due to planned disposal of STCU vehicle. Taxis Secure Cash Transport

$ 15,000

$ 11,000 $ 4,000

8.

Representation Significantly reduced as there will be no major events in 2017 (20th anniversary in 2016).

$ 5,000

9.

Postage and Delivery Maintained at the decreased 2016 level in line with reduced usage of traditional services and fewer projects and programmes.

$ 6,000

10.

Customs Storage Customs storage is usually all recharged to specific projects and this charge in the AOB is not usually used therefore reduced to $ 500.

$ 500

28

Line by line 3 11. General Office Supplies

Decreased by $ 4,000 compared with 2016. $ 8,000

12. Office Equipment Repair/Maintenance Maintained same as 2016.

$ 3,000

13.

Vehicle Operations STCU plans to operate without a vehicle and driver, a minimal level of costs is maintained in the budget for the vehicle which will be sold should it be shown that operating without a vehicle and driver causes no inconvenience.

$ 5,000

14.

Printing and Reproduction Decreased by $2,000 in 2016 due to reduced volumes of printing and more use of electronic media and maintained at this lower level.

$ 8,000

15.

Telecommunications Services Considerable savings have been made on telecommunications due to the devaluation of the Ukrainian hryvnia. We anticipate these will be continued in 2017, also negotiated new terms with supplier.

$ 15,000

16. Business Meetings and Conferences One physical Board meeting $ 4,000 Other ad hoc meetings $ 3,000

$ 7,000

15

29

Line by line 4 17. Subscriptions and Publications

Maintained same as 2016. $2,500

18. Building Supplies Decreased by $2,000 compared with 2016

$ 6,000

19.

Branch Offices Tbilisi Chisinau Kharkiv Baku Branch office costs maintained as the Board views it advantageous to maintain offices in all STCU countries.

$ 21,500 $ 7,000 $ 5,500 $ 2,000 $ 7,000

20.

Insurance Expense One vehicle, the contents of the building and life insurance for the local staff. Vehicle Assets Staff Life Insurance Insurance costs expected to stay the same as the values insured will be maintained in dollar terms.

$ 9,000

$ 2,800 $ 3,500 $ 2,700

21.

Bank Fees Off-shore Based on forecasted 2017 STCU transactions.

$ 33,000

30

Line by line 5 22. Bank Fees On-shore

Fees charged by STCU’s local banks (Ukraine, Azerbaijan, and Georgia) to conduct operations. Based on forecasted 2017 STCU transactions.

$ 20,000

23. Legal Services STCU has historically had little use of legal services maintained at the 2016 level which was a substantial reduction from prior years.

$ 5,000

24.

Accounting and Auditing A new international tender was held in 2016 the results will not be known until the autumn however it is not anticipated that the audit fees will increase over 2014 & 2015.

$ 43,000

25.

Other Professional Support Off-Site Backup Tape Storage Navision Consulting Annual Report production

$ 20,000 $ 2,250

$ 12,750 $ 5,000

26.

Facility Improvements Minor ongoing improvements to the offices as required.

$ 3,000

27. Furniture and Fixtures No purchases foreseen in 2017.

$ 0

16

31

Line by line 6 28. Telecommunications Equipment

No purchases envisaged in 2017. $ 0

29. Office Equipment Maintained same as 2017, only minor purchases envisaged.

$ 2,000

30.

Vehicle Purchase STCU will determine whether the plan to operate without a vehicle and driver in 2017 should this be successful the vehicle will be sold.

$ 0

31.

Computer Hardware Significant hardware upgrade was made in 2015 therefore minimal amount included in 2017 budget as significant expenditure not foreseen as being required at this stage.

$ 2,000

32.

Computer Software Navision Maintenance Fee Other Miscellaneous

$ 11,500 $ 8,000 $ 3,500

33. Contingency STCU has maintained a Non-recurring Contingency and a Recurring Contingency in the AOB each year. There has only once been recourse to use the contingency. It is considered that we do not need to maintain separate Recurring and Non-recurring contingencies and for 2017 a single contingency at an overall reduced level is proposed.

$ 12,000

32

Full AOB

17

33

Calculation of Parties’ Share of AOB

34

18

35

International Science and Technology Center Science and Technology Center in Ukraine 53 Kabanbay Batyr Avenue, 010000 Astana, Kazakhstan 7a Metalistiv Street, Kyiv 03057, Ukraine

2016/17 Financial Audit Tender Request for approval by the STCU and ISTC Governing Boards 1st November 2016

Statutory Requirements In accordance with Article XVI (C) of the STCU Statute and in accordance with ARTICLE XV Financial Procedures of the ISTC Statute both of which read: “An annual audit by an auditor approved by the Board shall be conducted of the Center’s expenditures and related financial activities. Results of the audit shall be reported to the Board within 30 days after completion.” The audit has the following objectives: (a) report to the Governing Board whether the financial statements present fairly the financial position

of the STCU and whether the financial statements are in conformity with the accounting principles recognized by the International Accounting Standards Committee;

(b) conduct the annual audit in accordance with the International Standards on Auditing (ISA). The ISA

require that the audit is planned and performed to obtain reasonable assurance about whether the financial statements are free of material misrepresentations.

Tender In accordance with STCU and ISTC financial regulations we carried out a joint open call for tender, the request for proposals was advertised on the STCU/ISTC websites (procurement opportunities) and the Top 20 audit firms were contacted directly. We received compliant tenders from the following firms:

KPMG, Riga Baker Tilly, Bucharest Moore Stephens, London

Evaluation Criteria and Technique The tenders were evaluated for technical merit on the following criteria: C1 Project team:

expertise and profiles of proposed project personnel, specifically qualifications related to the functional and technical expertise in auditing enterprises similar in nature to the STCU/ISTC,

recent pertinent continuing education,

appropriateness of assigned staff levels. C2 Office’s experience: includes resources to be applied, depth and breadth of technical expertise and experience and

demonstrated results attained in similar engagements.

2016/17 Financial Audit Tender Request for approval by the STCU and ISTC Governing Boards

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C3 Audit plan and work‐plan: proposers will be expected to submit a representative audit plan and workplan for the scope of

services identified in Section III Point A. The audit plan and workplan must address the proposed work methodology and tools to be used in providing STCU/ISTC services and identify the resources, tasks and schedules associated with delivery, and implementation of the audit. The timeliness of the projected completion dates, as well as the track record of meeting agreed upon delivery dates will also be considered.

These criteria were weighted (C1 x 50% + C2 x 30% + C3 x 20%) to give an overall technical score, any firm not achieving a minimum of 80 as a technical score was eliminated.

The successful firms financial offers were then compared using the formula:

Pe = Po / (C1 x 50% + C2 x 30% + C3 x 20%) x 100, where:

Pe is evaluated price, Po is price offered,

Evaluation and Comparison The proposals of the following firms have been received and determined to be compliant with the minimum requirements and their offered and evaluated prices are indicated below: Prices of the responsive proposals are given below. All values are in US$ and are for two years audits. STCU

Supplier’s Name Offered Price Evaluated Price Rank

KPMG 92,410 97,376 1

Baker Tilly 104,998 139,255 2

Moore Stephens 174,054 212,520 3

ISTC


KPMG 114,100 120,232 1

Baker Tilly 104,998 139,255 2


STCU and ISTC with a discount for being awarded both contracts


KPMG 192,096 202,419 1

Lubbock Fine 209,996 278,509 2


NB: evaluated prices are used for evaluation purposes only. The successful proposer’s offered price shall enter in a respective contract.

2016/17 Financial Audit Tender Request for approval by the STCU and ISTC Governing Boards

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Conclusion The conclusion of this is that in terms of the best evaluated price KPMG is the best value for money option for both centers. It should be noted that whilst there is no reduction in the fees from the 2014/15 call for proposals because STCU is reaching a core minimum level and for ISTC the change in location and personnel still is a determining factor on the audit fee. However by working together the Centers have achieved a significant saving over the six years from 2012 to 2017.

Award Recommendation Management of both Centers, recommends to the Governing Boards that the Boards approve the award of the contract to KPMG as an out of cycle Board approval so the contracts can be finalised and the audits commenced at the earliest dates. The decision will be included in the Record of Decisions for the forthcoming Board meetings for both Centers.

Additional Consideration on Mandatory Rotation of Auditors A suggestion was raised at a meeting between the two Centers and representatives of the Funding Parties that consideration should be given to the question of mandatory rotation of auditors. When the issue was raised the tender procedure had already been finalised and it was not contractually possible to amend the terms of the request for proposals for this two year cycle and the Secretariats agreed to research best practice in this area and report to their Governing Boards. The Secretariats of the Centers have examined the advantages and disadvantages of such a policy and concluded that the current practice is in accordance with recognised norms and that the practicalities do not merit a change in the foreseeable future (see attached discussion paper for further details).

International Science and Technology Center Science and Technology Center in Ukraine 53 Kabanbay Batyr Avenue, 010000 Astana, Kazakhstan 7a Metalistiv Street, Kyiv 03057, Ukraine

Governing Board Paper Mandatory Rotation of Auditors 1st November 2016

Background

A suggestion was raised at a meeting between the two Centers and representatives of the funding parties that consideration should be given to the question of mandatory rotation of auditors.

We have examined this from two view points the practicalities (professionalism, independence and cost) and the regulatory framework for similar organizations in the funding parties’ environments.

Practicalities (professionalism, independence and cost)

Proponents of mandatory auditor rotation primarily point to a potential conflict of interest between the auditee organisation (listed companies and public interest entities1 “PIE”) and their auditors. These proponents argue that an audit firm might be too willing to trust an organisation's executives because the firm has a financial incentive to continue the audit engagement ‐ and thus keep these executives happy. Some feel if they’re with the same auditor too long, the auditor may lose objectivity and won’t ask hard questions.

A policy of mandatory auditor rotation would generally set the audit engagement period in stone, reducing the auditor's alleged tendency to bend to management. Furthermore, the existing auditor would know that any errors or omissions could be discovered by an ensuing auditor.

Auditors’ independence can also be effected by the other services (eg tax planning, corporate finance, consultancy, etc) that they provide to the organisation and which may be in conflict with the aims of and objectivity required to perform the audit. Or that they hope to be able to sell such services to the auditee and hence further need to keep management sweet.

Most of the more notorious cases of corporate failures where auditors have failed to apply sufficient objectivity, such as Enron, have come about due to the provision of other services. In the case of the Centers this is not an issue as the Auditors provide only audit services.

On the other hand, opponents of mandatory rotation argue that the knowledge acquired by an auditor about the specifics of a company will be lost with each rotation, ultimately harming audit quality. Unfortunately, mandatory auditor rotation would impose a large burden on organisations. Newly‐appointed auditors would frequently need to spend time and money familiarising themselves with the complex operations of their new clients.

Ultimately, this up‐front investment would likely be passed down to corporations in the form of significantly higher audit fees. And during this start‐up period, studies have suggested that audit quality will be relatively low.

If an audit firm is familiar with an organization, it knows what reports to ask for and where to get them. It also learns the organisation’s terminology, which streamlines the audit process. Auditors can be more effective after they’ve gone through a couple of audit cycles because they have institutional knowledge.

Switching to another firm the organisation will experience the indirect cost of to its own staff’s time, more specifically, the extra time you’ll have to spend training the new firm and familiarizing them with your operations. Most audit clients are companies and operate in similar ways, other PIEs (such as intergovernmental organisations) making up a smaller proportion of auditees operate differently thus

1 STCU and ISTC should be considered as Public Interest Entities for the purposes of this discussion

Governing Board Paper Mandatory Rotation of Auditors

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steepening the learning curve and the Centers can be considered even more of a niche market steepening the curve further.

Other disadvantages of auditor rotation include:

Potential erosion in the quality of audits;

Potential opportunities for opinion shopping;

Potential that mandatory rotation would diminish the role and influence of the audit committee.

Since the start of joint tenders the Centers have saved (when compared with the prior level of fees) approximately $ 100,000 per year in audit fees. During this time we have seen no visible decline in the quality of the service provided and cost is therefore a major consideration in determining our auditors.

In the most recent call for proposals the tender was advertised as an open tender and the Top 20 accounting firms were approached direct, although nine firms expressed an initial interest we had only three firms tender for the audit, the chosen firm (also the incumbent) was technically evaluated as the best and was the best in financial terms. Two of these firms were from Eastern Europe and one from London. Had we been required to exclude the incumbent firm from the tender procedure the result would have been at least 10% higher fees; had the second Eastern European firm not tendered the result would have been 80% higher fees and an additional cost to the Centers over the two year cycle of $150,000.

In our view, the benefits of mandatory rotation do not justify its costs.

Regulatory Situation

The Centers are not governed by any specific legislation but by their own Agreements and Statutes and Financial Regulations which adopt the best practices of our funding countries and the countries in which we operate. Taking the European Union which has recently introduced new legislation on the subject as a baseline, the EU Rules on auditor rotation are adopted in each member country with variations adopted by each country from those proposed in the EU Rules. In Great Britain for example Listed Companies and other Public Interest Entities are required to put their audit out to tender every 10 years, and change (ie mandatory rotation) auditor at least every 20 years.

The Centers’ current practice of putting the audit out to tender every two years and having had three different auditors during the 20 years of operation is well within this requirement.

Conclusion

Considering that:

any benefits of mandatory rotation do not justify its costs; and

current practice is well within the accepted norms;

we propose that the current practice be continued for the foreseeable future.

References

Mandatory Firm Rotation PricewaterhouseCoopers Fact sheet 1 – February 2015

see attached (page 4)


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Surprising Effects of Mandatory Auditor Rotation on Audit Quality by Kendall O. Bowlin, University of Mississippi; Jessen L. Hobson, University of Illinois at Urbana‐Champaign; and M. David Piercey University of Massachusetts published in International Federation of Accountants Global Gateway

https://www.ifac.org/global‐knowledge‐gateway/viewpoints/surprising‐effects‐mandatory‐auditor‐rotation‐audit‐quality

Mandatory audit rotation risks outweigh benefits by Robert Pozen senior lecturer at Harvard Business School, and a Senior Fellow at the Brookings Institution published in the Institute of Chartered Accountants in England and Wales magazine economia

http://economia.icaew.com/opinion/robert‐pozen‐mandatory‐audit‐rotation

Will rotating accounting firms enhance audit quality? Some fear proposal could force companies to use auditors that don’t meet needs by Rajendra Bhika, Andrea Francis published in Corporate Secretary

https://www.corporatesecretary.com/articles/regulation‐and‐legal/12224/will‐rotating‐accounting‐firms‐enhance‐audit‐quality

Mandatory Audit Firm Rotation Too Costly With Minimal Benefit, Cautions IIA The IIA comments on PCAOB’s Concept Release Regarding Auditor Independence and Audit Firm Rotation published by the Institute of Internal Auditors North America

https://na.theiia.org/news/press‐releases/Pages/Mandatory‐Audit‐Firm‐Rotation‐Too‐Costly‐With‐Minimal‐Benefit‐Cautions‐IIA.aspx

https://www.ifac.org/global-knowledge-gateway/viewpoints/surprising-effects-mandatory-auditor-rotation-audit-quality

http://economia.icaew.com/opinion/robert-pozen-mandatory-audit-rotation

https://www.corporatesecretary.com/articles/regulation-and-legal/12224/will-rotating-accounting-firms-enhance-audit-quality/

https://www.corporatesecretary.com/articles/regulation-and-legal/12224/will-rotating-accounting-firms-enhance-audit-quality/

https://na.theiia.org/news/press-releases/Pages/Mandatory-Audit-Firm-Rotation-Too-Costly-With-Minimal-Benefit-Cautions-IIA.aspx

https://na.theiia.org/news/press-releases/Pages/Mandatory-Audit-Firm-Rotation-Too-Costly-With-Minimal-Benefit-Cautions-IIA.aspx


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Version as of November 11, ’16 Page 1 of 1

2017 Proposed GB Teleconference/Meeting Schedules

July 5, 12, and 19 (if necessary), 2017 = STCU GB via teleconference (1.5 hours each) w/ Funding Sheet and Record of Decisions done via written procedure November/December, 2017 = STCU physical GB (possibly in Kyiv)

contents of 43rd stcu governing board folder

Documents