REPUBLIC OF TURKEYPRIME MINISTRY

Undersecretariat of Treasury

INDEPENDENT AUDITOR'S REPORT

On

ISTANBUL SEISMIC RISK MITIGATIONAND EMERGENCY PREPAREDNESS PROJECT

ADDITIONAL FINANCE

Implemented by

ISTANBUL GOVERNORSHIPISTANBUL PROJECT COORDINATION UNIT

AndFinanced Under

World Bank Loan No. 8033-TU

As of December 31, 2015

Report Number:133/2 - 97/3 - 22/2 - 32/2

Prepared by

Zekiye Z. BALOGLU Sileyman BIYIK Ceren KONAK M. Emre BAYKALSenior Treasury Controller Treasury Controller Treasury Controller Treasury Controller

June 23, 2016

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

TABLE OF CONTENTS

1. EXECUTIVE SUMMARY

2. FINANCIAL STATEMENTS OF THE PROJECT

2.1, Independent Auditor's Report

2.2. Statement of Sources and Uses of Funds

2.3. Statement of Cumulative Investments

2.4. Statement of Requests for Reimbursement (SOE Statement)

2.5 Statement of Special Account

2.6 Notes to The Project Financial Statements

Li

L.

EXECUTIVE SUJMMARY

EXECUTIVE SUMMARY

A. Project Summary:

Against the risk of a major earthquake, Istanbul Seismic Risk Mitigation and EmergencyPreparedness (ISMEP) Project had been prepared by the Turkish Government in order totransform Istanbul into a city of greater resilience on a period of 10 to 20 years from theestablishment date of the project on. The Istanbul Seismic Risk Mitigation and EmergencyPreparedness (ISMEP) Loan Agreement (Loan No. 4784-TU) was signed by the Republic ofTurkey and the International Bank for Reconstruction and Development on October 18, 2005,and was brought into effect as of February 3, 2006,

The original closing date of the project being March 31, 2010, was first extended toDecember 31, 2011. Following a second extension, the closing date was determined to beDecember 31, 2012. Due to the ever-expanding scope of the project along with theunanticipated increases, a second agreement was signed between the Republic of Turkey andthe World Bank on August 4, 2011 for an additional loan (Loan No. 8033-TU).

The project operations have been implemented and supervised by istanbul ProjectCoordination Unit (IPCU) which was founded as an organ of the istanbul Special ProvincialAdministration during the commencement of the project. As of March 31, 2014, IPCU wasinstitutionally transferred into the organization of The Governorship of tstanbul as the legalentity of the Istanbul Special Provincial Administration was abolished by the Law 6360,published in the December 06, 2012 copy of the official gazette. In line with this change ofentity, an amendment to the Loan Agreement was made on December 12, 2014 including theprovisions that "IPCU means the Istanbul Project Coordination Unit established within theGovernorship of istanbul for overall Project implementation and supervision" and "Everyreference to the term istanbul Special Provincial Administration or ISPA is replacedthroughout the Loan Agreement by the term "Governorship of istanbul" ". The closing date ofthe project was also extended to December 31, 2015 by the amendment, which was originallyDecember 31, 2014.

The main goals of the Project are; enhancing the institutional and technical capacity ondisaster management, improving the consciousness of the public towards emergencypreparedness and intervention, analyzing the seismic condition of the public facilities havingpriority, retrofitting or re-building of these facilities according to the outcomes of the seismicanalysis, creating the seismic risk inventory of cultural and historical buildings stock andtaking supportive measures for the more effective implementation of building codes and landuse plans, all of which contribute to the aim of improving the preparedness of Istanbulagainst a major earthquake.

The Project is comprised of four components:

Component A) Increasing The Capacity Of Emergency Preparedness.Component B) Seismic Risk Mitigation For Priority Public Buildings.Component C) The Effective Usage Of Zoning And Building Regulations.Component D) Project Management.

According to the project financial statements, EUR 42.262.905,09 was disbursed in thisauditing period. So, total amount disbursed from the project resources (including front andfee) have amounted to EUR 107.726.987,51 by December 31, 2015.

B. Objectives of Audit:

The objectives of our audit are;

a) To provide an opinion on whether the financial statements, prepared as of December31, 2015 and for the year then ended, give a true and fair view of the financialposition of the Project in accordance with the cash receipts and disbursements basisof accounting,

b) To determine, as of December 31, 2015, whether IPCU has complied, in all materialrespects, with the rules and procedures of the Loan Agreement 8033-TU,

c) To examine whether adequate supporting documentation has been maintained tosupport claims to the World Bank for reimbursements of expenditures incurred withrespect to SOEs and evaluate eligibility of these expenditures for financing under theWorld Bank Loan Agreement 8033-TU.

C. Scope of Audit:

We have performed an audit of financial statements of the ISMEP as of December 31, 2015and for the year then ended in accordance with the cash receipts and disbursements basis ofaccounting. We have also performed a compliance audit on whether Project activities are inline with loan agreement and related World Bank guidelines.

Our audit was conducted in accordance with the International Standards on Auditingpublished by International Federation of Accountants.

There was no limitation in our scope for the Project's audit.

D. Audit Results:

For the financial statements of project; our audit resulted with an unqualified opinion.

In addition, as of December 31, 2015, the IPCU has complied, in all material respects, withthe rules and procedures of the Loan Agreement.

With respect to SOEs, adequate supporting documentation has been maintained to supportclaims to the World Bank for reimbursements of expenditures incurred; and theseexpenditures are eligible for financing under the World Bank Loan Agreement 8033-TU.

E. Management Recommendations:

A Management Letter, dated June 23, 2016, to the attention of the tstanbul ProjectCoordination Unit was issued separately from this report. The objective of this ManagementLetter is to enable the auditors to communicate appropriately to those charged withgovernance and management deficiencies in internal control that the auditors have identifiedduring the audit and that, in the auditors' professional judgment, are of sufficient importanceto merit their respective attentions. For this purpose, our recommendations in order ofpriorities are attached to the Letter.

V

F

VFINANCIAL STATEMENTS OF THE PROJECT

V

V

REPUBLIC OF TURKEYPRIME MINISTRY

Undersecretariat of Treasury

INDEPENDENT AUDITOR'S REPORT

TO THE ISTANBUL GOVERNORSHIP - ISTANBUL PROJECT COORDINATIONUNIT

We have audited the accompanying Statement of Sources and Uses of Funds, Statement ofCumulative Investments, Statement of Requests for Reimbursement (SOE Statement) andStatement of Special Account of the Istanbul Seismic Risk Mitigation and EmergencyPreparedness (ISMEP) Project's Additional Finance as of December 31, 2015, and for the

period then ended, and a summary of significant accounting policies and other explanatoryinformation. The financial statements have been prepared by Istanbul Governorship (IstanbulProject Coordination Unit-IPCU) based on relevant provisions of the Loan agreement 8033-TU

Management's Responsibility for the Financial Statements

IPCU is responsible for the preparation and fair presentation of the above mentioned financialstatements in accordance with the relevant provisions of the Loan agreement 8033-TU, andfor maintaining the internal control required to enable the preparation of financial statementsthat are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit,and to determine whether IPCU has complied with, in all material respects, the requirementsof the Loan agreement 8033-TU. We conducted our audit in accordance with InternationalStandards on Auditing. Those standards require that we comply with ethical requirements andplan and perform the audit to obtain reasonable assurance on whether the financial statementsare free from material misstatement and whether IPCU has complied with the requirements ofthe Loan agreement 8033-TU in all material respects,.

An audit involves performing procedures to obtain audit evidence about the amounts anddisclosures in financial statements. The procedures selected depend on the auditor'sjudgment, including the assessment of the risks of material misstatement in the financialstatements, whether due to fraud or error. In making those risk assessments, the auditorconsiders internal control relevant to the entity's preparation and fair presentation of thefinancial statements in order to design audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness of theentity's internal control. An audit also includes evaluating the appropriateness of accountingpolicies used and the reasonableness of accounting estimates made by management, as well asevaluating the overall presentation of the consolidated financial statements. We believe thatthe audit evidence we have obtained is sufficient and appropriate to provide a basis for ouraudit opinion.

Opinion

In our opinion;

a) The accompanying Statement of Sources and Uses of Funds, Statement ofCumulative Investments, Statement of Requests for Reimbursement (SOE Statement) andStatement of Special Account present fairly, in all material respects, the financial position andaccounting policies of the ISMEP Project as of December 31, 2015 and for the period thenended in accordance with the provisions of the Loan agreement No. 8033-TU.

b) IPCU, as of December 31, 2015 has complied with, in all material respects, therequirements of the Loan agreement No.8033-TU.

c) With respect to SOEs, adequate supporting documentation has been maintained tosupport claims to the World Bank for reimbursement of expenditures incurred, and theseexpenditures are eligible for financing under the Loan agreement No.8033-TU.

Basis of Accounting and Restriction on Distribution and Use

Without modifying our opinion, we draw attention to Note 2 to the financial statements,which describe the basis of accounting. The financial statements are prepared to assist IPCUto comply with the financial reporting provisions of the Loan agreement No.8033-TU. As aresult, the financial statements may not be suitable for another purpose. Our report is intendedsolely for IPCU, Undersecretariat of Treasury, and World Bank, and should not be distributedor used by other parties.

A. 4TmSUCUActing Chairman ofBoard of Treasury Controllers

i CALI$KAN(Audit Partner)Vice-Chairman

Zekiye Z. BALOOLU Slileyman BIYIK Ceren KONAK M. Emre BAYKALSenior Treasury Controller Treasury Controller Treasury Controller Treasury Controller

Date June 23, 2016Address Republic of Turkey, Prime Ministry, Undersecretariat of Treasury, Board of Treasury

Controllers, Emek ANKARA/TURKEY

-

l

！튼�出．l

-

-

�··「’나1.-

C> C> CD 0 CD

g OLDC,

CD 0, 0, tn GeCý mý r-ý CN m m

lmRn

0 cD MD rýC> le C> I C2N cý

CD V 10 r4 11ý r"ý- n-

CLCL

CD

99

CDCD

22 U 5Lä 2 u

cm o m C, u0 0 4 0

fia :6 5 U 3 .

cý b: CN

cp

42

r4F, 8, <9 rö0 .0

ID CD14C,

ri ri C4 is-Lä9 cp 9 9 - < la

CL o a, n< In

1ý 14 1 län i

0 CN

8899 8

LL il M 0 N

D zz C) Lq-

O<' - Ifo

000

uå< CO 00 0 <l '0 J z C> 0-

l, - 0

NUj V L

zO

0 I

oa U -a e .-c- . a W> w Eo moa w

oo

- ; -o uv <o - CL w- m o a n

r E m I -ID > >=j LJ f kL4ILn rbr.<I " =

REPUBLIC OF TURKEYISTANBUL GOVERNORSHIP

ISTANBUL PROJECT COORDINATION UNIT(IPCU)

8033-TR ISTANBUL SEISMIC RISK MITIGATION AND EMERGENCY PREPAREDNESSPROJECT

ADDITIONAL FINANCE

NOTES TO THE PROJECT FINANCIAL STATEMENTS

(31.12.2015)

1. OBJECTIVES AND NATURE OF THE PROJECT

To transform Istanbul in the next 10-20 years into a city more resilient to a major earthquake IstanbulSeismic Risk Mitigation and Emergency Preparedness (ISMEP) Project had been prepared by theTurkish Government. The World Bank and the Turkish Government signed a Loan Agreement(4784-TU) in the amount of Euro 310.00 million (US$400.00 million equivalent) on October 18,2005 for the funding of ISMEP. The agreement became effective on February 3, 2006. IstanbulSpecial Provincial Administration, Istanbul Project Coordination Unit (IPCU) is responsible for theimplementation of this project. Loan Agreement (4784-TU) closing date 31 December 2012.

Republic of Turkey Council of Minister's Decree Number 2011/1410 dated February 8, 201 1,TheWorld Bank and the Turkish Government signed a Loan Agreement (8033-TR) in the amount ofEuro 109.8 million on August 04, 2011 for the funding of ISMEP.

The overall goal of the proposed project is to save lives and reduce the social, economic and financialimpacts in the event of future earthquakes. The specific objective of the project is to improve the cityof Istanbul's preparedness for a potential earthquake through enhancing the institutional andtechnical capacity for disaster management and emergency response, strengthening critical publicfacilities for earthquake resistance, and supporting measures for better enforcement of building codesand land use plans.

2. MAIN ACCOUNTING POLICIES

a) IPCU accounts the project-related operations on the basis of cash. Accordingly, revenues arereceived when the loan is transferred to the special accounts, and expenditures arise when a paymentis made. Payments made to suppliers are expensed at the date of payment. However, tax withdrawalsfrom suppliers are accrued in bank accounts and expensed on the date of the payment of these taxesone month later.

b) IPCU is responsible for the payments, accountings, records and all financial reports on the project-related activities, resources and expenditures within the framework of the Project. Those records andaccounts are prepared for the special accounts to be held by the independent auditors acceptable tothe Bank, in accordance with the auditing conditions acceptable to the Bank, in each fiscal year.

c) IPCU procured an accounting software program, Financial Management System ("FMS"), tofollow up the payments and accounting records of the project. Data entry to FMS is conducted basedon the payment dates. The transactions recorded in local currency (Turkish Lira - TL) are convertedto the EURO using the exchange rate prevailing at the date of withdrawal in accordance with CentralBank's official bid rates for Euro. Since these rates are entered daily to FMS, conversions from TL toEURO are automatically held. FMS software was developed in compliance with AccountingStandards, for each accounting record, an automatically numbered wage receipt is taken. Receipts,invoices, contracts and payment orders are filed and archived regularly, Below there is a list of thereports received from FMS:

i. Project Resources and Fund Use

ii. Use of Funds on the base of Project Activities

iii. Cash Withdrawals

iv. Special Account Table (based on Euro)

c) There is one special account under the investment framework of the project, opened in theCentral Bank. As of December 31, 2015, a total amount of EURO 109.800.000 has been usedfrom the World Bank account.

3. RESTRICTIONS CONCERNING THE USE OF THE FUNDS AND OTHER ASSETS

In accordance with the Loan Agreement signed between Turkish Government and the Bank, use ofthose resources in the Special Account is limited to the project objectives. Those resources still unusedat the end of the Project will be returned back to the Bank, in compliance with the related financingagreement. Records shall be kept on the project resources and those assets procured through the projectresources during the project and the subprojects.

4. VARIANCES FROM THE PLANNED AMOUNT

IPCU is carrying out a revision on the distribution of the expenses over the years under the scope ofthe project and variations from the planned amount and the current and cumulative planned amountsare changing as well. In 2015, project investments realized 3.308.094,91 Euro below the plannedamount.

5. CASH AVAILABLE AT 31 DECEMBER 2015

Cash available at 31.12.2015 is as follows.(Euro)

Funds Other Funds TotalSpecial Account 2.032.453,21 0.00 2.032.453,21Commercial Bank Current Ac 0.00 0.00 0.00Commercial Bank Tax Ac. 40.559,31 0.00 40.559,31Commercial Bank Payment ac. 0.00 0.00 0.00Commercial Bank Auction Ac. 0.00 0.00 0.00Comercial Bank Suppliers ac. 0.00 0.00 0.00Cash 0.00 0.00 0.00Toplan 2.073.012,52 0.00 2.073.012,52

6. Withdrawals from special account for VAT, Income taxes, and Stamp Duties are made inaccordance with the contract payments spontaneously. For that purpose, three accounts areestablished in Vakifbank for each tax type and all tax payments are made from these accounts afterthe tax accrual statement is obtained from tax office. As a result no FX differences occur in financialstatements.

In Tax Accounts at Vakifbank there are accrued but not yet paid taxes. These balances are notexpensed in financial statements since still in bank accounts as of 31.12.2015. Total tax liabilities are40.559,31 Euro as of 31.12.2015.

7. In 2015, 44.298.323,59 Euro sources withdrawn to TCMB account from the World Bank.

8. In 2015 total request for withdrawal realized at EUR 48.286.495,04 from Worldbank. During thewithdrawals; EUR 3.988.171,45 in 22th application deduction by the World Bank. These amounts arededucted from application amounts with their respective shares in cumulative SOE and SummarySheet type breakdowns.

9.According to the World Banks Contract, time of extension has done and based on this the advanceof Euro 5.000.000,00 is used which was closed previosuly.

zim G6kh ELGIN Uk NADIRDirector Deputy Governor