Evidentiary Documents for Varoudakis - Asset Re-evaluation

Re-Assessment of YWSC Assets

References to the various notes by the YWSC and by the auditor indicate that there has been considerable consternation about the revaluation process.

YWSC 2003 Financial Statement Notes - KPMG

Limitations in the scope of audit

As described in note 11, the Company has not been able to make an assessment of the useful economic lives of property, plant and equipment and, therefore, of the appropriate depreciation rates that should be applied to these assets as required by IAS 16 Property, Plant and Equipment; nor has it been able to perform an assessment of the property, plant and equipment to determine whether any impairment exists, as is required by IAS 36 Impairment of Assets. It was not practicable to extend our procedures sufficiently to satisfy ourselves as to the fairness of the carrying amount and depreciation expense in respect of property, plant and equipment stated at Drams 24,003,162 thousand and Drams 6,168,877 thousand respectively in the accompanying financial statements, nor was it possible to satisfy ourselves as to whether any impairment exists. Such amounts enter into the determination of financial position, results of operations and cash flows.

In addition, the Company does not transfer realised surplus related to retired or disposed items of property, plant and equipment from revaluation reserve to retained earnings as required by IAS 16 Property, Plant and Equipment.

Further, the depreciation charge for the year ended 31 December 2003 includes Drams 1.8 bln related to the period from the date of revaluation, 1 July 2002, to date of recording revaluation results, 1 January 2003. The revaluation reserve as of 31 December 2003 has been overstated and the depreciation charge for the year ended 31 December 2003 has been overstated by Drams 1.8 bln. In our opinion, the revaluation reserve as at 31 December 2003 should be decreased and the depreciation charge for the year ended 31 December 2003 should be decreased by Drams 1.8 bln, and results of operations for the year ended 2003 should be increased by Drams 1.8 bln.

YWSC 2003 Financial Statement Notes - YWSC

11. Property, plant and equipment

During 2002 the Company hired an independent valuer to perform a physical inspection and valuation of the property, plant and equipment as of 1 July 2002. The exercise of physical inspection and valuation has been carried out in accordance with Government law No HO-245 dated 23 October 2001 and Government decree No. 1302 dated 29 December 2001.

The property, plant and equipment were revalued on the basis of market values. For items of property, plant and equipment of a specialised nature (infrastructure assets, machine and equipment, construction in progress) with no available market values, the valuation was performed on the basis of depreciated replacement cost. The physical inspection and valuation was completed in 2003, resulting in an increase in revalued cost of Drams 77,759 million and an increase in revalued accumulated depreciation of Drams 52,710 million, resulting in a net increase in property, plant and equipment of Drams 25,049 million.

The allocation of the results of the revaluation were applied to property, plant and equipment on an item by item basis. Since the Company recorded the revaluation results as of 1 July 2002 in 2003, the depreciation charge for the period from 1 July 2002 to 31 December 2002 based on revaluation results, amounting to Drams 1.8 billion, has been recorded in 2003.

IAS 36 Impairment of Assets requires that at each balance sheet date an enterprise assess whether any indications exist that an asset is impaired. In addition, IAS 36 Impairment of assets requires that an enterprise carry out an impairment review in relation to assets revalued on a basis other than fair value. The Company has neither assessed whether any such indications exist at the date of revaluation nor has carried out any impairment review as at the reporting date.

Subsequent to the revaluation, the property, plant and equipment are depreciated in accordance with standard Armenian tax rates, whereas IAS 16 Property, Plant and Equipment requires property, plant and equipment to be depreciated over their estimated useful economic lives. The Company has not been able to perform an assessment of the useful economic lives of the property, plant and equipment and, therefore, of the appropriate depreciation rates that should be applied to these assets as required by IAS

16. Property, Plant and Equipment. The Company’s machines and equipment and motor vehicles are pledged against the loan received from the Government of the Republic of Armenia with respect to the loan received by the Government of Armenia from the IDA, see note 17.

Parliamentary Commission Observations:

Although the YWSC Financial Statement for 2003 states that the physical inspection and evaluation was completed in 2003, the evaluation was actually completed in June 2002, as per required by Government Decree 1302.

The sub-loan agreement that facilitated transfer of the World Bank credit between the Ministry of Finance (the Borrower) and the Yerevan Water & Sewerage Company (the Beneficiary) requires that a security agreement be signed between the parties. The sub-loan agreement states that under the security agreement “All of the Group’s fixed assets should be pledged as collateral”. Clause 20 of the YWSC 1999 financial statement states that “All of the Group’s fixed assets were pledged as collateral against the facility”

In fact the CGHA Commission study established in February 2004 that the security agreement had not been signed and assets had not been pledged against the facility. A security agreement was subsequently established and signed, but only the machines and equipment and motor vehicles were pledged against the facility, valued at a little more than $100,000.

The massive increase in value of the machines and equipment and motor vehicles, resulting from the re-valuation of assets, achieves the objective of covering the value of the WB credit with the value of the machines and equipment and motor vehicles, leaving the fixed assets free from burden.

This eases the path toward privatization of the Yerevan water utility, which is always a prime objective of the World Bank, and which also nicely suits the desires of corrupt Government officials.

Below are copies of messages to and from the WB, before and after receipt of the YWSC Financial Statement for 2003, which should have been ready by July 2004, but was made available to the Commission in October, after my end-of-year report.

Sent: Thursday, July 15, 2004 03:46 PM

From: "CGHA Commission" cghacommission@xter.net

To: Naira Melkumyan nmelkumyan@worldbank.org
Portfolio Manager
World Bank Armenia Country Unit
Tel.: (374-1) 52-39-92; Fax: (374-1) 521-787

Subject: Municipal Development Project - Financial Statement 2003

Hello Naira:

I have been working with Richard Walkling and Hovik Marutyan, of the YWSC, who have both been very cooperative and helpful. Mr Marutyan tells me that the YWSC financial statement for 2003, audited by the KPMG, is now going through the approval process at the MDPMU, after which it has to be approved by the WB.

I would like to complete the work with the YWSC, but it is dependent upon information which will be available in the 2003 financial statement. Mr Hovhanessyan, Head of Commission, has written to Mr Avoyan at the MDPMU, following a number of letters to the YWSC and the KPMG, and Mr Avoyan confirms that the document will be submitted to the CGHA Commission as soon as it is finally approved.

Can you let me have an idea of when the statement is likely to be approved and available at the MDPMU, so that a copy of the document (English and Armenian) may be provided to our Commission.

I hope that you will be able to respond to this E-mail application, but please let me know if you need written application in letter form for you be able to provide any of the information hereby requested.

Thank you again for your assistance.

Regards,
Bruce

Sent: Friday, July 16, 2004 11:19 AM

From: <Rrobinson@worldbank.org>

To: <cghacommission@xter.net>

Cc: <Nmelkumyan@worldbank.org>

Subject: CGHA Commission

Dear Mr. Tasker,

Naira, is currently away from the office hence I am responding in her absence.
With regard to the audited accounts for Yerevan Water currently under preparation, we expect this audit very soon. Our own review should not take very long and you shall have a copy of these audited accounts as soon as possible.
Kind regards,

Roger Robinson.

Sent: Tuesday October 5, 2004 08:52 AM

From: "CGHA Commission"

To: rrobinson@worldbank.org
cc:
Subject: Re: YWSC 2003 statement

Dear Mr Robinson / Naira,

I have written to you both recently, requesting information on when the YWSC 2003 financial statement, plus associated auditing reports, will be available.

I have not had a reply to my messages, and so I repeat the request. Is there any news on the status of this work?

Regards,

Bruce Tasker

Sent: Thursday, October 07, 2004 9:57 AM

From: Nmelkumyan@worldbank.org

To: CGHA Commission

Cc: Rrobinson@worldbank.org

Subject: Re: YWSC 2003 statement

Mr. Tasker,

Please be informed that the YWSC 2003 audit report has been completed and signed. You may have a copy of the YWSC audit report from Mr. Avoyan at the MDPIU.

Regards,

Naira

Naira Melkumyan
Portfolio Manager
World Bank Armenia Country Unit
Tel.: (374-1) 52-39-92; Fax: (374-1) 521-787

----- Original Message -----

From: "CGHA Commission" <cghacommission@xter.net>

To: <Nmelkumyan@worldbank.org>

Cc: <Rrobinson@worldbank.org>

Sent: Monday, October 18, 2004 7:08 PM

Subject: Re: YWSC 2003 statement

Dear Naira,

I have recently received a copy of the YWSC 2003 financial statement, audited by the KPMG.

It is surprising that, despite the numerous points of concern, detailed in my letter to the YWSC on the 8th August(cc World Bank), and the continued interest of the CGHA Commission to study the 2003 statement, there are several obvious and serious irregularities in the document.

I refer you to Item 11 of the statement, 'Property, Plant and Equipment', which was revalued in 2002, increasing the overall value from about 4 billion to more than 83 billion Drams, which, after revaluation and a depreciation charge of more than 6 billion Drams for 2002/3, resulted in a
book value of more than 24 billion Drams for 2003. The actual valuation is not of concern, but the fact that the YWSC statement, audited by the KPMG, increases the value of machinery, equipment and motor vehicles from about half a billion Drams to more than 56 billion Drams (about $100 million), has attracted our attention. In fact, the 'Aucom' audit report provides very
much different information, with the machinery, equipment and motor vehicles revalued at less than 2 billion Drams. The reason for this misrepresentation should be obvious to the KPMG. The timing of the recording of revaluation also varies in different documents, which is important.

The increase in the YWSC charter capital is also incorrectly stated in the financial statement, plus there are other obvious misrepresentations.

The Commission members, including a senior representative of the Republican Party, have been studying my full report for the past month, and although there are still unanswered questions, the majority of the causes for concern have been acknowledged and accepted.

Corruption in Armenia has obviously escalated to a very serious level, and it seems that the lack of good intention, together with the lack of capability, will limit what can be done to regulate the problem in a worthwhile way. The Commission will now presumably decide how best to proceed, and I trust the information that has come out of this study may be of some use.

Regards,

Bruce