REPUBLIC OF TURKEYPRIME MINISTRY

Undersecretariat of Treasury

INDEPENDENT AUDITOR'S REPORT

On

ENHANCEMENT OF TURKISH ENERGY SECTOR IN LINE WITHTHE EU ENERGY PRIORITIES AND STRATEGIES PROJECT

Implemented by

REPUBLIC OF TURKEYMINISTRY OF ENERGY AND NATURAL RESOURCES

GENERAL DIRECTORATE OF FOREIGN AFFAIRS AND EU

And

Financed Under

The World Bank Grant Agreement No. TF-16532

As of December 31, 2015 and For the Year then ended

Report Number: 111/2 -17/2 -11/5

Prepared by

Nevzat $AHIN Omer KAQARAN Eyyip El Ensar YAZICISenior Treasury Controller Junior Treasury Controller Junior Treasury Controller

June 23, 2016

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TABLE OF CONTENTS

1. EXECUTIVE SUMMARY

2. FINANCIAL STATEMENTS OF THE PROJECT

2.1 Independent Auditor's Report

2.2 Statements of Sources and Uses of Funds

2.3 Statements of Cumulative Investments

2.4 Statement of Request for Reimbursement(SOE)

2.5 Statement of Special Account

2.6 Notes to the Project Financial Statements

1. The Objective of the Grant2. Duration of the Grant3. Financing of the Grant4. The Accounting Principles and Policies with Chart of Accounts and Fiscal Tables5. The Limited Utilization of the fund and Other Assets6. The Grant of International Bank for Reconstruction and Development (IBRD)7. The Actual Cash Amount Of December 31, 20158. The Planned Expenditures for the Current Year9. Differences Between the Requested and Paid Amounts under the SOE Procedure

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EXECUTLVE SIIJMMARY

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EXECUTIVE SUMMARY

A. PROJECT SUMMARY

Energy Sector Program Grant Agreement, under the Enhancement of Turkish EnergySector In Line With EU Energy Priorities and Strategies Project is implemented under IPAFund Grant Number TF-16532 which was signed between International Bank forReconstruction and Development (World Bank) and Turkish Government (Recipient) on May

30, 2014 and was put into effect upon publication in the Official Gazette dated June 23, 2013.

The objective of the Project is the enhancement of the Turkish Energy Sector in line withEU Energy priorities and strategies in energy efficiency, renewable energy and the natural gasmarket.

The project consists of the following parts;

PART A: Ministry Energy and Natural Resources

PART B: Natural Gas Market Development

PART C: Renewable Energy Development

PART D: Energy Efficiency Promotion

PART E: Visibility and Public Awareness

B. OBJECTIVES OF AUDIT

The objectives of our audit are;

a) To give an opinion on whether the financial statements, prepared as of December 31,2015 and for the year then ended present fairly in all material respects the financialposition of the Project in accordance with the cash receipts and disbursements basis ofaccounting, and

b) To determine, as of December 31, 2015, whether Ministry of Energy and NaturalResources (MENR) has complied, in all material respects, with the rules and proceduresof the Grant Agreement numbered TF-16532.

L c) To examine whether adequate supporting documentation has been maintained to supportclaims to the World Bank for reimbursements of expenditures incurred with respect toSOEs and evaluate eligibility of these expenditures for financing under the Grant

L Agreement numbered TF-16532.

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C. SCOPE OF AUDIT

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

Our audit was conducted in accordance with International Standards on Auditingpublished by International Federation of Accountants (IFAC) applicable to the audit offinancial statements and compliance auditing.

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

D. AUDIT RESULT:

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

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

With respect to SOEs, adequate supporting documentation has been maintained tosupport claims to the World Bank for reimbursements of expenditures incurred; and theseexpenditures are eligible for financing under the World Bank Grant Agreement numbered TF-16532.

E. MANAGEMENT RECOMMENDATION:

A management letter, dated June 23, 2016, to the attention of the General Directorate ofForeign Affairs and European Union was issued separately from this report. The objective ofthis Management Letter is to enable the auditors to communicate appropriately to thosecharged with governance and management deficiencies in internal control that the auditorshave identified during the audit and that, in the auditors' professional judgment, are ofsufficient importance to merit their respective attentions. For this purpose, ourrecommendations are attached to the Letter.

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FINANCIAL STATEMENTS OF THE PROJECT

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REPUBLIC OF TURKEYPRIME MINISTRY

Undersecretariat of Treasury

INDEPENDENT AUDITOR'S REPORT

TO MINISTRY OF ENERGY AND NATURAL RESOURCESGENERAL DIRECTORATE OF FOREIGN AFFAIRS AND EUROPEAN UNIONANKARA

We have audited the accompanying Statements of Sources and Uses of Funds, Statementsof Cumulative Investments, Statements of Requests for Reimbursement (SOE) and Statementof Special Account of the Enhancement of Turkish Energy Sector In Line With EU EnergyPriorities and Strategies Project as of December 31, 2015, and for the period then ended, anda summary of significant accounting policies and other explanatory information. The financialstatements have been prepared by the Ministry of Energy And Natural Resources based onrelevant provisions of the Grant Agreement, numbered TF-16532.

Management's Responsibility for the Financial Statements

Ministry of Energy And Natural Resources General Directorate of Foreign Affairs andEuropean Union is responsible for the preparation and fair presentation of these financialstatements in accordance with the relevant provisions of the Grant Agreement, numbered TF-16532, and for such internal control as management determines is necessary to enable thepreparation of financial statements that are free from material misstatement, whether due tofraud or error.

Auditor's Responsibility

Our responsibility is to express an opinion on these financial statements based on ouraudit, and to determine whether Ministry of Energy And Natural Resources has compliedwith, in all material respects, the requirements of the Grant Agreement, numbered TF-16532.We conducted our audit in accordance with International Standards on Auditing. Thosestandards require that we comply with ethical requirements and plan and perform the audit toobtain reasonable assurance about whether the financial statements are free from materialmisstatement and whether Ministry of Energy And Natural Resources has complied with, inall material respects, the requirements of the Grant Agreement, numbered TF-16532.

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 of 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 Statements of Sources and Uses of Funds, Statements ofCumulative Investments, Statements of Requests for Reimbursement (SOE) and Statement ofSpecial Account present fairly, in all material respects, the financial position of theEnhancement of Turkish Energy Sector In Line With EU Energy Priorities and StrategiesProject accounting policies and as of December 31, 2015 and for the period then ended inaccordance with the provisions of the Grant Agreement numbered TF-16532.

b) Ministry of Energy And Natural Resources, as of December 31, 2015 has compliedwith, in all material respects, the requirements of the Grant Agreement, numbered TF- 16532.

c) With respect to SOEs, adequate supporting documentation has been maintained tosupport the claims to the World Bank for reimbursements of expenditures incurred, and theseexpenditures are eligible for financing under the World Bank Grant Agreement numbered TF-16532.

Basis of Accounting and Restriction on Distribution and Use

Without modifying our opinion, we draw attention to Note 2 to the financial statementwhich describes the basis of accounting. The financial statements are prepared to assist theMinistry of Energy And Natural Resources to comply with the financial reporting provisions

L of the Grant Agreement, numbered TF-16532. As a result, the financial statements may not besuitable for another purpose. Our report is intended solely for World Bank, Undersecretariatof Treasury, and the Ministry of Energy And Natural Resources, and should not be distributedor used by other parties.

A. Umi SUActing Chairman ofBoard of Treasury Controllers

li Q ALISKANudit Partner)

Vice-Chairman

Nevzat AH4/ Omer KACARAN Eyyip El Ensar YAZICISenior .aury Controller Junior Treasury Controller Junior Treasury Controller

Date June 23, 2016Adress Republic of Turkey Prime Ministry

Undersecretariat of TreasuryBoard of the Treasury Controllers

rEmek ANKARA/TURKEY

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MINISTRY OF ENERGY AND NATURAL RESOURCES

GENERAL DIRECTORATE OF FOREIGN RELATIONS AND EU

ENERGY SECTOR PROGRAM PHASE 1 PROJECT(EU/IPA GRANT NUMBER TF016532-TR)

SPECIAL ACCOUNT STATEMENTACCOUNT NO; 57 82 52 78-5013-EUR AT ZiRAAT BANK

For The Year Then Ended on December 31, 2015

(In EU EURO)

Opening Balance 0,00Reimbursements to SA 2.000.000,00

a) Advance 1.271.000,00b) SOE Procedure 729.000,00c) Summary Sheet 0,00

Refund to SA

Available Funds 2.000.000,00

Payment Made for Expenditures 729.000,00Service charges for the account 0,00

Total Project Investments 729.000,00

Closing Balance 1.271.000,00.

Ali Mur B CE KLIni