Loan Agreement. Public Disclosure Authorized 1823 BR LOAN NUMBER. Public Disclosure Authorized

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1 Public Disclosure Authorized Public Disclosure Authorized Loan Agreement LOAN NUMBER 1823 BR Public Disclosure Authorized Public Disclosure Authorized (Southern States Water Supply and Sewerage Project) between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT and BANCO NACIONAL DA HABITAqAO and COMPANHIA DE SANEAMENTO DO PARANA - SANEPAR and COMPANHIA CATARINENSE DE AGUAS E SANEAMENTO - CASAN and COMPANHIA RIO GRANDENSE DE SANEAMENTO - CORSAN and STATE OF PARANA and STATE OF SANTA CATARINA and STATE OF RIO GRANDE DO SUL Dated LL, 1980

2 LOAN NOMBER 1823 BR LOAN AGREEMENT AGREEMENT, dated, 1980, between INTERNATIONAL BANK FOR RECONS CTION AND DEVELOPMENT (hereinafter called the Bank) and BANCO NACIONAL DA HABITAQAO (hereinafter called the Borrower) and COMPANHIA DE SANEAMENTO DO PARANA - SANEPAR (hereinafter called SANEPAR) and COMPANHIA CATARINENSE DE AGUAS E SANEAMENTO - CASAN (hereinafter called CASAN) and COMPANHIA RIO GRANDENSE DE SANEAMENTO - CORSAN (hereinafter called CORSAN) and STATE OF PARANA and STATE OF SANTA CATARINA and STATE OF RIO GRANDE DO SUL. WHEREAS (A) Plano Nacional de Saneamento (hereinafter called PLANASA) constitutes a water supply and sewerage program for Brazil which has been established under the direction of the Borrower, and which, in the opinion of the Bank, forms an acceptable basis for a specific financing operation of the Bank in Brazil; (B) The Project described in Sche-:ule 1 to this Agreement will be carried out and financed as part of PLANASA; (C) The Federative Republic of Brazil (hereinafter called the Guarantor), the State of Parana, the State of Santa Catarina and the State of Rio Grande do Sul (hereinafter called the Project States) and the Borrower have requested the Bank to assist in the financing of the Project by making the Loan to the Borrower as hereinafter provided; (D) Parts A, B and C of the Project will be carried out by SANEPAR, CASAN and CORSAN, respectively, with the assistance of the Borrower and also with the assistance, with resources other than the proceeds of the Loan, of the State of Parana, the State of Santa Catarina and the State of Rio Grande do Sul, respectively, and, as part of such assistance, the Borrower will make available the proceeds of the Loan as hereinafter provided; (E) Parts D and E of the Project will be carried out by the Borrower with the assistance, with resources other than the proceeds of the Loan, of the State of Parana, the State of Santa Catarina and the State of Rio Grande do Sul; (F) SANEPAR, CASAN and CORSAN have agreed to undertake certain obligations towards the Bank in respect of the Project being financed hereby as hereinafter in this Agreement set forth;

3 -2- (G) The State of Parana, the State of Santa Catarina and the State of Rio Grande do Sul have agreed to undertake certain obligations towards the Bank (including the provision of funds),n respect of the Project being financed hereby and related to the carrying out of the Project as hereinafter in this Agreement set forth; (H) The State of Parana, the State of Santa Catarina and the State of Rio Grande do Sul each warrants and represents that it is authorized to undertake its respective obligations in this Agreement set forth; (I) The Bank is willing to make the Loan available upon the terms and conditions set forth hereinafter, and in the Guarantee Agreement, of even date herewith, between the Guarantor and the Bank; NOW THEREFORE the parties hereto hereby agree as follows: ARTICLE I General Conditions; Definitions Section The parties to this Agreement accept all the provisions of the General Conditions Applicable to Loan and Guarantee Agreements of the Bank, dated March 15, 1974, with the same force and effect as if they were fully set forth herein, subject, however, to the modifications thereof set forth in Schedule 5 to this Agreement (said General Conditions Applicable to Loan and Guarantee Agreements of the Bank, as so modified, being hereinafter called the General Conditions). Section Wherever used in this Agreement, unless the context otherwise requires, the several terms defined in the General Conditions and in the Preamble to this Agreement have the respective meanings therein set forth and the following additional terms have the following meanings: (a) "Project State" means any of the following States of the Guarantor: State of Parana, State of Santa Catarina and State of Rio Grande do Sul, as parties to this Agreement, for the purpose of carrying out the Project; (b) "Company" means any of the following water supply and sewerage companies: (i) Companhia de Saneamento do Parana - SANEPAR, a mixed economy water supply and sewerage corporation,

4 -3- created by Law No dated January 23, 1963 of the State of Parana, established on December 30, 1963 in Curitiba by public document filed with the Junta Comercial Estado on January 9, 1964 under number and published in the Diario Oficial of the State of Parana on January 11, 1964; (ii) Companhia Catarinense de Aguas e Saneamento - CASAN, a mixed economy water supply and sewerage corporation, created by Law No of the State of Santa Catarina, dated December 31, 1970, and "Estatutos Sociais" means, in respect of CASAN, its statutes as approved by the extraordinary meeting of its shareholders held on July 2, 1971 and published in the Dialrio Oficial of the State of Santa Catarina on August 2, 1971; and (iii) Companhia Rio Grandense de Saneamento - CORSAN, a mixed economy water supply and sewerage corporation, created by Law No of the State of Rio Grande do Sul, dated December 21, 1965, and "Estatutos Sociais" means, in respect of CORSAN, its statutes as approved by the extraordinary meeting of its shareholders held on March 28, 1966 and published in the Diario Oficial of the State of Rio Grande do Sul on April 1, 1966; such companies hereinafter sometimes collectively called the "Project Companies". (c) "State Bank" means any of the following commercial banks: (i) Banco do Estado do Parana, a bank of which the State of Parana is the majority shareholder; (ii) Banco do Estado da Santa Catarina, a bank of which the State of Santa Catarina is the majority shareholder; and (iii) Banco do Estado do Rio Grande do Sul, a bank of which the State of Rio Grande do Sul is the majority shareholder; such banks hereinafter sometimes collectively called the "Project State Banks". (d) "Sub-project" means a project included in PLANASA consisting in the provision of water supply or sewage collection and disposal, or both, which will be carried out by a Company in any of the Project States and which the Borrower and such Project State propose to finance out of the proceeds of the Loan. (e) "free-limit Sub-project" means a Sub-project, as so defined, which qualifies as a free-limit Sub-project pursuant to the provisions of Section 2.02 (b) of this Agreement. (f) "Approved Sub-project" means a Sub-project, as so defined, which the Bank has approved or L free-limit Sub-project as so defined, for which the Bank has authorized withdrawals from the Loan Account, and which are consistent with the criteria set forth in Schedule 4 to this Agreement.

5 -4- (g) "BNH loans" means the loans from the Borrower to a State Bank referred to in Section 3.03 (ii) (A) of this Agreement. (h) "FINEST II" means a credit program established by the Borrower's Resolution No. 49/76 (particularly Articles 1.1 (b) and 3 thereof) under which a Project State receives financial assistance for purposes of financing the carrying out of water supply and sewerage projects within such Project State, and which can be substantially described as follows: (i) the Borrower makes loans to its financial agent (normally a State Bank controlled by such Project State) which in turn relends the proceeds of such loans to such Project State; (ii) the amount of such loans does not exceed the equivalent of the aggregate of funds that such Project State has made, or proposes to make, available to the Company operating in such Project State for purposes of the carrying out of the above-mentioned projects in Small Communities within such Project State; (iii) such Project State deposits the proceeds of such loans in the water supply and sewerage financing fund referred to in the Applicable PLANASA Agreement (as such term is defined below); and (iv) such Company retains a determined percentage of the funds referred to in (ii) above as an equity contribution from such Project State while it pays the balance of such funds within a certain period into the above-mentioned fund; "FINEST II Sub-project" means a Sub-project, as so defined, which is financed under FINEST II; and "Approved FINEST II Subproject" means an Approved Sub-project as so defined, which is financed under FINEST II. (i) "FINEST III" means a credit program established by the Borrower's Resolution No. 49/76 (particularly Articles 1.1 (c) and 4 thereof) under which a Company receives financial assistance for purposes of carrying out water supply and sewerage projects for Small Communities within the Project State in which such Company operates, and which can be substantially described as follows: (i) the Borrower makes loans to a financial agent (normally the State Bank controlled by such Project State) which in turn relends the proceeds of such loans to such Project State; (ii) such Project State undertakes to make available such proceeds, together with an equivalent amount of funds of such Project State (originated other than in loans from the Borrower), to such Company for purposes of the carrying out of the above-mentioned projects; and (iii) a determined percentage of the aggregate of the proceeds and the funds referred to in (ii) above is retained by such Company as an

6 - 5 - equity contribution from such Project State, while the balance is paid back by such Company to such Project State within a certain period; "FINEST III Sub-project" means a Sub-project, as so defined, which is financed under FINEST III; and "Approved FINEST III Sub-project" means an Approved Sub-project, as so defined, which is financed under FINEST III. (j) "Applicable PLANASA Agreement" means any of the following agreements: (i) in the case of Sub-projezts for purposes of Part A of the Project, the agreement between, inter alia, the Borrower and the State of Parana and Banco do Estado do Parana and SANEPAR, dated March 23, 1972, as such agreement has been renewed to encompass all operations of SANEPAR in respect of PLANASA, and the term includes each financing contract covering specific Sub-projects entered or to be entered into by the same parties to such agreement pursuant to paragraph 3 of clause 3 thereof (each such financing contract hereinafter called CTN- Parana); (ii) in the case of Sub-projects for purposes of Part B of the Project, the agreement between, inter alia, the Borrower and the State of Santa Catarina and Banco do L :tado da Santa Catarina and CASAN dated September 17, 1971, as a.zh agreement has been renewed to encompass all operations of CASAN in respect of PLANASA, and the term includes each financing contract covering specific Sub-projects, entered or to be entered into by the same parties to such agreement pursuant to paragraph 3 of clause 3 thereof (each such financing contract hereinafter called CTN-Santa Catarina); and (iii) in the case of Sub-projects for purposes of Part C of the Project, the agreement between the Borrower and the State of Rio Grande do Sul and Banco do Estado do Rio Grande do Sul and CORSAN dated December 22, 1975, as such agreement has been renewed to encompass all operations of CORSAN in respect of PLANASA, and the term includes each financing contract covering specific Sub-projects, entered or to be entered into by the same parties to such agreement pursuant to paragraph 3 of clause 3 thereof (each such financing contract hereinafter called CTN-Rio Grande do Sul). (k) "CTN" means, as applicable, each CTN-Parana or each CTN-Santa Catarina or each CTN-Rio Grande do Sul. (1) "Superintendencia" means Superintendencia do Sistema Financeiro de Saneamento, a superintendencia of the Borrower entrusted with the Borrower's financing and technical functions concerning sanitation of urban areas in Brazil, or any successor thereto.

7 (m) "Small Community" means a community within a Project State which, in accordance with the Guarantor's census applicable at the date of appraisal of a Sub-project, has an urban population of not more than 5,000 inhabitants. (n) "Medium-size City" means a city within a Project State, excluding the capital city of such Project State, which, in accordance with the Guarantor's census applicable at the date of appraisal of a Sub-project, has an urban population of more than 5,000 inhabitants. (o) "Law" means the Guarantor's Law No. 6528, published in the Guarantor's Didrio Oficial on May 12, 1978, and "Decree" means the Guarantor's Decree No , published in the Guarantor's Diario Oficial on November 7, 1978, which regulates the Law, the Law and the Decree hereinafter sometimes called the Legislation. (p) "Fiscal Year" means the fiscal year of SANEPAR, CASAN or CORSAN. (q) "UPC" means a constant monetary unit which is revalued quarterly on the basis of the National Treasury Bond Index of the Guarant6r. (r) "EVG" means a five-year investment and financing plan prepared by each Company which is annually updated and furnished to the Borrower for approval. ARTICLE II The Loan Section The Bank agrees to lend to the Borrower, on the terms and conditions in the Loan Agreement set forth or referred to, an amount in various currencies equivalent to one hundred thirty million dollars ($130,000,000). Section (a) The amount of the Loan may be withdrawn from the Loan Account for: (i) 54% of the amounts disbursed, after the date of this Agreement, by the Borrower under BNH loans in respect of reasonable expenditures made by a Company for goods or civil works or services (or

8 -7- any combination thereof) required for carrying out an Approved Sub-project; (ii) (iii) 27% of the amounts disbursed, after the date of this Agreement, by the Borrower in respect of loans made to a Project State according to Section 3.03 (ii) (B) of this Agreement in respect of reasonable expenditures made by a Company for goods or civil works or services (or any combination thereof) required for carrying out an Approved FINEST II Sub-project; 54% of the amounts disbursed, after the date of this Agreement, by the Borrower in respect of loans made to a Project State according to Section 3.03 (ii) (C) of this Agreement in respect of reasonable expenditures made by a Company for goods or civil works or services (or any combination thereof) required for carrying out an Approved FINEST III Sub-project; (iv) 54% of the amounts disbursed, after the date of this Agreement, by the Borrower for consulting services with respect to Part D of the Project; and (v) 100% of the foreign costs for consulting services with respect to Part E of the Project; provided, however, that, in the case the amounts disbursed by the Borrower may qualify for withdrawals from the Loan Account under sub-paragraphs (ii) and (iii) of paragraph (a) above, withdrawals from the Loan Account shall be made, at the Borrower's choice, under any of such sub-paragraphs but not under both. (b) A free-limit Sub-project shall be a Sub-project, the estimated total investment cost of which shall not exceed the sum of $2,000,000 equivalent, which has been previously approved by the Borrower and which will be located in a Medium-size City or Small Community for which no Approved Sub-project has been or is being carried out. (c) Except as the Bank and the Borrower shall otherwise agree, the aggregate amount of payments made out of the proceeds of the Loan for purposes of: (i) Part A of the Project, shall not

9 exceed the equivalent of $54,750,000; (ii) Part B of the Project, shall not exceed the equivalent of $27,800,000; (iii) Part C of the Project, shall not exceed the equivalent ci $46,750,000; (iv) Part D of the Project, shall not exceed the equivalent of $500,000; and (v) Part E of the Project, shall not exceed the equivalent of $200,000; provided, however, that should the Bank and the Borrower agree on a different allocation of the proceeds of the Loan for each Part of the Project described in Schedule 1 to this Agreement, the allocation set forth herein shall be changed accordingly. (d) Except as the Bank and the Borrower shall otherwise agree, no withdrawals shall be made on account of: (i) expenditures made by a Company before the date of this Agreement; (ii) expenditures made by a Company, other than the one taken into account for purposes of Section 8.01 (a) of this Agreement, unless evidence satisfactory to the Bank shall have been furnished to the Bank that the execution and delivery of this Agreement, on behalf of such onpany and on behalf of the Project State where suci. Company operates, have been duly authorized or ratified by all necessary corporate or governmental action. As part of such evidence, the Bank shall be furnished an opinion or opinions catisfactory to the Bank of counsel acceptable to the Bank showing: (A) that this Agreement has been duly authorized or ratified by, and executed and delivered on behalf of, such Company and such Project State and is legally binding upon such Company and such Project State in accordance with its terms; and (B) that all necessary acts, consents and approvals to be performed or given by the Guarantor and by such Project State, by their political subdivisions 'other than such Project State) or agencies, by any agency of any such political subdivisions, or otherwise to be performed or given in order to authorize the carrying out of each Part of the Project related to such Project State and to enable such Project State, the Borrower and the Company operating in such Project State to perform all of the obligations of each of them contained in this Agreement (including the

10 - 9 - obligations thereof relating to procurement) together with all necessary powers and rights in connection therewith, including the full power and authority of such Company to construct and operate the Sub-projects, have been performed or given; and (iii) disbursements made by the Borrower to finance expenditures incurred (other than expenditures in respect of const-uction) by a Company in respect of a Sub-project subject to the Bank's approval, if such expenditures shall have been made more than one hundred twenty days prior to the date on which the bank shall have received in respect of such Sub-project the application and information required by Section 2.03 (a) of this Agreement or, in respect of a free-limit Sub-project, more than one hundred twenty days prior to the date on which the Bank shall have received in respect of such free-limit Sub-project the request and information required by Section 2.03 (b) of this Agreement. (e) If the Bank shall have reasonably determined that the: (A) procurement of any item is inconsistent with the procedures set forth or referred to in this Agreement; or (B) selection and approval by the Borrower of a Sub-project, or -he manner in which an Approved Sub-project is being carried out, are not consistent with the criteria set forth in Schedule 4 to this Agreement, no expenditures therefor shall be financed out of the proceeds of the Loan and the Bank may, without in any way restricting or limiting any other right, power or remedy of the Bank under the Loan Agreement, by notice to the Borrower, cancel such amount of the Loan as, in the Bank's reasonable opinion, represents the amount of such expenditures which would otherwise have been eligible for financing out of the proceeds of the Loan. Section (a) When presenting a Sub-project (other than a free-limit Sub-project) to the Bank for approval, the Borrower shall furnish to the Bank an application, in form satisfactory to the Bank, together with (i) an appraisal (including economic and financial analysis) of the Sub-project, including a description of the expenditures proposed to be financed out of the proceeds of the Loan; (ii) the proposed financial terms and conditions for I

11 such Sub-project, including the CTN or CTNs covering such Subproject; and (iii) such other information as the Bank shall reasonably request. (b) Each request by the Borrower for authorization to make withdrawals from the Loan Account in respect of a free-limit Sub-project shall contain: (i) a summary description of the Sub-project, including a description of the expenditures proposed to be financed out of the proceeds of the Loan; (ii) the financial terms and conditions for such Sub-project, including the CTN or CTNs covering such Sub-project; and (iii) such other information as the Bank shall reasonably request. (c) Except as the Bank and the Borrower shall otherwise agree, applications and requests made pursuant to the provisions of paragraphs (a) and (b) of this Section shall be presented to the Bank on or before March 31, Section The Closing Date shall be June 30, 1983, or such later date as the Bank shall establish. The Bank shall promptly notify the Borrower and the Guarantor of such later date. Section Except as the Bank shall otherwise agree, procurement of the goods and civil works required for the Project shall be governed by the provisions of Schedule 3 to this Agreement. Section The Borrower shall pay to the Bank a commitment charge at the rate of three-fourths of one per cent (3/4 of 1%) per annum on the principal amount of the Loan not withdrawn from time to time. Seztion The Borrower shall pay interest at the rate of eight and twenty-five hundredths per cent (8.25%) per annum on the principal amount of the Loan withdrawn and outstanding from time to time. Section Interest and other charges shall be payable semiannually on April 1 and October 1 in each year. Section The Borrower shalj repay the principal amount of the Loan in accordance with the awortization schedule set forth in Schedule 2 to this Agreement.

12 ARTICLE III Execution of the Project Section SANEPAR shall carry out Part A of the Project, CASAN shall carry out Part B of the Project, CORSAN shall carry out Part C of the Project, the Companies and the Borrower shall carry out Part D of the Project, and the Borrower shall carry out Part E of the Project, all with due diligence and efficiency and in conformity with appropriate administrative, financial, ecological and public utility practices. Section (a) The Borrower and each of the Project States shall provide the Company in question with such funds (additional to the proceeds of the Loan), facilities, services and other resources as shall be necessary or appropriate to enable such Company to carry out the Approved Sub-projects which such Company shall carry out under the Project. (b) The Borrower shall: (i) relend the proceeds of the Loan, as and when needed for purposes of the Project, to the State Bank controlled by the Project State where each Approved Sub-project will be located; (ii) cause such State Bank to relend such proceeds for purposes of each such Approved Sub-fp.roject to (A) the Company operating in such Project State, if such Approved Subproject is financed under a BNH loan, or (B) to such Project State for the purposes of (1) replenishing a fund designated by such Project State in the Applicable PLANASA Agreement to finance water supply and sewerage projects, in the case of an Approved FINEST II Sub-project, or (2) making such proceeds available to such Company, in the case of an Approved FINEST III Sub-project, all in a manner consistent with the Applicable PLANASA Agreement. (c) The Borrower shall, in addition to its obligations under paragraph (a) above, provide such funds, facilities, services and other resources as shall be necessary or appropriate for the carrying out of Parts D and E of the Project. (d) The obligations of the Borrower and of the Project States under Section 3.02 (a) shall be several and shall be subject to Sections 3.03 and 3.04 of this Agreement, respectively. Section The Borrower, with due diligence and efficiency and for the purposes of complying with its obligations under

13 Section 3.02 (a) of this Agreement, shall: (i) assist each Company in the preparation and appraisal of each Sub-project; and (ii) make (A) loans to each State Bank in respect of a Sub-project in an amount equal to one-half of the amount of the loan or loans made (or to be made) by such State Bank to sucli Company for purposes of such Sub-project, 'or (B) loans to the State Bank controlled by the Project State where such Company operates in an amount equivalent to the amounts made available by such Project State to such Company for the financing of FINEST II Sub-projects, and cause such State Bank to relend the proceeds of such loans to such Project State, or (C) loans to the State Bank controlled by the Project State where such Company operates in an amount equivalent to one-half of the amounts made available by such Project State to such Company for the financing of a FINEST III Subproject, and cause such State Bank to relend the proceeds of such loans to such Project State, all in a manner consistent with the obligations of such Company under Section 5.07 of this Agreement and of such Company and the Borrower under the Applicable PLANASA Agreement. Section Each Project State shall, for the purposes of complying with its obligations under Section 3.02 (a) of this Agreement, make available to the Company operating in such Project State, partly as loans and partly as equity contributions into such Company's equity: (i) amounts equivalent to the loans referred to in Section 3.03 (ii) (B) and (C) of this Agreement; (ii) the proceeds of the loans referred to in Section 3.03 (ii) (C) of this Agreement; and (iii) cause the State Bank controlled by such Project State to make to the Company operating in such Project State, the loans referred to in Section 3.03 (ii) (A) of this Agreement, all in a manner consistent with the obligations of slich Company under Section 5.07 o. this Agreement and of such Company and such Project State under the Applicable PLANASA Agreement. Section (a) In order to assist the Companies and the Borrower in the carrying out of Parts D and E of the Project, the Companies and the Borrower shall employ consultants whose qualifications and experience, as well as the terms and conditions of the contract under which the services of such consultants shall be performed, shall be satisfactry to the Bank. (b) SANEPAR, CASAN and CORSAN shall, not late, than December 31, 1980, furnish through the Borrower to the Bank a plan on their part, satisfactory to the Bank, such plan to include, inter alia, the terms of reference, manpower estimates and a schedule

14 for execution, for the carrying out of Part D (1), (2) and (3) of the Project, respectively, and shall thereafter take all such action as shall be necessary on their part for the carrying out of Part D (1), (2) and (3) of the Project, respectively, in accordance with the schedule referred to herein. (c) The Borrower shall, not later than June 30, 1980, furnish to the Bank, a plan, satisfactory to the Bank, such plan to include, inter alia, the terms of reference, manpower estimates and a schedule for execution, for the carrying out of Part E of the Project, and shall thereafter take all such action as shall be necessary for the carrying out of Part E of the Project, in accordance with the schedule referred to herein. Section (a) Each Company undertakes to insure, or make adequate provision for the insurance of, the imported goods to be financed out of the proceeds of the Loan against hazards incident to the acquisition, transportation and delivery thereof to the place of use or installation, and for such insurance any indemnity shall be payable in a currency freely usable by such Company to replace or repair such goods. (b) Except as the Bank shall otherwise agree, such Company shall cause all goods and services financed out of the proceeds of the Loan to be used exclusively for Approved Sub-projects. Section (a) Each Company shall furnish through the Borrower to the Bank, promptly upon their preparation, the plans, specifications, reports, contract documents and construction and procurement schedules for the Project, and any material modifications thereof or additions thereto, in such detail as the Bank or the Borrower shall reasonably request. (b) Each Company: (i) shall maintain records and procedures adequate to record and monitor the progress of the Project and of each Approved Sub-project carried out thereunder by each such Company (including their cost and the benefits to be derived from them), to identify the goods and services financed out of the proceeds of the Loan, and to disclose their use in each Approved Sub-project; (ii) shall enable the Bank's accredited representatives to visit the facilities and construction sites included in each such Approved Sub-project and to examine the goods financed out of the proceeds of the Loan and any relevant records and documents in respect of each such Approved Sub-project; and (iii) shall furnish through the Borrower to the Bank every three months

15 all such information as the Bank shall reasonably request concerning the Project and each such Approved Sub-project, their cost and, where appropriate, the benefits to be derived from them, the expenditure of the proceeds of the Loan and the goods and services financed out of such proceeds. (c) Promptly after completion of the Project, but in any event not later than four months after the Closing Date or such later date as may be agreed for this purpose between the Borrower and the Bank, each Company shall prepare a report satisfactory to the Bank on the execution and initial operation of the Part of the Project that shall be carried out by each Company. On the basis of these reports, the Borrower shall prepare and furnish to the Bank, not later than six months after the Closing Date, a report, of such scope and in such detail as the Bank shall reasonably. reque.t, on the execution and initial operation of the Project, its cost and the benefits derived and to be derived from it, the performance by the Borrower, each Company, each Project State and the Bank of their respective obligations under the Loan Agreement and the accomplishment of the purposes of the Loan. (b) The Borrower and each Company shall enable the Bank's representatives to examine all plants, installations, sites, works, buildings, property and equipment of the Borrower or of each such Company and, in respect of each Approved Sub-project, any relevant records and documents. Section (a) The Borrower shall not furnish to the Bank, either for approval thereof or for authorizations to make withdrawals from the Loan Account therefor, a Sub-project which has not been previously approved by the Borrower, nor shall the Borrower approve a Sub-project to be financed out of the proceeds of the Loan which is not consistent with the criteria set forth in Schedule 4 to this Agreement. (b) Each Company shall select each Sub-project being furnished by each such Company to the Borrower for approval in a manner consistent with the criteria referred to in (a) above and shall ensure that such criteria are being consistently applied by each such Company in the carrying out of each Approved Subproject which each such Company is carrying out under the Project. ARTICLE IV Additional Covenants of the Borrower Section The Borrower shall conduct its operations and affairs in respect of the Project in accordance with sound

16 financial and administrative standards and practices, with qualified management and personnel, and in accordance with Laws No. 4,380 of August 21, 1964; No. 5,762 of December 14, 1971; and Decree No. 75,512 of July 23, Section The Borrower shall maintain records adequate to reflect in accordance with consistently maintained sound accounting practices its operations and financial condition in respect of PLANASA and the Project. Section The Borrower shall: (i) have its accounts and financial statements (balance sheets, statements of income and expenses and related statements) for each fiscal year audited, in accordance with sound auditing principles consistently applied, by independent auditors acceptable to the Bank; (ii) furnish to the Bank as soon as available, but in any case not later than four months after the end of each such year, (A) certified copies of its financial statements for such year as so audited and (B) the report of such audit by said auditors, of such scope and in such detail as the Bank shall have reasonably requested; and (iii) furnish to the Bank such other information concerning such accounts and financial statements and the audit thereof as the Bank shall from time to time reasonably request. Section (a) The Borrower represents that at the date of this Agreement no lien exists on any of its assets as security for any debt except as otherwise currently reported to the Bank or stated in writing. (b) The Borrower undertakes that, except as the Bank shall otherwise agree: (i) if the Borrower shall create any lien on any of its assets as security for any debt, such lien will equally and ratably secure the payment of the principal of, and interest and other charges on, the Loan, and in the creation of any such lien express provision will be made to that effect, at no cost to the Bank; and (ii) if any statutory lien shall be created on any assets of the Borrower as security for any debt, the Borrower shall grant, at no cost to the Bank, an equivalent lien satisfactory to the Bank to secure the payment of the principal of, and interest and other charges on, the Loan; provided, however, that the foregoing provisions of this paragraph shall not apply to: (A) any lien created on property, at the time of purchase thereof, solely as security for the payment of the purchase price of such property; or (B) any lien arising in the ordinary course of banking transactions and securing a debt maturing not more than one year after the date on which it is originally incurred.

17 Section The Borrower shall take all such action as shall be necessary or advisable to enable each of the Companies and the Guarantor, as the case may be, to comply with their respective obligations under Section 5.07 of this Agreement and Section 3.02 (b) of the Guarantee Agreement. Section The Borrower shall: (a) continue its studies on the appropriate technical methods for extending water supply services and waste disposal systems into low-income areas and into areas where conventional systems are not technically feasible or economically affordable by the users; and (b) provide to the Bank for review and comment the results of such studies and the proposals of the Borrower for applying the techniques adopted on the basis of such results to other such areas, including, inter alia, those within the Project States. Section The Borrower shall furnish to the Bank, promptly, but in any event not later than 45 days after receipt from any Project Company, the information referred to in Sections 3.07, 5.05, 5.09 and 5.11 of this Agreement. ARTICLE V Additional Covenants of the Project Companies Section Each Company shall at all times manage its affairs, maintain its financial position, plan its future expansion and conduct its business and undertaking, all in accordance with sound business, financial and public utility practices, and under the supervision of experienced and competent management assisted by adequate and competent staff. Section Each Company shall: (a) at all times take all necessary steps to maintain its existence and its right to carry on operations, and to acquire and retain all rights, powers, privileges and franchises which are necessary or useful for the purpose of complying with its obligations under this Agreement or for the efficient conduct of its business and undertaking;

18 (b) at all times operate and maintain the plants, machinery, equipment and other property owned or operated by it and promptly make all necessary repairs and renewals thereof, all in accordance with sound engineering and public utility practices; and (c) not sell, lease, transfer or otherwise dispose of any of the property or assets owned or operated by it, if such sale, lease, transfer or disposition would materially and adversely affect the efficient carrying out of the Project. Section Each Company shall make provision satisfactory to the Bank for insurance against such risks and in such amounts as shall be consistent with sound public utility practices. Section Each Company shall maintain records adequate to reflect in accordance with consistently sound ac-ounting practices its operations and financial condition. Section Each Company shall: (i) have its accounts and financial statements (balance sheets, statements of income and expenses and related statements) for each fiscal year audited, in accordance with sound auditing principles consistently applied, by independent auditors acceptable to the Bank; (ii) beginning with the 1979 fiscal year, furnish through the Borrower to the Bank as soon as available, but in any case not later than four months after the end of each such year, (A) certified copies of such financial statements for such year as so audited, and (B) the report of such audit by said auditors, of such scope and in such detail as the Bank shall have reasonably requested, which report shall include a statement of compliance during each such year by each Company of the covenants contained in this Agreement; and (iii) furnish through the Borrower to the Bank such other information concerning the accounts and financial statements of each such Company and the audit thereof as the Bank shall from time to time reasonably request. In addition, each such Company shall, not later than March 31 in each year until the Closing Date, furnish through the Borrower to the Bank five-year financial projections expressed in local currency and UPCs and set forth in an income statement, statement of cash flow, balance sheet and calculation of fixed assets in operation, in such detail as the Bank shall reasonably request. Section Each Company shall correct the monetary value of its fixed assets in service at the end of each fiscal year in accordance with the provisions of Article 185 of the Guarantor's Law No

19 Section (a) Except as the Bank shall otherwise agree, the Borrower and each of the Companies shall take all such action (including action with respect to the filing of appropriate applications with respect to the setting or adjustment of the Company's rates for its water supply and sewerage services) as shall be necessary or advisable to cause the Company's rates for such services to be set and maintained at such levels as will produce revenues, as permitted by the Legislation, which shall be sufficient, fter covering the Company's operating costs and depreciation charges in accordance with sound water supply and sewerage utility and financial practices, as required by the Legislation, to enable the Company to earn an annual rate of return (taxa de remuneragao autorzada) on permissible investment (investimento reconhecido), as such terms are defined in the Legislation, such taxa to be set or increased gradually every year so that, by 1983, the taxa applicable for that year and all years thereafter shall be not less than that provided in the Legislation. (b) The term "operating costs and depreciation charges" includes, as provided in the Legislation: (i) operating costs (despesas de exploragao); (ii) provision for bad debts (provisao para devedores); (iii) straight-line depreciation of assets based on the useful lives of depreciable assets in operation (quotas de depreciaiao); and (iv) amortization of capitalized operating costs (amortizagoes de despesas). Section Each Company shall: (a) prepare with the Borrower, in accordance with the Legislation, a proposal for tariffs for sewage collection and treatment services, including a schedule for putting into effect such tariffs; (b) not later than January 31, 1981, furnish such proposal through the Borrower to the Bank for approval; and (c) not later than January 31, 1982, put into effec- such proposal according to such schedule. Section Each Company shall, not later than December 31, 1980, furnish through the Borrower to the Bank for review and comment a plan for production metering for each major water system operated by the respective Company, including a schedule for execution, and shall thereafter put such plan into effect.

20 Section CORSAN shall, not later than December 31, 1981, establish and adequately staff, and shall thereafter maintain, an internal audit office satisfactory to the Bank. Section Each Company shall, not later than June 30, 1980, establish a system of monitoring indicators satisfactory to the Borrower and the Bank and shall furnish through the Borrower to the Bank, not later than two months after the end of each quarter, a progress report which shall include such itformation as the Bank shall reasonably request, including the following: (a) progress of Project execution, including, in addition to the information required under Section 3.07 (b) (iii) of this Agreement, details on design completion, physical execution of the works, and disbursements; (b) statistical data on the number of water and sewer connections, volume of water produced, volume of water and sewerage billed and average rates; and (c) preliminary financial statements setting forth significant operating and financial ratios separately for water supply and sewerage. ARTICLE VI Additional Covenants of States of Parana, Santa Catarina and Rio Grande do Sul Section Each Project State covenants and warrants that the Project is of paramount importance to its economic development and the social welfare of its inhabitants, and that it will fully support ths Project by cooperating with the Company operating in each such Project State in the execution of the Project and by providing, promptly as needed, the funds, facilities, services and other resources on its part required for the operation and maintenance of the facilities and services included in the Project. Section Each Project State shall take or cause its agencies and instrumentalities to take all such action as shall be required to assist the Company operating in each such Project State in the performance of the obligations of such Company under

21 this Agreement, including the obligations of such Company specified in Sections 3.01, 3.05 (b)l 5.07, 5.08, 5.09, 5.10 and 5.11 of this Agreement. ARTICLE VII Remedies of the Bank Section For the purposes of Section 6.02 of the General Conditions, the following additional events are specified pursuant to paragraph (k) thereof: (a) the Borrower or any of the Project Companies or the Project States or the Project State Banks shall have failed to perform any of its respective obligations (i) under the Applicable PLANASA Agreement, or (ii) in respect of any of the Project States or Project Companies under this Agreement; (b) any authority having jurisdiction shall have taken any action for the dissolution or disestablishment of any of the Project Companies or for the suspension of its operations; (c) any of the Estatutos Sociais shall have been amended so as to materially and adversely affect the carrying out of the Project or the operations or financial condition of thf Company in question; (d) an event shall have occurred or any action shall have been taken, Licluding any action by the Guarantor or any of the Project States, which will materially and adversely affect PLANASA or the carrying out of the Project or the financial condition or operations of the Borrower or the financial condition or operations, including the setting or adjustment of the rates charged for its services, of any of the Project Companies; (e) a change shall have been made in any of the Applicable PLANASA Agreements which will materially and adversely affect the carrying out of any Approved Sub-project, the operations of the Company or of the State Bank which are parties to such Applicable PLANASA Agreement or which will result in a substantive modification of the financial conditions under which Approved Subprojects are financed; and (f) an extraordinary situation shall have arisen which shall make it improbable that aiy of the Project Companies or

22 Project States will be able to perform its respective obligations under this Agreement or exercise its respective rights under the Applicable PLANASA Agreement; provided, however, that if the event referred to in this paragraph (f) shall have occurred and be continuing, the Bank may suspend the right of the Borrower to make withdrawals from the Loan Account only in respect of amounts allocated under Section 2.02 of this Agreement to any part of the Project for the respective Company or Project. State to which such event has occurred. Section For the purposes of Section 7.01 of the General Conditions, the following additional events are specified pursuant to paragraph (h) thereof: (a) any of the events specified in paragraphs (b), (c) or (d) of Section 7.01 of this Agreement shall occur; and (b) any of the events specified in paragraphs (a) or (e) of Section 7.01 of this Agreement Ohall occur and shall continue for a period of sixty days after notice thereof shall have been given by the Bank to the Borrower, to the Project State in question and to the Company operating in such Project State. ARTICLE VIII Effective Date; Termination Section The following events are specified as additional conditions to the effectiveness of the Loan Agreement within the meaning of Section (c) of the General Conditions: (a) that the execution and delivery of this Agreement on behalf of one of the Project States and of the Company operating in such Project State have been duly authorized or ratified by all necessary governmental and corporate action; and (b) that this Agreement has been duly registered by Banco Central do Brasil. Section The following are specified as additional matters, within the meaning of Section (c) of the General Conditions, to be included in the opinions to be furnished to the Bank: (a) that this Agreement has been duly authorized or ratified by, and executed and delivered on behalf of, the Project State

23 taken into account for purposes of Section 8.01 (a) of this Agreement and of the Project Company operating in such Project State, and is legally binding upon them in accordance with its terms; and (b) that all necessary acts, consents and approvals to be performed or given by the Guarantor and by the Project State referred to in paragraph (a) above, by their political subdivisions (other than such Project State) or agencies, by any agency of any such political subdivisions, o. otherwise to be performed or given in order to authorize the carrying out of each Part of the Project related to such Project State and to enable such Project State, the Borrower and the Company operating in such Project State to perform all of the obliga:ions of each of them contained in this Agreement (including the obligations thereof relating to procurement) together with all necessary powers and rights in connection therewith, including the full power and authority of such Company to construct and operate the Subprojects, have been performed or given. Section The date a L (s ( is hereby specified for the purpose of Secti 12. of the General Conditions. ARTICLE IX Addresses Section 9.01, The following addresses are specified for the purposes of Section of the General Conditions: For the Bank: International Bank for Reconstruction and Development 1818 H Street, N.W. Wrshington, D.C United States of America Cable address: INTBAFRAD Washington, D.C. Telex: (ITT) (RCA) or (WUI)

24 For the Borrower: Banco Nacional da Habita-o Av. Republica do Chile Rio de Janeiro, R.J. Brazil Cable address: Telex: For SANEPAR: HABITAgAO Rio Companhia de Saneamento do Parana Rua Eng. Reboucas, 1376 Curitiba, Parana Brazil CEP Telex: (041) 5913 For CASAN: Companhia Catarinense de Aguas e Saneamento Rua Emilio Blum, X0 11 Florianopolis, Santa Catarina Brazil CEP Telex: (048) 2243 CASNBR For CORSAN: Companhia Rio Grandense de Saneamento Rua Caldas Junior, andar Porto Alegre, Rio Grande do Sul Brazil CEP 90000

25 For the State of Parana: Exmo. Sr. Governador do Estado Estado do Parana Palacio Iguaqu Curitiba, Parana Brazil Telex: For the State of Santa Catarina: Exmo. Sr. Governador do Estado Estado da Santa Catarina Palacio do Governo Praca 15 de Novembro Florianopolis, Santa Catarina Brazil Telex: For the State of Rio Grande do Sul: Exmo. Sr. Governador do Estado Estado do Rio Grande do Sul Palacio dos A orianos Rio Grande do Sul Brazil Telex: Section Any action required or permitted to be taken, and any documents required or permitted to be executed, under this Agreement on behalf of one of the Project States may be taken or executed b- the Governor of such Project State o- such other person or persons as he shall designate in writii., and such Project State shall furnish to the Bank sufficient evieence of the authority and the authenticated specimen signature of each such person.

26 Section Any action required or permitted to be taken, and any document required or permitted to be executed, under this Agreement on behalf of one of the Project Companies may be taken or executed by its President or such other person or persons as he shall designate in writing, and such Company shall furnish to the Bank sufficient evidence of the authority and the authenticated specimen signature of each such person. Section Whenever the Bank, one of the Project States or one of the Project Companies shall, for purposes of the Project, write to each other or take any action or give any notice, as required or permitted as the case may be, they shall simultaneously furnish to the Borrower copies of all correspondence or documents or other information in respect thereof. IN WITNESS WHEREOF, the parties hereto, acting through their representatives thereunto duly authorized, have caused this 4grpement to b esigned in th ryespective names in the City of Federative Republic of Brazil, as of he day and year f rst above written. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT By Regional Vice President Latin America and the Caribbean BANCO NACIONAL DA HABITAQAO By Authorized Representative By Authorized Representative