Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized CONFORMED COPY

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1 Public Disclosure Authorized CONFORMED COPY CREDIT NUMBER HO Public Disclosure Authorized Development Credit Agreement (Transport Sector Rehabilitation Project) between Public Disclosure Authorized REPUBLIC OF HONDURAS and INTERNATIONAL DEVELOPMENT ASSOCIATION Dated April 28, 1993 CREDIT NUMBER HO DEVELOPMENT CREDIT AGREEMENT Public Disclosure Authorized AGREEMENT, dated April 28, 1993, between REPUBLIC OF HONDURAS (the Borrower) and INTERNATIONAL DEVELOPMENT ASSOCIATION (the Association). WHEREAS (A) the Borrower, having satisfied itself as to the feasibility and priority of the Project described in Schedule 2 to this Agreement, has requested the Association to assist in the financing of the Project; (B) the Association has received a letter dated December 23, 1992 from the Borrower describing a program of actions, objectives and policies for the period 1993 through 1996 designed to reform the transport sector in the Borrower s territory (the Program), and declaring the Borrower s commitment to the implementation of the Program; and WHEREAS the Association has agreed, on the basis, inter alia, of the foregoing, to extend the Credit to the Borrower upon the terms and conditions set forth in this Agreement; NOW THEREFORE the parties hereto hereby agree as follows:

2 ARTICLE I General Conditions; Definitions Section The "General Conditions Applicable to Development Credit Agreements" of the Association, dated January 1, 1985, with the last sentence of Section 3.02 deleted (the General Conditions) constitute an integral part of this Agreement. Section 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) "Civil Aviation Plan" means the Borrower s plan of action included as an annex to the Implementation Letter, designed to implement reforms in its aviation subsector, as such plan may be amended from time to time in terms acceptable to the Association; (b) "Decree No " means the Decreto No of the Borrower dated September 16, 1992, published in the Official Gazette (La Gaceta) on December 5, 1992, which established an implementation committee (such committee hereinafter referred to as IC) for the carrying out of a portion of Part A (v) of the Project; (c) "Decree No " means the Decreto No of the Borrower dated August 11, 1992, published in the Official Gazette (La Gaceta) on December 16, 1992, which established SSPF, amended by Decree No (Decreto No ) of the Borrower dated December 21, 1992, published in the Official Gazette (La Gaceta) on January 20, 1993; (d) "DGAC" means the Directorate General of Civil Aviation (Direccion General de Aeronautica Civil) of SECOPT; (e) "DGCCA" means the Directorate General of Roads and Airports Maintenance (Direccion General de Conservacion de Carreteras y Aeropuertos) of SECOPT; (f) "DGT" means the Directorate General of Transport (Direccion General de Transporte) of SECOPT; (g) "ENP" means the National Port Company (Empresa Nacional Portuaria) of the Borrower, established as a public entity with juridical personality pursuant to Decree No. 40 of the Borrower dated October 14, 1965, published in the Official Gazette (La Gaceta) on December 1, 1965, as amended to the date of this Agreement; (h) "ENP Contractual Arrangement" means the arrangement entered into between the Borrower and ENP on December 21, 1992, as the same may be amended from time to time in terms acceptable to the Association; (i) "FNH" means the Honduran National Railway (Ferrocarril Nacional de Honduras) of the Borrower, established as a public entity with juridical personality pursuant to Decree No. 48 of the Borrower dated May 7, 1958, published in the Official Gazette (La Gaceta) on May 8, 1958, as amended to the date of this Agreement; (j) "FNH Contractual Arrangement" means the arrangement entered into between the Borrower and FNH on December 21, 1992, as the same may be amended from time to time in terms acceptable to the Association; (k) "FY" means the fiscal year of the Borrower which begins on January 1 and ends of December 31 of each year; (l) "Highways Plan" means the Borrower s plan of action included as an annex to the Implementation Letter, designed to implement reforms, other than environmental reforms, within the highways subsector, as such plan may be amended from time to time

3 in terms acceptable to the Association; (m) "Implementation Letter" means the letter of even date herewith from the Borrower to the Association containing reference to the matters to be examined during the reviews referred to in Section 3.10 of this Agreement, and including as annexes thereto, the plans and the program referred to in Section 1.02 (a), (l), (n), (p), (r) and (v) of this Agreement; (n) "Institutional Development Plan" means the Borrower s plan of action included as an annex to the Implementation Letter, designed to: (i) strengthen SECOPT s institutional capabilities, as referred to in Part C (a) of the Project; (ii) implement environmental reforms within SECOPT; and (iii) revise the transport subsector regulatory framework, as such plan may be amended from time to time in terms acceptable to the Association; (o) "Lempiras" means the currency of the Borrower; (p) "Ports Plan" means the Borrower s plan of action included as an annex to the Implementation Letter, designed to implement reforms within the port subsector, as such plan may be amended from time to time in terms acceptable to the Association; (q) "Project Coordinating Unit" means SECOPT s Project coordinating unit referred to in Section 3.08 of this Agreement; (r) "Railways Plan" means the Borrower s plan of action included as an annex to the Implementation Letter, designed to implement reforms within the railways subsector, as such plan may be amended from time to time in terms acceptable to the Association; (s) "SECOPT" means the Secretariat of Communications, Public Works and Transport (Secretaria de Estado en el Despacho de Comunicaciones, Obras Publicas y Transporte) of the Borrower; (t) "Special Account" means the account referred to in Section 2.02 (b) of this Agreement; (u) "SSPF" means the Under Secretariat of Planning and Finance (Sub-Secretaria de Planificacion y Finanzas) within SECOPT governed by Decree No , as amended by Decree No ; (v) "TSIP" means the Borrower s transport sector investment program included as an annex to the Implementation Letter, to be financed in part with the proceeds of this Credit, as such program may be amended from time to time in terms acceptable to the Association; and (w) "UMA" means the Environmental Unit (Unidad del Medio Ambiente) of SECOPT. ARTICLE II The Credit Section The Association agrees to lend to the Borrower, on the terms and conditions set forth or referred to in the Development Credit Agreement, an amount in various currencies equivalent to forty six million nine hundred thousand Special Drawing Rights (SDR 46,900,000). Section (a) The amount of the Credit may be withdrawn from the Credit Account in accordance with the provisions of Schedule 1 to this Agreement for expenditures made (or, if the Association shall so agree, to be made) in respect of the reasonable cost of goods and services required for the Project described in Schedule 2 to this Agreement and to be financed out of the proceeds of the Credit. (b) The Borrower shall, for the purposes of the Project, open and maintain in dollars a special deposit account in its

4 Central Bank (Banco Central de Honduras) on terms and conditions satisfactory to the Association. Deposits into, and payments out of, the Special Account shall be made in accordance with the provisions of Schedule 5 to this Agreement. Section The Closing Date shall be December 31,1997 or such later date as the Association shall establish. The Association shall promptly notify the Borrower of such later date. Section (a) The Borrower shall pay to the Association a commitment charge on the principal amount of the Credit not withdrawn from time to time at a rate to be set by the Association as of June 30 of each year, but not to exceed the rate of one-half of one percent (1/2 of 1%) per annum. (b) The commitment charge shall accrue: (i) from the date sixty days after the date of this Agreement (the accrual date) to the respective dates on which amounts shall be withdrawn by the Borrower from the Credit Account or cancelled; and (ii) at the rate set as of the June 30 immediately preceding the accrual date or at such other rates as may be set from time to time thereafter pursuant to paragraph (a) above. The rate set as of June 30 in each year shall be applied from the next payment date in that year specified in Section 2.06 of this Agreement. (c) The commitment charge shall be paid: (i) at such places as the Association shall reasonably request; (ii) without restrictions of any kind imposed by, or in the territory of, the Borrower; and (iii) in the currency specified in this Agreement for the purposes of Section 4.02 of the General Conditions or in such other eligible currency or currencies as may from time to time be designated or selected pursuant to the provisions of that Section. Section The Borrower shall pay to the Association a service charge at the rate of three-fourths of one per cent (3/4 of 1%) per annum on the principal amount of the Credit withdrawn and outstanding from time to time. Section Commitment charges and service charges shall be payable semiannually on January 15 and July 15 in each year. Section (a) Subject to paragraphs (b) and (c) below, the Borrower shall repay the principal amount of the Credit in semiannual installments payable on each January 15 and July 15 commencing July 15, 2003, and ending January 15, Each installment to and including the installment payable on January 15, 2013 shall be one percent (1%) of such principal amount, and each installment thereafter shall be two percent (2%) of such principal amount. (b) Whenever: (i) the Borrower s gross national product per capita, as determined by the Association, shall have exceeded $790 in constant 1985 dollars for five consecutive years; and (ii) the Bank shall consider the Borrower creditworthy for Bank lending, the Association may, subsequent to the review and approval thereof by the Executive Directors of the Association and after due consideration by them of the development of the Borrower s economy, modify the terms of repayment of installments under paragraph (a) above by requiring the Borrower to repay twice the amount of each such installment not yet due until the principal amount of the Credit shall have been repaid. If so requested by the Borrower, the Association may revise such modification to include, in lieu of some or all of the increase in the amounts of such installments, the payment of interest at an annual rate agreed with the Association on the principal amount of the Credit withdrawn and outstanding from time to time, provided that, in the judgment of the Association, such revision shall not change the grant element obtained under the above-mentioned repayment modification. (c) If, at any time after a modification of terms pursuant to paragraph (b) above, the Association determines that the Borrower s economic condition has deteriorated significantly, the

5 Association may, if so requested by the Borrower, further modify the terms of repayment to conform to the schedule of installments as provided in paragraph (a) above. Section The currency of the United States of America is hereby specified for the purposes of Section 4.02 of the General Conditions. Section The Secretario de Estado en el Despacho de Hacienda y Credito Publico of the Borrower or such other person or persons as such Secretario de Estado shall appoint in writing are designated as representatives of the Borrower for the purpose of taking any action required or permitted to be taken under the provisions of Section 2.02 of this Agreement and Article V of the General Conditions. ARTICLE III Execution of the Project Section The Borrower declares its commitment to the objectives of the Project as set forth in Schedule 2 to this Agreement, and, to this end: (a) shall carry out: (i) through SECOPT, Parts A (i), (ii), (iii), a portion of Part A (v) (as reflected in the action plan referred to therein), B and C of the Project; and (ii) through IC, a portion of Part A (v) (as reflected in the action plan referred to therein) of the Project, all with due diligence and efficiency and in conformity with appropriate engineering, financial, administrative, technical and environmental practices, and shall provide, promptly as needed, the funds, facilities, services and other resources required for such Parts of the Project; (b) shall cause ENP to carry out a portion of Part A (v) (as reflected in the action plan referred to therein) of the Project with due diligence and efficiency and in conformity with appropriate financial, administrative, technical and environmental practices, and in accordance with the ENP Contractual Arrangement, and shall take or cause to be taken all action, including the provision of funds, facilities, services and other resources, necessary or appropriate to enable ENP to carry out a portion of Part A (v) of the Project, and shall not take or permit to be taken any action which would prevent or interfere with the carrying out of a portion of Part A (v) of the Project by ENP; (c) shall cause FNH to carry out Part A (iv) of the Project with due diligence and efficiency and in conformity with appropriate administrative, financial, technical and environmental practices, and in accordance with the FNH Contractual Arrangement and shall take or cause to be taken all action, including the provision of funds, facilities, services and other resources, necessary or appropriate to enable FNH to carry out Part A (iv) of the Project, and shall not take or permit to be taken any action which would prevent or interfere with the carrying out of Part A (iv) of the Project by FNH; and (d) the Borrower shall exercise its rights and comply with its obligations under the ENP and FNH Contractual Arrangements in such manner as to protect the interests of the Borrower and the Association, and to accomplish the purposes of the Credit, and, except as the Association shall otherwise agree, the Borrower shall not amend or terminate the ENP or the FNH Contractual Arrangements or any provision thereof. Section Except as the Association shall otherwise agree, procurement of the goods, works and consultants services required for the Project and to be financed out of the proceeds of the Credit shall be governed by the provisions of Schedule 3 to this Agreement. Section (a) The Borrower, through SECOPT, shall attain by the end of each FY during the implementation of the Project,

6 starting in 1993, the staff levels of DGCCA set forth in Part 2 (b) of Schedule 4 to this Agreement. (b) The Borrower shall cause ENP to attain by the end of each FY during the implementation of the Project, starting in 1993, the staff levels set forth in Part 2 (c) of Schedule 4 to this Agreement. (c) The Borrower shall cause FNH not to have, by the end of each FY during the implementation of the Project, starting in 1993, operational deficits exceeding the respective amounts set forth in Part 3 of Schedule 4 to this Agreement. Section (a) Without limitation to the provisions of Section 3.01 of this Agreement, the Borrower shall: (i) provide in its annual budget and make available promptly as needed, in Lempiras equivalent, as funds for the maintenance of the roads within the Borrower s territory, each FY, until the completion of the Project, the minimum amounts set forth in Part 1 of Schedule 4 to this Agreement; and (ii) within thirty days after the date in which such budget is approved each FY, furnish to the Association a copy of such approved budget. (b) In maintaining its road network, the Borrower shall attain the percentages set forth in Part 2 (a) of Schedule 4 to this Agreement. Section Without limitation to the provisions of Sections 3.01 and 3.04 of this Agreement, the Borrower shall: (a) not later than October 31, 1993 prepare and furnish to the Association, a program for maintaining and operating the airports within its territory, in terms acceptable to the Association; (b) provide in its annual budget and make available promptly as needed to DGAC, in Lempiras equivalent, as funds for the implementation of such program, the amount indicated in said program for each FY, starting in 1994, until an entity with juridical personality and financial autonomy has been established by the Borrower to carry out the operations of the aviation subsector; and (c) within thirty days after the date in which such budget is approved each FY, furnish to the Association a copy of such approved budget. Section (a) Without limitation to the provisions of Section 3.01 of this Agreement, the Borrower, through SECOPT, shall carry out the TSIP in a manner and in terms acceptable to the Association, subject to the following eligibility criteria for works to be carried out: all works shall yield an economic rate of return of at least 12% of the total cost of each work, such rate of return to be calculated in accordance with a methodology acceptable to the Association, except, that such rate of return shall not apply to the construction of access roads under the TSIP which represent, in the aggregate, 10% or less of the total cost of the construction of all access roads under such program, provided, however, that such access roads do not: (i) exceed 14 kilometers in length; and (ii) cost more than $650 per capita of the benefitted population. (b) The Borrower, through SECOPT, shall: (i) prior to the initiation of any work under the TSIP, carry out environmental impact assessments in terms acceptable to the Association; and (ii) carry out only those works under the TSIP which have been determined to be environmentally viable as a result of the assessments referred to in (i) herein. Section The Borrower, through SECOPT, shall not later than: (a) July 31, 1993 hire the consultants required to assist it in carrying out phase one of the plan referred to in Part C (a) of the Project; (b) December 15, 1993 hire the consultants required to assist in the completion of the execution of the plan referred to in Part C (a) of the Project; (c) October 31, 1993 hire the consultants required to assist it in carrying out Part C (b) of the Project; and (d) October 31, 1993 hire the consultants required to

7 assist the Borrower in the completion of the execution of Part C (c) (ii) of the Project. Section (a) Without limitation to the provisions of Section 3.01 of this Agreement, the Borrower shall operate and maintain in SECOPT, until the Closing Date, a unit, (the Project Coordinating Unit) with functions and responsibilities satisfactory to the Association, including, inter alia, the following: (i) the coordination and supervision of the Project; and (ii) the coordination and preparation of the reports referred to in Section 3.09 of this Agreement. (b) The Borrower, through SECOPT, shall ensure that the Project Coordinating Unit is at all times headed by a qualified professional and assisted by professional staff, all in number and qualifications satisfactory to the Association. Section Without limitation to the provisions of Section 9.06 of the General Conditions, the Borrower, through SECOPT, shall furnish to the Association by not later than May 31 and November 30 of each year, starting in November 1993 a report, of scope and detail satisfactory to the Association, concerning the progress in the implementation of the Project during the semester preceding the date of presentation of such report. Section (a) The Borrower, through SECOPT shall participate in annual reviews of Project implementation to be held in conjunction with the Association each month of June during Project implementation, beginning in Such reviews shall inter alia, focus on discussing the topics referred to in the Implementation Letter with regard to annual reviews and on analyzing the progress reports for the year in question referred to in Section 3.09 of this Agreement. As part of each such review, the Association may require that the Borrower, through SECOPT, prepare an action plan, satisfactory to the Association, to make adjustments in Project implementation. The Borrower, through SECOPT, shall furnish such action plan to the Association no later than one month after the conclusion of the review in question and shall thereafter carry out, or cause to be carried out, such action plan in accordance with its terms. (b) The Borrower, through SECOPT, shall participate in a Project implementation mid-term review to be held with the Association as part of the annual review to be held in June During such mid-term review, attention shall particularly focus, inter alia, on the topics referred to in the Implementation Letter with regard to the mid-term review. ARTICLE IV Financial Covenants Section (a) The Borrower shall maintain or cause to be maintained records and separate accounts adequate to reflect in accordance with consistently maintained sound accounting practices, the operations, resources and expenditures in respect of the Project. (b) The Borrower shall: (i) (ii) have the records and accounts referred to in paragraph (a) of this Section including those for the Special Account for each fiscal year audited, in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Association; furnish to the Association, as soon as available, but in any case not later than five months after the end of each such year the report of such audit by said auditors, of such scope and in such detail as the Association shall have reasonably requested; and

8 (iii) furnish to the Association such other information concerning said records, accounts, financial statements and the audits thereof as the Association shall from time to time reasonably request. (c) For all expenditures with respect to which withdrawals from the Credit Account were made on the basis of statements of expenditure, the Borrower shall: (i) (ii) (iii) (iv) maintain or cause to be maintained, in accordance with paragraph (a) of this Section, records and accounts reflecting such expenditures; retain, until at least one year after the Association has received the audit report for the fiscal year in which the last withdrawal from the Credit Account or payment out of the Special Account was made, all records (contracts, orders, invoices, bills, receipts and other documents) evidencing such expenditures; enable the Association s representatives to examine such records; and ensure that such records and accounts are included in the annual audit referred to in paragraph (b) of this Section and that the report of such audit contains a separate opinion by said auditors as to whether the statements of expenditure submitted during such fiscal year, together with the procedures and internal controls involved in their preparation, can be relied upon to support the related withdrawals. ARTICLE V Other Covenants Section The Borrower shall cause ENP and FNH to carry on its operations and conduct its affairs in accordance with sound administrative, financial, managerial, and technical practices under the supervision of qualified and experienced management assisted by competent staff in adequate numbers, all acceptable to the Association. ARTICLE VI Remedies of the Association Section Pursuant to Section 6.02 (h) of the General Conditions, the following additional events are specified: (a) Decree No or any provision thereof shall have been amended, suspended, abrogated, repealed or waived so as to affect materially and adversely, in the opinion of the Association, the ability of the Borrower to carry out Part A (v) of the Project. (b) the Borrower has taken any action or adopted any policy within its transport sector which is not consistent with the objectives of the Project; (c) Decree No or Decree or any provision thereof shall have been amended, suspended, abrogated, repealed or waived so as to affect materially and adversely, in the opinion of the Association, the ability of the Borrower to carry out Part C (a) of the Project; (d) Decree No. 40 or any provision thereof shall have been

9 amended, suspended, abrogated, repealed or waived so as to affect materially and adversely, in the opinion of the Association, the ability of ENP, to carry out its respective portion of Part A (v) of the Project, as reflected in the action plan referred to therein; (e) Decree No. 48 or any provision thereof shall have been amended, suspended, abrogated, repealed or waived so as to affect materially and adversely, in the opinion of the Association, the ability of FNH, to carry out Part A (iv) of the Project; (f) any of the parties to the ENP Contractual Arrangement shall have failed to comply with any of its obligations thereunder; (g) any of the parties to the FNH Contractual Arrangement shall have failed to comply with any of its obligations thereunder; and (h) the Borrower or any authority having jurisdiction shall have taken any action for the dissolution or disestablishment of ENP, or for the suspension of its operations. Section Pursuant to Section 7.01 (d) of the General Conditions, the following additional events are specified: (a) any event specified in paragraphs (a) or (b) or (c) or (d) or (e) or (f) or (g) of Section 6.01 of this Agreement shall occur and shall continue for a period of thirty days after notice thereof shall have been given by the Association to the Borrower; and (b) the event specified in paragraph (h) of Section 6.01 of this Agreement shall occur. ARTICLE VII Effective Date; Termination Section The following events are specified as additional conditions to the effectiveness of the Development Credit Agreement within the meaning of Section (b) of the General Conditions: (a) that UMA has: (i) started its operations within SSPF; and (ii) employed competent and qualified staff in adequate numbers to carry out its operations; (b) that the consultants for assisting the Borrower in the carrying out of phase one of Part C (c)(ii) of the Project have been employed; (c) that the Project Coordinating Unit has been established in accordance with Section 3.08 of this Agreement; and (d) that the SSPF has started its operations within SECOPT. Section The date July 27, 1993 is hereby specified for the purposes of Section of the General Conditions. Section The obligations of the Borrower under Sections III, IV and V of this Agreement shall cease and determine on the date on which this Agreement shall terminate or on the date twenty years after the date of this Agreement, whichever shall be the earlier. ARTICLE VIII Representatives of the Borrower; Addresses Section Except as provided in Section 2.09 of this Agreement, the Secretario de Estado en el Despacho de Comunicaciones, Obras Publicas y Transportes of the Borrower is designated as representative of the Borrower for the purposes of Section of the General Conditions.

10 Section The following addresses are specified for the purposes of Section of the General Conditions: For the Borrower: Barrio La Bolsa Tegucigalpa Honduras Cable address: Telex: For the Association: HACIENDA 1308 Tegucigalpa HACIENDA HO Honduras International Development Association 1818 H Street, N.W. Washington, D.C United States of America Cable address: INDEVAS Washington, D.C. Telex: (RCA) (FTCC) (WUI) or (TRT) IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized representatives, have caused this Agreement to be signed in their respective names in the District of Columbia, United States of America, as of the day and year first above written. REPUBLIC OF HONDURAS By /s/ Rene Arturo Bendana Authorized Representative INTERNATIONAL DEVELOPMENT ASSOCIATION By /s/ S. Shahid Husain Regional Vice President Latin America and the Caribbean SCHEDULE 1 Withdrawal of the Proceeds of the Credit 1. The table below sets forth the Categories of items to be financed out of the proceeds of the Credit, the allocation of the amounts of the Credit to each Category and the percentage of expenditures for items so to be financed in each Category: Amount of the Credit Allocated % of (Expressed in Expenditures Category SDR Equivalent) to be Financed (1) Works 25,190,000 80% (2) Goods under 690, % of foreign Parts B.2 expenditures and

11 and C (b) of 80% of local the Project expenditures (3) Consultants 5,550, % Services and Training (4) Periodic main- 7,510,000 80% until an tenance under aggregate amount Part B.1 (d) equivalent to of the Project SDR 3,500,000 has been disbursed from the Credit Account; 60% until an aggregate amount equivalent to SDR 6,100,000 has been disbursed from the Credit Account; and 45% thereafter (5) Unallocated 7,960,000 TOTAL 46,900, For the purposes of this Schedule: (a) the term "foreign expenditures" means expenditures in the currency of any country other than that of the Borrower for goods or services supplied from the territory of any country other than that of the Borrower; and (b) the term "local expenditures" means expenditures in the currency of the Borrower or for goods or services supplied from the territory of the Borrower. 3. Notwithstanding the provisions of paragraph 1 above, no withdrawals shall be made in respect of: (a) payments made for expenditures prior to the date of this Agreement, except that withdrawals, in an aggregate amount not to exceed SDR 1,230,000, may be made in respect of Categories (1) and (4) on account of payments made for expenditures before that date but after July 31, 1992; and (b) payments for expenditures under Part B.2 of the Project, unless the Borrower shall have employed the consultants to assist it in carrying out Part C (c)(i) of the Project. SCHEDULE 2 Description of the Project The objectives of the Project are to help the Borrower in: (a) developing the institutional and regulatory framework of its transport sector by: (i) encouraging a greater participation of the private sector in providing transport services; (ii) ensuring that investment and pricing policies are based on efficiency and equity considerations; (iii) strengthening SECOPT s capability to carry out planning and regulatory functions, including its capability to: (A) assess the environmental impact of the activities carried out by public and private entities and individuals within the sector; and (B) monitor the implementation of the recommendations of such assessments; (iv) restructuring the port subsector and redefining the role of ENP; (v) designing and implementing a strategy to develop the airport subsector; and (vi) rationalizing the railway operations in the railways subsector; and (b) improving and rehabilitating the transport infrastructure to foster export growth. The Project consists of the following parts, subject to such modifications thereof as the Borrower and the Association may agree upon from time to time to achieve such objectives:

12 Part A: Sector Policy Development Implementation of the Program by means of the carrying out of the activities included in the following action plans: (i) Institutional Development Plan; (ii) Highways Plan; (iii) Civil Aviation Plan; (iv) Railways Plan; and (v) Ports Plan. Part B: Civil Works 1. Carry out the following activities within the TSIP: (a) Rehabilitation of about 150 kilometers of roads in the Borrower s primary road network. (b) Rehabilitation of about 1,000 kilometers of feeder roads in the Borrower s secondary and tertiary road network. (c) Rehabilitation of about 1,000 meters of bridges in the Borrower s primary road network. (d) Periodic maintenance of about 1,800 kilometers of roads in the Borrower s road network. 2. Rehabilitation of about 2,700 meters of the runway of the San Pedro Sula Airport, including its taxiway and apron, and the acquisition of equipment therefor. Part C: Institutional Development and Technical Assistance Provision of technical assistance to SECOPT in: (a) carrying out Part A (i) of the Project (including the training of staff required therefor) through: (i) the strengthening of SSPF to prepare plans, programs and annual budgets, including the design of policies to protect the environment in connection with the carrying out of its operations; (ii) the improvement of DGT s capacity to analyze pricing and regulatory policies in land transport; and (iii) the development of a suitable data base for DGT concerning land transport; (b) designing and implementing a bridge management system in order to assist it in the planning, design, construction, maintenance, rehabilitation and replacement of bridges in the Borrower s territory, (including the acquisition of equipment required therefor); and (c) carrying out: (i) Part A (iii); and (ii) a portion of Part A (v) of the Project. * * * The Project is expected to be completed by June 30, SCHEDULE 3 Procurement and Consultants Services Section I. Procurement of Works Part A: International Competitive Bidding 1. Except as provided in Part C hereof, goods and works shall be procured under contracts awarded in accordance with procedures consistent with those set forth in Sections I and II of the "Guidelines for Procurement under IBRD Loans and IDA Credits" published by the Bank in May 1992 (the Guidelines), subject to the addition of the following text at the end of paragraph 2.13 of the Guidelines: "Bidding documents for fixed-price contracts should provide that, when the contract award is delayed beyond the original bid validity period, the bid price will be increased by two standard correction factors acceptable to the Association, one to be applied to all foreign currency components and the other to the local currency component of the bid price. Such correction factor should not be taken into account in bid evaluation.". 2. Bidders for works estimated to cost more than the equivalent of $5,000,000 per contract shall be prequalified as provided in

13 paragraph 2.10 of the Guidelines. 3. To the extent practicable, contracts for goods and works shall be grouped into bid packages estimated to cost the equivalent of $250,000 or more and $1,000,000 or more respectively. Part B: Preference for Regional Manufacturers and Domestic Contractors 1. In the procurement of goods in accordance with the procedures described in Part A.1 hereof, a margin of preference may be granted to bids offering goods described in the accompanying specifications which are manufactured to a substantial extent in any country, including Honduras, which is a party to the Mercado Comun Centroamericano, the common market created by the General Treaty of Central American Economic Integration signed at Managua, Nicaragua on December 13, 1960 by Guatemala, El Salvador, Honduras, Nicaragua and Costa Rica (hereinafter called the CACM), in accordance with, and subject to, the following provisions: A. For the purpose of Part B.1 of this Schedule, the following definitions shall apply: (a) (i) the term "Qualified CACM Bid" means a bid submitted by a manufacturer established in the territories of member countries, including Honduras, of the CACM, for goods manufactured or processed in such territories and for which the bidder shall have established to the satisfaction of the entity or agency inviting bids that the manufacturing or processing cost of such goods include a value added in such territories equal to at least 20% of the ex-factory bid price of such goods; (ii) (iii) the term "Non-Qualified CACM Bid" means a bid submitted by a manufacturer established in the territories of member countries, including Honduras, of the CACM, for goods manufactured or processed in such territories, other than any such bid classified as a Qualified CACM Bid; and the term "Foreign Bid" means any bid which is neither a Qualified CACM Bid nor a Non-Qualified CACM Bid. B. All bidding documents for the procurement of goods shall clearly indicate any preference which would be granted and shall set forth the information required to establish the eligibility of a bid for such preference. C. Bidders are required to state in their bid the c.i.f. (port of entry) price of imported goods and the ex-factory price of locally manufactured goods. D. Except to the extent hereinafter provided, bids will be compared on the basis of their ex-factory or c.i.f. (port of entry) price adjusted in accordance with paragraphs 2.49 through 2.54 of the Guidelines. E. After evaluation, responsive bids will be classified in one of the following groups: Qualified CACM Bids, Non-Qualified CACM Bids or Foreign Bids. F. All bids in each group will be first compared among themselves, to determine the lowest evaluated bid in each such group. The lowest evaluated bids of each group will then be compared with each other and if, as a result of this comparison, an evaluated Qualified CACM Bid or Non-Qualified CACM Bid is the lowest it will be selected for purpose of award. G. If the lowest bid in the comparison under paragraph F above

14 is a Foreign Bid, all Foreign Bids will be further compared with the lowest evaluated Qualified CACM Bid as determined under paragraph F above. For the purpose of this comparison only, each Foreign Bid will be compared on the basis of the sum of its c.i.f. (port of entry) price adjusted in accordance with the provisions of paragraph D above, plus an amount equal to the smaller of: (i) between the amount of customs duties and other import taxes which a non-exempt importer would have to pay for the importation of goods offered in such Foreign Bid and that applicable to a Qualified CACM Bid; or (ii) 15% of the c.i.f. bid price of such goods. If the Qualified CACM Bid is the lowest evaluated bid in such comparison, it shall be selected for the purpose of award; otherwise, the lowest evaluated Foreign Bid as determined under paragraph F above shall be so selected. 2. In the procurement of works in accordance with the procedures described in Part A.1 hereof, the Borrower may grant a margin of preference to domestic contractors in accordance with, and subject to, the provisions of paragraphs 2.55 and 2.56 of the Guidelines and paragraph 5 of Appendix 2 thereto. Part C: Other Procurement Procedures 1. Goods to cost more than the equivalent of $25,000 but less than $250,000 per contract may be procured under contracts awarded on the basis of competitive bidding, advertised locally, in accordance with procedures satisfactory to the Association. 2. Works estimated to cost less than the equivalent of $1,000,000 per contract, up to an aggregate amount equivalent to $24,600,000, may be procured under contracts awarded on the basis of competitive bidding, advertised locally, in accordance with procedures satisfactory to the Association. 3. Goods estimated to cost the equivalent of $25,000 or less per contract, up to an aggregate amount equivalent to $120,000, may be procured under contracts awarded on the basis of comparison of price quotations obtained from at least three suppliers eligible under the Guidelines, in accordance with procedures acceptable to the Association. Part D: Review by the Association of Procurement Decisions 1. Review of prequalification: With respect to the prequalification of bidders as provided in Part A.2 hereof, the procedures set forth in paragraph 1 of Appendix 1 to the Guidelines shall apply. 2. Review of invitations to bid and of proposed awards and final contracts: (a) With respect to: (i) each contract to be awarded pursuant to the provisions of Part A.1 of this Section; and (ii) the first contract to be awarded pursuant to the provisions of Parts C.1 and C.2 of this Section, the procedures set forth in paragraphs 2 and 4 of Appendix 1 to the Guidelines shall apply. Where payments for such contracts are to be made out of the Special Account, such procedures shall be modified to ensure that the two conformed copies of each contract required to be furnished to the Association pursuant to said paragraph 2 (d) shall be furnished to the Association prior to the making of the first payment out of the Special Account in respect of such contract. (b) With respect to each contract not governed by the preceding paragraph, the procedures set forth in paragraphs 3 and 4 of Appendix 1 to the Guidelines shall apply. Where payments for such contract are to be made out of the Special Account, such procedures shall be modified to ensure that the two conformed copies of the contract together with the other information required to be furnished to the Association pursuant to said paragraph 3 shall be furnished to the Association as part of the evidence to be furnished pursuant to paragraph 4 of Schedule 5 to this Agreement.

15 (c) The provisions of the preceding subparagraph (b) shall not apply to contracts on account of which withdrawals from the Credit Account are to be made on the basis of statements of expenditure. 3. The figure of 10% is hereby specified for purposes of paragraph 4 of Appendix 1 to the Guidelines. Part E: Standard Bidding Documents All procurement of goods and works to which international or local competitive bidding applies shall be carried out using standard bidding documents acceptable to the Association. Section II. Employment of Consultants In order to assist the Borrower in carrying out: (i) the supervision of the works under Part B of the Project; and (ii) Part C of the Project, the Borrower shall employ consultants whose qualifications, experience and terms and conditions of employment shall be satisfactory to the Association. Such consultants shall be selected in accordance with principles and procedures satisfactory to the Association on the basis of the "Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency" published by the Bank in August 1981 (the Consultants Guidelines). Section III. Special Provisions A. In addition and without limitation to any other provisions set forth in this Schedule or the Guidelines, the following principles of procurement shall expressly govern all procurement of goods and works referred to in Parts C.1 and C.2 of Section I of this Schedule: 1. Contracts shall be awarded to the lowest evaluated bid in accordance with criteria set forth in the bidding documents, and without taking into account, in the evaluation, the financial cost of foreign exchange components. 2. Foreign bidders shall not, as a condition for submitting bids, be required to: (i) be registered in Honduras; (ii) have a representative in Honduras; (iii) be associated with Honduran suppliers or contractors; and (iv) certify that, in their country of origin, Honduran suppliers or contractors are allowed to participate in competitive bidding procedures under equal conditions with other bidders. 3. Contracts shall not be divided for the sole purpose of reducing contract amounts. B. In addition and without limitation to any other provisions set forth in this Schedule or the Consultants Guidelines, the following principles of procurement shall expressly govern all procurement of consultants services referred to in Section II of this Schedule: 1. Foreign consultants shall be permitted to participate in the selection process even if there is availability of Honduran consultants for the services being procured. 2. Foreign consultants shall not be required to be registered with Honduran associations or to be associated with Honduran consulting firms as a condition for participating in any selection process. SCHEDULE 4 Year

16 1. Expenditures in Road Maintenance (US millions) - Periodic Routine Performance Targets (a) Percentage of the network maintained - Paved Routine Periodic Gravel Routine Periodic Unpaved Routine Periodic (b) DGCCA s staff 2,200 1,700 1,700 1,700 (numbers) (c) ENP s staff 1, (numbers) 3. FNH s Operational Deficit (US millions) SCHEDULE 5 Special Account 1. For the purposes of this Schedule: (a) the term "eligible Categories" means Categories (1) through (4) set forth in the table in paragraph 1 of Schedule 1 to this Agreement; (b) the term "eligible expenditures" means expenditures in respect of the reasonable cost of goods and services required for the Project and to be financed out of the proceeds of the Credit allocated from time to time to the eligible Categories in accordance with the provisions of Schedule 1 to this Agreement; and (c) the term "Authorized Allocation" means an amount equivalent to $4,000,000 to be withdrawn from the Credit Account and deposited in the Special Account pursuant to paragraph 3 (a) of this Schedule. 2. Payments out of the Special Account shall be made exclusively for eligible expenditures in accordance with the provisions of this Schedule. 3. After the Association has received evidence satisfactory to it that the Special Account has been duly opened, withdrawals of the Authorized Allocation and subsequent withdrawals to replenish the Special Account shall be made as follows: (a) For withdrawals of the Authorized Allocation, the Borrower shall furnish to the Association a request or requests for a deposit or deposits which do not exceed the aggregate amount of the Authorized Allocation. On the basis of such request or requests, the Association shall, on behalf of the Borrower, withdraw from the Credit Account and deposit in the Special Account such amount or amounts as the Borrower shall have requested. (b) (i) For replenishment of the Special Account, the Borrower shall furnish to the Association

17 requests for deposits into the Special Account at such intervals as the Association shall specify. (ii) Prior to or at the time of each such request, the Borrower shall furnish to the Association the documents and other evidence required pursuant to paragraph 4 of this Schedule for the payment or payments in respect of which replenishment is requested. On the basis of each such request, the Association shall, on behalf of the Borrower, withdraw from the Credit Account and deposit into the Special Account such amount as the Borrower shall have requested and as shall have been shown by said documents and other evidence to have been paid out of the Special Account for eligible expenditures. All such deposits shall be withdrawn by the Association from the Credit Account under the respective eligible Categories, and in the respective equivalent amounts, as shall have been justified by said documents and other evidence. 4. For each payment made by the Borrower out of the Special Account, the Borrower shall, at such time as the Association shall reasonably request, furnish to the Association such documents and other evidence showing that such payment was made exclusively for eligible expenditures. 5. Notwithstanding the provisions of paragraph 3 of this Schedule, the Association shall not be required to make further deposits into the Special Account: (a) if, at any time, the Association shall have determined that all further withdrawals should be made by the Borrower directly from the Credit Account in accordance with the provisions of Article V of the General Conditions and paragraph (a) of Section 2.02 of this Agreement; or (b) once the total unwithdrawn amount of the Credit allocated to the eligible Categories, less the amount of any outstanding special commitment entered into by the Association pursuant to Section 5.02 of the General Conditions with respect to the Project, shall equal the equivalent of twice the amount of the Authorized Allocation. Thereafter, withdrawal from the Credit Account of the remaining unwithdrawn amount of the Credit allocated to the eligible Categories shall follow such procedures as the Association shall specify by notice to the Borrower. Such further withdrawals shall be made only after and to the extent that the Association shall have been satisfied that all such amounts remaining on deposit in the Special Account as of the date of such notice will be utilized in making payments for eligible expenditures. 6. (a) If the Association shall have determined at any time that any payment out of the Special Account: (i) was made for an expenditure or in an amount not eligible pursuant to paragraph 2 of this Schedule; or (ii) was not justified by the evidence furnished to the Association, the Borrower shall, promptly upon notice from the Association: (A) provide such additional evidence as the Association may request; or (B) deposit into the Special Account (or, if the Association shall so request, refund to the Association) an amount equal to the amount of such payment or the portion thereof not so eligible or justified. Unless the Association shall otherwise agree, no further deposit by the Association into the Special Account shall be made until the Borrower has provided such evidence or made such deposit or refund, as the case may be. (b) If the Association shall have determined at any time that any amount outstanding in the Special Account will not be required to cover further payments for eligible expenditures, the Borrower shall, promptly upon notice from the Association, refund

18 to the Association such outstanding amount. (c) The Borrower may, upon notice to the Association, refund to the Association all or any portion of the funds on deposit in the Special Account. (d) Refunds to the Association made pursuant to paragraphs 6 (a), (b) and (c) of this Schedule shall be credited to the Credit Account for subsequent withdrawal or for cancellation in accordance with the relevant provisions of this Agreement, including the General Conditions.