Development Credit Agreement

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized O.0FICIAL CREDIT NUMBER 1237 KE %OCUMENTS Development Credit Agreement Public Disclosure Authorized (Cotton Processing and Marketing Project) between REPUBLIC OF KENYA and INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized Dated oay Jr, (, 1983

2 CREDIT NUMBER 1237 KE DEVELOPMENT CREDIT AGREEMENT AGREEMENT, dated -, 1983, between REPUBLIC OF KENYA (hereinafter called the Borrower) and INTERNATIONAL DEVELOPMENT ASSOCIATION (hereinafter called the Association). WHEREAS (A) the Borrower has requested the Association to assist in the financing of the Project described in Schedule 2 to this Agreement by extending the Credit as hereinafter provided; (B) Parts C, E (i) and E (ii) of the Project will be carried out by the Cotton Lint and Seed Marketing Board (hereinafter called the Board) and Parts A, B and D of the Project will be carried out by the Board and cooperatives, all with the Borrower's assistance and, as part of such assistance, the Borrower will make available to the Board and the cooperatives through the Cooperative Bank of Kenya (hereinafter called CBK) part of the proceeds of the Credit as hereinafter provided; (C) Part F of the Project will be carried out by CBK with the Borrower's assistance and, as part of such assistance, the Borrower will make part of the proceeds of the Credit available to CBK as hereinafter provided; 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, in a project agreement of even date herewith between the Association and the Board, and in a letter agreement of even date herewith between the Association and CBK; 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 Development Credit Agreements of the Association, dated June 30, 1980, with the same force and effect as if they were fully set forth herein (said General Conditions Applicable to Development Credit Agreements of the Association being hereinafter called the General Conditions).

3 -2- Section Wherever used in this Agreement, unless the context otherwise requires, the several terms defined in the General Conditions have the respective meanings therein set forth and the following additional terms have the following meanings: (a) "Project Agreement" means the agreement between the Association and the Cotton Lint and Seed Marketing Board of even date herewith, as the same may be amended from time to time, and such term includes all schedules to the Project Agreement and all agreements supplemental to the Project Agreement; (b) "Board" means the Cottn Tint and Seed Marketing Board, a body corporate established and operating pursuant to the Cotton Lint and Seed Marketing Act (Cap. 335 of the Laws of Kenya) and the Regulations made thereunder; (c) "CBK" means the Cooperative Bank of Kenya, a body corporate established and operatit-.g pursuant to the Cooperative Societies Act (Cap. 490 of the Laus of Kenya) and licensed as a bank under the Banking Act (Cap. 488 of the Laws of Kenya); (d) "Subsidiary Loan Agreement" means the agreement to be entered into between the Borrower and CBK pursuant to Section 1 (a) of Part II of Schedule 2 to this Agreement, as the same may be amended from time to time, and such term includes all schedules to the Subsidiary Loan Agreement, and "Subsidiary Loan" means the loan to be made by the Borrower to CBK pursuant to the Subsidiary Loan Agreement; (e) "Project Year" means the period from the first day of July in any calendar year through the thirtieth may of June next following, except that the first Project Year means the period from the date of this Agreement through the thirtieth day of June 1983; (f) "MOCD" means the Borrower's Ministry of Cooperative Development; (g) "cooperatives" means cooperative unions or cooperative societies, or both, depending on the context, which are engaged to a significant extent in post-harvest cotton operations; (h) "Revolving Credit" means the revolving line of credit to be made available to the Board by a consortium of banks

4 -3- pursuant to the letter of commitment dated January 28, 1983, and the "Revolving Credit Agreement" means the agreement to be entered into between the Board and the consortium of banks pursuant to the said letter of commitment and providing for the Revolving Credit; (i) "Subsidiary Financing Agreement" means the agreement to be entered into between CBK and the Board pursuant to Section 2 (a) of Part III of Schedule 2 to this Agreement, as the same may be amended from time to time, and such term includes all schedules to the Subsidiary Financing Agreement; (j) "Letter Agreement" means the agreement of even date with this Agreement between CBK and the Association with respect to the execution and the financing of the Project; and (k) "Project Coordinating and Steering Committee" means the committee to be convened in accordance with the provisions of Section 3.04 of the Development Credit Agreement. ARTICLE II The Credit Section The Association agrees to lend to the Borrower, on the terms and conditions in the Development Credit Agreement set forth or referred to, an amount in various currencies equivalent to eighteen million seven hundred thousand Special Drawing Rights (SDR 18,700,000). Section The amount of the Credit may be withdrawn from the Credit Account in accordance with the provisions of Schedule 1 to thic Agreement, as such Schedule may be amended from time to time by agreement between the Borrower and the Association, 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 and to be financed out of the proceeds of the Credit. Sectior Except as the Association shall otherwise agree, procurement of the goods and civil works to be financed out of the proceeds of the Credit shall be governed by the provisions set forth or referred to in Section 2.02 of the Project Agreement.

5 -4- Section The Closing Date shall be June 30, 1987 or such later date as the Association shall establish. The Association shall promptly notify the Borrower of such later date. 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 Service charges shall be payable semiannually on February 15 and August 15 in each year. Section The Borrower shall repay the principal amount of the Credit in semiannual installments payable on each February 15 and August 15 commencing August 15, 1992, and ending February 15, 2032, each installment to and including the installment payable on February 15, 2002, to be one-half of one per cent (1/2 of 1%) of such principal amount, and each installment thereafter to be one and one-half per cent (1-1/2%) of such principal amount. Section The currency of the United States of America is hereby specified for the pu,rposes of Section 4.02 of the General Conditions. ARTICLE III Execution of the Project Section (a) Without any limitation or restriction upon any of its other obligations under this Agreement, the Borrower shall exercise any right, power or remedy available to it so as to permit the Board and CBK to perform in accordance with the provisions of the Project Agreement, the Subsidiary Loan Agreement and the Letter Agreement, all the obligations therein set forth, and shall not take or permit to be taken any action which would prevent or interfere with such performance. (b) The Borrower shall carry out Part E (iii) of the Project through its Ministry of Cooperative Development and shall, through said Ministry, cause the cooperatives to carry out their responsibilities under Parts A, B and D of the Project, all with due diligence and efficiency, in accordance with the applicable provisions of Schedule 2 to this Agreement and in conformity

6 - 5 - with appropriate administrative, cooperative, accounting, engineering and management practices, and shall provide, promptly as needed, the funds, facilities, services and other resources required for the purpose. Section (a) The Borrower shall maintain records adequate to record the progress of Part E (iii) of the Project and of Parts A, B and D of the Project to the extent applicable to cooperatives, and shall maintain and cause the cooperatives to maintain separate accounts to reflect in accordance with consistently maintained appropriate accounting practices the operations, resources and expenditures, in respect of such Parts of the Project, of the MOCD and the cooperatives, including, without limitation to the foregoing, separate accounts reflecting all expenditures described in Sub-category (5) (b) of the table in paragraph 1 of Schedule 1 to this Agreement on account of which withdrawals are requested from the Credit Account on the basis of certificates of expenditures. (b) The Borrower shall retain, until one year after the Clos-.ng Date, all records (orders, invoices, bills, receipts and other documents) evidencing the expenditures on account of which withdrawals are requested from the Credit Account on the basis of certificates of expenditure and shall enable the Association's accredited representatives to examine such records. Section The Borrower shall: (i) have the separate accounts referred to in Section 3.02 (a) of this Agreement for each fiscal year audited, in accordance with appropriate auditing principles consistently applied, by the Controller and Auditor General for MOCD and the Audit and Accounts Division of MOCD for the cooperatives; (ii) furnish to the Association, as soon as available, but in any case not later than six months after the end of each such year, a certified copy of the report of such audit by such auditors, of such scope and in such detail as the Association shall have reasonably requested, including, without limitation to the foregoing, a separate opinion by said auditors in respect of the expenditures and records referred to in Section 3.02 (b) of this Agreement as to whether the proceeds of the Credit withdrawn from the Credit Account on the basis of certificates of expenditure have been used for the purpose for which they were provided; and (iii) furnish to the Association such other information concerning said separate accounts, records and expenditures and the audit thereof as the Association shall from time to time reasonably request.

7 - 6 - Section In order to ensure effective cooperation and coordination among the agencies of the Borrower and the other entitles participating in the execution of the Project, the Borrower shall cause the representatives hereinafter specified of such agencies and entities to meet at least twice yearly as a committee (hereinafter sometimes also called the Project Coordinating and Steering Committee) in order to review the progress of the Project, to review the six-monthly reports referred to in Section 2.04 (b) of the Project Agreement, and to review and approve proposed Annual Plans. The Committee will be composed of the Permanent Secretary of the Ministry of Finance (Chairman), the Permanent Secretary of the Ministry of Agriculture, the Permanent Secretary of the MOCD or the Commissioner for Cooperative Development, the General Manager of CBK, and the Managing Director of the Board, or their duly authorized representatives. Section The Borrower, through its AOCD, shall promptly provide the Board with all information reasonably requested by it in the operation of the monitoring and evaluation system to be established pursuant to Section 5 of Part II of Schedule 2 to this Agreement and in the preparation of the report required by Section 2.04 (d) of the Project Agreement. Section (a) Tne Borrower, through its MOCD, shall ensure that cooperatives involved in ginning operations shall not undertake any investments or financial commitments with respect to their Project-related operations other than those set forth in, or covered by, Annual Plans approved by the Association and the Project Coordinati.-g and Steering Committee in accrrdance with Section 9 of Part II of Schedule 2 to this Agreement If any such investments or financial commitments are desired to be made that are not set forth in, or covered by such Annual Plans, the approval of the Association and the Project Coordinating and Steering Committee shall be obtained before they are undertaken. (b) With respect to any investments or financial commitments relating to the other operations of such cooperatives, the Borrower, through its MOCD, shall ensure that appropriate consultations are undertaken with the Board, CBK and the Association with respect to such investments or financial commitments. Section (a) To the extent that the Borrower or any of its agencies exercises any control over the prices of seed

8 -7- cotton, cotton lint and cotton seed, the Borrower shall ensure that such prices shall be set at appropriate levels, taking into account the application of the following criteria: (i) providing farmers with adequate incentives to produce seed cotton; (ii) ensuring the financial viability of the institutions involved in cotton processing and marketing activities; and (iii) ensuring parity with international cotton price levels. (b) The Borrower and the Association shall annually exchange views on the application of the above criteria with respect to prices of seed cotton, cotton lint and cotton seed, and shall provide each other with such information in their possession as may be,relevant thereto. ARTICLE IV Remedies of the Association Section For the purposes of Section 6.02 of the General Conditions the following additional events are specified pursuant to paragraph (h) thereof, namely, that: (a) the Board shall have failed to perform 'any covenant, agreement or obligation of the Board under the Project Agreement or the Subsidiary Financing Agreement; (b) CBK shall have failed to perform any covenant, agreement or obligation of CBK under the Subsidiary Loan Agreement, the Subsidiary Financing Agreement or the Letter Agreement; (c) the Borrower's Cotton Lint and Seed Marketing Act (Cap. 335 of the Laws of Kenya) or the Cooperative Societies Act (Cap. 490 of the Laws of Kenya) shall have been amended, suspended, abrogated, repealed or waived in such a way as to materially and adversely affect the ability of the Board or CBK to carry out the covenants, agreements and obligations set forth in the Project Agreement or the Letter Agreement; (d) an extraordinary situation shall have arisen which shall make it improbable that the Board or CBK will be able to perform its obligations under the Project Agreement or the Letter Agreement, respectively;

9 -8- (e) the Borrower or any other authority having jurisdiction shall have taken any action for the dissolution or disestablish- ment of the Board or CBK or for the suspension of their respective operations; (f) (i) subject to subparagraph (ii) of this paragraph: (A) the right of the Board to withdraw the proceeds of the Revolving Credit shall have been suspended, cancelled or terminated in whole or in part, pursuant to the terms of the Revolving Credit Agreement, or (B) the Revolving Credit shall have become due and payable prior to the agreed maturity thereof; (ii) subparagraph (i) of this paragraph shall not apply if: (A) such suspension, cancellation, termination or prematuring is not caused by the failure of the Board to perform any of its obligations under such agreement; and (B) adequate funds for the proper operation of the Board are available to it from other sources on terms and conditions consistent with the obligations of the Board under the Project Agreement. Section For the purposes of Section 7.01 of the General Conditions, the following additional events are specified pursuant to paragraph (d) thereof: (a) any event specified in paragraph (a) or (b) of Section 4.01 of this Agreement shall occur and shall continue for a period of 60 days after notice thereof shall have been given by the Association to the Borrower and to the Board or CBK, as appropriate; and (b) any events specified in paragraphs (c), (e) or (f) (i) (B) of Section 4.01 of this Agreement shall occur.

10 -9- ARTICLE V 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) the Subsidiary Loan Agreement has been signed on behalf of the Borrower and CBK; (b) the Subsidiary Financing Agreement has been signed on behalf of the CBK aid the Board; (c) the heads of the Departments of Technical Services and Finance referred to in Section 5 of Part II of Schedule 2 to this Agreement and the senior financial analyst referred to in Section 8 of Part II of Schedule 2 to this Agreement shall have been appointed and shall have taken up their positions; (d) the Revolving Credit Agreement referred to in Section 1.02 (h) of this Agreement shall have been signed by the relevant parties and all conditions precedent to the effectiveness of such agreement, other than the effectiveness of this Agreement, shall have been fulfilled. Section The following are specified as additional matters, within the meaning of Section (b) of the General Conditions, to be included in the opinion or opinions to be furnished to the Association: (a) that the Project Agreement has been duly authorized or ratified by the Board, and is legally binding upon the Board in accordance with its terms; (b) that the Subsidiary Loan Agreement has been duly authorized or ratified by the Borrower and CBK and is legally binding upon the Borrower and CBK in accordance with its terms; (c) that the Subsidiary Financing Agreement has been duly authorized or ratified by CBK and the Board and is legally binding upon the CBK and the Board in accordance with its terms;

11 (d) that the Letter Agreement has been duly authorized or ratified by CBK and is legally binding upon CBK in accordance with its terms. Section The date 2 is hereby specified for the purposes of Section of the General Conditions. Section The obligations of the Borrower under Section of this Agreement shall cease and determine on the date on which the Development Credit Agreement shall terminate or on a date twelve years after the Effective Date of this Agreement, whichever shall be the earlier. ARTICLE VI Representative of the Borrower; Addresses Section The Minister of the Borrower for the time being responsible for finance is designated as representative of the Borrower for the purposes of Section of the General Conditions. Section The following addresses are specified for the purpose of Section of the General Conditions: For the Borrower: The Treasury P.O. Box Nairobi, Kenya Cable address: Telex: FINANCE Nairobi For the Association: International Development Association 1818 H Street, N.W. Washington, D.C United Stites of America

12 Cable address: INDEVAS Washington, D.C. Telex: (ITT) (RCA) or (WUI) IN WITNESS WHEREOF, the parties hereto, acting through their representatives thereunto duly authorized, 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 KENYA By Authorized Representative INTERNATIONAL DEVELOPMENT ASSOCIATION By Regional Vice President Eastern Africa

13 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) Civil works 80% (a) Board 2,550,000 (b) Cooperatives 1,280,000 (2) Vehicles 2,470, % of foreign expenditures and 80% of local expenditures (3) Equipment 4,080, % of foreign expenditures and 80% of local expenditure,, (4) Consultants', 100% of foreign experts' and expenditures professional and 80% of services local expenditures (a) Board 1,360,000 (b) CBK 510,000 (5) Incremental 25% operating expenses of:

14 Amount of the Credit Allocated % of (Expressed in Expenditures Category SDR Equivalent) to be Financed (a) Board 220,000 (b) Cooperatives 850,000 (c) CBK 40,000 (6) Incremental ginning 2,640,000 80% fees and purchases of seed cotton by the Board (7) Unallocated 2,700,000 TOTAL 18,700, For the purposes of this Schedule: (a) the term "foreign expenditures" means expenditures in the currency of any country other than the Borrower and for goods or services supplied from the territory of any country other than the Borrower; (b) the term "local expenditures" means expenditures in the currency of the Borrower and for goods or services supplied from the territory of the Borrower; (c) the term "operating expenses" means salaries and allowances of local personnel and operation and maintenance of buildings, offices, vehicles and equipment of the Board, CBK and cooperatives and the term "incremental operating expenses" means such operating expenses incurred specifically for the execution of the Project; (d) the term "incremental ginning fees and purchases of seed cotton" means for each Project Year, up to the maximum amounts indicated hereinafter, the excess of ginning fees and purchased amounts of seed cotton (both expressed in bales of lint equivalent) over: for the first Project Year, 59,000 bales; for

15 the second Project Year, 64,000 bales; for the third Project Year, 69,100 bales; and for the fourth Project Year, 73,400 bales. Unless the Association shall otherwise agree, the maximum amounts of incremental ginning fees and purchases of seed cotton shall be: for the first Project Year, 7,200 bales; for the second and fourth Project Years, zero bales; and for the third Project Year, 6,900 bales. 3. The disbursement percentages have been calculated in compliance with the policy of the Association that no proceeds of the Credit shall be disbursed on account of payments for taxes levied by, or in the territory of, the Borrower on goods or services, or on the importation, manufacture, procurement or supply thereof; to that end, if the amount of any such taxes levied on or in respect of any item to be financed out of the proceeds of the Credit decreases or increases, the Association may, by notice to the Borrower, increase or decrease the disbursement percentage then applicable to such item as required to be consistent with the aforementioned policy of the Association. 4. Notwithstanding the provisions of paragraph 1 above, no withdrawals shall be made in respect of payments made for expenditures: (i) prior to April 27, 1982; (ii) during the second, third, and fourth Project Year, respectively, until the Association and the Project Coordinatin6 and Steering Committee shall have approved the Annual Plan for such Project Year, except that withdrawals may be made for the appropriate percentage of expenditures to be financed in respect of Category (5) on account of expenditures prior to such approval of the Annual Plan for any Project Year to the extent that funds were allocated for such expenditures in the Annual Plan approved by the Association and the Project Coordinating and Steering Committee for the previous Project Year and remain unspent; (iii) during any Project Year if the Association shall have reasonably determined that such expenditures are not in accordance with the provisions of the

16 Annual Plan approved by the Association and the Project Coordinating and Steering Committee for such Project Year; (iv) in respect of Category (6) for any Project Year if the incremental ginning fees and purchases of seed cotton in such Project Year are less than those in the Project Year immediately preceding; and (v) in respect of Categories (1) and (3) for ginneries unless the investment plans referred to in Section 4 (b) of Part II of Schedule 2 to this Agreement shall have been approved by the Association and the Project Coordinating and Steering Committee. 5. Notwithstanding the allocation of an amount of the Credit or the disbursement percentages set forth in the table in paragraph 1 above, if the Association has reasonably estimated that the amount of the Credit then allocated to any Category will be insufficient to finance the agreed percentage of all expenditures in that Category, the Association may, by notice to the Borrower: (i) reallocate to such Category, to the extent required to meet the estimated shortfall, proceeds of the Credit which are then allocated to another Category and which in the opinion of the Association are not needed to meet other expenditures; and (ii) if such reallocation cannot fully meet the estimated shortfall, reduce the disbursement percentage then applicable to such expenditures in order that further withdrawals under such Category may continue until all expenditures thereunder shall have been made. 6. If the Association shall have reasonably determined that the procurement of any item in any Category is inconsistent with the procedures set forth or referred to in this Agreement, no expenditures for such item shall be financed out of the proceeds of the Credit and the Association may, without in any way restricting or limiting any other right, power or remedy of the Association under the Development Credit Agreement, by notice to the Borrower, cancel such amount of the Credit as, in the Association's reasonable opinion, represents the amount of such expenditures which would otherwise have been eligible for financing out of the proceeds of the Credit.

17 SCHEDULE 2 The Project The Project is designed to rehabilitate and expand cotton processing facilities and to improve the distribution and marketing of cotton. I. Description of the Project The Project consists of the following: Part A: Improvement of the Board's and cooperatives' seed cotton buying practices. Part B: Reorganization of the transportation of seed cotton from buying centers to ginneries through: (i) coordination by the Board of all seed cotton transportation; and (ii) purchase and utilization by the Board and cooperatives of appropriate transport vehicles and related equipment. Part C: Improvement of the Board's seed cotton storage and cotton lint warehousing facilities through: (i) renovation of existing stores and warehouses; (ii) construction of new stores and warehouses; (iii) construction of a rail connection between the Mombasa warehouse and the railway line; and (iv) expansion of the Board's vehicle and equipment fleet. Part D: (i) Improvement, rehabilitation and expansiod of existing ginneries operated by the Board and cooperatives; (ii) construction of one new ginnery to replace the Kendu Bay ginnery; and

18 (iii) refinement of the grading system for cotton lint. Part E: Improvement of the institutions in the cotton subsector through: (i) institutional improvement of the Board through, inter alia, adjustment of its organizational structure, adoption of improved management systems, and recruitment of staff for key positions; (ii) establishment of a training program for the Board and cooperatives; and (iii) improvement of the Ministry of Cooperative Development's capability to provide guidance to cooperatives and to examine and audit their operations. Part F: Assistance by the Cooperative Bank of Kenya to the institutions in the cotton sub-sector and strengthening of CBK through: (i) evaluation of investments to be proposed under the Project; (ii) advising the Board and cooperatives on the establisiment of sound financial procedures; (iii) administration, jointly with the First National Bank of Chicago, of the Revolving Credit; and (iv) recruitment of qualified financial analysts. The Project is expected to be completed by December 31, II. Execution of the Project Except as the Association may otherwise agree, the Project shall be carried out as follows: 1. Part A: During the seed cotton buying season, about thirty-six

19 mobile buying teams will be operated, each composed of a sub-team for buying and a sub-team for paying. To the extent such teams cannot be formed by the cooperatives, they shall be established by the Board. The buying schedule will be established by the Board and promptly communicated to the cooperatives. It will be established in such manner as to encourage timely planting and harvesting Payment will be made within two weeks. of the Board's acceptance of delivery and will take into account any necessary set-offs for debt service. 2. Part B: The Board shall coordinate the transportation of all seed cotton from buying centers to ginneries. All truck scheduling will be centralized under the Board's Operations Manager. The Board's and the cooperatives' fleets of vehicles and equipment will be modernized by the acquisition of, inter alia, forty-five 7-1/2-ton trucks, and four 15-ton trucks with trailers. At the same time as seed cotton is collected, cotton inputs will be delivered to the buying centers. The Board will take the necessary steps to ensure that, after consultation with the Association, the Board's fleet of vehicles and related equipment will be gradually transferred to cooperatives (or to the private transport sector to the extent necessary) by January 1, 1986 at the latest. 3. Part C: Until the improvements in cotton buying, distribution and processing under the Project will have been made, the need for temporary storage of seed cotton at buying centers will be met by the repair of about 127 field stores belonging to the Board and by the construction of new stores in locations to be determined by the Board on the basis of need. The new stores will be operated by the Board and, where appropriate, by cooperatives, and will be designed in such manner as to be suitable for other purposes when seed cotton storage requirements will have been reduced or eliminated. Warehousing capacity for cotton lint will be expanded to accommodate approximately five months' supply to the mills.

20 Increased warehousing capacity will also be provided for grading, storage of parts and ancillary processing operations. The following additional warehousing capacity will be built: Use/Location Additional capacity (m2) Lint storage: Kisumu 700 Eldoret 1,100 Thika 2,500 Mombasa 1,100 Lint grading: Thika 450 Spare parts and ancillary operations: Thika 1,000 In addition, the Board's existing warehouse in Mombasa will be repaired and a railway connection between the Mombasa warehouse and the railway line will be constructed. The Board's vehicle and equipment fleet will be expanded so as to make optimum use of existing and newly constructed warehousing space. 4. Part D: (a) The ginneries at Hola, Mwea, Meru and Makueni will be improved. The ginneries at Malaba-Malakisi, Nambale, Luanda, Ndere and Homa Bay will be rehabilitated and expanded. The ginnery at Kendu Bay will be replaced by a new ginnery, under joint Board-cooperative management. The ginneries to be rehabilitated and expanded, and the new ginneries to be built, will have 20 double roller gins, enough storage space to accommodate the buying and transport systems to be implemented under the Project, a weighing platform, a suction system to handle incoming seed cotton, and new power plants. The necessary recruitment will be carried out to ensure that all ginneries will have key staff composed of: (i) a manager, (ii) a senior mechanic as deputy manager, (iii) a shift supervisor, (iv)

21 an accountant, (v) a senior clerk for stores and spare parts, and (vi) a Board field officer. (b) Ownership and management of the ginneries at Meru, Makueni, Hola, and once completed, the ginpery in the Kerio Valley, shall be transferred from the Board to the cooperative unions concerned. Prior to such transfers of ownership and management responsibilities, plans to accomplish each such transfer shall be prepared by the Board, in cooperation with the cooperative union concerned, and shall be forwarded to the Association and the Project Coordinating and Steering Committee for approval. (c) In order to constitute more homogeneous lots, a new intermediary quality grade of cotton lint will be introduced between AR and BR. 5. Part E (i): The Board will adjust its organizational structure as follows: (a) Four regional offices will be established: one office for the Eastern and Central provinces combined and one office for each of the Nyanza, Western and Coast provinces. Each regional office will be staffed with a regional manager, who will be in charge of the office, one ginneries inspector, and supporting staff as appropriate. (b) Seven sub-regional offices will be maintained; they will be staffed with an area manager and supporting staff as appropriate. (c) A field officer will be posted at each ginnery. (d) A new Legal and Administrative Division will be established at headquarters. The head of this Division will report directly to the Managing Director. (e) A new Monitoring and Evaluation Division will also be esta.lished. The functions of this new division will be, inter alia: (1) to collect statistics and other information on Project components, (2) to assess progress in the fulfillment of objectives set out in the Annual Plans, (3) to measure actual expenditures against budgets, and (4) to identify problems and

22 constraints for timely adjustment and reorientation of Project Activities. The Board shall take such other managerial and organizational measures as to enable it to support, monitor, and advise the relevant ministries of the Borrower on all aspects of the cotton industry, including: (a) seed cotton production and harvesting, (b) seed cotton buying and payment systems, (c) ginning operations, (d) lint and seed quality control, (e) domestic and international marketing of lint and cotton seed, (f) manpower and training requirements, and (g) the development of the cotton sector in general. The Board will improve its management procedures through, inter alia, the establishment of effective procedures for reporting, monitoring and evaluation, budgetary and financial control and procurement. In order to assist the Board in carrying out its responsibilities under the Project, the Board shall employ duly qualified people to head the Departments of (a) Technical Services, (b) Operations, and (c) Finance, and the Divisions of (a) Lint and Cotton Seed Marketing, (b) Monitoring and Evaluation, and (c) Legal and Administration. The qualifications, experience and terms and conditions of employment of said department heads shall be satisfactory to the Association. In addition, the Board shall employ such consultants, experts and professionals as may be required under the Annual Plans. All such consultants, experts and professionals shall have qualifications, experience and terms and conditions of employment satisfactory to the Association in accordance with principles and procedures described in the "Guidelines on the Use of Consultants by World Bank Borrowers aid by the World Bank as Executing Agency", published by the Bank in August Part E (ii): In consultation with MOCD, the Board shall establish a detailed training program for its staff and the members of cooperatives. Such program shall set forth: (a) main objectives; (b) types of training to be provided; (c) training needs in terms of the numbers, categories and levels of personnel required and the timing thereof; (d) arrangements for the administration,

23 monitoring and evaluation of the training program, and (e) budgetary and financial requirements. As -art of the preparation of such program, detailed investment pr( i1s for the construction of a training center at Mwea will be prepared. The Board shall submit the training programi to the Association for its review and comment by October 31, 1983 and to the Project Coordinating and Steering Committee for its approval promptly thereafter and, in any event, not later than December 31, Part E (iii): The Ministry of Cooperative Development will base eight teams of accountants and auditors in the cotton producing areas. These teams will assist cooperatives in improving management and accounting practices and financial controls, and in the recruitment and training of cooperative staff. 8. Part F: (a) For the purpose of assisting it in the execution of Part F of the Project, CBK will recruit one senior financial analyst and four junior financial analysts. The senior financial analyst will be responsible for organizing the lending operations to cooperatives under the Project and to recruit and train the four junior financial analysts to assist him in administering such loan program. (b) Before the improvement, rehabilitation and expansion of existing ginneries and the ccnstruction of the new ginnery under Part D of the Project are undertaken, CBK, jointly with the Board and in cooperation with MOCD and the cooperative union concerned, shall carry out a feasibility study on the technical, financial and managerial aspects of each of the ginneries' operation and a detailed investment plan will be prepared for each ginnery. As part of such feasibility study, an initial comprehensive audit of each of the cooperatives shall be carried out as soon as possible by independent auditors acceptable to MOCD and the Association. Said auditors shall be retained by CBK and it shall furnish to the Association a certified copy of the audit reports as soon as availbl0e. The investment plans for each cooperative union will be forwarded to the Association and the Project Coordinating and Steering Cpmmittee for approval.

24 Annual Plans: (a) The Project shall be carried out in accordance with Annual Plans to be prepared and approved in accordance with the provisions of sub-paragraph (b) of this paragraph 9. The Annual Plans shall consist of detailed programs and budgets for each component of the Project to be carried out during the period covered by the Plan. They shall also contain a description of the other activities of the cooperatives during the Plan period, and the manner in which such activities will be financed. The format of the Annual Plan shall be agreed upon between the Board, the Borrower, CBK, and the Association. (b) The Board shall be responsible for the preparation of the Annual Plans, with the cooperation of CBK, the cooperatives and the Borrower. The Board's regional managers and the MOCD's district cooperative officers will start the data collection and the preparation of next year's programs and budgets, and will obtain the relevant data from the cooperatives in their region,, in a timely manner so as to allow consolidation and completion of the draft Annual Plan by the Board, with the assistance of CBK and the Borrower, at least two months prior to the start of the next Project Year. The Board will obtain the approval of the Treasury (and make any modifications deemed necessary) to the draft Plan and forward it to the Association for approval by March 31 at the latest. Upon approval of the draft by the Association (and incorporation of any changes upon which the Association may have conditioned its approval), the Board will present the draft Plan to all members of the Permanent Coordinating and Steering Committee. A copy of such draft shall be forwarded to the Association. The Association's approval shall be obtained for all material changes required by the Permanent Coordinating and Steering Committee. The Committee's approval, as well as the text of and reasons for any material changes, shall be communicated directly to the Association by the Chairman of the Committee or his designated representative. Promptly upon receipt of notification of the approval of the draft by the Committee, or upun approval of the Committee's material changes to the draft by the Association, the Association shall notify the Borrower, the Board, and CBK that the condition of disbursement set forth in paragraph 4 (ii) of Schedule 1 to this Agreement has been satisfied with respect to such Project Year.

25 III. Financing of the Project 1. (a) The Borrower shall lend $21.1 million equivalent to CBK under a subsidiary loan agreement to be entered into between the Borrower and CBK under terms and conditions which shall have been approved by the Association and which shall include, inter alia, that: (i) the interest rate shall be 10% per annum; and (ii) the repayment period shall be determined at the end of the first Project Year, and shall be adjusted annually thereafter, to correspond to the weighted average repayment period of the subloans made by CBK in accordance with paragraph 2 (c) below. (b) The Borrower shall exercise its rights under the Subsidiary Loan Agreement 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, neither the Borrower nor CBK shall assign, amend, abrogate or waive the Subsidiary Loan Agreement or any provision thereof. 2. (a) CBK shall lend $11.9 million equivalent to the Board under a subsidiary financing agreement to be entered into between CBK and the Board on terms and conditions which shall have been approved by the Borrower and the Association and which shall include the terms set forth in paragraph (c) below. (b) CBK shall lend $9.1 million equivalent to the cooperatives under loan agreements to be entered into between CBK and the cooperatives, the standard terms and conditions of which shall have been approved by the Borrower and the Association and which shall include the terms set forth in paragraph (c) below. If the feasibility studies, referred to in Section 8 (ii) of Part II of Schedule 2 should indicate that any cooperatives are not creditworthy according to CBK's normal banking criteria, CBK and the Board shall work out detailed proposals to remedy the situation; such proposals shall be submitted to the Borrower and the Association for their approval. CBK and the Board will work out, in agreement with the Borrower and the cooperatives, detailed arrangements to assure the repayment to CBK of the loans to be made i.o the cooperatives under the Project. (c) The principal lending terms for lending by CBK pursuant to paragraphs (a) and (b) of this Section 2 shall be:

26 Maximum Maximum Items or Minimum Principal Grace Activity Amount Annual Repayment Period to be Equivalent Interest Period (in Financed ($ million) Debtor(s) Rate (in years) years) (A) Vehicles 4.3 Board; 13% 7 0 cooperatives (B) Civil works 1.9 Board; 13% 7 2 for gin- cooperanery rehab- tives bilitation (C) Equipment 6.9 Board; 13% 7 2 for Mwea cooperatraining tives center and ginnery rehabilitation (D) Incre- 4.7 mental Board 13% 7 2 ginning fees and purchases of seed cotton (E) Ginnery 1.5 Coop- 13% construction erative 12 4 and equipment (F) Equipment 0.4 Board; 13% 12 4 mobile cooperabuying tives and paying teams

27 Maximum Maximum Items or Minimum Principal Grace Activity Amount Annual Repayment Period to be Equivalent Interest Period (in Financed ($ million) Debtor(s) Rate (in years) years) (G) Construc- 1.4 Board 13% 12 4 tion and equipment lint storage facilities and spare parts warehouses (d) The interest rates set forth in this Part III may be adjusted from time to time in light of changes in the maximum allowed loan interest rate of commercial banks. Prior to effectuating any change in said interest rates and in the three percentage point spread between the interest rates at which CBK borrows and relends proceeds of the Credit, the Borrower shall consult with CBK and the Association on the impact of the proposed change on the execution of the Project. (e) The Board and CBK shall duly perform all their obligations under the Subsidiary Financing Agreement. Except as the Association shall otherwise agree, neither the Board nor CBK shall take or concur in any action which would have the effect of amending, abrogating, assigning or waiving the Subsidiary Financing Agreement or any provision thereof. 3. The Borrower shall make available as a grant all funds necessary for: (a) the construction and equipment of multipurpose field storage facilities of the Board and cooperatives; (b) the construction of the Mwea training center; (c) consultants', experts' and professional services required under the Project by the Board and CBK; and (d) incremental operating costs of the Board and cooperatives through annual budget allocations for MOA and MOCD.

28 INTERNATIONAL DEVELOPMENT ASSOCIATION CERTIFICATE I hereby certify that the foregoing is a true copy of the original in the archives of the International Development Association. In witness whereof I have signed this Certificate and affixed the Seal of the Association thereunto the day of 198F E. FOR SECRETARY