Loan Agreement. Public Disclosure Authorized ANNEX LOAN NUMBER 2249 BR. Public Disclosure Authorized. (Water Supply and Sewerage Sector Project)

Transcription

1 Public Disclosure Authorized ANNEX LOAN NUMBER 2249 BR Public Disclosure Authorized Loan Agreement (Water Supply and Sewerage Sector Project) between Public Disclosure Authorized INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT and CAIXA ECONOMICA FEDERAL-CEF Dated March 30, 1983 Public Disclosure Authorized FIRST REVISION Dated, 1987

2 LOAN NUMBER 2249 BR LOAN AGREEMENT AGREEMENT, dated March 30, 1983 between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (hereinafter called the Bank) and CAIXA ECONOMICA FEDERAL-CEF (hereinafter called the Borrower). WHEREAS (A) Banco Nacional da Habitagao (hereinafter called BNH), which has been succeeded by the Borrower, requested the Bank to assist in the financing of the Project described in Schedule 1 to this Agreement by making the Loan as hereinafter provided; (B) the Project will be carried out by the Project Companies with the assistance of the Borrower and, as part of such assistance, the Borrower will make available to them the proceeds of the Loan as hereinafter provided; and (C) the Bank has agreed, on the basis, inter alia, of the foregoing, to make the Loan to the Borrower upon the terms and conditions set forth hereinafter; NOW THEREFORE the parties hereto hereby agree as follows: ARTICLE I General Conditions; Definitions Section The parties to this Agreement accept all the provisions of the General Conditions Applicable to Loan and Guarantee Agreements of the Bank, dated October 27, 1980, with the same force and effect as if they were fully set forth herein (said General Conditions Applicable to Loan and Guarantee Agreements of the Bank being hereinafter called the General Conditions). Section Wherever used in this Agreement, unless the context otherwise requires, the several terms defined in the General Conditions have the respective meanings therein set forth and the following additional terms have the following meanings: (a) "Project Companies" means collectively the Companhias Estaduais de Saneamento Basico referred to in Article 9 of Brazil's Decree No , of November 6, 1978, formed by the States, or by the Guarantor in the case of the Federal District

3 -2- and Territories, which have been selected or may be selected by agreement between the Borrower and the Bank for the purpose of executing one or more Sub-projects in accordance with Section 3.01 (g) of this Agreement; "Project Company" means any one of them, and when such term is used in reference to one State, it shall mean the Project Company which operates in such State; and "Eligible Project Company" means a Project Company which meets the conditions set forth in Section 3.01 (g) of this Agreement and has been accepted by the Bank for participating in the Project; (b) "States" means collectively the federative units of Brazil in which a Project Company is located, the Federal District and the Territories, and "State" means any one of them; (c) "CTN" means any agreement to be entered into between the Borrower, a State, the respective State Bank and/or Project Company pursuant to Section 3.01 (c) of this Agreement (hereinafter sometimes collectively called the CTNs) and such term includes all schedules and annexes to such CTN; (d) "State Bank" means a bank the majority equity voting capital of which is owned by a State and which is a party to a CTN (hereinafter sometimes collectively called "State Banks"); (e) "Sub-project" means a specific water supply or sewerage project consisting of one or more of the following: (i) construction, expansion or improvement of water supply or sewerage systems in urban areas; (ii) construction of sewage treatment plants in selected cities; (iii) construction of water and sewerage house connections and acquisition and installation of water meters; (iv) installation of production metering equipment and execution of leak detection programs; (v) acquisition of operational equipment; (vi) designing of water supply or sewerage systems, including provision of required engineering and consulting services; and (vii) carrying out of institutional development projects; (f) "free-limit Sub-project" means a Sub-project, as so defined, the estimated total investment cost of which shall not exceed the sum of $8,000,000 equivalent, which has been previously approved by the Borrower and which shall be subject to review by the Bank on an ex post basis;

4 - 3 - (g) "Eligible Sub-project" means a Sub-project which has been approved by the Bank after reviewing the information to be provided by the Borrower on such Sub-Project pursuant to Section 2.03 (a) of this Agreement or a free-limit Sub-project for which the Bank has authorized withdrawals from the Loan Account and which is consistent with the criteria set forth in Schedule 4 to this Agreement; (h) "PLANASA" means Plano Nacional de Saneamento, a water supply and sewerage program for Brazil, which has been established by BNH and is being carried out by the Borrower; (i) "FAE" means any Fundo de Financiamento para Agua e Esgotos, a water supply and sewerage financing fund constituted by agreement between the Borrower and a State for the purpose of implementing PLANASA within such State; (j) "FINEST II" means a credit sub-program established by BNH's Resolution No. 49/76 (particularly Articles 1.1 (b) and 4 thereof) and being carried out by the Borrower under which a State receives financial assistance for purposes of financing the carrying out of water supply and sewerage projects in small communities within such State, and which can be substantially described as follows: (i) the Borrower makes loans to a State Bank in a State which in turn relends the proceeds of such loans to such State; (ii) the amount of such loans does not exceed the equivalent of the aggregate of funds that such State has made, or proposes to make, available to the Project Company for purposes of the carrying out of the above-mentioned projects; (iii) such State deposits the proceeds of such loans and its counterpart funds in the FAE of such State; (iv) the entity responsible for the management of FAE makes the proceeds of such loans available to the Project Company; (v) a determined percentage of the aggregate of proceeds and funds referred to in (iii) above is made available to the Project Company on a non-repayable basin; and (vi) the Project Company pays the balance of such funds within a certain period into FAE; "FINEST II Sub-project" means a Sub-project which is financed under FINEST II; and "Eligible FINEST II Sub-project" means an Eligible Sub-project which is financed under FINEST II; (k) "FINEST III" means a credit program established by the BHN's Resolution No. 49/76 (particularly Articles 1.1 (c) and 5 thereof) and being carried out by the Borrower under which a State receives financial assistance for purposes of financing the

5 carrying out of water supply and sewerage projects in small communities within the State, and which can be substantially described as follows: (i) the Borrower makes loans to a State Bank in a State which in turn relends the proceeds of such loans to such State; (ii) such State undertakes to make available such proceeds, together with an equivalent amount of counterpart funds of such State (originated other than in loans from the Borrower) to the Project Company for purposes of the carrying out of the above-mentioned projects; (iii) a determined percentage of the aggregate of the proceeds and the funds referred to in (ii) above is made available to the Project Company on a non-repayable basis; and (iv) the Project Company pays the balance of such funds within a certain period into FAE; "FINEST III Sub-project" means a Sub-project which is financed under FINEST III; and "Eligible FINEST III Sub-project" means an Eligible Sub-project which is financed under FINEST III; (1) "DESAN" means Departamento Central de Saneamento, a department of the Borrower entrusted with the Borrower's financing and technical functions concerning sanitation of urban areas in Brazil, or any successor thereto; (m) "EVG" means a five-year investment and financing plan prepared by each Project Company which is annually updated and furnished to the Borrower for approval; (n) "Prior Loan Agreements" means the Loan Agreements, between the Bank and the Borrower et al, dated March 10, 1978, for Loan 1525-BR (Greater Sao Paulo Sewage Collection and Treatment Project), between the Bank and the Borrower et al, dated February 8, 1979 for Loan 1656-BR (Northeast Water Supply and Sewerage Project), the Loan Agreement between the Bank and the Borrower et al. dated April 14, 1980 for Loan 1823-BR (Southern States Water Supply and Sewerage Project), the Loan Agreement between the Bank and the Borrower et al, dated July 18, 1980 for Loan 1850-BR (Third Minas Gerais Water Supply and Sewerage Project) and the Loan Agreement between the Bank and the Borrower dated May 18, 1981 for Loan 1970-BR (Multi-State Water Supply and Sewerage Project); (o) "Special Account" means the account referred to in Section 2.02 (d) of this Agreement and "Account Bank" means Banco Central do Brasil; (p) "cruzado" means the currency of the Guarantor;

6 - 5 - (q) "Grants" means the non-repayable contributions made or to be made by a State to a Project Company out of the proceeds of a loan made by the Borrower to such State for the carrying out of Sub-projects in low income areas; (r) "FINEST I" means a credit sub-program established by BNH's Resolution No. 49/76, particularly Articles 1.1 (a) and 3 thereof and being carried out by the Borrower under which a State receives financial assistance for the purposes of funding the FAE of such State, and which can be substantially described as follows: (i) the Borrower makes loans to a state bank in a State, which, in turn, relends the proceeds of such loans to such State; (ii) the amount of such loans is a function of the percentage of such State annual tax revenues contributed, or to be contributed, by such State into the FAE of such State and ranges between 50 and 100% of such State contribution; (iii) such State deposits the proceeds of such loans and its counterpart funds in FAE of such State; and (iv) the proceeds of such loans are earmarked for the financing of such State's programs for water supply and sanitary sewerage; and "FINEST I Loan" means a BNH Loan to finance Sub-projects eligible for financing under FINEST I; (s) "FCVS" means Fundo de Compensagao de Variagoes Salariais, the Guarantor's Salary Equivalency Fund established by Resolution No. 25/67, dated June 16, 1967 of the Board of Directors of BNH; and (t) "FGTS" means Fundo de Garantia do Tempo de Servigo, the Guarantor's Employee Indemnity Fund established by the Guarantor's Law No , dated September 13, ARTICLE II The Loan Section The Bank agrees to lend to the Borrower, on the terms and conditions set forth or referred to in this Loan Agreement, an amount in various currencies equivalent to three hundred two million three hundred thousand dollars ($302,300,000). Section (a) The amount of the Loan may be withdrawn from the Loan Account for: (i) 80% of the amounts disbursed by the Borrower according to Section 3.01 (d) (i) of this Agree-

7 - 6 - ment in respect of reasonable expenditures made by a Project Company for goods and services required for carrying out an Eligible Sub-project; (ii) (iii) (iv) 40% of the amounts disbursed by the Borrower to a State according to Section 3.01 (d) (ii) of this Agreement in respect of reasonable expenditures made by a Project Company for goods and services required for carrying out an Eligible FINEST II Sub-project; 80% of the amounts disbursed by the Borrower in respect of loans made to a State according to Section 3.01 (d) (iii) of this Agreement in respect of reasonable expenditures made by a Project Company for goods and services required for carrying out an Eligible FINEST III Sub-project; 100% of foreign expenditures and 50% of local expenditures made (or if the Bank shall so agree, to be made) by the Borrower in respect of the reasonable cost of consulting services under Part B of the Project; (v) 40% of the amounts disbursed by the Borrower to the States for Grants allocated to Project Companies in respect of reasonable expenditures made for Eligible Sub-projects; and (vi) 50% of the amounts disbursed by the Borrower in respect of loans made to the State according to Section 3.02 (d) (ii) of this Agreement in respect of reasonable expenditures made by a Project Company for goods and services required for carrying out an eligible Sub-project financed under FINEST I Loans; provided, however, that: (A) in case the amounts disbursed by the Borrower may qualify for withdrawals from the Loan Account under sub-paragraphs (ii) and (iii) of paragraph (a) hereof, such withdrawals shall not exceed 40% of the total cost of the Sub-project being financed; (B) the Bank shall disburse for the Grants referred to in sub-paragraph (v) of paragraph (a) hereof only for Subprojects for which the Bank has been furnished with satisfactory

8 -7- evidence that at least 70% of the beneficiaries of each such Subproject have an average per capita income of less than three times the minimum wage in that respective State; (C) the amounts disbursed from the Loan Account in respect of the reasonable expenditures made for Eligible Sub-projects located in the States of Sao Paulo, Rio de Janeiro and Minas Gerais shall not exceed an amount equivalent to 55% of the amount of the Loan; and (D) no disbursements shall be made in respect of any Eligible Subproject until the Bank shall have received evidence satisfactory to the Bank, that the Borrower has entered into a CTN or CTNs, satisfactory to the Bank, for purposes of financing such Eligible Sub-Project, and that such CTN or CTNs is or are valid and binding upon the parties thereto. For the purposes of paragraph (a) (iv) above, the term "foreign expenditures" means expenditures in the currency of any country other than the Guarantor and for goods or services supplied from the territory of any country other than the Guarantor, and the term "local expenditures" means expenditures in the currency of the Guarantor and for goods or services supplied from the territory of the Guarantor. (b) Except as the Bank shall otherwise agree, the proceeds of the Loan shall be allocated as follows: Category Amount of the Loan Allocated (i) Eligible Sub-projects $279,049,628 equivalent (ii) Studies under Part B $ 1,000,000 equivalent of the Project (iii) Initial deposits in $ 20,000,000 equivalent the Special Account (iv) Fee $ 2,250,372 equivalent TOTAL $302,300,000 (c) Except as the Bank and the Borrower shall otherwise agree, no withdrawals shall be made on account of: (i) expenditures made by a Project Company before the date of this Agreement except that withdrawals, in an aggregate amount not

9 -8- exceeding the equivalent of $15,000,000, may be made on account of payments made by an Eligible Project Company, for expenditures under an Eligible Sub-Project made before that date but after January 1, 1983, provided that: (A) the goods and services to be financed out of the proceeds of the Loan have been procured in accordance with the provisions set forth or referred to in this Agreement; (B) a CTN that incorporates the terms and conditions set forth in this Agreement has been entered into by such Eligible Project Company or a previous CTN has been amended in order to incorporate such terms and conditions; (C) the Bank has been furnished with evidence, satisfactory to the Bank, that such CTN, as amended if such is the case, is a valid and binding obligation upon the parties thereto; and (D) all conditions set forth in subparagraphs (A), (B) and (C) above have been met on or before September 30, 1983; (ii) expenditures made by a Project Company, unless the Bank shall (A) have approved the respective CTNs under this Agreement for such Project Company, which shall, inter alia, incorporate the obligations of such Project Company and the correspondi.g State as set forth in Schedule 5 to this Agreement, and (B) have been furnished with evidence satisfactory to the Bank, including an opinion or opinions satisfactory to the Bank of counsel acceptable to the Bank, that the execution and delivery of such CTN on behalf of the Borrower, such Project Company, the State Bank and such State have been duly authorized or ratified by all necessary corporate, governmental and legislative action and is legally binding upon the parties thereto in accordance with its terms; (iii) expenditures financed under FINEST I incurred before July 1, 1983 or if the proceeds of the Loan disbursed for expenditures under FINEST I Loans exceed in the aggregate the equivalent of $70,000,000; and (iv) any expenditures incurred between November 30, 1986 and January 31, (d) The Borrower shall open and maintain a Special Account in dollars in the Account Bank on terms and conditions satisfactory to the Bank. Withdrawals from the Special Account shall be made exclusively for payments of the reasonable cost of goods and services required to carry out the Project and to be financed out of the proceeds of the Loan. Such withdrawals shall not exceed the applicable percentage stipulated in paragraph (a) of this Section for each such payment. (e) The Bank may, after the Effective Date and at the request of the Borrower, withdraw on behalf of the Borrower from the Loan Account and deposit in the Special Account all or part

10 - 9 - of the amount allocated to Category (iii) of the table set forth in paragraph (b) of this Section. At the request of the Borrower through Che Account Bank, the Bank on behalf of the Borrower shall further withdraw from the Loan Account and deposit in the Special Account such amounts as shall be required: (i) to replenish the Special Account with amounts equal to the withdrawals made by the Borrower from the Special Account in accordance with paragraph (d) of this Section; or (ii) for the disbursement of any unwithdrawn amount then allocated to Category (iii) of the table set forth in paragraph (b) of this Section. Except as the Bank shall otherwise determine, each application for withdrawal from the Loan Account for the purpose of a deposit under sub-paragraph (i) of Section 2.02 (e) shall be made under the applicable Category set forth in paragraph (a) of this Section, and in the same respective amounts as have been justified by the documentation for the request for such deposit furnished pursuant to paragraph (g) (i) of this Section. (f) Prior to, or at the time of, each request for withdrawal by the Borrower from the Special Account, the Borrower shall furnish to the Account Bank in respect of each payment made by the Borrower an application for withdrawal from the Special Account on the basis of certificates of expenditures and other evidence as shall be required to show that the payment was made on account of the reasonable cost of goods or services required for the Project and to be financed out of the proceeds of the Loan in accordance with the provisions of this Agreement. The Account Bank shall authorize the Borrower to withdraw from the Special Account on the basis of the foregoing evidence an amount in cruzados and shall debit the Special Account with the dollar equivalent of such amount in cruzados determined on the basis of the rate of exchange between the dollar and the cruzado in effect at the time each payment was made by the Borrower. (g) Prior to, or at the time of, each request for a deposit by the Bank into the Special Account the Account Bank shall furnish to the Bank for the purpose of Section 2.02 (e) (i) of this Agreement, in respect of each withdrawal from the Special Account an application for withdrawal from the Loan Account on the basis of the certificates of expenditures and other evidence referred to in paragraph (f) of this Section. (h) If the Bank shall have determined that any payment out of the Special Account: (i) was made for expenditures or in any amount not eligible for financing by withdrawal from the Loan

11 Account; or (ii) was not justified by the evidence furnished pursuant to paragraph (g) of this Section, the Borrower shall, promptly upon notice from the Bank and, unless otherwise determined by the Bank, prior to any further deposit in the Special Account by the Bank, deposit in the Special Account an amount equal to the amount of such payment or the portion thereof not so eligible or justified. (i) Notwithstanding the provision of paragraph (e) of this Section, no further deposit in the Special Account shall be made by the Bank when the Bank shall have determined, after consultation with the Borrower, that all further withdrawals from the Loan Account may be made directly by the Borrower from the Loan Account under paragraphs (a) and (b) of this Section, or when the total amount withdrawn from the Loan Account plus the amount of any qualified agreement to reimburse made by the Bank and of any special commitment entered into by the Bank pursuant to Section 5.02 of the General Conditions, shall have reached the equivalent of $260,000,000, whichever shall be sooner. Withdrawal from the Loan Account of the remaining amount of the Loan for the Project shall follow such procedures as shall be agreed between the Borrower and the Bank and shall be made only to the extent that the Bank shall be satisfied by the evidence submitted in support of the applications for such withdrawal that all payments by the Borrower out of the Special Account were made on account of the reasonable cost of goods or services required for the Project and to be financed out of the proceeds of the Loan in accordance with the provisions of this Agreement. (j) If the Bank shall have reasonably determined that: (A) the procurement of any item to be financed out of the proceeds of the Loan is inconsistent with the procedures set forth or referred to in this Agreement; or (B) the selection and approval by the Borrower of a Sub-project, or the carrying out of an Eligible Sub-project, are not consistent with the criteria set forth in Schedule 4 to this Agreement, no expenditures therefor shall be financed out of the proceeds of the Loan and the Bank may, without in any way restricting or limiting any other right, power or remedy of the Bank under the Loan Agreement, by notice to the Borrower, cancel such amount of the Loan as, in the Bank's reasonable opinion, represents the amount of such expenditures for such Sub-project which would otherwise have been eligible for financing out of the proceeds of the Loan.

12 (k) The disbursement percentages set forth in paragraph (a) of Section 2.02 shall apply through December 31, 1987, or such later date as the Bank may determine by notice to the Borrower, in respect of payments made for eligible expenditures on or before such date. The disbursement percentages applicable thereafter shall be established by the Bank by notice to the Borrower. Section (a) When presenting a Sub-project (other than a free-limit Sub-project) to the Bank for approval, the Borrower shall furnish to the Bank an application, in form and substance satisfactory to the Bank, together with: (i) an appraisal of the Sub-project, including the economic evaluation set forth in Schedule 4 to this Agreement and a description of the expenditures proposed to be financed out of the proceeds of the Loan; (ii) the financial terms and conditions for such Sub-project; (iii) the CTN or CTNs covering such Sub-project, which CTN or CTNs shall incorporate the obligations set forth in Schedule 5 to this Agreement; and (iv) such other information as the Bank shall reasonably request. (b) Each request by the Borrower for authorization to make withdrawals from the Loan Account in respect of a free-limit Sub-project shall contain: (i) a summary description of the Sub-project, including the economic evaluation set forth in Schedule 4 to this Agreement and a description of the expenditures proposed to be financed out of the proceeds of the Loan; (ii) the financial terms and conditions for such Sub-project; (iii) the CTN or CTNs covering such Sub-project, which CTN or CTNs shall incorporate by reference the obligations set forth in Schedule 5 to this Agreement; and (iv) such other information as the Bank shall reasonably request. (c) Except as the Bank and the Borrower shall otherwise agree, applications and requests made pursuant to paragraphs (a) and (b) of this Section shall be presented to the Bank not later than September 30, Section (a) Except as the Bank shall otherwise agree, procurement of the goods and civil works required for the Project shall be governed by the provisions of Schedule 3 to this Agreement.

13 (b) The Borrower, through DESAN, shall take all action as shall be necessary or advisable to enable the Project Companies to comply with the provisions of Schedule 3 to this Agreement. Section The Closing Date shall be September 30, 1989 or such later date as the Bank shall establish. The Bank shall promptly notify the Borrower and the Guarantor of such later date. Section (a) The Borrower shall pay to the Bank a fee equivalent to two million two hundred fifty thousand three hundred seventy-two dollars ($2,250,372). (b) On or promptly after the Effective Date, the Bank shall, on behalf of the Borrower, withdraw from the Loan Account and pay to itself the amount of the said fee in such currency or currencies as the Bank shall determine. Section The Borrower shall pay to the Bank a commitment charge at the rate of three-fourths of one per cent (3/4 of 1%) per annum on the principal amount of the Loan not withdrawn from time to time. Section (a) The Borrower shall pay interest on the principal amount of the Loan withdrawn and outstanding from time to time at a rate per annum for each Interest Period equal to one half percent per annum above the Cost of Qualified Borrowings for the last Semester ending prior to the commencement of such Interest Period. (b) As soon as practicable after the end of each Semester, the Bank shall notify the Borrower and the Guarantor of the Cost of Qualified Borrowings for such Semester. (c) Notwithstanding paragraph (a) of this Section, the interest rate for all Interest Periods commencing in 1982 shall be 11.43% per annum. (d) For purposes of this Section: (i) "Interest Period" means the six-months period commencing on each date specified in Section 2.09 of this Agreement, including the Interest Period in which this Agreement is signed.

14 (ii) "Cost of Qualified Borrowings" means the cost, expressed as a percentage per annum, as reasonably determined by the Bank, provided that the amount of $8,520.5 million referred to in (iii) (B) hereunder shall be reckoned at a cost of 10.93% per annum. (iii) "Qualified Borrowings" means: (A) outstanding borrowings of the Bank drawn down after June 30, 1982; and (B) until July 1, 1985, the amount of $8,520.5 million (representing borrowings of the Bank between July 1, 1981 and June 30, 1982) less any part thereof repaid earlier than July 1, (iv) "Semester" means the first six months or the second six months of a calendar year. Section Interest and other charges shall be payable semiannually on May 15 and November 15 in each year. Section The Borrower shall repay the principal amount of the Loan in accordance with the amortization schedule set forth in Schedule 2 to this Agreement. ARTICLE III Execution of the Project Section (a) In order to ensure the carrying out of the Project, the Borrower shall enter into agreements (CTNs) with the States, the State Banks and the Project Companies, on terms and conditions satisfactory to the Bank, which shall include, inter alia, the obligations for each Project Company and the corresponding State and the corresponding State Banks, as set forth in this Section and in Schedule 5 to this Agreement. (b) The Borrower shall: (i) in accordance with the provisions of the CTNs, without any limitation or restriction upon any of its other obligations under this Agreement, cause the Project Companies to carry out Part A of the Project; and (ii) carry out Part B of the Project and provide the funds, facilities and other resources necessary thereto, all with due diligence and efficiency and in conformity with appropriate administrative, financial, public utility, engineering and ecological practices.

15 (c) The Borrower shall, in accordance with the provisions of the CTNs: (i) cause the Project Companies, the States and the State Banks to take all action, including provision of funds under financial arrangements, facilities and other resources, necessary or appropriate to enable the Project Companies to carry out the Project; (ii) not take or permit the Project Companies, the States or the State Banks to take any action which would prevent or interfere with the timely execution of the Project by the Project Companies; (iii) provide the Project Companies with such funds (additional to the proceeds of the Loan and the funds provided by the States), facilities, services and other resources as shall be necessary or appropriate to enable such Project Companies to carry out Eligible Sub-projects under Part A of the Project; and (iv) not later than November 30 of each year, review with the Guarantor and the Bank the amount of funds to be made available by the Borrower in the following year for Eligible Sub-Projects. (d) The Borrower shall, in accordance with the provisions of the CTNs, make or cause to be made available to the Project Companies the proceeds of the Loan and its counterpart funds by: (i) making loans to the State Bank where each Eligible Sub-project shall be located in an amount equal to one-half of the amount of the loan or loans made or to be made available by such State Bank to the Project Company located in such State for the purpose of such Eligible Sub-project, and relending of the proceeds of such loans to such Project Company; or (ii) making loans to the State Bank in the State where each Eligible Sub-project shall be located in an amount equivalent to the amounts made or to be made available by such State through FAE to such Project Company for the financing of Eligible FINEST II Subprojects or Sub-projects eligible for financing under FINEST I, and relending of the proceeds of such loans to such State for deposit into the FAE of such State for further relending of such proceeds to such Project Company; or (iii) making loans to the State Bank in the State where each Eligible Sub-project shall be located in an amount equivalent to one-half of the amounts made available by such State to such Project Company for the financing of Eligible FINEST III Sub-projects, and relending of the proceeds of such loans to such State which shall relend such proceeds to such Project Company; or (iv) making loans to a State where an Eligible Sub-Project shall be located equivalent to the amount of the Grants made or to be made by such State to the Project Company for financing Sub-Projects in low income areas.

16 (e) The Borrower shall exercise its rights and comply with its obligations under each CTN in such a manner as to protect the interests of the Bank and the Borrower and to accomplish the purpose of the Loan and PLANASA, and, except as the Bank shall otherwise agree, the Borrower shall not agree to change or fail to enforce any such CTN or any provision thereof. (f) The Borrower shall: (i) assist each Project Company in the preparation and appraisal of each Sub-project; (ii) select each Sub-project in accordance with the selection criteria set forth in Schedule 4 to this Agreement; and (iii) submit for the prior approval of the Bank each Sub-project, other than a freelimit Sub-project. (g) For the purpose of obtaining the approval of the Bank on the selection of each Project Company, the Borrower shall: (i) approve and submit for the Bank's approval: (A) the EVG of such Project Company for the current year; (B) an institutional development program for such Project Company, and (C) not later than December 31, 1987, a plan to meet the financial performance referred to in Section 4.06 of this Agreement not later than in year 1989; and (ii) submit to the Bank evidence satisfactory to the Bank that: (A) such Project Company has complied with all covenants under the Prior Loan Agreement, if such be the case, and (B) the proceeds of the Loan under the Prior Loan Agreement allocated to such Project Company have been committed in accordance with the terms and conditions therein set forth, if such be the case. (h) Not later than April 30 each year, the Borrower shall: (i) exchange views with the Bank on the compliance by the Project Companies with the plans referred to in Section 3.01 (g)(i) (C) of this Agreement and the revenue provisions set forth in Section 4.06 of this Agreement; and (ii) propose to the Bank measures including the suspension of disbursements of loans made to specific Project Companies in order to ensure full compliance by the Project Companies with such plans and provisions. Section In order to assist the Borrower in the carrying out of Part B of the Project, the Borrower shall employ consultants whose qualifications, experience and terms and conditions of employment shall be satisfactory to the Bank; such consultants to be selected in accordance with principles and procedures satisfactory to the Bank on the basis of the "Guidelines

17 for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency" published by the Bank in August Section (a) The Borrower shall, with respect to Part B of the Project, make available to the Bank, promptly upon their preparation, the plans, specifications, reports, contracts and documents for such Part of the Project and any material modifications thereof or additions thereto. (b) The Borrower shall, with respect to Part B of the Project, maintain records and procedures adequate to record and monitor the progress of such Part of the Project (including the cost and the benefits to be derived from such Part of the Project), to identify the goods and services financed out of the proceeds of the Loan, and to disclose their use in such Part of the Project. (c) The authorized representatives of the Borrower shall, at least twice a year, visit the facilities of each Project Company and, on April 30 and October 31 of each year, furnish to the Bank a report containing all such information as the Bank shall reasonably request on the status of Project execution, financial projections, compliance with covenants under this Agreement, monitoring indicators and measures to be taken to improve the efficiency of each Project Company. (d) The Borrower shall prepare and furnish to the Bank, not later than four months after the Closing Date, a report of such scope and in such detail as the Bank shall reasonably request on the execution of the Project, its cost and the benefits derived and to be derived from it, the performance by the Borrower and the Bank of their respective obligations under the Loan Agreement, and the performance of each Project Company and each State of their respective obligations under any CTN and the accomplishment of the purposes of the Loan. (e) The Borrower shall enable, or cause the Project Companies to enable, the Bank's representatives to examine, with respect to the Project, all plants, installations, sites, works, buildings, property and equipment of the Project Companies and Borrower and any relevant records and documents. Section The Borrower shall not furnish to the Bank, either for approval thereof or for authorization to make with-

18 drawals from the Loan Account therefor, a Sub-project which has not been previously approved by the Borrower, nor shall the Borrower approve a Sub-project to be financed out of the proceeds of the Loan which is not consistent with the criteria set forth in Schedule 4 to this Agreement. Section Upon the award by the Borrower of any contract for goods, works or services to be financed out of the proceeds of the Loan, the Bank may publish a description thereof, the name and nationality of the party to whom the contract was awarded and the contract price. Section (a) The Borrower shall cause each Project Company to: (i) prepare and annually update an EVG satisfactory to the Borrower; and (ii) carry out the investment and institutional development programs set forth in such EVG in accordance with a timetable satisfactory to the Borrower. (b) The Borrower shall exchange views with the Bank before approving any major change to an EVG of a Project Company. Section Not later than September 30, 1983, the Borrower shall prepare and put into effect a set of indicators, satisfactory to the Bank, for monitoring the progress of, and the benefits to be derived from, the execution of the investment program contained in the EVG of each Project Company. Section (a) The Borrower shall maintain organizational arrangements satisfactory to the Bank for purposes of the management, monitoring and coordination of the execution of the Project and PLANASA, such arrangements to include a central unit in charge of planning, supervision and control of PLANASA and evaluating Sub-projects to be financed with the proceeds of the Loan. (b) The Borrower shall staff the unit referred to in paragraph (a) above with an adequate number of officials with suitable qualifications and experience. (c) The Borrower shall not change the organizational arrangements referred to in this Section without the Bank's prior concurrence.

19 ARTICLE IV Additional Covenants of the Borrower Section The Borrower shall carry on its operations and conduct its affairs in accordance with sound administrative, financial, standards and practices, with qualified management and personnel, and in accordance with the Guarantor's Decree-Law No of November 21, 1986, and Decree 93,600 of the same date and its Annex. Section The Borrower shall maintain records adequate to reflect, in accordance with consistently maintained appropriate accounting practices, its financial condition and operations in respect of PLANASA and the Project. Section The Borrower shall maintain a consolidated Project account adequate to reflect, in accordance with consistently maintained appropriate accounting practices, the operations, resources and expenditures of the Project Companies in respect of any Eligible Sub-project including, without limitation to the foregoing, separate accounts reflecting all expenditures on account of which withdrawals have been requested from the Loan Account or the Special Account on the basis of certificates of expenditures. Section (a) The Borrower shall: (i) have its accounts and financial statements (balance sheets, statements of income and expenses and related statements) and the consolidated Project account referred to in Section 4.03 of this Agreement for each fiscal year audited, in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Bank; (ii) furnish to the Bank as soon as available, but in any case not later than four months after the end of each such year: (A) certified copies of such financial statements for such year as so audited, and (B) the report of such audit by said auditors of such scope and ia such detail as the Bank shall have reasonably requested, which report shall include a statement of compliance during each such year by the Borrower of the financial covenants contained in this Agreement, and a statemcnt as to whether the proceeds of the Loan withdrawn from the Loan Account or the Special Account on the basis of certificates of expenditures have been used to make payments for goods and services eligible for financing under this Agreement; and (iii) furnish to

20 the Bank such other information concerning such accounts and financial statements and the audit thereof as the Bank shall from time to time reasonably request. (b) above: Without limitation to the provisions of paragraph (a) (i) except as the Bank shall otherwise agree, the Special Account shall be annually audited by independent auditors acceptable to the Bank and, promptly after the audit and not later than four months after the close of the Account Bank's fiscal year, the Bank shall be furnished with certified copies of such audit, together with a certified copy of the auditors's report, including a description of the audit procedures; (ii) (iii) the Borrower shall cause to be furnished to the Bank each month certified statements of the Special Account and from time to time such other information concerning such Special Account and such certificates of expenditures as the Bank shall reasonably request; the Borrower shall retain, until one year after the Closing Date, all records (contracts, orders, invoices, bills, receipts and other documents) evidencing the expenditures for the Project on account of which withdrawals are requested from the Loan Account on the basis of certificates of expenditures and enable the Bank's accredited representatives to examine such records; and (iv) the Borrower shall furnish, or cause to be furnished, to the Bank such other information concerning the Special Account and the audit thereof, as the Bank shall reasonably request. Section (a) The Borrower represents that at the date of this Agreement no lien exists on any of its assets as security for any debt except as otherwise currently reported or stated to the Bank in writing. (b) The Borrower undertakes that, except as the Bank shall otherwise agree: (i) if the Borrower shall create any lien on any

21 of its assets as security for any debt, such lien will equally and ratably secure the payment of the principal of, and interest and other charges on, the Loan, and in the creation of eny such lien express provision will be made to that effect, at no cost to the Bank; and (ii) if any statutory lien shall be created on any assets of the Borrower as security for any debt, the Borrower shall grant, at no cost to the Bank, an equivalent lien satisfactory to the Bank to secure the payment of the principal of, and interest and other charges on, the Loan; provided, however, that the foregoing provisions of this paragraph shall not apply to: (A) any lien created on property, at the time of purchase thereof, solely as security for the payment of the purchase price of such property or as security for the payment of debt incurred for the purpose of financing the purchase of such property; or (B) any lien arising in the ordinary course of banking transactions and securing a debt maturing not more than nne year after the date on which it was originally incurred. Section (a) The Borrower shall cause the Project Companies and States to take all such action (including timely action with respect to the setting or adjustment of each Project Company's rates for its water supply and sewerage services) as shall be necessary to cause, in each calendar year, each Project Company's revenues from water supply and sewerage services together with all its other operating revenues to reach not less than the sum of its operating costs, depreciation charges and debt service, provided, however, that the timetable for the implementation of this Section shall be in accordance with each Project Company's Plan referred to in Section 3.01 (g) (i) (C), as approved by the Borrower and the Bank. (b) For the purpose of this Section: (i) "operating revenues" means all revenues directly arising from the provision of water supply and sewerage services; (ii) "operating costs and depreciation charges" include: (A) operating costs (despesas de exploragao); (B) provision for bad debts (provisao para devedores duvidosos);

22 (C) straight-line depreciation of assets based on the useful lives of depreciable assets in operation (quotas de depreciagao); (D) amortization of capitalized operating costs (amortizagoes de despesas); and (iii) "debt service" means the total amount of amortization and interest (other than capitalized interest) on all outstanding debt. (c) Every three months or more often if so requested by the Bank, the Borrower shall exchange views with the Guarantor and the Bank on the adequacy of level and structure of the rates charged by the Project Companies for their water supply and sewerage services. Section The Borrower shall: (i) exchange views with the Bank on the recommendations made by the consultants hired by the Borrower for the carrying out of the study included in Part G of the Project described in Schedule 1 of the Prior Loan Agreement for Loan 1970-BR; (ii) from time to time, exchange views with the Bank on the progress of the implementation of the technical assistance program included in such Part G of the project; and (iii) complete the implementation of such Part G of the project by September 30, Section The Borrower shall: (a) not later than September 30, 1983, exchange views with the Bank on the results and recommendations of the study included in Part G (d) of the Project described in Schedule 2 of the Prior Loan Agreement for Loan 1525-BR; and (b) promptly thereafter, prepare and carry out a plan of action, satisfactory to the Bank, based on the results and recommendations of such study which are acceptable to the Bank and the Borrower. Section Not later than December 31, 1987, the Borrower shall prepare and furnish to the Bank a reconciliation satisfactory to the Bank of the accounts of the FGTS funds administered by the Borrower in calendar years 1985 and 1986.

23 ARTICLE V Remedies of the Bank Section For the purposes of Section 6.02 of the General Conditions, the following additional events are specified pursuant to paragraph (k) thereof: (a) any State or any Project Company or any State Bank shall have failed to perform any of its respective obligations under any CTN to which it is a party; (b) any authority having jurisdiction shall have taken any action for the dissolution or disestablishment of any Project Company or for the suspension of its operations; (c) the statutes of any Project Company shall have been amended so as to materially and adversely affect the carrying out of the Project or the operations or financial condition of any such Project Company; (d) any event shall have occurred or any action shall have been taken, including any action by the Guarantor or any State, which shall materially and adversely affect the carrying out of the Project; (e) an event shall have occurred or any action shall have been taken, including any action by the Guarantor, which shall materially and adversely affect the financial condition or operations of the Borrower or the performance of any of its obligations under this Agreement; (f) an event shall have occurred or any action shall have been taken, including any action by the Guarantor, which shall materially and adversely affect the financial condition or operations of or the setting or adjustment of rates for water supply and sewerage services charged by any Project Company; (g) an extraordinary situation shall have arisen which shall make it improbable that any Project Company or State or State Bank which are parties to any CTN shall be able to perform its respective obligations or exercise its respective rights thereunder;

24 (h) any authority having jurisdiction, including the Borrower and any State, shall have taken any action for the extinction of any FAE; (i) any action shall have been taken, including any action by the Guarantor, which shall materially and adversely affect the carrying out of any Eligible Sub-project, the operations of the Project Company or of the State Bank which are parties of a CTN, or the performance of any obligations of the State under any CTN; (j) any part of the principal amount of any loan to the Borrower having an original maturity of one year or more shall, in accordance with its terms, have become due and payable in advance of maturity as provided in the respective contractual instruments, or any security for any such loan shall have become enforceable; and (k) any Project Company shall have failed to comply with the plans referred to in Section 3.01 (g)(i) (C) of this Agreement; provided, however, that if any of the events referred to in paragraphs (a) to (c), (f) to (i) and (k) of this Section shall have occurred and be continuing, the Bank may suspend the right of the Borrower to make withdrawals from the Loan Account only with regard to the amounts made available to the respective State, State Bank or Project Company under one or more CTN's. Section For the purposes of Section 7.01 of the General Conditions, the following additional events are specified pursuant to paragraph (h) thereof: (a) any of the events specified in paragraphs (b) or (c) or (d) or (e) or (f) or (g) or (h) or (i) or (j) of Section 5.01 of this Agreement shall occur; and (b) any events specified in paragraphs (a) or (k) of Section 5.01 of this Agreement shall occur and shall continue for a period of sixty days after notice thereof shall have been given by the Bank to the Borrower. ARTICLE VI Effective Date; Termination Section The following events are specified as additional conditions to the effectiveness of the Loan Agreement

25 within the meaning of Section (c) of the General Conditions: (a) that the Loan Agreement has been duly registered with Banco Central do Brasil; and (b) that the Borrower has entered into at least three CTNs, satisfactory to the Bank, with three different Project Companies and the respective States and State Banks. Section The following are specified as additional matters, within the meaning of Section (c) of the General Conditions, to be included in the opinion or opinions to be furnished to the Bank: (a) that this Agreement has been duly registered with Banco Central do Brasil; (b) that the Project Companies referred to in Section 6.01 (b) of this Agreement have full power and authority to carry out and operate their respective parts of the Project and that all necessary acts, consents and approvals to be performed or given by the Guarantor, its political subdivisions or agencies to authorize the carrying out of the Project and to enable the Borrower and such Project Companies to perform all of their respective obligations in this Agreement and the CTNs contained have been duly and validly performed or given and that no other such acts, consents or approvals by the Guarantor are required in order to authorize the carrying out of the Project and to enable the Borrower and such Project Companies to perform all of their obligations in this Agreement and the CTNs contained; and (c) that the CTNs referred to in Section 6.01 (b) of this Agreement have been duly authorized or ratified by the Borrower, the corresponding States, Project Companies and State Banks, and by all necessary governmental, legislative and corporate action, and are legally binding upon the Borrower, such States, Project Companies and State Banks. Section The date August 1, 1983, is hereby specified for the purpose of Section of the General Conditions. ARTICLE VII Addresses Section The following addresses are specified for the purposes of Section of the General Conditions: