/'BThJAL CREDIT NUMBER 2826 ALB KESH Project Agreement (Power Transmission and Distribution Project) between INTERNATIONAL DEVELOPMENT ASSOCIATION and ALBANIAN ELECTROENERGETIC CORPORATION Dated MA-f-41 lr ,1996 CREDIT NUMBER 2826 ALB KESH PROJECT AGREEMENT AGREEMENT, dated '4 pr1C,4 AS' , 1996, between INTERNATIONAL DEVELOPMENT ASSOCIATION (the Association) and ALBANIAN ELECTROENERGETIC CORPORATION (KESH). WHEREAS (A) by the Development Credit Agreement of even date herewith between ALBANIA (the Borrower) and the Association, the Association has agreed to make available to the Borrower an amount in various currencies equivalent to nineteen million seven hundred thousand Special Drawing Rights (SDR19,700,000), on the terms and conditions set forth in the Development Credit Agreement, but only on condition that KESH agree to undertake such obligations toward the Association as are set forth in this Agreement; (B) by a subsidiary loan agreement to be entered into between the Borrower and KESH, a portion of the proceeds of the credit provided for under the Development Credit Agreement will be relent to KESH on the terms and conditions set forth in said Subsidiary Loan Agreement; and WHEREAS KESH, in consideration of the Association's entering into the Development Credit Agreement with the Borrower, has agreed to undertake the obligations set forth in this Agreement; NOW THEREFORE the parties hereto hereby agree as follows: ARTICLE I Definitions Section 1.01. Unless the context otherwise requires, the several terms defined in the Development Credit Agreement and in the General Conditions (as so defined) have the respective meanings therein set forth. ARTICLE H Execution of the Project Section 2.01. KESH declares its commitment to the objectives of the Project as set forth in Schedule 2 to the Development Credit Agreement, and, to this end, shall carry out Part A of the Project with due diligence and efficiency and in conformity with appropriate administrative, financial, engineering and public utility practices, and shall 2 provide, or cause to be provided, promptly as needed, the funds, facilities, services and other resources required for Part A of the Project. Section 2.02. Except as the Association shall otherwise agree, procurement of the goods and consultants' services required for Part A of the Project and to be financed out of the proceeds of the Credit shall be governed by the provisions of Schedule 1 to this Agreement. Section 2.03. (a) KESH shall carry out the obligations set forth in Sections 9.03, 9.04, 9.05, 9.06, 9.07 and 9.08 of the General Conditions (relating to insurance, use of goods and services, plans and schedules, records and reports, maintenance and land acquisition, respectively) in respect of the KESH Project Agreement and Part A of the Project. (b) For the purposes of Section 9.07 of the General Conditions, and without limitation thereto, and taking into account the provision of Section 3.03 of the Development Credit Agreement, KESH shall: (i) prepare and furnish to the Association not later than six (6) months after the Closing Date or such later date as may be agreed for this purpose between KESH and the Association, a plan, of such scope and in such detail as the Association shall reasonably request, for the future operation of Part A of the Project; and (ii) afford the Association a reasonable opportunity to exchange views with KESH on said plan. Section 2.04. KESH shall duly perform all its obligations under the KESH Subsidiary Loan Agreement. Except as the Association shall otherwise agree, KESH shall not take or concur in any action which would have the effect of amending, abrogating, assigning or waiving the KESH Subsidiary Loan Agreement or any provision thereof. Section 2.05. (a) KESH shall, at the request of the Association, exchange views with the Association with regard to the progress of Part A of the Project, the performance of its obligations under this Agreement and under the KESH Subsidiary Loan Agreement, and other matters relating to the purposes of the Credit. (b) KESH shall promptly inform the Association of any condition which interferes or threatens to interfere with the progress of Part A of the Project, the accomplishment of the purposes of the Credit, or the performance by KESH of its obligations under this Agreement and under the KESH Subsidiary Loan Agreement. .3 ARTICLE III Management and Operations of KESH Section 3.01. KESH shall carry on its operations and conduct its affairs in accordance with sound administrative, financial and public utility practices under the supervision of qualified and experienced management assisted by competent staff in adequate numbers. Section 3.02. KESH shall at all times operate and maintain its plant, machinery, equipment and other property, and from time to time, promptly as needed, make all necessary repairs and renewals thereof, all in accordance with sound engineering, financial and public utility practices. Section 3.03. KESH shall take out and maintain with responsible insurers, or make other provision satisfactory to the Association, for insurance against such risks and in such amounts as shall be consistent with appropriate practice. ARTICLE IV Financial and Other Covenants Section 4.01. (a) KESH shall maintain records and accounts adequate to reflect in accordance with sound accounting practices its operations and financial condition. (b) KESH shall: (i) have its records, accounts and financial statements (balance sheets, statements of income and expenses and related statements) for each fiscal year audited, in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Association; (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 copies of its financial statements for such year as so audited; and (B) the report of such audit by said auditors, of such scope and in such detail as the Association shall have reasonably requested; and 4 (iii) furnish to the Association such other information concerning said records, accounts and financial statements as well as the audit thereof, as the Association shall from time to time reasonably request. Section 4.02. (a) Except as the Association shall otherwise agree, KESH shall produce, for each of its fiscal years after its fiscal year ending on December 3 1, 1995, funds from internal sources equivalent to not less than 40% of the annual average of KESH's capital expenditures incurred, or expected to be incurred, for that year, the previous fiscal year and the fiscal year following that year. (b) Before September 30 in each of its fiscal years, KESH shall, on the basis of forecasts prepared by KESH and satisfactory to the Association, review whether it would meet the requirements set forth in paragraph (a) in respect of such year and the next following fiscal year and shall furnish to the Association a copy of such review upon its completion. (c) If any such review shows that KESH would not meet the requirements set forth in paragraph (a) for KESH's fiscal years covered by such review, KESH shall promptly take all necessary measures (including, without limitation, reduction of power losses and reduction of accounts receivables) in order to meet such requirements. (d) For the purposes of this Section: (i) The term "funds from internal sources" means the difference between: (A) the sum of revenues from all sources related to operations, consumer deposits and consumer contribu- tions in aid of construction, net non-operating income and any reduction in working capital other than cash; and (B) the sum of all expenses related to operations, including administration, adequate maintenance and taxes and payments in lieu of taxes (excluding provision for depreciation and other non-cash operating charges), --debt service requirements,allI cash dividends and other cash distributions of surplus, increase in working capital other than cash and other cash outflows other than capital expenditures. (ii) The term "net non-operating income" means the difference between: 5 (A) revenues from all sources other than those related to operations; and (B) expenses, including taxes and payments in lieu of taxes, incurred in the generation of revenues in (A) above. (iii) The term "working capital other than cash" means the difference between current assets excluding cash and current liabilities at the end of each fiscal year. (iv) The term "current assets excluding cash" means all assets other than cash which could in the ordinary course of business be converted into cash within twelve months, including accounts receivable, marketable securities, inventories and pre-paid expenses properly chargeable to operating expenses within the next fiscal year. (v) The term "current liabilities" means all liabilities which will become due and payable or could under circumstances then existing be called for payment within twelve months, including accounts payable, customer advances, debt service requirements, taxes and payments in lieu of taxes, and dividends. (vi) The term "debt service requirements" means the aggregate amount of repayments (including sinking fund payments, if any) of, and interest and other charges on, debt. (vii) The term "capital expenditures" means all expenditures on account of fixed assets, including interest charged to construction, related to operations. (viii) Whenever for the purposes of this Section it shall be necessary to value, in terms of the currency of the Borrower, debt payable in another currency, such valuation shall be made on the basis of the prevailing lawful rate of exchange at which such other currency is, at the time of such valuation, obtainable for the purposes of servicing such debt, or, in the absence of such rate, on the basis of a rate of exchange acceptable to the Association. Section 4.03. (a) Except as the Association shall otherwise agree, KESH shall not incur any debt unless a reasonable forecast of the revenues and expenditures of 6 KESH shows that the estimated net revenues of KESH for each fiscal year during the term of the debt to be incurred shall be at least two times the estimated debt service requirements of KESH in such year on all debt of KESH including the debt to be incurred. (b) For the purposes of this Section: (i) The term "debt" means any indebtedness of KESH maturing by its terms more than one year after the date on which it is originally incurred. (ii) Debt shall be deemed to be incurred: (A) under a loan contract or agreement or other instrument providing for such debt or for the modification of its terms of payment on the date of such contract, agreement or instrument; and (B) under a guarantee agreement, on the date the agreement providing for such guarantee has been entered into. (iii) The term "net revenues" means the difference between: (A) the sum of revenues from all sources related to operations and net non-operating income; and (B) the sum of all expenses related to operations including administration, adequate maintenance, taxes and payments in lieu of taxes, but excluding provision for depreciation, other non-cash operating charges and interest and other charges on debt. (iv) The term "net non-operating income" means the difference between: (A) revenues from all sources other than those related to operations; and (B) expenses, including taxes and payments in lieu of taxes, incurred in the generation of revenues in (A) above. 7 (v) The term "debt service requirements" means the aggregate amount of repayments (including sinking fund payments, if any) of, and interest and other charges on, debt. (vi) The term "reasonable forecast" means a forecast prepared by KESH not earlier than twelve months prior t9 the incurrence of the debt in question, which both the Association and KESH accept as reasonable and as to which the Association has notified KESH of its acceptability, provided that no event has occurred since such notification which has, or may reasonably be expected in the future to have, a material adverse effect on the financial condition or future operating results of KESH. (vii) Whenever for the purposes of this Section it shall be necessary to value, in terms of the currency of the Borrower, debt payable in another currency, such valuation shall be made on the basis of the prevailing lawful rate of exchange at which such other currency is, at the time of such valuation, obtainable for the purposes of servicing such debt, or, in the absence of such rate, on the basis of a rate of exchange acceptable to the Association. Section 4.04. KESH shall: (a) take all actions required on its part to ensure that the outstanding amounts in its accounts receivable will, on average not exceed the equivalent of two months' billing and (b) pay all bills owed by KESH within six weeks of billing. Section 4.05. KESH shall: (a) review with the Association, by September 30 of each year commencing in 1996, KESH's proposed investment expenditures program for the following five years; and (b) take the Association's views into consideration in finalizing said program. Section 4.06. KESH shall: (a) carry out the Environment Management Plan with due diligence and efficiency; 8 (b) prepare and furnish to the Association reports in form and substance satisfactory to the Association, on the progress achieved in the carrying out of the said Plan and the measures recommended to further such progress; and (c) thereafter implement all such measures as are required to ensure the achievement of the objectives of the said Plan, taking into consideration the Association's views on the matter. Section 4.07. KESH shall: (a) undertake and, complete a study on the use of Poly-chlorinated Biphenyls in accordance with terms of reference acceptable to the Association; (b) upon completion of the said study furnish a copy thereof to the Association for its comments and review; and (c) discuss with the Association the follow-up actions, if any, recommended by the said study or the Association. Section 4.08. KESH shall take all necessary measures to reduce total distribution losses of electricity entering the distribution system to 42% in the calendar year 1996 and to 34% in the calendar year 1997. Section 4.09. KESH shall: (a) carry out the Implementation Plan with due diligence and efficiency; (b) prepare and furnish to the Association reports in form and substance satisfactory to the Association, on the progress achieved in the carrying out of the said Plan and the measures recommended to further such progress; and (c) thereafter implement all such measures as are required to ensure the achievement of the objectives of the said Plan, taking into consideration the Association's views on the matter. Section 4.10. KESH shall: (a) by January 1, 1996, establish an escrow account at a commercial bank; (b) thereafter deposit all cash not needed for payment of current liabilities (as such term is defined in Section 4.02(d)(v) of this Agreement) other than those under (c) hereof into said account at the beginning of each month; and 9 (c) use the proceeds of the escrow account for payment of taxes and import duties, debt service, local costs of investments and such other purposes as may be agreed to by the Association. Section 4.11. By May 1, 1996, KESH shall appoint financial experts to its finance department with functions, powers and terms of reference acceptable to the Association. ARTICLE V Effective Date; Termination; Cancellation and Suspension Section 5.01. This Agreement shall come into force and effect on the date upon which the Development Credit Agreement becomes effective. Section 5.02. (a) This Agreement and all obligations of the Association and of KESH thereunder shall terminate on the earlier of the following two dates: (i) the date on which the Development Credit Agreement shall terminate in accordance with its terms; or (ii) the date twenty years after the date of this Agreement. (b) If the Development Credit Agreement terminates in accordance with its terms before the date specified in paragraph (a) (ii) of this Section, the Association shall promptly notify KESH of this event. Section 5.03. All the provisions of this Agreement shall continue in full force and effect notwithstanding any cancellation or suspension under the General Conditions. ARTICLE VI Miscellaneous Provisions Section 6.01. Any notice or request required or permitted to be given or made under this Agreement and any agreement between the parties contemplated by this Agreement shall be in writing. Such notice or request shall be deemed to have been duly given or made when it shall be delivered by hand or by mail, telegram, cable, telex or radiogram to the party to which it is required or permitted to be given or made at such party's address hereinafter specified or at such other address as such party shall have designated by notice to the party giving such notice or making such request. The addresses so specified are: 10 For the Association: International Development Association 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable address: Telex: INDEVAS 248423 (RCA) Washington, D.C. 82987 (FTCC) 64145 (WUI) or 197688 (TRT) For KESH: Albanian Electroen-rgetic Corporation Biloku "Vasil Shanti" Tirana, Albania Telex: 2173 DPE AB Section 6.02. Any action required or permitted to be taken, and any document required or permitted to be executed, under this Agreement on behalf of KESH may be taken or executed by Executive Director or such other person or persons as Executive Director shall designate in writing, and KESH shall furnish to the Association sufficient evidence of the authority and the authenticated specimen signature of each such person. Section 6.03. This Agreement may be executed in several counterparts, eacn of which shall be an original, and all collectively but one instrument. 11 IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized representatives, have caused this Agreement to be signed in their respective names in the District of Columbia, United States of America, as of the day and year first above written. INTERNATIONAL DEVELOPMENT ASSOCIATION By J XJ 4 e-S I ki A4 Regional Vice President Europe and Central Asia KESH ELECTROENERGETIC CORPORATION By /Auh e Re.pLrA4 eseLnjt Authorized Representative 12 SCHEDULE Procurement and Consultants' Services Section 1: Procurement of goods Part A: General Goods shall be procured in accordance with the provisions of Section I of the "Guidelines for Procurement under IBRD Loans and IDA Credits" published by the Bank in January 1995 (the Guidelines) and the following provisions of this Section, as applicable. Part B: International Competitive Bidding 1. Except as otherwise provided in Part C of this Section, goods shall be procured under contracts awarded in accordance with the provisions of Section II of the Guidelines and paragraph 5 of Appendix I thereto. 2. Preference for domestically manufactured goods The provisions of paragraphs 2.54 and 2.55 of the Guidelines and Appendix 2 thereto shall apply to goods manufactured in the territory of the Borrower. Part C: Other Procurement Procedures 1. Limited International Bidding Medium voltage cable and low voltage circuit breakers estimated to cost $1,200,000 each may be procured under two separate contracts awarded in accordance with the provisions of paragraph 3.2 of the Guidelines. 2. International Shopping Goods estimated to cost $300,000 equivalent or less per contract and $1,000,000 equivalent or less in the aggregate, may be procured under contracts awarded on the basis of international shopping procedures in accordance with the provisions of paragraphs 3.5 and 3.6 of the Guidelines. 13 Part D: Review by the Association of Procurement Decisions 1. Procurement Planning Prior to the issuance of any invitations to prequalify for bidding or to bid for contracts, the proposed procurement plan for Part A of the Project shall be furnished to the Association for its review and approval, in accordance with the provisions of paragraph I of Appendix I to the Guidelines. Procurement of all goods shall have been approved by the Association, and with the provisions of said paragraph 1. 2. Prior Review With respect to all contracts awarded under Parts B and C.1 of this Schedule, the procedures set forth in paragraphs 2 and 3 of Appendix 1 to the Guidelines shall apply. 3. Post Review With respect to each contract not governed by paragraph 2 of this Part, the procedures set forth in paragraph 4 of Appendix 1 to the Guidelines shall apply. Section II. Employment of Consultants 1. Consultants' services shall be procured under contracts awarded in accordance with the provisions of the "Guidelines for the Use of Consultants by World Bank Borrowers and by The World Bank as Executing Agency" published by the Bank in August 1981, (the Consultant Guidelines). For complex, time-based assignments, such contracts shall be based on the standard form of contract for consultants' services issued by the Association, with such modifications thereto as shall have been agreed by the Association. Where no relevant standard contract documents have been issued by the Association, other standard forms acceptable to the Association shall be used. 2. Notwithstanding the provisions of paragraph I of this Section, the provisions of the Consultants Guidelines requiring prior Association review or approval of budgets, short lists, selection procedures, letters of invitation, proposals, evaluation reports and contracts, shall not apply to: (a) contracts for the employment of consulting firms estimate to cost less than $100,000 equivalent each; or (b) contracts for the employment of individual consultants estimated to cost less tan $50,000 equivalent each. However, said exceptions to prior Association review shall not apply to: (a) the terms of reference for such contracts; (b) single-source selection of consulting firms; (c) assignment of critical nature, as reasonably determined by the Association; (d) amendments to contracts for the employment of consulting firms raising the contract value to $100,000 equivalent or above; or (e) amendments to contracts for the employment of individual consultants raising the contract value to $50,000 equivalent or above. 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. FOR SECRETARY