Page 1 July 15, 1999 Mr. Roman Shpek Chairman, National Agency of Ukraine for Development and European Integration Bogdana Khmelnytskoho 19a Kyiv 252030 Ukraine Re: Japanese Grant for Institutional Development APL Grant Number TF025817 (Recipient-Executed Portion) Dear Sir: I am writing on behalf of the International Bank for Reconstruction and Development (the Bank) to indicate the Bank’s agreement, as administrator of grant funds provided by Japan, to make a grant in an amount not exceeding US$250,000 (the Grant) to Ukraine (the Recipient). The Grant is made in response to the Recipient’s request for financial assistance and for the purposes and on the terms and conditions set forth in the Framework Grant Agreement between Ukraine and the Bank, dated January 14, 1998, and in the Annex to this Letter Agreement, which forms an integral part of this Letter Agreement. The Recipient represents, by confirming its agreement below, that it is authorized to contract and withdraw the Grant for the said purposes and on the said terms and conditions. Please confirm your agreement with the foregoing, on behalf of the Recipient, by signing, dating, and returning to us the enclosed copy of this Letter Agreement. Upon receipt by the Bank of the copy of this Letter Agreement countersigned by you, this Letter Agreement will become effective as of the date of the countersignature. Very truly yours, INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT By /s/ Paul J. Siegelbaum Country Director Belarus, Ukraine Country Unit Europe and Central Asia AGREED: By /s/ Roman Shpek, Chairman, National Agency of Ukraine for Development and European Integration Bogdana Khmelnytskoho 19a, Kyiv 252030 Ukraine DATE: September 7, 1999 Annex to the Letter Agreement For Grant Number TF025817 (Recipient-Executed Portion) Purposes, Terms, and Conditions of the Grant 1. Activities The purposes of the Grant are to assist in the preparation of the Institutional Development Project (the Project), which has as its main objectives: (a) enhance the Page 2 Government of Ukraine’s capacity to sustain the reform effort; (b) foster the development of critical market institutions; and (c) provide efficient government services. 1.1. The activities (the Activities) for which the Grant is given are as follows: Foster Institutional Capacity Development: (a) transfer knowledge to analyze business processes and/or data flows and develop a regulatory and operational framework; (b) develop internal capacity to produce organizational and management studies; (c) develop internal capacity to produce and participate in developing interim system specifications and requirements for tax administration, customs and statistics; and (d) assess and implement training requirements for the institutional development. Develop Information Technology/Systems: (a) build capacity for operational systems, (i.e., software design, technology architecture, communications); (b) develop interim systems including development of application software and procurement of hardware; (c) develop, install, and test final IT and operational systems for tax administration, customs and statistics; and (d) develop coordinating mechanisms, policies, and standards to ensure integrated operation of system country-wide. Project Support Activities: (a) sponsor local dissemination workshops; and (b) carry out study tours. 1.2 Grant funds estimated at US$5,000 will be used to procure office equipment (goods) in support of the Activities. Implementation Generally 2. The Recipient shall: (a) carry out the Activities with due diligence and efficiency; (b) promptly provide the funds, facilities, services and other resources required for that purpose; (c) furnish all information covering the Activities and the use of the proceeds of the Grant as the Bank shall reasonably request; (d) from time to time exchange views with the Bank’s representatives on the progress and results of the Activities; and (e) take all necessary measures required to enable the Bank to visit the territory of Ukraine for purposes related to the Grant. Without limitation on the foregoing, the Recipient shall, if the Bank shall so request, prepare and furnish to the Bank promptly upon completion of the Activities a report, in form and substance satisfactory to the Bank, on the results and impact of the Activities. 3. The expenditures for the following items may be financed out of the proceeds of the Grant and shall be used exclusively in the carrying out of the Activities: Amount of the Grant % of Allocated (in Expenditures to Item US Dollars) be Financed (1) Consultants’ 215,000 100% services (2) Workshops 30,000 100% -Study Tour (3) Goods 5,000 100% of foreign expenditures, 100% of local expenditures (ex-factory cost), and 80% of local expenditures for other items procured locally For purposes of this paragraph, the term "foreign expenditures" means expenditures in the currency of any country other than that of Ukraine for goods or services supplied from the territory of any country other than that of Ukraine, and the term "local expenditures" means any expenditures that are not foreign expenditures. 4. Notwithstanding the provisions of paragraph 3 above, no withdrawals shall be made: (i) for payments made for expenditures prior to the date of this Letter Agreement; or (ii) after June 30, 2001 or such later date as the Bank shall establish by written notice to the Recipient (the Closing Date), except that withdrawals may be Page 3 made for expenditures incurred prior to the Closing Date and received by the Bank within four months after the Closing Date, after which time any amount of the Grant remaining unwithdrawn from the Grant Account shall be canceled. 5. The Bank may require withdrawals from the Grant Account to be made on the basis of statements of expenditure for expenditures for: (a) services of consulting firms costing less than $100,000 equivalent; (b) services of individual consultants costing less than $50,000 equivalent; and (c) goods, all under such terms and conditions as the Bank shall specify by notice to the Recipient. 6. To facilitate the carrying out of the Activities, the Recipient may open and maintain in dollars a special deposit account (the Special Account) in a commercial bank acceptable to the Bank on terms and conditions satisfactory to the Bank, including appropriate protection against set-off, seizure or attachment. Deposits into, and payments out of, the Special Account shall be made in accordance with the provisions of Attachment I to this Annex. 7. Accounts and Audits (a) The Recipient shall maintain or cause to be maintained a financial management system, including records and accounts, and prepare financial statements in a format acceptable to the Bank, adequate to reflect in accordance with sound accounting practices the operations, resources and expenditures related to the Activities. (b) The Recipient shall: (i) have the records, accounts and financial statements referred to in subparagraph (a) above and the records and accounts for the Special Account for each fiscal year audited, in accordance with auditing standards acceptable to the Bank, 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 six months after the end of each such year, (A) certified copies of the financial statements referred to in paragraph (a) of this Section for such year as so audited, and (B) an opinion on such statements, records and accounts and report of such audit, by said auditors, of such scope and in such detail as the Bank shall have reasonably requested; and (iii) furnish to the Bank such other information concerning said records and accounts and the audit thereof, and concerning said auditors, as the Bank shall from time to time reasonably request. (c) For all expenditures with respect to which withdrawals from the Grant Account were made on the basis of statements of expenditure, the Recipient shall: (i) maintain or cause to be maintained, in accordance with subparagraph (a) above, records and accounts reflecting such expenditures; (ii) retain, until at least one year after the Bank has received the audit report for the fiscal year in which the last withdrawal from the Grant Account was made, all records (contracts, orders, invoices, bills, receipts and other documents) evidencing such expenditures; (iii) enable the Bank’s representatives to examine such records; and (iv) ensure that such records and accounts are included in the annual audit referred to in subparagraph (b) above and that the report of such audit contains a separate opinion by said auditors as to whether the statements of expenditure submitted during such fiscal year, together with the procedures and internal controls involved in their preparation, can be relied upon to support the related withdrawals. 8. Suspension and Cancellation 8.1. The Bank may at any time, by notice to the Recipient, suspend the right of the Recipient to make further withdrawals from the Grant Account if the Recipient has failed to comply with any of its obligations herein specified. 8.2. The Bank may, by written notice to the Recipient, terminate the right of the Recipient to make further withdrawals from the Grant Account: (a) at any time after the right of the Recipient to make withdrawals from the Grant Account shall have been suspended pursuant to the provisions of paragraph 8.1 above; or (b) if the Recipient shall have failed to take action, satisfactory to the Bank, within six months after the effective date hereof, to carry out the Activities. 9. Except as the Bank shall otherwise agree, procurement of the consultants’ services and goods required for the carrying out of the Activities and to be financed out of the proceeds of the Grant shall be governed by the provisions of Attachment II to this Annex. Page 4 Attachment I to the Annex to the Letter Agreement Special Account 1. For the purposes of this Attachment: (a) the term "eligible items" means the items set forth in the table in paragraph 3 of the Annex to this Letter Agreement; (b) the term "eligible expenditures" means expenditures in respect of the reasonable cost of goods and services required for the Activities and to be financed out of the proceeds of the Grant; and (c) the term "Authorized Allocation" means an amount equivalent to $75,000 withdrawn from the Grant Account and deposited into the Special Account pursuant to paragraph 3 (a) of this Attachment. 2. Payments out of the Special Account shall be made exclusively for eligible expenditures in accordance with the provisions of this Attachment. 3. After the Bank has received evidence satisfactory to it that the Special Account has been duly opened, withdrawals of the Authorized Allocation and subsequent withdrawals to replenish the Special Account shall be made as follows: (a) The Recipient shall furnish to the Bank a request or requests for a deposit into the Special Account of an amount or amounts which do not exceed the aggregate amount of the Authorized Allocation. On the basis of such request or requests, the Bank shall, on behalf of the Recipient, withdraw from the Grant Account and deposit into the Special Account such amount or amounts out of the proceeds of the Grant as the Recipient shall have requested. (b) (i) For replenishment of the Special Account, the Recipient shall furnish to the Bank requests for deposits into the Special Account at such intervals as the Bank shall specify. (ii) Prior to or at the time of each such request, the Recipient shall furnish to the Bank the documents and other evidence required pursuant to paragraph 4 of this Attachment for the payment or payments in respect of which replenishment is requested. On the basis of each such request, the Bank shall, on behalf of the Recipient, withdraw from the Grant Account and deposit into the Special Account such amount as the Recipient shall have requested and as shall have been shown by said documents and other evidence to have been paid out of the Special Account for eligible expenditures. All such deposits shall be withdrawn by the Bank from the Grant Account under the eligible item(s), and in the respective equivalent amounts, as shall have been justified by said documents and other evidence. 4. For each payment made by the Recipient out of the Special Account, the Recipient shall, at such time as the Bank shall reasonably request, furnish to the Bank such documents and other evidence showing that such payment was made exclusively for eligible expenditures. 5. Notwithstanding the provisions of paragraph 3 of this Attachment, the Bank shall not be required to make further deposits into the Special Account: (a) if, at any time, the Bank shall have determined that all further withdrawals should be made by the Recipient directly from the Grant; (b) if the Recipient shall have failed to furnish to the Bank, within the period of time specified in paragraph 7 (b) of the Annex to this Letter Agreement, any of the audit reports required to be furnished to the Bank pursuant to said paragraph Page 5 in respect of the audit of the records and accounts for the Special Account; (c) if, at any time, the Bank shall have notified the Recipient of its intention to suspend in whole or in part the right of the Recipient to make withdrawals from the Grant Account pursuant to the provisions of paragraph 8 of the Annex to this Letter Agreement; or (d) once the total unwithdrawn amount of the Grant shall equal the equivalent of twice the amount of the Authorized Allocation. Thereafter, withdrawals from the Grant Account of the remaining unwithdrawn amount of the Grant shall follow such procedures as the Bank shall specify by notice to the Recipient. Such further withdrawals shall be made only after and to the extent that the Bank shall have been satisfied that all such amounts remaining on deposit in the Special Account as of the date of such notice will be utilized in making payments for eligible expenditures. 6. (a) If the Bank shall have determined at any time that any payment out of the Special Account: (i) was made for an expenditure or in an amount not eligible pursuant to paragraph 2 of this Attachment; or (ii) was not justified by the evidence furnished to the Bank, the Recipient shall, promptly upon notice from the Bank: (A) provide such additional evidence as the Bank may request; or (B) deposit into the Special Account (or, if the Bank shall so request, refund to the Bank) an amount equal to the amount of such payment or the portion thereof not so eligible or justified. Unless the Bank shall otherwise agree, no further deposit by the Bank into the Special Account shall be made until the Recipient has provided such evidence or made such deposit or refund, as the case may be. (b) If the Bank shall have determined at any time that any amount outstanding in the Special Account will not be required to cover further payments for eligible expenditures, the Recipient shall, promptly upon notice from the Bank, refund to the Bank such outstanding amount. Attachment II to the Annex to the Letter Agreement Procurement Section I. Consultants’ Services Part A: General Consultants’ services shall be procured in accordance with the provisions of the Introduction and Section IV of the "Guidelines": Selection and Employment of Consultants by World Bank Borrowers" published by the Bank in January 1997 and revised January 1999 (the Consultant Guidelines) and the following provisions of this Section I. Part B: Other Procedures for the Selection of Consultants 1. Selection Based on Consultants’ Qualifications Services for Technical Assistance under Part A of the Project estimated to cost less than $100,000 equivalent per contract may be procured under contracts awarded in accordance with the provisions of paragraphs 3.1 and 3.7 of the Consultant Guidelines. 2. Single Source Selection Services for Technical Assistance under Part A of the Project which are estimated to cost less than $100,000 equivalent per contract, may, with the Bank’s prior agreement, be procured in accordance with the provisions of paragraphs 3.8 through 3.11 of the Consultant Guidelines. 3. Individual Consultants Services for Technical Assistance under Part A of the Project tasks that meet the requirements set forth in paragraph 5.01 of the Consultant Guidelines shall be procured under contracts awarded to individual consultants in accordance with the provisions of paragraphs 5.1 through 5.3 of the Consultant Guidelines. Page 6 Part C: Review by the Bank of the Selection of Consultants 1. Selection Planning Prior to the issuance to consultants of any requests for proposals, the proposed plan for the selection of consultants under the Project shall be furnished to the Bank for its review and approval, in accordance with the provisions of paragraph 1 of Appendix 1 to the Consultant Guidelines. Selection of all consultants’ services shall be undertaken in accordance with such selection plan as shall have been approved by the Bank, and with the provisions of said paragraph 1. 2. Prior Review (a) With respect to each contract for the employment of consulting firms estimated to cost the equivalent of $100,000 or more, but less than the equivalent of $200,000, the procedures set forth in paragraphs 1, 2 (other than the second subparagraph of paragraph 2(a)) and 5 of Appendix 1 to the Consultant Guidelines shall apply. (b) With respect to each contract for the employment of individual consultants estimated to cost the equivalent of $50,000 or more, the procedures set forth in paragraphs 1, 2 (other than the third subparagraph of paragraph 2(a)) and 5 of Appendix 1 to the Consultant Guidelines shall apply. 3. Post Review With respect to each contract not governed by paragraph 1 of this Part, the procedures set forth in paragraph 4 of Appendix 1 to the Consultant Guidelines shall apply. Section II. Procurement of Goods Goods shall be procured: (a) 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 and revised in January and August 1996, September 1997 and January 1999 (the Guidelines); and (b) under contracts awarded on the basis of shopping procedures in accordance with the provisions of paragraphs 3.5 and 3.6 of the Guidelines. The review procedures set forth in paragraph 4 of Appendix 1 to the Guidelines shall apply to such contracts, provided that the word "bids", in such paragraph 4, shall be read as "quotations".