Page 1 CONFORMED CREDIT NUMBER 3786-BO Development Credit Agreement (Second Programmatic Structural Adjustment Credit for Decentralization) between REPUBLIC OF BOLIVIA and INTERNATIONAL DEVELOPMENT ASSOCIATION Dated June 23, 2003 Page 2 CREDIT NUMBER 3786-BO DEVELOPMENT CREDIT AGREEMENT AGREEMENT, dated June 23, 2003, between REPUBLIC OF BOLIVIA (the Borrower) and INTERNATIONAL DEVELOPMENT ASSOCIATION (the Association). WHEREAS (A) The Association has received from the Borrower a letter, dated March 18, 2003, (hereinafter called the Letter of Development Policy), describing a program of actions, objectives and policies designed to achieve structural adjustment of the Borrower’s economy (hereinafter called the Program), declaring the Borrower’s commitment to the execution of the Program, and requesting assistance from the Association in support of the Program during the execution thereof; and (B) the Borrower has carried out the measures and taken the actions described in Schedule 2 to this Agreement to the satisfaction of the Association and has maintained a macroeconomic policy framework satisfactory to the Association; and WHEREAS on the basis, inter alia, of the foregoing, the Association has decided in support of the Program to provide such assistance to the Borrower by making the Credit in a single tranche as hereinafter provided; NOW THEREFORE the parties hereto hereby agree as follows: ARTICLE I General Conditions; Definitions Section 1.01. The “General Conditions Applicable to Development Credit Agreements” of the Association, dated January 1, 1985, (as amended through October 6, 1999), with the modifications thereof set forth below (the General Conditions) constitute an integral part of this Agreement: (a) Section 2.01, paragraph 12, is modified to read: “‘Project’ means the Program, referred to in the Preamble to the Development Credit Agreement, in support of which the Credit is made.”; (b) Section 4.01 is modified to read: “Except as the Borrower and the Association shall otherwise agree, withdrawals from the Credit Account shall be made in the currency of the deposit account specified in Section 2.02 of the Development Credit Agreement.”; Page 3 - 2 - (c) Section 5.01 is modified to read: “The Borrower shall be entitled to withdraw the proceeds of the Credit from the Credit Account in accordance with the provisions of the Development Credit Agreement and of these General Conditions”; (d) The last sentence of Section 5.03 is deleted; (e) Section 9.06 (c) is modified to read: “(c) Not later than six months after the Closing Date or such later date as may be agreed for this purpose between the Borrower and the Association, the Borrower shall prepare and furnish to the Association a report, of such scope and in such detail as the Association shall reasonably request, on the execution of the Program referred to in the Preamble to the Development Credit Agreement, the performance by the Borrower and the Association of their respective obligations under the Development Credit Agreement and the accomplishment of the purposes of the Credit.”; and (f) Section 9.04 is deleted and Sections 9.05, 9.06 (as modified above), 9.07 and 9.08 are renumbered, respectively, Sections 9.04, 9.05, 9.06 and 9.07. Section 1.02. Unless the context otherwise requires, the several terms defined in the General Conditions and in the Preamble to this Agreement have the respective meanings therein set forth and the following additional terms have the following meanings: (a) “CAD” means ‘ Comité de Análisis de Descentralización ’, a committee established pursuant to the Borrower’s Multi-Ministerial Resolution No. 001/2002, dated November 12, 2002, to oversee the Borrower’s decentralization policies; (b) “CDAPs” means ‘ Comités Departamentales de Aprobación de Proyectos ’, departmental committees established and operating under the laws of the Borrower for the approval of FPS investment projects (as hereinafter defined); (c) “Deposit Account” means the account referred to in Section 2.02 (b) of this Agreement; (d) “DUF” means ‘ Directorio Único de Fondos ’, the Unified Directorate of Funds within the Borrower’s Ministry in charge of sustainable development, established and operating under the laws of the Borrower; (e) “FNDR” means ‘ Fondo Nacional de Desarrollo Regional’ , the Bo rrower’s national fund for regional development established, pursuant to Law No. 926, dated March 25, 1987, as the agency responsible for investment credit financing to Municipalities and Prefectures (both as hereinafter defined) in the Borrower’s territory; Page 4 - 3 - (f) “FPS” means ‘ Fondo Nacional de Inversión Productiva y Social’ , the Borrower’s national productive and social investment fund established by the Borrower, pursuant to Supreme Decree No. 25984 dated November 16, 2000, and to Law No. 2235, dated March 31, 2001, as the agency responsible for implementing the National Compensation Policy (as hereinafter defined); (g) “FPS Operational Manual” means the operational manual adopted by FPS in connection with the Program, including procedures on monitoring, supervision and auditing of FPS procedures, effective distribution of FPS’ resources and eligibility criteria for municipal grant operations; (h) “Municipality” means any of the municipal governments in the Borrower’s territory; (i) “National Compensation Policy” means the Borrower’s policy set forth in Articles 1 through 10 of Supreme Decree No. 25984 of November 16, 2000, that defines the Borrower’s approach to financing priority programs and projects at the local level; (j) “Prefecture” means any of the departmental administrations in the Borrower’s territory; (k) “PRF” means ‘ Programa de Readecuación Financiera’ , the Borrower’s financial restructuring plan for the Borrower’s public sector, governed by Decree No. 25737, dated April 14, 2000; and (l) “PRF Agreements” means any or all of the agreements to be entered into between a Municipality and the Borrower’s Ministry in charge of finance for the purposes of carrying out the financial restructuring plan for the Borrower’s public sector adopted pursuant to Decree No. 25737 of April 14, 2000. ARTICLE II The Credit Section 2.01. The Association agrees to lend to the Borrower, on the terms and conditions set forth or referred to in the Development Credit Agreement, an amount in various currencies equivalent to eighteen million Special Drawing Rights (SDR18,000,000). Section 2.02. (a) Subject to the provisions of paragraphs (b) and (c) of this Section, the Borrower shall be entitled to withdraw the proceeds of the Credit from the Credit Account in support of the Program. (b) The Borrower shall open, prior to furnishing to the Association the first request for withdrawal from the Credit Account, and thereafter maintain in its central bank, a deposit account in Dollars on terms and conditions satisfactory to the Association. All Page 5 - 4 - withdrawals from the Credit Account shall be deposited by the Association into the Deposit Account. (c) The Borrower undertakes that the proceeds of the Credit shall not be used to finance expenditures excluded pursuant to the provisions of Schedule 1 to this Agreement. If the Association shall have determined at any time that any proceeds of the Credit shall have been used to make a payment for an expenditure so excluded, the Borrower shall, promptly upon notice from the Association: (i) deposit into the Deposit Account an amount equal to the amount of said payment; or (ii) if the Association shall so request, refund such amount to the Association. Amounts refunded to the Association upon such request shall be credited to the Credit Account for cancellation. Section 2.03. The Closing Date shall be January 31, 2004, or such later date as the Association shall establish. The Association shall promptly notify the Borrower of such later date. Section 2.04. (a) The Borrower shall pay to the Association a commitment charge on the principal amount of the Credit not withdrawn from time to time at a rate to be set by the Association as of June 30 of each year, but not to exceed the rate of one-half of one percent (1/2 of 1%) per annum. (b) The commitment charge shall accrue: (i) from the date sixty days after the date of this Agreement (the accrual date) to the respective dates on which amounts shall be withdrawn by the Borrower from the Credit Account or cancelled; and (ii) at the rate set as of June 30 immediately preceding the accrual date and at such other rates as may be set from time to time thereafter, pursuant to paragraph (a) above. The rate set as of June 30 in each year shall be applied from the next date in that year specified in Section 2.06 of this Agreement. (c) The commitment charge shall be paid: (i) at such places as the Association shall reasonably request; (ii) without restrictions of any kind imposed by, or in the territory of, the Borrower; and (iii) in the currency specified in this Agreement for the purposes of Section 4.02 of the General Conditions or in such other eligible currency or currencies as may from time to time be designated or selected pursuant to the provisions of that Section. Section 2.05. The Borrower shall pay to the Association a service charge at the rate of three-fourths of one percent (3/4 of 1%) per annum on the principal amount of the Credit withdrawn and outstanding from time to time. Section 2.06. Commitment charges and service charges shall be payable semiannually on February 15 and August 15 in each year. Section 2.07. (a) Subject to paragraphs (b), (c) and (d) below, the Borrower shall repay the principal amount of the Credit in semiannual installments payable on each February 15 and August 15 commencing August 15, 2013, and ending February Page 6 - 5 - 15, 2023. Each installment to and including the installment payable on February 15, 2023, shall be five percent (5%) of such principal amount. (b) Whenever: (i) the Borrower's per capita gross national product (GNP), as determined by the Association, shall have exceeded for three consecutive years the level established annually by the Association for determining eligibility to access the Association’s resources; and (ii) the Bank shall consider the Borrower creditworthy for Bank lending, the Association may, subsequent to the review and approval thereof by the Executive Directors of the Association and after due consideration by the Association of the development of the Borrower's economy, modify the repayment of installments under paragraph (a) above by: (A) requiring the Borrower to repay twice the amount of each such installment not yet due until the principal amount of the Credit shall have been repaid; and (B) requiring the Borrower to commence repayment of the principal amount of the Credit as of the first semiannual payment date referred to in paragraph (a) above falling six months or more after the date on which the Association notifies the Borrower that the events set out in this paragraph (b) have occurred, provided, however, that there shall be a grace period of a minimum of five years on such repayment of principal. (c) If so requested by the Borrower, the Association may revise the modification referred to in paragraph (b) above to include, in lieu of some or all of the increase in the amounts of such installments, the payment of interest at an annual rate agreed with the Association on the principal amount of the Credit withdrawn and outstanding from time to time, provided that, in the judgment of the Association, such revision shall not change the grant element obtained under the above- mentioned repayment modification. (d) If, at any time after a modification of terms pursuant to paragraph (b) above, the Association determines that the Borrower's economic condition has deteriorated significantly, the Association may, if so requested by the Borrower, further modify the terms of repayment to conform to the schedule of installments as provided in paragraph (a) above. Section 2.08. The currency of the United States of America is hereby specified for the purposes of Section 4.02 of the General Conditions. Page 7 - 6 - ARTICLE III Particular Covenants Section 3.01. (a) The Borrower and the Association shall from time to time, at the request of either party, exchange views on the progress achieved in carrying out the Program. (b) Prior to each such exchange of views, the Borrower shall furnish to the Association for its review and comment a report on the progress achieved in carrying out the Program, in such detail as the Association shall reasonably request. (c) Without limitation upon the provisions of paragraph (a) of this Section, the Borrower shall exchange views with the Association on any proposed action to be taken after the disbursement of the Credit which would have the effect of materially reversing the objectives of the Program, or any action taken under the Program, including any action specified in Schedule 2 to this Agreement. Section 3.02. Upon the Association’s request, the Borrower shall: (a) have the Deposit Account audited in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Association; (b) furnish to the Association as soon as available, but in any case not later than four months after the date of the Association’s request for such audit, a certified copy of the report of such audit by said auditors, of such scope and in such detail as the Association shall have reasonably requested; and (c) furnish to the Association such other information concerning the Deposit Account and the audit thereof as the Association shall have reasonably requested. ARTICLE IV Additional Event of Suspension Section 4.01. Pursuant to Section 6.02 (l) of the General Conditions, the following additional events are specified: (a) A situation has arisen which shall make it improbable that the Program, or a significant part thereof, will be carried out. (b) The Borrower’s macroeconomic policy framework has become inconsistent with the objectives of the Program. Page 8 - 7 - (c) An action has been taken or a policy has been adopted to reverse any action or policy under the Program in a manner that would, in the opinion of the Association, adversely affect the achievement of the objectives of the Program. (d) An action has been taken or a policy has been adopted to reverse any action listed in Schedule 2 to this Agreement. ARTICLE V Termination Section 5.01. The date September 22, 2003 is hereby specified for the purposes of Section 12.04 of the General Conditions. ARTICLE VI Representative of the Borrower; Addresses Section 6.01. The Minister of the Borrower at the time responsible for Finance is designated as the representative of the Borrower for the purposes of Section 11.03 of the General Conditions. Section 6.02. The following addresses are specified for the purposes of Section 11.01 of the General Conditions: For the Borrower: Ministerio de Hacienda Palacio de las Comunicaciones, Piso 19 Av. Mariscal Santa Cruz, esq. Calle Oruro s/n La Paz, Bolivia Cable address: Facsimile: FINANZA La Paz, Bolivia (591-2) 235-9955 Page 9 - 8 - For the Association: International Development Association 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable address: Telex: Facsimile: INDEVAS 248423 (MCI) or (202) 477-6391 Washington, D.C. 64145 (MCI) Page 10 - 9 - IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized representatives, have caused this Agreement to be signed in their respective names in the District of Columbia, United States of America, as of the day and year first above written. REPUBLIC OF BOLIVIA By /s/ Jaime Aparicio Otero Authorized Representative INTERNATIONAL DEVELOPMENT ASSOCIATION By /s/ David de Ferranti Regional Vice President Latin America and the Caribbean Page 11 - 10 - SCHEDULE 1 Excluded Expenditures For purposes of Section 2.02 (c) of this Agreement, the proceeds of the Credit shall not be used to finance any of the following expenditures: 1. expenditures in the currency of the Borrower or for goods or services supplied from the territory of the Borrower; 2. expenditures for goods or services supplied under a contract which any national or international financing institution or agency other than the Bank or the Association shall have financed or agreed to finance, or which the Association or the Bank shall have financed or agreed to finance under another credit or a loan; 3. expenditures for goods included in the following groups or subgroups of the Standard International Trade Classification, Revision 3 (SITC, Rev.3), published by the United Nations in Statistical Papers, Series M, No. 34/Rev.3 (1986) (the SITC), or any successor groups or subgroups under future revisions to the SITC, as designated by the Association by notice to the Borrower: Group Subgroup Description of Items 112 - Alcoholic beverages 121 - Tobacco, unmanu- factured, tobacco refuse 122 - Tobacco, manufactured (whether or not containing tobacco substitutes) 525 - Radioactive and associated materials 667 - Pearls, precious and semiprecious stones, unworked or worked Page 12 - 11 - Group Subgroup Description of Items 718 718.7 Nuclear reactors, and parts thereof; fuel elements (cartridges), non-irradiated, for nuclear reactors 728 728.43 Tobacco processing machinery 897 897.3 Jewelry of gold, silver or platinum group metals (except watches and watch cases) and goldsmiths’ or silversmiths’ wares (including set gems) 971 - Gold, non-monetary (excluding gold ores and concentrates) 4. expenditures for goods intended for a military or paramilitary purpose or for luxury consumption; 5. expenditures for environmentally hazardous goods (for purposes of this paragraph the term “environmentally hazardous goods” means goods, the manufacture, use or import of which is prohibited under the laws of the Borrower or international agreements to which the Borrower is a party); 6. expenditures: (a) in the territories of any country which is not a member of the Bank or for goods procured in, or services supplied from, such territories; or (b) on account of any payment to persons or entities, or any import of goods, if such payment or import is prohibited by a decision of the United Nations Security Council taken under Chapter VII of the Charter of the United Nations; and 7. expenditures under a contract in respect of which the Association determines that corrupt or fraudulent practices were engaged in by representatives of the Borrower or of a beneficiary of the Credit during the procurement or execution of such contract, without the Page 13 - 12 - Borrower having taken timely and appropriate action satisfactory to the Association to remedy the situation. Page 14 - 13 - SCHEDULE 2 Actions Referred to in Recital (B) of the Preamble to this Agreement 1. Ministerial Resolution No. 013 has been issued on April 28, 2003, by the Borrower’s Ministry of Services and Public Works, clarifying the roles and responsibilities of the different levels of public administration in the provision of rural electrification services, including network extensions, mini-networks, and off-network systems in rural areas. 2. Supreme Resolution No. 221487 has been issued by the Borrower on January 20, 2003, to simplify procedures at the Borrower’s Ministry of Finance for approving municipal proposals to modify the rates and structures of local taxes and fees. 3. The FPS Operational Manual has been modified by the Borrower in a manner satisfactory to the Association, so as to simplify financing, project evaluation and safeguard policies. 4. FPS has contracted an external private firm to manage an anti-corruption and anti- fraud hotline. 5. Supreme Decree No. 26868 has been issued on December 17, 2002, by the Borrower to require: (i) monthly disclosure from July 1, 2003, of gross and net governmental fiscal transfers to municipalities; (ii) private credit rating for municipalities with more than 50,000 inhabitants as a prerequisite for access to credit; (iii) certification by the Borrower’s Ministry of Finance of municipalities which do not exceed the legal existing debt stock and debt service limits; and (iv) a limit no greater than 50% on the withholdings by the Borrower on governmental fiscal transfers to municipalities. 6. DUF has issued Resolution No. 081/02 on November 26, 2002, requiring that the 15 largest municipalities in terms of population undergo annual financial assessments conducted by a private and accredited auditing agency as a prerequisite for accessing public and private credit (and also requiring that these assessments be annually published). 7. DUF has issued Resolution No. 083/02 on November 26, 2002, establishing bylaws for CDAPs. 8. Supreme Resolution No. 122 has been issued by the Borrower on March 18, 2003, to define sanctions and related procedures to be applied to municipalities not in compliance with PRF Agreements. Page 15 - 14 - 9. The Borrower has established the CAD. 10. DUF has issued Resolution No. 082/02 on November 26, 2002, requiring that FNDR make credit provisions based on municipal credit ratings.