Page 1 CONFORMED COPY TF GRANT NUMBER TF057878-GZ Trust Fund Grant Agreement (Additional Financing for the Integrated Community Development Project) between PALESTINE LIBERATION ORGANIZATION (for the Benefit of the Palestinian Authority) and INTERNATIONAL DEVELOPMENT ASSOCIATION (as Administrator of the Trust Fund for Gaza and West Bank) Dated February 2, 2007 Page 2 TF GRANT NUMBER TF057878-GZ TRUST FUND GRANT AGREEMENT AGREEMENT, dated February 2, 2007, between the PALESTINE LIBERATION ORGANIZATION (for the benefit of the Palestinian Authority) (the “Recipient”) and the INTERNATIONAL DEVELOPMENT ASSOCIATION (the “World Bank”), acting as administrator of the Trust Fund for Gaza and West Bank, established on October 19, 1993, by Resolution No. 93-11 and IDA 93-7, as amended by Resolution No. 95-6 and IDA 95-3 and Resolution No. 96-11 and IDA 96-7, and as further amended by Resolution No. 99-3 and IDA 99-2 and Resolution No. 03-193 and IDA 03-208, of the Executive Directors of the International Bank for Reconstruction and Development and the International Development Association (the “Trust Fund”). WHEREAS (A) the Board of Governors of the International Bank for Reconstruction and Development and the International Development Association has resolved, on February 4, 2004, to, inter alia, replenish the Trust Fund in the amount of eighty million dollars ($80,000,000), such amount to be transferred from the surplus of the International Bank for Reconstruction and Development and to be used for financing rehabilitation projects in parts of the Gaza Strip (“Gaza”) and the West Bank (the “West Bank”), which are under the jurisdiction of the Palestinian Authority; (B) the Palestine Liberation Organization and the Government of the State of Israel have entered, on September 28, 1995, into an agreement which, among other things , sets out certain interim self-government arrangements in Gaza and the West Bank (the “Interim Agreement”); (C) Section 5(b) of Article IX of the Interim Agreement authorizes the Palestine Liberation Organization to conduct negotiations and, in certain cases described thereunder, sign agreements with states and international organizations for the benefit of the Palestinian Authority; and (D) the Palestinian Authority, on behalf of the Recipient, has requested the World Bank to provide additional financing for activities related to the Original Project (as defined in the Appendix to this Agreement), which are described in Schedule 1 to this Agreement (the “Project”); WHEREAS the World Bank has agreed, on the basis, among other things , of the foregoing to extend the Grant to the Palestine Liberation Organization, for the benefit of the Palestinian Authority, upon the terms and conditions set forth in this Grant Agreement; Page 3 - 2 - ARTICLE I – STANDARD CONDITIONS; DEFINITIONS 1.01. The Standard Conditions for Grants Made by the World Bank Out of Various Funds, dated July 20, 2006 (“Standard Conditions”), in Appendix-II to this Agreement, constitute an integral part of this Agreement. 1.02. Unless the context requires otherwise, the capitalized terms used in this Agreement have the meanings ascribed to them in the Standard Conditions or in this Agreement. ARTICLE II – THE PROJECT 2.01. The Recipient declares its commitment to the objectives of the Project described in Schedule 1 to this Agreement. To this end, the Recipient shall carry out the Project in accordance with the provisions of Article II of the Standard Conditions and the Project Agreement. 2.02. Without limitation upon the provisions of Section 2.01 of this Agreement, and except as the Recipient and the World Bank shall otherwise agree, the Recipient shall ensure that the Project is carried out in accordance with the provisions of Schedule 2 to this Agreement. ARTICLE III – THE GRANT 3.01. The World Bank agrees to extend to the Recipient, on the terms and conditions set forth or referred to in this Agreement, a grant in an amount equal to five million United States Dollars ($5,000,000 ) (“Grant”) to assist in financing the Project. 3.02. The Recipient may withdraw the proceeds of the Grant in accordance with Section IV of Schedule 2 to this Agreement. ARTICLE IV – ADDITIONAL REMEDIES 4.01. The Additional Events of Suspension referred to in Section 4.02(i) of the Standard Conditions consist of the following: (a) Ineligibility of the Recipient. IBRD or IDA has declared the Recipient ineligible to be awarded a contract financed by IBRD or IDA. Page 4 - 3 - ARTICLE V – EFFECTIVENESS; TERMINATION 5.01. This Agreement shall not become effective until evidence satisfactory to the World Bank has been furnished to the World Bank that the conditions specified below have been satisfied. (a) The execution and delivery of this Agreement on behalf of the Recipient have been duly authorized or ratified by all necessary governmental and corporate action. (b) The Subsidiary Agreement referred to in Section I.A of Schedule 2 to this Agreement has been executed on behalf of the Recipient and the PECDAR. 5.02. As part of the evidence to be furnished pursuant to Section 5.01(a), there shall be furnished to the World Bank an opinion or opinions satisfactory to the World Bank of counsel acceptable to the World Bank or, if the World Bank so requests, a certificate satisfactory to the World Bank of a competent official of the Member Country, showing the following matters: (a) on behalf of the Recipient, that this Agreement has been duly authorized or ratified by, and executed and delivered on its behalf and is legally binding upon it in accordance with its terms; (b) the Subsidiary Agreement referred to in Section I.A of Schedule 2 to this Agreement has been duly authorized or ratified by the Recipient and the PECDAR and is legally binding upon each such party in accordance with its terms. 5.03. Except as the Recipient and the World Bank shall otherwise agree, this Agreement shall enter into effect on the date upon which the World Bank dispatches to the Recipient notice of its acceptance of the evidence required pursuant to Section 5.01 (“Effective Date”). If, before the Effective Date, any event has occurred which would have entitled the World Bank to suspend the right of the Recipient to make withdrawals from the Grant Account if this Agreement had been effective, the World Bank may postpone the dispatch of the notice referred to in this Section until such event (or events) has (or have) ceased to exist. 5.04. Termination for Failure to Become Effective. This Agreement and all obligations of the parties under it shall terminate if it has not entered into effect ninety (90) days after the date of this Agreement, unless the World Bank, after consideration of the reasons for the delay, establishes a later date for the purpose of this Section. The World Bank shall promptly notify the Recipient of such later date. Page 5 - 4 - ARTICLE VI – RECIPIENT’S REPRESENTATIVE; ADDRESSES 6.01. The Recipient’s Representative referred to in Section 7.02 of the Standard Conditions is Chief of Staff at the Office of the President of the Palestinian Authority. 6.02. The Recipient’s Address referred to in Section 7.01 of the Standard Conditions is: Dr. Rafiq Al-Husseini Chief of Staff Office of the President Palestinian Authority Ramallah, West Bank Telephone: Facsimile: 970-2-298 1370 970-2-296 9740 6.03. The World Bank’s Address referred to in Section 7.01 of the Standard Conditions is: International Development Association 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable: Telex: Facsimile: INDEVAS 248423 (MCI) or 1-202-477-6391 Washington, D.C. 64145 (MCI) Page 6 - 5 - AGREED at the West Bank, as of the day and year first above written. PALESTINE LIBERATION ORGANIZATION (for the Benefit of the Palestinian Authority) By /s/ Rafiq Al-Husseini Authorized Representative INTERNATIONAL DEVELOPMENT ASSOCIATION as Administrator of the Trust Fund for Gaza and West Bank By /s/ Juan Jose Daboub Authorized Representative Page 7 - 6 - SCHEDULE I Project Description The objective of the Project is to improve the quality and availability of basic economic and social services in poor and marginalized communities in the parts of the West Bank and Gaza under the jurisdiction of the Palestinian Authority. The Project consists of the following parts. Part 1 : Community Grants Provision of Community Grants to Local Government Units and Popular Services Committees to finance Micro-projects. Part 2 : Project Management Project management support to ensure the effective carrying out of the Project and the supervision of its execution. Page 8 - 7 - SCHEDULE II Project Execution Section I. Institutional and Other Arrangements A. Subsidiary Agreement 1. To facilitate the carrying out of the Project, the Recipient shall make the proceeds of the Grant available to PECDAR under a subsidiary agreement between the Recipient and PECDAR, under terms and conditions approved by the World Bank. 2. The Recipient shall exercise its rights under the Subsidiary Agreement in such manner as to protect the interests of the Recipient and the World Bank and to accomplish the purposes of the Grant. Except as the World Bank shall otherwise agree, the Recipient shall not assign, amend, arrogate or waive the Subsidiary Agreement of any of its provisions. B. Project Manuals and Plans 1. The Recipient shall cause PECDAR to: (i) ensure that the Project will be carried out in accordance with the provisions of this Agreement, the Operations Manual, and the Environmental Management Plan; and (ii) take all action, including the provision of funds, facilities, services, and other resources, necessary or appropriate for the carrying out of the Project; and (iii) not to take or permit to be taken any action which would prevent or interfere with the carrying out of the Project. 2. Except as the World Bank shall otherwise agree, the Recipient shall ensure that no provision of the Operations Manual and the Environmental Management Plan is amended or waived if, in the opinion of the World Bank, such amendment or waiver may materially and adversely affect the carrying out of the Project or the achievement of the objectives thereof. 3. The Recipient shall ensure that selection of Local Government Units and other beneficiaries under this Project are carried out in accordance with the Operations Manual and other terms and conditions agreed with the World Bank. C. Environmental and Social Safeguards 1. The Recipient shall cause PECDAR to update the Environmental Management Plan by no later than January 31, 2007, in a manner satisfactory to the Bank. Page 9 - 8 - 2. The Recipient shall ensure that PECDAR shall carry out and implement the Project in accordance with the applicable provisions of the Environmental Management Plan. 3. The Recipient shall ensure that no action is taken which shall prevent or interfere with the carrying out of any activities required under the Environmental Management Plan. Section II. Financial Management, Project Monitoring, Reporting, and Evaluation A. Financial Management and Audits 1. The Recipient shall ensure that a financial management system is maintained in accordance with the provisions of Section 2.07 of the Standard Conditions. 2. The Recipient shall ensure that interim unaudited financial reports for the Project are prepared and furnished to the World Bank not later than forty five (45) days after the end of each calendar quarter, covering the quarter, in form and substance satisfactory to the World Bank. 3. The Recipient shall have its Financial Statements for the Project audited in accordance with the provisions of Section 2.07(b) of the Standard Conditions. Each such audit of the Financial Statements shall cover the period of one fiscal year of the Recipient. The audited Financial Statements for each such period shall be furnished to the World Bank not later than six (6) months after the end of such period. B. Project Monitoring, Reporting, and Evaluation 1. The Recipient shall monitor and evaluate the progress of the Project and prepare Project Reports in accordance with the provisions of Section 2.06 of the Standard Conditions and on the basis of the indicators agreed with the World Bank. Each Project Report shall cover the period of each calendar semester, and shall be furnished to the World Bank not later than forty five (45) days after the end of the period covered by such report. 2. The Recipient shall prepare the Completion Report in accordance with the provisions of the Section 2.06 of the Standard Conditions. The Completion Report shall be furnished to the World Bank not later than six (6) months after the Closing Date. Page 10 - 9 - Section III. Procurement A. General 1. Procurement and Consultant Guidelines. All goods, works and services required for the Project and to be financed out of the proceeds of the Grant shall be procured in accordance with the requirements set forth or referred to in: (a) Section I of the “Guidelines for Procurement under IBRD Loans and IDA Credits” published by the World Bank in May 2004 (“Procurement Guidelines”) in the case of goods and works, and Sections I and IV of the “Guidelines: Selection and Employment of Consultants by World Bank Recipients” published by the World Bank in May 2004 (“Consultant Guidelines”) in the case of consultants’ services; and (b) the provisions of this Section III, as the same shall be elaborated in the procurement plan prepared and updated from time to time by the Recipient for the Project in accordance with paragraph 1.16 of the Procurement Guidelines and paragraph 1.24 of the Consultant Guidelines (“Procurement Plan”). 2. Definitions. The capitalized terms used below in this Section to describe particular procurement methods or methods of review by the World Bank of particular contracts, refer to the corresponding method described in the Procurement Guidelines, or Consultant Guidelines, as the case may be. B. Particular Methods of Procurement of Goods and Works 1. Goods and works shall be procured under contracts awarded on Community Participation procedures, which have been found acceptable to the World Bank. These procedures shall be specified in the Procurement Plan. C. Particular Methods of Procurement of Consultants’ Services 1. Quality- and Cost-based Selection. Except as otherwise provided in paragraph 2 below, consultants’ services shall be procured under contracts awarded on the basis of Quality and Cost-based Selection. 2. Other Methods of Procurement of Consultants’ Services . The following methods, other than Quality and Cost-based Selection, may be used for procurement of consultants’ services for those assignments, which are specified in the Procurement Plan: (a) Least Cost Selection; (b) Selection based on Consultants’ Qualifications; and (c) Single-source Selection. The Procurement Plan shall specify the circumstances under which such methods may be used. Page 11 - 10 - D. Review by the World Bank of Procurement Decisions 1. The Procurement Plan shall set forth those contracts which shall be subject to the World Bank’s Prior Review. All other contracts shall be subject to Post Review by the World Bank. Section IV. Withdrawal of Grant Proceeds A. General 1. The Recipient may withdraw the proceeds of the Grant in accordance with the provisions of (a) Article III of the Standard Conditions, (b) this Section, and (c) such additional instructions as the World Bank may specify by notice to the Recipient (including the “World Bank Disbursement Guidelines for Projects” dated May 2006, as revised from time to time by the World Bank and as made applicable to this Agreement pursuant to such instructions), to finance Eligible Expenditures as set forth in the table in paragraph 2 below. 2. The following table specifies the categories of Eligible Expenditures that may be financed out of the proceeds of the Grant (“Category”), the allocations of the amounts of the Grant to each Category, and the percentage of expenditures to be financed for Eligible Expenditures in each Category: Category Amount of the Grant Allocated (expressed in US Dollars) Percentage of Expenditures to be Financed (1) Community Grants for Micro-projects under Part 1 of the Project 4,750,000 100% (2) Incremental Operating Costs 250,000 100% TOTAL AMOUNT 5,000,000 B. Withdrawal Conditions; Withdrawal Period 1. Notwithstanding the provisions of Part A of this Section no withdrawal shall be made: for payments made prior to the date of this Agreement. 2. The Closing Date referred to in Section 3.06(c) of the Standard Conditions is December 31, 2007. Page 12 - 11 - Section V. Procedures and Eligibility Criteria for the Selection of Sub-Projects 1. PECDAR shall require a beneficiary Local Government Unit applying for a Community Grant to submit its proposal for a Community Grant in accordance with the procedures set forth in the Operations Manual. 2. PECDAR shall: (a) ensure that proposals for Community Grants meet the requisite terms and conditions set out in the Operations Manual; (b) ensure that beneficiaries meet the eligibility criteria set out in the Operations Manual and have the capacity to carry out, manage and maintain Community Grants in conformity with appropriate administrative, financial, technical and managerial standards; (c) approve each Community Grant and, to that end, enter into an agreement under which proceeds of the Community Grant will be made available to the beneficiary for the sub-project; and (d) monitor and evaluate the Micro- project in accordance with the guidelines set out in the Operations Manual. 3. The legal agreements between PECDAR and the beneficiaries shall provide for rights adequate to protect the interests of the World Bank and PECDAR, including, to the extent that it shall be appropriate, the right to: (a) require the beneficiary to: (i) carry out the Micro-project with due diligence and efficiency and in accordance with sound administrative, financial, technical and managerial standards; and (ii) maintain adequate records for the sub-project; (b) require that all goods, works and services required for the Micro-project shall be procured in accordance with the provisions of this Agreement; (c) require that such goods, works and services shall be used exclusively in the carrying out of the Micro-project; (d) require the beneficiary to allow PECDAR to inspect, by itself or jointly with representatives of the World Bank, if the World Bank shall so request: (i) the operations of the Micro-project; and (ii) any relevant records and documents; and (e) suspend or terminate the right of the beneficiary to use the proceeds of the Community Grant upon failure by the beneficiary to perform any of its obligations under the agreement with PECDAR. Page 13 - 12 - APPENDIX I Definitions 1. “Beneficiary” means a Local Government Unit or popular services committee (as this term is hereinafter defined) to which a Community Grant is to be made under Part 1 of the Project. 2. “Category” means a category set forth in the table in Section IV of Schedule 2 to this Agreement. 3. “Community Grant” means a grant made or proposed to be made out of the proceeds of the Grant to a Beneficiary for a Micro-project under Part 1 of the Project. 4. “Consultant Guidelines” means the “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” published by the World Bank in May 2004. 5. “Environmental Management Plan” means environmental mitigation plan for the Original Project dated October 2001, and updated by PECDAR for the purpose of this Project: (i) setting forth the measures to be taken during the implementation and operation of the Project to offset and reduce the adverse environmental impacts to levels acceptable to the World Bank; and (ii) consisting of an institutional strengthening component, an environmental mitigation plan and an environmental monitoring plan. 6. “Local Government Unit” means a local government unit, and such term shall include a municipality, village council, or a refugee camp service committee. 7. “Micro-project” means a specific subproject to be financed under Part 1 of this Project and more fully described in Schedule 1 to this Agreement. 8. “Operations Manual” means the operations manual for the Original Project, which is referred to in Section 1.02(k) of the Original Financing Agreement, including amendments made to the manual from time to time with the World Bank’s approval. 9. “Original Financing Agreement” means the Trust Fund Credit Agreement dated August 6, 2002, for the Integrated Community Development Project (TF050591) between the Palestine Liberation Organization for the benefit of the Palestinian Authority (referred to as the “Borrower” in the agreement) and the International Development Association, acting as administrator of the Trust Fund for Gaza and the West Bank (referred to as the “Administrator” in the agreement). Page 14 - 13 - 10. “Original Project” means the Project described in the Original Financing Agreement. 11. “PECDAR” means Palestinian Economic Council for Development and Reconstruction, an agency established and operating under a basic regulation issued on May 14, 1994, under a decree from chairperson of the Executive Committee of the Palestine Liberation Organization. 12. “Procurement Guidelines” means the “Guidelines for Procurement under IBRD Loans and IDA Credits” published by the World Bank in May 2004. 13. “Procurement Plan” means the procurement plan for the Project, dated January 31, 2007, and referred to in paragraph 1.16 of the Procurement Guidelines and paragraph 1.24 of the Consultant Guidelines, as the same shall be updated from time to time in accordance with the provisions of said paragraphs. 14. “Subsidiary Agreement” means the agreement referred to in Section I.A of Schedule 2 to this Grant Agreement pursuant to which the Recipient shall make the proceeds of the Grant available to PECDAR. Page 15 - 14 - APPENDIX II Modifications to the Standard Conditions The Standard Conditions are modified as follows: 1. Section 2.09 is amended to read as follows: “Section 2.09. Visits. The Recipient shall, throughout the implementation of the Project and for a period of ten years thereafter: (a) enable representatives of the World Bank to visit any part of the West Bank and Gaza under the jurisdiction of the Palestinian Authority for purposes related to the Grant; and (b) enable the World Bank’s representatives: (i) to visit any facilities and sites included in the Project; and (ii) to examine the goods financed out of the proceeds of the Grant, and any documents relevant to the performance of its obligations under the Grant Agreement.” 2. Sub-section (a) of Section 3.07 is amended to read as follows: “Section 3.07. Financing Taxes. (a) The Grant Agreement may specify that the proceeds of the Grant may not be withdrawn to pay for Taxes levied by, or in the parts of West Bank and Gaza under the jurisdiction of the Palestinian Authority on or in respect of Eligible Expenditures, or on their importation, manufacture, procurement or supply. In such case, if the amount of any such Taxes decreases or increases, the World Bank may, by notice to the Recipient, adjust the percentage of such Eligible Expenditures to be financed out of the proceeds of the Grant specified in the Grant Agreement, as required to ensure consistency with such limitation on withdrawals.” 3. Sub-sections (a) and (g) of Section 4.02 are deleted, and consequently, Sub-sections (b) through (i) are re-lettered as Sub-sections (a) through (g). 4. Re-lettered Sub-section (b) of Section 4.02 is amended to read as follows: “(b) Cross Suspension . IBRD or IDA has suspended in whole or in part the right of the Recipient or any agency thereof, or any entity in the West Bank and Gaza under the jurisdiction of the Palestinian Authority, to make withdrawals under any agreement with IBRD or with IDA because of a failure by the Recipient, the Project Implementing Entity, or any agency thereof, or any entity in the West Bank and Gaza under the jurisdiction of the Palestinian Authority, to perform any of its obligations under such agreement or any other agreement with IBRD or IDA.” Page 16 - 15 - 5. Re-lettered Sub-section (e) of Section 4.02 is amended to read as follows: “(e) Assignment of Obligations; Disposition of Assets. The Recipient or the Project Implementing Entity has, without the consent of the World Bank: (i) assigned or transferred, in whole or in part, any of its obligations arising under or entered into pursuant to the Grant Agreement; or (ii) sold, leased, transferred, assigned, or otherwise disposed of any property or assets financed wholly or in part out of the proceeds of the Grant; provided, however, that the provisions of this paragraph shall not apply with respect to transactions in the ordinary course of business which, in the opinion of the World Bank: (A) do not materially and adversely affect the ability of the Recipient (or such other entity) to perform any of its obligations arising under or entered into pursuant to the Grant Agreement or to achieve the objectives of the Project; and (B) do not materially and adversely affect the financial condition or operation of the Project implementation entity.” 6. Re-lettered Sub-section (f) of Section 4.02 is amended to read as follows: “(f) Condition of Recipient. If the Grant has been made to a Recipient which is not a member of IBRD: (i) Any action has been taken for the dissolution, disestablishment or suspension of operations of the Project Implementation Entity. (ii) The Project Implementation Entity has ceased to exist in the same legal form as that prevailing as of the date of the Grant Agreement. (iii) In the opinion of the World Bank, the legal character, ownership or control of the Project Implementation Entity has changed from that prevailing as of the date of the Grant Agreement so as to materially and adversely affect the ability of the Recipient (or such other entity) to perform any of its obligations arising under or entered into pursuant to the Grant Agreement, or to achieve the objectives of the Project.” 7. Sub-section (c) of Section 4.03 is amended to read as follows: “(c) Misprocurement; Fraud and Corruption. The World Bank: (i) determines, with respect to any contract to be financed out of the proceeds of the Grant, that (A) the procurement of such contract is inconsistent with the procedures set forth or referred to in the Grant Agreement; or (B) corrupt, fraudulent, collusive or coercive practices were engaged in by representatives of the Recipient or the Project Implementing Entity during the procurement or the execution of such contract, without the Recipient having taken timely and appropriate action satisfactory to the World Bank to remedy the situation; and (ii) establishes the amount of expenditures under such Page 17 - 16 - contract which would otherwise have been eligible for financing out of the proceeds of the Grant. ” 8. Sub-section (a) of Section 4.05 is amended to read as follows: “(a) If the World Bank determines that an amount of the Grant has been used in a manner inconsistent with the provisions of the Grant Agreement or these Standard Conditions, the Recipient shall, upon notice by the World Bank to the Recipient, promptly refund such amount to the World Bank. Such inconsistent use shall include, without limitation, use of such amount to: (i) make a payment for an expenditure that is not an Eligible Expenditure; or (ii) finance a contract during the procurement or execution of which corrupt, fraudulent, collusive or coercive practices were engaged in by representatives of the Recipient or the Project Implementing Entity, without the Recipient having taken timely and appropriate action satisfactory to the World Bank to remedy the situation.” 9. Sub-section (j) of Section 5.03 is amended to read as follows: “(j) If, within thirty (30) days after counterparts of the award have been delivered to the parties, the award has not been complied with, any party may: (i) enter judgment upon, or institute a proceeding to enforce, the award in any court of competent jurisdiction against any other party; (ii) enforce such judgment by execution; or (iii) pursue any other appropriate remedy against such other party for the enforcement of the award and the provisions of the Grant Agreement. Notwithstanding the foregoing, this Section shall not authorize any entry of judgment or enforcement of the award against the Recipient except as such procedure may be available otherwise than by reason of the provisions of this Section.” 10. Paragraph (17) of the Appendix is deleted and, consequently, paragraphs (18) through (26) are re-numbered as paragraphs (17) through (25).