Page 1 CONFORMED COPY CREDIT NUMBER 3929 KE GRANT NUMBER H098 KE Project Agreement (Agricultural Productivity Project) between INTERNATIONAL DEVELOPMENT ASSOCIATION and Kenya Agricultural Research Institute Dated June 25, 2004 Page 2 CREDIT NUMBER 3929 KE GRANT NUMBER H098 KE PROJECT AGREEMENT AGREEMENT dated June 25, 2004, between INTERNATIONAL DEVELOPMENT ASSOCIATION (the Association) and KENYA AGRICULTURAL RESEARCH INSTITUTE (KARI). WHEREAS (A) by the Development Financing Agreement of even date herewith between Republic of Kenya (the Borrower) and the Association, the Association has agreed to make available to the Borrower an amount in various currencies equivalent to twenty six million seven hundred thousand Special Drawing Rights (SDR 26,700,000), on the terms and conditions set forth in the Development Financing Agreement, but only on conditions that KARI agree to undertake such obligations toward the Association as are set forth in this Agreement; (B) by a Subsidiary Grant Agreement to be entered into between the Borrower and KARI, part of the proceeds of the financing provided for under the Development Financing Agreement will be made available to KARI on the terms and conditions set forth in said Subsidiary Grant Agreement; and WHEREAS KARI, in consideration of the Association’s entering into the Development Financing 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 Financing Agreement, the Preamble to this Agreement and in the General Conditions (as so defined) have the respective meanings therein set forth. ARTICLE II Execution of the Project Section 2.01. (a) KARI declares its commitment to the objective of the Project as set forth in Schedule 2 to the Development Financing Agreement, and, to this end, shall carry out Part C.2 of the Project with due diligence and efficiency and in conformity with Page 3 - 2 - appropriate administrative, financial, engineering, and environmental practices, and shall provide, or cause to be provided, promptly as needed, the funds, facilities, services and other resources required for Part C.2 of the Project. (b) Without limitation upon the provisions of paragraph (a) of this Section and except as the Association and KARI shall otherwise agree, KARI shall carry out Part C.2 of the Project in accordance with the Implementation Program set forth in the Schedule to this Agreement. Section 2.02. Except as the Association shall otherwise agree, procurement of the goods, works, and consultants’ services required for the Project and to be financed out of the proceeds of the Financing shall be governed by Schedule 3 to the Development Financing Agreement. Section 2.03. KARI 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 Project Agreement and Part C.2 of the Project. Section 2.04. KARI shall duly perform all its obligations under the Subsidiary Grant Agreement. Except as the Association shall otherwise agree, KARI shall not take or concur in any action which would have the effect of amending, abrogating, assigning or waiving the Subsidiary Grant Agreement or any provision thereof. Section 2.05. (a) KARI shall, at the request of the Association, exchange views with the Association with regard to the progress of Part C.2 of the Project, the performance of its obligations under this Agreement and under the Subsidiary Grant Agreement, and other matter relating to the purposes of the Financing. (b) KARI shall promptly inform the Association of any condition which interferes or threatens to interfere with the progress of Part C.2 of the Project, the accomplishment of the purposes of the Financing, or the performance by KARI of its obligations under this Agreement and under the Subsidiary Grant Agreement. ARTICLE III Management and Operations of KARI Section 3.01. KARI shall carry on its operations and conduct its affairs in accordance with sound administrative, financial, engineering, and environmental practices under the supervision of qualified and experienced management assisted by competent staff in adequate numbers. Page 4 - 3 - Section 3.02. KARI 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 environmental practices. Section 3.03. KARI 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 Covenants Section 4.01. (a) KARI shall establish and thereafter maintain a financial management system, including records and accounts, and prepare financial statements, in accordance with consistently applied accounting standards acceptable to the Association, adequate to reflect its operations and financial condition and to register separately the operations, resources and expenditures related to Part C.2 of the Project. (b) KARI shall: (i) have its financial statements (balance sheets, statements of income and expenses and related statements) for each fiscal year (or other period agreed to by the Association), audited, in accordance with consistently applied auditing standards acceptable to the Association, 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 (or such other period agreed to by the Association), (A) certified copies of the financial statements referred to in paragraph (a) of this Section, for such year (or such other period agreed to by the Association), as so audited, and (B) an opinion on such statements by said auditors, in scope and detail satisfactory to the Association; and (iii) furnish to the Association such other information concerning such records and accounts and the audit of such financial statements, and concerning said auditors, as the Association may from time to time reasonably request. Page 5 - 4 - Section 4.02. (a) Without limitation upon KARI’s reporting obligations set out in paragraph 5 of the Schedule to this Agreement, KARI shall prepare and furnish to the Association a financial monitoring report, in form and substance satisfactory to the Association, which: (i) sets forth sources and uses of funds for Part C.2 of the Project, both cumulatively and for the period covered by said report, showing separately funds provided under the Financing , and explains variances between the actual and planned uses of such funds; (ii) describes physical progress in Project implementation, both cumulatively and for the period covered by said report, and explains variances between the actual and planned Project implementation; and (iii) sets forth the status of procurement under Part C.2 of the Project, as at the end of the period covered by said report. (b) The first FMR shall be furnished to the Association not later than 45 days after the end of the first calendar quarter after the Effective Date, and shall cover the period from the incurrence of the first expenditure under the Project through the end of such first calendar quarter; thereafter, each FMR shall be furnished to the Association not later than 45 days after each subsequent calendar quarter, and shall cover the period not covered by the previous FMR until the end of such calendar quarter. 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 Financing Agreement becomes effective. Section 5.02. This Agreement and all obligations of the Association and of KARI thereunder shall terminate on the date on which the Development Financing Agreement shall terminate in accordance with its terms. 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. Page 6 - 5 - 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, telex or facsimile 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. Deliveries made by facsimile transmission shall also be confirmed by mail. The addresses so specified are: 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 7 - 6 - For KARI: Director Kenya Agricultural Research Institute P.O Box 57811 Nairobi, Kenya Telex: Facsimile: 22766 + (254) 258 3344 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 KARI, may be taken or executed by the Director or such other person or persons as the Director shall designate in writing, and the Director 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, each of which shall be an original, and all collectively but one instrument. Page 8 - 7 - IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized representatives, have caused this Agreement to be signed in their respective names in Nairobi, Kenya, as of the day and year first above written. INTERNATIONAL DEVELOPMENT ASSOCIATION By /s/ Makhtar Diop Authorized Representative KENYA AGRICULTURAL RESEARCH INSTITUTE By /s/ R. Kimoe Authorized Representative Page 9 - 8 - SCHEDULE Implementation Program 1. KARI shall carry out Part C.2 of the Project in accordance with the provisions of the PIP, and shall not, except as the Association shall otherwise agree, amend or waive any provision thereof which, in the opinion of the Association, may adversely and materially affect the implementation of Part C.2 of the Project. 2. The KARI shall provide Farmer Grants in accordance with procedures and eligibility criteria set forth in the FGM, which shall include, but not be limited to the following: (a) activities to be financed by Farmer Grants shall include provision of agricultural advisory services and acquisition of improved agricultural technologies; (b) activities to be financed by Farmer Grants shall be economically, financially and technically viable in accordance with standards set forth in the FGM; and (c) activities to be financed by Farmer Grants shall be initiated by a Beneficiary and a Farmer Grant shall not exceed the equivalent of $15,000. 3. A Farmer Grant shall be provided through a Farmer Grant Agreement to be entered into with the Beneficiary, under terms and conditions satisfactory to the Association, which shall include the following: (a) the Beneficiary’s obligation to carry out the activities to be financed by the Farmer Grant in accordance with the FGM, with due diligence and efficiency and in accordance with sound technical, financial, environmental and managerial standards and to maintain adequate records to reflect, in accordance with sound accounting practices, the operations, resources and expenditures in respect of the Farmer Grant; (b) the requirement that: (i) goods, works and services to be financed from the proceeds of the Farmer Grant shall be procured in accordance with the procedures set forth in Schedule 3 to this Agreement, and (ii) such goods, works and services shall be used exclusively in the carrying out of the eligible activities in accordance with the FGM; (c) the right of KARI to inspect by itself, or jointly with the Association, if the Association shall so request, the goods, works, sites, plants and construction financed by the Farmer Grant, the operations thereof and any relevant records and documents; (d) the right of KARI to obtain all information as KARI or the Association shall reasonably request regarding the administration, operation and financial conditions of activities to be financed by the Farmer Grant; and Page 10 - 9 - (e) the right of KARI to suspend or terminate the right of the Beneficiary to use the proceeds of the Farmer Grant upon the failure by the Beneficiary to perform any of its obligations under the Farmer Grant Agreement. 4. KARI shall carry out the financial management and procurement aspects of the Project, and shall assist the Borrower in building financial management and procurement capacity in the Project Secretariat. 5. KARI shall: (a) maintain policies and procedures adequate to enable it to monitor and evaluate on an ongoing basis, in accordance the indicators set forth in Schedule 6 to the Development Financing Agreement to this Agreement, the carrying out of Part C.2 of the Project and the achievement of the objective thereof; (b) prepare, under terms of reference satisfactory to the Association, and furnish to the Association, on or about September 30, 2005 and September 30, 2006, reports integrating the results of the monitoring and evaluation activities performed pursuant to paragraph (a) of this Section, on the progress achieved in the carrying out of Part C.2 of the Project during the period preceding the date of said reports and setting out the measures recommended to ensure the efficient carrying out of Part C.2 of the Project and the achievement of the objective thereof during the period following such date; and (c) review with the Association, by December 31,2005 and December 31, 2006, or such later date as the Association shall request, the report referred to in paragraph (b) of this Section, and, thereafter, take all measures required to ensure the efficient completion of Part C.2 of the Project and the achievement of the objective thereof, based on the conclusions and recommendations of the said reports and the Association’s views on the matter.