D 0CU,Y X ,5 LOAN NUKIER 2045-9C Loan Agreement (Power Transmission Project) between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT and INSTITUTO ECUATORIANO DE ELECTRIFICACION Dated , 1981 LOAN NUMBER 2045 EC LOAN AGREEMENT AGREEMENT, dated , 1981, between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (hereinafter called the Bank) and INSTITUTO ECUATORIANO DE ELECTRIFICACION (hereinafter called the Borrower). WHEREAS (A) the Borrower is currently carrying out its 1981-1984 Master Plan which includes, inter alia, an inventory of Ecuador's hydroelectric resources and the optimal expansion of its electric power generation, transmission and distribution facilities, and also the use of alternative sources of power generation; (B) the Project described in Schedule 2 of this Agreement is also included in the Master Plan and the Borrower has requested the Bank to assist in financing the Project by making the Loan as hereinafter described; and (C) by an Agreement of even date herewith between the Republic of Ecuador (hereinafter called the Guarantor) and the Bank (such Agreement hereinafter called the Guarantee Agreement), the Guarantor has agreed to: (i) guarantee repayment of the principal of the Loan and payment of interests and other charges thereon; and (ii) undertake certain obligations in the Guarantee Agreement set forth. WHEREAS the Bank has agreed, on the basis, inter alia, of the foregoing to make the Loan available to the Borrower upon the terms and conditions set forth hereinafter. NOW THEREFORE the parties hereto hereby agree as follows: ARTICLE I General Conditions; Definitions Section 1.01. The parties to this Agreement accept all the provisions of the General Conditions Applicable to Loan and Guarantee Agreements of the Bank, dated October 27, 1980, with the same force and effect as if they were fully set forth herein (said General Conditions Applicable to Loan and Guarantee Agreements of the Bank being hereinafter called the General Conditions). -2- Section 1.02. Wherever used in this Agreement, unless the context otherwise requires, the several terms defined in the General Conditions have the respective meanings therein set forth and the following additional terms have the following meanings: (a) "Subsidiary" means any company or cooperative of which a majority of the outstanding voting stock or other proprietary interest is owned or effectively controlled by the Borrower or by one or more subsidiaries of the Borrower or by the Borrower and one or more of its subsidiaries, and such term includes the regional companies to be established pursuant to Section 4.06 of this Agreement and the following electric power companies; (i) Empresa Elctrica Regional del (hereinafter called Norte S.A. Regional Norte); (ii) Empresa Electrica Quito S.A. (hereinafter called Quito); (iii) Cooperativa de Electrificaci6n (hereinafter called Rural Santo Domingo C. Ltd. Santo Domingo); (iv) Empresa Elctrica Ambato S.A. (hereinafter called Ambato); (V) Empresa El'ctrica Riobamba (hereinafter called S.A. Riobamba); (vi) Empresa El4ctrica Bolivar (hereinafter called S.A. Bollvar); (vii) Empresa El'ctrica Regional (hereinafter called Centro Sur S.A. Centro Sur); (viii) Empresa El'ctrica Regional (hereinafter called del Sur S.A. Sur); (ix) Empresa El4ctrica Esmeraldas (hereinafter called S.A. Esmeraldas); (x) Sistema El'ctrico Regional (hereinafter called Manabf S.A. Manabf); (xi) Empresa El'ctrica Peninsular (hereinafter called Santa Elena S.A. Santa Elena); - 3 - (xii) Empresa Electrica de Milagro (hereinafter called S.A. Milagro); (xiii) Empresa El'ctrica de Los Rios (hereinafter called S.A. Los Rfos); and (xiv) Empresa E14ctrica El Oro S.A. (hereinafter called El Oro). (b) "Group I Subsidiaries" means the following Subsidiaries: Quito, Regional Centro Sur, Manabil, Santa Elena, Milagro and El Oro; (c) "Group II Subsidiaries " means the following Subsi- diaries: Norte, Ambato, Riobamba and Los Rfos; (d) "fiscal year" means the Borrower's fiscal year, begin- ning on January 1 and ending on December 31; (e) "Rates Regulations" means Decree No. 684 of the Guarantor, dated August 7, 1975, published in the Official Gazette No. 869 of August 18, 1975; (f) "Resoluci6n" means the Resoluci6n No. 71 of the Borrower's Board of Directors, dated May 21, 1981, which estab- lished a program of increases in the rates for the sale of electricity by the Borrower and the Subsidiaries; (g) "Master Plan" means the Borrower's 1981 - 1984 expansion plan approved by its Board of Directors by Resoluci6n No. 028 dated January 29, 1980; and (h) "National Development Plan" means the Guarantor's Plan Nacional de Desarrollo 1980-1984 approved by Executive Decree No. 104, May 8, 1980, and published in the Registro Oficial dated May 8, 1980. ARTICLE II The Loan Section 2.01. The Bank agrees to lend to the Borrower, on the terms and conditions in the Loan Agreement set forth or referred to, an amount in various currencies equivalent to one hundred million dollars ($100,000,000). -4- Section 2.02. (a) The amount of the Loan may be withdrawn from the Loan Account in accordance with the provisions of Schedule 1 to this Agreement, as such Schedule may be amended from time to time by agreement between the Borrower and the Bank, for expenditures made (or, if the Bank shall so agree, to be made) in respect of the reasonable cost of goods and services required for the Project described in Schedule 2 to this Agreement and to be financed out of the proceeds of the Loan and in respect of interest and other charges on the Loan. (b) On each of the semiannual interest payment dates specified in Section 2.07 of this Agreement, the Bank shall, on behalf of the Borrower, withdraw from the Loan Account and pay to itself the amounts required to pay, on such date, interest and other charges on the Loan accrued and payable on or before the date set forth, and up to the amount allocated, in Schedule 1 to this Agreement, as such Schedule may be amended from time to time by agreement between the Borrower and the Bank. Section 2.03. Except as the Bank shall otherwise agree, procurement of the goods and civil works to be financed out of the proceeds of the Loan shall be governed by the provisions of Schedule 4 to this Agreement. Section 2.04. The Closing Date shall be December 31, 1985 or such later date as the Bank shall establish. The Bank shall promptly notify the Borrower and the Guarantor of such later date. Section 2.05. The Borrower shall pay to the Bank a commitment charge at the rate of three-fourths of one per cent (3/4 of 1%) per annum on the principal amount of the Loan not withdrawn from time to time. Section 2.06. The Borrower shall pay interest at the rate of nine and three-fifths per cent per cent (9-3/5%) per annum on the principal amount of the Loan withdrawn and outstanding from time to time. Section 2.07. Interest and other charges shall be payable semiannually on February 15 and August 15 in each year. Section 2.08. The Borrower shall repay the principal amount of the Loan in accordance with the amortization schedule set forth in Schedule 3 to this Agreement. -5- ARTICLE III Execution of the Project Section 3.01. (a) The Borrower shall carry out the Project with due diligence and efficiency and in conformity with appro- priate engineering, financial and public utility practices, and shall provide, promptly as needed, the funds, facilities, services and other resources required for the purpose. (b) The Borrower shall carry out the studies included in Parts C.1, D.l and E of the Project under terms of reference and according to timetables, satisfactory to the Bank. (c) The Borrower shall: (i) promptly upon the completion of each of such studies, furnish to the Bank copy of the correspond- ing reports; and (ii) carry out the recommendations of such studies which are satisfactory to the Bank and the Borrower in a manner and according to a timetable satisfactory to the Bank. Section 3.02. The Borrower shall: (a) employ consultants whose qualifications, experience and terms and conditions of employment shall be satisfactory to the Bank, to assist the Borrower in: (i) the supervision of the carrying out of Parts A and B of the Project; (ii) the carrying out of the studies in- cluded in Part C.1 and Part D.1 of the Project; and (iii) the carrying out of the study included under Part E of the Project; and (b) employ consultants whose qualifications, experience, terms of reference, work plans, reporting procedures and all other technical aspects of their contractual arrangements shall be satisfactory to the Bank, to assist the Borrower in: (i) the carrying out of the assets revaluation and related tasks referred to in Section 5.07 (a) of this Agreement; and (ii) the carrying out of the study referred to in Section 6.05 of this Agreement. The consultants referred to in paragraph (a) (i) hereof shall be employed by the Borrower not later than September 30, 1982; the consultants referred to in paragraphs (a) (ii), (b) (i) and (b) (ii) hereof shall be employed from not later than December 31, 1981. Section 3.03. (a) The Borrower undertakes to insure, or make adequate provision for the insurance of, the imported goods to be -6- financed out of the proceeds of the Loan against hazards incident to the acquisition, transportation and delivery thereof to the place of use or installation, and for such insurance any indemnity shall be payable in a currency freely usable by the Borrower to replace or repair such goods. (b) Except as the Bank shall otherwise agree, the Borrower shall cause all goods and services financed out of the proceeds of the Loan to be used exclusively for the Project. Section 3.04. (a) The Borrower shall furnish to the Bank, promptly upon their preparation, the plans, specifications, reports, contract documents and construction and procurement schedules for the Project, and any material modifications thereof or additions thereto, in such detail as the Bank shall reasonably request. (b) The Borrower: (i) shall maintain records and procedures adequate to record and monitor the progress of the Project (including its cost and the benefits to be derived from it), to identify the goods and services financed out of the proceeds of the Loan, and to disclose their use in the Project; (ii) shall enable the Bank's accredited representatives to visit the facili- ties and construction sites included in the Project and to examine the goods financed (ut of the proceeds of the Loan and any relevant records and documents; and (iii) shall furnish to the Bank at regular intervals all such information as the Bank shall reasonably request concerning the Project, its cost and, where appropriate, the benefits to be derived from it, the expenditure of the proceeds of the Loan and the goods and services financed out of such proceeds. (c) The Borrower shall: (i) prepare quarterly reports on the carrying out of the Project and the administration, operation and financial condition of the Borrower; and (ii) furnish to the Bank such reports within 60 days of the end of the respective quarter. (d) The Borrower shall: (i) prepare semi-annual reports on the administration, operation and financial condition of each of the Subsidiaries; and (ii) furnish to the Bank such reports within 90 days of the end of the respective period. (e) Upon award by the Borrower of any contracts for goods, works or services to be financed out of the proceeds of the Loan, the Bank may publish the description thereof, the name - 7 - and nationality of the party to whom the contract was awarded and the contract price. (f) Starting not later than January 1, 1982 and until quarterly consolidated financial statements, satisfactory to the Bank, for the Borrower and the Subsidiaries are prepared and made available to the Bank in a timely manner, the Borrower shall; (i) not later than 75 days after the end of each calendar quarter, furnish to the Bank a report, of such scope and in such detail as the Bank shall reasonably request, showing the Borrower's per- formance, and the consolidated performance of the Borrower and the Subsidaries, through the end of such quarter and projected through the remainder of the fiscal year, in meeting the annual rate of return requirements set forth in Sections 5.05 and 5.08 of this Agreement; and (ii) cause the Subsidiaries to prepare and furnish to the Borrower the information required for such purposes. (g) Promptly after completion of the Project, but in any event 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 Bank, the Borrower shall prepare and furnish to the Bank a report, of such scope and in such detail as the Bank shall reasonably request, on the execution and initial operation of the Project, its cost and the benefits derived and to be derived from it, the performance by the Borruwer and the Bank of their respec- tive obligations under the Loan Agreement and the accomplishment of the purposes of the Loan. (h) The Borrower shall enable the Bank's representatives to examine all plants, installations, sites, works, buildings, property, equipment and any relevant records and documents of the Borrower. Section 3.05. The Borrower shall take or cause to be taken all such action as shall be necessary to acquire as and when needed all such land and rights in respect of land as shall be required for the construction and operation of the facilities included in the Project and shall furnish to the Bank, promptly after such acquisition, evidence satisfactory to the Bank that such land and rights in respect of land are available for purposes related to the Project. Section 3.06. The Borrower shall take all necessary measures to ensure that the Project is carried out with due regard to ecological and environmental factors. -8- ARTICLE IV Management and Operations of the Borrower Section 4.01. (a) The Borrower shall at all times manage its affairs, maintain its financial position, plan its future expansion and carry on its operations in accordance with appro- priate business, financial and public utility practices and under the supervision of experienced and competent management assisted by adequate, experienced and competent staff. (b) The Borrower shall afford the Bank a reasonable oppor- tunity to comment on any proposed reorganization of the Borrower which may affect the operations or financial condition of the Borrower or the carrying out of the Project. Section 4.02. (a) The Borrower shall at all times maintain, and cause each of the Subsidiaries to maintain, its corporate existence and the right to carry on its operations, and take, and cause the Subsidiaries to take, all steps necessary to acquire, maintain and renew all rights, powers, privileges and franchises which are necessary or useful in the conduct of its business. (b) The Borrower shall at all times operate and maintain, and cause each of the Subsidiaries to operate and maintain, its plants, machinery, equipment and other property, and make all necessary repairs and renewals thereof, in accordance with sound engineering and public utility practices. (c) Except as the Bank and the Borrower shall otherwise agree, the Borrower shall not sell or otherwise dispose, or authorize the sale or disposal by any Subsidiary, of any of its property or assets which shall be required for the efficient carrying on of its business and undertaking, including the Project, provided, however, that the Borrower or any Subsidiary may sell or otherwise dispose of any of its property which shall have become obsolete, worn out or unnecessary for use in its operations. Section 4.03. The Borrower shall take out and maintain with responsible insurers, or make other provision satisfactory to the Bank for, insurance against such risks and in such amounts as shall be consistent with appropriate practice. Section 4.04. The Borrower shall: (a) cause its Paute-Amaluza dam, its reservoir and associated structures, earthworks and -9- waterways to be continuously monitored and inspected at least once a year by qualified and experienced experts in accordance with appropriate engineering practices, in order to determine whether there are any deficiencies or potential deficiencies in the condition of such structures or earthworks, or in the quality and adequacy of maintenance or methods of operation of such structures or earthworks, which may endanger the safety of such structures and earthworks and if any deficiency or potential deficiency is found, it shall promptly take all action necessary for remedying such deficiency; and (b) promptly after each such inspection is completed, furnish to the Bank a copy of the inspection report. Section 4.05. The Borrower shall: (a) not later than October 31, 1982, complete the ongoing study on the marginal cost of electricity generation; (b) promptly upon its completion, furnish to the Bank a copy of such study and of its recommendations, together with its proposals, based on such recommendations, for a comprehensive marginal cost study, which will enable the Borrower to revise its structure of retail rates for the sale of electricity; (c) afford the Bank a reasonable opportunity to comment on such recommendations and proposals; and (d) carry out such study including, if such is the case, any reasonable modifications thereto requested by the Bank, according to a timetable satisfactory to the Bank. Section 4.06. Not later than December 31, 1984, the Borrower shall integrate the Subsidiaries into no more than ten regional companies, which shall remain under the control of the Borrower. Section 4.07. The Borrower shall: (a) prepare a preliminary program, satisfactory to the Bank, to improve its supervision and participation in the management of the Subsidiaries, such program to include an upgrading of periodic reporting by the Subsidiaries, arrangements to improve the contacts between the Borrower's and the Subsidiaries' management, the establishment of procedures entailing a closer evaluation and control of the Subsidiaries' operations and capital budgets and the assignment of increased responsibilities to the Borrower's directors at the Subsidaries' Boards of Directors; - 10 - (b) afford the Bank a reasonable opportunity to comment on such program; (c) revise such preliminary program taking into account the recommendations of the study included under Part D.1 of the Project and any comments of the Bank thereon; (d) carry out such program in a manner and according to a timetable satisfactory to the Bank; (e) not later than December 31, 1981, furnish to the Bank a report describing the mechanisms it proposes to establish in order to enable each Subsidiary to meet the financial require- ments and rates of return set forth by the Borrower pursuant to the provisions of this Agreement; (f) afford the Bank a reasonable opportunity to comment on said report; and (g) establish such mechanisms in a manner and according to a timetable satisfactory to the Bank. Section 4.08. Unless the Bank shall otherwise agree, the Borrower shall retain, and cause the Subsidiaries to retain, all earnings from electrical power services, excluding its worker's participation thereon, for purposes of investing them in the development and improvement of the electric power sector. Section 4.09. (a) Not later than July 1, 1982 the Borrower shall establish and thereafter maintain, and cause the Subsidia- ries to establish and to maintain thereafter, an adequate system of surcharges for late payment of retail electricity bills. (b) The Borrower shall: (i) prepare quarterly reports on public sector receivables, such reports to be made on a consoli- dated basis covering the Borrower and the Subsidiaries; (ii) furnish to the Bank such reports within 75 days of the end of each quarter; (iii) have such reports prepared not later than January 1, 1982 with regard to the Borrower and the Group I Subsidiaries and not later than January 1, 1983 with regard to the Borrower and all the Subsidiaries. (c) For purposes of this Section "public sector receivables" means the retail electricity bills issued to the Guarantor and all public sector institutions and agencies, including municipalities, which are overdue for more than 30 days. - 11 - Section 4.10. The Borrower shall: (a) not later than December 31, 1981, prepare and furnish to the Bank a financial program which will, inter alia, establish a long-term borrowing strategy for the financing of the investments provided for in the Master Plan for itself and the Subsidiaries and adequate arrangements for limiting the Subsdiaries' reliance on the Borrower as lender of first resort and for assisting them in obtaining long-term financing; (b) afford the Bank a reasonable opportunity to comment on such program; and (c) carry out such program taking into account the Bank's comments thereon. ARTICLE V Financial Covenants Section 5.01. The Borrower shall maintain records adequate to reflect in accordance with consistently maintained appropriate accounting practices its operations and financial condition. Section 5.02. (a) The Borrower shall: (i) have its 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 Bank; (ii) furnish to the Bank as soon as available, but in any case not later than five 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 Bank shall have reasonably requested; and (iii) furnish to the Bank such other information concerning the- accounts and financial statements of the Borrower and the audit thereof as the Bank shall from time to time reason- ably request. (b) The financial statements referred to in paragraph (a) above shall include consolidated financial statements for the Borrower and the Subsidiaries, which the Borrower shall furnish to the Bank, within the five-month period established in paragraph (a) (ii) above, according to the following timetable: (A) for fiscal year 1981, a consolidated financial statement for the - 12 - Borrower and Group I Subsidiaries; (B) for fiscal year 1982, a consolidated financial statement for the Borrower and Group I and Group II Subsidiaries; and (C) for fiscal year 1983, and all fiscal years thereafter, for the Borrower and all Subsidiaries. (c) Not later than March 31, 1982, the Borrower shall employ the auditors referred to in paragraph (a) of this Section. Section 5.03. (a) The Borrower represents that at the date of this Agreement no lien exists on any of its assets as security for any debt, except as otherwise currently reported or disclosed in writing by the Borrower to the Bank. (b) The Borrower undertakes that, except as the Bank shall otherwise agree: (i) if the Borrower shall create any lien on any of its assets as security for any debt, such lien will equally and ratably secure the payment of the principal of, and interest and other charges on, the Loan, and in the creation of any such lien express provision will be made to that effect, at no cost to the Bank; and (ii) if any statutory lien shall be created on any assets of the Borrower as security for any debt, the Borrower shall grant, at no cost to the Bank, an equivalent lien satis- factory to the Bank to secure the payment of the principal of, and interest and other charges on, the Loan; provided, however, that the foregoing provisions of this paragraph shall not apply to: (A) any lien created on property, at the time of purchase thereof, solely as security for the payment of the purchase price of such property; or (B) any lien arising in the ordinary course of banking transactions and securing a debt maturing not more than one year after the date on which it is originally incurred. Section 5.04. (a) Until the Project shall have been com- pleted, the Borrower shall obtain the concurrence of the Bank before committing itself, or any Subsidiary committing itself, to any capital expenditures (not required for the Project or for other projects financed by the Bank or included in the Master Plan) if the aggregate of such capital expenditures and all such other capital expenditures made or to be made by the Borrower or any such Subsidiary exceeds or will exceed an amount equivalent to two per cent of the aggregate gross fixed assets in operation of the Borrower and of its Subsidiaries. (b) For purposes of obtaining the Bank's concurrence, the Borrower shall furnish, or cause to be furnished, to the Bank a report, satisfactory to the Bank, showing that such capital expenditure is economically justified and financially sound, and - 13 - that financing is available under terms and conditions which will not materially affect the Borrower's, or the respective Subsidiary's, financial condition and the efficient execution of the Project. Section 5.05. The Borrower shall: (a) take all such measures, including adjustment of the structure or levels of its rates for the sale of electricity, as may be necessary to generate an annual return at a rate of at least four per cent (4%) in fiscal year 1982, eight per cent (8%) in fiscal year 1983, and eight and one-half per cent (8-1/2%) in fiscal year 1984 and every fiscal year thereafter, on the average rate base of the Borrower; (b) for purposes of paragraph (a) above: (i) each fiscal year the annual return shall be calcu- lated by dividing the net income before interest and other charges on debt for that year by the average of the rate base at the beginning and at the end of that year; (ii) the term "net income" means all operating revenues of the Borrower less all its operating expenses; (iii) the term "rate base" means the gross value of fixed assets, including the value of any intangible assets subject to depreciation or amortization, as annually revalued, less the accumulated amounts similarly revalued in respect of depreciation of assets, based on appropriate methods of valuation and revaluation acceptable to the Bank; plus a ,provision for working capital, calculated in the manner set forth in Article 7 of the Rate Regula- tions in effect on the date of this Agreement; and (iv) the "average rate base" will be determined by adding the value of the rate base at the end of a fiscal year to the value of the rate base at the beginning of that year and dividing the total by two. Section 5.06. Except as the Bank shall otherwise agree, the Borrower shall not incur any debt, other than for money - 14 - borrowed for financing the Project or other Bank financed pro- jects, unless its net revenues for the fiscal year immediately preceding such incurrence or for the twelve-month period ended prior to such incurrence, whichever is the greater, shall be not less than 1.5 times the maximum debt service requirements for any succeeding fiscal year on all debt, including the debt to be incurred. For the purposes of this Section: (a) the term "debt" means all debt of the Borrower, includ- ing debt for the service of which the Borrower is responsible, maturing by its terms more than one year after the date on which it is originally incurred; (b) debt shall be deemed to be incurred under a contract, agreement or other instrument providing for or guaranteeing such debt, or for the modification of its terms of payment, on the date of such contract, agreement or instrument; (c) the term "net revenues" means gross revenues from all sources, adjusted to take account of the Borrower's rates for the sale of electricity in effect at the time of the incurrence of debt even though they were not in effect during the fiscal year or twelve-month period to which such revenues relate, less all expenses of operation and maintenance, administration, and taxes, if any, but before deduction of provision for depreciation and amortization of assets, and payment of interest and other charges on debt; (d) the term "debt service requirements" means the aggregate amount of amortization (including sinking fund payments, if any) of, and interest and other charges on, debt excluding any interest and other charges payable by the Borrower during construction of any of its projects, so long as such interest and other charges shall be financed out of the proceeds of the loan made to the Borrower for the financing of such project; and (e) whenever it shall be necessary to value in the currency of the Guarantor debt payable in another currency, such valuation shall be made on the basis of the rate of exchange at which such other currency is obtainable by the Borrower at the time such valuation is made for the purpose of servicing such debt, or, if such other currency is not so obtainable, at the rate of exchange that will be reasonably determined by the Bank. Section 5.07. (a) The Borrower shall, with the assistance of the consultants referred to in Section 3.02 (b) (i) of this - 15 - Agreement and in accordance with methodologies satisfactory to the Bank: (i) carry out a detailed inventory of its fixed assets and an assessment of their replacement value; (ii) furnish to the Bank the results of such assessment, and allow the Bank a reasonable opportunity to comment on its results; (iii) promptly upon the receipt of the Bank's comments, reflect such assessment, as amended in accordance with any reasonable comments of the Bank thereto, in its records and financial statements; and (iv) design recording systems that will enable the Borrower to maintain at all times its fixed assets inventory up to date. (b) On the basis of the inventory and assessment referred to in paragraph (a) above, the Borrower shall: (i) revalue its assets and reflect the results of such revaluation in its 1982 financial statements; and (ii) thereafter, annually revalue its assets as provided by the legislation of the Guarantor in effect on the date of this Agreement. (c) Starting in fiscal year 1980 and until the inventory and assessment referred to in paragraph (a) above has been completed and reflected in the Borrower's records, the Borrower shall annually revalue its fixed assets in operation by applying appro- priate inflation indices and revaluation methods satisfactory to the Bank. Section 5.08. (a) Without limitation to the provisions of Section 5.05 of this Agreement, the Borrower shall take, and cause each of the Subsdiaries to take, all such measures, including adjustment of their rates for the sale of electricity, as may be necessary to generate a consolidated annual return for the Borrower and all Subsidiaries of at least four per cent (4%) in fiscal year 1982, of at least eight per cent (8%) in fiscal year 1983, and of at least eight and one-half per cent (8-1/2%) for fiscal year 1984 and every fiscal year thereafter. (b) The annual returns provided in paragraph (a) above shall be calculated by dividing the consolidated net income before interest and -other charges on debt of the Borrower and the Subsidiaries for such fiscal year by the average of the con- solidated rate base of the Borrower and the Subsidiaries at the beginning and at the end of that fiscal year. (c) The terms "net income" and "rate base" have the meanings set forth in Section 5.05 (b) (ii) and 5.05 (b) (iii) of this Agreement, respectively, and the average of the consolidated rate base shall be calculated as set forth in Section 5.05 (b) (iv) of this Agreement. - 16 - Section 5.09. (a) As provided in the Resoluci6n, the Borrower shall increase, and cause the Subsidiaries to increase, the average rates for the sale of electricity by not less than 3% per month, until the Borrower has, for itself and on a consolidated basis, achieved and presented evidence satisfactory to the Bank that it has achieved the rates of return set forth in Sections 5.05 and 5.08 of this Agreement. (b) The term "average rates" means the weighted average of the rates for the various consumer classes, as defined in the prevailing rate structures, where the weights to be used shall be based on the proportion that sales to that consumer class bear to total sales of electricity of the Borrower and the Subsidiaries. (c) Without any limitation to other adjustments in the rates for the sale of electricity that may be required under the provisions of this Agreement, the Borrower shall, not later than January 1, 1982, put into effect, and cause the Subsidiaries to put into effect, the automatic rate adjustments provided by Article 15 of the Rate Regulations in effect on the date of this Agreement. (d) In order to enable the Bank to monitor the Borrower's performance of its obligations under this Agreement related to increases and adjustments of the rates for the sale of electri- city, the Borrower shall furnish to the Bank reports, within 30 days of the end of each month for the Borrower and Group I Sub- sidiaries and semi-annually for all other Subsidiaries, of such scope and detail as shall be reasonably requested by the Bank, on the level, for each consumer category, of the electricity rates charged by the Borrower and the Subsidiaries during the preceding month. ARTICLE VI Other Covenants Section 6.01. The Borrower shall furnish to the Bank reports which will identify the accounting problems faced by each Sub- sidiary and will include specific proposals to solve them. Such reports shall be furnished to the Bank not later than December 31, 1981 with regard to the Group I Subsidiaries and not later than July 1, 1982 with regard to all other Subsidiaries. Section 6.02. The Borrower shall cause each of the Sub- sidiaries: - 17 - (a) to carry out, under terms of reference satisfactory to the Bank and with the assistance of experienced and qualified consultants, a detailed inventory of its fixed assets and to assess their replacement value, in accordance with methodologies consistent with those applied by the Borrower; (b) to furnish to the Borrower the results of such assess- ment and to reflect such assessment, as amended in accordance with any reasonable comments of the Borrower thereto, in its records and financial statements; (c) to design, with the assistance of the consultants referred to in paragraph (a) above, recording systems that will enable the Subsidiary to maintain its fixed assets inventory up to date at all times; (d) to carry out the undertakings set forth in paragraphs (a), (b) and (c) above, according to the following timetable: (i) Group I Subsidiaries: not later than December 31, 1982; - (ii) Group II Subsidiaries: not later than June 30, 1983; and (iii) All other Subsidiaries: not later than December 31, 1983; (e) until the inventory and assessment referred to in paragraph (a) above shall have been completed and reflected in the Subsidiary's records, to annually revalue its fixed assets in operation by applying inflation indices and in accordance with methodologies consistent with those being applied by the Borrower; (f) once the inventory and assessment referred to in paragraph (a) above have been completed and reflected in the Subsidiary's records and financial statements, to annually revalue its assets as provided in the legislation of the Guarantor in effect on the date of this Agreement; (g) to review and, if required by the Borrower, revise its accounting system and the preparation of financial statements, in order to enable the Borrower to prepare the quarterly reports referred to in Section 3.04 (f) of this Agreement and the consol- idated financial statements referred to in Section 5.02 (b) of this Agreement; and - 18 - (h) to employ independent auditors acceptable to the Bank and the Borrower, according to the timetable set forth in para- graph (d) above, to audit its accounts and financial statements in accordance with appropriate auditing principles consistently applied and to furnish to the Borrower audited financial state- ments and such additional information as may be required by the Borrower for the timely preparation of the consolidated financial statements referred to in Section 5.02 (b) of this Agreement. Section 6.03. The Borrower undertakes to assist and supervise the Subsidiaries in the carrying out of the actions referred to in Section 6.02 of this Agreement. Section 6.04. The Borrower shall: (a) cause the Subsidiaries to construct, in accordance with the standard designs and specifications of the Borrower, the sub-transmission facilities required for the utilization of the facilities to be constructed under the Project and to complete and to make operative such sub-transmission facilities in a timely manner so as to coincide with the start of operations of the facilities constructed under the Project; (b) adequately supervise the construction of such sub- transmission facilities and report to the Bank, from time to time and in such detail as the Bank shall reasonably request, the results of such supervision; and (c) exchange views with the Bank on any proposed changes in the standard designs or specifications of the Borrower for sub-transmission facilities. Section 6.05. The Borrower shall: (a) under terms of reference satisfactory to the Bank, carry out a study on the means to improve the overall efficiency of the Subsidiaries' distribution systems, such study to include a review of current planning, construction and operational practices and recommendations on the standardization of such construction and operational practices, improvements of existing distribution systems and measures to reduce losses and theft of electricity; (b) promptly upon its completion, furnish to the Bank a copy of such study and afford the Bank a reasonable opportunity to comment thereon; and - 19 - (c) carry out, and cause the Subsidiaries to carry out, according to a timetable satisfactory to the Bank, all such recommendations of the study approved by the Bank and the Borrower. ARTICLE VII Remedies of the Bank Section 7.01. For the purposes of Section 6.02 of the General Conditions, the following additional events are specified pursuant to paragraph (k) thereof, namely, that unless the Bank shall otherwise agree, the Borrower shall have repealed, abrogated, amended or failed to carry out or enforce the Resoluci6n. Section 7.02. For the purposes of Section 7.01 of the General Conditions, the following additional event is specified pursuant to paragraph (h) thereof, namely, that the event specified in Section 7.01 of this Agreement shall occur and shall continue for a period of 60 days after notice thereof shall have been given by the Bank to the Guarantor and the Borrower. ARTICLE VIII Effective Date; Termination Section 8.01. The following events are specified as addi- tional conditions to the effectiveness of the Loan Agreement within the meaning of Section 12.01 (c) of the General Conditions: (a) the program referred to in Section 4.07 (a) of this Agreement has been furnished to the Bank; and (b) the auditors referred to in Section 5.02 (a) of this Agreement have been selected. Section 8.02. The dateO.-. % 4 , is hereby specified for the purpose of Section 12.04 of the General Conditions. ARTICLE IX Addresses Section 9.01. The following addresses are specified for the purposes of Section 11.01 of the General Conditions: - 20 - For the Bank: International Bank for Reconstruction and Development 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable address: Telex: INTBAFRAD 440098 (ITT) Washington, D.C. 248423 (RCA) or 64145 (WUI) For the Borrower: INECEL Avenida 6 de Diciembre 2275 y Orellana Quito Ecuador Telex: 2243 ED IN WITNESS WHEREOF, the parties hereto, acting through their representatives thereunto duly authorized, 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 BANK FOR RECONSTRUCTION AND DEVELOPMENT By Regional Vice President Latin America and the Caribbean INSTITUTO ECUATORIANO DE ELECTRICIFICACION By Authorized Representative - 21 - SCHEDULE 1 Withdrawal of the Proceeds of the Loan 1. The table below sets forth the Categories of items to be financed out of the proceeds of the Loan, the allocation of the amounts of the Loan to each Category and the percentage of expenditures for items so to be financed in each Category: Amount of the Loan Allocated % of (Expressed in Expenditures Category Dollar Equivalent) to be Financed (1) Equipment, 55,600,000 100% of foreign materials and expenditures associated and 85% of services local expendi- tures (2) Civil works 2,700,000 14% (repre- senting the estimated foreign expen- diture com- ponent) (3) Consulting services and related expenses: (a) Under Parts A 700,000 100% of foreign and B of the expenditures Project (b) Under Part C of the Project 2,150,000 95% (c) Under Parts D 3,650,000 70% and E of the Project (4) Interest and other 13,800,000 Amounts due charges on the Loan accrued on or before August 14, 1984 - 22 - Amount of the Loan Allocated % of (Expressed in Expenditures Category Dollar Equivalent) to be Financed (5) Unallocated 21,400,000 TOTAL 100,000,000 2. For the purposes of this Schedule: (a) the term "foreign expenditures" means expenditures in the currency of any country other than the Guarantor and for goods or services supplied from the territory of any country other than the Guarantor; and (b) the term "local expenditures" means expenditures in the currency of the Guarantor and for goods or services supplied from the territory of the Guarantor. 3. The disbursement percentages have been calculated in compliance with the policy of the Bank that no proceeds of the Loan shall be disbursed on account of payments for taxes levied by, or in the territory of, the Guarantor on goods or services, or on the importation, manufacture, procurement or supply thereof; to that end, if the amount of any such taxes levied on or in respect of any item to be financed out of the proceeds of the Loan decreases or increases, the Bank may, by notice to the Borrower, increase or decrease the disbursement percentage then applicable to such item as required to be consistent with the aforementioned policy of the Bank. 4. Notwithstanding the provisions of paragraph 1 above, no withdrawals shall be made in respect of payments made for expenditures prior to the date of this Agreement, except that withdrawals, in an aggregate amount not exceeding the equivalent of $1,000,000 may be made in respect of Category (3) on account of payments made for such expenditures before that date but after June 1, 1981. 5. Notwithstanding the allocation of an amount of the Loan or the disbursement percentages set forth in the table in para- graph 1 above, if the Bank has reasonably estimated that the amount of the Loan then allocated to any Category will be insufficient to finance the agreed percentage of all expenditures in that Category, the Bank may, by notice to the Borrower: (i) - 23 - reallocate to such Category, to the extent required to meet the estimated shortfall, proceeds of the Loan which are then allocated to another Category and which in the opinion of the Bank are not needed to meet other expenditures; and (ii) if such reallocation cannot fully meet the estimated shortfall, reduce the disbursement percentage then applicable to such expenditures in order that further withdrawals under such Category may continue until all expenditures thereunder shall have been made. 6. If the Bank shall have reasonably determined that the procurement of any item in any Category is inconsistent with the procedures set forth or referred to in this Agreement, no expenditures for such item shall be financed out of the proceeds of the Loan and the Bank may, without in any way restricting or limiting any other right, power or remedy of the Bank under the Loan Agreement, by notice to the Borrower, cancel such amount of the Loan as, in the Bank's reasonable opinion, represents the amount of such expenditures which would otherwise have been eligible for financing out of the proceeds of the Loan. -24 - SCHEDULE 2 Description of the Project The Project consists of the following Parts: Part A: Transmission Lines 1. Construction of about 338 circuit kin of 230 kV trans- mission lines: (i) from the Paute hydroelectric plant to Totoras (near Ambato); and (ii) from Milagro to Machala. 2. Construction of about 427 circuit km of 138 kV trans- mission lines: (i) from Guayaquil to Santa Elena; (ii) from Cuenca to Loja; (iii) from Ibarra to Tulcan; and (iv) from Totoras to Ambato. Part B: Substations Construction of substations and installation of step-down transformers totalling about 280 MVA capacity at Machala, Riobamba, Santa Elena, Posorja, Tulcan and Loja and expansion of the substation at Ibarra. Part C: Training A training program consisting of: 1. a study on the adequacy of, and possible improvements to, existing training programs and training facilities; 2. acquisition and utilization of laboratory and training equipment; and 3. a program of scholarships for the Borrower's managerial, technical and administrative staff. Part D: Institutional Development 1. A study of the Borrower's structure and operations (including organizational, financial, data processing and commercial aspects and procedures and related aspects of the operations of the Subsidiaries) and the formulation of a program of institutional improvements. 2. Acquisition, development and use of computer software for accounting, engineering and commercial operations. - 25 - Part E: National Dispatch Center A study covering the preparation of designs, tech- nical specifications and bidding documents for a national dispatch center for the Borrower's national interconnected system. Parts A and B of the Project are expected to be completed by December 31, 1984 and Parts C, D and E of the Project are expected to be completed by June 30, 1985. - 26 - SCHEDULE 3 Amortization Schedule Payment of Principal Date Payment Due (expressed in dollars)* On each February 15 and August 15 beginning February 15, 1986 through February 15, 1998 3,845,000 On August 15, 1998 3,875,000 * To the extent that any portion of the Loan is repayable in a currency other than dollars (see General Conditions, Section 4.04), the figures in this column represent dollar equivalents determined as for purposes of withdrawal. - 27 - Premiums on Prepayment The following percentages are specified as the premiums payable on repayment in advance of maturity of any portion of the principal amount of the Loan pursuant to Section 3.04 (b) of the General Conditions: Time of Prepayment Premium Not more than three years 1.70% before maturity More than three years but not 3.40% more than six years before maturity More than six years but not 6.20% more than eleven years before maturity More than eleven years but not 8.50% more than fifteen years before maturity More than fifteen years 9.60% before maturity - 28 - SCHEDULE 4 Procurement A. International Competitive Bidding 1. Except as provided in Part B hereof, goods and civil works shall be procured under contracts awarded in accordance with procedures consistent with those set forth in the current edition of "Guidelines for Procurement under World Bank Loans and IDA Credits" published by the Bank in March 1977 (hereinafter called the Guidelines), on the basis of international competitive bidding as described in Part A of the Guidelines. 2. For goods and works to be procured on the basis of inter- national competitive bidding, and in addition to the requirements of paragraph 1.2 of the Guidelines, the Borrower shall prepare and forward to the Bank as soon as possible, and in any event not later than 60 days prior to the date of availability to the public of the first tender or prequalification documents relating thereto, as the case may be, a general procurement notice, in such form and detail and containing such information as the Bank shall reasonably request; the Bank will arrange for the publication of such notice in order to provide timely notification to prospective bidders of the opportunity to bid for the goods and works in question. The Borrower shall provide the necessary information to update such notice annually so long as any goods or works remain to be pro- cured on the basis of international competitive bidding. 3. For the purpose of evaluation and comparison of bids for the supply of goods to be procured on the basis of international competitive bidding: (i) bidders shall be required to state in their bid the c.i.f. (port of entry) price for the imported goods, or the ex-factory price or off-the-shelf price of other goods, offered in such bid; (ii) customs duties and other import taxes levied in connection with the importation, or the sales and similar taxes levied in connection with the sale or delivery, pursuant to the bid, of the goods shall not be taken into account in the evaluation of the bids; and (iii) the cost to the Borrower of inland freight and other expenditures incidental to the delivery of goods to the place of their use or installation shall be included. - 29 - B. Other Procurement Procedures Contracts for the procurement of computer software and hard- ware, laboratory and training equipment and vehicles, estimated to cost the equivalent of less than $100,000 each, may be awarded after obtaining quotations from a group of potential suppliers broad enough, under the circumstances, to assure competitive prices from the member countries of the Bank (including, for the purpose of this paragraph, Switzerland and Taiwan), provided that the total amount of contracts entered into under this paragraph shall not exceed in the aggregate the equivalent of $1,000,000. Quotations shall be compared and evaluated in accordance with the Guidelines and no supplier shall be asked or allowed to change the substance or price of the quotation after it has been made. C. Review of Procurement Decisions by the Bank 1. Review of invitations to bid and of proposed awards and final contracts: With respect to all contracts estimated to cost the equiva- lent of $100,000 or more: (a) Before bids are invited, the Borrower shall furnish to the Bank, for its comments, the text of the invitations to bid and the specifications and other bidding documents, together with a description of the advertising procedures to be followed for the bidding, and shall make such modifications in the said documents or procedures as the Bank shall reasonably request. Any further modification to the bidding documents shall require the Bank's concurrence before it is issued to the prospective bidders. (b) After bids have been received and evaluated, the Borrower shall, before a final decision on the award is made, inform the Barik of the name of the bidder to which it intends to award the contract and shall furnish to the Bank, in sufficient time for its -review, a detailed report on the evaluation and comparison of the bids received, and such other information as the Bank shall reasonably request. The Bank shall, if it determines that the intended award would be inconsistent with the Guidelines or this Schedule, promptly inform the Borrower and state the reasons for such determination. (c) The terms and conditions of the contract shall not, without the Bank's concurrence, materially differ from those on which bids were asked or prequalification invited. - 30 - (d) Two conformed copies of the contract shall be furnished to the Bank promptly after its execution and prior to delivery to the Bank of the first application for withdrawal of funds from the Loan Account in respect of such contract. 2. With respect to each contract not governed by the preceding paragraph, the Borrower shall furnish to the Bank, promptly after its execution and prior to delivery to the Bank of the first application for withdrawal of funds from the Loan Account in respect of such contract, two conformed copies of such contract, together with the analysis of the respective bids, recommendations for award and such other information as the Bank shall reasonably request. The Bank shall, if it determines that the award of the contract was not consistent with the Guidelines or this Schedule, promptly inform the Borrower and state the reasons for such determination. 3. Before agreeing to any material modification or waiver of the terms and conditions of a contract, or granting an extension of the stipulated time for performance of such contract, or issuing any change order under such contract (except in cases of extreme urgency) which would increase the cost of the contract by more than 15% of the original price, the Borrower shall inform the Bank of the proposed modification, waiver, extension or change order and the reasons therefor. The Bank, if it determines that the proposal would be inconsistent with the provisions of this Agreement, shall promptly inform the Borrower and state the reasons for its determination. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT CERTIFICATE I hereby certify that the foregoing is a true copy of the original in the archives of the Interna- tional Bank for Reconstruction and Develop- ment. In witness whereof I have signed this Certifi- cate and affixed the Seal of the Bank thereunto this 4i day of 198 L. FOR SECRETARY