Page 1 CONFORMED COPY CREDIT NUMBER 2219-0-CHA (Liaoning Urban Infrastructure Project) between INTERNATIONAL DEVELOPMENT ASSOCIATION and LIAONING PROVINCE Dated April 25, 1991 CREDIT NUMBER 2219-0-CHA PROJECT AGREEMENT AGREEMENT, dated April 25, 1991, between INTERNATIONAL DEVELOPMENT ASSOCIATION (the Association) and LIAONING PROVINCE (Liaoning). WHEREAS by the Development Credit Agreement of even date herewith between People's Republic of China (the Borrower) and the Association, the Association has agreed to make available to the Borrower an amount in various currencies equivalent to fifty-four million two hundred thousand Special Drawing Rights (SDR 54,200,000), on the terms and conditions set forth in the Development Credit Agreement, but only on condition that Liaoning agree to undertake such obligations toward the Association as are set forth in this Agreement; and WHEREAS Liaoning, in consideration of the Association's entering into the Development Credit 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 Page 2 Definitions Section 1.01. Unless the context otherwise requires, the several terms defined in the Development Credit Agreement and the General Conditions (as so defined) have the respective meanings therein set forth. ARTICLE II Execution of the Project Section 2.01. (a) Liaoning declares its commitment to the objectives of the Project as set forth in Schedule 2 to the Development Credit Agreement, and, to this end, shall carry out the Project with due diligence and efficiency and in conformity with appropriate administrative, financial, engineering, water supply and public transport practices, and shall provide, or cause to be provided, promptly as needed, the funds (including local currency funds), facilities, services and other resources required for the Project. (b) Without limitation upon the provisions of paragraph (a) of this Section and except as the Association and Liaoning shall otherwise agree, Liaoning shall carry out the Project in accordance with the Implementation Program set forth in Schedule 2 to this Agreement. (c) Liaoning shall relend the proceeds of the Credit to the Project Municipalities on terms and conditions satisfactory to the Association. (d) Liaoning shall cause each of the Project Municipalities to: (i) relend to its respective Water Supply Company the portion of the proceeds of the Credit to be used by such Water Supply Company; and (ii) contract with its respective Water Supply Company to carry out its respective portion of the Project and undertake certain financial and operational obligations, all under a subsidiary loan agreement on terms and conditions which shall have been approved by the Association, including those set forth in Part B of Schedule 2 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 Credit shall be governed by the provisions of Schedule 1 to this Agreement. Section 2.03. Liaoning 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. Section 2.04. (a) Liaoning shall, at the request of the Association, exchange views with the Association with regard to progress of the Project, the performance of its obligations under this Agreement and other matters relating to the purposes of the Credit. (b) Liaoning shall promptly inform the Association of any condition which interferes or threatens to interfere with the progress of the Project, the accomplishment of the purposes of the Credit, or the performance by Liaoning of its obligations under this Agreement. ARTICLE III Financial Covenants Section 3.01. (a) Liaoning shall maintain or cause to be maintained records and accounts adequate to reflect in accordance with sound accounting practices the operations, resources and expenditures in respect of the Project of the departments or agencies of Liaoning responsible for carrying out the Project or any part thereof. (b) Liaoning shall: (i) have the records and accounts referred to in paragraph (a) of this Page 3 Section for each fiscal year audited, in accordance with appropriate auditing principles consistently applied, 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, the report of such audit by said auditors, of such scope and in such detail as the Association shall have reasonably requested; and (iii) furnish to the Association such other information concerning said records and accounts and the audit thereof as the Association shall from time to time reasonably request. ARTICLE IV Effective Date; Termination; Cancellation and Suspension Section 4.01. This Agreement shall come into force and effect on the date upon which the Development Credit Agreement becomes effective. Section 4.02. (a) This Agreement and all obligations of the Association and of Liaoning thereunder shall terminate on the earlier of the following two dates: (i) the date on which the Development Credit Agreement shall terminate in accordance with its terms; or (ii) the date 20 years after the date of this Agreement. (b) If the Development Credit Agreement terminates in accordance with its terms before the date specified in paragraph (a) (ii) of this Section, the Association shall promptly notify Liaoning thereof. Section 4.03. All the provisions of this Agreement shall continue in full force and effect notwithstanding any cancellation or suspension under the General Conditions. ARTICLE V Miscellaneous Provisions Section 5.01. 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, telegram, cable, telex or radiogram 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. 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: INDEVAS 248423 (RCA) Washington, D.C. 82987 (FTCC) 64145 (WUI) or 197688 (TRT) For Liaoning: Page 4 Liaoning Provincial Government Beiling Dajie Shenyang, Liaoning Province People's Republic of China Telex: 80039 LFAO CN Section 5.02. Any action required or permitted to be taken, and any document required or permitted to be executed, under this Agreement on behalf of Liaoning, or by Liaoning on behalf of the Borrower under the Development Credit Agreement, may be taken or executed by the Governor or such other person or persons as the Governor shall designate in writing, and Liaoning shall furnish to the Association sufficient evidence of the authority and the authenticated specimen signature of each such person. Section 5.03. This Agreement may be executed in several counterparts, each of which shall be an original, and all collectively but one instrument. IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized representatives, have caused this Agreement to be signed in their respective names in the District of Columbia, United States of America, as of the day and year first above written. INTERNATIONAL DEVELOPMENT ASSOCIATION By /s/ Shahid Javed Burki Acting Regional Vice President Asia LIAONING PROVINCE By /s/ Zhu Qizhen Authorized Representative SCHEDULE 1 Procurement and Consultants' Services Section I: Procurement of Goods and Works Part A: International Competitive Bidding 1. Except as provided in Part D hereof, goods and works shall be procured under contracts awarded in accordance with procedures consistent with those set forth in Sections I and II of the "Guidelines for Procurement under IBRD Loans and IDA Credits" published by the Bank in May 1985 (the Guidelines). 2. Bidders for civil works for water supply contracts shall be prequalified as provided in paragraph 2.10 of the Guidelines. Part B: Preference for Domestic Manufacturers In the procurement of goods in accordance with the procedures described in Part A.1 hereof, goods manufactured in China may be granted a margin of preference in accordance with, and subject to, the provisions of paragraphs 2.55 and 2.56 of the Page 5 Guidelines and paragraphs 1 through 4 of Appendix 2 thereto. Part C: Preference for Domestic Contractors In the procurement of works in accordance with the procedures described in Part A.1 hereof, China may grant a margin of preference to domestic contractors in accordance with, and subject to, the provisions of paragraphs 2.55 and 2.56 of the Guidelines and paragraph 5 of Appendix 2 thereto. Part D: Other Procurement Procedures 1. Items or groups of items up to an aggregate amount equivalent to $500,000 may be procured under contracts awarded on the basis of comparison of price quotations obtained from at least three suppliers eligible under the Guidelines, in accordance with procedures acceptable to the Association. 2. Civil works for water supply structures and corridor improvement, up to an aggregate amount equivalent to $23,000,000, may be procured under contracts awarded on the basis of competitive bidding, advertised locally, in accordance with procedures satisfactory to the Association. 3. Civil works for the construction of the pipeline over the Hun River, up to an aggregate amount equivalent to $2,100,000, may be carried out through force account procedures. Part E: Review by the Association of Procurement Decisions 1. Review of prequalification: With respect to the prequalification of bidders as provided in Part A.2 hereof, the procedures set forth in paragraph 1 of Appendix 1 to the Guidelines shall apply. 2. Review of invitations to bid and of proposed awards and final contracts: (a) With respect to each contract for civil works estimated to cost the equivalent of $3,000,000 or more and for goods estimated to cost the equivalent of $200,000 or more, the procedures set forth in paragraphs 2 and 4 of Appendix 1 to the Guidelines shall apply. Where payments for such contract are to be made out of the Special Account, such procedures shall be modified to ensure that the two conformed copies of the contract required to be furnished to the Association pursuant to said paragraph 2 (d) shall be furnished to the Association prior to the making of the first payment out of the Special Account in respect of such contract. (b) With respect to each contract not governed by the preceding paragraph, the procedures set forth in paragraphs 3 and 4 of Appendix 1 to the Guidelines shall apply. Where payments for such contract are to be made out of the Special Account, such procedures shall be modified to ensure that the two conformed copies of the contract together with the other information required to be furnished to the Association pursuant to said paragraph 3 shall be furnished to the Association as part of the evidence to be furnished pursuant to paragraph 4 of Schedule 3 to the Development Credit Agreement. 3. The provisions of the preceding subparagraph (b) shall not apply to contracts in respect of which the Association shall have authorized withdrawals on the basis of statements of expenditure. 4. The figure of 15% is hereby specified for purposes of paragraph 4 of Appendix 1 to the Guidelines. Section II: Employment of Consultants In order to assist Liaoning in carrying out the Project, Liaoning shall employ consultants whose qualifications, experience and terms and conditions of employment shall be satisfactory to the Association. Such consultants shall be selected in accordance with principles and procedures satisfactory to the Association on the basis of the "Guidelines for the Use of Consultants by World Bank Borrowers and by The World Bank as Executing Agency" published by the Bank in August Page 6 1981. SCHEDULE 2 Implementation Program Part A: Project Implementation 1. Liaoning shall maintain and shall cause each of the Project Municipalities to maintain the project offices established to facilitate Project implementation, with functions and responsibilities satisfactory to the Association, staffed by competent staff in adequate numbers. 2. Liaoning shall cause the training under Part C.3 of the Project to be carried out in accordance with a program agreed with the Association. 3. Liaoning shall cause the resettlement under the Project to be carried out in accordance with a plan acceptable to the Association. 4. Liaoning shall: (a) cause the study under Part C.2 of the Project to be carried out in accordance with terms of reference and timing agreed with the Association; (b) promptly upon completion of the study, exchange views with the Association on the study; and (c) thereafter, implement the study's recommendations, taking into account the Association's comments thereon. Part B: Water Supply Companies Except as the Association shall otherwise agree, the terms and conditions of the Subsidiary Loan Agreements shall be as set out below: 1. Each of the Water Supply Companies shall carry out its respective portion of the Project with due diligence and efficiency and in accordance with appropriate water supply, financial and management practices. 2. The terms and conditions for relending of the proceeds of the Credit to the Water Supply Companies shall include, inter alia: (a) interest payable at the variable rate payable on medium/long-term Renminbi loans made by the People's Construction Bank of China; (b) commitment charges at the rate of 0.5% per annum; (c) repayment period of 15 years, including a grace period of five years; and (iv) all foreign exchange risk to be borne by the respective Municipality. 3. Each of the Water Supply Companies shall carry out an action plan to improve its water metering, system leakage and staffing levels in a manner satisfactory to the Association. 4. Each of the Water Supply Companies shall: (a) maintain records and accounts adequate to reflect in accordance with sound accounting practices its operations and financial condition; (b) have its records, accounts and financial statements (balance sheets, statements of income and expenses and related statements) and total capital expenditures (including construction works financed by internal sources) for each fiscal year audited, in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Association; (c) furnish to the Association as soon as available, but in any case not later than six 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 Association shall have reasonably requested; and (d) furnish to the Association such other information concerning said records, accounts and financial statements as well as the audit thereof, as the Association shall from time to time reasonably request. 5. Each of the Water Supply Companies shall make adequate arrangements to insure Page 7 its assets in a manner satisfactory to the Association. 6. Each of the Water Supply Companies shall prepare and furnish to the Association by October 31 of each year, commencing October 31, 1991 and ending October 31, 1996, financial forecasts containing income statements, sources and applications of funds and balance sheets for the next eight years. 7. (a) Except as the Association shall otherwise agree, each of the Water Supply Companies shall produce, for each of its fiscal years after its fiscal year ending on December 31, 1991: (i) total operating revenues equivalent to not less than the sum of its: (A) total operating expenses; and (B) financial obligations; and (ii) funds from water supply operations equivalent to not less than 25% of the annual average of such Water Supply Company's capital expenditures incurred, or expected to be incurred, for that year, the previous fiscal year and the next fiscal year. (b) Before October 31 in each of its fiscal years, each of the Water Supply Companies shall, on the basis of forecasts prepared by it and satisfactory to the Association, review whether it would meet the requirements set forth in paragraph (a) in respect of such year and the next following fiscal year and shall furnish to the Association a copy of such review upon its completion. (c) If any such review shows that any of the Water Supply Companies would not meet the requirements set forth in paragraph (a) for the fiscal years covered by such review, such Water Supply Company shall promptly take all necessary measures (including, without limitation, adjustments of the structure or levels of its rates) in order to meet such requirements. (d) For the purposes of this Section: (i) The term "total operating expenses" means all expenses related to operations, including administration, taxes and payments in lieu of taxes, and provision for depreciation. (ii) The term "financial obligations" means the sum of: (A) interest and other charges on debt chargeable to operations; (B) debt repayments in excess of the amounts repayable from funds accumulated from provisions for depreciation and maintenance; (C) required allocations accounted for as a distribution of net income; and (D) any increase in working capital. (iii) The term "funds from water supply operations" means the difference between: (A) the sum of revenues from all sources related to operations, consumer contributions in aid of construction, net non-operating income and any reduction in working capital other than cash; and (B) the sum of all expenses related to operations, including taxes and payments in lieu of taxes (excluding provision for depreciation and other non-cash operating charges), debt service requirements, all cash distributions of surplus, increase in working capital other than cash and other cash outflows other than capital expenditures. (iv) the term "net non-operating income" means the difference between: (A) revenues from all sources other than those related to operations; and Page 8 (B) expenses, including, taxes and payments in lieu of taxes, incurred in the generation of revenues in (A) above. (v) The term "working capital other than cash" means the difference between current assets excluding cash and current liabilities at the end of each fiscal year. (vi) The term "current assets excluding cash" means all assets other than cash which could in the ordinary course of business be converted into cash within twelve months, including accounts receivable, marketable securities, inventories and pre-paid expenses properly chargeable to operating expenses within the next fiscal year. (vii) The term "current liabilities" means all liabilities which will become due and payable or could under circumstances then existing be called for payment within twelve months, including accounts payable, customer advances, debt service requirements, and taxes and payments in lieu of taxes. (viii) The term "debt service requirements" means the aggregate amount of repayments on debt. (ix) The term "capital expenditures" means all expenditures incurred on account of fixed assets related to operations. (x) Whenever for the purposes of this Section it shall be necessary to value, in terms of the currency of the Borrower, debt payable in another currency, such valuation shall be made on the basis of the prevailing lawful rate of exchange at which such other currency is, at the time of such valuation, obtainable for the purposes of servicing such debt, or, in the absence of such rate, on the basis of a rate of exchange acceptable to the Association.