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CONFORMED COPY
LOAN NUMBER 4179 CHA
Shanxi Project Agreement
(Wanjiazhai Water Transfer Project)
between
INTERNATIONAL BANK FOR 
RECONSTRUCTION AND DEVELOPMENT
and
SHANXI PROVINCE
Dated August 29 , 1997
LOAN NUMBER 4179 CHA 
SHANXI PROJECT AGREEMENT
AGREEMENT, dated August 29, 1997, between INTERNATIONAL BANK FOR RECONSTRUCTION 
AND DEVELOPMENT (the Bank) and SHANXI PROVINCE (Shanxi).
WHEREAS by the Loan Agreement of even date herewith between PEOPLE’S REPUBLIC OF 
CHINA (the Borrower) and the Bank, the Bank has agreed to make available to the 
Borrower an amount equal to four hundred million dollars ($400,000,000) on the terms 
and conditions set forth in the Loan Agreement, but only on condition that Shanxi 
agree to undertake such obligations toward the Bank as are set forth in this 
Agreement;
WHEREAS Shanxi, in consideration of the Bank's entering into the Loan 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 Loan Agreement, and the General Conditions (as so defined) have the respective 
meanings therein set forth.
ARTICLE II
Execution of the Project
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Section 2.01. Shanxi declares its commitment to the objectives of the Project as 
set forth in Schedule 2 to the Loan Agreement, and, to this end, shall:
(a)
carry out Part B of the Project with due diligence and efficiency and in 
conformity with appropriate administrative, economic, financial and technical 
practices and sound health, safety and environmental standards, and provide, or cause 
to be provided, promptly as needed, the funds, facilities, services and other 
resources required for Part B of the Project; and
(b)
cause YRDPC to perform in accordance with the provisions of the YRDPC 
Project Agreement, all of the obligations of YRDPC therein set forth, take and cause 
to be taken all action, including the provision of funds, facilities, services and 
other resources, necessary or appropriate to enable YRDPC to perform such obligations, 
and not take or permit to be taken any action which would prevent or interfere with 
such performance.
Section 2.02. Without limitation upon the provisions of Section 2.01 of this 
Agreement and except as the Bank and Shanxi shall otherwise agree, Shanxi shall carry 
out the Implementation Program set forth in Schedule 2 to this Agreement.
Section 2.03. each contract for the employment of individual consultants 
estimated to cost the equivalent of $50,000 or more, thExcept as the Bank 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 Loan shall be governed 
by the provisions of Schedule 1 to this Agreement.
Section 2.04. (a) Shanxi shall carry out the obligations set forth in Sections 
9.04, 9.05, 9.06, 9.07, 9.08 and 9.09 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 this Agreement and Part 
B of the Project.
(b)
For the purposes of Section 9.08 of the General Conditions and without 
limitation thereto, Shanxi shall:
(i)
prepare, on the basis of guidelines acceptable to the Bank, and 
furnish to the 
Bank not later than six months after the Closing Date 
or such later date as 
may be agreed for this purpose between the 
Bank and Shanxi, a plan designed to 
ensure the continued achievement 
of the objectives of Part B of the Project; 
and
(ii)
afford the Bank a reasonable opportunity to exchange views with 
Shanxi on said 
plan.
Section 2.05. (a) Shanxi shall, at the request of the Bank, exchange views with 
the Bank with regard to progress of the Project, the performance of its obligations 
under this Agreement and other matters relating to the purposes of the Loan.
(b)
Shanxi shall promptly inform the Bank of any condition which interferes 
or threatens to interfere with the progress of the Project, the accomplishment of the 
purposes of the Loan, or the performance by Shanxi of its obligations under this 
Agreement.
ARTICLE III
Financial Covenants
Section 3.01. (a) Shanxi 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 Shanxi responsible for carrying out the Project or any part thereof.
(b)
Shanxi shall:
(i)
have the records and accounts referred to in paragraph (a) of this 
Section for 
each Fiscal Year audited, in accordance with appropriate 
auditing principles 
consistently applied, by independent auditors 
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acceptable to the Bank;
(ii)
furnish to the Bank 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 Bank shall have reasonably 
requested; and
(iii)
furnish to the Bank such other information concerning said records 
and 
accounts and the audit thereof, as the Bank 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 Loan Agreement becomes effective.
Section 4.02. This Agreement and all obligations of the Bank and of Shanxi 
thereunder shall terminate on the date on which the Loan Agreement shall terminate in 
accordance with its terms, and the Bank shall promptly notify Shanxi 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 Bank:
International Bank for
  Reconstruction and Development
1818 H Street, N.W.
Washington, D.C. 20433
United States of America
Cable address:
Telex:
INTBAFRAD
248423 (MCI) or
Washington, D.C.
 64145 (MCI)
For Shanxi:
Shanxi Provincial Finance Bureau
No. 345 Yingze Street
Taiyuan  030001
People’s Republic of China
Cable address:
6299
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 Shanxi may be 
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taken or executed by [any Vice Governor of Shanxi] or such other person or persons as 
such Vice Governor shall designate in writing, and Shanxi shall furnish to the Bank 
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 BANK FOR
  RECONSTRUCTION AND DEVELOPMENT
By /s/ Yukon Huang
Acting Regional Vice President
East Asia and Pacific
SHANXI PROVINCE
By /s/ Zhou Wenzhong
Authorized Representative
SCHEDULE 1
Procurement
Section I.
Procurement of Goods and Works
Part A:
General
Goods and works shall be procured in accordance with the provisions of Section I 
of the “Guidelines for Procurement under IBRD Loans and IDA Credits” published by the 
Bank in January 1995 and revised in January and August 1996 (the Guidelines) and the 
following provisions of this Section.
Part B:
International Competitive Bidding
1.
Except as otherwise provided in Part C of this Section, goods and works shall be 
procured under contracts awarded in accordance with the provisions of Section II of 
the Guidelines and paragraph 5 of Appendix 1 thereto.
2.
The following provisions shall apply to goods and works to be procured under 
contracts awarded in accordance with the provisions of paragraph 1 of this Part B.
(a)
Prequalification
Bidders for works and for the production and supply of pipes shall be 
prequalified in accordance with the provisions of paragraphs 2.9 and 2.10 of the 
Guidelines.
(b)
Grouping of Contracts
To the extent practicable, contracts for works shall be grouped in bid packages 
estimated to cost $10,000,000 equivalent or more each, and contracts for goods shall 
be grouped in bid packages estimated to cost $1,000,000 equivalent or more each.
(c)
Preference for Domestically Manufactured Goods and Domestic
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Contractors
The provisions of paragraphs 2.54 and 2.55 of the Guidelines and Appendix 2 
thereto shall apply to goods manufactured in the territory of the Borrower and works 
to be carried out by domestic contractors.
(d)
Dispute Review Board
Each contract for works estimated to cost $50,000,000 equivalent or more shall 
include the provisions for a dispute review board set forth in the standard bidding 
documents for works referred to in paragraph 2.12 of the Guidelines.
(e)
Notification and Advertising
The invitation to prequalify or bid for each contract estimated to cost 
$10,000,000 equivalent or more shall be advertised in accordance with the procedures 
applicable to large contracts under paragraph 2.8 of the Guidelines.
Part C:
Other Procurement Procedures
1.
Goods
(a)
Limited International Bidding
Environmental and hydrologic forecasting equipment may be procured under 
contracts awarded in accordance with the provisions of paragraph 3.2 of the 
Guidelines.
(b)
National Competitive Bidding
Except as otherwise provided in paragraph (c) of this Section 1, goods estimated 
to cost less than $1,000,000 equivalent per contract, up to an aggregate amount not to 
exceed $48,059,700,000 equivalent, may be procured under contracts awarded in 
accordance with the provisions of paragraphs 3.3 and 3.4 of the Guidelines.
(c)
National Shopping
Goods estimated to cost less than $300,000 equivalent per contract, up to an 
aggregate amount not to exceed $3,14,900,000 equivalent, may be procured under 
contracts awarded on the basis of national shopping procedures in accordance with the 
provisions of paragraphs 3.5 and 3.6 of the Guidelines.
2.
Works
National Competitive Bidding
Works estimated to cost less than $10,000,000 equivalent per contract, up to an 
aggregate amount not to exceed $35,569,600,000 equivalent, may be procured under 
contracts awarded in accordance with the provisions of paragraphs 3.3 and 3.4 of the 
Guidelines.
Part D:
Review by the Bank of Procurement Decisions
1.
Procurement Planning
Prior to the issuance of any invitations to prequalify for bidding or to bid for 
contracts, the proposed procurement plan for the Project shall be furnished to the 
Bank for its review and approval, in accordance with the provisions of paragraph 1 of 
Appendix 1 to the Guidelines. Procurement of all goods and works shall be undertaken 
in accordance with such procurement plan as shall have been approved by the Bank, and 
with the provisions of said paragraph 1.
2.
Prior Review
With respect to (a) each contract for works estimated to cost the equivalent of 
$5,000,000 or more, and10,000,000 or more, (b) the first three contracts for works to 
be procured pursuant to the provisions of Part C.2 of this Section I, (c) each 
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contract for goods estimated to cost the equivalent of $31,000,000 or more, and (d) 
the first three contracts for goods to be procured pursuant to the provisions of Part 
C.1(b) of this Section I, the procedures set forth in paragraphs 2 and 3 of Appendix 1 
to the Guidelines shall apply.
3.
Post Review
With respect to each contract not governed by paragraph 2 of this Part, the 
procedures set forth in paragraph 4 of Appendix 1 to the Guidelines shall apply.
Section II.
Employment of Consultants
Part A:
General
Consultants’ services shall be procured in accordance with the provisions of the 
Introduction and Section IV of the “Guidelines:  Selection and Employment of 
Consultants by World Bank Borrowers” published by the Bank in January 1997 (the 
Consultant Guidelines) and the following provisions of Section II of this Schedule.
Part B:
Quality- and Cost-based Selection
Except as otherwise provided in Part C of this Section, consultants’ services 
shall be procured under contracts awarded in accordance with the provisions of Section 
II of the Consultant Guidelines, paragraph 3 of Appendix 1 thereto, Appendix 2 
thereto, and the provisions of paragraphs 3.13 through 3.18 thereof applicable to 
quality- and cost-based selection of consultants.
Part C:
Other Procedures for the Selection of Consultants
1.
Quality-based Selection
Services under Part B of the Project shall be procured under contracts awarded 
in accordance with the provisions of paragraphs 3.1 through 3.4 of the Consultant 
Guidelines.
2.
Single Source Selection
Services for detailed engineering designs under Part A of the Project may, with 
the Bank's prior agreement, be procured in accordance with the provisions of 
paragraphs 3.8 through 3.11 of the Consultant Guidelines.
3.
Individual Consultants
Services for tasks that meet the requirements set forth in paragraph 5.01 of the 
Consultant Guidelines shall be procured under contracts awarded to individual 
consultants in accordance with the provisions of paragraphs 5.1 through 5.3 of the 
Consultant Guidelines.
Part D:
Review by the Bank of the Selection of Consultants
1.
Selection Planning
Prior to the issuance to consultants of any requests for proposals, the proposed 
plan for the selection of consultants under the Project shall be furnished to the Bank 
for its review and approval, in accordance with the provisions of paragraph 1 of 
Appendix 1 to the Consultant Guidelines.  Selection of all consultants’ services shall 
be undertaken in accordance with such selection plan as shall have been approved by 
the Bank, and with the provisions of said paragraph 1.
2.
Prior Review
(a)
With respect to each contract for the employment of consulting firms 
estimated to cost the equivalent of $100,000 or more an, the procedures set forth in 
paragraphs 1, 2 (other than the third subparagraph of paragraph 2(a)) and 5 of 
Appendix 1 to the Consultant Guidelines shall apply.
(b)
With respect to each contract for the employment of individual 
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consultants estimated to cost the equivalent of $50,000 or more, the qualifications, 
experience, terms of reference and terms of employment of the consultants shall be 
furnished to the Bank for its prior review and approval.  The contract shall be 
awarded only after the said approval shall have been given.
3.
Post Review
With respect to each contract not governed by paragraph 1 of this Part, the 
procedures set forth in paragraph 4 of Appendix 1 to the Consultant Guidelines shall 
apply.
SCHEDULE 2
Implementation Program
A.
Part A of the Project
1.
Subsidiary Loan
(a)
Shanxi shall relend the proceeds of the Loan made available to it by the 
Borrower and allocated from time to time to Categories (1), (2)(a) and, (2)(b), (3)(a) 
and (4)(a) to YRDPC under a subsidiary loan agreement to be entered into between 
Shanxi and YRDPC under terms and conditions which shall have been approved by the Bank 
and which shall include the following:
(i)
the principal amount of the Subsidiary Loan shall be denominated 
and repayable 
in dollars and shall be repaid by YRDPC to Shanxi 
over a period of twenty 
years, inclusive of 
a grace 
period of five years;
(ii)
YRDPC shall pay interest on the principal amount of the Subsidiary 
Loan 
withdrawn and outstanding from time to time at a rate equal 
to the rate 
payable by Shanxi pursuant to Section 3.01(b)(ii) of 
the Loan Agreement; and
(iii)
YRDPC shall pay a commitment charge on the principal amount of the 
Subsidiary 
Loan not withdrawn from time to time at a rate equal to 
three fourths of one 
percent (0.75%) per annum.
(b)
Shanxi shall exercise its rights under the Subsidiary Loan Agreement in 
such manner as to protect the interests of Shanxi, the Borrower and the Bank and to 
accomplish the purposes of the Loan, and, except as the Bank shall otherwise agree, 
Shanxi shall not assign, amend, abrogate or waive the Subsidiary Loan Agreement or any 
provision thereof.
2.
Fen Dam Safety
In order to ensure the safety of the Fen Dam and downstream life, property and 
activities, Shanxi shall, through its bureau responsible for operation of the Fen Dam, 
take the following actions.
(a)
Operation and Maintenance and Emergency Preparedness Plans
Shanxi shall continue to carry out a plan for the operation and maintenance of 
the Fen Dam and an emergency preparedness plan for said dam, both acceptable to the 
Bank.
(b)
Periodic Inspections
Shanxi shall ensure that inspections of the Fen Dam and of its operation and 
maintenance shall be undertaken at intervals of not more than two years, with the 
first inspection to be completed by October 31, 1998, in accordance with sound 
engineering practices and on the basis of guidelines acceptable to the Bank\02, by 
qualified and experienced independent experts, in order to identify any deficiencies 
in the condition of the Fen Dam or in the quality and adequacy of the maintenance or 
methods of operation of said dam or of its plan for emergency preparedness, which may 
endanger the safety of said dam or of downstream life, property or activities, and to 
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rectify any such deficiencies promptly.  To this end, Shanxi shall employ, not later 
than February 15, 1998, a panel of independent experts whose qualifications, 
experience and terms of reference shall be acceptable to the Bank, to be responsible 
for undertaking such periodic inspections of the Fen Dam.  Shanxi shall ensure that 
said panel shall prepare and furnish to Shanxi and the Bank, promptly upon completion 
of each said inspection, a report on the results of said inspection, together with any 
measures recommended to be taken to ensure the safety of the Fen Dam and downstream 
life, property and activities, the first such report to be furnished to the Bank not 
later than November 15, 1998.  Shanxi shall afford the Bank a reasonable opportunity 
to exchange views with Shanxi on each report furnished by said panel, and thereafter 
shall implement the measures recommended by said report, taking into account the 
comments of the Bank on the matter.
B.
Part B of the Project
1.
Shanxi shall ensure that Sub-projects under Part B(5) of the Project shall be 
appraised and monitored, and Sub-loans for said Sub-projects, including the 
arrangements for the processing of Sub-loans by a commercial bank as fiscal agent for 
Shanxi, shall be made, all in accordance with policies and procedures acceptable to 
the Bank, which shall include inter alia, those set forth or referred to in the 
Sub-loans Operations Manual and in the following provisions of this Part B the 
following Sections of this Part B.  To this end, Shanxi shall, through Taiyuan, 
establish, not later than December 31, 1997 and thereafter at all times maintain 
throughout the period of Project implementation, an office with terms of reference, 
staffing and other resources acceptable to the Bank, to be responsible for the 
appraisal and monitoring of Sub-projects and the financial management of Sub-loans.
2.
Sub-loans shall be made on the terms and conditions set forth in the Annex to 
this Schedule.
3.
Shanxi shall:  (i) exercise its rights in relation to each Sub-project in such 
manner as to protect the interests of the Borrower and the Bank, comply with its 
obligations under this Agreement and achieve the purposes of the Project; and (ii) not 
assign, amend, abrogate or waive any of its agreements providing for Sub-loans, or any 
provision thereof, without the prior approval of the Bank.
C.
Complementary Investments
In order to ensure the efficient and economic use of the raw water to be 
transferred from the Yellow River to Taiyuan under the Project, Shanxi, through 
Taiyuan’s water supply authority, shall complete, under guidelines, and in accordance 
with a program, both acceptable to the Bank,\02 and not later than June 30, 20012, a 
program of investments complementary to the Project, consisting of:
1.
construction of a surface water treatment plant, pipelines, and three booster 
pumping stations and provision of training to personnel responsible for operation and 
management of said facilities in financial management, and in operation and management 
of said facilities;
2.
construction and rehabilitation of wastewater treatment plants, installation of 
interceptors and secondary and tertiary sewers, and provision of training to personnel 
responsible for management of said plants in financial management and plant 
operations; and and
3.
resettlement of persons displaced as a result of the activities referred to 
above in paragraphs 1 and 2 of this Part C..
D.
Resettlement under the Project and the Complementary Investment Program
Shanxi shall take, and shall cause to be taken all measures necessary to ensure 
that all persons displaced as a result of the Project and the Complementary Investment 
Program shall be resettled in accordance with the Project Resettlement Action Plan so 
as to improve the living standards and productivity of all such persons.
E.
Monitoring and Evaluation
1.
Shanxi shall maintain policies and procedures adequate to enable it to monitor 
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and evaluate on an ongoing basis, in accordance with indicators satisfactory to the 
Bank\02, the implementation of Part B of the Project and the Complementary Investment 
Program (including the implementation of the Project Resettlement Action Plan as it 
relates to such program), and the achievement of their respective objectives.
2.
Shanxi shall prepare, under guidelines acceptable to the Bank,\02 and furnish to 
the Bank semi-annual reports, not later than April 15 and October 15 of each Fiscal 
Year, integrating the results of said monitoring and evaluation activities performed 
during the preceding calendar semester, consolidating (in the case of the October 15 
reports) the reports furnished to it by the Beneficiaries pursuant to Section 7(g) of 
the Annex to this Schedule, and setting out (a) the measures recommended to ensure the 
continued efficient implementation of Part B of the Project and the Complementary 
Investment Program (including implementation of the Project Resettlement Action Plan) 
and the achievement of their respective objectives during the following twelve month 
period, including any proposed revisions to the Project Resettlement Action Plan 
indicated by said monitoring and evaluation activities, and (b) the proposed program 
of works for the Complementary Investment Program during the following 12 month 
period, including designs and a financing plan therefor.
3.
Shanxi shall afford the Bank a reasonable opportunity to exchange views with 
Shanxi on each said report, and shall thereafter (a) introduce the revisions and 
implement the recommendations proposed in said report, and (b) implement the program 
of works proposed by said report, all with due diligence and efficiency, taking into 
account the views of the Bank on the matter.
F.
Water Tariffs and Groundwater Extraction
1.
Taiyuan Water Supply Tariffs
(a)
Shanxi shall cause Taiyuan’s water supply authority:
(i)
until January 1, 2002, to refrain from incurring any debt, if 
after the 
incurrence of such debt, the ratio of debt to equity 
would be greater than 70 
to 30;
(ii)
commencing January 1, 2002, to refrain from incurring any debt 
unless a 
reasonable forecast of the revenues and expenditures 
of said authority shows 
that its estimated net revenues for each 
Fiscal Year during the term of the 
debt to be incurred shall be at 
least 1.2 times its estimated debt service 
requirements in such 
year on all debt, including the debt to be incurred; and
(iii)
to earn, for each Fiscal Year after the Fiscal Year ending on 
December 31, 
2001, an annual return of not less than 2% of the 
average current net value of 
the fixed assets of said authority in 
operation.
(b)
Before June 30 in each Fiscal Year, Shanxi shall, on the basis of 
forecasts prepared by it and satisfactory to the Bank, review whether Taiyuan’s water 
supply authority would meet the requirements set forth in paragraph (a)(iii) of this 
Section in respect of such year and the next following Fiscal Year and shall furnish 
to the Bank a copy of such review upon its completion.  If any such review shows that 
said requirements would not be met for the Fiscal Years covered by such review, Shanxi 
shall promptly take and cause to be taken all measures (including, without limitation, 
adjustments of the structure or levels of water tariffs charged by Taiyuan’s water 
supply authority) in order to ensure that said requirements are met.
(c)
For the purposes of this Section:
(i)
The terms used in sub-paragraphs (a)(ii) and (a)(iii) of this 
Section shall 
have the meanings set forth in Sections 4.02(b) and 
4.03(d) of the YRDPC 
Project Agreement, except that the 
references to YRDPC in said Sections of the 
YRDPC Project Agreement 
shall be deemed to refer to Taiyuan’s water supply 
authority.
(ii)
The term “equity” means the sum of the total unimpaired paid-up 
capital, 
retained earnings and reserves of Taiyuan's water 
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supply authority not 
allocated to cover specific liabilities.
(iii)
Wherever, 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 Bank.
2.
Capital Transfers to YRDPC
Shanxi shall transfer to YRDPC as a capital contribution, not later than 
December 31 of each of the calendar yFiscal Years 1997 through and including 2001, all 
Incremental Water Supply Revenues produced during said year.  For purposes of this 
Section, the term “Incremental Water Supply Revenues” means the Fiscal Year, the 
difference between total revenues of Shanxi from all sources related to water supply 
during asaid year and total revenues of Shanxi from all sources related to water 
supply during the next preceding year.
3.
Shanxi Groundwater Extraction
In order to ensure the extraction of groundwater on an environmentally 
sustainable basis, Shanxi shall take the following actions.
(a)
Shanxi shall, through its Price Bureau, develop, on the basis of 
guidelines acceptable to the Bank, and furnish to the Bank not later than February 15, 
1998, a program designed to ensure that not later than February 1, 2001June 30, 2002 
and at all times thereafter, the structure and levels of tariffs for all water 
supplied in Shanxi, shall be the same, regardless of whether the water is supplied 
through a municipal or provincial water supply authority or is obtained independently 
by the user of such water.
(b)
Shanxi shall, through its Water Conservancy Bureau, develop, on the basis 
of guidelines acceptable to the Bank, and furnish to the Bank not later than 
FebruaryJune 15, 1998, a program designed to ensure that groundwater extraction in 
Shanxi shall be limited at all times to environmentally sound levels.
(c)
Shanxi shall afford the Bank a reasonable opportunity to exchange views 
with Shanxi on the programs referred to in paragraphs (a) and (b) of this Section and 
shall thereafter carry out said programs with due diligence and efficiency, taking 
into account the comments of the Bank on the matter. 
ANNEX to  SCHEDULE 2
Sub-loans
The provisions of this Annex shall apply for purposes of Part B.2 of Schedule 2 
to this Agreement.
Enterprise Eligibility Criteria
1.
Each Sub-loan for a Sub-project shall be made exclusively to a Beneficiary, 
which shall have established to the satisfaction of Shanxi, on the basis of guidelines 
acceptable to the Bank, that:
(a)
it is an entity possessing legal person status, duly established and 
operating under the laws of the Borrower, with authority to borrow and carry out the 
Sub-project;
(b)
it is creditworthy and has a sound financial structure and the 
organization, management, staff and other resources required for the efficient 
carrying out of its operations, including the Sub-project; and
(c)
any proposed use in the Sub-project of patented or otherwise legally 
protected technology is consistent with its legal rights and obligations with respect 
to such technology.
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Sub-project Eligibility Criteria
2.
Each Sub-loan shall be made to a Beneficiary for a Sub-project which Shanxi 
shall have determined, on the basis of an appraisal (including an environmental 
assessment) carried out in accordance with guidelines acceptable to the Bank, meets 
the following requirements:
(a)
said Sub-project is technically feasible, and economically and 
financially and commercially viable; and is estimated to have a financial rate of 
return of at least 11% and an economic rate of return of at least 11%; and
(b)
said Sub-project (i) is in compliance with environmental standards 
satisfactory to the Bank, and with all applicable laws and regulations of the Borrower 
relating to health, safety and environmental protection, and (ii) has been developed 
in accordance with the recommendations of an environmental impact assessment which has 
been approved by the environmental protection bureau responsible for the locality in 
which said Sub-project is located, and includes appropriate mitigation measures, based 
on said recommendations, to remedy any adverse impact on the environment.\02\0d Terms
3.
The principal amount of each Sub-loan to a Beneficiary shall be [denominated and 
repayable in dollars]the equivalent in terms of dollars (determined as of the date or 
respective dates of withdrawal from the Loan Account) of the value of the currency or 
currencies so withdrawn for payments made by Shanxi under said Sub-loan (Dollar 
Amount), and shall be repaid by said Beneficiary to Shanxi in such currency as Shanxi 
shall specify in amounts equivalent to the Dollar Amount (determined as of the date or 
respective dates of repayment), over a period of not more than 8 years, inclusive of a 
grace period of not more than 3 years.
4.
Each Beneficiary shall pay: (a) interest on the principal amount of the Sub-loan 
made to it and withdrawn and outstanding from time to time at a rate equal to or 
greater than the sum of (i) the rate payable by Shanxi pursuant to Section 3.01(b)(ii) 
of the Loan Agreement plus (ii) 2%; and (b) a commitment charge on the principal 
amount of said Sub-loan not withdrawn from time to time at a rate equal to three 
fourths’ of one percent (0.75%) per annum.
5.
No expenditure for a Sub-project shall be eligible for financing out of the 
proceeds of a Sub-loan unless:
(a)
Shanxi shall have furnished to the Bank an appraisal report for said 
Sub-project and said Sub-loan shall have been approved by the Bank; or
(b)
said Sub-loan shall have been a free limit Sub-loan for which the Bank 
has authorized withdrawals from the Loan Account.  For purposes of this Annex, a free 
limit Sub-loan shall be a Sub-loan (other than the first three Sub-loans made by 
Shanxi) which shall not exceed the sum of $1,000,000 equivalent, when added to any 
other outstanding amounts financed or proposed to be financed out of the proceeds of 
the Loan or of any other loan provided for in any outstanding agreement between the 
Borrower and the Bank or the Association, the proceeds of which have been or are being 
used to finance goods and services directly and materially related to said 
Sub-project, the foregoing amount being subject to change from time to time as 
determined by the Bank.
6.
The aggregate amount of all Sub-loans made to any one Beneficiary andshall not 
exceed the equivalent of $1,500,000, and the aggregate amount of all Sub-loans made 
for any one Sub-project shall not exceed the lesser of:  (a) the estimated cost of 
said Sub-project (excluding the cost of land and civil works, and excluding taxes),; 
and (b) the equivalent of $1,500,000.  The proceeds of each Sub-loan for a Sub-project 
shall be utilized exclusively to finance expenditures for goods and services required 
for said Sub-project.
Other Conditions
7.
Each Sub-loan to a Beneficiary shall be made on conditions whereby said 
Beneficiary shall undertake to: 
(a)
carry out its operations, including its respective Sub-project, with due 
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diligence and efficiency, in accordance with sound financial, managerial and technical 
practices, and consistent with appropriate health, safety and environmental practices 
acceptable to the Bank, and provide promptly as needed the funds, and other resources 
required for the purpose, and maintain adequate records and accounts;
(b)
procure the goods and services required for its respective Sub-project in 
accordance with the provisions of Schedule 1 to this Agreement, and utilize said goods 
and works exclusively in the carrying out of said Sub-project;
(c)
take out and maintain such insurance, against such risks and in such 
amounts, as shall be consistent with sound business practice, including such insurance 
to cover the hazards incident to the acquisition, transportation, and delivery of 
goods financed out of the proceeds of the Loan to the place of use or installation, 
any indemnity thereunder to be payable in a currency freely usable by the enterprise 
to replace or repair such goods;
(d)
enable the Bank to inspect the goods and the sites and works included in 
its respective Sub-project, the operation thereof and any relevant records and 
documents;
(e)
at all times maintain and operate its equipment and facilities, and from 
time to time, promptly as needed, make all necessary repairs and renewals thereof, all 
in accordance with sound engineering, financial and industry practices;
(f)
maintain records and accounts adequate to reflect in accordance with 
consistently maintained sound accounting practices its operations and financial 
condition, have its records, accounts and financial statements for each Fiscal Year 
audited, in accordance with appropriate auditing principles consistently applied, by 
independent auditors acceptable to the Bank, and furnish to the Bank as soon as 
available, but in any case not later than six months after the end of each such year, 
for forwarding to the Bank should the Bank so require, certified copies of its 
financial statements for such year as so audited, and the report of such audit by said 
auditors, of such scope and in such detail as Shanxi and, the Bank if applicable, the 
Bank, shall have reasonably requested; and
(g)
(i) maintain policies and procedures adequate to enable it to monitor and 
evaluate in accordance with indicators acceptable to the Bank\02 the implementation of 
its Sub-project, and of the air and waste water emissions from its plants, (ii) 
prepare, under terms of reference acceptable to the Bank, and furnish to Shanxi for 
forwarding to the Bank pursuant to Part E of Schedule 2 to this Agreement, annual 
reports, not later than September 1 of each Fiscal Year summarizing said monitoring 
activities carried out during the current Fiscal Year, (iii) afford Shanxi and the 
Bank a reasonable opportunity to exchange views with said enterprise each said report, 
and (iv) thereafter, promptly take all measures required to ensure the continued 
efficient carrying out of its Sub-project, based on the conclusions and 
recommendations of said report and the views of the Bank and Shanxi on the matter.