Page 1 CONFORMED COPY CREDIT NUMBER 3545 UG UETCL Project Agreement (Fourth Power Project) between INTERNATIONAL DEVELOPMENT ASSOCIATION and UGANDA ELECTRICITY TRANSMISSION COMPANY LIMITED Dated February 23, 2005 Page 2 CREDIT NUMBER 3545 UG PROJECT AGREEMENT AGREEMENT dated February 23, 2005, between INTERNATIONAL DEVELOPMENT ASSOCIATION (the Association) and UGANDA ELECTRICITY TRANSMISSION COMPANY LIMITED (UETCL) (the Transmission Company). WHEREAS (A) by the Development Credit Agreement dated August 29, 2001, between The Republic of Uganda (the Borrower) and the Association, the Association agreed to make available to the Borrower an amount in various currencies equivalent to forty eight million Special Drawing Rights (SDR 48,000,000), on the terms and conditions set forth in the Development Credit Agreement, but only on conditions that the Transmission Company agree to undertake such obligations toward the Association as are set forth in this Agreement; (B) Parts A.2, A.3, A.5(a) and A.7 of the Project described in Schedule 2 to the Development Credit Agreement as amended by the Amending Agreement to the Development Credit Agreement dated on or about the date hereof, will be carried out by the Transmission Company; (C) by a subsidiary loan agreement to be entered into between the Borrower and the Transmission Company, the proceeds of the credit provided for under the Development Credit Agreement will be made available to the Transmission Company on the terms and conditions set forth in said Subsidiary Loan Agreement; and WHEREAS the Transmission Company, 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 Definitions Section 1.01. Unless the context otherwise requires, the several terms defined in the Development Credit Agreement, the Preamble to this Agreement and in the General Conditions (as so defined) have the respective meanings therein set forth. ARTICLE II Execution of the Project Page 3 - 2 - Section 2.01. (a) The Transmission Company 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 Parts A.2, A.3, A.5(a) and A.7 of the Project with due diligence and efficiency and in conformity with appropriate administrative, financial, engineering and environmental practices, and shall provide, or cause to be provided, promptly as needed, the funds, facilities, services and other resources required for the Project. (b) Without limitation upon the provisions of paragraph (a) of this Section and except as the Association and the Transmission Company shall otherwise agree, the Transmission Company shall carry out Parts A.2, A.3, A.5(a) and A.7 of the Project in accordance with the Implementation Program set forth in Schedule 1 to this Agreement. Section 2.02. (a) Except as the Association shall otherwise agree, procurement of the goods, works and services required for the Project and to be financed out of the proceeds of the Credit shall be governed by the provisions of Schedule 3 to the Development Agreement, as said provisions may be further elaborated in the Procurement Plan. (b) The Transmission Company shall update the Procurement Plan in accordance with guidelines acceptable to the Association, and furnish such update to the Association not later than 12 months after the date of the preceding Procurement Plan, for the Association’s approval. Section 2.03. (a) The Transmission Company 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 Parts A.2, A.3, A.5(a) and A.7 of the Project. (b) For the purposes of Section 9.06 of the General Conditions and without limitation thereto, the Transmission Company shall: (i) prepare, on the basis of guidelines acceptable to the Association and furnish to the Association not later than six (6) months after the Closing Date or such later date as may be agreed for this purpose between the Association and the Transmission Company, a plan for the future operation of Parts A.2, A.3, A.5 (a) and A.7 of the Project; and (ii) afford the Association a reasonable opportunity to exchange views with the Transmission Company on said plan. Page 4 - 3 - Section 2.04. The Transmission Company shall duly perform all its obligations under the Subsidiary Loan Agreement. Except as the Association shall otherwise agree, the Transmission Company shall not take or concur in any action which would have the effect of amending, abrogating, assigning or waiving the Subsidiary Loan Agreement or any provision thereof. Section 2.05. (a) The Transmission Company shall, at the request of the Association, exchange views with the Association with regard to the progress of the Project, the performance of its obligations under this Agreement and under the Subsidiary Loan Agreement, and other matters relating to the purposes of the Credit. (b) The Transmission Company 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 the Transmission Company of its obligations under this Agreement and under the Subsidiary Loan Agreement. ARTICLE III Management and Operations of the Transmission Company Section 3.01. The Transmission Company shall carry on its operations and conduct its affairs in accordance with sound administrative, financial and environmental practices under the supervision of qualified and experienced management assisted by competent staff in adequate numbers. Section 3.02. The Transmission Company shall at all times operate and maintain its plant, machinery, equipment and other property, and from time to time, promptly as needed, make all necessary repairs and renewals thereof, all in accordance with sound engineering, financial and environmental practices. Section 3.03. The Transmission shall take out and maintain with responsible insurers, or make other provision satisfactory to the Association for, insurance against such risks and in such amounts as shall be consistent with appropriate practice. ARTICLE IV Financial Covenants Section 4.01. (a) The Transmission Company shall maintain or cause to be maintained, a financial management system, including records and accounts, and prepare financial statements, in accordance with consistently applied accounting standards acceptable to the Association, adequate to reflect its operations and financial condition Page 5 - 4 - and to register separately the operations, resources and expenditures related to the Project. (b) The Transmission Company shall: (i) have its financial statements (balance sheets, statements of income and expenses and related statements) for each fiscal year (or other period agreed to by the Association), audited, in accordance with consistently applied auditing standards acceptable to the Association, by independent auditors acceptable to the Association; (ii) furnish to the Association as soon as available, but in any case not later than six months after the end of each such year (or such other period agreed to by the Association): (A) certified copies of the financial statements referred to in paragraph (a) of this Section, for such year (or such other period agreed to by the Association), as so audited; and (B) an opinion on such statements by said auditors, in scope and detail satisfactory to the Association; and (iii) furnish to the Association such other information concerning such records and accounts and the audit of such financial statements, and concerning said auditors, as the Association may from time to time reasonably request. Section 4.02. (a) Without limitation upon the Transmission Company’s reporting obligations set out in paragraph 4 of Schedule 1 to this Agreement, the Transmission Company shall prepare and furnish to the Association a financial monitoring report, in form and substance satisfactory to the Association, which: (i) sets forth sources and uses of funds for the Project, both cumulatively and for the period covered by said report, showing separately funds provided under the Credit, and explains variances between the actual and planned uses of such funds; (ii) describes physical progress in Project implementation, both cumulatively and for the period covered by said report, and explains variances between the actual and planned Project implementation; and (iii) sets forth the status of procurement under the Project, as at the end of the period covered by said report. Page 6 - 5 - (b) The first FMR shall be furnished to the Association not later than 45 days after the end of the first calendar quarter after the Effective Date, and shall cover the period from the incurrence of the first expenditure under the Project through the end of such first calendar quarter; thereafter, each FMR shall be furnished to the Association not later than 45 days after each subsequent calendar quarter, and shall cover the period not covered by the previous FMR until the end of such calendar quarter. Section 4.03. (a) Except as the Association shall otherwise agree, net revenues of the Transmission Company for any fiscal year shall at least be equal to the sum of its debt service requirements, working capital requirements, dividends and a proportion of investment, which may be financed out of the revenues of the Transmission Company. To this end, the Transmission Company shall not incur any debt, unless the net revenues of the Transmission Company for the fiscal year immediately preceding the date of such incurrence or a later twelve-month period ended prior to the date of such incurrence, which ever is the greater, shall at least be equal to the sum of its debt service requirements, working capital requirements, dividends and a proportion of investments, which may be financed out of the revenues of the Transmission Company, for any succeeding fiscal year on all debt of the Transmission Company, including the debt to be incurred. (b) For the purposes of this Section: (i) the term “debt” means any indebtedness of the Transmission Company maturing by its terms more than one year after the date on which is it originally incurred; (ii) debt shall be deemed to be incurred: (A) under a loan contract or agreement or other instrument providing for such debt or for the modification of its terms of payment on the date of such contract, agreement or instrument; and (B) under a guarantee agreement, on the date the agreement providing for such guarantee has been entered into; (iii) the term “net revenues” means the difference between: (A) the sum of revenues from all sources related to operations adjusted to take account of the Transmission Company’s rates in effect at the time of the incurrence of debt even though they were not in effect during the twelve month period to which such revenues related and net non-operating income; and Page 7 - 6 - (B) the sum of all expenses related to operations including administration, adequate maintenance, taxes and payments in lieu of taxes, but excluding provision for depreciation, other non-cash operating charges and interest and other charges on debt; (iv) the term “net non-operating income” means the difference between: (A) revenues from all sources other than those related to operations; and (B) expenses, including taxes and payments in lieu of taxes, incurred in the generation of revenues in (A) above; (v) the term “debt service requirements” means the aggregate amount of repayment (including sinking fund payments, if any) of, and interest and other charges on, debt; (vi) the term “working capital requirements” means the difference between current assets excluding cash and current liabilities at the end of each fiscal year. To this end: (A) 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 prepaid expenses properly chargeable to operating expenses within the next fiscal year; and (B) 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, taxes and payments in lieu of taxes, and dividends; and (vii) 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. Page 8 - 7 - ARTICLE V Effective Date; Termination; Cancellation and Suspension Section 5.01. This Agreement shall come into force and effect on the date upon which the Amending Agreement becomes effective. Section 5.02. (a) This Agreement and all obligations of the Association and of the Transmission Company 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 17 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 the Transmission Company of this event. Section 5.03. All the provisions of this Agreement shall continue in full force and effect notwithstanding any cancellation or suspension under the General Conditions. ARTICLE VI Miscellaneous Provisions Section 6.01. Any notice or request required or permitted to be given or made under this Agreement and any agreement between the parties contemplated by this Agreement shall be in writing. Such notice or request shall be deemed to have been duly given or made when it shall be delivered by hand or by mail, telex or facsimile to the party to which it is required or permitted to be given or made at suc h party’s address hereinafter specified or at such other address as such party shall have designated by notice to the party giving such notice or making such request. Deliveries made by facsimile transmission shall also be confirmed by mail. The addresses so specified are: For the Association: International Development Association Page 9 - 8 - 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable address: Telex: Facsimile: INDEVAS 248423 (MCI) or (202) 477-6391 Washington, D.C. 64145 (MCI) For Uganda Electricity Transmission Company Limited: Uganda Electricity Transmission Company Limited Amber House Plot 29/33, Kampala Road PO Box 7625 Kampala, Uganda Facsimile: 256 41 341789 Section 6.02. Any action required or permitted to be taken, and any document required or permitted to be executed, under this Agreement on behalf of the Transmission Company, may be taken or executed by Managing Director or such other person or persons as Managing Director shall designate in writing, and the Transmission Company shall furnish to the Association sufficient evidence of the authority and the authenticated specimen signature of each such person. Section 6.03. This Agreement may be executed in several counterparts, each of which shall be an original, and all collectively but one instrument. Page 10 - 9 - 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 Kampala, Republic of Uganda, as of the day and year first above written. INTERNATIONAL DEVELOPMENT ASSOCIATION By /s/ Judy O’Connor Authorized Representative UGANDA ELECTRICITY TRANSMISSION COMPANY LIMITED By /s/ Eriasi Kiyemba Authorized Representative Page 11 - 10 - SCHEDULE 1 Implementation Program A. Execution Covenants 1. The Transmission Company shall: (a) not later than the Effectiveness Date: (i) open and thereafter maintain, until completion of the Project, an account (the Project Account) in UShs, in a commercial bank acceptable to the Association and on terms and conditions acceptable to the Association; (ii) promptly thereafter, make an initial deposit of UShs equivalent to $50,000 into the Project Account to finance the Transmission Co mpany’s contribution to the costs of the Project; (iii) thereafter, on a monthly basis during Project Implementation, timely replenish the Project Account with such adequate amounts as shall be required to carry out the Project; (iv) use the Project Account funds exclusively to finance expenditures under the Project in addition to those financed from the proceeds of the Credit; and (v) establish and thereafter maintain a procurement filing system satisfactory to the Association. (b) appoint and thereafter maintain until the end of the Project, a procurement specialist having experience and qualifications satisfactory to the Association; (c) take all necessary effort to ensure that relevant training is offered to all its staff undertaking procurement under the Project. 2. The Transmission Company shall in accordance with paragraphs 3 (f) and (g) of Schedule 1 to the Development Credit Agreement, enter into: (a) a Project Management Services Agreement with the Generation Company; and (b) a Project Management Services Agreement with the Distribution Company and UMEME Limited, all in a form and substance satisfactory to the Association. Page 12 - 11 - B. Environmental Covenants 3. Except as the Association shall otherwise agree, the Transmission Company shall: (a) carry out or cause to be carried out the construction of the Namanve power substation under Parts A.3 (a) and A.7 of the Project, in accordance with the Environmental Management Plans as presented in the Environmental Impact Statement, in form and substance satisfactory to the Association; (b) carry out or cause to be carried out the rehabilitation of the Mbarara North, Masaka West, Lira and Lugazi power substations under Parts A.3 (a) and A.7 of the Project, in accordance with the Environmental Management Plans as presented in the Environmental and Social Impact Study, in form and substance satisfactory to the Association; (c) not amend or waive, or permit to be amended or waived, the Environmental Impact Statement, the Environmental and Social Impact Study, and the Environmental Management Plans, or any recommendations and provisions thereof, in a manner which, in the opinion of the Association may materially and adversely affect the implementation of Parts A.3 (a) and A.7 of the Project; (d) ensure that: (i) all measures necessary for the carrying out of the recommendations of the Environmental Impact Statement, and the Environmental and Social Impact Study are taken in a timely manner; and (ii) progress reports referred to in paragraph 4 under Part C of this Schedule shall include adequate information on monitoring of the measures defined in the Environmental Impact Statement, and the Environmental and Social Impact Study, respectively; and (e) (i) not later than December 31, 2005, carry out the RAP, in involuntary resettlement of the five brick makers, who have been determined as Displaced Persons as a result of activities under Parts A.3 and A.7 of the Project on Namanve substation; and (ii) ensure appropriate compensation, resettlement and rehabilitation of such Displaced Persons. C. Reporting and Monitoring 4. The Transmission Company shall: (a) maintain policies and procedures adequate to enable it to monitor and evaluate on an ongoing basis, in accordance with the indicators set forth in Schedule 2 to this Agreement the carrying out of Parts A.2, A.3, A.5(a) and A.7 of the Project and the achievement of the objectives thereof; Page 13 - 12 - (b) prepare, under terms of reference satisfactory to the Association, and furnish to the Association, on or about December 31, 2005, a report integrating the results of the monitoring and evaluation activities performed pursuant to paragraph (a) of this Section, on the progress achieved in the carrying out Parts A.2, A.3, A.5(a) and A.7 of the Project during the period preceding the date of said report and setting out the measures recommended to ensure the efficient carrying out of Parts A.2, A.3, A.5(a) and A.7, of the Project and the achievement of the objectives thereof during the period following such date; and (c) review with the Association, by June 30, 2006, or such later date as the Association shall request, the report referred to in paragraph (b) of this Section, and, thereafter, take all measures required to ensure the efficient completion of Parts A.2, A.3, A.5(a) and A.7 of the Project and the achievement of the objectives thereof, based on the conclusions and recommendations of the said report and the Association’s views on the matter. Page 14 - 13 - SCHEDULE 2 Performance Indicators 1. Transmission substation installed at Kampala Industrial and Business Park by end-of-Project. 2. Service interruptions to existing consumers at Kampala Industrial and Business Park reduced after installation of substation. 3. At least one new industrial plant connected to power in the Kampala Industrial and Business Park within a year of installation of substation.