Page 1 CONFORMED COPY CREDIT NUMBER 2315 UG (Enterprise Development Project) between INTERNATIONAL DEVELOPMENT ASSOCIATION and BANK OF UGANDA Dated January 9, 1992 CREDIT NUMBER 2315 UG PROJECT AGREEMENT AGREEMENT, dated January 9, 1992 between the INTERNATIONAL DEVELOPMENT ASSOCIATION (the Association) and BANK OF UGANDA (BOU). WHEREAS (A) by the Development Credit Agreement of even date herewith between the Republic of Uganda (the Borrower) and the Association, the Association has agreed to lend to the Borrower an amount in various currencies equivalent to forty-nine million three hundred thousand Special Drawing Rights (SDR 49,300,000), on the terms and conditions set forth in the Development Credit Agreement, but only on condition that BOU agree to undertake such obligations toward the Association as are set forth in this Agreement; (B) by a subsidiary agreement to be entered into between the Borrower and BOU, part of the proceeds of the credit provided for under the Development Credit Agreement will be made available to BOU on terms and conditions set forth in said subsidiary agreement; and WHEREAS BOU, in consideration of the Association's entering Page 2 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; Section 2.01. (a) BOU declares its commitment to the objec- tives of the Project as set forth in Schedule 2 to the Development Credit Agreement and, to this end, shall carry out or cause to be carried out Parts A and B of the Project with due diligence and efficiency and in conformity with appropriate administrative, financial, technical and management 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 and conduct its operations and affairs, in accordance with sound financial standards and practices, with qualified and experienced management and in accordance with the BOU Act. (b) Without limitation upon the provisions of paragraph (a) of this Section and except as the Association and BOU shall otherwise agree, BOU shall carry out Parts A and B of the Project in accordance with the Implementation Program set forth in Schedule 2 to this Agreement. Section 2.02. (a) BOU undertakes that, unless the Association shall otherwise agree, Sub-loans and Investments made under Parts A and B of the Project will be made in accordance with the procedures and on the terms and conditions set forth or referred to in Schedule 1 to this Agreement. (b) BOU shall exercise its rights in relation to each Investment Project in such manner as to: (i) protect the interests of the Association and of the Borrower; (ii) comply with its obligations under this Agreement and the BOU Subsidiary Agreement; and (iii) achieve the purposes of the Project. Section 2.03. Except as the Association shall otherwise agree, procurement of the goods 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 3 to the Development Credit Agreement. Section 2.04. BOU shall: (a) cause PBs to 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) in respect of the Project Agreement and Part A of the Project; and (b) carry out the obligations referred to in (a) above in respect of the Project Agreement and Part B of the Project. Section 2.05. BOU shall duly perform all its obligations under the BOU Subsidiary Agreement. Except as the Association shall otherwise agree, BOU shall not take or concur in any action which would have the effect of assigning, amending, abrogating or waiving the BOU Subsidiary Agreement or any provision thereof. Section 2.06. (a) BOU shall, at the request of the Associa- tion, exchange views with the Association with regard to the progress of the Project, the performance of its obligations under Page 3 this Agreement and under the BOU Subsidiary Agreement, and other matters relating to the purposes of the Credit. (b) BOU 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 BOU of its obligations under this Agreement and under the BOU Subsidiary Agreement. Article III Financial Covenants Section 3.01. (a) BOU shall maintain procedures and records adequate to monitor and record the progress of Parts A and B of the Project and of each Investment Project (including its cost and the benefits to be derived from it) and to reflect in accordance with consistently maintained sound accounting practices the operations and financial condition of BOU. (b) BOU shall: (i) have the records and accounts referred to in Section 3.01 (a) 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: (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 (iii) 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. 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 BOU thereunder shall terminate on the earlier of the following two dates: (i) the date on which the Development Credit Agree- ment shall terminate; or (ii) a date twenty years after the date of this Agree- ment. (b) If the Development Credit Agreement terminates before the date specified in paragraph (a) (ii) of this Section, the Association shall promptly notify BOU of this event. 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 Page 4 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 addresses 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 197688 (TRT) Washington, D.C. 248423 (RCA) 64145 (WUI) or 82987 (FTCC) For BOU: Bank of Uganda Kampala Road P.O. Box 7120 Kampala Uganda Cable address Telex: _________________ 973 61059 _________________ __________ Section 5.02. Any action required or permitted to be taken, and any documents required or permitted to be executed, under this Agreement on behalf of BOU or by BOU on behalf of the Borrower under the Development Credit Agreement, may be taken or executed by its Governor, or by such other person or persons as BOU shall designate in writing, and BOU 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 collec- tively 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/ Francis X. Colaco Acting Regional Vice President Africa BANK OF UGANDA Page 5 By /s/ Stephen K. Katenta-Apuli Authorized Representative SCHEDULE 1 Terms and Conditions of Sub-loans and Investments 1. (a) Lending Terms. Sub-loans approved by PBs will carry a maximum lending rate not exceeding the lending rate for development finance prescribed by BOU from time to time. PBs will be charged an interest rate of 60 percent of the maximum lending rate for development loans prescribed by BOU from time to time or such other rate as may be determined by agreement of the Borrower and BOU and satisfactory to the Association. Repayment periods of Sub-loans should not normally exceed seven years, including a grace period not exceeding two years for repayment of principal. PB shall repay BOU the principal amount of loans made to them under Participating Bank Agreements in accordance with the repayment schedules of Sub-loans made by PB. (b) PB Eligibility criteria. Any commercial bank or financial institution registered in Uganda and engaged or willing to engage in medium- and long-term lending will be eligible as a PB, provided it satisfies the following criteria: (i) satisfactory and regular compliance with all prudent banking regulations issued by BOU; (ii) adequacy of capital as required by applicable BOU regulations as reviewed annually by the Association; (iii) adequate organizational arrangements and proce- dures for scrutiny approval and follow up of loans and classification of debts; and (iv) unqualified certification of annual financial statements by independent external auditors, particularly in regard to provision for bad debts. (c) Accreditation of PB will be based on a special review by the Banks Supervision Department of BOU and approval by the Association. If accreditation is not approved, the concerned institution will be informed of the reasons. Such institutions can renew their applications after complying with the requirements. Accreditation may be withdrawn in the event of the failure of a PB to comply with the requirements of the scheme. (d) Criteria. The criteria for an Investment Enterprise to be eligible for a Sub-loan include: a a determination that the Investment Project to which the Sub-loan applies is technically feasible and financially viable; a assurances that the Investment Enterprise will maintain a minimum debt-equity ratio of 3:1 during the period of the Sub-loan, will contribute a minimum of 25 percent of the cost of the project/assets acquired (in the case of new projects), and provide adequate security for the Sub-loan in cases where the projects are for expansion of existing enterprises; a assurances that the Investment Enterprise will generate sufficient net surplus to provide a minimum debt service cover of 1.5 times; and a a requirement that the Investment Enterprise should Page 6 maintain a minimum current ratio in excess of 1.00, and for Sub-loans exceeding US$500,000 the Investment Project should have an internal financial rate of return exceeding the real interest rate on the Sub-loan. (e) Eligible purposes. Sub-loans for the following purposes will be eligible for financing: (a) investment by private entre- preneurs in public enterprises or divestment, (b) investment by private entrepreneurs and viable public enterprises for moderniza- tion and expansion of existing registered/licensed enterprises, as well as for setting up new private enterprises, (c) credit for incremental working capital needs associated with new fixed investment, and (d) credit for acquisition of consumable production inputs (tools, spares, refractories, etc.). (f) Limitation. Loan amounts will depend on project costs and genuine credit needs. Sub-loans will not exceed US$2 million equivalent in any case, or 70 percent of the project cost and 100 percent of the foreign exchange needs converted into Uganda Shillings at the prevailing rate of Participating Banks, foreign exchange bureau(s), or any other market foreign exchange rate prevailing from time to time and satisfactory to the Association. Sub-loans shall be eligible for financing from the proceeds of the Credit to the extent of 90 percent of the loan amount in the case of term loans and 80 percent in the case of permanent working capital loans. These percentages will be reviewed annually by BOU and the Association. The review will cover operating costs of the PEs portfolio performance and consequent profitability of lending operations. Disbursements of loans by the Participating Banks to the Investment Enterprises should be made only after BOU's approval. If the loan amount exceeds the equivalent of $1,000,000, prior approval by the Association will be required. 2. No expenditures for goods or services required for an Investment Project shall be eligible for financing out of the proceeds of the Credit unless: (a) the Sub-loan or Investment for such Investment Project shall have been approved by the Association and such expenditures shall have been made not earlier than ninety days prior to the date on which the Association shall have received the application and information required under paragraph 3 (a) of this Schedule in respect of such Sub-loan or Investment; or (b) the Sub-loan for such Investment Project shall have been a free-limit Sub-loan for which the Association has authorized withdrawals from the Credit Account and such expenditures shall have been made not earlier than ninety days prior to the date on which the Association shall have received the request and information required under paragraph 3 (b) of this Schedule in respect of such free-limit Sub-loan. For the purposes of the Development Credit Agreement and this Agreement, a free-limit Sub-loan shall be a Sub- loan for an Investment Project in an amount to be financed out of the proceeds of the Credit which shall not exceed the sum of (i) $1,000,000 equivalent, when added to any other outstanding amounts financed or proposed to be financed out of the proceeds of the Credit, or (ii) $1,000,000 equivalent, when added to all other free- limit Sub-loans financed or proposed to be financed out of the proceeds of the Credit, the foregoing amounts being subject to change from time to time as determined by the Association. 3. (a) When presenting a Sub-loan (other than a free-limit Sub- loan) or an Investment to the Association for approval, BOU shall furnish to the Association an application, in form satisfactory to the Association, together with (i) a description of the Investment Enterprise and an appraisal of the Investment Project, including a description of the expenditures proposed to be financed out of the proceeds of the Credit; (ii) the proposed terms and conditions of the Sub-loan or Investment, including the schedule of amortization of the Sub-loan or of repayment of the amount of the Credit to be used for the Investment; and (iii) such other information as the Association shall reasonably request. Page 7 (b) Each request by BOU for authorization to make withd- rawals from the Credit Account in respect of a free-limit Sub-loan shall contain: (i) a summary description of the Investment Enter- prise and the Investment Project, including a description of the expenditures proposed to be financed out of the proceeds of the Credit; and (ii) the terms and conditions of the Sub-loan, including the schedule of amortization therefor. (c) Applications and requests made pursuant to the provi- sions of sub-paragraphs (a) and (b) of this paragraph shall be presented to the Association on or before December 31, 1998. 4. Sub-loans and Investments shall be made on terms whereby BOU shall obtain, by written contract with the Investment Enterprise or by other appropriate legal means, rights adequate to protect the interests of the Association and BOU, including, in the case of any Sub-loan and, to the extent that it shall be appropriate, in the case of any Investment, the right to: (a) require the Investment Enterprise to carry out and operate the Investment Project with due diligence and efficiency and in accordance with sound technical, environmental, financial and managerial standards and to maintain adequate records; (b) require that: (i) the goods and services to be financed out of the proceeds of the Credit shall be procured in accordance with the provisions of Schedule 3 to the Development Credit Agreement; and (ii) such goods and services shall be used ex- clusively in the carrying out of the Investment Project; (c) inspect, by itself or jointly with representatives of the Association if the Association shall so request, such goods, works, plants and construction included in the Investment Project, the operation thereof, and any relevant records and documents; (d) require that: (i) the Investment Enterprise shall take out and maintain with responsible insurers such insurance, against such risks and in such amounts, as shall be consistent with sound business practice; and (ii) without any limitation upon the foregoing, such insurance shall cover hazards incident to the acquisition, transportation and delivery of goods financed out of the proceeds of the Credit to the place of use or installation, any indemnity thereunder to be made payable in a currency freely usable by the Investment Enterprise to replace or repair such goods; (e) obtain all such information as the Association or BOU shall reasonably request relating to the foregoing and to the administration, operations and financial condition of the Investment Enterprise and to the benefits to be derived from the Investment Project; and (f) suspend or terminate the right of the Investment Enter- prise to the use of the proceeds of the Credit upon failure by such Investment Enterprise to perform its obligations under its contract with a PB. SCHEDULE 2 Implementation Program Part A of the Project 1. Fund Operations. BOU will on-lend the funds to PBs as demand for Investment Projects arises. PBs will make medium- and long-term Sub-loans (including for permanent working capital) in Uganda Shillings for the purposes referred to in Schedule 1 to this Agreement. The beneficiaries of the loans will buy foreign curren- cies from the foreign exchange bureaus, PB or other financial institutions authorized by BOU to deal in foreign exchange, and satisfactory to the Association, to import capital equipment and for other purposes related to project implementation. The Investment Page 8 Enterprises will repay the Sub-loans to the Participating Banks in Uganda Shillings, at the interest rate prescribed by BOU. The Fund will be managed by a specialized division of the Development Finance Department of BOU. Separate accounts for the operation of the fund will be maintained. Part B of the Project 2. The Technology and Management Fund. The objectives of the fund are to enhance the technological and management capabilities of Ugandan enterprises by facilitating payments in foreign exchange for technical assistance rendered through technology and management contracts. The fund will finance the foreign exchange cost, while the local costs associated with the carrying out of these contracts will be financed by entrepreneurs from their internal resources or from commercial bank loans. This fund will be a separate foreign exchange account in BOU and shall be managed by a specialized unit within the Exchange Control Department of BOU. The operational arrangements for the funds are designed to be kept simple and quick. A fast-track system of processing will apply to contracts below US$100,000 per year. This system will entail almost automatic approval, provided the type of technology and management support is not on a negative list of ineligible services to be established by BOU and satisfactory to the Association ("the negative list"), the amount payable is reasonable, and the entrepreneur is bondable. For proposals exceeding the above level, an internal committee in BOU will decide reasonableness of payments. This evaluation could also be done in consultation with sectoral and other ministries of the Borrower, at the discretion of BOU. Any proposal for changes to the negative list shall be subject to the prior consultation with and approval of the Association. 3. Technology and Management Services contracts eligible for financing under Part B of the Project shall be selected in accor- dance with the following procedure. (a) At the commitment stage, BOU will examine each proposal for (i) eligibility, (ii) purpose and usage, and (iii) reasonable- ness of foreign exchange requirement, including efforts made to canvass other competitive sources. Irrespective of costs to be incurred, all procurement under this category will be examined in this fashion, except that the scrutiny of cases costing more than US$100,000 per year will be reviewed by a committee and the cases involving costs exceeding US$200,000 per year (and/or total cost of US$500,000) will be subject also to prior consultation with the Association. (b) At the implementation stage, BOU will authorize specific payments against satisfactory documentation of services rendered.