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January 18, 2001
His Excellency
Roberts Zile
Minister of Special Assignments
or Cooperation with International Financial Agencies
Ministry of Finance
1 Smilsu Street, LV-1919, Riga 
Republic of Latvia
Re:
Japanese Grant for Second Programmatic Structural Adjustment Loan
Grant No. TF026556
Excellency:
I am writing on behalf of the International Bank for Reconstruction and 
Development (the Bank) to indicate the Bank’s agreement, as administrator of grant 
funds provided by Japan, to make a grant in an amount not exceeding five hundred and 
four thousand, three hundred and fifteen United States dollars ($504,315) (the Grant) 
to Republic of Latvia (the Recipient).
The Grant is made in response to the Recipient's request for financial 
assistance and for the purposes and on the terms and conditions set forth in the Annex 
to this Letter Agreement. The Recipient represents, by confirming its agreement below, 
that it is authorized to contract and withdraw the Grant for the said purposes and on 
the said terms and conditions.
Please confirm your agreement with the foregoing, on behalf of the Recipient, by 
signing, dating, and returning to us the enclosed copy of this Letter Agreement.  Upon 
receipt by the Bank of the copy of this Letter Agreement countersigned by you, this 
Letter Agreement will become effective as of the date of the countersignature.
Very truly yours,
INTERNATIONAL BANK FOR 
   RECONSTRUCTION AND DEVELOPMENT
By /s/ Basil G. Kavalsky
Director
Estonia, Latvia, Lithuania and Poland Country Unit
Europe and Central Asia Region
AGREED:
REPUBLIC OF LATVIA
By /s/ Roberts Zile
Minister for Special Assignment for Cooperation 
   with International Financial Agencies
Date:
February 5, 2001
ANNEX
Purposes, Terms, and Conditions of the Grant
1.
Purposes and Activities
The purposes of the Grant is to assist in the preparation of the Second 
Programmatic Structural Adjustment Loan (the Project), which has as main objectives
to 
support the continuation of the Recipient’s Government (the Government) ongoing 
economic reform program backed by the Bank’s first Programmatic Structural Adjustment 
Loan (PSAL I) (the Project). The activities (the Activities) for which the Grant is 
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given are as follows:
(A)  
Social Sectors and Resource Use:  
(i)
provision of technical assistance to enhance reforms in the area 
of pensions and delivery of social 
assistance with the 
objective of advising the Government how to further rationalize resource use in the 
social sector.  The technical assistance will focus on how the social 
assistance system may be reformed to 
a system which: (a) places 
gatekeeping and referral decisions and financing responsibilities for social 
care and social assistance with one level of the Government; (b) assists the 
Government evaluating the 
impact of its public expenditure policies, 
especially on households and poverty reduction; (c) assists the 
Government evaluating the impact of its pension reforms; and (d) assists the 
Government completing the 
reform agenda in this area, which is estimated 
to cost US$110,970, equivalent; and
(ii)
provision of technical assistance to enhance reforms in the public 
sector through identifying measures to 
improve resource use in the 
public sector showing the Government how to performance oriented budgets.  The 
technical assistance will focus on the development of an action plan for the 
Government to strengthen the 
function of the Ministry of Finance, and 
other related ministries, by developing strategic expenditure 
plans 
which focus on: (a) explicit objectives for the medium-term; (b) explicit programs for 
reaching 
development objectives; (c) explicit output and 
outcome indicators; (d) identification of expenditure 
priority programs along functional lines; (e) fully funded programs and with the 
developments of a manual 
for costing out activities and policies; and 
(f) the improvement of the participation of civil society in 
the 
process of policy formulation and expenditure evaluation, which is estimated to cost 
US$150,209, equivalent. 
(B)
Functioning of Public Sector:  
(i)
provision of technical assistance to enhance the reform of the 
public sector by demonstrating to the 
Government how: (i) to 
further improve the effectiveness of the anticorruption campaign of the Corruption 
Prevention Council and the anti corruption unit in the State Revenue 
Service; (ii) to establish capacity in 
public sector bodies to respond 
to public request for information and how to enforce public access to 
information; and (iii) how to design administrative procedures that meet the 
requirements of a modern
democratic state, which is estimated to 
cost US$30,642, equivalent; 
(ii)
provision of technical assistance to enhance the reform of the 
public sector by: (a) demonstrating to the 
Government how to improve 
the transparency and accountability of public sector agencies; (b) participate in 
developing an action plan for the Government on how to amend the 
Government’s public expenditure management 
and administrative 
structures in order to bring all public sector agencies in conformity with the laws on 
institutional frameworks for public administration and the law on 
public sector agencies, which is 
estimated to cost US$30,642, 
equivalent; 
(iii)
provision of technical assistance to enhance reform of the public 
sector by demonstrating to the Government 
how to design and sequence 
the horizontal and vertical functional reviews so that the outcome will 
guarantee a minimum of disruption of the current functions of the public sector 
and takes advantage of the 
existing synergy between the two 
delicate processes both with the objective to streamline the structure of 
the public sector and to increase its efficiency, which is estimated to cost 
US$30,642, equivalent; and
(iv)
provision of technical assistance to enhance reform of the public 
sector by demonstrating to the Government 
how to implement the pay 
reform concept so its implementation will not disrupt the financial viability of 
the Government budget and will lead to a comprehensive pay system for the 
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public sector that will provide a 
fair, transparent and equitable 
reward for the ensuring retention of high skilled personnel as well as 
giving the government the ability to monitor and evaluate the impact of the pay system 
on performance of 
its employees, which is estimated to cost US$60,284, 
equivalent.
(C)
Regulatory framework that rationalizes the relationship 
between public and private sector: 
(i)
provision of technical assistance to enhance regulatory reform by 
demonstrating to the Government how to 
develop a regulatory agenda in 
the area of utilities so that the Recipient establishes an effective, 
well-focused, and flexible post privatization governance that serves the public 
interests, mimics the 
market to a maximum extend possible and 
stipulates a preference for market-like policy solutions and 
determinations, which is estimated to cost US$30,642, equivalent; and
(ii)
provision of technical assistance to enhance judicial reform by 
demonstrating to the Government how to 
develop a medium term strategic 
action plan for the reform of the judicial system that incorporates actions 
to increase its efficiency, strengthen its incentive structure, guarantee its 
independence, enhance its 
transparency and openness, and collects 
feedback from the public as well as establishes a system to monitor 
and report on the performance of the judicial sector, which is estimated to cost 
US$60,284, equivalent.
2.
Implementation Generally
2.1.
The Recipient shall: (a) carry out the Activities with due diligence and 
efficiency; (b) promptly provide the funds, facilities, services and other resources 
required for that purpose; (c) furnish all information covering the Activities and the 
use of the proceeds of the Grant as the Bank shall reasonably request; (d) from time 
to time exchange views with the Bank’s representatives on the progress and results of 
the Activities; and (e) take all necessary measures required to enable the Bank to 
visit the territory of Republic of Latvia for purposes related to the Grant. Without 
limitation on the foregoing, the Recipient shall, if the Bank shall so request, 
prepare and furnish to the Bank promptly upon completion of the Activities a report, 
in form and substance satisfactory to the Bank, on the results and impact of the 
Activities.
3.
Procurement
3.1.
Except as the Bank shall otherwise agree, procurement of the consultants’ 
services required for the carrying out of the Activities and to be financed out of the 
proceeds of the Grant shall be governed by the provisions of Attachment I to this 
Annex.
4.
Withdrawal of Grant Proceeds
4.1.
The amount of the Grant shall be credited to an account opened by the Bank on 
its books in the name of the Recipient (the Grant Account), and may be withdrawn 
therefrom by the Recipient in accordance with the provisions of this Section 4, for 
expenditures in respect of the reasonable cost of services required for the Activities 
and to be financed out of the proceeds of the Grant.
4.2.
The expenditures for the following items may be financed out of the proceeds of 
the Grant and shall be used exclusively in the carrying out of the Activities:
Amount of the Grant
   % of
Allocated (in U.S.
Expenditures
Items
   Dollars)
to be 
Financed
(1)
Consultants' services
   504,315
100%
TOTAL
   504,315
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4.3.
Notwithstanding the provisions of paragraph 4.2 above:
(a)
No withdrawals shall be made from the Grant Account: (i) for payments 
made for expenditures prior to the date of signature of this Letter Agreement by the 
Bank; (ii) on account of payments for any taxes levied by or in the territory of the 
Recipient; (iii) on account of expenditures in the territories of any country which is 
not a member of the Bank or for services supplied from such territories; or (iv) for 
the purpose of any payment to persons or entities if such payment, to the Bank’s 
knowledge, is prohibited by a decision of the United Nations Security Council taken 
under Chapter VII of the Charter of the United Nations;
(b)
No withdrawals shall be made from the Grant Account after July 31, 2001, 
or such later date that the Bank shall establish by notice to the Recipient (the 
Closing Date), provided that, except in special circumstances, the Closing Date shall 
not be extended beyond the expected date of Bank approval of financing for the 
Project. However, withdrawals may be made after the Closing Date for expenditures 
incurred prior to the Closing Date if the corresponding withdrawal application is 
received by the Bank within four months after the Closing Date, after which time any 
amount of the Grant remaining unwithdrawn from the Grant Account shall be canceled; 
and
(c)
If, in the Bank’s opinion, an amount of the Grant allocated to any of the 
items in the table in paragraph 4.2 above will be insufficient to finance the 
expenditures for such item, the Bank may, by written notice to the Recipient, 
reallocate to such item an amount of the Grant then allocated to another item which, 
in the Bank’s opinion, will not be necessary to meet other expenditures.
4.4.
When the Recipient shall desire to withdraw any amount from the Grant Account, 
it shall deliver to the Bank a written application for withdrawal of such amount in 
the form specified by the Bank.  Withdrawal applications shall be: (a) signed on 
behalf of the Recipient by the Minister of Finance or such other person as he or she 
shall have authorized in writing; and (b) accompanied by such evidence in support of 
the application as the Bank shall reasonably request.  Authenticated specimen 
signatures of the person authorized to sign withdrawal applications shall be provided 
with the first application bearing his or her signature.  Each withdrawal application 
for an amount of the Grant and its supporting evidence must be sufficient in form and 
substance to satisfy the Bank that the Recipient is entitled to withdraw such amount 
from the Grant Account and that such amount is to be used in the carrying out of the 
Activities.  The Bank shall pay the amounts withdrawn by the Recipient from the Grant 
Account only to or on the order of the Recipient.
4.5.
The Bank may require withdrawals from the Grant Account to be made on the basis 
of statements of expenditure for expenditures under contracts for: (a) services of 
consulting firms costing less than US$100,000 equivalent; and (b) services of 
individual consultants costing less than US$50,000 equivalent, all under such terms 
and conditions as the Bank shall specify by notice to the Recipient. 
4.6.
Withdrawals of the proceeds of the Grant shall be made in the currency of the 
Grant.  The Bank, at the Recipient’s request and acting as an agent of the Recipient, 
shall purchase with the currency of the Grant withdrawn from the Grant Account such 
currencies as shall be required to pay for expenditures to be financed out of the 
proceeds of the Grant.  Whenever it shall be necessary, for the purposes of this 
Letter Agreement, to determine the value of one currency in terms of another, such 
value shall be as reasonably determined by the Bank.
4.7.
To facilitate the carrying out of the Activities, the Recipient may open and 
maintain in US dollars a special deposit account (the Special Account) in a commercial 
bank on terms and conditions satisfactory to the Bank, including appropriate 
protection against set-off, seizure or attachment.  Deposits into, and payments out 
of, the Special Account shall be made in accordance with the provisions of Attachment 
II to this Annex.
5.
Accounts and Audits
5.1.
(a)
The Recipient shall maintain or cause to be maintained a financial 
management system, including records and accounts, and prepare financial statements in 
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a format acceptable to the Bank, adequate to reflect in accordance with sound 
accounting practices the operations, resources and expenditures related to the 
Activities.
(b)
The Recipient shall: (i) have the records, accounts and financial 
statements referred to in subparagraph (a) above and the records and accounts for the 
Special Account for each fiscal year audited, in accordance with auditing standards 
acceptable to the Bank, consistently applied, by independent auditors acceptable to 
the Bank; (ii) furnish to the Bank as soon as available, but in any case not later 
than six months after the end of each such year, (A) certified copies of the financial 
statements referred to in paragraph (a) of this Section for such year as so audited, 
and (B) an opinion on such statements, records and accounts and 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, and concerning said auditors, as the Bank 
shall from time to time reasonably request.
(c)
For all expenditures with respect to which withdrawals from the Grant 
Account were made on the basis of statements of expenditure, the Recipient shall: (i) 
maintain or cause to be maintained, in accordance with subparagraph (a) above, records 
and accounts reflecting such expenditures; (ii) retain, until at least one year after 
the Bank has received the audit report for the fiscal year in which the last 
withdrawal from the Grant Account was made, all records (contracts, orders, invoices, 
bills, receipts and other documents) evidencing such expenditures; (iii) enable the 
Bank’s representatives to examine such records; and (iv) ensure that such records and 
accounts are included in the annual audit referred to in subparagraph (b) above and 
that the report of such audit contains a separate opinion by said auditors as to 
whether the statements of expenditure submitted during such fiscal year, together with 
the procedures and internal controls involved in their preparation, can be relied upon 
to support the related withdrawals.
6.
Suspension and Cancellation
6.1.
The Bank may at any time, by notice to the Recipient, suspend the right of the 
Recipient to make further withdrawals from the Grant Account if any of the following 
events has occurred and is continuing: (a) the Recipient has failed to comply with any 
of its obligations herein specified; or (b) the right of the Recipient, or any other 
entity to which the Bank has made a loan with the guarantee of the Republic of Latvia, 
to make withdrawals under any loan agreement with the Bank or any development credit 
agreement with the International Development Association shall have been suspended. 
6.2.
The Bank may, by written notice to the Recipient, terminate the right of the 
Recipient to make further withdrawals from the Grant Account: (a) at any time after 
the right of the Recipient to make withdrawals from the Grant Account shall have been 
suspended pursuant to the provisions of paragraph 6.1 above; or (b) if the Recipient 
shall have failed to take action, satisfactory to the Bank, within six months after 
the effective date hereof, to carry out the Activities; or (c) if the Bank has 
decided, at any time after consultation with the Recipient, to withdraw its support to 
the Project; or (d) if the Recipient has withdrawn its request for the Bank’s 
assistance in financing the Project.
Attachment I 
Procurement
Section I.
Consultants’ Services
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 and 
revised in September 1997 and January 1999 (the Consultant Guidelines), and the 
following provisions of this Section I.
Part B:
Quality- and Cost-based Selection
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1.
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.
Selection Based on Consultants’ Qualifications
Services for activities described under paragraph 1.1 (B)(iv) of the Annex may 
be procured under contracts awarded in accordance with the provisions of paragraphs 
3.1 and 3.7 of the Consultant Guidelines.
2.
Individual Consultants
Services for activities described under paragraph 1.1 (A), 1.1 (B)(i),(ii) and 
(iii) and 1.1 (C)(i) and (ii) of the Annex 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 Activities 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 US$200,000 or more, 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 consulting firms 
estimated to cost the equivalent of US$100,000 or more, but less than the equivalent 
of $200,000, the procedures set forth in paragraphs 1, 2 (other than the second 
subparagraph of paragraph 2 (a)) and 5 of Appendix 1 to the Consultant Guidelines 
shall apply.
(c)
With respect to each contract for the employment of individual 
consultants estimated to cost the equivalent of US$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 said approval shall have been given.
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 Consultant Guidelines shall 
apply.
Attachment II
Special Account
1.
For the purposes of this Attachment:
(a)
the term “eligible item(s)” means the item(s) set forth in the table in 
paragraph 4.2 of the Annex to this Letter Agreement;
(b)
the term “eligible expenditures” means expenditures in respect of the 
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reasonable cost of services required for the Activities and to be financed out of the 
proceeds of the Grant; and
(c)
the term “Authorized Allocation” means an amount equivalent to US$35,000 
to be withdrawn from the Grant Account and deposited into the Special Account pursuant 
to paragraph 3 (a) of this Attachment.
2.
Payments out of the Special Account shall be made exclusively for eligible 
expenditures in accordance with the provisions of this Attachment.
3.
After the Bank has received evidence satisfactory to it that the Special Account 
has been duly opened, withdrawals of the Authorized Allocation and subsequent 
withdrawals to replenish the Special Account shall be made as follows:
(a)
The Recipient shall furnish to the Bank a request or requests for a 
deposit into the Special Account of an amount or amounts which do not exceed the 
aggregate amount of the Authorized Allocation.  On the basis of such request or 
requests, the Bank shall, on behalf of the Recipient, withdraw from the Grant Account 
and deposit into the Special Account such amount or amounts as the Recipient shall 
have requested.
(b)
(i)
For replenishment of the Special Account, the Recipient shall 
furnish to the Bank requests for deposits 
into the Special Account 
at such intervals as the Bank shall specify.
(ii)
Prior to or at the time of each such request, the Recipient shall 
furnish to the Bank the documents and 
other evidence required pursuant 
to paragraph 4 of this Attachment for the payment or payments in respect 
of which replenishment is requested.  On the basis of each such request, the Bank 
shall, on behalf of the 
Recipient, withdraw from the Grant Account and 
deposit into the Special Account such amount as the 
Recipient 
shall have requested and as shall have been shown by said documents and other evidence 
to have 
been paid out of the Special Account for eligible 
expenditures.  All such deposits shall be withdrawn by 
the Bank from 
the Grant Account under the eligible item(s), and in the respective equivalent 
amounts, as 
shall have been justified by said documents and other 
evidence.
4.
For each payment made by the Recipient out of the Special Account, the Recipient 
shall, at such time as the Bank shall reasonably request, furnish to the Bank such 
documents and other evidence showing that such payment was made exclusively for 
eligible expenditures.
5.
Notwithstanding the provisions of paragraph 3 of this Attachment, the Bank shall 
not be required to make further deposits into the Special Account:
(a)
if, at any time, the Bank shall have determined that all further 
withdrawals should be made by the Recipient directly from the Grant Account;
(b)
if the Recipient shall have failed to furnish to the Bank, within the 
period of time specified in paragraph 5.1 (b) (ii) of the Annex to this Letter 
Agreement, any of the audit reports required to be furnished to the Bank pursuant to 
said paragraph in respect of the audit of the records and accounts for the Special 
Account;
(c)
if, at any time, the Bank shall have notified the Recipient of its 
intention to suspend in whole or in part the right of the Recipient to make 
withdrawals from the Grant Account pursuant to the provisions of paragraph 6.1 of the 
Annex to this Letter Agreement; or
(d)
once the total unwithdrawn amount of the Grant shall equal the equivalent 
of twice the amount of the Authorized Allocation.
Thereafter, withdrawals from the Grant Account of the remaining unwithdrawn amount of 
the Grant shall follow such procedures as the Bank shall specify by notice to the 
Recipient.  Such further withdrawals shall be made only after and to the extent that 
the Bank shall have been satisfied that all such amounts remaining on deposit in the 
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Special Account as of the date of such notice will be utilized in making payments for 
eligible expenditures.
6.
(a)
If the Bank shall have determined at any time that any payment out of the 
Special Account: (i) was made for an expenditure or in an amount not eligible pursuant 
to paragraph 2 of this Attachment; or (ii) was not justified by the evidence furnished 
to the Bank, the Recipient shall, promptly upon notice from the Bank: (A) provide such 
additional evidence as the Bank may request; or (B) deposit into the Special Account 
(or, if the Bank shall so request, refund to the Bank) an amount equal to the amount 
of such payment or the portion thereof not so eligible or justified.  Unless the Bank 
shall otherwise agree, no further deposit by the Bank into the Special Account shall 
be made until the Recipient has provided such evidence or made such deposit or refund, 
as the case may be.
(b)
If the Bank shall have determined at any time that any amount outstanding 
in the Special Account will not be required to cover further payments for eligible 
expenditures, the Recipient shall, promptly upon notice from the Bank, refund to the 
Bank such outstanding amount.