CONFORMED COPY IDA GRANT NUMBER H095-CE Development Grant Agreement (Health Sector Development Project) between DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA and INTERNATIONAL DEVELOPMENT ASSOCIATION Dated July 9, 2004 IDA GRANT NUMBER H095-CE DEVELOPMENT GRANT AGREEMENT AGREEMENT, dated July 9, 2004, between the DEMOCRATIC SOCIALIS T REPUBLIC OF SRI LANKA (the Recipient) and INTERNATIONAL DEVELOPMENT ASSOCIATION (the Association). WHEREAS (A) the Association has received from the Recipient a letter date d March 16, 2004 that describes its national policies and strategies (collectively, th e Program) for the public health sector ; (B) the Recipient has requested that the Association support the Program through a series of financing instruments; (C) the Recipient, having satisfied itself as to the feasibility and priority o f the project described in Schedule 2 to this Agreement (the Project), which is the first phase of the Program, has requested the Association to assist in the financing of the Project; (D) the Project will be carried out, in part, by the Recipient and, in part, by the Recipient's Provincial Councils with assistance from the Recipient, and as part of such assistance, the Recipient will make available proceeds of the grant (the Grant) provided for in Article II of this Agreement to each Provincial Council in accordanc e with certain arrangements acceptable to the Association ; and WHEREAS, on this basis, the Association has agreed to make a grant to th e Recipient, in support of the Project, upon the terms and conditions set forth in thi s Agreement and in the agreement between the Association and each Provincial Council (the Project Agreement) ; NOW, THEREFORE, the parties hereto hereby agree as follows : - 2 ARTICLE I General Conditions; Definitions Section 1 .01 . The "General Conditions Applicable to Development Credit Agreements" of the Association, dated January 1, 1985 (as amended throug h October 6, 1999), with the modifications set forth in Schedule 5 to this Agreement (th e General Conditions), constitute an integral part of this Agreement . Section 1 .02 . Wherever used in this Agreement, unless the context otherwis e requires, the several terms defined in the General Conditions and in the Recitals to thi s Agreement have the respective meanings therein set forth and the following additional terms have the following meanings : (a) "District" means an administrative district within a Provincial Council ; (b) "District Health Plan" means an annual work plan for a Fiscal Yea r prepared by a District, which forms the basis for its District Sub-Program ; (c) "District Sub-Program" means a District's program of activities and expenditures for the health sector in a Fiscal Year that : (i) are formulated on the basis of the District Health Plan ; and (ii) receive financing from Grant proceeds; (d) "District Sub-Programs Special Account" means the special deposi t account to be opened and maintained under Schedule 1 for Part A of the Project ; (e) "Eligible Categories" means: (i) in respect of the Primary Special Account, Categories (1), (2), (3), and (5) set forth in the table in paragraph 1 o f Schedule 1 to this Agreement; and (ii) in respect of the District Sub-Programs Special Account, Category (4) set forth in the same table ; (f) "Eligible Expenditures" means : (i) in respect of the Primary Special Account, the expenditures for goods, works, and services referred to in Section 2.02 (a) of this Agreement and to be financed out of the proceeds of the Grant allocated fro m time to time to the Primary Special Account's Eligible Categories ; and : (ii) in respect of the District Sub-Programs Special Account, the expenditures for goods, works, and services referred to in Section 2.02(a) of this Agreement and to be financed out of the proceeds of the Grant allocated from time to time to the District Sub-Programs Specia l Account's Eligible Categories ; 3 (g) "Financial Monitoring Report" means each report prepared by the Recipient for Parts B, C, and D of the Project and for Part A of the Project in accordanc e with Section 4 .02 of this Agreement ; (h) "Fiscal Year" means the Recipient's fiscal year commencing o n January 1 and ending on the following December 31 ; (i) "Health Sector Strategy" means the Recipient's Strategic Framework fo r Health Development in Sri Lanka dated August 12, 2003, a comprehensive strategy fo r the development of the health sector; (j) "Ministry of Health" means the Recipient's Ministry of Health , Nutrition and Welfare, or any successor entity thereto ; (k) "Ministry of Provincial Councils" means the Recipient's Ministry o f Home Affairs, Provincial Councils, and Local Government, or any successor entit y thereto; (1) "Operational Manual" means the Recipient's operation manual, satisfactory and acceptable to the Association, setting forth various operational, financial management, and procurement procedures governing the operation of the Project, as the same may be amended from time to time, and such term includes any schedules to th e Operational Manual; provided however, if there is a conflict between this Agreement o r the Project Agreements and the Operational Manual, the provisions of this Agreement o r the Project Agreements, as the case may be, shall prevail; (m) "Primary Special Account" means the special deposit account to b e opened and maintained under Schedule 1 for Part B, Part C, and Part D of the Projec t (but not including Part A) ; (n) "Project Agreement" means an agreement between the Association and a Provincial Council regarding implementation of this Agreement, including an y amendments made from time to time, and such term includes all schedules an d agreements supplemental to a Project Agreement ; (o) "Provincial Council" means a Provincial Council of the Recipient constituted under the Provincial Councils Act (No . 42 of 1987) that is a party to a Projec t Agreement with the Association; - 4 (p) "Provincial Health Authorities" means the health ministries and departments, as the case may be, of any of the Recipient's Provincial Councils ; (q) "Special Accounts" means both the Primary Special Account and the District Sub-Programs Special Account ; and (r) "Waste Management Policy and Guidelines" means the Recipient' s National Policy and Guidelines for Health Care Waste Management date d October 31, 2001, including any amendments to such document, satisfactory to th e Association, that shall: (i) enable the Recipient to assess, among other things, the Project's environmental and social impacts; and (ii) where applicable, govern the preparation of environmental management plans and other appropriate mechanisms , satisfactory to the Association, required to mitigate and monitor any adverse impact s from carrying out the Project. Section 1 .03. Each reference in the General Conditions to the Project implementation entity shall be deemed as a reference to the Provincial Councils . ARTICLE II The Grant Section 2.01 . The Association agrees to make available to the Recipient, on th e terms and conditions set forth or referred to in this Agreement, an amount in variou s currencies equivalent to forty million two hundred thousand Special Drawing Right s (SDR 40,200,000) . Section 2 .02 . The amount of the Grant may be withdrawn from the Gran t Account in accordance with the provisions of Schedule 1 to this Agreement fo r expenditures made (or, if the Association shall so agree, to be made) in respect of th e reasonable cost of goods, works, and services required for carrying out the Project and to be financed out of the proceeds of the Grant. Section 2.03 . (a) The Recipient shall pay to the Association a commitmen t charge on the principal amount of the Grant not withdrawn from time to time at a rate to be set by the Association as of June 30 of each year, but not to exceed the rate of one - half of one percent (1/2 of 1%) per annum . - 5 (b) The commitment charge shall accrue : (i) from the date sixty (60) days after the date of this Agreement (the accrual date) to the respective dates on whic h amounts shall be withdrawn by the Recipient from the Grant Account or canceled ; and (ii) at the rate set as of the June 30 immediately preceding the accrual date and at suc h other rates as may be set from time to time thereafter pursuant to paragraph (a) above . The rate set as of June 30 in each year shall be applied from the next date in that yea r specified in Section 2.04 of this Agreement. (c) The commitment charge shall be paid : (i) at such places as the Association shall reasonably request ; (ii) without restrictions of any kind imposed by, o r in the territory of, the Recipient; and (iii) in United States dollars or in such othe r eligible currency or currencies as may from time to time be designated or selecte d pursuant to the provisions of Section 4 .02 of the General Conditions. Section 2.04. Commitment charges shall be payable semiannually on February 1 and August 1 in each year. Section 2.05 . The Closing Date shall be June 30, 2010 or such later date as the Association shall establish . The Association shall promptly notify the Recipient of suc h later date. ARTICLE III Execution of the Project Section 3.01 . (a) The Recipient declares its commitment to the objectives of th e Project as set forth in Schedule 2 to this Agreement, and, to this end, shall carry out, an d shall cause the Provincial Councils to carry out, the Project with due diligence and efficiency and in conformity with appropriate administrative, environmental, technical , and public health practices, and shall provide, 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 Sectio n and except as the Recipient and the Association shall otherwise agree, the Recipient shall : (i) carry out its respective components of the Project in accordance with the Implementation Program set forth in Schedule 4 to this Agreement ; - 6 (ii) cause the Provincial Councils to carry out their respective portions of the Project in accordance with the provisions of this Agreement and the Project Agreement (including the Implementation Program set forth in Schedule 4 of this Agreement and Schedule 1 of the Project Agreement) ; and (iii) take, or cause to be taken all action, including the provision o f funds, facilities, services and other resources, necessary or appropriate to enabl e each of the Provincial Councils to perform their Project obligations, and shal l not take or permit to be taken any action which would prevent or interfere wit h such performance . 3.02. (a) The Recipient shall, in a timely manner, make available to th e Provincial Councils a portion of the Grant proceeds for carrying out their respective part s of the Project in accordance with formulas, terms, and conditions approved by th e Association in consultation with the Recipient . (b) The Recipient shall cause each Provincial Council to make available, i n a timely manner, to every District within its jurisdiction: (i) the Grant proceeds, and (ii ) additional funds from the Recipient's resources, which are received by the Provincial Council from the Recipient under sub-section (a), above, to implement the Project, in accordance with the formulas, terms, and conditions approved by the Association in consultation with the Recipient . (c) Without prejudice to the generality of sub-sections (b) and (c), above , Recipient shall ensure that no Grant proceeds are made available to a Provincial Counci l for District Sub-Programs under Part A of the Project prepared by Districts within th e administrative jurisdiction of the Provincial Council unless the Project Agreemen t between the Association and that North East Provincial Council has become effective i n accordance with the terms of the agreement . Section 3.03. Except as the Association shall otherwise agree, procurement of goods, works and consultants' services required for the Project and to be financed out of the proceeds of the Grant shall be governed by the provisions of Schedule 3 to thi s Agreement. Section 3.04. For the purposes of Section 9.06 of the General Conditions and without limitation thereto, the Recipient shall : 7 (a) prepare, on the basis of guidelines acceptable to the Association, an d furnish to the Association not later than six months before the Closing Date or such late r date as may be agreed for this purpose between the Recipient and the Association, a plan; and (b) afford the Association a reasonable opportunity to exchange views wit h the Recipient on said plan. Section 3.05. The Recipient and the Association hereby agree that 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, record s and reports, maintenance and land acquisition, respectively) shall be carried out by the Provincial Councils pursuant to Section 2 .03 of the Project Agreement with respect t o those activities for which they are responsible . ARTICLE IV Financial Covenant s Section 4.01. (a) The Recipient shall establish and maintain a financial management system, including records and accounts, and prepare financial statements i n accordance with consistently applied accounting standards acceptable to the Association , adequate to reflect the operations, resources and expenditures related to the Project . (b) The Recipient shall: (i) have the financial statements referred to in paragraph (a) of thi s Section for each Fiscal Year (or other period agreed to by th e Association), audited, in accordance with consistently applie d 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 cas e not later than six (6) months after the end of each such year (o r such other period agreed to by the Association), (A) certified copies of the financial statements referred to in paragraph (a) o f this Section for such year (or other period agreed to by th e Association), as so audited, and (B) an opinion on such - 8 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 financia l statements, and concerning said auditors, as the Association ma y 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 reports referred to in Part A .6 of Schedule 1 to this Agreement (Report-based Disbursements) or on the basis of statements of expenditure , the Recipient shall : (i) retain, until at least one (1) year after the Association ha s received the audit report for, or covering, the fiscal year in which the last withdrawal from the Grant Account was made, all records (contracts, orders, invoices, bills, receipts and othe r documents) evidencing such expenditures ; (ii) enable the Association's representatives to examine suc h records; and (iii) ensure that such reports and statements of expenditure are included in the audit for each fiscal year (or other period agreed to by the Association), referred to in paragraph (b) of this Section. Section 4.02. (a) Without limitation upon the Recipient's progress reporting obligations under this Agreement, the Recipient shall prepare and furnish to th e Association separate Financial Monitoring Reports for Part A of the Project and for Parts B, C, and D of the Project, in form and substance satisfactory to the Association, which : (i) set forth sources and uses of funds for the Project, both cumulatively and for the period covered by said reports, showing separately fund s provided under the Grant, and explains variances between the actua l and planned uses of such funds; - 9 ' - (ii) describes physical progress in Project implementation, both cumulatively and for the period covered by said reports, and explain s 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 reports . (b) The first Financial Monitoring Reports shall be furnished to the Association not later than forty five (45) days after the end of the first calendar quarte r after the Effective Date (or such later date agreed with the Association), and shall cove r the period from the incurrence of the first expenditure under the Project through the en d of such first calendar quarter (or such later date agreed with the Association); thereafter, Financial Monitoring Report shall be furnished to the Association not later than forty five (45) days after each subsequent calendar quarter, and shall cover such calenda r quarter. - 10 - ARTICLE V Remedies of the Association Section 5 .01 . Pursuant to Section 6.02(1) of the General Conditions, the following additional events are specified, namely, that : (a) a situation has arisen which shall make it improbable that the Program , or a significant part thereof, will be carried out ; (b) the Health Sector Strategy shall have been amended, waived, or abrogated in a manner that could materially or adversely affect the Project' s implementation or the achievement of its objectives ; (c) any of the Provincial Councils and the Districts shall have failed to perform any of their respective obligations under the applicable Project Agreement or it s related documents; (d) as a result of events which have occurred after the date of this Agreement, an extraordinary situation shall have arisen which shall make it improbabl e that any of the Provincial Councils and the Districts will be able to perform any of thei r respective obligations under the Project Agreement ; and (e) the Operational Manual shall have been amended, waived or abrogate d so as to adversely affect the efficiency, economy, and transparency of variou s operational, implementation, and procurement procedures under this Project . Section 5.02. Pursuant to Section 7.01(h) of the General Conditions, the following additional events are specified, namely that any of the events specified i n paragraphs (b), (d), and (e) of Section 5.01 of this Agreement shall occur and shall continue for a period of thirty (30) days after notice thereof shall have been given by the Association to the Recipient . ARTICLE VI Effectiveness; Termination Section 6.01 . The following is specified as an additional matter, within th e meaning of Section 12.02 (b) of the General Conditions, to be included in the opinion or opinions to be furnished to the Association, namely, that the Project Agreement s separately entered into by the Association with the Central Provincial Council, the North - 11 - Central Provincial Council, the North Western Provincial Council, the Sabaragamuw a Provincial Council, the Southern Provincial Council, the Uva Provincial Council, and the Western Provincial Council, respectively, have been duly authorized or ratified by, an d executed and delivered on behalf of, each of these Provincial Councils and are legally binding upon each of these Provincial Councils in accordance with their terms . Section 6 .02. The date ninety (90) days after the date of this Agreement is hereby specified for the purposes of Section 12.04 of the General Conditions . ARTICLE VII Representative of the Recipient; Addresses Section 7.01 . The Secretary, Ministry of Finance and the Director General , External Resources Department, Ministry of Policy Development and Implementation, Government of Sri Lanka, are designated representatives of the Recipient for th e purposes of Section 11 .03 of the General Conditions. Section 7.02. The following addresses are specified for the purposes o f Section 11 .01 of the General Conditions: For the Recipient: Ministry of Finance The Secretariat Colombo 1, Sri Lank a Cable address : Telex: Facsimile : SECMINFIN FINMIN 21409 94-1-449823 FORAID 2123294-1-447633 For the Association: International Development Association 1818 H Street, N.W. Washington, D.C. 20433 United States of Americ a - 12 - Cable address: Telex: Facsimile: INDEVAS 248423 (MCI) or (202) 477-6391 Washington, D.C. 64145 (MCI) IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized representatives, have caused this Agreement to be signed in their respectiv e names in Colombo, Sri Lanka, as of the day and year first above written . DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA By /s/ Punchi Bandara Jayasundera Authorized Representative INTERNATIONAL DEVELOPMENT ASSOCIATION By /s/ Peter Harrold Authorized Representative - 13 - SCHEDULE 1 A. Withdrawal of the Proceeds of the Gran t 1. The table below sets forth the Categories of items to be financed out of the proceeds of the Grant, the allocation of the amounts of the Grant to each Category and the percentage of expenditures for items so to be financed in each Category : Amount of the Grant Allocated % of (Expressed in Expenditures Category SDR Equivalent) to be Financed (1) Goods 4,800,000 100% of foreign expenditures; 100% of local expenditures (ex- factory cost); and 85% of local expenditures for other items procured locally (2) Works 800,000 85 % (3) Consultants' 7,300,000 100% of foreign services expenditures; 80% and training of local expenditures for consulting firms and 75% of local expenditures for individual consultants (4) Goods, works, services 22,800,000 85% and incremental operating cost s for District Sub-Programs under Part A of the Project - 14 - Amount of the Grant Allocated % of (Expressed in Expenditures Category SDR Equivalent) to be Financed, (5) Incremental operating costs 2,600,000 85% until December 31, 2006; 70% from January 1, 2007 until December 31, 2008 ; and 60% thereafter (6) Unallocated 1,900,000 TOTAL 40,200,000 2. For the purposes of this Schedule : (a) the term "foreign expenditures" means expenditures in the currency o f any country other than that of the Recipient for goods or services supplied from the territory of any country other than that of the Recipient ; (b) the term "local expenditures" means expenditures in the currency of th e Recipient or for goods or services supplied from the territory of the Recipient ; and (c) the term "incremental operating costs" means incremental recurrent expenditures incurred on account of the Project for per diems, office supplies, vehicle rental charges (including passenger insurance), government motorcycle and vehicle operating charges (fuel, maintenance, and insurance), maintenance of office equipment , telephone and other communications charges, office rent, salaries of contract staff, but excluding salaries of officials of the Recipient's civil and public service . 3. Notwithstanding the provisions of paragraph 1 above, no withdrawals shall be made in respect of: (i) payments made for expenditures prior to the date of thi s Agreement except that withdrawals, in an aggregate amount not exceeding the equivalen t of SDR 200,000, may be made in respect of Categories (1), (2), (3), and (5) on account - 15 - of payments made for expenditures before that date but after February 29, 2004 ; and (ii) a District Sub-Program unless it has been approved by the Association . 4. Notwithstanding the allocation in category (4) of paragraph 1, above, the aggregate amount of withdrawals under this category for Recipient's Fiscal Year 200 5 shall not exceed 1,700,000 SDRs . For each subsequent Recipient's Fiscal Year, the Association shall by notice to the Recipient establish an appropriate aggregate ceiling for withdrawals under category (4) . 5. The Association may require withdrawals from the Grant Account to be made on the basis of statements of expenditure for expenditures incurred for : (i) contracts for goods (including those for Part A of the Project) costing less than $250,000 equivalent each; (ii) contracts for civil works (including those for Part A of the Project) costing les s than $500,000 equivalent each; (iii) contracts with consulting firms (including those fo r Part A of the Project) costing less than $100,000 equivalent each ; (iv) contracts with individual consultants (including those for Part A of the Project) costing less tha n $50,000 equivalent; (v) all incremental operating costs (including those for Part A of th e Project); and (vi) all training, each, all under such terms and conditions as th e Association shall specify by notice to the Recipient . 6. The Recipient may request withdrawals from the Grant Account to be made o n the basis of reports to be submitted to the Association in form and substance satisfactor y to the Association, such reports to include the Financial Monitoring Reports and an y other information as the Association shall specify by notice to the Recipient (Report- based Disbursements). In the case of the first such request submitted to the Associatio n before any withdrawal has been made from the Grant Account, the Recipient shal l submit to the Association only a statement with the projected sources and applications of funds for the Project for the period following the date of such request . 7. If the Association shall have determined at any time that any amount of the Grant was used in a manner inconsistent with the provisions of this Agreement, th e Recipient shall, promptly upon notice from the Association, refund to the Association for deposit into the Grant Account, an amount equivalent to the amount so used . B. Special Accounts 1 . The Recipient may open and maintain in Dollars two special deposit accounts , the General Health Sector Special Account and the District Sub-Programs Specia l Account in its central bank on terms and conditions satisfactory to the Association . - 16 - 2. After the Association has received evidence satisfactory to it that the respectiv e Special Accounts have been opened, withdrawals from the Grant Account of amounts to be deposited into the Special Accounts shall be made as follows : (a) if the Recipient is not making Report-based Disbursements, withdrawal s shall be made in accordance with the provisions of Annex A to this Schedule 1 ; and (b) if the Recipient is making Report-based Disbursements, withdrawals shall be made in accordance with the provisions of Annex B to this Schedule 1 ; provided, however, notwithstanding anything in Part B of this Schedule, no deposits shall be made to the District Sub-Programs Special Account prior to January 1, 2005, o r such later date as the Association may indicate by notice to the Recipient . 3. Payments out of the Special Accounts shall be made exclusively for Eligibl e Expenditures. For each payment made by the Recipient out of the Special Accounts, th e Recipient shall, at such time as the Association shall reasonably request, furnish to th e Association such documents and other evidence showing that such payment was mad e exclusively for Eligible Expenditures . 4. Notwithstanding the provisions of Part B .2 of this Schedule, the Associatio n shall not be required to make further deposits into either or both Special Accounts : (a) if the Association, at any time, is not satisfied that the reports referred t o in Part A.6 of this Schedule 1 adequately provide the information required for Report- based Disbursements ; (b) if the Association determines at any time that all further withdrawals fo r payment of Eligible Expenditures should be made by the Recipient directly from th e Grant Account; or (c) if the Recipient shall have failed to furnish to the Association, within th e period of time specified in Section 4 .01 (b)(ii) of this Agreement, any of the audit report s required to be furnished to the Association pursuant to said Section in respect of th e audit of: (A) the records and accounts for either or both Special Accounts ; or (B) the records and accounts reflecting expenditures with respect to which withdrawals were Report-based Disbursements or were made on the basis of statements of expenditure, a s the case may be. 5. The Association shall not be required to make further deposits into the Specia l Accounts in accordance with the provisions of Part B .2 of this Schedule if, at any time , the Association shall have notified the Recipient of its intention to suspend in whole or - 17 - in part the right of the Recipient to make withdrawals from the Grant Account pursuant to Section 6.02 of the General Conditions . Upon such notification, the Association shall determine, in its sole discretion, whether further deposits into the Special Accounts may be made and what procedures should be followed for making such deposits, and shal l notify the Recipient of its determination . 6. (a) If the Association determines at any time that any payment out of eithe r or both Special Accounts was made for an expenditure which is not an Eligible Expenditure, or was not justified by the evidence furnished to the Association, the Recipient shall, promptly upon notice from the Association, provide such additional evidence as the Association may request, or deposit into the appropriate Specia l Accounts (or, if the Association shall so request, refund to the Association) an amount equal to the amount of such payment . Unless the Association shall otherwise agree, no further deposit by the Association into either or both Special Accounts shall be made until the Recipient has provided such evidence or made such deposit or refund, as th e case may be. (b) If the Association determines at any time that any amount outstanding i n the Special Accounts will not be required to cover payments for Eligible Expenditure s during the six-month period following such determination, the Recipient shall, promptly upon notice from the Association, refund to the Association such outstanding amount . (c) The Recipient may, upon notice to the Association, refund to the Association all or any portion of the funds on deposit in either or both Special Accounts . (d) Refunds to the Association made pursuant to subparagraph (a), (b) or (c ) of this paragraph 6 shall be credited to the Grant Account for subsequent withdrawal or for cancellation in accordance with the provisions of the Grant Agreement . - 18 - Annex A to SCHEDULE 1 Operation of Special Accounts When Withdrawals Are Not Report-based Disbursements 1 . For the purposes of this Annex: (a) the term "Authorized Allocation" means : (i) in respect of the Primary Special Account, an amount equivalent to $1,000,000 to be withdrawn from the Grant Account and deposited into the Primary Special Account pursuant to paragraph 2 of this Annex ; provided, however, that, unless the Association shall otherwise agree, said Authorize d Allocation shall be limited to an amount equivalent to $500,000, until th e aggregate amount of withdrawals from the Grant Account of amounts allocated to the Primary Special Account's Eligible Categories, plus the total amount of al l outstanding special commitments entered into by the Association pursuant t o Section 5 .02 of the General Conditions in respect of amounts allocated to said Categories, shall equal or exceed the equivalent of SDR 1,300,000 ; and (ii) in respect of the District Sub-Programs Special Account, an amount equivalent to $1,250,000 to be withdrawn from the Grant Account and deposited into the District Sub-Programs Special Account pursuant to paragraph 2 of this Annex, provided, however, that the Association may by notice vary thi s amount to reflect any changes made to the ceiling on aggregate withdrawal s indicated in Part A.4 of this Schedule with respect to category (4) in the table in paragraph 1 of Part A of this Schedule . 2. Withdrawals of the Authorized Allocation and subsequent withdrawals t o replenish the Special Accounts shall be made as follows : (a) For withdrawals of the Authorized Allocation, the Recipient shal l furnish to the Association a request or requests for deposit into the Special Accounts of an amount or amounts which in the aggregate do not exceed the Authorized Allocation. On the basis of each such request, the Association shall, on behalf of the Recipient , withdraw from the Grant Account and deposit into the Special Accounts such amount a s the Recipient shall have requested . - 19 - (b) For replenishment of the Special Accounts, the Recipient shall furnish to the Association requests for deposit into the Special Accounts at such intervals as th e Association shall specify. Prior to or at the time of each such request, the Recipient shal l furnish to the Association the documents and other evidence required pursuant to Part B.3 of Schedule 1 to this Agreement for the payment or payments in respect of whic h replenishment is requested . On the basis of each such request, the Association shall, on behalf of the Recipient, withdraw from the Grant Account and deposit into the Specia l Accounts 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 Accounts for Eligible Expenditures . Each such deposit into the Special Accounts shal l be withdrawn by the Association from the Grant Account under one or more of th e Eligible Categories. 3 . The Association shall not be required to make further deposits into the Specia l Accounts, once the total unwithdrawn amount of the Grant minus the total amount of all outstanding special commitments entered into by the Association pursuant to Section 5 .02 of the General Conditions shall equal the equivalent of twice the amount o f the applicable Authorized Allocation . Thereafter, withdrawal from the Grant Account o f the remaining unwithdrawn amount of the Grant shall follow such procedures as the Association shall specify by notice to the Recipient. Such further withdrawals shall be made only after and to the extent that the Association shall have been satisfied that al l such amounts remaining on deposit in the Special Accounts as of the date of such notice will be utilized in making payments for Eligible Expenditures . - 20 - Annex B to SCHEDULE 1 Operation of Special Accounts When Withdrawals Are Report-based Disbursement s 1. Withdrawals from the Grant Account shall be deposited by the Association into each Special Account in accordance with the provisions of Schedule 1 to this Agreement . Each such deposit into the Special Accounts shall be withdrawn by the Association fro m the Grant Account under one or more of the Eligible Categories . 2. Upon receipt of each application for withdrawal of an amount of the Grant, th e Association shall, on behalf of the Recipient, withdraw from the Grant Account an d deposit into the Special Accounts an amount equal to the lesser of : (a) the amount so requested; and (b) the amount which the Association has determined, based on th e reports referred to in Part A.6 of this Schedule 1 applicable to such withdrawal application, is required to be deposited in order to finance Eligible Expenditures during the six-month period following the date of such reports. - 21 - SCHEDULE 2 Description of the Project This Project's principal objective is to strengthen Sri Lanka's health sector . Its specific development objectives are to improve efficiency, equity, and quality of health care by strengthening planning, management, and monitoring capacity at the district, provincial, and central level with specific focus on supporting preventive care services a t the district and divisional level . The Project consists of the following parts, subject to such modifications thereo f as the Recipient and the Association may agree upon from time to time to achieve suc h objectives. Part A: Support for District Health Agencies in Improving Service Delivery and Outreach Strengthening delivery of health services in remote and under-served areas b y providing district health authorities with more financial resources and improving their capacity for planning, management, and monitoring through approved District Sub - Programs. Part B: Support for Central Programs and Hospital s 1. Promoting synergy across selected central health programs and thei r convergence at the central, provincial, and district level by focusing, in particular, on family health, immunization, and non-communicable disease programs. 2. Addressing structural efficiency and quality issues in the hospital-base d health-care delivery system. Activities will include: (i) modernizing hospital management, including the information system; and (ii) taking the first steps to develop country-wide service delivery networks that provide responsive services to customers within and across provinces. - 22 - Part C: Support for Policy-Making, Budget Formulation, and Monitoring and Evaluatio n Strengthening the Ministry of Health's capacity and contributing to increasing the credibility, transparency, and accountability of the public health-care system throug h the following sub-components . 1. Improving health-related public expenditure management and consultation and organizing annual health forums that will discuss ways to strengthen planning, performance management, resource allocation as well as donor coordination . These forums will include participation from various stakeholders, such as the private sector, civil society, external development partners and aid agencies, and clients . 2. Supporting monitoring and evaluation activities. 3. Supporting various institutional strengthening measures, including health-care waste management . Part D: Project Management Supporting various project management activities. These activities will include : assistance for procurement and financial management activities ; strengthening capacity, including procurement at the provincial and district level ; assistance for the project management secretariat; designing and implementing a monitoring information system ; collecting base-line, mid-term, and end-line data; and commissioning issue-specific studies seeking solutions for implementation problems . * The Project is expected to be completed by December 31, 2009 . - 23 - SCHEDULE 3 Procurement Section I. Procurement of Goods and Works Part A: General 1 . Goods and works for all parts of the Project shall be procured in accordance wit h the provisions of Section I of the "Guidelines for Procurement under IBRD Loans an d IDA Credits" published by the Bank in January 1995 and revised in January and Augus t 1996, September 1997 and January 1999 (the Guidelines) and the following provision s of this Section . Part B: International Competitive Bidding 1 . Except as otherwise provided in Part C of this Section, goods and works for th e Project shall be procured under contracts awarded in accordance with the provisions o f Section II of the Guidelines and paragraph 5 of Appendix 1 thereto . Part C: Other Procurement Procedure s 1 . National Competitive Bidding (a) Goods for the Project (including Part A) estimated to cost more tha n US$50,000 equivalent per contract, but less than $200,000 equivalent per contract, ma y be procured on the basis of competitive bidding advertised nationally, in accordance wit h procedures satisfactory to the Association and the provisions of paragraphs 3 .3 and 3.4 of the Guidelines . (b) Works for the Project (including Part A) estimated to cost more than US$50,000 equivalent per contract, may be procured on the basis of competitive biddin g advertised nationally, in accordance with procedures satisfactory to the Association an d the provisions of paragraphs 3 .3 and 3.4 of the Guidelines . (c) In order to ensure economy, efficiency, transparency and broa d consistency with the provision of Section 1 of the Guidelines : - 24 - (i) invitations to bid shall be advertised in at least one (1) national newspaper with a wide circulation, at least thirty (30) days prior to the deadline for the submission of bids; (ii) bid documents shall be made available, by mail or in person, to all who are willing to pay the required fee ; (iii) foreign bidders shall not be precluded from bidding and no preference of any kind shall be given to national bidders in the bidding process ; (iv) qualification criteria (in case prequalification was not carried out) shal l be stated in the bidding documents, and, if a registration process is required, a foreign firm declared as the lowest evaluated bidder shall be given a reasonable opportunity of registering, without let or hindrance ; (v) bids shall be opened in public in one location, immediately after th e deadline for submission of bids; (vi) bids shall not be rejected merely on the basis of a comparison with a n official estimate without the prior concurrence of the Association ; (vii) contracts shall be awarded to the lowest evaluated bidders ; (viii) post-bidding negotiations shall not be allowed with the lowest evaluated or any other bidders; (ix) rebidding shall not be carried out without the Association's prior concurrence ; (x) all bidders/contractors shall provide bid/performance security a s indicated in the bidding/contract documents ; (xi) evaluation of bids shall be made in strict adherence to the criteria disclosed in the bidding documents, in a format and specified period agreed by the Association; - 25 - (xii) a bidder's bid security shall apply only to a specific bid, and a contractor's performance security shall apply only to the specific contract under which i t was furnished; (xiii) bids shall not be invited on the basis of percentage premium or discoun t over the estimated cost; (xiv) extension of bid validity shall not be allowed unless justified b y exceptional circumstances; and (xv) there shall not be any restrictions on the means of delivery of the bids . 2. Shopping Goods estimated to cost less than $50,000 equivalent per contract and works estimated to cost $50,000 equivalent per contract or less for the Project (except fo r Part A), may be procured under contracts awarded on the basis of shopping procedures i n accordance with the provisions of paragraphs 3.1 and 3 .5 of the Guidelines . 3. Direct Contracting Computer software, small value spare parts, and goods of a proprietary nature fo r the Project (except for Part A) that satisfy paragraph 3 .7 of the Guidelines and costing $1000 per contract equivalent or less, may, with the Association's prior agreement, b e procured in accordance with the provisions of paragraph 3 .7 of the Guidelines . 4. Procurement of Small Works Works involving rehabilitation and minor repairs under the Project (except fo r Part A) estimated to cost $50,000 equivalent or less per contract may be procured unde r lump-sum, fixed-price contracts awarded on the basis of quotations obtained from three (3) qualified domestic contractors in response to a written invitation (with publi c bid opening). The invitation shall include a detailed description of the works, includin g basic specifications, the required completion date, a basic form of agreement acceptabl e to the Association, and relevant drawings, where applicable . The award shall be made t o the contractor who offers the lowest price quotation for the required work, and who ha s the experience and resources to complete the contract successfully . - 26 - 5. Shopping and Local Procedures for PartA Goods estimated to cost less than $50,000 equivalent per contract, and works estimated to cost $50,000 equivalent per contract or less for Part A of the Project, may b e procured under contracts awarded on the basis of shopping procedures in accordance with the provisions of paragraphs 3.1 and 3.5 of the Guidelines or in accordance with local procedures satisfactory and acceptable to the Association that are set forth in th e Operational Manual . Part D: Review by the Association of Procurement Decisions 1. Procurement Plannin g Prior to the issuance of any invitations to bid for contracts, the propose d procurement plan for the Project shall be furnished to the Association for its review an d approval, in accordance with the provisions of paragraph 1 of Appendix 1 to th e Guidelines . Procurement of all goods and works shall be undertaken in accordance wit h such procurement plan as shall have been approved by the Association, and with th e provisions of said paragraph 1 . 2. Prior Review With respect to: (i) the first contract for goods procured through internationa l competitive bidding procedures ; (ii) the first contract for goods procured through national competitive bidding procedures: (iii) each contract for goods estimated to cos t $250,000 equivalent and each contract for works estimated to cost $500,000 equivalen t the procedures set forth in paragraphs 2(f), 2(g) and 3 of Appendix 1 to the Guideline s 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 . - 27 - Section II. Employment of Consultants Part A: General 1. Consultants' services for the Project shall be procured in accordance with th e provisions of Sections I and IV of the "Guidelines : Selection and Employment of Consultants by World Bank Borrowers" published by the Bank in January 1997 an d revised in September 1997, January 1999 and May 2002 (the Consultant Guidelines) , paragraph 1 of Appendix 1 thereto, Appendix 2 thereto and the following provisions o f this Section. Part B :Quality- and Cost-based Selection 1. Except as otherwise provided in Part C of this Section, consultants' services for the Project shall be procured under contracts awarded in accordance with the provision s of Section II of the Consultant Guidelines, and the provisions of paragraphs 3 .13 through 3 .18thereof applicable to quality- and cost-based selection of consultants . 2. The following provision shall apply to consultants' services for the Project to b e procured under contracts awarded in accordance with the provisions of the precedin g paragraph: the short list of consultants, estimated to cost less than US$200,00 0 equivalent per contract, may comprise entirely national consultants in accordance with the provisions of paragraph 2.7 and footnote 8 of the Consultant Guidelines . Part C: Other Procedures for the Selection of Consultants 1. Selection Under a Fixed Budget Services may be procured under contracts awarded in accordance with the provisions of paragraphs 3.1 and 3 .5 of the Consultant Guidelines . 2. Least-cost Selection Services for the Project estimated to cost less than $100,000 equivalent per contract for consulting firms and $50,000 equivalent per contract for individuals may be procured under contracts awarded in accordance with the provisions of paragraphs 3 . 1 and 3.6 of the Consultant Guidelines. - 28 - 3. Selection Based on Consultants' Qualifications Services for the Project estimated to cost less than $100,000 equivalent pe r contract for consulting firms and $50,000 equivalent per contract for individuals may be procured under contracts awarded in accordance with the provisions of paragraphs 3 . 1 and 3.7 of the Consultant Guidelines. 4. Single Source Selection Services for the Project estimated to cost less than $50,000 equivalent pe r contract for consulting firms and research institutes may, with the Association's prior agreement, be procured in accordance with the provisions of paragraphs 3 .8 through 3 .1 1 of the Consultant Guidelines. 5. Individual Consultants Services of individual consultants for the Project performing tasks that meet th e requirements set forth in paragraph 5 .1 of the Consultant Guidelines shall be procure d under contracts awarded in accordance with the provisions of paragraphs 5 .1 through 5 .4 of the Consultant Guidelines. Part D: Review by the Association of the Selection of Consultants 1 . Selection Planning A plan for the selection of consultants, which shall include contract cos t estimates, contract packaging, and applicable selection criteria and procedures, shall be furnished to the Association for its review and approval prior to the issuance to consultants of any requests for proposals . Such plan shall be updated every twelve (12 ) months during the execution of the Project, and each such updating shall be furnished to the Association for its review and approval . Selection of all consultants' services shal l be undertaken in accordance with such selection plan (as updated from time to time) a s shall have been approved by the Association . - 29 - 2. Prior Review (a) With respect to each contract for the employment of consulting firms fo r the Project estimated to cost the equivalent of $100,000 or more, the procedures set fort h in paragraphs 2, 3 and 5 of Appendix 1 to the Consultant Guidelines shall apply . (b) With respect to each contract for the employment of individual consultants for the Project estimated to cost the equivalent of $50,000 or more, the report on the comparison of the qualifications and experience of candidates, the qualifications , experience, terms of reference and terms of employment of the consultants shall b e furnished to the Association for its prior review and approval . The contract shall be awarded only after the said approval shall have been given. The provisions of paragraph 3 of Appendix 1 to the Consultant Guidelines shall also apply to such contracts . 3 . Post Review With respect to each contract not governed by paragraph 2 of this Part, th e procedures set forth in paragraph 4 of Appendix 1 to the Consultant Guidelines shal l apply. - 30 - SCHEDULE 4 Implementation Program 1. The Recipient shall : (i) at all times implement its respective portions of th e Project in accordance with the provisions of this Agreement, the Operational Manual, the Waste Management Policy and Guidelines, any memorandum of understanding o r agreement to be entered into between the Provincial Councils and the Recipient regarding implementation of the Project, and applicable building codes ; and (ii) promptly inform the Association of any changes made, or proposed to be made, to the Operationa l Manual, the Waste Management Policy and Guidelines, and any memorandum o f understanding with a Provincial Council. 2. The Recipient shall maintain its Ministry of Health, the project managemen t secretariat, and other government departments and agencies in the health sector, an d shall cause each Provincial Council to maintain its Provincial Health Authorities, with staffing, organization, and functions in a manner satisfactory to the Association . 3. The Recipient shall carry out an independent evaluation with respect to Part A of the Project on terms and conditions satisfactory and acceptable to the Association by n o later than September 30, 2006, which shall cover: (i) physical progress of various Projec t activities in the Districts; (ii) the. overall progress made in achieving the Project' s development objectives; (iii) expenditure and use patterns of Grant proceeds and other financial resources for the Recipient's health sector; and (iv) any bottlenecks in project design and implementation. 4. The Recipient shall ensure, and shall cause the Provincial Councils to ensure, that expenditures in a Fiscal Year for District Sub-Programs to be financed from the Grant proceeds shall be in addition to those regular expenditures relating to the healt h sector in the Districts to be financed from the Recipient's own resources . 5 . The Recipient shall: (a) maintain policies and procedures adequate to enable it to monitor an d evaluate on an ongoing basis, in accordance with indicators satisfactory to the Association the carrying out of the Project and the achievement of the objective thereof ; (b) prepare, under terms of reference satisfactory to the Association, an d furnish to the Association not later than April 30, 2007, a report integrating the results of the monitoring and evaluation activities performed pursuant to paragraph (a) of this - 31 - Section, on the progress achieved in carrying out the Project during the period precedin g the date of said report and setting out the measures recommended to ensure the efficien t carrying out of the Project and the achievement of the objective thereof during the perio d following such date ; and (c) review with the Association by June 30, 2007, or such later date as th e Association shall request, the reports referred to in paragraph (b) of this Section, and thereafter, take all measures required to ensure the efficient completion of the Project and the achievement of the objective thereof, based on the conclusions an d recommendations of the said reports and the Association's views on the matter. - 32 - SCHEDULE 5 Modifications to the General Condition s For the purpose of this Agreement, the provisions of the General Conditions ar e modified as follows: 1 . Sections 3.02, 3.03, 3 .04(a), 3.04(b), 3.05, 6.05, Article VII, are deleted in thei r entirety. 2. Wherever used in the General Conditions, the following terms are modified to read as follows: (a) The term "Borrower" is modified to read "Recipient". (b) The term "Credit" is modified to read "Grant". (c) The term "credit" is modified to read "grant" ; except that where used in Sections 6.02(a)(ii) and 6.02(c)(i), as modified below, the term "credit" shall continue to read "credit" . (d) The term "Credit Account" is modified to read "Grant Account " (e) The term "Development Credit Agreement" is modified to read "Development Grant Agreement" . 3. Article IV is modified as follows: (a) Section 4.02(a) and the heading of Section 4.02 are modified to read a s follows: "Section 4.02. Currencies in which Commitment Charges are Payabl e (a) The Recipient shall pay the commitment charge on the Grant in the currency specified in the Development Grant Agreement or in suc h other eligible currency or currencies as may from time to time be designated or selected pursuant to paragraph (c) or (e) of thi s Section." - 33 - (b) Wherever used in Section 4.02(c) and (e) of the General Conditions th e words "principal and service charges" are modified to read "commitmen t charge". (c) Section 4.03 and its heading are modified to read as follows : "Section 4.03. Amount of the Grant The amount of the Grant withdrawn from time to time shall be the equivalent in terms of SDR (determined as of the date or respective date s of withdrawal from the Grant Account) of the value of the currency o r currencies so withdrawn ." 2. Section 6 .02 is modified as follows : (b) The phrase "any other development credit agreement" in Section 6.02(a)(ii) is modified to read: "any other development grant agreemen t or any development credit agreement or development financing agreement". (c) The phrase "any development credit agreement" in Section 6 .02(c)(i) is modified to read: "any development grant agreement, developmen t credit agreement or development financing agreement" . 5. The words "The principal of, and any other charges on" in paragraph (a) o f Section 8.01 are modified to read "The commitment charge on". 6. Paragraph (c) of Section 9 .06 is modified to read as follows: "(c) Not later than six months before the Closing Date or such later date as may be agreed for this purpose between the Recipient and th e Association, the Recipient shall prepare and furnish to the Association a report, of such scope and in such detail as the Association shal l reasonably request, on the execution and initial operation of the Project , its cost and the benefits derived and to be derived from it, the performance by the Recipient and the Association of their respective obligations under the Development Grant Agreement and th e accomplishment of the purposes of the Grant." - 34 - 7. Section 12.05 and its heading are modified to read as follows : "Section 12.05. Termination of Development Grant Agreement. The obligations of the Recipient under the Development Grant Agreement shall terminate on the date 20 years after the date of the Development Grant Agreement ."