Conformed Copy - C2249 - Second Telecommunications Project - Project Agreement

Page 1 CONFORMED COPY CREDIT NUMBER 2249 CE (Second Telecommunications Project) between INTERNATIONAL DEVELOPMENT ASSOCIATION and SRI LANKA TELECOM Dated July 15, 1991 CREDIT NUMBER 2249 CE PROJECT AGREEMENT AGREEMENT, dated July 15, 1991, between INTERNATION- AL DEVELOPMENT ASSOCIATION (the Association) and SRI LANKA TELECOM (Sri Lanka Telecom). WHEREAS (A) by the Development Credit Agreement of even date herewith between Democratic Socialist Republic of Sri Lanka (the Borrower) and the Association, the Association has agreed to make available to the Borrower an amount in various currencies equivalent to thirty-nine million seven hundred thousand Special Drawing Rights (SDR 39,700,000), on the terms and conditions set forth in the Development Credit Agreement, but only on condi- tion that Sri Lanka Telecom agree to undertake such obligations toward the Association as are set forth in this Agreement; (B) by a subsidiary loan agreement to be entered into between the Borrower and Sri Lanka Telecom, the proceeds of the credit provided for under the Development Credit Agreement will be relent to Sri Lanka Telecom on Page 2 the terms and conditions set forth in said Subsidiary Loan Agreement; and WHEREAS Sri Lanka Telecom, in consideration of the Association's entering into the Development Credit Agreement with the Borrower, has agreed to undertake the obligations set forth in this Agreement; NOW THEREFORE the parties hereto hereby agree as follows: ARTICLE I Definitions Section 1.01. Unless the context otherwise requires, the several terms defined in the Development Credit Agreement 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) Sri Lanka Telecom declares its commitment to the objectives of the Project as set forth in Schedule 2 to the Development Credit Agreement, and, to this end, shall carry out the Project with due diligence and efficiency and in conformity with appropri- ate administrative, financial and engineering practices, and shall provide, or cause to be provided, promptly as needed, the funds, facilities, services and other resources required for the Project. (b) Without limitation upon the provisions of paragraph (a) of this Section and except as the Associa- tion and Sri Lanka Telecom shall otherwise agree, Sri Lanka Telecom shall carry out the Project in accordance with the Implementation Program set forth in the Schedule to this Agreement. Section 2.02. Except as the Association shall otherwise agree, procurement of the goods, works and consultants' services required for Part B of 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 2.03. Sri Lanka Telecom shall carry out the obligations set forth in Sections 9.03, 9.04, 9.05, 9.06, 9.07 and 9.08 of the General Conditions (relating to insurance, use of goods and services, plans and sched- ules, records and reports, maintenance and land acquisi- tion, respectively) in respect of the Project Agreement. Section 2.04. Sri Lanka Telecom shall duly perform all its obligations under the Subsidiary Loan Agreement. Except as the Association shall otherwise agree, Sri Lanka Telecom shall not take or concur in any action which would have the effect of amending, abrogating, assigning or waiving the Subsidiary Loan Agreement or any provision thereof. Section 2.05. (a) Sri Lanka Telecom shall, at the request of the Association, exchange views with the Association with regard to the progress of the Project, the performance of its obligations under this Agreement and under the Subsidiary Loan Agreement, and other matters relating to the purposes of the Credit. (b) Sri Lanka Telecom shall promptly inform the Association of any condition which interferes or threat- Page 3 ens to interfere with the progress of the Project, the accomplishment of the purposes of the Credit, or the performance by Sri Lanka Telecom of its obligations under this Agreement and under the Subsidiary Loan Agreement. ARTICLE III Management and Operations of Sri Lanka Telecom Section 3.01. Sri Lanka Telecom shall carry on its opera- tions and conduct its affairs in accordance with sound administrative and financial practices under the supervision of qualified and experienced management assisted by competent staff in adequate numbers. Section 3.02. Sri Lanka Telecom shall at all times operate and maintain its plant, machinery, equipment and other property, and from time to time, promptly as needed, make all necessary repairs and renewals thereof, in accordance with sound telecommunications engineering practices. Section 3.03. Sri Lanka Telecom shall take out and maintain with responsible insurers, or make other provision satisfactory to the Association for, insurance against such risks and in such amounts as shall be consistent with appropriate practice. ARTICLE IV Financial Covenants Section 4.01. (a) Sri Lanka Telecom shall maintain records and accounts adequate to reflect in accordance with sound accounting practices its operations and financial condition. (b) Sri Lanka Telecom shall: (i) have its records, accounts and financial statements (balance sheets, statements of income and expenses and related stat- ements) 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 four 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 re- quest. Section 4.02. (a) Except as the Association shall otherwise agree, Sri Lanka Telecom shall earn, for each of its fiscal years after its fiscal year ending on December 31, 1991, an annual return of not less than 15% of the average current net value of Sri Lanka Telecom's fixed assets in operation. Page 4 (b) Before March 31 in each of its fiscal years, Sri Lanka Telecom shall, on the basis of forecasts prepared by Sri Lanka Telecom and satisfactory to the Association, review whether it would meet the require- ments set forth in paragraph (a) in respect of such year and the next following fiscal year and shall furnish to the Association the results of such review upon its completion. (c) If any such review shows that Sri Lanka Telecom would not meet the requirements set forth in paragraph (a) for Sri Lanka Telecom's fiscal years covered by such review, Sri Lanka Telecom shall promptly take all necessary measures (including, without limitation, adjustments of the structure or levels of its tariffs) in order to meet such requirements. (d) For the purposes of this Section: (i) The annual return shall be calculated by dividing Sri Lanka Telecom's net operat- ing income for the fiscal year in ques- tion by one half of the sum of the cur- rent net value of Sri Lanka Telecom's fixed assets in operation at the begin- ning and at the end of that fiscal year. (ii) The term "net operating income" means total operating revenues less total operating expenses. (iii) The term "total operating revenues" means revenues from all sources related to operations. (iv) The term "total operating expenses" means all expenses related to opera- tions, including administration, ade- quate maintenance, taxes and payments in lieu of taxes, and provision for depre- ciation on a straight-line basis at a rate of not less than 5% per annum of the average current gross value of Sri Lanka Telecom's fixed assets in opera- tion, or other basis acceptable to the Association, but excluding interest and other charges on debt. (v) The average current gross value of Sri Lanka Telecom's fixed assets in opera- tion shall be calculated as one half of the sum of the gross value of Sri Lanka Telecom's fixed assets in operation at the beginning and at the end of the fiscal year, as valued from time to time in accordance with sound and consistent- ly maintained methods of valuation sat- isfactory to the Association. (vi) The term "current net value of Sri Lanka Telecom's fixed assets in operation" means the gross value of Sri Lanka Tele- com's fixed assets in operation less the amount of accumulated depreciation, as valued from time to time in accordance with sound and consistently maintained methods of valuation satisfactory to the Association. Section 4.03. (a) Except as the Association shall otherwise agree, Sri Lanka Telecom shall produce, for Page 5 each of its fiscal years after its fiscal year ending on December 31, 1991, funds from internal sources equivalent to not less than 25% of the annual average of Sri Lanka Telecom's capital expenditures incurred, or expected to be incurred, for that year, the previous fiscal year and the next following fiscal year. (b) Before March 31 in each of its fiscal years, Sri Lanka Telecom shall, on the basis of forecasts prepared by Sri Lanka Telecom and satisfactory to the Association, review whether it would meet the require- ments set forth in paragraph (a) in respect of such year and the next following fiscal year and shall furnish to the Association a copy of such review upon its comple- tion. (c) If any such review shows that Sri Lanka Telecom would not meet the requirements set forth in paragraph (a) for Sri Lanka Telecom's fiscal years covered by such review, Sri Lanka Telecom shall promptly take all necessary measures (including, without limitation, adjustments of the structure or levels of its tariffs) in order to meet such requirements. (d) For the purposes of this Section: (i) The term "funds from internal sources" means the difference between: (A) the sum of revenues from all sourc- es related to operations, consumer deposits and consumer contributions in aid of construction, net non- operating income and any reduction in working capital other than cash; and (B) the sum of all expenses related to operations, including administra- tion, adequate maintenance and taxes and payments in lieu of taxes (excluding provision for deprecia- tion and other non-cash operating charges), debt service require- ments, all cash dividends and other cash distributions of surplus, increase in working capital other than cash and other cash outflows other than capital expenditures. (ii) The term "net non-operating income" means the difference between: (A) revenues from all sources other than those related to operations; and (B) expenses, including taxes and pay- ments in lieu of taxes, incurred in the generation of revenues in (A) above. (iii) The term "working capital other than cash" means the difference between current assets excluding cash and current liabilities at the end of each fiscal year. (iv) The term "current assets excluding cash" means all assets other than cash which could in the ordinary course of business be converted into cash within twelve Page 6 months, including accounts receivable, marketable securities, inventories and pre-paid expenses properly chargeable to operating expenses within the next fis- cal year. (v) The term "current liabilities" means all liabilities which will become due and payable or could under circumstances then existing be called for payment within twelve months, including accounts payable, customer advances, debt service requirements, taxes and payments in lieu of taxes, and dividends. (vi) The term "debt service requirements" means the aggregate amount of repayments (including sinking fund payments, if any) of, and interest and other charges on, debt. (vii) The term "capital expenditures" means all expenditures incurred on account of fixed assets, including interest charged to construction, if any, related to operations. (viii) Whenever for the purposes of this Section it shall be necessary to value, in terms of the currency of the Borrower, debt payable in an- other currency, such valuation shall be made on the basis of the prevailing lawful rate of exchange at which such other currency is, at the time of such valuation, obtain- able for the purposes of servicing such debt, or, in the absence of such rate, on the basis of a rate of exchange acceptable to the Asso- ciation. Section 4.04. Sri Lanka Telecom shall at all times maintain adequate funds to meet its requirements for operating costs, debt service, working capital and capital investment. ARTICLE V Effective Date; Termination; Cancellation and Suspension Section 5.01. This Agreement shall come into force and effect on the date upon which the Development Credit Agreement becomes effective. Section 5.02. (a) This Agreement and all obligations of the Association and of Sri Lanka Telecom thereunder shall terminate on the earlier of the following two dates: (i) the date on which the Development Credit Agreement shall terminate in accordance with its terms; or (ii) the date twenty years after the date of this Agreement. (b) If the Development Credit Agreement terminates in accordance with its terms before the date specified in paragraph (a) (ii) of this Section, the Association shall promptly notify Sri Lanka Telecom of this event. Page 7 Section 5.03. All the provisions of this Agreement shall continue in full force and effect notwithstanding any cancellation or suspension under the General Condi- tions. ARTICLE VI Miscellaneous Provisions Section 6.01. Any notice or request required or permitted to be given or made under this Agreement and any agreement between the parties contemplated by this Agreement shall be in writing. Such notice or request shall be deemed to have been duly given or made when it shall be delivered by hand or by mail, telegram, cable, telex or radiogram to the party to which it is required or permitted to be given or made at such party's address hereinafter specified or at such other address as such party shall have designated by notice to the party giving such notice or making such request. The addresses so specified are: For the Association: International Development Association 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable address: Telex: INDEVAS 248423 (RCA) Washington, D.C. 82987 (FTCC) 64145 (WUI) or 197688 (TRT) For Sri Lanka Telecom: Sri Lanka Telecom Lotus Road Colombo 1, Sri Lanka Cable address: Telex: MAGNETO 21477 TELECOM CE Colombo Section 6.02. Any action required or permitted to be taken, and any document required or permitted to be executed, under this Agreement on behalf of Sri Lanka Telecom may be taken or executed by its Managing Director or such other person or persons as Sri Lanka Telecom shall designate in writing, and Sri Lanka Telecom shall furnish to the Association sufficient evidence of the authority and the authenticated specimen signature of each such person. Section 6.03. This Agreement may be executed in several counterparts, each of which shall be an original, and all collectively but one instrument. 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 Page 8 By /s/ Jochen Kraske Acting Regional Vice President Asia SRI LANKA TELECOM By /s/ Susantha de Alwis Authorized Representative SCHEDULE Implementation Program 1. Sri Lanka Telecom shall establish and maintain a staffing ratio satisfactory to the Association. 2. Sri Lanka Telecom shall: (a) undertake a study with terms of reference satisfactory to the Association, of a cost-center based, performance related profit sharing staff remuneration system; (b) by December 31, 1991 furnish the recommenda- tions of the study to the Borrower and the Association for review; and (c) by June 30, 1992 begin to implement recommenda- tions agreed with the Borrower and the Association. 3. Sri Lanka Telecom shall implement the improvements in the institutional arrangements of the telecommuniatio- ns sector, referred to in Section 3.04 of the Development Credit Agreement. 4. Sri Lanka Telecom shall by December 31, 1991 establish, and thereafter maintain, a system satisfactory to the Association, to monitor its performance. 5. Sri Lanka Telecom shall: (a) undertake a study in accordance with terms of reference satisfactory to the Association, of the telecommunications tariff structure; (b) by December 31, 1991 furnish the findings of the study to the Borrower and the Association for review; and (c) by March 31, 1992 submit to the Borrower recommendations satisfactory to the Association, for changes in the telecommunications tariff structure. 6. Sri Lanka Telecom shall, as of June 30, 1992 maintain its accounts receivable below the equivalent of three months of billing.