Philippines - Second Provincial Cities Water Supply : Loan 1710 - Project Agreement - 1 - Conformed

~sl CONFORMED COPY CREDIT NUMBER 920 PR LOAN NUMP,ER 1710 PH Projeet Agreement (Second Provincial Cities Water Supply Project) between INTERNATIONAL DEVELOPMENT ASSOCIATION and INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT and LOCAL WATER UTILITIES ADMINISTRATION Dated June 27, 1979 CREDIT NUMBER 920 PH LOAN NUMBER 1710 PR PROJECT AGREEMENT AGREEMENT, dated June 27, 1979, between INTERNATIONAL DEVEL- OPMENT ASSOCIATION (hereinafter called the Association), INTERNA- TIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (hereinafter called the Bank) and LOCAL WATER UTILITIES ADMINISTRATION (hereinafter called LWUA). WHEREAS by the Development Credit Agreement of even date herewith between Republic of the Philippines (hereinafter called the Borrower) and the Association, the Association has agreed to make available to the Borrower an amount in various currencies equivalent to twenty-two million dollars ($22,000,000), on the terms and conditions set forth in the Development Credit Agree- ment, but only on condition that LWUA agree to undertake such obligations toward the Association as are hereinafter set forth; WHEREAS by the Loan Agreement of even date- herewith between the Borrower and the Bank, the Bank has agreed to make available to the Borrower an.. amount in various currencies equivalent to sixteen million dollars ($16,000,000), on the terms and conditions set forth in the Loan Agreement, but only on condition that LWUA agree to undertake such obligations towards the Bank as are hereinafter set forth; WHEREAS by a subsidiary loan agreement to be entered into between the Borrower and LWUA, part of the proceeds of the credit provided for under the Development Credit Agreement and the pro- ceeds of the loan provided for under the toan Agreement will be made available to LWUA on the terms and conditions therein set forth; and WHEREAS LWUA, in consideration of the Association's and the Bank's entering into the Development Credit Agreement and the Loan Agreement, respectively, with the Borrower, has agreed to under- take the obligations hereinafter set forth; NOW THEREFORE the parties hereto hereby agree as follows: ARTICLE I Definitions Section 1.01. Wherever used in this Agreement, unless the context shall otherwise requite, the several terms defined in -2- the Development Credit Agreement and in the General Conditions applicable thereto, and in the Loan Agreement and in the General Conditions applicable thereto, have the respective meanings therein set forth. ARTICLE II Execution of the Project Section 2.01. (a) LWUA shall carry out Parts A and B of the Project described in Schedule 2 to the Development Credit Agree- ment with due diligence and efficiency and in conformity with appropriate administrative, financial, engineering and public utility practices, and shall provide, or cause to be provided, promptly as needed, the funds, facilities, services and other resources required for the purpose. (b) LWUA shall relend to each Water District included in the roject, the proceeds of the Loan and the Credit relent to LWTA by the Borrower under the Subsidiary Loan Agreement, together with the funds in the Borrower's currency required for carrying out Part A of the Project in each such Water District under agreements to be entered into between LWUA and each such Water District, under terms and conditions which shall have been approved by the Association and the Bank and which shall include, inter alia, provisions whereby each such Water District: (i) agrees that LWUA carry out the Sub-project in the said Water District on behalf of the said Water District; and (ii) authorizes LWUA to perform all acts necessary or appropriate to enable LWUA to carry out the Sub-project in such Water District. (c) The eligibility, preparation, review and appraisal design of each Sub-project to be carried out in the Water Dis- tricts shall be in accordance with criteria acceptable to the Association and the Bank. Section 2.02. In- order to assist LWUA in the preparation of feasibility studies, detailed design, supervision of construction and the review of sub-projects, LWUA shall, as may be determined by the Borrower, the Association and the Bank, employ engineering and management consultants whose qualifications, experience and terms and conditions of employment shall be satisfactory to the Association and the Bank. AL - .. j -3-: Section 2.03. Except as the Association and the Bank shall otherwise agree, procurement of the goods and civil works to be financed out of the proceeds of the Credit and of the Loan, shall be governed by the provisions of the Schedule to this Agreement. Section 2.04. (a) LWUA undertakes to insure, or make adequate provision for the insurance of, the imported goods to be financed out of the proceeds of the Credit and of the Loan relent to it by the Borrower against hazards incident to the Acquisition, trans- portation and delivery thereof to the place of use or installa- tion, and for such insurance any indemnity shall be payable in a currency freely usable by LWUA to replace or rapair such goods. (b) Except as the Association and the Bank may otherwise agree, LWUA shall cause all goods and services financed out of the proceeds of the Credit and of the Loan relent to it by the Bor- rower to be used exclusively for the Project. Section 2.05. (a) LWUA shall furnish to the Association and the Bank, promptly upon their preparation, the plans, specifi- cations, reports, contract documents and construction and procure- ment schedules for Parts A and B of the Project, and any material modifications thereof or additions thereto, in such det.Il as the Association and the Bank shall reasonably request. (b) LWUA: (i) shall maintain records and procedures adequate to record and monitor the progress of Parts A and B of the Project (including its cost and the benefits to be derived from it), to identify the goods and services financed out of the proceeds of the Credit and the Loan relent to it by the Borrower, and to disclose their use in the, Project; (ii) shall, without limitation upon the provisions of paragraph (d) of this Section, enable, and cause each Water District to enable, the -Association's and the Bank's accredited representatives to visit the facilities and con- struction sites included in the Project and to examine the goods financed out of the proceeds of the Credit and of the Loan and any relevant records and documents; and (iii) shall furnish to the Association and the Bank at regular intervals all such information as the Association and the Bank shall reasonably request concern- ing the Project, its cost and, where appropriate, the benefits to be derived from it, the expenditures of such proceeds and the goods and services financed out of such proceeds. F1 -4- (c) Promptly after completion of the Project, but in any event not later than six months after the Closing Date or such later date as may be agreed for this purpose among the Associa- tion, the Bank and LWUA, LWUA shall prepare and furnish to the Association and the Bank a report, of such scope and in such detail as the Association and the Bank shall reasonably request, on the execution and initial operation of Parts A and B of the Project, its cost and the benefits derived and to be derived from it, the performance by LWUA, the Association and the Bank of their respective obligations under the Project Agreement, the Develop- ment Credit Agreement and the Loan Agreement, and the accomplish- ment of the purposes of the Credit and the Loan. ()LWUA shall enable, and cause each Water District to"j enable, the Association's and the Bank's representatives to exam- ine all plants, installations, sites, works, buildings, property and equipment of LWUA and of each Water District and any relevant records and documents. Section 2.06. LWUA shall duly perform all its obligations under the Subsidiary Loan Agreement. Except as the Association and the Bank shall otherwise agree, LWUA 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 provi- sion thereof. Section 2.07. (a) LWUA shall at the request of the Associa- tion and the Bank, exchange views with the Association and the Bank with regard to the progress of Parts A ,nd B 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 and the Loan. (b) LWUA shall promptly inform the Association and the Bank of any condition which interferes or threatens to interfere with the progress of Parts A and B of the Project, the accomplishment of the purposes of the Credit and the Loan. ARTICLE III Management and Operations of LWUA and Water Districts Section 3.01. LWUA shall, and shall cause each Water District. to, at all times carry on its operations, manage its affairs, plan 11I -5- its future development and maintain its organization and its financial position all in accordance with appropriate public utility, financial and administrative practices and under theI supervision of experienced and competent management. Section 3.02. LWUA shall: (i) afford the Association and the Bank a reasonable opportunity to comment on the qualifications and experience of the proposed appointee to the position of its General Manager in the event that such position becomes vacant; and (ii) consult with the Association and the Bank prior to making any major changes in its organizational structure. Section 3.03. (a) In order to handle its increasing volume of lending operations more efficiently, LWUA shall formulate and furnish to the Association and the Bank by January 31, 1980, for their comments, an action program for LWUA's policies and proce- dures for billing and collections. (b) LWUA shall establish procedures satisfactory to the Association and the Bank for making provisions for bad debts. Section 3.04. LWUA shall cause each Water District to operate and maintain its plants, equipment and property and promptly make all necessary repairs and renewals thereof, in accordance with sound engineering and public utilities practices. V Section 3.05. LWUA shall cause each Water District to take out and maintain with responsible insurers, or make other provi- sions satisfactory to the Association and the Bank for, insurance against such risks and in such amounts as shall be consistent with appropriate practice. Section 3.06. LWUA shall, and shall cause each ,-ater District to, maintain its existence and right to carry on its operations and take all steps necessary to acquire, maintain and renew all rights, privileges and franchises which are necessary or useful in the conduct of its business. Section 3.07. LWUA shall, by June 30, 1980, complete the formation of about 50 Water Districts to carry out Sub-projects under the Project. -6- ARTICLE IV Financial Covenants Section 4.01. LWUA shall, and shall cause each Water District to, maintain records adequate to reflect in accordance with con- sistently maintained appropriate accounting practices its opera- tions and financial condition. *Section 4.02. (a) LWUA shall: (i) have its accounts and financial statements (balance sheets, statements of income and expenses and related statements) for each fiscal year audited, in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Association and the Bank; (ii) furnish to the Association and 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 its financial state- ments 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 Associa- tion and the Bank shall have reasonably requested; and (iii) furnish to the Association and the Bank such other information concerning the accounts and financial statements of LWUA and the audit thereof as the Association and the Bank shall from time to time reasonably request. (b) LWUA shall cause each Water District to: (i) have its accounts and financial statements (balance sheets, statements of income and expenses and related statements) for each fiscal year audited, in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to LWUA; and (ii) furnish to LWUA as soon as available, but in any case not later than six months after the end of each such year, certified copies of its financial statements for such year as so audited. Section 4.03. (a) Except as the Association and the Bank may otherwise agree, LWUA shall cause each Water District to take all steps necessary to set and maintain its tariffs .with a view of providing revenues sufficient to produce an annual rate of return on the value of such Water District's average net fixed assets in operation as follows: (i) in the third year after start of construction: 3%; (ii) increasing to 4%, 5%, 6% and 7%, respectively, in each succeeding year; and (iii) 8% thereafter. IllI (b) For the purpose of this Section: (i) The annual rate of return shall be calculated by relating the operating income for the year in question to the average of the value of the net fixed assets of the Water District in operation at the beginning and at the end of each year. (ii) The term "value of net fixed assets in operation" shall mean the gross book value of such assets, less the amount of accumulated depreciation, as such value shall be revalued from time to time in accordance with methods of valuation acceptable to the Bank. (iii) The term "operating income" shall mean the differ- ence between: (A) gross operating revenue accruing from the Water District's services; and (B) operating and administration expenses (includ- ing taxes, if any), adequate maintenance and depreciation but excluding interest and other charges on debt. Section 4.04. LWUA shall cause each Water District included in Part A of the Project to: (i) carry out an annual review of the rate structure and level of its tariffs; (ii) furnish such review to the Association and the Bank for their comments, not later than October 1 in each year; and (iii) implement, taking into account the comments of the Association and the Bank, the findings of such review by January 1 of the following year. Section 4.05. (a) Except as the Association and the Bank shall otherwise agree, LWUA shall ensure that: (i) during the construction period of a Sub-project in any Water District, such Water District shall not undertake any major capital expenditures other than those included in the Sub-project; and (ii) after completion of Sub-projezt in such Water District, such Water District shall not incur any long-term debt if its net revenues for the fiscal year next preceding such incurrence or for a later twelve-month period ended prior to such incurrence, whichever amount is the greater, shall be less than 1.3 times the maximum debt service requirements on all long-term indebtedness (including the debt to be incurred) in any succeeding fiscal year. 22 -8- (b) LWUA shall not incur any debt if such debt would raise LWUA's long-term debt-equity ratio to more than 3:1. For the purposes of this Section: (i) "long-term debt" means any debt maturing more than one year after the date on which it is originally incurred; (ii) debt shall be deemed to be incurred: (A) under a loan contract or agreement (including the Loan and Development Credit Agreements) on the date such debt becomes outstanding and repayable in accor- dance with the loan contract, agreement or other instrument providing for such debt, and (B) under a guarantee agreement, on the date the agreement providing for such guarantee is entered into, but only to the extent that the underlying guaranteed debt is outstanding; (iii) the term "net revenues" means gross revenues from operations adjusted to take account of tariffs in effect at the time of incurrence of the debt even though they were not in effect during the twelve consecutive months to which such revenues related, less operating, administrat4ve and overhead expen- ses, including adequate maintenance expenses and provision for taxes, if any, but before provision for depreciation, interest and other charges on debt; (iv) the term "debt service requirements" means the aggregate amount of amortization (including sinking fund payments, if any), interest and other charges on debt; (v) whenever it shall be necessary to value in the currency of the Borrower debt payable by LWUA or any of the Water Districts in another currency, such valuation shall be made on the basis of the rate of exchange at which such other currency is obtainable by LWUA, at the time such valuation is made, for the purposes of servicing such debt or, if such other currency is not so obtainable, at the rate of exchange that will be reasonably determined by the Association and the Bank; and -9- (vi) the term "major capital expenditure" means a capital expenditure equivalent to 20% or more of the Sub-project. Section 4.06. LWUA shall consult with the Association and the Bank prior to making any modifications in its financial policies. Section 4.07. LWUA shali cause each Water District to estab- lish realistic valåes for its assets and to maintain records ade- quate to reflect the nature, quantity and location of such assets. 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 and the Loan Agreement become effective. Section 5.02. (a) This Agreement and all obligations of the Association' the Bank and of LWUA thereunder shall terminate on the earlier of the following two dates: (1) the date on which the Development Credit Agreement and the Loan Agreement shall terminate in accor- dance with their respective terms; or 3 (ii) a date 20 years after the date ,of this Agreement. (b) If the Development Credit Agreemient and the Loan Agree- ment terminate in accordance with their respective terms before the date specified in paragraph (a) (ii) of this Section, the Association and the Bank shall promptly notify LWUA of this event. Section 5.03. All the provisions of this Agreement shall continue in full force and effect notwithstanding any cancellation or suspension under the Development Credit Agreement or the Loan Agreement. ART1CLE 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. Sch 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 des- ignated 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: INDE VAS Washington, D.C. For the Bank: International Bank for Reconstruction and Development 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable address: sINTBAFRAD Washington, D.C. 1 11 -- For LWUA: Local Water Utilities Administration NIA Building (7th Floor) E. Delos Santos Avenue Que:on City Philipplines Cable address: LOCAL VATER Quezon City 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 LWUA may be taken or exåcuted by the General Manager or such other person or persons as LWUA shall designate in writing, and LWUA shall furnish to the Association sufficient evidence of the authority and the authenticated specimen fi signature of each such person. Section 6.03. As long as the Bank has not given notice to the contrary to LWUA and so long as the Development Credit Agreement shall not have terminated prior to the termination of the Loan Agreement:, (a) the obligations of LWUA to consult with, and to furnish information, documpnts, plans, reports, records and statements to the Bank shall be satisfied to the 'xtent performance in respect of such obligations is rendered to the Association; (b) the obligations of the Bank to consult with, and to furnish information to LWUA shall be satisfied to the extent such obli- gations are fulfilled by the Association; and (c) all actions taken (including the giving of approvals or the granting of waivers) by the Association pursuant to the Development Credit Agreement shall be deemed to be taken pursuant to both the Devel- opment Credit Agreement and the Loan Agreement and in the name and on behalf of both the Association and the Bank. Section c5.03. This Agreement may be executed in several coun- terparts, each of which shall be an original, and all collectively but one instrument.