Sri Lanka - Small And Medium Industries Project : Credit 0942 - Credit Agreement - Conformed

CONFORMED COPY CREDIT NUMBER 942 CE Development Credit Agreement (Small and Medium Industries Project) between DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA and INTERNATIONAL DEVELOPMENT ASSOCIATION Dated July 24, 1979 CREDIT NUMBER 942 CE DEVELOPMENT CREDIT AGREEMENT AGREEMENT, dated July 24, 1979, between DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA (hereinafter called the Borrower) and INTERNATIONAL DEVELOPMENT ASSOCIATION (hereinafter called the Association). ARTICLE I General Conditions; Definitions Section 1.01. The parties to this Agreement accept all the provisions of the General Conditions Applicable to Development Credit Agreements of the Association, dated March 15, 1974, with the same force and effect as - if they were fully set forth herein (said General Conditions Applicable to Development Credit Agreements of the Association being hereinafter called the General Conditions). Section 1.02. Wherever used in this Agreement, unless the context otherwise requires, the several terms defined in the General Conditions have the respective meanings therein set forth and the following additional terms have the following meanings: (a) "NDB" means the National Development Bank of the Borrower established under the National Development Bank Act, No. 2 of 1979; (b) "SMI Fund" means the Small and Medium size Industries Fund established pursuant to the provisions of Section 3.02 (b) of this Agreement; (c) "IDB" means the Industrial Development Board, a body established within the Borrower's Ministry of Industries and Scientific Affairs, or any successor thereof; (d) "MTI" means the Borrower's Ministry of Textile Indus- tries or any successor thereof; (e) "DSI" means the Department of Small Industries within the Borrower's Ministry of Rural Industrial Development; (f) "Participating Credit Institution" means the Peoples' Bank, Bank of Ceylon, Hatton National Bank, Commercial Bank of Ceylon, Development Finance Corporation of Ceylon or any -2- other state or privately held credit institution established or operating under the laws of the Borrower, which has entered into a participation agreement with NDB pursuant to Section 3.09 of this Agreement; (g) "small and medium size industry" means any enterprise, privately or cooperatively owned, with plant and equipment valued at original cost (excluding land and buildings) of less than Rsl,000,000, prior to the granting of a Sub-loan, which is engaged or intends to engage in manufacturing, mining, construction, agro-industry, fish processing, handicraft production, or indus- trial service activities; (h) "Sub-loan" means a loan made or proposed to be made by a Participating Credit Institution in accordance with the provisions of this Agreement and which is or proposed to be refinanced by the proceeds of the Credit; (i) "Sub-project" means a sub-project for which a sub-loan is made or proposed to be made by a Participating Credit Insti- tution under the Project; (j) "Subsidiary Loan Agreement" means the agreement entered into between the Borrower and NDB pursuant to Section 3.03 of this Agreement, as the said agreement may be amended from time to time with the consent of the Association; and (k) "Rs" means Rupees, the currency of the Borrower. ARTICLE II The Credit Section 2.01. The Association agrees to lend to the Borrower, on the terms and conditions in the Development Credit Agreement set forth or referred to, an amount in various currencies equi- valent to sixteen million dollars ($16,000,000). Section 2.02. (a) The amount of the Credit may be withdrawn from the Credit Account in accordance with the provisions of Schedule 1 to this Agreement, as such Schedule may be amended from time to time by agreement between the Borrower and the Associ- ation, for: (i) Sub-loan disbursements under Part A of the Project for expenditures made (or, if the Association shall so agree, to be made); and (ii) in respect of the reasonable cost of goods and -3- services required for Parts B, C and D of the Project and to be financed out of the proceeds of the Credit. (b) Notwithstanding provisions of paragraph (a) of Section 2.02 above, no withdrawals shall be made for expenditures under the Project unless the Association shall have authorized such withdrawals. Each request by the Borrower for authorization to make withdrawals in respect of a Sub-loan under Part A of the Project shall be accompanied by: (i) a summary description of the Sub-project including a summary description of the expendi- tures proposed to be financed; and (ii) such other information as the Association shall reasonably request. Each request by the Borrower for authorization to make withdrawals in respect of Parts B, C and D of the Project should be accompanied by: (i) a summary description of the expenditures proposed to be financed and their intended uses; (ii) such other information as the Association shall reasonably request. Section 2.03. Except as the Association shall otherwise agree, procurement of the goods under the Project to be financed out of the proceeds of the Credit, shall be as follows: (a) under Part A of the Project, the Borrower shall cause NDB to establish procedures to ensure that: (1) the goods procured locally shall be purchased at reasonable and competitive prices, due account being taken also of other relevant factors such as time of delivery, quality and reliability of the goods and avail- ability of maintenance facilities and spare parts therefor; and (2) the contracts for goods procured outside the Borrower's territory and estimated to cost Rsl60,000 or more shall be let through international shopping on the basis of at least three price quotations; and (b) under Parts B, C and D of the Project, goods shall be procured in accordance with the procurement procedures of the Borrower acceptable to the Association. Section 2.04. The Closing Date shall be June 30, 1984 or such later date as the Association shall establish. The Association shall promptly notify the Borrower of such later date. Section 2.05. The Borrower shall pay to the Association a service charge at the rate of three-fourths of one per cent (3/4 of 1%) per annum on the principal amount of the Credit withdrawn and outstanding from time to time. -4- Section 2.06. Service charges shall be payable semiannually on February 1 and August 1 in each year. Section 2.07. The Borrower shall repay the principal amount of the Credit in semiannual installments payable on each Febru- ary 1 and August 1 commencing August 1, 1989, and ending Febru- ary 1, 2029, each installment to and including the installment payable on February 1, 1999, to be one-half of one per cent (1/2 of 1%) of such principal amount, and each installment thereafter to be one and one-half per cent (1-1/2%) of such principal amount. Section 2.08. The currency of the United States of America is hereby specified for the purposes of Section 4.02 of the General Conditions. ARTICLF III Execution of the Project Section 3.01. The Borrower shall carry out the PrDject or cause the Project to be carried out, with due diligence and efficiency and in conformity with appropriate administrative, financial and industrial practices, and shall provide or cause to be provided, promptly as needed, the funds, staff, facilities, services and other resources required for the purpose. Section 3.02. For the purposes of carrying out the Project, the Borrower shall: (a) establish and maintain a Project Coordinating Committee having such terms of reference as shall be satisfactory to the Borrower and the Association; (b) cause NDB to establish and maintain a SMI Fund with (i) an initial capitalization of not less than Rs20,000,000, (ii) an initial number of staff with qualifications and experience satisfactory to NDB and the Association, and (iii) accounting procedures and a statement of policies and operating procedures satisfactory to the Association; and (c) cause NDB, from time to time, to: (i) provide such additional capitalization funds to the SMI Fund; and (ii) increase the number of staff of the SMI Fund, as may be required to meet the operational needs of the SMI Fund. -5- Section 3.03. In order to carry out Part A of the Project, the Borrower shall relend to NDB for the account of SMI Fund, the equivalent in rupees of such amounts as shall be withdrawn from the Credit Account under Category (1) of the table set forth in paragraph 1 of Schedule 1 to this Agreement, under a subsidiary loan agreement on terms and conditions satisfactory to the Association including those set forth in Schedule 3 to this Agreement. Section 3.04. In order to assist the Borrower in carrying out Parts B, C and D of the Project, the Borrower shall employ or cause to be employed consultants whose qualifications, experience and terms and conditions of employment shall be satisfactory to the Association. Section 3.05. (a) The Borrower undertakes to insure, or make adequate provision for the insurance of, the imported goods under Part B of the Project to be financed out of the proceeds of the Credit against hazards incident to the acquisition, transpor- tation and delivery thereof to the place of use or installation, and for such insurance any indemnity shall be payable in a cur- rency freely usable by the Borrower to replace or repair such goods. (b) Except as the Association shall otherwise agree, the Borrower shall cause all goods and services financed out of the proceeds of the CrediL to be used exclusively for the Project. Section 3.06. (a) The Borrower shall furnish or cause to be furnished to the Association, promptly upon their preparation, the plans, specifications, contract documents and work and procurement schedules for Parts B, C and D of the Project, and any material modifications thereof or additions thereto, in such detail as the Association shall reasonably request. (b) The Borrower: (i) shall maintain or cause to be main- tained records and procedures adequate to record and monitor the progress 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 to disclose their use in the Project; (ii) shall enable or cause to enable the Association's accredited representatives to visit the facilities and construc- tion sites included in the Project and to examine the goods financed out of the proceeds of the Credit and any relevant records and documents; and (iii) shall furnish or cause to be -6- furnished to the Association at regular intervals all such infor- mation as the Association shall reasonably request concerning the Project, its cost and, where appropriate, the benefits to be derived from it, the expenditure of the proceeds of the Credit and the goods and services financed out of such proceeds. (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 between the Borrower and the Association, the Borrower shall prepare and furnish or cause to be prepared and furnished to the Association a report, of such scope and in such detail as the Associaticu shall reason- ably 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 Borrower and the Association of their respective obligations under the Development Credit Agreement and the accomplishment of the purposes of the Credit. Section 3.07. The Borrower shall cause NDB to: (a) apply procedures and criteria satisfactory to the Association in NDB's review of a Sub-project appraisal by a Participating Credit Institution for a Sub-loan to be refinanced by the SMI Fund under the Project; and (b) approve and refinance a Sub-loan on terms and conditions satisfactory to the Association, including those set forth in Schedule 3 to this Agreement. Section 3.08. The Borrower shall cause the existing Small Industries Credit Guarantee Scheme of the Borrower's Central Bank to be amended to include Sub-loans for small and medium size industries refinanced under the Project. Section 3.09. The Borrower shall cause NDB to enter into a participation agreement with each Participating Credit Insti- tution, on terms and conditions satisfactory to the Association. Section 3.10. The Borrower shall ensure that the terms of reference of the special studies to be carried out under Part D of the Project are satisfactory to the Association and shall consult with the Association regarding the findings and recommendations of these studies. -7- Section 3.11. The Borrower shall cause: (a) an annual (January 1 to December 31) work program on the Project to be prepared and furnished, not later than November 1 of the year prior to the year in which the work is to be carried out, to the Association for comment; and (b) a quarterly progress report on the Project to be pre- pared and furnished, not later than two months after the end of the quarter under review, to the Association for comment. ARTICLE IV Other Covenants Section 4.01. (a) The Borrower shall maintain or cause to be maintained: (i) the accounts and financial statements of NDB; and (ii) records and separate accounts adequate to reflect in accordance with consistently maintained appropriate accounting practices the operations, resources and expenditures, in respect of the Project, of the departments or agencies of the Borrower responsible for carrying out the Project or any part thereof, including, without limitation to the foregoing, all expenditures not exceeding the equivalent of $40,000 to refinance a Sub-loan under Category (1) (a) of the table in paragraph 1 of Schedule 1 to this Agreement on account of which withdrawals are requested from the Credit Account on the basis of certificates of expendi- ture. (b) The Borrower shall retain, or cause to be retained, until one year after the Closing Date, all records (orders, invoices, bills, receipts and other documents) evidencing the expenditures on account of which withdrawals are requested from the Credit Account on the basis of certificates of expen- diture and shall enable the Association's accredited represen- tatives to examine such records. (c) The Borrower shall: (i) cause an annual audit satisfactory to the Asso- ciation to be made of the accounts and financial statements of NDB and of the separate accounts referred to in Section 4.01 (a) above for each fiscal year, in accordance with appropriate audit- ing principles consistently applied, by independent and qualified auditors; -8- (ii) furnish or cause to be furnished to the Associ- ation, as soon as available, but in any case not later than six months after the end of each such year: (A) certified copies of the accounts and financial statements of NDB and said separate accounts for such year as so audited; and (B) the report of such audit by such auditors, of such scope and in such detail as the Association shall have reasonably requested, including without limitation to the foregoing, a separate opinion by said auditors in respect of the expenditures and records referred to in Section 4.01 (b) above as to whether the proceeds of the Credit withdrawn from the Credit Account on the basis of certificates of expenditure have been used for the purpose for which they were provided; and (iii) furnish or cause to be furnished to the Association such other information concerning said separate accounts, records and expenditures and the audit thereof as the Association shall from time to time reasonably request. Section 4.02. The Borrower shall take out and maintain or cause to be taken out and maintained with responsible insurers, or make or cause to be made other provision, satisfactory to the Association for, insurance against such risks and in such amounts as shall be consistent with appropriate practice. Section 4.03. The Borrower and the Association shall exchange views from time to time regarding the development of incentives affecting small and medium size industries. ARTICLE V Remedies of the Association Section 5.01. For the purposes of Section 6.02 of the General Conditions, the following additional events are specified pursuant to paragraph (h) thereof, namely, that: -9- (a) the National Development Bank Act, No. 2 of 1979, shall have been amended, suspended, abrogated, repealed or waived so as, in the judgment of the Association, to materially affect the carrying out of the Project or the operations or financial condition of NDB; (b) a change shall have been made in the Subsidiary Loan Agreement without the Association's consent; and (c) the Borrower or any other authority having jurisdiction shall have taken any action for the dissolution or disestablish- ment of NDB or SMI Fund, or for the suspension of the operations of NDB or SMI Fund. Section 5.02. For the purposes of Section 7.01 of the General Conditions, the following additional events are specified pursuant to paragraph (d) thereof, namely, any events specified in para- graphs (a) and (b) of Section 5.01 of this Agreement shall occur. ARTICLE VI Effective Date; Termination Section 6.01. The following events are specified as addi- tional conditions to the effectiveness of the Development Credit Agreement within the meaning of Section 12.01 (b) of the General Conditions, namely, that: (a) the SMI Fund shall have been established in accordance with the provisions of Section 3.02 (b) of this Agreement; (b) the existing Small Industries Credit Guarantee Scheme of the Borrower's Central Bank shall have been amended in accor- dance with the provisions of Section 3.08 of this Agreement; (c) the Subsidiary Loan Agreement shall have been entered into in accordance with the provisions of Section 3.03 of this Agreement; and (d) participation agreements have been entered into by NDB with at least two Participating Credit Institutions in accor- dance with the provisions of Section 3.09 of this Agreement. Section 6.02. The following is specified as an additional matter, within the meaning of Section 12.02 (c) of the General - 10 - Conditions, to be included in the opinion or opinions to be furnished to the Association, namely, that the Subisidary Loan Agreement has been duly authorized or ratified by, and executed and delivered on behalf of the parties thereto, and constitutes a valid and binding obligation upon the Borrower and NDB. Section 6.03. The date October 24, 1979 is hereby speci- fied for the purposes of Section 12.04 of the General Conditions. ARTICLE VII Representatives of the Borrower; Addresses Section 7.01. The Secretary, Ministry of Finance and Planning of the Borrower is designated as representative of the Borrower for the purposes of Section 11.03 of the General Conditions. Section 7.02. The following addresses are specified for the purposes of Section 11.01 of the General Conditions: For the Borrower: Ministry of Finance and Planning Colombo, Democratic Socialist Republic of Sri Lanka Cable address: Telex: SECMINFIN 1232 Colombo FORAID For the Association: International Development Association 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable address: Telex: INDEVAS 440098 (ITT) Washington, D.C. 248423 (RCA) or 64145 (WUI) - 11 - IN WITNESS WHEREOF, the parties hereto, acting through their representatives thereunto duly authorized, have caused Lis 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. DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA By Is/ W. S. Karunaratne Authorized Representative INTERNATIONAL DEVELOPMENT ASSOCIATION By Is/ W. David Hopper Regional Vice President South Asia - 12 - SCHEDULE 1 Withdrawal of the Proceeds of the Credit 1. The table below sets forth the Categories of items to be financed out of the proceeds of the Credit, the allocation of the amounts of the Credit to each Category and the percentage of expenditures for items so to be financed in each Category: Amount of the Credit Allocated % of (Expressed in Expenditures Category Dollar Equivalent) to be Financed (1) Part A of the Project: (a) refinanced 9,700,000 100% amount not exceeding $40,000 equi- valent per Sub-loan (b) refinanced 2,300,000 100% amount exceed- ing $40,000 equivalent per Sub-loan (2) Equipment, vehicles and materials for Part B of the Project (a) handloom company 240,000 100% of foreign expenditures; 100% of local expenditures (ex-factory); and 80% of other local expenditures - 13 - Amount of the Credit Allocated % of (Expressed in Expenditures Category Dollar Equivalent) to be Financed (b) other 1,400,000 100% of foreign expenditures; 100% of local expenditures (ex-factory); and 80% of other local expenditures (3) Training, consultant and technical ser- vices: (a) under Part B of 1,520,000 100% the Project (b) under Part C of 590,000 100% the Project (c) under Part D of 250,000 100% the Project TOTAL 16,000,000 2. The disbursement percentages have been calculated in com- pliance with the policy of the Association that no proceeds of the Credit shall be disbursed on account of payments for taxes levied by, or in the territory of, the Borrower on goods or services, or on the importation, manufacture, procurement or supply thereof; to that end, if the amount of any such taxes levied on or in respect of any item to be financed out of the proceeds of the Credit decreases or increases, the Association may, by notice to the Borrower, increase or decrease the disbursement percentage then applicable to such item as required to be consistent with the aforementioned policy of the Association. 3. Notwithstanding the provisions of paragraph 1 above, no withdrawals shall be made in respect of payments made for: -14- (a) expenditures prior to the date of this Agreement; and (b) expenditures under Category (2) (a) of the table in paragraph 1 above, until and unless the private limited handloom production and export company under Part B (ii) of the Project, has been established to the satisfaction of the Association. 4. Notwithstanding the allocation of an amount of the Credit or the disbursement percentages set forth in the table in para- graph 1 above, if the Association has reasonably estimated that the amount of the Credit then allocated to any Category will be insufficient to finance the agreed percentage of all expenditures in that Category, the Association may, by notice to the Borrower: (i) reallocate to such Category, to the extent required to meet the estimated shortfall, proceeds of the Credit which are then allocated to another Category and which in the opinion of the Association are not needed to meet other expen- ditures, and (ii) if such reallocation cannot fully meet the estimated shortfall, reduce the disbursement percentage then applicable to such expenditures in order that further withdrawals under such Category may continue until all expenditures thereunder shall have been made. 5. If the Association shall have reasonably determined that the procurement of any item in any Category is inconsistent with the procedures set forth or referred to in this Agreement, no expenditures for such item shall be financed out of the proceeds of the Credit and the Association may, without in any way restricting or limiting any other right, power or remedy of the Association under the Development Credit Agreement, by notice to the Borrower, cancel such amount of the Credit as, in the Associ- ation's reasonable opinion, represents the amount of such expendi- tures which would otherwise have been eligible for financing out of the proceeds of the Credit. - 15 - SCHEDULE 2 Description of the Project The purpose of the Project is to assist in the development of small and medium size industries in the Borrower's territory and consists of the following Parts: Part A: A program by NDB through the SMI Fund to refinance Sub-loans by Participating Credit Institutions to small and medium size industries. Part B: Strengthening of managerial, technical, marketing and other general and specific subsector services principally for small and medium size industries through provision of staff, training, equipment and facilities: (i) under IDB for establishment and expansion of a: (a) subcontracting exchange, (b) extension programs and (c) technical services centers for rubber products, metal products, and building materials; (ii) under MTI for the establishment and improvement of a garment training center and a private limited handloom production and export company; (iii) under DSI for establishment and improvement of a tech- nical extension program in the white coir products industry; and (iv) under other agencies for other small and medium size industry-related studies and activities. Part C: Improvement of NDB and Participating Credit Institution staff and operational systems through: (i) development of NDB operating procedures and training of staff; - 16 - (ii) training of staff to upgrade small and medium size industry appraisal and supervision capabilities of Participating Credit Institutions; and (iii) improvement of management information systems and staff development in the Participating Credit Insti- tutions. Part D: Policy studies by the Borrower to: (i) determine the feasibility of extending fiscal incen- tives to industrial enterprises which expand and those providing components to exporters; and (ii) analyze and make recommendations for the development of an appropriate tariff system. Parts B, C and D would be undertaken with the assistance of about 22 man-years of specialist assistance. The Project is expected to be completed by December 31, 1983. - 17 - SCHEDULE 3 A. Terms for On-lending by Borrower to NDB 1. Interest rate 9% per annum 2. Amortization period 13 years, inclusive of 4 years of grace 3. Foreign exchange risk to be borne by Borrower B. Terms for Refinancing Sub-loans by NDB 1. Interest rates : 10% per annum for Sub-loans up to Rs 100,000; 11% per annum for Sub-loans exceeding Rs 100,000 and up to Rs 500,000; 12% per annum for Sub-loans exceeding Rs 500,000 and up to Rs 1,000,000 2. Amortization period maximum of 10 years, inclusive of 2 years of grace 3. Amount of refinancing up to 80% of amount of each Sub-loan C. Terms of Sub-loans 1. Interest rate 15% per annum 2. Amortization period 3 to 10 years including a maximum of 2 years of grace. 3. Maximum sub-project size Rs 2,000,000 in land, build- ings, plant, machinery and equipment 4. Maximum Sub-loan size Rs 1,000,000 in land, build- ings, plant, equipment and permanent working capital - 18 - 5. Minimum equity contribution 20% of Sub-project amount The terms for On-lending, Refinancing and Sub-loans above set forth may be amended from time to time as mutually agreed between the Borrower and the Association.