Sri Lanka - Second Industrial Development Project : Credit 1692 - Project Agreement - 1 - Conformed

CREDIT NUMBER 1692 CE DFCC Project Agreement (Second Industrial Development Project) between INTERNATIONAL DEVELOPMENT ASSOCIATION and DEVELOPMENT FINANCE CORPORATION OF CEYLON Dated , 1986 CREDIT NUMBER 1692 CE DFCC PROJECT AGREEMENT AGREEMENT, dated , 1986, between INTERNATIONAL DEVELOPMENT SO ION hereinafter called the Association) and DEVELOPMENT FINANCE CORPORATION OF CEYLON (hereinafter called DFCC). WHEREAS (A) by the Development Credit Agreement of even date herewith between the Democratic Socialist Republic of Sri Lanka (hereinafter called the Borrower) and the Association, the Asso- ciation has agreed to make available to the Borrower an amount in various currencies equivalent to seventeen million four hundred thousand Special Drawing Rights (SDR 17,400,000), on the terms and conditions set forth in the Development Credit Agreement, but only on condition that DFCC agree to undertake such obligations toward the Association as are hereinafter set forth; (B) by a subsidiary loan agreement to be entered into between the Borrower and DFCC, part of the proceeds of the Credit provided for under the Development Credit Agreement will be made available to DFCC on the terms and conditions therein set forth; and WHEREAS DFCC, in consideration of the Association's entering into the Development Credit Agreement with the Borrower, has agreed to undertake the obligations hereinafter set forth; NOW THEREFORE the parties hereto hereby agree as follows: ARTICLE I Definitions Section 1.01. Unless the context shall otherwise require, the several terms defined in the Development Credit Agreement, the Preamble to this Agreement and the General Conditions (as so defined) have the respective meanings therein set forth. ARTICLE II Execution of the Project Section 2.01. DFCC 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 its part of -2- Parts A and B of the Project, with due diligence and efficiency and in conformity with appropriate administrative, financial and investment standards and practices, and in accordance with the DFCC Act, the DFCC Statement of Policy and the DFCC Strategy Statement. Section 2.02. Except as the Association shall otherwise agree, procurement of goods, works and services required for the Project and to be financed out of the proceeds of the Credit shall be governed by the provisions of Schedule 5 to the Development Credit Agreement. Section 2.03. (a) In accordance with and subject to the provisions of the Development Credit Agreement, DFCC shall submit Investment Projects to the Association for approval or for autho- rization for withdrawals to be made from the Credit Account. (b) (i) When submitting a Sub-loan (other than a free- limit Sub-loan) to the Association for approval, DFCC shall furnish to the Association an application, in form satisfactory to the Association, together with a description of the Invest- ment Enterprise and of the Investment Project to be financed thereunder (including a description of the expenditures for such Investment Project proposed to be financed by DFCC and an appraisal of the Investment Project as specified in sub- paragraph (ii) below) and the proposed terms and conditions of the Sub-loan including the schedule of amortization of the Sub-loan, and such other information as the Association shall reasonably request; and (ii) such appraisals will include an assessment of the environmental impact of the Investment Project, a calculation of the internal financial rate of return and an evaluation of the economic viability established in accordance with guidelines satisfactory to the Association. (c) Each request by DFCC for authorization to make with- drawals from the Credit Account in respect of a free-limit Sub-loan shall contain a summary description of the Investment Enterprise and the Investment Project (including a description of the expenditures proposed to be financed out of the proceeds of the Credit and the expected economic rate of return) and the terms and conditions of such free-limit Sub-loan, including the schedule of amortization therefor. (d) The amortization schedule applicable to each Investment ProjeCt shall provide for an appropriate period of grace and, -3- unless the Association and the Borrower shall otherwise agree: (i) shall not extend beyond 15 years (including the grace period) from the date of commitment by DFCC of such Investment Project or of authorization by the Association to make withdrawals from the Credit Account in respect of such Investment Project, whichever is later; and (ii) shall provide for approximately equal semi- annual, or more frequent, aggregate payments of principal and interest or approximately equal semi-annual, or more frequent, payments of principal. (e) Except as the Association shall otherwise agree, DFCC shall not submit an application for approval pursuant to the provisions of paragraph (b) of this Section or a request for authorization to withdraw from the Credit Account pursuant to the provisions of paragraph (c) of this Section, unless DFCC is in compliance with the eligibility provisions set forth in Schedule 2 of this Agreement. (f) Except as the Association and DFCC shall otherwise agree, DFCC shall submit applications for approval pursuant to the provisions of paragraph (b) of this Section and requests for authorizations to withdraw from the Credit Account pursuant to the provisions of paragraph (c) of this Section on or before March 31, 1990. Section 2.04. (a) DFCC undertakes that unless the Associa- tion shall otherwise agree, any Sub-loan or Investment will be made on terms whereby DFCC shall obtain, by written agreement or other appropriate legal means, rights adequate to protect the interests of the Association and of DFCC, including, inter alia, the terms and conditions and the rights set forth in Schedule 1 to this Agreement. (b) DFCC shall exercise its rights in relation to each Investment Project in such manner as to (i) protect the interests of the Association and of DFCC; (ii) comply with its obligations under this Agreement and the respective Subsidiary Loan Agree- ment; and (iii) achieve the purposes of the Project. Section 2.05. DFCC 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 schedules, records and reports, maintenance and land acquisition) in respect of the Project Agreement. -4- Section 2.06. DFCC shall duly perform all its obligations under the respective Subsidiary Loan Agreement. Except as the Association shall otherwise agree, DFCC shall not take or concur in any action which would have the effect of assigning, amending, abrogating or waiving the Subsidiary Loan Agreement or any provision thereof. Section 2.07. (a) DFCC shall, at the request of the Associa- tion, exchange views with the Association with regard to the progress of the Project, the performance of its obligations under this Agreement and under the respective Subsidiary Loan Agree- ment, and other matters relating to the purposes of the Credit. (b) DFCC shall furnish to the Association all such informa- tion as the Association shall reasonably request concerning the expenditure of the proceeds of the Sub-loans, its part of the Project, the Investment Enterprises, the Investment Projects and the administration, operations and financial condition of DFCC. (c) DFCC shall promptly inform the Association of any condition which interferes or threatens to interfere with the progress of the Project, the accomplishment of the purposes of the Credit, or the performance by DFCC of its obligations under this Agreement and under the Subsidiary Loan Agreement. Section 2.08. DFCC shall duly perform all its obligations in agreements under which funds have been lent or otherwise put at the disposal of DFCC by the Borrower or its agencies or others for relending, investment or management. DFCC shall promptly inform the Association of any action which would have the effect of assigning, or of amending, abrogating or waiving any material provision of, any such agreement. Section 2.09. DFCC shall cause each of its Subsidiaries (if any) to observe and perform the obligations of DFCC under this Agreement to the extent to which such obligations may be made applicable thereto as though such obligations were binding upon each of such Subsidiaries. ARTICLE III Management and Operations of DFCC Section 3.01. DFCC shall carry on its operations and conduct its affairs in accordance with a Statement of Policy and a -5- Strategy Statement satisfactory to the Association and sound administrative, financial and investment standards and practices under the supervision of qualified and experienced management assisted by competent staff in adequate numbers. Section 3.02. Except as the Association and DFCC shall otherwise agree, DFCC shall: (i) not sell, lease, transfer or otherwise dispose of any of its property or assets, except in the ordinary course of business; and (ii) take all action necessary to maintain its corporate existence and right to carry on opera- tions and to acquire, maintain and renew all rights, powers, privileges and franchises necessary or useful in the conduct of its business. Section 3.03. DFCC shall take out and maintain with respon- sible insurers, or make other provisions 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. DFCC shall maintain procedures, records and separate accounts adequate to monitor and record the progress of its part of the Project and of each Investment Project, and to reflect in accordance with consistently maintained appropriate accounting practices its operations and financial condition and shall enable the Association's representatives to examine such records. Section 4.02. (a) DFCC 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; (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 -6- 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 accounts, financial statements, records and expenditures, as well as the audit thereof, as the Association shall from time to time reasonably request. (b) For all expenditures with respect to which withdrawals from the Credit Account were made on the basis of statements of expenditure, DFCC shall: (i) maintain, in accordance with Section 4.01 of this Agreement, separate records and accounts reflect- ing such expenditures; (ii) retain, until one year after the Association has received the audit report for the fiscal year in which the last disbursement from the Credit Account was made, all records (contracts, orders, invoices, bills, receipts and other documents) evidencing such expenditures; (iii) enable the Association's representatives to examine such records; and (iv) ensure that such separate accounts are included in the annual audit referred to in paragraph (a) of this Section and that the report thereof contains, in respect of such separate accounts, a separate opinion by said auditors as to whether the pro- ceeds of the Credit withdrawn in respect of such expenditures were used for the purposes for which they were provided. Section 4.03. Except as the Association shall otherwise agree, DFCC shall: (a) conduct its operations and affairs in such manner as shall be necessary to maintain, at all times, its debt/equity ratio within the limit referred to in Section 4.04 of this Agree- ment; and -7- (b) if such ratio shall, for reasons beyond DFCC's control, be exceeded, promptly take all such reasonable action as shall be necessary or advisable to bring such ratio within such limit. Section 4.04. Except as the Association and DFCC shall otherwise agree, DFCC shall not incur or permit any of its Subsidiaries to incur any debt if, after the incurring of such debt, the consolidated debt of DFCC and all its Subsidiaries then incurred and outstanding would exceed seven times the consoli- dated capital and surplus of DFCC and all its Subsidiaries. For the purpose of this Section: (a) The tern "debt" means any debt incurred by DFCC or any Subsidiary maturing more than one year after the date on which it is originally incurred, including debt assumed or guaranteed by DFCC or by a Subsidiary. (b) Wherever reference is made in this Section to the incurring of debt, such reference shall include any modification of the terms of payment of such debt. Debt shall be deemed to be incurred: (i) under a loan contract or agreement, on the date and to the extent the loan is drawn down pursuant to such loan con- tract or agreement; and (ii) under a guarantee agreement, on the date the agreement providing for such guarantee has been entered into but only to the extent the guaranteed debt is outstanding. (c) Whenever in connection with this Section it shall be necessary to value in terms of Rupees debt payable in foreign currency, such valuation shall be made at the prevailing lawful. rate of exchange at which such foreign currency is, at the time ol such valuation, obtainable in Sri Lanka for the purposes of servicing such debt. (d) The term "consolidated debt of DFCC and all its Sub- sidiaries" means the total amount of debt of DFCC and all its Subsidiaries excluding: (i) debt owed by DFCC to any Subsidiary or by any Subsidiary to DFCC or to any other Subsidiary; and (ii) debt referred to in paragraph (e) (ii) and (iii) of this Section. (e) The term "consolidated capital and surplus of DFCC and all its Subsidiaries" means the aggregate of: (i) the total unimpaired paid-in capital, surplus and free reserves of DFCC and of all its Subsidiaries after excluding therefrom such amounts as shall represent equity interests of DFCC in any Subsidiary, or of - 8 - any such Subsidiary in DFCC or in any other Subsidiary; (ii) the amount of the loans and credits extended to DFCC by the Bank and the Association; and (iii) such amount of any other loan which the Association may determine to be included in the consolidated capital and surplus of DFCC. Section 4.05. Except as the Association and DFCC shall otherwise agree, DFCC shall not make any repayment in advance of maturity in respect of any of its borrowings (other than deposits) having an original term exceeding one year. Section 4.06. DFCC shall take such steps satisfactory to the Association as shall be necessary to protect itself against risk of loss resulting from changes in the rates of exchange between the various currencies (including Rupees) used in its borrowing and lending operations. 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 DFCC 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) a date twenty years after the date of this Agree- ment. (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 DFCC of this event. Section 5.03. All the provisions of this Agreement shall continue in full force and effect notwithstanding any cancella- tion or suspension under the General Conditions. 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 deiivered 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 440098 (ITT) Washington, D.C. 248423 (RCA) or 64145 (WUI) For DFCC: Development Finance Corporation of Ceylon P.O. Box 1397 Colombo Sri Lanka Cable Address: Telex: DELCEY 21681 DELCEY 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 DFCC, or by DFCC on behalf of the Borrower under the Development Credit Agreement, may be taken or executed by its General Manager or such other person or persons as DFCC - 10 - shall designate in writing, and DFCC shall furnish to the Asso- ciation sufficient evidence of the authority and the authenti- cated 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 collec- tively but one instrument. IN WITNESS WHEREOF, the parties hereto, acting through their representatives thereunto duly authorized, have caused this Agreement to be signed in their respective names in the District of Columbia, Unites States of America, as of the day and year first above written. INTERNATIONAL DEVELOPMENT ASSOCIATION By / Regional Vice President South Asia DEVELOPMENT FINANCE CORPORATION OF CEYLON By Authorized Representative - 11 - SCHEDULE 1 Terms and Conditions of Sub-loans 1. Terms and conditions specified in Schedule 3 to the Develop- ment Credit Agreement shall apply. 2. Except as the Association shall otherwise agree, DFCC shall obtain, inter alia, in respect of Sub-loans, the right to: (a) require the Investment Enterprise to carry out and operate the Investment Project with due diligence and efficiency and in accordance with sound technical, financial and managerial standards and to maintain adequate records; (b) require that: (i) the goods, works and services to be financed out of the proceeds of the Credit shall be purchased in accordance with provisions of Schedule 5 to the Development Credit Agreement; and (ii), such goods and services shall be used exclusively in the carrying out of the Investment Project; (c) inspect, by itself or jointly with representatives of the Association if the Association shall so request, such goods, works, plants and construction included in the Investment Pro- ject, the operation thereof, and any relevant records and docu- ments; (d) require that: (i) the Investment Enterprise shall take out and maintain with responsible insurers such insurance, against such risks and in such amounts, as shall be consistent with sound business practice; and (ii) without any limitation upon the foregoing, such insurance shall cover hazards incident to the acquisition, transportation and delivery of goods financed out of the proceeds of the Credit to the place of use or instal- lation, any indemnity thereunder to be made payable in a currency freely usable by the Investment Enterprise to replace or repair such goods; (e) obtain all such information as the Association or the Borrower shall reasonably request relating to the foregoing and to the administration, operations and financial condition of the Investment Enterprise and to the benefits to be derived from the Investment Project; and (f) suspend or terminate the right of the Investment Enter- prise to the use of the proceeds of the Credit upon failure by - 12 - such Investment Enterprise to perform its obligations under its contract with DFCC. 3. Commitments in any single industrial sub-sector shall not exceed 20% of total commitments made by DFCC under the Project. - 13 - SCHEDULE 2 Eligibility Conditions Except as the Association may otherwise agree, DFCC shall, in order to maintain its eligibility to gain ar.cess to the proceeds of the Credit, achieve: (a) a minimum cash collection* rate of 70% in **FY 1987 to participate initially, increasing to 75% in FY 1988 and thereafter; (b) return on average net worth of not less than 9%; (c) return on average total assets of not less than 1% in FY 1987, and thereafter increasing progressively to 2% by FY 1990; (d) debt service ratio of 1.1:1 for FY 1987 and 1.2:1 thereafter; and (e) debt equity ratio of 7:1. * Collection rates shall be calculated on a rolling quarterly basis with the rate computed on the basis of aggregate accounts due and aggregate amounts collected. ** FY means the fiscal year of DFCC for the period of April 1 to March 31 each year. INTERNATIONAL DEVELOPMENT ASSOCIATION CERTIFICATE I hereby certify that the foregoing is a true copy of the original in the archives of the International Development Association. FOR SECRETARY