Conformed Copy - L3788 - Shenyang Industrial Reform Project - Project Agreement 3

Page 1 CONFORMED COPY LOAN NUMBER 3788 CHA SMTCL Project Agreement (Shenyang Industrial Reform Project) between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT and SHENYANG MACHINE TOOL COMPANY LIMITED Dated January 11, 1995 LOAN NUMBER 3788 CHA SMTCL PROJECT AGREEMENT AGREEMENT, dated January 11, 1995, between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (the Bank) and SHENYANG MACHINE TOOL COMPANY LIMITED (SMTCL). WHEREAS by the Loan Agreement of even date herewith between People's Republic of China (the Borrower) and the Bank, the Bank has agreed to make available to the Borrower an amount in various currencies equivalent to one hundred seventy-five million dollars ($175,000,000), on the terms and conditions set forth in the Loan Agreement, but only on condition that SMTCL agree to undertake such obligations toward the Bank as are set forth in this Agreement, that Shenyang agree to undertake such obligations toward the Bank as are set forth in the Shenyang Project Agreement and that the Financial Intermediaries agree to undertake such obligations toward the Bank as are set forth in the Financial Intermediaries Project Agreement; WHEREAS SMTCL, in consideration of the Bank's entering into the Loan 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 Page 2 in the Loan Agreement and the General Conditions (as so defined) have the respective meanings therein set forth. ARTICLE II Execution of the Project Section 2.01. (a) SMTCL declares its commitment to the objectives of the Project as set forth in Schedule 1 to the Loan Agreement, and, to this end, shall carry out Part B.1 of the Project with due diligence and efficiency and in conformity with appropriate administrative, financial, engineering and industrial practices, and shall provide, or cause to be provided, promptly as needed, the funds, facilities, services and other resources required for Part B.1 of the Project. (b) Without limitation upon the provisions of paragraph (a) of this Section and except as the Bank and SMTCL shall otherwise agree, SMTCL shall carry out Part B.1 of the Project in accordance with the Implementation Program set forth in Schedule 2 to this Agreement. Section 2.02. Except as the Bank shall otherwise agree, procurement of the goods technical licenses and consultants' services required for Part B.1 of the Project and to be financed out of the proceeds of the Loan shall be governed by the provisions of Schedule 1 to this Agreement. Section 2.03. SMTCL shall carry out the obligations set forth in Sections 9.04, 9.05, 9.06, 9.07, 9.08 and 9.09 of the General Conditions (relating to insurance, use of goods and services, plans and schedules, records and reports, maintenance and land acquisition, respectively) in respect of the SMTCL Project Agreement and Part B.1 of the Project. Section 2.04. SMTCL shall duly perform all its obligations under the SMTCL Subsidiary Loan Agreement. Except as the Bank shall otherwise agree, SMTCL shall not take nor concur in any action which would have the effect of amending, abrogating, assigning or waiving the SMTCL Subsidiary Loan Agreement or any provision thereof. Section 2.05. (a) SMTCL shall, at the request of the Bank, exchange views with the Bank with regard to the progress of Part B.1 of the Project, the performance of its obligations under this Agreement and the SMTCL Subsidiary Loan Agreement and other matters relating to the purposes of the Loan. (b) SMTCL shall promptly inform the Bank of any condition which interferes or threatens to interfere with the progress of Part B.1 of the Project, the accomplishment of the purposes of Loan, or the performance by SMTCL of its obligations under this Agreement and under the SMTCL Subsidiary Loan Agreement. ARTICLE III Management and Operations of SMTCL Section 3.01. SMTCL shall carry on its operations and conduct its affairs in accordance with sound administrative, financial and industrial practices under the supervision of qualified and experienced management assisted by competent staff in adequate numbers. Section 3.02. SMTCL 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, all in accordance with sound engineering, financial and industrial practices. Section 3.03. SMTCL shall take out and maintain with responsible insurers, or make other provision satisfactory to the Bank for, insurance against such risks and in such amounts as shall be consistent with appropriate practice. ARTICLE IV Financial Covenants Page 3 Section 4.01. (a) SMTCL shall maintain records and accounts adequate to reflect in accordance with sound accounting practices its operations and financial condition. (b) SMTCL shall: (i) have its records, 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 Bank; (ii) furnish to 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 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 Bank shall have reasonably requested; and (iii) furnish to the Bank such other information concerning said records, accounts and financial statements as well as the audit thereof, as the Bank shall from time to time reasonably request. Section 4.02. (a) Except as the Bank shall otherwise agree, SMTCL shall not: (i) incur any debt unless a reasonable forecast of the revenues and expenditures of SMTCL shows that the estimated net revenues of SMTCL for each fiscal year during the term of the debt to be incurred shall be at least 1.5 times the estimated debt service requirements of SMTCL in such year on all debt of SMTCL including the debt to be incurred; or (ii) declare any dividend or make any other distribution with respect to its share capital, unless such a forecast shows that after such dividend has been paid or other distribution has been made, the estimated net revenues for that fiscal year shall be at least 1.5 times such estimated debt service requirements. (b) Except as the Bank shall otherwise agree, SMTCL shall maintain a ratio of current assets to current liabilities of not less than 1.3 commencing in the fiscal year ending December 31, 2002. (c) Before April 30 in each of its fiscal years, SMTCL shall, on the basis of forecasts prepared by SMTCL and satisfactory to the Bank, review whether it would meet the requirements set forth in paragraphs (a) and (b) in respect of such year and the next following fiscal year and shall furnish to the Bank the results of such review upon its completion. (d) If any such review shows that SMTCL would not meet the requirements set forth in paragraphs (a) and (b) for SMTCL's fiscal years covered by such review, SMTCL shall promptly take all necessary measures (including, without limitation, adjustments of the structure or levels of its prices) in order to meet such requirements. (e) For the purposes of this Section: (i) The term "debt" means any indebtedness of SMTCL maturing by its terms 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 or other instrument providing for such debt or for the modification of its terms of payment on the date of such contract, agreement or instrument; and (B) under a guarantee agreement, on the date the agreement providing for such guarantee has been entered into. (iii) The term "net revenues" means the difference between: (A) the sum of revenues from all sources related to operations and net non-operating income; and (B) the sum of all expenses related to operations including Page 4 administration, adequate maintenance, taxes and payments in lieu of taxes, but excluding provision for depreciation, other non-cash operating charges and interest and other charges on debt. (iv) 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 payments in lieu of taxes, incurred in the generation of revenues in (A) above. (v) 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. (vi) The term "reasonable forecast" means a forecast prepared by SMTCL not earlier than twelve months prior to the incurrence of the debt in question, which both the Bank and SMTCL accept as reasonable and as to which the Bank has notified SMTCL of its acceptability, provided that no event has occurred since such notification which has, or may reasonably be expected in the future to have, a material adverse effect on the financial condition or future operating results of SMTCL. (vii) The term "current assets" means cash, all assets which could in the ordinary course of business be converted into cash within twelve months, including accounts receivable, marketable securities, inventories and pre-paid expenses properly chargeable to operating expenses within the next fiscal year. (viii) 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. (ix) Whenever for the purposes of this Section it shall be necessary to value, in terms of the currency of the Borrower, debt payable in another 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, obtainable 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 Bank. Section 4.03. (a) SMTCL shall carry out a program satisfactory to the Bank, to reduce its inventory so that its inventory levels satisfactory to the Bank shall not exceed: (i) 140 inventory days for its fiscal year ending December 31, 1996 and each of its fiscal years thereafter through its fiscal year ending December 31, 1999; and (ii) 120 inventory days for its fiscal year ending December 31, 2000, and each of its fiscal years thereafter. (b) For the purposes of this Section: (i) the number of inventory days shall be calculated by dividing the total cost of SMTCL's inventory as at December 31 of the fiscal year by the sales revenues per day for that fiscal year; and (ii) "sales revenues per day" means the total sales revenues for the fiscal year divided by 360 days. Section 4.04. SMTCL shall, by April 30 in each year, commencing April 30, 1995, through April 30, 2002, prepare and furnish to the Bank for review a rolling long-term financial plan (including projected income statements, sources and uses of funds and Page 5 balance sheets) for a period of no less than 5 years. 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 Loan Agreement becomes effective. Section 5.02. This Agreement and all obligations of the Bank and of SMTCL thereunder shall terminate on the date on which the Loan Agreement shall terminate in accordance with its terms, and the Bank shall promptly notify SMTCL thereof. Section 5.03. All the provisions of this Agreement shall continue in full force and effect notwithstanding any cancellation 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 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 Bank: International Bank for Reconstruction and Development 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable address: Telex: INTBAFRAD 248423 (RCA), Washington, D.C. 82987 (FTCC), 64145 (WUI) or 197688 (TRT) For SMTCL: Shenyang Machine Tool Company Limited No. 247, Xishuncheng Street, Shenhe District Shenyang 110011 People's Republic of China 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 SMTCL may be taken or executed by the Chairman of the Board of Directors or such other person or persons as such Chairman shall designate in writing, and SMTCL shall furnish to the Bank 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 Page 6 written. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT By /s/ Russell J. Cheetham Regional Vice President East Asia and Pacific SHENYANG MACHINE TOOL COMPANY LIMITED By /s/ Li Daoyu Authorized Representative SCHEDULE 1 Procurement and Consultants' Services Section I: Procurement of Goods Part A: International Competitive Bidding 1. Except as provided in Part C hereof, goods shall be procured under contracts awarded in accordance with procedures consistent with those set forth in Sections I and II of the "Guidelines for Procurement under IBRD Loans and IDA Credits" published by the Bank in May 1992 (the Guidelines). (a) For fixed-price contracts, the invitation to bid referred to in paragraph 2.13 of the Guidelines shall provide that, when contract award is delayed beyond the original bid validity period, the successful bidder's bid price will be increased for each week of delay by two predisclosed correction factors acceptable to the Bank, one to be applied to all foreign currency components and the other to the local currency component of the bid price. Such an increase shall not be taken into account in the bid evaluation. (b) In the procurement of goods in accordance with this Part A.1 SMTCL shall use the relevant standard bidding documents issued by the Bank, with such modifications thereto as the Bank shall have agreed to be necessary for the purposes of the Project. Where no relevant standard bidding documents have been issued by the Bank, SMTCL shall use bidding documents based on other internationally recognized standard forms agreed with the Bank. 2. To the extent practicable, contracts for goods shall be grouped into bid packages estimated to cost the equivalent of $200,000 or more. Part B: Preference for Domestic Manufacturers In the procurement of goods in accordance with the procedures described in Part A.1 hereof, goods manufactured in China may be granted a margin of preference in accordance with, and subject to, the provisions of paragraphs 2.55 and 2.56 of the Guidelines and paragraphs 1 through 4 of Appendix 2 thereto. Part C: Other Procurement Procedures Limited International Bidding 1. Goods (including technical licenses) which the Bank agrees are supplied through a limited number of sources and which are estimated to cost an amount not to exceed the equivalent of $30,300,000 in the aggregate, may be procured under contracts Page 7 awarded through limited international bidding procedures on the basis of evaluation and comparison of bids obtained from at least three qualified suppliers eligible under the Guidelines and in accordance with procedures set forth in Sections I and II of the Guidelines (excluding paragraphs 2.8, 2.9, 2.55, 2.56 thereof). Shopping 2. Goods estimated to cost the equivalent of less than $200,000 per contract, up to an aggregate amount equivalent to $3,100,000 may be procured under contracts awarded on the basis of comparison of price quotations obtained from at least three suppliers eligible under the Guidelines, in accordance with procedures acceptable to the Bank. Direct Contracting 3. Goods (including technical licenses) which the Bank agrees are of a proprietary nature may be awarded after direct negotiations with suppliers, in accordance with procedures acceptable to the Bank. Part D: Review by the Bank of Procurement Decisions 1. Review of invitations to bid and of proposed awards and final contracts: (a) With respect to (i) each contract to be awarded in accordance with the provisions of Part A.1 of this Section estimated to cost the equivalent of $1,000,000 or more, and (ii) each contract to be awarded in accordance with the provisions of Part C.1 of this Section, the procedures set forth in paragraphs 2 and 4 of Appendix 1 of the Guidelines shall apply. Where payments for such contract are to be made out of the Special Account, such procedures shall be modified to ensure that the two conformed copies of the contract required to be furnished to the Bank pursuant to said paragraph 2(d) shall be furnished to the Bank prior to the making of the first payment out of the Special Account in respect of such contract. (b) With respect to each contract not governed by the preceding paragraph, the procedures set forth in paragraphs 3 and 4 of Appendix 1 to the Guidelines shall apply. Where payments for such contract are to be made out of the Special Account, such procedures shall be modified to ensure that the two conformed copies of the contract together with the other information required to be furnished to the Bank pursuant to said paragraph 3 shall be furnished to the Bank as part of the evidence to be furnished pursuant to paragraph 4 of Schedule 4 to the Loan Agreement. 2. The figure of 15% is hereby specified for purposes of paragraph 4 of Appendix 1 to the Guidelines. Section II: Employment of Consultants 1. In order to assist SMTCL in carrying out Part B.1 of the Project, SMTCL shall employ consultants whose qualifications, experience and terms and conditions of employment shall be satisfactory to the Bank. Such consultants shall be selected in accordance with principles and procedures satisfactory to the Bank on the basis of the "Guidelines for the Use of Consultants by World Bank Borrowers and by The World Bank as Executing Agency" published by the Bank in August 1981 (the "Consultant Guidelines"). For complex, time-based assignments, SMTCL shall employ such consultants under contracts using the standard form of contract for consultants' services issued by the Bank, with such modifications as shall have been agreed by the Bank. Where no relevant standard contract documents have been issued by the Bank, SMTCL shall use other standard forms agreed with the Bank. 2. Notwithstanding the provisions of paragraph 1 of this Section, the provisions of the Consultant Guidelines requiring prior Bank review or approval of budgets, short lists, selection procedures, letters of invitation, proposals, evaluation reports and contracts, shall not apply to (a) contracts for the employment of consulting firms estimated to cost less than $100,000 equivalent each, or (b) contracts for the employment of individuals estimated to cost less than $50,000 equivalent each. However, said exceptions to prior Bank review shall not apply to (a) the terms of reference for such contracts, (b) single-source selection of consulting firms, (c) assignments of a critical nature, as reasonably determined by Page 8 the Bank, (d) amendments to contracts for the employment of consulting firms raising the contract value to $100,000 equivalent or above, or (e) amendments to contracts for the employment of individual consultants raising the contract value to $50,000 equivalent or above. SCHEDULE 2 Implementation Program 1. SMTCL shall carry out the SMTCL Management Restructuring Plan in a manner acceptable to the Bank. 2. SMTCL shall carry out the disposition of non-productive assets and reduction in workforce under Part B.1 (d) and (e) of the Project, respectively, each in accordance with a program satisfactory to the Bank. 3. SMTCL shall maintain its project implementation unit, to coordinate and manage overall implementation of the restructuring program, with competent staff in adequate numbers and with functions and responsibilities acceptable to the Bank. 4. SMTCL shall carry out the training under Part B.1 (f) of the Project in accordance with a training program satisfactory to the Bank.