Operation Number 758
PROJECT AGREEMENT
(RUSSIAN FEDERATION: KALININGRAD WATER
AND ENVIRONMENTAL SERVICES REHABILITATION PROJECT)
BETWEEN EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT
AND KALININGRAD MUNICIPAL WATER AND WASTE WATER SERVICES
ENTERPRISE "VODOKANAL" WITH THE RUSSIAN FEDERATION
AS A PARTY FOR SPECIFIED PURPOSES
(Kaliningrad, 4.VII.1999)
Agreement dated 4 July 1999 among:
(1) the European Bank for Reconstruction and Development (the
"Bank");
(2) the Russian Federation <*> (the "Borrower"); and
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<*> A party for the purposes of Section 5.01(b) of the Project
Agreement only.
(3) Kaliningrad Municipal Water and Waste Water Services
Enterprise "Vodokanal" (the "Project Entity").
Preamble
(A) Whereas by a loan agreement dated 4 July 1999 between the
Borrower and the Bank (the "Loan Agreement"), the Bank has agreed
to make available to the Borrower a loan (the "Loan") on the terms
and conditions set forth in the Loan Agreement, but only on
condition that the Project Entity agrees to undertake such
obligations toward the Bank and the Borrower as are set forth in
this Project Agreement;
(B) Whereas by the Subsidiary Loan Agreement between the
Borrower, the Project Entity, the City and the Region, the
proceeds of the Loan will be made available to the Project Entity
for the purposes of carrying out the Project; and
(C) Whereas the Project Entity, in consideration of the above,
has agreed to undertake the obligations set forth in this Project
Agreement.
Now, therefore, the parties hereby agree as follows:
Article I. STANDARD TERMS AND CONDITIONS;
DEFINITIONS; HEADINGS
Section 1.01
Incorporation of Standard Terms and Conditions
All the provisions of the Standard Terms and Conditions dated
February 1999 are hereby incorporated into and made applicable to
the Project Agreement with the same force and effect as if they
were fully set forth herein (said provisions being hereinafter
called the Standard Terms and Conditions).
Section 1.02
Definitions
Wherever used in the Project Agreement or the Schedule(s)
hereto, except where stated otherwise, the terms defined in the
Preamble to the Project Agreement have the respective meanings
ascribed therein, and the terms defined in Loan Agreement and in
the Standard Terms and Conditions have the respective meanings
ascribed therein.
Section 1.03
Headings
The headings of Articles and Sections, as well as the Table of
Contents, are inserted for convenience of reference only and shall
not be used to interpret the Project Agreement.
Article II. EXECUTION OF THE PROJECT
Section 2.01
Project Obligations
The Project Entity shall carry out the Project. For this
purpose, except as the Bank shall otherwise agree:
(a) all references in Section 4.02 of the Standard Terms and
Conditions to "the Borrower" shall be read as the Project Entity
and the responsibilities set forth therein shall be applied,
mutatis mutandis, to the Project Entity;
(b) the Project Entity shall take or cause to be taken all
additional action necessary to provide adequate funds for the
completion of the Project.
Section 2.02
Subsidiary Loan Agreement
The Project Entity shall duly perform all its obligations under
the Subsidiary Loan Agreement and any Co-Financing Agreements to
which the Project Entity is a party. Except as the Bank shall
otherwise agree, the Project Entity shall not take or concur in
any action that would have the effect of amending, abrogating,
assigning or waiving the Subsidiary Loan Agreement or any
provisions thereof, save for any amendments of a non-material
nature of which the Bank has been given prior written notice (and,
without prejudice to the generality of the foregoing, amendments
relating to Article III(a)(i) to (iii) of the Loan Agreement are
agreed to be material for this purpose).
Section 2.03
Procurement
For the purposes of Section 4.03 of the Standard Terms and
Conditions, the following provisions shall, except as the Bank
shall otherwise agree, govern procurement of goods, works and
services required for the Project and to be financed out of the
proceeds of the Loan:
(a) Goods, works and services (excluding consultants' services,
which are included within subsection (c) below) shall be procured
through open tendering.
(b) For purposes of subsection (a), above, the procedures for
open tendering, are set out in Chapter 3 of the EBRD Procurement
Policies and Rules.
(c) Consultants to be employed by the Project Entity to assist
in the carrying out the Project shall be selected in accordance
with the procedures set out in Chapter 5 of the EBRD Procurement
Rules.
(d) All contracts shall be subject to the review procedures set
out in Annex 1 to the EBRD Procurement Policies and Rules.
Section 2.04
Management Contractor
(a) In order to assist in the implementation of the Project,
the Project Entity shall, unless otherwise agreed with the Bank,
employ and use the Management Contractor to carry out conceptual
design of the Project, the procurement of goods, works and
services for the Project, and to assume responsibility for
contract administration, progress monitoring and cost control. The
qualifications, experience and terms of reference of the
Management Contractor shall be satisfactory to the Bank and in the
Project Entity's procurement of the Management Contractor, the
Project Entity shall follow the procurement rules of the relevant
funding agencies.
(b) The Project Entity shall provide, without charge, to any
consultants engaged to assist in matters relating to the Project
or the operations of the Project Entity, including the Management
Contractor and the Lenders Agent, all facilities and support
necessary for the carrying out of their functions, including
office space, telecommunication facilities and transportation, as
well as all documents, materials, and other information as may be
relevant to their work.
Section 2.05
Contract Administration and Monitoring Unit
In order to monitor performance of the Management Contractor
and administer procurement, the Project Entity shall establish and
at all times during execution of the Project operate a Contract
Administration and Monitoring Unit ("CAMU") with adequate
resources and suitably qualified personnel, under terms of
reference acceptable to the Bank.
Section 2.06
Corporate Development Plan and Corporate Partner
Unless the Bank shall otherwise agree, the Project Entity
shall:
(a) not later than 12 months after the date of the Project
Agreement enter into an agreement in form and substance
satisfactory to the Bank with a corporate partner acceptable to
the Bank and the Borrower, appointing such corporate partner to
assist the Project Entity in reviewing the Project Entity's
activities and developing and implementing the Corporate
Development Plan;
(b) not later than 6 months after the date of the effectiveness
of the agreement with the Corporate Partner referred to in Section
2.06(a) of the Project Agreement and with the assistance of the
Corporate Partner, adopt and thereafter implement a corporate
development plan which will integrate the key development
activities necessary for transforming the Project Entity into a
cost effective and competitive utility company, which shall be in
form and substance satisfactory to the Bank and which shall
include targets in respect of, amongst other things, the
following:
(i) autonomous: the strengthening of the ability of the Project
Entity to function as an autonomous and financially accountable
legal entity;
(ii) budget control: the Project Entity to establish an
accounting and management information system enabling it to
exercise appropriate budget control;
(iii) tariff collection rate: the Project Entity to increase
the tariff collection rate in accordance with Section 3.03(e) of
the Project Agreement;
(iv) cash collection rate: the Project Entity to ensure that
the cash collection rate is in accordance with Section 3.03(f) of
the Project Agreement;
(v) account receivables: the Project Entity to reduce account
receivables;
(vi) efficiency: the Project Entity to improve operational and
financial efficiency; and
(vii) tariffs - general: the Project Entity to work with the
City and the Region as necessary to ensure a tariff system for
water and waste water services based on the principle of full cost
recovery for all consumer categories is in place by the start of
the year 2003 as provided in the Presidential Decree on Russian
Housing Reform (No. 425 of 28 April 1997).
Section 2.07
Environmental Covenants
Without limiting the generality of Sections 4.02(a),
4.04(a)(iii), and 5.02(c)(iii) of the Standard Terms and
Conditions, the Project Entity shall:
(a) Environment - general: carry out the Project in accordance
with the environmental regulations and standards in effect from
time to time in the jurisdiction in which the Project is located;
(b) Environment - first year: develop within the period of one
year from the signing of the Project Agreement, a programme to
achieve compliance with Russian, HELCOM and European Union
environmental standards, with details and timeframe to be agreed
with the Bank, and implement such programme in accordance with
such timeframe; and
(c) Sludge Disposal: develop and agree with the Bank a
programme to address the issue of sludge disposal.
Section 2.08
Reporting Frequency and Submission Requirements
(a) Annual environmental report: As soon as available but, in
any event, within 60 days after the end of each FY, the Project
Entity shall furnish to the Bank a report, in form and scope
satisfactory to the Bank, on environmental, health and safety
issues arising in relation to the Project during such FY,
including:
(i) the status of compliance with the Environmental Standards,
including an update on permit status and any incidents of non-
compliance, fines, results of inspection reports, and remedial
action relating thereto;
(ii) copies of significant information on environmental matters
submitted by the Project Entity to the environmental regulatory
authorities; and
(iii) a summary of the health and safety records, including
accident rate and any related initiatives implemented or planned
during the reporting period.
(b) Incident reporting: Immediately upon the occurrence of any
incident or accident, relating to the Project Entity or the
Project, likely to have a material adverse effect on the
environment, health or safety, the Project Entity shall give the
Bank notice thereof by facsimile transmission or telex specifying
the nature of such incident or accident and any steps the Project
Entity is taking to remedy the same. Without limiting the
generality of the foregoing, an incident or accident is likely to
have a material adverse effect on the environment, health or
safety if:
(i) any applicable law requires notification of such incident
or accident to any governmental authority;
(ii) such incident or accident involves fatality or multiple
serious injuries requiring hospitalisation; or
(iii) has become public knowledge whether through media
coverage or otherwise.
(c) Quarterly reports: The periodic Project reports referred to
in Section 4.04(a)(iv) of the Standard Terms and Conditions shall
be submitted by the Project Entity quarterly, within thirty (30)
days after the end of the period being reported on, until the
Project has been completed. Such reports shall include the
following specific features:
(i) the following general information:
(1) the physical progress accomplished in the
implementation of the Project to the date of report and during
the reporting period;
(2) actual or expected difficulties or delays in the
implementation of the Project and their effect on the
implementation schedule, and the actual steps taken or planned
to overcome the difficulties and avoid delays;
(3) expected changes in the completion date of the
Project;
(4) key personnel changes in the staff of the Project
Entity, the CAMU and the Manager Contractor;
(5) matters that may affect the Project cost; and
(6) any development or activity likely to affect the
economic viability of any part of the Project;
(ii) financial statements showing details of the expenditures
incurred under each part of the Project and the drawdowns from the
Loan, together with a statement showing:
(1) original cost estimates;
(2) revised cost estimates, if any, with reasons for
changes;
(3) original estimated expenditures to date;
(4) reasons for variations of (3) above from actual
expenditures; and
(5) estimated expenditure for remaining quarters of the
year;
(iii) a brief statement of the status of compliance with each
of the covenants of the Project Agreement.
(d) Semi-annual reports: the Project Entity shall submit semi-
annual reports on implementation of the Corporate Development
Plan. Such reports shall be submitted within 30 days after the end
of the 6 month period being reported on and shall include
information on the targets listed at (i) to (vii) of Section
2.06(b) of the Project Agreement.
Article III. FINANCIAL AND OPERATIONAL COVENANTS
Section 3.01
Financial Records and Reports
(a) The Project Entity shall maintain procedures, records and
accounts adequate to reflect in accordance with internationally
accepted accounting standards the operations and financial
condition of the Project Entity and its subsidiaries, if any, and
adequate to monitor and record the progress of the Project
(including its costs and the benefits to be derived from it).
(b) The Project Entity shall:
(i) have its records, accounts and financial statements
(balance sheets, statements of income and expenses and related
statements), and the records, and financial statements of its
subsidiaries:
(A) for each FY until and including the FY in which the
Effective Date falls, the Project Entity shall ensure that
independent auditors acceptable to the Bank review all
relevant records, accounts and financial statements in order
to give documentary evidence, in form and substance
satisfactory to the Bank, as to whether there are, or are not,
arrears in excess of 60 days on the balance sheet of the
Project Entity; and
(В) for each FY thereafter, audited in accordance with
internationally accepted auditing principles and standards
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 fiscal year, (A)
certified copies of its financial statements for such fiscal 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 (C) a statement of all financial transactions
between the Project Entity and each of its subsidiaries and
affiliates; and
(iii) furnish to the Bank such other information concerning
such records, accounts and financial statements as well as the
audit thereof, as the Bank shall from time to time reasonably
request.
Section 3.02
Negative Financial Covenants
(a) The Project Entity shall not, except as the Bank and the
Borrower shall otherwise agree, take any one of the following
actions, other than in the ordinary course of business, and shall
provide to the Bank all such information thereon as the Bank shall
reasonably request:
(i) enter into any agreement or arrangement to guarantee or in
any way or under any condition to become obligated for all or any
part of any financial or other obligation of another person,
including any subsidiary or affiliate;
(ii) enter into any transaction with any person except in the
ordinary course of business, on ordinary commercial terms, and on
the basis of arm's length arrangements, or establish any sole and
exclusive purchasing or sales agency, or enter into any
transaction whereby the Project Entity might pay more than the
ordinary commercial price for any purchase or might receive less
than the full ex-works commercial price (subject to normal trade
discounts) for its products;
(iii) enter into any partnership, profit-sharing or royalty
agreement, or similar arrangement whereby the Project Entity's
income or profits are, or might be, shared with any other person;
(iv) sell, transfer, lease, or otherwise dispose of all or a
substantial part of its assets (whether in a single transaction or
in a series of transactions, related or otherwise) save for any
disposal of assets which are not essential or desirable for the
smooth operation of the primary business of the Project Entity and
which in aggregate do not exceed US dollar 500,000; or
(v) undertake or permit any merger, consolidation, or
reorganisation (save for any internal reorganisation that improves
efficiency and/or financial condition).
(b) The Project Entity shall not, unless it shall have informed
the Bank at least thirty (30) days in advance, take any one of the
following actions other than in the ordinary course of business,
and shall provide to the Bank all such information thereon as they
shall reasonably request:
(i) enter into any management contract or similar arrangement
whereby its business or operations are managed by any other
person, including any-subsidiary or affiliate; or
(ii) form any subsidiary, or make or permit to exist loans or
advances to, or deposits (except deposits with commercial banks in
the ordinary course of business) with other persons or investments
in any person, including any subsidiary or affiliate; provided,
however, that the Project Entity may invest in investment grade
short-term marketable securities acquired solely to make use of
its unutilised resources.
Section 3.03
Other Financial Covenants
Without limiting the generality of Section 3.02 of the Project
Agreement, the Project Entity shall:
(a) generate funds: generate sufficient funds to cover:
(i) the Project Entity operating and maintenance costs;
(ii) the Project Entity's debt requirements; and
(iii) after the Last Availability Date, the capital
expenditures necessary to maintain and improve the level of water
and waste water services in Kaliningrad, taking into account funds
provided by the City and the Region.
(b) Debt Service Coverage Ratio: from the beginning of year
2002 onwards maintain a Debt Service Coverage Ratio of no less
than 1.2, Debt Service Coverage Ratio being Free Cash Flow/Debt
Service <*>.
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<*> Free cash flow is defined as annual EBDIT [Earnings plus
depreciation, +/- non-cash expense/amortisation] plus/minus the
change in working capital minus agreed on capital expenditure:
divided bv (ii) annual debt service [interest paid plus on
amortisation of principal on all debt].
(c) Debt Service Reserve Account: establish and maintain until
the Loan is fully repaid a debt service reserve account at a bank
acceptable to the Bank and the Borrower and:
(i) from the date 6 months before the first repayment date in
respect of the Loan pursuant to Section 2.02(d) of the Loan
Agreement, each month on or before the 15th day of the month pay
into the Debt Service Reserve Account an amount which corresponds
to on sixth (1/6) of the debt service to the Borrower under the
Subsidiary Loan Agreement due on the next Interest Payment Date,
unless otherwise authorised by the Bank and the Borrower; and
(ii) use the sums on the account only for debt service under
the Subsidiary Loan Agreement, unless otherwise authorised by the
Bank and the Borrower; and
(d) current liabilities: discharge its current liabilities as
and when due or within 60 days of them falling due.
(e) tariff collection rate: Unless the Bank has given its prior
written consent otherwise, the Project Entity shall increase the
average monthly tariff collection rate over a FY to not less than
70 percent by the end of the 2000 FY, not less than 73 percent by
the end of the 2001 FY, not less than 75 percent by the end of the
2002 FY, and not less than 80 percent by the end of any subsequent
FY;
(f) cash collection rate: Unless the Bank has given its prior
written consent otherwise, the Project Entity shall ensure that
the average monthly cash collection rate over a FY is not less
than 45 percent by the end of the 2000 FY, not less than 50
percent by the end of the 2001 FY, not less than 55 percent by the
end of the 2002 FY and not less than 60 percent thereafter;
(g) tariffs - general: Unless the Bank has given its prior
written consent otherwise, the Project Entity shall work with the
City and the Region as necessary to ensure a tariff system for
water and waste water services based on the principle of full cost
recovery for all consumer categories is in place by the year 2003
as provided in the Presidential Decree on Russian Housing Reform
(No 425 of 28 April 1997).
Section 3.04
Negative Pledge
The Project Entity undertakes that, except as the Bank shall
otherwise agree:
(a) if the Project Entity creates any lien on any of its assets
as security for any debt, such lien will equally and rateably
secure the payment of the principal amount of, and interest and
other charges on, the Subsidiary Loan, and in the creation of any
such lien express provision will be made to that effect, at no
cost to the Bank; and
(b) if any statutory lien is created on any assets of the
Project Entity as security for any debt, the Project Entity shall
grant at no cost to the Bank an equivalent lien satisfactory to
the Bank to secure the payment of the principal amount of, and
interest and other charges on, the Subsidiary Loan;
(c) the foregoing undertakings shall not apply to:
(i) any lien created on property, at the time of purchase
thereof, solely as security for the payment of the purchase price
of that property or as security for the payment of debt incurred
for the purpose of financing the purchase of such property; and
(ii) any lien arising in the ordinary course of banking
transactions and securing a debt maturing not more than one year
after its date.
Section 3.05
Conduct of Business and Operations
The Project Entity shall, except as the Bank shall otherwise
agree,
(a) conduct its business and operations (i) in accordance with
sound administrative, financial, engineering, and other relevant
standards and practices, (ii) with due regard to ecological and
environmental factors, and (iii) with due regard to all its
principal operating policies;
(b) promptly take all action within its powers to maintain its
legal existence, to carry on its operations, and to acquire,
maintain, and renew all rights, properties, powers, privileges,
and franchises that are necessary for the conduct of its business,
including the carrying out of the Project;
(c) promptly notify the Bank of any proposal to amend, suspend,
or repeal any provision of its Statutes and shall afford the Bank
an adequate opportunity to comment on such proposal prior to
taking any action thereon;
(d) take out and maintain with responsible insurers, or make
other provisions satisfactory to the Bank in respect of, insurance
of its property against such risks and in such amounts as shall be
consistent with appropriate practice in the Russian Federation;
(e) at all times operate and maintain its plant, facilities,
equipment, and other property in good working order and promptly
as needed, make all necessary repairs and renewals thereof, all in
accordance with sound business and financial practice;
(f) enter into a service agreement with the City on or before
the date 6 months after the effectiveness of the agreement with
the Corporate Partner referred to in Section 2.06(a) of the
Project Agreement and take full operational responsibility for the
water supply and waste water services in the Kaliningrad service
area under such agreement;
(g) implement the Project essentially as described in Schedule
1 to the Loan Agreement; and
(h) ensure that the key management positions in the Project
Entity are at all times staffed by appropriately qualified and
experienced individuals.
Article IV. EFFECTIVE DATE; TERMINATION;
CANCELLATION AND SUSPENSION
Section 4.01
Effective Date
The Project Agreement shall come into force and effect on the
date upon which the Loan Agreement becomes effective.
Section 4.02
Termination
The Project Agreement and all obligations of the Bank, the
Borrower and the Project Entity hereunder shall terminate on the
date on which the Loan Agreement shall terminate in accordance
with its terms, and the Bank shall promptly notify the Project
Entity and the Borrower thereof.
Section 4.03
Cancellation; Suspension
All the provisions of this Agreement shall continue in full
force and effect notwithstanding any cancellation or suspension
under Article IV of the Loan Agreement.
Article V. MISCELLANEOUS
Section 5.01
Notices
(a) The following addresses are specified for the purposes of
Section 10.01 of the Standard Terms and Conditions:
For the Project Entity:
Kaliningrad Municipal Water and Waste Water Services Enterprise
"Vodokanal"
Attention: The Director General of the Project Entity
Komsomolskaya Street 12
Kaliningrad, 136000
Russian Federation
Telephone: 007 0112 21 47 94
Telefax: 007 0112 21 92 18
For the Bank:
European Bank for Reconstruction and Development
Attention: Operation Administration Unit
One Exchange Square
London EC2A 2JN
England
Telephone: (44-71) 338 6000
Telefax: (44-71) 338 6100
Telex: 881 2161
(b) The Bank and the Project Entity agree that each notice or
request that they send to each other in accordance with Section
10.01 of the Standard Terms and Conditions shall be copied to the
Borrower at the Borrower's address specified in the Loan
Agreement, or at any other address as the Borrower shall have
specified in writing to the party giving the notice or making the
request. Except as otherwise provided in the EBRD Disbursement
Handbook (for Drawdown applications and related matters), such
delivery may be made by hand, mail, telex or facsimile
transmission. Deliveries made by telex or facsimile transmission
shall also be confirmed by mail.
In witness whereof the parties hereto, acting through their
duly authorised representatives, have caused the Loan Agreement to
be signed in six copies and delivered at London, England as of the
day and year first above written.
(Follow the signatures)
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