Page 1 CONFORMED COPY GRANT NUMBER H135 ET Development Grant Agreement (Second Poverty Reduction Support Operation) between FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA and INTERNATIONAL DEVELOPMENT ASSOCIATION Dated December 17, 2004 Page 2 GRANT NUMBER H135 ET DEVELOPMENT GRANT AGREEMENT AGREEMENT, dated December 17, 2004, between FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA (the Recipient) and INTERNATIONAL DEVELOPMENT ASSOCIATION (the Association). WHEREAS (A) the Association has received a letter dated October 28, 2004, (the Letter of Development Policy) from the Recipient describing therein a program of actions, objectives and policies designed to promote growth and achieve sustainable reductions in poverty in its territory by enhancing rapid and equitable economic growth, through rural and private sector development, while maintaining macroeconomic stability and strengthening public sector management and governance, including in the context of decentralization (hereinafter called the Pr ogram), declaring the Recipient’s commitment to the execution of the Program, and requesting assistance from the Association in support of the Program during the execution thereof; (B) the Recipient has carried out the measures and taken the actions described in Schedule 2 to this Agreement to the satisfaction of the Association and has maintained a macroeconomic policy framework satisfactory to the Association; and (C) on the basis, inter alia , of the foregoing, the Association has decided, in support of the Program, to provide such assistance to the Recipient by making the Grant in a single tranche as hereinafter provided; NOW THEREFORE the parties hereto hereby agree as follows: ARTICLE I General Conditions; Definitions Section 1.01. The “General Conditions Applicable to Development Credit Agreements” of the Association, dated January 1, 1985 (as amended through May 1, 2004), with the modifications set forth in Schedule 3 to this Agreement (the General Conditions), constitute an integral part of this Agreement. Section 1.02. Unless the context otherwise requires, the several terms defined in the General Conditions and in the Preamble to this Agreement have the respective meanings therein set forth and the following additional terms have the following meanings: Page 3 2 - - (a) “Fiscal Year” and “FY” mean the Recipient’s fiscal year beginning July 8 and ending July 7 of the following calendar year; (b) “MEFF” means Macroeconomic and Fiscal Framework, a medium-term financing plan developed by the Recipient to achieve an integrated planning and budget system in Ethiopia; (c) “MoFED” means either the Recipient’s Ministry of Finance and Economic Development; (d) “PIP” means the Recipient’s Public Investment Program; (e) “PEP” means the Recipient’s Public Expenditure Program; (f) “Proclamation, Regulations, Directives, and Circulars” mean various laws of the Recipient adopted respectively, by the Recipient’s Parliament, Council of Ministers, Ministries, Public Agencies and Regions; and (g) “Region and Woreda ” mean either a specific administrative area within the Recipient’s territory as defined in the Recipient’s Constitution or different local government levels within the Recipient’s territory established and operating pursuant to the relevant Regional Constitutions. ARTICLE II The Grant Section 2.01. The Association agrees to make available to the Recipient, on terms and conditions set forth or referred to in the Development Grant Agreement an amount in various currencies equivalent to eighty eight million six hundred thousand Special Drawing Rights (SDR 88,600,000) (the Grant). Section 2.02. (a) Subject to the provisions of paragraphs (b) and (c) of this Section, the Recipient shall be entitled to withdraw the proceeds of the Grant from the Grant Account in support of the Program. (b) Except as the Association may otherwise agree: (i) all withdrawals from the Grant Account shall be deposited by the Association into an account designated by the Recipient and acceptable to the Association; and (ii) the Recipient shall ensure that Page 4 3 - - upon each deposit of an amount of the Grant into said account, an equivalent amount is credited to an account, acceptable to the Association, that finances budget expenditures. (c) The Recipient undertakes that the proceeds of the Grant shall not be used to finance expenditures excluded pursuant to the provisions of Schedule 1 to this Agreement. If the Association determines at any time that any amount of the Grant was used to make a payment for an expenditure so excluded, the Recipient shall, promptly upon notice from the Association, refund an amount equal to the amount of said payment to the Association. Amounts refunded to the Association upon such request shall be cancelled. Section 2.03. The Closing Date shall be December 31, 2005, or such later date as the Association shall establish. The Association shall promptly notify the Recipient of such later date. Section 2.04. (a) The Recipient shall pay to the Association a commitment charge on the principal amount of the Grant not withdrawn from time to time at a rate to be set by the Association as of June 30 of each year, but not to exceed the rate of one-half of one percent (1/2 of 1%) per annum. (b) The commitment charge shall accrue: (i) from the date sixty days after the date of this Agreement (the accrual date) to the respective dates on which amounts shall be withdrawn by the Recipient from the Grant Account or canceled; and (ii) at the rate set as of the June 30 immediately preceding the accrual date and at such other rates as may be set from time to time thereafter pursuant to paragraph (a) above. The rate set as of June 30 in each year shall be applied from the next date in that year specified in Section 2.06 of this Agreement. (c) The commitment charge shall be paid: (i) at such places as the Association shall reasonably request; (ii) without restrictions of any kind imposed by, or in the territory of, the Recipient; and (iii) in the currency specified in this Agreement for the purposes of Section 4.02 of the General Conditions or in such other eligible currency or currencies as may from time to time be designated or selected pursuant to the provisions of that Section. Section 2.05. Commitment charges shall be payable semiannually on May 15 and November 15 in each year. Section 2.06. The currency of the United States of America is hereby specified for the purposes of Section 4.02 of the General Conditions. Page 5 4 - - ARTICLE III Particular Covenants Section 3.01. (a) The Recipient undertakes to implement the Program with due diligence to ensure that actions and policies adopted under the Program are put into effect. (b) The Recipient and the Association shall from time to time, at the request of either party, exchange views on the progress achieved in carrying out the Program. (c) Prior to each such exchange of views, the Recipient shall furnish to the Association for its review and comment a report on the progress achieved in carrying out the Program, in such detail as the Association shall reasonably request. (d) Without limitation upon the provisions of paragraph (a) of this Section, the Recipient shall exchange views with the Association on any proposed action to be taken after the disbursement of the Grant which would have the effect of materially reversing the objectives of the Program, or any action taken under the Program, including any action specified in Schedule 2 to this Agreement. Section 3.02. Without limitation upon the provisions of Section 9.01(a) of the General Conditions, the Recipient shall promptly furnish to the Association such information relating to the provisions of Article II of this Agreement as the Association may, from time to time, reasonably request. ARTICLE IV Additional Event of Suspension Section 4.01. Pursuant to Section 6.02 (l) of the General Conditions, the following additional event is specified, namely, that a situation has arisen which shall make it improbable that the Program, or a significant part thereof, will be carried out. ARTICLE V Effective Date; Termination Section 5.01. The date ninety (90) days after the date of this Agreement is hereby specified for the purposes of Section 12.04 of the General Conditions. Page 6 5 - - ARTICLE VI Representative of the Recipient; Addresses Section 6.01. The Minister of Finance and Economic Development of the Recipient is designated as the representative of the Recipient for the purposes of Section 11.03 of the General Conditions. Section 6.02. The following addresses are specified for the purposes of Section 11.01 of the General Conditions: For the Recipient: The Minister of Finance and Economic Development Ministry of Finance and Economic Development P.O. Box 1905 Addis Ababa Federal Democratic Republic of Ethiopia Telex: Facsimile: 21147 251-1-551355 For the Association: International Development Association 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable address: Telex: Facsimile: INDEVAS 248423 (MCI) or (202) 477-6391 Washington, D.C. 64145 (MCI) Page 7 6 - - 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 written. FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA By /s/ Ato Kassahun Ayele Authorized Representative INTERNATIONAL DEVELOPMENT ASSOCIATION By /s/ Ishac Diwan Authorized Representative Page 8 7 - - SCHEDULE 1 Excluded Expenditures For purposes of Section 2.02 (c) of this Agreement, the proceeds of the Grant shall not be used to finance any of the following expenditures: 1. expenditures for goods or services supplied under a contract which any national or international financing institution or agency other than the Bank or the Association shall have financed or agreed to finance, or which the Bank or the Association shall have financed or agreed to finance under another grant, credit or a loan; and 2. expenditures for goods included in the following groups or subgroups of the Standard International Trade Classification, Revision 3 (SITC, Rev.3), published by the United Nations in Statistical Papers, Series M, No. 34/Rev.3 (1986) (the SITC), or any successor groups or subgroups under future revisions to the SITC, as designated by the Association by notice to the Recipient: Group Subgroup Description of Items 112 - Alcoholic beverages 121 - Tobacco, unmanu-factured, tobacco refuse 122 - Tobacco, manufactured (whether or not containing tobacco substitutes) 525 - Radioactive and associated materials 667 - Pearls, precious and semiprecious stones, unworked or worked 718 718.7 Nuclear reactors, and parts thereof; fuel elements (cartridges), non-irradiated, for nuclear reactors 728 728.43 Tobacco processing machinery 897 897.3 Jewelry of gold, silver or platinum group metals (except watches and watch cases) and goldsmiths’ or silversmiths’ wares (including set gems) Page 9 8 - - Group Subgroup Description of Items 971 - Gold, non-monetary (excluding gold ores and concentrates) 3. expenditures for goods intended for a military or paramilitary purpose or for luxury consumption; 4. expenditures for environmentally hazardous goods (for purposes of this paragraph the term “environmentally hazardous goods” means goods, the manufacture, use or import of which is prohibited under the laws of the Recipient or international agreements to which the Recipient is a party; 5. expenditures on account of any payment to persons or entities, or any import of goods, if such payment or import is prohibited by a decision of the United Nations Security Council taken under Chapter VII of the Charter of the United Nations; and 6. expenditures under a contract in respect of which the Association determines that corrupt, fraudulent, collusive or coercive practices were engaged in by representatives of the Recipient or of a beneficiary of the Grant during the procurement or execution of such contract, without the Recipient having taken timely and appropriate action satisfactory to the Association to remedy the situation. Page 10 9 - - SCHEDULE 2 Actions Referred to in Recital (B) of the Preamble to this Agreement (a) The Recipient has in accordance with the provisions of paragraph 26 of the Letter of Development Policy, finalized a privatization action plan and commenced implementation of measures for accelerating the privatization program; (b) the Recipient has adopted the revised telecommunications policy to allow for partial liberalization of the telecommunications sector, and has provided evidence satisfactory to the Association, in accordance with the provisions of paragraph 30 of the Letter of Development Policy; (c) the Recipient has reviewed the micro and rural finance strategy and developed an action plan to improve access to micro and rural finance, in a manner satisfactory to the Association, and consistent with the provisions of paragraph 32 of the Letter of Development Policy; (d) the Recipient has defined institutional arrangements, implementation modalities and monitoring mechanisms for a system of multi-annual productive safety nets and commenced implementation, in a manner satisfactory to the Association, and consistent with the provisions of paragraph 26 of the Letter of Development Policy; (e) in accordance with paragraph 33 of its Letter of Development Policy, the Recipient has furnished to the Association evidence, in form and substance satisfactory to the Association, of the validation and adoption by all Regions of the Federal design options and guidelines for primary school construction with lower unit costs and community participation; (f) in accordance with paragraph 21 of its Letter of Development Policy, the Recipient has furnished to the Association evidence, satisfactory to the Association, of issuance by MoFED of fiscal decentralization strategy for municipalities and Woredas, including municipal financial management regulations adopted and passed by four Regions; (g) in accordance with paragraph 22 of its Letter of Development Policy, the Recipient has furnished to the Association evidence, in form and substance satisfactory to the Association, of issuance of a directive on strategic planning management, consistent with the MEFF, PIP, PEP and the annual budgeting cycle; Page 11 10 - - (h) the Recipient has furnished to the Association evidence, satisfactory to the Association, of: (i) the revision of the urban land lease regulation adopted in the city of Addis Ababa; (ii) adoption of a directive for the management and regularization of informal settlements; and (iii) commencement of implementation of the regularization process, all consistent with the provisions of paragraph 31 of the Letter of Development Policy; (i) in accordance with paragraph 24 of its Letter of Development Policy, the Recipient has furnished to the Association evidence, in form and substance satisfactory to the Association of clearance by the Cabinet and submission to its parliament of the draft Procurement Proclamation; and (j) in accordance with paragraph 23 of its Letter of Development Policy, the Recipient has furnished to the Association evidence, in form and substance satisfactory to the Association of the reduction of the audits backlog for consolidated Federal accounts to one year, including closing the accounts and submission of such accounts to the Auditor General. Page 12 11 - - SCHEDULE 3 Modifications to the General Conditions For the purpose of this Agreement, the provisions of the General Conditions are modified as follows: 1. Sections 3.02, 3.03, 3.04 (a), 3.04 (b), 3.05, 6.05, Article VII, are deleted in their entirety. 2. Wherever used in the General Conditions, the following terms are modified to read as follows: (a) The term “Borrower” is modified to read “Recipient”. (b) The term “Credit” is modified to read “Grant”. (c) The term “credit” is modified to read “grant”; except that where used in Sections 6.02 (a) (ii) and 6.02 (c) (i), as modified below, the term “credit” shall continue to read “credit”. (d) The term “Credit Account” is modified to read “Grant Account”. (e) The term “Development Credit Agreement” is modified to read “Development Grant Agreement”. 3. Section 1.01 is modified to read as follows: “Section 1.01. Application of General Conditions These General Conditions set forth the terms and conditions generally applicable to the Development Grant Agreement to the extent and subject to any modifications set forth in such agreement.” 4. Paragraph 3 of Section 2.01 is modified to read as follows: “3. “Recipient” means the party to the Development Grant Agreement to which the Grant is made.” Page 13 12 - - 5. Section 2.01, paragraph 12, is modified to read: “‘Project’ means the program, referred to in the Preamble to the Development Grant Agreement, in support of which the Grant is made.”; 6. Article III is modified as follows: (a) The heading of Article III is modified to read “Grant Account; Partial Payment”. (b) The words “The principal of, and service charges on, the Credit” in Section 3.05 are modified to read “All amounts required to be paid under the Development Grant Agreement”. 7. Article IV is modified as follows: (a) Section 4.02(a) is modified to read as follows: “Section 4.02. Currencies in which Payments are to be Made (a) The Recipient shall pay all amounts required to be paid by it under the Development Grant Agreement in the currency specified in such agreement or in such other eligible currency or currencies as may from time to time be designated or selected pursuant to paragraph (c) or (e) of this Section.” (b) Wherever used in Section 4.02(c) and (e) of the General Conditions, the words “principal and service charges” are modified to read “amounts”. (c) Section 4.03 is modified to read as follows: “Section 4.03. Amount of the Grant The amount of the Grant withdrawn from time to time shall be the equivalent in terms of SDR (determined as of the date or respective dates of withdrawal from the Grant Account) of the value of the currency or currencies so withdrawn.” (d) Section 4.06(b) is modified to read as follows: Page 14 13 - - “(b) All amounts which the Recipient shall be required to pay under the Development Grant Agreement shall be paid without restrictions of any kind imposed by, or in the territory of, the Recipient.” 8. Section 5.01 is modified to read: “The Recipient shall be entitled to withdraw the proceeds of the Grant from the Grant Account in accordance with the provisions of the Development Grant Agreement and of these General Conditions”; 9. The last sentence of Section 5.03 is deleted; 10. Section 6.02 is modified as follows: (a) The phrase “any other development credit agreement” in Section 6.02 (a) (ii) is modified to read: “any other development grant agreement or any development credit agreement or development financing agreement”. (b) The phrase “any development credit agreement” in Section 6.02 (c) (i) is modified to read: “any development grant agreement, development credit agreement or development financing agreement”. 11. Section 8.01(a) is modified to read as follows: “(a) All amounts which the Recipient shall be required to pay under the Development Grant Agreement shall be paid without deduction for, and free from, any taxes levied by, or in the territory of, the Recipient.” 12. Section 9.06 (c) is modified to read: “(c) Not later than six months after the Closing Date or such later date as may be agreed for this purpose between the Recipient and the Association, the Recipient shall prepare and furnish to the Association a report, of such scope and in such detail as the Association shall reasonably request, on the execution of the program referred to in the Preamble to the Development Grant Agreement, the performance by the Recipient and the Association of their respective obligations under the Development Grant Agreement and the accomplishment of the purposes of the Grant.” Page 15 14 - - 13. Section 9.04 is deleted in its entirety and Sections 9.05, 9.06 (as modified above), 9.07 and 9.08 are renumbered, respectively, Sections 9.04, 9.05, 9.06 and 9.07. 14. Section 12.05 and its heading are modified to read as follows: “Section 12.05. Termination of Development Grant Agreement. The obligations of the Recipient under the Development Grant Agreement shall terminate on the date 20 years after the date of the Development Grant Agreement.”