Page 1 CONFORMED COPY LOAN NUMBER 3740 EE Tallinn Project Agreement (District Heating Rehabilitation Project) between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT and MUNICIPALITY OF TALLINN Dated May 27, 1994 LOAN NUMBER 3740 EE TALLINN PROJECT AGREEMENT AGREEMENT, dated May 27, 1994, between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (the Bank) and the MUNICIPALITY OF TALLINN (Tallinn). WHEREAS (A) by the Loan Agreement of even date herewith between Republic of Estonia (the Borrower) and the Bank, the Bank has agreed to make available to the Borrower an amount in various currencies equivalent to thirty-eight million four hundred thousand dollars ($38,400,000), on the terms and conditions set forth in the Loan Agreement, but only on condition that Tallinn agree to undertake such obligations toward the Bank as are set forth in this Agreement; (B) by a subsidiary loan agreement to be entered into between the Borrower and Tallinn, a portion of the proceeds of the loan provided for under the Loan Agreement will be relent to Tallinn on the terms and conditions set forth in said Tallinn Subsidiary Loan Agreement; and WHEREAS Tallinn, 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 Page 2 Definitions Section 1.01. Unless the context otherwise requires, the several terms defined 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. Tallinn declares its commitment to the objectives of the Project as set forth in Schedule 2 to the Loan Agreement, and, to this end, shall carry out Parts B.1 and D.2 of the Project with due diligence and efficiency and in conformity with appropriate administrative, financial, engineering and public utility practices, and shall provide, or cause to be provided, promptly as needed, the funds, facilities, services and other resources required for Parts B.1 and D.2 of the Project. Section 2.02. Except as the Bank shall otherwise agree, procurement of the goods, works and services required for Parts B.1 and D.2 of the Project and to be financed out of the proceeds of the Loan shall be governed by the provisions of the Schedule to this Agreement. Section 2.03. Tallinn 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 Project Agreement and Parts B.1 and D.2 of the Project. Section 2.04. Tallinn shall duly perform all its obligations under the Tallinn Subsidiary Loan Agreement. Except as the Bank shall otherwise agree, Tallinn shall not take or concur in any action which would have the effect of amending, abrogating, assigning or waiving the Tallinn Subsidiary Loan Agreement or any provision thereof. Section 2.05. (a) Tallinn shall, at the request of the Bank, exchange views with the Bank with regard to the progress of Parts B.1 and D.2 of the Project, the performance of its obligations under this Agreement and under the Tallinn Subsidiary Loan Agreement, and other matters relating to the purposes of the Loan. (b) Tallinn shall promptly inform the Bank of any condition which interferes or threatens to interfere with the progress of Parts B.1 and D.2 of the Project, the accomplishment of the purposes of the Loan, or the performance by Tallinn of its obligations under this Agreement and under the Tallinn Subsidiary Loan Agreement. Section 2.06. Tallinn shall: (a) by July 1, 1995, have completed the first phase key steps towards restructuring its district heating companies, which steps shall include, but not be limited to: corporate structure and by-laws, opening balance sheet, basic operational management and organizational systems with staff assigned, and key contracts in such areas as: service license from Tallinn, bulk supply from heat producers, and supply arrangements with customers; and (b) by July 1, 1997, have completed the second phase key steps for detailed development of operational systems including training of staff. ARTICLE III Management and Operations Section 3.01. Tallinn shall cause its district heating companies to carry on its operations and conduct its affairs in accordance with sound administrative, financial and public utility practices under the supervision of qualified and experienced management assisted by competent staff in adequate numbers. Section 3.02. Tallinn shall at all times cause its district heating companies to operate and maintain 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, Page 3 financial and public utility practices. Section 3.03. Tallinn shall cause its heating companies to 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 Section 4.01. (a) Tallinn shall and shall cause its district heating companies to maintain records and accounts adequate to reflect in accordance with sound accounting practices their operations and financial condition with respect to the Project. (b) Tallinn shall, and shall cause: (i) such records, accounts and financial statements (balance sheets, statements of income and expenses and related statements) for each fiscal year to be audited, in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Bank; (ii) to be furnished 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 such financial statements or project accounts as the case may be 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, Tallinn shall ensure that its district heating companies participating in the Project shall not incur any debt unless a reasonable forecast of the revenues and expenditures of such district heating companies shows that the estimated net revenues of such district heating companies for each fiscal year during the term of the debt to be incurred shall be at least 1.3 times the estimated debt service requirements of such district heating companies in such year including the debt to be incurred. (b) For the purposes of this Section: (i) The term "debt" means any indebtedness of such district heating company 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 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. Page 4 (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 such district heating company not earlier than twelve months prior to the incurrence of the debt in question, which both the Bank and Tallinn accept as reasonable and as to which the Bank has notified such district heating company 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 such district heating company. (vii) Whenever for the purposes of this Section it shall be necessary to value, in terms of the currency of the Bor- rower, 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. Tallinn shall cause its district heating companies to prepare and furnish to the Bank annually during the Project implementation period a report of the five year financial projections (beginning with its 1995 financial year) for such district heating companies. Section 4.04. Tallinn agrees, as long as it exercises control over the setting of tariffs of its district heating companies, to establish tariffs for such companies which would allow such companies, under conditions of efficient operation at reasonable levels of capacity utilization, to cover their costs of production, operations and maintenance, depreciation, interest and make a reasonable contribution to reserves. 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 Tallinn thereunder shall terminate on the date on which the Loan Agreement shall terminate in accordance with its terms, and the Bank shall promptly notify Tallinn 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 Page 5 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 Tallinn: Municipality of Tallinn Vabaduse Valjak 7 EE0001 Tallinn Estonia Telex: 173264 LINN EE 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 Tallinn may be taken or executed by the Mayor or such other person or persons as the Mayor shall designate in writing, and Tallinn 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 written. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT By /s/ Wilfried Thalwitz Regional Vice President Europe and Central Asia MUNICIPALITY OF TALLINN By /s/ Toomas Ilves Authorized Representative SCHEDULE Procurement Part A: International Competitive Bidding 1. Except as provided in Part C hereof, goods and works shall be procured Page 6 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 and works in accordance with this Part A, Tallinn 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, Tallinn shall use bidding documents based on other internationally recognized standard forms agreed with the Bank. 2. To the extent practicable, contracts for substations shall be grouped into bid packages estimated to cost the equivalent of $1,000,000 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 Estonia 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 1. Items or groups of items for office equipment and materials estimated to cost less than $50,000 equivalent per item or group, up to an aggregate amount equivalent to $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. 2. Items or groups of items for installation of district heating equipment and supply of district heating equipment estimated to cost less than $300,000 equivalent per item or group, up to an aggregate amount equivalent to $2,000,000, may be procured under contracts awarded on the basis of comparison of price quotations obtained from at least three suppliers from at least three countries eligible under the Guidelines, 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 each contract awarded in accordance with the procedures of Part A of this Schedule, the procedures set forth in paragraphs 2 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 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 5 to the Loan Agreement. Page 7 (c) The provisions of the preceding subparagraph (b) shall not apply to contracts on account of which withdrawals from the Loan Account are to be made on the basis of statements of expenditure. 2. The figure of 15% is hereby specified for purposes of paragraph 4 of Appendix 1 to the Guidelines.