Page 1 CONFORMED COPY LOAN NUMBER 2995 UNI (Private Small and Medium Enterprise Development Project) between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT and CENTRAL BANK OF NIGERIA Dated December 22, 1988 PROJECT AGREEMENT AGREEMENT, dated December 22, 1988, between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (the Bank) and CENTRAL BANK OF NIGERIA (CBN). WHEREAS (A) by the Loan Agreement of even date herewith between Federal Republic of Nigeria (the Borrower) and the Bank, the Bank has agreed to make available to the Borrower an amount in various currencies equivalent to two hundred seventy million dollars ($270,000,000), on the terms and conditions set forth in the Loan Agreement, but only on condition that CBN agrees to undertake such obligations toward the Bank as are set forth in this Agreement; (B) by a subsidiary administration agreement to be entered into between the Borrower and CBN, part of the proceeds of the loan provided for under the Loan Agreement will be made available to CBN on the terms and conditions set forth in the Subsidiary Administration Agreement; and WHEREAS CBN, 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; Page 2 NOW THEREFORE the parties hereto hereby agree as follows: ARTICLE I Definitions Section 1.01. Unless the context otherwise requires, wherever used in this Agreement, the several terms defined in the Loan 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. CBN 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 or cause to be carried out Parts A to E of the Project with due diligence and efficiency and in conformity with appropriate administrative, financial, engineering, management and environmental practices, and shall provide, or cause to be provided, promptly as needed, the funds, facilities, services and other resources required for the said Parts of the Project. Section 2.02. For the purpose of carrying out Parts A to D and E (1) of the Project, CBN shall: (a) relend to PBs the equivalent of the Loan allocated to Parts A to D and E (1) of the Project under Participation Agreements to be entered into between CBN and each PB, under terms and conditions which shall have been approved by the Bank, and which shall include those set forth in Schedules 1 and 2 to this Agreement; and (b) without limitation or restrictions upon any of its other obligations under this Agreement, take all action, including the provisions of funds, facilities, services or other resources, necessary or appropriate to enable PBs to perform in accordance with the provisions of their respective Participation Agreements all the obligations of PBs therein set forth, and not to take any action which would prevent or interfere with such performance. Section 2.03. CBN undertakes that, unless the Bank shall otherwise agree, Sub-loans and Investments and loans made under Part E (1) of the Project will be made in accordance with the procedures and on the terms and conditions set forth or referred to in Schedules 1 and 2 to this Agreement. Section 2.04. In order to assist CBN in carrying out Part E of the Project: (a) CBN shall employ or cause to be employed 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; and (b) CBN shall procure vehicles and equipment under Part E (2) of the Project under contracts to be awarded on the basis of comparison of price quotations solicited from a list of at least three suppliers from countries eligible under the "Guidelines for Procurement under IBRD Loans and IDA Credits" published by the Bank in May 1985 (the Guidelines), in accordance with procedures acceptable to the Bank. Section 2.05. CBN shall carry out the obligations set forth in Sections 9.04 through 9.09 of the General Conditions (relating Page 3 to insurance, use of goods and services, plans and schedules, records and reports, maintenance and land acquisition, respec- tively) in respect of the Project Agreement and Parts A to E of the Project. Section 2.06. CBN shall duly perform all its obligations under the Subsidiary Administration Agreement. Except as the Bank shall otherwise agree, CBN shall not take or concur in any action which would have the effect of amending, abrogating, assigning or waiving the Subsidiary Administration Agreement or any provision thereof. Section 2.07. (a) CBN shall, together with the Borrower, review with the Bank, at least once every year, progress in carrying out Parts A through E of the Project, with a view to determining and effecting such changes as may be required to ensure the successful implementation of the Project, including any adjustment required in the onlending terms and conditions. To that end, CBN shall furnish to the Borrower and the Bank a report on the progress achieved in carrying out said Parts of the Project, in such detail and at such times as the Borrower or the Bank shall reasonably request. (b) CBN shall promptly inform the Borrower and the Bank of any condition which interferes or threatens to interfere with the progress of Parts A through E of the Project, the accomplishment of the purposes of the Loan, or the performance by CBN of its obligations under this Agreement and under the Subsidiary Administration Agreement. Section 2.08. For the purpose of carrying out Parts A to E of the Project, CBN shall: (a) establish, and maintain at least until the completion of the Project, the SME Apex Unit which shall be staffed with qualified and experienced persons in adequate numbers satisfactory to the Bank; and (b) coordinate and monitor the overall execution of Parts A to E of the Project and supervise the carrying out by PBs of the provisions of their respective Participation Agreements in accordance with procedures satisfactory to the Bank. Section 2.09. CBN shall: (a) not later than March 31, 1989, carry out and complete a study under terms of reference satis- factory to the Bank, to formulate policies and implementation procedures for the Pilot Mutualist Credit Guarantee Scheme included in Part C (1) of the Project and to identify prospective non-governmental organizations to participate in the said Scheme; and (b) take appropriate measures soon thereafter to establish the Pilot Mutualist Credit Guarantee Scheme, taking into account the views of the Bank. Section 2.10. (a) CBN shall: (a) not later than June 30, 1989, carry out and complete a study, under terms of reference satisfactory to the Bank, to develop an appropriate regulatory and policy framework for equipment leasing; and (b) implement the findings of said study after obtaining the views of the Borrower and the Bank. Section 2.11. CBN shall: (a) not later than December 31, 1989, carry out under terms of reference acceptable to the Bank, the Mutual Investment Fund study included in Part E (2) (g) of the Project; (b) exchange views with the Borrower and the Bank on the conclusions and recommendations of the study; and (c) taking into account the views expressed by the Bank, implement such recommendations within a timetable acceptable to the Bank. Page 4 Section 2.12. CBN shall: (i) not later than December 31, 1988, establish the Pilot Studies Facility included in Part E (1) of the Project in a form satisfactory to the Bank; and (ii) through PBs extend, out of the said Facility, financial assistance on loan terms to SMEs and entrepreneurs under arrangements satisfactory to the Bank for the purposes of Part E (1) of the Project. Section 2.13. CBN shall, under terms of reference and within a timetable acceptable to the Bank, carry out the following training programs for staff of CBN and the PBs: (a) an orientation program in term lending procedures; (b) project appraisal, supervision and monitoring; and (c) preparation and evaluation of financial restructuring workouts. Section 2.14. CBN shall: (a) carry out, under terms of reference acceptable to the Bank, an annual review of the social and economic impact of Investment Projects; and (b) submit to the Bank the findings of every such review; provided, however, that the findings of the first such review shall be submitted to the Bank not later than December 31, 1990. ARTICLE III Financial Covenants Section 3.01. (a) CBN shall maintain accounts, procedures and records adequate to monitor and record the progress of Parts A to E of the Project (including the costs and benefits to be derived from said Parts of the Project) and to reflect in accordance with consistently maintained sound accounting practices the operations and financial condition of CBN with respect to the said Parts of the Project. (b) CBN shall: (i) have the records, accounts (including Special Account A and any Sub-account) 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 the accounts and financial statements referred to in Section 3.01 (a) above for such year as so audited, and (B) the reports of such audit by said auditors of such scope and in such detail as the Bank shall have reasonably requested including a separate opinion by said auditors on the operation of Sub- accounts and showing whether the statements of expenditures submitted during such fiscal year, together with the procedures and internal controls involved in their preparation can be relied upon to support the related withdrawals; and (iii) furnish to the Bank such other information concern- ing said records, accounts and financial statements as well as the audit thereof, as the Bank shall from time to time reasonably request. (c) For all expenditures under Parts A to E of the Project with respect to which withdrawals from the Loan Account were made on the basis of statements of expenditures, CBN shall: (i) maintain or cause to be maintained in accordance with sound accounting practices, records and accounts reflecting such expenditures; Page 5 (ii) ensure that all records (contracts, orders, invoices, bills, receipts or other documents) evidencing such expenditures are retained until at least one year after the Bank has received the audit report for the fiscal year in which the last withdrawal from the Loan Account was made; and (iii) enable the Bank's representatives to examine such records. ARTICLE IV Effective Date; Termination; Cancellation and Suspension Section 4.01. This Agreement shall come into force and effect on the date upon which the Loan Agreement becomes effective. Section 4.O2. This Agreement and all obligations of the Bank and of CBN thereunder shall terminate on the date on which the Loan Agreement shall terminate in accordance with its terms, and the Bank shall promptly notify CBN thereof. Section 4.03. All the provisions of this Agreement shall continue in full force and effect notwithstanding any cancellation or suspension under the General Conditions. ARTICLE V Miscellaneous Provisions Section 5.01. 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 440098 (ITT) Washington, D.C. 248423 (RCA) or 64145 (WUI) For CBN: Central Bank of Nigeria Tinubu Square P.M.B. 12194 Lagos, Nigeria Cable address: Telex: CENBANK 21350 Cebank NG Lagos Section 5.02. Any action required or permitted to be taken, and any document required or permitted to be executed, under this Agreement on behalf of CBN may be taken or executed by the Page 6 Governor of the Central Bank of Nigeria or such other person or persons as CBN shall designate in writing, and CBN shall furnish to the Bank sufficient evidence of the authority and the authen- ticated specimen signature of each such person. Section 5.03. 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/ Edward V. K. Jaycox Regional Vice President Africa CENTRAL BANK OF NIGERIA By /s/ Hamzat Ahmadu Authorized Representative SCHEDULE 1 Principal Terms and Conditions of Sub-loans, Investments and Participation Agreements Except as the Bank shall otherwise agree, the principal terms and conditions set forth in this Schedule shall apply for the purposes of Section 2.02 (a) of this Agreement with respect to Participation Agreements. A. Terms 1. Currency All Sub-loans and Investments and loans made under Part E (1) of the Project shall be denominated in Naira. The aggregate amount (the PB Subsidiary Loan) to be made available by CBN to a PB under its respective Participation Agreement shall be the equivalent in Naira (determined as of the respective date or dates of withdrawal from the Loan Account using the market determined rate of the most recent foreign exchange auction system or any other lawful rates acceptable to the Bank) of the value of the currency or currencies so withdrawn or paid out on account of the cost of the goods and services to be incurred with respect to the carrying out of an Investment Project. 2. Interest Rates (a) Interest on a PB Subsidiary Loan shall be charged on the principal amount thereof outstanding from time to time at a variable interest rate which shall correspond to the prevailing CBN Rediscount Rate. (b) Interest on Sub-loans to Beneficiaries and loans made under Part E (1) of the Project shall be determined by PBs and shall be variable and be adjusted by PBs in accordance with changes in the CBN Rediscount Rate. Page 7 (c) Interest on Sub-loans made by PBs to micro-enterprises under Part C (2) of the Project shall be determined by PBs and shall be variable in accordance with the changes in the CBN Rediscount Rate, provided, however, that the sharing of the spread among PBs, MGAs and the funds established by MGAs under the Pilot Mutualist Credit Guarantee Scheme shall be determined on the basis of recommendations of the Study referred to in Section 2.09 of the Project Agreement and be satisfactory to the Bank. 3. Commitment Charge Each PB shall be required to pay a commitment charge at a rate of three-fourths of one percent (0.75%) per annum on the principal amount of the PB Subsidiary Loan not withdrawn from time to time. Such commitment charge shall accrue from the date on which CBN shall notify the PB that an Investment Project or an application for a loan under Part E (1) of the Project presented by it to CBN has been approved by the Bank and withdrawals may be made from the PB Subsidiary Loan. The PB may pass on the commitment charge to the Beneficiary or the entrepreneur. 4. Maturities (a) Sub-loans under Parts A and B of the Project for fixed assets and free-standing working capital shall have maturities of up to 12 years and three years, respectively, including grace periods of up to three years, and one year respectively. (b) Sub-loans for the preparation of financial restructuring workouts by Beneficiaries under Part B of the Project and loans made under Part E (1) of the Project shall have maturities of up to three years including grace periods of up to one year. (c) Sub-loans for fixed assets and free-standing working capital under Part C (2) of the Project shall have maturities of up to five years and two years, respectively, including grace periods of up to 12 months and six months, respectively. (d) Sub-loans for equipment leasing under Part D of the Project shall have maturities of up to 10 years, including grace periods of up to two years. (e) For PBs making equity investments under Parts A and B of the Project, the PBs shall adopt a flexible divestment policy satisfactory to CBN and the Bank. The divestment policy shall include a buy-back option for the enterprise owner to purchase the PBs' equity at its estimated market or pre-determined value. 5. Repayments (a) The aggregate amount of PB Subsidiary Loans and loans made under Part E (1) of the Project to be repaid by PBs to CBN shall be in Naira. (b) PB Subsidiary Loans and loans made under Part E (1) of the Project shall be repaid in accordance with fixed amortization schedules which shall be an aggregate of amortization schedules for the said loans. (c) Repayments of Investments from a PB to CBN under Parts A and B of the Project shall be based on a fixed schedule of payments for a period of up to 10 years. 6. Pre-payment (a) If a Sub-loan or a loan made under Part E (1) of the Project or any part of any such Sub-loan or loan shall be repaid to a PB in advance of maturity or if a Sub-loan or a loan made under Part E (1) of the Project or any part of any such Sub-loan or loan shall be sold, transferred, assigned or otherwise disposed of for value by a PB, the PB shall promptly notify CBN and shall Page 8 repay to CBN on the next following interest payment date, the amount withdrawn in respect of any such Sub-loan or loan made under Part E (1) of the Project or part thereof. (b) If a PB divests its Investment or sells, transfers, assigns or otherwise disposes of its Investment, the PB shall promptly notify CBN and shall repay to CBN on the next following interest payment date for the Investment, the amount withdrawn in respect of such Investment or part thereof. (c) Any amount so repaid by the PB shall be applied by CBN to the maturity or maturities of the PB Subsidiary Loan or the loan made under Part E (1) of the Project (as the case may be) in amounts corresponding to the outstanding amounts of the maturity or maturities of the Sub-loan or the loan made under Part E (1) of the Project so repaid or disposed of. B. Conditions 1. Each Participation Agreement shall contain provisions pursuant to which each PB shall continue to: (a) be duly established and operating under the laws of the Borrower; (b) maintain a sound financial structure, a healthy portfolio, and the organization, management, staff and other resources required for the efficient carrying out of its activities; (c) conduct its operations and affairs including interest rate policies in accordance with sound financial principles and practices; (d) maintain a lending and investment policy acceptable to the Bank and CBN and suitable procedures and an adequate number of suitably qualified staff to enable it effectively to: (i) appraise the financial, technical, environmental and economic feasibility of Investment Projects and to make Sub-loans and loans under Part E (1) of the Project and Investments to Beneficiaries and entrepreneurs in accordance with said lending and investment policy and on the basis of the criteria, procedures and principal terms and conditions set forth in Schedule 2 to this Agreement; and (ii) supervise, monitor and report on the carrying out by: (A) Beneficiaries of Investment Projects; and (B) Beneficiaries and entre- preneurs of studies under Part E (1) of the Project, including the procurement of goods and services, costs and benefits therefor. 2. Each Participation Agreement shall also contain provisions requiring each PB to: (a) exercise its rights in respect of Sub-loans and Investments and loans made under Part E (1) of the Project, in such a manner as to protect the interests of the Borrower, the Bank and CBN and to comply with its obligations under its Participation Agreement in order to achieve the purposes of Parts A to D and E (1) of the Project; (b) undertake not to assign, amend, abrogate or waive any of its agreements providing for Sub-loans or loans made under Part E (1) of the Project or Investments or any provision thereof without the approval of CBN; (c) (i) maintain records and accounts adequate to monitor and record the operations, resources, expenditures Page 9 and progress of each Investment Project and the studies to be carried out under Part E (1) of the Project and withdrawals from the Sub-accounts and to reflect in accordance with consistently maintained sound accounting practices its operations and financial conditions; (ii) have its records, accounts and financial statements (balance sheets, statements of income and expenses and related statements) including Sub-accounts for each fiscal year audited, in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Bank; (iii) furnish to CBN 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 and accounts for such year as so audited; and (B) the report of such audit by said auditors of such scope and in such detail, including the status of Sub-accounts and compliance by PBs with eligibility criteria of Investment Projects, as CBN or the Bank shall have reasonably requested; (iv) within six weeks of the end of the first and the second six months of the calendar year furnish to CBN Semi-Annual Progress Reports outlining the progress of each Investment Project and studies under Part E (1) of the Project; and (v) furnish to CBN monthly reports on the operation of the Sub-accounts. 3. Procurement (a) With respect to the procurement of goods and services to be financed under Sub-loans, Investments and loans made under Part E (1) of the Project, each Participation Agreement shall contain provisions requiring each PB to comply with the following procedures: (i) Goods and services shall be purchased at a reason- able price, account being taken also of other relevant factors such as time of delivery and efficiency and reliability of the goods and availability of maintenance facilities and spare parts therefor, and, in the case of services, of their quality and the competence of the parties rendering them; (ii) Goods estimated to cost more than the equivalent of $250,000 per contract: (A) may be procured under contracts awarded on the basis of comparison of price quotations solicited from a list of at least three suppliers from countries eligible under the Guidelines, in accordance with procedures acceptable to the Bank; and (B) all contracts for such goods shall be reviewed by PBs prior to award. (iii) Consultants shall have qualifications, experience, and be employed on terms and conditions, satis- factory to the Bank. Such consultants shall be selected in accordance with principles and proce- dures 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. (b) Each PB shall undertake that such goods and services shall be used exclusively in the carrying out of the Investment Page 10 Project or, as the case may be, Part E (1) of the Project. SCHEDULE 2 Procedures for Terms and Conditions of Sub-loans and Investments A. Terms and conditions 1. No expenditures for goods or services required for an Investment Project shall be eligible for financing out of the proceeds of the Loan unless: (a) the Sub-loan or Investment for such Investment Project shall have been approved by the Bank and such expenditures shall have been made not earlier than 180 days prior to the date on which the Bank shall have received the application and information required under paragraph 2 (a) of this Part in respect of such Sub-loan or Investment; or (b) the Sub-loan or Investment for such Investment Project shall have been a free-limit Sub-loan or Investment for which the Bank has authorized withdrawals from the Loan Account and such expenditures shall have been made not earlier than 180 days prior to the date on which the Bank shall have received the request and information required under paragraph 2 (b) of this Part in respect of such free-limit Sub-loan or Investment. For the purpose of this Agreement, the Bank shall establish the amounts for the free-limit Sub-loans, Investments and lease financing for each PB after reviewing the first three appraisal reports for Investment Projects submitted by PBs under Parts A to D of the Project. Thereafter, PBs may extend financing under the Project up to the free-limits so established. 2. (a) When presenting a Sub-loan or Investment (other than a free-limit Sub-loan or Investment) to the Bank for approval, CBN shall furnish to the Bank an application, in form satisfactory to the Bank, together with: (i) a description of the Beneficiary and an appraisal of the Investment Project, including procurement procedures and a description of the expenditures proposed to be financed out of the proceeds of the Loan; (ii) the proposed terms and conditions of the Sub-loan or Investment, including the schedule of amortization of the Sub-loan or schedule of payments of the Investment; (iii) in the case of Investment Projects under Part B of the Project, a restructuring plan; and (iv) such other information as the Bank shall reasonably request. (b) Each request by CBN for authorization to make withdrawals from the Loan Account in respect of a free-limit Sub- loan or Investment shall contain: (i) a summary description of the Beneficiary and the Investment Project, including procurement procedures and a description of the expenditures proposed to be financed out of the proceeds of the Loan; and (ii) the terms and conditions of the Sub-loan or Investment, including the schedule of amortization of the Sub-loan or the schedule of payments of the Investment. (c) Applications and requests made pursuant to the provi- sions of sub-paragraphs (a) and (b) of this paragraph shall be presented to the Bank on or before September 30, 1992. 3. Sub-loans and Investments shall be made on terms whereby CBN shall cause each PB to obtain by written contract with the Beneficiary or by other appropriate legal means, rights adequate to protect the interests of the Borrower, the Bank and CBN, including the right to: (a) require the Beneficiary to carry out and operate the Investment Project with due diligence and efficiency and in accordance with sound technical, financial, environmental and managerial standards and to maintain adequate records and accounts; Page 11 (b) inspect, by itself or jointly with representatives of the Bank if the Bank shall so request, such goods and the sites, works, plants and construction included in the Investment Project, the operation thereof, and any relevant records and documents; (c) require that: (i) the Beneficiary 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 Loan to the place of use or installation, any indemnity thereunder to be made payable in a currency freely usable by the Beneficiary to replace or repair such goods; (d) obtain all such information as the Bank or CBN shall reasonably request relating to the foregoing and to the administration, operations and financial condition of the Beneficiary and to the benefits to be derived from the Investment Projects; and (e) suspend or terminate the right of the Beneficiary to the use of the proceeds of the Loan upon failure by such Beneficiary to perform its obligations under its contract with PBs. B. Eligibility Criteria for Beneficiaries and Investment Projects - General Procedures 1. With the exception of subsistence agriculture, commerce, real estate, finance and insurance, hotels and construction, all SMEs and micro-enterprises engaged in other economic sectors (including manufacturing, agro-related industries, mining, quarrying, industrial support services, equipment leasing, and other service activities ancillary thereto) are eligible to receive Sub-loans and Investments from PBs to carry out Investment Projects. 2. Sub-loans and Investments shall be used by Beneficiaries to finance rehabilitation, expansion and energy saving investments of existing enterprises, as well as for establishing new enterprises. In particular Sub-loans and Investments shall be used to finance: (a) fixed assets (machinery, equipment, factory buildings and related civil works), technical know-how, consultancy services and training; (b) permanent working capital (initial stocks or increases in stocks of raw materials, spare parts and components); (c) free-standing working capital (raw materials, spare parts and components) to expand capacity utilization of existing firms; (d) preparation of restructuring workouts; and (e) leasing of industrial and business equipment. C. Specific Procedures 1. For Part A of the Project CBN shall ensure that PBs adopt the following procedures when processing Investment Projects: (a) Beneficiaries shall contribute at least 25% of the Investment Project cost in equity or from internally-generated resources. (b) The equity participation of a PB shall be such as to maintain at all times a minority equity holding in a Beneficiary. Page 12 (c) During implementation and for five-years after start up of operations, Beneficiaries shall be required to maintain a long- term debt to equity ratio of not more than 3:1; a current ratio of at least 1.2; and a debt service coverage of at least 1.4. (d) Appraisal of Investment Projects PBs shall carry out the appraisal of Investment Projects in accordance with procedures acceptable to the Bank, which shall include the following: (i) to calculate the financial rate of return (FRR) for all Investment Projects with costs over N 0.8 million in constant 1988 prices; (ii) to calculate the economic rate of return (ERR) for all Investment Projects with costs over N 4 million in constant 1988 prices; (iii) FRR (after tax) under (d) (i) above and ERR under (d) (ii) above shall each be at least 12% in constant prices for each Investment Project; and (iv) to carry out a cash-flow analysis for Investment Projects with costs below N 0.8 million in constant 1988 prices. PBs shall actively promote, encourage and give priority to those SMEs which make the maximum use of local raw materials; provided, however, that in the case of new manufacturing enterprises, the share of locally sourced raw materials of the total raw materials shall be at least 40%, with the objective of reaching 60% by September 30, 1992. (e) Sub-loan Limits (i) Maximum financing from the proceeds of the Loan shall be 70% of the Investment Project cost. (ii) Maximum Sub-loan for free-standing working capital shall be N 2 million in 1988 constant prices. (iii) Maximum outstanding amounts of Sub-loans and Investments to any individual Beneficiary or a group of related beneficiary enterprises shall be N 7 million in 1988 constant prices. 2. For Part B of the Project CBN shall ensure that PBs adopt the following procedures in processing Investments and Sub-loans under Part B of the Project: (a) The equity participation of a PB shall be such as to maintain at all times a minority equity holding in a restructured company. (b) The proceeds of the Loan under the Project shall be used only to finance preparation of restructuring programs, increases in working capital (raw materials, spare parts and components), fixed assets, consultancy services and training. (c) Maximum outstanding amount of Sub-loans and Investments to any individual Beneficiary or a group of related Beneficiary enterprises shall be N 7 million in 1988 constant prices. (d) The Investment Projects would be financed only if their incremental financial rate of return (after tax) and economic rate of return each exceed 12% in constant prices. (e) The Beneficiary shall have debt service coverage ratios of not less than 1.0 in every year of the Investment Project, averaging not less than 1.2 during the period of the Sub-loan or Page 13 Investment with the projected current ratios of not less than 1.2 at any time. 4. For Part C of the Project CBN shall ensure that PBs adopt the following procedures and criteria in processing Sub-loans under Part C of the Project: (a) The PB shall carry out a simplified form of appraisal of the Investment Project; (b) MGAs should agree to fully guarantee a Sub-loan to a Beneficiary and to maintain the funds established by MGAs under the Pilot Mutualist Credit Guarantee Scheme in accordance with procedures and on terms and conditions satisfactory to the Bank; and (c) the maximum outstanding amount of Sub-loans to a Beneficiary shall be N 100,000 in constant 1988 prices. 5. For Part D of the Project. CBN shall ensure that PBs adopt the following procedures in processing Sub-loans under Part D of the Project: (a) The maximum pay-back period for leased equipment shall be six years, calculated on the basis of the installed cost of the equipment and the estimated annual net cash flow generated from the equipment. (b) The maximum lease amount financed from the proceeds of the Loan shall be N 2.5 million in constant 1988 prices. (c) The overall maximum book value of leased equipment financed from proceeds of the Loan and outstanding with respect to a Beneficiary or a group of related beneficiary enterprises shall be N 2.5 million in constant 1988 prices. SCHEDULE 3 Special Account A 1. For the purposes of this Schedule: (a) the term "eligible Categories" means Categories (1) to (5) set forth in the table in paragraph 1 of Schedule 1 to the Loan Agreement; (b) the term "eligible expenditures" means expenditures in respect of the reasonable cost of goods and services required for Parts A to E of the Project and to be financed out of the proceeds of the Loan allocated from time to time to the eligible Categories in accordance with the provisions of Schedules 1 and 2 to this Agreement, provided, however, that notwithstanding the provisions of paragraph 1 (b) of Schedule 2 to this Agreement, payments for expenditures to be financed out of the proceeds of free-limit Sub- loans and Investments may be made out of the Special Account before the Bank shall have authorized withdrawals from the Loan Account in respect thereof. Such expenditures, however, shall qualify as eligible expenditures only if the Bank shall subse- quently authorize such withdrawals; and (c) the term "Authorized Allocation" means an amount equiva- lent to $15,000,000 to be withdrawn from the Loan Account and deposited into the Special Account pursuant to paragraph 3 (a) of this Schedule. 2. Except as the Bank shall otherwise agree, payments out of the Special Account shall be made exclusively for eligible expendi- tures in accordance with the provisions of this Schedule. 3. After the Bank has received evidence satisfactory to it that Page 14 the Special Account or a Sub-account has been duly opened, with- drawals of the Authorized Allocation and subsequent withdrawals to replenish the Special Account or a Sub-account may be made as follows: (a) On the basis of a request or requests by CBN for a deposit or deposits which add up to the aggregate amount of the Authorized Allocation, the Bank shall, on behalf of the Borrower, withdraw from the Loan Account and deposit into the Special Account such amount or amounts as CBN shall have requested. (b) CBN shall furnish to the Bank requests for replenishment of the Special Account at such intervals as the Bank shall specify. On the basis of such requests, the Bank shall withdraw from the Loan Account and deposit into the Special Account such amounts as shall be required to replenish the Special Account with amounts not exceeding the amount of payments made out of the Special Account for eligible expenditures. All such deposits shall be withdrawn by the Bank from the Loan Account under the respec- tive eligible Categories, and in the respective equivalent amounts, as shall have been justified by the evidence supporting the request for such deposit furnished pursuant to paragraph 4 of this Schedule. 4. For each payment made by CBN out of the Special Account or any Sub-account for which CBN requests replenishment pursuant to paragraph 3 (b) of this Schedule, CBN shall furnish to the Bank, prior to or at the time of such request, such documents and other evidence as the Bank shall reasonably request, showing that such payment was made for eligible expenditures. 5. (a) Notwithstanding the provisions of paragraph 3 of this Schedule, no further deposit into the Special Account shall be made by the Bank when either of the following situations first arises: (i) the Bank shall have determined that all further withdrawals should be made by CBN directly from the Loan Account in accordance with the provisions of Article V of the General Conditions and paragraph (a) of Section 2.02 of the Loan Agreement; or (ii) the total unwithdrawn amount of the Loan allocated to the eligible Categories for Parts A to E of the Project, minus the amount of any outstanding special commitment entered into by the Bank pur- suant to Section 5.02 of the General Conditions with respect to Parts A to E of the Project, shall be equal to the equivalent of twice the amount of the Authorized Allocation. (b) Thereafter, withdrawal from the Loan Account of the re- maining unwithdrawn amount of the Loan allocated to the eligible Categories for Parts A to E of the Project shall follow such pro- cedures as the Bank shall specify by notice to CBN. Such further withdrawals shall be made only after and to the extent that the Bank shall have been satisfied that all such amounts remaining on deposit in the Special Account or any Sub-account as of the date of such notice will be utilized in making payments for eligible expenditures. 6. (a) If the Bank shall have determined at any time that any payment out of the Special Account or any Sub-account: (i) was made for any expenditure or in any amount not eligible pursuant to paragraph 2 of this Schedule; or (ii) was not justified by the evidence furnished to the Bank, CBN shall, promptly upon notice from the Bank, deposit into the Special Account (or, if the Bank shall so request, refund to the Bank) an amount equal to the amount of such payment or the portion thereof not so eligible or justified. No further deposit by the Bank into the Special Account shall be made until CBN has made such deposit or refund. Page 15 (b) If the Bank shall have determined at any time that any amount outstanding in the Special Account or any Sub-account will not be required to cover further payments for eligible expendi- tures, CBN shall, promptly upon notice from the Bank, refund to the Bank such outstanding amount for crediting to the Loan Account.