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CONFORMED COPY
CREDIT NUMBER 3590 IN
Development Credit Agreement
(Second Karnataka Rural Water Supply and Sanitation Project)
between
INDIA
and
INTERNATIONAL DEVELOPMENT ASSOCIATION
Dated March 8, 2002
CREDIT NUMBER 3590 IN
DEVELOPMENT CREDIT AGREEMENT
AGREEMENT, dated March 8, 2002, between INDIA, acting by its President (the Borrower) and 
INTERNATIONAL DEVELOPMENT ASSOCIATION (the Association).
WHEREAS (A) the Borrower, having satisfied itself as to the feasibility and priority of 
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the project described in Schedule 2 to this Agreement (the Project), has requested the 
Association to assist in the financing of the Project; and 
(B) the Project will be carried out by the State of Karnataka (Karnataka) and the 
Karnataka Rural Water Supply and Sanitation Agency (KRWSSA) with the Borrower’s 
assistance and, as part of such assistance, the Borrower will make the proceeds of the credit 
provided for in Article II of this Agreement (the Credit) available to Karnataka, as set forth in 
this Agreement; and
WHEREAS the Association has agreed, on the basis, 
inter alia
,
of
the foregoing, to 
extend the Credit to the Borrower upon the terms and conditions set forth in this Agreement and 
in the agreement of even date herewith between the Association and Karnataka and KRWSSA 
(the Project Agreement);
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 October 6, 1999), with the 
modifications set forth below (the General Conditions), constitute an integral part of this 
Agreement: 
(a)
A new paragraph (12) is added to Section 2.01 of the General Conditions to read 
as set forth below, and the existing paragraphs (12) through (14) of said Section are accordingly 
renumbered as paragraphs (13) through (15):
“12.
‘Participating Country’ means any country that the Association determines meets 
the requirements set forth in Section 11 of Resolution No. 194 of the Board of Governors 
of the Association, adopted on April 8, 1999; and ‘Participating Countries’ means, 
collectively, all such countries.” ; and
(b)
The second sentence of Section 5.01 is modified to read:
“Except as the Borrower and the Association shall otherwise agree, no 
withdrawals shall be made: (a) on account of expenditures in the territories of 
any country which is not a Participating Country or for goods produced in, or 
services supplied from, such territories; or (b) for the purpose of any payment to 
persons or entities, or for any import of goods, if such payment or import, to the 
knowledge of the Association, is prohibited by a decision of the United Nations 
Security Council taken under Chapter VII of the Charter of the United Nations.”
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:
(a)
“Act” means the Karnataka Panchayati Raj Act (Karnataka Act No. 14 of 1993);
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(b)
“DSU” means the District Support Unit established by KRWSSA for a Zilla 
Panchayat pursuant to the Memorandum of Association and Rules of the Karnataka Rural Water 
Supply and Sanitation Agency dated August 27, 2001; 
(c)
“Eligible Categories” means categories (1), (2), (3), and (4) set forth in the table 
in paragraph 1 of Schedule 1 to this Agreement;
(d)
“Eligible Expenditures” means the expenditures for goods, works and services 
referred to in Section 2.02 of this Agreement;
(e)
“Financial Management Manual” means the manual of policies and procedures 
for financial management of the Project agreed to between Karnataka and the Association;
(f)
“Financial Management System” means the financial management system that 
KRWSSA shall establish and operate pursuant to Section 4.03 of the Project Agreement; 
(g)
“Fiscal Year” means the fiscal year of the Borrower, Karnataka and KRWSSA, 
starting April 1, and ending March 31; 
(h)
“Gram Panchayat” has the meaning assigned to such term in the Act;
(i)
“Indigenous Peoples Development Plan” means the indigenous peoples 
development plan, agreed with the Association, and dated November 6, 2001, referred to in Part 
A.3 of Schedule 2 to this Agreement;
(j)
“Karnataka” means the Borrower’s State of Karnataka, or any successor thereto;
(k)
“KRWSSA” means Karnataka Rural Water Supply and Sanitation Agency, a 
society established and registered on August 27, 2001, under the Karnataka Societies 
Registration Act, 1960;
(l)
“NGOs” means non-governmental organizations established and operating in the 
territory of the Borrower;
(m)
“Pilot Batch” means first twenty Project Gram Panchayats in which 
implementation of the Project commenced in April 2001;
(n)
“Project Agreement” means the agreement among the Association, Karnataka 
and KRWSSA of even date herewith, as the same may be amended from time to time, and such 
term includes all schedules and agreements supplemental to the Project Agreement;
(o)
“Project Districts” means the districts of Bagalkot, Belgaum, Bidar, Bijapur, 
Dharwar, Gadag, Gulbarga, Haveri, Koppal, Raichur and Uttar Kannada in Karnataka, and any 
successor districts thereto;
(p)
“Project Gram Panchayats” means Gram Panchayats of the Project Districts that 
have been selected to participate in the Project in accordance with paragraph 4 of Schedule 2 to 
the Project Agreement;
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(q)
“Project Implementation Plan” means the implementation plan for the Project 
dated September 30, 2001, including time-bound action plans, procedures and criteria agreed 
with the Association;
(r)
“Project Management Report” means each Project Management Report prepared 
in accordance with Section 4.02 of the Project Agreement;
(s)
“Project Settlement” means any settlement, habitation or other local entity that is 
selected for implementation of Parts A and B of the Project under an agreed Indigenous Peoples 
Development Plan; 
(t)
“Special Account” means the account referred to in Part B of Schedule 1 to this 
Agreement;
(u)
“Subsequent Batches” means the first, second, third, fourth and any subsequent 
batches of Project Gram Panchayats and Project Settlements in which implementation of Parts A 
and B of the Project shall take place, and the term “Batch” refers to any of those batches or the 
Pilot Batch;
(v)
“Support Agency” means any non-governmental agency including consultant, 
voluntary or community-based organization selected by KRWSSA to provide necessary 
community development and engineering support and services to the Project Gram Panchayats, 
VWSCs, Project Settlements and User Groups;
(w)
“User Group” means any group of persons within the Project District and 
deriving water supply and sanitation benefits from the Project;
(x)
“VWSC” means a Village Water and Sanitation Committee of a Gram 
Panchayat, which is a committee of the Gram Panchayat pursuant to Section 61-A of the Act;
(y)
“Zilla Panchayat” has the meaning assigned to such term in the Act; and
(z)
“ZPED” means the Zilla Panchayat Engineering Division for each  Zilla 
Panchayat.
ARTICLE II
The Credit
Section 2.01. The Association agrees to lend to the Borrower, on the terms and 
conditions set forth or referred to in the Development Credit Agreement, an amount in various 
currencies equivalent to one hundred and nineteen million Special Drawing Rights (SDR 
119,000,000).
Section 2.02. The amount of the Credit may be withdrawn from the Credit Account in 
accordance with the provisions of Schedule 1 to this Agreement for expenditures made (or, if the 
Association shall so agree, to be made) in respect of the reasonable cost of goods, works and 
services required for the Project and to be financed out of the proceeds of the Credit.
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Section 2.03. The Closing Date shall be December 31, 2007 or such later date as the 
Association shall establish. The Association shall promptly notify the Borrower of such later 
date.
Section 2.04. (a) The Borrower shall pay to the Association a commitment charge on the 
principal amount of the Credit 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 Borrower from the Credit 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 
Borrower; 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. The Borrower shall pay to the Association a service charge at the rate of 
three-fourths of one percent (3/4 of 1%) per annum on the principal amount of the Credit 
withdrawn and outstanding from time to time.
Section 2.06. Commitment charges and service charges shall be payable semiannually on 
June 15 and December 15 in each year.
Section 2.07. (a)  Subject to paragraphs (b), (c) and (d) below, the Borrower shall repay 
the principal amount of the Credit in semiannual installments payable on each June 15 and 
December 15 commencing June 15, 2012 and ending December 15, 2036.  Each installment to 
and including the installment payable on December 15, 2021 shall be one and one-fourth percent 
(1-1/4%) of such principal amount, and each installment thereafter shall be two and one-half 
percent (2-1/2%) of such principal amount.
(b)
Whenever: (i) the Borrower’s per capita gross national product (GNP), as 
determined by the Association, shall have exceeded for three consecutive years  the level 
established annually by the Association for determining eligibility to access the Association’s 
resources; and (ii) the Bank shall consider the Borrower creditworthy for Bank lending, the 
Association may, subsequent to the review and approval thereof by the Executive Directors of 
the Association and after due consideration by them of the development of the Borrower’s 
economy, modify the repayment of installments under paragraph (a) above by:
(A)
requiring the Borrower to repay twice the amount of each such 
installment not yet due until the principal amount of the Credit shall 
have been repaid; and
(B)
requiring the Borrower to commence repayment of the principal amount 
of the Credit as of the first semiannual payment date referred to in 
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paragraph (a) above falling six months or more after the date on which 
the Association notifies the Borrower that the events set out in this 
paragraph (b) have occurred, provided, however, that there shall be a 
grace period of a minimum of five years on such repayment of principal.
(c)
If so requested by the Borrower, the Association may revise the modification 
referred to in paragraph (b) above to include, in lieu of some or all of the increase in the amounts 
of such installments, the payment of interest at an annual rate agreed with the Association on the 
principal amount of the Credit withdrawn and outstanding from time to time, provided that, in the 
judgment of the Association, such revision shall not change the grant element obtained under the 
above-mentioned repayment modification.
(d)
If, at any time after a modification of terms pursuant to paragraph (b) above, the 
Association determines that the Borrower’s economic condition has deteriorated significantly, 
the Association may, if so requested by the Borrower, further modify the terms of repayment to 
conform to the schedule of installments as provided in paragraph (a) above.
Section 2.08. The currency of the United States of America is hereby specified for the 
purposes of Section 4.02 of the General Conditions.
ARTICLE III
Execution of the Project
Section 3.01. (a) The Borrower declares its commitment to the objectives of the Project 
as set forth in Schedule 2 to this Agreement, and, to this end, without any limitation or restriction 
upon any of its other obligations under the Development Credit Agreement, shall cause 
Karnataka and KRWSSA to perform in accordance with the provisions of the Project Agreement 
all the obligations of Karnataka and KRWSSA therein set forth, shall take and cause to be taken 
all action, including the provision of funds, facilities, services and other resources, necessary or 
appropriate to enable Karnataka and KRWSSA to perform such obligations, and shall not take or 
permit to be taken any action which would prevent or interfere with such performance.
(b)
The Borrower shall make the proceeds of the Credit available to Karnataka in 
accordance with the Borrower’s standard agreements for developmental assistance to the states 
of India.
Section 3.02. Except as the Association shall otherwise agree, procurement of the goods, 
works and consultants’ services required for the Project and to be financed out of the proceeds of 
the Credit shall be governed by the provisions of Schedule 1 to the Project Agreement.
Section 3.03. The Borrower and the Association hereby agree that the obligations set 
forth in Sections 9.03, 9.04, 9.05, 9.06, 9.07 and 9.08 of the General Conditions (relating to 
insurance, use of goods and services, plans and schedules, records and reports, maintenance and 
land acquisition, respectively) shall be carried out by Karnataka and KRWSSA pursuant to 
Section 2.03 of the Project Agreement. 
ARTICLE IV
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Financial Covenants
Section 4.01. (a) For all expenditures with respect to which withdrawals from the Credit 
Account were made on the basis of Project Management Reports or statements of expenditure, 
the Borrower shall:
(i)
maintain or cause to be maintained in accordance with sound accounting 
practices, records and separate accounts reflecting such expenditures;
(ii)
ensure that all records (contracts, orders, invoices, bills, receipts and 
other documents) evidencing such expenditures are retained until at least 
one year after the Association has received the audit report for the fiscal 
year in which the last withdrawal from the Credit Account was made; 
and
(iii)
enable the Association’s representatives to examine such records.
(b)
The Borrower shall:
(i)
have the records and accounts referred to in paragraph (a)(i) of this 
Section and those for the Special Account for each fiscal year audited, in 
accordance with appropriate auditing principles consistently applied, by 
independent auditors acceptable to the Association;
(ii)
furnish to the Association as soon as available, but in any case not later 
than six months after the end of each such year the report of such audit 
by said auditors, of such scope and in such detail as the Association shall 
have reasonably requested, including a separate opinion by said auditors 
as to whether the Project Management Reports or statements of 
expenditure 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 Association such other information concerning said 
records and 
accounts and the audit thereof as the Association shall 
from time to time 
reasonably request.
ARTICLE V
Remedies of the Association
Section 5.01. Pursuant to Section 6.02(l) of the General Conditions, the following 
additional events are specified:
(a)
Karnataka or KRWSSA shall have failed to perform any of its obligations under 
the Project Agreement.
(b)
As a result of events which have occurred after the date of the Development 
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Credit Agreement, an extraordinary situation shall have arisen which shall make it improbable 
that Karnataka or KRWSSA will be able to perform its obligations under the Project Agreement.
(c)
Any change shall have been made to the Memorandum of Association of 
KRWSSA so as to materially and adversely affect the ability of KRWSSA to perform any of its 
obligations under the Project Agreement.
(d)
The Act shall have been amended, suspended, abrogated, repealed or waived so 
as to affect materially and adversely the ability of Karnataka or KRWSSA to perform any of their 
respective obligations under the Project Agreement.
Section 5.02. Pursuant to Section 7.01(h) of the General Conditions, the following 
additional events are specified: 
(a)
the event specified in paragraph (a) of Section 5.01 of this Agreement shall 
occur and shall continue for a period of sixty (60) days after notice thereof shall have been given 
by the Association to the Borrower.
(b)
The event specified in paragraph (c) of Section 5.01 of this Agreement shall 
occur.
(c)
The event specified in paragraph (d) of Section 5.01 of this Agreement shall 
occur.
ARTICLE VI
Effective Date; Termination
Section 6.01. The following event is specified as an additional condition to the 
effectiveness of the Development Credit Agreement within the meaning of Section 12.02 (b) of 
the General Conditions to be included in the opinion or opinions to be furnished to the 
Association, namely, that the Project Agreement has been duly authorized or ratified by 
Karnataka and KRWSSA, and is legally binding upon Karnataka, KRWSSA, and any successors 
thereto, in accordance with its terms.
Section 6.02. 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.
Section 6.03. The provisions of Section 5.02 of this Agreement shall cease and determine 
on the date on which the Development Credit Agreement shall terminate or on the date 20 years 
after the date of this Agreement, whichever shall be the earlier.
ARTICLE VII
Representative of the Borrower; Addresses
Section 7.01. The Secretary, Additional Secretary, Joint Secretary, Director, Deputy 
Secretary or Under Secretary of the Department of Economic Affairs in the Ministry of Finance 
or successor thereto of the Borrower are each designated as representative of the Borrower for 
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the purposes of Section 11.03 of the General Conditions.
Section 7.02. The following addresses are specified for the purposes of Section 11.01 of 
the General Conditions:
For the Borrower:
Secretary to the Government of India
Department of Economic Affairs
Ministry of Finance
Government of India
New Delhi 110 001
India
Cable address:
Telex:
Facsimile:
ECOFAIRS953-31-66175 FINE IN
91-11-3016075
New Delhi
953-31-66175 FINE IN
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)
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IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized 
representatives, have caused this Agreement to be signed in their respective names in New Delhi, 
India as of the day and year first above written.
INDIA
By
/s/ Adarsh Kishore
Authorized Representative
INTERNATIONAL DEVELOPMENT ASSOCIATION
By
/s/ Edwin R. Lim
Country Director, India
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SCHEDULE 1
Withdrawal of the Proceeds of the Credit
A.
General
1.
The table below sets forth the Categories of items to be financed out of the proceeds of 
the Credit, the allocation of the amounts of the Credit to each Category and the percentage of 
expenditures for items so to be financed in each Category:
Amount of the
Credit Allocated
% of
(Expressed in
Expenditures
Category
SDR Equivalent)
to be Financed
(1)
Civil Works
89,100,00080%
(2)
Goods
2,000,000100% of foreign
expenditures,
100% of local
expenditures (ex-factory
cost) and 80% of local
expenditures for other
items procured locally
(3)
Consultants’
17,900,000100%
Services and Training
(4)
Incremental Operating
1,100,00080% until March 31, 2004
Costs 
60% until March 31, 2005 
and 25% thereafter
(5)
Unallocated
8,900,000
TOTAL
119,000,000
2.
For the purposes of this Schedule:
(a)
the term “consultants’ services and training” means services of consultants, 
NGOs, Support Agencies and community organizations, training programs, workshops and study 
tours; 
(b)
the term “foreign expenditures” means expenditures in the currency of any 
country other than that of the Borrower for goods or services supplied from the territory of any 
country other than that of the Borrower;
(c)
the term “incremental operating costs” means salaries and the benefits and travel 
costs of individuals engaged as Project staff on a contract basis in KRWSSA and DSUs for the 
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purposes of carrying out the Project.
(d)
the term “local expenditures” means expenditures in the currency of the 
Borrower or for goods or services supplied from the territory of the Borrower.
3.
Notwithstanding the provisions of paragraph 1 above, no withdrawals shall be made in 
respect of payments made for expenditures prior to the date of this Agreement except that 
withdrawals in an aggregate amount not exceeding the equivalent of $1,000,000 may be made in 
respect of Categories 1, 2, 3 and 4 on account of payments made for expenditures before that 
date but after January 1, 2001.
4.
The Association may require withdrawals from the Credit Account to be made on the 
basis of statements of expenditure for expenditures for goods, works and services:  (a) in the case 
of works under contracts costing less than $300,000 equivalent each; (b) in the case of goods 
under contracts costing less than $300,000 equivalent each; (c) in the case of consultants’ firms 
under contracts costing less than $100,000 equivalent each; (d) in the case of individuals under 
contracts costing less than $50,000 equivalent each; (e) training, workshops and study tours; and 
(f) incremental operating costs each under such terms and conditions as the Association shall 
specify by notice to the Borrower.
B.
Special Account
1.
The Borrower shall open and maintain in dollars a special deposit account in the Reserve 
Bank of India, on terms and conditions satisfactory to the Association.
2.
After the Association has received evidence satisfactory to it that a Special Account has 
been opened, withdrawals from the Credit Account of amounts to be deposited into the Special 
Account shall be made as follows:
(a)
until the Association shall have received: (i) the first Project Management 
Report referred to in Section 4.02(b) of the Project Agreement; and (ii) a request from the 
Borrower for withdrawal on the basis of Project Management Reports, withdrawals shall be 
made in accordance with the provisions of Annex A to this Schedule 1; and
(b)
upon receipt by the Association of a Project Management Report pursuant to 
Section 4.02(b) of the Project Agreement, accompanied by a request from the Borrower for 
withdrawal on the basis of Project Management Reports, all further withdrawals shall be made in 
accordance with the provisions of Annex B to this Schedule 1.
3.
Payments out of the Special Account shall be made exclusively for Eligible 
Expenditures.  For each payment made by the Borrower out of the Special Account, the 
Borrower shall, at such time as the Association shall reasonably request, furnish to the 
Association such documents and other evidence showing that such payment was made 
exclusively for Eligible Expenditures.
4.
Notwithstanding the provisions of Part B.2 of this Schedule, the Association shall not be 
required to make further deposits into the Special Account:
(a)
if the Association determines at any time that any Project Management Report 
does not adequately provide the information required pursuant to Section 4.02 of the Project 
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Agreement;
(b)
if the Association determines at any time that all further withdrawals should be 
made by the Borrower directly from the Credit Account; or
(c)
if the Borrower shall have failed to furnish to the Association within the period 
of time specified in Section 4.01(b)(ii) of this Agreement, any of the audit reports required to be 
furnished to the Association pursuant to said Section in respect of the audit of (A) the records 
and accounts for the Special Account or (B) the records and accounts reflecting expenditures 
with respect to which withdrawals were made on the basis of Project Management Reports.
5.
The Association shall not be required to make further deposits into the Special Account 
in accordance with the provisions of Part B.2 of this Schedule if, at any time, the Association 
shall have notified the Borrower of its intention to suspend in whole or in part the right of the 
Borrower to make withdrawals from the Credit Account pursuant to Section 6.02 of the General 
Conditions. Upon such notification, the Association shall determine, in its sole discretion, 
whether further deposits into the Special Account may be made and what procedures should be 
followed for making such deposits, and shall notify the Borrower of its determination.
6.
(a)
If the Association determines at any time that any payment out of the Special 
Account was made for an expenditure which is not an Eligible Expenditure, or was not justified 
by the evidence furnished to the Association, the Borrower shall, promptly upon notice from the 
Association, provide such additional evidence as the Association may request, or deposit into the 
Special Account (or, if the Association shall so request, refund to the Association) an amount 
equal to the amount of such payment.  Unless the Association shall otherwise agree, no further 
deposit by the Association into the Special Account shall be made until the Borrower has 
provided such evidence or made such deposit or refund, as the case may be.
(b)
If the Association determines at any time that any amount outstanding in the 
Special Account will not be required to cover payments for Eligible Expenditures during the 
six-month period following such determination, the Borrower shall, promptly upon notice from 
the Association, refund to the Association such outstanding amount.
(c)
The Borrower may, upon notice to the Association, refund to the Association all 
or any portion of the funds on deposit in the Special Account.
(d)
Refunds to the Association made pursuant to sub-paragraph (a), (b) or (c) of this 
paragraph 6 shall be credited to the Credit Account for subsequent withdrawal or for cancellation 
in accordance with the provisions of the Development Credit Agreement.
Annex A
to
SCHEDULE 1
Operation of Special Account
When Withdrawals Are Not Made
On the Basis of Project Management Reports
For the purposes of this Annex: 
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1.
The term “Authorized Allocation” means an amount of $8,000,000 to be withdrawn from 
the Credit Account and deposited into the Special Account pursuant to paragraph 2 of this 
Annex; provided, however, that, unless the Association shall otherwise agree, the Authorized 
Allocation shall be limited to an amount equivalent to $4,000,000 until the aggregate amount of 
withdrawals from the Credit Account, plus the total amount of all outstanding special 
commitments entered into by the Association pursuant to Section 5.02 of the General Conditions 
shall equal or exceed the equivalent of SDR 20,000,000.
2.
Withdrawals of the Authorized Allocation and subsequent withdrawals to replenish the 
Special Account shall be made as follows:
(a)
For withdrawals of the Special Account’s Authorized Allocation, the Borrower 
shall furnish to the Association a request or requests for deposit into the  Special Account of an 
amount or amounts which in the aggregate do not exceed the said Authorized Allocation.  On the 
basis of each such request, the Association shall, on behalf of the Borrower, withdraw from the 
Credit Account and deposit into the said Special Account such amount as the Borrower shall 
have requested.
(b)
For replenishment of the Special Account, the Borrower shall furnish to the 
Association requests for deposit into the Special Account at such intervals as the Association 
shall specify.  Prior to or at the time of each such request, the Borrower shall furnish to the 
Association the documents and other evidence required pursuant to Part B.3 of Schedule 1 to this 
Agreement for the payment or payments in respect of which replenishment is requested. On the 
basis of each such request, the Association shall, on behalf of the Borrower, withdraw from the 
Credit Account and deposit into the Special Account such amount as the Borrower shall have 
requested and as shall have been shown by said documents and other evidence to have been paid 
out of the Special Account for Eligible Expenditures. Each such deposit into the Special Account 
shall be withdrawn by the Association from the Credit Account under one or more of the Eligible 
Categories.
3.
The Association shall not be required to make further deposits into the Special Account, 
once the total unwithdrawn amount of the Credit minus the total amount of all outstanding 
special commitments entered into by the Association pursuant to Section 5.02 of the General 
Conditions, shall equal the equivalent of twice the amount of the Special Account’s Authorized 
Allocation. Thereafter, withdrawal from the Credit Account of the remaining unwithdrawn 
amount of the Credit shall follow such procedures as the Association shall specify by notice to 
the Borrower.  Such further withdrawals shall be made only after and to the extent that the 
Association shall have been satisfied that all such amounts remaining on deposit in the Special 
Account as of the date of such notice will be utilized in making payments for Eligible 
Expenditures.
Annex B
to
SCHEDULE 1
Operation of Special Account
When Withdrawals Are Made
On the Basis of Project Management Reports
1.
Except as the Association may otherwise specify by notice to the Borrower, all 
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withdrawals from the Credit Account shall be deposited by the Association into the Special 
Account in accordance with the provisions of Schedule 1 to this Agreement.  Each such deposit 
into the Special Account shall be withdrawn by the Association from the Credit Account under 
one or more of the Eligible Categories.
2.
Each application for withdrawal from the Credit Account for deposit into the Special 
Account shall be supported by a Project Management Report.
3.
Upon receipt of each application for withdrawal of an amount of the Credit, the 
Association shall, on behalf of the Borrower, withdraw from the Credit Account and deposit into 
the Special Account an amount equal to the lesser of: (a) the amount so requested; and (b) the 
amount which the Association has determined, based on the Project Management Report 
accompanying said application, is required to be deposited in order to finance Eligible 
Expenditures during the six-month period following the date of such report; provided, however, 
that the amount so deposited, when added to the amount indicated by said Project Management 
Report to be remaining in the Special Account, shall not exceed the equivalent of $16,000,000.
SCHEDULE 2
Description of the Project
The objectives of the Project are to assist Karnataka in: (i) increasing rural communities’ 
access to improved and sustainable drinking water supply and sanitation services; and (ii) 
institutionalizing decentralization of rural water supply and sanitation service delivery to Gram 
Panchayats and User Groups.
The Project consists of the following parts, subject to such modifications thereof as the 
Borrower and the Association may agree upon from time to time to achieve such objectives.
Part A:
Community Development and Infrastructure Building
1.
Community Development
(a)
Provision of social, technical and management support to Gram Panchayats, 
VWSCs and User Groups through provision of Support Agencies’ services and assistance for 
community mobilization, capacity building, engineering designs, procurement, construction 
supervision and in operation and maintenance.
(b)
Mobilizing women, including the formation of self-help groups, and building 
their skills to participate in the Project through provision of consultants’ and Support Agencies’ 
services, training and equipment.
2.
Infrastructure Building
(a)
Construction of about 2,100 new drinking water supply schemes, including 
augmentation of existing schemes;
(b)
Implementation of associated ground water recharge activities, including check 
dams, water harvesting structures, percolation tanks and dykes; 
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(c)
Construction of about 210,000 household latrines, and provision of about 
210,000 smokeless chullahs (stoves);
(d)
Construction of about 2,100 sullage/storm water drainage schemes, including 
safe disposal of wastewater, construction of about 700 institutional and about 700 pay and use 
type community latrines and about 700 compost yards; and
(e)
Rehabilitation of existing water supply schemes in about 700 Project Gram 
Panchayats.
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3.
Indigenous People’s Development Plan
Carrying out an Indigenous People’s Development Plan targeted for about 400 Project 
Settlements with indigenous people in the Project Districts, including through the provision of 
civil works, equipment, consultants’ and NGOs’ services and training.
Part B:
Institution Building
1.
Establishment and operation of KRWSSA and the DSUs, including strengthening their 
capacity for Project management, monitoring and evaluation, through the provision of 
consultants’ and Support Agencies’ services, equipment and materials and incremental operating 
costs.
2.
Development and implementation of sanitation and hygiene promotion strategic plan 
through the provision of consultants’ and Support Agencies’ services, training, workshops, and 
carrying out of baseline surveys.
3.
Building capacity of state level administrators, policy makers, and staff of KRWSSA, 
DSUs, ZPEDs, Support Agencies, Gram Panchayats and VWSCs and User Groups through 
provision of consultants’ and Support Agencies’ services, training and workshops.
4.
Strengthening of Gram Panchayats through the provision of civil works, equipment, 
training and incremental operating costs.
Part C:
Sector Strengthening Programs
1.
Strengthening of the sector program, 
inter alia,
 through the carrying out of advocacy 
workshops, exposure visits, mass media campaigns, and procurement of goods and equipment.
2.
Developing and implementing a rural water supply and sanitation sector information 
management system in Karnataka through provision of consultants’ services, training and 
equipment.
3.
Carrying out of other sector related special studies, including studies on water quality 
assessments and health impact studies, sustainability monitoring, alternative technology options 
and institutional studies.
**
*
The Project is expected to be completed by June 30, 2007.