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CONFORMED COPY
CREDIT NUMBER 3215 NEP
Development Credit Agreement
(Rural Infrastructure Project)
between
KINGDOM OF NEPAL
and
INTERNATIONAL DEVELOPMENT ASSOCIATION
Dated September 8, 1999
CREDIT NUMBER 3215 NEP 
DEVELOPMENT CREDIT AGREEMENT 
AGREEMENT, dated September 8, 1999, between KINGDOM OF NEPAL (the Borrower) and 
INTERNATIONAL DEVELOPMENT ASSOCIATION (the Association).
WHEREAS (A) the Borrower, having satisfied itself as to the feasibility and 
priority of the project described in Schedule 2 to this Agreement (the Project), has 
requested the Association to assist in the financing of the Project;
(B)
the Project will be carried out by the Borrower and the District 
Development Committees of selected districts of the Borrower with the Borrower’s 
assistance and, as part of such assistance, the Borrower will make part of the 
proceeds of the credit provided for in Article II of this Agreement (the Credit) 
available to such District Development Committees, 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;
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 \0bDecember 2, 
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1997), 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 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 10 of Resolution No. 
183 of the Board of 
Governors of the Association, adopted on \0bJune 26, 
1996; and ‘Participating Countries’ 
means, collectively, all such 
countries.”
(b)
The second sentence of Section 5.01 is modified to read as follows:
“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.”
(c)
Paragraph (c) of Section 9.06 of the General Conditions is modified to 
read as follows:
“(c)
Not later than six months before the Closing Date or such later 
date as may be 
agreed for this purpose between the Borrower and the Association, 
the Borrower shall prepare 
and furnish to the Association a report, of such 
scope and in such detail as the Association 
shall reasonably request, on the 
execution and initial operation of the Project, its cost 
and the benefits derived 
and to be derived from it, the performance by the Borrower and the 
Association 
of their respective obligations under the Development Credit Agreement and the 
accomplishment of the purposes of the Credit.”
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)
“DDC” means the District Development Committee established in each of the 
following districts of the Borrower, or any successor thereto: Kapilbastu; Rupandehi; 
Nawalparasi; Syangja; Palpa; Kaski; Dhading; and Sankhuwasabha; 
(b)
“DOLIDAR” means the Department of Local Infrastructure Development and 
Agricultural Roads of the MLD (as hereinafter defined); 
(c)
“DTMP” means the District Transport Master Plan of each DDC for the 
development and maintenance of road assets of that district; 
(d)
“DTU” means the District Technical Unit established in each DDC and 
responsible for, inter alia, the planning, implementation and supervision of 
activities to be carried out under the Project at the district level;
(e)
“Eligible Categories” means categories (1), (2), (3) and (4) set forth in 
the table in Part A.1 of Schedule 1 to this Agreement;
(f)
“Eligible Expenditures” means the expenditures for goods and services 
referred to in Section 2.02 of this Agreement;
(g)
“Memorandum of Understanding” means each Memorandum of Understanding to 
be executed by the Borrower and each DDC and furnished to the Association pursuant to 
Section 3.01(c) of this Agreement;
(h)
“MLD” means the Ministry of Local Development of the Borrower; 
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(i)
“Nepal Rastra Bank” means the central bank of the Borrower, established 
and operating pursuant to the Nepal Rastra Bank Act, 2012 (1955), as amended from time 
to time;
(j)
“PCU” means the Project Coordination Unit established in the DOLIDAR and 
responsible for, inter alia, the planning, implementation and supervision of 
activities to be carried out under the Project at the central level and the overall 
coordination and monitoring of activities to be carried out under the Project at the 
central and district levels;
(k)
“PIP” means the Project Implementation Plan of the Borrower, dated April 
1999 and approved by the Association, as the same may be updated from time to time 
with the agreement of the Association;
(l)
“Project Management Report” means each report prepared in accordance with 
Section 4.02 of this Agreement;
(m)
“Social and Environmental Assessment” means the Stakeholder Analysis, 
Social and Environmental Assessment – in the context of Rural Infrastructure Project, 
Ministry of Local Development, Nepal and the World Bank, October 1998, setting forth, 
inter alia, the assessment of environmental and socio-economic impacts of the road 
maintenance and rehabilitation works under the Project and recommendations based on 
such assessment; and (n)
“Special Account” means the account referred to in Part B of 
Schedule 1 to this Agreement.
Section 1.03. Each reference in the General Conditions to the Project 
implementation entity shall be deemed to be a reference to each DDC. 
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 three million seven hundred thousand Special Drawing 
Rights (SDR 3,700,000).
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 and services required for the Project described in Schedule 2 to this 
Agreement and to be financed out of the proceeds of the Credit.
Section 2.03. The Closing Date shall be July 31, 2002 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.
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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 April 1 and October 1 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 April 1 and October 1 commencing October 1, 2009 and ending April 1, 2039.  Each 
installment to and including the installment payable on April 1, 2019 shall be one 
percent (1%) of such principal amount, and each installment thereafter shall be two 
percent (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 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, and, to this end, without any limitation or restriction upon any of its other 
obligations under this Agreement, shall carry out, and cause each DDC to carry out, 
the Project with due diligence and efficiency and in conformity with appropriate 
administrative, financial, engineering, transport and environmental practices, and 
shall provide, and cause each DDC to provide, promptly as needed, the funds, 
facilities, services and other resources required for the Project.
(b)
Without limitation upon the provisions of paragraph (a) of this Section 
and except as the Borrower and the Association shall otherwise agree, the Borrower 
shall carry out, and cause each DDC to carry out, the Project in accordance with the 
Implementation Program set forth in Schedule 4 to this Agreement.
(c)
Without any limitation or restriction upon any of its other obligations 
under this Agreement, the Borrower shall execute with each DDC a Memorandum of 
Understanding, satisfactory to the Association and substantially in the form set forth 
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in Schedule 4 to this Agreement, and promptly upon such execution furnish a copy 
thereof to the Association, before such DDC participates in the carrying out of any 
activities under the Project.
(d)
Without any limitation or restriction upon any of its other obligations 
under this Agreement, the Borrower shall cause each DDC to perform in accordance with 
the provisions of the applicable Memorandum of Understanding all the obligations of 
such DDC therein set forth, shall take or cause to be taken all action, including the 
provision of funds, facilities, services and other resources, necessary or appropriate 
to enable such DDC to perform such obligations, and shall not take or permit to be 
taken any action which would prevent or interfere with such performance.
(e)
The Borrower shall make available to each DDC, as a grant and in a timely 
manner, (i) part of the proceeds of the Credit and (ii) additional funds from the 
Borrower’s own resources if and as required for such DDC to carry out its activities 
under the Project.
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 3 to 
this Agreement.
Section 3.03. For the purposes of Section 9.06 of the General Conditions and 
without limitation thereto, the Borrower shall:
(a)
prepare, on the basis of guidelines acceptable to the Association, and 
furnish to the Association not later than six (6) months before the Closing Date or 
such later date as may be agreed for this purpose between the Borrower and the 
Association, a plan designed to ensure the continued achievement of the Project’s 
objectives; and
(b)
afford the Association a reasonable opportunity to exchange views with 
the Borrower on said plan.
Section 3.04. The Borrower and the Association hereby agree that the obligations 
set forth in Sections 9.03, 9.04, 9.05, 9.06 and 9.07 of the General Conditions 
(relating to insurance, use of goods and services, plans and schedules, records and 
reports and maintenance, respectively) in respect of the activities to be carried out 
by each DDC shall be carried out by such DDC.
ARTICLE IV
Financial Covenants
Section 4.01. (a) The Borrower shall, and shall cause each DDC to, maintain a 
financial management system, including records and accounts, and prepare financial 
statements in a format acceptable to the Association, adequate to reflect in 
accordance with sound financial management and accounting practices the operations, 
resources and expenditures related to the Project of the departments or agencies of 
the Borrower and each DDC responsible for carrying out the Project or any part 
thereof.
(b)
The Borrower shall:
(i)
have the records, accounts and financial statements referred to in 
paragraph 
(a) of this Section including 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 fiscal year, (A) 
certified copies 
of the financial statements referred to in paragraph 
(a) of this Section for 
such fiscal year as so audited, and (B) an 
opinion on such financial 
statements, records and accounts and a 
report of such audit, by said auditors, 
of such scope and in such 
detail as the Association shall have reasonably 
requested; 
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and
(iii)
furnish to the Association such other information concerning said 
records, 
accounts and financial statements, and the audit 
thereof, and concerning said 
auditors, as the Association may from 
time to time reasonably request.
(c)
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 paragraph 
(a) of this 
Section, records and separate accounts reflecting such 
expenditures;
(ii)
retain or cause to be 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, all records 
(contracts, orders, invoices, 
bills, receipts and other documents) 
evidencing such expenditures;
(iii)
enable the Association’s representatives to examine such records; 
and
(iv)
ensure that such records and accounts are included in the annual 
audit 
referred to in paragraph (b) of this Section and that the 
report of such audit 
contains 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.
Section 4.02. (a) Without limitation upon the provisions of Section 4.01 of this 
Agreement, the Borrower shall carry out, and cause each DDC to carry out, a time-bound 
action plan acceptable to the Association for the strengthening of the financial 
management system referred to in paragraph (a) of said Section 4.01 in order to enable 
the Borrower, not later than November 30, 2000, or such later date as the Association 
shall agree, to prepare trimesterly Project Management Reports, acceptable to the 
Association, each of which:
(i)
(A) sets forth actual sources and applications of funds for the 
Project, both 
cumulatively and for the period covered by said 
report, and projected sources 
and applications of funds for the 
Project for the eight-month period following 
the period covered by said 
report, and (B) shows separately expenditures 
financed out of the 
proceeds of the Credit during the period covered by said 
report and 
expenditures proposed to be financed out of the proceeds of the 
Credit during the eight-month period following the period covered by said 
report;
(ii)
(A) describes physical progress in Project implementation, both 
cumulatively 
and for the period covered by said report, and (B) explains 
variances between 
the actual and previously forecast implementation 
targets; and
(iii)
sets forth the status of procurement under the Project and 
expenditures under 
contracts financed out of the proceeds of the Credit, 
as at the end of the 
period covered by said report.
(b)
Upon the completion of the action plan referred to in paragraph (a) of 
this Section, the Borrower shall prepare, in accordance with guidelines, and furnish 
to the Association not later than 45 days after the end of each trimester a Project 
Management Report for such period.
ARTICLE V
Remedies of the Association
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Section 5.01. Pursuant to Section 6.02(l) of the General Conditions, the 
following additional events are specified:
(a)
The Borrower or any DDC shall have failed to perform any of its 
obligations under its Memorandum of Understanding. 
(b)
As a result of events which have occurred after the date of this 
Agreement, an extraordinary situation shall have arisen which shall make it improbable 
that the Borrower or any DDC will be able to perform its obligations under its 
Memorandum of Understanding.
(c)
The Borrower or any DDC shall have waived or failed to enforce any of the 
provisions of any Memorandum of Understanding.
(d)
Any Memorandum of Understanding shall have been amended, suspended, 
abrogated or repealed so as to materially and adversely affect the implementation of 
the Project.
Section 5.02. Pursuant to Section 7.01(h) of the General Conditions, the 
following additional event is specified, namely that any of the events specified in 
paragraphs (a), (c) and (d) 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.
ARTICLE VI
Termination
Section 6.01. The date ninety (90) days after the date of this Agreement is 
hereby specified for the purposes of Section 12.04 of the General Conditions.
ARTICLE VII
Representative of the Borrower; Addresses
Section 7.01. The Secretary, Ministry of Finance of the Borrower is designated 
as representative of the Borrower for 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:
Ministry of Finance
His Majesty’s Government of Nepal
Kathmandu, Nepal
Cable address:
Telex:
ARTHA
2249-NEP
Kathmandu, Nepal
For the Association:
International Development Association
1818 H Street, N.W.
Washington, D.C. 20433
United States of America
Cable address:
Telex:
INDEVAS
248423 (MCI) or
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 
Kathmandu, Nepal, as of the day and year first above written.
KINGDOM OF NEPAL
By /s/ Ram Binod Bhattarai 
Authorized Representative
INTERNATIONAL DEVELOPMENT ASSOCIATION
By /s/ Hans M. Rothenbuhler 
Country Director, Nepal
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
   2,225,000
80%
(2)
Goods
     150,000
100% of foreign
expenditures,
100% of local
expenditures
(ex-factory cost) and
90% of local expend-
itures for other items
procured locally
(3)
Consultants’services
   1,030,000
100%
and training
(4)
Incremental operating
      75,000
70%
costs
(5)
Unallocated
     220,000
   _________
TOTAL
   3,700,000
   =========
2.
For the purposes of this Schedule:
(a)
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;
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(b)
the term “local expenditures” means expenditures in the currency of the 
Borrower or for goods or services supplied from the territory of the Borrower; and
(c)
the term “incremental operating costs” means (i) expenditures incurred by 
the PCU for the operation and maintenance of facilities, vehicles and equipment used 
for Project implementation and (ii) salaries and allowances of staff employed by the 
PCU after December 20, 1998 for the purposes of carrying out the Project.
3.
Notwithstanding the provisions of paragraph 1 above, no withdrawals shall be 
made in respect of payments made for:
(a)
expenditures prior to the date of this Agreement, except that 
withdrawals, in an aggregate amount not exceeding the equivalent of\0bSDR 75,000, may be  
made in respect of Categories (1), (2), (3) and (4) set forth in the table in Part A.1 
of this Schedule on account of payments made for expenditures before that date but 
after December 20, 1998;
(b)
expenditures incurred by any DDC for any activities under the Project 
unless and until the Borrower and such DDC have executed a Memorandum of Understanding 
satisfactory to the Association and furnished a copy thereof to the Association 
pursuant to Section 3.01(c) of this Agreement; and
(c)
expenditures incurred by the DDC of the district of Sankhuwasabha for 
civil works for rehabilitation of its district roads/trails under Part A of the 
Project unless and until such DDC has submitted to the Association its DTMP 
satisfactory to the Association pursuant to paragraph 7 of Schedule 4 to this 
Agreement.
4.
The Association may require withdrawals from the Credit Account to be made on 
the basis of statements of expenditure for expenditures for: (a) goods under contracts 
costing less than $20,000 equivalent each; (b) works under contracts costing less than 
$50,000 equivalent each; (c) services under contracts costing less than $20,000 
equivalent each for employment of consulting firms and $5,000 equivalent each for 
employment of individual consultants; (d) training; and (e) incremental operating 
costs; all 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 
Nepal Rastra Bank, on terms and conditions satisfactory to the Association.
2.
After the Association has received evidence satisfactory to it that the 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 this 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 this 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:
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(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 this 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, accounts and financial statements 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 this Agreement.
Annex A to SCHEDULE 1
Operation of Special Account When Withdrawals Are Not Made 
On the Basis of Project Management Reports
1.
For the purposes of this Annex, the term “Authorized Allocation” means an amount 
equivalent to $500,000 to be withdrawn from the Credit Account and deposited into the 
Special Account pursuant to paragraph 2 of this Annex.
2.
Withdrawals of the Authorized Allocation and subsequent withdrawals to replenish 
the Special Account shall be made as follows:
(a)
For withdrawals of the 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 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 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 
Page  11
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 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 
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 eight-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 $1,000,000.
SCHEDULE 2
Description of the Project
The objective of the Project is to assist the Borrower in strengthening the 
institutional capacity of the decentralized governance system in its planning and 
managing capabilities to improve the quality, efficiency and sustainability of rural 
roads/trails in selected districts of the Borrower with active participation of 
Project beneficiaries.
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 objective:
Part A:
Infrastructure Works
1.
Implementing routine maintenance of about 1,000 km of district roads, periodic 
maintenance of about 240 km of district roads and rehabilitation and spot improvement 
of about 100 km of district roads in the districts of Kapilbastu, Rupandehi, 
Nawalparasi, Syangja, Palpa, Kaski and Dhading.
2.
Implementing rehabilitation and spot improvement of about 75 km of existing 
Page  12
trails in the district of  Sankhuwasabha.
3.
Implementing maintenance and rehabilitation of other small-scale rural 
infrastructure, including rural marketing structures and rural transport schemes.
Part B:
Institutional Capacity Strengthening
1.
Strengthening the institutional capacity of the MLD/DOLIDAR and the DDCs in 
planning and managing rural infrastructure and developing the knowledge base for an 
expansion of the Project approach through: (i) provision of Project management 
advisory services to the MLD/DOLIDAR and the DDCs; (ii) provision of training to 
MLD/DOLIDAR staff, DDC staff, contractors and consultants; (iii) provision of 
technical assistance in the technical, financial, environmental and socio-economic 
monitoring and verification of road works; (iv) stakeholder mobilization in the 
community-based performance monitoring of technical and financial aspects of project 
implementation in selected districts; and (v) evaluation of the achievement of the 
Project’s objectives and the feasibility of a larger follow-on project.
*          *          *
The Project is expected to be completed by January 31, 2002. 
SCHEDULE 3 
Procurement 
Section I.
Procurement of Goods and Works
Part A:
General
1.
Goods and works shall be procured in accordance with (a) the provisions of 
Section I of the “Guidelines for Procurement under IBRD Loans and IDA Credits” 
published by the Bank in January 1995 and revised in January and August 1996, 
September 1997 and January 1999, subject to the modifications thereto set forth in 
paragraph 2 of this Part A (the Guidelines), and (b) the provisions of the following 
Parts of this Section I.
2.
In paragraphs 1.6 and 1.8 of the Guidelines, the references to “Bank member 
countries” and “member country” shall be deemed to be references, respectively, to 
“Participating Countries” and “Participating Country.”
Part B:
National Competitive Bidding
1.
Except as otherwise provided in Part C of this Section, goods and works shall be 
procured under contracts awarded in accordance with the provisions of paragraphs 3.3 
and 3.4 of the Guidelines.
2.
In order to ensure economy, efficiency, transparency and broad consistency with 
the provisions of Section 1 of the Guidelines:
(a)
invitations to bid shall be advertised in at least one widely circulated 
national daily newspaper, at least 30 days prior to the deadline for the submission of 
bids;
(b)
bid documents shall be made available, by mail or in person, to all who 
are willing to pay the required fee;
(c)
evaluation of bids shall be made in strict adherence to the criteria 
disclosed in the bidding documents, in a format and specified period agreed with the 
Association;
(d)
bids shall be opened in public in one place, immediately after the 
deadline for submission of bids;
(e)
foreign bidders shall not be precluded from bidding and no preference of 
any kind shall be given to national bidders;
Page  13
(f)
qualification criteria (in case pre-qualifications were not carried out) 
shall be stated in the bidding documents, and if a registration process is required, a 
foreign firm declared as the lowest evaluated bidder shall be given a reasonable 
opportunity of registering, without let or hindrance;
(g)
contracts shall be awarded to the lowest evaluated bidders;
(h)
post-bidding negotiations shall not be allowed with the lowest evaluated 
bidders or any other bidders;
(i)
bids shall not be rejected merely on the basis of a comparison with an 
official estimate without the prior concurrence of the Association;
(j)
contracts shall not be awarded on the basis of nationally negotiated 
rates;
(k)
re-bidding shall not be carried out without the prior concurrence of the 
Association;
(l)
all bidders/contractors shall provide bid/performance security as 
indicated in the bidding/contract documents;
(m)
a bidder’s bid security shall apply only to a specific bid, and a 
contractor’s performance security shall apply only to the specific contract under 
which it was furnished;
(n)
split award or lottery in award of contracts shall not be carried out.  
When two or more bidders quote the same lowest price, an investigation shall be made 
to determine any evidence of collusion, following which:
(i)
if collusion is determined, the parties involved shall be 
disqualified and the 
award shall then be made to the next lowest 
evaluated and qualified bidder; 
and
(ii)
if no evidence of collusion can be confirmed, then fresh bids 
shall be invited 
after receiving the concurrence of the Association;
(o)
extension of bid validity shall not be allowed without the prior 
concurrence of the Association (i) for the first request for extension if it is longer 
than eight weeks and (ii) for all subsequent requests for extension irrespective of 
the period;
(p)
bids shall not be invited on the basis of percentage premium or discount 
over the estimated cost; and
(q)
there shall not be any restrictions on the means of delivery of the bids.
Part C:
Other Procurement Procedures
1.
International or National Shopping
Goods estimated to cost less than $20,000 equivalent per contract, up to an 
aggregate amount not to exceed $100,000 equivalent, may be procured under contracts 
awarded on the basis of shopping procedures in accordance with the provisions of 
paragraphs 3.5 and 3.6 of the Guidelines.
2.
Procurement of Small Works
Works estimated to cost less than $20,000 equivalent per contract, up to an 
aggregate amount not to exceed $2,400,000 equivalent, may be procured under lump-sum, 
fixed-price contracts awarded on the basis of quotations obtained from at least three 
(3) qualified domestic contractors in response to a written invitation. The invitation 
shall include a detailed description of the works, including basic specifications, the 
required completion date, a basic form of agreement acceptable to the Association, and 
relevant drawings, where applicable. The award shall be made to the contractor who 
offers the lowest price quotation for the required work, and who has the experience 
and resources to complete the contract successfully.
Page  14
Part D:
Review by the Association of Procurement Decisions
1.
Procurement Planning
Prior to the issuance of any invitations to bid for contracts, the proposed 
procurement plan for the Project shall be furnished to the Association for its review 
and approval, in accordance with the provisions of paragraph 1 of Appendix 1 to the 
Guidelines. Procurement of all goods and works shall be undertaken in accordance with 
such procurement plan as shall have been approved by the Association, and with the 
provisions of said paragraph 1.
2.
Prior Review
(a)
With respect to (i) each contract for works estimated to cost the 
equivalent of $50,000 or more, (ii) the first three contracts for works estimated to 
cost the equivalent of $20,000 or more but less than the equivalent of $50,000, and 
(iii) each contract for goods estimated to cost the equivalent of $20,000 or more, the 
procedures set forth in paragraphs 2 and 3 of Appendix 1 to the Guidelines shall 
apply.
(b)
With respect to the first contract for works to be procured in accordance 
with the procedures referred to in paragraph 2 of Part C above, the following 
procedures shall apply:
(i)
prior to the selection of the supplier, the Borrower shall provide 
to the 
Association a report on the comparison and evaluation 
of quotations received;
(ii)
prior to the execution of the contract, the Borrower shall provide 
to the 
Association a copy of the specifications and the 
draft contract; and
(iii)
the procedures set forth in paragraphs 2(f), 2(g) and 3 of 
Appendix 1 to the 
Guidelines shall apply.
3.
Post Review
With respect to each contract not governed by paragraph 2 of this Part, the 
procedures set forth in paragraph 4 of Appendix 1 to the Guidelines shall apply.
Section II.
Employment of Consultants
Part A:
General
1.
Consultants’ services shall be procured in accordance with (a) the provisions of 
the Introduction and Section IV of the “Guidelines: Selection and Employment of 
Consultants by World Bank Borrowers” published by the Bank in January 1997 and revised 
in September 1997 and January 1999, subject to the modifications thereto set forth in 
paragraph 2 of this Part A (the Consultant Guidelines), and (b) the provisions of the 
following Parts of this Section II.
2.
In paragraph 1.10 of the Consultant Guidelines, the references to “Bank member 
countries” and “member country” shall be deemed to be references, respectively, to 
“Participating Countries” and “Participating Country.”
Part B:
Quality- and Cost-based Selection
1.
Except as otherwise provided in Part C of this Section, consultants’ services 
shall be procured under contracts awarded in accordance with the provisions of Section 
II of the Consultant Guidelines, paragraph 3 of Appendix 1 thereto, Appendix 2 
thereto, and the provisions of paragraphs 3.13 through 3.18 thereof applicable to 
quality- and cost-based selection of consultants.
2.
The following provisions shall apply to consultants’ services to be procured 
under contracts awarded in accordance with the provisions of the preceding paragraph.  
The short list of consultants for services, estimated to cost less than $200,000 
Page  15
equivalent per contract, may comprise entirely national consultants in accordance with 
the provisions of paragraph 2.7 of the Consultant Guidelines.
Part C:
Other Procedures for the Selection of Consultants
1.
Single-Source Selection
Services for the preparation and implementation of the civil works program in 
any district may, with the Association’s prior agreement, be procured in accordance 
with the provisions of paragraphs 3.8 through 3.11 of the Consultant Guidelines.
2.
Individual Consultants
Services for tasks that meet the requirements set forth in paragraph 5.1 of the 
Consultant Guidelines shall be procured under contracts awarded to individual 
consultants in accordance with the provisions of paragraphs 5.1 through 5.3 of the 
Consultant Guidelines.
Part D:
Review by the Association of the Selection of Consultants
1.
Selection Planning
Prior to the issuance to consultants of any requests for proposals, the proposed 
plan for the selection of consultants under the Project shall be furnished to the 
Association for its review and approval, in accordance with the provisions of 
paragraph 1 of Appendix 1 to the Consultant Guidelines.  Selection of all consultants’ 
services shall be undertaken in accordance with such selection plan as shall have been 
approved by the Association, and with the provisions of said paragraph 1.
2.
Prior Review
(a)
With respect to each contract for the employment of consulting firms 
estimated to cost the equivalent of $20,000 or more, the procedures set forth in 
paragraphs 1, 2 (other than the third subparagraph of paragraph 2(a)) and 5 of 
Appendix 1 to the Consultant Guidelines shall apply.
(b)
With respect to each contract for the employment of individual 
consultants estimated to cost the equivalent of $5,000 or more, the qualifications, 
experience, terms of reference and terms of employment of the consultants shall be 
furnished to the Association for its prior review and approval.  The contract shall be 
awarded only after the said approval shall have been given.
3.
Post Review
With respect to each contract not governed by paragraph 2 of this Part, the 
procedures set forth in paragraph 4 of Appendix 1 to the Consultant Guidelines shall 
apply. \0cSCHEDULE 4 Implementation Program DDC Funding for Civil Works
1.
The Borrower shall cause each DDC to contribute, out of such DDC’s own resources 
or any block grants allocated by the Borrower, at least twenty percent (20%) of the 
total funds required for the civil works to be undertaken in the Project on an annual 
basis before the Borrower grants authority to such DDC to apply the proceeds of the 
Credit to the remaining portions of the costs of such civil works.
Project Coordination Unit (PCU)
2.
The Borrower shall maintain the PCU with adequate numbers of professional staff 
with skills, experience and qualifications and on terms of reference satisfactory to 
the Association, including without limitation the Project Coordinator, one Accounts 
Officer, two accountants and one computer technician for the operation of the 
financial management system.
3.
The Borrower shall ensure that the Project Coordinator and the Accounts Officer 
in the PCU will not be transferred to other positions during the period of Project 
implementation without prior consultation with the Association and except as required 
under the applicable law of the Borrower.
Page  16
District Technical Unit (DTU)
4.
The Borrower shall cause each DDC to maintain the DTU with adequate numbers of 
professional staff with skills, experience and qualifications and on terms of 
reference satisfactory to the Association.
5.
The Borrower shall cause each DDC to ensure that its District Engineer will not 
be transferred to another position during the period of Project implementation without 
prior consultation with the Association and except as required under the applicable 
law of the Borrower.
Project Implementation Plan (PIP) and District Transport Master Plans (DTMPs)
6.
The Borrower shall, and shall cause each DDC to, carry out the Project in 
accordance with the PIP and its DTMP satisfactory to the Association.
7.
With respect to the DDC of the district of Sankhuwasabha, the Borrower:\0b(i) 
shall cause such DDC to submit to the Association by October 31, 1999 its DTMP 
satisfactory to the Association; and (ii) shall not make any part of the proceeds of 
the Credit available to such DDC for civil works for rehabilitation of its district 
roads/trails under Part A of the Project unless and until such DDC has submitted such 
DTMP to the Association.
Memorandum of Understanding
8.
Except as the Association shall otherwise agree, the Memorandum of Understanding 
to be executed by the Borrower and each DDC shall include, inter alia, the following 
provisions:
(a)
Each DDC shall declare its commitment to the objective of the Project as 
set forth in Schedule 2 to the Development Credit Agreement, and to this end, shall 
agree to carry out its activities under the Project with due diligence and efficiency 
and in conformity with appropriate administrative, financial, engineering, transport 
and environmental practices, and to provide, or cause to be provided, promptly as 
needed, the funds, facilities, services and other resources required for its 
activities under the Project.
(b)
Each DDC shall agree to assume all the obligations applicable or relevant 
to such DDC under the Development Credit Agreement and to take all actions necessary 
to undertake its activities under the Project.  Each DDC shall further agree to carry 
out its activities under the Project in accordance with the Implementation Program set 
forth in Schedule 4 to the Development Credit Agreement, the PIP and its DTMP (as such 
terms are defined in the Development Credit Agreement).
(c)
The Borrower shall agree to make available to each DDC, as a grant and in 
a timely manner, (i) part of the proceeds of the Credit and (ii) additional funds from 
the Borrower’s own resources if and as required for such DDC to carry out its 
activities under the Project.
(d)
Each DDC shall agree that 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 3 to the Development 
Credit Agreement.
(e)
Each DDC shall agree that the Borrower and the Association may from time 
to time inspect the goods, works and services under the Project including all records 
and documents relating thereto.
(f)
Each DDC shall agree to carry out the obligations set forth in Sections 
9.03, 9.04, 9.05, 9.06 and 9.07 (relating to insurance, use of goods and services, 
plans and schedules, records and reports and maintenance, respectively) of the General 
Conditions (as such term is defined in the Development Credit Agreement) in respect of 
its Memorandum of Understanding and its activities under the Project.
(g)
Each DDC shall agree to comply and assist the Borrower in complying with 
the financial covenants prescribed by Article IV of the Development Credit Agreement.
Page  17
(h)
Each DDC shall acknowledge that the Borrower may suspend or terminate its 
right to use the proceeds of the Credit made available under the Development Credit 
Agreement upon its failure to perform any of its obligations under its Memorandum of 
Understanding or upon notice by the Association that it intends to exercise its 
remedies under Article V of the Development Credit Agreement.
(i)
Without limitation on any other provisions of the Memorandum of 
Understanding, each DDC shall acknowledge that if, as a result of a review of the 
implementation of the Project for any period, the performance of such DDC during such 
period is deemed by the Association, in consultation with the DOLIDAR (as such term is 
defined in the Development Credit Agreement) to be less than satisfactory, the 
Borrower is not permitted to make any part of the proceeds of the Credit available to 
such DDC for any of its activities carried out under the Project after such review 
until further notice by the Association.
(j)
Each DDC shall agree to promptly inform the Borrower and the Association 
of any condition which interferes or threatens to interfere with the progress of its 
activities under the Project, the accomplishment of the purposes of the Credit, or the 
performance of its obligations under its Memorandum of Understanding.
(k)
Each DDC shall agree that it shall, from time to time, at the request of 
the Borrower or the Association, (i) exchange views with the Borrower and/or the 
Association with regard to the progress of its activities under the Project, the 
performance of its obligations under its Memorandum of Understanding and other matters 
relating to the purposes of the Credit and (ii) furnish all such information related 
thereto as may reasonably be required by the Borrower and/or the Association.
(l)
Each DDC shall agree that it shall: (i) prepare, on the basis of 
guidelines acceptable to the Association, and furnish to the Association not later 
than six (6) months before the Closing Date (as such term is defined in the 
Development Credit Agreement) or such later date as may be agreed for this purpose 
among the Association, the Borrower and such DDC, a plan designed to ensure the 
continued achievement of the Project’s objective; and (ii) afford the Association a 
reasonable opportunity to exchange views with such DDC on said plan.
(m)
Each DDC shall agree not to use any part of the proceeds of the Credit to 
undertake civil works on any roads/trails not included in its DTMP satisfactory to the 
Association.
Performance of DDC
9.
If, as a result of a review of the implementation of the Project for any period, 
the performance of any DDC during such period is deemed by the Association, in 
consultation with the DOLIDAR, to be less than satisfactory, the Borrower shall not 
make any part of the proceeds of the Credit available to such DDC for any of its 
activities carried out under the Project after such review until further notice by the 
Association.
Financial Management System
10.
The Borrower shall: (i) by November 30, 1999, complete the preparation of an 
accounts manual, satisfactory to the Association, for the operation of its financial 
management system; (ii) by December 15, 1999, start the training, with terms of 
reference satisfactory to the Association, of the adequate number of accounts staff of 
the PCU and DDCs by using such accounts manual; and (iii) by December 15, 1999, 
appoint a second accountant in the PCU with experience satisfactory to the 
Association.
Roads Not Included in DTMP
11.
The Borrower shall cause each DDC not to use any part of the proceeds of the 
Credit to undertake civil works on any roads/trails not included in its DTMP 
satisfactory to the Association.
Socio-Economic and Project Implementation Issues
12.
The Borrower shall cause each DDC to implement the recommendations regarding 
Page  18
socio-economic and other Project implementation issues set forth in the Social and 
Environmental Assessment in a manner satisfactory to the Association, including 
without limitation: (i) measures to maximize the benefits of the Project for the poor 
and women; (ii) the use of labor-based techniques and local contractors and road user 
groups in the civil works; (iii) the undertaking of the community-based performance 
monitoring of technical and financial aspects of project implementation in selected 
districts; and\0b(iv) the undertaking of a socio-economic survey in selected districts 
with the beneficiary participation in data collection and impact monitoring.
Environmental Issues
13.
The Borrower shall cause each DDC to implement the recommendations regarding 
environmental issues set forth in the Social and Environmental Assessment in a manner 
satisfactory to the Association, including without limitation the development of a 
system to screen the environmental and social impacts of road works and to identify 
and implement environmental mitigation measures.
Environmental Mitigation Measures in Civil Works Contracts
14.
The Borrower shall cause each DDC to ensure that all civil works contracts for 
the roads covered by the Project will include environmental mitigation measures set 
forth in the Social and Environmental Assessment.
Resettlement and Rehabilitation
15.
The Borrower shall, and shall cause each DDC to, ensure that no involuntary 
resettlement arises from any land acquisition, use of land or change of land use under 
the Project, except to the extent that such DDC shall: (i) sufficiently in advance of 
such land acquisition or land use, prepare a resettlement plan satisfactory to the 
Association by, inter alia, undertaking meaningful consultation with affected people 
and incorporating their views in the plan and submit it to the Association; and (ii) 
thereafter implement such resettlement plan in a manner and with a timetable 
satisfactory to the Association.
Trimesterly Reports
16.
The Borrower shall, within forty-five (45) days after the end of each trimester, 
provide to the Association a trimesterly report setting forth the progress of the 
implementation of the Project and proposed action plans for the following trimester, 
such trimesterly report to include a trimesterly report prepared by each DDC.
Monitoring and Evaluation; Mid-Term Review
17.
The Borrower shall:
(a)
maintain, and cause each DDC to maintain, policies and procedures 
adequate to enable them to monitor and evaluate on an ongoing basis, in accordance 
with indicators satisfactory to the Association, the carrying out of the Project and 
the achievement of the objective thereof;
(b)
prepare, and cause each DDC to prepare, under terms of reference 
satisfactory to the Association, and furnish to the Association, by October 31, 2000, 
a report or reports integrating the results of the monitoring and evaluation 
activities performed pursuant to subparagraph (a) of this paragraph, on the progress 
achieved in the carrying out of the Project during the period preceding the date of 
said report(s) and setting out the measures recommended to ensure the efficient 
carrying out of the Project and the achievement of the objective thereof during the 
period following such date; and
(c)
review with the Association, by November 30, 2000, or such later date as 
the Association shall request, the report(s) referred to in subparagraph (b) of this 
paragraph, cause each DDC to participate in such review as necessary or appropriate, 
and, thereafter, take, and cause each DDC to take, all measures required to ensure the 
efficient completion of the Project and the achievement of the objective thereof, 
based on the conclusions and recommendations of the said report(s) and the 
Association’s views on the matter.
Page  19