Page 1 CONFORMED COPY LOAN NUMBER 4064 LT Loan Agreement (Energy Efficiency/Housing Pilot Project) between REPUBLIC OF LITHUANIA and INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Dated August 6, 1996 LOAN NUMBER 4064 LT LOAN AGREEMENT AGREEMENT, dated August 6, 1996, between REPUBLIC OF LITHUANIA (the Borrower) and INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (the Bank). WHEREAS (A) the Borrower, having satisfied itself as to the feasi- bility and priority of the Project described in Schedule 2 to this Agreement, has requested the Bank to assist in the financing of the Project; (B) the Project will be carried out with the participation of the Housing Credit Foundation, the Participating Financial Institutions and the Participating Municipalities (all as defined in Section 1.02 of this Agreement) with the Borrower's assistance and, as part of such assistance, the Borrower will make available to each of the Participating Financial Institutions and the Participating Municipalities a portion of the pro- ceeds of the Loan as provided in this Agreement; (C) the Borrower intends to contract from other donor sources a grant or grants (the Additional Grants) in an amount equivalent to $2,900,000 to assist in financing part of Part C of the Project on the terms and conditions to be set forth in an agreement or agreements (the Additional Grant Agreements) to be entered into between the Borrower and additional donors; and WHEREAS the Bank has agreed, on the basis, inter alia, of the fore- going, to extend the Loan to the Borrower upon the terms and conditions set forth in this Agreement. Page 2 NOW THEREFORE the parties hereto hereby agree as follows: ARTICLE I General Conditions; Definitions Section 1.01. The "General Conditions Applicable to Loan and Guarantee Agreements for Single Currency Loans" of the Bank, dated May 30, 1995 (the General Conditions) constitute an integral part of this Agreement. Section 1.02. Unless the context otherwise requires, the several terms defined in the General Conditions and in the Preamble to this Agreement have the respective meanings therein set forth and the following additional terms have the following meanings: (a) "Bank of Lithuania" or "BOL" means the central bank of the Borrower, established and operating pursuant to the Borrower's law on the Bank of Lithuania dated December 23, 1994, as the same may be amended from time to time; (b) "Beneficiary" means each of: (i) a Homeowners' Association (as hereinafter defined); (ii) an individual owner of a free standing house in the territory of the Borrower; and (iii) an individual owner of an apartment provided that the Homeowners' Association of which such owner is a member is also a Beneficiary under the Project; (c) "Consumer Rate" means the fixed interest rate payable on a Sub-loan by a Beneficiary to a PFI, established periodically by the Borrower and agreed with the Bank; (d) "HCF Charter" means the by-laws of HCF (as defined below) approved by MOF on May 3, 1996 and registered with the Borrower's Ministry of Economy on May 29, 1996; (e) "HOA Law" means the Law on Multi-apartment Homeowners' Associations (No. I-798) adopted by the Borrower's Parliament on February 21, 1995; (f) "Homeowners' Associations" or "HOAs" means homeowners' associations duly established and registered according to the HOA Law; (g) "Housing Credit Foundation" or "HCF" means the Housing Credit Foundation established as a non-profit organization pursuant to Decree No. 210 of the Borrower dated February 7, 1996 and operating pursuant to the HCF Charter; (h) "Implementation Agreement" means the agreement to be entered into between MOF (as hereinafter defined) and the Housing Credit Foundation referred to in Section 6.01 (b) of this Agreement, as the same may be amended from time to time, and such term includes all schedules to such agreement; (i) "Litas" means the lawful currency of the Borrower; (j) "Market Reference Rate" means a market-based reference rate determined by the Borrower on a semi-annual basis and agreed with the Bank and referred to in paragraph 6 of Section II of the Annex to Schedule 5; (k) "MCUD" means the Borrower's Ministry of Construction and Urban Development; (l) "MOF" means the Borrower's Ministry of Finance; (m) "Operating Procedures" means the operating procedures referred to in Section 6.01 (c) of this Agreement as the same may be amended from time to time with the agreement of the Borrower and the Bank, setting out the procedures for implementation of the Project, including, without limitation, eligibility criteria for Beneficiaries, Sub-projects and Rehabilitation Projects and the terms and conditions of Sub-loans; Page 3 (n) "Participating Financial Institution" or "PFI" means a bank or other financial institution referred to in paragraph 2 of Schedule 5 to this Agreement which shall have been selected by the Borrower and approved by the Bank for participation in the Project, collectively referred to as "PFIs"; (o) "Participating Municipality" or "PM" means each of the municipalities of Vilnius, Kaunas and any other municipality approved by the Borrower and the Bank, collectively referred to as "Participating Municipalities"; (p) "PCU" means the Project Co-ordination Unit to be established within the Housing Credit Foundation and referred to in Section 6.01 (d) of this Agreement; (q) "PFI Subsidiary Loan Agreement" means any agreement to be entered into between the Borrower, through MOF, and a Participating Financial Institution pursuant to Section 3.01 (b) of this Agreement as the same may be amended from time to time, and such term includes all schedules to such agreement, collectively referred to as "PFI Subsidiary Loan Agreements"; (r) "PFI Subsidiary Loan" means any loan made pursuant to a PFI Subsidiary Loan Agreement; (s) "PM Subsidiary Loan Agreement" means any agreement to be entered into between the Borrower and a Participating Municipality pursuant to Section 3.01 (c) of this Agreement as the same may be amended from time to time, and such term includes all schedules to such agreement, collectively referred to as "PM Subsidiary Loan Agreements"; (t) "PM Subsidiary Loan" means any loan made pursuant to a PM Subsidiary Loan Agreement; (u) "Rehabilitation Project" means a specific rehabilitation project under Part B of the Project to be carried out by a Participating Municipality; (v) "Special Account" means the account referred to in Section 2.02 (b) of this Agreement; (w) "Sub-loan" means a loan made or proposed to be made by a Participating Financial Institution to a Beneficiary for the purposes of financing a portion of the costs required for the carrying out of a Sub-project; (x) "Sub-loan Agreement" means any agreement to be entered into between a Participating Financial Institution and a Beneficiary in accordance with paragraph (b) of Section I.B of the Annex to Schedule 5 as the same may be amended from time to time, and such term includes all schedules to such agreement; (y) "Sub-project" means a specific project or investment under Part A of the Project qualifying under the Operating Procedures which is proposed to be carried out by a Beneficiary utilizing the proceeds of a Sub-loan; and (z) "Subsidiary Loan Agreements" means, collectively, the PFI Subsidiary Loan Agreements and the PM Subsidiary Loan Agreements. ARTICLE II The Loan Section 2.01. The Bank agrees to lend to the Borrower, on the terms and conditions set forth or referred to in the Loan Agreement, an amount equal to ten million Dollars ($10,000,000). Section 2.02. (a) The amount of the Loan may be withdrawn from the Loan Account in accordance with the provisions of Schedule 1 to this Agreement for (i) amounts paid (or, if the Bank shall so agree, to be Page 4 paid) by a Participating Financial Institution on account of withdrawals made by a Beneficiary under a Sub-loan; and (ii) expenditures made (or, if the Bank shall so agree, to be made) in respect of the reasonable cost of works or services required for Parts B and C of the Project described in Schedule 2 to this Agreement and to be financed out of the proceeds of the Loan. (b) The Borrower may, for the purposes of the Project, open and maintain in Dollars a special deposit account in a commercial bank on terms and conditions satisfactory to the Bank, including appropriate protection against set-off, seizure or attachment. Deposits into, and payments out of, the Special Account shall be made in accordance with the provisions of Schedule 6 to this Agreement. Section 2.03. The Closing Date shall be December 31, 2000 or such later date as the Bank shall establish. The Bank shall promptly notify the Borrower of such later date. Section 2.04. The Borrower shall pay to the Bank a commitment charge at the rate of three-fourths of one percent (3/4 of 1%) per annum on the principal amount of the Loan not withdrawn from time to time. Section 2.05. (a) The Borrower shall pay interest on the principal amount of the Loan withdrawn and outstanding from time to time, at a rate for each Interest Period equal to LIBOR Base Rate plus LIBOR Total Spread. (b) For the purposes of this Section: (i) "Interest Period" means the initial period from and including the date of this Agreement to, but excluding, the first Interest Payment Date occurring thereafter, and after the initial period, each period from and including an Interest Payment Date to, but excluding the next following Interest Payment Date. (ii) "Interest Payment Date" means any date specified in Section 2.06 of this Agreement. (iii) "LIBOR Base Rate" means, for each Interest Period, the London interbank offered rate for six-months deposits in dollars for value the first day of such Interest Period (or, in the case of the initial Interest Period, for value the Interest Payment Date occurring on or next preceding the first day of such Interest Period), as reasonably determined by the Bank and expressed as a percentage per annum. (iv) "LIBOR Total Spread" means, for each Interest Period: (A) one half of one percent (1/2 of 1%): (B) minus (or plus) the weighted average margin, for such Interest Period, below (or above) the London interbank offered rates, or other reference rates, for six-month deposits, in respect of the Bank's outstanding borrowings or portions thereof allocated by the Bank to fund single currency loans or portions thereof made by it that include the Loan; as reasonably determined by the Bank and expressed as a percentage per annum. (c) The Bank shall notify the Borrower of LIBOR Base Rate and LIBOR Total Spread for each Interest Period, promptly upon the determination thereof. (d) Whenever, in light of changes in market practice affecting the determination of the interest rates referred to in this Section 2.05, the Bank determines that it is in the interest of its borrowers as a whole and of the Bank to apply a basis for determining the interest rates applicable to the Loan other than as provided in said Section, the Bank may modify the basis for determining the interest rates applicable to the Loan upon not less than six (6) months' notice to the Borrower of the new basis. The basis shall become effective on the expiry of the notice period unless the Borrower notifies the Bank during said period of its objection thereto, in which case said modification shall not apply Page 5 to the Loan. Section 2.06. Interest and other charges shall be payable April 15 and October 15 in each year. Section 2.07. The Borrower shall repay the principal amount of the Loan in accordance with the amortization schedule set forth in Schedule 3 to this Agreement. 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 Loan Agreement, shall cause: (i) the PFIs to carry out Part A of the Project and to perform in accordance with the provisions of the PFI Subsidiary Loan Agreements, all obligations of the PFIs therein set forth; (ii) the PMs to carry out Part B of the Project and to perform in accordance with the provisions of the PM Subsidiary Loan Agreements, all the obligations of the PMs therein set forth; and (iii) HCF to carry out Part C of the Project and to perform in accordance with the provisions of the Implementation Agreement, all the obligations of HCF therein set forth, and shall take and cause to be taken, all action, including the provision of funds, facilities, services and other resources, necessary or appropriate to enable the PFIs, the PMs and HCF to perform such obligations, and shall not take or permit to be taken any action which would prevent or interfere with such performance. (b) For the purpose of carrying out Part A of the Project, the Borrower shall: (i) enter into a PFI Subsidiary Loan Agreement with each PFI under terms and conditions satisfactory to the Bank including, without limitation, those set forth in Section I of the Annex to Schedule 5 to this Agreement; (ii) relend to each such PFI, out of the proceeds of the Loan allocated from time to time to Category (1) of the table set forth in paragraph 1 of Schedule 1 to this Agreement, the amount required to finance expenditures incurred by the Beneficiaries in the carrying out of approved Sub- projects in respect of which such PFI shall have made Sub-loans in accordance with the Operating Procedures and on the terms and conditions referred to in Section II of the Annex to Schedule 5 to this Agreement; and (iii) exercise its rights under the PFI Subsidiary Loan Agreements in such manner as to protect the interests of the Bank and the Borrower and to achieve the purposes of the project, and, except as the Bank shall otherwise agree, not assign, amend, abrogate or waive any PFI Subsidiary Loan Agreement or any respective provision thereof. (c) For the purpose of carrying out Part B of the Project, the Borrower shall: (i) relend the proceeds of the Loan allocated from time to time to Category (2) of the table set forth in paragraph 1 of Schedule 1 to this Agreement, to Participating Municipalities under PM Subsidiary Loan Agreements to be entered into between the Borrower, represented by MOF, and each Participating Municipality under terms and conditions which shall have been approved by the Bank for the carrying out of Rehabilitation Projects, selected and appraised in accordance with the selection and appraisal criteria set out in the Operating Procedures, and the PM Subsidiary Loan Agreement shall include: (A) the principal amount of each PM Subsidiary Loan shall be denominated and repayable in Dollars and be the equi- Page 6 valent in Dollars of the amount withdrawn from the Loan Account or paid out of the Special Account, (determined as of the date or respective dates of repayment); (B) each Participating Municipality shall pay interest on the principal amount of the PM Subsidiary Loan withdrawn and outstanding from time to time, at a variable interest rate equal to the rate applicable to the Loan as deter- mined in accordance with Section 2.05 of this Agreement; (C) the term of the PM Subsidiary Loan shall be twenty (20) years including a grace period of five (5) years; and (D) the implementation responsibilities of the respective Participating Municipality in respect of Part B of the Project; (ii) exercise its rights under the PM Subsidiary Loan Agreements in such manner as to protect the interests of the Bank and the Borrower and to achieve the purposes of the project, and, except as the Bank shall otherwise agree, not assign, amend, abrogate or waive any PM Subsidiary Loan Agreements or any respective provision thereof; and (iii) under the PM Subsidiary Loan Agreement, cause each PM to allocate and make available for the purposes of the Project, amounts equal to twenty (20) percent of the cost of each proposed Rehabilitation Project under Part B of the Project. (d) For the purpose of carrying out Part C of the Project, the Borrower shall: (i) enter into an Implementation Agreement with HCF under terms and conditions which shall have been approved by the Bank; (ii) exercise its rights under the Implementation Agreement in such manner as to protect the interests of the Bank and the Borrower and to achieve the purposes of the Project, and, except as the Bank shall otherwise agree, not assign, amend, abrogate or waive the said agreement or any provision thereof; and (iii) provide information to HCF with respect to implementation of Parts A and B of the Project. (e) Without limitation upon the provisions of paragraph (a) of this Section, and except as the Borrower and the Bank shall otherwise agree, the Borrower shall cause the Project to be carried out in accordance with the Implementation Program set forth in Schedule 5 to this Agreement. Section 3.02. Except as the Bank shall otherwise agree, procurement of the works and services required for the Project and to be financed out of the proceeds of the Loan shall be governed by the provisions of Schedule 4 to this Agreement. Section 3.03. For the purposes of Section 9.08 of the General Conditions and without limitation thereto, the Borrower shall: (a) prepare, on the basis of guidelines acceptable to the Bank, and furnish to the Bank not later than six (6) months after the Closing Date or such later date as may be agreed for this purpose between the Borrower and the Bank, a plan designed to ensure the continued achieve- ment of the Project's objectives; and (b) afford the Bank a reasonable opportunity to exchange views with the Borrower on said plan. ARTICLE IV Financial Covenants Section 401. (a) The Borrower shall maintain or cause to be main- Page 7 tained records and accounts adequate to reflect in accordance with sound accounting practices the operations, resources and expenditures in respect of the Project of the departments or agencies of the Borrower responsible for carrying out the Project or any part thereof. (b) The Borrower shall: (i) have the records and accounts 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 Bank; (ii) furnish to the Bank as soon as available, but in any case not later than six (6) 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 Bank shall have reason- ably requested; and (iii) furnish to the Bank such other information concerning said records and accounts and the audit thereof as the Bank shall from time to time reasonably request. (c) For all expenditures with respect to which withdrawals from the Loan Account were made on the basis of statements of expenditure, the Borrower shall: (i) maintain or cause to be maintained, in accordance with paragraph (a) of this Section, records and accounts reflecting such expenditures; (ii) retain, until at least one year after the Bank has received the audit report for the fiscal year in which the last withdrawal from the Loan Account was made, all records (contracts, orders, invoices, bills, receipts and other documents) evidencing such expenditures; (iii) enable the Bank'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 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) The Borrower shall cause HCF to maintain records and accounts adequate to reflect in accordance with sound accounting practices the operations, resources and expenditures in respect of the Project. (b) The Borrower shall cause HCF to: (i) have the records and accounts referred to in paragraph (a) above for each fiscal year audited, in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Bank; (ii) furnish to the Bank as soon as available, but in any case not later than six (6) months after the end of each year: (A) certified copies of its financial statements for such year as so audited; and (B) the report of such audit by said auditors, of such scope and in such detail as the Bank shall have reasonably requested; and (iii) furnish to the Bank such other information concerning such records, accounts and financial statements and Page 8 the audit thereof as the Bank shall from time to time reasonably request. ARTICLE V Remedies of the Bank Section 5.01. Pursuant to Section 6.02 (l) of the General Conditions, the following additional events are specified: (a) The HOA Law shall have been amended, suspended, abrogated, repealed, waived or declared to be unconstitutional so as to affect materially and adversely the ability of the Borrower to achieve the objectives of the Project; (b) The HCF Charter shall have been amended, suspended, abrogated, repealed or waived so as to affect materially and adversely the ability of the HCF to carry out the Project or to perform any of its obligations under the Implementation Agreement; (c) The Borrower or any other authority having jurisdiction shall have taken any action for the dissolution or disestablishment of the Housing Credit Foundation or for the suspension of its operations; (d) As a result of events which have occurred after the date of the Loan Agreement, an extraordinary situation shall have arisen which shall make it improbable: (i) that all PFIs will be able to perform their obligations under the PFI Subsidiary Loan Agreements; or (ii) that all Participating Municipalities will be able to perform their obligations under the PM Subsidiary Loan Agreements; (e) The Additional Grants shall have failed to become effective within two (2) months of the date of effectiveness of this Agreement, or by such later date as the Bank may agree; provided, however, that the provisions of this paragraph shall not apply if the Borrower establishes to the satisfaction of the Bank that adequate funds for the Project are available to the Borrower from other sources on terms and conditions consistent with the obligations of the Borrower under this Agreement; and (f) (i) Subject to subparagraph (ii) of this paragraph: (A) the right of the Borrower to withdraw the proceeds of any grant or loan made to the Borrower for the financing of the Project shall have been suspended, canceled or terminated in whole or in part, pursuant to the terms of the agreement providing therefor; or (B) any such loan shall have become due and payable prior to the agreed maturity thereof. (ii) Subparagraph (i) of this paragraph shall not apply if the Borrower establishes to the satisfaction of the Bank that: (A) such suspension, cancellation, termination or prematuring is not caused by the failure of the Borrower to perform any of its obligations under such agreement; and (B) adequate funds for the Project are available to the Borrower from other sources on terms and conditions consistent with the obligations of the Borrower under this Agreement. Section 5.02. Pursuant to Section 7.01 (h) of the General Conditions, the following additional events are specified: the events specified in paragraphs (a), (b), (c), (e) (subject to the proviso thereto), and (f) (i) (B) (subject to the proviso of sub-paragraphs (f) (ii)) of Section 5.01 of this Agreement shall occur. Page 9 ARTICLE VI Effective Date; Termination Section 6.01. The following events are specified as additional conditions to the effectiveness of the Loan Agreement within the meaning of Section 12.01 (c) of the General Conditions: (a) At least one PFI Subsidiary Loan Agreement between the Borrower, through MOF, and a PFI has been signed on behalf of the parties thereto on terms and conditions satisfactory to the Bank; (b) The Implementation Agreement has been signed by MOF and HCF, on terms and conditions satisfactory to the Bank; (c) The Operating Procedures, satisfactory to the Bank, have been adopted by the Borrower, each PFI which has entered into a PFI Subsidiary Loan Agreement under paragraph (a) above, and HCF; and (d) The PCU shall have been established within HCF to coordinate Project related activities and a manager, technical assistance coordinator, implementation officer and accounting officer, with qualifications, terms of reference and experience satisfactory to the Bank, shall have been appointed. Section 6.02. The following is specified as an additional matter within the meaning of Section 12.02 (c) of the General Conditions, to be included in the opinion or opinions to be furnished to the Bank: the PFI Subsidiary Agreements referred to in paragraph (a) of Section 6.01 of this Agreement and the Implementation Agreement referred to in paragraph (b) of Section 6.01 of this Agreement, has been duly authorized or ratified by the parties thereto and is legally binding upon the respective parties thereto in accordance with its terms. Section 6.03. 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 Minister 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 Sermuksniu 2696 Vilnius Republic of Lithuania Telex: 261252 FIMA SU For the Bank: International Bank for Reconstruction and Development 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable address: Telex: INTBAFRAD 197688 (TRT), Washington, D.C. 248423 (RCA), Page 10 64145 (WUI) or 82987 (FTCC) IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized representatives, have caused this Agreement to be signed in their respective names in the District of Columbia, United States of America, as of the day and year first above written. REPUBLIC OF LITHUANIA By /s/ Alfonsas Eidintas Authorized Representative INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT By /s/ Basil G. Kavalsky Acting Regional Vice President Europe and Central Asia SCHEDULE 1 Withdrawal of the Proceeds of the Loan 1. The table below sets forth the Categories of items to be financed out of the proceeds of the Loan, the allocation of the amounts of the Loan to each Category and the percentage of expenditures for items so to be financed in each Category: Amount of the Loan Allocated % of (Expressed in Expenditures Category Dollars) to be Financed (1) Sub-loans 7,200,000 70% of the amount under Part A disbursed under of the Project a Sub-loan (2) Civil Works 1,700,000 80% of total under Part B expenditures of the Project (3) Consultants' services 100,000 100% (4) Unallocated 1,000,000 __________ TOTAL 10,000,000 ========== 2. Notwithstanding the provisions of paragraph 1 above, no withdrawals shall be made: (a) in respect of payments made for expenditures prior to the date of this Agreement; (b) in respect of any payments under Category (1), unless the Sub- loan has been made in accordance with the criteria and procedures set out in the Operating Procedures and on terms and conditions referred to in Section II of the Annex to Schedule 5 to this Agreement; (c) in respect of any payments made under Category (1), unless the Bank shall have received evidence satisfactory to it that a PFI Sub- Page 11 sidiary Loan Agreement satisfactory to the Bank has been executed on behalf of the Borrower and the PFI in respect of which the Borrower has requested a withdrawal from the Loan Account or payment out of the Special Account; and (d) in respect of any payments made under Category (2), unless the Bank shall have received evidence satisfactory to it that a PM Subsidiary Loan Agreement satisfactory to the Bank has been executed on behalf of the Borrower and the Participating Municipality in respect of which the Borrower has requested a withdrawal from the Loan Account or payment out of the Special Account. 3. The Bank may require withdrawals from the Loan Account to be made on the basis of statements of expenditure for expenditures: (i) for works under contracts costing less than $250,000 equivalent; and (ii) for services under contracts costing less than $100,000 equivalent for the employment of consulting firms and under contracts costing less than $50,000 equivalent for the employment of individual consultants, under such terms and conditions as the Bank shall specify by notice to the Borrower. SCHEDULE 2 Description of the Project The objectives of the Project are: (i) to support private initiative in improving residential energy efficiency; (ii) to support public initiative in improving energy efficiency in schools; and (iii) to support the implementation of the Borrower's policies with respect to the privatization of housing and enable increased private initiative in housing maintenance in general. The Project consists of the following parts, subject to such modifications thereof as the Borrower and the Bank may agree upon from time to time to achieve such objectives: Part A: Credit for residential energy efficiency rehabilitation Establishment and operation of a credit facility through PFIs to make Sub-loans to Beneficiaries for the financing of Sub-projects. Part B: Energy efficiency rehabilitation of schools Carrying out of Rehabilitation Projects in schools in Participating Municipalities to improve energy efficiency. Part C: Institutional Strengthening 1. Establishment of advisory centers to provide organizational support for homeowners, Homeowners' Associations and associations of HOAs. 2. Provision of technical and engineering advice to: (i) homeowners and Homeowners' Associations for energy efficiency rehabilitation of residential buildings; and (ii) to Participating Municipalities for energy efficiency rehabilitation of schools. 3. Provision of technical assistance to: (i) strengthen the institu- tional capacity of the Housing Credit Foundation and of public and private agencies involved in technical or financial aspects of the housing market; and (ii) to support Project implementation through monitoring and public information programs. 4. Provision of technical assistance to support reform in the housing sector and policies related to energy efficiency through the preparation of policy studies and action plans. * * * The Project is expected to be completed by June 30, 2000. SCHEDULE 3 Page 12 Amortization Schedule Payment of Principal Date Payment Due (expressed in dollars)* October 15, 2001 215,000 April 15, 2002 220,000 October 15, 2002 225,000 April 15, 2003 235,000 October 15, 2003 240,000 April 15, 2004 245,000 October 15, 2004 255,000 April 15, 2005 260,000 October 15, 2005 270,000 April 15, 2006 275,000 October 15, 2006 285,000 April 15, 2007 295,000 October 15, 2007 300,000 April 15, 2008 310,000 October 15, 2008 320,000 April 15, 2009 330,000 October 15, 2009 340,000 April 15, 2010 345,000 October 15, 2010 355,000 April 15, 2011 370,000 October 15, 2011 380,000 April 15, 2012 390,000 October 15, 2012 400,000 April 15, 2013 410,000 October 15, 2013 425,000 April 15, 2014 435,000 October 15, 2014 450,000 April 15, 2015 460,000 October 15, 2015 475,000 April 15, 2016 485,000 ____________________________ * The figures in this column represent the amount in dollars to be repaid, except as provided in Section 4.04 (d) of the General Conditions. SCHEDULE 4 Procurement and Consultants' Services Section I. Procurement of Works Part A: General Works shall be procured in accordance with 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 1996 (the Guidelines) and the following provisions of this Section, as applicable. Part B: Procurement Procedures 1. National Competitive Bidding Except as provided in paragraph 2 below, works required for Part B of the Project shall be procured under contracts awarded in accordance with the provisions of paragraphs 3.3 and 3.4 of the Guidelines. 2. Procurement of Small Works Works: (i) under contracts financed under Part A of the Project; and (ii) under Part B of the Project, which are estimated to cost less than $50,000 equivalent per contract, up to an aggre- gate amount not to exceed $500,000 equivalent, Page 13 shall be procured under lump-sum, fixed-price contracts awarded on the basis of written quotations obtained from three (3) qualified contractors in accordance with procedures acceptable to the Bank. Part D: Review by the Bank of Procurement Decisions 1. Procurement Planning Prior to the issuance of any invitations to bid for contract under Part B of the Project, the proposed procurement plan for the Project shall be furnished to the Bank for its review and approval, in accordance with the provisions of paragraph 1 of Appendix 1 to the Guidelines. Procurement of all works shall be undertaken in accordance with such procurement plan as shall have been approved by the Bank, and with the provisions of said paragraph 1. 2. Prior Review With respect to: (i) the first two contracts under Part A of the Project to be financed by each PFI under Sub-loans to HOAs; (ii) the first two contracts under Part A of the Project, to be financed by each PFI under Sub-loans to Beneficiaries other than HOAs; (iii) the first two contracts for each Participating Municipality for works under Part B of the Project estimated to cost the equivalent of $50,000 or more; and (iv) each contract for works under the Project estimated to cost the equivalent of $250,000 or more, the procedures set forth in paragraphs 2 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 1. Consultants' services shall be procured under contracts awarded in accordance with the provisions of the "Guidelines for the Use of Consultants by World Bank Borrowers and by The World Bank as Executing Agency" published by the Bank in August 1981 (the Consultant Guidelines). For complex, time-based assignments, such contracts shall be based on the standard form of contract for consultants' services issued by the Bank, with such modifications thereto as shall have been agreed by the Bank. Where no relevant standard contract documents have been issued by the Bank, other standard forms acceptable to the Bank shall be used. 2. Notwithstanding the provisions of paragraph 1 of this Section, the provisions of the Consultant Guidelines requiring prior Bank review or approval of budgets, short lists, selection procedures, letters of invitation, proposals, evaluation reports and contracts, shall not apply to (a) contracts for the employment of consulting firms estimated to cost less than $100,000 equivalent each; or (b) contracts for the employment of individual consultants estimated to cost less than $50,000 equivalent each. However, said exceptions to prior Bank review shall not apply to: (a) the terms of reference for such contracts; (b) single- source selection of consulting firms; (c) assignments of a critical nature, as reasonably determined by the Bank; (d) amendments to contracts for the employment of consulting firms raising the contract value to $100,000 equivalent or above; or (e) amendments to contracts for the employment of individual consultants raising the contract value to $50,000 equivalent or above. SCHEDULE 5 Implementation Program The provisions of this Schedule shall apply for the purposes of Section 3.01 (e) of this Agreement. 1. During the execution of the Project, the Borrower shall: Page 14 (a) maintain, within MOF, staff whose qualifications, experience and terms of reference are satisfactory to the Bank for implementation of the Project; (b) cause the PCU to be maintained with functions and responsi- bilities satisfactory to the Bank and with staff whose qualifications, experience and terms of reference are satisfactory to the Bank; (c) cause the PCU to coordinate with MOF the overall execution of the Project in accordance with the Implementation Agreement and monitor the carrying out by the PFIs and the Participating Municipalities of their obligations under their respective Subsidiary Loan Agreements in accordance with policies and procedures satisfactory to the Bank; and (d) cause the members of the supervision board of managers of HCF to meet on a quarterly basis commencing on or before the date falling three (3) months after the date of effectiveness of this Loan Agreement, to review the implementation of the Project. 2. For the purpose of carrying out Part A of the Project, the Borrower shall select the financial institutions to participate in financial intermediation of the credit facility provided under Part A of the Project in accordance with the eligibility criteria and procedures set forth or referred to in Schedule 7 to this Agreement and monitor the continued compliance by the PFIs with the conditions set forth in Schedule 7 to this Agreement. 3. Prior to October 1, 1997, the Borrower shall cause the PCU to: (a) submit to the Bank the results of a study undertaken by the Participating Municipalities and any other municipalities selected by the PCU and agreed with the Bank, under terms of reference agreed withthe Bank, of their housing maintenance organizations; and (b) review with the Bank and the municipalities participating under sub-paragraph (a) above the findings and recommendations of such study. 4. Prior to October 1, 1997, the Borrower shall: (a) complete a study, under terms of reference agreed with the Bank, on: (i) assistance programs in the housing sector (the "Bustas program"); and (ii) the Borrower's energy subsidy program for resi- dential households; and (b) submit to the Bank the results of such study, including a specific action plan, satisfactory to the Bank, setting out steps to refocus assistance programs in the housing sector to meet the needs of the poorest inhabitants of the Borrower and recommendations for the reform of the Borrower's energy subsidy program for residential households. 5. Prior to October 1, 1998, the Borrower shall complete a study, under terms of reference agreed with the Bank, for the formulation of its overall strategy to promote the energy rehabilitation of resi- dential and public buildings and containing recommendations for the implementation of such strategy. 6. On or before March 31, 1997, and semi-annually thereafter, the Borrower shall review with the Bank: (i) the Consumer Rate; and (ii) the Market Reference Rate and the Borrower's contribution for the next six (6) month period, and the Borrower shall cause the PFIs to implement any changes to the terms and conditions of Sub-loans agreed between the Bank and the Borrower. 7. On or before the date falling one (1) year from the date of effectiveness of this Loan Agreement, and annually thereafter, the Borrower shall: (A) review with the Bank: (i) the overall implementation of the Project; (ii) the performance of MOF, the HCF, the PCU, the Participating Municipalities and the PFIs in implementing the Page 15 Project; (iii) the levels of repayment by Beneficiaries under Sub- loans; (iv) the adequacy of technical and financial advice to enable HOAs and individual homeowners to evaluate the benefits of partici- pating in the Project; and (v) the appropriateness and level of the subsidy program for the Project; and (B) on the basis of the abovementioned review, implement any changes to the implementation arrangements and the Operating Procedures required to ensure the efficient completion of the Project and the achievement of the objectives thereof. 8. The Borrower shall: (a) ensure that HOAs and individual homeowners are provided with adequate financial and technical advice in accordance with indicators satisfactory to the Bank to enable them to evaluate the benefits of participating in the Project; and (b) on or before May 1, 1997, review with the Bank, the nature and extent of advisory services provided to HOAs and individual home- owners and shall adopt any measures agreed between the Borrower and the Bank to ensure efficient completion of the Project and the achievement of the objectives thereof. 9. The Borrower shall: (a) maintain policies and procedures adequate to enable it to monitor and evaluate on an ongoing basis, in accordance with indicators satisfactory to the Bank, the carrying out of the Project and the achievement of the objectives thereof; (b) prepare, under terms of reference satisfactory to the Bank, and furnish to the Bank, on or about June 1, 1998, a report integrating the results of the monitoring and evaluation activities performed pursuant to paragraph (a) of this Section, on the progress achieved in the carrying out of the Project during the period preceding the date of said report and setting out the measures recommended to ensure the efficient carrying out of the Project and the achievement of the objectives thereof during the period following such date; and (c) review with the Bank, by July 1, 1998, or such later date as the Bank shall request, the report referred to in paragraph (b) of this Section, and, thereafter, take all measures required to ensure the efficient completion of the Project and the achievement of the objec- tives thereof, based on the conclusions and recommendations of the said report and the Bank views on the matter. ANNEX TO SCHEDULE 5 Section I. Principal Terms and Conditions of PFI Subsidiary Loan Agreement The following are the principal terms and conditions of PFI Subsidiary Loan Agreements which shall apply for the purposes of Section 3.01 (b) (i) of this Agreement. A. Terms 1. Principal Amount The principal amount to be relent out of the proceeds of the Loan to a Participating Financial Institution under its respective PFI Subsidiary Loan Agreement shall be: (a) denominated and repayable in Litas and shall be the Litas equivalent of the value of the currency or currencies withdrawn from the Loan Account or paid out of the Special Account on account of disbursements under Sub-loans determined as at the date of withdrawal from the Loan Account or payment out of the Special Account; and (b) the equivalent of the aggregate outstand- ing amount of the principal of all Sub-loans made out of the proceeds thereof. 2. Interest Rate Page 16 The Subsidiary Loan shall be charged on the principal amount thereof withdrawn and outstanding from time to time: (a) for Sub-loans to Homeowners' Associations, at the Consumer Rate; and (b) for Sub-loans to Beneficiaries other than Homeowners' Associations, the Consumer Rate less a maximum spread to be agreed between the Borrower and the PFI and approved by the Bank. 3. Maturity The Subsidiary Loan shall be repaid over a period of up to ten (10) years. 4. Credit Risk of HOAs Any portion of a Subsidiary Loan on-lent by a PFI to a HOA shall, except as the Bank may otherwise agree, be repayable by the PFI to the Borrower only to the extent the PFI has been repaid by the HOA under the Sub-loan, provided that the PFI takes all enforcement measures agreed with the Borrower and approved by the Bank to obtain repayment from the HOA. 5. Fees (a) In respect of each Sub-loan made by a PFI to a HOA, the PFI shall be entitled to payment of the following fees (as such fees may be varied with respect to new Sub-loans by the Borrower with the agreement of the Bank): (i) one percent (1%) of the amount disbursed under a Sub- loan, upon disbursement of such amount to the HOA; and (ii) three percent (3%) of any amounts (principal or interest) repaid by the HOA under the Sub-loan Agreement, upon repayment of such amounts by the PFI, to the Borrower. (b) The Borrower shall, upon presentation of supporting documents satisfactory to the Borrower, reimburse the PFI for all reasonable out- of pocket expenses incurred by the PFI in respect of collection of amounts due under Sub-loans made by it to HOAs up to the following maximum amounts: (i) if the PFI initiates court proceedings against the HOA, up to six percent (6%) of the total amount claimed by the PFI from the HOA under the Sub-loan Agreement; and (ii) if the PFI takes enforcement measures other than through court proceedings, up to one and half percent (1-1/2%) of the total amount claimed by the PFI from the HOA under the Sub-loan Agreement. (c) The fees specified in paragraph (a) above shall not be payable by the Borrower in respect of amounts on-lent by the PFI to Beneficiaries other than HOAs and the expenses specified in paragraph (b) above shall not be reimbursed in respect of amounts on-lent by the PFI to Beneficiaries other than HOAs. B. Conditions 1. Each respective PFI Subsidiary Loan Agreement shall contain pro- visions pursuant to which each respective Participating Financial Institution shall undertake to: (a) carry out its activities under Part A of the Project and conduct its operations and affairs in accordance with appropriate financial standards and practices, with qualified management and staff in adequate numbers and to provide, promptly as needed, the funds, facilities, services and other resources required for the purpose; Page 17 (b) (i) make Sub-loans to Beneficiaries on the terms and conditions set forth in Section II of this Annex; (ii) exercise its rights in relation to each such Sub-loan in such manner as to protect its interests and the interests of the Borrower and the Bank; (iii) comply with its obligations under its respective PFI Subsidiary Loan Agreement in accordance with the purposes of Part A of the Project; (iv) not assign, amend, abrogate or waive any of its agreements providing for Sub-loans, or any provision thereof, without prior approval of the Borrower and the Bank; and (v) appraise Sub-projects and supervise, monitor and report on the carrying out by Beneficiaries of Sub-projects, in accordance with procedures satisfactory to the Borrower and the Bank; (c) in respect of repayments made to it under its respective Sub-loans: (i) upon receipt of each such repayment, credit the same to the account of the MOF maintained for the purposes of the Project; and (ii) utilize all amounts authorized by the Borrower exclusively to finance other Sub-projects in accordance with the terms and conditions of the PFI Subsidiary Loan Agreement and the Operating Procedures; (d) (i) exchange views with, and furnish all such information to, the Bank MOF and the PCU, as may be reasonably requested by the Bank, MOF and the PCU with regard to the progress of its activities under the Project and the performance of its obligations under its respective PFI Subsidiary Loan Agreement; and (ii) promptly inform MOF or the PCU of any condition which interferes or threatens to interfere with the progress of its activities under its respective PFI Subsidiary Loan Agreement; (e) (i) maintain records and accounts adequate to reflect, in accordance with sound accounting practices, its operations and financial condition; (ii) have its financial statements (balance sheets, statements of income and expenses and related statements) for each fiscal year audited, in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Bank; (iii) furnish to the Borrower as soon as available, but in any case not later than six (6) months after the end of each such year, certified copies of said financial statements and accounts for such year as so audited, and the report of such audit by said auditors in such scope and detail as the Bank shall have reasonably requested; and (iv) furnish to the Bank and the Borrower such other information concerning said records, accounts and financial statements, as well as the audit thereof, as the Bank or the Borrower shall from time to time reasonably request; and (f) ensure that appraisal of Sub-projects is undertaken in accordance with the Operating Procedures and the applicable environ- mental laws and standards of the Borrower. C. Remedies 1. Each respective PFI Subsidiary Loan Agreement shall also provide that the right of the PFI to commit further Sub-loans shall be: (a) suspended upon its failure to: (i) continuously comply with the eligibility criteria set out in Schedule 7; or (ii) perform any of its obligations under a PFI Subsidiary Loan Agreement; and (b) terminated if such right shall have been suspended pursuant to paragraph (a) hereof for a continuing period of 120 days. Section II. Principal Terms and Conditions of the Sub-loans and Eligibility Criteria The provisions of this Section shall apply for the purposes of Section 3.01 (b) (ii) of this Agreement. 1. Principal Amount The principal amount of each Sub-loan made out of the proceeds of Page 18 the Loan allocated from time to time to Category (1) of the table set forth in paragraph 1 of Schedule 1 to this Agreement shall: (a) be denominated and repayable in Litas and shall be the Litas equivalent of the value of the currency or currencies withdrawn from the Loan Account or paid out of the Special Account on account of disbursements under a Sub-loan determined as at the date of withdrawal from the Loan Account or payment out of the Special Account; and (b) be repayable on terms and conditions determined in accordance with the Operating Procedures. 2. Interest Each Sub-loan: (a) made to a Homeowners' Association, shall be charged interest, on the principal amount thereof withdrawn and outstanding from time to time, at the Consumer Rate; (b) made to a Beneficiary other than a Homeowners' Association, shall be charged interest, on the principal amount thereof withdrawn and outstanding from time to time, at a rate determined by the PFI which shall not exceed the Consumer Rate; and (c) shall be made for a minimum period of three (3) years and a maximum period of ten (10) years. 3. Sub-loan Eligibility Criteria No expenditures for works or services required for a Sub-project shall be eligible for financing out of the proceeds of the Loan unless: (a) the first two Sub-loans made by each PFI to HOAs shall have been approved by the Bank; (b) the first two Sub-loans made by each PFI to Beneficiaries other than a HOA shall have been approved by the Bank and the PCU; (c) the first five Sub-loans made by each PFI to HOAs shall have been approved by the PCU; (d) the Sub-loan for such Sub-project has been made in accordance with the criteria and procedures set out in the Operating Procedures; and (e) the Beneficiary has been required to make a contribution equal to ten percent (10%) of the proposed cost of the Sub-project. 4. Review Procedures (a) In respect of the Sub-loans made by the PFI to be reviewed by the PCU under paragraphs 3 (b) and 3 (c) above, the PFI shall submit to the PCU for approval, documentation, in form and substance satisfactory to the Bank, which shall include: (i) a description of the Beneficiary; (ii) the appraisal of the Sub-project, including a description of the expenditures proposed to be financed out of the proceeds of the Loan; (iii) the proposed terms and conditions of the Sub-loan; and (iv) such other information as the PCU may reasonably request for review. (b) A PFI may, at any time, request a review by the PCU of any proposed Sub-loan in accordance with paragraph (a) above. 5. Criteria for Selection and Appraisal of Sub-projects Sub-loans shall be made for Sub-projects which are each determined to be: (a) in compliance with the eligibility criteria and procedures set out in the Operating Procedures; Page 19 (b) technically feasible and financially viable; and (c) in compliance with all environmental laws and standards of the Borrower and the guidelines for environmental assessment, agreed with the Bank. 6. Notification of Market Reference Rate In respect of each Sub-loan made by a PFI, the PFI shall notify the Beneficiary: (a) on the date of the Sub-loan Agreement, the Market Reference Rate as at that date (the "Original Market Reference Rate"); and (b) on the date of each annual statement of account submitted by the PFI to the Beneficiary, the Market Reference Rate as at the date of such statement and the Original Market Reference Rate. 7. Other Conditions Sub-loans shall be made on terms whereby the PFI making the Sub- loan shall obtain, by written contract or other appropriate means, rights adequate to protect its interest and those of the Borrower and the Bank, including: (a) the right to require the Beneficiary to carry out the Sub- project with due diligence and efficiency and in conformity with appropriate technical, economical, financial, environmental and commercial practices, to maintain adequate records, and to provide, promptly as needed, the funds, facilities and other resources required for the purpose; (b) the right to require that the works and services to be financed out of the proceeds of the Loan be procured in accordance with the provisions of Schedule 4 to this Loan Agreement, and use such works and services exclusively in the carrying out of the Sub-project; (c) the right to inspect, by itself or jointly with represen- tatives of the Bank or the Borrower if the Bank or the Borrower shall so request, the sites, plans and construction included in the Sub-project, the operation thereof, and any relevant records and documents; (d) the right to require that the Beneficiary shall take out and maintain such insurance, against such risks and in such amounts, as shall be consistent with sound business practices; (e) the right to obtain all such information as the Bank or the Borrower shall reasonably request relating to the foregoing and to the administration, operations and financial condition of the Beneficiary and to the benefits to be derived from the Sub-project; and (f) the right to suspend or terminate the right of the Bene- ficiary to the use of the proceeds of the Sub-loan upon failure by such Beneficiary to perform its obligations under its Sub-loan agreement with the PFI. SCHEDULE 6 Special Account 1. For the purposes of this Schedule: (a) the term "eligible Categories" means Categories (1), (2) and (3) set forth in the table in paragraph 1 of Schedule 1 to this Agree- ment; (b) the term "eligible expenditures" means expenditures in respect of the reasonable cost of works and services required for the Project and to be financed out of the proceeds of the Loan allocated from time to time to the eligible Categories in accordance with the provisions of Page 20 Schedule 1 to this Agreement; and (c) the term "Authorized Allocation" means an amount equal to eight hundred thousand Dollars ($800,000) to be withdrawn from the Loan Account and deposited into the Special Account pursuant to para- graph 3 (a) of this Schedule, provided, however, that unless the Bank shall otherwise agree, the Authorized Allocation shall be limited to an amount equal to four hundred thousand Dollars ($400,000) until the aggregate amount of withdrawals from the Loan Account plus the total amount of all outstanding special commitments entered into by the Bank pursuant to Section 5.02 of the General Conditions shall be equal to or exceed one million Dollars ($1,000,000). 2. Payments out of the Special Account shall be made exclusively for eligible expenditures in accordance with the provisions of this Schedule. 3. After the Bank has received evidence satisfactory to it that the Special Account has been duly opened, 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 Bank a request or requests for deposit into the Special Account of an amount or amounts which do not exceed the aggre- gate amount of the Authorized Allocation. On the basis of such request or requests, the Bank shall, on behalf of the Borrower, withdraw from the Loan Account and deposit into the Special Account such amount or amounts as the Borrower shall have requested. (b) (i) For replenishment of the Special Account, the Borrower shall furnish to the Bank requests for deposits into the Special Account at such intervals as the Bank shall specify. (ii) Prior to or at the time of each such request, the Borrower shall furnish to the Bank the documents and other evidence required pursuant to paragraph 4 of this Schedule for the payment or payments in respect of which replenishment is requested. On the basis of each such request, the Bank shall, on behalf of the Borrower, withdraw from the Loan 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. All such deposits shall be withdrawn by the Bank from the Loan Account under the respective eligible Categories, and in the respective equivalent amounts, as shall have been justified by said documents and other evidence. 4. For each payment made by the Borrower out of the Special Account, the Borrower shall, at such time as the Bank shall reasonably request, furnish to the Bank such documents and other evidence showing that such payment was made exclusively for eligible expenditures. 5. Notwithstanding the provisions of paragraph 3 of this Schedule, the Bank shall not be required to make further deposits into the Special Account: (a) if, at any time, the Bank shall have determined that all further withdrawals should be made by the Borrower directly from the Loan Account in accordance with the provisions of Article V of the General Conditions and paragraph (a) of Section 2.02 of this Agreement; (b) if the Borrower shall have failed to furnish to the Bank, 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 Bank pursuant to said Section in respect of the audit of the records and accounts for the Special Account; (c) if, at any time, the Bank shall have notified the Borrower of Page 21 its intention to suspend in whole or in part the right of the Borrower to make withdrawals from the Loan Account pursuant to the provisions of Section 6.02 of the General Conditions; or (d) once the total unwithdrawn amount of the Loan allocated to the eligible Categories, minus the total amount of all outstanding special commitments entered into by the Bank pursuant to Section 5.02 of the General Conditions with respect to the Project, shall equal the equi- valent of twice the amount of the Authorized Allocation. Thereafter, withdrawal from the Loan Account of the remaining unwithdrawn amount of the Loan allocated to the eligible Categories shall follow such procedures as the Bank shall specify by notice to the Borrower. Such further withdrawals shall be made only after and to the extent that the Bank shall have been satisfied that all such amounts remaining on deposit in the Special Account as of the date of such notice will be utilized in making payments for eligible expenditures. 6. (a) If the Bank shall have determined at any time that any payment out of the Special Account: (i) was made for an expenditure or in an amount not eligible pursuant to paragraph 2 of this Schedule; or (ii) was not justified by the evidence furnished to the Bank, the Borrower shall, promptly upon notice from the Bank: (A) provide such additional evidence as the Bank may request; or (B) deposit into the Special Account (or, if the Bank shall so request, refund to the Bank) an amount equal to the amount of such payment or the portion thereof not so eligible or justified. Unless the Bank shall otherwise agree, no further deposit by the Bank 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 Bank shall have determined at any time that any amount outstanding in the Special Account will not be required to cover further payments for eligible expenditures, the Borrower shall, promptly upon notice from the Bank, refund to the Bank such outstanding amount. (c) The Borrower may, upon notice to the Bank, refund to the Bank all or any portion of the funds on deposit in the Special Account. (d) Refunds to the Bank made pursuant to paragraphs 6 (a), (b) and (c) of this Schedule shall be credited to the Loan Account for subsequent withdrawal or for cancellation in accordance with the relevant provisions of this Agreement, including the General Conditions. SCHEDULE 7 Eligibility Criteria and Procedures for Selection of Participating Financial Institutions Under Part A of the Project 1. A PFI Subsidiary Loan Agreement may be entered into with a bank or other financial institution, duly established and operating under the laws of the Borrower, having statutes duly registered with the Bank of Lithuania and having an independent board elected in accordance with its statutes which, as the Borrower shall have determined, and the Bank shall have agreed: (a) has an acceptable audit report which: (i) covers one full year of operations; (ii) incorporates a portfolio review; and (iii) is prepared by an internationally recognized audit firm in accordance with International Accounting Standards ("IAS"); (b) has been in existence and has produced operating results for a minimum of two years; (c) has agreed to engage in an institutional development program, designed in conjunction with the Bank to: (i) address identified deficiencies; and (ii) be implemented with the assistance of a foreign bank or other acceptable experts; (d) has provided a certificate of compliance from BOL stating that: (i) it has a valid banking license, and specifying type and date Page 22 of license; (ii) BOL is not aware of any criminal proceedings ongoing against the PFI or any of its major shareholders with voting rights in excess of ten percent (10%); and (iii) the PFI is in general compliance with all relevant banking laws and regulations; (e) has minimum assets (as defined under IAS) equivalent to US$25,000,000; (f) has minimum equity equivalent to US$2,000,000 and has undertaken to increase its capital as necessary to comply with future increases required by BOL; (g) has a minimum risk-weighted equity capacity adequacy ratio (as defined by the Basel Committee on banking regulations and supervisory practices) of five percent (5%) by year-end 1995, six percent (6%) by year-end 1996, seven percent (7%) by year-end 1997 and eight percent (8%) by year-end 1998; (h) has exposure to any one borrower as a percent of its equity capital of no more than forty percent (40%) by year-end 1995, thirty five percent (35%) by year-end 1996, thirty percent (30%) by year-end 1997 and twenty five percent (25%) by year-end 1998; and (i) has aggregate exposure to insiders (defined as council members, members of the Management Board of such PFI, employees in a management position and shareholders with voting rights in excess of ten percent (10%)) of no more than ninety percent (90%) of equity capital by year-end 1995, eighty percent (80%) by year-end 1996, seventy percent (70%) by year-end 1997 and sixty percent (60%) by year-end 1998. 2. For the purposes of paragraph 1 (a) of this Schedule, the term "International Accounting Standards" or "IAS" means the accounting standards issued or endorsed by the International Accounting Standards Committee and the term "equity capital" or "capital" or "net worth" means assets minus liabilities, as defined under the IAS.