CONFORMED COPY CREDIT NUMBER 4768-IN Project Agreement (Additional Financing for the Second Karnataka Rural Water Supply and Sanitation Project) among INTERNATIONAL DEVELOPMENT ASSOCIATION and STATE OF KARNATAKA and KARNATAKA RURAL WATER SUPPLY AND SANITATION AGENCY Dated July 17, 2010 PROJECT AGREEMENT AGREEMENT dated July 17, 2010, entered into among INTERNATIONAL DEVELOPMENT ASSOCIATION (“Association�), the STATE OF KARNATAKA, acting by its Governor (“Karnataka�) and KARNATAKA RURAL WATER SUPPLY AND SANITATION AGENCY (“KRWSSA�) (“Project Agreement�) in connection with the Financing Agreement (“Financing Agreement�) of same date between India (“Recipient�) and the Association. The Association, Karnataka and KRWSSA hereby agree as follows: ARTICLE I — GENERAL CONDITIONS; DEFINITIONS 1.01. The General Conditions (as defined in the Appendix to the Financing Agreement) constitute an integral part of this Agreement. 1.02. Unless the context requires otherwise, the capitalized terms used in this Agreement have the meanings ascribed to them in the Financing Agreement or the General Conditions. ARTICLE II — PROJECT 2.01. Karnataka and KRWSSA declare their commitment to the objectives of the Project. To this end, Karnataka and KRWSSA shall carry out the Project in accordance with the provisions of Article IV of the General Conditions, and shall provide promptly as needed, the funds, facilities, services and other resources required for the Project. 2.02. Without limitation upon the provisions of Section 2.01 of this Agreement, and except as the Association, Karnataka and KRWSSA shall otherwise agree, Karnataka and KRWSSA shall carry out the Project in accordance with the provisions of the Schedule to this Agreement. ARTICLE III — REPRESENTATIVE; ADDRESSES 3.01. (a) Karnataka’s Representative is the Secretary, Rural Development and Panchayati Raj Department, or such other person or persons as he or she shall designate in writing. (b) KRWSSA’s Representative is its Director or such other person or persons as KRWSSA shall designate in writing. -2- 3.02. The Association’s Address is: International Development Association 1818 H Street, N.W. Washington, D.C. 20433 United States of America Facsimile: 1-202-477-6391 Karnataka’s Address is: Secretary to the Government of Karnataka Department of Rural Development and Panchayati Raj Government of Karnataka M.S. Building Bangalore 560001 India Facsimile: 91-80-2264650 KRWSSA’s Address is: Director Karnataka Rural Water Supply and Sanitation Agency Cauvery Bhawan, Sixth Floor, F Block KHB Complex Bangalore 560 009 India Facsimile: 91-80-2240509 -3- AGREED at Bangalore, India, as of the day and year first above written. INTERNATIONAL DEVELOPMENT ASSOCIATION By /s/ Benedictus Eijbergen Authorized Representative STATE OF KARNATAKA By /s/ P. Ravi Kumar Authorized Representative KARNATAKA RURAL WATER SUPPLY AND SANITATION AGENCY By /s/ P. Boregowda Authorized Representative -4- SCHEDULE Execution of the Project Section I. Implementation Arrangements A. Institutional Arrangements 1. Karnataka shall make available to KRWSSA as a grant and in a timely manner: (i) the proceeds of the Credit made available to Karnataka by the Recipient, and (ii) additional funds from Karnataka’s own resources sufficient for carrying out the Project. B. Project Implementation. 1. The provisions of paragraphs 1, 2, 4, 8, 11, 12 and 15(a) of Schedule 2 to the Original Project Agreement are incorporated herein by reference and apply to the Project, mutatis mutandis. 2. Karnataka and KRWSSA shall complete, by no later than September 30, 2010, the staffing of KRWSSA and of the 11 DSUs, all pursuant to the staffing plan furnished to the Association on May 6, 2010, which staffing plan has been found satisfactory to the Association. 3. The provisions of paragraph 6 (except for paragraph 6(a)(ii)) of Schedule 2 to the Original Project Agreement are incorporated herein by reference and apply to the Project, mutatis mutandis. Paragraph 6(a)(ii) of said Schedule 2 is hereby amended to read: : “6(a)(ii) an implementation phase agreement with the DSU, Support Agency and either a Project Gram Panchayat or a Project Settlement, as appropriate". C. Anti-Corruption Karnataka and KRWSSA shall ensure that the Project is carried out in accordance with the provisions of the Anti-Corruption Guidelines and the GAAP. D. Safeguards Karnataka and KRWSSA shall: (a) carry out the Project in accordance with the EMP and the Tribal Development Plan in a manner satisfactory to the Association; and (b) ensure that the environmental and social performance indicators contained in the EMP and Tribal Development Plan are updated and monitored regularly, in agreement with the Association. -5- Section II. Project Monitoring, Reporting and Evaluation A. Project Reports 1. Karnataka shall monitor and evaluate the progress of the Project and prepare Project Reports in accordance with the provisions of Section 4.08 of the General Conditions and on the basis of the Key Performance Indicators. Each such Project Report shall cover the period of six (6) months, and shall be furnished by Karnataka to the Association not later than forty-five (45) days after the end of the period covered by such report to the Association. 2. Karnataka shall provide to the Recipient and the Association all such information as the Recipient or the Association shall reasonably request with respect to the report referred to in Section 4.08 of the General Conditions 3. Karnataka shall prepare and furnish to the Association and the Recipient, for their review and approval, by June 30 of each year until completion of the Project, commencing on July 31, 2011, an annual action plan for the Project for the current financial year and proceed thereafter to coordinate the carrying out of the annual action plan taking into account the Association’s comments. B. Financial Management, Financial Reports and Audits 1. Karnataka and KRWSSA, each shall maintain a financial management system and prepare financial statements in accordance with consistently applied accounting standards acceptable to the Association, both in a manner adequate to reflect the operations and financial condition of Karnataka and KRWSSA, including the operations, resources and expenditures related to the Project. Without limitation to the provisions of this paragraph 1. KRWSSA shall, by not later than December 1, 2010, establish, and thereafter maintain throughout the period of Project implementation, a computerized Financial Management System for the Project, satisfactory to the Association. 2. Karnataka and KRWSSA each shall prepare and furnish to the Association, not later than forty-five (45) days after the end of each calendar quarter, Interim Un- audited Financial Reports (IUFR) for the Project covering the quarter, in form and substance satisfactory to the Association. Said IUFRs will also serve as a basis for disbursement of the Credit for Eligible Expenditures incurred during said quarter. 3. Each of Karnataka and KRWSSA shall have its financial statements, referred to above, audited by independent auditors acceptable to the Association, in accordance with consistently applied auditing standards acceptable to the Association. Each audit of these financial statements shall cover the period of one (1) financial year of Karnataka and KRWSSA, respectively. The audited -6- financial statements for each period shall be furnished to the Association not later than six (6) months after the end of the period. 4. KRWSSA shall, by not later than December 1, 2010, appoint, and thereafter maintain throughout the period of Project implementation, a finance cell with adequate professional staff and qualifications acceptable to the Association in accordance with a staffing plan agreed upon between Karnataka and the Association. 5. KRWSSA shall, by not later than October 1, 2010, appoint, and thereafter retain throughout the period of Project implementation, chartered accountants’ firms to assist the Gram Panchayats in the financial accounting area. 6. KRWSSA shall, by not later than October 1, 2010, appoint, and thereafter retain throughout the period of Project implementation, external and internal auditors in accordance with terms of reference acceptable to the Association. 7. Karnataka and KRWSSA shall cause each of the Project Gram Panchayat and Project Settlements participating in the Project to: (a) open, prior to the commencement of Project implementation, and thereafter maintain throughout the Project implementation period, a separate bank account for the Project funds, and (b) maintain throughout the Project implementation period separate records and books of accounts for the said funds. Section III. Procurement All goods, works and services required for the Project and to be financed out of the proceeds of the Credit shall be procured in accordance with the provisions of Section III of Schedule 2 to the Financing Agreement.