Page 1 CONFORMED COPY LOAN NUMBER 3273 ZIM (Second Railways Project) between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT and NATIONAL RAILWAYS OF ZIMBABWE Dated January 15, 1991 LOAN NUMBER 3273 ZIM PROJECT AGREEMENT AGREEMENT, dated January 15, 1991, between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (the Bank) and NATIONAL RAILWAYS OF ZIMBABWE (NRZ). WHEREAS (A) by the Loan Agreement of even date herewith between Zimbabwe (the Borrower) and the Bank, the Bank has agreed to make available to the Borrower an amount in various currencies equivalent to thirty-eight million six hundred thousand dollars ($38,600,000), on the terms and conditions set forth in the Loan Agreement, but only on condition that NRZ agree to undertake such obligations toward the Bank as are set forth in this Agreement; (B) by a subsidiary loan agreement to be entered into between the Borrower and NRZ, the proceeds of the loan provided for under the Loan Agreement will be made available to NRZ on the terms and conditions set forth in said Subsidiary Loan Agreement; and WHEREAS NRZ, in consideration of the Bank's entering into the Page 2 Loan Agreement with the Borrower, has agreed to undertake the obligations set forth in this Agreement; NOW THEREFORE the parties hereto hereby agree as follows: ARTICLE I Definitions Section 1.01. Unless the context otherwise requires, the several terms defined in the Loan Agreement, the Preamble to this Agreement and the General Conditions (as so defined) have the respective meanings therein set forth and the following additional terms have the following meanings: (a) "Fiscal Year" means the fiscal year of NRZ which begins on July 1 each year and ends on June 30 of the following year; (b) "Zimbabwe Dollars" and "Z$" mean the currency of the Borrower; and (c) "Investment Plan" means NRZ's Capital Budget and Development Programme for the Fiscal Year ending June 30, 1991 and subsequent years, amounts of which provisionally are as follows: Fiscal Year 1991 Z$246,900,000; Fiscal Year 1992 Z$300,000,000; Fiscal Year 1993 Z$317,200,000. ARTICLE II Execution of the Project Section 2.01. NRZ declares its commitment to the objectives of the Project as set forth in Schedule 2 to the Loan Agreement and, to this end, shall carry out the Project with due diligence and efficiency and in conformity with appropriate administrative, financial, engineering and railway operations practices and the Framework for NRZ Operations and shall provide, or cause to be provided, promptly as needed, the funds, facilities, services and other resources required for the Project. Section 2.02. Except as the Bank 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 Loan shall be governed by the provisions of Schedule 1 to this Agreement. Section 2.03. After acquiring 17 locomotives pursuant to the provisions of Part A.1 of the Project, NRZ shall not take any action towards the procurement of the remaining 8 locomotives under the said Part A.1 without prior approval of the Bank. Section 2.04. NRZ shall carry out the obligations set forth in Sections 9.04, 9.05, 9.06, 9.07, 9.08 and 9.09 of the General Conditions (relating to insurance, use of goods and services, plans and schedules, records and reports, maintenance and land acquisi- tion, respectively) in respect of the Project Agreement. Section 2.05. NRZ shall duly perform all its obligations under the Subsidiary Loan Agreement. Except as the Bank shall otherwise agree, NRZ shall not take or concur in any action which would have the effect of amending, abrogating, assigning or waiving the Subsidiary Loan Agreement or any provision thereof. Section 2.06. (a) NRZ shall, at the request of the Bank, exchange views with the Bank with regard to progress of the Project, the performance of its obligations under this Agreement and under the Subsidiary Loan Agreement, and other matters relating to the purposes of the Loan. (b) NRZ shall promptly inform the Borrower and the Bank of any condition which interferes or threatens to interfere with the progress of the Project, the accomplishment of the purposes of the Loan, or the performance by NRZ of its obligations under this Page 3 Agreement and under the Subsidiary Loan Agreement. Section 2.07. NRZ shall take all action necessary to achieve the operational targets set forth in Schedule 2 to this Agreement, as such targets may be revised from time to time by agreement among the Borrower, the Bank and NRZ. Section 2.08. (a) NRZ shall prepare and submit to the Borrower and the Bank by not later than March 31, 1991, programs for the scrapping and disposal of locomotives and high-sided and drop-sided wagons, including timetables for implementation of such programs. (b) After review of the said programs by the Borrower and the Bank, NRZ shall adopt and implement scrapping and disposal programs satisfactory to the Borrower and the Bank. ARTICLE III Management and Operations of NRZ Section 3.01. (a) NRZ shall carry on its operations and conduct its affairs in accordance with sound administrative, financial and railway operations practices under the supervision of qualified and experienced management assisted by competent staff in adequate numbers. (b) NRZ shall consult the Borrower and the Bank prior to implementing any recommendations resulting from the manpower study to be carried out under Part E (ii) of the Project. Section 3.02. NRZ shall at all times operate and maintain its plant, machinery, equipment and other property, and from time to time, promptly as needed, make all necessary repairs and renewals thereof, all in accordance with sound engineering, financial and railway operations practices. Section 3.03. NRZ shall take out and maintain with responsible insurers, or make other provision satisfactory to the Bank for insurance against such risks and in such amounts as shall be consistent with appropriate practice. ARTICLE IV Financial Covenants Section 4.01. (a) NRZ shall maintain records and accounts adequate to reflect in accordance with sound accounting practices its operations and financial condition. (b) NRZ shall: (i) have its records, accounts and financial state- ments (balance sheets, statements of income and expenses and related statements) for each fiscal year audited, in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Bank; (ii) furnish to the Bank as soon as available, but in any case not later than six months after the end of each such year: (A) certified copies of 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 con- cerning said records, accounts and financial statements as well as the audit thereof, as the Bank shall from time to time reasonably request. Section 4.02. The Borrower shall cause NRZ: Page 4 (a) to review annually with the Borrower and the Bank the adequacy of the amounts allocated in its Investment Plan for the Fiscal Years included in such Plan; (b) to make revisions in the amounts allocated in such Plan for any Fiscal Year and for subsequent years, if necessary, having due regard to revisions agreed during the review referred to in paragraph (a) of this Section; and (c) not to undertake any investments beyond those included in its Investment Plan (as may have been amended pursuant to paragraph (b) of this Section) estimated to cost in the aggregate in any given Fiscal Year more than the equivalent of two million dollars ($2,000,000), without prior consultation with the Bank. Section 4.03. (a) NRZ shall take all necessary measures so that by June 30, 1992 its accounts receivable (excluding non-trading and contiguous railways accounts receivable) shall have been reduced to no more than 45 days of revenues for Fiscal Year 1992 and thereafter maintained at that level for each Fiscal Year. (b) NRZ shall furnish a report to the Borrower and the Bank, semi-annually as from June 30, 1992 indicating the status of its accounts receivable. Section 4.04. (a) Not later than its Fiscal Year beginning from July 1, 1991, NRZ shall prepare and furnish to the Bank its projections for the ensuing Fiscal Year of: (i) its locomotive and wagon hiring requirements; (ii) its intended disposition or use of wagons or locomotives surplus to its requirements, if any; and (iii) its operating costs and revenues based on specified performance targets for such Fiscal Year and manpower and locomotive fleet restructuring actions agreed with the Borrower and the Bank to be undertaken during such Fiscal Year. (b) Upon review and comments by the Bank of each such projections, NRZ shall adopt and implement an operational plan for the Fiscal Year in question paying due regard to such comments as the Bank may have made. Section 4.05. (a) Except as the Bank shall otherwise agree, NRZ shall earn a return of not less than 4% on its total capital employed in the previous Fiscal Year for its Fiscal Year 1991. For each Fiscal Year thereafter, NRZ shall earn a return on its total capital employed in the previous Fiscal Year, satisfactory to the Bank. (b) Before March 31 in each of its Fiscal Years, NRZ shall, on the basis of forecasts prepared by NRZ and satisfactory to the Bank, review whether it would meet the requirements set forth in paragraph (a) in respect of such Fiscal Year and the next following Fiscal Year and shall furnish to the Bank the results of such review upon its completion. (c) If any such review shows that NRZ would not meet the requirements set forth in paragraph (a) for NRZ's Fiscal Year covered by such review, NRZ shall promptly take all necessary measures in order to meet such requirements. (d) For purposes of this Section: (i) The annual return shall be calculated by dividing NRZ's net operating income for the Fiscal Year in question by the amount of NRZ's total capital employed at the end of the previous Fiscal Year. (ii) The term "net operating income" means total operating revenues less total operating expenses. (iii) The term "total operating revenues" means reve- nues from all sources related to operations. Page 5 (iv) The term "total operating expenses" means all expenses related to operations, including admin- istration, adequate maintenance, taxes and pay- ments in lieu of taxes, and provision for depre- ciation consistent with NRZ's current accounting policies or other basis acceptable to the Bank, but excluding interest and other charges on debt. (v) The term "total capital employed" means the sum of the value of all outstanding NRZ's loans, bank overdrafts and the value of NRZ's capital account at the end of the Fiscal Year prior to the Fiscal Year in question. (vi) The term "capital account" means the sum of: Loan principal capitalized; interest on capital outlay; excess of loan and sinking fund repay- ments over depreciation; losses or profits aris- ing from disposal of asset; deficits charged against capital; currency losses charged to capital in accordance with NRZ's accounting policy; and any other financing contribution to NRZ by the Borrower other than in the form of debt. Section 4.06. (a) NRZ shall, by not later than March 31, 1991, prepare and furnish to the Borrower and the Bank for their review and comments, a policy on the disposition of any surplus of income over expenditure arising at the end of each Fiscal Year. (b) After review and comment by the Borrower and the Bank, NRZ shall adopt a policy satisfactory to the Borrower and the Bank. Section 4.07. (a) Except as the Bank shall otherwise agree, NRZ shall at the end of each Fiscal Year carry out a review of its passenger tariffs and adjust such tariffs by amounts which are sufficient to cover the aggregate cost of coaches procured during such Fiscal Year, amortized over 20 years at the applicable interest rate per annum charged by the Borrower for loans to its parastatal organizations. (b) NRZ shall itemize the operating costs, revenues and any financing charges related to its passenger services assets for each Fiscal Year in the financial statements which are subject to audit pursuant to Section 4.01 (b)(i) of this Agreement. ARTICLE V Effective Date; Termination; Cancellation and Suspension Section 5.01. This Agreement shall come into force and effect on the date upon which the Loan Agreement becomes effective. Section 5.02. This Agreement and all obligations of the Bank and of NRZ thereunder shall terminate on the date on which the Loan Agreement shall terminate in accordance with its terms, and the Bank shall promptly notify NRZ thereof. Section 5.03. All the provisions of this Agreement shall continue in full force and effect notwithstanding any cancellation or suspension under the General Conditions. ARTICLE VI Miscellaneous Provisions Section 6.01. Any notice or request required or permitted to be given or made under this Agreement and any agreement between the parties contemplated by this Agreement shall be in writing. Such Page 6 notice or request shall be deemed to have been duly given or made when it shall be delivered by hand or by mail, telegram, cable, telex or radiogram to the party to which it is required or permitted to be given or made at such party's address hereinafter specified or at such other address as such party shall have designated by notice to the party giving such notice or making such request. The addresses so specified are: For the Bank: International Bank for Reconstruction and Development 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable address: Telex: INTBAFRAD 197688 (TRT), Washington, D.C. 248423 (RCA), 64145 (WUI) or 82987 (FTCC) For NRZ: The General Manager National Railways of Zimbabwe P.O. Box 596 Bulawayo Zimbabwe Cable address: Telex: NRZ 33173 NRZ ZW Section 6.02. Any action required or permitted to be taken, and any document required or permitted to be executed, under this Agreement on behalf of NRZ, or by NRZ on behalf of the Borrower under the Loan Agreement, may be taken or executed by the General Manager or such other person or persons as the General Manager shall designate in writing, and NRZ shall furnish to the Bank sufficient evidence of the authority and the authenticated specimen signature of each such person. Section 6.03. This Agreement may be executed in several counterparts, each of which shall be an original, and all collec- tively but one instrument. IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized representatives, have caused this Agreement to be signed in their respective names in the District of Columbia, United States of America, as of the day and year first above written. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT By /s/ Stephen Denning Acting Regional Vice President Africa NATIONAL RAILWAYS OF ZIMBABWE Page 7 By /s/ S. G. Chigwedere Authorized Representative SCHEDULE 1 Procurement and Consultants' Services Section I: Procurement of Goods and Works Part A: International Competitive Bidding 1. Except as provided in Part C hereof, goods and works shall be procured under contracts awarded in accordance with procedures consistent with those set forth in Sections I and II of the "Guidelines for Procurement under IBRD Loans and IDA Credits" published by the Bank in May 1985 (the Guidelines). 2. To the extent practicable, contracts for goods and works shall be grouped in bid packages estimated to cost the equivalent of $100,000 or more each. Part B: Preference for Domestic Manufacturers In the procurement of goods in accordance with the procedures described in Part A (1) hereof, goods manufactured in Zimbabwe may be granted a margin of preference in accordance with, and subject to, the provisions of paragraphs 2.55 and 2.56 of the Guidelines and paragraphs 1 through 4 of Appendix 2 thereto. Part C: Other Procurement Procedures 1. Specialized items not included in packages under Part A of this Schedule may be procured under contracts awarded through limited international bidding procedures on the basis of evaluation and comparison of bids invited from a list of at least 3 qualified suppliers eligible under the Guidelines and in accordance with procedures set forth in Section I and II of the Guidelines (exclud- ing paragraphs 2.8, 2.9, 2.55 and 2.56 thereof). 2. Small items not procured as set forth in paragraph 1 of this Part may be procured under contracts awarded on the basis of competitive bidding advertised locally in accordance with procedures satisfactory to the Bank provided that the aggregate amount of such contracts shall not exceed $500,000 equivalent. 3. Contracts for proprietary spare parts shall be procured on a negotiated basis from the original manufacturers or their authorized representatives, on terms satisfactory to the Bank, provided, however, that the aggregate amount of such contracts shall not exceed $1,000,000 equivalent. Part D: Review by the Bank of Procurement Decisions 1. Review of invitations to bid and of proposed awards and final contracts: (a) With respect to each contract estimated to cost the equivalent of $100,000 or more, the procedures set forth in paragraphs 2 and 4 of Appendix 1 to the Guidelines shall apply. Where payments for such contract are to be made out of the Special Account, such procedures shall be modified to ensure that the two conformed copies of the contract required to be furnished to the Bank pursuant to said paragraph 2 (d) shall be furnished to the Bank prior to the making of the first payment out of the Special Account in respect of such contract. (b) With respect to each contract not governed by the pre- ceding paragraph, the procedures set forth in paragraphs 3 and 4 of Appendix 1 to the Guidelines shall apply. Where payments for such contract are to be made out of the Special Account, such procedures shall be modified to ensure that the two conformed copies of the contract together with the other information required to be Page 8 furnished to the Bank pursuant to said paragraph 3 shall be furnished to the Bank as part of the evidence to be furnished pursuant to paragraph 4 of Schedule 4 to the Loan Agreement. (c) The provisions of the preceding subparagraph (b) shall not apply to contracts on account of which the Bank has authorized withdrawals on the basis of statements of expenditure. 2. The figure of 15% is hereby specified for purposes of para- graph 4 of Appendix 1 to the Guidelines. Section II: Employment of Consultants In order to assist NRZ in the carrying out of the Project, NRZ shall employ consultants whose qualifications, experience and terms and conditions of employment shall be satisfactory to the Bank. Such consultants shall be selected in accordance with principles and procedures satisfactory to the Bank on the basis of the "Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency" published by the Bank in August 1981. SCHEDULE 2 Operational Targets 1989 1991 1992 1993 1994 1995 LOCOMOTIVE AVAILABILITY (%) (Hourly Position) New Locomotives 60 80 80 DE 10A 64 73 75 75 75 75 Other Diesel a/ 47 55 65 65 65 65 Electric 73 80 80 80 80 80 Steam 38 45 50 50 50 50 LOCOMOTIVE RELIABILITY (Mean Eng-Km Between Failures) New Locomotives 80000 80000 80000 DE 10A 23642 50000 50000 50000 50000 50000 Other Diesel a/ 4531 10000 15000 15000 15000 15000 Electric 52644 55000 55000 55000 55000 55000 Steam 7237 10000 15000 15000 15000 15000 LOCOMOTIVE UTILIZATION (Eng.Km per Day/Loco In Use) New Locomotives 500 500 500 DE 10A 446 460 460 460 460 460 Other Diesel a/ 216 240 250 250 250 250 Electric 329 375 400 400 400 400 Steam 291 300 300 300 300 300 LOCOMOTIVES ON HIRE (Daily Average) 20 18 17 8 0 0 WAGON AVAILBILITY (%) High Sided 92 92 92 92 92 92 Drop Sided 92 92 92 92 92 92 Others 88 92 92 92 92 92 FOREIGN WAGONS ON NRZ (Daily Average) Transit 718 550 500 500 500 500 Other 4314 3000 3000 2700 2400 2100 WAGON UTILIZATION b/ (Wagon Km/Wagon Day 41 60 72 72 72 72 In Use) Page 9 AVERAGE WAGON LOADS (TONS) High Sided 36 39.6 39.6 39.6 39.6 39.6 Drop Sided 38 39.9 39.9 39.9 39.9 39.9 POL Tankcars 28 29.4 29.4 29.4 29.4 29.4 _____________________________________________________________________________ a/ excluding locomotive to be scrapped b/ general purpose wagons only