OFFiCtAL DOCUMENTS LOAN NUMBER 8379-BR Loan Agreement (Rio Grande do Sul Strengthening Fiscal And Water Resources Management Development Policy Loan - Programa de ConsolidaVdo do Equilibrio Fiscal para o Desenvolvimento do Estado do Rio Grande do Sul - II) between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT and STATE OF RIO GRANDE DO SUL Dated A uSL 0.0 , 2014 LOAN AGREEMENT Agreement dated 4!05 2o, 2014, entered into between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT ("Bank") and STATE OF RIO GRANDE DO SUL ("Borrower") for the purpose of providing financing in support of the Program (as defined in the Appendix to this Agreement). WHEREAS (A) the Bank has decided to provide this financing on the basis, inter alia, of: (a) the actions which the Borrower has already taken under the Program and which are described in Section I of Schedule I to this Agreement; (b) the Guarantor's maintenance of an adequate macroeconomic policy framework; and (c) the Borrower's maintenance of: (i) an appropriate expenditure program; (ii) sustainable debt; and (iii) appropriate fiscal arrangements with the Guarantor. WHEREAS (B) the Borrower has informed the Bank that, upon deposit by the Bank of the proceeds of the Loan (on the terms set forth in the Section II of Schedule 1 to this Agreement and for purposes of supporting the Program) into an account to be designated by the Borrower, the Borrower's financial capacity will be strengthened by expanding its fiscal space to finance further public investments in accordance with the Borrower's budgetary laws. The Bank and the Borrower therefore hereby agree as follows: ARTICLE I - GENERAL CONDITIONS; DEFINITIONS 1.01. The General Conditions (as defined in the Appendix to this 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 General Conditions or in the Appendix to this Agreement. ARTICLE II- LOAN 2.01. The Bank agrees to lend to the Borrower, on the terms and conditions set forth or referred to in this Agreement, the amount of two hundred and eighty million Dollars ($280,000,000), as such amount may be converted from time to time through a Currency Conversion in accordance with the provisions of Section 2.07 of this Agreement ("Loan"). 2.02. The Borrower may withdraw the proceeds of the Loan in support of the Program in accordance with Section II of Schedule I to this Agreement. The Borrower's representative for purposes of taking any action required or permitted to be taken pursuant to this Section is the Borrower's Secretary of Finance. 2.03. The Front-end Fee payable by the Borrower shall be equal to one quarter of one percent (0.25%) of the Loan amount. 2.04. The interest payable by the Borrower for each Interest Period shall be at a rate equal to the Reference Rate for the Loan Currency plus the Variable Spread; provided, that upon a Conversion of all or any portion of the principal amount of the Loan, the interest payable by the Borrower during the Conversion Period on such amount shall be determined in accordance with the relevant provisions of Article IV of the General Conditions. Notwithstanding the foregoing, if any amount of the Withdrawn Loan Balance remains unpaid when due and such non- payment continues for a period of thirty days, then the interest payable by the Borrower shall instead be calculated as provided in Section 3.02 (e) of the General Conditions. 2.05. The Payment Dates are March 15 and September 15 in each year. 2.06. The principal amount of the Loan shall be repaid in accordance with the amortization schedule set forth in Schedule 2 to this Agreement. 2.07. (a) The Borrower may at any time, in each case with the prior non-objection of the Guarantor, through the Secretariat of the National Treasury of the Guarantor's Ministry of Finance, request any of the following Conversions of the terms of the Loan in order to facilitate prudent debt management: (i) a change of the Loan Currency of all or any portion of the principal amount of the Loan, withdrawn or unwithdrawn, to an Approved Currency; (ii) a change of the interest rate basis applicable to: (A) all or any portion of the principal amount of the Loan withdrawn and outstanding from a Variable Rate to a Fixed Rate, or vice versa; or (B) all or any portion of the principal amount of the Loan withdrawn and outstanding from a Variable Rate based on a Reference Rate and the Variable Spread to a Variable Rate based on a Fixed Reference Rate and the Variable Spread, or vice versa; or (C) all of the principal amount of the Loan withdrawn and outstanding from a Variable Rate based on a Variable Spread to a Variable Rate based on a Fixed Spread; and (iii) the setting of limits on the Variable Rate or the Reference Rate applicable to all or any portion of the principal amount of the Loan withdrawn and outstanding by the establishment of an Interest Rate Cap or Interest Rate Collar on the Variable Rate or the Reference Rate. (b) Any conversion requested pursuant to paragraph (a) of this Section that is accepted by the Bank shall be considered a "Conversion", as defined in the General Conditions, and shall be effected in accordance with the -2- provisions of Article IV of the General Conditions and of the Conversion Guidelines. (c) Promptly following the Execution Date for an Interest Rate Cap or Interest Rate Collar for which the Borrower has requested that the premium be paid out of the proceeds of the Loan, the Bank shall, on behalf of the Borrower, withdraw from the Loan Account and pay to itself the amounts required to pay any premium payable in accordance with Section 4.05 (c) of the General Conditions up to the amount allocated from time to time for the purpose in the table in Section II of Schedule 1 to this Agreement. 2.08. Without limitation upon the provisions of Section 5.08 of the General Conditions (renumbered as such pursuant to paragraph 3 of Section II of the Appendix to this Agreement and relating to Cooperation and Consultation), the Borrower shall promptly furnish to the Bank such information relating to the provisions of this Article II as the Bank may, from time to time, reasonably request. ARTICLE III - PROGRAM 3.01. The Borrower declares its commitment to the Program and its implementation. To this end, and further to Section 5.08 of the General Conditions: (a) the Borrower and the Bank shall from time to time, at the request of either party, exchange views on: (i) the Guarantor's macroeconomic policy framework; (ii) the Borrower's maintenance of an appropriate expenditure program, sustainable debt, and appropriate fiscal arrangements with the Guarantor, as referred to in the Whereas Clause (A) of this Agreement; and (iii) the progress achieved in carrying out the Program; (b) prior to each such exchange of views, the Borrower shall furnish to the Bank for its review and comment a report on the progress achieved in carrying out the Program, in such detail as the Bank shall reasonably request; and (c) without limitation upon the provisions of paragraphs (a) and (b) of this Section, the Borrower shall promptly inform the Bank of any situation that would have the effect of materially (i) impairing the Borrower's ability to maintain an appropriate expenditure program, sustainable debt and/or fiscal arrangements with the Guarantor; or (ii) reversing the objectives of the Program or any action taken under the Program including any action specified in Section I of Schedule 1 to this Agreement. -3 - ARTICLE IV - REMEDIES OF THE BANK 4.01. The Additional Events of Suspension consist of the following, namely, that an action has been taken or a policy has been adopted by the Borrower to reverse any action or policy under the Program, including any action listed in Section I of Schedule 1 to this Agreement, in a manner that would, in the opinion of the Bank, adversely affect the achievement of the objectives of the Program. ARTICLE V - EFFECTIVENESS; TERMINATION 5.01. The Additional Conditions of Effectiveness consist of the following: (a) The Bank is satisfied with the progress achieved by the Borrower in carrying out the Program and with the adequacy of the Guarantor's macroeconomic policy framework. (b) The Bank is satisfied with the Borrower's maintenance of an appropriate expenditure program, sustainable debt and appropriate fiscal arrangements with the Guarantor. 5.02. The Additional Legal Matter consists of the following, namely, that the Loan has been registered with the Guarantor's Central Bank. 5.03. The Effectiveness Deadline is the date ninety (90) days after the date of this Agreement, but in no case later than the eighteen (18) months after the Bank's approval of the Loan which expire on December 24, 2015. ARTICLE VI - REPRESENTATIVE; ADDRESSES 6.01. The Borrower's Representative is its Governor. 6.02. The Borrower's Address is: Secretaria da Fazenda Avenida Maud, No 1155 Porto Alegre, RS 90030080 Facsimile: (55-51) 3214-5192 -4- The Bank's Address is: International Bank for Reconstruction and Development 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable address: Telex: Facsimile: INTBAFRAD 248423(MCI) or 1-202-477-6391 Washington, D.C. 64145(MCI) AGREED ativ4e- A(V < e aeAjje -qrubh'c. 4. Rq as of the day and year first above writteV. I INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT By lim1~ Authorized Representative STATE OF RIO GRANDE DO SUL By Authori epresentative -5- SCHEDULE 1 Program Actions; Availability of Loan Proceeds Section I. Actions under the Program. The actions taken by the Borrower under the Program include the following: 1. The Borrower has improved its assessment procedures for New Tax Expenditures, as evidenced by the Service Order (Ordem de Serviqo) No 005, issued by the Borrower's Undersecretary of Internal Revenue, dated March 24, 2014. 2. The Borrower has established: (a) procedures to guide the recovery of tax arrears, reducing processing times and prioritizing cases with high values and high probability of recovery; and (b) criteria to measure results of tax arrears recovery actions, as evidenced by Directive (Portaria) No 55, issued by the Borrower's Secretary of Finance (SEFAZ), dated December 27, 2013, and published in the Official Gazette on December 30, 2013. 3. The Borrower has mandated the use of price information from its electronic fiscal invoice database as a reference price to inform its procurement processes of goods, as evidenced by the Borrower's Decree No 51.200, dated February 7, 2014, and published in the Official Gazette on February 10, 2014, as amended by the Borrower's and Decree No 51.274, dated March 11, 2014, and published in the Official Gazette on March 12, 2014. 4. The Borrower has mandated all of its secretariats that have implemented the Cost Policy and System for more than one year to prepare, as part of their annual report, a managerial cost report, as evidenced by Normative Instruction (Instruqdo Normativa) No 01, issued by the Borrower's General Accounting and Auditing Office (Contadoria e Auditoria Geral do Estado) on March 28, 2014, and published in the Official Gazette on March 31, 2014. 5. The Borrower has created a system to identify and estimate the fiscal risks created by contingent liabilities, and to prevent and mitigate their fiscal impact, as evidenced by the Borrower's Decree No 51.153, dated January 24, 2014, and published in the Official Gazette on January 27, 2014. 6. The Borrower has aligned its 'More Water, More Income' Program with its Irrigation Policy and its Water Resources Policy, as evidenced by the Borrower's Law No 14.244, dated May 27, 2013, and published in the Official Gazette on May 28, 2013. 7. The Borrower has strengthened the institutional capacity of its Department of Water Resources through the approval of an enhanced staff organogram and the -6- initiation of the corresponding recruitment process, as evidenced by the Borrower's Law No 14.477, dated January 23, 2014, and published in the Official Gazette on January 24, 2014 and by the Borrower's decision included in file No 010210- 24.00/13-2', dated February 7, 2014. (despacho no expediente 010210-24.00/13-2'), respectively. 8. The Borrower has: (a) adhered to the National Pact for Water Management (Pacto Nacional pela Gestdo das Aguas), which establishes, inter alia, targets for improving the Borrower's legal and institutional framework for water resources; planning, information and decision support tools; and operational instruments, including water availability, water use rights, water pricing and drought preparedness plans; and (b) signed an agreement with the Guarantor's Water Agency (AgOncia Nacional de Aguas) committing to comply with specific water resource management targets in exchange of financial support, as evidenced by the Borrower's Decree No 50.741/2013, dated October 14, 2013, and published in the Official Gazette on October 15, 2013, and the Contract No 114/ANA/2013 - PROGESTAO entered into between the Borrower and the Guarantor's Water Agency, dated December 31, 2013, and published in the Guarantor's Official Gazette on January 15, 2014, respectively. Section II. Availability of Loan Proceeds A. General. The Borrower may withdraw the proceeds of the Loan in accordance with the provisions of this Section and such additional instructions as the Bank may specify by notice to the Borrower. B. Allocation of Loan Amounts. The Loan (except for amounts required to pay the Front-end Fee) is allocated in a single withdrawal tranche, from which the Borrower may make withdrawals of the Loan proceeds. The allocation of the amounts of the Loan to this end is set out in the table below: Allocations Amount of the Loan Allocated (expressed in Dollars) (1) Single Withdrawal Tranche 279,300,000 (2) Front-end Fee 700,000 (3) Amount due pursuant to Section 0 2.07(c) of this Agreement TOTAL AMOUNT 280,000,000 C. Withdrawal Tranche Release Conditions. 1. No withdrawal shall be made of the Single Withdrawal Tranche unless the Bank is satisfied: -7- (a) with the adequacy of the Guarantor's macroeconomic policy framework and the progress achieved by the Borrower in the carrying out of the Program; and (b) with the Borrower's maintenance of an appropriate expenditure program, sustainable debt and appropriate fiscal arrangements with the Guarantor. D. Deposits of Loan Amounts. Except as the Bank may otherwise agree: 1. all withdrawals from the Loan Account shall be deposited by the Bank into an account designated by the Borrower and acceptable to the Bank; and 2. the Borrower shall ensure that upon each deposit of an amount of the Loan into this account, an equivalent amount is accounted for in the Borrower's budget management system, in a manner acceptable to the Bank. E. Excluded Expenditures. The Borrower undertakes that the proceeds of the Loan shall not be used to finance Excluded Expenditures. If the Bank determines at any time that an amount of the Loan was used to make a payment for an Excluded Expenditure, the Borrower shall, promptly upon notice from the Bank, refund an amount equal to the amount of such payment to the Bank. Amounts refunded to the Bank upon such request shall be cancelled. F. Closing Date. The Closing Date is December 31, 2015. The Bank shall grant an extension of the Closing Date after the Guarantor's Ministry of Finance has informed the Bank that it agrees with such an extension. -8- SCHEDULE 2 Amortization Schedule 1. The following table sets forth the Principal Payment Dates of the Loan and the percentage of the total principal amount of the Loan payable on each Principal Payment Date ("Installment Share"). If the proceeds of the Loan have been fully withdrawn as of the first Principal Payment Date, the principal amount of the Loan repayable by the Borrower on each Principal Payment Date shall be determined by the Bank by multiplying: (a) Withdrawn Loan Balance as of the first Principal Payment Date; by (b) the Installment Share for each Principal Payment Date, such repayable amount to be adjusted, as necessary, to deduct any amounts referred to in paragraph 4 of this Schedule, to which a Currency Conversion applies. Principal Payment Date Installment Share (Expressed as a Percentage) 15-March-2019 0.10 15-September-2019 0.10 15-March-2020 0.10 15-September-2020 0.10 15-March-2021 1.15 15-September-2021 1.15 15-March-2022 2.40 15-September-2022 2.40 15-March-2023 1.00 15-September-2023 1.00 15-March-2024 1.50 15-September-2024 1.50 15-March-2025 2.00 15-September-2025 2.00 15-March-2026 2.00 15-September-2026 2.00 15-March-2027 2.75 15-September-2027 2.75 15-March-2028 3.25 15-September-2028 3.25 15-March-2029 3.25 15-September-2029 3.25 15-March-2030 3.25 15-September-2030 3.25 15-March-2031 3.25 15-September-2031 3.25 -9- Principal Payment Date Installment Share (Expressed as a Percentage) 15-March-2032 2.50 15-September-2032 2.50 15-March-2033 2.50 15-September-2033 2.50 15-March-2034 2.50 15-September-2034 2.50 15-March-2035 2.50 15-September-2035 2.50 15-March-2036 2.50 15-September-2036 2.50 15-March-2037 2.50 15-September-2037 2.50 15-March-2038 0.25 15-September-2038 0.25 15-March-2039 1.40 15-September-2039 1.40 15-March-2040 1.40 15-September-2040 1.90 15-March-2041 1.90 15-September-2041 1.90 15-March-2042 1.90 15-September-2042 1.90 15-March-2043 1.90 15-September-2043 1.90 2. If the proceeds of the Loan have not been fully withdrawn as of the first Principal Payment Date, the principal amount of the Loan repayable by the Borrower on each Principal Payment Date shall be determined as follows: (a) To the extent that any proceeds of the Loan have been withdrawn as of the first Principal Payment Date, the Borrower shall repay the Withdrawn Loan Balance as of such date in accordance with paragraph I of this Schedule. (b) Any amount withdrawn after the first Principal Payment Date shall be repaid on each Principal Payment Date falling after the date of such withdrawal in amounts determined by the Bank by multiplying the amount of each such withdrawal by a fraction, the numerator of which is the original Installment Share specified in the table in paragraph 1 of this Schedule for said Principal Payment Date ("Original Installment Share") and the denominator of which is the sum of all remaining Original Installment Shares for Principal Payment Dates falling on or after such - 10- date, such amounts repayable to be adjusted, as necessary, to deduct any amounts referred to in paragraph 4 of this Schedule, to which a Currency Conversion applies. 3. (a) Amounts of the Loan withdrawn within two calendar months prior to any Principal Payment Date shall, for the purposes solely of calculating the principal amounts payable on any Principal Payment Date, be treated as withdrawn and outstanding on the second Principal Payment Date following the date of withdrawal and shall be repayable on each Principal Payment Date commencing with the second Principal Payment Date following the date of withdrawal. (b) Notwithstanding the provisions of sub-paragraph (a) of this paragraph, if at any time the Bank adopts a due date billing system under which invoices are issued on or after the respective Principal Payment Date, the provisions of such sub-paragraph shall no longer apply to any withdrawals made after the adoption of such billing system. 4. Notwithstanding the provisions of paragraphs 1 and 2 of this Schedule, upon a Currency Conversion of all or any portion of the Withdrawn Loan Balance to an Approved Currency, the amount so converted in the Approved Currency that is repayable on any Principal Payment Date occurring during the Conversion Period, shall be determined by the Bank by multiplying such amount in its currency of denomination immediately prior to the Conversion by either: (i) the exchange rate that reflects the amounts of principal in the Approved Currency payable by the Bank under the Currency Hedge Transaction relating to the Conversion; or (ii) if the Bank so determines in accordance with the Conversion Guidelines, the exchange rate component of the Screen Rate. 5. If the Withdrawn Loan Balance is denominated in more than one Loan Currency, the provisions of this Schedule shall apply separately to the amount denominated in each Loan Currency, so as to produce a separate amortization schedule for each such amount. -11- APPENDIX Section I. Definitions 1. "Cost Policy and System" means a set of norms, rules, procedures and information technology systems established to register, process, evidence and analyze the Borrower's administration costs, as set forth in the Borrower's Decree No 49766, dated of October 30, 2012, and published in the Official Gazette on October 31, 2012. 2. "Excluded Expenditure" means any expenditure: (a) for goods or services supplied under a contract which any national or international financing institution or agency other than the Bank or the Association has financed or agreed to finance, or which the Bank or the Association has financed or agreed to finance under another loan, credit, or grant; (b) for goods included in the following groups or sub-groups of the Standard International Trade Classification, Revision 3 (SITC, Rev.3), published by the United Nations in Statistical Papers, Series M, No 34/Rev.3 (1986) (the SITC), or any successor groups or subgroups under future revisions to the SITC, as designated by the Bank by notice to the Borrower: Group Sub-group Description of Item 112 Alcoholic beverages 121 Tobacco, un-manufactured, tobacco refuse 122 Tobacco, manufactured (whether or not containing tobacco substitutes) 525 Radioactive and associated materials 667 Pearls, precious and semiprecious stones, unworked or worked 718 718.7 Nuclear reactors, and parts thereof; fuel elements (cartridges), non-irradiated, for nuclear reactors 728 728.43 Tobacco processing machinery 897 897.3 Jewelry of gold, silver or platinum group metals (except watches and watch cases) and goldsmiths' or silversmiths' wares (including set gems) 971 Gold, non-monetary (excluding gold ores and concentrates) -12- (c) for goods intended for a military or paramilitary purpose or for luxury consumption; (d) for environmentally hazardous goods, the manufacture, use or import of which is prohibited under the laws of the Borrower or international agreements to which the Borrower is a party); (e) on account of any payment prohibited by a decision of the United Nations Security Council taken under Chapter VII of the Charter of the United Nations; and (f) with respect to which the Bank determines that corrupt, fraudulent, collusive or coercive practices were engaged in by representatives of the Borrower or other recipient of the Loan proceeds, without the Borrower (or other such recipient) having taken timely and appropriate action satisfactory to the Bank to address such practices when they occur. 3. "General Conditions" means the "International Bank for Reconstruction and Development General Conditions for Loans", dated March 12, 2012, with the modifications set forth in Section II of this Appendix. 4. "Irrigation Policy" means the Borrower's Law No 14.328, dated October 23, 2013 and published in the Official Gazette on October 25, 2013. 5. "'More Water, More Income' Program" means the Borrower's program created by the Borrower's Decree No 48.921, dated March 14, 2012, and published in the Official Gazette on March 15, 2012, which, inter alia, facilitates access to credit and subsidies for small farmers and promotes the use of more efficient irrigation techniques. 6. "New Tax Expenditures" means tax expenditures granted or renewed by the Borrower in or after January 1, 2014. 7. "Official Gazette" means the Borrower's Didrio Oficial. 8. "Program" means the program of actions, objectives and policies designed to promote growth and achieve sustainable reductions in poverty and set forth or referred to in the letter dated March 21, 2014, from the Borrower to the Bank declaring the Borrower's commitment to the execution of the Program, and requesting assistance from the Bank in support of the Program during its execution. 9. "Single Withdrawal Tranche" means the amount of the Loan allocated to the category entitled "Single Withdrawal Tranche" in the table set forth in Part B of Section II of Schedule I to this Agreement. -13 - 10. "Water Resources Policy" means the Borrower's Law No 10.350 dated December 30, 1994, and published in the Official Gazette on January 1, 1995, and May 31, 1995. Section II. Modifications to the General Conditions The modifications to the General Conditions are as follows: 1. The last sentence of paragraph (a) of Section 2.03 (relating to Applications for Withdrawal) is deleted in its entirety. 2. Sections 2.04 (Designated Accounts) and 2.05 (Eligible Expenditures) are deleted in their entirety, and the remaining Sections in Article II are renumbered accordingly. 3. Sections 5.01 (Project Execution Generally), and 5.09 (Financial Management; Financial Statements; Audits) are deleted in their entirety, and the remaining Sections in Article V are renumbered accordingly. 4. Paragraph (a) of Section 5.05 (renumbered as such pursuant to paragraph 3 above and relating to Use of Goods, Works and Services) is deleted in its entirety. 5. Paragraph (c) of Section 5.06 (renumbered as such pursuant to paragraph 3 above) is modified to read as follows: "Section 5.06. Plans; Documents; Records (c) The Borrower shall retain all records (contracts, orders, invoices, bills, receipts and other documents) evidencing expenditures under the Loan until two years after the Closing Date. The Borrower shall enable the Bank's representatives to examine such records." 6. Paragraph (c) of Section 5.07 (renumbered as such pursuant to paragraph 3 above) is modified to read as follows: Section 5.07. Program Monitoring and Evaluation ... (c) The Borrower shall prepare, or cause to be prepared, and furnish to the Bank not later than six months after the Closing Date, a report of such scope and in such detail as the Bank shall reasonably request, on the execution of the Program, the performance by the Loan Parties and the Bank of their respective obligations under the Legal Agreements and the accomplishment of the purposes of the Loan. -14- 7. The following terms and definitions set forth in the Appendix are modified or deleted as follows, and the following new terms and definitions are added in alphabetical order to the Appendix as follows, with the terms being renumbered accordingly: (a) The definition of the term "Eligible Expenditure" is modified to read as follows: "'Eligible Expenditure' means any use to which the Loan is put in support of the Program, other than to finance expenditures excluded pursuant to the Loan Agreement." (b) The term "Financial Statements" and its definition are deleted in their entirety. (c) The term "Project" is modified to read "Program" and its definition is modified to read as follows (and all references to "Project" throughout these General Conditions are deemed to be references to "Program"): "'Program' means the program referred to in the Loan Agreement in support of which the Loan is made." - 15 -