Page 1 CONFORMED COPY CREDIT NUMBER 3701 GE Project Agreement (Municipal Development and Decentralization Project II) between INTERNATIONAL DEVELOPMENT ASSOCIATION and MUNICIPAL DEVELOPMENT FUND Dated December 3, 2002 Page 2 CREDIT NUMBER 3701 GE PROJECT AGREEMENT AGREEMENT, dated December 3, 2002, between the INTERNATIONAL DEVELOPMENT ASSOCIATION (the Association) and MUNICIPAL DEVELOPMENT FUND (MDF). WHEREAS (A) by the Development Credit Agreement of even date herewith between Georgia (the Borrower) and the Association, the Association has agreed to lend to the Borrower an amount in various currencies equivalent to fifteen million four hundred thousand Special Drawing Rights (SDR 15,400,000), on the terms and conditions set forth in the Development Credit Agreement, but only on condition that MDF agree to undertake such obligations toward the Association as are set forth in this Agreement; and WHEREAS MDF, in consideration of the Association’s entering into the Development Credit 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 Development Credit Agreement and in the General Conditions (as so defined) have the respective meanings therein set forth. ARTICLE II Execution of the Project; Management and Operations of MDF Section 2.01. MDF declares its commitment to the objectives of the Project as set forth in Schedule 2 to the Development Credit Agreement, and, to this end, shall carry out the Project and conduct its operations and affairs in accordance with sound financial standards and practices, with qualified and experienced management and personnel, and in accordance with its Charter and the Operational Manual. Page 3 2 - - Section 2.02. (a) MDF undertakes that, unless the Association shall otherwise agree, each Local Project Financing shall be made in accordance with the procedures and on the terms and conditions set forth or referred to in the Schedule to this Agreement. (b) MDF shall not amend or waive any condition of the Operational Manual without obtaining the Association’s prior approval to any such amendment or waiver. (c) MDF shall exercise its rights in relation to each Local Investment Project in such manner as to: (i) protect the interests of the Association and of MDF; and (ii) achieve the purposes of the Project. Section 2.03. Except as the Association shall otherwise agree, procurement of the goods, works and consultants’ services required for the Project and to be financed out of the proceeds of the Credit shall be governed by the provisions of Schedule 3 to the Development Credit Agreement. Section 2.04. MDF shall carry out the obligations set forth in Sections 9.03, 9.04, 9.05, 9.06, 9.07 and 9.08 of the General Conditions (relating to insurance, use of goods and services, plans and schedules, records and reports, maintenance and land acquisition, respectively) in respect of the Project Agreement. Section 2.05. (a) MDF shall, at the request of the Association, exchange views with the Association with regard to the progress of the Project, the performance of its obligations under this Agreement and other matters relating to the purposes of the Credit. (b) MDF shall promptly inform the Association of any condition which interferes or threatens to interfere with the progress of the Project, the accomplishment of the purposes of the Credit, or the performance by MDF of its obligations under this Agreement. ARTICLE III Financial Covenants Section 3.01. (a) MDF shall maintain procedures and records adequate to monitor and record the progress of the Project and of each Local Investment Project (including its cost and the benefits to be derived from it) and to reflect in accordance with consistently maintained sound accounting practices the operations and financial condition of MDF. (b) MDF shall: (i) have its records, accounts and financial statements (balance sheets, statements of income and expenses and related statements) for each fiscal year audited, in accordance with Page 4 3 - - appropriate auditing principles consistently applied, by independent auditors acceptable to the Association; (ii) furnish to the Association, as soon as available but in any case not later than six (6) 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 Association shall have reasonably requested; and (iii) furnish to the Association such other information concerning said records, accounts and financial statements as well as the audit thereof as the Association shall from time to time reasonably request. ARTICLE IV Effective Date; Termination Cancellation and Suspension Section 4.01. This Agreement shall come into force and effect on the date upon which the Development Credit Agreement becomes effective. Section 4.02. All the provisions of this Agreement shall continue in full force and effect notwithstanding any cancellation or suspension under the General Conditions. ARTICLE V Miscellaneous Provisions Section 5.01. 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 notice or request shall be deemed to have been duly given or made when it shall be delivered by hand or by mail, telex or facsimile 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. Deliveries made by facsimile transmission shall also be confirmed by mail. The addresses so specified are: Page 5 4 - - For the Association: International Bank for Reconstruction and Development 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable address: Telex: INTBAFRAD 248423 (MCI) or Washington, D.C. 64145 (MCI) For MDF: 41, Vajsha-Pshavela Avenue 380077 Tbilisi Georgia Fax: 995-32-94-04-39 Section 5.02. Any action required or permitted to be taken, and any documents required or permitted to be executed, under this Agreement on behalf of MDF may be taken or executed by its Executive Director, or by such other person or persons as the Executive Director shall designate in writing, and MDF shall furnish to the Association sufficient evidence of the authority and the authenticated specimen signature of each such person. Section 5.03. This Agreement may be executed in several counterparts, each of which shall be an original, and all collectively but one instrument. Page 6 5 - - 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 Tbilisi, Georgia, as of the day and year first above written. INTERNATIONAL DEVELOPMENT ASSOCIATION By /s/ Tevfik M. Yaprak Authorized Representative MUNICIPAL DEVELOPMENT FUND By /s/ Victor Metreveli Authorized Representative Page 7 6 - - SCHEDULE Eligibility Criteria, Selection Procedures and Terms and Conditions of Local Project Financing Section I . Eligibility Criteria for Participating LGUs Eligibility of Participating Local Government Units shall be determined on the basis of eligibility criteria set forth in the Operational Manual and monitoring to be carried out by the MDF in accordance with the provisions of Paragraph 1 of Schedule 4 to the Development Credit Agreement, with respect to Participating LGUs’ performance under their respective Project Development Agreement. Section II. Selection Procedures for and Terms and Conditions of Local Project Financing: 1. Local Investment Projects shall be selected in accordance with the selection criteria set forth in the Operational Manual. 2. Local Project Financing shall be made in accordance with terms and conditions set forth in the Operational Manual, and unless otherwise agreed by MDF and the Association, shall include the following principal terms: (a) Maximum amount of Local Investment Project cost: $600,000 equivalent, unless otherwise agreed with the Association. (b) Minimum financing to be made available by the Participating LGU out of its own resources: 20% of total cost of Local Investment Project. (c) Currency: the Local Project Financing shall be extended in Lari determined as of the date or respective dates of disbursement. (d) Repayment terms and Interest Rate: 50% of the principal amount of the Local Project Financing shall be repayable over a period not to exceed ten (10) years following a grace period not to exceed one year and an interest rate shall be payable on 50% of the principal amount withdrawn and outstanding at the rate of 15%; the other Page 8 7 - - 50% of the principal amount of the Local Project Financing shall be made available as a grant. 3. No expenditures for goods or services required for a Local Investment Project shall be eligible for financing out of the proceeds of the Credit unless the Local Project Financing for such Local Investment Project shall have been approved by the Association and such expenditures shall have been made not earlier than ninety (90) days prior to the date on which the Association shall have received the application and information required under paragraph 5 (a) of this Schedule in respect of such Local Project Financing. 4. (a) When presenting a Local Project Financing to the Association for approval, MDF shall furnish to the Association an application, in form satisfactory to the Association, together with: (i) a report on the compliance of the Participating LGU with its Project Development Agreement and an appraisal of the Local Investment Project, including a description of the expenditures proposed to be financed out of the proceeds of the Credit; (ii) the proposed terms and conditions of the Local Project Financing, including the schedule of amortization of the Local Project Financing or of repayment of the amount of the Credit to be used for the Local Investment Project; and (iii) such other information as the Association shall reasonably request. (b) Applications and requests made pursuant to the provisions of sub- paragraph (a) of this paragraph shall be presented to the Association on or before June 30, 2006. 5. Local Project Financing shall be made on terms whereby MDF shall obtain, by written contract with the Participating LGU rights and obligations adequate to protect the interests of the Association and MDF, including: (a) require the Participating LGU to operate the Local Investment Project with due diligence and efficiency and in accordance with sound technical, financial, managerial and environmental standards and practices, and to maintain adequate records; (b) require that: (i) the goods, works and consultants’ services to be financed out of the proceeds of the Credit shall be procured in conformity with the provisions of Schedule 3 to the Development Credit Agreement; and (ii) such goods, works and services shall be used exclusively in the carrying out of the Local Investment Project; (c) inspect, by itself or jointly with representatives of the Association if the Association shall so request, such goods, works, plants and construction included in the Local Investment Project, the operation thereof, and any relevant records and documents; (d) obtain all such information as the Association or MDF shall reasonably request relating to the foregoing and to the administration, operations and financial Page 9 8 - - condition of the Participating LGU and to the benefits to be derived from the Local Investment Project; (e) require that the Participating LGU shall repay 50% of the base and/or actual cost of the Local Project Financing and the interest accrued in accordance with the amortization table; (f) suspend or terminate the right of the Participating LGU to the benefits of the Project upon failure by such Participating LGU to perform its obligations under its agreement with MDF; and (g) require that: the Participating LGU shall provide for the further maintenance of the Project output, shall not sell or burden it with any legal obligations towards third parties without the written consent of the MDF, prior to full repayment of the principal and the interest of the loan. 6. Any financing made by the MDF out of its own resources, or MDF acting as a financial intermediary for other cofinanciers, shall be made available to municipalities on the same financial terms and conditions as set forth in Section 3 of this Schedule and the Operational Manual, unless otherwise approved by the Association.