LOAN NUMBER 3973-CO

Loan Agreement

(Urban Environmental Management Project)

between

REPUBLIC OF COLOMBIA

and

INTERNATIONAL BANK FOR RECONSTRUCTIONAND DEVELOPMENT

Dated ACtd), 1996

LOAN NUMBER 3973-COLOAN AGREEMENT

AGREEMENT, dated :WLtJ/U aG , 1996, between Republic ofColombia (the Borrower) and INTERNATIONAL BANK FOR RECONSTRUCTIONAND DEVELOPMENT (the Bank).

WHEREAS the Borrower, having satisfied itself as to the feasibility and priorityof the Project described in Schedule 2 to this Agreement, has requested the Bank to assistin the financing of the Project; and

WHEREAS the Bank has agreed, on the basis, inter alia, of the foregoing, toextend the Loan to the Borrower upon the terms and conditions set fort- in thisAgreement;

NOW THEREFORE the parties hereto hereby agree as follows:

ARTICLE I

General Conditions; Definitions

Section 1.01. The "General Conditions Applicable to Loan and GuaranteeAgreements" of the Bank, dated January 1, 1985, with the modifications set forth below(the General Conditions) constitute an integral part of this Agreement:

(a) The last sentence of Section 3.02 is deleted.

(b) The second sentence of Section 5.01 is modified to read:

"Except as the Bank and the Borrower shall otherwise agree, nowithdrawals shall be made: (a) on account of expenditures in theterritories of any country which is not a member of the Bank or for goodsproduced in, or services supplied from, such territories; or (b) for thepurpose of any payment to persons or entities, or for any import ofgoods, if such payment or import, to the knowledge of the Bank, isprohibited by a decision of the United Nations Security Council takenunder Chapter VII of the Charter of the United Nations."

(c) In Section 6.02, subparagraph (k) is relettered as subparagraph (1) and anew subparagraph (k) is added to read:

"(k) An extraordinary situation shall have arisen under which anyfurther withdrawals under the Loan would be inconsistent with the

-2-

provisions of Article m, Section 3 of the Bank's Articles of Agreement."

Section 1.02. Unless the context otherwise requires, the several terms defined inthe General Conditions have the respective meanings therein set forth and the followingadditional terms have the following meanings:

(a) "Agreed Work Plan" means a Work Plan (as defined in (bb) below)agreed between the Borrower, through the Ministry (as defined in paragraph (o) below),and the Bank pursuant to subparagraphs (iii) and (iv) of paragraph (e) of Section 3.01 ofthe Agreement and that is an integral part of the corresponding contractual arrangementsto be entered into by the EMA in question pursuant to the provisions of Section 3.01 (g)(i) of this Agreement;

(b) "AREA" means Area Metropolitana del Valle de Ab .the MetropolitanArea referred to in paragraph (1) (iv) below;

(c) "Capital District" means Santa Fe de Bogoti, the capital of the Borrower,

(d) "CAR" means Corporaci6n Aut6noma Regional (Autonomous RegionalCorporation) a separate legal entity administratively and financially autonomous andestablished pursuant to the provisions of Title VI of Law 99 (as defined in paragraph (n)below): (i) whose jurisdiction may comprise, in whole or in part, one or more TerritorialEntities which, because of their characteristics, -onstitute the same ecosystem from ageographical viewpoint or, form a geopolitical, biogeographical or hydrogeographical unit;and (ii) that has been charged by the aforesaid Law with the responsibility of managingthe environment and the renewable natural resources with the aim of achieving sustainabledevelopment of said resources, all in conformity with the prevailing legal provisions andthe Ministry's policies on the subject;

(e) "City" means an intermediate or smaller urban area with a population ofless than one million inhabitants and in which area the jurisdiction on environmentalmatters is exercised by the corresponding CAR jointly with Departmental and MunicipalAuthorities (as the terms are defined in (k) and (r) below, respectively) pursuant to theprovisions of Law 99 (as the term is defined in (n) below);

(f) "DAHP" means the Ministry's Direcci6n de Asentamientos Humanos yPoblaci6n - (Directorate of Human Settlements and Population);

(g) "DADIMA" means Departamento Administrativo Distrital del MedioAmbiente (District Administrative Department for the Environment), a separate legalentity wholly owned by the Municipality (as the term is defined in (q) below) ofBarranquilla;

-3-

(h) "DAGMA" means Departamento de Gesti6n del Medio Ambiente(Managerial Department for the Environment), an administrative subdivision of theMunicipality of Cali;

(i) "DAMA" means Departamento T6cnico Administrativo del MedioAmbiente (Techno-Administrative Department for the Environment), an administrativesubdivision of the Capital District;

(j) "Department" means Departamento a political subdivision of theBorrower;

(k) "Departmental Authority" means the entity (either an administrativesubdivision of, or a legal entity separated from, the Department in question) with authorityto discharge such Department's responsibilities on environmental matters pursuant to theprovisions of Law 99;

(1) "EMA" means, each of the environmental management agencies of urbanareas in the Borrower's territory with a population of one million inhabitants or more,which, for purposes of the Project and unless otherwise agreed between the Borrower andthe Bank, shall be limited to the following urban areas operating through the agencymentioned below in respect of each of the said areas or through any successor theretoacceptable to the Bank that may result from the detailed design of EMA's organizationalstructure to be carried out under Part B.1 of the Project: (i) Capital District (DisjitoCagital Santa Fe de Bota, operating through DAMA; (ii) Municipality of Cali(Municipalidad de Santiago de Cali), operating through DAGMA; (iii) the Special Districtof Barranquilla referred to in paragraph (dd) (ii) below, operating through DADIMA; and(iv) Metropolitan Area of the Aburri Valley CA Metroolitana del Valle de Abura'),a separate legal entity grouping the Municipalities of Barbosa, Bello, Caldas, Copacabana,Envigado, Estrella, Girardota, Itagui, Medellin and Sabaneta (and other Municipalities thatmay join the group in the future) established by virtue of the provisions of the Borrower'sLaw No. 128 of February 23, 1994, as published in the Borrower's Official Gazette,operating through Unidad Ambiental;

(M) "IDEAM" means the Borrower's Instituto de Hidrologia, Meteorologia yEstudios Ambientales (Institute of Hydrology, Meteorology and Environmental Studies);

(n) "Law 99" means the Borrower's Law 99 of December 22, 1993, aspublished in the Borrower's Official Gazette dated December of 1993 which, inter alia,established the Ministry (as the term is defined in (o) below), and reorganized the CARsand put them under the jurisdiction of the Ministry;

(o) "Ministry" means the Borrower's Ministry of the Environment (Ministerio

-4-

del Medio Ambiene, as established by virtue of the provisions of Law 99;

(p) "Minister of the Environment" means the Borrower's Minister in chargeof the Ministry or the person lawfully acting for such Minister;

(q) "Municipality" means Municipio, a political subdivision of the Borrowerwith a geographical area that is within the boundaries of one given Department;

(r) "Municipal Authority" means the entity (either an administrativesubdivision of, or a legal entity separated from, the Municipality in question) vested bythe Municipality in question with authority to discharge such Municipality'sresponsibilities on environmental matters pursuant to the provisions of Law 99;

(s) "National Environmental Policy" means the Borrower's environmentalpolicy, as reflected in document No. 2750 of December 21, 1994 of the Borrower'sConsejo Nacional de Politica Econ6mica y Social (CONPES);

(t) "NEIS" means National Environmental Information System (SistemaNacional de Informaci6n Ambiental), as regulated by the Borrower's Decree No. 1600 of

July 27, 1994;

(u) "Programa Meores Ciudades" means Better Cities Program, a programso called in the National Environmental Policy which aims at reducing urban pollutionand strengthening the urban management of environmental resources;

(v) "Project Implementation Manual" means a comprehensive manual, issued

pursuant to the provisions of paragraph (a) of Section 6.01 of this Agreement, containinginstructions for all public sector personnel involved in the carrying out of the Project,particularly staff of the Ministry and the EMAs, and norms governing all aspects of

Project execution, particularly in relation to procurement, flow of Loan proceeds,supervision and monitoring, reporting and auditing, and including an annex thereto settingforth the standard bidding documents, to be used when procuring goods for the Projectunder national competitive bidding procedures as stipulated in Parts C.1 and E of SectionI of Schedule 4 to this Agreement);

(w) "Special Account" means the account referred to in Section 2.02 (b) ofthis Agreement;

(x) "Steering Committee" means the committee consisting of the Minister ofthe Ministry, the Director of DAHP, the Chief of the Environmental Policy Unit of theBorrower's Departamento Nacional de Planeaci6n (National Planning Department), anda representative of each EMA, as established by Resolution No. 1524 of the Minister of

-5-

the Environment dated December 11, 1995;

(y) "Subsidiary Contractual Arrangements" means each of the subsidiarycontractual arrangements, if any, to be entered into between an EMA and an entityacceptable to the Bank, pursuant to the provisions of Section 3.01 (g) (i) (B) (1) of thisAgreement;

(z) "Technical Working Group" means a group established by Resolution No.1525 of the Minister of the Environment dated December 11, 1995, with representativesof, inter alia, each EMA and under the leadership of the Ministry and IDEAM, andcharged with the responsibilities stipulated in paragraph (d) of Section 3.01 of thisAgreement;

(aa) "Territorial Entity" means, for purposes of this Agreement, a Department,a District (as defined below in paragraph (dd) or a Municipality;

(bb) "Unidad Ambiental means Environmental Unit, a unit within theadministration of AREA that reports directly to AREA's Manager,

(cc) "Work Plan" means each of the annual work plans for purposes of theProject which include all the activities of the Ministry and each EMA thereunder inrespect of a given calendar year, and which are to be approved by the Steering Committeeand submitted to the Bank pursuant to the provisions of Section 3.01 (e) of thisAgreement;

(dd) "District" means, for purposes of this Agreement, any one of the followingpolitical Subdivisions of the Borrower: (i) the Capital District; or (ii) the Distrito EspecialIndustrial y Portuario de Barranqulla (Special Industrial and Port District of Barranquilla)established by the Borrower's Acto Legislativo (Legislative Act) No.1 of August 17,1993; and

(ee) "EMA Arrangements" means each of the contractual arrangements to beentered into between the Borrower, through the Ministry, and each EMA, pursuant to theprovisions of Section 3.01 (g) (i) of this Agreement.

ARTICLE H

The Loan

Section 2.01. The Bank agrees to lend to the Borrower, on the terms andconditions set forth or referred to in the Loan Agreement, various currencies that shall

-6-

have an aggregate value equivalent to the amount of twenty million dollars ($20,000,000),being the sum of withdrawals of the proceeds of the Loan, with each withdrawal valued

by the Bank as of the date of such withdrawal.

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

expenditures made (or, if the Bank shall so agree, to be made) in respect of the reasonable

cost of goods and services required for 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 its Central Bank on terms and conditions satisfactoryto the Bank. Deposits into, and payments out of, the Special Account shall be made in

accordance with the provisions of Schedule 5 to this Agreement.

Section 2.03. The Closing Date shall be July 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 the Cost of Qualified Borrowings determined in respect of the preceding

Semester, plus one-half of one percent (1/2 of 1%). On each of the dates specified in

Section 2.06 of this Agreement, the Borrower shall pay interest accrued on the principalamount outstanding during the precding Interest Period, calculated at the rate applicableduring such Interest PerioC.

(b) As soon as practicable after the end of each Semester, the Bank shallnotify the Borrower of the Cost of Qualified Borrowings determined in respect of suchSemester.

(c) For the purposes of this Section:

(i) "Interest Period" means a six-month period ending on the dateimmediately preceding each date specified in Section 2.06 of thisAgreement, beginning with the Interest Period in which thisAgreement is signed.

(ii) "Cost of Qualified Borrowings" means the cost, as reasonably

-7-

determined by the Bank and expressed as a percentage perannum, of the outstanding borrowings of the Bank drawn downafter June 30, 1982, excluding such borrowings or portionsthereof as the Bank has allocated to fund: (A) the Bank'sinvestments; and (B) loans which may be made by the Bank afterJuly 1, 1989 bearing interest rates determined otherwise than asprovided in paragraph (a) of this Section.

(iii) "Semester" means the first six months or the second six monthsof a calendar year.

(d) On such date as the Bank may specify by no less than six months' noticeto the Borrower, paragraphs (a), (b) and (c) (iii) of this Section shall be amended to readas follows:

"(a) The Borrower shall pay interest on the principal amount of theLoan withdrawn and outstanding from time to time, at a rate for each Quarterequal to the Cost of Qualified Borrowings determined in respect of the precedingQuarter, plus one-half of one percent (1/2 of 1%). On each of the dates specifiedin Section 2.06 of this Agreement, the Borrower shall pay interest accrued on theprincipal amount outstanding during the preceding Interest Period, calculated atthe rates applicable during such Interest Period."

"(b) As soon as practicable after the end of each Quarter, the Bankshall notify the Borrower of the Cost of Qualified Borrowings determined inrespect of such Quarter."

"(c) (iii) 'Quarter' means a three-month period commencing onJanuary 1, April 1, July 1 or October 1 in a calendar year."

Section 2.06. Interest and other charges shall be payable semiannually onFebruary 1 and August 1 in each year.

Section 2.07. The Borrower shall repay the principal amount of the Loan inaccordance with the amortization schedule set forth in Schedule 3 to this Agreement.

-8-

ARTICLE III

Execution of the Project

Section 3.01. (a) The Borrower declares its commitment to the objectives of theProject as set forth in Schedule 2 to this Agreement, and, to this end, shall carry out theProject through the Ministry, with the assistance of each EMA in respect of the activitiesof the EMA in question under Part B of the Project, which assistance will primarilyconsist of the assumption by such EMA of the financial and technical responsibilities forsaid activities as provided for under the corresponding EMA Arrangements entered intowith such EMA pursuant to the provisions of paragraph (g) (i) of this Section, all withdue diligence and efficiency and in conformity with appropriate administrative, financialand environmental practices, and shall provide, promptly as needed, the funds, facilities,services and other resources required for the Project.

(b) Without limitation to the provisions of paragraph (a) of this Section andexcept as the Borrower and the Bank shall otherwise agree, the Borrower shall carry outthe Project in accordance with the Project Implementation Manual.

(c) Without limitation or restriction to the provisions of paragraph (a) of thisSection, the Borrower shall maintain the Steering Committee (except for changes theretowhich, in the opinion of the Borrower and the Bank, shall not adversely affect thecarrying out of the Project) until the closing of the Loan Account with the responsibilityof overseeing general implementation of the Project in accordance with the ProjectImplementation Manual and, more specifically, with the following functions: (i) toapprove each Work Plan and operating budget for the corresponding activities under PartA of the Project and of each EMA under Part B of the Project that has been agreed withthe Bank pursuant to paragraph (e) of this Section; (ii) to review progress inimplementation of the corresponding agreed Work Plan and to recommend or approve,as the case may be, changes thereto which may be required for a better implementationof the Project; and (iii) monitor and evaluate achievement of Project objectives.

(d) Without limitation or restriction to the provision of paragraph (a) of thisSection, the Borrower shall maintain the existence of the Technical Working Group withthe representatives and leadership referred to in Section 1.02 (z) of this Agreement, untilcompletion of the activities of the Ministry under Part A.5 of the Project and of eachEMA under Part B of the Project, and shall ensure that such Group reviews each proposalrelated to activities to be included in each Work Plan in connection with Part B.7 of theProject and with strengthening environmental monitoring capacity of one or more EMAs,and provides comments to the Steering Committee on each such proposal before theproposed Work Plan is approved by the Steering Committee;

-9-

(e) The Borrower shall, for purposes of the carrying out of the Project: (i) onApril 30 of each year, commencing in 1996, seek, through the Ministry, the agreementof the Bank in respect of the general project activity categories and budgetary limitsthereof for the immediately following calendar year; (ii) discuss with the Bank, throughthe Steering Committee, the Work Plan for the immediately following calendar year basedon the categories and limits agreed under (i) above; (iii) introduce in such Work Plan thechanges reasonably requested by the Bank, if any; (iv) cause the Work Plan agreedbetween the Borrower and the Bank pursuant to (iii) above to be formally approved bythe Steering Committee on or before November 30 of the year in question; (v) carry outor cause each EMA to carry out the corresponding activities included in the Agreed WorkPlan in question; and (vi) unless the Borrower and the Bank shall otherwise agree, withthe approval of the Steering Committee, not allow changes to the Agreed Work Plan inquestion;

(f) The Borrower, through the Ministry and for purposes of the carrying outof Part A of the Project: (i) may enter with an entity acceptable to the Bank intocontractual arrangements satisfactory to the Bank under which arrangements the entity inquestion shall provide the Borrower services to manage adequately the procurement, onbehalf of the Borrower, of the goods or services or both which may be required by theBorrower to carry out said Part of the Project; and (ii) shall not terminate, assign oramend or fail to enforce said contractual arrangements, unless otherwise agreed with theBank.

(g) The Borrower, for purposes of the carrying out of Part B of the Project,shall:

(i) enter, through the Ministry, with each EMA into contractualarrangements, satisfactory to the Bank (EMA Arrangements), tomake available to the EMA in question, as a budgetary transferthe proceeds of the Loan to be used by such EMA for thecarrying out of such EMA's activities under Part B of theProject, and to cause the EMA in question:

(A) to carry out all of its activities under Part B of theProject in accordance with the Project ImplementationManual and the corresponding Agreed Work Plan (eachsuch annual Plan to be an integral part of the EMAArrangements with the EMA in question), and in amanner that shall enable the Borrower to comply with itsobligations under this Agreement; and

(B) either: (1) to enter into subsidiary contractual

- 10 -

arrangements satisfactory to the Bank with an entityacceptable to the Bank (Subsidiary ContractualArrangements) that shall provide to the EMA in questionservices to manage adequately the procurement, onbehalf of such EMA, of the goods or services or bothwhich may be required by such EMA to carry out itsactivities under the applicable EMA Arrangement andAgreed Work Plan; or (2) to open and maintain, in formand substance satisfactory to the Bank, a revolvingaccount to be used for funding the expenditures incurredin by such EMA under the corresponding Agreed WorkPlan in the manner stipulated in the ProjectImplementation Manual, before such EMA is reimbursedfor such expenditures by the Ministry with thecorresponding proceeds of the Loan; and

(ii) not terminate, amend, assign or fail to enforce any of the EMAArrangements or any provision thereof without prior agreement with theBank.

Section 3.02. Except as the Bank shall otherwise agree, procurement of the goodsand consultants' services required for the Project and to be financed out of the proceedsof 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 andwithout limitation thereto, the Borrower, through the Ministry, shall:

(a) prepare, on the basis of guidelines acceptable to the Bank, and furnishto the Bank not later than six (6) months after the Closing Date or such later date as maybe agreed for this purpose between the Borrower and the Bank, a plan designed to ensurethe continued achievement of the objectives of the Project; and

(b) afford the Bank a reasonable opportunity to exchange views with theBorrower on said plan.

ARTICLE IV

Financial Covenants

Section 4.01. (a) The Borrower, through the Ministry, shall maintain or cause tobe maintained records and separate accounts adequate to reflect in accordance with sound

- 11 -

accounting practices the operations, resources and expenditures in respect of the Projectof the departments or agencies of the Borrower (including each EMA) responsible forcarrying out the Project or any part thereof.

(b) The Borrower shall, through the Ministry:

(i) have, and cause each EMA to have, the records and accountsreferred to in paragraph (a) of this Section including those for theSpecial Account for each fiscal year audited, in accordance withappropriate auditing principles consistently applied, byindependent auditors acceptable to the Bank;

(ii) furnish, and cause each EMA to furnish, to the Bank as soon asavailable, but in any case not later than six months after the endof each such year, the report of such audit by said auditors, ofsuch scope and in such detail as the Bank shall have reasonablyrequested; and

(iii) furnish to the Bank such other information concerning saidrecords and accounts and the audit thereof as the Bank shall fromtime to time reasonably request.

(c) For all expenditures with respect to which withdrawals from the LoanAccount were made on the basis of statements of expenditure, the Borrower, through theMinistry, shall:

(i) maintain or cause to be maintained, in accordance with paragraph(a) of this Section, records and accounts reflecting suchexpenditures;

(ii) retain, until at least one year after the Bank has received the auditreport for the fiscal year in which the last withdrawal from theLoan 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 annualaudit referred to in paragraph (b) of this Section and that thereport of such audit contains a separate opinion by said auditorsas to whether the statements of expenditure submitted duringsuch fiscal year, together with the procedures and internal

- 12 -

controls involved in their preparation, can be relied upon to

support the related withdrawals.

ARTICLE V

Other Covenants

Section 5.01. The Borrower shall, through the Ministry, cause each EMA, underthe applicable EMA Arrangements.

(a) to take out and maintain with responsible insurers, or to make otherprovision satisfactory to the Bank for, insurance against such risks and in such amountsas shall be consistent with appropriate practice;

(b) to carry on its operations and conduct its affairs in accordance with soundadministrative, financial and environmental practices under the supervision of qualifiedand experienced management assisted by competent staff in adequate numbers; and

(c) at all times to operate and to maintain its plants, machinery, equipmentand other property, and from time to time, promptly as needed, to make all necessaryrepairs and renewals thereof, all in accordance with sound engineering, financial andenvironmental practices.

ARTICLE VI

Effective Date; Termination

Section 6.01. The following events are specified as additional conditions to theeffectiveness of the Loan Agreement within the meaning of Section 12.01 (c) of theGeneral Conditions:

(a) the Project Implementation Manual has been issued by the Ministry,through a Ministerial Resolution, on terms mutually agreeable to the Borrower and to theBank;

(b) the services of key consultants or Ministry staff reassigned to DAHP keypositions and of key consultants or staff for at least two EMAs have been hired orappointed, as the case may be, on terms and conditions mutually agreeable to theBorrower and the Bank; and

- 13 -

(c) the two EMA Arrangements of the EMAs which have met the conditionunder paragraph (b) above and the corresponding Subsidiary Contractual Arrangementshave been executed and delivered in form and substance satisfactory to the Bank, and theconditions of effectiveness thereto, if any, have been fulfilled; provided, however, that,as an alternative to the execution and delivery of such Subsidiary ContractualArrangements, this condition shall be met if revolving accounts shall have been openedpursuant to subparagraph (B) (2) of paragraph (g) (i) of Section 3.01 of this Agreementby the EMA or EMAs who have not executed and delivered such Subsidiary ContractualArrangements.

Section 6.02. The date of , 1996 is hereby specified for thepurposes of Section 12.04 of the General Conditions.

ARTICLE VII

Representative of the Borrower; Addresses

Section 7.01. The Minister of Finance and Public Credit of the Borrower isdesignated as representative of the Borrower for the purposes of Section 11.03 of theGeneral Conditions.

Section 7.02. The following addresses are specified for the purposes of Section11.01 of the General Conditions:

For the Borrower:

Ministerio de Hacienda y Cr6dito PublicoCarrera 7A, No. 645Santa Fe de BogotaColombia

Cable address: Telex:

MINHACIENDA 4473

- 14 -

For the Bank:

International Bank forReconstruction and Development

1818 H Street, N.W.Washington, D.C. 20433United States of America

Cable address: Telex:

INTBAFRAD 197688 (TRT),Washington, D.C. 248423 (RCA),

64145 (WUI) or82987 (FTCC)

IN WITNESS WHEREOF, the parties hereto, acting through their duly authorizedrepresentatives, have caused this Agreement to be signed in their respective names in theDistrict of Columbia, United States of America, as of the day and year first above written.

REPUBLIC OF COLOMBIA

ByAuthorized Representative

INTERNATIONAL BANK FORRECONSTRUCTION AND DEVELOPMENT

Byb Regional Vice President

Latin erica and the Caribbean

- 15 -

SCHEDULE 1

Withdrawal of the Proceeds of the Loan

1. The table below sets forth the Categories of items to be financed out of theproceeds of the Loan, the allocation of the amounts of the Loan to each Category and thepercentage of expenditures for items so to be financed in each Category:

Amount of theLoan Allocated % of(Expressed in Expenditures

Category Dollar Equivalent) to be Financed

(1) Goods for Parts A.5 423,000 50% of amounts paidand A.6 (b) of the by the Ministry orProject on its behalf

(2) Goods for Parts B.7 50% of amountsand B.8 (b) paid by the EMA inof the Project: question or on its

behalf(a) AREA 720,000

(b) DADIMA 608,000

(c) DAGMA 720,000

(3) Consultants' services 2,409,000 50% of amountsfor Part A of the paid by the MinistryProject (other than or on its behalfPart A.4), auditingservices under Section4.01 of this Agreement

- 16 -

Amount of theLoan Allocated % of(Expressed in Expenditures

Category Dollar Equivalent) to be Financed

(4) Consultant services 50% of amounts paidfor Part B of the by the EMA inProject (other than question or on itsPart B.5), auditing behalfservices under Section4.01 of this Agreementand either fees ofentity contracted underSubsidiary ContractualArrangements or incrementaladministration servicesunder Part B.8 (c) of theProject:

(a) AREA 2,460,000

(b) DADIMA 1,286,000

(c) DAGMA 2,405,000

(d) DAMA 3,217,000

(5) Training 1,285,000 50% of amountsexpenditures for paid by the MinistryPart A.4 of the or on its behalfProject

-17-

Amount of theLoan Allocated % of(Expressed in Expenditures

Category Dollar Equivalent) to be Financed

(6) Training 50% of amountsexpenditures for paid by the EMA inPart B.5 of question or on itsthe Project: behalf

(a) AREA 646,000

(b) DADIMA 356,000

(c) DAGMA 700,000

(d) DAMA 765,000

(7) Unallocated 2,000,000

TOTAL

2. For the purposes of this Schedule the term "Training expenditures" meansexpenditures for training activities under the corresponding Agreed Work Plan incurredby the Ministry or an EMA (or on behalf thereof) in respect of consultant services andassociated travel, purchases of training materials and equipment for the Ministry or anEMA, subsistence costs or per-diem for trainees and rental of training facilities andequipment.

3. Notwithstanding the provisions of paragraph I above, no withdrawals shall bemade in respect of: (a) payments made for expenditures prior to the date of thisAgreement, except that withdrawals, in an aggregate amount not exceeding the equivalentof $2,000,000, may be made on account of payments made for expenditures before thatdate but after July 31, 1995; and (b) payments for expenditures under the correspondingSubcategory of Categories (2), (4) or (6) of the table set forth in paragraph 1 of thisSchedule, which expenditures are related to activities under Part B or the Project of anyof the EMAs other that the two EMAs in respect of which the effectiveness conditions

- 18 -

under paragraphs (b) and (c) of Section 7.01 of this Agreement has been considered metby the Bank, unless: (i) the services of the key staff of the EMA in question have beenhired in a manner satisfactory to the Bank; and (ii) the EMA Arrangements andSubsidiary Contractual Arrangements related to the EMA in question have been executedand delivered and the conditions of effectiveness thereto, if any, have been fulfilled;provided, however that, as an alternative to the execution and delivery of the applicableSubsidiary Contractual Arrangements, this condition shall be met, in respect of the EMAin question, if a revolving account shall have been opened thereby pursuant to theprovisions of subparagraph (B) 2 of paragraph (g) (i) of Section 3.01 of this Agreement.

4. The Bank may require withdrawals from the Loan Account to be made on thebasis of statements of expenditure for expenditures for goods under contracts costing lessthan $100,000 equivalent and for services of consultant firms and individual consultantsnot subject to prior review and costing less than the equivalent of $100,000 and $50,000respectively, under such terms and conditions as the Bank shall specify by notice to theBorrower.

- 19 -

SCHEDULE 2

Description of the Project

The primary objective of the Project is to support implementation of theBorrower's National Environmental Policy and the improvement of environmentalmanagement capacity in urban areas by means of strengthening the Ministry's capacityto provide policy advice and technical assistance to Cities and EMAs and by strengtheningEMAs. In support of the primary objective of the Project, additional objectives are to helpestablish those components of the NEIS, both at the national and local levels, which areinstrumental to the improvement of urban environmental management.

The Project consists of the following parts, subject to such modifications thereofas the Borrower and the Bank may agree upon from time to time to achieve suchobjectives:

Part A: Design and Imnlementation of a Technical Assistance Strategy by theMinistry for the Cities

The strategy, when put into effect, will enable the Ministry, to carry out itsmandate under Law 99 and to implement the Progama Mejores Ciudades; towards thatend the following activities will be executed:

1. Design of a technical assistance strategy for the Ministry that will comprise thepreparation of environmental action plans in a number of Cities and the provision oftechnical support to the CARs and Departmental and Municipal Authorities for theimprovement of environmental management.

2. Design and implementation of local planning tools and planning exercises,including:

(a) definition of methodologies for local environmental planning appropriateto the range of institutional, technical and financial capabilities of the urban areas inquestion;

(b) preparation of environmental action plans in cities selected in accordancewith the steps and criteria agreed between the Borrower and the Bank;

(c) developing mechanisms to ensure that the environmental criteria set forthunder each plan prepared under Part A.2 (b) above are incorporated in the correspondingurban development plan; and

- 20 -

(d) developing mechanisms to enable CARs to assist Municipal Authoritiesin Cities other that those selected under (b) above in the preparation of environmentalaction plans.

3. Execution of sectoral, institutional, economic and other studies to assist theMinistry to identify and address common and typical urban environmental problems,develop appropriate management strategies and formulate technical assistance programsthrough which the Ministry might further support the implementation of the strategies sodeveloped, including:

(i) studies to clarify allocation of different types of environmentalresponsibilities between, inter alia, Municipal Authorities and CARs;

(ii) studies on financial sources and development of economic instruments forfinancing urban environmental management activities by the public sector; and

(iii) studies required to facilitate the implementation of Progra MejoresCiudades and the development of sustainable management patterns for key activities orareas involving critical rural-urban interactions, including a study for Canal del Dique.

4. Execution of a training program for Ministry's staff, and public sector agency andcommunity representatives involved in environmental management activities, at national,regional and local levels, including local serminars and short-term courses onenvironmental management issues, acquisition and utilization therefor of trainingequipment and materials, and training abroad in different aspects of environmentalmanagement for Ministry's staff and EMAs' staff.

5. Putting in place information systems, including:

(a) definition of the general concept and implementation strategy for theurban component of NEIS;

(b) design, development and implementation of a management informationsystem for the Ministry;

(c) training for Ministry's information management staff; and

(d) acquisition of computer and other equipment, and utilization thereof tomake the systems in (a) and (b) above operative.

6. Strengthening DAHP's operational capabilities by means of: (a) provision ofconsultant services to assist and complement DAHP staff in tasks of short to medium-term

- 21 -

duration; and (b) acquisition, installation if so required, and use, by DAHP, of thenecessary office equipment and materials required for the execution of DAHP's activitiesunder the Project; provided, however, that the reference to DAHP above shall be deemedexpanded to other similar activities related to any administrative subdivision of theMinistry, if activities of, or for, such subdivision are included in one or more AgreedWork Plans.

Part B: Strengthening of the Institutional and Technical Capacity of the EMAs.

The strengthening of each EMA will help it to carry out the environmentalmanagement functions specified in Title VI of Law 99, and will include for each EMA,unless specifically -,tated otherwise, the following activities:

1. Design of each EMA's Organizational Structure and Administrative Procedures.

This will include the establishment of institutional mechanisms to facilitate intra-jurisdictional environmental management and inter-jurisdictional and inter-sectoralcoordination, where appropriate, and citizen participation, in strategic priority settingexercises and in the design, implementation and evaluation of environmental projects andprograms.

2. Preparation of Urban Environmental Strategies and CorresRonding Action Plans.

Revision or preparation, as the case may be, of an environmental strategy andaction pians to be based on a rapid but thorough assessment of environmental issues,institutional capacities and constraints, in the short and medium term.

3. Preparation of Pre-feasibility and Feasibility and other Studies.

Execution of studies for potential environmental investments and activities otherthan investments, as identified in each EMA's strategy and action plan, unless otherwiseagreed between the Borrower and the Bank in respect of one or more given studies whichare intended to be carried out before the said strategy or plan, or both, are available, orto meet unexpected circumstances after the plan is issued.

4. Prearation of the Regulatory Framework for Environmental Management.Licensing and Enforcement Procedures by each EMA.

Adapt and complement, as needed, legal provisions enacted or issued at a nationallevel so as to adjust them to the particular circumstances and to the environmentalobjectives and institutional conditions of the area under jurisdiction of the EMA inquestion.

- 22 -

5. Training.

Execution of a training program for professional staff within each EMA, stafffrom other public agencies operating in the area under such EMA's jurisdiction, relatedCARs, community leaders and general public, including acquisition and utilizationtherefor of training equipment and materials and seminars and short courses, internshipprograms at the EMA in question, visiting professors to local universities or to the EMA,and university degree programs in the Borrower's territory.

6. Environmental Education and Public Particiation.

In respect of each EMA other than DAMA, design and implementation ofenvironmental education campaigns to raise public awareness and promote publicinvolvement in urban environmental management, including acquisition and utilization ofcommunications and training equipment and materials by the EMA in question.

7. Information and Monitoring Systems.

Putting in place information and monitoring systems, including:

(a) definition of the general concept and implementation strategy for urbanenvironmental information and monitoring systems, within each EMA's jurisdiction, tobe integrated into NEIS;

(b) design, development and implementation of a management informationsystem for each EMA and use thereof by the EMA;

(c) training for each EMA's information management staff; and

(d) acquisition of computer and other equipment, and utilization thereof tomake the above systems operative.

8. Strengthening of EMAs' Operational Capabilities.

This will be achieved by means of: (a) provision of consultant services to UnidadAmbiental to assist it in tasks of short to medium-term duration complementing regularstaff (b) acquisition, installation if so required, and use, by each EMA, of the necessaryoffice equipment and materials required for the execution of such EMA's activities underthe Project; and (c) provision of incremental administration services to any EMA not

- 23 -

contracting services under Subsidiary Contractual Arrangements.

The Project is expected to be completed by January 31, 2000.

- 24 -

SCHEDULE 3

Amortization Schedule

Payment of PrincipalDate Payment Due (expressed in dollars)*

On each February 1 and August 1

beginning August 1, 2001through August 1, 2012 835,000

On February 1, 2013 795,000

* The figures in this column represent dollar equivalents determined as of therespective dates of withdrawal. See General Conditions, Sections 3.04 and 4.03.

- 25 -

Premiums on Prepayment

Pursuant to Section 3.04 (b) of the General Conditions, the premium payable onthe principal amount of any maturity of the Loan to be prepaid shall be the percentagespecified for the applicable time of prepayment below:

Time of Prepayment Premium

The interest rate (expressed as apercentage per annum)applicable to the Loan on theday of prepayment multipliedby:

Not more than three years 0.18before maturity

More than three years but 0.35not more than six yearsbefore maturity

More than six years but 0.65not more than eleven yearsbefore maturity

More than eleven years but not 0.88more than fifteen yearsbefore maturity

More than fifteen years before 1.00maturity

- 26 -

SCHEDULE 4

Procurement and Consultants' Services

Section I. Procurement of Goods

Part A: General

Goods 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 Bankin January 1995 (the Guidelines) and the following provisions of this Section, asapplicable.

Part B: International Competitive Bidding

1. Except as otherwise provided in Part C of this Section, goods shall be procuredunder contracts awarded in accordance with the provisions of Section II of the Guidelinesand paragraph 5 of Appendix 1 thereto.

2. The following provisions shall apply to goods to be procured under contractsawarded in accordance with the provisions of paragraph 1 of this Part:

(a) Grouping of Contracts

To the extent practicable, contracts shall be grouped in bid packages estimated tocost more than the equivalent of $250,000 each.

(b) Preference for Domestically Manufactured Goods [and domesticcontractorsl

The provisions of paragraphs 2.54 and 2.55 of the Guidelines and Appendix 2thereto shall apply to goods manufactured in the territory of the Borrower.

Part C: Other Procurement Procedures

1. Limited International Bidding

Computers estimated to cost $250,000 equivalent or less per contract, andlaboratory equipment which the Bank agrees can only be purchased from a limitednumber of suppliers, regardless of the cost thereof, up to an aggregate amount equivalentto $1,850,000, may be procured under contracts awarded in accordance with theprovisions of paragraph 3.2 of the Guidelines.

- 27 -

2. National Competitive Bidding

Goods other than those referred to in C. 1 above, estimated to cost the equivalentof $250,000 or less per contract may be procured under contracts awarded in accordancewith the provisions of paragraphs 3.3 and 3.4 of the Guidelines, as supplemented by theprovisions of Part E of this Section.

3. National Shopping

Goods other than those referred to in C.1 above, estimated to cost less than$100,000 equivalent per contract, up to an aggregate amount equivalent to $4,000,000,may be procured under contracts awarded on the basis of national shopping proceduresin accordance with the provisions of paragraphs 3.5 and 3.6 of the Guidelines, provided,however, that the aggregate amount of goods to be procured under national shopping byeach of the EMAs or the Ministry shall not exceed 10% of the respective estimatedaggregate budgets corresponding to Agreed Work Plans of the EMA in question or theMinistry, as the case may be.

Part D: Review by the Bank of Procurement Decisions

1. Procurement Planning

Prior to the issuance of any invitations to prequalify for bidding, if any, or to bidfor contracts, the proposed procurement plan for the Project shall be furnished to the Bankfor its review and approval, in accordance with the provisions of paragraph 1 of Appendix1 to the Guidelines. Procurement of all goods and works shall be undertaken inaccordance with such procurement plan as shall have been approved by the Bank, andwith the provisions of said paragraph 1.

2. Prior Review

With respect to each contract for goods to be procured under Parts B, C.1 and C.2of Section I of this Schedule, the procedures set forth in paragraphs 2 and 3 of Appendix1 to the Guidelines shall apply.

3. Post Review

With respect to each contract not governed by paragraph 2 of this Part, theprocedures set forth in paragraph 4 of Appendix 1 to the Guidelines shall apply.

- 28 -

Part E: Procurement Provisions Concerning National CompetitiveBidding

1. All bidders, irrespective of whether they are foreigners or Colombians, will betreated equally and, particularly, no preference will be granted to any bidder or group ofbidders for bid evaluation purposes. Bidders shall be allowed to submit their bids by handor through the post office or private mailing services. There shall not be any requirementfor any bidder to show evidence of the bidder's registration in any public registry,chamber of commerce or similar entity, whether in Colombia or elsewhere, or to appointa representative domiciled in Colombia, unless and until such bidder is awarded thecorresponding contract.

2. Bids shall be opened in a public meeting to which bidders and theirrepresentatives shall be allowed to attend if they so wish. Date, time and place for theopening meeting shall be set forth in the bidding documents. Bid opening shall coincidewith, or take place promptly after, the final date and time of the period for bid submissionstipulated in the bidding documents.

3. Each bid shall be evaluated and the corresponding contract awarded to theresponsive bidder who meets appropriate technical and financial standards of capabilityand whose bid has been determined to be the lowest evaluated bid. Such determinationshall be made exclusively on the basis of the specifications, conditions and evaluationcriteria stipulated in the bidding documents. If any factor additional to the amount oramounts of each bid is to be considered in bid evaluation, such factor or factors and thequantified manner in which they will be applied for purposes of determining the lowestevaluated bidder, shall be precisely stipulated in the bidding documents. For purposes ofbid evaluation and comparison, the only bid amount or amounts to be used as a factorshall be the bid amount or amounts as quoted in corresponding bid, including correctionof arithmetic errors.

4. The provisions of paragraph 2.46 of the Guidelines shall fully apply and, morespecifically, bids shall not be disclosed, without the corresponding bidder's writtenauthorization, to persons other than the persons officially charged with the task ofcomparing and/or evaluating the bids while they are performing their official duties.Moreover, bidders shall not be required to provide such authorization as a condition tobe entitled to bid. This confidentiality requirement shall apply until the award of contractis notified to the successful bidder. Thereafter, confidentiality of the bids shall be limitedto those bid portions for which confidentiality has been specifically requested by thebidder in question.

- 29 -

Section II. Employment of Consultants

1. Consultants' services shall be procured under contracts awarded in accordancewith the provisions of the "Guidelines for the Use of Consultants by World BankBorrowers and by the World Bank as Executing Agency" published -by the Bank inAugust 1981 (the Consultant Guidelines). For complex, time-based assignments, suchcontracts shall be based on the standard form of contract for consultants' services issuedby 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, otherstandard forms acceptable to the Bank shall be used.

2. Notwithstanding the provisions of paragraph 1 of this Section, the provisions ofthe Consultant Guidelines requiring prior Bank review or approval of budgets, short lists,selection procedures, letters of invitation, proposals, evaluation reports and contracts, shallnot apply to: (a) contracts for the employment of consulting firms estimated to cost lessthan $100,000 equivalent each; or (b) contracts for the employment of individualconsultants estimated to cost less than $50,000 equivalent each. However, said exceptionsto 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, asreasonably determined by the Bank; (d) amendments to contracts for the employment ofconsulting firms raising the contract value to $100,000 equivalent or above; or (e)amendments to contracts for the employment of individual consultants raising the contractvalue to $50,000 equivalent or above.

- 30 -

SCHEDULE 5

Special Account

1. For the purposes of this Schedule:

(a) the term "eligible Categories" means Categories (1) through (6) set forthin the table in paragraph 1 of Schedule 1 to this Agreement;

(b) the term "eligible expenditures" means expenditures in respect of thereasonable cost of goods and services required for the Project and to be financed out ofthe proceeds of the Loan allocated from time to time to the eligible Categories inaccordance with the provisions of Schedule 1 to this Agreement; and

(c) the term "Authorized Allocation" means an amount equivalent to$1,500,000 to be withdrawn from the Loan Account and deposited into the SpecialAccount pursuant to paragraph 3 (a) of this Schedule, provided, however, that unless theBank shall otherwise agree, the Authorized Allocation shall be limited to an amountequivalent to $1,000,000 until the aggregate amount of withdrawals from the LoanAccount plus the total amount of all outstanding special commitments entered into by theBank pursuant to Section 5.02 of the General Conditions shall be equal to or exceed theequivalent of $6,000,000.

2. Payments out of the Special Account shall be made exclusively for eligibleexpenditures in accordance with the provisions of this Schedule.

3. After the Bank has received evidence satisfactory to it that the Special Accounthas been duly opened, withdrawals of the Authorized Allocation and subsequentwithdrawals to replenish the Special Account shall be made as follows:

(a) For withdrawals of the Authorized Allocation, the Borrower shall furnishto the Bank a request or requests for deposit into the respective Special Account of anamount or amounts which do not exceed the aggregate amount of the AuthorizedAllocation. On the basis of such request or requests, the Bank shall, on behalf of theBorrower, withdraw from the Loan Account and deposit into the Special Account suchamount or amounts as the Borrower shall have requested.

(b) (i) For replenishment of the Special Account, the Borrower shallfurnish to the Bank requests for deposits into the Special Accountat such intervals as the Bank shall specify.

(ii) Prior to or at the time of each such request, the Borrower shall

- 31 -

furnish to the Bank the documents and other evidence requiredpursuant to paragraph 4 of this Schedule for the payment orpayments in respect of which replenishment is requested. On thebasis of each such request, the Bank shall, on behalf of theBorrower, withdraw from the Loan Account and deposit into theSpecial Account such amount as the Borrower shall haverequested and as shall have been shown by said documents andother evidence to have been paid out of the Special Account foreligible expenditures. All such deposits shall be withdrawn bythe Bank from the Loan Account under the respective eligibleCategories, and in the respective equivalent amounts, as shallhave been justified by said documents and other evidence.

4. For each payment made by the Borrower out of the Special Account, theBorrower shall, at such time as the Bank shall reasonably request, furnish to the Banksuch documents and other evidence showing that such payment was made exclusively foreligible expenditures.

5. Notwithstanding the provisions of paragraph 3 of this Schedule, the Bank shallnot be required to make further deposits into the Special Account:

(a) if, at any time, the Bank shall have determined that all further withdrawalsshould be made by the Borrower dirmctly from the Loan Account in accordance with theprovisions of Article V of the General Conditions and paragraph (a) of Section 2.02 ofthis Agreement;

(b) if the Borrower shall have failed to furnish to the Bank, within the periodof time specified in Section 4.01 (b) (ii) of this Agreement, any of the audit reportsrequired to be furnished to the Bank pursuant to said Section in respect of the audit of therecords and accounts for the Special Account;

(c) if, at any time, the Bank shall have notified the Borrower of its intentionto suspend in whole or in pwrt the right of the Borrower to make withdrawals from theLoan 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 eligibleCategories minus the total amount of all outstanding special commitments entered into bythe Bank pursuant to Section 5.02 of the General Conditions with respect to the Project,shall equal the equivalent of twice the amount of the Authorized Allocation.

Thereafter, withdrawal from the Loan Account of the remaining unwithdrawnamount of the Loan allocated to the eligible Categories shall follow such procedures as

- 32 -

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.

INTERNATIONAL BANKFOR RECONSTRUCTION AND DEVELOPMENT

CERTIFICATE

I hereby certify that the foregoing is a true copy of

the original in the archives of the International Bank

for Reconstruction and Development.

FOR SECRETARY