SF) LOAN AGREEMENT (Special Operations

CONFORMED COPY

LOAN NUMBER 2060-PAK (SF)

LOAN AGREEMENT (Special Operations)

(Southern Punjab Basic Urban Services Project)

between

ISLAMIC REPUBLIC OF PAKISTAN

and

ASIAN DEVELOPMENT BANK

DATED 23 JANUARY 2004

LAS:PAK 23213

LOAN AGREEMENT (Special Operations)

LOAN AGREEMENT dated 23 January 2004 between ISLAMIC REPUBLIC OF PAKISTAN (hereinafter called the Borrower) and ASIAN DEVELOPMENT BANK (hereinafter called the Bank).

WHEREAS

(A) the Borrower has applied to the Bank for: (i) a loan from its Special Fund resources; and (ii) a loan from its Ordinary Capital resources, both for the purposes of the Southern Punjab Basic Urban Services Project (hereinafter called the Project), as more fully described in Schedule 1 to this Loan Agreement;

(B) by an agreement of even date herewith between the Borrower and the Bank (hereinafter called the Ordinary Operations Loan Agreement), the Bank has agreed to lend to the Borrower, from its Ordinary Capital resources, a loan in an amount of Four Billion Eight Hundred Ninety-six Million Two Hundred Twenty-five Thousand Yen (¥4,896,225,000), for the purposes of the Project;

(C) the Project will be carried out by the Province of Punjab (hereinafter called Punjab), and for this purpose the Borrower will make available to Punjab, the proceeds of the loan provided for herein (hereinafter called the Loan) upon terms and conditions satisfactory to the Bank; and

(D) the Bank has, on the basis inter alia of the foregoing, agreed to make the Loan to the Borrower from the Bank's Special Funds resources upon the terms and conditions set forth herein and in the Project Agreement of even date herewith between the Bank and Punjab;

NOW THEREFORE the parties hereto agree as follows:

ARTICLE I

Loan Regulations; Definitions

Section 1.01. All the provisions of the Special Operations Loan Regulations of the Bank, dated 7 December 1982, are hereby made applicable to this Loan Agreement with the same force and effect as if they were fully set forth herein, subject, however, to the following modifications thereof (said Special Operations Loan Regulations as so modified being hereinafter called the Loan Regulations):

(a) Section 2.01(17) is deleted and the following is substituted therefor: 17. The term "dollar" or "dollars" or the sign "$" means dollar or dollars in the currency of the United States of America.

(b) Section 2.01(27) is deleted and the following is substituted therefor: 27. The term "interest charge" means a charge made on the Loan pursuant to Section 3.02, and includes a portion to cover administrative expenses and a portion that does not.

(c) The term "service charge" wherever it appears in the Loan Regulations shall be substituted by the term "interest charge".

(d) Section 4.05 is deleted and Sections 4.06, 4.07 and 4.08 are renumbered as Sections 4.05, 4.06 and 4.07, respectively.

(e) Section 5.02 is deleted and the following is substituted therefor:

Commitment Letters by the Bank. Upon the Borrower’s request, the Bank may issue commitment letters to pay amounts in respect of the cost of goods and services to be financed under the Loan Agreement notwithstanding any subsequent suspension or cancellation.

(f) Section 5.03 is deleted and the following is substituted therefor:

Application for Withdrawal. When the Borrower shall desire to withdraw any amount from the Loan Account or to request the Bank to issue commitment letters pursuant to Section 5.02, the Borrower shall deliver to the Bank an application in such form and containing such statements and agreements, as the Bank shall reasonably request. Except as the Bank and the Borrower shall otherwise agree, applications for withdrawal, with the necessary documentation as hereinafter in this Article provided, shall be made promptly in relation to expenditures for the Project.

(g) Section 8.03 is deleted and the following is substituted therefor:

Cancellation by the Bank. If (i) the right of the Borrower to make withdrawals from the Loan Account shall have been suspended with respect to any amount of the Loan for a continuous period of thirty (30) days, or (ii) at any time the Bank determines, after consultation with the Borrower, that any amount of the Loan will not be required for the purposes of the Project, or (iii) at any time the Bank determines, with respect to any contract to be financed out of the proceeds of the Loan, that corrupt or fraudulent practices were engaged in by representatives of the Borrower or of a beneficiary of the Loan during the procurement/consultant selection or the execution of such contract, without the Borrower having taken timely and appropriate action satisfactory to the Bank to remedy the situation, or (iv) at any time, the Bank determines that the procurement of any contract to be financed out of the proceeds of the Loan is inconsistent with the procedures set forth or referred to in the Loan Agreement, or (v) by the date specified 3

in the Loan Agreement as the closing date for withdrawals an amount of the Loan shall remain unwithdrawn from the Loan Account, the Bank may by notice to the Borrower and the Guarantor, if any, terminate the right of the Borrower to make withdrawals with respect to such amount or contract. Upon the giving of such notice, the amount of the Loan or the relevant portion thereof shall be cancelled.

(h) Section 8.04 is deleted and the following is substituted therefor:

Amounts Subject to Commitment Letters. No cancellation or suspension shall apply to amounts subject to any commitment letter issued by the Bank pursuant to Section 5.02 except as expressly provided in such commitment letter.

Section 1.02. Wherever used in this Loan Agreement, unless the context otherwise requires, the several terms defined in the Loan Regulations have the respective meanings therein set forth, and the following additional terms have the following meanings:

(a) "CBOs" mean community based organizations;

(b) "CCBs" mean citizen community boards;

(d) “DG KAUI” means the Directorate General of Katchi Abadi and Urban Improvement of Punjab;

(e) “Eligibility Criteria” means the eligible criteria set forth in Appendix 5 of the RRP to be met by a TMA in order for it to be entitled to draw funds from the proceeds of the Loan;

(f) “E&T Department” means Excise and Taxation Department of Punjab;

(g) “LGRD” means the Local Government and Rural Development Department of Punjab;

(h) “MOF” means the Ministry of Finance of the Borrower or any legal successor thereof;

(i) “NGO” means non-government organization;

(j) “PC-1” means the Planning Commission Performa 1;

(k) “PFC” means the Provincial Finance Commission;

(l) “PFC Rules of Business” mean the rules of business made by Punjab on the recommendations of the PFC;

(m) “PIRC” means Project Implementation Review Committee to be established at each tehsil;

(n) “PLGO” means the Punjab Local Government Ordinance, 2001, as amended from time to time;

(o) “P&D” means the Department of Planning and Development of Punjab:

(p) “PPMS” means Project Performance Monitoring System to be established by LGRD through PCO;

(q) “Project Coordination Office” or “PCO” means the core project monitoring unit of Punjab, transformed into PCO;

(r) “Project Completion Report” means the report to be submitted by LGRD to the Bank upon completion of the Project;

(s) “Project Executing Agency” means, for the purposes and within the meaning of the Loan Regulations, LGRD, which is responsible for the carrying out of the Project;

(t) “Project facilities” mean the facilities provided or to be provided under the Project;

(u) “Project Towns” mean Bahawalpur, Ahmadpur East, Hasilpur, Khaipur Tamewali, Yazman, Dera Ghazi Khan, Taunsa, Jahanian, Kabirwala, Khanewal, Mian Channu, Jalalpur Pirwala, Qadirpur Ran, Shujabad, Alupur, Jatoi, Kot Addu, Jampur, Rajanpur, Rojhan and Multan;

(v) “PSC” means the Project Steering Committee to be established at the P&D, as more fully described in Schedule 6 to this Loan Agreement;

(w) “PUs” mean the Project Units established by the TMAs, as more fully described in Schedule 6 to this Loan Agreement;

(x) “Resettlement Framework” means the resettlement framework, as more fully described in Supplementary Appendix D of the RRP;

(y) “RRP” means the Bank’s Report and Recommendation of the President for the Project;

(z) “TMAs” mean tehsil municipal administrations;

(aa) “TMA Rules of Business” mean the rules of business of TMAs made pursuant to the PLGO;

(bb) “TMO” means the Tehsil Municipal Office;

(cc) “TO I&S” means Tehsil Officer Infrastructure and Services; and

(dd) “UIPT” means Urban Immovable Property Tax. 5

ARTICLE II

The Loan

Section 2.01. The Bank agrees to lend to the Borrower from the Bank's Special Funds resources an amount in various currencies equivalent to Thirty-one Million Four Hundred Twenty-nine Thousand Special Drawing Rights (SDR31,429,000).

Section 2.02. (a) The Borrower shall pay to the Bank an interest charge at the rate of one percent (1%) per annum during the grace period, and one and one-half percent (1.5%) per annum thereafter, on the amount of the Loan withdrawn from the Loan Account and outstanding from time to time.

(b) The term "grace period" as used in paragraph (a) of this Section means the period prior to payment of the first principal amount of the Loan on the payment date in accordance with the amortization schedule set forth in Schedule 2 to this Loan Agreement.

Section 2.03. The interest charge and any other charge on the Loan shall be payable semiannually on 15 March and 15 September in each year.

Section 2.04. (a) Subject to the provisions of paragraphs (b) and (c) below, the Borrower shall repay the principal amount of the Loan withdrawn from the Loan Account in accordance with the amortization schedule set forth in Schedule 2 to this Loan Agreement.

(b) If the Bank shall determine, after due consideration by its Board of Directors, that (i) the Borrower's gross national product per capita (per capita GNP) has exceeded the Bank's per capita GNP operational cutoff in respect of the Bank's Special Funds resources for five consecutive years and (ii) the Borrower has achieved the capacity to borrow from the Bank's ordinary capital resources, the Bank may, by notice to the Borrower, modify the terms of repayment of the Loan by increasing by 100 percent the amount of each maturity due thereafter until the principal amount of the Loan shall have been fully repaid. However, at the request of the Borrower, the Bank may, in lieu of so increasing any such maturity amounts, charge interest, at an annual rate to be agreed between the Borrower and the Bank, on the principal amount of the Loan withdrawn and outstanding from time to time in such a manner and to such extent as to yield the same grant element as would be obtained under the above-stated increase of maturity amounts.

c)If, at any time after a modification of the lending terms pursuant to the provisions of paragraph (b) above, the Bank shall, after due consideration by its Board of Directors, determine that the Borrower's economic condition has deteriorated significantly, the Bank may, at the request of the Borrower, restore the original lending terms with respect to the remaining amount of the Loan withdrawn and outstanding.

ARTICLE III

Use of Proceeds of the Loan

Section 3.01. (a) The Borrower shall relend the proceeds of the Loan to Punjab, upon terms and conditions satisfactory to the Bank. Except as the Bank may otherwise agree, the Borrower shall relend the proceeds of the Loan to Punjab, on the same terms and conditions, as are applicable to the Borrower. The foreign exchange risk shall be borne by Punjab.

(b) The Borrower shall cause Punjab to: (i) apply the proceeds of the Loan to the financing of expenditures on the Project in accordance with the provisions of this Loan Agreement and the Project Agreement; and (ii) make proceeds of the Loan available to LGRD for the purposes of the Project.

Section 3.02. The goods and services and other items of expenditure to be financed out of the proceeds of the Loan and the allocation of amounts of the Loan among different categories of such goods and services and other items of expenditure shall be in accordance with the provisions of Schedule 3 to this Loan Agreement, as such Schedule may be amended from time to time by agreement between the Borrower and the Bank.

Section 3.03. Except as the Bank may otherwise agree, all goods and services to be financed out of the proceeds of the Loan shall be procured in accordance with the provisions of Schedule 4 and Schedule 5 to this Loan Agreement. The Bank may refuse to finance a contract where goods or services have not been procured under procedures substantially in accordance with those agreed between the Borrower and the Bank or where the terms and conditions of the contract are not satisfactory to the Bank.

Section 3.04. Except as the Bank may otherwise agree, the Borrower shall cause all goods and services financed out of the proceeds of the Loan to be used exclusively in the carrying out of the Project.

Section 3.05. Withdrawals from the Loan Account in respect of goods and services shall be made only on account of expenditures relating to:

(a) goods which are produced in and supplied from and services which are supplied from such member countries of the Bank as shall have been specified by the Bank from time to time as eligible sources for procurement, and

(b) goods and services which meet such other eligibility requirements as shall have been specified by the Bank from time to time.

Section 3.06. The closing date for withdrawals from the Loan Account for the purposes of Section 8.03 of the Loan Regulations shall be 31 July 2009 or such other date as may from time to time be agreed between the Borrower and the Bank.

ARTICLE IV

Particular Covenants

Section 4.01. (a) The Borrower shall cause Punjab to carry out the Project with due diligence and efficiency and in conformity with sound administrative, financial, engineering, environmental and urban services practices.

(b) In the carrying out of the Project and operation of the Project facilities, the Borrower shall perform, or cause to be performed, all obligations set forth in Schedule 6 to this Loan Agreement.

Section 4.02. The Borrower shall make available to Punjab promptly as needed, the funds, facilities, services, and other resources which are required, in addition to the proceeds of the Loan, for the carrying out of the Project.

Section 4.03. The Borrower shall ensure that the activities of its departments and agencies with respect to the carrying out of the Project and operation of the Project facilities are conducted and coordinated in accordance with sound administrative policies and procedures.

Section 4.04. The Borrower shall furnish, or cause to be furnished, to the Bank all such reports and information as the Bank shall reasonably request concerning (i) the Loan, and the expenditure of the proceeds and maintenance of the service thereof; (ii) the goods and services and other items of expenditure financed out of the proceeds of the Loan; (iii) the Project; (iv) the administration, operations and financial condition of Punjab and any other agencies of the Borrower responsible for the carrying out of the Project and operation of the Project facilities, or any part thereof; (v) financial and economic conditions in the territory of the Borrower and the international balance-of-payments position of the Borrower; and (vi) any other matters relating to the purposes of the Loan.

Section 4.05. The Borrower shall enable the Bank’s representatives to inspect the Project, the goods financed out of the proceeds of the Loan, and any relevant records and documents.

Section 4.06. The Borrower shall take all action which shall be necessary on its part to enable Punjab to perform its obligations under the Project Agreement, and shall not take or permit any action which would interfere with the performance of such obligations.

Section 4.07. (a) It is the mutual intention of the Borrower and the Bank that no other external debt owed a creditor other than the Bank shall have any priority over the Loan by way of a lien on the assets of the Borrower. To that end, the Borrower undertakes (i) that, except as the Bank may otherwise agree, if any lien shall be created on any assets of the Borrower as security for any external debt, such lien will ipso facto equally and ratably secure the payment of the principal of, and interest charge and any other charge on, the Loan; and (ii) that the Borrower, in creating or permitting the creation of any such lien, will make express provision to that effect; provided, however, that if for any constitutional or other legal reason, such provision cannot be made with respect to any lien on assets of its political subdivision, the Borrower shall, at no cost to the Bank, promptly secure the principal of, and 8 interest and other charges on, the Loan by an equivalent lien on assets of the Borrower satisfactory to the Bank.

(b) The provisions of paragraph (a) of this Section shall not apply to (i) any lien created on property, at the time of purchase thereof, solely as security for payment of the purchase price of such property; or (ii) any lien arising in the ordinary course of banking transactions and securing a debt maturing not more than one year after its date.

(c) The term "assets of the Borrower" as used in paragraph (a) of this Section includes assets of any political subdivision or any agency of the Borrower and assets of any agency of any such political subdivision, including the State Bank of Pakistan and any other institution performing the functions of a central bank for the Borrower.

ARTICLE V

Suspension; Cancellation; Acceleration of Maturity

Section 5.01. The following are specified as additional events for suspension of the right of the Borrower to make withdrawals from the Loan Account for the purposes of Section 8.02(l) of the Loan Regulations:

(a) the Borrower shall have, in the opinion of the Bank, failed to perform any of its obligations under the Ordinary Operations Loan Agreement; and

(b) The structure, organization, functions, or capabilities of the TMAs as currently provided under PLGO shall have been changed in a manner which in the reasonable opinion of the Bank may adversely affect the carrying out of the Project.

Section 5.02. The following is specified as an additional event for acceleration of maturity for the purposes of Section 8.07(d) of the Loan Regulations: any of the events specified in Section 5.01 of this Loan Agreement shall have occurred.

ARTICLE VI

Effectiveness

Section 6.01. The following are specified as additional conditions to the effectiveness of this Loan Agreement for the purposes of Section 9.01(f) of the Loan Regulations:

(a) the Ordinary Operations Loan Agreement shall have been duly executed and delivered on behalf of the Borrower, and all conditions precedent to its effectiveness (other than a condition requiring the effectiveness of this Loan Agreement) shall have been fulfilled;

(b) the PC-1 of the Project shall have been approved by the Executive Committee of the National Economic Council of Pakistan; and 9

(c) PCO and PUs shall have been established and fully staffed in accordance with the provisions of Schedule 6 of this Loan Agreement.

Section 6.02. The following are specified as additional matters, for the purposes of Section 9.02(d) of the Loan Regulations, to be included in the opinion or opinions to be furnished to the Bank that the Ordinary Operations Loan Agreement has been duly authorized or ratified by, and executed and delivered on behalf of, the Borrower and is legally binding upon the Borrower in accordance with its terms; and

Section 6.03. A date ninety (90) days after the date of this Loan Agreement is specified for the effectiveness of the Loan Agreement for the purposes of Section 9.03 of the Loan Regulations.

ARTICLE VII

Delegation of Authority

Section 7.01. The Borrower hereby designates Punjab its agent for the purposes of taking any action or entering into any agreement required or permitted under Sections 3.02, 3.03 and 3.06 of this Loan Agreement and under Sections 5.01, 5.02, 5.03 and 5.04 of the Loan Regulations.

Section 7.02. Any action taken or any agreement entered into by Punjab pursuant to the authority conferred under Section 7.01 of this Loan Agreement shall be fully binding on the Borrower and shall have the same force and effect as if taken by the Borrower.

Section 7.03. The authority conferred on Punjab under Section 7.01 of this Loan Agreement may be revoked or modified by agreement between the Borrower and the Bank.

ARTICLE VIII

Miscellaneous

Section 8.01. The Secretary, Economic Affairs Division, Ministry of Economic Affairs and Statistics of the Borrower is designated as representative of the Borrower for the purposes of Section 11.02 of the Loan Regulations.

Section 8.02. The following addresses are specified for the purposes of Section 11.01 of the Loan Regulations:

For the Borrower

Secretary Economic Affairs Division Ministry of Economic Affairs and Statistics Islamabad, Pakistan

Cable Address:

ECONOMIC ISLAMABAD

Telex Number:

5634 ECDIV PK

Facsimile Numbers:

(92-51) 920 5971 (92-51) 921 0734.

For the Bank

Asian Development Bank P.O. Box 789 0980 Manila, Philippines

Cable Address:

ASIANBANK MANILA

Telex Numbers:

29066 ADB PH (RCA) 42205 ADB PM (ITT) 63587 ADB PN (ETPI)

Facsimile Numbers:

(632) 636-2444 (632) 636-2293.

IN WITNESS WHEREOF the parties hereto, acting through their representatives thereunto duly authorized, have caused this Loan Agreement to be signed in their respective names and to be delivered at the principal office of the Bank, as of the day and year first above written.

ISLAMIC REPUBLIC OF PAKISTAN

By ______IFTIKHAR HUSSAIN KAZMI Authorized Representative

ASIAN DEVELOPMENT BANK

By ______TADAO CHINO President 12

SCHEDULE 1

Description of the Project

1. The overall goals of the Project are to: (i) reduce urban poverty; (ii) improve community health; and (iii) reduce environmental degradation in low-income urban settlements in selected towns of Southern Punjab. The objectives of the Project are to: (i) improve the standard of living and quality of life of low-income communities in the Project Towns by improving water supply, sanitation facilities, solid waste management and road network; (ii) ensure sustainability of urban investments by strengthening institutional capacities of newly devolved local government agencies, promoting policy reforms focusing on greater devolution of authority, and involving all stakeholders in the development process of sub-projects; and (iii) alleviate urban poverty.

2. The Project consists of the following components:

PART A: Development of Infrastructure for Basic Urban Services

This component comprises infrastructure improvements and community development and participation, and includes town-specific investments in one or more infrastructure improvement sub-projects, mapping and asset management, review of actual water use and wastewater generation, and the formation of CBOs. This component consists of the following sub-components:

a. Water Supply

(1) The water supply services in Bahawalpur, Hasilpur, Dera Ghazi Khan, Taunsa, Jalalpur Pirwala, Rojhan, and Multan shall be improved by:

(i) rehabilitation of existing distribution systems;

(ii) construction of new distribution systems;

(iii) provision of new tubewells, transmission mains and storage reservoirs;

(iv) provision of latrines and safe drinking water for all schools in the Project Towns;

(v) updating of consumer databases and conversion of illegal connections to registered accounts;

(vi) development of programs for detection and rectification of leakage;

(vii) development of programs for water quality monitoring; and

(viii) monitoring the effects of water quality improvements, especially the effects on child stunting through a representative sample study and PPMS.

Schedule 1

(2) implementation of pilot public pay toilets in Multan, and depending upon their success, replication of such toilets in other Project Towns

b. Sewerage Systems and Wastewater Treatment

Improvements shall be made to the sewerage systems and new wastewater treatment facilities shall be constructed in all the Project Towns except Ahmadpur East and Hasilpur by:

(i) extension and rehabilitation of sewerage systems;

(ii) construction of new wastewater treatment plants;

(iii) rehabilitation of existing and the laying of new secondary and main trunk sewers;

(iv) rehabilitation and construction of disposal stations; and

(v) construction of new sullage carriers, where needed.

c. Solid Waste Management

The collection and disposal of solid waste shall be improved in all Project Towns and disposal of hazardous hospital waste shall be improved in Bahawalpur, Ahmedpur East, Hasilpur, Dera Ghazi Khan, Kabirwala, Khanewal, Mian Channu, Shujabad, Kot Addu, Jampur, and Rajanpur through:

(i) community support through waste minimization with concentration of waste to neighborhood collection points;

(ii) procurement of equipment/vehicles for disposal of solid waste to landfill sites, and development of such sites;

(iii) construction of incinerators; and

(iv) inclusion of communities, NGOs and the private sector in solid waste collection, recycling and compositing.

d. Road Links

Access of low-income communities to their town center and local neighborhood shall be improved in Bahawalpur, Ahmadpur East, Yazman, Taunsa, Jahanian, Kabirwala, Khanewal, Mian Channu, Qadirpur Ran, Shujabad, Jatoi, Jampur and Rojhan through the construction of new road links. 14

Schedule 1

e. Slaughterhouses

Hygiene conditions shall be improved by the construction or relocation of municipal slaughterhouses in Ahmadpur East, Yazman, Jahanian, Kabirwala, Khanewal, Mian, Channu, Qadirpur Ran, Shujabad, Jatoi, Jampur, Rojhan, Multan.

f. Incremental Land Development for the Poor

Improvements shall be made to the living conditions of the poor by:

(i) selection of an area of state land in Mian Channu for housing scheme for the low-income households;

(ii) delineation of small individual plots of such land for the low-income households; and

(iii) provision of external access to such housing scheme and construction of water supply sanitation infrastructure.

g. Community Development and Participation

Community development and participation shall be enhanced in all Project Towns by:

(i) developing organizational and human capacity within TMAs for participatory processes targeted at poverty reduction and basic needs programs;

(ii) developing programs supporting the infrastructure investments, specifically social mobilization for component sharing approach, public health education and hygiene awareness campaigns;

(iii) conducting research aimed at system improvements of CBO-managed collection of solid waste in residential areas and CBO-managed decentralized compositing; and

(iv) programs aimed at poverty alleviation.

All these programs shall be implemented by social mobilization teams or NGOs.

PART B: Institutional Development

a. Municipal Management System Development for TMAs

Improvements shall be made for the delivery of urban services by:

(i) improving municipal financial management by introducing improved accounting procedures and management information system including budgeting, resource mobilization and enhanced operation and maintenance of assets and improved billing and collection system; 15

Schedule 1

(ii) the provision of training in technical and financial management and mapping and asset management for TMA staff; and

(iii) raising public awareness regarding urban issues and sustainability of facilities and the options available to facilitate improved delivery of urban services through active participation.

b. Project Implementation Assistance

Provision of consulting services for Project implementation support to PCO and PUs for infrastructure design and construction supervision, community development and institutional strengthening of TMAs.

c. Incremental Administration Support

Provision of incremental administrative support to PCO and PUs for implementation of the Project.

The Project is expected to be completed by 31 January 2009.

SCHEDULE 2

Amortization Schedule (Southern Punjab Basic Urban Services Project)

Date Payment Due Payment of Principal (expressed in Special Drawing Rights)*

15 March 2012 654,770 15 September 2012 654,770 15 March 2013 654,770 15 September 2013 654,770 15 March 2014 654,770 15 September 2014 654,770 15 March 2015 654,770 15 September 2015 654,770 15 March 2016 654,770 15 September 2016 654,770 15 March 2017 654,770 15 September 2017 654,770 15 March 2018 654,770 15 September 2018 654,770 15 March 2019 654,770 15 September 2019 654,770 15 March 2020 654,770 15 September 2020 654,770 15 March 2021 654,770 15 September 2021 654,770 15 March 2022 654,770 15 September 2022 654,770 15 March 2023 654,770 15 September 2023 654,770 15 March 2024 654,770 15 September 2024 654,770 15 March 2025 654,770 15 September 2025 654,770 15 March 2026 654,770 15 September 2026 654,770 15 March 2027 654,770

______*The figures in this column represent SDR equivalents determined as of the respective dates of withdrawal. The arrangements for payment of each maturity are subject to the provisions of Sections 3.04 and 4.03 of the Loan Regulations.

Schedule 2

Date Payment Due Payment of Principal (expressed in Special Drawing Rights)*

15 September 2027 654,770 15 March 2028 654,770 15 September 2028 654,770 15 March 2029 654,770 15 September 2039 654,770 15 March 2030 654,770 15 September 2030 654,770 15 March 2031 654,770 15 September 2031 654,770 15 March 2032 654,770 15 September 2032 654,770 15 March 2033 654,770 15 September 2033 654,770 15 March 2034 654,770 15 September 2034 654,770 15 March 2035 654,770 15 September 2035 654,810 SDR 31,429,000

SCHEDULE 3

Allocation and Withdrawal of Loan Proceeds

General

1. The table attached to this Schedule sets forth the Categories of goods, services and other items to be financed out of the proceeds of the Loan and the allocation of amounts of the Loan to each such Category (hereinafter called the Table). (Reference to "Category" or "Categories" in this Schedule is to a Category or Categories of the Table and reference to "Subcategory" or "Subcategories" in this Schedule is to a Subcategory or Subcategories of a Category.)

Taxes

2. No withdrawals from the Loan Account shall be made in respect of any local taxes.

Percentages of Bank Financing

3. Except as the Bank may otherwise agree, the items of the Categories and Subcategories listed in the Table shall be financed out of the proceeds of the Loan on the basis of the percentages set forth in the Table.

4. Notwithstanding paragraph 5 of this Schedule, any contract awarded to a local supplier after effective international competitive bidding or international shopping pursuant to the relevant provisions of Schedule 4 to this Loan Agreement shall be financed out of the proceeds of the Loan on the following basis:

(a) where the goods procured from a local supplier are manufactured locally, 100 percent of the ex-factory price of the goods supplied (exclusive of any taxes); and

(b) where the goods procured from a local supplier have been entirely imported, 100 percent of the foreign-currency component of the contract price. Local Expenditure

5. (a) Loan proceeds up to the amount equivalent to SDR25,070,000 may be withdrawn from the Loan Account in foreign currency for the purposes of financing local expenditure.

(b) Except as provided in this paragraph or as the Bank may otherwise agree, no withdrawals from the Loan Account shall be made in respect of any local expenditure on the Project.

Schedule 3

Interest Charge

6. The amount allocated to Category 6 is for financing interest charge on the Loan during the implementation period of the Project. The Bank shall be entitled to withdraw from the Loan Account and pay to itself, on behalf of the Borrower, the amounts required to meet payments, when due, of such interest charge.

Reallocation

7. Notwithstanding the allocation of Loan proceeds and the withdrawal percentages set forth in the Table and subject to paragraph 5 of this Schedule,

(a) if the amount of the Loan allocated to any Category appears to be insufficient to finance all agreed expenditures in that Category, the Bank may, by notice to the Borrower, (i) reallocate to such Category, to the extent required to meet the estimated shortfall, amounts of the Loan which have been allocated to another Category but, in the opinion of the Bank, are not needed to meet other expenditures, and (ii) if such reallocation cannot fully meet the estimated shortfall, reduce the withdrawal percentage applicable to such expenditures in order that further withdrawals under such Category may continue until all expenditures thereunder shall have been made; and

(b) if the amount of the Loan then allocated to any Category appears to exceed all agreed expenditures in that Category, the Bank may, by notice to the Borrower, reallocate such excess amount to any other Category.

Imprest Account; Statement of Expenditures

8. (a) Except as the Bank may otherwise agree, the Borrower shall ensure that LGRD shall establish immediately after the Effective Date, a first generation imprest account at the National Bank of Pakistan, Lahore. Second generation imprest accounts shall be established by PUs immediately after the Effective Date at the local branches of the National Bank of Pakistan to meet eligible expenditures incurred by PUs under the Project. The establishment of the first and second generation imprest accounts shall be subject to the appointment of qualified account staff and the establishment of internal controls by PCO and PUs, acceptable to the Bank. PCO shall disburse funds from the first generation imprest account for: (i) PCO activities including capital and operating costs of PCO; (ii) payments to consultants; (iii) technical support team offices; (iv) capacity building and training activities; and (v) related expenditures on monitoring, review and evaluations. Funds for Part A of the Project shall be transferred to the second generation imprest accounts managed by PUs on the basis of work plans for eligible items in accordance with the Eligibility Criteria. The first and second generation imprest accounts shall be managed, replenished and liquidated in accordance with the Bank's "Loan Disbursement Handbook" dated January 2001, as amended from time to time, and detailed arrangements agreed upon between the Borrower and the Bank. The initial amount to be deposited into the: (i) first generation imprest account shall not exceed $1,200,000; (ii) second generation imprest accounts for each PU shall not exceed $100,000, except for Ahmadpur East, the second generation imprest account for which shall not exceed $10,000.

Schedule 3

(b) The statement of expenditures (SOE) procedure may be used for reimbursement of eligible expenditures and to liquidate advances provided into the imprest accounts, in accordance with the Bank's "Loan Disbursement Handbook" dated January 2001, as amended from time to time, and detailed arrangements agreed upon between the Borrower and the Bank. Any individual payment to be reimbursed or liquidated under the SOE procedure shall not exceed the equivalent of Fifty Thousand Dollars ($50,000).

9. Except for withdrawals in respect of (i) front-end fee and interest and commitment charge under the Ordinary Operations Loan Agreement; and (ii) interest charge under this Loan Agreement, and except as the Borrower and the Bank may otherwise agree, all withdrawals to be made under this Loan and ordinary capital resources loan shall be made on a pro rata basis.

Condition of Withdrawals from Loan Account

10. Notwithstanding any other provision of this Loan Agreement, no withdrawals shall be made from the Loan Account until: (i) qualified account staff at PCO and PUs, acceptable to the Bank, has been appointed by LGRD and TMAs, respectively; and (ii) internal controls by PCO and PUs, acceptable to the Bank, have been established.

Attachment to Schedule 3

TABLE

ALLOCATION AND WITHDRAWAL OF LOAN PROCEEDS (Southern Punjab Basic Urban Services Project) CATEGORY PERCENTAGE OF BANK FINANCING Amount Allocated SDR (R/Off’000) Basis for Withdrawal Number Item Category Subcategory Percentage from the Loan Account

1 Civil Works 19.414 71 percent of total expenditure (3% for foreign and 68% for local)

2 Equipment and Material 8.172 100 percent of foreign expenditure 100* percent of local expenditure

3 Social/Community 0.203 100* percent of local expenditure Mobilization

4 Consultants 1.677 100 percent of foreign expenditure 100* percent of local expenditure Incremental Administration 5 1 1.028 100* percent of local expenditure Cost

6 Interest Charge 0.935 100 percent of amounts due

Total 31.429

*Exclusive of local taxes

1 Incremental operating costs will be withdrawn on the basis of the following percentages of each payment made for such costs during the Project implementation period: 100% in the first and second years of the Project implementation commencing from the Effective Date; 75% in the third year; and 50% in the fourth and fifth years.

SCHEDULE 4

Procurement

1. Except as the Bank may otherwise agree, the procedures referred to in the following paragraphs of this Schedule shall apply in the procurement of goods and services to be financed out of the proceeds of the Loan. In this Schedule and the Attachment hereto, the term "goods" includes equipment and materials; the term "services" does not include consulting services.

2. Procurement of goods and services shall be subject to the provisions of the "Guidelines for Procurement under Asian Development Bank Loans" dated February 1999 (hereinafter called the Guidelines for Procurement), as amended from time to time, which have been furnished to the Borrower.

3. Procurement of goods and services shall be made without any restriction against, or preference for, any particular supplier or contractor or any particular class of suppliers or contractors, except as otherwise provided in paragraph 6 below.

4. (a) Each civil works contract estimated to cost the equivalent of more than $ 1,000,000 and each supply contract for equipment or materials estimated to cost the equivalent of more than $500,000 shall be awarded on the basis of international competitive bidding as described in Chapter II of the Guidelines for Procurement.

(b) For contracts to be awarded on the basis of international competitive bidding, there shall be submitted to the Bank, as soon as possible, and in any event not later than 90 days before the issuance of either the first prequalification invitation or the first invitation to bid for the Project, a General Procurement Notice (which the Bank will arrange to publish separately) in such form and detail and containing such information the Bank as shall reasonably request. The Bank shall be provided the necessary information to update such General Procurement Notice annually as long as any goods and works remain to be procured on the basis of international competitive bidding.

(c) For contracts to be awarded on the basis of international competitive bidding, procurement actions shall be subject to review by the Bank in accordance with the procedures set forth in Chapter IV of the Guidelines for Procurement. Each draft invitation to bid, to be submitted to the Bank for approval under such procedures, shall reach the Bank at least 42 days before it is issued and shall contain such information as the Bank shall reasonably request to enable the Bank to arrange for the separate publication of such invitation.

5. (a) Each supply contract for equipment or materials estimated to cost the equivalent of between $500,000 and $100,000 (other than minor items) shall be awarded on the basis of international shopping as described in Chapter III of the Guidelines for Procurement.

Schedule 4

(b) Each draft invitation to bid and related bid document shall be submitted to the Bank for approval before they are issued.

(c) Notwithstanding paragraph 3.03(b) of the Guidelines for Procurement, any award of contract shall be subject to prior Bank approval, except as the Bank may otherwise agree.

6. In comparing bids under international competitive bidding, a margin of preference may be provided, at the option of the Borrower and in accordance with the provisions of the Attachment to this Schedule, for goods manufactured in the territory of the Borrower, provided that the bidder offering such goods shall have established to the satisfaction of the Borrower and the Bank that the domestic value added equals at least 20 percent of the ex-factory bid price of such goods.

Local Procurement

7. Civil works contracts estimated to cost the equivalent of $1,000,000 or less may be awarded on the basis of local competitive bidding among prequalified contractors in accordance with the standard procurement procedures of Punjab and acceptable to the Bank. Prequalification, selection and engagement of contractors shall be subject to the approval of the Bank. As soon as the bids received have been evaluated, the proposal for award of contract shall be submitted to the Bank for approval. For this purpose, the Bank shall be furnished with three copies of (i) an account of the public opening of bids; (ii) a summary and evaluation of the bids; (iii) the proposal for award; and (iv) a draft contract or a draft letter of acceptance. Promptly after each contract is awarded, the Bank shall be furnished with three copies of the contract as executed.

Force Account

8. Certain works for minor development or maintenance, estimated to cost the equivalent of $15,000 or less, may be carried out by Punjab on a force account basis.

Direct Procurement

9. Certain minor items of equipment, which are estimated to cost, in the aggregate, less than the equivalent of $50,000, may be procured through direct purchase in accordance with procedures acceptable to the Bank. After award, three copies of each contract for such items shall be furnished to the Bank.

Intellectual Property

10. (a) The Borrower shall ensure that all Bank-financed goods and services procured (including without limitation all computer hardware, software and systems, whether separately procured or incorporated within other goods and services procured) do not violate or infringe any industrial property or intellectual property right or claim of any third party.

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(b) The Borrower shall ensure that all Bank-financed contracts for the procurement of goods and services contain appropriate representations, warranties and, if appropriate, indemnities from the contractor or supplier with respect to the matters referred to in subparagraph (a) of this paragraph.

Attachment to Schedule 4 (Page 1)

Preference for Domestically Manufactured Goods

1. In the procurement of goods through international competitive bidding, goods manufactured in the territory of the Borrower may be granted a margin of preference in accordance with the following provisions, provided that the bidder shall have established to the satisfaction of the Borrower and the Bank that the domestic value added equals at least 20 percent of the ex-factory bid price of such goods. The 20 percent domestic value added applies to the total ex-factory bid price of the goods and not only to one item in a list.

(a) For application of domestic preference, all responsive bids shall first be classified into the following three categories:

Category I -- bids offering goods manufactured in the territory of the Borrower which meet the minimum domestic value added requirement;

Category II -- bids offering other goods manufactured in the territory of the Borrower; and

Category III -- bids offering imported goods.

(b) The lowest evaluated bid of each category shall then be determined by comparing all evaluated bids in each category among themselves, without taking into account customs duties and other import taxes levied in connection with the importation, and sales and similar taxes levied in connection with the sale or delivery, pursuant to the bids, of the goods.

(c) Such lowest evaluated bids shall next be compared with each other and if, as a result of this comparison, a bid from Category I or Category II is found to be the lowest, it shall be selected for the award of contract.

(d) If, however, as a result of the comparison under subparagraph (c) above, the lowest bid is found to be from Category III, it shall be further compared with the lowest evaluated bid from Category I. For the purpose of this further comparison only, an upward adjustment shall be made to the lowest evaluated bid price of Category III by adding either

(i) the amount of customs duties and other import taxes which a nonexempt importer would have to pay for the importation of the goods offered in such Category III bid; or

(ii) 15 percent of the CIF bid price of such goods if the customs duties and import taxes referred to above exceed 15 percent of the CIF bid price.

Attachment to Schedule 4 (Page 2)

If, after such further comparison, the Category I bid is determined to be the lowest, it shall be selected for the award of contract; if not, the lowest evaluated bid from Category III shall be selected for the award.

2. (a) Bidders applying for the preference shall provide evidence necessary to establish the eligibility of a bid for the preference, including the minimum domestic value added.

(b) The bidding documents shall clearly indicate the preference to be granted, the information required to establish the eligibility of a bid for the preference claimed, and the procedures to be followed in the comparison of bids, all as set forth above.

Attachment to Schedule 4 (Page 3)

Preference for Domestic Contractors

3. In the selection of civil-works contractors, single-responsibility turnkey (including design- build) contractors or supply-and-installation contractors where the CIF cost of goods to be used for or in the permanent works under such contracts is less than 60 percent of the total cost of such works, eligible domestic contractors, as defined below, through international competitive bidding may be granted a margin of preference in accordance with the following provisions.

(a) For application of domestic preference, all responsive bids shall first be classified into the following two categories:

Category I -- bids offered by domestic contractors and joint ventures eligible for the preference in accordance with the applicable criteria as set forth in paragraph 6 below; and

Category II -- bids offered by other contractors.

(b) The lowest evaluated bid of each category shall then be determined by comparing all evaluated bids in each category among themselves.

(c) Such lowest evaluated bids shall next be compared with each other and if, as a result of this comparison, a bid from Category I is found to be the lowest, it shall be selected for the award of contract.

(d) If, however, as a result of the comparison under subparagraph (c) above, the lowest bid is found to be from Category II, it shall be further compared with the lowest evaluated bid from Category I. For the purpose of this further comparison only, an upward adjustment shall be made to the lowest evaluated bid price of Category II by adding an amount equal to seven-and-one-half percent of the bid price. If, after such comparison, the Category I bid is determined to be the lowest, it shall be selected for the award of contract; if not, the lowest evaluated bid from Category II shall be selected.

Attachment to Schedule 4 (Page 4)

4. (a) To be eligible for the preference set forth in paragraph 5 above, domestic contractors must meet the following criteria:

(i) firms are registered in the territory of the Borrower;

(ii) firms have majority ownership by nationals of the Borrower; and

(iii) firms will not subcontract more than 50 percent of the total value of their work to foreign contractors.

(b) A joint venture between a domestic contractor and its foreign partner shall be eligible for the preference only if it meets the following criteria:

(i) the domestic partner(s) is individually eligible for the preference according to the criteria stated above;

(ii) the domestic partner(s) would not qualify for the contract works on technical or financial grounds without the foreign participation; and

(iii) the domestic partner(s) will, under the arrangements proposed, carry out at least 50 percent of the contract works measured in terms of value.

(c) Contractors applying for the preference shall be required to provide, as part of the data for qualification, necessary information, including details of ownership, for determining whether, according to the applicable criteria, a particular firm or group of firms qualifies for the preference.

5. The bidding documents shall clearly indicate the preference to be granted, the information required to establish the eligibility of firms for the preference claimed, and the procedures to be followed in the comparison of bids, all as set forth above. Bidders applying for the preference shall provide such additional information in support of such eligibility as may be requested by the Borrower and the Bank. 29

SCHEDULE 5

Consultants

1. The services of international and domestic consultants shall be utilized in the carrying out of the Project, particularly with regard to:

(a) Project management and implementation support to PCO and PUs, including sub-project detailed design, construction supervision, and monitoring and evaluation;

(b) municipal management system development;

(d) PU professionals.

The terms of reference of the consultants shall be as determined by agreement between the Bank and the Borrower.

2. The selection, engagement and services of the consultants shall be subject to the provisions of this Schedule and the provisions of the "Guidelines on the Use of Consultants by Asian Development Bank and Its Borrowers" dated April 2002 (hereinafter called the Guidelines on the Use of Consultants), as amended from time to time, which have been furnished to the Borrower.

3. The services of international/domestic consulting firms shall be utilized in carrying out of items (a) and (b) described in paragraph 1 to this Schedule. The services of individual social mobilizers or local NGOs as consultants shall be utilized in carrying out item (c) described in paragraph 1 to this Schedule. The services of individual consultants shall be utilized in carrying out item (d) described in paragraph 1 to this Schedule.

4. The consultants shall be selected and engaged as a firm by Punjab using the quality-and-cost-based selection (QCBS) method in accordance with the following procedures.

(a) Invitation for technical and financial proposals. The invitation to submit technical and financial proposals (hereinafter called the Request for Proposals or RFP) and all related documents shall be approved by the Bank before they are issued. For this purpose, three copies of the draft RFP, the names of consultants to be short-listed, the proposed criteria for evaluation of both proposals, a draft consultancy contract, and other related documents shall be submitted to the Bank. A period of at least 60 days shall be allowed for submission of both proposals. A copy of the final RFP as issued, together with all related documents, shall be furnished to the Bank for information promptly after issuance. The validity period for the technical and financial proposals as provided in the RFP shall usually not exceed three (3) months from the date specified for submission of the technical 30

Schedule 5

and financial proposals. The approval of the Bank shall be obtained for any request to extend such validity period. Except as the Bank may otherwise agree, the validity period, including any extensions, shall not exceed a maximum total period of six (6) months. If the contract is not signed within the validity period in accordance with the Guidelines on the Use of Consultants, the selection shall be invalid and the selection and engagement process as provided in this paragraph shall be followed again.

(b) Evaluation and scoring of technical proposals. Immediately after the technical proposals have been evaluated and scored, approval of the Bank shall be obtained to the evaluation and scoring of the technical proposals. For this purpose, the Bank shall be furnished with three copies of the technical proposals.

(c) Public opening of financial proposals. The financial proposals of the firms whose technical proposals meet the minimum qualifying technical score shall be opened publicly after adequate notice is given to such firms or their representatives to attend the opening of the financial proposals.

(d) Evaluation and scoring of financial proposals and ranking of technical and financial proposals. After the financial proposals have been evaluated and scored, the ranking of the technical and financial proposals shall be made. Before negotiations are started with the first- ranked consultants, approval of the Bank shall be obtained to the evaluation and scoring of the financial proposals and the ranking of the technical and financial proposals. For this purpose, the Bank shall be provided with three copies of (i) the evaluation and scoring of the financial proposals and (ii) the ranking of the technical and financial proposals.

(e) Execution of contract. After the conclusion of negotiations but before the signing of the contract, the Bank shall be furnished with the contract as negotiated for approval. Promptly after the contract is signed, the Bank shall be furnished with three copies of the signed contract. If any substantial amendment of the contract is proposed after its execution, the proposed changes shall be submitted to the Bank for prior approval.

5. Individual consultants shall be selected and engaged by Punjab in accordance with the following procedures.

(a) A list of the candidates together with their qualifications and their ranking and a draft contract shall be furnished to the Bank for approval before the selection of consultants.

(b) Promptly after the contract is signed, the Bank shall be furnished with the evaluation of the candidates and a brief justification for the selection, together with three copies of the signed contract.

(c) If any substantial amendment of the contract is proposed after its execution, the proposed changes shall be submitted to the Bank for prior approval.

Schedule 5

6. The Borrower shall ensure that all Bank-financed contracts with consultants contain appropriate representations, warranties and, if appropriate, indemnities from the consultants to ensure that the consulting services provided do not violate or infringe any industrial property or intellectual property right or claim of any third party.

SCHEDULE 6

Execution of Project and Operation of Project Facilities; Financial Matters

Project Execution and Implementation Arrangements

Project Executing Agency

1. LGRD shall be the Project Executing Agency and shall coordinate the implementation of the Project. PCO shall be headed by the Director General of DG KAUI and supported by a team of counterpart staff and consultants. PCO shall:

(i)assist TMAs in providing policy guidance and inter-TMA coordination; (ii) assist in the implementation of the Municipal Management System Development component; (iii) support the monitoring and evaluation of works executed by PUs; and (iv) act as a support unit for TMAs by providing TMAs with guidance in implementing Project activities.

Project Implementing Agencies

2. Each TMA shall act as a Project Implementing Agency within its respective jurisdiction. Each TMA shall have established a PU to execute Part A of the Project, as more fully described in Schedule 1 to this Loan Agreement. Each PU shall be headed by the Chief Officer of the TMA and shall comprise of:

(i) a municipal engineer; (ii) two (2) sub-engineers; (iii) an accounts officer; and (iii) five (5) support staff.

In Multan, PU shall also include staff from the Multan Development Authority.

3. Each PU shall work in close collaboration with the TO I&S. Four (4) technical support teams of consultants, one each placed in Multan, Bahawalpur, Dera Ghazi Khan and Khanewal, shall assist PUs in the preparation of detailed designs, and procurement for Part A of the Project.

4. The Borrower shall ensure that Punjab causes TMAs to retain their PUs after completion of the Project as their core development units to look after TMAs’ development works under annual development programs and ensure sustainability of all development works including the works carried out under the Project.

Project Implementation Review Committee

5. A PIRC shall be set up by each TMA within one (1) month of the Effective Date at each Tehsil level to review the implementation of the Project. PIRC shall be headed by the Tehsil Nazim and shall comprise of: 33

Schedule 6

(i) Male and female representatives of the TMA, Union Councils, and CBOs; (ii) TMO; (iii) Tehsil Officer, Planning and Coordination; (iv) TO I&S; (v) Chief Officer of the TMA; (vi) Package A and B Consultants referred to in Supplementary Appendix C of the RRP; (vii) Assistant Director, LGRD of the concerned district; and (viii) Conveners of the CCBs.

PIRC shall meet every month to discuss the progress of the Project.

Project Steering Committee

6. A PSC shall be set up by Punjab at P&D within one (1) month of the Effective Date to: (i) ensure smooth and timely implementation of the Project; (ii) provide policy guidance on ongoing and new policy initiatives; (iii) resolve inter-agency problems; and (iv) follow up with LGRD on the progress made regarding the policy actions referred to in paragraphs 13 to 15 herein below. The Chairman, Planning and Development Board, Punjab, shall head the PSC. Senior officers of the P&D, LGRD, Department of Finance, and Tehsil Nazims of the participating TMAs shall be members of the PSC. The PSC shall hold meetings at least once every three (3) months. LGRD shall continue to hold follow-up meetings with PCO and TMAs, as and when required.

Audit, Accounts and Reports

7. Without limiting the provisions of Section 4.10 of this Loan Agreement, the Borrower shall ensure that LGRD shall maintain records and accounts adequate to identify the works, goods and services financed out of the proceeds of the Loan and the ordinary capital resources loan. In particular, LGRD shall: (i) maintain separate Project accounts of PCO and PUs; (ii) ensure that Project accounts and financial statements are audited annually in accordance with sound accounting principles by independent auditors acceptable to the Bank; and (iii) furnish to the Bank, not later than nine (9) months after the close of each fiscal year, certified copies of such audited accounts and financial statements and the report of the auditors relating thereto (including the auditors' opinion on the use of the Loans proceeds and compliance with the covenants of this Loan Agreement and the Ordinary Operations Loan Agreement as well as on the use of the procedures for the imprest accounts and statement of expenditures), all in the English language. The Borrower shall ensure that Punjab shall furnish to ADB such further information concerning such accounts and financial statements and the audit thereof as ADB shall from time to time reasonably request. 34

Schedule 6

Project Review and Reporting

8. The Borrower shall ensure that Punjab shall cause PCO to submit reports to the Bank concerning the use of loan proceeds, project administration, and financial management. PCO shall prepare quarterly progress reports in a form and substance acceptable to the Bank, which shall include information on: (i) progress made against the set targets, including pre- determined performance monitoring indicators; (ii) any delays and/or problems encountered and the actions taken to resolve them; (iii) due compliance with loan covenants; and (iv) proposed program of activities to be undertaken and the expected progress during the next quarter. Within three (3) months of the physical completion of the Project, LGRD shall prepare and submit to the Bank a Project Completion Report on the execution of the Project including the costs and compliance with Loan covenants.

9. The Bank and the Borrower shall semi-annually review the implementation of the Project. A comprehensive mid-term review at the end of year three (3) shall be undertaken to evaluate actual physical and financial progress The review shall include: (i) a comprehensive evaluation of the Project implementation arrangements with progress made against set targets; (ii) consultations with community groups; and (iii) an appraisal of the institutional and policy development aspects of the Project, and shall recommend adjustments to the Project design and/or implementation arrangements, if necessary.

Project Performance Management System

10. The Borrower, LGRD and PCO shall establish, maintain and implement the PPMS in accordance with the Bank’s Project Performance Management System Handbook to monitor and evaluate the technical performance and social and economic benefits of the Project, particularly with reference to the poor and women. The performance monitoring indicators and procedures established in accordance with the Bank’s Project Performance Management System Handbook, as more fully described in Supplementary Appendix D of the RRP, shall be tested with respect to data availability and other constraints, revised, if necessary, and institutionalized as part of the Project management information system. PUs, with the assistance of PCO, shall undertake monitoring and assessment of the performance monitoring activities for sub-projects on a semi-annual basis. To measure the Project impacts on the beneficiaries, in particular low-income groups within Project Towns, accurate baseline information shall be established by PCO and PUs at the commencement of sub-project implementation, with this information being the basis for determining the resulting impacts.

Spot Audits

11. The Borrower shall ensure that Punjab allows and facilitates the Bank’s representatives to carry out spot and random checks on (i) flow of funds and their use for the Project in accordance with this Loan Agreement and the Ordinary Operations Loan Agreement; (ii) work-in-progress; and (iii) Project implementation.

Schedule 6

Counterpart Funds

12. The Borrower shall ensure that Punjab allocates and makes available to LGRD and eligible TMAs, in a timely manner, sufficient funds from its budget for each fiscal year for the implementation of the Project and operation and maintenance of the Project facilities and shall ensure that such facilities are operated and maintained in accordance with sound urban utility practices.

Policy Actions

13. The Borrower shall ensure that Punjab shall undertake the following time-bound policy actions:

(i) within one (1) month of the date of execution of this Loan Agreement, Punjab shall create a special grant (the PFC Grant) under the PFC for participating TMAs fulfilling the eligibility criteria set forth in the PFC Grant and notify it as part of PFC award;

(ii) within one (1) month of the date of execution of this Loan Agreement, Punjab shall provide copy of the PFC award to all TMAs and place it on Punjab web- site;

(iii) within one (1) months of the date of execution of this Loan Agreement, LGRD shall hold workshops with TMA Nazims and TMOs to explain the PFC Grant, its operation and performance evaluation procedures;

(iv) within three (3) months of the date of execution of this Loan Agreement, Punjab shall make arrangement for the smooth transfer of PFC Grant funds to the imprest accounts of the eligible TMAs;

(v) within three (3) months of the date of execution of this Loan Agreement, Punjab shall provide the CO Units of the TMAs the financial power to meet urgent operation and maintenance expenditures;

(vi) Punjab shall, on a quarterly basis, from the date of execution of this Loan Agreement, provide to TMAs, statements showing total collection, TMAs’ share, deductions and balance transferred to the TMA which should be reconciled by the E&T Department and TMAs;

(vii) Punjab shall, on a quarterly basis, from the date of execution of this Loan Agreement, transfer to TMAs their share in UIPT;

(viii) within six (6) months of the date of execution of this Loan Agreement, Punjab shall consider and specify the sources and application of TMA funds derived from urban areas. Punjab shall spend UIPT, TOTP, octroi compensatory grant, property rentals, and user charges in the CO Units to ensure equity in resource allocation and adequate provision of municipal services;

Schedule 6

(ix) within six (6) months of the date of execution of this Loan Agreement, Punjab shall facilitate the TMAs in reconciling the arrears due to the Pakistan Water and Power Development Authority;

(x) within six (6) months of the date of execution of this Loan Agreement, Punjab shall devise transition arrangements for the transfer of the operational expenditures of public health engineering schemes; and

(xi) within twelve (12) months of the date of execution of this Loan Agreement, Punjab shall, through promulgation of PFC Rules of Business, operationalize the PFC redress of grievance mechanism relating to transfers.

14. The Borrower shall ensure that Punjab shall issue timely directives on the following policy actions;

(i) within one (1) month of the date of execution of this Loan Agreement, the TMAs shall be made responsible for payment of their electricity bills;

(ii) within two (2) months of the date of execution of this Loan Agreement, meetings of the Zila Mushavarat Committee shall be held on regular intervals in accordance with the provisions of the PLGO;

(iii) within two (2) months of the date of execution of this Loan Agreement, CCBs shall be registered with the prescribed authority;

(iv) within three (3) months of the date of execution of this Loan Agreement, the district governments shall review and revise the land values notified for levy of stamp duty and registration charges, which exercise shall be repeated after every three (3) years;

(v) within six (6) months of the date of execution of this Loan Agreement, Punjab shall issue directives on the pension contribution and provident fund deduction of staff of decentralized departments working in the TMAs; and

(vi) within twelve (12) months of the date of execution of this Loan Agreement, Punjab shall issue directives on the setting-up of an internal audit office required under Section 57(h) of the PLGO and shall also specify the existing service/department from where the audit staff may be utilized.

15. The Borrower shall ensure that, within six (6) months of the execution of this Loan Agreement, Punjab shall notify rules for monitoring and house committees and for the conduct of business of the tehsil councils.

Schedule 6

Eligibility Criteria for TMAs and Investment Pool

16. The Borrower shall cause Punjab to make the Loan proceeds available to TMAs through LGRD under PFC as the PFC Grant. Funds to TMAs shall be allocated on the basis of a TMA-specific investment plan based on the actual needs of the TMA for basic urban services, particularly for low-income communities, within the agreed scope of the Project. The PFC Grant shall be available to TMAs meeting:

(i) Eligibility Criteria: All TMAs shall meet the Eligibility Criteria before approval of any sub-project. PCO shall assist TMAs in undertaking the required actions under the Eligibility Criteria and prepare a compliance report, which shall be reviewed and endorsed by LGRD and submitted to the Bank for review and approval. Future quarterly progress reports to be prepared by PCO shall include the status of sustainability of the required actions under the Eligibility Criteria. Bank review missions shall review and validate the situation in the light of these reports.

(ii) Project Specific Criteria: Upon fulfillment of the Eligibility Criteria, TMAs shall prepare annual work plans and budgets for their respective PUs. In order to fulfill the Project Specific Criteria, TMAs shall be required to meet: (a) generic; and (b) sector- specific requirements:

(a) Generic requirements: TMAs shall: (i) ensure transparency in all bidding procedures, the compliance whereof shall be certified by the Package A Consultants specified in the Supplementary Appendix C of the RRP; (ii) be required, upon release of overall annual development funds by Punjab, to demonstrate availability of requisite counterpart funds for the sub-projects and adequate budget for meeting the operation and maintenance expenditure of the existing facilities of the TMAs. LGRD shall provide the status of such funds to the Bank for the Bank’s consideration.

(b) Sector-specific requirements:

Water Supply and Sewerage Improvement Works: TMAs shall have finalized plans for the detection of leaks and the rectification thereof, and for water quality monitoring. In view of the consumer survey and tariff plan furnished under the Eligibility Criteria, which shall be approved by the Bank, first bills shall have been issued for water supply and sewerage charges and all illegal connections shall have been detected and regularized, as certified by the Package A Consultants specified in the Supplementary Appendix C of the RRP.

Schedule 6

Wastewater treatment plant, solid waste management, and slaughterhouse: Upon completion of the requisite actions to be undertaken by the district governments, TMAs shall have acquired all land required, in accordance with land acquisition plan referred to in paragraph 21 to this Schedule, and involuntary resettlement, if any, shall have taken place in accordance with the Resettlement Framework.

Low income area link roads: TMAs shall have finalized the arrangements with communities and CCBs for the implementation schedule of the roads.

Incremental land development: Following clearance from Punjab, the required government land shall have been arranged and demarcated, and plots accordingly delineated with the assistance of LGRD.

17. The Borrower shall cause Punjab to determine the share of the PFC Grant to be provided to each TMA, in the first year of the Project, on the basis of the investment plan specified in the Supplementary Appendix I of the RRP. In subsequent years, the PFC Grant shall be allocated according to the formula agreed with the Bank. Performing TMAs shall be entitled to withdraw their agreed allocation and the TMAs that fail to meet minimum performance targets shall forfeit their share of the PFC Grant. Any unused shares shall be credited to the investment pool (Investment Pool) and shall be available, annually, for reallocation to other TMAs based on a performance evaluation of the TMAs, as provided under the following performance measures (Performance Measures) and the Investment Pool:

(a) Investment Project-specific Performance Measures (IPPM):

The IPPM shall include measures to be observed by TMAs to ensure the effective use of resources allocated to individual investment projects. The performance of the TMAs shall be measured and evaluated on a sliding scale as follows:

(i) operations of PUs (fully staffed, equipped and functional 10 points; inadequate in above areas 0-5 points depending on deficiency);

(ii) community participation in sub-projects (satisfactory 10 points; partly satisfactory 5 point; unsatisfactory 0 point);

(iii) compliance of TMAs with agreed targets for physical progress (variance of actual versus stipulated progress within 10% (10 points); between 10-20% (5- 10 points); more than 20% (0 point); 39

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(iv) quality of construction in general (satisfactory 10 points, partly satisfactory 5 points, and unsatisfactory 0 point);

(v) observance of the PLGO in respect of maintenance of accounts, closing of accounts (satisfactory 10; unsatisfactory 0);

(vi) tendering and procurement (transparent 10 point; problematic 0 point);

(vii) TMA staff involved in construction supervision (fully involved 10 points; partially involved 0 point);

(viii) PIRC meetings, (held regularly 10 points; irregular 5 points; not held 0 point);

(ix) progress reports, submitted by PUs to PCO (regularly 10 points, irregular submission 5 points, not submitted 0 points); and

(x) monitoring and evaluation (M & E) (TMA staff deputed and fully involved in M & E 10 points; partly involved 5-9 points; not deputed/involved 0 point).

A TMA must secure 70 points to qualify for a PFC Grant. Full compliance under (v) to (vii) and a minimum of 5 points each under (i) to (iv) and (ix) to (x) shall be mandatory to qualify for a PFC Grant.

(b) Reform Implementation Performance Measures (RIPM):

The RIPM shall further strengthen the reforms undertaken by TMAs by fulfilling the Eligibility Criteria. The performance of the TMAs shall be evaluated and measured as follows:

(i) Effective functioning of complaints cells (number of staff recruited and facilities provided, number of complaints registered and addressed, efficiency of complaints addressed, public feedback on the performance);

(ii) Implementation of actions specified in the PLGO for transfer of functions to UCs;

(iii) TMA accounts showing utilization of the twenty-five percent (25%) of development budget by CCBs;

(iv) Improved public access to information, demonstrated by: (a) posting of approved TMA annual budget at designated public places (TMA offices, TMA hospital/health unit, etc); (b) posting of listing of approved schemes and implementation schedules at TMA offices, and (c) posting within one month of the close of any quarter, a statement of accounts/expenditures for each sub- project at TMA offices; 40

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(v) completion and publication of the results of the user survey; implementation of the action plan on financial reforms; and implementation of the tariff plan;

(vi) Completion of the revenue enhancement base-line survey etc; and

(vii) Implementation of budget rules in accordance with PLGO on detailing arrears.

TMAs shall be evaluated on a sliding scale of one (1) to five (5), with 5 representing 100% performance by a TMA within a specific category. A total of 25 points, with minimum 3 points in each category, shall be considered satisfactory to qualify for a PFC Grant.

18. The Borrower shall cause Punjab to suspend disbursements to an ongoing subproject and reallocate funds of the PFC Grant to the Investment Pool should a TMA fail to score 70 points in IPPM and 25 points in RIPM. To meet the criteria specified in the Performance Measures, PCO shall assist the TMA in resolving the issues affecting the implementation progress of the subproject and shall facilitate continuing compliance with the required actions under the Eligibility Criteria. Should the TMA performance improve, PCO shall report such improvement to LGRD. A joint review mission of PCO, TMA, LGRD, and consultants shall verify the situation and depending on the satisfactory results, LGRD shall permit such TMA to have access to the funds available in the Investment Pool.

19. The Borrower shall cause Punjab to, annually, reallocate funds, originally allocated in the works schedules for any TMA under the PFC Grant, to the Investment Pool established at PCO and operated with the assistance of a special committee of LGRD constituted for this purpose, under the supervision of Secretary, LGRD and Secretary, Finance, Punjab, in case any of the following eventualities shall have occurred:

(a) a TMA shall not have met the Eligibility Criteria within six (6) months of the date of execution of this Loan Agreement;

(b) after having attained the Eligibility Criteria, a TMA shall not have met the Project Specific Criteria, within three ( 3) months of approval of the annual program of works (three (3) months from the start of each year); and

(c) after compliance with the Eligibility Criteria and the Project Specific Criteria, a TMA’s performance in a given year is unsatisfactory with below minimum score, as specified in the Performance Measures.

20. The Borrower shall cause Punjab to: (a) apply the Performance Measures to determine eligibility to access the Investment Pool; and (b) ensure that the annual review process to ascertain eligibility for the PFC Grant shall be completed within three (3) months after the commencement of the next year which should include:

(a) technical review by PCO of compliance with the Project Specific Criteria and the Performance Measures by TMAs; and 41

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(b) review to ascertain compliance of the RIPM, conducted by a sub- committee of the PSC including LGRD, TMAs, PCO, Package B consultants specified in Appendix C of the RRP, and 1-2 other members of the PSC.

Land Acquisition and Resettlement

21. The Borrower shall cause Punjab to ensure that all land, rights-of-way and other rights required for any sub-project shall be acquired or otherwise made available to the TMA concerned in a timely manner. The Borrower shall further ensure that all land acquired for the Project shall be acquired in accordance with the land acquisition plan agreed between the Borrower/Punjab and the Bank and shall cause Punjab to ensure that the social and economic base of the affected persons shall be restored and/or enhanced through mitigating measures.

22. The Borrower shall cause Punjab to ensure that no persons shall be adversely affected in terms of the Bank’s Policy on Involuntary Resettlement and the Bank’s Policy on Indigenous People. The Borrower shall cause Punjab to further ensure that involuntary resettlement under the Project, if any, shall be undertaken in accordance with the Bank’s Handbook on Resettlement, to the satisfaction of the Bank, and in accordance with the Resettlement Framework, as agreed between the Borrower/Punjab and the Bank, and if applicable, the individual resettlement plans shall be prepared for each TMA in accordance with the Resettlement Framework.

23. The Borrower shall ensure that Punjab and TMAs implement land acquisition and resettlement activities in accordance with the Bank’s Policy on Involuntary Resettlement and all applicable laws and regulations of the Borrower including: (i) Land Acquisition Act of 1984; (ii) Project Implementation and Resettlement of Affected Persons Ordinance of 2002; (iii) Punjab Development of Cities Act of 1977; and (iv) Pakistan Environmental Protection Act of 1997, as amended from time to time.

Environment

24. The Borrower shall cause each of Punjab and TMAs to ensure that all environmental mitigation measures identified in the initial environmental examination are incorporated into the Project design and implemented during Project construction and operation and maintenance, in accordance with the Borrower’s environmental laws and regulations, the Bank’s Environment Policy, the Bank’s environmental guidelines as set forth in Environmental Assessment Guidelines (2003) and the environmental management plan agreed with the Bank.

Equal Opportunity

25. The Borrower shall cause Punjab to ensure that men and women are given equal employment opportunities to benefits from the Project. The mechanisms for maximizing local employment benefits shall be included in the Project design.

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Health Risks

26. The Borrower shall cause Punjab to ensure that the civil works contracts include legally mandated provisions on health, sanitation, and appropriate working conditions, including accommodation, where appropriate, for construction workers at campsites during the construction period of the Project.

Gender and Development

27. The Borrower shall ensure that the Project shall be carried out in accordance with the Bank’s Policy on Gender and Development. The Borrower shall cause Punjab to ensure women’s participation in the Project implementation in accordance with the gender strategy as agreed between the Borrower and the Bank. The Borrower shall ensure that Punjab causes LGRD to ensure that (i) women councilors of TMAs and UCs shall be trained for effective gender-based planning and monitoring of Project activities; (ii) women councilors are included in PIRC of each TMA; and (iii) at each PU, one female community development and social mobilization staff will be hired to facilitate women’s participation in the planning of subprojects’ activities.