CONFORMED COPY Public Disclosure Authorized LOAN NUMBER 4690-BR Loan Agreement Public Disclosure Authorized (Recife Urban Upgrading Project - PROMETRÓPOLE) between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized and STATE OF PERNAMBUCO Dated July 23, 2003 Public Disclosure Authorized LOAN NUMBER 4690-BR LOAN AGREEMENT AGREEMENT, dated July 23, 2003, between the INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (the Bank) and the STATE OF PERNAMBUCO (the Borrower). WHEREAS (A) the Federative Republic of Brazil (the Guarantor) and the Borrower, having been satisfied as to the feasibility and priority of the project described in Schedule 2 to this Agreement (the Project), have requested the Bank to assist in the financing of the Project; (B) by an agreement (the Guarantee Agreement) of even date herewith between the Guarantor and the Bank, the Guarantor has agreed to guarantee the payment obligations of the Borrower in respect of the loan set forth in Section 2.01 of this Agreement (the Loan); (C) certain components of the Project will be carried out by the Municipality of Recife (Recife) or the Municipality of Olinda (Olinda), which, by agreements of even date herewith between the Bank and each such Municipality (the Recife Project Agreement and the Olinda Project Agreement, respectively), have agreed to carry out such Project components and to undertake the other obligations set forth in those agreements; (D) certain components of the Project will be carried out by CONDEPE/FIDEM (as hereinafter defined) and COMPESA (as hereinafter defined), for the execution of which components the Borrower shall enter into agreements with CONDEPE/FIDEM and COMPESA as set forth in Article III of this Loan Agreement; and WHEREAS the Bank has agreed, on the basis, inter alia, of the foregoing, to extend the Loan to the Borrower upon the terms and conditions set forth in this Agreement; NOW THEREFORE the parties hereto hereby agree as follows: - 2 - ARTICLE I General Conditions; Definitions Section 1.01. The “General Conditions Applicable to Loan and Guarantee Agreements for Single Currency Loans” of the Bank, dated May 30, 1995 (as amended through October 6, 1999), constitute an integral part of this Agreement. Section 1.02. Unless the context otherwise requires, the several terms defined in the General Conditions and in the Preamble to this Agreement have the respective meanings therein set forth and the following additional terms have the following meanings: (a) “Beberibe River Basin” means the area in the RMR which surrounds the Beberibe River; (b) “COMPESA” means Companhia Pernambucana de Saneamento, the Borrower’s water supply and sanitation company, or a successor thereto satisfactory to the Bank; (c) “COMPESA Agreement” means the agreement referred to in Section 3.06 (a) (i) of this Agreement; (d) “CONDEPE/FIDEM” means Agência Estadual de Planejamento e Pesquisa de Pernambuco-CONDEPE/FIDEM, the Borrower’s planning and research agency (autarquia), created pursuant to Article 59 of the Borrower’s Lei Complementar No. 49, of January 31, 2003; (e) “CONDEPE/FIDEM Agreement” means the agreement referred to in Section 3.07 (a) (i) of this Agreement; (f) “EMP” means the environmental mitigation plan referred to in Section 3.09 (a) of this Agreement; (g) “FMR” means financial monitoring report as referred to in Section 4.02 of this Agreement; (h) “Municipalities” means Recife and Olinda; - 3 - (i) “Operational Manual” means the manual referred to in Section 6.01 (c) of this Agreement; (j) “Pilot Subprojects” means the Subprojects to be carried out in UEs 17 (O) and 23 (R) under Part C of the Project; (k) “Resettlement Framework” means the document, issued by the Borrower on October 15, 2001, which contains the principles and policies that shall apply to the preparation and carrying out of any action plan for the resettlement of population that may be required under any Subproject; (l) “RMR” means Região Metropolitana do Recife, the metropolitan region in the territory of the Borrower comprised of the following municipalities: Recife, Olinda, Ipojuca, Cabo de Santo Agostinho, Moreno, Jaboatão dos Guararapes, São Lourenço da Mata, Camaragibe, Paulista, Abreu e Lima, Araçoiaba, Igarassu, Itapissuma, and Itamaracá; (m) “Special Account” means the account referred to in Section 2.02 (b) of this Agreement; (n) “Subproject” means any of the projects referred to in Parts A and C of the Project; (o) “Subsidiary Agreement” means any of the agreements referred to in Section 3.05 of this Agreement; and (p) “UE” means unidade de esgoto, a drainage unit in the Beberibe River Basin which is identified in the Borrower’s Estudo de Consolidação e Complementação de Diagnóstico Sobre a Qualidade das Águas, Relativo à Preparação do Programa de Investimentos nas Bacias dos Rios Beberibe, Jaboatão e Ipojuca (PQA/PE). ARTICLE II The Loan Section 2.01. The Bank agrees to lend to the Borrower, on the terms and conditions set forth or referred to in this Agreement, an amount equal to forty six million Dollars ($46,000,000). - 4 - 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, works and consultants’ services required for the Project and to be financed out of the proceeds of the Loan, and in respect of the front-end fee referred to in Section 2.04 of this Agreement. (b) The Borrower may, for the purposes of the Project, open and maintain in Dollars a special deposit account in a commercial bank on terms and conditions satisfactory to the Bank, including appropriate protection against set-off, seizure and attachment. 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 March 31, 2009 or such later date as the Bank shall establish. The Bank shall promptly notify the Borrower, the Guarantor and the Municipalities of such later date. Section 2.04. The Borrower shall pay to the Bank a front-end fee in an amount equal to one per cent (1%) of the amount of the Loan. On or promptly after the Effective Date, the Bank shall, on behalf of the Borrower, withdraw from the Loan Account and pay to itself the amount of said fee. Section 2.05. 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 2.06. (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 LIBOR Base Rate plus LIBOR Total Spread. (b) For the purposes of this Section: (i) “Interest Period” means the initial period from and including the date of this Agreement to, but excluding, the first Interest Payment Date occurring thereafter, and after the initial period, each period from and including an Interest Payment Date to, but excluding the next following Interest Payment Date. (ii) “Interest Payment Date” means any date specified in Section 2.07 of this Agreement. - 5 - (iii) “LIBOR Base Rate” means, for each Interest Period, the London interbank offered rate for six-month deposits in Dollars for value the first day of such Interest Period (or, in the case of the initial Interest Period, for value the Interest Payment Date occurring on or next preceding the first day of such Interest Period), as reasonably determined by the Bank and expressed as a percentage per annum. (iv) “LIBOR Total Spread” means, for each Interest Period: (A) three-fourths of one percent (3/4 of 1%); (B) minus (or plus) the weighted average margin, for such Interest Period, below (or above) the London interbank offered rates, or other reference rates, for six-month deposits, in respect of the Bank’s outstanding borrowings or portions thereof allocated by the Bank to fund single currency loans or portions thereof made by it that include the Loan; as reasonably determined by the Bank and expressed as a percentage per annum. (c) The Bank shall notify the Borrower and the Guarantor of LIBOR Base Rate and LIBOR Total Spread for each Interest Period, promptly upon the determination thereof. (d) Whenever, in light of changes in market practice affecting the determination of the interest rates referred to in this Section 2.06, the Bank determines that it is in the interest of its borrowers as a whole and of the Bank to apply a basis for determining the interest rates applicable to the Loan other than as provided in said Section, the Bank may modify the basis for determining the interest rates applicable to the Loan upon not less than six (6) months’ notice to the Borrower and the Guarantor of the new basis. The new basis shall become effective on the expiry of the notice period unless the Borrower or the Guarantor notifies the Bank during said period of its objection thereto, in which case said modification shall not apply to the Loan. Section 2.07. Interest and other charges shall be payable semiannually in arrears on May 15 and November 15 in each year. Section 2.08. The Borrower shall repay the principal amount of the Loan in accordance with the amortization schedule set forth in Schedule 3 to this Agreement. - 6 - ARTICLE III Execution of the Project Section 3.01. The Borrower declares its commitment to the objective of the Project as set forth in Schedule 2 to this Agreement, and, to this end, shall: (a) cause (i) CONDEPE/FIDEM to carry out Part A of the Project, the Pilot Subprojects, and the activities under the Borrower’s responsibility in Parts D and E of the Project (i.e.