CONFORMED COPY

LOAN NUMBER 1262 YU

VODOVOD PROJECT AGREEMENT

(Morava Region Development Project:Water Supply, Sewerage and Water Resources)

between

INTERNATIONAL BANK FOR RECONSTRUCTIONAND DEVELOPMENT

and

VSKUPSTINA OPSTINE CACAK

(The City Assembly of Cacak)

and

KOMUNALNA ORGANIZACIJA UDRUZENOGRADA ZA VODOVOD I KANALIZACIJU

"VODOVOD" CACAK(Communal Organization of Associated

Labor for Water Supply and Sewerage Systems"Vodovod" Cacak)

Dated June 14, 1976

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VODOVOD PROJECT AGREEMENT

AGREEMENT, dated June 14, 1976, between INTERNATIONAL BANK

FOR RECONSTRUCTION AND DEVELOPMENT (hereinafter called the Bank)

and SKUPSTINA OPSTINE CACAK (The City Assembly of Cacak) (herein-

after called Cacak) and KOMUNALNA ORGANICACIJA UDRUZENOG RADA ZA

VODOVOD I KANALIZACIJU "VODOVOD" CACAK (Communal Organization of

Associated Labor for Water Supply and Sewerage Systems "Vodovod"

Cacak) (hereinafter called Vodovod).

WHEREAS by the Loan Agreement of even date herewith between

Republicki Fond Voda (Republic Water Fund) (hereinafter called

the Borrower) and the Bank, the Bank has agreed to make available

to the Borrower an amount in various currencies equivalent to twenty

million dollars ($20,000,000), on the terms and conditions set

forth in the Loan Agreement, but only on condition that Vodovod

agree to undertake such obligations toward the Bank as hereinafter

set forth; and

WHEREAS Vodovod, an Organization of Associated Labor estab-

lished and existing in accordance with its Statutes dated May 28,

1973, is responsible, inter alia, for water supply, sewerage and

drainage systems in the city of Cacak;

WHEREAS by a subsidiary loan agreement to be entered into be-

tween the Borrower and Vodovod, the proceeds of the loan provided

for under the Loan Agreement will be made available to Vodovod on

the terms and conditions therein set forth; and

01

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WHEREAS Cacak and Vodovod, in consideration of the Bank's

entering into the Loan Agreement with the Borrower, have agreed

to undertake the obligations hereinafter set forth;

NOW THEREFORE the parties hereto hereby agree as follows:

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ARTICLE I

Definitions

Section 1.01. Wherever used in this Agreement, unless the

context shall otherwise require, the several terms defined in

the Loan Agreement, the Preamble to this Agreement and the Gen-

eral Conditions (as so defined) have the respective meanings

therein set forth.

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ARTICLE II

Execution of the Project

Section 2.01. Vodovod shall carry out Part F of the Project

described in Schedule 2 to the Loan Agreement with dae diligence

and efficiency and in conformity with appropriate administrative,

financial and engineering practices, and shall provide, or cause

to be provided, promptly as needed, the funds, facilities, ser-

vices and other resources required for the purpose.

Section 2.02. (a) In order to assist Vodovod in the prepara-

tion of plans and specifications for, in the preparation of bid-

ding documents for, and in the supervision of the construction of,

Parts F(1), F(2) and F(3) of the Project, Vodovod shall employ,

no later than September 30, 1976, or such other date as the Bank

may agree, engineering consultants whose qualifications, experi-

ence and terms and conditions of employment shall be satisfactory

to the Bank.

(b) In order to assist Vodovod in the prepa& tion of final

designs of a wastewater plant for Cacak under Part F(5) of the

Project to be located near the Zapadna Morava river, Vodovod shall

employ, no later than September 30, 1976, or such other date as

the Bank may agree, engineering consultants whose qualifications,

experience and terms and conditions of employment shall be satis-

factory to the Bank.

(c) Except as the Bank shall otherwise agree, in order to

assist Vodovod in the carrying out of Part F(4) of the Project, to

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be completed within eighteen months from the date of the Loan Agree-

ment, Vodovod shall employ no later than December 31, 1976 consul-

tants whose qualifications, experience and terms and conditions of

employment shall be satisfactory to the Bank.

Section 2.03. Except as the Bank shall otherwise agree, the

goods and works for Part F of the Project shall be procured by

Vodovod in accordance with the provisions of Schedule 4 to the

Loan Agreement.

Section 2.04. (a) Vodovod undertakes to insure, or make ade-

quate provision for the insurance of, the imported goods to be fi-

nanced out of the proceeds of the Loan relent to it by the Borrower

against hazards incident to the acquisition, transportation and

delivery thereof to the place of use or installation, and for such

insurance any indemnity shall be payable in a currency freely us-

able by Vodovod to replace or repair such goods.

(b) Except as the Bank may otherwise agree, Vodovod shall

cause all goods and services financed out of the proceeds of the

Loan relent to it by the Borrower to be used exclusively for the

Project.

Section 2.05. (a) Vodovod shall furnish to the Bank, promptly

upon their preparation, the plans, specifications, reports, con-

tract documents and work and procurement schedules for Part F of

the Project, and any material modifications thereof or additions

thereto, in such detail as the Bank shall reasonably request.

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(b) Vodovod: (i) shall maintain records adequate to record

the progress of Part F of the Project (including the cost thereof)

and to identify the goods, works and services financed out of the

proceeds of the Loan relent to it by the Borrower, and to disclose

the use thereof in Part F of the Project; (ii) shall, without limi-

tation upon the provisions of paragraph (c) of this Section, enable

the Bank's repreosentatives to visit the facilities and construction

sites included in Part F of the Project and to examine the goods

financed out of such proceeds and any relevant records and docu-

ments; (iii) shall furnish to the Bank within forty-five calendar

days after each calendar quarter a report, of such scope and in

such detail as the Bank shall reasonably request on the progress

of Part F of the Project, during such quarter; and (iv) shall fur-

nish to the Bank all such information as the Bank shall reasonably

request concerning Part F of the Project, the expenditure of the

proceeds of the Loan so relent to it and the goods, works and ser-

vices financed out of such proceeds.

(c) Vodovod shall enable the Bank's representatives to ex-

amine all plants, installations, sites, works, buildings, property

and equipment of Vodovod and any relevant records and documents,

as the Bank shall reasonably request.

Section 2.06. Vodovod shall duly perform all its obligations

under the Subsidiary Loan Agreement. Except as the Bank shall

otherwise agree, Vodovod shall not take or concur in any action

which would have the effect of amending, abrogating, assigning or

waiving the Subsidiary Loan Agreement or any provision thereof.

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Section 2.07. (a) Vodovod shall, at the request of the Bank,

exchange views with the Bank with regard to the progress of Part

F of the Project, the performance of its obligations under this

Agreement and under the Vodovod Subsidiary Loan Agreement and

other matters relating to the purposes of the Loan.

(b) Vodovod shall promptly inform the Bank of any condition

which interferes or threatens to interfere with, the progress of

Part F of the Project, the accomplishment of the purposes of the

Loan, or the performance by Vodovod of its obligations under this

Agreement and under the Vodovod Subsidiary Loan Agreement.

Section 2.08. Vodovod shall take all such action as shall be

necessary to acquire as and when needed all such land, and rights

in respect of land as shall be required for the construction (and

operation) of the facilities included in Part F of the Project and

shall furnish to the Bank, promptly after such acquisition, evidence

satisfactory to the Bank that such land and rights in respect of

land are available for purposes related to Part F of the Project.

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ARTICLE III

Management and Operations of Vodovod

Section 3.01. (a) Vodovod shall at all times manage its af-

fairs, maintain its financial position, plan its future expansion

and carry on its operations, all in accordance with sound business,

financial and public utility practices and under the supervision

of experienced and competent management, inciuding but without lim-

itation a director of Vodovod's finance department, assisted by

adequate, experienced and competent staff.

(b) Vodovod shall at all times operate, maintain, renew and

repair its facilities, plants, equipment, machinery and property

(including but not limited to all facilities, plants, equipment,

machinery and property financed out of the proceeds of the Loan),

and promptly make all necessary repairs and renewals thereof, in

accordance with sound engineering and public utility practices.

(c) Vodovod shall take all action within its power to main-

tain its existence and right to carry on operations and shall take

all steps necessary to acquire, maintain and renew all rights,

privileges and franchises which are necessary or useful in the

conduct of its business.

(d) Except as the Bank shall otherwise agree, Vodovod shall

obtain title to all goods financed out of the proceeds of the

Loan free and clear of all encumbrances.

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1.) Vodovod shall not, without the prior approval of the

Bank, sell, lease, transfer or otherwise dispose of any of its

property or assets which shall be required for the efficient

operation of its business and undertaking.

Section 3.02. Vodovod shall take out and maintain with

responsible insurers, or make other provisions satisfactory to

the Bank for, insurance against such risks and in such amounts as

shall be consistent with appropriate practices.

Section 3.03. Vodovod shall afford the Bank a reasonable

opportunity to comment on the details of any proposed reorgani-

zation of Vodovod, including but not limited to any possible as-

sociation of Vodovod with any other enterprise or organization.

Section 3.04. (a) Before undertaking or executing any major

project or development other than Part F of the Project, Vodovod

shall afford a reasonable opportunity "o the Bank to exchange views

on the recommendations of the system development study to be under-

taken under Part F(4) of the Project and on such proposed project

or development, and shall not undertake or execute, for its own

account or for the account of any third party or parties, any major

project or development other than Part F of the Project, which

would substantially and adversely affect the carrying out of Part

F of the Project, the operati'.n of the facilities included in Part

F of the Project, the conduct of Vodovod's business, the Vodovod's

financial situation, or the efficiency of the Vodovod's management

and personnel.

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(b) For the purpose of this Section, the term "major project

or development", means any project or development with an invest-

ment character resulting in estimated aggregate capital expenditures

exceeding $500,000, or the equivalent, or such other amount as

shall be agreed from time to time between the Bank and Vodovod.

* -11 -

ARTICLE IV

Financial Covenants

Section 4.01. (a) Vodovod shall maintain records adequate to

reflect in accordance with consistently maintained appropriate ac-

counting practices its operations and financial condition.

(b) Without imitation or restriction on the generality of

the provisions of the foregoing paragraph (a) of this Section

Vodovod shall: (i) maintain separate accounts adequate to reflect

in accordance with consistently maintained appropriate accounting

practices its operations and financial condition in respect of its

water supply and wastewater operations and stormvater service;

such accounts shall be maintained in such a manner so as to enable

Vodovod and the Bank to identify Vodovod water supply and waste-

water operations and stormwater service independently from its

other operations; and (ii) put into effect, no later than July 30,

1977, or such other time as the Bank may agree, modifications in

its accounting procedures so as to facilitate adequate separation

of costs between construction activities and normal operations and

maintenance.

Section 4.02. Vodovod shall: (i) have its accounts, including

but without limitation the separate accounts referred to in para-

graph (b) (i) of Section 4.01 of this Agreement, and financial

statements (balance sheets, statements of income and expenses and

related statements) for each fiscal year audited, in accordance

with appropriate auditing principles consistently applied, by the

Social Accounting Service or another competent and experienced

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independent auditing organization acceptable to the Bank; (ii)

furnish to the Bank as soon as available, but in any case not

later than four months after the end of each such year, (A)

certified copies of its financial statements for such year as so

audited and (B) the report of such audit by said auditors, of

such scope and in such detail as the Bank shall have reasonably

requested; and (iii) furnish to the Bank such other information

concerning the accounts, including but without limitation the

separate accounts referred to in paragraph (b) (i) of Section

4.01 of this Agreement, and financial statements of Vodovod and

the audit thereof as the Bank shall from time to time reasonably

request.

Section 4.03. Except as the Bank shall otherwise agree, Vodo-

vod shall:

(a) implement until December 31, 1979: the tariff scale

for water supply and sewerage as set out in Schedule 1 to this

Agreement or such other tariff scales for water supply and sewer-

age as shall produce revenues at least equivalent to revenues pro-

duced by the tariffs included in the tariff scale set out in Sched-

ule 1 to this Agreement; and thereafter a modified tariff scale

which, together, with its other revenues, shall provide operating

revenues sufficient:

(i) to cover in any given year all operating expenses

including employee compensations, administrative

and overhead costs, adequate maintenance costs,

and adequate provision for taxes and other con-

tributions provided by law, if any, but excluding

depreciation;

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(ii) to cover in any given year debt amortization in-

cluding sinking funds payments, if any, and inter-

est and other charges on debt;

(iii) to provide for adequate increases in working

capital;

(iv) to make contributions as necessary to reserve and

other authorized funds; and

(v) beginning with the year 1980 to finance each year

not less than 30% of the average cost of investment

in water and sewerage facilities, including inter-

est during construction, during each consecutive

three-year period comprising the year for which the

tariffs are determined together with the year im-

mediately preceding and the year immediately follow-

ing such year for which the tariffs are determined.

(b) for purposes of the foregoing and as part of such in-

formation as may be requested under Section 2.07 of this Agree-

ment, by September 30 of each year:

(i) prepare and furnish to the Bank an updated state-

ment of sources and application of funds covering

in every case (A) until the year 1978, the period

1976-1980 and (B) thereafter the current year and

the following two years; and

(ii) prepare and furnish to the Bank all other relevant

information concerning the steps taken or planned

to be taken by Vodovod in order to comply with its

obligations under paragraph (a) of this Section.

Section 4.04. (a) Except as the Bank shall otherwise agree,

Vodovod shall not incur any debt, other than debt incurred for

purposes of Part F of the Project and referred to in Recital (I)

to the Loan Agreement, if the net revenues for the fiscal year

next preceding such incurrence shall be less than 1.5 times the

maximum debt service requirements for any succeeding fiscal year

on all of its debt then outstanding (including the debt to be

incurred).

(b) For the purposes of this Section:

(i) the term "debt" means any debt maturing by its

terms more than one year after the date on which

it is originally incurred;

(ii) debt shall be deemed to be incurred (A) under

a loan contract or agreement, on the date the

loan contract or agreement providing for such

debt or modifying its terms of payment is en-

tered into, and (B) under a guarantee agree-

ment on the date the agreement providing for

such guarantee is entered into;

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(iii) the term "net revenues" means gross revenues

from all sources adjusted to take account of

tariffs in effect at the time of calculation

even though they were not in effect during

the twelve consecutive months to which such

revenues related, less operating and administrative

expenses, in-cluding adequate maintenance, taxes

and levies, if any, or any payments in lieu thereof,

and personal remuneration, but before provision

for depreciation and debt service requirements;

(iv) the term "debt service requirements" means the

aggregate amount of amortization (including

sinking fund payments, if any), interest and

other charges on debt; and

(v) whenever it shall be necessary to value in the

currency of the Guarantor debt payable in an-

other currency, such valuation shall be made on

the basis of the rate of exchange at which

such other currency is obtainable by Vodovod,

at the time such valuation is made, for the

purposes of servicing such debt or, if such

other currency is not so obtainable, at the

rate of exchange that will be reasonably de-

termined by the Bank.

Section 4.05. Except as the Bank shall otherwise agree, if

Vodovod shall prepay part, or all, of the principal amount out-

standing of any debt of Vodovod, Vodovod shall prepay a propor-

tionate part, or all, as the case may be, of the loan provided

for under the Vodovod Subsidiary Loan Agreement.

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Section 4.06. If the completion of Part F of the Project is

hindered or delayed, or is threatened with hindrance or delay,

because the funds available to Vodovod are inadequate to insure

its completion, Vodovod shall promptly demand that Beogradska

Banka, Beograd provide Vodovod, or cause Vodovod to be provided,

with the necessary funds as and when required, in accordance with

the provisions of the Agreement referred to in Recital (I) of the

Preamble of the Loan Agreement.

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ARTICLE V

Undertakings of Cacak

Section 5.01. Cacak unconditionally undertakes, whenever there

is reasonable cause to believe that the funds available to Vodovod

will be inadequate to meet the estimated expenditures required for

the carrying out of Part F of the Project, to make arrangements,

satisfactory to the Bank, promptly to provide Vodovod or cause

Vodovod to be provided, with such funds as are needed to meet such

expenditures.

Section 5.02. (a) Cacak covenants that it will not take or

cause or permit any of its organs to take any action which would

prevent or interfere with the performance by Vodovod of any of

its obligations contained in this Agreement and will take or cause

to be taken all reasonable action necessary or appropriate to en-

able Vodovod to perform such obligations.

(b) Without limitation on the provisions of paragraph (a) of

this Section 5.02, Cacak shall take all such action, including the

approval of applications on the part of Vodovod for tariff increases,

as shall be required to enable Vodovod, to meet the requirements

of Section 4.03 of this Agreement.

Section 5.03. (a) Cacak shall, at the request of the Bank,

exchange views with the Bank with regard to the progress of Part

F of the Project, the performance of its obligations under this

Agreement, and other matters relating to the purposes of the Loan.

- 18 -

(b) Cacak shall promptly inform the Bank of any condition

which interferes or threatens to interfere with, the progress of

Part F of the Project, the accomplishment of the purposes of the

Loan, or the performance by Cacak of its obligations under this

Agreement.

Section 5.04. Cacak shall make arrangements to reimburse

Vodovod promptly and in full for all expenses incurred in the op-

eration, maintenance and administration of all storm drainage

facilities, and for meeting all related debt service obligations.

Section 5.05. Cacak shall take all such action as may be

required to assign to Vodovod as of September 1, 1976, or such

other date as the Bank may agree, exclusive responsibility for

construction, operation and maintenance of all facilities, plants,

equipment, machinery and property financed out of the proceeds of

the Loan.

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ARTICLE VI

Effective Date; Termination;Cancellation and Suspension

Section 6.01. This Agreement shall come into force and effect

on the Cate upon which the Loan Agreement becomes effective.

Section 6.02. (a) This Agreement and all obligations of the

Bank and of Cacak and Vodovod, respectively, thereunder shall ter-

minate on the earlier of the following two dates:

(i) the date on which the Loan Agreement shall

terminate in accordance with its terms; or

(ii) a date 20 years after the date of this

Agreement.

(b) If the Loan Agreement terminates in accordance with its

terms before the date specified in paragraph (a) (ii) of this

Section, the Bank shall promptly notify Cacak and Todovod, re-

spectively, of this event.

Section 6.03. All the provisions of this Agreement shall con-

tinue in full force and effect notwithstanding any cancellation or

suspension under the Loan Agreement.

Section 6.04. Cacak and Vodovod: (i) represent that all obli-

gations of Cacak and Vodovod under the Vodovod Project Agreement

and under the Vodovod Subsidiary Loan Agreement, respectively,

which shall or may require for its performance the approval, coop-

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eration or financial assistance of any governmental authorities

having jurisdiction, are undertaken with the consent and full

support of such authorities; and (ii) agree that no action or

failure to act by such authorities shall excuse the performance

of such obligation by Cacak and Vodovod or limit the remedies of

the Bank under the Loan Agreement in respect of any default in the

performance of such obligations.

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ARTICLE VII

Miscellaneous Provisions

Section 7.01. Any notice or request required or permitted to

be given or made under this Agreement and any agreement between

the parties contemplated by this Agreement shal' be in writing.

Such notice or request shall be deemed to have been duly given

or made when it shall be delivered by hand or by mail, telegram,

cable, telex or radiogram to the party to which it is required or

permitted to be given or made at such party's address hereinafter

specified or at such other address as such party shall have des-ignated by notice to the party giving such notice or making suchrequest. The addresses so specified are:

For the Bank:

International Bank forReconstruction and Development

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

Cable address:

INTBAFRADWashington, D.C.

For Cacak:

Skupstina Opstine CacakCacak, Yugoslavia

Cable address:

Skupstina Opstine CacakCacak

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For Vodovod:

Komunalna Organizacija UdruzenogRada za Vodovod i Kanalizaciju"Vodovod" Cacak

Cacak, Yugoslavia

Cable address:

"Vodovod"Cacak

Section 7.02. Any action required or permitted to be taken,

and any documents required or permitted to be executed, under this

Agreement on behalf of Cacak and Vodovod, respectively, may be

taken or executed by the President of the City Assembly of Cacak

and the Direktor of Vodovod, respectively, or such other person

or persons as such President and Direktor, respectively, shall

designate in writing.

Section 7.03. Cacak and Vodovod shall each furnish to the

Bank sufficient evidence of the authority and the authenticated

specimen signature of the person or persons who will, on behalf

of Cacak and Vodovod, respectively, take any action or execute any

documents required or permitted to be taken or executed by Cacak

and Vodovod, respectively, pursuant to any of the provisions of

this Agreement.

Section 7.04. This Agreement may be executed in several coun-

terparts, each of which shall be an original, and all collectively

but one instrument.

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IN WITNESS WHEREOF, the parties hereto, acting through their

representatives thereunto duly authorized, have caused this Agree-

ment to be signed in their respective names in the District of

Columbia, United States of America, as of the day and year first

above written.

INTERNATIONAL BANK FORRECONSTRUCTION AND DEVELOPMENT

By /s/ Willi A. WapenhansRegional Vice President

Europe, Middle East and North Africa

SKUPSTINA OPSTINE CACAK

By /s/ Naum AckovskiAuthorized Representative

KOMUNALNA ORGANIZACIJA UDRUZENOGRADA ZA VODOVOD I KANALIZACIJU"VODOVOD" CACAK

By /s/ Naum AckovskiAuthorized Representative

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SCHEDULE 1

Water Supply and Sewerage Tariffs

1976-1988

Water Supply Sewerage

3 .3Price: Din per m Surcharge: Din per m

other other

Date Household consumers Household Consumers

July 1, 1976 1.70 4.00 0.40 0.85

July 1, 1977 2.05 4.85 0.50 1.00

July 1, 1978 2.45 5.80 0.60 1.20

July 1, 1979 2.95 6.95 0.75 1.45