CONFORMED COPY

CREDIT NUMBER 600 NEP

Development Credit

Agreement(Kulekhani Hydroelectric Project)

BETWEEN

KINGDOM OF NEPAL

AND

INTERNATIONAL DEVELOPMENT ASSOCIATION

DATED JANUARY 9, 1976

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CONFORMED COPY

CREDIT NUMBER 600 NEP

Development Credit

Agreement(Kulekhani Hydroelectric Project)

BETWEEN

KINGDOM OF NEPAL

AND

INTERNATIONAL DEVELOPMENT ASSOCIATION

DATED JANUARY 9, 1976

DEVELOPMENT CREDIT AGREEMENT

AGREEMENT, dated January 9, 1976, between KINGDOM OF NEPAL(hereinafter called the Borrower) and INTERNATIONAL DEVELOPMENTASSOCIATION (hereinafter called the Association).

WHEREAS (A) The Borrower has requested the Association to assist in thefinancing of the foreign exchange cost of the Project described in Schedule 2 tothis Agreement by extending the Credit as hereinafter provided; and

(B) The Borrower intends to contract from the Kuwait Fund for ArabEconomic Development (hereinafter called the Kuwait Fund) a loan (hereinaftercalled the Kuwait Fund Loan) in an amount of KD5,000,000 to assist in financingthe foreign exchange cost of the civil works included in the Project on the termsand conditions set forth in an agreement (hereinafter called the Kuwait Fund LoanAgreement) to be entered into between the Borrower and the Kuwait Fund;

(C) The Borrower intends to contract from the Overseas EconomicCooperation Fund (hereinafter called OECF) an agency of the Government of Japana loan (hereinafter called the OECF Loan) in an amount of three billion Yen toassist in financing the foreign exchange cost of the equipment required for theProject on the terms and conditions set forth in an agreement (hereinafter calledthe OECF Loan Agreement) to be entered into between the Borrower and OECF;and

(D) The Borrower, the Bank and the United Nations DevelopmentProgramme (hereinafter called UNDP) have entered into an agreement (hereinafterdalled the UNDP Project Document) whereby UNDP will provide technicalassistance to the Borrower to assist the Borrower in the field investigation, andin the preparation of detailed designs, specifications and tender documents,procurement and supervision of construction, and the Bank will act as executingagency for the purpose.

WHEREAS the Association has agreed, on the basis inter alia of the foregoing,to extend the Credit to the Borrower upon the terms and conditions hereinafterset forth;

NOW THEREFORE the parties hereto hereby agree as follows:

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ARTICLE I

General Conditions; Definitions

Section 1.01. The parties to this Agreement accept all the provisions of theGeneral Conditions Applicable to Development Credit Agreements of theAssociation, dated March 15, 1974, with the same force and effect as if they werefully set forth herein (said General Conditions Applicable to Development CreditAgreements of the Association being hereinafter called the General Conditions).

Section 1.02. Wherever used in this Agreement, unless the context otherwiserequires, the several terms defined in the General Conditions and in the Preambleto this Agreement have the respective meanings therein set forth and the term"NEC" means Nepal Electricity Corporation, a corporation established andoperating under the laws of the Borrower.

ARTICLE II

The Credit

Section 2.01. The Association agrees to lend to the Borrower, on the termsand conditions in the Development Credit Agreement set forth or referred to, an -amount in various currencies equivalent to twenty-six million dollars ($26,000,000).

Section 2.02. The amount of the Credit may be withdrawn from the CreditAccount in accordance with the provisions of Schedule I to this Agreement, assuch Schedule may be amended from time to time by agreement between theBorrower and the Association, for expenditures made (or, if the Association shallso agree, to be made) in respect of the reasonable cost of goods and services requiredfor the Project and to be financed out of the proceeds of the Credit.

Section 2.03. Except as the Association shall otherwise agree, the goods,works and services (other than consultants' services) for the Project to be financedout of the proceeds of the Credit, shall be procured in accordance with theprovisions of Schedule 3 to this Agreement.

Section 2.04. The Closing Date shall be December 3 1, 1981 or such laterdate as the Association shall establish. The Association shall promptly notify theBorrower of such later date.

Section 2.05. The Borrower shall pay .:o the Association a service chargeat the rate of three-fourths of one per cent (3,4 of Wr) per annum on the principalamount of the Credit withdrawn and outstanding from time to time.

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Section 2.06. Service charges shall be payable semi-annually on April I andOctober 1 in each year.

Section 2.07. The Borrower shall repay the principal amount of the Creditin semi-annual installments payable on each April 1 and October 1 commencingApril 1, 1986, and ending October 1, 2025, each installment to and includingthe installment payable on October 1, 1995 to be one-half of one per cent (1/2of 1%) of such principal amount, and each installment thereafter to be one andone-half per cent (1-1/2%) of such principal amount.

Section 2.08. The currency of the United States of America is herebyspecified for the purposes of Section 4.02 of the General Conditions.

ARTICLE III

Execution of the Project

Section 3.01. The Borrower shall carry out the Project with due diligenceand efficiency and in conformity with appropriate financial, engineering and publicutility practices, and shall provide, promptly as needed, the funds, facilities, servicesand other resources required for the purpose.

Section 3.02. (a) The Borrower undertakes to insure, or make adequateprovision for the insurance of, the imported goods to be financed out of theproceeds of the Credit against hazards incident to the acquisition, transportationand delivery thereof to the place of use or installation, and for such insuranceany indemnity shall be payable in a currency freely usable by the Borrower toreplace or repair such goods.

(b) Except as the Association shall otherwise agree, the Borrower shallcause all goods and services financed out of the proceeds of the Credit to be usedexclusively for the Project.

Section 3.03. The Borrower shall furnish to the Association, not later thanMarch 31, 1977, or such other date as the Association shall agree, a detailed planfor the resettlement of the people living on the reservoir area and shall provide,promptly as needed, the funds, facilities, services and other resources required forthe purpose.

Section 3.04. (a) The Borrower shall furnish to the Association, promptlyupon their preparation, the plans, specifications, reports, contract documents and

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construction and procurement schedules for the Project, and any materialmodifications thereof or additions thereto, in such detail as the Association shallreasonably request.

(b) The Borrower: (i) shall maintain records adequate to record theprogress of the Project (including the cost thereof) and to identify the goods andservices financed out of the proceeds of the Credit, and to disclose the use thereofin the Project; (ii) shall enable the Association's accredited representatives to visitthe facilities and construction sites included in the Project and to examine thegoods financed out of the proceeds of the Credit and any relevant records anddocuments; and (iii) shall furnish to the Association all such information as theAssociation shall reasonably request concerning the Project, the expenditure of theproceeds of the Credit and the goods and services financed out of such proceeds.

ARTICLE IV

Management and Operations of NEC

Section 4.01. (a) The Borrower shall cause NEC at all times to carry onits operations, manage its affairs, plan the future development of its power systemand maintain its financial position in accordance with sound engineering, financial,administrative and public utility practices, and under the supervision of experiencedand competent management.

(b) The Borrower shall cause NEC to operate and maintain its plant,equipment, properties and facilities and from time to time make all necessaryrenewals and repairs thereof in accordance with sound engineering and public utilitypractices.

Section 4.02. The Borrower shall cause NEC to take out and maintain withresponsible insurers, or make other provision satisfactory to the Association for,insurance against such risks and ir such amounts as shall be consistent withappropriate practice.

Section 4.03. The Borrower shall ensure that NEC does not, without theconsent of the Association, sell, lease, transfer, or otherwise dispose of any ofits properties or assets which shall be required for the efficient carrying out ofits business.

Section 4.04. The Borrower shall cause NEC to take, at all times, all stepsnecessary on its part to maintain its right to carry on its operations and exceptas the Association shall otherwise agree, to take all steps necessary to acquire and

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to retain such land, interests in land and properties, and to acquire, maintain andrenew such licenses, consents, franchises or other rights, as may be necessary oruseful for the operation of the Project and the conduct of its business.

ARTICLE V

Financial and Other Covenants

Section 5.01. (a) The Borrower shall cause NEC to maintain records adequateto reflect in accordance with consistently maintained sound accounting practicesthe operations and financial condition of NEC.

(b) The Borrower shall cause NEC to: (i) have its accounts and financialstatements (balance sheets, statements of income and expenses and relatedstatements) for each fiscal year audited, in accordance with sound auditingprinciples consistently applied, by independent auditors acceptable to theAssociation; (ii) furnish to the Association as soon as available, but in any casenot later than six months after the end of each such year, (A) certified copiesof its financial statements for such year as so audited and (B) the report of suchaudit by said auditors, of such scope and in such detail as the Association shallhave reasonably requested; and (iii) furnish to the Association such otherinformation concerning the accounts and financial statements of NEC and the auditthereof as the Association shall from time to time reasonably request.

(c) The Borrower shall cause NEC to employ and maintain on its staffa qualified and experienced internal auditor.

Section 5.02. (a) Except as the Association shall otherwise agree the Borrowershall cause NEC to take all steps necessary to set and maintain its tariffs at sucha level as may be necessary to provide NEC with revenue sufficient to producean annual rate of return on the value of the NEC's average net fixed assets inoperation of not less than the percentage shown against NEC's fiscal year below:

(i) 1975-76: 2.5%

(ii) 1977-78: 4.0%

(iii) 1980-8 1 and thereafter: 6.0%

(b) For the purpose of this Section:

(i) The annual rate of return shall be calculated by relating theoperating income for the year in question to the average of the

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value of the net fixed assets of NEC in operation at the beginningand at the end of such year.

(ii) The term "value of net fixed assets in operation" shall meanthe gross book value of such assets, less the amount of

accumulated depreciation.

(iii) The term "operating income" shall mean the difference between:

(A) gross operating revenue accruing from NEC's services; and

(B) the operating and administration expenses (includingtaxes, if any), adequate maintenance and depreciation butexcluding interest and other charges on debt.

(iv) For the purpose of calculating the rate of return fcr fiscal year1975-76 in the event that a tariff increase is made during suchfiscal year, the term "gross operating revenue accruing fromNEC's services" include the revenue which would have accruedto NEC if such tariff increase had been made at the beginningof such fiscal year.

(c) The Borrower shall review the said tariffs and consult with theAssociation not later than July 15, 1981, or such other date as the Associationshall agree, with a view to achieving a rate of return of 8% as defined in thissection as early thereafter as possible.

Section 5.03. The Borrower shall transfer to NEC the Sunkosi hydroelectricplant not later than July 15, 1977 or such other date as shall be agreed betweenthe Borrower and the Association and the hydroelectric plants of Trisuli (2nd stage)and Gandak promptly upon the transfer thereof to the Borrower.

Section 5.04. (a) Promptly upon the commissioning of the firstturbo-generating unit included in Part F of the Project, the Borrower shall transferto NEC the said turbo-generating unit and all such other parts of the Project asshall have been completed and commissioned by the date of commissioning suchturbo-generating unit.

(b) Promptly upon the commissioning of the second turbo-generating unitincluded in Part F of the Project, the Borrower shall transfer to NEC the saidturbo-generating unit and such other parts of the Project as shall not have beentransferred pursuant to paragraph (a) of this Section.

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(c) The said assets shall be valued for purposes of such transfer at theircost.

(d) On each of the said transfers, the Rupee equivalent of the part ofthe proceeds of the Credit used for the financing of the assets so transferred shallbe deemed to have been lent by the Borrower to NEC and shall be repaid tothe Borrower in fifty equal semi-annual installments of principal and interest atthe rate of 8-1/2% per annum starting from the year of each such transfer.

Section 5.05. The Borrower shall inform the Association of the terms andconditions of the transfer of the assets referred to in Section 5.03 and 5.04 ofthis Agreement and the Gandak-Hetauda power transmission facilities promptlyafter any such transfer shall have been made. Such information shall include interalia the date of such transfer, whether such assets are transferred as equity ordebt and in the latter case, the terms and conditions of such debt.

Section 5.06. (a) With regard to any assets transferred to NEC as debt, suchdebt shall equal the cost of such assets less any amount which NEC shall havecontributed toward their cost.

(b) The Borrower shall cause NEC to increase its authorized share capitalas and when needed to issue shares for assets transferred as equity.

Section 5.07. The Borrower shall continue to provide to NEC the electricitygenerated by the Sunkosi hydroelectric plant until the said plant is transferredto NEC.

Section 5.08. The Borrower shall settle all outstanding bills owed by it toNEC not later than July 15, 1976 or such other date as the Association shallagree, and shall thereafter pay its current bills to NEC promptly after the receiptthereof by the Borrower.

Section 5.09. The Borrower shall ensure that NEC does not declare anydividend until the assets forming the Project shall have been transferred to NECpursuant to Section 5.04 of this Agreement.

Section 5.10. The Borrower shall consult with the Association on anyproposed institutional changes in the power sector which may affect the CentralNepal Power System.

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ARTICLE VI

Remedies of the Association

Section 6.01. For the purposes of Section 6.02 of the General Conditions,the following additional events are specified pursuant to paragraph (h) thereof:

(a) the Borrower shall have taken any action for the dissolution ordisestablishment of NEC or for the suspension of its operations;

(b) the Borrower shall have suspended, terminated, repealed orsubstantially amended the Nepal Electricity Corporation Act, 2019 (1962) or anyother legal provision governing the organization or operations of NEC in suchmanner as would materially and adversely affect the efficient carrying out of theProject, or the operation of the Project; and

(c) (i) Subject to subparagraph (ii) of this paragraph:

(A) The right of the Borrower to withdraw the proceeds ofthe OECF Loan or of the Kuwait Fund Loan shall havebeen suspended, cancelled or terminated in whole or inpart, pursuant to the terms of the OECF Loan Agreementand the Kuwait Fund Loan Agreement, respectively, or

(B) the OECF Loan or the Kuwait Fund Loan shall havebecome due and payable prior to the agreed maturitythereof.

(ii) Subparagraph (i) of this paragraph shall not apply if theBorrower establishes to the satisfaction of the Association that:(A) such suspension, cancellation, termination or prematuringis not caused by the failure of the Borrower to perform anyof its obligations under such agreement, and (B) adequate fundsfor the Project are available to the Borrower from other sourceson terms and conditions consistent with the obligations of theBorrower under this Agreement.

Section 6.02. Fu the purposes of Section 7.01 of the General Conditions,the following additional events are specified pursuant to paragraph (d) thereof,namely, that any event specified in paragraphs (a), (b) or (c)(i)(B) of Section 6.01of this Agreement shall occur.

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ARTICLE VII

Effective Date; Termination

Section 7.01. The following events are specified as additional conditions tothe effectiveness of the Development Credit Agreement within the meaning ofSection 12.01(b) of the General Conditions:

(a) the Kuwait Fund Loan Agreement and the OECF Loan Agreementhave, or will concurrently with this Agreement, become fully effective; and

(b) the Borrower has implemented tariffs at levels such that the rate ofreturn for fiscal year 1975-76 set forth in Section 5.02 of this Agreement will,in the opinion of the Association, be achieved.

Section 7.02. The date May 10, 1976, is hereby specified for the purposesof Section 12.04 of the General Conditions.

Section 7.03. The obligations of the Borrower under Sections 5.01, 5.02and 5.10 of this Agreement and the provisions of Section 6.02 of this Agreementshall cease and determine on the date on which the Development Credit Agreementshall terminate or on a date thirty years after the date of this Agreement, whichevershall be the earlier.

ARTICLE VIII

Representative of the Borrower; Addresses

Section 8.01. The Secretary of the Ministry of Finance of the Borroweris designated as representative of the Borrower for the purposes of Section 11.03of the General Conditions.

Section 8.02. The following addresses are specified for the purposes ofSection 11.01 of the General Conditions:

For the Borrower:

Ministry of FinanceHis Majesty's Government of NepalKathmanduNepal

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Cable address:

ARTHAKathmanduNepal

For the Association:

International Development Association1818 H Street, N.W.Washington, D.C. 20433United States of America

Cable address:

INDEVASWashington, D.C.

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

KINGDOM OF NEPAL

By /s / D. R. PandayAuthorized Representative

INTERNATIONAL DEVELOPMENT ASSOCIATION

By /s/ S.M.L. van der MeerActing Regional Vice President

South Asia

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SCHEDULE 1

Withdrawal of the Proceeds of the Credit

1. The table below sets forth the Category of items to be financed out ofthe proceeds c' the Credit, the allocation of the amount of the Credit to suchCategory and the percentage of expenditures for items so to be financed in suchCategory:

Amount of theCredit Allocated % of

(Expressed in ExpendituresCategory Dollar Equivalent) to be Financed

(1) Civil works for 15,700,000 100% of foreignPart A of the expendituresProject

(2) Civil works 2,100,000 100% of foreignfor Part B of expendituresthe Project

(3) Unallocated 8,200,000

TOTAL 26,000,000

2. For Lhe purposes of this Schedule, the term "foreign expenditures" meansexpenditures in the currency of a country other than the Borrower and for goodsand services supplied from the territory of any country other than the Borrower.

3. Notwithstanding the provisions of paragraph I above, no withdrawals shallbe made in respect of:

(a) expenditures prior to the date of this Agreement.

(b) payments for taxes levied by, or in the territory of, the Borroweron goods or services, or on the importation, manufacture, procurement or supplythereof.

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4. Notwithstanding the allocation of an amount of the Credit or thedisbursement percentages set forth in the table in paragraph I above, if theAssociation has reasonably estimated that the amount of the Credit then allocatedto any Category will be insufficient to finance the agreed percentage of allexpenditures in that Category, the Association may, by notice to the Borrower:(i) reallocate to such Category, to the extent required to meet the estimatedshortfall, proceeds of the Credit which are then allocated to another Category andwhich in the opinion of the Association are not needed to meet other expenditures,and (ii) if such reallocation cannot fully meet the estimated shortfall, reduce thedisbursement percentage then applicable to such expenditures in order that furtherwithdrawals under such Category may continue until all expenditures thereundershall have been made.

5. If the Assoc*.tion shall have reasonably determined that the procurementof any item in any Category is inconsistent with the procedures set forth or referredto in this Agreement, no expenditures for such item shall be financed out of theproceeds of the Credit and the Association may, without in any way restrictingor limiting any other right, power or remedy of the Association under theDevelopment Credit Agreement, by notice to the Borrower, cancel such amountof the Credit as, in the Association's reasonable opinion, represents the amountof such expenditures which would otherwise have been eligible for financing outof the proceeds of the Credit.

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SCHEDULE 2

Description of the Project

The Project which is located about 30 km south-west of Kathmandu consistsof the construction and equipping of a hydroelectric power station and consistsof the following parts:

Part A: a 107 m high rockfill dam on the Kulekhani River with a totalembankment volume of about 3.5 million m3;

Part B: an open channel spillway controlled by two radial gates;

Part C: an intake structure connected to a headrace tunnel of about 2.5 min diameter and 5.8 km long;

Part D: a surge tank;

Part E: a penstock of about 1.6 m in average diameter and about 1,340 mlong;

Part F: an underground power house equipped with two 30 MWturbo-generating units;

Part G: a tailrace tunnel of about I km in length;

Part H: a switchyard equipped with two step-up 35 MVA power transformersand associated switching and protection equipment;

Part I: a 66 kV about 200 m long double circuit transmission line to connectthe power station with the existing line between Kathmandu andBirganj; and

Part J: extension of the existing substation in Kathmandu to accommodate two

35 MVA step-down transformers with switching and protectionequipment.

The Project is expected to be completed by December 1982.

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SCHEDULE 3

Procurement

A. General Procedures

1. Civil works under Parts (A) and (B) of the Project shall be procured underone contract to be awarded in accordance with procedures consistent with thoseset forth in the "Guidelines for Procurement under World Bank Loans and IDACredits" published by the Bank in August 1975 (hereinafter called the Guidelines),on the basis of international competitive bidding.

2. Bidders for the works included in Parts (A) and (B) of the Project shallbe prequalified as described in paragraph 1.3 of Part A of the Guidelines.

3. In the event that all of the bidders prequalified under paragraph 2 aboveare also prequalified for other civil works under the Project, then the Borrowershall invite bids from all such prequalified bidders for the civil works under Parts(A) and (B) of the Project together with the other civil works under the Projectfor which such bidders have been prequalified.

B. Review of Procurement Decisions by the Association

1. Review of prequalification. The Borrower shall, before qualification is invited,inform the Association in detail of the procedure to be followed and shall introducesuch modifications in said procedure as the Association shall reasonably request.The list of prequalified bidders, together with a statement of their qualificationsand of the reasons for the exclusion of any applicant for prequalification shallbe furnished by the Borrower to the Association for its comments before theapplicants are notified, and the Borrower shall make such additions to, deletionsfrom, or modifications in, the said list as the Association shall reasonably request.

2. Review of invitation to bid and of proposed award and final contract.

(a) Before bids are invited, the Borrower shall furnish to the Association,for its comments, the text of the invitations to bid and the specifications andother bidding documents, together with a description of the advertising proceduresto be followed for the bidding, and shall make such modifications in the saiddocuments or procedures as the Association shall reasonably request. Any furthermodification to the bidding documents shall require the Association's concurrencebefore it is issued to the prospective bidders.

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(b) After bids have been received and evaluated, the Borrower shall, beforea final decision on the award is made, inform the Association of the name ofthe bidder to which it intends to award the contract and the reasons for theintended award and shall furnish to the Association, in sufficient time for its review,a detailed report, by the consultants referred to in the Preamble to the DevelopmentCredit Agreement, on the evaluation and comparison of the bids received, togetherwith the recommendation for award of the said consultants and such otherinformation as the Association shall reasonably request. The Association shall, ifit determines that the intended award would be inconsistent with the Guidelinesor this Schedule, promptly inform the Borrower and state the reasons for suchdetermination.

(c) The terms and conditions of the contract shall not, without theAssociation's concurrence, materially differ from those on which bids were askedor prequalification invited.

(d) Two conformed copies of the contract shall be furnished to theAssociation promptly after its execution and prior to the submission to theAssociation of the first application for withdrawal Of funds from the Credit Accountin respect of such contract.