Public Sector Financial Management Project

LOAN NUMBER 7110-EC

Loan Agreement

(Public Sector Financial Management Project)

between

REPUBLIC OF ECUADOR

and

INTERNATIONAL BANK FOR RECONSTRUCTION

AND DEVELOPMENT

Dated August 27, 2003

- 13 -

LOAN NUMBER 7110-EC

LOAN AGREEMENT

AGREEMENT, dated August 27, 2003, between the REPUBLIC OF ECUADOR (the Borrower) and the INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (the Bank).

WHEREAS (A) the Borrower, having satisfied itself as to the feasibility and priority of the project described in Schedule 2 to this Agreement (the Project), has requested the Bank to assist in the financing of the Project;

(B) on May 11, 1977, the Borrower’s Supreme Council of Government passed the Organic Law of Financial Administration and Control (Supreme Decree No. 1429 of 1977) that provides basic rules for the programming, organization, management, implementation, coordination and supervision of the Borrower’s public sector budget, revenue, treasury, accounting and control systems;

(C) on November 26, 1992, the Borrower’s Congress passed the Public Sector Budget Law (Law No. 18 of 1992) that provides the general rules for the programming, formulation, approval, implementation, supervision, evaluation and liquidation of the Borrower’s public sector budget;

(D) on March 13, 2000, the Borrower’s Congress passed an Economic Transformation Law (Law No. 4 of 2000) that provides, inter alia, rules on the Borrower’s public sector accounting;

(E) on December 29, 2000, the Borrower’s Ministry of Economy and Finance (MEF) issued the Financial Management System Standards (Ministerial Resolution No. 182 of 2000) and launched the implementation of the Financial Management System (Sistema de Gestión Financiera - SIGEF) for the Borrower’s public sector;

(F) MEF has received from: (1) the State Comptroller General (Contraloría General del Estado - CGE) a letter dated October 3, 2001; and (2) the Ecuadorian Association of Municipalities (Asociación de Municipalidades Ecuatorianas - AME) letters dated October 4, 2001 and January 22, 2002, declaring CGE’s and AME’s commitment to the objectives of SIGEF and the Project, and requesting assistance from MEF for the implementation of SIGEF and the Project;

(G) On March 15, 2002, MEF and CGE entered into an inter-institutional agreement providing for regular coordination mechanisms to facilitate the implementation of SIGEF and the Project, including a joint interpretation of Supreme Decree No. 1429 of 1977, Law No. 18 of 1992, Law No. 4 of 2000 and Ministerial Resolution No. 182 of 2000; 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:

ARTICLE I

General Conditions; Definitions

Section 1.01. The “General Conditions Applicable to Loan and Guarantee Agreements for Fixed-Spread Loans” of the Bank, dated September 1, 1999 (the General Conditions) 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) “Affiliated Agency” means any agency of the Borrower, without legal personality, that operates affiliated to a Ministry of the Borrower;

(b) “AME Participation Agreement” means the agreement referred to in Section 3.03 (c) of this Agreement;

(d) “Autonomous Body” means any agency of the Borrower with legal personality;

(e) “CGE Participation Agreement” means the agreement referred to in Section 3.03 (b) of this Agreement;

(f) “Eligible Categories” means categories (1) through (4) set forth in the table in Part A.1 of Schedule 1 to this Agreement;

(g) “Eligible Expenditures” means the expenditures for goods and services referred to in Section 2.02 (a) of this Agreement;

(h) “Fiscal Year” means the Borrower’s fiscal year which commences on January 1 and ends on December 31 of each calendar year;

(i) “FMR” means each financial monitoring report prepared in accordance with Section 4.02 of this Agreement;

(j) “Implementation Agreement” means any of the agreements referred to in Section 3.03 (a) of this Agreement;

(k) “Implementing Agency” means any agency of the Borrower that under Supreme Decree No. 1429 of 1977, Law No. 18 of 1992, Law No. 4 of 2000 and Ministerial Resolution No. 182 of 2000 must implement SIGEF, including: (i) the Borrower’s Ministries, Presidency and Electoral Tribunal; (ii) Autonomous Bodies; (iii) Affiliated Agencies; (iv) Provincial Councils (as hereinafter defined); and (v) Municipalities (as hereinafter defined);

(l) “Large Municipality” means any Municipality (as hereinafter defined) with a population of 100,000 inhabitants or more;

(m) “Medium and Small Municipality” means any Municipality (as hereinafter defined) with a population of less than 100,000 inhabitants;

(n) “Municipality” means any of the Borrower’s municipalities (Municipio) established under Article 234 of the Borrower’s Constitution;

(o) “Operational Manual” means the Borrower’s manual for the implementation of the Project referred to in Section 3.05 (a);

(p) “Performance Indicators” means the Project performance indicators set forth in the letter of even date herewith from the Borrower to the Bank (Supplemental Letter);

(q) “PIU” means the Project implementing unit established pursuant to MEF’s Ministerial Resolution No. 098 of 2001;

(r) “Procurement Strengthening Action Plan” means the Borrower’s plan to strengthen procurement within MEF dated January 18, 2002;

(s) “Project Implementation Plan” means the Borrower’s plan for the implementation of the Project dated January 25, 2002;

(t) “Project Preparation Advance” means the Project preparation advance granted by the Bank to the Borrower pursuant to the letter agreement signed on behalf of the Bank on May 11, 2001 and on behalf of the Borrower on May 16, 2001;

(u) “Provincial Council” means any of the Borrower’s provincial councils (Consejo Provincial) established under Article 233 of the Borrower’s Constitution;

(v) “Sectional Government” means any Provincial Council or any Municipality;

(w) “SIGEF-Global” means the SIGEF module used by MEF’s Under Secretariat of the Budget to track approved budgets of the Implementing Agencies;

(x) “SIGEF-Institutional” means the SIGEF module used by the Implementing Agencies to control budget execution, perform treasury ledger accounting and cash management; and

(y) “Special Account” means the account referred to in Part B of Schedule 1 to this Agreement.

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 thirteen million eight hundred and sixty thousand Dollars ($13,860,000), as such amount may be converted from time to time through a Currency Conversion in accordance with the provisions of Section 2.09 of this Agreement.

Section 2.02. (a) The amount of the Loan may be withdrawn from the Loan Account in accordance with the provisions of Schedule 1 to this Agreement for expenditures made (or, if the Bank shall so agree, to be made) in respect of the reasonable cost of goods and services required for the Project and to be financed out of the proceeds of the Loan and in respect of interest and other charges in respect of the Loan, the front-end fee referred to in Section 2.04 of this Agreement and any premium in respect of an Interest Rate Cap or Interest Rate Collar payable by the Borrower in accordance with Section 4.04 (c) of the General Conditions.

(b) Promptly after the Effective Date, the Bank shall, on behalf of the Borrower, withdraw from the Loan Account and pay to itself the amount required to repay the principal amount of the Project Preparation Advance withdrawn and outstanding as of such date and to pay all unpaid charges thereon. The unwithdrawn balance of the authorized amount of the Project Preparation Advance shall thereupon be canceled.

Section 2.03. The Closing Date shall be March 1, 2007 or such later date as the Bank shall establish. The Bank shall promptly notify the Borrower of such later date.

Section 2.04. The Borrower shall pay to the Bank a fee in an amount equal to one percent (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 on the principal amount of the Loan not withdrawn from time to time, at a rate equal to: (i) eighty five one-hundredths of one per cent (0.85%) per annum from the date on which such charge commences to accrue in accordance with the provisions of Section 3.02 of the General Conditions to but not including the fourth anniversary of such date; and (ii) seventy five one-hundredths of one per cent (0.75%) per annum thereafter.

Section 2.06. The Borrower shall pay interest on the principal amount of the Loan withdrawn and outstanding from time to time, in respect of each Interest Period at the Variable Rate; provided, that upon a Conversion of all or any portion of the principal amount of the Loan, the Borrower shall, during the Conversion Period, pay interest on such amount in accordance with the relevant provisions of Article IV of the General Conditions.

Section 2.07. Interest and other charges shall be payable semiannually in arrears on April 15 and October 15 in each year.

Section 2.08. The Borrower shall repay the principal amount of the Loan in accordance with the provisions of Schedule 3 to this Agreement.

Section 2.09. (a) The Borrower may at any time request any of the following Conversions of the terms of the Loan in order to facilitate prudent debt management:

(i) a change of the Loan Currency of all or any portion of the principal amount of the Loan, withdrawn or unwithdrawn, to an Approved Currency;

(ii) a change of the interest rate basis applicable to all or any portion of the principal amount of the Loan from a Variable Rate to a Fixed Rate, or vice versa; and

(iii) the setting of limits on the Variable Rate applicable to all or any portion of the principal amount of the Loan withdrawn and outstanding by the establishment of an Interest Rate Cap or Interest Rate Collar on said Variable Rate.

(b) Any conversion requested pursuant to paragraph (a) of this Section that is accepted by the Bank shall be considered a “Conversion,” as defined in Section 2.01 (7) of the General Conditions, and shall be effected in accordance with the provisions of Article IV of the General Conditions and of the Conversion Guidelines.

(c) Promptly following the Execution Date for an Interest Rate Cap or Interest Rate Collar in respect of which the Borrower has requested that the premium be paid out of the proceeds of the Loan, the Bank shall, on behalf of the Borrower, withdraw from the Loan Account and pay to itself the amounts required to pay any premium payable in accordance with Section 4.04 (c) of the General Conditions up to the amount allocated from time to time for such purpose in the table in paragraph 1 of Schedule 1 to this Agreement.

ARTICLE III

Execution of the Project

Section 3.01. (a) The Borrower declares its commitment to the objectives of the Project as set forth in Schedule 2 to this Agreement, and, to this end, shall carry out the Project through MEF, with the cooperation of CGE (in respect of Part D of the Project) and AME (in respect of Part B.2 of the Project), and with participation of the Implementing Agencies (in respect of Parts A through C of the Project), all with due diligence and efficiency and in conformity with appropriate financial, accounting, administrative and managerial practices, and shall provide, promptly as needed, the funds, facilities, services and other resources required for the Project.

(b) Pursuant to the CGE Participation Agreement, the AME Participation Agreement and each Implementation Agreement, the Borrower shall:

(i) take or cause to be taken all action necessary or appropriate to enable MEF, CGE, AME and the Implementing Agencies to carry out the Project; and

(ii) not take or permit to be taken any action which would prevent or interfere with the carrying out of the Project by MEF, CGE, AME and the Implementing Agencies.

(c) Without limitation or restriction to the provisions of paragraph (a) above, the Borrower (through MEF) shall carry out the Project in accordance with the Project Implementation Plan. If any provision of the Project Implementation Plan is inconsistent with a provision of this Agreement, the provisions of this Agreement shall govern.

Section 3.02. Except as the Bank shall otherwise agree, procurement of the goods and consultants’ services required for the Project and to be financed out of the proceeds of the Loan shall be governed by the provisions of Schedule 4 to this Agreement.

Section 3.03. (a) The Borrower (through MEF) shall enter into agreements with each Implementing Agency, under terms and conditions satisfactory to the Bank, such agreements to provide for MEF’s overall coordination of the implementation of Parts A through C of the Project, including, inter alia:

(i) MEF's obligation to take all actions necessary or appropriate to enable each such Implementing Agency to participate in the implementation of the Project; and

(ii) the obligation of each such Implementing Agency to: (A) operate, maintain, insure and repair, in accordance with appropriate technical and insurance standards, the goods financed out of the proceeds of the Loan; and (B) adequately train the personnel assigned to the implementation of the Project.

(b) The Borrower (through MEF) shall enter into an agreement with CGE, under terms and conditions satisfactory to the Bank, such agreement to provide the rules and procedures for CGE’s cooperation in the implementation of Part D of the Project.

(c) The Borrower (through MEF) shall enter into an agreement with AME, under terms and conditions satisfactory to the Bank, such agreement to provide the rules and procedures for AME’s cooperation in the implementation of Part B.2 of the Project.

(d) The Borrower (through MEF) shall exercise its rights and carry out its obligations under each Implementation Agreement, the CGE Participation Agreement and the AME Participation Agreement in such a manner as to protect the interests of the Borrower and the Bank and to accomplish the purposes of the Loan and, except as the Bank shall otherwise agree, the Borrower shall not assign, amend, abrogate, waive or fail to enforce any Implementation Agreement, the CGE Participation Agreement or the AME Participation Agreement or any provision thereof.