The World Bank 1818 H Street N.W. (202M73-1000INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Washington, D.C. 20433 Cable Address: INTBAFRADINTERNATIONAL DEVELOPMENT ASSOCIATION U.S.A. Cable Address: INDEVAS

U\10Y, 2014

Lic. Ver6nica Baranda Sep61vedaDirectora de Planeaci6n, Andlisis y ContraloriaBanco Nacional de Obras y Servicios Piblicos, S.N.C.Av. Javier Barros Sierra No. 515Col. Lomas de Santa FeDelegaci6n Alvaro Obreg6nM6xico D.F., 01219

Re: IBRD Loan 8386-MX [8386-001 for the Program Loan and 8386-002 for the ProjectLoan] (Oaxaca Water and Sanitation Sector Modernization Operation)

Additional Instructions: Disbursement Letter

Dear Lic. Baranda:

I refer to the Loan Agreement between the International Bank for Reconstruction andDevelopment ("World Bank") and Banco Nacional de Obras y Servicios P6blicos, S.N.C.[BANOBRAS] ("Borrower") for the above-referenced Operation, dated Jme 15 _. TheLoan Agreement provides that the World Bank may issue additional instructions regarding thewithdrawal of the proceeds of Loan 8386-001 ("Program Loan") and Loan 8386-002 ("ProjectLoan"). This letter ("Disbursement Letter"), as revised from time to time, constitutes theadditional instructions.

I. Withdrawal of Program and Project Loan Proceeds

(i) Authorized Signatures. An authorized signatory letter in the Form attached (Attachment 1)should be furnished to the World Bank at the address indicated below providing the name(s) andspecimen signature(s) of the official(s) authorized to sign Applications for withdrawal:

Banco MundialInsurgentes Sur 1605, Piso 24Colonia San Jos6 Insurgentes03900 M6xico, D.F.M6xicoAttention: Gloria M. Grandolini, Director, Country Management Unit

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(ii) Applications. Please provide completed and signed Applications for withdrawal, togetherwith suppor.ing dc...ents, as applicablW, to the address indicated below:

Banco MundialSCN, Quadra 02, Lote AEdificio Corporate Finance Center70 Andar70712-900 Brasilia, D.F.BrazilAttention: Loan Department

(iii) Electronic Delivery (subsection 3.4). The World Bank may permit the Borrower toelectronically deliver to the Bank Applications for withdrawal (with supporting documents, asapplicable) through the World Bank's Client Connection, web-based portal. The option todeliver Applications for withdrawal to the World Bank by electronic means may be effected if:(a) the Borrower has designated in writing, pursuant to the terms of subparagraph (i) of thisSection, its officials who are authorized to sign and deliver Applications for withdrawal and toreceive secure identification credentials ("SIDC") from the World Bank for the purpose ofdelivering such Applications for withdrawal by electronic means; and (b) all such officialsdesignated by the Borrower have registered as users of Client Connection. If the World Bankagrees, the World Bank will provide the Borrower with SIDC for the designated officials.Following which, the designated officials may deliver Applications for withdrawal electronicallyby completing Form 2380, which is accessible through Client Connection(https://clientconnection.worldbank.org). The Borrower may continue to exercise the option ofpreparing and delivering Applications for withdrawal in paper form. The World Bank reservesthe right and may, in its sole discretion, temporarily or permanently disallow the electronicdelivery of Applications for withdrawal by the Borrower.

(iv) Terms and Conditions of Use of SIDC to Process Applications. By designating officials touse SIDC and by choosing to deliver the Applications for withdrawal electronically, theBorrower confirms through the authorized signatory letter its agreement to: (a) abide by theTerms and Conditions of Use of Secure Identification Credentials in connection with Use ofElectronic Means to Process Applications and Supporting Documentation ("Terms andConditions of Use of Secure Identification Credentials") provided in Attachment 2; and (b) tocause such official to abide by those terms and conditions.

(v) Withdrawal Conditions. Please refer to the Withdrawal Condition(s) in the Loan Agreementas follows: (a) for the Program Loan, refer to the Loan Agreement, Section IV.B. of Schedule 2;and (b) for the Project Loan, refer to the Loan Agreement, Section IV.B. of Schedule 3.

II. Disbursement Arrangements-Program Loan-IBRD 8386-001

(i) Applications for withdrawal. Applications for withdrawal from the Program Loan, ofamounts of the Program Loan allocated to individual Disbursement Linked Results ("DLR")may, pursuant to the provisions of Section IV.A. 1. and IV.A.2. of Schedule 2 to the Loan

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Agreement, be sent to the World Bank at any time after the World Bank has notified theBorrower in writing that it has accepted evidence of achievement of the specific DLR.

(ii) Withdrawal Amount. Applications for withdrawal may be for an amount not to exceed theamount of the Program Loan confirmed by the World Bank for the specific DLR in respect ofwhich the withdrawal is requested, as specified in the World Bank's notice to the Borrower.

(iii) Advances and Recovery ofAdvances. The Borrower may, in accordance with provisions setforth in Section IV.B.2. of Schedule 2 to the Loan Agreement, request advances of amounts ofthe Program Loan allocated to certain DLRs that have not yet been achieved. The aggregatedamount of all such advances made in respect of amounts allocated to DLRs may not exceed theequivalent of USD $11,250,000. The amount of the advance(s) and the specific DLR(s) to whichit relates must be clearly indicated in the Application for withdrawal using the Request forAdvance letter, in the form attached (Attachment 3).

The World Bank records an amount of the advance as disbursed for an achieved DLR("recovered") after it has notified the Borrower of its acceptance of the evidence of achievementof the DLR for which the advance was provided. The amount so reclassified becomes availablefor further advances in accordance with the preceding paragraph.

(iv) Disbursement Deadline Date. The period of disbursement of the Program Loan ends sixmonths after the Closing Date specified in Section IV.B.3. of Schedule 2 to the Loan Agreement("Disbursement Deadline Date"). This is the final date established by the World Bank for receiptby the World Bank of Applications for withdrawal. Normally, to support orderly closure of theProgram (and Project) Loan Account, the World Bank does not accept Applications forwithdrawal received after the Disbursement Deadline Date. The Borrower should promptlyinform the World Bank of any expected implementation delays or exceptional administrativeissues before these dates. The World Bank will notify the Borrower of any exception that theWorld Bank may make to the Disbursement Deadline Date.

(v) Deposits of Loan Amounts. All withdrawals from the Program Loan shall be deposited bythe World Bank into an account established at Citibank in the case of USD and at BancoNacional de Mxico, S.A., Integrante del Grupo Financiero Banamex in the case of localcurrency (MXN).

(vi) Additional information on disbursement arrangements and electronic delivery ofApplications for withdrawal. Please visit our secure website "Client Connection" athttps://clientconnection.worldbank.org.

(vii) Disbursement Linked Indicators - Disbursement Linked Results. The following tablecomplements the information in Section IV.A.2. of Schedule 2 to the Loan Agreement, as thistable shows the description of each area and DLI of the Program, total amount allocated to eachDLI, financing percentage, baseline, and timeframe for achievement:

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Total amount % of total Timeframefor achievement of DLI

DLI allocated to DLI financing Baseline Year ) Year 2 Year 3 Year 4 Year 5(2014) (2015) (2016) (2017) (2018)

Results Area 1. Modernization of the legal andregulatory framework of the WSS sector in theState

DLI 1: Reform of legal and regulatory framework

Amount allocated to DLI 1: US$4.5 million 100%

- New State Water and Sanitation Law submitted No Yesto Congress

Amount allocated: US$2 million

- Regulation of State Water and Sanitation Lawprepared and published in the Official Gazette ofthe State- Standard regulation for provision ofmunicipal water and sanitation services prepared- Amendment of law creating SAPAO submittedto Congress No Yes- CEA's internal regulation and organizationalmanual adopted and published in the OfficialGazette of the State- SAPAO's internal regulation and organizationalmanual adopted and published in the OfficialGazette of the State

Amount allocated: US$2.5 million

Results Area 2. Improvement of water services inOaxaca Metropolitan Area

DLI 2-1: Improvement of service quality

Amount allocated to DLI 2-1: US$7 million 50%

- Preparation of the Expendientes Tecnicos for therehabilitation and/or construction of the selected No Yessector's macro and micro distribution systems

Amount allocated: US$1 million

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Component 1 :Yes- Construction of the selected sector's macro No - Component 2:Yes -

distribution Component 3:YesComponent 3:Yes

Amount allocated: US$3 million

- Percentage of active users with continuous 0% 0% 0% 30% 100%service in the selected sector

Amount allocated: US$1.5 million US$1.5 million

DLI 2-2: Improvement of service sustainability 49% 49% 55% 70% 90%Commercial efficiency in the selected sector

Amount allocated to DLI 2-2: US$1.5 million 50% US$0.5 million US$0.5 million US$0.5 million

Results Area 3. Improvement of water services insecondary towns

DLI 3-1: Improvement of informationNumber of selected water utilities with an approved 0 9 18 -

program of interventions of immediate impact

Amount allocated to DLI 3-1: US$2 million 50% US$1 million US$1 million

DLI 3-2: Improvement of service qualityNumber of selected water utilities with improved 0 0 3 8 13 18service continuity

Amount allocated to DLI 3-2: US$14 million 50% US$3.5 million US$3.5 million US$3.5 million US$3.5 million

DLI 3-3: Improvement of service sustainabilityNumber of selected water utilities whose service 0 0 3 8 13 18revenue is greater than their operating expenses

Amount allocated to DLI 3-3: US$14 million 50% US$3.5 million US$3.5 million US$3.5 million US$3.5 million

Results Area 4. Improvement of WSS informationin rural areas

DLI 4-1: Improvement of informationPercentage of localities in selected segment with 0% 0% 25% 75% 100%information integrated in SIASAR

Amount allocated to DLI 4-1: US$2 million 100% US$0.5 million US$1 million US$0.5 million

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Total amount allocated to DLI: US$45 million US$4 million US$14.5 million US$10 million US$9.5 million US$7 million

(viii) Information. Please visit our secure website "Client Connection" at https://clientconnection.worldbank.org for additionalinformation on disbursement arrangements and electronic delivery of Applications for withdrawal.

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III. Disbursement Arrangements-Proiect Loan -IBRD 8386-002

(i) Disbursement Guidelines (section 2). The attached World Bank Disbursement Guidelines forProjects, dated May 1, 2006, ("Disbursement Guidelines") (Attachment 4), are an integral partof the Disbursement Letter. The manner in which the provisions in the Disbursement Guidelinesapply to the Project Loan is specified below. Sections and subsections in parentheses belowrefer to the relevant sections and subsections in the Disbursement Guidelines and, unlessotherwise defined in this Section III of the Disbursement Letter, the capitalized terms used havethe meanings ascribed to them in the Disbursement Guidelines.

(ii) Disbursement Methods (section 2). The following Disbursement Methods may be usedunder the Project Loan: (a) Reimbursement, and (b) Advance.

(iii) Disbursement Deadline Date (subsection 3.7). The Disbursement Deadline Date is fourmonths after the Closing Date specified in Section IV.B.2. of Schedule 3 to the LoanAgreement. Any changes to this date will be notified by the World Bank.

(iv) Minimum Value of Applications (subsection 3.5). The Minimum Value of Applications forreimbursement is United States Dollar (USD) $ 200,000 equivalent.

(v) Advances (sections 5 and 6).

* Type of Designated Account (subsection 5.3): Segregated

* Currency ofDesignated Account (subsection 5.4): USD

* Financial Institution at which the Designated Account Will Be Opened (subsection5.5): Citibank in the case of USD and Banco Nacional de Mexico, SA., Integrante delGrupo Financiero Banamex in the case of local currency (MXN).

* Ceiling (subsection 6.1): Variable: Forecast for two quarters, as approved by theWorld Bank's Task Team Leader.

(vi) Supporting Documentation (section 4). Supporting documentation should be provided witheach Application for withdrawal as set out below:

* For requests for Reimbursement:

o Statement of Expenditure in the form attached (Attachment 5) for allexpenditures under contracts that are not subject to the World Bank's priorreview.

o List of payments against contracts that are subject to the World Bank's priorreview, in the form attached (Attachment 6) together with the Recordsevidencing eligible expenditures (e.g., copies of receipts, supplier invoices, billsof lading).

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* For reporting eligible expenditures paid from the Designated Account:

o Statement of Expenditure in the form attached (Attachment 5) for allexpenditures under contracts that are not subject to the World Bank's priorreview.

o List of payments against contracts that are subject to the World Bank's priorreview, in the form attached (Attachment 6) together with the Recordsevidencing eligible expenditures (e.g., copies of receipts, supplier invoices, billsof lading).

(vii) Frequency of Reporting Eligible Expenditures Paid from the Designated Account(subsection 6.3): Minimum frequency: Quarterly

(viii) Additional information on disbursement arrangements. Please refer to the DisbursementHandbook available on the World Bank's public website at https://www.worldbank.org and itssecure website "Client Connection" at https://clientconnection.worldbank.org. Print copies areavailable upon request.

IV. Other Important Information

If you have not already done so, the World Bank recommends that you register as a userof the Client Connection website (https://clientconnection.worldbank.org). From this websiteyou will be able to prepare and deliver Applications, monitor the near real-time status of theProgram Loan and Project Loan, and retrieve related policy, financial, and procurementinformation. All Borrower officials authorized to sign and deliver Applications for withdrawalby electronic means are required to register with Client Connection before electronic deliverycan be effected. For more information about the website and registration arrangements, pleasecontact the World Bank by email at clientconnection@worldbank.org with copy to AngelicaCalderon at acalderon@worldbank.org.

If you have any queries in relation to the above, please contact us atloalcr@worldbank.org (with copy to Victor Ordonez at vconde@worldbank.org) using the aboveOperation name and Program Loan and Project Loan numbers as a reference in the subject line.

Yours sin rely,

Gloria G liniDire

Mexic Country agement UnitLatin A ca and the aribbean Region

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Attachments -

1. Form for Authorized Signatures2. Terms and Conditions of Use of Secure Identification Credentials in connection with Use

of Electronic Means to Process Applications and Supporting Documentation, datedMarch 1, 2013

3. Form of Request for Advance4. World Bank Disbursement Guidelines for Projects, dated May 1, 20065. Form of Statement of Expenditure6. Form of Payments Against Contracts Subject to the Bank's Prior Review

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Attachment 1

Form of Authorized Signatory Letter[Letterhead]

[Street address][City] [Country]

[DATE]The World Bank1818 H Street, N.W.Washington, D.C. 20433United States of America

Attention: Gloria Grandolini, Director

IBRD Loan 8386-MX [8386-001 for the Program Loan and 8386-002 for the Project Loan](Oaxaca Water and Sanitation Sector Modernization Operation)

Dear Ms. Wetzel

I refer to the Loan Agreement ("Agreement") between the International Bank forReconstruction and Development ("Bank") and Banco Nacional De Obras Y Servicios Pziblicos,S.N.C, Instituci6n De Banca De Desarollo ("Borrower") for the above-referenced Operation,dated [Loan Agreement signing date], providing the above Program Loan and Project Loan. Forthe purposes of Section 2.02 of the General Conditions for the Program and of Section 2.03 ofthe General Conditions for the Project as defined in the Agreement, any '[one] of the personswhose authenticated specimen signatures appear below is authorized on behalf of the Borrowerto sign Applications for withdrawal under this Program Loan and Project Loan.

For the purpose of delivering Applications for withdrawal to the Bank, 2 [each] of thepersons whose authenticated specimen signatures appears below is authorized on behalf of theBorrower, acting 3[individually] 4 Dointly], to deliver Applications for withdrawal, and evidencein support thereof on the terms and conditions specified by the Bank.

5[This confirms that the Borrower is authorizing such persons to accept SecureIdentification Credentials (SIDC) and to deliver the Applications for withdrawal and supporting

1 Instruction to the Borrower: Stipulate if more than one person needs to sign Applications, and how many or whichpositions, and if any thresholds apply. Please delete this footnote in final letter that is sent to the Bank

2 Instruction to the Borrower: Stipulate if more than one person needs to jointly sign Applications, if so, pleaseindicate the actual number. Please delete this footnote in final letter that is sent to the Bank

3 Instruction to the Borrower: Use this bracket if any one of the authorized persons may sign; if this is notapplicable, please delete. Please delete this footnote in final letter that is sent to the Bank

4 Instruction to the Borrower: Use this bracket only if several individuals must jointly sign each Application; if thisis not applicable, please delete. Please delete this footnote in final letter that is sent to the Bank.

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documents to the Bank by electronic means. In full recognition that the Bank shall rely uponsuch representations and warranties, including without limitation, the representations andwarranties contained in the Terms and Conditions of Use of Secure Identification Credentials inconnection with Use of Electronic Means to Process Applications and SupportingDocumentation ("Terms and Conditions of Use of SIDC"), the Borrower represents and warrantsto the Bank that it will cause such persons to abide by those terms and conditions.]

This Authorization replaces and supersedes any Authorization currently in the Bankrecords with respect to this Agreement.

[Name], [position] Specimen Signature:

[Name], [position] Specimen Signature:

[Name], [position] Specimen Signature:

Yours truly,

/ signed /

[Position]

5 Instruction to the Borrower: Add this paragraph if the Borrower wishes to authorize the listed persons to acceptSecure Identification Credentials and to deliver Applications by electronic means; if this is not applicable, pleasedelete the paragraph. Please delete this footnote in final letter that is sent to the Bank

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Attachment 2

Terms and Conditions of Use of Secure Identification Credentials in connection with Use ofElectronic Means to Process Applications and Supporting Documentation

March 1, 2013

The World Bank (Bank)6 will provide secure identification credentials (SIDC) to permit theBorrower7 to deliver applications for withdrawal and applications for special commitments underthe Agreement(s) and supporting documentation (such applications and supportingdocumentation together referred to in these Terms and Conditions of Use as Applications) to theBank electronically, on the terms and conditions of use specified herein.

SIDC can be either: (a) hardware-based (Physical Token), or (b) software-based (Soft Token).The Bank reserves the right to determine which type of SIDC is most appropriate.

A. Identification of Users.

. The Borrower will be required to identify in a completed Authorized Signatory Letter(ASL) duly delivered to and received by the Bank each person who will be authorized todeliver Applications. The Bank will provide SIDC to each person identified in the ASL(Signatory), as provided below. The Borrower shall also immediately notify the Bank ifa Signatory is no longer authorized by the Borrower to act as a Signatory.

2. Each Signatory must register as a user on the Bank's Client Connection (CC) website(https://clientconnection.worldbank.or-) prior to receipt of his/her SIDC. Registration onCC will require that the Signatory establish a CC password (CC Password). TheSignatory shall not reveal his/her CC Password to anyone or store or record the CCPassword in written or other form. Upon registration as a CC user, the Signatory will beassigned a unique identifying account name.

B. Initialization of SIDC.

. Prior to initialization of SIDC by a Signatory, the Signatory will acknowledge havingread, understood and agreed to be bound by these Terms and Conditions of Use.

2. Where a Physical Token is to be used, promptly upon receipt of the Physical Token, theSignatory will access CC using his/her account name and CC Password and registerhis/her Physical Token and set a personal identification number (PIN) to be used in

6 "Bank" includes IBRD and IDA.7 "Borrower" includes the borrower of an IBRD loan, IDA credit, or Project Preparation Facility advance and therecipient of a grant.

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connection with the use of his/her Physical Token, after which the Physical Token will beinitialized for use by the Signatory exclusively for purposes of delivering Applications.Where a Soft Token is to be used, the Signatory will access CC using his/her accountname and CC Password and set a personal identification number (PIN) to be used inconnection with the use of his/her Soft Token, after which the Soft Token will beinitialized for use by the Signatory exclusively for purposes of delivering Applications.Upon initialization of the SIDC, the Signatory will be a "SIDC User". The Bank willmaintain in its database a user account (Account) for each SIDC User for purposes ofmanaging the SIDC of the SIDC User. Neither the Borrower nor the SIDC User willhave any access to the Account.

3. Prior to first use of the SIDC by the SIDC User, the Borrower shall ensure that the SIDCUser has received training materials provided by the Bank in use of the SIDC.

C. Use of SIDC.

1. Use of the SIDC is strictly limited to use in the delivery of Applications by the SIDCUser in the manner prescribed by the Bank in the Agreement(s) and these Terms andConditions. Any other use of the SIDC is prohibited.

2. The Bank assumes no responsibility or liability whatsoever for any misuse of the SIDCby the SIDC User, other representatives of the Borrower, or third parties.

3. The Borrower undertakes to ensure, and represents and warrants to the Bank (suchrepresentation and warranty being expressly relied upon by the Bank in granting SIDC)that each SIDC User understands and will abide by, these Terms and Conditions of Use,including without limitation the following:

4. Security

4.1. The SIDC User shall not reveal his/her PIN to anyone or store or record the PIN inwritten or other form.

4.2. The SIDC User shall not allow anyone else to utilize his/her SIDC to deliver anApplication to the Bank.

4.3. The SIDC User shall always logout from CC when not using the system. Failure tologout properly can create a route into the system that is unprotected.

4.4. If the SIDC User believes a third party has learned his/her PIN or has lost his/herPhysical Token he/she shall immediately notify clientconnection@worldbank.org.

4.5. The Borrower shall immediately notify the Bank atclientconnectiongworldbank.org of any lost, stolen or compromised SIDC, and takeother reasonable steps to ensure such SIDC are disabled immediately.

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5. Reservation of Right to Disable SIDC

5.1. The Borrower shall reserve the right to revoke the authorization of a SIDC User touse a SIDC for any reason.

5.2. The Bank reserves the right, in its sole discretion, to temporarily or permanentlydisable a SIDC, de-activate a SIDC User's Account or both.

6. Care of Physical Tokens

6.1. Physical Tokens will remain the property of the Bank.

6.2. The Bank will physically deliver a Physical Token to each Signatory designatedto receive one in a manner to be determined by and satisfactory to the Bank.

6.3. Physical Tokens contain delicate and sophisticated instrumentation and thereforeshould be handled with due care, and should not be immersed in liquids, exposed toextreme temperatures, crushed or bent. Also, Physical Tokens should be kept more thanfive (5) cm from devices that generate electromagnetic radiation (EMR), such as mobilephones, phone-enabled PDAs, smart phones and other similar devices. Physical Tokensshould be carried and stored separate from any EMR device. At close range (less than 5cm), these devices can output high levels of EMR that can interfere with the properoperation of electronic equipment, including the Physical Token.

6.4. Without derogating from these Terms and Conditions of Use, other technicalinstructions on the proper use and care of Physical Tokens are available athttp://www.rsa.com.

7. Replacement

7.1. Lost, damaged, compromised (in terms of 4.5, above) or destroyed PhysicalTokens will be replaced at the expense of the Borrower.

7.2. The Bank reserves the right, in its sole discretion, not to replace any PhysicalToken in the case of misuse, or not to reactivate a SIDC User's Account.

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Attachment 3

[Date]

Request for Advance[Ministry Letterhead]

[Street Address]

Banco MundialSetor Comercial Norte,Quadra 02, Lote AEdificio Corporate Finance Center70 Andar70712-900 Brasilia, D.F.BrazilAttention: Loan Department

Re: IBRD Loan 0000-001-MX (Program Loan) (Oaxaca Water and Sanitation SectorModernization Operation)

Dear Sir/Madam

To support the implementation of the above operation and in order to achieve the planned results,we request an Advance in the amount of USD 0,000,0008 in accordance with provisions set forthin Section of Schedule _ to the Loan Agreement and the provisions in theDisbursement Letter. The Advance relates to the following Disbursement Linked Indicators(DLIs) and Disbursement Linked Results (DLRs):

DLI DLR Result to be achieved ProposedAdvance9

USD

TOTAL ADVANCE REQUESTED

8 The Proposed Advance should be in the currency of the DLI/DLR result as set out in the Bank FinancingAgreement and in accordance with provisions in the Disbursement Letter.9 The Proposed Advance should be in the currency of the DLI/DLR result as set out in the Bank FinancingAgreement and in accordance with provisions in the Disbursement Letter.

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We request that the Advance be disbursed in [currency requested for disbursement] equivalent tothe Total Advance Requested above. We acknowledge that the amount disbursed will becharged to the Program Loan Account in the currency of the Loan at the rate of exchange ineffect at the time of disbursement.

Sincerely,

[Name, Position]Io

10 To be signed by legal representative of the [Borrower/Recipient], as set out in the Form of Authorized SignatoryLetter, dated _ .

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Attachment 4

3E LWO I[ I) [AN K

DISBURSEMENTGUIDELINESFOR PROJECTS

MAY 2006

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WORLD BANK

DISBURSEMENT GUIDELINESFOR PROJECTS

LOAN DEPARTMENTMay 1, 2006

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Copyright 0 200The laternational Bank for Recomnstruction and Development/THE WORLD BANK1818 1 Street, N.W.Washington, D.C. 20433, US.A.

First Printing: July 2006

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CONTENTS

Page

1. Purpose ................ 5

2. Disbursement Methods ......... 6

3. Withdrawal of Loan Proceeds ......................................... 6

4. Supporting Documentation Requirements ......... 9

5. Designated Accounts ....... ................. 10

6. Terms and Conditions Applicable to Advances .............. 12

7. Ineligible Expenditures ................ 14

8. Refdunds .......................................... 15

31

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4

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World BankDisbursement Guidelines

for ProjectsMay 1, 2006

1. Purpose

1.1 The purpose of these Guidelines is to set out the Bank'sprocedures for disbursement of loan proceeds for projects.'Specifically, the Guidelines explain (a) the different methodsused by the Bank to disburse loan proceeds, (b) the require-ments for withdrawal from the Loan Account, (c) the typesof supporting documentation that the borrower may be re-quired to provide to demonstrate the use of loan proceedsfor eligible expenditures, (d) the criteria for establishing des-ignated accounts, (e) the terms and conditions applicable toadvances, (f) the types of actions that the Bank may takeif it determines that loan proceeds are not needed or havebeen used for ineligible purposes, and (g) the consequence ofrefunds.

"Bank" includes IBRD and IDA; Iloan" includes credit and grant; "bor-rower" includes the borrower of an IBR) loan, IDA credit, or Project Prepa-ration ]Facility advance and the recipient of a grant; and "tAwn Agreement"includes the agreement with the Bank providing for a credit, grant, or ad-vance. These Disbursement Guidelines apply to all loans, credits, advancesunder the Project Preparation Facility, and grants financed under the In-stitutional Development Fund and Global Environment Facility unless oth-erwise provided in Operational Policy 10.20, Global Environment FacilityOpmtions (forthcoming). These Guidelines also apply to other recipient-executed grants financed from trust funds unless, exceptionally, the termsof the agreement with the donor make provision for different requirements.They do not apply to Development Policy loans.

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WoRmn nANK WIsBUSasimit UIHLIeS FOR PRWWIS

2. Disbursement Methods

2.1 The Bank establishes disbursement arrangements for an op-eration in consultation with the borrower and taking intoconsideration, inter alia, an assessment of the borrower'sfinancial management and procurement arrangements, theprocurement plan and cash flow needs of the operation, andits disbursement experience with the borrower.

2.2 The Bank disburses proceeds from the Loan Account estab-lished for each loan, to or on the order of the borrower, usingone or more of the disbursement methods set forth below, asdetermined by the Bank.

(a) Reimbursement: The Bank may reimburse the bor-rower for expenditures eligible for financing pursuant tothe Loan Agreement ("cligible expenditures") that theborrower has prefinanced from its own resources.

(b) Advance: The Bank may advance loan proceeds intoa designated account of the borrower to finance eligibleexpenditures as they are incurred and for which sup-porting documents will be provided at a later date (seesection 5, "Designated Accounts").

(c) Direct Payment The Bank may make payments, atthe borrower's request, directly to a third party (e.g.,supplier, contractor, consultant) for eligible expendi-tures.

(d) Special Commitment: The Bank may pay amountsto a third party for eligible expenditures under specialcommitments entered into, in writing, at the borrower'srequest and on terms and conditions agreed between theBank and the borrower.

3. Withdrawal of Loan Proceeds

3.1 Authorized Signatures. Before loan proceeds may bewithdrawn or committed from the Loan Account, the au-

16

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NoE LOAN DPArWers MAV , 2W6

thorized representative of the borrower (as designated in theLoan Agreement) must furnish to the Bank (a) the name(s)of the official(s) authorized to sign applications for with-drawal and applications for a special commitment (collec-tively, "Applications"), and (b) the authenticated specimensignature(s) of the official(s). The borrower must indicateclearly if more than one signature is required on Applica-tions and must notify the Bank promptly of any changes insignature authority.

3.2 Applications. Applications must be provided to the Bankin such form and include such information as the Bank mayreasonably request. Application forms are available onlinefrom the Client Connection Web site at http://clientconnec-tion.worldhank. ory or from the Bank upon request.

33 For withdrawal from the Loan Account for advances, theborrower should provide an original signed application forwithdrawal. For withdrawal from the Loan Account for re-imbursements and direct payments and for reporting on theuse of advances, the borrower should provide an originalsigned application for withdrawal together with one copyof supporting documents (see section 4, "Supporting Docu-mentation Requirements"). For a special commitment fromthe Loan Account, the borrower should provide an originalsigned application for a special commitment together withone copy of the letter of credit. The Bank reserves the rightnot to accept or review duplicate copies of Applications andsupporting documents and may at its discretion return ordestroy the duplicates.

3.4 Electronic Delivery. The Bank may authorize the bor-rower to use electronic means, in a manner and on termsand conditions specified by the Bank, to deliver Applicationsand supporting documentation to the Bank. Applicationsand supporting documentation delivered in accordance withthis subsection will be deemed to have been provided to theBank for the purposes of satisfying the requirements of sub-sections 3.2 and 3.3 of these Guidelines.

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WomD BANK DkswsLxt Cmnes Von Pnoswcs o n e

3.5 Minimum Value of Applications. The Bank establishesa minimum value for Applications for reimbursement, directpayment, and special commitment. The Bank reserves theright not to accept Applications that are below such mini-mum value.

3.6 Loan Disbursing Period. The Bank processes Appli-cations only after the Loan Agreement has been declaredeffective in accordance with the terms of the Loan Agree-ment. The expenditures for which the Applications aremade must be:

(a) paid for (i) on or after the date of the Loan Agreement,or (ii) in the case of operations that permit retroactivefinancing, on or after the earlier date specified in theLoan Agreement for that purpose; and

(b) incurred on or before the closing date specified or re-ferred to in the Loan Agreement ("Closing Date"), ex-cept as otherwise specifically agreed with the Bank.

3.7 The loan disbursing period ends on the final date establishedby the Bank for receipt by the Bank of applications for with-drawal and supporting documentation (the "DisbursementDeadline Date"). The Disbursement Deadline Date may bethe same as the Closing Date, or up to four months after theClosing Date. Normally, to support orderly project comple-tion and closure of the Loan Account, the Bank does not ac-cept applications for withdrawal or supporting documentationreceived after the Disbursement Deadline Date. The borrowershould promptly inform the Bank of any expected implemen-tation delays or exceptional administrative issues before thesedates. The Bank notifies the borrower of any exception thatthe Bank may make to the Disbursement Deadline Date.

3.8 Disbursement Conditions. If the Loan Agreement con-tains a disbursement condition for a specific expenditure cat-egory, the Bank will disburse loan proceeds for that categoryonly after the disbursement condition has been fulfilled andthe Bank has notified the borrower to this effect.

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LOAN D'rAIM'I~ MAY 1, 2U(X

4. Supporting Documentation Requirements

4.1 The borrower provides supporting documentation to theBank to show that loan proceeds have been or are beingused to finance eligible expenditures.

4.2 For special commitments, the commercial bank provides itsconfirmation directly to the Bank that conditions for releaseof payments committed for withdrawal have been met.

4.3 TVpes of Supporting Documentation. The Bank re-quires either copies of the original documents evidencingeligible expenditures ("Records") or summary reports of ex-penditure ("Summary Reports") in such form and substanceas the Bank may specify. Records include such documentsas invoices and receipts. A Summary Report may be either(a) the interim un-audited financial report required underthe Loan Agreement ("Interim Financial Report") or (b)a statement of expenditure summarizing eligible expendi-tures paid during a stated period ("Statement of Expendi-ture"). In all cases, the borrower is responsible for retainingthe original documents evidencing eligible expenditures andmaking them available for audit or inspection.

4.4 The Bank determines the types of supporting documentationthat the borrower should provide, taking into considerationthe disbursement method used. The supporting documenta-tion may be the following:

(a) For applications for reimbursement (i) InterimFinancial Reports, (ii) Statements of Expenditure, (iii)Records, or (iv) Records required by the Bank for spe-cific expenditures and Statements of Expenditure for allother expenditures;

(b) For reporting on the use of advances- (i) InterimFinancial Reports, (it) Statements of Expenditure, (iii)Records, or (iv) Records required by the Bank for spe-cific expenditures and Statements of Expenditure for allother expenditures;

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Wou IIANk DMiuAW'm CUMIMS VbR PIWoAVI s I N

(c) For applications for direct payments: Records;and

(d) Any other supporting documentation that the Bankmay request by notice to the borrower.

4.5 Failure to Provide Audited Financial Statements. Ifthe borrower fails to provide any of the audited FinancialStatements required in accordance with, and within the pe-riod of time specified in, the Loan Agreement, the Bank mayat its discretion decide not to accept applications for with-drawal supported by Summary Reports, even if such reportsare accompanied by Records.

5. Designated Accounts

5.1 The borrower may open one or more designated accountsinto which the Bank may, at the borrower's request, de-posit amounts withdrawn from the Loan Account for thepurpose of paying for eligible expenditures as they are in-curred ("Designated Account"). Before the Bank authorizesestablishment of a Designated Account, the borrower musthave adequate administrative capability, internal controls,and accounting and auditing procedures to ensure effectiveuse of the Designated Account.

5.2 The Bank may decide not to permit the use of DesignatedAccounts in new projects if the borrower has failed to re-fund undocumented advances in the Designated Account ofany other loan to, or guaranteed by, the borrower withintwo months after the Disbursement Deadline Date for suchloan.

5.3 Type of Designated Account A Designated Account maybe established in one of the two ways set out below, as ap-propriate for the operation concerned, as determined andnotified by the Bank.

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M 0 l~~I,AN DVP'1-Pv MAV I If wim

(a) Segregated Account this is an account of the borrowerinto which only proceeds of the loan may be deposited;or

(b) Pooled Account: this is an account of the borrowerinto which the loan proceeds and proceeds of other fi-nancing for the operation (e.g., borrower resources and/or financing by other development partners) may be de-posited.

5.4 Currency of the Designated Account. Designated Ac-counts must be in a currency acceptable to the Bank. Incountries that have a freely convertible currency, DesignatedAccounts may be held in the currency of the borrower orany freely convertible currency. The Bank may also agreeto local currency Designated Accounts when, inter alia, thecountry's currency (even if not freely convertible) is stableand the expenditures to be financed are primarily in lo-cal currency. The borrower bears all risks associated withforeign exchange fluctuations between (a) the currency ofdenomination of the loan and that of the borrower's Desig-nated Account, and (b) the currency of denomination of theborrower's Designated Account and the currency or curren-cies of project expenditures.

5.S Financial Institution. Designated Accounts must beopened and maintained in a financial institution accept-able to the Bank on terms and conditions acceptable to theBank. To be acceptable to the Bank, the financial institutionproposed by the borrower should generally meet all the fol-lowing requirements:

(a) be financially sound;

(b) be authorized to maintain the Designated Account inthe currency agreed between the Bank and the bor-rower;

(c) be audited regularly, and receive satisfactory audit re-ports;

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Woma BAx Dmm r Cunuins VoR 1parts N O N

(d) be able to execute a large number of transactionspromptly;

(e) be able to perform a wide range of banking services sat-isfactorily;

(f) be able to provide a detailed statement of the Desig-nated Account;

(g) be part of a satisfactory correspondent banking network;and

(h) charge reasonable fees for its services.

5.6 The Bank reserves the right not to accept a financial insti-tution for the opening and/or maintenance of a DesignatedAccount if such institution has asserted or asserts a claimto set off, seize, or attach the proceeds of any Bank loan ondeposit in a Designated Account maintained by it.

6. Terms and Conditions Applicable to Advances

6.1 Ceiling. The Bank notifies the borrower of the maximumamount of loan proceeds that may be on deposit in a Desig-nated Account (the "Ceiling-). The Bank, at its discretion,may establish the Ceiling as either (a) a fixed amount, or (b)an amount that is adjusted from time to time during projectimplementation based on periodic forecasts of project cashHow needs.

6.2 Applications for Advances. The borrower may apply foran advance in an amount up to the Ceiling less the aggre-gate amount of those advances previously received by theborrower for which the borrower has not yet provided sup-porting documentation. Normally, to support orderly closureof the Loan Account, the Bank does not advance loan pro-ceeds into the Designated Account after the Closing Date.

6.3 Peuency of Reporting Eligible Expenditures Paidfrom the Designated Account. The borrower reports onthe use of loan proceeds advanced to the Designated Account

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0 M LGAN DWMMY-N-1 M,' I,2tyJ

at intervals specified by the Bank by notice to the borrower("Reporting Period"). The borrower should ensure that allamounts deposited in the Designated Account are accountedfor and their use reported prior to the Disbursement Dead-line Date. After this date, the borrower must refund to theBank any advances still unaccounted for or remaining in theDesignated Account.

6.4 Withholding Advances. The Bank is not required to makeany deposit into the Designated Account if:

(a) The Bank determines that payment of the deposit wouldresult in exceeding the Ceiling (see subsection 6.2, "Ap-plications for Advances");

(b) The Bank is not satisfied that the borrower's plannedproject expenditures justify the deposit. The Bank may,by notice to the borrower, adjust the amount it depositsor withhold further deposits into the Designated Ac-count until it is satisfied that the financial needs of theproject warrant further deposits;

(c) The borrower fails to take the action required pursuantto the determinations made by the Bank under subsec-tions 7.1 and 7.2 of these Guidelines;

(d) The borrower fails to provide any of the audited Finan-cial Statements required in accordance with, and withinthe period of time specified in, the Loan Agreement;

(e) The Bank determines that all further withdrawals ofloan proceeds should be made by the borrower directlyfrom the Loan Account; or

(f) The Bank has notified the borrower of its intention tosuspend in whole or in part the borrower's right to makewithdrawals from the Loan Account.

6.5 Ezces8 Advances. If at any time the Bank determines thatany amount deposited in the Designated Account will not berequired to cover further payments for eligible expenditures("Excess Amount"), it may, at its discretion, require theborrower to take one of the two actions listed below. Upon

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WORM HANK DssUMeNt GULuNS VOR PRAmIs M E N

notification by the Bank, the borrower must promptly takethe action requested:

(a) Provide evidence satisfactory to the Bank within a pe-riod specified by the Bank that the Excess Amount willbe used to pay for eligible expenditures. If the evidenceis not furnished within the time period specified, theborrower must promptly refund the Excess Amount tothe Bank; or

(b) Refund the Excess Amount promptly.

7. Ineligible Expenditures

7.1 Ineligible Expenditures Generally. If the Bank deter-mines that any amount of the loan was used to pay for anexpenditure that is not eligible pursuant to the Loan Agree-ment ("ineligible expenditure"), the Bank may, at its dis-cretion, require the borrower to take one of the two actionslisted below. Upon notification by the Bank, the borrowermust promptly take the action requested:

(a) Refund an equivalent amount to the Bank; or

(b) Exceptionally, provide substitute documentation evi-dencing other eligible expenditures.

7.2 Ineligible Expenditures Paid from the DesignatedAccount. If the Bank determines that any payment out ofthe Designated Account was not justified by the evidencefurnished to the Bank or was made for an ineligible expen-diture, the Bank may, at its discretion, require the borrowerto take one of the actions listed below. Upon notificationby the Bank, the borrower must promptly take the actionrequested:

(a) Provide the additional evidence requested by the Bank;

(b) Deposit an equivalent amount into the Designated Ac-count;

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N 0 1"% Dw'iARImmFoxi ,MAY 1, 00

(c) Refund an equivalent amount to the Bank; or

(d) Exceptionally, provide substitute documentation evi-dencing other eligible expenditures.

8. Refunds

8.1 Borrower Decision to Refund. The borrower may, uponnotice to the Bank, refund all or any amount of the loan ondeposit in the Designated Account to the Bank for credit tothe Loan Account.

8.2 Consequence of Refunds. The Bank shall determinewhether refunds made to the Bank in accordance with sec-tions 6 and 7 and subsection 8.1 of these DisbursementGuidelines will be credited to the Loan Account for subse-quent withdrawal or for cancellation. Borrowers should beaware that refunds of loan proceeds may result in swap ter-mination fees and/or unwinding costs for amounts for whichthe interest rate basis or currency has been converted orhedged.

8.3 Other Obligations Unaffected by Refunds. Refunds ofamounts of the loan do not affect any remedies of the Bankunder the Loan Agreement.

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Attachment 5

Statement of Expenditures (SOE)

Payments made during the period from to Date:Application No.:

For expenditures against contracts that are not subject to the Bank's Loan No.::Prior Review

SOE No.:

1 2 3 4 5 6 7 8 9

Item Category Currency and Currency and Eligible % Amount Currency and Exchange RemarksNo. No. (*) Total Amount Total Amount from Loan Eligible Amount Paid Rate (Col. 7

of Contract of Invoice Agreement for from divided byCovered by Financing Designated Col. 6)Application (4 x 5) Account (if

(Net of Applicable)Retention)

TOTALS

Supporting documents for this SOE retained at

(insertlocation)

(*) Items should be grouped by category; or alternatively, a separate SOE form may be usedfor each category.

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Attachment 6

Payments Made during Reporting PeriodAgainst Contracts Subject to the Bank's Prior Review

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FOR OFFICIAL USE ONLY

Prepared by: Victor Ordonez, CTRLN

Cleared with and cc: Fabiola Altimari, LEGLECharles Delfieux, LCSWS

With copy to: Dmitri Gourfinkel, LCSFM

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