O0FICIAL LOAN NUMBER 1867 BRDOCUMENTS

Loan Agreement(Northeast Basic Education Project)

between

FEDERATIVE REPUBLIC OF BRAZIL

and

INTERNATIONAL BANK FOR RECONSTRUCTIONAND DEVELOPMENT

Dated ,1980

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LOAN NUMBER 1867 BR

LOA AGREEMENT

AGREEMENT, dated , 1980, betweenFEDERATIVE REPUBLIC OF BRAZIL ( ereinafter called the Borrower)and INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (herein-after called the Bank).

WHEREAS (A) the Borrower has requested the Bank to assistin the financing of the Project described in Schedule 2 to thisAgreement by making the Loan as hereinafter provided;

(B) the Project will be carried out by the Borrower andnine States and certain Municipalities of the Borrower (herein-after collectively called the Executing Entities) with the Bor-rower's assistance and, as part of such assistance, the Borrowerwill make available to such States and Municipalities part ofthe proceeds of the Loan as hereinafter provided;

WHEREAS the Ministry of Education and Culture of the Borrowerhas given priority, within the 1980-85 sectoral development planfor education, culture and sports, to the aevelopment of educationin rural areas, and has created, for the purpose of meeting thisobjective, a program of socio-educational and cultural activitiesfor rural areas, which includes, among its sub-components, thesupplementing of salaries of municipal teachers in the Northeastregion, up to the regional minimum salary;

WHEREAS the Bank has agreed, on the basis inter alia ofthe foregoing, to make the Loan to the Borrower upon the termsand conditions hereinafter set forth;

NOW THEREFORE the parties hereto hereby agree as follows:

ARTICLE 1

General Conditions; Definitions

Section 1.01. The parties to this Agreement accept allthe provisions of the General Conditions Applicable to Loanand Guarantee Agreements of the Bank, dated March 15, 1974,with the same force and effect as if they were fully set forthherein (said General Conditions Applicable to Loan and GuaranteeAgreements of the Bank being hereinafter called the GeneralConditions).

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Section 1.02. Wherever used in this Agreement, 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) "MEC" means Ministerio da Educagio e Cultura, the Bor-

rower's Ministry of Education and Culture;

(b) "CEBRACE" means "Centro Brasileiro de Construg,es e

Equipamentos Escolares" an autonomous entity of MEC, established

by Decreto No. 72532 of the Borrower, dated of July 26, 1973;

(c) "CRHJP" means "Centro de Recursos Humanos Jogo Pinheiro",

a center within MEC for the upgrading of humav resources;

(d) "CNAE" means "Campanha Nacional de Alimentaggo Escolar",

a program under the authority of MEC, established by Decreto No.

37106 of the Borrower, dated March 31, 1955;

(e) "FENAME" means "Fundaco Nacional de Material Escolar",

a foundation under the authority of MEC, established by Law No.

5327 of the Borrower, dated October 2, 1967;

(f) "FNDE" means "Fundo Nacional de Desenvolvimento da

Educago", an autarquia of the Borrower established by Law No.

5537, dated November 21, 1968;

(g) "SG/MEC" means "Secretaria Geral do MEC", the coordina-

ting and planning secretariat of MEC;

(h) "SEC" means the State education authority;

(i) "Project Agreement" means any of the agreements to be

signed for the purposes of the Project between the Borrower and

each one of the following States: Alagoas, Bahia, Ceara, Maranhgo,

Parafba, Pernambuco, Piaui, Rio Grande de Norte and Sergipe;

(j) "Sub-project Agreement" means any of the agreements

to be signed for the purposes of the Project between each State

and each one of the Municipalities participating in the Project

located in the territory of such State;

(k) "State" means any State of the Borrower which is a

party to a Project Agreement;

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(1) "Municipality" means any Municipality which is a partyto a Sub-project Agreement;

(m) "PMU" means Project Management Unit, a unit to be estab-lished within the Secretaria de Ensino de Primeiro e Segundo Grausof MEC to coordinate, supervise and monitor the execution of theProject;

(n) "SPMU" means State Project Management Unit, a unit tobe established within the SEC of each one of the States;

(o) "OME" means "Org5o Municipal de EducagKo", the municipalcoordinating unit established or to be established in any Munici-pality for purposes of the Project;

(p) "SEPS" means "Secretaria de i&nsino de Primeiro e SegundoGraus", a secretariat of MEC;

(q) "Cr$" means "Cruzeiro", the currency unit of theBorrower;

(r) "MEC's technical agencies" means CNAE, FENAME, CEBRACEand CRHJP;

(s) "EMATER" means "Empresa de Assistencia Tecnica eExtensgo Rural", the enterprise of any State responsible forrural technical assistance;

(t) "Regional Minimum Wage" means the salario minimoin a region of Brazil, as determined by a Decreto of the Borrower;and

(u) "Project Coordinating Group" means the group to beestablished in accordance with Section 3.06 (ii) of this Agreement.

ARTICLE II

The Loan

Section 2.01. The Bank agrees to lend to the Borrower,on the terms and conditions in the Loan Agreement set forthor referred to, an amount in various currencies equivalent tothirty-two million dollars ($32,000,000).

Section 2.02. The amount of the Loan may be withdrawn fromthe Loan Account in accordance with the provisions of Schedule 1

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to this Agreement, as such Schedule may be amended from time totime by agreement between the Borrower and the Bank, for expendi-tures made (or, if the Bank shall so agree, to be made) inrespect of the reasonable cost of goods and services required forthe Project and to be financed out of the proceeds of the Loan.

Section 2.03. Except as the Bank shall otherwise agree,procurement of the goods and civil works required for the Projectand to be financed out of the proceeds of the Loan shall begoverned by the provisions of Schedule 4 to this Agreement.

Section 2.04. The Closing Date shall be September 1, 1985or such later date as the Bank shall establish. The Bank shallpromptly notify the Borrower of such later date.

Section 2.05. The Borrower shall pay to the Bank a commitmentcharge at the rate of three-fourths of one per cent (3/4 of1%) per annum on the principal amount of the Loan not withdrawnfrom time to time.

Section 2.06. The Borrower shall pay interest at the rate ofeight and one quarter per cent (8.25%) per annum on the principalamount of the Loan withdrawn and outstanding from time to time.

Section 2.07. Interest and other charges shall be payablesemiannually on May 1 and November 1 in each year.

Section 2.08. The Borrower shall repay the principal amountof the Loan in accordance with the amortization schedule setforth in Schedule 3 to this Agreement.

ARTICLE III

Execution of the Project

Section 3.01. The Borrower shall carry out the Project, orcause the Project to be carried out by the Executing Entities,with due diligence and efficiency and in accordance with appro-priate administrative, financial and educational practices, andshall provide the funds, facilities, services and other resourcesrequired for the purpose.

Section 3.02. The Borrower shall:

(I) (i) cause CEBRACE to assist:

(A) the Municipalities and States in thecarrying out of Part 1 of the Project;and

(B) the States in carrying out Part 6 (vi) ofthe Project, all in accordance withSchedule 5 to this Agreement;

(ii) cause FENAME to assist the States in thecarrying out of Part 2 (iii) and (iv) of theProject;

(iii) acting by SEPS, carry out Part 2 (vi) and(vii) of the Project;

(iv) (A) acting by CRHJP, review and, if satisfac-tory, approve the duration, content,staffing and costs of the courses to berendered under Part 3 of the Project;

(B) monitor and supervise the execution ofPart 3 of the P zject; and

(C) unless the Bank shall otherwise agree,ensure the execution of the previouslyapproved plans on the duration, contentand costs of such courses;

(v) acting by CNAE, (A) carry out Part 4 (i) ofthe Project, in cooperation with Piaui'sSEC, and (B) assist SEC of Pernambuco in thecarrying out of Part 4 (ii) of the Project;

(vi) acting by SEPS, assist the States in thecarrying out of Part 5 of the Project;

(vii) acting by SEPS and MEC's technical agencies,assist each SPMU in the carrying out of Parts1 (iii), (iv), (v), 2, 3, 4 (ii) and 6 (vi) ofthe Project; and

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(viii) acting by SEPS, carry out Part 6 (i) of theProject.

(II) (i) in order to assist the Borrower in carryingout Part 6 (i) of the Project, contract one ormore independent entity or consultant exper-ienced in educational program evaluation whosequalifications and terms and conditions ofemployment shall be satisfactory to theBorrower and the Bank;

(ii) furnish to the Bank for comment, no laterthan one year before the expected completionof the Project, an interim report of the studyunder Part 6 (i) of the Project and, on thecompletion of the Project, a final report ofsuch study;

(III) afford the Bank a reasonable opportunityto make comments on the studies included inPart 6 of the Project.

Section 3.03. (a) The Borrower shall enter into a ProjectAgreement with each State, on terms and conditions which shallinclude those set forth in Schedule 5 to this Agreement and,except as the Bank shall othevwise agree, the Borrower shall notamend or fail to enforce any provision of such Schedule 5.

(b) In the event that a Sub-project Agreement is not signedbetween a State and a Municipality designated in the respectiveState's Project Agreement with the Borrower, the State may proposeto PMU the substitution in the Project of any such Municipality byanother one. The Borrower shall ensure that the substitute Muni-cipality is selected in accordance with the provisions set forthin Schedule 6 to this Agreement.

(c) The Borrower covenants that it will not take or permitany of its agencies to take any action which would prevent orinterfere with the performance by the Executing Entities of any ofthe respective covenarts, agreements and obligations of theExecuting Entities in the Project Agreements and the Sub-ProjectAgreements contained, and will take or cause to be taken allaction which shall be necessary to enable the Executing Entitiesto perform such covenants, agreements and obligations.

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Section 3.04. (a) The Borrower shall furnish to the Bank,promptly upon their preparation, the plans, specifications,reports, contract documents and construction and procurementschedules for the Project, and any material modifications thereofor additions thereto, in such detail as the Bank shall reasonablyrequest.

(b) The Borrower shall: (i) maintain records and proceduresadequate to record and monitor the progress of the Project (in-cluding its cost and the benefits to be derived from it), toidentify the goods and services financed out of the proceeds ofthe Loan, and to disclose their use in the Project; and (ii)furnish to the Bank at regular intervals all such information asthe Bank shall reasonably request concerning the Project, its costand, where appropriate, the benefits to be derived from it, theexpenditure of the proceeds of the Loan and the goods and servicesfinanced out of such proceeds.

(c) Promptly after completion of the Project, but in anyr event not later than six months after the Closing Date or such

later date as may be agreed for this purpose between the Borrowerand the Bank, the Borrower shall prepare and furnish to the Bank areport, of such scope and in such detail as the Bank shall reason-ably request, on the execution and initial operation of theProject, its cost and the benefits derived and to be derived fromit, the performance by the Borrower and the Bank of their respec-tive obligations under the Loan Agreement and the accomplishmentof the purposes of the Loan.

(d) The Borrower shall furnish to the Bank, for review,by December 31 in each calendar year, project execution schedulesfor the next calendar year after they have been updated by theSPMUs and after they have been approved by IU and by the ProjectCoordinating Group.

Section 3.05. The Borrower shall:

(a) for purposes of the Project, establish and thereaftermaintain a Project Management Unit (PMU) within SEPS to coordi-nate, supervise and monitor the execution of the Project;

(b) provide PMU with such staff, funds, facilities, servicesand other resources as required for purposes of the Project;and

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(c) cause CEBRACE, FENAME, CRHJP and CNAE to assist PMU indealing with matters related to their respective competences.

Section 3.06. The Borrower shall: (i) establish and maintainan Interministerial Administrative Committee to review the annualoperating plan of the Project, evaluate Project execution andcoordinate the management of all financial matters related to theProject. Such Interministerial Administrative Committee shall haverepresentatives of the Ministry of Finance, SG/MEC, SEPS, Secre-tariat of Planning of the Presidency of the Republic and Secre-tariat of Internal Control of MEC; and (ii) establish and maintaina Project Coordinating Group to assist PMU in the execution of theProject. Such Project Coordinating Group shall have a representa-tive of CEBRACE, FENAME, CRHJP and shall be headed by SEPS.

Section 3.07. (a) The Borrower shall cause adequate provisionto be made for the insurance of the imported goods to be financedout of the proceeds of the Loan against hazards incident to theacquisition, transportation and delivery thereof to the place ofuse or installation, and for such insurance any indemnity shall bepayable in a currency freely usable by the Borrower to replace or

repair such goods.

(b) Except as the Bank shall otherwise agree, all goodsand services financed out of the proceeds of the Loan shallbe used exclusively for the Project.

ARTICLE IV

Other Covenants

Section 4.01. (a) It is the policy of the Bank, in makingloans to, or with the guarantee of, its members not to seek,in normal circumstances, special security from the member con-cerned but to ensure that no other external debt shall havepriority over its loans in the allocation, realization or distri-bution of foreign exchange held under the control or for thebenefit of such member. To that end, if any lien shall be createdon any public assets (as hereinafter defined), as security forany external debt, which will or might result in a priority forthe benefit of the creditor of such external debt in the alloca-tion, realization or distribution of foreign exchange, such lienshall, unless the Bank shall otherwise agree, ipso facto and at nocost to the Bank, equally and ratably secure the principal of,and interest and other charges on, the Loan, and the Borrower,

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in creating or permitting the creation of such lien, shall makeexpress provision to that effect; provided, however, that, if forany constitutional or other legal reason such provision cannotbe made with respect to any lien created on assets of any ofits political or administrative subdivisions, the Borrower shallpromptly and at no cost to the Bank secure the principal of,and interest and other charges on, the Loan by an equivalentlien on other public assets satisfactory to the Bank.

(b) The foregoing undertaking shall not apply to: (i)any lien created on property, at the time of purchase thereof,solely as security for payment of the purchase price of suchproperty; and (ii) any lien arising in the ordinary course ofbanking transactions and securing a debt maturing not more thanone year after its date.

(c) As used in this Section, the term "public assets"means assets of the Borrower, of any political or administrativesubdivision thereof and of any entity owned or controlled by,or operating for the account or benefit of, the Borrower or anysuch subdivision, including gold and foreign exchange assets heldby any institution performing the functions of a central bank orexchange stabilization fund, or similar functions, for theBorrower.

Section 4.02. The Borrower shall:

(a) maintain or cause to be maintained separate accountsadequate to reflect in accordance with consistently maintainedappropriate accounting practices its operations, resources andexpenditures in respect of the Project, including separateaccounts reflecting all expenditures on account of which with-drawals are requested from the Loan Account on the basis ofcertificates of expenditures;

(b) retain, until one year after the Closing Date, allrecords (orders, invoices, bills, receipts and other documents)evidencing the expenditures on account of which withdrawalsare requested from the Loan Account on the basis of certificatesof expenditures and shall enable the Bank's accredited representa-tives to examine such records.

Section 4.03. The Borrower shall: (i) have the accountsreferred to in Section 4.02 of this Agreement for each fiscal yearaudited, in accordance with appropriate auditing principles

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consistently applied, by independent auditors acceptable to theBank; (ii) furnish to the Bank as soon as available, but in anycase not later than four months after the end of each such year,(A) certified copies of such accounts for such year as so auditedand (B) the report of such audit by said auditors, of such scopeand in such detail as the Bank shall have reasonably requested,including, without limitation to the foregoing, a separate opinionby said auditors in respect of the expenditures referred to inSection 4.02 (b) of this Agreement as to whether the proceeds ofthe Loan withdrawn from the Loan Account on the basis of certifi-cates of expenditure have been used to make payments for goodsreceived, or works or services performed, and that such goods,works and services were eligible for financing under this Agree-ment and were used in the carrying out of the Project; and (iii)furnish to the Bank such other information concerning suchaccounts and the audit thereof as the Bank shall from time to timereasonably request.

Section 4.04. The Borrower shall take out and maintain withresponsible insurers, or make other provision satisfactory tothe Bank for, insurance against such risks and in such amounts asshall be consistent with appropriate practice.

ARTICLE V

Remedies of the Bank

Section 5.01. For the purposes of Section 6.02 of the GeneralConditions, the following additional events are specified pursuantto paragraph (k) thereof:

(a) any Executing Entity shall have failed to performany of its covenants, agreements or obligations set forth in itsProject Agreement or Sub-Project Agreement;

(b) a change shall have been made in the Borrower's DecretosNo. 72532, dated of July 26, 1973 and 37106, dated of March 31,1955 or in Laws 5327, dated of October 2, 1967 and 5537, dated ofNovember 21, 1968, which would materially and adversely affect theability of the Borrower to carry out any of its covenants, agree-ments and obligations set forth in any one of the Project Agree-ments;

(c) a change shall have been made in any legislation appli-cable to any State or Municipality which would materially and

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adversely affect the ability of such State or Municipality tocarry out any of its covenants, agreements and obligations setforth in its respective Project Agreement or Sub-Project Agree-ment;

(d) the Borrower or any authority having jurisdictionshall have taken any action for the dissolution or disestablish-ment of CEBRACE, CRHJP, CNAE, FENAME or FNDE or for the suspensionof any of their operations with respect to the Project; and

(e) the head of the Municipal Government of a Municipalityshall have failed to present, within three years from the date ofthe Loan Agreement, a bill to the legislative body (CamaraMunicipal) of the Municipality for the purpose of establishinga teachers' charter (Estatuto do Magist6rio) to define teachers'rights and duties, privileges and obligations, in such Munici-pality;

provided, however, that the suspension of the right to makewithdrawals from the Loan Account shall be limited to the undis-bursed portion. of the Loan which has been allocated to the Partof the Project affected by any of the above-mentioned events.

Section 5.02. For the purposes of Section 7.01 of the GeneralConditions, the following additional events are specified pursuantto paragraph (h) thereof:

(a) any event specified in paragraphs (a) of Section 5.01 ofthis Agreement shall occur and shall continue for a period of 60days after notice thereof shall have been given by the Bank to theBorrower; and

(b) any event specified in paragraphs (b), (c), (d) and (e)of Section 5.01 of this Agreement shall occur.

ARTICLE VI

Effective Date; Termination

Section 6.01. The following events are specified as addi-tional conditions to the effectiveness of the Loan Agreementwithin the meaning of Section 12.01 (c) of the General Conditions:

(a) the Loan Agreement has been duly registered by BancoCentral do Brasil;

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(b) the Bank has received evidence satisfactory to it thatPMU has been established within SEPS;

(c) one Project Agreement has been duly executed betweenthe Borrower and one State; and

(d) one or more independent entity or consultant has beenhired for the purpose of carrying out the baseline survey and theevaluation studies referred to in Section 3.02 (I) (viii) of thisAgreement and in Part 6 (i) of the Project.

Section 6.02. The following are specified as additionalmatters, within the meaning of Section 12.02 (c) of the GeneralConditions, to be included in the opinion or opinions to befurnished to the Bank:

(a) that the Loan Agreement has been duly registered byBanco Central do Brasil;

(b) that the Project Agreement referred to in Section6.01 (c) of this Agreement has been duly authorized or ratified byeach of the parties thereto and is legally binding upon each suchparty in accordance with its terms; and

(c) that all necessary acts, consents and approvals tobe performed or given by the Borrower, its political subdivisionsor agencies, any agency of any such political subdivision orotherwise to be performed or given in order to authorize thecarrying out of the Project and to enable the Borrower to performall of their respective obligations in this Agreement containedtogether with all necessary powers and rights in connectiontherewith, have been duly and validly performed or given and thatno other such acts, consents or approvals are required in order toauthorize the carrying out of the Project and to enable theBorrower to perform all of their respective obligations in thisAgreement contained.

Section 6.03. The date IMLI) /6 / , is herebyspecified for the purposes of Section 12.04 of the GeneralConditions

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ARTICLE VII

Representative of the Borrower; Addresses

Section 7.01. The Ministro da Fazenda of the Borroweris designated as representative of the Borrower for the purposesof Section 11.03 of the General Conditions.

Section 7.02. The following addresses are specified forthe purposes of Section 11.01 of the General Conditions:

For the Borrower:

Ministerio da FazendaEsplanada dos Ministerios70048-Brasilia, D.F.Brazil

Cable address: Telex:

MINIFAZBrasilia, Brazil 611506 PGFN BR

With copies to: Telex:

Ministerio da Educaqo e Cultura 611068Esplanada dos Ministerios70047-Brasilia, D.F.Brazil

Secretaria de Planejamento da 611146Presidencia da Republica 611023

SUBINEsplanada dos Ministerios70063-Brasilia, D.F.Brazil

For the Bank:

International Bank forReconstruction and Development

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

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Cable address: Telex:

INTBAFRAD 440098 (ITT)Washington, D.C. 248423 (RCA) or

64145 (WUI)

IN WITNESS WHEREOF, the parties hereto, acting throughtheir representatives thereunto duly authorized, have causedthis Agreement to be signed in their respective names in theDistrict of Columbia, United States of America, as of the day andyear first above written.

FEDERATIVE REPUBLIC OF BRAZIL

ByAuthorized Representative

INTERNATIONAL BANK FORRECONSTRUCTION AND DEVELOPMENT

By

Be- '~Regional Vice PresidentLatin America and the Caribbean

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SCHEDULE 1

Withdrawal of the Proceeds of the Loan

1. The table below sets forth the Categories of items to befinanced out of the proceeds of the Loan, the allocation of theamounts of the Loan to each Category and the percentage ofexpenditures for items so to be financed in each Category:

Amount of theLoan Allocated % of(Expressed in Expenditures

Category Dollar Equivalent) to be Financed

(1) Civil works 10,100,000 35%(including pro-fessional fees)

(2) Equipment and 2,900,000 35%furniture

(3) Training 6,100,000 35%

(4) Goods and ser- 5,200,000 35%vices forCurriculumDevelopmentand Teachingand LearningMaterials

(5) Goods and ser- 1,000,000 35%vices for theestablishment, operationalcosts and strengtheningof OMEs

(6) Technical assis- 700,000 35%tance for schoolmapping, evaluationand studies, con-sultants servicesand school meals

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Amount of theLoan Allocated % of(Expressed in Expenditures

Category Dollar Equivalent) to be Financed

(7) Administrative 3,500,000 35%costs

(8) Unallocated 2,500,000

TOTAL 32,000,000

2. The disbursement percentages have been calculated in compli-ance with the policy of the Bank that no proceeds of the Loanshall be disbursed on account of payments for taxes levied by, orin the territory of, the Borrower on goods or services, or on theimportation, manufacture, procurement or supply thereof; to thatend, if the amount of any such taxes levied on or in respect ofany item to be financed out of the proceeds of the Loan decreasesor increases, the Bank may, by notice to the Borrower, increase ordecrease the disbursement percentage then applicable to such itemas required to be consistent with the aforementioned policy of theBank.

3. Notwithstanding the provisions of paragraph 1 above, nowithdrawals shall be made in respect of payments made for expen-ditures: (i) prior to the date of this Agreement, except thatwithdrawals, in an aggregate amount not exceeding the equivalentof $1,500,000 may be made in respect of Categories (1), (3), (4),(5) and (6) on account of payments made for such expendituresbefore that date but after March 1, 1980; (ii) in respect ofCategories (1), (2), (3), (4), (5) and (8), for any State, untilthe Bank has been furnished with evidence satisfactory to the Bankthat the respective Project Agreement has been executed with MECand is legally binding on the parties thereto, and that itsrespective SPMU has been established and staffed accordingly;(iii) in respect of Categories (1), (2), (3), (4), (5) and(8), for each Municipality, until the Bank has been furnished withsatisfactory evidence that the respective Sub-project Agreementhas been duly executed and is legally binding on the partiesthereto; (iv) in respect of Categories (1) and (2), for each

Municipality, until the Bank has been furnished with satisfactory

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evidence that the respective OME has been established and staffedadequately and that the school mapping referred to in Part 6 (vi)of the Project, regarding such Municipality, has been accomplishedto the satisfaction of the Bank; and (v) in respect of Category(7), for each Pernambuco and Piaul until the Bank has beenfurnished with satisfactory evidence that its respective ProjectAgreement has been signed with MEC and that its respective SPMUhas been established and staffed adequately.

4. Notwithstanding the allocation of an amount of the Loanor the disbursement percentages set forth in the table in para-graph 1 above, if the Bank has reasonably estimated that theamount of the Loan then allocated to any Category will be insuffi-cient to finance the agreed percentage of all expendituresin that Category, the Bank may, by notice to the Borrower: (i)reallocate to such Category, to the extent required to meet theestimated shortfall, proceeds of the Loan which are then allocatedto another Category and which in the opinion of the Bank arenot needed to meet other expenditures; and (ii) if such realloca-tion cannot fully meet the estimated shortfall, reduce thedisbursement percentage then applicable to such expenditures inorder that further withdrawals under such Category may continueuntil all expenditures thereunder shall have been made.

5. If the Bank shall have reasonably determined that theprocurement of any item in any Category is inconsistent withthe procedures set forth or referred to in this Agreement, noexpenditures for such item shall be financed out of the proceedsof the Loan and the Bank may, without in any way restrictingor limiting any other right, power or remedy of the Bank underthe Loan Agreement, by notice to the Borrower, cancel such amountof the Loan as, in the Bank's reasonable opinion, representsthe amount of such expenditures which would otherwise have beeneligible for financing out of the proceeds of the Loan.

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SCHEDULE 2

Description of the Project

The purpose of the Project is to improve basic educationin selected rural areas of the States. It will enlarge educationalopportunities and improve the present low internal efficiency ofthe educational systems. The Project consists of the followingParts:

Part 1: School Construction, Furnishing and Equipping

(i) Ccnstruction, furnishing and equipping of about 1,691new classrooms for about 62,000 student places;

(ii) Remodeling, furnishing and equipping of existing class-rooms with a capacity for about 16,000 student places.

Each new or remodeled school will have 2 classrooms, anoffice for the teacher, a small canteen, a multipurpose area andsanitary facilities.

(iii) State of Cear&: construction of about 26 Rural Educa-tion Centers, each to assist at least 4 surroundingsatellite schools.

Each Rural Education Center to have 2 classrooms, an officefor the coordinator, a deposit for textbooks and teaching andlearning materials, a multipurpose area, a canteen and kitchenarea and sanitary facilities.

(iv) State of Pernambuco: construction, furnishing andequipping of 7 basic schools (grades 1st to 8th or 5thto 8th, or both), linked to already existing RuralEducation Centers (CERu) in 7 different Municipalities.

Each such intermediate school to have 4 classrooms, 1 practi-cal arts room, a library, multipurpose area, administration area,canteen and kitchen area and sanitary facilities.

(v) State of Alagoas: construction, furnishing and equippingof 3 Rural Education Nuclei (NURE) in 3 differentMunicipalities. Each NURE to have 4 classrooms, apractical arts room, a library, multipurpose area,school meal delivery point, admini,tration area and a

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teacher training wing with class and conference room andbavic residential facilities for 40 teachers-in-train-ing.

(vi) State of Rio Grande do Norte: construction, furnishingand equipping of 3 Community Education Centers in three differentMunicipalities. Each Center to have 4 classrooms, practical artsroom, a library, canteen and kitchen area, administration area andsanitary facilities.

The number of classrooms to be built or remodelled in eachState shall be as specified in the exhibit to this Schedule.

Part 2: Curriculum Development and Teaching and LearningMaterial

Assistance to the States in designing basic education curri-culum and syllabi for grades 1st to 8th. Such assistance willinclude:

(i) curriculum design, development and preparation ofsyllabi;

(ii) preparation of textbooks and related teachers' guides;

(iii) printing or acquisition, or both, of about 4,800,000textbooks and teachers' guides;

(iv) acquisition of about 2,000,000 packages of teaching andlearning materials for basic education students andteachers;

(v) supervision services to strengthen the central andsub-regional supervisory network of the States ofAlagoas, Bahia and Para'ba;

(vi) monitoring of the programming and execution of newcurricula in each State; and

(vii) preparation of an annual education audit report onstudent flows and achievements in schools under theProject.

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Part 3: Training of about 23,000 Teachers and of about 2,000

Supervisors and Administrators

(i) Courses to upgrade unqualified basic education

teachers.

(ii) Refresher courses for qualified basic education

teachers.

(iii) Upgrading and in-service training for school

supervisors and administrators.

The distribution by State of the educational personnel to be

trained under this Part of the Project shall be as set forth in

the Exhibit to this Schedule.

Part 4: School Meal Program

(i) In the State of Piaui:

A. construction and equipping of 9 sub-regional

warehouses;

B. acquisition and utilization of 6 vehicles for

transportation from the warehouses to the schools

under the Project;

C. furnishing and equipping of kitchens and canteens

in about 360 schools; and

D. provision of meals to pupils in schools under the

Project.

(ii) In the State of Pernambuco:

A. A 4-year pilot program to purchase the food,

necessary to prepare school meals, from farmers

located near rural school through a central agri-

cultural cooperative;

B. distribution of such meals to about 50% of the

rural schools in Municipalities partially covered

by the National School Meal Program of the Bor-

rower.

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Part 5: Strengthening of MunicipalEducation Administration

(i) training of an average of 3 staff members of eachOME;

(ii) equipping of each OME;

(iii) construction, furnishing and equipping of officespaces for the OMEs in each of the 13 Municipali-ties of the State of Alagoas; and

(iv) provison of fellowships to OME's staff members.

Part 6: Evaluation and Studies

(i) Evaluation of the Project impact and results on arepresentative sample of Municipalities of theStates of Pernambuco and Piaul by carryingout a study:

(A) to identify the educational achievements amongthe student population of schools under theProject;

(B) to check the availability and use of materialsand facilitics provided for under Parts 1 and2 of the Project;

(C) to identify improvements in the progressionrate of school students under the Project;and

(D) to assess the effect of the institutionbuilding element of the Project at municipallevel.

(ii) Study to evaluate the basic education curriculumin the States of Ceara and Pernambuco.

(iii) Study on the effectiveness of the in-service andupgrading teacher training programs to be carriedout under the Project in the State of Pernambuco.

- 22 -

(iv) Study to be carried out in the State of Pernambuco,on the use and effectiveness of the teaching andlearning materials provided under the Project, as abasis for *the preparation of low cost materialswith the participation of the community and localteachers.

(v) Study on the impact of over-age students on learn-ing effectiveness as a basis to define the feasi-bility of establishing separate accelerated primarycourses for such students in the State of Alagoas.

(vi) Study to compare and analyze the effectivenessof the alternative food purchase arrangementsin the State of Pernambuco under Part 4 (1i) Aof the Project.

(vii) School mapping studies to be carried out in theMunicipalities of the States of Alagoas, Cear,Maranhgo, Parafba, Pernambuco, Piaul, Rio Grandedo Norte and Sergipe.

The Project is expected to be completed by March 1, 1984.

- 23 -

Exhibit to Schedule 2

Distribution by State of Municipalities, Classroomsand Training of Personnel

(Approximate Numbers)Training of

Munici- Classrooms EducationalState palities New Remodelled Personnel

Alagoas 13 154 76 538

Bahia 36 200 -0- 3581

Cearg 53 238 154 6042

MaranhAo 22 300 -0- 1939

Paraiba 31 247 -0- 1437

Pernambuco 29 75 66 2295

Piaul 35 119 -0- 3550

Rio Grande do Norte 14 150 128 2808

Sergipe 15 126 -0- 1540

- 24 -

SCHEDULE 3

Amortization Schedule

Payment of PrincipalDate Payment Due (expressed in dollars)*

On each May 1 and November 1

beginning November 1, 1983through November 1, 1994 1,335,000

On May 1, 1995 1,295,000

* To the extent that any portion of the Loan is repayable in acurrency other than dollars (see General Conditions, Section4.02), the figures in this column represent dollar equiva-lents determined as for purposes of withdrawal.

-25-

Premiums on Prepayment

The following percentages are specified as the premiumspayable on repayment in advance of maturity of any portion ofthe principal amount of the Loan pursuant to Section 3.05 (b)of the General Conditions:

Time of Prepayment Premium

Not more than three years 1.65%before maturity

More than three years but not 3.30%more than six years beforematurity

More than six years but not 6.00%more than eleven yearsbefore maturity

More than eleven years but not 7.15%more than thirteen yearsbefore maturity

More than thirteen years 8.25%before maturity

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SCHEDULE 4

Procurement

A. Competitive Bidding

Except as provided in Part B hereof, goods and civil worksshall be procured under contracts awarded in accordance with theBorrower's procedures in force on the date of the Loan Agreement,which include competitive bidding locally advertised.

B. Exceptions to Competitive Bidding

(a) With the prior agreement of the Bank, certain parts ofthe civil works under the Project may be carried out by use offorce account; provided, however, that the amount of the works socarried out shall not, in the aggregate, exceed the equivalent of$3,000,000.

(b) Contracts for equipment and furniture that cannot begrouped in economical packages shall be awarded through normaltrade channels on the basis of the usual procurement procedures ofthe purchasers of such equipment and furniture; provided, however,that the price of the contracts so procured shall not, in theaggregate, exceed the equivalent of $500,000.

(c) Contracts for textbooks and teaching and learningmaterials that cannot be grouped in economical packages shall beawarded through normal trade channels on the basis of the usualprocurement procedures of the purchases of such textbooks andteaching and learning materials; provided, however, that the priceof the contracts so procured shall not, in the aggregate, exceedthe equivalent of $500,000.

C. Review of Procurement Decisions by the Bank

1. Review of invitations to bid and of proposed awards andfinal contracts:

With respect to all contracts estimated to cost the equi-valent of $500,000 or more, procured in accordance with Part Ahereof:

(a) Before bids are invited, the concerned Executing Entityshall furnish to PMU, for delivery to the Bank, for its comments,

- 27 -

the text of the invitations to bid and the specifications andother bidding documents, together with a description of theadvertising procedures to be followed for the bidding, and shallmake such modifications in the said documents or procedures as theBank shall reasonably request. Any further modification to thebidding documents shall require the Bank's concurrence before itis issued to the prospective bidders.

(b) The terms and conditions of the contract shall not,without the Bank's concurrence, materially differ from thoseon which bids were asked or prequalification invited.

(c) The Borrower shall furnish to the Bank, promptly afterits execution and prior to the delivery to the Bank of the firstapplication for withdrawal of funds from the Loan Account inrespect of each contract, two conformed copies of such contract,together with the analysis of the respective bids, recommendationsfor award and such other information as the Bank shall reasonablyrequest. The Bank shall, if it determines that the award of thecontract was not consistent with this Schedule, promptly informthe Borrower and state the reasons for such determination.

2. With respect to each contract not governed by the precedingparagraph, the Executing Entities shall furnish to PMU, promptlyafter its execution and prior to the delivery to the Bank of thefirst application for withdrawal of funds from the Loan Account inrespect of such contract, two conformed copies of such contract,and such other information as the Bank reasonably request. Theanalysis of the respective bids, recommendations for award andother information shall be furnished to the Bank. The Bank shall,if it determines that the award of the contract was not consistentwith the Guidelines of this Schedule, promptly inform the Borrowerand state the reasons for such determination.

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SCHEDULE 5

The Project Agreements andthe Sub-project Agreements

(A) Project Agreements

The terms and conditions of each Project Agreement to besigned between the Borrower and each State shall include (but notbe limited to) those set forth below. As an annex to the Agree-ment, there will be (i) a list of the Municipalities within theState included in the Project in accordance with criteria mutuallyagreed by the Borrower and the Bank and (ii) a Municipalitysubstitutability provision as set forth in Schedule 6 to the LoanAgreement.

1. Wherever used in the Agreement, unless the context shallotherwise require, the several terms defined in the Loan Agreement(Northeast Basic Education Project) between Federative Republic ofBrazil and the International Bank for Reconstruction and Develop-ment (the Bank) have the meanings therein set forth.

2. Each State shall execute the parts of the Project for whichit is responsible with due diligence and efficiency, in conformitywith appropriate administrative, educational and financial prac-tices, and the Borrower shall transfer, as a grant, to each Statethe portion of the proceeds of the Loan required for the purpose.The State shall refrain from taking any action which would preventor interfere with the performance by an Executing Entity of any ofits respective covenants, agreements and obligations contained inthe Project Agreement and in the Sub-Project Agreements and willtake or cause to be taken all action which shall be necessary toenable the Executing Entities to perform such covenants, agree-ments and obligations.

3. Each State shall: (i) establish, staff and maintain until thecompletion of the Project, a State Project Management Unit (SPMU)to carry out the State's respective part of the Project. Such SPMUshall be established within each State's respective SEC andassisted and supported, whenever necessary, by technical stafffrom SEPS and MEC's technical agencies, pursuant to Section 3.02(vi) of the Loan Agreement; (ii) update annually, through itsSPMU, Project execution schedules relating to the State andsend such Project execution schedules to PMU and Project Coordi-nating Group for approval and delivery to the Bank, pursuant to

- 29 -

Section 3.04 (d) of the Loan Agreement; and (iii) deliver to PMUthe availablR information necessary for the preparation of PMU'sreports to the Bank referred to in Section 3.04 (a) of the LoanAgreement.

4. Each State shall: (i) by agreement with the Municipalitiesand otherwise, enable the Bank's accredited representatives tovisit the facilities and construction sites included in theProject and to examine the goods financed out of the proceeds ofthe Loan and any relevant redords and documents; (ii) take orcause to be taken all such action as shall be necessary to acquireas and when needed all such land and rights in respect of land asshall be required for the construction and operation of thefacilities included in the Project and shall furnish to PMU fordelivery to the Bank, promptly after such acquisition, evidencesatisfactory to the Bank that such land and rights in respect ofland are available for purposes related to the Project; (iii)cause all goods and services financed out of the proceeds of theLoan to be used exclusively for the Project, except as the Bankshall otherwise agree; and (iv) adequately maintain or cause to bemaintained the buildings, equipment and furniture of the educa-tional institutions included in the Project and make, or cause tobe made, all necessary repairs and renewals thereof, all inaccordance with sound administrative and technical standards.

5. Each State shall employ education consultants whose qualifi-cations, experience and terms and conditions of employment shallbe satisfactory to the Borrower in order to assist the State indesigning new curricula and syllabi in the carrying out of Part 2of the Project and for the evaluation and studies referred to inPart 6 (ii) (iii) (iv) (v) (vi) and (vii) of the Project.

6. Each State shall cause the procurement of the goods andcivil works required for its respective part of the Project to becarried out in accordance with the provisions of Schedule 4 to theLoan Agreement.

7. Each State shall take out and maintain with responsibleinsurers, or shall make other provision satisfactory to the Bankfor, insurance against such risks and in such amounts as shall beconsistent with appropriate practice.

8. Each state shall maintain or cause to be maintained recordsadequate to reflect in accordance with consistently maintained

- 30 -

sound accounting practices the operations, resources and expendi-

tures, in respect of the part of the Project under the respon-

sibility of each such State, of the departments or of the agencies

of such State responsible for carrying out any part of the Pro-

ject.

Execution of Part 1 of the Project

9. Before st,rting construction or remodelling work of basic

education schools and rural education centers, and before author-

i,-ng a Municipality to start such construction or remodelling

work of basic education schools, as the case may be, each State

shall: (i) furnish to PMU, for delivery to the Bank, satisfactory

evidence that suitable sites for the basic education schools or

rural education centers have been legally acquired by the respec-

tive State or Municipality, as the case may be; (ii) furnish to

PMU, for delivery to the Bank, site plans for the proposed basic

education schools or rural education centers, as the case may be,

approved by CEBRACE, as well as the respective justification for

the location of such schools or centers, together with the school

mapping of the Municipality or Municipalities; (iii) submit to

CEBRACE, for approval, a proper inventory of the works to be

executed and an estimate of their cost; and (iv) ensure that all

Project schools shall be used on a double shift basis, offering

720 hours of instruction per shift per academic year.

Execution of Part 2 of the Project

10. Each State shall: (i) ensure that prototypes of all textbooks

and teacher's guides to be printed or procured under Part 2 (iii)

of the Project shall be tested and evaluated at least for one full

academic year before being printed or procured, and, if necessary,

revised in light of such evaluation; (ii) prior to testing and

adopting the new curriculum, and prior to using the new textbooks

and teaching and learning materials, cause the teachers of the

Project schools to undergo appropriate in-service training; and

(iii) after Project completion, assume incremental recurrent

expenditures related to the acquisition and distribution of

textbooks and teaching and learning materials.

Execution of Part 3 of the Project

11. (I) Each State shall: (i) carry out Part 3 of the Project

by providing, through its respective SECs, the facilities, admin-

istrative arrangements, materials, staff, transportation, and

- 31 -

taking all steps necessary to allow the selected school teachers,supervisors and administrators to attend the courses; and (ii)send to CRHJP, for review and approval, pursuant to Section 3.02(iv) (A) of the Loan Agreement, detailed plans for the coursesto be provided under Part 3 of the Project, including theircontents, duration, staff to be allocated and probable costs.

(II) The State of Alagoas shall cause the local EMATER toassist SEC in the carrying out of the skill training components ofthe courses under Part 3 of the Project.

Execution of Part 4 of the Project

12. Not later than October 31, 1980: (i) SEC of the State ofPernambuco shall enter into an agreement, in terms and conditionssatisfactory to the Borrower and the Bank, with the agriculturalcooperative in charge of the furnishing of food for the mealsunder Part 4 (ii) of the Project, providing for the regularfollow-up of such furnishing, the establishing of prices, amountof meals to be furnished, length of the furnishing, all to bedefined through negotiations between SEC and the management of theagricultural cooperative; and (ii) SEC of the State of Piauishall make all necessary arrangements with CNAE, for purposes ofthe Project, to provide for:

(a) training of the school ancillary staff (merendeiras) inthe preparation of the meals;

(b) carrying out of maternal health education and nutritionprograms related to the School Meal Program in the schools underthe Project; and

(c) funding the cost of salaries for additional staffhired to carry out the School Meal Program.

Execution of Part 5 of the Project

13. (I) Each State shall carry out Part 5 of the Project inthe Municipalities located within the State's territory by: (i)organizing training courses for OME's staff members; (ii) purchas-ing the equipment necessary for such OMEs; (iii) assigning SEC'sstaff members to participate in the State's SPMU; (iv) providingfor fellowships for OME's staff members and (v) assisting themanagement and operation of the ONEs.

- 32 -

(II) The State of Alagoas shall make all arrangements neces-sary for the construction, furnishing and equipping of officespaces for the OMEs of the Municipalities located within theState's territory.

Execution of Part 6 of the Project

14. (I) Ceara and Pernambuco:

(a) Ceara's and Pernambuco's SECs shall furnish to PMU, fordelivery to the Bank by December 31, 1980, for comments, thedraft agreement to be signed with a selected education consultantor evaluation agency for the carrying out of the study under Part6 (ii) of the Project.

(b) Pernambuco's SEC shall furnish to PMU, for delivery tothe Bank by December 31, 1980, for comments, the draft agreementto be signed with a selected education consultant or evaluationagency for the studies under Part 6 (iii) and (iv) of the Project.

(II) Alagoas

Alagoas's SEC shall furnish to PMU, for delivery to the Bankby December 31, 1980, for comments, the draft agreement to besigned with a selected education consultant or evaluation agencyfor the studies under Part 6 (v) of the Project.

(III) School Mapping

The States of Alagoas, Ceara, Maranh50, Paralba,Pernambuco, Piaui, Rio Grande do Norte and Sergipe shall carryout Part 6 (vii) of the Project by appointing qualified SEC staffmembers, providing necessary support and making all necessaryarrangements with the concerned Municipalities for the purpose.

(B) Sub-Project Agreements

The terms and conditions of each Sub-project Agreement to besigned between a State and each Municipality located within suchStates's territory shall include (but not be limited to) those setforth below:

1. Each Municipality shall establish and adequately staffits Orgio Municipal de Educa%fo (ONE).

- 33 -

2. Each head of a Municipal Government (Prefeito) of any ofthe Municipalities shall, within 3 years from the dateof the Loan Agreement, present to the respective legis-lative body (Camara Municipal) a bill to establish ateachers' charter (Estatuto do Magisterio) to defineteachers' rights and duties, privileges and obligations.

3. Each Municipality shall deliver to its State's SPMUsatisfactory evidence that suitable sites for basiceducation schools have been legally acquired and shallnot start the construction or remodelling of any suchshools before being previously authorized by the State,pursuant to paragraph (A) 8 hereof.

4. Each Municipality shall: (I) in selecting candidatesfor courses under Part 3 (i) of the Project: (i) grantpriority to those teachers already employed in itsMunicipal schools; (ii) not terminate without due causethe employment in the Municipal schools of the teacherssuccessfully completing such courses, for at least 2years after the end of such courses; (iii) grant pri-ority to teachers successfully completing such coursesfor the benefits and privileges of the teacher'scharter; (iv) in hiring teachers for schools under theProject, require that such teachers (a) have a minimumeducational level corresponding to the fourth grade ofbasic education; (b) be already trained or receivetraining in teaching techniques under Part 3 (ii) of theProject; (c) receive training to effectively carry outthe curriculum to be reformed; and (d) teach a minimumof four periods per day and per shift during the aca-demic year; and (II) in selecting candidates forcourses under Part 3 (iii) of the Project, require (i) aminimum educational level corresponding at least to theend of secondary education, and (ii) substantial teach-ing supervisory experience.

5. Each Municipality shall:

(i) enable the Bank's accredited representatives tovisit the facilities and construction sites included inthe Project and to examine the goods financed out ofthe proceeds of the Loan and any relevant records anddocuments; (ii) take or cause to be taken all suchaction as shall be necessary to acquire as and when

-34-

needed all such land and rights in respect of land asshall be required for the construction and operation ofthe facilities included in the Project and shall furnishto SPMU, promptly after such acquisition, evidence thatsuch land and rights in respect of land are availablefor purposes related to the Project; (iii) cause cllgoods and services financed out of the proceeds of theLoan to be used exclusively for the Project, except asthe Bank shall otherwise agree; and (iv) adequatelymaintain or cause to be maintained the buildings,equipment and furniture of the educational institutionsincluded in the Project and make, or cause to be made,all necessary repairs and renewals thereof, all inaccordance with sound administrative and technicalstandards.

6. Each Municipality shall cause the procurement of thegoods and civil works required for its respective partof the Project to be carried out in accordance with theprovisions of Schedule 4 to the Loan Agreement.

7. Each Municipality shall execute the parts of the Projectfor which it is responsible with due diligence andefficiency, in conformity with appropriate administra-tive, educational and financial practices, and the Statein whose territory the Municipality is located shalltransfer to each Municipality, as a grant, the portionof the proceeds of the Loan required for the purpose.

8. Each Municipality shall maintain or cause to be main-tained records adequate to reflect in accordance withconsistently maintained sound accounting practices theoperations, resources and expenditures, in respect ofthe part of the Project under the responsibility of eachsuch Municipality.

- 35 -

Schedule 6

Substitution of Municipalities

In the event that a Sub-Project Agreement is not signedbetween a State and a Municipality designated in the respectiveState's Project Agreement with the Borrower, the State may proposeto PMU the substitution in the Project of any such Municipality byanother one, chosen in accordance with the following criteriawhich were applied in selecting the original Municipalities:

(a) Municipalities where problems of access to and effi-ciency, and quality of education are acute;

(b) Municipalities with a rural population representing morethan 40% of their total population; and

(c) Municipalities not being assisted in any of the majorProject elements by the integrated rural development projectsbeing carried out by the Borrower.

Upon receipt of such proposals, PMU will review them toassure that the proposed Municipalities do meet the above criteriaand that the number of classrooms to be built or remodelled andeducational personnel to be trained are within the limits for eachState specified in the Exhibit to Schedule 2 to this Agreement andin its respective Project Agreement. PMU will then seek Bankapproval for inclusion of the new Municipalities in the Project.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

CERTIFICATE

I hereby certify that the foregoing is a true

copy of the original in the archives of the Interna-

tional Bank for Reconstruction and Develop-

ment.

In witness whereof I have signed this Certifi-

cate and affixed the Sea! of the Bank thereunto

this day of , 19.

FOR SECRETARY