1. General

Under the agreements for Phase II of the Town Development Program between KfW, on the one side, and HMG / TDF, on the other side, TDF can disburse loan fund for

   · social infrastructure, including environmental improvement projects
   · revenue-generating projects,

as listed in Annex 2, under loan or soft loan conditions or a combination of both. The costs for project preparation and construction supervision related to loan projects are shared between the municipalities and TDF depending upon categorization as defined hereinabove in Paragraphs III.2 and III.3, respectively, and the TDF shares will be financed from grant funds.

2. Matching Funds

For both, loan and soft loan, matching funds will be required equal to 10% of the loan amount, to be borne by the municipalities and/or users' groups, with due support from the Ministry of Local Development (MLD). The matching funds will remain 10% of the loan amount throughout the duration of the program.

3. Interest Rates

The interest rates will be as follows:

The long-term development bond rate will be determined by TDF on January 15 and July 15 every year, corresponding to information obtained from the Nepal Rastra Bank, and remain applicable for all project appraisals during the next 6 months.

The interest rates of all concluded loan agreements will be subject to review and, if necessary, adjustment at least every five years.

4. Maturities and Grace Period

The maturities of the loans / soft loans will be either 12, 16 or 20 years, including a grace period of 2 years, depending on the category of the municipality and the type of the project.

5. Eligibility for Loan Funds

Considering the above conditions, municipalities can obtain loan funds from TDF as follows:

provided always that TDF determines

• a revenue-generating project to be viable on its own merits, while eventually considering the loan to be an annuity loan with a progressive repayment schedule to improve the cash-flow situation in the initial years of its operation; the internal rate of return ( IRR ) shall at least be 3.5% above the applicable interest rate
  
  
• the municipality applying for a soft loan for a social infrastructure project to have adequate net eligibility; the net eligibility is taken as the gross eligibility minus any outstanding social infrastructure loan amount. The gross eligibility is in turn calculated with the following formula:
  
                    gross eligibility =0.75 N(ACAS + N-1/2 * d) E

where

         ACAS = average current account surplus ( CAS ) over the past 3 years

         CAS = own source revenue

                    plus administrative, district development and social program grants
                    minus current, social program and ordinary capital expenditures and debt
                    payments

         N = loan maturity period in years

         d = expected future trend in the CAS taken as the average change over the past 3                 years, plus officially declared increases in government grants

         E = eligibility factor, which takes account of the different interest rates and maturities,                 derived as per the following table:

6. Application for Loan Assistance

The municipalities apply for loan assistance from TDF using the Loan Application Form attached in Annex 5 hereto. Each application shall be supported by

• copies of the related decisions of the Municipal Board and of the Municipal Council; in case the council decision is not yet made, the same can be submitted at a later date, but in any case before the conclusion of the Loan Agreement
  
  
• the detailed design together with the pertaining cost estimate and other information relevant for appraisal and construction; especially, all information relevant to assess the eligibility of the municipality for soft loan or to the project viability in case of loan shall be included
  
  
• evidence of land ownership

In case a detailed design, etc. is not available, the municipalities use the Grant Application Form attached in Annex 3 hereto to apply for technical assistance for design and/or feasibility study.

7. Appraisal and LoanAgreement

Upon receipt of a duly supported application, TDF appraises the concerned project in respect of the following criteria:

   · need for the project
   · technical feasibility
   · environmental and socio-cultural impacts
   · in case of soft loan, cost effectiveness of the project as well as affordability of operation      and maintenance to and adequacy of eligibility of the municipality
   · in case of loan, viability and adequacy of internal rate of return of the project

Appraisal will be in the format of the Loan Appraisal Form attached in Annex 6 hereto. Upon appraisal and loan approval by the TDF Board, TDF notifies the municipality accordingly. The Loan Agreement will be signed by the Mayor on behalf of the municipality and by the Executive Director on behalf of TDF.

8. Disbursement of Loan Funds and (Re-)Payment of Principle and Interest

For disbursement of loan funds, municipalities will first be required to open a separate account in a commercial bank and deposit the matching fund therein. TDF will then disburse the loan funds on a "running bill" basis, i.e. each time the contractor for the construction of the project submits a bill, the municipality applies to TDF for disbursement of the portion of the bill under loan funding. The applications shall be supported by the concerned bill, duly checked, verified and certified, all in accordance with the construction contract documents. The final disbursement will be made only upon availability of the completion report. The municipalities will keep accurate project accounts for amounts received from TDF, on the one side, and amounts paid from the loan fund and the matching fund, on the other side.

During the grace period, municipalities will have to pay interest only. The grace period is counted from the date of signing of the Loan Agreement; repayment of the principle will be due from the date 2 years after the date of signing of the agreement. Interest will be computed daily on an actual days basis on amounts of the principle actually disbursed and not repaid. The (re-)payments of principle and interest to TDF will follow the amortization schedule contained in the loan agreement.

9. Securities, Remedies and Guarantees

The TDF Act 1997 authorizes TDF to incorporate, when concluding a loan agreement with a municipality, terms and conditions in the agreement as TDF deems necessary for the protection of its interests.

Accordingly, TDF may at its discretion take collateral from a municipality against a loan. If any municipality breaches the terms and conditions of the agreement by e.g. deferring repayment of principle or payment of interest or amounts due in advance, then TDF is empowered under Article 11 of the Act to realize its dues either through seizure and use of the collateral property in rent or in lease or by selling the property through auction or tender or direct negotiation. Where any property of a municipality is seized and sold off under this procedure, the amount received by TDF in excess of the dues shall be refunded to the municipality. If, despite repeated efforts, a property cannot be sold off or only be sold off at an offered amount not in the interest of TDF, then TDF may acquire the property itself at a price fixed as per the prevailing HMG/N rules.

A municipality may, notwithstanding of having outstanding debt to TDF, secure a loan from any other source provided that the municipality first obtains written approval from TDF. For the purpose, the municipality shall send a request in writing to TDF duly supported by

   · a guarantee to pay the outstanding debt to TDF
   · a copy of the Municipal Council decision on the loan to be secured from the other source
   · a justification of the investment project for which this loan is sought
   · any other information reasonably asked by TDF

10. Loan Re-Scheduling

TDF may consider re-scheduling of a loan upon written request of a municipality, duly explaining the circumstances which, in the opinion of the municipality, necessitate the re-scheduling. TDF may then, at its discretion, re-appraise the financial situation of the municipality. Upon the re-appraisal, TDF will inform the municipality about its decision..

In case TDF agrees to re-scheduling, TDF will at the same time review and, if necessary, adjust the interest rate under Paragraph IV. 3 hereinabove. The interest rate for the re-scheduled loan will be set at one percentage point above the adjusted interest rate. The maturity of the re-scheduled loan will be detemined by TDF.

11. Cancellation

A loan approved by the TDF Board may be cancelled, if the municipality fails to sign the Loan Agreement within three months of the date of notification of the loan approval, notwithstanding reminders one and two months after the said date.

A loan for which a Loan Agreement has been signed may be cancelled by TDF if

   ·  the project for which the loan is approved is not started within 3 months from the date       of the Loan Agreement without convincing justification
   · progress is delayed by 6 months or more for reasons under the control of the       municipality
   ·  fund is used for any purpose other than intended

Any decision regarding the cancellation of a loan will be taken by TDF with the consensus of the External Consultant. In case of a project with total costs above NRs. 8,500,000.-, TDF will seek the formal non-objection of KfW.

A municipality will be notified in writing of the cancellation. Any fund already disbursed and not yet used for the intended purpose shall be returned to TDF immediately.