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LOAN AND GRANT ADMINISTRATION Operational Manual FOREWORD The IFAD Loan and Grant Administration Operational Manual outlines the policies and pro- cedures applied by the International Fund for Agricultural Development (IFAD or the Fund) with regard to loans and grants and to the cofinancing grants with which the Fund is entrusted. These are subject to the Fund's General Conditions for Agricultural Development Financing (the 'General Conditions'). The manual does not apply to non-project-related grants (technical assistance or research grants provided to non-governmental organizations or the Global Mechanism, among others). It is intended for use by the staff and consultants employed by IFAD to assist with project appraisal and by staff of the cooperating institutions (CIs) appointed by IFAD to handle loan or grant administration on the Fund's behalf. Unless otherwise indicated, the policies and procedures set forth in the manual apply equally to loans and grants made by IFAD and to the cofinancing grants the Fund adminis- ters. For the sake of readability, the term 'Borrower' has been used to refer to both the bene- ficiaries of loans and the recipients of grants, and the term 'loan' has been used to refer to both loans and grants. Instructions to Borrowers on the procedures for the withdrawal of loan funds are provided by the CIs based on the procedures for their own lending pro- grammes or, in the case of institutions that have no lending programmes of their own, adapted from those of other CIs. The manual is issued in the form of a loose-leaf binder so that individual sections may be readily updated as amendments are introduced. The table of contents shows the date of issuance of the latest version of each section, and individual sections include cross references to other, related sections. The manual replaces all earlier directives on the topics covered and incorporates a number of amendments to previous instructions. The assistant controller, loans and grants, is responsible for keeping this manual updated and for advising the CIs of changes in IFAD's policies and procedures related to the Fund's loans and grants. Abbreviations and acronyms have been used throughout the manual. A list is given on the following page. During the preparation of the manual, the views were sought of the staff of IFAD and the Fund's CIs, and the comments received have been incorporated to the extent possible. Any further comments would be welcome, as this would help us update and improve the clarity of the directives. In such cases, please send these comments to the address shown below.1 1 Assistant Controller, Loans and Grants, Office of the Controller, IFAD, 107 Via del Serafico, 00142 Rome, Italy. Tel: (+39) 06-5459-2429, Fax: (+39) 06-504-3463. iii This manual remains the property of IFAD, and all copies are to be returned to the Office of the Controller when staff members reach the end of their employment with IFAD or at the termination of a CI's appointment iv ABBREVIATIONS AND ACRONYMS CI Cooperating institution FC Office of the Controller (IFAD) GNP Gross national product OL Office of the General Counsel (IFAD) PMD Programme Management Department (IFAD) SA Special account SC Special commitment SDR Special Drawing Right of the International Monetary Fund SOE Statement of expenditure USD United States dollars v GENERAL CONDITIONS 1 The General Conditions Applicable to Loan and Guarantee Agreements (IFAD/9), dated 13 April 1978, adopted by the Executive Board at its Second Session (10-13 April 1978), apply to all the loan and guarantee agreements approved by the Board after 10 April 1978 and before 13 December 1978, as follows: 1-SRI to 10-NEP. The General Conditions Applicable to Loan and Guarantee Agreements (IFAD/9 Rev.1, Rev.2 and Rev. 3), dated 11 December 1978, adopted by the Executive Board at its Fourth Session (11-12 December 1978), apply to all the loan and guarantee agreements approved by the Board after 12 December 1978 and before 20 September 1986, as follows: 11-MG to 193-MO SRS-1-MR BG-1-KE to BG-4-SO. The General Conditions Applicable to Loan and Guarantee Agreements (IFAD/9 Rev.4), dated 19 September 1986, approved by the Executive Board at its Twenty-Eighth Session (16- 19 September 1986), apply to all the loan and guarantee agreements approved by the Board after 19 September 1986 and before 28 April 1999, as follows: 194-BA to 499-TN SRS-2-GH to SRS-48-AO BG-5-UG to BG-30-UG. The General Conditions for Agricultural Development Financing, dated February 1999, adopted by the Executive Board at its Sixty-Fifth Session (2-3 December 1998), apply to all agree- ments for agricultural development projects and programmes approved by the Board from 28 April 1999, starting with: 500-BI BG-31-TD. 1 All references in this manual to 'General Conditions' relate to the General Conditions approved in December 1998. Loans approved prior to April 1999 will contain references in the loan agreement to earlier editions of the General Conditions. vi TABLE OF CONTENTS 1. IFAD POLICIES, LOANS AND GRANTS, AND DOCUMENTATION 1.1 Core IFAD Disbursement Principles Introduction Use of Loan Proceeds Withdrawal of Loan Proceeds Taxes Eligible and Ineligible Expenditures Treatment of Interest Earned on Deposits under Loans and Grants 1.2 Loans and Grants IFAD Loans IFAD Grants Supplementary Fund Grants 1.3 Loan Administration Documents General Conditions Loan, Grant and Guarantee Agreements Cooperation Agreements Letters of Appointment 1.4 Procurement Principles Introduction International Competitive Bidding Other Methods of Procurement Procurement Limits General Requirements Eligibility 1.5 Cofinancing Arrangements Introduction Joint Financing of All Expenditures Financing Selected Activities vii 2. LOAN AND GRANT ADMINISTRATION ARRANGEMENTS 2.1 Appointment and Role of the Cooperating Institution Appointment Procedure Role Supervision Procurement Monitoring Disbursement Monitoring Disbursement Authorization 2.2 IFAD's Role in Project Development and FC Loans Involvement in the Project Cycle Introduction Project Formulation/Appraisal/Preparation of Loan Documents Loan Negotiations Loan Approval Loan Signing Project Supervision and Loan Administration Relations with Cooperating Institutions 2.3 Loans and Grants System Purpose System Components 3. LOAN AND GRANT STRUCTURE AND CHARACTERISTICS 3.1 Key Project/Loan Dates Date of Executive Board Approval Date of Signature Effectiveness Date Project Completion Date Loan Closing Date viii 3.2 Withdrawal Schedule Purpose Category Description Category Allocations Disbursement Percentages Unallocated Funds Definition of Foreign and Local Expenditures Unforeseen Project Expenditures Special Conditions 3.3 Loan Signing and Effectiveness Signature Effectiveness Reporting Requirements 3.4 Loan Closing Dates and Closure of Loan Disbursement Accounts Purpose Extension of the Project Completion Date Approval of Extension Requests Loan Closure Closure of the IFAD Loan Disbursement Account Special Procedures for Force Majeure Periods Effect of the Special Account on Loan Closing 3.5 Retroactive Financing Purpose Criteria Limits Disbursement Arrangements 3.6 Disbursement Conditions Purpose Category Links Compliance Notices 3.7 Audit Requirements Project Accounts Statements of Expenditure Remedies for Non-Compliance with Audit Requirements ix 3.8 Project Completion Reports Purpose Financing Review 4. PROJECT FINANCING MECHANISM 4.1 Project Accounts Purpose Monitoring and Use 4.2 Special Account Purpose Criteria Size of the Advance Currency, Location and Operation Monitoring Recovery of the Advance Effects of the Suspension of Disbursements 5. ADMINISTRATION OF DISBURSEMENTS 5.1 Disbursement Letter Purpose Responsibility for Issuing Disbursement Letters Content Minimum Application Value 5.2 Withdrawal Application Authorized Signatures Application Format Numbering Sequence Payment Instructions Supporting Documents Currency of Withdrawal Ineligible Expenditures 5.3 Statements of Expenditure Purpose Criteria Monitoring x 5.4 Special Commitments to Cover Letters of Credit Purpose Availability and Operation Payments Monitoring 5.5 Disbursement Authorization Basic Content Numbering Sequence Additional Information IFAD Processing Procedures Safeguarding against Fraud 5.6 Loan and Grant Refunds Refund Types Treatment of Refunds Reporting Requirements 6. LOAN ADMINISTRATION DURING PROJECT IMPLEMENTATION 6.1 Category Overdrafts and Reallocations Limits on Category Disbursements Category Reallocations 6.2 Suspensions of Disbursements Reasons for Suspension Application of Cofinancing Cross-Default Provisions Suspension Notices Exemptions from Suspension Processing of Applications during Suspension Informal Suspensions of Disbursements 6.3 Loan Amendment's Supplementary Financing and Reporting Requirements Introduction Amendment Procedure Supplementary Financing Reporting Requirements xi 6.4 Loan Cancellation Circumstances Leading to Cancellation Cancellation Notices 6.5 Dealing with De Facto Governments Introduction Establishment of Relations Impact on Disbursements 6.6 Flexible Lending Mechanism 7. SUPPORT TO BORROWERS 7.1 Disbursement Reports Purpose Debit Advices Monthly Reports Other Reports 7.2 Loan Administration Missions Purpose Disbursement Guidance Loan Repayment Guidance Mission Reports 8. LOAN REPAYMENT 8.1 Loan Repayment Provisions Loan Terms Loan Amount and Amortization Schedule Selection of the Repayment Currency Billing Procedures Loan Participation Special Procedures Handling of Underpayments and Overpayments Revised Amortization Schedules xii 8.2 Overdue Debt Service Collection Steps Remedies Arrears Settlement Plans Exceptions to Normal Follow-Up Action De Minimus Procedure Lifting Disbursement Suspensions Return to Accrual Status 9. DOCUMENT RETENTION 9.1 IFAD Document Retention Policies Loan and Guarantee Agreements Withdrawal Applications Billing Statements Disbursement Notices Correspondence ANNEXES Annex 1-A IFAD member states that are eligible as sources of procurement through the regular programme Annex 1-B IFAD member states that are eligible as sources of procurement through the special programme for Sub-saharan African countries affected by drought and deserti- fication Annex 2 Sample withdrawal schedule Annex 3 Sample disbursement letter Annex 4 Flow charts of the disbursement process Annex 5 Follow-up procedures for loan servicing Annex 6 Samples of overdue and suspension notices xiii Section 1.1 CHAPTER 1 IFAD policies, loans and grants, and documentation Section 1.1 – Core IFAD Disbursement Principles Introduction 1. The International Fund for Agricultural Development (IFAD or the Fund) is a specialized agency of the United Nations. It was established in 1977 with the objective of financing projects designed to improve food production in the poorest food-deficit countries and to enhance the incomes, productivity and nutritional status of the rural poor. IFAD, the funding operations of which commenced in January 1978, is guided by its Lending Policies and Criteria in determining priorities for the allocation of resources. Use of Loan Proceeds 2. Article 7 of the Agreement Establishing the International Fund for Agricultural Development (the Agreement Establishing IFAD) stipulates that: "The Fund shall make arrangements to ensure that the proceeds of any financing are used only for the purposes for which the financing was provided, with due attention to considerations of economy, efficiency and social equity." 3. Each loan agreement includes a covenant governing the use of the proceeds, as follows: "Except as the Fund shall otherwise agree, withdrawals shall be made only on account of expenditures relating to goods, works and services which are supplied from any of the Member States of the Fund." 4. A list of IFAD's Member States is given in Annex 1. 5. IFAD's Procurement Guidelines set out the procedures to be followed by Borrowers in com- plying with the above requirements. These guidelines are incorporated into each loan agreement for loans exclusively financed by IFAD. When a loan is cofinanced with a cooperating institution (CI) appointed by IFAD to administer the loan (see Sections 1.5 and 2.1), the procurement guidelines that the CI applies to its own loan are normally incorporated into IFAD's loan agreement. The core principle of IFAD's guidelines and of those of an CI of which the guidelines are applied to an IFAD loan is that – to the extent described in the loan agreement – the procurement of goods and services should be based on a competitive bidding procedure that assures the bidders of equal opportuni- ties to bid, subject to appropriate preferences for the goods and services of IFAD devel- oping country Member States, as permitted under the Agreement Establishing IFAD. Section 1.5 summarizes the principles outlined in the Procurement Guidelines. July 2003 1 Section 1.1 Withdrawal of Loan Proceeds 6. Section 4.02 of the General Conditions for Agricultural Development Financing (General Conditions) sets out the core principle with respect to the withdrawal of funds, as follows: "The Borrower may from time to time request withdrawals from the Loan Account of amounts paid or amounts to be paid for Eligible Expenditures. The loan agreement may specify minimum amounts for withdrawals, in which case the Borrower shall finance Eligible Expenditures less than such minimum amounts by using the Special Account or its own resources." 7. The General Conditions require that withdrawal applications must be in a form accept- able to the CI and that applications, with supporting documentation as required in Article 4.04 of the General Conditions, shall be made promptly. Taxes 8. Section 11.01 of the General Conditions stipulates that: (a) "The Loan and all Loan Service Payments shall be exempt from all Taxes, and all loan service payments shall be made free and clear of taxes. (b) The Loan Documents shall be exempt from any Taxes on signature, delivery or reg- istration. (c) It is the policy of the Fund that Loan proceeds are not to be used to pay Taxes, includ- ing (but not limited to) any Taxes levied on the importation, procurement, or sup- ply of any goods, civil works, or services financed by the Loan." 9. The policy outlined in point (c) above is applied through the selection of the items to be financed and the establishment of eligible disbursement percentages in order that the overall level of IFAD financing is exclusive of taxes. In the case of imported goods avail- able on local markets, IFAD usually disburses a percentage of the purchase price net of any applicable local taxes. As a general rule, local taxes are exempted by ministerial decree, or paid by the Borrower in cash, or, depending on the country involved, settled by means of a coupons system. Charges to social security benefits are considered as con- stituting a part of staff salaries and are thus eligible for financing. Eligible and Ineligible Expenditures 10. In order for goods, services and works to be eligible for financing, the following condi- tions must, as a general rule, be met: • Goods and services must be obtained from the Fund's Member States. • Items must fall within the project and category description defined in the loan agreement. 2 July 2003 Section 1.1 • Items must be procured in accordance with the provisions of the loan agreement. • Payments must be made or be due for goods, works and services that are provided after the loan signing date or any date specified for retroactive financing (see Sections 3.3 and 3.5) and before the loan closing date (see Section 3.4). • Applications must be in an acceptable form and accompanied by satisfactory support- ing documentation (see Section 5.2). 11. Items that are not usually considered eligible for financing include: • duties and taxes imposed by Member States; • land acquisition; and • second-hand goods. 12. Late-payment penalties imposed by suppliers are not normally eligible for financing, unless the penalties have been incurred in connection with a disputed payment that was under arbitration. Treatment of Interest Earned on Deposits under Loans and Grants 13. It is both appropriate and desirable that Borrowers open interest-bearing accounts inas- much as the funds deposited in such accounts are thus available to meet project expen- ditures as they are incurred. Any interest earned by a Borrower should be used in accor- dance with government regulations. However, IFAD encourages Borrowers (especially those who have received loans on highly concessional terms) to use interest earnings to cover project expenditures. 14. With regard to grants, any interest earned on funds advanced by IFAD from grant accounts to meet project expenditures and held in a bank account administered by the recipient shall be reported to the Fund. Such interest should preferably be used to cover project expenditures, such as the fees of external auditors. July 2003 3 Section 1.2 Section 1.2 – Loans and Grants IFAD Loans 1 1. IFAD loans are provided on ordinary, intermediate, or highly concessional terms based on the gross national product (GNP) per capita of beneficiary countries. Loan repayment terms are set out in Section 8.1 of this manual. Loans provide support in ten major areas: agricultural development; rural infrastructure; financial services; irrigation; livestock; fisheries; capacity and institution-building; storage, food processing and marketing; research, extension and training, and the resettlement of displaced persons. Within these major project types, special focus is placed on women in development, sustainable, long-term community development, environmental conservation, and on-farm and off- farm income-generating activities. 2. Loans are denominated in Special Drawing Rights (SDRs).2 However, disbursements are made in the currencies in which the expenditures to be financed from the proceeds of the loan have been paid or are payable, or in such currency(ies) as IFAD may select. The loan account is charged with the SDR equivalent of the currency used to make the dis- bursement. 3. IFAD appoints an international or regional institution – the CI – to handle administra- tion of the loan or grant on its behalf (see Section 2.1). IFAD Grants 4. Project financing may be carried out wholly or partially through a grant. This is known as a project-component grant and is subject to the General Conditions. 5. Grants are denominated in SDRs. Withdrawals may be made in the currencies needed for the implementation of a programme of work. The grant account is charged with the SDR equivalent of the currency used to make the disbursement. 6. IFAD appoints a CI to handle the administration of these grants. 1 In May 1991, the Fourteenth Session of the Governing Council adopted a resolution that provided for a second and last phase of IFAD's Special Programme for Sub-Saharan African Countries Affected by Drought and Desertification. The programme, which included grants and loans provided on highly concessional terms, was integrated into IFAD's regular resources as of 1 January 1996. 2 SDRs comprise a basket of currencies as established and valued from time to time by the International Monetary Fund. IFAD's first ten loans were denominated in US dollars. July 2003 1 Section 1.2 Supplementary Fund Grants 3 7. From time to time, donors (mainly bilateral donors) provide supplementary funds in order to cofinance projects for which IFAD makes a loan, or to finance a project that is not included in IFAD's lending programme. The obligations of both parties are recorded in a partnership agreement or a memorandum of understanding concluded between IFAD and the donor. 8. IFAD then enters into a supplementary fund grant agreement with the recipient. Such an agreement specifies the items eligible for financing and normally includes cross refer- ences to the associated IFAD loan (if any) so as to cover items such as procurement, the operation of a special account (SA) (see Section 4.2) and other specific project covenants. In some cases, the donor funds are made available in instalments or 'tranches', usually based on the anticipated pace of disbursements. In such cases, the grant agreement stipulates that the availability of the grant proceeds will be conditional on the provision of funds from the donor. 9. In cases of cofinancing, IFAD requests that the CI appointed to handle the administra- tion of the Fund's loan also administers the disbursements of the supplementary fund grant as well. The letter appointing the CI sets out this additional responsibility. In the event the supplementary fund grants are not associated with IFAD loans, the Fund will normally assume the responsibility for administering the grants. 3 For the purposes of this manual, this includes grants funded through the Belgian Survival Fund for the Third World. 2 July 2003 Section 1.3 Section 1.3 – Loan Administration Documents General Conditions 1. The General Conditions apply to all loan agreements, except as otherwise specifically provided for in loan agreements. The General Conditions cover, inter alia, such items as: • currency provisions, including the purchase and valuation of currencies; • the responsibilities of and cooperation with CIs; • the requirements for the withdrawal of loan proceeds, including reallocation proce- dures; • suspension, cancellation and termination rights; and • the requirements for project implementation, including those relating to accounting and auditing. Loan, Grant and Guarantee Agreements 2. Loan and grant agreements amplify, or, in some cases, modify the provisions of the General Conditions in accordance with specific project needs. For example, loan agree- ments between Borrowers and IFAD include, inter alia, provisions governing: • loan amounts and specific repayment requirements; • the official representatives of Borrowers; • the conditions that must be satisfied before a loan can become effective; • project descriptions; • withdrawal schedules listing the categories for withdrawal, the applicable disburse- ment percentages, items eligible for disbursement on the basis of statements of expen- diture (SOEs) and any special restrictions on disbursement; • procurement schedules specifying the manner in which goods and services are to be procured; • the use of funds advanced to an SA, if one exists; and • special covenants essential to the success of the project. 3. Whenever IFAD makes a loan directly to an entity other than a Member State, it also enters into a guarantee agreement with the government involved (the guarantor). By means of such an agreement, the Member State confirms its willingness to take all necessary action for the success of the project and guarantees loan repayment. July 2003 1 Section 1.3 Cooperation Agreements 4. The cooperation agreement, which is prepared by IFAD in consultation with the relevant CI and is signed by both parties, provides the framework for overall cooperation between the two institutions. All agreements include elements covering: • cooperation, consultation and the exchange of views; • exchanges of information; and • liaison, annual meetings and reciprocal representation. 5. The cooperation agreement also sets out the basic arrangements governing the reim- bursement by IFAD of the relevant CI's costs when that CI formulates/ appraises projects on IFAD's behalf, administers loans or provides other services requested by IFAD. Section 2.1 provides further details. Letters of Appointment 6. A letter of appointment is drawn up for each approved project in order to supplement the general provisions of the cooperation agreement. The letter of appointment, which spells out the responsibilities of IFAD and the CI with respect to the project in question, is drafted by IFAD and countersigned by the CI. It specifies the effective date of the CI's appointment and the procedures for the termination of the appointment by either party. In the event supplementary fund grants (see Section 1.2) administered by IFAD are also used to finance the project, the letter of appointment lists the specific loan(s) or grant(s) for which the CI accepts the responsibility for administration. 2 July 2003 Section 1.4 Section 1.4 – Procurement Principles Introduction 1. IFAD's procurement regulations are set out in the Procurement Guidelines, the provi- sions of which are incorporated into each loan agreement except in the case of some cofinanced projects for which IFAD may agree to follow the procurement guidelines applied by the cofinancing partner (Section 1.1). Loan agreements amplify and, in some cases, modify the provisions of the guidelines. International Competitive Bidding 2. As a general rule, international competitive bidding is the preferred and most effective method of procurement because it assures the Borrower that the goods and services sup- plied will be of the desired quality and bear the most reasonable price. This method pro- vides prospective bidders from all IFAD Member States with adequate notice of the Borrower's requirements and gives them equal opportunities to bid, subject to appro- priate preferences for the goods and services of developing Member States, as provided in the Agreement Establishing IFAD. Other Methods of Procurement 3. In some cases, however, international competitive bidding is not the most economic and efficient method of procurement for a project. For example, there may be very few poten- tial suppliers of highly specialized equipment, or little likelihood of widespread interest in bidding for small civil works contracts in remote areas. Whenever IFAD and the Borrower agree that other procedures are more appropriate, the loan agreement reflects these agreed arrangements. This might include: • limited international bidding (international competitive bidding by direct invitation only); • locally advertised competitive bidding in accordance with local procedures; • local or international shopping; • direct purchases; • commercial practices (where the loan proceeds are on-lent to the private sector), pro- vided these practices are acceptable to IFAD; and • construction by force account (Borrower's existing labour force). 4. The Procurement Guidelines provide examples of circumstances under which these types of procurement arrangements may be appropriate. July 2003 1 Section 1.4 Procurement Limits 5. Each loan agreement specifies the procurement procedure to be followed. Where excep- tions to the use of international competitive bidding are incorporated, the loan agree- ment specifies limits above which procurement becomes subject to such bidding. Limits may also be set for purchases through any of the other procurement procedures. These limits vary from one project to another, depending on the size of the intervention, the types of goods and services to be procured and the experience of the project executing agency in the application of appropriate procurement practices. 6. In addition, each loan agreement specifies contract limits above which any contract award is subject to the prior review of the CI appointed by IFAD to handle loan admin- istration (see Section 2.1). General Requirements 7. Irrespective of the procurement procedure followed, the bidding process must be fair and open. Bid specifications must be precise. The conditions of contract must be clearly defined. Bidders must be given a reasonable period to submit their bids, and any margin of preference for goods and services from member countries or neighbouring countries (applicable only in the case of international competitive bids) must be spelled out. Bid opening should take place at the stipulated time and should normally occur in public. 8. The purpose of the bid evaluation is to determine the cost of each bid to the Borrower in a manner that will permit a comparison of bids on the basis of the evaluated costs. The bid with the lowest evaluated cost, but not necessarily the lowest submitted price, should be selected for award. The bidding documents should specify any relevant fac- tors, in addition to price, to be considered during the bid evaluation and the manner in which these factors will be applied for the purpose of determining the lowest evaluated bid. The Borrower prepares a detailed report on the valuation and comparison of bids and the specific reasons on which the recommendation for the award of the contract is based. The contract should be awarded within the period of the validity of bids. Eligibility 9. Funds from IFAD loans may be disbursed only for expenditures for goods and services produced or supplied from the Fund's Member States (see Section 1.1). Bidders offering goods and services from other countries should be disqualified from bidding for con- tracts to be financed through IFAD loans. 2 July 2003 Section 1.4 10. IFAD does not permit Borrowers to disqualify any bidders from Member States for rea- sons that are not related to their capacity to supply the goods or works in question. As an exception to this rule, firms of a Member State or goods manufactured in a Member State may be excluded if, as a matter of law or official regulation, the Borrower's coun- try prohibits commercial relations with that country, 1 provided IFAD is satisfied that such exclusion does not preclude effective competition. 1 A primary boycott. July 2003 3 Section 1.5 Section 1.5 – Cofinancing Arrangements Introduction 1. The Agreement Establishing IFAD cites the importance of mobilizing the resources of donor agencies (both bilateral and multilateral) to cofinance projects that meet the pro- visions of IFAD's Lending Policies and Criteria. In the event that IFAD and another donor (or other donors) finance the same project, the cofinancing partners would determine the financing arrangements that will best serve the Borrower's needs. These arrangements are then reflected in the loan or grant agreements prepared for each donor's contribution. Joint Financing of All Expenditures 2. In some cases, IFAD and the cofinancing partners agree that the most effective way to cofinance the project would be to finance each eligible expenditure on a pro-rata basis so that all sources of funds are drawn down at the same pace. In such cases, the loan agreements or financing agreements involving all cofinancing partners specify the ratio of IFAD's share and each cofinancing partner's share to be applied to applications. Under this type of arrangement, the Borrower normally submits a single withdrawal applica- tion for each eligible expenditure or group of expenditures; the application refers to all sources of funds and specifies the ratio applicable to each donor. 1 The Borrower may also establish a single SA into which the cofinancing partners deposit their share of the authorized allocations. 3. This method of financing has the advantage of ensuring that the financiers provide funds for all eligible components. It is essential that the administrative requirements among the cofinancing partners be harmonized. In the event of a suspension of dis- bursements due to overdue debt servicing on one of the loans for the project, a cofi- nancing partner should also suspend its loan. Cross-default clauses in the respective loan agreements should be clearly stipulated. 4. On occasion, the cofinancing arrangements may also involve the application of different ratios for different categories of expenditure. Given the complexity, this type of arrange- ment is generally avoided. 1 In such cases, the CI's disbursement authorization indicates the amount eligible for financing through the IFAD loan and the amount applicable to grants, including supplementary fund grants. Alternatively, the CI may issue a separate disbursement authorization for each source of funds. July 2003 1 Section 1.5 Financing Selected Activities 5. In many cases, the cofinancing partners agree to finance different components or cate- gories of expenditure for the same project, an arrangement that is sometimes referred to as 'parallel financing'. Under this approach, the pace at which each source of funds is drawn down will depend on the pace of the implementation of the components or activ- ities involved. The Borrower submits applications for withdrawal from the appropriate source of funds depending on the expenditure involved. Separate SAs may be main- tained, thereby simplifying the administration of disbursements during a suspension of disbursements. 6. Should disbursements be suspended by only one of the donors involved, the project activities funded by the other donors may in some cases proceed without interruption. As projects are designed as a whole, however, a partial suspension (for example, the with- drawal of funding for technical assistance) may lead to the interruption of all project activities. Cross-default clauses in donor loan agreements may therefore be invoked, leading to the suspension of all loans. 2 July 2003 Section 2.1 CHAPTER 2 Loan and grant administration arrangements Section 2.1 – Appointment and Role of the Cooperating Institution Appointment Procedure 1. IFAD's governing principles are outlined in the following documents: • the Agreement Establishing IFAD; and • the General Conditions for Agricultural Development Financing. 2. The Agreement Establishing IFAD states that, as a general rule, IFAD shall use the serv- ices of international institutions and other competent agencies for the formulation/ appraisal of projects and programmes submitted to the Fund for financing. It further requires that IFAD should entrust the administration of loans, for the purposes of dis- bursement and supervision, to competent international institutions of a worldwide or regional character selected by IFAD's Executive Board in consultation with the Borrower. The criteria for the selection of a CI to be responsible for a specific project include expe- rience in the formulation/appraisal and loan administration of similar projects, knowl- edge of and good working relations with the Borrower in question and the ability to pro- vide the staffing resources needed to fulfil the role of a CI effectively. 1 3. The framework for the appointment of a CI is formally documented in a cooperation agreement and supplemented by a letter of appointment that spells out the effective date of the appointment 2 and the CI's specific responsibilities with respect to individual proj- ects (see Section 1.3). Role 4. The General Conditions relevant to each loan agreement spell out the responsibilities of the CI in question (see Section 3.02 of the General Conditions). These are as follows: "The CI shall be responsible for: (a) facilitating Project implementation by assisting the Loan Parties and the Project Parties in interpreting and complying with the Loan Documents; 1 Resolution 102/XX, which was adopted by the Twentieth Session of the Governing Council, states that, notwithstanding the provisions of Article 7, Section 2(g), of the Agreement Establishing IFAD, the Fund may supervise specific projects and programmes it finances. Such supervision shall be limited to a small, representative sample of IFAD-initiated projects. No more than a total of 15 projects and no more than three projects per geographical region may be directly supervised and administered by the Fund during a period of five years. Resolution 102/XX will cease to be operational five years after the date of effectiveness of the last approved project. 2 The effective date is the date from which the CI may be compensated for its services in accordance with the provisions of the governing cooperation agreement. July 2003 1 Section 2.1 (b) reviewing the Borrower's withdrawal applications to determine the amounts which the Borrower is entitled to withdraw from the Loan Account; (c) reviewing and approving the procurement of goods, civil works and services for the Project financed by the Loan; (d) monitoring compliance with the Loan Documents, bringing any substantial non- compliance to the attention of the Fund and recommending remedies therefore; and (e) carrying out such other functions to administer the Loan and supervise the Project as may be set forth in the Cooperation Agreement." 5. Section 3.04 of the General Conditions confirms that any action taken by the CI in con- nection with these responsibilities shall be regarded and treated by the Borrower, guar- antor and project entity as an action taken by IFAD. 6. The CI must administer the loan in accordance with the loan agreement and the relevant regulations, guidelines, criteria and policies of IFAD, as communicated by IFAD to the CI. To ensure the effective coordination of actions between IFAD and the CI, IFAD promptly informs the CI of the progress towards effectiveness or of any plans to modify materially the loan agreement or to suspend or terminate disbursements, as well as of any postponement of the loan closing date or project completion date and suspensions, cancellations or repayments in advance of maturity of any amount of the loan. 7. Briefly stated, the CI is expected to administer IFAD loans with the same care and dili- gence that it applies to its own operations, if any. Supervision 8. As part of its responsibility for implementing the project, the Borrower is required to report periodically on project progress in order to satisfy IFAD that the project is being carried out properly and is likely to achieve the objectives of the loan. The CI supervises the project through periodic visits at intervals adequate to ascertain whether satisfactory progress is being made and to ensure the early identification of problems requiring remedial action. Mission staffing takes into account the nature of the project and any special expertise that may be needed to address specific problems. In some cases, IFAD staff may accompany supervision missions. The CI provides advance notice of mission schedules in order to facilitate IFAD involvement. 2 July 2003 Section 2.1 Procurement Monitoring 9. In the event the CI, besides acting as the CI for an IFAD loan, also provides cofinancing, the IFAD loan agreement stipulates that the CI's procurement rules shall apply. This arrangement prevents any conflict due to a variance in the eligibility criteria and pro- curement practices generally followed by the two institutions. If no such cofinancing arrangements exist, IFAD's procurement rules (see Section 1.4) are incorporated into the IFAD loan agreement. 10. For all contracts that exceed the limits specified in the loan agreement (the 'prior review threshold'), the CI reviews the Borrower's proposed procurement decisions prior to the contract award.3 In such cases, the CI notifies the Borrower whether the proposed deci- sion is acceptable. This does not automatically mean that the contract will be financed through the loan; rather, the contract is eligible for financing subject to the availability of funds and the compliance with loan conditions at the time the individual applica- tions are submitted. 11. Contracts for amounts below the prior review threshold are subject to review after the award. This review is normally carried out on a selective basis through an examination of contracts and the bid evaluation information submitted by the Borrower to the CI or, particularly in the case of small contracts eligible for disbursement against SOEs (see Section 5.3), through an examination of the relevant documents during a supervision mission. If, as part of the post-review process, any contracts are found to have been improperly awarded, the Borrower is required to refund any amounts already withdrawn from the loan in relation to these contracts. 12. The Borrower's failure to procure goods and services as specified in the loan agreement is termed a 'misprocurement' and may lead to the cancellation of a portion of the loan (see Section 6.4). The CI advises IFAD whether the misprocurement is a sufficiently seri- ous infringement to warrant cancellation. Disbursement Monitoring 13. The CI examines the Borrower's applications for withdrawal to ascertain whether the amounts claimed for withdrawal are in the correct format, properly signed by the Borrower's authorized representative, fit the project description, fall within the disburse- ment categories in the withdrawal schedule (see Section 3.2), conform to the eligible dis- bursement percentages, are appropriately documented, and (in the case of contracts exceeding the prior review threshold) are consistent with the terms of the contract 3 Timely response to procurement or other queries is critical because any delay may seriously impede project implementation. July 2003 3 Section 2.1 approved by the CI. In addition, the CI monitors the compliance with the disbursement conditions (see Section 3.6) and informs IFAD of any amounts that may not be dis- bursed while a suspension of disbursements (see Section 6.2) is in force. 14. The specific responsibilities of the CI with respect to disbursements are further outlined in the following sections of this manual. Disbursement Authorization 15. Once the review process described above has been completed, the CI is responsible for forwarding to IFAD an authenticated message authorizing the disbursement of funds. Further details are provided in Section 5.6. 4 July 2003 Section 2.2 Section 2.2 – IFAD's Role in Project Development and FC Loans Involvement in the Project Cycle Introduction 1. As described in President's Bulletin, No. 94/01 of January 1994, for each proposed proj- ect, IFAD appoints an interdepartmental project development team led by the relevant country portfolio manager in the Programme Management Department (PMD). The team is responsible for the coordination with the agencies or consultants involved in the identification, formulation, appraisal and implementation of projects financed by IFAD. Project Formulation/Appraisal/Preparation of Loan Documents 2. The formulation/appraisal of projects proposed for IFAD financing may be undertaken by IFAD 1 or by another agency. 3. In the event a CI formulates/appraises a project, IFAD staff may participate on the for- mulation/appraisal team. Once the CI has completed its internal review process and submitted the results of its formulation/appraisal to the Fund, the project is reviewed within IFAD by PMD, the Office of the General Counsel (OL) and the Office of the Controller, Loans (FC Loans). 4. IFAD reviews all aspects of the project to ensure compliance with the Fund's overall objectives. PMD focuses on project design, viability and conditionality. OL ensures that the loan documents incorporate both the general safeguards required by IFAD in lend- ing and any necessary, specific project conditionality. 5. As part of the project development team, FC Loans assists PMD in preparing draft terms of reference for project formulation/appraisal. It pays special attention to the project financing plan, the categories of expenditure, the financing percentages, the operational modalities of project and special accounts, audit requirements, procurement procedures, the thresholds for use of SOEs, and the disbursement conditions. It briefs mission mem- bers on IFAD's loan administration requirements and debriefs returning missions. Draft formulation/appraisal reports are sent to FC Loans for comment. Thereafter, the appraisal report is submitted to the assistant president, PMD for approval. 6. OL draws up the relevant draft loan agreement between IFAD and the Borrower. The rel- evant country portfolio manager verifies that all the necessary project conditionalities are incorporated as appropriate. FC Loans assists in the preparation of financial clauses (the amount of the loan; the repayment schedule; the withdrawal schedule, including the conditions for disbursement and retroactive financing; the accounting and audit 1 IFAD may invite the CI expected to be appointed to handle loan administration to participate in the formulation/appraisal process. July 2003 1 Section 2.2 provisions; the provisions for operation of the SA, and the eligibility for the use of SOEs). In the event the project has been appraised by a CI, the CI reviews the draft agree- ment to ensure that it is consistent with the formulation/appraisal findings and that it includes any conditions essential to the success of the project. Loan Negotiations 7. IFAD enters into a loan negotiation process with the Borrower. Through the negotia- tions, agreement is reached on the project's scope, the implementation requirements and the terms and conditions of the loan. The negotiations are usually held at IFAD headquarters in Rome. The relevant country portfolio manager leads the negotiating team and is assisted by OL and the staff of FC Loans. In coordination with the country portfolio manager, FC Loans is responsible for the articles and schedules as regards financial management. The loan officer involved briefs the Borrower's negotiating team on IFAD's core disbursement principles, the withdrawal procedures that will be applied by the CI appointed to administer disbursements and the loan repayment policies and procedures. In some cases, IFAD may invite the CI to participate in loan negotiations as an observer. 8. For projects cofinanced on a joint (pari passu) basis, IFAD and the cofinancier should, whenever possible, jointly negotiate their respective loan agreements. If circumstances do not allow for such joint negotiations, the lead financier's (for example, the World Bank) loan agreement should be negotiated before the loan agreement of IFAD is negotiated. Loan Approval 9. The President's Report and Recommendations to the Executive Board is prepared by the country portfolio manager and cleared by FC Loans and OL on the basis of an appraisal report approved by the assistant president, PMD. OL also prepares a summary of impor- tant supplementary assurances included in the negotiated loan agreement. The project is submitted to the Executive Board for approval (see Section 3.1) prior to the signing of the loan agreement. Loan Signing 10. The loan signing is arranged between IFAD and the Borrower promptly following Executive Board approval of the project. The PMD Regional Division notifies the Borrower that the loan has been approved and takes the necessary follow-up action to ensure the prompt signature of the loan agreement. The country portfolio manager is responsible for arranging the loan signing ceremony with the Office of the President after consultation with FC Loans and OL. Before any loan is signed, FC Loans must give 2 July 2003 Section 2.2 clearance concerning the arrears situation of the Borrower and notify the Office of the President, the country portfolio manager and OL. If arrears exist, the loan signing may not be possible (see Section 8.2, paragraph 4). OL is responsible for the preparation of the loan/financing agreement for signature and all related documentation. Project Supervision and Loan Administration 11. The relevant PMD Regional Division monitors compliance with the conditions for loan effectiveness, keeps the CI informed of the progress towards effectiveness and notifies the Borrower when the conditions for effectiveness have been met. 12. Thereafter, in close coordination with the CI, the PMD Regional Division monitors the progress in the implementation of the project. Similarly, FC Loans works closely with the CI to ensure that the disbursement process is efficient and that there is appropriate accountability in the use of the loan proceeds by the Borrower. The staff of these units are involved in project start-up workshops. 13. PMD is responsible for monitoring the overall loan portfolio for the purpose of provid- ing early warning signals to IFAD management on major implementation issues and problems. The department organizes periodic loan portfolio reviews, during which problem projects and other categories of implementation problems are brought to the attention of the respective PMD Regional Division and corrective measures are pro- posed; staff also undertake country portfolio reviews and participate in mid-term reviews, in missions fielded to investigate prolonged project implementation bottle- necks and in project completion missions. 14. The CI recommends the appropriate course of action in situations that require direct IFAD involvement and communication with the Borrower. These include: • any amendment of the loan agreement; • a postponement of the project completion date; • a reallocation of loan proceeds or a change in disbursement percentages; • the application of remedies available under IFAD's loan agreement, for example, the suspension of disbursements because of non-compliance with a crucial loan covenant or the cancellation of a portion of a loan due to misprocurement; and • the cancellation of any loan balance remaining after the closing date. 15. IFAD staff review the CI's recommendations and, as required, seek management approval of the recommendations. The designated IFAD official (see Sections 3.4, 6.2, 6.3, or 6.4 as appropriate) then signs the notification to the Borrower. If IFAD's review leads to a conclusion that differs from the CI's recommendations, the CI is informed of the reasons IFAD has decided on a different course of action. July 2003 3 Section 2.2 16. IFAD makes a decision in cases in which overdue debt servicing (see Section 8.2) requires the imposition of remedies such as the suspension of disbursements, the can- cellation of undisbursed loan balances, or a delay in the presentation of new loans to the Executive Board. The CI is informed of any such decisions. Relations with Cooperating Institutions 17. PMD acts as the focal point for relations with CIs. It organizes periodic meetings with CIs and monitors the orientation, frequency, quality, reporting and cost of the supervi- sion activities of these institutions. FC Loans is entrusted with similar responsibilities with respect to the disbursement function (the dispatch of disbursement status infor- mation for loans and grants, the notification of suspension or cancellation and so on). 4 July 2003 Section 2.3 Section 2.3 – Loans and Grants System Purpose 1. IFAD's Loans and Grants System is a comprehensive system that integrates financial data on IFAD loan and grant operations (see Section 1.2). It processes loan and grant dis- bursements, generates billing statements, processes loan repayments and provides an essential management tool throughout the life of a loan or grant. By means of computer terminals, the system gives IFAD staff immediate access to current data on the status of loan and grant disbursements and on loan repayments. Designated data flow from the system to the general ledger. 2. The Loans and Grants System generates reports for IFAD staff and Borrowers (and the Fund's CIs) with regard to disbursements and the amounts due in the repayment of loans. In addition, the system serves as a management tool to flag problem loans (for example, loans for which the compliance with effectiveness conditions is unduly delayed or for which the principal, interest, or services charges are overdue) and monitors the compliance with the conditions in the loan agreement (for instance, the timely submis- sion of audit reports). System Components 3. The major components of the Loans and Grants System are as follows: • project data, including data on the financing plan; • basic loan data (loan beneficiaries, loan amounts, effectiveness deadlines, repayment schedules, withdrawal categories, closing dates, document recipients and so on) and other master data files on grants, including supplementary fund grants; these data are entered once a loan is approved and updated as needed to reflect changes in status; • payment authorization information; this is entered when the CIs approve withdrawal applications; it is subject to the validation of the Loans and Grants System that the pay- ments are consistent with the basic loan data; it is updated on a provisional basis as the authorized staff of FC Loans approve withdrawals, and it is finalized once the IFAD Treasury has processed the payments; • debit advices generated in order to notify Borrowers (with copies to the CIs) of with- drawals made from their loans and grants accounts; • billing statements generated for loans when repayments are due; • receipts for the repayments of loans, which are recorded as the payments are received; and • reports generated in a wide variety of formats to meet specific IFAD portfolio manage- ment needs. July 2003 1 Section 3.1 CHAPTER 3 Loan and grant structure and characteristics Section 3.1 – Key Project/Loan Dates Date of Executive Board Approval 1. Each loan is submitted to the Executive Board for approval following a loan negotiation process during which agreement is reached between IFAD and the Borrower on the terms and provisions of the proposed loan. The Executive Board meets thrice yearly, usually in April, September and December. The loan repayment schedule is based on the date of the Executive Board approval of the loan (Section 8.1). Date of Signature 2. Following the Executive Board approval, each loan agreement must be signed (see Section 3.3). In the event the Borrower is unable to complete a number of important pre- liminary steps prior to the Executive Board approval, IFAD may request that these requirements constitute a condition of the loan signing. Unless the loan agreement includes special provisions for retroactive financing, the date of signature is the date after which project expenditures for start-up activities or to fulfil conditions of effectiveness become eligible for financing. Effectiveness Date 3. The effectiveness date is the date on which a loan agreement enters into full force and effect. It is therefore the basis for the calculation of the project completion date and the loan closing date. As of the effectiveness date, withdrawals may be made from the loan account (subject to the conditions of disbursement, if any; see Section 3.6, paragraph 1). Further details on the conditions of effectiveness and the deadline for the fulfilment of these are provided in Section 3.3, paragraph 3. Project Completion Date 4. This date is calculated by adding the duration of the project implementation period, which is set forth in the President's Report and Recommendations approved by the Board, to the loan effectiveness date. It is systematically rounded to the end of the fol- lowing quarter for the convenience of IFAD's internal reporting requirements. July 2003 1 Section 3.1 Loan Closing Date 5. The loan closing date falls six months after the project completion date. The loan clos- ing date is the date after which IFAD has the right to cancel any unwithdrawn loan bal- ance and close the loan account, although the date may be postponed at IFAD's discre- tion. Further details on the selection and postponement of a closing date are given in Section 3.4. Basically, FC Loans needs six months to process payments relating to the expenditures incurred prior to the completion date and to cover the limited expenditures to wind up the project that are incurred after the completion date (for example, operat- ing costs, salaries, auditing and the project completion report). 6. Once all the conditions of effectiveness set forth in the loan agreement are met, OL pre- pares a facsimile, which is cleared by the country portfolio manager and FC Loans and then sent to the Borrower. This facsimile specifies the dates of effectiveness, the project completion date and the loan closing date. 2 July 2003 Section 3.2 Section 3.2 – Withdrawal Schedule Purpose 1. Each IFAD loan agreement includes a schedule (generally, Schedule 2) entitled 'Allocation and Withdrawal of Loan Proceeds' (hereafter withdrawal schedule). This schedule groups in a single location the basic provisions for loan withdrawal. These include the designation of: • the broad categories of expenditure eligible for financing; • the specific amounts allocated to each of the categories; • the percentage of expenditures to be financed under each category; • expenditures, if any, that may be disbursed on the basis of SOEs (Section 5.3); • the provisions for retroactive financing (Section 3.5); • the disbursement conditions attached to specific categories (Section 3.6); and • the provisions for joint financing. 2. Each withdrawal schedule includes language described below. Category Description 3. Projects are prepared and costed by 'component'. The formulation/appraisal report con- tains a full set of cost tables that provide all single estimated project expenditures, grouped into categories. A simple category structure generally aids implementation. Categories should be clearly defined but sufficiently broad to cover reasonable project expenditures. For example, the more inclusive term 'vehicles' is generally preferred to 'motor vehicles', which would exclude the financing of bicycles. Nevertheless, care should be taken to avoid ambiguous category descriptions. 4. In particular, categories such as 'operating costs' must be clearly defined so that IFAD, the Borrower and the CI have the same understanding of eligible items. To supplement the formulation/appraisal report's description of the operating costs intended for financ- ing, the loan agreement must include a definition that is legally binding since this helps to avoid any subsequent disagreement regarding the eligibility of specific activities. Where appropriate, the legal definition may include language that permits IFAD to deter- mine whether additional activities may be considered eligible for financing. (For exam- ple, a definition might read: "Vehicle operation and maintenance, project unit staff salaries and such other activities as IFAD may agree.") 5. The withdrawal schedule does not necessarily cover all project expenditures. For exam- ple, the disbursement process may be simplified by financing only key components crit- ical to project success and by excluding the financing for activities for which disburse- July 2003 1 Section 3.2 ment documentation would be costly for the Borrower to supply together with the Borrower's applications. Each loan agreement includes a general provision requiring the Borrower to provide all the resources needed to complete the project. The activities not included in the withdrawal schedule are therefore financed in full by the Borrower or through other financing arranged by the Borrower. 6. The circumstances that warrant a more complex category structure include: • projects implemented by different agencies, each of which operates independently and requires separate allocations for management control purposes; • activities that are subject to disbursement conditions; and • critical activities for which the total amounts disbursed should be limited (for exam- ple, an innovative component involving experimental activities on a pilot basis). Category Allocations 7. The amounts allocated for each category are based on project cost estimates 1 for the types of expenditures involved and the relevant eligible disbursement percentages. The amounts are normally rounded up or down to the nearest SDR 10 000 units. Disbursement Percentages 8. In the determination of the disbursement percentages according to the categories of expenditure, IFAD accords priority to the financing of direct foreign expenditures. This policy has been adopted in recognition of the fact that most Borrowers will maximize the benefits of their loans if they are provided with 100% financing of direct foreign expenditures because many Borrowers have limited access to foreign exchange. Disbursement percentages also take account of any cofinancing arrangements (Section 1.5) and of the counterpart contributions of the Borrowers. IFAD's policy not to finance taxes (see Section 11.01 of the General Conditions and Section 1.1 of this manual) requires that the disbursement percentages for any locally procured goods and services be set at levels that exclude locally imposed taxes. The percentages of expenditures eligi- ble for financing through the loans are applied to each invoiced expenditure as pay- ments become due. 9. Section 4.09 of the General Conditions allows IFAD to reduce the disbursement per- centage in the event no further funds are available for reallocation to the category so that further withdrawals under the category may continue until project completion. If tax levels change, IFAD may notify the Borrower that the disbursement percentage applica- ble to an affected category has been increased or reduced. 1 The contingencies associated with each expenditure type are normally placed in the 'unallocated' category. 2 July 2003 Section 3.2 Unallocated Funds 10. As a general rule, each loan includes an 'unallocated' category. This category is not avail- able for disbursement purposes. Rather, the amounts allocated under this category are available for reallocation (see Section 6.1), as provided for in Section 4.09 of the General Conditions. The amounts initially allocated to this category represent contingencies used to calculate the appropriate loan amounts and generally range from 10 to 15% of the loan amounts. Definition of Foreign and Local Expenditures 11. These are: • local expenditures: expenditures incurred or to be incurred in the currency of the Member State in the territory of which the project is to be carried out and for goods produced in and services supplied from the territory of this Member State, excluding, however, expenditures for the import content of such goods and services; and • foreign expenditures: any expenditures other than local expenditures. 12. If the import content of any locally supplied goods and services payable in local currency can be readily identified, these amounts are eligible for financing at the percentage spec- ified for foreign expenditures. Otherwise, locally supplied goods and services are financed at the percentage specified for local expenditures. 13. While foreign expenditures are normally expenditures in the currency of a country other than the country of the Borrower (or guarantor) for goods or services supplied from the territory of any country other than the country of the Borrower, locally supplied goods and services, if payable in foreign currency, also fall within the definition of foreign expenditures. When the loan finances 100% of foreign expenditures, the amounts claimed must exclude any customs duties and taxes (Section 1.1). 14. Some loan agreements specify a third class of expenditures not defined in the General Conditions: • Ex-factory expenditures: expenditures for goods manufactured in the Borrower's coun- try that represent the prices at the factory gate, excluding transportation costs and excise or sales taxes. July 2003 3 Section 3.2 Unforeseen Project Expenditures 15. Section 4.09 of the General Conditions stipulates that the Borrower, with the approval of IFAD, may use a reasonable amount of the loan allocated to another category, but not needed to meet any further expenditures, to cover any unforeseen expenditures that IFAD determines are directly related to and necessary for the proper and efficient execu- tion of the project. This provision offers a degree of flexibility that may not be available under the General Conditions of some CIs. IFAD's approval to use remaining loan funds to meet unforeseen expenditures is given only after a review process that includes an endorsement of the Borrower's proposal by the CI, the director of the relevant PMD Regional Division, OL and FC Loans. Special Conditions 16. Considerations that one must bear in mind when including special conditions in the withdrawal schedule are outlined in the relevant sections of this manual, as follows: • retroactive financing, Section 3.5; • disbursement conditions, Section 3.6; • SOEs, Section 5.3. 4 July 2003 Section 3.3 Section 3.3 – Loan Signing and Effectiveness Signature 1. The date of signature is the date on which the Borrower and IFAD sign the loan agree- ment. All eligible payments made by the Borrower following that date may be reim- bursed upon loan effectiveness. Exceptions to this general rule are outlined in Section 3.5, retroactive financing, and in Section 3.6, disbursement conditions. 2. With a view to ensuring prompt signature, IFAD periodically reviews the projects for which the loan signing has been delayed. Loans for which the signature has been delayed more than two years following Executive Board approval are automatically can- celled by the President unless an additional period for signature is granted by the Board. Effectiveness 3. Each loan agreement contains conditions that the Borrower must fulfil in order for the agreement to become effective. Such conditions should include, but not exceed, all actions that must be taken in order to begin channelling loan proceeds to the project. The loan agreement also specifies the deadline, normally 90 days, by which all effective- ness conditions must be met and after which the agreement will terminate unless the deadline is extended. PMD Regional Division directors, in consultation with OL, may approve extensions of the deadline for up to a total of 18 months after the original dead- line, but for no longer than two years after the signing date. Thereafter, the loan agree- ment will terminate for non-effectiveness unless an additional period is granted by the Executive Board. For each new deadline, OL shall prepare a facsimile, which is to be cleared by the relevant country portfolio manager and sent to the Borrower, containing a notification of the new deadline. 4. Once the conditions for effectiveness have been met, IFAD notifies the Borrower and the guarantor, if any, that the loan has been declared effective and provides the Borrower with the dates established for project completion and loan closing. This facsimile is prepared by OL, cleared by the relevant country portfolio manager and FC Loans and signed by the PMD Regional Division director. IFAD keeps the CI informed of any progress made towards the achievement of effectiveness, as well as of the date of actual effectiveness. 5. Loans shall not normally be declared effective if the right of the Borrower to request withdrawals from the loan accounts has been suspended or if a Borrower has a loan in non-accrual status (see Section 6.2). Before preparing the notification declaring a loan effective, the country portfolio manager verifies with FC Loans that the country loan portfolio is not subject to a suspension or that loans are not in non-accrual status. July 2003 1 Section 3.3 Reporting Requirements 6. PMD prepares an annual report, to be cleared by OL and FC Loans and for submission to the Executive Board through the Audit Committee, on all loans not yet signed 12 months after approval. 7. PMD also reports to the Executive Board on a yearly basis with regard to loans not yet effective 12 months after Board approval. These reports are also to be cleared by OL and FC Loans. 2 July 2003 Section 3.4 Section 3.4 – Loan Closing Dates and Closure of Loan Disbursement Accounts Purpose 1. The timely closing of projects forms an essential part of efficient implementation and portfolio management. Therefore, IFAD projects are expected to close on time.1 Extension of the Project Completion Date 2. If a Borrower requests an extension, the relevant PMD Regional Division will ensure that the CI makes a careful review of the progress of project implementation. Following the review and in consultation with the Borrower, but no less than six months before the project completion date, the CI recommends to the PMD Regional Division whether to close the loan or extend the project completion date. 3. Any recommendation to extend the project completion date should be accompanied by a request for such an extension from the Borrower and an assessment of the matters set forth in paragraph 13 of this section, unless the relevant PMD Regional Division has itself undertaken such an assessment. 4. If the CI recommends an extension of the project completion date, the relevant PMD Regional Division may (but is not required to) request an extension in accordance with the provisions of paragraphs 7-19 below. 5. If the CI recommends that a loan should close, the relevant PMD Regional Division may nevertheless request an extension in accordance with the provisions of paragraphs 7-19 below, but will be required to include valid justifications in support of the request. 6. If the PMD Regional Division does not request an extension in a timely manner, then FC Loans will take action – through a notification to the division – to close the loan in line with the provisions of paragraph 26 below and notify the PMD Regional Division accordingly. 7. The project completion date may be extended only in exceptional circumstances and in compliance with the provisions set forth in this section. 8. The project completion date will be extended only if all of the following conditions have been met at the time the extension is requested: • the country portfolio manager, the CI and the Borrower have made a concerted effort to address any issues affecting project performance; • the country portfolio manager has engaged in active portfolio management; 1 'Policy Statement', President's Bulletin, PB 99/01. July 2003 1 Section 3.4 • the project remains viable; the overall performance of the Borrower and the project executing agency is (or is reasonably likely to become) satisfactory, and the extension is likely to lead to the successful achievement of the project objectives; and • the Borrower's commitment is strong, and its assurances with regard to improvement are considered adequate. 9. The project completion date may not be extended if any of the following problems have occurred and are continuing to occur at the time the extension is requested: • the project's objectives have not been achieved due to overoptimistic design; • an extension has already been granted, and the plan of action that was to have been completed during the previous extension period has not been completed; or • the Borrower is in material non-compliance with the loan documents, or the loan is under total suspension; however, if the project completion date occurs during a period of force majeure,2 a stay in normal closing procedures and the other special procedures set forth in paragraph 33 below will apply. 10. The project completion date may not be extended beyond three years; however, in cases where an extension is sought in order to reactivate a project after a period of force majeure, the President of the Fund may agree to prolong the three-year limit by a period corresponding to the length of the force majeure period. 11. The project completion date may not be extended solely for the purpose of utilizing cost savings whether these are due to a devaluation of local currency or other causes. 12. The project completion date may be extended with respect to certain project compo- nents or activities. In such cases, any undisbursed amounts of the loan allocated for cat- egories not relevant to such components or activities will be cancelled or reallocated. 13. The relevant PMD Regional Division will take the following action prior to submitting any request for extension: (a) either through or in collaboration with the CI, the PMD Regional Division will undertake an assessment of the following matters: • the factors causing the delay in project implementation; • the additional time needed to complete the implementation of the project, con- solidate the project achievements, finalize disbursements, or draw up a schedule for further withdrawals; and 2 A period of 'force majeure' means, inter alia: (a) a period of civil war, severe political unrest or similar force majeure circumstances in the territory of the Borrower during which all or substantially all project activities and loan disbursements have been suspended, or (b) a period during which all or substantially all loan disbursements have been suspended due to arrears. 2 July 2003 Section 3.4 • any special action called for on the part of the Borrower, the project executing agency, or IFAD to make it possible to meet the extended project completion date; (b) the PMD Regional Division will obtain the Borrower's request for the extension and the CI's comments on this request. 14. All requests for extensions should specify: • the period for which the extension is sought; • in the case of partial extensions, the activities or components with respect to which the extension is sought and, if applicable, any related reallocation or cancellation; • in the case of project reactivation, a request to prolong the extension duration limit and justification for such a prolongation; • an action plan for project implementation during the extension period, including the targets for physical progress, a schedule of further disbursements and an indication that either the full amount of the undisbursed sums will be required or an estimation will be made of the amount of a partial cancellation; and • an estimate of the additional costs to be incurred. 15. All such requests should demonstrate, in explicit and quantifiable terms, that: • the affirmative conditions specified in paragraph 8 above have been fulfilled; • the adverse conditions specified in paragraph 9 above have not occurred and are not continuing; • the action specified in paragraph 13 above has been completed; • if the CI has not recommended an extension, that valid counter-arguments justify an extension; and • the circumstances are otherwise sufficiently exceptional to justify an extension. 16. Any such request will be rejected if the above-mentioned matters are not resolved to the decision-maker's full satisfaction. Requests should state all material facts, including those that do not support the extension being sought, and be cleared by OL and FC Loans before signature by the relevant Regional Division director. The request should also clearly show that such clearance and signature have been obtained. 17. The request should be submitted to the decision-maker no later than three months before the current project completion date. Late requests will be rejected unless the deci- sion-maker is satisfied that there are good and sufficient reasons for the late submission. 18. The assistant president, PMD, will decide whether to extend the project completion date of any particular project by a period of up to three years at the request of the country portfolio manager through the relevant PMD Regional Division director. July 2003 3 Section 3.4 19. The President of the Fund will decide on any extension of a project completion date involving a prolongation of extension time limits pursuant to paragraph 10 above at the request of the relevant PMD Regional Division director through the assistant president, PMD. Approval of Extension Requests 20. The approval by the decision-maker of any request to extend the project completion date will effectively lead to the extension of both the current project completion date and the current closing date by the period so approved. 21. In collaboration with FC Loans and OL, the relevant Regional Division director will notify the Borrower and the CI of any extensions of a project completion date as soon as possible following the approval on the part of the decision-maker. 22. In the case of a partial extension, the relevant Regional Division director will, in the notification to the CI, include instructions to ensure that only those activities for which the extension has been approved continue after the former project completion date. The Regional Division director will refer any related request for reallocations to OL for action. FC Loans will notify the Borrower and the CI with regard to any partial cancellation. 23. PMD will report to the Executive Board in the yearly progress report on project imple- mentation on all projects for which the project completion date or closing date has been extended by two years or more. 24. Rejections of extension requests by the decision-maker shall be final and not subject to appeal. The relevant Regional Division director should notify the Borrower and the CI, in collaboration with FC Loans and OL, of any such rejection as soon as possible there- after. If any request is rejected, the provisions of paragraph 33 shall apply. 25. Discussions at portfolio review meetings with the President of IFAD should include, inter alia, a review of • force majeure periods and the extensions of project completion dates approved during the period under review; and • force majeure periods and the extensions of project completion dates foreseen during the subsequent review period in order to determine their impact on the size of the loan portfolio (both at the regional level and on an overall basis). 4 July 2003 Section 3.4 Loan Closure 26. FC Loans is responsible for initiating the procedures set forth in this section: • two months before the project completion date, unless it has previously received an original or a copy of an extension request approval signed by the decision-maker; or • immediately after receiving notice that a decision has otherwise been taken to close the loan or not to extend the project completion date. 27. With the occurrence of any of the events described in paragraph 26 above, FC Loans will notify the CI and the Borrower that the loan will be closed on schedule and any expen- ditures incurred (other than the limited expenditures for winding up the project) and commitments made after the project completion date will not be honoured. FC Loans will, at the same time, instruct the CI to ensure that the Borrower submits all withdrawal applications before the closing date. 28. FC Loans will send to the CI and the Borrower a reminder of the closing date no later than three months before the closing date. 29. By the loan closing date, the Borrower should have submitted the final withdrawal appli- cations to the CI and the final audit report to the CI and IFAD for review, along with a response to any issues raised by the auditor, as well as the project completion report to the CI and IFAD for review. The Borrower should also have fully justified the SA or refunded any balance not justified. 30. In the event the Borrower wishes to request additional time so as to be able to comply with the above, an official request should be submitted no later that one month prior to the closing date through the CI, along with full justification. The CI should comment on the request and make a recommendation to FC Loans prior to the loan closing date. FC Loans, in consultation with the country portfolio manager and OL, as appropriate, will notify the Borrower and the CI of the Fund's decision and establish a revised loan clos- ing date. 31. After the loan closing date has expired, FC Loans should assess the amount of the loan, which may be reduced prior to the final closing of the loan disbursement account. Such a reduction would reflect the undisbursed amount of the loan, adjusted for any pending withdrawal applications notified by the CI and any likely need for IFAD to take remedial action with regard to audit issues or as follow-up to the project completion report. July 2003 5 Section 3.4 Closure of the IFAD Loan Disbursement Account 32. Prior to the formal closure of the IFAD loan disbursement account, FC Loans should confirm with the CI that there are no withdrawal applications pending that have been received prior to the loan closing date. It should also confirm that the final audit report has been received and reviewed and that any required follow-up action has been taken. It should likewise confirm that the project completion report has been received and reviewed, that any follow-up action has been taken and that the SA has been satisfacto- rily closed. 33. The loan disbursement account will be kept open after the loan closing date if this is required so as to: (a) disburse any withdrawal for which a withdrawal application has been received by the CI prior to the closing date; (b) permit IFAD to take remedial action with regard to the audit of the project; (c) permit IFAD to take remedial action with regard to the project completion report and (d) receive any balance remaining in the SA if such balance has not been sent prior to loan closing. After this period, which will nor- mally not exceed six months from the loan closing date, FC Loans will close the loan dis- bursement account and notify the Borrower, the CI, OL and the relevant PMD Regional Division accordingly. The notification to the Borrower will include a revised amortiza- tion schedule in the event that any amount of the loan has been reduced after the loan closing date, unless the SA remains unjustified in an amount equivalent to USD 50 000 or more, in which case, no reamortization will be processed. If FC Loans determines that the loan disbursement account must be kept open for a period beyond six months after the loan closing date, a request justifying the extension should be sent to the Controller for approval. Special Procedures for Force Majeure Periods 34. If the project completion date occurs during a force majeure period, the assistant presi- dent, PMD, may, at the request of the country portfolio manager through the relevant Regional Division director, decides to suspend certain operational procedures set forth in this manual. All suspension requests should specify, in reasonable detail, the circum- stances justifying the suspension and demonstrate in explicit terms that these circum- stances fall within the definition of a force majeure period as described above, that the suspension will be consistent with appropriate portfolio management practices and that it will be otherwise in the interests of the Fund. 35. Any such request should state all material facts, including those that do not support the suspension sought. All requests should be cleared by FC Loans and OL before being signed by the relevant country portfolio manager. Requests should also show that such clearance and signature have been obtained. All requests should be submitted to the assistant president, PMD, prior to the project completion date, with sufficient lead-time 6 July 2003 Section 3.4 so as to allow a considered decision on the proposed suspension. Promptly following the decision by the assistant president, PMD, the Regional Division should notify FC Loans and OL thereof. 36. Any decision to suspend the operational procedures taken in accordance with paragraph 35 above will have the following effects until such time as normal closing procedures are resumed pursuant to paragraph 37 below: • neither the relevant PMD Regional Division nor the CI will be required to undertake or (if such procedures have already been initiated) continue the review procedures set forth in paragraphs 2-19 above; • the project completion date may not be extended pursuant to the provisions of para- graphs 7-19; and • FC Loans will not commence the closing procedures set forth in paragraphs 26-33. 37. The assistant president, PMD, will review any decision taken under the provisions of paragraph 34 above in conjunction with the responsible Regional Division director and country portfolio manager no less frequently than every six months. 38. If the assistant president, PMD, consequently determines that either (a) the force majeure period has ended, or (b) a continuance of the suspension is no longer consis- tent with appropriate portfolio management practices or is otherwise not in the interest of the Fund, he will either (a) instruct the relevant Regional Division to resume normal operational procedures (with copies to OL and FC Loans), or (b) instruct FC Loans to initiate loan closing procedures immediately. 39. If instructed by the assistant president, PMD, to resume normal operational procedures, the relevant Regional Division should promptly initiate the procedures set forth in para- graphs 2 and 4 above and may thereafter request an extension of the project completion date in accordance with paragraphs 7-19 (but not paragraph 4).3 40. If a decision has been taken to resume normal operational procedures, FC Loans should commence the loan closing procedures set forth in paragraph 35 above following receipt of instructions from the assistant president, PMD, or four months after receipt of a copy of the instructions sent by the assistant president, PMD, to the relevant Regional Division to resume normal operational procedures, unless FC Loans has previously received an original or a copy of an extension request approval signed by the President of the Fund. 3 A review by the CI and other special requirements are always needed following force majeure periods. The related extensions cannot be viewed as routine even if they fall within the redefined project implementation periods. July 2003 7 Section 3.4 Effect of the Special Account on Loan Closing 41. The process of recovering the amounts outstanding in the project SA should commence three months prior to the completion date, as stipulated in the General Conditions, or in accordance with procedures specified by the CI and IFAD, so as to ensure that such amounts are fully recovered by the closing date. 42. As a general rule, a small amount is kept in the SA after the completion date so as to cover any expenditures incurred in winding up project activities. In the event the advance in the SA is not fully justified at the closing date, FC Loans requests, through the CI, that the project should justify the SA or refund the balance in the SA to IFAD as a matter of urgency. If, 30 days following the closing date, no refund or justification has been received by IFAD, FC Loans will request that the Borrower should justify (with a copy to the CI) or refund the unjustified balance in the SA by a specific date (normally 45 days from the date of the request). FC Loans will also advise the Borrower that no reamorti- zation will be processed until the SA is settled. If a justification or refund is not received by IFAD by the deadline, FC Loans will proceed to close the loan account. FC Loans shall maintain a record of all such cases and advise the Borrower and the Regional Division thereof. The SA facility for new projects shall take into consideration the Borrower's pre- vious record. In addition, FC Loans may, in consultation with PMD and OL, suspend any replenishment of the SA for an ongoing country portfolio. 8 July 2003 Section 3.5 Section 3.5 – Retroactive Financing Purpose 1. Project expenditures shall be eligible for financing if they are incurred on or after the effectiveness date except for those related to start-up activities that may be eligible as of loan signing. (General Conditions, Section 4.10). On an exceptional basis and with the approval of the Executive Board, project expenditures may be incurred before the loan signing. This type of financing is known as retroactive financing. In this case, IFAD shall provide in the loan agreements for these items to be reimbursed after the effectiveness of the loans. The eligible date for retroactive financing shall be specified in the President's Report and Recommendation approved by the Executive Board. Criteria 2. To be eligible for retroactive financing, goods and services must have been procured according to the procurement procedures applicable to all other loan financing. The expenditures must, of course, fall within the project description and within one or more of the eligible categories. Limits 3. Retroactive financing is normally limited; the justification for such financing is given in the formulation/appraisal report, and details are included in the President's Report and Recommendation to the Executive Board. The withdrawal schedule (see Section 3.2) of each loan with a provision for retroactive financing specifies the limits that apply for that loan. These are: • the relevant category or categories; • the maximum amount that may be withdrawn for retroactive financing; this may be a specific amount for each category or a global amount for two or more categories, expressed in the loan currency; and • the date after which expenditures become eligible for financing; this is not normally earlier than the project formulation/appraisal date; since the legal documents specify that expenditures after this deadline are eligible, it is preferable to choose the last day of a month as the deadline, particularly in cases where claims will be submitted on the basis of SOEs. 4. Annex 2 includes an example of a withdrawal schedule with retroactive financing provi- sions. July 2003 1 Section 3.5 Disbursement Arrangements 5. The disbursement letter (see Section 5.1) normally reminds the Borrower that expendi- tures eligible for retroactive financing should be claimed in a separate application for reimbursement promptly after loan effectiveness. The submission of a separate applica- tion simplifies the monitoring by the CI of the limits specified in the loan agreement. Only those payments actually made prior to loan signing are counted against the retroactive financing limit; any payments in excess of the limit are rejected. If significant amounts are involved, however, for instance because of an unanticipated delay in loan signing, the CI may propose to IFAD that the loan be amended by raising the retroactive financing limit. 6. Payment instructions (see Section 5.6) from the CI to IFAD include references to any amounts that involve retroactive financing. 2 July 2003 Section 3.6 Section 3.6 – Disbursement Conditions Purpose 1. Loan proceeds normally become available for disbursement once the loan has been declared effective (see Section 3.3). In some cases, however, it is appropriate to delay the disbursements for a specific project component or expenditure category until such time as additional actions critical to the success of the component have been undertaken by the Borrower. Disbursement conditions provide this mechanism while still allowing dis- bursements to proceed for other project activities. They should, however, be used judi- ciously. An example of a disbursement condition is shown in Annex 2. The country port- folio manager shall send all evidence supporting the fulfilment of the conditions of dis- bursement to OL and FC. Category Links 2. The design of the withdrawal schedule (see Section 3.2) takes account of any disburse- ment conditions by allocating amounts subject to these conditions to separate cate- gories. The clear designation of amounts that cannot be disbursed until the satisfaction of the disbursement condition is helpful both to the Borrower and to the CI responsible for loan administration. 3. In the disbursement letter (see Section 5.1), the Borrower is normally reminded to with- hold any applications related to a component or category subject to a disbursement con- dition until the condition has been met. SA funds may not be used for these expendi- tures prior to compliance; any amounts so withdrawn are subject to refund. Any other applications submitted prior to compliance are returned. Compliance Notices 4. The CI monitors the compliance with disbursement conditions as part of the supervi- sion process. When a condition is met, the CI sends a notification to this effect to the Borrower and a copy to IFAD so that IFAD may update the Loans and Grants System (see Section 2.3) to reflect compliance and the availability of funds in the relevant category for disbursement purposes. July 2003 1 Section 3.7 Section 3.7 – Audit Requirements Project Accounts 1. The project formulation/appraisal process includes an evaluation of the adequacy of the Borrower's accounting systems and practices and an assessment of the Borrower's insti- tutional capacity to maintain appropriate accounts that record and document project expenditures and the use of loan proceeds. The auditing arrangements are also evaluated during the formulation/appraisal process. As part of project supervision, the CI subse- quently verifies that adequate accounting and auditing arrangements have remained in place. 2. The General Conditions, except as otherwise provided in the loan agreement, require the Borrower to maintain separate accounts and records for the project in accordance with consistently maintained appropriate accounting practices (see Section 9.01 of the General Conditions). Loan agreements specify that these accounts, including the SA, if one exists, must be audited on a yearly basis by independent auditors 1 acceptable to IFAD.2 Normally, the fiscal year of the Borrower is used as the financial year so as to facil- itate the provision of counterpart contributions, and accounting and auditing. A certified copy of the report must be submitted to IFAD and the CI within the period specified in the loan agreement. 3. The effectiveness date (see Section 3.3) is used to determine the first year for which an audit report is required. In cases where very limited expenditures are incurred during the first year of project implementation (for example, if a loan is declared effective shortly before the end of the fiscal year), IFAD may agree to waive the requirement for the sub- mission of an audit report so as to avoid excessive auditing costs. This waiver is granted by the Regional Division director, in consultation with FC Loans and OL, on the recom- mendation of the CI. 4. The audit process supplements and strengthens the controls exercised through the CI procurement and disbursement review processes, which are designed to ensure that the loan funds are used for the intended purposes in conformity with the provisions of the loan agreement. 5. The CI is responsible for monitoring the timeliness and quality of the audit reports and for instructing Borrowers to take corrective action when: • audit reports are not received by the due date; 1 In most cases, the project description and withdrawal categories may include provision for the cost of the audit, if this is carried out by a non-government agency, to be financed from the proceeds of the loan. 2 Auditors frequently seek a verification of loan balances when carrying out an audit; any such requests received by the CI are referred to FC Loans for action. July 2003 1 Section 3.7 • an audit report indicates deficiencies in a Borrower's accounting system, internal con- trols, or financial statements; or • the scope or quality of an audit report is unacceptable. 6. When reports are overdue, the CI sends a notification reminding the Borrower of the Borrower's audit obligations and also sends a copy to IFAD. In the event a report is seri- ously overdue (more than three months beyond the specified deadline), the CI may rec- ommend that IFAD consider the application of appropriate remedies that may ulti- mately lead to a suspension of disbursements. If an audit report points up serious defi- ciencies in an accounting system or records or if the report itself is unacceptable, the CI recommends the remedial action required of the Borrower, as well as any remedies that should be applied by IFAD pending satisfactory completion of such action. The CI is pri- marily responsible for monitoring the timeliness and quality of the audit reports and for instructing the Borrower to take any necessary corrective action. In order to ensure com- pliance with the loan covenants, FC Loans closely monitors the receipt of audit reports, in collaboration with the CI. Statements of Expenditure 7. Statements of expenditure (see Section 5.3) provide a useful mechanism for the simpli- fication of the disbursement of small and numerous expenditures. At the same time, they reduce the control measures available when the CI undertakes a detailed review of pro- curement decisions and disbursement documentation before IFAD's funds are dis- bursed. For this reason, the General Conditions require the Borrower to retain, for ten years after the closing date, all records (contracts, purchase orders, invoices, bills, receipts and other relevant documents) related to SOE claims (see Section 4.07 of the General Conditions). The audit report must include an opinion stating that the proceeds of the loan that have been withdrawn on the basis of SOEs have been used for the intended purposes (see Section 9.03(b) of the General Conditions). 8. Given the increased risk associated with SOE disbursements, an overdue or unsatisfac- tory audit report covering the use of SOEs should normally lead to a suspension of the right to make further SOE withdrawals until such time as a satisfactory report has been received or until the problems associated with the accounting systems and controls have been resolved. The CI is responsible for notifying the Borrower of the needed corrective action and for recommending to IFAD any specific remedies that should be applied until such time as satisfactory action has been taken by the Borrower. 2 July 2003 Section 3.7 Remedies for Non-Compliance with Audit Requirements 9. The General Conditions allow for the suspension of disbursements (see Section 6.2) if the Borrower is in non-compliance with audit or other loan covenants and for cancella- tion (see Section 6.4) if such non-compliance continues for more than 30 days. Some CIs are more rigorous than others in recommending that IFAD exercise its right of sus- pension in such cases. In all cases, the CI should determine the reason for non-compli- ance and assess the risks associated with continued disbursement in the absence of a sat- isfactory audit report. 10. IFAD maintains a close dialogue with the Borrowers and CIs in an effort to understand the reasons for the non-submission of audit reports. Under 'Remedies of the Fund', loan agreements include a provision for IFAD to engage independent auditors to audit proj- ect accounts. However, if, six months after the due date for submission specified in the loan agreement, it has not yet been possible to finalize the audit report due to failure on the part of the Borrower, IFAD will suspend disbursements under the loan. Country port- folio suspension may be applied in the case of persistent non-compliance. 11. Furthermore, if the overdue status of the audit report persists for another three months, the project development team, through the Regional Division director, will recommend to the President that the loan be closed. The Borrower and the CI will be so advised. 12. During a suspension of disbursements, IFAD delays its agreement to reallocate funds or to postpone the closing date of the loan in question until such time as the Borrower has complied with audit covenants. Furthermore, it may make compliance with audit covenants a condition for loan negotiation or for the submission of a follow-up loan to the Executive Board for approval. July 2003 3 Section 3.8 Section 3.8 – Project Completion Reports Purpose 1. Each loan agreement includes a requirement that the Borrower should prepare a project completion report promptly after the project has been completed. This report examines the implementation process and the final results of the project. It therefore serves to make a formal identification of both those aspects of the project that succeeded and those that failed. IFAD uses the project completion report, together with its own inter- nal project evaluation process, to evaluate the success of its lending operations and applies the lessons learned to new lending activities. Financing 2. Borrowers generally use their own staff to prepare project completion reports and finance any associated costs from their own resources. In some cases, however, a Borrower may require the assistance of consultants to prepare the report. This activity may be eligible for financing through a withdrawal category covering consultant services. The project completion report should be prepared before the loan closing date (see Section 3.4), and the relevant withdrawal application should be submitted to the CI before that date. Review 3. The project completion report should be reviewed by PMD, OL and FC Loans. If follow- up action is required, this should be agreed upon prior to the formal closing of the loan disbursement account. July 2003 1 Section 4.1 CHAPTER 4 Project financing mechnanism Section 4.1 – Project Accounts Purpose 1. The timely provision of the financial contributions of the Borrowers to projects (coun- terpart funding) is essential since delays in the provision of counterpart funds may impede implementation and in some cases may lead to a misuse of the funds advanced to an SA (see Section 4.2). 2. In order to ensure that counterpart funds are available when needed, IFAD includes covenants in loan agreements stipulating that counterpart funds should be paid into a specially designated account (the project account) at specified intervals and in amounts judged to be sufficient to meet counterpart funding requirements for a reasonable period of time. Monitoring and Use 3. In the event the loan agreement requires the establishment of a specially designated project account, the CI is responsible for monitoring the compliance with the conditions for the operation and maintenance of the account as part of the supervision process. 4. The project account may be used to meet project expenditures that are not eligible under the IFAD loan, as well as IFAD's share of those project expenditures that are less than 100% eligible under the IFAD loan. When a project account is used to prefinance IFAD's share of eligible expenditures,1 the account is subsequently reimbursed at the eligible percentage from the SA, if one exists. Alternatively, the Borrower may submit a reim- bursement application (see Section 5.2) for a withdrawal from the loan account. 1 If borrowers have numerous payments that are only partly financed under the IFAD loan (particularly, many local currency payments), the transaction and administrative costs may be reduced if the payments are initially made from a single account. July 2003 1 Section 4.2 Section 4.2 – Special Account Purpose 1. An SA provides a mechanism somewhat like an imprest account or a revolving fund to assist Borrowers in financing eligible expenditures, as defined in the loan agreement, as payments fall due. When all project expenditures can be readily financed initially from the Borrower's own resources and subsequently reimbursed by IFAD, there is no need for an SA. However, many Borrowers lack the cash flow necessary to prefinance these expen- ditures. SAs offer Borrowers greater control over the timing of payments by making it unnecessary for them to submit an application for each eligible expenditure in the event they are not in a position to prefinance this expenditure. 2. If an SA is justified, IFAD funds are advanced to the SA to cover eligible expenditures for a limited period. While project implementation is under way, the SA is restored to its original level ('replenished') if satisfactory evidence of the expenditures is received. If project completion is imminent, the SA is wound down through a gradual recovery of the advance. 3. The basic requirements for the establishment and operation of an SA are spelled out in Section 4.08 of the General Conditions. Criteria 4. The advance of funds from an SA exposes IFAD to the risk that these funds may be used for non-project purposes. To mitigate against this risk, the following criteria govern the establishment of an SA: • The SA must be considered necessary as a means to ensure that the funds are available to make eligible payments as these become due. • The Borrower must have adequate accounting systems and control mechanisms in place so as to ensure that the SA funds are used exclusively to meet the expenditures eligible for financing through the IFAD loans. • The SA must be held in a separate account1 and in a currency and in a bank acceptable to IFAD. • SA funds must be withdrawn only as eligible expenditures are incurred. • The replenishment applications documenting the expenditures from SAs must be sub- mitted regularly, and any amounts ruled ineligible must be promptly refunded to the 1 If a project is jointly financed (see Section 1.5) with a CI or through a supplementary funds grant and if the joint financing applies to all eligible categories of expenditure, the IFAD funds may be placed in a single SA with the funds of other donors. July 2003 1 Section 4.2 SA or otherwise justified through the submission of evidence that other eligible expen- ditures have been financed through Borrower's own resources. • The audits of project accounts must include SAs. • If SAs have been granted to the same Borrower under other projects, no major unre- solved problems can exist, such as unrecoverable balances or the continuing misuse of funds. 5. A single project may include multiple SAs if separate implementing agencies are involved and if there is no central agency available to ensure the efficient operation of a single SA. Size of the Advance 6. The advance from an SA is limited to an amount sufficient to cover expenditures for a reasonable period of time. This period may range from four to six months, so that the Borrower will still have access to SA funds while awaiting replenishment under the most recent application. The advance should not normally exceed IFAD's share of the expen- ditures for a six-month period. The loan agreement sets out the maximum advance (the 'authorized allocation'). Should the authorized allocation be found inadequate during implementation, the Borrower's request for an increase may be approved, provided suit- able justification is given. Any such change constitutes an amendment to the loan (see Section 6.3). 7. In the calculation of the amount of the authorized allocation, it is likely that large pay- ments (for example, purchases of major items of equipment or substantial payments against consulting or civil works contracts) should more appropriately be made through individual withdrawals from the loan account or through the use of special commit- ments (SCs). In some cases, it may be appropriate to restrict the use of an SA to selected categories of expenditure. 8. The disbursement of the authorized allocation in the SA may occur through one or more transfers, taking into account the cash requirement of the project during the first years of implementation. The modalities as regards the disbursements of authorized allocations are provided in the relevant section of the loan agreement. 9. Excessive advances should be avoided in view of the risk of misuse. Furthermore, it is not in the interests of the Borrowers (particularly those with higher interest loans) to have large unused balances in an SA. The interest payable to IFAD may be greater than any interest earnings on the SA balance, and a depreciation of the SA currency against the loan currency may occur, thereby effectively reducing the purchasing power of the loan. 2 July 2003 Section 4.2 Currency, Location and Operation 10. The SA should normally be held in a freely convertible and stable currency widely used in international trade. This allows SA funds to be used to finance any eligible expendi- tures both local and foreign. 11. Local currency SAs should be established only in exceptional cases. The circumstances justifying a local currency account may include a positive assessment of the stability of the currency involved and the existence of assurances that the SA will be used exclusively for categories of financing in local expenditures and that the banking arrangements are such that they preclude the easy access of the project executing agency to a foreign cur- rency account. Proposals to establish local currency SAs are reviewed during IFAD's man- agement review of the formulation/appraisal report prior to loan negotiation. 12. The SA may be held in a commercial bank or a central bank. While the bank must be acceptable to IFAD, the Borrower is responsible for the selection of the institution involved. The bank in which the account has been opened must be able to: • execute a large number of payments in a variety of currencies and without delay; • issue regular monthly bank statements in sufficient detail to document eligible trans- actions satisfactorily; and • open letters of credit if these are required for efficient project execution. 13. The selected bank should be reputable and in sound financial condition so as to ensure that the SA funds are secure. If the account is held with a commercial bank, the Borrower should verify that the bank charges are reasonable. These charges may be included in replenishment requests. 14. The Borrower's level of control over the access to the account should reflect the need for the project executing agency to have controlled, efficient access to SA funds for the financing of eligible expenditures. Controls for the compliance with loan conditions should not hinder project implementation or delay the payment of these expenditures. 15. Interest-bearing accounts are desirable, provided the funds remain readily available to meet expenditures as these are incurred. The interest earned on the balance in the SA should be used in accordance with the Borrower's regulations. While the Borrower is not required to report on the use to which interest earnings are put, the use of the earnings to cover project costs is encouraged, particularly if the Borrower would otherwise face difficulties in making counterpart funds available to meet the Borrower's share of proj- ect expenditures. July 2003 3 Section 4.2 Monitoring 16. The Borrower must submit an application in order to receive an advance from the SA. A partial advance is generally preferable in the early stages of project implementation, while further advances up to the authorized allocation are appropriate as implementa- tion accelerates. 17. The disbursement letter (see Section 5.1) spells out the frequency at which replenish- ment applications must be submitted; the interval may be shortened during periods of rapid expenditures as a means of avoiding any increase in the authorized allocation. 18. Regular applications for the replenishment of the SA offer the best means of ensuring that the account is used correctly. Borrowers are therefore normally instructed to apply for replenishment on a monthly basis or once the amount withdrawn reaches one third of the amount advanced if this occurs sooner. The applications should preferably be sub- mitted promptly once the monthly statement is received and reconciled from the bank in which the SA is held. The reconciliation process should verify that the SA balance at the end of the reporting period, plus the amount of the current application and any ear- lier application that has not yet been reimbursed by IFAD, is equal to the outstanding advance. 19. The most frequent problems associated with the operation of an SA involve: • failure to use the account even though sufficient funds are available (project entities sometimes prefer to apply for direct payment to their suppliers if the controls on the use of the SAs are too cumbersome); • delayed replenishment requests, leading to an unnecessary shortage of funds that may impede implementation and • the use of SA funds to cover the Borrower's share of those project expenditures financed by IFAD at less than 100%. 20. The Borrower is requested to use the SA for all eligible payments below a threshold spec- ified in the loan agreement (minimum application value) or in the disbursement letter. 2 The Borrower should also be encouraged to use the SA for all eligible payments, includ- ing those above the minimum application value, provided sufficient funds are available in the account. 2 In cases of a joint financing (see Section 1.5) with a CI that stipulates the minimum application value for payments and the issuance of SCs outside the SA in the SA schedule of its loan agreement, IFAD's loan agreement will generally incorporate similar provisions. 4 July 2003 Section 4.2 21. The misuse of SA funds is rare when the Borrower has adequate control measures in place. If funds are misused due to inadequate controls or a misinterpretation of the eli- gibility criteria, the CI notifies the Borrower promptly of any amount that must be refunded or justified through evidence for other eligible expenditures financed from the Borrower's own resources. The loan agreement specifies that any further replenishment may be withheld until the refund has been made or until substitute documentation on other eligible expenditures has been submitted. While this remedy may be applied with some flexibility (for example, the eligible portion of an application may be replenished at the moment when the refund notice is sent), repeated misuse or delayed refunding should result in the withholding of further replenishments until such time as the SA has been restored to its proper level. 22. In addition to routinely reviewing SA applications, the CI should also monitor SA activ- ity. Special attention should be paid to any SAs for which there have been no replenish- ment applications in the previous six months and to SAs for which the outstanding advance is substantially greater than the flow through the account over a six-month period. Recovery of the Advance 23. The SA schedule in the loan agreement specifies that recovery may begin: • if IFAD determines that all further withdrawals should be made directly from the loan account; or • if the undisbursed balance of the loan (excluding SCs, see Section 5.4) is equal to twice the amount of the advance. 24. To avoid excessive outstanding advances at loan completion (see Section 3.4), the recov- ery of the advance should commence three months before the completion date. 25. A gradual recovery of the advance – normally through the application of part of the amount documented in each replenishment application for the reduction of the out- standing advance – offers the most effective means of ensuring that funds remain avail- able to finance further eligible expenditures. For example, recovery may be made so as to maintain the 2:1 ratio, that is, for each USD 3 of documented eligible expenditure, IFAD reimburses the Borrower USD 2 and applies the documentation for USD 1 to the recovery of the outstanding advance, thus ultimately ensuring the full documentation to cover the entire advance. If some withdrawals are made outside the SA, the recovery ratio for subsequent applications is appropriately modified so as to ensure that the recovery is completed before the loan is fully disbursed. July 2003 5 Section 4.2 Effects of the Suspension of Disbursements 26. During a full suspension of disbursements (see Section 6.2), no replenishments are made to the SA, but the Borrower may continue to use any balance in the SA to meet eli- gible expenditures. Applications documenting these expenditures should continue to be submitted on a regular basis. These applications are applied to the recovery of the out- standing advance. After the suspension is lifted, IFAD may agree to make further dis- bursements so as to restore the SA to the authorized allocation. If the disbursements are partially suspended, only those expenditures related to components or project entities not affected by the suspension are eligible for replenishment. 6 July 2003 Section 5.1 CHAPTER 5 Administration of disbursements Section 5.1 – Disbursement Letter Purpose 1. The disbursement letter outlines the disbursement procedures that are to be followed for a particular loan and that are based on the requirements of the CI responsible for loan administration. It gives the Borrower and implementing agencies clear instructions on withdrawals, further defines some of the provisions of the General Conditions and sets the specific limits for any disbursement-related requirements spelled out in the loan agreement. Thus, it serves as an important working tool for the implementing agency responsible for the preparation of withdrawal applications. Responsibility for Issuing Disbursement Letters 2. The CI is normally responsible for issuing the disbursement letter. The standard form of the letter of the CI involved is used since it is the CI that establishes the application for- mat, the withdrawal procedures and the supporting documentation for each application. In exceptional circumstances, IFAD may issue disbursement letters, for example, if a CI is not thoroughly familiar with IFAD's requirements. 3. Disbursement letters are sent to the official representatives of the Borrowers, to the proj- ect executing agencies and to any other agencies designated by the Borrowers during the loan negotiations. Copies are also sent to the relevant Regional Division director and the assistant controller, FC Loans. Content 4. An example of a disbursement letter is given in Annex 3. The letter: • informs the Borrower about the designation of the CI that is responsible for reviewing disbursement applications and specifies the withdrawal procedures that will apply to the loan; • reminds the Borrower of the need to submit the authorized signatures of officials des- ignated to sign withdrawal applications; • sets out any special requirements that amplify the provisions of the loan agreement, for example: – the requirements for SA operation and the intervals at which SA replenishment applications should be submitted (see Section 4.2); July 2003 1 Section 5.1 – the items eligible for disbursement on the basis of SOEs (see Section 5.3), and – the minimum application value 1 for direct payments from the loan account or for the issuance of SCs (see Section 5.4); • specifies the agencies that will receive copies of IFAD disbursement notices and requests details about any additional addressees; • clarifies special requirements with respect to any retroactive financing provisions (see Section 3.5) or conditions for disbursement (see Section 3.6) and • outlines special disbursement arrangements for any supplementary fund grants (see Section 1.2) associated with the project and administered by the CI. 5. The disbursement letter will also give details on audit requirements and remind the Borrower that applications must be submitted by the loan closing date. 6. The disbursement letter is modified as necessary should any basic requirements be changed during the course of project implementation whether due to amendments to the loan or to changes in administrative requirements. Minimum Application Value 7. From an administrative standpoint, the execution of numerous small payments is costly. Each disbursement letter or loan agreement (Schedule 2) should therefore indicate a minimum application value. For payments or for the coverage of letters of credit below this level, the Borrower should use the SA, if one exists, or first make the payments and then group eligible expenditures into a reimbursement application of reasonable size. When an SA exists, the minimum application value for replenishment transactions should be between 20 and 30% of the authorized allocation of the SA. The disbursement letter should therefore also indicate the minimum replenishment value. When no SA exists, the minimum application value should normally not be less than the equivalent of USD 20 000. However, these limits should be applied with a reasonable degree of flex- ibility during the processing of applications so as to take due account of the issues and the level of urgency involved. 1 In the case of joint financing (see Section 1.5) with a CI, the latter's loan or credit agreement generally stipulates the minimum application value for payments and the issuance of SCs external to the SA. In such a case, IFAD's loan agreement will generally incorporate similar provisions. 2 July 2003 Section 5.2 Section 5.2 – Withdrawal Application Authorized Signatures 1. The General Conditions require a Borrower to furnish IFAD and the CI with evidence, satisfactory to the CI, of the authority of the person or persons authorized to sign appli- cations for withdrawal and with authenticated specimen signatures of each such person (see Section 4.04 of the General Conditions). In some cases, Borrowers may decide that applications must be signed by two authorized officials as an additional control meas- ure to prevent fraudulent withdrawals. 2. To avoid delays in disbursement, authorized signatures should be submitted to the CI, with a copy to IFAD, promptly following loan signing. The disbursement letter (see Section 5.1) normally reminds the Borrower of this requirement and requests prompt notification with regard to any changes in the authorized signatories. 3. The CI is responsible for ascertaining that applications are properly signed by the author- ized signatory(ies) before it authorizes disbursement. Application Format 4. The CI is responsible for determining the appropriate application format. This is nor- mally the standard format used by a CI that is a financial institution. CIs that have no lending programme of their own normally adopt practices and application formats con- sistent with those of one of the major financial institutions appointed by IFAD as CIs for other loans. Application forms should include the Borrower's statement that the expen- ditures are eligible under the loan, as well as sufficient information to satisfy the CI that the Borrower is entitled to make the withdrawal for the purposes specified in the loan agreement (see Section 4.04(d) of the General Conditions). 5. In cases of joint financing, when all expenditures are financed at a fixed ratio by the cofi- nancing partners (see Section 1.5), a single application may be used for all donors pro- vided the percentage share applicable to each donor is shown. 6. The following withdrawal procedures are generally allowed by CIs: • reimbursement to the Borrower's account so as to cover expenditures already made by the Borrower; • direct payments to a third party at the request of the Borrower for goods or services supplied by that party; • advance payments to an SA (see Section 4.2) opened by the Borrower in accordance with the provisions of the loan agreement and July 2003 1 Section 5.2 • an SC issued by the CI, on behalf of IFAD, to a commercial bank so as to cover a let- ter of credit, with payments to the commercial bank as the conditions in the letter of credit are met (see Section 5.4). 7. In some cases, the CI may also agree to accept a blanket (or lump sum) application to cover future expenditures. Section 5.5 provides a further description of the arrangements used by several financial institutions. 8. Flow charts outlining the various application types and payment processes are given in Annex 4. 9. The application format must include sufficient information to determine eligibility; details about the supplying country(ies) and complete and correct instructions concern- ing the transfer of funds to the designated bank account. Numbering Sequence 10. As a control mechanism, Borrowers are required to number their withdrawal applica- tions. This helps the CI identify applications that may have gone astray. Applications should preferably be numbered consecutively irrespective of the application procedure. In the event multiple implementing agencies submit separate applications, the number- ing sequence should include a short alphabetic code to identify the respective agency (for example, MOA-1 for an application from a ministry of agriculture). These numbers appear on the debit advices (see Section 7.1) issued by IFAD for each withdrawal. Payment Instructions 11. Applications must include clear and complete payment instructions. All payments are made by telegraphic transfer, which is the most secure and prompt method of payment. The application should designate the name and address of the payee's bank, the payee's account number and the name and address of the payee. If the payment currency is not the currency of the country in which the payee's bank is located, the application should also indicate the name of the correspondent bank (normally designated by the payee in consultation with the payee's bankers) of the payee's bank. For example, a payment in United States dollars to a bank in Canada must be made through a correspondent bank in the United Sates for the account of the Canadian bank. 2 July 2003 Section 5.2 Supporting Documents 12. The General Conditions require the Borrower to provide the CI with such documents and other evidence in support of applications for withdrawal as the CI may reasonably request whether before or after 1 the CI has authorized payment. In practice, the supporting documents usually required are readily available commercial documents, such as: • contract or purchase orders; • supplier's or consultant's invoices or a summary statement of works performed that is signed by the supervising engineer or other authorized official; and • evidence of shipment (for equipment and materials purchased). 13. This can be a: • copies of the bills of lading; • forwarder's certificates; • evidence of payment (for reimbursement); • receipted invoices or formal receipts; • commercial bank's reports of payment; • performance securities, such as a bank guarantee in the case of advance payments if these are required under the terms of the contract or if an unusually large advance pay- ment is made; or • letters of credit in favour of the supplier (for issuance of an SC, see Section 5.4). 14. The procurement schedule of the loan agreement requires the Borrower to submit two conformed copies of contracts to the CI promptly following signature and before the submission of the first related application. Copies of the remaining documents normally accompany the application sent to the CI. 15. When SOEs are used (see Section 5.3), the supporting documents justifying the amounts claimed are retained by the Borrower for inspection by the CI during supervision mis- sions and for examination by the Borrower's independent auditors (see Section 3.7). Currency of Withdrawal 16. The Borrower is entitled to apply for a withdrawal in the currency in which the expen- ditures are incurred. Generally, this means that the Borrower makes claims for payments in the currency paid or due to the suppliers of the goods or services. In the case of reim- 1 Supporting documents normally accompany the application, except in cases where IFAD has agreed to disburse against SOEs (see Section 5.3) or for some types of blanket withdrawal applications (see Section 5.5). July 2003 3 Section 5.2 bursement claims, if the Borrower has used another currency to purchase the currency paid to the supplier, reimbursement may be requested in the currency amount used to execute the payment, subject to the submission of evidence of payment that shows both the currency amount used and the currency and amount actually paid to the supplier. 17. IFAD may also agree to reimburse the Borrower in another currency if the Borrower would otherwise have to convert the funds after receiving the payment from IFAD. In such cases, the Borrower requests payment in the designated currency in an amount equivalent to the eligible expenditure. For example, the Borrower's application may request the payment of the euro equivalent of USD 500000 if the eligible expenditure has been incurred in United States dollars. This arrangement ensures that the loan account is charged with the appropriate amount based on the exchange rates prevailing at the date of IFAD's payment, while also allowing the Borrower to receive the currency actually needed for future expenditures. Ineligible Expenditures 18. The CI notifies the Borrower of the reasons for a determination that any application or part of an application is ineligible for financing. Where appropriate, the CI also indicates any corrective action, for example, that it may be necessary for the Borrower to submit additional supporting documents. Brief details of any ineligible amounts are also included in the CI's disbursement authorization sent to IFAD (see Section 5.6). 4 July 2003 Section 5.3 Section 5.3 – Statements of Expenditure Purpose 1. IFAD modifies its usual requirements for the documentation of disbursements by expecting a Borrower to use SOEs if the expenditure amounts are small and the docu- mentation is voluminous. Through this procedure, IFAD reimburses the Borrower on the basis of a withdrawal application supported by a statement of eligible expenditures (the SOE) that is prepared and certified by the implementing agency and meets the criteria of IFAD and the CI in both form and content. The Borrower or project entity retains the supporting documentation (including contracts where appropriate) and makes it avail- able for inspection and verification by independent auditors and supervision missions. SOEs thus make a significant reduction possible in the documentation that must be sub- mitted by the Borrower in support of applications. They also simplify the review process undertaken by the CI for individual applications. Criteria 2. SOEs may be used provided the Borrower has: • the administrative and accounting capability to prepare and maintain SOE records and make them readily available for inspection; • an adequate internal control system; and • developed arrangements for regular and independent audits of SOE records. 3. Compliance with these criteria is verified as part of the project formulation/appraisal process. 4. Reimbursement by IFAD under the SOE procedure is approved only for payments already made to suppliers of goods, works, or services from the Borrower's own resources (including payments made from an SA; see Section 4.2). The expenditures eligible for SOE withdrawals are spelled out in the disbursement letter (see Section 5.1). 5. The types of activities for which SOEs are generally considered appropriate are the fol- lowing: • expenditures on civil works carried out by force account; • operating costs; • small agricultural subsidiary loans; and • payments on small contracts or purchase orders. July 2003 1 Section 5.3 6. Items that may constitute small subsidiary loans or small contracts are agreed upon with the Borrower at the time of loan negotiation. The SOE limitation on contracts applies to the total value of the contracts; the limitation may vary depending on the type of expen- diture. For contracts with values above the limitations, all related withdrawal applica- tions must be accompanied by the normal supporting documentation. 7. SOE limitations on small contracts are set at or below the procurement prior-review threshold (see Sections 1.4 and 2.1) since IFAD reserves to the CI the right to review pro- posed procurement decisions for larger expenditures before Borrowers can award con- tracts. Monitoring 8. The use of SOEs in place of normal, fully documented applications makes it impossible for the CI to conduct an independent review of the supporting documents for each expenditure prior to the transmission of a disbursement authorization to IFAD. Two ex post review mechanisms are used as a means of verifying the eligibility of the items claimed under SOEs: • Supervision missions use random sampling techniques to verify that the SOE proce- dure has been employed correctly, that the required documentation supporting the SOEs has been properly maintained in the Borrower's files and is readily available for inspection and that adequate arrangements have been made for the timely submission of SOE audit reports. • Independent auditors appointed by the Borrower are required under the provisions of the General Conditions to supply an opinion on the adequacy of the systems used to prepare SOEs and on the availability of appropriate supporting documentation. 9. SOE forms are designed so as to contain sufficient information to assist supervision mis- sions in the review process. These forms must also include details of the origin of goods and services in order for IFAD to record expenditures according to the supplying country. 10. Monitoring by the CI is required so as to ensure that audit reports are received in a timely manner and that they provide a satisfactory opinion with respect to the use of SOEs (see Section 3.7). 11. Any amounts withdrawn on the basis of SOEs that are subsequently found to be ineli- gible must be deducted from future claims for the reimbursement of eligible expendi- tures financed from the Borrower's own resources (excluding the SA), provided these claims are submitted within a reasonable time, or they must be refunded to IFAD (see Section 5.6). 2 July 2003 Section 5.4 Section 5.4 – Special Commitments to Cover Letters of Credit Purpose 1. Special commitments 1 enable IFAD to confirm that it is providing the financial backing for a letter of credit that is eligible for financing under an IFAD loan. By means of an SC, the supplier's bank is able to submit claims directly to the CI for the payment of amounts due as the conditions for the payment of the letter of credit are met, rather than claiming these amounts from the Borrower's bank that opened the letter of credit. Thus, the SC serves to increase the confidence of the supplier's bank that the payments due against the letter of credit will be promptly and reliably met. SCs are normally used to cover imported goods. 2. IFAD does not impose any special charges to cover the issuance of SCs even if the CI issu- ing an SC on IFAD's behalf imposes a charge in connection with the SCs issued under its own loans. 3. Flow charts showing the disbursement process are given in Annex 4. Availability and Operation 4. The standing of SCs depends largely on the extent to which commercial banks operating at the international level are familiar with the institutions issuing the SCs. For example, the World Bank (one of IFAD's CIs) issues SCs both under its own loans and on behalf of cofinancing partners such as IFAD. These SCs are readily accepted by all major com- mercial banks since they provide an assurance that payments will be made even in the event the balance of the loan is cancelled or suspended. For CIs that do not have a long- standing relationship with commercial banks through the issuance of such commit- ments for payments through their own operations, SCs issued on behalf of IFAD should be in a format similar to that used by agencies such as the World Bank and administered in the same manner. This will increase the likelihood that commercial banks will be will- ing to accept the commitment. 5. Some CIs issue documents entitled 'Guarantee', 'Qualified Agreement to Reimburse', or 'Qualified Commitment' that provide the same type of assurance as an SC. In the case of a qualified agreement to reimburse or a qualified commitment, the CI (and IFAD) reserves the right to withhold payment in the event of loan cancellation or suspension. If this right is exercised, however, it will undermine the standing of the commitment for this and other loans. Thus, IFAD normally prefers not to exercise the right to cancel or suspend any amounts committed to cover letters of credit. 1 Some CIs use different names for this document. July 2003 1 Section 5.4 6. Before issuing an SC, the CI undertakes a full review of the Borrower's application so as to ascertain eligibility and the availability of funds and to confirm that the terms and conditions of the letter of credit are acceptable. The SC has the same validity period as the underlying letter of credit. Commitments cannot be made beyond the loan comple- tion date (see Section 3.4); and new commitments may not be issued during a suspen- sion of disbursements (see Section 6.2). 7. SCs are issued to the supplier's bank (the bank that will negotiate the documents sub- mitted by the supplier in compliance with the letter of credit) in the currency and the amount of the supporting letter of credit. Since IFAD financing is limited, the SCs are subject to a second limitation expressed in the currency of the IFAD loan. This is calcu- lated by adding a margin to the current exchange rate (generally about 5%) to cover future exchange rate fluctuations. The SC form notes that the Borrower has undertaken to make prompt payment of any shortfall originating from the supplier's bank because of the imposition of this limit. 8. Copies of the SCs are transmitted to the Borrower, the project executing agency and IFAD so as to ensure that these are aware of the amount that must be committed (or reserved) from the undisbursed loan amount in order to cover the letter of credit. These amounts cannot be used for any other eligible expenditures unless the letter of credit has lapsed or has been cancelled. 9. Some letter-of-credit amendments may affect the eligibility of the expenditure for financ- ing through the IFAD loan. Consequently, the terms and conditions of the SC specify that certain letter-of-credit amendments are subject to the existence of a written approval of the CI. As a general rule, changes in the name of the beneficiary, the description or quantity of the goods, the value, or the extension of the validity period of the letter of credit by more than six months, or beyond the loan completion date, whichever is ear- lier, are subject to the approval of the CI. Payments 10. When an amount comes due under an SC, the supplier's bank submits a payment claim to the CI requesting payment to its account. The submission of additional documenta- tion by the supplier's bank to the CI is generally unnecessary since the international reg- ulations issued by the International Chamber of Commerce governing the operation of letters of credit give adequate protection and assurance that the amount claimed is con- sistent with the terms of the letter of credit. 2 July 2003 Section 5.4 11. The SC normally specifies that payment will be made within a reasonable period of time (generally 30 days) following the receipt of a payment request from the supplier's bank. Therefore, the prompt issuance to IFAD of disbursement authorizations (see Section 5.5) if a CI receives a payment claim is of particular importance since an interest penalty for late payment could otherwise be claimed by the supplier's bank. Monitoring 12 Outstanding SCs are monitored by the CI in order to ensure that the amount commit- ted remains sufficient to cover any undisbursed balance in the SC. In the event the amount needs to be increased significantly because of exchange rate fluctuations between the currency of the letter of credit and the loan currency, IFAD and the com- mercial bank are notified of the increase. Any part of the uncommitted loan balance may be used for this purpose. IFAD must also be notified when any SC currency balance has been cancelled 2 so that the funds reserved for the SC become available to meet other eli- gible expenditures. 2 If the full SC currency amount has been paid, IFAD automatically releases any excess amount committed in the loan currency. July 2003 3 Section 5.5 Section 5.5 – Disbursement Authorization Basic Content 1. Once the CI has completed its review of a withdrawal application and determined the eligibility of the expenditures claimed, it sends an authenticated payment instruction to IFAD. The payment instruction may be authenticated by: • adding a test key to the message; this test key is agreed upon by IFAD and the CI and is used for all loans administered by the CI; or • transmitting messages via SWIFT (a financial message system used by the Society for Worldwide Interbank Financial Telecommunications). 2. Each payment instruction includes the following elements: • IFAD's loan number and project name; • the CI's associated loan or project number, if any; • the application number, currency and total amount; • the total amount approved for payment by IFAD; • the amount related to each withdrawal category and supplying country; • complete payment instructions, including the name and address of the payee's bank and the beneficiary's account number, name and address; • a meaningful payment reference to be cited by the payee bank to the payee, for exam- ple, the loan and application numbers for a reimbursement application, or the con- tract and invoice numbers for a direct payment to a supplier; and • the SC number, if one exists. 3. The exclusion of any of these items may lead to payment delays while IFAD seeks addi- tional information from the CI. 4. Several applications may be grouped into a single payment instruction, provided the cur- rency and beneficiary are the same. Numbering Sequence 5. IFAD and the CI agree on a numbering system for all payment instructions so that any missing messages may be quickly identified. If this arrangement is in place, IFAD can promptly notify the CI of any gaps in the numbering sequence of the messages received, and IFAD can request the retransmission of the missing messages. July 2003 1 Section 5.5 Additional Information 6. Payment instructions include supplementary information in cases where: • part of an application has been found to be ineligible; • part of an application for the replenishment of an SA is to be applied in order to recover an outstanding advance (see Section 4.2); • the payment of the authorized amount will lead to an overdraft on the amount allo- cated to a category (see Section 6.1); • a loan is suspended, but the items claimed fall within the list of exemptions to the sus- pension; or • part or all of the application are to be paid only after a suspension of disbursements has been lifted (see Section 6.2). IFAD Processing Procedures 7. The test key in the payment instruction is verified by the Office of the Treasury. FC Loans then enters data into the Loans and Grants System (see Section 2.3) verifying that the loan is effective, that there are no unsatisfied disbursement conditions attached to the withdrawal category(ies), that the available loan funds are sufficient, that sufficient funds remain in the relevant withdrawal category(ies), or that justification has been given for an overdraft, that SA the replenishment amounts are within the authorized allocation specified in the loan agreement, that the loan closing date has not lapsed, or that the payment instruction has been received within any extended period for submis- sion of applications (see Section 3.4), and (in the event the loan disbursements have been suspended) that the items fall within the list of exemptions. 8. If the application number has been used already, a message number (if required) is miss- ing or duplicated, or the incoming message is garbled or illegible to the extent that the amount or the payment instructions are unclear, FC Loans seeks clarification from the CI before executing payment. 9. All payment instructions should include details of the withdrawal category (essential information that is included in the debit advice; see Section 7.1). 10. Similarly, all payment instructions should include details of the supplying country(ies) related to each category (these data are required by IFAD for reporting purposes). If this information is missing, the payment is executed to avoid penalizing the Borrower. At the same time, however, IFAD requests that the CI provide the missing details. 11. IFAD establishes limits on the rights of its individual loan administration staff to author- ize payments. 2 July 2003 Section 5.5 Safeguarding against Fraud 12. The review process undertaken by the CI should be sufficiently rigorous to safeguard against fraudulent withdrawals. Direct payments to the suppliers of goods and services offer the greatest opportunity for fraud. The monitoring of the application numbering sequence offers some control since a third party might not be aware of the exact status of the loan. The primary controls are: • for payments reimbursing the Borrower's account: a verification of the authorized sig- nature(s) and assurance that the payment instructions are appropriate; • for payments on an SA: a verification of the authorized signature(s) and assurance that the payment instructions are consistent with the evidence submitted when the account was opened; • for payments against an SC: a verification that the payment request has been submit- ted by the commercial bank holding the CI's special commitment; and • for direct payments to the suppliers of goods and services: a verification of the author- ized signature(s), the monitoring of procurement eligibility and a check that the sup- porting documents submitted with the application justify the payment to the desig- nated beneficiary. July 2003 3 Section 5.6 Section 5.6 – Loan and Grant Refunds Refund Types 1. Any amounts withdrawn from an IFAD loan and subsequently found to be ineligible or not needed for the original purpose must be refunded to IFAD. These amounts are cred- ited to the loan account and become available for disbursement or cancellation, as appropriate. 2. Refunds are required if: • the balance in an SA (see Section 4.2) is not required to meet further project expendi- tures; • the amount paid to a supplier of goods or services exceeds the amount needed (this situation mainly arises when an advance payment has been made); • a contract or other activity included in an application and paid for by IFAD is subse- quently determined to be ineligible (this situation may arise when SOEs (see Section 5.3) are used, or when contracts fall below the prior-review threshold and contract award procedures are examined during a supervision mission); or • a disbursement error leads to the payment of an incorrect amount or currency, or to the payment of an improper beneficiary. Treatment of Refunds 3. When the CI becomes aware that a refund is required, it consults FC Loans to determine the correct payment instructions for the refund, that is, the name and address of the bank, IFAD's account number and the payment reference required for prompt credit to the loan account. The banking details vary depending on the currency to be refunded. The payment reference should include IFAD's loan number and the withdrawal author- ization number, or the Borrower's application number, if applicable. The CI must also notify IFAD of the reason for the refund so as to enable IFAD to determine the most appropriate method of handling the matter. 4. Provided the original payment is consistent with the payment request received from the Borrower, or from a commercial bank holding an SC (see Section 5.4), the refund is credited to the loan account, and its value date is entered as the date on which IFAD receives the funds. This applies to the first three cases outlined above. (In the case of a mistaken claim against an SC, the Borrower may claim compensation from the com- mercial bank in order to cover interest or any other costs.) Thus, the Borrower bears any exchange risk from the date of the original disbursement to the date of the refund and is liable for any interest or service charges while the amount is outstanding. July 2003 1 Section 5.6 5. In the event the original payment is inconsistent with the payment request received from the Borrower, or from a commercial bank holding an SC, the refund is applied accord- ing to the value date and the value equivalent applicable to the original transaction so that the Borrower's account is made whole. In this case, once the refund has been completed, the loan account is restored as though the transaction had not occurred. Any exchange loss or gain is absorbed by IFAD. Losses of more than the equivalent of USD 10 000 require the approval of IFAD's Vice-President prior to the adjustment of the loan account. Reporting Requirements 6. FC Loans reports on a quarterly basis to the Vice-President on loan refunds for which IFAD has been required to absorb an exchange loss or gain because the original payment has been inconsistent with the payment request. 2 July 2003 Section 6.1 CHAPTER 6 Loan administration during project implementation Section 6.1 – Category Overdrafts and Reallocations Limits on Category Disbursements 1. The withdrawal schedule (see Section 3.2) in the loan agreement specifies the amount allocated for each withdrawal category based on the estimated costs at loan approval. Most loans also include unallocated funds (a contingency allowance) that are available for reallocation among withdrawal categories. The specified allocations provide a meas- ure of control to avoid excessive disbursements for one type of expenditure at the expense of another project activity. 2. In some cases, the CI may determine, to a limited extent, that it is appropriate to dis- burse beyond the category allocation. This situation arises when: • a more detailed evaluation of the overall progress of the project progress is required to justify a formal reallocation, generally during the course of the next supervision mis- sion; or • the project completion date is imminent, and less than 10% of the loan remains for disbursal. 3. If a formal reallocation is anticipated within a short period of time, categories should be overdrawn only to the extent judged appropriate by the responsible IFAD country port- folio manager in consultation with the loan officer or task manager in the CI. The pay- ment instruction (see Section 5.6) that is sent to IFAD by the CI and that would result in a category overdraft should include a brief justification for the overdraft in payment. If the payment instructions received by IFAD would result in an overdraft on a specific category and no information is received from the CI on any follow-up action taken, IFAD (FC Loans) will act as follows: • if the amount overdrawn is less than 30% of the category and can be covered through the existing funds in the unallocated category, the payment may be processed and the CI will be informed accordingly; or • if the overdrawn amount is 30% or more of the category or exceeds the amount of the funds remaining in the unallocated category, no further payment will be processed unless the CI provides IFAD with valid reasons for making the payment. 4. On an exceptional basis, payments on overdrawn categories will be made in the event: • they would occur within six months prior to the project completion date, or July 2003 1 Section 6.1 • if the undisbursed balance of the loan is less than 10% of the loan amount; in such a case, unless an extension of the completion date is envisaged, no formal reallocation should be made and the disbursements for eligible expenditures will continue up to the closing date or until the total draw-down of the loan amount. Category Reallocations 5. Section 4.09 of the General Conditions makes provision for IFAD to reallocate funds from one category to another upon notification of the Borrower. This allows realloca- tions to be made expeditiously. The CI must endorse any proposals for reallocation before such proposals are acted upon by IFAD. 6. In practice, the CI normally first reviews the progress of individual project components with the Borrower so as to determine how funds may need to be reallocated. Proposals for reallocation usually involve: • the transfer of unallocated funds to one or more of the other categories; or • the transfer of the anticipated savings in one category to another category or categories for which the requirements are greater than previously estimated. 7. Following such a review, the CI forwards its recommendations to IFAD, which notifies the Borrower of the revised allocations for individual categories. Reallocations take account of the amounts already withdrawn, the amounts reserved to cover SCs (see Section 5.4) and anticipated future expenditures. 8. The responsible country portfolio manager, in consultation with FC Loans, reviews all reallocation recommendations from the CI. The relevant Regional Division director approves transfers from unallocated funds. Transfers among other categories require the clearance of FC Loans and OL and are approved by the assistant president, PMD. In the consideration of such proposals, one should pay close attention to categories such as 'operating costs' and 'salaries' so as to ensure that the proposed reallocated amounts for these categories do not constitute a sizeable percentage of the total loan amount. The resulting shifts in categories must not impair the overall financial and physical balance of the project. PMD notifies the Borrower of the amendment. 9. The need for changes, such as the deletion or the modification of an existing category or the creation of a new category, generally emerges from a mid-term review or other major review of project implementation, including a detailed assessment of the project com- ponent costs associated with each of the withdrawal categories. This process requires a comprehensive knowledge of the project's design parameters. Changes in the category structure require an amendment of the loan, which is signed by the President of the Fund and countersigned by the Borrower (see Section 6.3). 2 July 2003 Section 6.2 Section 6.2 – Suspensions of Disbursements Reasons for Suspension 1. As provided for in Section 12.01 of the General Conditions, disbursements may be sus- pended by IFAD for the following reasons: • non-compliance with specific project loan covenants (for example, failure to have proj- ect accounts audited, the dissolution of a key project entity, or the diversion of funds or project resources); or • overdue debt service payments. 2. Continued non-compliance may lead to loan cancellation (see Section 6.4). 3. A project-specific suspension is initiated when the CI informs IFAD of an event of default and recommends remedial action. IFAD issues a warning notice to the Borrower and sets a reasonable deadline within which the Borrower will be expected to comply. The suspension goes into effect if the Borrower has not taken corrective action by the specified deadline and remains in place until the problem is resolved. The suspension may be restricted to a specific component1 or to selected categories of expenditure. For example, it may be appropriate to restrict suspension for audit non-compliance by one of several implementing agencies to the disbursement categories that fund that agency's activities. 4. An overdue debt service suspension is imposed by IFAD when a semi-annual debt serv- ice payment is overdue by more than 75 days. The steps taken prior to this deadline are outlined in Section 8.2. IFAD applies a graduated approach that escalates the penalty for overdue debt service. Under this approach, the initial suspension is restricted to the loan for which the payment is overdue. However, if the amount remains overdue for more than 120 days, the suspension is then extended to the entire portfolio of loans made to the same Borrower or guarantor. Application of Cofinancing Cross-Default Provisions 5. Loan agreements for projects that are cofinanced by other donors include the provision that IFAD may suspend its loan in the event of a default under the cofinancing partner's loan. In such cases, IFAD's decision to proceed with a suspension is taken by the Regional Division director following consultation with the Vice-President. 1 The impact of a partial suspension that affects a specific component is carefully evaluated since, in many cases, it may thereafter not be appropriate to continue financing other components. July 2003 1 Section 6.2 Suspension Notices 6. Irrespective of the reason for a suspension, IFAD issues a series of notices (see Section 8.2 for the collection steps associated with overdue debt service) culminating in a warn- ing notice to the Borrower that the Borrower has 15 days to remedy the default. If the deadline elapses without satisfactory action on the part of the Borrower, a formal sus- pension notice is served on the Borrower. Both notices are copied to the CI. Examples of these notices are provided in Annex 6. All suspension notices are sent in the name of the President of IFAD. Exemptions from Suspension 7. IFAD has the right to suspend all disbursements other than disbursements against an SC (see Section 5.4) if the SC includes an undertaking that it is not subject to the cancella- tion or suspension of disbursements as long as the underlying letter of credit remains valid. 8. In practice, IFAD normally exempts a number of items when it suspends disbursements. These exemptions are granted so as to avoid the undue disruption of project implemen- tation and, to the extent possible, to avoid causing harm to innocent third parties. The items normally exempted are as follows: • claims for payment from commercial banks holding SCs, guarantees, qualified agree- ments to reimburse, or qualified commitments issued by the CI on behalf of IFAD prior to the suspension date; • direct payments to consultants and payments for training or fellowships in cases in which an interruption would cause personal hardship or disrupt critical work; • payments related to contracts signed before the suspension date for the supply of goods shipped or delivered or for works performed or for any expenditures made on or before the suspension date, provided the relevant applications are received by a specified date, normally not more than 90 days after the suspension date; and • payments against blanket applications received before the suspension date. 9. The list of exemptions has been kept relatively short in order to avoid situations in which the suspension would have little practical effect in limiting IFAD's exposure and would give little additional incentive to the Borrower to come back into compliance. 2 July 2003 Section 6.2 Processing of Applications during Suspension 10. The CI reviews all applications to determine whether the claimed amounts fall within the list of exemptions. Payment instructions (see Section 5.6) for SA replenishment requests specify the amount to be applied to the recovery of the outstanding advance (see Section 4.2). Payment instructions for other applications indicate the amounts eli- gible for payment despite the suspension and the amounts to be paid by IFAD once the suspension is lifted. Informal Suspensions of Disbursements 11. In rare cases, when it is cofinancing a project with a CI that applies the concept of infor- mal disbursement suspension, IFAD may agree to adopt the same practice for a specific project. An informal suspension of disbursements, in this case, involves an agreement with the Borrower to refrain from submitting any new withdrawal applications until a condition of default (other than overdue debt service) has been remedied. An informal suspension is applied only if there is a strong probability that the default will be recti- fied within 60 days. The notice of informal suspension specifies a deadline for corrective action and reminds the Borrower that failure to meet this deadline will lead to a formal suspension of disbursements. The Borrower is advised that the submission of new appli- cations during the period of informal suspension could also lead to a formal suspension. The notice is signed by the Regional Division director and cleared by OL and FC Loans, and a copy is sent to the CI. 12. Although a notice of informal suspension lists the submission of incorrect applications as possible grounds for formal suspension, the Borrower is first allowed to withdraw any such application. The CI informs FC Loans of any applications received during an infor- mal suspension so as to enable IFAD to ascertain whether the Borrower wishes to with- draw these applications. July 2003 3 Section 6.3 Section 6.3 – Loan Amendments, Supplementary Financing and Reporting Requirements Introduction 1. During implementation, the original loan provisions may require amendment in order to reflect changed circumstances. A detailed mid-term review of the progress of a project may sometimes be required to supplement the normal schedule of supervision missions in the event serious implementation difficulties have been identified. In some cases, components that are no longer viable may be cancelled, while other components may be redesigned. The overall approach is sufficiently flexible to allow for any modifications needed to ensure effective project implementation. The approval process varies depend- ing on the degree of change. 2. In exceptional cases, if potential cost savings have been identified prior to the comple- tion date, there may be justification for the expansion or extension of a given project component so as to use surplus funds to procure additional goods or services that would result in the achievement of the approved objectives of the project. However, funds that are no longer needed cannot be diverted to meet the needs of another project for the same Borrower. Instead, cost savings are normally cancelled in accordance with Section 12.02(e) of the General Conditions, which provides for the cancellation of any amounts that have not been withdrawn by the closing date. In general, financial prudence dictates that, following project completion, any surplus funds in loan accounts should revert to IFAD. Amendment Procedure 3. Amendments under the jurisdiction of the assistant president, PMD, are the following: • a postponement of the effectiveness deadline (see Section 3.3) or the completion and closing dates (see Section 3.4); • changes in the disbursement percentages for reasons outlined in Section 4.09(b)(ii) of the General Conditions on reallocation; • the reallocation of proceeds among categories (see Section 6.1); • loan cancellations initiated by IFAD (see Section 6.4); and • the use of cost savings when the amount does not exceed 10% of the loan amount or the equivalent of SDR 1 million, whichever is less. July 2003 1 Section 6.3 4. In all such cases, these amendments require a memorandum to the assistant president, PMD, from the country portfolio manager through the Regional Division director. The memorandum is sent to OL and FC Loans for clearance. Once the amendment has been approved, the Borrower and the CI are notified by facsimile, which is signed by the Regional Division director. The amendment is effective on the date of approval, unless otherwise stated. 5. The following amendments are under the jurisdiction of the President: • changes in the project description; • amendments to loan covenants (for example, a change in the provisions concerning the on-lending of a portion of the loan proceeds); • amendments related to procurement or the SA (for example, a change in the procure- ment prior-review threshold or the authorized allocation for the SA); • amendments in the withdrawal schedule that may introduce a new category, change a category description, or result in the deletion of a category or an adjustment in a dis- bursement percentage for reasons other than those described in Section 4.09(b)(ii) of the General Conditions; 1 • the use of cost savings when the amount is between 10 and 20% of the loan amount or between the equivalent of SDR 1 million and the equivalent of SDR 2 million, whichever is less; for larger amounts, the proposal is submitted to the Executive Board for approval. 6. In all such cases, the amendments require a request from or the agreement of the Borrower's authorized representative after due consultation with the CI and prior to the processing of the request for amendment. The Regional Division director must prepare a memorandum to the President through the assistant president, PMD. The memoran- dum is sent to OL and FC Loans for clearance. OL prepares six copies of the letters of amendment that have been cleared by the country portfolio manager and FC Loans. The amendments enter into force after they have been countersigned by the Borrower. The amendment letter shall indicate the date on which the amendment comes into effect. 7. Amendments to be submitted to the Executive Board: OL, in consultation with FC Loans, will determine if an amendment significantly changes the scope or characteristics of the loan or the project originally approved by the Executive Board. If this is so, the amendment must be presented to the Executive Board for approval. In this case, the Regional Division director prepares a President's 1 A category against which withdrawals have already been made may not be deleted. To avoid administrative difficulties, categories with disbursed amounts should not be renumbered. 2 July 2003 Section 6.3 Memorandum for the consideration of the Executive Board. This memorandum is first cleared by OL and FC Loans and then submitted to the assistant president, PMD, so as to obtain the approval of the President. After Executive Board approval, OL prepares an amendment letter, as described in paragraph 5 above. Supplementary Financing 8. Careful assessments of the project costs at formulation/appraisal and the provision of adequate contingency allowances to cover both physical factors and price escalations over the implementation period help avoid the need for supplementary financing. 9. Proposals for the supplementary financing of cost overruns are considered by IFAD on a case-by-case basis. The overall approach to this issue is restrictive. Each case is considered on its own merits in light of the nature of the project, the stage of implementation, the extent and underlying cause of the cost overruns, the capacity of the Borrower to raise additional resources and the possibility of scaling down or rephrasing the project's scope. In carrying out the related analysis, one must take due account of situations in which the cost overruns have occurred because of an underestimation of project costs during formulation/appraisal or because of circumstances beyond the Borrower's con- trol. 10. As a last resort, the need for supplementary financing is considered. The economic via- bility and overall orientation of the project must be maintained. Where the overrun is large, a reappraisal of the project may be required. Thereafter, the review procedure for supplementary financing proposals is similar to that for the processing of a new loan. Reporting Requirements 11. The President of IFAD submits an annual report to the Executive Board on the cancella- tion of loan and grant proceeds. This submission takes the form of tabulated reports pre- pared by PMD in consultation with FC Loans. July 2003 3 Section 6.4 Section 6.4 – Loan Cancellation Circumstances Leading to Cancellation 1. Loan cancellations fall into two groups, those initiated by the Borrower and those initi- ated by IFAD. 2. The Borrower may at any time initiate the cancellation of any undisbursed portion of the loan, excluding amounts that have been reserved for SCs (see Section 5.4). Section 12.03 of the General Conditions stipulates that the Borrower shall consult with IFAD and obtain the concurrence of a guarantor, if any. IFAD seeks the views of the CI before act- ing on any such cancellation request. 3. IFAD's right to cancel the undisbursed portion of a loan is discussed in Section12.02 of the General Conditions. The cases for cancellation are briefly summarized below: • the right of the Borrower to request withdrawals from the loan account has been sus- pended under Section 12.01 of the general conditions with respect to any amount of the loan for a continuous period of at least 30 days; • at any time, the Fund determines, after consultation with the Borrower, that any por- tion of the loan will not be required to finance certain costs of the project; • at any time, after consultation with the Borrower, the Fund determines that represen- tatives of any loan party, project party, or beneficiary has engaged in corrupt or fraud- ulent practices in respect of any amount of expenditures incurred during the procure- ment or the carrying out of any contract financed through the loan and that the Borrower has failed to take timely and appropriate action to remedy the situation; • at any time, the Fund determines that any amount of the loan proceeds has been used to finance an expenditure other than an eligible expenditure; • after the loan closing date, any amount of the loan remains unwithdrawn from the loan account; • the Fund has received a notice from the guarantor that the guarantor has terminated its obligations under the guarantee agreement with respect to any amount unwith- drawn from the loan account; or • any other event so specified in the loan agreement. 4. Such termination shall be effective upon dispatch of the notification to the loan parties, whereupon such amounts of the loan shall be cancelled. The Fund shall provide a copy of the notification to the lead project agency, although failure to do so shall not affect the validity of the notification. July 2003 1 Section 6.4 5. While IFAD has the right to cancel undisbursed balances remaining after the loan clos- ing date, the Borrower may request an additional period for the submission of final withdrawal applications (see Section 3.4). This request should be submitted through the CI to FC Loans. 6. Before the cancellation of any loan amount because of anticipated project cost savings, the CI and the Borrower should carefully review the remaining project activities in order to ensure that subsequent price changes are unlikely to lead to a shortfall in loan funds. 7. Cancellations that involve a significant portion of a loan may require an assessment of the arrangements in place to ensure the repayment of the disbursed portion of the loan and an assessment by OL of whether an acceleration in maturity would be appropriate. Cancellation Notices 8. If the entire undisbursed balance is being cancelled, the cancellation notice specifies the total amount and the effective date of the cancellation, as well as the reason for the can- cellation. If a partial cancellation is justified (for example, because of anticipated project cost savings, a reduction in the scope of the project, or misprocurement), the cancella- tion notice also specifies the amount that is being cancelled from each affected category. 9. Authority to sign the cancellation notices sent to the Borrower varies depending on the circumstances involved. Details are provided below. • Cancellation after the closing date: FC Loans is responsible for the preparation of a letter for the signature of the assistant president, PMD, to reflect the revised amortiza- tion schedule, if necessary. • Cancellation following the suspension or cancellation of a guarantee: FC Loans submits a memorandum, cleared by OL and PMD, to the President of the Fund through the Vice-President, together with a letter to the Borrower, for approval and signature. • Cancellation due to misprocurement, cost savings or other causes: the assistant president, PMD, submits a memorandum to the President, together with a letter to the Borrower, for approval and signature. The memorandum is prepared by the responsi- ble country portfolio manager, in collaboration with FC Loans, and is cleared by the relevant Regional Division director and OL. 2 July 2003 Section 6.5 Section 6.5 – Dealing with De Facto Governments Introduction 1. When the recognized government of a Member State is overthrown without an orderly transition of power, it is necessary to reconfirm the commitment of the de facto govern- ment to the undertakings given by the previous government before continuing IFAD's lending operations. Establishment of Relations 2. The relevant Regional Division director is responsible for communications with the de facto government and for verifying that this government is in effective control of the country, able to continue project implementation and prepared to honour the commit- ments made in individual loan agreements, including the loan repayment obligations. Impact on Disbursements 3. While this verification is being sought, the responsible country portfolio manager warns FC Loans that no further withdrawal authorizations should be issued (other than those under SCs (see Section 5.4) in which IFAD has renounced its right of suspension or can- cellation). FC Loans then holds in abeyance all payment instructions it has received from the CI. 4. When a response is received from the de facto government, the Regional Division direc- tor forwards a copy thereof to the Vice-President and OL in order to seek confirmation that the response received justifies a resumption of normal operations. If such a confir- mation is received, FC Loans resumes the processing of payment instructions. 5. In the event a satisfactory response is not obtained within 15 calendar days, the proce- dures for the suspension of disbursements on project-related grounds (see Section 6.2) are initiated for the country's entire loan portfolio. Any decisions on subsequent steps, such as the cancellation of loan balances, are taken on a case-by-case basis. July 2003 1 Section 6.6 Section 6.6 – Flexible Lending Mechanism 1. The Executive Board approves a Flexible Lending Mechanism commitment under a loan for a maximum duration of 10 to 12 years. The authority to approve subsequent phases rests with IFAD management. The approval depends, however, on the positive conclu- sion of a joint in-depth field review before the end of the previous phase that is under- taken by the government concerned, the CI and IFAD, with active stakeholder participa- tion. The field review and subsequent IFAD reviews determine whether certain precon- ditions have been achieved and re-examine the implementation criteria and technical approach for the subsequent phase. These reviews set (or refine) the preconditions that are to be achieved by the end of the next phase and establish the project budget for that phase. The Executive Board receives a copy of individual case evaluation reports before the end of each phase, but does not play a decision-making role between phases. It is also informed as soon as IFAD management approves the field review's recommenda- tion on whether to proceed to the following phase. 2. Schedule 2 of the loan agreements for loans financed under the Flexible Lending Mechanism presents the loan categories for the activities to be financed during the first phase in the same way as these are presented for standard loans, and these are based on detailed cost tables in the formulation/appraisal report. However, another category enti- tled 'Phases 2 and 3' is presented in each loan agreement against a single lump sum. The Schedule 2 stipulates that no funds shall be disbursed from this category until the pre- conditions for each phase have been reached – as determined by an IFAD-approved assessment of the status of the progress towards meeting these preconditions – and duly approved by IFAD. The passage to subsequent phases therefore requires a loan amend- ment or an addendum so as to reallocate funds from the non-disbursing category to the other categories. The internal IFAD approval procedure for the amendment of the loan or for the addition of an addendum, as well as the procedure for reaching an agreement with the Borrower, is the same for loans financed under the Flexible Lending Mechanism as it is for standard loans. If a decision is taken to cancel the loan because the perform- ance in achieving preconditions is judged inadequate, the procedure is the same for these loans as it is for the cancellation of standard loans. July 2003 1 Section 7.1 CHAPTER 7 Suppor t for borrrowers Section 7.1 – Disbursement Reports Purpose 1. In addition to the accounts required for repayment purposes, IFAD maintains detailed records of loan utilization. These records are designed to provide both information and support to Borrowers and to keep the CI informed of the loan status as a tool for mon- itoring the eligibility of withdrawal applications. These records also meet IFAD's internal reporting needs. Debit Advices 2. Primary disbursement information is provided in debit advices that are generated for loans and grants on a periodical basis. The notices are forwarded to the Borrower, the project executing agency and any other agencies specifically designated by the Borrower and the CI. Debit advices are numbered consecutively by year. The notice shows the Borrower's application number, the currency and amount paid, the equivalent in the cur- rency of commitment and, if it has been necessary to purchase local currency, the cur- rency used to purchase the local currency. The debit advices also indicate the withdrawal category(ies) that have been charged. In this way, the debit advice contains all the infor- mation needed so that the Borrower can monitor loan withdrawals and determine the status of individual categories. Monthly Reports 3. As supplements to the debit advices, IFAD prepares a series of monthly reports that are sent to the CI, as follows: • A recapitulation of category status shows the total amounts disbursed, committed and undisbursed for each withdrawal category of a loan. • Loans administered by each cooperating institution provides a summary, by the CI, of the status of all loans. Details include the dates of approval, signature, effectiveness and closing, as well as the disbursed and undisbursed balances of each loan. 4. These reports are available to Borrowers upon request. July 2003 1 Section 7.1 Other Reports 5. Other reports may be generated at the request of the Borrower or the CI. Examples are: • reports providing details on all withdrawals to date, or for a specified period, in a summarized format that includes most of the information provided in the disburse- ment notice; this type of report is useful if the data included in the original notices have been lost, or as a means of identifying a specific transaction; and • other relevant reports required for IFAD's internal purposes. 2 July 2003 Section 7.2 Section 7.2 – Loan Administration Missions Purpose 1. Loan administration missions, whether undertaken by CI or IFAD staff, are intended to monitor the compliance with loan conditions and provide the guidance and support needed by Borrowers and project executing agencies for efficient project implementation and the disbursement of loan proceeds. Missions may also monitor specific aspects of loan utilization (for example, reviews of supporting documents concerning the amounts withdrawn on the basis of SOEs; see Section 5.3). Disbursement Guidance 2. Since the CI specifies the withdrawal procedures to be followed by Borrowers, it is gen- erally responsible for the provision of the guidance needed by the Borrower to ensure prompt loan utilization and for the monitoring of the compliance with loan conditions. Missions focus on: • training the staff of the Borrower who are responsible for the preparation of with- drawal applications; • the provision of guidance on problems that may lead to delays in disbursement; • the resolution of problems that have arisen with individual applications; • monitoring the use of SAs (see Section 4.2) both to verify the adequacy of controls and to ensure that the controls are being implemented in the proper fashion; • reviews of the use of SOEs to verify the adequacy of systems and controls; and • the examination of the supporting documents in a random sample of SOE applica- tions. 3. To the extent possible and in order to minimize costs, missions should take advantage of their presence in project areas to provide assistance to other Borrowers and project executing agencies in the region. Wherever possible, disbursement seminars should be arranged during such missions in order to ensure the widest possible participation by Borrowers and the project executing staff responsible for handling disbursements. Adequate advance notice must be given to the Borrowers and the other agencies to be visited so as to allow them to undertake any research or preparatory work for the mis- sions. 4. In some cases, with the knowledge and agreement of the CI, the staff of FC Loans may also provide disbursement guidance to selected Borrowers. Direct involvement by IFAD normally occurs only if a relatively inexperienced CI has been appointed to act on behalf of IFAD. In these cases, IFAD staff may accompany a CI mission in order to inform the Borrowers of the general disbursement requirements for IFAD loans and address topics July 2003 1 Section 7.2 such as the reallocation of loan proceeds, the postponement of closing dates, the use of SAs and SOEs, and audit requirements. Loan Repayment Guidance 5. The provision of guidance to Borrowers on loan repayments and debt servicing is the sole responsibility of IFAD. Missions focus on new Borrowers or on Member States or Borrowers that are experiencing difficulty in complying with IFAD's debt service require- ments. These missions aim at ensuring that Borrowers clearly understand the billing statements (statements sent to Borrowers in advance of the due date and indicating all transactions made on a loan since the last statement, as well as the interest and princi- pal payments due by the Borrowers to IFAD), their repayment obligations and the reme- dies that IFAD may apply (for example, the suspension of disbursements or the acceler- ation of maturity) in the event debt servicing is overdue. Mission Reports 6. The CI keeps IFAD informed of its mission findings. This is done by letter or a copy of the mission report.1 Similarly, IFAD informs the CI of the results of any independent loan administration missions undertaken by IFAD staff. Reports are prepared promptly (normally within two weeks of a mission's return), briefly describe any substantive issues in need of attention and outline any corrective action taken or recommended in cases that require management consultation within the CI or approval by IFAD. 7. The outcome of discussions with Borrower representatives and project executing agen- cies is documented to ensure that appropriate, specific action is taken. An aide memoire signed by the Borrower or project entity representative and the mission leader or min- utes prepared by the project entity may serve to record such agreements. Whenever mat- ters require the endorsement of CI management or IFAD approval, this is noted in dis- cussions and recorded in the aide memoire or the minutes. A follow-up letter is then sent to the Borrower once the most suitable course of action has been determined. 1 Where links exist, reports are sent by electronic mail. Alternatively, reports may be sent on diskette. 2 July 2003 Section 8.1 CHAPTER 8 Loan repayment Section 8.1 – Loan Repayment Provisions Loan Terms 1. This section refers exclusively to IFAD loans, since grants are not repayable. 2. IFAD provides loans on varying repayment terms basically linked to the borrowing coun- try's GNP per capita. In December 1993, the Executive Board approved changes in the Fund's lending terms. These included a change from a fixed interest rate to a variable interest rate 1 for loans on ordinary and intermediate terms (without changing the matu- rity period) and a reduction in the fixed service charge for highly concessional loans from 1 to 0.75% (with a change in the repayment period from 50 to 40 years). 3. IFAD's lending terms are: • Highly concessional terms: normally applicable to Member States with a GNP per capita of USD 805 or less at 1992 prices, or classified as International-Development- Association-only countries by the World Bank: Loans approved beginning in April 1994 Loan terms: No interest, but an annual service charge of 0.75% Maturity: 40 years Grace period: 10 years (included in the maturity period) Loans approved prior to April 1994 Loan terms: No interest, but an annual service charge of 1% Maturity: 50 years Grace period: 10 years (included in the maturity period). • Intermediate terms: normally applicable to Member States with a GNP per capita of between USD 806 and USD 1 305, inclusive, at 1992 prices: Loans approved beginning in April 1994 Loan terms: Annual interest rate set at 50% of the variable reference interest rate Maturity: 20 years Grace period: 5 years (included in the maturity period) 1 IFAD uses the World Bank variable rate established for the second semester of each calendar year as the variable reference interest rate for IFAD for the entire following year. July 2003 1 Section 8.1 Loans approved prior to April 1994 Loan terms: Annual interest rate set at 4% Maturity: 20 years Grace period: 5 years (included in the maturity period). • Ordinary terms: normally applicable to Member States with a GNP per capita of USD 1 306 or more at 1992 prices Loans approved beginning in April 1994 Loan terms: Annual interest rate set at 100% of the variable reference interest rate Maturity: 15 to 18 years Grace period: 3 years (included in the maturity period) Loans approved prior to April 1994 Loan terms: Annual interest rate set at 8% Maturity: 15 to 18 years Grace period: 3 years (included in the maturity period). 4. Loans are repayable in accordance with the amortization schedule contained in the loan agreement. Repayments are made in equal semi-annual instalments. Loan Amount and Amortization Schedule 5. IFAD's loans are denominated in SDRs.2 The project formulation/appraisal report gives the project costs and the intended loan amount in United States dollars. The SDR amount of the loan is calculated by FC Loans using the United States dollar-SDR exchange rate prevailing on the last day of the month preceding the loan negotiations, rounded up to the next SDR 50 000. 6. The amortization schedule is determined on the basis of the date the loan is approved by the Executive Board. Thus, for a loan with a ten-year grace period, the first repayment is due on the first semi-annual repayment date after the tenth anniversary of the date of the Executive Board approval. The amortization schedule discussed with the Borrower during the loan negotiations may therefore need to be modified prior to the loan signa- ture if the anticipated Executive Board approval date is advanced or delayed. Selection of the Repayment Currency 7. The Borrower's repayment obligation is expressed solely in SDRs rather than in the actual currencies disbursed (see Section 1.2). IFAD restricts the number of currencies used for loan service payments to those included in the composition of the SDR. IFAD 2 IFAD's first ten loans were denominated in United States dollars. These loans have been fully disbursed. Some are still being repaid. 2 July 2003 Section 8.1 therefore requests that the Borrower specify the repayment currency during the loan negotiations. The Borrower may elect to make payments in United States dollars, pounds sterling, Japanese yen or the euro (the currencies of the SDR). The currency selected remains the sole currency of payment throughout the life of the loan, although, in spe- cial circumstances, IFAD may consider a change in the repayment currency Billing Procedures 8. IFAD computes charges according to semi-annual accruals and uses as a basis a 360- day year of 12 30-day months. To compute the exact amount of interest and other charges payable by the Borrower on the due date specified in the loan agreement, IFAD takes account of all loan-related transactions up to the preceding day. Since the Borrower must receive advance notice of the amounts due, IFAD follows a financial reporting sys- tem through which the amounts payable by the Borrower on a due date are determined on the basis of the transactions that have occurred up to two months before the specific due date (the date two months before the due date is called the 'financial reporting date'). 9. Two months before the due date, FC Loans calculates the amount of the interest or other charges due up to the due date. This calculation is made in SDRs and then converted into the repayment currency at the rate on the financial reporting date. Details about the SDR amount and the equivalent in the repayment currency for the principal, the interest and the other charges are given in the semi-annual statement of account (the billing state- ment) sent to the Borrower. This statement is mailed about seven weeks in advance of each due date. 10. By the due date, the Borrower is required to arrange the payment of the payment cur- rency amount into the account identified by IFAD. Fluctuations in the exchange rate between the SDR and the payment currency may lead to a shortfall or an overpayment at the due date. Adjustments for any such shortfalls or overpayments are included in the subsequent statement of account. Charges payable by the Borrower on the due date because of transactions occurring between the financial reporting date and the due date are also included in the subsequent statement of account. 11. The statement of account is a supplementary service that IFAD provides to assist Borrowers to meet their obligations under loan agreements. If, for any reason, the Borrower does not receive such a statement, or if the statement is in some respect in error, this does not in any way limit the Borrower's responsibility to make payments in accordance with the loan agreement. July 2003 3 Section 8.1 Loan Participation 12. At any time during the life of a loan, a donor may participate in a loan by contributing an amount to be used to pay off part of the principal portion of the loan. Billing state- ments are adjusted to take any such contributions into consideration. Special Procedures 13. In rare cases, project implementation may be so delayed that the amounts due to repay the principal based on the amortization schedule in the loan agreement exceed the amounts already disbursed. This situation normally comes to light when billing state- ments are being prepared. In such cases, IFAD does not reschedule the loan by modify- ing the final repayment date. Rather, the billing notice to the Borrower limits the amount of the next repayment to the amount disbursed and not yet repaid. The amount of the shortfall is then added to the amount billed for the succeeding semi-annual payment, provided the amount disbursed has reached the appropriate level. Exceptions to this pol- icy require the approval of the Vice-President of the Fund. Handling of Underpayments and Overpayments 14. Underpayments of less than the equivalent of USD 10 000 are treated according to the de minimus procedure outlined in Section 8.2. If the underpayment exceeds the equiva- lent of USD 10 000, the normal procedure for overdue debt service is followed (see Section 8.2). 15. Overpayments of less than the equivalent of USD 10 000 are applied for the interest or service charges due at the next billing without notice to the Borrower. The Borrower is advised by FC Loans that overpayments of more than the equivalent of USD 10 000 are being applied for the interest or service charges due at the next billing unless the Borrower requests a refund of the amount overpaid. Revised Amortization Schedules 16. When a portion of the loan is cancelled during project implementation, FC Loans pre- pares a revised amortization schedule that reflects the reduced loan amount and for- wards this to the Borrower for countersignature. 4 July 2003 Section 8.2 Section 8.2 – Overdue Debt Service Collection Steps 1. The statement of account (see Section 8.1, paragraphs 9-12) is forwarded to the Borrower about seven weeks before the due date. Fifteen days before the due date, FC Loans sends a reminder to the Borrower. 2. Subsequent steps are briefly outlined below and in paragraph 6 (see the heading in 'De Minimus Procedure' for amounts below USD 10 000); Annex 5 provides details about the persons involved in clearing any necessary notifications and the reception of copies for information purposes, and Annex 6 offers samples of follow-up notices and suspension notices: • 30 days: The OL issues a warning concerning the suspension of disbursements in the case of disbursing (active) loans or a warning that the Borrower risks an acceleration of maturity in the case of closed or fully disbursed loans. • 60 days: For disbursing loans, a notification is sent in the name of the President of IFAD advising the Borrower that the disbursements of the affected loan will be sus- pended unless payment is received within 15 days and warning of the possible sus- pension of all other loans. If the loan is fully disbursed or closed, the President's noti- fication warns the Borrower that the maturity of the loan may be accelerated and that other loans may be suspended if the payment is not received within 60 days of the communication. • 75 days: A notification in the name of the President is sent announcing a suspension in the disbursements of the disbursing loan in question and warning of the possible suspension of all other loans within 45 days. • 105 days: A notification in the name of the Vice-President is sent to remind the Borrower of the impending suspension of the country portfolio within 15 days. • 120 days: A notification in the name of the President is sent announcing the suspen- sion of the disbursements of all active loans to the Borrower in question. • 150 days: When appropriate, the assistant controller, loans and grants, sends a work- ing note to the Vice-President to arrange a meeting with the OL and the relevant Regional Division director and country portfolio manager. Subsequent action is deter- mined on a case-by-case basis. • 180 days: The country in question is placed in non-accrual status. 3. Notes in IFAD's financial statements contain summary information on each loan in non- accrual status, including the name of the country, the date of non-accrual, the principal outstanding, the total arrears and the effect of the non-accrual policy on the income dur- ing the reporting period. July 2003 1 Section 8.2 Remedies 4. As indicated above, a suspension of disbursements (see Section 6.2) and an acceleration of maturity are the chief remedies available to IFAD under Article IX of the General Conditions. Once a President's notification has become effective, that is, when the pay- ments are overdue by 75 days, new lending is also affected in the following ways: • No new loans will be processed or presented to the Executive Board. • Loans approved by the Executive Board will not be signed. • Signed loans will not be declared effective. • Amendments and modifications of loan agreements will not be processed. Arrears Settlement Plan 5. In a number of very poor countries, mainly in Africa, arrears have led to the suspension of IFAD country portfolios. To address this issue, IFAD has negotiated and implemented arrears settlement plans, on the basis of which a number of country portfolios have been normalized, operations resumed and new projects submitted to the Executive Board for approval. 6. FC Loans reviews all requests for the settlement of arrears and, as appropriate, prepares various scenarios for discussions with Borrowers. In consultation with the relevant divi- sion, FC Loans fields missions to negotiate the settlement plans that best suit the Borrowers while complying with Executive Board and Governing Council directives. 7. After a resettlement plan has been negotiated, FC Loans prepares a paper for submission to the Executive Board. Once Executive Board approval has been obtained, FC Loans informs the Borrower that the country portfolio suspension has been lifted and that operations may resume. Exceptions to Normal Follow-Up Action 8. Normal follow-up action is not taken in the event that: • payments are owed in a currency the availability of which is unduly constrained on international financial markets at the time the payment falls due; • a Borrower reliably informs IFAD that payment is in process; IFAD normally requires evidence of the payment transfer (that is, a copy of the transfer instructions from the Borrower's bank to IFAD's account with the depository bank named in the billing state- ment); the standard follow-up procedures are then delayed for two weeks; • a Borrower's questions on the amount due require investigation; or • the amount due is less than the equivalent of USD 10 000 (see the next paragraph). 2 July 2003 Section 8.2 De Minimus Procedure 9. If the amount due is less than the equivalent of USD 10 000, FC Loans sends a 15-day advance notification to the Borrower. This amount may be further mentioned in notifi- cations to the same Borrower issued by LC or the President of the Fund with respect to other overdue loans. No further action is taken unless another loan becomes overdue for more than 120 days, at which point the entire country portfolio, including the loan(s) subject to the de minimus procedure, is suspended. Lifting Disbursement Suspensions 10. A facsimile in the name of the President of IFAD is sent to inform the Borrower that the suspension has been lifted (see Annex 6 for examples). Once the Borrower pays its arrears on a loan that is more than 120 days overdue, the portfolio suspension is lifted not only for the loan in question, but for all other loans that have been suspended because of arrears under the specific loan, provided that: • the Borrower's debt service is not overdue by more than 60 days; or • the arrears are less than the equivalent of USD 10 000. 11. If, however, any of the loans affected by the portfolio suspension is delinquent for more than 60 days, the suspension of that loan will persist. The portfolio suspension will remain in place if, in the meantime, another loan goes into arrears of more than USD 10 000 that have been overdue for more than 120 days. Return to Accrual Status 12. A loan is placed on accrual status when the debt servicing becomes up to date. July 2003 3 Section 9.1 CHAPTER 9 Document retention Section 9.1 – IFAD Document Retention Policies Loan and Guarantee Agreements 1. IFAD retains the original copies of loan and guarantee agreements and any amendments in its permanent records. Withdrawal Applications 2. The Borrower sends the original withdrawal applications and supporting documents to the CI, which should retain them until such time as no further queries regarding loan utilization are anticipated. The preferred minimum retention periods are: • original applications and summary sheets: five years after the loan closing date; and • supporting documents: one year after the loan closing date (or five years after the loan closing date if the documents have been filed with the original application). 3. The documents should be available for review by IFAD on request should IFAD wish to verify the adequacy of the CI's review processes. Alternatively, if this is contrary to the policy of the CI, IFAD should be provided with a statement from the CI's auditors con- firming the reliability of the procedures used by the CI to review applications. Billing Statements 4. IFAD retains copies of its billing statements until six years after the loan has been fully repaid. Disbursement Notices 5. IFAD retains copies of debit advices until one year after the loan closing date. Other reports are retained only as long as judged necessary by FC Loans. Correspondence 6. The CI should retain substantive correspondence on significant issues until no further queries with regard to project implementation are anticipated. This requirement is nor- mally satisfied if the correspondence is retained for one year after the issuance of the project completion report. 7. IFAD retains any substantive correspondence in its records for a minimum of three years after the issuance of the project completion report. July 2003 1 Annex 1-A ANNEX 1-A IFAD Member States that are Eligible as Sources of Procurement Through the Regular Programme Afghanistan Cook Islands Honduras Albania Costa Rica Iceland Algeria Côte d'Ivoire India Angola Croatia Indonesia Antigua and Barbuda Cuba Iran Argentina Cyprus Iraq Armenia D.P.R. Korea Ireland Australia D.R. Congo Israel Austria Denmark Italy Azerbaijan Djibouti Jamaica Bangladesh Dominica Japan Barbados Dominican Republic Jordan Belgium Ecuador Kazakhstan Belize Egypt Kenya Benin El Salvador Kuwait Bhutan Equatorial Guinea Kyrgyzstan Bolivia Eritrea Laos Bosnia and Herzegovina Ethiopia Lebanon Botswana Fiji Lesotho Brazil Finland Liberia Burkina Faso France Libyan Arab Jamahiriya Burundi Gabon Luxembourg Cambodia Gambia, The Madagascar Cameroon Georgia Malawi Canada Germany Malaysia Cape Verde Ghana Maldives Central African Republic Greece Mali Chad Grenada Malta Chile Guatemala Mauritania China Guinea Mauritius Colombia Guinea-Bissau Mexico Comoros Guyana Mongolia Congo Haiti Morocco July 2003 1 Annex 1-A Mozambique Saint Christopher and Tanzania, United Republic Myanmar Nevis of Namibia Saint Lucia Thailand Nepal Saint Vincent and the The Former Yugoslav Netherlands 1 Grenadines Republic of Macedonia New Zealand Samoa Timor-Leste Nicaragua Sao Tome and Principe Togo Niger Saudi Arabia Tonga Nigeria Senegal Trinidad and Tobago Norway Seychelles Tunisia Oman Sierra Leone Turkey Pakistan Solomon Islands Uganda Panama Somalia United Arab Emirates Papua New Guinea South Africa United Kingdom Paraguay Spain United States Peru Sri Lanka Uruguay Philippines Sudan Venezuela Portugal Suriname Viet Nam Qatar Swaziland Yemen Republic of Korea Sweden Yugoslavia 2 Republic of Moldova Switzerland Zambia Romania Syria Zimbabwe Rwanda Tajikistan 1 Applicable only to the Kingdom in Europe and Aruba. 2 The Socialist Federal Republic of Yugoslavia is still a Member State of the Fund, but its participation in IFAD governing bodies was suspended by the Executive Board on 4 December 1992. The Union of Serbia and Montenegro is not a Member State of the Fund. 2 July 2003 Annex 1-B ANNEX 1-B IFAD Member States that are Eligible as Sources of Procurement Through the Special Programme for Sub-saharan African Countries Affected by Drought and Desertification Afghanistan Côte d'Ivoire Indonesia Albania Croatia Iran Algeria Cuba Iraq Angola Cyprus Ireland Antigua and Barbuda D.P.R. Korea Israel Argentina D.R. Congo Italy Armenia Denmark Jamaica Australia Djibouti Japan Azerbaijan Dominica Jordan Bangladesh Dominican Republic Kazakhstan Barbados Ecuador Kenya Belgium Egypt Kuwait Belize El Salvador Kyrgyzstan Benin Equatorial Guinea Laos Bhutan Eritrea Lebanon Bolivia Ethiopia Lesotho Bosnia and Herzegovina Fiji Liberia Botswana Finland Libyan Arab Jamahiriya Brazil France Luxembourg Burkina Faso Gabon Madagascar Burundi Gambia, The Malawi Cambodia Georgia Malaysia Cameroon Germany Maldives Cape Verde Ghana Mali Central African Republic Greece Malta Chad Grenada Mauritania Chile Guatemala Mauritius China Guinea Mexico Colombia Guinea-Bissau Mongolia Comoros Guyana Morocco Congo Haiti Mozambique Cook Islands Honduras Myanmar Costa Rica India Namibia July 2003 1 Annex 1-B Nepal Saint Lucia Thailand Netherlands1 Saint Vincent and the The Former Yugoslav New Zealand Grenadines Republic of Macedonia Nicaragua Samoa Timor-Leste Niger Sao Tome and Principe Togo Nigeria Saudi Arabia Tonga Norway Senegal Trinidad and Tobago Oman Seychelles Tunisia Pakistan Sierra Leone Turkey Panama Solomon Islands Uganda Papua New Guinea Somalia United Arab Emirates Paraguay South Africa United Kingdom Peru Spain United States Philippines Sri Lanka Uruguay Portugal Sudan Venezuela Qatar Suriname Viet Nam Republic of Korea Swaziland Yemen Republic of Moldova Sweden Yugoslavia2 Romania Switzerland Zambia Rwanda Syria Zimbabwe Saint Christopher and Tajikistan Nevis Tanzania, United Republic of 1 Applicable only to the Kingdom in Europe and Aruba. 2 The Socialist Federal Republic of Yugoslavia is still a Member State of the Fund, but its participation in the organization's governing bodies was suspended by the Executive Board on 4 December 1992. The Union of Serbia and Montenegro is not a Member State of the Fund. 2 July 2003 Annex 2 ANNEX 2 Sample withdrawal schedule SCHEDULE 2 The Allocation and Withdrawal of Loan Proceeds 1. The table below sets forth the categories of goods, works, services and other items, as provided in Section 4.09 of the General Conditions, that are to be financed out of the proceeds of the loan, the allocation of the amounts of the loan for each category and the percentages of the expenditures for items that are to be financed in each category. These percentages may be amended from time to time by agreement between the Borrower and the Fund. Category Amount of Loan Allocated Expenditures to be Financed (SDR equivalent) I. Civil Works 60 000 90% II. Vehicles and Equipment 80 000 100% of foreign expenditure or 80% of local expenditures III. Technical Assistance, 260 000 100% of foreign expenditures Studies and Training or 70% of local expenditures IV. Credit 1 840 000 80% of subsidiary loans disbursed V. Incremental Operating Costs 350 000 55% VI. Unallocated 360 000 Total 2 950 000 2. Withdrawals from the loan account may be made against certified statements of expen- diture that the Fund may designate from time to time through notification of the Borrower. The records evidencing such expenditures need not be submitted to the Fund, but shall be retained by the Borrower for inspection by the representatives of the Fund and the cooperating institution, in accordance with Sections 4.07 (Statements of Expenditure) and 10.03 (Visits, Inspections and Enquiries) of the General Conditions. 3. Notwithstanding the provisions of Section 4.10(a)(ii)(A) of the General Conditions, withdrawals not exceeding, in aggregate, the equivalent of two hundred and fifty thou- sand Special Drawing Rights (SDR 250 000) may be made from the loan account in respect of payments made for eligible expenditures under Category III before the date of this agreement, but after 31 March 2003. July 2003 1 Annex 2 4. Notwithstanding the provisions of Section 4.10(a)(ii)(A) and Section 13.01 of the General Conditions, no withdrawals shall be made in respect of payments made for expenditures under Category IV of the allocation table under paragraph 1 of this sched- ule until the subsidiary loan agreement referred to in Section 3.01 of the agreement has been signed. 2 July 2003 Annex 3 ANNEX 3 Sample disbursement letter Cooperating Institution Letterhead (including address) [Name] [Date] [Address] Re: IFAD Loan [Number] [Name of IFAD Project/Programme] Dear Mr/Ms: This letter provides instructions regarding the withdrawal of proceeds from the International Fund for Agricultural Development (IFAD) loan for the [name of the project/pro- gramme] once IFAD has declared the loan effective. IFAD has charged our institution with the responsibility for loan administration, including the supervision of implementation and dis- bursement administration. Copies of our institution's standard disbursement forms, together with instructions for their completion, are enclosed herewith. The present letter, the disbursement instructions and copies of IFAD's loan agreement should be copied to all staff responsible for the preparation of withdrawal applications. Supplies of application forms have been sent to you under sepa- rate cover. Instructions on various matters that will contribute to ensuring the prompt and efficient disbursement of the loan are given in the attachment to this letter. Please do not hesitate to contact my office should you require any further information or assistance. Yours sincerely, [Name and Title] cc: [Project Executing Agency] [name and address] Assistant Controller, Loans and Grants Office of the Controller International Fund for Agricultural Development 107, Via del Serafico 00142 Rome, Italy July 2003 1 Annex 3 ATTACHMENT Page (i) DISBURSEMENT INSTRUCTIONS IFAD Loan [Number] Authorized Signatures 1. Section 15.04 of IFAD's General Conditions for Agricultural Development Financing require that you furnish IFAD and our institution with evidence of the authority of the person or persons authorized to sign applications for withdrawal and with the authenticated specimen signature of each such person. Kindly comply with this request as soon as pos- sible so as to avoid delays in disbursement. Please clearly indicate whether more than one signature is required on each application. The signature(s) should be updated promptly whenever there are any changes in the person(s) authorized to sign withdrawal applications. Withdrawal Schedule and Application Procedure 2. The project/programme expenditures eligible for financing and the disbursement per- centages applicable to the withdrawal categories appear in Schedule 2 of IFAD's loan agreement. Our disbursement instructions provide guidelines on the withdrawal proce- dures for different types of expenditures. Two copies of each application should be sub- mitted to our Disbursement Division at the address shown above. Special Account 3. This loan includes provisions for an advance to be made to a special account maintained in [currency]. The bank selected to hold the account must be in a position to: • handle expeditiously a high volume of transactions in both local and foreign currencies; • open letters of credit; and • issue prompt monthly statements in sufficient detail to facilitate the reconciliation of the account. 4. The bank should be in sound financial condition so that the funds on deposit are secure. We recommend that you verify that the bank's transaction charges are reasonable before opening the account. 2 July 2003 Annex 3 ATTACHMENT Page (ii) 5. When the special account has been opened with an acceptable bank, you may submit an application for an advance not exceeding the amount of the authorized allocation of [currency and amount]. You may request a partial advance initially and then submit a further request for the balance of the authorized allocation when project expenditures accelerate as implementation proceeds. 6. Replenishment applications documenting eligible expenditures should be submitted at regular monthly intervals promptly after the bank statements of the commercial bank holding the special account have been reconciled by the project executing agency. In order to reconcile the account, the project executing agency must establish that the full outstanding advance is satisfactorily accounted for through expenditures now being claimed, the balance in the account and the amounts (if any) previously claimed but not yet reimbursed. Any discrepancies must be explained in the replenishment application. 7. Control measures with regard to access to the special account should take into consid- eration the need of the project executing agency to have controlled, efficient access to special account funds so as to finance eligible expenditures. Control measures for the compliance with loan conditions should not hinder project implementation or delay the payment for such expenditures. The special account should, to the greatest extent possi- ble, be used to meet eligible expenditures. 8. The interest earnings on balances in the special account should be used in accordance with government regulations. You may wish to consider using any such amounts to meet part of the share of project expenditures to be financed from your own resources. Statements of Expenditure 9. The items that may be disbursed on the basis of statements of expenditure are listed below. Specially designed forms to be used for these expenditures are attached as annexes to this letter. [Insert] July 2003 3 Annex 3 Retroactive Financing 10. The loan includes provision for the retroactive financing of expenditures incurred (pay- ments made) prior to the loan signing. As noted in paragraph [number] of Schedule 2 of the loan agreement, retroactive financing is limited to an aggregate amount of [cur- rency and amount] for expenditures under category [number and description] to cover payments made before the loan signing but after [date]. A separate application seeking the reimbursement of these expenditures should be submitted promptly once the loan is declared effective by IFAD. Disbursement Conditions 11. As noted in paragraph [number] of Schedule 2, no withdrawals may be made against cat- egory [number and description] until [brief description of action required]. You will be notified once it has been determined that this condition of disbursement has been sat- isfied. Prior to that time, no special account funds may be used for expenditures related to this category. Disbursement Notices 12. IFAD will forward periodic notices showing the amounts withdrawn from the loan and the overall status of the loan. These notices will be sent to you and to the project exe- cuting agency at the address shown on this letter. Please notify us promptly should there be any change in your requirements. 4 July 2003 Project Executing Borrower's Bank Cooperating IFAD IFAD's Supplier, Contractor Agency of Borrower Institution Depository Bank or Consultant July 2003 Payment Effected Payment Received Withdrawal WA (Original) Copy of WA Application (WA) Reviewed and without supporting Approved documentation Test Payment PIT verified Instruction Telex (PIT) and processed ANNEX 4 Reimbursement Procedure (Flow Chart) Withdrawal Authorization approved and issued Telegraphic Remittance Telegraphic Remittance Order to IFAD's Executed Depository Bank Bank's Credit Advice Borrower's Account Credited Debit Advice Debit Advice Debit Advice Advice of execution (with amount of telegraphic and Value date) remittance 1 Annex 4 2 Project Executing Cooperating IFAD IFAD's Supplier's Supplier, Contractor Agency or Borrower Institution Depository Bank Commercial Bank or Consultant Annex 4 Withdrawal WA (Original) Copy of WA Application (WA) Reviewed without supporting and Approved documentation Test Payment PIT verified Instruction and processed Telex (PIT) Direct Payment Procedure (Flow Chart) Withdrawal Authorization approved and issued Telegraphic Telegraphic Remittance Supplier's Account Bank's Credit Advice Remittance Order to Executed Credited IFAD's Depository Bank Debit Advice Debit Advice Debit Advice Advice of execution (with amount of telegraphic and Value date) remittance July 2003 Project Executing Borrower's Cooperating IFAD IFAD's Advising/ Supplier Agency or Commercial Bank Institutions Depository Bank Negotiating July 2003 Borrower Commercial Bank 1) Issuance of OPS's Special Commitment Letter (SC) Application for L/C opened Letter of Credit (L/C) Copy of L/C L/C advised L/C (Original) (but not yet operative Application SC Application Copy of SC for SC + reviewed Application copy of L/C and approved SC Issued Supplier's Bank's Credit Account Credited Advice Special Commitment Procedure – Letters of Credit (Flow Chart) IFAD 3 Annex 4 4 Project Executing Borrower's Cooperating IFAD IFAD's Advising/ Supplier Agency or Commercial Institutions Depository Bank Negotiating Annex 4 Borrower Bank Commercial Bank 2) Negotiation and payment under L/C Documents Documents Scrutinized required by L/C Documents Proceeds negotiated received Letters of Credit (Flow Chart) Request Cabled or airmailed Request for reviewed reimbursement and approved certifying L/C condition complied with Tested payment PIT verified instruction and processed telex (PIT) Withdrawal authorization approved and issued Telegraphic Telegraphic Funds remittance remittance received order executed Debit Advice Debit Advice Debit Advice Advice of execution (with amount of telegraphic and value date) remittance July 2003 Annex 5 ANNEX 5 Follow-Up Procedures 1 for Loan Ser vicing In Advance of the Due Date 15 DAYS: REMINDER OF THE APPROACHING DUE DATE Procedure: Facsimile reminding Borrower's representative of the approaching due date Information to: None Authorized by: Loan servicing assistant Next action: See '30 days'. After the Due Date 30 DAYS: LEGAL NOTICE 1 Procedure: For a disbursing loan, facsimile to Borrower's representative warning of the possible suspension of disbursements Information to: Project executing agency Any other agency as specifically requested by the Borrower Authorized by: General counsel Copy to: Division director Country portfolio manager Office of the General Counsel Loan servicing Next action: See '60 days'. 30 DAYS: LEGAL NOTICE 2 Procedure: For fully disbursed or closed loans, facsimile to Borrower's representative warning of the possible acceleration of maturity Otherwise: Same as Legal Notice 1 in all other respects. 1 In the case of loans that fall under the de minimus procedure (that is, when the amount due is less than the equivalent of USD 10 000), the only reminders that are sent are the reminder sent 15 days in advance of the due date and the reminder of non-receipt sent 15 days after the due date. July 2003 1 Annex 5 60 DAYS: PRESIDENT'S NOTICE 1 Procedure: Facsimile advising Borrower's representative that disbursements will be suspended unless arrears are settled within 15 days and warning of the possible suspension of all other loans Information to: Cooperating institution(s) Project executing agency Government's Embassy to IFAD Any other agency as specifically requested by the Borrower Authorized by: The Controller Copy to: Office of the President Division director Country portfolio manager Office of the General Counsel Loan servicing Next action: See '75 days'. 60 DAYS: PRESIDENT'S NOTICE 2 Procedure: For a closed or fully disbursed loan, facsimile advising Borrower's representative of the risk of the acceleration of maturity and warning of the possible suspension of all other loans within 60 days from the date of the facsimile Information to: Project executing agency Any other agency as specifically requested by the Borrower Authorized by: The Controller Copy to: Office of the President Division director Country portfolio manager Office of the General Counsel Loan servicing Next action: See '105 days'. 75 DAYS: SUSPENSION NOTICE FOR A SINGLE LOAN Procedure: Facsimile in President's name advising Borrower's representative that dis- bursements have been suspended and warning of the possible suspension of all other loans within 45 days Information to: Cooperating institution(s) Project executing agency Government's Embassy to IFAD Any other agency as specifically requested by the Borrower 2 July 2003 Annex 5 Authorized by: The Controller Copy to: Office of the President Division director Country portfolio manager Office of the Legal Counsel Loan servicing Next action: See '105 days'. 105 DAYS: ADVICE OF IMPENDING PORTFOLIO SUSPENSION Procedure: Vice-President's facsimile warning Borrower's representative of the coun- try portfolio suspension in 15 days' time Information to: Cooperating institution(s) Authorized by: The Controller Copy to: Office of the President Vice-President Division director Country portfolio manager Office of the Legal Counsel Loan servicing Next action: See '120 days'. 120 DAYS: PRESIDENT'S SUSPENSION NOTICE FOR ALL LOANS IN THE COUNTRY PORTFOLIO Procedure: President's facsimile advising Borrower's representative that disbursements have been suspended on all active loans Information to: Cooperating institution(s) Project executing agency Government's Embassy to IFAD Any other agency as specifically requested by the Borrower Authorized by: The Controller Copy to: Office of the President Division director Country portfolio manager Office of the Legal Counsel Loan servicing Next action: See '150 days'. July 2003 3 Annex 5 150 DAYS: WORKING NOTE TO THE VICE-PRESIDENT Procedure: As appropriate, the assistant controller, loans and grants, arranges a meet- ing with the Vice-President and the relevant IFAD staff Information to: Office of the General Counsel The Controller Division director Country portfolio manager Authorized by: Assistant controller, loans and grants Copy to: Loan servicing Next action: Determined on a case-by-case basis by the participants at the meeting. 180 DAYS: NON-ACCRUAL STATUS Procedure: Trigger date: 180 days after the due date Exemption: Only one: evidence that the payment is in process Information to: Office of the General Counsel Division director Country portfolio manager Assistant president, PMD Accounting Authorized by: Assistant controller, loans and grants Copy to: Vice-President The Controller Next action: Notification in financial statements. 4 July 2003 Annex 6 ANNEX 6 Samples of overdue and suspension notices Reminder of the Approaching Due Date (15 days before the due date) [Addressee: Ministry of Borrower's Representative as indicated in the Loan Agreement] Ref: IFAD Loan No. [loan number] [project/programme name] Billing Statement dated [date], due date [date] This is to remind you that an amount of [amount due in figures] is due as stipulated in the loan agreement. [In the case of an overdue amount, add the following sentence.] Kindly also note that an amount is overdue from previous billing(s) of [amount overdue in figures]. Consequently, the total amount now due and payable is [amount in figures]. The prompt settlement of your account would be most appreciated. Regards, [Name] Assistant Controller, Loans and Grants July 2003 1 Annex 6 Legal Notice 1, for Disbursing Loans (30 days after the due date) [Addressee: CC: Project Executing Agency Borrower's Representative Government's Embassy to IFAD as indicated in the Loan Agreement] Ref: IFAD Loan No. [loan number] [project/programme name] Overdue (Principal and Interest/Service) Charges Mr Minister, [This is the normal salutation if Borrower's representative is a minister; otherwise the salutation should be completed manually.] aaa) Our records indicate that no payment has been received by IFAD of the amounts due, totalling [amount in figures, due date]. Kindly recall that a billing statement and a facsimile communication regarding the amount due were sent to you on [date]. bbb) Please be advised that the non-payment of these amounts constitutes non-compli- ance by the Borrower with loan covenants stipulated in the loan agreement. Upon Borrower's failure to deposit the amount due in the account referred to in ccc) below, IFAD, pursuant to its General Conditions, may suspend Borrower's right to make further withdrawals from the loan account and, after thirty days of such suspension, may cancel the unwithdrawn portion of loan. [In case another amount is overdue under another loan for the same Borrower, please add the follow- ing sentence] Kindly also note that the following amounts are overdue: [amount overdue in figures]. Consequently, the total amount now due and payable is [amount in figures]. ccc) We request your immediate deposit of the amount(s) due as follows: [depository bank mentioned in the billing statement] for the account of the International Fund for Agricultural Development, referencing IFAD loan [loan number]. Please advise us as soon as possible (at facsimile no. +39-06-504-3463) of the name and address of your correspondent bank and the payment date. Accept, Mr Minister, the assurances of my highest consideration. [or, if the addressee is not a minister] Regards, [Name] General Counsel Copies: Country Portfolio Manager Loan Officer 2 July 2003 Annex 6 Legal Notice 2, for Closed Loans (30 days after the due date) [Addressee: CC: Project Executing Agency Borrower's Representative Government's Embassy to IFAD as indicated in the Loan Agreement] REF: IFAD Loan No. [loan number] [project/programme name] Overdue (Principal and Interest/Service) Charges Mr Minister, [This is the normal salutation if Borrower's representative is a minister; otherwise the salutation should be completed manually.] aaa) Our records indicate that no payment has been received by IFAD of the amounts due, totalling [amount in figures, due date]. Kindly recall that a billing statement and facsimile communication regarding the amount due were sent to you on [date]. bbb) Please be advised that the non-payment of these amounts constitutes non-compliance by Borrower with loan covenants stipulated in the loan agreement. Upon Borrower's failure to deposit the amount due into the account referred to in ccc) below, IFAD, pursuant to its General Conditions, may declare the principal of the loan outstanding and all accrued interest to be due and payable immediately. [In case another amount is overdue under another loan for the same Borrower, please add the follow- ing sentence] Kindly also note that the following amounts are overdue: [amount overdue in figures]. Consequently, the total amount now due and payable is [amount in figures]. ccc) We request your immediate deposit of the amount(s) due as follows: [depository bank mentioned in the billing statement] for the account of the International Fund for Agricultural Development, referencing IFAD loan [loan number]. Please advise us as soon as possible (at facsimile no. +39-06-504-3463) of the name and address of your correspondent bank and the payment date. Accept, Mr Minister, the assurances of my highest consideration. [or, if the addressee is not a minister] Regards, [Name] General Counsel Copies: Country Portfolio Manager Loan Officer July 2003 3 Annex 6 President's Notice 1, for Disbursing Loans (60 days after the due date) [Addressee: CC: Project Executing Agency Borrower's Representative Government's Embassy to IFAD as indicated in the Loan Agreement] Cooperating Institution Ref: IFAD Loan No. [loan number] [project/programme name] Mr Minister, [This is the normal salutation if Borrower's representative is a minister; otherwise the salutation should be completed manually.] aaa) I invite your urgent attention to facsimile no. [number] dated [date] from IFAD's General Counsel addressed to you and indicating that no payment has been received from the Government of [name of country] of the sum due [specify due date] for the above loan amounting to [amount in figures]. bbb) To avoid the consequences stated in the facsimile referred to in aaa) above, we request that your Government deposit the amount due without delay into the IFAD account at [depos- itory bank]. Please advise us of the name and address of your correspondent bank and the payment date. Unless this advice is received within 75 days from the due date, that is, [date], IFAD will not be in a position to process any further withdrawal requests. ccc) The suspension of this loan may have a negative impact on the disbursements relating to other ongoing projects (if any) and on future decisions regarding requests for additional loans for [name of the country]. As long as arrears persist, any new project approved by the Executive Board will not be signed or implemented. [If another amount is overdue under another loan for the same Borrower, please add the following sen- tence] ddd) Kindly also note that other amounts are overdue, as follows: [amount overdue in fig- ures]. Consequently the total amount now due and payable is [amount in figures]. eee) We await your positive response. 4 July 2003 Annex 6 Accept, Mr Minister, the assurances of my highest consideration. [Name] [or, if the addressee is not a minister] Regards, [Name] President Copies: Office of the President Assistant President, Finance and Administration Division Director Country Portfolio Manager General Counsel Controller Assistant Controller, Loans and Grants July 2003 5 Annex 6 President's Notice 2, for Closed Loans (60 days after the due date) [Addressee: CC: Project Executing Agency Borrower's Representative Government's Embassy to IFAD as indicated in the Loan Agreement] Ref: IFAD Loan No. [loan number] [project/programme name] Mr Minister, [This is the normal salutation if Borrower's representative is a minister; otherwise the salutation should be completed manually.] aaa) I invite your urgent attention to facsimile no. [number] dated [date] from IFAD's General Counsel addressed to you and indicating that no payment has been received from the Government of [name of country] of the amounts due on the above loan totalling [amount in figures]. bbb) To avoid an acceleration of maturity as stated in the above mentioned communication from IFAD's General Counsel, I request that your Government deposit the amount due with- out delay in the IFAD account at [depository bank]. Please advise by facsimile of the name and address of your correspondent bank and the payment date. ccc) Delays in the payment of the amounts due may have a negative impact on other ongo- ing projects (if any) and on future decisions regarding requests for additional loans for [ name of country]. As long as arrears persist, any new project approved by the Executive Board will not be signed or become effective. [In case another amount is overdue under another loan for the same Borrower, please add the follow- ing sentence] ddd) Kindly also note that other amounts are overdue, as follows [amount overdue in fig- ures]. Consequently, the total amount now due and payable is [amount in figures]. eee) We await your positive response. 6 July 2003 Annex 6 Accept, Mr Minister, the assurances of my highest consideration. [Name] [or, if the addressee is not a minister] Regards, President Copies: Office of the President Assistant President, Finance and Administration Division Director Country Portfolio Manager General Counsel Controller Assistant Controller, Loans and Grants July 2003 7 Annex 6 Suspension Notice (75 days after the due date) [Addressee: CC: Project Executing Agency Borrower's Representative Government's Embassy to IFAD as indicated in the Loan Agreement] Cooperating Institution REF: IFAD Loan No. [loan number] [project/programme name] Mr Minister, [This is the normal salutation if Borrower's representative is a minister; otherwise the salutation should be completed manually.] aaa) I invite your urgent attention to facsimile no. [number] dated [date] stating that, unless the total amounts due under IFAD's loan are paid within 75 days, that is [date], no further dis- bursement requests would be processed. This deadline has now elapsed. Regrettably, IFAD is not in a position to release further funds until such time as the payment by your Government of the overdue charges has been received. The suspension is, however, subject to the following exceptions: 1) Requests for reimbursements to commercial banks holding qualified or irrevocable agreements to reimburse or special commitments issued by the [Cooperating Institution] prior to [suspension date]. 2) Withdrawal applications for trainees already abroad (if any) at [suspension date], the interruption of which would cause personal hardship or disrupt critical technical work, subject to the time limits specified by the [Cooperating Institution]. 3) Withdrawal applications for technical/consultant services under contracts signed before [suspension date], provided the applications are received by [Cooperating Institution] no later than [suspension date plus six months]. 4) Withdrawal applications received by [Cooperating Institution] on or before [the sus- pension date, plus 90 days] for the payment of goods shipped or delivered, or for works per- formed, or for other expenditures incurred on or before [suspension date] under contracts signed before [suspension date]. [For loans with special account] 5a) While the suspension remains in effect, no replenishments will be made to the special account(s). However, while applications documenting eligible expenditures (the justification of expenditures already made) from the account(s) should continue to be submitted to [Cooperating Institution], IFAD will not make any reimbursement. [For loans with revolving fund accounts] 8 July 2003 Annex 6 5b) While the suspension remains in effect, no advance will be authorized to the revolving fund account. However, while applications documenting eligible expenditures (the justifica- tion of expenditures already made) from the accxount(s) should continue to be submitted to [Cooperating Institution], IFAD will not make any reimbursement. [In case another amount is overdue under another loan for the same Borrower, please add the following sentence] ccc) Kindly also note that other amounts are overdue, as follows: [ amount overdue in fig- ures]. Consequently, the total amount now due and payable is [amount in figures]. ddd) The immediate payment of the amounts due [amount in figures] is requested to the fol- lowing account: [IFAD depository bank] for the account of the International Fund for Agricultural Development, referencing IFAD loan(s) [loan number(s)]. The payment is imperative so as to avoid delays in project implementation or the possible can- cellation of the loan(s) in question. In addition, failure to service debt in a timely manner would adversely affect future projects. eee) We await positive action by your Government on this urgent matter in order to be in a position to resume disbursements under the loan(s). Accept, Mr Minister, the assurances of my highest consideration. [or, if the addressee is not a minister] Regards, [Name] President Copies: Office of the President Vice-President Assistant President, Finance and Administration Division Director Country Portfolio Manager General Counsel Assistant Controller, Loans and Grants July 2003 9 Annex 6 Advice of Portfolio Suspension (105 days after the due date) [Addressee: CC: Project Executing agency Borrower's Representative Government's Embassy to IFAD as indicated in the Loan Agreement] Cooperating Institution(s) Mr Minister, [This is the normal salutation if Borrower's representative is a minister; otherwise the salutation should be completed manually.] I refer to facsimile no. [number] dated [date] addressed to you by the President of IFAD regard- ing the possible suspension of the disbursements under all ongoing projects unless the charges due under loan [loan number already suspended] are paid. I regret that, as of today, we have not received the payment of these charges. Therefore, unless payment is received by [45 days from the date of the suspension of the first loan], IFAD will be forced to suspend the dis- bursements for all other active loans in the country, that is, [loan numbers and project/pro- gramme names] We await your positive reply. Accept, Mr Minister, the assurances of my highest consideration. [or, if the addressee is not a minister] Regards, [Name] Vice-President Copies: Office of the President Vice-President Assistant President, Finance and Administration Division Director Country Portfolio Manager General Counsel Assistant Controller, Loans and Grants 10 July 2003 Annex 6 Country Portfolio Suspension Notice (120 days after the due date) [Addressee: CC: Project Executing Agency Borrower's Representative Government's Embassy to IFAD as indicated in the Loan Agreement] Cooperating Institution(s) Ref: IFAD Loans No. [numbers and project/programme names] Mr Minister, [This is the normal salutation if Borrower's representative is a minister; otherwise the salutation should be completed manually.] aaa) I invite your urgent attention to facsimile no. [number] dated [date] from the Vice- President of IFAD indicating that, unless the amounts overdue under IFAD's loan are paid by [date], disbursements under all other ongoing loans, that is, [loan numbers and project/pro- gramme names], would also be suspended. bbb) The deadline has now elapsed. Regrettably, IFAD is not in a position to release further funds until such time as the payment by your Government of the overdue amounts is received. The suspension is, however, subject to the following exceptions: 1) Requests for reimbursements to commercial banks holding qualified or irrevocable agreements to reimburse or special commitments issued by the relevant Cooperating Institution [if only one Cooperating Institution, fill in the name throughout] prior to [sus- pension date]. 2) Withdrawal applications for trainees already abroad (if any) at [suspension date], the interruption of which would cause personal hardship or disrupt critical technical work, subject to time limits specified by the relevant Cooperating Institutions(s). 3) Withdrawal applications for technical/consultant services under contracts signed before [suspension date], provided the applications are received by the relevant Cooperating Institution(s) no later than [suspension date, plus six months]. 4) Withdrawal applications received by the Cooperating Institution(s) on or before [sus- pension date, plus 90 days] for the payment of goods shipped or delivered, or for works per- formed, or for other expenditures incurred on or before [suspension date] under contracts signed before [suspension date]. [For loans with special account] 5a) While the suspension remains in effect, no replenishments will be made to the special account(s). However, while applications documenting eligible expenditures (the justification of expenditures already made) from the account(s) should continue to be submitted to the rel- evant Cooperating Institution(s), IFAD will not make any reimbursement. [For loans with revolving fund accounts] July 2003 11 Annex 6 5b) While the suspension remains in effect, no advance will be authorized to the revolving fund account. However, while applications documenting eligible expenditures (the justifica- tion of expenditures already made) from the account(s) should continue to be submitted to the relevant Cooperating Institution(s), IFAD will not make any reimbursement. [In case another amount is overdue under another loan for the same Borrower, please add the follow- ing sentence] ccc) Kindly also note that other amounts are overdue, as follows: [amount overdue in fig- ures]. Consequently, the total amount now due and payable is [amount in figures]. ddd) The immediate payment of the amounts due [amount in figures] is requested to the fol- lowing account: [IFAD depository bank] for the account of the International Fund for Agricultural Development, referencing IFAD loan(s) [loan number(s)]. The payment is imperative so as to avoid delays in project implementation or the possible can- cellation of the loans in question. In addition, failure to service the debt in a timely manner would adversely affect future projects. eee) We await positive action by your Government on this urgent matter in order to enable us to resume disbursements under these loans. Accept, Mr Minister, the assurances of my highest consideration. [or, if the addressee is not a minister] Regards, [Name] President Copies: Office of the President Vice-President Assistant President, Finance and Administration Division Director Country Portfolio Manager General Counsel Assistant Controller, Loans and Grants Loan Officer 12 July 2003 Annex 6 Lifting Suspensions (For one loan or more, in the case of a country portfolio suspension, upon receipt of payment) [Addressee: CC: Project Executing Agency Borrower's Representative Government's Embassy to IFAD as indicated in the Loan Agreement] Cooperating Institution(s) Ref: IFAD Loan No. [loan number(s) and project name(s)] Mr Minister, [This is the normal salutation if Borrower's representative is a minister; otherwise the salutation should be completed manually.] aaa) I acknowledge receipt on [value date of the incoming telex] of the amount of [amount in figures] for the payment of the principal/charges due on the above loan(s) from the Government of [name of country]. bbb) I confirm that the Borrower's right to make withdrawals from the loan account(s) has been restored. This notification takes effect as of [value date of the receipt memorandum]. ccc) I hope that future amounts due on the loan debt will be remitted on the due date spec- ified in the loan agreement. [Phrase to be added in case there remains an amount outstanding under any loan.] ddd) Kindly also note, however, that an amount of [amount in figures] remains outstanding under loan(s) [number(s) of loan(s)]. eee) Urgent action for the settlement of the charges due would eliminate the possibility of further interruptions of the loan disbursements, which would adversely affect project efficiency and the preparation of new projects. Accept, Mr Minister, the assurances of my highest consideration. [or, if the addressee is not a minister] Regards, [Name] President Copies: Office of the President Vice-President Assistant President, Finance and Administration Division Director Country Portfolio Manager General Counsel Assistant Controller, Loans and Grants Loan Officer July 2003 13
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