Document of The World Bank FOR OFFICIAL USE ONLY Report No: 40771-TZ PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 66.70 MILLION (US$105 MILLION EQUIVALENT) AND A PROPOSED GRANT FROM THE GLOBAL ENVIRONMENT FACILITY TRUST FUND IN THE AMOUNT OF US$6.5 MILLION TO THE UNITED REPUBLIC OF TANZANIA FOR AN ENERGY DEVELOPMENT AND ACCESS EXPANSION PROJECT November 9, 2007 Energy Unit, Sustainable Development Department Eastern Africa Country Cluster Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective September 30, 2007) Currency Unit = Tanzanian Shillings (TSh) TSh 1250 = US$1 US$1.55281 = SDR1 FISCAL YEAR July 1 -- June 30 (Government of Tanzania) January 1 ­ December 31 (TANESCO) ABBREVIATIONS AND ACRONYMS AfDB African Development Bank CAG Controller and Auditor General COD Commercial Operations Date CREST Commercial Reorientation of the Electricity Sector Toolkit EATTA East African Tea Trade Association EHS Environment, Health and Safety EIA Environmental Impact Assessment EIRR Economic Rate of Return ENPV Economic Net Present Value ERT Energizing Rural Transformation ESMF Environmental and Social Management Framework EWURA Energy and Water Utilities Regulatory Authority FDI Foreign Direct Investment FIRR Financial Rate of Return FNPV Financial Net Present Value FRP Financial Recovery Plan FY Fiscal Year GEF Global Environment Facility GoT Government of the United Republic of Tanzania HFO Heavy Fuel Oil HVDS High Voltage Distribution System ICT Information and Communication Technologies IDA International Development Association IPP Independent Power Producer IPTL Independent Power Tanzania Limted IRR Internal Rate of Return JAST Joint Assistance Strategy for Tanzania JICA Japan International Cooperation Agency kV Kilovolt kWh Kilowatt hour M&E Monitoring and Evaluation MDGs Millennium Development Goals MEM Ministry of Energy and Minerals MKUKUTA Mpango wa Kukuza Uchumi na Kupunguza Umaskini Tanzania MoF Ministry of Finance MoU Memorandum of Understanding MTB Ministerial Tender Board MTEF Medium Term Expenditure Framework FOR OFFICIAL USE ONLY MW Megawatt NAO National Audit Office NDF Nordic Development Fund NEMC National Environmental Management Council NGOs Non-Governmental Organizations NSGRP National Strategy for Growth and Reduction of Poverty NTF Nordic Trust Fund OG Operating Guidelines O&M Operations and Maintenance PFM Public Financial Management PIU Project Implementation Unit PPRA Public Procurement Regulatory Authority PRSC Poverty Reduction Support Credit PV Photovoltaic RAP Resettlement Action Plan REA Rural Energy Agency REB Rural Energy Board REF Rural Energy Fund REWG Rural Energy Working Group RPF Resettlement Policy Framework SCADA Supervisory Control and Data Acquisition SHS Solar Home System Sida Swedish International Development Cooperation Agency SIL Sector Investment Loan SPP Small Power Projects or Small Power Plants SPPAs Small Power Purchase Agreements SPPTs Small Power Purchase Tariffs SSMP Sustainable Solar Market Packages TA Technical Assistance TANESCO Tanzania Electric Supply Company Limited TEDAP Tanzania Energy Development and Access Expansion Project UNFCCC United Nations Framework Convention on Climate Change ZECO Zanzibar Electricity Company Limited Vice President: Obiageli Katryn Ezekwesili Country Director: John M. McIntire Sector Manager: S. Vijay Iyer Task Team Leader: Pankaj Gupta This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. TANZANIA Energy Development and Access Expansion Project CONTENTS Page I. STRATEGIC CONTEXT AND RATIONALE...............................................................................1 A. Country and sector issues.................................................................................................................1 B. Rationale for Bank involvement......................................................................................................5 C. Higher level objectives to which the project contributes.................................................................6 II. PROJECT DESCRIPTION ..............................................................................................................6 A. Lending instrument..........................................................................................................................6 B. Project development objective and key indicators...........................................................................7 C. Project components..........................................................................................................................7 D. Lessons learned and reflected in the project design.........................................................................8 E. Alternatives considered and reasons for rejection ...........................................................................9 III. IMPLEMENTATION .................................................................................................................10 A. Partnership arrangements...............................................................................................................10 B. Institutional and implementation arrangements.............................................................................11 C. Monitoring and evaluation of outcomes/results.............................................................................12 D. Sustainability and Replicability .....................................................................................................12 E. Critical risks and possible controversial aspects............................................................................13 F. Credit conditions and covenants ....................................................................................................14 IV. APPRAISAL SUMMARY ..........................................................................................................15 A. Economic and financial analysis....................................................................................................15 B. Technical........................................................................................................................................18 C. Fiduciary........................................................................................................................................20 D. Social .............................................................................................................................................21 E. Environment...................................................................................................................................22 F. Safeguard policies..........................................................................................................................25 G. Policy Exceptions and Readiness...................................................................................................25 Annex 1: Country and Sector Background ............................................................................................26 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ...............................38 Annex 3: Results Framework and Monitoring.......................................................................................39 Annex 4: Detailed Project Description....................................................................................................45 Annex 5: Project Costs .............................................................................................................................61 Annex 6: Implementation Arrangements ...............................................................................................64 Annex 7: Financial Management and Disbursement Arrangements...................................................71 Annex 8: Procurement Arrangements....................................................................................................80 Annex 9: Economic and Financial Analysis ...........................................................................................88 Annex 10: Safeguard Policy Issues........................................................................................................108 Annex 11: Incremental Cost Analysis...................................................................................................114 Annex 12: Project Preparation and Supervision .................................................................................131 Annex 13: Documents in the Project File..............................................................................................133 Annex 14: Statement of Loans and Credits..........................................................................................135 Annex 15: Country at a Glance .............................................................................................................136 Annex 16: Map # 35713 ..........................................................................................................................138 TANZANIA ENERGY DEVELOPMENT AND ACCESS EXPANSION PROJECT PROJECT APPRAISAL DOCUMENT AFRICA AFTEG Date: November 9, 2007 Team Leader: Pankaj Gupta Country Director: John M. McIntire Sectors: Power (70%); General energy sector Sector Manager / Director: S. Vijay Iyer / Michel (20%); Renewable energy (10%). Wormser Themes: Analysis of economic growth (P); Other Project ID: P101645 urban development (P); Rural services Lending Instrument: Specific Investment Loan and infrastructure (S). Environmental screening category: B (Partial Assessment). Global Supplemental ID: P092154 Team Leader: Pankaj Gupta Lending Instrument: Specific Investment Loan Sectors: Power (85%); Renewable energy (15%). Focal Area: C-Climate change Themes: Rural nonfarm income generation (P). Supplement Fully Blended?: Yes Infrastructure services for private sector development (P); Climate change (S). Project Financing Data [ ] Loan [X] Credit [X] Grant [ ] Guarantee [ ] Other: For Credits: US$111.5 million Total Bank financing (US$m.): 105.00 Proposed terms: Standard terms: 40 years maturity, with 10 years grace period. Financing Plan (US$m) Source Local Foreign Total Borrower 6.80 0.00 6.80 International Development Association (IDA) 13.73 91.27 105.00 Global Environment Facility (GEF) 2.45 4.05 6.50 Other Donors and Bilateral Agencies 0.00 3.20 3.20 Local Sources of Borrowing Country (Private 13.55 0.00 13.55 Sector, unidentified) Foreign Private Sector (unidentified) 0.00 13.55 13.55 Total: 36.53 112.07 148.60 Donor and Private Sector Financing is expected to materialize during the implementation of Component B of the Project, supported by both IDA and GEF as parallel and leveraged financings, respectively. Borrower: Ministry of Finance on behalf of Government of Tanzania PO Box 9111 Dar es Salaam, Tanzania Responsible Agency: (a) Ministry of Energy and Minerals PO Box 2000 Dar es Salaam, Tanzania (b) Tanzania Electric Supply Company Ltd. PO Box 9024 Dar es Salaam, Tanzania Estimated disbursements (Bank FY/US$m) FY 08 09 10 11 12 Annual 5.25 26.25 26.25 26.25 21.00 Cumulative 5.25 31.50 57.75 84.00 105.00 GEF Estimated disbursements (Bank FY/US$m) FY 08 09 10 11 12 Annual 0.33 1.63 1.63 1.63 1.30 Cumulative 0.30 2.00 3.80 5.50 6.50 Project implementation period: Start: March 1, 2008 End: February 29, 2012 Expected effectiveness date: March 1, 2008 Expected closing date: March 31, 2012 Does the project depart from the CAS in content or other significant respects? [ ] Yes X No Does the project require any exceptions from Bank policies? [ ] Yes X No Have these been approved by Bank management? [ ] Yes [ ] No Is approval for any policy exception sought from the Board? [ ] Yes [ ] No Does the project include any critical risks rated "substantial" or "high"? X Yes [ ] No Does the project meet the Regional criteria for readiness for implementation? X Yes [ ] No Project development objective The objective of the project is to improve the quality and efficiency of the electricity service provision in the three main growth centers of Dar es Salaam, Arusha, and Kilimanjaro and to establish a sustainable basis for energy access expansion. The project is consistent with the latest Joint Assistance Strategy (2007-2010) by specifically supporting the goals of the Government's National Strategy for Growth and Reduction of Poverty ­ MKUKUTA. Global environment objective The project's global environmental objective is to abate greenhouse gas emissions through the use of renewable energy in rural areas to provide electricity. This objective is also consistent with the Investment Framework for Clean Energy and Development and its goal of accelerating investments to increase energy access in developing countries, especially in subsaharan Africa, while reducing global carbon emissions. Project description The proposed project will consist of the following three components: (i) a grid component of US$85.8 million focusing on urgent investments in TANESCO's transmission and distribution network; (ii) an offgrid component of US$22.5 million (including US$6.5 million from GEF) to support an institutional set-up for the newly established Rural Energy Agency (REA) and to develop and test new offgrid electrification approaches for future scale-up; and (iii) a technical assistance component of US$3.2 million. Which safeguard policies are triggered, if any? Environmental Assessment (OP/BP 4.01); Natural Habitats (OP/BP 4.04); Physical Cultural Resources (OP/BP 4.11); Involuntary Resettlement (OP/BP 4.12); Safety of Dams (OP/BP 4.37); and Projects on International Waterways (OP/BP 7.50). Significant, non-standard conditions for credit effectiveness: · The Recipient and TANESCO have, each prepared plans showing adequate in-house capacity for environmental and social impact management, required to implement the Project. · The Recipient has adopted and submitted to the Association the Operating Guidelines, in a form and substance satisfactory to the Association. Board presentation: December 20, 2007 Credit effectiveness: March 1, 2008 Covenants applicable to project implementation: · Except as the Association shall otherwise agree, the Recipient shall, during each FY: (a) make adequate provision in its budget adequate to finance all costs and charges associated with the leased generators; and (b) provide at least approximately one billion five hundred million Tanzania Shillings (TSh 1,500,000,000) per months as compensation to TANESCO for capacity charges arising under a power purchase agreement between TANESCO and Independent Power Tanzania Limited, until such time as: (i) TANESCO shall have been fully discharged from its obligation under the said power purchase agreement; or (ii) TANESCO shall have produced a reasonable forecast that demonstrates its operational cost recovery. · Except as the Association shall otherwise agree, TANESCO shall not incur any new debt, unless TANESCO shall produce a reasonable forecast of net annual revenues equal to, or greater than 1.3 times the estimated debt service requirement of TANESCO the following Fiscal Year. · Except as the Association shall otherwise agree, TANESCO shall maintain a gross domestic sales revenue at least TSh 100 per kilowatt-hour (kWh) of power generated, imported, or contracted under a power purchase agreement. Implementation and Reporting Milestones: · TANESCO and MEM will prepare quarterly project progress and IFR reports. These are to be submitted within 45 days after quarter end. · TANESCO will submit entity annual financial statements within six months after fiscal year end. · REA will be fully staffed by December 31, 2008. I. STRATEGIC CONTEXT AND RATIONALE A. Country and sector issues 1. Tanzania has an estimated population of about 40 million, growing annually at a rate of 2%. It has a land area of about 945,087 sq. km and is well endowed with natural resources such as hydropower, tin, phosphates, iron ore, coal, diamonds, gemstones, gold, natural gas, geothermal and nickel. The economy of Tanzania depends heavily on agriculture, which accounts for almost half of GDP, provides 85% of exports, and employs 80% of the work force. Topography and climatic conditions allow cultivation of crops on 54% of the land area. Industry has traditionally featured the processing of agricultural products and light consumer goods. 2. Tanzania continues to implement sound macro-economic policies, which provide a suitable environment for progress towards its macro objectives of high growth and reduced poverty. Drought and high energy prices of 2006 led to an increase in inflation to 5.8% per annum, however as inflationary pressures subside in 2007, inflation is expected to fall to about 5%. Growth for 2007 is projected to increase to over 7%. 3. Tanzania is endowed with diverse energy sources including biomass, natural gas, hydropower, coal, geothermal, solar and wind power, much of which is untapped. Wood fuel accounts for up to 90% of total energy supply with about 2% from hydro-electricity and 8% from oil- derived products. Tanzania's power sector is dominated by a single vertically integrated national utility, Tanzania Electric Supply Company Limited (TANESCO). Total installed generation capacity is 1,192 MW including IPPs and imports, of which 47% is hydro based. National electricity coverage is about 10%. At present, Tanzania is recovering from an energy crisis that can be attributed largely to loss of hydro generation, which is estimated to account for about a 2% GDP drop in 2006. Drought for several years resulted in lower water levels in the reservoirs for hydropower facilities (the available hydropower generation capacity dropped from 562 MW to about 300 MW in 2006 when TANESCO resorted to load shedding) which together with the delays in sector investments and lack of optimization of hydro and thermal generation resources caused significant load shedding in 2006. 4. Significant rainfall during the "short rains" season in late 2006 and early 2007 unexpectedly restored full hydro capacity, and since then generation shortfalls have been avoided. TANESCO has also contracted about 140 MW of 2-year leased generation capacity, and 40 MW of 1-year leased capacity, in addition to about 150 MW of new permanent capacity that is scheduled to come on line in late 2007 and mid 2008. Based on this additional leased and permanent capacity available to TANESCO, it is envisaged that TANESCO will have adequate reserve generation margins for at least the coming 24 months and no load shedding should be expected over the medium-term.1 5. The energy crisis in 2006 has highlighted the importance of reliable energy for economic growth and poverty alleviation. This crisis has once again revealed the underlying vulnerability of hydro-dominated generation systems to droughts. It has also shown the importance of adequate diversified generation planning and timely investments in the transmission and distribution subsectors to maintain technical losses and overall reliability of the system. As the sector is moving from the short-term crisis management to medium- and long-term planning, the following issues and strategic goals have been identified. 6. Ensuring appropriate long-term generation capacity. Tanzania has faced four energy crises over the last decade. Sufficient capacity in generation is assured in the near term, but it is essential 1Based on an average hydrology scenario on an ongoing basis. 1 that a least cost generation plan is put in place and followed. It is also necessary to ensure that the new capacity additions are least-cost, transparent, and competitive procurement processes are followed to procure such capacity. To that extent, the Government is preparing a new long-term least-cost Power Sector Master Plan (PSMP) and to strengthen the transparency of new transactions, it has been agreed that the Energy and Water Utilities Regulatory Authority (EWURA), the sector regulator, will establish regulatory rules that will support competitive procurement of new generation capacity. 7. Ensuring quality of supply. There are large investment needs currently in transmission and distribution (T&D) subsectors, as little investment has gone into maintaining and replacing the network since late 1980's. Correspondingly, quality of service has deteriorated and current system- wide losses are about 24% primarily due to lack of a T&D investment program. TANESCO has not been able to invest its own resources in T&D investments, as current tariff levels (which are below cost recovery) do not allow it to generate adequate income. TANESCO has developed a 5-year investment plan, which estimates urgent investment needs of about US$1.3 billion (including expansion of TANESCO's grid). Of these urgent investments, TANESCO has identified priority investments of about US$100 million to upgrade the network in three main urban areas ­ Dar es Salaam, Arusha and Kilimanjaro, which account for the majority of TANESCO's revenues. The upgrade of T&D system will not only improve service in the key urban areas, but also reduce losses and improve revenue streams, therefore directly contributing to TANESCO's financial recovery. The proposed project is designed to support this objective. Several of the identified investments are being envisaged with a view that they may yield additional resources through the global carbon market. Large amount of additional capital will be required over the next few years to meet the overall goal of improving service reliability throughout the system. 8. Ensuring long-term financial sustainability of TANESCO. The average tariff charged by TANESCO is not able to generate enough revenues to meet operational costs. The current blended (hydro and thermal, based on average hydrology) cost of generation is about 8.4 cents, when compared to an average retail tariff of about 7 cents (in 2006). The Government has developed a Financial Recovery Plan (FRP) for TANESCO, with the objective of restoring complete financial sustainability of TANESCO. On February 3, 2007, the Cabinet approved the TANESCO FRP. The first 6% tariff increase was implemented in early 2007. As part of the Letter of Development Policy for the PRS Credit, the government also committed that during 2007 TANESCO will improve its power sales revenues by at least 15%. To that extent, an additional 40% tariff increase has been requested by TANESCO to meet its operational costs in late August 2007. Based on current estimates, increase in power sales revenues due to the proposed regulator approved tariff increase should go towards significant operational cost recovery. TANESCO will have to request another significant tariff increase to meet its long-term capital investment plans. Once full financial cost recovery levels are achieved, it is expected that a reliable mechanism for tariff adjustment will be put in place for the long-term to ensure sustainability of TANESCO's financial recovery. 9. As part of the ongoing dialogue with the Bank, the Government has also requested to use the project savings from the Songo Songo Gas Development and Power Generation Project (Cr. 3569)2 to support the TANESCO FRP and to continue making funds available for the Independent Power 2The Songo Songo Gas Development and Power Generation Project (the Project, Credit 3569-TA), financed by a Credit in the amount of SDR 145.7 million (US$220 million equivalent), was approved by the Intenational Development Association's (IDA's) Board of Executive Directors on October 9, 2001 and became effective on November 27, 2001. It has a Project Development Objective (PDO) of developing Tanzania's natural gas reserves to produce least-cost power generation for domestic and industrial use in an environmentally sustainable and efficient manner. 2 Tanzania Limited (IPTL) conversion to gas. The Bank is proposing to support the Government of Tanzania (GoT) and TANESCO to reduce the cost of power generation, thereby assuring least cost supply in the sector. In addition to implementing the IPTL Heavy Fuel Oil (HFO) to gas conversion component, it is proposed to use the remaining project savings of US$50.7 million primarily to finance, at GoT's request, the implementation of the option in the Songas Power Purchase Agreement that allows GoT to reduce capacity charges by refinancing up to 75% of costs associated with the engineering, procurement and construction of the Ubungo Expansion Project (UEP). If the proposal is approved, it will result in substantial reduction in Songas capacity charges to TANESCO, thereby reducing the cost burden on the utility. The use of savings in this manner, to support the FRP, is consistent with the project objectives of producing least-cost power generation. Reduction in overall cost of power generation will improve the creditworthiness of TANESCO, thus enabling continued interest of the private sector to support the electricity sector, especially for generation projects as envisaged in the government's power sector reform strategy (see below). 10. Continuing sector reform process. The Government is in the process of finalizing a Power Sector Reform Strategy (2007) which has been developed in close donor cooperation and consultation. This strategy presents a vision of the power industry in Tanzania over the medium- to long-term and envisages the evolution from a 'single buyer' market structure, with competition to enter into long-term PPAs with TANESCO; to ongoing wholesale competition, in which the producer sells directly (or through a pool or voluntary electricity exchange) to the distribution companies over the medium to long-term. The strategy also presents a plan of reform activities with implementation dates regarding key institutional, policy, and regulatory reform actions related to procurement of new generation through competitive bidding and creating enabling environment for private sector participation; open access to transmission grid; institutional and legal framework, tariff policy, promoting market based pricing, etc. Furthermore, it provides steps to improve participation of IPPs under the single buyer model, and those needed to move to ongoing wholesale competition. It also covers broad issues and options related to regulation of rural and off grid electrification with a plan for reform activities, including the development of rural energy policy. 11. In 2001, the Government of Tanzania, recognizing the advantages to be derived from power sector reform, established the EWURA. EWURA was made operational in June 2006. By its legislative mandate ("the EWURA Act"), EWURA is obligated to: (a) promote competition and economic efficiency; (b) protect consumers; (c) protect the financial viability of efficient suppliers; (d) promote the provision of services to all consumers; and (e) enhance public awareness regarding their rights and obligations. A draft Electricity Bill was approved by Government in September 2007 and is expected to be submitted to the Parliament in 2007. The bill acknowledges that EWURA is already a functioning regulatory authority and provides for the regulation of the electricity supply and services industry covering licensing and issuing of permits, rights and obligations of licensees, tariffs and charges, consumer rights and protection, monitoring, inspections, investigations and compliance, the access to land for electricity supply installations, the planning, monitoring and regulation of rural electrification, and the reorganization and restructuring of the electricity supply industry. The Bill has taken into account many of the international best practices for electricity sector reform enunciated by the Bank and tailors them to the specificities of the Tanzanian environment. 12. Furthermore, EWURA intends to conduct a public consultation for purposes of establishing regulatory rules that will mandate competitive procurement of new generation supplies and the development of one or more model PPAs with an objective of improving governance in the power 3 sector.3 To complement this activity, TANESCO will undertake an Independent Power Producer (IPP) Strategy with the development of model bidding documents incorporating such guidance over the medium-term. The Bank is envisaging providing support to this EWURA and TANESCO initiative through the Privatization and Private Sector Development Project (Cr. 3304). 13. Improving Management of TANESCO. A management contract for TANESCO to South Africa's NetGroup expired in 2006. This initiative was instrumental in achieving productivity gains, particularly in terms of commercial loss reductions and increase in collections, but such gains have been eclipsed by the sustained technical losses due to the lack of investments in the T&D network. In 2006, the Government decided not to renew the management contract but to continue with full public ownership of TANESCO. A new Managing Director with a commercial background has been appointed; a new Chief Financial Officer has been appointed; and key management post have been restructured and filled. TANESCO has been also been reorganized with a leaner headquarter and empowered decentralized staff. 14. Expanding access to unserved areas. Access scale-up is an important component of the Government's long-term economic growth plan and is one of the Government's highest priorities in the context of the power sector. The lack of access to modern energy services constrains Tanzania's growth potential, contributes to the poverty and isolation of rural population, and affects provision of other key services, such as clean water supply, health, and education, threatening the achievement of Millennium Development Goals. Access to modern energy services is scarce outside Dar es Salaam. TANESCO serves about 635,000 customers, out of a population of about 40 million. 15. The electricity coverage is less than 10% nationally and in most regions is in single digits. Rural coverage is below 2%. The key reasons for this low coverage include: (i) limited reach of TANESCO's grid and low intensity of connections in the grid areas; (ii) TANESCO's lack of financial strength which precludes any financially nonviable grid access expansion; and (iii) inadequate regulatory and financing mechanism for rural electrification in general, and alternative offgrid solutions in particular. 16. Recognizing these constraints, in 2005, Tanzania's Parliament approved a Rural Energy Act, which established a Rural Energy Agency (REA) to lead the development of rural energy access initiatives and a Rural Energy Fund (REF) to finance such initiatives. The REA and REF are in the process of becoming operational. REA Board is now functional and a Director General and a Chief Financial Officer have been appointed. As a new institution, two key challenges are faced by REA, namely to develop a robust rural access strategy which combines currently fragmented elements of grid and offgrid expansion, and to demonstrate rapid increase in access to electricity on the ground. 17. Increasing the use of renewable energy: The Government has also expressed a commitment to increase use of renewable energy, including the generation and monetization of carbon credits and considers the growth of the renewable energy industry as an integral part of its rural energy and power sector development strategy. In its last National Energy Policy document (2003), GoT has reiterated its objectives to reduce the dependency on fossil fuel for isolated grids and remote locations and suggested additional research and development of renewable energy, particularly as part of rural electrification initiatives. Various studies demonstrate that Tanzania has substantial potential4 for 3 In this context, a two-phased approach is being followed. Phase I will involve the creation of a standardized application and tables that will allow for benchmarking of proposed PPAs. Phase 2 will involve the creation of guidelines for competitive procurement and model PPAs. 4The most promising resources include small hydro, biomass, solar and geothermal (with a more limited wind potential). 4 renewable energy development, yet new renewable energy sources contribute less than 1% of the national energy balance. Tanzania's renewable industry is still in its infancy; barriers to its growth include a limited number of project promoters, renewable energy finance providers, service companies, planners and specific regulatory framework (standardized power purchase agreements, technical specifications etc.). B. Rationale for Bank involvement 18. The Bank has established itself as one of the key partners to support Tanzanian government in its efforts to establish conditions for sustainable and reliable energy provision for economic growth and poverty alleviation. The recent Joint Assistance Strategy for Tanzania (JAST) highlights energy as one of the key development focus areas. 19. The Bank has been supporting the reform strategy of the power sector in Tanzania for decades. Based on the Bank's recommendation, a management contractor was hired by the government to prepare TANESCO for privatization. Since the utility was supposed to be privatized, the government decided that no investments were to be made which has now led to a technically dilapidated system. In late 2006, the government decided not to renew the management contract and further decided to keep the utility in public ownership. The current 5-year investment plan focuses on capacity expansion and needs to be complemented with measures to exploit recent advances in energy efficiency and demand side management interventions. The plan contemplates an ambitious electricity access scale-up, raising coverage from 10% to 25%. Out of a cumulative investment plan of about US$1.3 billion, TANESCO has identified urgent T&D investments of over US$200 million in nine key areas of Tanzania; these investments will improve the capacity of existing networks thus improving power system performance by reducing system losses, frequent outages due to overloaded transformers and old equipment, low and fluctuating voltage conditions and poor power factors. 20. The proposed Energy Development and Access Expansion project (the project) is expected to be the first in the series of projects aiming at energy development and sustainable access scale-up through both grid and offgrid interventions. This first project will primarily focus on the urgent upgrade of TANESCO's transmission and distribution grid and it will support a sustainable basis for the access expansion by supporting REA and targeting new approaches for future electrification scale-up. It is expected that successful implementation of this new project, combined with the proposed use of savings of the Songo Songo project to reduce the overall cost of generating power, and the proposed tariff increase(s) will help the sector back to a sustainable path of development allowing for additional private sector investment in the sector. Follow-on projects are envisaged to strengthen the transmission backbone of Tanzania and other generation and transmission investments allowing Tanzania to export power in East Africa in the medium-term. 21. The project will also support the sector dialogue by aligning itself with the Poverty Reduction Support Credit (PRSC), and with the broader donor dialogue in Tanzania. The project has been prepared based on a consultative approach with other key donors (Sida, MCC, AfDB, NDF, JICA, JBIC, and the Clinton Foundation) who have confirmed their agreement with the proposed approach and interest in working closely with the Bank on the proposed project and on the development of a comprehensive scale-up strategy. The Bank is also in discussions with Korean Export Import Bank to explore additional investment support to the Tanzanian energy sector. 22. The Bank Group supports the Government's sector strategic goals cited above through a variety of instruments, including policy dialogue (PRSC), technical assistance (least cost generation plan, tariff setting, sector reform, capacity building), transaction advice and has offered the use of 5 IDA Guarantees, IFC and MIGA support (as appropriate) for upcoming public-private partnership schemes, in addition to investment credits for transmission and distribution expansion projects. C. Higher level objectives to which the project contributes 23. The overall objective of the recently agreed and approved JAST is to contribute to sustainable development and poverty reduction in line with the National Vision 2025 by consolidating and coordinating Government and Donor support under a single Government-led framework to achieve results on the 2005 National Strategy for Growth and Reduction of Poverty (NSGRP/MKUKUTA). The MKUKUTA is committed to the achievement of the Millennium Development Goals (MDGs) and has an increased focus on growth and governance. The MKUKUTA identifies three clusters of broad outcomes: (i) growth and reduction of income poverty; (ii) improvement in quality of life and social well being; and (iii) good governance. 24. The proposed project will support and contribute to the outcome and achievement of goals of the JAST and MKUKUTA (Goal 6: Provision of reliable and affordable energy to consumers) allowing for improved electricity access to the population and through focusing the majority of investments on specific, targeted service quality improvements and access expansion in the key growth areas, the project will improve the quality of life for the affected population. The Project will target 6 out of 8 World Bank CAS milestones related to the achievement of MKUKUTA Goal 6. At the regional level, the project will support several economic and social objectives of the World Bank's Africa Action Plan. The project will support closing the infrastructure gap in Africa and support the achievement of economic growth required for poverty reduction. 25. The proposed project will also contribute to a higher-level global objective of reducing greenhouse gas emissions. Tanzania signed the United Nations Framework Convention on Climate Change (UNFCCC) in 1992 (and ratified it on April 17, 1996, as a non-Annex 1 party). Tanzania remains strongly committed to promotion of renewable energy sources. The project will allow Tanzania to support the most significant renewable energy options identified, namely, hydropower generation, mini-hydropower, biomass cogeneration, and solar energy. II. PROJECT DESCRIPTION A. Lending instrument 26. The proposed lending instrument will be a 4-year Sector Investment Loan (SIL). The total IDA-financing sought is US$105 million. It is proposed that given the weak financial health of TANESCO and the commercial discipline that is being imposed on TANESCO via the commercial borrowing that it has recently undertaken, the IDA credit will be provided to TANESCO as GoT equity. 27. The proposed project5 seeks US$6.5 million from the Global Environment Facility (GEF) to remove barriers to the use of renewable energy for electricity supply. The proposed GEF co-financed interventions fall under Climate Change Focal Area, Strategic Program 3 ­ Promoting market approaches for renewable objectives under GEF-4. This is consistent with the former Operational Program 6, under which the Project was approved by the Council for the Work Program Entry. The 5The GEF council approval was obtained for the Energizing Rural Transformation (ERT) project in June 2006, which anticipated a large-scale energy access expansion (both grid and offgrid). This approach had to be modified as the sector was not deemed to be ready for a larger-scale on-grid expansion resulting in the proposed offgrid component of the project, which has been designed based on the principles of the ERT. 6 Project is consistent with Strategic Long-term Objectives 4 ­ to promote on-grid renewable energy and 5 ­ to promote the use of renewable energy to provide rural energy services (offgrid). B. Project development objective and key indicators 28. The objective of the project is to improve the quality and efficiency of the electricity service provision in the three main growth centers of Dar es Salaam, Arusha, and Kilimanjaro and to establish a sustainable basis for energy access expansion. The project is consistent with the latest Joint Assistance Strategy (2007-2010) by specifically supporting the goals of the Government's National Strategy for Growth and Reduction of Poverty ­ MKUKUTA. 29. The project's global environmental objective is to abate greenhouse gas emissions through the use of renewable energy in rural areas to provide electricity. This objective is also consistent with the Investment Framework for Clean Energy and Development and its goal of accelerating investments aimed at increasing energy access in developing countries, especially in Sub-Saharan Africa, while reducing global carbon emissions. 30. Progress towards achieving the project objectives will be measured by the following indicators: · Improvement in TANESCO's operational efficiency as measured by: (i) reduction in total losses; and (ii) increase in collection efficiency in targeted areas. · Improvement in service quality as measured by: (i) increase in end user voltage; and (ii) improved customer satisfaction. · REA fully functional as demonstrated by: (i) capacity to develop, finance, and implement scale up of pilot schemes; and (ii) pipeline of new rural household connections. 31. The project is also designed to support a global environmental objective to abate greenhouse gas emissions through use of renewable energy in rural areas for provision of electricity. The key performance indicators in this respect will be: · Number of MW of renewable energy installed for generation of electricity; and · The resulting avoided carbon dioxide emissions. C. Project components 32. The proposed project will consist of the following three components: (i) a grid component of US$85.8 million focusing on urgent investments in TANESCO's transmission and distribution network; (ii) an offgrid component of US$22.5 million (including US$6.5 million from GEF) to support an institutional set-up for the newly established Rural Energy Agency (REA) and to develop and test new offgrid electrification approaches for future electrification scale-up; and (iii) a technical assistance (TA) component of US$3.2 million. 33. Component A will support urgent investments in TANESCO's transmission and distribution networks in Dar es Salaam, Arusha, and Kilimanjaro. This grid component will improve the capacity of existing networks, thus improving the service quality for existing customers and allowing new customers to connect to the grid in the three main growth centers of Tanzania. Furthermore, these investments will improve the capacity of existing networks thus improving power system performance by reducing system losses, frequent outages due to overloaded transformers and old equipment, low and fluctuating voltage conditions and poor system power factors. The investments will include adding, replacing or upgrading transmission and distribution lines and substations and medium and low voltage equipment, meters, spare parts, and tools. The Project will explore 7 monetizing the carbon credits potentially created through these investments for efficiency improvements. The Project will also support investments that aim at improving: (i) corporate performance; (ii) customer interface of TANESCO; and (iii) access expansion in urban areas. The main rationale of these investments is to create value in the electricity business and to demonstrate its viability in a replicable manner. Component A will be implemented by TANESCO. 34. Component B will support an institutional set-up for the newly established Rural Energy Agency (REA) and develop, test and demonstrate new electrification approaches, which could be easily scaled-up. As TANESCO's current financial health does not allow sustainable expansion of grid into rural areas, the component will focus on a development of scalable, economically and financially feasible offgrid alternatives. Specifically, the objectives of this component are to: (i) increase electricity access in rural and peri-urban Tanzania to productive enterprises, service delivery facilities (in health and education), and to households with the capacity to pay for electricity; (ii) establish a functioning institutional and regulatory framework for commercially oriented, sustainable service delivery for rural electrification that can be scaled up; and (iii) exploit Tanzania's renewable energy potential. 35. Component B is overall costed at US$59.6 million, of which IDA and GEF will finance US$22.5 million. This component has three subcomponents: (i) Small Power Generation and Distribution (SPGD) subprojects, including renewable power generation and mini-grids; (ii) Sustainable Solar Market Development (SSMD), supplying solar PV systems for public institutions and for individual households and businesses in rural areas; and (iii) Technical Assistance to the Rural Energy Agency (REA) and other stakeholders. These activities will be implemented through: (a) provision of grants to the private sector (including NGOs and cooperatives) to partially offset investment costs of new service connections (through performance grants), and for pre-investment studies, business and market development, including productive uses (through matching grants); and (b) supply, installation and provision of maintenance and other associated services for the Sustainable Solar Market Packages, as well as the provision of goods, consultant services and training for the technical assistance subcomponent, and related operating expenses. 36. Component C will support technical assistance for about US$3.2 million will be provided for: (i) training needs assessment for TANESCO with subsequent selected capacity building implementation; and (ii) increasing the GoT's capacity to develop public and private generation projects through the provision of legal, technical, financial, environmental, and social advisory services. 37. Table 1 below provides a summary of the IDA and GEF support to the proposed project components. The overall financing plan is provided in Annex 5. Table 1: Proposed Project Components IDA GEF financing (US$ million) (US$ million) Component A - Grid upgrade and expansion 85.8 0 Component B - Offgrid electrification 16 6.5 Component C ­ Sectoral Technical Assistance ­ MEM & TANESCO 3.2 0 Total 105 6.5 D. Lessons learned and reflected in the project design 38. Financial viability of utilities: Grid scale-up requires, at a minimum, a stress-tested financial recovery plan for financially recovering utilities. Investments for corresponding generation, 8 transmission, and distribution capacity in the sector should be targeted to improve the cash flow to the utilities. Therefore, it is well regarded that targeted interventions in utility's distribution system can simultaneously improve service, reduce technical and commercial losses and increase revenues and that such interventions are critical during the scale-up process. In addition, a financially viable and operationally sustainable utility are key to promoting private sector investments in the sector. 39. Access expansion requires a long-term, comprehensive approach: Access expansion is a long-term process. From recent projects (e.g. Philippines and Sri Lanka), it has been learnt that this process tends to follow a growth curve that has an exponential character ­ the initial stages are relatively slow as locally adapted models need to be developed and institutional framework and capacity built, but subsequent stages show ever increasing expansion rates. Countries aiming at significant access scale-up typically require both on-grid and offgrid electrification solutions based on a least cost analysis, and using appropriate low-cost technical solutions and corresponding technical/regulatory standards. In addition, an effective institutional, policy and regulatory implementing framework is also a key basic requirement for expanding access. 40. Operational efficiency of Utilities - Lessons from the region: The current operational status of TANESCO clearly demonstrates the need for improvement of commercial and technical efficiencies before any substantial investments can be made in generation. Initial results of the implementation of a utility improvement program called CREST (Commercial Reorientation of the Electricity Sector Toolkit) by other countries in Africa such as Nigeria have demonstrated that the underlying value in the distribution business can be significantly realized through investment support to pave the way for the launch of institutional reform and privatization initiatives on a sustainable basis. Based on these encouraging experiences, the proposed project has incorporated the guiding principles of the CREST program as the underlying philosophy for its support to TANESCO. E. Alternatives considered and reasons for rejection 41. Larger on-grid investments versus additional follow-on projects. TANESCO has identified a medium-term investment program of about US$1.3 billion that include important transmission and distribution projects. The project could have been designed to include additional distribution and transmission networks for high voltage customers. Given that some of these transmission investments will also serve to improve regional power trade options, a choice was made to finance urgent transmission and distribution needs in the proposed project, and to finance regional transmission and interconnection networks as a follow-on project. 42. Changing the focus for access expansion. The originally conceived Energizing Rural Transformation (ERT) project for Tanzania anticipated a large-scale energy access expansion (both grid and offgrid). This approach was abandoned as developments in the sector and further analyses revealed that the Tanzania electricity sector was not ready for a larger-scale expansion. In particular, grid expansion is not feasible until: (i) sufficient generation capacity is secured; (ii) TANESCO's financial situation is improved and its network's technical capacity upgraded to allow a sustainable expansion of the grid; and (iii) Rural Energy Agency's implementation capacity is established. Therefore, a phased approach to access expansion is proposed. The project represents the first phase, which will focus on establishing underlying conditions for a successful access scale-up through: (i) implementing urgent rehabilitation of TANESCO's transmission and distribution network, improving its financial and technical performance; and (ii) establishing and testing scalable models for offgrid electrification and institutionalizing and strengthening the Rural Energy Agency. 43. Bundling electricity with Information and Communication Technologies (ICT). The originally contemplated ERT project bundled energy, information, and communication technologies 9 services in the rural areas. This approach was abandoned due to added complexity to the project with many subcomponents. 44. Single Implementation Agency. The team considered establishing a single implementing agency at MEM, with centralized procurement and financial management functions to simplify institutional arrangements. Such solution, however, was found impractical, as each component requires a different approach and a close involvement of the respective agencies (TANESCO & REA). A centralized project implementation unit (PIU) will most likely just add another bureaucratic layer and delays. MEM will, however, still be responsible for the overall coordination of the project, as well as monitoring and evaluation, to ensure a coherent approach and consistency with the Government's overall energy development policies. III. IMPLEMENTATION A. Partnership arrangements 45. Several development partners directly or indirectly support the energy sector in Tanzania. To harmonize support provided to the energy sector, the Bank has taken the lead in collaborating with Sida, NORAD, DFID, MCC, AfDB, JICA/JBIC, IMF, DGIS / Netherlands, EU and UNDP to design the overall assistance to the energy sector. A task force comprising of World Bank, IMF, Sweden, UK and Netherlands also has been created that meets on a regular basis under the leadership of the Ministry of Finance (MoF) to assess short- and medium-term issues facing the energy sector. The Bank is also in discussions with NORAD about financing of a twinning arrangement between the Norwegian State owned STATTNET, the Norwegian Transmission System Operator and TANESCO. 46. The proposed project also provides support to the development of a comprehensive, sector- wide approach to access expansion in Tanzania. Sida and the Bank co-lead the development of this sector-wide approach. In addition, Sida has been providing assistance to the energy sector for many years concentrating on rural electrification and support to MEM. Sida has also financed a World Bank managed and Client executed Trust Fund to assist the preparation of the REA-executed components of the Tanzania Energy Development and Access Expansion Project (TEDAP, the project)), mainly involving studies for offgrid electrification and renewable energy by consultants. 47. NDF and JICA are parallel financiers to the project. NDF will finance transmission lines and substations in Kilimanjaro and Arusha for Euro 8 million. JICA is expected to finance a transmission line from Ubungo to and including a new substation in Dar es Salaam. JICA has also planned for technical assistance to TANESCO in support of a distribution and transmission training program. The Bank is also in discussions with Korean Export Import Bank to explore additional investment support to the Tanzanian energy sector. AfDB is expected to finance one substation in Arusha and other distribution activities under the AfDB "Electricity V" project. 48. The Millennium Challenge Corporation (MCC) has recently negotiated a US$206 million grant package for the energy sector that includes high-voltage power sea cable to Zanzibar, a small run-of-river hydropower plant and the extension of a mini-grid system, and rehabilitation of the existing distribution infrastructure in six regions. The MCC activities related to the rehabilitation of T&D networks have been designed in keeping with the goals of the proposed project. 49. In addition, several initiatives have led to the realization that there is a need to facilitate infrastructure development for power trade by promoting key regional investments, particularly backbone transmission investments and national grid interconnections. The Bank is supporting such 10 initiatives. Specifically, the Bank is also managing the Regional Power Trade Project through the Nile Basin Trust Fund (NBTF), whose donors include Norway and Sweden. B. Institutional and implementation arrangements 50. The project will be implemented by two agencies; TANESCO will implement component A and a portion of component C and MEM will implement component B and a part of the component C. 51. Component A will be implemented by the existing dedicated TANESCO project team under the leadership of the Senior Manager, Strategic Planning and Projects, and under the guidance of TANESCO's General Manager, Transmission, who will have overall responsibility for implementation of the component. The Senior Manager, Strategic Planning and Projects will coordinate and manage project activities and interact across all departments in TANESCO and with the MEM, the MoF and the Bank. The Manager, Procurement will be responsible for procurement and will report to the Chief Financial Officer. Financial aspects will be the responsibility of the Manager, Finance, who will also report to the Chief Financial Officer. The General Manager, Marketing will be accountable for monitoring the operation through TANESCO's regional offices. The Chief Internal Auditor will be in charge of project auditing and will report directly to the Managing Director. 52. Component B will be initially implemented by the Ministry of Energy and Minerals (MEM). The implementation will be mainstreamed into the current MEM organizational structure, without creating a new project implementation unit. Following the positive experience established under the implementation of a Sida-financed Bank-managed trust fund, a Coordination Team will be established at MEM, led by the head of Department of Energy, and in addition include a project coordinator, a technical specialist, and an accountant. The team will call upon assistance from other departments under normal operational procedures of the Ministry. This includes involvement of the Ministerial Procurement Management Unit (MPMU) and the Ministerial Tender Board (MTB). In addition, to exploit experiences from the Songo Songo Gas to Power project, especially in the financial management area, the Songo Songo PMU accountant will provide supervision and guidance to the Coordination Team accountant. The team will also rely on existing expertise in the Ministry and National Environmental Management Council (NEMC) for environmental and social issues. The project TA will provide funds to further enhance the Ministry's staff capacity in fiduciary, environmental, and social areas. 53. One of the key component objectives is to support the newly established Rural Energy Agency (REA) and implementation responsibilities (excluding financial management) will pass on to REA, once the institution is fully staffed and its capacity to develop investments is assessed and deemed satisfactory by MEM. To that effect, the MEM and REA will sign a Memorandum of Understanding (MoU) or any other administrative arrangement that is mutually acceptable to MEM and REA, which will specify among other the functions transferred, application of the Operating Guidelines, reporting requirements and transitional arrangements. The key elements of the MoU will be included in the Operating Guidelines (OG) for the offgrid component. The transfer of implementation responsibilities to REA will be conditional on satisfactory assessment of REA's technical, procurement and safeguards capacity at the time of transfer, and the effectiveness of the MoU. The transfer of implementation responsibilities to REA will not affect the financial management arrangements and flow of funds, which will continue to be managed by MEM through the IDA and GEF Special Accounts. 54. Funds will flow directly from IDA and GEF to the two implementing agencies: MEM and TANESCO. The implementing agencies will each open designated US$ bank accounts with 11 commercial bank acceptable to the Bank. For efficiency reasons, each implementing agency will submit separate IFRs to the Bank. However, TANESCO will be expected to copy MEM on all such correspondence. Each Implementing agency will then pay its various suppliers, trainers and consultants. The details of funds and accountability arrangements are provided in Annex 7. 55. The implementing agencies will be individually responsible for financial, procurement and physical monitoring reports on activities implemented by them. Disbursements will be based on quarterly Interim Unaudited Financial Reports (IFR). C. Monitoring and evaluation of outcomes/results 56. The monitoring and impact evaluation for the overall project will be the responsibility of the MEM, with support from TANESCO and REA. The MEM will submit the evaluation reports to the Government, IDA and the GEF. The project will have a 4-year implementation period. There will be annual reviews and an Implementation Completion and Results Report (ICR) at the end of the project, to be jointly prepared by IDA and the concerned implementing agencies. 57. Performance monitoring of the proposed project will include: (a) the performance indicators as included in Annex 3; and (b) the progress reports on preparation of investment programs and the execution of contracts. a. Component A: Grid based transmission and distribution investments will improve the capacity of existing networks, improve service quality of existing customers and allow new customers to connect to the grid in the major urban areas. These investments are likely to improve the overall power system performance by reducing system losses, frequent outages due to overloaded transformers and old equipment, low and fluctuating voltage conditions and poor system power factors. The institutional capacity building components are expected to result in reduction in nontechnical losses in targeted clusters and overall improvement in operational efficiency of TANESCO. Baselines have been established and will be confirmed in the first year of implementation. b. Component B. It should be noted that this is the first attempt in Tanzania for a larger- scale offgrid electrification program, mobilizing and leveraging private sector resources and promoting small-scale power projects. Therefore, the focus on institutional strengthening and market development is as important as the number of connections achieved. Monitoring and evaluation indicators include the following categories: (i) new connection targets; (ii) subproject pipeline development; (iii) development of REA capacity; and (iv) CO2 emission reductions. c. Component C. Progress in achieving intermediate outputs and procurement of consultancy services will be documented in supervision reports and continued sector dialogue. D. Sustainability and Replicability 58. Sustainability. The main elements for ensuring sustainability of TANESCO related components will be: (a) increasing net revenue per unit of electricity sales (through cost-reflective tariffs and agreed Government support); and (b) reducing the per customer unit cost of supply. TANESCO has requested a 40% tariff increase to the regulator in August 2007; increase in tariff levels will enable TANESCO to maintain its assets. To reduce the overall per unit cost of supply, the transmission and distribution investments will enable TANESCO to lock-in the operational efficiency gains. The trajectory of improvements that will be initiated with these investments should eventually 12 lead to lower operating and maintenance costs through improved efficiencies in transmission and distribution. 59. Because the capital cost of the intensification and grid extension components is being provided by the GoT as incremental equity, TANESCO will need to recover only operations and maintenance (O&M) costs for the electricity networks in the project areas. The financial analysis shows that for all grid intensification schemes, TANESCO will be able to recover the O&M cost even at proposed tariff levels. 60. The design of the rural electrification schemes will take into account technical, financial, social and environmental sustainability. The project will promote the use of low cost technologies to increase service affordability for lower income households, thereby increasing connection volume and reducing costs per consumer. The subsidies provided will target only investment costs and the proposed tariffs will, at a minimum, have to cover all operation and maintenance costs. The project will rely on private sector providers (including cooperatives and non-governmental organizations), with incentives for sustainable operation and corresponding technical assistance. 61. Use of renewable energy technologies will enhance both environmental and financial sustainability due to their relatively low operating costs. To address sustainability problems in some past solar PV projects (including in Tanzania), the project proposes a new approach of Sustainable Solar Market Packages (SSMPs), based on a model already successfully tested in Philippines, which bundles together provision of institutional and household applications and establishes compulsory maintenance and training obligations by the private sector provider. 62. Replicability. The offgrid component of the project supports the development and initial implementation of a commercially oriented framework for scaling-up electricity access. It also supports emerging business models that engage the private sector in providing electricity services. Once these models demonstrate success, they can be replicated nationwide in Tanzania and in other subsaharan countries. It is expected that a follow up access scale-up projects could be prepared by GoT as early as FY2010. E. Critical risks and possible controversial aspects Risk Risk Mitigation Measures Risk Rating Overall project Another sector crisis may M The recent generation crisis in 2006 has been overcome and there is now force attention on measures to adequate generation capacity. TANESCO will be relying on leased resolve short-term issues and generation, new coal IPP and its new permanent facilities for reserve prevent longer-term vision margins. The Bank is proposing to support the next least cost generation development embodied in the IPP to assure continuity of supply. The proposed project has been designed project design. as an integral part of Bank's long-term sector strategy, contributing to the solution of key sector issues (TANESCO's financial recovery, reliable service, and increasing access to modern energy). Grid component TANESCO's financial crisis S A FRP for TANESCO has been approved by the Government. A first tariff may continue; appropriate increase of 6% has been implemented. In late August, TANESCO has tariff increases may not be submitted a 40% tariff increase request to the regulator in August 2007; a allowed and/or implemented. tariff increase order by EWURA is expected prior in January 2008. The proposed project (and the use of savings from the Songo Songo gas development and power generation project) are designed to support TANESCO financial recovery by reducing losses and increasing revenues. 13 Risk Risk Mitigation Measures Risk Rating Continued commercial and L A new Managing Director with a commercial background has been financial problems at appointed; a new Chief Financial Officer also has been appointed; and all TANESCO. key management positions have been restructured and filled. The new Managing Director has initiated TANESCO's reorganization (approved by its Board on March 28, 2007), which involves a leaner headquarter, and empowering decentralized staff. In addition, the new management structure includes the position of a Chief Financial Officer, which is expected to strengthen the financial management expertise at TANESCO. Offgrid component Weak institutional and S Project will be first implemented by MEM and passed to REA only when implementation capacity in adequate implementation capacity is established. The project, together REA.r with Sida's continued assistance will provide capacity building and TA to REA. Private developers may not be M TA under the project will allow MEM/REA to assess financial investment interested in investments or needs and the design of appropriate credit support instruments (including may not be able to raise increased use of existing instruments). The project is designed to be matching funds for flexible in its implementation arrangements, and will allow alternative investments. mechanisms, such as Co-operatives, NGOs and other forms of public- private partnerships. The project will finance dissemination and capacity building activities to enhance the involvement of private sector and financial intermediaries in offgrid electrification approaches. Insufficient volume of quality L Pipeline of eligible subprojects has been identified, and first year project proposals. investments will be ready prior to effectiveness. Overall Risk Rating M L ­ Low, M- Moderate, S ­ Significant F. Credit conditions and covenants Conditions for Effectiveness: · The Subsidiary Agreement has been executed on behalf of the Recipient and TANESCO. · The GEF Trust Fund Grant Agreement has been executed and delivered and all conditions precedent to its effectiveness or to the right of the Recipient to make withdrawals under it (other than the effectiveness of this Agreement) have been fulfilled. · The Recipient and TANESCO have each prepared plans showing adequate in-house capacity for environmental and social impact management required to implement the Project. · The Recipient has adopted and submitted to the Association the Operating Guidelines, in a form and substance satisfactory to the Association. Loan Covenants · Except as the Association shall otherwise agree, the Recipient shall, during each FY: (a) make adequate provision in its budget adequate to finance all cost and charges associated with the leased generators; and (b) provide at least approximately one billion five hundred million Tanzania Shillings (TSh 1,500,000,000) per month as compensation to TANESCO for capacity charges arising under a power purchase agreement between TANESCO and Independent Power Tanzania Limited, until such time as: (i) TANESCO shall have been fully discharged from its obligation under the said power purchase agreement; or (ii) TANESCO shall have produced a reasonable forecast that demonstrates its operational cost recovery. · Except as the Association shall otherwise agree, TANESCO shall not incur any new debt, unless TANESCO shall produce a reasonable forecast of net annual revenues equal to, or 14 greater than 1.3 times the estimated debt service requirement of TANESCO the following Fiscal Year. · Except as the Association shall otherwise agree, TANESCO shall maintain a gross domestic sales revenue at least TSh 100 per kilowatt-hour (kWh) per each unit of power generated, imported or contracted under a power purchase agreement. Implementation and Reporting Milestones · TANESCO and MEM will prepare quarterly project progress and IFRs reports, which should be submitted within 45 days after end of each quarter. · TANESCO will submit annual financial statements within six months after fiscal year end. · REA will be fully staffed by December 31, 2008. IV. APPRAISAL SUMMARY A. Economic and financial analysis 63. The economic analysis of or all project components show significant financial and economic benefits from investments envisaged under the project. The preliminary EIRR of investment projects is expected to be about 30.8% and an ENPV of US$86.9 million (see Table 2 below). The benefits accrue primarily from reduced technical losses and improved reliability and quality of the service; for example, the reinforcement of the distribution network is expected to result in a reduction of 9% of the technical losses in selected clusters of Dar es Salaam. In addition, the identified investments in Dar es Salaam will cause a reduction of unserved energy in the network and cause a reduction of the nontechnical losses in the network of Dar es Salaam. Economic analysis also has been conducted for the connection of new urban customers. The EIRR is expected to be even higher than indicated above, due to higher current alternative energy expenditures, consumer willingness to pay (both households and businesses) in urban areas, and the potentially lower than assumed connection costs. Table 2: Summary of Economic Analysis for Ongrid Components Component Economic internal Economic NPV rate of return (%) @ 10% (US$ million) Reinforcement of distribution and transmission networks in 22.5 25.7 Dar es Salaam Reinforcement of distribution networks in Arusha 27.9 15.1 Reinforcement of distribution networks in Kilimanjaro 44.2 19.7 Connection of 25,000 new customers 61.7 23.6 Replacement of 60,000 credit meters 28.3 3.1 Total for Ongrid Investments 30.8 86.9 64. Table 3 below presents the financial internal rate of return (FIRR) and financial net present value for different components. The overall project FIRR is positive; the subcomponent that will finance the connection of 25,000 new customers shows a marginal rate of return and a negative NPV. This is explained by the fact that even with a 40% tariff increase TANESCO will be recovering only its incremental and marginal cost of supplying electricity and will not be making sufficient profits to recover its investment costs. Therefore, any new connections/customers that are added to the network will result in limited financial returns in the near term. However, as shown in Table 2, this component has a high economic rate of return (an EIRR of 61.7%). 15 Table 3: Financial Assessment of Project Investments6 Component Financial internal rate Financial NPV of return (%) @ 10% (US$ million) Reinforcement of distribution and transmission networks in 14.7 9.0 Dar es Salaam Reinforcement of distribution networks in Arusha 18.6 6.7 Reinforcement of distribution networks in Kilimanjaro 25.2 7.7 Connection of 25,000 new customers 2.7 -3.4 Replacement of 60,000 credit meters 28.3 3.1 Total for Ongrid Investments 16.0 22.7 65. Given that TANESCO has requested a tariff increase of 40% which is still under the process of review by EWURA, a sensitivity analysis has been carried out to assess the financial viability of the new investments in two scenarios: Scenario 1: with an approval of an average tariff increase of 30% shows a FIRR of 14.7% and a FNPV of 16.5 million; Scenario 2: with an approval of an average tariff increase of 20% shows a FIRR of 13.9% and a FNPV of 13.6 million. The ENPV and EIRR under these scenarios show that the subcomponents are marginally impacted with lower tariff increases. Direct economic benefits are not sensitive to the actual tariffs since they are based on consumer willingness to pay, and therefore changes in the ENPV and EIRR under different tariff scenarios are related only to the financial benefits accruing from such investments. 66. All offgrid access expansion subcomponents also show robust EIRR (see Table 4 below), using avoided expenditure and consumer surplus methodology for customer connections, and avoided costs of generation and global environmental benefits for renewable generation. The market surveys have been conducted, confirming relatively high current energy expenditures (typically ranging from US$4 to US$12 per month) for households, with various businesses using expensive diesel sets). Table 4: Summary of Economic Analysis for Offgrid Component Subproject category EIRR Renewable small power generation 15-48% Mini-grid connections 31-38% SSMP: Institutional PV systems 21% SSM: Solar Home Systems 59% 67. Financial viability of the proposed models also has been confirmed, with return on investment ranging from 15% (for SSMPs) to 48% (renewable generation displacing diesel in isolated systems). Sample projects remain economically and financially feasible under possible cost increases related to connections. The offgrid component is not affected by TANESCO's tariffs as the selection of these subprojects is based on avoided cost methodology and independent mini-grids are eligible for differentiated tariff. 68. A detailed economic and financial assessment is provided in Annex 9. TANESCO's Financial Health 69. A detailed Financial Analysis also has been carried out for TANESCO, the state owned electric utility. TANESCO has been suffering from poor performance for several years. A combination of high level of network losses, low electricity tariffs, low network voltages and most 6Assuming a 40% increase in electricity tariffs as per TANESCO's August 2007 request to EWURA. 16 importantly, lack of hard investments has paralyzed the utility. In 2006, there were widespread blackouts throughout the TANESCO grid, primarily due to lack of generation capacity. 70. As a result of the aforementioned issues, there has been a revenue shortfall to meet operating costs, in the 2006 calendar year, of about TSh 166 billion or about US$129 million. Although in the past the shortfall between revenues and costs has been covered by direct and indirect subsidies from the Government's budget, this has been a strain on the limited resources of the GoT. Despite Government's support for the lease payments of three lease plants and intermittently for IPTL's capacity charges, TANESCO incurred a net loss of over TSh 183 billion in 2006 (approximately US$142 million), and was obligated to resort to expensive short-term overdraft borrowing to cover cash flow deficits. 71. Since 2002, the cost of electricity generation has continuously increased, primarily as the reliance on thermal energy has increased. Hydro generation has been continuously decreasing from 98% in 2002 to 40% in 2006 (severe drought was experienced in East Africa from 2004 ­ 2006). Over the last few years, IPPs have become a substantial contributor to thermal electricity generation for TANESCO. IPP contribution to the power sector (in terms of capacity) is expected to increase from 4% in 2003 to 50% in 2011. The costs associated with such power accounts are expected to be about 42% of TANESCO's revenues and about 69% of total electricity generation cost in the 2007 ­ 2011. 72. TANESCO is presently being advised by a Financial Advisor and a Tariff Advisor to implement critical actions under its financial recovery plan7, namely: a. Securing a significant increase in tariff to at least cover its cost of operations (including cost of generation, administrative costs, operations and maintenance, and financing costs) ­ to this extent TANESCO has requested a 40% increase in electricity tariffs in August 2007; b. Improving service delivery by implementing urgent transmission, distribution rehabilitation and commercial recovery investments to improve overall system losses; c. Securing a TSh 250 billion loan to assure cash flow for operations until tariff increases are effected; and d. Reducing operational expenses by converting IPTL to gas and reducing the Songas capacity charges by implementing the option in the Songas Power Purchase Agreement that allows GoT to pay for (up to) 75% of costs associated with the engineering, procurement, and construction of the Ubungo Expansion Project (UEP). 73. In order to gradually move the tariff level up to commercially realistic levels that will allow TANESCO to cover its cost of operations, the company has proposed to EWURA, the regulator, a 40% tariff increase for 2008. If approved, this tariff increase is expected to cover only the projected cost of electricity sales and operating cost, and will not cover costs related to depreciation and provision for doubtful debt. 74. Based on financial projections undertaken, a tariff increase of 45.8% will cover the projected cost of electricity sales and operating cost excluding depreciation. A tariff increase of 39.0% will cover the projected cost of electricity sales and operating cost excluding depreciation and provision for doubtful debt. A tariff increase of 31.1% is required to meet the company's operating and debt service cash requirements of 2008. 7The principles of the TANESCO FRP were approved by the Cabinet in February 2007. 17 75. TANESCO has requested a 40% tariff increase from EWURA. This request for tariff increase is lower than the 60.2% tariff increase required to cover the full projected cost of electricity sales and operating costs, including depreciation as demonstrated by the financial analysis. This "gap" in tariff increase is expected to be gradually implemented in 2008 ­ 2010 to improve the company's financial viability in the medium-term. TANESCO will need to request a minimum tariff increase of about 16% to be effected in 2009 to ensure continual positive operating net income. 76. Detailed economic and financial assessment of the project is provided in Annex 9. B. Technical Component A ­ Ongrid Investments 77. The scope of ongrid investments to be financed by the proposed project was identified through two key studies: (a) the Bank-supported Reinforcement and Upgrade of Dar es Salaam, Kilimanjaro and Arusha Transmission and Distribution System (2004 feasibility study by Lahmeyer International); and (b) 2002 JICA-supported Master Plan Study on the Power Sector for Major Towns. Additional work was carried out by TANESCO and its consultants in 2006 ­ 2007 to reaffirm the technical, economic and financial viability of such investments. 78. The key technical issues currently faced and repeatedly identified in the three supply centers of Dar es Salaam, Arusha and Kilimanjaro are: a. Obsolete equipment b. Overloaded transport and distribution system components c. Bad voltage profile on the medium and low voltage network d. Bad power factor e. Numerous outages due to overloaded transformers and line tripping f. High technical and nontechnical losses in the distribution networks g. Suppressed demand h. Missing network monitoring 79. The investments proposed under the project have been designed to improve the capacity of existing networks in Dar es Salaam, Arusha, and Kilimanjaro by reducing technical and nontechnical losses and improving the overall reliability of the system. Two main themes of support identified as critical to jumpstart the process of the recovery of the utility's operational performance are: (a) Grid based investments; and (b) Commercial and Institutional Capacity Development. 80. Grid based investments include transmission and distribution network investments to improve TANESCO's ability to deliver power to customers. This subcomponent includes the conversion of a pilot distribution area into a low-loss high-voltage configuration. · Transmission. Additional 132 kV lines are needed urgently for bulk supply to new areas and areas with a high load density. The related 132 kV substations have to be extended and additional new substations have to be built. Because new line corridors are difficult to find in the densely populated areas of Dar es Salaam, compact line design and tubular poles have to be used for narrow 132 line corridors. In case the lines share the same line corridor, multi-circuit lines with one 132 kV and up to two 33 kV to 11 kV systems on the same structure will be used. · Distribution. Numerous 33 kV and 11 kV substations and lines have to be extended and rehabilitated. The sizes of the supply areas have to be reduced by additional lines and substations. Recording energy meters will be installed on all 33 kV and 11 kV feeders to 18 monitor the network and foresee problems. Extension and reinforcement of the low voltage network will be required and new lines will be built with aerial bundled conductors. The power factor will be improved by installing capacitive reactors and penalizing industries with a bad power factors. · High Voltage Distribution System Clusters. These investments will introduce a new concept involving high voltage distribution and more but smaller size transformers to curb electricity theft, improve revenue realization and customer satisfaction, strengthen distribution infrastructure and improve quality of supply. The project will develop bidding documents, support the bidding process for this approach, and establish a baseline against which the project outputs and impacts will be evaluated. 81. Commercial and Institutional Capacity Development component includes extending new service connections. Special emphasis will be on pending industrial and commercial connections (to improve the revenue streams), establishing a trouble call center and customer care centers to improve response time and quality to high-revenue yielding (high-value) customer complaints as well as to reduce outage times. In addition, the subcomponent will also focus on extending the coverage of prepaid metering system in Dar es Salaam and installing solid-state meters for high-value customers of industrial and commercial categories as well as for grid interface points to improve energy audit. Moreover, three much-needed corporate management systems will be implemented: (a) a Commercial Management System (CMS) to support commercial functions; (b) a Technical Service Management System (TSMS) to attend customers' claims in electricity supply; and (c) a Resource Management System (RMS) to support centralized functions. These systems will improve TANESCO's overall operational efficiencies. Technical assistance also is included to provide capacity building, training, and assistance with design and supervision of implementation. Component B ­ Offgrid Investments 82. The renewable energy technologies being considered under the project are well proven globally and do not pose key technical concerns. Three renewable technologies have been identified as having the greatest potential for small power generation in Tanzania: small hydro, solar and biomass. 83. The potential for small hydropower generation (less than 10 MW) is estimated at about 250 MW of which only 8 MW has been exploited so far. Studies have indicated that up to 200 MW could be developed economically. It is also estimated that about 600 kWp of solar photovoltaic (PV) generation has been installed for various applications in Tanzania, of which an estimated 30% is contributed by Solar Home Systems (SHS). The estimated sales of SHS are 500 to 600 systems per annum. However, most solar PV systems are institutional and are donor funded. Surveys of solar PV systems used for health and education institutions show low sustainability and a high proportion of installed systems not fully working. Therefore, the project proposes a new approach of Sustainable Solar Market Packages, which has been successfully implemented in Philippines. It bundles institutional and household applications, and requires contractors to provide medium-term maintenance services and user training. 84. Biomass accounts for about 90% of Tanzania's energy consumption. Various initiatives are already on the ground in Tanzania to encourage sustainable use of biomass resources, including improved charcoal stoves and domestic-size biogas plants. There is, however, a significant potential of biomass use for power generation. The first examples include a 2.25 MW wood-fuelled power plant by the Tanganyika Wattle Company (Tanwat) in Iringa and a few biogases fuelled cogeneration plants. An estimated 30 MW of biomass cogeneration could be developed economically in short- to medium-term. 19 C. Fiduciary Procurement 85. Bank staff carried out an assessment of the capacity of MEM and TANESCO to implement procurement actions for the project in June--July 2007. In general, the assessment was positive. A new Public Procurement Act (PPA) was enacted in 2004 and became operational in May 2005. The Act is based on recommendations of the 2003 Country Procurement Assessment Report (CPAR). The new legislation improves the overall government procurement system since the Public Procurement Regulatory Authority (PPRA) established by the Act is responsible for public procurement oversight and capacity building. 86. However, the assessment revealed that procurement filing, record keeping (procurement data management system), and storing of procurement documents storage to be inadequate for both entities. In addition, the Procurement Management Unit (PMU) was not properly placed within TANESCO's organizational structure. Actions proposed to enhance procurement capacity of the implementing agencies include provision of procurement training to relevant staff of the implementing agencies; preparation of Operating Guidelines (OG) with procedures and arrangements for implementing Component B under MEM to be implemented later by REA; and placing of PMU properly within TANESCO's organizational structure. 87. At MEM, the Ministerial Procurement Management Unit (MPMU) established in accordance with the public procurement act of 2004 will carry out the procurement function. The ministry has also established a tender board as per requirement of the Act. Procurement function at TANESCO falls under the Chief Financial Officer. 88. Although TANESCO has established a PMU according to the public procurement act of 2004, it is not consistent with the requirements of the Act because the PMU does not report to the Chief Executive Officer (the Managing Director). A tender board also has been established as per requirements of the PPA and is chaired by General Manager, Transmission. The PMU staff has implemented Bank and donor financed projects and TANESCO has trained about 70 staff on management and basic procurement principles. 89. Risks regarding procurement implementation of the proposed project include placement of the PMU at TANESCO, contravening the requirements of the Act that the PMU should report to the chief executive of the organization; limited recent experience with the new World Bank Procurement and Consultants Guidelines; and inadequate procurement planning, record-keeping, and filing systems at both entities. 90. Overall, the procurement capacity to implement the TEDAP has been assessed and found to be Satisfactory (Average rating). Financial Management 91. The financial management (FM) assessment was carried out at TANESCO and MEM in June-July 2007. The assessments draw on the following reviews: (a) 2006 PEFA; (b) FM performance of two IDA-financed projects implemented by MEM and TANESCO; and (c) implementing agencies statutory audit reports. 92. The various public financial management (PFM) assessments carried out in the past six years reveal that the GoT has taken significant steps to improve its PFM systems and is currently regarded 20 as satisfactory. Significant progress has been made to ensure that the risks associated with lack of clear rules and regulations have been reduced. In addition, more information that is useful is now provided in the annual accounts. The timelines of financial reporting have improved with all the MDAs submitting the annual financial statements within the statutory period. The GoT continues to strengthen the capacity of accountants and auditors through training and through recruiting additional qualified accountants and auditors. Capacity building also includes strengthening the national audit office to become independent and use modern auditing techniques. The country's overall fiduciary risk is assessed as Modest. 93. The existing TANESCO and MEM structures and systems will be used to record and account for project funds. More specifically, the agency's own financial management systems -- applicable financial laws, rules, and procedures in terms of accounting and reporting, planning and budgeting, and internal, and external auditing -- will be used to account for project funds. 94. Risks regarding financial management during implementation (for which appropriate risk mitigating measures have been identified in Annex 7) include: (i) ineffective government internal control systems; (ii) weak financial health of TANESCO as highlighted in 2006 TANESCO's audited accounts; and (iii) challenges faced by TANESCO with its general accounting software and in particular, the materials management module which has resulted in delays in the submission of audited accounts. 95. The FM arrangements of the two institutions are adequate to handle IDA funds and satisfy the World Bank minimum requirements under OP/BP 10.12. The overall project financial management risk is assessed as Modest. D. Social 96. The project design is intended to contribute to the social and economic development of the affected areas and of the country as a whole. This project is rated as category B and triggers two of the Bank's social fiduciary policies: OP 4.12 and OP 4.11. The project will be undertaking necessary design changes to avoid negative impacts. When this is not possible, mitigation measures will be developed in line with the Bank's above-mentioned policies. In the longer run, the project will improve the availability and reliability of power to support economic growth and employment opportunities. At the policy reform level, as part of its broader policy analysis, the project will undertake a more focused poverty and social impact analysis (PSIA). It will facilitate informed decision-making, provide ex-ante policy reform recommendations, and situate the reforms in the context of the country's political economy and pro-poor policy agenda. The GoT will lead the PSIA and public consultations processes with the Bank's technical assistance. 97. This process has been used successfully in other countries to engage key stakeholders and the public in a meaningful policy dialogue about potential impacts of the sector reforms and the development of mitigation measures that will make the sector reforms more sustainable. 98. At the operational level, important positive impacts are expected from Component B. These will include improvements in employment opportunity, income, and quality of life in rural and peri- urban households caused directly by expanding access to electricity and indirectly through more effective delivery of education, health, and other services. In this regard, the project will undertake additional stakeholder consultations and social impact assessments to ascertain that the implementation and design processes: (i) are participatory and inclusive; and (ii) take into account early on the views and needs of the beneficiaries, particularly the poor and the vulnerable. 21 99. A Resettlement Policy Framework (RPF) has been prepared for Component B, mainly to cover land acquisition issues. Although the actual displacement of people under Component B is unlikely, the Framework also provides for this eventuality. 100. Component A will have additional albeit short-term positive impacts during construction. These include: (i) employment opportunities for skilled and unskilled workers; and (ii) opportunities to provide goods and services required for the project. 101. Component A will also result in displacement of people and land acquisition. At this stage, the real scope of these impacts is unknown. Consequently, a Resettlement Policy Action Framework has been prepared and disclosed, and mitigation measures established according to the Bank's policy. To ensure the effective implementation of the Bank's social fiduciary policies, before construction begins, a Resettlement Action Plan (RAP) with adequate stakeholder consultations and relevant impact assessments will be prepared and implemented under the subprojects. 102. Additional significant social impacts of Component A, other than those of land acquisition and resettlement discussed above, includes the temporary disruption of agricultural activities in the Right of Way (ROW) outside of Dar es Salaam (assuming that cultivation will be permitted to resume after construction is complete) and of small businesses in Dar es Salaam. The project will develop an adequate communication plan, as part of the consultations with the project affected people to inform them about the nature, timing, and scope of the relevant project impacts, as well as the mitigation measures. The Environmental Impact Assessment (EIA) expresses concern about a possible influx of workers from other localities, bringing the risks of social conflict and the spread of HIV/AIDS and other STDs. The project will establish, as part of the mitigation measures, activities that address grievances and lay out conflict management and resolutions mechanisms. In the area of HIV/AIDS, there will be public awareness and education campaign undertaken in collaboration with the relevant local health authorities before and during the construction period. 103. With regard to physical cultural property, it is expected that there will be limited impacts. The project will develop mitigation measures to safeguard any chance findings. It is already known that based on the project design, a small number of burial sites along the right of way will be affected. The plan is to avoid these sites by adjusting the pylons. During construction and operations, the project will ensure that adequate public safety hazards training, warning signs and strict safety workplace rules will be adhered to and compliance monitoring plan will be established prior to the commencement of works. 104. To examine the project impacts, various safeguard documents covering environmental and social safeguards have been prepared as discussed below. For the purposes of the resettlement work, resettlement audits will also be conducted as part of the social fiduciary requirements. The Borrower will include implementation of project safeguards in routine project progress reports to the Bank. At least one supervision mission per year will include an environmental and social safeguards specialist. E. Environment 105. Environmental impacts. The project is in Category B for environmental assessment. Environmental assessment documents for Component A were completed in 2005 in connection with the Songo Songo Gas Development and Power Generation Project. They consist of "Environmental Impact Assessment: Reinforcement and Upgrade of Dar es Salaam, Kilimanjaro and Arusha Transmission and Distribution System" and "Environmental Audit of 18 Substations." Since the specific locations of Component B investments will be determined during project implementation, its environmental document is an "Environmental and Social Management Framework (ESMF)", also 22 prepared in 2005 but in connection with the ERT project. TANESCO carried out field reconnaissance in 2007 to update the environmental assessment findings. All documents have been redisclosed for this project. 106. The findings and recommendations of the environmental assessments and the arrangements for implementation of impact mitigation and monitoring measures are summarized in Annex 10. Some of the highlights include: · The GEF-supported element of Component B to promote use of renewable energy sources in rural electrification contributes to global environmental benefits by controlling greenhouse gas production. Availability of electricity may alleviate some of the pressure on Tanzanian forest resources by reducing demand for fuel, wood, and charcoal as the primary energy sources. · With much of the transmission and distribution system work to be carried out in or parallel to existing rights of way and at existing substations, and with access roads already existing at nearly all locations, potential negative impacts of Component A are not extensive. Vegetation clearing is identified as the most significant activity that could cause environmental impacts, including soil erosion and air pollution from burning. No undisturbed natural habitat will be affected. No rare or endangered biota has been found in the affected area. The EIA recommends minimizing clearing, and prompt re-vegetation of disturbed sites, including equipment and materials storage areas and borrow pits, upon completion of activities. Impacts on soil erosion, surface water quality, air quality, noise, and solid waste management will be local and of short duration, and they can be readily mitigated through adherence to good construction practices. PCB contamination was confirmed in transformers at two of the substations to be upgraded, and this will require special handling, storage, and disposal. · The ESMF lists the potential adverse environmental impacts of Component B as: degradation of land, water quality, and natural habitat caused by poorly planned locations for infrastructure; poor performance of contractors in implementing mitigating measures; inattention to maintenance during operation of electric systems; and greenhouse gas emissions that will vary depending on the choice of technology. Adverse social impacts other than land acquisition and resettlement described above may arise from inadequate stakeholder participation in choices of technology and served areas, and exclusion of vulnerable groups from project benefits. The ESMF contains detailed checklists and generic mitigation measures to ensure that the potential impacts are addressed in environmental assessments and management plans of proposed subprojects. 107. OP 4.04 Natural Habitats is triggered for the project, although no critical natural habitat will be converted. The intent is to ensure that facilities under Component B are sited, constructed, and operated in ways that avoid degradation of natural habitat. The ESMF includes procedures for compliance with OP 4.04. OP 4.37 is also triggered, because Component B may finance mini-hydro generating capacity. The size of any dams that might be constructed is so small that there will be no requirements for a Dam Safety Panel, but the ESMF includes procedures for compliance with the objectives of OP 4.37. OP 7.50 Projects on International Waterways is also triggered. So much of Tanzania's surface area lies in the basins of international waters that it is likely that some of the hydroelectric facilities that might be constructed under Component B will be located in one of them. It is unlikely that any of these facilities will have a measurable effect on water quality or quantity, but notifications have been sent to riparian states to comply with this OP. 108. Institutional arrangements for impact mitigation and monitoring. The implementing agency for the recommendation of the Environment Audit is TANESCO and its management has committed 23 itself to taking the corrective measures recommended in the audit, budgeting for them in the company's business plan. TANESCO and its contractors are the agencies primarily responsible for implementing the Mitigation Plan for Component A that is presented in Chapter 8 of the EIA. For this reason, it will be important that TANESCO field personnel be familiar with the Plan, and that construction contracts be specific regarding contractor responsibilities for impact prevention and mitigation and penalties for non-compliance. District and local government authorities are identified as having some responsibility for ROW maintenance (primarily preventing unauthorized activities), public safety, and collaboration on prevention of impacts at burial sites and shrines. Contractors and TANESCO (directly or by consultants) have the majority of the monitoring responsibilities, except for overall compliance with environmental regulations and certain other specialized monitoring and reporting activities that are assigned to NEMC. The cost of mitigation measures not included in construction contracts will be borne by TANESCO, and the cost of monitoring will be supported by NEMC's operating budget. 109. TANESCO has in recent years developed substantial environmental management capacity. It has an Environment Unit headed by a Chief Research Environmental Engineer, with two environmental engineers and one investigative engineer as its professional staff. The unit presently lacks in-house capacity in social impact management and has been obtaining it through consultants. TANESCO is expected to recruit a social scientist for the unit prior to the time of project implementation or make other definite arrangements to obtain social science expertise. 110. MEM has overall responsibility for implementation of the ESMF for Component B. MEM presently does not have the capacity to oversee ESMF implementation but, by the time of project effectiveness, it will have developed a staffing plan to have the necessary expertise prior to implementation of Component B. NEMC will be responsible for review and clearance of ESIAs for subprojects for which they are required prior to licensing and financing, for training district staff to carry out monitoring, and for periodic oversight to ensure compliance with Tanzanian law and regulations and World Bank operational policies. Districts, through District Environmental Coordinators, are responsible for review and clearance of ESMPs for subprojects not requiring ESIAs prior to licensing and financing, for regular monitoring through all phases of each subproject, for submission of monitoring reports to NEMC, and for compliance with directives from NEMC and MEM. 111. Subproject operators will be responsible for: compliance with national law and regulations, World Bank directives, and the ESMF; implementing all required mitigation and monitoring measures identified in their respective ESIAs and/or ESMPs; self-monitoring; providing adequate budgets to sustain mitigation and monitoring activities; and compliance with any directives issued by MEM, NEMC and the Districts. EWURA is the licensing authority; it will not issue licenses to operators until NEMC or the District Environmental Coordinator issues environmental and social clearance. REA, which manages the Rural Energy Fund, will not disburse funds to an operator until EWURA has issued a license. 112. The ESMF includes an estimate of costs for ESMF implementation other than activities that are operators' responsibilities. The review and monitoring functions, including the monitoring of EIA implementation will be undertaken and budgeted as part of the normal functions of NEMC and the district offices. The project is exploring the provision of about US$250,000 for capacity-building (to MEM with NEMC as the beneficiary) in the form of training for groups of potential providers and for groups of District Environmental Coordinators with priority given to Coordinators from those districts in which the project is going to be active. 24 F. Safeguard policies Safeguard Policies Triggered by the Project8 Yes No Environmental Assessment (OP/BP 4.01) X Natural Habitats (OP/BP 4.04) X Pest Management (OP 4.09) X Physical Cultural Resources (OP/BP 4.11) X Involuntary Resettlement (OP/BP 4.12) X Indigenous Peoples (OP/BP 4.10) X Forests (OP/BP 4.36) X Safety of Dams (OP/BP 4.37) X Projects in Disputed Areas (OP/BP 7.60)* X Projects on International Waterways (OP/BP 7.50) X * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas G. Policy Exceptions and Readiness 113. The proposed project complies with all World Bank policies and no exceptions are necessary. The following table provides an overview of the project's readiness for Board Consideration. Readiness Criteria Status Financial Management Assessment Assessment Complete - Modest Procurement Capacity Assessment Assessment Complete - Satisfactory Social and Environment Assessment Assessment Complete ­ Documents released in Infoshop and in Country Project Implementation Teams Established Yes Project Implementation Manuals Prepared Not Applicable; Operational Guidelines for Component B is under finalization and is a condition of Effectiveness. Baseline Data for M & E Available Yes; these will be confirmed at the beginning of implementation. Bidding Documents Prepared for Year 1 Bid documentation for about US$50 million of ongrid activities investments have been submitted for Bank no-objection. 8Including those policies that could be triggered by Component B. 25 Annex 1: Country and Sector Background TANZANIA: Energy Development and Access Expansion Project A. Country Background 1. Tanzania has an estimated population of about 40 million, growing annually at a rate of 2%. It has a land area of about 945,087 sq. km and is well endowed with natural resources such as hydropower, tin, phosphates, iron ore, coal, diamonds, gemstones, gold, natural gas, geothermal and nickel. Tanzania is one of the poorest countries in the world. The economy depends heavily on agriculture, which accounts for almost half of GDP, provides 85% of exports, and employs 80% of the work force. Topography and climatic conditions limit cultivated crops to only 54% of the land area. Industry traditionally featured the processing of agricultural products and light consumer goods. 2. Since the mid-1990's, Tanzania has made substantial progress in macroeconomic stabilization and structural reforms of the economy. At the beginning of the reform process, economic growth was slow to gain momentum, but over the last ten years, it has averaged about 5% per annum. Tanzania's economy grew by about 6.8% in 2005, however, a drought and an extended energy crisis resulted in lower than projected growth in 2006. Overall GDP growth for 2006 is estimated to be around 5.8%.9 3. Accelerated private and public sector investment has laid a strong foundation for sustained economic growth in the country. The investment to GDP ratio has increased from 17% in 2001 to 21.9% in 2005. Foreign Direct Investment (FDI) continues to play an important role in the country with an estimated inflow of about US$500 million in 2005. Raising Tanzania's export competitiveness remains a challenge -- its exports of goods more than doubled between 2000 and 2005, mostly due to gold, while traditional exports increased at a much slower pace. Since imports of goods and services have been rising, the current account deficit has increased to 11.8% of GDP in 2005 (most of the increase in current account deficit represents absorption of foreign aid). Fiscal policy remains consistent with macro-economic stability objectives, however TANESCO (the government owned power utility) has had a sizable operational deficit over the last few years. Monetary policy and financial sector development has supported continued low inflation and increased credit to the private sector. Strong demand for credit and increasing competition has led to an increase in interest rate on time deposits, and posted lending rates have jumped from 14.9% to 16.4% in 2006. 4. In summary, Tanzania continues to implement sound macro-economic policies, which provide a conducive environment for progress towards the MKUKUTA objectives of high growth and reduced poverty. The drought and high energy prices have led to an increase in inflation to 5.8% in 2006, however, as inflationary pressures are expected to subside in 2007, inflation is expected to fall to about 5%. The implantation of the financial recovery plan for TANESCO is critical to avoid budgetary pressure, which could result in an increased fiscal deficit of the crowding out of growth and poverty related expenditures (see Annex 9 for details on TANESCO's financial health). Growth for 2007 is projected to increase to over 7%. B. The Electricity Sector 5. Tanzania is endowed with diverse energy sources including biomass, natural gas, hydropower, coal, geothermal, solar and wind power, much of which is untapped. Wood fuel 9GDP estimates for 2006 are based on preliminary estimates for the first three quarters of 2006. 26 accounts for up to 90% of total energy supply with about 2% from hydro-electricity and 8% from oil- derived products. Generation 6. The Tanzanian power system is comprised of 1,192 MW of installed capacity (permanent plants) and is characterized by a dependence on hydropower generation -- about 562 MW (47% of total installed capacity) while permanent thermal capacity at present is about 630 MW. TANESCO depends on its hydro resources for the bulk of the country's electricity supply. Competing water interests (e.g. agriculture, industry, power generation etc.) and the last 3 years of drought have resulted in continuously declining reservoir water levels, and therefore over time the share of thermal power generation has increased substantially. Table 5 below summarizes the characteristics of TANESCO's existing generation capacity. TANESCO also operates about 30 MW of thermal generation in isolated areas not connected to the grid. Table 5: Installed Grid Generation Capacity Plant Ownership Fuel Installed Capacity (MW)10 Hydro Mtera TANESCO Hydro 80 Kidatu 204 Kihansi 180 NYM 8 Hale 21 Pangani 68 Uwemba 0.84 Total hydro 562 (47.2%) Thermal Ubungo Songas Natural Gas 189 Tegeta IPTL HFO 103 Grid connected TANESCO IDO/Gas Oil 10 Kiwira Kiwira Coal and Power Coal 6 Ltd. Ubungo TANESCO Natural Gas 100 Isolated - Thermal TANESCO Gas Oil 27 Mbinga (IPPs) Gas Oil 0.25 TANWAT IPP Biomass 3 Artumas (IPP) Natural Gas 11.5 Ubungo Aggreko (lease) Natural Gas 40 Ubungo Dowans (lease) Natural Gas 100 Mwanza APR (lease) Diesel 40 Total thermal 630 (52.8%) Grand Total 1,192 7. TANESCO's largest hydropower complex, the Mtera and Kidatu Dams, is on the great Ruaha river. The Mtera dam is the most important reservoir in the power system providing over a year of storage capability. In addition, it regulates the outflows to maintain the water level for the downstream Kidatu hydropower plant. Thermal generation relies primarily on indigenous gas (Songo Songo gas infrastructure facilities, supported under Credit 3569-TA) and imports of Heavy Fuel Oil (HFO), and Automotive Gas Oil (Diesel). 8. There are several diesel generating stations connected to the national grid in Dar es Salaam, Mwanza, Tabora, Dodoma, Musoma and Mbeya. These have installed capacity of 80 MW but they effectively contribute about 35 MW due to running problems. Some regions, districts, and townships are dependent on isolated diesel-run generators (Kigoma, Mtwara, Lindi, Njombe, Mafia, Mpanda, 10As of commissioning of the respective plants. 27 Tunduru, Songea, Liwale, Ikwiriri, Masasi, and Kilwa Masoko). These have installed capacity of 31 MW but they effectively contribute about 15 MW due to aged machinery and lack of spare parts. 9. Two private independent power projects (IPPs) which are connected to TANESCO grid are IPTL (Independent Power Tanzania Ltd) with 103 MW installed capacity and Songas (IDA financed Songo Songo gas development and power generation project) with an installed capacity of 189 MW. TANESCO also imports 10 MW of electric power for Kagera Region from Masaka substation in Uganda while Sumbawanga, Ileje, Tunduma and Mbozi receive about 3 MW from neighboring Zambia. Bulk supply of electricity is made to Zanzibar from Ras Kilomoni substation at the Indian Ocean coast in Dar es Salaam. TANESCO also purchases power from two small power producers (6 MW coal fired power plant and 2.5 MW biomass power plant). 10. Building on the experience from Songo Songo project, the GoT has recently awarded a concession to Artumas Group, Inc. of Canada for an 11.5 MW gas to power project in the Mtwara corridor (Mnazi Bay)11. This concession has paved the way for future offgrid developments by including the associated distribution license (offgrid) for sale of power generated by the system. As expected, the GoT has provided front-end minimum revenue guarantees (escrow accounts) to the private developers. 11. Due to heavy short-rains, hydro capacity was fully restored in late 2006, and since then generation shortfalls have been avoided. 40 MW of Aggreko leased capacity reached Commercial Operations Date (COD) in November 2006. In addition, 100 MW of Dowans leased capacity is being has made available.12 At present, IPTL capacity (based on expensive HFO) is not being dispatched. The 100 MW (Ubungo) permanent plant is expected to be made available by last quarter 2007, and the 45 MW (Tegeta) permanent plant is expected to be made available by late 2008. To meet the increased gas requirements, a third gas train is expected to be installed by Songas by late 2008. New Coal capacity is expected to be made available in 2010 (150 MW) from the Kiwira Coal and Power Ltd.; the construction contracts have been awarded to Chinese contractors. Based on the leased and permanent capacity available to TANESCO, it is expected that TANESCO will have adequate reserve margins for at least the coming 30 months. In the event that coal capacity does not come online as expected, and if needed, TANESCO will also have the opportunity to renegotiate and renew all or a portion of the 160 MW of leased capacity under Aggreko and Dowans. Based on the reserve margin analysis (see Table 6), it has been concluded that no load shedding is expected in the medium-term. Table 6: Estimated Generation Reserve Margins (until 2009)13 Year 2007 2008 2009 2010 2010 Peak Demand (GWh) 3,153 3,393 3,750 4,108 4,406 Required Generation (GWh) after accounting for losses 4,148 4,221 4,498 4,755 4,983 Required Generation Capacity (MW; LF of 73%) 649 660 703 744 779 Average Installed Generation Capacity (MW) 1192 1237 1287 1437 1437 Available Average Generation Capacity (MW; average hydrology) 870 911 957 1095 1095 Reserve Margins - average hydrology (MW) 222 251 254 352 316 Reserve Margins - worst case hydrology (MW) 21.5 51.0 53.7 151.5 115.9 Reserve Margins - average hydrology (as a % of Required Generation Capacity) 34% 38% 36% 47% 41% Reserve Margins - worst case hydrology (as a % of Required Generation 3% 8% 8% 20% 15% Capacity) 11The plant commenced commercial operations on March 5, 2007. 12Dowans have installed equipment designed to generate 120 MWs, however, the power purchase agreement is for dispatch of 100 MWs. 13Based on TANESCO's generation plan and power purchase agreements signed by TANESCO as of November 2007. The low hydrology scenario, conservatively assumes a drop of useful capacity to generate hydropower by 200 MW. This calculation assumes the drop to be constant for the period. 28 Gas Development for Power 12. The downstream oil industry is an important sector of Tanzania's economy as it absorbs an average 55% of the country's foreign exchange earnings. Government policies are directed at petroleum product substitution by exploiting indigenous resources. In the upstream oil industry, oil and gas exploration and production is also being encouraged. Extensive gas fields have been identified off the coast at Songo Songo and Mnazi Bay and these are in the process of being further developed. A new gas field also has been discovered some 60 kms to the southeast of Dar es Salaam. The hydrocarbon industry is regulated by the MEM, with upstream activities governed by the Petroleum (Exploration and Production) Act 1980 and the downstream activities by the National Investment (Promotion and Protection) Act 1990. 13. Tanzania, with its oil seeps, seismic and other data, shows strong hydrocarbon potential in its upstream oil industry sector with more than 20 active onshore and offshore Production Sharing Agreements (PSAs). However, only 38 wildcat exploration and 8 development wells have been drilled in a 222,000 sq km area, and therefore Tanzania is classified as underexplored. Natural Gas reserves at Songo Songo island are: Proved (P) remaining 295 bcf, Proved and Probable (2P) remaining 470 bcf, Proved, Probable and Prospective (3P), remaining 752 bcf; Natural Gas Reserves at Mnazi Bay are: P - 404 bcf; 2P - 986 bcf, 3P - 1947 bcf. In addition, gas has recently been found close to Dar es Salaam and reserve estimates are being assessed. 14. Under the Gas Agreement, the Production Sharing Agreement, the Gas Processing, and Transportation Agreement for the Songo Songo Gas Development and Power Generation Project, the GoT and PanAfrican Energy/TPDC (as a consortium) have agreed to set aside "protected gas" for 150 MW of Songas generation, and for the Twiga Cement Plant (at predetermined price of US$0.55 per mmBtu). Up to 100 billion cubic feet of "reserve gas" has been set aside for future power generation from the Songo Songo complex. The responsibility for production and sale of "additional gas" for power and industrial use has been provided to PanAfrican Energy and TPDC. 15. Although gas sales with third parties have developed, they are a fraction of total current production, Songas and therefore TANESCO is the primary taker, and in essence the `market maker'. Songas' fuel price was originally conceived of as part of the initial project concept to offset the capacity charges so that the utility will not shoulder the full weight of developing the country's gas infrastructure. 16. The production of "additional gas" requires further investment by PanAfrican/TPDC. Such investments are deemed to be recovered from the wellhead price to be paid by the offtakers of such additional gas. Current regulatory functions of EWURA do not call for a wellhead price setting by them; and MEM is responsible for setting such pricing. There have been discussions between TANESCO and PanAfrican/TPDC regarding potential offtake agreements for `additional gas' regarding forthcoming generation. However, such discussions did not resulted in a gas-offtake agreement; and Songas has indicated to the GoT that without such an agreement, it will not be able to invest in new trains to process any "additional gas"14. Under powers conferred to MEM under the Petroleum Exploration Act, MEM has recently set the real wellhead price of "additional gas" for power generation at US$1.87 per mm Btu (up to June 2012) and thereafter rising to US$2.76 per mmBtu (in 2012 prices). It is expected that this price setting will allow much needed private investment in the gas sector. 14Current gas processing equipment at Songo Songo can only process 70 mcf per day, adequate for operating about 300 MW of power plants at any given time. 29 Transmission and Distribution 17. The national grid does not cover all parts of the country, leaving a significant portion of the population without access to electricity. The national grid consists of 220 kV extra high-voltage transmission lines -- extending south to Mbeya and north to Arusha and Mwanza from Dar es Salaam, the national grid supplies electric power to many of the major cities of the country. The cities in northern Tanzania receive electric power from the 132 kV transmission system with three power stations on the Pangani River. This system is linked to the 220 kV systems in Arusha, Dar es Salaam, and Morogoro to form the national grid. The national grid also supplies electric power to Zanzibar Island over a 41 km submarine cable. Since the 220 kV transmission line between the Kidatu Power Station and the Ubungo substation was put into operation in 1975, several 220 kV transmission lines have been constructed. Electric power generated at the power stations is transmitted from the National Grid to the primary substations, where the electric power is stepped down to 33 kV or 66 kV before it is transmitted to the nearby distribution substation. In Dar es Salaam and other cities, the electric power is stepped down from 33 kV to 11 kV before it is supplied to factories, etc. over an 11 kV feeder. It is also distributed to residential customers after it is further stepped down to 400/240 volts. In rural areas, etc. where customers are sparse, electric power is distributed over a 33 kV feeder to reduce transmission losses. 18. TANESCO's distribution network is dilapidated and has a number of serious problems. With the electrification and urbanization of more and more rural areas, the demand for power has been increasing. Nevertheless, there have been insufficient investments for expansion and maintenance of the existing facilities. There are problems of voltage drop with the 33 kV, 11 kV, and low-voltage distribution networks. This is due to the use of excessive low voltages and excessively thin conductors relative to the scale of users. In addition, there are voltage problems arising from insufficient number of pole transformers relative to the number of users. More generally, other problems arise due to theft of pole transformer insulating oil, the destruction of electrical equipment and theft of electricity. As of December 2006, about 635,000 customers were connected to the grid (an annual increase of about 7.1% per annum since 2002). This growth is tremendous given that little investment has been made into TANESCO for some time. 19. The TANESCO network is characterized by significant losses at all stages of generation, transmission, and distribution. Table 7 provides an overview of the system performance in 2006. Table 7: Power System Performance (2006) Performance Indicators Level Actual total Energy Generation 3,572 GWh (Required) Total Energy Generation 3,793 GWh Annual growth of the total energy generation +1.3% Transmission losses in the national grid system 168 GWh Transmission losses in the national grid system 4.7% Energy fed into the distribution networks 3,404 GWh Total distribution losses 683 GWh Total distribution losses (as a % of Energy fed in the distribution networks) 20.1% Actual total billed energy15 2,769 GWh Total number of customers 635, 310 Annual increase of number of customers 8.50% Cumulative losses 851 GWh Cumulative losses (as a % of Actual total Energy Generation) 23.8% 15Billed energy may be less than the energy demand in a particular year. 30 Access to Electricity 20. Use of domestic electricity is almost exclusively concentrated in urban areas (municipal areas and towns). Of the 20 districts with the highest degree of connectivity to the grid, only two are rural districts, Mwanga and Hai, while 20 districts with the least access to electricity are exclusively rural (see Table 8). Table 8: Electricity Connectivity by District 20 districts with highest 20 districts with lowest grid coverage grid coverage 1 Ilala MC 46.3% Rwangwa DC 0.6% 2 Kinondoni MC 45.5% Shinyanga DC 0.6% 3 Iringa MC 43.7% Serengeti DC 0.5% 4 Arusha MC 41.9% Singida DC 0.5% 5 Tanga MC 36.6% Songea DC 0.5% 6 Bukoba MC 35.0% Ngara DC 0.4% 7 Temeke MC 34.8% Ukerewe DC 0.4% 8 Morogoro MC 32.7% Lindi DC 0.4% 9 Musoma TC 32.6% Kibondo DC 0.4% 10 Singida TC 25.1% Urambo DC 0.3% 11 Songea TC 24.1% Nkansi DC 0.3% 12 Tabora MC 23.8% Bukombe DC 0.3% 13 Mbeya MC 23.3% Mbinga DC 0.3% 14 Lindi TC 23.3% Tabora DC 0.3% 15 Dodoma MC 23.0% Dodoma DC 0.2% 16 Mwanga DC 22.1% Kasulu DC 0.2% 17 Mtwara TC 21.2% Sikonge DC 0.2% 18 Shinyanga MC 20.8% Biharamulo DC 0.2% 19 Kigoma TC 18.9% Sumbawanga DC 0.1% 20 Hai DC 14.8% Mtwara DC 0.1% Note: These data are from the year 2002. Since that time, the number of households connected to the grid has increased by approximately 150-170,000. Source: 2002 Population and Housing Census 21. In Dar es Salaam access to electricity is highest, but even there less than 50% of all households are connected. Out of the 118 districts identified in the 2002 population census, only in 18 districts do more than 20% of all households have access to electricity. In 31 districts electricity is such a rare phenomenon that more than 99% of all households lack access. Overall, it is estimated that electricity access rate in Tanzania is about 10%, but it is below 2% in rural areas. 22. Despite the high incidence of poverty in rural areas, various surveys show that non-electrified rural households spend substantial resources to satisfy their energy needs (kerosene, candles, and batteries). Surveys estimate average energy expenditures of non-electrified households as around US$7-US$10 per month.16 A specific pilot survey for Rukwa region developed in the framework of the project preparation shows that monthly expenditures of rural households in the region vary from US$3.5 per month for the poorest, US$5 for less poor and US$12 for affluent households. For the poorest households, this spending amounts to 10% of the monthly disposable income. Various modern offgrid technologies can provide electricity service for the same price, with improved quality and additional social, economic, health and environmental benefits. 16See for example Rural Electrification Master Plan, 2005 31 23. In the past, rural electrification was carried out through fragmented donor initiatives focused mainly on grid extension and small offgrid pilots, barely keeping the access rates with the population growth. A new approach is needed to achieve a noticeable scale-up. The key constraints include: (i) limited reach of TANESCO's grid; (ii) TANESCO's lack of financial strength to finance rural access expansion; (iii) absence of policy, regulatory and financing mechanism for alternative offgrid alternatives; and (iv) relatively high costs of service provision coupled with low income, calling for alternative low-cost solutions in line with local capacity to pay. 24. Aware of these challenges, the Government of Tanzania has started redefining its rural energy access policy. The latest National Energy Policy of 2003 establishes affordable and reliable energy supplies in the whole country as one of the key objectives. The policy also takes into consideration: (i) the need to reform the market for energy services and establish an adequate institutional framework, which facilitates for investments, expansion of services, efficient pricing mechanisms and other financial incentives; and (ii) the need to enhance the development and utilization of indigenous and renewable energy sources and technologies. Renewable Energy 25. The renewable energy industry is in its infant stage of development with a limited number of project promoters; renewable energy finance providers; service companies; planners and specific legislation (standardized power purchase agreement; technical specifications). New renewable energy sources contribute less than 1% of the national energy balance, however, several studies show good potential including the recently completed rural electrification study supported by AfDB. 26. The potential for small hydropower generation (less than 10 MW) is estimated at about 250 MW of which only 8 MW has been exploited so far. Several studies have been conducted over the last decades mainly providing insight in the technical potential. Studies that have included economic analyses show a limited number of sites, which could produce electricity at competitive cost in areas where demand is available. It is estimated that up to 200 MW could be developed economically soon. Other potential sites need additional research. 27. It is estimated that about 600 kWp of solar photovoltaic (PV) has been installed for various applications of which an estimated 30% is contributed by Solar Home Systems (SHS). The estimated sales of SHS are estimated to be 500 to 600 systems per annum. However, most solar systems are institutional and are donor funded. Surveys of solar systems used for health and education institutions show low sustainability, with a high proportion of installed systems not fully working. In most cases after sales service and local maintenance arrangements are not in place. There have been, however, some positive developments in the past years. With assistance of a Sida project, six service providers have expanded their networks in rural areas. A solar energy association has been established. In addition, some of the dealers have established initial strategic partnerships with micro finance organizations and private organizations with rural outreach. 28. A relatively low potential for larger-scale wind to power development is available based on indicative data from meteorological stations, however a detailed national wind map is not available. A few studies indicate site-specific potential in Njombe, Mwanga, and Singida Districts. To confirm these potentials, site-specific wind speed measurements have to be expanded. These measurements have to last for at least a year, preferable longer. A possible wind to power project in the Singida district is currently being considered by a private developer. In addition, non-electricity wind projects are limited even though smaller household and community wind pumps have been installed in about one hundred locations. Micro wind generators have been reported in a few locations. 32 29. There are considerable biomass resources in the form of agricultural, forest residues and animal wastes in the country for sustainable use. Most of them are not exploited, although 90% of Tanzanian energy consumption is wood fuel. There are, however, some emerging positive experiences in this area. For example, improved charcoal stoves have been in use with some success for the past 15 years. Recent studies also show that about 4,000 domestic-size biogas plants have been built over the last two decades. This makes Tanzania one of the leading biogas countries in Africa. Biomass for power generation is also available on a small scale. A 2.25 MW wood-fuelled power plant by the Tanganyika Wattle Company (Tanwat) in Iringa and a few bagasse-fuelled cogeneration plants are typical examples of biomass potential for power generation. An estimated 30 MW biomass cogeneration could be economically developed soon. 30. There are indications that significant potential exist for geothermal development. Preliminary studies conducted in the southern highlands of the country indicate high temperature fluids beneath the Mbeya and Rungwe volcanoes. Some other areas far from the East African Rift valley are also reported to have hot springs. Given the fact that Kenya has already operational geothermal plants, Tanzania stands a good chance to benefit from the Kenyan experience in the geothermal technology. Electricity Tariffs 31. Approximately half of all power that is generated in Tanzania is utilized by households. This is reflected in Table 9 by the categories for domestic low usage, general use and the electricity delivered to Zanzibar. The other half of electricity is consumed by industries and service providers. Table 9: Electricity Sales & Tariff by Consumer Category ­ 2006 Tariff Electricity Fraction of Sales Category use all electricity use kWh million Percent TSh million TSh/kWh USc/kWh Domestic low usage D1 391 14.12 35,258 90.17 7.04 ... of which sold at low energy 140 5% 4,900 35.0 2.73 charge ... of which sold at high energy 251 9% 30,358 120.95 9.434 charge General use T1 786 28.39 70,237 89.36 6.97 Low voltage supply T2 398 14.37 39,927 100.32 7.83 High voltage supply T3 830 29.97 65,648 79.09 6.17 Zanzibar State Fuel & Power Corp. T5 204 7.37 6,799 33.33 2.60 Resolute Gold Mine T6 48 1.73 3,228 67.25 5.25 Kahama Gold Mine T7 112 4.04 11,049 98.65. 7.70 Total 2,769 100% 232,146 83.84 6.54 Note: The total cost of sales is TSh 371 billion, or TSh 134/kWh. Source: Staff calculations based on TANESCO's 2006 accounts. 32. A review of the electricity demand-supply balance for TANESCO shows that the annual energy generation in the recent seven years is relatively consistent (with exception of the year 2006) and shows an annual growth of about 7.6 %. This growth rate is not extraordinary high, but it demonstrates that TANESCO has been able to continue growing its customer base even under limited availability of funds to support the upgrades and extension of the supply system. To meet the pent up demand for power and to cope with high growth rates in the future, TANESCO will require hard investments of about US$1.3 billion over the next 5 years for the expansion of its generation, transmission, and distribution networks. 33 Government's Power Sector Reform Program 33. Tanzania began its power sector reform program in the early 1990s. The first National Energy Policy framework was written in 1992, and it emphasized plans to involve the private sector in development of the energy sector. These changes in policy in the early 1990s launched Tanzania's electricity reforms and paved the way for a greater emphasis on commercialization, private sector involvement, and restructuring of the electricity sector. Reforms were catalyzed by economic crisis conditions and macro-economic stabilization initiatives in the 1980s and 1990s and driven by deteriorating electricity services and sector finances. 34. The most immediate results of power sector reforms were negotiations for two private power projects (IPPs) that began in the mid-1990s: Independent Power Tanzania Limited (IPTL), a 100 MW diesel fired plant, and Songas, a 192 MW natural gas plant that was part of a larger natural gas- to electricity project. The development of both projects was lengthy and involved contentious delays. IPTL began selling power in 2002. Songas came online in July 2004 with 115 MW and expanded to 192 MW in January 2005. 35. In 2002, the Government of Tanzania entered into a two-year management contract for the national utility, Tanzania Electric Supply Company Limited (TANESCO), with NETGroup Solutions (Pty) Ltd. of South Africa. The contract was extended for an additional two and a half years in 2004. In total, the contract spanned 56 months from May 2002 to December 2006, including an initial phase of 27 months (May 2002 to July 2004) and extension of 29 months (August 2004 to December 2006). The scope of work was designed around specific performance incentives. Initially, the contract aimed to achieve rapid improvement in technical and commercial operations, and financial turn-around to prepare TANESCO for full privatization at the end of the two years. During the extension, the contract's scope was extended to include technical turn-around. The aim was to direct the revenue gains achieved in Phase I into new, utility-financed investments to improve technical performance. As eventual privatization became less likely, the contract was increasingly looked to as an independent instrument to pursue financial and technical goals that were necessary to improve sector performance. 36. Uncertainties over generation costs and supply conditions have been difficult exogenous factors that affected the performance of the management contract. IPPs now provide a large component of generation, 49% in 2005, and 55% in 2006, and constitute the largest expense for TANESCO, reaching a significant portion of utility revenues in 2005-2006 (see Annex 9). 37. A number of new institutions have been created in the context of reforms. In 2005, legislation was passed to form a Rural Energy Agency and Rural Energy Fund (REA/REF), which separates non-commercial rural electrification from the direct purview of the utility. The REA/REF was not yet functional, as of end-2006, but it will be the principal agency involved in the future in coordinating rural energy initiatives. The Energy and Water Utilities Regulatory Authority (EWURA) was established in late 2006, five years after initial legislation for its formation. As the majority of reforms occurred prior to EWURA's formation, de facto oversight during reforms has been via the PSRC and the MEM. 38. To date, little progress on unbundling and privatization has materialized, and privatization plans have been formally revised. In 2005, TANESCO was taken off the list of companies specified for privatization. The MEM is now pursuing a more-flexible approach for TANESCO's restructuring, based on internal ring fencing, which separates utility operations horizontally into business areas, while maintaining state-ownership. Private sector participation in electricity, especially in the generation subsector, remains an ongoing policy objective, although how this will 34 figure into operations post-management contract and under public ownership is uncertain. Table 10 summarizes the status of Tanzania's electricity reforms. Table 10: Elements of Tanzania's Electricity Reforms Reform Elements Status Policy Elements Year Corporatize Implemented 1931 Electricity Ordinance forms private companies: 1964 public utility DARESCO & TANESCO; 1964 government purchases established private shares, merge into TANESCO. Commercialize Extensive Extensive commercialization initiated in 1990s under 1992 initiated Operations & World Bank Power VI Project to address earlier crisis; 2002 ­ 2006 Service Provision accelerated under management contract. (Mgmt. Contract) Legislation only, Legislation to form Rural Energy Agency and Fund 2005 Legislation not operational (REA/REF): will separate non-commercial (as of 2006) electrification from direct utility mandate, commercial (mainly peri-urban) expansion remains under utility. Revise General policy National Energy Policy frameworks in 1992 and 2003 1992 framework Electricity Law framework, Law include reform intentions; Electricity Act not yet 2003 framework not amended amended, draft Power Sector Reform Strategy prepared but not approved. Establish Regulator Operational Energy and Water Regulatory Authority (EWURA) 2001 Legislation as of mid-2006 appointed, operational as of mid-2006. 2006 Operational Introduce Private Implemented Monopoly in generation lifted 1992; Two larger IPPs: 1992 Legislation Generation (IPPs) Independent Power Tanzania Ltd (IPTL, 100 MW 2002 IPTL online diesel), Songas (192 MW natural gas). 2004 Songas online Restructure & Modified plan Plans for unbundling of national utility into separate Modified plan Unbundle Utility generation, transmission, and distribution companies underway revised to ring-fencing of separate business areas (internal restructuring) while remaining state-owned. Privatization of Utility In flux & Privatizations plans for utilities announced 1997; 1997 specified (Private Sector uncertain Management contract toward privatization 2002; 2005 de-specified Participation) TANESCO de-specified 2005; Increasing emphasis on private sector participation rather than full privatization. 39. For the medium- to long-term, a Power Sector Development Master Plan is under preparation. A load forecast, system expansion plan as well as a least cost expansion plan is expected in 2007. It is envisaged that hydro/gas IPPs will need to be financed to meet generation requirements. The GoT/TANESCO will need to be supported by legal/financial/technical advisors to facilitate the proper development of such transactions. It is also expected that initially such IPPs (with non- Chinese financing) will require multilateral financing instruments to reach financial close. TANESCO ­ the Vertically Integrated Power Utility 40. Tanzania Electric Supply Company Limited (TANESCO) is a parastatal organization that was established in 1964 and is wholly owned by the Government of the United Republic of Tanzania. The Ministry of Energy and Minerals sets and oversees policies and strategies while EWURA regulates the operations of TANESCO. The Company's core business is generation, transmission, distribution, and sale of electricity to the Tanzania Mainland and bulk power supply to the island of Zanzibar. Distribution of electricity in Zanzibar and Pemba is the responsibility of the Zanzibar Electricity Company Limited (ZECO). TANESCO has a workforce of 3,646 staff, largely employed in the regional offices. The current Board of Directors comprises of eight members from the Government, public and private sectors. Apart from the Chairman, the Minister for Energy and Minerals appoints all members of the Board of Directors. The President of the United Republic of Tanzania appoints the Chairman. 41. The following tables highlight the trends of new customer connections, power losses of TANESCO during the period under NetGroup's management. Apart from 2002, when connections were above target by 13.8%, customer connections have been below target between 2003 and 2006. 35 Further, it is estimated that there is a backlog of approximately 10,000 customers who have paid their service line charges as of September 2006 but have not been connected. Power losses have also increased substantially over time. The greatest portion of the losses are in the distribution network; the technical losses are as a result of overloading of lines and transformers while meter tampering, erroneous billing and power theft account for the large component of nontechnical losses. Utilities similar to TANESCO in the region average losses of about 20%. Table 11: Technical Performance of TANESCO Year 2004 2005 2006 2007 2008 (forecast) (forecast) Peak Demand (MW) 451 551 574 649 660 Energy Sales (GWh) 2,369 2,657 2,796 3,153 3,393 Energy Transmitted to Grid 2,887 3,526 3,572 4,148 4,221 Of which Hydro 2,511 1,778 1,436 2,632 2,282 Of which Thermal 318 1,737 2,020 1,355 1,755 Of which Isolated Grids 0 0 0 86 107 Of which Imports 58 55 66 75 78 Cumulative Losses (as a % of 18% 25% 24% 24% 20% power generated) Number of Customers 550,863 585,773 635,310 670,999 771,011 New Connections (Actual) 34,139 27,685 31,492 32,241 100,000 % of Target 113.8% 92.3% 83.9% 58.9% 100% Number of Staff 4,857 4,783 3,646 4,697 4,838 42. There has been significant deterioration in TANESCO's financial performance over the last few years. The 2003 and 2006 drought had a severe negative impact on TANESCO's financial situation because of the cost of imported fuel for thermal generation alternatives to hydropower has been very high compared to TANESCO's present tariff. TANESCO's current operational requirements are not being met from its present revenues. 43. After the conclusion of the NetGroup management contract, TANESCO is now led by a government appointed managing director. TANESCO has undergone reorganization (approved by its Board on March 28, 2007), including a leaner HQ, and empowered decentralized staff. More importantly, this strategy has reorganized TANESCO to include a Chief Financial Officer thereby strengthening the financial management expertise at TANESCO. 44. On February 3, 2007, the Cabinet also approved a TANESCO Financial Recovery Plan (FRP). This plan has been approved with a clear understanding that some of key assumptions will need to be revised, notably regarding actions that are not in government's control. It is envisaged that to compensate for delays in effecting these assumptions, substantial tariff increases will be required to support TANESCO's financial recovery. Based on the current financial projections, tariff increases alone will not be sufficient to bring TANESCO in the black and that short-term financing for past and current operational shortfall will be required. The Government has made it clear that the budget will not subsidize TANESCO for operational cash shortfalls, but will provide support for investment expenditures as agreed upon for the medium-term. To fully finance its short-term operations and maintenance costs, TANESCO, with GoT guarantees, has secured a TSh 250 billion syndicated loan, 6-year tenor with a grace period of 1.5 years, from commercial banks and domestic pension funds. 45. TANESCO filed for a 6% tariff increase in January 2007, which was effected in early February 2007. In addition, with the help of the Financial and Tariff advisors that are being procured with Sida financed & Bank managed trust fund, TANESCO has also filed for a new tariff application in August 2007 requesting EWURA's approval for a tariff increase of 40% to close the revenue-cost gap that TANESCO demonstrated in its presentation at the December 2006 public hearing on its previous tariff request. In addition, to assure Tanzanian electricity consumers that they will be getting 36 value for any increases in tariffs, the request for a new tariff increase is accompanied by a proposal from TANESCO for the establishment of quality of service and enterprise monitoring that can be used by EWURA for future regulatory purposes. 46. Given the lack of transparency in the selection of service providers for the recent leased generators, it has been proposed and agreed with EWURA, MEM, and TANESCO, that EWURA will conduct a public consultation for purposes of establishing regulatory rules that will mandate competitive procurement of new generation supplies and the development of one or more model PPAs. In this context, a two-phased approach is being proposed. Phase I will involve the creation of a standardized application and tables that will allow for benchmarking of proposed PPAs (whose progress will be monitored as part of PRSC VI appraisal). Phase 2 will involve the creation of guidelines for competitive procurement and model PPAs. To complement this activity, TANESCO will undertake an IPP strategy with the development of model bidding documents incorporating such guidance over the medium-term. Such activities are being financed as part of the TA component of Credit 3569 under the IPP strategy work. Rural Energy Agency and Rural Energy Fund 47. The Rural Energy Act of 2005 establishes the Rural Energy Board (REB), Rural Energy Fund (REF), and Rural Energy Agency (REA) to be responsible for promotion of improved access to modern energy services in the rural areas of Mainland Tanzania and through a Fund within the Agency Board to provide for grants and subsidies to developers of rural energy projects and for related and consequential matters. The Act sets out the principles of rural energy development, procedures for establishment of the REB, the REA, and the REF, as well as guidelines for management of the fund. 48. REA's key functions designated by the Rural Energy Act are to promote, stimulate and facilitate rural energy development in Tanzania; to promote rational and efficient production and use of energy in rural areas; to utilize the REF to finance eligible rural energy projects that result in improvement in the livelihoods of rural people, their access to clean, modern energy, and their production of clean, modern energy; and to facilitate activities of key stakeholders with an interest in rural energy, including local and national government agencies, the private sector, community based groups, non-governmental organizations (NGOs), and financial intermediaries. 49. The Rural Energy Fund (REF) will provide capital subsidies to rural energy projects to stimulate the increased provision of modern energy services to social services, enterprises, and households in rural areas. The sources of funding for the REF include: Annual budget allocation from Government; contributions from international financial organizations, multilateral and bilateral agencies and other development partners; levies of up to five percent on the commercial generation of electricity from the national grid (not in force yet); fees in respect of programs, publications, seminars, consultancy services and other services provided by the REA; and interest on return on investment. 50. A competitively selected Trust Agent will be responsible for disbursement of grant payments from the Fund and ensuring that any pre-conditions set by the REB/REA are met by the developer. It is envisaged that different subsidy rates will apply for different types of investment. Social energy projects may be subsidized in full. 51. The REA is in the process of becoming operational. The REA Board was appointed in 2006 and REA Director General and the Chief Financial Officer were appointed in September 2007. REF trust agent has not been selected yet. 37 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies TANZANIA: Energy Development and Access Expansion Project Ratings Sector Issue Project (Bank-financed projects only) IEG Ratings Risk to Borrower Completed Projects Outcome Development Performance Outcome Financing of incremental power Emergency Power Supply Project Moderately High Moderately supply (kWh) to avoid severe (Cr. 3916-TA) Satisfactory Satisfactory load shedding. OED Ratings Sustain- Outcome ID Impact ability Rehabilitation of generation, Power Rehabilitation Project Moderately Uncertain Modest transmission and distribution (Cr. 1687-TA) Satisfactory (T&D), engineering services, training, energy-efficient stoves. Engineering studies/bid Power Engineering and Technical Satisfactory Likely Substantial documents for the lower Kihansi Assistance Project hydropower scheme, billing, and (Cr. 2330-TA) accounting systems. Hydropower generation, Power VI Un- Unlikely Modest distribution reinforcements, (Cr. 2489-TA) satisfactory utility commercialization. Latest Supervision (ISR) Ratings Implementation Development Ongoing Projects Progress (IP) Objective (DO) Power generation from natural Songo Songo Gas Development Moderately Moderately gas reserves. Promotion of and Power Generation Project Satisfactory Satisfactory private ownership/investment. (Credit 3569-TA) Rural electrification. Reform, restructuring, and Privatization and Private Sector Satisfactory Satisfactory privatization. Development Project (Cr. 3304-TA) Other Development Agencies Rural electrification projects, Sida several districts. Institutional Support to MEM Sida and the creation of REA. PV project. Sida PV project, Mwanza. UNDP 38 Annex 3: Results Framework and Monitoring TANZANIA: Energy Development and Access Expansion Project A. Results Framework 1. The monitoring and impact evaluation for the overall project will be the responsibility of the MEM. For result evaluation, a mid-term evaluation and a final evaluation will be carried out by external consultants, terms of reference for which will be provided by the respective implementation teams for the three components. MEM will submit the report to the Government, IDA, GEF, and the PSC. PDO Project Outcome Indicators Use of Project Outcome Information (a) To improve the quality and ·Improvement in TANESCO's ·To evaluate the progress towards efficiency of the electricity service operational efficiency as measured goals established in the provision in the three main growth by: (i) a 7% reduction in losses; MKUKUTA. centers of Dar es Salaam, Arusha, and (ii) a 25% increase in ·To evaluate the longer-term and Kilimanjaro. collection efficiency in targeted prospects of the sector and its areas. economic and fiscal impact on (b) To establish a sustainable basis for ·Improvement in service quality as Tanzanian economy. energy access expansion. measured by: (i) increase in end user voltage to 216 volts; and (ii) improved customer satisfaction. (c) To support the global objective of ·REA fully functional as reducing CO2 emissions by demonstrated by: (i) capacity to reducing barriers to renewable develop, finance, and implement energy development. scale-up of pilot schemes; and (ii) pipeline of 40,000 new rural household connections. ·17 MW of renewable energy installed resulting in CO2 emission reductions. Intermediate Outcomes Intermediate Outcome Use of Intermediate Outcome Indicators Monitoring TANESCO related and Ongrid Cluster level outcome Investments (i) Increased operational efficiency of ·Improved customer service with a ·Demonstrates the potential for TANESCO. centralized call center and a high scaling up efficiency and supply (ii) Increased quality of supply and value customer cell in place. side enhancements. service levels in selected clusters. ·Improved IT systems for ·Creates market confidence in (iii) Increased access to electricity in commercial, technical service and TANESCO, thereby increasing the targeted clusters. resources management functional. attractiveness of the sector to ·Replacement of 60,000 credit private participation. meters with prepaid meters completed. ·Pilot project for low loss high voltage distribution system implemented. ·25,000 new urban household connections to electricity services. Offgrid Investments (iv) Increased electricity access in ·15,000 new rural household and ·Serves as inputs to policy and rural and peri-urban Tanzania to business connections to electricity regulation development, sector- productive enterprises, service services through new offgrid wide access expansion program delivery facilities (in health and models. and design of REA's subsidy education), and to households ·1,200 new public institutions guidelines. with the capacity to pay for electrified through new offgrid 39 electricity. models. (v) Establishment of a functioning ·12 MW of grid connected institutional and regulatory renewable energy delivered by framework for commercially small private power developers oriented, sustainable service (SPPs) under Standard PPA/Ts. delivery for rural electrification ·Use of Standard PPA/Ts in signing and renewable energy that can additional 20 MW of renewable be scaled up. energy. (vi) Removal of barriers to, and ·At least 5 subproject transactions reduction of costs of, concluded by REA. implementation of renewable energy technologies to help mitigate greenhouse green emissions. Technical Assistance Sector level outcome (vii) Support for ·Timely and equitable development ·Serves as inputs to policy and legal/technical/financial advisory of the identified least cost large regulation. support for least cost IPP. power generation project. ·Creates market confidence in (viii) Capacity building for ·Institutional capacity development Tanzania, thereby increasing the TANESCO and MEM. needs identified and a plan to attractiveness of the sector to address these agreed and private participation. implemented. 2. Tanzania has large investment requirements. In view of this, any investment influx will not demonstrate the desired impact unless the same is directed to achieve specific outcomes in identified areas. In order to address this concern, the Project will adopt a cluster approach. Clusters will be a group of customers that are served by an electrically demarcated distribution and sub-transmission network. The distribution efficiency investments will be implemented in these clusters to create "islands of excellence". Hence efforts will be made to develop these clusters in such a way that measurable and tangible improvements will be targeted in these clusters in terms of improved distribution sector performance that will lead to improved revenues, reduced losses and enhanced customer satisfaction in terms of quality of supply, reduced fault redressal times, and reduced billing complaints. 3. Rationale behind the cluster approach: In contrast with conventional investment approach to electrical infrastructure, the cluster approach will facilitate the following advantages in Tanzania's context: · Given that the country's power sector in general and the distribution sector in particular, require large investments for reasonably efficient operations, there is an imminent risk that the resource envelope available under the Project may not demonstrate clear impact if it is too thinly spread across the country. Making concerted investments as per a result specific strategy in a demarcated area will facilitate directing these investments to specific tangible and measurable impacts. · This approach will facilitate establishing a baseline on key performance indicators such as quality of supply (tail end voltage), distribution losses (technical and commercial), billing and collections, response and resolution times for various activities that involve customer interface and so on. The impact that will come by investments in these clusters can then be measured. · The measurement of impacts brought about by investments in clusters will also facilitate economic and financial cost benefit analysis of investments made in the Project. It will be a matter of enhancing investments and time to scale-up the improvement of the distribution sector by increasing the number of clusters gradually given availability of resources. 40 4. Features of a typical cluster. The electrical network that is part of a single 11 kV feeder will be defined as a cluster. Thus, a cluster will be a part of the electrical network served by a 33/11 kV substation. Typically, such a substation will have up to six 11 kV feeders. These 11 kV feeders, the distribution transformers (that will step down the voltage from 11 kV to 415/220 volts), the LT network along with the metering and related arrangements at the customer points will together constitute the distribution network. The incoming 33 kV feeder will constitute the sub transmission network. These clusters will be serving around 10,000 consumers or a population of 50,000 each. The clusters are demarcated thus to facilitate measurement of energy input into the network fed from the 33/11 kV substation into each 11 kV feeder. 5. Determination of size of the cluster. A cluster could comprise of any of the following alternatives: (a) the network of a distribution transformer and its downstream infrastructure; (b) a 11 kV feeder emanating from a 33/11 kV substation; or (c) a 33 kV/11 kV substation and the downstream network. While each of these alternatives facilitate ring fencing and energy audit, a 11 kV feeder is expected to be selected for the proposed project as it has specific advantages over other alternatives in the context of this project area. Given that a 11 kV feeder caters to substantial load with well organized metering, it will be possible to conduct energy audit and conduct proper monitoring and evaluation of the results. 6. Horizontal and vertical investment components: Even though investments will be principally fashioned as vertical components targeted to improve distribution in specific clusters, certain investments will have to be system wide that will strengthen improvements across all the clusters on a countrywide basis. It is expected that after implementation of the TEDAP, the number of such clusters ("islands of excellence") will be replicated and scaled-up substantially. For this goal to be realized, it is essential that some system wide measures, such as developing Local and Wide Area Networks, customer database and related software, standardizations required for design and safety etc. are undertaken. The project will therefore incorporate certain investments that will have a horizontal system wide implication as against the essentially vertical cluster interventions. 7. Bulk of the goods and services to be procured under this project will essentially be vertical investment components that are focused on a cluster. Customer service centers and prepaid metering systems are typical components covered under this approach. Typical horizontal investment components that will be implemented on a system wide basis for improvements across all the clusters include: development of a universal billing system and software, accounting and financial systems; and related hardware and software are typical components that are undertaken under this approach. 8. Data collection and any survey exercises needed are proposed to be the primary responsibility of the implementing agencies. Such data is expected to be readily available from existing planning and operational reports of these agencies. 41 Data for Collection Responsibility TANESCO TANESCO TANESCO TANESCO REA REA REA Reporting and Units be Sales Zonal sector sector on System", of to Data available Bank Bank Collection Instruments Grid Report "Transfer ­ Monthly Reports TANESCO Monthly Reports Marketing Division Monthly Reports Summary Report Customer Feedback Survey made World Supervision Mission Reports, Ongoing dialogue World Supervision Mission Reports, Ongoing dialogue SPPA implementation Collection Data and Reports Frequency Monthly Monthly Monthly Bi-Annual Annual Annual Annual be volts to has after 17 Closing Date) 21% 95% been REA and new set baseline 40,000 At >218 Target survey conducted identifies approves connections volts - YR4 23% 85% REA and new 11 27,500 218 identifies approves connections of volts (post 42 REA T&D 6 YR3 25% 75% to 15,000 >190 Mid-term key Offgrid Values Survey investments) Transfer Component implementat ion Target volts - 3 YR2 27% 70% and 190 added 5,000 > Technical, Capacity Procurement Safeguards 17 and - Staff - - YR1 28% 70% 190 volts Director Key appointed end. General Monitoring year 6 of has volts in- - - until 28% 70% ness on Baseline Survey an Results Baseline 190 within months Effective REA complete functional organizati for a as as to new (as cumulative of of (as in as clusters). voltage selected implement feedback renewable losses collection improvement in improvement of Outcome measure user functionality capacity and schemes. functionality connections. pipeline shown total in a of of by selected a reduction MW improving efficiency end Arrangements Indicators in pilot (as operational in quality quality). REA REA by by are of clusters). in customer finance of installed). Project measure measure household emission a a service service 2 Values B. Reduction measure operational selected Improvement efficiency improving efficiency Increase (as in clusters). Improved (as in Improving demonstrated develop, scale-up Improving measured rural CO measured energy 17 for Data ility Responsib Collection TANESCO TANESCO TANESCO TANESCO TANESCO MEM/REA MEM/REA IT and and s Reporting Data Collection and Instrument Monthly Marketing Division Reports Monthly Division Reports Monthly Marketing Division Reports Monthly Marketing Division Reports Monthly Marketing Division Reports MEM/REA reports, verification reports surveys MEM/REA reports, verification reports surveys - - Collection Reports Frequency and Annual Annual Annual Annual Annual Data At - - ed Date) 60,000 Fully 25,000 15,000 1,200 Closing Implement - - ed YR4 800 60,000 Partially 25,000 11,000 Implement of & Center High YR3 Value Cell ed No CMS, RMS 35,000 16,000 6,000 500 and ation Call Customer Implement Implement TSMS 43 Values - - YR2 No 10,000 4,000 3,000 200 Target and and - - - - YR1 No Models Regulatory Framework developed Models Regulatory Framework developed - - - - - - No Baseline Loss value prepaid to models services through with a Low Indicators high with with a business models commercial, and meters Voltage connections electricity electrified for resources and service Implemented. electrification services. Outcome center place. and credit High modern in systems functional. of for System call household to offgrid institutions electrification customer cell IT household service electricity new Project urban rural PSP. public offgrid Intermediate Improved centralized customer Improved technical management Replacement meters. Pilot Distribution New modern New connections through with New new PSP. for Data ility Responsib Collection MEM/REA MEM/REA REA TANESCO MEM s reports Reporting Data Collection and Instrument MEM/REA/ TANESCO reports MEM/REA reports REA Monthly Human Resource Division Reports MEM Report Collection Reports Frequency and Annual Annual Annual Annual Annual Data for of At 12 MW 5 next cost Date) Closing SPPA/Ts 20 power project signed additional Capacity Building program completed Financial Close the least generation for 10 MW 3 - - YR4 SPPA/Ts 10 signed additional for 6 YR3 MW 1 - 5 SPPA/Ts signed additional Financial Advisors procured 44 for 12 Values 3 - YR2 MW first SPPA/Ts signed Capacity Building program initiated Technical Advisors procured Target - - YR1 needs Legal SPPA/Ts formally adopted Capacity Building identified Advisors procured - - - - - Baseline in the small and needs of grid PPA/Ts. for these Indicators by adopted REA. power by energy Standard address development to development large Outcome methodology projects under plan cost completed a capacity renewable SPPs power implemented. equitable project. of PPA/Ts and least and and Intermediate Delivery connected Standard renewable use. Transactions Institutional identifies agreed Timely identified generation Annex 4: Detailed Project Description TANZANIA: Energy Development and Access Expansion Project Component A: Ongrid Investments (US$85.8 million) 1. There are large investment needs currently in transmission and distribution (T&D) subsectors, as little investment have gone into maintaining and replacing the network since late 1980's. Correspondingly, quality of service has deteriorated and system-wide losses have remained high (about 24% in 2006) due to lack of a T&D investment program. TANESCO has not been able to invest its own resources in T&D as tariffs, in the recent years, remained below the cost-recovery levels. TANESCO has developed a 5-year investment plan, which estimates urgent investment needs of about US$1.3 billion (including expansion of TANESCO's grid). Of these urgent investments, TANESCO has identified priority investments of about US$100 million to upgrade the network in three main urban areas ­ Dar es Salaam, Arusha and Kilimanjaro, which account for the majority of TANESCO's revenues. The upgrade of T&D system (see Table 12 below) will not only improve service in the key urban areas, but also reduce losses and improve revenue streams, therefore directly contributing to TANESCO's financial recovery. The proposed project is designed to support this objective. Several of these identified investments are being envisaged with a view that they may yield additional resources through the global carbon market. Large amounts of additional capital will be required over the next few years to meet the overall goal of improving service reliability throughout the system. Table 12: Ongrid Component Costs and Financing Plan (US$ Million) Part Component Total Costs IDA A.1 Transmission and Distribution network investments Transmission network (substations, transmission lines) 22.89 22.89 Distribution network (new substations, rehabilitation of substations, overhead lines) 26.41 26.41 A.2 Distribution System Upgrade Investments Low Loss, High Voltage Distribution System in a designated area 5.00 5.00 A.3 Ongrid Access Expansion Connection of 25,000 new customers 10.00 10.00 A.4 Commercial and Institutional Capacity Development Pre-paid meters, Centralized call center, High-value customer cell, Solid state meters 8.05 8.05 for HV/LV customers, Corporate Management Systems (CMS, TSMS & RMS) A.5 Technical Assistance Planning and design on CMS, TSMS, RMS; Centralized Call Center, High-value customer cell, connection of new meters, training and supervision of T&D 4.33 4.33 investments Contingencies (and Unallocated) 9.12 9.12 Ongrid Component 85.80 85.80 Component A.1 -- Transmission and Distribution System Upgrade Investments (US$49.3 million) 2. Transmission network investments (US$22.9 million). Several critical transmission investments in Dar es Salaam, Arusha, and Kilimanjaro have been identified by TANESCO ­ both lines and substations. It is expected that these investments will ease critical transmission constraints, increase the network capacity, and reduce transmission losses. Bid documents have already been prepared for these investments under Cr. 3569. 3. Dar es Salaam Area. The 132 kV transmission network is the backbone of the electricity system of Dar es Salaam. The grid serves to transport electric energy from the main 220 kV source, located at Ubungo, northeast of Dar es Salaam, to the bulk distribution/load centers of the town, namely the 132 kV 45 substations Ilala, FZ III, Tegeta, and Kurasini. Ilala, besides Ubungo, is the other key bulk supply station connecting the whole centre of Dar es Salaam. JICA is expected to finance a new transmission line from Ubungo to Oyesterbay along with a new substation at Oyesterbay. Identified Investments Activity Extension of two existing Substations Ubungo 220/132/33/11 kV substation Supply and installation of one (1) 132 kV line feeder bay. Factory Zone III 132/33/11 kV substation Supply and installation of one (1) 132 kV line feeder bay; Supply and installation of one (1) 33 kV line feeder bay; Supply and installation of one (1) 33 kV transformer feeder bay; Supply and installation of one (1) 15 MVA 33/11 kV transformer; and Supply and installation of one (1) 11 kV containerized switchgear. Supply and erection of 3 new 132/33 kV Each substation shall consist of: substations at Factory Zone II, Mbagala, One 50 MVA 132/33 kV transformer Kurasini One 132 kV transformer feeder bay Two 132 kV line feeder bays Transmission lines Supply and erection of 4 132 kV line sections Factory Zone III - Factory Zone II tubular steel towers - 7.4 km Factory Zone II - Mbagala lattice steel towers - 16.2 km Mbagala -- Kurasini lattice steel towers - 15.1 km Kurasini -- Ubungo tubular steel towers - 13 km 4. Arusha & Kilimanjaro Area. The backbone in the areas of Arusha and Kilimanjaro is the 132 kV link connected to the 220 kV network in Njiro substation, Arusha. The 132 kV line between Njiro ­ Kiyungi is loaded at 35 MW. A second 132 kV line from Arusha to Moshi is necessary to face the fast growing demand in the region and for reliability of supply reasons to the Kilimanjaro area. A new 132/33/11 kV substation will be installed close to the Kilimanjaro International Airport. This substation will release load from the Njiro and Kiyungi 132 kV or 33 kV transformers and the 33 kV distribution system. NDF is expected to finance 132 kV lines between Njiro ­ KIA and KIA ­ Kiyungi. Both of the substations at Njiro and Kiyungi must be extended by 132 kV line bays for the new line. NDF is expected to finance extensions of the Kiyungi substation and AfDB the extension of the Njiro substation. The Bank is proposing to finance the new substation at Kilimanjaro International Airport (KIA). Identified Investments Activity Kilimanjaro International Airport substation, Kilimanjaro Region Supply and erection of one new 132/33 kV Shifting of two (2) existing 132/33 kV 20 MVA transformers from Njiro substation to substation: the new 132/33 kV Kilimanjaro International Airport substation; Installation of the two (2) 132/33 kV 20 MVA Transformers shifted from Njiro substation; Supply and Installation of two (2) 132 kV transformer feeder bays; Supply and Installation of two (2) 132 kV line feeder bays; Supply and Installation of one new metal clad 33 kV switchgear consisting mainly of (a) two (2) transformer feeder bays; (b) six (6) line feeder bays; and (c) one (1) bus section. 5. Distribution network investments (US$26.4 million). There are serious problems with TANESCO's Distribution Network both in terms of technology and in terms of the supply capacity. The demand of electric power is continuously increasing with the electrification and urbanization of more and more rural areas. There are problems with voltage drop common for the 33 kV, 11 kV, and low-voltage distribution networks. This is due to the use of too low voltages; thin conductors and insufficient number of pole transformers relative to the number of users. Theft of pole transformer insulating oil, destruction of devices and stealing of electricity is also rampant. 46 6. TANESCO has identified key distribution investments: 33 kV/11 kV primary substations; 33 kV lines and 11 kV lines to reduce distribution faults, outages, to improve distribution transformation capacity, reduce distribution losses and to facilitate electricity connections to new customers. The investments financed by the project include six new substations and rehabilitation and upgrading of five existing substations in the Dar es Salaam area, eight new substations in the Arusha and Kilimanjaro areas, and the construction of 33 and 11 kV overhead lines in Dar es Salaam, Arusha and Kilimanjaro areas. Bid documents have already been prepared for these investments under Cr. 3569. Identified Investments Activity Supply and Installation of Plant and Equipment 33/11 kV substation including 33 and 11 kV indoor metal-clad, switchgear (6 sets) for Six New 33/11 kV Substations in Dar es 33/11 kV power transformers 15 MVA (10 pieces) Salaam 11/0.4 kV auxiliary transformers 100 KVA (6 pieces) New control and switchgear building (6 pieces) Supply and Installation of Plant and Equipment 33/11 kV substation including 33 kV outdoor and 11 kV indoor metal-clad switchgear for Rehabilitation of Five 33/11 kV Substations (5 sets) in Dar es Salaam 33/11 kV power transformers 15 MVA (4 pieces) 11/0.4 kV auxiliary transformers 100 KVA (1 piece) Rehabilitation of control and switchgear building (5 pieces) Supply and Installation of Plant and Equipment for Eight New 33/11 kV Substations in Arusha and Kilimanjaro Substations in Arusha Area 33/11 kV substation including 33 and 11 kV indoor metal-clad switchgear (6 sets) 33/11 kV power transformers 15 MVA (6 pieces) 11/0.4 kV auxiliary transformers 100 KVA (6 pieces) New control and switchgear building (6 pieces) Substations in Kilimanjaro Area 33/11 kV substation including 33 and 11 kV indoor metal-clad switchgear (2 sets) 33/11 kV power transformers 15 MVA (2 pieces) 11/0.4 kV auxiliary transformers 100 KVA (2 pieces) New control and switchgear building (2 pieces) Supply and Installation of Plant and Equipment for 33 and 11 kV Distribution Overhead Line in Dar es Salaam, Arusha and Kilimanjaro Dar es Salaam Area 33 kV distribution overhead line (83 km) 33/0.4 kV distribution transformers (39 pieces) 1/0.4 kV distribution transformers (11 pieces) Arusha and Kilimanjaro Area 33 kV distribution overhead line in Arusha (62 km) 11 kV distribution overhead line in Arusha (81 km) 0.4 kV distribution overhead line in Arusha (31 km) 33/0.4 kV distribution transformers in Arusha (24 pieces) 11/0.4 kV distribution transformers in Arusha (23 pieces) 33 kV distribution overhead line in Kilimanjaro (25 km) 33/0.4 kV distribution transformers in Kilimanjaro (14 pieces) 11/0.4 kV distribution transformers in Kilimanjaro (14 pieces) Component A.2 -- Distribution System Upgrade Investments (US$5.0 million) 7. Low Loss, High Voltage Distribution System (HVDS) in a designated area of Dar es Salaam. While TANESCO confronts high system losses, both technical and nontechnical in the peri urban areas of Dar es Salaam, customers in these areas are also dissatisfied with the supply conditions. TANESCO has identified the conversion of the existing low voltage distribution system in these areas to a High Voltage configuration as a solution for this situation. This initiative is expected to reduce technical and nontechnical losses significantly and at the same time improve quality of supply. This will be implemented as a pilot in the area served by one primary distribution substation and six feeders in the Dar es Salaam area. It is expected that once TANESCO is able to harness and analyze the benefits of this 47 intervention, this initiative will be replicated and scaled up in other areas served by TANESCO. About 10,000 customers are expected to be added under this component. The benefits that are expected to accrue with this initiative are further elaborated in the following paragraphs. 8. Quality of supply (Voltage): Voltage profiles in general are very poor and consumers get 180 volts or even lower at times instead of the standard 220 volts. As a result, household consumers cannot run appliances at all or are at considerable risk and industrial customers find it very difficult to carry out industrial and commercial activities efficiently. The conversion to HVDS will address the voltage problem by upgrading the distribution lines to a High Voltage Distribution System (HVDS) to replace the traditional low voltage distribution system. In the current system, typically a 500 KVA transformer transports the electricity from a distance at 500-1000 meters and serves around 400 customers. By the time the customer is served, it is at low voltage through long, sometimes sagging lines that are prone to breakdown or being tapped into by theft. 9. With a number of smaller capacity transformers replacing such large transformers under the HVDS, voltage is stepped down from 11 kV to 220 volts at several points along a supply line instead of at one point. As a result the transformation occurs closer to the consumption point limiting voltage drop and dramatically improving the voltage profile. In HVDS projects already implemented in other countries, actual measurements of voltages at consumer points show vast improvement ­ from 160 volts in some cases to the desired level of 220 volts. 10. The initiative dramatically reduces technical losses by reducing the amount of current output in the system.18 Technical loss reduction increases energy efficiency and creates reductions of global carbon emissions that can generate revenues. 11. Pilferage of electricity: A long LT line facilitates theft, as it is relatively simple to pilfer electricity from an LT line. It is practically impossible to pilfer electricity from a distribution system that is configured under the HVDS that uses insulated aerial bunched cables to connect the consumption point from the distribution transformer. TANESCO also intends to build on the results obtained through this initiative in other countries of the region such as Nigeria. Component A.3 -- Ongrid Access Expansion Investments (US$10 million) 12. Connection of 25,000 new customers. The project will include around 25,000 new connections in Dar es Salaam. This subcomponent will be undertaken as a supply and install contract, including: (i) Short LV OHL (branches) basically consisting of maximum 150 m LV line; (ii) Metering equipment and testing equipment for TANESCO crews for testing the new connections (including a portable metering laboratory); (iii) communication equipment and vehicles, if needed; and (iv) Training and technical assistance for the equipment. Necessary MV/LV OHL and distribution transformers for the new customers will also be covered. However, TANESCO is expected to establish new accounts, and commission all meters for the new customers. Installation of the meters may be carried out by TANESCO depending upon the availability of human resources.19 Transformers of appropriate specifications that promote low losses and better quality of supply will be considered. 18 These losses are calculated as the square of the current multiplied by the resistance (I2xR). Hence with a 500 KVA transformer, the output current is 350 amperes resulting in very high losses (equal to 3502 x resistance value of the wires). Alternatively, with a 25 KVA transformer the output current is only 31 amperes. In this case, the losses are much lower (equal to 312 x resistance value of the wires). The proposed HVDS system, thus, leads to a dramatic reduction in technical losses. 19 To manage the actual installation of the meters at the customers' premises and to avoid possible collusion, and given the manpower and technical constraints at TANESCO, this contract will include a possibility of an install 48 Component A.4 -- Commercial and Institutional Capacity Development (US$ 8.05 million) 13. Replacement of 60,000 credit meters by prepaid meters (US$3 million). In order to improve billing and reduce commercial losses, TANESCO has identified the need for gradually expanding the pre- payment metering system, which is currently in vogue in certain areas in Dar es Salaam. The project will replace 60,000 credit meters by pre-paid meters for existing customers to improve TANESCO's cash flow. Prepaid energy meters mitigate the financial risks associated with power distribution and promote responsible power usage by energy consumers. The prepaid technology enhances utility revenue and reduces costs in multiple ways: (i) accelerate cash flow; improves the utility's financial position; (ii) reduces pilferage; (iii) reduces bad debts; (iv) reduces administration costs (no meter reading & billing; previous balances recovered; revenue shortfalls eliminated; disconnect/re-connect costs reduction); (v) supports loss reduction programs; (vi) increases Client's satisfaction and confidence. The prepaid meters will assist the elaboration of an Energy Management. Installation of the meters may be carried out by TANESCO depending upon the availability of human resources.19 14. Centralized Call Center for Dar es Salaam (US$200,000). In order to improve TANESCO's customer relations, the project will include a Centralized Call Center for Dar es Salaam. Modern information communication technology will provide rapid improvement in customer services. A centralized call attention centre will provide the following advantages: (i) quick responses, specialized and focused attention 24 hours a day by properly trained personnel and optimal communication resources; (ii) reduced outage time due to improved information to the working emergency crews; (iii) allows for different customer's inquiries and collection of pertinent information for subsequent technical and commercial responses; (iv) improves customer satisfaction and confidence; (v) allows subsequent links with GIS information on billing and technical details; (vi) easier to provide timely information for large and sensitive customers about planned outages (planned works, switching, etc); and (vii) potential to obtain more added value by adding supplementary services for others networks at night time (i.e. water, TV cable, Fire department, etc). 15. High Value Customer Cell for HV (T3), LV (T2) and other Large Customers (US$100,000). TANESCO's customers in categories T2 and T3 consumed over 60% of total energy billed in December 2006. In order to improve TANESCO's revenues and reduce system losses, it is important to focus on customers who consume large volumes of power. Experience from many countries show that reducing non-payments by these types of customers can make a significant contribution to the efforts of reducing nontechnical losses of the company. A significant improvement in the billing coverage and collection rates of large customers has been achieved by almost all the utilities in Latin America, through a combination of good management practices and application of IT tools. This component will include the following subcomponents: (a) create a "High Value Customer Cell" (HVCC) as an organizational unit within TANESCO; (b) design and implement a detailed field assessment on the current situation of all large consumers; (c) define and execute a plan aimed at regularizing supply in all individual cases where this is needed; (d) install remote metering for all points of supply to regularized large customers and; (e) define and implement operational procedures for systematic monitoring of the situation of electricity supply to large customers. 16. Installation of solid state meters for high revenue yielding customers and network energy audit (T2, Commercial, and T3, Industrial, as well as medium voltage distribution feeders) (US$2.2 million). In order to improve TANESCO's revenues and reduce system losses, it is important to focus on customers who consume large volumes of power. As such customers, though a small proportion of the customer base of the utility, contribute to a large share of the total revenue collected, TANESCO needs to ensure that the business and commercial interface with such customers is efficient and is of a high component allowing TANESCO to conduct all or a portion of the works on its own. Any savings from this component during implementation could then be allocated for additional credit meters or for any other component. 49 standard. Similarly, for systematic monitoring and targeted reduction of the technical and commercial losses, a comprehensive energy accounting system will have to be put in place by metering grid interface points and energy flows -- both input and output -- to critical medium voltage feeders. Both these initiatives require high accuracy solid state meters. The project will also finance consultancy services for the design, preparation of specifications and bidding documents and supervision of the supply and installation of 1800 such meters to facilitate these objectives of TANESCO (see A.5). It is also envisaged that as part of the technology transfer program, the contractor could install, test and commission the first 300-500 meters using TANESCO's meter installation crews. The remaining meters could then be installed by the TANESCO staff who participated in the installation of these first meters. However, all upstream equipment for this component shall be installed by the contractor. 17. Separate ICB procurements are envisaged for Tender 1: Lot 1-Network for all components including Cluster HV distribution system; Lot 2-RMU Switching Units and TENDER 2 Lot 1-Prepaid meters (circa 95,0000); and Lot 2-1,800 solid state, remote meters. The contracts will include appropriate flexibility to install20 all or a portion of the 1,800 meters at the customers' premises on its own. In view of TANESCO's previous experience with contractor-installed meters, appropriate flexibility shall be built into the contracts to allow TANESCO to conduct this portion of the works on its own. 18. Incorporation of a Commercial Management System (CMS); a Technical Service Management System (TSMS) and a Resources Management System (RMS) (US$2,550,000). (i) Commercial Management System (US$1.25 million): The project will finance incorporation of a new "state of art" corporate commercial management system (CMS), which will allow TANESCO to properly execute and monitor all the activities related to: (a) commercial cycle: regular metering, billing and collection; (b) attention of customers at commercial agencies or by phone (call centers); (c) disconnection and reconnection of electricity supply related to commercial debts; (d) connection of new customers. Information collected and missions during the project preparation has highlighted that TANESCO's weak commercial performance is to a large extent due to inadequate operational procedures and poor information on customer's commercial situation. (ii) Technical Service Management System (US$700,000): The project will also finance incorporation of a new Technical Service Management System (TSMS), aimed at optimizing attention of customers claims related to bad quality of electricity supply. The current situation in this area is precarious, based on manual records and procedures poorly organized and difficult to monitor and supervise. TSMS and related procedures minimizes the time between reception of the claim and restoration of regular electricity supply, which is the critical parameter defining quality of electricity supply. At the same time, it will increase TANESCO's efficiency in carrying out related activities. Conceptual design of TSMS is based on establishing a link between each point of electricity consumption and the electric networks involved in the supply. Following a customer complaint, the TSMS allows for a quick identification of the potentially faulty components of the networks and sending the operational crews straight to those installations. At the same time, it allows for proper managing of multitude of customer complaints resulting from faults involving a large number of consumers. 20 As part of the technology transfer program, the contractor is expected to install, test, and commission the first lot of meters using TANESCO's meter installation crews. The remaining meters could then be installed by the TANESCO staff who participated in the installation of the first lot of meters. However, it is expected that all upstream equipment for this component shall be installed by the contractor. 50 (iii) Resources Management System (US$600,000): The project will finance a new Resource Management System (RMS) to support centralized corporate functions (shared services): finances and accounting, management of human resources, procurement, and logistics. Component A.5 -- Technical Assistance for implementation (US$5.83 million) 19. Consultancy services for Incorporation of a Commercial Management System (CMS); a Technical Service Management System (TSMS) and a Resources Management System (RMS) (US$225,000). The project will finance technical assistance to improve commercial management and customer service through coordinated implementation of new CMS, TSMS, and RMS (Enterprise Resource Planning ­ ERP) systems. The Consultant will be involved in all matters pertaining to the project execution, starting from survey and design, bid document preparation, bidding and bid evaluation, assistance in contract negotiations, certification for contractor payment, supervision during construction/implementation and preparation of reports required by IDA and TANESCO, know how transfer and training for staff and other related issues. The consultancy services will include elaboration of operational procedures and supervision of construction of customer and installation databases. This technical assistance will also ensure coordinated implementation of the CMS, TSMS, and RMS systems. 20. Design and implementation of new operational procedures aimed at optimizing performance of the Marketing Department (US$125,000). The project will finance technical assistance to improve commercial management and customer service through: (i) design and implementation of a new Centralized Call Center and the High Value Customer Cell; (ii) definition and effective application of operational procedures for optimized performance of the Marketing Department. This refers to reengineering of processes and activities for commercial management and customer service, supported by the CMS and TSMS systems; and (iii) identification and implementation of action plans aimed at achieving short-term sustainable reduction of nontechnical losses, supported by the CMS. The consultancy services to be provided under this subcomponent will include elaboration of operational procedures and supervision of construction of customer and installation databases. 21. Consultancy services for Distribution System Upgrade Investments, Ongrid Access Expansion and Metering (US$480,000). These consultancy services covers planning, design, bid documents, and bid evaluation for: (i) the HV Distribution Cluster (up to 10,000 new customers); (ii) Ongrid Access Expansion (25,000 new customers); (iii) replacement of 60,000 credit meters by prepaid meters, as appropriate; and (iv) installation of 1,800 solid state meters with remote metering. 22. The Consultancy services for the High Voltage Distribution System in Dar es Salaam will cover all aspects pertaining to the HV distribution project execution, starting from survey and design, bid document preparation, bidding and bid evaluation and up to assistance in contract negotiations. To ensure technical optimization and logical priorities of investments for the distribution network development, a "cluster" development implementation for an entire primary substation with typically six feeders will be undertaken and the consultancy services shall take the following into account: (i) Proper investigation and area delimitation; (ii) Proper input data collection (energy, quantity of transformers, line lengths, customers, etc,); (iii) Present problems and major threats for network improvement; (iv) Plan and strategy for investments/measures; (v) Monitoring/Correcting factors; (vi) Set the condition for long scale proliferation of clusters depending on economical importance (losses and energy demand). The result should be a strategy for network optimization that can be applied to the network with some similarities to the results provided. The Consultancy Services for the Ongrid Access Expansion and Metering components will include the network planning required for these components following the above principles. 51 23. Supervision of Investments and Project Management (US$3.5 million). Because of the long period of no investments in TANESCO staff and its network, TANESCO's capabilities to manage the requirements for supervision and management of design, construction, operation and maintenance of the generation plants, transmission lines, substations, and the distribution systems has deteriorated. These consultancy services will provide TANESCO with the services of consultants to assist with project overall management and supervision. The services will include certifications for contractor payment, supervision during construction/implementation and preparation of reports required by IDA and TANESCO, know how transfer and training for staff and other related issues. It is expected that TANESCO will need to purchase service vehicles, such as stations wagons and/or light trucks (up to 10) to carry out these operations. 24. TANESCO has already implemented two QCBS tendering processes for supervision of implementation works up to commissioning and preparation of the final project report for the 132 kV Transmission Network Reinforcement Project for Dar es Salaam, Arusha, and Kilimanjaro and for the TANESCO Distribution System Reinforcement Project for Dar es Salaam, Arusha, and Kilimanjaro. An initialed contract for the transmission supervision was submitted by TANESCO to the Bank in May 2006 and an initialed contract for the distribution supervision was forwarded to the Bank in June 2006. 25. In addition, this subcomponent also includes consultant services and technical assistance for preparation, implementation and supervision of works up to commissioning of: (i) the HVDS Cluster (up to 10,000 new customers); (ii) Ongrid Access Expansion (25,000 new customers); (iii) replacement of 60,000 credit meters by prepaid meters, as appropriate; and (iv) installation of 1,800 solid state meters with remote metering. Component B: Offgrid Investment Framework and Pilot Investments (US$16 million IDA, US$6.5 million GEF) 26. The proposed component B is designed to support an institutional set-up for the newly established Rural Energy Agency (REA) and to develop, test and demonstrate new, electrification approaches, which could be easily scaled-up. As TANESCO's financial condition do not allow sustainable expansion of grid into rural areas, this component will focus on a development of scalable, economically and financially feasible offgrid alternatives. Specifically, this component (B) will: (a) increase electricity access in rural and peri-urban Tanzania to productive enterprises, service delivery facilities (e.g. in health and education), and to households with the capacity to pay for electricity; (b) establish a functioning institutional and regulatory framework for commercially oriented, sustainable service delivery for rural electrification and small renewable power projects that can be scaled up; and (c) remove barriers to, and reduction of costs of, implementation of renewable energy technologies to help mitigate greenhouse gas emissions (GHGs). 27. It should be noted that this is the first attempt in Tanzania for a larger-scale offgrid electrification program, mobilizing and leveraging private sector resources and promoting small-scale power projects. Consequently, although preliminary business models have been identified, and are described below, it is important that the component retains a necessary degree of flexibility to adjust the models and open the support to new promising business models and technologies as they emerge (as long as they are eligible for the project support, and comply with all legal, safeguards, technical and procurement criteria). This flexibility is consistent with the best practices for rural energy programs/agencies (e.g. Bangladesh). The detailed eligibility and evaluation criteria, subsidy thresholds and implementation instructions will be established in the Operating Guidelines, completion of which is a condition of effectiveness. 28. The component has three subcomponents: (i) Small Power Generation and Distribution (SPGD) subprojects, including renewable power generation and mini-grids; (ii) Sustainable Solar Market Development (SSMD), supplying individual systems (primarily solar PV based) for public institutions 52 and for individual households and businesses in rural areas; and (iii) Technical Assistance to the Rural Energy Agency (REA) and other stakeholders. These activities will be implemented through: · provision of grants to the private sector (including NGOs and community-based organizations) to partially offset investment costs of new service connections (through performance grants), and for pre-investment studies, business and market development, including productive uses (through matching grants); · supply, installation and provision of maintenance and other associated services for the Sustainable Solar Market Packages, as well as the provision of goods, consultant services and training for the technical assistance subcomponent, and related operating expenses. Table 13: Offgrid Component Costs and Financing Plan (US$ Million) Part Component Total IDA GEF GoT Donors Private Costs Sector* Small Power Generation Distribution B.1.a Grid-Connected generation 18.9 0.0 0.6 0.0 0.0 18.3 B.1.b Grid-Connected mini-grid 4.1 2.0 0.0 0.5 0.0 1.6 B.1.c Green mini/micro-grid 9.7 5.0 1.6 1.0 0.0 2.1 Subtotal 32.7 7.0 2.2 1.5 0.0 22.0 Sustainable Solar Market Development B.2.a Sustainable Solar Market Packages for public 10.1 6.4 1.2 2.5 0.0 0.0 institutions B.2.b Households/micro-enterprises 8.3 1.6 1.1 0.5 0.0 5.1 Subtotal 18.4 8.0 2.3 3.0 0.0 5.1 Technical Assistance B.3 Technical Assistance (excluding Operating Costs) 6.2 0.7 2.0 0.3 3.2 0.0 B Technical Assistance (Operating Costs) 2.3 0.3 0.0 2.0 0.0 0.0 Subtotal 8.5 1.0 2.0 2.3 3.2 0.0 Offgrid Component 59.6 16.0 6.5 6.8 3.2 27.1 * Private Sector leveraged financing 29. Investment components B.1 and B.2 are financed through: · Performance grants, financing investments under the components B.1 and B.2.b, are estimated to be financed by US$7.6 million of IDA, US$2.1 million of GEF, and US$1.5 million of GoT resources. · Matching grants, financing pre-investment and market development under the components B.1 and B.2.b are estimated to be financed by US$1 million of IDA and US$1.2 million of GEF. · Provision of goods (including installation and maintenance) and services (component B.2.a), are estimated to be financed by US$6.4 million of IDA, US$1.2 million of GEF, and US$2.5 million of GoT resources. Component B.1 -- Small Power Generation and Distribution (SPGD) 30. This subcomponent aims at increasing access rates in areas not covered by the TANESCO's grid in a sustainable manner, leveraging private resources for rural electrification. Three types of subprojects will be developed under this subcomponent: (i) small renewable power generation subprojects (under 10 MW) selling power to the main grid; (ii) grid-connected mini-grid subprojects; and (iii) isolated (greenfield) mini-grid subprojects. 31. The Component B.1 is financed through the provision of performance and matching grants for pre-investment and market development. All sub-categories are eligible for matching grants for pre- investment and market development. Performance grants are available only for categories (ii) and (iii) 53 grid-connected and isolated (greenfield) mini-grids21, set on a per-connection basis, (e.g. US$500 per connection), covering up to 80% of the investment costs. The precise values and thresholds for the subsidies for each type of subproject will be set in the Operating Guidelines and periodically adjusted, based on market response and updated cost estimates. Box 1: Examples of Eligible SPDGs 1. TPCL Biomass Co-generation Project Project Developer: Tanganyika Planting Company Limited is the developer of the bagasse fired cogeneration power facility. Project Location: TPCL Estate, Arusha. Existing cogeneration facility, with possibility of excess power being sold to TANESCO or mini-grid operator. Capable of producing electricity for 8 to 8.5 months of the year. Estimated electrical output 14 MW-18 MW. Excess electricity available for sale estimated at 7 MW-11 MW. Expansion options are under consideration. Proposed distribution system to supply power to estimated potential additional 2,200 consumers, with total load demand of 926 kW. 2. Njonbe (Ruhudji river) Small Hydro Power Project Project Developer: Roman Catholic Diocese of Njombe. Project Location: Igominyi division within Kifanya ward at Indonja Falls of the Ruhudji River. Capacity: 4.6-10 (two options under consideration). Available net head 35.82 m. Proposed supply of power to Catholic mission at Kilocha, plus the villages of Ihanga, Itupila, Kifanya, and Iboya. Excess power to be sold to TANESCO. 3. Mufindi Small Hydro Power Project Project Developer: Mufindi Tea Company. Project Location: Mufindi District of the Iringa Region in southern Tanzania. This site is on the MTC estate, and is located approximately 55 km from the MTC headquarters. It is proposed that the capacity of the station will be 3.0 MW, with a head of 62 m and a flow of 5.7 m3/s. Due to the head and flow parameters at this site, Francis turbines are proposed to be used, and to make the best use of flow, two identical turbines are proposed. Power now proposed to be supplied to MTC, UTTL, villages along transmission route, and supply of power to TANESCO under the proposed standardized PPA and Tariffs. 4. Mafia Island 200 kW Biomass Gasification Project Project Developer: H.J. Stanley and Sons and Mikumi Milling Company. Project Location: Mafia Island. Project idea developed by H.J. Stanley and Sons to provide additional power for Mafia Island through use of renewable fuel. Project has a number of phases ­ only Phase 1 considered here. Generation plant will displace generation by TANESCO's current diesel fuelled generators and provide supply for new connections. Plant proposed rated capacity (at June 2007) is 390 kW. Fuel supply for Phase 1 is to be waste timber from saw milling operations, with timber supply in later years to be from coppice crops planted after removal of senile coconut trees. Estimated current waste wood supply available for 40 years operation. Projects in advanced stage with feasibility studies Project Type Capacity Cost TPCL Co-generation & mini grid 7.0 MW US$ 988,160 Njombe Hydro and mini-grid 4.6 MW US$ 8,638,900 Mufindi Hydro and mini-grid 3.0 MW US$ 8,138,993 Mngeta Kilombero Hydro Rehab & mini-grid 0.4MW US$ 307,151 Tosamaganga Hydro rehabilitation 1.3 MW US$ 3,101,599 Mafia Island Biomass gasification 0.2 MW US$ 1,095,000 32. The sizes of the grids will vary depending on the local demand and supply conditions, e.g. from village micro-grids as low as 30 households to larger isolated mini-grids covering a number of villages, e.g. 3,000 households. Both renewable and non-renewable projects will be eligible. Transaction advisory services are being recruited by MEM to establish procedures and to prepare investment proposals for up to four packages on a pilot basis. The typical grant per transaction (i.e., mini/micro-grid investment package) will be between US$300,000 and US$3,000,000 depending on the size of the mini-grid. 21 Small renewable power generation sub-projects, selling power to TANESCO grid, are not expected to require investment subsidies, as they are a least-cost investments, that should be commercially funded under the standard power purchase tariff. These sub-projects, however, will be enabled through the TEDAP project through: (i) adoption of standard power purchase agreements and tariff, and streamlined regulatory procedures, developed under the Project; and (ii) provision of matching grant support for technical assistance to overcome initial market barriers. 54 33. Detailed implementation arrangements, including grant types, grant amounts, eligibility criteria and monitoring/reporting arrangements will be described in Operating Guidelines. For non-GEF financed renewable energy activities, carbon finance will be sought. The first subprojects under the SPGD component are currently being analyzed by the Community Development Carbon Fund for possible support. 34. Project pipeline and readiness for implementation. The subprojects are demand driven, and cannot therefore be identified ex ante. The preparation studies have, however, identified a number of potential developers with subprojects that are likely to sign the Standard Power Purchase Agreements with TANESCO, and apply and be eligible for the project assistance for access expansion. In total, 20 subprojects have been identified, for which studies are available and promising. It is expected, however, that many more projects are at different stages of identification and development by private parties. Examples of the likely eligible subprojects in advanced preparation stage, with a private sector sponsor, are included in Box 1 (see above). A Transaction Adviser (currently in process to be contracted) will further assist in bringing the first projects to closure. Standard Power Purchase Agreements and Tariffs have been drafted and are in the process of being formally adopted by the Government and the utility. 35. Similarly, there is a high potential and interest of NGOs and communities in developing village micro-hydro schemes, which so far have not been concluded due to the lack of funding for this rural electrification modality. A pipeline of the first five village micro-hydro projects is under preparation. Component B.2 -- Sustainable Solar Market Packages (SSMP) 36. This subcomponent will be developed in remote rural areas, with a large share of dispersed population, outside TANESCO's main grid and other isolated grids where it is the least economic cost option. Based on the lessons leant from past experience in Tanzania (see Box 2 below), this subcomponent will finance two types of activities: 37. Sustainable Solar Market Packages (SSMP) ­ B.2.a consisting of supply, installation and provision of maintenance and associated services for solar photovoltaic (PV) systems for rural public institutions, including 5-year maintenance period (with an option to extend the maintenance contract) and provision of associated services (e.g. user training). The typical system sizes will be approximately 400 Wp for schools and clinics, 85 Watt peak (Wp) for staff houses and 60 Wp for street lights. The investment and the service provision will be implemented by private sector providers, with demonstrated experience in PV sales, installations and service provision, competitively selected through ICB or NCB procedures. The packages will include: (i) provision, installation, service and maintenance of PV systems to a number of pre-identified public institutions in defined geographical areas; and (ii) an obligation to commercially sell PV systems for households, businesses and private schools and clinics in the same geographical area (for commercial sales all SSMP contractors will be automatically eligible for grants under the subcomponent B.2.b; see below). The packages may be of varying sizes of US$0.1 ­ US$3 million to allow for participation of smaller local providers as well as larger international companies. First three indicative packages, prepared for the Rukwa region are described below: 38. Investments for SSMP will be implemented at: i. rural health centers and dispensaries meeting the energy needs for essential lighting, communications and key accessories and improved conditions for staff; ii. rural post-primary schools with a focus on meeting the energy needs for lighting for evening classes/homework and preparation of materials and administration by teachers, computers, communications, sciences and workshop activities and improved living conditions for teachers; 55 iii. other rural facilities may be included, such as police stations, street lighting, energy for water supply systems, community centers, ICT facilities etc. 39. Ownership of the facilities in which the PV systems are installed is a critical factor in determining sustainability. Local ownership that is directly tied to the beneficiaries provides strong incentives for good maintenance and stewardship. It is also necessary to ensure that owners will provide adequate funds for continued system maintenance and part replacement after the closure of SSMP contracts. In line with the decentralization reforms, health facilities will fall under the responsibility of districts. The Memorandum of Understanding (MoU), therefore, will be signed with the Ministry of Local Government. The secondary education facilities will remain the responsibility of the central government, and the MoU will therefore be signed with the Ministry of Education. The technical specifications have been developed in coordination with the sectoral institutions and follow international best practices. In the future, the local governments are also expected to provide co-financing for the investment portion of the systems, gradually replacing GEF subsidies. Box 2: Lessons learnt from the past PV program in Tanzania and SSMP The SSMP approach has been developed based on lessons learnt from the past PV projects in Tanzania: The Tanzania PV market has been in early-stage commercial development for about a decade, selling between 100-150 kW of PV per annum. The market has undergone slow, steady growth but like other small African PV markets, has not had the rapid growth characterized by the much more dynamic Kenya market. Traditionally in Tanzania, purchasing of solar equipment has been on a sectoral basis, the linkages to maintenance and after sales services have been weak and capacities have not been developed in the local economies for technical support. Procurement of PV system for public facilities and retail sales to households are typically handled by different supply companies in the same rural space. Sales for institutions, which dominate in terms of value and capacity, have been lumpy, sporadic and based on sectoral programs, while sales in the household market segment are low and not reaching the poor. PV systems installed in schools, clinics and other public facilities, often financed by official and donor project budgets, have had poor track records for sustainability, with inadequate attention having been paid to appropriateness of design and maintenance arrangements linked to local capacities for after sales maintenance and other services. The equipment suppliers to the household market have traditionally been operating with high prices and low volumes, with sales by agents in a few urban centres, with no significant development as yet of commercially based sales and services capabilities in rural areas. Certain progress has been achieved through UNDP and Sida-financed market development programs, which provides technical assistance grants to the solar service providers to establish retail and maintenance networks in rural areas. But relatively high system prices still restrict demand, and contribute to service providers' high operating costs as sales are spread out over large territory. The possibility of aggregating demand across market segments and areas to achieve sufficient volumes to sustain a rural infrastructure for sales and services has not been realized. The perceived "lack of market" among local and international players prevents investment in key growth areas. There is, however, important activity in some niches (city- based off-shelf, inverter power backup, NGOs), which can be built on in the development of a larger PV market. Also, rural incomes are increasing due to steady economic growth, foreign investment, stable political leadership and rapid development of key sectors such as sugar, tea, coffee, cashew and horticulture. The rapid growth of mobile phones in peri-urban and rural areas clearly demonstrate rural spending power. There are about six PV providers operating in the country, with modest but growing retail network. By bundling institutional, community and household applications in particular areas, SSMP approach addresses some of the key affordability and sustainability issues of the past PV projects: · SSMP creates a critical mass to induce reduction in system prices and operating costs; · SSMP approach buttresses the sustainability of the institutional systems by linking them with medium-term maintenance obligations, and capacity building for the local authorities and communities; · Bundling institutional and household applications will create a critical mass for the household market as well, allowing substantial increases in rural electrification in the remote areas with only modest subsidies. The SSMP operator will have an obligation to commercially sell a target number of household systems; and · SSMP operator will also be required to establish a rural outlet network which will help with trouble shooting and maintenance services support for the PV systems installed in the institutional facilities, and allow for further access expansion. In addition, the project will promote demand-side market aggregation through engaging: (i) major rural firms such as tea processors, sugar cane millers, coffee processors etc.; (ii) rural entrepreneurs, such as small businesses, tourism, ICT service providers; and (iii) microfinance institutions. 56 40. Subprojects for individual lighting systems for households and enterprises (including private schools and health centers) ­ B.2.b. The subcomponent will facilitate sustainable and affordable electricity service with PV systems (or any other modern lighting technologies, as appropriate) to individual households, rural businesses and private schools and clinics, through the provision of performance grants (established on a Wp basis ­ e.g. US$2-4 per Wp of installed capacity) and business/market development matching grants to the eligible service providers. The typical size of the systems is expected to be 14-60 Wp for households, and 60-400 Wp for micro enterprises. Smaller systems for poor households may receive higher subsidy per Wp. 41. Service providers, and associated supply chain, including local producers and micro finance institutions, will also be eligible for matching grants for business and market development. The project will support the development of commercial supply channels for PV systems both within and outside the SSMP areas, building on successful experiences of SIDA and UNDP projects. 42. In order to reduce system prices, the component will explore opportunities for market aggregation through: (i) rural entrepreneurs, such as small business, tourism, ICT service providers etc.; (ii) engaging with major rural firms such as tea processors, sugar cane millers, coffee processors etc. in partnership with commercial bank/MFI and PV suppliers to facilitate access of out-growers to PV systems for basic lighting; and (iii) SSMP contractors (who will have an obligation to commercially market PV systems to households and private businesses in the SSMP area, and will be also eligible for performance and matching grant incentives). In this context, particular attention will be paid to expanding low-cost lighting technologies (such as solar lanterns, LEDs etc.), which might be also eligible for grant support (per Operating Guidelines instructions). 43. Detailed implementation arrangements, including grant types, grant amounts, eligibility criteria and monitoring/reporting arrangements will be described in the Operating Guidelines. The SSMD subcomponent is also a part of the World Bank/IFC Lighting Africa Initiative. 44. Indicative SSMP Packages. GEF support for this component consist of a support of US$2 per Wp (on average) of installed PV capacity, amounting to an expected support of US$1,200,000 for institutional applications within SSMP approach, US$480,000 for businesses and other institutions, and US$320,000 for households. In addition, solar providers will be eligible for technical assistance through the matching grant window. 45. GEF support is expected to be phased out by the end of the project as: (i) reduction of the PV system prices is expected due to enhanced competition and increased volumes, as well as the targeted TA and facilitation of commercial channels with lower cost producers (e.g. in Asia); and (ii) increased co- financing from the local governments for institutional systems (see above). 46. The following Tables and Figure provide detailed information regarding the indicative SSMP packages to be supported by the Project, based on the first three packages prepared for the Rukwa region. 57 Table 14: SSMP Packages in the Rukwa Region Sumbawanga East *(no. of villages) Muze (13) Mtowiza (6) Lake Rukwa Sumbawanga Kipeta (7) Mwazye (9) Mpui (6) Sumbawanga West Matai (8) Laela (7) Kasanga Mwimbi (13) (12) Sumbawanga Central Sumbawanga East Sumbawanga West Sumbawanga Central Size of Number Total Number Total Number Total System Dispensaries 353 5 1,765 7 2,471 14 4,942 Dispensaries excl. Refrigerators22 102 2 204 5 510 2 204 Health Centers 748 0 0 2 1,496 3 2,244 Police Posts 122 3 366 2 244 4 488 Staff Houses 86 21 1,806 20 1,720 30 2,580 Secondary Schools 1,032 2 2,064 2 2,064 5 5,160 Dormitories 576 2 1,152 3 1,728 2 1,152 Public Lighting 63 78 4,914 63 3,969 99 6,237 Total N/A 113 12,271 104 14,202 159 23,007 Table 15: Projected SHS subsidies (based on average GEF subsidy of US$2 per Wp). Year 1 Year 2 Year 3 Year 4 Year 5 Total 14Wp 40Wp 14Wp 40Wp 14Wp 40Wp 14Wp 40Wp 14Wp 40Wp Sales 2389 286 2107 738 1771 501 1687 164 1411 78 Subsidy (USD) 83,625 17,142 73,747 44,277 61,987 30,063 59,057 9,814 49,392 4,673 433,777 The subsidy may be complemented with IDA resource (up to US$2/Wp) based on the market response. Table 16: Estimated costs for the first three packages (USD) Year 1 2 3 4 5 Institutional Systems 418,289 - - - - ga Upfront Maintenance 275,421 - - - - Sumb awan East SHS subsidies 33,901 39,547 29,473 21,890 17,499 Institutional Systems 853,684 - - - - ga al Upfront Maintenance 379,401 - - - - Sumb awan Centr SHS subsidies 36,495 42,311 32,438 25,786 19,376 Institutional Systems 537,545 - - - - ga Upfront Maintenance 296,402 - - - - Sumb awan West SHS subsidies 30,730 36,166 30,140 21,195 17,190 Total 2,443,579 118,024 92,051 68,871 54,065 Grand Total 2 776 590 22Dispensaries excluding system for refrigerator as these were already in place. 58 Table 17: PV Sector Sales Targets over the Project Period Type Number Average Wp Total Wp Official Institutions and street lighting 1,200 400* 480,000 Other Institutions, including businesses 600 200 120,000 Households 10,000 20 200,000 Total 800,000 * The average Wp for institutions only and does not include staff houses and street lighting, which are additional to this target. 47. Project pipeline and readiness for implementation. The first three SSMP packages have been finalized by the consultants and submitted to MEM on August 31, 2007. The bidding documents are ready for further processing. Component B.3: Technical Assistance for Offgrid Electrification and Small Scale Renewable Energy 48. The project will provide technical assistance to REA and other stakeholders (MEM, EWURA, service providers, financial institutions, NGOs, and communities). This technical assistance will be used primarily for institutional strengthening of Government institutions (REA, MEM, and EWURA), market assessment and data collection, pipeline development, renewable energy assessments, development of rural electrification strategies and programs, monitoring and evaluation, awareness campaigns and productive use facilitation, and training and operating costs. The main purpose of the technical assistance will be to support the component objective to establish a functioning institutional and regulatory framework for commercially oriented, sustainable service delivery for rural electrification and small renewable power projects that can be scaled up. The TA will therefore concentrate on all types of barriers to successful scale-up of commercially oriented rural electrification and renewable energy, including policy, regulatory, institutional, financial, and capacity. Table 18: Technical Assistance for Offgrid Component (in US$ millions) Total IDA GEF Government Donors Pipeline development SSMP preparation 0.50 0.50 Village micro-grid development 0.30 0.30 Renewable energy assessment/GIS development 0.30 0.30 Advisory services to REA 2.20 0.20 0.30 1.70 Awareness programs and productive uses 0.80 0.30 0.50 Monitoring and evaluation 0.70 0.30 0.30 0.40 Training MEM/REA (including fiduciary and 0.70 0.10 0.60 safeguards) REA goods 0.70 0.40 0.30 Operating costs 2.00 0.30 1.70 0.20 Total 8.20 1.00 2.00 2.00 3.20 49. Productive uses. Special attention will be given to educate the users about the benefits of productively using the electricity provided by the new systems. This applies in particular to the village based systems and the stand-alone systems for entrepreneurs and households. A structured awareness creation program will be implemented to improve the general awareness of the benefits of electricity as well as a more specific program for the new users of electricity (through the service providers and NGOs). The awareness program will explain the higher quality end-uses that can be created through the efficient use of electricity. In addition, promotion of productive uses will be one of the activities eligible for support from the matching grant program of the project. 50. Annex 6 provides further details on the implementation arrangements of the component and definition of the performance matching grants. 59 Component C: Sectoral Technical Assistance (US$3.2 million) 51. Training Needs Assessment for TANESCO ­ C.1.a (US$80,000). The project will finance an assessment of the needs of capacity and competence for TANESCO's Staff. Not unique in parastatal organizations, TANESCO is lacking a comprehensive and systematic approach to training and in general, to develop technical and management competence in its staff. The consequence is the ad-hoc selection of personnel for ad- hoc programs, courses and conferences offered from time to time by international organizations and bilateral donors. Thus this approach, while it may benefit individual staff members, is rather inefficient to bring the needed capacity and competence to the roles and functions of TANESCO. TANESCO needs to undertake a planning exercise with the aim to develop a comprehensive training program for its staff and units. To make such a program an active instrument in the capacity development of TANESCO, it will be necessary to build it on a training or competence development policy. The policy will direct all training activities in TANESCO and guarantee the fit between individual competence development efforts and the need of competence in the functions of TANESCO. It will take into account introduction of "performance contracts" between the staff at all levels and their superiors. To speed up the process of capacity building at TANESCO, it is in the process of identifying parallel financing for this subcomponent. If such funds have been identified, the allocated amounts for this subcomponent may be used to finance the capacity building activities (see paragraph below). 52. Implementation of the Capacity Building ­ C.1.b (US$620,000). Having established the training needs for the staff, the project will finance technical assistance for implementation of the agreed institutional capacity development. The project will support training and capacity building activities for TANESCO staff to improve the managerial skills required to enhance the efficiency of various business processes, as well as design and supervision activities to improve TANESCO's institutional capacity to implement the project components. As part of this exercise, two vehicles will also be provided to facilitate project implementation, which will later be transferred for use of customer service centers. 53. Legal, technical, financial, environmental and social advisory services for the next power generation project (private or public) ­ C.2 (US$2.5 million). This component will provide international support to MEM to support the development of generation and transmission projects for TANESCO. 54. During the recent past, Tanzania has had varied experiences with the private sector. One thermal power project has been deemed as an unfair and non-equitable transaction (IPTL), the other transaction (Songo Songo) has been successful but was unable to mobilize any private lending ­ it was largely financed by private equity/IDA and EIB. Learning from IPTL and Songas developments, it is expected that the next least cost power generation project will be structured to maximize private or public sector debt financing to make available long-term cheap and reliable power to Tanzania and possibly for other regional off takers. 55. Development of a fair and equitable private transaction requires high quality legal, financial, technical, environmental and social advice to developing countries. In house capacity to negotiate key project agreements is limited in Tanzania, and often for lack of resources, no or limited advice has been made available to in developing such projects. Development of private projects, and especially hydropower, in developing countries is a challenge; there are a handful of such hydro projects in the developing world that have reached financial close. In all of these cases, high quality advisors were made available to the government to enable a fair transaction and most importantly timely close of the financial transaction. 60 Annex 5: Project Costs TANZANIA: Energy Development and Access Expansion Project 1. The following tables provide an overview of the project costs and financing plan. In addition, they provide a detailed breakdown of the project costs, and expected financing by Project Components and subcomponents. Project Cost By Component and/or Activity Local Foreign Total US $million US $million US $million Component A ­ Ongrid Investments Transmission & Distribution System Investments 5.90 43.40 49.30 Distribution System Upgrade Investments 0.30 4.70 5.00 Ongrid Access Expansion ~ 25,000 new customers 0.50 9.50 10.00 Commercial and Institutional Capacity Development 0.80 7.25 8.05 Technical Assistance for Implementation of Ongrid Components 0.00 4.33 4.33 Component B ­ Offgrid Investments Small Power Generation and Distribution (SPGD) 17.10 15.60 32.70 Sustainable Solar Market Packages (SSMP) 8.64 9.76 18.40 Technical Assistance Provided to REA 4.19 4.31 8.50 Component C ­ Sectoral Technical Assistance Provided to TANESCO 0.00 0.70 0.70 Provided to MEM 0.00 2.50 2.50 Total Baseline Cost 37.43 102.05 139.48 Contingencies (and Unallocated) 0.00 9.12 9.12 Total Project Costs* 37.43 111.16 148.60 *Excludes taxes and duties on goods and works, but includes taxes on consultant services. *Donor and Private Sector Financing is expected to materialize during the implementation of Component B of the Project supported by both IDA and GEF as parallel and leveraged financings, respectively. Component A - Ongrid Investments A.1 - Transmission & Distribution System Investments Project Cost By Activity Quantity Amount (US$) Transmission network investments Substations in Dar es Salaam 5 11,671,000 Transmission Lines in Dar es Salaam 4 5,826,000 Substation at Kilimanjaro International Airport (KIA) 1 5,398,000 Subtotal 22,895,000 Distribution network investments New substations in Dar es Salaam 6 8,080,000 Rehabilitation of 33/11 kV substations in Dar es Salaam 5 2,440,000 New Substations in Arusha and Kilimanjaro 8 9,120,000 33 and 11 kV OHL in Dar es Salaam, Arusha and Kilimanjaro - 6,767,425 Subtotal 26,407,425 Total 49,302,425 61 A.2 - Distribution System Upgrade Investments Project Cost By Activity Quantity Amount (US$) Low Loss, High Voltage Distribution System in a designated area - 5,000,000 Total 5,000,000 A.3 - Ongrid Access Expansion Project Cost By Activity Quantity Amount (US$) Connection of 25,000 new customers (supply and install, incl. network extensions) 25,000 10,000,000 Total 10,000,000 A.4 - Commercial and Institutional Capacity Development Project Cost By Activity Quantity Amount (US$) Replacement of 60,000 credit meters by prepaid meters (supply and install) 60,000 3,000,000 Centralized Call Center for Dar es Salaam 1 200,000 High Value Customer Cell ­ HV, LV Customers, Other Large Customers 1 100,000 Installation of Solid State Meters, with Remote Metering, for 1,800 customers (T2 and T3 as 1,800 2,200,000 well as MV distribution Feeders) Incorporation of a Commercial Management System (CMS) to support commercial functions; a Technical Service Management System (TSMS) to attend customers' claims; - 2,550,000 and a Resource Management System (RMS) to support centralized functions. Total 8,050,000 A.5 - Technical Assistance for implementation Project Cost By Activity Quantity Amount (US$) Consultancy Services for planning and design of CMS, TSMS and RMS systems - 225,000 Consultancy Services for Marketing Department, including the Centralized Call Center and High Value Customer Cell - 125,000 Consultancy Services for Distribution System Upgrade Investments, Connection of new - 480,000 customers and Metering Consultancy Services for Training and Supervision of Transmission and Distribution System - 3,500,000 Investments Total 4,330,000 Component B - Offgrid Investments Total Costs Part Component IDA (US$) GEF (US$) (IDA & GEF Financed) Small Power Generation Distribution B.1.a Grid-Connected generation 0 600,000 600,000 B.1.b Grid-Connected mini-grid 2,000,000 0 2,000,000 B.1.c Green mini/micro-grid 5,000,000 1,600,000 6,600,000 Subtotal 7,000,000 2,200,000 9,200,000 Sustainable Solar Market Development B.2.a Sustainable Solar Market Packages for public institutions 6,400,000 1,200,000 7,600,000 B.2.b Households/micro-enterprises 1,600,000 1,100,000 2,700,000 Subtotal 8,000,000 2,300,000 10,300,000 Technical Assistance B.3 Technical Assistance (excluding Operating Costs) 700,000 2,000,000 2,700,000 B Technical Assistance (Operating Costs) 300,000 0 300,000 Subtotal 1,000,000 2,000,000 3,000,000 Offgrid Component 16,000,000 6,500,000 22,500,000 62 Component B ­ Total Costs and Parallel/Leveraged Financing Plan for GEF-related Activities (US$) Part Component Total Costs IDA GEF GOT Donors Priv.Sector* Small Power Generation Distribution B.1.a Grid-Connected generation 18,900,000 0 600,000 0 0 18,300,000 B.1.b Grid-Connected mini-grid 4,100,000 2,000,000 0 500,000 0 1,600,000 B.1.c Green mini/micro-grid 9,700,000 5,000,000 1,600,000 1,000,000 0 2,100,000 Subtotal 32,700,000 7,000,000 2,200,000 1,500,000 0 22,000,000 Sustainable Solar Market 0 0 0 0 0 0 Development Sustainable Solar Market Packages for B.2.a 10,100,000 6,400,000 1,200,000 2,500,000 0 0 public institutions B.2.b Households/micro-enterprises 8,300,000 1,600,000 1,100,000 500,000 0 5,100,000 Subtotal 18,400,000 8,000,000 2,300,000 3,000,000 0 5,100,000 Technical Assistance 0 0 0 0 0 0 Technical Assistance (excluding B.3 6,200,000 700,000 2,000,000 300,000 3,200,000 0 Operating Costs) B Technical Assistance (Operating Costs) 2,300,000 300,000 0 2,000,000 0 0 Subtotal 8,500,000 1,000,000 2,000,000 2,300,000 3,200,000 0 Offgrid Component 59,600,000 16,000,000 6,500,000 6,800,000 3,200,000 27,100,000 * Private Sector leveraged financing Component C - Sectoral Technical Assistance Sub- Implementing Amount Project Cost By Sub-Component Component Agency (US$) Training Needs Assessment for TANESCO C.1.a TANESCO 80,000.00 Implementation of Capacity Building Needs C.1.b TANESCO 620,000.00 Legal, Technical and Financial Consultancies for Power Generation Project C.2 MEM 2,500,000.00 Total 3,200,000.00 63 Annex 6: Implementation Arrangements TANZANIA: Energy Development and Access Expansion Project Component A: Grid-related investments 1. Implementation will be carried out through a team formed within TANESCO, so that various activities under the Project are mainstreamed in terms of identification, implementation, and ownership. Hence, a separate PIU is not contemplated and it is proposed that the project team will be an integral part of the Department of Projects of TANESCO, which is mandated to identify, plan and execute all investments. This is in line with the current thinking in the Bank to move away from project specific stand alone PIUs. However, TANESCO itself does not have a sustained track record of implementing Bank projects. Implementation support is required in all areas of preparation, evaluation, and award of bids, supervision of execution, procurement and fiduciary diligence as well as compliance. Hence, it is proposed that the project will include support to design and supervision of the implementation of the components as well as capacity building in relevant areas. The project implementation team will discharge a monitoring and coordinating role for implementation of this component and will also collect base line data, develop monitoring indicators and evaluate the developmental impact of the investments. 2. TANESCO's General Manager, Transmission will have overall responsibility for the implementation of the project. The project will be implemented by the existing dedicated project team under the leadership of the Senior Manager, Strategic Planning and Projects, and under the guidance of the General Manager Transmission. Figure 1: TANESCO Organizational Structure Board of Directors Managing Director Chief Internal Audit Company Secretary Human Resource Chief Financial Officer Chief Information Technology Officer GM GM GM Generation Transmission Marketing SM system SM Marketing SM strategic SM Hydro SM Thermal control & SM Zonal planning and Generation Generation and Customer Managers Projects transmission service 3. The Senior Manager, Strategic Planning and Projects will coordinate and manage project activities and interact across all departments in TANESCO and with the Ministry of Energy and Minerals, the Ministry of Finance and IDA. The Manager, Procurement will be responsible for procurement and will report to the Chief Financial Officer. Financial aspects will be the responsibility of the Manager Finance, who will also report to the Chief Financial Officer. The General Manager, Marketing will be accountable for monitoring the operation through TANESCO's zonal and regional offices. The Chief Internal Auditor will be in charge of project auditing and will report directly to the Managing Director. 64 4. A comprehensive capacity assessment of TANESCO's procurement and financial management has been carried out, and provisions have been made under the TA component of the Project to fund any recommendations or action plans arising from this capacity assessment. Consultants have been employed to prepare detailed bidding documents and to assist with construction supervision. TANESCO will produce quarterly progress reports and performance monitoring indicators on key financial and operational indicators Component B: Offgrid Investment Framework and Pilot Investments 5. Overall Implementation Arrangements: Component B will be implemented by the Ministry of Energy and Minerals. However, given one of the component objectives is to support the newly established Rural Energy Agency (REA), certain implementation responsibilities may pass to REA once the institution is fully staffed and its capacity (including technical, procurement and safeguards issues) is assessed and found satisfactory ­ see paragraph 9 below on the transition to REA. Detailed implementation arrangements will be specified in the Operating Guidelines. 6. Ministry of Energy and Minerals as the implementing agency: The component implementation will be mainstreamed into the MEM structure, without the necessity to create a Project Implementation Unit. The component implementation will be placed under the responsibility of the Commissioner for Energy and Petroleum Affairs, who will be also the Bank's official counterpart for the project at the working level. Following a positive experience established under the implementation of Sida trust fund, a coordinating team will be established, led by the head of the department of energy, and in addition include a project coordinator, a technical specialist, and an accountant. The team will call upon assistance from other departments under normal operational procedures of the Ministry. This includes involvement of the Ministerial Procurement Management Unit (MPMU) and the Ministerial Tender Board (MTB). In addition, to exploit experiences built under the Songo Songo project in the financial management area, the Songo Songo PMU accountant will provide supervision and guidance to the Coordination Team accountant. The team will also rely on existing expertise in the Ministry and NEMC for environmental and social issues. The project TA will provide funds to further enhance the Ministry's staff capacity in fiduciary, environmental, and social areas. The organizational structure is illustrated below. Figure 2: Organization Structure ­ MEM/REA to Implement Component B Ministry of Energy & Minerals Permanent Secretary Energy Department Commissioner for Energy and Petroleum Affairs Ministerial Procurement Ministerial Tender Management Unit Board Rural Energy Coordination Team Working Group on Small Working Group Ass. Commissioner for Energy Coordination Team Development Power Development 7. Two ad-hoc working groups will assist the Ministry and REA with the implementation of the Offgrid Component: (i) the Rural Energy Working Group (REWG); and (ii) the Working Group on Small Power Development (WGSPD). The Rural Energy Working Group (REWG) will advise the Ministry on an as needed basis on rural energy related issues but in particular on the Sustainable Solar Market Packages (SSMP). This REWG has been operational for several years. MEM is the host and chair for 65 meetings of REWG. The REWG consists of members from among: Ministry of Health and Social Welfare; Ministry of Education and Vocational Training; Regional Administration and Local Government; Vice Presidents' Office (NEMC); Ministry of Planning, Economy and Empowerment; Ministry of Public Safety, Ministry of Community Development, Gender and Children Affairs, TANESCO, TPDC and MEM. The Working Group on Small Power Development (WGSPD) will advise the Ministry on the Standardized Small Power Purchase Agreements (SPPAs) and Standardized Power Purchase Tariffs (SPPTs). It will act as the focal point in matters related to development of Small Power Plants (SPPs) and maintain/update a database of prospective SPPs, their costs, advise on, and coordinate review processes for standardized Small Power Purchase Agreements and Small Power Purchase Tariffs. MEM is the host for meetings of WGSPD. The WGSPD consist of members from: TANESCO; University of Dar es Salaam; Tanzania Private Sector Foundation; EWURA (as observer); Rural Energy Agency; EWURA Consumer Consultative Council and Ministry of Energy and Minerals. 8. Tanzania's Parliament in 2005 approved a Rural Energy Act, which established a Rural Energy Agency (REA), with the purpose to lead development of rural energy access initiatives and to administer a Rural Energy Fund (REF), which will finance such initiatives. REA and REF are governed by a Rural Energy Board, comprised of members of the Government and private sector. Box 3: REA's functions There are three broad functional areas where the REA will be active: (i) Policy and strategy related functions; (ii) Project related functions; and (iii) Administrative functions. Policy and strategy related functions: The REA will have a role in developing strategy to implement Government rural energy policy, including: a. Policy advice: Advise the Minister responsible for Energy on policy matters related to rural energy provision; b. REF procedures and guidelines: Develop procedural guidelines, selection criteria and terms and conditions, and subsidy criteria for the application of REF; c. Facilitate coordination of the rural energy program activities with other rural development activities; d. Training and capacity building to upgrade skills inside the organization as well as disseminating information and skills to key stakeholders; e. Development of a network of allied partners: develop a network of partners to act as intermediaries or facilitators to ensure a wider outreach. Project related functions: Project identification and planning: This includes awareness raising, promotion of project concepts, and early-stage identification of potential projects, the preparation of socio-economic baseline material, market surveys, load forecasts, and indicative planning: f. Project facilitation: Working with stakeholders to conceptualize projects; facilitating contact between communities and developers, and with project financiers' and assisting district and other rural government officers to conceptualize and engage in rural energy project development. g. Technical assistance to project developers: provision of support for project preparation activities, such as surveys, pre- feasibility and feasibility studies and general business development services. h. Project appraisal: This includes the appraisal of applications made to the REF and preparation of recommendations on whether support should be provided, and the level of this support. i. Project supervision, ensuring that milestones and targets are being met, and recommendation of interventions and possible solutions should problems arise. j. Monitoring and evaluation. Administrative functions: Such functions will include: k. Reporting: Preparation of annual reports for submission to the Ministry and other stakeholders. l. Trust Agent selection: Select the Trust Agent for the REF, based on a competitive selection process with clear set of selection criteria. m. Procurement: Competitively procure goods, works, and services as per Public Procurement Act of 2004. n. Board Secretariat: Keep all records of the affairs and the meetings of the Board and follow up to ensure the proper implementation of Board decisions and directives. o. Prepare Annual budget and work plan and Establish and maintain a Rural Energy Database. p. Auditing: Ensure that the accounts of the REA and REF are audited. q. Staff and office management. 66 9. The REA and REF are in the process of becoming operational. Top management (Director General and Chief Financial Officer) were appointed and the recruitment of other key staff is in process. The Board also has been appointed. Box 3 provides a description of REA's functions. As a new institution, the REA faces a double challenge due to simultaneous needs to develop a robust rural access strategy, combining all current fragmented elements of grid and offgrid expansion, and demonstrate rapid results and scale-up. Hence, the project is designed such that one of the primary objectives of component B is to assist GoT in building implementation capacity of the Rural Energy Agency (REA). 10. Transition to REA: It has been agreed with the Government that certain implementation responsibilities may be transferred from MEM to REA once REA capacity is established and demonstrated. To that effect, the MEM and REA will sign the Memorandum of Understanding (MoU), which will specify the functions transferred, application of the Operating Guidelines, reporting requirements and transitional arrangements. The key elements of the MoU will be included in the Operating Guidelines. The transfer to REA will be conditional on carrying out satisfactory technical, procurement, and safeguards capacity assessment, and MoU signing. The transfer will not affect the financial management arrangements and flow of funds, which will continue to be managed by MEM through the IDA and GEF Special Accounts. The above-mentioned working groups will also assist REA in the implementation, once the transfer is executed. 11. MEM/REA will execute the project with other parties and will be responsible for ensuring good governance in implementing the project. MEM/REA will be responsible for recruiting consultants and procurement of goods, works, and services, award of grants and administering the day-to-day responsibility of monitoring progress of the entire project. MEM shall be responsible for administering IDA and GEF Special Accounts and for ensuring that accounts are audited and audited reports are distributed to relevant authorities and for overall oversight and coordination of the project implementation. 12. Implementation Arrangements for Sub-components: The detailed implementation arrangements for each subcomponent will be established in the Operating Guidelines (OG), which will be a condition of Effectiveness for the Project. The following sections describe key implementation principles and processes, which will be detailed in the OG. 13. The offgrid component will finance three subcomponents: (i) Small power generation and distribution subprojects; (ii) Sustainable Solar Market Packages; and (iii) Technical Assistance. The following table provides an overview of these subcomponents. Components & Activity Subcomponent B.1. Small Power Generation and Distribution subprojects (SPGD) B.1.a Grid-connected renewable subprojects; B.1.b Grid-connected mini-grid subprojects; B.1.c Greenfield, isolated mini-grid subprojects. B.2 Sustainable Solar Market Development B.2.a Sustainable Solar Market Packages (SSMP) for Public Institutions B.2.b Sub-projects for individual lighting systems for households and enterprises B.3 Technical Assistance and Operating costs for Component B 67 14. The project will be implemented through: a. provision of grants to the private sector (including NGOs and cooperatives) to partially offset investment costs of new service connections (through performance grants), and for pre-investment studies, business and market development, including productive uses (through matching grants); b. supply, installation and provision of maintenance and other associated services for the Sustainable Solar Market Packages, as well as the provision of goods, consultant services and training for the technical assistance subcomponent, and related operating expenses. 15. Performance grants: Performance grants will be used to partially offset investment costs of subprojects. Sub-projects under B.1.b, B.1.c, and B.2.b will be eligible for performance grants. The eligibility criterion, grant amounts and thresholds, standard grant agreements, fiduciary and safeguards requirements, performance targets, and reporting, monitoring, and verification procedures will be established in the Operating Guidelines. As performance grants are set on an output-basis (per service connections or Wp), no specific counterpart is required from the beneficiaries. 16. The performance grants for mini-grid subprojects will be set on a per-connection basis ­ the grant amount per connection will be specified in the Operating Guidelines per each project type. The sizes of the total grant will vary, depending on the size of the subprojects (number of connections). The per- connection grant amounts will be periodically adjusted in the Operating Guidelines based on a market response and updated cost estimates. The per-connection grant amounts will be set below the estimated connection costs to promote efficiency (subproject developers will have to cover the remaining portion of costs). IDA performance grant will be eligible for all types of mini-grids. GEF performance grant will be eligible only for greenfield mini-grids with renewable power generation to provide incentives for renewable energy in the offgrid areas. 17. The performance grants for the individual solar systems under the category B.2.b will be set a Watt peak basis (e.g. US$2/Wp). 18. Matching grants: Matching grants will be available for all subproject developers (subcomponents B.1, B.2.b) including microfinance institutions that fulfill eligibility criteria set in the Operating Guidelines. The matching grants will cover only a part of the supported activity (the percentages and overall thresholds will be established in the Operating Guidelines for different categories of the matching grants). The beneficiaries will be required to contribute a specified percentage of the costs. In general, the matching grants will be available for three types of activities: (i) pre-investment studies; (ii) business and market development; and (iii) post-investment activities, such as promotion of productive uses. 19. The SSMP for public institutions (B.2.a) will be implemented through standard procurement methods, including procurement of goods (including installation and maintenance, consulting services, services other than consulting, and training). The packages will be competitively awarded through the international or national competitive bidding (to the lowest-cost bidder). The contractors will be private sector providers, with demonstrated experience in PV sales, installations and service provision. System specifications and contractor qualification criteria will be included in the bidding documents. The contractors will deliver, install, and maintain (for a minimum of 5 years) the specified PV systems in the specified public institutions. Memorandum of Understanding will be signed between the Ministry of Energy and Minerals and the Ministries responsible for the beneficiary public institutions. This MOU will stipulate the conditions of transfer of goods from MEM to the respective public beneficiary institution, and the obligations of these beneficiary institutions to maintain the system after the closure of the SSMP contract. The SSMPs for public institutions will be co-financed between IDA and GEF. GEF 68 will finance about US$2 per Wp of installed systems. IDA will finance the remainder of the contract (relating to costs resulting from the ICB or NCB). 20. Technical Assistance: Technical Assistance subcomponent will be implemented through: a. Consultant services and training; b. Training; c. Goods (computers, vehicles, office equipment); and d. Incremental operating costs. 21. Figure 3 provides an overview of the overall implementation arrangements for the project. Figure 3: Offgrid Component Implementation Arrangements World Bank Designated Account A (IDA) Designated Account B (GEF)Finances Sub- Finances Sub- components: components: B.1 renewable B.1.b MEM generation only B.1.c B.2.a average $2 per B.2.a Wp B.2.b B.2.b average $2 per B.3 consulting services, REA Wp goods, training, operating B.3 consulting services expenses Initiative Initiative MEM/REA initiates the process, identifies MEM/REA receives applications from the activities, designs procurement documents, private sector for performance and matching procures: grants for SPGDs and PV systems for private SSMPs (goods) entities in rural areas TA consulting services, goods, training, operating expenses REA evaluates proposal according to criteria established in the Operating Guidelines and signs Grant Agreements with successful applicants. 22. Monitoring, verification and evaluation of Sub-components: Given that a large part of the component resources will be passed to the private sector through a performance-based mechanism, a robust monitoring and verification mechanism needs to be developed. The TA for such a mechanism will be provided through the proposed project, and parallel SIDA financing. The key elements of this mechanism will include: (i) establishment of clear outputs, disbursement schedule, and reporting requirements in the contracts and grant agreements; (ii) verification procedures by MEM/REA of compliance with agreed outputs; and (iii) contracting of annual independent technical audit to verify compliance of sub-contractors with their contractual obligations. The detailed arrangements for monitoring and verification will be established in the Operating Guidelines. 23. In addition, data will be collected throughout the project life (including household surveys) for continuous monitoring and evaluation of project implementation and progress towards achieving 69 intermediate and final outcomes, which will be used for fine-tuning of the design throughout its implementation and compilation of lessons learnt for the future operations. Component C: Technical Assistance 24. Implementation arrangements for capacity building for TANESCO will follow the general arrangements for the on-grid component; and the capacity building for MEM/REA will follow the general arrangements for the offgrid component (Component B). Other Implementation Arrangements 25. Institutional Strengthening and Capacity Building: The responsibility for this project will rest with MEM/REA and TANESCO. The MEM/REA and TANESCO will provide technical oversight for technical assistance for the management of the overall program including deployment of technical assistance and capacity building support. Consultants will be contracted to assist MEM/REA and TANESCO steer the implementation of the project. 26. Governance Framework ­ Fiduciary Oversight and Remedial Measures: The implementation arrangements are complemented by essential financial management and procurement arrangements for the project as detailed in Annexes 7 and 8. The MEM and TANESCO finance departments will be responsible for managing the financial affairs of each respective project component. They will, among other things, be responsible for ensuring compliance with the financial management requirements of the Bank and the Government, including forwarding the quarterly unaudited Interim Financial Reports and audited annual financial statements to IDA. 27. Monitoring and Evaluation: Monitoring and evaluation of results and indicators will be done on a cluster basis as described in Annex 3. Regardless of where the data collection occurs, care should be taken not to duplicate systems of monitoring in the different organizations. Therefore, an effort will be made to make full use of existing survey instruments for monitoring and if possible for impact evaluation (the project will seek to influence the design of existing survey instrument such as the Tanzania Enterprise Survey and the National Panel Survey by suggesting additional and improved questions on electricity service). The project monitoring and evaluation (M&E) component is expected to evaluate the economy wide benefits that are expected to result from improved electricity service as well as the impact on household welfare of those that will be newly connected to the grid. The TA component should provide resources to ensure adequate monitoring and evaluation of outputs, outcomes, and impact of the electrification activities. This activity is particularly important in Tanzania, given that past rural electrification interventions in Tanzania did not pay sufficient attention to baselines and impact assessments. 28. To improve the design of future operation, it will be necessary to start collecting systematically information on: (i) baseline, including current energy expenditures and willingness to pay; (ii) outputs, including connections, service quality, adequate maintenance, customer satisfaction and key factors affecting achievements of desired outputs (such as what are the constraints to reach higher connection rates in electrified areas); and (iii) impact of rural electrification programs on household level (standards of living, income generation activities, etc.) and institutional level (improved education, health services etc.). The proposed methodology will be mainstreamed to all rural energy activities of the newly established Rural Energy Agency and TANESCO. Given the relative novelty of the impact evaluation approaches, the Bank has requested additional resources from Nordic Trust Fund (NTF) to cover the design of the impact evaluation, including methodology, surveys, and a workshop with REA. Additional TA will be sought for implementation and for capacity building of local M&E and survey consultants. 70 Annex 7: Financial Management and Disbursement Arrangements TANZANIA: Energy Development and Access Expansion Project 1. The financial management (FM) assessment was carried out at TANESCO and MEM in June- July 2007. The assessments draw on the following reviews: (a) 2006 PEFA; (b) FM performance of two IDA-financed projects implemented by MEM and TANESCO; and (c) implementing agencies statutory audit reports. 2. The various public financial management (PFM) assessments carried out in the past six years reveal that the GoT has taken significant steps to improve its PFM systems and is currently regarded as satisfactory. Significant progress has been made to ensure that the risks associated with lack of clear rules and regulations have been reduced. In addition, information that is more useful is now provided in the annual accounts. The timelines of financial reporting have improved with all the MDAs submitting the annual financial statements within the statutory period. The GoT continues to strengthen the capacity of accountants and auditors through training and through recruiting additional qualified accountants and auditors. Capacity building also includes strengthening the national audit office to become independent and use modern auditing techniques. The country's overall fiduciary risk is assessed as Modest. 3. The existing TANESCO and MEM structures and systems will be used to record and account for project funds. More specifically, the agency's own financial management systems ­ applicable financial laws, rules, and procedures in terms of accounting and reporting, planning and budgeting, and internal, and external auditing ­ will be used to account for project funds. 4. Risks regarding financial management during implementation (for which appropriate risk mitigating measures have been identified in Annex 7) include: (i) ineffective government internal control systems; (ii) weak financial health of TANESCO as highlighted in 2006 TANESCO's audited accounts; and (iii) challenges faced by TANESCO with its general accounting software and in particular, the materials management module which has resulted in delays in the submission of audited accounts. 5. The overall Government public financial management system is assessed as Modest. MEM and TANESCO financial management risk is assessed as Modest. (see risk assessment & mitigation table below). 6. There are no project audits outstanding for this sector. 7. Country Issues and Risks. The various PFM assessments carried for the last six years revealed that the Government of Tanzania has taken significant steps to improve its public financial management system and is regarded as satisfactory. Significant progress has been made to ensure that the risk associated with lack of clear rules and regulations has been reduced. In addition, information that is more useful is now provided in the annual accounts. The timelines of financial reporting has improved with all the Central Government ministries and local government authorities submitting the annual financial statements within the statutory period. For the last two years (FY05 and FY06), NAO submitted government audit report within the statutory period. Government continues to strengthen the capacity of accountants and auditors at the MDAs and LGAs through various training programs. This includes recruitment of additional qualified accountants and auditors. This also includes strengthening NAO to become independent and use modern audit techniques. The overall Government public financial management system is assessed as Modest. 71 8. Despite the above efforts taken to reform government PFM, challenges remain to ensure effective, transparency, and accountability of the public funds; more specifically, strengthening of the oversight bodies (PAC and LAC), Audit Committees, and internal controls at all levels. 9. With a number of development partner-assisted initiatives, such as the PFMRP, LGRP, ATIP, and LGSP, the government is working to rapidly enhance the financial accountability framework to mitigate fiduciary risks in public expenditure management; achieve economy, efficiency and effectiveness in the use of public funds; enhance transparency and accountability; and enhance staff capacity in public financial management. 10. Risk Assessment and Mitigation: The table below summarizes the financial management risks relating to the program as well as the necessary mitigating measures. Risk Risk Rating Risk Mitigating Measures Incorporated into Residual Condition of (pre- Project design Risk Rating Negotiations, investment) (post- Board or investment) Effectiveness Inherent Risk Country level: M The government is strengthening the oversight L Funds may not be bodies (NAO and Public Accounts Committee) used in an efficient including the internal audit functions by providing and economical training. These will therefore ensure better follow- way. up of internal and external audit reports by these functions. The PFM systems are reviewed and monitored during the annual PEFAR and PFMRP reviews. In addition, fiduciary risks are reviewed and monitored during the annual PEFAR mission. Implementing M Both MEM and TANESCO have internal audit L Entity: units and Audit Committees in place. These will Funds may not be play an oversight role in ensuring that the project used in an efficient funds are used for intended purposes, and economical accountability and value for money is achieved. way. Also follow-up on the implementation of the recommendations arising from the annual audit report and internal audit reports. Annual external financial audit will include procurement audit. Project Level: L Both Songo Songo Gas Development and L Funds may not be Emergency Power Project were satisfactorily used in an efficient implemented and received clean audit reports and economical through out the implementation period. way. Overall Inherent M Risk Control Risk Planning & L Medium Term Expenditure Framework (MTEF) L Budgeting: planning and budgeting process will be applied and will include project disbursement requirement. Accounting: M MEM - satisfactory accounting systems in place L, with Accounting TANESCO has had challenges with its iSCALA Satisfactory Policies, Procedure, accounting package. A company wide IT review is implementation and Information currently in progress. Part of the project funds will of IT related Systems. be allocated to finance the new IT infrastructure. investments This will include update of the current accounting software. Staffing: L Adequate capacity in terms of internal auditing L Will be 72 Risk Risk Rating Risk Mitigating Measures Incorporated into Residual Condition of (pre- Project design Risk Rating Negotiations, investment) (post- Board or investment) Effectiveness Lack of adequate function exists in MEM and TANESCO. monitored as qualified internal part of project auditors, external implementation auditors and and support accountants. could be contemplated under Component C.2 Internal Control: M Both MEM and TANESCO have internal audit M units and Audit Committees in place. These will play an oversight role in ensuring that the project funds are used for intended purposes, accountability and value for money is achieved. Also, follow up on the implementation of the recommendations arising from the annual audit report and internal audit reports. Funds Flow: L Limited instances of delays have occurred in L Delays in release of releasing funds. funds by donors / Government. Financial S TANESCO - A company wide IT review is M, with Development Reporting: currently in progress. Part of the project funds will Satisfactory of sample of Delay in the be allocated to finance the new IT infrastructure. implementation IFRs is a submission of This will include update of the current accounting of IT related Negotiation annual financial software. investments Condition statements. M MEM will coordinate and consolidate the IFRs and Progress Reports. Samples of the formats will be Delay in the detailed in the program financial management submission of addendum and will be agreed upon during quarterly Interim negotiations. Financial Reports (IFRs). External Audit : M There are ongoing efforts to strengthen NAO by M Inadequate audit way of capacity building (including more training, capacity and hiring of additional qualified auditors, putting in techniques. place of an effective organizational structure) under the PFMRP. This is aimed at enabling the NAO to use modernized audit techniques and to focus more on value for money audit. A public audit act with the aim of further strengthening the NAO will be submitted to the Parliament in November 2007. Overall Control M Risk Overall Risk M Assessment Risk rating: H (High Risk), S (Substantial Risk), M (Modest Risk), L (Low Risk) 11. The Project financial management is strengthened by the following features: · The Government continues to implement key recommendations of the 2003 CFAA, PEFAR 2005 and 2006 to improve the Public Financial Management (PFM) systems. Additionally, there is an ongoing PFMRP that is being implemented to further strengthen the PFM system; 73 · MEM and TANESCO have adequately qualified and experienced accounting personnel, most of whom have been trained in World Bank Financial Management and Disbursement Guidelines; also experienced in managing IDA funds; · MEM and TANESCO have satisfactory budgeting arrangements in place; · External auditing arrangements for both MEM and TANESCO are adequate. Both are audited by the Controller and Auditor General (CAG)/National Audit Office (NAO); · MEM and TANESCO both have Internal Audit units that have qualified and experienced Internal Auditors. Further, both Implementing Agents have Audit Committees in place; · Funds flow arrangements are adequate for both MEM and TANESCO. It has also experience in IFRs disbursement under the emergency Power project; · Financial Reporting requirements are adequate for both MEM and TANESCO but management needs to ensure that the financial reports are submitted to the Bank on time, and IFR formats to be agreed upon with the Bank before negotiations; · MEM and TANESCO have Financial Management Manuals that are sufficient for the Project; and · Recently implemented Projects by both MEM and TANESCO received clean and unqualified opinions. 12. The Project financial management is weakened by the following features: · TANESCO made an operating loss of TSh 20 billion in 2005 (and an operating profit of TSh 39 billion in 2004). As a result, the audit report included a qualification regarding the same. TANESCO's future operations depend on continuing financial support as expounded in its financial recovery plan that has been approved by the Government. · TANESCO has not been able to submit audited accounts within the stipulated time frame of six months. The 2005 accounts were signed off by the auditors on December 28, 2006. Auditing for FY2006 accounts have been finalised and are awaiting approval of the Board of Directors. This has been attributable to the problems encountered with the new material management module that was introduced in 2005. TANESCO is currently undertaking an overall review of its entire IT function. · TANESCO's 2005 audit report also carried a qualification on its inventories. This arose from the challenges faced during the implementation of the new material management module. This inventory problem requires urgent attention as once the project commences, then controls over Project inventories will be weak. A review of TANESCO's Internal Audit Report for the period October 2005 to November 2006 highlights non compliance with Accounting, Engineering and procurement instructions and procedures. The issue appears to be the lack of adequate supervisory controls. · The audit of the 33 kV Overhead Double Circuit from Tegeta to Mwenge revealed poor procurement/tendering procedures that resulted in sub-standard work. Internal shortcomings included inadequate design works coupled by poor supervision. This had the effect of funds not being used in a most economic and efficient manner. · MEM's audit report for the year 2005/2006 also contains emphasis of matter on uncollected revenue collections (TSh 232 million), unvouched expenditure (TSh 118 million), irregular payments (TSh 122 million), and improperly vouched expenditure (TSh 275 million). All these point to weak internal controls. MEM has subsequently informed the Bank that the above noted issues have been satisfactorily resolved with the external auditors. 74 13. The overall Project risk for Financial Management is considered Modest and the following action plan is designed to mitigate the financial risk. Risk/Role Action Plan to mitigate risk Completion Date Responsibility TANESCO going concern- TANESCO/GoT implement its Ongoing Plan with target TANESCO/GoT weak financial capacity financial recovery plan as approved financial recovery in 3 years by the government with steady state tariffs. Delays in submission of audits Update of IT systems which During project implementation TANESCO includes update of the current accounting software and more specially the material module Weak internal controls Internal audit to develop a audit Within 6 months after MEM MEM strategy and an action plan on risk effectiveness based approach TANESCO Internal audit to develop an audit Within 6 months after TANESCO strategy and action plan on risk effectiveness based approach Update of financial manuals Customization of project chart of Within 6 months after TANESCO & MEM TANESCO & MEM accounts in the financial manual effectiveness Overview of Financial Management Implementation Arrangements 14. The proposed Project activities are mainstreamed in the existing MEM and TANESCO structure and systems, including financial management arrangements. The accounting officers of MEM and TANESCO will assume overall financial management responsibility for project funds. More specifically, MEM Accounts & Finance unit and TANESCO Finance Unit will manage IDA dollar Designated Accounts, maintain, and report on the annual project financial statements respectively. They will ensure that the project financial management activities are carried out efficiently and in accordance with acceptable international accounting standards, Government Public Finance Act 2001, and financing agreement. 15. MEM and TANESCO have experience in executing programs financed by other multi-lateral institutions and international development partners including IDA. MEM has received a clean audit report on the Songo Songo Gas Development and Power Generation Project. TANESCO has maintained a satisfactory FM rating on the Emergency Power Project by also receiving a clean audit report. The external audit will be carried out annually by the National Audit Office (NAO), the current auditor auditing both MEM and TANESCO. Disbursements from the IDA Credit will be on Report-Based disbursement method using quarterly IFRs. 16. Planning and Budgeting: The overall project budget and a disbursement schedule will be drawn up and included in the PAD. IDA funds will be provided in line with this disbursement schedule (as may be subsequently revised). The process will be guided by the policy guidelines issued by the Ministry of Finance under MTEF framework. 17. Accounting Policies, Procedures and Information systems: MEM - The government accounting system is based on integrated government computerized systems called EPICOR. The project accounting arrangements shall comply with the requirements stipulated in Government Public Finance Act and Regulations of 2001, the accounts will be maintained on a cash basis. TANESCO - Its main accounting system is iSCALA, which will also be used to maintain the Project's accounts. Both Implementing Agents' have written manuals that expound on accounting procedures and policies that are based on generally accepted accounting practices. 18. Staffing and Training: MEM's accounting units is headed by a Chief Accountant. Total staff Complement is 52 of whom 4 are CPA holders and another 10 hold Advance Diplomas in accounting. Generally, the capacity of the accounting staff at all levels is now at a satisfactory level. TANESCO's 75 accounting unit is headed by the Chief Finance Officer. Total staff complement is 104 of whom 8 are CPA holders. 19. Periodic Reporting for Project Monitoring: Formats of the un-audited interim IFRs, i.e. periodic financial monitoring reports, are designed to provide quality and timely information to government, the World Bank, and various stakeholders on the project's performance. MEM and TANESCO will prepare within 45 days of the end of each quarter, the reports and submit to the World Bank. The contents of these reports should, at a minimum, be the financial reports, which set forth sources and uses of funds by project activity/component, and statement of actual and budget expenditures, both cumulatively and for the period covered by said report, and explanations for variances between the actual and planned uses of such funds. 20. Internal Control and Internal Auditing: The internal control systems and environment revolves around: (i) the internal audit function, which review day to day operations of TANESCO and MEM respectively including adequacy and effectiveness of the internal controls; and (ii) Audit Committee which provides an oversight role on TANESCO and MEM operations and financial matters. This includes following up on implementation of internal and external audit queries as required by the 2001 Public Finance Act. 21. The auditor's reports on the entities internal control systems indicated weak levels of supervisory controls. However, the individual IDA financed Projects implemented by both MEM and TANESCO indicated satisfactory levels of segregation of duties and controls. Both MEM and TANESCO have established internal audit units with adequate qualified staff. Internal audit guidelines have been developed and training completed for the internal auditors. At the country level, long-term training is on going for all internal auditors and Audit Committee members and is funded under PFMRP. 22. The Internal Audit is functioning effectively. Generally, the responsibility of the Internal Auditor is to assist the Chief Executive/Permanent Secretary in managing the systems of internal controls and corporate governance within the agency. The unit is also involved in assisting the Chief Executive and the Permanent Secretary in upholding good governance and fighting corruption. The unit work very closely with the Integrity Committee, Committee on Good Governance, senior management. The unit is independent and is headed by the Director of Internal Audit who reports directly to Chief Executive TANESCO and Chief Internal Auditor who reports directly to the Permanent Secretary (MEM). The unit has an audit strategy and plan based on risk assessment of the agency. The internal auditor's work is monitored and reviewed by the Audit Committee on a quarterly basis to ensure internal control systems are functioning adequately and that issues raised in the internal auditor's report are addressed by management. 23. The Internal Auditors will develop an audit strategy and plan for the project based on the risk assessment. The internal auditor's work will be monitored and reviewed by their respective audit committees on a quarterly basis to ensure that the internal control systems are functioning adequately and that the issues raised in the internal auditor's report are addressed by the ministry/TANESCO. 24. Audit Committees will be reviewing their unit's internal audit reports and annual audit reports. Results of their follow up/review meetings will be reported in the quarterly reports to be submitted to the project steering committee. 25. External Audit: The external audit will be carried out annually by the NAO or such other person registered as an auditor under the Auditors and Accountants Act of 1972 and approved by CAG. The Auditors will express a separate opinion on the Designated Account and on the annual financial operation 76 of the TEDAP. The terms of reference for the audits was agreed with the CAG by the Bank during negotiations. Audit Report Due Date TANESCO entity audit By June 30 each year (within six months after end of the FY) Project's annual audits, Component A By June 30 each year (within six months after end of the FY) Project's annual audits, Component B By December 31 each year (within six months after end of the FY) 26. Funds Flow Arrangements: Figure 4 below indicates the proposed funds flow arrangement. Two Special Accounts will be opened, one for IDA monies and the other for GEF monies. In addition, two designated accounts will be opened, two by MEM for IDA credit and GEF grants, and one by TANESCO for the IDA credit. Based on the half-yearly cash forecast (as prepared by the implementing agencies), the Bank will deposit funds in these separate designated bank accounts of each of the implementing agencies. The Agencies will in turn make direct payments to its various suppliers, consultants, and trainers. Both agencies will use their existing accounting procedures and manuals for making such payments. Figure 4: Bank Account and Flow of Funds Arrangements IDA GEF Credit Grant Account Account MEM TANESCO MEM Designated Designated Designated US$ Account US$ Account US$ Account Suppliers/ Suppliers/ Contractors/consultants/Operating Contractors/consultants/Operating costs costs 27. Designated Accounts: Each implementing entity, i.e. TANESCO and MEM will open a US Dollar Designated Account with a reputable bank and acceptable to IDA. The aforementioned bank accounts shall be opened by credit effectiveness date. 28. Disbursement Method: Disbursements from the IDA Credit will be based on quarterly IFRs involving advances to cover cash forecast of the following 2 quarters. 29. Allocation of proceeds (IDA credit): Category Amount of the Percentage of Credit Allocated Expenditures to be (US$s) Financed (1) Works, and Goods, including supply and installation, and 72,552,425 100% services other than Consultants' services under Part A of the Project (2) Consultants' services, including audits, Training and Workshops 4,830,000 100% under Parts A and C.1 of the Project 77 Category Amount of the Percentage of Credit Allocated Expenditures to be (US$s) Financed (3) Consultants' services, Training and Workshops, and Operating 600,000 100% Costs under Part B.3 of the Project, and audits for Parts B and C.2 of the Project (4) Goods, including supply and installation, and Consultants' 6,800,000 100% services under Part B.2(a) and B.3 of the Project (5) Grants for Subprojects under Part B.1 and B.2(b) of the Project 8,600,000 100% of the amount disbursed (6) Consultants' services under Part C.2 of the Project 2,500,000 100% (7) Unallocated 9,117,575 - TOTAL AMOUNT 105,000,000 - 30. Allocation of proceeds (GEF grant): Category Amount of the Percentage of Credit Allocated Expenditures to be (US$s) Financed (1) Goods, including supply and installation, and Consultants' 3,200,000 100% services under Part B.2(a) and B.3 of the Project (2) Grants for Subprojects under Parts B.1 and B.2(b) of the 3,300,000 100% of the amount disbursed Project TOTAL AMOUNT 6,500,000 31. Documentation requirements for report-based disbursement: The following reports are required: · IFRs · Designated USD Account Activity Statement · Designated USD Account Bank Statements · Summary Statement of Designated USD Account Expenditures for Contracts subject to Prior Review · Summary Statement of Designated USD Account - Expenditures not subject to Prior Review · Projected cash requirements for the next two reporting quarters 32. All documents supporting the reported expenditures, such as invoices, statements, and bills of lading, should be maintained by the implementing entities and made available for review by auditors as set out in the Financing Agreement. 33. Submission of Withdrawal Applications to IDA: MEM and TANESCO should submit the initial withdrawal application together with six cash forecast after project has become effective and the Designated USD Accounts have been opened. For subsequent withdrawals, MEM and TANESCO should submit withdrawal applications to the Bank along with the IFRs and other documents as indicated above. 34. Due date for submission of the above report: The Bank must receive all disbursement reports and bank statements within 45 days of the end of each reporting period. 35. Procurement arrangements: The Procurement Specialist has assessed the Procurement arrangements for the project as highlighted under Annex 8. 78 36. Overall Monitoring: The monitoring and impact evaluation for the overall project will be the responsibility of the MEM, with support from TANESCO and REA. For result evaluation, a mid-term evaluation and a final evaluation will be carried out by external consultants. The MEM will submit the report to the Government, IDA, and the GEF. The Project will have a 4-year implementation period. There will be annual reviews and an Implementation Completion and Results Report (ICR) at the end of the Project, to be jointly prepared by IDA and the concerned implementing agencies. 37. Supervision arrangements: There will be regular FM supervision reviews by the WB FMS. The inherent risk of project funds not being used in an efficient, economical way and exclusively for the intended purpose will continue to be addressed through the PFMRP currently under implementation. Additionally and as currently done, this risk will be reviewed and monitored during the annual Public Expenditure and Financial Accountability Review (PEFAR). Additional program monitoring will include: (a) Management oversight of the audit committees; and (b) Annual external audits. 38. The WB FMS will carry out regular reviews of quarterly IFRs and annual audit reports, and follow up on any issues and recommendations. Transactions and control reviews will be carried out at each of the implementing entity by internal audit units and their reports will be submitted to their respective Audit Committees for further follow-up. Financial Management Effectiveness and Disbursement Conditions 39. At present, it is not expected that there will be any financial management and disbursement conditions for credit effectiveness. Financial Covenants 40. Standard financial covenants include the submission of the following to IDA: · Three Audited financial statement of: (i) TANESCO entity audits; (ii) TEDAP ­ TANESCO components; and (iii) TEDAP ­ MEM components within six months after the year-end of the financial year. · Agreed IFRs within 45 days after each financial year quarter, and shall cover such financial quarter. · Other related information as required by the financiers. 79 Annex 8: Procurement Arrangements TANZANIA: Energy Development and Access Expansion Project A. General 1. Procurement for the proposed project will be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004 and revised October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 and revised October 2006, and the provisions stipulated in the Legal Agreement. The general description of various items under different expenditure category is described below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 2. Procurement of Works/ Supply & Installation of Plant & Equipment: Works, Supply & Installation of Plant & Equipment to be procured under this project and implemented under TANESCO will include: · Six (6) new 33/11 kV substations in Dar es Salaam; · Rehabilitation of five (5) 33/11 kV substations in Dar es Salaam; · Eight (8) new 33/11 kV substations in Arusha and Kilimanjaro; · 33 and 11 kV overhead distribution lines in Dar es Salaam, Arusha and Kilimanjaro; · Five (5) new 132/33 kV substations in Dar es Salaam; · Four (4) 132 transmission lines in Dar es Salaam; · One (1) 132/33 kV substation at KIA; and · A pilot High Voltage Distribution Network and connections for 25,000 new customers. 3. The procurement will be done using the Bank's Standard Bidding Documents (SBD) and Standard Bid Evaluation Forms for all International Competitive Bidding (ICB) contracts. The Government has prepared SBDs for National Competitive Bidding (NCB) procedures for procurement of works; supply and installation of plant & equipment which have been found acceptable to the Bank. The Government may use these documents when carrying out procurement of works/supply and installation of plant & equipment through NCB procedures. Civil works/supply and installation of plant & equipment estimated to cost more than US$500,000 equivalent per contract will be procured through ICB. Civil works, supply and installation of plant & equipment estimated to cost less than US$500,000 equivalent per contract will be procured through NCB, except for minor works/supply and installation of plant & equipment contracts estimated to cost less than US$ 50,000 per contract will be procured using Shopping method. The prior review threshold for works/supply and installation of plant & equipment contracts will be US$500,000 equivalent per contract. 4. Procurement of Goods: Goods to be procured under this project and implemented under (a) TANESCO will include: (i) credit meters; (ii) solid state meters; and (iii) motor vehicles; and (b) Ministry of Energy and Minerals (MEM)/Rural Energy Agency (REA) will include: (i) supply and install sustainable solar market packages (SSMP)/solar photovoltaic (PV) energy equipment systems for rural public institutions; (ii) office equipment; and (ii) motor vehicles. 5. Procurement will be done using the Bank's SBD and Standard Bid Evaluation Forms for all ICB. As the Government has prepared SBDs for NCB procedures for procurement of goods, which have been found acceptable to the Bank, procurement of goods through NCB may be carried out using these 80 documents. Goods estimated to cost more than US$200,000 equivalent per contract will be procured through ICB. Goods estimated to cost less than US$200,000 equivalent per contract will be procured through NCB, except for goods contracts estimated to cost less than US$50,000 per contract will be procured using Shopping method. Direct contracting may be used when it can be justified that a competitive method is not advantageous and meets the requirements under paragraph 3.6 of the Procurement Guidelines and after consultation with the Bank. The prior review threshold for goods contracts will be US$ 200,000 equivalent per contract. 6. Procurement of non-consulting services: Non-consulting to be procured under the project will include facilities and venues for conferences, training, workshops, etc. The procurement of these expenditures will follow the Borrower's administrative procedures and will be in accordance with Public Procurement Act (PPA) no. 21 of 2004. 7. Selection of Consultants: Consulting services and training under the project are proposed for studies; supervision; reviews; and institutional capacity building. Main consulting services and training to be implemented under TANESCO will include training needs assessment; TEDAP investments supervision; capacity building; business systems studies; legal, technical and financial services; and SCADA system feasibility study. Under MEM and REA, the following consultancies will be implemented: establishing an enabling policy and regulatory framework for SPPs; development of a comprehensive access scale up plan and subsidy framework including both grid and offgrid expansion; market promotion of offgrid investments; planning of rural offgrid expansion; capacity building; establishment of effective monitoring and evaluation systems; and development of private sector capacities and investments in rural sector application of solar PV and micro-hydro generation and distribution. 8. World Bank's Standard Request for Proposals (RFP) and evaluation forms will be used where applicable. Contracts for consulting services, each estimated to cost US$ 200,000 equivalent or more will be awarded following the procedures of Quality and Cost Based Selection (QCBS). Procedures of Quality-Based Selection (QBS) will be followed for assignments which meet the requirements of paragraph 3.2 of the Consultants Guidelines. Short lists of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Consulting firms for services of small assignments (estimated to less than US $ 200,000 equivalent per contract) and meeting the requirements under paragraph 3.7 of the Consultant Guidelines will be selected using Consultants' Qualifications (CQS). Consulting firms for carrying out standard or routine nature assignments such as audits will be selected through Least Cost Selection (LCS). 9. Individual consultants will be selected on the basis of their qualifications in accordance with Section V of paragraphs 5.1, 5.2, 5.3, and 5.4 of the Consultant Guidelines. Single source may be used where it can be justified and after consultation with the Bank. 10. Consultancy services estimated to cost above US$100,000 equivalent per contract for firms and above US$50,000 equivalent per contract for individual consultants and single source selection of consultants will be subject to prior review by the Bank. The appropriate selection method for each consulting services contract will be established and provided in the procurement plan based on the type of assignment and provisions of the Consultant Guidelines. 11. Operational Costs: The Project will finance operating costs that are directly related to the project implementation incurred by MEM and later by REA after transfer of implementation from MEM to REA. The project's operating costs will include: fuel and vehicle maintenance for project vehicles, office supplies, communication expenses, subsistence allowances and travel costs for staff on duty carrying out activities that directly relate project implementation. The procurement of these expenditures will follow the Borrower's administrative procedures and will be in accordance with Public Procurement Act (PPA) no. 21 of 2004. Salaries of government staff will not be financed by the project. 81 12. Others: The IDA Credit and GEF Grant will finance offgrid access expansion for subprojects including (i) grid-connected renewables; (ii) grid-connected mini-grid; (iii) greenfield isolated mini/micro-grid; and (iv) individual systems subprojects for rural households and enterprises under SSMP. The subprojects will be eligible for performance and matching grants and will consist of demand driven proposals by private operators (including NGOs and community based organizations). Depending on the type of Subproject identified, it may consist of goods, consultancy services, and/ or works. The procurement of the Subprojects by the private operators will be in accordance with Established Private Sector or Commercial Practices acceptable to the Bank. In this case the implementing entity (MEM/REA) will hire a consultant with experience of Bank procedures to carry out procurement assessment of the private operator(s). The assessment will be shared with the Bank to ensure that they have adequate procurement system acceptable to the Bank. In the event that the systems are inadequate, the private operator(s) will use national procurement procedures for Subprojects that will be procured through NCB and Bank procedures for ICB and large consultancies. Before implementation of a Subproject, the private operator will submit to MEM/REA details of components which constitute the Subproject in terms of goods, consultancy services, and/ or works. Procurement arrangements, procedures and methods of goods, consultancies and works for the subprojects will be presented in the Operating Guidelines (OG). Furthermore the OG will provide guidelines that will be used in preparing, screening, implementing, and monitoring the subprojects. The OG is under preparations and will be finalized before project effectiveness. B. Assessment of the agencies' capacity to implement procurement 13. Procurement activities will be carried out by two implementing agencies. The proposed implementing agencies are MEM, and TANESCO. MEM will implement component B ­ Offgrid investment framework and pilot investments, and corresponding part of component C ­ Technical assistance; while TANESCO will implement component A ­ Grid based transmission and distribution investments, and corresponding part of component C ­ Technical assistance. It is envisaged that at a later stage, implementation of component B and the corresponding part of component C will be transferred from the Ministry to the newly established Rural Energy Agency (REA) once it is fully staffed, procurement capacity assessed and found satisfactory. 14. At MEM, procurement will be carried out by the Procurement Management Unit (PMU) established in accordance with the Public Procurement Act (PPA) no. 21 of November 2004 which became effective May 2005. The Ministry has also established a tender board as per requirement of the Act and chaired by the Commissioner for Energy and Petroleum. Technical aspects of the various component activities to be implemented by the Ministry will be under the Commissioner for Energy and Petroleum Affairs. The PMU reports to the Permanent Secretary and is headed by a Senior Supplies Officer assisted by five members of staff (four engineers and one planning officer). The PMU staff has been involved in Bank and Donor financed projects such as Songo Songo Gas Development and Generation Project, Petroleum Sector Rehabilitation Project, Energizing Rural Transformation Project, Solar PV, Rural Electrification Project , and Institutional Support Project. 15. Procurement function at TANESCO falls under the Chief Financial Officer. The PMU is headed by a Principal Supplies Officer assisted by six members of staff (three engineers, two supplies officers, and one secretary). The user departments and units are responsible for providing PMU with technical inputs for tendering purposes. Although TANESCO has established a PMU according to the PPA of 2004, it is not consistent with the requirements of the Act because the PMU does not report to the Chief Executive Officer (Managing Director). A tender board also has been established as per requirements of the PPA and is chaired by General Manager Transmission. The PMU staff has implemented Bank and donor financed projects and TANESCO has trained about 70 staff from various departments and units on management and basic procurement principles. 82 16. An assessment of the capacity of MEM and TANESCO to implement procurement actions for the project has been carried out by a procurement specialist in June and July 2007. The assessment reviewed the organizational arrangements, staffing plans, qualification and experience of the staff carrying out procurement, working environment, record keeping and filing systems for implementing the project as well as the interactions between the project's staff and unit responsible for procurement and the other departments or units for administration and finance. Capacity assessment of REA will be carried out later when it is fully staffed. 17. Most of the issues/risks concerning the procurement component for implementation of the project have been identified and include procurement staff who have limited experience with the new World Bank Procurement Guidelines as well as Consultants Guidelines of May 2004, and revised October 2006 which will be applicable to this project; procurement filing, record keeping (procurement data management system) and storing of procurement documents was found to be inadequate both at MEM and TANESCO. It was also noted that at TANESCO, the PMU was not properly placed within organization structure. 18. The corrective measures which have been proposed and agreed to strengthen the procurement capacity of the implementing agencies include: (i) procurement training to be provided for the relevant staff of the two implementing agencies; (ii) preparation of Operating Guidelines (OG) with detailed procedures and arrangements for implementing Component B (offgrid investments); (iv) preparation of a procurement plan covering at least the first 18 months of the project; and (vi) placing of PMU properly within TANESCO's organization structure. 19. The overall Project risk for procurement is considered Average and the following action plan is designed to mitigate the procurement risk. Risk/Role Action Plan to mitigate Completion Date Responsibility risk 1. Inadequate skills in procurement of goods, works and consultancy services MEM and TANESCO Procurement staff to attend During project implementation Borrower and IDA workshops or courses on procurement of goods, works and consultancy. - World Bank procurement procedures. - Public procurement procedures under PPA. 2. Procurement processing MEM (i) Prepare Operating (i) By project effectiveness Borrower Guidelines (OG-MEM). (ii) By negotiations (ii) Prepare procurement plan. TANESCO (i) Prepare procurement plan. (i) By negotiations Borrower (ii) PMU to report to CEO. (ii) Within 6 months after effectiveness 3. Working environment MEM Storage of procurement Within 3 months after Borrower documents. effectiveness TANESCO Storage of procurement Within 3 months after Borrower documents. effectiveness 4. Inadequate procurement filing and record keeping MEM and TANESCO (i) Train Procurement and (i) During project (i) Borrower and IDA Project Department staff on implementation (ii) Borrower procurement filing and record keeping. (ii) Within 3 months after (ii) improve procurement filing effectiveness and record keeping. 83 C. Procurement Plan 20. The Borrower, at appraisal, developed a Procurement Plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on October 11, 2007 during negotiations and is available at MEM and TANESCO. It will also be available in the Project's database and in the Bank's external website after the credit has been approved. The Procurement Plan will be updated annually in agreement with the Project Team or as required to reflect the actual project implementation needs and improvement in institutional capacity. The Procurement plan includes relevant information on goods, works, consultancy services, and supply and installation plant and equipment under the project as well the timing of each milestone in the procurement process. As subprojects (under component B) cannot be identified clearly up-front as they are demand-driven, the OG will provide guidelines that will be used in preparing, screening, implementing, and monitoring the subprojects. The OG is under preparations and will be finalized before project effectiveness. D. Frequency of Procurement Supervision 21. In addition to the prior review supervision to be carried out from Bank office, the capacity assessment of the Implementing Agencies suggests that one supervision mission be undertaken every six months to visit the field to carry out post review of procurement actions. E. Details of the Procurement Arrangements Involving International Competition and other methods 1. Goods, Works, and Non Consulting Services (a) List of contract packages to be procured following ICB and direct contracting and other methods of contracting: Ref. Contract Part of Estimat Procur P- Domesti Review Expected Imple- No. Description the ed Cost ement Q* c Pref. by Bank Bid-Opening menting Project (US $) Metho (yes/no) (Prior / Date Agency d Post) 1 Works/ Supply and Installation ­ TANESCO 1.1 5 132/33 kV A.1 (Trans.) 11,671,000 ICB No No Prior Feb. 9, 2008 TANESCO Substations in DSM 1.2 4 132 kV A.1 (Trans.) 5,826,000 ICB No No Prior Feb. 9, 2008 TANESCO Transmission Lines in Dar es Salaam 1.3 1 132/33 kV A.1 (Trans.) 5,398,000 ICB No No Prior Feb. 9, 2008 TANESCO substation at KIA 1.4 6 new 33/11 kV A.1 (Distrib) 8,080,000 ICB No No Prior Feb. 1, 2008 TANESCO substations in DSM 1.5 Rehabilitation of 5 A.1 (Distrib) 2,440,000 ICB No No Prior Feb. 1, 2008 TANESCO 33/11 kV substations in DSM 1.6 8 new 33/11 kV A.1 (Distrib) 9,120,000 ICB No No Prior Feb. 1, 2008 TANESCO substations in Arusha and Kilimanjaro 1.7 33 and 11 kV A.1 (Distrib) 6,767,425 ICB No No Prior Feb. 1, 2008 TANESCO overhead lines in Dar es Salaam, Arusha and Kilimanjaro 84 Ref. Contract Part of Estimat Procur P- Domesti Review Expected Imple- No. Description the ed Cost ement Q* c Pref. by Bank Bid-Opening menting Project (US $) Metho (yes/no) (Prior / Date Agency d Post) 1.8 HV Distribution A.2 and A.3 10,000,000 ICB No No Prior Nov. 30, 2009 TANESCO Network, Lot 1: Network for 25,000 new customers and new HV Cluster, Lot 2: RMU switching units 2 Goods ­ TANESCO 2.1 Meters, Lot 1: A.2, A.3, 10,200,000 ICB No No Prior April 1, 2009 TANESCO Replacement of A.4 60,000 credit meters by prepaid meters, supply and installation of 25,000 new prepaid meters and up to 10,000 new prepaid meters for the HV cluster; Lot 2: 1,800 Solid State Remote Meters 2.2 Centralized Call A.4 200,000 ICB No No Post Sep. 1, 2009 TANESCO Center for Dar es Salaam 2.3 High Value Customer A.4 100,000 NCB No No Post Sep. 1, 2009 TANESCO Cell 2.4 Corporate IT A.4 2,550,000 ICB No No Prior April 1, 2009 TANESCO Systems: Lot1: Commercial Management System (CMS) to support commercial function; Lot 2: Technical service management System (TSMS) to attend customers claims; Lot3: Resource Management System (RMS) to support centralized functions 2.5 Vehicles for Project A.5 500,000 ICB No No Prior April 1, 2008 Tanesco Supervision 3 Goods ­ MEM/REA23 Sustainable Solar Market Packages (SSMP) 3.1 First 3 SSMP B.2.a 2.800,000 ICB No No Prior Aug. 1, 2008 MEM packages 3.2 Second 3 SSMP B.2.a 2,440,000 ICB No No Prior Feb. 1, 2009 MEM packages 3.3 IT equipment B.3 150,000 NCB No No Post March 1, 2008 MEM 3.4 Office equipment B.3 50,000 NCB No No Post March 1, 2008 MEM 3.5 Vehicles B.3 150,000 NCB No No Post March 1, 2008 MEM * P-Q stands for Pre-Qualification (b) ICB contracts for works estimated to cost above US$500,000 equivalent per contract, for goods estimated to cost above US$200,000 equivalent per contract and all direct contracting will be subject to prior review by the Bank. 23This is an 18-month procurement plan for Component B. 85 2. Consulting Services (a) List of consulting assignments. Ref Description of Assignment Part of Estimate Selection Review Expected Implementi No. the d Method by Bank Proposals ng Agency Project Cost (Prior / Submissio (US$) Post) n Date 1 Consulting Services ­ TANESCO 1.1 Training Needs Assessment for TANESCO C.1.a 80,000 QBS Post June 29, 2007 TANESCO 1.2 Implementation of Capacity Building for C.1.b 620,000 Multiple TBD March 3, 2009 TANESCO TANESCO Contracts ­ TBD 1.3 Consultancy services for training, supervision A.5 1,000,000 QCBS Prior Sep. 6, 200624 TANESCO of TEDAP Investments & Project management - Component A.1 (transmission) 1.4 Consultancy services for training, supervision A.5 1,000,000 QCBS Prior June 6, 200625 TANESCO of TEDAP Investments & Project management - Component A.1 (distribution) 1.5 Consultancy Services for training, A.5 1,000,000 QCBS Prior June 1, 2009 TANESCO supervision of HVDS Investments etc. & Project management (A.2, A.3, A.4) 1.6 Planning, design, bid documents, evaluation A.5 480,000 QCBS Prior June 15, 2008 TANESCO for HV Distribution Cluster, 25,000 new customers and replacement and installation of electricity meters 1.7 Consultancy services for Corporate A.5 225,000 QCBS Prior June 1, 2008 TANESCO Management Systems: (i) Incorporation of CMS to improve operational procedures and customer information; (ii) Incorporation of TSMS to attend to customers claims; (iii) Incorporation of RMS (including definition of new operational procedures) 1.8 Design and implementation of the Marketing A.5 125,000 CQS Prior June 1, 2008 TANESCO Department, including the Centralized call Center and High Value Customer Cell 2 Advisory Services ­ MEM 2.1 Legal, Technical, Financial, Environmental C.2 2,500,000 QCBS Prior Jan. 1, 2009 MEM and Social Advisors for the next generation project 3 Advisory Services to REA 3.1 Implementation support B.3 80,000 CQS Post May 1, 2008 MEM 3.2 Renewable energy expert B.3 30,000 IC Post Feb. 1, 2008 MEM 3.3 Solar expert B.3 30,000 IC Post Feb. 1, 2008 MEM 3.4 Rural electrification expert B.3 30,000 IC Post Feb. 1, 2008 MEM 3.5 REF agreement and guidelines B.3 70,000 IC Prior March 1, 2008 MEM 3.6 Renewable energy assessment /GIS B.3 300,000 QCBS Prior Feb. 1, 2009 MEM development 3.7 M&E Design B.3 50,000 CQS Post May 1, 2008 MEM 3.8 Verification audit B.3 50,000 CQS Post Dec. 1, 2008 MEM 3.9 Awareness campaign B.3 100,000 CQS Prior Feb. 15, 2008 MEM 3.10 SSMP design B.3 100,000 CQS Prior Aug. 1, 2008 MEM 3.11 Rural surveys for SSMP design (contract 1) B.3 60,000 CQS Post Oct. 1, 2008 MEM 3.12 Market analysis for SSMP design (contract 2) B.3 60,000 CQS Post Oct. 1, 2008 MEM 3.13 Village micro-hydro development (contract 1) B.3 30,000 CQS Post March 1, 2008 MEM 24A QCBS process for a Time-Based Contract involving Consultancy services (supervision of implementation works up to commissioning and preparation of the final project report) for the TANESCO 132 kV Transmission Network Reinforcement Project for Dar es Salaam, Arusha and Kilimanjaro was negotiated by TANESCO in May 2006 and an initialed contract was forwarded to the Bank on September 6, 2006. 25 A QCBS process for a Time-Based Contract involving Consultancy services (supervision of implementation works up to commissioning and preparation of the final project report) for the TANESCO Distribution System Reinforcement Project for Dar es Salaam, Arusha and Kilimanjaro was negotiated by TANESCO in May 2006 and an initialed contract was forwarded to the Bank on June 27, 2006. 86 Ref Description of Assignment Part of Estimate Selection Review Expected Implementi No. the d Method by Bank Proposals ng Agency Project Cost (Prior / Submissio (US$) Post) n Date 3.14 Village micro-hydro development (contract 2) B.3 30,000 CQS Post March 1, 2008 MEM 3.15 Village micro-hydro development (contract 3) B.3 30,000 CQS Post Sep. 1, 2008 MEM 3.16 Village micro-hydro development (contract 4) B.3 30,000 CQS Post Sep. 1, 2008 MEM 3.17 Village micro-hydro development (contract 5) B.3 30,000 CQS Post Feb. 1, 2009 MEM 3.18 Village micro-hydro development (contract 6) B.3 30,000 CQS Post Feb. 1, 2009 MEM 3.19 Procurement capacity assessment of B.3 20,000 IC Post March 1, 2008 MEM Subprojects (b) Consultancy services estimated to cost above US$100,000 equivalent per contract for firms and above US$50,000 equivalent per contract for individual consultants and single source selection of consultants will be subject to prior review by the Bank. (c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 3. Thresholds for Procurement Methods and Prior Review Expenditure Category Contract Value Procurement Method Contracts Subject to Threshold Prior Review (US$ thousands) 1. Works/ >= 500 ICB All Supply & Installation < 500 NCB None (Post review) All values Direct Contracting All 2. Goods >200 ICB All <200 NCB None (Post review) <50 Shopping None (Post review) All values Direct Contracting All 3.1 Consultancy Services >= 200 QCBS All All (Firms) > =100 QCBS/QBS/CQS/LCS None (Post Review) <100 QBS/CQS/LCS All All values SSS 3.2 Consultancy Services >50 IC All None (Post Review) (Individual) <50 IC All All values SSS ICB - International Competitive Bidding, NCB - National Competitive Bidding, QCBS - Quality and Cost Based Selection, LCS - Least Cost Selection, QBS - Quality Based Selection, CQS - Consultants' Qualification Selection, SSS - Single Source Selection, IC - Individual Consultant. 87 Annex 9: Economic and Financial Analysis TANZANIA: Energy Development and Access Expansion Project A. Economic and Financial Analysis of Grid Based Investments ­ Component A 1. The proposed upgrade investments in transmission and distribution network are designed to eliminate bottlenecks and weak links in TANESCO's supply system. The preliminary EIRR of the investment projects is expected to be about 30.8%. These estimated benefits accrue primarily from reduced losses and improved reliability and quality of the service; for example, the reinforcement of the distribution network of Dar es Salaam, Kilimanjaro and Arusha is expected to result in the reduction of average 7% of the total losses in the distribution system. In addition, the investments in prepaid meters and new connections will bring about a reduction of unserved energy and nontechnical losses in the network of Dar es Salaam. Based on the assumption that average tariffs have been increased by 40% (as applied for by TANESCO), the Project is expected to generate positive financial returns to TANESCO, with a NPV of 22.7 million at a discount rate of 10% and a corresponding FIRR of 16.0%.26 2. All access expansion subcomponents also show robust EIRR, using avoided expenditure and consumer surplus methodology. The EIRR for TANESCO's access component is expected to be 61.7% due to the high current alternative energy expenditures and willingness to pay of beneficiaries (households and businesses) in urban areas and low connection costs. At present tariff levels, however, this investment is expected to have a Financial Internal Rate of Return (FIRR) of 2.7%. In terms of offgrid investments, economic analysis for the sustainable solar market package for the Rukwa region has been finalized, resulting in 31% EIRR for public institutions (health centers, dispensaries and schools), and 28% EIRR for households. Economic analysis was also conducted for sample mini-grid projects (e.g. Tanganyika bagasse cogeneration with an independent grid). Economic Analysis of Component A: Grid-related investments 3. This section provides the economic justification for the grid-related investments. The economic justification is an assessment of the incremental net benefits of implementing the investment program over not implementing it. The benefits include reductions in technical losses in the sub-transmission and distribution networks; the estimated consumption of new consumers; reductions in the level of unpaid consumption; and improvements in the quality of service. The evaluation focuses on the calculation of the economic net present value and internal rate of return on the incremental investment, testing the sensitivity of these calculations to changes in key variables that affect them. 4. General Methodology: The main criterion applied for the assessment of all project of the TEDAP is the Internal Rate of Return (IRR). The following formula has been applied: 26This analysis is based on a cumulative investments of about US$62 million out of US$77 million envisaged (excluding unallocated amounts) under Component A. "Soft" investments in IT and TA that are targeted to improve nontechnical losses and operational efficiency of TANESCO are excluded, as the benefits from such investments cannot be quantified with reasonable precision prior to implementation. Nonetheless, as described in Annex 4, the project's capacity building components are expected to play a critical role for improving the efficiency at TANESCO and developing rural access expansion by the Rural Energy Agency (REA). 88 5. Basic Assumptions include: a. Financial and economic analyses have been undertaken based on 2007 constant costs, i.e. the costs and benefits are expressed in real terms; b. The following foreign exchange rates have been used: Euro/US$ of 0.750, TSh/US$ of 1,250; c. A discount rate of 10% has been applied; d. The costs and benefits were estimated over a period including the 4 years of project implementation plus 10 years; e. Benefits become effective the year following implementation of respective investments; f. Service life of equipment is considered to be 30 years; the analysis includes undepreciated investment in the final year based on linear depreciation; g. 6.4 US-Cents/kWh has been used in the following as the long run marginal cost of generation. 6. Tariff Structure: The current tariff structure distinguishes between the following customer groups: · Domestic Low Usage Tariff (D1) for low consumption users. · General Usage for general use of electricity including residential, small commercial and light industrial use, public lighting and billboards (T1). · Low Voltage Maximum Demand Usage for general use at 400 volts and average consumption is more than 75,000 kWh per meter reading period (T2). · High Voltage Maximum Demand Usage Tariff for general use where power is metered at 11, 33, 132 and 220 kV (T3). · Individual tariffs for large customers like Zanzibar and the mines. 7. The current cost of supply to TANESCO is TSh 118/kWh, and the average tariffs charged in 2006 were TSh 84/kWh and TSh 92/kWh in 2007. As a result of this , TANESCO loses on average, about TSh 26 on every kWh sold. TANESCO has submitted an application for a 40% tariff increase to EWURA (assumed to be effective from January 1, 2008) as well as an automatic adjustment in subsequent years to take into account inflation, exchange rate fluctuations, and energy input costs. 8. The economic analysis assumes the tariff application will be granted, which implies that the average tariff will equal US-cents 10.3/kWh (TSh 129/kWh) in 2008 given the forecasted customer mix at that date. The tariff is assumed to increase in step with inflation from 2008 onwards, and therefore will be the same in real terms. The sensitivity analysis examines the consequences of lower tariff increases. 9. Willingness to pay: The economic benefits from the connection of the 25,000 new customers to the low voltage network in Dar es Salaam are based on the "willingness to pay" for electricity for the following two types of new customers: · New customers paying the low consumption D1 tariff have a willingness to pay of 10.4 US- cents/kWh. This figure comes from about a calculation about the energy spending patterns of a representative household.27 27It is assumed that a typical new customer consists of a family of 7-10 people. Usually, such a household utilizes 3-4 petroleum lamps to light their rooms during darkness. The monthly demand on kerosene for these lamps amounts to 15-20 litres. Given the prevailing market price, monthly expenditures on kerosene are around 13.500 TSh/month. Furthermore, such a household uses candles, dry cell batteries and car batteries for radios, TVs, etc. The cost of these products is assumed to be 20% of the cost of kerosene. Together, these assumptions imply that current energy spending is 194,400 TSh per year (equal to 155.52 US$/annum), which leads to the willingness to pay quoted above given average monthly consumption in Dar es Salaam of 125 kWh. 89 · New customers paying the general usage T1 tariff have a willingness to pay of 40 US-cents/kWh. This is based on the assumption that these customers currently rely on their own generating units, for which the cost is 40-50 US-cents/kWh. 10. The average willingness to pay is the weighted average for the two customer groups, taking account of the forecasted customer mix between D1 and T1 customers in 2008.28 Average willingness to pay has been calculated at 23 US-cents/kWh. This calculation is consistent with studies of willingness to pay for electricity in Tanzania and other African countries.29 11. Additional assumptions: The economic benefits from the reinforcement of the transmission and distribution networks are derived from avoided self-generation using costly generation units, since the quantity and duration of partial and total blackout is reduced as a consequence of increased power system reliability. The analysis assumes a cost of unserved energy of 40 US cents/kWh for domestic customers and of 50 US cents/kWh for commercial and industrial customers. The latter is higher in view that generation units of "high value customers" usually have a higher installed capacity (> 100 kW) than generators of a household (< 20 kW), and total generation cost per kWh of larger units is commonly higher. 12. Under consideration of the prevailing tariffs of TANESCO the following average monthly consumption can be taken into account based on the figures for December 2006. An average monthly consumption of 125 kWh is considered for the mix of D1 and T1 customers in Dar es Salaam area, largely composed of customers in the T1 category. It is assumed that energy demand of new customers increases by 7% per year, and that energy demand of existing customers in Dar es Salaam, Arusha and Kilimanjaro increases by 7.6% per year. 13. The investment amounts in the cost-benefit analysis correspond to the breakdown of project costs by component and subcomponent presented in Annex 5. The yearly staging of investments is assumed to be made in accordance with the Procurement Plan and the anticipated improvements in Outcome Indicators. Approximately 60% of investment is in reinforcement of transmission and distribution networks and will be disbursed within 3 years from effectiveness: specifically, the analysis assumes that 30% of this investment is executed in year 1 and the remaining 70% in year 2. New connections are expected to be undertaken from year 2 to 4, proportionally to the target value of the intermediate Outcome Indicator: 4,000 connections by year 2; 16,000 by year 3; and all 25,000 by year 4. Similarly, prepaid meters are expected to be installed in years 2 to 4, in proportion to the intermediate Outcome Indicator: 10,000 out of the 60,000 meters to be installed by year 2; 35,000 by year 3; and all 60,000 by year 4. 14. Additional assumptions were made to present separate economic and financial assessments for the reinforcement of distribution and transmission in Dar es Salaam, Arusha and Kilimanjaro. Because the substation planned at Kilimanjaro International Airport will release load from both Arusha and Kilimanjaro distribution systems, the analysis divides the investments in equal proportions between each area. The distribution network substations that will serve Arusha and Kilimanjaro are taken to cost the same, and therefore the investment share in each area depends on the number of substations planned. The investment for distribution OHLs in Dar, Arusha and Kilimanjaro is split equally between the three areas. 28TANESCO is forecasted to have a total of 436,016 D1 customers and 332,523 T1 customers in 2008. 29 A World Bank study calculates that the top quintile of electricity customers in Tanzania has a willingness to pay of TSh 300-500/kWh. Elizabeth Ilskog et al. (2005) concludes that: "The example of Urambo shows that even in rural villages, it is possible to find a fraction of the population that has the ability and willingness to pay the fairly high price of almost 0.5 USD/kWh for electricity", "Electrification co-operatives bring new light to rural Tanzania," Energy Policy, Vol. 33, pages 1299­1307. In other African countries, the willingness to pay typically range from 15-0.25 US-cents/kWh, depending on the location, income and other characteristics of the relevant customer mix. 90 15. Economic Return of the Project: For the group of project components included in the cost-benefit analysis, the economic internal rate of return (EIRR) is estimated to be 30.6%. The Project Economic Net Present Value (ENPV) applying a discount rate of 10% is equal to US$84.8 million. Table 19 below presents the EIRR and the ENPV for different components. In each case, the EIRR is above 10%, the assumed long-term cost of capital. Table 19: Economic Assessment of Project Investments Component Economic internal rate of Economic return (%) NPV @ 10% (US$ million) Reinforcement of distribution and transmission networks in 22.5% 25.7 Dar es Salaam Reinforcement of distribution networks in Arusha 27.9% 15.1 Reinforcement of distribution networks in Kilimanjaro 44.2% 19.7 Connection of 25,000 new customers 61.7% 23.6 Replacement of 60,000 credit meters 28.3% 3.1 Total for Ongrid Investments 30.8% 86.9 million 16. Given that TANESCO has requested a tariff increase of 40% which is still under the process of review by EWURA, a sensitivity analysis has been carried out to assess the economic viability of the new investments in two scenarios: Scenario 1: with an approval of an average tariff increase of 30%, and Scenario 2: with an approval of an average tariff increase of 20%. The EIRR and ENPV under these scenarios show that the subcomponents are marginally impacted with lower tariff increases. It is worth underlining that the direct economic benefits are not sensitive to the actual tariffs since they are based on consumer willingness to pay, and therefore changes in the ENPV and EIRR under different tariff scenarios are related only to the financial benefits accruing from such investments. 17. A sensitivity analysis was also carried out to check the viability for the following scenarios: the implementation of all project subcomponents is delayed by 1 year; the service life of the equipment is 15 years instead of 30, because of poor maintenance; annual growth of electricity demand is 3% countrywide (instead of 7%) and for the distribution networks targeted by the project (instead of 7.6%). The EIRR remains significantly above 10% for all components in each scenario, with positive ENPV. Financial Analysis of Component A ­ Grid Based Investments 18. Table 20 below presents the financial internal rate of return (FIRR) and financial net present value for different components. In each case, the FIRR is positive. The subcomponent that will finance the connection of 25,000 new customers shows a FIRR and therefore a negative NPV. This is explained by the fact that even with a 40% tariff increase TANESCO will be recovering only its marginal and and incremental cost of supplying electricity and will not be making sufficient profits to recover its investment costs. With the anticipated tariff increases, new connections/customers added to the network will result in limited financial returns, although a high economic rate of return (61.7%). Table 20: Financial Assessment of Project Investments (assuming a 40% tariff increase) Component Financial internal Financial NPV rate of return (%) @ 10% (US$ million) Reinforcement of distribution and transmission networks in Dar es Salaam 14.7% 9.0 Reinforcement of distribution networks in Arusha 18.6% 6.7 Reinforcement of distribution networks in Kilimanjaro 25.2% 7.7 Connection of 25,000 new customers 2.7% -3.4 Replacement of 60,000 credit meters 28.3% 3.1 Total for Ongrid Investments 16.0% 22.7 million 91 19. A sensitivity analysis was carried out to assess the financial viability of the new investments under two tariff scenarios: (a) a 20% increase; and (b) a 30% increase in tariffs. The results of this analysis are provided in Table 21 and Table 22. Besides, the subcomponent regarding the additional connections, the FNPV continues to be significantly positive in both these scenarios, with an FIRR exceeding 10%. Table 21: Financial Assessment of Project Investments (assuming a 30% tariff increase) Component Financial internal Financial NPV rate of return (%) @ 10% (US$ million) Reinforcement of distribution and transmission networks in Dar es Salaam 13.8 6.7 Reinforcement of distribution networks in Arusha 17.6 5.4 Reinforcement of distribution networks in Kilimanjaro 24.2 6.6 Connection of 25,000 new customers .03 -4.4 Replacement of 60,000 credit meters 25.7 2.5 Total for Ongrid Investments 14.7% 16.5 million Table 22: Financial Assessment of Project Investments (assuming a 20% tariff increase) Component Financial internal Financial NPV rate of return (%) @ 10% (US$ million) Reinforcement of distribution and transmission networks in Dar es Salaam 13.3 5.8 Reinforcement of distribution networks in Arusha 17.0 5.0 Reinforcement of distribution networks in Kilimanjaro 23.5 6.2 Connection of 25,000 new customers -2.4 -5.3 Replacement of 60,000 credit meters 23.72 2.1 Total for Ongrid Investments 13.9% 13.6 million B. Economic and Financial Analysis of Offgrid Investments ­ Component B 20. The offgrid component subprojects are not known at the time of the PAD preparation. The subprojects are demand-driven and will be presented to MEM/REA for evaluation throughout the project implementation period. The present analysis uses sample subprojects, determining expected economic rate of return for each subproject category and for the program as a whole. Financial rate of return also has been calculated to demonstrate subprojects' financial feasibility, from the service provider point of view. 21. General Methodology: Consumer surplus methodology is used to estimate access expansion benefits from improved lighting. This methodology is used for both mini-grid and solar household users. This methodology uses demand curves to estimate the increase in consumer surplus resulting from the substantial increase in the number of lumens at a lower price per lumen. In Figure 5 this involves a shift from to . The gross benefit of displacing electricity-substitutable expenditures is represented by area B+D. The gross benefit of improved lighting quality (more lumens/hr) and increased hours of lighting, due to a lower price per lumen, is represented by area C+E. In order to arrive at an estimate for the net increase in consumer surplus, the expenditures for the service (D+E) is then subtracted. 92 Figure 5: Contributions to Total Lighting Benefits 22. Renewable power generation projects are compared with non-renewable generation alternatives. The economic benefits are based on the displacement of higher cost generation options. Additional global benefits are calculated on basis of CO2 emissions displaced due to renewable energy generation. Other benefits (e.g. improvements in education, health, communication and productivity) are commonly recognized of electrification, but are not quantified in this analysis. Thus the results shown below are conservative estimates. 23. New offgrid household connections: Demand curves have been estimated based on a household survey in Rukwa region and comparable grid-connected households data. Converting lighting services into lumens allows for capturing the willingness to pay for the significantly higher quality of the light which is provided by a mini-grid or stand-alone systems, when compared with wick lanterns and candles. Additional benefits related for example to ICT usage, productive uses etc. are not captured in this analysis, they will further increase the EIRR. The demand curves and EIRR results are presented below separately for mini-grids and solar home system connections. 24. Mini-grids: Two main consumer categories were identified, lower-income customers (with substitutable expenditures of US$6/month) and higher-income households (US$12/month), which translates into a potential demand of 30-60 kWh. The EIRR is 31% for lower-income households and 37% for higher-income households. 93 Figure 6: Demand Curve for Lighting for mini-grid customers (Estimate based on Rukwa survey) Demand curve for lighting for mini-grid customers (estimate based on Rukwa survey) 1.60 1.40 1.20 ne 1.00 0.80 Poor ice/lumr Q = 4403p-1.01 P0.60 0.40 Affluent Q = 5825p-1.01 0.20 R2=0.9239 0.00 0 50000 100000 150000 200000 250000 300000 350000 400000 450000 Lumens Source: ECON and Datavision Table 23: Economic Analysis per mini-grid customer (US$) Capital O&M Generation TA Total Avoided Benefits Total EIRR costs supply costs costs from net improved benefits lighting Lower-income 700 18 p.a. 23 p.a. 50 103 p.a. 170 p.a. NPV 10% 999 631 1,702 1,229 31% Higher income 700 18 p.a. 46 p.a. 50 149 p.a. 191 p.a. NPV 10% 2,022 2,973 3,817 1,599 37% Mini-grid program 7.0 0.18 p.a. 0.34 p.a. 0.5 0.13 p.a. 0.19 (10,000 customers) US$M NPV 10% 10.9 30.0 36.1 15.8 36% Assumptions: · The costs include the investment costs, mini-grid operation and maintenance costs, the TA associated with the subproject development and the costs of generation supplying a mini-grid. · The average costs per connection have been estimated conservatively at US$700 per connection. · The O&M costs are estimated at 2.5% of investment costs. · The costs of generation supply are based on LRMC of US$0.064/kWh. · 20 years of operation. · TA costs of US$50 per customer (matching grants, pipeline development etc.). · The mini-grid average tariff is estimated at US$0.18/kWh (the tariffs are expected to vary depending on the system costs and local willingness to pay). 25. Solar Home Systems: It has been assumed that each SHS will replace 80% of household expenditures on kerosene, candles and batteries ­ approximately US$4, US$5 and US$9 monthly, for the three groups defined as `poor households', `less poor households'' and `affluent households', respectively, as described above. Regarding the increase benefits from the improved lighting, demand curves have been estimated for each of the three income groups. Accordingly, the estimated annual benefits from an increase in quality of light (C+E) for a poor, less poor and affluent household are US$136, US$177 and US$244, respectively. 94 Figure 7: Demand for lumens in Sumbawanga, Tanzania 1.60 1.40 1.20 1.00 ne Affluent m Q = 6743p-.903 lu 0.80 e/ icr P 0.60 Less Poor Q = 5172p-.903 0.40 Poor Q = 4638p-.903 0.20 R2=0.591 0.00 0 20000 40000 60000 80000 100000 120000 140000 Lumens Source: ECON and Datavision Table 24: Summary Economic Analysis of SHS component, Sumbawanga SHS Systems Systems Installed Costs Benefits Initial Gain in Capital Avoided Lighting Total Expenditur Replaceme Total Lighting Benefit Total Net Year 14Wp 40Wp 90Wp Systems es nt costs Costs Costs from PV Benefits 2008 2389 286 56 2731 $809 561 $809 561 -$809 561 2009 4496 1024 65 5585 $941 504 $0 $941 504 $143 726 $388 102 -$409 676 2010 6267 1525 190 7982 $853 288 $94 891 $948 179 $293 206 $806 627 $151 654 2011 7954 1689 248 9891 $570 659 $181 590 $752 249 $425 667 $1 165 916 $828 378 2012 9365 1767 318 11450 $467 740 $76 711 $544 451 $527 149 $1 437 751 $1 424 042 2013 9365 1767 318 11450 $0 $94 891 $94 891 $611 172 $1 659 869 $2 179 743 2014 9365 1767 318 11450 $0 $54 102 $54 102 $611 172 $1 659 869 $2 220 532 2015 9365 1767 318 11450 $0 $74 648 $74 648 $611 172 $1 659 869 $2 199 985 2016 9365 1767 318 11450 $0 $94 891 $94 891 $611 172 $1 659 869 $2 179 743 2017 9365 1767 318 11450 $0 $0 $0 $611 172 $1 659 869 $2 274 633 2018 9365 1767 318 11450 $0 $259 927 $259 927 $611 172 $1 659 869 $2 122 350 2019 9365 1767 318 11450 $0 $170 561 $170 561 $611 172 $1 659 869 $2 104 072 2020 9365 1767 318 11450 $0 $0 $0 $611 172 $1 659 869 $2 274 633 2021 9365 1767 318 11450 $0 $0 $0 $611 172 $1 659 869 $2 274 633 2022 9365 1767 318 11450 $0 $94 891 $94 891 $611 172 $1 659 869 $2 179 743 2023 9365 1767 318 11450 $0 $75 670 $75 670 $611 172 $1 659 869 $2 198 963 NPV 10% $3 118 888 $539 493 $3 658 381 $3 764 127$10 240 960 $9 359 532 ERR 59% Assumptions: · The costs include the all life-cycle costs, including installation, maintenance and part replacements; · 15-years of system life; · Based on the results of demand study, 14 Wp, 40 Wp and 90 Wp systems are assumed to be demanded by the poor, less poor and affluent customer categories respectively; · Based on 5-year sales forecast of mini-grid operation and maintenance costs, the TA associated with the subproject development and the costs of generation supplying a mini-grid. 26. Sustainable solar market packages for institutions: The economic analysis covers the first three packages identified and designed for Sumbawanga. Replication packages are expected to have a similar EIRR, as both costs and benefits are not expected to vary dramatically across regions. 95 27. Financial viability of the SSMP packages has been also confirmed, with return on equity at 15% and net profit margin of 16.6% after 5 years of the contract. Table 25 summarizes the results of the institutional component of the economic analysis, indicating a economic return of 21%. While all institutional systems are economically viable, it should be noted that secondary school and dormitory systems are only marginally so at 10% and 8% EIRR, respectively. Table 25: Summary Economic Analysis of Institutional Component, Sumbawanga Institutional Systems Systems Installed Costs Benefits Initial Avoided Capital Diesel Total Expenditur Replaceme Total Generation Total Net Year Disp HC Sec Shools Dorm Police Systems es nt costs Costs Costs Benefits 2008 26 4 9 7 9 55 $1 006 909 $1 006 909 $115 090 -$891 819 2009 26 4 9 7 9 55 $0 $0 $0 $225 708 $226 508 2010 26 4 9 7 9 55 $0 $0 $0 $225 708 $226 508 2011 26 4 9 7 9 55 $0 $0 $0 $225 708 $226 508 2012 26 4 9 7 9 55 $0 $164 305 $164 305 $225 708 $62 204 2013 26 4 9 7 9 55 $0 $0 $0 $225 708 $226 508 2014 26 4 9 7 9 55 $0 $0 $0 $225 708 $226 508 2015 26 4 9 7 9 55 $0 $0 $0 $225 708 $226 508 2016 26 4 9 7 9 55 $0 $164 305 $164 305 $262 068 $98 564 2017 26 4 9 7 9 55 $0 $0 $0 $225 708 $226 508 2018 26 4 9 7 9 55 $0 $0 $0 $234 573 $235 373 2019 26 4 9 7 9 55 $0 $0 $0 $225 708 $226 508 2020 26 4 9 7 9 55 $0 $164 305 $164 305 $225 708 $62 204 2021 26 4 9 7 9 55 $0 $0 $0 $225 714 $226 514 2022 26 4 9 7 9 55 $0 $0 $0 $225 708 $226 508 NPV $0 $1 006 909 $188 871 $1 195 780 $1 522 348 $301 351 Assumptions: · It is assumed that the installation of institutional PV systems allows for the displacement of diesel generation costs associated with similar electrical services. An overhaul of the generators is required every 8 years. · The system sizes for public institutions are 400 Wp on average, with larger systems for health centers and secondary schools, and smaller systems for dispensaries, and police stations. · See table below for the main assumptions Health Dispensary Center Sec School Dormitory Police Post Lighting/Communication 307 1500 1915 1739 369 Laboratory 1198 Refrigeration 758 758 Wh/day per staff house 261 261 261 261 261 No of Staff houses (Mean, rounded up) 1 2 5 0 0 Total ex staff houses 1065 2258 3113 1739 369 Total (Wh/day) 1326 2780 4418 1739 369 KWh/month 40 83 133 52 11 kWh/month ex staff houses 32 68 93 52 11 Hours operation per day @ half load 12 15 18 6 8 Average Load 110.5 185.3 245.4 289.8 46.1 Disel consumption L/h (rated load) 1.67 1.875 1.875 1.67 1.3 Disel consumption L/h (half load) 1.07 1.18 1.18 1.07 0.9 Total cost of PV system w/ staff house(s) 13551 26009 44634 16139 4221 Generator overhaul every 8 years Overhaul cost of 30% Of initial price Diesel cost per liter (Tsh) 1600 Rural price Solar life-span 15 yrs 28. Small Power Generation and Distribution Projects (SPGD) ­ Renewable Power Projects: As renewable energy generation costs are site- and technology-specific, it is not possible to calculate ex-ante EIRR for the program as a whole. Each subproject needs to be evaluated on its own. Economic rates of return, however, have been calculated for a sample of three well advanced potential SPGDs, for which feasibility studies have been concluded. The results are provided in Table 26. It should be noted that no Bank funding is used for generation investments, only new customer connections are financed (if applicable). All subprojects, however, are eligible for TA support. Economic benefits are calculated on basis of avoided costs of generation (both grid and offgrid). 96 Table 26: Summary Results - Prospective SPGD Project Units Hydro Hydro Rehab Biomass Hydro Njombe Mngeta Mafia Island Mufindi Hydro Kilombero Biomass Hydro Hydro Cogen Type TANESCO Rehab + TANESCO TANESCO sales + Mini- Isolated Mini- Isolated sales + Mini- grid grid Mini-grid grid Plant Size MW 10 0.39 0.44 3 Mini-grid Consumers Number 1,188 343 0 1,400 Mini-grid Consumption GWh/year 0.7 0.62 0 4.16 Sale to TANESCO GWh/year 40.91 - 2.56 17.43 Total Supply GWh/year 41.61 0.62 2.56 21.6 Cost of Distribution US$ million 0.7 0.19 - 0.51 Cost of Generation US$ million 12.68 0.08 0.88 7.7 Total Investment Cost US$ million 13.38 0.27 0.88 8.21 Other Subsidies EU: $3.8m for hydro Total TEDAP Subsidy US$ 557,472 228,592 - - Subsidy/connection US$ 469 666 - - EIRR % 15% 36.00% 40% 48% Loan Tenor Years 10 7 8 7 Loan Interest % 18% 18.00% 18% 18% Equity % 40% 40.00% 30% 30% FIRR - Net Cash Flow % 17% 27.20% 23% 27% FIRR - Equity (After Tax) % 18% 28.40% 28% 34% Minimum DSCR 1.26 1.08 1.24 1.26 Avoided diesel costs: US$250/MWh; Electricity cost avoided on TANESCO grid: US$62.4/MWh & TANESCO grid transmission loss: 4%. 29. The EIRR varies between 15% and 48% (it is lower for grid-connected projects, higher for projects supplying isolated mini-grids, displacing diesel). The FIRR has been calculated for a total project (including a mini-grid where applicable). All projects have been found financially feasible, with FIRR (equity, after tax) varying between 18% and 34%. Global Environmental Benefits 30. Global environmental benefits of the subprojects, based on the assumption of 17 MW of renewable power capacity installed have been estimated at about 1 million ton of CO2, corresponding to US$10 million of total benefits assuming the price of US$10/ton of CO2. See Annex 12 ­ Incremental Cost Analysis for more details. Sensitivity Analysis 31. Sensitivity analysis has been carried to account for changes in investment costs (+/- 15%). Projects remain economically and financially feasible under those conditions. The offgrid component is not affected by TANESCO's tariffs. C. Financial Analysis of TANESCO 32. TANESCO, the state owned electric utility, has been suffering from poor performance for several years. A combination of high level of network losses, low electricity tariffs, low network voltages and 97 most importantly, lack of hard investments has paralyzed the utility. In 2006, there were widespread blackouts throughout the TANESCO grid, primarily due to lack of generation capacity, which led to public outcry. Below, are some of the critical challenges faced by TANESCO: a. Inability to meet national demand: The supply has not been able to keep up for the last few years to meet the average 7.6% per annum increase in electricity demand. In addition, the utility is also bogged down by heavy network losses; b. Low tariff levels: At an average tariff of TSh 84/kWh (in 2006), and estimated to be TSh 92/kWh (in 2007), current tariff levels are one of the lowest in the region (see Figure 8 below) and have not been enough to meet operational expenses or long-term capital investment needs. Resulting from persistent bad hydrological conditions within the country, TANESCO has not been able to supply about 14% of the expected generation demand for the calendar year 2006. Linked to the generation shortfall TANESCO is also facing serious accumulated and forecasted monthly revenue shortfalls. Figure 8: Regional Electricity Tariffs c. Expensive thermal generation: Over the years, TANESCO PPAs with the IPPs, Songas and IPTL, have resulted in high capacity and or energy payments. Even though, the GoT is required to make 40% of the payment to TANESCO for IPTL, there is occasional failure on the part of the Government to do so. In the past, TANESCO's capacity and energy payments to IPPs use up 90% of collected revenues, as against an estimated 65% in most other countries. d. Heavy dependency on hydro-generation: Due to severe drought and high dependency on hydro-power (about 98% in 2002 to about 40% in 2006), the gap between supply and demand has been severe, and as a result, the utility had to rely on expensive thermal power to meet growing demand. e. High network losses: TANESCO has long suffered from high network losses that require the company to generate more electricity than necessary. As depicted in Figure 9 and Figure 10 below, the recent network losses have been in the range of 23-30%.30 30The losses during transmission have been considered part of TANESCO's cost of generation as it was not billed to the customers. As a result, there has been a wide gap between generated units and billed units. 98 Figure 9: TANESCO Network Losses Figure 10: TANESCO Units Generated vs Billed f. Inadequate business systems and processes: TANESCO lacks good resource management and technical management systems, which has had an adverse effect on the overall operational efficiency of the utility. TANESCO has requested the Bank to support technical assistance and procurement of software and hardware required to improve utility operations. Financial Performance of TANESCO 33. As a result of the aforementioned issues, there has been a revenue shortfall to meet operating costs, in the 2006 calendar year, of about TSh 166 billion or about US$ 129 million. Although, in the past, the shortfall between revenues and costs has been covered by direct and indirect subsidies from the Government's budget, this has been a strain on the limited resources of the GoT. Despite Government's support for the lease payments of three lease plants and intermittently for IPTL's capacity charges, TANESCO incurred a net loss of over TSh 183 billion in 2006 (approximately US$ 142 million), and was obligated to resort to expensive short-term overdraft borrowing to cover cash flow deficits. 34. In term of operations, the company's liquidity has been tied up substantially in accounts receivables. The accounts receivables were running at a 47% of sales in 2002 to 2005. The average collection period was 195 days during the same period. This had caused the current ratio (current assets divided by current liabilities) to decline from 0.43 in 2002 to 0.29 in 2003 and 0.27 in 2004, respectively. 99 However, the ratio significantly improved from 0.27 in 2004 to 1.40 in 2005 primarily because of conversion of GoT loans and accrued interest of TSh 692 billion to equity. During this tight liquidity condition, TANESCO has relied on external sources of fund, including Government's contribution and term loan to maintain liquidity. Figure 11: TANESCO Liquidity 35. This cash flow situation is expected to continue (possibly in less severity today because of increased water levels in reservoirs) until the following important issues are properly addressed: a. Adequate amount of generation capacity is added and IPTL capacity is converted to gas to meet the expected load forecast demand and long run marginal cost projections thereby reducing cost of generating electricity. b. Critical transmission and distribution investments in the networks are targeted to reduce technical and nontechnical losses. c. The expected revenue requirements are met with an increase in electricity tariffs, increased operational efficiencies and Government/Donor assistance with long-term investment plan. 36. In addition, there has been substantial foreign exchange losses in 2002 and 2003 resulting from a significant depreciation of the Tanzanian Shilling, while the company's major liabilities from electricity generation, both capacity and energy payments, were tied to hard currencies. Table 27 provides a snap shot of the historical financial performance of TANESCO. Table 27: Historical Financial Performance of TANESCO (in TSh Millions) 2002 2003 2004 2005 2006 Actual Actual Actual Actual Actual Income Items Electricity Sales 150,015 165,014 188,475 221,658 232,146 Cost of Sales* 140,214 184,073 228,408 282,736 374,349 Gross Margin 9,801 (19,059) (39,933) (61,078) (142,203) Gross Margin (% of Sales) 7% (12%) (21%) (28%) (61%) Operating Expenses 33,391 73,595 83,625 72,046 112,551 Operating Income 43,751 (18,993) 38,933 (19,748) (134,290) Net Income (72,199) (177,573) (15,637) (860) (183,343) Tariff TSh/kWh 68.63 70.94 76.43 84.34 83.84 100 2002 2003 2004 2005 2006 Balance Sheet Items Collection Days 234 223 191 131 89 Payment Days 587 500 419 80 87 Current Ratio 0.43 0.29 0.27 1.40 0.58 Long Term Loan Cash Flow Items Cash/ Cash Equivalent at year end 20,047 11,605 9,018 (10,482) (20,653) Working Capital (340,021) (494,745) (547,426) (81,450) (180,183) Cash Debt Service Coverage Ratio** 1.08 (0.67) (0.47) 7.85 (9.59) Self Financing Ratio*** Per Unit Data Unit Sales GWh 2,186 2,326 2,369 2,657 2,796 Unit Generation GWh 2,758 2,825 2,887 3,526 3,572 Per Unit Generation Cost USc 5.11 6.13 7.11 6.97 8.15 Per Unit Repair and Maintenance cost USc 0.03 0.05 0.06 0.02 0.01 Per Unit Operating Cost USc 1.22 2.45 2.60 1.78 2.45 *Cost of Sales include cost of electricity generation, cost of purchase electricity, distribution expense and depreciation **Cashflow from Operations/(Loan repayment + Interest Expense) Generation Mix 37. Since 2002, the cost of electricity generation has continuously increased, primarily as the reliance on thermal energy has increased. As seen from Figure 12, the reliance on hydro generation has been continuously decreasing from 98% in 2002 to 40% in 2006. Hydro generation dramatically decreased during 2004 to 2006 because of the severe drought experienced in East Africa. 38. Over the next five years, TANESCO is expected to generate power from only the currently installed plants; supply from hydro plants is expected to be 2,632 GWh in 200731 and 2,282 GWh per year from 2008-2011. Figure 13 below shows the expected proportion of electricity generated from different fuel sources available to TANESCO. Figure 12: TANESCO Generation Mix 31Heavy rains that unexpectedly occurred during the "Short Rains" season in 2007 have filled up the reservoirs in the hydro systems in Tanzania. For 2008 and beyond, the supply is based on average rainfall. 101 Figure 13: TANESCO Expected Fuel Mix for Generation 39. IPPs have become a more substantial contributor to electricity generation for TANESCO in the last few years and will continue to be so, in the future. IPP contribution will increase from 4% in 2003 to 50% in 2011. The costs associated with such power accounts are expected to be about 42% of TANESCO's revenues and about 69% of total electricity generation cost in the 2007 ­ 2011. The major thermal plant is the Bank financed Songas IPP which will supply about 29% of total demand. IPTL is expected to convert to gas firing plant in July 2009. However, if the conversion does not take place, TANESCO will have to purchase electricity from relatively higher cost power plants, and that will affect TANESCO's cost of electricity generation and therefore its overall financial performance. 40. Table 28 provides a detailed overview of the demand supply balance and the generation mix. Table 28: Demand Supply Balance and Generation Mix (in GWh) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Actual Actual Actual Actual Actual Projecti Projecti Projecti Projecti Projecti on on on on on Demand 2,186 2,326 2,369 2,657 2,796 3,153 3,393 3,750 4,108 4,406 Required Generation 2,758 2,825 2,887 3,526 3,572 4,148 4,221 4,498 4,755 4,983 Supply Hydro Kidatu 1,157 1,140 1,000 683 488 907 691 691 691 691 Mtera 436 452 430 233 97 344 297 297 297 297 New Pangani Falls 231 231 231 171 266 Kihansi 783 732 750 617 501 927 880 880 880 880 Nyumba ya Mungu 26 30 30 23 22 Hale 70 70 70 51 62 P/System 454 414 414 414 414 Total Hydro 2,703 2,655 2,511 1,778 1,436 2,632 2,282 2,282 2,282 2,282 Thermal SONGAS U1 - 6 300 1,149 1,303 1,046 1,270 1,385 1,404 1,404 AGGREKO 0 0 0 - 57 208 266 - - - WARTSILA-UB 38 219 242 - - Dowans 32 - - - - IPTL Oil 113 17 578 640 31 - - - - Grid Diesel 1 1 0 9 20 - - - - - Kiwira-Old 0 - - - - ALSTHOM-MWZ - - - - - 102 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 ORETI - TEGETA - - 18 - - IPTL Gas Units 1&2 - - - - - IPTL Gas Units 3&4 - - - - - Kiwira Phase 1 - - 236 357 393 Kiwira Phase 2 - - 146 517 704 Total - Thermal 1 115 318 1,737 2,020 1,355 1,755 2,027 2,278 2,501 Isolated Station 86 107 109 111 113 Import 54 55 58 55 66 75 78 80 83 86 Total Supply 2,758 2,825 2,887 3,526 3,572 4,148 4,221 4,498 4,755 4,983 Hydro Generation (as a %) 98% 94% 87% 50% 40% 63% 54% 51% 48% 46% Financial Projections for TANESCO 41. TANESCO is presently being advised by a Financial Advisor and a Tariff Advisor to implement its financial recovery plan whose principles were approved by the cabinet in February 2007, namely: a. Securing a significant increase in tariff to at least cover its cost of operations (including cost of generation, administrative costs, operations and maintenance, and financing costs) ­ to this extent TANESCO has requested a 40% increase in electricity tariffs in August 2007; b. Improving service delivery by implementing urgent transmission, distribution rehabilitation and commercial recovery investments to improve overall system losses; c. Securing a TSh 250 billion loan to assure cash flow for operations until tariff increases are effected; and d. Reducing operational expenses by converting IPTL to gas and reducing the Songas capacity charges by implementing the option in the Songas Power Purchase Agreement that allows GoT to pay for (up to) 75% of costs associated with the engineering, procurement and construction of the Ubungo Expansion Project (UEP). 42. Table 29 provides an overview of the TANESCO's financial performance.32 Table 29: TANESCO ­ Highlights of Projected Financial Performance 2007 2008 2009 2010 2011 Actual Projection Projection Projection Projection Income Items Electricity Sales 291,239 438,722 643,174 711,852 763,567 Cost of Sales* 341,597 341,681 395,139 404,472 436,656 Gross Margin (50,358) 97,041 248,035 307,380 326,912 Gross Margin (% of Sales) -17% -17% -17% 22% 39% Operating Expenses 137,236 239,603 295,561 304,654 320,943 Operating Income (141,371) 27,514 108,155 99,690 109,811 Net Income (196,519) (52,083) - - 12,544 Tariff (TSh/kWh) 92.37 129.32 171.49 173.29 173.29 YOY Tariff increase 40.00% 33.00% 1.00% 0.00% Balance Sheet Items Collection Days 91 93 95 97 99 Payment Days 87 87 87 87 87 Current Ratio 0.48 0.5 0.58 0.58 0.61 Long Term Loan 235,000 250,000 215,278 173,611 131,944 Cash Flow Items Cash Flow from Operations (168,332) (42,556) 33,326 50,271 76,957 Cash/Cash Equivalent at year end (155,745) (183,895) (185,575) (177,074) (141,874) 32Based on the assumption that critical financial recovery actions such as multiple tariff increases, conversion of IPTL to gas, reduction of Songas Capacity charges have been effected. 103 2007 2008 2009 2010 2011 Working Capital (214,872) (286,135) (342,787) (376,393) (391,534) Cash Debt Service Coverage Ratio** (0.70) (1.00) 0.44 0.67 1.13 Self Financing Ratio*** (0.12) 0.08 0.26 0.61 Per Unit Data Unit Sales (GWh) 3,153 3,393 3,750 4,108 4,406 Unit Generation (GWh) 4,148 4,221 4,498 4,755 4,983 Per Unit Generation Cost (USc) 6.14 5.78 6.02 5.59 5.52 Per Unit Repair and Maintenance cost (USc) 1.01 1.11 1.43 1.41 1.39 Per Unit Operating Cost (USc) 2.47 4.06 4.5 4.21 4.05 Tariff Tariff required to cover yearly operating expenditures (OPEX) **** 147.98 171.23 173.29 173.29 YOY Tariff increase required to cover OPEX 60% 16% 1% 0% Tariff required to cover OPEX excluding depreciation and provision for 128.40 142.93 147.49 147.49 doubful debts YOY Tariff increase required to cover OPEX excl. depreciation and 39% 11% 3% 0% provision for doubtful debt *Cost of Sales include cost of electricity generation, cost of purchase electricity, distribution expense and depreciation **Cashflow from Operations/(Loan repayment + Interest Expense) *** Self Financing Ratio = Cash flow from operation/ Capital Investment **** OPEX includea operating expenses, and depreciation and provision for doubtful debts 43. These projections have been prepared based on 2006 audited statements, TANESCO budget for 2007 and the following key assumptions: · It is assumed, in the absence of a regulatory approval by EWURA, that the proposed tariff increase of 40% in 2008 is applicable; appropriate scenario analysis is provided below; · Songas equity refinancing for the expansion units occurs prior to July 2008; · GoT continues to pay for 40% of the IPTL capacity payments (until the conversion is complete in July 2009) and 100% of the capacity charges for the lease plants at Ubungo; · IPTL buyout will not occur in the next five years; · Electricity unit sales are derived from historical demand and supply ­ projections are based on a growth in demand of 7.6% per year in 2008-2011 (2007 sales are derived from the company budget); · Network losses are expected to gradually decline from 28% in 2007 to 19% in 2011, as a result of new investment program supported by the Project and MCC financed investments in the network; · Average hydrology is assumed to translate into 2,282 GWh of hydropower per annum; · TANESCO is expected to have a capital investment program of about TSh 699.9 billion between 2008 and 2011, of which TSh 683.2 billion shall comprise investment in new assets and TSh 16.7 billion shall fund associated technical assistance; · The dollar exchange rate was 1,286 TSh in 2006. It is assumed that TSh will depreciate by 4.3% per annum in the five year period; and · Annual US inflation is assumed to be 2.7% per annum and local inflation is assumed to be 7% per annum. 44. Syndicated Loan for TANESCO Operations: A syndicated loan amounting to TSh 250 billion has been secured by TANESCO in September 2007. It is expected that TSh 235 billion will be drawn in 2007 to fund (a) refinancing of overdrafts, TSh 80 billion; (b) repayment of commercial bank (Stanbic) standby loan facility, TSh 55 billion; (c) payment of IPTL arrears, TSh 45 billion; and (d) payments to other creditors, TSh 20 billion. Remaining TSh 30 billion is expected to finance ongoing capital expenses and expenditure. The balance of TSh 15 billion is assumed to be drawn in 2008, if needed. This loan is 104 expected to be repaid in six years, with one and a half years of grace period on principal repayments and an TSh interest rate of about 17%. 45. Revenue Analysis: The financial analysis demonstrates that the company will generate gross revenues from electricity sales of TSh 438 billion in 2008 (assuming 40% tariff increase is in effect). The revenue from electricity sales is expected to gradually increase and reach TSh 763 billion in 2011. The projected units sales will increase from 3,153 GWh in 2007 to 4,406 GWh in 2011 supporting an increase in demand from the existing customers, 25,000 new customers connected under TEDAP and additional mines in the north west of the countries in 2009. Including the support from the government and other sources of revenue, TANESCO is expected to generate gross revenues of TSh 589 billion in 2008, gradually increasing to TSh 826 billion in 2011. The revenue growth rate in the next 5 years is expected to be 24% as seen in Figure 14 below. 46. Tariff Increase and TANESCO's Operations: In order to gradually move the tariff level up to commercially realistic levels that will allow TANESCO to cover its cost of operations, the company has proposed to EWURA a 40% tariff increase for 2008. At this stage, the tariff increase is expected to cover only the projected cost of electricity sales and operating cost, but does not cover depreciation and provision for doubtful debt. As a result, the company is expected to report a net operating loss of about TSh 52 billion in 2008 if such a tariff increase is approved. 47. A tariff increase of 45.8% will only cover the projected cost of electricity sales and operating cost (excluding depreciation). A tariff increase of 39.0% will cover the projected cost of electricity sales and operating cost (excluding depreciation and provision for doubtful debt). A tariff increase of 31.1% is required to meet the operating and debt service cash requirements of 2008. 48. TANESCO has requested a 40% tariff increase from EWURA, lower than the 60.2% tariff increase is required to cover the full projected cost of electricity sales and operating costs, including depreciation as demonstrated by the Financial Analysis. This "gap" in tariff increase could be gradually implemented in 2008 to improve the company's financial viability in the medium-term. TANESCO will need to request tariff increases of about 16% to be effected in January 2009 to assure continual positive net income (see Table 29 for details). Figure 14: Projected Sales and Operating Costs 900 800 700 600 n 500 illio B hsT 400 300 200 100 0 2007 2008 2009 2010 2011 Electricity Sales Cost of sales Total Revenues Operating Expenses 49. Cost of Sales: TANESCO's cost of electricity generation will be higher than in the past because of a much higher reliance on thermal electricity. Due to higher thermal generation costs and high network losses, the cost of sales increased from 55% of revenue in 2002 to 130% of revenue in 2007, and the average tariffs have increased from 44 TSh/kWh in 2002 to 84 TSh /kWh in 2006 (estimated to be 120 TSh/kWh for 2007). In the future, the total cost of sales is expected to decrease from 130% of gross 105 revenues in 2007 to 52% of gross revenues in 2011, primarily as a result of investments in improving transmission and distribution network and thereby reduced losses. 50. Operating Expenses: Key operating expenses include repair and maintenance costs and staff costs. The repair and maintenance cost accounts for 34% of the total operating expenses, while staff cost accounts for 30% of the total operating expenses. The financial projections are based on an expectation that the repair and maintenance costs will be about 15% of the gross revenues, thereby significantly increasing from TSh 56 billion in 2007 to about TSh 110 billion in 2011. Staff costs are expected to grow with inflation as TANESCO has little plans to expand the staff roster; these costs are projected to increase from TSh 59 billion in 2007 to TSh 84 billion in 2011. Cumulative operating expenses are expected to be about 46% of gross revenues. 51. Operating Income: Lower network losses and a least-cost generation plan, together with partial government support and significant tariff increases are expected to lead to a better financial position and positive operating income of TSh 27 billion in 2008. Operating income is expected to remain positive thereafter (inflationary tariff increase may be required to sustain it). An average operating profit margin of 3% is expected to be seen during the projection period. 52. Cash flow: As a result of high generation costs, high network loss and low collection rates on credit meters, the utility has operated in a tight liquidity environment. However, collection rates have been very good, over 90%, and higher in the prepaid meter environments. In addition to investment in transmission and distribution networks, technology enhancement, 60,000 credit meters will be replaced by prepaid meters, as part of the Project enabling a high collection level. In terms of future liquidity, the company is expected to generate enough cash to cover operating expenses including working capital requirement. This is evidenced from positive operating cash flow of TSh 33 billion in 2009, increasing to TSh 76 billion in 2011. In the near term, the company is expected to report a negative cash flow from investment activities of TSh 354 billion in 2008, and is TSh 125 billion in 2011. However, to improve the long-term viability of the company, TANESCO will need to make the needed investment immediately. Such investment will not incur short-term net benefits to the company, but the benefits will be captured in the long run. 53. Self financing ability: The financial analysis shows that TANESCO will have limited ability to finance long-term investments; GoT and Donor support will be required for continued investments and growth of the power sector in Tanzania, especially to increase access to electricity in Tanzania. The financial analysis shows that the company operating cash flow will partially cover the needed investment program. The ability to self finance the investment program is expected to improve overtime as reflected in the increasing of self financing ratio from 0.08 in 2008 to 0.61 in 2011. 54. Sensitivity Analysis ­ TANESCO Financial Projections: TANESCO's financial viability is critically dependent upon the following key variables: growth in sales; regional hydrology; HFO price until IPTL conversion to gas firing; transmission and distribution losses; and the level of tariff increase(s) approved by EWURA. In a good rainfall year, TANESCO is expected to generate a higher net income (than the base case), thus requiring lower year to year tariff increase to cover its costs. In a bad rainfall year, TANESCO is expected to supply only 28% of total demand for electricity with hydropower, thus reporting lower than expected net income; in such a scenario for 2008, a tariff increase of 74% is required to cover full operating costs (including depreciation and provision on doubtful debt) when compared to 60.2% with average hydrology. Repair and maintenance expenses, that contribute about 34% of the total operating expenses, are also critically important. If such expenses increase from 15% of gross revenues to about 20%, a tariff increase of 62.3% will be required to cover full operating costs (including depreciation and provision on doubtful debt) when compared to 60.2% in the base case. The cost of electricity sales which includes energy charge, capacity charge and imported energy are denominated (or calculated) in US$ and converted to TSh for payment. If the TSh is assumed to depreciate by 10% annually (rather than 4.3% per annum), TANESCO will require a tariff increase of 65.9% in 2008 to 106 cover full operating costs (including depreciation and provision on doubtful debt). Table 30 provides an overview of this analysis. Table 30: TANESCO Financial Analysis ­ Sensitivity and Scenario Analysis Tariff Tariff 2008 2008 2008 increase increase Unit cost Operating Cashflow required required of sales income from for for operations breakeven breakeven (TSh) (As a %) (TSh/kWh) (TSh (TSh millions) millions) Base Case 147.98 60.20% 95.67 27,514 (42,556) Sale growth 20% higher than base case 144.16 59.87% 93.57 27,647 (42,535) 20% lower than base case 152.02 60.58% 97.89 27,302 (42,636) Rainfall Good 144.71 56.67% 92.85 36,627 (35,614) Average 147.98 60.20% 95.67 27,514 (42,556) Bad 164.75 78.36% 110.14 -19,315 (78,225) Fuel price Natural Gas prices increase by 20% 149.99 62.38% 97.4 21,897 (46,834) Network losses Distribution losses are 20% higher than the base case 149.65 62.01% 97.11 22,838 (46,117) Transmission losses are 20% higher than the base case 148.42 60.68% 96.05 26,273 (43,501) Transmission and Distribution losses are 20% higher 150.12 62.52% 97.51 21,541 47,105 than base case US inflation US inflation is 4% per annum 146.69 58.81% 93.79 31,105 (40,440) US inflation is 6% per annum 144.76 56.72% 90.97 36,497 (37,262) Tanzania inflation Tanzania inflation per annum is 5% 144.52 56.46% 92.04 37,171 (36,147) Tanzania inflation per annum is 10% 153.25 65.91% 101.2 12,804 (52,320) Exchange rate Shilling depreciates by 7% per annum 150.78 63.24% 99.69 19,686 (47,225) Shilling depreciates by 10% per annum 154 66.72% 104.29 10,713 (52,577) Others Repair and maintenance costs increase to 20% (base case 157.55 70.57% 96.05 5,577 (59,264) is 15% of Sales) Songas refinancing in January 2008 (Base case assumes 144.97 56.95% 93.07 35,899 (36,169) July 2008) 107 Annex 10: Safeguard Policy Issues TANZANIA: Energy Development and Access Expansion Project Social 1. Policy, Regulatory, and Legislative Requirements: The project has been designed and will be operated in compliance with applicable regulatory and legislative requirements, including those of the Government of Tanzania and the World Bank. 2. Resettlement and Cultural Heritage: The project design is intended to contribute to the social and economic development of the affected areas and of the country as a whole. This project is rated as category B and triggers two of the Bank's social fiduciary policies: OP 4.12 and OP 4.11. The project will be undertaking the necessary design changes to avoid negative impacts and in the cases, where this is not possible, mitigation measures will be developed in line with the Bank's above-mentioned policies. Under component A there will be displacement of people and land acquisition. Since the scope of these impacts is unknown, a Resettlement Policy Action Framework is being used (Cr. 3569) and mitigation measures established according to the Bank's policy. To ensure effective implementation of the Bank's social fiduciary policies a Resettlement Action Plan with adequate stakeholder consultations and relevant impact assessments will be prepared and implemented under the subprojects, before construction begins. To assess the effectiveness of the implementation of the resettlement plans a socio-economic baseline survey will be conducted and resettlement impact assessment audits will be undertaken as part of the social fiduciary requirements. 3. Cultural Property (archaeological and burial sites): With regard to physical cultural property it is anticipated that there will limited impacts. The project will develop mitigation measure to safeguard any chance finds. It is already known that based on the project design a small number of burial sites along the right of way will be affected. The plan is to avoid these burial sites, shrines and archeological sites by adjusting the pylons. The baseline studies will be used to establish the number of sites affected and procedures for salvaging chance finds will be followed in collaboration with the Director of Antiquities, before clearing of the wayleave and other works commence. Contractors will follow the policy and avoid disturbance on such sites as far as possible and inform workers of known sites. 4. StakeholderCconsultations and Communication Plans: One of the key findings of the Environmental Impact Assessment is that adverse social impacts other than land acquisition and resettlement described above may arise from inadequate stakeholder participation in choices of technology and served areas, and exclusion of vulnerable groups from project benefits. The ESMF contains detailed checklists and generic mitigation measures to ensure that the potential impacts are addressed in environmental and social assessments and management plans of proposed subprojects. The project will develop an adequate communication plan, as part of the consultation with the project affected people to inform them about the nature, timing and scope of the relevant project impacts, as well as the mitigation measures. 5. Institutional Arrangement and Compliance of Mitigation Monitoring Plan: The implementing agency for the recommendation of the Environment and Social Audit is TANESCO. TANESCO management has committed itself to taking the corrective measures recommended in the audit, budgeting for them in the company's business plan. TANESCO and its contractors are the agencies primarily responsible for implementing the Mitigation Plan for Component A that is presented in Chapter 8 of the EIA, and for this reason it will be important that TANESCO field personnel be familiar with the Plan and that construction contracts be specific regarding contractor responsibilities for impact prevention and mitigation and penalties for noncompliance. In this regard it is important to conduct a thorough screening of the contractors' qualifications and track record. District and local government authorities are identified 108 as having some responsibility for ROW maintenance (primarily preventing unauthorized activities), public safety, and collaboration on prevention of impacts at burial sites and shrines. Contractors and TANESCO (directly or by consultants) have the majority of the monitoring responsibilities, except for overall compliance with environmental regulations and certain other specialized monitoring and reporting activities that are assigned to NEMC. The total cost of mitigation measures not included in construction contracts is estimated at US$32,000. The total cost of monitoring other than for implementation of the RAP is estimated at US$32,000 as well. 6. HIV/AIDS and Collaboration with Public Health Sector and Department of Public Works: The Environmental Impact Assessment (EIA) expresses concern about a possible influx of workers from other localities, bringing the risks of social conflict and of the spread of HIV/AIDS and other STDs. The project will establish as part of the mitigation measures which include activities that address grievances and lay out conflict management and resolutions mechanisms. In the area of HIV/AIDS there will be public awareness and education campaign undertaken with the relevant local health authorities before and during the construction period. During construction and operations, the project will ensure that adequate public safety hazards training, warning signs and strict workplace rules will be adhered to and compliance monitoring plan will be established prior to the commencement of work. 7. Environment, Health and Safety Management System: The operators of the project will design, construct and operate the project and implement an environment, health, and safety (EHS) management system based on the principles of ISO 14001. Standards and procedures will be consistent with those of the World Health Organization (WHO) and the World Bank. Where appropriate, Tanzanian standards policies will be used if more stringent. Each standard will include a minimum set of specific, measurable performance criteria. The project management team will establish a review process to develop and examine standards and procedures on a continuing basis, and where necessary, to modify them to reflect current operating conditions and regulatory requirements. These standards will be applicable to all Project planning and operations activities, as well as personnel at all levels. This includes senior management (for program implementation and resource allocation); mid-level managers and supervisors (for application at work sites); and all other employees (to promote adherence to the appropriate program requirements on the job). 8. Social and Poverty Impacts: To examine the project's impact various safeguard documents, covering environmental and social safeguards have been prepared. For a more comprehensive assessment of the social, institutional and poverty impact, aside from the resettlement work, the project will undertake a poverty and social impact analysis to contribute to the policy and program development of the power sector in the country. 9. Government of Tanzania: MEM approved the Environmental Impact Assessment and the Environmental and Social Management Framework. NEMC provided a one-stop clearance process by involving all other key governmental agencies in the approval process. The NEMC, which advises the Government on environmental and social safeguard issues has reviewed and commented on the drafts of the Environmental Impact Assessments and the Environmental and Social Management Framework (ESMF). NEMC's comments have been taken into consideration in the final version. 10. Public Consultation and Disclosure: In accordance with Bank policies, the project components involve extensive communication and consultation with the Tanzanian public both in the directly affected communities in the resettlement areas as well as at large. The project is being covered in the print, radio and TV media. Specfic activities include: (a) involvement and extensive communication and consultation with those households affected by the project; (b) development of brochures prepared in Swahili and widely distributed to people affected by the project and the general public; (c) notices for meetings to local leaders and media such as radio, TV, and newspapers (both in English and Swahili); (d) numerous 109 meetings to discuss concerns with communities in along the wayleave, and at the resettlement areas; (e) visits by senior Government officials at the project sites; including meeting local residents and listening to their questions and concerns; (f) several seminars with Government leaders, local leaders and Members of Parliament; and (g) a radio program by the National Radio Station (Radio Tanzania Dar es Salaam) informing the public of major project issues. These radio programs will be reestablished during the implementation stage of the project. 11. In spite of the project's already high profile in Tanzania, when the construction phase begins, the plan is to communicate effectively with all stakeholders and project affected people so that there is accurate information about the project available to all interested parties. The communication strategy and plan will utilize various tools to communicate information on the project, including press releases and newsletters, media interviews with PAPs, MEM and contractor staff, meetings with groups such as Members of Parliament or service clubs, project brochures and fact sheets, annual reports, videos, posters, and the MEM and TANESCO website. Community level activities will be an essential element of the project's communication strategy and provide important information to the public, to non-governmental organizations (NGOs) and to government agencies. Community liaison provides the opportunity for affected members of the public to identify their support and concerns, provides a forum for communication with project proponents and regulatory bodies, and facilitates anticipation of and management of project issues. 12. Disclosure of documents: In addition to these numerous public discussions and reviews, the Project has complied with the World Bank's formal disclosure requirements for environmental assessments by making its documentation available both at the World Bank InfoShop and in-country. The ESMF has been distributed and presented to all stakeholders. The following documentation has been sent to the World Bank's InfoShop and distributed in country: · Environmental Impact Assessment · Resettlement Policy Framework · Environmental and Social Management Framework · Project Environmental documentation was disclosed to the Tanzanian public (through announcements in English and Kiswahili newspapers). 13. Resettlement Assessment Audit: Plans are under way to assess the effectiveness of the resettlement plans and compensation activities. This will ensure that the work was done in compliance with the World Bank's safeguard policies. Any discrepancies or deficiencies will be addressed through remedial action plans. In addition, initial and supplemental socio-economic baseline data are to be collected to assure that, where resettlement occurred, income and sources of livelihood of affected people were restored, if not improved. Environment 14. The project is in Category B for environmental assessment: Environmental assessment documents for Component A were completed in 2005 in connection with the Songo Songo Gas Development and Power Generation Project. They consist of "Environmental Impact Assessment: Reinforcement and Upgrade of Dar es Salaam, Kilimanjaro and Arusha Transmission and Distribution System" and "Environmental Audit of 18 Substations." Since the specific locations of Component B investments will be determined during project implementation, its environmental document is an "Environmental and Social Management Framework (ESMF)", also prepared in 2005 but in connection with the Energizing Rural Transformation Project. TANESCO's Environment Unit carried out field reconnaissance in 2007 for the purpose of updating the environmental assessment findings. 110 15. Environmental Impact Assessment (EIA): Below are key findings and recommendations of the environmental assessments: · The GEF-supported element of Component B to promote use of renewable energy sources in rural electrification contributes global environmental benefits by controlling greenhouse gas emission. Availability of electricity may alleviate some of the pressure on Tanzanian forest resources by reducing demand for fuel wood and charcoal as the primary energy sources. · With much of the transmission and distribution system work to be carried out in or parallel to existing rights of way and at existing substations, and with access roads already existing at nearly all locations, potential negative impacts of Component A are not extensive. Vegetation clearing is identified as the most significant activity that could cause environmental impacts, including soil erosion and air pollution from burning. No undisturbed natural habitat will be affected. No rare or endangered biota have been found in the affected area. The EIA recommends minimizing clearing and prompt re-vegetation of disturbed sites, including equipment and materials storage areas and borrow pits, upon completion of activities. Impact on soil erosion, surface water quality, air quality, noise, and solid waste management will be local and of short duration, and they can be readily mitigated through adherence to good construction practices. PCB contamination was confirmed in transformers at two of the substations to be upgraded, and this will require special handling, storage and disposal. 16. The ESMF for Component B defines in detail the "Environmental and Social Planning, Review and Clearing Process", which incorporates guidelines from both the National Environmental Management Council (NEMC) of Tanzania and the World Bank's OP 4.01. The ESMF clearly specifies that "Compliance with this environmental and social management process will constitute part of the evaluation methodology for bids/tenders from potential operators leading to award of a license to operate their subproject package". The FIRST step in the process begins with the preparation of the bid/tender package that potential operators will have to submit. The potential operator must first assign an Environmental Category for his subproject type, using the below. The potential operators will be assisted throughout this process by their team of engineers (consultants)/service providers. The guidelines in this ESMF are specific to small-scale non-renewable and renewable energy subprojects to provide services in rural areas . The categorization in the table is based on the extent of the potential impacts and not the generic "subproject type", which in turn determines the extent of the environmental assessment required for it. Depending upon the nature of the subproject, its extent, and the extent of the potential impacts, the Category, and hence the level of rigor for environmental analysis, is determined. The table in the ESMF (below) provides a list of subproject types that may be considered by potential operators for funding program under the TEDAP. Rural Electrification Subproject Types, Major Environmental and Social Concerns and Subproject Environmental Category Project Potential Major Environmental and Social Concerns Category Type* A. Renewable Sources/Energy for Rural Electrification Waste Sugar Waste disposal, pollution control, safety B Conversion Biomass Energy Air emissions; loss of soil fertility and soil organic matter B Methane Waste Disposal/Safety B Capture/Conversion Biogas Production Loss of soil fertility B Wind Power Aesthetics; noise pollution B 111 Project Potential Major Environmental and Social Concerns Category Type* Mini ­ Hydro Power Loss of natural habitat; resettlement A/ B** Decentralized Solar Recycling of batteries and parts B PV Energy B. Non Renewable Resettlement; loss of natural habitat; aesthetics B Sources/Energy for Rural Electrification Thermal Generation Emission of GHG, Air, land and water pollution, noise B Plants Transmission and Resettlement; loss of natural habitat; A/B distribution * Resettlement is also likely to be a factor for most subproject types involving land acquisition or restriction for new Transmission and Distribution Grids or extension of grids. ** Although most mini-hydro subprojects are expected to be run-of-river and fall within a Category B, it is possible that some may require water storage. This could include the impoundment of large relatively flat areas. As such, these areas could remove land from cultivation and possibly result in involuntary resettlement. In such cases, the subproject will fall into a Category A. + The TEDAP Category is B for the program as a whole. Not to be confused with subproject category. The SECOND step is to determine which of the World Bank's safeguards policies may be triggered by the subproject and what the requirements are to comply with the triggered policy. This requires the potential operator to use the Safeguards Tables in Annex A to the ESMF. Further information on these policies is available on the Bank's website, www.worldbank.org. The assumption is that the Environment Assessment OP 4.01 is already triggered and hence the need for compliance with this ESMF. OP 4.01 is included in Annex A to provide additional guidance and information to the potential operators. Therefore, potential operators compliance with this ESMF process is deemed to be accepted as compliance with OP 4.01. The following Safeguards Policies are not included in Annex A, because they are not likely to apply for the reasons noted in brackets next to the OP: 1. Pest Management (OP 4.09) (mostly for agriculture projects using inputs). 2. Indigenous Peoples (OD 4.20) (no recognized indigenous people in URT). 3. Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60) (no disputed borders with neighbors of Tanzania). 4. Projects on International Waters (OP 7.50, BP 7.50, GP 7.50) (To be addressed at the national level by the government of the URT and not by subproject operators). However, Annex A contains information to help the potential operators determine which of the following Bank safeguard policies may be triggered by their subproject; 1. Environmental Assessment (OP 4.01, BP 4.01, and GP 4.01) (Always Applies). 2. Natural Habitats (OP 4.04, BP 4.04, GP 4.04). 3. Forestry (OP 4.3633, GP 4.36). 4. Cultural Property (OPN 11.03) 5. Involuntary Resettlement (OP/BP 4.12). 6. Safety of Dams (OP 4.37, BP 4.37). If any of the Bank safeguards policies are triggered by subproject, the operator will modify the design, implementation, operation, maintenance, and decommissioning phases to ensure that the subproject satisfies the requirements of that particular policy. The THIRD step is for the operator to prepare a comprehensive subproject Environmental and Social Impact Assessment (ESIA) including an environmental and social management plan (ESMP) (see Annex C of the ESMF for guidelines on how to prepare an ESMP). Additionally, for situations where OP 4.12 may apply, the Operator will prepare a Resettlement Action Plan (RAP) consistent with the separately disclosed RPF. For situations where OP4.37 may apply, the operator will prepare a Dam Safety Measures Report. Annex H to the ESMF has specific guidelines for the assessment and preparation of the Dam Safety Measures Report. Annex B contains an example of a comprehensive terms of reference (TORs) for the ESIA. For Category C subprojects the operator is only required to prepare an Environmental and Social Management Plan (ESMP). Annex C to the ESMF contains guidelines for the preparation of an ESMP for Category C subprojects and what the ESMP in Category A or B subproject ESIAs should also contain. 33OP 4.36 will not be triggered by this project, because no forest management activities are being financed or modified by the project. Potential impact on forests are adequately covered by OP 4.01 and OP 4.04. 112 According to Tanzanian Law and World Bank OP4.01, Public Consultation is required as part of the ESIA and/or ESMP process. Annex F has a generic guide to an acceptable public involvement process. The Fourth Step: Following compliance with these steps the operators submit their ESIA and or ESMP as part of their complete bid/tender package to the required authority as specified in the specific requests for bids/tenders. The ESIA for Category A and B subprojects will be reviewed and cleared by the NEMC. The ESMP for Category C subprojects is to be reviewed and cleared by the respective District Environmental Coordinators. Annex G contains a generic Environmental and Social Appraisal Form to be used by NEMC and the District Environmental Coordinators, to provide guidance to their review process and to notify the approving body of the operators tender of their decision before final award and funding is made. The first set of cleared ESIA's for Category A and B subprojects will also have to be reviewed and cleared by the World Bank, to ensure compliance with its safeguards policies. The World Bank reserves the right to not allow funds under the TEDAP offgrid component be applied to subprojects that do not meet the requirements of its safeguards policies. 17. MEM has overall responsibility for implementation of the ESMF for Component B. NEMC will be responsible for review and clearance of ESIAs for subprojects for which they are required prior to licensing and financing, for training district staff to carry out monitoring, and for periodic oversight to ensure compliance with Tanzanian law and regulations and World Bank operational policies. Districts, through District Environmental Coordinators, are responsible for review and clearance of ESMPs for subprojects not requiring ESIAs prior to licensing and financing, for regular monitoring through all phases of each subproject, for submission of monitoring reports to NEMC, and for compliance with directives from NEMC and MEM. Subproject operators are responsible for: compliance with national law and regulations, World Bank directives, and the ESMF; carrying out the initial screening of their subprojects according to the procedures specified in the ESMF; preparing an ESIA or ESMP as required by the ESMF, submitting it to the reviewing and clearing authority specified in the ESMF, and obtaining environmental and social clearance; implementing all required mitigation and monitoring measures identified in their respective ESIAs and/or ESMPs; self-monitoring; providing adequate budget to sustain mitigation and monitoring activities; and compliance with any directives issued by MEM, NEMC and the Districts. EWURA is the licensing authority; it will not issue licenses to operators until NEMC or the District Environmental Coordinator issues environmental and social clearance. REA, which manages the Rural Energy Fund, will not disburse funds to an operator until EWURA has issued a license. The review and monitoring functions, including the monitoring of EIA implementation will be undertaken and budgeted as part of the normal functions of NEMC and the district offices. The project is exploring the provision of about US$250,000 for capacity-building (to MEM with NEMC as the beneficiary) in the form of training for groups of potential providers and for groups of District Environmental Coordinators with priority given to Coordinators from on those districts in which the project is going to be active. 113 Annex 11: Incremental Cost Analysis TANZANIA: Energy Development and Access Expansion Project Introduction 1. Tanzania has an estimated population of about 40 million, growing annually at a rate of 2%. It has a land area of about 945,087 sq. km and is well endowed with natural resources such as hydropower, tin, phosphates, iron ore, coal, diamonds, gemstones, gold, natural gas, geothermal and nickel. The economy of Tanzania depends heavily on agriculture, which accounts for almost half of GDP, provides 85% of exports, and employs 80% of the work force. Industry traditionally featured the processing of agricultural products and light consumer goods. 2. Tanzania is endowed with diverse energy sources including biomass, natural gas, hydropower, coal, geothermal, solar and wind power, much of which is untapped. Wood fuel accounts for up to 90% of total energy supply with about 2% from hydro-electricity and 8% from oil-derived products. Tanzania's power sector is dominated by a single vertically integrated national utility TANESCO. Total installed generation capacity is 1,192 MW including IPPs and imports, of which 47% is hydro based. National electricity coverage is about 10%. At present, Tanzania is recovering from an energy crisis that can be attributed largely to loss of hydro generation which is estimated to account for at least 2% GDP drop in 2006. Drought for several years resulted in lower water levels in the reservoirs for hydropower facilities which together with the delays in sector investments and lack of resources to enable optimization of hydro and thermal resources have caused the energy crisis with significant load shedding in 2006. Significant rainfall during the "short rain" season in late 2006 and early 2007 and TANESCO's contracting of emergency generation, ended the crisis in 2007. 3. The energy crisis in 2006, however, has highlighted the importance of reliable energy for economic growth and poverty alleviation. It once again revealed the underlying vulnerability of hydro- dominated generation system to droughts and the resulting importance of adequate diversified generation planning and timely investments, now urgent, in the transmission and distribution subsectors to reduce technical losses. As the sector is moving from the short-term crisis management to medium- and long- term planning, the following issues and strategic goals have been identified. These include: · Ensuring appropriate long-term generation capacity. · Ensuring quality of supply. · Diversify energy supply and increase use of renewable energy. · Ensuring long-term financial sustainability of TANESCO. · Continuing sector reform process. · Improving Management of TANESCO. · Expanding access to unserved areas. Renewable Energy 4. The renewable energy industry is in its infancy with a limited number of project promoters; renewable energy finance providers; service companies; planners and specific legislation (standardized power purchase agreement; regulatory framework). New renewable energy sources contribute less than 1% of the national energy balance, however, several studies show good potential including the recently completed rural electrification study supported by AfDB. 5. The potential for small hydropower generation (under 10 MW) is estimated about 250 MW of which only 8 MW has been exploited so far. Several studies have been conducted over the last decade 114 mainly providing insight in the technical potential. Studies that have included economic analyses show a limited number of sites which could produce electricity at competitive cost in areas where demand is available. It is estimated that up to 200 MW could be developed economically soon. Other potential sites are being researched. 6. It is estimated that atleast 600 kWp of solar photovoltaic (PV) has been installed for various applications of which an estimated 30% is contributed by Solar Home Systems (SHS). The estimated sales of SHS are 500 to 600 systems per annum. However, most solar systems are institutional and are donor funded. Surveys of solar systems used for health and education institutions show low sustainability, with a high proportion of installed systems not fully working. In most cases after sales service and local maintenance arrangements are not in place. There have been, however, some positive developments in the past years. With assistance of UNDP and Sida projects, six service providers have expanded their networks in rural areas. A solar energy association has been established. Also, some of the dealers have established initial strategic partnerships with micro finance organizations and private organizations with rural outreach. 7. A relatively low potential for larger scale wind power development is available based on indicative data from meteorological stations, however a detailed national wind map is not available. A few studies indicate site-specific potential in Njombe, Mwanga and Singida Districts. To confirm these potential, site-specific wind speed measurements have to be expanded. A potential site in the Singida District is under consideration by a private developer. These measurements have to last for at least a year, preferable longer. Also, non electricity wind projects are limited even though smaller household and community wind pumps have been installed in about one hundred locations. Micro wind generators have been reported in a few locations. 8. There are considerable biomass resources in the form of agricultural, forest residues and animal wastes in the country for sustainable use. Most of them, however, are not exploited. On the contrary, 90% of Tanzanian energy consumption is wood fuel. There are, however, some emerging positive experiences in this area. For example, improved charcoal stoves, however, have been in use with some success for the past 15 years. Recent studies also show that about 4,000 domestic-size biogas plants have been built over the last two decades. This makes Tanzania one of the leading biogas countries in Africa. Biomass for power generation is also available on a small scale. A 2.25 MW wood-fuelled power plant by the Tanganyika Wattle Company (Tanwat) in Iringa and a few bagasse fuelled cogeneration plants are typical examples of biomass potential for power generation. An estimated 30 MW biomass cogeneration could economically be developed soon. 9. There are indications that significant potential exist for geothermal development. Preliminary studies conducted in the southern highlands of the country indicate high temperature fluids beneath the Mbeya and Rungwe volcanoes. Some other areas far from the East African Rift valley are also reported to have hot springs. Given the fact that Kenya has already operational geothermal plants, Tanzania stand a good chance to much benefit from Kenyan experience in the geothermal technology. Access to Electricity 10. Use of domestic electricity is almost exclusively concentrated in urban areas (municipal areas and towns). Of the 20 districts with the highest degree of connectivity to the grid, only two are rural districts: Mwanga and Hai, while the 20 districts with the least access to electricity are exclusively rural. In Dar es Salaam access to electricity is highest, but even there less than 50% of all households are connected. Out of the 118 districts identified in the 2002 population census, only in 18 districts do more than 20% of all households have access to electricity. In 31 districts electricity is such a rare phenomenon that more than 115 99% of all households lack access. Overall it is estimated that electricity access rate in Tanzania is about 10%, but it is below 2% in rural areas. 11. Despite the high incidence of poverty in rural areas, various surveys show that non-electrified rural households spend substantial resources to satisfy their energy needs (kerosene, candles, batteries). Surveys estimate average energy expenditures of non-electrified households as around US$7-10 per month.34 A specific pilot survey for Rukwa region developed in the framework of the project preparation shows that monthly expenditures of rural households in the region vary from US$3.5 per month for the poorest, US$5 for less poor, and US$12 for affluent households. For the poorest household, this spending amounts to 10% of the monthly disposable income. Various modern offgrid technologies can provide electricity service for the same price, with improved quality and additional social, economic, health and environmental benefits. 12. In the past, rural electrification was carried out through fragmented donor initiatives focused mainly on grid extension and small offgrid pilots, barely keeping the access rates with the population growth. A new approach is needed to achieve a noticeable scale-up. The key constraints include: (i) limited reach of TANESCO's grid; (ii) TANESCO's lack of financial strength to finance rural access expansion; (iii) absence of policy, regulatory and financing mechanism for alternative offgrid alternatives; and (iv) relatively high costs of service provision coupled with low income, calling for alternative low- cost solutions in line with local capacity to pay. 13. Aware of these challenges, the Government of Tanzania has started redefining its rural energy access policy. The latest National Energy Policy of 2003 establishes affordable and reliable energy supplies in the whole country as one of the key objectives. The 2003 policy takes into consideration, among other: (i) the need to reform the market for energy services and establish an adequate institutional framework, which facilitates for investments, expansion of services, efficient pricing mechanisms and other financial incentives; and (ii) the need to enhance the development and utilization of indigenous and renewable energy sources and technologies. Broad development goals 14. The overall objective of the recently agreed and approved, multi-donor Joint Assistance Strategy for Tanzania (JAST) is to contribute to sustainable development and poverty reduction in line with the National Vision 2025 by consolidating and coordinating Government and Donor support under a single Government-led framework to achieve results on the 2005 National Strategy for Growth and Reduction of Poverty (NSGRP/MKUKUTA). The MKUKUTA is committed to the achievement of the Millennium Development Goals (MDGs) and has an increased focus on growth and governance. The MKUKUTA identifies three clusters of broad outcomes: (i) growth and reduction of income poverty; (ii) improvement in quality of life and social well being; and (iii) good governance. 15. The proposed project will support and contribute to the outcome and achievement of goals of the JAST and MKUKUTA (Goal 6: Provision of reliable and affordable energy to consumers) allowing for improved electricity access to the population and through focusing the majority of investments on specific, targeted service quality improvements and access expansion in the key growth areas, the project will improve the quality of life for the affected population. The Project will target 6 out of 8 World Bank CAS milestones related to the achievement of MKUKUTA Goal 6. At the regional level, the project will support several economic and social objectives of the World Bank's Africa Action Plan. The project will support closing the infrastructure gap in Africa and support the achievement of economic growth required for poverty reduction. 34See for example Rural Electrification Master Plan, 2005. 116 16. The proposed project will also contribute to a higher level global objective of reducing greenhouse gas emissions. Tanzania signed the United Nations Framework Convention on Climate Change (UNFCCC) in 1992 (and ratified it on April 17, 1996, as a non-Annex 1 party). Tanzania remains strongly committed to the promotion of renewable energy sources. The project will allow Tanzania to support the most significant renewable energy options identified, namely, hydropower generation, mini-hydropower, biomass cogeneration, and solar energy. Barriers to accelerated renewable energy market growth 17. Barriers for renewable energy industry growth: Of the four development phases (introduction, growth, maturity and decline) of a renewable energy industry, the industry in Tanzania is in its introduction phase. In general terms, during this phase the goal is to create renewable energy product awareness and develop the market. This includes establishing recognition and a quality level of renewable energy systems; appropriate pricing for market penetration; selective distribution till acceptance of the product by the end user; and, promotion aimed at early innovators and early adopters to build product awareness and to educate end users about the renewable energy product. In the National Energy Policy, the GoT identifies barriers that confirm that the industry is in its introduction phase. Based on this, the following barriers can be highlighted: 18. Lack of a favourable business environment and policy framework: The National Energy Policy states as one of its main barriers the "lack of a policy and institutional framework". To address this barrier several initiatives are being implemented including the establishment of a Rural Electrification Agency and Fund; the explicit mentioning of renewable energy in rural energy and power sector policies; and the waiver of import duties on some of the renewable energy systems. However, other activities remain to be done, these include the adoption of a standardized power purchase agreement and tariff for small renewable power producers; streamlined and simplified regulatory requirements for small power projects (SPPs), technical specifications to ensure quality for isolated grid and stand alone systems; and the facilitation of local financing. The National Energy Policy also mentions the "lack of publicly available resource information for renewable energy power generation" which is particularly the case for wind resource measurements; geothermal resources and biogas. It also stipulates the "high cost of production" which is in part caused by the low volume of transactions and the limited business connections with low cost producers in other countries, particularly in Asia. 19. Lack of scale-up capacity building efforts: The National Energy Policy states the "lack of adequate capacity to design, manufacture, market, and distribute as well as install and maintain renewable energy technologies" as the second main barrier. To address this barrier, a large number of relatively small projects have been supported by the Government over the last decade. Most of the projects were supported by donors. The projects supported biogas initiatives in different districts; renewable energy stakeholder workshops; solar power for household electrification and water pumping; mini hydro demonstration project; biomass fuel production; support for small and medium enterprises; and low cost alternative energy in schools. These projects fulfilled niche needs and more is to be done. The industry is preparing to bundle business specific capacity building efforts to accommodate the expected market growth. For the project developers, this is knowledge of the renewable energy technologies, the closing of a deal with the national utility, and the preparation of bankable business proposals. For the financiers, it is the analysis of the risks. For the utility and the enduser it is the quality of the service offered. 20. Lack of understanding of end user need and awareness: The National Energy Policy states "low level awareness and understanding of available practices, technologies, and resources, which contributes to reluctance towards utilization of renewable energy" as the third barrier. Several initiatives have been started to address this barrier, particularly for solar PV technology, including the UNDP/GEF supported "Transformation of the Rural PV Market" in the Mwanza region and the SIDA supported program to 117 stimulate the end user market. Other activities remain to be done including generic promotion campaign to educate endusers on the advantages and limitations of renewable energy systems, service and warranty arrangements and about available finance arrangement. Furthermore, careful market research are under consideration to identify which communities or rural areas are best suited to service from renewable energy systems. 21. Lack of a rural delivery infrastructure: The National Energy Policy stipulates "fragmented demand" as a barrier for growth of the solar industry. Official and donor procurements of PV systems for public facilities and retail sales to households are typically handled by different companies in the same rural space. Sales for the institutional market segment, while they dominate in terms of value and capacity, have been lumpy, sporadic and based on sectoral programs, while sales volumes in the household market segment are low. PV systems installed in schools, clinics and other public facilities, often financed by official and donor project budgets have poor track record for sustainability, with inadequate attention having been paid to appropriateness of design and maintenance arrangements or the development of strong linkages with local capacities for after sales maintenance and other services. The companies selling to the household market are operating with high prices and low volumes, with sales from offices and by agents in a few of the major urban centers, with no significant development as yet of commercially based sales and services capabilities in rural areas. The possibility of aggregating demand sufficiently across market segments and within market areas to achieve sufficient volumes to sustain a rural infrastructure for sales and services that will increase the access of both institutions and households to sustainable PV systems is not realized. The National Energy Policy also mentions the "lack of standards" for PV and a "combination of high prices and low volumes for solar PV" (see also barrier 1). 22. Lack of access to finance: One barrier that has not been mentioned in the National Energy Policy is the lack of finance to overcome the high initial cost of renewable energy systems to end users and potentially working capital for companies. Under the TEDAP project, a first effort is supported to establish transparent and performance based subsidy provisions and to seek additional mechanisms to leverage local financing. Barrier removal strategy 23. The renewable energy program can be divided in three more or less distinct phases. The first phase is to complete the preparation of the renewable energy agenda with some initial trials. During the second phase, the industry will grow out of its infant stage through capacity building, business development and increasingly accelerating investments. In the third phase, proven success models are scaled up. This GEF project supports the second phase of this program. 24. Phase 1 ­ Preparing the agenda for action: To finalize the agenda for action, the following activities are completed or have been started: (i) several studies on the potential for isolated and grid- connected small hydropower systems; (ii) study on design and plan to meet high-priority electricity needs of rural public institutions with solar PV; (iii) institutional support to MEM/REA for the implementation of rural electrification, (iv) drafting of Standard Power Purchase Agreements, and (v) Transaction Advise to bring first small power subprojects to financial closure. 25. Phase 2 ­ Capacity building, business development and initial investment: During the second phase, the activities will be supported through a framework of incentives rather than individual assignments. The Government will play a market enabling role, distancing itself from implementation of activities and creating an environment in which private sector activities can develop. The MEM/REA will play key-facilitating roles during this stage. The proposed GEF assisted TEDAP project supports this phase of the program. 118 26. Phase 3 ­ Up scaling of proven business models: Phase three falls outside the TEDAP time period. Activities at this phase will focus on accelerating the success models that have evolved during the second phase of the program. The TEDAP will, however, prepare grounds for this scale-up, including a viable pipeline of the potential projects. Baseline Scenario 27. Rural Electrification: Less than 10% of the households have grid access, almost entirely in the main cities. Rural household access is estimated at no more than 2% at most, primarily through the TANESCO network. Per capita electricity consumption is among the lowest in the world. The total number of registered consumers is about 635,000. To improve rural access to modern electricity, the GoT recently adopted new legislation. Tanzania's Parliament in 2005 approved a Rural Energy Act, which established a Rural Energy Agency (REA), with the purpose to lead development of rural energy access initiatives and to administer a Rural Energy Fund (REF), which will finance such initiatives. REA and REF are governed by a Rural Energy Board, comprised of members of the Government and the private sector. The REA and REF, however, are still in the process of becoming operational, and has to yet establish its implementation track record. As a new institution, the REA faces a double challenge due to simultaneous needs to develop a robust rural access strategy, combining all current fragmented elements of grid and offgrid expansion, and demonstrate rapid results and scale-up. 28. Power sector: The power sector in Tanzania is small with at present a single vertically integrated national utility TANESCO. The Tanzanian power system is comprised of 1,192 MW of installed capacity (permanent plants) and is characterized by a dependence on hydropower generation -- about 562 MW (47% of total installed capacity) while permanent thermal capacity at present is about 630 MW. TANESCO has depended on its hydro resources for the bulk of the country's electricity supply. Competing water interests (e.g. agriculture, industry, power generation etc.) and the last 3 years of drought have resulted in continuously declining water levels, and therefore over time the level of thermal power generation has increased substantially. Overall, energy losses are estimated at 24%. The high- voltage grid covers only part of the country. Several urban centers have to rely on TANESCO's isolated diesel stations (about 30 MW) which provide low quality, high cost (over USc 20/kWh) service and add require larger cross subsidies because of a uniform national tariff policy. Several larger scale industries and some rural private entrepreneurs are using their own sources of power. Drought for several years has resulted in lower water levels in the reservoirs for hydropower facilities. In 2006, TANESCO had to introduce a load-shedding program to address shortage in power supply. 29. Baseline Scenario: The business-as-usual scenario implies an unreliable generation situation in particular when it comes to the isolated areas. Load centers in these areas will continue to rely on expensive diesel-based systems that are primarily run by TANESCO at a loss, undermining the operational quality of the plants. Other than TANESCO investments for additional isolated generation facilities is not coming forward for as no long -term financing is available, no facilitating regulatory framework established, and no subsidy is available. In other areas where large-scale generation is developed the weak transmission network restricts the actual use of this power at the locations where it is needed. Access to electricity continues to increase only through line expansion projects from TANESCO, through an extremely slow pace, as the company faces a number of technical, commercial and financial problems, which preclude financially-sustainable grid expansion in short to medium-term. For the more remote customers no alternatives are offered other than a few pilot programs supported by international donors. Reform of the sector improves the operations of TANESCO even though there continues to be limited encouragement for efficiency improvement and demand side management. Both the traditional biomass and renewable energy sectors will continue to rely on ad-hoc initiatives which have limited impact on: a sustained growth of these industries; their efficiency improvement; and cost reduction of their products. 119 Global environmental objective and key indicators 30. The project's global environmental objective is to abate greenhouse gas emissions through the use of renewable energy in rural areas for provision of electricity. The key global performance indicators are the number of MW of renewable energy installed for generation of electricity to the grid and resulting CO2 emissions. Total estimated emission reductions from facilities installed during the project's life are estimated at 1 million metric tons of CO2, over the lifetime of the systems. The long-term national impact of this Project is expected to be much larger than this number, as broad replication is expected to occur through the establishment of a legal and regulatory framework for rural electrification. Additionally, the project will also track the number of new connections supplied with renewable power, pipeline development, improvements in REA's functionality and effectiveness of new regulatory framework. 31. The proposed GEF co-financed interventions fall under Climate Change Focal Area, Strategic Program 3 ­ Promoting market approaches for renewable objectives under GEF-4. This is consistent with the former Operational Program 6, under which the Project was approved by the Council for the Work Program Entry. The Project is consistent with Strategic Long-term Objectives 4 ­ to promote on-grid renewable energy and 5 ­ to promote the use of renewable energy to provide rural energy services (offgrid). 32. See Annex 3 for the results framework and monitoring arrangements. Project development objectives 33. The project development objective is to improve the quality and efficiency of the electricity service provision in Tanzania and to establish a sustainable basis for energy access expansion. The proposed project will consist of the following three components which are detailed in Annex 5: (i) a grid component focusing on urgent investments in TANESCO's transmission and distribution network, tentatively US$86 million; (ii) an offgrid component of US$22.5 million (including US$6.5 million from GEF) to support an institutional set-up for the newly established Rural Energy Agency (REA) and to develop and test new offgrid electrification approaches for future scale-up; and (iii) a technical assistance component of about US$3 million. Only Component B (Offgrid component) is related to renewable energy development and supported by the GEF. 34. The offgrid component will: · Increase electricity access in rural and peri-urban Tanzania to productive enterprises, service delivery facilities (e.g. in health and education), and to households with the capacity to pay for electricity; · Establish a functioning institutional and regulatory framework for commercially oriented, sustainable service delivery for rural electrification and small renewable power projects that can be scaled up; and · Remove barriers to, and reduction of costs of, implementation of renewable energy technologies to help mitigate greenhouse green emissions. The GEF Alternative 35. The total estimated cost of the GEF-supported Component B (Offgrid Component) is US$59.6 million. Table 31 provides an overview of Offgrid Component Costs and the Financing Plan: 120 Table 31: Offgrid Component Costs and Financing Plan (US$ Million) Part Component Total Costs IDA GEF GoT Donors Private Sector* Small Power Generation Distribution B.1.a Grid-Connected generation 18.9 0.0 0.6 0.0 0.0 18.3 B.1.b Grid-Connected mini-grid 4.1 2.0 0.0 0.5 0.0 1.6 B.1.c Green mini/micro-grid 9.7 5.0 1.6 1.0 0.0 2.1 Subtotal 32.7 7.0 2.2 1.5 0.0 22.0 Sustainable Solar Market Development B.2.a Sustainable Solar Market Packages for public institutions 10.1 6.4 1.2 2.5 0.0 0.0 B.2.b Households/micro-enterprises 8.3 1.6 1.1 0.5 0.0 5.1 Subtotal 18.4 8.0 2.3 3.0 0.0 5.1 Technical Assistance B.3 Technical Assistance (excluding Operating Costs) 6.2 0.7 2.0 0.3 3.2 0.0 B Technical Assistance (Operating Costs) 2.3 0.3 0.0 2.0 0.0 0.0 Subtotal 8.5 1.0 2.0 2.3 3.2 0.0 Offgrid Component 59.6 16.0 6.5 6.8 3.2 27.1 *Private sector leveraged financing Offgrid component (B) 36. The component has three subcomponents: (i) Small Power Generation and Distribution (SPGD) subprojects, including renewable power generation and mini-grids; (ii) Sustainable Solar Market Development (SSMD), supplying individual (primarily solar PV) systems for public institutions and for individual households and businesses in rural areas; and (iii) Technical Assistance to the Rural Energy Agency (REA) and other stakeholders. These activities will be implemented through: · Provision of grants to the private sector (including NGOs and community-based organizations) to partially offset investment costs of new service connections (through performance grants), and for pre-investment studies, business and market development, including productive uses (through matching grants); · Supply, installation and provision of maintenance and other associated services for the Sustainable Solar Market Packages, as well as the provision of goods, consultant services and training for the technical assistance subcomponent, and related operating expenses. B.1 Small power generation and distribution (SPGD) subprojects 37. This subcomponent aims at increasing access rates in areas not covered by the TANESCO's grid in a sustainable manner, leveraging private resources for rural electrification. Three types of subprojects will be developed under this subcomponent: (i) small renewable power generation subprojects (under 10 MW) selling power to TANESCO's grid; (ii) grid-connected mini-grid subprojects; and (iii) isolated (greenfield) mini-grid subprojects. 38. Component B.1 is financed through the provision of performance and matching grants for pre- investment and market development. All sub-categories are eligible for matching grants for pre- investment and market development. Performance grants are available only for categories (ii) and (iii) grid-connected and isolated (greenfield) mini-grids35, set on a per-connection basis, (e.g. US$500 per 35 Small renewable power generation sub-projects, selling power to TANESCO grid, are not expected to require investment subsidies, as they are a least-cost investments that should be commercially funded under the standard power purchase tariff. These sub-projects, however, will be enabled through the TEDAP project through: (i) adoption of standard power purchase 121 connection), covering up to 80% of the investment costs. The precise values and thresholds for the subsidies for each type of subproject will be set in the Operating Guidelines and periodically adjusted, based on market response and updated cost estimates. The sizes of the grids will vary depending on the local demand and supply conditions, e.g. from village micro-grids as low as 30 households to larger isolated mini-grids covering a number of villages, e.g. 3,000 households. Transaction advisory services are being recruited by MEM to establish procedures and to prepare investment proposals for up to four packages on a pilot basis. The typical grants per transaction (i.e., mini/micro-grid investment package) will be between US$300,000 and US$3,000,000 depending on the size of the mini-grid. 39. The GEF supported activities of the subcomponent include GEF performance grants for renewable energy generation investments supplying independent mini-grids, to partially offset high upfront costs of the renewable power generation, as well as matching grants for pre-investment and market developmentfor both grid-connected and isolated renewable energy. The purpose of the GEF grant is to jump-start small-scale renewable power projects in Tanzania. It is expected that the GEF grant can be phased out by the end of the project. By that time at least 17 MW will be installed, including at least 6 isolated mini-grids, and local capacity should be strengthened. The grid-connected renewables should be economically viable through the Standardized Power Purchase Agreement and Tariff approach, and will therefore not require grants. Renewable power mini-grids will be mainstreamed fully into the REF funding, with sustainable finance through a sector-based levy, established by the Rural Energy Act of 2005, and will therefore also not require additional GEF support. B.2 Sustainable Solar Market Development 40. This subcomponent will be developed in remote rural areas, with a large share of dispersed population, outside TANESCO's main grid and other isolated grids where it is the least economic cost option. The subcomponent will finance two types of activities: 41. Sustainable Solar Market Packages (SSMP) ­ B.2.a , consisting of supply, installation and provision of maintenance and associated services for solar photovoltaic (PV) systems for rural public institutions, including 5-year maintenance period (with an option to extend the maintenance contract) and provision of associated services (e.g. user training). The typical system sizes will be approximately 400 Wp for schools and clinics, 85 Watt peak (Wp) for staff houses and 60 Wp for street lights. The investment and the service provision will be implemented by private sector providers, with demonstrated experience in PV sales, installations and service provision, competitively selected through ICB or NCB procedures. The packages will include: (i) provision, installation, service and maintenance of PV systems to a number of pre-identified public institutions in defined geographical areas; and (ii) an obligation to commercially sell PV systems to households, businesses, private schools and clinics in the same geographical area (for commercial sales all SSMP contractors will be automatically eligible for grants under the subcomponent B.2.b ­ see below). The packages may be of varying sizes of US$0.1 ­ US$3 million, to allow for participation of smaller local providers as well as larger international companies. 42. Sub-projects for individual lighting systems for households and enterprises (including private schools and health centers) ­ B.2.b. The subcomponent will facilitate sustainable and affordable electricity service with PV systems (or any other modern lighting technologies, as appropriate) to individual households, rural businesses and private schools and clinics, through the provision of performance grants (established on a Wp basis ­ e.g. US$2-US$4 per Wp of installed capacity) and business/market development matching grants to the eligible service providers. The typical size of the systems is expected to be 14-60 Wp for households, and 60-400 Wp for micro enterprises. Smaller systems for poor households may receive higher subsidy per Wp. agreements and tariff, and streamlined regulatory procedures, developed under the Project; and (ii) provision of matching grant support for technical assistance to overcome initial market barriers. 122 43. Service providers, and associated supply chain, including local producers and microfinance institutions, will also be eligible for matching grants for business and market development. The project will support the development of commercial supply channels for PV systems both within and outside the SSMP areas, building on successful experiences of SIDA and UNDP projects. In order to reduce system prices, the component will explore opportunities for market aggregation through: (i) rural entrepreneurs, such as small business, tourism, ICT service providers etc.; (ii) engaging with major rural firms such as tea processors, sugar cane millers, coffee processors etc. in partnership with commercial bank/MFI and PV suppliers to facilitate access of out-growers to PV systems for basic lighting; and (iii) SSMP contractors (which will have an obligation to commercially market PV systems to households and private businesses in the SSMP area, and will be also eligible for performance and matching grant incentives). In this context, particular attention will be paid to expanding low-cost lighting technologies (such as solar lanterns, LEDs etc.), which might also be eligible for grant support (as per Operating Guidelines). 44. Investment components B.1 and B.2 are financed through: · Performance grants, financing investments under the components B.1 and B.2.b, are estimated at US$7.6 million of IDA, US$2.1 million of GEF, and US$1.5 million of GoT resources. · Matching grants, financing pre-investment and market development under the components B.1 and B.2.b, are estimated at US$1 million of IDA and US$1.2 million of GEF. · Provision of goods (including installation and maintenance) and services (component B.2.a), are estimated at US$6.4 million of IDA, US$1.2 million of GEF, and US$2.5 million of GoT resources. B.3 Technical Assistance 45. The project will provide technical assistance to REA and other stakeholders (MEM, EWURA, service providers, financial institutions, NGOs and communities). This technical assistance will be used primarily for institutional strengthening of Government institutions (REA, MEM, EWURA), market assessment and data collection, pipeline development, renewable energy assessments, development of rural electrification strategies and programs, monitoring and evaluation, awareness campaigns and productive use facilitation, and training and operating costs. The main purpose of the technical assistance will be to support the component's objective to establish a functioning institutional and regulatory framework for commercially oriented, sustainable service delivery for rural electrification and small renewable power projects that can be scaled up. The TA will therefore concentrate on all types of barriers to successful scale-up of commercially-oriented rural electrification and renewable energy, including policy, regulatory, institutional, financial, and capacity. Table 32: Physical targets TEDAP offgrid component Activity # systems # users MWs B.1a SPDG for grid connected generation 4 - 12 B.1.b and B.1.c Grid-connected and isolated mini- 9 5,000 4 grids B.2.a SSMP for public institutions 1,200 1,200 0.6 B.2.b SSMP for individual end users and enterprises 10,600 10,600 0.4 Total 11,813 16,800 17 123 Incremental costs summary 46. The total incremental cost calculated for the Tanzania Energizing Rural Transformation Project is US$33.6 million derived as the difference between the baseline scenario (US$26 million) and the Alternative (US$ 59.6 million). Of the total increment, GEF is contributing US$6.5 million while the remaining is private sector cofinancing, leveraged by GEF. 47. An incremental cost analysis was conducted for the three main subcomponents: (i) grid-based renewable energy systems; (ii) isolated hydropower grids; and (iii) solar PV. The result of the analysis was that the grid connected hydro systems are least cost hence no incremental costs on the investments are required. Substantial assistance, however, is needed for pre-investment and market development to overcome initial market barriers and estimated at US$0.6 million. The isolated hydropower grids have an incremental cost of US$1.2 million for 4 MW or US$0.3/watt, and market development support of US$0.3 million. The solar institutional systems have an incremental cost of US$1.2 million for 600 kW or US$2.0/Wp. The solar home systems have an incremental cost of US$0.8 million for 400 kW or US$2.0/Wp, and market development support of US$0.3 million. For further detail on the incremental cost see the incremental cost matrix provided below. US$2 million of technical assistance is estimated to be needed for helping to remove policy and regulatory barriers. 48. These incremental costs covered by GEF financing leverage additional US$27 million by the private sector. Incremental cost matrix 49. Based on the description of the context, development goals, barriers, objectives, baseline, GEF alternative, and sustainability provided above, a summary of the incremental cost is found in the following table. Table 33: Incremental cost matrix Baseline Alternative Increment Domestic Benefits 1. Access to electricity 1. Stimulation of rural and 1. Main barriers (information services will continue to be energy businesses to expand first cost, etc.) to commercial low and the demand operations while including development removed. suppressed. renewable energy solution. 2. Process of economic 2. Large scale intervention to 2. Successful demonstration development in rural areas support access expansion of a wide range of alternative will continue to hamper due using renewable energy technologies and business to lack of electricity. technologies (where least approaches. cost) and leveraging private resources. 3. Power availability remains 3(a). Institutional 3. Renewable energy constrained, with prices high strengthening in developmen businesses provide improved and reliability low. of regulation, pricing, technologies to complement contracts, financing etc. generation capacity and grid 3(b). Energy costs decline extension for rural and availability improves, households/institutions on a with linkages to productive competitive basis under an use applications, improved established regulatory social services and framework. development of local small power entrepreneurs. 4. Very limited development 4. Renewable energy as 4. Experienced renewable 124 Baseline Alternative Increment of the commercial market of integral part of rural energy businesses ready for renewable energy electrification and power up scaling of rural technologies. supply development investments and grid supply. strategies. Global Environmental 5. Power supply development 5. Significant offset of GHG 5(a). About 1 million tons of Benefits and rural energy services emissions through range of avoided CO2 emissions largely rely on grid connected renewable energy options 5(b). Opening market for diesel based systems, displacing 12 MW what will commercial sustainable independent diesel systems, otherwise be fossil fuel energy business in Tanzania. kerosene and car batteries. generator sets, over 10,000 kerosene households, and 1,200 diesel powered institutions. Cost by Areas of (million US$) (million US$) (million US$) Intervention Small Power Generation and 8.5 32.7 24.2 Distribution Grid-Connected 0.0 18.9 18.9 generation(10MW) Mini-grids 8.5 13.8 5.3 Sustainable Solar Market 11.0 18.4 7.4 Packages (12) Institutional/staff houses 8.9 10.1 1.2 Households/micro-enterprises 2.1 8.3 6.2 (12,000) Technical Assistance 6. 5 8.5 2.0 Total 26.0 59.6 33.6* *Of the total incremental costs of US$33.6 the GEF is providing US$ 6.5 million. Global Environmental Benefits 50. The global environmental benefits of the Project are about 1 million ton of CO2 over a period of fifteen years. The largest benefits will come from the grid-based hydro systems (expected to displace in 70% natural gas and in 30% diesel), about 0.84 million tons of CO2; followed by the isolated hydro based power projects with 0.15 million tons CO2; and the solar components of about 40 thousand tons of CO2. The average cost of a ton of CO2 for this Project is US$6.5/ton CO2. Sustainability and Replicability 51. There are several factors under the GEF project that contribute towards a sustainable renewable energy industry: (i) integral part of sector-based intervention; (ii) target high potential areas; (iii) subsidy allocation for capital cost only; (iv) phasing out of GEF grants with increased viability of renewable energy industry; (v) focus on leveraging of local private sector initiatives and financing; and (vi) special attention for productive uses; and (vii) incorporation of lessons learnt from past operations. The project also monitors continued incorporation of renewable energy into sector access expansion planning; focused TA for business development services; and adopts a detailed monitoring and evaluation program. 52. Integral part of large-scale sector-based intervention. The GEF intervention is mainstreamed into a large-scale investment operation, aiming at improving sector efficiency. This allows to view access and renewable energy intervention in a more holistic way and link them closer with the overall sector strategy. A phased approach proposed in this operation allows to program better individual interventions to maximize their overall impact in the medium-term. 125 53. Target high potential areas: The rural renewable energy investments will target areas in Tanzania where grid extension is not planned in the near future. Thus, the project will likely compete with diesel generators, batteries, and kerosene lamps, which often offer poor services at high costs. Therefore, renewable energy services will be marketed to provide reliable and quality services at comparable costs, which should ensure their long-term sustainability. Care will be taken to select sites with concentrated demand for grid-based projects. PV systems will be promoted in remote areas where they are likely to be the most cost-effective clean energy solution and through aggregating demand to provide the critical mass in the targeted areas for commercially sustainable access by households and institutions to rural sales and services. 54. Subsidy allocation: All subprojects must demonstrate that they will be able to recover the costs of operation and maintenance and the fixed costs that remain after the capital subsidy to receive co- financing grants. It is expected that the maximum value of subsidy for a subproject will be capped at a proportion (approx 80%) of total subproject costs, with the balance of investment capital to be met from other sources, for example, consumer contributions, private equity, commercial loans, and local government contributions. Competition for subsidies will be open to all technology types (grid, offgrid, renewable and conventional). GEF funds will be used only for renewable energy. The co-financing provided for investments are on a performance basis and are only released after verified achievement of physical milestones or full installation (household systems), including the satisfactory completion of after sales arrangements. GEF co-financing grants cannot be used for an investment project that has already received carbon financing. 55. GEF co-financing grants: Life-cycle cost calculations show that renewable energy systems are a least cost solution in niche markets of the energy sector. Despite this beneficial economic situation penetration of renewable energy systems is low and limited uptake is expected. This is caused by internal barriers of businesses that deliver the systems and by external factors, including market fragmentation that contribute to the low rural sales and the lack of service networks in rural communities. On an individual company basis these often are "soft" barriers for which business and market development support, usually through cost share matching grants, will be available. Companies and financial organizations will access this support on a demand driven basis to develop renewable energy and solar PV businesses and markets. Investment co-financing for solar PV will be through performance grants, which will be based on confirmed sales of qualifying systems, satisfactorily installed in households, businesses and institutions; they will be available to companies that are investing in the development of rural sales and services infrastructure. Investment co-financing for micro and mini-hydro generation and distribution in rural areas will be based on achievement of physical milestones for systems that have been assessed as sustainable. 56. Out phasing of GEF co-financing grants: GEF support is required to have an effect on technology choices, gain critical mass, and establish the market for a long enough period to facilitate full deployment of installation, operation, and maintenance facilities. For this reason, the GEF grant is "front- end loaded" with a higher absolute amount for investments as well as higher capacity building costs in the first phase of the program. With the increasing commercialization of the industry, the GEF supported co- financing grants are phased out to zero for the products that reached commercialization while retaining co-financing grants for systems, in particular the systems for poorer households, that are not yet viable. There are several possible strategies on how the capital cost support could be sustained after the Project (even though the focus is to reduce them as much as possible). An exit strategy for GEF will be prepared by the Government during implementation of the project and before mid-term review. Three possible options for an exit strategy have been identified: (i) continuation of grant program under REF under a sustainable financing through a sector-based levy established by the Rural Energy Act of 2005; (ii) complete phase out of grant facility after sufficient economies of scale has been achieved and (iii) expansion of grant program on a provincial level with Government and donor support. 126 57. Leveraging of local private sector initiatives financing: Increased access to local resources is provided through the establishment of the REA and REF, which aims to leverage local private capital. The co-financing for initial investments is provided on a performance basis and is substantially less than the local contribution. The co-financing will reduce even further with efficiency improvements through economies of scale. The emphasis of technical assistance support is on cost-shared activities by project promoters leveraging local funding for company-specific barrier removal. During preparation additional `credit enhancements' from the Tanzanian capital market will be considered carefully to further increase the leveraging of GEF funds provided. The program is expected to leverage the various existing or planned private sector initiatives aimed at renewable energy development and/or access expansion, which could not come to closure due to the lack of institutional, regulatory or financing framework. 58. Productive uses: Special attention will be given to educate the users of the benefits of productively using the electricity provided by renewable energy systems. This applies in particular to the village based systems and the stand-alone systems for entrepreneurs and households. TANESCO will support the acceleration of the adoption of productive uses through targeted campaigns and assistance in selected newly electrified communities. This will support awareness creation as well as specific activities involving companies, developers, finance organizations, equipment suppliers, existing and potential enterprises in the targeted areas and NGOs. The awareness program will explain the higher quality end- uses that can be created through the efficient use of electricity. Best practices from other countries (like Indonesia, Sri Lanka) will be incorporated in the design. Stakeholders stressed the importance of this activity to the success of the Project. In addition, promotion of productive uses will be one of the key activities eligible for support from the matching grant program of the project. 59. Incorporation of lessons learnt from the past operation. To address sustainability problems in some past solar PV projects (including Tanzania), the project proposes a new approach of Sustainable Solar Market Packages, based on a model already successfully tested in Philippines, which bundles together provision of institutional and household applications and establishes compulsory maintenance and training obligations by the private sector provider. 60. Replication of successful business models: The project is open to a wide range of business models building on the expectation that entrepreneurial innovations will provide solution on how to reach endusers within an environment of financial viability. To assess if models are scalable is largely determined by business success. The M&E during the project and the review by core stakeholders at the end of the program will define which incentive programs could be adopted to further the rapid growing initiatives. GEF Role / catalytic involvement 61. The Government of Tanzania has supported renewable energy activities through several projects for over a decade. However, it has not yet embarked on a more systematic and longer-term effort in which institutional capacity could develop and the environment for sustained business participation could emerge. GEF over the last year has supported the Government in preparing a more programmatic approach. Furthermore, it supports the core principles of the program, which are: (i) private sector led, (ii) based on cost-recovery; and (iii) Government as market enabler. 62. GEF provides three catalytic elements to the program: (i) co-financing grants to provide the private sector with incentives to grow while at the same time covering some of the incremental costs; (ii) technical assistance to remove barriers as defined by the stakeholders; and (iii) best practice expertise from other countries with similar renewable energy programs. 127 63. It is expected that successful business model will be mainstreamed into the Bank's larger-scale follow up access project, tentatively scheduled for FY2010. Participation, collaboration and cooperation 64. During preparation consultations have taken place with finance organizations, private renewable energy companies, TANESCO, relevant ministries, regulator and beneficiaries. Several participatory workshops were conducted. Results from these activities include the draft Standard Power Purchase Agreement and Tariff, developed in a highly participatory manner, based on a consensus among MEM, REA, EWURA, TANESCO and private sector developers. Similar workshops have taken place for the development of the solar program, with a resulting SSMP and market aggregation approach to be applied for this project. The participatory approach will continue during the implementation of the project. 65. Several donor supported activities are under implementation or under preparation and complement the proposed project. To ensure coordination, two working groups will assist MEM and REA with the implementation of the Offgrid Component: (i) the Rural Energy Working Group (REWG); and (ii) the Working Group on Small Power Development (WGSPD). The Rural Energy Working Group (REWG) will advise the Ministry on a need basis on rural energy related issues but in particular on the Sustainable Solar Market Packages (SSMP). This REWG has been operational for several years. MEM is the host and chair for meetings of REWG; The REWG consists of members from among: Ministry of Health and Social Welfare; Ministry of Education and Vocational Training; Regional Administration and Local Government; Vice Presidents' Office (NEMC); Ministry of Planning, Economy and Empowerment; Ministry of Public Safety, Ministry of Community Development, Gender and Children Affairs, TANESCO, TPDC and MEM. The Working Group on Small Power Development (WGSPD) will advise the Ministry on the Standardized Small Power Purchase Agreements and Standardized Power Purchase Tariff. It will act as the focal point in matters related to development of Small Power Plants (SPPs) and maintain/update a database of prospective SPPs, their costs, advise on, and coordinate review processes for standardized Small Power Purchase Agreements (SPPAs) and Small Power Purchase Tariffs (SPPTs). MEM is the host for meetings of WGSPD. The WGSPD consist of members from: TANESCO; University of Dar es Salaam; Tanzania Private Sector Foundation; EWURA (as observer); Rural Energy Agency; EWURA Consumer Consultative Council and Ministry of Energy and Minerals. 66. The main ongoing related activities are detailed below: Solar PV programs in Tanzania · UNDP/GEF - Transformation of the Photovoltaic (PV) Market in Tanzania. The project builds on an earlier UNEP/GEF ­ Building Sustainable Commercial Dissemination Networks for Household PV Systems in Eastern Africa. The project aims to remove barriers to wide-scale utilization of PV to meet the basic electricity needs of individual households in terms of lighting, power for basic ICT appliances and of community users like health clinics and schools, in the Mwanza region. The project has been operating in the Mwanza region since March 2004. A mid- term review has been completed, and the project is entering into the second phase ­ replication and dissemination. The mid-term review concluded that the project has helped contribute to very significant market growth in PV sales and number and scale of operations of the suppliers, retailers and installers in Mwanza; awareness activities have been well conducted; consumer knowledge have increased dramatically (both household and institutional demand has increased); and the project has helped Government adopt East African community standards for PV. The key remaining challenges include: (i) concerns about sustainable servicing of institutional systems; (ii) micro-finance remains under-utilized; and (iii) product and installation quality remains a concern, despite the attention given to the development of standards. 128 · Sida, a major donor to Tanzania's energy sector will support GoT in the design and creation of the REA and REF and preparation of the first few investments, which is included in the project co- financing. It also supports a project that facilitates growth of PV private sector by stimulating demand. The project supports: (i) business development support to existing and potential PV companies; (ii) development of the solar network; (iii) policy and institutional development; and (iv) stimulation of end-user market. The project is structured in a similar way as the UNDP/GEF project, initially operating in four regions, with the possibility of future expansion in other regions. Similar to the UNDP/GEF project, the Sida project has been successful in helping PV companies to expand their retail network in the four operating regions, and to increase sales in these regions. The key challenges include: (i) continued fragmented sales in the rural areas and resulting relatively high costs of PV systems, installation and post-installation services; and (ii) difficulties to attract micro-finance to increase affordability of the systems for the poor. TEDAP Value-added 67. The proposed TEDAP project builds on experiences and lessons learnt of these earlier PV projects in Tanzania. It will complement these activities through: · The Sustainable Solar Market Packages approach aiming at improving sustainability of institutional systems. · The market aggregation approach, aimed at a reduction of transaction costs through aggregating demand, e.g. through major rural firms, such as tea/coffee processors, sugar cane millers etc. · Targeted focus of matching grants on micro-finance. · Promotion of smaller lighting systems benefiting the poor, in coordination with the Lighting Africa Initiative (which TEDAP project is a part of). 68. The TEDAP market development support will focus on these areas, complementing, not duplicating the existing support from other projects. Coordination will be done by MEM/REA and the Rural Energy Working Group. A launch workshop with all interested PV and microfinance companies is scheduled for December 2007. Other Regional Programs promoting Renewable Energy · UNEP/GEF supports a small hydro project (Greening the Tea Industry in East Africa) by the East African Tea Trade Association (EATTA). The project has been approved by GEF Council as a full-size project. The objective is to promote the use of hydropower and power cost reduction in the East African Tea sector through barrier removal related to financial weakness, lack of technical awareness and capacity as well as obstacles related to power sector policies. It is anticipated that 6 demonstration projects will be supported, ranging from 0.5 to 4 or 4 MW. Possibly one of these small hydro plants will be constructed in Tanzania. The project aims to use the regional network to bring highly specialized small-hydro expertise, investment and knowhow that is appropriate for the tea industry. MEM/REA will ensure coordination among the UNEP/GEF program and the proposed TEDAP project. In particular, the UNEP/GEF-sponsored small hydro plants in Tanzania will be able to benefit from the streamlined regulatory procedures established by the project and will be eligible for additional grants from REA for electrification of surrounding communities. TEDAP project, in turn, will benefit from the direct involvement of the tea industry, and possibility to replicate the approach among other tea companies. · UNEP/AfDB/GEF assisted Cogen Africa: The Project has been approved by a GEF Council for funding as a full-size project. It will be co-implemented by UNEP & the African Development Bank (AfDB) and executed by the Nairobi-based AFREPREN/FWD ­ the Energy, Environment 129 and Development Network for Africa ­ which incorporates the regional programs of the African Energy Policy Research Network (AFREPREN) and the Foundation for Woodstove Dissemination (FWD). The six-year initiative seeks to significantly scale up the use of efficient cogeneration options in seven eastern and southern African countries, namely: Kenya, Uganda, Tanzania, Ethiopia, Sudan, Malawi and Swaziland. As in the case of the above-referenced small hydro projects, the possible Cogen Africa subprojects in Tanzania will benefit from the streamlined regulatory procedures established by the project and will be eligible for additional grants from REA for electrification of surrounding communities. TEDAP project will benefit from additional resources provided for awareness building for cogeneration and an international network to be established among the participating agro-industries. For both Cogen Africa and Greening the Tea Industry project, coordination will be established through REA and through the Working Group on Small Power Projects. · World Bank/UNEP/GEF assisted African Rift Geothermal Energy Development Program (ARGeo): ARGeo is based on an initiative by the Global Environment Facility (GEF), the United Nations Environment Program (UNEP), and the World Bank (WB) responding to a number of African countries, which requested support for geothermal energy development. The Program follows a strategic approach in providing support in barrier removal, financial aid, and technical assistance in project preparation and implementation to project developers in client countries to facilitate the implementation of individual geothermal projects. It is expected that the program will increase low-cost power generation capacity, improve supply security and promote economic development in the region. The Program serves as an umbrella for many geothermal subprojects in participating countries of the African Rift valley, including Kenya, Tanzania, Uganda, and Ethiopia, Eritrea, Djibouti. This will be done by: (i) offering a Risk Mitigation instrument to reduce exposure to geothermal resource risks during the exploration drilling phase; (ii) providing technical assistance and capacity building to transfer necessary know-how to tap the significant geothermal potential of the Rift valley; (iii) providing assistance for resource mapping and surface exploration activities; (iv) supporting capital investments in geothermal energy development projects by building reliable, robust, and sustainable public-private sector relationships; and (v) supporting reforms in policies, and the legal, regulatory and institutional framework of the energy market. The possible geothermal projects in Tanzania are likely to be larger investments than those supported by the TEDAP projects, therefore there is less scope for synergies. Nevertheless, coordination will be established both through MEM and the World Bank team. · Lighting Africa is a World Bank Group-led initiative aimed at providing up to 250 million people in Sub-Saharan Africa with access to non-fossil fuel based, low cost, safe, and reliable lighting products with associated basic energy services by the year 2030. The initiative focuses on new advancements in lighting technology, such as compact fluorescent light bulbs (CFLs) and light emitting diodes (LEDs), which promise clean, portable, durable, lower cost, and higher quality lighting. The challenge is to make these products accessible to the half billion "lighting poor" in Africa. With expenditures on fuel based lighting estimated at US$38 billion annually, the potential exists to engage the international lighting industry in this new market area, while serving consumers, bolstering local commerce, creating jobs, enhancing incomes, cleaning the air, and improving health, safety, and quality of life. The first phase of Lighting Africa has three priorities: (i) competition for design and delivery of innovative lighting products; (ii) market research in Kenya, Ghana, Tanzania, and Zambia; (iii) business-to-business Web portal to build a virtual business community. TEDAP project is a part of the Lighting Africa activities in Tanzania. 130 Annex 12: Project Preparation and Supervision TANZANIA: Energy Development and Access Expansion Project Planned Actual PCN review September 9, 2006 January 25, 2007, Second PCN on March 14, 2007 Initial PID to PIC April 2, 2007 Initial ISDS to PIC March 22, 2007 Safeguard Documents to Infoshop March 26, 2007 Appraisal September 27, 2007 September 27, 2007 Negotiations October 8, 2007 October 11, 2007 Board/RVP approval December 20, 2007 December 13, 2007 Planned date of effectiveness March 1, 2008 Planned date of mid-term review March 1, 2010 Planned closing date March 31, 2012 Key institutions responsible for preparation of the Project: (i) Ministry of Energy and Minerals (MEM) (ii) Tanzania Electricity Supply Company (TANESCO) (iii) Rural Energy Agency (REA) (iv) Energy and Water Utilities Regulatory Authority (EWURA) Bank staff and consultants who worked on the Project included: Name Title Unit Task Team S. Vijay Iyer Sector Manager, Energy Unit AFTEG Pankaj Gupta Task Team Leader, Senior Financial Analyst AFTEG Dana Rysankova Senior Energy Specialist, Offgrid and Renewable Energy AFTEG Ralph Karhammar Senior Energy Specialist, Ongrid AFTEG Prasad Tallapragada Senior Energy Specialist, Transmission/Distribution AFTEG Elijah Luhanga Consultant, Power Engineer AFTEG Mohua Mukherjee Senior Private Sector Development Specialist AFTEG Bernard Tenenbaum Retiree Consultant, Regulatory AFTEG Thomas Walton Retiree Consultant, Environment AFTEG Naima A Hasci Consultant, Social AFTEG R. Anil Cabraal Lead Energy Specialist, Renewable Energy ETWEN Edith Mwenda Senior Counsel LEGAF Mercy Sabai Senior Financial Management Specialist AFTFM Hubert Mengi Consultant, Financial Management AFTFM Donald Mneney Procurement Specialist AFTPC Umang Goswami Financial Analyst FEU John Gabriel Goddard Young Professional, Economist AFTEG Suchada Nevijit Consultant, Financial Modelling AFTEG Luis Schwarz Senior Finance Officer, Disbursement LOAFC Raima Oyeneyin Language Program Assistant AFTEG Gloria Sindano Program Assistant AFCE1 Regine Mpoyi Program Assistant AFTEG 131 Quality Assurance Team & Peer Reviewers Tjaarda Storm Van Leeuwen Lead Financial Analyst AFTEG Cecile Ramsay Operations Adviser AFTQK Douglas Barnes Senior Energy Specialist ETWES Reynold Duncan Lead Power Engineer MNSSD Chris Ratnayake Consultant, Power Engineer AFTEG Bank funds expended to date on project preparation: 1. Bank resources: US$547,562 2. Bank Budget GEF36: US$84,691 3. Total: US$632,253 Estimated Approval and Supervision costs: 4. Remaining costs to approval: US$10,000 5. Estimated annual supervision cost: US$100,000 36 Reflects costs associated with the preparation of the proposed project, for FY07 and FY08. Costs prior to FY07 reflect expenses associated with the now-dropped Energizing Rural Transformation project. 132 Annex 13: Documents in the Project File TANZANIA: Energy Development and Access Expansion Project A. Project Implementation Plan/Feasibility Studies · Upgrade of Dar es Salaam, Kilimanjaro and Arusha Transmission and Distribution System, Feasibility Study Report by Lahmeyer International in 2004. · JICA supported Master Plan Study on the Power Sector for Major Towns in the United Republic of Tanzania prepared by Electric Power Development Co. Ltd. of Japan in 2002. · Technical and Economic Assessment of the Distribution Efficiency Improvement Program, Final Report by DECON, August 2007. · AFDB supported Rural Electrification Master Plan by DECON and FITCHNER GmbH. B. World Bank Assessments: · TEDAP Project Concept Note. · Aide Memoire, Identification and Pre-appraisal mission (March 19 to April 2, 2007). · Aide Memoire, Pre-appraisal Mission (July 11 to July 27, 2007). C. Other Consultant Reports · Distribution and Transmission Rehabilitation Project (Dar es Salaam, Moshi and Arusha), Proposed 132 kV Transmission Line from Moshi to Arusha, Resettlement Action Plan November 2005. · Distribution and Transmission Rehabilitation Project (Dar es Salaam, Moshi and Arusha), Proposed 132 kV Transmission Lines in Dar es Salaam, Draft Resettlement Action Plan March 2007. · Environmental Impact Assessment: Reinforcement and Upgrade of Dar es Salaam, Kilimanjaro and Arusha Transmission and Distribution System, Songo Songo Gas Development and Power Generation Project, 2005. · Environmental Audit of 18 Substations, Songo Songo Gas Development and Power Generation Project, 2005. · Environmental and Social Management Framework (ESMF), Energizing Rural Transformation Project, 2005. · Distribution System Reinforcement Project for Dar es Salaam, Arusha and Kilimanjaro, Inception Report, DECON, December 2006. · 132 kV Transmission Network Reinforcement Project for Dar es Salaam, Arusha and Kilimanjaro, Conceptual Design Report, Fichtner, February, 2007. · Distribution System Reinforcement Project for Dar es Salaam, Arusha and Kilimanjaro, Draft Bidding Documents (4 Lots) February 2007. a) Lot 1: Installation of Plant and Equipment for 33/11 kV Substations in Dar es Salaam b) Lot 2: Supply and Installation of Plant and Equipment for Rehabilitation of 33/11 kV Substations in Dar es Salaam c) Lot 3: Installation of Plant and Equipment for 33/11 kV Substations in Arusha and Kilimanjaro. d) Lot 4: Supply and Installation of Plant and Equipment for 33 kV and 11 kV Distribution Overhead Lines in Dar es Salaam, Arusha and Kilimanjaro. · 132 kV Transmissions Network Reinforcement Project for Dar es Salaam, Arusha and Kilimanjaro, Draft Bidding Documents (4 Lots) FICHTNER. a) Lot 1 ­ Substations Dar es Salaam b) Lot 2 ­ Transmission Lines, Dar es Salaam 133 c) Lot 3 ­ Substations Arusha & Kilimanjaro Region d) Lot 4 ­ Transmission Lines, Arusha and Kilimanjaro · STAP Roster Review: by Daniel M. Kammen, Professor of Energy and Society, Professor of Public Policy, University of California at Berkeley · Sustainable Solar Market Packages, Market Study, Technical Design and Draft Procurement Packages, 2007. · Screening and Review of Feasibility Studies for Small Renewable Energy Project. Ministry of Energy and Minerals, TANESCO · Draft Power Sector Reform Strategy 2007. · Power System Master Plan Study, Draft Load Forecast, SNC-Lavalin, July 2007. · TANESCO Financial Recovery Plan 2006-2010. · TANESCO Tariff Application January 2007. · TANESCO Tariff Application August 2007. · TANESCO Financial Model, June 2007, October 2007, November 2007. · MEM application for PPIAF support for legal advisors for Ruhudji Hydropower IPP Project. · Draft Standard Power Purchase Agreement and Tariff for Small Renewable Power Projects. 134 Annex 14: Statement of Loans and Credits TANZANIA: Energy Development and Access Expansion Project Operations Portfolio (IBRD/IDA and Grants) As Of Date -10/01/2007 Active Projects Difference Between Expected and Actual Original Amount in US$ Disbursements a/ Millions Project ID Fiscal Project Name IBRD IDA GRANT Cancel. Undisb. Orig. Frm Year Rev'd IBRD IDA Grants Cancel. Undisb. Orig. Frm Rev'd P099231 2006 Financial Sector Support Project 15 14.43 -0.32 P070544 2006 TZ-Accountability,Transparency&Integrity 40 37.72 2.58 P085752 2006 TZ-Agr Sec Dev (FY06) 90 85.18 11.24 P078387 2004 TZ-Central Transp Corridor Prj (FY04) 122 67.51 51.30 P059073 2003 TZ-Dar Water Suply & Sanitation (FY03) 61.5 16.92 8.17 -1.61 P058706 2002 TZ-Forest Conserv & Mgmt SIL (FY02) 31.1 18.01 12.41 11.99 P084213 2006 TZ-GEF Marine & Coastal Env Mgmt (FY06) 10 7.40 0.65 P071014 2004 TZ-HIV/AIDS APL (FY04) 70 37.63 17.49 -6.04 P082335 2004 TZ-Health Sector Development II (FY04) 125 59.08 -4.99 P070736 2005 TZ-Loc Govt Supt SIL (FY05) 150 103.01 -2.28 -2.71 P073397 2002 TZ-Lower Kihansi Env Mgmt TAL (FY02) 9.8 3.80 -0.72 P082492 2006 TZ-Marine & Coastal Env Mgmt SIL (FY06) 51 41.18 12.05 P067103 2003 TZ-Partic Agr Dev & Empwrmnt SIL (FY03) 56.58 27.93 12.79 P085009 2006 TZ-Private Sector/MSME Competitiveness 95 91.78 11.73 P049838 2000 TZ-Privatization & Priv Sec Dev 45.9 21.01 19.01 19.01 P060833 2000 TZ-Pub Sec Reform Prgm (FY00) 41.2 0.64 -1.07 -1.07 P047762 2002 TZ-Rural Water Sply (FY02) 26 5.69 0.88 -0.93 P085786 2005 TZ-Soc Action Fund 2 SIL (FY05) 150 94.86 44.70 P002797 2002 TZ-Songo Gas Dev & Power Gen (FY02) 183 87.30 56.73 P100314 2006 TZ-Tax Modernization Project 12 12.58 1.73 P087154 2007 TZ-Water Sector Support SIL 200 209.79 20.00 P102262 2007 TZ-Zanzibar Basic Educ. SIL (FY07) 42 43.69 Total 1617.08 10 1087.12 274.08 18.64 IFC Committed and Disbursed Outstanding Investment Portfolio As of 08/29/2007 (In USD Millions) Committed Disbursed Outstanding FY Company Loan Equity **Quasi *GT/RM Participant Loan Equity **Quasi *GT/RM Partici Approval Equity Equity pant 2001 Aef boundary hil 0.2 0 0 0 0 0.2 0 0 0 0 0 Alaf 5 0 0 5.14 0 0 0 0 0 0 2005 Bbl 9 0 0 0 0 9 0 0 0 0 2002/07 Exim bank 5 0 1 0 0 0 0 1 0 0 2000 Ioh 2.02 0 0 0 0 2.02 0 0 0 0 2000 Nbc 0 10 0 0 0 0 4 0 0 0 0 Stanbic tanzania 0 0 3 0 0 0 0 3 0 0 1994 Tanzania brewery 0 3.43 0 0 0 0 3.43 0 0 0 Total Portfolio: 21.22 13.43 4 5.14 0 11.22 7.43 4 0 0 * Denotes Guarantee and Risk Management Products. ** Quasi Equity includes both loan and equity types. 135 Annex 15: Country at a Glance TANZANIA: Energy Development and Access Expansion Project Sub- POVERTY and SOCIAL Saharan Low- Tanzania Africa income Development diamond* 2006 Population, mid-year(millions) 39.5 770 2,403 Life expectancy GNI per capita(Atlas method, US$) 340 842 650 GNI (Atlas method, US$ billions) 13.4 648 1,562 Average annual growth, 2000-06 Population (%) 2.6 2.4 1.9 Labor force (%) 2.4 2.6 2.3 GNI Gross per primary Most recent estimate (latest year available, 2000-06) capita enrollment Poverty (% of population below national poverty line) 36 .. .. Urban population(% of total population) 25 36 30 Life expectancy at birth(years) 46 47 59 Infant mortality(per 1,000 live births) 76 96 75 Child malnutrition(% of children under 5) 22 30 .. Access to improved water source Access to an improved water source(% of population) 62 56 75 Literacy (% of population age 15+) 69 59 61 Gross primary enrollment (% of school-age population) 110 92 102 Tanzania Male 112 98 108 Low-income group Female 109 86 96 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1986 1996 2005 2006 Economic ratios* GDP (US$ billions) .. 6.5 12.6 12.8 Gross capital formation/GDP .. 16.6 18.2 18.6 Trade Exports of goods and services/GDP .. 19.9 23.5 24.3 Gross domestic savings/GDP .. 4.6 10.9 12.0 Gross national savings/GDP .. 3.1 9.4 11.2 Current account balance/GDP .. -14.5 -9.7 -12.2 Domestic Capital Interest payments/GDP .. 1.5 0.3 .. Total debt/GDP .. 113.7 61.7 .. savings formation Total debt service/exports 36.8 23.0 4.4 .. Present value of debt/GDP .. .. 17.9 .. Present value of debt/exports .. .. 77.9 .. Indebtedness 1986-96 1996-06 2005 2006 2006-10 (average annual growth) GDP 2.6 5.6 6.8 5.9 .. Tanzania GDP per capita -0.6 3.0 4.1 3.3 .. Low-income group Exports of goods and services 17.5 8.5 12.3 -0.2 .. STRUCTURE of the ECONOMY 1986 1996 2005 2006 Growth of capital and GDP (%) (% of GDP) 20 Agriculture .. 48.0 46.1 45.3 Industry .. 14.2 16.9 17.4 15 Manufacturing .. 7.4 6.8 6.9 10 Services .. 37.8 37.0 37.3 5 0 Household final consumption expenditure .. 83.8 72.1 69.9 01 02 03 04 05 06 General gov't final consumption expenditure .. 11.6 17.0 18.1 GCF GDP Imports of goods and services .. 31.9 30.8 30.8 1986-96 1996-06 2005 2006 Growth of exports and imports (%) (average annual growth) 30 Agriculture 3.2 4.3 5.2 3.8 Industry -0.1 8.5 10.6 8.6 20 Manufacturing 0.3 6.7 9.0 7.1 10 Services 1.6 5.7 6.9 7.2 0 01 02 03 04 05 06 Household final consumption expenditure 3.0 3.0 4.0 5.1 -10 General gov't final consumption expenditure -8.4 15.6 14.3 11.9 -20 Gross capital formation -4.5 6.8 6.0 7.4 Exports Imports Imports of goods and services 2.1 5.0 7.4 3.6 Note: 2006 data are preliminary estimates. This table was produced from the Development Economics LDB database. * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. 136 PRICES and GOVERNMENT FINANCE 1986 1996 2005 2006 Inflation (%) Domestic prices 15 (% change) Consumer prices 32.4 21.0 8.6 9.8 10 Implicit GDP deflator .. 19.3 7.6 6.3 5 Government finance (% of GDP, includes current grants) 0 Current revenue .. 11.9 12.5 12.9 01 02 03 04 05 06 Current budget balance .. -0.7 -7.2 -8.9 GDP deflator CPI Overall surplus/deficit .. -3.9 -13.9 -15.0 TRADE 1986 1996 2005 2006 Export and import levels (US$ mill.) (US$ millions) Total exports (fob) 350 696 1,594 1,759 4,000 Coffee 185 136 72 68 Cotton 30 125 94 115 3,000 Manufactures 39 123 130 143 Total imports (cif) 1,023 1,370 2,993 3,661 2,000 Food 86 54 204 212 1,000 Fuel and energy 184 189 794 1,065 Capital goods 464 461 1,070 1,155 0 00 01 02 03 04 05 06 Export price index (2000=100) 80 106 113 119 Import price index (2000=100) 104 143 154 166 Exports Imports Terms of trade (2000=100) 76 74 73 72 BALANCE of PAYMENTS 1986 1996 2005 2006 Current account balance to GDP (%) (US$ millions) Exports of goods and services 426 1,142 2,794 3,133 0 Imports of goods and services 1,105 1,986 3,827 4,565 00 01 02 03 04 05 06 Resource balance -680 -844 -1,033 -1,431 -5 Net income -105 -118 -204 -182 Net current transfers 242 20 11 58 Current account balance -543 -942 -1,227 -1,556 -10 Financing items (net) 547 1,023 1,461 1,601 Changes in net reserves -4 -81 -234 -46 -15 Memo: Reserves including gold (US$ millions) 61 440 2,049 2,259 Conversion rate (DEC, local/US$) 32.7 580.0 1,128.9 1,251.9 EXTERNAL DEBT and RESOURCE FLOWS 1986 1996 2005 2006 Composition of 2005 debt (US$ mill.) (US$ millions) Total debt outstanding and disbursed 4,901 7,387 7,763 .. IBRD 291 56 0 0 IDA 670 2,242 3,861 1,056 G: 1,229 Total debt service 157 269 127 .. IBRD 47 33 0 0 F: 105 IDA 8 31 45 51 Composition of net resource flows B: 3,861 E: 1,288 Official grants 483 431 889 .. Official creditors 168 80 404 .. Private creditors 69 -16 3 .. Foreign direct investment (net inflows) -7 150 473 .. D: 938 Portfolio equity (net inflows) 0 0 3 .. C: 342 World Bank program Commitments 185 173 382 39 A - IBRD E - Bilateral Disbursements 92 134 275 377 B - IDA D - Other multilateral F - Private Principal repayments 29 40 15 31 C - IMF G - Short-term Net flows 63 94 261 346 Interest payments 26 23 30 20 Net transfers 38 71 231 327 Note: This table was produced from the Development Economics LDB database. 9/28/07 137 Annex 16: Map # 35713 TANZANIA: Energy Development and Access Expansion Project [Page Intentionally Left Blank] 138 MAP SECTION IBRD 35713 To Masaka 32° U G A N D A 36° 40° Kagera Kyaka Shirati T A N Z A N I A Sugar Sirari K E N Y A ENERGY DEVELOPMENT AND BUKOBA Lake Kayanga Victoria Tarime MUSOMA Kiabakari RWANDA Myuleba Butiama ACCESS EXPANSION PROJECT Bunda To Nairobi MWANZA Nasa Magu POWER STATIONS: Sengerema Longido Nyambiti Bariadi HYDRO Geita Luguru Mkuu Misungwi Ngudu Manawa Maswa Ngorongoro THERMAL Mtowa Monduli Sanya Juu BURUNDI Malampaka Mbu Bulyanhulu MOSHI Mwadui Meatu Lake Oldean ARUSHA To Voi SUBSTATIONS Eyasi Ugweno Karatu KIA TRANSMISSION LINES: Kibondo SHINYANGA Muhunze Lake Arusha Mwanga Tinde Manyara Mererani Chini 220 kV Kahama Mwadukani Magugu Nyumba 4° CONGO Nata Mbulu Yamungu Usangi Lusu Kiomboi 4° 132 kV Nzega Same C/Nkola Kiru Valley KitangiriHanang Lake Endesaki Gonja 66 kV Nzega Wheat Babati Ndungu To Kinampanda Farms Mwembe Mombasa 33 kV Kasulu Lgunga Iguguno OF Katesh Makanya Kihurio Lushoto Mazinde . KIGOMA Mgori Urambo SINGIDA Mombo Moa Korogwe Ujiji Malagarasi Kaliua TABORA Kondoa Itigi TANGA WETE L a Uvinza Korogwe Muheza Kalema SELECTED CITIES AND TOWNS Malagarasi Manyoni Pemba REP k e Handeni Hale Pangani REGION CAPITALS Kijungu (2x10MW) Island Sikonge Pangani Falls (2x34MW) NATIONAL CAPITAL Hombolo Mkata Zanzibar MAIN ROADS Chamwino Island Kongwa Turiani RAILROADS Mtibwa Mandera ZANZIBAR DODOMA DEM. INTERNATIONAL BOUNDARIES Mpanda Kigwe Mpwapwa Wami Msata Bagamoyo I N D I A N Chalinze Kunduchi Kimamba Mlandizi DAR ES SALAAM T a Tegeta Kilosa Ilala n Rungwa MOROGORO Mtera Ubungo g Rungwa Migoli a (2x40MW) Mkuranga O C E A N n Mikumi y Namanyere Ruaha Ilula Ruvu Kisiju i Lake Tosamaganga k Rukwa Kibiti a Kipembawe IRINGA R u f i j i Ikwiriri Mafia DJIBOUTI SUMBAWANGA Ihemi Kidatu C H A D 8° Island Kihansi 8° Matinga S U D A N Ifakara ETHIOPIA SOMALIA Kasanga Mufindi Chunya Tea Estate CENTRAL Kapunga Mufindi Mahenge Kilwa Masoko Kilwa Kivinje AFRICAN REPUBLIC To MBEYA Makambako Mbala Mbozi Tunduma Makete Ilembula Z A M B I A Vwawa Tukuyu Tanwat Ileje Mwakaleli Njombe UGANDA To Nakonde Kiwira Kyela Uwemba KENYA Luwegu CONGO To Isoka Liwale DEM. REP. OF Lake CONGO RWANDA Victoria To Karonga LINDI Ruangwa BURUNDI I N D I A N Mbwomkuru Mnazi Mmoja MTWARA TANZANIA 0 100 200 300 400 KILOMETERS Lake Nachingwea Mikindani Dodoma O C E A N Mtama Nyasa SONGEA Masasi Mahula Mbinga Tandahimba This map was produced by the Map Design Unit of The World Bank. Newala The boundaries, colors, denominations and any other information shown Tunduru Ruvuma COMOROS on this map do not imply, on the part of The World Bank Group, any ANGOLA judgment on the legal status of any territory, or any endorsement or Mbamba Bay MALAWI acceptance of such boundaries. MALAWI Mayotte Z A M B I A (Fr) M O Z A M B I Q U E MOZAMBIQUE MADAGASCAR 12° 32° 36° 40° 12° SEPTEMBER 2007