The World Bank South Africa Partnership for Market Readiness (P155885) REPORT NO.: RES36901 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF SOUTH AFRICA PARTNERSHIP FOR MARKET READINESS APPROVED ON DECEMBER 21, 2016 TO REPUBLIC OF SOUTH AFRICA ENVIRONMENT & NATURAL RESOURCES AFRICA Regional Vice President: Hafez M. H. Ghanem Country Director: Marie Francoise Marie-Nelly Regional Director: Ede Jorge Ijjasz-Vasquez Practice Manager/Manager: Africa Eshogba Olojoba Task Team Leader: Daniel James Besley The World Bank South Africa Partnership for Market Readiness (P155885) ABBREVIATIONS AND ACRONYMS CED Central Energy Database DEFF Department of Environment, Forestry and Fisheries DMRE Department of Mineral Resources and Energy PMR Partnership for Market Readiness NAEIS National Atmospheric Emissions Inventory System NT South African National Treasury VAT Value-Added Tax The World Bank South Africa Partnership for Market Readiness (P155885) BASIC DATA Product Information Project ID Financing Instrument P155885 Investment Project Financing Original EA Category Current EA Category Not Required (C) Not Required (C) Approval Date Current Closing Date 21-Dec-2016 30-Jun-2020 Organizations Borrower Responsible Agency Republic of South Africa National Treasury Project Development Objective (PDO) Original PDO The Project Development Objective (PDO) is to strengthen the readiness of the government of South Africa for the design, preparation and implementation of a carbon pricing instrument. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed TF-A2970 03-Mar-2017 03-Mar-2017 03-Mar-2017 30-Jun-2020 5.00 .87 4.13 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank South Africa Partnership for Market Readiness (P155885) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Project Status 1. While project implementation has been slow due to delays in undertaking and finalizing procurement activities, there has been progress on the major activities and the project is on track to achieve its development objective if the updated implementation plan outlined in this paper continues to be adhered to. 2. At present 52% of the funding has been committed under contract and US$0.87M has been disbursed. Disbursements are expected to grow rapidly this fiscal year as payments occur for the activities recently contracted. 3. There are no outstanding audits. 4. The table below outlines the status of the project activities. The World Bank South Africa Partnership for Market Readiness (P155885) Status of Current Activities Estimated Agency Component Activity Cost Status Lead (USD) 1. Supporting the TOR is to be finalized by the end of design of the 1.1 Review of industry benchmarks NT 230,000 November 2019. The activity is expected carbon tax to be implemented within 6 months 2.1 Modification of the NAEIS system Procurement is completed. DEFF 1,119,502 to include emissions reporting Implementation is ongoing RFP drafted and approved. The RFP is to 2.2 Strengthening the DoE Central DMRE 793,500 be published in November 2019. 2. Data mgt and Energy Database (CED) MRV 2.3 NAEIS-CED institutional set-up and EOI published and candidates shortlisted. DEFF 280,000 business case RFP developed but yet to be published. Procurement to start in November 2019 2.4 Capacity Building for MRV DEFF 315,000 and will be completed by February 2020. Procurement is completed. 3.1 Support for the offsets registry DMRE 227,897 Implementation is ongoing 3. Supporting the 3.2 Capacity building and secondment DMRE 270,000 Procurement is to start in December 2019 design of the of expertise offset scheme 3.3 Manual for offset scheme users Contract being negotiated with selected and framework for adopting local DMRE 194,492 vendor. standards 4.Communications, 4.1 Program Coordinator NT 175,000 Completed stakeholder engagement and project 4.2 Communication and stakeholder Activity to start in February 2020 and NT 170,000 administration engagement conclude by July 2020. B. Rationale for restructuring 1. The restructuring proposes changes to some of the activities, which will result in an extension of the project closing date by six months; a reduction in the expected cost by US$1m; and a modification of some the performance indicators (KPIs) in the results framework. 2. These changes to the activities reflect the changing needs of the South African Government in implementing the carbon tax, particularly given the recent passage of the carbon tax Bill and the start of the carbon tax on June 1, 2019. In addition, some activities were completed using the preparation grant and other funding and so are no longer needed. The reasons for the specific changes to the original activities are: a) Component 1: Supporting the refinement of the design of the carbon tax through analytical work (i) Due to the urgency of the activities in component 1, they were completed during the preparation phase of the project and, therefore, do not need to be undertaken as part of the implementation phase of the project. The World Bank South Africa Partnership for Market Readiness (P155885) (ii) Under this component, , a review of industry benchmarks was identified as a priority for the South African Government. Emissions intensity benchmarks are established for each industry as a basis for determining eligibility for a partial tax exemption. The benchmarks that have been submitted by industry need to be reviewed by experts to determine their suitability for use under the carbon tax. This activity has been added to component 1. b) Component 2: Strengthening the capacity of the government to enhance data management and measurement, reporting and verification (MRV) systems: (i) When developing the detailed TORs, it became apparent that there were significant synergies between NAEIS-CED exchange protocols activity and the NAEIS-CED institutional set-up activity. The synergies were such that the activities would be best undertaken together. Therefore, the exchange protocols activity was included in the institutional setup activity. It is believed that the exchange protocols activity can be included without the need to expand the budget for the institutional set up activity. This has resulted in a saving of US$80,000. (ii) The vessels under pressure registry activity was dropped as the Department of Environment, Forestry and Fisheries (DEFF) could not confirm the participation of the Department of Labor, which is responsible for managing the register for equipment under pressure, in the PMR project. (iii) A review of the capacity building needs of the agencies involved in implementing the carbon tax was undertaken given both the time since the proposal for this project was developed and the imminent start of the carbon tax. As a result, it is proposed that these activities be amended to better target the current needs of Department of Mineral Resources and Energy (DMRE), DEFF and South African Revenues Service (SARS) as they seek to implement the systems and processes needed for the carbon tax implementation. c) Component 3: Supporting the design of the carbon offset scheme: (i) Additional capacity building for DEFF following the review of capacity building needs: The additional capacity building would focus on the implementation and operationalization of the Monitoring and Evaluation System. This entails the coordination of data and information, data processing, quality assurance and quality control, data storage, and the analysis of data and information to feed into national and international reporting as well as support policy development and implementation. d) Component 4: Communication, stakeholder engagement and support to project administration: (ii) It is proposed that rather than hiring a communications expert to develop a communication strategy, this component focuses on engaging stakeholders, particularly businesses, on how the carbon tax works and what is needed for compliance in advance of the first compliance year. This is a priority given that companies will need to prepare for carbon tax compliance in 2019/20. 3. It is proposed that the project closing date be extended by six months from June 30, 2020 to December 30, 2020. This will allow time for the (1) expanded capacity building activities with the DEFF, DMRE and SARS; and (2) the additional engagement with the private sector on compliance with the carbon tax legislation. These two important sets of activities need to happen over time and would take the project a few months beyond the current closing date of June 2020. The World Bank South Africa Partnership for Market Readiness (P155885) 4. Value-Added Tax (VAT) was not considered at the time of developing cost estimates as South African law exempts donor-funded projects from paying VAT. It is, however, a World Bank practice for VAT to be paid on projects in South Africa. Therefore, VAT has been added to those activities that have been contracted or are under contractual negotiations (VAT is 15%). VAT will be factored into the bids for the remaining activities and thus within their budget envelope. II. DESCRIPTION OF PROPOSED CHANGES 5. The following changes are proposed: a) Component 1. Activities in the original plan are replaced with an activity aimed at reviewing the industry benchmarks needed for the carbon tax. This activity is expected to cost US$230,000 (including VAT). The budget for component 1 would change from US$550,000 to US$230,000. b) Component 2. Includes the NAEIS-CED exchange protocols activity in the institutional set-up activity. This would save US$80,000. The support for the vessels under pressure registry activity (US$400,000) will be dropped. The modification of the NAEIS activity was more expensive than budgeted resulting in an increase in estimated cost from US$510,000 to US$973,480 plus VAT of $146,022 (total of $1,119,502). VAT was not previously considered in the cost estimate. The capacity building on MRV activity has been amended, resulting in the estimated cost changing from US$790,000 to US$315,000. VAT of $103,500 has been added to the strengthening of the Central Energy Database activity. c) Component 3. The estimated cost of developing the technical guidelines and institutional frameworks has increased from US$100,000 to US$175,000 (plus $19,492 for VAT) following detailed development of the TOR and a greater appreciation of work involved. The technical assessment of the registry was cheaper than expected, resulting in a reduction in cost from US$1,000,000 to US$200,000 (plus $27,897 for VAT). The capacity building for staff working on the offsets program has been redesigned resulting in an increase in the estimated cost from US$150,000 to US$270,000. d) Component 4. The activities of hiring a communications expert and a facilitator (US$300,000) will be dropped. Instead a more extensive than planned consultation with stakeholders about compliance with the carbon tax will be done. This will result in an increase in the estimated cost of this activity from US$50,000 to US$170,000. The Program Coordinator will be extended for a year, resulting in an increase in budget from US$100,000 to US$175,000. e) Budget. The result of the budget changes outlined above is an aggregate change to the budget from US$5million to US$3.8million. f) Project Closing Date. The project closing date to be extended by six months to 30 December 2020. g) Results Framework. The results framework stays largely the same as the objectives of the components haven’t changed and the main activities have remained. The indicators for component 1 to be dropped reflects the dropped activities and will be replaced with an indicator related to the new activity of reviewing the industry benchmarks. In addition, it is proposed that the last intermediate indicator (under component 4) that relates to a training program be dropped as no training program was or is planned for that component. The World Bank South Africa Partnership for Market Readiness (P155885) Comparison of original plan and proposed plan Original Plan in PAD Latest implementation plan (October 2019) Activity Estimated Comment Estimated Cost (US$) Cost (US$) Component 1 Assessment of existing Replaced with: international 175,000 230,000 competitiveness measures Review of industry benchmarks Analysis of private sector and 175,000 Dropped: No longer needed. Done as part of n/a international climate finance separate project resources Carbon tax modeling impact 200,000 Dropped: No longer needed. Done as part of n/a studies separate PMR project Component 2 Strengthening of the DoE Central Energy Database 690,000 VAT added to cost estimate. 793,500 (DoE-CED) NAEIS-CED exchange 80,000 Rolled into the institutional set-up and design n/a protocols activity below. Budget not needed Support to the Vessels under 400,000 n/a Activity dropped Pressure Registry Modification of NAEIS Activity kept but more expensive than 510,000 1,119,502 budgeted and VAT has been added. NAEIS-DEA+DoE-CED 280,000 Includes work on exchange protocols 280,000 institutional set-up design Capacity building on Carbon Tax MRV and training for 790,000 Scaled down 315,000 technical staff Component 3 Developing regulatory and institutional frameworks and 100,000 194,492 Kept but budget increased, and VAT added. technical guidelines for offset scheme Carrying out technical 1,000,000 Kept but less expensive than budgeted and assessment for registry and 227,897 VAT added possible establishment Component 3 Providing training for technical and administrative 150,000 270,000 Kept but budget increased staff and the secondment of technical expertise The World Bank South Africa Partnership for Market Readiness (P155885) Component 4 Design of the communication 150,000 n/a Dropped strategy Consultations facilitator with 150,000 n/a Rolled into the consultations activity below the relevant stakeholders Project Coordinator 100,000 Budget increased 175,000 Component 4 Consultations with the Combined with the facilitator activity above relevant stakeholders 50,000 and focused on goods procurement (Venue, 170,000 travel etc) TOTAL 5,000,000 3,775,391 I. SUMMARY OF CHANGES Changed Not Changed Results Framework ✔ Components and Cost ✔ Loan Closing Date(s) ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Disbursement Estimates ✔ Implementation Schedule ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ Disbursements Arrangements ✔ Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ The World Bank South Africa Partnership for Market Readiness (P155885) Financial Management ✔ Procurement ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_COMPONENTS_TABLE COMPONENTS Current Current Proposed Proposed Cost Action Component Name Component Name Cost (US$M) (US$M) Supporting the refinement of the Supporting the refinement of design of the carbon tax through 0.75 Revised the design of the carbon tax 0.23 analytical work through analytical work Strengthening the capacity of the Strengthening the capacity of government to enhance data the government to enhance management and measurement, 2.47 Revised data management and 2.51 reporting and verification (MRV) measurement, reporting and systems verification (MRV) systems Supporting the design of the Supporting the design of the 3.00 Revised 0.69 carbon offset scheme carbon offset scheme Communication, stakeholder Communication, stakeholder engagement and support to 0.78 Revised engagement and support to 0.35 project administration project administration TOTAL 7.00 3.78 OPS_DETAILEDCHANGES_LOANCLOSING_TABLE LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications TF-A2970 Effective 30-Jun-2020 31-Dec-2020 30-Apr-2021 OPS_DETAILEDCHANGES_CANCELLATIONS_TABLE The World Bank South Africa Partnership for Market Readiness (P155885) CANCELLATIONS Value Reason Current Cancellation New Ln/Cr/Tf Status Currency Date of for Amount Amount Amount Cancellation Cancellation BORROWER' S REQUEST TF-A2970- Disburs USD 5,000,000.00 1,200,000.00 08-Jul-2019 3,800,000.00 FOR 001 ing COUNTRY REASONS OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed TF-A2970-001 | Currency: USD iLap Category Sequence No: 1 Current Expenditure Category: Gds, NCS, CS, Training 5,000,000.00 27,218.75 3,800,000.00 100.00 100.00 Total 5,000,000.00 27,218.75 3,800,000.00 OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed 2017 0.00 0.00 2018 0.00 0.10 2019 0.00 0.90 2020 0.00 1.80 2021 0.00 1.00 2022 0.00 0.00 . The World Bank South Africa Partnership for Market Readiness (P155885) . Results framework COUNTRY: South Africa South Africa Partnership for Market Readiness Project Development Objectives(s) The Project Development Objective (PDO) is to strengthen the readiness of the government of South Africa for the design, preparation and implementation of a carbon pricing instrument. Project Development Objective Indicators by Objectives/ Outcomes RESULT_FRAME_TBL_PDO Indicator Name DLI Baseline End Target To strengthen the readiness of the government to implement a carbon tax Impacts of carbon pricing approach analyzed and modelled No Yes (Yes/No) Action: This indicator has been Marked for Deletion Satisfaction by main stakeholders with engagement on impacts 0.00 75.00 and implementation of carbon pricing (Percentage) Action: This indicator has been Marked for Deletion Carbon offset scheme designed according to defined criteria and No Yes approved by the National Treasury (Yes/No) Share of targeted entities that report GHG emissions to the Government in accordance with the relevant monitoring and 0.00 75.00 reporting protocols (Percentage) Direct project beneficiaries, of which female (Number) 0.00 250.00 PDO Table SPACE The World Bank South Africa Partnership for Market Readiness (P155885) Intermediate Results Indicators by Components RESULT_FRAME_TBL_IO Indicator Name DLI Baseline End Target 1. Supporting the refinement of the design of the carbon tax through analytical work Additional analysis and modelling of impacts of carbon pricing approach prepared by the National Treasury and validated with No Yes the main stakeholders (Yes/No) Action: This indicator has been Marked for Deletion Industry benchmarks reviewed (Yes/No) No Yes Action: This indicator is New 2. Strengthening the capacity of the government to enhance data management and MRV systems Monitoring and reporting protocol for GHG reporting by the targeted entities prepared and validated with the main No Yes stakeholders (Yes/No) Verification mechanism established for €GHG emissions No Yes monitoring and reporting system (Yes/No) 3. Supporting the design of the carbon offset scheme Definition of the rules and procedures and technical guidelines for the carbon offset scheme by the Department of Energy No Yes (Yes/No) Functional registry to support the carbon offset scheme No Yes established by the Department of Energy (Yes/No) 4. Communication, stakeholder engagement and support to project administration Stakeholder engagement plan prepared and implemented No Yes according to defined criteria (Yes/No) Training plan prepared and implemented according to defined No Yes criteria (Yes/No) The World Bank South Africa Partnership for Market Readiness (P155885) RESULT_FRAME_TBL_IO Indicator Name DLI Baseline End Target Action: This indicator has been Marked for Deletion IO Table SPACE The World Bank South Africa Partnership for Market Readiness (P155885)