Document ofThe World Bank

Report No: 41308 - ZM

PROJECT DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR {_______} MILLION(US$33 MILLION EQUIVALENT)

AND

PROPOSED GRANT FROM THEGLOBAL ENVIRONMENT FACILITY TRUST FUND

IN THE AMOUNT OF US$4.5 MILLION

TO THE

GOVERNMENT OF ZAMBIA

FOR A

ZAMBIA: INCREASED ACCESS TO ELECTRICITY SERVICE PROJECT

April 3, 2008

Its contents may not otherwise be disclosed without World Bank authorization.

CURRENCY EQUIVALENTS

(Exchange Rate Effective April 3, 2008)

Currency Unit = KwachaZMK 3500 = US$1US$ 1.437 = SDR 1

FISCAL YEARMarch 1 – April 31

ABBREVIATIONS AND ACRONYMSCAS Country Assistance StrategyCAZ Communications Authority of ZambiaCEC Copperbelt Energy CorporationCO2 Carbon DioxideDDCC District Development Coordinating CommitteeDRC Democratic Republic of CongoERB Energy Regulatory BoardESMAP Energy Sector Management Assistance ProgramESMF Environmental and Social Management FrameworkEU European UnionFBS Fixed Budget SelectionFMR Financial Monitoring ReportGNI Gross National IncomeGEF Global Environment FacilityGoZ Government of ZambiaGWh Gigawatt HourHIPC Highly Indebted Poor CountryIAES Increased Access to Energy ServicesIC Individual ConsultantICB International Competitive BiddingIDA International Development Association (World Bank)ISDS Integrated Safeguard Data SheetJBIC Japan Bank for International CooperationJICA Japanese International Cooperation AgencyK KwachakW KilowattkWh Kilowatt hourLCS Least Cost SelectionMEWD Ministry of Energy and Water DevelopmentMOE Ministry of EducationMOH Ministry of HealthMoFNP Ministry of Finance and National PlanningMOLG Ministry of Local Government MW Megawatt

MWh Megawatt HourNCB National Competitive BiddingNGO Non-Governmental OrganizationO&M Operation and MaintenanceOED Operations Evaluation Department (World Bank)OP6 Operational Program 6 (of the GEF)OPPPI Office for Promoting Private Power InvestmentPAC Public Access CenterPCN Project Concept NotePDF B Project Development Facility B (of the GEF)PHRD Policy and Human Resource Development POP Point of PresencePREP Priority Rural Electrification ProjectPRSP Poverty Reduction Strategy PaperPV Solar PhotovoltaicQBS Quality Based SelectionQCBS Quality and Cost Based SelectionRE Rural ElectrificationREA Rural Electrification AuthorityREF Rural Electrification FundRFP Request for ProposalRPF Resettlement Policy FrameworkRVP Regional Vice President (World Bank)SAPP Southern Africa Power PoolSBD Standard Bidding DocumentsSHS Solar Home SystemSIDA Swedish International Development AgencySIL Sector Investment LoanSSS Single Source SelectionTA Technical AssistanceTOR Terms of ReferenceUNIDO United Nations International Development OrganizationUSAID United States Agency for International DevelopmentVAT Value Added TaxZESCO Zambia Electricity Supply CompanyZPA Zambian Privatization Agency

Vice President: Obiageli K. Ezekwesili Country Director: Michael BaxterSector Manager: S. Vijay Iyer

Task Team Leader: Xiaodong Wang

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.

ZAMBIA

INCREASED ACCESS TO ELECTRICITY SERVICE PROJECT

PROJECT APPRAISAL DOCUMENT

Date: April 3, 2008Country Director: Michael Baxter Sector Manager/Director: S. Vijay IyerProject ID: P077452

Lending Instrument: Specific Investment Loan

Team Leader: Xiaodong WangSectors: Power (73 percent); Renewable Energy (27 percent)Themes: Infrastructure services for private sector development (P); Rural services and infrastructure (P)Environmental screening category: Partial Assessment

Global Supplement ID: P076320Lending Instrument: Specific Investment LoanGEF Focal Area: C - Climate changeSupplement Fully Blended?: Yes

Team Leader: Xiaodong WangSectors: Power (50 percent); Renewable Energy (50 percent)Themes: Infrastructure services for private sector development (P); Rural services and infrastructure (P); Climate change (S); Small and medium enterprise support (S)

Project Financing Data[ ] Loan [X] Credit [X] Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others: $33 million equivalent Total Bank financing (US$ million.): $37.5 million equivalentProposed terms: Standard IDA terms, maturity of 40 years, including a grace period of 10 years

Financing Plan (US$ million)Source Local Foreign Total

Borrower/recipient 12.00 0.00 12.00International Development Association (IDA)

6.60 26.40 33.00

Global Environment Facility (GEF) 0.90 3.60 4.50EU 3.00 12.00 15.00Local Sources of Borrower Country 11.00 0.00 11.00Total: 33.50 42.00 75.5

Recipient:Ministry of FinanceLusaka, Zambia

Responsible Agency:ZESCO

Stand No. 6949, Great East Road,P.O. Box 33304, Lusaka, ZambiaRural Electrification AuthorityPlot No. 1613Sheki Sheki RoadPost Net Box 349Private Bag E891Lusaka, Zambia

IDA Estimated Disbursements (Bank FY/US$ million)FY 2008 2009 2010 2011 2012 2013 2014Annual 0 2 8 8 8 6 1Cumulative 0 2 10 18 26 32 33

GEF Estimated Disbursements (Bank FY/US$ million)FY 2008 2009 2010 2011 2012 2013 2014Annual 0 0.5 1 1 1 0.5 0.5Cumulative 0 0.5 1.5 2.5 3.5 4 4.5Project implementation period: Start: October 1, 2008. End: December 31, 2013.Expected effectiveness date: October 1, 2008Expected closing date: December 31, 2013

Does the project depart from the CAS in content or other significant respects? Ref. PAD A.3 [ ]Yes [X] No

Does the project require any exceptions from Bank policies?Ref. PAD D.7Have these been approved by Bank management?Is approval for any policy exception sought from the Board?

[ ]Yes [X] No[ ]Yes [ ] No[ ]Yes [X] No

Does the project include any critical risks rated “substantial” or “high”?Ref. PAD C.5 [ X]Yes [] No

Does the project meet the Regional criteria for readiness for implementation? Ref. PAD D.7 [X]Yes [ ] No

Project development objective. Ref. PAD B.2, Technical Annex 3The objective of this project is to increase access to electricity services and improve efficiency and quality of the electricity distribution system in targeted areas.

Global environment objective. Ref. PAD B.2, Technical Annex 3The project global environmental objective, in line with GEF Operational Program No. 6, is to remove barriers to renewable energy technologies to help mitigate greenhouse gas emissions.

Project description [one-sentence summary of each component]. Ref. PAD B.3.a, Technical Annex 4 The project has three components: (1) ZESCO efficiency improvement: including reinforcement of existing distribution networks, intensification within existing grids in peri-urban areas, and energy efficiency and demand side management; (2) access expansion: including grid extension to rural areas, isolated grids such as mini-hydro, and solar PV for schools, clinics, commercial establishments, and household market; and (3) technical assistance for both ZESCO and REA.

Which safeguard policies are triggered, if any? Ref. PAD D.6, Technical Annex 10The Environmental Assessment (OP/BP/GP 4.01) and Involuntary Resettlement (OP/BP 4.12) safeguard policies are triggered under the Project. Significant, non-standard conditions, if any, for:Ref. PAD C.6

Loan/credit effectiveness: Final REA and REF Operational Manual completed (satisfactory governance structure of

REF, eligibility criteria for RE projects, principles and procedures for awarding the subsidies, Procurement and Financial Management Manuals);

GoZ has entered into subsidiary loan agreement with ZESCO and subsidiary grant agreement with REA, in form and substance satisfactory to the Association;

GoZ has established the Project Steering Committee, with a composition and terms of reference satisfactory to the Association;

Appointment of project coordinators and implementation teams, including technical, environmental, procurement, accounting and monitoring and evaluation expertise, within ZESCO and REA, with qualifications and under terms of reference satisfactory to the Association.

Covenants applicable to project implementation: ZESCO and the Recipient will commence implementation of the agreed ZESCO

Performance Improvement Plan by no later than December 31, 2010, in a manner satisfactory to the Association.

Sub-projects for grid extension, mini-grids, and solar PV will follow the eligibility criteria and procedures set forth in the REF Operational Manual, and satisfactory to the Association;

Sub-projects for intensification by ZESCO will have a Financial Internal Rate of Return more than or equivalent to 10%, and satisfactory to the Association;

The ESMF and RPF will be implemented in a manner satisfactory to the Association;

ZESCO and REA will maintain the appropriate staffing as agreed with the Association, including technical, environmental, procurement, accounting and monitoring and evaluation expertise, throughout project implementation period;

The deadline for the Co-financing Agreement with EU Energy Facility is December 31, 2008.

ZAMBIAIncreased Access to Electricity Service

CONTENTS

Page

A. STRATEGIC CONTEXT AND RATIONALE..................................................................1

1. Country and Sector Issues...................................................................................................1

2. Rationale for Bank Involvement..........................................................................................6

3. Higher Level Objectives to Which the Project Contributes................................................6

B. PROJECT DESCRIPTION..................................................................................................7

1. Lending Instrument..............................................................................................................7

2. Project Development Objective and Key Indicators...........................................................7

3. Project Components.............................................................................................................8

4. Lessons learned and reflected in the project design..........................................................14

5. Alternatives considered and reasons for rejection.............................................................15

C. IMPLEMENTATION.........................................................................................................15

1. Partnership arrangements...................................................................................................15

2. Institutional and implementation arrangements.................................................................16

3. Monitoring and evaluation of outcomes/results................................................................17

4. Sustainability.....................................................................................................................18

5. Critical Risks and Possible Controversial Aspects............................................................19

D. APPRAISAL SUMMARY..................................................................................................22

1. Economic and financial analyses.......................................................................................22

2. Technical............................................................................................................................25

3. Fiduciary............................................................................................................................25

4. Social.................................................................................................................................26

5. Environment......................................................................................................................27

6. Safeguard policies..............................................................................................................28

7. Policy Exceptions and Readiness......................................................................................28

Annex 1: Country and Sector or Program Background..........................................................30

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies..................39

Annex 3: Results Framework and Monitoring.........................................................................40

Annex 4: Detailed Project Description......................................................................................43

Annex 5: Project Costs................................................................................................................56

Annex 6: Implementation Arrangements..................................................................................57

Annex 7: Financial Management and Disbursement Arrangements......................................67

Annex 8: Procurement Arrangements.......................................................................................79

Annex 9: Economic and Financial Analysis..............................................................................92

Annex 10: Safeguard Policy Issues...........................................................................................108

Annex 11: Project Preparation and Supervision....................................................................115

Annex 12: Documents in the Project File................................................................................117

Annex 13: Statement of Loans and Credits.............................................................................118

Annex 14: Country at a Glance................................................................................................120

Annex 15: Incremental Cost Analysis......................................................................................123

Annex 16: Maps.........................................................................................................................130

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and Sector Issues

Country Background

1. In Zambia, poverty is widespread amidst rich natural resources. With a per capita GNI of US$690, Zambia’s population of 12 million is among the poorest in Africa. This equates to about 50 percent of all Zambians living on less than one dollar a day, which is particularly striking considering the country’s vast fertile land and rich endowment of copper and other resources. However, recent economic trends are promising. World copper prices have rebounded from an extended decline to reach new record highs. Moreover, Zambia’s recent HIPC completion and the G8 debt relief have reduced its heavy debt burden. In addition, even though exports remain dominated by copper and cobalt mining (73 percent), the remaining contributors (mostly agriculture, with some manufacturing and tourism) are keeping up and outperforming mining in real terms. As a result, despite a number of adverse supply shocks (e.g. drought, high world oil prices, and fuel shortages due to oil refinery production interruptions), the Zambian economy is now performing well, with real GDP growth of 6 percent in 2006.

Electricity Sector

2. Power sector plays a key role in economic development. The electricity sector is a key driver of economic growth in Zambia, and is therefore accorded prominence in Zambia’s Poverty Reduction Strategy. Electricity is a fundamental input to mining -- more than 50 percent of electricity generated serves the mining sector in Zambia. In 2007, the total installed capacity reached 1,760 MW, mostly hydro generation, while the peak demand was 1,400 MW. The total generation in 2007 was 8,535 GWh. Organized development of the sector, steady improvement in the provision of reliable and affordable electricity services, and expanding electricity access are all important determinants of Zambia’s economic performance and the quality of life.

3. The power sector is dominated by ZESCO, the vertically integrated state-owned utility. Other important sector actors include the Copperbelt Energy Corporation (CEC), a private company that purchases bulk power from ZESCO and supplies to the copper mines. The Ministry of Energy and Water Development (MEWD) promulgates policy and provides strategic coordination of the energy sector. The Energy Regulation Board (ERB) was established in 1995 with a mandate to oversee the entire energy sector, including electricity, petroleum, and coal. ERB reviews and approves ZESCO tariff submissions, and issued a three-year incentive-based tariff order on January 1 2008. The key sector issues and strategies are outlined as the following:

4. Power Shortage: In Zambia, no major new generating station for power has been developed since the 1970s. However, electricity demand on the power system has increased steadily since then and accelerated in the late 1990s, but without a corresponding expansion of the supply infrastructure. With the rapid development of new mines and industries, and growing household electricity needs, the country is experiencing load shedding. In the short-term, energy efficiency (EE) and demand side management (DSM) measures can be an effective response to

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power shortage, based on international experience. New generation capacity is urgently needed. Furthermore, transmission expansion and rehabilitation/reinforcement of power distribution are also required to improve supply, quality and reliability of service delivery. To address the current power crisis, ZESCO is implementing power rehabilitation projects, which will increase availability and reliability of existing plants, and can add an additional 210 MW by 2009. In addition, rehabilitation and development of new small hydro plants can also be short to medium-term measures to mitigate power shortage. The long-term solution is building new large generation plants such as Itezhi Tezhi (120 MW), Kariba North Extension (360 MW), Kafue Gorge Lower (750 – 900 MW), and Kalungwishi (210 MW), with an estimated cost of about US$1.5 billion in the next five years to meet domestic demand and for export. Financing would be a major constraint, and the issue of tariff is a key factor to attract investment for development of new generation capacity.

5. The establishment of the Southern Africa Power Pool (SAPP) provides a strategic opportunity for Zambia, especially with regard to SAPP links to other countries such as Zimbabwe, Democratic Republic of Congo (DRC), South Africa, and to the planned East Africa power market. Zambia also has considerable untapped hydropower generation potential to feed into these emerging markets.

6. Financial Sustainability and Performance of ZESCO: The current electricity tariff in Zambia does not cover full costs of supply. A financially viable power sector is vital and urgent to attract investors for new power plants. The historically low tariff has resulted in current deteriorating financial performance of ZESCO. In addition, the low national uniform tariff severely limits access expansion rate. Financial analysis demonstrated that rural electrification requires substantial capital subsidies at current tariff level. Furthermore, the initial connection charge ($400-700) is too high, creating a major barrier for the poor to connect to the grid, as experience from other countries demonstrates that high initial connection charges are often a far greater barrier to the poor than the full cost recovery monthly electricity bill. The ERB has completed a Cost of Service Study to provide a firm analytical footing for electricity pricing. This Study suggested that the tariff is on average 45 percent below the cost of service.

7. In addition to the low electricity tariff, ZESCO also has low operating efficiencies, with high staff costs accounting for 50 percent of operating costs and high distribution losses of 23 percent; as well as low revenue collection with one third of customers not metered and arrears build-up mostly by central government and parastatals, and municipal water utilities.

8. The government is committed and taking steps to move the sector towards financial viability. As the mining sector consumes more than 50 percent of electricity in Zambia, with long-term power purchase contracts at prices well below the costs of supply, the government has initiated re-negotiation of the power purchase agreements with the mining sector to a cost recovery tariff level. The mining sector has generally accepted the principle of tariff adjustment. ZESCO is at an advanced stage of re-negotiation with CEC. For the non-mining customers, ZESCO filed four-year tariff adjustment applications to the ERB by the end of August, 2007. ZESCO proposed to reach full cost recovery within four years, and requested for an average tariff increase of 50 percent, 45 percent, 27 percent, and 19 percent for both mining and non-mining customers from FY 2008 to FY 2011. After public consultations and review of the

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ZESCO tariff application, ERB issued a three-year incentive-based tariff order on January 1, 2008, with an average tariff increase of 27 percent, 15 percent, and 9 percent for non-mining customers only from 2008 to 2010. ERB’s tariff order also included a list of performance benchmarks as conditions for ZESCO to improve efficiency and quality of services, including (i) metering all new and existing consumers by 2010; (ii) reducing distribution system loss from present 23 percent to 14 percent by 2010; (iii) reducing staff cost as proportion of operating budget from present 49 percent to 30 percent by 2010 and increasing staff productivity from 61 consumer per staff to 100 by 2010; (iv) increasing revenue collection rate to reduce debtor days from present 180 days to 60 days; (v) reducing unplanned outages from present 32 hours per customer per month to 3 hours by 2010; (vi) reducing waiting time for applicants to get connected from present 57 days to 30 days in 2010; and (vii) reducing supply demand gap through demand side management, efficiency improvement, regional energy import, etc.

9. In addition, the lifeline block is reduced from 300 kWh/month to 100 kWh/month. ERB also requested ZESCO, within 60 days from the tariff order was issued, with a plan to reduce the financial burden on people who wish to connect. These are important measures to protect the poor and increase their ability to get connected to the grids. Furthermore, the government also agreed that cost recovery tariff scheme should be applied to isolated grid areas under “light handed” regulations, and private sector should be allowed to sell power to ZESCO at cost of service in existing ZESCO diesel stations.

10. The government has instructed ZESCO to move to a commercial footing. To date, this has focused more on governance issues including the development of a business plan to orient company operations, and corporate restructuring by division of the company into strategic business units. The ZESCO Commercialization Roadmap, designed by the government, was successfully completed for the Entry and Interim Phases, and the relevant HIPC triggers were met. The Evaluation of Commercialization is yet to be done. The emphasis is now turning to improvement in financial performance and efficiency. Consequently, the next phase of commercialization should focus primarily on ZESCO performance improvement plan to achieve financial turn-around and meet ERB’s performance benchmarks. This is critical to achieving and sustaining commercial viability over the longer-term to enhance quality of service and attract private investors in the sector.

11. During ERB’s public consultations for tariff adjustment, consumers expressed concerns over the poor quality of electricity services. ZESCO has not been able to invest its own resources in maintaining and replacing the distribution networks, as current tariff levels do not allow it to generate adequate income. Correspondingly, quality of service has deteriorated and current distribution losses are about 23 percent. The upgrade of distribution systems will not only improve service in the key urban areas, but also reduce losses and improve revenue streams, therefore directly contributing to ZESCO’s financial recovery.

12. Sector Reform: The government aims to promote competition, efficiency, and private sector involvement. The Government’s overall objective for the energy sector is to establish a stable and credible policy, a regulatory framework, and a market structure that is consistent with

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regional initiatives and, above all, promotes competition, efficiency, and private sector involvement. Furthermore, this framework should ensure a smooth transition to a liberalized electricity supply industry that would enable Zambia to maximize benefits from participation in the future regional electricity trade by taking advantage of its unique position at the cross-roads of the future Eastern and Southern Africa power markets, and its abundant and relatively low cost hydroelectric resources, which would require significant investment for development. To this end, Government has promulgated: (a) a National Energy Policy (1994) and an Energy Regulation Act (1995) under which the ERB has been established; (b) an Electricity Act (1995) which permits private investment in the power sector; (c) a Rural Electrification Act (2003), which established the autonomous Rural Electrification Authority (REA) and channeled the Rural Electrification Levy into the Rural Electrification Fund (REF); and (d) a draft revised National Energy Policy (2005), which was approved by the Cabinet in November 2007. In May 1999, the Government published the “Framework and Package of Incentives for private Sector Participation in Hydropower Generation and Transmission Development.” An Office for Promoting Private Power Investment (OPPPI) has been set up under the MEWD to implement the framework. However, this initiative has yet to be made operational.

13. The 2003 Electricity Act set the stage for private sector entrants to generate electricity in accordance with the regulations under the Act. However, to date there have been no significant new providers. ZESCO’s vertically integrated and monopolistic structure poses a constraint to private sector participation and competition for improved efficiency. There is an urgent need to establish a market structure and improve legal and regulatory enabling environment to attract private investments, competition, and efficiency improvements. Such sector structure would also enable Zambia to be able to maximize benefits from participation in the Southern Africa power market. Future private sector involvement in the power sector is expected to be primarily in the areas of power generation and off-grid electrification. The government and ZESCO are inviting the private sector to jointly invest and develop the new hydropower plants. For grid extension, it is still difficult for the private sector or cooperatives to provide electricity services under the current low national uniform tariff. However, ZESCO has agreed to hire the private sector as supply and installation contractors for construction of grid extension projects. For off-grid, few private developers exist for micro-hydro and solar PV, and the private sector is expected to be the primary service providers for off-grid electrification.

14. Access to Electricity Services: Zambia has an overall national electrification rate of less than 20 percent, with about 40 percent of the population in urban and peri-urban areas (chiefly Lusaka and the Copperbelt area) and a meager 2 percent of the rural population access to electricity. In its current business plan, ZESCO anticipates adding 10,000 new customers per year, which does not even keep up with Zambia’s 2 percent population growth. The low access rate for power has inhibited economic advancement and diminished quality of life. The government plans to increase national electrification rate from 20 percent to 66 percent by 2030, with 90 percent in the urban areas and 50 percent in the rural areas, based on a Rural Electrification Master Plan. Recognizing that limited access to electricity services has been a major bottleneck for economic growth, the government has made scaling up energy access a centerpiece of power sector development. The five-year access expansion program includes five tracks: (i) enhanced power supply from new generation capacity; (ii) strengthened transmission

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through regional power integration; (iii) grid electrification; (iv) off-grid electrification; and (v) stand-alone renewable energy systems.

15. The government established the REA, under the Rural Electrification Act. REA is responsible for (i) administering and managing the REF to rural electrification project developers (ZESCO and private sector) on a competitive basis; (ii) developing rural electrification plans to provide a level playing field for grid and off-grid electrification; (iii) monitoring and enforcement of project implementation; and (iv) providing technical assistance and promoting rural electrification. Currently, there is a 5 percent levy on non-mining customers, of which 3 percent is earmarked for REA to provide capital subsidies for rural electrification projects (currently equivalent to about US$2.5 million per year), which is far from sufficient to expand access in Zambia. A SIDA-supported consultancy is assisting REA in becoming operational. This will include developing transparent and effective capital subsidy schemes, project selection criteria based on economic and financial principles, eligibility criteria and principles for capital subsidy, appraisal of project proposals, etc. outlined in the REF Operational Manual. The REA will provide capital subsidies to project developers in rural areas, while ZESCO will increase connections within its grid networks in peri-urban areas.

16. Renewable Energy: To date, access expansion has focused primarily on grid-based electrification. Due to dispersed population in Zambia, decentralized and off-grid options, particularly renewable energy, deserve more attention. The government is committed to increasing use of renewable energy, and considers the growth of the renewable energy industry as an integral part of its rural energy and power sector development strategy. Zambia is endowed with rich renewable energy resources. To date, however, utilization of renewable energy is quite limited, except for large hydro, due to a number of barriers, including a lack of policy and regulatory frameworks (e.g. standardized power purchase agreements, technical specifications, etc.) as well as a limited number of project developers and renewable energy finance providers. For off-grid renewable energy electrification, priority should be given to provide energy services in public facilities such as schools and clinics, as well as productive use sectors such as agriculture and Information and Communication Technologies (ICT). 17. Sector Syndication Approach: This approach allows the donors to support government’s financing needs in a programmatic and coordinated way with scaled-up funding. The government also needs to demonstrate commitment and credibility. This approach was outlined in the Africa Energy Access Scale-Up Action Plan. Zambia has been selected as one of the few countries in Africa to pilot sector syndication. The GoZ is fully supportive of this approach. This proposed project will serve as a showcase to pilot the first phase of this syndication framework. SIDA, JBIC, and EU expressed interest in partnering with the Bank in this sector syndication plan.

18. The Bank financed Power Rehabilitation Project, which was recently closed, has assisted ZESCO in rehabilitation of the three major hydropower generation plants, transmission and distribution systems in selected areas, which contributed to ZESCO loss reduction and efficiency improvement. SIDA has been providing capacity building to REA and ERB. JICA assisted Rural Electrification Master Plan has been completed by the end of 2007.

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2. Rationale for Bank Involvement

19. The Bank has established itself as one of the key partners to support Zambian Government in its efforts to establish conditions for sustainable and reliable energy provisions for economic growth and poverty alleviation. The recent Joint Assistance Strategy (JAS) and the Bank Country Assistance Strategy (CAS) for Zambia highlights energy as one of the key development focus areas. This project intends to help the government address major challenges in the power sector, namely access expansion, improvement of ZESCO efficiency and quality of service, and demand side management, thereby, contributing to improvement of its power sector performance.

20. The rationale for Bank involvement is four-fold. First, the World Bank would provide critical financial support needed to enable REA to scale up electrification and ZESCO to improve efficiency and quality of service in targeted areas over the next five-year period, given the increased financing constraints from the Government of Zambia (GoZ). Second, the Bank will build capacities to operationalize REA to promote and fund productive rural infrastructure, and assist ZESCO in developing strategies to improve its financial performance and efficiency. Essential complements to the envisaged capacity building will be a sound policy and regulatory framework as well as financing mechanisms. Bank’s role is to help ZESCO and REA by supporting them with international best practice advice, providing technical assistance to develop ZESCO performance improvement plan and establish a new and effective access expansion framework, and providing them with their initial capitalization for the first round of investments in line with the framework. Third, the Project will provide a vehicle for continued dialogue between the Bank and the GoZ on key institutional, regulatory and energy policy issues. Fourth, Bank involvement is viewed as catalytic to attract other donors. Once ZESCO and REA demonstrate their performance, it is expected that that other financing partners would also step in and support investments in efficiency improvement and access expansion by channeling their funding, which is the primary focus of this project. The proposed engagement of the Bank would be therefore catalytic as well as knowledge based, and is intended to draw upon the Bank’s broad international experience and lessons learned from similar projects elsewhere. Several donors, particularly SIDA, JBIC, and EU have expressed interest and willingness to contribute with funds provided that ZESCO and REA can demonstrate the analytic rigor and results consistent with Bank requirements (including its safeguard policies). The Bank is committed to working together and in coordination with these donors and has established a dialogue of collaboration.

3. Higher Level Objectives to Which the Project Contributes

21. The Project will contribute to improvement of ZESCO efficiency and quality of service in targeted areas, and bring grid and off-grid electricity services to 65,000 households, public facilities (schools, clinics, church, etc.), and commercial establishments (farm blocks, agriculture processing mills, water pumping, shops, etc.), benefiting a total population of 550,000 inhabitants. Access to affordable and reliable electricity will improve the quality of life and create new business opportunities, including shops, artisans, flour mills and other services. It will

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also provide enhanced income-generating opportunities, support strengthened health care and education services, improve agricultural productivity (e.g., through improved irrigation points and more efficient localized livestock vaccination services) and expanded ICT services. Better and cleaner lighting will have a positive impact on the operating hours of the schools and on the hours available for children to study at night. Public street lighting will also improve the quality of life and safety of the population living in the communities.

22. The proposed project is consistent with the framework laid down in the Poverty Reduction Strategy Paper (PRSP). The PRSP recognized the direct relationship between energy and poverty and that increasing access to electricity is needed to contribute to poverty alleviation. The proposed project is directly linked to Infrastructure Development under the recent CAS of 2008 – Accelerating and Sharing Growth through Improved Competitiveness. The CAS calls for improving ZESCO efficiency and quality of service, and expanding reliable access to power, which are key elements of this project.

B. PROJECT DESCRIPTION

1. Lending Instrument

23. The proposed lending instrument would be a 5-year Sector Investment Loan (SIL). The IDA Credit and GEF Grant will assist GoZ in access expansion and improvement of ZESCO efficiency by financing investment, business development and operational support, with technical assistance to build the capacity of key sector institutions and service providers. The project includes cross-sectoral links with the health and education sectors. The project financing plan includes (i) an IDA credit; (ii) a GEF grant; (iii) an EU grant; (iv) government contributions; and (v) equity and debt from ZESCO, private developers, and consumers. In addition, a larger access expansion program also includes potential funding from JBIC, SIDA, and an additional EU grant.

2. Project Development Objective and Key Indicators

24. The objective of this project is to increase access to electricity services and improve efficiency and quality of the electricity distribution system in targeted areas. The project will support reinforcement of ZESCO existing distribution networks in selected areas to reduce losses, improve quality of supply, and increase new connections. It will also assist ZESCO in implementing demand side management measures as cost effective short-term response to mitigate the current power crisis. The access expansion framework follows the principle that REF managed by REA will provide partial capital subsidy in the form of grants to all service providers, including both ZESCO and the private sector, and tariff revenue should recover remaining capital cost, bulk supply, and operation, and maintenance (O&M) costs. In addition, it includes both grid and off-grid options to complement each other, which will be defined based on a set of transparent project selection criteria following economic and financial principles. Furthermore, the project will support capacity building of key sector institutions (ZESCO, REA, MEWD, and ERB) and operationalization of REA, and will also finance initial investments. These initial investments, will increase electricity access in rural and peri-urban

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Zambia to productive enterprises, service delivery facilities (in health and education), and to households.

25. The presumption is that increased access to electricity, when combined with other key growth-inducing factors that inter-play, will lead to the development outcomes sought at the strategic level: i.e. higher raised incomes, employment generation and improvements in the quality of life in rural areas. Furthermore, there is a strong expectation that the development of a successful and substantial track record of operational experience by REA, ZESCO and the private sector, will lead to the mainstreaming of rural electrification on a larger scale, thereby enabling a shift away from project-by-project support to sector syndication approach.

26. Selected key performance indicators toward development objectives include:

Increased access to electricity services as measured by: (i) number of connections through grid and off-grid electrification; and (ii) increased access rate in terms of a larger share of population with access to electricity services;

Improvement in ZESCO operational efficiency in targeted investment areas as measured by reduction in ZESCO distribution losses in targeted investment areas;

Improvement in service quality in targeted investment areas as measured by reduced unplanned outages in targeted investment areas; and

Mitigation of power crisis as measured by number of CFLs installed.

27. The project’s global objective, in line with GEF Operational Program (OP) 6, is to remove the barriers to, and reduce the implementation costs of renewable energy technologies to help mitigate greenhouse gas emissions. The key performance indicators in this respect would be (i) installed capacity of renewable energy systems; and (ii) avoided carbon dioxide emissions.

3. Project Components

28. The total project cost is estimated to be $75.5 million, of which IDA $33 million equivalent, GEF $4.5 million, EU Energy Facility $15 million equivalent, government $12 million, and equity and debt from ZESCO, private developers, and consumers $11 million. This project target at providing electricity services to 65,000 new customers including households, public facilities (schools, clinics, church, etc.), and commercial establishments (farm blocks, agriculture processing mills, water pumping, shops, etc), benefiting a total population of 550,000 inhabitants. As a result, the electricity access rate will increase from 20 percent to 24 percent. It will also contribute to improvement of ZESCO efficiency and quality of service in targeted areas and mitigation of power crisis.

29. The IDA and GEF funding is fully blended. The IAES project has three components: (1) ZESCO efficiency improvement, including reinforcement of existing distribution networks, intensification within existing grids in peri-urban areas, and energy efficiency (EE) and demand side management (DSM); (2) access expansion: including grid extension to rural areas, isolated grids such as mini-hydro, and solar PV systems for public institutions (schools and clinics), commercial establishments, and households; (3) technical assistance for both ZESCO and REA.

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GEF will provide support to component 2c and 3. The project components are described in the following paragraphs. Table 1 below summarizes the cost breakdown of the IAES project.

Table 1. Cost Break-Down for IAES Project (US$ Million)

Project Components

Total Costs IDA GEF EU GoZ Project Sponsors

1. Efficiency Improvement1a Reinforcement 9 8 11b Intensification 11  6 4  0 11c. EE/DSM 2 22. Access Expansion2a Grid Extension 25 7 8 8 22b. Mini-grids 14 6 4 42c. Solar PV 9 4 2.5 0 2.53. TA 5.5 0 2 3  0 0.5

Total Project Costs

75.5 33 4.5 15.0 12.0 11

30. In addition, a larger access expansion program includes potential funding from JBIC, SIDA, and an additional EU grant. The GoZ submitted requests to the Japanese government for providing Japanese ODA loan following the JICA Rural Electrification Master Plan Study. Based on the request, JBIC has conducted project preparation studies covering 23 sub-projects for Intensification and Grid Extension (initial estimate was US$54.4 million) and 2 sub-projects for Mini-hydro (initial estimate was US 17.9 million). The final decision regarding Japanese ODA loan for the project, including the size and scope, is expected to be made in 2008. The GoZ indicated its intention to appoint ZESCO as the project implementation agency for JBIC funded portion, who will own, operate and maintain the infrastructure, and will be responsible for carrying out JBIC procurement procedures and guidelines. SIDA plans to fund $30 million to REF and an additional $12 million for capacity building and institutional strengthening to MEWD, REA, ERB, and ZESCO in the energy sector. Furthermore, the EU Energy Facility will provide an additional 10 million Euro to REA for access expansion. If materialized, this larger access expansion program, including this project, could assist the government in achieving 30 percent access rate.

Component 1 ZESCO Efficiency Improvement

Sub-Component 1a Reinforcement (Cost: US $9 million)

31. This component will assist ZESCO in strengthening and upgrading existing distribution networks in selected areas of Lusaka to reduce system losses, improve the quality of service to existing customers, and increase capacity of the networks to support additional connections to new customers. To enhance revenue collection and reduce non-technical losses, ZESCO has

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procured 85,000 meters for the 100,000 un-metered customers. This component may also install additional pre-payment meters in selected areas, if needed. IDA funds will finance 90 percent of the investment costs, and ZESCO will provide 10 percent equity. These measures will contribute to improvement of ZESCO efficiency and quality of service in targeted investment areas. Reinforcement of existing networks will also remove bottlenecks and increase the capacity of the network to connect additional consumers. The investment will support adding, replacing or upgrading distribution network lines, substations, and transformers, and medium and low voltage equipment, meters, spare parts, and tools in selected areas of Lusaka.

Sub-Component 1b Intensification (Cost: US$11 million)

32. This component will focus on intensification to increase connections within existing ZESCO grids in peri-urban areas, which is the least-cost approach to increase connection rate. The current connection rate in Lusaka, for example, is only around 50 percent. This is primarily because most households can not afford to pay for the high initial connection charge ($400-700). To address this barrier, ERB has requested ZESCO for submission of a plan to reduce connection charges. IDA and EU funds will finance 90 percent of the investment costs in different geographic areas, and ZESCO will provide 10 percent equity. ZESCO has agreed to bid out supply and installation to private contractors. The project will also introduce low-cost technologies such as ready boards to bring down the costs of connections. These measures can substantially increase a large number of low-income families to obtain electricity in a relatively short time period. ZESCO should target at a 90 percent connection rate within its grid areas.

33. This component would connect about 31,000 new customers. The investment will support construction of 11 kV and Low Voltage distribution networks, transformers, poles, consumer connection services (drop lines, meters, etc.) and associated equipment in selected towns. Independent consultants under the Priority Rural Electrification Projects (PREPs) during project preparation have conducted pre-feasibility studies for seven intensification sites as the first batch of investment – Chibolya, Chipulukusu, Kabushi, Makululu, Matilyo, New Kawama, and Woodlands extension plots – with a total investment cost of approximately $6 million. Selection of future investments should meet the criteria of Financial Internal Rate of Return (FIRR) not less than 10 percent.

Sub-Component 1c Energy Efficiency and Demand Side Management (Cost: $2 million)

34. EE/DSM measures are an effective short-term response to mitigate power shortages. This component will support ZESCO installation of 1,000,000 Compact Fluorescent Lamps (CFLs) in households (equivalent to 3 CFLs per customer). CFLs can enable energy savings of up to 80 percent for residential customers. Distribution of 1,000,000 CFLs can cut peak demand by 50 MW, resulting in $40/peak kW reduced. Experience from Uganda, Rwanda, and Vietnam proved that bulk procurement of CFLs can substantially reduce the costs of CFL from $4-5 to under $1 each. International experience in Ghana and South Africa also demonstrated that bulk procurement and distribution of CFLs is the quickest way to assure load reduction and mitigate power crisis at less than a tenth of supply costs. Technical specifications also assure product quality and warranty provides comfort to customers. Distributing a large number of CFLs through such programs helps market development for high quality and low costs CFLs, and build

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up customer confidence and CFL image, which will lead to increased market acceptance. ZESCO will install 3 CFLs per household for existing customers in exchange of incandescent light bulbs, which will be recycled by ZESCO. ZESCO can give away CFLs to low-income customers, and sell them at subsidized or full price to high-income customers. ZESCO can also claim carbon credit to fully recover the costs.

Component 2 Access Expansion

Sub-Component 2a Grid Extension (Cost: US$25 million)

35. Intensification and extension from existing grid networks operated by ZESCO will be the primary means of expanding access to electricity in Zambia. This component will seek least-cost options of grid-based electrification first. REA will adopt transparent criteria to select these grid-based electrification projects based on economic and financial principles, to be specified in the REF Operational Manual. Given that ZESCO is currently the only player providing grid extension services, and it takes some time for the nascent private sector to enter into this market, it is expected that ZESCO will continue to be the primary service provider for grid extension over the next few years during IAES project implementation. IDA, EU, and government funds will be used to finance up to 90% of capital subsidy through grants in different geographic areas. ZESCO will provide the balance of financing. REA should only finance those grid extension projects with an Economic IRR not less than 10 percent, and a FIRR not less than 10 percent after the partial capital subsidy is taken into account. That is, ZESCO should be able to recover the remaining capital investment, bulk electricity supply and O&M costs. The eligibility criteria and principles of subsidies will be specified in the REF Operational Manual.

36. This component would connect about 18,000 new customers, including households, commercial customers (farm blocks, agriculture processing mills, water pumping, shops, etc.), and public facilities (schools, clinics, church, etc.). This component will finance the construction of 33 kV and 11 kV lines to connect the project areas to the national grid, step-down transformers, low voltage distribution networks, poles, and consumer connection services (drop lines, meters, etc.). Independent consultants under PREPs have conducted pre-feasibility studies for six grid extension sites as the first batch of investment – Ipusukilo, Lukulu, Mangango, Mtilizi, Mukonchi, and TBZ farm block – with a total investment cost of $11.5 million.

Sub-Component 2b Isolated Grids (Cost: US$14 million)

37. Independent electricity networks are the practical option for serving towns and other clusters of customers which are distant from the interconnected network. These consist of a generation source (e.g. mini-hydro) energizing a localized electricity distribution network. There are two potential business models for mini-grids. Currently, ZESCO has 8-9 diesel stations operating at 25-30 cent/kWh, resulting in serious financial strains on ZESCO given the average national tariff of 3 cent/kWh. At existing ZESCO diesel stations, mini-hydro, wherever available, is the least-cost option. ERB agreed that the private sector should be encouraged to develop mini-hydro at these sites, and sell electricity to ZESCO at their cost of service under standardized long-term power purchase agreement (PPA). ZESCO will build expanded distribution network if necessary, receive capital subsidies from REA, and sell electricity to consumers at the level of

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their ability to pay. This represents a much more affordable electricity supply, and can substantially reduce ZESCO’s loss at its diesel stations.38. For stand-alone mini-grids, ERB has agreed that cost-recovery differentiated tariff scheme is allowed with “light handed” regulations. A private developer would build both small hydro power plant and the distribution network and sell electricity to consumers at cost recovery tariff. If the full cost recovery tariff level is higher than consumers’ ability to pay, REA will provide partial capital subsidies to bring down the tariff.

39. Under this component, REA will select mini-grid projects based on transparent selection criteria, organize competitive bidding to concession out these areas to the private sector, and provide partial capital subsidy. The IDA Credit will be disbursed to the REF to provide partial capital subsidies in the form of grants to developers that meet established minimum requirements of financial and technical competence as outlined in the REF Operational Manual, and whose projects meet an EIRR not less than 10 percent, and a FIRR not less than 10 percent after capital subsidies. Unlike grid extensions, mini-grids are usually developed by local entrepreneurs or community-based organizations, who would usually require capacity building. Therefore, REA will assist the project developers, and closely monitor the project implementation to ensure that the construction and operation of the sub-projects are consistent with guidelines and standards specified in the agreement.

40. The component would support the installation of one or two small hydro systems, with initial connections of about 6,000 new customers. This will include construction of about 3-5 MW of mini-hydro power plants, medium and low voltage distribution networks, and associated equipment. Independent consultants under PREPs have conducted pre-feasibility studies for one mini-hydro sites – Chikata. Chikata is located 200 km from the main ZESCO grid. It has an existing ZESCO diesel station. To meet the local energy demand, a 3.5 MW mini-hydro power plant is designed, with a total investment cost of $11 million including the mini-hydro power plant and expansion of the distribution network. In addition, EU, SIDA and JICA are supporting five additional mini-hydro PREP sites.

Sub-Component 2c Solar PV Systems (Cost: $9 million)

41. Solar photovoltaic (PV) systems are a practical option for serving electricity needs in remote rural areas. To date, the PV market in Zambia is dominated by donor funded sales for government institutions such as schools, clinics, and related staff housing. The maintenance of the institutional PV systems, however, is a major issue. In the mean time, Zambia has a very small household market segment for solar PV systems, and affordability to pay for the high upfront costs for solar home systems is the major barrier to expanding the household market.

42. The project strategy is to aggregate solar PV systems in schools, clinics, commercial customers, and households in one or more contiguous districts to ensure commercial viability and reach an economy of scale. This component will support a number of “Sustainable Solar Market Packages (SSMP)” to supply, install and maintain public sector-funded PV systems for schools, health and other public facilities, and sales to households on a semi-commercial basis. REA will concession out selected SSMP sites to eligible private sector. The project will support the supply, installation and maintenance (initially for 5 years with extensions) of PV systems in

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primary/secondary schools, health posts and rural health centers, potable water pumping/ purification schemes, and associated ICT services. In addition to supporting the new equipment at un-electrified public facilities, the project will also support the rehabilitation and upgrade of existing facilities powered by PV. IDA funds will pay for supply and installation of the public sector facilities including health and education staff quarters, as they are government owned and provide public services. GEF funding will be used to pay for the five-year maintenance contracts including battery replacement and spare parts for both new and existing solar PV systems. Once the SSMP approach proves to be successful, it is expected that the project will leverage at least $5 million from the Ministry of Education (MOE) and Ministry of Health (MOH) for additional solar PV systems in schools and clinics.

43. For the household market, GEF funding will be used to support solar companies to deepen the market segment by focusing on affordable and good quality small size solar home systems in the neighborhood of the institutional market. Household systems will be eligible to receive a subsidy from REF through grants funded by the GEF. The level of subsidy and subsidy award procedures will be specified in the REF Operational Manual. All PV systems will comply with international standards, issued by the International Electro-technical Committee (IEC), PV Global Approval Program, or equivalent organizations.

44. This component would fund about ten SSMPs for 250 public institutions and 10,000 households, increasing electricity coverage rate in the SSMP areas from current 2 percent to about 20 percent. This is equivalent to an installed capacity of 410 kWp of PV systems.

Component 3 Technical Assistance (Cost: $5.5 million)

45. This component will provide technical assistance (TA) support to ZESCO, REA, MEWD, ERB, MOE, MOH, the private sector, and local financial institutions, complementing ongoing or proposed TA activities by other donors, including SIDA, JICA, and ESMAP. The TA package is designed to support the full range of project stakeholders as required to support project objectives.

Sub-Component 3a TA to ZESCO

46. EU grant will (i) assist ZESCO in developing a Performance Improvement Plan on how to enhance revenues and reduce costs; and (ii) support ZESCO in technical design of optimum distribution system improvement, loss reduction programs, intensification, and grid extension investments, and preparation of additional intensification and grid extension sites.

Sub-Component 3b TA to REA

47. GEF funding will (a) assist REA in capacity building and implementation support, including preparation of additional small hydro PREP sites and SSMPs; (b) support MEWD, ERB, MOE, MOH, and ECZ on sector long-term financial viability, energy sector strategies, renewable energy policy, regulations, outreach, capacity building, and environmental management guidelines; and (c) provide advisory services, matching grants, and training to the private developers and local financial institutions.

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4. Lessons learned and reflected in the project design

48. Financial viability of utilities: Grid scale-up requires at least a stress tested financial recovery plan for financially recovering utilities. Investments for corresponding generation, 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 during the scale-up process are critical. More importantly, a financially viable and operationally sustainable utility are critical attributes for any private sector investment in the sector.

49. Access expansion: A recent ESMAP report highlighted the main lessons from successful rural electrification programs in the developing world. Broadly speaking these are: (i) setting up an effective implementing agency dedicated to rural electrification; (ii) placing a strong emphasis on cost recovery; (iii) keeping prices high enough to make rural distribution companies financially sustainable; (iv) ensuring that subsidies encourage rather than discourage the development of the distribution business; (v) dealing with political dimension; (vi) setting up criteria for rural electrification; (vii) reducing initial connection charges demanded by the utility or spreading them over a period of several years; (viii) reducing construction and operating costs; (xi) making sure that local people are involved with the electricity business and perceive it to be both fair and responsive to their needs; and (x) allowing both grid-based rural electrification and off-grid alternatives to coexist and complement each other.

50. The project design has incorporated key lessons learned from similar programs following the REA model in other African countries, including (i) there is limited uptake from the private sector to invest in grid extension, particularly at the initial stage; (ii) capacity building for REA is critical; and (iii) preparation of a first batch of investment projects would give REA an initial hands-on experience for faster implementation.

51. Renewable Energy: For solar PV, lessons from China, Bangladesh, Sri Lanka, and the Philippines projects are incorporated into this project design. In China, the average size of the solar home systems sold is 10-20 Wp, making it a leading example of sales of small size systems to address the affordability barrier. Under this IAES project, the grants funded by GEF will be output-based and linked to actual installations, and target at small-size solar home systems (less than 20 Wp) to benefit the poor. The credit sale model, which was successfully implemented in Bangladesh and Sri Lanka, was considered but rejected, as Zambia does not have a mature micro-finance sector. In addition, SIDA has funded a project that set up three Energy Service Companies (ESCOs) to provide fee-for-service for solar home systems. While the fee-for-service model directly addresses the affordability issue, we have seen limited successful implementation worldwide, since it is capital intensive and requires a service provider with sufficient financial resources. As the solar PV market in Zambia is dominated by donor funded programs for public institutions and a lack of maintenance services has been identified as a major barrier, this project adopted SSMP approach, successfully implemented in the Philippines, to remove this barrier.

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5. Alternatives considered and reasons for rejection

52. Private Sector-Led Grid Extension: The heavy reliance on ZESCO to implement intensification and grid extension projects builds on lessons learned from other countries, and is a pragmatic decision that recognized that the Zambian private sector does not yet have the financial and technical capabilities to undertake such a large-scale investment program. ZESCO, on the other hand, already has strong in-house capacities. It is also likely to be in a position to raise funds from the local capital market to cover its portion of the investments.

53. Separate Implementing Agency for the Solar PV Component: Alternative implementation arrangement for the solar PV component was considered but rejected. It has an advantage to ensure a level playing field between grid and off-grid options by channeling all the grant funds through the REF, managed by REA, to multiple service providers for grid, mini-grid, and solar PV options. However, it is recognized that REA needs to strengthen its capacity and adopt private sector-oriented approaches, as REA is now responsible for implementing grid extension, mini-grid, and solar PV components that involve both public sector and private sector players. The TA component under this project includes major capacity building activities for REA and the private sector service providers. In parallel, an ESMAP Small and Medium Size Enterprise (SME) TA activity will also provide additional funding for extensive capacity building and advisory services to the private sector.

54. Bundling Electricity with ICT: The original project design included an ICT component, which was intended to support the Communication Authority of Zambia and Universal Access Fund. This approach was abandoned because it substantially added complexity to an already complex project with many sub-components. To this end, it was agreed with the government that the project will focus on the electricity sector only to ensure maximum impacts and leverage. However, priorities will be given to provide electricity services for ICT applications.

C. IMPLEMENTATION

1. Partnership arrangements

55. Zambia has been selected as one of a few countries in Africa to pilot sector syndication approach, and this project can serve as a showcase to pilot the first phase of such a syndication framework. This IAES project is part of a larger access expansion program, which will assist GoZ in achieving the target of 30 percent access rate, to be financed by the following partners:

Swedish International Development Agency (SIDA) is already funding capacity building for REA and ERB. They plan to fund $30 million to REF, and increase support to capacity building and institutional strengthening for MEWD, REA, ERB, and ZESCO in the energy sector with an additional $12 million.

EU Energy Facility will provide 10 million Euro co-funding to the IAES project for intensification, grid extension, and TA, subject to final clarification. In addition, it will also provide an additional 10 million Euro to REA for access expansion.

Japan Bank for International Cooperation (JBIC) is currently reviewing government’s request for $72 million ODA loans for access expansion following the JICA Rural Electrification Mater Plan, and will finalize the project scope by 2008.

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2. Institutional and implementation arrangements

56. This project has two implementing agencies: (i) ZESCO for Component No. 1 and 3a; and (ii) REA for Component No. 2 and 3b. Both ZESCO and REA will assign dedicated project coordinators and teams to manage implementation of this project. Beyond these two agencies, there are a number of additional project stakeholders involved in rural access expansion, such as MEWD, ERB, project sponsors, and customers. A project steering committee will be set up, consisting of MOFNP, MEWD, REA, ZESCO, MOH, MOE, and Ministry of Local Government, to be chaired by the Permanent Secretary of MEWD, to provide policy guidance and coordination. The following chart outlines implementation arrangement, and Annex 6 presents the roles of each stakeholder. Specific implementation arrangement for each component is described as below:

57. Reinforcement and Intensification: ZESCO will be the implementing agency, responsible for procurement, financial management, and supervision of construction, and O&M. ZESCO will procure supply and installation contractors to construct sub-projects, following the Bank procurement guidelines, in order to shorten the construction period at a lower cost.

58. Grid extension: Donor funds will flow to the REF. REA will be responsible for developing project selection criteria, evaluating proposals from ZESCO, providing partial capital subsidies to ZESCO and eventually other service providers in the form of grants, and sign appropriate contractual arrangements between REA and ZESCO, as defined in the REF Operational Manual. ZESCO is the primary service provider, responsible for procurement following the World Bank guidelines, supervision of construction and O&M, and will also adopt supply and installation contracts for construction.

59. Isolated Grids: IDA funds will flow to the REF. Private sector companies and cooperatives will be the service providers, responsible for procurement, construction and operation of the sub-projects. REA will support mini-grid development via (a) establishing transparent, competitive selection criteria; (b) evaluating proposals for potential service providers, (c) providing partial capital subsidy from the REF, through grants financed by the IDA Credit and the government, to ensure financial viability of the sub-projects; and (d) building capacity for the project developers, monitoring and enforcement of project implementation. The developers are responsible for construction and O&M, as well as procurement following commercial practice procedures acceptable to the Bank.

60. Solar PV: IDA and GEF funds will flow to the REF. The Working Group consisting of REA, MOE and MOH, will select a site for SSMP. Such a site should be located in an area where ZESCO grid will not arrive over the next five years and there are sufficient numbers of un-electrified public facilities. REA will then prepare the SSMP and bidding documents, and organize the bidding process. The Working Group will evaluate the bids, and REA will award the contracts to selected eligible private companies, who will provide supply, installation, and maintenance services for solar PV in public facilities and households in the selected area and receive grants financed by IDA and GEF. REA will follow the Bank procurement guidelines.

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61. Technical Assistance: ZESCO is responsible for procurement of consulting services and training for ZESCO, MEWD, and ERB to implement Component 3a funded by the EU Grant. REA is responsible for procurement of consulting services and training for REA, MEWD, ERB, MOE, MOH, and private developers to implement Component 3b funded by GEF Grant.

Figure 1 Project Implementation Chart

Project Steering CommitteeMOFNP, MEWD, REA, ZESCO, MOH, MOE, MOLG

Chair: PS of MEWD

ZESCO REA (Efficiency Improvement and TA) (Access Expansion and TA)

ZESCO Private Developers MEWD, ERB, MOE, MOH (Grid extension) (Mini-grids and Solar PV) Private Developers (TA)

3. Monitoring and evaluation of outcomes/results

62. The monitoring and impact evaluation for the overall project will be the responsibility of ZESCO and REA. For result evaluation, a mid term evaluation and a final evaluation will be carried out by external consultants. The ZESCO and REA will submit the reports to the Government, IDA and the GEF.

63. Performance monitoring of the proposed Project would include: (a) the performance indicators as included in Annex 3; (b) the results of periodic stakeholder workshops and customer surveys; and (c) progress reports on preparation of investment programs and the execution of contracts. The expected intermediate results by project component are noted in the following paragraphs.

64. Component 1: (i) Improvement in ZESCO operational efficiency in targeted investment areas is measured by reduction in ZESCO distribution losses in targeted investment areas; (ii) improvement in service quality in targeted investment areas is measured by reduced unplanned outages in targeted investment areas; (iii) intensification is measured by increased number of connections to new customers in peri-urban areas; and (iv) EE/DSM is measured by number of CFLs installed. These investments will contribute to ZESCO financial performance improvement, and mitigation of the power crisis.65. Component 2: It should be noted that this is the first attempt for REA to implement a large-scale comprehensive rural electrification program in Zambia, mobilizing and leveraging private sector resources. Therefore, the focus on institutional strengthening and market development is as important as the number of connections achieved. The monitoring and

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evaluation indicators for increased access to electricity services are measured by: (i) number of connections through grid and off-grid electrification; (ii) increased access rate in terms of a larger share of population with access to electricity services; and (iii) market development in terms of number of sub-projects in the pipeline.

66. Component 3: Progress in achieving intermediate outputs and procurement of consultancy services will be documented in ongoing supervision reports and continued sector dialogue.

67. As ZESCO financial turnaround is critical to successful project implementation and sector financial viability, the project will adopt tracking indicators to monitor ZESCO financial performance: (i) ZESCO will for each fiscal year maintain a current ratio (current assets divided by current liabilities) not less than 1; (ii) ZESCO will for each fiscal year maintain a debt service ratio no less than 1.3; (iii) ZESCO will meet ERB’s performance benchmarks, including metering all new and existing consumers by 2010; reducing distribution system loss from present 23 percent to 14 percent by 2010; reducing staff cost as proportion of operating budget from present 49 percent to 30 percent by 2010; increasing staff productivity from 61 consumer per staff to 100 by 2010; increasing revenue collection rate to reduce debtor days from present 180 days to 60 days; reducing unplanned outages from present 32 hours per customer per month to 3 hours by 2010; and reducing waiting time for applicants to get connected from present 57 days to 30 days in 2010.

4. Sustainability

68. The following topics are areas relevant to long-term sustainability:

69. Policy framework: The approved Revised National Energy Policy provides an overall policy framework for the energy sector. Government’s rural electrification policy is explicitly spelled out and backed up by a solid legislative framework. Public-private partnerships present the best chances of success, given the failure of all-public or all-private models.

70. Institutional: ZESCO financial performance is critical to the sector financial sustainability and secure power supply. This project will provide investment to support ZESCO reducing distribution losses and improving quality of service in selected areas. It will also provide TA to ZESCO to develop a Performance Improvement Plan, as well as to MEWD and ERB to ensure long-term financial viability and energy sector strategy. These measures would contribute to ZESCO faster financial turnaround. In addition, REA’s capacity to establish and implement the new framework for access expansion is the key to the success of the project. REA has recently recruited 11 new staff on board, who have received essential training. This has substantially strengthened REA’s capacity. REA has also put in place an organization structure to better fulfill its functions. In addition, REA has prepared a number of draft Operational Manuals, including the REF Operational Manual, Procurement, Financial Management, Training, and Recruitment Manuals, and Environmental and Social Management Procedures. Under the TA component, the project design includes a major capacity building effort to ensure that REA acquire the skills and capabilities to run larger scale subsidy programs by the end of

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the project. Furthermore, the project plans to provide cost-shared business development services to private sector project sponsors.

71. Financial: The financial health of subproject investments will be a key to their long-term sustainability. Each subproject will undergo a full due-diligence assessment, including a financial analysis. Only subprojects which meet minimum financial hurdles (e.g. rate of return) will be considered. Independent consultants have conducted pre-feasibility studies for fourteen PREP sites -- seven intensification sites, six grid extension sites, and one mini-hydro sites. With the new ERB tariff order on January 1 2008, investment in reinforcement and intensification becomes financially viable, while grid extension would still need substantial capital subsidies. The cost recovery tariff for the mini-hydro site is estimated at around 12 US cents/kWh. This is substantially lower than the current diesel operating costs. If project developers are allowed to charge a cost recovery tariff in isolated grid areas, or sell electricity to ZESCO at cost of service, as agreed by ERB, these mini-hydro projects can be financially viable. In addition, carbon finance can provide additional revenue stream to increase the viability of mini-hydro projects.

72. Fiscal: During the IAES project implementation period, fiscal impacts are modest. Levies on electricity bills for increasing rural access already exist, however, it is currently very low and should be increased in the future to reduce the budgetary impact of a scaled up access expansion program. The longer term sustainability of access expansion programs may move towards allocating part of government budget for these investments, even if these continue to be predominantly supported by donor funds.

73. GEF: The proposed GEF support intends to establish a framework and support its implementation of renewable energy development under the context of rural electrification. It deploys both market pull and technology push approaches to promote renewable energy development. GEF support will help strengthen policy and regulatory framework as well as institutional capacity that provide incentives for private sector to engage in renewable energy development. It will also assist the private sector to develop a renewable energy market in Zambia by providing matching grants, advisory services and training to the private developers and local financial institutions. As a result, it is expected that an increasing number of local entrepreneurs would emerge to provide renewable energy services. This strategy ensures sustainability of the project by enabling greater private sector participation in renewable energy after completion of this project.

5. Critical Risks and Possible Controversial Aspects

74. The project has been rated as a Category B under the Bank’s safeguard policies. The overall project risk is “Modest”. The principal risks, their ratings and mitigation measures are shown in Table 2:

Table 2 Principle Risks, Ratings, and Mitigation Measures

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Main risks Mitigation measuresRisk

Rating

ZESCO financial sustainability

The government is committed and taking steps to move the sector towards financial viability. The government has initiated re-negotiation of the power agreements with the mining sector to a cost recovery tariff level, and ZESCO is at an advanced stage of re-negotiation with CEC. Following ZESCO tariff application for non-mining customers, ERB issued a three-year incentive-based tariff order on January 1, 2008, with an average tariff increase of 27 percent, 15 percent, and 9 percent for non-mining customers only from 2008 to 2010. ERB’s tariff order also required ZESCO to improve efficiency and quality of services with a list of performance benchmarks. With the new ERB tariff order, investment in reinforcement and intensification becomes commercially viable, while grid extension would still need capital subsidies. The proposed project is designed to support ZESCO reducing losses, and developing a Performance Improvement Plan. It will also assist the government and ERB to ensure long-term financial viability to the energy sector. These measures would contribute to ZESCO financial turnaround.

S

Dominant sectoral position of ZESCO makes it difficult for private service providers to enter into the market

In the off-grid areas, private developers are expected to be the main service providers. For grid electrification, ZESCO will continue to be the dominant player for the next few years, given the uniform tariff scheme, substantial capital requirements, and nascent private sector in Zambia. ZESCO has agreed to hire private contractors for construction.

M

Weak institutional & implementation capacity in REA

REA has recently recruited 11 new staff on board, and drafted a number of Operational Manuals. This project will provide extensive capacity building and technical assistance to REA, supplementary to the ongoing capacity building provided by SIDA.

S

Lack of coordination among REA, MOE, and MOH to implement SSMP

This project will provide TA to REA, MOE, and MOH to develop implementation framework and MOU among three parties. A working group consisting of three parties has been set up.

M

Inability of private developers to prepare subprojects and raise funds

The project will seek to identify and assist the most credible private developers as vanguard for others. This project will provide matching grants, advisory services, and training to private developers. TA will also be provided to local banks as needed.

M

Insufficient solar PV demand

Aggregation of institutional demand (e.g. health, education) and household market is aimed at reaching an economy of scale to establish a viable market base for sustainable service in target districts.

M

Overall Risk Rating

M

S: Substantial; M: Moderate; L: Low

6. Credit Conditions and Covenants

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75. The main conditions for negotiations are :

The government and the Bank have agreed on the Letter of Sector Policy, and the Bank has received the letter signed by the Minister of MEWD;

The government and ZESCO have confirmed co-funding.

76. The main conditions for effectiveness are :

Final REA and REF Operational Manual completed (satisfactory governance structure, eligibility criteria for RE projects, principles and procedures for awarding the subsidies, Procurement and Financial Management Manuals);

GoZ has entered into subsidiary loan agreement with ZESCO and subsidiary grant agreement with REA, in form and substance satisfactory to the Association;

GoZ has established the Project Steering Committee, with a composition and terms of reference satisfactory to the Association;

Appointment of project coordinators and implementation teams, including technical, environmental, procurement, accounting and monitoring and evaluation expertise, within ZESCO and REA, with qualifications and under terms of reference satisfactory to the Association.

77. The main Credit Covenants are :

ZESCO and the Recipient will commence implementation of the agreed ZESCO Performance Improvement Plan by no later than December 31, 2010, in a manner satisfactory to the Association.

Sub-projects for grid extension, mini-grids, and solar PV will follow the eligibility criteria and procedures set forth in the REF Operational Manual, and satisfactory to the Association;

Sub-projects for intensification by ZESCO will have a Financial Internal Rate of Return more than or equivalent to 10%, and satisfactory to the Association;

The ESMF and RPF will be implemented in a manner satisfactory to the Association;

ZESCO and REA will maintain the appropriate staffing as agreed with the Association, including technical, environmental, procurement, accounting and monitoring and evaluation expertise, throughout project implementation period.

The deadline for Co-financing Agreement with EU Energy Facility is September 30, 2008.

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Implementation and Reporting Milestones

ZESCO and REA will prepare quarterly project progress and IFRs reports. These should be submitted within 45 days after quarter end.

ZESCO will submit entity annual financial statements within six months after fiscal year end.

D. APPRAISAL SUMMARY

1. Economic and financial analyses

Economic Analysis

78. An economic analysis of all project components (reinforcement, intensification, grid extension, mini-hydro, and solar PV) has been undertaken to estimate the net present value (NPV) and economic internal rate-of-return (EIRR) for the investments under each component. The following sections summarize the methodology, assumptions and results of these analyses. Table 3 lists the average EIRRs and NPVs for each project component.

79. Reinforcement: The costs include capital investments and O&M expenses for the distribution networks. 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 x percent of the technical losses in the selected clusters of Lusaka. In addition, the identified investments in Lusaka will cause a reduction of un-served energy in the network and also cause a reduction of the non-technical losses in the network of Lusaka. The analysis shows a robust EIRR of xx percent.

80. Intensification and Grid extension: NPVs and EIRRs are estimated for electricity access expansion resulting from more intensive use of the existing distribution system as well as grid-extension projects. The costs include capital investments, O&M expenses for the distribution networks, and bulk supply tariff (power purchase costs from power generation and transmission). Benefits are measured as electricity consumption valued at consumers’ willingness-to-pay. For households, the willingness to pay is based on expenditures on lighting using kerosene, candles, and battery charging, which is estimated to be about 0.20 US cents/kWh. For commercial and industrial customers, the willingness-to-pay draws primarily on the costs of electricity supply from diesel generators to meet their production needs. The willingness–to-pay for these consumers is estimated at 0.25 US cents/kWh.

81. The analysis shows an EIRR of 30 to 75 percent for the seven intensification PREP sites, with an average EIRR of 49.3 percent. For the six grid extension PREP sites, the analysis indicates an EIRR of 20 to 85 percent, with an average EIRR of 47.4 percent.

82. Small Hydro: The economic costs of small hydro mini-grid systems include capital investment, operation and maintenance costs for the small hydro power plant and distribution networks. Benefits are measured as avoided costs of electricity supply from diesel generators. The analysis shows a robust EIRR of 30.5 percent for the small hydro site under PREP.

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83. Solar PV: The economic costs of solar PV systems consist of investment costs, replacement costs and operating and maintenance costs of the new systems. The consumer benefit is estimated conservatively from (i) current expenditures on kerosene, candles, and battery charging for lighting which are used as a minimum estimate of future willingness to pay for better lighting from PV; (ii) the gain in consumer surplus from lighting substitution; and (iii) global environmental externalities. Additional consumer benefits of convenience, improved safety, better indoor air quality, and higher quality of light were not included due to a lack of adequate valuation data.

84. Economic analysis shows that the SSMP approach is economically cost effective and economic viability is robust. For health and education facilities, the PV alternative is least cost compared to grid extension if the grid is more than 0.4 to 1.9 km from the facility. Relative to diesel generation, the PV option is always least cost for health and education facilities with economic internal rates of return (EIRR) ranging from 11 to 40 percent, with an average EIRR of 37 percent. The economic analysis of small PV systems for commercial establishments and households reveals substantial economic returns, with an average EIRR of 26 percent. The high economic rate of return reflects both high current expenditures on poor quality lighting, and a significant willingness to pay for improved lighting. On an indicative program basis, SSMP packages benefiting 10,000 commercial establishments and households as well as 210 public service facilities has an EIRR of 27 percent.

Table 3. Summary of Economic Analysis

Component EIRR (%) Economic NPV @ 10% (US$)

ReinforcementIntensification 49.3 14,210,377Grid Extension 47.4 40,916,983Mini-grid 30.5 14,961,193Solar home systems 26.3 3,407,969Solar PV for public institutions 37.2 2,969,435

Financial Analysis:

85. A financial analysis of reinforcement, intensification, and grid extension has also been undertaken to estimate the net present value (NPV) and financial internal rate-of-return (FIRR) for the investments under each component. The analysis demonstrates that with the new ERB tariff order on January 1 2008, investment in reinforcement and intensification is financially viable, while most of the grid extension sites would still need capital subsidies. The following sections summarize the methodology, assumptions and results of these analyses.

86. Reinforcement:

87. Intensification and Grid Extension: Costs include the capital cost of investments, operations and maintenance expenditures, and bulk supply tariff (power purchase costs from power generation and transmission). The benefits are the revenues collected from consumers.

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88. The results show that intensification investment would have an acceptable FIRR of 12.8 percent, higher than the required 10 percent threshold. This will not pose financial strain on ZESCO as the IDA Credit will be on-lent to ZESCO. For grid extension investments, partial capital subsidy is required. REA will provide RE grant to ZESCO to cover up to 90 percent of the capital investment. The project is not likely to have negative impacts on ZESCO, as ZESCO can recover its remaining capital investment, bulk supply and O&M costs.

Table 4. Summary of Financial Analysis

Component FIRR under new ERB tariff order (%)

Financial NPV @ 10% (US$)

ReinforcementIntensification 12.8 2,417,439Grid extension 2.5 -4,625,604

89. Small Hydro: The cost recovery tariff for the mini-hydro site is estimated at approximately 12 US cents/kWh. This is substantially lower than the current diesel operating costs. If project developers are allowed to charge a cost recovery tariff in isolated grid areas, or sell electricity to ZESCO at cost of service, as agreed by ERB, these mini-hydro projects can be financially viable. In addition, carbon finance can provide additional revenue stream to increase the viability of mini-hydro projects.

90. Financial Performance of ZESCO: A review of the financial performance of ZESCO demonstrates that ZESCO profit margin is reducing every year since FY 2003, and experienced losses in FY 2007. If debt swaps is taken into consideration, ZESCO would have shown operating deficits since 2003. This primarily results from the low tariff levels. This is one of the main reasons for ZESCO’s current volatile financial performance. In August 2007, ZESCO filed a tariff application to ERB to reach full cost recovery within four years. ZESCO has requested for an average tariff increase of 50 percent, 45 percent, 27 percent, and 19 percent for both mining and non-mining customers from FY 2008 to FY 2011. On January 1, 2008, ERB issued a three-year incentive-based tariff order, with a weighted average tariff increase of 25 percent, 15 percent, and 9 percent for the non-mining consumers only1, with a list of performance benchmarks as conditions for ZESCO to improve efficiency and quality of service.

91. As energy demand in Zambia has significantly increased and recently surpassed ZESCO’s generation capacity, ZESCO has become a net importer of power from the SAPP. Given the limited energy availability in the Regional Power Pool, cost of import has also increased significantly. To meet the domestic demand, ZESCO has to import power at a very high cost – higher compared to its sales tariff. ZESCO has served less than its demand in FY 2007 and plans to continue to do so in FY 2008. Therefore, the financial analysis used Low Case power growth scenario to make a financial projection of ZESCO.

1 The ZESCO tariff application included proposed tariff increase for both mining and non-mining customers, while ERB tariff order applies only to non-mining customers. Considering zero tariff increase for the mining customers, the ERB tariff order approved an average tariff increase of 13%, 9%, and 6% for both mining and non-mining customers from 2008 to 2010.

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92. The financial analysis of the ERB tariff order showed that the approved tariff increase for non-mining customers alone will not help ZESCO achieve healthy financial performance. In particular, it will not allow ZESCO to generation enough cash flow for investment in performance improvement and power expansion. Analysis of several scenarios also demonstrated that tariff increase to the mining customers is essential, and substantial tariff increase will be needed for 2009 and 2010 to ensure positive financial return for ZESCO and maintain its debt service coverage ratio above 1.3. Therefore, it is recommended that (i) ZESCO should conclude re-negotiations with the mining industry and increase the mining tariff to cost recovery level as soon as possible; (ii) ERB should review ZESCO’s performance at the end of 2008, and allow ZESCO a revised tariff increase for 2009 and 2010; (iii) the government may consider to inject funds to support ZESCO’s investment programs; and (iv) ZESCO should improve efficiency and quality of service as required by ERB.

93. On-lending Arrangement: For Component 1, the Government would on-lend the IDA Credit to ZESCO under a subsidiary loan agreement. For other components, Government would transfer the IDA Credit as a grant to REA for capital subsidies. Funds from GEF and EU would be transferred to REA and ZESCO through the MoFNP under grant agreements.

2. Technical

94. Technical aspects of the project are largely conventional, involving standard equipment and techniques for on- and off-grid rural electrification. In this regard, there are no serious technical issues facing the project. However, the project will promote the use of low cost designs and techniques where appropriate to reduce rural electrification investment and operating costs. These will follow from an ESMAP-supported “Low Cost Design” program.

3. Fiduciary

Procurement

95. The Bank team carried out an assessment of the capacity of ZESCO and REA to implement procurement actions for the project. The project’s procurement arrangement is satisfactory. ZESCO has well established procurement capacity through the Bank Power Rehabilitation Project (PRP). The ZESCO Procurement Department has been certified in category A with a limit of K2.0 billion by the Zambia National Tender Board (ZNTB). REA recruited a qualified procurement officer in April, and drafted Procurement Manual. This procurement officer left REA in September, and a new procurement specialist came on board starting October 1, 2007. REA is a new institution and as such is in the process of establishing the procurement function and Unit within REA. The Procurement Unit for REA is not yet certified by ZNTB. In recognition of this limitation, the ZNTB has assigned the lowest procurement approval limits of K500 million to REA. All contracts above this amount will require the involvement at various stages and approval of the ZNTB. As REA capacity is developed and re-assessed, the ZNTB may revise the thresholds upwards. ZESCO will procure most of the works, goods, and services under this project. While REA has the coordinating role under the project, REA is only responsible for procurement of works, goods, and services for part of Component 2c and 3b, with a total value less than 9% of the total project cost.

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Financial Management

96. The Bank team carried out a Financial Management (FM) assessment of the Accounting unit of ZESCO and REA. While the Country Financial Accountability Assessment in Zambia showed substantial weakness and risks at the national level, the FM systems at ZESCO and REA satisfies the Bank’s OP/BP 10.02 minimum requirements. The project financial transactions will be managed by existing accounting units at ZESCO and REA. The two implementing agencies (IAs) have adequate organizational structures composed of adequate numbers of competent, technically qualified and experienced accounting staff. Furthermore, all accounting staff at each of the IAs has written job descriptions and is supported by written operational procedures and guidelines for processing transactions. ZESCO has previously managed an IDA PRP project. ZESCO has a computerized accounting system. Even though REA has not implemented an IDA project before, training has been provided to all the three members of the accounting staff in FM and disbursement procedures in IDA assisted projects. The training has equipped the REA staff with the knowledge to help them take on the project responsibilities.

97. The IAES activities will be subject to internal and external audit oversight by independent, competently qualified and experienced auditors using audit TOR that are acceptable to IDA. The audit will be conducted using international standards on auditing. Besides the external audit at ZESCO, the IAES activities will also be audited by the internal audit. ZESCO’s internal audit department is fully developed and manned by adequately qualified staff. The internal audit function will provide added internal controls. Therefore, the overall conclusion of the financial management assessment is that, even though the project will operate in the country’s weak financial management control environment, the IAES financial management risk is assessed as moderate, because the two IAs with the responsibilities to implement the project have adequate and reliable FM system that will allow for project resources to be properly accounted for, reported on and subject to an independent external audit.

4. Social

98. Overall, the project will likely have positive social impacts in Zambia. The project will increase access to reliable and clean energy services in rural areas, and it will provide access to energy for public facilities such as clinics and schools. Further, structural reforms in the energy sector should lead to increased economic activity that will in turn raise individual and household incomes in rural areas, due to private capital and labor investments, employment opportunities and increased commercial activity.

99. In terms of social safeguards, the IAES project has relatively limited adverse impacts that will nonetheless be addressed in project design, implementation and monitoring. Loss of cultural property should be avoided wherever possible (i.e., with the possible exception of small hydropower) through the sub-project screening process to ensure that all facilities should be located away from cultural sites. Impacts on indigenous peoples, if any, will be similarly avoided through the sub-project screening process unless the indigenous people themselves fully support the initiative.

100. The major potential social impact is involuntary resettlement, which is taken up below:

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101. Since land acquisition will be required under the project for small hydro, generation plants, and transmissions lines, the Bank policy on involuntary resettlement applies to project activities. For this reason, the Project has developed an approved Resettlement Policy Framework (RPF) to guide the development of any required Resettlement Action Plans (RAPs).

102. The RPF provides several measures not only to ensure that involuntary resettlement is minimized but also, where unavoidable, to ensure that the legal and customary rights of the affected population are fully respected. In the first instance, the project screening process will identify whether land is required, and, if so, whether that land is inhabited, occupied or claimed. If so, the project screening process requires that alternative sites be investigated for the physical infrastructure. The preliminary selection of sites will be done in a participatory manner at the local level so that any potentially affected people are given the opportunity to voice and have registered their opinions and objections.

103. If land acquisition is unavoidable, the livelihoods and standards of living of the affected persons will be improved or at least restored in real terms and they will be compensated at full replacement cost. The RPF has provisions for independent assessments to be carried out by professional property values paid for by the Developer. Compensation payments and any resettlement costs will be financed by the developer, therefore will be part of the overall budget of the individual project. These determinations will be done for the preparation of the RAP, which must be approved by the Bank before the project works can begin, and all compensation and resettlement will be completed before construction can begin.

5. Environment

104. The project is likely to have several positive environmental impacts. The emphasis of the project on expanding access with renewable energy sources rather than fossil fuels will have favorable impacts on local air quality and noise levels, and reducing greenhouse gas emissions. In addition, the TA component of the project will support the finalization and adoption of national guidelines for the environmental management of energy sector investments, and REA will collaborate with the Department of Fisheries to promote aquaculture at mini-hydro sites.

105. The potential adverse impacts with greatest spatial coverage are those associated with investments in distribution systems. These impacts are typically modest and relatively easy to manage through good engineering and construction practice. More complex impacts, though of more limited spatial extent, are those associated with investments in small hydro, in particular those associated with changes in hydrologic regime, including impacts on downstream water uses, aquatic ecosystems, obstruction of fish passage, and inundation of terrestrial habitat. Additional minor potential impacts are associated with the disposal of lead-acid batteries used in conjunction with solar panels.

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106. The Environmental and Social Management Framework (ESMF) is designed to ensure that the environmental and social issues associated with this program are adequately analyzed and understood, and that all associated adverse impacts are identified through screening, and are effectively mitigated and monitored. Each investment supported by the project must comply with the applicable provisions of both the RPF and ESMF, for which appropriate procedures have been incorporated in REA Operational Manual. Capacity for implementation of these procedures has been established at REA through the appointment of well-qualified environmental and social specialists, and is further ensured by ZESCO’s well-established and experienced environmental and social management unit. To address the potential adverse impacts on aquatic ecology of small hydro investments, REA will seek the guidance of the Department of Fisheries on a case-by-case basis, in particular to determine whether fish passes or ladders should be provided depending on the presence of migratory species at a given location.

107. Support to the development of small hydropower plants (SMPs) necessarily triggers OP 7.50 (Projects on International Waterways) as all waterways within Zambia fall in the Zambezi or Congo river basins. Both are international waterways flowing through Angola, Botswana, Burundi, Cameroon, Central African Republic, Democratic Republic of the Congo, Malawi, Mozambique, Namibia, Rwanda, Republic of Congo, Tanzania, Zambia and Zimbabwe. All of the SHPs are expected to be run-of-river and are therefore not expected to adversely change the quality or quantity of water flows to another riparian state or to adversely affect another riparian state's possible water use. Riparian states have been notified and afforded the opportunity to respond to the project. No objection has been received from any of the riparian states.

6. Safeguard policies

Safeguard Policies Triggered by the Project Yes NoEnvironmental Assessment (OP/BP/GP 4.01) [X] [ ]Natural Habitats (OP/BP 4.04) [ ] [X]Pest Management (OP 4.09) [ ] [X]Cultural Property (OPN 11.03, being revised as OP 4.11) [ ] [X]Involuntary Resettlement (OP/BP 4.12) [X] [ ]Indigenous Peoples (OD 4.20, being revised as OP 4.10) [ ] [X]Forests (OP/BP 4.36) [ ] [X]Safety of Dams (OP/BP 4.37) [ ] [X]Projects in Disputed Areas (OP/BP/GP 7.60)* [ ] [X]Projects on International Waterways (OP/BP/GP 7.50) [X ] [ ]

7. Policy Exceptions and Readiness

108. There is no policy exceptions required for this project.

109. Indicators of project readiness are: Completion of procurement and financial management capacity assessment.

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas

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ESMF was disclosed in country on October 16, 2006, and submitted to InfoShop on December 11, 2006. The RPF was disclosed in country on March 5, 2007, and submitted to InfoShop on March 6, 2007.

Implementing agencies established. Final PREP packages and draft REF Operational Manuals completed. Draft Procurement Plan agreed.

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Annex 1: Country and Sector or Program Background

ZAMBIA: Increased Access to Electricity Services

Country Background

1. In Zambia, poverty is widespread amidst rich natural resources. With a per capita GNI of US$690, Zambia’s population of 12 million is among the poorest in Africa. This equates to about 50 percent of all Zambians living on less than one dollar a day, which is particularly striking considering the country’s vast fertile land and rich endowment of copper and other resources. In 1969, Zambia produced about 720,000 tonnes of copper, and was the world’s fourth largest copper producer. However, falling production, due to low market prices and a lack of investment, have reduced Zambia’s copper output to about half of this level, meaning that Zambia is now the 11th largest producer. This decline took a devastating toll on Zambia’s economy, from which it has yet to emerge.

2. Recent economic trends are promising. World copper prices have recently rebounded from an extended decline to reach new record highs. Moreover, Zambia’s recent HIPC completion and G8 debt relief have reduced its heavy debt burden. In addition, even though exports remain dominated by copper and cobalt mining (73 percent), the remaining contributors (mostly agriculture, with some manufacturing and tourism) are keeping up and outperforming mining in real terms. As a result, despite a number of adverse supply shocks (e.g. drought, high world oil prices, and fuel shortages due to oil refinery production interruptions), the Zambian economy is now performing well, with real GDP growth of 6 percent in 2006.

Electricity Sector

3. Power sector plays a key role in economic development. The electricity sector is a key driver of economic growth in Zambia, and is therefore accorded prominence in Zambia’s Poverty Reduction Strategy. Electricity is a fundamental input to mining -- more than 50 percent of electricity generated serves the mining sector in Zambia. Organized development of the sector, steady improvement in the provision of reliable and affordable electricity services, and growing electricity access are all important determinants of Zambia’s economic performance and the quality of life of Zambians.

4. Generation: In 2007, the total installed capacity reached 1,760 MW, of which 95 percent hydro generation primarily from three major hydro power plants – Kafue Gorge, Kariba North, and Victoria Falls, and the rest from 8-9 diesel generators. The peak demand was 1,400 MW, with an annual projected demand growth of 100 MW. The total generation in 2007 was 8,535 GWh. Table A1.1 lists existing generation power plants in Zambia.

5. In Zambia, no major new generating station for power has been developed since the 1970s. However, electricity demand on the power system has increased steadily since then and accelerated in the late 1990s, but without a corresponding expansion of the supply infrastructure. With the rapid development of new mines and industries, and rapidly growing household electricity needs, the country is experiencing load shedding. In the short-term, energy efficiency (EE) and demand side management (DSM) measures can be effective response to power

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shortage, based on international experience. Ultimately, the power crisis calls for an urgent need to develop new generating capacity, and the extension and improvements in the power transmission and distribution systems. To address the current power crisis, ZESCO is implementing power rehabilitation projects, which will increase availability and reliability of existing plants, and can add an additional 210 MW by 2009. In addition, rehabilitation and development of new small hydro plants can also be short to medium-term measures to mitigate power shortage. The long-term solution is building new large generation plants such as Itezhi Tezhi (120 MW), Kariba North Extension (360 MW), and Kafue Gorge Lower (750 - 900 MW), and Kalungwishi (210 MW), with an estimated cost of about US$1.5 billion in the next five years to meet domestic demand and for export. There could be no immediate relief from the power shortages until the Itezhi Tezhi and Kariba North Extension commissioned by 2012 and Kafue Gorge commissioned by 2015. Financing would be a major constraint, and the issue of tariff is a key factor to attract investment for development of new generation capacity.

Table A1.1 Existing Generation Power Plants

PlantInstalled Capacity (MW)

HydroKafue Gorge 900Kariba North 600Vitoria Falls 108Lunsemfua & Mulungushi

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Small hydro 24Hydro Total 1,670Diesel 10Gas Turbine (stand by) 80Grand Total 1,760

6. Regional Integration : The establishment of the Southern Africa Power Pool (SAPP) provides a strategic opportunity for Zambia, especially with regard to SAPP links to other countries such as Zimbabwe, Democratic Republic of Congo (DRC), South Africa, and to the planned East Africa power market. Zambia also has considerable untapped hydropower generation potential to feed into these emerging markets.

7. Transmission : Zambian transmission system consists of a 330 kV grid, which is 2,236 km long and contains 6 substations or “bulky supply points” (BSP). The transmission voltages used in the Zambian grid are 66 kV, 132 kV, and 220 kV. Table A1.2 lists existing transmission lines. Zambian transmission system is old, with a transmission loss of 3.68%, and in need of overhaul and expansion because of long delayed routine rehabilitation. Delays in rehabilitation have occurred due to tariff levels that have been insufficient to cover the costs.

8. Distribution : The distribution system consists of 33 kV and 11 kV lines (overhead and underground), and low voltage lines (overhead and underground). In urban areas, Bulk Supply Points (BSPs) deliver power to the 33 kV network, or in some cases directly to the 11 kV network, from where the main substations (33/11 kV) supply the 11 kV primary distribution

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lines. 11/0.4 kV substations deliver power to the secondary distribution network. 33 kV is used as sub-transmission voltage for bulk supply to the distribution network, but some distribution transformers and large consumers are also directly energized from this voltage. In rural areas, the 33 kV system forms the bulk of the primary distribution system supplying distribution transformers. ZESCO has not been able to invest its own resources in maintaining and replacing the distribution networks, as current tariff levels do not allow it to generate adequate income. Correspondingly, quality of service has deteriorated and current distribution losses are about 23 percent. A large part of these losses are “non-technical”, i.e. they derive from pilferage of electricity, billing inefficiencies, and inadequate metering. The upgrade of distribution systems will not only improve service in the key urban areas, but also reduce losses and improve revenue streams, therefore directly contributing to ZESCO’s financial recovery.

Table A1.2 Existing Transmission Lines

No. Voltage level Transmission length1 330 kV 2,236 km2 220 kV 348 km

3 132 kV 229 km 4 66 kV 3,048 km

Total 5,861 km

9. Institutional Framework : The power sector is dominated by ZESCO, the vertically integrated state-owned utility. Other important sector actors include the Copperbelt Energy Corporation (CEC), which is a private company that purchases bulk power from ZESCO and supplies to the copper mines. The Energy Regulation Board (ERB) was established in 1995 with a mandate to oversee the entire energy sector, including electricity, petroleum, and coal. ERB reviews and approves ZESCO tariff submissions, and issued a three-year incentive-based tariff order on January 1, 2008.

10. ZESCO : ZESCO’s financial performance is deteriorating, primarily because of (i) electricity tariffs significantly below cost of service; (ii) operating inefficiencies, with high staff costs accounting for 50 percent of operating costs and high distribution losses of 23 percent; and (iii) non-payment and arrears build-up mostly by central government and parastatals, and municipal water utilities. As a consequence, Government has instructed ZESCO to move to a commercial footing. To date, this has focused more on governance issues including the development of a business plan to orient company operations, and corporate restructuring by division of the company into strategic business units. The ZESCO Commercialization Roadmap, designed by the government, was successfully completed for the Entry and Interim Phases, and the relevant HIPC triggers were met. The Evaluation of Commercialization is yet to be done. The emphasis is now turning to improvement in financial performance and efficiency. Consequently, the next phase of commercialization should focus primarily on ZESCO performance improvement plan to achieve financial turnaround and meet ERB’s performance benchmarks. This is critical to achieving and sustaining commercial viability over the longer-term to enhance quality of service and attract private investors in the sector.

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11. Electricity Tariff : The current electricity tariff in Zambia does not cover full costs of supply. Given the current power crisis, new generation capacity is urgently needed. To attract investment, a financially sustainable power sector is vital. At current tariff level, no investors will be interested in new generation capacity. The low tariff has resulted in current deteriorating financial performance of ZESCO. In addition, the low national uniform tariff severely limit access expansion rate. Preliminary financial analysis demonstrated that rural electrification requires substantial capital subsidies at current tariff level. Furthermore, the lifeline block (0-300 kWh/month) represents 57 percent of ZESCO customers, and is not targeted to the poor. The initial connection charge ($400-700) is too high, creating a major barrier for the poor to connect to the grid, as experience from other countries demonstrated that high initial connection charges are often a far greater barrier to the poor than the full cost recovery monthly electricity bill2. The ERB has completed a Cost of Service Study to provide a firm analytical footing for electricity pricing. The Study recommended an initial tariff increase of 45 percent on average. Table A1.3 lists old tariff levels by consumer category, the recommendations from the Cost of Service Study, the proposed ZESCO initial tariff increase in 2007/2008, and the approved three-year ERB tariff increase.

12. The government is committed and taking steps to improve the financial viability of the sector. The process of a tariff increase for both the mining and non-mining customers is launched and in progress towards a positive result. As the mining sector consumes more than 50 percent of electricity in Zambia, with long-term power purchase contracts at prices well below the costs of supply, the government has initiated re-negotiation of the power agreements with the mining sector to a cost recovery tariff level. The mining sector has generally accepted the principle of tariff adjustment. ZESCO is at an advanced stage of re-negotiation with CEC. For the non-mining customers, ZESCO filed four-year tariff adjustment applications to the ERB by the end of August, 2007. ZESCO proposed to reach full cost recovery within four years, and requested for an average tariff increase of 50 percent, 45 percent, 27 percent, and 19 percent for both mining and non-mining customers from FY 2008 to FY 2011. After public consultations and review of the ZESCO tariff application, ERB issued a three-year incentive-based tariff order on January 1, 2008, with an average tariff increase of 27 percent, 15 percent, and 9 percent for non-mining customers only from 2008 to 2010. ERB’s tariff order also included a list of performance benchmarks as conditions for ZESCO to improve efficiency and quality of services, including (i) metering all new and existing consumers by 2010; (ii) reducing distribution system loss from present 23 percent to 14 percent by 2010; (iii) reducing staff cost as proportion of operating budget from present 49 percent to 30 percent by 2010 and increasing staff productivity from 61 consumer per staff to 100 by 2010; (iv) increasing revenue collection rate to reduce debtor days from present 180 days to 60 days; (v) reducing unplanned outages from present 32 hours per customer per month to 3 hours by 2010; (vi) reducing waiting time for applicants to get

2 The ESMAP study on successful factors of rural electrification programs recommended that reducing initial connection charges, or spreading them over several years, would allow larger numbers of low-income rural households to get connected. Both ERB and ZESCO have accepted this principle. Normally, the value of the connection charge should be established to recover the connection service costs and consider local household income, which is usually in the order of magnitude of $50-150. Since the current electricity tariff does not recover the cost of supply, ZESCO charges high up-front investment costs as connection charges to reduce financial losses.

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connected from present 57 days to 30 days in 2010; and (vi) reducing supply demand gap through demand side management, efficiency improvement, regional energy import, etc.

Table A1.3 Tariff Levels by Consumer Category (US cent/kWh)

Tariff Categories

Old Tariff Levels

Cost of Service Study Recommendations (Step Up)

Proposed ZESCO Initial Tariff Increase in 2007/8

ERB Approved Tariff Increase

Sales

2008 2009 2010

Mining 2.34 3.01 (28.5%) 3.60 (54%)

2.34 (0%)

2.34 (0%)

2.34 (0%)

50%

Residential 3.05 7.55 (147.6%) 4.42 (45%)

3.87 (26.8%)

4.51 (16.6%)

5.05 (11.9%)

15%

Large Power

2.07 3.03 (46.3%) 3.62 (75%)

2.64 (27.5%)

3.08 (16.6%)

3.15 (2.2%)

20%

Small Power

3.14 3.68 (17.4%) 4.55 (45%)

3.65 (16.2%)

3.85 (5.5%)

4.02 (4.5%)

Commercial 5.87 6.01 (2.4%) 8.81 (50%)

5.95 (1.3%)

5.96 (0.3%)

5.98 (0.3%)

5%

Services 3.97 4.23 (6.3%) 5.96 (50%)

4.24 (6.8%)

4.32 (1.9%)

4.40 (1.9%)

5%

Exports 2.87 3.27 (14.0%) 3.59 (25%)

5.53 (69%)

6.80 (23%)

7.82 (15%)

5%

TOTAL 2.66 3.87 (45.4%) 3.98 (50%)

3.01 (13%)

3.28 (9%)

3.47 (6%)

100%

13. In addition, the lifeline block is reduced from 300 kWh/month to 100 kWh/month. ERB also requested ZESCO, within 60 days from the tariff order was issued, with a plan to reduce the financial burden on people who wish to connect. These are important measures to protect the poor and increase their ability to get connected to the grids. Furthermore, the government also agreed that cost recovery tariff scheme should be applied to isolated grid areas under “light handed” regulations, and private sector should be allowed to sell power to ZESCO at cost of service in existing ZESCO diesel stations.

14. Sector Reform: The government aims to promote competition, efficiency, and private sector involvement. The Government’s overall objective for the energy sector is to establish a stable and credible policy, a regulatory framework, and a market structure that is consistent with regional initiatives and, above all, promotes competition, efficiency, and private sector involvement. Furthermore, this framework and structure should continue to ensure a smooth transition to a liberalized electricity supply industry that would enable Zambia to maximize benefits from participation in the future regional electricity trade by taking advantage of its unique position at the cross-roads of the future Eastern and Southern Africa power markets, and its abundant and relatively low cost hydroelectric resources, which would require significant investment for development. To this end, Government has promulgated: (a) a National Energy Policy (1994) and an Energy Regulation Act (1995) under which the ERB has been established; (b) an Electricity Act (1995) which permits private investment in the power sector; (c) a Rural

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Electrification Act (2003), which established the autonomous Rural Electrification Authority (REA) and channeled the Rural Electrification Levy into the Rural Electrification Fund (REF); and (d) a draft revised National Energy Policy (2005) was approved by the Cabinet in November 2007. In May 1999, the Government published the “Framework and Package of Incentives for private Sector Participation in Hydropower Generation and Transmission Development.” An Office for Promoting Private Power Investment (OPPPI) has been set up under the Ministry of Energy and Water Development (MEWD) to implement the framework. However, this initiative has yet to be made operational.

15. The 2003 Electricity Act set the stage for private sector entrants to generate electricity in accordance with the regulations under the Act. However, to date there have been no significant new providers. ZESCO’s vertically integrated and monopolistic structure poses a constraint to private sector participation and competition for improved efficiency. There is an urgent need to establish a market structure and improve legal and regulatory enabling environment to attract private investments, competition, and efficiency improvements. Such sector structure would also enable Zambia to be able to maximize benefits from participation in the Southern Africa power market. Future private sector involvement in the power sector is expected to be primarily in the areas of power generation and off-grid electrification. The government and ZESCO are planning to invite the private sector to jointly invest and develop the new hydropower plants. For grid extension, it is still difficult for the private sector or cooperatives to provide electricity services under current low national uniform tariff. However, ZESCO has agreed to hire the private sector as supply and installation contractors for construction of grid extension projects. For off-grid, few private developers exist for micro-hydro and solar PV.

16. Access to Electricity : Zambia has an overall national electrification rate of less than 20 percent, with about 40 percent of the population in urban and peri-urban areas (chiefly Lusaka and the Copperbelt area) and a meager 2 percent of the rural population access to electricity. Table A1.4 lists electrification status by region in 2004. In its current business plan, ZESCO anticipates adding 10,000 new customers per year, which does not even keep up with Zambia’s 2 percent population growth. Thus an increasing number of un-electrified businesses and households are left ‘in the dark,’ faced with inferior and more costly options for lighting as well as powering of productive activities and amenities. This low access rates for power inhibit economic advancement and diminish quality of life. It undermines the pace and scope of rural development as it hinders productive and income generating activity. It also detracts from rural quality of life, and reduces the welfare levels of the under-privileged population. Without electricity, the quality of basic social services (where they exist) such as schools and health clinics is seriously diminished.

17. The government plans to increase national electrification rate from 20 percent to 66 percent by 2030, with 90 percent in the urban areas and 50 percent in the rural areas, based on the Rural Electrification Master Plan. Recognizing that limited access to electricity services has been a major bottleneck for economic growth, the government has made scaling up energy access a centerpiece of power sector development. The five-year access expansion program includes five tracks: (i) enhanced power supply from new generation capacity; (ii) strengthened transmission through regional power integration; (iii) grid electrification; (iv) off-grid electrification; and (v) stand-alone renewable energy systems.

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Table A1.4 Electrification of Towns and Villages by Region in 2004No. Region Electrified

PopulationRelative Coverage percent

1. Lusaka 272,094 43.02. Copperbelt 289,647 41.13. Southern 204,398 12.54. Central 178,820 11.95. Northern 258,887 4.06. North-Western 111,133 3.67. Western 150,420 3.38. Luapula 164,739 3.09. Eastern 254,603 2.9Rural 1,232,301 2.2Urban 652,440 44.1

Total 1,884,741 16.7

18. The government established the REA, under the Rural Electrification Act. REA is responsible for (i) administering and managing the REF to rural electrification project developers (including ZESCO) on a competitive basis; (ii) developing rural electrification plans to provide a level playing field between grid and off-grid electrification; (iii) monitoring and enforcement of project implementation; and (iv) providing technical assistance and promoting rural electrification. Currently, there is a 5 percent levy on electricity consumption for non-mining customers, of which 3 percent is earmarked for REA to provide capital subsidies for rural electrification projects (currently equivalent to about $2.5 million per year), which is far from sufficient to expand access in Zambia. A SIDA-supported consultant will be assisting REA in becoming operational. This will include developing transparent and effective capital subsidy schemes, project selection criteria based on economic and financial principles, eligibility criteria and principles for capital subsidy, appraisal of project proposals, etc. outlined in the REF Operational Manual. The REA will provide capital subsidies to project developers to provide electricity services through grid and off-grid electrification in rural areas, while ZESCO will increase connections within its grid networks in peri-urban areas.

19. Renewable Energy : The government is committed to increasing use of renewable energy. To date, access expansion has focused primarily on grid-based electrification. Due to dispersed population in Zambia, decentralized and off-grid options, particularly renewable energy, deserve more attention. The government is committed to increasing use of renewable energy, and considers the growth of the renewable energy industry as an integral part of its rural energy and power sector development strategy. Zambia is endowed with rich renewable energy resources. To date, however, utilization of renewable energy is quite limited, except for large hydro, due to a number of barriers, including a lack of policy and regulatory frameworks (e.g. standardized power purchase agreements, technical specifications, etc.) as well as a limited number of project developers and renewable energy finance providers. For off-grid renewable energy

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electrification, priority should be given to provide energy services in public facilities such as schools and clinics, as well as productive use sectors such as agriculture and ICT.

20. For areas that are not served by ZESCO, where the population is dispersed and unsuitable for grid extension, solar photovoltaics (PV) is recognized as a cost effective option. The government and donors, including the World Bank as well as private sector have utilized PV systems for public sector services, including health care, education, local government and telecommunications. The Ministry of Health uses PV for providing electricity services for rural health posts and rural health centers (lighting, refrigeration, communication), and for staff quarters. The Ministry of Education provides PV systems for staff as well as for educational (class room lighting, dormitories, computers etc). Both Ministries consider electricity supply to staff as an essential incentive for retaining qualified staff in these remote facilities. Despite their efforts to-date, there remain nearly 800 health facilities presently without access to electricity. The situation is worse in schools with about 5,800 schools without access to grid electricity. A few of these schools and clinics do have solar or diesel generators.

21. Under project preparation, an independent study examining solar PV programs in the health and education sectors concluded that low sustainability of the public institutional systems is a main problem. Most are sold without maintenance contracts and many with warranties limited to one year for all components. As there are no commercial PV sales and service networks from which institutions could purchase services, spare parts and advice on an as-needed basis, the absence of maintenance arrangements and short warranties are critical issues.

22. There is some training of staff of government departments in PV operation and trouble shooting, but apparently no comprehensive approach to equipment maintenance after installation. There are reports that on the order of 50 percent of the systems after four or five years of operation experience problems of component failure and lower performance, or have stopped working. Timely repairs are a problem. Battery and light replacements, which have not been anticipated in operational budgets, are additional problems. Field observations indicate that for repair in rural areas the institutions rely on local technicians and official technicians, who have very limited or no training in PV.

23. Zambia has a relatively small commercial PV market which is in a pioneer stage. Household systems are sold through two main channels. The two specialized companies that dominate in the institutional market (not including the recent large World Bank funded procurement) also sell to individuals; these systems are installed by trained technicians. The second channel is retail shops, such as general furnishing shops and stores, including outlets of South African chain stores and at least one retail shop that is specialized in solar equipment. These sales are mainly cash and carry, with any installation arranged privately by the customer. There are about 5 companies installing solar energy systems in Zambia, though most of this capacity is located in Lusaka and other large towns. Estimated installed capacity is only 400 kWp, which mostly located in hospitals, schools, NGOs and, increasingly, in rural households.

24. Sector Syndication : Implementation of such a programmatic approach requires sector syndication approach. The government needs to demonstrate commitment and credibility through access expansion scale-up plans, predictable and ensured government budget allocation,

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and implementation of policy, tariff, institutional, and regulatory measures. The cooperating partners (CPs) need to adopt programmatic and sector-wide approaches, moving away from the traditional project-by-project and donor-by-donor approach to sector syndication approach with scaled-up funding. This approach, outlined in the Africa Energy Access Scale-Up Action Plan, was endorsed by the Bank Board and included in the recent G-8 Declaration on Africa.

25. The government fully supports the sector syndication approach. The MEWD has prepared a Power Sector Development Framework in Zambia, which emphasized the importance of energy for development and growth, proposed overall sector strategy and access expansion program, recommended policy, regulatory, and institutional frameworks including the five-year incentive-based tariff scheme, and estimated the investment plan. The government is committed to putting in place sound policy and regulatory measures. Zambia has been selected as one of few countries in Africa to pilot the sector syndication approach. The next step is to prepare a detailed and credible 5-year investment plan for the sector and develop a syndication plan. On the strength of a Syndication Prospectus, the government can invite participation of the donors and private sector for financing specific elements of the framework. This proposed project will serve as a showcase to pilot the first phase of this syndication framework. SIDA, JBIC, and EU expressed interests in partnering with the Bank to co-fund this syndication framework.

26. The Bank financed Power Rehabilitation Project, which was recently closed, has assisted ZESCO in rehabilitation of the three major hydropower generation plants, transmission and distribution systems in selected areas, which contributed to ZESCO loss reduction and efficiency improvement. SIDA has been providing capacity building to REA and ERB. JICA assisted Rural Electrification Master Plan has been completed by the end of 2007.

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Annex 2: Major Related Projects Financed by the Bank and/or other Agencies

ZAMBIA: Increased Access to Electricity Services

Sector Issue Project Latest Supervision

(PSR) Ratings(Bank-financed projects only)

Bank-financedImplementation

Progress (IP)Development

Objective (DO)

Sector reform, ZESCO commercialization

Zambia: Power Rehabilitation Project

MS MS

Other development agenciesTechnical assistance to REA and RE Fund

SIDA: Technical Assistance to REA

n/a n/a

Solar home systems SIDA: Providing Electricity Services Through Energy Service Companies (ESCOs) in the Eastern Province of Zambia

n/a n/a

Renewable energy mini-grids UNIDO/GEF: Renewable Energy Based Electricity Generation for Isolated Mini-Grids

n/a n/a

Solar for ICT in rural schools UNIDO/GEF PDF B: Renewable Energy Promotion through Information and Communication Technology Introduction in Off-grid Rural Communities in Zambia and Malawi

n/a n/a

IP/DO Ratings: HS (Highly Satisfactory), MS (Marginally Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

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Annex 3: Results Framework and Monitoring

ZAMBIA: Increased Access to Electricity Services

Results Framework

PDO Project Outcome Indicators Use of Project Outcome Information

Project Development Objective: To increase access to electricity services and improve efficiency and quality of electricity distribution system in targeted areas.

Global Objective: To remove barriers to renewable energy technologies to help mitigate greenhouse gas emissions

Electricity access rateImproved distribution efficiency in targeted areas

Installed capacity of renewable energy systems

Tonnes of CO2 reduction

Evaluate the progress of access rate towards the MEWD objectives;

Monitor effectiveness of RE framework established by GoZ and make modifications as necessary

Identify key elements required for successful scale-up

Demonstrate effective use of renewable energy technologies

Adjustments in sector policies and implementation in light of performance

Intermediate Outcomes Intermediate Outcome Indicators

Use of Intermediate Outcome Monitoring

Increased access to electricity services

No. of connections through grid and off-grid electrification

Use of data in planning of future electrification efforts

Strengthened REA capacity and active private sector participation

No. of projects implementedNo. of projects in the pipeline

Assess quality and level of private sector participation

Measure effectiveness of TA component of project

Improved efficiency for ZESCO Reduced distribution losses and outages in targeted investment areas

Create market confidence in ZESCO

Increased renewable energy market

No. and installed capacity of renewable energy systems

Demonstrate effective use of renewable energy technologies to promote scale-up

1. Key performance indicators of project progress toward development objectives include: number of connections through grid and off-grid electrification; increased access rate in terms of a larger share of population with access to electricity

services; reduction in ZESCO distribution losses in targeted investment areas; reduced unplanned outage in targeted investment areas; installed capacity of renewable energy systems; and installed capacity of renewable energy systems.

110. In addition to the output and outcome indicators listed above, the project will also monitor ZESCO’s financial performance through tracking indicators. ZESCO’s financial health

40

is critical to successful project implementation, sector financial viability, and secure power supply. While the project can not alone contribute to ZESCO’s financial turnaround, investments that support loss reduction and improvement in quality of services in targeted areas under Component 1 can contribute to its faster financial turnover. Consequently, the project will adopt tracking indicators to monitor ZESCO financial performance: (i) ZESCO will for each fiscal year maintain a current ratio (current assets divided by current liabilities) not less than 1; (ii) ZESCO will for each fiscal year maintain a debt service ratio no less than 1.3; (iii) ZESCO will meet ERB’s performance benchmarks, including metering all new and existing consumers by 2010; reducing distribution system loss from present 23 percent to 14 percent by 2010; reducing staff cost as proportion of operating budget from present 49 percent to 30 percent by 2010; increasing staff productivity from 61 consumer per staff to 100 by 2010; increasing revenue collection rate to reduce debtor days from present 180 days to 60 days; reducing unplanned outages from present 32 hours per customer per month to 3 hours by 2010; and reducing waiting time for applicants to get connected from present 57 days to 30 days in 2010.

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Arrangements for results monitoring

Target Values (Accumulative) Data Collection and ReportingProject Outcome

Indicators Baseline YR1 YR2 YR3 YR4 YR5 Frequency &

ReportsData Collection

InstrumentsResponsibility

for Data Collection

Electricity access rate 20% 20% 21% 22% 23% 24% Annual Annual Reports REAInstalled capacity of renewable energy systems (MW)

1.3 1.3 1.4 1.6 5.3 5.3 Annual Annual Reports REA

Tonnes of CO2 reduction

0 0 100 300 20,000 20,000 Annual Annual Reports REA

Intermediate Outcome Indicators

REA

Number of connections through grid electrification

0 0 12,000 24,000 36,000 49,000 Annual Annual Reports REA

Number of connections through off-grid

0 0 1,000 5,000 12,000 16,000 Annual Annual Reports REA

Number of institutional solar PV systems

200 0 280 350 400 450 Annual Annual Reports REA

Number of projects implemented

0 0 7 15 25 30 Annual Annual Reports REA

Number of projects in the pipeline

14 14 20 25 30 40 Annual Annual Reports REA

Loss reduction in targeted areas

23% 23% 23% 14% 14% 14% Annual Annual Reports ZESCO

Reduced unplanned outages in targeted areas

32 hour/mon per customer

32 hour/mon per customer

32 hour/mon per customer

3 hour/mon pe customer

3 hour/mon per customer

3 hour/mon per customer

Annual Annual Reports ZESCO

Number of CFLs installed

0 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Annual Annual Reports ZESCO

Note: The target values, particularly those for loss reduction and reduced outages in targeted areas, will be further refined during project implementation. The project will conduct survey to collect baseline indicators under M&E at the beginning of project implementation.

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Annex 4: Detailed Project Description

ZAMBIA: Increased Access to Electricity Services

1. The total project cost is estimated to be around $75.5 million, of which IDA $33 million equivalent, GEF $4.5 million, EU $15 million, government $12 million, and equity and debt from ZESCO, private developers, and consumers $11 million. This project targets at providing electricity services to 65,000 new customers including households, public facilities (schools, clinics, church, etc.), and commercial establishments (farm blocks, agriculture processing mills, water pumping, shops, etc), benefiting a total population of 550,000 inhabitants. As a result, the electricity access rate will increase from 20 percent to 24 percent. It will also contribute to improvement of ZESCO efficiency and quality of service in targeted areas and mitigation of power crisis.

2. The IDA and GEF funding is fully blended. The IAES project has three components: (1) ZESCO efficiency improvement, including reinforcement of existing distribution networks, intensification within existing grids in peri-urban areas, and energy efficiency (EE) and demand side management (DSM); (2) access expansion: including grid extension to rural areas, isolated grids such as mini-hydro, and solar PV systems for public institutions (schools and clinics), commercial establishments, and households; (3) technical assistance for both ZESCO and REA. GEF will provide support to component 2c and 3. The project components are described in the following paragraphs. Table 1 below summarizes the cost breakdown of the IAES project.

Table A4.1. Cost Break-Down for IAES Project (US$ Million)

Project Components

Total Costs IDA GEF EU GoZ Project Sponsors

1. Efficiency Improvement1a Reinforcement 9 8 11b Intensification 11  6 4  0 11c. EE/DSM 2 22. Access Expansion2a Grid Extension 25 7 8 8 22b. Mini-grids 14 6 4 42c. Solar PV 9 4 2.5 0 2.53. TA 5.5 0 2 3  0 0.5

Total Project Costs

75.5 33 4.5 15.0 12.0 11

3. In addition, a larger access expansion program includes potential funding from JBIC, SIDA, and additional EU grants. The GoZ submitted requests to the Japanese government for providing Japanese ODA loan following the JICA Rural Electrification Master Plan Study. Based on the request, JBIC has conducted project preparation studies covering 23 sub-projects for Intensification and Grid Extension (initial estimate was US$54.4 million) and 2 sub-projects for Mini-hydro (initial estimate was US 17.9 million). The final decision regarding Japanese ODA loan for the project, including the size and scope, is expected to be made in 2008. The GoZ indicated its intention to appoint ZESCO as the project implementation agency for JBIC funded

43

portion, who will own, operate and maintain the infrastructure, and will be responsible for carrying out JBIC procurement procedures and guidelines. SIDA plans to fund $30 million to REF and an additional $12 million for capacity building and institutional strengthening to MEWD, REA, ERB, and ZESCO in the energy sector. Furthermore, the EU Energy Facility will provide an additional 10 million Euro to REA for access expansion. If materialized, this larger access expansion program, including this project, could assist the government in achieving 30 percent access rate.

Component 1 ZESCO Efficiency Improvement – to be implemented by ZESCO

Sub-Component 1a Reinforcement (Cost: US $9 million: IDA $8 million and ZESCO $1 million)

4. This component will assist ZESCO in strengthening and upgrading existing distribution networks in selected areas of Lusaka to reduce system losses, improve the quality of service to existing customers, and increase capacity of the networks to support additional connections to new customers. To enhance revenue collection and reduce non-technical losses, ZESCO has procured 85,000 meters for the 100,000 un-metered customers. This component may install additional pre-payment meters in selected areas, if needed. IDA funds will finance 90 percent of the investment costs, and ZESCO will provide 10 percent equity.

5. The investment will support adding, replacing or upgrading distribution network lines, substations, and transformers, and medium and low voltage equipment, meters, spare parts, and tools in selected areas of Lusaka. Adding new connections within existing networks requires removing bottlenecks in the medium voltage system, and strengthening the network to accommodate the expected load growth while meeting the desired quality of supply. To achieve this, this sub-component will support construction of new primary substations, augmentation of transformer capacities, construction of new feeders, upgrading selected lines etc., which will enable the networks to handle the additional loads from new customers both in existing networks and the new intensification lines. This will result in increased network capacity to connect new customers, and improved system performance through reduced losses and improved quality of service in terms of lower outage rates. It should be noted that reinforcing the existing network and increasing connections need to be planned in a comprehensive and coordinated manner. These measures will contribute to improvement in ZESCO financial performance and quality of service in targeted investment areas.

Sub-Component 1b Intensification (Cost: US$11 million: IDA $6 million, EU $4 million, and ZESCO $1 million)

6. This component will focus on intensification to increase connections within existing ZESCO grids in peri-urban areas, which is the least-cost approach to increase connection rate. The current connection rate in Lusaka, for example, is only around 50 percent. This is primarily because most households can not afford to pay for the high initial connection charge ($400-700). To address this barrier, ERB has requested ZESCO for submission of a plan to reduce connection charges. IDA and EU funds will finance 90 percent of the investment costs in different geographic areas, and ZESCO will provide 10 percent equity. ZESCO has agreed to bid out supply and installation to private contractors. The project will also introduce low-cost technologies such as ready boards to bring down the costs of connections. These measures can

44

substantially increase a large number of low-income families to obtain electricity in a relatively short time period. ZESCO should target at 90-100 percent connection rate within its grid areas. 7. This component would connect about 31,000 new customers. Independent consultants under the Priority Rural Electrification Projects (PREPs) during project preparation have conducted pre-feasibility studies for seven intensification sites as the first batch of investment – Chibolya, Chipulukusu, Kabushi, Makululu, Matilyo, New Kawama, and Woodlands extension plots – with a total investment cost of approximately $6 million. Selection of future investments should meet the criteria of Financial Internal Rate of Return (FIRR) not less than 10 percent.

Sub-Component 1c Energy Efficiency and Demand Side Management (Cost: $2 million from IDA)

8. EE/DSM measures are an effective short-term response to mitigate power shortages. This component will support ZESCO installation of 1,000,000 Compact Fluorescent Lamps (CFLs) in households (equivalent to 3 CFLs per customer). CFLs can enable energy savings of up to 80 percent for residential customers. Distribution of 1,000,000 CFLs can cut peak demand by 50 MW, resulting in $40/peak kW reduced. Experience from Uganda, Rwanda, and Vietnam proved that bulk procurement of CFLs can substantially reduce the costs of CFL from $4-5 to under $1 each. International experience in Ghana and South Africa also demonstrated that bulk procurement and distribution of CFLs is the quickest way to assure load reduction and mitigate power crisis at less than a tenth of supply costs. Technical specifications also assure product quality and warranty provides comfort to customers. Distributing a large number of CFLs through such programs helps market development for high quality and low costs CFLs, and build up customer confidence and CFL image, which will lead to increased market acceptance. ZESCO will install 3 CFLs per household for existing customers in exchange of incandescent light bulbs, which will be recycled by ZESCO. ZESCO can give away CFLs to low-income customers, and sell them at subsidized or full price to high-income customers. ZESCO can also claim carbon credit to fully recover the costs.

Component 2 Access Expansion – to be implemented by REA

Sub-Component 2a Grid Extension (Cost: US$25 million: IDA $7 million, EU $8 million, GoZ $8 million, and ZESCO $2 million)

9. Intensification and extension of service from the existing interconnected electricity grid network operated by ZESCO will be the primary means of expanding access to electricity in Zambia. This component will seek least-cost options of grid-based electrification first. REA will adopt transparent criteria to select these grid-based electrification projects based on economic and financial principles, to be specified in the REF Operational Manual. IDA and EU funds will be used to finance partial capital subsidy in the forms of grants, along with Government contributions. The balance of financing will be debt and equity from the service providers. REA should only finance those grid extension projects which will enable the service providers to recover partial capital investment, bulk electricity supply, and O&M costs, after the partial capital subsidy provided by REA is taken into account.

10. A “smart subsidy” design would be employed, to ensure financial viability of the investments for the service providers, while also ensuring affordability of services to potential end users. In the mean time, it should provide strong business incentives for service providers to use a least cost rollout strategy and reduce unit costs of new connections; by linking payment of

45

subsidies to verifiable outputs (essentially an ex-ante fixed subsidy per connection). The project will provide up to 90 percent of capital subsidy through RE grants for each Sub-project to ensure its FIRR not less than 10 percent after capital subsidy.

11. Given that ZESCO is currently the only player providing grid extension services, and it takes some time for the nascent private sector to enter into this market, it is expected that ZESCO will continue to be the primary service provider for grid extension over the next few years during IAES project implementation. However, following the government’s priority to engage the private sector in access expansion, REA will investigate different business models for private sector participation in grid electrification, and use a few attractive PREP sites to pilot the selected business model(s).

12. The three co-financiers will divide the geographic areas for their support to grid extension, including (a) IDA; (b) EU; and (c) government contributions. Each co-financier will provide 100 percent of RE Grant for Sub-projects.

13. The IAES project will adopt a strategy of scale up access starting closer to the existing grid and gradually growing outwards, aiming for the lowest cost and highest return connections first. The project will encourage maximum number of connections by electrifying the areas with low connection costs, creating a larger future revenue base when reaching further out in the more costly and remote areas. The draft REF Operational Manual suggested that project selection criteria would include EIRR not less than 10 percent, FIRR not less than 10 percent after capital subsidies, and project readiness. Selection criteria for project developers would include financial capacity, local community endorsement, technical capacity, management capacity, entrepreneur skills, and track record. After meeting these criteria, the lowest bidder for subsidies would win, given the national uniform tariff scheme.

14. Following this principle, selection of the first batch of sub-projects should focus on densely populated areas that are close to the national grid but currently have no access to electricity. One of the important driving forces is to ensure financial viability and sustainability of these sub-projects. The PREP package has selected the first batch of grid extension sites and conducted pre-feasibility studies, with the project selection criteria of (i) distance to the grids (or renewable resources for off-grid sub-projects); (ii) sufficient load measured by No. of connections, social and economic activities, etc.; (iii) economic IRR, and financial IRR after capital subsidies; and (iv) regional equity.

15. This component would connect about 18,000 new customers, including households, commercial customers (farms blocks, agriculture processing mills, water pumping, shops, etc.), and public facilities (schools, clinics, church, etc.). This component will finance the construction of 33 kV and 11 kV lines to connect the project areas to the national grid, step-down transformers, low voltage distribution networks, poles, and consumer connection services (drop lines, meters, etc.). Independent consultants under PREPs have conducted pre-feasibility studies for 6 grid extension sites as the first batch of investment – Ipusukilo, Lukulu, Mangango, Mtilizi, Mukonchi, and TBZ farm block – with a total investment cost of $11.5 million.

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Sub-Component 2b Isolated Grids (Cost: US$14 million: IDA $6 million, GoZ $4 million, and Project Sponsors $4 million)

16. Independent electricity networks are the practical option for serving towns and other clusters of customers which are distant from the interconnected network. These consist of a generation source (e.g. mini-hydro) energizing a localized electricity distribution network. The regulatory framework and subsidy schemes for mini-grids are quite different from those for grid extensions. Grid extensions are usually developed and invested by utilities such as ZESCO and major private sector players with large financial resources. Mini-grids, on the other hand, are usually developed by local entrepreneurs or community-based organizations. Renewable energy mini-grids, such as mini-hydro, have high initial investment costs but low operation and maintenance costs, compared to diesel generators.

17. There are two potential business models for mini-grids. Currently, ZESCO has 8-9 diesel stations operating at 25-30 cent/kWh, resulting in serious financial strains on ZESCO given the prevailing national tariff of about 3 cent/kWh. At existing ZESCO diesel stations, a private investor can develop low-cost renewable energy projects such as small hydro, and sell power to ZESCO at cost of service under a standardized long-term power purchase agreement (PPA). This will reduce ZESCO’s losses and is a win-win solution for both. ZESCO will build expanded distribution network if necessary, receive capital subsidies from REA, and sell electricity to consumers at a level of their ability to pay.

18. For stand-alone mini-grids, a private developer would build both small hydro power plant and the distribution network and sell electricity to consumers at cost recovery tariff by location under "light handed" regulation. REA may provide partial capital subsidies to the private developers, if the full cost recovery tariff is above consumers’ ability to pay. ERB, ZESCO, and MEWD agreed with both these approaches.

19. This component will support development of isolated mini-hydro power plants wherever resources are available, since these are the least-cost options compared to diesel gensets. In off-grid areas, REA will select mini-grid projects based on transparent selection criteria, organize competitive bidding to concession out these areas to the private sector, and provide partial capital subsidy from the REF. The IDA Credit will be channeled to the REF to provide partial capital subsidies through RE grants to developers that meet established minimum requirements of financial and technical competence as outlined in the REF Operational Manual, and whose projects meet an EIRR not less than 10 percent and a FIRR not less than 10 percent after capital subsidy. In addition, as most local entrepreneurs usually require capacity building, REA will assist project developers, and closely monitor the project implementation to ensure that the construction and operation of the sub-projects are consistent with guidelines and standards specified in the agreement between REA and the Beneficiaries.

20. The two co-financiers will divide the geographic areas for their support to mini-grid, including (a) IDA; and (b) government contributions. Each co-financier will provide 100 percent of RE Grant for Sub-projects.

21. The component would support the installation of one or two mini-grid systems, with initial connections of about 6,000 new customers. This will include construction of about 3-5 MW of mini-hydro power plants, medium and low voltage distribution networks, and associated equipment. Independent consultants under PREPs have conducted pre-feasibility studies for one

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mini-hydro sites – Chikata. Chikata is located 200 km from the main ZESCO grid. It has an existing ZESCO diesel station. To meet the local energy demand, a 3.5 MW mini-hydro power plant is designed, with a total investment cost of $11 million including the mini-hydro power plant and expansion of the distribution network. In addition, EU, SIDA and JICA are supporting five additional mini-hydro PREP sites. This can provide REA with initial hands-on experience in performing the needed due diligence of a rural electrification proposal using “smart” subsidies for isolated grids. The initial projects have been selected in areas where grid-connected power is deemed unviable in the short to medium term and/or where an economically competitive local energy source is available.

Sub-Component 2c Solar PV Systems (Total Cost $9 million: IDA $4 million, GEF $2.5 million, consumers $2.5 million)

22. Solar photovoltaic (PV) systems are a practical option for serving electricity needs which are relatively small and remote. To date, the PV market in Zambia is dominated by donor funded sales for government and mission institutions such as schools, clinics, and related staff housing. The maintenance of the institutional PV systems, however, has been identified as a major problem, leading to premature failure or sub-optimal performance of many existing systems. Most systems are sold with one year maintenance contracts, and battery and light replacements, which have not been anticipated in operational budgets, are additional problems. In the mean time, Zambia has a very small household market segment for solar PV systems, and affordability to pay for the high upfront costs for solar home systems is the major barrier to expanding the household market.

23. Project Design: The project strategy is to aggregate solar PV systems in schools, clinics, and household markets in one or more contiguous districts to ensure commercial viability and reach an economy of scale. This component will support a number of “Sustainable Solar Market Packages” (SSMP) to supply, install and maintain public sector-funded PV systems for schools, health and other public facilities, and sales to households on a semi-commercial basis. Each tender will be for a minimum number of institutional PV systems and solar home systems so that it will provide a commercial basis in the same area to attract private dealers to provide sustaining services in the area. This 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. This will place a high level of responsibility on the contractor to supply and install a high level of quality, and establish a decentralized maintenance capacity to ensure effective operation of the systems for a period of up to five years. The core element of the design is to aggregate the demand for PV for rural institutions to provide an anchor or critical mass of business to provide a feasible basis for a solar operator to serve the household market segment on a commercial basis.

24. In summary, this approach is designed to have the following advantages:

Aggregation of anchor loads/systems (schools and health care facilities) in a relatively compact area to minimize transport related cost of supply and maintenance. This also reduces monitoring and supervision costs.

Standardization of equipment to reduce costs through bulk procurement and minimizing cost of carrying spares.

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Ability to more effectively sell/service systems for households and other uses using the infrastructure built to serve anchor loads and through increased affordability obtained from partial grants made available through the project.

Long term maintenance assured within contract and backed by performance bond.

Incentives to serve households and commercial establishments in area through the service.

Competitive contract award to reduce cost.

Standardization of documentation and streamlining of procedures to minimize transactions time and cost.

Capacity building and consumer outreach and education to improve ability of contractors to provide services and to consumers to use the PV systems more effectively.

25. For the household market, this project will assist the local solar companies to deepen market penetration in the household segment with certified solar home systems by focusing on sales of affordable but also good quality smaller size systems and operating in the neighborhood of institutional installations to reach an economy of scale. Consumers’ low ability to pay for the high upfront costs of SHS remains to be the major barrier to the solar market development. To overcome this barrier, this subcomponent will assist local dealers in marketing affordable small systems in the range of 1 to 20 Wp, such as PV-power LED flashlights, solar lanterns that provide basic lighting services.

26. Principal Feature of SSMP: Each SSMP contract would provide for the supply of solar PV energy equipment with medium (five years with option to extend) maintenance and repair service contracts to schools, clinics, and other community facilities in a defined rural area, bundled with requirements and incentives for commercial sales to households, business and other non-government customers in the same area. The SSMP contract will also provide for repair, upgrade and maintenance of existing PV systems at public facilities in districts covered under the SSMP. The principal features of the SSMP contract include the following:

Technical specifications based on international standards will be used in the procurement to ensure that the installed systems provide reliable services.3 Particular attention will be paid to reducing/eliminating the incidence of misuse and theft.

Medium term service agreement for repair and maintenance of the public service systems, including battery replacement

Service standards and warranties backed by performance bond.

Consumer education and user training.

Community mobilization and socialization, particularly to create a sense of ownership of the PV systems for public facilities.

Obligations backed by performance-based incentives to commercially sell PV systems for households and other customers in the SSMP area.

27. Selection and Procurement of SSMP: The size of each contract package is expected to be of the order of US$0.5 to 1.5 million in order to encourage bidding by credible and 3 See “Guidance on Establishing Procurement Specifications in Photovoltaics Projects” at Technical Standards and Specifications for Photovoltaics in http://www.worldbank.org/retoolkit.

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experienced international firms along with local partners who have local knowledge, and on-the-ground reach and capacity. Bids for multiple contracts will be permitted. Candidate districts will be selected from among the 18 Level 4 and 5 districts that have adequate number of un-electrified public facilities. The selections will be made in consultations with the Ministry of Local Government and with concurrence of the respective District Development Coordinating Committees (DDCC). The public service systems to be supported will be based on consultations with the relevant ministries and the DDCC, subject to budgetary constraints. REA will award each SSMP contract using ICB procedures to an “SSMP operator”. The contract would be sized to provide sufficient volume of sales for the SSMP operator to sustain the services on an efficient, affordable basis. Preparation is underway for the first package which will serve as a pilot to launch the SSMP component. The preparation is being undertaken by consultants under REA supervision and in close consultation with a Working Group. Please see Annex 6 for detailed implementation arrangement.

28. Eligible Goods and Services: They comprise of the following:

Supply and installation of PV systems in new health, education and other public facilities, or repair and upgrade of PV systems in existing facilities. The facilities to be served and services to be provided by the PV systems will be based on decisions made by the line ministries subject to budget constraints and include among others:

Rural health centers and health posts for lighting, communications, cold chains vaccination, other medical appliances, and staff quarters.

Rural basic, community, primary and post-primary schools for lighting and preparation of materials and administration by teachers, computers, communications, sciences and workshop activities, student dormitories and staff quarters.

Other facilities may include potable water supply, community centers, ICT facilities, street lighting etc.

The components/systems include PV modules and support structures, batteries, controllers, wiring and connectors, safety equipment, switches, sensors, end-use appliances such as lights, vaccine refrigerators, HF radios, tools, instruments and meters, transport, installation services, and user/technical manuals.

Renovate and upgrade existing PV systems serving public facilities in the SSMP area. The line ministries will be responsible for selecting these facilities and PV applications.

Supply and installation of PV systems for households and other commercial customers including lighting (LED and CFL-based lighting, lanterns, flashlights etc.), home systems as well as larger PV systems that can provide electricity for mobile phone charging, radio, TV etc. Systems for enterprises may be larger to include power for refrigeration, fans, and communication. These are sold commercially with the SSMP contractor receiving a performance-based grant from GEF of up to $5/Wp.

Establishment of sales and service capacity in the area and provision of maintenance/repair services for public systems, including systems that were renovated and upgraded, for an estimated five years. The maintenance contract can be extended. This service facility would also provide commercial sales and services in the SSMP area for households and businesses within the area.

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Optionally and under contract amendments, as needed, the SSMP contractor may be required to supply, install and maintain additional systems for public institutions during the period of the existing contract.

29. Targeted Number of PV Systems: This component will fund about ten SSMP for about 250 institutional and community applications in rural areas in several contiguous districts and electrify about 10,000 households, increasing electricity coverage rate in the SSMP areas from current 2 percent to about 20 percent. The indicative ten SSMP packages comprise of the facilities shown in Table A4.2. The population benefiting from improved services available at the public service facilities is estimated to be about 100,000. The actual composition of facilities in each SSMP will be based on selections made by the concerned ministries and REA. The 10,000 households is indicative only, the actual numbers of systems and their capacities sold to households and other customers will be based on market response. This will be done as each SSMP is being prepared for bidding. To provide the levels of services noted above will require 210 kWp of PV systems for public facilities and 200 kWp for households.

Table A4.2 Representative Facilities Served

Rural Health Posts 60 25%Rural Health Centers 35 15%Basic Schools 150 60%Secondary Schools 5 2%Total Number of Public Systems 250 100%The proportion of facilities is based on benchmarks or norms established by the Ministries of Education and Health with respect to health and education services coverage in rural areas.

30. Financing: IDA funds will finance the supply and installation of the institutional systems. GEF grant will be used to cover the cost of the medium term maintenance contract, including battery replacement and spare parts, in order to demonstrate the effectiveness of the SSMP business model to provide reliable services. GEF funding is intended to remove the key barrier of sustainability. It also includes training to local staff and technicians on solar PV maintenance. Once this model demonstrates successful, it is expected that the MOE and MOH would better understand the importance of maintenance, and replicate this model on their own. As such, the project would leverage at least $5 million from MOE and MOH for supply, installation, and maintenance of additional solar PV systems in schools and clinics. This has been confirmed through the consultations with the MOE and MOH.

31. The household systems will be provided on a market basis. Since the solar PV household market is still at very nascent stage in Zambia, and currently there are no solar dealers in remote rural areas except a few suppliers located in Lusaka, GEF grant is requested to provide performance-based incentives for local dealers to kick-start the solar PV household market in Zambia. REA would provide eligible dealers a subsidy of up to US$5 per Wp for qualified household systems, financed by GEF. The grants are expected to cover the incremental costs of solar PV systems and additional costs incurred by the companies in developing their sales and service capabilities in deep rural markets. The REF is expected to gradually increase its contribution to the solar PV incentive programs to ensure sustainability.

32. The RE grant will be disbursed only after independent verifications of sales, installations and technical compliance. The verifications and the strict application of technical and other

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requirements provide a layer of quality assurance that is expected to increase market confidence in the technology and the companies.

33. The estimated cost of the ten indicative SSMP packages is $9 million, to be financed by the following sources:

(a) IDA will finance 100 percent of capital costs of the solar PV systems in health service and school systems.

(b) GEF will finance (i) 100 percent of five year maintenance and repair contract including battery replacement and spare parts with $1.5 million; and (ii) 100 percent of RE grants for solar home systems with $1 million. Table A4.3 gives the sources and uses of funds.

Table A4.3 Financing Plan for 10 SSMP (US$ Million)SSMP Sources  IDA  GEF Consumers Total

Solar PV Systems in Public Facilities

4 4

5-year maintenance contract, including replacements and spare parts

1.5 1.5

Household & Commercial Systems

1 2.5 3.5

Total 4 2.5 2.5 9

34. All PV systems will comply with international standards, issued by the International Electro-technical Committee (IEC), PV Global Approval Program, or equivalent organizations. Where national/regional standards are to be used, a standards harmonization study under project preparation will confirm that such national/regional standards are consistent with international practices and standards. Specific and additional attention must be paid to ensure that these systems will function reliably in Zambian rural conditions, including preventing termite damage, theft and vandalism, and limited availability of skilled technicians, especially in rural areas. Specifically, the education and health facility equipment specifications will adopt the recommendations of the Econ Analysis study, “Zambia: Energy and ICT Access Project – Cross-sectoral Links with Education and Health.” Specifications for community water supply and other public service applications will be developed as needed.

Component 3 Technical Assistance (Cost $5.5 million: GEF $2 million, EU $3 million, and Project Sponsors matching grant $0.5 million) – to be implemented by REA and ZESCO

35. This component will provide technical assistance (TA) support to REA, MEWD, ERB, ZESCO, and the private sector, complementing other ongoing or proposed TA activities by other donors, including those from SIDA, JICA, and ESMAP SME. The TA package is designed to support the full range of project stakeholders as required to support project objectives.

Sub-Component 3a TA to ZESCO

36. EU grant will (i) assist ZESCO in developing a Performance Improvement Plan on how to enhance revenues and reduce costs; and (ii) support ZESCO in technical design of optimum distribution system improvement, loss reduction programs, intensification, and grid extension

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investments, and preparation of additional intensification and grid extension sites. These activities will be implemented by ZESCO.

Sub-Component 3b TA to REA

37. GEF funding will (i) assist REA in capacity building and implementation support, including preparation of additional small hydro PREP sites and SSMPs; (ii) support MEWD, ERB, MOE, MOH, and ECZ on sector long-term financial viability, energy sector strategies, renewable energy policy, regulations, outreach, capacity building, and environmental management guidelines; and (iii) provide advisory services, matching grants, and training to the private developers and local financial institutions. These activities will be implemented by REA.

Rural Electrification Authority

38. Preparation for two to three mini-grid PREP packages (GEF funding). This will support REA preparation of three additional mini-grid PREP sites, particularly mini-hydro sites, including pre-feasibility studies and bidding documents.

39. Preparation of nine Sustainable Solar Market Packages (GEF funding). This will support REA preparation of pilot scheme of provision solar PV electricity services to health, education, household and commercial consumers; preparation of tendering document and assessing the economic feasibility of these services. In order to rapidly scale up the implementation of the SSMP in other districts, early support is needed to prepare these market packages. Services required including consumer market survey, identification of health and education facilities to be energized, preparing technical specifications, preparing procurement documents and assisting REA in contract award, contract monitoring and evaluation. This assignment will also assist REA in designing the procurement tendering documents that aggregate demand for solar PV. The tendering document should be more concise and simpler to minimize tendering and evaluation overheads. The project documentation and technical specifications for implementation of solar PV systems should focus on standardization of system configurations, use of high quality materials, installation codes of practice, and acceptance of testing procedures. It will also develop specifications for solar PV packages for remote facilities.

40. Implementation support to REA (GEF funding). During project implementation, REA will need to hire short-term consultants and advisors to assist them in reviewing and evaluating project proposals. REA is implementing a new business model in Zambia and has limited staff, and additional consultants and expertise will be necessary to help REA establishing good practices and increasing the confidence of project developers/investors in REA. Consultancy services are required to help REA advance renewable energy subprojects, particularly small hydro and SSMP, through procurement and financial closure and approval of the transactions. The assignment therefore will involve the preparation of viable business models for the operation of the mini-grids and development of a strategy for marketing the transaction packages to potential investors/developers. Among others, the Advisor must prepare the Terms of Reference for mini-grid operators, Request for Proposals (RFP); and draft contracts, including the review and enhancement of the earlier drafted Energy Services Contract (ESC). The Advisor should assist in preparation of marketing the transactions, and provide bidding and negotiations support up to final conclusion of contract agreement with a qualified operator.

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41. Capacity Building for REA (GEF funding): This will provide training and capacity building to REA staff (incremental needs beyond ongoing SIDA support) in (1) implementing the commercial-oriented rural electrification framework – REF Operational Guidelines; (2) preparation and award of SSMP market packages and mini-grid packages, building on the experiences and lessons learned during the pilot project implementation; (3) preparing and adopting regulatory, bidding, contracting procedures; tariff setting and drafting legal agreements related to qualified third party contracts for the mini-grid concessions; (4) quality assurance and performance monitoring, and monitoring and evaluation of social, economic and development impacts; (5) procurement and financial management so that they cam be in compliance with all donors’ requirements; and (6) environment and social safeguard. In addition, this component will also assist REA in building capacity and increasing awareness of local stakeholders to promote rural electrification and renewable energy with government officials, utilities, local financial institutions, micro-finance institutions, communities, and consumers.

ZESCO (EU Funding)

42. Develop a Performance Improvement Plan: This task will help ZESCO develop a Performance Improvement Plan to achieve financial turnaround. It will assist ZESCO in developing implementation strategies and investment plan. Such a plan includes: (i) revenue enhancement: to conclude re-negotiations with CEC and increase tariff to the mining customers as soon as possible, to meter all new and existing customers, to reduce theft, to reduce arrears, and to increase customer base; (ii) cost reduction: to reduce distribution losses, and to cut staffing costs; and (iii) establishment of internal performance-based scheme to provide incentives and accountability for ZESCO management and staff to achieve these goals.

43. Consulting services of technical design of ZESCO sub-projects: ZESCO will procure consulting services to support technical design and supervision of implementation of sub-projects under Component 1. This includes: (a) optimum distribution network for loss reduction; (b) reinforcement of existing distribution networks to improve capacity and quality of service; (c) intensification to connect new customers; and (d) grid extension.

44. Preparation of additional PREP sites for grid extension and intensification: This will assist ZESCO in developing approximately 15 PREP sites, including preparation of technical, economic, financial, environment, and social feasibilities. These PREP sites will follow the project selection criteria in the REF Operational Manual.

45. Training: This will provide technical training to ZESCO in (a) load forecast methods; (b) optimum design of distribution network for loss reduction; (c) substation design; (d) contract and procurement management, financial management, and project management; and (e) EE/DSM.

MEWD and ERB (GEF Funding)

46. REA will procure consulting services and conduct training for (i) ERB on multi-year tariff framework to reach full cost recovery, renewable energy regulations, and monitoring performance benchmarks; and (ii) for MEWD on energy sector implementation strategies including renewable energy policy.

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Ministry of Health and Education (GEF Funding)

47. This component will provide training and raise awareness of SSMP concept and implementation support to MOE and MOH.

Private Developers (GEF Funding)

48. REA will manage the cost-sharing project preparation and business development facility and an innovation fund to assist qualified local entrepreneurs in developing rural electrification and renewable energy projects. The project preparation and business development facility can assist qualified local private developers in conducting pre-feasibility studies and feasibility studies, assessing market potentials, developing business plans, etc. The innovation fund can assist local entrepreneurs and other energy end-users in local communities to identify market opportunities for productive activities from rural electrification and renewable energy services in sectors such as water pumping for irrigation, cottage industry, agro-industry processing, crop and meat drying and freezing, drinking water, and telecommunications. The focus on providing energy for productive activities will assist the rural poor to generate incomes to pay for the energy services received and promote the local economy.

49. This business development assistance will also provide capacity building to local entrepreneurs in the form of advisory services and training courses in renewable energy technologies, installation and maintenance, after-sale services, business planning, marketing, and productive uses. It will also provide easily accessible useful information on technologies, project development, resource potential, etc. to local private developers.

50. The SSMP contractor will be eligible to receive cost-shared support to offset some of the incremental costs incurred by the companies in developing their sales and service capabilities in deep rural areas and in strengthening their capacities. The amount of annual support to be funded by the GEF grant will be up to $10,000 per year per SSMP for the first three years of the contract. Eligible activities include marketing and communications, market surveys, PV component testing and certification, business and financial management, technician training and certification, community mobilization and socialization, etc.

Local Financial Institutions (GEF Funding)

51. This component will build capacity and increase awareness of local financial institutions on renewable energy through training local financial institutions and micro-finance institutions in appraising renewable energy projects.

52. Furthermore, SIDA plans to fund programmatic capacity building and institutional strengthening to MEWD, REA, ERB, and ZESCO in the power sector. Such support will focus on the following areas: (a) support MEWD in energy sector policies and strategies such as implementation of National Energy Policy, re-negotiation of power agreements with the mining sector, access expansion, sector syndication plan, and biofuels; (b) support REA in preparation of additional PREP sites, evaluation of proposals, and monitoring project implementation; (c) support ERB in “light-handed” regulation for off-grid developers and other regulatory capacity building; and (d) capacity building for ZESCO.

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Annex 5: Project Costs

ZAMBIA: Increased Access to Electricity Services

Project Cost By Component and/or Activity LocalUS $million

ForeignUS $million

TotalUS $million

1a Reinforcement 1.4 5.8 7.21b. Intensification 1.8 7.0 8.81c. EE/DSM 0.3 1.3 1.62a. Grid Extension 4.0 16.0 20.02b. Isolated Grids 2.2 9.0 11.22c. Solar PV 1.4 5.8 7.23. TA 0.9 3.5 4.4

Total Baseline Cost 60.4Physical Contingencies 7.6Price Contingencies 7.6

Total Project Costs 75.5Total Financing Required 75.5

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Annex 6: Implementation Arrangements

ZAMBIA: Increased Access to Electricity Services

1. This project has two implementing agencies: (i) ZESCO for Component No. 1 and 3a; and (ii) REA for Component No. 2 and 3b. Beyond these two agencies, there are a number of additional project stakeholders involved in rural access expansion, including MEWD, REB, project sponsors, and customers. A project steering committee will be set up, consisting of MOFNP, MEWD, REA, ZESCO, MOH, MOE, and Ministry of Local Government, to be chaired by the Permanent Secretary of MEWD, to provide policy guidance and coordination. The Rural Electrification Authority will be responsible for consolidated project reporting on a quarterly basis (FMRs) as well as other project reporting requirements such as the mid-term review. Figure A6.1 outlines implementation arrangement. Specific implementation arrangement for each component is described as below:

2. Reinforcement and Intensification: ZESCO will be the implementing agency, responsible for procurement, financial management, and supervision of construction, and O&M. ZESCO will procure supply and installation contractors to construct sub-projects, following the Bank procurement guidelines, in order to shorten the construction period at a lower cost.

3. Grid extension: Donor funds will flow to the designated account at REF. REA will be responsible for developing project selection criteria, evaluating proposals from ZESCO, and providing partial capital subsidies to ZESCO based on appropriate contractual arrangements between REA and ZESCO as defined in the REF Operational Manual. ZESCO is the primary service provider, responsible for procurement following the World Bank guidelines, supervision of construction and O&M, and will also adopt supply and installation contracts for construction.

4. Isolated Grids: IDA funds will flow to the designated account at REF. Private Companies and cooperatives will be the service providers, responsible for procurement, construction and operation of the sub-projects. REA will support mini-grid development via (a) establishing transparent, competitive selection criteria; (b) evaluating proposals for potential service providers, (c) providing partial capital subsidy from the REF, capitalized by the IDA and the government, to ensure financial viability of the sub-projects; and (d) building capacity for the project developers, monitoring and enforcement of project implementation. The service providers will operate on a commercial basis, with tariff revenue covering the cost of service. The developers will follow commercial practice for procurement acceptable to the Bank.

5. Solar PV: IDA funds will flow to the designated account at REF. The Working Group consisting of REA, MOE and MOH, will select a site for SSMP. Such a site should be located in an area where ZESCO grid will not arrive over the next five years and there are sufficient numbers of un-electrified public facilities. REA will then prepare the SSMP and bidding documents, and organize the bidding process. The Working Group will evaluate the bids, and REA will award the contracts to selected eligible private companies, who will provide supply, installation, and maintenance services for solar PV in public facilities and households in the selected area. REA will follow the World Bank Procurement Guidelines.

6. Success of the SSMP concept and the ability to reap the maximum benefits will require close coordination and cooperation between the concerned line ministries and REA. MOH, MOE and other line ministries will continue to have the lead responsibilities for planning, facilities needs assessment, prioritization, provision of funding for capital investments (net of

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any grants REA can mobilize), co-funding for O&M for public facilities, and their reporting requirements. REA will be responsible for off grid electrification planning, providing incentives for households and commercial sales, co-funding capital investments and O&M for public facilities and capacity building, SSMP contracting, monitoring and supervision and reporting.

7. REA has established a Working Group chaired by REA and comprising of representatives of MOE, MOH, and local government. The Working Group has the following joint responsibilities: inter-ministerial coordination, ensuring good cooperation and information sharing among ministries, ensuring the timely and adequate availability of budgets, development of the SSMP requirements; bid package preparation and evaluation; monitoring and evaluation as well as guiding social mobilization, promotional activities, and consultations. After consultation with MOH and MOE, REA has recommended Lukulu District in the Western Province as the first pilot site to demonstrate the SSMP concept. As REA is responsible for rural electrification planning, they are best positioned to coordinate the planning process to determine where solar PV systems should be installed. Then REA is responsible for issuing, evaluating, and awarding the contract, with inputs from the working group. The REA, together with the key line ministries will be entering into a Memorandum of Understanding that would spell out each organization’s roles and responsibilities, prior to project effectiveness.

8. The principal objectives of the Working Group are as follows:

Act as a cooperative link among government agencies and related institutions.

Act as a promotional and advisory entity to built support from the government, staff of concerned agencies, as well as donors.

Advise and guide the harmonized implementation of the SSMP packages.

Provide advice on harmonization of conditionality and procedures associated with donor fund mobilization and procurement.

Provide a venue for addressing and resolving issues.

Provide and disseminate information to concerned parties.

9. The main outputs of the Working Group would include:

Drafting Memorandum of Agreement. The agreement to be signed between REA and each of the line ministries will lay out the roles and responsibilities of each parties, their joint responsibilities, define modalities for cooperation, inter-organization communication and reporting, approval procedures, planning and budgeting, facilitating the mobilization of investment and O&M financing, resolving differences between ministerial, REA and donor financing, procurement and reporting requirements, among others. The Memorandum of Agreement will be signed between the CEO of REA and the Permanent Secretaries of the Ministries.

Guiding consultants in preparation of detailed SSMP Operational Manual. The manual will detail procedures and guidelines for needs assessment, social mobilization, SSMP package assembly, technical specifications, procurement, award of funding, monitoring and evaluation, capacity building services provision, reporting requirements, schedules and preparation and update of annual plans and budgets. The working group will also

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develop a mechanism to ensure sustainable operation and maintenance of solar PV systems after GEF funding phase out.

Planning and budgeting. The Working Group will guide and obtain support from their agencies for the integrated planning of facilities to be provided with PV systems including area-wise packaging of facilities and sequencing of investments, prepare annual budgets, and help mobilize financing.

Guiding the preparation and award of Sustainable Solar Market Packages. The Working Group will facilitate access to information, assist in coordinating and prioritising the investments to be considered within each package, help resolve technical differences so that harmonized PV systems can be specified, provide advice in preparation of bid documents, facilitate the necessary approvals prior to bidding, bid evaluation and recommendation for award and contract supervision.

10. The principal steps and the lead responsibilities are as follows:

Line ministries select the priority areas, facilities and services to be provided under the SSMP and existing facilities to be renovated and/or upgraded.

Line ministries obtain commitment of funds.

The Working Group identifies the areas to be grouped into each SSMP.

The REA lead the preparation and execution of the SSMP contract, under the guidance of the Working Group. The work comprises of the following tasks

a. Public facilities survey and PV consumer market assessments for SSMP Areas to determine the new public facility requirements, need for repair/upgrade of existing facilities, and to assess consumer needs and willingness to pay. The survey will confirm that the facilities will not be receiving ZESCO or other grid-based electricity services in the next five-ten years.

b. Technical design and costing of PV Systems for the public facilities to be included in the SSMP. This includes requirements for facilities without power as well as power systems that need to be repaired and/or upgraded.

c. Preparation of estimates of targets and budget requirements over a five year period for the SSMP packages and assessing economic viability.

d. Preparation of model business plan and assess its financial viability to ensure that the SSMP contractor will indeed be able to have a sustainable business.

e. Confirmation of assessment and availability of co-financing through consultations with the line ministries.

f. Preparation of the SSMP implementation plan defining the organizational responsibilities, project targets and timetables as well as monitoring and supervision requirements.. The implementation plan will include a communications strategy for (i) raising awareness and informing local governments and communities of the SSMP opportunities and obligations; and (ii) informing and mobilizing prospective companies to bid for and undertake SSMP contracts.

g. Preparation of bid documents for SSMP, including procurement notices, requests for expressions and interest, request for proposals, pre-qualification requirements, scope of work and technical requirements, contract documents including pro-forma

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agreements between key partners, evaluation criteria, etc. These will comply with GoZ and World Bank procurement requirements.

h. Promotion and marketing of SSMP in bidding, bid evaluation and contract award.

i. Monitoring and supervising the SSMP contractor and in reporting to the concerned Ministries and the World Bank.

11. Technical Assistance: ZESCO is responsible for procurement of consulting services and training for ZESCO, MEWD, and ERB to implement Component 3a funded by the EU Grant. REA is responsible for procurement of consulting services and training for REA, MEWD, ERB, MOE, MOH, and private developers to implement Component 3b funded by GEF Grant.

Figure A6.1 Project Implementation Chart

Project Steering Committee MOFNP, MEWD, REA, ZESCO, MOH, MOE, MOLG

Chair: PS of MEWD

ZESCO REA (Intensification, EE/DSM, TA) (Grid, mini-grid, solar PV, TA)

ZESCO Private Developers MEWD, ERB, MOE, MOH, (Grid extension) (Mini-grids and Solar PV) Private Developers (TA)

Project Steering Committee

12. The Project Steering Committee is responsible for, inter alia: (i) providing overall advice and guidance to the project, and ensuring recommendations made by the project will be incorporated in policy and regulatory frameworks and implemented; (ii) reviewing semi-annually progress made towards achieving the Project’s objectives; (iii) facilitating the coordination of Project activities among the entities represented in the Steering Committee, and making recommendations for removal of any obstacles to the implementation of the Project; and (iv) providing comments on reports prepared by the agencies involved in the implementation of the Project for the benefit of the Bank and the Co-financiers.

ZESCO

13. The rural electrification unit under the Distribution Directorate of ZESCO will be responsible for implementing the intensification, grid extension, and EE/DSM components. A dedicated project coordinator and an implementation team will be assigned within the rural electrification unit. ZESCO will adopt supply and installation contracts for construction of intensification and grid extension. ZESCO’s procurement, financial management (FM), and environmental and social affairs units will provide support, similar to the arrangement under the

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Bank Power Rehabilitation Project. ZESCO has strong technical, procurement, FM and environment capacity to implement this project.

14. The Technical Support Services unit was established in 1997 under Engineering Development Directorate. The Unit was established to provide technical support to the corporation in the areas of standardization, quality of supply, substation grounding, insulation enhancement and new technological trends. The Unit has an establishment of sixteen (16) officers -- Senior Manager; Principal Project Engineer; Standardization Engineer; Field Services Electrical Engineer; Quality Of Supply Engineer; Field Services Chemical Engineer; Document Management & Drawing Office; Company & National Standards Engineer; and Regional & International Standards Engineer. They are responsible for (a) implementation of quality of supply measuring and monitoring system; (b) implementation of system measurement and maintenance; (c) completion and implementation of the transformer application guide; (d) insulation enhancement for installations located in areas where the pollution levels are very high; and (e) development of regional standards for the enhancement of electrification.

15. ZESCO has an Environmental and Social Affairs Unit, established in 1996 under the Bank Power Rehabilitation Project. They are responsible for environmental and social issues related to ZESCO operations. The unit consists of 15 staff, including environmental scientists, social scientists, hydrologists, ecologists, land acquisition and resettlement specialist, environmental technology specialists, etc. Many of the staff holds a bachelor and master degree. They have undertaken numerous projects to conduct environmental impact assessment, develop environmental management plan, and address resettlement issues for ZESCO generation, transmission, distribution, rural electrification, power rehabilitation projects. In sum, ZESCO has extensive expertise and strong capacity in environmental and social issues.

REA

16. REA’s capacity is crucial to the success of the IAES project. REA has recently recruited eleven new staff on board to strengthen its capacity, who has received essential training. REA has developed an organization structure with three departments: (i) Planning & Projects Department with a senior manager, three technical specialists, an economist, a rural electrification planning/GIS expert, and an environment and social expert; (ii) Finance & Administration Department with a manager, a financial management specialist, a legal expert, a procurement specialist, and supporting staff; and (iii) Public Relations Department with a manager, a communication specialist, and a community expert. Figure A6.2 shows REA organization structure. REA will assign (a) a dedicated project coordinator to manage the day-to-day implementation of the project; and (b) four project managers responsible for the grid, mini-grid, PV, and capacity building components, to effectively manage various components of the project to be implemented by REA. In addition, REA also prepared draft REF Operational Manual, Procurement, Financial Management, Training, and Recruitment Manuals. Advisory services to REA are being provided by SIDA financed consultancy. Given that REA is a young organization, REA and ZESCO have agreed to tap ZESCO’s expertise in procurement and environmental/social aspects to REA whenever necessary.

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Figure A6.2 REA Organization Structure

REA

Planning & Projects Dept. Finance & Administration Public Relations- Senior Manager - Manager - Manager- Electric Engineer (grid manager) - Financial Management - Communications- Mechanical Engineer (mini-grid manager) - Legal - Community- Economist (solar PV manager) - Procurement- Civil Engineer (capacity building manager)- Rural electrification planning/GIS- Environment/social

REA and REF Governance Structure and Operational Manual

17. The Rural Electrification Act established the autonomous REA as the institutional mechanism for rural electrification (RE) in Zambia. REA oversees the operations and disbursements of the REF. The Chief Executive (CEO) of REA is appointed by the Board with approval from the Minister of MEWD. The Board, appointed by the Minister of MEWD, consists of seven part time members as follows: (i) Permanent Secretary for Energy; (ii) Permanent Secretary for Local Government; (iii) Permanent Secretary for Finance; (iv) Representative of the Economics Association of Zambia; (v) Representative of the financial sector (nominated by the Banker’s Association of Zambia); (vi) Representative of a Non-Government Organisation (NGO) engaged in rural development projects; and (vii) Representative of the Engineering Institution of Zambia. Figure 7.1 outlines the institutional set-up for rural electrification in Zambia.

18. The Board was duly appointed and constituted to oversee and support rural electrification under the Act. It is the only body in Zambia charged with supporting and promoting rural electrification in the country. It oversees the REF, which is the major financing mechanism for rural electrification in the country. The REF is intended to leverage funds from government, donors, ZESCO, non-governmental and private sources in rural electrification in the country. 19. The Board’s second function is to support and oversee the provision of technical assistance, training and promotion of rural electrification in Zambia. In this regard, it appoints the CEO of the REA, who, in turn, oversees the operation of the REA. The CEO is the operational arm of the REA, and is supported by a number of staff, a budget, and a programme approved by the Board.

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Figure A6.3: Rural Electrification Institutional Set-up Zambia

20. The management of the REF is vital for the overall confidence in the REA and REF. A commercial bank, the Zambia National Commercial Bank (ZNCB), has been selected for administration of the REF accounts. The selection of the ZNCB followed standard practice in Zambia and was based on guidelines from the MoFNP.

21. Currently, REA has two accounts – one (current) account for the REA operational budget and one (capital) account for funding sub-projects approved by REA. The ZNCB has a network of branches throughout Zambia including rural areas, which was one of the criteria for selecting the bank for the REA. In addition, the ZNCB is able to:

make disbursements effectively;

work closely with the Authority and its delegated representatives;

provide monthly bank statements; and

receive instructions from the REA to make disbursements.

22. Electrification project related payment requests originates from a Contractor and is passed to the Department for Projects and Planning where verifications are made and documents are checked by the staff in the department. If the payment request is supported by the Head of the Department for Projects and Planning, the request is forwarded to the CEO for approval. If the request is approved it is forwarded to the Accountant, together with all supporting documentation, for payment. The Accountant also verifies the supporting documentation before the payment is made effective/the payment voucher is prepared.

23. The management of the two accounts is done internally as follows:

Rural Electrification Authority (Board)

Secretariat to the Authority (CEO)

Project Developers and Partners

Works with project developers

MEWD

The Authority administers and manages the REF

Minister appoints the Authority

Rural ElectrificationFund (REF)

The

Rural ElectrificationAuthority

Authority appoints the CEO

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upon receipt of a bank statement from ZANACO at the end of each month, the accountant undertakes bank reconciliation between the bank statement and the cash book. The cash book contains all payments undertaken in each month.

Every three months, the accountant prepares an income statement indicating the budget lines and the amount actually spent against budgeted amounts. This information is presented to the Board for monitoring and guidance.

At the end of each financial year, which is December the accountant prepares an income statement, balance sheet, and cash flow for that particular year.

The prepared financial statements are then audited by an External Auditor. The external auditor is selected through tender by competitive bidding in consultation with the Office of the Auditor General of the Republic of Zambia.

During the auditing process, a management letter outlying the weaknesses and strengths of the financial statements is written to REA management and later submitted to the Board for scrutiny and approval.

After Board approval, the accounts are signed by the Auditor before the Secretariat send to the Minister’s office.

The Minister of Energy and Water Development submits the audited accounts to Parliament.

24. Beyond these two agencies, there are a number of additional project stakeholders involved in rural access expansion. These include the respective ministries and regulatory bodies, project sponsors, and customers. The roles of each are presented below:

Entity Roles &ResponsibilitiesRural Electrification Authority

Implementing agency for component No. 2, 3, 4, and 6 – grid extension, isolated grids, solar PV, and TA

Establish guidelines, criteria, procedures Rural electrification planning (master plan) Collaborate with ERB on tariff guidelines Review and approve subsidy applications Ensure compliance with GoZ & WB environmental

and social safeguards and procurement requirements

Prepare bidding, evaluation & award subsidies PREPs

Sign legal agreements (e.g. subsidy, implementation, …) with service providers

Subproject supervision (construction, operation, financial performance, etc.)

Technical assistance and business development assistance to service providers

Awareness raising (publicity, sensitization, in conjunction with MEWD)

Information dissemination (technical options, renewable energy resources, …)

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Project Reporting (quarterly)ZESCO Implementing agency for component 1, 5, and 6 –

intensification, EE/DSM, and TA Primary service provider for intensification and

grid extension, responsible for construction, operation, and maintenance of sub-projects, procurement, and FM.

Bulk supplier Signing agreements with REA and ERB Obtaining licenses from ERB Timely billing and collection Fulfill license and subsidy conditions Propose tariffs to ERB for approval Off-taker for power from mini-hydro by private

developersMEWD Promulgates policy & drafts legislation

Channels Government budgetary contributions & levy to REA

Strategic supervision and coordination of energy sector, including IAES project implementation

Awareness raising (in conjunction with REA) Undertakes annual project performance audit

Energy Regulatory Board Approves tariff submissions Collaborates with REA on tariff guidelines Approve & sign licenses (e.g. distribution, retail,

etc.) Arbitration of conflicts among key players Monitors Compliance with license conditions

Ministry of Education and Ministry of Health

Working with REA to implement the SSMP: providing inputs on site selection and evaluation of bidding

Provide funding for capital cost of solar PV in public facilities

Beneficiary community (households, businesses, social sectors, etc)

Possible Equity participation in RE business Up front commitment & contribution by the

beneficiary community Productive application of electricity Participation in planning of RE investment Timely payment of bills Provide security for infrastructure Monitor & Evaluate service provider (annual report

card)Financial Institutions Appraise, approve & supervise loansREA Advisory Consultants Recommending on procedures, guidelines,

practices, criteria, etc Preparation of PREPS Any other related assignments that may arise

Trust Agent Disbursing subsidies based on REA instructionsPrivate Sector Primary service provider for off-grid and solar PV

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systems. Given that ZESCO is currently the only player

providing grid extension services, and it takes some time for the nescient private sector to enter into this market, only a few private sector players with large financial resources are expected to implement grid extensions.

Participate in the bidding for PREPs Present unsolicited proposals to REA Signing agreements with REA Obtaining licenses from ERB Build, operate and maintain Timely billing and collection Fulfill license and subsidy conditions Propose tariffs to ERB for approval

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Annex 7: Financial Management and Disbursement Arrangements

ZAMBIA: Increased Access to Electricity Services

Introduction

1. The FM assessment was carried out on the basis of the Financial Management Practice Manual (November 3, 2005) of the F M Sector Board. The purpose of the assessment is to determine whether the project implementing agencies (IA), REA and ZESCO, have the minimum acceptable financial management arrangements as defined by the Bank’s Operational Policy (OP)/Bank Procedures (BP) 10.02 on Financial Management in Bank assisted operations. These arrangements are aimed at ensuring that: (i) IDA and GEF funds are used only for the purposes intended, in an efficient and economical way; (ii) the funds are properly accounted for; (iii) the periodic financial reports produced/prepared are accurate, reliable and timely; (iv) arrangements exist for an independent audit of the sources and uses of funds;, and (v) systems for safeguarding of the projects’ assets.

Risk Assessment and Mitigation

2. The project will be overseen by a Steering Committee (SC) to be set up, consisting of MEWD, REA, ZESCO, MOH, MOE, and MLGH. The SC will provide policy guidance and coordination and will be chaired by the Permanent Secretary of MEWD. The actual implementation of the project will be the responsibility of ZESCO and REA, bodies established by statute. Both ZESCO and REA will have designated project coordinators to manage the implementation of the IAESP, and will be supported by a full compliment of procurement, financial management and M&E staff.

3. After the assessment the conclusion is that both ZESCO and REA financial management arrangements meet the Bank’s minimum requirements as per OP/BP10.02. The FM risk assessment is summarized in the table below:

Risk RiskRating

Risk Mitigating MeasuresIncorporated into Project Design

Condition of Negotiations, Board or Effectiveness (Y/N?)

Inherent Risks1 Country Level S The central Government’s involvement in the

financial management of the project is limited to the authorization of which Banks can host the designated accounts and providing signatories for signing the withdrawal applications

No

2

Entity Level

ZESCO MThe two implementing agencies ZESCO and REA are statutory bodies created by an Act of Parliament, with own Boards and therefore should be able to operate relatively independently and efficiently.ZESCO has experience in managing an IDA funded project successfully. REA has also experience of managing donor funds working with JICA on producing a Master Plan.

NoREA M

3 Project Level M The FM functions will be performed by units within ZESCO and REA which satisfy the minimum financial management capability

No

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Risk RiskRating

Risk Mitigating MeasuresIncorporated into Project Design

Condition of Negotiations, Board or Effectiveness (Y/N?)

requirements to handle IDA and GEF funds. Control Risks

4 Budgeting M Guidelines will be provided. The IAs will have the project implementation plans and operational manuals. There will be approved annual procurement plans that will provide the basis for budgeting

No

5 Accounting M The units that will be in charge of accounting are adequately staffed. In the case of ZESCO they have a dedicated unit with accounting staff experienced in WB fiduciary requirements and previous WB funded projects. ZESCO has a computerized accounting system. REA has installed a suitable accounting package. In both cases the accounting will be supported by a FM Procedures Manual. All the three REA accounting staff have received training in F M and disbursement arrangements in World Bank Assisted Projects, conducted by Bank staff in June 2007.

No

6 InternalControl

M The control environments at ZESCO and REA are fairly strong. The accounting staff have job descriptions which specify the roles; there is evidence of segregation of duties supported by the existence of F M procedures manual and the approval and authorization limits. At ZESCO the system is further strengthened by the existence of the internal audit unit. Currently at REA there is no internal audit function.

No

7 Funds Flow M Funding for the project will be through three designated accounts in US $ to be held at either, the Central Bank or a Commercial Bank approved by the Ministry of Finance and National Planning, under terms and conditions acceptable to IDA.

No

8 FinancialReporting

M Monthly, quarterly and annual financial reports will be prepared to support monitoring of project implementation.

No

9 Auditing M The Project will be subject to an annual independent external audit oversight. The audit will be carried out by auditors of each of the entities, REA and ZESCO appointed by the respective Boards, subject to IDA review based on qualifications, competence, independence and acceptability of the audit terms of reference.

No

Overall FM Risk Rating

M The overall FM risk is considered moderate; inherent risks are offset by (a) the centralized nature of the accounting functions at both ZESCO and REA i.e. there will be two locations handling funds (b) the IAs have adequate, competent and experienced staff to manage the project FM system (b) internal control environments which allows for segregation of functions and other basic internal control elements; independent internal and external audit functions; and (c) existence of well documented financial procedures.

H-High S-Substantial M-Moderate L-Low

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Strengths

4. Project financial management and control functions will be performed by qualified FM staff with experience of having worked on Bank projects (ZESCO) and the accounting staff at REA have attended training in FM and disbursements in IDA assisted projects. Both IAs have adequate numbers of accounting staff to carry out the project functions. Furthermore, there are adequate arrangements for audit oversight by independent external and internal auditors. These are significant financial management strengths for the project.

Weaknesses and Action Plan

5. REA will finalize the draft Finance and Accounting Procedure Manual, as part of the REA Operational Manual, acceptable to the Bank, prior to project effectiveness.

Implementation Arrangements

6. Detailed Implementation Arrangements are described in Annex 6. The project will be implemented by two agencies, ZESCO and REA. ZESCO will concentrate on the reinforcement and intensification within the existing grids in the peri-urban areas. ZESCO will hire and supply and installation contractors for construction under Component No. 1a and 1b. REA will be responsible for grid extension to rural areas through the provision of a capital subsidy to ZESCO. For isolated grids, the private developers would be responsible for construction, operation and maintenance. REA will also be concessioning out solar packages to the private sector to supply, install and maintain solar PV systems in public institutions, schools, clinics and households/businesses. The two IAs agencies, ZESCO, REA have independent financial management and control arrangements for the project. At REA the FM functions will be carried out by the finance department headed by the Finance and Administration Manager assisted by two accounting support staff. ZESCO has an independent project unit falling under the Engineering development Directorate charged with responsibility for implementing this project which includes as part of the unit, a Chief Accountant and support staff responsible for providing accounting services to the project.

Budgeting

7. Budgeting and other operational procedures will be covered in the, REA/REF Operational Manual and the Finance and Accounting Manual4. At a minimum ZESCO and REA will prepare and get approval of the annual work programs and the procurement plans. These plans will reflect project activities splitting the annual figures from the approved work plan and procurement plan into easy to monitor monthly and quarterly plans. The budgets will be approved by respective Boards of ZESCO and REA. It is worth to mention that REA with the help of JICA are engaged in the preparation of the Rural Electrification Master Plan which will form the basis for most of the projects under the grid extension category.

4 REA have drafts of the two documents at the time of the review which will be circulated to comments before these are finalized.

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Accounting

8. Project accounts will be maintained in United States dollars and Zambia Kwacha. Separate project financial statements will be prepared by ZESCO and REA. The accounts will be prepared on a cash basis. ZESCO has a fully computerized system, Oracle financial management information system which will also be utilized by the IAESP project. REA accounting systems are currently manual. At both IAs the capacity of the accounting staff is adequate to fulfill the accounting and reporting needs of the project. Appropriate charts of accounts will be developed that will be able to capture project activity expenditures and produce information that is useful in the control of the project. There are adequate processes for accounting, reporting, and safeguarding the project assets. The accounting and control procedures will be documented in a financial procedures manual.

Internal Control and Internal Auditing

9. Internal control comprises the whole systems of control, financial or otherwise, established by the implementing agencies in order to: achieve accountability at all levels; carry out the project activities in an orderly and efficient manner; ensure adherence to policies and procedures; safeguard the assets of the project; and secure the reliability and integrity of the accounting records and information.

10. The key elements that ensure sound management and effective internal control system include: (i) organizational structures, systems and procedures (ii) segregation of functions to initiate, authorize, execute and record; (iii) physical control over assets; (iv) clear descriptions of duties and responsibilities; (v) preparation of reconciliation statements; (vi) internal audit (vii) integrity and performance of staff at all levels; and (viii) supervision by management.

11. At varying levels all the above elements of internal control exist at ZESCO and REA. The two IAs have the necessary organization structures, systems and procedures that will allow for the segregation of duties, the checking of each others work by staff to avoid errors and defalcations. Job descriptions exist that defines the roles and responsibilities for staff. Furthermore, the financial accounting systems are supported by operational procedures manuals that provide guidance to staff. Monthly bank reconciliations are prepared which are checked and approved. ZESCO has a well established and adequately staffed internal audit department which enhances the system of internal control. The project transactions will be subject to internal control. REA does not have an internal audit function. This function is not provided for in the ACT that established REA. Nevertheless REA is a recent creation which became operational in 2004 and its size is small to justify the creation of an internal audit function from the word go. There may be need for the internal audit function in future but in the mean time reliance is on management to provide the checks and controls

Funds Flow and Disbursement Arrangements

Bank Accounts

12. IDA Credit - Each of the PIAs (REA and ZESCO) will manage: a US$ Designated Account at a Commercial Bank, under terms and conditions acceptable to IDA. These accounts will be used for disbursements from the IDA Credit and payment for IDA eligible expenditures under the project.

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13. GEF Grant - REA will manage a US$ Designated Account at a Commercial Bank, under terms and conditions acceptable to the Bank for disbursements from the Grant account and payment of eligible expenditures under the project.

14. Signing mandate based on a two panel signature arrangements will apply to all these bank accounts in line with the existing arrangements at ZESCO and REA. The accounting staff are on one panel and the administration and technical staff form another panel and the signing arrangements are that one signatory comes from each panel for the cheque or any instruction to be honored by the Commercial Bank.

15. All the above designated accounts will be reconciled on a monthly basis and the reconciliation statements will be checked and approved by a designated head of the accounting units at ZESCO and REA. Detailed financial and accounting procedures to guide staff are included in the Financial Procedures Manual (FPM).

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IDA Credit TotalUS $33million equivalent

Designated Bank Account B(In USD)

Designated Bank Account C

(In USD)

To support REA activities (US $ 21.5 million):Grid extension – IDA $ 7mMini-grids – IDA $6mSolar PV systems - ( IDA- $ 4m; GEF - $ 2.5m)Technical assistance (GEF – $2m)

To support ZESCO activities (US $ 16 million):Reinforcement and intensification within existing ZESCO grids in peri-urban areas - $ 14mEE/DSM ( IDA - $ 2m)

Replenishments

Designated Bank Account A

(In USD)

GEF Grant Total US $ 4.5 million

Replenishments

16. Funds Flow.

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Disbursement Arrangements

17. Method. Initially the project will use the Transaction-based disbursement procedures with an option to convert to Report-based disbursement procedures5. Under the Transaction-based, disbursements will be made on the basis of documented expenditures on a voucher by voucher documentation of expenditure. During implementation, it is a requirement that the borrower produces un audited quarterly Interim Financial Reports (IFRs), using agreed formats and contents, and submitted to IDA 45 days after the end of the quarter. The IFRs will be reviewed by IDA and comments communicated with the borrower. Where the IFRs over time are consistently found to be adequate, produced and submitted on a timely basis, and the borrower requests conversion to Report-based disbursements, a review will be undertaken by IDA to determine if the Project is eligible for Report-based disbursement. The Report-based procedures are very flexible and allow the Project to move away from the time-consuming Transaction-based method to quarterly advances to the Designated Account based on IFRs. Detailed disbursement procedures will be documented in the FPM and further information is available from the IDA Disbursement Hand Book6.

18. Designated Account (DA) Ceiling and procedures. During Project negotiations the borrower and IDA agree on the ceiling for the DA. After a Financing Agreement has been declared effective by IDA, the borrower can request, by completing Form 2380, “Application for Withdrawal”, for an advance to the DA. The advance to the DA will be used by the borrower to finance IDA and GEF share of eligible project expenditures. Replenishment to the DA for expenditures incurred will be made on the Borrower's request on monthly basis. This involves submitting a Withdrawal Application on the prescribed Form 2380 signed by designated signatories at the MoFNP.

Disbursement Mechanisms

19. The borrower will be availed use of various disbursement methods to access the Credit and the Grant. These methods include advances, direct payment, reimbursement and special commitment.

20. The Advance method involves the use of the DA held at a commercial bank in the borrower country, to make payments for IDA and GEF share of eligible expenditure and request replenishment for amounts spent.

21. The Direct payment method involves a request by the borrower, by submitting completed Form 2380 Application For Withdrawal, to IDA to pay a third party for works, goods or services directly out of the Credit/Grant on behalf of the borrower. Full supporting documentation of the transaction is a requirement for direct payment.

5 The first contracts for goods and services are expected to start in the first quarter of FY09, therefore, disbursement for goods, works, and services is expected to start in FY09.6 World Bank Disbursement Guidelines for Projects

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22. When the borrower pre-finances IDA and GEF share of eligible expenditure as per the Credit agreement from its own resources, the borrower qualifies to seek reimbursement of this expenditure from the proceeds of the Credit or Grant as applicable.

23. IDA can also issue Special Commitments in writing, at the borrower’s request completing Form 1931 Application for Special Commitment and on terms and conditions agreed between the IDA and the borrower, to pay amounts to a third party for eligible expenditures out of the proceeds of the Credit/Grant. The most common example under this method is the payments to a Commercial Bank against expenditures under a Letter of Credit where IDA gives a special commitment (SC) to pay the supplier after satisfying agreed conditions. This method stops commercial banks from blocking funds in the DAs to cover the value of the Letter of Credit, because IDA rules do not allow Credit proceeds to be used as collateral.

Disbursement Table (IDA):

Category Amount of the IDA Credit Allocated

(expressed in USD)

Percentage of Expenditures to be Financed by IDA[Inclusive of Taxes]

(1) ZESCO Reinforcement and Intensification: Goods, works, and services under Component 1a and 1b of the Project (Part 1(a) and 1(b) under the Financing Agreement)

$14,000,000 90%

(2) ZESCO Energy Efficiency and Demand Side Management: Goods, works, and services under Component 1c of the Project (Part 1 (c) under the Financing Agreement)

$2,000,000 100%

(3) REA Grid Extension and Isolated Grids: Goods, works, and services to be financed under RE Grants under Component 2a and 2b of the Project (Part 2 (a) (i) and (ii) under the Financing Agreement)

$13,000,000 100%

(4) REA Solar PV: Goods, works, and services for solar PV under Component 2c of the Project (Part 2 (a) (iii) under the Financing Agreement)

$4,000,000 60%

TOTAL AMOUNT $33,000,000

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Disbursement Table (GEF):

Category Amount of the Grant Allocated (expressed

in USD)

Percentage of Expenditures to be Financed by GEF

[Inclusive of Taxes]

(1) Solar PV: Goods, works, and services under Component 2c the Project (Part 1 (a) in the GEF Grant Agreement)

$2,500,000 40%

(2) Technical Assistance: Goods, consulting services, and training under Component 3b (Part 1 (b) and 2 in the GEF Grant Agreement)

$2,000,000 100%

TOTAL AMOUNT $4,500,000

24. Minimum Withdrawal Application Size. The minimum value of application for direct payment, reimbursement and special commitment to qualify for payment by the disbursement office is specified in the Disbursement Letter. This condition is necessary to exclude small payments that can be made out of the DA.

25. Use of Statement of Expenditure (SOE). The project will use the SOE procedures for all expenditures other than those under contracts subject to the Bank’s prior review. Any contract above these amounts, the contract has to be reviewed by IDA and a no objection given prior to incurring the expenditure. The use of SOE allows the borrower to be replenished for expenditures below the above thresholds per contract, by just summarizing the expenditures incurred on the SOE form, without submitting the supporting documentation. The supporting documentation however will be retained by the REA and ZESCO and the same must be made available for review by periodic IDA supervision missions, internal and external auditors.

26. Disbursement Letter. IDA and GEF will issue separate disbursement letters as part of the Financing Agreement with the borrower. The Disbursement Letter will set out and summarize all the disbursement arrangements and procedures under the project. The letter will have as attachments: The World Bank Disbursement Guidelines for Projects; dated May 1, 2006, sample of form 2380; sample of form used to advise IDA and GEF of Authorized Signatories and their Specimen signatures; and two sample Forms used to account for expenditure- Summary Sheet used for fully documented transactions i.e. transactions whose contracts are above the prior review thresholds, and SOE Form used for transactions below the prior review threshold where no supporting documents are sent to IDA but retained by the borrower for future review by IDA staff and external auditors.

27. Supporting Documentation. The supporting documentation required for each of the disbursement methods are detailed in the Disbursement Guidelines and the Disbursement handbook.

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Financial Reporting and Monitoring

28. Interim Financial Reports (IFRs). The IFRs to be produced quarterly will contain at the minimum the following:

a) A Consolidated Statement of Sources and Uses of Funds, for the period and cumulatively (project life and/or year to date) actual and planned cash inflows and outflows by main income and expenditure classifications (project component, activity and disbursement category); including opening and closing cash balances of the project; and if these IFRs are used as basis of disbursements, a cash flow forecast for the following two quarters.

b) Statement of Expenditure. Itemized statement summarizing eligible expenditures incurred during the quarter, shown by project components, activity and disbursement categories, comparing actual and budgeted.

c) Designated Account Reconciliation Statement, showing replenishments received, payments supported by withdrawal applications, interest earned on the account and the balance at the end of the reporting period, with copies of the bank statements

d) Bank Reconciliation Statement for each of the Designated bank account in local currency, including copies of the respective bank statements

29. Monitoring. The quarterly IFRs will be submitted respectively to at least: – (i) the Project Steering Committee; (ii) the Management and Boards at ZESCO and REA; (iii) IDA and other donors within 45 days after the end of the quarter, for purposes of project implementation monitoring.

30. Audited Annual Financial Statements. The annual financial statements will comprise: (a) A Statement of Sources and Uses of funds, which recognizes the total project as described in the PAD and financing agreements, and not just the part financed by IDA and GEF. These should reflect all project activities, financing, and expenditures, including counterpart funds and funds from other donors.7 (b) Significant Accounting Standards and Policies adopted in preparing the financial statements. The IAES project financial statements will be prepared on a cash basis (c) A Management Assertion that the funds have been expended in accordance with the intended purposes as specified in the Financing Agreement and (d) Any supplementary information or explanations that may be deemed appropriate by management to enhance the presentation of a "true and fair view."

31. The currency of the financial statements will be the United States dollar and the audited reports are due for submission to IDA within 6 months after the end of the financial year.

7 Financial Management Practices Manual in World Bank - Financed Investment operations ( Financial Management Sector Board, World Bank, November 3, 2005)

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32. Specific formats and contents8 of the IFRs and the annual audited financial statements to be agreed and confirmed during negotiations.

External Auditing

33. The IDA Financing Agreement and GEF Grant Agreement will require the submission of audited Annual Financial Statements for the project, within six months after the end of the fiscal year. Besides expressing an opinion on the Annual Financial Statements in compliance with International Standards on Auditing (ISAs), the auditors will be required to produce a report to Project Management on matters arising from the audit, giving observations, comments, and providing recommendations for improvements in accounting, record keeping, operation of internal control systems, reporting and compliance with financial covenants in the IDA and GEF agreements.

34. ZESCO and REA are statutory bodies established with their own procedures for appointing external auditors. The existing auditors for ZESCO and REA can also carry out the project, the auditors meet the IDA selection criteria with respect to qualifications, competence, independence and the TOR being acceptable. In this regard, IDA will have the discretion to evaluate the auditors on this basis and review the TORs. The project audit terms of reference to be ready for IDA review by date of negotiations.

35. ZESCO has been involved in the implementation of an IDA project, Power Rehabilitation Project which closed on 31 December 2005. There were no outstanding audit reports from that project that could affect the presentation of IAES project to the IDA Board. According to OP 10.02 new projects are normally not presented to the Board if there are overdue audit reports or outstanding audit issues on projects implemented by the same implementing entity.

36. Three separate audit reports will be produced under the project, one each by ZESCO and REA for each of the Designated Accounts under their control. In addition, REA will produce a separate audit report for the GEF. ZESCO fiscal year end is March 31 while REA and the Government of Zambia, the borrower, is December 31. For audit purposes the IAES project fiscal year will be from April 1 to March 31. The following audit reports will be required to be submitted by each of the IAs:

# Audit Report on Due Date

1. Financial Statements: Continuing Entity - ZESCO 30 September 2009

2. Financial Statements: Continuing Entity - REA 30 September 2009

3. Financial Statements - ZESCO PIU 30 September 2009

8 The basis will be from a World Bank booklet entitled:“ Financial Monitoring Reports: Guidelines for Borrowers.

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4. Financial Statements –REA PIU 30 September 2009

37. Audit Costs. Upon request by the borrower IDA and GEF can finance reasonable audit costs for this project out of the proceeds of the Credit and Grant.

Supervision Plan

38. Using the FM risk assessment model the IAESP has been assessed as a moderate risk project. Therefore, using the guidelines in the FM manual, the supervision intensity for a moderate risk project is one site visit of week duration. The other supervision activities are desk reviews of, the quarterly IFRs and the annual audit reports. Notwithstanding the favorable assessment that this project is of lower financial management risk, the plan is to provide two supervision visits in the first year of operation to make certain that the systems are in place and working as they have been described. During the same period efforts will made to ensure that reporting systems are adequate and will produce timely IFRs and to provide some guidance mainly to REA who has not implemented an IDA project before. The immediate plan is to work with the IAs to resolve any FM and accounting constraints before the project becomes effective.

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Annex 8: Procurement Arrangements

ZAMBIA: Increased Access to Electricity Services

A. General

1. The legal framework for public procurement in Zambia comprises the Zambia National Tender Board Act (ZTBA) of 1982, the Tender Regulations (TR), and the Procurement Guidelines. The ZTBA provides for the establishment of the Zambia National Tender Board (ZNTB) and the Central Tender Committee (CTC) in the ZNTB. The tender regulations provide for the establishment of tender committees and procurement and supply units (PSUs) in ministries, provinces and agencies. Some aspects of the regulations are supplemented by procurement guidelines.

2. The World Bank Country Procurement Assessment Report (CPAR) for Zambia was conducted in 2002 with close collaboration of the government and Cooperating Partners and formed as one of the inputs for the Public Expenditure and Financial Accountability Report. The procurement reform process is currently being implemented with a new draft procurement law due for presentation to parliament for approval in 2008.

3. The CPAR has identified a number of weaknesses in the country’s procurement legal and regulatory framework, institutional set-up and procedures. This formed the basis for the procurement reform action plan under the Public Expenditure Management and Financial Accountability (PEMFA). Some of the measures to be undertaken under the PEMFA include:

replacing the legal framework with a new Act based on the UNCITRAL Model Law and current international best practice;

excluding executive procurement from the oversight responsibilities of ZNTB and decentralize procurement fully to the procuring entities over a period;

creating an independent appeals body/ mechanism within a new Zambia National Procurement Authority (ZNPA);

introducing procurement planning and a contracts register and a procurement filing system;

re-designing the registration list system; and

Establishing a Professional Procurement Cadre with competitive salaries.

Procurement Arrangements

4. Procurement Guidelines: Procurement for the project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under “IBRD Loans and IDA Credits” dated May 2004 (revised in October 2006); Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004 (revised in October 2006); and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated

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costs, prior review requirements, and time frame are agreed between the Borrower and the Bank and are outlined in the Procurement Plan.

5. Standard Bidding Documents and Manuals: The World Bank Standard Bidding Documents (SBDs) will be used for all tenders for procurement of goods and works under International Competitive Bidding (ICB) and National SBD agreed with (or satisfactory to) the Bank.

6. Procurement of Works. IDA will finance the costs of construction and rehabilitation of electricity grids networks, mini-hydro power stations under ZESCO and private developers. ZESCO will adopt supply and installation contracts. Contracts for works costing US$500,000 equivalent or more per contract will be awarded through International Competitive Bidding, Contracts estimated to cost less than US$500,000 but more than US$50,000 will be awarded on the basis of National Competitive Bidding procedures. Contracts of works estimated to cost less than US$50,000 or equivalent per contract may be procured under lump-sum, fixed-price contracts, awarded on the basis of quotations obtained in writing from at least three local contractors. The request for quotations will include description of the works, including plans and technical specifications as appropriate, required completion time, and a standard form of contract to be included in the REA Operational Manual acceptable to IDA.

7. Procurement of Goods. The total cost of goods under the project is estimated at US$1.20 million. These comprise mostly CFLs, vehicles, laboratory equipment and office equipment including computers, copiers, etc. Goods estimated to cost US$100,000 or more per contract will be procured centrally by the NCO within MACO under ICB procurement method. Where practical, the goods to be purchased will be grouped and be procured under ICB contracts. Goods estimated to cost less than US$100,000 equivalent per contract may be procured through NCB procedures. Goods that are estimated to cost less than US$50,000 equivalent per contract may be procured through shopping procedures in accordance with the procedures set forth in the Bank Guidelines and as may be further reflected in the Operational Manual. Procurement for subprojects will be carried out by the beneficiary based on procedures that will be set forth in the operational manual. These will consist mostly of small contracts.

8. Procurement of Consultants. This procurement category includes costs associated with consultancies and studies. The preferred method of selection for consultant services would be the Quality and Cost Based Selection (QCBS) method. Consultants for financial audits and other repetitive services estimated to cost less than US$50,000 equivalent per contract will be selected through Least Cost Selection (LCS) method. Consultants’ services for training estimated to cost more than US$50,000 equivalent per contract will be procured through the Selection Based on Consultants’ Qualifications (CQS) method. As appropriate, other selection methods such as selection based on a fixed budget (FBS) and Quality Based Selection (QBS) may be used for selection of consultants.

9. Single-source selection of consultants may be used in exceptional cases, when the provisions specified in paragraph 3.9 to 3.12 of the Consultant Guidelines are met, and with the prior clearance with the Bank. Consultants for services meeting the requirements of Section V of the Consultant Guidelines will be selected under the provisions for the Selection of Individual

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Consultants (IC) method. Individual Consultants will be selected through comparison of qualifications and experience of the individual consultants expressing interest in the assignment or those approached directly to select the individual consultant whose qualifications and experience best meets the assignment description requirements. Support to implementation of certain interventions, such as under the Solar PV component may be contracted to specialized organizations with necessary expertise such as research and training institutions or universities subject to clearance by the IDA in the procurement plan.

10. To ensure that priority is given to the identification of suitable and qualified national consultants, short-list for contracts estimated under US$200,000 equivalent per contract may be comprised entirely of national consultants provided that a sufficient number of qualified firms are available. However, if foreign firms have expressed interest, they will not be excluded from consideration. The World Bank Standard Request for Proposals (SRFP) will be used for requesting proposals, and for selection and appointment of consultants.

11. Capacity Building and Training Programs: These are geared towards building capacity and improving management and staff skills. Overall strategy focuses on conducting training and support for training activities through seminars, workshops, and training in the region and abroad based on individual needs as well as group requirements. The REA and ZESCO will prepare and submit to the Bank, for its prior review, an annual training program, as part of the project annual work plan, which shall, inter alia, identify: (a) the training and workshops envisaged; (b) the justification for the training, how it will lead to effective performance and implementation of the project; (c) the personnel to be trained; (d) the selection methods of institutions or individuals conducting such training; (e) the institutions which will conduct training, if already selected; (f) the duration of proposed training; and (g) the cost estimate of the training. The detailed annual training program should outline categories of training, number of trainees, duration of training, staff months, timing, and estimated cost of the training. Report by the trainee upon completion of training would be mandatory.

12. Procurement of Non-Consulting Services: Procurement of non-consulting services will follow procurement procedures similar to those stipulated for the procurement of goods, depending on their nature. The applicable methods shall include NCB and Shopping.

13. Procurement Methods Accordance with Paragraph 3.12 of the Procurement Guidelines and 3.14 of the Consultant Guidelines: Under the mini-grid and solar PV component (Component No. 3 and 4), REA will provide RE grant to cover part of the capital costs to the Beneficiaries, primarily private sector developers, for mini-hydro and solar home systems. The private developers will also contribute their own resources in terms of equity and loans. Consequently, the project will use established private sector or commercial practice customarily used by the Beneficiaries of the Sub-projects under the mini-grid and solar home system program, agreed with the Bank in accordance with the provisions of 3.12 of the Procurement Guidelines, to be further detailed in the Procurement Manual, as part of the REA Operational Manual acceptable to the Bank prior to project effectiveness. Similarly, REA will also provide RE grant to qualified local entrepreneurs to cover up to 50 percent of pre-investment studies under the cost-sharing project preparation and business development facility, while the private developers will contribute their own resources. Therefore, the project will use

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established private sector or commercial practice customarily used by the Beneficiaries of the matching grants under the TA component, agreed with the Bank in accordance with the provisions of 3.14 of the Consultant Guidelines, to be further detailed in the Procurement Manual, as part of the REA Operational Manual acceptable to the Bank prior to project effectiveness. In addition to use of established private sector or commercial practices in accordance with the provisions of paragraph 3.14 of the Consultant Guidelines and paragraph 3.12 - Procurement Guidelines, REA will prepare a Procurement Manual, as part of the REA Operational Manual to reflect (i) these established private sector or commercial practices (ii) the eligibility criteria for funding the activities (iii) a review and approval system for funding that are proposed to be used. These will be reviewed and cleared with the Bank before they are applied. .

B. Assessment of Procurement Capacity

14. A Procurement Capacity Assessment for Increased Access to Energy and Electricity Project was carried out for the procurement under REA and under ZESCO. The assessment reviewed the capacity and experience of the implementing agencies and their organizational structures to carry out procurement under the project.

Procurement Management and Implementation:

15. The ZESCO Procurement Department will manage the procurement under the intensification, grid extension, EE/DSM, and TA components. REA will implement the procurement for solar PV and TA components.

16. Both ZESCO and REA have adequate staff to carry out procurement. The procurement staff for REA has been recruited after the procurement capacity assessment has been carried out. No capacity assessment has therefore been carried out of this new staff. They also have dedicated computers, printers, access to a telephone line (direct in the case of ZESCO) and via switch board in the case of REA, internet and email access. They also have access to photo copiers, facsimile machines and printers. In the case of ZESCO the Procurement Department also has adequate transport. For REA, a vehicle is in the process of being procured. The ZESCO Director of Engineering Development supervises the Procurement Department, who reports to the ZESCO CEO. The ZESCO Procurement Department has been certified in category A with a limit of K2.0 billion by the ZNTB. The Procurement Unit of REA falls under the Administration and Finance Department which is headed by the Administration and Finance Manager who in turn reports to The REA CEO. REA is not yet certified by ZNTB, with a procurement limit of K500 million. Since REA now has a established a procurement department and has a procurement officer in place, its upcoming capacity assessment by ZNTB may lead to increased thresholds.

Main procurement risks:

17. The procurement capacity of the ZESCO is adequate. There are at least five procurement specialists at professional level, one of whom is a manager. They are assisted by three support staff. REA is still in the process of establishing its procurement capacity being a new institution. REA has recruited a new Procurement specialist in October 2007 whose capacity is yet to be assessed by the Bank. The category of the Procurement Department of ZESCO is A under the

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Zambia National Tender Board for a Ministry or institution. REA has yet to be certified. Procurement systems, manuals and internal quality assurance systems and controls for REA are yet to be established. Some risks exist as follows:

i) REA recruited a qualified procurement specialist in April 2007, who left REA in September. As of October 1, 2007, REA hired a new procurement specialist. The Bank team needs to re-assess the adequacy of the qualifications and experience of new procurement officer at REA particularly in public procurement and procurement under Bank assisted projects.

ii) The procurement systems for REA are being developed. These need to be documented in the final Procurement Manual, to be included in the REA Operational Manual which is being prepared. The manual that clearly spells out the procurement roles and responsibilities of all participating institutions, and the roles and responsibilities of the technical / sector specialists within REA.

iii) Procurement planning and monitoring needs to be implemented as part of the procurement under REA and ZESCO.

iv) As some time has passed since ZESCO implemented the Power Rehabilitation Project which was IDA funded, and as the staff under REA are new, some staff will need to undergo training in procurement for bank assisted projects.

v) To facilitate the procurement of goods, works, and services for the isolated grids and solar PV components, the project will use established private sector or commercial practices by the Beneficiaries acceptable to the Bank in accordance with the provisions of 3.12 of the Procurement Guidelines. The procedures to be used will need to be described in general describing how procurement may be carried out under the components including when exception may be made to use Bank procurement procedures. The procedures will include private sector procurement practices to cover the requirements for mini-hydro and solar home systems.

18. Overall risk assessment rating for this project is high, because (i) competent procurement specialist left REA in September9; (ii) REA, the primary coordinating and one of the two implementing agencies for the project, is a newly established institution which is yet to establish its procurement systems. A new procurement specialist has just been recruited; (iii) REA is still in the process of developing its procurement manual outlining the procurement systems for public procurement and for the proposed involvement of the private sector; and (iv) The Bank is yet to review and give a No Objection to the procurement systems, qualifications and experience of the newly recruited procurement specialist. The procurement systems under ZESCO have been in place for a long time. ZESCO has experience in handling procurement under Bank financing, and has demonstrated strong procurement capacity through implementation of the Power Rehabilitation Project. ZESCO will procure most of the works, goods, and services under this project, with a total procurement value of $51 million under Component 1, 2, 5, and 6. The

9 The procurement capacity assessment for REA was medium, after REA hired a qualified procurement specialist in April 2007. After this procurement specialist left REA in September, a new procurement specialist started to work in REA on October 1, 2007. The team will re-assess the procurement capacity of REA, and re-assign a risk rating if the new procurement officer is qualified.

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private sector will be responsible for procuring works, goods, and services under Component 3, 4, and 6, with a total value of $22.5 million. REA is responsible for procuring only part of the works, goods, and services under Component 4 and 6, with a total value of $7 million, less than 9% of the total project cost.

Risk mitigation action plan:

19. The following actions are suggested to mitigate the procurement risk and facilitate the implementation of the program.

ZESCO:

(i) A selected number of ZESCO procurement staff to undergo training in basic and advanced procurement of consultant services and civil works preferably in the first six months of project implementation in order to update themselves on new developments in bank assisted procurement ;

(ii) Update the existing ZESCO Procurement Guidelines to provide IAES specific procurement implementation requirements.

REA:

(iii) The newly recruited REA Procurement Specialist should undergo training in basic procurement of consultant services, goods and civil works preferably in the first six months of project implementation;

(iv) REA should finalize the Procurement Manual and submit to the Bank for its review and No Objection the Procurement Manual. The manual should outline the REA procurement systems, internal controls and quality assurance systems and also clearly define when and how procurement of private sector and commercial practices will be applied under .the isolated Grids and solar home systems under the Solar PV component, to be include in the REA Operational Manual, prior to project effectiveness; and

(v) The Bank should review the qualifications and experience of the newly recruited REA Procurement specialist.

Procurement Plan:

20. A procurement plan for goods, works and consultancy service contracts for the first 18 months of project implementation has been prepared and will be finalized during negotiations. The plan includes relevant information on goods, works and consulting services under the project, prior review thresholds, as well as the timing of each milestone in the procurement process. The procurement schedule will be updated once every six months and reviewed by IDA during supervision missions. The procurement plan requirements for the intensification and grid extension under ZESCO will be packaged in supply and installation contracts by location based on the PREP sites. The procurement plan for REA for Sub-projects will be defined as the sub-projects, as the private sector service providers for mini-hydro are unknown at this stage. The

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procurement for the mini-hydro will include use of commercial practices as a procurement method.

21. As the solar PV systems for the public institutions (schools and clinics) and households cannot be identified up-front, an Operational Manual that provides all the guidelines that would be used in preparing, screening, approving and implementing subprojects will be finalized before project effectiveness (included in the final PIP). As the requirements are defined, the procurement plan will be amended to include the procurement requirements for the Solar PV systems. As appropriate requirements will be grouped into packages based on regions etc and appropriate procurement methods assigned based cost estimates.

Procurement Monitoring and Supervision:

22. The Bank will carry out procurement prior reviews and issue “No-objections for all ICB related procurement. Monitoring and evaluation of procurement performance would be carried out for procurement during IDA implementation supervision missions (frequency of procurement supervision missions proposed is once every 6 months) and through annual ex-post procurement audits. Post reviews of contracts awarded below the prior-review threshold levels will be carried out selectively by IDA during supervision missions and/or by an independent procurement auditor. At a minimum, 1 out of 5 contracts will be subject to post review. In addition, post-reviews of in-country training will be conducted from time to time to review the selection of institutions/ facilitators /course contents/trainees and justifications thereof, and costs incurred.

23. Annual independent physical verification of contract implementation will be carried out and would aim to:

verify that the procurement and contracting procedures and processes followed for the projects were in accordance with the Financing Agreement (FA);

verify technical compliance, physical completion and price competitiveness of each contract in the selected representative sample;

review and comment on contract administration and management issues as dealt with by participating agencies;

review capacity of participating agencies in handling procurement efficiently; and

Identify improvements in the procurement process in the light of any identified deficiencies.

Contract Award Disclosure Requirements:

24. Contract awards done through ICB procurement method shall be consistent with Paragraph 2.60 of the Guidelines: Procurement under IBRD Loans and IDA Credits, May 2004, revised October 1 2006. Within two weeks of receiving the World Bank’s "no objection" (acting on behalf of the cooperating partners) to the recommendation of contract award, the Borrower shall publish in UNDB online and in dgMarket the results identifying the bid and lot numbers and the following information:

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name of each bidder who submitted a bid;

bid prices as read out at bid opening;

name and evaluated prices of each bid that was evaluated;

name of bidders whose bids were rejected and the reasons for their rejection; and

name of the winning bidder, and the price it offered, as well as the duration and summary scope of the contract awarded.

25. Contract Awards done through Direct Contracting. Procurement method shall be consistent will Paragraph 3.7 of the Guidelines: Procurement under IBRD Loans and IDA Credits, May 2004, revised October 1, 2006. After the contract signature, the Borrower shall publish in UNDB online and in dgMarket the:

name of the contractor;

price;

duration; and

summary scope of the contract.

26. This publication may be done quarterly and in the format of a summarized table covering the previous period.

27. Contract Awards for Consultancies. shall be consistent with Paragraph 2.28 of the Guidelines: Selection and Employment of Consultants by World Bank Borrowers, May 2004, revised October 1, 2006. After the award of contract, the borrower shall publish in UNDB online and in dgMarket the following information:

names of all consultants who submitted proposals;

technical points assigned to each consultant;

evaluated prices of each consultant;

final point ranking of the consultants; and

name of the winning consultant and the price, duration, and summary scope of the contract.

28. The same information shall be sent to all consultants who have submitted proposals.

29. Contract Awards for Selection Based on the Consultants’ Qualifications (CQS). Shall be consistent with Paragraph 3.8 of the Guidelines: Selection and Employment of Consultants by World Bank Borrowers, May 2004, revised October 1, 2006. The Borrower shall publish in UNDB online and in dgMarket the:

name of the consultant to which the contract was awarded;

the price;

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duration; and

scope of the contract.

30. This publication may be done quarterly and in the format of a summarized table covering the previous period.

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Attachment I – Procurement Plan

I. General

1. Project Information: Increased Access to Electricity Services Project Project ID No. P077452 Project Implementing Agencies: ZESCO and REA

2. Bank’s approval Date of the Procurement Plan: April 1st 2008

3. Date of General Procurement Notice: TBA

4. Period Covered by this Procurement Plan: October 2008 – June 2010

II. Goods, Supply & Installation of Plant & Equipment, Works & non-Consulting Services

5. Prior Review Threshold: Procurement Decisions subject to Prior Review by the Bank as stated in Appendix 1 to the Guidelines for Procurement:

Table A8.1: Thresholds for Procurement Methods and Prior Review – Goods and Works

Expenditure Category Procurement Method Contract Value Threshold

(US$)

Contracts Subject to Prior Review

(US$ millions)1. Works ICB (Works/Supply & Installation)

NCBShopping

Direct ContractingCommercial Practices

>=500,000,000>=50,000 - <500,000

<50,000All values

All Contracts1st 2 contract only

NoneAll Contracts

None2. Goods ICB

NCBShopping

Direct ContractingCommercial Practices

>=100,000>=50,00 < 100,000<50,000

All values

All Contracts1st 2 contract only

NoneAll Contracts

None

Prequalification: There will be no prequalification of Bidders

7. Proposed Procedures for CDD Components (as per paragraph 3.17 of the Guidelines): N/A

8. Reference to (if any) Project Operational/Procurement Manual: The Procurement Plan will also form part of the Project Implementation Manual.

9. Any Other Special Procurement Arrangements (including advance procurement and retroactive financing, if applicable): N/A.

Procurement Packages with Methods and Time Schedule

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a) Works

1 2 3 4 5 6 7 8 9

Ref. No.

Contract (Description)

EstimatedCostUS$

ProcurementMethod

Pre-qualification(yes/

no)

Domestic Preferenc

e(yes/no)

Reviewby Bank(Prior / Post)

ExpectedBid-

OpeningDate

Comments

1. ZESCO (reinforcement) 1 Lusaka 132 kV Ring 2,000,000 ICB No No Prior May 30,

2009Reinforcement in Lusaka ring

– Lot 1Upgrade of

Coventry Street, Roma & Figtree and

Chisamba Area Substations – supply

and installation

7,200,000 Reinforcement in Coventry Street, Roma & Figtree and

Chisamba Areas of Lusaka – Lot 2

Sub Total

Supply and installation Contract

– supply and installation

9,200,000

2. ZESCO (Intensification) – to be co-financed by EU via IDA administrated trust fund – one contract2 Kabushi and New

Kawama2,070,150 ICB No No Prior May 30,

2009Intensification sites in

Copperbelt – Lot 1Chipulukusu and

Chibolya2,069,791 Intensification sites in

Copperbelt – Lot 2Makululu and

Matilya1,385,450 Intensification sites in Central

Region – Lot 3Woodlands 517,500 Intensification site in Lusaka –

Lot 4Sub

TotalSupply and

Installation Contract6,042,891

ZESCO (Grid extension) -- to be co-financed by EU via IDA administrated trust fund3. Mukonchi and Mangango

3 Mukonchi Farmblock

3,486,015 ICB No No Prior August 30, 2009

Grid extension Site Lot 1

Mangango 2,236,050 Grid extension site (Mission) Lot 2

Sub Total

5,721,065

4. TBZ, Lukulu, Ipusukilo, and Mtilizi4 TBZ Farmblock 4,699,500 ICB No No Prior June 31,

2009Grid extension Site Lot 1

Lukulu and Ipusukilo

584,000 Grid extension site in Northern Region Lot 2

Mtilizi 508,000 Grid extension site in Eastern Region Lot 3

Sub Total

Supply and Installation Contract

5,791,500

REA (Civil Works Sub-projects)5 Mini-hydro Sub-

projects14,000,000 Accordance

with paragraph 3.12 of the

Procurement Guidelines

No No Prior N/A The sub-projects will be defined in the course of the project implementation into individual contracts with respective procurement methods. Costs include IDA funding of $6.0m and government contribution of $4.0M. Beneficiary developers will contribute $4.0m.

6 Solar PV Sub-projects (supply, installation, and maintenance)

5,500,000 ICB No No Prior N/A The sub-projects will be defined in the course of the project implementation into individual contracts with respective procurement methods. Projects to be identified in Education and Health, coordinated with REA.

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b) Goods 1 2 3 4 5 6 7 8 9

Ref. No.

Contract (Description)

EstimatedCostUS$

ProcurementMethod

Pre-qualification(yes/

no)

Domestic Preferenc

e(yes/no)

Reviewby Bank(Prior / Post)

ExpectedBid-Opening

Date

Comments

1. CFLs 1,000,000 ICB No No Prior November 1, 20082. 2 vehicles 80,000 NCB NO YES Post October 30, 2008 For ZESCO and REA to

supervise the projects3. 2 vehicles 80,000 NCB NO YES Post October 30, 20084. Office equipment 40,000 shopping NO YES Post October 30, 2008

III. Selection of Consultants

10. Prior Review Threshold: Selection decisions subject to Prior Review by the Bank as stated in Appendix I to the Guidelines: Selection and Employment of Consultants:

Table A.8.2: Thresholds for Consultants Selection Methods and Prior Review

Expenditure Category Procurement MethodContract Value Threshold

(US$)Contracts Subject to Prior

Review(US$ millions)

3. Consulting Services

QCBS (firms)CQS, LCS, QBS, FBS

(firms)SSS

Individual Consultants (IC)

>=100,000<100,00

<All values>=50,000

All ContractsNone

All ContractsAll Contracts

11. Consultancy services estimated to cost above US$100,000 equivalent per contract and individual consultants assignments estimated to cost US$50,000 and above will be subject to prior review by the Bank.

12. Terms of Reference (TOR) for all consultancy contracts as well as all single source selections, irrespective of the contract value, will be subject to prior review.

13. Short lists 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.

14. Any Other Special Selection Arrangements: None

Consultancy Assignments and Training with Selection Methods and Time Schedule:

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c) Consultant Services

1 2 3 4 5 6 7

Ref. No.

Description of Assignment EstimatedCostUS$

SelectionMethod

Reviewby Bank(Prior / Post)

ExpectedProposals

SubmissionDate

Comments

REA1. Preparation of 2-3 mini-hydro

PREP sites250,000 QCBS Prior October 30,

2008GEF funding

2. Preparation of 9 SSMP sites 550,000 QCBS Prior October 31, 2008

GEF funding

3. Consulting services for implementation support to REA

150,000 QCBS Prior October 31, 2008

GEF funding

4. Promotion campaign for renewable energy

50,000 CQS Post December 30, 2008

GEF funding

5. Matching grants to project developers (to many sub-projects)

500,000 Accordance with paragraph 3.14 of the Consultant Guidelines

Prior October 31, 2008

GEF funding

6. Consulting services to MEWD 50,000 CQS Post December 30, 2008

GEF funding

7. Consulting services to ERB 50,000 CQS Post December 30, 2008

GEF funding

8. Environmental management guideline

50,000 CQS Post June 30, 2009 GEF funding

9. Monitoring and Evaluation 100,000 CQS Post December 31, 2008

GEF funding. Various assignments to be defined.

ZESCO10 Development of Performance

Improvement Plan500,000 QCBS Prior December 31,

2008EU funding

11 Preparation of intensification and grid extension sites

800,000 QCBS Prior December 31, 2008

EU funding

12. Consulting services for implementation support to ZESCO

1,700,000 CQS Prior December 31, 2008

EU funding. Several assignments on technical design and supervision

13 Distribution and marketing services for CFLs

1,000,000 QCBS Prior October 30, 2008

IDA Funding

d) Training

Ref. No.

Description of Assignment EstimatedCostUS$

Reviewby Bank(Prior / Post)

CommentsFunding sources

1. Training to REA, MEWD, MOH, MOE, private developers, and local financial institutions on renewable energy

100,000 Prior Various training to be defined under a training plan to be reviewed and approved by the bank at least once a year.

GEF funding

2. Training to ZESCO 50,000 Prior Various training to be defined under a training plan to be reviewed and approved by the bank at least once a year.

EU funding

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Annex 9: Economic and Financial Analysis

ZAMBIA: Increased Access to Electricity Services

1. An economic and financial analysis of fourteen PREP sites -- seven intensification sites, six grid extension sites, and one mini-hydro site -- was undertaken by international firms SMEC and COWI funded by the PHRD and PDF B, to estimate the economic and financial net present value (NPV) as well as economic and financial internal rate-of-return (EIRR and FIRR) for the investments under the each component. The following sections summarize the methodology, assumptions and results of these analyses.

2. General Methodology: The main criterion applied for the assessment of all project of the IAES is the Internal Rate of Return (IRR). The following formula has been applied:

ECONOMIC ANALYSIS

3. Intensification and Grid extension: NPVs and EIRRs are estimated for electricity access expansion resulting from more intensive use of the existing distribution system as well as grid-extension projects. The costs include capital investments, operating and maintenance expenses for the distribution networks, and bulk supply tariff (power purchase costs from power generation and transmission). Benefits are measured as electricity consumption valued at consumers’ willingness-to-pay. For households, the willingness to pay is based on expenditures on lighting using kerosene, candles, and battery charging, which is estimated to be about 0.20 US cents/kWh. For commercial and industrial customers, the willingness-to-pay draws primarily on the relative costs associated with electricity supply from diesel generators to meet their production needs. The willingness–to-pay for these consumers is estimated at 0.25 US cents/kWh.

4. Basic assumptions include:

The bulk supply tariff is estimated at 65 ZMK/kWh, or 1.5 US Cents/kWh, based on the Cost of Service Study

The O&M costs are estimated at 1.2 percent of investment costs

20 year of operation

Economic and financial analyses is based on 2006 constant costs

The foreign exchange rate have been used: 4300 ZMK/US$

A discount rate of 10 percent has been applied

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The costs and benefits were estimated over a 20-year period, including 5 years of project implementation.

5. The analysis shows an EIRR of 30 to 75 percent for the intensification PREP sites, with an average EIRR of 49.3 percent. For gird extension, the analysis indicates an EIRR of 20 to 85 percent, with an average EIRR of 47.4 percent. Table A9.1 summarize the EIRRs and NPVs, and FIRRs and NPVs for each project component.

6. Small Hydro: The economic costs of small hydro mini-grid systems include capital investment, operation and maintenance costs for the small hydro power plant and distribution networks. Benefits are measured as avoided costs of electricity supply from diesel generators. The analysis shows a robust EIRR of 30.5 percent for the small hydro site under PREP.

7. Basic assumptions include:

Load factor of 40 percent

The O&M costs are estimated at 1.2 percent of investment costs.

25 years of operation.

Economic and financial analyses is based on 2006 constant costs

The foreign exchange rate have been used: 4300 ZMK/US$

A discount rate of 10 percent has been applied

8. Solar PV: The economic costs of solar PV systems consist of investment costs, replacement costs and operating and maintenance costs of the new systems. The minimum consumer benefit is estimated conservatively from (i) current expenditures on kerosene, candles, and battery charging for lighting which are used as a minimum estimate of future willingness to pay for better lighting from PV; (ii) the gain in consumer surplus from lighting substitution; and (iii) global environmental externalities. Additional consumer benefits of convenience, improved safety, better indoor air quality, and higher quality of light were not included due to a lack of adequate valuation data.

9. Consumer surplus methodology is used to estimate the economic benefits from improved lighting. 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 A9.1 this involves a shift from α to β. 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.

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Figure A9.1: Consumer Surplus Methodology

10. Basic assumptions include:

Discount rate of 10 percent and constant 2006 USD.

10-year PV module economic life, with replacement costs and schedules (batteries, etc)

10,000 solar home systems are distributed among 20Wp, 40Wp and 50Wp systems for the three income groups ‘low income, ‘middle income’, and ‘high income’, respectively.

Public institutions include rural health posts, rural health centres and basic schools. Only those institutions which lie outside a defined perimeter around the grid are considered eligible for solar PV systems.

An institution includes PV systems for staff houses. One staff house per rural health posts and three staff houses per rural health centre and basic school respectively.

A rural Health post has one staff house with an 85Wp solar home system with three 8W lights and an inverter that allows for a 75W TV. The system can provide for 4 hours of light per light and for 3 hours of watching TV per evening. Each Rural

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Health Centre and each basic school has five staff houses – one staff house for senior staff with a 150 Wp system and four staff houses with the 85Wp system described above.

Estimates for global benefits from reductions in CO2 are based on an assumed market price of $10/tCO2.

11. Once installed, each Solar Home System (SHS) provides benefits to the household in the form of reduced expenditures on alternative lighting sources and improved lighting quality. While it is relatively straight forward to estimate the magnitude of these direct benefits, it should be recognized that it is unlikely that all benefits from electrification (e.g. reduced indoor air pollution) are reflected in households’ willingness to pay for lighting. Nonetheless, accounting for the displaced lighting expenditures and the increase in consumer surplus associated with improved lighting quality from an SHS provides a conservative estimate of the benefits that are expected to accrue to individual households.

12. These benefits have been estimated for each income group, using household energy expenditure data from the Eastern Province in Zambia collect under the SIDA/MEWD PV ESCO project. Regarding lighting expenditures, it has been assumed that each SHS will replace household expenditures on kerosene, paraffin and candles – approximately USD $23, $37 and $37 for the three groups defined as ‘low income households’, ‘middle income households’’ and ‘high income households’, respectively, as described above.

13. Regarding the increase benefits from the improved lighting, demand curves have been estimated for each of the three income groups, utilizing data from the SIDA/MEWD PV ESCO project. The data provides 539 observations and includes 302 households with SHSs and 237 households without. In estimating these demand curves, ‘lumens consumed’ and ‘price per lumen’ have been estimated utilizing SIDA/MEWD PV ESCO expenditure data, combined with lighting data from Gustavsson (2002) and technical specifications. Converting lighting services into lumens allows for capturing the willingness to pay for the significantly higher quality of the light which is provided by an SHS system, when compared with wick lanterns and candles. Figure A9.2 provides an illustration and the specifications of the three estimated demand curves.

14. Economic analysis shows that the SSMP approach is economically cost effective and economic viability is robust. For health and education facilities, the PV alternative is least cost compared to grid extension if the grid is more than 0.4 to 1.9 km from the facility. Relative to diesel generation, the PV option is always least cost for health and education facilities with economic internal rates of return (EIRR) ranging from 11 to 40 percent, with an average EIRR of 37 percent. The economic analysis of small PV systems for commercial establishments and households reveals substantial economic returns, with an average EIRR of 26 percent. The high economic rate of return reflects both high current expenditures on poor quality lighting, and a significant willingness to pay for improved lighting. On an indicative program basis, SSMP packages benefiting 10,000 commercial establishments and households as well as 250 public service facilities has an EIRR of 27 percent.

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Figure A9.2 Demand for lumens in Eastern Province, Zambia

0,00

2,00

4,00

6,00

8,00

10,00

12,00

0 50000 100000 150000 200000 250000 300000Q (Light in Lumens/mo)

P (Z

MK

/lum

en)

PoorestPoorLess Poor

Poorest Q = 11499p-1.27

R2=0.8671

Less PoorQ = 20952p-1.18

R2=0.96121

PoorQ = 20537p-1.16

R2=0.95337

Data source: Department of Energy, PV ESCO Project, data provided by Mattias Gustavsson, Gothenburg University, Sweden, 2002

Table A9.1 Summary of Economic Analysis

Component EIRR (%) Economic NPV @ 10% (US$ million)

Intensification 49.3 14,210,377Grid Extension 47.4 40,916,983Mini-grid 30.5 14,961,193Solar home systems 26.3 3,407,969Solar PV for public institutions 37.2 2,969,435

FINANCIAL ANALYSIS:

15. The financial analysis demonstrates that with the new ERB tariff order on January 1 2008, investment in reinforcement and intensification is financially viable, while most of the grid extension sites would still need substantial capital subsidies. The following sections summarize the methodology, assumptions and results of these analyses.

16. Intensification and Grid Extension: Costs include the capital cost of investments, operations and maintenance expenditures, and bulk supply tariff (power purchase costs from power generation and transmission). The benefits are the revenues collected from consumers.

17. The results show that intensification investment would have an acceptable FIRR of 12.8 percent, higher than the required 10 percent threshold. This will not pose financial strain on

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ZESCO as the IDA Credit will be on-lent to ZESCO. For grid extension investments, partial capital subsidy is required. REA will provide RE grant to ZESCO to cover up to 90 percent of the capital investment. The project is not likely to have negative impacts on ZESCO, as ZESCO can recover its remaining capital investment, bulk supply and O&M costs.

Table 4. Summary of Financial Analysis

Component FIRR under new ERB tariff order (%)

Financial NPV @ 10% (US$)

ReinforcementIntensification 12.8 2,417,439Grid extension 2.5 -4,625,604

18. Small Hydro: The cost recovery tariff for the mini-hydro site is estimated at approximately 12 US cents/kWh. This is substantially lower than the current diesel operating costs. If project developers are allowed to charge a cost recovery tariff in isolated grid areas, or sell electricity to ZESCO at cost of service, as agreed by ERB, these mini-hydro projects can be financially viable. In addition, carbon finance can provide additional revenue stream to increase the viability of mini-hydro projects.

FINANCIAL ANALYSIS OF ZESCO

19. Financial Performance of ZESCO: ZESCO had been experiencing healthy demand growth over the last couple of years. Its sale of energy is growing by about 10 percent per annum. About 50 percent of its sales revenue comes from the mining sector. More than 20 percent of its revenue comes from industrial consumers and about 15 percent revenue from residential sector. ZESCO also exports electricity to the Southern African regional grid and about 4 percent of its revenue comes from energy export. ZESCO has long term power sales contract with the mining industries and electricity price sold to these consumers are indexed with US dollar. Hence Kwacha (ZMK) vs US dollar exchange fluctuation affects ZESCO financial performance considerably.

20. Over the last two years, ZESCO’s power tariff has not been adjusted to reflect its increasing cost of supply. ZESCO’s latest tariff revision was in 2005, when ZESCO was only allowed for an average tariff increase of 11 percent, against an inflation rate of 15.9 percent. Table A9.3 shows that since 2002, ZESCO tariff has fallen behind the inflation rate. As a result,

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Category Wise Sales

0%

20%

40%

60%

80%

100%

2001 2002 2003 2004 2005 2006 2007

% o

f Sal

es

Mining Residential Industrial & Agricultural Commercial Exports

ZESCO experienced a net loss of ZMK 156 billion in FY 2007. Without considering the debt swaps, ZESCO would have been in operating deficit since 2003.

Table A9.3: Rate of Inflation Vs Tariff Adjustment2002 2003 2004 2005 2006 2007

Year End Inflation 26.7 17.2 17.5 15.9 12.7 12Proposed Tariff Increase 0% 16% 0% 15% 0% 0%Actual Approved 0% 5.3% 0% 11% 0% 0%Comment Not

AdjustedPartially Adjusted

Not Adjusted

Partially Adjusted

Not Adjusted

Not Adjusted

ZESCO Profitability:

21. Over the last couple of years ZESCO financial performance had been very volatile. Fluctuations in external environment are causing significant impact on ZESCO profitability. Since FY 2003 its profit from operation is reducing every year. In FY 2006 due to ZMK appreciation it experienced operating loss. In FY 2007 due to ZMK depreciation it made operating profit but it was not enough to absorb the exchange rate fluctuation loss against its foreign currency denominated long term loans and as a result it ended the year with about ZMK 156 billion retained loss after recovering tax.

Table A9.4: ZESCO Profit and Loss Statement

  In ZMK Mill    2001 2002 2003 2004 2005 2006 2007                   Sales Revenue 477,398 536,583 646,515 717,373 782,641 768,915 868,725

  Cost of Sales (96,359)(106,355

)(138,954

)(176,362

)(168,384

)(149,487

)(163,011

)Gross Profit 381,039 430,228 507,561 541,011 614,257 619,428 705,714 Other Operating Income 45,200 8,431 151,466 155,896 67,383 30,784 41,608

Operating Expense(354,611

)(464,543

)(532,205

)(597,293

)(623,828

)(702,687

)(770,923

)Profit from Operation 71,628 (25,884) 126,822 99,614 57,812 (52,475) (23,601)

Total Finance Cost 7,897 40,258 (23,877) (23,110) (22,108) 171,626 (194,611

) 

Profit Before Taxation 79,525 14,374 102,945 76,504 35,704 119,151 (218,212

)

 Taxation recoverable/(Charge) (41,420) (47,151) (37,732) (34,828) (71) (76,812) 62,117

Profit for the year 38,105 (32,777) 65,213 41,676 35,633 42,339 (156,095

)

ZESCO Tariff Application of August 2007

22. In 2006, ERB carried out a detailed study on ZESCO’s cost of service. The study revealed that ZESCO tariff on average had to be increased by about 45 percent starting from FY 2007 to reach its cost of supply level. However, in reality, the tariff in FY 2007 was not revised and ZESCO faced the expected consequences. Net Loss of ZESCO in FY 2007 was about ZMK 156 billion. In August 2007, ZESCO filed a four-year tariff application. As ZESCO tariff was last revised in 2005, it needed a 50 percent increase in 2007 and inflation in Zambia had been

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more than 10 percent over these years. To reach cost reflective levels in FY 2008, ZESCO requires a very large tariff increase.

23. Considering that the current economic, social and political situation in the country would make the immediate implementation of the required tariff increase difficult for all stakeholders, ZESCO adopted a four year tariff migration path to cost reflective tariffs in order to avoid a steep tariff increment in one year.

24. In determining the ideal tariffs, ZESCO had to bear in mind that some customer categories such as mining and exports have tariffs that are determined by existing bulk or power supply agreements. Residential tariffs may also prove difficult to adjust to cost reflective levels in one step due to the economic and social conditions prevailing in the country.

25. In order to avoid over estimate of revenue, ZESCO assumed that no extra revenue will come from export customers due to increase in tariffs to cost reflective levels during FY 2008. It however assumed that the mining tariff will rise to cost reflective level within FY 2008. ZESCO also assumed in its tariff application that overall cost reflective tariffs will be achieved in four years.

26. In order to maintain a gradual trend in adjustments to cost reflective levels, some tariff categories that were almost at cost reflective level were proposed to be raised beyond cost reflective levels. This is the case for small power, commercial, and service tariff categories. According to the Tariff Application, the average tariff proposed for each category is as indicated in the table below:

Table A9.5: Tariff Migration Path Over 4 Years Proposed by ZESCO (ZMK/kWh)

Average Tariff FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012Mining 85.63 132.04 209.22 270.03 313.14 336.00

% change 54% 58% 29% 16% 7%Residential 147.98 214.70 293.76 379.07 478.25 509.29% change 45% 37% 29% 26% 6%

Large power 71.81 125.40 194.49 251.31 318.10 338.46% change 75% 55% 29% 27% 6%

Small power 109.75 159.65 222.61 286.14 336.57 364.14% change 45% 39% 29% 18% 8%

Commercial 203.63 306.36 338.09 373.21 397.09 422.61% change 50% 10% 10% 6% 6%Services 139.48 208.36 254.11 307.38 350.31 378.24

% change 49% 22% 21% 14% 8%Exports 103.01 129.23 219.01 269.30 310.80 334.11

% change 25% 69% 23% 15% 7%Total 106.37 155.29 225.69 287.08 341.57 366.92

% change   50% 45% 27% 19% 7%

27. ZESCO in its Tariff Application budgeted to serve relatively reduced demand in FY 2008, compared to its planned expansion program and demand growth assumptions. According to its Cost of Service Study, ZESCO is expected to face energy demand of about 9,652 GWh in

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FY 2007 and 12,616 GWh in FY 2008. As ZESCO’s own generation capacity is capped at 10,500 GWh, to meet this demand, ZESCO would have to import about 4,000 GWh of energy to avoid load shedding. The detail is provided in Table A9.6.

Table A9.6: Projected Demand Growth Based on Cost of Service Study (2006)Base Case Scenario

Energy in GWh 2007 2008 2009 2010 2011 2012 2013 2014 2015

Projected Sales 9,652 12,616 15,799 17,446 18,764 19,334 19,638 19,974 20,140Distribution Losses 1,110 1,537 1,617 1,643 1,619 1,443 1,214 1,217 1,233Transmission Losses 377 495 610 668 713 727 730 742 748Energy Sent Out 11,138 14,648 18,026 19,758 21,096 21,504 21,582 21,933 22,122

ZESCO Generation 10,157 10,504 10,852 11,167 11,167 11,167 11,167 11,167 11,167Import Requirement 981 4,144 7,174 8,591 9,930 10,337 10,415 10,766 10,955

28. ZESCO’s Tariff Application reveals that in FY 2007, it served about 7,892 GWh of energy and for FY 2008, it has budgeted to serve about 9,652 GWh of energy. In this way, through not serving its total demand, ZESCO is minimizing its cost of service. To serve its full demand, ZESCO will have to import power from the South African regional grid. Cost of import is about 350 ZMK/kWh, whereas, ZESCO’s average selling rate in FY 2008, even after tariff increase will be about 155 ZMK/kWh. ZESCO’s cost of import is even higher than tariff charged to it highest paying consumer – Commercial Category – whose average tariff rate in FY 2008 is proposed to be 306 ZMK/kWh. Given this situation, as long as ZESCO’s tariff is less than its cost of import, ZESCO would be better off by not serving its full demand by shedding loads of its consumers. Unfortunately this will have a negative impact on the Zambian economy as the opportunity cost of the energy not served is more than the import cost of electricity.

ERB Tariff Order of January 2008

29. On January 1, 2008, ERB approved ZESCO’s tariff application after following its regulatory process. It approved a three-year incentive-based tariff order. However, ERB’s approved tariff level is less compared to the ZESCO’s requested level. ERB’s approved tariff increase is provided in Table A9.7.

Table A9.7: ERB Approved Multi-year Tariff Increase

Customer Category 2008 2009 2010Residential 26.8% 16.6% 11.9%Commercial 1.3% 0.3% 0.3%Services 6.8% 1.9% 1.9%Small power 16.2% 5.5% 4.5%Large power 27.5% 16.6% 2.2%

30. The weighted average of this increase for the non-mining consumers is about 25%, 15% and 9% respectively. This increase is significantly below ZESCO’s applied level and put ZESCO’s financial performance at risk to attain its targeted level.

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31. A detail analysis of the ERB tariff order reveals that ERB disallowed costly power import by ZESCO to reduce its cost of operation. However, subsequent adjustment in ZESCO’s energy sales was not made to reduce amount of sale by the reduced amount of import. ZESCO and ERB are now in discussion to address this situation.

32. ERB and ZESCO agreed to several performance benchmarks to improve ZESCO’s quality of service and improve efficiency. Some of these performance benchmarks include, (i) bring all customers under metering scheme by 2010 from present level of 70% of metered customers, (ii) reduce waiting period of new applicants for electricity connection from present 57 days waiting period to 30 days, (iii) reduce debtor days from present level of 180 days to 60 days by 2010, (iv) reduce labor cost from present level of 48% of operating cost to 30% by 2010, (v) increase staff productivity from present level of 61 customers per employee to 100 customers per employee, (vi) reduce outage hours per customer per month from present level of 32 hours to 3 hours by 2010, (vii) reduce transmission and distribution losses from present level of 3.68% and 22.9% to 3% and 14% respectively by 2010, etc.

33. ZESCO planned its investment program targeting the above performance benchmarks. For the first of the three-year tariff period, ZESCO planned to invest about ZMK 3.7 trillion (about US$ 893 million). However, ERB disallowed some of ZESCO investment program, and the revised investment program of ZESCO approved by ERB totals about US$ 778 million for the same corresponding three years. ZESCO’s investment program and ERB approved investment program are provided below. The differences in the planned and approved investment program might become critical for ZESCO to achieve its targeted performance benchmarks.

Table A9.8: ZESCO’s Planned and ERB’s Approved Investment Program

2008 2009 2010

ZESCO PlannedGeneration 612,000 560,000 252,000Transmission 224,000 496,000 628,000Distribution 264,000 288,000 324,000SS/ Other 28,000 14,000 15,000Total 1,128,000 1,358,000 1,219,000

ERB ApprovedGeneration 652,716 512,000 220,000Transmission 172,225 400,707 506,451Distribution 243,803 246,700 282,972Total 1,068,745 1,159,407 1,009,423

34. ZESCO in its tariff application assumed to finance most of its investment cost through financing. However, given ZESCO’s high gearing ratio, ERB recommended that ZESCO should finance only 70% of its investment program through loans and the remaining 30% should be financed through its own sources or equity. While this is a prudent observation of ERB, it is unlikely, given ZESCO’s financial performance and the lower than required tariff increase

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approved by ERB, that ZESCO will be able to raise financing for its investment program. Hence there seems to be a gap in ZESCO’s investment program and financing plan, given ERB directive.

ZESCO’s Projected Financial Performance Based on January 2008 Tariff Order

35. ERB approved ZESCO tariff for three years, calendar year 2008 to 2010, while ZESCO’s financial year runs from April to March of each year. Given this timeline, ERB approved 2008 tariff will only have an impact of three months in ZESCO’s FY 2008 and 9 months impact in FY 2009. Correspondingly the investment program would be also different based this difference in the time line. To address this difference, while projecting the financial performance of ZESCO, ERB’s three year tariff order is assumed to be effective for FY 2009 to FY 2011. The investment program considered for the financial performance projection is also different from the approved ERB investment program. As ZESCO has approved its budget for FY 2009, their planned approved program for FY 2009 is considered in the projection. For FY 2010, investment program as applied by ZESCO is considered and for FY 2011 to FY 2015, investment program identified in the ERB’s Cost of Supply Study is considered. Based on this the investment program used for the financial performance projection is different from what has been stated in Table A9.8. The investment program used for the projection is provided in Table A9.9 below. The investment plan is lumpy in the initial years and reduces after 2012.

Table A9.9: Investment Program used for ZESCO Financial Performance Projection

Investment Program

2009 2010 2011 2012 2013 2014 2015

In ZMK Million 1,218,232 1,219,000 929,877 326,277 573,092 309,814 327,821In US$ Million 305 305 232 82 143 77 82

36. For the financial projection, it is assumed that ERB Tariff Order will be effective in FY 2009 and will continue till FY 2011. As ZESCO has not yet finalized its tariff increase for the mining category, for the base case of the financial projection, no tariff increase for this category is assumed. Thus in the base case of the financial projections, tariff increase approved by ERB for the non-mining categories are only considered. Based on this assumption, the new tariff regime of ZESCO is stated in Table A9.10.

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Table A9.10: New ZESCO Tariff as Approved by ERB in ZMK/kWh

2007 2008 2009 2010 2011 2012 2013 2014 2015Mining 85.63 85.63 85.63 85.63 85.63 85.63 85.63 85.63 85.63

% change 0% 0% 0% 0% 0% 0% 0% 0%Residential 147.98 147.98 187.64 218.79 244.82 244.82 244.82 244.82 244.82 % change 0% 27% 17% 12% 0% 0% 0% 0%

large power 71.81 71.81 91.56 106.76 109.10 109.10 109.10 109.10 109.10 % change 28% 17% 2% 0% 0% 0% 0%

small power 109.75 109.75 127.53 134.54 140.60 140.60 140.60 140.60 140.60 % change 16% 6% 5% 0% 0% 0% 0%

Commercial 203.63 203.63 206.28 206.90 207.52 207.52 207.52 207.52 207.52 % change 1% 0% 0% 0% 0% 0% 0%Services 139.48 139.48 148.96 151.79 154.68 154.68 154.68 154.68 154.68

% change 7% 2% 2% 0% 0% 0% 0%Exports 103.01 103.01 174.57 214.66 247.74 266.32 301.64 309.18 313.82

% change 0% 69% 23% 15% 8% 13% 2% 1%Total 103.38 103.80 117.78 127.91 135.86 136.56 139.22 139.79 140.61

% change 0% 13% 9% 6% 1% 2% 0% 1%

37. The projection also takes into consideration the other directives of ERB Tariff Order. For example, ZESCO’s import has been capped at a certain level and the pricing model assumption of meeting full ZESCO demand by importing power has been disregarded. While this assumption will cause load shedding, given the present situation in Zambia and the prevailing energy shortage within Southern Africa, it is a realistic assumption. In 2006 and in 2007, total energy import was about 68 GWh and 218 GWh respectively. The import assumed in the financial projection is capped at 359 GWh and ZESCO will have to load shed the demand in excess of supply availability. Based on the above assumptions of ERB tariff order; sales growth and investment program, financial performance of ZESCO under the base case scenario can be summarized as follows.

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Table A9.11: ZESCO Financial Performance: January 2008 Tariff Order

  2009 2010 2011 2012 2013 2014 2015   Energy Sales in GWh 8,748 9,303 9,615 9,615 9,615 9,615 9,615Sales Growth 7% 6% 3% 0% 0% 0% 0%   Average Tariff in ZMK/kWh

118 128 136 137 139 140 141

Tariff Increase in % 13% 9% 6% 1% 2% 0% 1%Average Tariffin Usc/kWH 2.94 3.20 3.40 3.41 3.48 3.49 3.52  In ZMK MillionRevenue 1,030,33

2 1,189,909 1,306,238 1,312,973 1,338,586 1,344,009 1,351,856

Profit From Operation -70,452 -11,701 -6,982 -85,060 -131,418 -201,628 -263,015 Profit Before Tax -187,333 -209,770 -275,694 -420,156 -536,310 -687,859 -838,186 Retained Profit -18,147 -227,917 -503,611 -923,767 -

1,460,077 -

2,147,936 -

2,986,122 Net Cash Balance -866,811 -

1,570,372 -

2,117,521 -

2,696,578 -

3,428,096 -

4,226,819 -

5,149,817  RatiosAnnual Revenue Growth (%)

21% 15% 10% 1% 2% 0% 1%

Net profit Margin (%) -18% -18% -21% -32% -40% -51% -62%Return on Equity (%) -16% -22% -41% -164% 191% 71% 46%Return on Assets (%) -4% -4% -4% -7% -8% -11% -13% Debt-Equity Ratio 3.33 5.28 8.79 24.96 (25.68) (8.12) (4.80)Current Ratio (times) 0.31 0.20 0.15 0.12 0.10 0.08 0.07 Debt Service Coverage Ratio

0.59 0.51 0.45 0.31 0.24 0.16 0.09

38. The above table shows that Tariff Order for the non-mining sectors alone is not helpful enough for ZESCO to achieve healthy financial performance. ZESCO doesn’t even cover its operational cost with the increase in its non-mining tariff categories. It has been now almost a year that ZESCO has been discussing the mining tariff increase with CEC and other mines. It is important for ZESCO to conclude this negotiation as soon as possible and increase the tariff for the mines category. ZESCO has indicated for a tariff increase of about 60% for its mine consumers while the mines have so far agreed to a tariff increase of about 20%. To see the impact of tariff increase in mines, increase in 35% is considered for the next scenario. The financial projections provided below in Table A9.12 corresponds to the assumptions of Scenario 1, while Scenario 1 refers to the tariff increase in non-mining sector as per the January 2008 tariff order and a 35% increase in mining tariff effective from April 1, 2008.

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Table A9.12: ZESCO Financial Performance: Scenario 1January 2008 Tariff Order and Mining Tariff increase by 35%

      2009 2010 2011 2012 2013 2014 2015                   Energy Sales in GWh   8,748 9,303 9,615 9,615 9,615 9,615 9,615Sales Growth   7% 6% 3% 0% 0% 0% 0%                   Average Tariff in ZMK/kWh 133 156 174 175 178 178 179Tariff Increase in %   28% 17% 12% 1% 2% 0% 0%Average Tariffin Usc/kWH 3.32 3.89 4.34 4.38 4.45 4.46 4.47                    In ZMK Million                

Revenue    1,163,42

4 1,447,075 1,670,757 1,683,440 1,709,510 1,714,693 1,720,529 Profit From Operation   62,640 245,465 357,537 285,408 239,506 169,056 105,657 Profit Before Tax   -44,382 88,137 180,313 96,753 40,089 -47,677 -129,060 Retained Profit   124,804 243,789 487,212 617,829 671,949 624,272 495,211

Net Cash Balance   -768,224 -

1,162,958 -

1,202,639 -

1,232,163 -

1,373,346 -

1,531,837 -

1,745,291                    Ratios                  Annual Revenue Growth (%) 37% 24% 15% 1% 2% 0% 0%Net profit Margin (%)   -4% 6% 11% 6% 2% -3% -8%Return on Equity (%)   -3% 6% 11% 5% 2% -3% -8%Return on Assets (%)   -1% 2% 4% 2% 1% -1% -2%                   Debt-Equity Ratio   2.89 3.24 3.02 2.74 2.78 2.86 3.15 Current Ratio (times)   0.36 0.30 0.28 0.27 0.26 0.24 0.21 Debt Service Coverage Ratio 1.27 1.25 1.28 1.07 1.02 0.89 0.80

39. Scenario 1 (Table A9.12) shows a significant improvement in ZESCO’s finances compared to the Base case (Table A9.11). Hence, it is critical that ZESCO finalizes the required level of tariff increase for the mines and affects the change. Otherwise, ZESCO will not be able to maintain a viable operation. While the Scenario 1 shows that ZESCO will start to earn positive return from 2010 onwards, it will not be able to raise enough resources to finance 30% of its investment program. Since the realization of the investment program is important for ZESCO to meet its Key Performance Indicators directed by ERB, the financial model assumes that the investment program will be financed in full. Hence the gap in financing is assumed to be raised by Bank Overdrafts by EEC. Under Scenario 1, the financing gap of ZESCO remains above ZMK 1.2 trillion every year and this level of financing gap cannot be bridged by Bank overdrafts or short term financing. So, either equity contribution from the GOE would be required to meet this gap, or ZESCO will have to resort to long term borrowing; worsening its debt equity ratio, or ERB should increase ZESCO tariff further to ensure ZESCO raises enough internal resources to finance its investment program. If the situation is not addressed by any of the above interventions then ZESCO runs the risk of not implementing its investment program and not meeting the performance benchmarks agreed with ERB.

40. Importance of revising the mining customers’ tariff cannot be over emphasized. Comparison of ZESCO financial performance in Base case with Scenario 1 captures the impact

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of mining tariff increase. It should also be noted that in Scenario 1, mining tariff has been increased by 35% in 2009, 20% in 2010 and 15% in 2011. If the mining tariff is not increased in 2010 and 2011 to bring it at cost recovery level, then ZESCO again becomes unable to cover its operational cost from 2010 onwards.41. Scenario 1 shows that even after increasing the mining tariff by 35% in 2009, ZESCO may not earn a positive return. This could be due to the fact that the increase in non-mining tariff categories are not enough for ZESCO to earn a positive return in 2009. ERB may wish to look into this reality and find a way to compensate ZESCO for this loss.

42. ZESCO’s investment program is highly skewed towards the initial years, and hence it is difficult for ZESCO to raise internal resources to finance 30% of its investment program. This would require a high level of tariff increase in the initial years. However, if this resource is financed by GOZ equity contribution then the burden on tariff can be reduced. Table A9.13 shows the level of tariff increase required for ZESCO to attain positive net cash balance, current ratio of above 1 and debt service coverage ratio of above 1.3.

Table A9.13: ZESCO Financial Performance: Scenario 2Tariff Increase Required to Meet Financial Targets

  2009 2010 2011 2012 2013 2014 2015               Energy Sales in GWh 8,748 9,303 9,615 9,615 9,615 9,615 9,615Sales Growth 7% 6% 3% 0% 0% 0% 0%               Average Tariff in ZMK/kWh 133 173 205 206 209 210 210Tariff Increase in % 28% 30% 18% 1% 1% 0% 0%Average Tariffin Usc/kWH 3.32 4.34 5.12 5.15 5.22 5.24 5.26                In ZMK Million              Revenue 1,163,424 1,613,119 1,969,121 1,982,088 2,008,893 2,014,807 2,021,536 Profit From Operation 62,640 411,508 655,901 584,056 538,889 469,170 406,664 Profit Before Tax -44,382 275,296 547,267 521,298 481,806 410,621 351,475 Retained Profit 124,804 496,453 1,235,264 1,939,016 2,589,454 3,143,793 3,618,284 Net Cash Balance -768,224 -951,804 -516,747 26,806 481,788 925,160 1,315,072                Ratios              Annual Revenue Growth (%) 37% 39% 22% 1% 1% 0% 0%Net profit Margin (%) -4% 17% 28% 26% 24% 20% 17%Return on Equity (%) -3% 16% 23% 17% 13% 9% 7%Return on Assets (%) -1% 7% 12% 11% 10% 9% 7%               Debt-Equity Ratio 2.89 2.63 1.80 1.18 0.99 0.83 0.73 Current Ratio (times) 0.36 0.37 0.54 1.23 2.32 3.39 4.34 Debt Service Coverage Ratio 1.27 1.80 2.20 2.08 2.13 1.96 1.95

43. The above table shows that 1st year tariff increase will not allow ZESCO to earn a positive return in FY 2009, even after the mining tariff is increased by 35%. So it is expected that this loss will be capitalized by ZESCO and recovered by the subsequent tariff increase. If ZESCO tariff is increased by an average of 30% in FY 2010, then ZESCO will be able to earn a positive return and its debt service coverage ratio will be above 1.3. However, given ZESCO’s high investment cost in 2010 and 2011, it will not be able to maintain a current ratio of above 1

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and Debt: Equity ratio of 70:30. If ZESCO tariff is further increased by about 18% in FY 2011, then its current ratio remains above 1 from 2012 and all the performance indicators can be met by ZESCO.

44. The above analysis of ZESCO financial performance projection calls for the following recommendations.

a. ZESCO to complete its negotiation with the mining industry and affect the increase in tariff at cost recovery level as soon as possible;

b. ERB to review ZESCO’s performance in calendar year 2008 and based on the tariff requirement in 2010, allows ZESCO a revised tariff for FY 2010;

c. GOZ to support ZESCO to meet its investment program, either through grant or equity contribution; and

d. ZESCO to improve its quality of service and improve efficiency as directed by ERB.

45. On-lending Arrangement: For Component 1, Government would on-lend the IDA Credit to ZESCO with an on-lending rate of 0.5 percent under a subsidiary loan agreement. For other components, Government would transfer the IDA Credit as a grant to REA for capital subsidies. Funds from GEF and EU would be transferred to REA and ZESCO through the Ministry of Finance and National Planning (MoFNP) under grant agreements. The SIDA and JBIC would provide their funds through the MoFNP under separate agreements.

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Annex 10: Safeguard Policy Issues

ZAMBIA: Increased Access to Electricity Services

A. Summary of Key Safeguard Issues

1. Project investments will include grid network expansion, isolated grids with small-scale generation, and solar PV. These investments are expected to have overall positive social impacts, simply because increased access to reliable power services facilitate improvements in health and education facilities, agricultural processing, employment creation opportunities, etc. Potential negative social impacts are expected to be limited, and are primarily associated with temporary and permanent use of small areas of land for the investments. A resettlement policy framework (RPF) has been prepared to guide project activities in this regard.

2. The project investments are also expected to have only a modest impact on the environment. The Environmental and Social Management Framework (ESMF), which was cleared by the Bank and disclosed in country and at Info Shop, will ensure that the environmental and social issues associated with this program are adequately analyzed and understood, and that all associated adverse impacts are identified through screening, and are effectively mitigated and monitored. Each investment supported by the project must comply with the applicable provisions of both the RPF and ESMF.

Environment Issues

3. The project is expected to have a number of positive impacts on the environment, in particular by addressing the root causes of deforestation, which are insufficient energy alternatives to firewood, and by reducing emissions of greenhouse gases through promotion of renewable sources (PV and micro-hydro technologies). In addition, the TA component of the project will support the finalization and adoption of national guidelines for the environmental management of energy sector investments, and REA will collaborate with the Department of Fisheries to promote aquaculture at mini-hydro sites.

4. The project will have positive socio-economic implications for people in rural and peri-urban areas. For instance in rural areas, health and education facilities provide far more wide reaching services to the surrounding population than is commonly acknowledged. For example, the facilities act as meeting points where information is shared, communication with relatives (especially for funerals) at far off places can be done via radios accessible at these facilities, schools serve as communal meeting points where weddings, religious meetings, elections, and polls take place. Thus, making energy services available to these facilities will have an important impact on the possibilities for overall poverty reduction since the positive externalities and hence the social benefits of a healthier and more educated population are significant.

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5. The implementation of the project ESMF document will increase in Zambia the practice of subjecting the government's own development projects (especially energy and power projects) to an environmental management process, in the prevailing situation where a national environmental policy and regulatory framework are weakly enforced. The ESMF offers the opportunity to identify potential project impacts, mitigate them verifiably through monitoring while building capacity for environmental management within institutions, local governments and private operators.

Natural Habitat Disturbance:

The construction of transmission lines and transport access routes will affect natural habitats. Consequently, any impacts on biodiversity must be considered when assessing these projects. Small hydropower projects will divert water, changing the characteristics of the aquatic habitat, and creating barriers to fish migration. Further, the construction of weirs or dams for small hydropower projects will lead to the inundation of limited areas of land leading to the loss and conversion of associated habitat.

Impacts on Water Quality

6. Changes in water flow due to the construction of small hydropower dams and weirs may affect downstream water quality, which may affect microorganisms and the chemical composition of the river. This, in turn, could affect a range of environmental conditions.Erosion and Sedimentation

7. Erosion and sedimentation are issues that may need to be addressed in the EA's of IAES projects, especially in relation to hydropower projects. Construction activities could lead to erosion and sedimentation, affecting water quality, flooding and landslides, with consequences for both the natural and human environments.Pollution

8. Construction activities associated with investments in transmission, distribution and small hydropower may lead to pollution through noise, emissions to air and water and the generation of solid wastes.. The environmental management plans to be developed for each investment will include mitigating measures for the safe disposal of wastes, the management of pollution and the protection of water quality.Impacts on Landscape

9. The impacts on landscape and aesthetics could be factors in many IAES projects although the degree of impact will depend on the type of project. Transmission lines, diesel generators and hydropower projects could result in changes to the landscape that could have social (religious and cultural values) and economic (loss of potential tourism) effects. Measures to

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lessen impacts and assessments for compensation may need to be considered in ElAs.Health Issues

10. A number of IAES projects could have consequences for health of affected communities as referred to in World Bank (WB) guidelines relating to resettlement and environmental impacts. This is especially the case for large projects such as the construction of hydropower dams. There are a number of issues to consider related to health. Water quality, in terms of available safe drinking water, the possible strain on existing health facilities during a construction period and the influx of workers and camp followers, risks from pollution, the potential to spread waterborne diseases and sexually transmitted diseases including HIV/AIDS. Given the poor state of health facilities in many parts of the country, measures may need to be introduced to control any potential health hazards.Dam Safety

11. The World Bank’s dam safety policy refers directly to the related report of the World Council of Dams. This policy applies to dams with heights of 15 meters or greater. No such dams are anticipated within the IAES program but if such a dam is proposed, the design criteria, specifications, and other relevant documents would be forwarded to the World Bank for review.Overview of Safeguard Issues

12. The following table provides an overview of the various safeguard issues in relation to the different types of IAES projects.

Table A10.1:Relevance of Safeguard Issues to IAES Sub-projects

Safeguard IssueType of Project

Hydropower

Grid Extension

Generator & Co-generation

Photo Voltaic

Natural Habitat Disturbance

√√ √ √ OImpacts on Forestry √√ √ √ OImpacts on Water Quality

√√√ √ √ OErosion and sedimentation

√√√ √ √ OPollution √√ √ √√ OImpacts on Landscape √√ √√ √ √Loss of Cultural Property √√ √ √ OInvoluntary Resettlement

√√√ √ √ OCompensation √√√ √ √ √Health Issues, STIs/HIV/AIDS

√√ √ √ O

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International Agreements

√√ √O O ODam Safety √ √√ O O

O: No impacts expected √: Possibly a minor issue√√: Potentially an issue √√√: Potentially a major issue

Social Issues

13. In terms of social safeguards, the IAES project has relatively limited adverse impacts that will nonetheless be addressed in project design, implementation and monitoring. Loss of cultural property will be avoided through the sub-project screening process that will ensure that all facilities that are located away from cultural sites. Impacts on indigenous peoples, if any, will be similarly avoided through the sub-project screening process unless the IP themselves fully support the initiative.

14. The major potential social impact is limited involuntary resettlement. Since land acquisition will surely be required under the project for small hydro, generation plants, and transmissions lines (e.g., pylons), the Bank policy on involuntary resettlement applies to project activities. For this reason, the Project has developed an approved Resettlement Policy Framework (RPF) to guide the development of any required Resettlement Action Plans (RAPs).

15. The RPF provides several measures not only to ensure that involuntary resettlement is minimized but also, where unavoidable, to ensure that the legal and customary rights of the affected population are fully respected. In the first instance, the project screening process will identify whether land is required, and, if so, whether that land is inhabited, occupied or claimed. If such is the case, the project screening process requires that alternative sites be investigated for the physical infrastructure. Also, the preliminary selection of sites will be done in a participatory manner at the local level so that any potentially affected people are given the opportunity to voice and have registered their opinions and objections, as well as to help identify alternative sites.

16. If land acquisition is unavoidable, the RPF has provisions for independent assessments to be carried out by professional property valuers paid for by the Developer. (The Project Affected Person also has the legal right to hire his or her own property value, and if the two valuations differ significantly, to have the matter reviewed administratively.) Compensation payments and any resettlement costs will be financed by the developer, therefore will be part of the overall budget of the individual project. These determinations will be done for the preparation of the RAP, which must be approved by the Bank before the project works can begin. All compensation and resettlement will be completed before construction can begin.

B. Mitigation Measures

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17. GoZ has prepared an ESMF and RPF. The ESMF provided guidelines for environmental impact assessments (EIAs) and environmental management plans (EMPs). Table A10.2 to A10.5 list the mitigation measures for IAES sub-projects:

Table A10.2: Impacts and Mitigation Measures for IAES Hydro-power ProjectsImpacts Mitigation Measures

Impacts on Natural Habitat and Forestry

Strengthening local authorities and conservation personnel responsible for managing natural resources

Public Awareness Program Agricultural extension programs Provision for energy (kerosene subsidies and

wood-fuel lots as required during the construction period)

Impacts on Water Quality

Minimum bypass flows Measures to reduce organic and inorganic

waste

Erosion and Sedimentation

Drainage and erosion prevention and modified construction techniques during the construction period

Revegetation program Installation of settlement ponds and sediment

traps

Pollution

Measures to reduce organic and inorganic waste

Appropriate disposal of waste materials Establish landfill sites Restrictions on blasting Appropriate locations for handling, storing and

disposing of oil products and other harmful chemicals

Limited use of pesticides

Impacts on Landscape Considerations of aesthetic and cultural values

in design of project features Revegetation program

Loss of Cultural Property

Consultations with local leaders and spiritual leaders

Provisions for relocation of important cultural sites

Funds for conducting necessary rituals and ceremonies related to beliefs

Involuntary Resettlement

Avoid construction in and around settled areas Consultations with affected persons Resettlement plan and alternatives for affected

persons Strengthening of local authorities and line

agencies responsible for carrying out resettlement and agricultural extension and possible involvement of local NGOs

Compensation Avoid construction in and around settled areas Consultations with affected persons

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Mechanism for prompt and fair payments, monitoring and grievance procedures

Impacts on Health, eg. increased malaria and HIV/AIDS incidences

Development of program to control malaria carrying parasites,

Sensitization of the local community and construction workers on dangers of STDs such as HIV/AIDS including Voluntary Counseling and Testing.

Health Strengthening existing health facilities - perhaps with the active involvement of NGOs as support

Health awareness programs - hygiene, malaria and other water-borne diseases and STDs such as HIV/AIDS including Voluntary Counseling and Testing

Supervision of health facilities and worker safety measures during construction period

Provisions to ensure safe drinking waterInternational Agreements

Review of all relevant international agreements as required for projects

Dam Safety Independent review of dam design and safety

Table A10.3: Impacts and Mitigation Measures for IAES Grid Expension ProjectsImpacts Mitigation Measures

Natural Habitat Disturbance and Impacts on Forestry

Strengthening local authorities and conservation personnel responsible for managing natural resources

Public Awareness Program Agricultural extension programs Provision for energy (kerosene subsidies and

wood-fuel lots as required during the construction period)

Erosion and sedimentation

Drainage and erosion prevention and modified construction techniques during the construction period

Revegetation program

Pollution

Appropriate locations for handling, storing and disposing of oil products and other harmful chemicals

Limited use of pesticides

Impacts on Landscape Considerations of aesthetic and cultural values

in design of project features Revegetation program

Loss of Cultural Property

Avoidance of all culturally important sites

Involuntary Resettlement

Avoid construction in and around settled areas Consultations with affected persons Resettlement plan and alternatives for affected

persons Strengthening of local authorities and line

agencies responsible for carrying out resettlement and agricultural extension and possible involvement of local NGOs

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Compensation Avoid construction in and around settled areas Consultations with affected persons Mechanism for prompt and fair payments,

monitoring and grievance procedures

Health Strengthening existing health facilities - perhaps

with the active involvement of NGOs as support Health awareness programs - hygiene, malaria

and other water-borne diseases and STDs such as HIV/AIDS including Voluntary Counseling and Testing

Supervision of health facilities and worker safety measures during construction period

Provisions to ensure safe drinking water

Table A10.4:Impacts and Mitigation Measures for IAES Co-generation and Diesel Projects

Impacts Mitigation Measures

Natural Habitat Disturbance and Impacts on Forestry

Strengthening local authorities and conservation personnel responsible for managing natural resources

Impacts on Water Quality

Measures to reduce organic and inorganic waste

Erosion and sedimentation

Drainage and erosion prevention and modified construction techniques during the construction period

Revegetation program

Pollution

Measures to reduce organic and inorganic waste Appropriate disposal of waste materials Appropriate locations for handling, storing and

disposing of oil products and other harmful chemicals

Limited use of pesticides

Impacts on Landscape Considerations of aesthetic and cultural values

in design of project featuresLoss of Cultural Property

Avoidance of all culturally important sites

Involuntary Resettlement

Avoid construction in and around settled areas. Consultations with affected persons. Resettlement plan and alternatives for affected

persons Cash compensation based on District

assessment rates for loss of up to 25percent of property or production.

Relocation support and livelihood development plan for those affected by more than 25percent of property or production.

Strengthening of local authorities and line agencies responsible for carrying out resettlement and agricultural extension and possible involvement of local NGOs.

Compensation Avoid construction in and around settled areas.

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Consultations with affected persons. Mechanism for prompt and fair payments,

monitoring and grievance procedures.

Health

Strengthening existing health facilities - perhaps with the active involvement of NGOs as support.

Supervision of health facilities and worker safety measures during construction period.

Health awareness programs - hygiene, and STDs such as HIV/AIDS including Voluntary Counseling and Testing.

TableA10.5:Impacts and Mitigation Measures for IAES PV System ProjectsImpacts Mitigation MeasuresImpacts on Landscape Considerations of aesthetic and cultural values

in design of project featuresLoss of Cultural Property

Avoidance of all culturally important sites

Compensation Avoid construction in and around settled areas Consultations with affected persons Mechanism for prompt and fair payments,

monitoring and grievance procedures

C. Assessment of Capacity of Implementing Agencies

18. Effective implementation of environmental and social safeguard issues for the IAES projects will be achieved by establishing an institutional framework with qualified and experienced staff at the two implementing agencies: ZESCO and REA.

19. ZESCO has an Environmental and Social Affairs Unit, established in 1996 under the Bank Power Rehabilitation Project. They are responsible for environmental and social issues related to ZESCO operations. The unit consists of 15 staff, including environmental scientists, social scientists, hydrologists, ecologists, land acquisition and resettlement specialist, environmental technology specialists, etc. Many of the staff hold a bachelor and master degree. They have undertaken numerous projects to conduct environmental impact assessment, develop environmental management plan, and address resettlement issues for ZESCO generation, transmission, distribution, rural electrification, power rehabilitation projects. In sum, ZESCO has extensive expertise and strong capacity in environmental and social issues. During discussions with this unit under ZESCO, it was agreed that REA can tap their resources and expertise in environmental and social issues whenever necessary.

20. REA is a relatively new organization, set up under the Rural Electrification Act, and has recently recruited well-qualified environmental and social specialists. In addition, REA’s Operational Manual establishes the environmental and social management procedures to be followed in

115

preparing and appraising investments. This will make it possible to co-ordinate environmental matters and will ensure institutionalization of the EA processes.

21. The project will support the finalization and adoption of the existing draft EIA Review Guidelines for the Energy Sector. The Government stakeholders involved in this process will include the Ministry of Energy and Water Development, REA, ZESCO, MTENR, ECZ, ERB, the Ministry of Justice and the Zambian Bureau of Standards.

116

Annex 11: Project Preparation and Supervision

ZAMBIA: Increased Access to Electricity Services

Planned Actual PCN review Feb 19, 2004Initial PID to PIC June 9, 2004Initial ISDS to PIC June 10, 2004Appraisal July 29, 2007 July 29, 2007Negotiations March 28, 2008Board/RVP approval May 20, 2008Planned date of effectiveness October 1, 2008Planned date of mid-term review May 30, 2011Planned closing date December 30, 2013

Key institutions responsible for preparation of the project:

Ministry of Energy and Water Development Rural Electrification Authority ZESCO

Bank staff and consultants who worked on the project included:Name Title UnitXiaodong Wang Task Team Leader AFTEGRaihan Elahi Senior Financial Analyst SASEIAnil Cabraal Lead Energy Specialist EWDENReynold Duncan Lead Energy Specialist AFTEGSamuel O’Brien-Kumi Senior Energy Economist AFTEGMarcus Wishart Water Resource Specialist AFTWRChrisantha Ratnayake Senior Power Engineer

(Consultant)AFTEG

Baruany Elijah Luhanga Power Engineer (Consultant) AFTEGWedex Ilunga Procurement Specialist AFTPCHelena Mamle Koffi Procurement Analyst AFTEGFenwick Chitalu Financial Management

SpecialistAFTFM

Suzanne Morris Senior Financial Officer LOAFCNicolette K. Dewitt Lead Counsel LEGOPJonathan Pavluk Senior Counsel LEGAF Marjorie Mpundu Counsel LEGAFPaul Martins Senior Environmental

SpecialistAFTSD

Gordon Appleby Social Impacts Specialist (Consultant)

AFTS1

Anta Loum Lo Language Program Assistant AFTEG

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Bank funds expended to date on project preparation:

1. Bank resources:2. Trust funds: $1,057,000 (PHRD and GEF PDF B)

Estimated Approval and Supervision costs:

1. Remaining costs to approval:2. Estimated annual supervision cost:

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Annex 12: Documents in the Project File

ZAMBIA: Increased Access to Electricity Services

COWI PREP report

SMEC PREP report

Econ Solar PV Assessment Report

ZESCO Business Plan

ZESCO Financial Analysis

Rural Electrification Act 2003

Financial Management Assessment Report

119

Annex 13: Statement of Loans and Credits

ZAMBIA: Increased Access to Electricity Services

Closed Projects 78

IBRD/IDA *Total Disbursed (Active) 144.17

of which has been repaid 0.00

Total Disbursed (Closed) 3,086.24

of which has been repaid 892.54

Total Disbursed (Active + Closed) 3,230.41

of which has been repaid 892.54

Total Undisbursed (Active) 193.92

Total Undisbursed (Closed) 0.00

Total Undisbursed (Active + Closed) 193.92

Active Projects

Project ID Project Name Development Objectives

Implementation Progress Fiscal Year IBRD IDA GRANT Cancel. Undisb. Orig. Frm

Rev'd

P070063 ZM-Agr Dev Support Program (FY06) S S 2006 37.2 33.2 -0.1P070962 ZM-Copperbelt Env (FY03) MS MS 2003 40.0 28.7 19.7 14.3P074258 ZM-GEF SEED Biodiversity SIL (FY05) MU MU 2005 4 1.9 1.4P096131 ZM-Malaria Health Booster SIL (FY06) S S 2006 20.0 9.8 -8.2P082452 ZM-Pub Service Mgmnt Prog - Support Proj S S 2006 30.0 19.9 9.1P071985 ZM-Road Rehab Maintenance Prj (FY04) S S 2004 75.0 45.8 17.0 6.4P071407 ZM-SEED (FY05) MU MU 2005 28.2 18.4 6.6P057167 ZM-TEVET SIM (FY01) MS MS 2001 25.0 9.1 5.2 5.2P071259 ZM-Water Sector Performance Improv (FY07 MS MU 2007 23.0 23.2 -0.4P003248 ZM-Zanara HIV/AIDS APL (FY03) S S 2003 42.0 5.8 -2.4 1.1Overall Result 320.4 4 195.9 48.0 27.1

CAS Annex B8 - Zambia

As Of Date 09/17/2007

Original Amount in US$ Millions Disbursements a/

Difference BetweenExpected and Actual

Supervision Rating

Last PSR

Operations Portfolio (IBRD/IDA and Grants)

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ZAMBIASTATEMENT OF IFC’s

Held and Disbursed PortfolioIn Millions of US Dollars

Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

2001 AEF Chingola Htl 0.53 0.00 0.00 0.00 0.53 0.00 0.00 0.00

1998 AEF Drilltech 0.12 0.00 0.00 0.00 0.12 0.00 0.00 0.00

1999 AEF Esquire 0.09 0.00 0.00 0.00 0.09 0.00 0.00 0.00

1997 AEF JY Estates 0.87 0.00 0.00 0.00 0.87 0.00 0.00 0.00

2001 AEF Michelangelo 0.12 0.00 0.00 0.00 0.12 0.00 0.00 0.00

2000 Marasa Holdings 3.40 0.00 0.00 0.00 3.40 0.00 0.00 0.00

1999 Zamcell 0.90 0.60 0.00 0.00 0.90 0.60 0.00 0.00

2000 Zamcell 0.66 0.44 0.00 0.00 0.66 0.44 0.00 0.00

2004 Zamcell 0.00 0.25 0.00 0.00 0.00 0.25 0.00 0.00

Total portfolio: 6.69 1.29 0.00 0.00 6.69 1.29 0.00 0.00

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

Total pending commitment: 0.00 0.00 0.00 0.00

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Annex 14: Country at a Glance

ZAMBIA: Increased Access to Electricity Services Zambia at a glance 10/1/07

Sub-Key Development I ndicators Saharan Low

Zambia Africa income(2006)

Population, mid-year (millions) 11.9 770 2,403Surface area (thousand sq. km) 753 24,265 29,215Population growth (%) 1.7 2.3 1.8Urban population (% of total population) 35 36 30

GNI (Atlas method, US$ billions) 8.2 648 1,562GNI per capita (Atlas method, US$) 690 842 650GNI per capita (PPP, international $) 1,000 2,032 2,698

GDP growth (%) 5.7 5.6 8.0GDP per capita growth (%) 4.0 3.2 6.1

(most recent estimate, 2000–2006)

Poverty headcount ratio at $1 a day (PPP, %) .. 41 ..Poverty headcount ratio at $2 a day (PPP, %) 87 72 ..Life expectancy at birth (years) 38 47 59Infant mortality (per 1,000 live births) 102 96 75Child malnutrition (% of children under 5) 23 29 ..

Adult literacy, male (% of ages 15 and older) .. 69 72Adult literacy, female (% of ages 15 and older) .. 50 50Gross primary enrollment, male (% of age group) 114 98 108Gross primary enrollment, female (% of age group) 108 86 96

Access to an improved water source (% of population) 58 56 75Access to improved sanitation facilities (% of population) .. 37 38

Net Aid Flows 1980 1990 2000 2006 a

(US$ millions)Net ODA and official aid 317 475 795 945Top 3 donors (in 2005): United Kingdom 43 43 111 166 Japan 13 40 32 132 United States 41 12 46 124

Aid (% of GNI) 8.8 15.8 25.8 13.9Aid per capita (US$) 52 57 74 81

Long-Term Economic Trends

Consumer prices (annual % change) .. 117.5 26.0 8.2GDP implicit deflator (annual % change) 11.8 106.4 24.0 14.1

Exchange rate (annual average, local per US$) 0.8 34.5 3,110.8 3,601.0Terms of trade index (2000 = 100) .. 147 100 ..

1980–90 1990–2000 2000–06

Population, mid-year (millions) 6.1 8.4 10.7 11.9 3.2 2.4 1.7GDP (US$ millions) 3,884 3,288 3,238 10,938 1.0 0.7 4.8

Agriculture 14.0 18.2 19.9 20.4 3.6 4.2 2.1Industry 39.1 45.3 22.5 27.7 1.0 -4.2 9.2 Manufacturing 16.9 31.9 10.2 10.4 4.1 0.8 5.1Services 39.7 24.8 46.7 43.5 -0.2 2.9 4.7

Household final consumption expenditure 55.2 64.4 87.4 54.9 3.6 1.1 2.7General gov't final consumption expenditure 25.5 19.0 9.5 11.7 -3.4 -8.1 8.5Gross capital formation 23.3 17.3 17.4 24.9 -4.3 5.4 5.3

Exports of goods and services 41.4 35.9 27.1 37.5 -3.3 2.8 11.9Imports of goods and services 45.4 36.6 41.5 29.0 -2.0 1.5 9.9Gross savings 7.3 6.9 2.9 33.3

Note: Figures in italics are for years other than those specified. 2006 data are preliminary. .. indicates data are not available.a. Aid data are for 2005.

Development Economics, Development Data Group (DECDG).

(average annual growth %)

(% of GDP)

20 10 0 10 20

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

percent

Age distribution, 2006

Male Female

020406080

100120140160180200

1990 1995 2000 2005

Zambia Sub-Saharan Africa

Under-5 mortality rate (per 1,000)

-15

-10

-5

0

5

10

90 95 00 05

GDP GDP per capita

Growth of GDP and GDP per capita (%)

122

Zambia

Balance of Payments and Trade 2000 2006

(US$ millions)Total merchandise exports (fob) 746 3,375Total merchandise imports (cif) 978 2,744Net trade in goods and services -457 188

Current account balance -633 .. as a % of GDP -19.5 ..

Workers' remittances and compensation of employees (receipts) .. ..

Reserves, including gold 114 ..

Central Government Finance

(% of GDP)Current revenue (including grants) 19.4 16.9 Tax revenue 17.3 16.2Current expenditure 16.9 18.9

Technology and Infrastructure 2000 2005Overall surplus/deficit -11.6 -6.8

Paved roads (% of total) 22.0 ..Highest marginal tax rate (%) Fixed line and mobile phone Individual 30 30 subscribers (per 1,000 people) .. .. Corporate 35 35 High technology exports

(% of manufactured exports) 0.6 1.1External Debt and Resource Flows

Environment(US$ millions)Total debt outstanding and disbursed .. .. Agricultural land (% of land area) 47 47Total debt service .. .. Forest area (% of land area) .. ..Debt relief (HIPC, MDRI) 3,096 1,522 Nationally protected areas (% of land area) .. ..

Total debt (% of GDP) .. .. Freshwater resources per capita (cu. meters) .. 6,873Total debt service (% of exports) .. .. Freshwater withdrawal (% of internal resources) 2.2 ..

Foreign direct investment (net inflows) 122 380 CO2 emissions per capita (mt) 0.17 0.19Portfolio equity (net inflows) -1 ..

GDP per unit of energy use (2000 PPP $ per kg of oil equivalent) 1.3 1.5

Energy use per capita (kg of oil equivalent) 586 605

World Bank Group portfolio 2000 2006

(US$ millions)

IBRD Total debt outstanding and disbursed 25 0 Disbursements 0 0 Principal repayments – 0 Interest payments – –

IDA Total debt outstanding and disbursed 1,823 2,637 Disbursements – –

Private Sector Development 2000 2006 Total debt service – –

Time required to start a business (days) – 35 IFC (fiscal year)Cost to start a business (% of GNI per capita) – 29.9 Total disbursed and outstanding portfolio 22 6Time required to register property (days) – 70 of which IFC own account 22 6

Disbursements for IFC own account 16 0Ranked as a major constraint to business Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account 1 2 Access to/cost of financing 84.5 .. Tax rates 57.5 .. MIGA

Gross exposure 31 0Stock market capitalization (% of GDP) 7.3 13.5 New guarantees 30 0Bank capital to asset ratio (%) .. ..

Note: Figures in italics are for years other than those specified. 2006 data are preliminary. 10/1/07.. indicates data are not available. – indicates observation is not applicable.

Development Economics, Development Data Group (DECDG).

0 25 50 75 100

Control of corruption

Rule of law

Regulatory quality

Political stability

Voice and accountability

Country's percentile rank (0-100)higher values imply better ratings

2006

2000

Governance indicators, 2000 and 2006

Source: Kaufmann-Kraay-Mastruzzi, World Bank

Short-term, 0IBRD, 0Other multi-

lateral, 0IMF, 0IDA, 0Private, 0

Bilateral, 0

Composition of total external debt, 2005 (data are not available)

US$ millions

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Millennium Development Goals Zambia

With selected targets to achieve between 1990 and 2015(estimate closest to date shown, +/- 2 years)

Goal 1: halve the rates for $1 a day poverty and malnutrition 1990 1995 2000 2005 Poverty headcount ratio at $1 a day (PPP, % of population) .. .. .. .. Poverty headcount ratio at national poverty line (% of population) .. .. 72.9 68.0 Share of income or consumption to the poorest qunitile (%) 1.3 4.2 3.4 3.6 Prevalence of malnutrition (% of children under 5) 25.2 23.5 25.0 23.0

Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) .. .. .. .. Primary completion rate (% of relevant age group) .. .. 56 78 Secondary school enrollment (gross, %) 21 .. 22 28 Youth literacy rate (% of people ages 15-24) .. .. .. ..

Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (%) .. .. .. .. Women employed in the nonagricultural sector (% of nonagricultural employment) .. .. .. .. Proportion of seats held by women in national parliament (%) .. .. .. ..

Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) 180 182 182 182 Infant mortality rate (per 1,000 live births) 101 102 102 102 Measles immunization (proportion of one-year olds immunized, %) .. .. .. ..

Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) .. .. .. .. Births attended by skilled health staff (% of total) .. .. .. ..

Goal 6: halt and begin to reverse the spread of HIV/AIDS and other major diseases Prevalence of HIV (% of population ages 15-49) .. .. 15.6 17.0 Contraceptive prevalence (% of women ages 15-49) .. .. .. .. Incidence of tuberculosis (per 100,000 people) .. .. .. .. Tuberculosis cases detected under DOTS (%) .. .. .. ..

Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of population) 50 .. .. 58 Access to improved sanitation facilities (% of population) .. .. .. .. Forest area (% of total land area) .. .. .. .. Nationally protected areas (% of total land area) .. .. .. .. CO2 emissions (metric tons per capita) 0.3 0.2 0.2 0.2 GDP per unit of energy use (constant 2000 PPP $ per kg of oil equivalent) 1.4 1.2 1.3 1.5

Goal 8: develop a global partnership for development Fixed line and mobile phone subscribers (per 1,000 people) .. .. .. .. Internet users (per 1,000 people) 0 0 2 20 Personal computers (per 1,000 people) .. .. .. .. Youth unemployment (% of total labor force ages 15-24) .. .. .. ..

Note: Figures in italics are for years other than those specified. .. indicates data are not available. 10/1/07

Development Economics, Development Data Group (DECDG).

Zambia

0

25

2000 2002 2005

Primary net enrollment ratio (..)

Ratio of girls to boys in primary &secondary education (..)

Education indicators (%)

0

10

20

30

2000 2002 2005

Fixed + mobile subscribers (..)Internet users

ICT indicators (per 1,000 people)

0

25

50

75

100

1990 1995 2000 2005

Zambia (..) Sub-Saharan Africa

Measles immunization (% of 1-year olds)

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Annex 15: Incremental Cost Analysis

ZAMBIA: Increased Access to Electricity Services

Broad Development Goals

1. The overall development objective of the project is to develop and support initial implementation of a commercially-oriented and sustainable framework for increasing access to electricity services. As a result of the initial investment, the project will also increase electricity access in rural and peri-urban Zambia to productive enterprises, service delivery facilities (in health, education, and water), and to households with the capacity to pay for electricity.

Baseline

2. In Zambia, only about 20 percent of the urban population and 2 percent of the rural population have access to electricity. To date, the rural electrification program has primarily focused on grid extension. The IDA IAES project aims at development and initial implementation of a legal, regulatory, and institutional framework to increase access to electricity services in Zambia, primarily through grid extension.

3. Under the baseline, meeting the broad development goals will require high-cost grid extension and/or diesel genset mini-grids in concentrated but remote areas, and kerosene and dry cell batteries in dispersed rural areas.

4. For remote rural areas, however, there are few options to increase access to electricity. Because of the low population density in Zambia and the enormous distances between major towns or load centers, grid extension to some of these areas is currently not commercially viable, due to the high costs. While renewable energy can play a major role in providing electricity services in rural areas, and Zambia is endowed with rich renewable energy resources, to date, however, utilization of renewable energy is quite limited, except large hydro, due to a number of barriers. Without these barriers being removed through this project, renewable energy development such as small hydro, biomass, and solar PV will continue to be the minimum, and the access to electricity services in remote rural areas will continue to be very low.

5. Without GEF contribution to the IDA loan, it is likely that the rural electrification and renewable energy efforts will not be well integrated, which will mean that renewable energy will play only a marginal role in the larger rural energy access effort.

Global Environment Objectives

6. The global environmental objective of this activity is the reduction of GHG emissions by removing the major barriers to the development of renewable energy in Zambia. This project has been designed to be consistent with GEF Operational Program #6 on “Promoting the Adoption of Renewable Energy by Removing Barriers and Reducing Implementation Costs”. Proposed GEF project supports OP6 strategic priorities – expanding productive uses of renewable energy (institutional solar PV systems for social services) and promoting power sector policy frameworks supportive of renewable energy (stand-alone grids).

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7. The project will directly help reduce CO2 emissions through the implementation of mini-grids renewable energy projects, such as small hydro and biomass, as well as solar PV systems for education, health, and households. It is assumed that the planned 4 MW hydro plants produce the same amount of electricity as a 4 MW baseline diesel power plant. The emission factor for diesel-based electricity generation is 1330 g CO2 per kWh10. An assumed operating time of 4000 hours per year of the hydro scheme would result in annual savings of around 21,300 tons CO2 emissions per year. An assumed lifetime of 25 years results in around 532,000 tons CO2 emissions for the mini-grid scheme.

8. Based on the willingness to pay survey conducted under project preparation, most rural households in un-electrified areas are currently consuming kerosene, candles, and batteries for lighting. These currently un-electrified areas where grid extension would not arrive in the near future are the target areas for solar home system market. Therefore, most solar PV systems in the household market are energy substitutions, and directly offset carbon emissions from baseline fuels. However, solar PV systems in newly built schools and clinics are energy additions, and avoided carbon emissions are largely based on market growth over time.

9. Each solar PV system displaces at least kerosene and candles for lighting, resulting typically in CO2 savings of around 60 kg per solar home system for household each year, and avoid CO2 emissions about 450 kg per institutional system for rural schools and health clinics, and. Assuming the project will reach 250 rural schools and clinics as well as 10,000 households, this results in avoided emissions of 712 tons per year, or 7,100 tons over an assumed lifetime of the solar PV systems of 10 years. In this project, it is expected that some the electricity generated by solar PV will be used to support productive uses, which enables the SHS to displace more fossil-based electricity and the associated emissions.

10. Therefore, total direct benefits would be in the range of about 550,000 tons of CO2

emissions avoided over the life of the equipment installed.

11. Indirect global environmental benefits of the project will be further assessed during project implementation, when the project can demonstrate how much renewable energy is able to replace fossil-based energy services. Given that this project is intended to establish a framework and provide technical assistance and capacity building activities, it is expected that renewable energy would be replicated without further GEF interventions.

12. The agreed cost of barrier removal for renewable energy in rural access expansion is the GEF contribution of US$ 4.5 million. Several additional domestic benefits attributable to the project activities include: meeting the energy needs of presently unserved local communities and quality of life enhancements. For further local benefits please refer to the main project appraisal document. These local benefits justify the IDA grant and local co-financing of $ 54.5 million.

10 IPCC Guidelines for National Greenhouse Gas Inventories.

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GEF Alternatives

13. Two strategies exist to increase access to electricity services in remote rural areas of Zambia: 1) isolated mini-grids (e.g. small hydro and biomass) to serve a concentrated but remote rural population. Small hydro, for example, can offer a least-cost option to supply electricity services, compared to diesel operation; and 2) stand-alone systems (e.g. solar PV) to satisfy small local demands for dispersed areas. This provides an opportunity for renewable energy to play a major role in providing electricity services in rural areas. Zambia is endowed with rich renewable energy resources from small hydro, biomass, and solar.

14. To date, however, utilization of renewable energy is quite limited, except large hydro, due to a number of barriers, including a lack of enabling policies and regulations, financing mechanisms, information, know-how and human capacity. Without these barriers being removed through this project, a widespread renewable energy development is unlikely to take place. This GEF project intends to address these policy, financing, institutional, information, and capacity barriers, and play a catalyzing role to help Zambia tap its renewable energy potentials.

15. The IDA/GEF project has three components: (1) ZESCO efficiency improvement, including reinforcement of existing distribution networks, intensification within existing grids in peri-urban areas, and energy efficiency and demand side management; (2) access expansion, including grid extension to rural areas, isolated grids such as mini-hydro, and solar PV for school, clinics, commercial establishments, and household markets; and (3) technical assistance for both ZESCO and REA.

16. Component 1 intends to improve efficiency and quality of service of electricity distribution network in targeted investment areas, and increase connection to new customers in peri-urban areas. It will also install 1,000,000 CFLs, which can cut peak demand by 50 MW. This is a cost effective and short-term measure to mitigate current load shedding in Zambia. No GEF funding is sought.

17. Component 2a (grid extension) intends to increase access to electricity services through extension of service from the existing interconnected electricity grid network operated by ZESCO through REA with IDA funds. The balance of financing will be debt and equity from ZESCO. No GEF support is requested.

18. Component 2b (small hydro) targets at providing partial capital subsidies to isolated grid systems, primarily small hydro plants, from the Rural Electrification Fund, to be funded by IDA, and no GEF support is requested. This component will support installation of 1-2 small hydro power plants with a total installed capacity of 3-5 MW. No GEF support is requested for this component.

19. Component 2c (solar PV) intends to provide financial incentives for solar dealers to kick-start the solar PV market in both the institutional and household segments. For solar home systems, the baseline costs are household expenditures on kerosene, candles, and batteries in currently un-electrified areas. A 20-Wp solar home system installed cost is around $550 in Zambia, accounting for the replacement and O&M costs over 10-year lifetime, the NPV of the

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lifecycle cost for a 20-Wp solar PV system is estimated to be $35/Wp. With the kerosene price of $0.9/liter, annual costs of battery and charging of $30, the NPV for kerosene and batteries for the same amount of consumption is estimated to be $20/Wp. GEF support is sought for a capital subsidy of $5/Wp, to cover part of the incremental costs. Currently, there are no solar dealers in remote rural areas in Zambia, with a few solar PV suppliers located in Lusaka. This performance-based incentive is essential for eligible solar dealers to develop the small-sized solar PV market to cover some of the additional costs incurred by the companies in developing their sales and service capabilities in deep rural markets. With a target of 10,000 solar home systems, the total incremental costs would be $1 million, to be financed by GEF. The consumers will provide $2.5 million baseline funding for these activities.

20. For solar PV systems in the institutional market such as rural schools and health clinics, the Ministry of Health and Education will provide funding for the equipment and installation costs. However, a study conducted under IAES project preparation identified that maintenance is a key issue for sustainability of these systems. Therefore, GEF support is sought to remove this barrier by first bundling the supply, installation, and maintenance services in one tendering document, and then providing incentives for PV suppliers to provide regular maintenance services and set up maintenance outlets near the schools and clinics. This also includes technical training for these systems in the procurement contract, to help ensure operational sustainability. It is planned that 250 solar PV systems will be installed in rural schools and health clinics during project implementation, and GEF support of $1.5 million is requested to cover the five-year maintenance contracts including battery replacement and spare parts. IDA will provide $4 million baseline funding for the capital costs of these systems.

21. Component 3a (TA for ZESCO) is financed by EU Grant, while Component 3b (TA for REA) intends to remove the policy, financing, institutional, information, and capacity barriers by assisting government in developing policy and regulatory frameworks to incorporate renewable energy in rural electrification schemes as well as assisting the private sector in developing renewable energy projects in Zambia. GEF funding will be used to (i) assist REA in preparation of additional small hydro PREP sites and SSMPs, implementation support and capacity building; (ii) support MEWD, ERB, MOE, MOH, and ECZ on renewable energy policy, regulations, outreach, and capacity building, and environmental management guidelines; and (iii) provide advisory services, matching grants, and training to the private project developers and local financial institutions. These are standard GEF technical assistance activities that aim to achieve sustainability and promote scale-up renewable energy. These TAs are designed to remove specific barriers to renewable energy in Zambia. The government requested that the bulk of IDA funds will be used for investment, not TA. Without GEF resources, these TA activities for renewable energy development will not occur. In addition, GEF support is requested only for incremental activities, building on ongoing and proposed renewable energy activities by other agencies, particularly the UNIDO-GEF project. For example, the UNIDO-GEF project plans to provide TA to mini-grid project developers, while this project primarily focuses on TA to solar PV dealers. GEF will contribute $2 million to this component, and the private sector will contribute $0.5 million on a cost-sharing basis. EU funding of $3 million will serve as baseline funding.

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Incremental Cost Matrix

22. The incremental costs and benefits of the proposed project are summarized in the following incremental cost matrix. The estimated baseline project cost for the IDA/GEF project is $ 54.5 million, with contributions from IDA, EU, the government, and the project sponsors/consumers. The GEF alternative is estimated to be $ 75.5 million. Therefore the incremental cost for the project, $21 million is required to remove barriers to the widespread deployment of renewable energy in Zambia. Of the $21 million incremental costs, $4.5 million is requested from GEF, and the IDA contributes to $8 million, government $4 million, and the private sector $4.5 million. Without these barrier removal activities, it is very unlikely that the large-scale national replication of renewable energy would take place.

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Incremental Cost Matrix

ActivityBaseline Alternative Increment

Component 1: ZESCO efficiency improvement

No EE/DSM measures are taken

Cost: $20 M$14M from IDA$4 M from EU$2 M from ZESCO

1,000,000 CFLs are installed

Cost: $22 M$16M from IDA$4 M from govt.$2 M from ZESCOGEF: 0

50 MW peak demand reduced

Cost: $2M from IDA

Component 2a: grid extension

Cost: $25M$7M from IDA$8 M from EU$8 M from govt.$2 M from ZESCO

Cost: $25M$7M from IDA$8 M from EU$8 M from govt.$2 M from ZESCO GEF: 0

Component 2b: Independent electricity grids

1-2 mini-hydro projects under development.

Cost: 0

Increased number of small hydro projects

Cost: $14M$6M from IDA$4M from the private sector$4M from the govt GEF: 0

Accelerated small hydro development

Cost: $14M$6M from IDA$4M from the private sector$4M from the govt.

Component 2c: Solar PV systems

Limited solar home systems.

Solar PV systems for schools and clinics are not sustainable.

Cost: $6.5 M$2.5 M from consumers $4M from IDA

To kick-start solar PV market in both institutional and household segments by providing financial incentives to the private sector.

Cost: $9 M$2.5M from GEF$4M from IDA$2.5M from consumers

Expanded solar PV market in Zambia

Increased solar PV consumers and improved maintenanceservices for solar PV in schools and clinics.

Increment $2.5 M$2.5 M from GEF

Component 3: Technical assistance and capacity building

TA activities to REA, ZESCO, ERB, and MEWD on rural electrification.

There exist policy, financing, institutional, information, and capacity barriers to renewable energy.

Cost: $3M $3M from EU

Remove these barriers through technical assistance and capacity building.

Cost: US$5.5 M $2M from GEF$3M from EU$0.5M from private

Barriers to renewable energy removed, and increased investment in renewable energy.

Increment: $2.5 M$2 M from GEF$0.5 M from the private sector

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sectorGlobal Environment Benefits

Rural energy access is expanded primarily based on grid extension.

Renewable energy is unlikely to be incorporated in the rural electrification scheme.

Innovative cross-sectoral energy applications are developed without renewable energy considerations.

Renewable energy remains undeveloped. Barriers not removed.

Baseline carbon emissions from diesel, kerosene, candles, and batteries: 550,000 tons of CO2 over lifetime period

Local air pollution from diesel genset.

Renewable energy is integrated in rural electrification efforts and innovative cross-sectoral energy applications

Renewable energy is widely replicated. Policy, financing, institutional, information, and capacity barriers removed.

Alternative carbon emission: 0 ton of CO2

Significant GHG emissions achieve.

Direct emission reduction of CO2 reached 550,000 tons over a 25-year period, and more CO2 emission reductions from potential future replications.

Barrier removal for market development of renewable energy

Domestic Benefits Increased access to electricity in remote rural areas, improved economic activities and incomes, and better local environment from renewable energy use.

Sustainable business models and innovative cross-sectoral energy applications encourage buildup of local RE industry.

Improved livelihood in remote rural areas.

Increased job opportunities at local community.

Avoided air pollution from diesel genset.

Costs Baseline costs: $54.5M$25 M from IDA$8 M from the govt. $15 from EU$7.5 M from the private sector/consumers

GEF Alternative: $75.5M$4.5M from GEF$33 M from IDA$12 M from the govt. $15 M from EU$11 M from ZESCO, private sector, and consumers

Incremental costs: $21M$4.5 M GEF$8M IDA$4.5M private sector$4M govt.

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Annex 16: Maps

ZAMBIA: Increased Access to Electricity Services

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