The World Bank Solomon Islands Community Benefit Sharing Pilot Project (P153986) REPORT NO.: RES55655 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF SOLOMON ISLANDS COMMUNITY BENEFIT SHARING PILOT PROJECT APPROVED ON SEPTEMBER 18, 2017 TO SOLOMON ISLANDS SOCIAL SUSTAINABILITY AND INCLUSION EAST ASIA AND PACIFIC Regional Vice President: Manuela V. Ferro Country Director: Stephen N. Ndegwa Global Director: Louise J. Cord Practice Manager/Manager: Ingo Wiederhofer Task Team Leader(s): Sean Bradley The World Bank Solomon Islands Community Benefit Sharing Pilot Project (P153986) ABBREVIATIONS AND ACRONYMS AGO Auditor General’s Office CBSF Community Benefit Sharing Fund CBSP Community Benefit Sharing Pilot Project CWS Community WASH Specialist DA Designated Account ESIA Environmental and Social Impact Assessment ESMF Environmental and Social Management Framework ESMP Environmental and Social Management Plan GRM Grievance Redress Mechanism FM Financial Management HH Household HRDC Human Resource Development Contractor JSDF Japan Social Development Fund MMERE Ministry of Mines, Energy and Rural Electrification O&M Operations and Maintenance PET Pre-Employment Training PPA Power Purchase Agreement PDO Project Development Objective RDP Rural Development Program REP Rapid Employment Project RWASH Rural Water Supply, Sanitation and Hygiene SA Subsidiary Agreement SIG Solomon Islands Government TOR Terms of Reference TRHDP Tina River Hydropower Development Project WASH Water Supply, Sanitation and Hygiene WB The World Bank The World Bank Solomon Islands Community Benefit Sharing Pilot Project (P153986) BASIC DATA Product Information Project ID Financing Instrument P153986 Investment Project Financing Original EA Category Current EA Category Approval Date Current Closing Date 18-Sep-2017 31-May-2023 Organizations Borrower Responsible Agency Ministry of Mines, Energy & Rural Solomon Islands Electrification,Solomon Islands Electricity Authority Financing (in USD Million) FIN_SUMM_PUB_TBL SUMMARY Total Project Cost 0 Total Financing 0 Financing Gap 0 DETAILS -NewFin3 Project Development Objective (PDO) Original PDO The project development objective is to establish the institutional arrangements and capacity for Benefit Sharing Communities to manage a share of the revenues from the operation of a large-scale infrastructure investment project and to improve their basic services and skills for income generation during the construction period. OPS_TABLE_PDO_CURRENTPDO The World Bank Solomon Islands Community Benefit Sharing Pilot Project (P153986) Summary Status of Financing (US$, Millions) Net TF Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed TF-A6839 18-Sep-2017 10-Apr-2018 10-Apr-2018 31-May-2023 2.80 1.90 .90 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Introduction and Background 1. This Project Restructuring Paper seeks approval to restructure the Solomon Islands Community Benefit Sharing Pilot Project (CBSP – P153986). The proposed restructuring would add two grant disbursement categories, reallocate grant funds among all eligible categories, and allow for one additional procurement procedure under the project. These changes would be applied retroactively to reflect changes in the way that Component 2.b. of the project (rural electrification) was implemented, and therefore allowing financing of work completed by the Project Implementing Entity, Solomon Islands Electricity Authority. These changes would also require updating the withdrawal condition of the project’s Grant Agreement to include the two new disbursement categories added as part of this restructuring, and making corresponding modifications to those parts of the Grant Agreement that refer to the requirements of the Project Implementing Entity for component 2.b. In accordance with Bank Policy and Procedure for Investment Project Financing, these modifications to the Project represent a level two restructuring for which the Country Director has delegated authority to decide. 2. The CBSP) was approved on September 18, 2017, for USD2.80 million, financed by the Japan Social Development Fund (JSDF) through a small Recipient-Executed Trust Fund (TF0A6839). The project became effective on April 10, 2018. It was restructured in February 2021 to extend the closing date by 18 months, from June 30, 2021, to December 31, 2022. The project was restructured a second time on December 22, 2022, to further extend the closing date by five months to May 31, 2023, as well as reallocate grant funds among disbursement categories and to revised results framework indicators and targets. As of May 3, 2023, US$1.9 million (or 67.9 percent) of available project funds have been disbursed. B. Project Status 3. CBSP supports the Tina River Hydropower Development Project (TRHDP) (P161319) by piloting a community benefit sharing scheme for TRHDP-affected communities. Specifically, the CBSP aims to establish a Community Benefit Sharing Fund (CBSF) that would eventually be used to channel revenues from the Tina River Hydropower generation activities to the affected communities, to deliver early benefits sharing outcomes associated with TRHDP prior to its completion, and serve as a potential model for other similar projects in the Solomon Islands and the Pacific Region. The Project Development Objective (PDO) of CBSP is to establish the institutional arrangements and capacity for Benefit The World Bank Solomon Islands Community Benefit Sharing Pilot Project (P153986) Sharing Communities1 to manage a share of the revenues from the operation of a large-scale infrastructure investment project and to improve their basic services and skills for income generation during the construction period. The project consists of four components: i) Establishment of the Community Benefit Sharing Fund and Community Capacity Building; ii) Improvement of community infrastructure; iii) Human resource development: and iv) Project Management, Administration, Monitoring and Evaluation, and Knowledge Dissemination. 4. CBSP has made reasonably good progress towards achieving its PDO since the first disbursement in September 2019, despite the COVID-19 global pandemic. The ratings for both progress toward achievement of PDO and implementation progress are Moderately Satisfactory.2 These ratings reflect the fact that the project has carried out most planned activities and achieved most intended results under the control of the project, but with some delays. In recognition of the generally positive impact the CBSP is having for the communities affected by the TRHDP, and due to delays in completing the hydropower facility and therefore generating revenue for the CBSF, the Government has requested support from the Bank for a follow-on project (CBSP Phase 2, “CBSP2”) that would continue to provide tangible benefits to communities during the Tina Hydropower construction period using 100% IDA grant funds. 5. The status of project implementation by component is presented below. (a) Component 1 - Establishment of the Community Benefit Sharing Fund and Community Capacity Building. To date, good progress has been made under the first component of the project, which aims to support the drafting of instititional arrangements and operating procedures for a benefit sharing fund, establish and operationalize the fund, and facilitate active community consultation and input into fund arrangements. The component successfully supported a global stock-take of similar benefits sharing funds that provided recommendations on the CBSF’s governance structure and general management arrangements, which was subsequently consulted on with representatives of the CBSP communities. This process involved multiple community consultations, and sensitization and capacity building of selected community representatives to ensure understanding and buy-in to the proposed CBSF. These activities have resulted in the drafting of the Fund Constituion and Operations Manual that are required to formally register the CBSF as a Charitable Trust under the relevant laws of Solomon Islands. It is expected that the Fund will be formally registered by early May 2023. Five members of an interim Board have also been identified (four by the CBSP communities and one by Tina Hydropower Limited, the hydropower facility operator). The tenure of the interim Board will provide for overlap with the CBSP2 so that further training and support can be provided to operationalize the CBSF under the new project. (b) Component 2 – Improvement of community infrastructure. This component funds community investments in water supply and rural electrification as preliminary benefits to the communities before the hydropower project actually starts generating benefits. Both sub-components of the project have seen substantial progress as outlined below. i. Component 2.a., water supply systems. The project supported a survey of the full CBSF catchment areas to identify community needs and potential sources of safe water in the project 1 According to the Letter Agreement, "Benefit Sharing Community" means the communities, villages, and hamlets selected in accordance with the eligibility criteria and procedures detailed in the Project Operations Manual, to be eligible for receiving benefits from the Tina River Hydropower Development Project through the Community Benefit Sharing Fund; and "Benefit Sharing Communities" means more than one Benefit Sharing Community. 2 All ratings noted in the restructuring package are from the most recent Implementation Status and Results (ISR) Report of May 2023. The World Bank Solomon Islands Community Benefit Sharing Pilot Project (P153986) area. This survey led to the identification of 18 community water investment sub-projects that would benefit an estimated 4,200 people. As of mid-April 2023, 12 sub-projects had been completed and 6 are under construction and scheduled for completion by or before May 31, 2023. The project, together with the Rural Water and Sanitation (RWASH) Program of the Ministry of Health, has also begun training and estimated 80 community members in basic water systems operation and maintenance activities to ensure sustainability of infrastructure completed. The project will transfer to the CBSP2 the data on community needs not yet covered for support under the new project. ii. Component 2.b., rural electrification. The planned for 10 KM, 11Kv transmission/feeder line with three stepdown transformers, with connections to 141 households and the community school, was completed by Solomon Islands Electricity Authority (Solomon Power) in June 2022. The line and the associated connections were energized in April 2023. However, this work was not carried out as originally envisioned in the project document nor anticipated in the Grant Agreement, leading to challenges in finalizing payments for the work completed. The current project restructuring aims to address these implementation arrangement constraints, as described in Section II below. (c) Component 3 - Human resource development (HRD). This component intended to support skills development of CBSP catchment area residents linked to anticipated labor demands from the TRHDP. To date the project has organized and financed, with the support of a local HRD agency, several different activities that are aimed at improving resident’s chances of securing employment. However, the success of these efforts has been limited in part due to delays in starting civil works under the TRHDP. To date the results of the component are: (i) creation of a database of interested job-seekers (961 individual records), (ii) pre-employment training delivered to approximately 300 community members, (iii) facilitated enrollment and follow-up support provided to 76 technical and vocational education training (TVET) students, and (iv) arranged Distance Flexible Learning (for 5 students) and agricultural training for 29 residents. Due to COVID-19 and related restrictions, more than 25 students withdrew from the TVET program and most of the remaining defered their enrollment so that only seven had completed their courses of study by December 2022. The project will support an additional 32 students who will graduate by the end of 2023.3 The costs for the remaining 12 students who will complete their courses in 2024 and 2025 would not be eligible for financing beyond the closing date of the project. The PMU confirmed that these students with courses extending beyond the closing date of the project are aware that their outstanding tuition and allowance payments would not be financed by the project, and the PMU is actively supporting efforts to link those students with alternative scholarships. (d) Component 4 - Project Management, Administration, Monitoring and Evaluation, and Knowledge Dissemination. This component was designed to support the incremental costs to the TRHDP project office of managing the CBSP, and includes financial management and procurement activities, environmental and social safeguards compliance, monitoring, evaluation, and knowledge management activities. The project put in place a small but effective team to manage the CBSP, with a coordiantor, project officer and a finance assistant. This team was augmented by short-term consultant specialists (benefits sharing, legal, community water) as well as supported through institutional arrangments for HRD and rural electrification as noted above. The PMU also made appropriate use of the TRHDP project office and resources. Key project 3WFA has agreed on an exceptional basis to allow the financing of the full cost of course-work and related stipends for the students who would finish their course of studies by or before the end of December 2023. The World Bank Solomon Islands Community Benefit Sharing Pilot Project (P153986) management tasks (including progress reporting, financial audits, mid-term review, etc.) have been completed in a reasonably timely fashion. However, capacity constraints have adversely affected quality and timeliness of procurement and FM activities. The Country Office is providing direct implementation support and assistance to the PMU to help resolve systems issues. 6. Environmental and Social Safeguards. The CBSP triggers five safeguard policies: OP 4.01 Environmental Assessment, OP 4.04 Natural Habitats, OP 4.11 Physical Cultural Resources, OP 4.10 Indigenous Peoples, and OP 4.12 Involuntary Resettlement, and applies an Environmental and Social Management Framework (ESMF) document as the principal safeguard instrument. Overall, the project has fulfilled the requirements of the ESMF, including the preparation and implementation of an Environmental and Social Management Plan by Solomon Power for Component 2.b. The current Implementation Status and Results report rating for environmental and social safeguards is Satisfactory. The project restructuring does not trigger any new safeguard policies nor change the Environmental Classification of the project. 7. Financial Management (FM) and Procurement. The ratings for both FM and procurement are Moderately Satisfactory. The project has acceptable accounting, reporting and audit arrangements in place and the Bank has been providing support to enhance capacity and to advise on key FM reports and responsibilities. There are no changes to the Project FM reporting requirements with MMERE (PMU) responsible for preparing and submitting consolidated audited project financial statements and interim financial reports covering all project activities, in accordance with the Grant Agreement. Basic procurement systems are also in place and the project has uploaded most contracts (with the exception of those relating to component 2.b.) in STEP. However, delays have occurred in uploading all contracts which has affected the Bank’s ability to monitor procurement progress. The office in Honiara is providing implementation support assistance to overcome systems, capacity and internet connectivity constraints. There are no outstanding audit reports for the project. 8. The only outstanding legal matter relates to the establishment of a Subsidiary Agreement (paragraph 2.03.C. of the Grant Agreement) between SIG and Solomon Power as a Project Implementing Entity for component 2.b. This has not been accomplished despite Solomon Power having completed the work under the rural electrification component. However, the Government and Solomon Power are currently negotiating a draft Agreement, the finalization of which depends in part on changes proposed under this project restructuring. C. Rationale for Restructuring 9. The rationale for restructuring the CBSP is to allow the project to retroactively finance expenses incurred, and to recognize procurement procedures applied, for component 2.b. that are not currently allowed for under the Grant Agreement. This specifically includes expenditures for consultants services and operating costs and the use of force account procurement procedures by Solomon Power in implementing the rural electrification component. These additional types of expenditures and procurement procedure reflect the fact that Solomon Power directly implemented elements of component 2.b., including provision of certain goods and materials from their existing supplies, rather than fully contracting out the works and goods as originally envisioned. The use of force account is justified per the Procurement Guidelines (of January 2011, Revised July 2014) due to the small and scattered nature of the relevant procurements and will be accepted subject to the Bank’s technical review and inspection of the specific works conducted and equipment installed.` 10. There are two key reasons why the project was implemented in a manner inconsistent with the Grant Agreement. First, Solomon Power signed an agreement with the Recipient for the work under component 2.b., which the Bank did not review or provide its no objection to, that did not adequately pass on key requirements of the Grant Agreement. Second, COVID-19 restrictions limited the in-person presence of Bank supervision missions during the time The World Bank Solomon Islands Community Benefit Sharing Pilot Project (P153986) component 2.b., was being implemented, and therefore the lack of an appropriate legal agreement between Solomon Power and the Recipient was not immediately detected. 11. Notwithstanding these errors, the work has been completed in accordance with the original design of component 2.b., within the original budget, and to satisfactory technical4, environmental and social standards. This restructuring would allow for the last significant element of the project to be financed as originally planned. The Ministry of Finance and Treasury formally requested the relevant changes to the project in its letter to the Resident Representative of May 8, 2023. 12. These changes necessitate other amendments to the Grant Agreement. First, the addition of two new expenditure categories for component 2.b., requires their addition to the disbursement condition for the same component of the project. Second, given that Solomon Power will be paid in full retroactively for eligible expenditures, certain sub- paragraphs of the Grant Agreement that refer to the Subsidiary Agreement with Solomon Power would be modified to reflect the changes to the withdrawal table. These changes will not affect the Bank’s ability to exercise standard remidies under Articles IV of the Standard Conditions, the Procurement Guidelines, the Consultants Guidelines and/or the Anti- Corruption Guidelines. 13. The task team has found no indication that the Recipient willfully disregarded the terms of the Grant, but rather made an honest mistake by entering into an agreement with Solomon Power that did not have World Bank clearance. For its part, Solomon Power was unaware of the Grant terms and assumed they were contracted appropriately. 14. Given that Component 2.b., has been completed as designed, within budget and to relevant standards, and that the Recipient and Project Implementing Entity appear to have acted in good faith, the task team believes that restructuring the project to allow for the financing of the component is warranted. The key risk of not restructuring the project would be the negative effect that this would have on the working relationship between the World Bank and Solomon Power, an implementing agency for other World Bank projects in Solomon Islands, and potentially with the Recipient. Furthermore, and assuming approval of the restructuring, the task team notes that there remains the risk that the restructuring is rendered moot if the Recipient does not countersign the amendment, or that the Project Implementing Agency and the Recipient do not finalize an acceptable Subsidiary Agreement prior to the Project closing date of May 31, 2023. 15. The JSDF Secretariat of DFI that oversees all JSDF grants has reviewed this restructuring package and cleared the proposed changes to the allocation of grant proceeds across eligible expenditure categories on an exceptional basis, noting the positive results being achieved on the ground in their email to the task team of May 10, 2023. This includes exceeding the prescribed expenditure thresholds for consultants services as outlined in the JSDF Policy Guidelines. II. DESCRIPTION OF PROPOSED CHANGES 16. No changes are envisaged to the PDO, the results framework, project components or their costs, or the project closing date. The specific changes incorporated in this project restructuring are as follows: (a) Changes to and Reallocation between JSDF Grant Disbursement Categories. The restructuring will add two new categories of Eligible Expenditures and will reallocate Grant proceeds across all expenditure 4The Distribution and Transmission and the Regulatory Departments of Solomon Power independently certify that all lines and household connections meet appropriate technical and safety standards per Solomon Island Government requirements. The World Bank Solomon Islands Community Benefit Sharing Pilot Project (P153986) categories (Paragraph 3.01). The two new categories to be created are: Category 8-- Consultants Services under Part (Component) 2.b. of the Project, and Category 9-- Operating Costs under Part 2.b. of the Project. These two new categories reflect costs incurred directly by Solomon Power for consultant services, personnel costs, and other operating costs associated with implementing component 2.b. The restructuring would also address additional reallocations across other existing expenditure categories as presented in Table 1 below, which reflect actual costs of project implementation. The reasons for any significant variation between the previous restructuring and this restructuring are also presented in Table 1. (b) Changes to procurement procedures. The Grant Agreement will be revised to include force account procurement procedures as an additional method of procurement of Goods, Works and Non-consulting Services under the project (Paragraph 2.06), which would allow for the financing of goods drawn from Solomon Power’s stores for the construction of the transmission line. Both changes will apply to the project retroactively as of September 9, 2021, when Solomon Power issued the Notice to Proceed construction to Ann City Power Solution, the primary contractor for Component 2.b. 17. The project restructuring would also include Other Changes as follows: (c) The addition of two new Eligible Expenditure categories in relation to component 2.b. of the project requires a change in the Withdrawal Condition (Paragraph 3.02 (b)) related to that same project component to add Categories (8) and (9) to Withdrawal Condition. (d) Given that Solomon Power will be paid in full retroactively for eligible expenditures, certain sub- paragraphs of the Grant Agreement that refer to the Subsidiary Agreement (Paragraph 2.03. C., sub- paragraphs 1. (a); and 1. (c) iii; would be modified to reflect the additional categories of expenditures. The World Bank Solomon Islands Community Benefit Sharing Pilot Project (P153986) Table 1: Proposed Changes to Grant Expenditure Categories and Allocations (for JSDF TF0A6839) Original Grant 1st Revised Grant Current Revised Grant Category Allocation (USD) Allocation (USD) Allocation (USD) Explanation of Variation Consultants Services under Parts 1, 2a, 3 & due to 23 month extension and 1. 556,400 560,000 600,000 4 of the Project change in delivery approach Training under Parts 1, 2a, 3 & 4 of the less direct training due to delays 2. 325,500 290,000 280,000 Project in TRHDP start-up difference primarily due to shift Goods under Parts 1, 2a, 3 & 4 of the 3. 666,657 580,000 600,000 of water sub-project (2.a) goods Project to category 5 works for 2.a lower overall cost due to 4. Goods under Parts 2b of the Project 732,455 525,000 400,000 changes in final design & delivery approach (see cat.8) Works under Parts 1, 2a, 3 & 4 of the 5. 180,219 365,000 370,000 Project see above for category 3 Cost increase due to changes in 6. Works under Parts 2b of the Project 254,689 300,000 300,000 final design and delivery approach Operating Costs under Parts 1, 2a, 3 & 4 of 7. 84,080 180,000 140,000 the Project due to 23 month extension due to changes in SolPower's Consultants Services under Part 2b of the 8. 50,000 direct delivery of part 2b of Project project due to changes in SolPower's Operating Costs under Part 2b of the 9. 60,000 direct delivery of part 2b of Project project TOTAL AMOUNT 2,800,000 2,800,000 2,800,000 III. SUMMARY OF CHANGES Changed Not Changed Reallocation between Disbursement Categories ✔ Procurement ✔ Implementing Agency ✔ Project's Development Objectives ✔ Results Framework ✔ Components and Cost ✔ Loan Closing Date(s) ✔ Cancellations Proposed ✔ The World Bank Solomon Islands Community Benefit Sharing Pilot Project (P153986) Additional Financing Proposed ✔ Disbursements Arrangements ✔ Disbursement Estimates ✔ Change in Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ APA Reliance ✔ Implementation Schedule ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed TF-A6839-001 | Currency: USD iLap Category Sequence No: 1 Current Expenditure Category: CS Parts 1,2a,3 &4 560,000.00 557,904.59 600,000.00 100.00 100.00 iLap Category Sequence No: 2 Current Expenditure Category: Trng Prts 1,2a,3 &4 290,000.00 202,292.42 280,000.00 100.00 100.00 The World Bank Solomon Islands Community Benefit Sharing Pilot Project (P153986) iLap Category Sequence No: 3 Current Expenditure Category: Gds Prts 1,2a,3&4 580,000.00 565,981.92 600,000.00 100.00 100.00 iLap Category Sequence No: 4 Current Expenditure Category: Gds Part 2b 525,000.00 0.00 400,000.00 100.00 100.00 iLap Category Sequence No: 5 Current Expenditure Category: Wrks Prts1,2a,3&4 365,000.00 240,171.84 370,000.00 100.00 100.00 iLap Category Sequence No: 6 Current Expenditure Category: Wrks Part 2b 300,000.00 0.00 300,000.00 100.00 100.00 iLap Category Sequence No: 7 Current Expenditure Category: Prts 1,2a,3 & 4 180,000.00 130,372.78 140,000.00 100.00 100.00 iLap Category Sequence No: 8 Current Expenditure Category: CS Part 2b 0.00 0.00 50,000.00 100 iLap Category Sequence No: 9 Current Expenditure Category: Operating Costs Part 2b 0.00 0.00 60,000.00 Total 2,800,000.00 1,696,723.55 2,800,000.00 Note to Task Teams: End of system generated content, document is editable from here.