FOR OFFICIAL USE ONLY Report No: PAD5241 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROJECT APPRAISAL DOCUMENT ON A LOAN IN THE AMOUNT OF EUR 247 MILLION (US$268.4 MILLION EQUIVALENT) AND A CO-FINANCING FROM THE GREEN CLIMATE FUND IN THE AMOUNT OF US$20 MILLION (LOAN) AND US$5 MILLION (GRANT) TO THE SOCIETE TUNISIENNE DE L’ELECTRICITE ET DU GAZ AND REPUBLIC OF TUNISIA FOR A TUNISIA-ITALY ELECTRICITY INTEGRATION AND RENEWABLE ENERGY ECOSYSTEM PROJECT May 11, 2023 Energy and Extractives Global Practice Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective March 31, 2023) Currency Unit = Euro (€) €1 = US$1.087 US$ = SDR0.677 FISCAL YEAR January 1 – December 31 Regional Vice President: Ferid Belhaj Country Director: Jesko S. Hentschel Regional Director: Paul Noumba Um Practice Manager: Husam Mohamed Beides Task Team Leader(s): Anas Benbarka, Moez Cherif, Tu Chi Nguyen The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) ABBREVIATIONS AND ACRONYMS AC Alternating Current AFD French Development Agency (Agence Française de Développement) AM Accountability Mechanism ACG Anti-Corruption Guidelines ARERA Italian Regulatory Authority for Energy, Networks, and Environment ASA Advisory Services and Analytics AWPB Annual Work Plan and Budget BAP Biodiversity Action Plan BMF Biodiversity Management Framework BMP Biodiversity Management Plan CAPEX Capital Expenditure CBT Central Bank of Tunisia CCB Climate Co-Benefits CEF Connecting Europe Facility CHA Critical Habitat Assessment CPF Country Partnership Framework DA Designated Account DC Direct Current DFIL Disbursement and Financial Information Letter EBIT Earnings before Interest and Taxes EBITDA Earnings before Interest, Taxes, Depreciation, and Amortization EBRD European Bank for Reconstruction and Development EBSA Ecologically or Biologically Significant Area EENS Expected Energy Not Served EIB European Investment Bank EIRR Economic Internal Rate of Return ENPV Economic Net Present Value ENTSO-E European Network of Transmission System Operators for Electricity ESIA Environmental and Social Impact Assessment ESIP Energy Sector Improvement Project ESCP Environmental and Social Commitment Plan ESF Environmental and Social Framework ESHS Environmental, Social, Health, and Safety ESMAP Energy Sector Management Assistance Program ESMP Environmental and Social Management Plan ESS Environmental and Social Standards EU European Union EUR / € Euro FAA Funded Activity Agreement FBMP Framework Biodiversity Management Plan FIRR Financial Internal Rate of Return FM Financial Management The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) FMA Financial Management Assessment FNPV Financial Net Present Value GCF Green Climate Fund GCRF Global Crisis Response Framework GDP Gross Domestic Product GHG Greenhouse Gas GIF Global Infrastructure Facility GoT Government of Tunisia GRM Grievance Redress Mechanism GRS Grievance Redress Service HVDC High Voltage Direct Current IFI International Financial Institution IFR Interim Financial Report IMF International Monetary Fund IPF Investment Project Financing IPP Independent Power Producer JPA Joint Procurement Agreement KfW Kreditanstalt für Wiederaufbau K-IMMA Key-Important Marine Mammal Area LCC Line Commutated Converter LIB Limited International Bidding LMP Labor Management Procedures M&E Monitoring and Evaluation MBES Multi Beam Echo Sounder MESRS Ministry of Higher Education and Scientific Research MI Mass-Impregnated NDC Nationally Determined Contribution O&M Operation and Maintenance OHTL Overhead Transmission Line OPEX Operational Expenditures PCI Project of Common Interest PCM Private Capital Mobilization PDO Project Development Objective PEFA Public Expenditure and Financial Accountability PFM Public Financial Management PIU Project Implementation Unit POM Project Operational Manual PPA Power Purchase Agreement PPSD Project Procurement Strategy for Development PQ Prequalification RAB Regulated Asset Base RAP Resettlement Action Plan RE Renewable Energy RF Resettlement Framework The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) RFP Request for Proposal SEA/SH Sexual Exploitation and Abuse and Sexual Harassment SEP Stakeholder Engagement Plan SOE State-Owned Enterprise SRMI Sustainable Renewables Risk Mitigation Initiative STEG Tunisian Company of Electricity and Gas (Société Tunisienne de l’Electricité et du Gaz) STEM Science, Technology, Engineering, and Mathematics STEP Systematic Tracking of Exchanges in Procurement TA Technical Assistance TEEP Tunisia Tertiary Education and Employability Project TYNDP Ten Year Network Development Plan TSO Transmission Owner and System Operator VRE Variable Renewable Energy VSC Voltage Source Converter WACC Weighted Average Cost of Capital WBG World Bank Group The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) TABLE OF CONTENTS DATASHEET ........................................................................................................................... 1 I. STRATEGIC CONTEXT ...................................................................................................... 6 A. Country Context................................................................................................................................ 6 B. Sectoral and Institutional Context .................................................................................................... 8 C. Relevance to Higher Level Objectives............................................................................................. 15 II. PROJECT DESCRIPTION.................................................................................................. 16 A. Project Development Objective (PDO) ........................................................................................... 16 B. Project Components ....................................................................................................................... 17 C. Project Beneficiaries ....................................................................................................................... 21 D. Results Chain .................................................................................................................................. 22 E. Rationale for Bank Involvement and Role of Partners ................................................................... 23 F. Lessons Learned and Reflected in the Project Design .................................................................... 24 III. IMPLEMENTATION ARRANGEMENTS ............................................................................ 26 A. Institutional and Implementation Arrangements .......................................................................... 26 B. Results Monitoring and Evaluation Arrangements......................................................................... 28 C. Sustainability................................................................................................................................... 28 IV. PROJECT APPRAISAL SUMMARY ................................................................................... 29 A. Technical, Economic and Financial Analysis ................................................................................... 29 B. Fiduciary.......................................................................................................................................... 36 C. Legal Operational Policies ............................................................................................................... 39 D. Environmental and Social ............................................................................................................... 39 V. CITIZEN ENGAGEMENT AND GRIEVANCE REDRESS SERVICES ......................................... 43 VI. KEY RISKS ..................................................................................................................... 44 VII. RESULTS FRAMEWORK AND MONITORING ................................................................... 47 ANNEX 1: Implementation Arrangements and Support Plan .......................................... 52 ANNEX 2: Project Design Analysis.................................................................................. 66 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) DATASHEET BASIC INFORMATION BASIC_INFO_TABLE Country(ies) Project Name Tunisia Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem Project ID Financing Instrument Environmental and Social Risk Classification Investment Project P179240 High Financing Financing & Implementation Modalities [ ] Multiphase Programmatic Approach (MPA) [ ] Contingent Emergency Response Component (CERC) [ ] Series of Projects (SOP) [ ] Fragile State(s) [ ] Performance-Based Conditions (PBCs) [ ] Small State(s) [ ] Financial Intermediaries (FI) [ ] Fragile within a non-fragile Country [ ] Project-Based Guarantee [ ] Conflict [ ] Deferred Drawdown [ ] Responding to Natural or Man-made Disaster [ ] Alternate Procurement Arrangements (APA) [ ] Hands-on Enhanced Implementation Support (HEIS) Expected Approval Date Expected Closing Date 09-Jun-2023 28-Dec-2028 Bank/IFC Collaboration No Proposed Development Objective(s) To increase Tunisia’s resilient transmission capacity for the trade of electricity with Europe for the benefit of Tunisian households and businesses Components Component Name Cost (US$, millions) Page 1 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Converter station on Tunisian side 242.00 Tunisia domestic grid reinforcement 119.50 Project preparation and implementation support and TA for VRE deployment 15.40 Organizations Borrower: Republic of Tunisia (Subcomponent 3.3) STEG (Components 1, 2, 3.1, and 3.2) Implementing Agency: Ministry of Higher Education and Scientific Research (Subcomponent 3.3) STEG (Components 1, 2, 3.1, and 3.2) PROJECT FINANCING DATA (US$, Millions) SUMMARY -NewFin1 Total Project Cost 916.91 Total Financing 916.91 of which IBRD/IDA 268.40 Financing Gap 0.00 DETAILS -NewFinEnh2 Private Sector Investors/Shareholders Equity Amount Debt Amount Government Contribution 334.25 IFI Debt 268.40 Other Donors 334.25 IBRD 268.40 Non-Government Contributions 149.63 Commercial Debt 144.63 Private Sector Equity 144.63 Unguaranteed 144.63 Trust Funds 5.00 Trust Funds 20.00 Total 483.88 433.03 Expected Disbursements (in US$, Millions) WB Fiscal Year 2023 2024 2025 2026 2027 2028 2029 Page 2 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Annual 0.00 26.84 53.68 53.68 80.52 40.26 13.42 Cumulative 0.00 26.84 80.52 134.20 214.72 254.98 268.40 INSTITUTIONAL DATA Practice Area (Lead) Contributing Practice Areas Energy & Extractives Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating 1. Political and Governance ⚫ High 2. Macroeconomic ⚫ High 3. Sector Strategies and Policies ⚫ Substantial 4. Technical Design of Project or Program ⚫ Moderate 5. Institutional Capacity for Implementation and Sustainability ⚫ Substantial 6. Fiduciary ⚫ High 7. Environment and Social ⚫ High 8. Stakeholders ⚫ Substantial 9. Other 10. Overall ⚫ High COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [✓] No Page 3 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Does the project require any waivers of Bank policies? [ ] Yes [✓] No Environmental and Social Standards Relevance Given its Context at the Time of Appraisal E & S Standards Relevance Assessment and Management of Environmental and Social Risks and Impacts Relevant Stakeholder Engagement and Information Disclosure Relevant Labor and Working Conditions Relevant Resource Efficiency and Pollution Prevention and Management Relevant Community Health and Safety Relevant Land Acquisition, Restrictions on Land Use and Involuntary Resettlement Relevant Biodiversity Conservation and Sustainable Management of Living Natural Relevant Resources Indigenous Peoples/Sub-Saharan African Historically Underserved Traditional Not Currently Relevant Local Communities Cultural Heritage Relevant Financial Intermediaries Not Currently Relevant NOTE: For further information regarding the World Bank’s due diligence assessment of the Project’s potential environmental and social risks and impacts, please refer to the Project’s Appraisal Environmental and Social Review Summary (ESRS). Legal Covenants Sections and Description Section I.A.1(b) of Schedule 2 of the Loan Agreement: The Borrower shall (i) no later than (30) days after the Effective Date (or such later date as shall be agreed by the Bank), prepare a manual acceptable to the Bank (“Project Operational Manual” or “POM”); (ii) immediately thereafter, ensure that Parts 1, 2, 3.1 and 3.2 of the Project are carried out in accordance with the POM; and (iii) ensure that the POM or any of its provisions is not amended, abrogated or waived without the Bank’s prior written consent. In case of conflict between the provisions of the POM and the provisions of this Agreement, the provisions of this Agreement shall prevail. Sections and Description Page 4 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Section I.A.2 of Schedule 2 of the Loan Agreement: The Borrower shall no later than ninety (90) days after the Effective Date, or such later date as agreed by the Bank, the Borrower shall ensure, with the support of the Guarantor, the establishment, and thereafter operation and maintenance throughout Project implementation, of a Project oversight committee (“Project Oversight Committee”) with composition, terms of reference and functions acceptable to the Bank and defined in the POM to provide strategic guidance and oversight of the Project. Sections and Description Section I.A.3 of Schedule 2 of the Loan Agreement: To facilitate the implementation of Component 1 of the Project, the Borrower shall: (a) no later than thirty (30) days after the Effective Date, or such later date as agreed by the Bank, establish, and thereafter operate and maintain throughout Project implementation, a joint technical steering committee (“Italy-Tunisia Technical Steering Committee”) with composition, terms of reference and functions as defined in the POM; and (b) in collaboration with the Guarantor’s ministry in charge of energy, ensure close coordination between the Italy-Tunisia Technical Steering Committee and the Elmed Interconnector Steering Committee responsible of providing strategic coordination and oversight of the activities to be carried out under Part 1 of the Project, and more broadly, the Elmed Interconnector. Sections and Description Section I.A.4 of Schedule 2 of the Loan Agreement: Prior to the commencement of any civil works under Parts 1 and 2 of the Project, the Borrower shall select and hire an owner engineer firm with terms of references and under terms and conditions acceptable to the Bank, responsible of assisting the Borrower in the supervision of the activities under Parts 1 and 2 of the Project. Conditions Page 5 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) I. STRATEGIC CONTEXT A. Country Context 1. This Project Paper seeks the approval of the World Bank Board of Executive Directors for a €247 million (US$268.4 million equivalent) IBRD loan. Proceeds would finance, together with other partners, the Tunisia-Italy interconnector (Elmed) project for the trade of clean electricity between Tunisia and Europe, support for the deployment of renewable energy and a renewable energy excellence center in Tunisia. Complementary to the loan, the project would be supported by a financing from the Green Climate Fund in the amount of US$20 million (loan) and US$5 million (grant). The project development objective is to “increase Tunisia’s resilient transmission capacity for the trade of electricity with Europe for the benefit of Tunisian households and businesses.” The Project consists of three components to accompany the Government of Tunisia in its vision for renewable energy scale-up (as part of its energy transition strategy) and to position Tunisia as a regional clean energy hub. The Elmed interconnector will benefit countries on both sides of the Mediterranean by providing the Maghreb and Europe access to additional sources of supply, which will allow countries to reduce the use of natural gas, improve the electricity systems to integrate more renewable energy sources, and lower the cost of electricity supply which has important macro-fiscal impacts and improves the affordability and competitiveness of households and businesses. 2. Tunisia was the birthplace of the Spring Revolution in 2011 which has profound impacts on the country and the region alike. The country made early gains in this journey, securing a democratic opening and greater voice and civic freedoms for the population - core demands of the revolution; there were also gains in poverty reduction. However, Tunisia’s transition has been under severe and sustained pressure in recent years as the economy stalled, unemployment remained stubbornly high, service delivery declined and the country has entered a complex political transition since July 2021. 3. Tunisia’s economic performance decelerated after 2011, resulting in a lost decade for growth even before the COVID-19 pandemic hit. Annual gross domestic product (GDP) growth declined to 1.7 percent on average between 2011 and 2019, down from an average of 3.5 percent in 2000–2011. Economic performance stagnated due to a significant decline in productivity growth from the already low growth during the pre-revolution era.1 Low investment, limited innovation, reduced trade orientation, and excessive regulation of economic activity were major contributing factors for such disappointing growth performance. Private investment as a share of GDP dropped from an average 17.4 percent in 2000–2010 to 14.9 percent of GDP in 2011–2019. 4. With worsening growth and job outcomes, Tunisia increasingly relied on the welfare state to meet citizens’ aspirations for better livelihoods. This includes key fiscal instruments to support livelihoods and purchasing power of households, including consumer and producer subsidies, transfers to state-owned enterprises (SOEs), social transfers, and public sector jobs. These measures have helped many poor and vulnerable households at a delicate time in the early stages of the transition as did the significant scale-up of cash transfer programs for needy families which helped support livelihoods. But the public sector has also tended to be considered the employer of last (and at times first) resort when social 1World Bank (2014) highlights the limited structural change and the weak economic performance of Tunisia in the 2000 –2010 decade. The relatively limited economic growth of the period had been mainly driven by the expanding public sector in an economy saddled with severe distortions, which kept its performance below potential. Page 6 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) and youth unemployment pressures increase, leaving Tunisia with one of the highest public sector wage bills globally (growing from 10.0 percent in 2010 to 15.5 percent of GDP in 2021), and a growing imbalance in the public pension system, which limited the budget available for development purposes and public investments. 5. This approach has not tackled the deep distortions that have held back the economy, while it has generated an increasingly unsustainable public debt stock. These measures did not accelerate job creation or provide a broad sense of growing opportunities. In fact, markets became increasingly concentrated as barriers to entry and operations remained high across sectors, including cumbersome rules on investment, trade, and licenses; poor access to finance; and rigid public processes. At the same time, the expanding role of the state to compensate the lack of economic opportunities for Tunisians resulted in the rapid growth of public debt from 38.8 percent in 2010 to 80 percent in 2022. 6. The COVID-19 pandemic and Russia’s invasion of Ukraine have exacerbated the vulnerabilities of the economy. The pandemic caused a dramatic drop in GDP in 2020 (8.6 percent), while the economic recovery was moderate, relative to the drop, with a 4.3 percent growth in 2021. As a result, Tunisia’s economy shrank during the COVID-19 crisis (2019–2021) more than that of comparator countries in the region. Russia’s invasion of Ukraine compounded these challenges mainly through the increase in commodity prices linked to the war. GDP growth is estimated at 2.4 percent in 2022 with large fiscal (6.8 percent of GDP) and current account deficit (9.4 percent of GDP). The large twin deficits are mainly the result of the increase in energy and food subsidies and the related increases in energy and food imports. Energy subsidies in particular are estimated to have more than doubled from TND 3.3 billion in 2021 (2.6 percent of GDP) to TND 7.6 billion in 2022 (5.3 percent of GDP). 7. Tunisia entered a new political phase in July 2021. The country entered a critical political juncture in July 2021, when President Saied introduced measures such as the partial suspension of the 2014 Constitution and the dissolution of the parliament. A new Constitution was adopted by referendum in July 2022 with a 94 percent approval rating and a voter turnout of 30 percent and established a presidential system of government and a bicameral legislative system. Parliamentary elections took place between December 2022 and January 2023 with a turnout of around 11 percent. The new Parliament's first session took place on March 13, 2023. Additionally, the setting up of the second legislative chamber foreseen by the Constitution was initiated by the recent decree-laws on municipal elections and new local councils. 8. Tunisia’s plans to restore macroeconomic stability and navigate out of the crisis involve a new International Monetary Fund (IMF) program. Tunisia and the IMF reached a staff-level agreement in October 2022 which was to be approved by the IMF’s Executive Board in December 2022. This approval was postponed for ensuring completion of prerequisites and a new date has not been set. The program, for an amount of US$1.9 billion, includes important reforms for the country to achieve fiscal sustainability, including subsidy reforms (especially for energy), public sector wage bill containment as well as reforms of the last and, in most part, fiscally highly strained SOE sector. 9. One of the pillars of the recent government’s ‘Economic and Financial Stability Program’ is the achievement of sustainable development. Central to this pillar is the acceleration of the energy transition, including a target of 35 percent renewables generation capacity by 2030; a planned overhaul of the electricity sector; and increased involvement of the private sector in power generation. Becoming a clean energy hub in the center of the Mediterranean, and thus contributing to Euro-Mediterranean energy market integration, is a critical element of the country’s sustainable development plan. The Elmed Page 7 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) interconnector between Tunisia and Italy supports the ambition of becoming a Mediterranean clean energy hub, as it will enable trade of green electricity with Europe. Moreover, the interconnector supports renewable energy (RE) scale-up in the interconnected countries by enhancing power system flexibility. The Elmed interconnector will therefore help Tunisia achieve its ambitious climate mitigation objectives as reported in its updated Nationally Determined Contribution (NDC). B. Sectoral and Institutional Context 10. To improve energy security, alleviate electricity market tightness, and achieve its climate mitigation objectives, the Government laid out an ambitious plan to develop its vast renewable resources, for both domestic use and exports. With its high solar irradiation and wind resources, Tunisia has a potential to generate up to 280 GW in solar and 10 GW in wind. In 2013, the Government of Tunisia (GoT) endorsed an energy road map and priority measures that focus on (a) reviewing existing natural gas resources and consumption patterns and (b) diversifying electricity production away from natural gas, thus strengthening energy security, essentially by using RE sources. As part of the Tunisia Solar Plan in 2015, the GoT committed to reaching 30 percent of electricity generation capacity from renewables by 2030 (15 percent wind, 10 percent solar photovoltaic, and 5 percent concentrated solar power), a target which has now been raised to 35 percent. The achievement of the 2030 target would require the development of a capacity of 4.85 GW RE and an investment of €6.3 billion. The National Low-Carbon Strategy is even more ambitious with a target of 50 percent RE (8.35 GW) by 2035 and 80 percent by 2050. 11. RE scale-up will help reduce Tunisia’s dependence on natural gas, which is increasingly imported. Despite slow GDP growth, there has been strong growth in energy demand over the past 12 years. Between 2010 and 2021, the country’s energy demand grew by an average rate of about 1.5 percent per year, with demand for gas quadrupling since 1990. The country’s energy mix is based on natural gas (53 percent) and petroleum (46 percent) with renewables accounting for only 1 percent of primary energy requirements in 2021. With its high dependence on hydrocarbons, the country is vulnerable to disruptions in the international oil and gas markets and price volatility. Moreover, with declining national resources, the country is increasingly dependent on natural gas imports from Algeria. The structural trend of increasing reliance on hydrocarbon imports has considerably eroded Tunisia’s energy independence: while in 2010 the country relied only on 7 percent of imports to meet its energy demand, in 2021 imports satisfied 45 percent of national energy needs, at the cost of TND 5.7 billion (approximately US$2 billion), or 4.3 percent of GDP. 12. RE scale-up will also help diversify the energy mix and address the electricity market tightness. Natural gas dominates power generation at 98 percent, while renewables (mostly wind) make up only 2 percent. Besides dependence on only one fuel, the sector is characterized by extreme tightness due to low investment. Electricity consumption increased at a high pace growing on average by 3 percent annually between 2010 and 2021, with peak demand increasing by more than 4 percent annually. According to the GoT, 400–600 MW of new power generation capacity would need to be added every two years to cover expected electricity needs. Yet, installed capacity has increased only by 100 MW per year in the last few years. The installed capacity is 6,015 MW compared with the peak demand of 4,678 MW, or a reserve margin of 22 percent in 2022, but the real reserve capacity is much lower (less than 10 percent) due to degraded performance of gas units in high temperature, which coincides with the peak demand. To meet future demand, Tunisia will have to increase supply by significantly scaling up its RE program and/or importing electricity. Elmed is timely as it supports the RE scale-up, thanks to the Page 8 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) increased power system flexibility delivered by the balancing of electricity supply and demand over a broader geographic area and as such it provides a route to import electricity if and as needed. 13. Although the RE targets may seem ambitious given the previous track record, they are achievable for several reasons: (a) the GoT is being supported by the European Commission and Multilateral Development Banks to implement its ambitious policy; (b) the GoT is starting to undertake the necessary reforms, including streamlining the processes for private investment in renewable projects, and will continue reforms such as STEG performance improvement, establishing a regulator and energy subsidy reduction; and (c) STEG is undertaking investments and operating measures to increase the flexibility of the Tunisian power system, among which battery storage, demand-side response and regional integration, in particular owing to Elmed. These actions are based on the lessons learned from the last call for proposal of RE projects and aim to attract private investment while promoting resilient infrastructure. Box 1 describes in more details these actions and the World Bank Group (WBG)’s support. Box 1. Tunisia’s Renewable Energy Strategy and World Bank Group’s Support The GoT attracts private investment in renewable energy through three regimes (a) concession for large projects, (b) authorization for small and medium projects (up to 10 MW for solar photovoltaic and 30 MW for wind), and (c) self-generation for industrial customers. Under the concession regime, 500 MW of solar energy has been awarded. The electricity produced will be sold to the Tunisian Company of Electricity and Gas (Société Tunisienne de l’Electricité et du Gaz, STEG) at average prices of US$0.027 per kWh, which is competitive with other generation costs, and will result in an inflow of about US$500 million of foreign direct investments, but there are delays in reaching financial close since these prices are no longer valid due to inflation. For wind, the tender attracted several private investors (12 companies prequalified), but the restricted call for tenders has not yet been launched. In the same context, the Government recently announced its three-year development plan 2022–2025 and launched calls for tenders for a total capacity of 1,700 MW of solar and wind independent power producers (IPPs) under the concession regime over 2022–2025, which will be realized in four rounds as follows: (a) call for tenders for two solar projects on sites proposed by the state with a total capacity of 150 MW per project, (b) eight solar projects with a capacity of 100 MW per project with two projects per round on sites proposed by the promoters, and (c) eight wind projects with a capacity per project capped at 75 MW on sites proposed by the promoters. Under the authorization regime, there have been four rounds of call for projects in the last three years, with 62 projects totaling 394 MW authorized but only eight projects of 26 MW have been constructed due to lack of financing. By the first half of 2023, there have been 501 MW RE constructed, including 210 MW solar under the old self-generation regime, 26 MW under the authorization regime, and 265 MW installed by STEG. Measures have recently been taken by the Government to accelerate the financing of these projects such as the granting of letters of comfort to facilitate their financing and the streamlining of procedures related to the allocation of land and land use classification. Under the self-generation regime, the GoT issued the Transversal Law in 2019, establishing a new framework that allows special purpose vehicles to produce and sell electricity to its eligible shareholders, with subscribed demand above 1 MW, allowing third-party access to the transmission and distribution networks for the first time. The law, however, requires two additional implementation regulations, under preparation, to be implemented. The WBG is providing support to all three regimes. Under the concession regime, the Tunisia Energy Sector Improvement Project (ESIP, P168273) of US$151 million aims to strengthen the transmission network to integrate renewables. The World Bank is also providing technical assistance (TA) to enhance the bidding documents for the next round of call for proposals for 1,700 MW solar and wind. Under the authorization regime, the World Bank helped the GoT improve the manual of procedures for the bidding process and establish an online platform to allow investors to evaluate the project risk and improve their applications. Under the self-generation regime, the World Bank completed two analyses to provide inputs to the GoT in preparing two remaining decrees on (a) the wheeling charge for medium voltage network and (b) the contractual framework for sale of excess power to STEG. The TA also includes a VRE integration study to identify the necessary investments to allow for large scale RE Page 9 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) deployment. The International Finance Corporation, in parallel, is planning an important support including investment mobilization via (i) focused upstream and advisory interventions to support the scale-up of RE tenders; and (ii) financing of IPP projects. It is already financing one of the RE projects under the 500 MW concession. 14. To attract private investment in power generation capacity and restore STEG’s financial viability, the program of subsidy reform and tariff adjustments must be resumed. Tunisia is still maintaining energy subsidies to appease social tensions. Nevertheless, given budget constraints and fluctuating natural gas prices, subsidies have not always met the full financing needs of STEG so that the company has been facing financial deficits since 2010. The deficits reached TND 276 million in 2021 (US$96 million equivalent at 2021 exchange rate), even after subsidies, and are expected to be much higher with the increase in gas prices. In view of this situation, the GoT has taken measures to control subsidies by making periodic adjustments to electricity tariffs while keeping social tariffs low. After a pause following a series of tariff adjustments in 2018–2019, the GoT resumed electricity tariff adjustment in May 2022, but tariffs remain at around 60 percent of cost recovery for a Brent price of around US$100 per barrel2. 15. The massive scale-up of renewables, driven by the private sector, will require an enabling regulatory and financial environment and significant power system flexibility. With a limited track record of private sector participation in the sector, the GoT already started to embark on regulatory reforms to improve the performance of the Tunisian power sector and the attractiveness to private investors for the renewable program, including setting up different RE regimes; streamlining the bidding processes aligned with international standards; and establishing a regulator who, among others, will issue licenses to IPPs and determine the tariffs. The GoT is already in discussions with the IMF and World Bank to continue its subsidy reforms and modernization of STEG to restore financial viability of the sector. Finally, it is assessing the investment needs to reinforce the generation and transmission system to allow for massive RE integration. Many of these efforts are supported by the World Bank, in coordination with other donors, under separate Advisory Services and Analytics (ASA)3 which cover subsidy reform, STEG performance improvement, regulator establishment, and VRE integration. Furthermore, STEG is currently implementing the ESIP (P168273), financed by the World Bank, to strengthen part of Tunisia’s electricity transmission systems which is critical to enable the integration of RE and ensure reliable energy supply over the long term. Figure 1 features the interlinking between the complementary WBG lending and projects and ASAs to the sector, as well as those of other international financial institutions (IFIs). 2Oil prices determine STEG’s purchase price of natural gas. 3Enhancing the performance and financial viability of the Tunisian energy sector (P167211) and Technical support to accelerate Tunisian energy sector transition (P178700). Page 10 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Figure 1. Complementary Support to Tunisia Electricity Sector by the WBG and Other IFIs 16. The Elmed interconnector presents a tangible investment opportunity to improve Tunisia’s energy security and contribute to its decarbonization goal, while enhancing economic growth. Connecting the Tunisian power system—a small system with peak demand growing rapidly—to the larger European power system will spur diversification of the energy mix; reduce the extreme dependence on natural gas; and enable large-scale development of the country’s vast RE potential, by increasing the power system flexibility.4 This in turn will reduce the overall generation cost in Tunisia, hence enhancing the sector’s financial viability, and lower the need for natural gas imports (thus limiting the country’s fiscal exposure to global oil and gas prices), strengthening Tunisia’s energy security and reducing the current account deficit.5 In the long term, as the country develops its RE potential on a large scale, Tunisia will become a net electricity exporter to Italy and beyond, as indicated in the economic analysis below, with a positive derived impact on the economy from additional sources of export revenues. The economic analysis indicates that Elmed remains economically viable even if Tunisia has difficulties in reaching its ambitious RE targets. Thus the investment is robust for all RE development scenarios. 17. Elmed contributes to Euro-Mediterranean energy market integration, thus helping Europe diversify its energy sources in the wake of the Russia’s invasion of Ukraine and achieve its carbon neutrality objective. The Elmed interconnector will strengthen the interconnectivity across the Mediterranean, being the second interconnector between the African and European continents, after the one linking the Moroccan and Spanish power systems across the Gibraltar straight. The creation of an 4 ESMAP (Energy Sector Management Assistance Program). 2010. Regional Power Sector Integration: Lessons from Global Case Studies and a Literature Review. 5 Tunisia’s energy trade deficit deteriorated to TND 9.7 billion in 2022 (a deterioration of 72 percent compared to 2021), and energy accounts for 55 percent of the balance of trade deficit. Natural gas imports are responsible for close to 40 percent of the energy trade deficit. According to the economic analysis, Elmed would reduce natural gas import value by 12-13 percent in 2030 depending on the scenario. Although this is not a very large figure, it would have a welcome effect on the trade deficit, with a positive impact on the CAD which has deteriorated in 2022 to exceed 9 percent. Page 11 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) integrated Euro-Mediterranean energy market would also help the European Union (EU) alleviate the impact of external shocks, including the Russia’s invasion of Ukraine, by providing access to additional sources of supply of both natural gas and electricity, as foreseen in the REPowerEU Plan.6 7 Moreover, the interconnector would integrate the embryonic Maghreb electricity market with that of Europe, thus increasing electricity exchanges between Tunisia and Algeria (currently about 122 GWh per year), and possibly Libya once the interconnector between Tunisia and Libya can be made to operate properly. Figure 2. Map of the Tunisia-Italy (‘Elmed’) Power Interconnector Note: The map has been cleared by the Cartography Unit of the World Bank as of February 24, 2023 18. The Elmed interconnector is strongly supported by the Governments of Italy and Tunisia, and the EU. The interconnector is sponsored by STEG and Terna Group, the Italian transmission owner and system operator (TSO). It was clearly outlined as a priority project in both the Orientations Stratégiques du Secteur de l’Energie 2030 developed by the Tunisian Ministry of Industry, Mines, and Energy as well as the National Transmission Network Development Plans of Terna. The Elmed interconnector is included in the list of ENTSO-E TYNDP8 projects and MedTSO Master Plan.9 Given its strategic importance to realize the North-South Electricity Interconnections in Central Eastern and South Europe corridor, the interconnector has received the Project of Common Interest (PCI) status since 2017 and is reported among the PCIs also in the Commission Delegated Regulation (EU) 2020/389. In 2020, the Italian Regulatory Authority for Energy, Networks, and Environment adopted a decision on investment cost allocation for the Italy-Tunisia interconnection and inclusion of such costs in Italian transmission tariffs. On December 8, 2022, the EU approved through the Connecting Europe Facility (CEF) a grant of €307.6 million to Elmed 6 REPowerEU is EU’s plan to rapidly reduce dependence on Russian fossil fuels and fast forward the green transition. See Communication from The Commission To The European Parliament, The European Council, The Council, The European Economic And Social Committee And The Committee Of The Regions COM/2022/230 final. 7 Pariente-David, Silvia. 2022. L’integration du marché méditerranéen de l’énergie au secours de la décarbonisation in Afkar/Idées N°66 « Guerre en Ukraine : Impact sur la Méditerranée du Sud, Eté 2022. 8 ENTSO-E TYNDP = European Network of Transmission System Operators for Electricity Ten-Year Network Development Plan. 9 MedTSO = Master Plan for the Mediterranean Electricity Interconnections. www.med-tso.com. Page 12 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) as part of a €600 million package for energy infrastructure in support of the European Green Deal and REPowerEU. 19. With ongoing preparation and studies, the interconnector is close to being ready to be procured. The interconnector development started in 2003 and was the subject of several studies in 2005–2006.10 On this basis, a joint Tunisian-Italian group met in September 2005 and approved a project option consisting of a 1,000 MW submarine cable and a 1,200 MW power plant in Tunisia, of which 800 MW was for export to Italy. Based on the option chosen, the Tunisian and the Italian governments issued several joint declarations in 2007–2008 and created ‘Elmed Etudes’11 in 2009 as a joint venture between Terna and STEG. During this period, Terna and STEG signed a first memorandum of understanding. In 2011, the situation changed with the recession in Europe—resulting in a surplus of electricity on the Italian side—and the economic slowdown since 2011 in Tunisia. The two sides agreed to revise the interconnector project concept, which led to the elimination of the proposed power plant in Tunisia, the reduction of the cable’s capacity (to 600 MW), and the change in the expected direction of power flows in the short term (that is, from Italy to Tunisia). Since 2016, significant work has been undertaken by Elmed Etudes to fine-tune the interconnector concept and prepare its implementation, including through the World Bank-financed ongoing TA: Tunisia-Italy Power Interconnector Project Preparation TA (P164625), with a total financing of about US$12.5 million from the Global Infrastructure Facility (GIF) and ESMAP trust funds, 12 which was approved by the Board in 2018 and is expected to close in 2024. This TA (implemented by Elmed Etudes) financed (a) studies (environmental and Social Impact Assessment [ESIA] and Resettlement Action Plan [RAP]), which were completed; (b) two surveys (a terrestrial and a marine survey), which were completed; and (c) a transaction adviser to provide commercial, legal, financial, technical, and transaction processing advisory services to structure the Elmed interconnector (the recruitment will be launched by May 2023). On April 30, 2019, the Italian Ministry of Economic Development and the Tunisian Ministry of Industry entered into an agreement with the aim of supporting Terna and STEG in the development of the interconnection project. Ratified by Tunisia on January 29, 2020, and by Italy on December 19, 2021, the agreement became effective on January 25, 2022. 20. The Elmed interconnector has an estimated total cost of €964.2 million covering investments on the Tunisian and Italian sides. These estimates are based on the feasibility studies mentioned above and Terna’s experience implementing multiple interconnector projects. Terna also conducted a market assessment among major vendors, particularly for the High Voltage Direct Current (HVDC) submarine cable and HVDC converter stations, to verify the cost estimates. As shown in figure 3, the Interconnector consists of the following: (a) Sicily-Tunisia 200 km submarine cable and two HVDC converter stations in Tunisia and Sicily (estimated cost: €840 million), (b) Tunisian grid reinforcement (estimated cost: €110 million), and (c) Tunisia project implementation support and TA for VRE deployment (estimated cost: €14.2 million). Owing to supply chain constraints and tight market situations in HVDC technologies, the costs for the submarine cable and the converter stations are higher than those for other recent projects. The number of HVDC projects has more than quintupled over the years, particularly due to high demands 10 Network studies: (1) Scenario Analysis (September 2005) and (2) Detailed Analysis of the Selected Alternatives (February 2006). Two environmental and siting studies: (1) Standards and Instruments of Land Planning and General Characterization of the Examined Environmental Context (July 2005) and (2) Detailed Analysis of the Territorial and Environmental Insertion Context for the Selected Alternatives (December 2005). 11 Elmed Etudes (SARL) is a limited-liability company established on April 20, 2009 and is based and registered in Tunisia. It is a 50:50 joint venture between Terna and STEG whose main objective is to conduct studies, structure, and generally prepare the interconnector project until it is ready to be financed and procured. 12 The ESMAP fund to the Preparation TA was financed by the Government of Italy. Page 13 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) in Europe for regional integrations and offshore wind connections, and limited number of vendors (see Annex 2). It should be also noted that contingency is added to the cost with the aim of considering the impact of unexpected events. The cost estimate for the domestic grid reinforcement is based on STEG’s recent experiences. Figure 3. Schematic Diagram of Elmed interconnector 21. The EU CEF grant of €307.6 million is dedicated to financing the Sicily-Tunisia submarine transmission and converters (item (a) above), evenly split between Tunisia and Italy. The remaining on the Italian side will be financed through a mix of corporate loans and equity through Terna. The remaining on the Tunisian side will be financed by IBRD, the European Investment Bank (EIB), Kreditanstalt für Wiederaufbau (KfW), and the European Bank for Reconstruction and Development (EBRD). In addition, the World Bank mobilized concessional financing from the Green Climate Fund (GCF) in the amount of US$20 million to support Tunisian grid reinforcement investments and enable higher VRE integration into the grid, as well as a grant in the amount of US$5 million for TA to support deployment of VRE projects.13 Table 1 provides sources and uses of funds for the interconnector investments. Table 1. Interconnector Investments Uses and Sources of Funds (million €) Uses of Funds Amount Sources of Funds (i) Sicily-Tunisia interconnector Submarine cable 394.6 STEG, through CEF (153.8); Terna (120.4); STEG, through other IFIs (120.4) Italy HVDC converter station 222.7 Terna, through CEF (76.9); Terna (145.8) Tunisia HVDC converter station 222.7 STEG, through CEF (76.9); STEG, through IBRD (145.8) (ii) Tunisian grid reinforcement Tunisia Overhead Transmission Line (OHTL) 110.0 STEG, through IBRD (91.6); STEG, through GCF Mlaabi/Mornaguia + Grombalia substation (18.4) (iii) Project implementation support and TA for VRE deployment Project implementation support 9.6 STEG, through IBRD (9.6) 13The Funded Activity Agreement (FAA) for the GCF was signed in April 2023 but is awaiting an amendment for the changes in (i) Borrower from GoT to STEG, and (ii) addition of the Ministry of Higher Education and Scientific Research as implementing agency for subcomponent 3.3. Following signing of amendment, the grant funding requests will be created and submitted for approval at the Regional Vice-President level. Page 14 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) TA for VRE deployment 4.6 STEG, through GCF (4.6) Total 964.2 Both uses and sources of funds are best estimates given current information. C. Relevance to Higher Level Objectives 22. The Project directly contributes to Objectives 1.1 and 3.1 of the WBG’s Tunisia Country Partnership Framework (CPF) 2023–2027, which is planned to be presented to the Board of Executive Directors in June 2023. Objective 1.1 aims at ‘strengthening SOE financial performance and quality of service’. Under this objective, given the recent gas price hike, which potentially undermines STEG’s ability to provide reliable electricity supply, Elmed will provide not only an alternative, potentially cheaper, supply but also a solution to help integrate RE, hence increasing the security of supply. The Elmed interconnector also supports this objective by reducing energy costs for Tunisia, which would improve the financial viability of the electricity sector, a prerequisite to improving investor confidence and furthering the development agenda. Objective 3.1 aims at ‘accelerating the energy transition towards a new efficient, resilient and low-carbon development model’. In the short term, electricity imports from Italy will replace gas-based generation with relatively cleaner sources of supply. In the medium to long term, the interconnector will provide flexibility to the Tunisian power system to facilitate RE scale-up and avoid curtailment. By providing a low-cost source of electricity supply, the Project would also contribute to the WBG’s twin goals of poverty elimination and shared prosperity. 23. The Project supports the GoT’s vision for development outlined in the Economic and Social Development Plan 2023–2025, the ‘Note d’Orientation Tunisie 2035’ (Guidance Note Tunisia 2035), and the ‘Vision Stratégique du Secteur de l’Energie 2050’ (Strategic Vision of the Energy Sector 2050). The Project contributes to the achievement of two of the four pillars of the note: ‘a competitive and diversified economy that can adapt to change’ and ‘optimization of natural resources’ through promoting green growth. Elmed is expected to contribute to the energy mix diversification and decarbonization—a goal that is also in line with the 2030 Energy Sector Strategy. In addition, a key premise of the note is that Tunisia will maintain and strengthen its partnerships with the international community, and the proposed project is a critical step to link Tunisia with Italy, offering Tunisia access to the Italian and European power markets and strengthening its ties with such partners. The Elmed interconnector will also give a renewed push to the process of Maghreb electricity market integration and complete the integration of the Maghreb and European systems as outlined in the 2030 Tunisian Energy Sector Strategy. 24. The Project is consistent with the 2021 Middle East and North Africa Infrastructure Strategy’s guiding principles and strategic pillars. The Project contributes to the ‘Spurring green recovery’ objective of the strategy by investing in infrastructure that supports the clean energy transition. These investments involve significant participation of the private sector and will help secure clean and reliable electricity as a key service for livelihoods. Furthermore, by facilitating the exchange of RE between Tunisia and Europe, the Project helps unlock the potential for Tunisia and the broader Maghreb. The Project also meets the three pillars of the strategy, which are connectivity, transition, and reforms. The Project will contribute to strengthening regional ties in the electricity sector and will also expand partnerships with global players, namely Italy and the EU. The Project will also contribute to the pillar of the Middle East and North Africa Regional Strategy aimed at (re)construction and recovery through an approach that brings together external partners, by structuring the transaction to leverage global resources from the EU and other IFIs to meet Tunisia’s and the region’s infrastructure financing needs. Page 15 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) 25. The Project contributes to the World Bank’s and Tunisia’s climate goals. It is fully consistent with Tunisia’s NDC and long-term strategies leading to Paris climate goals. In promoting the trade of clean energy between North Africa and Europe, it will help decarbonize the electricity systems in all concerned countries. The Project also facilitates integration of RE in Tunisia, a low-carbon source of electricity, hence helping reduce greenhouse gas (GHG) emissions, in line with Tunisia’s NDC, disclosed in October 2021, in which Tunisia raises the goal of reducing national carbon intensity to 27 percent (unconditional) and 45 percent (conditional) by 2030, compared to its 2010 level, and the majority of this reduction (70 percent) is expected to come from the energy sector. The Project is well aligned with the World Bank Middle East and North Africa Climate Roadmap 2021–2025 under pillar of Energy Transition and Low-Carbon Mobility as it will contribute to increasing the flexibility of the Tunisian power system and therefore help scale up the integration of additional RE sources. 26. The Project is aligned with the WBG’s corporate objectives under the regional Climate Change Action Plan, Maximizing Finance for Development, and Private Capital Mobilization (PCM). The Project will contribute to the development of an enabling framework to leverage private financing for the development and operation of utility-scale VRE projects. The Project integrates the standardized methodology that was developed by the World Bank in partnership with the French Development Agency (Agence Française de Développement, AFD), International Renewable Energy Agency (IRENA), and International Solar Alliance (ISA) under the Sustainable Renewables Risk Mitigation Initiative (SRMI14), to support countries in designing and implementing sustainable RE programs that will attract private investments and reduce reliance on public finances. GCF financing has been allocated to the present Project through SRMI’s Facility led by ESMAP. The Project is also a critical component of the larger Elmed interconnector where it is complemented by associated facilities that are commercially funded. The Project may generate a PCM of up to €266 million corresponding to Terna’s equity contribution and debt financing of Project associated facilities. 27. Global Crisis Response Framework (GCRF). The Elmed interconnector contributes to Pillar 4 of the GCRF (Strengthening Policies, Institutions, and Investments for Rebuilding Better). It is strategic in consolidating the overall security of the Euro-Mediterranean electricity system, by diversifying sources and supply routes and optimizing the use of energy resources from the two shores of the Mediterranean. Most importantly, with recent developments in the global energy market, stemming from the increases in prices due to Russia’s invasion of Ukraine and the commitment of Europe to diversify away from Russian gas, while limiting the use of coal power plants, the interconnector places Tunisia in a position to export clean energy to Europe as it scales up its RE. II. PROJECT DESCRIPTION A. Project Development Objective (PDO) PDO Statement 28. To increase Tunisia’s resilient transmission capacity for the trade of electricity with Europe for the benefit of Tunisian households and businesses. 14 https://www.esmap.org/srmi. Page 16 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) PDO Level Indicators 29. The main results (PDO level indicators) arising upon completion of the proposed Project are expected to be • Increased Tunisia-Italy electricity trade capacity (MW) • Solar/wind capacity additionally installed in Tunisia (MW) • GHG emissions reduced from the electricity sector (million tons CO2eq/year) • Private investments additionally leveraged (US$ million) B. Project Components 30. The proposed Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem Project (the Project) will cover part of the investments on the Tunisian side of the Elmed interconnector (converter station and grid reinforcement) and support for the implementation of the Interconnector on the Tunisian side. The remaining investments, including on the Italian side, are associated facilities. The Project will comprise the following components as shown in table 2.15 Table 2. Elmed Investment Project Financing (IPF) (the Project) Sources and Use of Funds (€, millions) Project Components IBRD GCF STEG Total (via CEF) 1. Tunisia HVDC converter station in Mlaabi 145.8 — 76.9 222.7 2. Tunisia OHTL Mlaabi/Mornaguia + Grombalia 91.6 18.4 0.0 110.0 substation 3. STEG Project preparation and implementation 9.6 4.6 0.0 14.2 support and TA for VRE deployment Total 247.0 23.0 76.9 346.9 Component 1: Converter station on Tunisian side (estimated cost: €222.7 million, of which €145.8 million IBRD loan) 31. As shown in table 2, the IBRD loan will focus on the ±500 kV HVDC converter station in Mlaabi and related infrastructure. The Tunisian contribution to the submarine cable will be financed by other IFIs through parallel financing. The converter station will have a rated power of 600 MW in monopolar configuration and will switch the direct current (DC) at the voltage of ±500 kV to the 50 Hz alternating current (AC) at the voltage of 400kV. It will be equipped with the newest HVDC technology, that is, voltage source converter (VSC), which will enhance the flexibility of the Tunisian power system and hence increase the VRE integration capacity. The new technology was selected due to its advanced functionalities at an almost equivalent cost compared with the traditional technology, line commutated converter (LCC) technology. The new HVDC converter station will be built in a vacant space owned by STEG located in less than five kilometers from the coastal line, where the offshore DC cable is launched and connected to the onshore DC cable, leading to the converter station. The converter station has 400kV AC bays, which will transmit the power to Tunisia’s domestic grid through two new 400kV AC overhead transmission lines 15 The description of Project components and activities includes but it is not limited to the Funded Activity defined in the Funded Activity Agreement (FAA). Page 17 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) (OHTLs) which will be financed under Component 2: one OHTL from the Mlaabi station to the newly constructed Grombalia 2 substation and another OHTL from Grombalia 2 to the existing Mornaguia substation. Component 2: Tunisia grid reinforcement (estimated cost: €110 million, of which €91.6 million IBRD loan and €18.4 million GCF loan16, corresponding to Subcomponent 2.2 in the FAA) 32. This component will finance domestic grid reinforcements in Tunisia necessary to connect the HVDC interconnector to the Tunisian grid. The investment includes (a) a new 400/225 kV substation in Grombalia, (b) a new 400 kV double-circuit OHTL of 65 km length from the new HVDC converter station to the 400 kV Grombalia 2 substation, and (c) a new 400 kV double-circuit OHTL of around 51 km from Grombalia 2 substation to the existing Mornaguia substation (including two 400 kV underground cables at Mornaguia substation). The proposed grid reinforcement, which will eliminate transmission bottlenecks in the Tunisia grid, is critical to enable the Elmed interconnector to be operational at its full capacity and functionality. The investment will also enhance the grid’s resilience and flexibility to integrate more VRE, limit curtailment or grid instability. The grid reinforcements will be built using technical specifications that will make the investments resilient (including to environmental and climate risks), supported by the TA under Subcomponent 3.2 below. The GCF loan (corresponding to Subcomponent 2.2 in the Funded Activity Agreement-FAA) will specifically contribute to the finance of the Grombalia 2 substation, which connects the renewable generation in the South with the transmission network to transmit to the load centers in the North. Component 3: Project preparation and implementation support and TA for VRE deployment (estimated cost: €14.2 million, of which €9.6 million IBRD loan for Subcomponent 3.1 and €4.6 million GCF grant for Subcomponents 3.2 and 3.3). This component consists of three subcomponents: (a) Subcomponent 3.1: Project preparation and implementation support (financed by IBRD loan) i. Capacity building to STEG staff and Project Implementation Unit (PIU) for preparation, supervision and implementation support, including technical, procurement, financial management (FM), gender and Environmental and Social Framework (ESF) activities, and monitoring and evaluation (M&E) activities. Moreover, this subcomponent will finance the execution, design, and supervision of consultants and contracts as well as incremental operating costs (for example, information technology [IT] and office facilities). Training and consulting activities (technical, environmental and social, fiduciary, and so on) required for project implementation will also be included for STEG technical staff and management. ii. Selection and hiring of an owner’s engineer. A consulting firm to assist STEG in supervision of the works included under Components 1 and 2 on the Tunisian side and support them in technical dialogue/coordination and joint implementation with Terna. iii. If applicable, reimbursement of 75 percent of GIF financing for preparation studies funded through the Preparation TA (P164625), as per provisions of GIF reimbursable grant agreement. 16 Approved by GCF Board in March 2023. Page 18 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) (b) Subcomponent 3.2: Preparatory and feasibility studies for RE projects and capacity building for RE development (financed by GCF grant, corresponding to Subcomponent 1.2 and Subcomponent 1.3 in the FAA) i. Preparation of feasibility studies and environmental and social risk mitigation instruments for the development of RE projects in support of investment de-risking and investor selection process. Preparatory and feasibility studies may include, as needed, geospatial analyses of the land around the substation, topography and geotechnical analyses, environmental and social analyses, site-specific grid interconnection studies, solar irradiation/wind measurement analyses, adaptation/resilience study to ensure viability of the power plants taking into account climate risks on solar and wind resource, and other studies as needed. These studies will complement the ongoing VRE integration study under the World Bank’s ASA to identify specific RE projects ready for investment, which will complement the Elmed interconnector. ii. Implementation of capacity-building activities to support the competitive bidding process that is conducive to private sector investment. This could include a comprehensive review of technical, legal, and commercial aspects (including risk allocation and financial viability) and the development of a legal framework for IPPs and the design of bankable Power Purchase Agreements (PPAs) of RE IPP projects. These activities will complement the World Bank’s ongoing ASA which assessed the different barriers to financing RE projects, raise awareness among potential investors, and enhance the bidding process. (c) Subcomponent 3.3: Supporting the establishment of an RE center of excellence to maximize socio- economic benefits, with a focus on gender inclusion (financed by GCF grant, corresponding to Subcomponent 1.2 in the FAA) The TA will include development of a business model, capacity building and governance arrangements for the establishment of an RE center of excellence to enhance capacity and skills for RE projects in Tunisia and the broader Africa’s region, positioning Tunisia as a training hub. The TA will provide, among others, (a) the development of the business model and the governance arrangement through the preparation of relevant studies whereas the setup of the center (including infrastructure, teacher recruitment, training programs) will be covered in separate parallel projects to be defined, (b) capacity development which will feature two pilot training courses at vocational level (e.g., RE construction, maintenance and electrician skills) and a course at undergraduate level (e.g., engineering, planning and management), and (c) awareness campaigns with domestic firms about how to engage in RE projects. Specifically, this will entail training and research needs assessment with strong engagement of the private sector and industry operators. The pilots would be developed in close collaboration with industry and based on international standards. Additional activities that could be supported include provision of education and training materials, and development of a plan to scale up development of curricula for training in renewable energy occupations. The TA will ensure gender inclusion by including women’s groups and firms in the consultation on the design of the center, ensuring women’s participation in training programs and including outreach among women owned firms. 33. Mitigation and adaptation climate co-benefits. Activities supported by the Project will generate mitigation and adaptation climate co-benefits (CCB). Mitigation CCB will be achieved by enabling RE development, leading to the higher share of RE in the total energy mix in Tunisia and Italy. The power system flexibility added by the interconnector will help the power grids of the two countries integrate more RE sources and allow optimal operations of thermal power plants, leading to optimized fuel Page 19 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) consumptions. This mitigation benefit is particularly strengthened with the use of the newer HVDC technology, VSC, which allows flexible and efficient operations of the power systems. The electricity production modeling carried out for the economic analysis confirmed that the interconnector will reduce GHG emissions by approximately 500 kilotons per year and increase the RE share of the combined power system from 66.9 percent to 67.5 percent. Adaptation CCB will be supported by applying tailored designs and advanced technologies to enhance the resilience of the transmission infrastructure built under the Project to climate risks such as flooding, storm, strong wind, excessive rainfall, and sandstorm. Particularly, the interconnector with the use of the VSC technology, which is 30 percent more expensive than the traditional LCC technology, will enable the power systems to be more resilient to potential shocks in the power systems caused by such natural disasters through enhanced capability for quick response to electrical disturbances and prompt restoration of electricity supply in case of blackouts. The submarine cable and converter station built under Component 1 as well as the transmission line and substation under Component 2 will adopt most advanced resilient designs against climate risks and shocks. Those include redundant configurations, elevated converter station equipment, gas insulated equipment, coordinated relay protection schemes, and active monitoring systems, all of which will help effectively prevent failures caused by the aforementioned natural disasters and rapidly recover from breakdowns17. 34. Climate and Disaster Risk Screening. The country is largely influenced by the Atlas Mountains and Mediterranean Sea. It experiences precipitation gradients, one from north to south, which experiences decreasing precipitation, and the other west to east which experiences increasing precipitation. The Atlas Mountains are the dominant force in Tunisia’s northern areas, where the Project site is located. The area is characterized by a typical Mediterranean climate with hot summers (June to September) of up to 22°C on average and precipitation occurring in the winter (November to February), which does not exceed 500 millimeters (mm) of rainfall per year. The country experiences disasters such as flash flooding, droughts, storms, sandstorms, and earthquakes; sea-level rise also poses a significant threat to the country’s coastline not only due to inundation and salinization, but also from increasingly harmful storm surge.18 35. The climate and disaster risk screening of the Project confirmed that the new converter station and the domestic power grid reinforcements are exposed to climate and geophysical hazards, while the Project is rated Moderate given the various resilience measures that are integrated in the Project design. The main risk from climate change is related with sea level rise, extreme temperature, extreme precipitation and flooding, storm surge, and strong winds. The climate and natural disaster risks would be mitigated by designing the converter station, the substation, and the OHTLs to withstand sea level rise, extreme temperature, extreme precipitation and flooding, storm surge, strong winds and geophysical hazards that might occur in the Project area. 36. The converter/sub stations and OHTLs will be designed with the use of advanced design tools which allow designers to analyze various climate and geophysical conditions. Station equipment such as converter valves and arresters with use of advanced materials would help limit potential electrical faults that would be caused by natural hazards and could lead to power outages. The telecommunication network, which will communicate between two converter stations for protection and control, will 17 Redundant configurations of the transmission line and substation bus system ensure continued electricity supply during an electrical failure. Elevation of converter equipment prevents damages and electrical faults due to flooding. Gas insulated equipment has less exposure to ambient environments, and thus less probability of electrical failures. Coordinated relay protection scheme reduces impact of an electrical failure caused by natura disaster. Active monitoring system inside the substation and the converter station allows to precisely spot an electrical fault and promptly restore the power system. 18 World Bank Group “Climate Risk Country Profile Tunisia” Page 20 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) incorporate resilience design to mitigate and respond to potential abnormalities caused by natural hazards. In addition, the implementation of the Project will improve climate resilience of the power system and contribute to adaptation efforts in the country. Given the various resilience measures that are going to be incorporated in the design and construction phase of the Project, the outcome is not likely to be affected by climate and natural hazards. C. Project Beneficiaries 37. Direct project beneficiaries include all existing and prospective electricity customers in Tunisia and Italy, as well as Europe, who will benefit from expanded, more sustainable, and cost-efficient electricity supply. Through reducing the cost of electricity generation and congestion, the Project will also help improve the financial bottom line of STEG and Terna and, in the case of STEG, reduce its financial deficits and the need for government subsidies, with large positive impact on public finances. 38. This will serve as a model toward building a series of similar regional interconnection projects between North Africa and Europe (for example, possible power interconnector between Egypt and Greece), providing lessons and experience on institutional arrangements and power trade agreements. The increased use of electricity from renewables will reduce the carbon footprint of electricity generation, with environmental benefits spanning globally as the Project contributes to the global commitment to reduce GHG emissions. 39. Gender. Since 2010, STEG has seen a steady increase in female recruitment due to concerted efforts to promote gender diversity in its workforce.19 The number of female workers more than doubled, increasing the total workforce from 14 percent in 2010 to 20 percent in 2020. Despite this steady increase, only 7 percent of women are working in technical positions, such as engineering, or directly in positions related to operation and maintenance (O&M), production, and distribution with the majority concentrated in administration and commercial activities. These figures are in stark contrast to the availability of female talent. Female graduates of science, technology, engineering, and mathematics (STEM) fields of study are estimated at 59 percent in Tunisia, higher than the Middle East and North Africa average at 53 percent and the Organization for Economic Co-operation and Development average at 35 percent. 20 Yet, when it comes to labor market outcomes in STEM, studies estimate that less than 20 percent are working in those fields. Furthermore, women are underrepresented in positions of leadership at STEG, with only 18 percent recruited or advancing to become directors. 40. Based on a study of women’s economic status in the energy sector (World Bank 2022), a combination of reasons contributes to underrepresentation of women in the field. Limited guidance in the public education system and lack of information about available jobs is a challenge. Concerns surrounding mobility are common, particularly in contexts where travel to on-site work is required. A common thread across field consultations was the need for consistent training, mentorship, and role models to support female students or first-time job seekers in terms of transitioning to the workforce as well as in getting promoted and considering leadership opportunities. In the internal diagnostic carried 19 Based on the results of an internal diagnostic (2022) carried out by STEG in collaboration with Ernst and Young. This diagnostic was presented in the German Agency for International Cooperation (Deutsche Gesellschaft für Internationale Zusammenarbeit, GIZ) first edition report entitled ‘Expérience de la STEG dans la Diversité du GenreData’, which presented the results of an institution-wide survey implemented in 2021 followed by focus group discussions with women. The objective of the diagnostic was to assess gender diversity in the workplace and identify a potential way forward. 20 https://unesdoc.unesco.org/ark:/48223/pf0000375429 Page 21 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) out among employees in STEG, the top three barriers to gender equality were reported as limited access to positions of responsibility, working conditions, and lack of promotion opportunities. The need to work long hours needed to get promoted is particularly challenging for women who carry the burden of care responsibilities.21 41. Building on these results and findings, this Project will focus on accelerating female recruitment and professional development at STEG with a focus on technical positions and supporting women in their pathways to leadership. The Project will do this through an agreed collaboration between the Regional Network in Energy for Women in Middle East and North Africa (RENEW-MENA) and the appointed gender focal points at STEG and the Ministry of Industry, Mines and Energy. A series of activities have been identified to support the overarching objective of recruitment, retention, and promotion, which will be overseen by a Gender Committee at STEG to be established under the umbrella of RENEW: (a) integrating gender diversity policies and targets in STEG’s upcoming Human Resources Strategy (2023–2030), (b) designing an internship program for female graduates in STEM to gain practical experience in technical fields at STEG, (c) introducing a mentorship program to provide role models to female staff, (d) conducting a male engagement train-the-trainer program to promote more understanding of gender equality and promoting male allyship in the industry, (e) putting in place a mentoring network for women working in technical positions to participate in peer-to-peer experience sharing and showcasing their work, (f) raising the awareness of STEG recruiters and management on the importance of gender diversity, and (g) connecting women in leadership with other leaders and gender champions across the region to deepen their management skills and support their advancement to higher positions. The Gender Committee will also explore opportunities to increase voucher amounts to account for higher expenses associated with childcare. In addition, the RE center of excellence will make a concerted effort to include women in training programs and engage with women-owned firms, facilitating their entry to the emerging RE sector. 42. To measure progress made in closing gaps in recruiting/retaining women in technical leadership and promoting women in management positions, the Project will monitor the share of women in (a) technical positions with a target of 14 percent by project completion and (b) director positions with a target of 24 percent. D. Results Chain 43. The theory of change underpinning the Project is captured in figure 4. 21STEG offers its staff and employees (male and female) a range of care vouchers per child, annually, starting with TND 15 for children nursery/preschool to TND 40/ TND 100 for children in broader school system/college. Page 22 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Figure 4. Theory of Change E. Rationale for Bank Involvement and Role of Partners 44. The World Bank has been supporting the Elmed interconnector since its inception, working closely with the Governments of Tunisia and Italy and other development partners to define its scope and financing feasibility studies, ESIAs, and economic analysis to strengthen its design. The World Bank’s preparation TA was instrumental in supporting STEG and Terna to obtain the EU CEF investment grant. The Project therefore builds on earlier World Bank support to the Elmed interconnector and will be key to realize its development and putting it in place toward operations. The World Bank has also secured US$25 million for a concessional loan and grant from the GCF, which will support the network reinforcement for VRE integration and development of complementary RE projects. The World Bank has been working in close collaboration with other development partners, including the Government of Italy, EU, EBRD, EIB, and KfW who support the Elmed Interconnector, holding regular meetings and sharing information during the preparation and appraisal phases. The collaboration is expected to continue during the implementation phase to ensure close coordination for project supervision. 45. As a technical partner of the GIF (the GIF with ESMAP financed the Preparation TA), the World Bank will be able to substantially draw on the GIF partnership to strengthen the coordination with private sector financiers and investors and can provide market feedback on the proposed transaction structure. Several IFIs that finance the Elmed interconnector are also GIF Technical Partners (EIB and EBRD), and the GIF will provide a collaborative platform to coordinate between the partners during implementation. 46. The World Bank has significant expertise structuring and financing interconnector projects in other regions, including its various aspects (technical, procurement, regulatory, and financial), which is highly valued by the GoT/STEG, as they are investing in a submarine interconnector for the first time. The Page 23 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) World Bank’s long-term collaboration with the GoT and STEG will continue to be instrumental to outline the critical steps required for the Project to move forward and facilitate capacity building on the Tunisian side. The World Bank already mobilized a global team of experts (technical, procurement, commercial, safeguards) to assist Terna and STEG in their analyses and preparation of documents for the Project. 47. As described above, the World Bank has been providing support for improving the performance of the electricity sector and the environment for RE deployment. Elmed presents an important investment to facilitate the ambitious RE targets while contributing to reducing the cost of generation, and therefore is a natural candidate for World Bank financing. F. Lessons Learned and Reflected in the Project Design 48. The Project has been designed considering lessons from comparable World Bank-financed interconnection projects as well as other interconnectors built and operated by Terna (see table 3). Some lessons delineated in the Overview of Regional Energy Projects (December 2006), although dated, continue to be relevant for the current project design. Table 3. Lesson Learned Lessons Reflection in Project Design/World Bank’s support Sectoral Support and Reform Ensuring commitment and ownership. Strong political The Project is considered a priority at the highest commitment needs to be established at the onset. An level in both countries. This helps ease the efforts to understanding of the political pressures on the convene decision-makers and stakeholders in both project’s governance framework is a key first step to countries and develop institutional and commercial determine the potential for project success and risks to arrangements that would solicit buy-in at all levels. sustainability. Putting in place commercial and regulatory Tunisia is planning to undertake a substantial reform arrangements to properly capture the benefits of the of the power sector, which likely enables it to align Interconnector. While electricity interconnectors with the EU target model. This should facilitate potentially yield numerous economic benefits in harmonization of market design and operating rules, theory, putting in place the required contractual and thus supporting a fair and efficient use of the regulatory framework to materialize those benefits in interconnector. The World Bank is providing support practice can be a challenge. Lack of harmonization in to the GoT in this reform process in a parallel ASA. market design and of operating rules of power systems on either side of the interconnector can make the use of the interconnector less than optimal. As the number of operators requesting access to the interconnector increases, the complexity increases; this is likely to happen as the Tunisian electricity sector opens to the private sector. In parallel with an increasing level of interconnectivity, the EU has been harmonizing the market design across countries and creating a single balancing market, while countries have been gradually coupling their markets with each other. The sustainability of the Project and interconnector The Government will need to implement necessary hinges upon the viability of the Tunisian energy sector, reforms to enhance the performance and financial including its ability to scale up its RE capacity for trade viability of the sector before operation of the and STEG’s credit worthiness as the offtaker of interconnector. Many of these reforms (RE electricity imports. deployment, sector governance, and STEG Page 24 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Lessons Reflection in Project Design/World Bank’s support restructuring) are supported by parallel WBG projects and TAs. Project and Technical Design Over the last decades, HVDC technology has proved to The Project opted for HVDC transmission as the only be a reliable technology for the transmission of large solution available for the transfer of high power quantities of electric energy over long distances with across long subsea distances. The new HVDC relatively low losses. It is used more and more for technology applied to the Project, VSC, will allow linking distant areas that are complementary in flexible power system operations with non- electricity consumption and generation. interrupted bidirectional power flows and independent active and reactive power controls, which allow integration of VRE sources. The Project’s procurement approach will ensure maximum participation of potential suppliers. Implementation Arrangements Bridging institutional differences. Experience shows The Project will be implemented by STEG in that the least successful regional projects have tried to coordination with Terna. STEG and Terna have good rely on new institutions to oversee project working-level relations as they have worked together implementation, while the most successful ones are under the Elmed TA. Lessons learned—both good and often built on the track record of existing institutions. bad—from earlier working relationships have been reflected in the Project design. To be as much aligned as possible, STEG and Terna have adopted a shared project management scheme, which includes an intergovernmental monitoring committee at the ministerial level and a Joint Steering Committee at the technical level. Moreover, they have set up a knowledge sharing process to ensure adequate knowledge transfer and prevent potential misalignments in the management of Project milestones. Ensuring uniform implementation of the converter Procurement will be launched jointly, but separate stations and entire transmission line. In the past, some contracts will be signed for the Tunisian and Italian World Bank-financed regional transmission line sides. An owner’s engineer to assist STEG in projects relied on existing power utilities to prepare supervision of the works is included under the segment of the line that was located in their Component 3 and will support them in technical territory. This has led to delays in the completion of the dialogue/coordination and joint implementation with overall line, as different power utilities operated at Terna. different speeds. In view of Terna’s extensive experience with both HVDC convert stations and submarine cable, Terna will lead the preparation of technical specifications, tender process, in accordance with Joint Procurement Agreement (JPA) to be signed between Terna and STEG Ensuring sufficient capacity by the implementation STEG has assigned a dedicated team, with members agency. This will be the second project implemented from the ongoing World Bank project, to be part of by STEG, after an ongoing transmission project. Lessons the Elmed PIU. from this project indicate that STEG has reached a STEG’s lack of experience in HVDC and sub marine reasonable understanding of the World Bank’s cables will be complemented by Terna’s expertise in procedures, but it will need dedicated staff to ensure implementing similar projects during the timely implementation of project activities. procurement process and hiring of Owner Engineer Page 25 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Lessons Reflection in Project Design/World Bank’s support by STEG for contract supervision. III. IMPLEMENTATION ARRANGEMENTS A. Institutional and Implementation Arrangements 49. The Project will be implemented by STEG under the supervision of a Tunisian inter-ministerial Project Oversight Committee. STEG will be the sole implementing agency of the Project, with the exception of Subcomponent 3.3. STEG has set up a formal PIU structure (letter of instructions No. 014-23 of February 9, 2023), with all departments relevant to the Project mobilized and coordinated by the Director of Equipment. These include a team of STEG’s experienced professionals identified from the concerned departments including a project manager, who will coordinate all project activities and will be the main counterpart of the World Bank during project implementation, and experts in legal affairs, logistics, M&E, risk management, budget, procurement, finance, authorization, permits and customs, environment, and health and security, as well as engineers and technical specialists on transmission and civil work to draft technical specifications, evaluate technical proposals, and monitor implementation of all contracts and studies. Some of them are part of the PIU for the ESIP and are therefore familiar with World Bank projects. The exact implementation procedures for all fiduciary and safeguards aspects of the Project, as well as the composition and operational procedures of the committees described below, will be described in the Project Operational Manual (POM) prepared by STEG and submitted for approval by the World Bank. Any revisions to the POM during implementation will need to be approved by the World Bank. The project implementation support Subcomponent 3.1 will include training activities for both the PIU and STEG staff to enhance their capacity. In addition, it was agreed that a Project Oversight Committee be established to monitor the Project and provide strategic guidance. 50. For Component 1, STEG will coordinate closely with Terna. STEG and Terna will be jointly responsible for the procurement of the interconnector components; however, it was agreed that each of them will sign a separate contract with the same selected supplier (see technical analysis for the rationale to select the same contractor for the HVDC converter stations on the Tunisian and Italian sides). An Italy- Tunisia Technical Steering Committee consisting of representatives of STEG and Terna and an Elmed Interconnector Steering Committee consisting of representatives from the Ministry of Energy on both sides are in place for the strategic monitoring of investments relating to the interconnector (converter stations and submarine cable) (see Figure 5). For Subcomponent 3.2, STEG will lead the implementation with the technical guidance of the Ministry of Industry, Mines and Energy. For Subcomponent 3.3 – RE center of excellence, implementation will be under the existing PIU of the Ministry of Higher Education and Scientific Research (MESRS), which is currently implementing the World Bank project Tunisia Tertiary Education and Employability (TEEP – P151059). Additional TA will be provided to the PIU in the initial phases of the contracting to ensure adequate support on the subcomponent implementation. These activities are considered “soft” activities, with no infrastructure, rehabilitation or land acquisition planned. Page 26 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Figure 5. Elmed interconnector Governance Commercial Arrangements for Electricity Trade 51. Ownership arrangements. The submarine cable will be owned by STEG and Terna in a 50:50 joint venture structure with a clear set of risk/responsibilities contractual allocation giving independent access to financing to both parties. The parts (HVDC converter station) lying on the Tunisian territory will be owned and managed by STEG, and the parts (HVDC converter station) lying on the Italian territory will be owned and managed by Terna. Following the intergovernmental agreement, the costs of investment, and O&M of the cable will be split equally between STEG and Terna. The joint venture is deemed the best option considering a co-ownership need but also different paths of financing for each of the two parts (the CEF grant benefitting both STEG and Terna; for the remaining amount, Terna putting equity and raising internal corporate debt; STEG raising 100 percent IFI and concessional debt). The roles and responsibility related to the cost of the initial investment (CAPEX), the revenue stream and the OPEX related mainly to O&M are properly structured in an optimal allocation of risks and responsibilities. The ownership arrangement assumes that the main commercial driver for the interconnector is the desire by STEG and Terna to jointly own a regulated asset providing transmission services on an open access basis between Tunisia and Sicily. Under this model, the physical transmission rights of the interconnector would be made available to all parties on a nondiscriminatory basis. STEG and Terna would sell these transmission rights in accordance with standard EU approaches. The purchasers of these rights would be Italian generators seeking to sell power to STEG. In the future, some rights would be bought by Tunisian generators seeking to export to Italy or beyond. STEG will continue to be the single buyer on the Tunisian side. 52. Revenues and operating costs sources, sharing arrangements. The revenue arrangements will be different for STEG and Terna because STEG will both own the interconnector and purchase (in the future also sell electricity produced by IPPs, given its Single Buyer role) electricity flowing through it, while Terna only owns the interconnector. Page 27 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) 53. For Terna, the revenues are calculated on the basis of the methodology used to determine the electricity transmission tariff. The transmission tariff in Italy is calculated with the following methodology that gives a return on the invested capital of around 25 percent of the regulated asset base (RAB). It aims at recovering the sum of (a) the remuneration on invested capital for regulatory purposes (remunerated through a 5.6 percent weighted average cost of capital [WACC]), (b) operational expenditures (OPEX), and (c) the recognition of asset depreciation and amortization (depreciations calculated based on a useful life of 45 years for the submarine cable and 33 years for the converter stations). So, the return on the investment for Terna (for Terna’s total investment net of the CEF grant) is achieved through the transmission tariff paid by the final consumer of electricity and is not linked to the energy flows. 54. For STEG, the revenues are congestion rents (or fees), which are calculated as the product of the actual flow of electricity through the interconnector (in both directions) times its marginal cost differentials for every hour when the flow is not null. The differentials are the difference between the expected marginal production cost in Tunisia and the expected zonal marginal price in Sicily. STEG will benefit from 50 percent of these congestion rents. The financial analysis (see below) indicates that the congestion rents should cover the investment cost on the Tunisian side. 55. OPEX are mainly O&M calculated separately for converter stations and submarine cable as a percent of capital expenditures (CAPEX); they are estimated roughly €2.9 million per year to be equally split between STEG and Terna. B. Results Monitoring and Evaluation Arrangements 56. M&E will be managed by the PIU set up by STEG. A designated M&E specialist has been assigned and will be responsible for all aspects related to the M&E of the Project, according to the provisions included in the POM. Specifically, M&E will entail (a) monitoring physical progress; (b) carrying out M&E of delivered outcomes; (c) reviewing and supervising the environmental and social risks identified and any mitigation measures; and (d) providing guidance to the implementation team in early identification and resolution of any issues identified. The PIU will develop an annual work plan and will be responsible to share semiannual progress reports in addition to participating in a midterm review of the Project and preparing an Implementation Completion and Results Report once the Project is completed. 57. The owner’s engineer will play a key role in monitoring the progress and quality of the construction. The World Bank will also call on global experts and consultants to carry out technical reviews at critical milestones of the Project. C. Sustainability 58. Once completed, the interconnector will be transferred to STEG and Terna for O&M, with an agreement for equal shares in O&M costs and transmission revenues. Since the submarine cable will be co-owned by the two parties, while each HVDC converter station is owned by each party, although managed by the joint venture, O&M are calculated separately for converter station and cables as a percentage of certain components of CAPEX; O&M is the main part of OPEX. The details of the management of the O&M will be finalized in the Preparation TA through the selection of a transaction adviser. Page 28 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) 59. Mutually agreed and transparent terms of electricity trading are key to the sustainability of the Project. The World Bank will play a key role in facilitating this process, providing sample PPA contracts developed for other regional power trade contracts, and sharing lessons and best practices. Transaction advisory services for structuring trading arrangements will also be financed under the Preparation TA. IV. PROJECT APPRAISAL SUMMARY A. Technical, Economic and Financial Analysis Technical Analysis 60. The Elmed interconnector’s key technical parameters and configurations are considered optimal based on technical and economic analyses. The interconnector is included in TYNDPs for both Terna and ENTSO-E. The interconnector’s capacity of 600 MW was determined to maximize the economic benefit of the interconnector. The HVDC technology is the only option to transmit the power through the submarine cable for the length of 200 km while the alternative technology, namely high voltage alternating current (HVAC), is not possible to transmit such a high power through submarine cable. The HVDC voltage of +/-500 kV allows the interconnector to minimize operational losses while maximizing transfer capacity. The voltage has been applied in many submarine-cable HVDCs and therefore proven. The HVDC configuration and Symmetric Monopole configuration allow the interconnector to achieve an optimal balance between the cost and the reliability, compared with other options such as the asymmetric monopole and bipolar configurations. The interconnector will use the VSC technology due to various operational advantages stated earlier. Given the HVDC technology is new to Tunisia and STEG, TA will be provided under Subcomponent 3.1. The Project will also support hiring of an owner’s engineer, who will support STEG to implement the HVDC converter station and the HVDC submarine cable. 61. The interconnector’s technical feasibility has been thoroughly analyzed and confirmed through analyses and onsite surveys. The terrestrial and marine survey feasibility studies, conducted under the Preparation TA, determined potential routes of both submarine and terrestrial cables and landing points of the submarine cable in both Tunisia’s and Italy’s territories. Those studies conducted (a) the identification of seabed and territorial and environmental characteristics of the passageway lines and converter station areas; (b) an analysis of any archeological, landscape, hydro, geological, and environmental implications; and (c) the completion of the seabed route and the line passageway and the preparation of geotechnical, archeological, and environmental surveys and reports. Particularly it should be noted that the marine survey study consisted of two on-site surveys: (a) reconnaissance survey: bathymetric and morphological survey by means of the Multi Beam Echo Sounder (MBES), installed on the offshore vessel along a 3 km wide corridor from 40 m water depth on the Italian side to 40 m water depth on the Tunisian side, aimed to acquire bathymetry and morphology information of the study’s corridor and (b) detailed survey: bathymetric, morphological, and geophysical survey by MBES, Side Scan Sonar, Sub-Bottom Profiler installed on Remote Operative Vehicle, along the 500 m wide corridor centered on the route selected after the reconnaissance survey. These studies confirmed the feasibility of the interconnector and identified the optimal cable route. 62. Both HVDC converter stations need to be supplied by the same vendor due to engineering and operational reasons. In recent years, some efforts have been made to enable a multi-vendor HVDC Page 29 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) system.22 While core systems are standardized, HVDC converter control and protection are still rigidly vendor specific. The control and protection software must coordinate many devices and actions, ranging from the lower converter control loops concerned with the converter’s internal behavior—up to, for example, the transformer tap changer setting. These levels of detail and complexity cannot be specified in the technical specifications and often are not shared by vendors given that these protocols are intellectual property. Hence, it would be extremely difficult to achieve multi-vendor interoperability. It would be also difficult to manage different vendors in the engineering process and contractual arrangement. Nearly 95 percent of HVDC projects globally are from a single vendor. Hence, it is essential to have the same vendor for both converter stations. This is an important consideration for the Project’s procurement strategy. Economic and Financial Analysis Economic Analysis 63. Methodology. The economic viability of the interconnector is measured by the economic internal rate of return (EIRR) and the economic net present value (ENPV) at a discount rate of 6 percent (specified under the World Bank’s current guidelines regarding economic assessment of investment projects). Costs and benefits are determined on an incremental basis, derived from the difference of the costs and benefits under ‘with project’ and ‘without project’ scenarios. Economic costs consist of (a) the CAPEX of the interconnector and (b) the incremental OPEX. Economic benefits include the following: • Increase in social economic welfare (SEW) through (a) benefits coming from either Tunisia being a net importer from Italy, as this improves the power system reliability and lowers the cost of electricity supply, or the country being a net exporter in the longer run (from 2040) owing to the expected reduction in electricity production cost from the RE development in the country and (b) transit revenues (including congestion rents) from the electricity flows on Elmed (in both directions), which are derived from the cost differentials between the two markets (Tunisia and Italy). Since these are economic costs, they do not differ between the two countries for the same energy source but vary according to the sources used to produce electricity at different times of the day/year. • Reduction of the expected energy not served (EENS), owing to the additional energy coming from a new supply source, which is expected to improve Tunisia’s security of supply and power system reliability. • Environmental benefits due to GHG emissions reduction resulting from a higher rate of RE penetration because of Elmed as it increases the flexibility of the connected power systems. 64. In addition to the above benefits, the interconnector would yield other important benefits, although difficult to quantify and monetize, such as the transmission system reliability and the benefits due to ancillary services (balancing services, reserves, reactive power control, voltage support, etc..). It also induces various macroeconomic benefits as imports of natural gas are reduced. 22 Multi-vender projects include the PROMOTioN project and the BEST PATHS project. Page 30 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) 65. Two market scenarios. Since the energy flow on the interconnector depends on the ability of Tunisia to upscale its RE capacity, the analysis considered a base case based on the GoT’s RE plan and an alternative scenario with reduced RE capacity. (a) Base case. This scenario is based on the GoT’s target of RE development for 2030 (35 percent). For 2040, since there is no clear GoT target, it is assumed that RE development follows an optimized path. (b) Reduced VRE development. This scenario assumes a delay or disruption in the implementation of the Government’s RE development plan. For 2030, 1.1 GW less RE capacity than in the base case is assumed and includes only RE projects that were already approved or launched by 2023, not compensated by any additional thermal capacity. For 2040, the RE capacity is assumed to be 5.3 GW less than in the base case, marginally compensated by additional gas capacity to reach the same load adequacy level as in the base case. 66. Energy flows between Italy and Tunisia vary by season and time of day. The incorporation of Elmed in the dispatch of the power systems of the interconnected countries has multiple and complex effects. Among other things, the Elmed interconnector contributes to improving the reliability of the Tunisian power system (thus reducing load shedding), lowering RE curtailment both in Italy and Tunisia and improved load factors for all power plants in the interconnected areas (as the load is made smoother by regional market integration), effects which have positive benefits. The results of the dispatch model used for the cost-benefit analysis indicate that there are important energy flows between Italy and Tunisia in both directions, as well as between Algeria and Tunisia, from the beginning of the operation of the interconnector. Figure 6 summarizes and compares the net monthly flows by year between the two scenarios. In the base case, while Tunisia will be a net electricity importer in 2030 (net imports of 663 GWh in 2030), the situation is reversed in 2040 when the country starts exporting an important amount of RE to both Italy and Algeria, owing to the more significant deployment of solar and wind capacity. Net exports from 2040 onward are projected at around 611 GWh per year. During the summer season and in particular during evening peaks, as the country’s thermal capacity is more expensive or insufficient to cover the peak load, Tunisia mostly relies on imports from Italy and (to a lower extent) on Algeria to ensure system reliability. This is especially the case in 2030, less in 2040, owing to the possibility to rely on a larger storage system, which decreases import needs. During the other seasons, Tunisia can export the renewable excess (mostly wind) to Italy, except during evening peaks. Thus, the interconnector allows for higher VRE integration in Tunisia by improving the power system flexibility to cope with the variability of solar and wind while reducing RE curtailment. In the reduced RE development scenario, Tunisia is a net electricity importer from Italy in both 2030 and 2040, with imports highest in summer months. Page 31 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Figure 4. Comparison of Elmed Net Monthly Flows by Year and Scenario Source: World Bank’s VRE Integration study. 67. The economic analysis concludes that Elmed has positive benefits for both scenarios. The Elmed interconnector is economically viable under both scenarios and whether Tunisia is a net exporter or net importer. Flows that go from Italy to Tunisia mainly supply peak load in Tunisia at lower cost and contribute to ensuring reliability in Tunisia, hence avoiding load shedding; on the other hand, flows from Tunisia to Italy provide an outlet for Tunisia’s excess renewable. Overall, Elmed contributes to increasing the flexibility to the interconnected power systems and reduces investment needs in other sources of flexibility such as thermal power plants or storage. Furthermore, Tunisia benefits from the congestion rents as a result of energy flows in either direction. Table 4 shows the EIRR and ENPV for the two scenarios and the ENPV breakdown by category of economic benefits and costs. The ENPV is €708 million, with an EIRR of 11 percent, in the base case; under a scenario of reduced VRE development, the ENPV is €765 million, with an EIRR of 12 percent. The SEW is higher in the low RE scenario because electricity prices are higher when the amount of RE is lower, as RE sources have a zero marginal cost. Under a reduced RE scenario, producers can sell their electricity at a higher price, increasing their profits and thus their surplus, while consumers must buy their electricity at a higher price, decreasing their surplus. Thus, the producer surplus is higher and the consumer surplus lower under the low RE scenario compared to the base case. Those translate into higher ENPV and EIRR in low RE scenario. 68. Elmed also has environmental benefits, as it reduces GHG emissions. The interconnector also generates savings in GHG emissions. Under the base case, 13.4 MtCO2 is avoided during the interconnector lifetime, while in the reduced VRE development scenario, total avoided GHG emissions are estimated at 14.6 MtCO2; the sources of GHG emission reduction are the displacement by Elmed supply of thermal power plants used in Tunisia for peak load and reduced VRE curtailment in both countries. The CO2 emission reduction is higher in the low RE scenario than in the Base Case as Elmed displaces more natural gas-fired power generation in the low RE scenario and RE curtailment in Italy is reduced more when there is less VRE in Tunisia. When CO2 savings are included, the ENPV increases to €1,044 million in the base case (EIRR at 13 percent) and to €1,124 million in the reduced VRE development scenario (EIRR at 14 percent). Page 32 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Table 4. Breakdown of ENPV for Each Scenario (€, millions) Base Case Reduced VRE Development CAPEX NPV 831 831 OPEX NPV 74 74 Total Costs 905 905 SEW 851 919 Reduction in EENS 762 751 Total benefits 1,613 1,670 ENPV 708 765 EIRR (%) 11 12 Environmental benefits (reduction in CO2 emissions) 336 359 Total benefits, including CO2 reduction 1,949 2,029 ENPV, including environmental benefits 1044 1124 EIRR, including environmental benefits (%) 13 14 69. Sensitivity analysis on CAPEX overrun and increase in economic discount rate. Sensitivity analysis has been conducted on the base case to test the robustness of results against two main contingencies: (a) unexpected increase in CAPEX and (b) higher economic discount rate. Table 5 summarizes the results of the sensitivities and shows the switching values for CAPEX and discount rate which would bring the interconnector’s ENPV to zero. Table 5. Sensitivity Analysis - Switching Values for CAPEX and Discount Rate Scenarios Base Switching Value Change Switching Value Change Case (ENPV = zero) (ENPV after environmental benefits = zero) CAPEX (€, millions) 964.2 1,715 +78% 2,070 +114% Economic discount rate (%) 6.0 11.0 +500 13.0 +700 bp bp Financial Analysis 70. Methodology. The financial analysis of the Elmed interconnector has been conducted from STEG’s perspective and for the same scenarios as for the economic analysis. The main difference between the economic and financial analysis is that, for assessing the financial viability of the interconnector, only those monetary costs and benefits that directly affect the financial situation of the Borrower—STEG in this case—have been considered. The benefits are mainly derived from congestion rent revenues. The costs are only the CAPEX incurred by STEG through its concessional loans (not accounting for the grant it receives from EU CEF and GCF) and the OPEX on its managed infrastructure. The viability indicators used are the financial internal rate of return (FIRR) and the financial net present value (FNPV). The discount rate is 1.9 percent, equivalent to the WACC for the interconnector financing structure, which is a mix of debt from IBRD, GCF, and other IFIs. 71. Financial analysis results and sensitivity. The base case FNPV is estimated at €330 million with the FIRR at 5.9 percent. The reduced VRE scenario yields lower FNPV and FIRR due to more limited congestion revenue. Same sensitivity tests as for the economic analysis were carried out for the base case scenario, which indicate that the interconnector’s financial viability is at risk when CAPEX increases by over 86 percent and the WACC increases to over 5.9 percent. Page 33 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Table 6. FNPV and FIRR by Scenario Scenario FIRR (%) FNPV (€, millions) Base case 5.9 330 Reduced VRE development 2.6 45 Table 7. Sensitivity Analysis to the Base Case Scenarios Base Case Switching value (FNPV = zero) Change CAPEX (€, millions) 386 720 +86% WACC (%) 1.9 5.9 +400 bp Assessment of STEG Financial Viability 72. STEG has experienced financial difficulties and relies on state support and subsidies. In particular, STEG’s revenues have increased steadily over the recent years (+3.7 percent as annual average since 2017) but were not sufficient to compensate for the cost increases, for various reasons: • Fuel purchases—mostly, US dollar denominated—represent around 80 percent of STEG’s cost base, which highly depends on (a) the international gas and oil markets23 and (b) the local currency exchange rate which has significantly depreciated over the same period against hard currencies (−75 percent overall versus US dollar since 2011). • Although it has been able to guarantee reliable electricity supply, STEG’s commercial performance has been declining due to increasing losses and nonpayment, which has become more pronounced since the revolution (total losses increasing from 12 percent in 2010 to 21 percent in 2021; while payment among private customers is more than 95 percent, nonpayment is 50 percent from public customers, resulting in accumulated arrears of around 20 percent of total turnover). • Tariffs are below cost recovery level and adjustments are ad-hoc, which do not reflect fluctuations in gas prices and exchange rate. 73. This has led the utility to towards a weaker financial bottom line and a negative operating profit for three consecutive years from 2017 before reaching a positive profit in 2020. However, at the end of 2021, STEG is still loss making at operational level (negative EBIT24 at US$381 million). As a result, STEG’s financial performance relies heavily on government subsidies, which are expected to reduce over time in line with (a) a STEG modernization plan under discussion with the Government and (b) a potential reform of energy subsidies in the medium term. 74. Measures to improve STEG’s financial viability. To restore STEG’s financial situation—also in view of the expected growth in purchases from RE IPPs—significant actions are expected at the corporate level, such as STEG’s recapitalization and implementation of World Bank and EBRD programs to improve the utility’s technical, commercial, and operational performance, expected from 2023. These changes are expected to translate into lower operational costs and subsidies required from the GoT. Moreover, specific Government actions are expected to support STEG’s financial viability in the longer term, such as 23 STEG gas purchase contracts are indexed on oil productprices. It is only the price of the gas purchased beyond the contractual amount that is linked to the natural gas spot market. 24 EBIT = Earnings before interest and taxes. Page 34 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) (a) electricity and natural gas tariff revisions to achieve full cost recovery by 2026 according to the GoT’s plan and (b) implementation of GoT’s RE development plan which will reduce the overall generation costs and STEG’s vulnerability to international gas price fluctuations, thus strengthening its financial bottom line and stabilizing costs overtime. These commitments are expected to be formalized through the next STEG’s performance contract 2023-27, supported by the World Bank, which outlines key results indicators to improve reliability of supply, reduce losses, and lower operational and financial costs. 75. Modeling results indicate that, with the aforementioned reforms and subsequently Elmed, STEG will recover its financial viability. Its Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA) and its solvency ratios (financial debt to EBITDA and EBITDA to interest expense) would significantly improve (Figure 7). Its cost structure would also be less dominated by gas purchases, which are subject to international price and exchange rate fluctuations and will therefore be better managed. The unitary cost of electricity will also decrease as a result of Elmed and increased penetration of RE. However, STEG’s financial recovery hinges upon the commitment to cost recovery as part of the GoT’s energy subsidy reform. If tariffs are not adjusted, EBITDA will turn positive only in 2032, and will not be sufficient to pay debt service and cashflow will remain negative. This financial gap will need to be met by Government subsidies to maintain STEG’s liquidity. Figure 7. STEG’s EBITDA under the Base Case Scenario 15,000 2,000 EBITDA Million TND 10,000 1,000 Million TND 5,000 - - (5,000) (1,000) (10,000) (15,000) (2,000) 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Sale of electricity Sale of gas Others Other costs Fuel costs EBITDA Source: World Bank financial analysis based on VRE Integration Study. 76. In summary, STEG’s current financial weakness is mitigated through: (i) the utility improvement and tariff increase strategy described above, (ii) the positive financial returns expected from Elmed and renewable energy development, and (iii) the high level of concessionality of project financing with approximately 23 percent of grant and 5 percent of concessional financing from GCF. The IBRD and GCF loans will also benefit from sovereign guarantees. Although Tunisia is experiencing macro-fiscal difficulties, the GoT is in discussions with the IMF over a US$1.9 billion stabilization program. Assessment of Terna Financial Viability 77. Although not a counterpart in this Project, Terna’s financial viability is important since it finances the remaining parts of the interconnector on Italian territory. As per Terna’s publicly available financial statements, Terna enjoys a stable cash flow generation and a strong balance sheet structure, primarily owing to the highly predictable and low risk regulated activities (representing almost 100 percent of total revenues in 2021). Over the past four years, Terna revenues increased by 10 percent on an average annual basis, maintaining an average EBITDA margin of 75 percent during the same period. Also, the analysis of Page 35 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Terna financial ratios shows its solid cash flow generation and stable financial profile: particularly, an average cash flow from operations on total financial debt ratio at 0.15x demonstrates the Italian TSO’s full ability to repay its outstanding financial obligations over the longer term (around seven years) as well as to finance Elmed project investments and OPEX. In addition, the company’s financial structure is strong, with a net debt on regulated asset base (RAB) at approximately 50–55 percent and an average cost of net financial debt of 1.3 percent, at the end of 2021. B. Fiduciary (i) Financial Management 78. A Financial Management Assessment (FMA) was carried out in accordance with the World Bank Policy on IPF to evaluate the implementing agencies’ FM capacity and the adequacy of FM arrangements for Project implementation. The objectives of the assessments were to determine whether the respective selected implementing entities have adequate FM arrangements. The FM functions for the Project will be provided by two implementing agencies: PIU at STEG and the existing PIU of the MESRS. It was agreed that each PIU will coordinate the FM activities and will establish the Project's financial statements. 79. Capacity and risk assessment. The overall residual FM risk of the Project has been rated Substantial. The current FMA of STEG’s capacity during project preparation considered STEG’s experience with the World Bank’s FM procedures under the ESIP and the Elmed preparation TA. The FM performance of the two projects was rated Moderately Unsatisfactory and Moderately Satisfactory, respectively, following the last implementation support mission completed in January 2023. The following key risks were identified: (a) weak capacity in monitoring the project’s implementation and low disbursements rates, (b) absence of a dedicated fiduciary platform (FM staff and customized manual of procedures) to handle the project’s activities, (c) weak compliance of audit reports and interim financial report (IFR) submission, and (d) ineffectiveness of internal audit function of the projects. Adding to that, STEG does not have experience in implementing projects with the design and nature of the proposed one (complexity of the project requiring coordination across two countries). However, the FM assessment of the second PIU under MESRS concluded that it has a good track record in implementing projects funded by the bank. For example, the overall FM performance of the World Bank funded project, TEEP (P151059) was rated Satisfactory following the FM supervision of October 11, 2022. Although the satisfactory FM performance rate, a key risk was identified which is the lack of specific internal audit arrangements. 80. Mitigation measures. To mitigate the identified risks and weaknesses, the following measures will be carried out: (a) strengthening of STEG’s organization for effective project implementation by hiring the appropriate FM staff and capacities; (b) development of FM procedures as part of a detailed POM, which describes the roles and responsibilities of the implementing entities and the different beneficiaries; (c) integration of the project transactions in the annual program of the internal audit unit of STEG and the operationalization of the internal audit function at the MESRS; (d) configuration of STEG’s existing accounting software to allow the recording of the project transactions including a physical progress report, IFRs and annual financial statements; (e) implementation of Injez, a Project M&E software within the MESRS PIU; (f) provision of training on World Bank fiduciary procedures; and (g) amendment of the terms of reference of STEG’s external auditor to include all the project’s transactions (further details are provided in Annex 1). Page 36 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) 81. FM arrangements. STEG will be responsible for the overall FM of the Project with the exception of the subcomponent 3.3 for which the financial reporting will be done by the PIU of MESRS. Based on the letter of instructions No. 014-23 of February 9, 2023, STEG has set up a project team, which includes an FM officer. STEG will rely on its Financial Directorate to fully dedicate the FM officer who has already been involved in previous projects and has experience with FM procedures under World Bank-financed operations. The FM team of both PIUs will be required to prepare and submit an annual work plan and budget (AWPB) no later than November 30 of the year preceding the year the AWPB should be implemented. Unaudited IFRs will be prepared every six months and submitted to the World Bank 45 days after the end of each semester. STEG’s external audit arrangement will be applied to the Project. STEG’s external auditor will produce a separate audit report only on the Project’s activities under STEG’s responsibility. Furthermore, the audit reports of the Project's annual financial statements will be submitted to the World Bank within six months following the end of each calendar year. In addition to the above-mentioned financial reporting (AWPB and IFR), an audit report on the subcomponent 3.3 will be submitted by the PIU of the MESRS to the Bank within the same time limit. The General Financial Control (CGF) an entity acceptable to the bank will audit the accounts of the component managed by MESRS. 82. Disbursement. Disbursement of project funds will be processed in accordance with the World Bank procedures as stipulated in the Disbursement and Financial Information Letter (DFIL), and the Disbursement Guidelines for IPF, dated February 2017. Disbursement methods of project funds will be mainly direct payment. Other methods are also considered such as reimbursement, advance and special commitment. 83. Two (2) Designated Accounts (DA) in the currency of the loan agreement will be opened at the Central Bank of Tunisia (CBT) acceptable to the World Bank: one for payment of the expenditures incurred under the responsibility of STEG and one for payments of all activities managed by the MESRS PIU. The STEG and MESRS PIU (through the CBT) will report on the use of loan proceeds advanced to the Project’s DA in accordance with the DFIL. The ceiling of each DA will be stated in the DFIL. All disbursements will be subject to the terms of the Financing Agreement and to the procedures defined in the DFIL. (ii) Procurement 84. Applicable Procurement Regulations. Procurement under the Project will be carried out in accordance with the World Bank Procurement Regulations for IPF Borrowers, dated November 2020 (Procurement Regulations). The Project will be subject to the World Bank’s Anti-Corruption Guidelines (ACG) (‘Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and International Development Association (IDA) Credits and Grants’), dated October 15, 2006, and revised in January 2011 and July 2016. The project will use the Systematic Tracking of Exchanges in Procurement (STEP) tool to plan, record, and track procurement transactions. 85. All procurements under the Project, except under subcomponent 3.3, shall be carried out by STEG. The implementation of subcomponent 3.3 will be under the existing PIU of the TEEP within the MESRS. 86. Project Procurement Strategy for Development (PPSD): PPSD, together with Procurement Plan for the initial 18 months, has been prepared. Major procurements under the Project are: (a) Supply, civil works, installation, and commissioning 400 KV HVDC converter station in Tunisia Page 37 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) and related infrastructure with an estimated cost of €222.7 million. (b) Supply, civil works, installation, and commissioning of grid reinforcement under component 2, with total estimated cost of €110 million envisaged to be procured in three packages: • 400/225 kV substation in Grombalia • 400 kV double-circuit OHTL of 65 km length from the new HVDC converter station to the 400 kV Grombalia 2 substation • 400 kV double-circuit OHTL of 51 km from Grombalia 2 substation to the existing Mornaguia substation (including two 400 kV underground cables at Mornaguia substation). (c) Selection of owner’s engineer under Component 3 to support STEG in construction supervision of HVDC converter station in Tunisia under Component 1 (in close coordination with Terna) and supervision of other grid investments in Tunisia under Component 2. (d) Selection of consultant for the development of business plan for the RE center of excellence (subcomponent 3.3). 87. Procurement strategy for HVDC converter station: The single largest contract for HVDC converter station under Component 1 is required to be procured jointly by STEG and Terna through a single procurement process for sourcing the converter stations on the Italian and Tunisian sides from the same manufacturer due to essential technical considerations including common communication protocol and interoperability requirements. Terna will take the lead role in the procurement due to its proven experience and capacity in similar HVDC converter stations. To access CEF financing, Terna is required to carry out the joint procurement for the HVDC converter stations on Italy and Tunisian sides in compliance with EU Procurement Directives and Italian Legislation decree. There is a narrow market for HVDC converter stations (VSC technology) with three main manufacturers worldwide according to STEG and Terna’s market assessment and as also suggested by the World Bank’s technical experts. For sourcing of two converter stations in two countries, STEG and Terna will follow the Limited Competition approach from the pre-identified bidders according to the market assessment and prequalification (PQ) exercise conducted by STEG and Terna. The Request for Proposal (RFP) for Limited Competition will include the requirements of EU Directives/Italian legislation and Bank's Procurement Regulations and the document will be prior reviewed by the World Bank. The initial draft RFP, using Bank Standard Procurement Documents, is at an advanced stage of preparation which appears broadly acceptable. Discussions are underway for improvements. RFP will include Bank’s eligibility criteria for signing of Tunisian contract; Anti-corruption provisions including Bank’s right to inspection and audit, as well as Bank’s E&S and SEA/SH compliance requirements. The detailed modalities for joint procurement of converter stations by STEG and Terna along with the associated risks and mitigation measures are detailed in Annex 1. 88. Considering the nature, size and complexity, there remains a High risk in the procurement of HVDC converter stations due to likelihood of disagreements between STEG, Terna, and World Bank on RFP provisions; delays due to protracted discussions; bidders’ perception to the complexities; risk of poor bid response due to already narrow market; and differences in application and interpretation of deviations and treatment thereof in the evaluation of bids. Procurement activities under subcomponent 3.3 may be challenging for the PIU of TEEP but they are very limited compared to the rest of the Project and therefore they will not affect the overall procurement risk of the Project, which is High. Page 38 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) . C. Legal Operational Policies . Triggered? Projects on International Waterways OP 7.50 No Projects in Disputed Areas OP 7.60 No . D. Environmental and Social (i) Environmental Risk Management 89. The environmental risk rating is ‘High’ due to the nature and scale of activities to be financed under the Project. Environmental impacts are expected to occur during both the construction and subsequent operation of the OHTL, converter stations, and submarine cables. Based on the extant information included in the advanced draft ESIA (disclosed on February 7, 2023), the Integrated Biodiversity Assessment Tool annex, and the Screening-Level Critical Habitat Assessment (CHA), the Project may likely have an impact on critical natural habitats and RAMSAR sites. 90. STEG conducted a screening-level terrestrial and marine CHA for the Project in line with the requirements of the World Bank’s Environmental and Social Standards (ESS6). The terrestrial CHA identified the Lebna Ramsar site and Bir Drassen flyway zone as critical habitats for two bird species, white-headed duck and marbled teal, while the Bir Drassen locality corridor was identified as a critical habitat for migratory bird species. No critical habitats were identified for mammalians, birds, and bats. The marine CHA identified the Strait of Sicily as an ecologically or biologically significant area (EBSA) and key-important marine mammal area (K-IMMA) for various species, including the critically endangered Maltese skate and fin whale. The EBSA qualifies as a critical habitat under Criterion 23a, 23c, and 23d of ESS6 due to the presence of various important biological and ecological features, while the K-IMMA overlaps with the EBSA and is subject to precautionary measures to minimize impacts on biodiversity. The potential key risks to biodiversity may include the following: electrocution, collision, and habitat alteration. Collision is deemed a potentially high risk for migrant and resident birds, including several threatened species. Terrestrial mammals may be vulnerable to potential risks during construction and civil works, including noise, vibration, traffic, blasting, pollution, worker activities, etc. 91. STEG has prepared an ESIA, which includes a cumulative impact assessment and a biodiversity assessment, as well as an Environmental and Social Management Plan (ESMP). To manage the significant risks and impacts associated with the Project, the World Bank's ESF will be applied, including ESS1, ESS2, ESS3, ESS4, ESS5, ESS6, ESS8, and ESS10. However, OP/BP 7.50 (Projects on International Waterways) is not triggered by this Project. That said, the countries involved (Tunisia and Italy) are reminded that this determination is independent of any existing arrangements that they may have in place in accordance with the Barcelona Convention and its protocols or any other agreements/arrangements (including bilateral arrangements with Malta). The Project has prepared various instruments, such as an ESIA/ESMP, a Resettlement Framework (RF), a Stakeholder Engagement Plan (SEP), Labor Management Procedures (LMP), and a Sexual Exploitation and Abuse/Sexual Harassment Prevention and Response Plan. The Borrower has also submitted a draft FBMP for review before appraisal. An advanced draft ESIA, including a cumulative impact assessment and a biodiversity assessment and its associated biodiversity impact assessment and an ESMP to be embedded in the ESIA, was disclosed on February 7, 2023, for public Page 39 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) consultation. The final version of the ESIA were disclosed on STEG’s and the World Bank's websites on April 12, 2023. STEG will be required to prepare other assessments and management plans, RAP, full CHA and BMP, and Contractor-ESMP (C-ESMP), and ensure that they are reflected in the Environmental and Social Commitment Plan (ESCP). 92. STEG will undertake a comprehensive field investigation and survey recommended before the construction phase to have a full CHA, which will support the development of a Biodiversity Impact Assessment (BIA), updated Biodiversity Management Plan (BMP) and ESIA/ESMP, and any additional compensation measures needed to achieve net gain. To prevent potential impacts on biodiversity and comply with ESS6, the BMP will recommend the avoidance of areas of important and critical habitat, as identified in the Screening-Level CHA. Meanwhile, a cable routing study will be conducted by the borrower to avoid identified areas of sea grass beds before the start of construction, which will inform the full CHA. All other recommended mitigation measures are incorporated in the ESCP including a robust post- construction monitoring system that will be proposed and implemented by STEG. 93. Based on the findings and recommendations of the ESIA and draft BMP, a road map has been outlined to ensure compliance with ESS6 requirements for managing biodiversity impacts, based on the findings and recommendations of the ESIA/BMF. This includes conducting a biodiversity survey, finalizing/updating the ESIA/ESMP and Framework Biodiversity Management Plan (FBMP), strengthening STEG human resource team, and providing relevant mitigation measures in the C-ESMP. A robust monitoring system will also be implemented to cover all areas to be crossed by the OHTL and around the existing power transmission lines. The project aims to reduce Tunisia's dependence on fossil fuels and contribute to a reduction in GHG emissions. 94. Construction phase risks and impacts. The major civil works will entail the trenching and laying of underwater cables, the construction of transmission towers, the installation of electrical equipment at substations and converter stations, and the installation of cables or wires overhead. These activities will generate some adverse impacts related to dust and noise; air and water pollution; construction wastes; encroachment issues (wetlands, coastal zones, fish habitat, wildlife habitat, and areas of biodiversity); loss of private assets such as olive and citrus plantations; and cumulative impacts on hydrology, geomorphology, and biodiversity including aquatic and terrestrial species and habitats as a result of the Project activities. Health and safety risks for both local communities and project/contractors' personnel to be managed with appropriate safety measures and protocols to be put in place to ensure that these risks are minimized and managed effectively throughout the construction. Risk of soil contamination and degradation resulting from the construction of substations and converter stations that may require the proper disposal and management of various liquid and solid waste materials. 95. Operational phase environmental risks. (a) Health and safety impacts to both local communities and Project/contractors’ personnel such as electrocution during maintenance works and exposure to high electromagnetic fields and increased risk of a forest fire; (b) the operational aspects of the Project may have impacts on biodiversity such as electromagnetic fields and heat emission (underwater cable), risk of birds and bats collisions, and electrocution for the OHTL and distribution infrastructure; (c) air quality and standards violations/impacts; (d) fish migration routes and fish nursery areas; (e) cumulative impacts on hydrology, geomorphology, and biodiversity including aquatic and terrestrial species and habitats as a result of the project activities; and (f) potential contamination and degradation of soil is expected from the substations and converter stations, that may involve disposal and management of liquid and solid waste, such as metals, cables, wood, glass, and packaging materials. Page 40 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) 96. Associated facilities. The submarine cable in Tunisian territorial waters (101 km), owned by STEG, will be considered an associated facility where the ESF applies during all phases of the Project. This is because these activities have been assessed to be directly and significantly related to the Project and necessary to its viability and will be carried out contemporaneously with the project preparation and implementation. The submarine cable in Tunisian territorial waters is expected to be financed by multilateral and bilateral funding agencies (EIB, EBRD and KfW) with E&S policies and procedures which are materially consistent with the World Bank’s ESF (see EIB Environmental and Social Standards (February 2022); EBRD Environmental and Social Policy (April 2019); and KFW Development Bank Sustainability Guideline Assessment and management of Environmental, Social, and Climate Aspects: Principles and Procedures (February 2022). The Borrower commitment to applying the ESF to the associate facilities in Tunisia is included in the ESCP. The owner’s engineer will assist STEG with supervision of environmental and social risks including potential impacts on biodiversity. 97. While the activities that will be carried out on the Italian side are also considered as associated facilities, the ESF will not apply to these given that the borrower has no control or influence over the activities on the Italian side. That said, in addition, the borrower will establish a coordination mechanism to ensure that relevant environmental and social risks and impacts of the associated facilities are appropriately managed. Specifically, these associated facilities in Italy include (a) Italy HVDC converter station, (b) submarine cable in Italian territorial waters (90 km), (c) terrestrial underground cable pole (22–44 km) and electrode cable (18 km) connecting the new converter station in Italy and the landing site situated in Marinella di Selinunte in the city of Castelvetrano, and (d) joint box, where the submarine cable is converted to the terrestrial underground cable. The associated facilities that are located on lands characterized by agricultural land use are not expected to be significantly affected by the Project as a horizontal drilling technique will be used for the construction and installation of the cables. (ii) Social Risk Management 98. The project’s social risk rating is Substantial. The project faces foreseen adverse impacts such as economic displacement and the effects of labor influx during the construction phase (number of workers is estimated at approximately 300) and potential social/cultural/economic/labor risks associated with construction projects of this scale, such as informal or irregular work, forced child or juvenile labor, low wages, gender pay gap, and exacerbation of current risks of SH among workers, and SEA of community women and children by project workers.25 The ESIA describes the said risks by varying types, probability of occurrence, and magnitude. To manage these risks, the PIU will secure and keep qualified staff and consultants dedicated to implementation of actions specified in the different relevant instruments, including but not limited to the ESIAs ESMP, consultation requirements established by SEP, prevention and response measures defined by the SEA/SH Prevention and Response Plan, RF provisions for managing land acquisition and economic displacement, and labor rights enforcement detailed in the LMP. 99. Vulnerable groups have also been identified in the ESIA report and may include persons with disabilities, illiterate people, large families with more than five dependent children below 15 years (legal employable age with some limitations), youth, youth between 15 and 29 years neither in employment nor in education or training, women and women-headed households, households registered as poor, elderly households with no means of livelihood (or not earning) and households including family members with 25 Further details are available in the Environmental and Social Review Summary (ESRS). Page 41 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) disabilities, and internally displaced persons and migrants or transient users of lands affected. The ESMP, RF, and SEP set out specific actions to ensure their inclusion and assistance. 100. To secure meaningful consultations and engagement throughout the Project, SEP’s action plan includes activities such as ESIA and RAP consultation and validation workshops; consultations for preparation the construction phases; general awareness raising campaigns; information campaigns focused on land use, property, and land purchase issues; information campaigns focused on environmental and social-related issues such as SEA/SH risks; open houses; and one-on-one meetings with priority stakeholders and communications support. Furthermore, according to SEP, grievances may be lodged by a variety of different means: oral (verbal, phone calls), letters, e-mails, audio messages, phone messages, or others. Registration of grievances will start during project preparation and continue through to completion. The mechanism is detailed in SEP. 101. Mitigation of temporary land impacts. As the Project does not generate physical resettlement but rather the permanent and temporary loss of land, mainly agricultural land, crops, and economic activities, it is not possible at this stage to be able to estimate the number of project-affected people. The socioeconomic surveys that will be carried out as part of the social studies and the RAP, during implementation, will be used to estimate the number persons economically affected by the Project, such as owners of the agricultural land on which the pylons will be placed (permanent losses), owners of agricultural land who may suffer damage from the installation of pylons and the pulling of cables, owners of access land (agricultural or not) who may suffer damage during the passage of machinery, farmers who may lose their crops temporarily (cereal crops, market gardening) or permanently (olive trees, fruit trees, market gardening, and so on), permanent and/or occasional agricultural workers, breeders who may experience difficulty in accessing the usual grazing areas during work or maintenance, and people whose economic activities will be disrupted by the Project. The RF provides all relevant details including the specific type of impacts by OHTL section. 102. Procedures to ensure labor conditions. Although the overall number of workers on the Project is not expected to be significant (approximately 300), there is still likely to be a degree of labor influx. LMP, applicable throughout the Project’s life cycle and across all marine and terrestrial physical works, cover protection of workers and the management of their impacts on the communities within which they will be working, recruitment and selection of workers; protection of worker rights; terms and conditions of employment; labor conditions and protection; worker accommodation; management of worker relationships; occupational health and safety; management of contractor-worker relationships, policies, and procedures on discipline, grievances, and pay complaints; industrial action; demobilization and training for workers; and management of worker/community interactions that may lead to adverse community-level impacts. It also covers key labor risks associated with the Project including possible accidents or emergencies, hazardous work (for example, work at heights/in confined spaces, use of heavy machinery, and use of hazardous materials), prevention of child or forced labor, with reference to the sector or locality, likely presence of migrants or seasonal workers and the risk of unmanaged labor influx, and risks of SEA/SH. In an effort to reduce the impacts associated with labor influx, as well as to provide temporary or more long-term employment opportunities to some of the affected communities, the Page 42 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) borrower will require contractors to recruit construction workers from the country, with preference given to recruitment of workers from Project-affected communities.26 103. SEA/SH prevention and response. 27 Given factors such as the country-level context, regional disparities, and inequality between the urban and rural areas and the scope and specificities of this greenfield infrastructure project, the risk for SEA/SH is Substantial. For this reason, an action plan has been prepared to enable the Project to prevent and respond to cases of SEA/SH, including the following: (a) Prevention of project-induced SEA of community members by project workers and SH among project workers, by building awareness and capacity of project management and staff/implementing partners/contractors for mainstreaming SEA/SH prevention including measures such as adopting a Project Code of Conduct, which is signed by project staff and contractors and disseminated to staff and communities. (b) Putting in place/reviewing an existing Project grievance redress mechanism (GRM) to be responsive to SEA/SH. Accountability and grievance committees to be formed. (c) Engaging with and carrying out awareness raising among the affected labor and community population (especially vulnerable women and girls) on SEA/SH risks, in line with the Project SEP, and informing them of their rights, how to report through the established GRM, the existing referral pathways, and response support protocol for such incidents. (d) Mapping out available SEA/SH services (for example, shelters and legal, financial, and health support), especially in the wider project area (establishing quality and capacity) and developing referral pathways in the project area. (e) Engaging as needed with existing service providers such as recognized Tunisian nongovernmental organizations focused on sexual gender-based violence and gender issues. (f) Carrying out SEA/SH and safety and security risk audits to monitor the effectiveness of mitigation measures, identify new risks, and ensure that risks are adequately addressed. (g) Providing training on the overall ESMP, including SEA/SH, to the PIU, project staff, implementing partners, and contractors and communities. (h) Obtaining the support of national ministries to disseminate/develop referral pathways and liaising with relevant departments at the national, governorate, and local levels for effective support of survivors, including matters on transportation, justice, security, psychosocial and case management, and medical and health care. (i) Organizing regular monitoring sessions including spot checks to monitor the effectiveness of the grievance mechanism and community engagement. V. CITIZEN ENGAGEMENT AND GRIEVANCE REDRESS SERVICES 104. Citizen engagement. During implementation, to ensure two-way communication with beneficiaries, the Project will (a) deploy beneficiary/community surveys to collect feedback, including 26 The Government (as well as their contractors and subcontractors) will abide by the World Bank ’s Good Practice Note on Assessing and Managing the Risks of Adverse Impacts on Communities from Project-Related Labor Influx. 27 The plan has been prepared in accordance with World Bank ’s Good Practice Note ‘Addressing Sexual Exploitation and Abuse and Sexual Harassment (SEA/SH) in Investment Project Financing involving Major Civil Works’ (2nd edition, 2020). Page 43 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) among women; (b) conduct awareness campaigns to inform and update on project activities and progress; and (c) ensure proper handling of all project-related complaints through an adequate GRM using the country’s official language. 105. The Project will carry out at least one beneficiary/community survey and awareness campaign per year to keep the beneficiaries informed and engaged. Those can be implemented through meetings, phones, or other existing means in remote areas. GRM focal points at STEG and MESRS will be responsible for disseminating multiple access points (telephone, website, email, text message, and other means), so that beneficiaries will have different ways to voice their concerns. Complaints received will be registered by gender, age, and location among other indicators tracked, investigated, and promptly resolved. The surveys will either generate an annual, timebound action plan to address comments received through the surveys or publish the findings of each survey to foster transparency and potential for debate and engagement around the surveys’ results. All complaints will be treated equally. Copies of complaints will be recorded in the activity files and the progress reports, including the number and type of complaints and the results of their resolution. 106. Grievance redress. Communities and individuals who believe that they are adversely affected by a project supported by the World Bank may submit complaints to existing project-level grievance mechanisms or the Bank’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the Bank’s independent Accountability Mechanism (AM). The AM houses the Inspection Panel, which determines whether harm occurred, or could occur, as a result of Bank non-compliance with its policies and procedures, and the Dispute Resolution Service, which provides communities and borrowers with the opportunity to address complaints through dispute resolution. Complaints may be submitted to the AM at any time after concerns have been brought directly to the attention of Bank Management and after Management has been given an opportunity to respond. For information on how to submit complaints to the Bank’s GRS, please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the Bank’s Accountability Mechanism, please visit https://accountability.worldbank.org. VI. KEY RISKS 107. The overall risk to achieving the PDO is expected to be High. The main risks are related to political and governance, macroeconomic, fiduciary, and environmental and social. In addition, sector strategies and policies, institutional capacity for implementation and sustainability, social and stakeholders’ risks are rated Substantial. 108. Political and Governance (High). In the current context, the Tunisian political environment remains uncertain. The two rounds of parliamentary elections in December 2022 and January 2023 had low turnout rates, which may create legislative division that impedes implementation of necessary reforms. Furthermore, the Tunisian General Labor Union (UGTT) has shown opposition to private development of RE production, particularly the self-generation regime which would, for the first time, allow for third-party access to the grid. While this obstruction should not challenge the interconnector directly, it may slow the RE development. To manage the political/governance risks, the team will work closely with the Country Management Unit to address any arising problem during implementation that may have an impact on the Project outcomes. It has already collaborated with the Governance team to carry out political economy and stakeholder analyses to monitor the situation. Particular attention will be Page 44 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) paid to developing and institutionalizing M&E systems in government programs and projects to minimize risk. Close partner coordination will also be leveraged to track and address political developments. The remaining risk, however, is High. 109. Macroeconomic (High). Within Tunisia, the macroeconomic environment remains fragile. The economic crisis has exacerbated key vulnerabilities of the Tunisian economy. The weak macroeconomic environment and expected economic recovery therefore could pose a risk to STEG’s capacity to successfully implement the Project. The Government and the IMF reached a staff-level agreement for a new four-year US$1.9 billion Extended Fund Facility Program on October 15, 2022. The original date of IMF Board discussion was on December 19, 2022, but it was postponed for ensuring completion of prerequisites. Measures supported by the IMF program would help strengthen the macroeconomic environment. Technical and financial support from other development partners (the EU, African Development Bank, EBRD, KfW, and AFD) would help accelerate the implementation of structural reforms expected to boost growth and ensure macroeconomic stability. Globally, the COVID-19 pandemic and Russia’s invasion of Ukraine have raised commodity prices, including raw materials to be used by the Project. Conversely, higher energy prices have also underlined the urgency of this interconnector and RE development. 110. Sector Strategies and Policies (Substantial). The Elmed interconnector and RE scale-up feature prominently in various government strategies in the last 10 years on both the Italian and Tunisian sides. This Project therefore will remain a priority for the sector independent of other sector developments. There may be risks related to the implementation progress of the RE plan (it will require significant effort to scale up renewables to 35 percent by 2030 from 2 percent today), which will affect the ability of Tunisia to export electricity to Europe; nevertheless, this should not negate the economic benefit of the interconnector, which will help ensure the supply adequacy of Tunisian power system and the integration of VRE (see economic analysis). Furthermore, the WBG, together with other IFIs, is gearing up support to accelerate implementation of the RE plan (see box 1). The WBG also works closely with the GoT to mitigate other risks related to the sector institutional framework to ensure the commercial arrangement of the interconnector later on and enhance STEG creditworthiness as the importer of electricity and co-owner of the interconnector. These include collaborations with the IMF and GoT on the subsidy and STEG reform agenda, but their implementation will depend on the Government’s commitment, hence the remaining Substantial risk. 111. Technical Design (Substantial). Thorough studies have been conducted under the Preparation TA including marine surveys, which confirmed the feasibility of the interconnector. Globally, submarine power interconnection projects with much longer and deeper profiles have been implemented and operational. The proposed technology, particularly the mass-impregnated (MI) submarine cable technology, has long history since 1953 and is proven for such depth and length with a record depth of 1,640 m in the Mediterranean for the SAPEI link project and with a record length of 720 km in the North Sea for the North Sea Link project. Nevertheless, given the scale of the interconnector, the residual technical design risk is rated as Substantial. 112. Institutional Capacity for Implementation and Sustainability (Substantial). Although STEG has significant experience with transmission network construction and reinforcements and has gathered some experience with World Bank projects, it has never implemented an interconnector that involves HVDC technology and submarine cable. To mitigate these risks, the Project is supporting STEG with funding for enhancing its implementation capacity and an owner’s engineer for technical supervision. Page 45 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Considering the complexity of the Project and STEG’s responsibility to coordinate with Terna and multiple IFIs (as parallel financers), the residual risk is rated Substantial. 113. Fiduciary (High). The Project fiduciary risk is High, mainly due to the complexity of the procurement of the converter station, involving both STEG and Terna, which are subject to different procurement regulations. Annex 1 (Implementation Arrangements and Support Plan) provides further details on the fiduciary risks and mitigation measures, including a joint procurement process and agreement. 114. Environmental (High). See environmental risk management above. 115. Social (Substantial). See social risk management above. 116. Stakeholder (Substantial). The stakeholder risk mainly revolves around project coordination and interface between Tunisia and Italy and among the financiers: CINEA from the EU for the CEF, Terna (and its commercial banks), and other donors (EBRD, EIB, and KfW). The operational success of the Project will depend on well-delineated project’s financing, procurement, and implementation arrangements as well on the progress on various components of the interconnector which are financed by different actors. Mitigation measures include: (a) an Elmed Interconnector Steering Committee to oversee the interconnector implementation, (b) an Italy-Tunisia Technical Steering Committee as facilitator for the coordinated implementation of the interconnector, and (c) the same firm as the Owner’s Engineer in both countries to ensure that the technical design of the converter stations is harmonized, and the procurement the construction timelines are coordinated. Given the complexity of this coordination, the residual risk remains Substantial. . Page 46 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) VII. RESULTS FRAMEWORK AND MONITORING Results Framework COUNTRY: Tunisia Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem Project Development Objectives(s) To increase Tunisia’s resilient transmission capacity for the trade of electricity with Europe for the benefit of Tunisian households and businesses Project Development Objective Indicators RESULT_FRAME_TBL_ PD O Indicator Name PBC Baseline End Target To increase Tunisia’s resilient transmission capacity for the trade of electricity with Europe Increased Tunisia-Italy electricity trade capacity (Megawatt) 0.00 600.00 Solar/wind capacity additionally installed in Tunisia (Megawatt) 0.00 400.00 GHG emissions reduced from the electricity sector (tons/year) 0.00 490,000.00 (Tons/year) Private investments additionally leveraged (Amount(USD)) 0.00 380,000,000.00 PDO Table SPACE Intermediate Results Indicators by Components RESULT_FRAME_TBL_ IO Indicator Name PBC Baseline End Target Component 1: Converter station on Tunisian side Tunisia HDVC converter station constructed (Number) 0.00 1.00 Page 47 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) RESULT_FRAME_TBL_ IO Indicator Name PBC Baseline End Target Component 2: Tunisia grid reinforcement Transmission line constructed (Kilometers) 0.00 116.00 Substation constructed (Number) 0.00 1.00 Component 3: Project preparation and implementation support and TA for VRE deployment Project grievances addressed within a time frame and publicly 0.00 80.00 communicated by the Project (Percentage) VRE projects identified and enhanced competitive bidding process completed (Yes/No) No Yes Share of women in technical positions at STEG (Percentage) 7.00 14.00 Share of women in director positions at STEG (Percentage) 18.00 24.00 Community members reporting that community engagement processes were effective (transparent, inclusive, responsive) 0.00 60.00 (Percentage) New technical standards for grid resilient infrastructure No Yes developed and adopted (Yes/No) Number of firms/businesses that are grid customers that are indirectly benefiting from improved resilience of the grid 610,780.00 700,000.00 (Number) Reduction in System Average Interruption Duration Index (SAIDI) (Percentage) 0.00 50.00 IO Table SPACE UL Table SPACE Page 48 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Monitoring & Evaluation Plan: PDO Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection Transmission capacity of the STEG and Increased Tunisia-Italy electricity trade Once STEG report STEG PIU Tunisia-Italy (Elmed) Terna capacity interconnector Additional solar and wind Ministry in Solar/wind capacity additionally installed capacity enabled by the Annual charge of Ministry's report STEG PIU in Tunisia Project's technical Energy assistance Ministry in GHG emissions reduced from the Annual GHG emissions from Annual charge of Ministry's report STEG PIU electricity sector (tons/year) the electricity sector Energy Amount of private Ministry in investment in solar/wind Private investments additionally Annual charge of Ministry's report STEG PIU projects enabled by the leveraged Energy Project's technical assistance ME PDO Table SPACE Monitoring & Evaluation Plan: Intermediate Results Indicators Methodology for Data Responsibility for Data Indicator Name Definition/Description Frequency Datasource Collection Collection Tunisia HDVC converter station One (1) new HVDC Annual STEG Construction report STEG PIU constructed converter station in Mlaabi A new 400 kV double-circuit OHTL of 65 km length from Annual STEG Construction Report STEG PIU Transmission line constructed the new HVDC converter station to the 400 kV Grombalia 2 substation and Page 49 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) a new 400 kV double-circuit OHTL of 51 km from Grombalia 2 substation to the existing Mornaguia substation A new 400/225 kV Annual STEG Construction report STEG PIU Substation constructed substation in Grombalia A grievance redress mechanism will be Project grievances addressed within a implemented to address Annual STEG STEG's project STEG PIU time frame and publicly communicated by and publicly communicate the Project the grievances related to the Project Completion of the competitive bidding process Ministry in VRE projects identified and enhanced for solar/wind projects Annual charge of Ministry's report STEG PIU competitive bidding process completed which is enhanced by the Energy Project's technical assistance Percentage of women Human Resources Share of women in technical positions at Annual STEG STEG PIU holding technical positions Report STEG at STEG Percentage of women Human Resources Share of women in director positions at Annual STEG STEG PIU holding managerial Report STEG positions at STEG A citizen engagement Community members reporting that mechanism will be community engagement processes were Annual STEG Community survey STEG's PIU implemented to consult and effective (transparent, inclusive, inform the communities responsive) affected by the Project At least one new technical New technical standards for grid resilient Annual STEG STEG's report STEG PIU standard for grid resilient infrastructure developed and adopted infrastructure developed Page 50 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) and adopted by STEG Number of firms/businesses that are grid The number of grid STEG's customer Annual STEG STEG PIU customers that are indirectly benefiting customers that are firms database from improved resilience of the grid and businesses Reduction of average Reduction in System Average Interruption Annual STEG STEG technical report STEG PIU interruption duration Duration Index (SAIDI) (minutes/year) ME IO Table SPACE Page 51 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) ANNEX 1: Implementation Arrangements and Support Plan COUNTRY: Tunisia Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem A. Institutional and Organizational Arrangements 1. Tunisia’s electricity sector is dominated by STEG, which, as a vertically integrated utility, owns almost all generation and has the monopoly of transmission, distribution, imports, and exports of electricity and gas. Created in 1962 after independence, when the GoT decided to nationalize the electricity and natural gas sectors, 28 STEG is a public institution with financial autonomy under the supervision of the Ministry of Energy. Since 1996, STEG no longer has the monopoly over generation because private producers were allowed to enter the market. With the adoption of the 1996 law on the de-monopolization of STEG on the electricity generation, private companies selected competitively are allowed to generate electricity and sell it to STEG who is the single buyer. The major IPP, Rades II combined cycle gas turbine power plant with a capacity of 471 MW owned by the Carthage Power Company, reached the end of the concession and was transferred to STEG recently. In 2015, the Government put in place a regulatory framework for renewable electricity generation that provides for three areas of renewable electricity generation: (a) self-generation with the possibility of transporting the generated electricity through the national grid, (b) competitive licensing system for small and medium-size IPPs, and (c) competitive concession system for large-scale projects. Till beginning of 2023, three solar IPP power plants with a total capacity of 13 MW are connected to the network. By 2021, STEG’s installed power generation capacity had reached 5,934 MW, and electricity supply totaled 20,085 GWh delivered to its nearly 4 million customers. STEG receives direct subsidies from the state budget for its investments and to cover part of its operating costs. STEG employs around 13,000 people and is organized around functional units managed by a Board and a General Director. 2. The Ministry of Energy is in charge of both sector planning and regulation. The National Agency for Energy Management (Agence Nationale pour la Maîtrise de l’Energie, ANME), created in 1985 under the Ministry of Energy, is responsible for research and policies to promote energy efficiency, RE, and energy substitution. The sector does not yet have an independent regulator. Since 2020, EBRD has provided STEG with a government-guaranteed loan of up to €300 million to assist its reforms and development of the electricity sector in Tunisia through (a) liquidity support to STEG in immediate response to the COVID-19 crisis and (b) refinancing of existing short-term debt to lengthen maturities and provide terms more consistent with STEG's operations. 3. STEG has set up a formal PIU structure to implement the Project and the Elmed interconnector (letter of instructions No. 014-23 of February 9, 2023, see figure 1.1). As an SOE with a long track record of implementing projects funded by other development partners, including EIB, EBRD, Islamic Development Bank, and Japan International Cooperation Agency, STEG has the capacity to implement and manage investments under the Project. The utility has also acquired familiarity with the World Bank’s fiduciary requirements during implementation of the prepation TA and ESIP. 28 Under Law No. 62-8 of April 3, 1962. Page 52 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Figure 1.1. Implementation Arrangements PIU Head* Logistics Management Executive Assistant* Authorization/Permits Legal expert** expert Environmental expert Monitoring/evaluation/re Risk management expert porting/coordination* HV network expert** management expert Procurement expert Customs expert** Budget expert** Financial Health & Safety expert Development manager Development manager Development manager for converter station HV connections Civil works Controllers Controllers Controllers *full-time staff **non-core project staff B. Financial Management 4. Country public financial management (PFM) analysis. The 2017 Public Expenditure and Financial Accountability (PEFA) assessment concluded that the legal and administrative framework for PFM offers an adequate level of assurance regarding reliability of information, predictability, and control in budget planning and execution and a strong control environment. However, the report also identified that there is still room for improvement particularly with regard to budget comprehensiveness, transparency, and accountability. Ongoing TA has been mobilized by the donors (particularly the EU and World Bank) to address the remaining shortcomings. The Project will make wide use of the Tunisian PFM country systems particularly the procedures for budget preparation, execution, ex ante control and monitoring by the State Controller (Contrôleur d’Etat) of the SOE, and ex post review controls such audits performed by government independent bodies. The ongoing 2022 PEFA assessment will help update the status of the performance of the Tunisia PFM systems. 5. Organizational arrangements and staffing. STEG has set up a formal PIU in charge of the implementation of all project’s components with the exception of the subcomponent 3.3. The PIU incorporates several profiles, some of whom have experience with procedures under World Bank’s Page 53 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) financed operations for effective project implementation. The FM officer assigned to the STEG PIU is a current staff at the STEG’s Financial Directorate. The officer is already in charge of several projects with the World Bank and other donors. The officer’s role requires strengthening the FM team of the Project through the recruitment of a dedicated FM officer to assist the STEG team daily. The existing PIU under the MESRS will be in charge of the implementation of the subcomponent 3.3 and has two FM officers, one at the PIU level and the other is at the Ministry's Financial Affairs Directorate. The exact implementation procedures for FM aspects of the Project will be described in the POM. 6. Assessment of the Implementing Entities i. STEG. An assessment of STEG including the FM Unit of the PIU was conducted during the project preparation to check whether this directorate and the FM team of the PIU could manage the Project. The main finding arising from this assessment conducted in March 2023 was that the FM team has experience with World Bank IPF policies and guidelines and is currently in charge of the Tunisia Energy Sector Improvement Project (ESIP-P168273). The assessment identified several FM challenges and risks that require mitigation measures and related to (i) the Project complexity and the weak capacity of STEG in monitoring of previous projects; (ii) the expected overload of the FM Officer within STEG, currently in charge of the financial management activities of different funded projects; (iii) the weak compliance of audit reports and IFRs submission; and (iv) the ineffectiveness of internal audit function of previous projects. ii. MESRS. The PIU under the MESRS has a prior experience with the World Bank as an implementation agency of the Tunisia Tertiary Education and Employability (TEEP- P151059). The assessment of this PIU which was conducted in the last implementation support mission has identified the following key FM challenges and risks that require mitigation measures related to (i) the lack of a dedicated internal audit department within MESRS; (ii) the absence of an integrated Financial Information system. 7. Risk assesment and Mitigation Measures. The overall residual FM risk for the Project is rated Substantial due to all the FM chalenges and risks listed above. The FM Action Plan (table 1.1) has been developed to mitigate the overall FM risks. Table 1.1. FM Action Plan Issue/Topic Remedial Action Recommended Responsible Completion FM Body/Person Date Effectiveness Conditions Staffing Assignment of a dedicated FM officer from STEG and MESRS familiar with World Bank STEG/ 2 months procedures to work on the FM aspects of the MESRS after No Project and the reinforcement of the FM team effectiveness by hiring one FM consultant. Information • Configuration of the existing STEG’s STEG/ system accounting software to allow the recording accounting of the new Project transactions. software • Signing a convention with Centre National 2 months and implement the monitoring and after No evaluation tool Injez that allows the MESRS effectiveness tracking of all project expenditures Administrative Preparation of the FM procedures as part of the STEG 3 months No Page 54 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) accounting and POM to reflect the World Bank’s FM after financial procedures. effectiveness manual Internal audit • Preparation and submission of a copy of the STEG/ annual program of the internal audit unit of STEG covering the transactions of the Project. Copy of audit report shared with the World Bank quarterly. 3 months No • Discuss with the good governance entities after within the MESRS on the modalities of its effectiveness interventions including allocation of adequate resources to review project MESRS transactions External • Amendment of the terms of reference of STEG/ 5 months No auditing STEG’s external auditor to include the after Project’s activities under STEG effectiveness responsibility • The CGF an entity acceptable to the bank will audit the accounts of the component MESRS managed by MESRS (a) Annual work program. Each Implementing Entity (eg. STEG and MESRS) will prepare and submit to the World Bank a proposed AWPB for the Project’s activities under its responsibilities the following fiscal year, including (i) a timetable of consolidated programs and activities scheduled for implementation during that fiscal year and (ii) the estimated costs of each activity, along with related sources of funding. The AWPB will be submitted to the Project Oversight Committee for approval and thereafter to IBRD for ‘no objection’, not later than November 30 of the year preceding the year the work plan should be implemented. (b) Budgeting. The POM will describe the procedures for the preparation, execution, and control applicable for the activities to be implemented by the two implementing entities as well as FM and procurement procedures. (c) Accounting and information management system. STEG is using Tunisia’s private sector accounting standards, which are acceptable to record Project transactions and produce the financial statements. STEG is also working on the adoption of International Standards Financial Reports, which are expected to be used for producing financial statements in the midterm. STEG will be responsible for maintaining the Project’s transactions using the current information management systems. In addition to that, STEG must configure its accounting system to allow a separate recording of the Project transactions. The PIU under MESRS will use financial information generated from the public debt management system (SIADE), the government budgetary system (ADEB), and from accounting information held in spreadsheets in excel to prepare the financial reports related to the subcomponent 3.3. (d) Internal controls and internal audit. The internal control system is aimed to ensure (i) the effectiveness and efficiency of operations, (ii) the reliability of financial reporting, and (iii) the compliance with applicable laws and regulations. The POM will describe the internal control procedures for Project activities. For the Project, the FM Manual including procurement, which is due three months following project effectiveness and is part of the POM, would be developed to document, explain, and describe work processes, information Page 55 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) flow, authorization and delegation of authority, timing, job segregations, auto and sequential controls, compliance with project objectives, and micro and macro rules and regulations. STEG’s internal audit will include the review of the Project’s transactions in the annual audit plan. (e) Interim financial reporting. Each PIU (eg. STEG and MESRS) will prepare separate interim financial report. The unaudited IFRs will be prepared every calendar semester and submited to the World Bank regularly 45 days after the end of each semester and on time. The unaudited IFR for the Project includes the following financial statements: (i) Statement of Sources of Funds and Project Revenues and Uses of Funds; (ii) Statement of Expenditures classified by project components and/or disbursement category (with additional information on expenditure types and implementing agencies as appropriate), showing comparisons with budgets for the reporting semester, the year, and cumulatively for the Project life; (iii) cash forecast; (iv) explanatory notes; and (v) DA activity statements; and (vi) reconciliation table. (f) Annual financial reporting. In compliance with the country accounting standards and IBRD requirements, STEG and the MESRS PIU will produce separate annual financial statements for components under its responsibility. These include (i) a balance sheet that shows assets and liabilities; (ii) a Statement of Sources and Uses of Funds showing all the sources of project funds and expenditures analysed by project component and/or category; (iii) a DA activity statement; (iv) a summary of withdrawals using SOEs, listing individual withdrawal applications by reference number, date, and amount; and (v) notes related to significant accounting policies and accounting standards adopted by management and underlying the preparation of financial statements. (g) External audit. An external auditor acceptable to the World Bank, subject to an approved terms of reference for audit of the Project annual financial statements, will produce a separate audit report on its share of Project transactions. The scope of the audit of the Project will include the transactions funded by CEF and GCF for implementation of the Project activities. The auditor will produce (i) an annual audit report including an opinion on the Project’s annual financial statements and (ii) a Management Letter on internal controls. Each audited Project financial statements must cover one calendar year. The audited Project financial statements shall commence with the fiscal year in which the first withdrawal was made. The audited financial statements for each such period must be furnished to the World Bank not later than six months after the end of such period. An amendment of the terms of reference of STEG’s external auditor to include the project’s transactions under STEG’s responsibility will be required for the purpose of producing a separate audit report. For component under MESRS, The General Financial Control will audit the project financial statements including the designated account. Table 1.2. Due Dates of the Audit Report Audit Report Due Date Responsible Party Audited financial (a) Not later than June 30 (2000 + N) if effectiveness has STEG statements including audit occurred before June 30 (2000 + N−1). report and Management (b) Not later than June 30 (2,000 + N+1) if effectiveness has Letter occurred after June 30, (2000 + N−1) Page 56 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) (h) Support to the implementation plan. FM supervisions will be conducted over the Project’s lifetime. The Project will be supervised on a risk-based approach. Based on the outcome of the FM risk assessment, an implementation support plan is proposed (table 1.3). The objective of the implementation support plan is to ensure that the Project maintains a satisfactory FM system throughout its life. Table 1.3. FM Implementation Support Plan FM Activity Frequency Desk reviews IFRs’ review Semester Audit reports review of the program Annual Review of other relevant information such as interim internal control Continuous, as they become systems reports available On-site visits Review of overall operation of the FM system (Implementation Support Every six months for Substantial Mission) risk Monitoring of actions taken on issues highlighted in audit reports, auditors’ As needed Management Letters, internal audits, and other reports Transaction reviews As needed Capacity-building support FM training sessions Before project effectiveness and during implementation as needed Funds Flow and Disbursement Arrangements 8. Funds flow. In terms of the funds flow and in order to finance the Project’s activities under all the components the respective funds will be used: (i) IBRD financing of €247 million for components 1, 2 and 3; (ii) STEG financing of €76.9 million for only component 1; and (iii) GCF loan and grant of €23.5million for components 2 and 3. Given that all the Project’s activities are financed jointly by IBRD, STEG, and GCF, a segregation between the different financing according to the activities to be financed or based on a percentage should be considered to avoid double payments. In regards with the component 1 and taking into consideration the critical financial situation of STEG, activities under this component will be first financed by IBRD financing. Once the bank’s funding is totally consumed, STEG will take over. 9. Disbursement. Upon loan effectiveness, transaction-based disbursements will be used. The project will finance 100 percent of eligible expenditures inclusive of taxes. Two (2) DA will be opened at the CBT: one for payment of all the expenditures incurred under the responsibility of STEG and one for all payments of all activities managed by the MESRS. The proceeds of the Project will be disbursed in accordance with the traditional disbursement procedures of the World Bank and will be used to finance activities through the disbursement procedures currently used, that is, advances, direct payment, and reimbursement accompanied by appropriate supporting documentation (Statement of Expenditures) in accordance with the procedures described in the Disbursement Letter and the World Bank’s ‘Disbursement Guidelines’. 10. A DA (euro-denominated) will be opened at the CBT on behalf of STEG and will be used to make payments to suppliers under Components 2 and 3 of the Project. The ceiling of the DA will be stated in the DFIL. The DA will be replenished upon reporting on the use of a prior advance at least quarterly. Under Page 57 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Component 1, the use of other options of disbursing the funds is anticipated, mainly direct payments and special commitments. The documentation for the supporting expenditures will be retained at each implementing agency and will be readily accessible for review by the external auditors and periodic World Bank implementation support missions. The second DA (euro-denominated) will be opened at the CBT on behalf of the MESRS to make payments to suppliers under subcomponent 3.3. 11. Statement of Expenditures will be used for requests for reimbursement and reporting eligible expenditures paid from the DA: (a) Statement of Expenditures (in the corresponding form attached in the Disbursement Letter) and (b) Reconciliation Statement (in the corresponding form attached in the Disbursement Letter). Each PIU (through the CBT) will report on the use of loan proceeds advanced to the Project’s DA in accordance with the DFIL. Total Project’s eligible expenditure will be summarized in the Statement of Expenditures prepared by CBT and will be submitted to the Bank for processing. The CBT will sign and submit withdrawal applications electronically using the e-Signatures module accessible from the World Bank’s Client Connection website. If the Bank determines that an ineligible expenditure has been financed by loan proceeds, the Bank may require the Government to whether refund the amount to the designated accounts, or in exceptional circumstances, as provided in the Bank disbursement policies, provide substitute documentation acceptable to the Bank. C. Procurement 12. Applicable Procurement Regulations. Procurement under the Project will be carried out in accordance with the World Bank Procurement Regulations for IPF Borrowers, dated November 2020 (Procurement Regulations). The Project will be subject to the World Bank’s Anti-Corruption Guidelines (ACG) (‘Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and International Development Association (IDA) Credits and Grants’), dated October 15, 2006, and revised in January 2011 and July 2016. The project will use the Systematic Tracking of Exchanges in Procurement (STEP) tool to plan, record, and track procurement transactions. 13. All procurements under the Project, except for subcomponent 3.3, shall be carried out by STEG. The implementation of the subcomponent 3.3 will be under the existing PIU of the TEEP (P151059) within MESRS. 14. Project Procurement Strategy for Development (PPSD): PPSD, together with Procurement Plan for the initial 18 months, has been prepared. Major procurements under the Project are: - Supply, civil works, installation, and commissioning ±500 kV HVDC converter station in Tunisia and related infrastructure with an estimated cost of €222.7 million. - Supply, civil works, installation, and commissioning of grid reinforcement under component 2, with total estimated cost of €110 million envisaged to be procured in three packages: (i) 400/225 kV substation in Grombalia, (ii) 400 kV double-circuit OHTL of 65 km length from the new HVDC converter station to the 400 kV Grombalia 2 substation, (iii) 400 kV double-circuit OHTL of 51 km from Grombalia 2 substation to the existing Mornaguia substation (including two 400 kV underground cables at Mornaguia substation). - Selection of owner’s engineer under Component 3 to support STEG in construction supervision of HVDC converter station in Tunisia under Component 1 (in close coordination with Terna) and supervision of other grid investments in Tunisia under Component 2. Page 58 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) - Selection of consultant for the development of business plan for the renewable energy center of excellence (subcomponent 3.3). 15. Procurement strategy for HVDC converter station. The single largest contract for HVDC converter station under Component 1 is required to be procured jointly by STEG and Terna through a single procurement process for sourcing the converter stations on the Italian and Tunisian sides from the same manufacturer due to essential technical considerations including common communication protocol and interoperability requirements. Terna will take the lead role in the procurement due to its proven experience and capacity in similar HVDC converter stations. To access CEF financing, Terna is required to carry out the joint procurement for the HVDC converter stations on Italy side and Tunisian in compliance with EU Procurement Directives and Italian Legislation decree. 16. There is a narrow market for HVDC converter stations (VSC technology) with three main manufacturers worldwide according to STEG and Terna’s market assessment and as also suggested by the World Bank’s technical experts. For sourcing of two converter stations in two countries, STEG and Terna will follow Limited Competition approach from the pre-identified bidders according to the market assessment and PQ exercise conducted by STEG and Terna. The Request for Proposal (RFP) for the Limited Competition will comply with the requirements of EU Directives/Italian Legislation and the World Bank Procurement Regulations (the document will be prior reviewed by the World Bank). The initial draft RFP, using Bank Standard Procurement Documents, is under an advanced stage of preparation which appears broadly acceptable. Discussions are underway for improvements. The RFP will include World Bank’s eligibility criteria for the award of Tunisian contract; Anti-corruption provisions including World Bank’s right to inspection and audit; World Bank’s E&S and SEA/SH compliance requirements, etc. The following modalities were discussed with STEG and Terna: • The World Bank team will carry out a market assessment to confirm the list of potential qualified and eligible firms/bidders for the two HVDC converter stations. STEG and Terna will carry out the PQ process without the World Bank’s involvement. Terna and STEG will publish the PQ notice on the United Nations Development Business UNDB29 website mentioning that the converter station on the Tunisian side will be financed from the proceeds of the World Bank Loan. • At the end of the PQ process, STEG will submit the list of applicants, and the ones who are recommended to be prequalified will be submitted to the World Bank. The purpose of this list would be to confirm with the World Bank’s market assessment the eligibility of each pre- qualified firm. • The outcome of the strong market assessment (which is expected to be consistent with the outcome of the PQ process) would then be the basis for Limited Competition, envisaged under Procurement Regulations. • STEG and Terna will adopt the World Bank’s Standard Procurement Documents as the basis to prepare the RFP. The RFP will include World Bank’s eligibility criteria for awarding the Tunisian contract; Anti-corruption provisions including World Bank’s right to inspection and audit, as well as World Bank’s E&S and SEA/SH compliance requirements. The initial draft RFP is at the advanced stage of preparation which appears broadly acceptable. Discussions are underway for improvements. 29 UNDB = United Nations Development Business. Page 59 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) • The RFP will be designed to identify the scope of work distinctly on the Italian and Tunisian sides with corresponding financial proposals and other requirements. • The proposals will be evaluated by a single Bid Evaluation Committee from STEG and Terna. • Two separate contracts will be signed by STEG and Terna for the Tunisian and Italian side of converter stations and the Tunisian contract will be compliant with World Bank’s Standard Form of Contract. • Though the Bank’s prior review will be for the converter station in Tunisia, the Bank will issue No objection to the RFP, several stages of evaluation of proposals and recommendations to award the contract on Tunisian side. Terna and STEG will also sign a Joint Procurement Agreement (JPA) to stipulate specific roles and responsibilities for the management of the entire procurement process of converter stations (and for sub marine cable which is not covered under World Bank financing). Due to extensive experience in implementing similar projects Terna will be the lead procurer for the converter station. 17. Procurement for Tunisia grid reinforcement under Component 2. The procurements will be carried out following open international competition using the World Bank’s Standard Procurement Documents for Plant Design Supply and Installation. STEG will use the experience from the ongoing similar procurements under the ESIP. There are adequate qualified bidders for these procurement packages according to the bid response noted under the ESIP. 18. Contract management. In view of STEG’s lack of experience with construction of HVDC converter stations, STEG will select an owner’s engineer under Component 3 to support the construction supervision of HVDC converter station in Tunisia under Component 1 (in close coordination with Terna) and supervision of other grid reinforcement in Tunisia under Component 2. To ensure smooth working for Terna and STEG, all the systems and procedures shall be described precisely in the POM. STEG will set up a contract management mechanism with key performance indicators, milestones, and regular reporting. Other mitigation measures include training in World Bank procurement for the PIU appointed by STEG in addition to the mandatory use of STEP that will address the relatively poor information system reliability and communication weakness. 19. Procurement capacity assessment. STEG procurement is governed by the public procurement framework established by Decree 2014-139 of March 13, 2014. This decree has improved transparency, governance, and complaint handling. The procurement decree was recently amended by the decree-law 68/2022 of October 19, 2022, exempting procurement under donor-financed projects from the review of national control bodies (departmental procurement Commission and High Procurement Commission). To complement this decree-law, the Government issued, on February 1, 2023, a circular complementing the decree-law and clarifying its application, limiting its scope only to procurement subject to donors’ prior review. For procurements under the Project, STEG will carry out procurement according to the World Bank’s Procurement Regulations and ACG. 20. STEG is familiar with the World Bank’s Procurement Regulations and procedures, but procurement of transmission lines and substations under the ongoing ESIP experienced significant delays though the two main contracts are now in advanced stage of award. Further, STEG has no technical experience in procurement of large and complex procurements such as HVDC converter stations. STEG will, therefore, rely on Terna for all technical and procurement matters in the procurement of HVDC converter stations. Terna has proven experience with several similar projects completed or under implementation. This also carries the risk of Terna dominating the procurement process with little say of Page 60 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) STEG as STEG has delegated the lead procurement role to Terna for the converter station. This risk will be mitigated through JPA between STEG and Terna, that will stipulate equal voting rights of STEG and Terna in the procurement process, Bank’s technical support to STEG, and Bank’s oversight of joint procurement process to be carried by STEG and Terna for HVDC converter stations. Further for the management of the Project, STEG has already set up a PIU (letter of instructions No. 014-23 of February 9, 2023), which includes several specialists (environmental and social safeguards, procurement, FM, technical, logistic, security and health, legal, and so on), some of whom are already involved in the ESIP (transmission lines and substations) and, therefore, have experience in dealing with procurement under World Bank-financed operations. For procurements under Component 2 to be carried out exclusively by STEG, it will use the experience gained under the ESIP. The Bank team will provide training to STEG on World Bank Procurement Regulations and procedures and use of STEP during early stages of project implementation and as needed throughout project duration. 21. Subcomponent 3.3 will be implemented by the PIU of the TEEP (P151059) within MESRS. The PIU is subject to the Tunisian procurement control framework with the involvement of the departmental procurement commission and the high procurement authority (HAICOP) in the approval of evaluation reports and award decisions. As per the decree law 68/2022 of October 2022, all procurement not subject to Bank prior review will be subject to the review of the departmental procurement commission and the high procurement authority (HAICOP) as required. The PIU has a system of accountability with clearly defined responsibilities on Procurement decisions. Under the TEEP, due to the capacity limit of the PIU, a consultant was hired to help in handling procurement activities. The consultant selections foreseen under subcomponent 3.3 are by far more complex than the small selections and shopping under the TEEP. During the implementation of the TEEP, much confusion was noted regarding the procurement procedures to be used for the sub-projects (PAQ) and the activities of the PIU itself. In addition, several difficulties noted during the implementation of the project have affected and continue to affect its performance, such as: • persistent delays noted in the updating of procurement activities in STEP • procurement documents not uploaded in STEP as required, for several contracts already signed or activities under implementation • Procurement plan in STEP not updated regularly to reflect the status of activities 22. Procurement risk assessment and mitigation measures. Considering the nature, size, complexity, narrow market for HVDC converter stations and joint procurement by STEG and Terna, there remains High risk in the procurement of HVDC converter stations. Regarding subcomponent 3.3, the risk associated with procurement is considered substantial. The PIU of TEEP familiarized itself with World Bank procurement procedures. However, this familiarization remains limited given that the procurement in the TEEP concern small selections of consultants (individual for the most part) and shopping. The challenges posed by the selection of consultants provided for in subcomponent 3.3 are far more complex than those of the TEEP and require specific measures to strengthen the PIU, in addition to the appointment of a dedicated procurement officer. The procurement risks and mitigation measures are summarized in table 1.4. Table 1.4. Procurement Risk and Mitigation Measures Procurement Risk Mitigation Measures Risks related to difference in eligibility At least the three main manufacturers of HVDC converter stations between the Bank Regulations and EU (VSC technology) currently meet the eligibility requirements of both Directives in view of joint procurement the EU and World Bank. process by STEG and Terna for the Further market assessment by the World Bank and parallel PQ Page 61 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Procurement Risk Mitigation Measures converter stations due to technical process by STEG and Terna will confirm the eligible and qualified considerations manufacturers of HVDC converter stations before launch of Limited Competition. Risk of qualified bidders becoming This risk is low and unlikely to materialize. Further, Tunisian ineligible during the process before award contract will be signed only if the successful bidder meets the of contract. Bank’s eligibility criteria Risk of difference in eligibility of proposed All major subcontractors currently meet eligibility criteria of the subcontractors by the bidders for HVDC Bank. converter stations at the bidding stage Any ineligible and/or technically unqualified subcontractor will be required to be replaced with an eligible and qualified subcontractor. Risk of delays and disagreements between The initial working draft of RFP is at an advanced stage of the World Bank and STEG/Terna in preparation which appears broadly acceptable. Discussions are finalizing the RFP that complies underway for improvements. RFP is expected to be finalized requirements of EU Directives/Italian before STEG and Terna conclude the PQ process. Legislation code and World Bank requirements Poor bid response for HVDC converter PQ process will be a good indicator of number of qualified firms stations due to already narrow market and their interest in the procurement process. The first stage of and complexities of joint procurement by the RFP process will allow improvements in the RFP to address two entities across two countries with two firms feedback and clarifications on RFP. different sources of financing Differences in application and RFP provisions, including evaluation criteria, to be specified in a interpretation of deviations and treatment clear and unambiguous manner to minimize subjectivity thereof in the evaluation of bids for HVDC converter stations based on a long- standing precedent and practice that have material implications to the successful outcome of procurement process Risk of Terna dominating the procurement The procurement process will be jointly managed by Terna and process with STEG having little say due to STEG as per JPA to be signed between Terna and STEG. JPA will lack of STEG’s capacity in in the stipulate equal rights of STEG and Terna in procurement process. procurement of HVDC converter stations Bank’s technical support to STEG and World Bank’s oversight of the joint procurement process to be carried out by STEG and Terna for HVDC converter station. The Bank team will provide training to STEG on World Bank Procurement Regulations and procedures and the use of STEP during early stages of project implementation and as needed throughout project duration. Risk of delays due to lack of coordination JPA, to be signed between Terna and STEG, and the POM will between STEG, Terna, and the World Bank include a clear implementation plan with specific roles and responsibilities. Risks associated with quality of Owner’s engineer to be hired by STEG to support it in construction construction and delays due to STEG’s lack supervision of HVDC converter stations and Tunisian grid of technical capacity for supervision of reinforcements. HVDC converter stations STEG, with the assistance of the owner’s engineer will prepare the Contract Management Plan with key performance indicators, milestones, and regular reporting for monitoring through contract execution. Page 62 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Procurement Risk Mitigation Measures Sub-component 3.3 (implemented by PIU of TEEP within the MESRS) Lack of skills and knowledge of Bank - Recruitment of a procurement consultant with relevant procedures for selection of consulting experience in selection of consultants in accordance with firms World Bank procedures - Training of the PIU team assigned to management of sub- component 3.3 on Bank procurement procedures and the use of STEP - the inclusion in the POM of a section related to sub- component 3.3 with detailed procurement procedures for consultant selections foreseen 23. Records. STEG shall keep records of all proceedings of the procurement process in accordance with the requirements of the Legal Agreement. D. Implementation Support Plan 24. The strategy for project implementation support by the World Bank reflects the nature of the Project and its risk profile. The strategy aims at making implementation support to STEG more efficient while remaining focused on implementation of the risk mitigation measures identified in the SORT. The strategy is also an indicative and flexible instrument that will be revisited during Project implementation and as part of the routine reviews of the Project and will be adjusted based on emerging project challenges and field conditions. 25. Overall Project implementation. Project supervision will review the progress in the implementation of each component and support the following critical areas: (a) technical implementation support to ensure that the Project is being carried out in an effective manner; (b) fiduciary capacity support to ensure that the Project funds are used to achieve value for money and that there is adequate capacity and internal control systems and overall governance; and (c) management of environmental and social factors in the Project area of influence. Dedicated attention will be paid to the procurement and execution of the works under Components 1 and 2, as they entail construction of large transmission infrastructure and account for the bulk of project funds. The World Bank has established close partnership with the GoT and energy sector stakeholders, as a result of the extensive policy and technical support to the tariff and subsidy reform, STEG’s performance improvement, RE deployment, and the preparation and implementation of the ESIP. Also, mutual experience has been developed through the preparation TA. All this support has earned the World Bank the reputation of a trustworthy partner delivering top quality advisory services. The relations between the GoT and the World Bank are well established, as a result of the effective and integrated assistance provided by the World Bank to handle the multiple challenges associated with Tunisia’s macro-fiscal situation and the related debt exposure limitations. The World Bank team will leverage these good results and continue close dialogue and mutual collaboration with the GoT. Team members will ensure timely, efficient, and effective implementation support to STEG and carry out formal implementation support missions at least twice a year. 26. Technical support. The supervision mission will review the progress in the implementation of each component. The World Bank team will provide the required assistance, advice, and guidance to STEG on various technical aspects of the transmission investments. The team will review technical specifications of bidding documents for the Project and bid evaluation reports and provide advice as needed. Site visits will also be conducted during supervision missions along with STEG to verify physical implementation Page 63 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) progress and ensure proper guidance. Guidance will also be provided in the implementation of Component 3. 27. Fiduciary support. The supervision missions will ascertain whether the procurement and FM provisions of the Project Legal Agreements and POM are being followed. The FM specialist will review the (a) project accounting and internal control systems; (b) budgeting and financial planning arrangements; (c) IFRs; (d) audit reports, including financial statements, and remedial actions recommended in the auditor’s Management Letter; and (e) disbursement management and financial flows. Supervision of procurement will be carried out primarily through prior review supplemented by supervision missions at least twice a year. Procurement supervision will be closer during the first 18 months of project implementation, which is when procurement for the major investments is expected to be completed. The missions will also discuss progress in implementation of the Procurement Plan. 28. Environment/social support. The World Bank specialists in environmental and social risk mitigation (safeguards) will be responsible for supervising STEG’s compliance with World Bank safeguards policies and the preparation and implementation of the ESIA once project locations are confirmed. They will conduct supervision missions and site visits to the field twice a year during the duration of the Project, review deliverables prepared, and provide assistance to STEG as needed. 29. Policy dialogue on macroeconomic issues and sector strategies. The World Bank will remain closely engaged with the GoT and other partners (including the IMF) to support macro-fiscal stabilization in the country. The parallel TA being carried out by the World Bank is providing critical support for the subsidy reform and to improve STEG’s financial situation as well as to promote RE deployment. The World Bank team will also liaise with the GoT to anticipate and address governance and political risks, as well as shifting energy sector priorities. There is broad-based consensus across the political spectrum about the importance of developing Tunisia’s RE potential; thus, commitment to the Project is expected to remain firm. The TA also constitutes an ideal platform to provide on-demand technical assistance and advisory services to support the transition toward a more open and competitive power market—notably through the establishment of an independent regulation agency. 30. The overall implementation support plan for the Project and resource requirements are described in tables 1.5 and 1.6. Table 1.5. Resources Required by Time Frame Time Focus Skills Needed Resource Estimate (staff weeks) Project management Task team leaders, energy 20 specialists Procurement implementation support Procurement specialist 6 FM implementation support FM specialist 3 First 18 Environmental implementation support Environmental specialist 4 months Social implementation support Social specialist 4 18 Project management Task team leaders, energy 20 months— specialists project end Procurement implementation support Procurement specialist 4 date FM implementation support FM specialist 4 Environmental implementation support Environmental specialist 4 Page 64 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Time Focus Skills Needed Resource Estimate (staff weeks) Social implementation support Social specialist 4 Table 1.6. Skills Mix Required Skills Needed Number of Staff Weeks Number of Trips per Year Task team leaders 30 2 Energy specialists 4 2 Procurement specialist 4 2 FM specialist 4 2 Environmental safeguard specialist 4 2 Social safeguard specialist 4 2 Page 65 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) ANNEX 2: Project Design Analysis COUNTRY: Tunisia Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem 1. HVDC technology has been used for bulk long-haul transmission from the beginning of the history of electricity, with recent increasing applications in regional interconnectors and offshore wind connections. The HVDC technology has been available since the beginning of the electricity history in the later nineteenth century, while the alternative AC technology has widely spread. The history of modern HVDC technology started in 1930 with its first application in Sweden. The HVDC technology has been used for bulk long-haul overhead power transmission (> 500 km) and submarine cable transmission (> 60 km) due to its cost advantage over the HVAC technology. A large number of HVDC projects are being implemented or planned for regional power system integration and RE integration such as hydropower transmission in China and offshore wind integration in the North and Baltic seas. More than 20 large-scale HVDC projects are planned for the next decade. They include HVDC submarine cable regional connections such as UK-Portugal, UK-Germany, and Singapore-Australia as well as long-haul overhead HVDC transmission lines in China from west to east. Most of the projects are expected to be commissioned before 2030. Globally, more than 200 HVDC projects have been or are being implemented, among which more than 100 HVDC projects are concentrated in Europe followed by more than 50 projects in Asia. 2. Two technology choices are available for the HVDC converter station: VSC and Line Commutated Converter (LCC). VSC is chosen for the Elmed interconnector due to advanced operational capabilities. LCC is a more traditional technology suitable for bulk electricity transmission based on the Thyristor technology, while VSC is a newer technology based on power semiconductor as a short form of insulated- gate bipolar transistor. VSC allows more flexible operations through enhanced control capability. With the development of offshore wind and regional integration over the last decades, the new technology, VSC, has advanced, while the alternative traditional technology, LCC, has also been used for bulk transmission lines. Compared with LCC, which can transmit larger capacity of power up to 3,000 MW, VSC has several operational advantages including (a) uninterrupted bidirectional power flow capability, (b) black-start capability, (c) independent active and reactive powers controllability, and (d) applicability to weak power systems. Due to these operational advantages, many recent HVDC projects use the VSC technology and hence manufacturers are investing more in the new technology. The Elmed Project will use the VSC technology due to the advantages stated above, which will allow flexible market-based operations and increase the flexibility of both power systems. It should be also noted that the Tunisian grid is strong enough to accommodate the VSC technology, which is usually assessed with the short circuit ratio. Based on analyses of various future configurations, the feasibility study confirmed that the short circuit ratio is at least 3 p.u. at the connection node of Mlaabi, which is acceptable for the VSC technology. Page 66 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) Table 2.1. LCC versus VSC Comparison Summary Source: Terna. 3. Two technologies are available for submarine and underground HVDC cables: (a) lapped and (b) extruded. Considering the high depth (750 m) reached along the route and the lack of proven records at this depth, the most suitable solution considered for the Project is the mass-impregnated (MI) cable. (a) Lapped technology comes in two types: MI and Polypropylene Lapped Paper (PPLP) tape. In the MI cable, more than 200 paper layers are wound around the conductor. These are then impregnated in a high viscous compound. Instead of pure paper tapes, the PPLP cable type uses a layered tape consisting of polypropylene and paper, promising higher operating temperature. HVDC PPLP cables have only been used in three projects: Western Link 600 kV submarine cable, the Buk-Dangjin-Godeok 500 kV submarine and underground cable and the Seohaean Chungnam to Pyeongtaek, Gyeonggi-do underground cable project (voltage unknown, but probably 500 kV). The Western Link Project has faced technology issues, resulting in early cable breakdowns. The link seems to work currently without cable damages. While the experience of HVDC PPLP technology is limited, the experience of HVDC MI cable is extensive and started with the first commercial project in 1953. The MI cable has been deployed at a record depth of 1,640 m in the Mediterranean (SAPEI link). Also, the 500 kV Monita submarine cable link faces a maximum depth of around 1,200 m. To reduce the weight of the cable (important for deep water installation), an aluminum conductor was used. Although not supplied nor in service, a supplier has reached the status of preferred bidder for the award of the supply and installation for part of the EuroAsia cable that will reach 3,000 m depth. The HVDC MI submarine cable technology is proven at 500 kV and depths beyond 1,000 m. (b) Extruded technology comes in three categories: DC Cross-Linked Polyethylene (DC-XLPE), nano-filled XLPE, and High-Performance Thermoplastic Elastomere (HPTE). The extent of extruded DC cables that has been installed and contracted since the start is approximately Page 67 of 68 The World Bank Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem (P179240) 23,000 km, of which about 11,000 km is at 300/320 kV level and more than 6,000 km is at 525 kV (being manufactured as underground cable and not in operation yet). Extruded DC cables have not been deployed at large depths yet. So far, submarine cables of that type have only been installed in the Baltic Sea, North Sea, and Irish Sea. These depths are in the ‘100 m’ range. Extruded AC cable systems, that are similar to their DC cousins, have been installed in deep waters. Cables and depth are related to cable weight and water pressure. A heavy dynamic extruded 3-core HVAC cable of about 85 kg/m was installed in the Norwegian Sea at a maximum depth of 550 m. A heavy 3-core extruded HVAC cable in the Mallorca-Ibiza Project was installed at a maximum water depth of about 800 m. In comparison, the Elmed deep water section cable will probably weigh around approximately 25–45 kg/m. The challenge for extruded cables at large depths is the field and repair joints. Extruded cable technology has been contracted for significant amounts of 525 kV underground cables and is being tendered for submarine cable at that voltage level. In terms of quantity of delivered and contracted cable systems at all voltage levels, lapped and extruded cable technologies are to be seen as equal. Extruded 525 kV DC cable systems have not been proven in service yet as MI cable systems have. Although several TSOs have put their trust in the technology, proven by ongoing projects and tenders, there is no proof of a roadblock in using extruded DC submarine cable technology in deep waters, but this will need verification and qualification testing. Information on how much of such testing has already been performed is not readily available in the public domain. At this time, the HVDC XLPE submarine cable technology for such voltage level has been installed only at a depth of a few hundred meters. Page 68 of 68