The World Bank Electricity Service Access Project (P162760) REPORT NO.: RES54872 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF ELECTRICITY SERVICE ACCESS PROJECT APPROVED ON JUNE 27, 2017 TO REPUBLIC OF ZAMBIA Energy & Extractives Eastern and Southern Africa Regional Vice President: Victoria Kwakwa Country Director: Nathan M. Belete Regional Director: Wendy E. Hughes Practice Manager/Manager: Julia M. Fraser Task Team Leader(s): Christopher Saunders, Monali Ranade The World Bank Electricity Service Access Project (P162760) ABBREVIATIONS AND ACRONYMS ALCO Asset and Liability Committee ARAP Abbreviated Resettlement Action Plan C-ESMP Contractor’s Environmental and Social Management Plan CPs Cooperating Partners DoE Department of Energy DBZ Development Bank of Zambia E&S Environmental and social ESAP Electricity Service Access Project ESMF Environmental and Social Management Framework ESMP Environmental and Social Management Plan FA Financing Agreement FI Financial Intermediary FY Fiscal Year GPRBA The Global Partnership for Results-Based Approaches GRZ Government of Republic of Zambia IFC International Finance Corporation IPF Investment Project Financing ISR Implementation Supervision Report MSEs Micro and Small Enterprises MoE Ministry of Energy OG-RESS Off-Grid Rural Electrification Smart Subsidy PAD Project Appraisal Document PDO Project Development Objective PMC Project Management Consultant REA Rural Electrification Authority SMEs Small and Medium Enterprises SMPs Solar Milling Plants TF Trust Fund The World Bank Electricity Service Access Project (P162760) Note to Task Teams: The following sections are system generated and can only be edited online in the Portal. BASIC DATA Product Information Project ID Financing Instrument P162760 Investment Project Financing Original EA Category Current EA Category Partial Assessment (B) Partial Assessment (B) Approval Date Current Closing Date 27-Jun-2017 31-Aug-2023 Organizations Borrower Responsible Agency Republic of Zambia Project Development Objective (PDO) Original PDO The project development objective is to increase electricity access in Zambia's targeted rural areas. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing (US$, Millions) Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IDA-61060 27-Jun-2017 20-Mar-2018 15-Jun-2018 31-Aug-2023 26.50 19.73 6.87 TF-A8640 27-Jun-2017 01-May-2019 01-May-2019 31-May-2023 7.00 6.93 .07 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Electricity Service Access Project (P162760) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Project Status 1. The Electricity Service Access Project (ESAP; P162760) is a US$33.5 million Investment Project Financing (IPF) to support the Government of Republic of Zambia (GRZ) in its renewed efforts to accelerate access to electricity services, particularly in rural areas. The financing for ESAP was approved by the World Bank on June 27, 2017 and was declared effective on June 15, 2018. The project is co-financed by IDA (US$26.5 million) and the Global Partnership for Results- Based Approaches (GPRBA) (US$7 million). At the time of the financing approval, the World Bank planned to help GRZ scale up its rural electrification program in two stages. The first stage was to be achieved through the project, which is to increase access to electricity in rural areas with grid and off-grid technologies. This would be the building block for the second stage, which is to scale up electrification through a larger program that would be launched by the GRZ and potentially supported by the WBG, other Cooperating Partners (CPs), and the private sector. The World Bank committed to support the first stage through ESAP, which was designed to partner with the Rural Electrification Authority (REA) and invest in rural electrification through different modalities and lays the groundwork for the second stage. 2. The Project Development Objective (PDO) is to increase electricity access in Zambia’s targeted rural areas. The PDO indicator is “People provided with new or improved electricity service (number)”. The project components are: (i) on-grid electrification access expansion including a connection fee subsidy program and distribution network extension (Component A); (ii) off-grid electrification expansion including mini-grid smart subsidy program and off-grid Loan Facility (Component B); and (iii) Capacity Building and Project Implementation Support including a National Electrification Strategy (Component C). 3. The project is about four years into implementation and the progress towards achievement of the PDO is rated Satisfactory. Notably, through the connection fee subsidy program implemented by the national utility ZESCO under sub- component A1, 55,627 new connections have been made as of January 13, 2023, including 47,137 households (of which 14,374 female-headed households) and 8,490 Micro and Small and Medium Enterprises (MSMEs). The project has therefore already met its PDO level result indicator before the project completion date of August 31, 2023, as the PDO end target of ‘176,800 people provided with new or improved electricity service’ and 245,112 people have been provided with access to date. 4. Currently, the overall implementation progress is rated Moderately Satisfactory, due to delayed progress on the distribution grid extension (sub-component A2) and off-grid electricity access expansion (Component B). The implementation progress of sub-component A2 has been slower than expected due to delays in signing the works contracts and preparing the required safeguards instruments, and then compounded by delays in materials shipping caused by the COVID-19 pandemic. By July 2021, all the resettlement compensation was completed, and the contractors’ Environment and Social Management Plans (C-ESMPs), Health and Safety Management Plans (HSMPs), COVID-19 plans, and Risk Assessments were cleared by the World Bank. While 8 out 10 contracts have now been completed subject to final inspections, 2 contracts remained non-performing. These contracts for grid extension works in Central and Muchinga provinces were awarded to the same contractor. Despite prior contract extensions, several written exchanges, and a notice to correct, works were only partially completed by the time the contracts closed on February 4, 2023. Given the non-performance, no further extension has been granted. Together, the project implementation entities REA and ZESCO have proposed an alternative solution for completion of the works, relying on the use of materials received from the The World Bank Electricity Service Access Project (P162760) original contractor and procurement of the labor component separately through REA to complete the works. This process has been agreed with the Bank and is expected to take another 10 months with REA committing to absorbing any additional financial requirement expected to be marginal. 5. With regard to sub-component B1, the Off-Grid Smart Subsidy Program (OG-RESS), a funding mechanism has been set-up to expand access to off-grid electricity services in underserved rural areas in Zambia by providing incentives for private sector service providers to deliver these services. The OG-RESS provides direct, results-based financing to private Energy Service Providers (ESPs) to initiate and/or expand their electricity service provision in rural Zambia and to proactively mobilize various types of downstream investment and debt financing. While 5 contracts have now been signed, ESPs have yet to mobilize and – in some cases – obtain licenses from the Energy Regulation Board to begin operations. The contracts are valid for 4 years and REA has committed to supporting ESPs beyond the duration of the project. However, a project extension is proposed to obtain initial verified results of this pilot under the project for purposes of project evaluation and design of future operations. Expected savings of US$1.5 million have been identified under this component. 6. With regard to sub-component B2, the US$2.5 million off-grid loan facility is implemented in partnership with Development Bank of Zambia (DBZ) as apex lender and the country’s national commercial Bank, Zanaco, as retail lender. Encouraging progress has been made in last 18 months despite initial delays. The World Bank completed an assessment in May 2021, which concluded that DBZ had successfully met the Bank’s requirements for Financial Intermediary (FI) Lending (OP10). With all legal agreements associated with the facility signed in 2022, the credit line was launched in January 2023 and the full amount of the credit line is expected to be disbursed to DBZ as FI by April 2023. 7. All legal covenants stipulated in the FA have been complied with. There are no overdue audits or interim financial reports at the time of the restructuring. Safeguards, financial management, and procurement performance rating are rated Satisfactory. B. Rationale for restructuring 8. In December 2022, the Bank received a request for restructuring of the project with specific referent to: (i) re- allocation of expected project savings from sub-component B1 to the grid connection fee subsidy program under sub- component A1 to enhance the outcomes of the project; and (ii) extension of the project closing date from August 31, 2023, to July 31, 2024 (11 months). An implementation support mission completed in January 2023 highlighted that both objectives of the restructuring were warranted subject to limiting the extension of the project closing date to June 28, 2023 (10 months). 9. With respect to the re-allocation, the Government confirmed expected savings of US$1.5 million from the OG- RESS program under sub-component B1. These savings arose due to lower-than-expected subsidies requested by ESPs under the program. Whilst additional scope could be added to this pilot program in due course, this will not be done prior to the proposed project closing date. Conversely, the Government requested Bank support to re-launch the grid connection subsidy program under sub-component A1 to meet growing demand from customers newly in proximity to the grid following completion of grid extension works under sub-component A2. Furthermore, ZESCO has requested that any relaunch of the program include an increase in the connection reimbursement rate for new connections in line with recent increases to the connection fees approved by the Energy Regulatory Board. This would bring the connection reimbursement rate from US$165 to US$181 per household connection and from US$110 to US$152 per MSME connection. The utility estimates that approximately 40,560 additional people (7,800 households) and 500 additional MSMEs could be connected as a result of the activities to be financed by the proposed reallocation of savings. The World Bank Electricity Service Access Project (P162760) 10. As it concerns the request for the project closing date extension, this is justified on the following grounds: (a) A re-allocation of US$1.5 million to sub-component A1 will require additional time to relaunch the grid connection subsidy program that had been successfully implemented previously and complete, verify, and reimburse additional new connections. (b) Works under the grid extension contracts for two provinces remain only partially complete, despite the contracts having been extended and then closed in February 2023. REA and ZESCO have proposed alternative arrangements for completion of the works, centering in REA procurement of the labor required to complete the work (all materials were supplied by the previous contractor). No additional cost to the project is expected as REA has committed to provide any additional financing required, however, an estimated 10 additional months will be required to complete the grid extensions. (c) While OG-RESS has now resulted in the signature of contracts with private ESPs, additional time beyond the current closing date of the project will allow ESPs to maximize the number of off-grid connections completed and verified under the project, expected to reach 14,000. 11. The requirements of the Bank Directive on Investment Project Financing for a closing date extension are met, namely the Project’s development objective remains achievable, the performance of the Borrower remains satisfactory, and the Bank and Government have agreed on actions that will be undertaken to complete the project prior to the proposed closing date. A revised implementation schedule is presented in Annex 1. 12. This will be second extension of the closing date of IDA Credit IDA-6106. Cumulative extension will be 22 months. II. DESCRIPTION OF PROPOSED CHANGES 13. The proposed changes include (i) changes to the Project’s component and costs; (ii) funds reallocation; (iii) extension the closing date; (iv) revisions to the results framework and (v) revision to the disbursement estimates. These changes concern only IDA Credit № 6106-ZM and do not affect Grant № TF A8640. 14. Changes to Components and Cost. The cost of sub-component B1 for OG-RESS will be reduced by US$1.5 million (total cost for component B will now be US$4.40 million). Commensurately, the cost of sub-component A1 will be increased by US$1.5 million (total cost for component A will now be US$25.2 million). Table 1. Changes to the cost of components of the project Before restructuring After restructuring Name of component US$ million Name of component US$ million Component A - On-grid Electricity Component A - On-grid Electricity 23.70 25.20 Access Expansion Access Expansion Subcomponent A1 – Grid Subcomponent A1 – Grid connection subsidy 12.40 connection subsidy 12.40 program program Subcomponent A2 – Grid Subcomponent A2 – Grid 8.00 9.50 extension works extension works Component B - Off-grid Electricity Component B - Off-grid Electricity 5.90 4.40 Access Expansion Access Expansion The World Bank Electricity Service Access Project (P162760) Subcomponent B1 – Off- Subcomponent B1 – Off- grid rural electrification 3.40 grid rural electrification 1.90 smart subsidy program smart subsidy program Subcomponent B2 – Off- Subcomponent B2 – Off- 2.50 2.50 grid credit facility grid credit facility Component C - Capacity Building Component C - Capacity Building and Project Implementation 7.20 and Project Implementation 7.20 Support Support 15. Reallocation between Disbursement Categories. SDR 1,125,0001 (about US$1.5 million equivalent) of the proceeds from the IDA Credit IDA-6106 will be reallocated from Category (3) to Category (2). 16. Closing Date. The closing date of IDA Credit № 6106-ZM will be extended by 10 months from August 31, 2023, to June 28, 2024. 17. Results Framework. The Results Framework will be updated to reflect an additional 40,560 people provided with electricity (of which an additional 1,560 female headed households) and an additional 500 MSME connections. 18. Disbursement estimates. Disbursement estimates will be updated following extension of the closing date. 1 Per ClientConnection exchange rate tool, 1 USD = 0.75 XDR at time of submission. The World Bank Electricity Service Access Project (P162760) III. SUMMARY OF CHANGES Changed Not Changed Results Framework ✔ Components and Cost ✔ Loan Closing Date(s) ✔ Reallocation between Disbursement Categories ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ PBCs ✔ Cancellations Proposed ✔ Disbursements Arrangements ✔ Disbursement Estimates ✔ Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Implementation Schedule ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) The World Bank Electricity Service Access Project (P162760) OPS_DETAILEDCHANGES_COMPONENTS_TABLE COMPONENTS Current Current Proposed Proposed Cost Action Component Name Component Name Cost (US$M) (US$M) Component A - On-grid Component A - On-grid 23.70 Revised 25.20 Electricity Access Expansion Electricity Access Expansion Component B - Off-grid Component B - Off-grid 5.90 Revised 4.40 Electricity Access Expansion Electricity Access Expansion Component C - Capacity Building Component C - Capacity and Project Implementation 7.20 No Change Building and Project 7.20 Support Implementation Support TOTAL 36.80 36.80 OPS_DETAILEDCHANGES_LOANCLOSING_TABLE LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications IDA-61060 Effective 31-Aug-2022 31-Aug-2023 28-Jun-2024 28-Oct-2024 TF-A8640 Effective 31-Aug-2022 31-May-2023 OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IDA-61060-001 | Currency: XDR iLap Category Sequence No: 1 Current Expenditure Category: Gds,Wks,NCS,OC,Trng&CS ex Cat.2-4 12,735,000.00 9,776,077.42 12,735,000.00 100.00 100.00 iLap Category Sequence No: 2 Current Expenditure Category: On-grid conncections under Pt 1 (a) 2,600,000.00 2,295,699.82 3,725,000.00 100.00 100.00 iLap Category Sequence No: 3 Current Expenditure Category: Partial Grant Subsidies Pt 2(a)(ii) The World Bank Electricity Service Access Project (P162760) 2,200,000.00 0.00 1,075,000.00 100.00 100.00 iLap Category Sequence No: 4 Current Expenditure Category: Credit Lines under Pt 2(b)(ii) 1,865,000.00 0.00 1,865,000.00 100.00 100.00 Total 19,400,000.00 12,071,777.24 19,400,000.00 . The World Bank Electricity Service Access Project (P162760) . Results framework COUNTRY: Zambia Electricity Service Access Project Project Development Objectives(s) The project development objective is to increase electricity access in Zambia's targeted rural areas. Project Development Objective Indicators by Objectives/ Outcomes RESULT_FRAME_TBL_PDO Indicator Name PBC Baseline End Target People provided with new or improved electricity service People provided with new or improved electricity service (CRI, 0.00 176,800.00 Number) Action: This indicator has been Revised PDO Table SPACE Intermediate Results Indicators by Components RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 Component A - On-grid Electricity Access Expansion People provided with access to electricity services under the project by household 0.00 0.00 41,600.00 83,200.00 124,800.00 176,800.00 connections (grid or off-grid) (Number) The World Bank Electricity Service Access Project (P162760) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 Action: This indicator has been Revised Female-headed households provided with access to 0.00 0.00 1,600.00 3,200.00 4,800.00 6,800.00 electricity services under the project (grid) (Number) Action: This indicator has been Revised MSEs provided with access to electricity services under the 0.00 0.00 1,500.00 1,600.00 1,750.00 2,000.00 project (grid) (Number) Action: This indicator has been Revised Distribution lines constructed or rehabilitated under the 0.00 0.00 150.00 300.00 450.00 550.00 project (Kilometers) Component B - Off-grid Electricity Access Expansion Off-Grid Smart Subsidy OGSSP piloted with OGSSP piloted with OGSSP adopted by REA Program (OGESSP) piloted N/A N/A OGSSP designed procurement and award procurement and award and established (Text) completed completed Satisfactory Implementation of the Institutional Development Plan (IDP) for DBZ confirmed No No No Yes Yes Yes by independent reviewer (Yes/No) Loan Facility operationalized Loan Facility Loan Facility N/A N/A N/A Loan Facility designed (Text) Operationalized Operationalized The World Bank Electricity Service Access Project (P162760) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 Component C - Capacity Building and Project Implementation Support Geospatial Master Plan developed and publicly No No No Yes Yes Yes consulted (Yes/No) National Electrification Strategy developed and No No No No No Yes publicly consulted (Yes/No) Number of people trained in sector policy and technical 0.00 5.00 10.00 15.00 20.00 25.00 aspects (Number) Percentage of grievances registered related to delivery of Project benefits that are 0.00 100.00 100.00 100.00 100.00 100.00 actually addressed (Percentage) IO Table SPACE The World Bank Electricity Service Access Project (P162760) ANNEX 1 – REVISED IMPLEMENTATION SCHEDULE 2023 2024 N° Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun Component A: On-grid Electricity Access Expansion A1 Rural Connection Subsidy Program 1 Re-launch of conncetion subsidy program 2 ZESCO to receive the applications 3 ZESCO to make connections 4 IVA to verify connections made 5 REA to reimburse connections A2 Distribution backbone extensions 6 Procure labor component for remaining works 7 Complete construction of the extensions Component B: Off-grid Electricity Access Expansion B1 Off-Grid Smart Subsidy Program 8 ESPs to mobilize and begin connections 9 REA to verify and pay subsidies to ESPs B2 Off-grid loan facility 12 Disburse off-grid loan facility 12 Supervision of off-grid loan facility transactions Component C: Capacity Building and Program Implementation Support 16 Project management and capacity building 1 Key implementation steps 2 Implementation and disbursement