The World Bank Power Efficiency and Reliability Improvement Project (PERIP) (P158249) REPORT NO.: RES55565 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF POWER EFFICIENCY AND RELIABILITY IMPROVEMENT PROJECT (PERIP) APPROVED ON SEPTEMBER 28, 2017 TO REPUBLIC OF MOZAMBIQUE ENERGY & EXTRACTIVES EASTERN AND SOUTHERN AFRICA Regional Vice President: Victoria Kwakwa Country Director: Zviripayi Idah Pswarayi Riddihough Regional Director: Wendy E. Hughes Practice Manager/Manager: Erik Magnus Fernstrom Task Team Leader(s): Samuel Kwesi Ewuah Oguah The World Bank Power Efficiency and Reliability Improvement Project (PERIP) (P158249) ABBREVIATIONS AND ACRONYMS ARENE Energy Regulatory Authority (Autoridade Reguladora de Energia) DA Designated Account EDM Electricity of Mozambique (Electricidade de Moçambique) ERP Enterprise Resource Planning EU European Union FCV Fragility, Conflict, and Violence FM Financial Management GBV Gender-Based Violence GDP Gross Domestic Product GoM Government of Mozambique GPN Good Practice Note ICT Information and Communication Technology IFR Interim Financial Report IGEPE Institute for Management of Government Shares (Instituto de Gestão das Participações do Estado) IPF Investment Project Financing IPP Independent Power Producer KPI Key Performance Indicator LRP Loss Reduction Plan LV Low Voltage M&E Monitoring and Evaluation MEF Ministry of Economy and Finance (Ministério da Economia e Finanças) MEFA Mozambique Energy For All MIREME Ministry of Mineral Resources and Energy (Ministério de Recursos Minerais e Energia) MV Medium Voltage O&M Operations and Maintenance OPEX Operational Expenditure PDO Project Development Objective PERIP Power Efficiency and Reliability Improvement Project PIM Project Implementation Manual PIU Project Implementation Unit SEA Sexual Exploitation and Abuse STEP Systematic Tracking of Exchanges in Procurement WBG World Bank Group The World Bank Power Efficiency and Reliability Improvement Project (PERIP) (P158249) BASIC DATA Product Information Project ID Financing Instrument P158249 Investment Project Financing Original EA Category Current EA Category Partial Assessment (B) Partial Assessment (B) Approval Date Current Closing Date 28-Sep-2017 29-Sep-2023 Organizations Borrower Responsible Agency Republic of Mozambique Project Development Objective (PDO) Original PDO The Project Development Objective (PDO) is to improve the operational capacity of the electricity network in the project areas and the operational efficiency of EDM. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing (US$, Millions) Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IDA-D2380 28-Sep-2017 25-Oct-2017 07-Jun-2018 29-Sep-2023 150.00 123.64 21.21 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Power Efficiency and Reliability Improvement Project (PERIP) (P158249) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING 1. The proposed Level Two restructuring is to extend the project closing date by seven (7) months from September 29, 2023 to April 30, 2024 and reallocate unused funds across disbursement categories to maximize use of project funds The proposed restructuring will be the third of the project, and the extension will allow additional time for completion of the remaining project activities to meet its development objectives. A. Overview The Power Efficiency and Reliability Improvement Project (PERIP), financed through an IDA grant in the original amount of US$ 150 million (D238MZ), was approved on September 28, 2017. It reached effectiveness on June 7, 2018. The Project Development Objective (PDO) is to improve the operational capacity of the electricity network in the project areas and the operational efficiency of Electricidade de Moçambique, E.P. (EDM). The project has three components, namely : (a) rehabilitation and upgrade of network infrastructure; (b) enhancement of the operational and commercial performance of EDM; and (c) capacity building and implementation support. . The implementing agencies are the Ministry of Mineral Resources and Energy (Ministério dos Recursos Minerais e Energia - MIREME, and the EDM. 2. After approval, the project faced a slow start with limited capacity in the project implementation unit (PIU) which significantly delayed procurement. EDM strengthened the PIU with additional staff and the pace of implementation improved. However, the commencement of major contracts coincided with lockdowns associated with the COVID-19 pandemic which delayed the start of construction. Once construction started, initial gaps in contract management and delays in delivery of materials to site caused further delays. Overall pace of implementation improved as EDM resolved constraining factors and put in place additional resources for better project management. 3. The project was first restructured on February 14, 2021 as part of an emergency response to the COVID-19 pandemic by the Government of Mozambique (GoM) who requested support to pay for electricity supplied to health facilities and vulnerable households when the government announced an exemption to ease the economic strain on consumers. The first restructuring included (i) revising the list of eligible expenses under the project to include recurring costs for a limited period to pay for electricity consumed by health facilities and other critical public institutions; (ii) re- allocating savings from procurement of five contracts under Component 1 of the project to cover an agreed work program; and (iii) increasing the allocation for Components 2 and 3. The second project restructuring, which was approved in December 2022, was to extend the closing date for the project by nine (9) months from December 30, 2022 to September 29, 2023 to allow completion of all project activities. B. Status 4. The project has recorded good progress disbursing over US$50 million since June 2022 which brought the total disbursements to US$121.47 million (83.75 percent). Investments under the project are already translating into tangible results as EDM has recorded year-on-year reductions in losses over the past two years (1.3% and 1.8%) for the first time over the past 7 years. A new directorate for loss reduction under the distribution and retail Executive Director was established in August 2020 and empowered to execute its mandate (inspections, disconnections, disciplining staff through The World Bank Power Efficiency and Reliability Improvement Project (PERIP) (P158249) human resource actions, etc.). 22,000 smart meters have been installed with large consuming customers under the revenue protection program securing approximately 40 percent of EDM revenue. Component 1: Rehabilitation and Upgrade of Network Infrastructure (IDA US$ 87.0 million) Performance rating: Moderately Unsatisfactory Risk rating: High. Disbursed: US$60.9 million 5. Activities are being implemented under five (5) lots. Based on current progress, EDM estimates that works at 6 out of 23 substations under Lot 1 (Installation of additional Power Transformers to achieve redundancy in Lichinga and Maputo cities - US$20.1 million) and Lot 3 (Power Compensation, Power System Protection and Control in 3 substations of central and northern region - US$ 6.4 million) will not be completed by the current closing date. Of these, two are to be completed by end of December 2023, and four by end of March 2024. Additionally, estimated completion for Lot 2 (Reinforcement of 66kV Transmission Lines and Underground cable in Maputo and Matola - US$ 15.6 million) has been extended to March 2024 following a change in design in August 2023. The change was necessitated by claims by one project affected person (PAP). Following the claim, EDM agreed with the contractor to relocate two 66kV towers to minimize the need for compensation. The two new towers will are estimated to be delivered in December 2023. By September 29, 2023, outstanding works and payments are estimated at US$650,000 comprising: Lot 1-US$200,000; Lot 3 – US$220,000 and Owner’s Engineer-US$230,000. The performance rating for the component was therefore downgraded to Moderately Unsatisfactory on June 28, 2023. 6. Given that all works under the project are being implemented in live substations (substations in service), progress depends significantly on the duration of outages that are granted by EDM. To minimize the impact of outages on its customers, EDM has not been able to regularly grant outages as requested by contractors. Contractors in turn have responded by reducing the number of staff on site to minimize losses from extended down times. This significantly contributed to the delays. Other factors that contributed to the delays include: (i) continued weak performance of some contractors; (ii) poor contract management; (iii) heavy rains; and (iv) difficulty of some contractors to obtain work permits from immigration services of Mozambique. The World Bank Power Efficiency and Reliability Improvement Project (PERIP) (P158249) Component 2: Enhancement of EDM Operational and Commercial Operations (IDA US$ 41 million) Performance rating: Moderately Satisfactory Risk rating: High. Disbursement: US$30.4 million 7. Activities financed under component 2 aim to improve EDM’s operational efficiencies, through upgrades in management systems, process reengineering and the revenue protection program. Measures implemented by EDM are essential to sustain the rollout of the national Energia para Todos program by ensuring that new customers area properly incorporated into the commercial systems of EDM. 8. Significant progress has been made in streamlining operations with the organization. All contracts under this component are either completed or in closing stages except for: (i) Stabilization of the customer management system (CMS); (ii) incorporation of the pre-payment module of the CMS which are estimated to be completed in December 2023. Component 3 – Capacity Building and Implementation Support (US$11 million equivalent): Performance rating: Moderately Satisfactory Risk rating: Moderate Disbursement: US$ 7.3 million 9. Both EDM and MIREME have effectively used the funds under this component to receive technical assistance under this project as well as to support preparation of its national electrification program (Energia para todos) which the World Bank is supporting through the Energy for All (ProEnergia) Project (P165453) and the Sustainable Energy and Broadband Access in Rural Mozambique Project (P175295). Sub-Component 3.1 (US$ 3.0 million) is managed by MIREME, while sub-component 3.2 (US$ 8.0 million) is managed by EDM. A training program for 200 staff of EDM has been cleared and is under implementation . The training program draws from a skill management plan developed by EDM and covers topics related to project management, system maintenance and operation, power system protection, overhead line design, amongst others. Upon completion of the program in September, the project will exceed its current target of 50 indicated in the revised project results framework. B.4 Safeguards 10. Safeguards performance is rated Moderately Satisfactory. Additional efforts to improve occupational health and safety (OHS) compliance are needed from EDM. Five (5) incidents have been recorded and reported under Component 1 since April 2023, all of which was related to the same contractor. All incidents resulted in injuries leading to lost work days. No fatalities have been recorded. The contractor has replaced its OHS officer with a more experienced officer and EDM has seconded an OHS officer to the PIU in August 2023. B.5 Financial management 11. The financial management (FM) performance rating is Moderately Satisfactory. The project’s FM arrangements remain acceptable to the Bank. Both implementing agencies have been submitting unaudited interim financial reports (IFRs). However, the audit reports for the fiscal year ended December 31, 2022 are overdue since June 30, 2023, as the Administrative Tribunal, the country’s Supreme Audit Institution (SAI) started the audit work with significant delay due to budget constraints. The Bank team is following up with the Administrative Tribunal and an audit waiver to postpone the audit submission deadline from June 30, 2023 to November 15, 2023 has been approved by FMPM. Auditors have The World Bank Power Efficiency and Reliability Improvement Project (PERIP) (P158249) expressed unqualified opinions for the prior four fiscal years and no significant issues were raised in the management letters. C. Rationale for restructuring 12. The proposed restructuring of the project is to respond to a request dated August 18, 2023 from the Ministry of Economy and Finance to extend the closing date of the project financing agreement to April 30, 2024 to give additional time for completion of the delayed activities and reallocate unused funds. C.1 Extension of project closing date 13. Due to constraints with EDM granting outages, delays in obtaining work permits, and rains heavier than anticipated, implementation of Component 1 activities has fallen behind schedule and unlikely to be completed by the current closing date of September 29, 2023. At the current pace, EDM and its Owner’s Engineer estimate completion in March 2024 (6 months beyond the current closing date). EDM has undertaken the following measures to mitigate the risk of further delays:  Formally informed the contractors of Lot 1 and 3 to claim liquidated damages due to the delays in contract execution (04 October 2021 and 24 May 2023);  Reduced the scope for Lot 3 by taking out works at the Matambo substation given the poor performance of the contractor. Part of the supplied equipment at site will be installed under the ongoing Mozambique-Malawi interconnector project (P164354) which includes similar works at the same substation while the remaining will be used across the transmission network for essential replacements (21 August 2023);  Obtained approval from EDM’s Board of Directors to increase the number of outages granted to contractors (15 June 2022);  Deployed additional mobile equipment (such as mobile substations and mobile switchgear) to site to provide back- up while works advance at the live substations (June 2023);  Requested contractors for Lots 1 and 3 to double electrical crew so that more work can be completed when outages are granted which has since been complied with (11 August 2022). 14. Based on the afore mentioned and ongoing close supervision by the World Bank team, the proposed request for extension, if granted, will allow completion of key activities to meet the PDO and maximize the project’s economic benefits. The request for the project extension is justified considering the facts that: (i) the PDO is still relevant, in line with the government’s priorities, and remains achievable; (ii) the project is likely to fully achieve its development objective within the extended period; and (iii) the project is not subject to suspension. The audit report for the period ending December 2022 is outstanding but expected to be submitted by the client by November 15, 2023. Completion of the project will benefit existing electricity consumers, including industrial, commercial, and residential customers of EDM. Specifically, businesses suffer loss of sales, damage to equipment, and incur additional cost from deploying standby generators when grid electricity supply is unreliable. The reinforcement of the network capacity is also enabling new customers to be connected to the electricity network and creating conditions to expand access. The World Bank Power Efficiency and Reliability Improvement Project (PERIP) (P158249) C.2 Reallocation of funds across categories 15. EDM is over-committed on budget due to cost overruns while MIREME remains with an outstanding balance of close to US$800,000 following the cancellation of some activities 1. It was therefore agreed to reallocate the balance from MIREME under Category 1 to EDM under Category 2 of the Financing Agreement to help complete activities under Component 2. II. DESCRIPTION OF PROPOSED CHANGES 16. Extension of grant closing date: The project closing date will be extended from September 29, 2023 to April 30, 2024 to allow completion of the remaining project activities and achievement of the PDO. 17. Result framework. There will be no change to the PDO or intermediate indicators. The end dates of various indicators have been updated to account for implementation delays and to reflect the new closing date of April 30, 2024. These revised dates are consistent with the updated implementation schedule for the project reviewed as part of this restructuring. 18. Reallocation of funds across categories. The undisbursed balance under Category 1 (Gds,Tr,CS Part 3(a))) approximately US$800,000 will be reallocated to Category 2 (Gs,W,NCS,OC,Tr,CS P1,2,3(b)) under the project category schedule of the Financing Agreement. 19. Disbursement Estimates. Disbursement projections for the project will be updated to reflect the new closing date. 1 Gap Analyse of the Institutional Power Planning Tools at MIREME; and Design of GIS for Monitoring & Management of Power Infrastructure. Both activities are to be financed under the Sustainable Energy and Broadband Access in Rural Mozambique Project (P175295) The World Bank Power Efficiency and Reliability Improvement Project (PERIP) (P158249) III. SUMMARY OF CHANGES Changed Not Changed Components and Cost ✔ Loan Closing Date(s) ✔ Reallocation between Disbursement Categories ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ Results Framework ✔ Cancellations Proposed ✔ Disbursements Arrangements ✔ Disbursement Estimates ✔ Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Implementation Schedule ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) The World Bank Power Efficiency and Reliability Improvement Project (PERIP) (P158249) OPS_DETAILEDCHANGES_COMPONENTS_TABLE COMPONENTS Current Current Proposed Proposed Cost Action Component Name Component Name Cost (US$M) (US$M) Component 1: Rehabilitation and Component 1: Rehabilitation Upgrade of Network 117.00 Revised and Upgrade of Network 87.00 Infrastructure Infrastructure Component 2: Enhancement of Component 2: Enhancement of EDM Operational and 29.50 Revised EDM Operational and 54.50 Commercial Operations Commercial Operations Component 3: Capacity Component 3: Capacity Building 3.50 Revised Building and Implementation 8.50 and Implementation Support Support TOTAL 150.00 150.00 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-D2380 Effective 30-Dec-2022 29-Sep-2023 30-Apr-2024 30-Aug-2024 OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IDA-D2380-001 | Currency: XDR iLap Category Sequence No: 1 Current Expenditure Category: Gds,Tr,CS Part 3(a) 2,100,000.00 1,345,709.60 1,345,709.60 100.00 100.00 iLap Category Sequence No: 2 Current Expenditure Category: Gs,W,NCS,OC,Tr,CS P1,2,3(b) 89,060,000.00 59,337,680.36 89,814,290.40 100.00 100.00 The World Bank Power Efficiency and Reliability Improvement Project (PERIP) (P158249) iLap Category Sequence No: 3 Current Expenditure Category: PPF REFINANCING 1,440,000.00 449,957.30 1,440,000.00 100.00 100.00 iLap Category Sequence No: 4 Current Expenditure Category: ADMINISTRATIVE COSTS 14,000,000.00 29,937,643.98 14,000,000.00 100.00 100.00 Total 106,600,000.00 91,070,991.24 106,600,000.00 .