Document of The World Bank Report No: 64673-ZA RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF RENEWABLE ENERGY MARKET TRANSFORMATION PROJECT TO THE GOVERNMENT OF REPUBLIC OF SOUTH AFRICA September 10, 2011 Regional Vice President: Obiageli K. Ezekwesili Country Director: Ruth Kagia Sector Director: Jamal Saghir Sector Manager: Anna M. Bjerde Task Team Leader: Karan Capoor 2 SOUTH AFRICA RENEWABLE ENERGY MARKET TRANSFORMATION P073322 CONTENTS ANNEX 2: REALLOCATION OF PROCEEDS.........................................................................4 ANNEX 3: EXTENSION OF CLOSING DATE ........................................................................... 3 ANNEX 2: Reallocation of Proceeds SOUTH AFRICA — RENEWABLE ENERGY MARKET TRANSFORMATION P073322 {TF091191} Restructuring Paper 1. Proceeds for South Africa, Renewable Energy Market Transformation, [TF No 091191], P073322 will be reallocated as follow: Category of Expenditure Allocation Percentage of Expenditures to Current Proposed Difference % of be Financed revision Financing (1) Consultants' services 1,750,000 2,067,175 317,175 5.3% 100% of foreign (under Matching Grants) expenditure and 83% of local expenditures. (2) Consultants’ services and 250,000 185,714 -64,286 -1.1% 100% of foreign goods (under Performance expenditure and 83% Grants) of local expenditures. (3) Other Consultants’ 3,000,000 2,510,789 -489,211 -8.2% 100% of foreign services expenditure and 83% of local expenditures. (4) Training and Workshops 500,000 381,480 -118,520 -2.0% 100% (5) Operating Costs 150,000 600,000 450,000 7.5% 100% (6) Unallocated 350,000 254,842 -95,158 -1.6% TOTAL AMOUNT 6,000,000 6,000,000 0 0.0% 2. The REMT project has two PDOs. PDO 1 is to establish policy and regulatory framework and PDO2 is to build institutional capacity for renewable energy development in South Africa. Activities under PDO1 have provided significant inputs to policy and regulatory guidance issued by the Government of Republic of South Africa on renewable energy. Activities under PDO2 have been focusing on workshops, (e.g., Solar Water Heating (SWH) and Concentrating Solar Power (CSP)), renewable energy resource information dissemination (e.g., REMT website), and the launch of the Matching Grants programme. 3. A Mid-Term Review was conducted in May 2011, based on the achievement of the REMT project and taking into account significant changes that have taken place in the South African and international renewable energy sectors since the REMT project’s inception. It concluded that the REMT should (i) shift the model to one supporting the need for “real time� advice under PDO 1; and (ii) consolidate and accelerate Performance and Matching Grant Programmes under PDO 2. In response to these needs, the proposed reallocation is necessary to strengthen the “real-time� policy support, “help-desk� function, Renewable Energy Power Generation (REPG) and Solar Water Heater Grants, and capacity building support. The following justifications are provided according to each category: (a) Consultants' services (under Matching Grants): The reason for the 5.3% increase in the Consultants' services (under Matching Grants) is to reflect the rise of resources for the “help desk� to support developers, conduct due diligence prior to making awards, and etc. With the Grant programs now moving to implementation, a significant portion of these activities will shift to the “help desk� envisaged to facilitate the pre-investment activities for renewable energy investments. Sufficient human resources need to be dedicated under the “help desk� feature of the matching grant programs. (b) Consultants’ services and goods (under Performance Grants): The 1.1% decrease in the Consultants’ services and goods (under Performance Grants) reflects 1 Solar Water Heater (SWH) Performance Grant contract from the first round MG, 3 projected Renewable Energy Power Generation contracts at US$50, 000. The proposals that were received in the second round are likely to be turned down, which lead to the reduction of resources. (c) Other Consultants’ services: The Mid-Term Review concludes that the REMT project should consolidate and accelerate Performance and Matching Grant Programmes under PDO 2. In response to this need, the proposed reduce of 8.2% in this category will be shifted to Category (a) to strengthen the “help-desk� function. In addition, the Mid-Term Review concluded that, under the PDO 1, the REMT project has largely contributed to a number of initiatives, including the review of the initial REFIT procurement and related standardized power purchase agreement (PPA), as well as the development of the National Solar Water Heating Framework (NSWHF) and draft Renewable Energy White Paper (REWP). The policy implementation for renewable energy is a fast-moving process and at this stage, the biggest value the REMT Project can provide under PDO 1 is to move to a “real time� mode of providing guidance as these initiatives move toward implementation. Therefore, US$2,413,964 will remain in this category and will continue its support on a “real time� support (Renewable Energy finance, legal/regulatory, solar PV specialist, wind specialist and SWH specialist) and consulting assignments for independent review of REMT projects. (d) Training and Workshops: The 2% decrease in allocation is the proposed slight adjustment based on the actual disbursement to date US$81, 882, taking in account the activities planned under this category, such as assisting rural women to develop knowledge in maintaining solar systems. (e) Unallocated: The under-budgeted operating costs are mainly responsible for the slight decrease of 1.6% under this category. The item (f) provides detailed explanation. 5 (f) Operating Costs: The resolution of the procurement and financial monitoring issues has consumed a significant use of administrative resources. This budget resource looks especially depleted in light of the slow disbursement of matching DoE resources to the project. As at end-March 2011, the total project expenditure was USD 1, 093, 752. Of this, USD 516, 728 (or 47%) was spent towards the REMT Implementation Support Unit (ISU) operational expenses. The slow pace of disbursements, especially as a result of delays in commencing with the REMT Matching Grants programme, accounts for much of this unfavorable situation. Therefore, there is a pressing need to provide the operational costs to the REMT ISU to the end of the REMT project implementation, taking into account the effect of Matching Grants “help-desk� requirements on the ISU’s capacity. This will allow ISU to strengthen its human resources capacity in response to the requirements of the Matching Grants (e.g. analysis of applications and monitoring approved projects). This increased provision could be funded by re-allocating funds from other budget categories along with accelerated co-financing from DoE. 6 ANNEX 3: Extension of Closing Date SOUTH AFRICA — RENEWABLE ENERGY MARKET TRANSFORMATION P073322 {TF091191} Restructuring Paper 1. The closing date for South Africa Renewable Energy Market Transformation Project (REMT) (P073322/ IBRD****) will be extended from September 30, 2011 until December 31, 2012. 2. Project disbursements have been steadily increased since project effectiveness in September 26, 2008, and disbursements total US$2, 531, 802.59 (42%) of US$6 million; however, the current rate of disbursements remains below what was original expected. The primary reason for this low-than-expected level of disbursement has been the stretched procurement capacity of the REMT project Implementation Support Unit (ISU) located at the Development Bank of Southern Africa (DBSA). It has slowed the start of launching the Performance and Matching Grant Programmes, therefore, the disbursement pace. The extension will enable the project to complete all the activities and achieve the Project Development Objectives (PDO). Therefore, December 2012 is proposed as the closing date of the REMT project. 3. The REMT project is of very high strategic importance to the Government of Republic of South Africa (RSA) because it was commissioned in response to a need to support the Government of the Republic of South Africa in its drive to meet the renewable energy target of 10,000 GWh by 2013 and to offset greenhouse gas emissions. 4. A Mid-Term Review was conducted in May 2011, based on the achievement of the REMT project and taking into account significant changes that have taken place in the South African and international renewable energy sectors since the REMT project’s inception. It concluded that (i) the project’s objectives continue to be achievable (ii) the performance of the Borrower and the project implementation agency is satisfactory; (iii) with sustained efforts by the ISU and support from the World Bank and the DBSA, the ISU has substantially improved its procurement capacity. This is especially gratifying for the Matching Grant and Performance grant components of the project. Therefore, The Task Team believes that the proposed extension is realistic. 7 5. The team notes that: (i) neither the Bank in particular, nor Government of Republic of South Africa, is subject to an ongoing suspension of disbursements; and (ii) there is no pending audit and outstanding financial management or procurement issues. The most recent audit report raises neither serious accountability nor internal control issues. 8