FOR OFFICIAL USE ONLY Report No: PADHP00156 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF EUR 384.8 MILLION (US$400 MILLION EQUIVALENT) AND A FINANCING FROM THE CLEAN TECHNOLOGY FUND IN THE AMOUNT OF US$30 MILLION TO THE SOCIETE TUNISIENNE DE L'ELECTRICITE ET DU GAZ (STEG) FOR A TUNISIA ENERGY RELIABILITY, EFFICIENCY, AND GOVERNANCE IMPROVEMENT PROGRAM (TEREG) April 4, 2025 Energy & Extractives Middle East And North Africa 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 {Feb 28, 2025}) Currency Unit = = US$1 US$ = TND 3.1 US$= EUR 0.96176966 FISCAL YEAR January 1 - December 31 Regional Vice President: Ousmane Dione Regional Director: Almud Weitz Country Director: Ahmadou Moustapha Ndiaye Practice Manager: Husam Mohamed Beides Task Team Leader(s): Amira Klibi, Petra Valickova, Anas Benbarka ABBREVIATIONS AND ACRONYMS AMI Advanced Metering Infrastructure CAPEX Capital Expenditure CCAP Climate Change Action Plan CCDR Country Climate and Development Report CPF Country Partnership Framework COVID-19 Coronavirus Disease 2019 DLI Disbursement-Linked Indicator DLR Disbursement-Linked Result EBRD European Bank for Reconstruction and Development EIA Environmental Impact Assessment EIB European Investment Bank ELMED Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem Project ERR Economic Rate of Return E&S Environmental and Social ESMG Environmental and Social Management Guide ESSA Environmental and Social Systems Assessment GCF Green Climate Fund GHG Greenhouse Gas GDP Gross Domestic Product GRM Grievance Redress Mechanism GRS Grievance Redress Service GSAP Global Solutions Accelerator Platform IFC International Finance Corporation IFRS International Financial Reporting Standards IFSA Integrated Fiduciary Systems Assessment IPF Investment Project Financing IPP Independent Power Producer IVA Independent Verification Agency KPI Key Performance Indicator MFD Maximizing Finance for Development MIGA Multilateral Investment Guarantee Agency MIME Ministry of Industry, Mining, and Energy MoF Ministry of Finance NDC Nationally Determined Contribution O&M Operations and Maintenance OHS Occupational Health and Safety ONMP National Observatory of Public Procurement PAP Program Action Plan PASE Energy Sector Improvement Project PCE Private Capital Enabling PDO Program Development Objective PforR Program-for-Results PMU Project Management Unit POM Program Operational Manual PPA Power Purchase Agreement PSO Public Service Obligation RE Renewable Energy SAIDI System Average Interruption Duration Index SOE State-Owned Enterprise STEG Tunisian Electricity and Gas Company (Société Tunisienne de l'Electricité et du Gaz) T&D Transmission and Distribution TEREG Tunisia Energy Reliability, Efficiency, and Governance Improvement Program TPP Thermal Power Plant TND Tunisian Dinar US$ US Dollar vRE Variable Renewable Energy The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement rogram (TEREG) (P507304) TABLE OF CONTENTS DATASHEET ........................................................................................................................................ i I. STRATEGIC CONTEXT .................................................................................................................. 1 A. Program Strategic Context ............................................................................................................... 1 B. Sectoral (or Multi-Sectoral) and Institutional Context ..................................................................... 2 II. PROGRAM DESCRIPTION ............................................................................................................ 5 A. Program Development Objective(s) (PDO)....................................................................................... 5 B. Theory of Change and PDO Indicators.............................................................................................. 5 C. PforR Program Scope ........................................................................................................................ 6 D. Disbursement Linked Indicators ..................................................................................................... 10 E. Role of Partners .............................................................................................................................. 13 F. Lessons Learned and Reflected in the Program Design .................................................................. 13 III. PROGRAM IMPLEMENTATION .................................................................................................. 14 A. Institutional and Implementation Arrangements .......................................................................... 14 B. Results Monitoring and Evaluation, and Verification Arrangements ............................................. 14 C. Disbursement Arrangements.......................................................................................................... 15 IV. PROGRAM ASSESSMENTS SUMMARY ....................................................................................... 15 A. Technical ......................................................................................................................................... 15 B. Fiduciary.......................................................................................................................................... 21 C. Environmental and Social ............................................................................................................... 22 D. IPF appraisal, if applicable .............................................................................................................. 23 E. Program Action Plan ....................................................................................................................... 23 KEY RISKS ........................................................................................................................................ 24 ANNEX 1. RESULTS FRAMEWORK ..................................................................................................... 26 ANNEX 2. World Bank Engagement in the Tunisia Energy Sector ....................................................... 42 ANNEX 3. PROGRAM ACTION PLAN .................................................................................................. 45 ANNEX 4. Clean Technology Fund (CTF) Financing and Results Framework ........................................ 48 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) @#&OPS~Doctype~OPS^dynamics@padpfrbasicinformation#doctemplate DATASHEET BASIC INFORMATION Project Beneficiary(ies) Operation Name Tunisia Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) Does this operation have an IPF Operation ID Financing Instrument component? Program-for-Results P507304 No Financing (PforR) @#&OPS~Doctype~OPS^dynamics@padpfrprocessing#doctemplate Financing & Implementation Modalities [ ] Multiphase Programmatic Approach (MPA) [ ] Fragile State(s) [ ] Contingent Emergency Response Component (CERC) [ ] Fragile within a non-fragile Country [ ] Small State(s) [ ] Conflict [ ] Alternative Procurement Arrangements (APA) [ ] Responding to Natural or Man-made Disaster [ ] Hands-on Expanded Implementation Support (HEIS) Expected Approval Date Expected Closing Date 29-Apr-2025 31-Dec-2029 Bank/IFC Collaboration No Proposed Program Development Objective(s) The Program Development Objectives (PDO) are to scale-up renewable energy, improve electricity supply reliability, and enhance STEG financial and operational performance and sector governance. @#&OPS~Doctype~OPS^dynamics@padborrower#doctemplate i The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) Organizations Borrower: Société Tunisienne de l'Electricité et du Gaz [STEG] Contact Title Telephone No. Email Zohra Bouchnek director 0021671341311 zbouchnak@steg.com.tn Faycel Tarifa CEO (+216) 71 341 311 dpsc@steg.com.tn Implementing Agency: STEG Contact Title Telephone No. Email Zohra Bouchnak Director +0021625888009 zbouchnak@steg.com.tn @#&OPS~Doctype~OPS^dynamics@padfinancingsummary#doctemplate COST & FINANCING (US$, Millions) Maximizing Finance for Development Is this an MFD-Enabling Project (MFD-EP)? Yes Is this project Private Capital Enabling (PCE)? Yes SUMMARY Government program Cost 14,125.30 Total Operation Cost 1,190.00 Total Program Cost 1,189.00 Other Costs (Front-end fee,IBRD) 1.00 Total Financing 1,190.00 Financing Gap 0.00 Financing (US$, Millions) World Bank Group Financing International Bank for Reconstruction and Development (IBRD) 400.00 Non-World Bank Group Financing Trust Funds 30.00 ii The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) Clean Technology Fund 30.00 Counterpart Funding 760.00 Borrowing Agency 760.00 @#&OPS~Doctype~OPS^dynamics@paddisbursementprojection#doctemplate Expected Disbursements (US$, Millions) WB Fiscal Year 2025 2026 2027 2028 2029 2030 Annual 0.00 138.26 99.85 91.20 99.69 1.00 Cumulative 0.00 138.26 238.11 329.31 429.00 430.00 @#&OPS~Doctype~OPS^dynamics@padclimatechange#doctemplate PRACTICE AREA(S) Practice Area (Lead) Contributing Practice Areas Energy & Extractives CLIMATE Climate Change and Disaster Screening Yes, it has been screened and the results are discussed in the Operation Document @#&OPS~Doctype~OPS^dynamics@padrisk#doctemplate SYSTEMATIC OPERATIONS RISK- RATING TOOL (SORT) Risk Category Rating 1. Political and Governance ⚫ Substantial 2. Macroeconomic ⚫ High 3. Sector Strategies and Policies ⚫ Substantial 4. Technical Design of Project or Program ⚫ Low 5. Institutional Capacity for Implementation and Sustainability ⚫ Substantial 6. Fiduciary ⚫ Substantial 7. Environment and Social ⚫ Moderate iii The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) 8. Stakeholders ⚫ Moderate 9. Overall ⚫ Substantial @#&OPS~Doctype~OPS^dynamics@padpfrcompliance#doctemplate POLICY COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [✓] No Does the project require any waivers of Bank policies? [ ] Yes [✓] No Legal Operational Policies Triggered? Projects on International Waterways OP 7.50 No Projects in Disputed Area OP 7.60 No @#&OPS~Doctype~OPS^dynamics@padlegalcovenants#doctemplate LEGAL Legal Covenants Sections and Description Section I.A. 1(b)(i) of Schedule 2 of IBRD LA No later than (30) days after the Effective Date, prepare a manual acceptable to the Bank (“Project Operational Manual” or “POM”) Section I.B. 1(a) of Schedule 2 of IBRD LA Not later than thirty (30) days after the Effective Date, and thereafter maintain, at all times during the implementation of the Program, a verification agency having experience and qualification, and under terms of reference, satisfactory to the Bank (“Verification Agency”) to verify the data and other evidence supporting the achievement of one or more Disbursement Linked Results (“DLRs”) and recommend corresponding withdrawals to be made thereunder, as applicable. Section 2.02 of both the IBRD and CTF Guarantee Agreements: “The Guarantor, through the Interministerial Committee, shall assist the Borrower in the carrying out of the Program.” @#&OPS~Doctype~OPS^dynamics@padconditions#doctemplate Conditions Type Citation Description Financing Source The Interministerial Effectiveness Section 5.01 of IBRD LA IBRD/IDA Committee has been iv The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) established and is operational, with composition, terms of reference and functions and responsibilities acceptable to the Bank, including the responsibility to assist the Borrower in the implementation of the Program. The IBRD Loan Agreement has been executed and delivered and all conditions precedent to its effectiveness or to the right Effectiveness Section 5.01 of CTF LA Trust Funds of the Borrower to make withdrawals under it (other than the effectiveness of this Agreement) have been fulfilled. v The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) I. STRATEGIC CONTEXT A. Program Strategic Context 1. Tunisia’s economic performance slowed since the 2011 revolution, further exacerbated by the COVID-19 pandemic. With a population of 11.9 million and a gross domestic product (GDP) of US$48.5 billion, Tunisia is a middle- income country undergoing a democratic transition. The post-pandemic economic recovery remains modest, with moderate growth exacerbated by external shocks and limited private sector job opportunities. Real GDP grew by 0.3 percent in 2023 and 1.4 percent in 2024. In response to this situation, Tunisia has sought to meet citizens’ aspirations through support measures for vulnerable households and public enterprises. This approach has weighed on the state budget, exacerbating an already elevated public debt (81.2 percent of GDP in 2024, up from 67.8 percent in 2019). While Tunisia has recently made progress in terms of macro-financial stability, as reflected by the recent upgrade of its credit rating, the stabilization of the external debt and the continued reduction of the budget deficit through expenditures cuts, notably the public wage bill, the macro-fiscal situation remains challenging. 2. The global consequences of geopolitical conflicts and ongoing energy sector subsidies have further aggravated budget challenges. The trade deficit has declined since the peaks of 2022 (17.5 percent of GDP), when it was driven up by rising energy, food, and intermediate goods imports. However, the deficit is still significant at 11.4 percent of GDP in 2024, with almost 56 percent due to energy. This raises the external financing needs, which are increasingly challenging to finance given the tight external financing environment. The budgetary deficit (6.3 percent of GDP in 2024) is also significantly tied to rising energy subsidies, including those provided to the state-owned electricity and gas company (Société Tunisienne de l’Electricité et du Gaz – STEG). The latter rose from 1 percent of GDP in 2021 (average Brent oil price at US$69 per bbl) to 2.5 percent in 2023 (average Brent oil price at US$82.6 per bbl), more than half of overall energy subsidies. This significantly affects Tunisia fiscal stance. Measures are needed to improve operational efficiency, strengthen corporate governance, reduce the cost of electricity supply, and improve STEG’s financial management and performance. 3. The Government has launched an ambitious program to restore the energy sector viability and has requested World Bank support for its implementation through the proposed Program for Results (PforR) operation. This program addresses challenges facing STEG through a five-year performance contract signed between the Government and STEG, focusing on enhancing financial performance, improving management and governance, boosting renewable energy (RE), and strengthening technical and commercial performance. The proposed Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (“TEREG PforR”) aims to support the Government’s efforts to ensure a sustainable, reliable, and affordable electricity supply by accelerating RE deployment, improving STEG’s performance, and enhancing sector governance. These measures will reduce operational costs and increase revenue collection, helping toward improving the financial situation of STEG while tariff increases are not being considered at this stage by the Government due to the social vulnerability and economic competitiveness considerations. 4. The proposed TEREG PforR will support the creation of around 30,600 jobs, notably during the construction period1and enhance citizen engagement through two client satisfaction surveys to be conducted during the project life. It will also directly support Government efforts to (a) increase the RE share from 5.1 percent to 27 percent by 2028, thus reducing the reliance on natural gas imports with a positive impact on the fiscal and balance of payments deficit and energy security; (b) decrease electricity supply costs by 23 percent and improve cost recovery from 60 percent currently to 80 percent by 2028; (c) reduce state subsidies by TND 2,045 million and improve STEG’s net result2by TND 1 World Bank estimate based on “Does Solar Energy Create Inclusive Employment Opportunities?”, Prospera, September 2022 and “Renewable E nergy and Energy Efficiency in Tunisia – employment, qualification and economic effects”, GIZ, 2012. 2 The net result represents STEG's financial performance, showing the difference between its income (such as revenue from electricity and gas sales) and its costs (like operating expenses, maintenance, depreciation and interest on loans). For clarity, this figure is calculated before including Government subsidies or taxes, providing a clearer picture of STEG’s core financial health without external financial support. Page 1 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) 2,951 million over the period from 2025 to 20283; (d) boost investor confidence and enable around US$ 2.8 billion in private investment with an additional 2.8 GW of solar and wind capacity commissioned by 2028; and (e) reduce CO₂ emissions with grid emission intensity forecast to reduce by 28 percent by 2028, thereby supporting Tunisia’s energy security and economic growth. B. Sectoral (or Multi-Sectoral) and Institutional Context 5. Tunisia is facing a deep energy challenge due to its heavy reliance on fossil fuel imports to meet its energy needs, notably natural gas, which constitutes a large part of electricity production. The electricity mix relies primarily on natural gas (94.4 percent). This makes the country vulnerable to fluctuations in international fossil fuel prices, threatens energy security and burdens the macro-fiscal deficit, especially when international oil and gas prices are high. In 2023, Tunisia recorded an energy deficit of 52 percent of its primary energy needs, compared to 20 percent in 2012. Natural gas imports are responsible for close to 40 percent of the energy trade deficit. As indicated in Tunisia’s Country Climate and Development Report (CCDR), Tunisia’s current account deficit and financing conditions may eventually limit its ability to import the energy it needs to meet growing demand, thus stifling economic activity. 6. To tackle the challenges of decarbonization and ensure the electricity sector supports economic growth and job creation, Tunisia has started reducing its reliance on fossil fuels and enhancing energy security through an ambitious RE program considering the country’s huge RE potential estimated at more than 300 GW. Since 2010, the country has promoted energy efficiency and RE, notably through its solar rooftop program for the residential and commercial sectors, enabling the installation of 250 MW to date. In 2022, Tunisia updated its energy transition strategy to ensure a sustainable, reliable, and affordable electricity supply. This strategy aims to achieve 35 percent of RE in the energy mix by 2030 with a target of 4,800 MW of RE capacity by 2030 and 8,350 MW by 2035, compared to 516 MW at the end of 2023. In addition to energy security and climate resilience objectives, this new strategy expects to create over 70,000 jobs (direct, indirect, and induced) between 2021 and 2035, reducing the country’s high unemployment rate, especially among youth and women. The country aims to become a hub for RE, leveraging its potential to export green energy to Europe through the Tunisia-Italy Electricity Integration and Renewable Energy Ecosystem Project (ELMED) interconnection. 7. The electricity sector in Tunisia is vertically integrated, but unlocking the vast potential of RE requires greater private sector involvement. As of mid-2024, STEG accounts for 97 percent of the country's electricity production, with the remainder coming from the private RE sector, including rooftop solar projects. STEG also manages the national T&D (T&D) networks, as well as natural gas distribution. By the end of 2023, Tunisia had an installed generation capacity of 5982 MW. The RE capacity installed amounts to 516 MW, out of which 45 percent is owned by STEG and 55 percent by private investors. Tunisia’s electricity grid is interconnected with Algeria and Libya, and electricity imports increased to cover 12 percent of electricity demand in 2023. Given substantial investments required to reach RE goals, the Tunisian Government plans to achieve these targets through private sector participation. In 2015, a regulatory framework was established to attract private investors through: (a) the concession regime for large independent power producer (IPP) projects; (b) the authorization regime for medium-size IPPs of up to 10MW for solar and 30MW for wind; and (c) self- generation by industrial firms, including corporate power purchase agreements (PPAs). 8. Despite the Government’s efforts, the challenging financial situation of STEG as the main buyer has hindered scaling up private investment in RE. Given STEG's central role in the country's RE development, improving its operational and financial performance is crucial for fostering private sector participation. The process of developing new RE capacities owned and operated by the private sector has been relatively slow due to learning phase from initial experiences with renewable IPPs, increased costs following the COVID-19 pandemic, and a combination of bureaucratic inefficiencies and financial risks, but encouraging signs suggest that RE development is accelerating, as the Ministry of Industry, Mining, and 3 The proposed TEREG PforR contributes to a gradual improvement of STEG’s net result, with the relative improvement estimated a t 8 percent in 2025 and increasing to 33 percent in 2028, as key measures such as increased RE penetration and operational efficiencies take effect. Furthermore, these improvements are expected to have a sustained positive impact on STEG’s financial situation and cost reflectivity well beyond 2028. Page 2 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) Energy (MIME) has introduced various initiatives to streamline the process and speed up the deployment of RE. In 2019, a 500 MW solar tender was launched of which 200 MW is under construction and 300 MW is nearing financial close. In 2022, a 1,700 MW tender (1,100 MW solar and 600 MW wind) was launched in three rounds, incorporating lessons learned from the 2019 tender. In December 2024, 500 MW of solar capacity was awarded for the first round, with competitive bids ranging from 3.1 to 3.3 USc per kWh, with the remaining capacity to be awarded over the next two years. The Government has also improved the regulatory framework including: (a) the finalization of the implementing texts allowing third party access (corporate PPAs); (b) the simplification of the authorization procedures for medium-size private projects; (c) the elaboration of a law to establish an independent regulatory authority; and (d) the elaboration of standardized bankable documents for large-scale IPP projects. 9. The Government will need to address the following main challenges facing the electricity sector to ensure the sector modernization and sustainable deployment of the RE program: a) Challenge #1: Deterioration of STEG financial situation. STEG has been incurring losses since at least 2016, with losses before subsidy reaching TND 5.0 billion (US$ 1.6 billion) in 2022 and TND 4.5 billion (US$ 1.4 billion) in 2023. This has created revenue shortfalls and the need for subsidies from the state budget, amounting to TND 4.0 billion (US$1.3 billion) in 2023, equivalent to 2.5 percent of Tunisia’s GDP. The financial distress is mainly due to below cost-recovery tariffs, high electricity network losses, and low collection rates, including the public sector. STEG’s financial situation is further exacerbated by the following: i. Subsidy issues. Delays, incomplete payouts, and insufficient subsidies have led to cash shortfalls, forcing STEG to rely on short and medium-term borrowing and delaying payments to suppliers from the public sector. ii. High technical and commercial electricity losses. In 2023, total network losses stood at 18.4 percent, due to commercial losses (mainly fraud), under-spending on operation and maintenance (O&M), aging network assets, and lack of advanced metering infrastructure (AMI). iii. Low collection rates. By the end of 2023, outstanding invoices for electricity and gas reached 183 percent of annual sales for the public sector (equivalent to 22 months of bills), and 31 percent for the private sector (equivalent to 3.7 months of bills). iv. Significant accumulated losses, negative equity, and deteriorating working capital position. As of the end of 2023, STEG’s cumulative losses stood at TND 3.7 billion (US$ 1.2 billion), reflecting years of negative accounting result. This eroded STEG’s equity, leaving a negative equity position of TND -1.59 billion (US$ -0.5 billion), which in turn increases borrowing costs and overall cost of supply. STEG also faces a working capital deficit, with current liabilities of TND 10.1 billion (US$ 3.26 billion)—equivalent to over 60 percent of total liabilities. b) Challenge #2: High cost of electricity due to dominance of expensive thermal generation. The current average electricity tariff at US$0.09 per kWh covers only 60 percent of the supply cost, estimated at US$0.15 per kWh. The difference is due to especially high variable cost of electricity generation, estimated at US$0.11 per kWh in 2023, driven by Tunisia’s reliance on expensive natural gas for over 95 percent of its power generation, most of which is imported from Algeria. c) Challenge #3: Deterioration of electricity supply reliability due to tight power generation reserve margin and lagging investments in electricity T&D networks . STEG financial situation has exacerbated implementation of its capacity expansion plan. Between 2016 and 2022, the peak electricity demand grew by 5.5 percent per year, while investments in new generation capacity were lagging. This has led to an increased risk of electricity shortages during peak hours, estimated at 770 MW (about 16 percent of peak demand). Furthermore, the financial difficulties of STEG have affected the reliability of the electricity supply and the implementation of the company’s distribution investment plan. The impact of major climatic events such as the storm on January 24, 2019, and heavy rainfall in 2021 on the Quality of Service (QoS) is evident in the increased number of transient and permanent interruptions. Page 3 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) d) Challenge #4: Governance and transparency shortcomings at STEG. The difficulties are further compounded due to only a partial application of International Accounting Standards and International Financial Reporting Standards (IFRS) and weak execution of investments. There is no separation of accounts between STEG’s electricity and gas businesses, making it difficult to allocate costs among consumer groups and hindering efficient tariff-setting. STEG lacks optimal investment planning of power generation and T&D investment, consistent with least-cost principles. Finally, STEG’s corporate governance structures and practices require improvements to align with the international best practice. 10. Lack of proactive measures to improve STEG's performance and modernize its operations would further worsen the financial crisis within the sector, leading to higher costs and increased subsidies in the future. Continuing with the current approach will accelerate STEG's financial losses and strain its cash flow, necessitating additional short and medium- term commercial borrowing to meet its financial obligations. Without significant performance improvements, STEG may struggle to make timely payments to its suppliers and invest in the necessary upgrades and expansions of the transmission networks required to integrate higher levels of RE. Furthermore, the company may struggle to meet its obligations under the signed and planned PPAs with RE developers, potentially hindering RE growth, which is essential for the development of a more resilient, sustainable, and inclusive energy sector. 11. To address these challenges, the Government is prioritizing measures to improve sector performance to enhance cost recovery, rather than increasing energy tariffs, also given social vulnerabilities and economic competitiveness concerns. The Government has launched an ambitious US$14 billion program, including a five-year performance contract with STEG, signed on February 5, 2025. This contract is the result of extensive analytical work, consultations, and commitments made by STEG, MIME, and the Ministry of Finance (MoF) to work together to enhance STEG's financial and operational performance, improve its management and governance and sector regulations, and boost RE deployment. The contract will stabilize the sector and lay the foundation for a subsequent performance contract (2029 –2033), ensuring the sector's long-term viability. The Government program is aligned with the Government strategy to reach 35 percent of RE by 2030, reduce generation cost and overall cost of supply, lowering the need for subsidies by making STEG more financially viable. 12. The World Bank has conducted extensive analyses and policy dialogue in Tunisia, establishing a solid foundation for understanding the challenges and opportunities in the energy sector. In line with the Government strategy, the World Bank , through the Energy Sector Management Assistance Program (ESMAP)/Sustainable Renewables Risk Mitigation Initiative (SRMI) and Tunisia Economic Resilience and Inclusion (TERI) funds, has been providing the following support: (a) resource quality assessment, procurement approach, and contractual framework for privately owned and operated RE; (b) regional energy integration; (c) advice on development of operational and financial efficiency plan for STEG; and (d) integration of climate considerations into national development planning through the CCDR, as well as technical assistance for the preparation of the Government program. The World Bank’s engagement in the proposed TEREG PforR would complement the results to be achieved under the two World Bank-funded projects: i) ELMED (P179240); and the Energy Sector Improvement Project (PASE, P168606), focusing on strengthening domestic transmission network as well as expansion of interconnectors with neighboring countries to allow for increased RE development and trade. The proposed TEREG PforR builds on several years of advisory services and analytics (ASA) provided by the World Bank to Tunisia (annex 2). The International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA) provide financing and derisking solutions for private developers investing in RE. 13. The proposed TEREG PforR supports Objectives 1.2 and 2.3 of the World Bank Group’s Country Partnership Framework (CPF; Report No. 180304-TN) 2023-2027 for Tunisia. Objective 1.2 aims to enhance the financial performance and service quality of public enterprises. The proposed operation will strengthen STEG’s operational performance and lay the foundations for the achievement of financial viability, which would contribute to improved service delivery to consumers. Objective 2.3 of the CPF aims to accelerate the energy transition towards efficient, resilient, and low-carbon development. The proposed operation will also contribute to increased transparency and improved governance of STEG, Page 4 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) which is in line with the Middle East and North Africa SOE Compact for promoting Good Corporate Governance Practice in the Middle East and North Africa region. This would also help strengthen investors’ confidence, and therefore, the ambitious RE program of the Government considering that STEG is the main off tacker of all private RE contracts. 14. The proposed TEREG PforR aligns with the Paris Agreement’s mitigation and adaptation goals, Tunisia's Nationally Determined Contribution (NDC) target of carbon neutrality by 2050, and the recommendations in the country's CCDR. It also supports priorities in the World Bank Group Climate Change Action Plan (CCAP) 2021–2025. Specifically, the operation will help Tunisia meet its greenhouse gases (GHG) reduction targets by improving STEG's efficiency, scaling up RE, and addressing maintenance backlogs. Without improvements to STEG's operations and financial viability, Tunisia will struggle to increase the RE share and achieve its NDC goals. Additionally, the operation supports the upgrade and maintenance of T&D assets, ensuring the seamless integration of new RE capacity, and aligns with CCAP’s focus on scaling clean energy systems. II. PROGRAM DESCRIPTION A. Program Development Objective(s) (PDO) 15. The PDOs are to scale up renewable energy, improve electricity supply reliability, and enhance STEG financial and operational performance and electricity sector governance. B. Theory of Change and PDO Indicators 16. The achievement of the PDO will be monitored through the following PDO-level indicators: • PDO-Level Outcome Indicator 1 (Custom) / Disbursement-Linked Indicator (DLI) 2: Renewable energy capacity enabled with direct support (MW) (Corporate Scorecard Indicator), under Disbursement-Linked Result (DLR) 2.1 and DLR 2.2, with DLR 2.2 also verified for Private Capital Enabling (PCE). • PDO-Level Outcome Indicator 2 (Custom) / DLI 1: Reduction in the number of electricity service interruptions per customer. This indicator would be measured by the System Average Interruption Duration Index (SAIDI). • PDO-Level Outcome Indicator 3 (Custom) / DLI 3: Reduction in the total electricity losses (technical and commercial) (percentage). • PDO-Level Outcome Indicator 4 (Custom) / DLI 7: Strengthened electricity sector governance with the Electricity Sector Regulator established and operational. Page 5 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) Figure 1. Theory of Change C. PforR Program Scope i. Government program 17. The Government's program, outlined in the STEG performance contract for 2024-2028, was endorsed by the Council of Ministers on November 22, 2024, and signed by the Minister of Energy, on behalf of the Government, and STEG on February 5, 2025. 18. The Government program aims to comprehensively address sectoral reforms by focusing on financial, technical, commercial, and governance improvements. Implementing this Government program would cost approximately US$14.125 billion between 2024 and 2028, as per STEG estimation. The investments that form part of the program cover a wide range of areas, including the production, transmission, and distribution of electricity and natural gas. The program also includes O&M costs necessary to meet growing demand, ensure reliability of the energy network, and modernize dispatch systems. Additionally, the program includes costs related to enhancing commercial and financial management and improving sector governance. The main pillars of the Government program are summarized in figure 2. Page 6 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) Figure 2: Government program pillars Pillar : STEG nancial viability. Pillar 2: Improvement of technical and commercial performances. Pillar : Strengthening of STEG and electricity sector governance and increasing transparency Reduce outstanding receivables from public Achieve 00MW of private RE from the current MW (as of end clients (State and Administra ons) incurred prior 202 ). Implementa on of long term investment to the start of the performance contract. Ensure that the availability rate of combined cycle gas red power plants planning in electricity and gas sectors. Clear a share of outstanding subsidy arrears (as (baseload) is maintained at , ensuring stable and predictable Improvement of STEG nancial management per the situa on at the start of the contract), electricity produc on. and governance: (i) separa on of nancial with a target to se le 00 MDT by 202 . Rehabilitate and upgrade key electricity transmission and distribu on accounts for main lines of business (ii) Reduce outstanding receivables from public SOEs (T&D) assets to reduce overall electricity losses. alignment of corporate governance structures incurred prior to the start of the performance Rehabilitate and upgrade key gas transmission and distribu on (T&D) and prac ces with good standards (e.g. OECD contract, with a target to se le 00 MDT by assets to enhance the reliability of the gas supply network. Guidelines for Corporate Governance of SOEs, 202 . 202 ) and (iii) strengthening of accoun ng and Invest in new electricity T&D assets to connect new renewable energy nancial repor ng. Budget and disburse subsidies according to the installa ons and modernize control systems and change opera ng regulatory or contractual calendar, with the prac ces to improve RE integra on into power system. Strengthening of human resources systems target to pay all subsidy for the year by anuary including development of skills framework and Invest in new gas T&D infrastructure to replace aging equipment and performance evalua on system. . ensure the long term reliability of the gas supply network, with a target Reduce payment delays to suppliers, aiming to to complete infrastructure upgrades by 202 . Strengthening of investment project reduce total payables to suppliers from .2 billion management capacity to reduce Improve wholesale metering and energy audit systems to reduce implementa on period. TND as of end 202 to .2 billion as of end technical losses in electricity and gas networks, with the target to reduce 202 . technical losses and improve overall system e ciency by 202 . Establishment of energy sector regulator with Reduce the receivables rate from public quali ed sta and adequate budget Develop and implement a demand and supply management plan for customers (invoices issued during the temporary electricity shortages, with the goal of having the plan fully Improvement of transparency through performance contract), with a target to reduce developed and opera onal by 202 . disclosure of opera onal and nancial from to 2 by 202 . informa on. Reduce the transmission equivalent cuto me (e cluding load shedding) Reduce the receivables rate from private to improve service con nuity, with a target to reduce from minutes to Increase customer sa sfac on through customers to 2 by end of 202 . 0 minutes by 202 . improvement of customer service and complaint monitoring systems. Reduce the System Average Interrup on Dura on Inde (SAIDI), aiming to decrease from minutes to 2 minutes by 202 . Improvement of metering and billing, including roll out of AMI, re engineering of business processes and improved billing system through Enterprise Resource Planning (ERP) to allow for reduc on of commercial losses in electricity and gas networks. ii. PforR Program Boundary and Results Areas 19. The proposed TEREG PforR would support selected activities and key performance indicators (KPIs) from all pillars under the Government program with a focus on accelerating RE development, improving reliability of electricity supply, enhancing STEG’s financial performance, and strengthening the governance of the electricity sector. Table 1 Government program and Proposed TEREG PforR Government program Program supported by the proposed TEREG PforR Duration 2024-2028 2025-2028 Geographic coverage Entire country Entire country Result areas • Improve STEG financial performance • Increase share of RE in the power • Improve STEG technical and commercial generation mix and improve the performance electricity supply reliability. • Strengthen STEG and electricity sector • Enhance STEG’s financial and governance and increase transparency. operational performance. • Improve electricity sector governance and transparency. Overall Financing US$14.125 billion4 US$1.190 billion 20. Results Area 1: Increase RE power generation capacity and improve the electricity supply reliability. This includes the following measures: 4 Comprising of US$3 billion in CAPEX and ~ US$ 11 billion in OPEX, including imports of natural gas and electricity purchases. Page 7 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) a. Increase of RE in Tunisian power generation mix. An increase of RE-based electricity supply from IPPs would allow STEG to reduce the reliance on expensive gas-fired generation and reduce overall cost of electricity production, vital for improving STEG’s financial performance and reducing the burden of subsidies. b. Rehabilitation of key T&D assets. Rehabilitation of T&D assets, along with timely O&M, is critical for ensuring reliability of electricity supply. Aging or poorly maintained infrastructure can lead to frequent outages, voltage instability, and inefficient transmission, compromising the overall system's ability to meet demand. Timely O&M helps detect and address early potential failures, while rehabilitated assets enhance the grid's capacity and resilience, reducing the risk of disruptions and ensuring consistent and efficient electricity delivery to consumers. Activities will focus on reducing technical losses in the electricity network and revising design criteria to enhance climate resilience. This includes adopting higher standards for lines and pylons to withstand extreme weather, elevating substations to mitigate flooding risks, and implementing surge protection against storms. c. Investments in new electricity distribution assets. Investments in construction of new distribution lines and substations would be crucial for increasing electricity supply reliability given increasing demand as well as for contributing to additional electricity sales by STEG, therefore, adding to the revenue base. 21. Results Area 2: Enhance STEG financial and operational performance, including: a. Improvement in revenue collection and allowing STEG to cover a higher share of operational costs. It is essential to settle subsidy arrears and unpaid amounts by the public administrations. The goal is to reduce outstanding receivables from private and public customers and shorten STEG payment delays to suppliers. Additionally, efforts must be made to reduce technical and commercial losses, mainly driven by fraud. These measures aim to improve liquidity and enhance efficiency in public financial transactions. b. Timely payment of STEG subsidy. It is crucial to ensure adequate revenues and cash flow for STEG to cover purchases of RE, O&M, natural gas and other critical expenditures. c. Improvement of metering infrastructure and reduction in commercial losses. Implementation of AMI at the distribution level, along with wholesale metering, plays an important role in reducing electricity losses and increasing revenue generation. AMI enables real-time monitoring and accurate measurement of electricity usage, allowing for the quick detection of theft, meter tampering, and inefficiencies in the system. Wholesale metering ensures precise tracking of energy flows between STEG and customers, minimizing discrepancies and financial losses, while facilitating more accurate billing and energy balancing across the grid. Together, these technologies improve operational transparency at STEG and boost its overall revenue collection. 22. Results Area 3: Improve electricity sector governance and transparency. This includes the following measures: a. Improvement of STEG’s corporate governance, financial management and transparency. Publication of STEG’s financial statements in accordance with IFRS 8 disaggregated by activity (electricity and gas) and approving income statements by function (generation/transmission/distribution) will enhance financial transparency. This accounting separation will allow better cost reflectivity and informed decision making. Enhancing financial accounting and reporting systems within STEG will also be supported by the approval of IFRS compliant financial accounts. A multi-year financial model will be developed to allow multi-year planning, informed decision making and better monitoring of STEG’s financial performance. Strengthening corporate governance involves ensuring the effectiveness of the Board and its Committees, appointing two independent board members. Further governance improvements can be achieved through capacity building for Board members. These measures support better decision-making, risk assessment, and customer support by promoting accountability and showcasing STEG’s commitment to efficiency and financial stability. b. Improvement of electricity sector governance. This involves establishing an independent electricity sector regulator to oversee improvements in tariff calculation methods, ensure transparent and fair rules for private operators, and boost investor confidence. This will lead to higher participation in RE auctions, creating a more competitive environment, leading to more competitive prices. Page 8 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) c. Improvement of long-term investment planning. Preparation and adherence to sound (technically feasible and economically least-cost) power generation, transmission, and distribution plans for electricity and gas sectors is crucial for: (i) improvement of efficiency of STEG’s CAPEX with positive implications on net cash position of the company; and (ii) programming of new RE IPPs to avoid over-supply or deficit of electricity supply while providing project pipeline predictability for the market, which is essential for securing competitive tariffs in the PPAs. iii. Activities Excluded from the Program 23. The proposed TEREG PforR does not support the following activities: • Construction and rehabilitation of thermal and RE power plants. • Supply of gas to electricity sector and other consumers. • Construction and rehabilitation of gas T&D assets. • Investments in new transmission lines. iv. Program Beneficiaries 24. The main beneficiaries of the proposed TEREG PforR are all electricity consumers in the country and STEG: a. Tunisian electricity consumers. The proposed TEREG PforR will contribute to the ongoing efforts of the Government to ensure sustainable, reliable and affordable electricity supply, thus improving consumer welfare and companies' competitiveness. b. STEG. The proposed TEREG PforR will improve the financial performance of STEG and support modernization of the company to make it a better fit for the next stage of reforms. Furthermore, the Program will reduce GHG emissions in Tunisia, thus contributing to reaching carbon neutrality in Tunisia and the global commitment on GHG reductions. v. Program Expenditure Framework 25. The total cost of the proposed TEREG PforR is estimated at US$1.190 billion over four years (2025-2028). The Program is expected to be financed 63.87 percent by counterpart funding from STEG (US$760 million), 33.61 percent by World Bank IBRD loan (US$400 million) and a funding of 2.52 percent by the Clean Technology Fund (US$30 million). Of the IBRD loan, US$150 million is from the Global Solutions Accelerator Platform (GSAP), while the full IBRD loan amount benefits from a longer tenor, both in both in recognizing the Program’s contributions to improved efficiency of electricity delivery and enabled integration of renewable energy. The resulting significant reductions in greenhouse gas (GHG) emissions contribute to the goals of the IBRD Framework for Financial Incentives (FFI). The longer loan tenor results in IBRD loan payments that better match the economic benefits of the Program and therefore help with debt service management without increasing the cost of the loan. Table 2: PforR Program Expenditures (US$, millions) Costs 2025 2026 2027 2028 Total Electricity purchases from the grid connected private renewable electricity power plants (solar and wind) 8 57 91 181 337 New and upgraded network and system expenditures for RE dispatch, collection increase, and losses reduction 75 91 110 133 410 New and maintenance of electricity distribution network assets. 6 11 12 40 68 New and maintenance of transmission equipment 2 23 20 3 49 STEG personnel costs associated with Program implementation 78 80 83 86 326 Total 169 262 316 443 1,190 Page 9 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) D. Disbursement Linked Indicators 26. The following DLIs and DLRs are proposed for the Program considering the results areas and the measures it would be supporting. They are fully aligned with the KPIs in the performance contract adopted and signed by STEG and MIME, to which all counterparts are committed after extensive analytical work and consultations. Table 3. Proposed DLIs and DLRs No DLI Description Financing Allocated Results Area 1: Increase RE power generation capacity and improve electricity supply reliability 1 DLI1: DLR1: The average duration of electricity service interruptions per customer reduced by US$51.3 million (US$5.7 Improved a total of 9 minutes. million per minute reliability of Rationale for selection. The PDO of supply reliability cannot be met if STEG does not reduced up to US$51.3 electricity maintain the reliability of the network through timely implementation of the maintenance million) supply program. Climate mitigation and adaptation. This DLI aims at strengthening the grid for RE uptake and ensures that RE producers can efficiently connect and distribute electricity without curtailment, as sometimes seen in the current T&D system5. It also supports timely upgrades and maintenance of transmission assets to enhance capacity, reliability and resilience. Targeted upgrades are essential for network reliability and RE integration. Additionally, small-scale asset upgrades will consider climate change impacts on equipment lifespan. STEG will refine technical requirements and rehabilitation designs, incorporating climate-resilient measures to mitigate risks from extreme climate events. 2 DLI2: DLR 2.1: Electricity supply from new solar and/or wind IPPs plants under operation is US$130 million (for DLR Renewable increased by 500 (Megawatt). 2.1: US$100,000 per energy DLR 2.2: Signing of power purchase agreements (PPAs) for an additional cumulative 1,000 MW of new IPP capacity MW of solar and/or wind IPPs. connected capacity to enabled with Rationale for selection. Without implementing these DLRs, the Government will struggle the grid up to U$50 direct to increase the share of RE in the electricity supply mix, to reduce generation costs and million; for DLR 2.2: support enhance energy security as highlighted in the CCDR. Achieving these goals will be US$80,000 per new MW (MW) challenging without developing 500 MW from new RE IPPs and signing new 1,000 MW. DLR with PPA signed up to (Corporate 2.2 is also aligned and verified for PCE. 500 MW out of the 1,000 MW will be treated as prior US$80 million, out of Scorecard results and are reflected in the withdrawal table of the legal agreements under DLR 0. which US$30 million Indicator) Climate mitigation and adaptation. By increasing RE sources capacity (solar and wind), from CTF), with $32.72 these initiatives reduce GHG emissions and reliance on fossil fuels. Integrating million under IBRD and renewables into the grid enhances energy security and resilience RE project development $7.28 million under CTF integrates climate resilience across all phases6. Climate resilient design features of RE are treated as prior plants and grids include heat-resistant materials, anti-soiling PV coatings, reinforced results as reflected structures for high winds, and elevated foundations for flood protection. under DLR 0 in IBRD and CTF legal agreements. Results Area 2: Enhance STEG’s Financial and Operational Performance 3 DLI3: DLR 3: Overall electricity losses (technical and commercial) have been reduced to 15 US$59.16 million Reduction in percent. 5 As part of its long- and mid-term grid planning studies, STEG identifies the necessary grid infrastructure - such as substations, transformers, transmission lines, and smart grid technologies - to alleviate congestion, mitigate voltage issues, and reduce energy losses. These measures ensure the seamless connection of RE projects and the full dispatch of renewable power without curtailment risks, allowing for the evacuation of larger volumes of clean energy to demand centers. 6 Projects must submit an Environmental Impact Study (EIS) assessing climate risks, resilience measures, and compliance with local and international regulations (Law No. 88-91, Decree No. 2005-1991). Feasibility studies evaluate solar radiation, wind variability, and site vulnerability to flooding, desertification, and extreme heat, prioritizing climate-resilient locations. Page 10 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) the total Rationale for selection. This indicator is crucial to modernize T&D networks, improve the (US$1.74 million per 0.1 electricity accuracy of metering and billing systems, and combat fraud. This will optimize efficiency, percentage point losses increase revenue, and ensure a more reliable and sustainable energy supply. reduced up to US$59.16 (technical Climate mitigation and adaptation. Reducing electricity losses minimizes the need for million) and additional power generation, cutting fuel consumption and GHG emissions while commercial) enhancing the resilience of the electricity supply system. 7 As part of its resilience strategy, STEG has integrated climate-proofing measures into the design of key grid assets, such as towers and surge protection systems, to safeguard against storms. 4 DLI 4: DLR 4.1: Improvement in outstanding receivables rate from private customers to 24 US$81.35 million Improvement percent (outstanding receivables as a share of total invoices issued for the year). (US$0.95 million per 0.1 in DLR 4.2: Reduction in outstanding arrears accumulated as of end FY2023 for public percentage point receivables administration electricity and gas consumption owed to STEG by TND 550 million. reduced up to US$66.5 rate for Rationale for selection. These DLI/DLRs address STEG's financial challenges by million for DLR 4.1; electricity enhancing the collection of private receivables, improving cash flow, and reducing $1.35 million for every and gas outstanding debts. Timely reduction of public administration arrears enhances STEG's TND 50 million of unpaid invoices financial liquidity and operational efficiency, fostering a sustainable and robust electricity arrears of the public sector. administration reduced, Climate mitigation and adaptation. Improved receivables collection and timely up to US$14.85 payments ensure financial stability for energy providers, enabling investments in million for DLR 4.2) sustainable energy projects and enhancing grid resilience while reducing GHG emissions and strengthening infrastructure durability. 5 DLI 5: STEG’s DLR 5: a) The annual budgeted subsidy amount is paid to STEG no later than January 31, US$40 million (US$10 accounts after the end of the corresponding FY2023; and b) The subsidy arrears as of end FY23 are million per year) receivable reduced by cumulative 900 million TND at minimum, as follows: i) 0 TND in FY2025; ii) 200 related to the million TND in FY2026; 300 million TND in FY2027; and iv) 400 million TND in FY2028. subsidy Rationale for selection. This DLI was selected to address financial challenges related to payment is STEG's account receivables from subsidy payments. By reducing these receivables, the reduced measure aims to improve cash flow, financial situation, and operational efficiency for (TND million) STEG, contributing to a more sustainable and financially robust electricity sector, essential for scaling-up RE projects. Climate mitigation and adaptation. Reducing STEG's account receivables from subsidy payments would strengthen its financial health, enabling greater investment in sustainable energy projects and infrastructure improvements. This supports climate mitigation by supporting the transition to renewables and climate adaptation by enhancing energy supply system resilience and adaptive capacity. Results Area 3: Improve Electricity Sector Governance and Transparency 6 DLI 6: DLR 6.1: A multi-year financial model is approved by STEG to allow multi-year planning, US$40 million STEG’s informed decision making and monitoring STEG’s financial performance. (US$10 million per DLR) corporate DLR 6.2: Two independent members are appointed to STEG board of directors. governance, DLR 6.3: STEG publishes its financial statements in accordance with IFRS 8 disaggregated financial by activity (gas, electricity) and approves income statements by function (generation, management transmission, distribution), in a given year. and DLR 6.4: STEG approves audited financial statements, prepared in accordance with IFRS transparency accounting standards. improved 7 The average annual reduction in GHG emissions stemming from technical loss reduction only is estimated at kilotons of CO₂ e, while the reduction in GHG emissions stemming from commercial loss reduction is estimated at 0 kilotons of CO₂e per year. Page 11 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) Rationale for selection: These DLRs were selected as they contribute to improved financial transparency, operational efficiency, and customer satisfaction. Climate mitigation and adaptation: Implementing these actions will foster a sustainable and efficient electricity sector, financial transparency, attracting investments in RE and energy efficiency projects. This will lower GHG emissions and expand the use of cleaner energy sources. Compliance with IFRS will create a foundation for climate- related financial disclosures. These reforms provide the necessary conditions for Tunisia’s transition to a more sustainable and resilient power sector. 7 DLI 7: DLR 7.1: Electricity sector regulator law is in full force and effect. US$8 million (US$2 Strengthene DLR 7.2: The legal foundation and operational mandate of the electricity sector regulator million per DLR) d electricity is clarified through a decree published. sector DLR 7.3: The electricity sector regulator becomes operational, the related business plan governance is adopted, and the minutes of the first meeting of its board are signed. with the DLR 7.4: The methodology for calculating network access tariff is approved by MIME. electricity Rationale for selection: sector These DLRs aim to establish a transparent regulatory framework for the electricity sector, regulator enhancing governance and sustainability. established Climate mitigation and adaptation: Implementing these actions will foster a and sustainable and efficient electricity sector, attracting investments in RE and energy operational efficiency projects. This will lower GHG emissions and expand the use of cleaner energy sources. Additionally, an independent regulator will enhance the enforcement of environmental standards, enhancing climate resilience and sustainability. The network access tariff is vital to enable fair grid access for renewable producers, accelerating decarbonization and necessary for Tunisia to implement its energy transition strategy and meet climate commitments. 8 DLI 8: STEG DLR 8.1: STEG adopts a least-cost 10-year power generation and transmission US$19.19 million system investment plan consistent with the Tunisian Government’s energy transition objectives (US$15 million for DLR planning and is approved by MIME. 8.1 and US$ 4.19 million improved DLR 8.2: New grid-connected generation is consistent with STEG least-cost 10-year for DLR 8.2). investment plan approved by MIME. Rationale for selection: These DLRs ware selected to ensure new power generation, storage and transmission projects align with economic efficiency and strategic planning. Consistency with a 10- year least-cost system plan avoids unjustified projects and ensures competitive procurement. Climate mitigation and adaptation: This DLI plays a key role in integrating RE sources into the national grid, reducing fossil fuel dependence, and lowering GHG emissions. By aligning with the Government RE targets, it ensures sustainable energy sector growth while supporting international climate commitments and global climate action. Through this DLI, STEG is strengthening grid resilience by integrating climate considerations into its planning and assessing grid vulnerabilities8. Post-event evaluations refine mitigation strategies, while infrastructure upgrades -such as reinforced pylons, corrosion-resistant cables, and weather-resistant insulators- enhance durability against extreme climate events. Additionally, modernization efforts such us undergrounding vulnerable lines in high-risk areas reduce storm-related disruptions. 8STEG adopts an N-1 criteria to decide on required future grid reinforcement. This includes single circuit failure (loss of a simple circuit line or a transformer). In region of significant weather events, STEG has updated the criteria to include the impact of severe weather conditions on grid infrastructure. The event of the complete loss of a pylon with a double circuit connected to it (loss of two simple circuits which is equivalent to an N-2 event) is also assessed as a plausible contingency event. Page 12 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) E. Role of Partners 27. All development partners are supporting the Government of Tunisia for the energy transition and decarbonization agenda. For example, the European Investment Bank (EIB) funded the Elmed Interconnector Project for an amount of EUR 45 million (2023), and the Electricity Distribution Network Expansion and Strengthening Project for EUR 70 million (2022). The French Development Agency (AFD) financed the Smart Grid Project for an amount of EUR 120 million (2022). The European Union and the European Bank for Reconstruction and Development (EBRD) supported the Elmed Interconnector Project with EUR 45 million (2023), as well as the Tunisian Electricity Sector Restructuring Project with EUR 300 million. The African Development Bank (AfDB) financed the Electricity Transmission Project with EUR 138 million (2019), and KfW contributed EUR 35 million to the Elmed project. Together, these projects underscore STEG's commitment to leveraging international expertise and funding for a sustainable energy future. F. Lessons Learned and Reflected in the Program Design 28. Based on experience in the Middle East and North Africa region and beyond, the PforR has proven to be an effective tool for supporting the implementation of Government programs aimed at improving operations, supporting financial recovery, and reforming state-owned enterprises. One key lesson learned is the need for clear coordination of responsibilities at the highest levels of Government to avoid delays in implementation, which can occur when responsibilities are spread across multiple ministries and implementing agencies. The proposed TEREG PforR ensures that STEG is both the borrower and the lead implementing agency. By consolidating these responsibilities within a single entity, the program aims to streamline decision-making and accelerate the implementation process, reducing the risk of bottlenecks or slow progress due to fragmented oversight. 29. Another important lesson is the necessity of strong Government ownership to ensure commitment and sustainability. Setting ambitious but achievable targets and ensuring a direct link between results and expenditures are crucial for better transparency and accountability. The proposed TEREG PforR, incorporates these lessons by fostering close collaboration and continuous consultation with key stakeholders. This approach has fostered a shared vision and strengthened the commitment of all relevant stakeholders. The KPIs for the performance contract were established through a participatory approach and approved by the Council of Ministers on November 22, 2024. This collaborative effort culminated in the signing of the performance contract between STEG and MIME on behalf of the Government. 30. Additionally, rigorous Program design with stakeholders and clear communication of results are essential for maintaining credibility. The risks related to DLIs beyond the control of the implementing entity must be carefully managed. The proposed TEREG PforR benefits from extensive technical assistance in recent years provided by the World Bank to MIME and STEG to support them in assessing sector financial situation, identifying sustainable and realistic way forward, and ensuring consultative stakeholder engagement for early buy-in. The World Bank also conducted several workshops and training sessions to enhance STEG capacity in financial modeling and knowledge of the PforR instrument. These sessions helped identify key indicators to address sector challenges, with full buy-in from all stakeholders. This process has ensured commitment from all stakeholders, and the Program's streamlined implementation structure, aligned with the Government program, laying the groundwork for effective execution and greater accountability. 31. Finally, mechanisms for monitoring and evaluation must be in place to ensure that expected results are achieved. The proposed TEREG PforR has incorporated lessons from recent PforR in Tunisia, Jordan and Morocco by establishing robust monitoring and evaluation frameworks. These frameworks ensure that progress is tracked, and any issues are promptly addressed. This approach not only helps in achieving the desired results but also enhances the overall credibility and effectiveness of the program. Page 13 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) III. PROGRAM IMPLEMENTATION A. Institutional and Implementation Arrangements 32. STEG will be the main agency responsible for the implementation of the proposed TEREG PforR. Owing to its ongoing experience in managing projects funded by the World Bank and other development partners, particularly large-scale projects in the field of energy transmission, STEG has the necessary skills to utilize various financing instruments. The performance contract was signed in accordance with the provisions of the Prime Minister's Circular No. 31 dated November 23, 2023, and was the culmination following a participatory approach with key stakeholders to agree on the objectives and determine the KPIs of the performance contract. 33. The Government will establish an Interministerial Committee through a decree from MIME. The Interministerial Committee, composed of representatives from key ministries, will oversee the execution of the performance contract. Its responsibilities include periodically reviewing implementation progress and performance improvements, updating indicators, and managing challenges encountered during implementation. This structure will enable stakeholders to continuously monitor the achievement of all DLIs under the proposed TEREG PforR, especially those that depend on other parties. A covenant is also added to the Guarantee Agreement, reflecting the Guarantor’s commitment through the Interministerial Committee, to assist the borrower (STEG) in implementing the proposed TEREG PforR. 34. As the main implementing agency, STEG has established a multidisciplinary project management unit (PMU) to prepare, monitor, and supervise the proposed TEREG PforR. This ensures coordinated efforts and addresses challenges throughout the project's lifecycle. Additionally, STEG will recruit an independent verification agency (IVA) to support the Interministerial Committee, monitor the program's implementation, and provide recommendations to ensure compliance with commitments. The reports from the Interministerial Committee, and the periodic checks carried out by the IVA will be regularly communicated to the relevant authorities, ensuring transparency, accountability, and effective monitoring of the program. Table 4: Implementation Arrangements DLI Description Responsible Entity Results Area 1: Increase RE power generation capacity and improve the electricity supply reliability 1 Improved reliability of electricity supply STEG 2 Private-led renewable energy capacity enabled (MW) STEG/MIME Results Area 2: Enhance STEG’s financial and Operational Performance 3 Reduction of electricity losses (percent) STEG/Government 4 Reduction in receivables rate for electricity and gas invoices (percent) STEG/Government 5 Reduction in STEG account receivables related to the subsidy payment (in TND) STEG/MoF Results Area 3: Improve Electricity Sector Governance and Transparency 6 STEG’s corporate governance, financial management and transparency improved STEG 7 Strengthened electricity sector governance with the Electricity Sector Regulator is STEG/MIME established. 8 STEG system planning improved STEG B. Results Monitoring and Evaluation, and Verification Arrangements 35. The STEG PMU will be responsible for monitoring and reporting the results of the proposed TEREG PforR in collaboration with the external IVA and MIME (for DLR 2.1 and DLR 2.2), to verify the achievement of the DLIs. The STEG will set up a well-established monitoring and reporting system that tracks progress on a bi-annual and annual basis. STEG Page 14 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) PMU will coordinate with specific teams within STEG which will be responsible for each DLI/DLR outcome. Similarly, STEG is responsible for meeting the indicators (including DLIs) and reporting on them on a biannual basis. The PDO-level result indicators will be monitored using the corporate governance proceedings, technical and operational data, and financial statements of STEG. The IVA will be mandated by STEG to produce periodically IVA Program Results Verification Report on the achievement of the DLIs/DLRs. A mid-term review of the operation will be carried out no later than 30 months after the effective date of the loan agreements for the proposed TEREG PforR. C. Disbursement Arrangements 36. Every six months, STEG will submit the documentation related to each indicator to the IVA and MIME for DLI2 (DLR 2.1 and DLR 2.2) for the preparation of results verification report. The biannual reports from the IVA will serve as the basis for assessing progress toward achieving the DLI targets and for the World Bank’s authorization of disbursements. The World Bank reviews the said documentation and notifies STEG to confirm the achievement of results and the amount to be disbursed. Based on this notification, STEG will submit the related withdrawal applications via Client Connection and preferably through electronic submission. 37. Within six months after the closing of the proposed TEREG PforR, STEG will carry out an expenditure reconciliation. The reconciliation between the disbursement and the expenditure of this proposed TEREG PforR will be done after considering all sources of financing, the IBRD, the CTF and the implementing agency. Any deficit of expenses compared to the total amount paid by the World Bank will be reimbursed by STEG. Likewise, any balance of the advance not documented by achieved DLIs will be refunded to the World Bank. 38. DLR 5 is timebound, DLRs 6.1, 6.2, 6.3, 6.4, 7.1, 7.2, 7.3, 7.4, 8.1, and 8.2 will be paid in full separately once achieved, and all other DLRs are scalable. For the DLRs that are scalable, funds will be disbursed in proportion to the achievement of each DLR. The allocated amounts for each scalable DLR in each year are indicative, and they can be met at any time during Program’s implementation period of the Program by STEG. Disbursement of the yearly amount of the DLR achieved will be made based on the formula agreed between STEG and the World Bank for each such scalable DLR (as provided in the loan agreements and in the Disbursement Linked Indicators Matrix in Annex 1), up to the total amount allocated for such DLR. For timebound DLI, if the achievement has not been met in the given timeline, and for other DLRs if not met within two years from their expected achievement, the funding may be cancelled or reallocated to other DLR in accordance with an agreement between the two parties. 39. Prior results. An amount of up to US$ 7.28 million from the CTF loan and EUR 31.48 million IBRD loan will be allocated for achievement of prior results under DLR 2.2 covering the period from November 7, 2024, to date of signature of the legal agreements between STEG and the World Bank. Disbursements for prior results will be made against the verification of the results following the effectiveness of the Loan Agreements. 40. An advance up to 21.82 percent of the share of the IBRD loan, and 5.7 percent of the CTF loan allocated to the PforR may be requested by STEG once the Loan Agreements become effective to facilitate the achievement of DLI results. This advance will operate as a rolling advance as DLIs/DLRs are achieved and verified. The terms and conditions for the recovery of this advance will be described in the Program Operational Manual (POM). IV. PROGRAM ASSESSMENTS SUMMARY A. Technical 41. The Program supported under the proposed TEREG PforR is technically sound and includes all the key measures required for achieving the PDO and DLIs within the proposed timeline. The Program aligns with Tunisia's energy transition goals and aims to meet increasing electricity demand while ensuring a sustainable and efficient power supply system. The Program is based on comprehensive analytical work, with STEG providing necessary documents and methodologies to Page 15 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) justify each measure and related costs. MIME supports the program to ensure the signed performance contract is achievable. A technical assessment was conducted covering the three results area: a. Increase of RE in Tunisian power generation mix: Tunisia aims for 35 percent RE in its energy mix by 2030, with 4,800 MW of RE capacity by 2030 and 8,350 MW by 2035. Recent initiatives show acceleration, with tenders for 500 MW solar in 2019 and 1,700 MW solar in 2022. The regulatory framework has improved, and RE project PPAs follow international best practices. The World Bank continues to support acceleration of RE development. b. System reliability: Maintaining system reliability is crucial for integrating RE. STEG has the technical capacity to enhance system reliability, but several operating criteria need review. c. Rehabilitation of transmission Assets: Rehabilitating transmission assets is critical for reliability. STEG prioritizes rehabilitation using operation reports to define maintenance budgets. d. Investments in new electricity distribution assets: Investments in new distribution assets are essential for reliability. STEG allocates sufficient O&M costs for maintenance activities. It is recommended that technical assistance is provided for more advanced tasks, such as smart grid deployment. e. Improvement in revenue collection and settling of past arrears: STEG faces important financial challenges, among others accumulated arrears for electricity consumption by the public sector. Key measures include structured payment agreements and enhanced revenue collection. The 2024-2028 performance contract outlines a repayment schedule for part of the existing consumption arrears and targets for improved collection rates. f. Timely payment of STEG subsidy and reduction of subsidy arrears: Timely subsidy payments are crucial for STEG’s cash flow. The Government and STEG have agreed on a repayment plan to reduce existing subsidy arrears in the 2024- 2028 performance contract. g. Improvement in recovery rate of receivables of private customers: STEG faces challenges in improving the recovery rate of receivables of private sector. Key measures include digitalizing billing processes and strengthening enforcement mechanisms. h. Improvement of metering infrastructure: Implementing AMI is crucial for reducing electricity losses. Key measures include installing smart meters and deploying a comprehensive IT platform for customer management. i. Reduction of technical and commercial losses: Increased T&D losses impact STEG's efficiency. Key measures include activating capacitor banks, correcting power factor, and installing smart meters. k. Implementation of good-practice corporate governance, financial management and transparency at STEG: Key activities focus on ensuring the effective functioning of the Board of Directors, strengthening its composition and develop competences of its members. It is also important that STEG publishes financial statements in accordance with IFRS 8 for the breakdown of its activities (gas, electricity), and that it improves its financial transparency by aligning with the International Financial Reporting Standards (IFRS). j. Operationalization of electricity sector independent regulator: Establishing an independent regulator is crucial for transparency and efficiency. MIME has drafted a law for this purpose, drawing on international best practices. l. Improvement of long-term investment planning: STEG's long-term planning aligns with best practices but needs updated tools and unified models. Capacity building is needed for independent work. Program Expenditures 42. The Program expenditures is estimated at US$1.19 billion over the period of four years (2025-2028), as per Table 2 The Program is expected to be financed 63.86 percent by counterpart funding from STEG (US$760 million), 33.61 percent by World Bank IBRD loan (US$400 million) and a funding of 2.52 percent by the Clean Technology Fund (US$30 million). The Program expenditures are supported by detailed review of cost drivers for each line and are based on STEG’s projections that were approved as part of the performance contract for 2024-2028. The choice of the Program expenditures is driven by the focus of the Program, development objectives, and the financing required for achievement Page 16 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) of DLIs. The Program expenditures will cover the following, with efficiency of the expenditures ensured through various factors as detailed below: a) Electricity supply from RE IPPs: Increasing the share of RE in the electricity mix would depend on STEG ability to make timely payments to solar PV and wind projects. Expenditure efficiency is achieved through the adoption of competitive procurement mechanisms, such as call for tenders, which promote transparency and drive down costs by encouraging market competition. Total cost of RE purchases is determined by the actual volume (based on the average annual capacity factors under average climate conditions) and contractual tariff of electricity delivered by solar PV and wind projects under the concession regime. b) Maintenance of electricity T&D network assets: Maintenance expenditures contribute directly to extending asset lifespan and increasing the overall efficiency of the electricity network. STEG’s procurement process for T&D (T&D) spare parts is governed by a structured and transparent system and it employs centralized inventory systems to track spare parts, minimizing overstocking or shortage. Tenders for spare parts are published to ensure transparency and equal opportunity for local and international suppliers. STEG complies with Tunisia’s public procurement laws, which require strict oversight and auditing of all transactions. Procurement expenditures are monitored against the approved budget and subjected to regular internal and external audits to ensure expenditure efficiency and prevent irregularities. c) Construction of new distribution network assets including mobile medium voltage substation, metering and billing infrastructure: Construction of new distribution network assets supports the growing demand for electricity and continuity of supply while ensuring cost-effectiveness and sustainability. STEG employs planning and prioritization methods, focusing investments on regions with the highest load growth, customer density, and service reliability needs. Expenditure efficiency is guaranteed through the STEG adherence to public procurement regulations and regular audits which ensures transparency and accountability in all new electricity distribution infrastructure. d) STEG personnel costs associated with Program implementation: (technical, accounting, financial): Sustainable and effective human resource strategy is essential for the utility's long-term performance. STEG staff have an important role to play and would also provide substantive professional input into several activities across all Results Areas of the Program. The e penditure framework ensures that STEG’s human resource costs remain manageable and contribute to the utility's overall financial sustainability, while also enabling the workforce to support Tunisia’s energy sector modernization. The expenditures are efficient. In fact, as SOE, salaries in STEG are determined by a transparent structured process that considers various factors including labor laws, collective agreements, internal pay scales, and Government oversight. Economic Analysis of the Program 43. Rationale for public financing. The public financing of the Program is justified given that activities supported cannot be solely undertaken with private financing considering STEG’s current financial standing. The Program would help STEG stabilize its financial standing while maintaining sound operating fundamentals and preparing to embark on a trajectory of financial recovery. 44. Value added by the World Bank support. The World Bank has been providing substantial advisory and analytical support to inform the Government thinking on key challenges facing the power sector and measures to address them, including support for the preparation of the 2024-2028 performance contract. The World Bank will be able to add substantial value given the depth of the World Bank’s analytical engagement in the sector and global knowledge and expertise in similar projects. 45. Economic analysis of the impact of the Program. The economic analysis shows that the Program is economically viable even without consideration of environmental externalities. Using a social discount rate of 6 percent, the baseline net present value of the Program is estimated at US$328 million and economic rate of return (ERR) of 13.2 percent. Furthermore, when considering the impact of the Program on reduction of CO2 emissions estimated at 7.0 MtCO2e, the Page 17 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) net benefits increase to between US$601 and US$875 million (ERR of 20.3-28.4 percent), depending on the assumptions around the social cost of carbon. Details of the economic analysis are given in the Program’s Technical Assessment Report. Financial Analysis of the Program 46. The impact of the Program on STEG’s financial performance is estimated as the difference in STEG’s net result under the “without the Program” and “with the Program” scenario over the period of the Program (that is 2025 to 2028). Under the “with the Program” scenario, STEG’s net result improves significantly compared to the “without the Program" scenario. Specifically, STEG’s net result improves by TND 412 million in 2025, TND 634 million in 2026, TND 798 million in 2027 and TND 1,107 million in 2028, as shown in Table 5. Summing up, these yearly improvements highlight the significant aggregate financial benefit as a result of the Program over the whole period, amounting to TND 2,951 million (undiscounted). Most of these financial benefits will accrue to the state budget due to the reduction estimated at TND 2,045 million over 2025-2028 in the amount of subsidy need to be paid to STEG to cover part of the tariff revenue shortfall. The remainder of the financial benefit (that is, TND 0 million) will benefit STEG’s net result directly. Table 5: Impact of the Program on STEG’s net result before subsidy and corporate tax and need for subsidy Actual Forecast Forecast Forecast Forecast Forecast Forecast Total (2025- Unit 2023 2024 2025 2026 2027 2028 2028) US$/MM Forecast gas price BTu 11.6 11.1 10.3 8.6 8.2 7.8 Net result without the TND million (4,497) (4,760) (5,103) (3,720) (3,585) (3,395) (15,803) Program Net result with the TND million (4,497) (4,760) (4,691) (3,086) (2,787) (2,288) (12,852) Program Difference net result TND million n/a n/a 412 634 798 1,107 2,951 (impact of the Program) Relative improvement in percent 17 22 33 of net n/a n/a 8 percent 19 percent net result result percent percent percent Impact of the Program TND million n/a n/a (278) (399) (530) (838) (2,045) on subsidy need Source: World Bank estimates based on analysis of STEG’s actual financial statements, results to be achieved under the Program and ot her input data from STEG as per STEG’s financial modelling tool. Note: The “Total (2025-2028)” figures are a simple sum of the yearly figures between 2025 and 2028 and have not been discounted. No tariff increase has been considered in the analysis. Further detail is provided in the Program’s Technical Assessment Report. 47. In addition to the Program contributing toward increasing STEG’s ability to cover its future cost and reduce the reliance on subsidies, the clearance of a share of past arrears and improved collection rates will allow STEG to repay in turn a share of its overdue financial obligations toward suppliers. That is, total liabilities toward STEG’s suppliers and short and long-term debt would amount to TND 18.8 billion at the end of 2028, a reduction of TND 4.2 billion compared to the “without the Program” scenario, importantly contributing towards STEG’s long-term debt sustainability. Furthermore, tariff cost recovery improves from 60 percent today to 80 percent at the end of 2028 (that is, by 20 percentage points, driven by both fuel cost reduction, higher share of RE in the power generation mix, and measures supported under the Program). 48. Furthermore, many of the improvements achieved under the proposed TEREG PforR, such as technical and commercial loss reduction through the investments and other activities supported by the Program, are expected to be sustained beyond the Program’s closing date and hence continue to positively contribute toward improving operational and financial viability of STEG and better affordability of electricity for both households and businesses in Tunisia. Furthermore, the RE expansion supported by the TEREG PforR will contribute toward meeting Tunisia’s RE targets for Page 18 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) 2030 and 2035, further reducing the cost of electricity supply, improving affordability and decreasing subsidy requirements, thus enhancing cost recovery. By addressing structural inefficiencies and advancing cost-reflective tariffs, the Program lays the foundation for STEG to operate on a more financially sustainable path, further reducing fiscal pressures not only today but also in the future. The detail of the financial analysis is provided in the Program’s Technical Assessment Report. Corporate Requirements 49. Gender. Overall, the female unemployment rate in Tunisia is notably higher than that of men, at 20.1 percent for unemployed females compared to 12.9 percent for males. It is important to highlight that female employment in Tunisia's energy sector is relatively high at 28 percent compared to other energy utilities in the region, where women often represent less than 10 percent of the workforce. However, there is still significant room for improvement, particularly in increasing the representation of women in technical positions where there is demand for work in the field as technicians. In STEG, the share of women who get recruited as technicians in STEG during hiring batches averages only 3 percent. Recruitment of women in such positions is challenging due to gender biases at work and in field communities, late hours or travel that come with field assignments. Building on lessons learned from the ELMED Project, the proposed project will focus on increasing the share of female candidates recruited into technical positions through the following activities i) continue to provide unconscious bias training for hiring managers and panelists, to ensure that personal biases do not prevent female talent from joining field positions at STEG; ii) provide support for newly hired female line workers, technicians, training for field supervisors and staff, to ensure successful integration into the company roles that have been historically occupied by men; iii) improve the onboarding process to support technical women to remain in their posts and minimize the loss of female talent from those roles; and HR reform to consider flexible work, create a conducive and supportive work environment for qualified women to succeed in technical positions and advance to high- paying jobs. Furthermore, trainings and activities to support women in the workplace among technical female staff will be monitored for compliance under the Program Action Plan. 50. Citizen engagement. STEG has been actively engaging with citizens to improve transparency, accountability, and service delivery. Citizen engagement at STEG involves two-way interactions between the company and the public, ensuring that citizens have a stake in decision-making processes. This engagement includes public consultations, feedback mechanisms, and participatory monitoring and evaluation. By incorporating citizen feedback into its operations, STEG strives to enhance the quality of its services and foster a more inclusive and responsive energy sector. The investments under the TEREG PforR will follow STEG’s national framework that emphasizes the importance of holding public consultations with the aim of improving communication mechanisms with citizens and civil society, as well as enhancing transparency and participation in decision-making. The Program seeks to enhance stakeholder and citizen engagement through the intermediate results monitored under the proposed TEREG PforR, STEG will conduct at least 2 customer satisfaction surveys during the project duration, with their feedback findings guiding the formulation of time- bound action plans to address the feedback obtained. Furthermore, the Program aims to enhance transparency on policy reforms under reforms supported under DLI6 and DLI7. This would contribute to citizen-oriented design through the Project implementation. 51. Paris alignment. The operation is aligned with the goals of the Paris Agreement on mitigation and adaptation. It is also consistent with Tunisia’s NDC9,10 objective of reaching carbon neutrality by 2050 and the recommendations outlined 9 World Bank. 2019. Tunisia - Vulnerability Context, NDC Summary, GHG Inventory, Policy Context, and Recent. Washington, D.C. : World Bank Group. https://documentsinternal.worldbank.org/search/31168926 10 Tunisia is committed to climate change mitigation. Over the past 30 years, Tunisia has experienced an average temperature increase of 0.4°C per decade, with a total rise of 1.4°C during the 20th century. In addition to severe storms, Tunisia is particularly vulnerable to the impacts of sea-level rise, with approximately 61percent of the country’s exposed assets located within 10 kilometers of the coast. Rising sea levels exacerbate coastal erosion, increase fl ooding risks, and pose significant threats to critical infrastructure. Page 19 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) in the country´s CCDR11. It encompasses a range of activities designed to enhance the performance, efficiency, and sustainability of the power sector. Key initiatives focus on least-cost system planning to optimize investments in power generation and transmission infrastructure, improving reliability, and reducing dependency on gas-fired plants. Efforts to reduce T&D losses include grid upgrades, the deployment of smart meters, and anti-theft measures. Additionally, the operation aims to improve the efficiency of gas-fired power plants through dispatch optimization studies and RE integration targets, including 1GW of variable renewable energy (vRE) capacity awarded. The Program also addresses the CCDR’s call for incorporating climate change risks into infrastructure planning, ensuring the electricity grid can withstand climate-related disruptions.12 For adaptation measures at the DLI level, refer to the DLI description table. 52. On the mitigation side, the activities financed by this operation fall under the universally aligned list of activities: (a) purchase of RE; (b) rehabilitation of electricity T&D network to enable for integration of more RE; and (c) sector governance and other improvements, that will reduce STEG’s costs, mitigate risks for private RE investors, and contribute to lowering costs. The increased RE use for power generation will reduce the reliance on costly thermal generation. On the adaptation side, the project integrates specific measures to enhance resilience and address climate-related challenges, as identified in the climate and disaster risk screening. These measures aim to reduce risks to an acceptable level and include the integration of climate resilience into electricity sector planning. The rehabilitation of T&D assets will incorporate adaptation strategies, such as adopting higher design standards for lines and pylons to withstand stronger winds and higher temperatures, elevating substations or adding drainage to reduce flood risk, and implementing surge protection to guard against storms. Combined, these measures reduce material risks from climate hazards to an acceptable level, ensuring these risks will not have a material impact on the operation and its development objective. 53. Job creation. The Government program aims to significantly increase the share of RE in the energy mix from 516 MW to 3,300 MW of solar and wind capacity by 2028, with a primary focus on driving private sector participation. By offering targeted incentives and creating a favorable investment environment, the program will encourage private companies to take the lead in advancing the transition to cleaner, more sustainable energy sources. This shift will not only expand RE capacity but also stimulate job creation across multiple sectors. It is projected that that development of the additional 2,800 MW will generate approximately 29,500 jobs—including direct, indirect, and induced positions— during the construction phase, while the operational phase will create approximately an additional 1,100 jobs13 This job creation impact will be central to fostering economic growth, supporting local communities, and advancing the broader goal of building a green economy in Tunisia.14,15 54. The proposed TEREG PforR is aligned with the World Bank Maximizing Finance for Development (MFD) approach, and private investment generated through the Program is counted toward PCE. The following DLIs are verified MFD-e: DLI 2 focuses on expanding the share of RE in Tunisia's power generation mix by increasing electricity purchases from RE IPPs and signing new PPAs with RE developers, thereby encouraging private investments to meet growing demand. DLI 6 complements these efforts by improving STEG’s financial modeling and reporting and ensuring the publication of operational and financial data, which is critical for private developers to make informed decisions and assess risks 11 https://openknowledge.worldbank.org/entities/publication/66d30db7-bc0f-46fd-89bd-d983914147cc 12 Tunisia’s electrical grid is increasingly exposed to climate change, with extreme weather events such as severe storms, sands torms, and snowstorms causing widespread power outages and infrastructure damage. In 2019 alone, storms led to over 5.6 million TND in damages and drove a sharp rise in energy not supplied (ENS) from 6.3 GWh in 2018 to 10 GWh. More recently, a nationwide blackout in 2023 underscored the grid’s vulnerability to extreme climatic conditions. In response, STEG has implemented a comprehensive resilience strategy, including revising design standards for pylons and cables, undergrounding high-risk transmission lines, and leveraging advanced simulation tools like PSCAD to enhance infrastructure durability. Additionally, the company has introduced weather-resistant materials, reinforced emergency response teams, and preemptively stockpiled critical spare components to accelerate recovery efforts. These proactive measure s aim to fortify Tunisia’s electrical grid, reduce service disruptions, and ensure a more stable and climate-resilient energy supply. 13 World Bank estimate based on “Does Solar Energy Create Inclusive Employment Opportunities?”, Prospera, September 2022 and “Renewable E nergy and Energy Efficiency in Tunisia – employment, qualification and economic effects”, GIZ, 2012. 14 World bank: Scaling Up Renewables in Europe and Central Asia: Barriers and Opportunities. 15 World bank: Job Creation and Skills Development During the Energy Transition: Tunisia. Page 20 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) effectively. The Program has been tagged as MFD-e, and DLR 2.2 is also verified as PCE. In agreement with MIME and STEG, it is expected to enable an additional 1000 MW of private RE capacity under DLR 2.2, a non-monetary indicator. The volume of private investment under this result indicator has been estimated at approximately US$1 billion.16 The Program has also been tagged as PCE. B. Fiduciary 55. An Integrated Fiduciary Systems Assessment (IFSA) found that the existing fiduciary systems of STEG meet the World Bank’s PforR financing requirements. This is contingent on implementing the agreed fiduciary mitigation measures and actions in the PAP. The internal controls of the implementing entity’s fiduciary systems provide reasonable assurance that financing proceeds will be used to support the achievement of Program objectives, with due attention to the principles of economy, efficiency, effectiveness, transparency, and accountability. The fiduciary system, including financial management and procurement systems and fraud and corruption followed by the STEG and assessed by the IFSA, is acceptable to the World Bank and meets the requirements for implementing a PforR. For the entity assessed, there is an institutional governance framework, effective fiduciary planning and budget systems, and acceptable internal control systems with relevant segregations of duties at each step of the budget execution. 56. The overall residual fiduciary risk is deemed Substantial and appropriate mitigation measures are included in the PAP. The main risk and challenges include: (1) underperformance of STEG's capital budget execution, estimated at 27% in 2021, 58% in 2022 and 39% in 2023, suggests close monitoring to avoid impacting the achievement of some DLIs and Result Areas and therefore the program's development objective; (2) STEG has governance systems in place including a Board of directors, audit and inspection Directorate and specialized committees; however, delays in implementing audit recommendations suggest that the performance of these governance entities needs to be strengthened; (3) lengthy and cumbersome procurement process, including heavy procurement control mechanism, contributing to slowing the implementation of public procurement activities; (4) the statutory auditors expressed a qualified opinion on the 2021, 2022 and 2023 financial statements with several internal control recommendations; (5) as of December 31, 2023, STEG faces a fragile financial situation with negative working capital of TND 1,809 million, negative equity of TND 1,592 million, and cumulative deficits of TND 3,680.6 million; (6) the capacity to repay debt has declined from 0.84 in 2020 to 0.69 in 2023. In order to ease the pressure on cash flow, STEG has opted for a strategy aimed at transforming short-term debt into medium and long-term debt; and (7) STEG guarantees the integrity of contracts by verifying entities that have been debarred and suspended through the National Public Procurement Observatory (ONMP). However, STEG does not currently have an adequate mechanism for handling complaints and verifying suspensions/debarments, which risks leading to the awarding of contracts to companies that have been debarred or suspended by the World Bank. 57. The PAP includes specific, time-bound actions aimed at mitigating fiduciary risks, ensuring adequate budget and procurement execution of the Program Expenditure Framework, effective accountability and transparency mechanisms, and achievement of expected results. The PforR instrument provides an opportunity to strengthen investment budget credibility and performance of budget execution and follow up on audit recommendations. Existing systems in STEG will require additional capacity and systems strengthening to ensure adequate and timely budget execution, accurate and timely preparation of annual financial statements and achievement of expected results. The procurement and financial management-related risks including fraud and corruption will be addressed through key actions in the PAP. Furthermore, DLI 4; DLI 5; DLI 6 and DLI 7 have been included in the Program to improve governance in the sector and STEG's commercial performance, financial sustainability and financial management systems. 58. The Program ex-ante and ex-post arrangements were found adequate to address the risk of fraud and corruption, although additional efforts are needed. The arrangements for handling fraud and corruption within STEG involve several key institutions, including the Court of Accounts, the High Authority for Integrity and the Fight Against Corruption, the 16 World Bank estimate based on $768 per kW for 700 MW of solar and $1,600 per kW for 300 MW of wind, based on results of recent tenders in Tunisia and the estimated CAPEX for solar PV, and Morocco’s 2023 wind costs as reported by IRENA (Renewable Power Generation Costs in 2023). Page 21 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) General Inspectorate of Finance, and the General Inspectorate of Public Services. The Governance Directorate within STEG is the primary entity responsible for addressing fraud and corruption cases. The Audit and Inspection Directorate and the Central Distribution Directorate deal with cases of denunciation (embezzlement and fraud related to energy, corruption). The PMU will collect and report allegations to the World Bank through semi-annual progress reports. The reporting format will include details such as the location, date, description of allegations, investigation progress, outcome, and processing. The program will support mechanisms to strengthen the processing of corruption denunciations. STEG will also monitor and comply with the World Bank’s debarred/suspended firms list. 59. Procurement exclusion. The Program is not expected to procure large contracts exceeding the Operations Procurement Review Committee (OPRC) thresholds (US$25 million for each of works, goods, non-consulting services, and consultant services) due to a "Substantial" risk rating. This conclusion is based on STEG's procurement data analysis. The Program boundaries inherently exclude large-value contracts. STEG will report any large contracts to the World Bank during project implementation. The World Bank team will monitor fiduciary systems and contract management reports to identify any large-value contracts during Program implementation. Additionally, the Program is not expected to procure major projects of a strategic nature or stalled projects as governed by Decree 497 of November 24, 2024. Therefore, the specific procedures described in this decree will not apply to contracts financed under the Program. C. Environmental and Social 60. An Environmental and Social Systems Assessment (ESSA) has been prepared by the World Bank for the proposed PforR. The ESSA has reviewed the capacity of existing national and local E&S management systems to implement the Program in a sustainable manner. The draft of the ESSA was disclosed during appraisal mission after the consultation workshop with key stakeholders held on February 28, 2025. 61. The activities supported by the Program are expected to have overall positive E&S effects and its adverse E&S impacts are anticipated to be moderate. In compliance with World Bank Policy and Directive for PforR Financing, the screening made on the expenditure framework as part of the ESSA excluded any (a) activity that raises potentially significant E&S risks and impacts that are multiple, varied, irreversible, and unprecedented and specifically any activity that may be related to a biological and ecological value identified site or, protected areas or natural habitats or archaeological and historical cultural heritage resources; (b) activity that would require significant displacement of persons, land acquisition, or restriction of access to economic, collective, or natural resources. Damage to private property during maintenance will be compensated as per national law and STEG procedures. Occupational health and safety risks for STEG workers and contractors will follow national regulations, and the Labor Code will address potential layoffs due to outsourcing or changes in maintenance techniques. 62. The Program’s activities are e pected to yield positive environmental, social, and economic impacts. Positive impacts include improved electricity reliability and affordability, enhanced quality of life, job creation, and access to clean energy. Nevertheless, equity between electricity consumers among households, enterprises and public institutions should be observed. Also, STEG envisages maintaining the special measures adopted by STEG for poor and vulnerable and/or adoption of other alternative measures. 63. STEG has gained significant expertise in E&S management through the implementation of World Bank-funded Investment Project Financing (IPF) projects, while also holding the legal and regulatory authority to allocate resources and implement necessary measures effectively. These projects enabled STEG to develop an adequate internal system for preventing occupational health and safety (OHS) risks, including the empowerment of STEG workers. This procedure should be further enhanced and extended to subcontractor workers, particularly for project maintenance activities. 64. Tunisian E&S management legislation is relatively robust and almost aligns with World Bank principles, though some gaps and discrepancies exist, in particular regarding Environmental Impact Assessments (EIAs) for electrical sector projects where the Tunisia’s regulatory body for environmental protection (ANPE) is minimally involved, but STEG has developed internal systems, including projects screening and impact assessment studies, land acquisition and complaint management procedures, to ensure broader E&S compliance. Page 22 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) 65. The ESSA has identified some areas of improvement in the E&S legal and institutional systems that apply to the Program. As part of the assessment, STEG will apply specific screening tools to evaluate the level of social and environmental impacts for each activity, and specific instruments including adequate mitigation measures will be identified to comply with applicable procedures. Thus, with a view to filling the gaps identified in the ESSA, the Program will support specific measures to strengthen the performance of STEG E&S management system. 66. The ESSA recommends an E&S engagement Action Plan integrated into the PAP which will focus on measures related to (a) enhancing the Program's technical aspects, rules and procedures, and (b) strengthening stakeholder capacities. These measures aim to address the gaps identified in the ESSA and ensure effective environmental and social management throughout the Program's implementation: (a) Measures, focused on enhancing the Program's technical aspects, rules and procedures, include three key actions to be incorporated in the POM: (i) preparing an Environmental and Social Management Guide (ESMG); (ii) developing and implementing a gender action plan; and (iii) developing and promoting the use of an Investor Sustainability Charter. (b) Measures focused on enhancing STEG EIA system, by incorporating social aspects, consultation mechanism, OHS procedures and habilitation. (c) Measures focused on capacity building for STEG personnel, and STEG key partners. 67. Grievance Redress Mechanism (GRM): Communities and individuals who believe that they are adversely affected because of a World Bank supported PforR operation, as defined by the applicable policy and procedures, may submit complaints to the Program-level Grievance Redress Mechanism that is put in place by STEG. Setting up an effective GRM is crucial to handling communities and individuals concerns and for responsiveness to their expectations. For this purpose, grievances will be received, recorded and resolved and complainers will need to be promptly responded to. Follow-up on the implementation of the proposed solutions should be ensured. Unsatisfied complainers will have, in addition to the GRM, the possibility to submit their complaints to the World Bank’s Grievance Redress Services (GRS). Project affected communities and individuals may also submit their complaints to the World Bank’s independent Accountability Mechanism (AM). The AM houses the Inspection Panel, which determines whether harm occurred, or could occur, because of World 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 at any time after concerns have been brought directly to the Bank's attention, and the concerned STEG department has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s Grievance Redress Service (GRS), visit https://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank’s Accountability Mechanism, visit https://accountability.worldbank.org. D. IPF appraisal, if applicable Not Applicable. E. Program Action Plan 68. The PAP aims to enhance the technical, operational, and financial performance of the power generation and distribution sector, focusing on RE integration, loss reduction, management efficiency, corporate governance, E&S management, and financial management. This plan ensures compliance with international standards, transparency, and sustainable development. The detailed action plan is provided in annex 3. 69. Technical. The proposed actions to improve technical performance include implementing a proactive strategy for the replacement and upgrading of T&D equipment. Additionally, a management system for T&D assets will be operationalized to monitor the condition and performance of equipment. STEG will also implement a comprehensive approach to improve the management of customer connection requests and reduce connection times, while enhancing the transparency of renewable energy connection procedures. Finally, organizing training to support female staff and ensure the retention of technical managers will complement these efforts to strengthen human and technical capacities within the company. Page 23 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) 70. Corporate governance. The proposed corporate governance action includes enhancing the capacity of STEG’s Board and the Interministerial Committee (IC) members involves ensuring all members complete corporate governance training. 71. E&S Management. A comprehensive ESMG will outline procedures for E&S management throughout the program lifecycle, including strategies for risk assessment, communication, and grievance mechanisms. A Gender Action Plan will promote gender equality in career development and decision-making. Stakeholder capacity building for STEG personal and key partners through tailored training modules, with comprehensive sessions and targeted follow-ups throughout the TEREG PforR. 72. Fiduciary management. The fiduciary management plan addresses fraud and corruption by developing tools and procedures for reporting and strengthening relevant STEG departments. Implementing bi-annual reporting on public procurement and financial management ensures periodic monitoring. Following up on external audit recommendations involves establishing a monitoring team. Developing tools for budget execution monitoring and implementing capacity- building actions will enhance fiduciary capacities. Ensuring that debarred entities are not awarded contracts and developing standard procedures for handling procurement complaints are also critical components. Development and implementation of (1) a simplified process for reviewing procurement documents for oversight entities using detailed checklists; (2) simplified technical evaluation criteria and required administrative documents for the submission of standard product offers. @#&OPS~Doctype~OPS^dynamics@padpfrannexprogramactionplan#doctemplate KEY RISKS 73. The residual risks to achieving the PDO and the associated results are rated as Substantial due to substantial risks related to Political and governance, Sector strategies and Policies, Institutional capacity and Fiduciary as well as high risks related to macroeconomic environment. 74. Political and governance risk is Substantial. Given the importance of the energy sector to the economy and the country’s macro-fiscal framework, it is expected that the operation and its scope will remain relevant, even in the event of changes in sector governance. This is due to the longstanding commitment to energy sector reforms, modernization efforts and the need to decarbonize the sector. Delays in the design and adoption of improvements to the sector governance, including corporate governance at STEG, cannot be ruled out. However, these risks can be mitigated through ongoing policy dialogue and the DLIs under the Program (with multiple associated DLRs), by ensuring incentives are in place for their implementation and avoiding any setbacks to previously achieved results. 75. Sector strategies and Policies risk is Substantial. RE development and the improvement of the electricity sector have been key priorities in Government strategies over the past decade. These objectives align with the core objectives of the proposed TEREG PforR. However, risks exist in implementing the RE plan, which aims to significantly increase RE capacity from 516 MW at the end of 2023 to 3,300 MW by 2028, therefore impacting production costs and STEG's financial viability. The World Bank, in collaboration with other international financial institutions, provides technical support to mitigate these risks and works with the Tunisian Government to address institutional framework challenges. Nevertheless, the implementation of these measures and the Program's success depends on the Government's commitment and the country's overall economic situation, which could increase investment risk, deter investors, and hinder the mobilization of necessary investments. Therefore, the residual risk remains Substantial. Page 24 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) 76. Macroeconomic risk is High. Tunisia’s macroeconomic environment is characterized by relatively high fiscal and trade deficits, as well as external debt pressures, which create significant challenges to the financial sustainability of the energy sector, particularly for the state-owned utility, STEG. The reliance on imported natural gas, partially indexed to Brent prices, exposes the country and STEG to cost risks from fluctuations in global energy prices and foreign exchange (FX) rates. These risks are amplified by the increasingly tight external financing environment, which has pushed the authorities to tap more into domestic sources to fulfill the external financing needs. These risks have the potential to increase STEG’s financial burden, particularly in the absence of tariff adjustments, which may affect its ability to fund the Program in a timely manner. Additionally, any delays in Government subsidy payments could further strain STEG’s liquidity position. To mitigate these risks, the Program prioritizes measures to increase the share of competitively priced RE, thereby reducing reliance on natural gas imports and exposure to volatile international markets, thus contributing towards long-term energy sector stability in Tunisia. 77. Institutional capacity for implementation and sustainability is Substantial. STEG has historically faced challenges related to financial management, operational efficiency, and human resource capabilities. The Program includes measures to enhance STEG's institutional capacity, such as the implementation of an Enterprise Resource Planning (ERP) system and the development of a competency framework and strengthening of long-term investment planning. Additional support is provided by other development partners. 78. Fiduciary Risk is Substantial. The key risks and challenges include the following: (a) inadequate complaint handling mechanism (being developed); (b) inadequate suspension and debarment check mechanism, which might result in awarding a contract to firms and individuals debarred or suspended by the World Bank. So far, STEG ensures the integrity of its contract awards by verifying the list of excluded and suspended entities through the National Observatory of Public Procurement (ONMP); (c) STEG's equity has been negative over the past years to reach TND 1,592 million at end 2023 (before considering net loss of 2023) and its working capital (Fonds de Roulement) was negative from 2020 to 2023, estimated at TND -1,809 million at end 2023, which indicate potential liquidity problems; (d) debt levels are considered high, which could lead to limited access to financing and pressure on STEG profit as illustrated by deficits over the last years estimated at TND -3,680.6 million at end 2023; (e) lack of familiarity of STEG with the World Bank PforR financing instrument; which may impacts the team ability to monitor and report effectively on the execution of the Program Expenditure Framework through the reconciliation of DLI paid as well as on the status of PAP progress; (f) frequent delays in preparing financial statements prevent the Board of Directors from timely approval, leading to non-compliance with accounting and financial regulations (art 14 of law 89 - 9 of 01/02/1989); and (g) lengthy and cumbersome procurement process, including heavy control mechanism, contributing to substantial delays and slowing down the implementation of public procurement activities. Page 25 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) ANNEX 1. RESULTS FRAMEWORK @#&OPS~Doctype~OPS^dynamics@padpfrannexpolicyandresult#doctemplate Program Development Objective(s) The Program Development Objectives (PDO) are to scale-up renewable energy, improve electricity supply reliability, and enhance STEG financial and operational performance and sector governance. PDO Indicators by Outcomes Baseline Closing Period Results Area 1: Increase RE power generation capacity and improve electricity supply reliability Renewable energy capacity enabled with direct support (Megawatt) CRI DLI Dec/2024 Dec/2028 34 1,534 ➢DLR 2. : Electricity supply from new solar and/or wind IPPs plants under operation is increased by 00 . (Megawatt) DLI Dec/2024 Dec/2028 34 534 ➢DLR 2.2: Signing of power purchase agreements (PPAs) for an additional cumulative 1,000 MW of solar and/or wind IPPs. (Megawatt) DLI Dec/2024 Dec/2028 534 1,534 DLI1: Improved reliability of electricity supply (Minutes) DLI Dec/2023 Dec/2028 137 128 ➢DLR1: The average duration of electricity service interruptions per customer reduced by a total of 9 minutes. (SAIDI) (Minutes) DLI Dec/2023 Dec/2028 137 128 Results Area 2: Enhance STEG’s Financial and Operational Performance DLI3: Reduction in the total electricity losses (technical and commercial) (Percentage) DLI Dec/2023 Dec/2028 18.40 15 ➢DLR 3: Overall electricity losses (technical and commercial) have been reduced to 15 percent. (Percentage) DLI Page 26 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) Dec/2023 Dec/2028 18.40 15 Results Area 3: Improve Electricity Sector Governance and Transparency DLI 7: Strengthened electricity sector governance with the electricity sector regulator established and operational (Text) Dec/2024 Dec/2028 The Ministry of energy assure the whole electricity sector regulation The Electricity Sector Regulator has been established with (i) the enactment of the law, (ii) the clarification of its legal foundation and operational mandate through a specific decree, and (iii) the regulator becoming operational with the adoption of its business plan and the signing of the minutes from the first regulatory board meeting and (iv) the methodology for calculating network access tariff is approved by MIME.    Intermediate Indicators by Results Areas Baseline Closing Period Results Area 2: Enhance STEG's Financial and Operational Performance DLI 4: Improvement in receivables rate for electricity and gas invoices (Text) DLI Dec/2024 Dec/2028 ➢DLR 4.1: Improvement in outstanding receivables rate from private customers to 24 percent (outstanding receivables as a share of total invoices issued for the year). (Percentage) DLI Dec/2023 Dec/2028 31 24 ➢DLR 4.2: Reduction in outstanding arrears accumulated as of end FY2023 for public administration electricity and gas consumption owed to STEG by TND 550 million. (Number) DLI Dec/2023 Dec/2028 550 0 DLI 5: STEG’s accounts receivable related to the subsidy payment is reduced (TND million) (Number) DLI Dec/2023 Dec/2028 The subsidy arrears as of end FY2023 are 3816 MTND a) The annual budgeted subsidy amount is paid to STEG no later than Jan 31, after the end of each FY; and b) The subsidy arrears as of end FY2023 are reduced by 900 MTND ➢DLR 5: a) The annual budgeted subsidy amount is paid to STEG no later than January 31, after the end of the corresponding FY2023; and b)The subsidy arrears as of end FY23 are reduced by cumulative 900 (Text) DLI Dec/2023 Dec/2028 The subsidy arrears as of end FY2023 are 3816 MTND. a) The annual budgeted subsidy amount is paid to STEG no later than Jan 31, after the end of each FY; and b) The subsidy arrears as of end FY2023 are reduced by 900 MTND. Results Area 3: Improve Electricity Sector Governance and Transparency Page 27 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) DLI 6: STEG’s corporate governance, financial management and transparency improved (Text) DLI Dec/2024 Dec/2028 STEG and the government committed to actions improving the corporate governance, STEG’s corporate governance, financial management, and transparency are improved with financial management and transparency of STEG in the performance contract (i) the development of a multi-year financial model by STEG to allow multi-year planning, approved by its Board, (ii) the appointment of two independent members to the STEG Board of Directors, (iii) the disclosure of its financial statements in accordance with IFRS 8 disaggregated by activity (gas, electricity) and the approval of its income statements by function (generation, transmission, distribution), and (iv) the approval of its audited financial statements, prepared in accordance with IFRS accounting standards. DLI 8: STEG system planning improved (Text) DLI Dec/2024 Dec/2028 STEG investment plan is not based on full least cost system generation and STEG's system planning is strengthened with (i) a 10-year least-cost generation and transmission planning transmission investment plan, aligned with the government's energy transition goals and MIME approval, and (ii) the alignment of its new power generation investments with the latest least-cost plan. STEG conducts at least 2 customer satisfaction surveys during the project duration (Number) Dec/2024 Dec/2028 N/A STEG conducts at least two customer satisfaction surveys during the project duration, with their findings guiding the formulation of time-bound action plans to address the feedback obtained." Share of female candidates recruited as technical agents at STEG (Percentage) Dec/2024 Dec/2028 3 6 Results Area 1: Increase RE power generation capacity and improve the electricity supply reliability Projected net GHG emission reduction achieved with additional RE capacity (tCO2eq/year) Dec/2024 Dec/2028 N/A 900,000 Disbursement Linked Indicators (DLI) Period Period Definition Prior Results From PCN to the signature of the legal agreements Period 1 Dec-2025 Period 2 Dec-2026 Page 28 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) Period 3 Dec-2027 Period 4 Dec-2028 Baseline Prior Results Period 1 Period 2 Period 3 Period 4 1:DLI1: Improved reliability of electricity supply (Minutes ) 137 135 133 130 128 0.00 0.00 11,400,000.00 11,400,000.00 17,100,000.00 11,400,000.00 DLI allocation 51,300,000.00 As a % of Total DLI Allocation 6.49% ➢ 1.1:DLR1: The average duration of electricity service interruptions per customer reduced by a total of 9 minutes. (SAIDI) (Minutes ) 137 135 133 130 128 0.00 0.00 11,400,000.00 11,400,000.00 17,100,000.00 11,400,000.00 DLI allocation 51,300,000.00 As a % of Total DLI Allocation 6.49% 2:Renewable energy capacity enabled with direct support (Megawatt ) 0 0.00 40,000,000.00 12,500,000.00 20,500,000.00 28,500,000.00 28,500,000.00 DLI allocation 130,000,000.00 As a % of Total DLI Allocation 16.44% ➢ 2. :DLR 2. : Electricity supply from new solar and/or wind IPPs plants under operation is increased by 00 . (Megawatt ) 34 159 284 409 534 0.00 0.00 12,500,000.00 12,500,000.00 12,500,000.00 12,500,000.00 DLI allocation 50,000,000.00 As a % of Total DLI Allocation 6.32% ➢ 2.2:DLR 2.2: Signing of power purchase agreements (PPAs) for an additional cumulative 1,000 MW of solar and/or wind IPPs. (Megawatt ) 534 1,034 1,034 1,134 1,334 1,534 0.00 40,000,000.00 0.00 8,000,000.00 16,000,000.00 16,000,000.00 DLI allocation 80,000,000.00 As a % of Total DLI Allocation 10.12% 3:DLI3: Reduction in the total electricity losses (technical and commercial) (Percentage ) 18.40 17 16 15.50 15 0.00 0.00 24,360,000.00 17,400,000.00 8,700,000.00 8,700,000.00 DLI allocation 59,160,000.00 As a % of Total DLI Allocation 7.48% ➢ 3.1:DLR 3: Overall electricity losses (technical and commercial) have been reduced to 15 percent. (Percentage ) 18.40 17 16 15.50 15 0.00 0.00 24,360,000.00 17,400,000.00 8,700,000.00 8,700,000.00 Page 29 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) DLI allocation 59,160,000.00 As a % of Total DLI Allocation 7.48% 4:DLI 4: Improvement in receivables rate for electricity and gas invoices (Text ) 0.00 0.00 38,000,000.00 13,550,000.00 14,900,000.00 14,900,000.00 DLI allocation 81,350,000.00 As a % of Total DLI Allocation 10.29% ➢ 4.1:DLR 4.1: Improvement in outstanding receivables rate from private customers to 24 percent (outstanding receivables as a share of total invoices issued for the year). (Percentage ) 31 27 26 25 24 0.00 0.00 38,000,000.00 9,500,000.00 9,500,000.00 9,500,000.00 DLI allocation 66,500,000.00 As a % of Total DLI Allocation 8.41% ➢ 4.2:DLR 4.2: Reduction in outstanding arrears accumulated as of end FY2023 for public administration electricity and gas consumption owed to STEG by TND 550 million. (Number ) 550 550 400 200 0 0.00 0.00 0.00 4,050,000.00 5,400,000.00 5,400,000.00 DLI allocation 14,850,000.00 As a % of Total DLI Allocation 1.88% 5:DLI 5: STEG’s accounts receivable related to the subsidy payment is reduced (TND million) (Number ) The subsidy arrears as of The annual budgeted (a) The annual budgeted (a)The annual budgeted (a)The annual budgeted end FY2023 are 3816 subsidy amount is paid to subsidy amount is paid to subsidy amount is paid to subsidy amount is paid to MTND STEG no later than January STEG no later than January STEG no later than January STEG no later than January 31, 31, after the end of the 31, after the end of the 31, after the end of the after the end of the corresponding FY corresponding FY, and (b) corresponding FY, and (b) corresponding FY, and (b) at at minimum 200 MTND for at minimum 300 MTND for minimum 400 MTND for subsidy arrears are paid subsidy arrears are paid subsidy arrears are paid 0.00 0.00 10,000,000.00 10,000,000.00 10,000,000.00 10,000,000.00 DLI allocation 40,000,000.00 As a % of Total DLI Allocation 5.06% ➢ 5.1:DLR 5: a) The annual budgeted subsidy amount is paid to STEG no later than January 31, after the end of the corresponding FY2023; and b)The subsidy arrears as of end FY23 are reduced by cumulative 900 (Text ) The subsidy arrears as of The annual budgeted (a) The annual budgeted (a) The annual budgeted (a) The annual budgeted end FY2023 are 3816 subsidy amount is paid to subsidy amount is paid to subsidy amount is paid to subsidy amount is paid to MTND. STEG no later than January STEG no later than January STEG no later than January STEG no later than January 31, 31, after the end of the 31, after the end of the 31, after the end of the after the end of the corresponding FY corresponding FY, and (b) corresponding FY, and (b) corresponding FY, and (b) at at minimum 200 MTND for at minimum 300 MTND for minimum 400 MTND for subsidy arrears are paid subsidy arrears are paid subsidy arrears are paid Page 30 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) 0.00 0.00 10,000,000.00 10,000,000.00 10,000,000.00 10,000,000.00 DLI allocation 40,000,000.00 As a % of Total DLI Allocation 5.06% 6:DLI 6: STEG’s corporate governance, financial management and transparency improved (Text ) STEG and the government DLR 6.1: A multi-year DLR 6.2: Two independent DLR 6.3: STEG publishes its committed to actions financial model is members are appointed to financial statements in improving the corporate approved by STEG to allow STEG board of directors. accordance with IFRS 8 governance, financial multi-year planning, disaggregated by activity (gas, management and informed decision making electricity) and approves transparency of STEG in and monitoring STEG’s income statements by the performance contract financial performance. function (generation, transmission, distribution), in a given year. DLR 6.4: STEG approves audited financial statements, prepared in accordance with IFRS accounting standards. 0.00 0.00 0.00 10,000,000.00 10,000,000.00 20,000,000.00 DLI allocation 40,000,000.00 As a % of Total DLI Allocation 5.06% 7:DLI 7: Strengthened electricity sector governance with the electricity sector regulator established and operational (Text ) the Ministry of energy DLR 7.1: Electricity sector DLR 7.2: The legal DLR 7.3: The electricity DLR 7.4: The methodology for assure the whole regulator law is in full foundation and sector regulator becomes calculating network access electricity sector force and effect. operational mandate of operational, the related tariff is approved by MIME.    regulation the electricity sector business plan is adopted, regulator is clarified and the minutes of the through a decree first meeting of its board published. are signed. 0.00 0.00 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 DLI allocation 8,000,000.00 As a % of Total DLI Allocation 1.01% 8:DLI 8: STEG system planning improved (Text ) STEG investment plan is DLR 8.1: STEG adopts a DLR 8.2: New grid-connected not based on full least cost least-cost 10-year power generation is consistent with system generation and generation and STEG least-cost 10-year transmission planning transmission investment investment plan approved by plan consistent with the MIME. Tunisian Government’s Page 31 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) energy transition objectives and is approved by MIME. 0.00 0.00 0.00 15,000,000.00 0.00 4,190,000.00 DLI allocation 19,190,000.00 As a % of Total DLI Allocation 2.43% Page 32 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) Monitoring & Evaluation Plan: PDO Indicators by PDO Outcomes Results 1: Increase RE power generation capacity and improve electricity supply reliability DLI1: Improved reliability of electricity supply (Number of electricity service interruptions per customer (SAIDI) (Minutes) DLI DLR1: The avearge duration of electricity service interruptions per customer reduced by a total of 9 minutesDLI This indicator would be measured by System Average Interruption Duration Index (SAIDI). Description Calculate SAIDI reliability index based on the sum of all customer interruption minutes within the year divided by the number of customers served (DLI1) Frequency Annual Data source STEG STEG reports SAIDI of the overall distribution grid (ideally SAIDI of each Distribution region shall be reported as well). The SAIDI index is calculated by dividing the sum of all customer interruption minutes within the year by the number of customers served during the year using the formula: SAIDI=∑(Ni Ti)Ntot where: Ni: Number of customers affected by the i-the interruption Ti= Interruption duration Ntot= total number of customers Methodology for Data Methodology for calculation should be based on international standard (IEEE 1366): - Interruption is defined as any unplanned electricity outage (where customers were not notified prior to the outage) Collection that lasts more than 5 minutes. Planned events (i.e upgrades, maintenance) shall be discarded. -Interruptions because of the loss of the main transmission system shall be excluded from the calculation of the indicator. - Interruption caused by Major events days (e.g., widespread outages caused by severe storms). STEG shall however keep records of the interruptions caused by major events and loss of transmission grid to provide a broader image of customer experience Nb : There are 12 months between the last achievement of the DLI/DLRs and the project closing date to allow for data collection and verification of indicators. Responsibility for Data STEG with IVA support Collection DLI2: Renewable energy capacity enabled with direct support (MW) (Corporate Scorecard Indicator) (Megawatt) DLI DLR2.1: Electricity supply from new solar and/or wind IPPs plants under operation is increased by 500 (Megawatt) DLI Report on the total installed capacity of commissioned vRE IPP power plants and on the amount of purchased energy Description to ensure vRE power plants are effectively dispatched. Frequency Annual Data source STEG and MIME Methodology for Data STEG reports on the total installed capacity of commissioned RE IPP powerplants at the end of each year and the Collection amount of purchased energy to prove that these power plants are effectively dispatched. Responsibility for Data STEG and MIME Collection DLR 2.2: Signing of power purchase agreements (PPAs) for an additional cumulative 1,000MW of solar and/or wind IPPs (Megawatt) DLI Report on newly signed PPAs for RE IPPs. Description 500 MW out of the 1,000 MW will be treated as prior results and are reflected in the withdrawal table of the legal agreements under DLR 0. Frequency Annual Data source STEG Methodology for Data STEG with support from MIME reports on newly signed PPAs for RE IPP Collection Responsibility for Data STEG and MIME Collection Results area 2: Enhance STEG’s financial and operational performance DLI3: Reduction in the total electricity losses (technical and commercial) DLI Page 33 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) DLR 3: Overall electricity losses (technical and commercial) have been reduced to 15 percent. Collect information about electricity sales and total injected power at the end of the year and measure the overall Description system losses of the T&D grid (DLI3) Frequency Anual Data source STEG STEG collects at the end of the year information about total injected power to the grid and amount of electricity sales. Total injected power should consider net generation of STEG's own power plants +imported power through interconnection + IPP's generation-auto consumption. Methodology for Data The sales volume corresponds to the quantities of electricity sold plus the quantities recovered from fraud and Collection prorated amounts. Losses in percent are calculated using the formula: [(electricity injected into the grid – volume of electricity sales)/total electricity injected]x100 Responsibility for Data STEG with IVA support Collection Results area 3: Improve electricity sector governance and transparency DLI 7: Strengthened electricity sector governance with the electricity sector regulator established and operational. Description Electricity Sector Regulator is established and operational Frequency Annual Data source STEG and relevant laws and decrees published by relevant authorities Methodology for Data Law of the regulatory authority is published in the Tunisian official Gazette (Journal Officiel de la République Collection Tunisienne) Responsibility for Data STEG with laws and relevant decrees verified by an IVA Collection Monitoring & Evaluation Plan: Intermediate Results Indicators by Results Areas Results Area 1: Increase RE power generation capacity and improve electricity supply reliability Projected net GHG emission reduction achieved with additional RE capacity (tCO2eq/year) Defined as the difference between the total gross (absolute) GHG emissions projected to be generated by additional renewable energy capacity for which PPAs have been signed as supported under DLR 2.2 – aggregated over the expected economic lifetime of those projects – and the total gross GHG emissions under a counterfactual scenario (i.e. without the Description additional renewable energy capacity achieved under DLR 2.2 and where the grid relies on incremental thermal generation). The counterfactual is the weighted average emission intensity (g/kWh) of the current grid, estimated at 475 g/kWh. Decrease in the GHG emissions is linked to additional capacity achieved under DLIR 2.2 for which PPAs have been signed by STEG by project closing date. Frequency Verified for the year 2028 Data source STEG with IVA support STEG will compile and report on the additional capacity for which PPAs have been signed as supported under DLR 2.2. The Methodology for data IVA will assist STEG in calculating the projected net GHG emission reduction achieved with this additional RE capacity over collection the expected economic lifetime of those projects (25 years). Responsibility for Data STEG with IVA support Collection Results Area 2: Enhance STEG’s financial and operational performance DLR 4.1: Improvement in outstanding receivables rate from private customers to 24 percent (outstanding receivables as a share of total invoices issued for the year) DLI This indicator measures the efficiency of private sector receivables collection by calculating the percentage of receivables from private sector customers (i.e., amounts owed by private sector customers) at the end of the year Description relative to the total annual invoiced amount, i.e.: Private Sector Receivables as percent of Annual Invoiced Amount=(Total Private Sector Receivables/ Total Invoiced Amount)×100percent, where total invoiced amount includes both unpaid amounts from previous periods and new invoices for current period. It tracks the progress in reducing the Page 34 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) outstanding payments due from private sector consumers, relative to the total amount billed during the year. Frequency Annual Data source STEG’s financial and accounting information STEG will compile and report annual data on private sector receivables and total invoiced amounts, following Methodology for Data standardized accounting and financial reporting procedures. The independent verification authority (IVA) will validate Collection the reported data by reviewing STEG’s financial statements and accounting information to confirm total invoiced amounts for the year and outstanding private sector receivables at the end of the year. Responsibility for Data STEG with data verified by an IVA Collection DLR 4.2: Reduction in outstanding arrears accumulated as of end FY2023 for public administration electricity and gas consumption owed to STEG by 550 million TND DLI This indicator measures the reduction in the total value of accumulated arrears for electricity and gas consumption bills owed by public administration entities to STEG as of the end of 2023. The arrears are calculated as the cumulative unpaid amounts due from public administrations for their electricity and gas consumption as of the end of 2023 and which should be reduced by 150 million TND in 2026, 200 million TND in 2027 and 200 million TND in 2028.In case the Description amount is less than 550 million TND owed to STEG related to accumulated arrears as of end FY2023, the total repayment due to be paid to STEG on which basis the disbursement will be made and the achievement of the objective assessed, will be adjusted accordingly with full disbursement of the allocated DLR amount upon complete repayment of the accumulated arrears as of end FY2023. Frequency Annual Data source STEG’s financial and accounting information STEG will compile and report annual arrears data for public administration entities based on its billing and accounting Methodology for Data systems. This data will be verified by IVA that will review STEG’s financial statements to confirm the outstanding Collection amount of arrears at year-end and the amount paid throughout the year. Responsibility for Data STEG with information verified by an IVA Collection DLI 5: STEG’s accounts receivable related to the subsidy payment is reduced (TND million) DLI DLR 5: a) The annual budgeted subsidy amount is paid to STEG no later than January 31, after the end of the corresponding FY; and The subsidy arrears accumulated as of end FY2023 are reduced by cumulative 900 million TND at minimum, as follows: i) 0 TND in 2025; ii) 200 million TND in 2026; iii) 300 million TND in 2027; and iv) 400 million TND in 2028. DLI Definition: a) The annual budgeted subsidy amount is paid to STEG no later than January 31, after the end of the corresponding FY; and b) The 2023 subsidy arrears are reduced by cumulative 900 million TND at minimum, as follows: i) 0 TND in FY2025; ii) 200 million TND in FY2026; 300 million TND in FY2027; and iv) 400 million TND in FY2028. Explanation: The annual subsidy and the 2023 subsidy arrears are paid to STEG as per the above definition. The annual budgeted subsidy amount is the amount of subsidy to be paid to STEG to cover part of tariff revenue shortfall as per Description approved methodology for the subsidy calculation approved by the Ministry of Finance, which amount is included in the the initial Finance Law (Loi de Finance Initiale) and, if applicable, as revised by the amending Finance Law (Loi de Finance Rectificatif). If the budgeted subsidy amount is higher than the actual subsidy determined based on the approved methodology for subsidy calculation by the Ministry of Finance, then the indicator will be deemed met if the actual subsidy amount has been paid to STEG. Frequency Annual Data source STEG and the Ministry of Finance (Finance Laws) with IVA support STEG reports at the end of the year on the amount of subsidies received, as well as payments made by the Government Methodology for Data to pay a share of outstanding arrears. This information is also verified by IVA and checked against the relevant finance Collection laws. Responsibility for Data STEG’s financial statements and accounting information, and relevant Finance Laws, as verified by an IVA Collection Results Area 3: Improve Electricity Sector Governance and Transparency DLI 6: STEG’s corporate governance, financial management and transparency improved (Text) DLI Definition: Accountability and transparency of STEG are improved Description DLR 6.1: A multi-year financial model is approved by STEG to allow multi-year planning, informed decision making and Page 35 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) monitoring STEG’s financial performance. DLR 6.2: Two independent members are appointed to STEG Board of Directors. DLR 6.3: STEG publishes its financial statements in accordance with IFRS 8 desegregated by activity (gas, electricity) and approves income statements by function (generation/transmission/distribution), in a given FY. DLR 6.4: STEG approves audited financial statements, prepared in accordance with IFRS accounting standards. Explanation: Financial multi-year simulation tool is used by STEG and allows to issue financial statements per activity and functions and to achieve compliance with IFRS. Time to get electricity is defined as time between payment of connection fees and actual connection to the grid for LV consumers. Frequency Annual Data source STEG Methodology for Data STEG provides relevant documents and information Collection Responsibility for Data STEG with IVA support Collection Share of female candidates recruited as technical agents at STEG (Percentage) Share of female candidates recruited as technical agents at STEG is increased from a baseline of 3 percent (2024) to 6 Description percent by end 2028. Frequency Verified for the year 2028 Data source STEG with IVA support Methodology for Data STEG reports on the number of female candidates recruited for technical positions at STEG compared to the total Collection number of remales that applied for technical positions (during recruitment batches). Responsibility for Data STEG Collection STEG conducts at least two customer satisfaction surveys during the project duration, with their findings guiding the formulation of time- bound action plans to address the feedback obtained STEG conducts at least two customer satisfaction surveys during a project, using the results to develop time-bound action Description plans that address customer feedback. This ensures continuous service improvement based on customer needs.ime-bound action plans to address the feedback obtained Frequency Verified by end 2028 least twice during the project duration (once at mid-term and once at project closing). Data source STEG with IVA support by STEG on how the feedback received will be addressed covering service quality, responsiveness to customer input, satisfaction with complaint resolution, and engagement m Methodology for Data D STEG reports on the customer satisfaction surveys during the project duration collection echanisms. Analysis of survey Collection results to identify trends and key concerns. Responsibility for Data STEG Collection DLI8: STEG system planning improved (Text) DLI Definition: STEG adopts a least-cost generation and transmission plan that is in line with the Tunisian Government’s energy transition objectives and new grid-connected generation, storage and transmission investments are consistent with this plan. Description DLR 8.1: STEG adopts a least-cost 10-year power generation and transmission investment plan consistent with the Tunisian Government’s energy transition objectives and is approved by MIME. DLR 8.2: New grid-connected generation is consistent with STEG least-cost 10-year investment plan approved by MIME. Frequency DLR 8.1 verified for the year 2026 and DLR 8.2 verified for the year 2028 Data source STEG with IVA support DLR 8.1: STEG puts in place procedures for generation and transmission planning to make sure a 10-year master plan is elaborated in time and ensure inter-unit cooperation within STEG, consistent with the Government’s energy transition Methodology for Data objectives. The MIME reviews the master plan and approves it. Collection DLR 8.2: STEG reports on new transmission-connected generetion and storage projects and their commpliance with the latest adopted least-cost plan. Responsibility for Data STEG Page 36 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) Collection Page 37 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) Verification Protocol: Disbursement Linked Indicators DLR1: The average duration of electricity service interruptions per customer reduced by a total of 9 minutes. IBRD Loan of 5.7M$ per each minute reduced up to 51.3 M$. Disbursement will only occur if there is an improvement in SAIDI compared to the previous year. If SAIDI increases in any given year, no disbursement will occur until the total Formula cumulative reduction fully offsets the previous increase. Disbursement will then apply only to the net improvement beyond the previous increase. Definition: Electricity supply reliability is improved. Reliability of supply is evaluated using SAIDI index (System Average Interruption Duration Index) DLR 1: SAIDI is reduced from a baseline value of 137 in 2023 minutes to 128 minutes in 2028. Explanation: SAIDI index is calculated by dividing the sum of all customer interruption minutes within the year by the Description number of customers served during the year using the formula: SAIDI=∑(Ni Ti)/Ntot where: Ni:Number of customers affected by the i-th interruption, Ti= Interruption duration, Ntot= total number of customers. Interruptions are defined as unplanned electricity outages of more than 5 minutes and excluding events due to loss of the main transmission system and major events days. Calculation of SAIDI shall be in line with the IEEE 1366 standard. Data source/ Agency STEG Verification Entity IVA STEG calculates SAIDI index according to IEEE 1366 and reports the system average interruption duration index at the Procedure end of the year. Calculation shall consider only interruptions longer than 5 minutes excluding planned events, interruptions due to the loss of the transmission grid and major events days. DLR2.1: Electricity supply from new solar and/or wind IPPs plants under operation is increased by 500 Megawatt Formula IBRD Loan of 100,000$ per each MW of new IPP connected capacity to the grid up to 50M$ Definition: Amount of installed capacity (cumulative) from vRE sources (PV and wind power) that has been newly commissioned and is effectively injecting power to the grid between 2025 and 2028. Total 500 MW of installed capacity of PV and Wind under the concession regime are connected and became Description operational. Explanation: Installed capacity is the power of newly commissioned PV and Wind generating plants under the concession regime and which are effectively injecting power in the system. Data source/ Agency STEG Verification Entity MIME STEG reports on the total installed capacity of commissioned vRE power plants under the concession regime at the end Procedure of each year and the amount of purchased energy to prove that these power plants are effectively dispatched. DLR 2.2: Signing of power purchase agreements (PPAs) of additional cumulative 1,000MW of new solar and/or wind IPPs (Megawatt) IBRD Loan of 80,000$ per each new MW of IPP awarded up to 80 M$ out of which 30 M$ from the Climate Technology Formula Fund. DLR 2.2: Total 1000 MW (cumulative) of additional capacity of PV and Wind signed PPA with STEG. Definition: MW of additional RE (PV and wind power) that has been newly awarded and for which PPAs were signed Description with STEG. 500 MW out of the 1,000 MW will be treated as prior results and are reflected in the withdrawal table of the legal agreements under DLR 0. Data source/ Agency STEG/Ministry of Energy Verification Entity MIME Procedure STEG reports on newly awarded vRE power plants for which PPAs with STEG were signed. DLR3: Overall electricity losses (technical and commercial) have been reduced to 15 percent IBRD loan of 1.74 M$ per 0.1 percentage point reduced up to 59.16M$. Disbursement will only occur if there is a reduction in total electricity losses compared to the previous year. If total losses increase in any given year, no Formula disbursement will occur until the cumulative reduction fully offsets the previous increase. Disbursement will then apply only to the net reduction beyond the prior increase. Definition: Overall losses have been reduced by 3.4 percentage points, reaching 15 percent by end 2028, from a Description baseline value of 18.4 percent in 2023. Page 38 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) Explanation: Losses in percent are calculated using the formula: [(Energy injected into the grid – volume of electricity sales) / total electricity injected] × 100where total injected power is (net generation of STEG's own power plants +purchased power through interconnection + IPP's generation-auto consumption), electricity sold is the total amount of electricity sales. Data source/ Agency STEG Verification Entity IVA STEG collects information about electricity sales and total injected power at the end of the year and measure the Procedure overall system losses of the T&D grid using the formula T&D losses= [(Energy injected into the grid – volume of electricity sales) / total electricity injected] × 100 DLR 4.1: Improvement in outstanding receivables rate from private customers to 24 percent (outstanding receivables as a share of total invoices issued for the year) IBRD loan of 0.95 M$ for each 0.1 percentage point of reduced private receivables up to a maximum of 66.5M$. Disbursement will only occur if there is a reduction in private receivables compared to the previous year. If private Formula receivables increase in any given year, no disbursement will occur until the cumulative reduction fully offsets the previous increase. Disbursement will then apply only to the net reduction beyond the prior increase. Definition: Electricity and gas private payments are increased, and unpaid debts owed by private consumers are reduced. DLR 4.1: Improvement in the receivables rate from private consumers from a baseline value of 31 percent to 24 percent by 2028, where receivables rate is measured as a share of total invoices issued for the year). Description Explanation: Private receivables are calculated by dividing the amount of outstanding receivables from private consumers at the end of the year divided by the total issued invoices to private consumers in that year (noting that STEG’s issued invoices comprise of fresh invoices as well as any previously unpaid amounts that are still due). Data source/ Agency STEG Verification Entity IVA STEG reports at the end of the year on the total accounts receivable outstanding from private customers at the end of Procedure the year and the total invoices issued to private customers for the year, from which relevant accounts receivable rate is calculated. DLR 4.2: Reduction in outstanding arrears acumulated as of end FY2023 for public administration electricity and gas consumption owed to STEG by 550 million TND IBRD loan of $1.35 million for every TND 50 million of unpaid arrears of the public administration reduced, up to Formula US$14.85 million for DLR 4.2. Definition: Public administration receivables arrears as of 2023 are paid in time to STEG, in line with the agreed repayment plan, until full clearance of the actual balance as of end-2023. Explanation: The arrears are calculated as the cumulative unpaid amounts due from public administrations for their electricity and gas consumption as of the end of 2023 and which should be reduced by 150 million TND in 2026, 200 Description million TND in 2027 and 200 million TND in 2028. In case the amount is less than 550 million TND owed to STEG related to accumulated arrears as of end FY2023, the total repayment due to be paid to STEG on which basis the disbursement will be made and the achievement of the objective assessed, will be adjusted accordingly with full disbursement of the allocated DLR amount upon complete repayment of the accumulated arrears as of end FY2023. Data source/ Agency STEG Verification Entity IVA Procedure STEG reports at the end of the year on public administrative arrears owed to STEG for electricity and gas consumption DLR 5: a) The annual budgeted subsidy amount is paid to STEG no later than January 31, after the end of the corresponding FY; and b) The subsidy arrears accumulated as of end FY2023 are reduced by cumulative 900 million TND at minimum, as follows: i) 0 TND in FY2025; ii) 200 million TND in FY2026; 300 million TND in FY2027; and iv) 400 million TND in FY2028. Year 2025: 10 million USD upon confirmation of conditions (a) and at minimum the FY2025 target under (b)(i). Year 2026: 10 million USD upon confirmation of conditions (a) and at minimum the FY2026 target under (b)(ii). Formula Year 2027: 10 million USD upon confirmation of conditions (a) and at minimum the FY2027 target under (b)(iii). Year 2028: 10 million USD upon confirmation of conditions (a) and at minimum the FY2028 target under (b)(iv). The annual budgeted subsidy amount is the amount of subsidy to be paid to STEG to cover part of tariff revenue shortfall as per approved methodology for the subsidy calculation approved by the Ministry of Finance, which amount Description is included in the the initial Finance Law (Loi de Finance Initiale) and, if applicable, as revised by the amending Finance Law (Loi de Finance Rectificatif). If the budgeted subsidy amount is higher than the actual subsidy determined based on Page 39 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) the approved methodology for subsidy calculation by the Ministry of Finance, then the indicator will be deemed met if the actual subsidy amount has been paid to STEG. Data source/ Agency STEG’s financial statements and accounting information and Tunisia’s budget laws and their exectution Verification Entity IVA STEG reports at the end of the year on the amount of subsidies received, as well as payments made by the Government Procedure to pay a share of the 2023 outstanding subsidy arrears. This information is complemented by information from Tunisia’s budget law for the year and its execution to verify compliance. DLI 6: STEG’s corporate governance, financial management and transparency improved (Text) Formula IBRD loan of $10,000,000 per each DLR up to 40 M$ Definition: Accountability and transparency of STEG are improved DLR 6.1: A multi-year financial model is approved by STEG to allow multi-year planning, informed decision making and monitoring STEG’s financial performance. Description DLR 6.2: Two independent members are appointed to STEG board of directors. DLR 6.3: STEG publishes its financial statements in accordance with IFRS 8 desegregated by activity (gas, electricity) and approves income statements by function (generation/transmission/distribution), in a given FY. DLR 6.4: STEG approves audited financial statements, prepared in accordance with IFRS accounting standards. Data source/ Agency STEG Verification Entity IVA STEG submits reports to the IVA detailing the achievement of each DLR under DLI 6 and any supporting documentation, including the multi-year financial model, the appointment of independent Board members, the disclosure of separated Procedure financial statements by activity and income statements by function, the IFRS-compliant audited financial statements approved by STEG’s board, and the approval of network access methodology by MIME. IVA reviews the submitted documents and verifies their compliance. DLI 7: Strengthened electricity sector governance with the Electricity Sector Regulator is established, and operational and network access tariffs are approved. Formula IBRD load of $2,000,000 per each DLR up to 8M$ Definition: The regulatory authority law and application decree are approved, and the authority is operational and executes its mandates. STEG internal governance is improved. DLR 7.1: Electricity sector regulator law is in full force and effect. DLR 7.2: The legal foundation and operational mandate of the electricity sector regulator is clarified through a decree Description published. DLR 7.3: The electricity sector regulator becomes operational, the related business plan is adopted, and the minutes of the first meeting of its board are signed. DLR 7.4: The methodology for calculating network access tariff is approved by MIME. STEG/ Tunisian official Gazette (Journal Officiel de la République Tunisienne), relevant adopted decrees and other Data source/ Agency supporting documents. IVA reviews the submitted documents and verifies their compliance. Verification Entity IVA STEG with support from MIME reports on the regulatory framework progress and the operationalization of the Procedure regulatory authority. DLI8: STEG system planning improved (Text) Formula IBRD loan of $15M$ for DLR 8.1 and $4.19 for DLR 8.2 Definition: STEG adopts a least-cost 10-year generation and transmission plan that is in line with the Tunisian Government’s energy transition objectives and new grid-connected generation, storage and transmission investments are consistent with this plan. DLR 8.1: STEG adopts a least-cost 10-year power generation and transmission investment plan consistent with Tunisian Government’s energy transition objectives and is approved by MIME. Description DLR 8.2: New grid-connected generation is consistent with STEG least-cost 10-year investment plan approved by MIME. Explanation: STEG uses modeling tools such as WASP, OptGen, and PSR to develop the least-cost generation and transmission plan by optimizing the combination of power plants to minimize total system costs. The plan is qualitatively evaluated to compare alternative solutions with similar costs. IVA will verify this by examining the use of these recognized optimization models, the analysis of incremental costs, and the qualitative evaluation of alternative. Page 40 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) Data source/ Agency STEG Verification Entity IVA IVA approves the plan meets the above definition and objectives and STEG reports on the MIME decision on the Procedure approval of the least cost generation plan. IVA verifies that the investments in grid-connected generation are in compliance with the approved plan. Page 41 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) ANNEX 2. World Bank Engagement in the Tunisia Energy Sector 1. The World Bank has been supporting the development of the Tunisia energy sector through three pillars: (a) RE ecosystem development, (b) regional energy integration, and (c) national utility (STEG) modernization, as summarized in figure 2.1. Figure 2.1. Summary of World Bank Engagement in the Tunisia Energy Sector 2. The ELMED project, approved on June 21, 2023, and effective since March 13, 2024, is financed through a US$268 million IBRD loan, alongside a US$20 million Green Climate Fund (GCF) loan and a US$5 million GCF grant. It supports the construction of the Tunisia–Italy interconnector, focusing on the converter station in Tunisia and reinforcing the national grid to connect the interconnector. The project also includes technical assistance to advance Tunisia's RE IPPs program. Co-financing comes from an EU grant (€ 0 million), commercial financing secured by Italy, and concessional loans to Tunisia from EIB (€ million), Kreditanstalt für Wiederaufbau (€ million), and EBRD (€ million). The interconnector will position Tunisia as a key exporter of RE to Europe and facilitate the integration of more RE into Tunisia’s power grid. Complementing this effort, the Tunisia-Italy Power Interconnector Project Preparation Technical Assistance (P164625) continues to provide early implementation support through additional E&S studies and technical assistance for the procurement of converter stations. Together, these initiatives are pivotal in strengthening Tunisia's energy sector and fostering its transition to a more sustainable and interconnected RE ecosystem. 3. PASE is a US$ million IBRD loan approved on une 2 , 20 . The project aims to strengthen Tunisia’s electricity transmission system and improve the commercial performance of STEG. By enhancing the reliability of the electricity network and improving STEG’s financial and operational performance, PASE is playing a key role in supporting Tunisia’s broader energy sector reforms and ensuring a more sustainable and efficient energy supply. 4. Alongside the investment projects, the World Bank has been providing technical assistance to the Tunisia energy sector for many years as part of its broader engagement to support Tunisia’s transition to a secure, viable, and sustainable energy future, aligning with the country’s ambitious RE plans and commitment to reducing GHG emissions. The technical assistance is aimed to advance Tunisia’s key priorities in the sector including support to Page 42 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) sustainable and optimized deployment of RE and reforms to the electricity sector through modernizing STEG, establishing a regulatory authority, and enhancing financial viability. 5. Specifically, recently closed technical assistance (Technical support to accelerate Tunisian energy sector transition, P178700) assisted the Government in Tunisia, among others, in the following: • Developing and refining procedures for RE projects and strengthening the bankability of the contractual framework of a 1,700 MW call for bids for RE projects. This also helped organize several workshops to exchange with lenders on solutions to improve project bankability and derisk projects environment. The ASA also supported the Tunisian Government in streamlining authorization procedures for RE and designing appropriate feed-in tariffs to attract investors to small- and medium-scale private RE projects. Under this Technical Assistance, the World Bank also helps the Government of Tunisia to launch green bonds, establishing additional financing mechanisms for the RE sector. Capacity building was also provided with various workshops, training sessions, and field visits to build capacity of local banks, enabling them to effectively evaluate and finance RE projects. • Conducting a variable renewable integration (VRE) study to identify the investments needed to allow for large-scale RE deployment to the national electricity grid. • Providing technical assistance to the Government and STEG to prepare a performance contract outlining key targets for STEG and the government support necessary to achieve sectoral objectives. • Providing technical assistance to the Government to inform the legislative documents underpinning the establishment of an independent electricity regulator. • Helping the Government to pursue energy subsidy reform and raise public awareness of the reforms. 6. New technical assistance is currently being prepared (Enhance Tunisia’s Power Sector Performance and Accelerate Energy Transition, P507105) for which the scope of activities has already been agreed with the Government and that includes the following activities: • Sustainable Deployment of Clean Energy Solutions. Revision of the RE and green hydrogen code, diagnosis of obstacles to wind energy development, simplification of authorization procedures, and capacity building and awareness raising for the energy transition. • Creation of an integrated energy market. Legal, regulatory, and market analysis for electricity trade between Tunisia and Europe; identification of potential risks; analysis of management structures; development of a financial model to study different options; conducting of market surveys; and improvement of regional connectivity in general. • Improvement of the electricity sector's performance, with a focus on STEG. Assessment of the current situation and actions to improve STEG's billing and collection rates, strengthening of STEG’s financial reporting and management processes, establishment of a robust financial model, and support for the creation of an independent regulatory authority. • Capacity-building initiatives to enhance understanding and skills of STEG personnel in new areas such as financial modelling and reliability of financial information, electricity trading, risk hedging, and techniques to enhance RE integration into the power system. This may include training workshops, stakeholder engagement sessions, and knowledge sharing. • Implementation of climate-related disclosure practices and just-in-time support with capacity building on corporate governance. 7. In addition to the World Bank engagement in Tunisia, IFC and MIGA are providing financing and derisking solutions for private developers investing in RE, as summarized in Table 2.1. Page 43 The World Bank Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (TEREG) (P507304) Table 2.1. IFC, MIGA, and Other Ongoing and Potential Engagement IFC MIGA Ongoing and Further Collaboration • RE Program Round I - 500 MW Solar PV • Kairouan Project (PRI: US$23 million) • World Bank/IFC: Scale up IPP RE IPPs: financing of 100 MW Kairouan • Tozeur PV (PRI: US$10.4 million) programs Project (loan: US$37 million) • Sidi Bouzid Mezzouna (PRI: US$10 • MIGA: Deploy guarantee • RE Program Round II - Upstream million) platform for Round II engagement with bankability review of • Potential engagement: RE Program tender documents Round II - MIGA in discussion with • RE Program Round II - Phase I of 500 MW developers for solar and wind (PRI: solar PV and 150 MW wind IPPs: US$80 million) Potential financing (loan: up to US$200 million across all projects) Page 44 ANNEX 3. PROGRAM ACTION PLAN Action Description Source DLI# Responsibility Timing Completion Measurement Fraud and corruption and complaint handling Fiduciary N/A STEG Other Cases of fraud & corruption and complaints mechanism: Develop (1) tools and procedures Systems Within (6) reported in Program bi-annual and annual p for collection, consolidation, reporting months from the progress reports. including frequency, on fraud & corruption and date of procurement complaints in the POM and effectiveness strengthen the capacity of STEG’s fraud and corruption department; (2) Standard procedures for handling procurement complaints including timeliness for a) submission of complaints and appeals, b) submission of response, c) internal validation process. Implement annual and bi-annual reporting to Fiduciary N/A PMU Recurrent Annually Annual Program report submitted to the be included in semi-annual Program report on: Systems World Bank reflecting Fiduciary KPI [1] and (1) Public Procurement and (2) Financial status of follow up / implementation of audit Management, (3) Effectiveness of the follow-up recommendations. on external audit recommendations, this involves strengthening the monitoring team. Debarment and suspension list: Include in the Fiduciary N/A STEG Other Bidding documents include the eligibility bidding documents an eligibility check clause Systems Within (6) check clause. requiring procuring department to ensure that months from the any person or entity debarred or suspended by date of the Bank is not awarded a contract or effectiveness otherwise allowed to participate in or benefit from the Program during the period of such debarment or suspension by the World Bank. Development and implementation of (1) a Fiduciary N/A STEG Other Simplified review process, technical simplified process for reviewing procurement Systems Within (6) evaluation criteria, and required documents for oversight entities using precise months from the administrative documents for the submission checklists; (2) simplified technical evaluation date of of standard product bids are in place and criteria and required administrative documents effectiveness being used. for the submission of bids for standard products. Develop a comprehensive Environmental and N/A STEG Other Within one year Environmental and Social Management Social Management Guide (ESMG) that outlines Environm from the date of Guide (ESMG) elaborated. all Environmental and Social (E&S) procedures ental and effectiveness applicable throughout the different stages of the Program lifecycle. This includes a Social methodological approach for screening Systems Enhance the capacity of all stakeholders N/A STEG Recurrent Semi-Annually Completion of tailored training modules on involved (including STEG, ANPE, ANGED, local Environm E&S management, risk assessment, and contractors, and service providers) on best ental and mitigation for all relevant stakeholders, with practices for E&S management, risk Social 90percent participation and at least assessment, and mitigation. This will be Systems 75percent of participants demonstrating accomplished through tailored training module improved knowledge and application of best practices. Prepare a sustainability investment charter Environm N/A STEG in Other Within one year The sustainability Investment Charter (ESG (ESG Policy) as part of STEG’s Environmental & ental and collaboration from the date of Policy) is included in the E&S Management Social (E&S) management system Social with effectiveness System of STEG and disseminated in STEG Systems stakeholders website. and partners Enhance the capacity of STEG’s Board and CI Other N/A STEG Other Within two years Completion of a series of training sessions on members on corporate governance from the date corporate governance for STEG’s Board and effectiveness CI members, with at least 80percent of members attending and passing a post- training assessment, demonstrating a measurable improvement in their understanding and application of corporate governance principles. Increase of transparency of RE connection Technical N/A STEG Recurrent Within one year Publication of quarterly available hosting procedures by publishing distribution grid from the date of capacities after 12 months after effectiveness hosting capacity. effectiveness, date. Hosting capacity data published and then on a updated regularly. quarterly basis Put in place comprehensive approach to Technical N/A STEG Other Annually Reduction in average connection timeline Improve STEG management of customer (measured in days). connection applications and reduce connection timeline Put in place a proactive planning of Technical N/A STEG Other Annually Number of T&D assets tracked and replacements and upgrades strategy for T&D effectiveness of asset management. and implement an asset management system to track the condition and performance of equipment. Improvement in Receivables from Public Financial N/A Government of Recurrent Annually Receivables rate from public sector Customers (percent of annual invoices issued) assessme Tunisia customers are reduced from 183 percent in nt 2023 to reach 92 percent by end 2028, with annual targets to be aligned with the signed performance contract. Settlement of additional/complementary Financial N/A Government of Recurrent Annually If an complementary subsidy is due to be subsidy owed for the year to STEG, in assessme Tunisia paid to STEG (according to the MF approved accordance with the subsidy calculation formula nt formula), this amount shall be considered in of the Ministry of Finance, and following a set the state budget from year Y+2 and starting schedule by including them in the future State from the year from the finalized financial Budgets, starting from the closure of the fiscal statements for the year 2024. year, with the amount reflected in the State Budget of year N+2, beginning from the finalized financial statements for the year 2024. STEG has undertaken training and activities to Gender N/A STEG Recurrent Annually Each year throughout the project support women in the workplace and promote assessme implementation (2025-2028), STEG has the representation of women in technical roles. nt undertaken trainings and activities to support women in the workplace and promote the representation of women in technical positions. ANNEX 4. Clean Technology Fund (CTF) Financing and Results Framework Results Framework Indicator ISLE-1 Installed capacity for power 1000 MW private capital enabled under DLR 2.2 generation Installed capacity for battery N.A. storage Tons of GHG emissions reduced or 0.979 million CO2 tons per year avoided 24.48 million tons for 25 years (power plant lifetime) CTF financing requested US$ 30 million CTF loan US$ 400 million IBRD loan Financing leveraged through CTF US$ 760 million client financing funding US$ 1,060 million private sector IBRD/CTF: 13.3 CTF leverage ratio [1:X] Private sector/CTF: 35.3 Total Program/CTF: 38.7 Cost effectiveness (dollar per GHG CTF cost effectiveness: 1.23 USD/ton CO₂ reduced ($/tons C)) Total Program cost effectiveness: . USD/ton CO₂ - Support the government to meet its objective to reach 35 percent of RE in the energy mix by 2030 - Gender: improve the hiring of female staff in technical roles of STEG Other co-benefits - Citizen engagement through customer satisfaction surveys and actions plans to address feedback - Improved sector governance and regulatory framework I.Project Background 1. Tunisia is facing a significant energy crisis due to its heavy reliance on fossil fuel imports, particularly natural gas, which constitutes a large part of electricity production. This reliance makes the country vulnerable to fluctuations in international fossil fuel prices, threatens energy security, and burdens the already weakened macro-fiscal deficit. In 2023, Tunisia recorded an energy deficit of 52 percent of its primary energy needs, compared to 20 percent in 2012. To tackle these challenges, Tunisia has started reducing its reliance on fossil fuels and enhancing energy security through an ambitious renewable energy (RE) program, considering the country's huge RE potential estimated at more than 300 GW. The updated energy transition strategy aims to achieve 35 percent of RE in the energy mix by 2030, with a target of 4,800 MW of RE capacity by 2030 and 8,350 MW by 2035. 2. The electricity sector in Tunisia is vertically integrated, with STEG accounting for 97 percent of the country's electricity production. However, unlocking the vast potential of RE requires greater private sector involvement. The Government has established a regulatory framework to attract private investors through various regimes, including concessions for large independent power producer (IPP) projects, authorizations for medium-size IPPs, and self-generation by industrial firms. Despite these efforts, the weak financial situation of STEG has hindered scaling up private investment in RE. Improving STEG's operational and financial performance is crucial for fostering private sector participation and accelerating RE development. The Government has also improved the regulatory framework to streamline the process and speed up the deployment of RE. 3. The Government of Tunisia has launched an ambitious program to restore the energy sector viability and has requested World Bank and CTF support for its implementation through the proposed Program for Results (PforR) operation. This program addresses challenges facing STEG through a five-year performance contract signed between the Government and STEG, focusing on enhancing financial performance, improving management and governance, boosting renewable energy (RE), and strengthening technical and commercial performance. The proposed Tunisia Energy Reliability, Efficiency, and Governance Improvement Program (“TEREG PforR”) aims to support the Government’s efforts to ensure a sustainable, reliable, and affordable electricity supply by accelerating RE deployment, improving STEG’s performance, and enhancing sector governance. The proposed TEREG PforR will directly support Government efforts to (a) increase the RE share from 5.1 percent to 27 percent by 2028, thus reducing the reliance on natural gas imports with a positive impact on the fiscal and balance of payments deficit and energy security; (b) decrease electricity supply costs by 23 percent and improve cost recovery from 60 percent currently to 80 percent by 2028; (c) boost investor confidence and enable around US$ 2.8 billion in private investment with an additional 2.8GW of solar and wind capacity commissioned by 2028; (d) create around 30,600 jobs, notably during the construction period; and (e) reduce CO₂ emissions with grid emission intensity forecast to reduce by 28 percent by 2028, thereby supporting Tunisia’s energy security and economic growth. II.Assessment of Program with CTF Investment Criteria a) Potential for transformational change 4. Relevance. The proposed TEREG PforR is highly strategic and relevant Program for CTF investment as it aims to support RE deployment, improve the regulatory environment for private investment, and foster social and economic development. The Program is designed to enhance Tunisia's energy sector by increasing RE share in the power generation mix, improving electricity supply reliability, and strengthening the financial and operational performance of the utility STEG. Specifically, the Program targets an increase in renewable energy capacity from 516 MW to 3,300 MW by 2028, which will reduce reliance on natural gas imports and lower electricity production costs. This aligns with Tunisia's Nationally Determined Contributions (NDCs) and the country's updated energy transition strategy, which aims to achieve 35 percent renewable energy in the energy mix by 2030. 5. Systemic change. The Program aims to transform Tunisia's energy sector by enhancing RE deployment, improving electricity supply reliability, and strengthening STEG's financial and operational performance. Investments in dispatch and system operation, including battery storage, will prevent load shedding and increase RE penetration. The Program also focuses on improving STEG's financial performance by enhancing revenue collection, reducing losses, and ensuring timely payment of subsidies. Governance and transparency will be improved by establishing an independent electricity sector regulator and enhancing STEG's corporate governance. These reforms will create a more competitive and transparent environment, attracting private investment and fostering innovation in the energy sector. By addressing institutional and financial barriers and leveraging supportive policies and new business models, the Program seeks to create a sustainable and inclusive energy sector that supports Tunisia's NDCs and other national priorities. 6. Speed and scale. The TEREG PforR identifies barriers and enhances enabling conditions to accelerate the energy transition by focusing on policy coherence and capacity building. The Program aligns with Tunisia's updated energy transition strategy and addresses institutional and financial barriers by improving STEG's financial performance, enhancing governance, and fostering private sector participation. The Program's approach provides the flexibility needed for speed, as investments in the energy transition are time sensitive. It includes measures to streamline the process for developing new renewable energy capacities, such as simplifying authorization procedures and improving the regulatory framework. The TEREG PforR employs vertical scaling through policy and implementation strategies, including the establishment of an independent electricity sector regulator and the adoption of International Financial Reporting Standards (IFRS) for STEG. Horizontal scaling is achieved through technology proliferation, job creation, and infrastructure development. The Program targets a significant increase in renewable energy capacity by 2028, creating approximately 30,000 jobs. Depth scaling involves government buy-in and private investment mobilization, with the Program expected to enable around US$ 2.8 billion in private investment for solar and wind capacity. Overall, the TEREG PforR aims to achieve large-scale impact by addressing key challenges, leveraging opportunities, and ensuring a sustainable and inclusive energy sector. 7. Adaptive Sustainability. The TEREG PforR ensures long-term, resilient, and adaptive changes by building institutional capacity, promoting innovation, and creating demand for renewable energy through job creation and awareness building. The Program focuses on enhancing STEG’s financial and operational performance, which is crucial for the sustainable development of the energy sector. By improving governance and transparency, the Program aims to establish a more competitive and transparent environment that attracts private investment and fosters innovation. The Program also supports the creation of approximately 30,000 jobs during the construction phase, which will help stimulate economic growth and increase public awareness of RE. Additionally, the TEREG PforR aligns with Tunisia's NDCs and the country's updated energy transition strategy, which aims to achieve 35 percent RE in the energy mix by 2030. This alignment ensures that the Program supports lasting climate-neutral, inclusive, and resilient development pathways. b) Potential for GHG emissions reduction/avoidance 8. GHG emission reduction. The Program will focus on increasing clean energy deployment to set the path toward sustainable energy transition while promoting resilient infrastructure and increasing resilience of customers. The expected GHG emissions reduction under the Program is expected to be 7 MtCO2e. 9. Impact. Catalytic CIF support will be critical to provide just-in-time support to STEG both financially and technically to revise their current generation and transmission plans in least-cost manner in order to avoid building new gas plants. These are critical times to support new solar and wind projects in competing with the billions of US$ spent on fossil fuel subsidies. The CIF, thanks to its mandate and scale, will enable a scale- up of the SRMI approach that will enable real impact. In addition, supporting the scale-up of renewable energy through a systematic, integrated and open approach such as SRMI will ensure the replicability in a timely manner of low-emission development pathways. 10. Potential to significantly contribute to the principles of just transition. The SRMI-FIW Program is dedicated to ensuring an equitable transition to low-carbon and climate-resilient economies. It supports practitioners in planning for sustainable transitions in regions and sectors facing structural change by providing tools and resources. The program emphasizes the importance of mobilizing stakeholders and fostering socially inclusive planning processes, ensuring that the voices of vulnerable and marginalized groups are heard and incorporated into decision-making. Thorough assessments are conducted to understand the social, economic, and environmental impacts and opportunities, designing strategies to mitigate negative impacts while addressing socio-economic inequalities. By leveraging resources and partnerships, the program maximizes the impact of just transition through collaboration with financial institutions, industries, governments, and other stakeholders. The SRMI-FIW program aims to support an affordable and just energy transition in CIF countries by optimally allocating public resources to maximize social impacts while leveraging private capital for clean energy investments. It focuses on decarbonization and clean growth by enabling innovations in technologies, policies, business models, and project de-risking mechanisms. The program aligns with CIF's objectives of demonstrating and deploying low-carbon technologies, reducing the carbon footprint of the electricity sector, and increasing energy access while creating economic opportunities through renewable energy. It aims to use a strategic and cost-efficient combination of de-risking instruments to reduce the cost of capital, improve the risk-return profile of renewable energy investments, and attract private capital c) Financial Effectiveness. 11. The TEREG PforR is designed to tackle systemic barriers to investment, particularly those related to policy and regulatory environments, to pave the way for future investments in low carbon energy generation, and resilient energy infrastructure. The financial effectiveness of the Program is underpinned by its strategic approach to mobilizing private investment for renewable energy projects, ensuring the efficient and impactful use of public resources. The Program aims to significantly mobilize private capital by improving the risk-return profile of renewable energy investments in Tunisia by improving the financial performance and governance of STEG which is the single electricity buyer and at the heart of the sector health and sustainability. The cost effectiveness (dollar per GHG emissions reduced) on the CIF funding is 1.23 USD/ton CO₂; while it is US$ . USD/ton CO₂ when combining CIF, IBRD funding and counterpart funding. d) Implementation potential. 12. The Program’s success hinges on clearly identifying the institutions responsible for implementation, coordinating with relevant stakeholders, and addressing institutional, policy, regulatory, market, financial, knowledge, and technical capacity barriers. Successful implementation of the TEREG PforR relies on robust coordination and collaboration with a wide range of stakeholders. This includes governments, regulatory bodies, private sector participants, financial institutions, and local communities. The Program will facilitate stakeholder engagement through regular consultations, workshops, and joint planning sessions to ensure alignment and foster a shared vision for the transition. The Program is also committed to overcoming systemic barriers that hinder investment in low-carbon energy projects, such as policy and regulatory constraints, market and financial barriers and low capacity. The Program places a strong emphasis on ensuring long-term operations and sustainability. This involves creating an Interministerial Committee to oversee, monitor and evaluate the Program implementation, and by creating a Project Management Unit within STEG to properly execute and deliver the Program. By building robust institutional capacities and fostering ongoing stakeholder engagement, the Program aims to achieve lasting impacts that extend well beyond the Program closing period. The implementation potential of the is built on a foundation of strong institutional capacity, stakeholder collaboration, and a comprehensive strategy to address systemic barriers. By leveraging technical assistance, grid infrastructure investments, and innovative risk mitigation instruments, the Program is well-positioned to drive a successful and sustainable transition to low-carbon energy in Tunisia. e) Gender equality and social inclusion impact 13. The proposed TEREG PforR is committed to gender mainstreaming and enhancing gender equality outcomes in line with the CIF Gender Policy. It has a strong focus on gender equality and social inclusion. This commitment also involves advancing gender equality through climate change mitigation and adaptation actions and minimizing gender-related risks in climate actions. The Program will aim to improve female employment in Tunisia's energy sector. Though relatively high at 28 percent compared to other energy utilities in the region, where women often represent less than 10 percent of the workforce, there is still significant room for improvement, particularly in increasing the representation of women in technical and higher-decision positions. The proposed TEREG PforR has the following gender indicator: “Share of female candidates recruited as technical agents at STEG”, which is proposed as intermediate results indicator. Furthermore, trainings and activities to support women in the workplace and promote retention among technical female staff will be monitored for compliance under the Program Action Plan. f) Development impact potential 14. The proposed TEREG PforR focuses on reducing the cost of privately-owned generation, enabling VRE integration at scale, and fostering job creation, skills development, and women's empowerment during renewable energy tendering. It aligns with CIF’s objectives to demonstrate low-emission and resilient technologies, contributing to several SDGs: reducing poverty, promoting gender equality, ensuring access to affordable and clean energy, stimulating economic growth, enhancing industrial competitiveness, and combating climate change. The Program aims to generate significant social impacts, including improved health outcomes, enhanced livelihoods, and industry localization through RE development. It also focuses on improving access to essential services such as energy, contributing to national economic growth through job creation and renewable energy investments. The Program creates direct, indirect, and induced employment opportunities within the RE sector and associated industries, enhancing economic value through salaries, taxes, and company profits. At a broader level, it aims to strengthen the security and resilience of the energy sector through diversified energy sources and resilient infrastructure.