AFRICAN DEVELOPMENT FUND

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized AFRICAN DEVELOPMENT FUND DJIBOUTI PROPOSAL TO GRANT A UA MILLION ADF SUPPLEMENTARY LOAN TO FINANCE THE GEOTHERMAL EXPLORATION PROJECT IN THE LAKE ASSAL REGION RDGE/PGCL DEPARTMENTS May 2018 Translated Document

2 TABLE OF CONTENTS Page I. INTRODUCTION 1 2. INITIAL PROJECT DESCRIPTION Objectives Component Description 2 3. FINANCING ARRANGEMENTS Project Cost Financing Plan Implementation Arrangements Implementation Planning, Implementation Status, Performance Evaluation and Disbursement Rate 3 4. REASONS FOR THE PROPOSED SUPPLEMENTARY FINANCING, INCLUDING PROPOSED PROJECT MODIFICATIONS Contract Financing Gaps Description of the Project with the Supplementary Financing Revised Project Cost Revised Financing Plan Implementation Arrangements 5 5. JUSTIFICATION FOR SUPPLEMENTARY FINANCING Alignment of the Project Alignment with the Supplementary Lending Policy 7 6. ECONOMIC AND FINANCIAL ANALYSIS Key Economic and Financial Performance Indicators Financial Performance Economic Performance Sensitivity Analysis 8 7. CONDITIONS FOR SUPPLEMENTARY FINANCING Legal Instrument Conditions for Bank Intervention 8 8. CONCLUSION AND RECOMMENDATION Conclusion Recommendation 9 LIST OF TABLES 2.1 Components and Related Costs 3.1 Initial Financing Plan 4.1 Revised Project Cost by Component 4.2 Revised Project Cost by Expenditure Category 4.3 Revised Financing Plan 5.1 Risks and Mitigation Measures 6.1 Key Project Financial and Economic Performance Indicators

3 ANNEX I ANNEX II ANNEX III ANNEX IV ANNEX V LIST OF ANNEXES Revised Results-based Logical Framework Revised Implementation Schedule Supplementary Loan Compliance with Bank Group Policy and Procedures for Supplementary Financing Request for Financing by the Government of Djibouti Status of Bank Group s Active Portfolio in Djibouti

4 CURRENCY EQUIVALENTS, ACRONYMS AND ABBREVIATIONS CURRENCY EQUIVALENTS (March 2018) UA 1 = DJF UA 1 = USD UA 1 = EUR UNITS OF MEASUREMENT 1 GWh = Gigawatt-hour = MWh 1 MWh = Megawatt-hour = kwh 1 kwh = Kilowatt-hour = Wh 1 MW = Megawatt = kw 1 kw = Kilowatt = watts (W) 1 MVA = Megavolt-ampere = kva 1 kva = Kilovolt-ampere = VA 1 kv = Kilovolt = volts (V) ACRONYMS AND ABBREVIATIONS ADF = African Development Fund AFD = French Development Agency AfDB = African Development Bank AFO = Administrative and Finance Officer AGEPS = Accelerated Growth and Employment Promotion Strategy CAP = Comprehensive Action Plan CEI = Call for Expression of Interest CERD = Djibouti Studies and Research Centre CSP = Country Strategy Paper EA = Executing Agency EdD = Electricité de Djibouti (Djibouti Electricity Corporation) ENPV = Economic Net Present Value ERR = Economic Rate of Return ESMAP = Energy Sector Management Assistance Program ESMP = Environmental and Social Management Plan EU = European Union FE = Foreign Exchange FIRR = Financial Internal Rate of Return FNPV = Financial Net Present Value GCC = Geothermal Company Consulting GEF = Global Environment Facility GOV = Government IDA = International Development Association IDC = Iceland Drilling Company INDS = National Social Development Initiative IPM = International Project Manager IPP = Independent Power Producer IsDB = Islamic Development Bank i

5 JICA = Japanese International Cooperation Agency KOAFEC = Korea-Africa Economic Cooperation LC = Local Currency LPC = Local Project Coordinator MEERN = Ministry of Energy and Water in charge of Natural Resources MEFIP = Ministry of Economy and Finance in charge of Industry and Planning MESR = Ministry of Higher Education and Research NBPB = National Public Procurement Board NPP = National Procurement Procedure NPS = National Procurement System NPV = Net Present Value O&M = Operation and Maintenance OFID = OPEC Fund for International Development OPEC = Organization of Petroleum Exporting Countries PIU = Project Implementation Unit PMP = Procurement Method and Procedure PMU = Project Management Unit PPA = Power Purchase Agreement PPIAF = Public-Private Infrastructure Advisory Facility PQN = Prequalification Notice PRCA = Procurement Risk and Capacity Assessment PRCAAP = Procurement Risk and Capacity Assessment Action Plan PRSP = Poverty Reduction Strategy Paper RFIRR = Real Financial Internal Rate of Return RoE = Return on Equity SBD = Standard Bidding Document SPN = Specific Procurement Notice UA = Unit of Account US = United States FISCAL YEAR 1 January 31 December PROJECT INFORMATION SHEET Borrower Executing Agency Client Information Republic of Djibouti Djibouti Electricity Corporation REVISED FINANCING PLAN Sources of Financing Amount (UA million) Instrument Initial Financing African Development Fund (ADF) Grant African Development Fund (ADF) Loan Sustainable Energy Fund for Africa (SEFA) 1.2 Grant Work Bank (IDA) 4 Loan Global Environment Facility (GEF) 4 Grant OPEC Fund for International Development (OFID) 4.7 Loan French Development Agency (AFD) 2.2 Grant Energy Sector Management Assistance Program (ESMAP) 0.7 Grant ii

6 Republic of Djibouti 0.6 Own Resources Total Initial Financing 21.2 Supplementary Financing African Development Fund (ADF) Loan Republic of Djibouti 1.80 Own Resources French Development Agency (AFD) 0.08 Grant Total Supplementary Financing Total Revised Project Financing ADF GRANT AND LOAN AND SEFA GRANT FINANCING INFORMATION INSTRUMENT ADF SEFA SUPPLEMENTARY ADF LOAN GRANT GRANT ADF LOAN Currency UA UA USD UA Interest Rate Type N/A N/A N/A 1% Base Interest Rate N/A N/A N/A N/A Service Charge N/A 0.75% per annum on the N/A 0.75% per annum on the disbursed and disbursed and outstanding outstanding loan amount loan amount Commitment Fee N/A 0.50% per annum on the undisbursed loan amount, commencing 120 days after the signature of the Loan Agreement N/A 0.50% per annum on the disbursed loan amount, commencing 120 days after the signature of the Loan Agreement Tenor N/A 50 years N/A 30 years Grace Period N/A 10 years N/A 5 years KEY FINANCIAL AND ECONOMIC RESULTS Project with Supplementary Financing FIRR: 13.0% FNPV: USD 40.8 million ERR: 28.1% ENPV: USD million Initial Project FIRR: 12.8% FNPV: USD 37.4 million ERR: 29% ENPV: USD million DURATION AND MILESTONES Initial Project Concept Note Approval 9 May 2012 Project Approval June 2013 Effectiveness September 2013 Initial Last Disbursement Deadline 31 December 2017 Revised Last Disbursement Deadline 30 September 2019 Project with Supplementary Financing Project Approval 2 May 2018 Effectiveness Revised Last Disbursement Deadline 30 September 2019 iii

7 Project Executive Summary 1. Project Overview The Geothermal Exploration Project in the Lake Assal Region (the Project ) is part of a geothermal energy development programme that aims at improving the quality of life for Djibouti s population by helping to: (1) increase geothermal energy production capacity (green energy); (2) reduce oil imports; and (3) reduce greenhouse gas emissions. The Project will be implemented in three phases: (i) Phase 1 comprises the exploration of the Lake Assal geothermal steam field and confirmation of the characteristics of the field s geothermal resources; (ii) Phase 2 involves the development of the geothermal field and construction of a geothermal power plant with a capacity of 20 MW; and (iii) Phase 3 involves expanding the capacity of the geothermal power plant to 50 MW. Initially, the total project cost was UA 21.2 million. However, the budget allocated for the project only covered part of the cost of drilling two wells. The supplementary financing needed to complete the drilling of the first two wells and to drill a third well is UA million. The Bank will contribute UA million in the form of a supplementary loan while the Government of Djibouti and the French Development Agency (AFD) will contribute UA 1.80 million and UA 0.08 million respectively. Thus, the total revised project cost is UA million. 2. Needs Assessment During the competitive bid call for the procurement of drilling services, the budget allocated by one of the co-financiers covered only part of the cost of drilling two instead of the four wells initially envisaged. As envisaged in the initial project design, one of the co-financiers (not the Bank) was expected to finance the cost of drilling the four wells. Against this backdrop, the Republic of Djibouti requested the African Development Bank (AfDB) to finance the activities of the first two wells not yet funded and the third well. By providing supplementary financing, the Bank will enable the project to drill three wells instead of the four initially planned. Technically, three wells are sufficient to ascertain and quantify the geothermal resource in terms of energy production, thus facilitating the construction of the country s first geothermal power plant in the long run. The construction of this geothermal power plant will pave the way for the country s transition to cleaner and less costly energy and to abandon the use of diesel fuelpowered electrical energy which accounts for almost all of Djibouti s production. 3. Bank s Value Added At the outset, the resources provided by the African Development Fund (ADF) and the Sustainable Energy Fund for Africa (SEFA) helped to facilitate the mobilization of financing from other donors (World Bank, GEF, OFID, ESMAP and AFD) for the implementation of the project. The supplementary resources to be provided by the ADF will help to close the financing gap identified during project implementation and to complete the exploration phase. These resources will serve as a catalyst to rally independent geothermal electricity producers downstream, making it possible to develop the country s abundant geothermal reserves. iv

8 4. Implementation Planning, Implementation Status, Performance Evaluation and Disbursement Rate The project was expected to be implemented over a 30-month period and to be completed in May However, the physical completion of the project was extended to end-march 2019 owing to start-up and implementation delays and insufficient resources for drilling services. The last disbursement deadline was extended from 31 December 2017 to 30 September The construction of the three platforms, the storage area and the access roads have been completed. Contracts for: (i) the drilling of two wells; (ii) the supply of wellheads; (iii) the supply of casing; and (iv) the supply of steel equipment have been signed. On the whole, the project implementation performance is considered satisfactory. The overall project disbursement rate is 36%, while the ADF loan disbursement rate is 73.49%, the ADF grant 81.13% and the SEFA grant 32.26%. 5. Knowledge Management The project s catalytic reproduction effect will originate from the capacity-building and knowledge development that it will encourage in Djibouti and the region. The lessons learned from geothermal resource development, especially the development of independent geothermal electricity producers, will be disseminated to other Rift Valley countries in sub-saharan Africa such as Ethiopia, Uganda, Tanzania and Rwanda, which have considerable geothermal resource development potential. 6. Revised Implementation Schedule Drilling activities are scheduled to begin on 15 May The completion of project activities is scheduled for 31 March 2019 when drilling and the feasibility study should have been carried out. To take into account the risk associated with this type of activity, the last disbursement deadline has been extended from 31 December 2017 to 30 September v

9 1 INTRODUCTION 1.1 On 28 June 2013, the African Development Fund (ADF) approved a UA million loan and a UA million grant for the Republic of Djibouti to finance the Geothermal Exploration Project in the Lake Assal Region. These resources were provided from Djibouti s country allocation under ADF XII. The Sustainable Energy Fund for Africa (SEFA) which is administered by the African Development Bank Group also awarded a USD 1.8 million grant to the Republic of Djibouti for the implementation of the same project. The loan agreement and the two grant agreements were concluded on 26 August The project is jointly financed by the World Bank (WB), the Global Environment Facility (GEF), the OPEC Fund for International Development (OFID), the French Development Agency (AFD), the Energy Sector Management Assistance Program (ESMAP) and the Republic of Djibouti for a total amount of UA 21.2 million. Initially, the project was expected to be implemented over a 30-month period. 1.2 The project is part of a programme that will be implemented in three phases: (i) Phase 1 comprises the exploration of the Lake Assal geothermal steam field and confirmation of the characteristics of the field s geothermal resources; (ii) Phase 2 involves the development of the geothermal field and construction of a geothermal power plant with a capacity of 20 MW; and (iii) Phase 3 involves expanding the capacity of the geothermal power plant to 50 MW. 1.3 At appraisal, the project comprised the following components: (A) Drilling Activities; (B) Technical Assistance; (C) Project Implementation; and (D) Environmental and Social Management. Table 2.1 below provides a description of each component. 1.4 During the competitive bid call for the procurement of drilling services, the budget allocated by one of the co-financiers covered only part of the cost of two instead of the four wells initially envisaged. This financing gap is attributable to the fact that the cost was underestimated at project appraisal and bidders lack of interest in exploration activities in Djibouti owing to the risk involved. In the initial project design, the four wells were expected to be financed by one of the cofinanciers (not the Bank). Against this backdrop, the Republic of Djibouti requested the African Development Bank (AfDB) to finance the unfunded components of the first two wells and the third well. 1.5 In 2017, the electricity access rate in Djibouti was 76%, while the average price of a KWh of power was USD The Djibouti Electricity Corporation (EdD) has a total installed capacity of approximately 121 MW and a firm capacity of about 92 MW (with an ageing pool of equipment). Peak power stood at MW for a power generation capacity of GWh, including the energy imported from Ethiopia at a transfer tariff of USD 0.07/kWh. Over the past 8 years, Djibouti has witnessed a strong growth in electricity consumption averaging 5.5%. 1.6 The supplementary financing, which is the subject of this memorandum, will help to complete the execution of works under the Geothermal Exploration Project in the Lake Assal Region and achieve the project s objectives. 2 INITIAL PROJECT DESCRIPTION 2.1 Objectives The project is part of a programme aimed at improving the quality of life for Djibouti s population. The specific project objectives are to: (i) increase the green energy generation capacity; (ii) reduce oil imports; and (iii) reduce greenhouse gas emissions. 1

10 2.2 Component Description The project components and related costs are presented in Table 2.1 as they appear in the project appraisal report. Table 2.1 Components and Related Costs (amount in million) No. Component Name USD UA Component Description (A) Drilling Activities Implementation of a drilling programme for 4 production wells, including civil engineering works, drilling services, procurement of equipment and testing (B) Technical Assistance Recruitment of an expert to develop the exploration programme, including wells, the test set and the feasibility study for the geothermal power plant (C) Project Implementation Operation of the Project Implementation Unit (PIU), including costs related to the recruitment of the International Manager for the PIU (D) Environmental and Social Implementation of the Environmental and Social Management Management Plan Total Cost ORIGINAL FINANCING ARRANGEMENTS 3.1 Project Cost The total initial project cost, net of taxes and customs duties, but inclusive of a 10% provision for physical contingencies and price escalation, is estimated at USD 31.8 million (equivalent to UA 21.2 million at the initial appraisal date). The initial project cost by expenditure category and by component is presented in Annex A Sources of Financing Table 3.1: Initial Financing Plan [UA million] Component AfDB SEFA WB GEF OFID AFD ESMAP Djibouti TOTAL A. Drilling Activities B. Technical Assistance C. Project Implementation D. Environmental and Social Management TOTAL The project financing plan is presented in Table 3.1 above. ADF loan resources will be used to finance part of drilling costs. The ADF grant will finance part of drilling costs as well as project implementation costs. Lastly, the SEFA grant will finance technical assistance costs World Bank, GEF, OFID, AFD and ESMAP resources will also be used to finance drilling activities. GEF, OFID and ESMAP resources will be managed by the World Bank. Lastly, the Republic of Djibouti will finance part of project implementation and the Environmental and Social Management Component. 3.3 Implementation Arrangements Institutional, procurement and financial management arrangements, disbursement methods as well as audit arrangements as provided for in the initial project have not been changed. However, the PMU will be strengthened by an Administrative and Finance Officer (AFO). 2

11 3.4 Implementation Planning, Implementation Status, Performance Evaluation and Disbursement Rate The project was expected to be implemented over a 30-month period and to be completed in May However, the physical completion of the project was extended to end-march 2019 owing to implementation delays as a result of slow start-up and insufficient resources to finance drilling services. The last disbursement deadline was extended from 31 December 2017 to 30 September The construction of the three platforms, the storage area and the access road financed by the Bank has been completed. Contracts for: (i) the drilling of two wells; (ii) the supply of wellheads; (iii) the supply of casing; and (iv) the supply of steel equipment have been signed. On the whole, the project implementation is considered satisfactory. The project physical implementation rate is 40%, while the rate of implementation of Bank-funded components is 85%. The overall project disbursement rate is 36%, while the ADF loan disbursement rate is 73.49%, the ADF grant 81.13% and the SEFA grant 32.26%. 4 REASONS FOR THE PROPOSED SUPPLEMENTARY FINANCING, INCLUDING PROPOSED PROJECT MODIFICATIONS 4.1 Contract Financing Gaps During the competitive bid call for the procurement of drilling services, the budget allocated were insufficient to cover the cost of drilling four wells. The amount provided (USD 18 million) covered only part of the cost of drilling two instead of the four wells initially envisaged. This financing gap is attributable to: (i) the fact that the cost was underestimated at project appraisal; and (ii) bidders lack of interest in exploration activities in Djibouti owing to the risk involved. Furthermore, the smooth implementation of the geothermal exploration phase requires additional consultancy services and the conduct of a feasibility study on the selection of an independent power producer (IPP). Additional consultancy services are needed because the duration of drilling was underestimated at 30 days/well whereas the actual duration is 60 days/well. The feasibility study had already been provided in the contract for the recruitment of a geothermal consulting company (GCC) during the preliminary phase. It also includes the outcomes of the environmental and social impact assessment and technical assistance to EdD for the procurement of the IPP contract. The financing gap concerns: (i) the drilling of a third well and the non-funded activities of the first two wells; and (ii) the provision of additional consultancy services and conduct of a feasibility study on the selection of an IPP. This financing gap is estimated at UA million (USD million) The Bank s supplementary financing of UA million (USD million) will cover: (i) the cost of drilling the third well, including the non-funded activities of the first two wells, estimated at UA 9.65 million (USD million); and (ii) the cost of additional consultancy services and conduct of a feasibility study on the selection of an IPP for an estimated amount of UA 1.09 million (USD 1.58 million) to be carried out by the geothermal technical assistance firm The Government of Djibouti will mobilize UA 1.80 million (USD 2.60 million) to finance some of the non-funded components of the first well, notably: (i) the seawater pumping system; (ii) the workers camp; and (iii) related works. The transportation of steel equipment to the site for the drilling of the first and second wells will be financed to the tune of UA 0.08 million (US 0.11 million) with resources from the French Development Agency (AFD) The mobilization of supplementary resources will enable the project to complete the drilling of the three wells and achieve all its objectives. Technically, three wells are sufficient to ascertain and quantify a geothermal resource in terms of energy production. Thus, the confirmation 3

12 of the geothermal resource will facilitate the construction of a geothermal power plant in the medium term to increase the clean energy production capacity in Djibouti. 4.2 Description of the Project with the Supplementary Financing The project objectives initially approved in June 2013 remain unchanged. The same applies to the project components, namely: (i) (ii) Component A: Drilling Activities Component B: Technical Assistance (iii) Component C: Project Implementation (iv) Component D: Environmental and Social Management The costs of components A and B have increased (Table 4.1) while those of components C and D are the same as in the initial project. The cost of component A has increased due to the supplementary financing required to drill the third well and complete the drilling of the first two wells. The cost of component B has increased because of the additional consultancy services and the conduct of a feasibility study on the selection of an IPP. 4.3 Revised Project Cost The revised total project cost, net of taxes, is estimated at UA million, of which UA million (91%) in foreign exchange and UA 3.02 million (9%) in local currency. The additional cost resulting from the revised project cost, net of taxes, is UA million. Tables 4.1 and 4.2 present a summary of the revised project cost estimate by component and by expenditure category. A. Drilling Activities B. Technical Assistance C. Project Implementation D. Environmental and Social Management Table 4.1: Revised Project Cost by Component (UA million) Component Sub-component Initial Cost Revised Cost Gap UA Million UA Million UA Million FE LC Total FE LC Total A.1 Civil Engineering Works A.2 Drilling Services A.3 Drilling Equipment A.4 Inspection and Test Sub-total B.1 Geothermal Power Expert Sub-total C.1 PIU Manager C.2 PIU Operating Cost C.3 Goods for the PIU Sub-total D.1 Environmental and Social Management Sub-total Total Base Cost Provision for Physical Contingencies 5% Provision for Price Escalation 5% Total Project Cost

13 Works Goods Category Services other than consultancy services Consultancy services Operation Others Table 4.2: Revised Project Cost by Expenditure Category (UA million) Sub- Component Initial Cost Revised Cost Gap UA Million UA Million UA Million FE LC Total FE LC Total A.1 Civil Engineering Works ,58 Sub-total ,58 A.3 Drilling Equipment ,05 C.3 Goods for the PIU Sub-total ,05 A.2 Drilling Services ,84 A.4 Inspection and Test Sub-total ,84 B.1 Geothermal Power Expert ,99 C.1 PIU Manager Sub-total ,99 C.2 PIU Operating Cost Sub-total D.1 Environmental and Social Management Sub-total Total Base Cost Provision for Physical Contingencies 5% Provision for Price Escalation 5% 0, Total Project Cost Revised Financing Plan Table 4.3 below presents the revised project financing plan. Table 4.3: Revised Financing Plan [UA million] Component AfDB SEFA WB GEF OFID AFD ESMAP Djibouti TOTAL A. Drilling Activities B. Technical Assistance C. Project Implementation D. Environmental and Social Management TOTAL The Bank s contribution will come from the Republic of Djibouti s UA 15 million country allocation under ADF 14. Though UA 10 million of this amount was initially intended to be used to finance the cost of an energy access project, the Government of Djibouti requested the Bank to authorize the allocation of USD 15 million for the Geothermal Exploration Project in the Lake Assal Region to ensure its smooth implementation. 4.5 Implementation Arrangements Institutional arrangements: all arrangements remain unchanged, except that, to mitigate fiduciary the risk, the Project Implementation Unit (PIU) will be strengthened by an Administrative and Finance Officer (AFO) whose allowances will be covered by the initial financing Procurement arrangements: all procurements of goods and drilling and consultancy services financed by the Bank will be done in accordance with the Procurement Policy for Bank Group-funded Operations, dated October 2015, and the provisions set out in the Financing 5

14 Agreement. Specifically, all procurements will be done in accordance with the Bank s Procurement Methods and Procedures (PMPs) using relevant Bank standard bidding documents (SBDs) Procurement Risk and Capacity Assessment (PRCA): country, sector and project risks as well as the procurement capacity of the Executing Agency (EA) were assessed and the results used to inform decisions on the choice of the procurement system (Borrower, Bank, or Third Party) used for specific activities or a set of similar activities implemented under the project. A market analysis was also carried out to obtain in particular information on market characteristics, factors that could affect competition and key sector market actors. The outcomes of market assessments and analysis have helped to plan procurement, the structuring of markets, the selection of the best procurement methods and procedures (PMPs) tailored to the objective sought, and the definition of the Bank review and supervision framework Appropriate risk mitigation measures have been included in the Procurement Risk and Capacity Assessment Action Plan (PRCAAP) presented in Annex A Disbursement: considering the components and ensuing expenditure categories, that is the services category, the direct payment method will be used for disbursements under the supplementary financing of contracts for consultancy services and non-consultancy services Audit: Future audits will cover both the initial project and the supplementary financing. Since the external auditor has already had three exercises and a new auditor is to be recruited, during the selection process it will be necessary to indicate in the terms of reference that the audit will cover both the initial project and the supplementary financing. 5 JUSTIFICATION FOR SUPPLEMENTARY FINANCING Backed by the Bank, the Government of Djibouti sought financing from the European Union (EU), the Japanese International Cooperation Agency (JICA), the Islamic Development Bank (IsDB) and the Korea-Africa Economic Cooperation (KOAFEC) Trust Fund. The EU showed no interest in the project because many financial institutions are involved in geothermal exploration in Djibouti. JICA was already involved in the Hanlé Geothermal Exploration Project in Djibouti. The IsDB and KOAFEC Trust Fund indicated that they were not interested in geothermal exploration. Therefore, the Republic of Djibouti requested the Bank to fill the financing gap to enable the project to achieve its development objective The project will contribute to: (i) building the first geothermal power plant in Djibouti; (ii) increasing clean energy production capacity; (iii) increasing the population s access to electricity through a more reliable and affordable source of energy; (iv) reducing oil imports by barrels of oil annually; and (v) reducing greenhouse gas emissions by tonnes of CO2 annually. Thus, it will facilitate the improvement of the quality of life of Djibouti s population. 5.2 Project Alignment The project is consistent with the priorities set out in the CSP, the New Deal on Energy for Africa, the High 5s as well as Djibouti s Accelerated Growth and Employment Promotion Strategy (AGEPS) by promoting green and inclusive growth. It will help to: (i) increase the green energy generation capacity by 50 MW; (ii) increase the electricity access rate from 50% to 88%; (iii) reduce oil imports by barrels annually; and (iv) reduce CO2 emissions by tonnes annually Project implementation may encounter a number of risks. The main risks and their mitigation measures are presented in Table

15 Table 5.1: Risks and Mitigation Measures Risk Description Level Mitigation Measures Political and Risks related to the chronic instability in the M macroeconomic region and the Government s macroeconomic policy community in Djibouti Exploration There is the risk that the geothermal resource of Lake Assal may turn out to be insufficient in quantity and quality for large scale generation of electricity. This could lead to a reduction in the size of the project and/or steam shortage and/or cost or time overruns resulting from efforts deployed to address the resource deficit. Institutional Selection of the private investor There is no regulatory framework governing independent electricity producers in Djibouti. Various factors, some of which are beyond Djibouti s control (such as delays in the bidding process and the mobilisation of financing by private investors) could lead to delays in the conclusion of contracts as well as the construction and commissioning of the power plant by private investors 5.3 Alignment with the Supplementary Lending Policy Government support for the project and the involvement of the international M - The exploration risk will be mitigated by: (i) Djibouti s past experience in the area of geothermal exploration; (ii) geological data and the results of past exploration campaigns; (iii) site prospecting studies were conducted by Iceland GeoSurvey which is an entity with solid experience in the area; (iv) use of appropriate drilling technologies to treat geothermal resources with high salinity. M - The institutional risk will be mitigated by the support pledged by the Public- Private Infrastructure Advisory Facility (PPIAF) and the involvement of donors to ensure the establishment of a regulatory and institutional framework. M - The risk of lack of a private investor to develop the power plant. This risk will be mitigated by the fact that the Government of Djibouti is ready to create a specialized company (SPV) to develop the power plant. The supplementary loan complies with the Bank Group Policy and Procedures for Supplementary Financing of 1 January 1998 (Annex III). 6 ECONOMIC AND FINANCIAL ANALYSIS 6.1. Key Economic and Financial Performance Indicators The main financial and economic results are summarized in Table 6.1 below, while the assumptions and detailed calculations are presented in Annex A Table 6.1 Key Project Economic and Financial Performance Indicators Revised Project with the Supplementary FIRR: 13.0% FNPV: USD 40.8 million Financing EIR: 28.1% ENPV: USD million Initial Project FIRR: 12.8% FNPV: USD 37.4 million ERR: 29% ENPV: USD million NB: the assumptions and detailed calculations are presented in Annex A Financial Performance The result of this analysis, after reflecting the supplementary loan in the project, shows that the project is still financially viable. The real financial internal rate of return (FIRR) is estimated at 13.0%. The financial net present value (FNPV), at the weighted average cost of capital (real discount rate of 9.5%), is USD 40.8 million. In 2013, the real FIRR was estimated at 12.8% 7

16 with a financial net present value (FNPV) of USD 37.4 million. The supplementary loan will have no negative impact on the project s financial viability. However, the financial results also show that the project should yield an electricity generation price of approximately USD /kWh, which is slightly higher than the estimated amount USD /kWh in The financial results also show that the project should generate an electricity generation cost of approximately USD 0.09/kWh. 6.3 Economic Performance The results of economic analysis show that the project will generate a real economic rate of return (ERR) of 28.1% and an economic net present value (ENPV) calculated at 12% opportunity cost of capital (in real terms) of USD million. In 2013, the real ERR was estimated at 29% with an economic net present value (ENPV) of USD million. Though the supplementary loan will have a minimal negative impact on economic viability, the project is economically viable. Specifically, the project s economic benefits will be generated by the cost savings realized by Djibouti through the use of geothermal energy to reduce the exorbitant production costs (USD 0.27/kWh) in the country. 6.4 Sensitivity Analysis The project s economic and financial benefits were tested using potential risk parameters during the exploration and development phases. The main risks identified include the availability of steam in relationship to capacity factors, operating and maintenance costs, and the Power Purchase Agreement (PPA) price level. Specifically, a sensitivity test was conducted on the investment costs of the power plant and the rate of return on equity (RoE) to assess the impact of PPA price changes during Phase II and Phase III. The results of the sensitivity analysis show that the financial and economic results are robust even under the unfavourable conditions identified. The sensitivity tests are presented in detail in Annex A CONDITIONS FOR SUPPLEMENTARY FINANCING 7.1 Legal Instrument The additional project costs will be financed by an African Development Fund (ADF) supplementary loan of UA million (USD million) (granted to the Republic of Djibouti), under applicable ADF standard terms and conditions. 7.2 Conditions for Bank Intervention Conditions Precedent to Effectiveness of the Loan Protocol Agreement The effectiveness of the Supplementary Loan Agreement shall be subject to fulfilment by the Borrower of the conditions set forth in Section of the General Conditions Applicable to Loan Agreements and Guarantee Agreements of the African Development Fund Conditions Precedent to First Disbursement The first disbursement of supplementary loan resources shall be subject to the effectiveness of the Loan Agreement in accordance with the conditions set forth in paragraph above. 8

17 7.2.3 Undertaking The Borrower undertakes to: (i) (ii) Implement the Environmental and Social Management Plan (ESMP) and have its contractors implement it in accordance with: (a) the Bank s rules and procedures; (b) national laws; and (c) the recommendations, requirements and procedures contained in the ESMP; and Submit to the Fund annual reports on the implementation of the ESMP, including, as appropriate, the deficiencies noted and the corrective actions initiated or to be initiated. 8 CONCLUSION AND RECOMMENDATION 8.1 Conclusion The implementation of the project will help to: (i) increase clean energy generation capacity in Djibouti by increasing geothermal-based green energy generation by 50 MW; (ii) reduce oil imports by barrels annually; and (iii) reduce greenhouse gas emissions by tons of CO2 annually. Thus, it will contribute to improving the quality of life of Djibouti s population by improving access to electrical energy The project is economically viable and financially profitable. It will enable the EdD to have reliable and affordable energy and to increase its capacity to connect customers to the network. Ultimately, it will increase the proportion of renewable energy in the country s energy mix. The economic and financial rates of return of 28.1% and 13.0% respectively are satisfactory The project complies with all applicable Bank policies. 8.2 Recommendation Management recommends that the Board of Directors approves the supplementary ADF loan not exceeding UA million to the Republic of Djibouti. This new loan will increase the Bank s total participation in this project in Djibouti to UA million. 9

18 ANNEX I: REVISED RESULTS-BASED LOGICAL FRAMEWORK Country and Project Name: Geothermal Exploration Project in the Lake Assal Region (Djibouti) Project Goal: Increase the green energy production capacity of the Republic of Djibouti to improve access to electricity for the people of Djibouti. PERFORMANCE INDICATORS RESULTS CHAIN INDICATOR BASELINE SITUATION IN (including ISCs) SITUATION (2012) 2018 TARGET Increased access to Electricity access rate 50% 70% 88% in electricity for the (%) people of Djibouti IMPACTS MEANS OF VERIFICATION - Djibouti Electricity Corporation s annual reports - National statistics RISKS/MITIGATION MEASURES OUTCOMES OUTPUTS Reduction of oil imports Reduction greenhouse emissions of gas Increase in geothermal energy production capacity (green energy) Component A: Drilling Activities Component B: Technical Assistance Component C: Project Implementation Quantity of oil imported (in barrels) Quantity of CO2 emitted (in tonnes) n/a n/a Reduction of oil imports by barrels annually from 2021 n/a n/a Reduction of CO2 emissions by tonnes annually from MW in 2021 Geothermal power capacity (green energy) in MW Number of wells drilled None drilled in 2012 No well drilled in 2018 before May Technical specifications and bidding documents - Project supervision - Well testing protocol - Feasibility study - PMU established - Number of quarterly progress reports Number of audit reports Consulting engineering firm not recruited in PMU not established - No quarterly progress reports No audit report - Consulting engineering firm recruited - Quarterly progress reports - No test. No well drilled - Feasibility study not carried out - PMU established - Quarterly progress reports 3 wells drilled by end Consulting engineering firm recruited - Quarterly progress reports - Certification of test results and analysis - Feasibility study approved - PMU established - Quarterly progress reports transmitted to the Bank - National statistics - Project postevaluation report - Documents of public utility companies - Audit reports and quarterly progress reports of the Project Implementation Unit - Bank supervision mission reports - The Bank s disbursement reports and financial reports - Project completion report. - Political and macroeconomic risks will be mitigated through government support for the project and the involvement of the international community in Djibouti. - Exploration risk mitigated by: (i) Djibouti s past experience in the area of geothermal exploration; (ii) geological data and other results of past exploration campaigns; (iii) site prospecting studies were conducted by Iceland GeoSurvey, which is an entity with solid experience in this area; (iv) use of modern drilling technologies that make it possible to treat high salinity geothermal resources. - The institutional risk is mitigated by the pledged support of PPIAF and the involvement of donors to ensure the establishment of a 1 The value of the initial project appraisal report set for 2018 has been maintained. I

19 Component D: Environmental and Social Management Environmental and Social Management Plan (ESMP) ESMP unavailable transmitted to the Bank Audit reports transmitted to the Bank ESMP approved in 2016 and published in ISTS Audit reports transmitted to the Bank ESMP approved in 2016 ESMP implemented by end-2019 regulatory and institutional framework. - The risk of lack of a private investor to develop the power plant will be mitigated by the fact that the Government of Djibouti is ready to set up a specialized company (SPV) to develop the power plant. KEY ACTIVITIES A. Drilling Activities B. Technical Assistance C. Project Implementation D. Environmental and Social Management COMPONENTS RESOURCES Total initial project cost: UA 21.2 million Total revised project cost: UA million Application of funds Component A: UA million Component B: UA 2.29 million Component A: UA 1.10 million Component A: UA 0.40 million These amounts take into account provisions for physical contingencies and price escalation. II

20 ANNEX II: REVISED IMPLEMENTATION SCHEDULE Duration Activities N Description M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 1 Drilling activities 1.1 Borehole Test borehole Borehole Test borehole Borehole Test borehole 3 2 Feasibility study 2.1 Feasibility study III

21 ANNEX III: SUPPLEMENTARY LOAN COMPLIANCE WITH THE BANK GROUP POLICY AND PROCEDURES FOR SUPPLEMENTARY FINANCING OF 1 JANUARY 1998 Specific Conditions 1. The project s overall supervision rating is projected to be satisfactory or higher. 2. The provision of supplementary financing from AfDB or ADF resources will depend on the eligibility status of the Regional Member Country (RMC) concerned, in accordance with the relevant terms and conditions applicable to lending by the African Development Fund prevailing at the time of processing the request for financing. 3. The recipient country is making a determined effort towards national development in general and towards the mobilization of internal and external resources. 4. The country s environment is conducive to smooth project implementation. 5. The cost overrun is due to circumstances beyond the control of the borrowing country. 6. The cost overruns cannot be financed by the borrower that has not been able to find other sources of financing and provides justification for the request for supplementary Bank Group financing. 7. It was not possible to reduce the total cost of the project through changes in specifications or the scope of works or services without significantly affecting the objective and viability of the project. 8. The project is technically, economically and financially viable even with the cost overruns. 9. The size of the project cannot be reduced without undermining its ability to achieve its objectives and its sustainability. 10. There are no other exogenous constraints: financial, technical or managerial that would hinder the completion of the project. Compliance Justification (Yes/No) Yes The project s overall performance was considered to be satisfactory during the last supervision in December Yes The financing envisaged is in line with the allocations envisaged for Djibouti under ADF 14. Yes Yes Yes Yes Yes Yes Yes Yes The Government of Djibouti gives top priority to the project. It has undertaken to cover the cost of the Environmental and Social Management component, the operating costs, and the cost of the seawater pumping system, the workers camp and related works. The country enjoys peace and stability which are conducive to project implementation. The project cost overrun is due to the inadequate resources provided for the drilling of wells by one of the co-financiers. The Government has submitted a request for financing to the Bank with justification. The Government of Djibouti has undertaken to contribute UA 1.80 million. It was unable to obtain financing from the European Union, the Islamic Development Bank and KOAFEC Trust Fund for reasons given in the document.. There were changes in the specifications which helped to reduce the financing gap without eliminating it. Supplementary financing is needed. The project is still technically, financially and economically viable with a 13.0% financial rate of return. The project objectives can only be achieved through its full implementation. The size or scope of the project cannot be reduced. The financial and technical aspects are favourable to the completion of the project once financing is available. The project is managed by the Project Implementation Unit that has already been set up. IV

22 MINISTRY OF ECONOMY AND FINANCE CHAMBER OF INDUSTRY The Minister No. 649/MEFI ANNEX IV: GOVERNMENT OF DJIBOUTI S REQUEST FOR FINANCING REPUBLIC OF DJIBOUTI UNITY - EQUALITY PEACE Djibouti, 26 October 2017 To Mr Gabriel NEGATU Regional Director, Easter Africa Resource Centre African Development Bank The Regional Director, I wish to submit to you a request for the reallocation of USD 15 million, representing the Republic of Djibouti s total resources for the Fourteenth Replenishment of the African Development Fund (ADF), to the Fialè Geothermal Exploration Project which is one of the Government s strategic priorities. A first request was transmitted to the African Development Bank (AfDB) on 7 August 2016 (Ref. No. 574/MEFI) to this end, considering that the resources required to drill three wells largely exceeded the available project resources. Your institution responded favourably to the request. After reformulating the technical specifications for the drilling of three wells and for steel equipment (the latter will be funded by the French Development Agency (AFD), subsequent contracting and negotiation of the well drilling contract led to the signing of a contract with a firm tranche covering the drilling of two wells and a conditional tranche to complete the remaining components of the two wells and the drilling of a third well, which corresponds to the technical specifications preferred by experts. The resources from the reallocation of ADF -14 funds will be used to: implement the second phase of the first two wells: USD 3.4 million; carry out a feasibility study for the third well: USD 1 million; drill the third well: USD 10 million: cover physical contingencies: USD 0.6 million. Against this backdrop, I request you to reallocate the said ADF 14 resources to the Geothermal Exploration Project as soon as possible, because part of these additional resources will be used to finance the components required to complete drilling works on the two wells that are part of the firm tranche of the contract signed with the drilling company which is scheduled to start in early Thank you for your continuous support to my country in its efforts to ensure greater access to clean energy. Sincerely, ILYA MOUSSA DAWALEH V

23 ANNEX V: STATUS OF BANK GROUP ACTIVE PORTFOLIO IN DJIBOUTI AS AT 19 MARCH 2018 IN UNIT OF ACCOUNT PUBLIC SECTOR Sector Name Project Name Loan/Grant Number Approval Date Closing Date AGE (Years) Net Amount Amount Disbursed Disbursement Rate PAR Agriculture DJIBOUTI-DROUGHT RESILIENCE AND /12/ /9/ NPPP SUSTAINABLE LIVELIHOOD PROGRAM DJIBOUTI-GEF RURAL LIVELIHOODS /12/ /12/ ADAPTATION TO CLIMATE CHANGE MULTINATIONAL-DROUGHT RESILIENCE /06/ /12/ AND SUSTAINABLE LIVELIHOOD Agriculture Total % Multisector HEALTH SECTOR SKILLS BUILDING SUPPORT /12/ /6/ PROJECT HEALTH SECTOR SKILLS BUILDING SUPPORT PROJECT /12/ /6/ Multisector Total l l % Energy GEOTHERMAL EXPLORATION PROJECT /6/ /9/ NPPP GEOTHERMAL EXPLORATION PROJECT /6/ /9/ NPPP Energy Total % Social Social Total REGIONAL SOCIO-ECONOMIC /7/ /12/ NPPP INFRASTRUCTURE BUILDING AND ECONOMIC ACTIVITY PROMOTION SUPPORT PROJECT Water and Sanitation DWSS IN RURAL AREAS AND SECOBDARY /11/ /12/ NPPP CENTRES IN TADJOURAH, AR DWSS IN RURAL AREAS AND SECOBDARY CENTRES IN TADJOURAH, AR /11/ /12/ NPPP Water and Sanitation Total % PUBLIC SECTOR TOTAL % TOTAL PORTFOLIO % VI