AFRICAN DEVELOPMENT FUND MULTINATIONAL KENYA TANZANIA POWER INTERCONNECTION PROJECT

Transcription

1 AFRICAN DEVELOPMENT FUND Public Disclosure Authorized Public Disclosure Authorized MULTINATIONAL KENYA TANZANIA POWER INTERCONNECTION PROJECT APPRAISAL REPORT REVISED VERSION ONEC/EARC February 2015

2 Table of Contents FISCAL YEAR... i WEIGHTS AND MEASURES... i ACRONYMS AND ABBREVIATIONS... ii LOAN INFORMATION... iii PROJECT SUMMARY... iv 1. STRATEGIC THRUST AND RATIONALE Project Linkages with Country Strategy and Objectives Rationale for Bank Involvement Donor Coordination PROJECT DESCRIPTION Project Objectives Technical Solution Adopted and Alternative Considered Project Type Project Cost and Financing Arrangements Project s target area and population Participatory Approach Bank Group Experience and Lessons Reflected in Project Design Key performance indicators PROJECT FEASIBILITY Financial and Economic Performance Environmental and Social Impact IMPLEMENTATION Implementation Arrangements Governance Sustainability Risk Management Knowledge Building LEGAL INSTRUMENTS AND AUTHORITY Legal Instrument Conditions associated with the Fund s proposed Financing Compliance with the Bank s policy RECOMMENDATIONS APPENDIX I: COUNTRIES COMPARATIVE SOCIO-ECONOMIC INDICATORS - KENYA... I APPENDIX I: COUNTRIES COMPARATIVE SOCIO-ECONOMIC INDICATORS - TANZANIA... II APPENDIX II: ADB PORTFOLIO - KENYA... III APPENDIX II: ADB PORTFOLIO TANZANIA... V APPENDIX III: MAP OF PROJECT AREA... VII

3 CURRENCY EQUIVALENTS: MARCH UA = USD 1 UA = KSH 1 UA = TSH FISCAL YEAR 1 July 30 June WEIGHTS AND MEASURES 1 metric tonne = 2204 pounds (lbs) 1 kilogramme (kg) = lbs 1 metre (m) = 3.28 feet (ft) 1 millimetre (mm) = inch ( ) 1 kilometre (km) = 0.62 mile 1 hectare (ha) = acres m metre KOE kilogram of oil equivalent cm centimetre = 0.01 metre kv kilovolt = 1,000 volts mm millimetre = metre KVa kilovolt ampere (1,000 Va) km kilometre = 1,000 metres KW kilowatt = 1,000 Watts m² square meter GW gigawatt (1,000,000 kw or 1,000 MW) cm² square centimetre MW megawatt (1,000,000 W or 1,000 kw km² square kilometre = 1,000,000 m² KWh kilowatt hour (1,000 Wh) ha hectare = 10,000 m² MWh megawatt hour (1,000 KWh) t (t) metric tonne (1,000 kg) GWh gigawatt hour (1,000,000 KWh) i

4 ACRONYMS AND ABBREVIATIONS AC ACFA ADB ADF CDM CPIA CSRF CSP EAPP EARC E&S ESIA ESMP EWURA ERC FM GHG GoK GoT HFO JICA JPC JSC KETRACO KPLC MDB MoF MTP NEMA NBI OPGW PCR NELSAP PFM PIDA PIT ROW PRSP PSA RISP RAP SARC SAPP TANESCO VPP WB Alternating Current Accelerated Co-financing Facility for Africa African Development Bank African Development Fund Clean Development Mechanism Country Policy and Institutional Assessment Corporate Social Responsibility Fund Country Strategy Paper Eastern Africa Power Pool East African Resource Center Environment and Social Environmental and Social Assessment Environmental and Social management plan Energy and Water Utilities Regulatory Authority of Tanzania Energy Regulatory Commission of Kenya Financial Management Greenhouse Gas Emissions Government of Kenya Government of Tanzania Heavy Fuel oil Japan International Cooperation Agency Joint Project Coordinator Joint Steering Committee Kenya Electricity Transmission Company Limited Kenya Power and Lighting Company Multinational Development Bank Ministry of Finance Medium Term Plan National Environment Management Authority Nile Basin Initiative Optical Ground Wire Project Completion Report Nile Equatorial countries Subsidiary Action Program Public Financial Management Programme for Infrastructure Development in Africa Project Implementation Teams Right of Way Poverty Reduction Strategy Paper Power Sales Agreement Regional Integration Strategy Paper Resettlement Action Plan South Africa Resource Center South Africa Power pool Tanzania Electricity Supply Company Venerable People Plan World Bank ii

5 Country Recipient Implementing Agency Executing Agency LOAN INFORMATION CLIENT S INFORMATION Kenya and Tanzania Republic of Kenya and the United Republic of Tanzania Kenya Electricity Transmission Co. Ltd and Tanzania Electric Supply Company Ltd Ministry of Energy and Petroleum of Kenya and Ministry of Energy and Minerals of Tanzania FINANCING PLAN Sources Amount Instrument (UA million) Kenya Tanzania Total African Development Fund Loan Japan International Cooperation Agency Loan Government of Kenya/Tanzania Equity Total Financing PROJECT KEY FINANCIAL AND ECONOMIC OUTCOMES FIRR 10% (US$ EIRR ENPV@ 12% million) (US$ million) % TIME FRAME MAIN MILESTONES (expected) Concept note approval December 2013 Board approval February 2015 Loan signing March 2015 Launching April 2015 Effectiveness May 2015 Project Completion Report July 2019 Last disbursement December 2019 iii

6 Project Overview PROJECT SUMMARY The project involves the construction of a high voltage alternating current (HVAC) 400 kv transmission line (T-line) with a total length of km, of which about km are located in Tanzania and 93.1 km in Kenya. In Tanzania, the project includes the construction of a 400 kv substation in Arusha and the extension of the existing Singida substation. In Kenya, the project does not involve any works related to substations. Indeed, the substation outgoing bay in Isinya is part of the existing Nairobi Reinforcement project which is currently under construction. The proposed interconnection line, to be connected to the Ethiopia- Kenya transmission system through the Isinya Suswa 400 kv line, is part of the Eastern Africa Electricity Highway, with a transfer capacity of 2000 MW. As such, it will be the major link for power transfer between the Eastern Africa Power Pool and countries in the North such Sudan and Egypt. Completion of the line is expected in early Needs Assessment Project Outcomes Bank s added value Institutional development And knowledge building The project will allow the two countries to exchange power as well as import energy from the interconnected countries. The project fulfills the objectives of the NEPAD in terms of regional integration and promotion of infrastructure development through regional co-operation in key productive sectors such as energy. The project will contribute to: (i) improved power supply in both countries and in the East African region in general and; (ii) reduced operation costs of energy production. The project will help both countries to replace some of the high cost thermal energy production with cheaper hydropower, hence reducing Greenhouse Gas (GHG) emissions. The Bank has been playing a leading role in financing the implementation of infrastructure projects in the region including national transmission projects and regional power interconnections. Indeed, the Bank, being a lead financer and coordinator, managed to mobilize funds from other development partners such as JICA, AFD and the WB to finance major capital intensive interconnection projects in the like of the Ethiopia-Kenya Electricity Highway Project and the Backbone Transmission project in Tanzania. The project is also aligned with the climate change mitigation and adaptation strategy of the Bank, as it presents the potential to replace part of the fossil-fuelled thermal generation with hydropower. The project has a capacity-building component which includes training for technical staff of the utilities on operation and maintenance of the 400kV system. It will also provide training to commercial staff of both utilities to reinforce their management of commercial transactions. In addition it will include a training programme for regulatory issues raised in the context of power trade which will target experts of the regulatory authorities in both countries. iv

7 Anticipated Results Based Logical Framework Country and project name: Kenya-Tanzania Power Interconnection Project Purpose of the project : To improve the supply, reliability and affordability of electricity in the Eastern Africa region through cross-border exchanges of cheap and cleaner surplus power from neighboring countries, promote power trade, regional integration, and consequently contribute to Eastern Africa s socioeconomic transformation RESULTS CHAIN Indicator (including CSI) PERFORMANCE INDICATORS Baseline ( ) Target (2022) MEANS OF VERIFICATION RISKS/MITIGATION MEASURES IMPACT Sustainable economic growth and better quality of life in Eastern Africa region 1.GDP growth in % 2. Increased annual percapita electricity consumption in kwh 3.a. Decrease of Kenya s average electricity tariff for domestic &industrial customers 3.b. Decrease of Tanzania s average electricity tariff for domestic &industrial customers 1.Kenya: 5.8 % Tanzania: 6.8% 2.Kenya : 140 kwh Tanzania: 93kWh 3.a. Domestic: US$ /kwh; Industries: US$ 0.13/kWh 3.b. Domestic: US$ 0.14/ kwh; Industries : US$ 0.21/kWh 1.Kenya: 10% Tanzania: 10% 2. Kenya: 300kWh Tanzania : 200 kwh 3.a.Domestic: US$ 0.09 USD /kwh Industries: US$ 0.10/kWh 3.b.Domestic: US$ 0.09 /kwh; Industries: US$ 0.12 /kwh - Human Development Report - National economic statistics - AfDB CSP - Investment Prospectus Risk: Ambitious targets of 10% GDP in 2022 Mitigation: In Kenya, the government plan 5000+MW by 2016 is expected to support numerous economic activities. Such as mining, production of iron, large scale irrigation for food security, operation of petroleum pipelines In Tanzania, the project is included in the BRN (Big Results Now) which is a priority programme for the government. The GoT is planning to develop new gas power plants with a generation capacity of 400 MW. OUTCOMES Outcome 1 Improved power supply and trade in East Africa Outcome 2 Savings in operating costs in both countries operation costs in both countries Power trade in GWh Avoided Operating cost in US$ n/a n/a GWh US$ million - National statistics - Project post-evaluation report - Public utility companies statements and annual reports Risk: efforts at the regional level are not pursued; power trade is at risk. Mitigation: The PPA and Wheeling Agreements are designed to encourage regional power trade and promote sharing benefits of interconnections. v

8 Country and project name: Kenya-Tanzania Power Interconnection Project Purpose of the project : To improve the supply, reliability and affordability of electricity in the Eastern Africa region through cross-border exchanges of cheap and cleaner surplus power from neighboring countries, promote power trade, regional integration, and consequently contribute to Eastern Africa s socioeconomic transformation OUTPUTS ACTIVITIES RESULTS CHAIN Component A: Transmission Lines & ESMP Implementation Component B: Substations Component C: Rural Access Scale up T Component D: Project Supervision and Management (including Capacity Building) Component E: Technical Assistance & Capacity Building on Power Sales/ wheeling Agreements Indicator (including CSI) -Length ( in km) of HVAC T-line -Number of Elephants tagged -Number of jobs created -Number of HIV/AIDs and gender awareness sessions conducted N of high voltage substations build or extended N of villages along the T- line getting access to electricity N of project implementation & supervision reports Advisory service reports, n of people trained; PERFORMANCE INDICATORS Baseline ( ) Target (2022) n/a n/a n/a km of transmission line constructed (2019); -60 Elephants tagged and monitored (2019); temporary jobs and 35 permanent jobs (of which 30% women) (2019); -9 HIV/AIDS and gender awareness sessions annually (2019) 2 Substations in Tanzania (2017) 16 villages in Tanzania (128,000 people) and 5 villages in Kenya (70,000 people) (2019) n/a 8 supervision reports; 1 completion report; 2 trainings; 20 people trained, including 5 women A. Transmission lines B. Substations C. Rural access scale-up D. Project supervision and management E. Technical assistance and capacity building on power sales and wheeling agreements F. Environment and social costs G. Wildlife Monitoring Programme H. Total n/a 18 commercial staff trained; 20 engineers trained, including 8 women. vi MEANS OF VERIFICATION - Reports from PIT and supervision consultant - Supervision reports from the Bank - Disbursement and financial reports from the implementing agency - project completion report A MUA B MUA C MUA D MUA E MUA F MUA G MUA H MUA RISKS/MITIGATION MEASURES Risk: Project completion delay and failure to meet performance requirements. Mitigation 1: close supervision by Bank, Supervision Consultant and respective PIT Mitigation 2: The project will be implemented as design, supply and installation contract which should ensure minimum variance in costs

9 PROJECT IMPLEMENTATION SCHEDULE KENYA-TANZANIA POWER INTERCONNECTION PROJECT No Description Year Quarters Appraisal 2 Project Approval 3 Effectiveness 4 Selection of Consultants 5 Bid Preparation 6 Bidding period 7 Evaluation and Contract Award and 8 Mobilization and Construction 9 Commissioning 10 Operational Acceptance 11 Last Disbursement date vii

10 REPORT AND RECOMMENDATIONS OF MANAGEMENT TO THE BOARD OF DIRECTORS REGARDING ON PROPOSED LOANS TO THE REPUBLIC OF KENYA AND THE UNITED REPUBLIC OF TANZANIA FOR KENYA-TANZANIA POWER INTERCONNECTION PROJECT Management submits the following Report and Recommendations on proposed ADF loans of UA million and UA million to the United Republic of Tanzania and the Republic of Kenya respectively for the Kenya Tanzania Power Interconnection Project. 1 STRATEGIC THRUST AND RATIONALE 1.1 Project Linkages with Country Strategy and Objectives The proposed project is in line with one of the two pillars of the Bank s Country Strategy Paper (CSP) in Kenya for the period ( ) which focuses on enhancing physical infrastructure to unleash inclusive growth. The project is also aligned with the country s Vision 2030 which confirms that the expansion of electricity infrastructure is a top priority. Furthermore, the project fits within the Investment Prospectus ( ) and Power to transform Kenya MW by 2016, with the strategic aim to provide affordable electricity to quickly transform the economy. The initiative to add a generation capacity of around 5000 MW by 2016 is expected to transform the Kenyan economy through support to numerous economic activities such as mining, production of iron, large scale irrigation for food security, operation of petroleum pipelines, petrochemical production including fertilizer, electrification of rail lines. Therefore, increased and reliable power supply will be critical the desired growth in Kenya In Tanzania, the Bank s CSP ( ) seeks to support the country towards greater competitiveness and more inclusive growth under two reinforcing pillars, one of which being infrastructure development. The CSP is aligned with the Vision 2025, the medium-term national growth and poverty reduction strategy (MKUKUTA II and MKUZA II) as well as the Five Year Development Plan I-FYDP I- (2011/ /16) which emphasizes the importance of reliable and adequate power supply as a key driver for socioeconomic transformation. Tanzania recently revised its Vision 2025 under the banner of Big-Results- Now (BRN) in which the Energy Lab prioritized seven transmission line projects, including the Zambia- Tanzania and Kenya Tanzania interconnector The project is also consistent with the Bank s regional integration strategy paper (RISP) for East Africa ( ) whose main pillars are articulated around regional infrastructure and capacity building. The proposed project is included in the East Africa Power Master Plan (EAPMP) and will therefore contribute to make Kenya and Tanzania achieve some of the regional integration objectives of the East African Community 1 in the power sector Africa s economic and social transformation requires major investments in infrastructure as well as upgrading and modernization of existing infrastructure, which are recognized as a top priority by the African Union (AU) and the New Partnership for Africa s Development (NEPAD). Through the AU and NEPAD, African Heads of State and Government approved the Programme for Infrastructure Development in Africa (PIDA) in Addis Ababa, in January PIDA is a global partnership to transform Africa through modern infrastructure. It defines priority infrastructure investments required to integrate and interconnect Africa so that Africa starts to function as a single competitive market for goods and services linked to African markets and to the global economy. PIDA envisages investments of US$68 billion by 2020, out of which around 60% 1 Both countries are members of the EAC. 1

11 (US$40.3 billion) would be spent in the energy sector. Persistent power deficits are among the major challenges to Africa s sustained development. The energy sub-sector of PIDA has a focus on the development of major hydroelectric projects and the construction of transmission lines to connect the continent s power pools and enable inter-regional energy trade and cooperation. The Kenya-Tanzania Power Interconnector Project therefore contributes to the attainment of the objectives of PIDA This project is critical in completing the power transmission links from Ethiopia all the way to Zambia linking the Eastern African Power Pool (EAPP) to the Southern Africa Power Pool (SAPP), thus facilitating power trade between Eastern and Southern Africa and helping to address the critical power deficit in these regions through smoother flow of power trade from deficit to surplus areas. The proposed Kenya-Tanzania power interconnection is a like transformational as it will facilitate linking countries, businesses, communities and unlocking the potential for job creation and inclusive growth in both countries. Rationale for Bank Involvement The rationale for the Bank s involvement is fourfold: (i) the project will complement the NBI- NELSAP regional interconnection project2, and the Ethiopia-Kenya Electricity Highway project, both under implementation; (ii) the project will enable Tanzania to replace thermal based emergency power plants with hydro based imports, which is in line with the Bank s Energy sector policy (2012) aimed at encouraging the transition to green growth path in the delivery of affordable and reliable energy supply; (iii) the project is also aligned with the Bank s Ten-year Strategy ( ) that calls for accelerated regional integration and support to infrastructure projects that help unlock private sector participation. Accordingly, this interconnection project is expected to encourage the private sector investing in generation of electricity by facilitating power transfer through the interconnector; (iv) finally, the project aligns with the pillars of the regional integration strategy papers (RISPs) for Eastern Africa which focus on regional infrastructure and capacity building. The project will therefore contribute to the achievement of the two overarching objectives of the TYS, namely, inclusive growth and transitioning to green growth The project is also justified by the priority given by the NEPAD to energy as a key driver for economic growth. The programme strives to increase energy accessibility through development of regional energy infrastructure both on generation and grid connectivity. Indeed, regional integration is considered essential for meeting African s economic and development goals. As a major tool to drive regional integration, Energy is considered to play an important role in reducing the cost of doing business and energy infrastructure development is recognised as a priority and strategic focus area that requires special attention. The strategic objective to be pursued is to effectively address constraints related to the improvement of energy infrastructure in the region in order to foster physical regional energy connectivity and integration as well as enhance competitiveness. The region recognizes that removal of supply-side constraints related to energy is an essential pillar for improved market access and enhanced productive capacity Therefore, the Kenya-Tanzania Interconnection Project plays an important role in promoting regional integration through power trade. The project feasibility study was completed in June 2012 and affirmed the feasibility of the project as the least cost option, which adopts technology that is well proven and field-tested. The project allows the two countries to exchange power and also import from the interconnected countries. 2 connecting Kenya, Uganda, Rwanda, Burundi and the Democratic Republic of Congo (DRC) 2

12 Donor Coordination In Kenya, the Bank collaborates with other development partners (DP) through the Development Partners Group (DPG), the Harmonization, Alignment and Coordination Group (HAC), and various sector thematic working groups. The Ministry of Energy (MoE) in Kenya has established an Energy Sector Working Group (ESWG) which is currently chaired by the AFD. The most active development partners in the energy sector are; African Development Bank (AfDB,), World Bank (WB), European Investment Bank (EIB), Agence Française de Développement (AFD), Japan International Cooperation Agency (JICA), and Germany s Kreditanstalt für Wiederaufbau (KfW) In Tanzania, the Ministry of Finance (MoF) is responsible for coordinating donor financing activities within the energy sector. The Bank collaborates with other donors through the Joint Energy Sector Working Group (JESWG) composed of multilateral (AfDB, the European Union -EU and the WB) and bilateral (Canada, Denmark, Finland, Germany, Ireland, Japan, Norway, Switzerland and the United Kingdom) funding institutions. This group is currently chaired by the AfDB The Bank played a major role in organizing a donor coordination meeting for the financing of the Kenya Tanzania Zambia interconnection project. The interconnection between Kenya Tanzania will be co-financed with JICA. Such cooperation is based on Japan s strong commitment to realize the Action Plan of the Fifth Tokyo International Conference on African Development (TICAD V) held in Yokohama, Japan, in June The feasibility study for Tanzania - Zambia interconnection is almost completed and the project will be financed by the WB and AFD. 2.1 Project Objectives 2. PROJECT DESCRIPTION The ultimate development objective of the project is to improve the supply, reliability and affordability of electricity in the Eastern Africa region through cross-border exchanges of cheap and cleaner surplus power from neighboring countries. This project, through promotion of power trade at the regional level will contribute to Eastern Africa s socioeconomic transformation. Indeed, the project will help to improve the supply of electricity in Tanzania in the short to medium term with imports from Ethiopia The project involves the construction of approximately km of transmission line between Kenya and Tanzania (about 93.1 km in Kenya and km will be in Tanzania), with a transfer capacity of up to 2,000 MW in either direction, and associated substations in Arusha and Singida (Tanzania). There is no work pertaining to substations in Kenya as the Isinya substation is under construction under the Nairobi Ring Reinforcement project financed by the WB. The project also includes a capacity building component to strengthen the implementing agencies An intergovernmental memorandum of understanding was signed in September 2003 between the Governments of the Republic of Zambia, the Republic of Kenya and the United Republic of Tanzania on the development of Zambia-Tanzania-Kenya (ZTK) Interconnector. Recognizing that the project is part of the least-cost development plan, the three countries agreed jointly to develop the interconnection project. It was expected that the planning, construction, operation and the procurement of the investment shall be inferred in a manner that it will stabilize tariffs in the short to medium term time frames and shall lower tariffs in the long term among the three countries. While the Kenya Tanzania Interconnection component will be financed by AfDB and JICA, the WB and AFD are expected to finance the Zambia Tanzania Interconnection. The project has also been identified as a top priority project by Tanzania in the Big Results Now initiative and will 3

13 help to achieve the objectives set by the Government of Kenya (GoK) in the Power to Transform Kenya MW initiative. The project components are summarized hereunder: Table 2.1: Project Cost Estimates by Components (in UA million equivalent) Component Name Component A: Transmission lines Component B : Construction of Substations Estimated Component Description Cost MUA Construction of a 400 kv line: 93.1 km in Kenya and km in Tanzania including Implementation of environmental and social management plan Construction of one 400 kv substation in Arusha and expansion of the 220 kv substation in Singida Component C: Rural access scale-up Rural electrification along the transmission line route in Kenya and Tanzania. Component D: Project supervision and management 7.63 A Consulting Firm will be recruited to assist the implementing agencies in supervising the works on the transmission lines and substations. Component E: Technical assistance and capacity 9.60 i. This will include training for technical staff of the utilities in operating and maintaining the 400kV system. building on power sales and ii. Interconnection Tariff Study: a consultant will be recruited wheeling agreements to recommend a tariff structure to be applicable after interconnection is established between Tanzania and Kenya iii. Menengai (Rongai)-Kilgoris- Mwanza Interconnection Study iv. Distribution Master Plan Study (Tanzania) Component F: Environment and social costs This includes the environmental and social costs associated with resettlement of project affected persons (PAPs). Component G:Wildlife Monitoring Programme 1.02 This component will include the supply of collars as well as the necessary IT infrastructure to monitor elephant s movements Total Project Cost Technical Solution Adopted and Alternative Considered The optional alternatives of not interconnecting the two countries resulting in an independent national generation and also expanding the national transmission system were rejected. Independent generation and transmission development would deny both countries the opportunity of benefiting from the least cost option of integrating the two power systems. The solution considered is the construction of a 400 kv HVAC transmission line with a capacity of 2,000 MW along a route starting at Isinya substation in Kenya, passing through Namanga, crossing the border straight to Arusha (Tanzania) and ending at Singida substation (Tanzania). 2.3 Project Type The proposed intervention is a standalone investment project co-financed with JICA, under the framework of the Accelerated Co-Financing Facility for Africa (ACFA) dated February JICA will finance part of the works pertaining to the construction of the T-line and substations in Tanzania only while the Bank s funds will be used to finance project components in both countries. 2.4 Project Cost and Financing Arrangements The total project cost, including contingencies of 10% (physical contingency of 5% and price contingency of 5%), but excluding customs taxes and duties, is estimated at UA million (approximately equivalent to USD million), split between Kenya and Tanzania as UA million (approximately equivalent to USD million) and UA million (approximately equivalent to USD million) respectively. 4

14 2.4.2 Out of the total estimated project costs, UA million will be incurred in foreign currency and UA million in local currency, which represents respectively 69.7% and 30.3% of the total costs. The table presents the foreign and local currency costs by component for each country. Table 2.4.1: Project costs by Components in UA Million N Kenya Tanzania Kenya & Tanzania Components FC LC Total FC LC Total FC LC Total 1 T'-line Substations Rural Electrification ,74 4 Resettlement action plan costs a Capacity Building b Interconnection tariff study 5. c Distribution Master plan study d Feasibility study for Menengai (Rongai)- Kilgoris- Mwanza Interconnection Study interconnection Wildlife Monitoring Programme 8 Project Supervision & Management Total Project Costs The project cost estimates by country, category and expenditure by year are shown in the tables 2.4.2, and In addition, the project financing sources for foreign and local costs by country are illustrated in the Table Table 2.4.2: Project costs by Category and country (in UA Million) Categories Kenya Tanzania Kenya & Tanzania FC LC Total FC LC Total FC LC Total Works Services TOTAL

15 Table 2.4.3: Project costs by category of expenditure with ADF financing (in UA Million) Component FC LC Total FC LC Total FC LC Total Kenya Tanzania Kenya and Tanzania Works Services Total Project Cost Table 2.4.4: Expenditure Schedule by year (in UA Million) Source Total ADF JICA Kenya Tanzania Total Table 2.4.5: Project costs by Sources of financing (in UA Million) Source Kenya Tanzania Kenya and Tanzania FC LC Total FC LC Total FC LC Total ADF JICA GoK GoT TOTAL The Bank s financing, representing 51% of the total project cost estimates, will be sourced from the countries Performance Based Allocation (PBA) and the Regional Operation (RO) window as shown in Table below. Table 2.4.6: ADF allocation from the PBA and RO Component PBA RO Country Total Kenya Tanzania Total Project s target area and population The transmission line starts at Isinya (Kenya), where the originating substation is under construction. The Isinya substation is located 11 km to the south of the village of the same name. The line crosses the border near Namanga and travels through several main roads thus making access easy. The topography of the line is relatively flat. 6

16 2.5.2 The people along the transmission line s route earn their livelihoods mainly from crop farming. The direct beneficiaries of the project are households, businesses, and industries in communities located in both countries. The line is expected to benefit countries in North, East, and Southern Africa through interconnections between the EAPP and the SAPP hence facilitating power trade in the two sub-regions The high voltage transmission line requires the installation of ground (shield) wire to protect the line from lightning strikes. This ground wire can also be used to install optical fibers (optical ground wire-opgw). Hence, in addition to energy supply, the project will provide the local populations of both countries with access to high-speed ICT connectivity. This will be achieved through the OPGW line linked to the transmission line, which will provide spare capacity for use by local communities The project includes a rural electrification programme which consists in providing electricity access to about 21 villages (16 in Tanzania and 5 in Kenya) located within 20 km from the T-line and which are not currently connected to the grid. The project will entail the connection of the targeted households to the grid as well as the installation of pre-paid meters. This will enable a population of around 198,000 people (128,000 in Tanzania and 70,000 in Kenya) to have access to electricity and benefit from improved education and health services. Among the villages to be electrified in Tanzania included rural area around Babati Katesh, Giting, Endesh, Mgori and Ngimu. In Kenya, most of the villages along the line electrified with limited number of customers. Under the project financing the existing distribution transformers shall be exploited to the maximum through the extension of the low voltage network to reach around people located in the vicinity of these transformers and also with installation of new distribution transformers and low voltage lines. 2.6 Participatory Approach In Kenya, KETRACO had disclosed the environmental and social impact assessment (ESIA) for the Isinya Namanga section in accordance with the Environmental Management and Co-ordination Act in August 2013 prior to licensing. In Tanzania, the ESIA summary and the Resettlement Action Plan (RAP) Entitlement Matrix were written in Swahili to ensure larger diffusion and awareness among the local population. The Venerable People Plan (VPP) written in English will be largely disclosed on the TANESCO s website and library but also at the district, regional and national level. TANESCO agreed to disclose the reports until completion of the project. The disclosure of the ESIA report will be brought to the attention of the public through announcements on the local daily newspapers in English and Swahili by TANESCO, and through stakeholder consultations The public and stake holders in Kenya and Tanzania were consulted the potential impacts of the project during the preparation of the Environmental and Social Impact Assessment (ESIA), Resettlement Action Plan (RAP), and Environmental and Social Management Plan (ESMP). Stakeholder consultations were conducted with, affected communities, national and international NGOs, civil society and relevant government ministries 2.7 Bank Group Experience and Lessons Reflected in Project Design The Bank has been very active in the energy sector in Kenya and Tanzania. In Kenya, the Bank s energy portfolio through public sector financing is over UA 300 million which includes Nairobi-Mombasa, (UA 50 Million) and Transmission systems improvement project (UA 46.7) etc.. In Tanzania, the Bank s current energy sector portfolio includes the Electricity V project (UA 28.7 million, approved in 2007) and the Backbone Iringa Shinyanga transmission line project for an amount of UA million (approved in 2011). There is no backlog in project completion report (PCR) pertaining to power projects in the two countries. Some projects show slow disbursement due to poor performance of contractors. The Bank continues dialogue 7

17 with the Government to improve the performance of energy projects and to avoid delay in implementation of future projects Important lessons can be drawn from the Bank s past interventions in Kenya and Tanzania. These mainly relate to: (i) project readiness and quality at entry; (ii) project start-up and implementation delays due to ineffective institutional arrangements; (iii) delay in fulfilling conditions to first disbursement (vi) delay in implementing the RAP due to non-availability of counterpart funds and (vii) poor performance of contractors. Those lessons have been taken into account in the design of the proposed project notably by: (i) ensuring that it is supported by appropriate feasibility, ESIA and RAP studies; (ii) setting up a joint project coordination unit (JPCU) to minimize any implementation delays and ensure a close collaboration between utilities; (iii) ensuring the counterpart funds are budgeted before construction starts and; (iv) providing capacity building trainings in particular project management and (v) conduct dialogue with the Government and Strengthen the qualification criteria in selection of contractors 2.8 Key performance indicators The following indicators have been discussed with the implementing agencies and shall be applied to measure the impact of the project. The target figures and dates for each indicator have been confirmed by TANESCO and KETRACO. The proposed indicators are: increased annual per capita electricity consumption (kwh); decreased in each country s electricity tariff for domestic and industrial consumers; power trade (GWh); avoided operating costs (Maintenance and fuel) in both countries (MW); length of the T-line; number of elephants tagged; number of jobs created (permanent/temporary/women); number of HIV/AIDS and gender awareness campaigns conducted; number of high voltage substations; number of villages/people located along the T-line getting access to electricity; number of implementation and supervision reports; number of advisory reports and, number of people trained (out of which number of women). 3.1 Financial and Economic Performance 3. PROJECT FEASIBILITY The Kenya Tanzania Interconnection Project plays an important role in promoting regional integration through power trade. The feasibility study confirmed that the Kenya - Tanzania Power Interconnection project is the least cost option, which adopts technology that is well proven and field-tested It was assumed that, after being interconnected, both countries would aim at being self-sufficient and thus would not modify the generation expansion plan in isolated case. This approach is conservative. Indeed, optimizing the combined generation expansion plan of the two countries would bring additional benefits, but it would require a tight coordinated planning. The generation plans were built on the assumption of limited indigenous Tanzanian gas availability. The results of the simulations undertaken to predict energy flows show that in the first period (from 2019 to 2026), Tanzania mainly imports power from Kenya while during a second phase (from 2028 to 2038), the exchanges vary in amplitude and come primarily from Tanzania. After 2039, there is almost no exchange The benefits of the Kenya-Tanzania Interconnection will be determined by the difference between, on one hand, the savings in generation costs brought to the importing country, and; on the other hand, the additional generation cost incurred in the exporting country. The savings thus calculated represent the economic gain in generation costs brought by the interconnection. Power plants with lower variable costs in one country would increase their output and replace those with higher costs. 8

18 3.1.4 The financial and economic assessment of the project is undertaken over an operating period of twenty years starting in The investment is carried out over five years (2015 to 2019). The financial assessment of the proposed project results in financial internal rate of return (FIRR) and financial net present value (FNPV) of 22.03% and US$ million respectively, showing that the project is financially viable In the economic analysis, in addition to the savings in generation, another benefit of the interconnection is taken into account, namely the benefit that will accrue from a reduced reserve capacity. The interconnection between the two power systems provides the possibility for both countries to share a certain quantity of the reserve margin and allows each one to reduce the reserve capacity it needs and import the energy when required. The economic assessment of the project results in an economic rate of return (EIRR) and economic net present value (ENPV) of 25.21% and US$ million The following table sums up the main financial and economic indicators of the project. The complete analysis and assumptions are detailed in the Technical Annex B.7. Table 3.1: Main Financial and Economic Indicators PARAMETERS VALUES FIRR 22.03% FNPV (@10%) US$ million EIRR 25.21% ENPV (@12%) US$ million The financial and economic rates of return of the project have been tested against the possible risk parameters during the construction and operation phases. The identified key risks include investment costs overrun, an increase in operating costs and a reduction in revenues. The results of the sensitivity analysis show that the financial and economic results are robust under identified adverse conditions. They also reveal that the metrics of the project are more sensitive to a change in revenues and capital costs than to a variation in operating costs. The details of the sensitivity analysis are shown in the Technical Annex B Environmental and Social Impact Environment The Project has been classified as Category I in accordance with the Bank s environmental and social assessment procedures (ESAP). The project comprises the construction of a total of km of 400 kv HVAC transmission line (93.1 km of the line is in Kenya and km in Tanzania) with a designed transfer capacity of 2,000 MW. The associated substation works include: the extension of the existing Singida (Tanzania) substation to include 400 kv transformers, and the construction of a new 400kV substation in Arusha (Tanzania). In addition, the project is expected to affect 1,618 households (299 in Kenya and 1319 in Tanzania). The Summaries of the ESIA and RAP have been posted on the Bank website on August 15th The negative environmental impacts are the permanent loss of vegetation in the right of way (ROW) and the permanent loss of small portions of land required for the construction of towers. The transmission line crosses protected areas in Tanzania specifically some Game controlled areas and Wildlife Management Area (WMA s). These include three migration corridors: the Amboseli, Kilimanjaro-Lake Natron corridor, the Manyara Ranch Lake Natron corridor and the Tarangire-Manyara (Kwakuchinja) corridor. Other impacts, such as dust emissions, noise, soil erosion, degradation of water quality, soil contamination by poor waste management or accidental spill of hydrocarbons, may occur during construction, maintenance and decommissioning works but will be very limited and of temporary nature. The negative social impacts are the 9

19 permanent loss of arable land due to the presence of access roads and tower bases, and the restriction of plant species without the potential to grow beyond 5 m at maturity in the ROW. In addition, a significant impact will be the relocation of houses and some public or private infrastructure such as schools, mosques, churches, and shops An Environmental and Social Management Plan (ESMP) has been prepared. Mitigation measures have been proposed to minimize or compensate for adverse impacts. These include measures to minimize vegetation clearing; adjusting tower location and span length to minimize the need for tree removal and trimming along forest edges; Sagging of the line in wildlife corridor should not be less than 10 meters; Mixing of construction material should be restricted in sensitive ecological areas including corridors and dispersal areas (material should be prepared off site); Camouflage towers/blend to environment (combat like) in corridors to reduce reflection to migrating animals; promoting anti-poaching activities; Avoid construction of the transmission line through wetlands and span wetlands whenever possible; Carry out activities during the dry season to minimize disturbance of sensitive soils and problems in flood prone areas; Use existing roads for construction and operational access whenever possible and Regular control of vehicles to prevent introduction of invasive species. Details of roles and responsibilities for the implementation of the ESMP have been provided in Technical Annex B8.5. The cost of the ESMP implementation is estimated at USD 1 million and the annual monitoring costs are estimated at USD 951, The positive impacts include; the project will promote and enhance regional integration; provide employment creation to the local communities during construction; electrification of villages along the transmission line corridor will improve access by the locals; electrification in some of the public institutions and villages will improve the local socio-economy. Climate change The proposed project is a clean energy project and is perfectly aligned with the climate change mitigation and adaptation strategy of the Bank. It will contribute to the replacement of fossil-fuelled thermal generation and improve the climate resilience of both Kenya and Tanzania. The proposed project will facilitate importation of excess electricity produced in Tanzania into Kenya and vice versa and this will help reduce overall GHG emissions in both countries. Besides producing electricity, importation is one of the ways Kenya will have access to the needed power for its development, as proposed in the Least Cost Power Development Plan (Republic of Kenya, 2011). Indeed, and as shown in the Feasibility study, Kenya would have to produce MW of electricity mainly through coal fuel plants (52% or MW) and geothermal (48% or MW) to meet its power demand between 2014 and The construction and operation of these plants would produce, especially in the case of coal power plants, a large amount of GHG (coal produces 955 g of CO 2 per kwh). Improved access to electricity for both countries will also reduce the use of firewood for cooking and heating, which represents a significant source of deforestation, contributing to climate change. In addition, access to electricity can reduce the use of private generators and kerosene lamps, which also produce GHG. Gender Both Kenya and Tanzania have well elaborated gender mainstreaming policies and strategies which are grounded in their national constitutions and need to be operationalized in development projects especially in order to economically empower women. The KETRACO Gender Policy fosters equality in contracting for services at corporate level, training of staff and employment. While in Kenya the Central Government has instituted performance evaluation of all public offices that include gender mainstreaming parameters, hence performance contracts at KETRACO have specific obligations for mainstreaming gender through, among 10

20 others, contracting for works, goods and services; and deals with disability mainstreaming and youth and women empowerment Similarly, the National Gender Policy for Tanzania obliges all public institutions to mainstream gender and to appoint gender focal points. The project design has included workshops for staff to bring in gender awareness to engender policy formulation and operational procedures which are based on gender equality. Furthermore, employment of workers during construction shall include a quota for women (10% during construction and 30% during operation). In the case of Tanzania, through the Corporate Social Responsibility Fund (CSRF), TANESCO will implement a rural electrification programme for the affected communities in 16 villages which include female headed households, estimated to be 13%. Within the project, there will be a program of HIV and AIDS prevention and awareness campaigns which will impart information to both women and men who are at risk including school going girls and rural communities. The project has also included a technical assistance and capacity building component for 18 commercial staff, 20 engineers, 6 economist and legal officers including 4 women. Around 30% of the permanent jobs expected to be created through the project will be reserved for women. The workplace environment shall be tailored for both men and women and a code of conduct will be agreed upon between employer and workers in order to curb abuses perpetrated towards female workers. Social In Tanzania, villages located along the transmission line are not electrified. The proposed project includes a rural electrification component which will consist of providing electricity access to 16 villages located within a 25km distance from the 400kV transmission line route. Other direct benefits shall accrue to these communities through creation of short-term jobs. It is anticipated that at least 400 temporary jobs and 35 permanent jobs will be created in the two countries Furthermore, indirect employment shall be created through supply of local materials which, according to the new procurement regulations in Kenya, 30% of such locally sourced supplies will be from enterprises owned by women, youth and people with disabilities The two countries have rural electrification programs which are connecting as many rural areas as possible. In Kenya, the Government has embarked on a program for electrifying all government institutions such as primary schools, clinics and local administration offices. In addition to the rural electrification program, the utility in Tanzania has a policy of allocating 1% of the total project cost to the CSRF which will provide energy access through solar sources to community social services such as schools, health centres and markets that are not connected to the grid. As part of the proposed project, around 21 villages along the route (16 in Tanzania and 5 in Kenya) have been earmarked for such a program This being an interconnection between two countries, the overarching benefits are enhanced reliability, affordability (low cost electricity from Ethiopia), quality and adequacy of supply to productive industries of the two countries that would be realised from the power system integration and power trade. Additional benefits will be realized from leasing out spare capacity in the transmission line s optical fibre cable for data and information exchange between the two countries and the world at large. Involuntary resettlement The transmission line will pass through properties in the two countries and hence has triggered the preparation of a RAP. The affected properties and number of households are as follows: 299 in Kenya and 1319 in Tanzania. Of these, 20 households in Kenya have their main structures affected, and 253 in Tanzania have their primary structures affected. The rest of the affected households have secondary structures, crops 11

21 and trees affected. The number of households having their livestock grazing within the way leave is estimated at 105 and 326 in Kenya and Tanzania, respectively. To ensure that the affected households shall be adequately compensated, budgetary allocations have been set aside to the tune of USD million for Kenya and USD million for Tanzania. 4.1 Implementation Arrangements Institutional Arrangements 4. IMPLEMENTATION The Republic of Kenya, through the National Treasury, shall be the Borrower of the loan. The Ministry of Energy will be the Executing Agency and KETRACO will be the Implementing Agency of the project. The United Republic of Tanzania through its Ministry of Finance shall be the Borrower of the loan. TANESCO will be the Executing and Implementing Agency of the proposed project KETRACO acquired the necessary technical and managerial ability to implement such complex projects, as demonstrated by the ongoing implementation of the Mombasa-Nairobi Transmission Line, Kenya-Uganda interconnection and the Power Transmission System Improvement Project financed by the Bank. Similarly, TANESCO has demonstrated adequate technical and managerial ability to implement the project as with the ongoing implementation of the Iringa - Shinyanga high-voltage transmission project jointly financed by the AfDB/JICA, the WB and EIB. The involvement of the supervision and management consultant to be recruited through a competitive selection process will reinforce the capabilities of both entities The project will be implemented by national project implementation teams (PITs) designated within the respective utilities, which will be supervised by a Joint Steering Committee (JSC) composed of representatives from both countries. Each PIT will be adequately staffed and will be composed of the following key staff: a project manager, a transmission line engineer, a substation engineer (in Tanzania), a civil engineer, a procurement expert, an accountant, an environmental expert and a socio-economist. The team may be supported by other relevant experts from the utility To address the challenges of effective implementation of the project, a Joint Project Coordinator (JPC) will be appointed to ensure a smooth coordination and to deal with all project issues common to both countries. Given that a substantial portion of works will be carried out in Tanzania, the two countries have agreed that the JPC shall be appointed by TANESCO, in consultation with KETRACO. The role of the JPC covers the coordination, joint preparation and review of bidding documents, request for proposals and bid evaluation reports, obtaining of Bank s approval and negotiation of contracts. The JPC shall also be responsible for the compilation and transmission of consolidated quarterly project reports to all lenders and to the two Governments To ensure effective coordination and harmonized planning of activities, a JSC will be constituted as an overseer of the Kenya Tanzania project implementation. The JSC will be composed of Permanent Secretaries of the both ministries of energy, the Director of External Resources of Kenya, the Commissioner for External Finance of Tanzania, the Executive officers of TANESCO and KETRACO, the Chief Executive Officers and the Heads of Department responsible for Transmission from KETRACO and TANESCO. This committee will oversee the implementation of the project and ensure an effective cooperation between the two countries. The JSC provides a forum for arbitrating disputes arising between the two PITs that are not 12

22 resolved at the technical level. It will meet every six months or more often if required. Meetings of the JSC will be chaired by the Minister of Energy of the country in which the meeting is held Procurement Arrangements All procurement of works, and acquisition of consulting services financed by the Bank will be in accordance with the Bank s Rules and Procedures: Rules and Procedures for the Procurement of Goods and Works dated May 2008 (revised July 2012); and Rules and Procedures for the Use of Consultants dated May 2008 (revised July 2012), as amended from time to time, using the relevant Bank standard bidding and request for proposal documents, and the provisions stipulated in the Loan Agreements. Both utilities have been deemed to have adequate capacities and will be responsible for all envisaged procurements in the project. The procurement of works in Tanzania financed by JICA will also be processed by the Bank, following the applicable AfDB s rules and procedures. All the procurement decisions pertaining to the project will be submitted to JICA for information. The procurement arrangement is detailed in Annex B The JPC, supported by procurement experts from KETRACO and TANESCO, will be responsible for the procurement of goods, works, and services. A Joint Tender Evaluation Committee composed of appropriate technical staff designated by each of the project owners will participate in proposal evaluations for the selection of consultants for project supervision, as well as for the Feasibility Study for the Menengai (Rongai)-Kilgoris- Mwanza interconnection. KETRACO and TANESCO will separately use their own arrangements to approve all procurement and contract award decisions and the report will be submitted through the JPC to the Bank for no-objection. The JPC will be responsible for obtaining the necessary clearances on all procurement matters KETRACO and TANESCO will jointly prepare one bidding document for the construction of transmission lines in both countries. The bidding document shall include the schedule of prices and be comprised of one lot for Kenya and three lots for Tanzania. A separate bid Evaluation Committee composed of sufficient senior technical staff shall be established by each country to evaluate bids covering the project scope in their territory. Bidders will prepare separate bids for Kenya and Tanzania. The bids will be submitted to KETRACO or TANESCO depending on the bidders interest to participate in one of the countries or in both countries The two Borrowers have requested for the use of the advance contracting procedure for the construction of transmission line and substations and the recruitment of the Supervision Consultant. The project Procurement Plan has been prepared by the Executing Agencies and will be updated for Bank s approval before negotiations Financial Management Arrangements Financial Management: KETRACO and TANESCO have proper structures in place as well as adequate staff to carry out the Financial Management (FM) responsibilities of the project. Both entities will be accountable for the project funds and financial reporting and will use their respective accounting systems for all the project s financial transactions. Both entities are currently implementing on-going bank projects which are at various stages of implementation. The implementing agencies will be required to produce and submit quarterly Interim Financial Reports to the Bank (format will be agreed with the Bank) no later than 45 days after the end of each quarter. At the end of each financial year and at the end of the project, each entity will produce financial statements in line with International Financial Reporting Standards. 13

23 Disbursement: the project will use the Direct Payment as described in the Disbursement Handbook. The Bank s Disbursement Letter will be issued stipulating key disbursement procedures and practices Audit: the internal audit units will incorporate the new project in their work program and issue periodic reports as it is being done for the on-going projects. The annual financial statements of the project for each entity will be audited by the respective Country s Auditor General or a firm appointed by the Auditor General. The annual Audit Report, complete with a Management Letter and responses, will be submitted to the Bank no later than six months after the end of the fiscal year. The project will also be subjected to a Value for Money (VfM) audit at mid-term or when substantial work will have been undertaken. The two governments (or implementing agencies) are responsible for covering the expenses related to the financial and value for money audits Furthermore, the Bank and JICA will conduct supervision missions at least twice every year. The missions objectives will include ensuring that strong financial management systems are maintained for the project throughout its life. Reviews will be carried out regularly to ensure that expenditures incurred by the project remain eligible for the ADF and JICA funding Monitoring and Evaluation The project will be implemented over a period of 48 months from loan effectiveness. Each PIT will be responsible for the regular monitoring and reporting on the project implementation progress. The PIT will have the responsibility to supply data against the set of agreed performance indicators: (i) on an annual basis for project outcome indicators; (ii) on a quarterly basis for targets based on the expected outputs and propose corrective measures; (iii) on an annual basis for audit reports; and (iv) bi-annually for ESMP compliance reports. These reports shall cover all aspects of project implementation and disbursement schedules for all components; implementation of environmental and social mitigation measures as well as the fulfilment of loan conditions The JPC, in liaison with the project supervision and management consultant, will prepare and submit to the Bank the project quarterly progress reports. The audit report will be submitted to the Bank within six months after the end of every financial year. Furthermore, the supervision consultant will prepare and submit final commissioning reports to the PITs and the Bank at the completion of its assignment. The Tanzania field offices (TZFO) in Dar es Salaam and the Regional Resource Centre in Nairobi, with the support of the headquarter if need be, will carry out field supervisions twice a year or on an as-needed basis.. The coordination of the missions will be done by the Ministries of Finance of both countries in collaboration with KETRACO and TANESCO. 4.2 Governance The financial management arrangements of KETRACO and TANESCO are considered adequate to ensure that project resources are used for the purposes for which they were granted, with due consideration for efficiency and economy. KETRACO has an Audit & Risk Committee (which was reconstituted in 2013) which is comprised of four non-executive directors and is chaired by a non-executive director. Whereas the Board has overall responsibility for internal control, the systems of internal controls, certain responsibilities such as the review of the effectiveness of internal control systems are delegated to the Audit & Risk committee. Internal controls comprise of methods and procedures adopted by Management to provide reasonable assurance in safeguarding assets, prevention and detection of errors, accuracy and completeness of accounting records together with reliability of financial statements. TANESCO has an in Internal Audit 14

24 Department headed by the Chief Internal Auditor who reports administratively to the MD and functionally to the Audit committee of the Board of Directors of the entity The project implementation will be guided by all existing procedures, manuals, governance and anticorruption policies of both countries and external oversight will be provided by the respective Auditor General. The Bank will also provide some oversight, especially during supervision missions. The internal audit of the authorities and that of the ministries will complement the oversight of the management. The proposed value-for-money audit will further help in providing assurance that funds will be used for intended purposes only with due regard to economy and efficiency. 4.3 Sustainability The project is technically, economically, and financially sustainable. The technical sustainability is guaranteed by the use of proven technology widely used in both countries. The economic and financial sustainability of the project will be supported by the growing demand for electricity in both countries and the region. Indeed, the regional interconnection provides an opportunity to import hydropower from Ethiopia at a more competitive price compared to the high cost of thermal generation in both countries The realization of the GoK s strategy for an additional 5,000 MW generation capacity between 2013 and 2017 and the potential to exploit gas reserves in Tanzania will provide further opportunities to exchange power among countries in the region. Before the end of 2017, the GoT is planning to develop new gas power plants with a generation capacity of 400 MW KETRACO and TANESCO commit themselves to operate the interconnector and perform the maintenance on the part of the interconnection located on their territory Risk Management The project involves some degree of risks. The major risks and mitigation measures are summarized in the table below. The overall project risk is rated as moderate. Risk Description Rating Mitigations GDP Ambitious targets of 10% GDP in 2022 M In Kenya, the government plan 5000+MW by 2016 is expected to support numerous economic activities. Such as mining, production of iron, large scale irrigation for food security, operation of petroleum pipelines In Tanzania, the project is included in the BRN (Big Results Now) which is a priority programme for the government. The GoT is planning to develop new gas power plants with a generation capacity of 400 MW Power trade Implementat ion delay L: Low; M: Moderate Efforts at the regional level are not pursued; power trade is at risk. Project completion delay and failure to meet performance requirements L The PPA and Wheeling Agreements are designed to encourage regional power trade and promote sharing benefits of interconnections. L Close supervision by the Bank Supervision Consultant and respective PIT The project will be implemented as design, supply and installation contract which should ensure minimum variance in costs 15

25 4.4 Knowledge Building The construction and consulting contracts will include specific provisions to ensure the training of KETRACO and TANESCO engineers. Specific training programs will be provided by the contractors responsible for the construction of the transmission line and substations and will include topics related to the operation and maintenance of the interconnector. The supervision consultant will provide training in the areas of project management Moreover, the capacity building Programme component will cover training for technical staff of the utilities in operating and maintaining the 400kV system. The programme will also provide training to commercial staff of both utilities to reinforce management of commercial transactions. The programme will also include training in conducting environmental and social impact assessment studies to NEMC and TANESCO, and will cover issues pertaining to the regulatory environment in the context of power trade, which will be relevant to experts from the Energy and Water Utilities Regulatory Authority (EWURA) in Tanzania and the Energy Regulatory Commission (ERC) in Kenya. 5.1 Legal Instrument 5. LEGAL INSTRUMENTS AND AUTHORITY The legal instruments for the proposed project are: An ADF Loan Agreement with the Republic of Kenya; and An ADF Loan Agreement with the United Republic of Tanzania The proceeds of the loans will be on-lent to KETRACO and TANESCO in Kenya and Tanzania respectively. 5.2 Conditions associated with the Fund s proposed Financing A) Entry into Force Conditions The entry into force of each relevant ADF Loan Agreement shall be subject to the fulfilment, as applicable, by the Government of the Republic of Kenya and the Government of United Republic of Tanzania (the Borrowers ) of the provisions of Section of the General Conditions applicable to the African Development Fund Loan Agreements and Guarantee Agreements. B) Conditions Precedent to First Disbursements i. The conclusion of a Subsidiary Loan Agreement with TANESCO (for Tanzania) and Subsidiary Financing Agreement with KETRACO for on-granting (for Kenya) the loan proceeds on terms and conditions acceptable to the Fund; ii. iii. The establishment of a National Project Implementation Team whose composition, qualifications and experience are acceptable to the Fund and the appointment of a Joint Project Coordinator, whose qualifications and experience are acceptable to the Fund; and The Borrower s submission to the Fund of a Works and Compensation Schedule (the Works and Compensation Schedule ) detailing (A) each section of civil works under the Project and (B) the time 16

26 frame for compensation and resettlement of all project-affected persons (as defined in the RAP or any update of the RAP) in respect of each section. iv. The co-financier JICA has approved its financing of the Tanzania component of the project or the relevant Borrower has made appropriate arrangements to cover any financing gap resulting from failure to obtain the commitment of the co-financier; C) Other Conditions i. Each Borrower to provide evidence, in form and substance satisfactory to the Fund, that, prior to commencement of Transmission line construction on any section of the project, all project-affected Persons in respect of such section of civil works have been compensated and/or resettled in accordance with the RAP and the Works and Compensation Schedule. D) Undertakings The Government of the United Republic of Tanzania and the Government of Kenya, undertake the following: i. to establish not later than three months of the project approval by the Board of the African Development Fund a Joint Steering Committee for the project whose composition, is acceptable to the Fund; ii. iii. iv. to provide to the Bank not later than six months prior to completion of the project a Power Purchase Agreement (PPA) or a Power Exchange (PEA) or Wheeling Agreements (PWA) confirming potential utilisation of the proposed project assets; to provide to the Bank within three months of the project approval by the Fund a Construction, Operations and Maintenance Agreement, in form and substance acceptable to the Fund; Fully implement the Environmental and Social Impact Assessment (ESIA), Environmental and Social Management Plan (ESMP) and the Resettlement Action Plan (RAP) of the project, and comprehensively report to the Fund on the said implementation on a quarterly basis; v. Submit Annual Reports approved by the relevant authorities on ESMP and Occupational Health and Safety (OSHA) compliance. 5.3 Compliance with the Bank s policy This project complies with all applicable Bank policies. In particular, it is consistent with the Bank s Energy Sector Policy, approved in October RECOMMENDATION Management recommends that the Board of Directors of the African Development Fund approves the proposed loan of UA million and UA million to the Republic of Kenya and to United Republic of Tanzania respectively for the financing of the Kenya Tanzania Power Interconnection Project. 17

27 APPENDIX I: COUNTRIES COMPARATIVE SOCIO-ECONOMIC INDICATORS - KENYA Indicator Year Kenya Africa Developing Countries Developed Countries Basic Indicators Area ('000 Km²) , , ,658.4 Total Population (millions) , , ,068.7 Urban Population (% of Total) Population Density (per Km²) GNI per Capita (US $) , , ,688.1 Labor Force Participation - Total (%) Labor Force Participation - Female (%) Gender -Related Development Index Value Human Develop. Index (Rank among countries) Propel. Living Below $ 1 a Day (% of Population) Demographic Indicators Population Growth Rate - Total (%) Population Growth Rate - Urban (%) Population < 15 years (%) Population >= 65 years (%) Dependency Ratio (%) Sex Ratio (per 100 female) Female Population years (% of total population) Life Expectancy at Birth - Total (years) Life Expectancy at Birth - Female (years) Crude Birth Rate (per 1,000) Crude Death Rate (per 1,000) Infant Mortality Rate (per 1,000) Child Mortality Rate (per 1,000) Total Fertility Rate (per woman) Maternal Mortality Rate (per 100,000) Women Using Contraception (%) Health & Nutrition Indicators Physicians (per 100,000 people) Nurses (per 100,000 people)* Births attended by Trained Health Personnel (%) Access to Safe Water (% of Population) Access to Health Services (% of Population) Access to Sanitation (% of Population) Percent. of Adults (aged 15-49) Living with HIV/AIDS Incidence of Tuberculosis (per 100,000) Child Immunization Against Tuberculosis (%) Child Immunization Against Measles (%) Underweight Children (% of children under years) Daily Calorie Supply per Capita , , , ,284.7 Public Expenditure on Health (as % of GDP) Education Indicators Gross Enrolment Ratio (%) Primary School - Total Primary School - Female Secondary School - Total Secondary School - Female Primary School Female Teaching Staff (% of Total) Adult Literacy Rate - Total (%) Adult Literacy Rate - Male (%) Adult Literacy Rate - Female (%) Percentage of GDP Spent on Education Environmental Indicators Land Use (Arable Land as % of Total Land Area) Annual Rate of Deforestation (%) Annual Rate of Reforestation (%) Per Capita CO2 Emissions (metric tons) , Chart GNI per Capita (US $) Kenya Population Growth Rate - Total (%) 2012 Kenya Access to Safe Water (% of Population) Ke Secondary School - Total Kenya I

28 APPENDIX I: COUNTRIES COMPARATIVE SOCIO-ECONOMIC INDICATORS - TANZANIA Indicator Year Tanzania Africa Developing Countries Developed Countries Basic Indicators Area ('000 Km²) , , ,658.4 Total Population (millions) , , ,068.7 Urban Population (% of Total) Population Density (per Km²) GNI per Capita (US $) , , ,688.1 Labor Force Participation - Total (%) Labor Force Participation - Female (%) Gender -Related Development Index Value Human Develop. Index (Rank among countries) Propel. Living Below $ 1 a Day (% of Population) Demographic Indicators Population Growth Rate - Total (%) Population Growth Rate - Urban (%) Population < 15 years (%) Population >= 65 years (%) Dependency Ratio (%) Sex Ratio (per 100 female) Female Population years (% of total population) Life Expectancy at Birth - Total (years) Life Expectancy at Birth - Female (years) Crude Birth Rate (per 1,000) Crude Death Rate (per 1,000) Infant Mortality Rate (per 1,000) Child Mortality Rate (per 1,000) Total Fertility Rate (per woman) Maternal Mortality Rate (per 100,000) Women Using Contraception (%) Health & Nutrition Indicators Physicians (per 100,000 people) Nurses (per 100,000 people)* Births attended by Trained Health Personnel (%) Access to Safe Water (% of Population) Access to Health Services (% of Population) Access to Sanitation (% of Population) Percent. of Adults (aged 15-49) Living with HIV/AIDS Incidence of Tuberculosis (per 100,000) Child Immunization Against Tuberculosis (%) Child Immunization Against Measles (%) Underweight Children (% of children under years) Daily Calorie Supply per Capita , , , ,284.7 Public Expenditure on Health (as % of GDP) Education Indicators Gross Enrolment Ratio (%) Primary School - Total Primary School - Female Secondary School - Total Secondary School - Female Primary School Female Teaching Staff (% of Total) Adult Literacy Rate - Total (%) Adult Literacy Rate - Male (%) Adult Literacy Rate - Female (%) Percentage of GDP Spent on Education Environmental Indicators Land Use (Arable Land as % of Total Land Area) Annual Rate of Deforestation (%) Annual Rate of Reforestation (%) Per Capita CO2 Emissions (metric tons) Charts II

29 PROJECT NAME APPENDIX II: ADB PORTFOLIO - KENYA SOURCE OF FINANCE (INSTRUMENT) APPROVED AMOUNT (UA MILLION) DISB RATE (AS OF DEC. 2014) APPROVAL DATE AGRICULTURE KENYA-DRGHT RSILCE & ADF 37, 410, % 19 Dec SUSTAIN.LIVIHOOD SMALLSCALE HORTICULTURE ADF 17, 000, % 5 Sep DEVELOPMENT PRO FINANCE EQUITY BANK LIMITED - KENYA ADB 95, 544,280 0% 5 Nov POWER ADF - PRG FOR TURKANA T-LINE ADF 17, 500, % 2 Oct ADF - PRG FOR TURKANA T-LINE ADF 17, 500, % 10 Feb 2013 ETHIOPIA-KENYA ELECTRICITY ADF 75, 000, % 19 Sept HIGHWAY(KENYA LAKE TURKANA WIND POWER EKF ADB 15, 982, % 26 Apr.2013 LAKE TURKANA WIND POWER ADB 91, 902, % 26 Apr.2013 PROJECT LAKE TURKANA WIND POWER SUB ADB 3, 995, % 26 Apr.2013 DEBT MENENGAI GEOTHERMAL ADF 80, 000, % 14 Dec DEVELOPMENT PROJECT MENENGAI GEOTHERMAL SCF 5, 352, % 14 Dec DEVELOPMENT PROJECT MENENGAI GEOTHERMAL SCF 12, 488, % 14 Dec DEVELOPMENT PROJECT MOMBASSA NAIROBI TRANSMISSION ADF 50, 000, % 6 May 2009 LINE NELSAP INTERCONNECTION PROJECT ADF 39, 770, % 16 Jun KENYA POWER TRANSMISSION ADF 46, 700, % 6 Dec IMPROVEMENT PROJECT THIKA THERMAL POWER PROJECT ADB 22, 456, % 7 Jul LAST MILE CONNECTIVITY ADF 90, 000, % 19 Nov SOCIAL AFRICAN VIRTUAL UNIVERSITY ADF 10, 000, % 16 Dec (PHASE 2) COMMUNITY EMPOWERMENT ADF 17, 000, % 17 Dec PROJECT (CEISP) SUPPORT TO HEST TO ENHANCE ADF 28, 000, % 14 Nov QUALITY EAC CENTRES OF EXCELLENCE IN ADF 10, 000, % 3 Oct SKILLS TECHNOLOGY TRANSPORT ARUSHA - NAMANGA-ATHI RIVER ROAD DEV PJ ADF 49, 241, % 13 Dec EMERGENCY ASSISTANCE TO ADDRESS * ETHIOPIA - MOMBASA -NAIROBI- ADDIS ABABA ADF 713, % 30 Sept. ADF 120, 000, % 30 Nov III

30 PROJECT NAME MOMBASA-NAIROBI-ADDIS CORRIDOR II - KENYA MULTINATIONAL: EAST AFRICA: ARUSHA-VOI NAIROBI-THIKA HIGHWAY IMPROVEMENT PROJECT NAIROBI-THIKA HIGHWAY IMPROVEMENT PROJECT OUTER RING ROAD IMPROVEMENT PROJECT OUTER RING ROAD IMPROVEMENT PROJECT REHABILITATION OF TIMBOROA ELDORET ROAD RIFT VALLEYKENYA-UGANDA RAILWAYS WATER SUP/SANIT LAKE VICTORIA WATER AND SANITATION PROG. NAIROBI RIVERS BASIN REHABILITATION SCALING UP RAINWATER MANAGEMENT SMALL MED TOWNS WATER SUPPLY & WASTE WATER THWAKE MULTIPURPOSE WATER DEVELOPMENT THWAKE MULTIPURPOSE WATER DEVELOPMENT SOURCE OF FINANCE (INSTRUMENT) APPROVED AMOUNT (UA MILLION) DISB RATE (AS OF DEC. 2014) APPROVAL DATE ADF 125, 57.4% 1 Jul ,000 ADF 75, 000, % 14 Apr ADF 117, 91.4% 21 Nov ,000 ADF 3, 150, % 21 Nov ADF 77, 040, % 13 Nov , % 13 Nov ADF 35, 000, % 24 Nov ADF 28, 546, % 13 Jul ADF 72, 980, % 17 Dec ADF 35, 000, % 6 Dec Grant AWF 551, % 5 Jul ADF 70, 000, % 3 Nov ADF 61, 680, % 30 Oct ADF 1, 210, % 30 Oct IV

31 PROJECT NAME AGRICULTURE Marketing Infrastructure, Value Addition and Rural Finance Program (MIVARFP) APPENDIX II: ADB PORTFOLIO TANZANIA SOURCE OF FINANCE (Instrument) APPROVED AMOUNT (UA million) DISB RATE (As of Dec. 2014) APPROVAL DATE ADF Loan % 29-Jun-2011 Bagamoyo Sugar Project Standby Facility ADB Loan % 23-Apr-2014 Bagamoyo Sugar Project ADB Loan % 23-Apr-2014 TRANSPORT Singida-Minjingu-Babati Road Upgrading ADF Loan % 17 Sep 2007 Tanzania Road Sector Support Programme I ADF Loan % 2-Dec-2009 Tanzania Road Sector Support Programme II ADF Loan % 5-Apr-2012 Dsm-Isaka-Kigali/Keza-Musongati Railway Phase2 ADF Loan % 17-Nov-2009 Arusha - Namanga - Athi River Rd Upgr. (TZ/Ken) ADF Loan % 13-Dec-2006 Arusha - Namanga - Athi River Rd Upgr. (TZ/Ken) ADF Loan % 18 Dec East Africa Transport and Trade Facilitation (EAC) ADF Loan % 29 Nov. 2 Transit Transport Facilitation Agency (TTFA) NEPAD IPPF % 22-Dec-2010 Grant Arusha-Holili/Taveta-Voi Road Project ADF Loan % 16-Apr-2013 The EAC Payments & Settlement Systems Integration Project (EAC - PSSIP) EAC Railway Sector Enhancement Project ADF Grant % 5-Dec-2012 NEPAD IPPF Grant NEPAD IPPF Grant % 29-Jun-2012 The EAC Payments & Settlement Systems Integration Project (EAC - PSSIP) % 29-Jun-2011 WATER SUPPLY/SANITATION Rural Water Supply and Sanitation Programme II ADF Loan % 15-Sep-2010 RWSSF Grant % 15-Sep-2010 Zanzibar Water & Sanitation Project ADF Loan % 11-Nov-2008 RWSSF Grant % 11-Nov-2008 Zanzibar Urban Water & Sanitation Project ADF Loan % 19-Dec-2012 Lake Victoria Water Supply & Sanitation Programme ADF Grant % 17-Dec-2010 Phase II (LVWSSP) ENERGY Electricity V Project ADF Loan % 14 Dec ADF Grant % 14 Dec Iringa-Shinyanga Transmission Line ADF Loan % 26-Oct-2010 Regional Rusumo Hydropower ADF Loan % SOCIAL Support to Maternal Mortality Reduction Project ADF Loan % 11-Oct-2006 Small Enterpreneurs Loan Facility (SELF) II ADF Loan % 10-May-2010 Alternative Learning and Skills Development (ALSD) ADF Loan % 29-Jun-2011 II Support to Technical Vocational Education and ADF Loan % 2-Apr-2014 Training & Teacher Education MULTI-SECTOR CRDB SME Partial Credit Guarantee Facility ADB Loan % 22-Jul-2008 V

32 PROJECT NAME SOURCE OF FINANCE (Instrument) APPROVED AMOUNT (UA million) DISB RATE (As of Dec. 2014) APPROVAL DATE Institutional Support for Good Governance (ISPGG) II ADF Loan % 20-Sep-2010 EFC Tanzania- Fund for Africa Private Sector FAPA Grant % 1-Jun-2012 Assistance (FAPA Grant) OTHER OPERATIONS: SADC: Support to the control of communicable diseases ( HIV/AIDS, Malaria & TB) ADF-G % 31-May-2006 SADC: Shared Watercourses Support Project for Buzi, Save & Ruvuma River Basins ADF-G % 25-Jan-2006 Songwe River Basin Development Programme (Malawi and Tanzania) NB: AWF-TF denominated in EUROs; NEPAD IPPF denominated in USD AWF-TF % 25-May-2010 AWF-TF % 25-May-2010 NEPAD IPPF % 28-Apr-2010 VI

33 APPENDIX III: MAP OF PROJECT AREA VII