AFRICAN DEVELOPMENT BANK KENYA

Transcription

1 AFRICAN DEVELOPMENT BANK Public Disclosure Authorized Public Disclosure Authorized KENYA LAST MILE CONNECTIVITY PROJECT II APPRAISAL REPORT ONEC DEPARTMENT June 2016

2 Table of Contents 1. STRATEGIC THRUST AND RATIONALE PROJECT LINKAGES WITH COUNTRY STRATEGY AND OBJECTIVES RATIONALE FOR BANK INVOLVEMENT AND JUSTIFICATION AID COORDINATION PROJECT DESCRIPTION PROJECT OBJECTIVES TECHNICAL SOLUTIONS ADOPTED AND ALTERNATIVES CONSIDERED PROJECT TYPE PROJECT COST AND FINANCING ARRANGEMENTS PROJECT S TARGET AREA AND POPULATION PARTICIPATORY PROCESS FOR PROJECT IDENTIFICATION AND DESIGN 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 MONITORING AND EVALUATION GOVERNANCE SUSTAINABILITY RISK MANAGEMENT KNOWLEDGE BUILDING LEGAL INSTRUMENTS AND AUTHORITY LEGAL INSTRUMENT CONDITIONS ASSOCIATED WITH THE ADB S PROPOSED FINANCING COMPLIANCE WITH THE BANK S POLICY RECOMMENDATION APPENDIX I: KENYA COMPARATIVE SOCIO-ECONOMIC INDICATORS... I APPENDIX II: BANK GROUP PORTFOLIO IN KENYA (APRIL 2016)... II APPENDIX III: MAP OF PROJECT AREA... IV

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

4 ACRONYMS AND ABBREVIATIONS AC CSP EAPP EARC ESIA ESMF ERC FM GOK KETRACO KPLC MDB MoF MTP NEMA OPGW PCR NELSAP PFM RFP PIT ROW PRSP RISP RAP SARC UA Alternating Current Country Strategy Paper Eastern Africa Power Pool East African Resource Center Environmental and Social Assessment Environmental and Social management Framework Energy Regulatory Commission of Kenya Financial Management Government of Kenya Kenya Electricity Transmission Company Limited Kenya Power and Lighting Company Multinational Development Bank Ministry of Finance Medium Term Plan National Environment Management Authority Optical Ground Wire Project Completion Report Nile Equatorial Lake Subsidiary Action Program Public Financial Management Request for Proposals Project Implementation Team Right of Way Poverty Reduction Strategy Paper Regional Integration Strategy Paper Resettlement Action Plan South Africa Resource Center Unit of Account ii

5 Country Recipient Executing Agency Implementing Agency LOAN INFORMATION CLIENT S INFORMATION Kenya Republic of Kenya Ministry of Energy and Petroleum of Kenya Kenya Power and Lighting Company (KPLC) FINANCING PLAN Instrument Sources Amount (USD million) African Development Bank ADB Loan Government of Kenya Counterpart fund Total Financing KEY FINANCIAL AND ECONOMIC OUTCOMES PROJECT FIRR 10% EIRR ENPV@ 12% 14.11% US$ million 15.31% US$ 25.64million TIMEFRAME MAIN MILESTONES (expected) Concept note approval October 2015 Board approval June 2016 Loan signing August 2016 Effectiveness October 2016 Planned first Disbursement November 2016 Launching February 2017 Project Completion Report December 2020 Last disbursement June 2021 iii

6 PROJECT SUMMARY Project Overview Needs Assessment Bank s Added Value The proposed Last Mile Connectivity Project aims at maximizing the use of selected KPLC s 45,000 distribution transformers, spread across the 47 counties in the country, through extension of the low voltage network to reach around 1.2 million people located in the vicinity of these transformers. The project entails (i) the supply of distribution material to reach 300,000 new connections; (ii) the construction of low voltage (LV) distribution lines; (iii) the supervision and management; and (iv) capacity building activities in targeted areas of expertise. The total project cost is estimated at UA million, out of which the Bank will contribute UA 95 million. The population located in rural areas, low income groups as well as small businesses will particularly benefit from this project. Indeed, by providing increased electricity access, the project will contribute to improvement in standards of living of the targeted households in terms of education, health and access to information. As for small businesses, the project will help increase their competitiveness and expansion of activities. The proposed project is aimed at supporting the Government of Kenya (GoK) s initiatives of ensuring increased electricity access to Kenyans, particularly among the low income groups. Indeed, the GoK embarked on scaling up the electrification program throughout the country, with the aim to increase the electrification rate from 53% in 2016 to 70% in 2017 and 100% in 2020 Since 2004, an extensive effort was made to facilitate the acceleration of customer connection throughout the country. At that time, for customers located within a 600-m radius of an existing transformer, the average cost (including VAT) for connection on low voltage (between 3 and 8 KVA) was standardized at KSH 32,480 for a single phase connection and at KSH 44,080 for a-three phase connection. However, this accelerated connectivity has been achieved at a great cost to KPLC. Since this initiative has been implemented, material costs have increased by wide margins. Accordingly, the subsidies paid to KPLC rose from KSH 1.05 billion in 2007/2008 to KSH 7.5 billion in 2011/2012. KPLC then explored strategies to support the Government s initiatives of ensuring increased connectivity and electricity access to Kenyans at an optimal cost, adopting a maximization strategy which entails extending the low voltage network on existing and upcoming distribution transformers to reach households lying within these transformers protection distances (600 meters). The Bank approved the first ADF loan of UA 90 million for the Kenya Last mile connectivity (LMCP) project on 19 th November The loan agreement was signed on 18 th December The procurement process is completed. All twelve contracts under projects are signed. The project disbursed UA 12.2 Million at the end of April 2016 which is about 13.5% of the loan. All contractors are mobilized at site. The total project cost of Last Mile Connectivity Program is in the range of USD 900 Million. The Bank financing was downsized due to limited ADF resources. So far, AfDB and the World Bank (WB) approved one third (USD 300 million) of the total cost of the program. Following Kenya s positive credit worthiness assessment, further support for Last Mile -2 financing UA 95 million (USD Million) from ADB window has been considered to Support the program. This financing is the first of its kind for Bank s ADB window involvement in the energy access projects. The project is expected to support faster economic growth through the increased access to electricity by more Kenyan. The per capita electricity consumption in Kenya is quite low as demonstrated by the per capita consumption of 130 kwh per month, against 550 kwh on average for Sub-Saharan Africa. The Bank is playing the major role in support of the last mile connectivity program. KPLC connected 843,899 new customers during the year ended June fiscal year. This is the highest number of customers ever iv

7 Knowledge Management connected within a single financial year, and was an increase of 25% from previous year ; bringing the total number of customers to 3,611,904 at 30 th June A total of 1,126,103 new customers connected in the current physical up to mid-june2016, bringing the total number of customers to4,738,062there are challenges of reinforcing the power supply to electrified areas/towns/regions aiming at least-cost technical solutions that offer a combination of increased capacity, improved reliability and better voltage control. Against this background, the Government of Kenya (GoK), with its reforms in the energy sector, committed to increase access by extending electricity services to all priority load centers in the rural areas in the next few years. This is in the line with the Government objective to increase the access rate from the current 53% to 70% by 2017 and 100% in The Bank has been playing a leading role in financing infrastructure projects in the region including national transmission projects, geothermal development and regional power interconnections. Moreover, as a lead financer and coordinator, the Bank helps to mobilize funds from other development partners to finance major capital intensive projects. Project management is identified as a main challenge in Kenya. A capacity building program in project management shall be designed to provide sufficient knowledge to improve KPLC s project Management skills. A capacity building program will also be prepared for Environmental and Social team. v

8 ANTICIPATED RESULTS BASED LOGICAL FRAMEWORK Country and Project Name : Kenya-Last Mile Connectivity Project II Project purpose: Increase electricity access for low income population in Kenya PERFORMANCE INDICATORS RESULTS CHAIN MEANS OF VERIFICATION IMPACT OUTCOMES OUTPUTS KEY ACTIVITIES Increased access to electricity in rural Kenya Indicators Baseline (2016) Target National Electricity Access 53% 70% by Rural Electrification Agency - Ministry of Energy and Petroleum - Energy Regulatory Commission - Project report Increased electricity connection rate Number of customers 4, 950,000 by , 785,000 Increased economic participation of Value of contracts awarded by KPLC Contract value at Contract value at the marginalized to the marginalized KSH million KSH 570 million by Increased employment opportunities for women at site and share of women employed at KPLC A1. Low voltage distribution network constructed A.2. customer connections increased B.1. Project Supervision and Management enhanced C.1. Enhance KPLC s capacity in gender mainstreaming C.2. Re-establishment of KPLC tree seedling nursery COMPONENTS Share of women employed at KPLC Additional length of low voltage distribution line constructed connectivity project (km) Additional number of residential customer connections (no of meters installed) Additional Number of customer connection (small commercial), no of meters installed) Number of progress reports Number of Bank Supervision Number of people trained during Gender Mainstreaming workshops for KPLC in all regions Numbers of trees planted following the re-establishment of a tree seedlings nursery Component A : Supply of Energy Meters (300,000 new connections) Component B : Construction of low voltage distribution lines Component C : Project Supervision and Management Component E : Capacity Building Component D : Social Media and Marketing (2014 prices) 20% of women in 2015, zero women on site % of women by 2020, and 2500 local employees on site of which 750 (30%) are women. 12,000 24, , ,400 30,000 60,000 - Kenya Electric light and Power annual report - Utility record Project progress and completion report RISKS/MITIGATION MEASURES Risk: High Connection Charges Mitigation: Reduction of Connection charges through MABs concessional financing High Government commitment Risk: Implementation delays Mitigation: Establishment of PIT supported by consultant Risk: Delays in the procurement process Mitigation: Use of Advance contracting and timely no objection by the Bank and consultant support to the PIT. KPLC has adequate procurement capacity Progress reports Supervision Mission reports Risk: Timely selection of the consultant Mitigation: Advance contracting strategy 300 trained in trained by 2020 Quarterly Progress reports Risk: failure to meet performance requirements. Mitigation: close supervision by Bank, Supervision Consultant and PIT 0 40,000 Comp. A : USD 9.9 million Comp. B : USD million Comp. C : USD 3.1 million Comp. D : USD 2.07 million Comp. E : USD 0.37 million Total: USD 134,64 million PROJECT COST vi

9 No Description 1 Appraisal 2 Project Approval 3 Effectiveness 4 Selection of Consultants 5 Bid Preparation 6 Bidding period Evaluation, Contract Award 7 and Mobilization 8 Construction 9 Commissioning 10 Operational Acceptance 11 Last Disbursement date PROJECT IMPLEMENTATION SCHEDULE KENYA-LAST MILE CONNECTIVITY PROJECT II Year Quarters vii

10 REPORT AND RECOMMENDATION OF MANAGEMENT TO THE BOARD OF DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF KENYA FOR THE LAST MILE CONNECTIVITY PROJECT II Management submits the following Report and Recommendations on a proposed ADB loan of USD to the Republic of Kenya for the Last Mile connectivity Project II. 1. STRATEGIC THRUST AND RATIONALE 1.1 Project Linkages with Country Strategy and Objectives The proposed project, of extending the distribution system to scale-up access, is in line with pillar of the Bank s Country Strategy Paper (CSP) for Kenya ( ) which focuses on enhancing physical infrastructure to unleash inclusive growth. The project also aligns with the country s Vision 2030 and five-year Medium Term Plan ( ) which place the expansion of electricity infrastructure as a top priority The project will support the Government of Kenya (GoK) s initiative, Energy Access Scale-Up Program that aims to ensure increased electricity access to Kenyans, particularly among the low income groups. The project, by contributing to the delivery of power supply, will catalyze the growth and competitiveness of the rural economy, the development of social institutions such as schools and hospitals, and will multiply employment opportunities, thus creating the conditions for poverty reduction in the project zone The low level of access to electricity is an impediment to economic development and to the provision of basic social services. The rural areas consume biomass, including fuel-wood for cooking and lighting, consequently degrading forests leading to deforestation. The project will contribute to reduction of deforestation and to increase access to modern energy services, reliable and affordable supply which is in line with the Bank s Energy sector policy (2012), encouraging the transition to a green growth path The broad objective of the energy policy in Kenya is to ensure adequate, reliable and costeffective supply of energy to meet development needs of the country. The GoK is committed to develop the country s power infrastructure and has introduced a number of measures and key reforms to improve the sector. Over the last ten years, the country has seen a steady growth in electricity connections both in urban and rural areas. This has been driven by a combination of various factors, chief among them being the incoming of a new political dispensation in 2002 which demanded KPLC to accelerate connectivity. This called for a totally new approach in the connectivity model within KPLC and in 2004, a new connection policy was developed to address this new challenge. As a result, the cost for connection to customers on low voltage was standardized for single phase and three phase to KSH. 32,480 and KSH. 44,080 respectively for customers located at a distance of 600m from a distribution transformer. This resulted in an unprecedented increase in the number of new connections However, since the implementation of this initiative, the costs of materials have increased by wide margins and the accelerated connectivity has been achieved at a great cost for KPLC. Accordingly, the subsidies paid to KPLC rose from KSH 1.05 billion in 2007/2008 to KSH 7.5 billion in 2011/2012. Despite the great efforts, the challenges remain important as the electrification ratio remains low at 53% and per capita consumption stands at 130 kwh per month, which is below the average of 550 kwh in Sub-Saharan Africa. One of the factors explaining the low electrification rate stems from the high connection charges that customers are required to pay to be connected to the grid. Currently, KPLC has a total of about 45,000 distribution transformers spread across the country with enough capacity to connect around 6 million additional people. These transformers are underutilized since a significant portion of households, especially the low income groups, who are located within a 600-meter radius 1

11 from these transformers, cannot have access to electricity as a consequence of the unaffordable connection charges currently in place The project is aligned with the New Deal on Energy s focus on supporting end-user energy access and in particular the need for the sector to add 130 million on-grid connections by In fact, the project is the extension of Kenya last-mile access program mentioned in the Strategy as a successful example. The project fits within the overall thematic focus on supporting bottom of the pyramid energy access programs. Through the provision of end-user connections the project will not only provide the conveniences of modern energy access but also create economic opportunities for entrepreneurs and job seekers. 1.2 Rationale for Bank Involvement and Justification As per the Government ambitious plan to implement additional 5000 MW, the Kenya national grid peak demand is expected to rise by 50% from 1,664 MW as at June 2014, to approximately 2,500 MW in 2017; and electricity consumption to increase by 45.5% from 8,087 GWh to 11,689 GWh by the end of Kenya Power and Lighting Company (KPLC) as a distribution company of the National grid is to create additional demand. To this effect KPLC has embarked on concerted efforts to grow its customer base by an additional one million per annum starting in the 2014/2015 financial year increasing electricity access rate by more than 70% by The Kenya Last Mile connectivity project strategy adopts a new approach in expanding the distribution network in the country. Since the current customer-driven expansion is approaching saturation, the GoK, with the objective of increasing the connectivity rate in the country, has decided to extend the low voltage network from existing distribution transformers to reach households located within a 600-m diameter. The government envisages to pre-finance all the distribution and connection costs, including meters, to the potential customers, thus benefiting from economies of scale and contributing to reduction in the connection costs. The GoK is also currently working on a number of proposals and mechanisms to minimize the negative impact of connection costs on low income groups The proposed project is expected to benefit a minimum of 300,000 customers, which would translate into providing electricity access to approximately 1,500,000 people 1. By supporting the implementation of the Last Mile Connectivity project, the Bank will contribute to the provision of basic infrastructure needed to support economic growth and poverty reduction in rural areas. Accordingly, the Bank s support to the electricity sector in Kenya is in line with its current strategy which is articulated around greater focus on infrastructure investments, especially for the energy sector. 1.3 Aid Coordination The Bank collaborates with other development partners (DP) through the Development Partners Group (DPG), the Harmonization, Alignment and Coordination Group (HAC), and sector donor groups. The most active development partners in the energy sector in Kenya are the African Development Bank (AfDB), the World Bank (WB), the European Investment Bank (EIB), the French Development Agency (AFD), the European Union (EU), the Japan International Cooperation Agency (JICA), and the German development agency (KfW). The Ministry of Energy and Petroleum (MoEP) in Kenya has established an Energy Sector Working Group (ESWG) which is currently chaired by the AFD. The Bank, jointly with these development partners, is supporting the sector in the region: the Ethiopia Kenya Interconnection Project is financed by the WB, AFD and the Bank while the Kenya Uganda Interconnection Project and the Kenya Tanzania Interconnection project are jointly financed by JICA and the Bank. 1 One customer expected to include 5 family members. 2

12 2. PROJECT DESCRIPTION 2.1 Project Objectives The project s ultimate development objective is to support the Government s initiatives of ensuring increased electricity access to Kenyans, particularly the low income groups. In order to reach this objective, the project aims at extending the low voltage system throughout the country so that counties with low penetration rate benefit the most from the project. The proposed project is expected to connect around 300,000 customers, which would result in providing electricity access to approximately 1,500,000 people. The project is articulated around seven main components as summarized in the table below. Table 2.1: Project Cost Estimates by Components (in USD million) Component Name Estimated Cost A Supply of Energy meters 9.9 B C Construction of low voltage distribution lines Project supervision and management D Capacity Building program 2.07 E Social Media and Marketing 0.37 Total Project Cost Technical Solutions Adopted and Alternatives Considered Component Description The component includes supply and installation of Distribution Material for connection for 300,000 customers. This component includes procurement of contractors for the construction of low voltage lines and the installation of energy meters Project supervision and management by a consultancy firm to assist KPLC during the project implementation. Capacity building program for KPLC staff in project management KPLC will employ two professionals responsible to follow-up the implementation of last mile project and advocate to public In order to accelerate the connectivity rate and provide electricity to around one million people per year, a new model is proposed to help overcome the current bottlenecks. This new model focuses on availing the connection services, including the meter, to the customer premises prior to engaging him/her to pay for the service In view of the limited resources available, the proposed project consists of adopting the least cost alternative and maximizing the use of the existing distribution transformers in order to supply electricity to low income customers. Indeed, to reduce the cost burden on KPLC as well as the amount paid by the customer to connect to the grid, the strategy proposed is to extend the distribution network to as near the customer as possible using external or government funding. This can initially be achieved by extending the low voltage network on existing and other upcoming distribution transformers to reach households lying within the transformer protection distance (maximization). This model would involve building low voltage lines for both single phase and three phase (to a small extent) along rural access roads Alternative solution installation of solar home systems is found to be expensive. In addition, several other options were considered, such as rural electrification with expansion of the high voltage transmission system and construction of distribution systems. However, these options were rejected mainly because of their extensive investment requirements. Hence, the use of existing distribution transformers was considered the least cost alternative to increase electricity access in the country. 3

13 2.3 Project Type The proposed intervention is a standalone investment project funded through an ADB loan. 2.4 Project Cost and Financing Arrangements The total project cost, including a physical contingency of 5% and price contingency of 5%, but excluding customs taxes and duties, is estimated at UA million (approximately USD million). The tables below show the project cost estimates by component, category and source of financing The Bank financing for last mile connectivity II, representing 87.7% will be covered from ADB window. The GoK financing represents 12.3% of the total financing. The Government financing will mainly cover costs associated to compensation of project affected people (PAP), design costs of low voltage system as well as the Annual Audit of the project The Bank financing, representing 87.4% will be covered from ADB sovereign loan. The GoK financing represents 12.6% of the total project cost, excluding local taxes. The Counterpart fund will mainly cover costs associated to compensation of project affected people (PAP), design costs of low voltage system as well as the Annual Audit of the project. The relatively low counterpart fund is due to: (i) the project s contribution of the GoK will actually be above 12.6% since all Value Added Taxes (at 16% for all works, goods and services) will be paid by the GoK, thereby raising the contribution to around 30; (ii) Last Mile Connectivity Program is in the range of USD 900 million. So far, AfDB and the World Bank (WB) approved one third of the total cost of the program (USD 300 million). Following Kenya s positive credit worthiness assessment, further support for additional financing of USD million from the ADB window has been considered to support the program; (iii) the Government has demonstrated its commitment by making a substantive contribution including an allocation of USD 10,000,000 in ongoing works to connect poor rural households to electricity. The government s previous investment has also contributed to a transformer capacity with an excess capacity of about 60%; (iv) GoK has committed to achieve a 70% electricity access in 2017 from the current 32%, and (v) GoK s overall budget for Fiscal Year 2016/17 is USD billion, of which 6% is devoted to the energy sector. To reduce the GoK s financial burden in this project, the Bank s contribution has been increased. See Technical Annex B.2.2. No Table 2.4.1: Project cost estimates by component (in USD and UA) AfDB financing Component Supply of Energy Meters Construction of Distribution System Project Supervision and Management Social Media and Marketing In USD In UA FC LC Total FC LC Total 9,000,000-9,000,000 6,350,102-6,350,102 50,097,409 58,249, ,346,543 35,347,075 41,098,662 76,445,737 2,830,189-2,830,189 1,996,888-1,996, , , , ,627 5 Capacity Building 1,886,792-1,886,792 1,331,258-1,331,258 Subtotal 63,814,390 58,588, ,403,146 45,025,323 41,338,288 86,363,611 Physical contingency (5%) Price contingency (5%) 3,190,720 2,929,438 6,120,157 2,251,266 2,066,914 4,318,181 3,190,720 2,929,438 6,120,157 2,251,266 2,066,914 4,318,181 Total Project Cost 70,195,829 64,447, ,643,461 49,527,855 45,472,117 94,999,973 4

14 Table 2.4.2: Project cost estimates by component (in USD and UA) AfDB financing No. Categories In USD In UA FC LC Total FC LC Total 1 Goods 1.1 Supply of Energy Meters 9,900,000-9,900,000 6,985,113-6,985,113 Sub total 9,900,000-9,900,000 6,985,113-6,985,113 2 Works 2.1 Construction of Distribution 55,107,150 64,074, ,181,197 38,881,782 45,208,528 84,090,310 System Sub total 55,107,150 64,074, ,181,197 38,881,782 45,208,528 84,090,310 3 Services 3.1 Project Supervision and 3,113,208-3,113,208 2,196,576-1,996,888 Management 3.2 Capacity Building 2,075,472-2,075,472 1,464,384-1,464,384 Social Media and 3.3 Marketing - 373, , , ,627 Sub total 5,188, ,585 5,562,264 3,660, ,589 3,924,550 Total Project Cost 70,195,829 64,447, ,643,461 49,527,855 45,472,117 94,999,973 Table 2.4.3: Sources of Financing (in USD and UA) Component In USD In USD FC LC Total FC LC Total ADB 70,195,829 64,447, ,643,461 49,527,855 45,472,117 94,999,973 Government of Kenya - 19,200,410 19,200,410 13,547,174 13,318,441 Total 70,195,829 83,648, ,843,871 49,527,855 59,019, ,318,414 Table 2.4.4: Project Costs by category of expenditure ADB financing (in USD and UA) In USD In UA No. Categories FC LC Total FC LC Total 1 Goods 9,900,000-9,900,000 6,985,113-6,985,113 2 Works 55,107,150 64,074, ,181,197 38,881,782 45,208,528 84,090,310 3 Services 5,188, ,585 5,562,264 3,660, ,589 3,924,550 Total 70,195,829 64,447, ,643,461 49,527,855 45,472,117 94,999,973 Table 2.4.5: Category of expenditure KPLC/ GoK financing (in USD and UA) In USD In UA No. Component FC LC Total FC LC Total 1 Wayleaves 4,398,839 4,398,839-3,103,675 3,103,675 2 Survey - 3,863,336 3,863,336-2,725,842 2,725,842 3 Design Cost - 3,500,201 3,500,201-2,469,626 2,469,626 4 Project Management Costs - 5,572,543 5,572,543-3,931,802 3,931,802 5 Annual Project Audit - 120, ,000-84,668 84,668 Sub total - 17,454,918 17,454,918-12,315,613 12,315,613 Physical contingency (5%) - 872, , , ,781 Price contingency (5%) - 872, , , ,781 Total - 19,200,410 19,200,410-13,547,174 13,547,174 5

15 Table 2.4.6: Expenditure schedule (in USD and UA) Source Year, USD Total ADB - 47,125,211 47,125,211 33,660,865 6,732, ,643,461 Gov. of Kenya - 6,720,144 6,720,144 4,800, , ,200,410 Total 53,845,355 53,845,355 38,460,968 7,692, ,843, Project s Target Area and Population The project will cover the entire country with selected transformers in 47 counties with the potential of connecting 300,000 customers. The proposed project, which constitutes the second phase of this initiative, targets to connect a minimum of about 285,000 residential customers and 15,000 commercial customers within a 600-meter radius from an existing transformer. The direct beneficiaries of the project are households, mainly low income groups, and small businesses located near these distribution transformers, in counties with the lowest penetration rate. 2.6 Participatory Process for Project Identification and design Preliminary stakeholders engagement and consultation were conducted in January 2014 by KPLC s field engineers in the 47 counties during the project site identification and mapping phase. Additional consultations were carried out during the preparation phase of the project. They were undertaken by KPLC s Department of Safety Health and Environment, during the environmental assessment process in the context of the nationwide upgrading of existing substations and transmission lines and construction of new ones. Both engagements sought views and thoughts of the sector players. Most of the issues and suggestions raised by the public revolved around connectivity charges. Considering that most of the rural population are relatively poor and are not able to pay upfront for the connection fees, the stakeholders proposed the use of the STIMA loan model or any other method that will allow customers to settle connections charges over a period of time Further consultations will be conducted during the project implementation. Several rounds of discussions will be undertaken by KPLC, and will target prospective customers and focus largely on safety issues. Consultations will also be carried out during the preparation of the environmental social and management plans (ESMPs) for each lot, as required by the national legislation as well as the Bank s procedures. 2.7 Bank Group Experience and Lessons Reflected in Project Design The Bank has been very active in the energy sector in Kenya. The Bank s energy portfolio through public sector financing is over UA 450 million. Important lessons can be drawn from the Bank s past interventions in Kenya. These mainly relate to: (i) project readiness and quality at entry; (ii) project start-up and implementation delays due to institutional bottlenecks; (iii) delay in implementing the Resettlement Action Plan (RAP) due to the non-availability of counterpart funds (iii) Poor performance of contractors and (iv) inadequate project management capacity of implementing agencies As of April 2016, the Bank s portfolio in the country comprises of 25 active operations -20 public sector projects and 5 private sector operations, with a net total commitment of UA 1.46 billion. The Bank s investment in the energy sector accounts for about 30% of the current public sector active portfolio. The current (2015) CPPR assessment ratings returned satisfactory overall portfolio performance, with an overall disbursement rate of 47%. The portfolio records a DO rating of 3.58, indicating a stronger likelihood that the ongoing operations will meet their development objectives and an IP rating of 3.23, implying a satisfactory progress on project implementation. In addition, there is no project-at-risk in the portfolio and there is neither a problem project nor a potentially problematic project in the portfolio. 6

16 2.7.3 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 as well as environmental and social impact assessment (ESIA) and RAP studies; (ii) setting up an effective project implementation team (PIT) to avoid any implementation delays; (iii) ensuring the counterpart funds are budgeted for and; (iv) providing capacity building programs in the relevant areas specially in project management The project is implemented in all 47 counties. In addition of the PIT, the implementation team will be supported by KPLC regional operation staff. The project includes extension of low voltage lines only which make it easier for implementation as it doesn t involve way leave and resettlement. KPLC s achieved outstanding performance connecting above one million customers in budget year. Based on the current performance of KPLC implementation delay is not expected for this project The procurement process is about to start to insure the project readiness and quality at entry. The majority of the procurement process will be completed before effectiveness of the loan. There is sufficient experience gained form first financing. KPLC submitted all procurement document for the Bank s review clearance. 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 were discussed and agreed with KPLC. The outcomes to be achieved will be measured in terms of: (i) increased number of customers; (ii) increased value of contracts awarded by KPLC to the marginalized; (iii) number of jobs created disaggregated by gender and nature (temporary/permanent). In terms of outputs, the project s performance will be measured against the following indicators: (iv) additional length of the LV distribution lines; (v) additional number of customer connections (number of meters installed); (vi) additional number of small commercial customers (number of meters); (vii) number of reports by the supervision consultant; (viii) number of people trained; and (ix) number of trees planted. 3. PROJECT FEASIBILITY 3.1 Financial and Economic Performance Since the current customer-driven expansion is approaching saturation, the GoK, with the objective of increasing the connectivity rate in the country, has decided to extend the low voltage network from existing distribution transformers to customers located within a 600-m radius from these transformers Following the project implementation, around 300,000 residential customers will be connected to the national grid, which translates into providing electricity access to approximately 1.5 million people. The financial benefits for the company will accrue from increased revenues from connection fees and electricity consumption charges, whilst the financial costs include mainly total investment costs, estimated at US$ million, power purchase costs and operating costs The financial and economic assessment of the project is undertaken over an operating period of thirty years starting in The investment is carried out over five years (2017 to 2021). The financial assessment of the proposed project estimated a financial internal rate of return (FIRR) and a financial net present value (FNPV) of 14.11% and US$ million (at a 10% real discount rate) respectively, showing that the project is financially viable. 7

17 3.1.4 The main benefit to households is connection to the national grid at a cheaper rate. The economic analysis of the proposed project was based on the willingness to pay of the targeted population, estimated at around 37KSH/kWh. The economic assessment of the project projected an economic rate of return (EIRR) of 15.31% and economic net present value (ENPV) of US$ 25.64million (discounted at 12%, real). Table 3.1 summarizes 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 14.11% FNPV (@10%) US$ million EIRR % ENPV (@12%) US$ million The financial and economic returns 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 sensitivity analyses show that the financial and economic returns are robust under identified adverse conditions. The analyses 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 The specific information on the number of sub-projects, exact site location of subprojects, land requirements, geo-physical land features, nature, type and use of equipment, are not available at this stage. Therefore, precise details and the intensity of social and environmental impacts and their effective mitigation cannot be determined at this stage. The associated impacts of the sub-projects are deemed to be localized and mitigation measures can easily be implemented to minimize impacts. The project has therefore been classified as Category 2 in accordance with the Bank s new Integrated Safeguards System (ISS) and the environmental assessment instrument for this type of program is the Environmental and Social Management Framework (ESMF). The ESMF Summary has been prepared and was posted on the Bank website on 25 th September The Bank s new Integrated Safeguards Systems (ISS) also requires that Bank financed projects be screened for climate risk using the Bank s Climate Safeguards System (CSS). According to the CSS, the Last Mile Project is classified under Category III. Category III implies that the project performance and characteristics are not significantly exposed to additional climate risk Environment The potential negative impacts of the project include; (i) effects on natural vegetation along the right of way of the low voltage lines; (ii) risks of sparks or fires from conductors; (iii) occupational safety and health hazards including electric shocks and electrocution due to unsafe handling of electric wires, and falling from heights;; (iv) impacts related to sourcing of wooden poles; (v) oil leaks from transformers, and (vii) contamination from creosote-treated wooden poles Mitigation measures for identified impacts have been provided in the ESMF and the framework ESMP. The measures are twofold: physical and socio-economic. Physical measures relate to project location, tree-planting and re-vegetation and preventive measures like bush clearing, erosion, sedimentation and pollution control, good construction practices, waste management, and application 8

18 of Environmental Guidelines for Contractors. Regarding waste management, in particular, that of hazardous waste, mitigation measures will include the use of off-site treatment methods; incineration or proper disposal of any hazardous materials found on site; the use of protective gear during work; and the removal of all abandoned construction materials. Socio-economic measures will include education and awareness, hygiene and sanitation training, rules and regulations, institutional support (including skills training), and recruitment of qualified personnel It is envisaged that once the sub-project locations are identified, ESMPs will be drawn up and implemented by the Contractors supported by the Project Implementation Team (PIT). The ESMF has proposed Capacity Building and training for the PIT and operational staff who will be involved in project implementation. The estimated cost for capacity building, training and awareness to construction teams is USD 80,000. Furthermore, screening and reviewing processes would also involve some cost implications. Every sub-project would be screened and reviewed by the implementing unit while involving Environmental Experts. This exercise is estimated to cost USD 60,000. The estimated cost for monitoring is USD 60,000. Hence, the total cost of the ESMF implementation is USD 200, Climate change The proposed project has been classified as Category II according to the Bank s Climate Safeguards System, requiring low-cost risk management and adaptation measures. KPLC is currently implementing initiatives and activities to ensure that environmental sustainability, climate change adaptation & mitigation considerations are taken into account. In 2010, a total of 1.25 million energysaving bulbs were distributed to approximately 400,000 households. This initiative led to energy savings of 61GWh/ year, a peak demand reduction of 48 MW and a reduction in CO2 emissions of 55,000 tons/year. In 2016/2017, KPLC plans to distribute approximately 3.5 million energy saving compact fluorescent light (CFL) bulbs to low income households; such proposal is expected to save about 1,800 GWh of energy, peak reduction of 140MW, and avoid CO2 emissions of 1.2 million tons. KPLC will conduct public awareness on safe disposal of energy saving bulbs Other initiatives to adapt to climate change include: (i) the procurement of high efficiency transformers to reduce system losses; (ii) the installation of underground power lines to reduce right of way requirements and less impact on ecosystems; (iii) the installation of solar lamps in remote areas located in Northern Kenya to provide energy access to communities that were previously not electrified; (iv) the planting of trees and the reforestation of denudated Kenya Forestry Service forest blocks around off-grid power stations in various parts of the country The Bank s new Integrated Safeguards Systems (ISS) also requires that Bank financed projects be screened for climate risk using the Bank s Climate Safeguards System (CSS). According to the CSS, the Last Mile Project is classified under Category III. Category III implies that the project performance and characteristics are not significantly exposed to additional climate risk Gender The Bank s Ten Year Strategy has gender mainstreaming among its objectives and areas of special emphasis. In addition the Gender Strategy has highlighted mainstreaming gender in Bank operations. The project shall support the efforts being taken by KPLC through the office of the Gender Coordination Committee to mainstream gender. KPLC s has a gender policy, which seeks to promote equality and non-discrimination. The policy is consistent with the National Gender and Equality Commission s vision of A society that upholds gender equality, dignity and fairness for all. Following the Gender Assessment on Opportunities and Challenges in gender mainstreaming (2013), KPLC has embarked on a capacity building program of bringing awareness to KPLC in its internal and external gender mainstreaming efforts. Measures include KPLC s effort to achieve gender equality during recruitment and promotion exercises to improve the ratio of female employees from the current (June 2015) 20.1% to the prescribed national policy of 30%. Furthermore, KPLC has been conducting gender 9

19 mainstreaming training and workshops for its staff at headquarters and in all 6 regions. The overall goal for the training has been to equip the staff of Kenya Power with theoretical and practical knowledge, skills and attitudes that would enable them play exemplary roles in providing gender responsive customer service to attract and retain customers in realizing the organization s mission, vision and core values. Ultimately, Kenya Power shall have internalized in its operations and procedures cross cutting issues of gender, sexual harassment and discrimination. It is expected that at least 800 staff shall have gone through this training by end of project The project will stimulate beneficial outcomes to both women and men. In particular, increasing access to electricity will go a long way towards alleviating the daily household burdens of women. Once electricity reaches homes at a reasonable cost, it will be put into use to accomplish most traditional tasks that women perform, freeing up some of time for more productive activities. Providing electricity to communities and homes will help foster improved health and better health care delivery services, with the potential to benefit, to a large extent, women and children. For instance, electricity will displace more expensive candles, kerosene lamps and firewood for cooking, thereby reducing air pollution, fireburn risks and providing higher quality lighting. Delivering power to communities will help improve critical and urgent health services such as emergency treatments and childbirth The project is also crucial in enhancing education and access to information. More often, the available electricity will initially power lighting bulbs and energy gadgets such as televisions, radios, phones and refrigerators. This will directly benefit women and children. Children can have extended study time; women will have more access to information, for example, on health and nutrition as they would have more spare time. The project will also enhance security in the rural areas as most homes will be lit up, an improvement that will be more appreciated by women. In addition, women will equally take further advantage from direct jobs to be created during implementation, and indirectly through winning tenders to supply goods and services. As of 2015, at least 25% of women owned companies were prequalified under the L&T (Labor and Transport) category Social The positive impacts of the project include: (i) the creation of direct and indirect employment; (ii) the up-scaling electricity access to the poor; (iii) the promotion of social inclusion of peri-urban and rural communities; (iv) improve the health of communities not using kerosene lamps for lighting; (v) the improvement of standards of living and education for beneficiary communities and, (vi) the improvement of security through better lighting The project will have tremendous benefits to the communities that will be connected to electric power supply. With the potential to connect approximately 300,000 customers that are within 600 meters of the existing transformers, the project will directly serve approximately 1,500,000 people. Once connected to the grid, these people will replace their current sources of energy for lighting and to some extent, cooking, to clean energy from biomass which is associated with health hazards. It is estimated that kerosene costs make up to 10-25% of household monthly budgets according to Lighting Africa Market Trends Report A study on Kenya s lighting up Kiosks found that on average a family spends about KSH 750 per month (2010) for lighting kerosene. In comparison, if connected to the grid, a family consuming about 50 kwh for domestic use would have on average a bill of KSH 128 per month. Therefore the Last Mile Connectivity Project would induce substantial savings on the part of the households The project will also offer job opportunities and other means of income. It is estimated that at least 2500 people will have been employed during implementation of the project. Approximately 80% of all non-skilled workers shall be recruited from the local communities, among which at least 10% shall be women. In addition, there will be opportunities for forest owners, women, youths and people with disabilities in terms of sales of wooden poles. Part of the prospects envisaged for women, youth 10

20 and people with disabilities are enshrined in the Public Procurement and Asset Disposal Act 2015 and Preference and Reservation Amendment Regulations The provisions therein set out guidelines for supporting these groups. In all, it is projected that the increased business from sales of wooden poles will inject about KSH 730 million into the economy As part of the complementary benefits, GoK and KPLC will continue with the on-going programs of easing payment burden to low income groups including vulnerable group such as widows, widowers, orphans and disabled people. Some of the programs involve deferring and phasing in instalments from the required upfront payment of connection fees. Another program is the Stima Loan scheme, which KPLC is implementing in partnership with AFD. This program gives out loans to enable customers to meet 20% of the connection fee upfront and the balance is to be paid over a period of 24 months. Other initiatives planned to be undertaken to ensure connectivity expansion are (a) preinvesting in short medium voltage lines and distribution transformers to reach clusters of customers who may not be able to access the existing distribution transformers, but are close to existing MV lines; (b) the Umeme Pamoja initiative for groups of customers far from existing transformers and MV lines; and (c) customer clusters of 50 households who would be provided with reticulation in order to drive down the individual contributions from each customer. Regarding communities who are not connected to the national grid, such as the counties of Garissa, Lamu, Wajir, Mandera, Marsabit, Tana River, Turkana and Isiolo, they shall be connected on alternative off-grid power stations such as diesel generators or solar and be covered at 100% under the project. Furthermore, KPLC will continue with the program of retrofitting compact fluorescent lamp (CFL) bulbs in exchange with incandescent light bulbs. This will contribute to reduce the system peak demand as a CFL bulb uses 80% less electricity than an ordinary bulb, further benefiting the consumers Other complementary initiatives of the project will encompass the implementation of awareness and prevention activities against the spread of HIV/AIDS and STI through information dissemination to communities and workers who otherwise would not have had the correct information on three levels: (a) direct beneficiaries of the project who will be connected will have the benefit of health education messages through use of radios and TV; (b) during project implementation, the contractor through the daily tool box talks where the SHE (Safety Health and Environment) Department will, in liaison with NACC (National Aids Control Council), provide materials; and (c) during the Environment Impact Assessment for projects where the SHE Department disseminates HIV/AIDs information to the public during public consultations meetings. From KPLC side, the Safety Engineers and the Occupational, Safety and Health Officers (OSHO) monitor the implementation of the program by the contractor to ensure compliance. Additional measures to enhance the program are: (i) inclusion of HIV/AIDS activities in the bidding documents including recruitment of SHE (Safety, Health and Environment) Officers among key personnel; and (ii) allow contractor to subcontract a service provider specialized in areas of HIV/AIDS awareness, gender mainstreaming and safety at community level Occupational and Community Health and Safety: In line with the requirement of the national regulations through DOSH (Department of Safety and Health), the contractor is mandated to ensure safety of workers and a conducive work environment. The SHE Officer shall be responsible for preparing the Safety and Health Management Program for each contract and reviewed and approved by KPLC s SHE Department before works begin. Among the requirements under this regulation is training of gang representatives in 1 st Aid. This is important given the geographical spread of works and as such DOSH stipulates the minimum number of 1 st Aiders per number of workers for rapid response in case of emergency. The approach shall emphasize information, education and communication by use of mass media available at local and community levels to ensure measures of Community Health and safety are safeguarded. These shall include: (i) Awareness campaigns conducted as part of the ESMP exercise; (ii) Use of community and regional radio stations in vernacular languages; (iii) Use of the bi-annual barrazas which incorporate county government and local traditional leaderships; (iv) Use of Agricultural shows and Trade Fares; (v) Extra curriculum activities in schools; (vi) Sessions at project launch; and (vii) KPLC s website. In addition, emphasis is on awareness and sensitization of dangers of electricity both at the distribution centers and in the house including tampering with live connections and power theft. 11

21 Inclusion of Disadvantaged Groups (low income, women, youth and people with disabilities): In conformity with the Bank s agenda of inclusive growth and gender mainstreaming, the project design has ensured that women, youth and persons with disabilities take part in the planning, implementation and benefiting from the project. In line with KPLC s procedures, contracts have been awarded to these groups which as of June 2015 had amounted to KSh million in areas which included supply of wooden poles, stationery, earth-rods, etc. Furthermore KPLC runs, through its training institute, programs for local artisans to meet training needs and skills development that KPLC requires. This has been a sure way of enhancing the participation of the marginalized groups in KPLC works. Since the scope of works shall offer such opportunities and since national competitive bidding shall be applied, there is likelihood that some of the female owned LNT (labor and transport) contractors could win the tenders under this project in compliance with the 2013 Procurement Act. From the sample data available of pre-qualified LNT contractors, 25% are female owned. Among these, KPLC has the opportunity for partially implementing the 30% procurement rule by facilitating at least 30% of the 25% pre-qualified women owned companies to submit competitive bids. This would principally come from the areas where GOK/KPLC will be providing counterpart funding, namely: design costs, way-leave costs, and survey costs and to some extent material handling More on inclusive growth, the project will be supporting the government program of ensuring opportunities to connect to all households within reach of the transformers. This is facilitated with connection fees of KSh. 15,000. In that way, not only is KPLC maximizing usage of installed transformers, but it is reaching out to the potential consumers who otherwise wouldn t have managed to meet up-front the high connection fees of KSh.35, 000 or more. Hence the project will be able to connect at least 300,000 additional customers within three years. In addition, as is the case in many other countries, the project shall supply at least two energy saving bulbs to the new customers. The benefits for doing such would be multi-faceted, this would help the low income groups to get a reduction in electricity bills, reduce overall energy consumption hence positively impacting on generation, and as a contribution towards protecting the environment Corporate Social Responsibility: The Mission was informed about the Corporate Social Responsibility (CSR) programs which focus on providing additional benefits to communities who are in some ways affected by implementation of the projects they undertake. The areas of focus have included education, health and environment. In the past financial year (2012/13) at least KSh. 42 million have been spent in such programs benefiting a variety of groups and institutions. Selection of interventions and areas needing support are done through a demand driven process and needs assessment process. It is, therefore, expected that some of these areas will benefit from such CSR programs in the project period Involuntary resettlement The project will involve connection of power to the end user premises where most of the households will be reached by a service cable drop or a pole or two. These are low voltage lines mainly constructed along the road reserve and hence the project will not involve any resettlement. The way leaves to be acquired during implementation are simply easements to give the right of access and protect the lines with the consent of the owner. There might be, though minimal, still potential of the need to compensate people whose assets such as trees and crops may be damaged during stringing. Such impacts will be compensated by the Government and the procedures have been explained in the ESMF. The costs for such compensation shall be met by Government and the Way-Leave Officer shall take responsibility of execution in coordination with the contractors during implementation. 12

22 4. IMPLEMENTATION 4.1 Implementation Arrangements Institutional Arrangements The National Treasury shall be the Borrower of the loan. The Ministry of Energy & Petroleum will be the Implementing Agency, and KPLC, the Excursing Agency of the project. KPLC acquired the necessary technical and managerial ability to implement such projects, as demonstrated by the ongoing implementation of the distribution projects financed by the WB. The involvement of the supervision and management consultant to be recruited through a competitive bidding process will reinforce the capabilities of KPLC KPLC will strengthen the project implementation team (PIT) established for the earlier Bank financed Last Mile Connectivity Project to be also responsible for the day-to-day implementation of the project under consideration. The additional PIT team at minimum, will comprise of: one (1) project Coordinator/Team Leader; four (4) Site supervision engineers; one (1) procurement expert; one (1) socio economist one (1) environmental expert; and one (1) accountant. It should be noted that the PIT will be specifically put together for this project as per the structure proposed in Technical annexes B3 Implementation Arrangements The appointment of a Project Implementation Team whose composition, qualifications and experience are acceptable will constitute one of the conditions for loan Negotiation Procurement Arrangements All procurement of works, and acquisition of consulting services financed by the Bank will be in accordance with the Bank s Policy approved in October, 2015 for the Bank Funded Projects, using the relevant Bank Solicitation Documents, and the provisions stipulated in the Financing Agreement. The implementing agency will be responsible for all envisaged procurements in the project. The resources, capacity, expertise KPLC have been reviewed and are determined to be generally adequate per the organization mentioned in para above. The KPLC is also currently handling several other donorfinanced projects (which includes the Kenya Electricity Expansion Project, under which they have seven contracts valued at USD 190 million). The Project Implementation team shall be made familiar to the terms of Bank s Policy for procurement. Kenya Power is also managing therefore the additional workload envisaged under this project may not pose a challenge to the team over the project period. The Procurement Plan shall be prepared by the Executing Agency before the Project goes for negotiation. Most of the procurement activities should be initiated before loan negotiation. The procurement strategy will be similar to the first financing. Accordingly, similar procurement plan submitted for the Bank s review and clearance. The detailed procurement arrangements and the main outcome of the capacity assessment are provided in Technical Annex B Financial Management Arrangements The Financial Management (FM) capacities of KPLC are deemed adequate to undertake the project. The organization has proper structures in place as well as adequate staff (a total of fifty-six) to carry out the FM responsibilities of the project. KPLC has implemented projects funded by the World Bank, the International Finance Corporation (IFC) and the French Development Agency (AFD)/ the European Union. Currently KPLC implement Last Mile I project financed by the Bank. The project will make use of the KPLC s FM systems. 13

23 KPLC will assign a Project Accountant to be in charge of the day to day financial management operations of the project using the company s financial management systems. KPLC uses as an accounting system SAP Version 7, which is adequate for recording accurate and complete transactions and delivering financial reports timely. An internal order will be created for the project in SAP where project specific expenses will be recorded Department Heads coordinate the preparation of budget estimates based on the work plans for their departments with the help of staff in the budgeting department. For the projects, the project accountants prepare budget estimates based on the procurement plan. The project estimates are reviewed by the Chief Accountant for projects and approved by the Chief Manager-Projects. The project engineers provide the estimated time for various activities to be included in the procurement plan. All departmental and project estimates are forwarded to Finance Division, budgeting department for consolidation. The Management Budget Committee headed by Head of Finance reviews the consolidated budget with the budget division team who defend the proposals and revisions are made where necessary until the budget is finalized. The Management Budget Committee sends the final budget to the Board Budget Committee of KPLC for approval. Once approved by the Board Budget Committee, the final budget is sent to the main KPLC Executive Board for approval. The approved budget is sent to the Ministry of Energy & Petroleum (MoEP). MoEP then transmits the donor funded components of the budget to the National Treasury for inclusion in the government printed estimates Budget monitoring is done through the SAP system. All expenditure is captured into SAP on a daily basis and variance analysis reports are produced monthly for recurrent expenditure and quarterly for donor financed projects. The system does not allow any amount in excess of the budgetary allocation. Budget performance is used to monitor expenditure and take necessary actions, monitor the extent of implementation of key projects and the level of budget absorption for each manager KPLC has an internal audit department comprising of forty (40) qualified staff. The internal audit department is divided into three units which include Technical Audit, General Audit & Investigations and Systems Audit. Flexible risk-based annual audit plans are developed using appropriate risk-based methodology for implementation throughout the year. Quarterly audit reports are issued to the Audit Committee summarizing the results of the audit which are reviewed and track of previous recommendations by management is also tracked. The Last Mile Connectivity Project will be audited at least once in a year and audit reports will be shared with the Bank The annual project financial statements will be prepared by 30th September each year in accordance with the International Financial Reporting Standards (IFRS. The annual financial statements will include: (i) the statement of comprehensive income; (ii) the statement of financial position that shows assets and liabilities; (iii) the statement of cash flows and; (iv) the notes to the financial statements describing the applicable accounting principles in place. In addition, the Project will provide an update on financial performance of the project as part of the Quarterly Progress Report (QPR) as required by the Bank not later than 45 days after the end of the quarter The project financial statements will be audited by the Auditor General or any other private audit firm contracted by the Auditor General, using the bank s audit Terms of Reference. Currently KPLC is audited by Deloitte & Touche. A complete project audited financial statements including management letter and responses will be submitted to the Bank within six months after the close of the fiscal year The project will use the direct payment method for all disbursements of the Bank s funds. However, other disbursement method may be used as with prior approval of the Bank 14

24 4.2 Monitoring and Evaluation The project will be implemented over a period of 48 months from Bank approval. The Project will be launched in November 2016 and will be supervised by the Bank at least twice a year from 2017 through to The coordination of the missions will be done by the Ministry of Energy and Petroleum in collaboration with KPLC The supervision team will be organized from EARC team twice a year. The team will consist of Task Manger, Procurement expert, Financial Management expert and Socio experts. The Task Manager will conduct, regular meetings at least once a month. Site visits will be conducted as required to followup the implementation activities at site The monitoring and evaluation of the performance will also be realized through monitoring of the project s key output and outcome indicators. In addition, the project will be monitored through the environmental and social indicators The project coordinator, with the assistance of the project supervision and management consultant, will prepare and submit to the Bank the project quarterly progress reports The supervision consultant shall be required to prepare and submit to the Executing Agency and the Bank, final commissioning reports at the completion of their assignment. Within six months of the commissioning of the project, the Bank, together with the implementing agency will prepare and submit a project completion report (PCR). 4.3 Governance This project will be implemented by KPLC. As a state owned enterprise, KPLC is governed by the State Corporations Act. Moreover, as a listed company in the Nairobi Securit Exchange, KPLC prepares audited financial statements, usually within three months of the end of the financial year, in accordance with IFRS) and in compliance with the Kenyan Companies Act.No.17 of Moreover, the Board of Directors (BoD) appointed by the Minister of Energy and Petroleum will provide strategic direction and guidance to KPLC The project will adopt all the governance and anticorruption policies and guidelines of the country. The Internal Audit Department of KPLC will assist in monitoring and evaluating the internal controls. External oversight will be provided by the Government s Auditor General. 4.4 Sustainability The project is technically, economically, and financially sustainable. The technical sustainability is guaranteed by the use of proven technology of widely used in the country The GoK s strong commitment to the development of the country s power infrastructure is demonstrated by the funding of transmission and other energy projects directly out of Government s central budget. In addition, KenGen, and KPLC developed internal funding sources to support investments in the energy sector. The strong Government support to KPLC contributed to connection of more than 1.6 Million customers in 2015 and 2016/ The Government of Kenya approached several Development Partners requesting financing of the Last Mile Connectivity project. Hence, the sustainability of last mile connectivity project guaranteed through addition financing from the World Bank (USD 150 Million). In addition, the AFD/EU and EIB are in the process of initiating financing of Euro 120 million and Euro 60 million respectively 15

25 4.5 Risk Management The project overall risk is rated as moderate. Table discusses the envisaged risks and mitigation measures. Table 4.5.1: Risks and Mitigation Measures Risk Description Rating Mitigation Connection Charges High Connection Charges M Financing Funding gap L Implement ation delay L: Low M: Moderate Project completion delay and failure to meet performance requirements 4.6 Knowledge Building L Reduction of connection charges to Kshs 15,000 was introduced by the Government. In addition KPLC avail credit to potential customers. However, sustainability of reduction of connection charges by KPLC depends of availability of fund for implementation of Last mile connectivity program. There is high government commitment. The World Bank provided USD 150 Million. The AFD/EU and EIB are in the process of initiating similar financing. Increasing electricity access, particularly in rural areas, ranks among the Government s top priorities. Moreover, the modular nature of this flagship project gives flexibility in designing its scope and size, thus ensuring the Government to secure the necessary funding accordingly. The project will be implemented as supply and installation. Timely procurement of contractors will ensure to minimize any potential delay during project implementation The contract to be entered into by the contractors and the consultant responsible for the construction of the distribution system will include specific provisions to ensure the training of KPLC engineers especially in Project Management. This is a standard feature of contracts previously entered into by KPLC. This technology transfer component especially in project management is particularly important for KPLC. The Capacity building Program component will include training in project management and contract administration 5. LEGAL INSTRUMENTS AND AUTHORITY 5.1 Legal instrument The legal instrument for the project is a loan which will be given to the Republic of Kenya. 5.2 Conditions associated with the ADB s proposed Financing A) Conditions for Entry into Force The entry into force of the ADB Loan Agreement shall be subject to the fulfilment by the Government of the Republic of Kenya (the Borrower ) of the provisions of Section of the General Conditions Applicable to Loan Agreements and Guarantee Agreements of the ADB; 16

26 B) Conditions Precedent to First Disbursement The obligations of the Bank to make the first disbursement of the loan shall be conditional upon the entry into force of this Agreement in accordance with Section 5.2 A) above and the fulfillment by the Borrower of the following conditions: i) The conclusion of a Subsidiary Financing Agreement between the Borrower and KPLC for ongranting the Loan on terms and conditions acceptable to the Fund; ii) Written confirmation that the Project Implementation Team (PIT) established for the earlier African Development Bank financed Last Mile Connectivity Project will also be responsible for the implementation of the Project, and has been strengthened to include, at the minimum: one (1) Project Coordinator/Team Leader, four (4) Site Supervision Engineers, one (1) Procurement Expert, one (1) Socio Economist, one (1) Environmental Expert and one (1) Accountant. C) Undertakings The Government of Kenya undertakes to carry out the following: The Borrower undertakes to carry out the following: i. In the event of need for the Special Account disbursement method to be used with approval of the Bank (as indicated in Paragraph above), open special accounts in the Central Bank of Kenya as follows: (i) foreign currency account for the deposit of the proceeds of the Loan and (ii) operating local currency account; ii. iii. iv. Promptly compensate any persons whose assets such as trees and crops may be damaged during Project implementation, in accordance with the Bank s Policy on Voluntary Resettlement and KPLC s Resettlement Policy Framework developed based on the Bank s guidelines; Fully implement the Environmental and Social Management Plan (ESMP) and comprehensively report to the Bank on the said implementation on a quarterly basis; 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 Bank approve the proposed ADB loan of USD million to the Republic of Kenya for the Last Mile Connectivity II Project on the terms and conditions described in this report. 17

27 APPENDIX I: KENYA COMPARATIVE SOCIO-ECONOMIC INDICATORS Basic Indicators Year Kenya Africa Developing Countries Developed Countries Area ( '000 Km²) ,067 80,386 53,939 Total Population (millions) , Urban Population (% of Total) Population Density (per Km²) GNI per Capita (US $) Labor Force Participation - Total (%) Labor Force Participation - Female (%) Gender -Related Development Index Value Human Develop. Index (Rank among 187 countries) Popul. Living Below $ 1.25 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 (%) ,0 2,5 2,0 1,5 1,0 0,5 0, GNI Per Capita US $ Kenya Africa Population Growth Rate (%) Kenya Africa 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) Healthy life expectancy at birth (years) 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 5 years) Daily Calorie Supply per Capita 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) Agricultural Land (as % of land area) Forest (As % of Land Area) Per Capita CO2 Emissions (metric tons) Life Expectancy at Birth (years) Infant Mortality Rate ( Per 1000 ) Kenya Kenya Africa Africa Sources: AfDB Statistics Department Databases; World Bank: World Development Indicators; last update: May 2016 UNAIDS; UNSD; WHO, UNICEF, UNDP; Country Reports. Note: n.a.: Not Applicable; : Data Not Available. I

28 APPENDIX II: BANK GROUP PORTFOLIO IN KENYA (APRIL 2016) Public/Private Sector Project Title Loan Number Public Agriculture Fin. Source Approval Date Date Into Force Date Eff. for Disb. Completion Date Loan Amount (UA m) Kenya-Drought Resilience & Sustainable Livelihood Program ADF 12/19/2012 5/5/2013 8/14/ /31/ % Smallscale Irrigation & Agriculture Value Chain Development Disb. Ratio ADB 11/18/2015 n.a. n.a. 06/30/ % GAFSP 11/18/2015 n.a. n.a. 06/30/ % Agriculture Total % African Virtual University Support Social Project (Phase 2) ADF 12/16/2011 1/24/2012 2/14/ /30/ % East Africa Centers of Excellence Kenya ADF 10/03/2014 7/7/2015 7/7/ /31/ % Support to Higher Education Science and Technology to Enhance ADF 11/14/2012 2/19/2013 2/19/ /30/ % Support to TVET and Training for Relevant Skills Development ADF 07/01/ /10/ /10/ /30/ % Social Total % Power ADF - PRG for Turkana T-Line ADF 10/02/ /8/ /8/ /15/ % ADF PRG Menengai ADF 10/22/2014 n.a. n.a. 12/31/ n.a. Ethiopia-Kenya Electricity Highway(Kenya) ADF 09/19/2012 3/1/2013 9/26/ /31/ % Kenya - Last Mile Connectivity Project ADF 11/19/ /2/ /2/ /31/ % Kenya - Tanzania Interconnection (Kenya) ADF 02/18/ /13/2015 n.a. 12/31/ % Menengai Geothermal Development ADF 12/14/2011 7/10/2012 7/10/ /31/ % Project SCF 12/14/2011 7/10/2012 7/10/ /31/ % SCF 12/14/2011 3/12/2012 7/10/ /31/ % Nelsap Interconnection Project - Kenya ADF 06/16/2010 7/26/2011 1/23/ /31/ % Power Transmission Improvement Project ADF 12/06/ /14/2011 5/14/ /30/ % Power Total % Transport Mombasa -Nairobi-Addis Ababa Corridor Phase III - Kenya ADF 11/30/2011 6/29/2012 9/17/ /31/ % Mombasa-Mariakani Road Highway Project ADF 03/11/ /29/2015 1/22/ /30/ % Mombasa-Nairobi-Addis Corridor II - Kenya ADF 07/01/2009 4/2/2010 4/6/ /31/ % II

29 Public/Private Sector Project Title Loan Number Fin. Source Approval Date Date Into Force Date Eff. for Disb. Completion Date Loan Amount (UA m) Multinational: Arusha-Holili/Taveta-Voi Road (Kenya) ADF 04/16/ /18/ /18/ /31/ % Nairobi Outer Ring Road Project Improvement Project Sirari Corridor Accessibility & Road Safety Improvement Project Disb. Ratio ADF 11/13/2013 5/8/2014 5/8/ /31/ % ADF 11/13/2013 9/26/2014 9/26/ /31/ % ADB 03/30/2016 n.a. n.a. 12/31/ n.a EU AITF 03/30/2016 n.a. n.a. 12/31/ n.a. Transport Total % Water Sup/Sanit Lake Victoria Water And Sanitation Program ADF 12/17/2010 4/4/ /23/ /31/ % Nairobi River Rehabilitation: Sewerage Improvement Project ADF 12/06/ /9/ /9/ /31/ % Small Med Towns Water Supply & Waste Water ADF 11/03/2009 5/14/2010 1/21/ /30/ % Thwake Multipurpose Water Development Program ADF 10/30/2013 5/28/ /25/ /31/ % ADF 10/30/2013 1/27/ /27/ /31/ % Water Sup/Sanit Total % Public Total 1, % Private Finance Chase Bank ADB 10/28/2015 2/1/2016 n.a. 02/05/ % Equity Bank (Kenya) Limited ADB 11/05/2014 7/3/2015 9/3/ /31/ % Imperial Bank Keny in Respect of Commerzbank RPA ADB 05/03/2016 n.a. n.a. 05/31/ % ADB 05/03/2016 n.a. n.a. 05/31/ % Finance Total % Power Lake Turkana Wind Power EKF ADB 04/26/2013 3/24/ /12/ /19/ % Lake Turkana Wind Power Project ADB 04/26/2013 3/24/ /12/ /19/ % Lake Turkana Wind Power Project - Sub Debt Tranche ADB 04/26/2013 3/24/2014 7/24/ /19/ % Thika Thermal Power Project ADB 12/07/ /19/ /19/ /01/ % Power Total % Private Total % Grand Total 1, % III

30 APPENDIX III: MAP OF PROJECT AREA IV