Zambia Energy Sector World Bank Mission

October 31-November 10, 2016

AIDE MÉMOIRE

World Bank Energy Sector Portfolio

Implementation Support Mission

October 31 – November 10, 2016

for

Kafue – Muzuma – Victoria Falls Regional Transmission Line Reinforcement (P124351),

The Lusaka Transmission and Distribution System Rehabilitation (P133184),

The Renewable Energy Resource Mapping Technical Assistance (P145271),

The Electricity Access for Low-income Households in Zambia (P146636 and P159610),

Scaling Solar Guarantee (P157943), and

Scaling-Up Renewable Energy Investment Plan (P160383)

This Aide Mémoire was discussed and agreed upon with the,

Department of Energy – Ministry of Energy, on December 02, 2016

Introduction

1. This Aide Mémoire summarizes the findings of a World Bank energy sector

implementation support mission for the above captioned projects and initiatives.

2. The mission1 wishes to express its thanks to: Mr. Oscar Kalumiana, Director,

Department of Energy (DoE), Ministry of Energy and his team; Mr. Andrew Chipwende, Chief

Executive Officer, Industrial Development Corporation (IDC), Mr. Victor Mundende,

Managing Director, ZESCO Ltd. and the management team; Mr. Geoffrey Musonda, Chief

Executive Officer, Rural Electrification Authority (REA) and his management team;

3. Ms. Langiwe Lungu, Executive Director, Energy Regulation Board (ERB) and the

management team; and Mr Clement Sasa, Manager, Office for the Promotion of Private Power

Investments (OPPPI) for the cordial reception and courtesies rendered. A list of persons met is

provided in Annex 1.

1 The mission comprised: Mirlan Aldayarov (Zambia Program Leader), Joseph Kapika (Co-Program Leader/Senior Energy

Specialist), Reynold Duncan (Lead Energy Specialist); Arnaud Braud (Co-Leader for Scaling Solar/ Energy Specialist),

Anthony Molle (Senior Legal Counsel), Rajesh Advani (Co-Leader for Electricity Access/Senior Infrastructure Specialist);

Kenta Usui (Energy Specialist), Imtiaz Hizkil (Power Engineer), and Sipiwe Chihame (Program Assistant). Inputs for the Aide

Memoire were also provided by Wedex Ilunga (Senior Procurement Specialist), Baison Banda (Financial Management

Consultant), and Mwansa Lukwesa (Environmental Specialist).

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Mission Objectives

4. The main objectives of the mission were to:

Undertake the mid-term review of the Kafue – Muzuma – Victoria Falls Regional

Transmission Line Reinforcement Project (P124351);

Provide implementation support for the on-going projects: (i) Kafue - Muzuma - Victoria

Falls Regional Transmission Line Reinforcement (P124351); (ii) Lusaka Transmission

and Distribution Rehabilitation Project (LTDRP- P133184); Electricity Access for Low-

income Households in Zambia (P146636 and P159610); and Renewable Energy

Resource Mapping Technical Assistance (P145271);

Follow-up on the preparation of the Scaling Solar Guarantee Project (P157943); and

Finalize arrangements for the disbursement of the grant for the Zambia Scaling-Up

Renewable Energy Program (SREP) Investment Plan Project (P160383);

Disclosure

5. It was agreed at the wrap up meeting that the Aide Mémoire would be publicly disclosed.

A. Key Findings and Issues

1. Power Supply Situation. Zambia continues to face a significant electricity deficit

primarily due to lower than expected rainfall over the last two years which has led to the main

reservoirs in the country’s hydro dominated power system only being partially replenished. By

end October 2016, the water level at the Kariba reservoir had fallen to 478.5 meters above sea

level, close to the minimum operating level for electricity generation of 475.5 meters, and lower

than the 478.7 meters recorded at the same time in 2015. In order to manage the deficit, ZESCO

has since July 2015 invoked load-shedding, on a rotational basis that at times lasts more than 8

hours a day. The utility has also entered into contracts for emergency electricity imports from

Southern African Power Pool (SAPP member utilities and also private suppliers. The tariffs for

these emergency imports have generally been higher than the prevailing average for ZESCO

consumers. The fiscal strain that this imposes combined with the overall reduction in productive

activity on account of the power deficit is having an adverse impact on the economy.

2. Sector Reforms. The Government is committed to addressing the power deficit and

recognizes that insufficient investment in generation capacity and lack of diversification of the

energy mix has contributed to the current crisis. In order to place the power sector on a

sustainable path, the Government plans to move tariffs to cost recovery levels over the short to

medium term for all customers, including those in the mining industry that are on long-term

power supply agreements, and engage proactively with the private sector to deliver new

generation capacity and increase on-grid and off-grid access to electricity. In increasing

generation capacity, the Government is cognizant of the effects of climate change and for this

reason intends to diversify the generation mix with non-hydro sources. To this effect the

300MW coal-fired Maamba power plant has recently been commissioned and the World Bank

Group-supported Scaling Solar projects are a priority. The Government is also considering

options to improve both technical and commercial efficiency in the electricity supply industry

and intends to undertake a review of the structure, governance and operations of the sector. The

World Bank stands ready to support the Government with these initiatives, including

complementing the cost of service study that shall be launched by the Energy Regulation Board

by end December 2016 with further technical assistance as is necessary.

3. Scaling Solar Guarantee Project. The Mission was informed that projects under the

WBG Scaling Solar initiative remain a priority for Government. During the Mission joint

discussions with the Department of Energy (DoE), Industrial Development Corporation (IDC)

and ZESCO were held in order to align the next processing steps for all stakeholders and avoid

delaying project implementation. Commercial close of the two projects under Round 1, that

have a total capacity of 75.7MW, was initiated with the signing, in November 2016, of the

related Shareholders Agreements between IDC and the respective developers. It is expected that

following the registration of the project companies, the corresponding Power Purchase

Agreements (PPAs) and Government Support Agreements (GSAs) shall also be signed.

Execution of these agreements shall initiate a 90-day period, within which financial close should

occur. This requires that Bank Board approval for the International Development Agency (IDA)

guarantee is obtained within the period since this is part of the security structure in the PPAs.

The Mission informed DoE, IDC and ZESCO that in order to progress processing of the

guarantee and avoid breaching the 90-day period, ZESCO would need to issue the Request for

Proposals (RfP) for procurement of the Bank that would provide the Letter of Credit (L/C) – a

constituent part of the IDA guarantee structure – by November 23, 2016. The Mission further

informed the parties that if financial close was not reached within the stated period this could

lead to financial penalties. It was agreed that ZESCO would issue the L/C RfP as soon as the

Attorney General completed reviewing, and consented to the related documentation. The

Mission requested that all efforts be made to expedite this process.

4. Performance of ZESCO-implemented projects. Implementation of the projects has

been steadily improving and progress is accelerating.

ZESCO is to be commended for a number of corrective actions taken over the last few

months resulting in substantially expedited implementation of the Kafue -Muzuma -

Victoria Falls Regional Transmission Line Reinforcement Project (KMVFP). These

measures include: (i) closer supervision by the ZESCO project implementation unit

(PIU); (ii) allocation of additional resources by the contractor including the appointment

of a new project manager, increased manpower and equipment; and (iii) ZESCO’s

provision of longer line shutdown periods. The PIU was confident that this momentum

would be sustained through to completion of the project. Rehabilitation and

reinforcement of the Kafue Town - Muzuma portion of the transmission line was

expected to be completed by end-November/early December 2016. Thereafter, the

contractor would commence works on the Muzuma - Livingstone section.

Audit delays that had previously been reported had been resolved and since this was no

longer outstanding, the implementation rating of the project was expected to be

upgraded. However, despite the improved implementation progress, works at the

Muzuma and Kafue Town substations were only expected to be completed by August

2017, i.e. beyond the current closing date of June 30, 2017. Moreover, works at the EIB

- funded Livingstone substation would only be completed by end - December 2017.

Therefore, in order to achieve the project’s development objectives, and align the

implementation schedule with that of EIB, it was agreed that a closing date extension

through end-December 2017 was required. It was further agreed that ZESCO would

initiate the process and that the formal request from the Ministry of Finance (MoF)

should reach the Bank by end-December 2016. Further details on project implementation

progress are reflected in Annex 2.

Implementation progress on the Lusaka Transmission and Distribution

Rehabilitation Project (LTDRP) has also improved with works having commenced on

one Bank financed package and the procurement of another two underway. Further effort

was however required for the rating of the project to be upgraded. The Mission observed

that even if procurement of these three packages, estimated at US$68million value, was

to be completed, disbursements would remain low through June 2017. Furthermore,

procurement of the remaining 4 packages, under Bank financing, that are currently being

prepared is only scheduled to commence around mid-2018. The project may therefore

need to be restructured. An option that could be considered for a potential restructuring

would be to release the currently committed IDA resources that are earmarked to fund

packages scheduled to be procured later, in the amount of approximately US$40 million.

In the meantime, ZESCO would continue with preparation of the engineering designs

and bidding documents, for the remaining while at the same time focusing on

progressing the implementation the first three packages. Thereafter, and provided

implementation progress improved, the option of additional financing to fund the

remaining components could be considered. Further details on project implementation

are reflected in Annex 3.

Implementation of the output-based aid (OBA) grant for the (a) Electricity Access for

Low Income Households in Zambia (P146636 and P159610) is satisfactory, with a

disbursement rate of 82% that aligns with the project closing date of June 30, 2017. The

project has fully implemented the household connections component, and surpassed the

22,000 connections target that had been set by over 11,000 additional connections.

ZESCO has now commenced implementation of the component for connecting 5,000

micro and small enterprises (MSEs). Project details are reflected in Annex 4.

5. Renewable Energy Resource Mapping Technical Assistance. The project activities

are progressing well. The first round of maintenance for the 6 solar measurement stations that

have been installed was carried out in June 2016. Meanwhile, installation of all eight 80m wind

measurement masts was completed in December 2016. Project details are reflected in Annex 5.

6. Proposed New Access project. The Bank has identified about US$38 million of IDA

funding available for allocation and commitment in FY2017, i.e. by end-June 2017. Following

discussions with the Government, it was proposed to allocate the identified resources towards

increasing access in both peri-urban and rural areas. Given the short period to June 2017, it

would be beneficial to determine the extent to which the existing institutional infrastructure for

the roll-out of access programs within both ZESCO and the Rural Electrification Authority

(REA) could support the design and preparation of the proposed project. The proposed project

could also include an off-grid component, taking into account lessons learnt from the recently

closed (June 2015) Bank financed Increased Access to Electricity Services Project, which would

further support the development of private sector participation in off-grid solutions. In

discussions with ZESCO, the Mission noted that in order for an appreciable number of grid

connections to be made, the proposed project would also require investments in network

reinforcement, an element that is not included under the ongoing OBA project that ZESCO was

implementing. A proposed early design concept of the proposed project is reflected in Annex 6.

7. Scaling up Renewable Energy Program (SREP). The application for the US$300,000

grant by the Government for preparation of the Investment Plan under the SREP had been

approved. The requisite legal agreements had been finalized and were submitted to the Ministry

of Finance on December 01, 2016 and are awaiting signature. Once the Investment Plan had

been completed, it would be forwarded to the SREP sub-Committee for approval and

consideration for financing.

8. Multi-Tier Framework for Measuring Access. As agreed with the Government, the

World Bank would support the first Global Energy Access Household Survey for Zambia using

the Multi-tier Access Framework in order to set a baseline to track progress towards the

Sustainable Energy for All (SE4All) goal and Sustainable Development Goal (SDG) number 7

on access to affordable, reliable and sustainable modern energy by 2030. The Request for

Expressions of Interest (REOI) from suitably qualified firms to conduct the survey was issued

in November 2016. Procurement of the firm is scheduled to be finalized by January 2017 and

the survey completed by mid-2017.

B. Agreed Actions and Next Steps

9. The Mission discussed and agreed the Key Actions and next steps with Government and

implementing agency counterparts as detailed below. It was proposed that the next

implementation support mission take place in February 2017.

Agreed Actions and Next Steps

No. Key Agreed Actions Responsible

by

Target Date Status

Scaling Solar Guarantee Project

1 Follow up with AG office to complete review and

release of the L/C RfP

IDC, MoE November 18,

2016

Done

2 ZESCO to issue RfP ZESCO November 23,

2016

Done

3 L/C bids submission deadline ZESCO December 14,

2016

Done

4 World Bank Board guarantee approval date (tentative) World Bank Early

February

2017

Kafue Town-Muzuma-Livingstone Regional

Transmission Project (KTML project

1 PIU to provide revised disbursement estimates ZESCO December 31,

2016

2 ZESCO to initiate a closing date extension request to be

sent to the Bank

ZESCO December 31,

2016

Received

Lusaka Transmission and Distribution Project

1 Zambia counterparts to carry out internal consultations

on potential project restructuring options and

communicate to the Bank

MoE,

ZESCO

January 31,

2017

Proposed New Access Project

1 REA to share Master plan, rolling investment plan and

latest annual report

REA December 09,

2016

Received

2 ZESCO to share completed regional investment plans

for access

ZESCO November 18,

2016

Received

3 Draft TOR for consultants to compile REA and ZESCO

data and outline investment options for proposed project

and share with counterparts

World Bank December 31,

2016

4 Draft TOR for consultants to review investment options,

prepare demand analysis, financial and econ analyses,

and support project implementation plan and share with

counterparts

World Bank December 31,

2016

Annex 1

List of Persons Met During the Mission

Name Title Email Telephone

Department of Energy

Oscar Kalumiana Director kalumiana64@yahoo.com +260 966

090564

Arnold Simwaba Assistant

Director

arnmils.simwaba806@gmail.com +260 975

752993

L M Musalila Senior Energy

Officer

lmusalila@gmail.com +260 971

880896

Misheck

Mubuyaeta

Energy Officer mishmmubuyaeta@gmail.com +260 979

002299

William

Masocha

Energy Officer wmosocha4@gmail.com +260 974

871033

Lukonde Kaunda Energy

Economist

lookonday@gmail.com +260 9799

53948

Office for the Promotion of Private Power Investment

Clement Sasa Manager csasa@zamnet.zm +260 977

871109

Clement Chiwele Chief Engineer cschiwele@zamnet.zm;

chiwelecl@yahoo.com

+260 979

413853

Chrispin L.

Kahongo

Technical

Assistant –

Zambia Tanzania

Kenya

Interconnector

Project

clkahongo@gmail.com +260 966

765654

Energy Regulation Board

Alfred Mwila Director –

Economic

Regulation

amwila@erb.org.zm +260 977

826525

Yohane Mukabe Director –

Technical

Regulation

ymukabe@erb.org.zm +260 966

789004

Rodgers

Muyangwa

Manager –

Economic

Regulation,

Electricity

rmuyangwa@erb.org.zm +260 966

456382

ZESCO Limited

Webster

Musonda

Director

Transmission

wmusonda@zesco.co.zm +260 977

789915

Mutungwa

Mugala

Director

Distribution and

mmugala@zesco.co.zm +260 966

767025

Customer

Services

Saidi Chimya Acting Director

Finance

schimya@zesco.co.zm

Regina Chabala Senior Manager -

Treasury

rchabala@zesco.co.zm +260 966

458912

Kennedy

Mwanza

Project Manager

– Transmission

Development

(North)

kmwanza@zesco.co.zm +260 979

762136

Mundia

Simainga

Senior Manager

Consulting

Services

msimainga@zesco.co.zm +260 977

777168

Kennedy Sichone Project Manager

EALHP

ksichone@zesco.co.zm +260 977

805412

Daniel Mvula LTDRP mvulad@zesco.co.zm +260 955

765778

Leonard Mpundu IALHP lmpundu@zesco.co.zm +260 974

404686

Godfrey Mwenda IALHP gmwenda@zesco.co.zm +260 965

791919

John M. Chirwa LTDRP jmchirwa@zesco.co.zm +260 977

741424

Wilbroad Chanda LTDRP wchanda@zesco.co.zm +260 977

795043

Justin Changala IALHP jchangala@zesco.co.zm +260 966

745014

Taulino Banda LTDRP taulinobanda@zesco.co.zm +260 977

420028

Rural Electrification Authority

Geoffrey

Musonda

Chief Executive

Officer

gmusonda@rea.org.zm +260 977

601630

Patrick Mubanga Director –

Technical

Services

pmubanga@rea.org.zm +260 211

241301

Jaqueline

Musonda

Director –

Corporate

Service

jmusonda@rea.org.zm

Annex 2. Status of Implementation

Kafue - Muzuma – Victoria Falls Regional Transmission Line Reinforcement Project

(KMVFP)

Project Context

1. The Project was approved in May 2012 and became effective in December 2012. The

project development objective is to improve the reliability of ZESCO's regional

transmission network infrastructure along Kafue Town – Muzuma - Victoria Falls

corridor. In October 2015, the project closing date was extended from December 31,

2015 to June 30, 2017. The components of the project are:

a. upgrading of the existing 220kV transmission line;

b. reinforcement and construction of transmission substations; and

c. project management, environmental and social mitigation, and training.

2. The scope of the project is to re-insulate and re-conductor the transmission line running

from Kafue Town to Victoria Falls via Muzuma substation in order that it can be

energized from the current 220 kV to 330 kV and by so doing increase transfer capacity.

The first 341 km line is to be reinsulated to 330 kV and strung with twin Bison

conductors per phase. The remaining section of 7 km between Livingstone substation

and Victoria Falls substation is also to be reinsulated and re-conductored, however, it

will be operated at 220 kV. Furthermore, the substations at Kafue Town and Muzuma

will be upgraded and a new 500MVA 330/220 kV substation constructed at Livingstone.

The project will enhance bulk power transfers between Zambia and Namibia specifically

and in among SAPP member utilities in general.

3. The project is co-financed with the European Investment Bank (EIB) that are financing

construction of the green-field Livingstone substation and also the upgrade of Victoria

Falls substation.

4. A Mid-Term Review (MTR) was conducted to identify opportunities to accelerate

project implementation and thereby improve project performance. The MTR is subject

of a separate report.

Key Findings

Upgrade of Existing 220 kV Transmission Line from Kafue Town to Victoria Falls

Substations

5. Project implementation progress has accelerated in recent weeks. The line upgrade

contract was signed on January 8, 2015 and became effective on March 10, 2015. The

procurement of various components by the contractor has progressed satisfactorily.

However, overall works progress was unsatisfactory until October 2016. ZESCO

attributes the delays to technical difficulties encountered and the lack of capacity on the

part of the contractor. Initial delays were due to the mechanical failure of power line post

insulators on the diversion line as well as the 330 kV long rod post insulators. By end of

July 2016, only 60 km (17%) of stringing was completed which increased to 90 km

(26%) by end of September. However, progress during October was significantly higher

as it increased the total stringing to 147 km during the month and the PIU is confident

that this momentum will be sustained. This accelerated implementation was the result of

a number of ZESCO initiatives, including:

a. Closer project supervision by ZESCO, which considers Kafue-Muzuma

transmission line upgrade as a critical step to improve dispatching the domestic

generation and import. To this end, ZESCO accommodated longer shutdowns of

the line to allow the rehabilitation crew to work on the longer stretches of the

line.

b. Adequate resources made available by the contractor. The management of the

contracted company, paying closer attention to the project as ZESCO was

considering termination. The contract has since appointed a new project manager

and made available additional sets of equipment and a crew team.

6. The Mission visited the site of transmission line stringing work on the section of

transmission line between Mazuma and Kafue Town substations. The Mission was

informed by the contractor’s new Project Manager that upgrade works on the entire

section are expected to be completed before the end of December 2016. The upgrade

works on Muzuma – Livingstone - Victoria Falls sections is planned to commence in

January 2017. The plan was to complete the section comprising of 159 km of line length

by April. Acceleration of progress would also be possible due to increased bypass

section by 12 km for which additional wooden poles would be provided by ZESCO. This

would effectively increase the contractor’s output to 50 km of completed line (upgrade)

per month. ZESCO expected this to be achieved although some slippage could occur

due to the onset of the rainy season. The key milestones and a timeline of transmission

upgrade work that has been verified by ZESCO are shown in the table below.

Timeline of Transmission Line Upgrade Work

End of month Kafue Town-

Muzuma

Muzuma-

Livingstone

Total (348km)

June 2016 57 km 0km 57 km (16%)

July 60 km 0km 60 km (17%)

September 90 km 0km 90 km (25%)

October (current) 147 km 0km 147 km (42%)

November 189 km (Completed) 0km 189 km (54%)

April 2017 189 km 152km (Completed) 348 km (100%)

Upgrade of Existing Kafue Town and Muzuma Substations from 220 kV to 330 kV.

7. The two contracts, namely design, supply and installation of transformers and reactors,

and design, supply and installation of switchgear and associated equipment became

effective on February 02, 2015 and December 14, 2015 respectively.

8. Kafue Town Substation. By end October 2016, almost 60% of the civil works had been

completed. Civil works for the 330 kV and 132kV gas insulated switchgear (GIS) control

rooms had been partially completed. The 330 / 132 kV transformer, delivered in August

2016 was awaiting full assembly. Civil works on the cable trenches and outgoing bus

ducts would be completed by December 2016. It was expected that electrical installation

and instrumentation works would commence in January 2017. The mission was

informed that the substation works would be completed by end June 2017. All the

equipment and material ordered have either been delivered or shall be delivered by end

December 2016. However, due to the volume of works still to be completed and the

linkages among the activities a slippage by two to three months was possible.

9. Muzuma Substation. The old equipment had been dismantled and civil works were at

an advanced stage (more than 60% complete). The transformers had been delivered to

site in August 2016 and installation works were expected to commence by December

2016. This would be followed by installation of switchgear. Most of the equipment and

materials had either been delivered or were in the process of being shipped to site. Based

on current progress ZESCO expected completion of the substation works by June 2017.

This however required that necessary shut-downs were obtained from ZESCO system

control which could be difficult due to the fact that the country was experiencing a power

supply deficit and Muzuma was the evacuation point for the recently commissioned

Maamba power station. A slippage by two to three months was therefore possible.

10. Livingstone substation and Victoria Falls Substation. The contract for the substation

became effective on February 25, 2015. Procurement had progressed well and the

manufacturing of a wide range of equipment was complete. Construction progress had

however halted since August 2015 following delivery of the transformer and with around

60% of the foundation having been completed. This was due to the suspension of works

by the contractor on March 8, 2016 due to payment delays. Following resolution of the

outstanding payments issue, the contractor was expected to re-mobilize in November

2016. The Mission advised ZESCO that since commissioning of these substations would

take place some months after works at Kafue Town and Muzuma had been completed,

it was important that the contractors on the components that were under Bank financing

remained available to support coordination, testing and commissioning at the

Livingstone and Victoria Falls substations. The EIB project closing date has been

extended and the funding is confirmed to be available through December 2017.

11. Completion of the Kafue Town and Muzuma substations works was only likely to

occur in August 2017, beyond the current project closing date. Furthermore,

completion of Livingstone and Victoria Substations was required for the development

outcome to materialize. Therefore, in order to achieve the project’s originally targeted

objectives and align the implementation schedule with that of EIB, it was agreed that a

closing date extension through end-December 2017 was required. The Mission agreed

that ZESCO would initiate such request that would be sent to the Bank from the Ministry

of Finance (MoF) by end-December 2017.

12. Current result indicators need to be revisited. The mission reviewed the result

indicators with ZESCO. The current PDO indicators are (i) annual power trade between

Zambia and Namibia, and (ii) frequency and duration of unplanned interruptions in the

Kafue Town-Victoria falls corridor. A key issue was the fact that both indicators

required a reasonable period (say one year or two quarters) after the project’s completion

to measure the project’s results (in MWh terms and number of interruptions). The Bank

team would review this matter with the view of reaching a determination prior to the

next mission. In the meantime, ZESCO would provide figures for year 2016. ZESCO

further agreed to collect and share relevant data on the “direct beneficiaries” particularly

focusing on the areas around Muzuma substation along with the rationale that would be

used to select / quantify those beneficiaries.

13. ZESCO and the Bank mission team agreed on the following actions to sustain the project

performance. The key milestones and timeframe have been agreed with the PIU as in the

Table below.

Timeline of the Transmission Line Upgrade work

Fiduciary Aspects

Financial Management

14. The overall financial management performance is considered moderately satisfactory

due to the level of disbursements in comparison to the elapsed project period. The project

is up to date in submitting the IFR and they have already submitted the one for September

2016. As per IFR submitted during the third quarter the disbursements were US$8.821

million bringing the total cumulative disbursements to end of September to US$32.369

million representing 54% of the Credit. The time period that has elapsed since project

effectiveness is 84%

15. Flow of Funds. There have been no issues with regard to the flow of funds and the

project has been consistent in submitting requests for advance through the IFR method.

16. Audited Financial Statements. . The audited financial statements for the year ended 31

December 2016 were submitted after the due date of 30 June 2016. However there were

no issues raised in the management letter that were specific to the Project.

Procurement

17. The Bank held meetings with ZESCO and the engineering and supervision consultant as

part of the Mission. It was noted that all activities had been procured and were in the

contract management phase. Significant progress had been made on the substations

contract, however progress on the transmission line contract was a matter of concern.

The Bank suggested the following measures to improve progress:

a. ZESCO enhances supervision of the consultant and if needed request that the

consultant replace staff in order to enhance capacity

b. The consultant needed to be informed to improve its supervision of the

transmission lines contract and as necessary apply liquidated damages.

c. ZESCO was requested to ensure that the consultant demands a revised work

Milestones Timeline

(end of month)

Completion of Kafue Town-Muzuma transmission line upgrade (189km) November 2016

Completion of Muzuma- Livingstone- VicFalls transmission

upgrade/rehabilitation (159km)

April 2017

Completion of Kafue Town and Muzuma Substations August 2017

Completions of Livingstone and Victoria Falls substations (EIB-funded) December 2017

program from the contractor in which they would demonstrate how they would

make up for the delays incurred.

18. Following the discussions on the above interventions, ZESCO reported that the

contractor’s management had been summoned and informed of the concerns on the

implementation of the contract. Following this action, there has been considerable

improvement in the performance of the transmission lines contract.

19. For this mission the procurement rating was maintained as Satisfactory.

20. Given the project closing date of June 30, 2017, ZESCO should take note that only

activities completed on or by the project closure date will be eligible to be financed from

the credit. Any activities not completed by that date will not be eligible for financing

from the credit. Activities completed by or before the closing date may be invoiced and

paid for from the credit after the closing date within the four months grace period.

Environmental and Social Aspects

21. The Mission visited various sites along the Kafue Town – Muzuma – Victoria Falls

transmission line corridor. All resettlement activities have been finalized. The valuation

of crop fields and fruit trees near Kafue, Mazabuka and Muzuma have been disclosed,

and affected households have accepted the valuation amounts and signed off for them.

Compensation modalities are currently being arranged. During the visit to the new

Livingstone substation, it was observed that the site is was facing difficulties in obtaining

water as all the boreholes that had been sank were dry. As a result, the construction

company had opted to transport water to site using a bowser and thus increasing the

project footprint. ZESCO was advised to consider requesting the contractor to carry out

a further survey of the site with the aim of sinking a borehole that would ease the water

situation.

Annex 3. Status of Implementation

Lusaka Transmission and Distribution Project (LTDRP)

1. The objective of the project is to increase capacity and improve reliability of the

electricity transmission and distribution system in the Lusaka area. The project scope

includes upgrading of the existing 88kV and 132kV transmission networks, constructing

new 132kV transmission lines, constructing/upgrading of various 132/33/11kV

substations, constructing new 33kV lines, replacing/upgrading of 33kV and 11kV cables

and constructing new 11kV switching stations. The LTDRP has the following

components:

Component 1: Rehabilitation of the 132kV and 88kV Transmission Network in

Lusaka area (estimated cost: US$106 million, US$95 million from IDA and US$11

million from ZESCO)

Component 2: Rehabilitation of the 33kV and 11kV Distribution Network in Lusaka

area (estimated cost: US$130 million, US$101 million from EIB and US$29 million

from ZESCO)

Component 3: Technical Assistance and Project Supervision (estimated US$10

million from IDA).

2. The project was approved by the Board of Executive Directors on May 30, 2013 and the

financing agreement was signed on October 3, 2013. The project closing date is February

28, 2019. Overall, the implementation progress has been slow considering that almost 3

years have elapsed since project’s effectiveness with disbursements standing at around

12% for the IDA component. IDA made the first disbursement of US$ 10 million on

May 15, 2014, as required under the financing agreement. A total disbursement of USD

12,020,705.22 had been made by November 30, 2016.

3. The project is co-financed by the European Investment Bank (EIB). The EIB board

approved Euro 78 million in November 2013 and the loan agreement was signed on June

16, 2015. As part of the EIB loan, ZESCO was required to carry out a reactive power

study, last mile study and prepare an implementation plan for the Lusaka network that

also covered environmental issues and a recovered equipment disposal plan.

4. The progress achieved thus far by ZESCO included: a) Selection and mobilization of

the engineering and supervision consultant, b) completion of bidding process and

signing the contract for the Waterworks 132/33/11 kV substation and switching stations

package in September 2016, c) revision of the procurement plan through consolidation

of planned packages, and d) completion of the bid documents for the two bulk packages.

The revised procurement plan was reviewed by the Bank and a no objection was issued

on August 25, 2016. By consolidating the entire project into 7 packages, the project

implementation is expected to be accelerated.

5. The time taken towards contract finalization for Waterworks substation and its signing

by ZESCO after bid opening (January 22, 2016) was found to be over 8 months. The

Mission agreed with ZESCO on the need to avoid such delays on the other packages to

be procured.

6. The contract for the Waterworks 132/33/11 kV substations and switching stations

(Package B2) became effective on October 17, 2016 and advance payment amounting

to US$1,587,097.40 paid to the contractor following submission of the advance payment

guarantee and the performance guarantee. As at November 2016 the contractor had

mobilized and was undertaking preparatory and testing works.

7. Following the effectiveness the ZESCO and the consultant have worked with the

contractor to support initial construction activities, including on compliance to safety

and other requirements and supervision of geotechnical and geospatial studies. The

Mission visited the Waterworks substation and witnessed some of these works.

8. The expected bid opening dates for the remainder of the packages under Bank financing

in the amount of approximately $ 46 million were provided as follows:

a. Package J - July 2018

b. Package R - July 2018

c. Package D - Aug 2019

d. Package O - Feb 2020

9. Given that approximately USD 46 million of financing would remain tied until the end

of 2018, it was suggested that ZESCO consider restructuring the project including the

option of cancelling the portion of the credit earmarked for financing these four

packages. ZESCO agreed to undertake a technical review with the help of the consultant

to ensure that removal of the above stated four packages did not negatively affect the

integrity and operational flexibility of the remaining part of the project (packages). It is

anticipated that the results indicators and figures for the project cost and disbursement

would need to be revised as part of the proposed restructuring. It was agreed that ZESCO

and the Ministry of Energy would initiate the formal request on the proposed

restructuring, and that the Bank would receive this from the Ministry of Finance by the

end of December 2016. Thereafter, the Bank would field a Mission during the first

quarter of 2017 to finalize the parameters for restructuring with Ministry of Finance,

Ministry of Energy and ZESCO.

10. It was agreed that a midterm review (MTR) of the project would be undertaken in early

2017.

Fiduciary Aspects

Financial Management

11. Although the Designated Account (DA) has been active, disbursements are still lagging

behind mainly due to procurement delays. The project is up to date with the submission

of IFRs. Total disbursements to date as reported in the IFR for the quarter ended 30th

September 2016 is US$5.715 million which is only 5% of the total Credit of

US$105,000,000. The expenditure for quarter amounting to US$1,970,828 is highest

since the project became effective in 2014.

12. It should be noted that over 45% of the project period has elapsed but only 5% of the

Credit has been paid out toward goods, works and consulting services.

13. Audited Report: The project submitted its audited financial statements on time and the

management letter did not raise any outstanding issues. The overall FM rating has

remained at Moderate Satisfactory due to the low disbursement rate.

Procurement

14. During the mission the Bank carried out a review of the implementation status. The Bank

noted that though ZESCO had taken measures to consolidate requirements and request

bids for one of the packages, estimated at US$ 36 million, another similar document

required to be urgently prepared and submitted to the Bank if the procurement was to be

brought back on track. Regardless, the Bank noted that notwithstanding any efforts that

would be made it was unlikely that event if the contract was entered into, it would be

completed before project closure date. This makes it unlikely that the ensuing packages

could be implemented and paid for from the credit as activities would unlikely to be

completed before closing date.

15. This is consistent with the suggestion that ZESCO consider restructuring the project.

16. For the package currently under procurement it was agreed that ZESCO should

diligently carry out the remaining steps and complete contract execution within the

remaining period before project closure date. Any lapses would lead to ZESCO having

to meet part of the payments for activities that would not have been completed by project

closure date as

17. For this mission the procurement rating was rated as Moderately Satisfactory.

Environmental and Social Aspects

18. Compensation for resettlement has already been settled in full along the Roma –

Leopards Hill, Roma – Lusaka West and Lusaka West – Waterworks transmission

corridor. Along the Roma – Leopards Hill corridor, ZESCO have undertaken post

relocation monitoring and 70% of the households compensated have since relocated.

The mission was informed that post relocation monitoring was yet to take place along

the Roma – Lusaka West and Lusaka West – Water. Furthermore, the Environmental

and Social Impact Assessment (ESIA) for the greenfield sub-project had been drafted

and would be submitted to the Zambia Environmental Management Agency (ZEMA).

Also, the Terms of Reference (TOR) for the Biodiversity Assessment have also been

drafted and cleared by the Bank. The Biodiversity Assessment shall feed into the ESIA

and support the establishment of a baseline. This will help the evaluation of potential

impacts on sensitive habitats in the project areas and propose appropriate mitigation.

Annex 4. Status of Implementation

Electricity Access for Low Income Households in Zambia Project (P146636)

1. Background on access projects. Electricity access indicators from the recent household

survey (reference) suggest that urban access in Zambia has improved considerably and

is currently at 67%. Rural access however remains very low at 3.7%. The World Bank

has been supporting improved electricity access in low-income areas using results-based

approaches through the now closed IDA-financed Increased Access to Electricity

Services Project (IAES-P077452) and the output-based aid (OBA) grant for the

Electricity Access for Low Income Households in Zambia Project (P146636). The OBA

grant to ZESCO is financed by the Global Partnership on Output Based Aid (GPOBA)

with funding from the Government of Sweden (Sida). The projects have enabled ZESCO

to connect over 120,000 households over the last eight years. The closed IAES project

achieved a disbursement rate of 97%, and the on-going GPOBA-funded project has a

disbursement rate of 82% (closing date June 30, 2017). The European Union is funding

a connection program for the greater Lusaka area (Estimated at EUR 80 million), which

means that a new Bank-funded access project would exclude Lusaka to avoid overlap.

2. Progress of active OBA access project (P146636). The project has fully implemented

the household connection portion of the project, and surpassed the 22,000 household

connection target and installed over 33,000 connections. ZESCO is now working on

connecting the 5,000 micro and small enterprises (MSEs) targeted under the project. On-

going technical assistance activities will support ZESCO to develop a strategy for

targeting MSEs and assess the impact of electrification on the productivity of MSEs.

ZESCO has opted to exclude Lusaka from the MSE connection program in order for

low-income businesses in other parts of the country to benefit. This may change if the

connection rate does not accelerate by January 2017. ZESCO has set the connection fee

for MSEs connected under the program to ZMK 769 (as opposed to the standard

connection fee of ZMK 2,400).

Annex 5. Status of Implementation

Renewable Energy Resource Mapping Technical Assistance (P145271)

1. Solar: Data collection from the 6 stations that have been installed is ongoing. The first

round of maintenance of the stations took place in June 2016. During the maintenance

visit, each part of the solar measurement station was checked for proper functioning and

parts were replaced as necessary. Local technicians from the Zambia Meteorological

Department (ZMD) also received on-site training on how to undertake maintenance.

During the maintenance, other training sessions were conducted. The first was a 3 day-

training, organized at UNZA with the support of Stellenbosch University. The training

focused mainly on utility-scale solar power plants including concept stage, project

development, Engineering Procurement and Construction (EPC), financials, tariff

computation and Power Purchase Agreement (PPA). It also covered solar mini grids in

rural areas and large roof top solar installations. Another training session was organized

at the Department of Energy (DoE) to discuss the development and operation of solar

power plants and how to read solar and meteorological data. The link to the vendor’s

data management system, where the daily solar data is collected for all 6 stations, was

shared with DoE. The next mission is expected to be in January 2017 to undertake the

second round of maintenance and to continue the training program.

2. Wind: Wind mast installations are progressing. Six towers have been completed and two

towers are yet to be constructed. There have been issues with granting access to Petauke,

which were resolved only recently. The crew is currently on the field to build the mast.

After that, the crew will move to Lusaka II to build the last tower. A lease agreement

has been already signed both for Petauke and Lusaka II. Lusaka II is the new site –

originally the site was Lusaka I but, after discussions with DOE and the difficulty in

getting clearance for that site, it has been decided to move the site to Lusaka II that it is

on private land (rent for Lusaka II was agreed at a rate similar to that for the Choma site

and the contractor would make payments towards this). Construction of the remaining

towers was expected to be completed in November 2016 and commissioning planned to

take place in December 2016 once the instrumentation for each tower had been installed.

3. The Mission informed DoE to begin to consider options on the modalities for

transferring the measurement stations to ZMD once the 2 –year data collection phase,

under Bank financing, had been completed. In addition, the Bank would discuss with

DoE modalities for making the data collected, for both solar and wind, publicly

available.

Annex 6. Proposed New Access Project Conceptual Design

1. Proposed new access project (IDA loan $38 million + possible OBA grant). The

mission noted that there is strong interest from the Government of Zambia and the lead

implementing agencies, ZESCO and REA, to continue investments in increasing access

to electricity services in low-income areas. The Swedish government through Sida may

provide co-financing through an OBA grant administered by GPOBA. The distribution

network is near capacity and hence further investment is needed in network

reinforcement to enable ZESCO to add new connections to the grid. Some technical

assistance is needed to analyze existing investment plans developed by ZESCO and

REA, and to carry out an assessment of likely demand and investment requirements for

a possible access project. The proposed project would use a results-based financing

approach similar to those used under IAES and OBA projects, both of which were

successfully implemented by ZESCO and delivered strong results.

2. Proposed project development objective (PDO) and components. The proposed PDO

is to increase electricity access and improve efficiency and quality of the electricity

distribution system in targeted low-income areas. The project would finance the

following:

Network reinforcement, implemented by REA in rural areas and by ZESCO in peri-

urban areas. These investments will reinforce the existing distribution network, carry

out intensification within existing grids, and improve customer service in a

coordinated manner. The investments would be financed using a results-based

financing approach similar to IAES.

Electricity Access, implemented by ZESCO. This will provide output-based

subsidies for new electricity connections and ready boards with wiring for low-

income households and MSEs, partially subsidizing the cost of the installation of

new connections. It may support the off-grid electrification effort by assisting

certified solar system providers to obtain credit through a credit line.

Technical Assistance and Project Management, implemented jointly by REA,

ZESCO and the Ministry of Energy. This will include technical assistance and

capacity building to support identification of project areas and investments,

implementation supervision, an outreach campaign for consumers, and further

efforts to expand the productive use of electricity by MSEs. It will also include an

options analysis on the viability of implementing an off-grid solar access program

for rural electrification.

3. Availability of energy supply. ZESCO’s ability to supply new connections is currently

constrained by the current energy supply situation. However, there are several on-going

projects that are financing investment in electricity generation and transmission, such as

Maamba, and the generation capacity is expected to increase in the near future. This

coupled with ZESCO’s efforts on demand management (CFL replacement and consumer

awareness on energy efficiency) will enable ZESCO to continue to support new

connections.

4. Preparation timeline. If the proposed approach is accepted, the team expects the project

to follow the Track 1 preparation process, with PCN – in early December 2016, QER –

February 2017, Negotiations in April 2017, and Board in May/June 2017.