Mekele-Dallol and Semera-Afdera Power Supply for Industrial Development and Access Scale-Up Project (Mdsapiap)

AFRICAN DEVELOPMENT BANK

Public Disclosure Authorized Public Disclosure

ETHIOPIA

MEKELE-DALLOL AND SEMERA-AFDERA POWER SUPPLY FOR INDUSTRIAL DEVELOPMENT AND ACCESS SCALE-UP PROJECT (MDSAPIAP)

APPRAISAL REPORT

Public Disclosure Authorized Public Disclosure

ONEC DEPARTMENT July 2016

Table of Contents

1. STRATEGIC THRUST & RATIONALE 1 1.1. Project linkages with country strategy and objectives ...... 1 1.2. Rationale for Bank’s involvement ...... 2 1.3. Donor Coordination ...... 3

2. PROJECT DESCRIPTION 3 2.1 Project components ...... 3 2.2 Technical solution retained and other alternatives explored ...... 4 2.3 Project type ...... 4 2.4 Project cost and financing arrangements ...... 4 2.5 Project’s target area and population ...... 6 2.6 Participatory process for project identification, design & implementation ...... 6 2.7 Bank Group experience, lessons reflected in project design ...... 6 2.8 Key performance indicators ...... 7

3. PROJECT FEASIBILITY 8 3.1 Economic and Financial Performance ...... 8 3.2 Environmental and Social Impacts ...... 8 3.2.1 Environment ...... 8 3.2.2 Climate Change ...... 9 3.2.3 Gender ...... 10 3.2.4 Social...... 10 3.2.5 Involuntary resettlement ...... 11 3.2.6 Stakeholders ...... 11

4. IMPLEMENTATION 11 4.1 Implementation arrangements ...... 11 4.2 Procurement Arrangement ...... 12 4.3 Financial Management ...... 12 4.4 Monitoring and Evaluation ...... 13 4.5 Governance ...... 15 4.6 Sustainability...... 15 4.7 Risk management ...... 16 4.8 Knowledge building ...... 17

5. LEGAL INSTRUMENTS AND AUTHORITY 17 5.1 Conditions associated with Bank’s intervention ...... 17 A. Condition Precedent to Entry into Force of the Loan Agreement ...... 17 B. Conditions Precedent to First Disbursement of the Loan in Respect of Consultancy Services for an amount not exceeding 3.35 million USD : ...... 18 C. Conditions Precedent to Subsequent Disbursement of the Loan ...... 18

6. RECOMMENDATION 18

Appendix I: Comparative socioeconomic Indicator I Appendix II: Table of ADF Portfolio in the Country II Appendix III: Table of Key Projects Financed By the Bank and other Development Partners in the Country IV Appendix-IV: Project Location Map V Appendix V: Justifiction For Financing More Than 50% Of Cost By AFDB VI

Currency Equivalents As of May2016

1 UA = 1.4173 USD 1 UA = 30.5843 ETB 1 USD = 21.5788 ETB

1 ETB = 100 (Ethiopian cents) Financial Year for EEP July 8th – July 7th Weights and Measures

1 metric ton = 2204 pounds (lbs) 1 metre (m) = 3.28 feet (ft) 1 kilometre (km) = 0.62 mile 1 hectare (ha) = 2.471 acres 1 kilovolt (kV) = 1000 volts 1 kilowatt (kW) = 1000 watts 1 megawatt (MW) = 1000 kW 1 gigawatt (GW) = 1000 MW 1 kilowatt hour (kWh) = 1000 watt hour 1 gigawatt hour (GWh) = 1000 kWh

ABBREVIATIONS

ADB = African Development Bank Group ADF = African Development Fund AFD = Agence Française de Développement BADEA = Arab Bank for Economic Development for Africa? CAGR = Compounded Annual Growth Rate CIDA = Canadian International Development Agency CSP = Country Strategy Paper CSO = Civil Society Organization DC = Direct Current DFID = Department for International Development DSCR = Debt Service Coverage Ratio EEPCO = Ethiopian Electric Power (Corporation) EIB = European Investment Bank EC = European Commission EEA = Ethiopia Electric Agency EEP = Ethiopia Electric Power EEU = Ethiopia Electric Utility ENPV = Economic Net Present Value EMU = Environmental Monitoring Unit

EIRR = Economic Internal Rate of Return ENPV = Economic Net Present Value ESI = Electricity Supply Industry ESIA = Environmental and Social Impact Assessment ESMP Environmental and Social Management Plan ETB = Ethiopian ETB ETFO = Ethiopia Field Office FE = Foreign Exchange FIRR = Financial Internal Rate of Return FNPV = Financial Net Present Value FY = Financial Year GoE = Government of Federal Democratic Republic of Ethiopia GEP = Generation Expansion Plan GDP = Gross Domestic Product GTP = Growth & Transformation Plan GWh = Gigawatt hour HV = High Voltage HVTL = High Voltage Transmission Line ICB = International Competitive Bidding ICS = Interconnected System IPP = Independent Power Producer ISS = Integrated Safeguards System IDA = International Development Association JICA = Japanese International Co-operation Agency KFW = Kreditanstalt fur Wiederanfbaw km = Kilo meters kV = Kilo volt LC = Local Cost

LRMCS = Long Run Marginal Cost of Supply LV = Low Voltage MCM = Million Cubic Meters MoFEC = Ministry of Finance & Economic Cooperation MIS = Management Information System MW = Megawatt MV = Medium Voltage NDF = Nordic Development Fund NEPTP = Northern Ethiopia Power Transmission Project NGO = Non-Governmental Organization O&M = Operation and Maintenance p.a. = Per Annum PA = Project Area PAPs = Project Affected Persons PASDEP = Plan for Accelerated and Sustainable Development to End Poverty PCBs = Polychlorinated Biphenyls PCR = Project Completion Report PIT = Project Implementation Team PPA = Power Purchase Agreement PPER = Project Performance Evaluation Report PSNP = Productive Safety Net Program PSP = Private Sector Participation QPR = Quarterly Progress Report RAP = Resettlement Action Plan SCS = Self Contained System SIDA = Swedish International Development Agency SMEs = Small and Medium Enterprises SNNPR = Southern, Nations and Nationalities People’s Region TPP = Thermal Power Plant TVET = Technical, Vocational Education and Training UA = Unit of Account UEAP = Universal Electricity Access Program UNDB = United Nations Development Business UNECA = United Nations Economic Commission for Africa USAID = United States Agency for International Development USD = United States Dollars VCT = Voluntary Counselling and Testing TPP = Thermal Power Plant

Loan Information Client’s information

BORROWER: The Government of the Federal Democratic Republic of Ethiopia (GoE)

EXECUTING AGENCY: The Ethiopian Electric Power (EEP)

Indicative Financing Plan Sources of financing Amount Instrument (USD million) ADB 104.61 Loan ADF - EEPCO/ GoE 17.91 Counterpart contribution Total project cost 122.52 ADB’s key financing information

Loan currency United States Dollar (USD) Interest type Fully Flexible Loan Interest rate spread Funding margin+60 bps lending spread Commitment fee None Other fees None Repayment Semi-Annual Tenor 20 Years Grace period 5 Years FIRR 14.38% FNPV (@10%) US$ 64.52 million EIRR 29.13% ENPV (@12%) US$ 293.42 million

Timeframe - Main Milestones (expected) Concept Note approval September 2015 Project approval July 2016 Effectiveness October 2016 Completion July 2019 Closing date December 2020 Last repayment July 2046

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PROJECT SUMMARY

1.1 The Mekele-Dallol & Semera-Afdera Power Transmission Supply for Industrial Development and Access Scale-up Project (MSPIAP) (with the associated Transmission lines, Substations and Rural Electrification components) aims to improve the socio-economic development and livelihood of the population of beneficiary regions through increased access to affordable & sustainable electricity supply and improvement in service delivery. The two beneficiary regions are Tigray & Afar Regional States of Ethiopia.

1.2 The Program’s main outcomes include (i) provision of adequate & reliable electricity supply to industries and small businesses by adding 250 MVA capacity and making available 613 GWh/year at Dallol (for potash companies Yara, Allana & Sercum Minerals) & 31.5 MVA at Afdera (small salt extraction businesses); (i) increase in number of people with access to sustainable modern grid based electricity supply; (iii) improvement in power utility revenue through increment in number of domestic, commercial and industrial customers; and (iv) improved access in the provision of basic social services such as schools, health centres safe water etc.. At output level, it will result in the construction of two (2) 230 kV transmission lines and two (2) corresponding substations. The lines and substations to be constructed will cover the following sections: (i) 130 km of 230 kV Mekele-Dallol transmission line (ii) 175 km of 230 kV Semera-Afdera transmission line (iii) Construction of associated two new substations at Dallo & Afdera, vi) Substation expansion on two existing Mekele & Semera 230 kV substations (iv) Rural Electrification construction of MV and LV distribution networks (v) Consultancy Services for project supervision and management and (vi) Technical Assistance and Capacity building

1.3 At completion in 2019, the project will benefit an estimated 36 rural towns/villages (estimated 102,000 people) directly in the beneficiary regions from improved access to electricity, basic social services. The project will also support provision of adequate and reliable grid based power supply to potash industries as well as other small business. The program will have a direct positive social benefit, enabling improved education opportunities for women and school age children, improving access to health services, creating productive/livelihood opportunities and employment through expanded service and improved private sector activities.

2. NEEDS ASSESSMENT

2.1 The biggest challenge facing the Government of Ethiopia (GoE) is to mobilize the necessary resources to meet the generation, transmission, distribution and rural electricity access scale-up requirements,as these involve considerable investment costs. The Government has recently mobilized resources for implementing three wind & hydroelectric generation projects; namely: Ashegoda Wind project (120 MW) completed in 2012, Adama- I & II wind projects (204 MW) completed in 2015 with financing from the French &Chinese Governments, Gibe-III hydropower plant(1870 MW), completed end of 2015; Genale dawa-III hydropower plant (254 MW) to be completed in 2016 and Renaissance dam (6,000 MW) to be completed in 2018, which are the latest development in EEP’s generation expansion plan and are expected to provide an extra 8,124 MW to the system.

2.2 Implementation of this projectis therefore important to ensure that the generated power from the power plants is transported to remotely located load centres. It will also solve the prevailing power shortage due to in ability of the existing diesel power plants to satisfy rapidly growing demand in the area as a result of the need to expand exploitation of large potash and salt resources in the area. Providing electricity supply to large & small industries, urban & rural towns around Dallol and Afdera with modern, cleaner and cheaper reliable power as opposed to diesel power, by extending the grid, will stimulate economic activities that enhance job creation, improve access to basic services (schools, health & social centres) and limit environmental degradation due to the utilization of fossil fuel. In addition the proposed grid extension to the two towns will scale-up access to electricity in the Afar Region from 55% to 75% by supplying to schools, health centres, social centres, etc. planned to be connected. iv

2.3 The Project Coordinator is already appointed. The submission of CVs of all Project implementation Team including the procurement plan will be a condition for loan Negotiations. In order to avoid the project stat-up delay, the advance contracting is already approved and procurement documents for major components have already been received by the Bank. Procurement process is expected to start soon. The Bank energy sector operation in the country so far has been very successful. There is no energy project at risk. It can be concluded that the project preparedness is well advanced.

3. BANK’S ADDED VALUE

3.1 In support of the Government’s programs, the Bank has funded several projects in the electricity sub-sector. These include (i) feasibility studies of hydropower projects, namely Alleltu, Beles, Chemoga-Yeda and Halele-Werebesa (ii) Ethiopia-Sudan Power Interconnection Feasibility Study (iii) Northern Ethiopia Power Transmission Project (iv) 230 kV Koka-Dire Dawa Power Transmission, (v) Gilgel GibeI–Ghedo Transmission Project, (vi) 66 kV Transmission projects, (vii) Gefersa Fitch, Debere Markos – Bitchena and Debre Markos Finoteselam Transmission(viii) Rural electrification I, and (ix) Ethiopia-Djibouti Power Interconnection Project, to expand the transmission system, increase rural electricity access and enable exchange of power with neighbouring countries. These interventions have contributed to the development of Ethiopia’s hydropower resources, power evacuation from the generating plants and expand rural electrification, which are vital for increasing the population’s access to electricity. The Bank is currently financing: (i) the Ethiopia Rural Electrification-II Project, which involves the electrification of 335 rural towns/villages, (ii) Electricity Transmission System Improvement Project which involves construction of 943 km of 230 kV transmission line and associated 21 high voltage substations expected to be completed in December 2016, and (iii) Ethiopia-Kenya Electricity Highway project which involves construction of 434 kms 500 kV HV DC transmission line with associated converter station expected to be completed in 2018.

3.2 The Bank considers the support of domestic infrastructure development and regional integration, especially within the power sector, as a pillar of its strategy in the country which is aligned with the New Deal on Energy for Africa and the high 5s. The Bank’s participation is vital for the following reasons: (i) the financial support to EEP will strength the implementation of rural electrification and transmission system improvement programs, that enables transmitting sufficient power to customers (ii) the supply of electricity will contribute to the improvement of the standard of living of the people (iii) create opportunities for effective utilization of energy resources (iv) the project supports dialogue between the Bank and GoE on policy issues related to energy policy and regulatory issues.

4. KNOWLEDGE MANAGEMENT

EEP has sufficient experience in the implementation of similar 230 kV and 400 kV transmission and substation contracts and rural electrification projects. Implementation of this project will enhance the knowledge (technical & project management) of the executing agency in managing the design and project management/supervision of projects to be implemented in areas with extreme environmental condition. The Bank continues to build capacity and strengthen knowledge and skills in EEP through such types of projects. Bank’s Supervision Missions are key forums for dissemination and sharing of experience and knowledge with implementing agency, contractors and regional administration to improve sector coordination within government and financiers.

Country and Project Name: ETHIOPIA-Mekele – Dallol and Semera – Afdera Power Supply for Industrial Development and Access scale-up project Purpose: The Project is intended to supply Electric Power to Potash Industries, Salt Mines extraction businesses & create Electricity Access scale-up Results Chain Performance Indicators Means of Risks/Mitigation Measures Indicator (incl. CSI) Baseline Target 2020 Verification 2015 1.1 Reduced number of 28.5 % 20.4 % -Government 1. Improved living conditions people living below the Statistics and and Socio-economic poverty line Bulletins; 1.2 Increased % of access to 39% 80% (50% are - Central Statistics development of the I Agency, communities primary education (% are female) female) -UNDP Human

IMPACT Development index 2. Increased electricity access 2.1 Increased % of access to 55% (2104) 90% (50% are Risk 1: Timely completion of private sector & rural electricity supply electricity (% are female) female) -EEP and EEU potash industries 3. Improved availability of 2.2 Increased number of 1.98 5.85 annual reports; Mitigation: The private sector investors domestic customers (Million) -Utility records received investment permits and are actively reliable and sustainable 3.1 Increase in number of 37,903 111,976 -Project mobilized on site. electricity for private sector large industrial customer Completion Risk 2 : Availability of sufficient power industrial development connections Reports Mitigation: Ethiopia is currently building 3.2 Increase in large & - MoFEC annual about 6,000 MW generation

OUTCOME small industry Energy 5,407 15,063 reports Risk3: Shortage of financing resources Consumption, GWH/y Mitigation: Government support to financing, transmission system and rural electrifications components. Component A 1.Length of high voltage n.a 305 Project Quarterly Construction of high voltage line constructed for Potash progress report & Risk 4: Project completion delay transmission lines industry, Salt mines and Bank’s site Mitigation: Deployment of project

supply of urban & rural Supervisions management & supervision consultant & towns (km) enforcement of the PIT staff 2. Length of MV & LV n.a 0.4 kV, 481 Km Risk 5: Cost overrun distribution lines constructed 33KV, 1,524 Km Mitigation: Physical (5%) and price (5%)

OUTPUTS Component B for rural towns/villages contingencies built into the project costs, the Construction high voltage around Potash and Salt contract packaging will ensure that all Substations industry electricity access necessary construction guarantees and (km) insurances will be in place.

3. New high voltage n.a 2 Risk 6: Financial viability of EEP (Low substations constructed for tariff) Potash industry & rural Mitigation: Implement cost reflective tariff towns/villages electricity and expand export power to neighbouring access. countries - Added Substation capacity n.a 281 (MVA) 4.Additional large industry n.a 3 customers, No 5. Number of jobs created during project implementation (Semi- skilled & unskilled) -Temporary (% female) n.a 4130 (35% fem) -Permanent (% female) n.a 2077 (35% fem) 4.Additional number of rural n.a 36 Risk 7: Scattered rural villages and public Component C towns connected institutions Rural Electrification 5. Additional Rural n.a 102,000 (45% Mitigation: Government plan to urbanize population benefited beneficiaries are rural villages and expanding electricity - Connected households women) access (schools, health & social 20,400 (35 centres, private businesses n.a health & 43 and public institutions) educational facilities ) 6. Supervision consultant n.a 1 Risk 8: Delays in recruitment of the Component D recruited EA periodical & consultant Project Supervision and 7. Delivered supervision n.a 12 Project Supervision Mitigation: Consider using of Advance Management reports quarterly Reports Mission Reports contracting and timely no objection by the Bank - Project specific ESMP n.a 2 ESMP Risk 9: Compensation & RAP developed and implementation delay implemented Mitigation: Make sure that the capacity & skill mix of the team is adequate to manage compensation and RAP implementation.

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8. Number of staff trained n.a 35 (out of the Risk 10: EEP Management may lack the Component E within the EEP and Ministry total 50% are EEP & Energy necessary commitment and capacity to Capacity Building women) Ministry Reports implement the action points of the Gender 9. Percentage of action points Audit

of the Gender Audit n.a 75% Mitigation: Budget will be set aside for the implemented. implementation of the Gender Audit action plan and for the procurement of technical assistance if needed. CTIVITIES INPUTS (MUSD) Components Component A Transmission Lines Component A, USD 49.56 m Component B Substations Component B, USD 29.70 m Component C Rural Electrification Component C, USD 16.50 m Component D Consultancy Services Component D, USD 3.35 m Component E Capacity building & Feasibility Component E, USD 5.0 m Study of Transmission Projects Component F, USD 0.5 m Component F Distribution of advanced Cook Component G, USD 17.91 m

KEY ACTIVITIES stove & Solar Panels (PV) including capacity building Total: USD 122.52 m Component G Project Management, Audit,

Resettlement, Compensation and ESMF

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PROJECT IMPLEMENTATION SCHEDULE

Mekele – Dallol and Semera – Afdera Power Supply for Industrial Development and Access scale-up project

Year 2015 2016 2017 2018 2019 2020 N o Quart Description ers 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

1 Concept Note approval

2 Project Approval 3 Effectiveness Selection of Consultants 4 Bid Preparation 5 Bidding period Evaluation, Contract 5 Award and Mobilization 6 Construction

7 Commissioning

8 Last Disbursement

REPORT AND RECOMMENDATION OF THE MANAGEMENT OF THE ADB GROUP TO THE BOARD OF DIRECTORS ON A PROPOSED LOAN TO ETHIOPIA FOR MEKELE – DALLOL AND SEMERA – AFDERA POWER SUPPLY FOR INDUSTRIAL DEVELOPMENT AND ACCESS SCALE-UP PROJECT (MDSAPIAP)

Management submits the following Report and Recommendation on a proposed ADB loan of USD 104.61 million (UA 73.81 million) to finance the Mekele – Dallol and Semera – Afdera Power Supply for Industrial Development and Access scale-up project (MDSAPIAP) in Ethiopia.

1. STRATEGIC THRUST & RATIONALE

1.1. Project linkages with country strategy and objectives

1.1.1 Ethiopia has made progress in all spheres of development and achieved a stable overall macroeconomic performance and faster growth during the last ten years. The annual average real growth rate of GDP of the country averaged 10.9% since 2004/05, placing it among the top performing economies in the world. Growth has been broad-based and widespread and new jobs have been created in both the public and private sectors, particularly through a boom in construction. All sectors have grown significantly contributing to the overall growth registered in the country. On average, agriculture has grown by 8.2%; industry by 14.4%; and services by 13.1% since 2004/05.

1.1.2 Its Growth and Transformation Plans (GTP I and II) outline equitable and inclusive development and envisions the achievement of universal electricity access to its citizens by 2020. The GoE’s key development objective, outlined in the just completed GTPI; (2011-15), and the new GTPII; (2016-2020) is to achieve inclusive, accelerated and sustained economic growth and to eradicate poverty. Energy is one of the nine priority sectors in the GTP. The sector is also underpinned through sound policy, legal and strategic framework which includes the National Energy Policy (1994); new Energy Law, Proclamation 810/20131; Climate-Resilient Green Economy (CRGE) Strategy (2011) that outlines the green energy development path and the 25 year Power Development Master Plan adopted in 2014, which describes the national strategy and action plan for achieving the national electricity access and energy sector development targets.

1.1.3 The 2016-2020 Country Strategy Paper (CSP) for Ethiopia was approved by the Bank’s Board of Directors in March 2016. The CSP aligns with and facilitate attainment of GTP II objectives by continuing to focus on: (i) Infrastructure development, especially energy, transport, and water and sanitations, and; (ii) Promoting economic governance, with particular emphasis on facilitating effective and efficient delivery of basic services and business enabling environment for private sector development. By aligning with GTP II, the new CSP’s twin pillars are consistent with the objectives and core operational priorities of the Ten Year Strategy (TYS) of the Bank and will contribute to the attainment of green growth and climate resilience goals.

1.1.4 The Bank’s assistance strategy is part of the international donor community’s coordinated support for the implementation of the Government’s Plan as articulated in Ethiopia’s Third Poverty Reduction Strategy Paper, known as Growth and Transformation Plan (GTPI), covering the period under financial years (FY) 2010/11 to 2014/15. A key objective set in the GTPI is to increase the country’s generating capacity from 2,000 MW in 2010 to 10,000MW and electricity access from 41 % in 2010 to 75% by end of 2015, particularly through the development of the country’s hydro power potential (estimated at over 45,000 MW but developed at less than 10% of this potential capacity to date) including other renewable energy resources (wind, solar, geothermal.), electric power transmission and distribution infrastructure. GTP-I had registered some progress in increasing the generation capacity from 2000 MW in 2010 to

1 New Energy proclamation has replaced the existed energy law in broader term and included both the electricity & energy efficiency and conservation tasks. Proclaimed the establishment of the Ethiopian Energy Authority (EEA) under the regulation of the Council of Ministers; 1

4180 MW in 2015 and electricity access from 41 % in 2010 to 60 % in 2015 and the achieved results were below the set target.

1.1.5 The GTP-II covering the period 2015/16 to 2019/20 has considered achievements made and lessons learnt under the GTP-I implementation and will focus on sustained economic development with a clear target of achieving improvement in the livelihoods of the population by promoting universal electricity access program and maintaining sufficient, affordable & reliable supply of electricity by the end of the period. As a result, there is going to be given significant emphasis on the energy sector. 1.1.6 The project is intended to: (i) provide sustainable power for the population of the North and North Eastern parts of the country and potash mining industries, (ii) facilitate the implementation of the rural electrification program and (iii) reduce high transmission losses and improve system efficiency, stability and reliability. The project will thus result in increased economic activities and will enable Ethiopia to further exploit its hydro & other renewable energy potential and enhance industrialization and commercial business as well as improving the livelihoods of the rural population for sustained economic growth. As such, the proposed project is in line with the Bank CSP 2016-20120 and the Government’s GTP-II (2015/16-2019/20).

1.1.7 The project is aligned with the New Deal on Energy’s focus on supporting energy access and in particular the need for the sector to add 130 million on-grid connections by 2025. This transmission line and last mile connectivity project will not only contribute towards industrialization by providing power for three industrial enterprises with related benefits for the economy but provide the conveniences of modern energy access to over 100,000 people through the provision of household connections.

1.2. Rationale for Bank’s involvement

The intervention of the Bank has been requested and is justified in view of the following:

1.2.1 Ethiopia has made modest improvements during the last decade in access to electricity and basic services according to the Ministry of Finance & Economic Development (MoFEC) annual report.2.The country’s plan to meet its medium-term growth target of 10% and to increase the rate of the population with access to electricity from 60% in 2016 to 90% by 2020 will be realised with a focus on grid based rural electrification and off grid supply options and relying significantly on the development of adequate transmission & distribution systems for power transfer to various parts of the country. This project will be critical to meeting sufficient power transfer capacity to satisfy the growing industrial, commercial & domestic demand (at initial stage 80 MW and will increase up to 200 MW by 2020) in the affected regions and increase EEP’s revenue by USD 19 million at the initial stage from energy sales. This project will support the Bank’s country strategy by providing support for improved access to infrastructure, enhanced access to basic services and rural development through making available necessary power supply to meet the growing demand. A request from the Government of Ethiopia dated January 12, 2015 has been received by the Bank.

1.2.2 Most income generation schemes that communities are currently engaged other than agriculture are traditional, uniform and meant mostly to meet daily needs. Some of the activities widely undertaken include traditional informal salt mining, sell of fuel wood, gathering wild honey, etc. Hence the project will transform the beneficiary regions by creating enabling environment to industries, small & medium enterprises (SMES) to be engaged in exploitation of the abundant potash (estimated at l40 to l50 million tons) and salt mines resources in the region which are currently suppressed due to lack of adequate and sustainable power. In addition it will trigger inclusion of new salt extraction/iodizing industries (currently 30,000 tons/month salt is extracted by small private businesses) and commercial businesses, as well as the expansion of basic infrastructure (health and education facilities notably) and job creation opportunities.

2 Population Access to Electricity (Service coverage) has been improved from 17% (2005) to 55% (2015) 2

1.3. Donor Coordination

1.3.1 The Ministry of Finance and Economic Cooperation (MoFEC) is responsible for coordinating donor financing within the sector. This is done through regular consultations between the GoE and the Donors active in the energy sector through the Development Assistance Group (DAG). The DAG also serves as a forum for donors to harmonize their strategies for intervention in all sectors including the energy sector, and to share experiences from their respective areas of operation in the country to provide useful lessons to the group for incorporation in future interventions. Furthermore, the DAG serves as the conduit for development partners to assist the GoE in formulating policies as well as monitoring policy implementation. The Bank’s country office in Ethiopia (ETFO) is playing a leading role in the DAG and is currently serving as a Co-chair of the DAG Executive Committee. While there is no dedicated working group for the energy sector, there is active sharing of information and harmonization of donors’ position on key sector issues with a view to promoting long-term sector viability and growth on conducted periodical Energy Sector Partners Group meetings.

1.3.2 The most active development partners (DPs) include: the World Bank, Japanese International Cooperation Agency (JICA), French Development Agency (AfD), and European Investment Bank (EIB), the Arab Bank for African Economic Development (BADEA), the Kuwait Fund, India, China, Italy and the African Development Bank Group. The DPs are mainly involved in supporting (a) the Energy Access projects aimed at helping the country establish a sustainable program for expanding the access to electricity, and to improve the quality of electricity supply; (b) Energy project designed to increase the efficiency and sustainability of Ethiopia's power sector; (c) the Universal Electricity Access Program (UEAP); (d) Increase the hydro generation capacity and renewable energy mix (f) Urban distribution system rehabilitation (g) Transmission and Substation rehabilitation & upgrading (h) Development of geothermal power resources (for details see Appendix 3).

2. PROJECT DESCRIPTION 2.1 Project components

Table 2.1: Project Components

No Component Name Est. cost Component description (USD million) A. Transmission Lines This component comprises of construction, on a turnkey basis, Construction. the following two 230 kV transmission lines. (i) 130 km of 230 45.05 kV Mekele - Dallol line (ii) 175 km of 230 kV Semera-Afdera transmission line B Construction& This component comprises of extension of two substations at expansion of Mekele & Semera and Construction of two new substations at substations. 27.00 Dallol & Afdera, located in the north & North Eastern part of the country. C Rural Electrification This component comprises of construction of 1524 km of MV & Access scale-up 15.00 481 km of LV distribution lines, installation of distribution transformers and connection of the rural & urban households including energy meters. D Project Supervision and This component includes procurement of the consultancy Management. services for project management & s0u0pervision of the 49.56 construction contracts.

E Technical assistance & - This component includes procuring consultancy services for capacity building undertaking of feasibility & ESIA/RAP studies & bidding 29.70 document preparation for identified power transmission projects by EEP. - Undertaking capacity building training program for EEP staff involved in the project planning, design and environmental (ESIA/RAP) studies. - Provision of technical and capacity strengthening support in the implementation of the Gender Audit action plan.

F Distribution of This component includes provision of energy saving stoves and advanced cook stoves 3.35 distribution of solar panels and energy saving light bulbs for solar panels and energy selected rural households & public utilities in Dallol & Afdera saving light bulbs area. G EEP Project This component, consists of EEP project design, management Management and 5.00 and implementation of mitigation measures and compensation of Implementation of people affected by the project including the Rural Electrification ESMP, RAP and ESMF component ESMF implementation &. The Project has been categorized in ADB environmental and social category I.

2.2 Technical solution retained and other alternatives explored

The Feasibility study selected the 230kV extensions based on the length of the lines and the maximum required power transfer. The 230kV voltage level was considered based on the recommendation of Ethiopian Power Systems Expansion Master Plan and technical-economic analysis study done by EEP planning Department.

Table-2.2 Project alternatives considered and reasons for rejection Alternative name Brief description Reasons for rejection a) Using the existing The feasibility study The alternative option does not have adequate transfer capacity 132 kV supply considered extension of to transmit the anticipated load of 200 MW and give technically option. existing 132 kV systems to acceptable voltage at the receiving end. In addition the losses at supply the demand. 132 kV networks are considerably higher and leads to multiple lines being strung in the future at potentially higher cost compared to the construction of the 230 kV lines. b) New generation Plant Construction of power The option was discarded because even though initial cost of capacity initially 80 MW plants to service the local diesel or thermal option is relatively low; it involves high and will grow up to 200 demand and avoid operation & maintenance costs which will result in high energy MW building long costs to the users as compared to grid energy and notwithstanding transmission lines. the environmental cost of the use of fossil fuels

2.3 Project type

2.3.1 The proposed project is an integrated project and includes transmission lines, substation & rural electrification components. The two 230kV transmission lines are extended from existing 230 kV substations. The proposed new transmission lines will considerably expand the high voltage transmission system and increase the power transfer capacity from the existing and future generating sources to the major load centers in the country. 2.4 Project cost and financing arrangements 2.4.1 The project cost is estimated at USD 122.52 million (UA 86.45 million), comprising foreign exchange costs (71%) of USD 86.67 million (UA 61.15 million) and local cost (29%) of USD 35.85 million (UA 25.30 million).The summary of the cost estimates by component, sources of financing and by category of expenditure are shown in tables 2.2 below. Additionally, table 2.5 shows ADB and Govt. financing which Govt.’s contribution is estimated to be USD 17.91 million (UA 12.64 million). 2.4.2 The Bank provides an ADB sovereign guaranteed loan amounting USD 104.61 million to finance 85.4% of the total financial requirement of the proposed project. The remaining 14.6% (USD 17.91 million) of the project cost will be covered by the Government of Ethiopia. Detailed 4 justification is provided in Appendix V for the relatively low counterpart fund for the proposed project.

Table 2.3: Summary of Project Cost Estimates by Component No. Component FC LC Total FC LC Total In Million USD In Million UA 1 Mekele - Dallo 1.1 Transmission Line 17.68 4.42 22.10 12.47 3.12 15.59 1.2 Substation 12.80 3.20 16.00 9.03 2.26 11.29 Sub Total 30.48 7.62 38.10 21.51 5.38 6.88 2 Samara Afdera - - - 2.1 Transmission Line 18.36 4.59 22.95 12.95 3.24 16.19 2.2 Substation 9.90 1.10 11.00 6.99 0.78 7.76 Sub Total 28.26 5.69 33.95 19.94 4.01 23.95 3 Rural Electrification - - - 3.1 Medium and Low Voltage 12.00 3.00 15.00 8.47 2.12 10.58 Total for Transmission line 36.04 9.01 45.05 25.43 6.36 31.79 Total for Substation 22.70 4.30 27.00 16.02 3.03 19.05 Rural Electrification 12.00 3.00 15.00 8.47 2.12 10.58 Sub Total for TR, SS and RE 70.74 16.31 87.05 49.91 11.51 61.42 Price Contingency 5% 3.54 0.82 4.35 2.50 0.58 3.07 Physical Contingency 5% 3.54 0.82 4.35 2.50 0.58 3.07 Total Project Cost for Transmission, 77.81 17.94 95.76 54.90 12.66 67.56 Substation and Rural Electrification 4 Project Supervision and Management 3.35 - 3.35 2.36 - 2.36 5 Annual Audit - 0.10 0.10 - 0.07 0.07 6 Capacity Building Program 1.50 - 1.50 1.06 - 1.06 7 Feasibility Study for New transmission 3.50 - 3.50 2.47 - 2.47 line projects 8 EEP Project Management and design - 16.14 16.14 - 11.39 11.39 Cost Total for Services 8.35 16.24 24.59 5.89 11.46 17.35 9 Compensation, Resettlement & ESMF - 1.67 1.67 - 1.18 1.18 10 Distribution of advanced cook stove & 0.50 - 0.5 0.35 - 0.35 Solar Panels (PV) including capacity building Total Project Cost 86.67 35.85 122.52 61.15 25.29 86.45

Table 2.4: Source of financing in million USD and UA In Million USD Source FC LC Total ADB 86.67 17.94 104.61 Gov. Ethiopia 0 17.91 17.91 Total 86.67 35.85 122.52

Table 2.5 Financing expenditure schedule in million USD Year Source 2016 2017 2018 2019 2020 Total In Million USD ADB 1.0 30.88 36.37 25.9 10.46 104.61 Gov. 0.5 5.12 6.15 4.35 1.79 17.91 Ethiopia Total 1.50 36.00 42.52 30.25 12.25 122.52

2.5 Project’s target area and population

2.5.1 The project is located in the Northern and North Eastern part of the country in the Tigray & Afar regional states traversing the Woredas Quiha, Enderta, Atsbi woneberta, Kileteawulalo in Tigray & Kunoba, Berahale, Dallol, Afdera in Afar part of the target area; Afar region is an emerging region with below national average level of development across all social and economic indicators and thus implementation of the said project will significantly improve the socio-economic development and access to the basic services of beneficiaries as well as the region.

2.5.2 The main project beneficiaries will therefore include (i) the power utility EEP (ii) rural & urban households, industries, health & education facilities, commercial businesses and agriculture (irrigations) which are currently without electricity supply (like Afdera woreda 36 primary & 1 Secondary schools and 6 health centers etc.….). Existing electricity consumers connected to the diesel generation supply will also benefit from the supply and increased reliability of service as a result of the project.

2.6 Participatory process for project identification, design & implementation

2.6.1 Participation in identification was embedded in the government’s annual budget programming process. In line with the National Energy Policy, which emphasizes the need for the development of indigenous resources, Ethiopia has started to aggressively develop its immense hydro power & renewable energy potential, both for internal consumption and export purposes. The energy generated at the remote hydro sites has to be evacuated to the load centers through high voltage transmission network.

2.6.2 At design and preparation stage, views of the various stakeholders were captured through meetings and workshops carried out as part of the ESIA, ESMP and RAP studies. The main objective was to ensure all issues concerning the proposed project were covered. Consultations included stakeholders in relevant government ministries, communities including women & project affected population (PAPs), districts, national and international NGOs, civil society (SCO) and representatives of potash mining companies. Awareness campaigns and participatory assessments such as discussions with local leaders, public village meetings and interviews with focus groups were also held.

2.6.3 Results of the consultations have been incorporated into the project design. Issues were discussed and consensus was reached on land acquisition procedures, compensation in terms of valuation and timeliness for buildings and crops, the prospect of increased spread of HIV/AIDS and possibility of connecting villages along the line, among other issues discussed.

2.6.4 Stakeholders participation modalities during project implementation will be through involvement and follow-up on the compensation, RAP and ESMP activities, getting required periodical information about the project progress and undertake a visit to construction sites to witness actual accomplishment.

2.7 Bank Group experience, lessons reflected in project design

2.7.1 The Bank Group has been a partner of the Ethiopian government in the development of the electricity sub-sector for a long time. Since 1979, the Bank had provided financing for seven projects in the sub-sector. The Bank has also been supporting Ethiopia’s effort to expand and exchange power with its neighboring countries through financing the multinational projects. Support has been focused on providing finance for the high voltage transmission lines, rural electrification and regional interconnection projects of where the major ones are indicated in section 3.1 of the project summary. Currently there are three ongoing projects under the Bank’s energy portfolio namely Rural Electrification-II project (RE-II), Electricity Transmission System Improvement Project (ETSIP) and Ethiopia-Kenya Electricity Highway with amount of financing close to UA 390 million. The interconnection project is expected to be completed in 2018 and RE-II and ETSIP projects are progressing well and are expected to be completed by the end of 2016. Each of the operations above ensured that the ESIA were properly handled.

2.7.2 The Bank has 16 ongoing investment operations in Ethiopia with a total value of UA 1.138 billion and the overall performance of the portfolio is highly satisfactory with an average Implementation Progress (IP) rating of 3.1 and Development Objective (DO) of 3.50 as depicted in Appendix II. Some of the key lessons learnt from the on-going projects under implementation in Ethiopia, as well as those supported by other donors’, were taken into account in the formulation and design of the program. These include:

(i) Challenges have been faced on the on-going Rural Electrification program in connecting rural households as per the plan due to scarcity of adequate energy meters and connection accessories. In this project procurement of energy meters and connection accessories will be packaged under the rural electrification component.

(ii) The lack of competent project management team coupled with frequent staff turnover has in many occasions delayed project implementation. The project considered capacity building of executing agency project implementation team, and the project will also hire an experienced engineering consultancy firm for project management and supervision works.

(iii) There have been delays in submitting procurement plans, bidding documents, evaluation reports and contracts execution. The Bank is continuously conducting training of procurement experts & project management staff in the country to expedite procurement process & project implementation.

(iv) As in the case with other similar projects, where construction works are located in dispersed geographical areas, it is more cost effective and time saving to arrange them such that the contractors do not have to move across the country to access the different sites. In this project, proper procurement packaging (in lots) designed for transmission lines, substations and rural electrification project components in conformance to the Bank procurement policy and guidelines;

(v) Due consideration has not been given by implementing agencies to the follow-up and monitoring of ESMP & RAP implementation. In the project implementation arrangement adequate environmental & social experts are foreseen at the main project office and construction sites level.

(vi) Repeated loan saving utilization request were received from Government which in turn has caused project aging due to multiple extension of the disbursement deadline especially on the Rural Electrification-II project. In this project it is attempted to establish more realistic cost estimation of various components and required close follow-up for disbursement rate as well as project implementation and take timely decision on utilization of significant amount of saving.

2.8 Key performance indicators

2.8.1 The main deliverables of the project are: (i) construction of 305 km of 230kV single and double circuit transmission lines: (ii) extension of two substations at Mekele & Sermera (iii) construction of two new substations at Dallol (250 MVA ) & Afdera (31.5 MVA) (iv) construction of 1,524km of 33kV MV and 481 km LV distribution lines with customer connection materials including energy meters; (v) creating adequate electric power transmission capacity to industries and commercial businesses and electricity access (vi) Beneficiary population in 39 rural and urban towns (102,000 ) and connected households (20,400) (vii) full implementation of the ESIA and RAP measures (viii) Timely undertaking the feasibility studies, ESIA, RAP and bidding documents preparation.

2.8.2 The project will allow the transfer of 200 MW to the north and north eastern parts of the country towards Dallol, and 100 MW to the north eastern part of the country towards Afdera from the national grid.

2.8.3 The progress during implementation will be monitored by the establishment of the Project Implementation Team (PIT) which will ensure timely commencement of the works, regular disbursements, timely submission of quarterly progress and environmental monitoring reports and annual audit reports.

3. PROJECT FEASIBILITY

3.1 Economic and Financial Performance

3.1.1 In order to determine the impact of the proposed investment, the Bank developed a financial and economic model, based primarily on data from project technical feasibility studies prepared by EEP.

3.1.2 The financial and economic assessment of the project was undertaken over an operating period of thirty five years starting in 2021. The investment will be carried out over four years (2017 to 2020). The results of the analysis show that the project is financially sustainable and economically viable. Its financial internal rate of return (FIRR) is estimated at 14.38% (real) while the financial net present value (FNPV) discounted at a rate of 10% is equal to US$ 64.52 million. These figures were obtained on the basis of weighted average tariff of US$ 0.06 per kWh charged across the different category of customers.

3.1.3 The main benefit for households being connected to the national grid is the supply of electricity 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 US$ 17 cents per kWh. The economic assessment of the project results in an economic rate of return (EIRR) and economic net present value (ENPV) of 29.13% and US$ 293.42 million (discounted at 12%, real).

3.1.4 The main financial and economic results are summarized in Table 3.1 below. The detailed calculations and assumptions are presented in Annex B7.

Table 3.1: Main Financial and Economic Indicators PARAMETERS VALUES FIRR 14.38% FNPV (@10%) US$ 64.52 million EIRR 29.13% ENPV (@12%) US$ 293.42 million

3.1.5 A sensitivity analysis was also performed against the key risk variables of the project to test the robustness of its financial and economic cash flows. The identified key risks include an increase in investment costs, an increase in operating costs, an increase of the energy generation costs and a reduction in revenues, through a reduction of the end-user tariff. The results of the sensitivity analysis show that the financial and economic results are robust under adverse conditions and also reveal that the metrics of the project are more sensitive to a change in end –user tariffs and energy generation costs than to a change in investment cost or operating and maintenance costs. Details of the financial and economic analysis, as well as the sensitivity analysis, are provided in Annex B7.

3.2 Environmental and Social Impacts 3.2.1 Environment

3.2.1.1 Mekele-Dallol & Semera-Afdera Power Transmission project has been classified, as Category 1 in accordance with the AfDB’s Environmental and Social Assessment Procedures (ESAP) and the Involuntary Resettlement policy. This classification is based on the voltage level of the lines, which is 230kV exceeding the Bank’s threshold of 110 kV and spanning on aggregate over 305km; and has a potential impact of displacing more than 250 people in various settlements. This categorization is also consistent with the Ethiopian Environmental Laws, Regulations and Ministry of Environment and forestry,,Environmental Impact Assessment Procedural Guideline series 1, of November 2003, that

8 requires the preparation of full Environmental and Social Impact Assessment (ESIA) and Resettlement Action Plan (RAP) reports. The full ESIA & RAP reports are prepared end of November 2015 and ESIA/RAP summary of the project was posted on the Bank’s Public Information Centre in March 2016, with reference P-ET-FA0-011.

3.2.1.2 In general, the vegetation coverage of project area is low. Due to natural factors (disasters, agro climatic change, etc.) have reduced the species diversity in the area. In the project areas, the dominant tree species currently existing is Acacia. In the hot lowlands and dry-desert agro-climatic zones of the project affected sites are characterized by dwarf shrub grass land, dry thorn bush land vegetation types which will most likely be affected by the HV transmission line.

3.2.1.3 The diversity of wild animals in the study areas, as a whole, is low. However, according to the information from the project site woreda agriculture office, some common wild animals currently existing in the area might be affected and will potentially migrate to other locations. During the field assessment, based on data sources obtained from the project affected areas, there were no unique bird species in the areas, and therefore, there is no significant impacts on birds.

3.2.1.4 Extensive clearance of the way-leave can potentially create a specific biotope in areas with denser vegetation hence may become hunting ground for carnivores. Furthermore, traffic impact may be expected to occur during a short period at peak construction in the form of increased congestion on the main roads passing through the project areas. All of these impacts are expected to be localized, short lived, and reversible. Mitigation measures are included in detail in the ESMP. The project is also expected to result in affecting 246 households through creation of the way-leaves for the transmission lines. All the mitigation, monitoring and management measures proposed will be adopted by the EEP. The assessment of the potential impacts are within the acceptable limits of the Ethiopian and African Development Bank’s safeguard polices and guidelines.

3.2.1.5 An estimated USD 1.67 million will be made available in the project budget for ESMP implementation and resettlement and compensation in accordance with AfDB policy on Involuntary Resettlement taking into consideration country’s own involuntary resettlement policy. 3.2.2 Climate Change

3.2.2.1 The project categorized as climate change category- 2 and the there is no major direct climate risk with regard to the project implementation. But will affect bushes and shrubs as a result of the formation of right off ways (ROWs) and shall be cleared during the construction period, dust may arise due to the construction works and traffic increase that causes dust pollution (air quality) and may sometimes result a respiratory problem on some of the construction workforces and local communities living around and soil erosion due to clearing of vegetation and excavation works. Some of the mitigation majors are; taking proper route selection to minimize the ROW vegetation clearance, re-cultivating cleared areas with suitable sediment binding grasses & trees, taking proper dust abatement measures (e.g. watering) where necessary, and by using properly handled /maintained machineries.

3.2.2.2 Implementation of the project will foster development in the beneficiary regions hydroelectric production areas. This will allow for substitution of the current use of generators using diesel fuel, which releases greenhouse gases into the atmosphere, with less polluting cheaper hydroelectric production and by way of providing access to electricity to the rural Ethiopians, will reduce the burning of woods for fuel consumption and thus reduction of environmental degradation due to reduction of cutting trees that caused depleting of forests. Improvements in the establishment and functions of various social facilities in the targeted sites, such as; education, health, water supply and other social service facilitates will contribute much to the creation of public awareness and participation on environmental protection activities.

3.2.3 Gender

3.2.3.1 The project is not expected to cause any major negative impacts on either women or men both during construction and during implementation. However, it suffices to say that the most potentially negative impacts of the project will emanate from relocation and destruction of property including food crops whose incidences impact women more than men. Women bear the disproportionate burden of constructing the tukuls (small cottages) and taking care of children. Traditionally women in rural areas tend to rely more heavily than men on informal support networks. Interruption to these networks due to relocation will potentially affect women more than men. Implementation of the resettlement action plan in the project has included women as committee members and women interests will be highly considered. Similarly, the scourge of HIV/AIDS impacts more on women and girls more than men and this will be made worse by the influx of male workers into the project area. The project will embark on HIV/AIDS/STI awareness and prevention programs geared towards women and girls especially students.

3.2.3.2 The availability of power supply would ease the burden of women in the project area. It will facilitate the setting up of grinding/flour mills within their vicinities, thus reducing the costs of service. It would also promote the use of improved technology for the preparation of food using electric appliances for cooking and baking. Water pumps will function better because of power supply. Hence, construction of the envisaged project will reduce portage burden on women, which benefits the female members of the communities in particular. It would also enhance the social communication and interaction of women both within and outside of the Zone of Influence (ZOI).

3.2.3.3 During project implementation, women just like men will have the opportunity for direct and indirect jobs. It is expected that 30% of the semi-skilled and unskilled temporary jobs will be designated to women. In addition women also benefited from the permanent employment opportunities by the executing agency (EEP) in operation and maintenance of the constructed facilities and emerging private companies and businesses as a result of the electrification program. It is planned under this project provision of energy saving stoves using sustainable cooking fuels to 25,000 households in the Afdera and Semera regions at a total cost of ETB 3.0 million. The initiative shall complement and draw synergies from programs that are being funded by the Norwegian Government and UNDP with the involvement of NGOs. The estimated total cost for the intervention is USD 200,000 covering educational and social mobilization campaigns and training of both men and women in the technology to be carried out by the Directorate of Alternative Technologies at Federal and Regional levels. During operation, benefits to women shall include improvements to existing social infrastructures and services within reach such as health and secondary education services; and availability of flourmills will reduce the labor input by women and girls, thus freeing up time for other productive uses and girls will devote more time to their education.

3.2.4 Social

3.2.4.1 The construction phase of the transmission lines will take approximately 24 months, and during that period, the project will create a number of employment and business opportunities associated with the construction works. Over 90% of the rural population economy is cattle rearing and few agricultural based. The project will therefore enhance the economies in the project area hence contributing towards poverty alleviation through creation of jobs for local communities and supply of reliable and affordable electricity. The power project is expected to generate as many as 800 temporary jobs in semi-skilled and unskilled areas, thus the project has the potential to inject into the local economies an estimated ETB 79 million over the construction period. An additional 77 people will be employed during operation to operate each of the constructed 2 new substations and in the 2 new district offices to be opened in Dallol and Afdera for customer services and an estimated of 3500 temporary & 2000 permanent jobs in potash mining companies during construction & start potash mining. Since the power transmitted will be within the national grid, project benefits should be seen in a national context since the project will facilitate economic growth in the project area and nation through industrial growth in sectors such as manufacturing, agriculture and services, resulting in more jobs being created hence increased incomes.

3.2.4.2 During construction, several direct jobs will be created, including sub-contracting to local transmission and substations contractors, supply of local materials, such as cement and reinforcement bars, and casual labor for construction that could be sourced directly from the project area as well as contracts for services such as security, bush clearing, digging and catering. Salaries, wages and fees to construction workers and local sub-contractors will give a boost to the local economy. It is estimated that 15-20% of project costs could be spent in the project area.

3.2.4.3 Although there are on-going awareness campaigns against the dangers of HIV/AIDS/STI and TB, field workers such as those to be employed under this project may inevitably indulge in behaviors that may put them at risk of contracting or spreading the diseases. The project, therefore, will put in place and made provisions for implementing awareness and prevention campaigns for both contractor workers and the communities in the project areas. A provisional sum has been included in the ESMP for HIV/AIDS and STI awareness and prevention activities.

3.2.5 Involuntary resettlement

The project will result in affecting 246 households through creation of the way leave for the transmission line, tower foundations, access roads and establishing sub-stations. Main types of the assets that are to be affected are corrugated iron sheet (CIS) & small cottage houses, permanent loss of land etc.….The project has set aside ETB 3,724,031 (equivalent of USD 178,524.73) for implementation of the resettlement action plans (RAPs) for both lines (see Annex B8 for details). This will ensure that PAPs will be compensated for all their losses at full replacement costs before start of the construction work for each particular phase/section of the project and implemented in accordance with AfDB policy on Involuntary Resettlement and Integrated Safeguards System (ISS) which became operational in July 2015. Implementation will be done by EEP which has accumulated sufficient experience over the years in managing resettlement and compensation actions.

3.2.6 Stakeholders

3.2.6.1 Stakeholder consultations were performed during project preparation and conceptualization mainly through the ESIA and RAP exercises. Public Consultations were made with Zone, City, Woreda & Kebele administrative officials and affected people, and selected communities at Berehalie Woreda. Consultations and disclosure meetings were held with the affected community household members, elders and chairpersons of the Kebele (Peasant) Associations. The outcome of consultation with main stakeholders has shown that; (ii) they are supportive to the project; (iii) concerned raised have been taken into account and the project design was informed accordingly.

3.2.6.2 All key agencies such as Ministry of Finance and Economy Cooperation (MoFEC), Ministry of Environment and Forest (MoEF), Ministry of Water Irrigation and Electricity (MoWIE) and Ethiopian Electric Power (EEP), Tigray & Afar Regional Governments will be served with copies of the respective ESIAs. Zone and Woreda Administration offices will also be supplied with copies to be shared and discussed with local leaders. The Bank also posted the Executive Summary of the ESIA and RAP its website.

4. IMPLEMENTATION 4.1 Implementation arrangements

4.1.1 The GoE, through the Ministry of Finance and Economic Cooperation (MoFEC) will be the borrower of the loan. Ethiopian Electric Power (EEP) will be the executing agency. The loan proceeds will be transferred to EEP, a state institution established as per Council of Minsters rergulation No.302/2013, as amended whose mandate is to implement the project by signing a subsidiary loan agreement (on-lending) with the MoFEC on terms and conditions acceptable to the ADB.

4.1.2 The day to day implementation of the project will be under the responsibility of a Project Implementation Team (PIT). The PIT is headed by a Project Coordinator reporting to the Deputy Executive Officer of Portfolio Management Office of EEP. The Project Coordinator is assisted by four Site Managers. They will be located in Mekele, Dallol, Semera & Afdera. In addition a project accountant, dedicated for the project and an Environmental & Social Officer to closely follow ESMP & RAP implementation will also assist the project coordinator. Additional supervisors will also be assigned as necessary. Project accounting and reporting in accordance with the Bank’s requirements will be done at Project Coordination Office. In this regard, six appropriately qualified and experienced accountants will be assigned by EEP (2 at the Project Coordination Office and 4 for each of the four sub-sites).

4.1.3 Selection of the consultant for project supervision and management will be done prior to award of the contract for construction.

4.1.4 The project implementing arrangements for the Mekele-Dallol & Semera-Afdera Project including the Rural Electrification Component will comprise the overall Project Coordination Office and four sub-offices at each of the project sites. EEP will submit the CVs of the Project Coordinator, Site Managers and two accounting staff to be assigned at the project office for the Bank’s approval. The establishment of the project implementation team at EEP, with qualifications and experience acceptable to the Bank is one of the conditions for the Loan negotiation. The profiles of the project coordinator, site managers and two accountants are given in technical annex B.3 implementation arrangement. 4.2 Procurement Arrangement

4.2.1 All Bank financed procurement contracts of goods, works and acquisition of consulting services will be carried out in accordance with the Procurement Policy for Bank Group funded operations, dated October 2015 and the provisions stipulated in the Financing Agreement.

4.2.2 Ethiopian Electric Power (EEP) through the procurement process to be undertaken by the Procurement, Logistics and Warehouse Directorate, will be responsible for the procurement. The overall project risk for procurement is moderate as the capacity of Procurement, Logistics and Warehouse Directorate was assessed and found adequate to handle procurement with a recommendation to recruit an additional procurement specialist to help the project. Advance Contracting (AC) procedures will be followed with the objective of expediting important procurement processes. The project’s abbreviated procurement plan was discussed and prepared during appraisal as part of the Procurement Technical Annex and EEP team will prepare detailed Procurement Plan and submit prior to Loan negotiation. Details of the procurement arrangements under the project are summarized in the Procurement Technical Annex B5. 4.3 Financial Management

4.3.1 The Financial Management System of Ethiopian Electric Power (EEP) is adequate and capable of recording accurate and complete transactions and delivering financial reports timely. The company uses an automated financial reporting system, AGRESSO, which is specifically designed to meet the needs of its operations. EEP has adequate and qualified staff to carry out the financial management responsibilities of the project. As EEP is established as an autonomous public enterprise (Regulation No.302/2013), it is responsible for the planning, budgeting, financial management, execution and monitoring of its projects. EEP is financially autonomous and does not receive any budget allocation from the federal government. Its budget is approved independently by the Board of Management. A detailed financial management assessment is attached as technical annex B.4.

4.3.2 In line with the Paris Declaration on Aid Effectiveness and Accra Agenda for Action, the project will make use of the Ethiopia’s Public financial management systems. The day to day management will be as per the financial management policies and systems of EEP, as has been the case for previous projects financed by the Bank. The Company will set up new account codes (as extended from the main chart of 12 accounts of the company) to record and report the financial transactions of the project within its accounting system. Bank financed projects executed by EEP so far have demonstrated timely preparation of financial statements with annual audit reports submitted to the Bank within a reasonable period of time. The audits for all ADF financed projects and other projects for previous years were carried out by Audit Services Corporation. All project audit reports for the FY 2014/2015 were submitted in time and draft statements of project accounts for the FY 2014/2015 are also timely submitted.

4.3.3 The former EEPCo’s Corporate account for the FY 2011/2012 audit was issued with an “except for” opinion and the FY 2012/2013 audit report with ‘Adverse’ opinion with recommendations given on the inaccuracy of debtors, treatment of project costs incurred and projects not yet materialized and treatment of exchange rate losses in their construction projects. EEPCo’s 2013/2014 account is closed and draft statement prepared but not audited as they are in the process of finalization of division of assets and other properties which took longer period than expected. This is observed to be one of the critical risk areas due to backlog of two years’ unaudited financial statements.

4.3.4 The project implementing arrangements for the Mekele-Dallol & Semera-Afdera project will comprise the overall Project Coordination Office and four sub-offices at each of the project sites. Project accounting and reporting in accordance with the Bank’s requirements will be done at Project Coordination Office. In this regard, six appropriately qualified and experienced accountants will be assigned by EEP (two at the Project Coordination Office and one each for the four sub-sites). EEP will submit the CVs of the two accounting staffs to be assigned at the project coordination office to the project for the Bank’s approval.

4.3.5 Disbursement Arrangements: EEP will utilize the Bank’s four disbursement methods explained in the Disbursement Handbook. However, due to the project nature and arrangement, it will mainly use the Direct Payment method. No Special account method is to be used unless it is agreed between the Bank and the EEP due to certain circumstances to occur during the implementation period. The Bank’s Disbursement Letter will be issued stipulating key disbursement procedures and practices.

4.3.6 Audit Arrangement: The project financial statements will be prepared within three months after the closure of every financial year and presented to the auditors by 30 September and financial statements will be audited by independent and competent audit firm competitively recruited. The audit is to be conducted based on the Bank’s audit terms of reference in accordance with the International Standards for Auditing (ISA). The complete audited project financial statements, including a management letter, will be submitted to the Bank within six (6) months after the end of the fiscal year.

4.4 Monitoring and Evaluation

4.4.1 EEP’s performance is monitored through the preparation of periodic monthly and quarterly reports for both senior management and the Board. There are established performance indicators and budgets against which actual reporting is done and significant variances explained. The Bank requires quarterly progress reports showing cash receipts by sources and expenditures by main expenditure classifications together with physical progress reports linking financial information with physical progress and highlighting issues that require attention. The sector indicators for power infrastructure projects, as captured in the log frame, will be monitored using reports produced by MoWIE, EEP and the Ethiopia Energy Authority (EEA).

4.4.2 The Project will be launched in the 1st quarter of 2017 and will be monitored through supervision missions from the Bank’s headquarters, Regional Resource Centre and the Ethiopia country office (ETFO) at least twice a year from 2017 through to 2019. The Bank supervision will also involve desk supervisions including review of bi-annual progress and annual audit reports. The ETFO will also carry out field supervisions twice a year or on a need basis. The coordination of the missions will be done by the MoFEC in collaboration with the MoWIE.

4.4.3 The PIT, assisted by the consultant, has the primary responsibility for monitoring project implementation and fulfilling EEP’s reporting obligations to the Bank, including preparation and submission of Quarterly Progress Reports (QPRs) and annual audit reports. These reports shall cover all aspects of project implementation, including the status of progress, implementation of environmental and social mitigation measures as well as status of fulfilment of the loan conditions. Moreover, EEP shall maintain separate accounts that permit the identification of expenditures by category and financing source for all components of the project.

4.4.4 The supervision consultants shall be required to prepare and submit to EEP and the Bank, final commissioning reports at the completion of their assignments and assist the employer in Project Completion Report (PCR) preparation. After the commissioning of the project, the EA will prepare the PCR, which would serve as input in the preparation of the Bank’s own PCR.

4.4.5 During implementation, EEP’s Environmental, Health, Safety& Quality (EHS &Q) Office assisted by the consultant will monitor the ESMP and will prepare and submit to the Bank quarterly environmental reports. The EHS & Q Unit has been handling such tasks and is fully conversant with Bank procedures. The Environmental Unit under the MoWIE will also be actively involved during the monitoring phase.

4.4.6 Mid-Term Review (MTR): The Bank mid-term review of the project will be held not later than 18 months after the loan approval, which shall inform any adjustments to the project design to ensure that project objectives are achieved.

4.4.7 Implementation Schedule and Supervision: The project will be implemented over a period of 24 months. On the assumption that the ADB loan is approved in July 2016, the project physical work scheduled for completion by September 2018 with the commissioning of all sections of transmission lines, substations and Rural Electrification component. The critical milestones for project implementation are given below: Table 4.2 Project Implementation milestones No. Activity Responsible Target Date Agency 1 Loan Approval ADB July 2016 2 General Procurement Notice ADB/EEP June 2016 3 Loan Signed ADF/EEP September 2016 4 Effectiveness EEP October 2016 Recruitment of the Project Supervision 5 EEP/ADB July 2016 and Management Consultant 6 Bid document submitted to the Bank EEP May 2016 Review of bidding document and no 7 ADB June 2016 objection 8 Bidding EEP July -August y 2016 9 Evaluation, no objection EEP/ADB September-October 2016 Contract Signature for construction and November 2016 to Jan., 10 EEP/ADB Mobilization 2017 Construction completion & 11 Contractors February 2019 Commissioning 12 Project Completion Report EEP/Consultant December 2019

4.4.8 All contractors for the line and substations will be mobilized at site in January 2017. Before commencement of the construction work EEP will implement the environmental mitigation measures as per the recommendation of ESIA report. The manufacturing, supply and installation of two sections of the line and the substations will be undertaken in parallel and completed within 24 months from contract commencement. The testing and commissioning of the transmission lines and substations is planned to take place in January-February 2019, and the project will be operational by March 2019.

4.5 Governance

4.5.1 EEP is managed by the Board of Directors consisting of 9 members from various Ministries and Government organizations and the CEO of EEP. The Board holds monthly meetings and works closely with the Management Committee of EEP with regard to the overall activities of the company. The internal controls of the company are very effective in monitoring the utilization of its resources. Furthermore, EEP’s financial statements are audited annually by the Audit Service Corporation (ASC), a governmental entity which carries out annual audits for public and private organizations in the country. However employing (contracting) other competent private audit firms is also possible under competitive selection. At the project level, the project office will be required to maintain accounting and financial records that will be audited in accordance with international accounting standards.

4.5.2 In general, the energy sector’s governance issues are well-articulated in Ethiopia. Currently, the country has begun undergoing Civil Service Reform Programs to attain competitiveness and accountability in all sectors including the energy sector. Furthermore, the Government has established an Anti-Corruption and Ethics Commission with the objective of fighting corruption at all levels and enhancing transparency and accountability. The commission is being strengthened through technical assistance programs from some development partners.

4.6 Sustainability

4.6.1 Government Commitment: GoE has shown great commitment to implementing the project due to the fact that the project will provide support to transmit sufficient power for industrial development and electricity access scale-up so as to strengthen the national economy and livelihoods of the population.

4.6.2 Technical Sustainability: EEP has over the decades implemented similar projects and the staff has gained considerable experience in the implementation of such projects and also has staff that is experienced in the operation and maintenance of high voltage transmission lines, substations and distribution network. In addition EEP has allocated significant amount of financing for the rehabilitation and upgrading of the existing installations to get assurance of sustainability of the electricity supply. Capacity building for EEP staff involved in engineering, operation & planning functions foreseen in the project design.

4.6.3 Financial Sustainability: The tariff system in Ethiopia is still a cautious tariff regime. A uniform tariff is charged with a lifeline tariff for the first block of 50kWh of consumption maintained since the last tariff change in July 2006. Current tariffs average US¢0.0273/kWh across all consumer categories and tariff levels this low cannot cover all non-power operating costs and purchased power costs and effectively place the utility in a position whereby it has a strong financial disincentive to connect additional consumers. If tariffs are not periodically adjusted to cover these costs, the financial situation of the electric utilities will deteriorate resulting in decreasing service quality and impacting the sustainability of electricity supply services. As a mitigation measure Government supports () in capital injection through financing some of capital investments and granting debt restructuring to reduce the burden of loan repayments from cash flows and foreign earnings from energy exports that commenced to Sudan and Djibouti generating close to USD 100 million per annum and committed 400 MW to Kenya by 2018. In addition, EEP & EEU appears to be working within the framework of achieving a selling price of electricity placed or suppressed to a rate equivalent to US¢0.06/kWh depending on the prevailing exchange rate. Recently, EEP has submitted a gradual cost recovery tariff adjustment proposal initially up to 50% increase adjustment because the rate has fallen below the benchmark rate of at US¢0.06/kWh due to mostly foreign exchange fluctuations and increase in operation expenses.

The request is under consideration by the EEA and final decision is expected after undergoing scrutiny in the Council of Ministers and the parliament, and revised tariff expected to be implemented in the year 2017.

4.6.4 Institutional Sustainability: The Sector undergone reform by restructuring of the monopolistic former entity (EEPCo) into two independent entities mandated; EEP to the bulk generation, transmission and substation operation and construction of new installations and EEU to be responsible for distribution system operation, energy sales and customer services through commercialization and decentralization of their operations to achieve efficiency & effectiveness.

4.6.5 Private sector participation: The public sector-led development strategy implemented over the past decade, focusing on heavy investments in infrastructure, has sustained strong economic growth, which reached an estimated 10.3% in 2013/14, which is over doubled of the Sub-Saharan Africa (SSA) average growth rate. However, currently the government acknowledged that private sector involvement is crucial to sustain the achievements so far made and continue the growth. The new energy policy allows local private investment in generation facilities up to 25 MW (hydro, thermal and renewables) including community organized cooperatives and similar entities. Over 25 MW, the policy allows local or foreign investment in power projects.. The recent agreement with a private company to develop 2,000 MW Corbetti geothermal power plant on IPP basis is also a demonstration of the Government’s intention towards gradual opening of the power sector for private sector participation. The Bank also supported the ‘Roadmap to the Public Private Partnerships Framework in Ethiopia” study which was completed in 2014, recommending government to issue a Public Private Partnerships (PPPs) policy statement.

4.7 Risk management

The major risks and mitigating measures during project implementation are outlined in the table below:

Table 4.3 Risk Management Risk Description Rating Mitigation measures Starting potash Delay in completion the High The private sector investors received investment and production construction of private sector mining permits and are actively mobilized on site potash industries and completed resources assessment and verification. Availability of sufficient Inability to supply adequate High Ethiopia is currently building about 6,000 MW power power to the industrial area and generation capacity which will be operational in rural towns 2018 Shortage of financing Insufficient fund for project Medium Government support to financing (counterpart resources implementation funding) and commitment to implement, transmission system and rural electrifications components Project completion delay Electricity supply infrastructure High Deployment of project management and projects implementation delay supervision consultant ahead of start of the project & re-enforcement of PIT. Delays in recruitment of Procurement process execution Medium Consider using of Advance contracting and timely the consultant will take long time no objection by the Bank Lack commitment and EEP Management may lack the Low Budget will be set aside for the implementation of capacity to implement the necessary commitment and the Gender Audit action plan and for the action points of the capacity to implement the procurement of technical assistance if needed. Gender Audit action points of the Gender Audit Project cost overrun Project implementation cost Medium Physical (5%) and price (5%) contingencies built exceeding the allocated budget into the project costs and the contract packaging will ensure that all necessary construction guarantees and insurances will be in place

Risk Description Rating Mitigation measures Financial viability of EEP Tariff levels is below true costs Medium - Government has been very supportive through (low tariff) of producing, transmitting and financing some of capital investments and granting distributing electricity debt restructuring to reduce the burden of loan (including financing costs) repayments on EEP’s cash flows.

- Whilst EEP does not currently employ foreign exchange hedging mechanisms, the impact of ETB devaluation will be mitigated through foreign earnings from energy exports that commenced to Sudan and Djibouti by 2011 generating close to USD 100 million per annum and committed 400 MW to Kenya by 2018. In addition, the process to revise the existing tariff and gradual increase to $ 0.06/kWh has started, and will also contribute much for improvement in financial viability.

Timely implementation Resettlement and compensation Medium Appraisal mission has critically examined the of compensation & RAP program may not be implementation program, the skill mix composition implemented in a timely of the team implementing the agreed plan to ensure manner owing to capacity that the team has adequate experience and limitation and litigations which competence mix on resettlement and compensation might arise. issues. Note: Risk rating (high, medium or low)

4.8 Knowledge building

4.8.1 The proposed project area is located in one of the hottest part of the country. The project provides an opportunity to the staff of EEP in building transmission lines, associated substations and distribution lines in difficult climatic areas. Therefore, during the construction of the transmission line and the installation of the equipment, EEP’s staff will be trained on the job by the contractors and the consultant. The Bank staff involved in the project will also gain access to the technology which could be applied to other regional member states that intend to build similar projects.

4.8.2 The ESIA and the ESMP for the project conducted by EEP conform to international practices on Health, Safety and Environment (HSE) standards. Implementation of the ESMP including the monitoring system will allow the EEP to promote best international practice in operating transmission system of such voltage level. EEP’s knowledge building resulting from the Bank’s intervention will help GoE to attract more investment in the power generation & transmission sector. In turn the Bank will also learn from the lessons learned from its planned supervision on how best to promote high HSE standards.

5. LEGAL INSTRUMENTS AND AUTHORITY

The Project will be governed by a Loan Agreement between the Bank and the Federal Democratic Republic of Ethiopia.

5.1 Conditions associated with Bank’s intervention

A. Condition Precedent to Entry into Force of the Loan Agreement

The Loan Agreement shall enter into force subject to fulfilment by the Borrower of the provisions of Section 12.01 of the General Conditions Applicable to Loan and Guarantee Agreements of the Bank.

B. Conditions Precedent to First Disbursement of the Loan in Respect of Consultancy Services for an amount not exceeding 3.35 million USD :

The obligation of the Bank to make the first disbursement of the Loan shall be conditional upon:

i. the entry into force of the Loan Agreement ;and

ii. The first disbursements of the Loan for an amount not exceeding 3.35 million USD (the “First Disbursements”) shall be made by the Bank to the Borrower and the Borrower shall apply such First Disbursements, solely for the purpose of the payment of consultancy services in connection with the Project Supervision & Management services for the Project (the “Consultancy Services”);

C. Conditions Precedent to Subsequent Disbursement of the Loan

The obligation of the Bank to make the subsequent of the Loan shall be conditional upon submission by the Borrower of evidence satisfactory to the Bank that the following conditions have been fulfilled:

i. an On-lending Agreement has been signed between the Borrower and EEP in which the Borrower on –lending the loan to EEP, on terms and conditions acceptable to the Bank.The Borrower has submitted to the Bank a Works and Compensation Schedule (the “Works and Compensation Schedule”) detailing (A) each section of civil works under the Project and (B) the time frame for compensation and resettlement of all project-affected persons in respect of each section, in accordance with the RAP or an updated RAP.

ii. Have compensated and/or resettled in accordance with the RAP and the Works and Compensation Schedule, all Project Affected Persons in respect of the civil works under the first section or lot of the Project.

D. Other conditions:

iii. The Borrower shall, based on tariff review recommendations received from Ethiopian Energy Authority, maintain electricity tariffs at levels that enable EEP to achieve a positive operating margin”.

5.1.1 Undertakings: The Borrower shall ensure that:

(i) EEP recruits additional Environmental and Social experts to strengthen its environmental and social team;

(ii) Fully implements the recommendations of the Environmental and Social Impact Assessment (ESIA), Environmental and Social Management Plan (ESMP) and the Resettlement Action Plan (RAP) of the project, and comprehensively reports to the Fund on the said implementation on a quarterly basis;

(iii) EEP undertakes to revise the current tariffs up to the level of cost reflective tariffs the latest by March 2017 to ensure its financial sustainability.

6. RECOMMENDATION

6.1 Management recommends that the Board of Directors approve the proposed ADB loan of USD 104.61 million (UA 73.81million) to the Federal Democratic Republic of Ethiopia for the purposes and subject to the conditions stipulated in this report and the Loan Agreement.

Appendix I: Comparative socio – economic Indicator3 Ethiopia COMPARATIVE SOCIO-ECONOMIC INDICATORS

Develo- Develo- Year Ethiopia Africa ping ped Countries Countries Basic Indicators GNI Per Capita US $ Area ( '000 Km²) 2015 1 104 30 067 80 386 53 939 Total Population (millions) 2015 99,4 1 184,5 5 945,0 1 401,5 2500 Urban Population (% of Total) 2015 19,4 39,7 47,0 80,7 2000

Population Density (per Km²) 2015 99,4 40,3 78,5 25,4 1500 GNI per Capita (US $) 2014 550 2 045 4 226 38 317 1000 Labor Force Participation * - Total (%) 2015 83,7 66,3 67,7 72,0 Labor Force Participation ** - Female (%) 2015 78,3 56,5 53,0 64,5 500

Gender -Related Dev elopment Index Value 0

2000

2005

2008

2009

2010

2011

2012 2013 2007-2013 0,853 0,801 0,506 0,792 2014 Human Dev elop. Index (Rank among 188 countries) 2014 174 ...... Popul. Liv ing Below $ 1.25 a Day (% of Population) 2008-2013 36,8 39,6 17,0 ... Ethiopia Africa Demographic Indicators Population Grow th Rate - Total (%) 2015 2,5 2,6 1,3 0,6 Population Grow th Rate - Urban (%) 2015 4,9 3,6 2,6 0,8 Population < 15 y ears (%) 2015 41,4 41,0 28,3 17,3 Population Growth Rate (%) Population >= 65 y ears (%) 2015 3,5 3,5 6,2 16,0 3,5 Dependency Ratio (%) 2015 81,6 80,1 54,6 50,5 3,0 Sex Ratio (per 100 female) 2015 99,6 100,1 102,8 97,4 2,5 Female Population 15-49 y ears (% of total population) 2015 24,3 24,0 25,8 23,0 2,0 Life Ex pectancy at Birth - Total (y ears) 2015 64,6 61,2 68,9 79,1 1,5 Life Ex pectancy at Birth - Female (y ears) 2015 66,6 62,6 70,8 82,1 1,0 Crude Birth Rate (per 1,000) 2015 31,9 34,8 21,0 11,6 0,5

Crude Death Rate (per 1,000) 2015 7,2 9,3 7,7 8,8 0,0

2000

2005

2009

2010

2011

2012

2013 2014 Infant Mortality Rate (per 1,000) 2015 41,4 52,2 35,2 5,8 2015 Child Mortality Rate (per 1,000) 2015 59,2 75,5 47,3 6,8 Total Fertility Rate (per w oman) 2015 4,3 4,6 2,6 1,7 E thiopia Africa Maternal Mortality Rate (per 100,000) 2013 420,0 411,3 230,0 22,0 Women Using Contraception (%) 2014 34,4 35,3 62,1 ...

Health & Nutrition Indicators Phy sicians (per 100,000 people) 2004-2012 2,5 46,9 118,1 308,0 Life Expectancy at Birth Nurses and midw iv es (per 100,000 people) 2004-2012 25,3 133,4 202,9 857,4 (years) Births attended by Trained Health Personnel (%) 2009-2012 10,0 50,6 67,7 ... 80 Access to Safe Water (% of Population) 2015 57,3 71,6 89,1 99,0 70 60 Healthy life ex pectancy at birth (y ears) 2012 55,0 51,3 57 69 50 Access to Sanitation (% of Population) 40 2015 28,0 39,4 60,8 96,3 30 Percent. of Adults (aged 15-49) Liv ing w ith HIV/AIDS 2013 1,2 3,8 1,2 ... 20 Incidence of Tuberculosis (per 100,000) 10

2013 224,0 245,9 149,0 22,0 0

2000

2005

2009

2010

2011

2012

2013 2014 Child Immunization Against Tuberculosis (%) 2013 71,0 84,1 90,0 ... 2015 Child Immunization Against Measles (%) 2013 62,0 76,0 82,7 93,9

Underw eight Children (% of children under 5 y ears) 2005-2013 29,2 20,8 17,0 0,9 Ethiopia Africa Daily Calorie Supply per Capita 2011 2 105 2 621 2 335 3 503 Public Ex penditure on Health (as % of GDP) 2013 3,1 2,7 3,1 7,3

Education Indicators Gross Enrolment Ratio (%) Primary School - Total 2011-2014 87,0 106,4 109,4 101,3 Primary School - Female 2011-2014 80,5 102,6 107,6 101,1 Infant Mortality Rate Secondary School - Total 2011-2014 28,9 54,6 69,0 100,2 ( Per 1000 ) Secondary School - Female 2011-2014 22,3 51,4 67,7 99,9 100 90 Primary School Female Teaching Staff (% of Total) 2012-2014 36,7 45,1 58,1 81,6 80 Adult literacy Rate - Total (%) 2006-2012 39,0 61,8 80,4 99,2 70 60 Adult literacy Rate - Male (%) 2006-2012 49,1 70,7 85,9 99,3 50 Adult literacy Rate - Female (%) 2006-2012 28,9 53,4 75,2 99,0 40 30 Percentage of GDP Spent on Education 2009-2012 4,7 5,3 4,3 5,5 20 10

2000

2005

2009

2010

2011

2012

2013 2014 Environmental Indicators 2015 Land Use (Arable Land as % of Total Land Area) 2013 15,1 8,6 11,9 9,4 Agricultural Land (as % of land area) 2013 36,3 43,2 43,4 30,0 Forest (As % of Land Area) 2013 12,4 23,3 28,0 34,5 Ethiopia Africa Per Capita CO2 Emissions (metric tons) 2012 0,1 1,1 3,0 11,6

Sources : AfDB Statistics Department Databases; World Bank: World Development Indicators; last update : november 2015 UNAIDS; UNSD; WHO, UNICEF, UNDP; Country Reports. Note : n.a. : Not Applicable ; … : Data Not Available. * Labor force participation rate, total (% of total population ages 15+) ** Labor force participation rate, female (% of female population ages 15+)

3 Sources: AfDB Statistics Department Databases; last update :May 2014; For any given interval, the value refers to the most recent year available during the period Note: n.a.: Not Applicable ; … : Data Not Available I

Appendix II: Table of ADF Portfolio in the Country ETHIOPIA -ONGOING PORTFOLIO 15 MAY 2016 Loan/Grant Disbursement Age No Project Approval Amount IP DO PFI Status Ratio Years. Date (UA) PUBLIC SECTOR OPERATIONS AGRICULTURE SECTOR 58,482,000 Drought Resilience and 1 19-Dec-12 30,000,000 10.64% 2 3 PPP 3.4 Sustainable Livelihoods I Drought Resilience and 26-Nov- NON- 2 28,482,000 3.20% NR NR 1.5 Sustainable Livelihoods II 14 PP/NON PPP TRANSPORT SECTOR 316,770,000 Mombassa-Nairobi- Addis Road Corridor – NON- 3 1-Jul-09 85,000,000 84.83% 3.77 4 6.9 Agere Mariam -Yabelo PP/NON PPP Road Project (Phase II) Mombassa-Nairobi- Addis Road Corridor- NON- 4 30-Nov-11 105,000,000 40.16% 3 3 4.5 Hawassa-Agere Mariam PP/NON PPP Road Project (Phase III) Bedele-Metu Road NON- 5 10-Nov-11 41,060,000 62.71% 3 3 4.5 Upgrading PP/NON PPP Modjo- Hawassa NON- 6 Highway Road Project 6-Nov-13 84,080,000 17.78% NR NR 2.5 PP/NON PPP Phase I Modjo- Hawassa NON- Highway Road Project 6-Nov-13 1,630,000 2.21% NR NR 2.5 PP/NON PPP Phase I* ENERGY SECTOR 388,950,000 Rural Electrification II NON- 7 20-Dec-06 87,200,000 82.35% 3.82 3.5 9.4 Project PP/NON PPP Electricity Transmission NON- 8 Systems Improvement 6-Dec-10 93,750,000 86.28% 3.85 4 5.4 PP/NON PPP Project Electricity Transmission NON- Systems Improvement 6-Dec-10 58,000,000 96.83% 3.85 4 5.4 PP/NON PPP Project* Ethiopia-Kenya NON- 9 Electricity Highway 19-Sep-12 150,000,000 15.05% 3 3 3.7 PP/NON PPP Project WATER SECTOR 120,027,122 Support to the One Water Sanitation and NON- 10 8-Sep-14 60,000,000 29.69% 3 3 1.7 Hygiene National Water PP/NON PPP Program Support to the One Water Sanitation and NON- 8-Sep-14 6,015,073 37.86% 3 3 1.7 Hygiene National Water PP/NON PPP Program* Four Towns Water and NON- 11 Sanitation Improvement 13-Jan-16 54,012,049 NR NR 0.3 PP/NON PPP Program MULTI - SECTOR 186,143,000 0 Basic Services NON- 12 17-Dec-15 180,000,000 NR NR 0.4 Transformation Program PP/NON PPP Institutional Support NON- 13 26-May-15 1,173,000 10.73% NR NR 1.0 project for PPPs* PP/NON PPP Ethiopia-Africa Trade insurance-RMC 14 23-Sep-15 4,970,000 0.6 Membership Program Insurance agency PUBLIC SECTOR 1,070,372,122

ETHIOPIA -ONGOING PORTFOLIO 15 MAY 2016 Loan/Grant Disbursement Age No Project Approval Amount IP DO PFI Status Ratio Years. Date (UA) PUBLIC SECTOR OPERATIONS TOTAL

PRIVATE SECTOR OPERATIONS Deba-Midroc Cement NON- 15 Factory 16-Apr-09 39,882,752 100% 3.09 4 PP/NON PPP 7.1 NON- 16 Ethiopian Air Lines 23-Mar-11 27,998,968 96.68% 3.77 4 5.2 PP/NON PPP PRIVATE SECTOR 67,881,720 TOTAL

TOTAL INVESTMENT 1,138,253,842 OPERATIONS

TRUST FUNDS Assela Wind Farm SREP NON- 17 28-Jun-12 1,206,418 21.02% 3.75 NR 3.9 PPG PP/NON PPP NON- 18 Africa Bamboo 532,550 NR NR 1.4 5-Dec-14 6.61% PP/NON PPP AWF/NEPAD Baro NON- 19 2-May-13 2,060,000 28.00% 3 3 3.0 Akobo Sobat PP/NON PPP Capacity Building for NON- 20 Financial Inclusion in 26-Feb-15 230,247 40.68% NR 0.1 PP/NON PPP Ethiopia (M-Birr) Support to Institutional Strengthening in Gender NON- 21 1-Apr-15 230,925 30% NR 1.1 Mainstreaming for PP/NON PPP Infrastructure Sector ClimDev Fund for NON- 22 Adaptation to Climate Jun-15 795,580 8% NR 0.4 PP/NON PPP Change in Ethiopia Marketing and Service Chain Support for Total NON- 23 11-Jun-15 973,536 NR 0.9 Sanitation in Arba PP/NON PPP Minch TOTAL TRUST FUNDS 6,029,256 TOTAL PORTFOLIO 1,144,283,098 * Grant components

III

Appendix III: Table of Key Projects Financed By the Bank and other Development Partners in the Country Project/Framework Development Amount of Sector Contribution Partner finance x1,000 Rural Electrification-I AfDB UA Creating electricity access to 36 rural Woreda towns in seven 34,230 administrative Regions, to improve the livelihood of rural population and economic development in the country, Rural Electrification II AfDB UA Creating electricity access to rural population to 335 towns and 87,200 villages in Amhara, Oromiya and Southern regions to improve the livelihood of rural population and economic development in the country Ethiopia-Djibouti AfDB UA Multinational power Transmission Interconnection, to enable Interconnection project 59,400 countries to exchange (export/import) electric power for mutual (Construction of 283 km 230 kV economic benefit and reduction the fossil fuel generation by line) importing/exporting clean energy Electricity Transmission System AfDB UA Improve access to electricity for the rural population, improve Improvement 151,750 transmission capacity and reliability of power supply to businesses and project(Construction of 943 km manufacturing firms in urban areas through the reduction of system 230 kV lines & 21 subsations) losses and frequency of outages Ethipia-Kenya Electricity AfDB UA Multinational power Transmission Interconnection, to enable Highway project (Construction 150,000 countries to exchange (export/import) electric power for mutual of 1045 km, 500 kV HV DC economic benefit and reduction the fossil fuel generation by line) importing/exporting clean energy Sululita-Bahir Dar-D.markos- China Exim Improving the power transfer capacity & relaibility of high voltage Sululta 400kV Transmission Bank transmission network line Generation (Amertin Neshi China Exim USD Increasing the Country’s hydro generation capacity, to satisfy the Hydro Electric power project, Bank 117,000.00 growing energy supply demand throughout the country 100 MW)

Generation (Gilgel Gibe II Govt. Italy & EUR Increasing the Country’s hydro generation capacity, to satisfy the Hydro Electric power project, EIB 270,000 growing energy supply demand throughout the country 420 MW) (220,000, 50,000) Ethiopia-Sudan Interconnection World Bank USD Multinational power Transmission Interconnection, to enable project 41,000 countries to exchange (export/import) electric power for mutual economic benefit and reduction the fossil fuel generation by importing/exporting clean energy

Addis Ababa distribution World Bank Distribution network (rehabilitation & upgrading) to improve network rehabilitation project power distribution capacity, reliability and quality of electricity supply to customers

Rural Electrification (EAREP I World Bank USD Electrification of 265 towns through grid expansion and additional & II) 180,800 villages through mini off grid system and development of productive use of energy Transmission & Substations World Bank USD Rehabilitation & upgrading of the existing transmission lines & Rehabilitation & Upgrading 90,000.00 substations in Addis Ababa area & other regions to enhance their project capacity in order to improve the power supply situation

Rural Electrification Kuwait USD Electrification of 27 towns, improvement of 4 substations and 35,000.00 construction of 3 transmission lines in Afar Region to create access to electricity & improve the livelihood of rural population

Rural Electrification BADEA-I USD Electrification of 44 towns in two regions, Amhara and SNNP region 3,600.00 to create access to electricity &improve the livelihood of rural population Transmission (132 kV line and BADEA & USD Constructing the 132 KV transmission line and associated substations substation for SAWLA-Key OPEC 29,000.00 to improve power supply to Urban and Rural areas in southern part of Afer) (9,000.0 & the country 20,000.00) Rural Electrification India USD Electrification of 27 towns in Hagare-Mariam Mega area to create 65,000.00 access to electricity & improve the livelihood of rural population

Appendix-iv: Project Location Map

APPENDIX V – JUSTIFICTION FOR FINANCING MORE THAN 50% OF COST BY ADB

1. Introduction: GOE made a request for this financing plan during appraisal of the program. This appendix provides the justification for waiver for the Bank financing more than 50% of the proposed operation financing as indicated in the financing plan depicted in the table below.

Total Amount % Total Source Million US$ Million US$ ADB 104.61 85.4% GoE 17.91 14.6% Total 122.52 100%

2. Country Commitment to Overall Development: Ethiopia has experienced strong economic growth, averaging 10.8% since 2005, underpinned by public-sector-led development. Real gross domestic product (GDP) is estimated to have grown by 10.2% in fiscal year 2014/15. The agriculture, services and industry sectors accounted for 38.8%, 46.6% and 15.2% of real GDP, respectively. Public investments are expected to continue driving growth in the short and medium term with huge investments in infrastructure and the development of industrial parks, prioritized to ease bottlenecks to structural transformation, which will still have to take shape with industry playing a significant role in the economy. The country has made significant headway in achieving most of the MDG targets owing to the Government’s commitment to development. Poverty level declined from 45% in 1995/96 to 29.6% in 2010/11. Under five mortality dropped from 123 in 2005 to 88 in 2010. HIV/AIDs prevalence drop to 1.3% below the MDG target of 2.5%. Primary school net enrolment increased from 68% in 2005 to 95% in 2013. In 2014/15, access to electricity supply reached 60% nationally, from a national average of 16% in 2004/5. 3. Financing allocated by Sector Targeted by the Bank: Ethiopia has made significant improvement in basic social services over the years. This has been supported by progress in long-term institution building, provision of physical infrastructure and gradual improvements in governance. With the government’s consistent implementation of its poverty-reduction strategy, pro-poor spending continues to rise (73% of total public expenditure in 2014/15). As a result, poverty in Ethiopia has declined at an annual average of 1.94% since 1995. The population share of persons living below the national poverty line fell from a baseline of 48% in 1990 to 45.5% in 1996 and 29.6% in 2011, and is estimated to have further declined to 23.4% in 2015, which is below the MDG target of 24%. This trend has continued under the government’s commitment in the GTP-I. The 2012/13 approved federal government budget indicates the commitment of Government in implementing the GTP, which engulfs the target sectors of the Bank (energy, roads, basic services and governance). The commitment in the energy sector is even stronger, as reflected in the EEPs budget of 2012/13 below, which is one of the Banks target sector:

Budgetary Allocation Budget 2012/13 Own Share for power Sector Total source Generation Projects (20) 30,878.2 1,249.8 4.1% Upgrading projects (1) 98.2 98.2 100.0% Generation studies 10.6 10.6 100.0% Transmission Projects (15) 10,605.2 188.0 1.7% Transmission line studies 53.8 7.8 14.5% Distribution 2,214.6 1952.0 88.1% Universal Electricity Access 2,414.6 1000.0 41.4% Institutional strengthening 1,311 715 53.8% Total 53,405.2 4,220.3 7.9%

4 Ethiopia has started exploiting its huge hydropower potential for domestic needs and export of power to the Eastern African region and beyond. The generation capacity in the national grid will be increased from the current 4,180 MW in 2015 and to 17,347 MW in 2020. To evacuate the power generated, the transmission and distribution systems will also be rehabilitated and expanded. The national access to electricity will grow from the current level of 60 percent to 90 percent in 2020. EEP, a State owned and vertically integrated utility responsible for the construction and operation of generation plants, transmission & substation networks as well as bulk sell of sale of electricity in the country, is expected to operate on dual objectives - undertaking such huge development oriented programs and operating on financial sustainability with strict adherence to the performance benchmarks. None the less, the utility was incapable of raising tariff since 2006, which is threatening its financial sustainability. The major sources of finance for EEP were multilateral development banks, bilateral financing, retained earnings and government equity. End user payments contributed to about 2 percent of EEP’s sources of financing. The external sources were 65 percent concessional and 35 percent non- concessional. All these were happening under the strong government guarantee and custody and all these reflect government’s commitment and ownership.

5. Budget and Debt Situation: Ethiopia’s budget has been steadily growing and it has now proclaimed to reach US$ 11 billion in 2015/16 financial year from US$5 billion in 2005/6. In 2014/15, the fiscal deficit amounted to 2.0% of GDP compared to 2.6% in 2013/14. The tax-revenue-to-GDP ratio improved to 13.4% in 2014/15 from 12.7% % in the previous year, but this remains well below the sub-Saharan Africa average of about 20%. The growth in exports slowed down during the last 3 years, roving around US$ 3.0 - 3.25 billion in the last three years, showing contraction as a percent of GDP, while import bill increased by about 20% in 2013/14. The trade balance is hence further deteriorated as a percentage of GDP and by nominal value. The external debt increased from USD 11.2 billion in 2011/12 to USD 19 billion in 2014/15, up from 12.1% of GDP in 2009/10 to 26.2% in 2014/15. In 2014, Ethiopia accessed the EURBOND and borrowed USD 1 billion from the international financial market. Ethiopia’s 2014/15 Federal budget law shows an allocation of 4.6% of the federal budget to debt servicing. Ethiopia’s debt is steadily growing, despite still remaining at moderate level in terms of debt stress.

5. Conclusion: The GoE has demonstrated commitment through its achievements and spending in critical sectors such as in Energy & road. The HV transmission network expansion and rural electricity access scale-up program shall not be seen in isolation from the national power sector development for which Government’s contribution is estimated at 50% of the estimated financing need of USD 29.3 Billion for the GTP-II (2016-2020). The financing under the program enhances the achievement of the sector goals and builds on the Bank’s earlier contribution to the development of the energy sector in Ethiopia. Furthermore, Ethiopia is still an ADF country only and eligible to access the ADB resources based on the new Credit Policy approved in 2014 (Diversifying the Bank’s Products to Provide Eligible ADF-Only Countries Access to the ADB Sovereign Window). Requiring an ADF country to comply with counterpart financing level of ADB countries (refer 2.1.2, (ii) of the Policy on Expenditure Eligible for Bank Group Financing) more than 50% of program financing is a burden to the country.

VII