The World Bank Zanzibar Energy Sector Transformation Project (P169561) Project Information Document (PID) For Official Use Only Appraisal Stage | Date Prepared/Updated: 12-Dec-2019 | Report No: PIDA27565 Dec 11, 2019 Page 1 of 17 The World Bank Zanzibar Energy Sector Transformation Project (P169561) BASIC INFORMATION OPS_TABLE_BASIC_DATA A. Basic Project Data Country Project ID Project Name Parent Project ID (if any) Tanzania P169561 Zanzibar Energy Sector Transformation Project Region Estimated Appraisal Date Estimated Board Date Practice Area (Lead) AFRICA 02-Mar-2020 30-Apr-2020 Energy & Extractives Financing Instrument Borrower(s) Implementing Agency Investment Project Financing Ministry of Finance and Ministry of Land, Housing, Planning of the United Water and Energy Republic of Tanzania (MoLHWE), Zanzibar Electricity Corporation (ZECO) Proposed Development Objective(s) The project development objective is to expand access to efficient and reliable electricity services and to create an For Official Use Only enabling environment for private sector participation in the Zanzibar electricity sector. Components Enabling infrastructure for enabling solar power plants development with private sector participation Grid extension, reinforcement, rehabilitation, modernization, and access scale-up Technical assistance, capacity building, and project implementation support PROJECT FINANCING DATA (US$, Millions) SUMMARY-NewFin1 Total Project Cost 145.00 Total Financing 145.00 of which IBRD/IDA 117.00 Financing Gap 0.00 DETAILS-NewFinEnh1 World Bank Group Financing Dec 11, 2019 Page 2 of 17 The World Bank Zanzibar Energy Sector Transformation Project (P169561) International Development Association (IDA) 117.00 IDA Credit 117.00 Non-World Bank Group Financing Trust Funds 28.00 Clean Technology Fund 28.00 Environmental and Social Risk Classification Substantial Decision The review did authorize the team to appraise and negotiate Other Decision (as needed) B. Introduction and Context For Official Use Only Country Context 1. Tanzania, with rich endowment of natural resources, has enjoyed relatively stable economic growth in the past decade. Tanzania has experienced a strong and steady growth rate in its Gross Domestic Product (GDP) of 6.7 percent per annum between 2006 and 2016, higher than the average growth for Sub-Saharan Africa of 4.8 percent during the same period.1 The services sector is the main contributor to the GDP (about 46 percent).2 Agriculture remains an important economic driver, accounting for more than 25 percent of GDP, 85 percent of exports, and employing about 65 percent of the work force. Real GDP growth is projected to rise gradually over the medium term, assuming modest but steady implementation of reforms, especially for improving the business environment and fiscal management. The Debt Sustainability Analysis conducted by the IMF in 2018, indicated that Tanzania remains at “low” risk of external debt distress. The public debt-to-GDP ratio was estimated at 40.1 per cent in 2018. 2. Over the past decade, Tanzania has registered a decline in national poverty levels, but the gains have been undermined by population growth and low growth elasticity of poverty. The population in Tanzania was about 56 million (2016) and is expected to almost double to 100 million by 2040. The population growth rate has undermined the reduction in poverty. Between 2007 and 2016, the national poverty rate reduced from 34.4 percent in 2007 to an estimated 26.8 percent,3 however the head count of those living in extreme poverty remained at about 13 million during the same period. The growth elasticity of poverty has remained at less than unity, which means that a 1 percent increase in economic 1 World Bank CPF for Tanzania for the period FY2018–2022. 2 Tanzania Economic Update, 12th Edition, World Bank, 2019. 3 The poverty rate based on the US$1.90 per day global poverty line declined from 60 percent to 47 percent over the same period. Dec 11, 2019 Page 3 of 17 The World Bank Zanzibar Energy Sector Transformation Project (P169561) growth reduces the poverty headcount by less than 1 percent. It appears economic growth is not generating enough opportunities for the poor to make their assets more productive and increase their incomes. 3. Zanzibar is a semi-autonomous region of the United Republic of Tanzania. Zanzibar has its own legislative assembly, judicial system, and an executive headed by the President.4 The Zanzibar archipelago consists of two main islands, Unguja and Pemba. The two islands are located roughly 35 kilometers (km) off the coast of Tanzania and are surrounded by a group of approximately 50 islets. In 2012, Zanzibar’s population was 1.3 million, 900,000 in Unguja, and 400,000 in Pemba. Zanzibar has a total area of 2,461 square-km representing 0.3 percent of Tanzania’s total area. By 2020, Zanzibar’s population is expected to increase to 1.6 million people, given an estimated population growth rate of 3.1 percent per year.5 Currently, over 60 percent of the inhabitants live in urban areas, and the population density is more than ten times higher than on mainland Tanzania and its urbanization rate is twice as much as the national average (33 percent). 4. Zanzibar’s growth trajectory has been similar to the national trend, albeit slightly lower by 6 about 0.3 percent. Zanzibar exhibits strong economic prospects but also potential economic vulnerabilities. In 2017, the estimated GDP of Zanzibar was US$1 billion. This was mostly driven by services, particularly tourism and related services.7 Zanzibar, once the largest producer and exporter of cloves in the world, still relies on exports of agricultural products – cloves and other spices, seaweed, and coconut products, but tourism growth is outpacing all the other sectors. Agriculture was traditionally the backbone of Zanzibar’s economy, but tourism has become the main growth driver, contributing to more than a quarter of the GDP and most of the foreign exchange earnings. The number of tourist arrivals has For Official Use Only more than doubled over the last decade, reaching about 400,000 arrivals each year. The sector also provides the highest private sector employment. However, due to heavy dependence on imported goods, the fiscal situation in Zanzibar is vulnerable to the changes in the price of oil and other imports. With a growing population, a high fertility rate, and a lack of adequate job creation, unemployment is increasingly a pressing economic and social problem. The unemployment rate rose from 5.5 percent to 2006 to 14.3 percent in 2014. 5. Over the past years, Zanzibar registered a modest decline in poverty. In 2015, around 30.4 percent of the population lived below the basic-needs poverty line, down from 34.9 percent in 2010. The decline in poverty was mainly in Unguja (18.4 percent from 26 percent). This was mainly driven evident in the larger urban centers in Unguja, where more than 60 percent of the population lives. Pemba experienced an increase in poverty (55 percent from 48 percent). In contrast more than 80 percent of the population in Pemba lives in rural areas. Most of the rural households depend on fishing and agriculture for their livelihood and spend on average 18 percent of their incomes on energy, water, and housing. With a median age of 17 years, Zanzibar has a young population, signifying the potential for demographic dividends. However, rapid population growth has impeded poverty reduction and posed challenges for youth employment and provision of social services. 4 Tanganyika (Tanzania-mainland) and Zanzibar formed a unity on April 26, 1964 through the Union of Tanganyika and Zanzibar Act of 1964, which led to the formation of the United Republic of Tanzania. 5 Tanzania-Zanzibar National Population Projections, February 2018. It is estimated that the population will reach 1.6 million inhabitants in 2020, 1.76 million in 2022 and 2.3 million in 2035. 6 World Bank (2017). Tanzania CPF FY18-22. 7 Bank of Tanzania Annual Report 2017/18 Dec 11, 2019 Page 4 of 17 The World Bank Zanzibar Energy Sector Transformation Project (P169561) 6. The Zanzibar Strategy for Growth and Reduction of Poverty 2016-2020 (ZSGRP III) prioritizes the tourism sector and enabling infrastructure such as energy, water, transport as key drivers of economic growth and poverty reduction. The RGoZ’s high-level objectives for the development of the energy sector are stated in Vision 2020 and the Energy Policy (2009) under the overarching umbrella of ZSGRP III. The Vision 2020 emphasizes the development and efficient utilization of Zanzibar’s locally available energy resources to minimize dependency on imported energy and reduce pressure on natural forests. These documents focus on (i) expansion of generation capacity using sustainable and clean energy sources, and extension/strengthening of the distribution network to meet the growing demand and to serve more customers and (ii) increase of new customer connections, with a focus on women. Sectoral and Institutional Context Sector governance 7. The Zanzibar power sector comprises of three key institutions. The Ministry of Land, Housing, Water and Energy (MoLHWE), the Zanzibar Utilities Regulatory Authority (ZURA), and the vertically integrated utility, the Zanzibar Electricity Corporation (ZECO) are the main actors in the power sector. There is no independent power producer in Zanzibar. (a) MoLHWE. The Department for Energy and Minerals (DoEM) within MoLHWE is responsible for overall sector coordination, planning, and policy. The ministry through the DoEM is responsible for supervising the implementation of the energy policy and overseeing the functioning of ZECO and appointing its Board of Directors. For Official Use Only (b) ZURA is responsible for technical and economic regulation in the water, petroleum, and electricity sectors. ZURA’s functions include tariff setting and review, licensing and quality of service regulation, promoting economic efficiency and performance monitoring of sector utilities, and promoting private sector participation.