Tanzania - First and Second Power and Gas Sector DPO ...



Document ofThe World BankReport No: ICR00004220IMPLEMENTATION COMPLETION AND RESULTS REPORT(IDA-52150 AND IDA-53970)ON ASERIES OF TWO CREDITSIN THE TOTAL AMOUNT OF SDR 130.1 MILLION(US$200 MILLION EQUIVALENT)TO THEUNITED REPUBLIC OF TANZANIAFOR THEFIRST AND SECOND POWER AND GAS SECTOR DPODecember 21, 2017Macroeconomics and Fiscal Management Global PracticeAfrica RegionCURRENCY EQUIVALENTS(Exchange Rate Effective as of December 21, 2017)Currency Unit = Tanzania Shilling (T Sh)T Sh 2,240.00 = US$1.00US$1.00 = SDR 0.706255GOVERNMENT FISCAL YEARJuly 1 – June 30TANESCO FINANCIAL YEARSince July 1, 2015: July 1 – June 30Transition year: January 1, 2014 – June 30, 2015 Until December 31, 2013: January 1 – December 31ABBREVIATIONS AND ACRONYMSAfDBAfrican Development BankCASCountry Assistance StrategyDPDevelopment PartnerDPODevelopment Policy OperationEPPEmergency Power ProducerESCBPEnergy Sector Capacity Building ProjectEWURAEnergy and Water Utilities Regulatory AuthorityFYDPFive Year Development PlanGDPGross Domestic ProductGHGGreenhouse GasIMFInternational Monetary FundIPPIndependent Power ProducerIPTLIndependent Power Tanzania Ltd.ISRImplementation Status and Results ReportKPIKey Performance IndicatorLNGLiquefied Natural GasMEMMinistry of Energy and MineralsMOFMinistry of Finance and PlanningM&EMonitoring and EvaluationNAONational Audit OfficeNDCNationally Determined ContributionNGUMPNational Gas Utilization Master PlanNNGIPNational Natural Gas Infrastructure ProjectPDOProgram Development ObjectivePPPPublic Private PartnershipPPRAPublic Procurement Regulatory AuthorityPSMPPower System Master PlanREARural Energy AgencySCFStandby Credit FacilityTANESCOTanzania Electric Supply CompanyTPDCTanzania Petroleum Development CorporationUSAIDU.S. Agency for International DevelopmentSenior Global Practice Director:Carlos Felipe JaramilloCountry Director:Bella BirdPractice Director:Paloma Anos CaseroTask Team Leaders:Jacques Morisset, Yutaka YoshinoICR Task Team Leader:Joern HuentelerICR Primary Author:Nestor NtungwanayoCONTENTSData Sheet TOC \o "1-2" \h \z \u A. Basic Information PAGEREF _Toc501700604 \h vB. Key Dates PAGEREF _Toc501700605 \h vC. Ratings Summary PAGEREF _Toc501700606 \h viD. Sector and Theme Codes PAGEREF _Toc501700607 \h viiE. Bank Staff PAGEREF _Toc501700608 \h viiiF. Results Framework Analysis PAGEREF _Toc501700609 \h xG. Ratings of Program Performance in ISRs PAGEREF _Toc501700610 \h xiiiH. Restructuring (if any) PAGEREF _Toc501700611 \h xiii1. Program Context, Development Objectives, and Design PAGEREF _Toc501700612 \h 12. Key Factors Affecting Implementation and Outcomes PAGEREF _Toc501700613 \h 83. Assessment of Outcomes PAGEREF _Toc501700614 \h 184. Assessment of Risk to Development Outcome PAGEREF _Toc501700615 \h 335. Assessment of Bank and Borrower Performance PAGEREF _Toc501700616 \h 356. Lessons Learned PAGEREF _Toc501700617 \h 387. Comments on Issues Raised by Borrower/Implementing Agencies/Partners PAGEREF _Toc501700618 \h 39Annex 1. Bank Lending and Implementation Support/Supervision Processes PAGEREF _Toc501700619 \h 40Annex 2. Beneficiary Survey Results PAGEREF _Toc501700620 \h 42Annex 3. Stakeholder Workshop Report and Results PAGEREF _Toc501700621 \h 43Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR PAGEREF _Toc501700622 \h 44Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders PAGEREF _Toc501700623 \h 45Annex 6. Supporting Data PAGEREF _Toc501700624 \h 46Annex 7. List of Supporting Documents PAGEREF _Toc501700625 \h 48Annex 8. Map PAGEREF _Toc501700626 \h 49A. Basic InformationProgram 1CountryTanzaniaProgram NameTZ First Power and Gas Sector DPOProgram IDP143645L/C/TF Number(s)IDA-52150ICR DateDecember 21, 2017ICR TypeCore ICRLending InstrumentDevelopment Policy LendingBorrowerMinistry of Finance and PlanningOriginal Total CommitmentSDR 64.90 millionDisbursed AmountSDR 64.90 millionImplementing Agency: Ministry of Finance and PlanningCofinanciers and Other External Partners: n.a.Program 2CountryTanzaniaProgram NameTZ Second Power and Gas Sector DPOProgram IDP145254L/C/TF Number(s)IDA-53970ICR DateDecember 21, 2017ICR TypeCore ICRLending InstrumentDPLBorrowerMinistry of Finance and PlanningOriginal Total CommitmentSDR 65.20 millionDisbursed AmountSDR 65.20 millionImplementing Agency: Ministry of Finance and PlanningCofinanciers and Other External Partners: n.a.B. Key Dates TZ First Power and Gas Sector DPO - P143645 ProcessDateProcessOriginal DateRevised/Actual Date(s) Concept Review:01/17/2013Effectiveness:-06/12/2013 Appraisal:02/06/2013Restructuring(s):-- Approval:03/26/2013Mid-term Review:11/07/201311/07/2013 Closing:06/30/201406/30/2014 TZ Second Power and Gas Sector DPO - P145254ProcessDateProcessOriginal DateRevised/Actual Date(s) Concept Review:11/07/2013Effectiveness:-06/09/2014 Appraisal:02/03/2014Restructuring(s):n.a.n.a. Approval:03/21/2014Mid-term Review:11/07/201311/07/2013 Closing:06/30/201506/30/2015C. Ratings Summary C.1 Performance Rating by ICROverall Program Rating OutcomeModerately Unsatisfactory Risk to Development OutcomeHigh Bank PerformanceModerately Satisfactory Borrower PerformanceModerately UnsatisfactoryC.2 Detailed Ratings of Bank and Borrower Performance (by ICR)Overall Program RatingBankRatingsBorrowerRatings Quality at EntryModerately Satisfactory Government:n.a. Quality of Supervision:Moderately Satisfactory Implementing Agency/Agencies:n.a. Overall Bank PerformanceModerately Satisfactory Overall Borrower PerformanceModerately UnsatisfactoryC.3 Quality at Entry and Implementation Performance IndicatorsTZ First Power and Gas Sector DPO - P143645Implementation PerformanceIndicatorsQAG Assessments (if any)Rating: Potential Problem Program at any time (Yes/No):NoQuality at Entry (QEA)None Problem Program at any time (Yes/No):NoQuality of Supervision (QSA)None DO rating before Closing/Inactive statusModerately SatisfactoryTZ Second Power and Gas Sector DPO - P145254Implementation PerformanceIndicatorsQAG Assessments (if any)Rating: Potential Problem Program at any time (Yes/No):NoQuality at Entry (QEA)None Problem Program at any time (Yes/No):NoQuality of Supervision (QSA)None DO rating before Closing/Inactive statusModerately SatisfactoryD. Sector and Theme Codes TZ First Power and Gas Sector DPO - P143645OriginalActualMajor Sector Energy and Extractives Other Energy and Extractives5757 Oil and Gas4343Major Theme/Theme/Sub Theme Private Sector Development Business Enabling Environment2828 Investment and Business Climate2828 Jobs1414 Job Creation1414 Public Sector Management Public Administration1515 Transparency, Accountability and Good Governance1515 Public Finance Management1515 Public Expenditure Management1515 Urban and Rural Development Rural Development1414 Rural Infrastructure and Service Delivery1414 Urban Development1414 Urban Infrastructure and Service Delivery1414 TZ Second Power and Gas Sector DPO - P145254OriginalActualMajor Sector Energy and Extractives Other Energy and Extractives4444 Energy Transmission and Distribution1111 Oil and Gas4545Major Theme/Theme/Sub Theme Private Sector Development Jobs1414 Job Creation1414 Public Private Partnerships1010 Public Sector Management Public Administration1515 Transparency, Accountability and Good Governance1515 Public Finance Management1515 Public Expenditure Management1515 Urban and Rural Development Rural Development1414 Rural Infrastructure and service delivery1414 Urban Development1414 Urban Infrastructure and Service Delivery1414E. Bank Staff TZ First Power and Gas Sector DPO - P143645PositionsAt ICRAt Approval Vice President:Makhtar DiopMakhtar Diop Country Director:Bella BirdPhilippe Dongier Practice Manager/Manager:Abebe Adugna DadiAlbert Zeufack Task Team Leader:Jacques MorissetJacques Morisset ICR Team Leader:Joern Huenteler ICR Primary Author:Nestor Ntungwanayo TZ Second Power and Gas Sector DPO - P145254PositionsAt ICRAt Approval Vice President:Makhtar DiopMakhtar Diop Country Director:Bella BirdPhilippe Dongier Practice Manager/Manager:Abebe Adugna DadiAlbert Zeufack Task Team Leader:Yutaka YoshinoYutaka Yoshino ICR Team Leader:Joern Huenteler ICR Primary Author:Nestor NtungwanayoF. Results Framework AnalysisProgram Development Objective (from Program Document Loan and Program Summaries)The PDO of the program was to (a) strengthen the country’s ability to bridge the financial gap in its power sector, (b) reduce the cost of power supply and promote private sector participation in the power sector, and (c) strengthen the policy and institutional framework for the management of the country’s natural gas resources.Revised Program Development ObjectivesThe PDO was not revised during the period of implementation of the two operations (DPO-1 and DPO-2).PDO Indicator(s)TZ First and Second Power and Gas Sector DPOs (P143645 and P145254).IndicatorBaseline ValueOriginal Target Values (from approval documents)Actual Value Achieved when the DPO program elapsedActual Value Achieved at the time of the ICRPillar 1Strengthening the country’s ability to bridge the financial gap in its power sectorIndicator 1: TANESCO operating deficit (US$ million)Value (quantitative or qualitative)2405092a(80)b (profit)Date achievedYear to December 31, 20132016Year to June 30, 2016Year to June 30, 2017Comments (including % achievement) Overachieved, albeit with delay. Improvements in the operating deficit of the Tanzania Electric Supply Company (TANESCO) were a result of (a) tariff reforms, (b) significant cost reductions (Indicator 5), and (c) significant reductions in technical and non-technical losses (Indicator 3). Results were achieved despite a major depreciation of the Tanzanian Shilling during FY2015 (8 percent) and FY2016 (24 percent), affecting TANESCO’s fuel cost.Indicator 2:TANESCO accounts (trade and other) payable (T Sh billion)Value (quantitative or qualitative)7073001,187a1,331bDate achieved20122016June 30, 2016June 30, 2017Comments (including % achievement) Not achieved, because of (a) pressure on TANESCO’s cash flow as external financing is insufficient for TANESCO’s investment program, including for new connections; (b) insufficient surplus cash generated from operations; and (c) a major depreciation of the T Sh (see Indicator 1) (TANESCO’s arrears are mostly denominated in U.S. dollars but indicator is in Tanzania Shilling).Indicator 3:TANESCO technical and non-technical losses in transmission and distribution (%)Value (quantitative or qualitative)211818.29c16.44cDate achieved20122016Year to June 30, 2016Year to June 30, 2017Comments (including % achievement) Achieved and subsequently exceeded, as a result of measures to enhance transparency in—and accountability for—TANESCO’s operational performance, as well as investments in grid strengthening.Pillar 2:Reducing the cost of power supply and promoting private sector participation in the power sectorIndicator 4:Amount of gas-fired power generation capacity commissioned after 2011 (MW)Value (quantitative or qualitative)105400255d255dDate achieved20122016March 20, 2016June 30, 2017Comments (including % achievement) Not achieved. The Kinyerezi I gas power plant (150 MW) was fully commissioned in 2016 and the first unit of Kinyerezi II is expected to be commissioned by the end of 2017. However, while construction of both power plants was delayed, the pressure to commission new capacity was less than anticipated as demand grew much slower than expected (actual sales in 2016 were 17% lower than projected in the Program Document of the first Development Policy Operation [DPO-1]) and hydrology conditions have been relatively favorable. However, TANESCO will need to secure additional capacity soon to be able to withstand another major drought.Indicator 5:Average unit cost of power sales (US$/kWh)Value (quantitative or qualitative)0.18f0.150.12a0.09bDate achieved20122016Year to June 30, 2016Year to June 30, 2017Comments (including % achievement) Achieved and significantly exceeded, as a result of (a) the phaseout of emergency power plants, made possible by relatively good hydrological years in 2015 and 2017, new gas-fired generation capacity, and relatively slow demand growth; (b) a shift from oil products to natural gas in the generation mix; and (c) significant reductions in technical and non-technical losses (Indicator 3).Indicator 6:Number of bids for gas IPP power plants launched on a competitive basis (count)Value (quantitative or qualitative)0100Date achieved20122016March 20, 2016June 30, 2017Comments (including % achievement) Not achieved. The pressure to secure new capacity has not been as high as anticipated (see Indicator 4). In addition, a series of major sector governance controversies relating to independent power producers (IPPs) and emergency power producers (EPPs) slowed down plans for procurement of privately-owned generation capacity during the Program period.Indicator 7:Ministry of Energy and Minerals (MEM) documents on sector reforms published for public knowledge (count)Value (quantitative or qualitative)0222Date achieved20122016March 20, 2016June 30, 2017Comments (including % achievement) Achieved. The two major sector reform documents approved by MEM since 2012 are (a) the Electricity Supply Industry Reform Strategy and Roadmap 2014–2025 (2014) and (b) the National Energy Policy (2015).Pillar 3Strengthening the policy and institutional framework for the management of the country’s natural gas resourcesIndicator 8:Volume of gas produced (mmscfd)Value (quantitative or qualitative)78250102e132eDate achieved20122016Year to December 31, 2015Year to December 31, 2016Comments (including % achievement) Not achieved. Growth in gas production has been much slower than anticipated at approval of the DPOs, largely due to (a) slow domestic demand growth (see Indicator 4); (b) the decline in global energy prices; and (c) slow reform progress in the upstream regulatory and policy framework.Indicator 9:Amount of onshore proven natural gas reserves (Tcf)Value (quantitative or qualitative)1.03.51.369e1.187eDate achieved20122016April 1, 2015cDecember 31, 2016Comments (including % achievement) Not achieved. Probable reserves are now estimated at 57 Tcf. However, investment exploration and production (which would probable reserves into ‘proven reserves’) has been subdued, largely due to (a) slow domestic demand growth (see Indicator 4); (b) the decline in global energy prices; and (c) slow reform progress in the upstream regulatory and policy framework.Indicator 10:Annual monitoring under the Natural Resource Charter initiativeValue (quantitative or qualitative)NoYesNoNoDate achieved20122016March 20, 2016June 30, 2017Comments (including % achievement) Not achieved. Reform progress in the upstream regulatory and policy framework has been much slower than anticipated, as a result of a series of sector governance controversies in the energy and minerals sectors (details in the main text) in combination with a change in Government and policy priorities and the decline in global energy prices which made the development of Tanzania’s natural gas resources less lucrative.a. Source: Audited financial statements of TANESCO. b. Source: Draft unaudited financial statements of TANESCO. c. Source: TANESCO. d Source: TANESCO.e. Source: National Bureau of Statistics; Tanzania Petroleum Development Corporation.Note: f. Updated data suggest that the 2012 baseline was 0.16; the value in 2013 was 0.18.G. Ratings of Program Performance in ISRs TZ First Power and Gas Sector DPO - P143645No.Date ISR ArchivedDOIPActual Disbursements(US$, millions)104/16/2014Moderately SatisfactoryModerately Satisfactory98.22 TZ Second Power and Gas Sector DPO - P145254No.Date ISR ArchivedDOIPActual Disbursements(US$, millions)108/13/2015Moderately SatisfactoryModerately Unsatisfactory100.43H. Restructuring (if any) There were no program restructurings during the period of implementation of the two operations (DPO-1 and DPO-2). However, results indicators and triggers were revised during the appraisal of DPO-2.1. Program Context, Development Objectives, and DesignThis Implementation Completion and Results Report (ICR) assesses the results of the programmatic series of two Development Policy Operations (DPOs) to the United Republic of Tanzania. The DPO series aimed to (a) strengthen the country’s ability to bridge the financial gap in its power sector, (b) reduce the cost of power supply and promote private sector participation in the power sector, and (c) strengthen the policy and institutional framework for the management of the country’s natural gas resources. The first operation (DPO-1) of SDR 64.90 million was approved by the World Bank’s Board of Directors on March 26, 2013. The second operation (DPO-2) of SDR 65.20 million was approved on March 21, 2014.The series was originally set up to consist of three programmatic DPOs. However, because of a delay in implementing the prior actions for DPO-3, on March 20, 2016 the programmatic series was considered to have lapsed because no subsequent operation was presented to the Board within 24 months after the Board approval of the previous operation in the series. A concept review meeting for a follow-up series of two operations was held in July 2016, but preparation of the follow-up DPO series was cancelled at the time of this ICR.1.1 Context at AppraisalWhen the DPO reform program was initiated in 2013, only 16 percent of Tanzanians had access to electricity and the lack of access to affordable and reliable energy was viewed as a major constraint to Tanzania’s economic growth and diversification. Based on the latest Household Budget Survey 2011/12 data, only 16 percent of the population had access to electricity. Tanzania had access rates that were higher than Malawi and Uganda (9 percent) but lower than Kenya and Zambia (over 20 percent) and far lower than developing countries of East Asia (more than 90 percent coverage) and South Asia (62 percent). Access to the national grid was particularly limited in rural areas and for the poor. Only 1.1 percent of the lowest income quintile in rural areas had access to electricity. U.S. Agency for International Development (USAID) and World Bank studies found that poor infrastructure, especially power and transport, was a key constraint to economic growth and diversification in Tanzania. Managers of firms and most Tanzanian enterprises considered routine load shedding and power outages to be the most serious constraint to doing business. The lack of access to cheap and reliable energy was costing local firms as much as 5 percent of sales and as much as 18 percent for manufacturing firms. This scale was consistent with other reports in Africa, which suggest that power outages result in significant losses equivalent to 6–16 percent of turnover. To promote electricity access, in early 2013, the Government reduced connection fees by 30 percent to 90 percent, and instructed the Tanzania Electric Supply Company (TANESCO) to increase its customers base to 1,500,000 by 2015 and target 250,000 new connections per year.Reforms to modernize Tanzania’s power sector had begun in the early 2000s but a significant sector reorganization, stipulated by the Electricity Act of 2008, still had to be implemented. TANESCO, the vertically integrated utility, was corporatized in 2002 under the Public Corporations Act, but is still fully government-owned. The company was under a private management contract between May 2002 and December 2006, which focused on financial and technical performance improvements. A Rural Electrification Agency was established through the Rural Energy Act of 2005, with the mission to promote and facilitate availability and access to modern energy services in rural mainland Tanzania. An independent Energy and Water Utilities Regulatory Authority (EWURA) became operational in 2006. This was followed by the adoption of an Electricity Act in 2008, which established a stronger separation between ownership, policy, and regulatory functions and created a clearer framework for sector governance, licensing, and tariff regulation. The Act included a mandate for the Ministry of Energy and Minerals (MEM) to prepare and publish a policy for the reorganization of the electricity market. The Act also stipulated the strengthening of the governance of TANESCO, reforming its top management structure and creating a Board of Directors with public and private sector stakeholder representations. However, implementation of the Electricity Act of 2008 had yet to make significant progress by the time of the appraisal of DPO-1, and the Government retained strong influence over all decision-making in the sector.Tanzania was facing a power supply crisis during the appraisal of DPO-1 and DPO-2, which threatened to derail the country’s industrialization agenda, put severe financial strain on TANESCO and the Government, and endangered its electricity access targets. In the years leading up to the DPO series, Tanzania was experiencing declining reserve capacity, triggered by growing demand and years of underinvestment in new and diversified generation capacity. Out of total of 1,092 MW of installed capacity in 2010, hydropower represented 52 percent, natural gas 33 percent, oil products 13 percent and imports 1 percent. In FY2010/11, as a result of poor rainfall that reduced hydropower production, Tanzania started experiencing a series of supply deficit. At the peak of the crisis, in mid-2011, some parts of the country experienced daily load shedding of up to 12 hours. TANESCO entered into expensive, short-term contracts with private emergency power producers (EPPs) to provide a total of 317 MW of generation capacity. These steps eased supply shortages but significantly increased the cost of supply: In 2012, the share of electricity generation of the EPPs was 11 percent, but their share of costs was 43 percent, doubling the average unit cost of sales (from US$0.08 per kWh in 2010 to US$0.16 per kWh in 2012). This turned the power supply crisis into a financial crisis when the regulator did not pass through the additional costs to consumers. In mid-2012, TANESCO’s financial shortfall was running at more than US$40 million per month, as the hydrological condition continued to be below average, while electricity demand kept increasing, requiring continued engagement of the expensive EPPs. TANESCO accumulated arrears to the EPPs, independent power producers (IPPs), and fuel and other suppliers, as tariffs and Government transfers to the sector did not keep up with the rising cost of supply. By the end of 2014, the total cumulative financial gap of the energy sector was expected to be between US$760 million and US$1 billion (or between 2.9 percent and 3.8 percent of gross domestic product [GDP]). The reform program prepared by the Government in response to this power supply crisis (the ‘Program’) was supported by the DPO series (envisioned as programmatic DPO series with three operations). The Program was also supported by the IMF and the AfDB.To respond to the power sector crisis, the Government had prepared a Program of reforms that included (a) crisis-response measures to address the short-term fiscal risks; and (b) medium- to long-term reform measures to prevent a similar crisis from repeating in the future. The Program had support at the highest levels of the Government and had been developed in close collaboration with development partners (DPs). It consisted of prior actions under three, interlinked pillars. The short term, crisis-response elements of the Porgram included measures to close the financial gap in the power sector through a combination of tariff reforms, transparent Government transfers to TANESCO, and Government-guaranteed commercial borrowing by TANESCO (Pillar 1). The medium to long-term reform measures (crisis-prevention) aimed at ensuring that the power and the gas sectors are developed and operated in a more efficient, transparent, and financially sustainable manner. To reduce the cost of supply and mitigate the risk of supply shocks (such as droughts or oil price increases), the authorities intended to shift the energy mix away from the expensive emergency supply to more efficient, gas-fired generation, developed through the private sector (Pillar 2). To ensure sufficient gas supply to the power sector (and the economy overall), the authorities aimed to develop a framework to attract investment in upstream natural gas exploration and production (Pillar 3).Increasing gas production in a relatively short period and at relatively low cost required an adequate investment framework that had the capacity to incentivize investment in gas production. During 2013–16, the Government’s strategy was to use existing nearshore gas reserves to supply new gas power plants through the construction of a new pipeline. In the longer term, the authorities planned to invest in renewable resources and possibly coal and hydroenergy. The development of offshore massive gas reserves was at the top of the Government’s agenda, but the expected impact on economic growth and poverty was expected to occur only when production starts in about 7–10 years. The objective of the strategy was not only to increase power capacity but also to significantly reduce production costs by lowering the reliance of the energy network on expensive fuel power plants. It could also help diversify the risks associated with climatic shocks and variations in fuel prices on international markets. The DPO series was to support this medium-term vision.The proposed series was to complement a larger World Bank portfolio supporting the energy sector of Tanzania directly or indirectly. Ongoing and planned complementary World Bank interventions cited in the Program documents included the following: (a) investment lending that intended to promote access to energy, strengthen the transmission and distribution network, and expand use of renewable energy; (b) the Energy Sector Capacity Building Project (ESCBP, P126875); (c) nonlending analytical work and technical assistance on the multisector gas agenda; (d) a potential policy-based guarantee operation to increase the capacity of TANESCO to borrow commercially at attractive terms; and (e) ongoing and future general budget support aimed at improving effectiveness and transparency in public finance areas including revenue mobilization and public investment management.The country’s macroeconomic performance during the period covered by the DPO program was broadly positive ( REF _Ref495826396 \h \* MERGEFORMAT Table 1). The real GDP annual growth for Tanzania remained high during FY2013–17, averaging about 7.0 percent, driven by construction and services. In FY2016/17, the growth rate is projected to reach 6.6 percent. The inflation rate remained low and stable. The external balance improved, with the current account deficit falling from14.3 percent in FY2012/13 to an estimated 2.8 percent in FY2016/17. The fiscal deficit improved sharply after FY2012/13 from 6.8 percent of GDP to around 3 percent of GDP, and remained stable throughout the Program period. However, a looser monetary policy has yet to translate into a reduced cost of borrowing for the private sector or into increased private investment, partly because of the continued uncertainty. Going forward, fiscal and monetary policy challenges remain, with persistently high domestic payment arrears (at around 6 percent of GDP at the end of FY2016/17) and the low execution rate of the development budget (62 percent in FY2016/17) threatening the credibility of the budget. The growth outlook is favorable in the short- to medium-term, with key risks being both mostly domestic and under the Government’s control. In the medium term, the main risks relate to a further deterioration in business sentiment as a result of increased policy uncertainty and to a decline in the execution rate of the development budget. The most significant external risks relate to potential rebounds in oil prices, volatile global financial conditions, and a decline in demand from Tanzania’s main export partners.Table 1. Key Economic Indicators: FY2012/13–FY2016/17(in percent unless otherwise indicated)Government Fiscal Years (July 1–June 30)2013/142014/152015/162016/17e2017/18f2018/19fReal GDP growth, at constant market prices7.07.07.06.66.86.9Private Consumption4.52.34.54.04.04.0Government Consumption-0.5-4.0-7.42.66.36.2Gross Fixed Capital Investment12.811.58.05.310.09.7Exports, Goods and Services17.723.0-23.23.92.84.7Imports, Goods and Services2.9-2.1-26.8-5.32.93.6Real GDP growth, at constant factor prices6.98.65.76.56.86.9Agriculture3.42.32.12.52.52.7Industry10.311.310.710.210.710.6Services7.110.35.06.46.66.6CPI6.06.35.06.46.66.6Current Account Balance (% of GDP)-10.3-8.6-4.4-2.8-3.3-3.6Financial and Capital Account (% of GDP)11.19.14.52.93.43.7Net Foreign Direct Investment (% of GDP)5.13.92.92.95.89.5M3 growth (in FY)15.618.812.76.1....Private sector credit growth (in FY)16.518.218.51.3....Revenue (% of GDP)14.817.216.717.618.018.3Expenditure (% of GDP)17.820.620.020.721.621.9Fiscal Balance (% of GDP)-3.0-3.4-3.3-3.1-3.6-3.6Arrears (% of GDP, in FY)4.36.56.46.3....Debt (% of GDP)33.634.537.437.638.239.2Notes: e = estimate, f = forecast.Source: International Monetary Fund (IMF) Report, World Bank Staff.Note: a. Net of treasury bills issued for liquidity management.b. Excludes interest payments due on external debt under negotiation for relief and domestic unpaid claims.1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved)The PDO of the Program supported by DPO-1 and DPO-2 was to (a) strengthen the country’s ability to bridge the financial gap in its power sector, (b) reduce the cost of power supply and promote private sector participation in the power sector, and (c) strengthen the policy and institutional framework for the management of the country’s natural gas resources.”The Program’s results indicators are shown in REF _Ref495828650 \h \* MERGEFORMAT Table 2.1.3 Revised PDO and Key Indicators, and Reasons/JustificationNo changes were made to the PDO between DPO-1 and DPO-2.DPO-2 made some changes to selected indicators with the aim to better align with the interpretation of the original objectives and capture progress toward them. It also added three new results indicators and revised the target year of all indicators from 2015 to 2016. REF _Ref495828650 \h \* MERGEFORMAT Table 2 presents the two sets of indicators indicating the concordance between them. When referring to results indicators of the DPO series, this ICR refers to the numbering shown in REF _Ref495828650 \h \* MERGEFORMAT Table 2 (for example, ‘Results Indicator 1’ is TANESCO’s operating deficit).The revised indicators are used in this ICR to evaluate the DPO series. When assessing the DPO series’ achievement of its PDOs, this ICR takes into account that the results indicators were designed for a series of three operations but only two out of three planned DPOs were approved.Table 2. Original and Adjusted Results Indicators of the Program#Indicator as Approved under DPO-1Indicator as Approved under DPO-2Baselinea (2012)Targeta (2016)Pillar 1: Strengthening the country’s ability to bridge the financial gap in its power sector1TANESCO operating deficit (US$, millions)TANESCO operating deficit (US$, millions)240(DPO-1: 244)502Amount of accumulated arrears to suppliers by TANESCO (US$, millions)TANESCO accounts (trade and other) payable (T Sh, billions)T Sh 707 billion(DPO-1: US$276 million)T Sh 300 billion(DPO-1:US$50 million)Pillar 2: Reducing the cost of power supply and promoting private sector participation in the power sector3TANESCO technical and non-technical losses in transmission and distribution (%)21184New generation capacity added to the system, cumulative (MW)Amount of gas-fired power generation capacity commissioned after 2011 (MW)105400(DPO-1: >600)5Average unit cost of power sales (US$/kWh)Average unit cost of power sales (US$/kWh)0.18b(DPO-1: 0.20)0.15(DPO-1: 0.13)6Number of bids for gas IPP power plants launched on a competitive basisNumber of bids for gas IPP power plants launched on a competitive basis017MEM documents on sector reforms published for public knowledge02Pillar 3: Strengthening the policy and institutional framework for the management of the country’s natural gas resources8Volume of gas produced (mmscfd)Volume of gas produced (mmscfd)78250(DPO-1: >290)9Amount of onshore proven natural gas reserves (Tcf)Amount of onshore proven natural gas reserves (Tcf)1.03.510Annual monitoring under the Natural Resource Charter initiativeNoYesNote: MEM = Ministry of Energy and Mining; mmscfd = Million Standard Cubic Feet per Day; Tcf = Trillion Cubic Feet.a. Values in brackets are from DPO-1. b. Updated statistics indicate that the baseline cost was 0.16 in 2012 and 0.18 in 2013.1.4 Original Policy Areas Supported by the ProgramThe DPO series supported three main policy areas, which also formed the elements of the PDO: (a) strengthening the country’s ability to bridge the financial gap in the power sector, (b) reducing the cost of power supply and promoting private sector participation in the power sector, and (c) strengthening the policy and institutional framework for the management of the country’s natural gas resources. Below is a description of the expected outcome, the prior actions completed under the two first operations, and the triggers that were to set the stage for the third operation.Pillar 1: Strengthening the country’s ability to bridge the financial gap in its power sectorExpected outcomes. Pillar 1 aimed to restore the financial sustainability of the sector by (a) raising TANESCO’s collected revenues close to a cost-reflective level and (b) arresting and eventually reversing the buildup of arrears. These outcomes, measured by the size of TANESCO’s operating deficit and the level of its arrears, were expected to be affected by measures under Pillar 1 (which focused on the revenue side of TANESCO’s income statement) as well as Pillars 2 and 3 (which tackled the cost of electricity supply).Prior actions and triggers. Under DPO-1 and DPO-2, the Government implemented measures to (a) increase tariffs and improve bill collection, including from Government consumers and (b) ensure fiscal transfers to TANESCO are determined based on TANESCO’s needs as well as transparent and consistent with an adequate macroeconomic policy framework. Triggers for DPO-3 (as approved under DPO-2) were a comprehensive national subsidy policy with principles for subsidizing the energy sector and a commitment to reduce the level of transfers to TANESCO in FY2014/15 to the level of not more than 2 percent of controlled total public expenditure.Pillar 2: Reducing the cost of power supply and promoting private sector participation in the power sectorExpected outcomes. Pillar 2 aimed to reduce the cost and risks related to power supply by (a) reducing system losses; (b) promoting private investment to overcome the supply shortage and ending the dependence on EPPs; (c) replacing costly and polluting oil-fired power generation with natural gas-based generation in Tanzania’s power mix; and (d) enhancing sector governance and performance through closer monitoring, enhanced access to information for all stakeholders, and the adoption of a participative and consultative approach to problem solving and policy formulation. These outcomes were to be measured by newly installed generation capacity, loss reduction, unit cost of power sales; launched tenders for private sector-owned generation capacity; and sector reform documents published by the MEM. Expected outcomes of Pillar 2 were interlinked with those of Pillars 1 and 3, in two main ways: First, as mentioned earlier, prior actions under this pillar were also expected to contribute to the outcomes of Pillar 1. Second, the additional upstream gas investments required for additional gas-fired power plants (Results Indicator 2) were to be enabled through measures under Pillar 3.Prior actions and triggers. Under DPO-1 and DPO-2, the Government adopted, and took measures to implement, a new strategic power sector policy. Implementation measures included (a) a performance contract between TANESCO and the MEM; (b) period publication of performance reports, financial audits, and procurement audits; and (c) launching a capacity-building program. The Government also prepared a road map for structural reforms, which was to be approved under DPO-3. Triggers for DPO-3 (as approved under DPO-2) were for (a) TANESCO to continue improving and reporting publicly on collection performance and on operational losses, (b) the Government to phase out 150 MW of EPPs, (c) TANESCO to implement the 2013 policy to promote private sector participation in power generation by launching at least one competitive bidding process for new gas-based generation capacity to diversify power generation sources in the country toward lower cost structure of the power sector, and (d) the Government to approve the road map for structural reforms of the energy sector (including the power and gas subsectors).Pillar 3: Strengthening the policy and institutional framework for the management of the country’s natural gas resourcesExpected outcomes. Pillar 3 aimed to expand gas supply to the sector by strengthening the policy and institutional framework of the upstream gas sector. This expected outcome was likely to contribute to the objectives of the other two pillars, as secure gas supply for its planned gas-fired generation capacity was critical to reduce costs (Pillar 2) and restore the balance of revenues and costs in the sector (Pillar 1).Prior actions and triggers. Under DPO-1 and DPO-2, the Government has put in place the first building blocks of the policy and institutional framework. The Government (a) adopted a Natural Gas Policy, based on a consultative process; (b) launched a program to adopt a Tanzania Natural Resource Charter; (c) elevated the natural gas agenda by including natural gas development in the mandate of the Cabinet committee on economic affairs and creating an interministerial senior task force; (d) cleared arrears with gas developers; (e) verified the amount of natural gas reserves in the United Republic of Tanzania’s territory; and (f) mandated the Tanzania Petroleum Development Company (TPDC) to publish its audited financial statements; its latest procurement audit reports, and its key performance indicators (KPIs). Triggers for DPO-3 (as approved under DPO-2) foresaw the completion of the major building blocks of the policy and institutional framework by (a) adopting a National Gas Utilization Master Plan, (b) preparing new natural gas legislation, and (c) and adopting a Petroleum Policy.Distinction between crisis response elements and medium- to long-term reform elements of the Policy and Results Matrix in this ICRIn the narrative and assessment, this ICR distinguishes crisis-response elements of the Policy and Results Matrix on the one side and medium- to long-term reform elements on the other. The three pillars group prior actions of the DPO series according to the objectives. However, for the purpose of the assessment carried out in this ICR it was considered useful to distinguish between short-term (crisis response) measures that yielded immediate results and reforms to the energy sector structure, sector policy framework, and sector institutions that could be expected to translate into tangible outcomes only in the medium to long term. The former includes measures on tariffs, arrears clearance, and fiscal transfers under Pillar 1 and also measures relating to performance contracts and performance audits under Pillar 2 and arrears clearance under Pillar 3. The latter includes most reform measures under both Pillar 2 and Pillar 3. This distinction was made because as laid out in sections 2–6 of this ICR, the assessment of adequacy of design and objectives of the DPO series was found to differ significantly between these two elements of the Policy and Results Matrix.1.5 Revised Policy AreasThe policy areas for the PDO program were not revised. The Policy and Results Matrix approved with DPO-2 included only relatively small changes to the prior actions of DPO-2 compared to the triggers approved with DPO-1, as summarized in REF _Ref495834142 \h \* MERGEFORMAT Table 5 in section 2.1.1.6 Other Significant ChangesThe Government and IDA did not proceed with the proposed third operation in the series because of delays in the implementation of the Program. On March 20, 2016, the programmatic series was considered lapsed because no subsequent operation was presented to the Board within 24 months after the Board approval of the previous operation in the series (in this case, DPO-2). A concept review meeting for a follow-up series of two operations (DPO-3 and DPO-4) was held in July 2016, but preparation of the follow-up DPO series was cancelled at the time of the ICR. Details on the reasons for the delays and the status of triggers for DPO-3 are provided in section 2.2. Key Factors Affecting Implementation and Outcomes2.1 Program PerformanceThe programmatic series consisted of two single-tranche DPOs, disbursed in full upon effectiveness, in the total amount of SDR 130.1 million. Key dates of the two operations are provided in REF _Ref501613556 \h \* MERGEFORMAT Table 3.Table 3. Key Dates of the DPO SeriesOperationDisbursed AmountApprovalEffectiveness DateClosingDPO-1SDR 64.9 millionMarch 26, 2013June 12, 2013June 30, 2014DPO-2SDR 65.2 millionMarch 21, 2014June 9, 2014June 30, 2015All prior actions were completed by the Government before the Board presentation of DPO-1 and DPO-2. REF _Ref496011725 \h \* MERGEFORMAT Table 4 shows the key objectives pursued and all prior actions completed ahead of the approval of each operation. None of the prior actions was reversed after Board approval. However, progress on some reform areas tackled by the prior actions either slowed down or was partially reversed in subsequent years (see section 3.2 for details).Table 4. Policy Matrix and Status of Prior ActionsPrior ActionStatusPillar 1: Strengthening the country’s ability to bridge the financial gap in its power sectorPrior action #1.1: TANESCO has increased its collection of revenues by 30% between CY2011 and CY2012, through tariff increase and improved collections of pleted ahead of DPO-1Prior action #1.2: To improve the financial conditions of TANESCO in FY2013, (a) EWURA reviewed the current electricity tariffs; (b) the Government has identified the amount of subsidies to be transferred from the Government budget to TANESCO based on, among others, the abovementioned tariff review; and (c) the Government has paid T Sh 67 billion by June 2012 to clear its arrears to TANESCO for electricity consumed by governmental entities.Prior action #2.1: TANESCO has implemented new tariffs, approved by EWURA in December 2013 in order to increase its pleted ahead of DPO-2Prior action #2.2: The Government had created in its approved FY2013/14 budget a specific code with funds for transfers to TANESCO to improve fiscal transparency.Prior action #2.3: The Government has taken actions to reduce the level of transfers to TANESCO from the level of FY2012/13 and has committed that the level will not exceed 2.5 percent of controlled total expenditure in FY2013/14.Pillar 2: Reducing the cost of power supply and promoting private sector participation in the power sectorPrior action #1.3: The Government adopted a policy aiming to reduce the cost of power supply, improve the operational efficiency of the power sector, and promote the participation of the private sector in power generation through a competitive and transparent bidding process that respects the national laws and the best practices of international environmental and social pleted ahead of DPO-1Prior action #1.4: TANESCO and the Ministry of Energy and Mining signed a performance contract, which includes measurable key performance indicators for TANESCO to enhance its efficiency in CY2013.Prior action #1.5: TANESCO published (a) periodic performance reports prepared by TANESCO against the key performance indicators set out in the abovementioned performance contract between TANESCO and MEM; (b) its latest annual audit report issued by NAO; and (c) its latest annual performance report issued by PPRA.Prior action #2.4: The Government and TANESCO have implemented the initial phase of the 2013 Policy for Private Sector Participation in Power Generation through Competitive Processes by launching PPP capacity-building programs for (a) screening and conducting due diligence; (b) financial structuring; (c) structuring processes for selecting developers and implementing transactions; (d) preparing legal and regulatory documents; and (e) managing government and public corporation fiscal pleted ahead of DPO-2Prior action #2.5: The Government has adopted the recommendations of the Presidential Big Results Now (BRN) Initiative to develop a road map for structural reforms of the energy sector and has established a Ministry Delivery Unit within MEM to oversee the implementation of the recommendations.Pillar 3: Strengthening the policy and institutional framework for the management of the country’s natural gas resourcesPrior action #1.6: The Government completed a nationwide public consultation process for adopting its Natural Gas pleted ahead of DPO-1Prior action #1.7: The Government adopted measures, including clearing arrears with gas developers by paying them US$106.9 million by December 2012 and verifying the amount of natural gas reserves in the United Republic of Tanzania’s territory, which will enable higher production of natural gas and its use in power generation after CY2014.Prior action #2.6: The Government has adopted the Natural Gas pleted ahead of DPO-2Prior action #2.7: The Government has launched a program to adopt a Tanzania Natural Resource Charter and has established an expert panel to oversee the program.Prior action #2.8: The Government has established a top-level institutional mechanism to enhance interministerial coordination by mandating the Cabinet committee on economic affairs to handle the natural gas agenda and creating an interministerial senior task force on natural gas.Prior action #2.9: TPDC has published on its website its latest audited financial statement, latest procurement audit report, and key performance indicators.Note: EWURA = Energy and Water Utilities Regulatory Authority; NAO = National Audit Office; PPP = Public-Private Partnership; PPRA = Public Procurement Regulatory Authority.Minor adjustments were made to the DPO series’ Policy and Results Matrix during preparation and appraisal of DPO-2. The Government had made progress on all results indicators approved with DPO-1 (listed in REF _Ref495828650 \h \* MERGEFORMAT Table 2), and showed continued resolve to address the crisis in the power sector. Reflecting the continuity of the implementation of the Program, the Policy and Results Matrix approved with DPO-2 included only relatively small changes to the prior actions of DPO-2 compared to the triggers approved with DPO-1, as summarized in REF _Ref495834142 \h \* MERGEFORMAT Table 5 below. Changes to the results indicators were summarized in REF _Ref495828650 \h \* MERGEFORMAT Table 2 above.Table 5. Prior Actions for DPO-2 Compared to Triggers for DPO-2 as Approved under DPO-1#Trigger for DPO-2, as Approved under DPO-1Prior Action for DPO-2CommentPillar 1: Strengthening the country’s ability to bridge the financial gap in its power sector2.1TANESCO to increase revenues through a combination of better bills collection, reduction in losses, and, if necessary, requesting EWURA to adjust tariffs.TANESCO has implemented new tariffs, approved by EWURA in December 2013 in order to increase its revenue.Trigger modified to capture the stronger action taken by the Government (approved tariff increase) and edited for clarity.2.2To improve fiscal transparency, the Government has provisioned in the FY2014 budget contingency funds that can be used to address the financing gap in TANESCO.The Government had created in its approved FY2013/14 budget a specific code with funds for transfers to TANESCO to improve fiscal transparency.Substance strengthened (specific budget line instead of contingency fund) and trigger language edited for clarity.2.3In FY2014, Government shall use a combination of tariff increases, commercial borrowing, and government subsidies to cover the financing gap in TANESCO. Government subsidies shall not exceed 2.5 percent of total expenditures (excluding consolidated funds services, wages, and development foreign).The Government has taken actions to reduce the level of transfers to TANESCO from the level of FY2012/13 and has committed that the level will not exceed 2.5 percent of controlled total expenditure in FY2013/14.Substance maintained, but trigger language edited for clarity.Pillar 2: Reducing the cost of power supply and promoting private sector participation in the power sector2.4The Government, and TANESCO as appropriate, have adopted concrete measures (including training, hiring transaction advisers if necessary, and completing necessary studies) to improve its technical and commercial capacity to develop PPP projects in the energy sector through transparent and competitive process, as well as to evaluate unsolicited proposals (where they have merits), including subjecting them to a competitive process.The Government and TANESCO have implemented the initial phase of the 2013 Policy for Private Sector Participation in Power Generation through Competitive Processes by launching PPP capacity-building programs for (a) screening and conducting due diligence; (b) financial structuring; (c) structuring processes for selecting developers and implementing transactions; (d) preparing legal and regulatory documents; and (e) managing government and public corporation fiscal risks.Substance maintained, but trigger language edited for clarity.2.5The Government has completed an Energy Sector Review whose objective is to recommend structural reforms aimed at improving power sector performance (including efficiency and accountability), to comply with the Electricity Act (2008, including part viii), and has approved its recommendations.The Government has adopted the recommendations of the Presidential Big Results Now (BRN) Initiative to develop a road map for structural reforms of the energy sector and has established a Ministry Delivery Unit within MEM to oversee the implementation of the recommendations.Substance maintained and strengthened (establishment of delivery unit) and trigger language edited for clarity.Pillar 3: Strengthening the policy and institutional framework for the management of the country’s natural gas resources2.6The Government approves the Natural Gas Policy.The Government has adopted the Natural Gas Policy.Trigger language edited for clarity.2.7Gas Act to be submitted to Parliament after participative public consultations, including (a) transparent and participative regulatory practices and (b) access to information and participative monitoring by stakeholders.The Government has launched a program to adopt a Tanzania Natural Resource Charter and has established an expert panel to oversee the program. Trigger was replaced. The Gas Act was moved to DPO-3 because by the time of DPO-2 it had not been submitted to the Parliament as an extended period was required to conduct public consultations. At the same time, the Government implemented an equally significant action in strengthening the policy and institutional framework for the management of the natural gas resources by launching the Natural Resource Charter initiative. This replacement was to accommodate those latest developments while maintaining the strength of the overall program under DPO-2.2.8The Government establishes a top-level institutional mechanism to enhance intersectoral cooperation on the gas policy agenda.The Government has established a top-level institutional mechanism to enhance interministerial coordination by mandating the Cabinet committee on economic affairs to handle the natural gas agenda and creating an interministerial senior task force on natural gas. Trigger edited for clarity.2.9TPDC publishes (on its website and in print) its internal periodic performance reports, latest audit annual report of the NAO and latest annual performance report of the PPRA.TPDC has published on its website its latest audited financial statement, latest procurement audit report, and key performance indicators. Trigger edited for clarity.Progress toward implementing triggers for DPO-3 was delayed during 2014–2016 and fell short of the expectations in some areas, causing the series to lapse in early 2016. Completion of all triggers and Board approval of DPO-3 was originally envisioned by early 2015. However, only one trigger (#3.2) was met by then. Several others were met during 2015 and 2016, as summarized in REF _Ref496011742 \h \* MERGEFORMAT Table 6, while four triggers were not met by the time of the ICR. Consequently, the series lapsed 24 months after Board approval of DPO-2, on March 24, 2016.Table 6. Status of Triggers of DPO-3 (as approved with DPO-2) at the time of the ICRTrigger for DPO-3StatusTrigger #3.1: The Government adopts a comprehensive national subsidy policy, which defines principles for providing subsidies in the energy sector.Not met. No national subsidy policy has been adopted. Meanwhile, the Government has eliminated subsidies for capacity charges, fuels, and other operating expenses but continues to fund TANESCO’s capital expenses.Trigger #3.2: The Government has committed to reduce the level of transfers to TANESCO in FY2014/15 to the level not more than 2 percent of controlled total public expenditure.Met, without delay. In FY2014/15 the Government provided transfers of US$33 million (net of taxes) to TANESCO, which is equivalent to around 1 percent of controlled total public expenditures. Net transfers in FY2015/16 and FY2016/17 were US$7 and US$3 million, respectively.Trigger #3.3: TANESCO continues to improve and report publicly on collection performance and on operational losses and develops a plan to meet the targets set by the EWURA order in December 2013.Met, albeit with delay. Bill collection increased from 90% in FY2014/15 to 101% in FY2015/16 and 96% in FY2016/17. Technical and non-technical losses in the distribution grid fell from 19% in 2012 to 12.3% in FY2015/16 and 10.4% in FY2016/17, meeting the 2013 EWURA order target of 15.1%.Trigger #3.4: The Government phases out Emergency Power Projects by 150 MW without lowering the reliability of power supply delivery.Met, albeit with delay. EPP capacity in use declined from 317 MW in 2012 and 2013 to 162 in FY2015/16 and 0 in FY2016/17. This has been achieved without lowering the reliability of power supply delivery but the sector remains highly exposed to supply shortages in the case of technical failures or a major drought.Trigger #3.5: TANESCO implements the 2013 policy to promote private sector participation in power generation by launching at least one competitive bidding process for new gas-based power project(s) to diversify power generation sources in the country toward lower cost structure of the power sector.Not met. The Government chose to implement Kinyerezi I (including extension) and Kinyerezi II as public projects. The Government’s policy toward private sector participation in future generation projects is unclear.Trigger #3.6: The Government approves the road map for structural reforms of the energy sector (including the power and gas subsectors), which includes specific structural measures aimed at improving its governance and overall efficiency and time-bound implementation schedule, and initiates its implementation.Partially met. The MEM adopted and published on its website the Electricity Supply Industry Reform Strategy and Roadmap in June 2014, which is consistent with recommendations of the energy lab of Big Results Now. However, it excludes the natural gas subsector and implementation of the road map has not proceeded as per the envisioned implementation schedule. The Government’s policy toward implementation of the road map is unclear.Trigger #3.7: The Government adopts a National Gas Utilization Master Plan (NGUMP).Not met. The Government has prepared the draft NGUMP that has not been shared widely by energy sector stakeholders.Trigger #3.8: The Government prepares a Gas Bill to the Parliament.Met, albeit with delay. The Oil and Gas Revenue Management Act 2015 and the Petroleum Act were passed by the Parliament in June 2015 following the adoption of the Natural Gas Revenue Management Policy adopted by the Cabinet in May 2015.Trigger #3.9: The Government prepares and adopts a Petroleum Policy.Met, albeit with delay. The Petroleum Policy was adopted by the Cabinet in 2014. Following the adoption of the Petroleum Policy, the Petroleum Act 2015 was passed by the Parliament in June 2015, signed by the President in October 2015, and gazetted thereafter. The substance of the act still needs to be supplemented with the establishment of an effective sector institutional framework and the gradual introduction of an internationally benchmarked, prioritized body of regulations to implement the act. The act was amended in July 2017 following the parliamentary inquiry into mining contracts.2.2 Major Factors Affecting ImplementationDesign Factors Affecting Program Implementation and OutcomesThe Government was highly committed to resolve the 2011–2013 electricity supply crisis and associated financial difficulties of TANESCO, leading to strong implementation performance up to Board approval of DPO-2. The objectives, prior actions, and results indicators were very closely aligned with the Government’s response to the electricity supply crisis. Major tariff hikes, which raised per-unit revenues of TANESCO by 35 percent in 2012 and 30 percent in 2014, underscored the Government’s commitment to implement difficult reforms.The World Bank’s DPO series was part of a concerted donor effort to support the Government’s response to the fiscal and macroeconomic implications of the electricity supply crisis, reducing the risk of reform slippage, especially during 2012–2014. The Government’s reform response was developed in close consultation with stakeholders including the energy sector donor consultation group. A Standby Credit Facility (SCF) arrangement of the IMF (2012–2014; SDR 149 million) included structural benchmarks on TANESCO’s financial recovery—complementary to the DPO series—and closely monitored fiscal transfers and domestic borrowing for the electricity sector. While overall program performance was ‘mixed’, the third and final SCF review noted that “[s]ignificant progress was achieved in addressing financial difficulties of the energy sector” (p. 9). The Government’s power sector reform program also received support from the African Development Bank (AfDB) in the form of a three-phase budget support operation (2015–2017; SDR 100 million in total).The crisis-response elements of the Policy and Results Matrix was informed by recent analytical work and global experience and had a clear line of sight between prior actions and results indicators. The short-term reform elements supported by the DPO series, which included tariff reforms, fiscal transfers, and performance agreements between the MEM and TANESCO, were informed by extensive, up-to-date analysis, and lessons learned from the World Bank’s reform and crisis-response experience in the power sector. Relevant analytical work included (a) the Power System Master Plan (PSMP 2012), (b) a short-term financial assessment (2012–2015) of TANESCO, (c) the Big Results Now Energy Lab Report (2013), and (d) the Government of Tanzania-Energy Development Partner Group—Joint Energy Sector Review (2013). Prior actions and objectives were clearly aligned and there was a clear line of sight between prior actions and results indicators.In contrast, the medium- to long-term reform elements of the Policy and Results Matrix carried high implementation risks because they were backloaded, heavy on commitments and light on implementation, and missed a clear line of sight between prior actions and results indicators. Prior actions and triggers under Pillars 2 and 3 called for fundamental reforms to the power and gas sectors but envisioned that the analytical foundations and buy-in of stakeholders would be established, to a large extent, during implementation. The program also envisioned that Government commitments—in the form of policies, plans, and road maps—would be followed by reform implementation measures above and beyond the measures laid out in the DPO Policy and Results Matrix. As outlined in more detail in section 3, Program progress stalled on several fronts after the immediate pressure of the crisis eased in 2015.The World Bank took an informed risk by engaging with the Government on natural gas reforms (supported by Pillar 3) without significant prior sector dialogue, because of the strategic importance of a strong upstream natural gas policy framework for the development of Tanzania’s energy sector. Unlike in the power sector pillars, Pillar 3 of the DPO series could not build on solid analytical foundations and an established sector dialogue. Only after initiation of the preparation of the DPO series did the World Bank engage in deeper sector dialogue through a natural gas ‘scoping mission’, co-led by the World Bank and including six other DPs, which developed the policy and institutional actions to be undertaken by the authorities. However, the World Bank’s senior management assessed the risk of not engaging on such an important sector as higher than the Program’s risks. The technical risk assessment was adequate but important governance risks were missed; the political economy of power sector reform in particular was poorly reflected in the design of the medium- to long-term reform measures in the Program. The most important technical risks that materialized had been correctly identified, including hydrology, global energy prices, and exchange rate volatility, and the appraisal documents rightly noted that these risks could not be fully mitigated within the Program. However, risks relating to the governance of the Program and the political economy of power sector reform could have been better reflected in the length, scope and ambition of the DPO series. Specifically, these risks included (a) the Government’s reform commitment beyond the immediate crisis, (b) insufficient stakeholder consensus on structural sector reforms (the exact nature of which was to be determined under the Program), and (c) the risks associated with designing a reform program that spans election cycles.External Factors Affecting Program Implementation and OutcomesDuring implementation, progress toward the envisioned outcomes was affected by a number of external factors, including major macroeconomic and governance risks that materialized. The main external factors of the Program that affected implementation are summarized in REF _Ref497222164 \h \* MERGEFORMAT Table 7, grouped by (a) sector developments outside of the Program, (b) governance factors, and (c) macroeconomic factors.Table SEQ Table \* ARABIC 7. Major External Factors of the Program Affecting ImplementationFactorsImpact on Program ImplementationSector developments outside of the ProgramAccess agenda becoming priority: To promote access, in early 2013, the Government reduced connection fees by 30% to 90%, and instructed TANESCO to increase its customers base to 1,500,000 by 2015 and target 250,000 new connections per year.Investments in new connections and related distribution grid strengthening were financed mainly from TANESCO’s internal cash funds, limiting the company’s ability to pay off arrears (thus affecting Results Indicator 2)Electricity demand growth slowdown: Slower than expected, demand growth in FY2012–17 averaged 7.6%, below the 10% growth per year estimated during appraisal of DPO-1.Improved balance between demand and supply and lessened pressure to commission new gas power plants (Results Indicator 4)Hydrology improvements. Hydrology improved after drought in FY2011–13 and was above average in FY2015 and FY2017. FY2016 hydrology was at similar level as FY2011–13.Decrease in TANESCO’s generation cost during FY2015 and FY2017 (Results Indicator 5)Improved balance between demand and supply and lessened pressure to commission new gas power plants (Results Indicator 4)Global energy price decline. Global oil and liquefied natural gas (LNG) prices declined after mid-2014, subsequently remained subdued through the end of 2017.Slowdown in investor interest in natural gas exploration and production, especially offshore (Results Indicator 8)Impact on TANESCO’s generation cost was favorable but more than cancelled out by exchange rate depreciation from FY2015 onwards (Results Indicators 1 and 5)Gas pipeline delay. Completion of the National Natural Gas Infrastructure Project (NNGIP), a core element of the Government strategy to increase natural gas-fired power generation, was delayed by one year (completed October 2015)Delay in the availability of gas for new power plants (especially Kinyerezi I) and fuel switching of existing power plants (Results Indicator 4)Governance factorsLegal controversies. The inquiry into the sale of the Independent Power Tanzania Ltd (IPTL) plant in 2014, controversies surrounding the structure of payments to IPPs and EPPs, and the mining sector inquiry in 2017 both led to removal or suspension of prolonged periods of time of MEM officials including key leadership positions.Delay in implementation of sector reform program under Pillar 2 (especially Results Indicators 6 and 7) as well as difficulties in maintaining the strategic policy dialogue for DPO-3 in the absence of the MEM leadership team2015 election. Parliamentary and presidential elections held in October 2015 led to change in the Government.Reorientation of priorities for sector reform program under Pillar 2 (especially Results Indicators 6 and 7)Macroeconomic factorsGrowth and inflation: GDP growth remained favorable at around 7 percent throughout the implementation period. Inflation declined after FY2012 and remained around 5–6 percent in FY2013–FY2016/17.Improvements in households’ available income, cushioning the impact of tariff increases (indirectly affecting Results Indicator 1)Exchange rate depreciation: Major exchange rate depreciation during FY2015 (8 percent) and FY2016 (24 percent). Relatively stable before and after.Increase in value of TANESCO’s arrears to suppliers (which are mostly denominated in U.S. dollars) by around 30 percent (Results Indicator 2)Impact on TANESCO’s generation cost was unfavorable and only partially cancelled out by decline in global energy prices from FY2015 onwards (Results Indicators 1 and 5)Fiscal consolidation: The Central Government’s overall fiscal consolidation, as a result of lower-than-expected domestic revenue collection, diminishing aid disbursements, and higher investment in infrastructure projects, posed a challenge for the energy sector in receiving sufficient public funds to scale up necessary investments. Arrears to contractors, suppliers and pension funds by the Government reached over 6 percent of GDP at the end of FY2015/16.The Central Government’s fiscal consolidation slowed down investment financing from the Ministry of Finance and Planning (MOF) for TANESCO’s capital investment programPhaseout of direct budget transfers to TANESCO even though TANESCO’s net income remained negative.2.3 Monitoring and Evaluation (M&E) Design, Implementation and UtilizationM&E design:Results Framework. The Program’s results indicators and target values, identified at appraisal of DPO-1 and revised at DPO-2, were adequately linked to the PDO. The Results Framework included more outcome indicators (for example, Results Indicators 1–5 and 8–9) than output indicators (Results Indicators 6, 7, and 10). The focus on outcomes was adequate for the crisis-response elements of the Program (for example, tariff reforms and phase-out of EPPs) but less appropriate for the medium- to long-term elements of the Program. In the case of the latter, the emphasis on outcomes blurred the line of sight between prior actions and results indicators (for example, the link between the natural gas policy framework and the volumes of proven gas reserves and gas produced). Output indicators would have been more adequate for these prior actions. Results indicators were appropriately defined, measurable, and did not require data collection efforts beyond the financial and performance reporting of the MEM and TANESCO, ensuring that (a) monitoring of the indicators relied on and further built capacity of country systems (b) it could continue beyond the Program period, and (c) this ICR had access to reliable information on all results indicators.Roles and responsibilities. The MOF was notionally responsible for overseeing the M&E of the Program,?but was to draw on the assistance of the MEM, TANESCO, and the energy sector regulator, EWURA. This setup was adequate in view of the selected results indicators. Key Program results indicators were also included in (a) the budget support framework used by the Government and DPs over the past decade in Tanzania, (b) the IMF program, and (c) the World Bank-led annual Public Expenditure Review process. This close integration of M&E efforts across the World Bank’s and other DPs’ engagement benefited M&E implementation.M&E implementation:Results monitoring. The Government and the World Bank continuously monitored progress against the main financial and performance indicators of the power sector, which included the results indicators of the DPO series, although information on reform progress is not always reflected on time. Financial monitoring of TANESCO in particular still needs to become more timely. On the World Bank side, two Implementation Status and Results Reports (ISRs) were filed, in April 2014 and August 2015, but they did not give a thorough account of the reasons for delays and postponement of the DPO-3, in part reflecting the fact that the M&E framework’s choice of outcome indicators over output indicators was inadequate for monitoring the progress of medium- to long-term reforms (see above). However, overall, monitoring of the Results Framework was implemented adequately and at the time of ICR, data on all indicators were readily available.Change in financial year affecting M&E implementation. The M&E framework was set up to measure progress in TANESCO’s financial years, which were equal to calendar years at the time of appraisal. However, TANESCO soon switched to a new financial year from July 1 to June 30 to align with the Government’s fiscal year, starting in FY2015/16. The transition year FY2014/15 was an 18-month period. This ICR adopts TANESCO’s financial years for the measurement of the results indicators.M&E utilization. The M&E framework was used in the implementation of the Program and decisions on the World Bank’s DPO series in an adequate manner. On the Government side, financial indicators informed Government decisions, including tariff reforms. On the World Bank side, a midterm review in June 2015 came to the conclusion that—at that time—only three out of the nine triggers were met (#3.2, #3.8 and #3.9), leading to the decision of not proceeding with DPO-3 until after the general elections in October 2015.2.4 Expected Next Phase/Follow-up OperationFor IDA18 (FY2018–20), the Government and the World Bank are in dialogue on a follow-up operation to continue support in specific policy areas of the Program, in particular TANESCO’s financial recovery, complemented by lending in other areas of the Government’s energy sector development program. As of November 2017, a particular emphasis of the operation will be on resolving the problem of the legacy payment arrears. Other ongoing and pipeline operations of IDA in the sector include financing for access, transmission (including interconnections with neighboring countries), and capacity building.3. Assessment of Outcomes3.1 Relevance of Objectives, Design and ImplementationOverall Rating: Substantial(a) Relevance of Objectives: SubstantialThe objectives of the crisis-response elements of the Policy and Results Matrix—to restore TANESCO’s financial viability and reduce fiscal risks—were core to the Government’s and the World Bank’s strategy in the energy sector. From initial approval through to closing of the series, the objectives of improving the financial situation of the power sector and phasing out EPPs to reduce the cost of energy supply (that is, Pillar 1 and parts of Pillar 2) were closely aligned with (a) Tanzania’s National Strategy for Growth and Poverty Reduction 2025 (Mkakati wa Kukuza Uchumi na Kupunguza Umaskini Tanzania [MKUKUTA] II), (b) Tanzania’s five-year development plans (FYDP I 2011/12–2015/16 and FYDP II 2015/16–2020/21), (c) the World Bank’s Country Assistance Strategy (CAS) for FY2012–FY2015, and (d) the World Bank’s energy sector strategy.Initially, the objectives of the medium- to long-term reform elements of the Policy and Results Matrix reflected shared priorities between the Government and the World Bank, but their relevance to the Government was less clear at the time of the ICR. At the time of appraisal, there was strong Government commitment to the objectives of promoting private sector participation in power generation (Pillar 2) and strengthening the policy and institutional framework for natural gas utilization (Pillar 3). These objectives were translated into concrete policy commitments and action plans with the Electricity Supply Industry Reform Strategy and Roadmap 2014–2025 of 2014 and the National Energy Policy of 2015. However, reform implementation toward these two objectives slowed down after 2014—in part due to the IPTL inquiry, skepticism within the Government about the structure of payments to IPPs and EPPs, and preparations for the election of 2015—and has not picked up since then. FYDP II, prepared by the new Government, strongly emphasizes energy infrastructure development and includes certain elements of the Electricity Supply Industry Reform Strategy and Roadmap 2014–2025, but puts less emphasis on the objectives of private sector participation and strengthening the policy and institutional framework for natural gas. At the time of the ICR, new controversies surrounding the IPTL power plant and contracts in the mining industry have introduced additional uncertainty about the ways in which the Government handles contracts with private investors on large investments, including in the power and natural gas sectors, thus potentially affecting the relevance of the DPO series’ objectives relating to the private sector.The DPO series’ objectives were aligned with Tanzania’s Nationally Determined Contribution (NDC) to the Paris Agreement. Tanzania’s NDC, submitted in 2015, builds on the reform directions of the Program, including in the following two priority mitigation measures specified in the NDC: (a) investing in energy diversification to ensure overall energy security for economic development through enhanced availability, affordability, and reliability while contributing toward energy emissions intensity reduction over time and (b) expanding the use of natural gas for power production, cooking, transport, and thermal services through improvement of natural gas supply systems throughout the country.Acceleration of TANESCO’s electrification program became a core objective for the Government in the power sector from 2013 onwards and would have to be part of any comprehensive energy sector reform program initiated at the time of the ICR, but was not reflected in the objectives and design of the evaluated DPO series. To promote electricity access, in early 2013, the Government reduced connection fees by 30 percent to 90 percent, and instructed TANESCO to increase its customers base to 1,500,000 by 2015 and target 250,000 new connections per year. While the Rural Energy Agency (REA) was to finance rural and peri-urban connections; a substantial share of new connections was to be financed from TANESCO’s own funds. This put pressure on TANESCO’s cash flow and limited the company’s ability to pay back arrears. However, this scale-up in access investment was not sufficiently considered in the design of the DPO, especially its measures and targets relating to arrears.(b) Relevance of Design: SubstantialThe choice of a programmatic DPO series and the selection of prior actions were adequate for the crisis-response elements of the Program. The electricity supply crisis required the Government to take difficult decisions in a short time and follow up and avoid reversal over a period of several years. The programmatic DPO was the right instrument to support such reforms.Through careful design of the prior actions, the DPO series enabled the Government to internalize difficult policy trade-offs. Enough flexibility was built into the design of the Policy and Results Matrix to allow the Government’s deliberation on important but difficult policy decisions to follow due course. This was achieved by agreeing with the Government on the objective and desired outcomes of the prior actions and triggers, while leaving the resolution of policy trade-offs to the Government. For instance, the Triggers for DPO-2 under Pillar 1 specified the fiscal reform objective (a cap on transfers to TANESCO), which but left the exact nature of policy actions. During preparation of DPO-2 the language of Prior Action 2.1 was then adjusted to account for the outcomes of the Government’s deliberation.However, the DPO series’ approach to bringing arrears under control would be inadequate at the time of the ICR. The design of the DPO series was based on a careful analysis of TANESCO’s profitability (net income) under different scenarios. Beyond immediate measures (for example, clearance of Government arrears to TANESCO), less attention was paid in the analysis and the design of the Policy and Results Matrix to TANESCO’s cash flow and potential impacts on arrears from reduced Government transfers, the changes in Government subsidies for connections and connection targets (see above), or policy slippage in the shift toward private sector-owned generation. While there was consistent logic behind the Program’s strategy to reduce arrears, the DPO series would have benefited from separate analysis and risk mitigation measures in this regard. More careful analysis of TANESCO’s cash flow under different scenarios would be needed to inform renewed support by DPs to resolve TANESCO’s arrears.The medium- to long-term reform elements of the Program would have benefited from less backloading and a clearer line of sight between prior actions and results indicators. As outlined in more detail in section 3, Program progress stalled on several fronts after the immediate pressure of the crisis eased in 2015. This hindered achievement of the Program’s results indicators even where outputs of the prior actions were achieved.The design of the DPO series could have been more resilient to changes in the Government priorities if the PDO of the series had solely focused on ends (for example, security of supply or financial sustainability), rather than means (for example, private sector participation). Reference in the PDO to private sector participation in particular limited the World Bank’s ability to adjust to changes in the Government’s priorities after the completion of the second DPO.(c) Relevance of Implementation: HighImplementation arrangements were highly relevant in that they emphasized ongoing dialogue and the mobilization of technical support, which were critical in view of the complexity of attempted power sector and natural gas upstream reforms. The ongoing technical assistance engagement, including several activities for which the World Bank team raised trust fund resources, helped maintain the technical dialogue despite a transition in Government and several changes in sector leadership during the implementation of the DPO series.The decision not to proceed with the third operation in the series within the two years after Board approval of DPO-2 was adequate. The decision reflected an adequate adjustment to changing context and Government priorities.Close alignment of the DPO series with DPs’ programs was critical for the success achieved during implementation and parallel technical assistance by the World Bank provided much-needed capacity-building support to implement the Program. The close alignment with the parallel IMF program (2012–2014) and the World Bank’s ESCBP were essential for achieving the results of the Program.3.2 Achievement of Program Development ObjectivesRating: ModestAchievement of the PDO is assessed as Moderately Unsatisfactory on the basis of the progress on key indicators. The PDO of the program was to (a) strengthen the country’s ability to bridge the financial gap in its power sector, (b) reduce the cost of power supply and promote private sector participation in the power sector, and (c) strengthen the policy and institutional framework for the management of the country’s natural gas resources. As laid out below in detail and summarized in REF _Ref498161785 \h \* MERGEFORMAT Table 8, the DPO series performed well on Results Indicators 1, 3, and 5, which relate to TANESCO’s operating deficit, technical losses, and cost of supply. The DPO series also achieved Results Indicator 7 (documents published on sector reforms). However, the series only made partial progress toward Indicators 4, 8, and 9, and did not make any progress (or even reversed progress) on Results indicators 2, 6, and 10.Table SEQ Table \* ARABIC 8. Performance of Program against DPO Target Indicators#Indicator2012 (Baseline)Target set in 2013Target set in 2014Actual FY2015/16Actual FY2016/171TANESCO operating deficit/(profit) (US$ million)240505092(82)a2TANESCO accounts (trade and other) payable (T Sh billion)707—3001,1871,331a3TANESCO technical and non-technical losses in transmission and distribution21—1818.316.44Amount (in MW) of gas-fired power generation capacity commissioned105>600400255255 5Average unit cost of power sales (US$/MWh)0.180.130.150.120.09a6Number of bids for gas IPP power plants launched on a competitive basis011007MEM documents on sector reforms published for public knowledge0—2228Volume of gas produced (mmscfd)78>290250102b132c9Amount of onshore proven natural gas reserves (Tcf)1.03.53.51.4d1.2e10Annual monitoring under the Natural Resource Charter initiativeNo—YesNoNoNote: In 2014, TANESCO’s financial year was changed from January–December (until FY2013) to June–June. (starting FY2016). The transition fiscal year had 18 months (January 2014 to June 2015). a Based on unaudited draft financial statements of TANESCO. b year to December 31, 2015; d year to December 31, 2016; d as of April 2015; e as of December 31, 2016.An ex post analysis of the results chain of the Program is presented in REF _Ref498165918 \h \* MERGEFORMAT Table 9. The table presents, for each pillar, a summary of the implemented prior actions and their immediate outputs; other factors affecting the results indicators; and the Program’s performance toward the results indicators. The results chain for each pillar is discussed below in details.Table SEQ Table \* ARABIC 9: Efficacy and Causal Chain of the Series Reform ProgramPrior Actions and Outputs(DPO-1 and DPO-2)Other Factors Affecting Results IndicatorsPerformance toward Results IndicatorsObjective 1: Strengthening the country’s ability to bridge the financial gap in its power sector(Efficacy Rating: Modest)Two tariff increases in January 2012 and January 2014Improvements in bill collection from conventional meters and increased use of prepaid metersReduction of Government arrears to TANESCOImproved transparency and reduction of Government transfers to TANESCODuring the Program period, the Government pursued fiscal consolidation amid lower-than-expected domestic revenues and slow aid disbursements, reducing the fiscal resources available to support TANESCO’s investment programMajor exchange rate depreciation during FY2015 (8 percent) and FY2016 (24 percent) increased the value of TANESCO’s arrears to suppliers (which are mostly denominated in U.S. dollars) and its fuel costHydrology improved after the drought in FY2011–FY2013 and was above average in FY2015 and FY2017 (FY2016 hydrology was poor again), leading to decrease in TANESCO’s generation costAccess agenda became priority after 2013 for the Government, which reduced connection fees and instructed TANESCO to increase its customers base to 1,500,000 by 2015 and target 250,000 new connections per year, to be financed mainly from TANESCO’s internal cash funds, limiting the company’s ability to pay off arrearsTANESCO turned around its operating results, improving its operating margin from ?21% in FY2012 and ?41% in FY2013 to 13% in FY2015, ?14% in FY2016, and 12% in FY2017Arrears continued to increase: trade and other payables surged from a total of T Sh 472 billion (US$298 million at that time) at the end of FY2011 to T Sh 980 billion (US$565 million) in FY2015, T Sh 1,187 billion (US$538 million) in FY2016, and T Sh 1,331 billion (US$605 million) at the end of FY2017Objective 2: Reducing the cost of power supply and promoting private sector participation in the power sector(Efficacy Rating: Modest)New strategic power sector policyRoad map for structural reformsCapacity-building programPerformance contract between TANESCO and the MEMRegular publication of performance reports (including bill collection and technical/non-technical losses), financial audits, and procurement auditsParliamentary and presidential elections held in October 2015 led to change in Government, reorientation of priorities and delay in implementation of sector reform program under Pillar 2The inquiry into the sale of IPTL private power plant in 2014 and the mining sector inquiry in 2017 both led to removal or suspension of prolonged periods of time of MEM officials including key leadership positions, causing delays in implementation of sector reform program under Pillars 2 and 3Completion of the NNGIP pipeline, a core element of the Government strategy to increase natural gas-fired power generation, was delayed by about one year, which delayed the availability of gas for new power plants (especially Kinyerezi I) and fuel switching of existing power plantsGood hydrology in FY2015 and FY2017 as well as slower-than-expected demand growth (7.6% compared to estimated 10% per year]) improved balance between demand and supply and lessened pressure to commission new gas power plantsTechnical and non-technical losses in transmission and distribution fell from 22.4%in FY2011 and 24.7% in FY2013 to 16.4% in FY2017Installed gas-fired generation capacity increased by 150 MW in 2016 and another 425 MW are under construction, out of which 30MW are expected to be commissioned by the end of 2017Average cost of supply has fallen back at pre-crisis level (US?9.2 per kWh in FY2017 compared to US?8.4 per kWh in FY2010 and US?18.4 per kWh in FY2013)No new tenders for private sector-owned generation capacity were issuedObjective 3: Strengthening the policy and institutional framework for the management of the country’s natural gas resources(Efficacy Rating: Modest)Adoption of Natural Gas PolicyLaunch of a program to adopt a Tanzania Natural Resource CharterInclusion of natural gas in the mandate of the Cabinet committee on economic affairs and creation of an interministerial senior task forceClearing of arrears with gas developersVerification of the amount of natural gas reservesPublication of TPDC’s audited financial statements, its latest procurement audit reports, and its key performance indicatorsNew natural gas legislationNew Petroleum Policy and legislationGlobal oil and LNG prices declined after mid-2014, subsequently remained subdued through the end of 2017, leading to a slowdown in investor interest in natural gas exploration and production, especially offshoreThe inquiry into the sale of IPTL private power plant in 2014 and the mining sector inquiry in 2017 both led to removal or suspension of prolonged periods of time of MEM officials including key leadership positions, causing delays in implementation of sector reform program under Pillars 2 and 3Volume of gas produced increased from 78 mmscfd in 2012 to 102 mmscfd in 2015 and 132 mmscfd in 2016Amount of onshore proven natural gas reserves increased from 1.0 Tcf in 2012 to 1.4 Tcf in 2015 and 1.2 Tcf in 2016Annual monitoring under the Natural Resource Charter initiative was not implementedSource: Data from TANESCO, TPDC, and MEM; analysis by World Bank staff.Objective 1: Strengthen the country’s ability to bridge the financial gap in its power sectorRating: ModestTANESCO’s profitability recovered from the 2011–2013 crisis, buoyed by tariff increases, improved hydrology, and the phase-out of EPPs. As a result of the measures taken under the DPO series, average tariff per unit sold increased from T Sh 136 per kWh in FY2011 to T Sh 249 per kWh in FY2016 and T Sh 238 per kWh in FY2017. GDP growth remained favorable during the same period, at around 7 percent and inflation declined after to around 5–6 percent in FY2013–FY2016/17, cushioning the impact of tariff increases and avoiding erosion of tariffs in real terms. In parallel, changes in the fuel mix (discussed under Pillar 2 below) and the phase-out of 317 MW of expensive EPPs reduced the cost of power generation.Results Indicator 1 was achieved and TANESCO reached operating cost recovery despite the phase-out of operating subsidies from the Government and a major depreciation in FY2015/16. As a result, TANESCO’s profitability improved significantly, as shown in REF _Ref498266698 \h \* MERGEFORMAT Figure 1, turning its operating deficit of US$239 million in FY2013 into an operating surplus of US$149 million in FY2014/15 and US$80 million in FY2016/17 (FY2015/16 showed an operating deficit of US$92 million because of poor hydrology conditions). This was achieved amid a period of fiscal consolidation and reduction of budget transfers to TANESCO as well as major exchange rate depreciation during FY2015 (8 percent) and FY2016 (24 percent), which translated into higher fuel cost.Figure SEQ Figure \* ARABIC 1. Gross Profit Margin (before Government subsidies and other cost and revenues) and Operating Profit Margina of TANESCO during FY2008–FY2016/17Note: a The operating profit margin is defined here as income before financing cost and taxes; * 18-month period; ** based on TANESCO’s unaudited draft financial statements.Source: ernment subsidies to cover TANESCO’s operating expenses were phased out as profitability improved. TANESCO had since the mid-2000s benefited from Government subsidies to cover its operating expenses. These subsidies escalated during the crisis of 2011–2013, reaching US$139 million in FY2013. As a result of the measures taken under the DPO series, Government transfers (net of taxes) to cover operating costs of TANESCO became more transparent and decreased from US$117 million in FY2012 and US$139 million in FY2013 to US$3 million in FY2016 and 0 in FY2017. The Government continues to contribute to financing investment projects in the sector (capital expenses), consistent with the subsidy policies adopted in the National Energy Policy 2015.Figure SEQ Figure \* ARABIC 2. Development of TANESCO’s Trade and Other PayablesSource: World Bank staff estimates based on TANESCO data; 2017 data based on unaudited draft financial statements.Cash collected per year by TANESCO more than doubled between FY2011 and FY2015/16 as a result of measures taken under the DPO series. Between FY2011 and FY2015/16, revenues per kWh increased by 82 percent. Average bill collection increased from 82 percent in FY2012 to 101 percent in FY2016 and 96 percent in FY2017.Figure SEQ Figure \* ARABIC 3: Impact of acceleration of electrification program on TANESCO’s cash needs for investmentSource: World Bank staff estimates based on TANESCO data.Arrears continued to climb, however, as measures taken under the DPO series were insufficient to counterbalance other factors that put pressure on TANESCO’s arrears balance. These factors included in particular the acceleration of the electrification program, insufficient Government transfers for investment, and the exchange rate depreciation:The sharp depreciation of the local currency between 2015 and 2016 raised the nominal value of TANESCO arrears to suppliers by almost 30 percent in local ernment support for TANESCO’s investment program fell short of cash needs as the Government underwent a period of expenditure consolidation in 2014/15 and 2015/16 to maintain its fiscal deficit target.Except for two small commercial loans in the total amount of around T Sh 60 billion, TANESCO’s access to commercial borrowing to repay arrears was restricted by the Government after FY2014/15.After the 2015 election, the new Government put a strong emphasis on a rigorous verification process before clearing outstanding payments/arrears to the private sector, which slowed down payment of outstanding arrears across the public sector.At the same time, TANESCO’s cash used for investment increased sharply after the Government in January 2013 reduced the cost of new connections by 29 percent to 75 percent and instructed TANESCO to increase its customers base to 1,500,000 by 2015 and target 250,000 new connections per year (see REF _Ref501306439 \h \* MERGEFORMAT Figure 3).Results indicator 2 (trade and other payables) was therefore missed by a wide margin, despite the significant increase in cash collected. As shown in REF _Ref498269732 \h \* MERGEFORMAT Figure 2, trade and other payables surged from a total of T Sh 472 billion (US$298 million) at the end of FY2011 to T Sh 980 billion (US$565 million) in FY2015, T Sh 1,187 billion (US$538 million) in FY2016, and T Sh 1,331 billion (US$605 million) at the end of FY2017. If measured in creditor days, trade and other payables fell in FY2012 and FY2013 but increased thereafter. That is, while operational performance of TANESCO significantly improved, the burden of the historical payment arrears has gotten worse. Most of these payables are due to the electricity and fuel suppliers and some are interest carrying. Resolving them is of critical importance for TANESCO’s financial sustainability, supply security, and investment environment.Objective 2: Reduce the cost of power supply and promote private sector participation in the power sectorRating: ModestMeasures to improve transparency and accountability on TANESCO's operational performance contributed to reducing system losses and improving bill collection. Technical and non-technical losses in transmission and distribution fell from 22.4 percent in FY2011 and 24.7 percent in FY2013 to 16.4 percent in FY2017 (compared to a target of 18 percent under Results Indicator 3, see REF _Ref498286048 \h \* MERGEFORMAT Figure 4). Average bill collection increased from 82 percent in FY2012 to 101 percent in FY2016 and 96 percent in FY2017. Prior actions under the DPO series contributed to this improvement, including the performance contract between TANESCO and the MEM and the publication of performance reports, financial audits, and procurement audits, which enhanced transparency and accountability at TANESCO.Figure SEQ Figure \* ARABIC 4. Decline in Technical and Non-Technical Losses during FY2009–FY2016/17Note: * 18-month period; ** based on TANESCO’s management accounts.Source: TANESCO.Newly commissioned gas-fired generation capacity improved supply security and helped phase out oil-fired generation and EPPs. The target of Results Indicator 4, the commissioning of 400 MW of new gas-fired generation capacity, was not met but significant progress has been made as of the time of the ICR. The Kinyerezi I gas power plant (150 MW) was fully commissioned in 2016 and the first unit of Kinyerezi II is expected to be commissioned by the end of 2017. As a result, the share of liquid fuels (diesel and heavy fuel oil) in the generation mix fell from 18 percent in FY2013 to 4 percent in FY2017 (see REF _Ref498290154 \h \* MERGEFORMAT Figure 5), leading to lower costs and lower per unit emissions. Together with improved hydrology and lower-than-expected demand growth (see below) allowed TANESCO to phase-out 317 MW of oil-fired EPPs.Figure SEQ Figure \* ARABIC 5. Tanzania’s Power Generation MixSource: TANESCO.Delays in the commissioning of gas-fired generation capacity (Results Indicator 4) can be explained by infrastructure bottlenecks as well as a lower-than-anticipated need for additional capacity. Completion of the NNGIP pipeline, a core element of the Government strategy to increase natural gas-fired power generation, was delayed by about one year, which delayed the availability of gas for new power plants (especially Kinyerezi I) and fuel switching of existing power plants. At the same time, good hydrology in FY2015 and FY2017 as well as slower-than-expected demand growth (7.6 percent compared to an estimated 10 percent per year) improved balance between demand and supply and lessened pressure to commission new gas power plants.Figure SEQ Figure \* ARABIC 6. Revenues and Cost of Supply of TANESCO FY2009–FY2016/17Note: * 18-month period; ** based on TANESCO’s unaudited draft financial statements.Source: World Bank staff estimates based on TANESCO data.The switch from oil to gas-fired generation and the phaseout of EPPs contributed to a sharp reduction in the cost of supply, leading to overachievement on Results Indicator 5. The average cost of supply (Results Indicator 5; see REF _Ref498286068 \h \* MERGEFORMAT Figure 6) fell by half and returned to pre-crisis levels (US?9.2 per kWh in FY2017, which compares to US?8.4 per kWh in FY2010 and US?18.4 per kWh in FY2013). The main factors were better hydrology (about one-third of the reduction) and the replacement of oil-fired generation and EPPs with natural gas (two-thirds of the reduction).Implementation of the reform policy and road map developed under the Program stalled soon after they were published, and the private sector participation agenda did not advance under the DPO series. Results Indicator 7 was met when the MEM published a road map for structural reforms and a new strategic power sector policy. Both documents strongly emphasized the need to attract private sector investment into the sector. To facilitate implementation, the Government initiated a capacity-building program. However, the inquiry into the sale of the IPTL private power plant in 2014 led to removal or suspension for prolonged periods of MEM officials including key leadership positions, putting reform implementation on hold. The preparation for the parliamentary and presidential elections held in October 2015 further stalled implementation and under the new Government the reform agenda laid out in 2014–2015 did not pick up significant momentum again, despite the issuance in October 2016 of “The Electricity (Market Re-organization and Promotion of Competition) Regulations, 2016” 2016, pursuant to the Electricity Act of 2008. The regulations stipulated that the power sector would be unbundled along the functional lines (generation, transmission, distribution), market liberalized, and procurement of generation projects competitively done. The regulations also established an Electricity Infrastructure Procurement Committee. The FYDP-II, too, calls for a more significant role for the private sector in generation and emphasizes the need for independence in decision-making in determining power purchasing tariffs, management of the power master plan, and power transmission. However, the October 2016 regulations are yet to be implemented, the Government however retains strong influence over decision-making in the sector, and its medium- to long-term vision for sector reforms remains to be articulated. Results Indicator 6, which aimed to capture the first competitive auction for private sector-owned generation capacity, was not met as the Government is yet to proceed with such a tender.Objective 3: Strengthen the policy and institutional framework for the management of the country’s natural gas resourcesRating: ModestUnder Pillar 3 of the Program, the Government established a policy framework for the upstream natural gas sector and laid the groundwork for subsequent legislative reforms. Under DPO-1 and DPO-2, the Government (a) approved a Natural Gas Policy and a Petroleum Policy in 2014; (b) cleared arrears with developers; (c) initiated an independent verification of Tanzania’s natural gas reserves; (d) took measures to make TPDC more transparent and improve accountability, and (e) established a top-level institutional mechanism to enhance policy coordination by mandating the Cabinet committee on economic affairs to handle the natural gas agenda and creating an interministerial senior task force on natural gas. These measures—in particular the two policies and the coordination mechanism—laid the foundations for subsequent legislative reforms (see below). The Government also initiated a benchmarking exercise of the natural gas sector in close partnership with the Natural Resource Charter.The Government maintained the reform momentum in the natural gas sector after approval of DPO-2 and implemented legislation that reformed sector governance. The Parliament passed the Petroleum Act of 2015, the Oil & Gas Revenue Management Act of 2015, and the Tanzania Extractive Industries Transparency Initiative Act of 2015. Taken together, these measures established a unified legal framework for investment in upstream natural gas in Tanzania, by (a) tasking two agencies to regulate the upstream and midstream,/downstream segments (the Petroleum Upstream Regulatory Agency and the Energy and Water Utilities Regulatory Agency); (b) mandating the regulatory agencies to establish and maintain a transparent licensing and contracting framework; (c) tasking the Government to establish a transparent fiscal regime; and (d) mandating the establishment of an Oil and Gas Fund for maintaining fiscal and macroeconomic stability, enhancing social and economic development, and safeguarding resources for future generations. However, the legal framework suffered from a series of conceptual contradictions—on the one hand introducing a regulatory structure and regulatory procedures favoring free market principles, transparency and competition, while on the other opening space for Government interference in due process—and introduced elements in its institutional framework that may discourage prospective investors. Further, follow-up on the legislative reforms has been slower than anticipated, in part due to a slump in global energy prices and the resulting downturn in global capital investment in the oil and gas industry. The Natural Resource Charter initiative has not yet been implemented (Results Indicator 10).Investments in gas production by established private sector partners increased but fell short of expected levels. The gas-to-power investment program is a core in the FYDP II and in the Electricity Supply Industry Reform Strategy and Roadmap, which establish ambitious targets for the expansion of power generation capacity. During the Program period, the volume of gas produced increased from 78 mmscfd in 2012 to 102 mmscfd in 2015 and 132 mmscfd in 2016 (Results Indicator 8). Information provided by the private sector suggests that these numbers underestimate investment as additional production capacity is ready for ramp-up (possibly up to 200 mmscfd). However, even when accounting for these uncounted investments, private sector interest fell short of expected levels, and may lead to shortages in gas supply if gas-fired generation capacity is scaled up rapidly (current Government plans calling for the trebling of gas-based generation capacity by FY2020/21 will require an equally ambitious expansion of natural gas production to over 300 mmscfd).Investments in new exploration also fell short of expectations, at least partially because of the decline in global energy prices. Global oil and LNG prices declined after mid-2014 and subsequently remained subdued through the end of 2017, leading to a slowdown in investor interest in natural gas exploration. As a result, the amount of onshore proven natural gas reserves increased only slightly, from 1.0 Tcf in 2012 to 1.4 Tcf in 2015 and 1.2 Tcf in 2016 (Results Indicator 9). In consequence, the development of Tanzania’s offshore resources is also unlikely to proceed in the short to medium term.3.3 Justification of Overall Outcome RatingRating: Moderately UnsatisfactoryThe DPO series is rated Moderately Unsatisfactory because, despite significant achievements in the crisis-response elements of the Policy and Results Matrix, the Program did not make sufficient progress towards its objectives (efficacy). The relevance of objectives was Substantial but efficacy was Modest (4 out of 10 results indicators were achieved). The outcome rating compares to a rating of Moderately Satisfactory in the latest ISR for ‘Progress toward achievement of PDO’. The rating’s justification is that measures taken under the DPO series:Enabled the Program to achieve 4 out of 10 indicators (and overachieve on two of them), even though the results indicators were designed for a series of three operations but only two out of three planned DPOs were approved;Led to major rebalancing of cost and revenues in the power sector, bringing TANESCO’s profitability back to pre-crisis levels (Results Indicators 1 and 5);Contributed to significant improvements in TANESCO’s operational performance, including a one-fourth reduction in technical and non-technical losses and achievement of good practice benchmark levels of bill collection;Scaled up the power-to-gas supply chain in Tanzania and established a legislative framework for upstream natural gas development, but did not achieve the envisioned medium-term supply security of natural gas and gas-fired power;Laid the conceptual groundwork for a power sector reform policy and road map, but could not facilitate significant progress toward reform implementation.3.4 Overarching Themes, Other Outcomes and Impacts(a) Poverty Impacts, Gender Aspects, and Social DevelopmentPoverty impacts of the electricity tariff reforms under the Program were mitigated through cross-subsidies between consumer groups. As shown in the tariff schedule in annex 6, electricity tariffs in Tanzania are differentiated by consumer groups. Small household consumers (category D1; defined as average consumption below 75 kWh per month) have been and continue to be subsidized. As of FY2017, the tariff applied to this consumer group is T Sh 100 per kWh, compared to a general use tariff of T Sh 292 per kWh (category T1). In relative terms, tariffs for D1 increased by 67 percent between FY2012–2017 (28 percent in real terms), the highest value among the five categories, but in absolute terms the increase of D1 tariffs (T Sh 40 per kWh) was the second lowest among the categories (see annex 6). Thus, cross-subsidies mitigated the poverty impact of the reforms under the DPO series.Growth in real household income from strong GDP growth and contained inflation also mitigated the poverty impacts of the tariff reforms under the DPO series. GDP growth remained favorable at around 7 percent throughout the implementation period. Inflation declined after FY2012 and remained around 5–6 percent in FY2013–FY2016/17.A review of household spending on electricity tariffs in over 20 Sub-Saharan African countries found that, after the tariff reforms, the share of household spending on electricity in Tanzania was still not above average in the region (1.9–5.8 percent among the poor and 3.0–3.3 percent among all households). This is in line with the finding that the tariff reforms under the Program did not have significant negative impacts on poverty in Tanzania.The tariff increases enabled TANESCO to significantly expand its electrification program from 2013 onward, with the associated positive social and gender impacts. Providing households, social institutions, and enterprises with new energy access and improved energy services has the potential to promote gender equality, create employment and business opportunities, and contribute to a broad range of human development outcomes. As shown in REF _Ref498173876 \h \* MERGEFORMAT Figure 7, TANESCO and REA accelerated the implementation of Tanzania’s electrification program. Between them, the two institutions more than tripled the number of new connections completed per year between FY2012 and FY2015/16. TANESCO’s contribution to this expansion was largely financed from its own resources and thus benefited significantly from increased revenues due to the tariff reforms under the Program.Figure SEQ Figure \* ARABIC 7. New Electricity Connections Completed by TANESCO and REA in FY2004–FY2016/17Source: TANESCO.Reduced budget transfers to the power sector contributed to fiscal consolidation and provided fiscal space for spending on other priorities, including spending on social development. During the Program period, fiscal consolidation remained a major challenge for the Government due to lower-than-expected domestic revenue collection, diminishing aid disbursements, and higher investment in infrastructure projects. As a result of the Program, Government transfers to the power sector (net of taxes) decreased from US$117 million in FY2012 and US$139 million in FY2013 to US$3 million in FY2016 and 0 in FY2017. This provided fiscal space and reduced the pressure on fiscal consolidation in other sectors.(b) Institutional Change/StrengtheningTANESCO and the MEM took several measures under the Program to strengthen TANESCO’s governance and operational capacity, but the long-term impact of these measures has been marginal. The key institutional change brought in by the DPO program was the signing of a performance contract for FY2013 between TANESCO and the MEM, which included measurable KPIs for TANESCO. However, follow-up on areas of underperformance has been limited. TANESCO’s institutional independence and its accountability for performance have not changed significantly since the beginning of the Program. Other governance measures included the publication of financial reports and performance audits, but publication of these documents has since been irregular and the scope of reporting could be improved.The Government has put in place a comprehensive reform road map for institutional restructuring and strengthening in the power sector, but implementation of the road map has been limited. Under the Program, the Government adopted the recommendations of the Presidential Big Results Now Initiative to develop a road map for structural reforms of the energy sector, developed the Electricity Supply Industry Reform Strategy and Roadmap 2014–2025 in 2014, and established a Ministry Delivery Unit within the MEM to oversee the implementation of the road map. However, implementation of the roadmap has been limited.Significant institutional reforms in the natural gas sector were initiated with the adoption of new gas sector legislation in 2015. The legislative reforms under the Program established the basic elements of its legal and institutional framework for the proper development of its natural gas sector.(c) Other Unintended Outcomes and Impacts (positive or negative)Implementation of the Program halted the increase in specific greenhouse gas (GHG) emissions of Tanzania’s power sector. Per unit GHG emissions in the sector increased by 78 percent, from 228 gCO2/kWh to 408 gCO2/kWh, between 2008 and 2013. This trend was due to increased reliance on oil-fired generation while hydropower output remained stable and was expected to continue in the absence of larger utilization of natural gas. By promoting hydropower and natural gas over oil-fired generation, the Program reversed this trend and specific emissions fell to an average of 361 gCO2/kWh during FY2014–FY2016/2017.Figure SEQ Figure \* ARABIC 8. Impact of the Program on GHG Emissions in the SectorSource: World Bank staff estimates based on TANESCO data.The ICR identified no other unintended outcomes or impacts.3.5 Summary of Findings of Beneficiary Survey and/or Stakeholder WorkshopsNo beneficiary survey or stakeholder workshop was held.4. Assessment of Risk to Development OutcomeOverall Rating: HighThe risk to the development outcome is assessed as High, for six main reasons: (a) the tight balance between supply and demand in the power sector; (b) continued pressure on TANESCO’s cash flow; (c) changes in the priorities and reform direction of the new Government in the power sector; (d) recent reforms in the upstream natural gas policy framework and potential impacts on the investment climate; (e) there is a risk that the Government is learning the wrong lessons from private sector investments in the power sector; and (f) macroeconomic risks, including exchange rate risks, constraints on fiscal space limiting the Government’s ability to contribute to TANESCO’s investment program and arrears repayment, and global energy price volatility.First, the supply-demand balance in Tanzania’s power sector is still precarious and TANESCO may fall back into financial difficulties—e.g., in case of a drought or power plant failure before additional gas-fired generation capacity comes online and the interconnection to Ethiopia is commissioned. Tanzania has experienced periodic financial crises in the power sector (last in 2011–2013), largely due to a lack of sufficient supply capacity to withstand droughts. As of end-2017, the supply-demand balance remains tight, even at the current level of connectivity, as evidenced by the major 10-hour power outage in late October 2017. Two major gas power plant investments (Kinyerezi I Extension and Kinyerezi II) are expected to be completed in 2018/19, adding 425 MW in total. In addition, a new grid interconnection with Kenya/Ethiopia is expected to be completed in phases starting in 2019, eventually allowing up to 400 MW of imports. However, utilizing the new gas plants will require securing gas supplies, which are at risk of falling short of quantities needed for the new gas-fired generation plants; and until the investments are completed, the system remains vulnerable to outages in case of failures of individual power plants. Improved system expansion planning and execution, including supply diversification by utilizing Tanzania’s solar and wind resources, will be important to further reduce vulnerability to droughts and other supply side risks.Second, plans for major public investment in the power sector will continue to put pressure on cash flow, limiting TANESCO’s ability to repay its arrears. The 2016 PSMP update implies major public investment in generation and transmission. The same is true for the Government’s access targets (connecting 50 percent of the population by 2020 and over 75 percent by 2030, up from 33 percent in 2016), which imply a major scale-up of investment in new connections. World Bank estimates suggest that achieving the targets would require 600,000–800,000 new household connections per year, up from around 250,000 per year in recent years. TANESCO is already at the limits of its financing capacity and access to commercial borrowing is restricted. Pressure on TANESCO’s liquidity is therefore expected to continue.Third, the Government has at least partially shifted direction in the reform program in the power sector, potentially reversing or stalling some of the outputs and outcomes under the Program. The new Government has charted out a new course of action with regard to key economic policy directions, but its priorities in the energy sector are still being worked out. An ongoing consulting assignment on the financial situation of TANESCO is an illustration of the Government’s intent to understand the prevailing situation before embarking on a new reform program. Whether or not the Government intends to continue implementation of the reform program laid out under Pillar 2—including the reform road map laid out in the documents that contributed to Results Indicator 7—is currently unclear. Nonetheless, it is clear that the current Government is putting less emphasis on private sector-funded infrastructure development in the energy sector than the Program laid out under this DPO series, meaning that some of the outputs and outcomes of the Program may be reversed or stalled in the future. The Government also retains strong direct influence over decision-making in the sector and has weakened EWURA’s ability to make independent regulatory decisions.Fourth, there is a risk that the Government is learning the wrong lessons from past private sector investments in the power sector. While the Government and TANESCO implemented the initial phase of the 2013 Policy for Private Sector Participation in Power Generation through Competitive Processes by launching PPP capacity-building programs, the DPO series was not able to demonstrate the benefits of well-executed private sector investments in the power sector. Therefore, a small number of controversial and poorly executed contracts continue to cast a shadow on the outlook for privately-owned generation in Tanzania in general. In the absence of a clearly articulated rationale and shared vision among sector stakeholders, the Government’s policy toward private sector participation in future generation projects is unclear. The risk to the development outcome is that the Government concludes from these poorly executed investments that private sector investments are not worth pursuing at all, rather than that private sector investments have to be done right.Fifth, recent amendments to the Petroleum Act in mid-2017, passed in response to the outcomes of a parliamentary inquiry into mining contracts with the private sector, may affect the natural gas investment framework. Shortly before the ICR was prepared, in July 2017, the Government amended the Petroleum Act of 2015. Potential impacts of the reforms include (a) negatively affecting the stability of existing Production Sharing Agreements; and (b) clouding the prospects for future private investment in the sector. Therefore, although the impact of the amendments on the attractiveness of investment in natural gas exploration and production was not fully clear at the time of the ICR, the amendments increased the risks to the development outcome.Sixth, while the macroeconomic outlook is relatively stable, macroeconomic risks to the development outcome include TANESCO’s exposure to exchange rate risks; constrained fiscal space limiting the Government’s ability to adequately fund TANESCO’s investment program or contribute to repayment of arrears; and global energy price volatility. Tanzania’s economy remains one of the highest performers in the region, exceeded in 2016 only by C?te D’Ivoire and Ethiopia. Real GDP expanded at a slower rate of 6.8 percent in the first half of 2017 compared to 7.7 percent over the same period in 2016. The inflation rate has remained low and stable and reserves are at a healthy level. The outlook remains favorable with the main downside risks of a domestic nature and largely under Government control. However, TANESCO’s arrears remain exposed to exchange rate risks as much of it is denominated in US$. Furthermore, in view of continued fiscal constraints for the Central Government, such as persistently high arrears and underexecution of the development budget, it is unclear to what extent the Government can contribute to funding TANESCO’s investment program or the repayment of arrears. Lastly, macroeconomic risks to the sustainability to the development outcome also include global energy price volatility, especially the potential negative impact of sustained low energy prices on investments in the development of Tanzania’s natural gas resources.5. Assessment of Bank and Borrower Performance5.1 Bank Performance(a) Bank Performance in Ensuring Quality at EntryRating: Moderately SatisfactoryWorld Bank performance in ensuring quality at entry is rated Moderately Satisfactory for the following reasons:The World Bank ensured that the DPO series was part of a concerted donor effort to support the Government’s response to the fiscal and macroeconomic implications of the electricity supply crisis during 2012–2014.The objectives of the crisis-response elements of the Policy and Results Matrix—to restore TANESCO’s financial viability and reduce fiscal risks—were core to the Government’s and the World Bank’s strategy in the energy sector.The crisis-response elements of the Policy and Results Matrix was informed by recent analytical work and global experience and had a clear line of sight between prior actions and results indicators.Enough flexibility was built into the design of the Policy and Results Matrix to allow the Government’s deliberation on important but difficult policy decisions to follow due course. For instance, the Triggers for DPO-2 under Pillar 1 specified the fiscal reform objective (a cap on transfers to TANESCO), but left the exact nature of policy actions open. During preparation of DPO-2 the language of Prior Action 2.1 was then adjusted to account for the outcomes of the Government’s deliberation.The medium- to long-term reform elements of the Policy and Results Matrix were risky because they were backloaded; heavy on commitments and light on implementation; and missed a clear line of sight between prior actions and results indicators. Some of these risks were informed risks and thus do not represent shortcomings in the performance of the World Bank, but important governance risks were missed; the political economy of power sector reform in particular was poorly reflected in the design of the medium- to long-term reform measures in the Program.(b) Quality of SupervisionRating: Moderately SatisfactoryWorld Bank performance in ensuring quality at supervision is rated Moderately Satisfactory for the following reasons.Continued close alignment of the DPO series with DPs’ programs was critical for the success achieved during implementation.Throughout the implementation of the Program, the World Bank provided close implementation support by an experienced core team as part of regular supervision missions and additional support missions as needed.The parallel technical assistance under the World Bank’s ESCBP provided much-needed capacity-building support to implement the Program.The World Bank continuously monitored progress against the main financial and performance indicators of the power sector and the M&E framework was used in the implementation of the Program and decisions on the World Bank’s DPO series in an adequate manner.The decision not to proceed with the third operation in the series within the two years after Board approval of DPO-2 reflected an adequate adjustment to changing context and Government priorities and was based on in-depth dialogue with the Government during three missions in September and then in November and December 2016.However, the World Bank’s implementation support is considered to have had moderate shortcomings, because it did not reflect a complete understanding of the political economy of power sector reform in Tanzania and the World Bank team was not always able to respond to implementation challenges on time. For instance:The major change in the Government’s policy for connection charges in early 2013 and its impact on TANESCO’s finances were not recognized in the preparation of DPO-2 and thus not reflected in the design of the operation.The fact that arrears continued to mount in FY2014/15 despite positive income could have led the Bank team to adjust course in the reform dialogue.In hindsight, more could have been done to disseminate global best practices in structuring and executing private-sector participation in the power sector, and the potential benefits for Tanzania’s development.The DPO series’ results framework was not adjusted when it became clear that the third DPO would not be not approved within 24 months.(c) Justification of Rating for Overall Bank PerformanceRating: Moderately SatisfactoryThis rating combines the ratings for Quality at Entry and Quality of Supervision.5.2 Borrower PerformanceRating: Moderately UnsatisfactoryWhile the MOF was the official implementing agency of DPO series, the ICR considers the MOF and the MEM as the key implementers of the program, as both represented the Government in the implementation of the Program. Government performance is rated Moderately Unsatisfactory because of significant shortcomings despite strong performance in some areas of the Policy and Results Matrix:Government commitment to and leadership in the crisis-response elements of the Policy and Results Matrix was strong and the Government successfully managed the fiscal impacts of the power sector crisis in 2011–2013. Service and performance improvements facilitated under the leadership of the MEM contributed to the social acceptability of tariff reforms.The MOF, in coordination with the MEM, TANESCO, and EWURA took ownership in selecting and implementing the prior actions and the borrower’ commitment was reflected in the timely approval of DPO-1 and DPO-2.The Government established a policy framework for upstream natural gas development, maintained momentum after approval of DPO-2 and adopted legislation that reformed natural gas sector ernment commitment to the medium- to long-term power sector reforms—including private sector participation, structural reforms of the power sector, good governance and financial sustainability of TANESCO and an independent regulatory function—in the Policy and Results Matrix was less clear from the start.The Government’s reform efforts in the energy sector and engagement with the World Bank lost momentum when the IPTL controversy led to removal or suspension of prolonged periods of time of MEM officials including key leadership positions. Despite progress in some areas, reform efforts are yet to regain momentum, causing major delays in implementation of the Program. DPO-3 was cancelled as a result.Insufficient Government funding for TANESCO’s investment program after approval of DPO-2 led to a cash shortfall at TANESCO and contributed to the buildup of arrears. Under DPO-2, the Government and TANESCO committed to finance any remaining financing gap in the power sector (after tariff reforms) from Government subsidies and commercial borrowing. However, actual Government measures fell short of this commitment, especially with regard to cash needs for investment.6. Lessons LearnedRating: Moderately UnsatisfactoryA sectoral DPO series can be an effective crisis response when it is closely aligned with an IMF program, complements fiscal consolidation with service improvements, and has a clear line of sight between prior actions and expected outcomes. The Power and Gas Sector DPO series was successful in the first two years and in (most of) the crisis-response elements relating to financial sustainability and fiscal risks of the power sector, for three main reasons. First, close coordination and parallel support by several DPs, especially the IMF, was critical for sustained implementation of these difficult reforms. Second, the major tariff reforms between FY2011 and FY2014/15 which, cumulatively, more than doubled tariffs for some categories, were acceptable to consumers only because they were accompanied by significant reductions in outages and improvements in quality of service. This further underpins recent global experience, which suggests that consumers are willing to pay more if they in turn receive better service. Third, the crisis-response elements of the Policy and Results Matrix—especially measures relating to TANESCO’s revenues and costs such as tariff reforms and the phase-out of EPPs—had a clear line of sight between prior actions and expected outcomes.Improving liquidity and profitability of utilities are related objectives but require separate analyses and risk mitigation measures. The DPO series implicitly assumed that achieving profitability and reducing arrears—the two subobjectives under Pillar 1—could be achieved largely through the same measures (the term ‘financing gap’ in the PDO was meant to capture both cash needs and net income). However, trends in profitability and arrears diverged widely during the Program period because TANESCO’s investment program was inadequately funded, underscoring the need for separate analyses and risk mitigation measures in the design of operations targeting both.Engaging in the natural gas agenda was a risk worth taking, even if outcomes as measured by the results indicators were only Modest. The Bank used this DPO series as an opportunity to establish an engagement with the Government in the natural gas sector, which was and remains critical for the development of Tanzania’s energy sector. This decision enabled the DPO series to support a comprehensive reform program that tackled the whole energy supply chain. While the reform momentum in the natural gas sector slowed down when global energy prices declined in 2015, significant progress was made towards a modern upstream natural gas policy framework that would not have been possible without the DPO series. Thus, despite weak performance on indicators under Pillar 3, engagement in the gas sector reform proved to be risk worth taking.World Bank-supported power sector reform programs in Sub-Saharan Africa need to take into account the full breadth of utility investment obligations—including investments to deliver on the electricity access agenda—and their impacts on sector fundamentals. The Government’s efforts to expand electricity access were recognized in the design of the Program, but not fully integrated into the financial modeling that underpinned the Program’s Results Framework. The impact of the access agenda on sector financials was therefore not anticipated, even in DPO-2, which was approved after the Government significantly expanded financial obligations for TANESCO in financing new connections (because of the delays in TANESCO’s financial reporting, the full impact of these reforms was not yet visible in the performance indicators by the time of appraisal of DPO-2). As a result, TANESCO’s arrears continued to rise despite significant improvement and, in fact, overachievement, on TANESCO’s income statement (see section 3.2 for more details). In view of the prominence of the access agenda in the Sustainable Development Goals and the sector development programs of Sub-Saharan African governments, the lesson from this DPO series is that future energy DPOs in Sub-Saharan Africa—including in Tanzania—need to take access investments and related policy frameworks more explicitly into account into the design of the operation.Where the promotion of private sector participation is part of a World Bank-supported reform program, program design needs to be informed by a political economy analysis and global best-practices as well as associated benefits need to be clearly articulated. The series was underpinned by comprehensive economic and financial analysis and informed by the World Bank’s global experience with energy sector reform. However, no systematic stakeholder mapping and political economy analysis were undertaken. Therefore, the political economy risks of power sector reform in Tanzania were insufficiently reflected in the design and implementation of the program, which contributed to the underperformance of the DPO series (see sections 2 and 3 for details). For instance, in hindsight, the DPO series’ expectations about the pace and momentum of reforms (beyond immediate crisis-response measures) appear overambitious, and the results framework should have been adjusted once it became clear that DPO-3 would not be approved. Further, more could have been done to articulate and share with the Government global best practices in structuring and executing private-sector participation in the power sector (e.g., best practice in risk sharing in PPP models), and the potential benefits for Tanzania’s development. In the absence of a clearly articulated rationale and shared vision among sector stakeholders, a small number of controversial and poorly executed contracts cast a shadow on the outlook for PPPs in Tanzania’s power sector in general. This lesson learned is in line with emerging findings from a currently ongoing review of the global power sector reform agenda by the World Bank’s Energy and Extractives Global Practice (‘Rethinking Power Sector Reform’; P157376), which will lay out an agenda for more closely integrating political economy considerations into power sector reform programs.7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing agenciesNot applicable.(b) CofinanciersNot applicable.(c) Other partners and stakeholders (for example, NGOs/private sector/civil society)Not applicable.Annex 1. Bank Lending and Implementation Support/Supervision Processes(a) Task Team MembersP143645 – TZ First Power and Gas Sector DPONamesTitleUnitResponsibility/Specialty LendingJacques MorissetProgram LeaderAFCF2Task Team LeaderVladislav VuceticLead Energy SpecialistGEE01Team MemberNazaneen Ismail AliSenior Procurement Specialist GGO05ProcurementMona El-ChamiSenior Financial Management SpecialistGGO23Financial ManagementMustafa Zakir HussainOperations Adviser: OPSPQTeam MemberRobert SchlottererLead Infrastructure Finance SpecialistGEEFSTeam MemberYutaka YoshinoProgram LeaderAFCE1Team MemberEmmanuel MungunasiSenior EconomistGMF07Team MemberSanjeev Ahluwalian.a.n.a.Team MemberZhengjia MengYoung ProfessionalGEEFSTeam MemberAlexander HuurdemanSenior Gas SpecialistGEEX1Team MemberGoodluck Moshan.a.n.a.Team MemberWaly WaneSenior EconomistGED07Team MemberChiara BronchiPractice ManagerGGO13Team MemberKatherine BainConsultantGGODRTeam MemberVictoria Cunninghamn.a.n.a.Team MemberAgnes MgangaProgram AssistantAFCE1Team MemberLeah Mukutan.a.n.a.Team MemberMercy SabaiSr Financial Management SpecialistGGO31Team MemberDonald MneneyConsultantGGO01Team MemberAnn Jeannette GlauberLead Environmental SpecialistGEN2ATeam MemberCharles Feinsteinn.a.n.a.Peer reviewerFrancisco CarneiroProgram LeaderLCC3CPeer reviewerP145254 - TZ Second Power and Gas Sector DPO NamesTitleUnitResponsibility/Specialty LendingYutaka YoshinoProgram LeaderAFCE1Task Team leaderVladislav VuceticLead Energy SpecialistGEE01Team MemberNatalyia KulichenkoSenior Energy SpecialistGEE07Team MemberMustafa Zakir HussainOperations Adviser: OPSPQTeam MemberJacques MorissetProgram LeaderAFCF2Team MemberEmmanuel MungunasiSenior EconomistGMF07Team MemberVictoria Cunninghamn.a.n.a.Team MemberNicola Woodroffen.a.n.a.Team MemberLydie AhodehouProgram AssistantGMF07Team MemberZhengjia MengYoung ProfessionalGEEFSTeam MemberAlexander HuurdemanSenior Gas SpecialistGEEX1Team MemberJustina KajangeOperations AnalystGTI11Team MemberZoe KolovouLead CounselLEGAMTeam MemberLuis SchwarzSenior Finance SpecialistWFALNTeam MemberRoy Sudharshan CanagarajahManagerECADETeam MemberHilda EmeruwaOperations AnalystGMFDRTeam MemberOliver BraedtProgram LeaderLCC6CTeam MemberAnn Jeannette GlauberLead Environmental SpecialistGEN2ATeam MemberAmy FaustConsultantGSU13Team MemberHelen ShahriariSenior Social ScientistGSU05Team MemberAlexandra C. BezerediLead Social Development SpecialistGSU01Team MemberHanneke Van TilburgSenior Social Development SpecialistOPSPFTeam MemberLeah Mukutan.a.n.a.Team MemberIsis GaddisSenior EconomistGCGDRTeam MemberNadia Belhaj HassineSenior EconomistGPV01Team MemberMercy SabaiSenior Financial Management SpecialistGGO31Financial ManagementDonald MneneyConsultantGGO01Team MemberMilan Brahmbhattn.a.n.a.Peer reviewerCharles Feinstein n.a.n.a.Peer reviewerHavard HallandSenior EconomistGGOPSPeer reviewer(b) Staff Time and CostP143645 – Tanzania First Power and Gas Sector DPOStageStaff Time and Cost (Bank Budget Only)No. of Staff WeeksUS$, thousands (including travel and consultant costs)Lending and Supervision?? FY1335.40170,101.33TOTAL35.40170,101.33P145254 – Tanzania Second Power and Gas Sector DPOStageStaff Time and Cost (Bank Budget Only)No. of Staff WeeksUS$, thousands (including travel and consultant costs)Lending and Supervision?? FY1443.62175,965.66TOTAL43.62175,965.66Annex 2. Beneficiary Survey ResultsNot applicable.Annex 3. Stakeholder Workshop Report and ResultsNot applicable. Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR No comments from the Borrower were received by the time of the submission of this ICR.Annex 5. Comments of Cofinanciers and Other Partners/StakeholdersNot applicable.Annex 6. Supporting DataTable 6.1. Results IndicatorsNo.Pillar 1Unit2008200920102011201220132015201620171TANESCO operating deficitUS$ million(3)(20)(3)22109239(149)92(80)2TANESCO accounts (trade and other) payableT Sh million202,236321,883428,961472,213707,012824,033979,9181,187,2381,330,9313TANESCO technical and non-technical losses in transmission and distribution (%)%25.1824.9822.8122.4221.8724.7017.8118.2916.44Pillar 2Unit2008200920102011201220132015201620174Amount of gas-fired power generation capacity commissioned after 2011 (MW)MWn.a.n.a.n.a.n.a.1051051052552855Average unit cost of power sales (US$/MWh)US?/kWh9.289.218.3511.8916.5018.3612.9012.219.196Number of bids for gas IPP power plants launched on a competitive basis (count)n.a.n.a.n.a.n.a.n.a.n.a.00007MEM documents on sector reforms published for public knowledge (count)n.a.n.a.n.a.n.a.n.a.n.a.0222Pillar 3Unit2008200920102011201220132015201620178Volume of gas produced (mmscfd)mmscfdn.a.n.a.n.a.n.a.78n.a.102132n.a.9Amount of onshore proven natural gas reserves (Tcf)Tcfn.a.n.a.n.a.n.a.1.000n.a.1.3691.187n.a.10Annual monitoring under the Natural Resource Charter initiativen.a.NoNoNoNoNoNoNoNoNoTable 6.2. Electricity Tariffs by Category FY2008–FY2017Electricity Tariffs CategoryUnitFY2008FY2009FY2010FY2011FY2012FY2013FY2015FY2016FY2017Change FY2012–FY2017D1Consumers who consume on average below 75 kWhService chargeT Sh/Month——————————Energy charge (0–75 kWh)T Sh/kWh49494960606010010010067%Energy charge (>75 kWh)T Sh/kWh15615615619527327335035035028%T1General usage tariffService chargeT Sh/Month2,3032,3032,3032,7383,8413,8415,52000?100%Energy chargeT Sh/kWh12912912915722122129829229232%Maximum demand chargeT Sh/kVA/Month——————————T2Consumers at 400 V and above and >7,500 kWh/monthService chargeT Sh/Month8,5348,5348,53410,14614,23314,23314,23314,23314,2330%Energy chargeT Sh/kWh8585859413213220019519548%Maximum demand chargeT Sh/kVA/Month9,3479,3479,34712,07816,94416,94415,00415,00415,004?11%T3Medium voltageService chargeT Sh/Month8,5348,5348,53410,14614,23313,23316,76916,76916,76918%Energy chargeT Sh/kWh7979798411811815915715733%Maximum demand chargeT Sh/kVA/Month8,66910,35014,52013,20013,20013,20028%T5High voltageService chargeT Sh/Month8,5348,5348,53410,14614,23315,233000?100%Energy chargeT Sh/kWh7575758310610615615215243%Maximum demand chargeT Sh/kVA/Month4,7754,7754,7758,61012,07912,07916,55016,55016,55037%Annex 7. List of Supporting DocumentsTitleDateReference Number2016 Power System Master Plan UpdateDecember 2016n.a.AfDB Power Sector Reforms and Governance Support Program (PSRGSP) Phases I–III2015, 2016n.a.Aide Memoires for the Project’s Supervision MissionsMultipleMultipleDevelopment of Electricity Tariff-Setting Methodology and Carrying Out Cost of Service Study (Mercados Study)August 2012n.a.DPO Program DocumentsFebruary 2013, February 201474994-TZ, 84028 -TZElectricity Supply Industry Reform Strategy and Roadmap 2014–2025June 2014n.a.IMF Staff Reports on Article IV Consultations and Reviews under the Standby Credit Facility Arrangement2012–2014MultipleProgram Implementation Status and Results Reports (ISRs)MultipleMultipleTANESCO Audited Financial Statements and Management Accounts2008–2016n.a.TANESCO Short-term Financial Assessment 2012–2015June, 2012n.a.TANESCO Tariff Applications 2012–2016n.a.TANESCO Turnaround Study (MCC)2016n.a.Tanzania Development Vision 20251999n.a.Tanzania Economic Update 10: Managing Water WiselyNovember 2017n.a.Tanzania National Energy PolicyDecember, 2015n.a.Tanzania Rural Electrification Expansion Program—Program for ResultsMay, 2016103827-TZTanzania: Intended Nationally Determined Contribution (INDC) under the UNFCCCSeptember 2015n.a.The Tanzania Five-Year Development Plan 2011/12–2015/16June 2011n.a.The Tanzania Five-Year Development Plan 2016/17–2020/21June 2016n.a.World Bank Tanzania CAS for FY2012/15May, 201160269-TZNote: MCC = Millennium Challenge Corporation; UNFCCC = United Nations Framework Convention on Climate Change.Annex 8. MapSource: The World Bank. ................
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