The World...

Document of

The World Bank FOR OFFICIAL USE ONLY

Report No: PAD2551

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED GLOBAL INFRASTRUCTURE FACILITY GRANT IN THE AMOUNT OF US$7 MILLION

AND

A PROPOSED ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAM GRANT

IN THE AMOUNT OF US$5.5 MILLION

TO THE

REPUBLIC OF TUNISIA

FOR

TUNISIA-ITALY POWER INTERCONNECTOR - PROJECT PREPARATION TECHNICAL ASSISTANCE

JULY 31, 2018

Energy & Extractives Global Practice

Middle East And North Africa Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective April 1, 2018)

Currency Unit = Tunisian Dinar (TND)

TND1 = US$0.42

US$1 = TND2.42

FISCAL YEAR

January 1 - December 31

Regional Vice President: Ferid Belhaj

Country Director: Marie Francoise Marie-Nelly

Senior Global Practice Director: Riccardo Puliti

Practice Manager: Erik Magnus Fernstrom

Task Team Leader(s): Moez Cherif, Emmanuel Py

ABBREVIATIONS AND ACRONYMS

AC Alternative Current

ACER Agency for the Cooperation of Energy Regulators

AfDB African Development Bank

AICS Agenzia Italiana per la Cooperazione allo Sviluppo (Italian Agency for Development Cooperation)

ASA Advisory Services and Analytics

BAU Business As Usual

CEF Connecting Europe Facility

COP Conference of the Parties

CPF Country Partnership Framework

CSP Concentrated Solar Power

CTF Clean Technology Fund

DC Direct Current

DFI Development Finance Institutions

DPF Development Policy Financing

DTS Desktop Study

EBRD European Bank for Reconstruction and Development

EHSG Environment Health and Safety Group

EIB European Investment Bank

ENTSO-E European Network of Transmission System Operators for Electricity

ESIA Environmental and Social Impacts Assessment

ESMAP Energy Sector Management Assistance Program

ESMP Environmental and Social Management Plan

EU European Union

EU IEM European Internal Electricity Market

FM Financial Management

FS Feasibility Study

GBV Gender Based Violence

GCF Green Climate Fund

GIF Global Infrastructure Facility

GOT Government of Tunisia

GW Gigawatt

HVDC High-Voltage Direct-Current

IBRD International Bank for Reconstruction and Development

ICR Implementation Completion and Results Report

IFR Interim Financial Report

INDC Intended Nationally Determined Contribution

IPPs Independent Power Producers

LCC Line commuted converter

LCOE Levelized Cost of Electricity

LNG Liquefied Natural Gas

LPG Liquefied Petroleum Gas

M&E Monitoring and Evaluation

MFD Maximizing Finance for Development

MOU Memorandum of Understanding

MTR Midterm review

NIF Neighborhood Investment Facility

OCGT Open Cycle Gas Turbine

PDA Project Definition Activity

PDO Project Development Objective

PIE Project Implementing Entity

POM Project Operations Manual

PPP Public Private Partnership

PPSD Project Procurement Strategy for Development

PS Performance Standards

PTR Physical Transmission Rights

RAP Resettlement Action Plan

SEP Stakeholder Engagement Plan

SPV Special Purpose Vehicle

STEG Société Tunisienne de l’Electricité et du Gaz

TA Technical Assistance

TSO Transmission owner and System Operator

TYNDP Ten-Year Network Development Plan

VSC Voltage Source Converter

The World Bank Tunisia-Italy Power Interconnector - Project Preparation TA (P164625)

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BASIC INFORMATION BASIC_INFO_TABLE

Country(ies) Project Name

Tunisia Tunisia-Italy Power Interconnector - Project Preparation TA

Project ID Financing Instrument Environmental Assessment Category

P164625 Investment Project Financing

A-Full Assessment

Financing & Implementation Modalities

[ ] Multiphase Programmatic Approach (MPA) [ ] Contingent Emergency Response Component (CERC)

[ ] Series of Projects (SOP) [ ] Fragile State(s)

[ ] Disbursement-linked Indicators (DLIs) [ ] Small State(s)

[ ] Financial Intermediaries (FI) [ ] Fragile within a non-fragile Country

[ ] Project-Based Guarantee [ ] Conflict

[ ] Deferred Drawdown [ ] Responding to Natural or Man-made Disaster

[ ] Alternate Procurement Arrangements (APA)

Expected Approval Date Expected Closing Date

31-Jul-2018 31-Dec-2021

Bank/IFC Collaboration

No

Proposed Development Objective(s)

The PDO is to establish the technical, environmental, social and financial feasibility, and to help structure the proposed Tunisia-Italy Power Interconnection (“Proposed Project”).

Components

Component Name Cost (US$, millions)

Preparation Studies 10.64


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Transaction Advisory 1.91

Project Management Services 0.86

Organizations

Borrower: Republic of Tunisia

Implementing Agency: STEG Elmed Etudes

PROJECT FINANCING DATA (US$, Millions)

SUMMARY-NewFin1

Total Project Cost 13.40

Total Financing 13.40

of which IBRD/IDA 0.00

Financing Gap 0.00

DETAILS-NewFinEnh1

Non-World Bank Group Financing

Counterpart Funding 0.53

LOCAL: BENEFICIARIES 0.53

Trust Funds 12.50

Energy Sector Management Assistance Program 5.50

GLOBAL INFRASTRUCTURE FACILITY 7.00

Other Sources 0.38

EC: European Investment Bank 0.38

Expected Disbursements (in US$, Millions)

WB Fiscal Year 2018 2019 2020 2021 2022

Annual 0.00 2.50 2.50 4.00 3.50


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Cumulative 0.00 2.50 5.00 9.00 12.50

INSTITUTIONAL DATA

Practice Area (Lead) Contributing Practice Areas

Energy & Extractives

Climate Change and Disaster Screening

This is an IBRD-only operation

Gender Tag

Does the project plan to undertake any of the following?

a. Analysis to identify Project-relevant gaps between males and females, especially in light of country gaps identified through SCD and CPF

No

b. Specific action(s) to address the gender gaps identified in (a) and/or to improve women or men's empowerment

No

c. Include Indicators in results framework to monitor outcomes from actions identified in (b) No

SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT)

Risk Category Rating

1. Political and Governance Substantial

2. Macroeconomic Substantial

3. Sector Strategies and Policies Moderate

4. Technical Design of Project or Program Moderate

5. Institutional Capacity for Implementation and Sustainability Substantial

6. Fiduciary High

7. Environment and Social Substantial

8. Stakeholders Substantial


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9. Other

10. Overall High

COMPLIANCE

Policy

Does the project depart from the CPF in content or in other significant respects?

[ ] Yes [✓] No

Does the project require any waivers of Bank policies?

[ ] Yes [✓] No

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 ✔

Performance Standards for Private Sector Activities OP/BP 4.03 ✔

Natural Habitats OP/BP 4.04 ✔

Forests OP/BP 4.36 ✔

Pest Management OP 4.09 ✔

Physical Cultural Resources OP/BP 4.11 ✔

Indigenous Peoples OP/BP 4.10 ✔

Involuntary Resettlement OP/BP 4.12 ✔

Safety of Dams OP/BP 4.37 ✔

Projects on International Waterways OP/BP 7.50 ✔

Projects in Disputed Areas OP/BP 7.60 ✔

Legal Covenants

Sections and Description • Section 3.04 of GIF Grant Agreement

The Recipient shall reimburse the World Bank as follows: (a) if the Proposed Project reaches the Financial Close on

or before the Long-Stop Date (but except where the Proposed Project reaches the Financial Close after the

occurrence of the Recipient’s Withdrawal from the Project, in which case sub-paragraph (b) below of this Section

3.04 shall apply), a reimbursement shall be made in the amount equal to seventy-five percentage (75%) of the


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Withdrawn Grant Balance, to be paid in full within sixty (60) calendar days of the Financial Close of the Proposed

Project, or by any such later date if so specified in the notice delivered by the World Bank pursuant to Section 3.07;

(b) if at any time the Recipient’s Withdrawal from the Project occurs, a reimbursement shall be made in the amount

equal to one hundred percent (100 %) of the Withdrawn Grant Balance, to be paid in full within thirty (30) calendar

days of the date of the notice delivered by the World Bank to the Recipient notifying of the occurrence of the

Recipient’s Withdrawal from the Project, or by any such later date if so specified in the notice delivered by the

World Bank pursuant to Section 3.07.

Sections and Description • Section I.B of Schedule II to the GIF and ESMAP Grant Agreements

The Recipient shall cause Elmed Etudes (for Parts 1 and 3 of the Project) and STEG (for Part 2 of the Project) to: (i)

no later than (30) days after the Effective Date, or such later date as shall be agreed by the World Bank, prepare a

manual, acceptable to the World Bank (Project Operational Manual or POM).

Sections and Description • Section I. D of Schedule II to the GIF and ESMAP Grant Agreements

1. The Recipient shall ensure that the terms of reference for any technical assistance provided under Part 1 of

the Project, shall be satisfactory to the World Bank, and to that end, such termsof reference shall require that the

advice conveyed through such technical assistance be consistent with the requirements of the World Bank’s

Performance Standards (including the Environmental and Heath Safety Guidelines dated 2007 and the Electric

Power Transmission and Distribution Environmental and Health Safety Guidelines dated 2007).

2. The Recipient shall ensure that the Project is carried out in accordance with the Stakeholder Engagement

Plan (SEP). The Recipient shall ensure that the SEP is not amended without the World Bank’s prior written consent.

Conditions

Type Description Effectiveness • Section 4.01 of the GIF Grant Agreement

(a) The Execution and delivery of the GIF Grant Agreement on behalf of the Recipient has been duly authorized or ratified by all necessary governmental actions.


(b) The STEG Subsidiary Agreement referred has been executed on behalf of the Recipient and STEG.


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(c) The ESMAP Grant Agreement has been executed and delivered and all conditions precedent to its effectiveness or to the right of the Recipient to make withdrawals under it have been fulfilled.

Type Description Effectiveness • Section 4.01 of the ESMAP Grant Agreement

The Elmed Etudes Subsidiary Agreement has been executed on behalf of the Recipient and Elmed Etudes.


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TUNISIA

TUNISIA-ITALY POWER INTERCONNECTOR - PROJECT PREPARATION TA

TABLE OF CONTENTS

I. STRATEGIC CONTEXT ...................................................................................................... 9

A. Country Context .................................................................................................................. 9

B. Sectoral and Institutional Context .................................................................................... 10

C. Higher Level Objectives to which the Project Contributes ............................................... 12

I. PROJECT DEVELOPMENT OBJECTIVES ............................................................................ 13

A. PDO .................................................................................................................................... 13

B. Project Beneficiaries .......................................................................................................... 14

C. PDO-Level Results Indicators ............................................................................................. 14

II. PROJECT DESCRIPTION .................................................................................................. 15

A. Project Components .......................................................................................................... 15

B. Project Cost and Financing ................................................................................................ 16

C. Lessons Learned and Reflected in the Project Design ...................................................... 18

III. IMPLEMENTATION ........................................................................................................ 19

A. Institutional and Implementation Arrangements ............................................................. 19

B. Results Monitoring and Evaluation ................................................................................... 19

C. Sustainability ..................................................................................................................... 20

D. Role of Partners................................................................................................................. 20

IV. KEY RISKS ..................................................................................................................... 21

A. Overall Risk Rating and Explanation of Key Risks .............................................................. 21

V. APPRAISAL SUMMARY .................................................................................................. 22

A. Economic and Financial Analysis ....................................................................................... 22

B. Technical ............................................................................................................................ 22

C. Financial Management ...................................................................................................... 23

D. Procurement ..................................................................................................................... 24

E. Social (including Safeguards) ............................................................................................. 24

F. Environment (including Safeguards) ................................................................................. 26

G. Other Safeguard Policies (if applicable) ............................................................................ 26


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H. World Bank Grievance Redress ......................................................................................... 26

VII. RESULTS FRAMEWORK AND MONITORING .................................................................... 28

ANNEX 1: DETAILED PROJECT DESCRIPTION ......................................................................... 36

ANNEX 2: IMPLEMENTATION ARRANGEMENTS .................................................................... 45

ANNEX 3: IMPLEMENTATION SUPPORT PLAN ...................................................................... 59

ANNEX 4: ECONOMIC & FINANCIAL ANALYSES ..................................................................... 61


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I. STRATEGIC CONTEXT

A. Country Context 1. Tunisia has implemented an ambitious reform agenda in the post-revolution period but the gains of democracy have yet to fully materialize. With a population of 11.4 million and a GDP of $42.06 billion, Tunisia is an upper middle-income country that underwent a transition to democracy following the 2010 revolution. In the aftermath of the Arab Spring, the country made significant strides to lay the foundations of a new social contract, which included: easing restrictions on civil society organizations; improving economic governance; revising the investment code; tax reform; and trying to increase competition. The political transition culminated in 2014 with the adoption of a new constitution, and parliamentary and presidential elections. However, the country has suffered from increased instability in the aftermath of the revolution, with political unrest and terrorist attacks, along with persistent lack of competition in certain sectors and fraud. The uncertain security, political, and policy environment has significantly impacted investors’ confidence in Tunisia, both domestic and foreign. Graduate unemployment remains very high at 31.2 percent, and the ongoing exclusion of large segments of Tunisia’s youth population from the country’s social and economic mainstream has created a breeding ground for radical politics. 2. Tunisia’s development prospects are hindered by the growing fiscal deficit. Economic growth averaged only 1.5 percent per annum in 2011-17 and has mostly been driven by consumption while investment, exports and productivity growth have been low. Consequently, exports and investment averaged 44 percent and 21 percent of GDP respectively in the post-Revolution period, compared to 49 and 25 percent, respectively, in the five years preceding the Revolution. On the factor side, the contribution of capital formation to GDP growth remains extremely low compared to the 1990s when part of the economy was liberalized. The expansionary fiscal policy implemented as a response to the post-revolution economic crisis and downturn led to an increase of the fiscal deficit and public debt of the country. The fiscal deficit increased from 1 percent of GDP in 2010 to 6 percent in 2017, and the public debt rose from 42 percent to 69.9 percent of GDP in the same period. The government’s focus on increasing current expenditures rather than investments has left little room for growth enhancing projects. 3. The instability in the region is exacerbating social and economic challenges, making the need for international support to strengthen Tunisia’s stability and democracy more urgent. The power struggle within Libya has brought hundreds of thousands of migrants to Tunisia, and the expanded population has meant greater competition for housing and basic commodities. This has driven up prices for ordinary Tunisians, and the need to supply larger amounts of subsidized commodities has added economic pressure on the government. The instability in Libya has also exacerbated unemployment, particularly in the lagging regions, which did not benefit as much from the post-revolution reforms and the overall reduction in poverty rates. Coupled with a lack of government investment and a high unemployment rate (15.5 percent in 2017), the country’s fragile situation can provide a fertile breeding ground for radicalization and extremism. With widening regional disparities and challenges exacerbated by instability in neighboring countries, support of international partners is critical to ensure that Tunisia’s stability is not undermined by terrorism in the country or in other parts of the region. 4. Tunisia plans to develop its economy while promoting sustainable growth and climate change goals. In its “Note d’Orientation Stratégique”, the Government of Tunisia (GoT) outlined its vision for development between 2016 and 2020, and underscored the importance of a structural transformation that is sustainable and


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in line with the principles of green growth. The GoT aims to ensure that development will not only be spatially balanced but also environmentally sustainable. The GoT has thus placed the sound utilization of natural resources at the heart of its green growth strategy. In its Intended Nationally Determined Contribution (INDC) presented at the COP21, the GoT proposes to reduce greenhouse gas emissions across all sectors to lower the country’s carbon intensity by 41 percent in 2030, relative to the base year 2010. Mitigation efforts will need to be particularly centered on the energy sector.

B. Sectoral and Institutional Context 5. Tunisia’s energy sector is characterized by overreliance on imported hydrocarbons, high demand growth and waning national resources. The country’s recovery in the post-revolution transition drove a strong growth in energy demand. Between 2010 and 2015, the country’s energy demand grew by an average rate of 2.2 percent per year, with demand for gas quadrupling since 1990. Electricity consumption also increased at a high pace growing on average by 3.6 percent annually, with peak demand increasing by 3.9 percent. The country’s energy mix is based on natural gas (55 percent) and petroleum (44 percent) with renewables accounting for only 1 percent of primary energy. With its high dependence on hydrocarbons, the country is vulnerable to disruptions in the international oil and gas markets and to price volatility, and to the continuity of its current energy supply options. 53 percent of national gas consumption is sourced from Algeria1, and the government expects a steep decline in its national production of hydrocarbons, from 5.35 Mtep in 2016 to 1.5 Mtep in 2030. The structural trend of increasing reliance on hydrocarbon imports and depleting local resources has considerably eroded Tunisia’s energy independence: while in 2010 the country relied only on 7 percent of imports to meet its energy demand, in 2014 imports satisfied more than 40 percent of national energy needs. Italy on the other hand had about 70 percent of its power in 2016 generated from fossil fuels (predominantly natural gas) and 30 percent from renewables (hydropower, geothermal, wind and solar energy). Table 1: Evolution of demand and availability of natural gas in Tunisia

*based on proven minimum resources (fields in operation)2

1 It is worth noting in particular the exposure of the power sector to Algerian gas and so the benefits of diversification. 2 Source: Orientations Stratégiques du Secteur de l’Energie 2030, Tunisian Govt, Ministry of Industry, Energy & Mines, Nov. 2016. BAU: Business as usual; the alternative being the targets of the Tunisian Solar Plan.


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6. The growing energy deficit from domestic sources has left the energy sector underfunded, with little reserve margin, and with increasing concerns about the security of supply. The government estimates that the energy import requirements increased six-fold between 2010 and 2014, standing at 4.05 Mtep in 2015, due to higher energy bills, lower oil and gas production, and lower transiting volumes in the Algeria-Italy pipeline from which Tunisia is paid a transit fee in kind. Despite this, investments in the energy sector have been lagging. While the sector has thus far been reasonably able to respond to demand, it is increasingly curtailed by significant underfunding. Since 2010, there have been delays in the construction and commissioning of new scheduled power stations3, which has led STEG (Société Tunisienne de l’Electricité et du Gaz) to urgently use open cycle gas turbines instead of combined cycle turbines that are more energy efficient. In addition, the country lacks infrastructure to use other energy sources, such as LNG, and is increasingly at risk of power outages. The GoT has estimated that in light of possible malfunctioning of key generation units used for peak load, the country would lack the reserve capacity to guarantee power supply. According to the GoT, the generation park would need to add 400-600 MW of new generation capacity every two years to cover expected national electricity needs. 7. Pervasive energy subsidies make it difficult to invest in new generation and to reduce energy costs. Tunisia is still striving to achieve a balance between fiscal concerns and appeasing potential social tensions by maintaining energy subsidies. From 2010 to 2013, energy subsidies increased seven-fold from TND549 million to TND3.73 billion (or 4.7 percent of GDP), accounting for two-thirds of total public subsidies in the country in 20134. In view of this situation, the GoT has taken measures to control subsidies by making annual and periodic adjustments to the prices of petroleum products, natural gas, and electricity, and by abolishing energy subsidies to the cement sector, considered to be the most energy intensive sector. Energy subsidies had thus reduced to TND918 million in 2015. The GoT has also taken measures towards the poor and vulnerable in the population by creating social tariffs for electricity, while maintaining the prices of Liquefied Petroleum Gas (LPG) and kerosene for households at low levels. 8. Tunisia’s growth requires investments to allow the energy sector to supply continuous and stable power. In 2014, the GoT endorsed a dedicated energy road map and priority measures that focus on: (i) reviewing existing gas resources and consumption patterns, and (ii) diversifying electricity supply away from gas, thus strengthening energy security, notably through the use of renewable energy sources. The GoT has also set ambitious energy targets for Tunisia, aiming to increase its marginal reserve capacity by 10-15 percent by 2030. It has also committed to generating 12 percent of electricity from renewables by 2020, and 30 percent by 2030 (15 percent wind, 10 percent solar Photovoltaic, and 5 percent CSP). In the period 2016 to 2022, this is equivalent to 1860 MW of additional renewable energy capacity. The GoT has also committed in its energy strategy to implement the ‘Tunisian Renewables Plan’ to realize the country’s solar potential. The implementation of this road map will require making available significant levels of financing to ensure necessary investments can be made to meet electricity demand. Overall, the achievement of the 2030 target would require the development of a capacity of 3.8 GW of electricity production from renewable energy and an investment of Euros6.3 billion from the public and private sectors (Tunisian and foreign investors). 9. The Elmed Interconnector (see Box 1 of the Appraisal Summary) presents a tangible investment opportunity in the current socio-political context, and a driver for sustainable and integrated economic development within the entire Maghreb area, and with Europe. In addition to responding to the increasing

3 Mostly due to several procurement issues / choice of suppliers. 4 Cuesta, José; El-Lahga, Abdel Rahmen; Lara Ibarra, Gabriel. 2015. The Socioeconomic Impacts of Energy Reform in Tunisia: A Simulation Approach. Policy Research Working Paper; No. 7312. World Bank, Washington, DC.


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demand for electricity in Tunisia – a small market with high peak demand growth and constrained transmission capacity - the Elmed Interconnector (the Interconnector) is strategic in consolidating the overall security of the Euro-Mediterranean electricity system, by diversifying sources and supply routes, and optimizing the use of energy resources from the two shores of the Mediterranean. The Interconnector will also contribute to achieving Tunisia’s renewables development roadmap by providing access to large back-up power capacity, facilitating the absorption of intermittent solar and wind energy in Tunisia. The project has consequently received the support of the Governments involved, as well as that of the European Commission. On the Maghreb side, the project could also increase energy exchanges between Tunisia and Algeria (currently about 122 GWh/Year), as well as between Tunisia and Libya. 10. The Elmed Interconnector was conceived to link the electricity markets of Tunisia and Italy and enable STEG to address some of the key investment and energy needs of the country. Tunisia’s geographical location puts the country in a strategic position for reinforcing its electricity interconnections with Maghreb as well as with Europe. The Elmed interconnector is strongly supported by the governments of Italy and Tunisia, and by the European Union, as well as by other countries such as Germany and Algeria. It is clearly outlined as a priority project in both the Orientations Stratégiques du Secteur de l’Energie 2030 developed by the Tunisian Ministry of Industry, Energy and Mines, and in the Note d’Orientation Stratégique 2016-2020 of the Tunisian government. 11. Ongoing subsidy reforms undertaken by the GoT with support from the World Bank under a separate activity5 will improve the performance of the Tunisian power sector and strengthen the financial viability of the Elmed Interconnector. The interconnector will contribute to diversifying Tunisia’s electricity supply away from gas (thus limiting its fiscal exposure to global oil and gas prices) and to strengthening Tunisia’s energy security, notably through higher renewable energy integration and dispatch with the direct connection to the European electricity market. Furthermore, the project implementation will follow the recent approval by the Bank of a $500 million DPF6 which aims - as one of its three objectives - to move the country towards a more efficient, sustainable and inclusive energy sector. The DPF involves several triggers and the first was the approval by the Government of Tunisia of an increase in electricity tariffs to reduce subsidies.

C. Higher Level Objectives to which the Project Contributes 12. The proposed Project directly contributes to Pillar I of the World Bank Group’s Country Partnership Framework for Tunisia (CPF) for the period 2016-2020. Pillar I aims at “restoring an environment conducive to sustainable economic growth and private sector-led job creation”. Under this objective, given Tunisia’s long-term challenges in accessing gas for power production which impacts its competitiveness and economic growth, the World Bank has committed to support the GoT with analytical work to better assess the situation and identify least-cost options for power generation. The detailed feasibility studies and the transaction advisory activity of the proposed Project will contribute to achieving this objective and provide the GoT with an interconnection project that will strengthen the country’s security of supply. The Elmed Interconnector also supports Pillar I by reducing energy costs for Tunisia which would improve its fiscal balance, as a prerequisite to improving investor confidence and furthering the development agenda. By providing a low-cost option for power delivery to STEG/ Tunisia (see the economic analysis section) and its residential and industrial customers, the project would also contribute to the World Bank Group’s twin goals of poverty elimination and shared prosperity.

5 Technical support to improve the performance and enhance the financial viability of the Tunisian energy sector (P167211). 6 Tunisia: Investment, Competitiveness and Inclusion Development Policy Financing.


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13. The proposed Project supports the Republic of Tunisia’s vision for development outlined in the Development Plan 2016-2020, the “Note d’Orientation Stratégique 2016-2020” and in the “Vision Stratégique du Secteur de l’Energie 2050”. The Project contributes to the achievement of two of the five pillars of the Note, namely strengthening the national economy and promoting sustainable development. The proposed feasibility studies covered by the Project are a critical step in the preparation of the Elmed Interconnector, which will enable Tunisia to diminish its reliance on natural gas and secure lower cost electricity, improve its fiscal position and enable economic growth. In the long-run, Elmed is also expected to contribute to the diversification of the energy mix through sustainable energy development - a goal that is also in line with the 2030 Energy Sector Strategy. After 2030, and more visibly from 2035, it is expected that the Elmed Interconnector will indeed enable Tunisia to export electricity, particularly from renewables including solar power, providing a transformational change for Tunisia’s energy mix in the long-term. In addition, a key premise of the Note is that Tunisia will maintain and strengthen its partnerships with the international community, and the proposed Project is a critical step to link Tunisia with Italy, affording Tunisia access to the Italian and European power markets and strengthening its ties with such partners. The Elmed Interconnector could also give a renewed push to the regional electrical integration of the Maghreb, and will finalize the integration of the Maghreb and European networks as outlined in the 2030 Tunisian Energy Sector Strategy. 14. The proposed Project (and the future Elmed Interconnection) is consistent with the WBG MENA Strategy, which seeks to promote peace and stability throughout the region by means of regional integration, in particular through the promotion of regional energy trade. The proposed Project will contribute to strengthening regional ties in the electricity sector, and will also expand partnerships with global players, namely Italy and the European Union (EU). 15. Finally, the proposed Project (and the future Elmed Interconnection) fits well with the World Bank’s Maximizing Finance for Development (MFD) agenda by supporting a transaction advisory component that would - inter alia - advise on the financial structure of the Elmed interconnector (that would be expected to consist of a mix of grants, concessional financing, and private financing). Risk-sharing and credit enhancement instruments (such as a partial risk guarantee) could also be used to cover any possible risks that would remain after upstream support.

I. PROJECT DEVELOPMENT OBJECTIVES

A. PDO

16. The PDO is to establish the technical, environmental, social and financial feasibility, and to help structure the proposed Tunisia-Italy Power Interconnection7 (“Proposed Project”).

7 Also referred to as the “Elmed Interconnection”.


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B. Project Beneficiaries 17. The TA will inform decision makers. The primary beneficiaries of the project are the Republics of Tunisia and Italy, and the two project sponsor companies, Terna and STEG. Terna is the private Italian transmission system owner-operator, and STEG is the Tunisian public energy utility.8 C. PDO-Level Results Indicators 18. The main result arising upon completion of the proposed Project is expected to be the full completion of the following studies/ activities found to be of satisfactory quality by the World Bank:

(a) Terrestrial and marine feasibility studies;

(b) Environmental and Social Impact Assessment study and Resettlement Action Plan;

(c) Financial model;

(d) Transaction advisory activity.

The Project’s Theory of Change would be as follows:

8 If the construction of the Elmed interconnector materializes, other beneficiaries will include power producers in Italy and in other European countries (through exports), renewable energy developers in Tunisia, and electricity consumers on both sides of the Mediterranean Sea.


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II. PROJECT DESCRIPTION

A. Project Components

19. The proposed TA Project will allow the Elmed Interconnector stakeholders to undertake the necessary technical feasibility and environmental and social impact studies and provide transaction advisory support. The proposed Project will be instrumental to the GoT and STEG, as well as their Italian partners, to make informed decisions on the final technical, legal and financial structure of the Elmed Interconnector. The development of the commercial, regulatory and financial arrangements will be critical to define STEG’s roles and responsibilities, and will be instrumental for the sponsors to seek financing. In addition, the feasibility and safeguards studies are mandated by law and required before applying for the necessary permits in each jurisdiction. The Terrestrial and Marine Survey Study, and the environmental and social impacts assessment (ESIA) and resettlement action plan (RAP) will be prepared by independent consultants. These studies will be prepared in parallel, but in close collaboration between the Survey Study and ESIA/RAP consultants. Thus, the proposed Project will support the GoT and Elmed sponsors to assess the feasibility of the Interconnector by undertaking three key feasibility studies on networks integration, terrestrial and marine survey, and environmental and social impacts. It will also support the GoT to design a transaction structure attractive to DFIs and to commercial financiers, and will have a project management component. 20. The proposed Project (estimated cost: US$13.40 million) will comprise the three components described below. Annex 1 contains the detailed project description.

Component 1: Preparation Studies (estimated cost: US$10.64 million) 21. This component would consist of the following studies: • Terrestrial Survey Feasibility Study. The purpose of this study is to determine potential routes and landing points of the Proposed Project for the area converter station, the direct current cable route from the landing point of the marine cable on the coast to the converter station on land and the AC cable route from the converter station to the grid node in both Tunisia and Italy’s territories. Said study shall include, inter alia: (i) the identification of territorial and environmental characteristics of the passageway lines and the converter station areas; (ii) an analysis of any archeological, landscape, hydro, geological and environmental implications; and (c) the completion of the line passageway and the preparation of geotechnical, archeological, and environmental surveys and reports. • Marine Survey Feasibility Study. The purpose of this study is to determine potential routes and landing points of the Proposed Project for the area converter station, the direct current cable route from the landing point of the marine cable on the coast to the converter station on land and the AC cable route from the converter station to the grid node in both Tunisia and Italy’s territories. Said study shall include, inter alia: (i) the identification of the seabed and environmental characteristics of the cable passageway; (ii) an analysis of any archeological, landscape, hydro, geological and environmental implications; and (c) the completion of the seabed route and the preparation of geotechnical, archeological, and environmental surveys and reports.


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• Network Study. The study will determine: (i) the electrical Proposed Project scheme (including monopolar/bipolar grid node connection and networks reinforcements); (ii) the feasible technology and rated power to link; and (iii) the performance required to the Direct Current system. • Market Study (European Investment Bank financed and executed). The study will include inter alia: (i) an assessment of the social economic welfare and other relevant indicators; (ii) an assessment of the maximum transmission capacity freed up through the Proposed Project on the Northern Italian border; and (iii) the impact of the Proposed Project on inter alia: (A) the integration of renewable energy generation in the Tunisian network; and (B) the integration of Maghreb electricity markets and with Europe9. • Environmental and Social Impact Study. The study will include, inter alia, a Social and Environmental Impact Assessment/Environmental and Social Management Plan (“ESIA/ESMP”) and a Resettlement Action Plan (“RAP”). • Development of the financial model for the financial viability of the Proposed Project. Component 2: Transaction Advisory Services (estimated cost: US$1.91 million). • Provision of commercial, legal, financial, technical and transaction advisory services for the carrying out of the following activities, including: (a) identifying the most appropriate commercial and regulatory structure for the future implementation of the Proposed Project; (b) establishing the Proposed Project vehicle and drafting any necessary secondary legislation, contracts and codes; (c) supporting the transaction design, including ownership and governance arrangements for the interconnector, the approach to procurement and the regulatory framework for the provision of access to the interconnector and charging for its use; and (d) carrying out negotiations with potential sponsors (including assessing their equity), as well as liaising with private providers and other development financial institutions, to maximize financing for the Proposed Project. Component 3: Project management (estimated cost: US$0.86 million). • Provision of support for the implementation, monitoring and evaluation of the Project, including: (a) technical assessment of the consultant proposals for the studies; (b) the technical monitoring and evaluation of the Project activities, including the preparation of Project reports; (c) the carrying out of coordination meetings; (d) the carrying out of technical consultations with the high-voltage direct current system supplier; and (e) carrying out raising awareness campaigns and other communication activities on the Proposed Project.

B. Project Cost and Financing

22. The project cost has been estimated at US$13.40 million as shown below.

9 The study would include an additional economic analysis of the Elmed Interconnector to confirm: (a) that it is the least cost option for Tunisia to address its future energy needs; and (b) the impact of further integration of renewables in Tunisia (including solar).


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Component/ Study Title Estimated Cost (US$)

GIF (US$) ESMAP (US$)

EIB (US$) STEG/ TERNA (US$)

1. Preparation Studies: 10,638,000 5,091,000 4,797,000 375,000 375,000 Terrestrial Survey Feasibility Study

625,000 321,792 303,208 0 0

Marine Survey Feasibility Study 8,625,000 4,440,724 4,184,276 0 0

Network Study 375,000 0 0 0 375,000

Market Study 375,000 0 0 375,000 0

ESIA & RAP 500,000 257,433 242,567 0 0

Financial Model 138,000 71,052 66,948 0 0

2. Transaction advisory: 1,909,000 1,909,000 0 0 0

Provision of commercial, legal, financial, technical and transaction processing advisory services to GoT/STEG to structure the Elmed interconnector

1,909,000 1,909,000 0 0 0

3. Project management 855,000 0 703,000 0 152,000

PIE project management costs 855,000 0 703,000 0 152,000

Total Project Costs 13,402,000

Total Financing Required 13,402,000 7,000,000 5,500,000 375,000 527,000 1 USD = 0.80 Euro

23. The financing plan for the proposed Project amounts to US$13.40 million and includes financing from:

• the Global Infrastructure Facility (GIF): US$7 million10.

• the Energy Sector Management Assistance Program (ESMAP): US$5.5 million.

• the European Investment Bank (EIB): €300,000, for financing, procuring and executing the Market Study.

• STEG and Terna financing the network study and part of PIE project management costs.

24. The GIF funding for project preparation and transaction structuring technical assistance is undertaken on a reimbursable basis, with a view to sharing the preparation cost and risk with the government counterparts and, ultimately, the investors. 75 percent of the GIF funds will have to be reimbursed. If the Recipient makes a written request to the World Bank and the World Bank agrees, the Investor designated by the Recipient may make the above payment directly to the World Bank on behalf of the Recipient, provided that in the event of a default by the designated Investor, the Recipient would make the said payment to the World Bank.

25. Should the Elmed Interconnector be found to be non-viable or fail to reach financial close within a specified timeframe, no GIF reimbursement will be required. Should the GoT terminate the Elmed Project prior to reaching financial close for any reason other than the non-viability of the interconnector project, or the Government fails to comply with the terms of the World Bank engagement, 100 percent of the costs incurred

10 The client requested that the Bank first disburses ESMAP and then the GIF, as the latter is partly reimbursable.


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under the GIF grant will be deemed reimbursable. These provisions are included in Article III of the GIF grant agreement.

C. Lessons Learned and Reflected in the Project Design

26. The interconnector project development started in 2003 and was the subject of several studies in 2005-2006 by the Italian consulting firm, CESI11. On this basis, a joint Tunisian-Italian group met in September 2005 and approved a project option consisting of a 1000 MW submarine cable and a 1200 MW power plant in Tunisia, of which 800 MW would be exported to Italy. In 2007-2008, on the basis of the option chosen, several joint declarations were made between the Tunisian and the Italian sides, and resulted in the creation of “Elmed Etudes” in 2009 as a joint venture between Terna and STEG. During this period Terna and STEG signed a first MOU. 27. In 2011, the situation changed with the recession in Europe – resulting in a surplus of electricity on the Italian side – and the economic slow-down after the Revolution in Tunisia. The two sides therefore agreed to revise the interconnector project concept, which led to the elimination of the proposed power plant in Tunisia, the reduction of the cable’s capacity (to 600 MW), and the change in the direction of forecasted power flows in the short-term (i.e., from Italy to Tunisia). Since 2016, significant work was undertaken by Elmed Etudes to refine the approach to the interconnector, and prepare its implementation. 28. In 2016-2017 an economic study was carried out under Bank supervision that established the economic viability of the interconnector for Tunisia, Italy, and the European power network more broadly, and a preliminary financial analysis was prepared by the Bank. The economic study took into account the planned interconnectors between Italy and other countries that are expected to be operational in advance of the Elmed project, as well as a 10 percent renewable energy capacity in Tunisia. 29. Technical Assistance Phase 1 (P162542, an ASA task). In 2017 a consultant firm (Castalia) was recruited under GIF funding to provide technical assistance to the GoT and other project stakeholders for the preparation of the future Elmed interconnector project. The scope of work for Phase 1 included: clarifying the roles and responsibilities of stakeholders; developing a high-level options analysis and transaction design; market-sounding potential financiers; and identifying the additional work required at the project preparation stage. The potential structures for the project were discussed in a series of workshops, and the key issues to be addressed at project preparation were identified. In light of these recent developments, it is believed that the Elmed interconnector is now mature for the full feasibility stage.

30. In addition, key lessons from international experience are being considered for the preparation of the Elmed Interconnector. These are:

(i) A formal comprehensive demonstration of strong economic benefits has been the cornerstone for all successful cross-border transmission projects;

(ii) The choice of technology – High Voltage Direct Current (HDVC) in many cases – has to be carefully crafted to manage multiple objectives including economics, system security and flexibility;

11 -Network studies: 1/ Scenario Analysis (September 2005), and 2/ Detailed Analysis of the Selected Alternatives (February 2006) -Two Environmental and Siting Studies: 1/ Standards and Instruments of Land Planning and General Characterization of the Examined Environmental Context (July 2005) and 2/ Detailed Analysis of the Territorial and Environmental Insertion Context for the Selected Alternatives (December 2005).


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(iii) Significant efforts are needed to put together the necessary institutional set up for the policy makers, planners and system operators to agree on the projects;

(iv) Bilateral agreements have been by far the more successful business model for these projects; and (v) Once a market is established, it requires a transparent set of criteria to drive the development of

interconnections based on market fundamentals.

III. IMPLEMENTATION

A. Institutional and Implementation Arrangements 31. The Elmed interconnector has two sponsors, the Société Tunisienne de l’Electricité et du Gaz (STEG) and Terna. STEG is the Tunisian vertically integrated state-owned utility, owning most of the country’s existing generation capacity and contracts with independent power producers (IPPs). STEG also manages power system operation, transmission, and distribution, and is responsible for electricity supply. Terna is Italy’s electricity transmission system operator, the majority owner of the Italian high-voltage and very high-voltage electricity National Transmission Grid. Terna operates a natural monopoly and its public service mission is to secure the transmission and dispatching of electricity throughout Italy. 90 percent of Terna’s activities are conducted in the regulated market. It is a private company with shares that are openly traded with a market value of $9.8 billion. 32. The project’s design involves the participation of two implementing entities: Elmed Etudes (a 50:50 joint-venture between Terna and STEG) and STEG, managing respectively 86 percent and 14 percent of the project’s funds. Components 1 and 3 will be implemented by Elmed Etudes and Component 2 will be implemented by STEG on behalf of the Republic of Tunisia. 33. A Steering Committee will be established involving senior management (preferably Chief Executive Officers) of STEG and TERNA and will meet twice a year to resolve high-level issues, as they arise. 34. Two grant agreements (for ESMAP and GIF respectively) will be signed between the Bank and the GoT. A subsidiary agreement will be signed between the GoT and Elmed Etudes covering both ESMAP and GIF funds for components 1 and 3, as Elmed Etudes is a private sector entity. The Recipient will enter into an agreement with STEG for the transfer of funds for the implementation of component 2. Both subsidiary agreements are established as effectiveness conditions for the ESMAP and GIF Grants. 35. To determine the optimum procurement approach to yield the appropriate response from the market, a project Procurement Strategy for Development (PPSD) has been prepared. The strategy took into consideration, inter alia, the market situation, operational context, previous experience, and risks. The PPSD will assist in the elaboration of the Procurement Plan.

B. Results Monitoring and Evaluation 36. Monitoring and evaluation (M&E) of the project will be the responsibility of Elmed Etudes, which will carry out the M&E of the different components and activities in accordance with the indicators included in the results framework (see section VII) and will be complemented by World Bank supervision and technical support. The


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M&E will have the following core objectives: (a) improve project management, (b) ensure transparency in data sharing, (c) promote efficiency, and (d) provide timely and accurate information on project results in relation to the evolution of the context during implementation. Bi-annual project progress reports will be generated by the PIE to report on the implementation progress of the three components. A midterm review (MTR) and a final Implementation Completion and Results (ICR) Report will be conducted in collaboration with the GoT. During the MTR, progress towards reaching the project objectives will be evaluated and remedial actions will be taken, as needed.

C. Sustainability 37. The Governments of Tunisia and Italy are very committed to the project. The preparation of the future Tunisia-Italy Interconnector is listed as a priority activity in the “Note d’Orientation Stratégique du Secteur de l’Energie 2030” prepared by the Tunisian Ministry of Industry, Energy and Mines. 38. The Terrestrial and Marine Studies and the Network Study will be tendered out and completed by specialized consulting companies with strong expertise, thus guaranteeing high-quality end products. The Environmental and Social Impact Assessment Study (ESIA) and the Resettlement Action Plan (RAP) will ensure that the future project is designed in an environmentally and socially sustainable manner. Finally, the transaction advisory component will enable STEG to make informed decisions on its role and stakes in the future Elmed Interconnector; recommend a suitable institutional and regulatory structure; and maximize financing for the project, in order to bring it to a financial close.

D. Role of Partners

39. The Italian Agency for Development Cooperation (AICS) is a regular contributor to ESMAP, one of the two trust funds for this project. The World Bank’s early involvement in the Elmed interconnector is expected to draw the participation of a number of partners from the private sector, Government of Italy, the EU and DFIs. The World Bank coordinated a workshop in July 2017 with other DFIs, including the African Development Bank (AfDB), the European Bank for Reconstruction and Development (EBRD), and EIB, as well as private financiers, which was useful to develop a High-Level Transaction Design and an Implementation Plan. The World Bank’s support will be instrumental to leverage other sources of public funds, including EU grants from the Connecting Europe Facility (CEF), as well as support from other DFIs. While the proposed Project is an early step in the development of the Elmed interconnector, the WB collaboration with the GoT, Government of Italy, STEG and Terna will continue to be instrumental to outline the critical details and steps required for the project to move forward, and to attract the interest of international partners. 40. As a Technical Partner of the GIF, the World Bank will be able to substantially draw on the GIF partnership to strengthen the collaboration and coordination with private sector financiers, investors, and DFIs. GIF’s Project Definition Activity (PDA) support has already proved useful to take the project to where it is today. The GIF Advisory Council is made up of institutional investors, commercial banks, infrastructure finance associations, and DFIs, and can provide market feedback on the proposed transaction structure determined by the Project. Several of the DFIs that have expressed interest in the Elmed Project are also GIF Technical Partners (EIB and EBRD) or pending Technical Partners (AfDB), and the GIF will provide a collaborative platform to coordinate between the partners. As mentioned earlier, the EIB will be financing and executing the market study.


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41. The World Bank will also bring the GIF’s expertise on structuring bankable infrastructure projects to attract private sector investment to the proposed Project. The GIF has global experience in structuring complex infrastructure projects, including large and institutionally complex regional projects. The GIF would contribute its knowledge of innovative financing structures, including the use of guarantees and other credit enhancement mechanisms.

IV. KEY RISKS

A. Overall Risk Rating and Explanation of Key Risks 42. The overall risk to achieving the PDO is rated high (see the SORT table in the Data Sheet). The following are the key risks facing the proposed project:

(a) Fiduciary risk (High). STEG has a well-structured procurement system and specialized human resources; however, ELMED-Etudes has no regulatory or procedures framework, no records and no trained dedicated staff to ensure these responsibilities. It also has no prior experience with World Bank procedures, and it will rely on its shareholders’ (STEG and TERNA) expertise and staff to carry out procurement. Risk mitigation measures are discussed under Appraisal Summary, Procurement.

(b) Institutional Capacity for Implementation and Sustainability (Substantial). Elmed Etudes, which will implement Components 1 and 3, has no prior experience of Bank procedures. A Project Operations Manual (POM) has been prepared and training will be delivered by the Bank during the first months of implementation to strengthen Elmed Etudes’ readiness to swiftly implement the project.

(c) Safeguards (Substantial). Given the many stakeholders involved (sponsors and related government authorities), the transboundary nature of the project, and the environmental and social risks identified, the preparation of a solid ESIA and RAP, including consultation of affected communities and interested parties, will require full time highly qualified specialists in the Project Implementing Entities (PIEs) and the independent consultants for these studies. The ESIA and RAP will be guided by a Stakeholder Engagement Plan (SEP), which was disclosed on the World Bank’s website on July 5, 2018. Elmed Etudes will select the independent consultants for the ESIA and RAP under Bank supervision and will assess their work with the help of an independent panel of experts. The ESIA will then be subject to clearance by national environmental agencies in both countries, by the EU, other involved IFIs and by the World Bank. The Survey Study and the ESIA will be prepared in parallel, and the consultants of both studies will need to coordinate their work and exchange data in order to ensure that environmental and social considerations are included in the final selection of the offshore line route and the locations of the onshore facilities.

(d) Stakeholders (Substantial). Given the complexity of the future Elmed Interconnector and the many stakeholders involved (sponsors and related government authorities), implementing the project will require a comprehensive effort to bring together partners with different interests and requirements. The advisory component of the proposed Project has been designed to closely engage all possible stakeholders. A Steering Committee will be established involving senior management of STEG and Terna, and will meet twice a year to resolve high-level issues as they arise.


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An Implementation Plan - with the necessary tasks and responsibilities - has been defined to successfully move the project forward.

V. APPRAISAL SUMMARY

A. Economic and Financial Analysis 43. Economic Analysis. This project will contribute to the overall costs and benefits of the future Elmed Interconnector. An economic analysis of the Elmed Interconnector, completed by the consulting firm CESI in 2016 under Bank supervision, found the project to be economically viable for Tunisia, Italy, and the broader European power market, with an economic rate of return of 12-18 percent under the most likely scenarios. An additional economic analysis of the Elmed Interconnector will be carried out under the project (in the Market Study) to confirm: (i) that it is the least cost option for Tunisia to address its future energy needs; and (ii) the impact of further integration of renewables in Tunisia. Annex 4 provides more details of the economic analysis. 44. Financial Analysis. A preliminary financial analysis of the Elmed Interconnector showed that to be financially viable, the project would require an investment subsidy of 25-50 percent (€150 million to €300 million), as some of the key economic benefits of the project, such as security of supply and integration of renewables, cannot be easily monetized. The subsidy is expected to be provided by the EU, but this means that the project will require public sector DFI financing, in addition to private sector equity. 45. Consultations were held with financiers in coordination with the two sponsors to determine potential financiers’ interest in the Elmed Interconnector and the conditions that would influence their participation. The key conditions that would need to be met for private financiers to consider the project included: (i) revenues based on availability and not subject to demand risk; (ii) contractual obligations of STEG guaranteed; and (iii) early engagement in the development of the interconnector. An additional financial analysis will be carried out under Component 1 to develop a financial model that reflects the financiers’ conditions and the impact on the Elmed Interconnector.

B. Technical 46. The proposed Project will support the Republic of Tunisia to prepare the future Elmed Interconnector by developing the Terrestrial and Marine Study, the Network Study, and the Environmental and Social Impact Assessment Study (ESIA) and the Resettlement Action Plan (RAP). The ESIA and RAP Studies are discussed in more detail in sections E and F below. Box 1 summarizes the key features of the future Elmed Interconnector.

Box 1: Presentation of the future Elmed Interconnector The Elmed Project Interconnector is a 200 km, 600 mw undersea high-voltage direct current (HVDC) interconnector connecting Italy and Tunisia. The Elmed Interconnector will enable trade in energy between Tunisia and Italy. The Elmed Interconnector is a 600 MW undersea high-voltage direct current (HVDC) interconnector expected to include 192-km of cable under the Mediterranean Sea, 32 km of underground cable in Italy and 9 km of underground cable in Tunisia. The interconnector cable will span between two AC/DC converter stations, one in Partana in Sicily,


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Italy and the other at Mlaaba, in the Cap Bon area of Tunisia. The Elmed Interconnector will also necessitate the upgrading of the power systems in both Tunisia and Italy, including the installation of a new 400-kV substation and a new 120 km double circuit line connecting this substation to the Mornaguia substation in Tunisia. A 200 km 400 kV double circuit transmission line is already under development across the island of Sicily, between Chiaromonte and Ciminna. The capital expenditure is estimated to be €600 million. This estimate includes the cost of the undersea and underground HVDC transmission cable and converter stations, laying of both cables, protection of the undersea cable, and engineering, supply, and installation of necessary accessories.

47. In addition, the proposed Project will provide transaction advice and support the Republic of Tunisia’s efforts to assess the viability of (and prepare) the Elmed Interconnector project using a bankable structure that may enable private sector financing for the cable12. The preparation of the interconnector is a complex endeavor that will require STEG to define a bankable commercial and regulatory structure for the line, as well as a suitable electricity import strategy. Advisory support for structuring key elements of the interconnector, such as governance structure, procurement, access and revenue arrangements, is instrumental for the Elmed Interconnector and for the improvement of Tunisia’s socio-economic welfare.

C. Financial Management 48. A Financial Management Assessment (FMA) was carried out in accordance with the World Bank Policy on Investment Project Financing to evaluate the adequacy of financial management arrangements for the implementation of the project. This assessment reflects the financial management arrangements for STEG and Elmed Etudes. 49. Risk assessment. Elmed Etudes and STEG will implement the project and will be responsible for the overall financial management. Established in 1962, STEG (a State-Owned Enterprise) has a long track record and adequate financial management arrangements. Elmed Etudes has been newly created and is staffed with a co-director in Tunisia (and a co-director from Terna who travels periodically to the Tunis headquarters of Elmed Etudes) and an assistant, and has outsourced its financial function to a private accounting firm. Elmed Etudes’ lack of (i) experience in the World Bank’s FM procedures and (ii) track record of pose a substantial control risk which is balanced by a moderate inherent risk as the project’s activities (which focus on studies) are not complex.

50. Mitigation measures. To mitigate the identified risks and weaknesses, the following measures will be carried out:

12 The World Bank supports a “cascade/ MFD approach” to investment decision-making to encourage private sector participation, while leveraging and preserving public dollars for critical public investments. The starting point is to assess if the Project can be financed on commercial terms without government guarantees, while remaining affordable. If commercial financing is not viable due to perceived risks or market failures, upstream support to address market failures and risks would be considered. Risk-sharing and credit enhancement instruments could be used to cover risks anticipated to remain after upstream support. If it is assessed that commercial finance would remain not cost-effective or viable despite upstream support and risk mitigation efforts, public and concessional resources would be considered.


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• Elmed Etudes: (i) the amendment of the terms of reference of the accounting firm in charge of overseeing the financial management function to incorporate a financial management consultant for the project’s management, who is well conversant with the World Bank procedures; (ii) the development of a detailed POM describing the roles and responsibilities of the two implementing entities, as well as the financial management procedures; and (iii) the recruitment of an external auditor.

• STEG: (i) the appointment of an accountant from its financial directorate to handle the project’s transactions; and (ii) the amendment of the terms of reference of the external auditor to include the project.

51. Further details of the project’s financial management arrangements are provided in Annex 2.

D. Procurement 52. Procurement for the project will be carried out in accordance with World Bank Procurement Regulations for Borrowers (Regulations), July 2016 edition, revised in November 2017, and the provisions stipulated in the Grant Agreement. The project will be subject to the Bank’s Anticorruption Guidelines (‘Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants’), dated October 15, 2006, and revised in January 2011. 53. The Project’s procurement consists mainly of consulting services. A project procurement strategy for development (PPSD) has been prepared in accordance with the Bank’s new procurement framework. The initial procurement plan for the 18 first months of the project, prepared based on the outcome of the PPSD, is acceptable to the Bank. It will be updated in agreement with the World Bank, annually or as required to reflect project implementation needs and improvements in institutional capacity. The Procurement Plan will be disclosed publicly. 54. Procurement under the project will be implemented by Elmed Etudes (for Components 1 and 3) and STEG (for Component 2). The Bank’s procurement capacity assessment found that while STEG has a well-structured procurement system and specialized human resources, ELMED-Etudes has no regulatory or procedures framework, no records and no trained dedicated staff to ensure these responsibilities. It has past experience in network studies and in market studies (i.e., requests for proposal issued as from 2010); but it has no prior experience with World Bank procedures. However, it will rely on its shareholders’ (STEG and TERNA) expertise and staff to carry out procurement. Annex 2 provides a summary of the main procurement risks and the corresponding mitigation measures.

E. Social 55. The potential beneficiaries of the project are estimated at 70.05 million: Tunisia’s population of 11.25 million and Italy’s population of 59.8 million. 56. Consultation – Communication. The Elmed Interconnector has been conceived in a participatory manner and has been the subject of recurrent discussions and presentations by the two countries since 2003, at local, at national, as well as at the international level. Consultations with stakeholders, as described in the SEP, will


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continue throughout the interconnector project cycle, from preparation to project completion. The preparation and implementation of safeguards instruments has been, and will continue to be, part of the consultation process. The SEP was disclosed in Tunisia on June 20, 2018 and in Italy on July 3, 2018. It was disclosed on the World Bank website on July 5, 2018. 57. Social benefits – Gender and Equity. This TA Project will feed into the development of the planned Elmed Interconnector investment project, which is expected to deliver significant social benefits by improving electricity services and reduce the power deficit in Tunisia. It will contribute to leveling the playing field for energy service delivery between wealthy and low-income neighborhoods. Civil works to be carried out will create income generating opportunities for both professionals, skilled workers and manual labor. It will provide households with electricity, improve the quality of life, and potentially strengthen social cohesion. The project will benefit working women and men, school children, the elderly and youth. Women and girls who often are in charge of household chores, such as buying and preserving food and cooking, will benefit from reliable electricity services. The potential social and poverty outcomes of the proposed project will include, but not be limited to: (i) income generating opportunities; (ii) enhanced government capacity to provide reliable and competitive energy services; and (iii) productivity gains as both the public and private sector, as well as households, will gain access to reliable electricity services. 58. Consultations and Citizen Engagement. Citizen engagement was an integral part of project preparation, feeding into the project design. Representatives of the national government, city authorities, local government officials, neighborhood organizations and the international donor community were consulted and expressed support for the project. Groups to be engaged during the implementation of the TA include: neighborhood organizations; municipalities; project affected communities, project affected persons including youth, women and men, local community leaders, NGOs and CBOs. 59. Labor influx and violence prevention. The potential future implementation of the Elmed Interconnector will induce labor influx from outside local communities, even though the hiring of local labor will be given priority. Measures to be taken to address the challenges of labor influx will include, but will not be limited to: (i) assessing labor influx risks in the ESIA, based on Bank’s sector-specific experience in the country and other similar conditions; (ii) developing appropriate mitigation instruments, such as Labor Influx Management Plan; (iii) inclusion of clauses on workers’ condition and management, child protection and gender based violence (GBV) prevention in all civil works contracts; (iv) provision of technical assistance and training, and increasing the awareness of GBV among all contractors, workers and local residents; and (v) setting up an accessibile and accountable grievance redress system to ensure that any incidents related to labor influx and GBV are addressed in an effective manner. However, it is to be noted that this project is technical assistance (TA) only. 60. Social Safeguards. The expected adverse social impacts associated with the future interconnector project include, but are not limited to: land acquisition; involuntary resettlement; impacts on cultural resources; and influx of workers during construction. The project will be governed by World Bank Performance Standards (PSs) under OP 4.03; PS 5 on Land Acquisition and Involuntary Resettlement applies as the future interconnector project is likely to induce land acquisition and/or involuntary resettlement. The draft terms of reference (TORs) for the preparation of a resettlement action plan (RAP) has been approved by the Bank. The RAP TOR (disclosed on the Bank website on April 1, 2018) will be disclosed in-country for consultations prior to the preparation of the RAP and appraisal of the project. The RAP will be prepared in compliance with Performance Standard 5 on Land Acquisition and Involuntary Resettlement, as well as the Tunisian and Italian laws on land acquisition and


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expropriation. The PIEs will publish the draft RAP and draft ESIA/ESMP for consultations prior to their completion. The final draft ESIA/ESMP and RAP (reflecting the outcome of the consultations) will be reviewed and cleared by the Bank.

F. Environment 61. Environmental and Social Impact Assessment (ESIA). This project is a Category A project, because of the potential significant environmental and social impacts on marine biodiversity, pollution of the marine environment, and its complex transboundary nature. Owing to the public private partnership (PPP) nature of the interconnector, the ESIA will be prepared in accordance with the Bank’s Performance Standards (under OP 4.03), in addition to relevant Tunisian, Italian and European guidelines. The Environmental and Social Impact Study under Component 1 will prepare an assessment of the environmental and social impacts (ESIA), including the health and safety aspects (in particular the General Environmental, Health and Safety Guidelines - EHSG - of April 2007 and the Electric Power Transmission and Distribution EHSG of April 2007) of the Elmed Interconnector and associated grid reinforcement investments. It will recommend measures to avoid, reduce, mitigate, and address these impacts in Tunisia, on the marine route between Tunisia and Italy, and in Italy. The ESIA TOR approved by the World Bank was disclosed in-country and on the World Bank website on April 1, 2018. The ESIA will be guided by a Stakeholder Engagement Plan (SEP), and gender is addressed in the TORs for the ESIA and RAP. The ESIA will include and assess the impacts on terrestrial and marine biodiversity at the project sites, pollution, broader ecosystem impacts, and water/pollution from construction, as well as social impacts. It will use findings from public consultations, as described in the SEP and in the technical studies under Component 1. 62. The Environmental and Social Management Plan (ESMP) will develop effective mitigation measures for identified environmental and social impacts and risks, as well the management of expected health and safety risks during construction and operation. It will recommend that the Contractors prepare and implement their own Construction ESMP (CESMP) and a comprehensive Health & Safety Plan compliant with OHSAS 18001:2007, NEBOSH or similar. The ESMP will also describe the responsibilities of Contractors, Supervising Engineers, the project developer and other stakeholders with regard to environmental and social management, as well as health and safety during construction and operation, and the staff with international experience who need to be recruited for this purpose. 63. Due to the TA nature of this project, safeguard-related studies will be prepared under Component 1 of the Project. The Environmental & Social Review Summary (ESRS) was disclosed on July 5, 2018, the Integrated Environmental and Social Data Sheet (ISDS) was disclosed on July 6, 2018, and the Stakeholders Engagement Plan (SEP) was disclosed on July 5, 2018.

G. Other Safeguard Policies (if applicable) Not applicable.

H. World Bank Grievance Redress

64. Communities and individuals who believe that they are adversely affected by a World Bank (WB) supported project may submit complaints to existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to


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the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org

.

http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service

http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service

http://www.inspectionpanel.org/


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VII. RESULTS FRAMEWORK AND MONITORING

Results Framework

Project Development Objective(s) The PDO is to establish the technical, environmental, social and financial feasibility, and to help structure the proposed Tunisia-Italy Power Interconnection (“Proposed Project”).

RESULT_FRAME_T BL_ PD O

PDO Indicators by Objectives / Outcomes DLI CRI Unit of Measure

Baseline End Target

Refer to the full PDO description in the datasheet

Completion progress of the Terrestrial feasibility study found to be of satisfactory quality by the World Bank

Percentage 0.00 100.00

Completion progress of the Marine feasibility study found to be of satisfactory quality by the World Bank


Completion progress of the Environmental and social impact study found to be of satisfactory quality by the World Bank


Completion progress of the Transaction advisory activity found to be of satisfactory quality by the World Bank


Completion progress of the Financial model found to be of satisfactory quality by the World Bank



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RESULT_FRAME_T BL_ IO

Intermediate Results Indicators by Components DLI CRI Unit of Measure

Baseline End Target

Component 1,2,3

Tendering process for terrestrial feasibility study initiated Text TORs prepared (by March 15, 2018) Initiated (by September 30, 2018)

Tendering process for marine feasibility study initiated. Text TOR prepared (by March 15, 2018) Initiated (by September 30, 2018)

Tendering process for environmental and social impact study initiated.

Text TOR prepared (by March 15, 2018) Initiated (by September 30, 2018)

Tendering process for transaction advisory activity initiated. Text TOR prepared (by March 15, 2018) Initiated (by December 31, 2018)

Tendering process for financial model initiated. Text TOR prepared (by March 15, 2018) Initiated (by September 30, 2018)

Grievance redress Text No grievance redress mechanism

Grievance redress mechanisms included in the safeguards studies and in the project manual. Consultations and grievance redress mechanisms are gender inclusive, and incorporated into the safeguards instruments and into the project manual.


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Monitoring & Evaluation Plan: PDO Indicators

Indicator Name Completion progress of the Terrestrial feasibility study found to be of satisfactory quality by the World Bank

Definition/Description 25% inception / 50% interim / 100% final study reports

Frequency Biannually

Data Source World Bank

Methodology for Data Collection World Bank

Responsibility for Data Collection World Bank

Indicator Name Completion progress of the Marine feasibility study found to be of satisfactory quality by the World Bank







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Indicator Name Completion progress of the Environmental and social impact study found to be of satisfactory quality by the World Bank






Indicator Name Completion progress of the Transaction advisory activity found to be of satisfactory quality by the World Bank

Definition/Description 25% inception / 50% interim / 100% final activity






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Indicator Name Completion progress of the Financial model found to be of satisfactory quality by the World Bank

Definition/Description 25% inception / 50% interim / 100% final financial model





Monitoring & Evaluation Plan: Intermediate Results Indicators

Indicator Name Tendering process for terrestrial feasibility study initiated

Definition/Description



Methodology for Data Collection



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Indicator Name Tendering process for marine feasibility study initiated.






Indicator Name Tendering process for environmental and social impact study initiated.







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Indicator Name Tendering process for transaction advisory activity initiated.






Indicator Name Tendering process for financial model initiated.







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Indicator Name Grievance redress


Frequency Annual

Data Source Consultant


Responsibility for Data Collection PIE


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ANNEX 1: DETAILED PROJECT DESCRIPTION

COUNTRY : Tunisia

Tunisia-Italy Power Interconnector - Project Preparation TA

1. Tunisia’s demand for power has been growing steadily for the past two decades. To meet future demand, the country will have to increase supply by importing electricity or developing new power sources. The Elmed Interconnector is a planned 600 MW sub-sea high-voltage direct-current (HVDC) link between Tunisia and Sicily with a length of 200 km that would connect the Italian and Tunisian electricity grids and enable electricity trade between Tunisia and Italy. The interconnector has an estimated cost of €600 million13 and a target financial close of 2019, with a planned operational date of 2023. The proposed Project is the second phase (“Phase 2”) of technical assistance (TA) to the Republic of Tunisia to prepare the project, including technical feasibility studies, and will help define a bankable structure that may enable private sector participation in financing.

Map of the Tunisia-Italy (‘ELMED’) Power Interconnector

2. The Elmed Interconnector is included in the list of ENTSO-E TYNDP14 projects. The cable would be able to supply up to 16 percent of Tunisia’s current power needs. In the medium-term, the interconnector would:

13 ±15 percent; Including two HVDC converter stations and terrestrial lines. 14 European Network of Transmission System Operators for Electricity - Ten-Year Network Development Plan.

PARTANNA

MORNAGUIA

CAP BON AREA


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• help Tunisia address its growing energy shortage by importing electricity from Italy;

• help Tunisia with the integration of future intermittent renewable energy expected to come online in the next five years, through the back-up capacity of a wider European power network; and

• enable a deeper integration of North African electricity markets with the European Internal Electricity Market (EU IEM), as it would close the Europe-Maghreb network loop that runs from Morocco, Spain, France, Italy, Tunisia, and Algeria.

In the longer-term, the interconnection will enable exports of power from North Africa to Europe, especially renewable energy from Tunisia.

3. On the Italian side, the interconnector may contribute to reducing, under specific conditions, present and future limitations to the power exchanges on the northern Italian border with France, Switzerland, Austria and Slovenia, and therefore potentially allow increase in the transmission capacity and its exploitation on that boundary. This will be assessed further in Component 1 of the project. 4. The interconnector is sponsored by STEG, the Tunisian energy utility, and Terna Group, the private Italian transmission owner and system operator (TSO). The interconnector sponsors (STEG and Terna) are exploring a range of financing options, including equity financing, grant financing from the European Union through the Projects of Common Interest program, concessional financing from development finance institutions (DFIs), and financing from private banks. Due to the large capital costs of the interconnector, it is expected that support from the European Union and DFIs will be necessary to achieve value for money. EIB and AfDB have indicated that they could consider loans and guarantees, if the project cannot be financed on commercial terms due to perceived risks.

5. The interconnector project development started in 2003 and was the subject of several studies in 2005-2006 by the Italian consulting firm, CESI15. On this basis, a joint Tunisian-Italian group met in September 2005 and approved a project option consisting of a 1000 MW submarine cable and a 1200 MW power plant in Tunisia, of which 800 MW would be exported to Italy. In 2007-2008, on the basis of the option chosen, several joint declarations were made between the Tunisian and the Italian sides, and resulted in the creation of “Elmed Etudes” in 2009 as a joint venture between Terna and STEG. During this period, Terna and STEG signed a first MOU. In 2011, the situation changed with the recession in Europe – resulting in a surplus of electricity on the Italian side – and the economic slow-down after the Revolution in Tunisia. The two sides therefore agreed to revise the interconnector project concept, which led to the elimination of the proposed power plant in Tunisia, the reduction of the cable’s capacity (to 600 MW), and the change in the direction of forecast power flows in the short-term (i.e., from Italy to Tunisia). Since 2016, significant work has been undertaken by Elmed Etudes to refine the approach to the interconnector, and prepare its implementation. 6. In 2016-2017 an economic study was carried out under Bank supervision that established the economic viability of the interconnector for Tunisia, Italy, and the European power network more broadly, and a preliminary financial analysis was prepared by the Bank. The economic study took into account the planned interconnectors between Italy and other countries that are expected to be operational in advance of the Elmed project, as well as a 10 percent renewable energy capacity in Tunisia.

15-Network studies: 1/ Scenario Analysis (September 2005), and 2/ Detailed Analysis of the Selected Alternatives (February 2006). -Two Environmental and Siting Studies: 1/ Standards and Instruments of Land Planning and General Characterization of the Examined Environmental Context (July 2005) and 2/ Detailed Analysis of the Territorial and Environmental Insertion Context for the Selected Alternatives (December 2005).


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7. Technical Assistance Phase 1 (P162542, ASA task). In 2017 a consultant (Castalia) was recruited under GIF funding to provide technical assistance to the GoT and other project stakeholders for the preparation of the future Elmed interconnector project. The scope of work for Phase 1 included: clarifying the roles and responsibilities of stakeholders; developing a high-level options analysis and transaction design; market-sounding potenital financiers; and identifying the additional work required at the project preparation stage. The potential structures for the project were discussed in a series of workshops and the key issues to be addressed at project preparation were identified. In light of these recent developments, it is considered that the Elmed interconnector is now mature for the full feasibility stage.

8. The proposed TA Project will allow the Elmed Interconnector stakeholders to undertake the necessary technical feasibility and environmental and social impact assessment (ESIA) studies, as well as the preparation of a Resettlement Action Plan (RAP), defining a bankable structure that may enable private sector financing, and providing transaction advisory support. The proposed Project is instrumental to the GoT and STEG, as well as their Italian partners, to make informed decisions on the final technical, legal and financial structure of the Elmed Interconnector. The development of the commercial, regulatory and financial arrangements will be critical to define STEG’s roles and responsibilities, and will be instrumental for the sponsors to seek financing. In addition, the feasibility and environmental and social safeguards studies are mandated by law and required before applying for the necessary permits in each jurisdiction. The Terrestrial and Marine Survey Study, and the environmental and social impacts assessment study (ESIA) and resettlement action plan (RAP) will be prepared by independent consultants. These studies will be prepared in parallel, but in close collaboration between the Survey Study and ESIA/RAP consultants. 9. Thus, the proposed Project will support the GoT and Elmed sponsors to assess the feasibility of the Interconnector by undertaking three key feasibility studies on network integration, terrestrial and marine survey, and environmental and social impacts. It will also support the GoT to design a transaction structure attractive to DFIs and potentially to commercial financiers, and will have a project management component to cover the Project Implementing Entity’s incremental costs to undertake the project. The Elmed Interconnector will require careful structuring to address the risks associated with the high capital costs (estimated at €600 million) and the uncertainties of long-term power flows across the cable. The consultation of financiers undertaken by external consultants found that several conditions will need to be met for the Interconnector to be bankable. The early stage involvement of possible financiers - both from the private sector as well as DFIs - through a consultation process has proven helpful to identify possible steps to de-risk the Elmed interconnector. Two private financiers have so far expressed interest in financial participation to the project. In addition to the IBRD, the European Investment Bank (EIB), which is engaging with the Italian sponsor Terna, and the African Development Bank (AfDB) have both expressed interest. The EIB and AfDB have indicated they could consider loans and guarantees if the project cannot be financed on commercial terms due to perceived risks. Other sources of public support have also been identified as potential funding opportunities that could complement private financing, including possible grants from the Neighborhood Investment Facility (NIF), the Clean Technology Fund (CTF), and the Green Climate Fund (GCF). Moving forward, financiers from both private sector and DFIs will continue to be closely involved to enable their requirements and appetite for the project to be understood.


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Box 2: Expected ownership structure of the future ELMED interconnector There is a general preference for an approach that provides stable, regulated revenues. Further discussions between the stakeholders will be required before a final decision is made on the preferred high-level transaction design option during the implementation of the project, but the following two options would be the most likely. Option 1: Regulated Link Joint Venture The Regulated Link model assumes that the main commercial driver for the line is the desire by STEG and Terna to jointly own a regulated asset that provides transmission services on an open access basis between Tunisia and Italy. Under this model, the physical transmission rights (PTR) on the line would be made available to all parties on a non-discriminatory basis. The revenues earned on the line would generate a fixed, regulated return on investment. It would be possible for the line to be developed as a Special Purpose Vehicle (SPV) or as a joint venture. This option is consistent with regulated returns for each transmission business on their share of the assets, and so requires clear identification of ‘joint’ assets rather than combined assets. This approach will require a strong joint venture agreement.

Option 2: Cap and Floor model Like the Regulated Link model, the Cap and Floor model assumes that the main commercial driver for the line is a desire by STEG and Terna to jointly own a regulated asset that provides transmission services on an open access basis between Tunisia and Sicily. Where the Cap and Floor model differs from the Regulated Link model is that returns to the owners of the interconnector will vary with the value of the transmission service it provides, rather than being a fixed regulated level.


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STEG and Terna would both invest equity in the SPV. Outside equity participation from financial investors and DFIs could also be sought.

10. The proposed Project (estimated cost: US$ 13.40 million) will comprise the following components:

a) Component 1: Preparation Studies (estimated cost: US$10.64 million). This component would consist of the following studies:

• Terrestrial Survey Feasibility Study16. The purpose of this study is to determine the optimal site locations in both Tunisia and Italy for: (i) the converter station areas; (ii) the DC cable route from the landing point of the marine cable on the coast to the converter stations; and (iii) the AC cable route from the converter stations to the grid nodes. The study will: (i) identify the territorial and environmental characteristics of the passageway lines and the converter station areas relevant to arrange the next phases of the preliminary project and permitting process; (ii) look at any archeological, landscape, hydro geological and environmental implications; and (iii) complete the line passageway, the geotechnical, archeological and environmental survey and the report. The first part of the study (desk top analysis - DTS) will assess alternative solutions to present to citizens and authorities during meetings in order to take into account their comments and suggestions. Following the DTS, the second part of the study will consist of the terrestrial survey with reference to the preferred solution. This study will be carried out in close collaboration with the independent ESIA and RAP consultants.

• Marine Survey Feasibility Study. The purpose of the marine survey feasibility study is to determine the feasible and optimal site locations for: (i) the DC marine cable route on the seabed between the two landing points in Italy and in Tunisia; and (ii) the electrodes. The study will: (i) identify the seabed and environmental characteristics of the cable passageway; (ii) look at any archeological, hydro, bathymetry, geological, unexplored ordnance, environmental aspects; and (iii) complete the seabed route, geophysical, archeological

16 The high cost is due to the technical complexity and high-tech nature of marine surveys.


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and environmental surveys and reports. Furthermore, the study will include a specific environmental benthic survey requested by the Italian Ministry in order to obtain the laying permit, according to the Italian Ministerial Decree no. 31 dated January 24, 1996. This study will be carried out in close collaboration with the independent ESIA and RAP consultants. The first part of the study (Desk top study - DTS) will assess the alternative preferential solutions to present to citizens and authorities during meetings in order to take into account their comments and suggestions. Following the DTS, the marine survey can start with reference to the results of the previous DTS. Based on the results of the public consultations and the above-mentioned technical analysis, potential routes and landing points of the Elmed interconnector will be determined. The Survey Studies need to be carried out in close collaboration with the ESIA and RAP Consultants. Both studies need to be prepared by independent consultants, but in close collaboration and in parallel. The ESIA study will start two months after the start of the Survey Study. The ESIA and RAP Consultants will have an important say in the selection of all the project sites. The environmental and social impacts on the project sites, the archeology, landscape, terrestrial route and the sea-bed are the responsibility of the ESIA Consultants. The Survey Studies must comply with relevant laws and be considered adequate by regional and national authorities in order to secure the necessary permits and proceed with the construction of the Elmed cable. Further, the ESIA and RAP are also an essential requirement for securing additional funds for the Elmed Interconnector, as well as obtaining the environmental permit from the Ministries of Environment in Tunisia and Italy. As indicated by the Italian sponsor Terna, the preliminary results of the marine study will need to be submitted to the European Commission as part of the package to request funds from the Connecting Europe Facility (CEF). If the studies are not considered adequate, additional studies may be required and this would risk delaying the interconnector. This risk is being mitigated by listing and outlining the necessary permits ahead of starting the feasibility studies, so that the studies can be tailored to the relevant permitting requirements.

• Network Study. The study will be performed based on CIGRE Guidelines and will determine the electrical project scheme (monopolar/bipolar, grid node connection and network reinforcements), the feasible technology (Line Commuted Converter, LCC or Voltage Source Converter, VSC) and the rated power of the link, the performance required to the DC system. This component is aimed at verifying the security of the two systems when the Elmed interconnector is operational, studying the system behavior during contingencies and grid component switching, and evaluating system reliability and resilience. It will also confirm and identify any network reinforcements that may be required for the safe operation of the Italian and Tunisian grids. The first part of the study will assess the electrical project scheme. In the second part, any necessary reinforcements will be investigated and confirmed.

• Market Study (European Investment Bank financed and executed). The study will be performed based on ENTSO-E Guidelines and on multiple scenarios, taking into account different economic, social and climatic conditions impacting on generation (additional and in particular from renewable energy resources) and demand in the two countries. The study will assess socio-economic welfare and other indicators (such as CO2 and RES curtailment), the implications of the project on the transmission capacity and congestion at the Northern Italian border. Additional components of the study will assess the contribution of the Elmed


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interconnector to: (i) the increase in energy exchange among the Maghreb Countries and with Europe; (ii) the development of the Tunisian Solar Plan; and (iii) the least cost solution of the Tunisian energy strategy. This study would update the latest economic analysis and confirm that it is the current least cost generation option for Tunisia.

• Environmental and Social Impact Study. This study will prepare an assessment of the environmental and social impacts of the Elmed Interconnector and recommend measures to avoid, reduce, mitigate, and address these impacts in Tunisia, the marine route between Tunisia and Italy, and in Italy. The ESIA and RAP Consultants will collaborate closely with the Feasibility Consultant with regard to site selection of all project sites and line routes, since an adequate site selection significantly reduces the environmental and social impacts of the project. The environmental assessment will include an assessment of the impacts on terrestrial and marine biodiversity at the project sites, resource efficiency and pollution prevention, broader ecosystem impacts, and water/pollution from construction, labor and working conditions, community health, safety and security. The Environmental and Social Management Plan (ESMP) will develop effective mitigation measures for identified environmental and social impacts and risks, as well the management of the expected health and safety risks during construction and operation. The ESMP will recommend that the Contractors prepare and implement their own Construction ESMP (CESMP) and a comprehensive Health & Safety Plan in compliance with OHSAS 18001:2007, NEBOSH or similar. The ESMP will also describe the responsibilities of Contractors, Supervising Engineers, STEG and other stakeholders with regard to environmental and social management, as well as health and safety during construction and operation and the staff with international experience who need to be recruited for this purpose. The ESIA Consultant will also be responsible for obtaining the environmental permits in Tunisia and Italy. The Resettlement Action Plan (RAP) and social assessment will assess the potential social impacts of the project in Tunisia and Italy, including land acquisition required for the project and the resettlement that may result. In addition, the social assessment will assess the loss of livelihoods and identify interventions to mitigate their impact. This social assessment will examine the potential gender risks that the project may pose, particularly with respect to resettlement and loss of livelihoods. In terms of citizen engagement, the ESIA will use the findings from public consultations, as described in the SEP, and the technical studies to develop an ESIA report (including an archeological study, a landscape study, a geological study, and environmental documentation). The ESIA and RAP will be carried out in line with Italian laws, Tunisian laws and World Bank Performance Standards under OP 4.03 and policies17 (due to the public private partnership (PPP) nature of the interconnector), and will assess the potential impacts on the sea-bed between Tunisia and Italy, and on the terrestrial parts of the project in Tunisia and Italy. The ESIA also needs to be in compliance with the World Bank General Environmental, Health and Safety Guidelines and the Electric Power Transmission and Distribution EHSG, both of April 2007. The ESIA and RAP will be guided by a Stakeholder Engagement Plan (SEP) that has been disclosed in-country (Tunisia and Italy) and on the World Bank website. Amendments and additions to the ESIA and RAP reports shall be managed along the permitting process in order to respond to the specific requests of local and national authorities.

• Developing the financial model assessing the viability of the project vehicle. A preliminary financial analysis of the Elmed Interconnector was undertaken and reviewed by external consultants under Technical Assistance

17 The analysis and the consultations to be carried in conjunction with the safeguards documents should have a gap analysis of the three legal frameworks, and inform which ones should be applied.


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Phase 1. A refined model would need to be developed to advise Terna and STEG more precisely on the structuring of the financial transaction. This model will be required for the Project sponsors to raise finance and secure guarantees. In addition to equity from the sponsors, finance could be raised from private (equity and debt) providers, and development financial institutions (DFIs).

b) Component 2: Transaction Advisory (estimated cost: US$1.91 million). Making a decision on the commercial, regulatory, and financial structure of the Elmed interconnector and identifying the agreements necessary for its implementation will require comprehensive support that will be accommodated through this component. Specifically, this component will include advisory work to the Republic of Tunisia and to the implementing sponsor STEG throughout the following tasks: - agreeing on the commercial and regulatory structure; - putting the agreed structure in place through establishing the project vehicle and drafting any necessary

regulations, contracts, and codes regulating access to and use of the line; - supporting the transaction design, including ownership and governance arrangements for the line,

approach to procurement, environmental and social management, and the framework for providing access to the line and charging for its use;

- negotiating and securing the necessary financing for the Elmed Interconnector, including accessing equity from the sponsors, and liaising with private providers and other DFIs.

Through this component, STEG will be able to make informed decisions on its role and its stake in the Elmed Interconnector, maximizing financing for the project and bringing it to a financial close.

c) Component 3: Project management (estimated cost: US$0.86 million). This component will cover project management costs of Elmed Etudes. Project management costs will include the following:

• Preparation of technical specifications for several procurement packages, including preliminary environmental and social and technical assessment in order to define the hypothesis line route and internal landing points (i.e., studies undertaken for Component 1). This information will be used as data input for the technical specifications of the packages.

• Technical assessment of the tender proposal during the World Bank procurement phase.

• Technical monitoring of the actions and approval of final reports.

• Participation and organization of co-ordination meetings.

• At the end of the first part of network study (undertaken in Component 1), a list of network reinforcements not yet planned by STEG and Terna could be defined. In this case, a pre-feasibility assessment would be necessary in order to assess if the electrical scheme identified by the network study is feasible and coordinate its timely realization with the overall project.

• Technical consultations with the supplier of the HVDC system.

• Preparing a final report, by compiling the results of all studies executed. The final report shall summarize all analyses performed to select the final electrical and geographical scheme of the project and estimates of timing, as well as the costs of project implementation.

• Support for presenting the project to NRAs and other European TSOs under the Cross-Border Cost Allocation analysis required by ACER (the Agency for the Cooperation of Energy Regulators) for cross-border interconnection projects.

• Support for communication efforts as part of project management (i.e., capacity to handle communications, stakeholder dialogue, possible opposition, the media, etc.)


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Wages of either STEG or Terna staff would be covered by their respective institutions, and not by the grants.


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ANNEX 2: IMPLEMENTATION ARRANGEMENTS

COUNTRY : Tunisia


Project Institutional and Implementation Arrangements 1. The Elmed interconnector has two sponsors, the Société Tunisienne de l’Electricité et du Gaz (STEG) and Terna. STEG is the Tunisian vertically integrated state-owned utility, owning most of the country’s existing generation capacity and contracts with independent power producers (IPPs). STEG also manages power system operation, transmission, and distribution, and is responsible for electricity supply. Terna is Italy’s electricity transmission system operator, the majority owner of the Italian high voltage and very high voltage electricity National Transmission Grid. Terna operates a natural monopoly and its public service mission is to secure the transmission and dispatching of electricity throughout Italy. 90 percent of Terna’s activities are conducted in the regulated market. It is a private company with shares that are openly traded with a market value of $9.8 billion.

Box 3: Key TERNA and STEG figures TERNA18:

- 72,800 KM of high voltage lines operated - 3,958 employees as of September 30, 2017 - Euros5.3 billion in investments in regulated activities envisaged over the five-year period

2018-2022 - Euros2.2 billion in revenue in 2017

STEG19:

- 6,440 KM of high voltage lines operated (2015) - 12,388 employees in 2017 - TND6.403 billion (= Euros2.15 billion) in investments in regulated activities during 2005-

2015 - TND3.767 billion (= Euros1.265 billion) in revenue (net of tax) per year between 2014 and

2016.

2. The project’s design involves the participation of two implementing entities: Elmed Etudes and STEG, managing respectively 86 percent and 14 percent of the project’s funds. Components 1 and 3 will be implemented by Elmed Etudes and Component 2 will be implemented by STEG on behalf of the Republic of Tunisia (GoT). 3. A Steering Committee will be established involving senior management (preferably CEOs) of STEG and TERNA, and will meet twice a year to resolve high-level issues as they arise.

18 Source : Terna’s website 19 Source : STEG


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4. Two grant agreements (for ESMAP and GIF respectively) will be signed between the Bank and the GoT. A subsidiary agreement will be signed between the GoT and Elmed Etudes covering both ESMAP and GIF funds for Components 1 and 3, as Elmed Etudes is a private sector entity. The Recipient will enter into an agreement with STEG for the transfer of funds for the implementation of Component 2. Both subsidiary agreements are established as effectiveness conditions.

5. To determine the optimum procurement approach to yield the appropriate response from the market, a project Procurement Strategy for Development (PPSD) has been prepared. The PPSD took into consideration, inter alia, the market situation, operational context, previous experience, and risks. The PPSD will assist in the elaboration of the Procurement Plan. Elmed Etudes 6. Elmed Etudes (SARL) is a limited-liability company established on April 20, 2009 and is registered in Tunisia. It is a 50:50 joint venture between Terna and Société Tunisienne de l’Electricité et du Gaz (STEG) whose main object is to conduct studies, structure and generally prepare the interconnector project until it is ready to be financed and procured. Elmed Etudes is based in Tunis and has a share capital of TND2.7 million (equal to about US$1.1 million). The company was established in accordance with the partnership agreements between the Italian Ministry for Economic Development and the Tunisian Ministry of Industry, Energy and Small Business (of June 29, 2007 and August 7, 2008) and in execution of a partnership agreement between Terna and STEG (signed in Rome on March 11, 2009 and in Tunis on March 26, 2009). 7. Elmed Etudes has some experience with network and market studies, but it has no prior experience of World Bank procedures. However, it can count on its shareholders’ (STEG and Terna) expertise and staff to provide knowledge of internationally acceptable procurement procedures. Currently, its organization relies on two ‘co-managers’, who jointly manage the company, and two directorates (technical and financial). The company has no permanent staff, apart from an assistant, but it operates by involving shareholders’ personnel on an “as needed” basis. In view of its role as one of the key project implementing agencies, Elmed Etudes will strengthen its organization and put in place an integrated project management and control system to ensure effective work, flow of information and communication.

8. If needed, its team could be expanded with additional transfers and by hiring short-term and long-term external consultants. Elmed Etudes will use STEG and Terna’s staff to provide expertise on technical feasibility, environmental and social safeguards for the design and execution of the Component 1 studies. Terna has a strong track record in the implementation of subsea HVDC projects, such as the Monita subsea HVDC line between Italy and Montenegro and the Sapita HVDC line between Italy and Sardinia. Elmed Etudes will have to procure the services of experienced consulting firms on a competitive basis for all Component 1 studies.

9. Elmed Etudes will coordinate the technical design and supervision of Component 1 closely with STEG and Terna. All feasibility studies will be aligned with permitting requirements where necessary, along with any specific requirements arising from other DFIs or the European Commission.


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STEG 10. STEG will implement the only activity in Component 2: “Provision of commercial, legal, financial, technical and transaction processing advisory services to GoT/STEG to structure the Elmed interconnector”. 11. STEG (Société Tunisienne de l’Electricité et du Gaz) is the national Electricity and Gas utility created in 1962, when the Tunisian Government decided to nationalize the generation, transmission, distribution, import and export of electricity and gas, and entrusted these activities to STEG. The Company provides the national market in electric energy and combustible gas. It is a public institution under the supervision of the Ministry of Energy with financial autonomy.

12. As a state-own enterprise with a long track record, STEG has the capacity to manage Component 2 of the project. STEG’s organization chart comprises a Board, a Chief Executive Officer and several technical and financial directorates, and includes an internal audit function.

Financial Management and Disbursements

13. Country public financial management analysis. The 2016 Public Expenditure and Financial Accountability assessment (PEFA) concluded that the legal and administrative framework for public financial management offers an adequate level of assurance regarding reliability of information, predictability and control in budget planning and execution, and a strong control environment. However, the report also identified that there is still room for improvement, particularly with regard to budget comprehensiveness, transparency and accountability. Ongoing technical assistance has been mobilized by the donors (particularly the European Union, the World Bank, the IMF and AfDB) to strengthen the modernization of the performance system. The project’s activities under the responsibilities of STEG will make wide use of the Tunisian public financial management systems, in particular the procedures for budget preparation, execution, ex ante control and monitoring by the State Controller (Contrôleur d’Etat) of the SOE, as well as ex-post review controls, such as audits performed by independent government bodies. 14. Organizational arrangements and staffing at Elmed Etudes. Elmed is staffed with a co-director in Tunisia (and a co-director from Terna who travels periodically to the Tunis headquarters of Elmed Etudes) and an assistant, with support from STEG’s staff for some technical activities. This team is complemented by a private accounting firm in charge of the financial management function. This team is not conversant with World Bank financial management procedures. In addition, a significant part of project financing will be implemented by Elmed Etudes (86 percent). This poses a risk that will be mitigated by the amendment of the terms of reference of the accounting firm to include a financial management consultant who is well conversant with World Bank financial management procedures.

15. Organizational arrangements and staffing at STEG. As an SOE with a long track record, STEG’s staff is capable of managing the project’s financial management activities (14 percent of the financing).

16. Risk assessment. The financial management risk is assessed as Substantial. The lack of (i) experience in the World Bank’s FM procedures and (ii) track record for the main implementing entity (Elmed Etudes) pose a substantial control risk which is balanced by a moderate inherent risk as the project’s activities (which are focused on studies) are not complex.


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17. Mitigation measures. To mitigate the identified risks and weaknesses, the following measures are being taken:

• Elmed Etudes: (i) the amendment of the terms of reference of the accounting firm in charge of overseeing the financial management function to incorporate a financial management consultant who is well conversant with World Bank procedures; (ii) the development of a detailed POM describing the roles and responsibilities of the two implementing entities and the financial management procedures; and (iii) the recruitment of an external auditor.

• STEG: (i) the appointment of an accountant from its financial directorate to handle the project’s transactions; and (ii) amendment of the terms of reference of the external auditor to include the project.

18. Annual work program. Elmed Etudes and STEG will prepare and submit to the Bank a proposed annual work program and budget for the following Fiscal Year, giving details of: (i) a time table of programs and activities scheduled for implementation during the following Fiscal Year; and (ii) the estimated cost of each such activity, along with the budget line item and the corresponding source of funding. 19. Budgeting. The POM will describe the procedures for the preparation, execution, and control applicable for the activities to be implemented by Elmed Etudes. STEG will apply its budgeting procedures, which are deemed acceptable.

20. Accounting and information management system. Elmed Etudes and STEG use Tunisia’s private sector accounting standards, which are acceptable to record the project’s transactions and produce financial statements. The private accounting firm will handle the project’s transactions managed by Elmed Etudes. STEG’s financial directorate will be responsible to book the project’s transactions under its responsibilities using the current information management systems.

21. Internal controls and internal audit. The POM will describe the internal control procedures for the activities to be implemented by Elmed Etudes. STEG will apply its internal control procedures, which are adequate. STEG’s internal audit will include the review of the overall project’s transactions in the annual audit plan.

22. Funds Flow. One Designated Account will be opened at the Central Bank of Tunisia (for STEG) and another at a commercial bank (for Elmed Etudes). Further advances to the project’s designated accounts will be made upon reporting on the use of the prior advances. Each entity will report on the use of grant proceeds advanced to the project’s designated account in accordance with the Disbursement Letter. The project’s eligible expenditures will be summarized in the Statement of Expenditures and will be submitted to the Bank for processing. If the Bank determines that an ineligible expenditure has been financed by grant proceeds, the Bank may require Elmed Etudes and STEG to refund the amount either to the Designated Account or directly to the World Bank. The funds flow is presented below.


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Legend Transfers of funds

Flow of documents

Payment to suppliers

23. Financial reporting. The agreed format of the Interim Financial Reporting (IFR) to be prepared 45 days after the end of each semester and the annual Financial Statements will be reflected in the Project Operational Manual. Each IFR will comprise: (i) the report on the sources and use of funds cumulative (project-to-date and year-to-date) and for the period, showing budgeted amounts versus actual expenditures, including a variance analysis; (ii) the forecast of sources and uses of funds; and (iii) reconciliation of the designated account. 24. External Audit. STEG’s external audit arrangement will be applied for project. Its external auditor is acceptable to the World Bank and will produce a separate audit report on STEG’s share of the project’s transactions. Elmed Etudes will recruit an external auditor to audit its share of the project’s transactions. Each entity will submit an audit report not later than six months after the end of the fiscal year audited. The terms of reference (TOR) for the audit work will be submitted to the Bank for its acceptance. The TORs will encompassthe audit of the financial transactions as well as an assessment of internal controls. The auditor will produce (i) an annual audit report, including an opinion on the project annual financial statements, and (ii) a management letter on internal controls. Procurement 25. Procurement for the project will be carried out in accordance with the Bank’s Procurement Regulations for Borrowers for Goods, Works, Non-Consulting and Consulting Services dated July 1, 2016, revised in November

World Bank

Elmed Etudes

Designated Account

Commercial Bank

STEG Designated Account

CBT

Suppliers / Service Providers


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2017 and applicable to Investment Project Financing (IPF); here in after referred to as “Regulations”. The project will be subject to the Bank’s Anticorruption Guidelines (‘Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credits and Grants’), dated October 15, 2006, and revised in January 2011. 26. Procurement arrangements for the project will be based on the existing arrangements of STEG, (which is subject to the Tunisian Public Procurements regulation) and of ELMED (a joint venture between STEG and TERNA, an Italian public power provider). STEG has proven experience in procurement, particularly in donor-funded projects. However, it has no track record of procurement for a World Bank funded project. Elmed-Etudes, on the contrary, has no significant experience in procurement.

27. Organization of project implementing units. STEG has set up a dedicated team for procurement under Component 1, composed of about 10 experienced staff. This team will interact with different internal stakeholders, such as the Commissions for Bidding Documents, bid opening bid evaluation and Commission for Procurements Control, as well as external entities such as HAICOP and audit agencies. STEG has acquired good knowledge and understanding of the procurement procedures of International Donors (although this does not include the World Bank). The team set up by STEG will need training to be updated on the Bank's new procurement framework, which came into effect on July 1, 2016. On the other hand, ELMED-Etudes has no permanent staff or structures. For the implementation of the Components 1 and 3 of the project, Elmed-Etudes will lean on the experts of its shareholders (STEG and TERNA). It has no specific internal procedure governing procurement management or control. Elmed-Etudes shareholders have not yet finalized the procurement arrangements and the implementation structures for the project. This would lead to a risk of coordination among the two shareholders, especially during implementation. 28. Procurement Controls. For Component 2 (which will be implemented by STEG), procurement processes will be reviewed by the control bodies in accordance with national rules. These reviews will be carried out by the competent control entity according to the importance of the contracts. Based on past experience, it is anticipated that the intervention of the controllers in the procurement processes will affect the speed of project implementation. This risk factor will be mitigated through specific measures at the level of the implementing units (in terms of internal organization). For Components 1 and 3, procurement review processes will be described in the POM.

29. Project Procurement Strategy Development (PPSD). The PPSD has been developed with support from the World Bank. It describes institutional arrangements for procurement, roles and responsibilities, thresholds, procurement methods, and prior review, as well as the requirements for carrying out procurement. It also includes also a detailed assessment and description of the implementing agencies’ capacity for carrying out procurement and managing contract implementation.

30. Procurement Plan. The implementing agencies have prepared the initial procurement plan for the 18 first months of the project, based on the outcome of the PPSD; this Plan is acceptable to the Bank. It will be updated in agreement with the World Bank, either annually or as required to reflect project implementation needs and improvements in institutional capacity. The Procurement Plan will be disclosed publicly.

31. Works: N/A


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32. Goods and non-consulting services. N/A

33. Consulting services under the project will include: Terrestrial Survey Feasibility Study; Marine Survey Feasibility Study; Environmental and Social Impact Assessment (ESIA) and Resettlement Action Plan (RAP); Developing financial model for assessing project vehicle viability; and Advisory services to GoT/STEG for the provision of commercial, legal, financial, technical and transaction processing to structure the Elmed interconnector.

34. Filing and record keeping. The procurement procedures manual will set out the detailed procedures for maintaining and providing readily available access to project procurement records in compliance with the Loan Agreement. The implementing agencies will assign one person for maintaining procurement records. A logbook of contracts will be maintained with a unique numbering system.

35. Project operational manual (POM). Procurement arrangements, roles and responsibilities, methods, and requirements for carrying out procurement will be elaborated in the POM. The POM will be updated by the recipient as needed over the course of the project implementation and agreed with the World Bank.

36. Procurement methods. The implementing agencies will use the procurement methods and market approach in accordance with the Procurement Regulations.

37. Open National Market Approach is normally used for public procurement in Tunisia and may be used to procure goods, works, or non-consultant services, provided it meets the requirements of paragraphs 5.3 to 5.6 of the Procurement Regulations.

38. The thresholds for particular market approaches and procurement methods are indicated in the table below, along with the thresholds for the World Bank’s prior review.

Thresholds, Procurement Methods, and Prior Review

No. Expenditure

Category

Contract (C) Value

Threshold a [equivalent

US$]

Procurement Method Contracts Subject to

Prior Review [equivalent US$]

2

Goods,

information

technology,

and non-

consulting

services

200,000 < C < 3,000,000

Open Competition

National Market

Approach

Prior review not required

Bidding documents agreed with

the Bank will be used.

C ≤ 200,000 Request for Quotation None

3

National

short list for

selection of

consultant

firms

C < 300,000

For consulting services None


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No. Expenditure

Category

Contract (C) Value

Threshold a [equivalent

US$]

Procurement Method Contracts Subject to

Prior Review [equivalent US$]

4

International

short list for

selection of

consultant

firms

C ≥ 300,000 For consulting services

≥500,000

5

Selection of

Individual

Consultants

All values All approaches ≥200,000

6 Direct

Contracting All values

As agreed in the Procurement

Plan

7

Training,

workshops,

study tours

All values

Based on approved

annual work plan and

budgets

Note: These thresholds are for the initial Procurement Plan for the first 18 months. The thresholds will be revised periodically based on reassessment of risks. All contracts not subject to prior review will be post reviewed.

39. Procurement risk rating. The project procurement risk before the mitigation measures is rated ‘High’. This risk can be reduced to a residual rating of ‘Substantial’ upon consideration of successful implementation of the mitigation measures. 40. The risks and mitigation measures are provided below.

Procurement Risk Assessment and Mitigation Action Plan

Procurement Risk Mitigation measure Responsibility and Deadline

Risk level Initial/residual

Substantial /Moderate

Lack of knowledge of Bank procedures by STEG and Elmed-Etudes

Training in procurement for staff from both implementing agencies

STEG and TERNA Before project effectiveness

Heavy national regulatory and control framework for STEG is No defined procurement framework for ELMED-Etudes

STEG should ensure an efficient follow up of the procurement procedure in order to monitor the contracting deadlines/ STEG and TERNA to agree on the framework for handling of procurement by ELMED-Etudes.

Before project effectiveness

Weaknesses in the records keeping system of STEG (audit report of 2016)

Prepare an Operational manual of the project with detailed provision for



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No records keeping system for ELMED

record keeping (both STEG and Elmed-Etudes)

Weaknesses in the contracts monitoring system of STEG (audit reports) No contracts monitoring system for ELMED

Prepare an Operational manual of the project with detailed provision for contracts monitoring (both STEG and Elmed-Etudes)


Lack of clarity on Elmed-etudes management arrangements for the handling of this project, including procurement responsibility

Elmed-etudes management arrangements for the implementation of this project well defined by STEG and TERNA including for procurement responsibility, in the operations manual


Environmental and Social (including safeguards) Social

41. The potential beneficiaries of the project are 70.05 million people: 11.25 million in Tunisia and 59.8 million in Italy. 42. Consultation – Communication. The Elmed Interconnector has been conceived in a participatory manner and has been the subject of recurrent discussions and presentations by the two countries since 2003, at local, national, as well as at international levels. The interconnector has been discussed with various stakeholders in Tunisia and in Italy, including not only with national and regional government administrations, but also with the private sector. Consultations with stakeholders, as described in the SEP, will continue throughout the interconnector project cycle, from preparation to project completion. The preparation and implementation of safeguards instruments has been, and will continue to be, part of the consultation process.

43. Social benefits – Gender and Equity. The Elmed Interconnector is expected to deliver significant social benefits by improving electricity supply in Tunisia. The project will contribute to leveling the playing field for energy service delivery between wealthy and low-income neighborhoods. Civil works to be carried out will create income generating opportunities for professionals, skilled workers and manual labor. The provision of a reliable electricity supply will respond to private sector energy demand and boost productivity. It will provide households with electricity supply, improve the quality of life and potentially strengthen social cohesion. The project will benefit working women and men; school children; the elderly and youth. The social and poverty outcomes of the proposed project will include, but not be limited to, the following: (i) income generation opportunities; (ii enhanced government capacity to provide reliable and competitive energy services; and (iii) productivity gains, as the public and private sectors, as well as households, will get access to reliable electricity services.


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44. Consultations and Citizen Engagement. The design of the project has been consultative at several levels. Representatives of the national government, city authorities, local government officials, neighborhood organizations and the international donor community were the key stakeholders consulted. Citizen engagement was an integral part of project preparation. Groups investors were the key stakeholders consulted. Groups to be engaged during the implementation of the TA include: neighborhood organizations; municipalities; project affected communities, project affected persons, including youth; women and men, and local community leaders; and NGOs and CBOs.

45. Labor influx and violence prevention. The future implementation of the Elmed Interconnector will induce labor influx from outside the local communities, even though the hiring of local labor will be given priority. Measures to be taken to address the challenges of labor influx will include, but will not be limited to: (i) assessing labor influx risks in the ESIA, based on the Bank’s sector-specific experience in the country and in other similar conditions; (ii) developing appropriate mitigation instruments, such as a Labor Influx Management Plan; (iii) requiring the inclusion of clauses on workers’ condition and management, child protection, and GBV prevention in all civil works contracts; (iv) provision of technical assistance and training and increasing the awareness of GBV among all contractors, workers and local residents; and (v) setting up an accessibile and accountable GRM to ensure that any incident related to labor influx and GBV is addressed in an effective manner.

46. Social Safeguards. Expected adverse social impacts associated with the future interconnector project include, but are not limited to: land acquisition; involuntary resettlement; and impacts on cultural resources, as well as influx of workers, during construction. The project applies the World Bank Performance Standards (PSs) under OP 4.03. PS 5 on Land Acquisition and Involuntary Resettlement applies as the future interconnector project is likely to induce land acquisition and/or involuntary resettlement. The draft terms of reference (TORs) for the preparation of a resettlement action plan (RAP) has been approved by the Bank and has been disclosed in-country and on the World Bank website for consultations. The RAP will be prepared in compliance with Performance Standard 5 on Land Acquisition and Involuntary Resettlement, as well as the Tunisian and Italian laws on land acquisition and expropriation. Upon completion and approval by the World Bank, the RAP will be disclosed in-country and on the external website of the World Bank. Environment 47. Environmental and Social Impact Assessment (ESIA). The study will prepare an assessment of the environmental and social impacts (ESIA), including the health and safety aspects, of the Elmed Interconnector and recommend measures to avoid, reduce, mitigate, and address these impacts on the terrestrial part of Tunisia, on the marine route between Tunisia and Italy, and on the terrestrial part of Italy. The ESIA Consultants will collaborate closely with the Survey Study Consultant with regard to the selection of all project sites and line routes, since an adequate site selection significantly reduces the environmental and social impacts of the project. The ESIA Consultant will also be responsible for obtaining the environmental permits in Tunisia and Italy. 48. Due to the public private partnership (PPP) nature of the interconnector, the ESIA will be prepared in accordance with the Bank’s Performance Standards under OP 4.03, in addition to relevant Tunisian, Italian and European guidelines. The ESIA will include and assess the impacts on terrestrial and marine biodiversity at the project sites, resource efficiency and pollution prevention, broader ecosystem impacts, and water/pollution from construction, labor and working conditions, community health, safety and security, as well as social impacts. The


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Environmental and Social Management Plan (ESMP) will develop effective mitigation measures for identified environmental and social impacts and risks, as well the management of expected health and safety risks during construction and operation. The ESMP will recommend that the Contractors prepare and implement their own Construction ESMP (CESMP) and a comprehensive Health & Safety Plan compliant with OHSAS 18001:2007, NEBOSH or similar. The ESMP will also describe the responsibilities of Contractors, Supervising Engineers, the project developer and other stakeholders with regards to environmental and social management, as well as health and safety during construction and operation, and the staff with international experience to be recruited for this purpose. Health and Safety staff will need to have international experience and be certified in OHSAS 18001:2007, NEBOSH or similar. 49. The ESIA will include a worker’s camp management plan and a labor influx management plan, which clearly prescribe how temporary local employees are hired and how labor influx will be managed. This needs to be a very orderly and transparent process. Unskilled labor will be, by preference, recruited from nearby communities in the area where construction is taking place and should shift with the progress of construction. Temporary laborers need to have a contract and working conditions should be in compliance with PS2, ILO labor standards, as well as Tunisian and Italian Labor Laws. Contractors will need to have sufficient insurance for workers in case of disability or a fatal accident. The Contractors and Supervising Engineers will be requested to provide in their bids a specific budget line for the CESMP and H&S Plan preparation and implementation. These amounts should also be stated in the Contractors and Supervising Engineer Contracts. In case of non-compliance, these amounts will be withheld.

50. Given the many stakeholders involved (sponsors and related government authorities), the transboundary nature of the project, and the environmental risks identified, the preparation of the ESIA and Resettlement Action Plan (RAP), including consultation of affected communities, will require highly qualified full time specialists in both PIEs as well in the consultant teams for the studies. The ESIA will be guided by a Stakeholder Engagement Plan (SEP). Terna, STEG and Elmed Etudes will select the consultants for the preparation of the ESIA and RAP under Bank supervision and will assess their work with the help of an independent panel of experts. The ESIA will then be subject to clearance by national environmental agencies in both countries, by the EU, and by the World Bank. The Survey Study and the ESIA will be prepared in parallel and the consultants of both studies need to coordinate their work and exchange data in order to ensure that environmental and social considerations are included in the final selection of the offshore line route and the location of the onshore facilities. The ESIA study will start a few months after the start of the Survey Study. 51. Elmed Etudes will use STEG and TERNA staff to provide expertise on environmental and social safeguards management, as well as on health and safety and supervision for all studies that are supported by the TA project, including the ESIA and RAPs of the interconnector. Elmed Etudes will select an experienced consulting firm for the execution of the ESIA.


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PERFORMANCE STANDARDS THAT APPLY

Performance Standards (please explain why) Yes No TBD

PS 1: Assessment and Management of Environmental and Social Risks and Impacts

X

The ESIA studies that are supported by the project aim to enable the development of the Elmed interconnector, which is expected to be a category A project consistent with submarine HVDC links across seas. The interconnector could have significant adverse environmental impacts that are sensitive, diverse, or unprecedented. For the marine part, during installation, maintenance and repair work and removal phase, these environmental and social impacts may concern impacts on fisheries, seabed disturbance with impacts on marine biodiversity, damage/disturbance of organisms, re-suspension of contaminants, visual disturbance, noise (vessels, laying machinery) and emissions and wastes from vessels. During operational phase, the impacts may be related to the introduction of artificial hard substrate, to the electromagnetic fields and to thermal radiations. For the terrestrial part that will be buried, during installation, operation, maintenance and repair work and removal phases, the environmental and social impacts may concern land acquisition, terrestrial habitat alteration, and forest fires. Other impacts are related to the management of hazardous wastes and occupational and community Health, Safety and Security. All these impacts may affect an area broader than the sites or facilities subject to physical works especially in coastal and marine areas. The ESIA will assess direct, indirect and cumulative impacts. A Stakeholder Engagement Plan (SEP) will be prepared and disclosed prior to appraisal of the TA project to describe the consultation plans during the preparation of the ESIA and RAP. During its implementation, Elmed Etudes is responsible to retain independent environmental and social assessment experts not affiliated with the project to carry out the ESIA and RAP for the interconnector. Elmed Etudes in collaboration with the ESIA and RAP consultants will consult project-affected groups, interested parties and local nongovernmental organizations (NGOs) about the project's environmental and social aspects and takes their views into account. Elmed Etudes will initiate such consultations as early as possible. Relevant environmental guidelines can be found in the documents referred to in the footnotes below 20212223 Before appraisal, the Bank will disclose an Environmental & Social Review Summary (ESRS), incorporating a Stakeholders Engagement Plan (SEP), as well as any relevant safeguards instruments like TORs of relevant studies, specially the TOR for the ESIA and the RAP.

PS 2: Labor and Working Conditions X

The ESIA will specify labor conditions in compliance with PS 2 and Health and Safety aspects to be applied during construction and operation of the interconnector by all sub-contractors, contractors,

20 WBG EHS Guidelines: General and Electric Power Transmission and Distribution 21 WBG EHS Guidelines for Ports, Harbors and Terminal 22 Convention for the Protection of the Marine Environment of the North-East Atlantic (the “OSPAR Convention”) reports on environmental impacts of submarine cables https://qsr2010.ospar.org/media/assessments/p00437_Cables.pdf 23 Convention for the protection of the Mediterranean Sea against pollution (Barcelona Convention)


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and developers. The signing by all workers of a Code of Conduct to prevent misbehavior of workers, such as sexual harassment en sex with minors. The use of child labor and forced labor are prohibited.

PS 3: Resource Efficiency and Pollution Prevention X

Resource Efficiency and Pollution Prevention and other environmental management responsibilities will be part of the ESIA/ESMP and will be implemented by the Developer, the Contractors, sub-contractors of the interconnector if it goes ahead. The Contractors will be responsible to prepare and implement their own Construction EMSP (CESMP). The client will refer to EHS Guidelines or other internationally recognized sources, as appropriate, when evaluating and selecting resource efficiency and pollution prevention and control techniques for the project. The Supervising Engineer will be responsible for the supervision of the implementation of the CESMP and Health and Safety Plans, which need to be compliant with OHSAS 18001: 2007.

PS 4: Community Health, Safety, and Security X

The ESIA will evaluate the risks and impacts to the health and safety of the Affected Communities during the interconnector life-cycle and will establish preventive and control measures consistent with good international industry practice (GIIP), such as in the World Bank Group Environmental, Health and Safety Guidelines (EHS Guidelines) or other internationally recognized sources. The ESIA will identify risks and impacts, including any potential non-local labor influx, workers camp management and propose mitigation measures that are commensurate with their nature and magnitude. These measures will favor the avoidance of risks and impacts over minimization.

PS 5: Land Acquisition and Involuntary Resettlement X

As the interconnector project is expected to induce land acquisition and possibly resettlement in Tunisia and Italy for the terrestrial portion of the interconnector, the project will help the client to prepare a resettlement action plan (RAP) including consultations with various stakeholders in both countries, a social impact assessment and costed mitigation measures, in parallel with the environmental and social impact assessment preparation (ESIA).

PS 6: Biodiversity Conservation and Sustainable Management of Living Natural Resources

X

The ESIA will determine how PS6 is to be applied to the interconnector in case it determined that it will affect or modify, natural and critical marine (e.g. spawning and nursery areas for fish and shrimp species) and terrestrial habitats. The ESIA will consider direct and indirect, as well as cumulative, project-related impacts on biodiversity and ecosystem services and identify any significant residual impacts, as well as cumulative impacts. This process will consider relevant threats to biodiversity and ecosystem services, especially focusing on habitat loss, degradation and fragmentation, invasive alien species, hydrological changes, nutrient loading, and pollution. It will also take into account the differing values attached to biodiversity and ecosystem services by Affected Communities and, where appropriate, other stakeholders. The ESIA will consider project-related impacts across the potentially affected landscape or seascape.

PS 7: Indigenous Peoples X

There are no indigenous people in the project area.

PS 8: Cultural Heritage X

The ESIA will identify potential impacts on marine and terrestrial cultural heritage and protect cultural heritage if relevant by ensuring that internationally recognized practices for the protection, field-based study, and documentation of cultural heritage are implemented. Where the risk and identification process determines that there is a chance of impacts to cultural heritage, the client will


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retain competent professionals to assist in the identification and protection of cultural heritage. Every Contractor contract will include a “Chance Find Procedure.”

52. OP 7.50 Projects on International Waterways is not triggered. The Project supports a number of TA studies for the feasibility stage of the Elmed interconnector which do not fall within the scope of paragraph 2(a) of the policy. The route of the planned interconnector crosses the Mediterranean Sea between Tunisia and Sicily, which is divided between the two countries in accordance with the Italy–Tunisia Delimitation Agreement of 1971. The Elmed interconnector, which will be laid at the bottom of the sea, will not use any water and is not expected to cause pollution to the sea route. The Bank will ensure that the Borrower respects the relevant international environmental treaties and agreements, including the 1995 Convention for the Protection of the Marine Environment and the Coastal Zone. 53. Safeguard-related studies will be carried out under Component 1 of the Project. An Environmental & Social Review Summary (ESRS), the Integrated Environmental and Social Data Sheet (ISDS), the Stakeholders Engagement Plan (SEP), as well as the ESIA and RAP TORs were disclosed prior to appraisal. Monitoring and Evaluation 54. Monitoring and evaluation (M&E) of the project will be the responsibility of Elmed Etudes, in accordance with the indicators included in the results framework (see Section VII) and will be complemented by World Bank supervision and technical support. The M&E will have the following core objectives: (i) improve project management; (ii) ensure transparency in data sharing; (iii) promote efficiency; and (iv) provide timely and accurate information on project results in relation to the evolution of the context during implementation. Bi-annual project progress reports will be generated by the PIE to report on the implementation progress of the three components. A midterm review (MTR) and a final ICR will be conducted in collaboration with the GoT. During the MTR, progress towards reaching the project objectives will be evaluated and remedial actions will be taken as needed.


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ANNEX 3: IMPLEMENTATION SUPPORT PLAN

COUNTRY : Tunisia


Strategy and Approach for Implementation Support 1. In the design of the Implementation Support Plan (ISP), consideration has been given to the risks identified in the SORT, the nature of activities supported by the proposed Project, the capacities of the PIEs (Elmed Etudes and STEG) and sponsors, and the implementation arrangements of the proposed Project.

2. The main challenge to providing the necessary implementation support to the proposed Project will be project coordination and timely preparation, given the complexity of the future Elmed Interconnector and the many stakeholders involved (sponsors and related government authorities). The second key issue will be safeguards, given the transboundary nature of the project, and the environmental risks identified. The third key issue will be the permitting risk, since the feasibility studies must comply with relevant laws and be considered adequate by regional and national authorities in order to secure the necessary permits and financing, and proceed with the construction of the future Elmed cable. 3. Factoring in these challenges, implementation support for the proposed Project will be delivered through continuous interaction with the PIEs, sponsors, and stakeholders to provide support and guidance on issues and challenges that may arise during procurement and for safeguards, as well as during preparation and implementation of the feasibility studies. 4. A multi-disciplinary Bank team will be formally established, mostly working out of the Tunis country office, with team leadership in Washington. The local team will comprise environmental and social safeguards specialists, as well as procurement and financial management specialists. In addition, a Senior Power Engineer Consultant with international expertise will be hired. Having key specialists based in Tunis will ensure rapid and effective response to the needs for implementation support and safeguards. Considering the complexities of the feasibility studies, the local team will receive regular support from other technical staff in Washington and elsewhere, including an operations officer and the Task Team Leader.

5. The detailed support from the World Bank team during project supervision is outlined below:

a) Environmental and social safeguards. The World Bank safeguards team will provide implementation support for: (i) the preparation of safeguards documents (ESRS, ESIA, Health & Safety Plans and RAPs, and the preparation of the ESIA and RAP TORs) and the SEP; (ii) compliance with safeguards requirements through assistance and regular supervision missions; (iii) review of environmental and social monitoring reports and following up on any safeguards issues that may arise; and (iv) monitoring GRM and gender aspects. The task team will work with the proposed Project stakeholders to set up an independent panel of experts, who will review and comment on the ESIA, Health & Safety Plans and RAPs to be prepared under Component 1, and which would advise on eventual ESIA and RAP implementation.


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b) Procurement and technical. The World Bank team will provide implementation support for: (i) reviewing procurement documents, including technical specifications and providing timely feedback and no objection; (ii) monitoring procurement progress against the Procurement Plan developed by the PIEs; and (iii) review implementation of the Project Procurement Strategy for Development (PPSD).

c) FM. The World Bank team will provide implementation support for reviewing the project’s FM system, including but not limited to accounting, reporting, and internal controls.

d) Institutional Capacity for Implementation and Sustainability. Training will be delivered by the Bank within the first months of implementation to strengthen Elmed Etudes’ readiness to swiftly implement the project.

e) Stakeholders. The Bank will follow up closely with stakeholders and will ensure that a Steering Committee is established, involving senior management (preferably CEOs) of STEG and Terna and meets twice a year to resolve high-level issues as they arise.

Implementation Support Plan and Resource Requirements

6. Regular need-based visits will be carried out by the task team, supported by other specialists. Estimated inputs from different specialists are outlined below. 7. Regular support to the PIEs and sponsors in between formal missions will be provided as necessary. Specific attention will be paid to safeguards, procurement, and financial management. 8. Continuous dialogue with PIEs, sponsors, and other stakeholders both in-country and out of country will take place to identify areas where there could be greater coordination.

Table 3.1. Skills Mix Required

Skills Needed Number of Staff Weeks

Number of Trips Comments

Team Leader 7 2 Washington, DC

Operations Officer 6 2 Washington, DC

Sr. Power Engineer (consultant) 5 0 International staff

Procurement Specialist 3 0 Country Office-based

FM Specialist 1 0 Country Office-based

Environmental Specialist 1 0 Country Office-based

Social Specialist 1 0 Country Office-based

Total 24 4

9. A visit to the sites in Tunisia and Italy will be required. The ESIA and RAP Consultants need to be guided.


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ANNEX 4: ECONOMIC & FINANCIAL ANALYSES

COUNTRY : Tunisia

Tunisia-Italy Power Interconnector - Project Preparation TA Economic Analysis 1. The project provides technical assistance to assess the feasibility of the Tunisia-Italy Power Interconnector and will contribute to the overall costs and benefits of the future Elmed Interconnector. 2. An economic analysis of the Elmed Interconnector, completed by the consulting firm CESI in 2016 under Bank supervision, found the project to be economically viable for Tunisia, Italy, and the broader European power market, with an economic rate of return of 12-18 percent under the most likely scenarios. The study quantified several economic benefits, including: (i) gains from trade; (ii) security of supply; and (iii) higher renewable energy integration and dispatch.

3. The economic analysis was based on the simulation of the expected price differential within the electricity markets of the countries, which in turn was based on projections for the short and long run marginal cost of electricity generation, both in the absence and presence of the Elmed interconnector. The analysis took into account the interconnectors that will be operational between Italy and other neighboring countries prior to the Elmed interconnector and assumed a 10 percent renewable energy capacity in Tunisia by 2030.

4. The primary economic benefit associated with the Elmed Interconnector, of which the proposed Project represents a critical step, will be an increase in the socio-economic welfare of Tunisia and Italy arising from a reduction in electricity generation costs at least up to 2030. Assuming that the European electricity market will evolve in line with 2030-2050 EU decarbonization targets, the Elmed Interconnector represents a low-cost option for Tunisia to achieve more affordable electricity and increased reliability of electricity supply. The economic analysis shows24 that the cost of producing power in Tunisia, estimated through the Levelized Cost of Electricity (LCOE), is expected to be higher than the forecast of electricity prices in the Sicily zone of the Italian wholesale market through to 2030 and possibly beyond. By connecting with the Italian market, the GoT and STEG will be able to buy power from Italian generators at lower prices than the cost of producing it internally, while avoiding additional investments in generation capacity until at least 203025. After 2030 the opportunity for Tunisia to benefit, through Elmed, from accessing the Italian market with significantly lower prices will remain during peak hours of the Tunisian demand (while it will reduce during peak load hours in Sicily). 5. The Elmed interconnector will also contribute to increased reliability of electricity supply in Tunisia. The Elmed cable is expected to supply up to 16 percent of the country’s historical (2015) peak electricity demand. The high utilization factor, with Sicily expected to export electricity at all hours of the day until 2025 and at peak load hours in the years after 2025, will thus ensure that the GoT can increase its system reliability margin. This will represent a much-needed source of baseload electricity for the country and an important addition to

24 A first economic analysis was done by CESI in 2016-2017, and an update was done by REF-E in May 2017. 25 It is to be noted that there are a lot of stranded assets in Europe as too much capacity got built prior to the 2008 crisis while there is not enough power supply in Tunisia, and that therefore an interconnector can make more economical sense than building more capacity in Tunisia while there is plenty across the Mediterranean.


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Tunisia’s power sources in the face of the country’s expected capacity deficit, especially for guaranteeing security of supply. In addition, the Elmed cable will allow greater energy diversification for Tunisia by reducing the current strong dependency on Algerian gas supply.

Box 4: Benefits of the Elmed interconnector Project The Elmed interconnector would represent a low-cost option for STEG in terms of electricity supply as this project would: - avoid or defer investments in production facilities by STEG (postponing the construction of a 500 MW power plant that would otherwise have been planned by STEG in 2022) - reduce the consumption of natural gas for power generation by 700 million ton-equivalent (Mtep) from 2022 and thus reduce Tunisia's dependence on natural gas - contribute to better control Tunisian kWh costs through the development of power trade with the European network - strengthen the supply security of Tunisia’s electricity system and increase its reserve capacity - contribute to the improvement of the integration of renewable energy into the country's electricity system - promote greater power trade among North-African power utilities and consequently more efficiency in energy supply.

6. In the long-term, the Elmed interconnector will allow for a better integration of renewables in Tunisia’s energy mix as it will enable access to Europe’s large power back-up capacity and the export of electricity produced by renewable energy sources towards Europe. The economic analysis done so far shows that the annual power flow from Sicily to Tunisia is expected to slowly decrease with time due to the narrowing price differential between the markets. As a result, after 2030 and more visibly from 2035, it is expected that the Elmed Interconnector will enable Tunisia to export electricity, particularly from renewables (including solar power), thus providing a transformational change for Tunisia’s energy mix in the long-term. 7. The Elmed cable is also of strategic economic and geopolitical value for Tunisia and for the wider Maghreb region. In the long-term, Elmed could also allow other Maghreb countries, including Algeria and Libya, to trade power with Europe. The proposed project will include an additional economic analysis that will investigate the relationship between the interconnector on the one hand, and integration of renewables in Tunisia and the integration of power markets in the Maghreb on the other.

8. The interconnector also has strategic importance for Italy. The Sicilian electricity grid presents several bottlenecks and severe security constraints that could limit the future integration of renewables. In the short to medium term, the possibility to connect the Tunisian demand to the Sicilian system through the Elmed interconnector will help to fully exploit renewable energy production in the island. Economically, Italy will thus benefit from the lower prices that the reverse flow of the Elmed cable from Tunisia to Sicily will afford in the long-term. Its strategic importance is highlighted by its inclusion in the Ten-Year Network Development Plan by the European Network of Transmission System Operators for Electricity (ENTSO-E).

9. An additional economic analysis of the Elmed Interconnector to confirm its least cost nature for Tunisia, and the impact of further integration of renewables in Tunisia will be carried out under the Market Study to ensure that it is the least cost option for Tunisia to address its future energy needs.


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Figure 1. Comparison between Sicilian prices and LCOE of new entrant OCGT in Tunisia.

10. The figure provides a projection of the levelized cost of electricity (LCOE) in Tunisia in the future and compares it with the projected LCOE in Sicily. This is based on the assumption that in Tunisia open cycle gas turbine (OCGT) plants will remain the marginal plant for many periods rather than combined cycle gas turbine. 11. The figure shows that the cost of producing power in Tunisia is expected to be higher than the forecast of electricity priced in the Sicily zone of the Italian wholesale market through 2030 and possibly beyond. (Source: REF-E scenario and JRC data).


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Figure 2. Marginal Cost in Italy and in Tunisia in 2020 and 2030.

Source: REF-E Scenario 12. The Figure shows the projected marginal cost of electricity in Tunisia and Italy in 2020 and 2030. In both reference years, the marginal costs in Italy are projected to be lower than in Tunisia.


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Figure 3. Expected Annual Power Flows on the Elmed Interconnector.

Source: REF-E scenario. 13. The Elmed cable’s annual capacity is equal to 5.26 TW, and the power flow is expected to be principally from Sicily to Tunisia until 2030, when new power plants will be available in Tunisia. From 2031, the flow from Sicily to Tunisia will decrease and simultaneously the flow from Tunisia towards Sicily will increase. The trend will reverse in 2035. Financial Analysis 14. A preliminary financial analysis of the Elmed Interconnector was undertaken and reviewed by external consultants. The financial analysis assessed the financial outcomes of the Elmed Interconnector Project over a 35-year period and estimated the tariff required for the project to be viable under several financing scenarios. The analysis showed that for the project to be financially viable it would require an investment subsidy of 25-50 percent (some €150 to 300 million), as some of the key economic benefits of the project, such as security of supply and integration of renewables, cannot be easily monetized. 15. The subsidy is expected to be provided by the EU, but this means that the project will require public sector DFI financing, in addition to private sector equity. Consultations were held with financiers in coordination with the two sponsors to determine the interest of potential financiers in the Elmed Interconnector and the conditions that would influence their participation. The key conditions that would need to be met for private financiers to consider the project included: (i) revenues based on availability and not subject to demand risk; (ii) contractual obligations of STEG guaranteed; and (iii) early engagement in the development of the interconnector.

16. An additional financial analysis is required to develop a financial model that reflects the financiers’ conditions and their impact on the Elmed Interconnector. This will be done in Component 1.

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