Docomnm of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 5731

PROJECT PERFORMANCE AUDIT REPORT

GRANA: KPONG HYDROELECTRIC AND THE THIRD POWER PROJECT

(LOAN 1380-GH, 1381-GH AND CREDIT 689-GH)

June 25, 1985

Operations Evaluation Department

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ABBREVIATIONS AND ACRONYMS

ABEDA = Arab Bank for Development in Africa

CEB = Communaute Electrique du Benin

CIDA = Canadian International Development Agency

ECG = Electricity Corporation of Ghana

EDF = European Development Fund

EECI = Energie Electrique de la CZte d'Ivoire

EIB= European Investment Bank

KfW = Kreditans talt fiir Wiederaufbau (FAG)

MFP = Ministry of Fuel and Power

VALCO Volta Aluminium Company

VRA = Volta River Authority

FOR OFFICIAL USE ONLY

PROJECT PERFORMANCE AUDIT REPORT

GHANA: KPONG HYDEOELECTRIC AND THE THIRD POWER PROJECTS(LOANS 1380-GM, 1381-GH AND CREDIT 689-Ga)

TABLE OF CONTENTS

Page No.

Preface ..................................... iBasic Data Sheet ................................ ...................... ivHighlights ......................................................... vii

PROJECT PERFORMANCE AUDIT MEMORANDUK

I. PROJECT SUMMARY ..... . ....... ......................... 1

II. SUPPLEMENTARY COMMENTS ................................... 4

Electricity Tariffs .................................. 6Project Justification ....................... ....... 8Rehabilitation and Reform Measures ..................... 11Cofinancing Experience ................................. 14Resettlement Experience ................................ 14Sustainability of Sector Institutions and ProjectFacilities ........................................... 15

III. CONCLUSIONS .......... ............................ 15

Annexes: Tables 1-3 ............................ 19

Appendix I: Comments from VRA, ECG and the cofinanciers .......... 22

PROJECT COMPLETION REPORTS

Part 1: Kpong Hydroelectric Project (Loan 1380-GR)

I. Introduction ........................................... 322. Project Preparation and Appraisal ..... ................. 333. Project Implementation Operations and Cost ....... ....... 374. Operating Performance ................... a . ......... 495. Financial Performance ..................................... 516. Institutional Performance .......................... .. 537. Economic Justification ......................... 558. Bank Performance ........................ ........ -. -.. 569. Conclusions ................... *.......... 57

Annexes:

1. Main International Contracts and Their Financing ........... 582. Estimated and Actual Project Costs ... ............... 63. Disbursement Schedule ......................... 61

This docment has a restricted distribution and may be used by recipients only in the performance ofkoffid duties. Its contens may not otherwise be dicosed without Wod Bank aunthoaon.

TABLE OF CONTENTS (Cont'd)Page No.

4. Disbursements by Categories .............................. 625. VRA Operational Characteristics ........................... 636. Compliance with Major Covenants ........................... 647. Economic Re-evaluation .................................. 658. Schedule of Supervision Missions .......................... 689. Comparative Income Statements (1976-1982) ................ 6910. Comparative Balance Sheets (1976-1982) .................. 7011. Comparative Flow of Funds Statements (1976-1982) .......... 71

Part II. The Third Power Project (Loan 1381-GH and Credit 689-GH)

1. Introduction ............................... 722. Project Preparation ..... .............. 733. Project Implementation, Operation and Cost .......... 754. Operating Performance ..................................... 825. Financial Performance ....................... 836. Institutional Performance .............. .................. 867. Project Justification ............................... ... 878. Bank Performance ...... ........ 899. Conclusion ................................................ 90

Annexes:

1. List of foreign Suppliers and Contractors ................ 912. Schedule of Disbursements ........ ........... 933. Allocation of Proceeds of Loan .......................... ... 944. Operational Characteristics ............................... 965. Compliance with their Covenants ........................... 976. Return on Investment ........................... 997. Schedule of Supervision Mission .............. ..... 1008. ECG Income Statement .. ... ........ ....... . 1019. Balance Sheet .................. ............. 102

10. Sources and Applications of Funds ..... ........ ...... 103

PROJECT PERFORMANCE AUDIT REPORT

GHANA: KPONG HYDROELECTRIC AND THE THIRD POWER PROJECTS(LOANS 1380-G, 1381-GS AND CREDIT 689-G)

PREFACE

This report presents the results of performance audit of two powerprojects in Ghana: the Kpong Hydroelectric Project (Loan 1380-GH), and theThird Power Project (Loan 1381-GH, and Credit 689-GM). The Bank provided aUS$39.0 million loan for the Kpong project in March 1977. The loan was madeto the Volta River Authority (VRA), and was fully disbursed and closed byDecember 31, 1982. There were important cofinanciers. The Bank financed 20%of Kpong's foreign cost, Arab agencies 46%, the Canadian development fund15%, and European agencies 11%.

In addition, the Bank Group provided a US$9.0 million loan and aUS$9.0 million credit for the Third Power Project in March 1977. The loanwas made to the Electricity Corporation of Ghana (ECG), which was also thebeneficiary of the credit. The credit was fully disbursed by May 11, 1978and the loan by August 10, 1982.

The Kpong project provided for the construction of 160 MW ofadditional hydro-generating capacity, and supportive transmission lines. TheThird Power focused, however, on the development and rehabilitation of thedistribution system, and the extension of the network to areas where costlydiesel power could be replaced by hydroelectricity. A study of Ghana'stariff system was part of the Third Power project's objectives.

This report consists of a Project Performance Audit Memorandum(PPAM) prepared by the Operations Evaluation Department (OED), and twoProject Completion Reports (PCR) prepared by the West Africa RegionalOffice. The PCRs have examined the financial and institutional developmentsaffecting the two electricity corporations in Ghana. While reviewing theseissues, the audit has also focused on the projects' economic justificationand on the sector's need for rehabilitation and reform measures. Morespecifically the audit has reviewed:

- electricity tariffs,- project justification,- rehabilitation and reform measures,- cofinancing experience,- resettlement experience, and- sustainability of sector institutions.

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Both the PCRs were prepared by a Bank/IDA consultant who reviewedBank reports, project records and filesl/. The PPAM is also based onsimilar sources, including the PCRs, a one-week mission to Ghana, andinterview with Bank Staff. The audit mission visited ECG's distributioncenters in Kumasi, Mampon, Bibiani, Awaso, Wiawaso, Tema and Accra. Inaddition to meeting ECG field staff, several residential, commercial, andindustrial consumers were interviewed. Also, ECG's training program in Temaand training needs were considered. The mission is most grateful for thecourtesy, and the assistance provided to it by the VRA and ECG management.

Following normal OED procedures, copies of the draft report weresent to the country and cofivanciers for comments. Comments received havebeen reproduced in Appendix 1, and reflected in the audit report.

1/ For preparing VRA PCR the data source included: Appraisal Report No.1299b-GH, March 1, 1977; President's Report No. P-1971-GH, March 8,1977; the Loan and Project Agreements, March 24, 1977; the PCR preparedby VRA consultants; correspondence with the Borrower and internal Bankmemoranda on the project issues contained in the Bank files and a visitto Ghana in January 1984.For preparing ECG PCR the data source included:Appraisal Report No. 1196a-GH, March 1, 1977; President's Report No.P-1972-GH, March 8, 1977; the Loan and Credit Agreements, March 24,1977; the PCR prepared by EOG consultants, and other sources asindicated under VRA PCR.

PROJECT PERFORMANCE AUDIT BASIC DATA SHEET

GHANA - VRA, KPONG HYDROELECTRIC PROJECT(LOAN 1380-HM)

KEY PROJECT DATA

Item Appraisal Actual (est.)

Total project cost (in US$ million) 236.5 250.6 /aCost overrun () - 6.0Foreign exchange cost (in US$ million) 172.0 196.8Cost overrun in foreign exchange (in %) 14.4Loan amount (in million US$) 39.0 39.0Disbursed 39.0Completion of physical components

- hydroplant 6/81 12/81- other facilities 10/79 11/82

Proportion completed by above date - 100%Equalizing discount rate (compared to

thermal alternative) - 8Z-13% /bEconomic rate of return 7.5% 7.5%Financial performance Good Not GoodInstitutional performance Good Good

CEMLATIVE FORECAST AND ACTUAL DISBURSEMENT(US$ million)

1977 1978 1979 1980 1981 1982As of December 31

(i) Appraisal estimate 7.3 12.6 23.4 33.5 39.0 -(ii) Actual - 4.8 13.8 27.4 35.2 39.0(iii) as Z of (i) - 38 59 82 90 100

OTHER PROJECT DATA

Actual orItem Original Plan Estimated

First mention in file 10/72Government application 8/73Negotiations 10/76 1/77Board Approval 12/76 3/22/77Loan agreement date 3/24/77Effectiveness date 6/24/77 8/24/77Closing date 12/31/81 12/31/82 /c

/a Because of the distortion of the exchange rate, US dollar equivalent ofCedi-cost greatly understates local expenditure (see VRA's comments,App. I, p. 1).

/b PPAM, para. 32.7T Final disbursement was made on 12/08/82.

OTHER PROJECT DATA (Continued)

Borrower: Volta River AuthorityGuarantor: Government of GhanaFollow-on project: None

]MISSION DATA

No.of No. of Staff Date ofItem Month/Year weeks Persons week Report

Project preparation 6/74Pre-appraisal 8/74-7/75Appraisal 3/76

Supervision I 6/77 1.5 2 3 2/15/78Supervision II 7/78 1 1 1 10/02/78Supervision III 2/79 1 1 1 4/19/79Supervision IV 11/79 1 3 3 11/26/79Supervision V 10/80 1 3 3 11/05/80Supervision VI 7/81 1.5 3 4.5 7/29/81Supervision VII 10/81 1 1 1 12/01/81

8.0 16.5

COUNTRY EXCHANGE RATES

Name of Currency (abbreviation) - Cedi (C)

Year:Appraisal Year Average (1975) US$ I = C 1.15Intervening Years Average (1975-1982) US$ 1 = C 1.81Completion Year Average (1982) US$ 1 = C 2.75

PROJECT PERFORMANCE AUDIT BASIC DATA SHEET

GHANA: THIRD POWER PROJECT-ECG(LOLN 1381-GH AND CREDIT 689-GH)

KEY PROJECT DATA

Item Appraisal Actual (est.)

Total project cost (in US$ million) 26.7 29.5 /aCost overrun (Z) - 10.4Foreign exchange cost (in US$ million) 18.0 18.8Cost overrun in foreign exchange (in Z) - 4.4Credit/Loan Amount IDA 9.0 9.0

IBRD 9.0 9.0Disbursed (Credit and Loan) - 18.0Completion of physical components 6/80 6/82Proportion completed by above date 60 98Economic rate of return 7.5-21.4Z positive /bFinancial performance Poor PoorInstitutional performance Fair Poor

CUMULATIVE FORECAST AND ACTUAL DISBURSEMENT(US$ million)

1976 1977 1978 1979 1980 1981 1982As of December 31

(i) Appraisal estimate 6.1 13.1 16.6 18.0 18.0 18.0 18.0(ii) Actual - 6.3 12.6 15.4 16.9 17.5 18.0(iii) as Z of (i) - 48 76 86 94 97 100

OTHER PROJECT DATA

Actual orItem Original Plan Estimated

First mention in file 6/72Government application 10/74Negotiations 4/76 11/76Board Approval 6/76 3/22/77Credit agreement date 3/24/77Loan agreement date 3/24/77Effectiveness date 6/24/77 6/10/77Closing date (Loan 1381-GH) 12/31/80 12/31/81 /cClosing date (Credit 689-GH) 12/31/80 12/31/80 /d

/a Because of the distortion of the exchange rate, US$ equivalent ofCedi-cost greatly understates local expenditures.

/b After improved utilization of the new facilities (PPAM, para. 34)./c Final disbursement was made on 2/09/82 and loan closed 8/10/82 when

undisbursed balance of US$0.001 million was cancelled./d Final disbursement made on 5/11/78.

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OTHER PROJECT DATA (Continued)

Borrower of Credit Government lof GhanaBorrower of Loan Electricity Corporation of Ghana (ECG)Beneficiary of Credit Electricity Corporation of Ghana (ECG)Follow-on Project Name ECG Rehabilitation Project

MISSION DATA

No.of No. of Staff Date ofItem Month/Year weeks Persons week Report

Identification 8/74Pre-appraisal 2/75, 7/75Appraisal 11/75

Supervision 1 6/77 1 1 1 8/05/77Supervision II 12/77 1 2 2 2/01/78

Supervision III 2/79 1 1 1 4/13/79Supervision IV 10/79 1 2 2 12/14/79Supervision V 10/80 1 2 2 11/11/80Supervision VI 6/81 1 2 2 7/29/82

Total 6 10

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PROJECT PERFORMANCE AUDIT REPORT

GHANA: KPONG HYDROELECTRIC AND THE THIRD POWER PROJECTS(LOANS 1380-GH, 1381-GH AND CREDIT 689-Ga)

HIGHLIGHTS

The two projetts, under review in this report, are complementary.The Kpong Hydroelectri. Project (Loan. 1380-GK), which VRA has undertaken,provides 160 MW of capacity, and the Third Power Project (Loan 1.381-CH andCredit 689-G), executed by ECG, focused on the development and rehabilita-tion of the distribution system, and the extension of the network to areaswhere hydroelectricity could replace costly diesel power.

The Bank provided a US$39.0 million loan for the Kpong project; theloan being fully disbursed and closed by December 31, 1982. Also the BankGroup provided a US$9 million Loan, and a US$9 million credit for the ThirdPower Project. These amounts were fully disbursed by August 10, 1982.

Technically, the Kpong project was a success. Implementationdelays were attributable to new procurement procedures, introduced inmid-1977. Cost overruns were also modest (PPAM, para. 7). The project'ssuccess is striking, given the great difficulty caused by the worseningeconomic situation and political turmoil. VRA and its consultants andcontractors were responsible for this accomplishment (PCR, para. 3.08).

In contrast, ECG's performance was poor. Deterioration in systemreliability contributed to a slowdown in sales. However, facilitiesconstructed under the distribution project helped to ease some of theoperational problems of the Corporation.

Most ECG project components were completed 1 to 3 years late.Disruption in the economy was the main cause of the delay. Managementweaknesses, poor maintenance, and a lack of skilled and motivated staffcontributed to deterioration in the quality of service (ECG PCR, para.4.03). Moreover, the 10% estimated cost overrun substantially understateslocal expenditure (PPAM, para. 12).

The performance of consultants, working on the electrical part ofthe project, was satisfactory (ECG PCR, para. 3.27). But questions continueto be raised about the competence of the local civil works consultants.

Ghana has suffered from severe drought and because of it, probablymuch of Kpong's additional generating capacity would be utilized severalyears later than originally forecast (VRA PCR, para. 7.02). However,improved utilization, which depends on water inflows, cannot be foreseen atthis stage. Also many facilities constructed under the Third Power projectare currently underutilized (ECG PCR, para. 3.18). But improved utilizationcould be achieved by the extension of service to many potential consumers inthe existing service areas.

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Because of high inflation, the two PCRs' presentation of accountsin current prices and local currency is inadequate (PPAM, para. 16). Owingto the supply interruption to VALCO2 / and other cutbacks in sales, theAuthority's financial performance is currently out of line with the SAR3 /assessment (PPAM, para. 17). ECG's financial problems have, however, beenpartly caused by institutional weaknesses (ECG PCR, para. 5.02), and partlyby "rigidity in Governmental machinery.- 4 / Despite significant tariffincreases in July 1984, ECG's finances remain precarious. Also, theCorporation is short of foreign exchange for acquiring materials for themaintenance and rehabilitation of distribution facilities (PPAM, para. 18).

Other major themes which the audit has reviewed include: (a) proj-ect justification, and (b) sector rehabilitation and reform. The Kpongproject illustrates the weakness of the link binding some country economicand project works in the Bank. Ghana's economy, suffering from stagfla-tion, 4 required that only the very high priority programs should receive thefunds spent on Kpong (PPAM, para. 29). This is because the audit considersthat Kpong was not required to supply the domestic market provided, however,that electrical energy exports and sales to VALCO could have been frozen atthe 1976 level (PPAM, para. 29). Thus Kpong's justification depended onsales to VALCO and the export market, but the power rates for these outletswere not enough to justify the project (PPAM, para. 32).

Further, given the weakness of the distribution system, it shouldhave been possible to redirect -equipment and materials to maintain existingfacilities rather than carry out the extensions in full- (ECG PCR, para.9.02). Since many facilities, under the project, are currently underutilized(ECG PCR para. 3.18) and since distortions in the foreign exchange rate havealso resulted in gross understatement of cost, the PCR's reassessment of thereturn on investment at about 36% exaggerates the project's net benefits.The audit mission has found that a significant portion of the potential con-sumers in the project area are not currently being served because of theshortages of meters, transformers, wires, poles, insulators, service vehi-cles, etc. Since ECG depends on imports for the supply of most materials,foreign aid in helping it to acquire these materials would improve the utili-zation of distribution facilities. Therefore, the Third Power's justifica-tion depends on the extension of service to potential consumers and on thespeed of the Ghanaian economic recovery and expansion (PPAM, para. 34).

But more needs to be done than merely await the outcome of economicrecovery. The rehabilitation and reform program, presented in this report,comprises:

- a '-alanced development program for the system's generation,transmission and distribution facilities;

2/ Volta Aluminum Company.

3/ Staff Appraisal Report (SAR).

4/ VRA's comments, App. I, p. 1.

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- foreign exchange supply for ECG so that it acquires materials forthe improved utilization of distribution network, and for theefficient operation and maintenance of the system;

- an effective training program for ECG' s staff;

- revised tariffs securing for the sector a steady improvement offinancial performance and reflecting gradually the future cost ofpower supply;

- revised incentive package, particularly for ECG employees; and

- sector coordination.

The reform measures envisage the emergence of a unified sector anda strong distribution entity, capable of extending and administering an effi-cient and reliable distribution network, and of pursuing a well-balanced andwell-integrated expansion program (PPAU, para. 47).

Two other lessons which merit emphasis are that:

- for hydro project in the Sahel, extensive drought periods must beconsidered in structuring the hydrological design and operationcriteria (PPAM, para. 66); and

- in economies where growth prospects are uncertain, more emphasisshould be placed on ensuring full utilization of capacity ofexisting facilities, rather than investing in extensions of suchsystems (PPAM, para. 66).

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PROJECT PERFORMANCE AUDIT MENORANDUM

GHANA: KPONG HYDROELECTRIC AND THE THIRD POWER PROJECTS(LOANS 1380-GH, 1381-GE AND CREDIT 689-GR)

I. PROJECT SUMMARY

1. Ghana's Five Year Development Plan (1975176-1979/80) envisioned therapid expansion of generation and distribution facilities, the phasing out ofdiesel generators, and the extension of service to the Southwest and a fewrural centers. The plan targets were largely incorporated in the two proj-ects under review in this report. The two projects were executed by theVolta River Authority (VRA), and the Electricity Corporation of Ghana (ECG).

2. VRA generates and transmits hydropower. ECG retails supplies at avoltage level of up to 33 kV, and operates a small number of diesel units inremote centers. VRA's clientele comprises: ECG, Volta Aluminum Company(VALCO), Akosombo township, several mining companies, and Commnmautf Elec-trique du Bfnin (CEB) which serves Togo and Benin. In terms of the 1982sales, VALCO bought 63%, ECG 21%, and CEB 10% of the VRA supplies.

3. Of the two projects, Kpong executed by VRA, provided for:

- 160 MW addition to the system' s installed capacity;

- network extension (a) to tie in Kpong with VRA grid, (b) to extend-power lines to the Southwest, and (c) to reinforce and expand capa-city between Tema and Accra;

- additional reactive power compensation for the system's 161 kVgrid; and

- resettlement of 7,000 residents of the reservoir area.

4. The Third Power Project, focusing on the development of thedistribution system, comprised:

- new subtransmission lines (240 km. of 22-33 kV network);

- new substations (11 units of 33/11 kV systems);

- expansion of existing substations (six units);

- improvement of distribution network, particularly in Tema;

- rehabilitation of the existing transmission and distributionsystem;

- replacement and expansion of vehicle fleet;

- engineering services for ECG; and

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- a power sector study, "to derive therefrom a tariff structuredesigned to reflect the marginal cost of power...- - ECG SAR,para. 2.22.

5. Ghana has suffered from three successive years of severe drought(1981-83). Chiefly because of it Xpong's additional generating capacity willprobably be utilized several years later than originally forecast (VRA PCR,para. 7.02). But improved utilization. which depends on water inflows, I/cannot be foreseen at this stage. Because of power shortages VALCO, whichhad ceased operation, has now commenced limited production. ECG's energysupply had also been severely curtailed. Yet, against enormous difficulties,caused by a receding economy and political turmoil, the construction of Kpongwas completed. VRA and its contractors and consultants were responsible forthis remarkable achievement (VRA PCR, para. 3.08). The consultants togetherwith "the main contractors.. .conceived and helped carry out imaginativemeasures to overcome the obstacles created by the near breakdown of theeconomy--VRA PCR, para. 3.29. Contractors, engaged in VRA's networkextension, did not perform well, however-VRA PCR, para. 3.32.

6. The dam was completed six months behind schedule. Delays in bidpreparation, analysis, and clarification were the cause (VRA PCR, para.3.07). After this hurdle, implementation proceeded smoothly. Other delays,affecting electromechanical equipment and the connecting grid, did not impedeutilization of the dam. Construction of the network extension was completed5-28 2/ months late. This setback was caused by the Government's newcontract approval procedure (VRA PCR, para. 3.11), which required theAuthority to submit bid documents to a Public Agreement Review Committee.The Committee, in turn, sought the concurrence of the Supreme MilitaryCouncil.

7. When expressed in US currency, Kpong's cost overrun was a modest 6%(VRA PCR, Table 3.03). Although the project's aggregate foreign costincreased by 14%, the local cost in terms of the US dollar fell below theappraisal estimate. The main reason seems to have been significantadjustments in the country's foreign exchange rate. Because of exchange rateadjustments it is not meaningful to discuss the local cost overruns. 3 Over80% of the foreign costs were paid for civil works and equipment contracts.The foreign cost of these contracts increased by 17%: 32% increase in civilworks and a slight decline in equipment contracts (VRA PCR, Table 3.04).Over three-fourths of the increase in the foreign cost of civil works stemedfrom changes in the scope of work and price escalation. Further, economicdislocation added to the cost . For example, materials and equipment had tobe imported because they were locally unavailable (VRA PCR, para. 3.22).

1/ VRA's comments, App. I, p.2.

2/ VRA's comments, App. I, p.2.

3/ VRA believes that "This could be done through indexation, i.e.comparisons made in 1976 Cedis," App. I, p.2.

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8. Because of cofinancing, five types of contract were awarded: threebased on different versions of international competitive bidding (ICB), oneon bids by Canadian firms, and one on bids by local contractors. Althoughcofinancing complicated the procurement, the implementation delay was mainlycaused by the introduction of new procedures (PPAM, para. 6).

9. About 79% of Kpong's costs were in foreign exchange. The WorldBank financed 20% of the foreign cost, Arab agencies 46%, the CanadianDevelopment Fund (CIDA) 15%, and European agencies 11%. The Bank's US$39.0million loan was fully disbursed and closed by December 31, 1982, about oneyear behind the SAR schedule.

10. In contrast to the Authority's satisfactory performance ECG didrather poorly. Its management weaknesses, poor maintenance practices, andlack of skilled and motivated staff undermined the quality of service (ECGPCR, para. 4.03). Retail sales fell partly because of the system reliabilitybecoming still less reliable.

11. Disruption in the economy was the main cause of the Third Power'simplementation delays. Materials were hard to acquire. Local funds werescarce and staff were generally demoralized and pessimistic (ECG PCR, para.3.03). Except for part of the Tema extension, other ECG project componentswere completed 1k to 3 years late.

12. The ECG PCR states that chiefly because of gross distortions inforeign exchange rate, the 10% estimated cost overrun substantiallyunderstates local expenditure4 / (ECG PCR, para. 3.17). Two-thirds of theestimated cost overrun are due to price escalation, and one-third to a fewmodest changes in the scope of work (ECG PCR, para. 3.17a).

13. The Bank Group provided US$18.0 million for almost the total amountof the project's foreign exchange cost. One-half of the amount was in loanand one-half in credit. The package was fully disbursed and closed by August10, 1982, about 1k years behind the original schedule.

14. ECG retained one foreign and several local consultants. Therelationship between the two groups remained undefined. While theCorporation assumed that the foreign consultant would provide the necessaryinformation and instruction to civil works consultants, this lack of clarityproved to be a stumbling block. The foreign consultant assisted ECG inengineering, procurement and supervision of equipment installation. But itdid not initially provide any guidance to local consultants. Subsequentlythe Corporation requested that instructions be given to local consultants whosupervised the work of local civil works contractors. The limited -technicalability of both local consultants and contractors allowed only slow progress,often associated with substandard work" which "had to be corrected or evenredone" - ECG PCR, para. 3.04. The Corporation has now recognized theadvantage of retaining one consultant for such works while providing for

4/ VRA believes that -shadow exchange rate could be used if the officialrate is not accepted-, App. I, p.1. VRA does not provide any estimateof its ou-.

others to subcontract from the main consultant. To summarize, theperformance of consultants working on the electrical part of the Third Powerwas satisfactory (ECG PCR, para. 3.27). However, questions continue to beraised about the competence of local civil works consultants.

15. Further, while equipment suppliers delivered the goods on time,local contractors failed to complete the corresponding civil worksexpeditiously. ECG, therefore, decided to make the electrical contractorsresponsible for the associated civil works. The new arrangement worked well.

16. As for the financial performance of the two agencies (VRA and ECG),the PCR's presentation of accounts in current prices and in local currency,under a long-term hyperinflationary condition, is clearly insufficient. Inresponse the Western Africa Region maintains that the PCRs have reviewed theaccounts as -they are kept in local money and believe that this method wouldbe more reliable because of lack of adequate statistical data in Ghana".However, at least VRA could have been requested to present its financesexpressed in terms of a stable unit of account, since a considerable portionof its income is in foreign currency - retained for the servicing and therepayment of foreign loans (Akosombo and Kpong project loans).

17. Because of recent supply disruptions to VALCO (PPAM, para. 5) andcutbacks in other sales, the Authority is currently short of foreign exchangeand its financial performance has diverged from the SAR assessment. Still,VRA was able to finance 37% of its 1977-82 capital investment from internallygenerated funds, compared to SAR's estimate that such savings would fund 32%of a significantly higher level of capital investment, including about $110million for the Bui hydroproject (VRA PCR, para. 5.03).

18. In contrast, ECG's financial plight is partly institutional. ThePCR states that the deferral of Government's approval of -tariff increaseswere apparently due to its reluctance to provide them to such aninefficiently run utility- - para. 5.02. An example in maladministration isthe Corporation's receivables which were often more than 7 months' revenue(ECG PCR, para. 5.04). Despite ECG's weaknesses, the Government hasauthorized considerable increase in tariffs, under the Economic RecoveryProgram, in 1983 and 1984. These adjustments enabled the Corporation to earnan improved rate of return (ECG PCR, para. 5.03). ECG's finances remain,nevertheless, precarious: the Corporation totally lacks foreign exchange tomaintain or rehabilitate its distribution facilities. Also its debt-equityratio has deteriorated because of the sharp devaluation of the cedi, thelocal currency.

II. SUPPLEMENTARY COMMENTS

19. The assessment of the two projects must be undertaken in thecontext of Ghana's severely impaired socio-economic condition. The longneglect of the economy aggravated by the several successive droughts5/ and a

5/ See VRA's comments, App. I, p.3.

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poor outlook for the country's principal export, cocoa, could not be quicklyreversed. The economy had all along needed a short, medig and long termdevelopment strategy that would have focused on stabilization, rehabilita-tion, and then economic growth. This is the type of strategy which is nowembodied in the Economic Recovery Program. Already domestic savings andinvestment rates have hit such a low watermark that they cannot, on theirown, forestall the continuing slide in per capita income; the domesticsavings and investment rates each is now about 1% of the GDP6/. The highrate of inflation (40% a year during 1970-82) has also been disruptive.Other major indicators that clearly reveal the weakness of the economy, sincethe year 1970, include: a 30% drop in per capita income, an 80% f all in realwages, a 52% decline in real export earnings, and a 33% downturn in importvolumes. About half of the country's much reduced export proceeds are alsoneeded to finance petroleum imports.

20. However, the new government (December 31, 1981) has embarked on anEconomic Recovery Program in April 1983, including: moves towards a realisticexchange rate, gradual easing of price controls, improved monetary and fiscaldisciplines, and rehabilitation programs for key sectors. In the face ofsevere shortages of food and other essentials, the Government has continuedto take a tough stand on many economic fronts. Luckily a more normal weatherin 1984 has also ended several successive years of drought.5/ Food,hydroelectricity, and the production of export goods have begun to recover.With sizeable new aid commitment, the economy is expected to continue itsrecovery in 1985. Against this checkered background, the following themesare reviewed:

- Electricity tariffs;

- Project justification;

- Rehabilitation and reform measures;

- Cofinancing experience;

- Resettlement experience; and

- Sustainability of sector institutions.

6/ Gross domestic savings fell from 17% of GDP in 1960 to 1% in 1982.Concurrently, gross domestic investment sagged. It was 24% of the GDPin 1960 and 1% in 1982 (see, Towards Sustained Development inSub-Saharan Africa, World Bank, August 1984, p. 61). While per capitaGDP stagnated in the 1960s, it fell by 2.5% a year in the period1970-82. All sectors of Ghana's economy experienced negative growth inthis period.

51 See VRA's comments, App. I, p.3.

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Electricity Tariffs

21. This section briefly reviews: VRA's power rates for VALCO and CEB,and ECG's average price for the domestic consumer.

22. VALCO. Ghana and VALCO have both gained from the original MasterAgreement.7Without it the Akosombo dam would not have been built, and thecountry's dependence on costly sources of energy would have been greater thanit is today. What is more, VRA would not have existed, and a much weakerpower generation authority would probably have functioned in its place.

23. The Agreement stipulated: (1) the delivery of up to 370 MW of firmpower to VALCO, (2) the payment of 0.26 US4/kWh by VALCO to VRA or a minimumannual payment of US$7-8 million, and (3) a 30-year agreement (1967-97)without any adjustment clause. The rigidity of the power rate, stipulated inthe Agreement, implied that: (a) VALCO would have reaped the benefit from anyerosion in the purchasing power of the dollar, the erosion being unavoidableover a 30-year period, and (b) VALCO would have captured all windfall gainsfrom any energy price upheaval which could boost aluminum prices because of ahigher electricity cost, pushing up the aluminum production cost.

24. With the expansion of the Ghanaian economy, it should have beenexpected that Akosombo output would increasingly cater to the needs of thedomestic market. Article 5 of the Agreement had recognized this aspiration:Further, th. Authority shall not after the tenth anniversary of the Perma-

nent Delivery Date be obliged to increase the said amount to an amountgreater than three hundred and fifteen thousand kilowatts (but this sentenceis without prejudice to any higher figure which may be in effect at thatdate)."

25. In the context of Kpong project and additional supply to VALCO,Ghana renegotiated, in 1975, a power rate package comprising a payment of:0.325 US4/kWh for the period 1973-75; 0.45 US4/kWh for 1976, the rateincreasing gradually to 0.5 US/kWh by 19S1. Moreover, the Authority agreedto supply VALCO 30 MW of additional firm and 15 MW of interruptible electri-cal energy. The power rate on the additional supply was to be derivedfrom an agreed formula that would use the project's revised final cost, oneyear before its completion. If the ensuing rate exceeded 0.975 US 4/kWhVALCO could decrease or forego entirely its claim on the 30 MW.

26. Ghana has done well in scrupulously honoring its internationallegal obligations. But the power rate agreement for additional supply to

7/ The Master Agreement between the Government of Ghana and Volta AluminumLimited, concluded on January 22, 1962, includes several scheduleddocuments, one of which is about the power contract. PPAM, para. 23refers to a number of provisions in that contract, defining:

- power ceiling (Article 5);- contract rate (Article 12);- minimum charge (Article 13); and- period of agreement (Article 23).

-7-

VALCO, over the 315 MW supply ceiling, should have recouped the incrementalcost of electricity generation, including a fair rate of return oninvestment, fully reflecting the opportunity cost of capital to the Ghanaianeconomy8 / (see PPAM, paras. 32-33). Moreover, since investment has itsrisks the Authority should have required VALCO's participation through, forexample:

(a) a fixed annual payment, irrespective of the actual amount supplied;and/or

(b) an equity contribution towards financing the project cost.

27. CEB. The Authority has a continuing contractual commitment tosupply Communautf Electrique du Bfnin (CEB) up to 80 MW of capacity. Theprice CEB pays has been modest. SAR estimated it at 0.82 US 4/kWh/ (VRASAR, para. 2.15). Subsequently it was increased to around 1.4 US4IkWh in1978, and to 2.5 US V/kWh in April 1982. From April 1, 1985, CEB's ratebecame 4 US4/kWh for supply up to 500 GWh, and 41 US4/kWh for supply above500 GWh. These rates would be adjusted for inflation. Therefore, CEB'srate, now, approximates the incremental cost of Kpong supply.Lo

28. ECG. Under the Economic Recovery Program, domestic tariffsincreased significantly (Cedis 1.92/kWh, July 1984)111. Given that Ghana'sexchange rate is considerably distorted, ECG's retail tariff still fallsshort of Kpong's incremental cost uf power supply which, as shown in AnnexTable 1, is 5 US4/kWh, in 1982 dollar values. Under the project, ECG hadhired a consultant to undertake a sector study, define power supply costs,and propose a tariff policy for the sector. The study, completed in 1980,suggested new tariffs based on the long-run marginal cost of power

8/ See VRA's comments, App. I, p.3.

9/ This is based on a demand charge of 2.48 US$/kW per month, anenergy charge of 0.00248 4/kWh, and a construction charge ofUS$24,500/month. On a 70% load factor and 50 MW supply, the averagerate would be 0.82 4/kWh ($2.54 million divided by 306.6 an kWh).

10/ See VRA's comments, App. I, p.3.

11/ At 38 cedis to 1 US dollar (1984), the power rate would be 5.1 US/kWh(See ECG PCR, Annex 6-footnote). The recent economic report entitled:"Managing the Transition", states that electricity "tariffs wereinitially adjusted by 40% in April 1983, and then in January 1984 by500%, from an average price per kWh of 10.31 pesewas to 50 pesewas" -Report No. 5289-GH, November 7, 1984, para. 1.10, p. 6. The same reportconsiders the official exchange rate to be distorted: "The existence ofa black market and the large premiums over the official rate (threetimes or more the official rate) reflects the huge imbalance between thedemand and supply for foreign exchange..." (para. 2.07).

-8-

supply. 1 2 / Because of the country's economic difficulties these recommenda-tions were not immediately implemented (ECG PCR, para. 3.12). With therecent turnaround in the economy and significant amounts of new foreignassistance in support of the country's Economic Recovery Program, it shouldnow be possible to gradually restructure tariffs and raise their levels (seePPAM, paras. 43-45).

Project Justification

29. The Kpong project exemplifies the tenuous link that binds somecountry economic and project works in the Bank. The project, initially esti-mated to cost US$236.5 million, claimed a considerable portion of publicsector resources. But Ghana's economy required that only the very highpriority program, which could help stabilize and rehabilitate the economy'scritical sectors, should have received the funds spent on Kpong. The Bankstaff were aware of past economic problems. In the President's report ofMarch 8, 1977 the staff portray a fairly bleak economic picturel 3 /. Theyalso outline the principal objectives of the Bank Group's assistance(President's Report, para. 14). One, with some bearings on the projectobjective, concerned the improvement in "the country's essential infrastruc-ture so as to relieve constraints upon economic growth-. But Ghana's slug-gish economy did not require Kpong's additional supply provided sales toVALCO and CEB were restricted to the 1976 levelt 4/ (PPAM Annex Table 2).

30. Besides, domestic market needs could hardly be foreseen. The SARpresented a somewhat bright economic prospect, however: "average expectedload growth of public utility consumption corresponds approximately to a GNPgrowth of the order of 5.0% and a GNP/electricity consumption growth ratio ofup to 2, based on limited historical data- - para. 5.03. But as indicated

11/ See VRA's comments, App. I, p.3.

13/ Report No. P-1971-GH states, "over the past decade and a half GDPgrowth averaged 2.5 percent per annum and failed to keep pace with thegrowth of the population"...-The imbalance has depressed governmentdevelopment expenditures to an inadequate level and has also been apersistent source of inflationary pressure"... "It is difficult atpresent to assess the likelihood of the government taking all theeconomic policy measures necessary to restore equilibrium on theexternal account and provide a more secure basis for accelerated growthin the domestic economy."

14/ See VRA's comments, App. I, p.3.

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earlier (PPAM, para. 19), historical data show a sagging per capita GNP, alackluster GNP growth performance, and a receding industrialI5/ sector.

31. Since expansion of the domestic market would not justify Kpong, thequestion remains whether the additional sales to VALCO and CEB could havevindicated it. This issue is relevant because Akosombol6/ supplies to VALCOand CEB could have been restricted to about 365 M 7 / leaving enoughcapacity to cater to the Peeds of the domestic market in the medium-term.Therefore, Kpong should have been justified on possible sales to VALCO andCEB. In contrast, the SAR's economic assessment is based on domestic marketsales. Benefits were calculated on 75% of the Liberian tariff (3.75 US{/WWhat 1976 prices), yielding an economic rate of return of 16%. At 1982 pricesa 12% rate of return from Kpong would have required a wholesale electricityprice of 5 US4/kWh (PPAM Annex Table 1). Both VALCO and CEB paid, at thetime of appraisal, power rates below 1 US4/kWh (PPAM, paras. 25 and 27), andtheir expected payments in 1980 were substantially below the rate that ensurea reasonable return on investment.

32. It might, however, be argued that VALCO's willingness to pay a ratehigher than the one in the original Master Agreement (PPAM, para. 25) wasprobably motivated by the expectation that it could secure additionalsupplies from Ghana, although VRA believes that -VALCO's willingness to payhigher rates is due mainly to pressure from the Ghanaian public and theinternational community".18/ If the increase in benefits, resulting from therise in VALCO's power rate, be entirely attributed to Kpong, the project'seconomic rate of return would still approximate 5%. Further, SAR could haveargued that since Ghana cooperated in providing additional supplies, VALCOwould have been more receptive to an upward revision of power rates in the1980s. Such an expectation was, however, too tenuous to support a project ofsuch a magnitude. A further "-gument would have been that, notwithstandingthe sluggish growth of the economy, domestic sales could expand by about 3% ayear because of the possibility of extending service to new customers, mostly

15/ 2.4% a year decline during the 1970-82 period (Towards SustainedDevelopment in Sub-Saharan Africa, World Bank, August 1984, p. 58).Also the quotation from SAR para. 5.03 should be referring to anelectricity consumption/GNP (not a GNP/electricity consumption) growthcatio of up to 2, since, as shown in PPAM, Annex Table 2, the electricalenergy demand of the domestic market (ECG and others) was expected togrow by 8.6% a year during 1976-86.

16/ PPAM Annex Table 2 shows energy supply from Akosombo and diesel sets tobe about 5,600 GWh. Supplies to VALCO and CEB, at 95% load factor,would have amounted to about 3,000 GWh.

17/ As stated in PPAM, para. 24, Article 5 of the Master Agreement required315 MW of supply for VALCO, after the tenth anniversary of the permanentdelivery date. This is also reflected in VRA SAR Annex 11, Table 1. Inaddition, the SAR projected up to 50 MW of supply to CEB.

18/ App. I, p.4.

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in the existing service areas. As shown in PPAN Annex, Table 3, benefitsthat the domestic economy would derive from the project are in the distantfuture and their present values are limited, giving an overall economic rateof return of about 7.5%, including the incremental benefits from the rise inVALC'; s rate being entirely attributed to Kpong.

33. Kpong has had some other benefits. Although the SAR could notforesee the occurrence of successive droughts, because it has beenunprecedented, 19 construction of the dam has helped mitigate the severityof power cuts: Since downstream waterflows are used for electricitygeneration, Kpong does not compete with Akosombo for the use of Ghana's waterresources. To conclude, the VRA PCR's 16Z rate of return (PCR, para. 7.06),based on ECG tariffs in effect on July 1, 198420/, is questionable. Kpongwas not needed, in the medium-term, for the domestic market, and VALCO andCEB's expected payments were not enough to justify its construction.

34. As regards the justification of the Third Power, given that thesystem suffered from an acute shortage of spare parts, the project ceased toremain a least-cost solution, at the implementation phase. This is becausethe use of funds for the rehabilitation of the existing system would havebeen more advantageous than their use in a less effective distribution net-work. Although the ECG PCR estimates the return on investment to be about36Z, over three times the appraisal estimate, this high rate is the result ofa 49 fold increase in retail tariffs. However, continued distortion of theforeign exchange rate means that the project's foreign cost, expressed inlocal currency and at July 1, 1984 prices (PCR Annex Table 6), is grosslyunderstated. It is also uncertain whether the July 1, 1984 tariffs could bemaintained in real terms under the prevailing hyperinflationary situation(PPAM, para. 41). Moreover, since many facilities, under the project, arecurrently underutilized (ECG PCR, para. 3.13), the PCR's high rate of returnexaggerates the project's net benefit. An improved utilization rate could,however, have been secured if investment in generation, transmission, sub-transmission and distribution programs were well-balanced, and more resourceswere allotted for maintenance and for the additional supply of meters, wires,transformers, poles, insulators, etc. An improved utilization rate will alnoresult from the rapid recovery and expansion of the Ghanaian economy. Sincetariffs inadequately measure benefits and since energy shortages couldseverely retard economic development, the Third Power's justification dependsultimately on the speed of the Ghanaian economic recovery and expansion. Asindicated elsewhere, the prospect for a better economic performance hasrecenatly improved (PPAM, para. 2), and with that the Third Power Projectmight well be vindicated.

191 SAR has stated: -Forty years of hydrological data are available forderiving streamflow records.. .The longest continuous below averagerun-off period occurred from 1936 to 1944 with a nine-year mean annualflow of 1,000 m3 /s."-Annex 1, paras. 3-4. The recent drought was moresevere.

20/ Cedis 1.92/kWh (VRA PCR, Annex 7, p. 3); see also PPAM, para. 28.

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Rehabilitation and Reform Measures

35. However, more should be done than merely await the outcome of thecountry's economic recovery. A package of reform measures is required forsector rehabilitation and development. The package needs to include:

- a program for the balanced development of generation, transmission,and distribution facilities;

- a provision for foreign exchange supply to ECG so that theCorporation could acquire materials for improving the utilizationof its distribution network and for the efficient operation andmaintenance of its system;

- an effective training program for ECG's staff;

- revised tariffs, securing for the sector a steady improvement offinancial performance and reflecting gradually the future cost ofpower supply;

- a revised incentive package, primarily for ECG's staff; and

- sector coordination.

36. A Balanced Rehabilitation and Development Program. Despite theacute shortage of materials, ECG is currently serving a large number ofcities and towns - some important centers (for example, Sunyani and Tamale)with diesel generators. Moreover, most Ghanaian industrial establishmentsdepend for their electricity needs on public supplies. The underutilization,f distribution network under the project, reported in the ECG PCR, relateprimarily to 161/33 kV and 33/11 kV substations as well as in the subtrans-mission grids (33 kV and 11 kV lines). The unused capacity in these facili-ties would be utilized more fully as ECG succeeds in extending service topotential customers. The new service areas, under the project (for example,Bibiani-Wiawaso-Sefwi), have many potential consumers who could be advanta-geously served. But because of the shortage of meters, transformers, wires,poles, insulators, service vehicles, etc., they must wait their turns.Therefore, a greater emphasis on the improved maintenance of the distributionsystem, and on the extension of service to potential customers in the exist-ing service centers should result in a better balance between the distribu-tion service provided by ECG and the generation and transmission facilitiessupplied by VRA.

37. Moreover, ECG is faced with many options: (a) rehabilitation andupgrading of the quality of service versus expansion of the electricityservice; (b) extension of subtransmission and distribution lines to new areasversus extension of service to potential customers in the existing servicecenters; (c) human resource development versus expansion of physical assets.Considering the importance of building a strong ECG, the focus needs to be,at least in the short-run, on: human resource development, rehabilitation,quality of supply, and potential customers in the existing service areas.

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38. Foreign Exchange Resources. Since ECG depends on imports for thesupply of most materials, foreign exchange resources are necessary forachieving the short-term objectives noted at the end of the preceding para-graph. The Bank Group can play a key role in assisting the power sector torehabilitate and develop by financing the foreign exchange needs of thereform program (paras. 35-47).

39. Training and Human Resource Development. Already VRA has aneffective training program. But ECG's center at Tema, and a few otherschemes which it sponsors, fall considerably short of the distributionsystem's training requirements. Three areas need priority attention. Theyconcern: (a) the artisan class, (b) the distribution engineers, and (c) ateam of planners for the preparation and the monitoring of expansionprograms.

40. Over 40% of the ECG staff belong to the artisan class, numberingabout 2,000. They are wiremen, cable jointers, linesmen, electrical fitters,engine fitters, switch board attendants, etc., who constitute the bulk ofECG's technical field staff. Each year, about 20% of this group need to betrained or retrained. Facilities at Tema, and the supportive staff, arewoefully inadequate for this task. Lack of equipment and tools is not theonly problem confronting ECG. An effective training program must also beprepared, involving: (a) the determination of training requirements of eachdistribution district for specific skills, reflecting the trainees' jobperformance and know-how; (b) the preparation of suitable curricula; (c) thetraining and retention of a core of skillful teachers; (d) suitable accommo-dation for trainees coming from regional distribution centers; and (e) theperiodic evaluation of the program's effectiveness.

41. In the past, ECG's engineering staff were eligible for overseastraining after serving the Corporation for a period of three years. TheSouth West Electricity Board (SWEB) organized the overseas program. Thistype of training is desirable at least for two reasons: to improve the staffmorale, and expose staff to system maintenance, management and opezation inother countries. Because of foreign exchange limitations, ECG has beenforced to de-emphasize its overseas training program.

42. In addition, ECG needs a team of planners in Accra and districtcenters to program rehabilitation and expansion work, and to monitor andevaluate progress. The training program should teach how the trainees couldprepare a least-cost expansion program, and how they should collect and ana-lyze key socio-economic information needed for arriving at sound judgmentabout the system's extension to new centers.

43. Revised Tariffs As noted elsewhere, substantial tariff increaseshave already been sanctioned (PPAM, para. 28). The objective of furthertariff adjustments should be:

(a) to secure a steady improvement, in the medium-term, in the sector'sfinancial performance; and

(b) to achieve, shortly after realizing the financial objective, atariff level reflecting the future cost of power supply.

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44. This dual approach in reforming the tariff system responds suitablyto the Ghanaian needs, since, in the absence of a least-cost expansion pro-gram, the calculation of the long-run marginal cost (LRHC) of power supply isbound to be arbitrary. Under the Third Power, the consultants have alreadystudied an LRMC pricing system which, according to VRA, has been reflected inthe domestic tariff structure. VRA and ECG should continue their efforts inrefining, in-house, the LRMC pricing study, which needs to be based on aleast-cost expansion program for an increasingly efficient electricity supplyindustry. These refinements should measure, with a greater accuracy than nowpossible, the divergence bet.reen the prevailing level/structure of rates andthe LRMC tariffs.

45. However, the immediate focus must be on a substained increase inpower rates, in real terms, so that an 8% financial rate of return on thesector's revalued assets is secured at the end of a four to five yearperiod. Current price regulations 2 l! are insufficient, since they requirethat ECG's retail tariffs should increase 5% a quarter until the end of March1986. Since the cost of capital goods will continue to rise, when expressedin cedis, faster than 5% a quarter, the electricity tariffs, governed byexisting regulations, will become increasingly incapable of recovering thecost of power sector investment. Therefore, power rates need to be adjustedquarterly by combining 2/ an index that accurately measures changes in thecost of capital goods for the electricity supply industry with another compo-nent introducing a sustained rate of increase in tariffs, in real terms, soas to achieve the sector's overall financial objective within a realistictime-frame. The appropriateness of a sector-specific price index for capitalgoods stems from the need to recover investment cost by reflecting changes insuch costs on the tariff level. Since Ghana imports the bulk of its capitalgoods, the cost of such imports should be expressed in local currency,reflecting the increasing devaluation of the cedis. The Bank should assistVRA and ECG to work out an appropriate index for tariff adjustments.

46. Incentive Package for Employees. The ECG and VRA staff receivemodest pays. VRA is, however, able to motivate, attract and retain staff notbecause of high monetary rewards, but primarly because the staff perceivesthe Authority as providing a good opportunity for career development and asgiving an incentive package focused on their basic needs, such as housing andtransportation. Elsewhere the need for human resource and career development

21/ Electricity Corporation of Ghana (Power Tariffs) (Amendment)Regulations, 1984.

22/ Tariffs need to be adjusted as follows:First quarter: A price index, reflecting quarterly changes in the costof capital goods, to be expressed in cedis, for the electricity supplyindustry (CGEL 'ndex) + 1.10.Second quarter: CGEL Index.Third quarter: CGEL Index + 1.10.Fourth quarter: CGEL Index.

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in ECG has been emphasized (PPAM, paras. 42-45). A good training program forECG should be supplemented by a well-balanced incentive package, includinghousing benefits and mass transportation facilities to work place. Thesemeasures should help the Corporation to improve its work environment.

47. Sector Coordination. The Authority has thrived because of goodmanagement, an autonomous status, and the market security, which has enabledit to earn foreign exchange. Notwithstanding Ghana's other urgent needs, themaintenance of VRA's autonomy is of paramount importance: A good institutioncan easily be destroyed, but to rebuild it, under adverse economicconditions, would be an insuperable task.

48. The Ghanaian economy benefits from VRA operations mainly throughthe distribution of electrical energy among productive and other sectors.Because of ECG's weaknesses, these benefits have not been fully realized.For Ghana to obtain a much richer return from VRA operation, ECG must betransformed into a well-managed and vigorous organization. There is also aneed for well-balanced expansion program, encompassing generation,transmission and distribution facilities and tailored to the Ghanaiandomestic economic requirements.

Cofinancing Experience

49. The cofinancing package, exclusively from Official DevelopmentAssistance, took four years to be arranged. The package has been to Ghana'sadvantage, since many agencies adhered to ICB and similar procurementprocedures (PPAM, para. 8) and the grant element in the loan was high. Forexample, the Arab agencies provided US$73 million for a period ranging from17 to 20 years, including a 5-year grace period at an annual interest cost of2-6Z (VRA's comments, App. I, p.5). Since considerable efforts went intoputting the package together, an element of additionality in the loan amountis evident, at least from the Ghanaian perspective.

Resettlement Experience

50. Ghana's previous resettlement experience (Volta Lake) has been val-uable in the design of Kpong resettlement program. The Volta resettlement,which established 52 sites for relocating 80,000 people, had emphasized thedevelopment of large land holdings and farm mechanization. In contrast,Kpong resettlement has relocated some 7,000 people iG ix new towns, and itsfocus has been on small farms, and appropriate farming practices, includingtraditional agriculture. Under the recent program,people were not removedfrom their natural habitat. What is more, they were initially invited toparticipate in the decisions made concerning the towns and neighborhoods theypreferred to live in. This participation was through village chiefs.

51. As in the earlier program, the resettlement objective aimed at theestablishment of viable economic communities rather than refugee camps, andat equitable compensations for the loss of property and productive assets.The PCR has not assessed the experience in depth. But the contrasting strat-egies, employed by the two resettlement programs, have important lessons forother nations, and therefore, their relative merits need to be studied. Such

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an assessment cannot be undertaken now, when the recent drought has causedgreat economic hardship, and has probably obliterated much of the gains fromthe two contrasting strategies.

Sustainability of Sector Institutions and Project Facilities

52. Because VRA provides electricity to VALCO and CEB, and earnsforeign exchange, and because the Authority enjoys an autonomous status whichallows it to retain the foreign exchange income to meet its needs, VAR is ina much stronger position than ECG to operate, relatively unperturbed, byGhana's economic tribulations. But VAR's sustainability depends also on theGovernment's commitment to respect the Authority's autonomy and permit it toprovide and sustain the necessary environment for employing and retainingtalents.

53. In contrast, ECG is a weaker organization. It cannot secure thenecessary self-reliance partly because of institutional weaknesses. But itis also weak because of the inability to provide necessary incentives forwell-qualified staff. To strengthen ECG and give it a status similar tothat enjoyed by VRA, an ECG-VRA merger 2 3 / has often been proposed. If theproposal is carried out a unified sector would emerge that could promoteECG's sustainability provided, however, that the Authority is not weekened inthe process. Also with a strong ECG and the implementation of rehabilitationand reform package outlined in this report, the Third Power Project facili-ties would be sustainable. There will still remain the need for a muchbetter access to some service centers by improving the road network and byproviding ECG with foreign exchange to acquire the requisite transportfacilities.

III. CONCLUSIONS

54. Despite great difficulties caused by a depressed economy andpolitical unrest, Kpong was completed without excessive delays or costoverruns (PPAM paras. 5 and 7). The Authority, its consultants, andcontractors are responsible for this remarkable achievement.

55. In contrast, ECG did not do well (PPAM para. 10). Dicruption inthe economy was the main cause of the Third Power's implementation delay.Besides, the undefined relationship between ECG's foreign and domesticconsultants caused problems (PPAM, para. 14). The Corporation has nowrecognized the advantage of retaining one consultant while providing forsub-contractual arrangement with others. Also, ECG's decision to makeelectrical contractors responsible for the associated civil works seems tohave worked well (PPAM, para. 15).

56. Because of the drought and supply disruptions to VALCO and others,VRA's financial performance has fallen short of the SAR assessment. ECG's

231 Shortly, the Electricity Supply Board of Ireland will undertake a "Studyof Power Sector Organization and Management in Ghana".

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financial problems were, however, partly institutional. Despite theweakness, considerable tariff increases have been authorized in recent years(PPAM para. 28). Still, ECG's finances remain precarious, partly because theCorporation is short of foreign exchange resources to enable it torehabilitate its distribution facilities (PPAM, para. 18), and extend serviceto potential consumers in the existing service areas. Also, the uncollectedbills, which often fall for more than six months behind payment dates,present a serious problem. Such bills need to be promptly collected, andpenal interest rates be imposed on the delinquents.

57. Ghana has suffered from severe drought and because of it the utili-zation of Kpong's additional generating capacity will depend on water in-flows. Aside from this problem, the audit considers that Kpong was notneeded for the domestic market, provided supplies to VALCO and CEB could havebeen frozen at the 1976 levels. This means that the project's justificationdepended on sales to VALCO and CEB. But power rates paid by these agencieswere not enough to justify Kpong (PPAM, para. 32).

58. The Kpong project illustrates the tenuous links that bind somecountry economic and project works in the Bank. Ghana's stagnant economyrequired that only the very high priority programs should receive the fundsspent on Kpong (PPAM para. 29).

59. Further, given that the distribution system suffered from an acuteshortage of spare parts, the Third Power Project, a least-cost solution, wasno longer least-cost when it was being undertaken. Although the ECG PCRestimates the return on investment to be about 36%, this high rate is delu-sory: Because of the continued distortion of foreign exchange rate the proj-ect's foreign cost has been grossly understated. It is also uncertainwhether the tariffs, measuring the benefits, could be maintained, in realterms, under the prevailing hyperinflationary conditions. Moreover, manyfacilities, constructed under the project, are currently underutilized. Thelow utilization rate would improve if ECG could acquire critical supplies ofmaterials to extend service in existing areas. The utilization rate couldalso improve as a result of the overall economic recovery and growth. Hence,the Third Power's justification depends on system rehabilitation and develop-ment, and ultimately, on the state of the Ghanaian economy (PPAM, para. 34).

60. However, more should be done than merely await the outcome of theeconomic recovery. The reform measures, outlined in this report, include:

- A balanced development program for the system's generation, trans-mission, and distribution facilities (PPAM, paras. 36 and 37);

- adequate provision for foreign exchange supply to ECG so that itcould acquire materials for the improved utilization of distribu-tion network, and for the efficient operation and maintenance ofthe system;

- an effective training program for ECG staff (PPAM, paras. 39-42);

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- revised tariffs securing f or the sector a steady improvement offinancial performance and reflecting gradually the futcre cost ofpower supply to Ghana (PPAM, paras. 43-45);

- revised incentive package, particularly for the ECG staff (PPAM,paras.46); and

- a unified sector approach with measures to safeguard and reinforcethe sector's autonomy (PPAM, paras. 47-48).

These measures should be a part of a sector rehabilitation and developmentpackage under the current Economic Recovery Program.

61. The World Bank's lack of operational flexibility is of concern.Given the weakness of the distribution system and the sluggishness of demand,it should have been possible to redirect -equipment and materials to maintainexisting facilities rather than carry out the extensions in full"-ECG PCR,para. 9.02.

62. VRA's autonomy, which has been the chief reason for the project'stechnical success, remains so far intact. The Authority's foreign exchangeearnings, and its status as the country's most important parastatal companyshould help to reinforce it.

63. The Ghanaian economy benefits from VRA operations mainly throughthe distribution of the electrical energy to the productive and othersectors. But because of ECG's weaknesses these benefits have not been fullyrealized. Without a unified sector, and the establishment of a strongdistribution entity, capable of extending and administering an efficient andreliable distribution network, the formulation of a well-balanced and well-integrated expansion program will remain distant goals2 4 / (PPAM, para. 48).

64. The cofinancing package, exclusively from offical developmentassistance, has been to Ghana's advantage, since many agencies adhered to ICBprocedures, and the grant element in the loans was high.

65. The Authority has extensive experience in resettlement programs.Some 87,000 individuals have been moved around over the past 2 V, decades,7,000 people under the current project. The contrasting strategies, employedin the two resettlement schemes, are of interest to many LDCs. They shouldbe studied further.

66. Two other lessons which merit emphasis are that:

- for hydro projects in the Sahel, extensive drought periods must beconsidered in structuring the hydrological design and operationcriteria, and

24/ According to VRA, "A strong and balanced electricity sector can stillemerge under the two separate organizations. What is necessary is toimprove and enhance management skills of the existing two institutions."

- App. I, p.5.

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- in economies where growth prospects are uncertain, more emphasisshould be placed on ensuring full utilization of capacity ofexisting facilities, rather than investing in extensions of suchsystems.

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ANNEX 1

Table 1: KPONG'S INCREMENTAL COST OF ENERGY SUPPLY(IN MILLIONS OF 1982 DOLLARS) /a

PresentValue

Investment Operating Total Sales Net (12% DiscountCost Cost (5.13 USJ/kWh) Benefit Rate)

1976 1.9 1.9 (-) 1.9 (-) 1.71977 2.4 2.4 (-) 2.4 (-) 1.91978 27.1 27.1 (-)27.1 (-)19.31979 67.5 67.5 (-)67.5 (-)42.91980 68.1 68.1 (-)68.1 (-)38.61981 70.2 70.2 (-)70.2 (-)35.61982 36.8 36.8 (-)36.8 (-)16.61983 - 2.7 2.7 46.2 43.5 17.6

T I I I I

2015 2.7 2.7 46.2 43.5 0.4

Total (-) 0.3

/a According to the SAR estimate on Kpong, the project was expected to cost$225.0 million (SAR, para. 4.08). This estimate excludes transmissionlines related to ECG's operation, and also taxes, duties, and interestduring construction, but it includes $48.7 million for price contingencyand owner's cost. Without this item, Kpong project cost, at mid-1976prices, would have been $176.3 million, or at 1982 prices (year-endprices) $274 million. The latter estimate assumes a 7% annual increasein cost from mid-1976 to end 1982 (6-1/2 years), but no cost overrun, inreal terms. The expenditure pattern given in the table follows theprofile shown in VRA PCR, Annex 7, p. 3.

Note: The table shows that a tariff level of at least 5 US 4/kWh, in 1982prices, is required to secure a 12% rate of return (the opportunitycost of capital) on investment in Kpong.

- 20 -

ANNEX 2

Table 2: PROJECTED DEMAND/SUPPLY FOR ELECTRICAL ENERGY(GWh)

DEMAND1976 1981 1986

I. SAR ScenarioVALCO and CEB 2,873 3,642 3,642ECG and others 1,309 2,042 2,993

Losses 142 216 285

Total 4,324 5,901 6,920

II. Alternative Scenario

VALCO and CEB 2,873 2,873 2,873ECG and others 1,309 2,043 2,993

Losses 142 187 252

Total 4,324 5,103 6,118

SUPPLY

Akosombo and diesel sets 5,600 5,600 5,600Shortfalls under:

Scenario I - 301 1,320II - 518

Kpong 970Shortfall under Scenario I - - 350

Source: SAR scenario and supply estimates are based on the Appraisal ReportNo. 1299b-GH, Annex 11, Table 2.

Note: This table shows that if sales to VALCO and CEB could have been frozenat the 1976 level, and if the domestic demand had grown as envisaged inthe SAR (8.6% a year), an overall power shortfall of 350 GWh could havebeen foreseen for 1986 in the absence of Kpong project. But if demandwas projected to grow 3-6% a year, rather than 8.6% a year, a surplusof 300-900 GWh would have been forecast for 1986. Since PPAM, para. 30questions the very basis of domestic demand projection, Kpong justi-fication for early construction depended on sales to VALCO and thedomestic market.

-21-

ANNEX 3

Table 3: ECONOMIC RATE OF RETURN FROM SALES TO VALCO, CEB AND ECG(in millions of 1982 dollars)

PresentBene fits Value of Net

Total VALCO /b CEB /c Net Benefits, atYear Cost /a 315 MW 55 MW 30 MW 20 MfECG /d Total Benefits 7.5Z discount rate

1976 1.9 10.1 10.1 8.2 7.631977 2.6 9.4 3.6 3.3 2.9 19.2 16.8 14.541978 27.1 8.8 3.4 3.1 2.8 18.1 (-) 9.0 (-) 7.241979 67.5 8.3 3.2 2.9 2.6 17.0 (-) 50.5 (-) 37.811980 68.1 7.7 2.9 2.7 2.4 15.7 (-) 52.4 (-) 36.501981 70.2 7.2 2.8 2.5 2.2 14.7 (-) 55.5 (-) 35.641982 36.8 6.7 2.6 2.4 2.1 13.8 (-) 23.0 (-) 13.861983 2.7 6.3 2.4 2.2 2.0 12.9 10.2 5.721984 2.7 6.3 2.4 2.2 2.0 12.9 10.2 5.32

I I W I I I I I

2001 2.7 ' ' ' ' 6.0 18.9 16.2 2.472002 2.7 6.3 2.4 2.2 2.0 12.2 25.1 22.4 3.182003 2.7 6.3 2.4 2.2 2.0 18.7 31.6 28.9 3.812004 2.7 6.3 2.4 2.2 2.0 25.4 38.3 35.6 4.372005 2.7 6.3 2.4 2.2 2.0 26.5 39.4 36.7 4.19

2016 2.7 6.3 2.4 2.2 2.0 26.5 39.4 36.7 1.89

TOTAL (-)0.53

/a As shown in PPAM Annex Table 1.

'b (1) 315 MW x 8760 hours x .95 load factor x .24 USS t/kWh, i.e.,2,621 GWh sales for $6,291,432 at 1982 prices;

(2) 55 MW x 8760 hours x .95 load factor x .50 US t/kWh, i.e.,482 GWh sales for S2,409,000 at 1982 prices;

(3) 30 MW x 8,760 hours x .86 load factor x .975 US t/kWh, i.e.,226 GWh sales for $2,203,500 at 1982 prices.

In all the three cases, the figures for the period 1976-82 were increased 7% ayear to convert them to 1982 dollars. Similarly, one could discount benefitsbeyond the year 1982 by 7% a year so as to present them in 1982 prices. Thetable has not done this, which means it has overstated benefits as they couldhave been foreseen In 1976 when the project was being finalized. Since, asexplained in footnote /d to the table, domestic sales have also been givenreasonable values (UST7kWh), the ensuing economic rate of return is not anunderestimate.

/c 20 MW x 8760 hours x .8 load factor x 1.4 USt/kWh i.e.140 GWh sales for 1.96million dollars. The table assumes that the rate can be maintained in realterms. Also, figures for the period 1976-82 were increased 7% a year to convertthem to 1982 dollar.

/d It would probably have been reasonable to assume, in the Kpong/SAR, that Ghana'sdomestic power market could expand by about 3% a year, as the ECG service getsgradually extended to the unconnected customers. Such an assumption does notrest on any significant economic upturn. The SAR could then have projected theuse of Kpong power in the domestic market in the year 2001 and beyond. The ECGcolumn in the table tries to capture the benefit of such sales at USt5/kWh at1982 prices. Of the 900 Gwh projected power sales from Kpong in the year 2005,the following could have been assumed: ECG sales, 530 Gwh; sales to VALCOr 230Gwh; and sales to CEB, 140 Gwh.

-22-

C1IMITS FRR THE BORROWER APPENDIX I

VR's C2f2M Page 1 of 6

PrefaceOED Notes

page iv Footnote 'a' seems loaded. A shadow exchange could be used if Footnote revisedtne official rate. ad,Listeu twice ouring project execution is found

unsuitaole. The total US dollar cost of the project shown as US$Z5U.b million is understated. Even if the local component isconverted at Q27b/uS collar it puts total project's cost at US

$2ol.7 million.

Page viliparagraph 4:

VRA's sale statistics up to 1981 with tre exCepLtiVA of 1979 donot Indicate Loat mere had ueefn a fall in sales. Ttie last sentenceis also not crue.

Page ix paragrapnt 3:

Full utilisation of Cpong plant depends moure on inflows tnan Revised

what has been Stated.

Paragrapni 4:

deferral tu approve *tdriff increases' cuulu nut be attriouted Revised

to inefficiency in Eu system only teven if there iS anyLning likethat) out also to rigidity in the Governmental machinery.

Page x:

Paragrapn 1 fails to take cognisance of the oevelopment in Ghana True, rld Development Report (VM).1979

in early 1970s. The economy was not all that depressea. Sales to shown that the Ghanaian GM- grw 2- a yearECG grew at the rate of 7% p.a. between 1971 and 1978 while during 1970-76 (Table Z,p. 7 8, Item 55).

industrial sales grew at the rate of 4.4% p.a. between 1973 and The 1979 MDR Indicates however, a GDP1978. Total generation of 5341 gwh in 1981 was 10% below the consul- 0eowth of only 0.4Z a year between 1970-78

tant's projection as per their Nay 1975 report and only 1Z below the (Table 2, p.128, Item 41). Both reports

Akosombo plant's originally assessed firm energy capability level confim a declining per capita income,*4ui gwh. which gmgests need for extreme caution In

rne Valco option to increase its cenand to 37U ?W could not berejectea without maur interniational repercussions. Not according to the term of original

rejeted ~ithuL mjurmester Agreement (PPAM. para. 24).

bimilarly to limit LEIS to the 197b level would affect the AccordiuZ to PPAM if CEB and VALCOoperation of the regiunal CIMAu project in rugo, required additional power they should have

alreed to pay for the Incremental cost ofsup.uly (PPAM. para. 26).

The reassessed firm energy capability of the Akosombo plant and -Me SAR couldnot foresee the occurrencerecent drought further justified the need for Kpong. of severe droughts, since they were un-

precedented. But the substance of the

comment is already reflected in PPom,para. 33.

-23-APPElIX I

Page 2 of 6Paragrapn Z: OED Notes

There is no statistics to confina near collapse in the 'The first two lines reflected in the PPAN. ThedistriDutiR systeus nor "sluggishness of oemand" at least up to EC PCR Annex 6 must present benefits and costs1978. Furthermore to say costs have been grossly unuerstatta because in constant prices. Since it has presented bene-of exchange rate uistortions is incorrect. uvervalueu cecii will .fits in terms of 1984 tariffs (1.98 g/dih),.allinflate total costs in US S. costs and benefits most also be in constant 1984

prices. This means the aggregate investment costThe 'exchange rate" issue is being overplayea. In economic of t95.4 million (1977-82) in that Anner is about

analysis or evaluation if one is not happy with a given exchange rate US1.9 million. at the official exchange rate andall one has to do is to use a shadow rate instead- much less at the 'free' market rate. In contrast,

the 'Third Power has alone used up $26.7 million(ECC PCR, para. 3.17) at current prices and stillmore in 1984 prices.

Tariffs to reflect future costs of power and sectorcoordination have always been sector objectives. The revised PPAZI version reflects these objectives.

Page xi:Paragraph 2 is not quite clear or it is not understood. What wormiated and explained in PPAM, para. 47.

is intended to be put across should he precisely stated.

Project sumimary:

Paragraph 1, line 4:

representing a sharp break with tne past" appears loaaeu since Revisedprojections are oasej on historical ors. Actual kn sales to ECGfrom 1971 to 198 showS a gruwth r-, if about 6.4% per annum asagainst a forecast of 9.!%. rio, ., oetween 1971 anu 1978 theincrease is sales was 7-.b per annum. Deviations from the forecasteotrena com.lu oe explainea in terms of socio-econuianc anu politicalaisturb-snces isu the country after 1978.

Paragraph b lines Z an 3:

Consent not completely valiu. Full utilisation of Kpony oepenos Revisedon inflows.

Pe:ragrapn a line 5: RevisedNetwork extension took 5 - 28 months longer.

Paragrdpn / starting from liue *::

oecause of excnange rate adjustaents it is not meaningful to Footnoteddiscuss tne local cost overruns" It is felt tnis coulo De noneLhrou9h inuexalui i-e. comparsons made in "fl0b" Cedi!.

Oaragrapn lu last sentence. tais is not true. snuula be deleteu. Deleted

Paragraph 1Z:

Ceoi/US $ relationship neeas to be streamlined. At best Shdauw Footnotedexcndnge rate couo be used if the official rate is not acceptea.

APPENDIX IPage 3 of 6

Supplementary Comments OED Notes

Paragraph 19 line 3: Footnotes to PPAN paras. 19"Several successive droughts" and 20 refer to VRA.s

Paragraph 20 line 7: ents"several successive years of drought"

These two phrases look slightly misleading in terms of 1976 - 78and 1982 - 83. The 3 consecutive drought years in the 70s. 197o -1978 had inflows of about l hAF. The worst drought years were 1982and 1983 with inflows of l0.5 MAF and 7.2 MAF respectively. -

Paragraph 23 line 1:Revised

"37b M" to be changed to "3/U hW"

Paragraph Zo:

Pricing of supply aoove 31bM was pre aetermined by the Valco Footnote to PPAX, para- 26Agreement hence an introauction of a new concept sucn as incremental refers to VRA's coments.pricing of energy will never be accepted in the ls. However theevents of the early Sus including me reassessed firm energycapability of Akosombo made Valco to accept a power ceiling of 315 mwhence an implied marginal cost of pricing of supply above Alb MW.

Paragrapn z7:

CEB's rate of 2.5 US Cents/kwh is more than half of Kpong price Revisedof aoout 3.5 US Lents/kwh jV(A's estimate). From April 1, 1985 CES'srate Decomes 4 US Cents/kwn for supply up to 50 gwh and 4.5Cents/kwh for supply aDove 5UU gwh and adjusted for annualinflation. CEB's rate therefore fully relfect the marginal cost ofKpong after April 1, 1985.

Paragrapn 28:

The objective of the study referred to from line 5 is to move Footnote to PRAN, pars. 28tariffs towaros long-tern marginal cost of supply. however the refers to VRA's comments.

development projects included in the study have not yet been fullyimplementeu or chances if impleienting some of tnem i.e. dui Project

Fre far remote.

Project Justification

Paragrapn 29: Partly revised. The paragraphrefers to the Bank's rather

This paragraph is very unfair. It depicts a clear ignorance of than tle Ghanaian assessmentGhanaian economy and sector economics and statistics. Hence it neeas procedure.De deleteo or rewritten to give credence to those involved inplanning and execution of the project.

APPENDIX 1Page 4 of 6

Paragrdph 31: on votesThere was no Statistical Dasis to confirm nuat kpung was not See footnote 17, to PPAM, pars. 31; alan Note con-

required for the utwlestic marKet. AdtiUnale to lsrait Valto au LEo cerains DPAK, Anex Table 2.to 3o* 4h is also not given. A2l costs am expressed in constant price The

Tdole I states prices in 1982 levels and not 196U levels. At year 1982 han been chosen as the base period. ThisU5 Ltents/kufh,tnasutchoice has nothing to do with the opportunity costdiscounting should start from 1983 and not 197b as per Table 1. paitr.

-Paragarapnter.Paara z.: PEWZ, pars. 32 is revised to reflect VR&'s view. An

e3mlained in a Note to PPAM, Annex Table 2 ,VRAVico's wi I 3rugness to pay nighter rates is uue maily to SAX could not establish that the domestic marketpressure from the baraldn public and Ln internetional communaty. needed lpour power. Also see PPAK, pars. 30.It is wrong to apply Valco rate to Kpong power. This paragraph alsoneeds to oe rewritten to ortug anti proper perspective sectoreconordicS ana statistics.

The argisment is similar to the one presented InParagraph 3: OED Notes concerning VRAs coments on PPAM, pars

2 and 34. As an Illustration. VRA PCF, Annex 7It will be worthwhile to explain why 'Ib rate of return" ile gives the distribution coat of li5.4 milion (thej as% CluestlunaOle sauce tais relates to the entire sector. se as 1o ca.t Annex 6). which must be in con-stant 1984 prices, since benefits are expressed in

terms of 1984 tariffs. But the distribution costwould O2y be sout $2 million at the prevailingexchange rate, and much less at the 'free marketrate.

True assertion that 4pong is not needed for the domestiC inart VA has not presented a convincing argument tostarting fran lisie Ij u LLbhs rateb not riign enuua Lu ijustify Its justify the project.CunstruciOn SIS not acceptable. We accept ebung power as not dteano

for Valcu at leastL or. true DdSI5 Of Te earSLumn hIco tariff.

2sraalrapti P:

.r9ument acing auvancea .aijst imp lementation of tue Tnira -Mcoidiv g to several reports. oC. and the auditPower Project in favour Of uiverLing resources. to procurement ofmisosfel trp Cishrtfvhce.spare Parts de onstrae at lack of adequate knOwlege of the sector in mes rs nesf Pre, e6s, htc. It m istbuegeneral and 11n particular distributive netwoirk. Lonters ofte18 uan ers. e The r oe d istribu s

eao grate, under muth led atte Pree' mkrTe syster was not Suffeing frn an acute saurEage of spare a hatlo pr ta n c au t

Pans at tne time of appraisal. The Third Power Project was oesi ento replace more expensive diesel generation.

Tor DVa IS Of lea tu"1 trtai on trisuen Do5f Of% ilne exsLn) 1aCo rtf

T enti on q uvances retinst iementa of the Tlie ? cco At the Prevailing official exchange rate (tag:USnotclaran cnfuin LntjostfdCto reviews). $1). the E=C tariff of 1-98it/kuh. ashattwn inPu i prct i vourd of auv n mres tC15CIfoocur-en o PCi Annex 6. is about C US c/kWh which does

s ri p s demonstrar ar tcOiea l acot of vqPay for e r po s , incretntal cost ofco l nd i ns par tivcul d strlDutivesupply (5.3 tio c/s m) - PuAn Annex Table . Atthe 'free' market rate the retail tariff is1robobpy 1.3 - 2.0 US c/kWhi retrieving at most

4Th Of EPOng' Incremental cost of supply. Thismeas that the existing ECC tariff does not payfor any part of the incremental cost of distri-

Pararaph49:bution under the Third Power Project.

IIs'argapraugrapln 49:tLRChe1{$OS"-R

file tenlIS Of the prar i Aoencies rfiage l eca - ea yearstInCIL141119 a D-year grace averlUU St a) auual thrE,Cr CoSa of 1.9a/b as

EPCA and PCR favor a flexible approach to under-taking projects. For examle, it should have beenpossible to revise Power Three and shift funds forthe acquisition of spare parts Instead of proceed-ing with the extension of distribution networkunder the project.

- 26 - APPEDIX IPag. 5 of6

GED NotesParagrapn 56:

ECG's finances lime 6) is now more of collections than lack of Revisedforeign exchange to maintain or rehaillitate the systen.

Paragrdpn 57 :

Full utilisation f Kpong-s additional generating capacity neeus evisednot De seen in terms of "several years" out rather in terms of"inflows".

Audit's assertion that Kpong was not needed of the domestic This befit could not be foieseen when themarKet is not acceptea oecause it falls to give congnisance to the project was appraised.reassessed firms energy capabilities of tie two systems nob. put at479U guh per annum. Similarly comments on Valco and CEs are notvalid.

Varagrapn 58:

Inferences not valid eitner now or at the time tne project was See OED rate concerning VRA's coments on PPMappraised. para. 32.

Paragrapn 59:

The systens never experienced shortage of spare pdrts on the EG PCR, EM, end World Bank consultants do notlevel ueing imagined in Las report. agree with this position.

Trying to seek refuge ai exchange race levels nas been As illustrated is OED Notes concerning VRAtsoverdune. More positive suggestion as to now to resulve the exchange cnts on WAN paras. 2.33 and 34. therace issues will be more beneficial to the review. race significantly distorts the picture.

Paragraph 60:Tariff pulicy tu reflect marginal cust of suppli has been PPAN, pares. 43-45 reflect the marginal cost

accepted in principle. objective.

Kevise pay scale Shuuld tean a total compensation package to - ditto -incluae housing ani transportation provisions as well as allowancesreflecting responsibility, inducement, environment etc.

Paragrapn 61:

Loment not relevant ano not fair Lu the teami wnicn took part its See OED Notes concerning VRA's coments on PPAY.the appraisals. If tne appraisals were to ue uone in 19dk para. 29.Conclusions would have Deen different.

Paragrapn 62:

COMwent tiat several VWA senior officials have retirea or went deletedon prolonged leave partly due to erosion of salary scales is notcorrect.

Furthermore accidents leading to freezing of Valca's potlines in deleted1978 vusAot really oue to unrest amiong emp loyees.

Paragrapn 6of

A strong and balanced electricity sector can still emerge under Icluded in PPAN, pare. 63.th' two separate organisatiuns. at is necessary is po improve aaipeSnhance management Skills Of onie existing two cimstitutins.

- - APPENDIX I

Page 6 of 6

OED Notes

Table IAll costs are expressed in con-

Costs are in 1982 prices while Giscounting started from 197b scant prices. The year 1982 hasinstead of 1983. been chosen as the base year. This

choice has nothing to do with theopportunity cost of capital, (the12 discount rate).

APPENDIX I

- 28 - COIIENTS FROM TRE BORROVER

CG's comments dated Nay 1985

OED Notes

1.05Cmrrenty, E q sugplie about 900 GUh to nom 196,000 rs ential,

35,000 o~oia, an 272 imdalurial pr~ses. PCR revised.

2.08

(b) Ipova.nt of distribution (415/24OV) n pertloar in Aoa~md%a.

PCR revised.

am11S IN P J!

3.02

Se projects involvrhg the extension of Oupp~is to alt Refina y Reference inthe PCR

ar huss, Brewery in Accra and a SteeWll in ilmasi were at deleted.

3.1 1

aIggg "Represenatives of t ~ Consultant returnd in 1983 fr

the ~nergiztion of the Sefri Wiamo - Bibi~n -scheme." Dh

Coiit==Uint < of the subtation was dom by EG staf. Deleted.

3.21

0e Aboso Glass l~oory was mupplied with p~.r duri the period

TRA curtai3ed its supply to wa. PCR revised.

3.28

8Toih in 19E5 Govenmnt was able to grant wG a 3arEe impart

liee. EOG 6ould apt a itelf of this opportunity because

it was short of esh."

mis stat.snt s =t oo=ret. It shOud reVC "tho1gh in 193 PCR revised.Govnt s able to grant EG a largr import lan~, EG oould

at utilis the whoe ien=, beosme the ba~ could mot establih

the acessary Lttes of Credt."

- 29 - APPENDIX I

ZCZC DIST9935 JUS 0492COlMdNTS FROM COFINANCIER

OEDOD

REP: TCP MET CoWAIT FUND)

JWS 492 ZJR641 IN 07/07:02 OUT 7107:07

REF: KFICEN/1681

7.5.1985

FROM: KUWAIT FUND FOR ARAB ECONOMIC DEVELOPMENT, KUWAIT

TO: WORLD BANK - WASHINGTON. D.C. U.S.A.

ATTN: HR. YUKINORI WATANABE, DIRECTOR

OPERATIONS EV4LUATION DEPARTMENT

THANK YOU FOR YOUR LETTER DATED APRIL 15.1985 AND THE ATTACHED

COPY OF THE FIRST DRAFT OF THE PROJECT PERFORMANCE AUDIT

REPORT ON GHANA KPONG HYDRO-ELECTRIC POWER PROJECT AND YOUR

THIRD POWER PROJECT. WE HAVE REVIEWED THE SAID REPORT AND

ARE PLEASED TO SEE THAT KPONC PROJECT WHICH THE FUND HAD

PARTICIPATED IN ITS FINANCING, HAD BEEN COMPLETED SATIS-

FACTORILY AND AT A REASONABLE COST. WE ARE ALSO PLEASED

TO NOTE THAT THE CONTRIBUTION OF THE THREE ARAB FUNDS (KUWAIT

FUND, SAUDI FUND AND BADEA) IN THE FINANCING OF THE FOREIGN

COST OF THE CIVIL WORKS OF THE DAN AND THE CONCESSIONAL

NATURE OF THIS FINANCING WAS HIGHLIGHTED, INCLUDING THE

ADDITIONAL FINANCING PROVIDED ST KUWAIT AND SAUDI FUNDS.

WE ALSO NOTED THAT YOU RAVE ELABORATED AT LENGTH ON ALL

ASPECTS PERTAINING TO THE SUPPLY AND DEMAND FOR ENERGY

AND THE GENERAL TARIFF AND THAT APPLICABLE TO VALCO.

TO CONCLUDE, WE HAVE NO OTHER COMMENTS TO MAKE APART FROM

HOPING THAT THE VAST EXPERIENCE GAINED DRING THE IMPLE-

MENTATION OF KPONG HYDRO-ELECTRIC PROJECT WOULD BE OF

BENEFIT TO BOTH BORROWERS AND DEVELOPMENT INSTITUTIONS

WHEN DEALING WITH SIMILAR PROJECTS IN FUTURE.

KHALED AL-SRALFAN

DEPUTY DIRECTOR-GENERAL (ADMINISTRATION)

COMENTS FROM COFINANCIERZCZC DisT1338 JWS 0625

OEDOD (EUROPEAN INVESTHENT BANK)

REF: TCP FCA

JUS0625 ZJ1B76 IN 10/08:08 OUT 10/08:f1

LUXMIOURG. 10/05/1985

EUROPEAN INVESMENT BANK

FOR THE ATTENTION OF HR. WATANABI, DIRECTOR, OPERATIONS EVALUATION DEPARDENT

RE: PROJECT PERFoRMANCE AUDIT REPORT: KPONG ELECTRICITY AND THIRDPOWER PROJECT

THANK YOU FOR SENDING US THE REPORT. PLEASED TO INFORM YOU

THAT WE FOUND THE REPORT VERY INTERESTING AND HAVE NO

SPECIFIC COMMENT.

BEST REGARDS

N. URHES - J. NOELMONITORING DEPARTMENT FOR OPERATIONS OUTSIDE THECOMMUNITY BNKEU LU

-05100836

APPENDIX I

- 30 - COMENTS FROM COFINANCIERPage 1 of 2

(CIDA)

34 Agowecvwaomede Cxwdgnhansdiaftp-nit V I DeuakPrna AgWncy

cafat cbmaIAS moA66

June 12, 1985 400/10134

Mr. Yukinori WatanabeDirector,Operations Evaluation DepartmentThe World Bank1818 H Street, N.W.WASHINGTON. D.C. 20433USA

Dear Mr. Watanabe:

Thank you for your April 15, 1985 letter forwarding copies of the firstdraft of the Project Performance Audit Report - Ghana: Kpong HydroelectricPower and Third Power Projects supported by Loans 1380-GH, 1381-Cb andCredit 689-GH. MED Notes

We are pleased to note that the Audit Team attributes the project'ssuccess to the VRA and its consultants and contractors. This is ofparticular note to us as the main consultants were Canadian (Acres) andfunded by CIDA.

Comments on the report, particularly at the "Preface" level are asfollows:

1. It is a pity that the Team did not visit Tamale (page 11) as it Tamale Was not a part ofwould have been useful to CIDA to have had the Teams opinion on the two aUted reports.

the EG situation in the Northern Region.

2. The mention on page ix. par. 3, that because of the recent Ghana

drought, "Kpong's additional generating capacity will beutilized several years later than originally forecast" is, webelieve incorrect and contradicted by para 33 on page 14, whichstates that "construction of the dam has helped mitigate the VR se to suggest that wmvedseverity of power cuts". It is CIDA's understanding that, had u i, which depends on water In-lpong not been constructed, power outs associated with the f t be foreseen at this stage.recent drought would have been even more severe than was, in he tet baa been revised to read: "mfact. the case. of Kporg's

3. The Teams comments, page 13, that the power rates to VALCO andthe export market are "not enough to justify the project" areof interest. ERR's of below 5 and 7.5% are mentioned with theTeam stating that "Ghana's depressed economy required only thevery high priority programmes should receive the funds spent onXpong". It would seem that some further revision to the latestVALCO agreement will be required.

.../2

Canad

- 31 - COIENTS FRON COPINANCIERPage 2 of 2

(CIDA)

4. It was of interest to note that the Team found (page x) whenreviewing the ECG project that a "significant" portion of thepotential customers in the project are not currently beingserved because of the shortage of meters, transformers etc.-".

5. Additionally, of importance is the Team's mention in page xiithat "for hydro projects in the Sahel, extensive droughtperiods must be considered in structuring hydrological designand operation criteria". This statement is relevant not onlyto the Sahel but throughout most of African Savannah regions.In fact, the problem is, in many cases, made worse by the factthat no standard "Code of Practice" exists for the evaluationof hydrological information in Africa. As a result designshave been subject in a number of instances to the whim ofvarious specialists, some with little experience in the verysensitive nature of Africa's hydraulic regimes. Perhaps theBank could give encouragement to the development of a "Codeof Practice for the interpretation and use of African hydro-logical information". (It should be noted that this impliesno criticism of Acres' hydrological work, which is generallyundertaken on the conservative basis essential to such workin Africa).

In conclusion, we found the Audit Report to be a useful document andlook forward to receiving the final version of it when it is completed.

Sincerely,

C. StrabyProject OfficerGhana/Regional ProgramAnglophone Africa Branch

- 32 -

GHANA

VOLTA RIVER AUTHORITY

PROJECT COMPLETION REPORT

KPONG HYDROELECTRIC PROJECT - LOAN 1380-GH

1. INTRODUCTION

1.01 In Ghana public electricity supply is the responsibility of VoltaRiver Authority (YRA) and of Electricity Corporation of Ghana (ECG), bothstatutory corporations owned by the Government of Ghana. Created in 1961 tobuild and operate the first hydropower plant on the Volta River at Akosombo,VRA supplies bulk power to ECG, to the Volta Aluminum Company (VALCO), whichoperates a smelter at Tema, to several gold, diamond, manganese, and bauxitemining industries, to the Akosombo township, and to CommunautC Electrique duB6nin (CEB), which supplies Togo and B6nin. ECG, established in 1967, isresponsible for the distribution of electricity to all other consumers and forthe generation of electricity for public supply in areas that cannot beeconomically connected to VRA's high voltage system.

1.02 In 1956, a commission established -he feasibility of developing thehydropower potential of the Volta river and recommended the implementation ofa first stage at Akosombo, basically to supply ECG and an aluminum smelter.In the late 50's, Kaiser Aluminium and Chemical Corporation (USA) decided tosponsor the smelter and in 1962 the Bank and other lenders agreed toparticipate in financing the hydroplant that VRA was to construct. Thus, theAkosombo project, the establishment of VRA, and the development of VALCO'saluminum smelter are closely connected. The two most important agreementsreflecting this interdependence are:

(i) the Master Agreement of 1961 between Government and Kaiserwhich defines the general conditions under which Kaiser woulddevelop the smelter, one of these being Government'scommittment to construct Akosombo and to give VALCO thespecial status of pioneering industry, which translated into aseries of concessions;

(ii) the Power Contract of 1962 between VRA and VALCO whichobligates VRA to deliver up to 370 MW of firm power to VALCOand VALCO to pay VRA US mills 2.625 per kWh for the energyactually taken or a minimum charge whichever was the higher;VALCO's payments were to be in USS; the elect-icity rate toremain constant for 30 years.

1.03 The Bank assisted VRA in developing the Akosombo plant (completed inDecember 1981) and the related transmission facilities (completed in November1982) with two loans, 310-GH for US$ 47 million in 1962 and 618-GH for USS 6million in 1969. It also made two credits (118-GH for US$ 10 million and256-GH for US$ 7.1 million) to Ghana, for relending to ECG, to help improvethe utility's subtransmission and distribution facilities.

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1.04 In 1976, VRA's system comprised:

the Akosombo hydropower plant, situated some 100 km northwestof Accra, and equipped with six units with total rated outputof 792 MW; its continuous overload capacity is 900 MW, and itslong-term dependable generation estimated at appraisal was5,400 GWh per year; the powerhouse is located at the toe of a90 m high rockfill dam impounding a reservoir which covers anarea of 8,400 km2 and a volume of 61 billion m3 ;

- a grid of 162 kV transmission lines concentrated in thesoutheastern part of the country, six 67 km long circuitsconnecting Akosombo with the heavy loads in Tema (inparticular VALCO) and Accra, a 650 km long loop feedingvarious substations of ECG and of mines, and a 200 km doublecircuit line supplying energy to Togo and Benin;

- various substations of which the most important is the Voltasubstation, located some three kilometers from the VALCOsmelter at Tema; this facility also operates as loaddispatching and system control center.

1.05 VRA is responsible for planning generation and high-voltagetransmission, ECG for subtransmissicn and distribution. For planning, VRAnormally employs consultants. In 1969-1971 it commissioned a number ofstudies to determine the requirements for additional generating capacity andthe most desirable next addition. These studies compared several alternativesequences of development including, in particular, the Kpong plant dowastreamfrom Akosombo and the Bui plant on the Black Volta, near the border with UpperVolta. The studies concluded that the Kpong development should be furtherinvestigated as it seemed likely to be the most economical choice.

1.06 At this stage, the Bank became actively involved in the project thatwas ultimately to become the main component of the complex operation asso-ciated with Loan 1380-GE. The present report discusses the preparation andimplementation of the Kpong hydro project and of its financing, based on theconsultant's completion report, the IBRD supervision reports and files, aswell as the findings of recent missions to Ghana carried out by a Bankfinancial analyst and a consultant.

2. PROJECT PREPARATION AND APPRAISAL

Origin and Preparation of the Project

2.01 Project preparation started -2 1973, when the Bank assisted VRA inpreparing the terms of reference for the feasibility study of the Kpong hydroplant. In 1974-75 consultants carried out this study wi.th a CIDA grant. Onthe basis of preliminary results of the study, which confirmed the merits ofKpong as the next VRA generating station, the Bank sent its first projectpreparation mission to Ghana in June 1974. This mission requested additionalwork in the feasibility study, in particular investigation of irrigationpossibilities with the hydro development. The mission also made sure that theenvironmental and resettlement problems were properly assessed. This point

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was particularly importE 't because the implementation of the Akosombo projecthad serious shortcomings in the planning and execution of environmental andresettlement programs.

2.02 In 1975, consultants submitted-their feasibility report which not onlydemonstrated that Kpong was the next project that VRA should execute but thatGhana needed the additional energy by 1981. This deadline left very littletime for the many steps that were needed until completion of the project.Therefore, VRA immediately (i.e. mid-1975) commissioned consultants to carryout the design of the plant, to assist VRA in procurement, and to superviseconstruction and project execution.

2.03 In 1973, the Bank started to assist VRA in contacting other lendingagencies for financing, particularly as it had become clear that any projectpackage including the Kpong development would require investments in foreignexchange exceeding what the Bank could allocate for the project. Puttingtogether the financing package took about four years. The decisive turn wasthe May 1976 meeting of colenders. At this meeting, the following sevenagencies confirmed their agreement in principle to provide funds for theproject:

- the Canadian International Development Agency (CIDA),- the Arab Bank for Economic Development in Africa (ABEDA),- the European Development Fund (EDF),- the European Investment Bank (EIB),- the Kuwait Fund,- the Saudi Fund, and- the IBRD

However, it took another nine months to finalize the financing package.

2.04 The main issue which delayed progress of project preparation wasundoubtedly negotiations on the VALCO power rates. Indeed, the rate ofUS mills 2.625/kWh which in accordance with the 1962 Power Contract betweenVRA and VALCO was to remain constant for 30 years, could no longer beconsidered equitable compensation to VRA and Ghana for the use of thecountry's hydropower resource and for VRA's service to VALCO. With worldwideinflation at a level never anticipated in the early 60's, compounded by the1973 oil crisis, several agencies, foremost CIDA and the Bank, thought that arevision of the Power Contract should be a condition for considering lendingat all. While VALCO did not oppose such a revision, its assessment of faircompensation was very different from that of most other institutionsinterested in the Kpong project, in particular Government and VRA. In late1973, VRA and VALCO agreed to appoint consultants to study the principles fordefining a fair energy price. Though the study was somewhat limited becauseit only suggested one approach, it helped the parties in their negotiationswhich, besides the rate issue, were also concerned with the supply ofadditional power to VALCO. The supply issue was solved in early 1976, but ittook until August 1976 for VRA and VALCO to agree on the electricity rates.On the one hand, the revised agreement stipulated that VRA would provide VALCOwith an additional 30 MW of firm capacity and 15 MW of interruptible serviceabove and beyond the basic 370 MW to supply a fifth potline, which VALCOintended to commission in 1977. On the other hand, the agreement providedfor:

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- a retroactive increase of the basic rate from 2.625 USmills/kWh to 3.25 US mills/kWh for the period 1973-75;

- further adjustments resulting in the rate from 4.5 USmills/kWh in 1976 to 5.0 US mills/kWh in 1981;

- a temporary rate of 6.75 US mills/kWh for the additional 30 XWof firm and 15 MW of interruptible power; and

a review of the rate for additional power about one year priorto the commissioning of the Kpong plant, i.e. -when actualcosts of the facility would be reasonably well known; in casethe rate resulting from this review were to exceed 9.75 USmills/kWh, VALCO would have the option to reduce or foregoaltogether the additional power.

2.05 In February 1975, during the above negotiations, the Bank pre-appraised the project and in February 1976, when the prospects for agreementon the rates and on the financing seemed good, it appraised the project which,in the meantime, had been expanded to include further components of VRA'sinvestment program.

2.06 While consultants in their studies of the Kpong project Ied alsodesigned the associated 161 kV transmission lines, other consultants hadconcluded that by 1980 the system would need additional reactive powercompensation and that the best solution would consist in installing a 25 NVARsynchronous condenser at Prestea, the most westernly point of the grid, and ofa static condenser of the same capacity at the northernmost point of thesystem. Italconsult also determined that by 1980 the thermal rating of thetwo km long 161 kV single circuit lines connecting Tema and Accra would beexceeded whenever one circuit failed and that therefore VRA had to foresee theinstallation in the short run of an additional circuit. Finally, severalexport-oriented industries, some existing (gold mines, saw mills), somedeveloping (metal and wood industries), justified the connection of thenorthern area with the western part of VRA's grid, rather than continuation ofthe supply with isolated diesel stations. Therefore, VRA agreed to hook 'pthe northern region to its grid through an 80 km long 161 kV single circuitline. ECG was to install the associated subtransmission and distributionfacilities under its third extension program, which was at the centre of theBank/IDA operation (Loan 1381-GH and Credit 689-GH) that was in preparation inparallel with the proposed Kpong project. During appraisal, the Bank includedthe above additional items of VRA's investment program 1976-81 into theproject.

2.07 Consultants prepared the design of the Kpong plant and the tenderdocuments so that by December 1975, before appraisal took place, VRA couldstart the prequalification procedure for the main contracts. By April 1976,firms were preqrilified and, in August, VRA called bids for the civil works

1/ In their 1975 study of VRA's 161 kV grid.

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and turbines, generators, and powerhouse crane. It received the bids inFebruary and March 1977, just in time to integrate the cost information intothe project presentation to the Bank's Board of Directors. The Loan documentswere signed on March 24, 1977.

2.05 Successful project preparation and appraisal, on a schedule which wasvery tight, was achieved because of the competence of VRA's management, ofwhich several members had been involved in previous Bank operations and weretherefore familiar with the most important Bank procedures. It was alsofacilitated by the high level of the consultant's professionalism and theirfamiliarity with the working ways of the various agencies involved, which wasa decisive factor in getting the project started on time.

Project Role

2.09 Already in the 1950's, hydroelectric power was identified as Ghana'smajor energy resource with an estimated potential generation of some 9,000 GWhper year. AccorCingly, Government designated the development of this resourceas one of its major goals. By 1972 a generating capacity of 5,400 GWh/yearalready existed at Akosombo. The fact that it had been possible to find acustomer (VALCO) for a large part of the generation had made it possible tobuild a large power plant producing low cost energy. This, in turn, permittedthe supply of inexpensive power to a substantial part of the country and gaveGhana an advantage over most other West African countries in overcoming theoil crisis. Hydroelectric resources are still Ghana's most valuable energysource as extensive oil exploration has not yet led to the discovery ofsignificant oil reserves and Ghana has no known coal deposits. It was clear,however, that the next hydro plant after Akosombo (Kpong) would be muecostlier.

2.10 The Bank's specific sector objectives for the period 1976-1981 were:

a) to increase the firm generating capacity to be able to supplythe demand growth beyond 1978, in particular that of VALCO,which expected to start operating a fifth pot line in itsaluminum smelter in 1977;

b) to carry out the feasibility studies for the generating andtransmission facilities required for the years 1983-84onwards;

c) to extend hydropower supply to (i) areas uneconomically servedby diesel plants and (ii) rural areas not yet served;

d) to extend and reinforce subtransmission and distributionsystems in order to improve the quality of service, and totake care of load growth; and

e) to rationalize sector tariffs.

The Kpong project pursued the objectives (a), (b) and the transmission part of(c). The transmission component included facilities to supply the Sefwi-Wiawso-Bibiani area where important export-oriented industries weredeveloping. The parallel ECG operation, which was supported by Loan 1381-GH

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and Credit 689-GH, aimed at the subtransmission and distribution part of goal(c) and at objectives (d) and (e).

2.11 Through the project, the Bank and the other participatinginstitutions also aimed at helping Government and VRA renegotiate the energyrates with VALCO, and preserving and reinforcing the high quality of VRA's topmanagement, particularly in the financial field.

Project Description

2.12 The project comprised:

Part A: the Kpong hydroelectric power plant, 24 km downstream from Akosombo,including:

- a 20 m high main dam consisting of a 150 m long concretestructure containing intake and powerhouse, a 250 m longconcrete spillway (capacity 18,600 m3 corresponding to a I in10,000 year flood) and a 300 m long embankment;

- 6 km long forebay dykes flanking the main dam;

- a four unit powerhouse with a total installed capacity of 160VLW with vertical shaft fixed-blade propeller turbines under agross head of 12 m.

- a 60 km long double circuit 161 kV transmission line to Temawhere it was to tie in with VRA's existing transmission grid.

Part B: the installation of a 25 VAR synchronous condenser at Prestea and a25 MVAR static condenser at Kumasi;

Part C: the construction of a 80 km long 161 kV single circuit transmissionline to the Sefwi-Wiawso-Bibiani area and the substations at bothends of the line; and

Part D: the construction of a third 25 km long 161 kV single circuittransmission line from Tema to Accra.

As the construction of the Kpong plant also involved the resettlement of theinhabitants and commercial enterprises established in the area which was to becovered by the reservoir, the Loan Agreement (Schedule 1) specifically set outthis resettlement as Part E, though in fact, it is a component of Part A. Thefinal agreement among the lending agencies stipulated that from the totalestimated project costs of US$ 236.5 million equivalent, VRA would financelocal costs (USS 74.2 million equivalent), and the lending agencies theforeign costs (US$ 172.0 million). Tables 3.03 through 3.05 below givedetails about estimated costs and financing.

3. PROJECT IMPLEMENTATION, OPERATION AND COST

Conditions of Effectiveness

3.01 The Loan Agreement of March 24, 1977, specified that, before the Bank

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declared the loan effective, the following conditions had to be fulfilled:

- all the agreements concerning project financing by lendingagencies other than the Bank should be executed;

- the agreement between VRA and VALCO on electricity rates(para. 2.04) should be signed; and

- the Bank should have received a detailed program, satisfactoryto the Bank, for the resettlement of the people affected bythe project.

3.02 While the agreement on the rates, reached in August 1977, wasformalized in time and the resettlement program was completed and approved onschedule, there was a minor delay in signing some of the financingagreements. Therefore, the Bank declared the Loan Agreement effective onAugust 24, 1977, instead of June 24, 1977.

Engineering Review Board

3.03 In mid 1977, as agreed during appraisal, VRA appointed fourinternational experts to the Engineering Review Board. These engineers ofinternational reputation were to meet about every six months to review thedesign of the facilities and the progress of construction and installation.The full Board met three times but individual members provided specializedadvice on other occasions. The Board suggested a few revisions to theproject; their detailed analyses contributed substantially to ensuring thatdesign and construction were at all times under tight control as far asquality, timeliness and costs of the works were concerned.

Revisions to the Project

3.04 The only project revisions of any significance resulted from theinitial project review by the Engineering Review Board and consisted of:

- the provision of one step-up transformer per generating unitinstead of one per two units;

- the installation of a double-bus scheme for the 161 kY Kpongsubstation instead of the ring-bus scheme Acres had originallyforeseen, and

- the construction of a single circuit 161 kV transmission linefrom Kpong to Akosombo instead of the second circuit Kpong-Tema.

3.05 The three changes improved reliability at a very low cost. Althoughcalculations tended to show that there was an economic justification for themodifications, it would seem that the modifications essentially were theresult of a judgement stressing service reliability.

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Implementation Schedule

3.06 Table 3.01 below shows the construction schedule at the time ofproject appraisal compared with actual events. The starting month in bothcases is that of the invitation for tenders.

Table 3.01

Construction Schedule and Implementation of Kpong Plant

Appraisal Actual

No. of Months from No. of Months fromDate starting date Date starting date

Call for tenders(civil works) Aug. 76 - Aug. 76 -

Contract award(civil works) Aug. 77 12 Aug. 77 12

Call for tenders(electrical and Sep. 76 1 Sep. 76-May 78 1-20mechanical equipment)

Contract award(electrical and Feb. 77 6 Aug. 77-Apr. 79 12-32mechanical equipment)

Start of reservoirfilling Nov. 80 51 June 81 58

Commissioning of Unit 1 Dec. 80 52 July 81 59

Commissioning of Unit 4 June 81 58 Dec. 81 64

3.07 The above table shows taat although the call for tenders on the civilworks was on schedule, the project was completed six months late: 2-monthdelay in bid preparation and a 4-month delay in bid analysis and clarifica-tion. One may also conclude that, at the time of appraisal, the consultantshad not satisfactorily established the procurement schedule for theelectromechanical equipment and hai also underestimated the time required forthis phase of project implementation. Part of the delays was also due to theGovernment instituting i:. mid-1977 a lengthy procedure to review proposedcontract awards. However, this had little influence on overall projectcompletion as the critical path was in the civil works.

3.OB Once started, the project proceeded at the expected pace. This wasa major accomplishment by VRA, its consultants, and contractors, particularly

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considering the difficulties that they had to overcome in connection with thescarcity of fuel, construction materials and other difficulties with whichGhana was faced from 1978. Unit 1 could have become operational 3 1/2 monthsearlier had it not been for a modification of the generators' lower bearingbracket that proved to be necessary when its installation was underway.

3.09 Scheduling and execution of the transmission facilities connectedwith the Kpong plant (161 kV single circuit lines Kpong - Tema and Kpong -Akosombo) as well as the associated switchyard extensions, is shown below:

Table 3.02

Construction Schedule and Actual Implementationof Transmission Facilities

Appraisal Actual

No. of Months from No. of Months fromDate starting date 1 Date starting date 1/

Call for tenders July 77 11 Apr./May 78 20-21Award of contracts Dec. 77 16 Feb./May 79 30-33Completion Nov. 80 51 June 81 58

3.10 The observations made above concerning the electromechanicalequipment also apply to the transmission facilities. At appraisal, theprogram for the transmission component, which also did not lie on the criticalpath, had not been studied in depth, and the time allowed between call fortenders and contract award was too short, particularly consideringGovernment's review procedure.

3.11 Project components not directly related to the Kpong development,covered installation of reactive power compensation in the 161 kV transmissionsystem, construction of the 161 kV line to the Sefwi-Wiawso-Bibiani area, andconstruction of the third 161 kV circuit between Tema and Accra. For theseitems, VRA contracted consultants for planning, engineering, assistance inprocurement, and construction supervision as this firm had already carried outthe grid expansion studies. The consultant's contract was signed only in late1977; most of the delay was due to the Government's new contract approvalprocedure. This same procedure held up the award of the works contracts and,finally, the unsatisfactory performance of the contractors added to the delaysto the extent that the works were completed only in late 1982 (20 to 24 monthsbehind schedule).

I/ Starting date, August 76.

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The Kpong Resettlement and Compensation Program

3.12 VRA undertook its first major resettlement program when it had toremove about 80,000 people from the area now covered by the Volta Lakeproduced by the Akosombo dam. As planning, execution, and follow-up of themove were fraught with problems, the resettlement necessary in connection withKpong, though it concerned only about 7,000 people, was a sensitive issue.Therefore, VRA, assisted by specialists from the Kumasi University of Scienceand Technology, the University of Legon, the Lands Department, and otherinstitutions studied and planned the resettlement, taking into account amongothers the environmental impact study carried out by Acres.

In May 1977, VRA submitted to the Bank, as required for theeffectiveness of the Loan, a detailed resettlement program to which itcommitted itself. Ultimately VRA:

- resettled 1,089 households and provided them with potablewater, sanitary blocks, electricity, roads, church, and schoolas well as technical, public health, and agricultural adviceduring the settling-in period;

- prepared 1,140 ha of non-irrigated land for the resettled;eople;

- compensated the former owners of the lands referred to abovewith 1,175 ha of non-i-rigated replacement land; and

- developed 607 ha of gravity irrigated land as compensation forflooded similar land belonging to Ghana Sugar Estates Ltd., toAgriculture Development Company Ltd., and the University ofGhana Agricultural Research Station Kpong.

3.13 The resettlement operation started in 1978. In December of thatyear, VRA removed the people from the areas where the civil works had tostart. However, progress was slowed by some changes in the concept (e.g. theevacuation of Lower Kpong in addition to the construction of a dike around theaffected area), questions raised about the suitability of the envisagedagricultural developments (which the specialists from the :BRD office inAbidjan helped clarifyi, disputes over land ownwership, and the economiccrisis associated with scarcity of fuel and construction material. The Bank'sintervention and the main civil works contractor helped put work on trackagain and permitted the completion of the resettlement. Government, VRA, andthe affected population and companies seem satisfied with the results.

The Kpong Intake for the Accra Water Supply System

3.14 As the impounding of the VoltL river at Kpong was to increase themaximum water level at the intake of the water works, it called formodifications at this intake. In 1979 it became clear that VRA and the GhanaWater and Sewerage Corporation had designed the needed changes. The Bank'sadvice helped start this work as soon as possible and to complete it beforethe water rose for the first time over the former maximum level.

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Studies of VRA's Further Development

3.15 Besides the project discussed here, VRA studied a development programextending beyond project completion. These studies concentrated on theidentification of new power sources and on the definition of the associatedhigh voltage grid extensions. The main investigations concerned:

- the interconnection with the Ivory Coast network with a 215 kmlong 225 ky single circuit line which, together with theassociated substations, the consultants estimated would costUS$ 18 million, of which VRA would have to bear about US$ 8.5million;

- the Bui hydroelectric power plant on the Black Volta with anultimate capacity of 350 MV (of which 270 MW would be firm)which the consultant estimated to cost US$270 million/1977, ofwhich US$ 190 million would be in foreign exchange;

- alternatives to the Bui plant (i.e. a further increase ofinstalled capacity at Akosombo, thermal plants or a hydroplanton the Oti river); a development of about 140 MW of firmcapacity of the Oti river may be feasible but only as theaddition to follow Bui.

These studies have been successfully completed. Based on them theinterconnection with Ivory Coast was completed by year-end 1983. The otherprojects have beer shelved due to poor economic conditions in the country andweakening finances of VRA.

Procurement

3.16 The Kpong project called for five types of contract:

(i) those financed by Arab agencies and submitted tointernational competitive bidding under the rules of theseagencies;

(ii) those financed by CIDA and submitted to bidding only byCanadian firms in accordance to CIDA's standard procedures;

(iii) those financed by IBRD and submitted to internationalcompetitive bidding under the Bank Guidelines forProcurement;

(iv) those financed jointly by IBRD, EDF and EIB submitted tointernational competitive bidding under agreed rules whichonly differred slightly from the Bank Guidelines (currencycalculation strictly at the rates prevalent at bid opening),and

(v) those financed locally and submitted to local bidding.

3.17 The above requirements were less complicated to handle than it wouldappear, as the three types of international competitive bidding were very

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similar. In fact, VRA does not seem to have experienced substantialdifficulties with this arrangement. Nevertheless, it called for a specialeffort from VRA and the engineering consultants who had to prepare, for eachtype of contract, the appropriate tender documents, follow the individualprocedures and, with Bank assistance, co-ordinate with the respective lenders.

3.18 In all cases, except the local contracts that VRA handled directly,the engineering consultant invited prequalified contractors to bid. Asdiscussed earlier the time allotted between call for tender and award oftenproved too short. The prequalification procedure for the main contracts (withthe longest lead time and the largest cost) took place in the first half of1976 to allow bidding during the second half of the y-ar. Thus, VRA was ableto award the contracts for the civil works, the turbines, the generators, andthe powerhouse crane in August 1977; the signing of the contract for theelectro-mechanical equipment and later that of several other contracts wasunduly delayed by the new procedure the government introduced in June 1977.Until then VRA's Board had had power to award all its contracts for goods andservices. The new procedure required VRA to submit the documents relevant tothe main contracts to a Public Agreement Review Committee which, in turn, hadto refer them for approval to the Supreme Military Council. Thus, the newprocedure delayed the award of several contracts related to the project,except for those concerning VRA's grid extension (Parts B, C and D), it hadlittle effect on completion dates. Annex 1 shows the main data concerning thevarious contracts.

Project Costs

3.19 Table 3.03 below summarizes estimated and actual costs of the project*hich are detailed in Annex 2. Local costs were calculated on the basis ofthe average exchange rates prevalent during the various years of the projectperiod. As the Cedi was overvalued during the project period, the valuesexpressed in US$ may not reflect accurately actual costs.

Table 3.03

Summary of Estimated and Actual Project Costs(in 7illion)

Appraisal Estimate Actual

Foreign Local Total Foreign Local TotalUS$ USS usS uss

Kpong Development,including engineering 162.0 72.5 225.0 187.7 169.1 238.9

Network extension 10.0 1.7 11.5 9.1 9.4 11.7

Total 172.0 74.2 236.5 196.8 178.5 25G.6

Percentage ofAppraisal estimate 114% 241% 106%

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3.20 Taking into account the qualifications set forth above, the tableshows that the foreign exchange cost of the project exceeded the estimate byabout 14%, whereas the actual total cost is not substantially higher thanexpected. In view of the adverse conditions prevailing in Ghana during nearlythe entire project period this result should be considered quite good.

3.21 Table 3.04 below analyzes the variations between estimated and actualcosts for the main items, civil works and electro-mechanical equipment. Thetable permits the fol--wing conclusions:

- the original contract amounts are in line with the estimatedcosts, which confirms the advantage of using bid prices for theappraisal estimates;

- contract additions (para.3.04) exceeded by far the allowancesfor physical contingencies;

- escalation was reasonably in line with the allowances forforeign exchange price contingencies; however, as a result ofthe unexpectedly high rate of inflation from 1978, the localcost escalation exceeded by far the allowance made at appraisal.

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Table 3.04

Cost Analysis of Civil Works and Equipment Contracts

(in millions)

Appraisal Actual Difference

Foreign Local Foreign Local Foreign Local

Civil orks $ I

Cost/originalcontract amount 55.5 30.4 59.6 35.1 7.4 15.5

Physical contingencies/contract additions 4.4 3.1 21.6 10.2 390.9 229.0

Price contingencies/escalation 14.4 9.2 16.6 78.8 15.3 756.0

Total 74.3 42.7 97.8 124.1 31.6 190.6

Mechanical and ElectricalEquipment

Cost/originalcontract amount 45.1 2.7 41.9 3.5 -7.1 30.0

Physical contingencies/contract additions 6.9 0.3 11.2 0.3 62.3 62.3

Price contingencies/escalation 12.2 1.6 10.7 5.1 -12.3 218.7

Total 64.2 4.6 63.8 8.9 -0.6 93.0

3.22 The main additions to the project, which the physical contingencieswere supposed to cover,occurred in the civil works contracts and amounted toUS$ 31.4 million (36%) of the basic contract price and were due to:

- changes in the powerhouse superstructure design to allow forhigher earthquake loads;

- unanticipated adverse geological conditions in a few places;

- use of materials (cement, steel, etc.) and equipment imported bythe contractor because they were not available locally due tothe economic crisis;

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- major economic dislocations forcing the contractor to incursignificant expenditures to keep the work going;

- work outside original scope in connection with the resettlementscheme, and the modification of the intake for the water works;and

- a 12% increase of the contractual quantities due to a series ofmostly minor changes except for the higher cost in civilstructures due to higher earthquake loadings.

3.23 Unforeseen items added USS 4.2 million (47%) to the basic contractprice for mechanical and electrical services because of:

- supply of non-contractual parts for the generating plant;

- installation of overhead lines between powerhouse andswitchyard;

- provision of a telephone system;

- supply and erection of all mechanical and electricalinstallation for the modified water works intake;

- final painting of all mechanical equipment; and

- VRA's purchase of contractor's site equipment at contract end.

3.24 The addition to the switchyard equipment amounted to about $0.3million (20%) of the basic contract price mainly because the contractor had tosupply switching equipment for a 5 MVA transformer bay, and his installationsupervision work substantially exceeded the quantities included in thecorresponding provisional sum of the contract. Finally, t]e amount ofengineering work was 16% greater than forecast due to increased scope of workand extension of the contract period.

Financing

3.25 Table 3.05 below shows the financing packages, as defined atappraisal compared with the actual funding. The conditions for the variousloans and credits were as follows:

- Arab agencies (ABEDA, Kuwait, Saudi Fund): US$ 73 million for20 years including a grace period of 5 years at an interest rateof 2 to 4%;

- CIDA: US$ 39.0 million for 50 years including a grace period of10 years, at no interest;

- EDF: US$ 10.0 million for 40 years including a grace period of10 years at an interest rate of 1%;

- EIB: US$ 11.0 million for 15 years including a grace period of 41/2 years at an interest rate of 8.5%.

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Table 3.05

Financing of Foreign Exchange Component

--- Million US$---Lender 'r+^&s Estimated Actual

(1) Saudi Fund, Kuwait Civil Works KpongFund and ABEDA 73.0 90.8

(2) Joint financing EDF, Generating equipnent, powerhouseEIB, and IBRD crane, transmission Kpong to Tema

and Tema to Accra, reactive powercompensation, engineering, reviewBoard 54.6 55.8

(3) CIDA Engineering Kpong, gates and hoists 39.0 29.7

(4) IBERD Preliminary works Rpong, resettlement,Sefwi-Wiawso, Bihiani, transmission 5.4 5.4

(5) OPEC-Fund Gate erection a/ - 3.7

(6) VRA - 11.5

Total 172.0 196.9

a/ Originally included in (2)

3.26 Actual financing of the foreign exr-bange component of the projectcost can be characterized as follows:

- in connection with the increase in the cost of civil works theSaudi Fund, the Kuwait Fund, and ABEDA increased theircommitment by US$ 17.8 million;

- the contribution of EDF, EIB, and IBRD were in the order ofmagnitude foreseen;

- only about three quarters of CIDA's credit was used as thecorresponding package did not cost as much as originallyenvisaged;

- the OPEC Fund filled a financing gap left in the package jointlyfinanced by EDF, EIB, and IBRD, and;

- VRA had to finance the remaining shortfall of US$ 11.5 millionin foreign exchange.

- 48 -

Disbursements

3.27 Initially, disbursements of the IBRD loan fell behind schedulebecause of the delays incurred at the award stage of the Kpong contracts.Later, works at Kpong proceeded as quickly as planned, disbursements stilllagged about one year and towards the end of construction the transmissionfacilities were significantly behind schedule. Annex 3 comparesthe disbursement profiles.

Operation

3.28 Since July 1981, when the first units of Kpong started operating,they have run to VRA's full satisfaction with only minor interruptions causedby minor equipment flaws. An inspection in early 1984 showed that theequipment was in very good condition. The only shortcoming observed was asuperficial roughness of practically all the piston rods of the turbinegovernors. VRA consulted the supplier to have this defect analyzed andcorrected. The efficiency of the equipment is also satisfactory. Though theoutput of a unit is nominally 40 MV, the actual power generated easily reaches42 MV. Since mid-1983, when it became clear that there would be largedeficits in the runoff of the Volta river, VRA drastically reduced productionto save water. The water level of the Volta Lake at Akosombo is currentlybelow the safe turbine operating limit. Thus, for several months Kpong hasgenerated mostly with only one turbine running. This is likely to continue atleast until mid-1984 and will end only if the rainy seasons refill the lake tosafe operating levels,which has not yet occurred. After protracted finishingwork, the addition to VRA's transmission system (the Accra-Tema line, theconnection of the Sefwi-Wiawso-Bibiani area and the power factor correctionequipment) has operated satisfactorily. However, by early 1984 most of thesefacilities had operated for less than a year. Consequently, operationalexperience with them is still limited.

Performance of the Consultants

3.29 The performance of both consulting firms involved in the project, forthe Kpong development and for the transmission system additions was quitegood, particularly taking into account the difficult economic environment inwhich they had to plan and help the contractors carry-out their work. Aftersuccessful completion of the feasibility study, project design, andpreparation of the complicated set of tender documents under severe time con-straints, the Kpong consultant implemented the bidding, the tender evaluation andthe award procedure without any major problem. The consultant's professionalismand their familiarity with the working ways of the various agencies involvedwas a decisive factor in getting the project started. Together with the maincontractors, in particular the one responsible for the civil works, theyconceived and helped carry out imaginative measures to overcome the obstaclescreated by the near breakdown of the economy.

3-30 The Engineering Review Board suggested, and VRA endorsed, among othermatters, the changes in the Kpong consultant's design discussed in paragraphs 3.04.None of these modifications should be considered design corrections. However, VRA

- 49 -

feels that the necessity of reinforcing the generator brackets, which onlyappeared at the erection stage and delayed operation of the first unit bythree months, could have been detected earlier.

3.31 An engineering firm had great difficulties with the contractors forthe additions to VRA's 161 kY network. Therefore, in spite of its efforts,the works experienced long delays. The firm was, however, successful inurging the contractors to remedy the technical shortcomings that had at anearlier stage seemed to endanger the quality of the works.

Performance of the Contractors

3-32 The performance of the main contractors for the Kpong plant wasgenerally satisfactory. However, that of the civil works contractor deservesa special mention. Indeed, by taking over or helping complete works (e.g.preparatory works, resettlement, adjustments at the water works intake) thatthe local contractor could not master under the adverse conditions prevailingin Ghana at the time, the main contractor contributed a great deal to thetimely completion of the plant. The high quality of all the works of theKpong complex reflects the competence of the contributing companies. Incontrast, both contractors involved in the reactive power compensation and thetransmission lines connecting Accra and Tema and the grid with the Sefwi-Wiawso-Bibiani area, did not perform as well. Their organisation was weak andthey lacked the management and motivation necessary to carry out under theadmittedly adverse prevailing conditions the technically relatively simplejobs for which they were responsible.

Performance of the Borrower

3.33 VRA performed well. It has benefitted from the fact that it had aseasoned management team under a strong leadership which was not notablyaffected by a change in the Managing Director. The reinforcement of themanagement by an expatriate during project implementation was also a success.

4. OPERATING PERFORMANCE

4.01 During the entire project period VRA's sales remained below thoseestimated in 1976. Whereas they were forecast to increase from 4,180 GWh in1976 to 5,860 GWh in 1982, they actually grew from 4,081 GWh in 1976 to 5,181G'Wh in 1981 but fell off to 4,799 GWh in 1982 due to the worsening watershortage in the Akosombo reservoir. The shortfall in VRA's sales is mainlydue to ECG's own sales remaining about constant from 1978 onwards because ofthe economic disruption in the country. Furthermore, VALCO did not requirethe full energy for its five potlines until 1980, instead of 1977 as foreseenat the time of project appraisal. This was mainly due to the breakdowns ofVRA's system discussed in paragraphe 4.02 below. Annex 5 shows a comparisonof actual load, generation, and sales figures with their 1976 estimates. Italso shows the systems losses, which were consistently lower than forecast.

4.02 In 1977, the generating units at Akosombo developed mechanical andelectrical problems related to cracks in the speed rings of all six turbinesand to stator faults on unit 4. VRA's plans called for repairing the speedring of unit 4 while replacing the coils of the stator and then for the

- 50 -

successive reconditioning of the other units. However, two times in a row the

system collapsed. In part due to a strike joined by most of VRA's engineers,VRA was not in a position to restore the system before VALCO's smelting potscooled requiring the removal of the solidified flux and alumina with pneumatichammers. This took about ten weeks. In April 1978, the system collapsedagain, this time because someone manually operated the C02 fire protection.Due to lack of coordination between VRA and VALCO and to VALCO's personnelworking to rule, VALCO's potlines froze again, causing again a damage to VALCOin excess of US$ 40 million in repairs and lost production.

4.03 The analysis of the system collapses pointed to several shortcomingsin the maintenance of protection and control equipment as well as in the levelof training of the operating personnel. This prompted YRA to appoint a PowerEquipment Review Board integrated by three specialists of Ontario Hydro(Canada) and the electromechanical specialist of the Kpong Engineering ReviewBoard to inquire about the accidents and to propose corrective measures. UponVRA's request, the Bank agreed to finance the cost of this new board under theloan. In January 1979, the experts submitted their report recommending:

- modifications in the protection system including the installa-tion of automatic load sheding relays;

- a complete renovation of VRA's telecommunication systems; and

- a special training of control room personnel.

These measures, which VRA carried out at a cost of some USS 5 million, weresuccessful.

4.04 The construction schedule for Kpong foresaw the commissioning of thefirst unit at the end of 1980. However, in accordance with the demandprojections, the Akosombo plant could only meet the demand until 1977, on thebasis of the average year runoff of the Volta river. Therefore, theoperations plan foresaw from 1978 to 1980 an overdraft on the Akosomboreservoir to cover the expected energy deficits with respect to theavailability in an average year. As the demand did not develop as expected,and as the accidents referred to in paragraphe 4.02 above further reducedconsumption, the drawdown was not necessary to the extent foreseen. Thus, thedepletion of the water reserve for operational reasons was limited.Nevertheless, by the end of 1978 the water level in the lake fell below safeoperating limits due to two consecutive dry years (1977-1978). In 1979 therunoff was substantially above average and brought the level up well above thedesign operating limits. However, since 1980, the river discharge has been solow that, even with Kpong fully available from late 1981 and consumption wellbelow the forecast, the water volume was depleted to such an extent thattowards the end of 1982 VRA was forced to reduce output drastically. Thus,VRA was not able to supply VALCO. As the drought continued in 1983, VALCOhad to stop aluminum production altogether.

4.05 At the time of appraisal, following the appraisal missionrecommendation, VRA and ECG temporarily planned to supply electroboilers withinterruptible surplus hydroelectric energy. As, during the entire projectperiod, no surplus energy was available and since there is little chance thatthis would happen in the future, VRA and ECG discussed with the present andpotential boiler owners an early changeover to oil firing. This disruption

- 51 -

considerably slowed down industrial production for which the boilers areneeded.

5.0. FINANCIAL PERFORMANCE

General

5.01 The following discussion of the development of VRA's finances duringthe implementation of Kpong project covers only VRA's power activities. VRAcarries out the non-power operations as Government's agent. It also owns allthe shares of the Volta Lake Transport Company, but it keeps separate accountsfor the non-power activities.

5.02 The years 1977-1982, during which VRA carried out the Kpong project,were characterized by a rapid deterioration of Ghana's economy: severeinflation and depreciation of the Cedi. Therefore, the Cedi-figures in VRA'sfinancial statements (Annexes 9, 10, and 11) bear little resemblance to thoseestimated in 1976, as the 11% annual inflation rate estimated at appraisal wasconsiderably below the actual average of 32%. Furthermore, the officialexchange rate greatly overvalued the Cedi, thus significantly distorting US$equivalent figures. Hence, the following paragraphs concentrate on theexpected and actual trend of VRA's main financial indicators, although theunreliability of the values corresponding to the actual financial figures alsoreduces the validity of conclusions drawn from the indicators calculated.

Financial Plan

5.03 With the limitations indicated above, the analysis of the flow offunds (Annex 11) shows that VRA financed about 37% of its 1977-1982 capitalinvestment program with internally generated funds. This result correspondsvery closely to the appraisal estimate of 32%. The cost of the actual programamounted to US$ 270 million, against an estimated US$ 380 million; thedifference between these two figures stems from the fact that, contrary towhat VRA had planned at appraisal, it did not start construction of a newplant (Bui) during execution of Kpong.

Financial Indicators

5.04 Table 5.01 below shows variations in the main financial indicators.

- 52 -

Table 5.01

Actual and Estimated Financial Indicators

1977 1979 1981 1982

Average tariff (mills/kWh) actual 7.8 18.2 35.3 37.0appraisal 7.6 8.2 9.3 9.5

Sales in GWh actual 4,799 4,524 5,181 4,799appraisal 5,060 5,510 5,680 5,860

Rate of return actual 0.9 2.0 5.8 1.6on equity (%) adjusted actual 5.7 6.5 7.3 7.3

appraisal 6.9 7.9 8.8 8.9

Operating ratio actual 0.72 0.58 0.49 0.60appraisal 0.45 0.42 0.40 0.37

Current ratio actual 3.9 2.2 2.1 2.2appraisal 4.2 4.9 4.4 3.2

Debt/equity ratio actual 16:84 32:68 30270 2B:72appraisal 28:72 35:65 38:62 39:61

Receivables (% billings) actual 28 33 44 48appraisal 20 20 20 20

5.05 The above figures show that the rate of return was consistentlylower than estimated at appraisal. The covenant (Section 5.05 of LoanAgreement) called for a minimum return on equity of 7% in 1977, 8% in 1978-1980, and 9% thereafter, adjusted to take into account the results of therevaluation of assets which VRA was to carry out in 1977. At appraisal netfixed assets at end of 1976 were estimated at about 0 300 million; the abovecovenant states that if the value of revalued assets were different from saidamount the minimum rate would be adjusted in inverse proportion to therelation of assumed to actual revalued net assets. By October 1977 ( fourmonths after the date foreseen in the Loan Agreement) VRA had determined thevalue of its assets at December 31, 1976 at about 0 370 millioi. Therefore,the actual lower limits for the rate of return were 5.7% for 1977, 6.5% for1978-80, and 7.3 % thereafter, levels which VRA never achieved.

5.06 The main reasons for unsatisfactory earnings, which prevented VRAfrom paying a dividend, except for 1977, can be summarized as follows:

- Sales were substantially lower than expected and not associatedwith correspondingly lower costs, this was related to thedownturn of the economy as a whole, to the 1977-78 systembreakdowns temporarily interrupting supply to VALCO, and to thesupply curtailments associated with the drought from 1982onward; and

- 53 -

- While Government granted VRA a series of substantial tariffincreases, these fell short of YRA's needs.

Essentially for the same reasons, the operating ratio was consistently higherthan expected. Only in 1981, as a consequence of massive tariff increases,the operating ratio and rate of return came within 25 % of the forecastvalues.

5.07 The debt/equity ratio stayed lower than forecast mainly because theasset revaluation reserve, which is the dominant part of equity, grew atapproximately the rate of devaluation of the Cedi and VRA did not incur asmuch additional foreign debt as expected, as it did not start the post-Kpongprogram as originally envisaged.

5.06 Accounts receivables were consistently higher than estimated in1976, mostly because of ECG's overdues, in turn caused by ECG's inability toobtain adequate tariff increases.

Conclusions

5.09 With all the shortcomings highlighted above, it is fair to statethat under the conditions prevailing in Ghana during project execution, it wasno small feat for VRA to have fared financialy as it has. This, of course,was not only VRA's doing; it was also related to VRA's foreign exchangeearnings. Furthermore, VRA took maximum advantage of its special position asthe country's most important parastatal company.

6. INSTITUTIONAL PERFORMANCE

Management

6.01 All in all, VRA remained well managed throughout the projectperiod. Since 1966, a competent, forceful, and highly respected engineer wasthe authority's Chief Executive. He retired in 1980 and the former DeputyChief Executive (Engineering) replaced him. The Bank concurred with thelatter appointment.

6.02 In 1977, as agreed during loan negotiations, VRA appointed a ChiefFinancial Officer, a Canadian, whose services CIDA helped finance. Thisspecialist focused on loan and contractual aspects, costing, budgeting, andtariffs.

6.03 In 1977-78, YRA went through a difficult time when political turmoilpenetrated the organization and led to industrial action which wasinstrumental in the accidents that led to the freezing of VALCO's potlines in1978. In the early 80's VRA also started to suffer from the economicdisruption and general demoralization in the country, as several seniorofficers retired or went on prolonged leave without replacement. Onecontributing factor to this exodus is VRA's salary scale which is closelyrelated to that of the civil service. Thus, in recent years VRA's middlemanagement, in both the financial and engineering sectors, suffered seriousdepletion, as many specialists took positions in Ghana's private sector orwent to other West African countries.

- 54 -

Personnel

6.04 Throughout the implementation of the Kpong project, VRA's personnelremained about constant at some 2,500 people of which 1,250 were carrying outthe power activities proper, 850 servicing the Akosombo township, and 400working in connection with VRA's agency activities (shipping, resettlement,Volta Lake research, etc.).

6.05 In the late 70's a certain unrest came into the middle and lowerechelon personnel leading to work-to-rule measures. The situation hadimproved by 1980. However, demoralization still persists today.

Training

6.06 VRA's training has traditionally been very good, as the authorityyear after year had about 100 people attending courses at local institutionsand 10 to 20 overseas. Nevertheless, the three system breakdowns in 1977-78showed that control room personnel needed more specialized training, which VRAprovided. As a continuation of this action, VRA is installing and manning atraining center at Akuse (near Kpong) with the financial assistance of CIDA(about US$ 3 million).

Merger of VRA and ECG

6.07 Since its inception, VRA has operated rather independently under thecontrol but with little direct intervention of Government. Being a majorearner of foreign currency it had and still has great advantages over otherparastatals, in particular ECG. It was, and continues to be, well managed inspite of the major economic difficulties it is currently experiencing.Therefore, it is natural that a merger of YRA with ECG, which for years hassuffered from sub-standard management, has been under consideration off and onfor the past 20 years. In 1976, the Bank concluded that the merger would notbring major benefits to Ghana. However, with the dramatic deterioration ofECG's management in the past 6 years, the issue has emerged again. It is tobe analyzed in 1984 as part of a new proposed project.

Autonomy

6.08 Until project conclusion, VRA's autonomy, which in the Bank's viewhas been a major factor for the authority's efficiency, remained essentiallyintact except for the temporary application of the complicated major contractapproval procedure which in 1977-78 hampered project implementation.

Covenants

6.09 Annex 6 sets forth the princial covenants in the Loan and GuaranteeAgreement. The Annex shows that VRA complied with all covenants except forthe rate of return one.

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7. ECONOMIC JUSTIFICATION

Actual and Prospective Consumption

7.01 In VRA's system, energy consumption is the dominant supply factorand not power demand. Therefore, the following considerations exclusivelyconcern energy. Nevertheless, VRA has made sure that power does not become aproblem.

7.02 Annex 7 shows actual and projected consumption and generation. Theprojections assume that in 1985 the water accumulation at Akosombo will havenormalized to a point permitting VALCO to start again operations with twopotlines and a third in 1986. However, the fourth potline would restartproduction in 1990 and the fifth only when a further plant will have beencommissioned. The projections further assume that the ECG demand will returnto the 1981 level until 1987 and grow thereafter at about 3.5% per year. Thisleads to required generation by 1986 which is less than 60% of that estimatedat project appraisal.

Generation Attributable to Kpong

7.03 Annex 7 also shows the generation attributable to Kpong whichessentially consists of three parts. The first of these is the actualgeneration at Kpong which, had the plant not existed, could have beengenerated at Akosombo but only at the expense of a further drawdown of thelake level or earlier restrictions. Second, in the years 1985 and 1966, whenthe refilling of the lake is assumed to take place, the production assignableto Kpong and Akosombo is assumed in proportion to the installed capacities,again because without Kpong the return to normal operation would takelonger. Finally, once normal operation is reached again, only the incrementalgeneration above that possible at Akosombo is assigned to Kpong. As a reviewof the hydrology of the Volta river is likely to show that the averageproduction at Akosombo and Kpong has to be assumed lower than projected, thepresent re-evaluation uses three assumptions which assign to Akosombo andKpong 100%, 90%, and 75% of the originally planned productivity.

7.04 The energy attributable to Kpong could improve if Ghana could exportto Ivory Coast more energy than presently anticipated. However, an improve-ment of the Volta river runoff usually parallels a similar improvement in theavailability of water in the other West African rivers. Therefore, aconsiderable increase of the energy transfer to the Ivory Coast would not belikely.

Least Cost Solution

7.05 The procedure applied to determine whether the Kpong investment waseconomically sound, is the same used in the appraisal report, which is tocompare Kpong with an equivalent thermal plant (the comparison slightly favorsKpong because the thermal plant could have been somewhat smaller; furtherrefinements were not necassary for such ex post facto review). Comparison ofKpong within a long range investment program was not done because it did notexist then or now. Based on a price for crude of US$ 20 per barrel, which ison the low side for 1981, the equalizing discount rates for the threeassumptions used for the average potential hydrogeneration (para. 7.03) are

- 56 -

between 8% and 10%. With fuel costs at US$ 25 per barrel, these ratesincrease by some three percentage points. Therefore, the decision to buildKpong was sound but not clearly the least cost solution.

Return on Investment

7.06 The return on investment was estimated as the discount rate thatequates the present values of the benefits and costs associated with the1976-1982 VRA investment program, plus ECG's (distribution). Benefits weremeasured by the forecast revenues from the sales of electricity at the averageretail level, usir-g the tariff in effect on July 1, 1984 (see Annex 7). Thereturn for the program is about 16% which compares marginally with theopportunity cost of capital for Ghana, estimated to be between 15% and 20%

Project Achievements

7.07 Although the return on investment is unsatisfactory, theimplementation of the Kpong project has provided Ghana with facilities thatwill ease the starting phase of an economic recovery by providing industriesand foreign exchange earning activities with electric energy at a still ratheradvantageous cost. Furthermore, Kpong is an important generating element inthe developing regional electricity network presently interconnecting Ghana,Togo, Bnin and Ivory Coast. Bank involvement was also instrumental inhelping to limit the negative effect of the economic disruption on VRA'smanagement and thus on the authority's future.

8. BANK PERFORMANCE

Assessment of Borrower's Capability

8.01 At appraisal, the Bank assessed VRA's capability in terms ofmanagement, project implementation and operation at a high level. Theexecution of the project under unexpectedly difficult conditions essentiallyconfirmed this judgement. The circumstances leading to the system breakdownshowed that there were some shortcomings in VRA which had not been detected.However, the decisiveness with which VRA's management corrected thedeficiencies under adverse circumstances again confirms the correctness of theBank's original judgement.

The Bank's Role

8.02 The Bank played a crucial role in coordinating the interventions ofthe various lending agencies in the context of the project. Not only was thisrole decisive at the project preparation stage but also at the procurementstage, where Bank staff assisted VRA and the consultants in the fine tuning ofthe various contract packages. It also helped the financing agencies byproviding them with the results of the Enk supervision missions. The Bankalso supported Government and VRA in their negotiations with VALCO and thushelped Ghana obtain a fair retribution for the resources used. This support,requested by the Government, consisted of the Bank advising the Ghanaians onthe most app:opriate and most experienced consultants needed for thenegotiations.

- 57 -

Supervision

8.03 Annex 8 sets forth the schedule of the Bank's supervisionmissions. The average interval between such missions was about 10 months and,over the 6 years of project implementation, two engineers, --ur financialanalysts - two of them in the same team - and a consultant participated in thesupervision. Relations between Bank staff and Government and VRA officialswere at all times very good.

9. CONCLUSIONS

9.01 The project did achieve its main objective which was to provideGhana with an additional power plant and associated facilities utilizing oneof the country's -main resources, water. It also helped preserve theefficiency of one of the country's main institutions, VRA. Unfortunately, theunforeseen economic depression has not allowed Ghana to reap the fullbenefits of the investment in the short term. Nevertheless, Kpong and therelated transmission installations will be a substantial asset in thecountry's expected recovery.

GHANA: VRA - KPONG HYDROELECTRIC PROJECT

LOAN 1380-OH

Main International Contracts and Their Finanoing

Contract Scope to Work Contractual Dates Contractor Foreign FinancingTender Tander ContractCall Receipt Award

K3 - Civil Works Construction of principal civil 08/76 02/77 08/77 Joint Venture Kuwait Fund, Saudiworks, including provision of Impregilo-Recohi Fund, BADEAcamp facilities and equipment, (Italy)transportation to other con-tractors and construction ofresettlement villages

K4 - Turbines, Design, supply and installation 09/76 03/77 08/77 Joint Venture IRD, EDP and BIB iGenerators of turbines, generators and Thoshiba-Bovingand Power- powerhouse crane (Japon/UK)house Crane

K5 - Transformers Design and supply of generator 10/77 01/78 08/78 Oy Stromberg IBRD, EDF and BIBtransformers (Finland)

K6 - Spillway Supply of spillway radial gates 08/77 10/77 02/78 Dominion Bridge CIDAGates and hoists, stop logs, including Company Limited

embedded parts (Canada)

K7 - Powerhouse Supply of powerhouse operating 10/77 12/77 03/78 Canron Limited CIDAGates gates and hoists, bulkhead gates, (Canada) H

trashracks draft tube gates and 1

gantry cranes

Contract Status Contractual Dates Contractor Poreign FinancingTender Tender ContractCall Receipt Award

K8A - Mechanical Design, supply and installation 03/78 09/78 04/79 Sadelmi IBRD, EDF and EIBand Elec- all mechanical and electrical (Italy)trical auxiliary services, installationServices of generator transformers and

switchyard equipment

K8B - Gates Installation of spillway and 03/78 09/78 04/79 Sadelmi OPEC FundErection powerhouse gates (Italy)

K9 - Transmission Design, supply and installation 05/78 10/78 05/79 Sadelmi OPEC FundLines of 161-kV transmission lines (Italy)

K1O - Switchyard Design and supply of switchyard 04/78 08 02/79 Merlin 0rin IBRD, EDF and BIBEquipment equipment for Kpong switchyard (France)

and additional equipment forAkoeombo switchyard

N1 - Transmission Design, supply and installation 06/78 10/78 05/79 Energoinvest IBRD, EDF and BIBLine of 161-double circuit line (Yugoslavia)

Acora-Tema

N2 - Power Factor Design, sipply and installation 06/78 09/78 06/79 Bharat Heavy IBRD, DF and EIBCorrection of 25 NVAR sinchronous condensor EquipmentEquipment at Prestea and 25 NVAR static (India)

condenseor at Kumasi N

N3 - Transmission Design, supply and installation 06/78 10/78 05/79 Energoinvest IBRD 0Line of 161-single circuit line (Yugoslavia)

Dunkwa-Akiwinso (Snfwi, Wiawo,Bibiani area)

March 1984

Annex 2-60 -

KPONG HYDROELECTRIC PROJECT

COMPLETION REPORT

Estimated and Actual Project Costs in million units

Appraisal estimate 11 Actual

Foreign Local Total Foreign Local Total

a) Kpong Power Plant US$ 0 US$ US$ I US$

Preliminary works 1.7 4.5 5.6 3.0 4-9 6.4

Civil engineeringworks 75-3 42.7 112.4 97.8 124.1 133.0

Electrical andmechanical works 61.3 4.6 65.3 63.8 8.9 66.3

Resettlement 1.7 11.3 11.5 1.6 9-5 5.4

Engineering andmanagement 15.9 3.6 19.0 14.8 - 14.8

Owner's cost - 4-8 4.2 - 17.2 5.0

Review Board 0.2 - 0.2 0.1 - 0.1

Transmissionfacilities 5.9 1.0 6.8 6.6 4.5 7.9

Subtotal 162.0 72.5 225.0 187.7 169.1 238.9

b) Reactive Power

Compensation 3.8 0.2 4.0 - - -

c) Sefwi-Viawso-Bibianitransmission system 3.0 1.1 4.0 - - -

d) Additional transmissionTema-Accra 3.2 0.4 3.5 - - -

Subtotal 10.0 1.7 11.5 9.1 9.4 11.7

Grand Total 172.0 74.2 236-5 196.8 178.6 250.6

1/ Contingencies included in individual items.

Annex 3

GHANA

KPONG HYDROELECTRIC PROJECT

COMPLETION REPORT

Schedule of Disbursements (in million US$)

IERD FY Cumulative Disbursements at endand semester of semester

Appraisal estimate Actual

2nd 1977 3.6

1st 1978 7.3

2nd 1978 9-9 3-6

1st 1979 12.6 4-8

2nd 1979 18.0 8.0

1st 1980 23.4 13.8

2nd 1980 28.4 18.6

1st 1981 33.5 27-4

2nd 1981 36.2 29.8

1st 1982 39.0 35.2

2nd 1982 37.6

1st 1983 39.0 1/

1/ Last payment 8.12.82

- 62 -

Annex 4

GEANA: VRA - KPONG HIDROELECTRIC PROJECT

LOAN 1380-GH

Disbursements by Categories

Actual disbursements against the various categories are as follows:

Categg Description Original Allocation Actual Disbursement

1-A & B Equipment Parts A, C, E 30,400,000.00 32,831,202.07& Engineering servicesParts C, E

2-A & B Equipment & Engineering 2,700,000.00 3,279,536.80services Part D

3 Review Engineering Board 200,000.00 38,969.84Part D

4 Construction, Equipment & 2,200,000.00 2,850,291.29Vehicles for preliminaryworks and resettlement

Unallocated 3,500,000.00 N/A

TOTAL 39,000,000.00 39,000,000.00

March 1984

-63 -.6-Annex 5

GMANA: KPONG HYDROELECTRIC PROJECT

LOAN 1380-GH

VRA Operational Characteristics

1976 1977 1978 1979 1980 1981 1982

Peak load in XW- 1976 estimate 570 684 730 768 786 803 831- actual 554 640 632 660 703

Gross Generation in GVh- 1976 estimate 4320 5230 5530 5706 5790 5900 6090- actual 4174 4394 3721 4631 5276 5349 4891

Sales in GYh- 1976 estimate 4180 5060 5340 5510 5580 5680 5860- actual 4091 4303 3652 4524 5130 5181 4799

Sales to VALCO in GMh- 1976 estimate 2700 3330 3333 3330 3330 3330 3330- actual 2645 2784 2086 2908 3319 3303 3008

Sales to other clients in GWh- 1976 estimate 1480 1730 2010 2180 2250 2350 2530- actual 1446 1519 1566 1616 1811

Losses in % of generation- 1976 estimate 3.2 3.2 3.4 3.4 3.6 3.7 3.8- actual 2.0 2.1 1.9 2.3 2.8 3.1 1.9

March 1984

-64 - Annex 6

GHANA: VRA - KPONG HIDROELECTRIC PROJECT

LOAN 1380-GH

Compliance with Major Covenants

Loan AgreementSection Description Status

3-02 (a) Employment of consultants - done (see para. 2.02)

4.01 (b) Appointment of Director ofFinance by July 1, 1977 - done (see para. 6.02)

4.04 Periodical inspection of worksafter completion - organised

4.05 Power for boilers to be - done insofar applicableinterruptible (see para. 4.05)

5.04 Revaluation of assets - done (see para. 5.05)

5.05 Rate of return - not met(see para. 5.05 )

5.07 Debt limitation - metVRA had to seek Bankconcurrence for furtherindebtedness

5-09 Non-power operations - met

March 1984

GHANAs LOAN 1380-GH

VRA: KPONG HYDROELECTRIC PROJECT

Economic Re-evaluation

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1995

a) VRA's sales and generation in GWh

Total sales with Kpong 5,181 4,799 2,384 1,060 3,022 3,732 3,839 3,952 4.070 4.190 4,980 5.530

Total generation with Kpang 5,350 4.970 2,470 1,100 3,130 3,860 3,980 4,090 4,220 4,340 5,160 5,740

(100%) 5,250 4,970 2,090 950 2,630 3,260 3,980 4,090 4,220 4,340 5o160 5,400Total generation without Kpong (1902) 1/ 5.250 4,970 2,090 950 2,630 3,260 3,980 4,090 4,220 4,340 4,860 4,860(and ray water usage)

( ( 752) 2 5,250 4,210 2,090 950 2,630 3,260 3,980 4,030 4,030 4,030 4,030 4,030

( (1OOZ) 150 760 320 150 500 600 3/ - - - - - 340 |Generation Attributable to Kpong ( ( 902) 150 760 360 150 500 - 600 / - - - - 300 870

( ( 752) 150 760 380 150 500 - 600 - - 60 190 210 730 730

( (1002) 145 735 365 145 485 580 - - - - - - 335Sales attributable to Kpong ( ( 902) 145 735 365 145 485 580 - - - - 290 840

( ( 752) 145 735 365 145 485 580 - 60 185 205 705 705

( (100)z 2.1 10.6 5.3 2.1 6.8 8.1 - - - - - 4.8b) Benefits of Kpong in million US ( ( 90%) 2.1 10.6 5.3 2.1 6.8 8.1 - - - - 4.1 11.8

( ( 75%) 2.1 10.6 5.3 2.1 6.8 8.1 - 0.8 2.6 2.9 9.9 9.9

If average generating capability 902 of originalestimate i.e. 4,860 Mh for Akosombo and870 GWh for Kpong

V average generating capability 75% of originalestimate i.e. 4.030 GWh for Akosombo and730 GWh for Kpong

V Contribution of Kpong to faster return tonormal reservoir operation

-66- Annex 7Page 2 of 3

Basic Assmptions for Preceding Table

- Total sales assume that it will take until 1992 to reach again the saleslevel of 1981 as VALCO would work with only 3 potlines until then and onlyin 1991 add again the fourth line, the fifth still remaining in reserve.

- After the droughts of the 70s and the 80s the hydrology is likely to haveto be revised in particular to take into account retention in the under-ground. As the potential generations at Akosombo are likely to require areduction against the figures used in the appraisal report, the table uses75% and 90% (i.e. 4,030 GWh and 4,860 GVh) for Akosombo, and 730 GWh and870 GYh for Kpong.

- During the years 1981 to 1984 when the drawdown of Volta lake took placegeneration was attributed to Akosombo and Kpong in proportion to theircapacity. This is justified as, without Kpong, the corresponding energywould not have been available. Indeed, Akosombo could have produced itusing more water which later would have been lacking.

Least Cost Solution

As in the project appraisal least cost solution results from acomparison of Kpong with a thermal alternative. The main assumptions on thethermal plants compare as follows. The monetary values for the re-evaluationcorrespond to the 1981 cost level as Kpong was commissioned in that year.

1976appraisalestimate 1981 figures

Installed capacity MW 160 160 144 122(1oo%) (90%) (75%)

Productibility GWh 970 970 870 730Capital Cost USS/kW 400 500Fuel Cost US/barrel 12 20Transmission investment million US$ 1.6 2.0

Equalizing discount rates- with fuel at US$ 12/barrel 11%- with fuel at US$ 20/barrel 7.5% 8.5% 9%- with fuel at US$ 25/barrel 10% 11% 12%

-67- Annex 7Page 3 of 3

VOLTA RIVER AUTHORITY - VRA

KPONG HYDROELECTRIC PROJECT, LOAN 1380-GH

Cost and Benefts Streams - Return on Investment

Year Investments

Generation & Operation and TotalTransmission Distribution Total Maintenance Costs

I. COSTS (in million Cedis)

1 1976 61 - 6.1 6.12 1977 7.8 12.2 20.0 20.03 1978 87.0 25.1 112.1 112.14 1979 216.6 9.3 225.95 1980 218.6 10.2 228.8 228.86 1981 225.1 19.9 245.0 245.07 1982 118.0 18.7 135.7 136.78-25 - - 2.5 2.5

Total Sales Increase in Total Sales through Project Benefits(GWh) Sales over 1981 (GWh) (GWh) (Cedis X 106 a/

II. BENEFITS (in million Cedis)

1 198- 4779 (382) -2 1983 2384 (2797) -3 1984 1060 (2159) -4 1985 3022 (2159 -5 1986 z732 (1449) -6 1987 3839 (1342) -7 1988 4107 (1074) -8 1989 4394 (787) -9 1990 4702 (479) -10 1991 5031 (150) -11 1992 5383 202 202 40012 1993 5761 580 580 114813 1994 6165 984 970 192014-25 1995 6595 1219 970 1920

Rate of Return = 19.6%

a/ At ave-age retail tariff of Cedis 1.92/kWh, effective on July 1, 1984

-68 - Annex 8

GHANA

KPONG HYDROELECTRIC PROJECT

COMPLETION REPORT

Schedule of Supervision Missions

Date of Duration Mission Staff No. of monthsImission in days since last mission

June 1977 10 Engineer No.1 15Fin.Anal.No.1 1/

July 1978 7 Engineer No.1 13

February 1979 7 Engineer No.1 7

November 1979 7 Engineer No.1 10Fin.Anal.No.2

Consultant 2/

October 1980 7 Engineer No.1 11Engineer No.2Fin-Anal.No.3

July 1981 7 Engineer Bo.2 9Fin.Anal-No.3Fin.Anal.No.4

November 1981 7 Fin-Anal.No.3 4

1/ members of appraisal team2E/ resettlement specialist

GHANAKPORG HTVROELECTRIC PROJECT

COPLETION REPORT

Cosparative Intas. 8tat.ens,LI[6-198tin *tLl0r.na of EInt Cedis)

Sales (vh 1 000)Iw 1.0 1.0 1.n 1.2 1.1 1.4 1.0 1.5 1.1 1.6 1.1 1.7 1.0 1.8VALCO 2.6 2.7 2.8 3.3 2.1 3.3 2.9 3.3 3.3 3.3 3.3 3.3 3.0 3.31ines 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3CIn 0.2 0.2 0.2 0.2 0.2 0.3 0.3 0.3 0.4 0.3 0.5 0.3 0.5 0.3Almolbo 0 0.0 0 00 0 0 0 0.0 0.0 0 0 0.0 0.0 0.1

Pris- (Mill/kVh>EW 9.761 9.360 12.878 11.940 16.821 12.080 22.277 12.400 as.068 12.640 "6.07 12.620 79.217 12.560VALCO 5.175 5.170 4.973 5.360 8.210 5.450 12,827 5.620 13.191 5.870 15.886 7.370 13.787 7.470Nine. 10.630 10.340 13.827 13.960 20.492 13.950 34.825 13.930 65.827 13.930 89.456 13.930 92.006 13.930Cza 9.948 9.340 11.223 9.280 24.506 8.850 40.992 8.650 39.594 8.850 39.40 8.850 58.665 8.850Akosomh 09989 224 8 7 990 D22-39 e90 2.2 W*.9i* 1 1 .7

Oe rtag RevenuAs.ed 9.6 9.4 13.3 14.0 17.9 16.5 22.8 18.8 47.4 19.9 85.6 21.0 79.2 22.9VIL00 13.7 14.0 13.8 17.8 17.1 18.1 37.3 18.7 43.8 19.5 52.5 24.5 41.4 24.9sina 3.0 2.8 3.6 3.9 5.1 4.1 9.0 4.2 17.9 4.4 24.5 4.6 23.7 4.9C&B 1.5 1.6 2.0 2.3 5.3 2.8 12,3 2.8 17.4 2.8 18.6 2.8 30.6 2.8Akoscabo 0. _. 9. 0.4 0.7 _0 1.1 0.4 b. 0.4 1.6 0. 1.2 20.Total maln revenuss 28T 28.1 3ti 38.3 4wT 4 9 8 W, 44d I2.T4" iU¶ 51" I7T 55.8

Other 0.8 4.6 1.1 1.0 2.6 6.7 5.5 11.0 8.6 16.9 10.9 28.6 12.7 52.0

Total 28.9 32.6 34.5 39.3 48.7 48.6 88.0 55.9 136.7 64.0 193.6 81.9 188.8 107.8

¥81.rtion 1.8 1.4 2.9 1.4 4.3 1.4 5.2 1.4 9.0 1.4 12.2 1.4 16.2 1.4Transafislon 1.7 1.5 2.8 1.5 3.7 1.5 5.1 1.5 8.2 1.5 10.6 1.5 11.0 1.5Adatnistration 2.7 2.0 3.8 2.0 5.1 2.0 8.0 2.0 9.9 2.0 13.0 2.0 15.7 2.0Akosombo Tovnöhup 0.9 0.7 1.6 0.7 2.2 0.7 2.9 0.7 4.7 0.7 6.9 0.7 6.0 0.7Health a Satfsy 1.1 0.8 1.5 0.8 2.0 0.8 2.5 0.8 4.4 0.8 6.1 0.8 5.9 0.8Prias conttngenaies • 1.1 - 1.9 - 3.4 - 4.9 - 6.0 - 7.8 - 9.1[pong - - - - - - - - - - 0.5 - 0.5Deproiation _95 16:3 10:7 27.8 12:0 41:0 13 45.8 18.4 23._Total fl =f4 W__. fl. -9l- K-O: IM- 2U»2 11.

OporatIng %acnse 16.0 18.3 9.5 21.5 15.2 28.1 36,7 32.7 59.5 38.1 99.0 48.9 75.3 68.0

son-operattag aopsaes - - 3.5 - 5.0 - 11.0 - 10.9 - 10.3 - 8.4 -

internt chrgsed tooperations 4.0 4.2 .L 4.0 5j8 8.3 .4 11.4 3.1 7.2 2.8 401 11.4

fst incowe 12.0 14.! 2.3 17.6 4.4 24.4 17.3 29.3 37.1 35.0 81.5 46.1 26.s 56.5

Dats of return onequity 12.3 8.9 0.9 6.9 0.8 7.9 2.0 7.9 3.3 7.9 5.8 8.8 1.6 8.9

Averaga 1977-1982 2.4 8.1Iata of return on not

rasd asdsta 10.0 8.0 3.1 6.9 2.4 8.2 4.0 8.8 5.2 9.4 6.0 8.4 3.5 8.9

Average 1977-1982 4.0 8.4

Covenanted te. ofreturn on qats j - - 5.7 7.0 6.5 8.0 6.5 8.0 6.5 8.0 7.3 9.0 7.3 9.0

Operating ratin 45 44 72 45 69 42 58 42 56 40 49 40 60 37

11 Forsat fagrs are the Loan Agreement figuren; the asoult figurco are the forcesso figure edjusted bl the fater 300/370. The fattor te *ospose4of the 1 300 stilton not firmed aset valut sattnated at apprataat and the 0 37n atual reulte of the revaluation aerats as of December 31, 1976.

March 12, 1984

OHANA

KP )NG HYDROELECTRIC PROJECT

COMPLETION REPORT

Comparative Balance Sheets, 1976-1982(in millions o current Cedia)

1976 1977 1978 1979 180 91 1982Actual Foreasst Actual Forecast Actual "orecast Actual Forecast ActaUldPrecast Ac 96_eca ActualFPorecas

AssetaPraat in operation 200.6 373.1 571.4 421.2 987.3 469.5 1,339*3 527.8 1,789.3 591.8 2,825.2 940.6 3,013.3 1,046.1Lees Depreciation 43.1 76.1 124.3 94.0 186.3 115.0 285.3 139.6 5. 168.4 740.2 205.4 79a.1 251.8Net plant 15. 9. 47.1 327.2 801.0 354.5 1,054.0 38.T~843. ,8. 3-5.2 2,215.2 794.3

Work in progress 15.1 7.0 18.2 45.3 146.5 117.7 341.2 209.4 555.9 306*3 68.9 142.6 112.9 327.6

Current assetsiCash and banks 8.1 5.1 16.0 11.3 43.5 13.8 82.1 18.4 71.5 18.9 72.t 24.9 73.9 16.4Accounta receivable 11.2 7.3 9.6 7.9 20.3 9.7 28.6 11.2 63.7 12.5 85.6 16.4 83.9 21.6Inventories 2.1 1.- 2.0 1.9 2.2 2.0 5.0 2.0 6.4 2.1 ... ± 2.1 11.2 2.2

Total -14 14,0 2q.6 j.O W 0 T -.5 TI 115 .7 31.6 141.6 33.8 -14 4 3.4 190 4.2

Total assets 194.0 318.0 492.9 393.5 1,013.5 497.7 1,510.9 629.2 1,924.3 763.5 2,318.3 921.2 2,497.1 1,162.0................... .......... ..... Rangoon a....0 SU*m....a .Now ws.... moxam 420.080 mumm..

ltabilitieEquity 59.1 59.1 59.1 59.1 59.1 59.1 59*1 59.1 59*1 59.1 59.1 59.1 59.1 59.1Retained earnings 29.7 27.9 34.4 43.5 60.8 5.8 89.7 93.1 144.7 126.1 227.5 t70.2 252.9 224.7Revaluation reserve 17.6 142.7 ~jI.- 175.4 602.0 211.4 849.0 20.4 11,0998 293.1 1.8. 33* 1,419.1 420.-Total 10. -4 366 28. T 3 99. 402.6 163.6 47 T 1,6. 568.9 1.731.1 704.3

Long term debt 80.5 84.0 79.2 110.5 270.0 155.7 459.9 220.1 597.3 277.2 672.3 342.3 689.7 445.2

Current liabilities:Accounts payable 5.8 3.0 5.7 3.6 18.2 3.8 46.4 3.9 56.2 4.0 52.7 4.1 42.6 4.2Finan-.ial charges 3 1.3 1.4 1. 3.5 2.0 6.9 2.6 .2 4.0 2 _ 33.7 8.3Total 7.1 4.1 : H 21.7 5.8 53*3 =i 64 8.0 78.1 10.0 .-3 -12.5

Total liabilities 194.0 318.0 492.9 393.5 1,013.5 497.7 1,510.9 629.2 1,924.3 763.5 2,318.3 921.2 2,497.1 1,162.0........ .............. ....... ........ .......** 0.0.0 ..... U a. aw.4 Ummw. .0. ... a.. .

Debt/Debt + Equity 43 27 16 28 27 32 32 35 32 37 30 38 28 39Debt/Equity 0.7 0.4 0.2 0.4 0.4 0.5 0.5 0.5 0.5 0.6 0.4 0.6 0.4 0.6Current ratio 3.0 3.3 3.9 4.2 3.0 4.4 2.2 4.9 2.2 4.2 2.1 4.4 2.2 3.2Receivabler/revenue () 39 20 28 20 42 20 33 20 47 20 44 20 48 20Receivables (days) 141 72 102 72 152 72 119 72 170 72 161 72 174 72Annual revaluation (a) 81 80 20.3 11 34.8 11 34.0 11 35.8 It 34.5 11 35 11

March 12, 1984

OHANA

KPON HYDROELECTRIC PROJECT

COMPLETION REPORT

Comparative Flow of Funds Statements 1976-1982(in millions of current Cedia)

1977 1n J1i 190 198 1 1977-19a2Actual Forecast Actual Forecast AcuI ore ActualForecasf ActualIMorecas ActuallForet114t Acua orecast Actual Forecast

Internal SourcesOperating Income 20.2 18.3 9.5 21.5 15.2 28.1 36.7 32.7 59.5 381 99.0 48.9 75.3 68.0 295.2 2Y7.3Depreciation 4.6 6. 12.3 .5 16.3 10.7 27.6 12.0 4. . 45.8 18.4 58.8 23.8 201.8 8.

Total 24.8 25.2 21.8 31.0 31.5 38.7 64.3 44.7 100.5 51.5 144.8 67.3 134.1 91.8 497.0 325.0

Operational requirementasWorking capital 7.2 0.5 0.1 0.1 (3.7) 1.3 (20.5) 0.8 26.4 0.7 7.5 1.7 4.6 2.7 14.4 7.3Debt service 8.6 8.9 5.6 9.7 10.7 11.6 19.9 14.3 23.7 19.2 20.5 26.3 75.2 42.2 158.6 123.3Dividends 2.0 2.0 1.0 2.0 - 2.0 - 2.0 - 2.0 - 2.0 - 2.0 1.0 12.0

Total 17.8 11.4 _.7 11.8 _.0 1.9 (0.6) 17.1 50.1 21.4 28.0 29.9 79.8 47.0 174.0 1420

Net available from operations 7.0 13.8 12.1 19.2 24.5 23.9 64.9 27.5 50.4 30.2 116.8 37.3 54.3 44.8 323.0 182.9

Construction requirements 6.1 10.6 7.8 44.4 87.0 71.6 216.6 93.0 218.6 92.7 225.1 103.2 118.0 170.8 873.1 575*7

Balance to finance (0.9) (3.*) (4.3) 25.2 62.5 47.7 151.7 65.5 168.2 62.5 108.3 65.8 63.7 126.0 550.1 392.7

Financed bytBorrowings 0.2 - 1.4 31.3 62.8 50.3 190.3 70.0 157.7 63.0 106.2 71.8 S6.2 117.5 584.o 403.9Other 1.1 - 2.2 - 27.2 - - - - - 2.7 - (0 7) -_ 31 -

Total 1.3 - 3.6 31.3 90.0 50.3 190.e 70.0 157.7 63.0 108.9 71.8 65*5 117.5 616.0 403.9

Surplue (deficit) of funds 2.2 3.1 7.9 6.1 27.5 2.6 38.6 4.5 (10.6) 0.5 0.6 6.0 1.8 (8.5) 65.8 11.2Accumulated surplue (deficit)

of funds 8.1 3.1 16.0 9.3 43.5 11.8 82.1 16.4 71.5 16.9 72.1 23.0 73*9 14.4 73.9 14.4

Net available from operations/construction requirements (U) 115 130 155 43 28 33 30 30 23 33 52 36 46 26 37 32

Debt service covereas 2.9 2.8 2.5 3.2 2.9 3.3 3.2 3.t 4.2 2.7 7.1 2.6 1.8 2.2 3.1 2.6

March 12, 1984

- 72 -

GRANA

ELECTRICITY CORPORATION OF GHANA

PROJECT COMPLETION REPORT

THIRD POWER PROJECT - LOAN 1381-GH, CREDIT 689-GH

1. INTRODUCTION

1.01 In Ghana public electricity supply is the responsibility of VoltaRiver Authority (VRA) and Electricity Corporation of Ghana (ECG), bothstatutory corporations owned by the Government of Ghana. Created in 1961 tobuild and operate the first hydropower plant on the Volta river at Akosombo,VRA supplies power to BCG, to Volta Aluminium Company (VALCO), which operatesa smelter at Tema, to several gold, diamond, manganese, and bauxite miningindustries, and to the CommunautZ Electrique du Benin (CEB), which suppliesthe national power entities of Togo and Benin. ECG is responsible for thedistribution of power to all other consumers and for the generation ofelectricity for public supply in areas that cannot be economically connectedto VRA's high voltage system. The government of Ghana established ECG in1967 to reorganize, under Loan 310-GH to VRA, the Electricity Division of theMinistry of Works and Housing as a government-owned public utility withauthority to conduct its business according to commercial principles. Today,the inistry of Fuel and Power (MFP) supervises ECG, which is directed by aboard of seven members including ECG's and VRA's Managing Directors.

1.02 The Bank Group has assisted both entities of the power sector. VRAreceived Loan 310-GH for US$ 47 million in 1963, Loan 618-GH for US$ 6.1million in 1969 and Loan 1380-GH for US$ 39.0 million. Loan 1380-GH wasapproved in 1977 at the same time as the Loan/Credit package for the ECG'sThird Power Project. Loans 310-GH and 618-GH helped finance the Akosombohydroelectric plant on the Volta river and associated transmission facilities,and Loan 1380-GK the Kpong hydro-plant downstream from Akosombo and furthertransmission installations. ECG has been the beneficiary of two previous IDAoperations: Credit 118-GH for US$ 10 million in 1968 and Credit 256-GH forUS$ 7.1 million in 1971. All the projectb have been satisfactorily completedwithout undue delay. OED's audit of the first four oper-.tions in the powersector comments on the desirability of (i) merging VRA and ECG (ii) revaluaingthe sector's assets, (iii) achieve a higher rate of return, and (iv) solve theoverstaffing problems.

1.03 In 1976, ECG had an installed generating capacity of only 81 MV in28 diesel plants. The largest such plants were those at Tema (33 XV) andAccra (15 MW). The dependability of some of this equipment was low, but itdid not affect the quality of service as the units served only to back up thenormally reliable supply from VRA's Akosombo hydro-plant. Only isolatedsystems had to rely entirely on ECG diesel plants. As these systems weresmall and as in the interconnected system transmission was and remains VRA'sresponsibility, ECG only owned subtransmission networks and distributionfacilities at a voltage less than 33 kV. Currently, ECG supplies about 900GVh to some 105,000 residential, 35,000 commercial, and 250 industrialpremises.

- 73 -

1.04 Ghana has never had a long term program for rural electrification.However, Government has supported this activity and each year, within itsbudget constraints, ordered ECG to implement specific facilities judged tohave high priority. Usually the economic viability of the ventures was notanalyzed. Under Credit 256-GH, Government undertook not only to financeinvestment in rural electrification but also to reimburse ECG for operatinglosses in rural scheiues.

1.05 In 1975, Government asked the Bank to continue supporting ECG'sefforts to meet the growing demand and to improve service by helping finance afurther subtransmission and distribution project. This report describes thepreparation 7id implementation of the third power project on the basis of theconsultant's completion report, the IBRD supervision reports and files, andthe findings of recent missions to Ghana by one of the Bank's financialanalysts and a consultant.

2. PROJECT PREPARATION

Origin and Preparation of the Project

2.01 ECG's own staff prepared the project. The Bank was instrumental inits formulation through three identification and pre-appraisal missionscarried out in 1974 and 1975. The Bank carried out the appraisal in November-December 1975, but loan approval and signature took place only in March 1977,essentially because the VRA project (Loan 1380-GH), with which the ECGoperation was to be coordinated, took longer to process than the ECGproject. Furthermore, only after long discussions was the Bank willing toinclude the Kumasi-Kumawu scheme, which is essentially rural, into theproject.

2.02 In 1976, ECG had hired an engineering consultant to assist in pro-curement, to carry out the final design of the electrical facilities and toadpervise their installation. As the consultant completed most of theevaluation of bids before the project was submitted to the Bank's Board ofDirectors, the cost estimates in the appraisal report were based on bidprices.

Project Role

2.03 Ghana's power sector objectives for the period 1976-1981 were to:

a) increase the firm generating capacity to enable the sector tomeet the demand growth beyond 1978;

b) carry out the feasibility studies for the generating andtransmission facilities required for the years 1983 onwards;

c) extend hydropower supply to areas where it is moee economicalthan that based on diesel generation; and

d) extend and re-inforce subtransmission and distribution systemsto improve the quality of service and meet the load growth.

2.04 Whereas VRA pursued objectives (a), (b) and the transmission part of

- 74 -

(a), ECG was responsible for reaching objective (d) and the subtransmissionand discribution component of objective (c) above.

2.05 VRA and ECG prepared separate development plans: VRA for large scalepower generation (which until now and in the foreseeable future is hydro) andhigh voltage transmission; ECG for subtransmission and distribution. In 1975,when the Bank appraised ECG's Third Power Project, VRA had identified the 160NW Kpong hydroelectric plant on the Volta River, 30 km downstream from thethen already operating Akosombo plant (912 NV), as the most economical nextfacility for meeting load growth. VRA's planning also foresaw the associatedextensiorn and reinforcement of its transmission system.

2.06 ECG, which has incrrRsingly concentrated on distribution, preparedonly a medium term plan, which, in 1976, was essentially the physical part ofthe Third Power Project. ECG and VRA have effectively coordinated theirplanning as:

- VRA and ECG offices are located in the same building;

- the Chief Executive of each entity is a member of the Board ofDirectors of the other; and

- managers of one utility at times transfer to the other.

2.07 At the time the project was appraised, it was without any doubt theappropriate step for meeting the demand of ECG customers and hence provide theeconomy with the electric energy it needed, and at one of the lowest costs inthe region. A further project objective was ECG's institutionalstrengthening, particularly in the field of management, staffing, training,systems operation, and maintenance.

Project Description

2.08 The project comprised the following components:

a) Construction of about 240 km of 33 and 22 kV subtransmissionlines and 11 new 33/11 kV substations with a capacity of 150MVA, and the expansion of 6 existing stations by about 60 MVA,the facilities supplying mainly:- the Aboso glass factory (Tarkwa - Aboso scheme)- the Teschie housing program (Teschie - Nungua scheme)- the Weija water works (Weija scheme)- the agglomeration of Tema (Tema scheme)- the Sefvi-Wiawso-Bibiani area- the Kumawn area (Kumasi-Kumawu scheme);

2/b) Improvement of distribution (415 /24 0 V) in particular in Accra/Tema-;

c) Supply of miscellaneous equipment and material forrehabilitating the existing subtransmission and distributionsystems;

d) Vehicles to replace and expand existing transportationfacilities which, due to the lack of foreign exchange, could notbe kept in good ct.ndition; and

2/ See ECG's comments, Appendix I, p. 28.

- 75 -

e) Consultant and engineering services for- the execution of the project and- a power tariff study.

2.09 The USS 9 million IDA credit was intended principally to helpGovernment finance the foreign exchange component of the Kumawu rural scheme(USS 2.8 million). The remainder of the credit and the entire US$ 9 millionIBRD loan were to finance the rest of the items on a pro rata basis.Accordingly, Government relent US 6.1 million of the IDA credit to ECG on thesame terms as the Bank loan, i.e. for 20 years including a five years graceperiod and an interest rate of 8.5%. Furthermore, Government passed on to ECGthe US$ 2.9 million for the Kumawu scheme as a grant.

3. PROJECT IMPLEMENTATION, OPERATION AND COST

Conditions of Effectiveness

3.01 The loan and credit documents contained only the usual requirementsfor execution and ratification of Loan Agreement, Project Agreement, andSubsidiary Loan Agreement. No events delayed the procedures. Thus, loan andcredit became effective on June 10, 1977, that is 2 1/2 months after the dateof signature and two weeks before the date set in the Loan and DevelopmentCredit agreements.

Changes in Project

3.02 ECG did not introduce any changes of substance into the project. Themost important modification concerned the addition of two substationextensions and of connection cables between substations in Kumasi. However,due mainly to the difficult economic situation which developed in 1978 andwhich impeded the orderly execution of the project, ECG sometimes had to useequipment and material earmarked for maintenance to carry out systemextensions and vice versa. 3/

Implementation Schedule

3.03 Except for part of the Tema distribution extension, the physicalproject items suffered delays of between 1 1/2 and 3 years. Thus, finaldisbursement of the loan was postponed from December 1980 to February1982. The delays were mainly due to the deterioracion of the economy, whichat times, in particular in 1979, led to severe disruptions of most activitiesin the country. In the context of project execution, this caused:

- scarcity of materials such as fuel, tires, cement, steel due toshortages of foreign exchange;

- long delays in the processing of payments involving foreignexchange;

- late payment of local currency expenditures because ECG was

3/ See ECG Ts coments, Appendix I, p. 23.

- 76 -

short of cash, due to insufficient tariffs; and

a rather pervasive staff pessimism and low morale, which alsoaffected many contractors and, together with the reasonsmentioned (para. 3.03 above), made many of them reluctant tokeep up the work pace.

3.04 A more project specific reason for the delays relates to the planningand execution of the civil works, which ECG separated from supply and erectionof equipment and entrusted to local consultants and contractors. Mis-understandings between ECG and its main consultant, concerning the latter'srole in assisting the local firms, unduly delayed the start ofinstallations. Only after the consultant, at ECG's requ5it, had instructedthe civil works consultants did the corresponding engineering actuallystart. But the limited technical ability of both local consultants andcontractors allowed only slow progress, often associated with substandard workthat had to be corrected or even redone. This experience led ECG to return toits earlier practice of making the installation contractors also responsiblefor the associated civil works. Under the circumstances prevailing in Ghana,this certainly had the best chances to lead to timely completion and to therequired quality of the facilities.

3.05 ECG completed the Tarkwa-Aboso scheme in February 1982, 38 monthslate, though it had started work 5 months before schedule. The main delayoccurred at the Tarkwa connection to the VRA system, where VRA and ECG took anunduly long time to define the details of the interphase. Work on theTeschie-Nungua scheme started about one month early but ended about 14 monthslate, in November 1980. The Weija scheme, which had started about one monthlate, was completed in October 1980 with a 16-months delay mainly due to thereasons already mentioned (para. 3.03).

3.06 The improvement and extension of the Tema system including part (b)of the project (para. 2.08), essentially consisted of the construction orextension of 3 substations, of the connection of the Tema steel plant and ofTema Textiles, and of the installation of a 33 WV overhead line between twosubstations. Whereas the line was completed three months early, the otheritems suffered long delays, the last of them (switchgear at Station H) wascompleted in June 1981, i.e. 28 months late.

3.07 ECG had to coordinate its work on the Sefwi-Wiawso-Bibiani schemewith that of VRA, which, under Loan 1380-GH, was extending its 161 kVtransmission system to supply the scheme. The loan and credit documentsincluded as a condition of disbursement of funds for this item that VRA issuea letter of intent concerning the construction of the facilities feeding thescheme. VRA sent that letter in early 1978 but incurred a three-year delay inthe execution; therefore, when BCG completed its scheme in May 1982, i.e. 26months late, VRA was still not in a position to supply it. This finallyoccured in 1983. The slippage in ECG's own work was also due to thepreviously stated general reasons.

3.08 The Kumasi-Kumawu scheme, including the reinforcement of the 33 kVsystem in Kumasi, has not yet been entirely completed. A temporary connectionbetween two substations in Kumasi is limited to I1kV capacity until ECG cancarry out a permanent rearrangement of its system. Only then will it bepossible to install the 33 kY cable planned to replace the temporary 11 kY

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connection. Work on the Kumasi-Kumawo line, though started about 9 monthsearly, was only completed in October 1980, i.e. 17 months late.

3.09 The supply of equipment and materials for maintenance and normaldevelopment under Part (c) of the project proceeded essentially as foreseen.The same applies to the vehicles procured under Part (d) of the project.

3.10 Under Part (e), Consulting and Engineering Services of the project,ECG contracted a consulting engineering firm to assist in engineering andprocurement, and to supervise equipment installation. As mentioned earlier,ECG also let contracts for the engineering of civil works to localconsultants, but this did not lead to satisfactory results. It would bepreferable in future to follow the consultant's suggestion, which ECG nowendorses, that only c -onsultant be made responsible for a project likeECG's. This would not. vent using local consultants as subcontractors ofthe main consultant or wucing the installation contractors responsible forassociated civil works.

3.11 As completion of the project as a %.ole was delayed by some threeyears, the consultant had to extend their services in Ghana to May 1982, whenits personnel left the country as the project facilities were completed exceptfor the connection of the Sefwi-Wiawso-Bibiano scheme (para. 3.07) and thecable installations in Kumasi (para. 3.08). From its headquarters, the consul-tant continued to administer the contracts. At this late stage this mainlyinvolved the processing of contractors' cia:ms, of which a fer r_nor ones arestill pending 4/.

3.12 In 1978, also under Part (e) of the project, ECG appointedan economic consultant to carry out a sector study aimed at definingcosts of supply and proposing a tariff policy for the sector. EdF completedthe assignment in 1980, rhen it submitted a report suggesting a tariffschedule based on marginal cost pricing and designed to provide the revenuesECG needed to reach and maintain a sound financial position. However, therapidly deteriorating economic situation and the effects of the droughts onVRA's operations prevented implementation.

Procurement

3.13 ECG, assisted by its consultant procured the project items inaccordance with the Bank's Guidelines for Procurement, except for US$ 400,000(USS 500,000 forecast) of materials and of subtransmission and distributionequipment which, for compatibility and standardization reasons, the originalsupplier furnished. Before contract award the consultant made sure that theprices of the latter equipment were reasonably in line with those obtainedunder international competitive bidding.

3.14 By the end of 1976, or three months before signing of loan and credit,the engineering consultant had already carried out the tender procedure and ana-lyzed the bids for all the supply and erection contracts. ECG issued letters ofintent in early 1977 before the validity of the bids expired. Although the ten-der documents included the usual preference clause for locally manufacturedequipment, no Ghsnaian supplier presented a winning bid. By mid-1977, whencredit and loan became effective, only the spare parts contract had not yetbeen signed. This happened in the second half of 1977. Annex 1 lists themain contracts.

4/ See ECG's comments, Appendix I, p. 28.

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3.15 In parallel with the above procedure, RCG, assisted by localconsultants, carried out the tendering for the civil works which, by mid-1977,led to the signature of all contracts except one, which was finalized later inthe year.

3.16 To contract the consultants for the tariff study ECG invited pre-selected consultants of 5 nationalities to present proposals based on terms ofreference approved by the Bank. ECG selected a firm which best responded tothese terms and offered a reasonable price. The Bank concurred with theprocedure and ECG's award recommendation.

Costs

3.17 Table 3.01 below compares estimated and actual costs of HCG's ThirdPower Project. The actual costs are those of SWEB's completion report, asmodified to include works that ECG carried out with it.q own forces (e.g.clearing and some erection of distribution items). It seems that theseadditions, especially those in local currency, are substantially under-stated. Furthermore, the US$ equivalent of the local currency component hasbeen calculated on the basis of average official exchange rates in the variousyears that expenditures took place. As the exchange rate was grosslydistorted, the US$ equivalent figures are at best indicative of orders ofmagnitude.

Table 3.01

Estimated and Actual Project Costs(in million of USS)

Appraisal Estimate ActualForeign Local Total Foreign Local Total

Item

Tarkwa-Aboso Scheme 0.8 0.4 1.2 1.2 0.8 2.0Teshic-Nmgua Scheme 1.1 0.5 1.6 0.8 0.7 1.5Veija Scheme 0.9 0.5 1.4 1.0 0.6 1.6Tema Scheme 1.9 0.4 2.3 2.8 1.1 3.9Sefri-Viawso Scheme 2.8 1.6 4.4 3.6 4.0 7.6Kunasi-Kuman Scheme 2.8 1.7 4.5 3.1 2.2 5.3Supply of spares etc. 2.6 - 2.6 3.5 - 3.5Vehicles 1.5 - 1.5 1.3 - 1.3Consultancy 0.3 0.2 0.5 1.1 0.5 1.6Others - - - 0.4 0.8 1.2

14.7 5.3 20.0 18.8 10.7 29.5Contingencies 3.3 3.4 6.7 - - -

Total 18.0 8.7 26.7 18.8 10.7 29.5

Prom the above figures, it can be concluded that:

- the actual foreign cost was slightly (about 4%) above theappraisal estimate;

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- total cost in US$ equivalent exceeded the estimated amount byonly 10%; and

- the local costs in Cedis, in spite of inflation, and even if oneassumes that another 2 or 3 million Cedis should be added tomake them comparable with the estimated figures (as ECG accountsdo not seem to include all assets), could not have been morethan 40% above the amount envisaged in 1976.

3.18 As there were no extraordinary project modifications, it is possibleto compare the appraisal estimates for physical and price contingencies withthe amounts actually paid for variations and escalation. Table 3.02 belowsets forth this comparison.

Table 3.02

Contingency Allowances and their Use(in millions of USS)

Foreign Local Total

Physical contingencies:appraisal estimate 0.6 0.2 0.8

Actual costs of additions orchanges 1.3 1.0 2.3

Price contingencies:appraisal estimate 2.7 3.2 5.9

Actual 2.9 6.0 8.9

Total contingencies (appraisal) 3.3 3.4 6.7

Total incremental cost (actual) 4.2 7.0 11.2

Table 3.01 and 3.02 show that the appraisal estimate of costs was veryaccurate for the foreign exchange component, due mainly to having been basedon bid prices. The difference between estimated and actual Cedi costs isapparently due to the devaluation of that currency during the projectperiod. Allowances for physical contingencies were clearly too low. Thosefor price contingencies were quite adequate for the foreign exchange componentbut too low for the local currency portion. This large difference is notsurprising as neither Government nor the Bank foresaw Ghana's economicdeterioration.

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Disbursements

3.19 Due to procedural difficulties in Ghana, disbursements of both the

loan and the credit started only four months after effectiveness. However,these picked up quickly as funds were needed to reimburse the Bank of Ghana

for the US$ 1.5 million it had advanced for consultants fees and down payments

for equipment which the Bank had agreed to finance retroactively. By the end

of 1980, total drawdowns had nearly reached the level foreseen at appraisal.Later, however, disbursements fell again behind schedule because of the delaysincurred in installations and construction. Annex 2 shows planned and actual

disbursements, and Annex 3 shows the use of credit and loan by categories.

Operations

3.20 As far as ECG'e engineers are already able to judge, the equipmentinstalled under the project operates satisfactorily. However, as indicated

below, many facilities have been tested but are not yet operating under normal

conditions. Indeed, the various schemes' present utilization may be as low as

20% of their capacity.

3.21 The Tarkwa-Aboso scheme, though complete since Narch 1982, has not

yet provided significant service because the installation of the Aboso glassfactory was delayed due to the depressed state of the economy. Later, however,the Aboso Glass Factory was supplied with power during the period VRA curtailedits supplies 5/ to ECG as a consequence of the severe drought that had depletedVolta Lake (Akosombo plant).

3.22 The Teschie scheme was able to supply some new industries but thehousing development was executed at a very slow pace due to the financialdifficulties facing the State Housing Corporation and to the country-wide lackof building materials.

3.23 The Veija scheme is fulfilling its purpose of improving thereliability of operation of the water works. Furthermore, it could soonprovide service to the Weija irrigation project, as the pumping station wasrecently commissioned.

3.24 In the Tema scheme, EGG was to supply energy to two newelectroboilers at the Tema textile factory. However, for most of 1983 thefactory was closed for lack of raw material. Recently, it received materialbut due to the prevailing power curtailment, ECG could not supply the energyrequired and had to suggest to the company to rehabilitite and operate itsoil-fired boilers.

3.25 In 1983, VRA was able to hook up ECG's Sefti-Wiawso-Bibiani scheme.When VRA can provide electricity, ECG may discontinue operation of its dieselplants in Sefwi, Wiawso, and Bibiani. The same applies to the Awaso bauxitemine and the State Gold Minirg Corporation which has built its own 33 kV lineto connect its facilities with the VRA/ECG system. ECG expects that a sawmilland a plywood factory in the area will start operating in 1984. It would seemthat this region, which has a substantial actual and potential export-orientedproduction, is developing in spite of the difficult economic situation.

3.26 The Kumasi-Kumawu scheme has permitted ECG to discontinue operatingits diesel station at Mampong and seems, within the present constraints, to

5/ See ZCG's co-mments, Appendix I, p. 28.

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have brought a considerable improvement in the economic activity and theliving standard in the communities along the main line.

3.27 The vehicles acquired under the project have proved to be of goodquality. ECG engineers state that many are still operational.

3.28 Naintenance of ECG's system, including the new facilities, is notsatisfactory. The utility is often not in a position to carry out preventivemaintenance because it lacks spares and tools. The items purchased under theproject have been used and Government, in 1982, could not provide enoughforeign exchange to permit ECG to import the materials required. Though in..1983Government was able to grant ECG a larger import license, ECG could not utilize thewhole license, because the banks could not establish the necessary Letters ofCredit. 6/

Performance of consultants

3.29 The performance of the consultants employed to assist ECG in design,procurement and implementation of the electrical part of the project wassatisfactory. However, there are diverging views on the responsibility of thelocal civil work consultants for the delays experienced in this part ofconstruction, which had the unfortunate effect of impeding the completion ofseveral of the main items before the economic crisis set in and furtherhampered work.

3.30 The contract between ECG and its consultant stated that ECG would beresponsible for all civil works at substation sites, for accesses, and forservices associated with these items. ECG, of course, also assumed theresponsibility for the standard of design and the quality of these items aswell as for their integration and cocrdination with the electrical works. ECGobviously assumed that the main consultant would provide the information andinstruction to the civil works consultants although the contract did notexplicitly foresee such a service. The consultant in turn, on the basis ofthe contract provision outlined above felt that, beyond holding a watchingbrief and attempting to step up progress by written comment to ECG andunofficial contact with the local consultants, it had no obligation to providefurther services in this matter. Ultimately, but very late, ECG asked itsconsultant to provide the local consultants with the details required and togive them the initial instructions, which the foimer did in March 1978.

3.31 It seems that there was, if not a lack of communication, certainly alack of understanding among the various parties involved. It is also likelythat ECG's coordinating capacity was already affected by the shortage ofstaff. The local consultants also appeared to have been overtaxed by theirjob and affected by ECG's lack of strong guidance.

Performance of Contractors

3.32 G experienced no problems with the equipnent suppliers, as thesedelivered their equipment and materials in good condition and essentially ontime. The erection contractors also performed satisfactorily under the verydifficult circumstances they faced. To begin with, they were confronted withdelays which started at the design stage of the civil works and compoundedlater by those experienced during construction. Thus, erection, except thatof the 33 kV overhead lines, started late and the contractors suffered thefull impact of the economic situation in the country. As a result of the

. various deviations from schedules, the consultants, in order to prevent

6/ See EC's conens, Appendix I, n. 28.

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further slippage and interruption, directed the installation contractors toinstall equipment whenever it was possible. Therefore, it was sometimesexpedient for the electrical contractor to complete minor civil workshimself. Taking into account that payments often came late, it is no smallfeat that all equipment was eventually satisfactorily installed.

3.33 The performance of the lozal contractors was rather poor, but it islikely that under a stronger guidance they might have done better. However,one should take into account that the performance of these firms, which arefinancially weak and fully paid in Cedis, often after long delays, wasaffected by the adverse economic conditions in the country.

3.34 In any event, ECG's decision to make the electrical contractorsresponsible for the associated civil works seems sound. ECG has alreadyaccumulated some experience with this method as it is applying it successfullyin the electrification of the Volta region, financed by KfW.

Performance of the Borrower

3-35 It is evident that, since 1978, ECG was not in a position to providethe strong leadership that project implementation would have required, as theutility was burdened by tasks which it easily could have delegated (e.g. thecoordination of civil and erection work). The reason for this weakness lieswith the institutional shortcomings which, in part, were also responsible forECG's poor operational performance.

4. OPERATING PERFORMANCE

4.01 ECG's expected operating performance waa not achieved. Between 1977and 1981:

- instead of growing by the projected 9% per year, sales grew atless than 5%. In 1982 they fell to 928 GWh, the lowest valuesince 1975;

- instead of improving, the reliability of ECG's system diminishedsubstantially; and

- instead of improving, the financial situation of ECGdeteriorated.

4.02 The main reason for ECG's operational deterioration was the poorstate of Ghana's economy. In the period 1977-1981, despite residential salesgrowth of about 8% per year, total energy sales stayed about constant until1Sr81 as industrial and commercial consumption fell by about 15%. In 1982 andapparently also in 1983, a reduction of consumption in all categories tookplace as in addition to the economic problems the drought forced VRA tocurtail energy production and thus the supply to ECG. ECG, in turn, had to"iscontinue periodically service to its customers. The situation may improveat the earliest in late 1984 if the year's ixflows to the Akosombo reservoirare sufficiently abundant to bring the reservoir level, which in January 1984was about 4 a below the lower rule curve, above the curve again. Annex 4compares planned and actual development of the main operationalcharacteristics.

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4.03 The deterioration of system reliability also contributed to theshortfall of sales. Already in 1979, operation of ECG's distribution system,particularly in the Accra-Tema, Kumasi, and Takoradi areas, was reaching acritical level with frequent outages and consequent disruption of industrialproduction, as well as of commercial and residential activities. Since then,the situation has further deteriorated due to the combined effects of thefollowing main factors:

- lack of foreign exchange allowed ECG to import only smallquantities of spare parts and materials beyond those included inthe project; and

- deficient quality and quantity of maintenance work due to poormanagement and lack of adequately trained and motivated staff.

17

4.04 ECG statistics indicate that since 1977 the energy unaccounted forvaried between 9% and 15%, which compares rather poorly with the 10%appraisal target. Thesz figures, however, should be used with caution, asthe relialility of the statistics is doubtful.

4.05 Operations have further been hampered by recurrent strikes andshortages of fuel and lubricants, which at times forced ECG to stop operationof its generating plants in isolated systems.

4.06 During negotiations, ECG committed itself to making surplus energygenerated by VRA available on an interruptible basis for steam generation inindustries. Moreover, ECG was to replace the low tariff conceded to variousclients for relatively large firm power contracts with the standard industrialtariff, whenever such contracts expired. In late 1977, the utility took stepsto meet these commitments. Unfortunately, the initial measures were delayedas they had to be clarified and adjusted. By the time ECG was ready forimplementation, VRA's curtailments of energy generation forced ECG to informthe industries using boilers that it could not hold up basic supply, let aloneprovide interruptible excess energy.

5. FINANCIAL PERFORMANCE

5.01 The years 1977-1982, during which ECG carried out its third powerproject under Bank/IDA financing, were characterized by a rapid deteriorationof Ghana's economy with increasing inflation, devaluation of the currency anda sharp overvaluation of the Cedi. Therefore, the Cedi figures in ECG'sfinancial statements (see Annexes 8, 9, and 10) show little resemblance withthose estimated in 1976, when the project was appraised. Furthermore, thedistortion of the exchange rate takes much meaning away from US$ equivalentsof Cedi amounts. Hence, the following analysis concentrates on the estimatedand actual development of the main financial indicators bearing in mind thatthe uncertainty of the values corresponding to the actual financial figuresalso reduces the validity of the conclusions drawn from the indicators derivedfrom such figures.

5.02 Table 5.01 below, which should be considered under the limitationsindicated above, compares the actual development of sales and of the mainfinancial indicators with that expected at appraisal time.

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Table 5.01

Actual and Estimated Financial Indicators

1977 1979 1981 1982

Sales in GWh - actual 967 972 1005 928- 1976 estimate 1096 1403 1550 1698

Revenue per kWh sold (0) - actual 0.041 0.082 0.245 0.269- 1976 estimate 0.038 0.042 0.055 0.063

Rate of returnon revalued rate base (%) - actual 1.1 3.1 16.7 10.6

- 1976 estimate 10 8 8 8- covenanted (adjusted 7.8 6.2 6.2 6.2

after actualrevaluation)

Operating ratio (%) - actual 96 94 82 86- 1976 estimate 87 91 92 94

Current ratio (M) - actual 2.2 1.6 1.4 1.0- 1976 estimate 3.8 4.3 4.5 4.4

Debt/equity ratio - actual 36/64 71/29 40/60 32/68- 1976 estimate 34/66 28/72 27/73 26/74

Receivables as a % - actual 65 70 59 62of power revenues - 1976 estimate 24 26 25 25

Internal contribution to - actual 61 2 114 98investment () - 1976 estimate 23 137 45 10

These figures, together with those of the Annexes 8, 9, and 10, illustrate theworsening trend of ECG's finances, which, in the framework of general economicdeterioration, was due to the following more specific main reasons:

- Government granted tariff adjustments (e.g. 230% betweei marchand July 81 alone) but often late and not in imounts sufficientto compensate fully for the increases in costs. It also happenedthat VRA could increase its rates far earlier and in largeramounts than ECG. This lag was due to Government's ability toincrease VRA's tariffs without referring to Parliament.Deferrals of Government's approval of ECG's tariff increases wereapparently due to its reluctance to provide them to such aninefficiently run utility.

- Although ECG revalued its assets annually in an environment ofgalloping inflation, the valuation of the foreign debt at theofficial exchange rates -- which produced an overvalued Cedi --resulted in substantial distortions (e.g. an artificially lowerdebt/equity ratio).

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5.03 The rate covenant (Section 5.05 of Loan Agreement) essentiallycalled for a return of at least 8% on net fixed assets in operation, adjustedto take into account the results of the revaluation of assets ECG was to carryout in 1977. At appraisal, net fixed assets at the end of 1976 were estimatedat about 0 69 million. If, following the revaluation, the value of ECG's netfixed assets exceeded this amount, the covenant required a proportionatereduction in the minimum rate of return. By December 1977, i.e. about sixmonths after the date foreseen in the Loan Agreement, ECG determined the valueof its assets as of December 31, 1976, at about 0 96 million. Therefore, thelower limit for the rate of return became 6.2%. ECG's actual rate of returnwas far below this until 1981. In 1980 ECG was heavily in deficit andrecovered in 1981 and 1982 sufficiently to produce a rate of return on netfixed assets substantially above the required 6.2%. However, its relativelyhigh cash generation in 1981/1982 was needed to avoid a financial breakdown ofthe corporation, as during the period 1977-79 revenues had barely met operatingcosts including depreciation, and in 1980 not even cash operating costs. Thus,for long periods ECG was not in a position to pay VRA for energy purchased andto meet its debt service obligations. In this desperate situation, the higher1981-82 revenues allowed to improve somewhat ECG's current ratio frc,i a low of0.9 in 1980 to 1.0 in 1982, which is still far below the 4.4 estimated atappraisal time.

5.04 The current illiquid position is due to ECG's inability to collect itsbills promptly. Throughout the project period, receivables were always inexcess of 7 months' revenues, which compares poorly with the maximm of threemonths' revenues called for in Section 5.09 of Loan Agreement.

5.05 The debt/equity ratio behaved erratically.. In 1978, debt increasedas a consequence of project requirements and a first devaluation of the Cedi.The ratio also increased as retained earnings were depleted because ofinsufficient revenues. By 1982 it was back at about 30/70, i.e. as forecast,as a consequence of improved earnings, increased asset revaluation reserve andapproximately constant debt, the latter, of course, largely a consequence of alow level of investment and valuation of foreign debt at the official exchangerate.

5.06 The appraisal team had forecast that net internal cash generation overthe project period would finance about 50% of ECG's construction program.Actually, it covered 57% of investment but on a reduced construction program.

6. INSTITUTIONAL PERFORANCE

Management

6.01 At the time of appraisal, ECG's management seemed to be performingmoderately well, though numerous improvements were necessary- During projectimplementation, the quality of management seriously deteriorated and ECG didnot or could not implement many of the improvements agreed duringnegotiations. The predominant reason for this was ECG' s inadequate pay, whichis even lower than that of VRA, and impedes the recruitment of suitablyexperienced staff. Daring the past eight years the situation has worsened asGovernment remains unwilling to make ECG's pay scales competitive with those ofthe private sector, allegedly because such a step would invite the latter toraise further its own salary scales. Low salaries together with a pervasivedemoralization and lack of motivation, with even high level employees havingconstantly to worry about finding the essentials for subsistence (food,gasoline, etc), has reduced the quality of ECG's management to crisis level.Most top positions are filled by people who are not officially appointed butare acting incumbents. This may reflect the fact that many of the managers areconsidered inadequate, and often rightly so, for the task they have beenassigned. This state of affairs further discourages those who are capable offilling senior positions but whose capability is not recognized.

6.02 ECG' s nren-compliance with the specific covenants referring tomanagement highlights the general trend of events. ECG should have appointed aChief Engineer in July, 1977. As the utility did not comply until late 1977,the Bank agreed to the appointment of the Acting Chief Engineer on thecondition that ECG hire an expatriate to support the Managing Director. Theutility was not able to do this, mainly because of a growing lack of foreignexchange. In the meantime, upon the General Manager's retirement, the ChiefEngineer has become Acting General Manager and a new Acting Chief Engineer wasappointed. During negotiations ECG had also agreed to appoint, by July 1977,two highly qualified accountants who would lead the teams responsible forfinancial accounts, budgeting, and stores. The Bank agreed to postpone thedeadline first to January 1, 1978, then to July 1, 1978. In 1979, ECG stillhad not found adequate personnel; even worse, both the Chief Accountant and hisDeputy left ECG with no experienced successors in sight for either position.The lack of qualified staff also forced ECG's management to subordinate theCommercial Engineer, i.e. the head of the commercial division, to the ChiefEngineer. Given the importance of the commercial function, this measure isonly understandable as a judgement on the calibre of the man in charge.

Personnel

6.o In the course of project implementation, the staff first increasedfrom 5,200 in 1976 to 6,200 in 1979 and then diminished to 5,140 in 1982.Sales per employee were about 160 MWH in 1975 and thereafter varied between 175and 215 MWh. Though these figures indicate that a slight improvement tookplace, they form no reasonable basis for a positive judgement as thestatistical data is uncertain and the decrease in staff is dae less to aconscious effort to reduce personnel than to ECG' s incapacity to fillvacancies, in particular in posts requiring reasonably trained people. Duringnegotiations, ECG had agreed that (i) with the assistance of experts it woulddraw up by January 1, 1978, a staffing plan, (ii) thereafter implement the planas agreed with the Bank, and (iii) until such agreement had taken place, not toincrease staff. To determine the staffing plan, ECG used the services of the

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Management Development and Productivity Institute, sponsored by Government,UNDP, and ILO, which studied ECG's manpower and training needs and submittedits suggestions in the second quarter of 1979, i.e. some 16 months late.However, no further action resulted until 1980, when the Bank hired a consultantto study ECG's problems. Slightly later, Government appointed a technicalcommittee to inquire into these problems. The conclusions of the Bank'sconsultant and the committee coincided; however the consultant recommended amore massive technical assistance than the committtee. The consultant's finalreport is one of the basis used for the planned next IDA operation with ECG.

Training

6.04 At the time of appraisal ECG needed to assess its trainingrequirements and to improve and expand its existing programs. Duringnegotiations, it agreed to survey its needs by July 1, 1977, and to designate asenior staff member responsible for training. Ultimately, Government asked thetechnical committee which analyzed ECG's staffing problems (para. 6.03) to alsosubmit proposals concerning ECG's training. Implementation of these proposalsis planned in the context of the next IDA operation as, at this stage, ECG isnot in a position to finance such a program. During the implementation of theThird Project, ECG's personnel manager succeeded with the extremely limitedmanpower at his disposal in training up to 100 junior staff and up to 22 seniorstaff per year locally and up to 5 persons per year overseas, but these effortsremained far short of the goal of formalizing manpower training.

Covenants

6.05 Annex 5 sets forth the principal covenants in the loan and creditdocuments and the degree to which they were followed. This Annex shows thatECG did not fulfill practically any of the financial covenants and that therewas considerable delay in fulfilling the organizational covenants, if at all.

7. PROJECT JUSTIFICATION

The Power Market

7.01 Annex 4 compares actual and appraisal forecast figures forgeneration, sales, and peak load. It illustrates the effect of the economiccrisis, which the appraisal did not anticipate. Indeed, instead of growing asexpected in 1976 at about 9% annually, sales were slightly above those of 1976.The differences were mainly due to ECG's capability to supply (para. 4.01).The 1982 figures already reflected the curtailment of VRA's supply related tothe excessive drawdown of the Volta Lake. Thus in 1981 (the last year of theappraisal estimate), ECG's actual sales amounted to only 58% of the estimated

values. As it is not possible to assume that in the short or medium term theabove shortfall will be compensated, it is evident that the economic indicatorsof the program after its implementation are substantially below the levels

expected at appraisal.

7.02 ECG's current sales forecast assumes that, after a drought relateddramatic drop from about 800 GWh in 1983 to 520 GWh expe,-ed in 1984, both therun-off of the Volta river and the economic situation will permit a moderaterecovery back to the 1977-80 level. ECG hopes to reach this level by 1987 andwith a modest 5% per year increase thereafter until at least 1990. However, in

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view of the uncertainty that the current drought has brought about, theeconomic reevaluation of the project assumes that in future VRA will not beable to provide significant amounts of interruptible energy.

Project and Demand

7.03 At appraisal, the project items were deemed necessary to meet theexpected increase in demand. Although the latter did not materialize asforecast, the project items are needed to meet the same type of loads asforeseen in the appraisal as the load may build up in the second half of the80's, or 7 to 10 years later than envisaged in 1976.

Least Cost Solution

7.04 The executed subprojects essentially consist of subtransmission anddistribution equipment combined in a way that they represent the least cost wayto meet the demand. Had the load forecast been accurate the works could havebeen deferred for a few years or executed at a slower pace. Nevertheless, theywould still constitute the least cost way to meet the demand.

Return on Investment

7.05 The return on investment was estimated as the discount rate thatequates the present values of the benefits and costs associated with the1977-1982 ECG investment program. Benefits were measured by the forecastrevenues from the sales of electricity at the average retail level, using thetariff in effect on July 1, 1984 (see Annex 6). The return for the program isabout 36% which compares quite favorably with the opportunity cost of capitalfor Ghana, estimated to be between 15% and 20%.

Project Achievements

7.06 This report deals in various places with specific projectobjectives. They can be summarized as follows:

- The project has provided ECG and Ghana with several facilitieswhich, if properly maintained, will ease the starting phase of aneconomic recovery by serving industries, and in particularforeign exchange earning activities.

- The provision of material and equipment for operation andmaintenance has prevented ECG from a total operational collapse.

- The EdF study has provided a basis for a reasonable tariffstructure by introducing the concept of marginal cost pricing.Now that the principle is set, the specific quantitativeproposals will have to be adjusted to take into accountdevelopments which the original study did not anticipate.

- Bank involvement, though it could not prevent the deteriorationof ECG's operation and management, was instrumental in limitingthe negative developments and in preparing for a recovery that isthe main purpose of the planned next operation.

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8. BANK PERFORMANCE

Assessment of Borrower' s Capability

8.01 It is evident that the Bank's evaluation of ECG's capability to carryout the project was rather optimistic. One of the main reasons for thisoptimism was the appointment in early 1975 of the former Director ofEngineering of TRA to the position of Managing Director of ECG. The newofficer took project preparation, which had been lacking, energetically in handand thus allowed the Bank to appraise the project in 1976, as planned in 1974.

8.02 Unfortunately, ECG was never able to hire the personnel required tostrengthen its management and administration; on the contrary, it soon startedto lose key people with nobody in sight to replace them. The Bank had from thestart seen that one of the main issues was ECG's salary scale which was (andremains) intimately linked to that of public service, and was far too low topermit the successful recruitment of capable Ghanaian personnel. As the Bankdid not see any possibility to sever this link, it aimed at the solution ofindividual problems by agreeing on covenants which foresaw the filling of keypositions, the preparation of a staffing plan, and the definition andimplementation of a training program, all measures that ultimately could notsucceed without a change in salary policy. From hindsight, the question iswhether a limited but perhaps more realistic objective, such as putting ECG inthe top category of Government-owned companies, would not have been worthpursuing. It would certainly not have prevented, but it may have helped limitthe deterioration of ECG' s management.

8.03 An early agreement on a technical assistance package providing forexpatriate managers in some key positions, or on a kind of sponsorship(twinning) between a utility in a developing country and the Borrower, mighthave helped to limit the derioration in ECG.

8.04 Also with hindsight, but on a more specific level, tha Bank shouldhave forcefully intervened in the discussion about the responsibility for thedesign and supervision of civil works and tried to prevent ECG from takingresponsibilities which it would not be able to discharge successfully.

Supervision

8.05 Annex 7 gives a schedule of the Bank's supervision missions. Theaverage interval between such missions was 10 months and over the five-yearproject implementation 3 engineers and 3 financial analysts were successivelyresponsible for supervision, which is not unusual. While the frequency mighthave been intensified, it is unlikely that more intensive supervision wouldhave provided the basis for any material improvement in project-relatedperformance as the problems encountered derived mainly from fundamentalproblems with Government's management of its institutions and the economy.

Working Relationship

8.06 Relations between Bank staff and Government and ECG officials were atall times good, even when ECG's handling of the special contracts with someindustries - which in part was based on ECG' s misunderstanding - caused theaffected companies to express some anger (para. 4.06).

- 90 -

9. CONCLUSIONS

9.01 The project achieved its main objective which was the installation ofthe facilities; it did not succeed in helping improve management andoperations. In fact, both EOG's conduct of business and the reliability of itselectricity supply greatly deteriorated. The project was nevertheless partlysuccessful in providing facilities important for the future development of thecountry though Ghana will reap the full benefit of these installations someseven years later than expected at the time the Bank appraised the project.The reasons for the above shortcomings were mostly beyond ECG's and the Bank'scontrol, as they were largely determined by political and economic developmentsin the country which were, in part, related to changes in the internationalenvironment.

9.02 It was unrealistic from the Bank's point of view not to try to obtainassurances from Government that it would allow ECG to improve its employmentconditions outside the framework of civil service and the complex of the otherparastatal companies and then to have agreed on measures that ECG could not beexpected to implement without a revision of its salary scales. At the time ofappraisal it was certainly not possible to predict the depth of the economiccrisis that was to come. Nevertheless, the economy was already struggling andthe prospects were not good, in particular one could foresee that theavailability of foreign exchange for ECG's operations would at best beprecarious. Therefore, it would seem that the Bank could have been moredecisive in helping ECG prepare contingency plans. The question is whether, assoon as it became evident that the expected growth in consumption would notmaterialize in the short term, it should have redirected the utilization ofequipment and materials to maintain existing facilities rather than carry outthe extensions in full. As the actual developments showed, this wnuld havebeen possible to some extent. Indeed, ECG used some of the maintenancematerial and of the spare equipment for extensions and vice versa employedequipment earmarked for project items for emergency repairs.

9.03 The main lesson the Bank should draw from this project concerns itsflexibility in responding to unexpected developments. The Bank should notreadily agree to modify its projects but, nevertheless, it might better servethe interests of the country and of the specific project goals by supporting,if not inducing, project changes when these might contribute to improvedproject efficiency or at least to cut financial losses. It seems that in thisproject some such changes might have been possible.

Annex 1-91 - Page 1 of 2

GHANA

ELECTRICITY CORPORATION OF GHANA

THIRD POWER DISTRIBUTION PROJECT

Loan 1381-G/Credit 689-GR

List of Foreign Suppliers and Contractors

Description of Plant and Country otEquipment Origin

Supply and delivery of 33 kV England

cables and accessories

Supply and delivery of 11 k England

cables and accessories

Supply and delivery of MV England

cables, accessories andfeeder pillars

Supply and delivery of England

pilot cables and accessories

Installation of cables and Ghana

jointing work

ionstruction of 33 kV England

overhead lines

Supply and delivery of England

insulators

Supply and delivery of Indiainsulators

Supply and delivery of England

overhead line fittings

Supply of overhead line Finland

conductors

Supply, delivery and erec- England

tion of 11 kV switchgear

-92- Annex IPage 2 of 2

Description of Plant and Country ofEquipment Origin

Supply and delivery of Yugoslavia33 kV switchgear

Supply, delivery and Yugoslaviaerection of connectionsto 33 kV/11 kV transformers

Modification of existing Yugoslaviaswitchgear

Modification to existing West Germanyswitchgear

Supply, delivery and Yugoslaviaerection of 33 kVswitchgear in Kumasi

Supply and delivery of11 kV fuse switch andisolator units

Supply and delivery and West Germanyerection of cooling fansstation E Tema

Modification to existing Englandswitchgear

Supply, delivery and Scotlanderection of 33/11/6.6 kVtransformers

Supply and delivery of Englandcars, trucks and lorries

Supply and delivery of Englandfork lift trucks

Supply and delivery of Canadachain link fencing andancillary equipment

Annex 2

GRANA

ELECTRICITY CORPORATION OF GHANA

THIRD POWER POWER DISTRIBUTION PROJECT

Loan 1381-GICredit 689-GE

Disbursements

Cumulative disbursements by end ofsemester of Bank FY in million US$

Appraisal ActualEstimate Credit Loan

1st semester 1977 6.1

2nd semester 1977 10.6

1st semester 1978 13.1 6.3

2nd semester 1978 15.1 9.0 2.8

1st semester 1979 16.6 - 3.6

2nd semester 1979 17.1 5.3

1st semester 1980 18.0 6.4

2nd semester 1980 7.2

1st semester 1981 7.9

2nd semester 1981 8.4

1st semester 1982 8.5

2nd semester 1982 8.9

2nd semester 1982* 9.0

*) drawdown completed July 1982

- 94 -

Annex 3page 1 of 2 pages

GRANA: LOAN 1381 AlD CREDIT 689ECG: THIRD POWER PROJECT

CORPLETION REPORT

Allocation of Proceeds of Loan

Credit 689-GH

The expectd and actual amounts disbursed under Schedule 1 of the DevelopmentCredit Agreement compare as follows:

BS1 MATE US$ ACTUAL US$All Parts except A-5 & D

Category 1 Equipment, materiels, 4,100,000-- 8,817,463.37supplies, spare partsand vehicles

Category 2 Erection of lines and 300,000.-- -substations, andrelated works

Category 3 Consultants' Services 100,000.-- 156,721.62

Part A-5

Category Equipment, materiels, 2,900,000.-- 25,815-01supplies, spare parts andvehicles.Erection of linessubstations, andrelated works

Part D

Category 5 Consultants Services 100,000.--

Category 6 Unallocated 1 ,500,000.-- -9,000,000.-- 9,000,000

- 95- Annez 3page 2 of 2 pages

Loan 1381-GH

Disbursements under the above Loan Account were completed on July 7, 1982.

The Bank by its cable dated August 10, 1982, informed the Borrower that the

undisbursed balance of US$ 1,018.45 is cancelled effective August 10, 1982.

Category/Description Original Amount Amount DisbursedusS usS

I - Equipment, materials, 6,700,000.-- 8,033,724.75supplies, spare parts,and vehicles

II - Erection of lines and 500,000.-- -substations andrelated works

III - Consultants's Services 150,000.-- 965,256.80

IV - Unallocatd 1,650,00.-- n.a.

TOTAL 9,000,000.-- 8,998,981.55

Amount cancelled 8/10/82 1,018.45

Total disbursed 8,998,981.55 8,998,9981.55

-96- Annex 4

GHANA

ELECTRICITY CORPORATION OF GHANA

THIRD POWER DISTRIBUTION PROJECT

Loan 1381-Gi/Credit 689-GH

Operational Characteristics

1976 1977 1978 1979 1980 1981 1982

(1) Energy purchasedand generated

- actual GWh 1029 1101 1118 1086 1116 1151 1001

(2) Energy sold

- 1976 estimate GWh 1045 1218 1419 1576 1633 1740

- actual GWh 918 967 1019 972 952 1005 928

(3) = (1) - (2) losses

- actual GWh 119 118 99 114 164 146 93

- in Z of (1) 12 11 9 11 15 13 9

(4) non coincidentalpeak load

- 1976 estimate MW 183 201 237 272 291 308- actual MW 181 191 192 197 201 209 180

(5) number of employees 5160 5860 6100 6190 5830 5350 5140

(6) daily rated workers % of (5) 46 n.a. n.a. n.a. 33 36 36

(7) sales per employee MWh 178 165 167 157 163 189 177

1/ These figures do not appear in the projections.

-97- Annex 5Page 1 of 2

GRANA

ELECTRICITY CORPORATION OF GHANA

THIRD POWER DISTRIBUTION PROJECT

Loan 1381-CH/Credit 689-GM

Major Covenants - Status of Compliance

Loan AgreementSection Description Status

3.02 Employ engineering consultants - done

4.01 (b) By July 1/77 - appoint Chief Engineer - done (para.6.02)- employ two qualified - not fulfilled, furthermore

accountants position of Chief Accountantand Deputy Chief Accountantvacant (para. 6.02)

4.01 (c) By January 1/78 - prepare manpower - prepared by local consultantrequirement plan 16 months late (ysra. 6.03)

4.01 (d) By July 1/77 - survey feasibility of - done by Government appointedupgrading operating efficiency committee (para. 6.04)through training, and- appoint senior training officer - done in November 1979 (personnel

manager, para. 6.04)

4.04 From January 1/78 ensure customers - attempt to comply led towith electro-boilers supplied only misunderstandings; after 1979 noby surplus hydro power on surplus hydropowerinterruptible basis

5.02 Audited accounts to Bank not later - not fulfilled (para. 5.05)than 6 months after December 31(closing date)

5.04 By June 30/77 revalue fixed assets - not fulfilledas of December 31/76; thereafter,revalue fixed assets each year

5.05 (a) Take action to ensure 6.2% return - not fulfilled, several(the 8% modified by revaluation) on insufficient tariff increasesnet fixed assets in service plus %para. 5.10)5% in lieu of working capitalallowance

-98- Annex 5Page 2 of 2

Loan AgreementSection Description Status

5.05 (b) By July 31 each year basis financial - not fulfilledprojections- review adequacy of tariffs and- provide Bank with results of review

5.06 Except as Bank agrees, Borrover not - not met; Bank has approvedto incur debt unless current net incurrence of new debtrevenues cover maximum future debtservice 1.5 times

5.07 Receivables less than or equal to - not met; equivalent to aboutthree months of billing seven months in average

5.08 (a) Apply uniform rates to industrial - donecustomers, except existing contracts

5.08 (b) Not extend existing contracts - done

5.10 By December 31/77 - Employ financial - not doneexperts to assist in revaluation ofinventories and review inventorymanagement sys tem;- Inform Bank of results and proposedaction

5.11 Not undertake construction (other - donethan Project and Rural Electrifica-tion) with annual expenditure over$2 million without Bank concurrence

GuaranteeSection No. Description Status

2.02 Government to provide funds as - donerequired for project expenditures

3.03 Government to allow ECG to increase - doDe but ininsufficient amounts

tariffs when VRA iucreases rate toECG

Credit

3.01 By June 30/78 carry out tariff study - done with 20 months delaywith assistance of consultants

-99 - Annex 6

GHANA

ELECTRICITY CORPORATION OF GRAIL

THIRD POVER DISTRIBUTION PRDJECT

Cost and Benefit Streams - Return on Investment

Operation andYear Investments Naintenance Total Costs

I. Costs (in million Cedis)

1 1977 12.2 12.22 1978 25.1 25.13 1979 9.3 9.34 1980 10.2 10.25 1981 19.9 19.96 1982 18.7 18.77-25 - 1.00 1.0

Total Sales Increase in Total Sales tbrough Project Benefits a/

(GWh) Sales over 1981 (GWh) (GWh) (Cedis I 10U)

II. Benefits

1 1982 928 (76)2 1983 786 (218) - -3 1984- 484 (520) - -4 1985 80 (196) - -5 1986 860 (144) -6 1987 925 (79)7 1988 990 (14) -8 1989 1059 55 55 255.49 1990 1133 129 129 255.410 1991 1212 208 208 411.811 1992 1297 293 293 580.112 1993 1388 384 384 760-313 1994 1485 481 481 952.414 1995 1598 585 585 1158.315 1996 1700 696 696 1378.116 1997 1819 815 815 1613.717 1998 1946 942 942 1865.218-25 1999 2083 942 942 1865.0

Rate of Return = 36%

a/ At average retail tariff of Cedis 1.98/kWh, effective on July 1, 1984.

100 Annex 7

GHANA

ELECTRICITY CORPORATION OF GHANA

THIRD POWER DISTRIBUTION PROJECT

Loan 1381-GH/Credit 689-GH

Schedule of Supervision Missions

Date of Duration Mission staff No of months sinceMission in days last mission

6/77 5 Engineer No. 1 -

12/77 7 Engineer No. 1 6

Fin. An. No. 1

2/79 8 Engineer No. 1 14

10/79 8 Engineer No. 2 8

Fin. An. No. 2

10/80 7 Engineer No. 3 11

Fin. An. No. 3

7/81 10 Engineer No. 3 9

Fin. An. No. 3

EOECTRICITY CORPORATION 07 OHAIA

THIRD POVER DISTRIBUTION PROJECT

Loan 1281-0y/CRBDIT 689-011

Inoome Statement(million U)

1977 1970 179 1980 1981 19a

Act. Foreoait Act. Foreoast a, o t o recast Act. forecast Act, Forecas

Sales in GVh 967 1096 1019 1277 972 1403 952 1465 1005 1550 928 1698

Revenue per kWh (g) 0.041 0.038 0.053 0.039 0.082 0.042 0.095 0.048 0.245 0.055 0.269 0.063

Revenuess

Energy Revenue 39.7 41.6 54.0 50.1 80.0 58.6 90.7 70.7 245*8 85.2 250.0 107.5

Other Revenue 4.1 - 1.5 - 1.5 - 1.5 - 2.6 - 1.5 -

Total 43.8 41.6 55.5 50.1 81.6 58.6 92.2 .70.7 248.4 85.2 251.5 107.5

Operating Costs:

Purchases from VRA 13.8 14.2 18.6 16.8 24.1 19.2 40.6 20.4 85.4 21.5 62.2 23.4

Other Costa 20.8 16.1 26.1 21.8 37.1 27.1 53.1 35.8 93.1 46.7 119.4 66.1

Depreoiation 7.5 5.8 10.7 6.5 15.3 7.2 20.6 8.6 26.0 10.2 35.2 11.3

Total 42.1 36.1 55.4 45.1 76.5 53*5 122.3 64.8 204.9 78*4 216.8 100.8

Operating Income 1.7 5.5 0.1 5.0 5.1 5.1 (30.1) 5.9 43.9 6.9 34.7 6.7

Interest charged to operation. 2.2 1.5 4.6 1.3 8.4 1.1 9.5 1.0 7.6 2.2 9.5 2.0

Non-operating expenses (0.9) (0.5) 8,1 (0.5) 8.3 (0.5) 7.4 (0.5) 7.4 (0.5) 7.4 (0.s)

Net Inoose 0.4 4.5 (12.8) 4.2 (11.7) 4.4 (47.0) 5.3 28.9 5.0 17.8 5.1

Operating ratio (M) 96 87 100 90 94 91 133 92 82 92 66 94

Rate of Return on rate base (%) 1.1 10 0 8 3.1 8 (14.5) 8 16.7 8 10.6 8

March 1984

GHANA

BLECTRIOITY CORPORATION OF GHANA

THIRD POWER DISTRIBUTION PROJECT

Loan 1381-OH/Oredit 689-01

lalance Sheet

(Million 9)

1977T~reas 1978 1979. 1980 1981 18

Acti recast Actual Forecast AotuaT Feoast AotuaT Forecast Aotua"orecast Aotus -orocastAssets

Fixed AsetesPlant in operation 173.3 123.1 238,3 137.1 333.6 152.7 456.7 192.4 620.6 214.1 837.8 236.2Leae aooumul. depreciation 66.6 _2.3 10044. A 4. 78.9 24.2 '96.2 32.6 7117. .4 j1 12Net plant in operation 100T 70.7 137.9 72.5 183.7 73.8 232.5 96.2 293.0 97.1 360.4 97.0

Work in Progress 16.5 15.0 55.0 21.7 54.8 252 61.7 12.6 75.3 27.3 94.0 44.8

Investments 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 015 0.5 0.5 0.5

Current assetesCash 6.4 9.1 1.8 9.6 1.9 13.0 0.3 14.2 5.0 14.5 7.0 10.3Receivables 25.7 10.4 31.5 13.4 56.1 15.4 80.2 18.4 144.8 21.4 155.0 27.4Inventories 90 8.0 12,0 80 3 8. 0 8.0 29.8 8.0 45.0 8.0Total current asset. -7. T . 73.3 T t IbT.T . T 207.0 T5.7

Total asset. 164.8 113.7 238.7 125.7 312.3 135,8 398.2 149.9 548.4 168.8 661.9 187.9

Liabilities

Equity:Government equity 17.3 17.3 17.3 17.3 17.3 17.3 17.3 17.3 17.3 17.3 17.3 17.3Asset revaluation reserve 45.9 33.3 16*9 41.2 55.6 49.1 120.3 57.2 202.4 67.8 275.3 78.5Retained earnings 12.5 3.0 0 j52 JU.& 1. 6 (§8.9) . (3. 0) 2 12a 27.1

Total equity 75.7 63.6 33.9 73.6 61.0 84.0 78.7 95.4 189.7 109.0 280.4 122.8

Long term debt 43.0 32.3 134.4 33.7 151.6 32.8 147.6 34.8 128*7 39.4 131.0 44.0

Customer contributions 27.3 10.5 3901 10.5 54.1 10.6 76.4 10.6 106.1 10.7 145.8 10.7

Current liabilities 18.7 .1 31.3 7.9 4 8.5 115.9 _2. 123.9 a I- C jA _-

Total liabilities 164.8 113.7 238.7 125.7 312.4 135.8 398.2 149.9 548.4 160.8 661.9 187.9

Current ratio 2.2 3.8 1.4 3.9 1.6 4.3 0.9 4.5 14 4.5 2.0 4.4

Debt/Equity ratio 36/64 34/66 80/20 31/69 71/29 28/72 65/35 27/73 40/60 27/73 32/68 26/74

Receivables as % of revenues 65 24 50 26 70 26 88 25 59 25 62 25

March 1984

GHANA,

RLECTRICITY CORPORATION OF GHANA

THIRD POWER DISTRIBUTION PROJECT

Loan 1381-GH/Credit 689-OH

Sourcen and Applicatione of Funds(Million 1)

1977 1978 1979 1980 1981 V82Actual Forecast Actual Forecast Aotual Forecast Actual Forecast Actual Forecast Actual Forecast

Sources

Internal cash generation:Operating Income 1.7 5.5 0.1 5.0 5.1 5.1 (30.1) 5.9 43.9 6.8 34.7 6.7Depreciation 7.5 5.8 10.7 6.5 15.3 7.2 20.6 8.6 26.0 10.2 35.2 11.3Consumer contributions 3.7 2 2.2 0.1 0.1 2.9 0.1 - 0.1 2 0.1

Gross internal generation 12.9 13.6 13.1 11.6 22.1 12.4 (6.6) 14.6 73.2 17.1 72.4 18.1Lees: - debt service 2.2 6.5 4.6 4.6 8.4 4.7 9.5 4.9 7.6 5.4 9.5 7.0

- dividends - 2.0 - 2.0 - 2.0 - 2.0 - 2.0 - 2.0- increases in non cash

working capital 3.2 1.7 (3.7 2.6 13.6 .0 (18.1)W 4 .. j ! w

Net cash generation 7.5 3-4 12.2 2.4 0.2 3.7 2.0 4.4 22.6 6.5 18.3 1.7

Borrowings 7.3 11.0 9.5 3.6 8.0 1.3 3.9 4.2 2.0 7.0 2.4 8.0

Other sources (O0) 0.5 (1.0) 0.5 1.1 0.5 2.7 0.5 - 0.5 - 0.5

Total sources 14.7 14.9 20.7 6.5 9.3 5.5 8.6 9.1 24.6 14.0 20.7 10.2

Applicationst

Construction 12.2 15.0 25.1 6.1 9.3 2.7 10.2 8.8 19.9 14.4 18.7 16.4Increases in cash balance 2.5 (2.1j k.4) O U[ - 2.8 16 .3 4.7 (0.i) 2.0 C.2

Total applications 14.7 14.9 20.7 6.5 9.3 5.5 8.6 9.1 24.6 14.0 20.7 10.2

Internal contribution toinvestment () 61 23 49 39 2 137 20 50 114 45 98 10

March 1984