Ghana - Fifth Power Project

Document of THE WORLD BANK FOR OFFICIAL USE ONLY REPORT No 16735 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF GHANA FIFTH POWER PROJECT (Credit 2061-GH) JUNE 19, 1997 Water, Urban and Energy 2 Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Cedi US$ Cedi 1991 - 368 Cedi 1992 437 Cedi 1993 - 649 Cedi 1994 = 957 Cedi 1995 = 1200 Cedi 1996 = 1637 Cedi 1997 = 2000 Cedi (estimate) WEIGHTS AND MEASURES I meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 mile (mi.) 1 cubic meter (mr) = 262 US gallon 1 liter per capita per day (I cd) = 0..'6 gallon per capita/day ABBREVIATIONS AND AC'RONYMS CFD Caisse Francaise de Developpement CDC Commonwealth Development Corporation ECG Electricity Corporation of Ghana ESB Electricity Supply Board of Ireland GOG Government of Ghana NEP National Electrification Project VRA Volta River Authority FISCAL YEAR January 1- December 31 Vice President: .Jean-Louis Sarbib, AFR Country Director: Serge Michailof, AFCIO Technical Manager: Max Pulgar-Vidal, AFTU2 Task Team Leader: Mark Segal, AFTU2  FOR OFFICIAL USE ONLY TABLE OF CONTENTS Pages Preface PROPOSED OPERATIONAL PLAN ............................................................. ii EVALUATION SUMMARY .............................................................. ii PART 1: PROJECT IMPLEMENTATION ASSESSMENT............................................................1 1. INTRODUCTION ............................................................. I 11. STATEMENT AND ACHIEVEMENT OF PROJECT OBJECTIVES ..................................................... 2 III. PROJECT IMPLEMENTATION EXPERIENCE ............................................................. 4 IV. PROJECT OUTCOME, SUSTAINABILITY, AND FUTURE OPERATIONS ..................................... 6 V. IDA PERFORMANCE ............................................................. 7 VI. BORROWER PERFORMANCE ............................................................. 7 VII. MAJOR LESSONS LEARNED .....................................................8........ PART II: STATISTICAL ANNEXES...........................................................................................10 TABLE 1: SUMMARY OF ASSESSMENTS ............................................................. I I TABLE 2: RELATED BANK CREDITS ............................................................. 12 TABLE 3: PROJECT TIMETABLE ............................................................. 3 TABLE 4: CREDIT DISBURSEMENTS: CUMULATIVE ESTIMATED AND ACTUAL ............................................... 13 TABLE 5: KEY INDICATORS FOR PROJECT IMPLEMENTATION ............................................................. 13 TABLE 6: KEY INDICATORS FOR PROJECT OPERATION ............................................................. 14 TABLE 7: STUDIES INCLUDED IN THE PROJECT ............................................................. 14 TABLE 8A: PROJECT COSTS ............................................................. 15 TABLE 8B: PROJECT FINANCING ............................................................. 15 TABLE 9: INTERNAL RATE OF RETURN CALCULATION ............................................................. 16 TABLE 10: STATUS OF LEGAL COVENANTS ............................................................. 17 TABLE 11: COMPLIANCE WITH OPERATIONAL MANUAL STATEMENTS ......................................................... 20 TABLE 12: BANK RESOURCES: STAFF INPUTS ............................................................. 20 TABLE 13: BANK RESOURCES: MISSIONS ............................................................. 21 TABLE 14: INDICATORS OF FINANCIAL COVENANT COMPLIANCE ............................................................. 21 Annex A: Borrower's Contribution Summary Annex B: Last Mission's Aide Memoire This document has a restricted distribution and may be used by recipients only in the p)erformance of their official duties. Its contents may not otherwise be disclosed without W#orld Bank authorization.  I I  IMPLEMENTATION COMPLETION REPORT GHANA FIFTH POWER PROJECT Credit 2061-GH Preface This is the Implementation Completion Report (ICR) for the Fifth Power Project in Ghana, for which IDA approved a credit of US$40 million on August 29, 1989. The Credit became effective on January 9, 1990. The credit closed on December 31, 1996, three years after the original closing date of December 1993. It was fully disbursed and the last disbursement took place on April 28, 1997. Co-financing was provided by the Caisse Francaise de Developpement Economique (CFD) of France and the Commonwealth Development Corporation (CDC) of the United Kingdom. A copy of the ICR was sent to the borrower and the co- financiers for comment. The ICR was prepared by Mark Segal, Team, leader of the Water, Urban, Energy II (AFTU2) Infrastructure Family, Africa Region and reviewed by the Ghana country team. The ICR is based on material in the project files. The Borrower contributed to the ICR by providing information and reports. Borrower's contribution is in Annex A.  IMPLEMENTATION COMPLETION REPORT GHANA FIFTH POWER PROJECT Credit 2061-GH PROPOSED OPERATIONAL PLAN The Government of Ghana is undertaking a comprehensive power sector reform programn, part of which is supported by the Thermal Power Project (Credit 2682-GH). The main thrust of the reform is to unbundle the sector into separate market entities for generation, transmission and distribution, invite competition into the generation business, and open both generation and distribution to private sector participation. A power sector tariff framework has been created to be consistent with this -structure. A new regulatory framework and agency is to be established for regulating the non-competitive aspects of the industry. The specific plan for restructuring the distribution segment is firstly to convert ECG (the electricity distribution utility) into a limited liability company (which has been done), and then to restructure it into five geographic business units. This involves a financial and managerial restructuring which the Bank will support under the Public Enterprise Privatization Technical Assistance Project (PEPTA). Thereafter, it is the Government of Ghana's intention to invite the private sector to operate them as concessions, which would also include private investment in distribution system expansion. The combination of sector restructuring, new tariff regime, regulatory agency and private concessions in the distribution business will help to sustain a commercially viable service.  IMPLEMENTATION COMPLETION REPORT GHANA FIFTH POWER PROJECT Credit 2061-GH EVALUATION SUMMARY IntroductioL 1. The Fifth Power Project was part of a broad program of improving infrastructure to support economic expansion and reforming public enterprises to deliver goods and services more efficiently. In the power sector, the focus was on improving the capability of the Electricity Corporation of Ghana to meet expected increases in power demand efficiently and improve its commercial operations. IDA considered power development in Ghana a high priority; at time of project appraisal in 1988, it had financed virtually all power development in Ghana and had lent more to the power sector than to any other sector in the country. Past project experience had emphasized the need to improve the use of existing capacity before building new capacity. In support of this approach, Power V was to concentrate on investments to improve and extend existing distribution system capacity and overall sector performance. EWoject bLectives 2. The main objectives of Power V were to enhance ECG's capability to deliver a technically and commercially viable supply of power to its customers and develop a long- term power development strategy and electrification program. The objectives were reasonable and supported IDA's strategy for economic development in Ghana. The design of project components to implement the objectives was adequate. These components consisted of: the financing of capital expenditures for improving the distribution system, related equipment and supplies, an institutional development program for management reorganization and financiat restructuring, and plans for distribution system expansion and electrification. The key project covenants concerned monitoring progress in implementation of a performance agreement, annual reviews of electricity strategy, the preparation of a program for improved revenue management and financial indicators specifying the minimum rate of return on net revalued fixed assets, debt/equity ratio, and investment limits to maintain the ECG's commercial viability. Implementation Experience and Results 3. The project partially met its objectives. It strengthened ECG's technical and commercial capability and improved the reliability of power supply. However, ECG was not able to comply fully with important financial covenants throughout the project's implementation period (Part II, table 14). In some years, financial covenants were in  - iv - compliance but in others they were not. Originally the project was to be effective over a five year period (1989-93) corresponding to ECG's investment program. The original closing date was December 31, 1993 (Part II, Table 3). IDA extended the closing date three times to enable ECG to complete the project. The actual project cost was US$128.0 million slightly higher than the US$124 million estimated at appraisal (Part II, Table 8 A.). IDA disbursed US$42.8 million toward financing the project costs compared to the US$ 40 million planned at appraisal. The actual cost of the project and the IDA credit amount were higher than appraisal figures because of the devaluation of the US$ relative to the SAR, the original currency of the credit. The key factors that helped the project were ECG's good technical capability and the harmonious relationship between IDA and the Borrower. The main factor external to the project which hindered its implementation was the devaluation of the national currency (the cedi) which increased ECG's cost of meeting foreign obligations. External factors which constrained project performance were the long, bureaucratic approval process for contracts, delays in implementing tariff increases, and inadequate control over customer arrears. Taking all of these factors into account, the overall outcome of the project was satisfactory; IDA's performance was satisfactory (para. 20) and the Borrower's performance was satisfactory for works, but deficient for financial performance (para. 21). Summary of Findings. Future Operations and Lessons Learned 4. The project helped meet increased demand from existing customers and made significant operational improvements in the areas of system control, protection and reliability. Without this project, the country's power supply would not have been technically sustainable1. However, adverse economic conditions and some deficiencies in commercial operations prevented the project from fully achieving its financial objectives. A power sector reform program, currently in progress, and related follow-up power projects should help to sustain and enhance the project's institutional achievements as well as improve ECG's capability to meet financial objectives. The main objective of reform, which the Thermal Power Project (Credit 2682-GH) is supporting, is to separate generation, transmission and distribution operations, and to promote competition and private sector participation in their operation. This program is to be implemented between now and 1999 (Operational Plan). The Thermal Power Project is also providing additional thermal capacity as part of the least cost program to meet expected demand growth (Part I, para. 19). In addition, the National Electrification Project (Credit 2467- GH) is extending connection of outlying areas to the grid and helping to improve commercial operations by consolidating these operations under one directorate and managing them under a performance-based management contract. In May 1997, the Government increased the tariffs; the expected average tariff yield should I Furthermore, ECG succeeded in meeting considerable load growth over the period. (Between 1991 and 1996, customers increased from about 350,000 to 500, 000).  be about 200% above that in effect before May 1997. Also, a working party is being established to resolve ECG's indebtedness. The key lessons learned in the implementation of this project are the following: (a) Efficient operation of a power company requires a supportive operating environment and in the case of Ghana will require fundamental changes in the power sector's structure and operations, including the introduction of competition and private sector participation. (b) Co-financing and related agreements, which are crucial to timely, efficient project implementation, should be in place before the presentation of the project to the Board. (c) Improvements in procurement efficiency may involve actions outside the scope of the project and even the sector, since many governments organize their procurement operations centrally often with many bureaucratic procedures, making it difficult to resolve procurement problems at the project level. (d) When problems related to tariffs, billings and collections are known at the time of project preparation, these should be addressed up-front with direct measures to resolve them; it is not sufficient only to rely on the covenants. (e) In a highly inflationary environment, special measures are needed to maintain tariffs at real levels of cost recovery, so as not to impair the utility's ability to meet its obligations.  I I  IMPLEMENTATION COMPLETION REPORT GHANA FIFTH POWER PROJECT Credit 2061-GH PART I: PROJECT IMPLEMENTATION ASSESSMENT L. INTRODUCTION 1 The Fifth Power Project (Power V) was part of major economic recovery and expansion program, including public enterprise reform. The reform program had an impact on the power sector in two ways. First, economic expansion led to increased power demand and there was a need to rehabilitate the existing system and invest in new capacity in order to meet this demand. Second, the reform program called for the commercialization of Ghana's two key public utilities: the Volta River Authority (VRA) and the Electricity Corporation of Ghana (ECG). VRA was responsible for providing bulk electricity to ECG, and a few other bulk electricity users. To meet power generation needs during the 1990s, the investment program included the installation of 300 MW of gas turbine capacity and the retrofitting of the Akosombo hydroplane. ECG also needed to rehabilitate and expand its sub-transmission and distribution system . Also, a long- term goal of the Government of Ghana (GOG ) was to provide most of the population with electricity, over a thirty-year period, amongst other means by extending the interconnected transmission grid to towns and villages, substituting hydro-power or other energy for less reliable and more expensive isolated diesel-based power. 2. At the time of project appraisal (July 1988), VRA was an autonomous, financially viable company. In contrast, ECG was the successor of the Electricity Division of the Ministry of Works and Housing. It had not successfully made the transition from government department to corporate entity. Although a consultant study had recommended merging both organizations for future power system development, GOG and IDA believed that such a merger would constrain VRA's capabilities, without necessarily solving the structural problems ECG was facing. Instead, GOG with the support of IDA, decided to improve ECG's management and financial situation through further commercialization of the power sector. 3. Power V was an integral part of a detailed program to progressively strengthen ECG. In 1988, the Electricity Supply Board of Ireland (ESB) was preparing a complete diagnostic study of the company under the Power System Rehabilitation Project (Credit 1628-GH), then effective. The World Bank Group had been lending to Ghana's power sector since 1961. Lending to the power sector (US$150 million ) had exceeded that of lending to all other sectors and had helped finance virtually all of the country's major power sector investments since its independence. Performance audits for past projects had emphasized the need to fully utilize existing facilities before constructing capacity.  -2 - The Bank's lending operations supported that approach. Power V was to continue investments to improve existing system capacity, distribution, and overall sector performance. II. STATEMENT AND ACHIEVEMENT OF PROJECT OBJECTIVES Statement of Objectives and Components 4. The main objectives of Power V were to: continue ongoing sector policy reforms, which had begun under Credit 1628-GH, help improve the technical and commercial efficiency of ECG, enhance ECG's capability to deliver a reliable, economic supply of electricity to its customers, and assist GOG in developing a long-term power sector development strategy and an electrification program. To implement these objectives, the project had three major components: institutional development, support for ECG's investment program, and formulation of a sector development strategy. The institutional development program was to focus on completing the management reorganization and financial restructuring. It also was to improve efficiency through a technical assistance contract, staff reduction/training, continued technical assistance from ESB, and the development of a computer-based management information system. The investment component consisted of support for ECG's capital expenditures through 1993 on sub- transmission, distribution, telecommunications equipment and works, vehicles, staff housing, and working capital. The component for sector development strategy included a national electrification planning study and a distribution and sub-transmission master plan. Achievement of Objectives Overview 5. Overall the project partially achieved its objectives (Part II, Table 1). While it strengthened ECG's technical and commercial operations and improved the reliability of electricity supply, the financial impact of these developments was disappointing. During most of the project, ECG experienced financial problems due to inflation, currency devaluation, insufficient tariff increases and inadequate billing and collection performance. As a result, ECG was not able to comply with financial covenants designed to make ECG financially viable. Sector Reform and ECG Commercialization 6. Improving Management and Operations. The project helped to improve operations, planning and financial control functions through facilities improvements and studies. These led to the introduction of measures to enhance efficiency in the company's various operating departments (Part II, Table 7). Operational improvements consisted of an overhaul of control procedures relating to materials, vehicles, office equipment and  -3 - civil works. A System Protection study examined ECG's approach to system protection and define policy changes necessary for improvement. As a result of the study, ECG created a Protection Division within its Operations Department. The computerization master plan which the project produced helped ECG focus on priorities for computerization; follow-up work will continue in the context of the current power sector reform program. To improve financial operations, the project provided for a computerized financial management system and upgrading of the asset register. The project also identified ECG's short and medium term staffing requirements which ECG is using as a basis for future planning. 7. Meeting Financial Objectives. Despite greater commercialization of ECG's operating systems and tariff increases, the company did not consistently meet most of the financial objectives for rate-of return on assets, accounts receivable, and avoidance of high capital expenditures outside the project (Part II, Table 10). The major constraining factors were devaluation, inflation, problems in revenue collection and billing system losses, which led to increased costs and under-recovery of potential sales revenues. Also there were higher than expected demands on ECG for electrification works. Significant tariff increases during the project did not compensate for the adverse impact of these factors. During project implementation, ECG established a Revenue Management Division, under the control of the Director of Finance, for the purpose of improving the billing and collection process. Except for a computerized billing and payroll system, ECG's accounting system was mainly manual, which made the production of reports time consuming and subject to error. Therefore, in addition to upgrading the billing system, the project included plans to develop a comprehensive Management Information System (MIS). Improvements in System Operations 8. Satisfying Customer Demand. The main contribution of Power V was to meet demand from existing customers and improve the quality of the service they received. At project appraisal, demand projections covering the period 1989-94 indicated an increase from 120 GWh to 153 GWh at an average annual growth rate of about five percent. Instead, the rate of growth was closer to 9.5%, with demand increasing from 117 GWh to 184 GWh. In the time elapsed between the load surveys and start of construction system needs grew more than expected, and suppressed demand exceeded the estimates in the load surveys. 9. Enhancing System Reliability. The expansion and reinforcement of the distribution system improved reliability, allowing the system to meet higher demand levels from existing consumers and substantially reduce power outages. The project completed a significant amount of distribution rehabilitation and expansion in several major cities. This work consisted of 605 kilometers (km) of low-voltage lines, 349 km of overhead and underground distribution lines, over 200 distribution substations along with various substation and sub-transmission line improvements. The extension of grid supply to some isolated locations not only has replaced less efficient local generation but  -4 - has allowed a continuous supply of electricity where before supply was confined to certain hours of the day. The planned improvement of ECG's telecommunication system and SCADA system did not take place due to problems encountered between ECG and the consultant during the design phase. Also the amount of investment required to improve the system was larger than originally anticipated and there were not enough funds in the project to finance it. 10. Reducing Losses. The rehabilitation of the sub-transmission and distribution network has led to a substantial reduction in technical losses. However, at the same time non-technical losses have increased. As a result there were times during the project when total system losses actually increased and overall losses have remained fairly high, in the range of 17-20 percent. In an effort to determine the cause of the non-technical losses, ECG conducted a survey of the status of meters in Accra, and other locations. This survey showed a significant number of un-metered premises and faulty meters. The company decided to place control of meters with the project unit and made an effort to coordinate this activity with the Customer and Data Processing directorates of the company. Long-Term Power Development 11. The project supported the preparation of a master plan for the future development of ECG's sub-transmission and distribution networks. This plan has recommended- improvements to facilitate projected load growth over the next ten years. ECG is reviewing the plan, including the validity of the assumptions made and the potential impact of the proposals. III. PROJECT IMPLEMENTATION EXPERIENCE Implementatio Record 12. According to the SAR, the project was to be effective over a five-year period (1989-93) corresponding to ECG's investment program in the sub-transmission and distribution system. The original closing date of the project was December 1993 (Part II, Table 3). The actual project cost was US$128.0 million equivalent compared to US$124.8 million estimated at appraisal (Part II, Table 8A). Project financing arrangements (Part II, Table 8B) remained as planned except that ECG and the Government of Austria could not conclude a financial contract for US$10.5 million and this portion was funded by CFD. An unspecified US$3.7 million was to cover the telecom component of the SCADA system in Accra but did not materialize and IDA transferred this component to Credit 2467-GH. IDA disbursements amounted to US$42:8 million, which, in US dollar terms, was slightly higher than the original credit amount because of fluctuations between the values of the US dollar and the SDR, the currency of the credit. (Part II, Table 4). The project's supervision reports indicated that during most of the period implementation was satisfactory but there were problems in the areas of  - 5- finance, management, and covenant compliance. (Part II, Tables 13 and 14). The project experienced considerable delays resulting in IDA 's extension of the closing date three times. 13. The first extension of the closing date noted an 1 8-month delay due to difficulties in completing agreements with other financiers, including lengthy bureaucratic procedures in Ghana, and protracted negotiations with various financiers. IDA justified the extension noting that ECG had overcome initial implementation difficulties and was making good progress in project implementation, especially distribution works. These works were important to service quality, technical loss reduction, and the provision of capacity to meet suppressed demand. The extension also included a detailed action plan which ECG had prepared to complete project components. 14. IDA extended the closing date a second time, to December 31, 1995, because it was evident that the activities included in the action plan could not be achieved by the end of 1994. The justification for the extension was ECG's satisfactory progress in implementing the action plan prepared for the first extension. However, the extension request noted that it was likely that one additional year would not provide enough time to complete the project's communication component. 15. A third extension, to December 31, 1996 was necessary to complete additional distribution works, the supply of distribution materials, the completion of a distribution system master plan, and implementation of the customer billing system and training. The completion of these components required a reallocation of remaining funds. IDA granted the extension in the interest of maintaining the technical reliability of the power system, in consideration of the importance of the work which remained to be done, and in light of the progress being made in the power sector reform dialogue. Mjor Factors Affecting Implementation 16. Factors outside the control of the Implementing Agency (ECG). The main factors external to ECG affecting project implementation were devaluation of the national currency (cedi), which increased the cost of servicing ECG's foreign debt and inflation which increased local costs of goods and services. Inflation and devaluation were less severe before 1992 and relatively more so thereafter. To mitigate the adverse impact of devaluation on ECG, the company's Board introduced two funds: (a) a debt contingency fund to protect the company against short-term domestic currency fluctuations, which operated by creating a reserve to meet foreign exchange obligations, and (b) an asset replacement fund, which was to serve as a standby source of funds for financing critical development projects in the case of financial distress. ECG was also required to meet greater than expected demands for rural electrification.  - 6- 17. Factors subject to control of the Borrower (GOG) and Implementing Agency (ECG). ECG's good capability for executing the project's technical components and the generally harmonious relationship between IDA and the Borrower were helpful to project implementation performance. However, there were also several factors that contributed to project implementation delays and constrained the project in meeting its financial objectives. First, the Borrower had a long, bureaucratic process for the approval of contracts. Second, although GOG allowed substantial tariff increases several times during the project, delays in implementing them diminished their real value and their effectiveness toward improving ECG's financial situation. Although the tariff increases helped to reduce financial losses they were not sufficient to offset inflation and currency devaluation (paragraph 16) and to recover the economic cost of supply. Third, GOG and ECG did not exercise adequate control over high levels of customer arrears, which fluctuated during project implementation and were as high as five months, well beyond the agreed 1.5 months limit in the project's legal agreements. The cross-debt cleaning mechanism has failed to operate satisfactorily in 1995 and 1996 on account of ECG's financial difficulties and periodic disagreement between the government and ECG concerming the accuracy of electricity bills for government electricity consumption. IV. PROJECT OUTCOME, SUSTAINABILITY, AND FUTURE OPERATIONS 18. The project's outcome overall is satisfactory with respect to most of its technical and institutional objectives. Without this project, Ghana's power supply would not have been technically sustainable. Between 1991 and 1996, ECG met substantial load growth, customers increasing from about 350,000 to 500,000. The National Electrification and Thermal Power projects now being implemented, and in particular GOG's own restructuring program, will further assist in sustaining these objectives. However, ECG was unable to meet most financial objectives of Power V. The major benefits of the project were to be improvements in the reliability and efficiency of power supplies. The SAR quantified efficiency improvements by valuing the benefits of reduced technical losses compared to the costs of investments required to reduce them. On that basis, the SAR estimated an internal economic rate-of-return of 20 percent (Report No. 7405-GH of July 1989, Annex 2-7) On this basis, the re-estimated IERR based on actual figures is 28 percent. The SAR adequately assessed the major risks which could delay efficiency achievements. The presence of a strong technical assistance team was intended to minimize these risks. 19. Two ongoing projects are helping to further commercialize the sector, connect new customers and expand generating capacity. The National Electrification Project (NEP), approved in March 1993 and supported by an IDA Credit of US$80 million (2467-GH), is designed to improve the existing network, connect new areas to the grid and improve ECG's operational efficiency through institutional reforms. About 25 percent of the NEP is for reinforcement of ECG's network. To improve financial performance, the project provides for the regrouping of all commercial services under one directorate managed through a performance-based management contract. The second  -7- project is the Thermal Power Project (Credit 2682-GH), approved in February 1995, and supported with a Credit of US$175 million. This project is providing additional thermal capacity as part of the least-cost program to meet demand growth. It also has an important component for power sector reform, the objective of which is to support GOG's program to improve power sector efficiency by introducing competition, private sector participation and an appropriate regulatory mechanism. These measures should be phased-in between now and 1999. In May 1997, the Government increased the electricity tariff by about 200% and it is establishing a working party to resolve ECG's indebtedness. V. IDA PERFORMANCE 20. IDA's performance overall was satisfactory. Its identification and appraisal of the project adequately addressed the main sector issues at the time within the context of IDA's assistance priorities for Ghana. During most of the project's implementation IDA supervised two or three power projects at the same time. To improve results, IDA formed a special power sector implementation review team which took a sector-wide approach in project supervision. Supervision teams usually included a power engineer an economist and a financial analyst. IDA showed considerable flexibility and commitment to the GOG and ECG in providing three extensions of the project's closing date. ECG reported a good working relationship with IDA and noted that a change in IDA's supervision team toward the end of the project was smooth without any disruption to project implementation. During most the project's implementation, IDA rated the overall status of the project as "1" (minor problems), "2" (moderate problems) or "S" (satisfactory) often while rating financial objectives, management, and compliance with covenants as "3" (major problems). Based on this rating it appears that IDA, in assigning the overall rating, was reflecting the progress in the process of commercialization rather than the impact. VI. BORROWER PERFORMANCE 21. The performance of GOG and ECG was satisfactory overall. ECG performed well in the tendering and bid evaluation process, however delays occurred mainly on account of governmental approval procedures. ECG was successful in implementing the technical and institutional components to establish a framework for commercially viable operations. GOG raised power tariffs substantially in a difficult economic environment. However, due to factors exogenous and endogenous to the project, ECG's financial situation suffered and the company did not comply with most of the project financial covenants (Part II, Table 14). The financial performance of ECG was better during the original period of the project (1989-93) than during the period of project extension, mainly because inflation and devaluation accelerated after 1992 as did demands for rural electrification. Nevertheless IDA extended the credit because of the need to complete  -8 - important components for maintaining the technical reliability of the power system. Also, the extension occurred in the context of a policy reform dialogue addressing fundamental financial and structural problems in the sector. VII. MAJOR LESSONS LEARNED 22. The major lessons learned in project implementation were the following: (a) Promoting commercialization in an adverse structural environment. In many IDA-financed power projects there is a tendency to rely on tariff increases to make power companies viable; it is equally important to focus on the more difficult process of identifying and implementing appropriate measures to reduce costs and sustain efficiency. This is all the more important when consumnption is growing rapidly because the utility is under great pressure to expand service and tariffs are too low. At the outset of Power V, the policy environment was not conducive to the introduction of major structural reforms in the sector. GOG has recognized that efficient operation, cost control and appropriate tarification requires a fundamental rethinking of how the power sector is structured and operated, and has taken ownership of this issue through a major program, which it is designing to restructure the sector. This process is being supported in part by the Thermal Power Project. (b) Performance management contract. The management contract for the Commercial Services Directorate is a component of the NEP project. However, the management of ECG's commercial activities by an external contractor clearly influenced ECG's financial and commercial performance during the last three years of this project. Important improvements were achieved in the way the company is managing commercial operations. The operator succeeded in substantially improving billing and collection results but to date has not succeeded in adequately reducing non-technical losses. Lessons learned from that experience will be developed in the completion report of the NEP project. Among those, one could anticipate the following two: (a) by limiting the transfer of management to commercial operations, the operator's effective authority and control over other aspects of company policy and operations affecting commercial operations is ambiguous; this suggest the importance of ensuring that such contractors have sufficient control over the variables which could influence their operational effectiveness; (b) the specification of indicators to evaluate the performance of the operator is very difficult due to inadequacies in the data available for setting the initial conditions and measuring progress; it may be preferable, for example, to remunerate the contractor solely on the basis of paid-up energy; but to do so requires that the contractor has the kind of control suggested immediately above.  - 9- (c) Structuring co-financing arrangements. In projects with a large number of co-financiers, the likelihood of delays in reaching agreements increases. Securing co-financing and related agreements is an important part of project implementation, hence these agreements should be in place before Board presentation. (d) Streamlining the procurement process. The project experience indicated that it is difficult to resolve procurement problems within the context of a particular sector alone. Since other government agencies are involved across many sectors, it is important to press for an overall solution. In the case of Power V, this approach helped to improve procurement efficiency. (e) Utility Finances. When problems related to tariffs, billings and collections are known at the time of project preparation, these should be addressed with direct measures to resolve them: it is not sufficient only to rely on the covenants. As well, in a highly inflationary environment special measures are needed to maintain tariffs at real levels of cost recovery, so as not to impair the utility's ability to meet it obligations.   PART II: STATISTICAL ANNEXES  I I  TABLE 1: SUMMARY OF ASSESSMENTS A. Achievement of Project Objectives Assessment Substantial Partial Negligible Not Applicable Categories Macroeconomic Policies X Sector Policies X __ __l Financial Objectives X Institutional development X Physical objectives X X Gender concerns - X Other social objectives x Environmental objectives X Public sector management X Private sector development X Other _ _ X B. Project Sustainability Likely Uncertain Unlikely x C. Bank Performance Stage of Project Cycle Highly Satisfactory Satisfactory Deficient Identification X Preparation _ X Appraisal _X Supervision _x D. Borrower Performance Stage of Project Cycle Highly satisfactory Satisfactory Deficient Preparation - Borrower X - Implementing agency _ X Implementation _____ _ - Borrower X - Implementing agency _ X Covenant Compliance - Borrower X - Implementing agency . _ _ . x  - 12- TABLE 2: RELATED BANK CREDITS Preceding Operations Title Northern Grid Extension Loan no. 1759-GHA Year of approval 1987 Amount US$6.3 million Purpose To assist the VRA in extending the grid supply to northern Ghana. Status Closed. Title Power System Rehabilitation Loan no. 1628-GH Year of approval 1986 Amount US$ 28 million Purpose Rehabilitation and institutional development Status Closed. Following Operations Title National Electrification Project Loan no. 2467-GH Year of approval 1993 Amount US$ 80 million Purpose Extend hydro-based electricity from the national grid to isolated areas, and improve ECG's existing distribution network and operational efficiency. Status Ongoing. Title Thermal Power Project Loan no. 2682-GH Year of approval: 1995 Amount : US$ 175 million Purpose Meet future electricity generation needs, improve transmission and distribution system operations and strengthen power sector institutions through new regulatory arrangements and measures to encourage private sector participation. Status Ongoing.  - 13 - TABLE 3: PROJECT TIMETABLE Steps in project cycle Planned Date Actual Date Identification January 1988 January 1988 Preparation June 1988 June 1988 Appraisal July 1988 July 1988 Negotiations October 1988 March 3, 1989 Board presentation October 1988 August 29, 1989 Signing November 1988 September 26, 1989 Effectiveness November 1989 January 9, 1990 Project completion June 1993 June 1996 Credit closing December 31, 1993 December 31, 1996 Source: Project files and Bank Staff estimates. TABLE 4: CREDIT DISBURSEMENTS: CUMULATIVE ESTIMATED AND ACTUAL (US$ million) Comparative Indicators FY FY FY FY FY FY FY FY L90 91 92 93 94 95 96 97 Appraisal estimnate 4.5 16.1 27.3 45.8 40.0 40-0 40.0 40.0 Actual 2.7 8.3 14.7 20.2 25.9 32.2 39.8 42.8* Actual as