Ghana - Petroleum Refinery Rehabilitation and Technical Assistance Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-3725-GH REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 6.6 MILLION TO THE REPUBLIC OF GHANA FOR A PETROLEUM REFINERY REHABILITATION AND TECHNICAL ASSISTANCE PROJECT February 23, 1984 This document has a restricted distribution and way 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 C:urrency Unit = Cedis (4) ITS$1 = 30.0 Cedis a/ SDR1 = US$1.06 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS BEICIP Bureau d'Etudes Industrielles et de Cooperation de L'Institut Francais du Petrole ECG Electricity Corporation of Ghana EIB European Investment Bank ENI Ente Nazionale Idrocarburi GHAIP Ghanaian Italian Petroleum Company Limited GNPC Ghana National Petroleum Corporation GOG Government of Ghana GOIL Ghana Oil Company ICB International Competitive Bidding LPG Liquefi-ed Petroleum Gas MFP Ministry of Fuel and Power NEB National Energy Board SBM Single Buoy Mooring VRA Volta River Authority a/ Since October 10, 1983.  FOR OFFICIAL USE ONLY GHANA PETROLEUM REFINERY REHABILITATION AND TECHNICAL ASSISTANCE PROJECT CREDIT AND PROJECT SUMMARY Borrower : Republic of Ghana Beneficiary : Ghanaian Italian Petroleum Company Limited (GHAIP) Amount : SDR 6.6 million (US$6.9 million equivalent) Terms Standard Onlending Terms The Government of Ghana (GOG) would onlend SDR 2.71 million (about US$2.9 million equivalent) of the proceeds to GHAIP at an interest rate of not less than 12 percent per annum, and repayable in 12 years including three years of grace period. The Government of Ghana would bear the foreign exchange risk. Project Description: The project has two objectives. Its main objective is to provide technical assistance to conduct studies and prepare plans: to rationalize the petroleum refinery to match its production to domestic demand; to improve the refinery's energy and operating effi- ciency; to reduce losses of crude oil in ocean trans- port, at the harbor and in the refinery itself; and to improve the product distribution system in the country. The project's second objective is to finance equipment and materials already identified and immediately required for rehabilitation and energy efficiency improvement. Possible risks include likely delay in the project implementation due to delays in appointment of consultants and release of payments. These risks are minimized by steps already taken to recruit consultants and advances approved under the Project Preparation Facility. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Est.imated Project Cost a/ Local Foreign Total ------US$ million------ (i) Technical assistance for the execution of inspection of refinery and crude handling facilities; surveyor's inspect- ion of the crude oil loading, transporta- tion and unloading system; studies related to demand forecast, rehabilitation, revamping, energy conservation, marketing and distribution facilities, and training. 0.08 1.79 1.87 (ii) Technical assistance for feasibility studies for second.ary conversion options and bitumen manufacturing facilities, Volta Lake transportation of petroleum products, single buoy mooring (SBM) facility at Tema port, and lube blending plant. 0.02 0.75 0.77 (iii) Technical assistance for management improvement program. 0.05 0.30 0.35 (iv) Equipment and materials required immediately for rehabilitation and energy efficiency improvement. 1.20 11.65 12.85 Base Cost EstiLmate 1.35 14.49 15.84 Physical Contingency 0.14 1.45 1.59 Price Contingency 0.11 0.76 0.87 Total Project Costs 1.60 16.70 18.30 Financing Plan: IDA 0.0 6.9 6.9 European Investment: Bank (EIB) 1.6 4.7 6.3 Government of Ghana (GOG) 0.0 5.1 5.1 1.6 16.7 18.3 Disbursement Estimates (IDA FY) 1984 1985 1986 Annual 2.5 3.5 0.9 Cumulative 2.5 6.0 6.9 Rate of Return: 65% for the Rehabilitation and Energy Efficiency Improvement Component Staff Appraisal Report: None a7 Services and materials i.mported under this project are exempt from taxes.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED PETROLEUM REFINERY REHABILITATION AND TECHNICAL ASSISTANCE PROJECT TO THE REPUBLIC OF GHANA 1. I submit the following report and recommendation on a proposed Petroleum Refinery Rehabilitation and Technical Assistance Credit to the Republic of Ghana for SDR 6.6 million (US$6.9 million equivalent) on standard IDA terms. The Government of Ghana (GOG) would onlend SDR 2.71 million (about US$2.9 million equivalent) to the Ghanaian Italian Petroleum Company Limited (GHAIP) on terms and conditions acceptable to the Association (see para 63). The foreign exchange risks would be borne by the Government. The European Investment Bank would provide US$6.3 million of cofinancing for the project. PART I - THE ECONOMY 1/ 2. An economic report entitled "Ghana: Policies and Program for Adjustment" was distributed to the Executive Directors in October 1983 (4702-GH). Part I of this Report contains the principal findings of the report. Basic economic data and selected social indicators are summarized in Annex I. Basic Structural Characteristics 3. Ghana is endowed with considerable natural and human resources. The country has valuable mineral deposits, particularly gold, but also diamond, bauxite and manganese. The large hydropower potential has only been partly tapped to generate electric power for the country as well as for export to neighboring countries. Recently some oil deposits have been discovered and offshore oil exploitation is under way. Ghana has sufficient arable land to grow various kinds of food cereals and starchy staples and possesses considerable fishing resources. The country is also rich in forest resources. 4. Agriculture is the largest sector of the economy, accounting for about 51 percent of GDP, although only about 11 percent of the land area is cultivated, divided equally between cocoa and food crops. Nearly 70 1/ Parts I and II of this report are substantially the same as Parts I and II of the President's Report for the Export Rehabilitation Project (No. P-3695-GH), dated December 12, 1983.  - 2 - percent of the population derive an income from agriculture or related activities. The basic staple foods are maize, rice, millet, yam, cassava, and plantain but, except for cassava, yields of these crops have stagnated. Food production in 1980 was only 88 percent of that in 1975. Prolonged droughts in 1975-77 and 1982-83, inadequate support services, poor transport facilities and lack of fertilizers and other inputs contributed to the decline. In the last five years, Ghana has had to import 10 to 15 percent of its cereal consumption (mainly rice and maize). Most foodstuffs other than cereals and starchy staples are either unavailable or can be purchased only on the black market. 5. Ghana is typical of a developing country that depends on primary products for exports. Cocoa (of which Ghana is the world's third largest producer) contributes about 60 percent of total export earnings; production has been declining, however, and world cocoa prices are depressed. Timber is also an important export. Although production has been declining for the past two decades, mining is still Ghana's second largest foreign exchange earner, contributing 10 to 15 percent of the total. Div(ersification of the export base, although emphasized by every Government over the past 25 years, has not made much headway. 6. Industrial production and services account for 7.5 and 41 percent of GDP, respectively. Manufacturing--including textiles, steel, tires, oil refining and simple consumer goods--contributed 9 percent of GDP in 1980 (down from 14 percent in 1971) and provided full- or part-time employment to about 12 percent of the labor force. Manufacturing in Ghana remains heavily dependent on imported inputs, however. As a result, the goal of import substitution through industrialization has met little success and imposed a serious burden on the economy. 7. Ghana used to import all of its petroleum, mostly in the form of crude oil, which is refined domestically and used chiefly as a source of fuel for the transport sector. Recently, some oil deposits have been discovered and commercial exploitation has commenced. Production of crude is now about 1,200 barrels per day, equivalent to 7 percent of Ghana's requirements. Hydroelectric power meets most of Ghana's non-transport commercial energy needs. Recent Economic Developments 8. Despite relatively abundant natural resources and human capital, Ghana's economy has been ailing for many years. Prominent among the symptoms are: declining per capita income, persistent high inflation, a greatly overvalued exchange rate, widespread smuggling and other illegal economic activities, large public-sector deficits, a difficult balance of paynents situation, low productivity, low domestic saving and declining investment, deteriorating infrastructure, severe under-utilization of productive capacity, high unemployment, a brain drain of skilled professionals, skewed income distribution, and much-weakened institutions. Real GDP has declined every year since 1975, except for 1978, and real per capita income has fallen by 25 percent since 1975. Per capita income in current prices was estimated at US$360 in 1982. Per capita food  - 3 - availability is 30 percent lower than in 1975. The reasons for these difficulties are manifold. Political instability and persistent mismanagement of the economy by successive Governments, an over-extended parastatal sector, sharp increases in oil prices, adverse terms of trade for Ghana's major exports, and declining export production are among the most important factors. 9. Inflation has been rampant since the mid-1970s. The consumer price index increased by an average of 80 percent a year after 1975, and reached the triple digit level (116 percent) in 1981, despite extensive Government use of price controls. Large public deficits, excess liquidity, and shortages of goods all contributed to the rise in prices. Fixed wage earners and cocoa farmers have suffered the most, while traders, import licensees, speculators, and farmers with marketable crops have been the main beneficiaries. 10. Budget deficits grew, as the Government proved unable to sustain a program of stabilization begun in 1978, when Government expenditures were cut by about one-third in real terms and the deficit was reduced to 5 percent of GDP (compared with 12 percent in 1977). An increase in the minimum wage in November 1980 and a serious shortfall in revenues--due to a dramatic fall in cocoa duties to 5 percent of total revenues (from 47 percent in 1978/79) and to a narrowing of the Government tax base--widened the deficit to