Ghana - Volta River Hydroelectric Project

R E S T R I C T E D PYi Report No. P-263 This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the Bank's views. The Bank accepts no responsibility for the occuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE VOLTA RIVER AUTHORITY OF THE REPUBLIC OF GHANA August 31, 1961  REPORT AND RECOG'tflTDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE VOLTA RIVER AUTHORITY OF THE REPUBLIC OF GHANA 1. I submit the following report and recommendations on a proposed loan in various currencies equivalent to $47 million to the Volta River Authority of Ghana. PART I - HISTORICAL 2. This is the first loan proposed for Ghana. 3. Before becoming independent in 1957, Ghana had been the British colony of the Gold Coast. In 1960 the country became a republic within the Commonwealth, with a President as head of State and head of Government. 4. Development of the Volta River basin in Ghana has been the subject of many studies from time to time since 1915, when the discovery of bauxite first directed attention to the possibility of generating hydroelectricity from the Volta to produce aluminum from local ore. Following a study in 1951 by engineer- ing consultants, the Gold Coast Government set up in 1953 a Preparatory Commission to follow up the work already done and to examine in detail the main problems to be overcome. The Commission reported in 1956, outlining a wide plan for power, bauxite mining, an aluminum smelter of 210,000 tons annual capacity, railways and a port. Construction of the port began soon after, but otherwise there was little progress in the years immediately following this report, partly because of the large amount of finance required and partly because of the discouraging world outlook for aluminum at that time. 5. The Government of Ghana maintained their interest in the possibilities of' the Volta and in 1957 approached the U.S. Government to see whether it would be prepared to assist in bringing the project to life. The U.S. arranged for studies of the project in Ghana and in the course of the reexamination that fol- lcwed various changes were made in the scheme, and the railway and 'oauxite mining parts of it were postponed. An aluminum smelter remained as an integral part o1' the plan; but it was now to use imported alumina, at least initially. 6. The engineering aspects of the nower project were reappraised in 1959 bY a firm of consultants, Kaiser Engineers and Constructors, Inc., in a study fi- nanced jointly by the Ghana and U.S. Governments. The consultantst proposals were for a dam and power station on the Volta with transmission lines to Accra, the capital, and Tema, the new port area, and another transmission network to serve southern Ghana, including Kumasi, Takoradi and mining areas. During the same year a consortium of aluminum producers led by Kaiser Aluminum & Chemical Corporation formed the Volta Aluminium Company, Ltd. (Valco), which was incorporated under Ghanaian law, to explore the possibility of establishing the smelter. The Ghana Government discussed all these proposals with the Governments of the U.S. and the U.K., and later asked the Bank to appraise the electric power aspects of the scheme. 7. In 1960 the Bank studied and reported upon Ghanats economy (Report EA- llOa of June 29, 1960) and upon the power nroject (Report TO-249a of June 30, 1960). In sending these reports to the Ghana Government the Bank stressed the  need for satisfactory agreements covering the sale of power to the smelter, and a suitable organization for constructing and operating the project. Because the project was so large relative to Ghana's economy, the Bank stressed also that the public investment program should be kept within bounds and should concentrate on the more productive investments, and that Ghana should continue its conservative ptblic financial policies. 8. The Bank also suggested that Ghana investigate the likely abstraction in other countries of the Volta's waters, so as to judge the need for an agreement on the use of water. At the request of the Ghana Government, the Bank arranged for investigations of tlhis question and was satisfied that the effect of possible abstraction would be small and thus would give no cause for anxiety for the future of the project. 9. The scheme consists essentially of a dam and power plant to be built and run by an Authority established by the Ghana Government to supply power to two main purchasers: the Electricity Division of Ghana's Ministry of W,Jorks and Housing for distribution to general consumers; and Valco's aluminum smelter. The total cost of the power project is estimated at $196 million. Negotiations between the Ghana Government and Valco resulted in agreements, initialled in November 1960, and approved by Parliament on February 22, 1961, for ouilding a smelter of 100,000 tc 150,000 tons annual capacity, and for the purchase of power over a thirty-year period with a possible extension for twenty more years. By the end of June 1061, arrangements by Valco for financing the smelter were advanced sufficiently for the Bank to begin loan negotiations with the Ghana Government in Washington. 10. Negotiations on the Bank's loan have now been completed. There will also be loans on the power project from the U.S. Development Loan Fund and the Export- Import Bank, and from the U.K. Export Credits Guarantee Department; these too are expected to be ready for signature shortly. PART II - DESCRIPTION OF THE LOAN 11. Borrower The Volta River Authority Guarantor The Republic of Ghana Amount The equivalent in various currencies of $47 million Purpose To help finance the construction of a dam and hydro- electric power project on the Volta River at Akosombo and a transmission system to supply poerer to southern Ghana Amortization In 39 semi-annual installments, beginning February 15, 1968, and ending February 15, 1987. Each pay- ment of interest and principal taken together would be approximately equal. Interest Rate To be determined at time of loan signing Commitment Charge 3/4 of 1%  PART III - THE PROJECT The Borrower 12. The Volta River Authority Act of 1961 provides for the establishment of the Volta River Authority to execute and operate the project. The President of Ghana will be ex-officio Chairman of the Authority, and he will appoint seven other members, of whom one is to be the Chief Executive. The prior approval of the Bank is to be obtained for the first and subsequent appointments of a Chief Exe^utive. This officer, subject to the general control of the Authority on mat- ters of policy, will be charged with the direction of the business of the Authority and of its administration and organization, and with the employment, control and dismissal of all the Authority's staff and work people. 13e The Act empowers the Authority to take any action necessary for the suc- cess of the project and requires it to conduct its affairs on sound commercial lines and to carrj out its functions so that, taking one year with another, its revenues are greater than its outgoings properly chargeable to revenue account. It is reauired also to establish a reserve for the purpose of expanding its activ- ities. The Authority will supply power direct to the aluminum smelter, and to the Electricity Division of the Ghana Ministry of Works and Housing for distribution to other consumers. Description of the Project i4. A report on the project, "Appraisal of the Volta River Hydroelectric Project - Ghana" (TO-281a), is attached (No. 1). The project consists of: a. A dam, saddle-dam and power -jlant at Akosombo having initially four generating units with a maximum continuous rating of 589 PINT, together with a fifth unit to be installed later when the demand for powzer re- quires it, and nrovision for a sixth unit; b. Transmission lines to Accra and Tema where the smelter will be built; c. A transmission network to supply Kumasi, Takoradi, and the other main towns and the mines of southern Ghana. Cost of the Project 15, The estimated cost of '196 includes interest during construction on borrowings and includes the cost of that part of the fifth generating unit which it is estimated would not be met by internal cash generation. The estimated foreign exchange component is 60% of the total cost of the project, or the equi- valent of $118 million. 16. To cover this capital expenditure the Volta River Authority will be pro- vided with the equivalent of $98 million by the Ghana Government and would borrow a similar amount from various lenders. The Ghana Government would make its con- tribution from its own reserves and revenues; a draft letter from the Ghana Govern- ment on this subject is attached (No. 2). The borrowed funds would come from the following sources:  Interest Grace Amount Rate Term Period m illion IBRD To be determined 25 years 6 years 47 United States Development Loan Fund 3-1/2% 30 years 6 years 27 Export-Import Bank 5-3/4% 25 years 6 years 10 United Kingdom Export Credit Guarantee Determined when Department funds are drawn 25 years 6 years