Ghana - Power System Rehabilitation Project

Documet of The World Bank FOR OFFICIAL USE ONLY Report No. 11498 PROJECT COMPLETION REPORT REPUBLIC OF GHANA POWER SYSTEK REHABILITATION PROJECT (CREDIT 1628-GH) DECEMBER 28, 1992 Industry and Energy Division Western Africa Department Africa Regional Office 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.  ABBREVIATIONS AND ACRONYMS CEB Communaute Electrique du Benin ECG Electricity Corporation of Ghana ESB Electricity Supply Board of Ireland GOG Government of Ghana KV kilovolt kWh kilowatt hour LRMC Long run marginal costs MOE Ministry of Energy ODA Overseas Development Authority PCR Project Completion Report PPF Project Preparation Facility of the World Bank Group VALCO Volta Aluminum Company VRA Volta River Authority FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of the Director-General Operations Evaluation December 28, 1992 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Ghana Power System Rehabilitation Project (Credit 1628-GH) Attached is a copy of the report entitled "Project Completion Report on Ghana - Power System Rehabilitation Project (Credit 1628-GH) prepared by the Africa Regional Office with Part II contributed by the Borrower. The project achieved its physical objectives faster than anticipated and reached some of its institutional goals through a twinning arrangement between ECG and the Electricity Board of Ireland. ECG's staff and its receivables were reduced by two thirds. While, at completion, ECG's autonomy, institutional capability, and tariffs were still unsatisfactory, two follow-on projects address these issues. Consequently, the project is rated as satisfactory and its sustainability as likely. The Project Completion Report is informative. The project will be audited. 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.   FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT REPUBLIC OF GHANA POWER SYSTEM REHABILITATION PROJECT (CREDIT 1628-GH) TABLE OF CONTENTS Page No. Preface ............................................................. ii Evaluation Summary ................................................... iii Part L Project Review From the Bank's Perspective ............................ 1 1. Project Identity. 1 2. Background. 1 3. Project Objectives and Description. 4 4. Project Design and Organization. 5 5. Project Implementation. 6 6. Project Results .7 7. Project Sustainability .12 8. IDA Performance .13 9. Borrower Performance .13 10. Project Relationships .13 11. Consulting Services .13 12. Project Documentation and Data .13 Part II. Project Review from the Borrower's Perspective ........................ 15 Part IIL Statistical Information . ............................................ 19 1. Related Bank Loans and/or Credits in the Power Subsector ..... ......... 19 2. Project Timetable ............................................... 20 3. Credit Disbursements . ............................................ 21 4. Project Implementation ................ ......................... 22 5. Project Cost and Financing ............. .......................... 23 6. Project Results ................................................ 24 7. Status of Covenants ............................................. 26 8. Use of IDA Resources . .......................................... 28 Annex 1 ECG - Audited Income Statement and Balance Sheet, 1984-1990 .......... 30 Annex 2 VRA - Audited Income Statement and Balance Sheet, 1984-1990 .32 Annex 3 Cost and Benefit Stream - Rate of Return. 34 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.   PROJECT COMPLETION REPORT REPUBLIC OF GHANA POWER SYSTEM REHABILITATION PROJECT (CREDIT 1628-GH) PREFACE This is the Project Completion Report (PCR) for the Power System Rehabilitation Project in Ghana for which Credit 1628-GH in the amount of SDR 27.0 million equivalent was approved on September 19, 1985. The Credit became effective on February 14, 1986 and closed on June 30, 1991 as originally scheduled. SDR 26.9 million equivalent was disbursed and SDR 745.53 was cancelled. The last disbursement was made on October 30, 1991. The PCR was jointly prepared by the Industry and Energy Division, Country Department IV of the Africa Regional Office (Preface, Evaluation Summary, Parts I and III) and the Borrower (Part II). Preparation of this PCR is based on the Staff Appraisal Report, the President's Report, the Development Credit and Project Agreements, supervision reports, correspondence between the Bank and the Borrower, and internal Bank memoranda.   - ii - PROJECT COMPLETION REPORT REPUBLIC OF GHANA POWER SYSTEM REHABILITATION PROJECT (CREDIT 1628-GH) EVALUATION SUMMARY Project Objectives and Description 1. The Project was designed to restore reliable electric service by overcoming the most serious operating problems owing to inadequate system maintenance to Ghana's electric power network since the late 1970s. These operating problems include system overloads with concomitant energy losses and voltage reduction and curtailment of service because of frequent outages of old thermal generating equipment. As IDA had not succeeded in introducing institutional and organizational reforms in its past lending to ECG, this Project (the seventh operation in the sector) was seen also as a means to strengthen ECG's institutional capacity to reliably deliver electricity services at reduced costs. The Project was consistent with the Bank's efforts to prepare the sector for future development and enhance its ability to fulfill its strategic role in the economic growth of Ghana and its neighbors. 2. The Project consisted mainly of rehabilitation works to ECG's distnbution network and limited work on VRA's principal substations; provision for improvements to general plant; technical assistance for operational support, training, work planning, and the preparation and implementation of the rehabilitation plan of ECG; and studies on the organization of the power sector, tariffs, the efficiency of the Akosombo hydro plant, expansion of the distribution system, and extension of facilities to the north. Project Implementation 3. The Project became effective on February 14, 1986 and closed on June 30, 1991, as originally scheduled. SDR26.9 million was disbursed and a nominal SDR746 was canceled. 4. The staff of ECG and VRA, local contractors and consultants satisfactorily carried out the system rehabilitation work for ECG and VRA. ECG benefited from the twinning arrangement with the Electricity Supply Board of Ireland (ESB) (a decision taken during project implementation) and the assistance provided under this arrangement for its system rehabilitation work and organization, management, personnel, training, and operations requirements. Despite ESB's efforts to assist ECG with its revenue management function, IDA felt the need to provide intensive supervision efforts to try to put ECG's financial performance on track. ECG is still experiencing problems in this area. In addition, studies funded out of the Project were conducted effectively and provided a vehicle for dialogue with the Government on issues including the sector organizational set-up, tariffs, and future expansion of the distribution and generation systems. 5. Compliance with loan covenants was satisfactory with the exception of conditions relating to the reduction in the level of ECG's receivables and its outstanding account with VRA.  - iii - Targets had to be revised under the ECG Fifth Power Project (Cr. 2061-GH). Following the completion of the tariff study, satisfactory agreement was reached between IDA and the Government (under the ECG Fifth Power Project) on financial objectives for the power sector and on the minimum rate of return on annually revalued net fixed assets in operation. 6. The Bank's guidelines for the procurement of equipment and hiring of consultants were followed by the Borrower. Following the clearance of initial problems relating to the delivery of materials and effecting payment to suppliers, the rehabilitation work on existing systems was generally accomplished ahead of schedule. The rehabilitation of the Tema diesel plant, a major part of VRA's component, was cancelled from the Project following the provision of grant funds from the Overseas Development Authority for this purpose. The construction of housing units for ECG's senior staff was delayed because of procurement problems and carried over for implementation under the ECG Power V Project. Funds originally allocated for the rehabilitation of the Tema diesel plant and the construction of houses for senior staff were reallocated to other Project components including additional rehabilitation work. Following these changes, ECG became the main beneficiary of the Project. Project Results 7. The principal objectives of the Project were met with more success for the rehabilitation component for ECG's distribution network system than for the technical assistance component for operational support to ECG. 8. ECG benefited widely as a result of the Project. With the provision of foreign exchange and technical expertise brought about by the twinning arrangement with ESB, the rehabilitation on its system resulted in improvements in the quality of electric service. In addition, ECG's organizational structure was revised providing a basis for its medium-term development and performance improvement objectives. ECG recruited key personnel to upgrade the skills mix of its staff and, using its own resources, implemented a staff redundancy program. In 1990, its total work force was reduced to 3,106 from 4,648 in 1986. Training facilities were completed in Tema and ECG is now in a better position to develop comprehensive staff development and training programs. Also, 189 vehicles were added to its transport fleet; provisions were also made for spare parts. On its financial performance, its customer receivables were brought down from 15.5 months in 1986 to 6.7 months in 1990. Its debt service coverage ratio was satisfactory following the December 1988 capital structuring. Compared to 1986 its arrears position has improved although it is still experiencing problems in meeting its debt obligations. ECG's accounting and budgeting system has improved and ECG can now better comply with its audit requirements. However, ECG has not been able to sustain some of these improvements and is now experiencing major problems with its revenue management function. It has not been able to achieve the agreed 8% rate of return on revalued net fixed assets in operation nor meet its receivables target. As a result, under the ECG Fifth Power Project, new targets on returns and receivables were set and ECG's financial recovery was included as part of the institutional development program. 9. Also, a Cross Debt Clearing House System was established and provides a useful means to settle inter-public enterprise indebtedness in the power sector. 10. As for VRA, the anti-corrosive painting of steel structures and equipment at the Akosombo Power House proceeded smoothly.  - iv - 11. Findings from the studies on the organization of the power sector, tariffs and the distribution and generation expansion plans served as a vehicle for dialogue with the Government on policy issues and the investment program of the sector. After completion of the tariff study, satisfactory agreement was reached with the Government on financial objectives for the power sector and on a minimum rate of return on annual revalued net fixed assets of ECG and VRA. However, electricity prices still have not made it possible for ECG to meet its financial covenants nor do they reflect its long run marginal cost (LRMC) of the supply. Support for institutional arrangements for tariff setting and ongoing expansion plans in the country were provided under the ECG Fifth and VRA Sixth Power Projects. 12. The return on investment estimated at appraisal was 30% using the existing tariffs as a measure of benefits. It was discovered, however, that the cost of purchased power was omitted in the calculations resulting in an underestimation of the costs and a high rate of return. Adjustments were made to the assumptions made at appraisal and benefits were measured based on revenues from the incremental sales of electricity after the project using the average tariff in effect. This gave a negative return on the project because the average tariff ($0.03 per kWh) was insufficient to cover the LRMC of the bulk supply of power ($0.044 per kWh). Assuming the consumers' willingness to pay at $0.06 per kWh (as compared to $0.14 per kWh estimated and used to justify a subsequent project, the Northern Grid Extension Project, Cr. 1759-GH) in lieu of the average tariff, the project yielded an internal rate of return of 33.5% (Annex 3). This compares favorably with the opportunity cost of capital for Ghana estimated at 10% and illustrates the need for a tariff policy that reflects the LRMC of power. Sustainabilitv 13. The sustainability of the project depends greatly on the power utilities' capacity to manage those factors that determine their financial and operational equilibrium, in particular, carrying out an appropriate tariff policy, a better handling of their financial position, and developing its human resources. Much work remains to be done and efforts to sustain progress for ECG and VRA are currently being made within the framework of the ECG Fifth and the VRA Sixth Power Projects. Findings and Lessons Learned 14. The physical work under this Project (the overhaul of the 33kV and 11kV systems of ECG and anti-corrosive treatment of the VRA Akosombo Powerhouse) was completed satisfactorily. On the technical assistance side, although the twinning arrangement between ECG and ESB was relatively successful, much still needs to be done in institutional strengthening of ECG. 15. One of the basic reasons for ECG's continuing institutional weakness, particularly its financial condition, is the delayed response of the Government in increasing tariffs. There were some improvements in ECG's commercial operations but not enough. Also, collections continue to remain a serious problem. Lessons learned from the project under review are similar to those experienced in power utility projects implemented in other developing countries. Unless the Government allows adequate autonomy to ECG and a reasonable tariff regime is put in place, it is not possible for an electric power utility to become self sustaining. Without autonomy the utility is not able to offer competitive salaries and, therefore, becomes a training ground for young technical professionals who later leave for better paying jobs. Without a core of competent and  - v - motivated staff no organization can build systems that are essential to institutional building. An interesting comparison is seen in this Project where VRA operates as a fairly well run independent utility because it has been provided the required autonomy while ECG, because it lacks this autonomy, has not been able to put in place satisfactory management, operational and financial systems.  PROJECT COMPLETION REPORT REPUBLIC OF GHANA POWER SYSTEM REHABILITATION PROJECT (CREDIT 1628-GH) Part I - Project Review From the Bank's Perspective 1. Project Identity Project Name: Power System Rehabilitation Project Credit No. : 1628-GH RVP Unit : Africa Region Country : Republic of Ghana Sector : Energy Subsector: Power 2. Background Energy Sector 2.1 At appraisal in 1985, Ghana had substantial energy resources. Wood was plentiful in the high forest zone covering 34% of the total land area (8.2 million hectares). Hydropower resources were ample, particularly in the Central and Western regions of the country; the economically useable potential was estimated at 2,000 MW, then about twice the installed capacity. Estimates of proven reserves of oil varied from 1 to 5 million barrels though the potential was considered to be larger. Drilling in the Tano basin seemed to confirm the existence of large quantities of oil and natural gas. There were no known coal, lignite or peat deposits. 2.2 Energy demand of 4.2 million toe per year, or 360 kg per capita was relatively low in comparison with other African countries. Domestic output of energy, consisting primarily of wood and, to a lesser extent, hydropower and petroleum, was estimated at 3.6 million tons of oil equivalent (toe) and covered nearly 86% of Ghana's energy requirements. Wood met about 73% of primary energy demand, petroleum 17% and hydropower 10%. Sectorally, energy demand was estimated to be by residents (urban and rural), over 67%; industry and commerce, 15%; transport, 12%; and agriculture, less than 6%. Energy consumption increased by almost 5% p.a. during 1971-79 despite the economic decline during most of the 1970s, decreased by about 20% between 1980 and 1984 because the scarcity of foreign exchange limited the import of petroleum products, and declined further by 33% during this same period because of the severe drought and breakdowns in electrical distribution systems. 2.3 Forest-based products were a source of cooking fuel for more than 95% of households and also provided the energy requirements for activities such as food processing, post- harvest drying and beverage making. Total wood demand by 1990 was estimated to be around 17 million cu.m. of fuelwood and 7 million cu.m. of commercial forestry cut. Although projections of the forest resource balance through 1990 showed an annual allowable cut of about 23 million cu.m. indicating Ghana was not likely to face a forest depletion problem over the next decade, there were serious prospects of regional fuelwood scarcity in some areas, particularly the extreme northeast. A large amount of research work in the renewable energy field was carried out by Ghanaian institutions with the assistance of IDA and other public and private aid agencies and coordinated by a renewable energy unit of the National Energy Board.  2.4 At appraisal, Ghana was producing petroleum at about 650 barrels per day from the Saltpond field, about 15 km offshore and 100 km west of Accra. This represented about 5% of 1984 domestic consumption of about 0.6 million metric tons; the remaining 95% was imported. Although not a petroleum intensive economy by international standards (50 kg per capita in 1984), Ghana's heavy dependence on imported petroleum for commercial energy strained its foreign exchange position. Petroleum import claims on the country's total export earnings increased from 19 % in 1979 to about 40% in 1984 despite controls on petroleum consumption by the Government because of rising international oil prices and declining export revenues. By 1990 oil imports were down to about 23% of exports. Energy Sector Organizations 2.5 The principal responsibility for the energy sector lies with the Ministry of Fuel and Power, recently renamed the Ministry of Energy (MOE). Government entities in the petroleum sector include the Geological Survey Department, which monitors petroleum exploration; the Ghana Italian Petroleum Company Limited, which operates the refinery; the Ghana Oil Company Limited, which distributes petroleum products; the Ghana National Petroleum Corporation, which has responsibility for exploration, development, production and disposal of petroleum, and procurement of crude and petroleum products; and the National Energy Board, the advisory body to the MOE, which until it was dissolved recently, was responsible for gathering statistical data on energy resources, production, transformation and consumption, for developing energy policies, conducting energy studies, and coordinating activities in the renewable energy field. Power Sub-sector 2.6 In 1983, only about 10% of the total population of about 12.5 million had access to electricity, of which Accra, Tema, Takoradi, Kumasi and Cape Coast accounted for 70% of the total number of consumers and the remainder spread over other urban areas. Per capita electricity consumption reached a high of 110 kWh in 1981 (excluding sales to the Volta Aluminum Company (VALCO) and exports to other countries) compared with 217 kWh in Cote d'Ivoire and 124 kWh in Senegal. Sector sales grew steadily at an annual rate of 6.3% between 1970 and 1977 but slowed down to an annual pace of 5% over the period 1977 to 1981 as economic activity declined. As virtually all of the power supply in Ghana is hydro-based, following the drought which started in 1981, sales dropped by 33.4% from 5,650 GWh in 1981 to 2,650 GWh in 1983. In 1984 VRA restricted supply to the domestic market to 1,000 GWh and its exports to 300 GWh. Organization of the Power Sub-sector 2.7 The MOE is responsible for establishing and supervising implementation of overall policies of the power sub-sector. The Volta River Authority (VRA) sells locally and exports bulk electricity and owns and operates the hydro plants and high voltage transmission facilities. The Electricity Corporation of Ghana (ECG) purchases power from VRA for distribution throughout the country and owns and operates diesel plants supplying isolated systems. 2.8 VRA was established in 1961 to construct and operate the Akosombo hydro-plant on the Volta River, which was the first hydroelectric project in Ghana (parly financed by the Bank, Loan 310-GH, February 1962). In addition to Akosombo, VRA owns the Kpong hydroplant and the 161 kV grid in Ghana with extensions to Togo and Cote d'Ivoire. VRA is a modern, relatively well operated public utility with a high degree of autonomy, and is responsible for hydropower generation  - 3 - and power exports to Togo-Benin and Cote d'Ivoire, bulk power supplies to ECG, the VALCO smelter at Tema, gold and diamond mines and the Akosombo textiles and township. VRA is also charged with developing the Volta Lake which involves lake research and transport. 2.9 VRA is governed by a Board which is appointed by the Head of State, who is Chairman ex-officio. The Board is composed of a Chairman and seven other members, including its Chief Executive, the Managing Directors of ECG and VALCO, and a VRA staff representative. As of December 1984, VRA had about 2,500 employees of which about 95% were engaged in electricity services. It was able to build up and retain capable staff because of its financial and managerial independence and relatively good working conditions in spite of low salaries. It developed its own training center and received financial assistance on concessional terms from CIDA (Canada) to finance equipment and expatriate instructors for its training center. Its financial and accounting systems were good although the respective departments were understaffed. 2.10 ECG was established in 1967 to succeed the Electricity Division of the Ministry of Works and Housing. At appraisal, it was responsible for the distribution of electricity throughout Ghana and for the country's diesel power plants and operations of the Government's rural electrification works. Over five years prior to appraisal of the Project, ECG could not discharge its responsibilities satisfactorily due to ineffective management and lack of foreign exchange to purchase spare parts and equipment. The quality of its service was poor and characterized by interrupted and intermittent supply and the inability to provide for new connections and for system reinforcement to maintain voltage levels. 2.11 At the end of 1979 ECG had 6,200 employees. At year end 1984 this declined to 4,800 employees. During this time, ECG was overstaffed at the lower levels and staffed by unqualified and untrained personnel at all levels. Fifty percent of its management and professional positions were vacant and incumbents of other positions appeared unsuitable for the positions they held. ECG had problems recruiting and retaining suitably qualified staff because of image problems and inadequate compensation for its employees. At appraisal, ECG was building its own training center at Tema but had been experiencing completion problems. Also, staff training abroad had been curtailed due to cuts in bilateral aid and foreign exchange problems resulting in a backlog of training needs for managers, engineers and accountants. Unlike VRA, ECG's financial management was almost non- existent and its accounting system needed redesign. Information was sparse and unreliable. Power Facilities 2.12 The total installed generating capacity in Ghana was about 1,130 MW of which 1,072 MW (95%) was hydroelectric. The remainder comprised diesel units installed in 28 stations varying in size from 51 kW to 30 MW. Hydro capacity was installed in two stations on the Volta River, the Akosombo plant (912 MW) commnissioned in the mid-1960s and the Kpong plant (160 MW) commissioned in 1982, both owned by VRA. In 1985, these plants were in good condition and well maintained although efficiency for the Akosombo plant had fallen. 2.13 The VRA 161 kV transmission system totals over 1,300 km with a further 800 km under construction to improve supply in northern Ghana. Eight circuits of 67 km each connect the Akosombo and Kpong plants to the Volta Aluminum Company (VALCO) smelter at Tema and other industrial loads while a 650 km transmission loop supplies ECG areas and mines in southern Ghana. A 161 kV double circuit line provides an interconnection with Communaute Electrique du Benin (CEB) and connects Akosombo to Lome (Togo). Cote d'Ivoire was interconnected in 1983 through  -4 - a 225 kV transmission line. 2.14 ECG's distribution facilities comprise 33 kV and 11 kV lines and underground cables with 33/11/0.4 kV substations feeding power from VRA's transmission system or ECG's diesel plants. ECG distributes power in the main cities of Accra, Tema, Kumasi and Sekondi-Takoradi and in other urban centers located within the interconnected grid which covers the southern part of Ghana. ECG also operates a number of isolated stations on behalf of the Government, which subsidizes the operation of these facilities. Service within the distribution system deteriorated over the years due largely to poor maintenance and inadequate reinforcement of the distribution system. Development Objectives 2.15 The Government's investment plans for the energy sector during the period 1985-1990 were concentrated in power and petroleum. Proposals for investments in the power sector were mainly for rehabilitation of existing facilities, extension of the high voltage grid and additions in thermal generating capacity to complement the operation of the hydro plants. In the petroleum sector investment plans included the rehabilitation of the Tema refinery and petroleum product distribution network. Investments in petroleum exploration and development were left largely for the private sector. 2.16 The principal objective of IDA in the power sector in Ghana was to improve the reliability, reduce the cost of electric power supplies and support economic grid extensions while at the same time reducing the demands imposed by the sector on Government resources and maintaining the sector's export capability. The Bank's past lending helped Ghana achieve some of these objectives, and by assisting VRA, helped build one of the better managed utilities in West Africa. However, the Bank had not succeeded in introducing institutional and organizational reforms in ECG, which would have helped improve reliability and reduce costs. This Project was designed to deal with the reorganization, institutional, and physical rehabilitation of the sector's facilities to prepare the sector for future development and enhance its capacity to fulfill its strategic role in the economic growth of Ghana and its neighbors. 3. Project Obiectives and Description 3.1 The principal objective of the project was to restore reliable electric service by overcoming the most serious operating problems in the coastal grid and various isolated systems owing to inadequate system maintenance since the late 1970s. These operating problems include system overloads with concomitant energy losses and voltage reduction and curtailment of service because of frequent outages of old thermal generating equipment. The project consisted mainly of rehabilitation works to ECG's distribution network and VRA's principal substations in addition to provisions for improvements in general plant and technical assistance for studies and training of qualified managers and staff. 3.2 The project components included the following: A. ECG (a) Rehabilitation and reinforcement of the distribution network; (b) provision of technical assistance for operational support, training, work planning, and  - 5 - preparation and implementation of a detailed rehabilitation plan; (c) Construction of housing for senior staff and improvement and expansion of the general plant through the acquisition of approximately 100 new motor vehicles, spare parts for existing vehicles, and office equipment; B. VRA (a) Anti-corrosive painting of all exposed metal parts of the Akosombo hydro plant; (b) Rehabilitation of the diesel power generation plant at Tema; (c) General improvements and renovation of miscellaneous electrical apparatus in the following substations: Kpong, Tafo and Akwatia (Akosombo area); Winneba, Achimota and Smelter (Volta area); Cape Coast, Takoradi, Tarkwa and Prestea (Takoradi area); and Obuasi, Dunkwa, Kumasi, Konongo and Nkawkaw (Kumasi area). C. Studies 3.3 Studies on the improvement in efficiency of the Akosombo hydro plant, distribution expansion plan, market surveys and economic analyses of the high voltage line extensions to the northwest and northern parts of Ghana, detailed and updated economic analyses of the proposed generation expansion plan and detailed engineering studies for the next power plant, tariffs, sectoral analysis and reorganization, and sectoral legislation, particularly with respect to proposals for reorganization of the sector. 4. Project Design and Organization 4.1 The project, designed to support the objectives described above, was timely, appropriate and formulated in the context of a least-cost solution to the development plan. The Project was initially prepared during 1981 but was postponed because of the coup d'etat at the end of that year. Following the change in government and reappraisal of the project, IDA and the Government agreed on a two-front approach to tackle the sector's problems: first, support for the reorganization and institutional rehabilitation of the sector; and, second, the physical rehabilitation of the sector's facilities to improve service and consolidate finances thereby preparing the utilities for future development. 4.2 Lessons learned from previous IDA power operations in Ghana, i.e., to fully utilize the capacity of existing facilities rather than investing in extensions of such systems particularly in light of uncertain growth prospects, were incorporated in the project design. 4.3 Project preparation was thorough. Key issues to successful project formulation and implementation including the merits of merging ECG and VRA, the managerial autonomy of the utilities, the classification of ECG as an A grade corporation so that it could adequately compensate its staff and attract and retain qualified and experienced staff, the reduction of ECG's manpower, tariff increases, and future investments, among others, were discussed and actions agreed prior to Board presentation and credit effectiveness. 4.4 The roles and responsibilities of the beneficiary utilities and the consultants responsible  - 6 - for different components of the Project were clearly defined and understood making it possible for most of the rehabilitation work to be completed ahead of schedule. 5. Project Implementation 5.1 The Project became effective on February 14, 1986 and was closed on June 30, 1991, as scheduled. Of the original amnount of SDR27.0 million, SDR26.9 million was disbursed and a nominal SDR746 was canceled; the last disbursement was made on October 31, 1991. 5.2 System rehabilitation work for ECG and VRA was carried out satisfactorily by the staff of the power utilities, local contractors and consultants. Under the technical assistance component, the Electricity Supply Board (ESB) of Ireland successfully conducted studies and made recommendations on the sector organization, management and legislation, drew up and assisted in the implementation of a least-cost rehabilitation program, conducted a study and developed system protection procedures, and provided operational support to ECG. A twinning arrangement agreed between ECG and ESB helped ECG successfully meet some of its objectives under this Project. Studies funded out of the Project were carried out effectively and are discussed in paras. 6.19 to 6.23 below. 5.3 Compliance with major loan conditions was satisfactory with the exception of conditions relating to the reduction in the level of ECG receivables and its account with VRA. Despite increased tariffs and persistent follow through by IDA staff and consultants, ECG's financial management remains poor. ECG's financial recovery is a part of the institutional assistance component of the ongoing ECG Power V Project (Credit 2061-GH). 5.4 Delays in Project implementation were experienced in the appointment of the consultants to carry out the tariff study and in the appointment of a managing director and a director of finance for ECG. There were also delays in the delivery of materials and in effecting payment to suppliers because of delays in port clearances, inspection by the Society of General Superintendents processing in the banks in Ghana in setting up letters of credit and effective operations of the special account, and unfamiliarity with Bank disbursement procedures. Once cleared, implementation proceeded satisfactorily. 5.5 Following agreements reached by GOG, VRA and ECG on the transfer of the Tema diesel plant from ECG to VRA effective January 1, 1987 and the provision of Overseas Development Authority (ODA) grant funds for the rehabilitation of this plant, funds for this purpose were reallocated to ECG rehabilitation work. This change made ECG the main beneficiary of this Project. 5.6 ECG decided to use the allocation for housing to fund additional distribution system rehabilitation work. This decision was based on the urgency of the rehabilitation work and the fact that the housing project had experienced delays brought about by lengthy internal procurement procedures and the lack of understanding of IDA's procurement guidelines. It was also expected that financing for the housing component could be obtained from cedi resources. 5.7 Supervision missions identified the need for better stores and materials management and security of warehouses. In response, new systems covering materials management were developed together with ESB and implemented. Also, the need for closer supervision of sub-projects, keener attention to quality control of its concrete and wooden poles, and the definition and communication of standards for wooden poles utilized throughout the system were pointed out by supervision  missions. Standards were subsequently prepared by the consultants for ECG's use. 5.8 During appraisal, no major risks were associated with the Project. Concern was expressed about the financial health of the sector and VRA's ability to supply VALCO and utilities of neighboring countries, which was dependent on a replenished Volta Lake. The rains in 1985 were good and VRA has been in a better position to protect the domestic market against power restrictions because of the flexibility offered by a renegotiated contract with VALCO. However, risks associated with institutional and management weaknesses and tariffs that are below the cost of power supply were not identified and have been the major reasons for the continuing poor financial performance of ECG. Attention to ECG's problems in these areas is being provided under the ECG Power V Project. 6. Project Results 6.1 Overall, the objectives of the Project were achieved with greater success for the system physical work for ECG and VRA than the technical assistance component for institutional support for ECG. ECG System Rehabilitation 6.2 Following the least cost rehabilitation program developed by ESB and ECG, the system rehabilitation program began in 1987 and was completed in 1990. The distribution network rehabilitation work included the injection of new substations and the upgrading of low voltage networks, replacement of old distribution pillars, dilapidated ring main units, cracked poles, rehabilitation of the BBC switchgears for high and low voltage equipment, reinforcement of the 11 kV network in Accra and Cape Coast, addition of small (11/0.4 kV) substations, upgrade of undersized LV lines, replacement of dilapidated switchgear and distribution boards, and construction of 110 circuit km of LV and 45 circuit km of 11 kV networks. 6.3 Sub-transmission rehabilitation work included the refurbishment or replacement of the switchgears in all the 55 33kV/ 1 1kV and bulk supply point substations. Obsolete 33 kV and 11 kV switchgears in substations in Accra, Tema, Eastern, Ashanti, Western and Central regions were replaced and 33 kV substations in Accra, Tema, Western and Ashanti regions were refurbished. Reconstruction of the Accra-Nsawam and Kpong-Okwenya 33 kV lines were completed; total route length was 30 km. Organization and Management 6.4 Technical assistance provided by ESB was beneficial to ECG. ESB conducted a diagnostic study of ECG's organization, management, operations and personnel needs. The organizational structure was revised and following the reorganization reforms were made and provided a satisfactory basis for ECG's medium-term development and performance improvement objectives. ESB provided a technical assistance team, comprising a Managing Director, Project Manager and Director of Operations in executive roles, supported by other ESB staff on shorter assignments, to help implement these reforms. Following the completion of the technical assistance team's assignment, qualified and experienced Ghanaians were appointed and now occupy the positions of Managing Director, Directors of Administration, Engineering, Finance, Operations and Internal  - 8 - Audit. In addition, a number of short-term ESB consultants assisted ECG in various operational and functional areas. Training and familiarization courses were also provided by ESB in Dublin for ECG Directors and newly recruited finance staff. 6.5 During project implementation, it was recognized that ECG needed a comprehensive technical assistance program using a utility twinning arrangement. This was necessary to ensure support was available on a continuous basis to help resolve problems, establish systems and procedures, and expose ECG staff, through secondment, to a sound operating environment. As the technical assistance provided by ESB was beneficial to ECG and resulted in the development of cordial relationships between the utilities, this twinning arrangement was established. However, despite ECG and ESB working together since 1983 and substantial improvements in the engineering and project supervision areas since then, ECG continues to exhibit weaknesses in management, operational and financial areas. A review of ESB's terms of reference and training procedures under the ongoing ECG Power V project would lead to the identification of ineffective processes and the adoption of more useful methods to correct these problems. 6.6 To develop successfully as a commercial entity, ECG recognized the need to upgrade the skills mix of its staff through better recruitment and training policies. The Corporation prepared a manpower plan as part of its corporate plan (1988-92) and identified a shortage of 110 skilled staff in key accounting, commercial and engineering areas. Recruitment of key personnel was carried out in 1989 and 1990. In addition, ECG introduced an incentive program which included bonuses, housing and training benefits to improve its image as an employer and its ability to recruit and retain good quality staff. Because of the assistance received under the Project, ECG is now in a better position to develop comprehensive staff development and training programs following the development by ESB of a training plan, the completion of training facilities in Tema, the staffing of senior positions in the training center and the provision of additional training for its instructors in Ireland by ESB. 6.7 Recognizing that it had a surplus of lower skilled staff, ECG implemented a staff redundancy program (using its own resources) to reduce the surplus and to fully compensate and assist affected staff in seeking alternative employment. The total force in 1990 stood at 3,106, a reduction from 4,807 in 1985. Under the ECG Power V Project, ECG should further reduce its work force to 2,840 by 1992. 6.8 Outside the corporate headquarters, ECG was organized into seven regions, each headed by a Regional Director who is responsible to the Director of Operations at headquarters. The new regional organization was initially implemented in Tema and based on experience obtained there was progressively extended to other regions. Key regional personnel were appointed with emphasis placed on improving maintenance practices and revenue collection. 6.9 While a sound start has been made, continued organizational reform focussing on the commercialization of ECG is supported under the ECG Power V Project and includes, among others, the completion of the management reorganization started under this Project, the establishment of performance contracts that monitor five key areas of operations (sales/revenues, collections, manpower reductions, quality of supply and physical project implementation), staff development and training programs and a staff redundancy program.  -9 - Financial Performance 6.10 ECG was required to ensure that its revenues were sufficient to produce a reasonable return on the "fair value" of its assets, having regard to the need to service its debt and contribute to expanding and improving its services. In the absence of a "fair value" (by end-1986 the book value of ECG's gross fixed assets was a mere US$2 million equivalent), it was agreed under this project that ECG's fixed assets would be revalued. This was done satisfactorily and the results incorporated in ECG's 1987 accounts. It was also agreed that ECG should contribute 25% to its investment program, have debt service coverage of at least 1.5 times, pay off its arrears to VRA, and reduce progressivley the level of its customers receivables. ECG met some of these obligations but improvements were not sustained over the years. Major Cedi devaluations had a serious impact on the cost of electricity supplied by VRA and on ECG's debt servicing obligations which were not fully compensated for in retail tariff increases. 6.11 ECG was also seriously undercapitalized. With heavy losses in prior years, at the end of 1986 its total equity was negative. In 1988 its capital was restructured and included the following salient features: conversion of half of ECG's indebtedness to VRA in respect of power sales to additional Government equity to ECG; refund at monthly installments of the balance of ECG's indebtedness to VRA into a Government Rural Electrification Fund; conversion of the Ghana Water and Sewerage Corporation's (GWSC) indebtedness to ECG into long term receivables to ECG repayable at monthly installments; and conversion of part of the outstanding Subsidiary Loan Agreements with the GOG into Government equity, part into a special Government loan, and the balance repaid in accordance with the original loan agreement. 6.12 ECG's customer receivables remained at an excessively high level for several years. By end 1986 they were equivalent to 15.5 months current billings. Improved collection efforts in 1987 and 1988 reduced receivables to an average of 9 months. Of the total outstanding (CZ7.6 billion) at end 1988, 12.8 billion due from GOG and GWSC was dealt with under the capital restructuring, leaving a balance due mainly from the private sector of C4.8 billion. As a result of more detailed investigation of the state of customer accounts ECG identified a very substantial amount of doubtful debts, resulting from past inaccurate billings and the age of many debts. Consequently, ECG included in its accounts a provision for bad and doubtful debts equivalent to 50% of the balance of customer receivables. Also, to prevent a recurrence of the problem of public sector mutual- indebtedness in the power sector, GOG established with effect from January 1989 a Cross Debt Clearing House System to settle on a monthly basis current mutual obligations of ECG, VRA, GWSC, and GOG in respect of electricity and water bills and utility servicing of Government debt. 6.13 Following years of neglect, ECG's revenue management function - meter installation and reading, billing, collection and recovery procedures - continues to require strengthening both at the head office and in the regions. Escalating receivables exacerbated the situation to a point where ECG is still unable to meet its obligations to Government and to VRA and its ability to finance the local component of its investment program is jeopardized. New targets for receivables had to be set under the ECG Power V Project. 6.14 A comparison of ECG's appraisal estimate and its actual financial performance are found in Part III, Project Results (No. 6). Annex 1 provides ECG's audited financial statements for 1985- 1990.  - 10 - 6.15 ECG's management understands its current financial problems and is making efforts to improve its position. As much remains to be done to turn ECG into a financially viable entity, the ECG Power V Project was designed with financial recovery as a part of the ongoing institutional development program. Accounting and Auditing 6.16 Prior to improvements made under the Project, ECG's accounting and budgeting systems were poor because of lack of discipline brought about by problems of recruiting and retaining qualified staff. This resulted in delays in preparing and sending audited accounts to IDA and the submission of reports which were heavily qualified by ECG's auditors, Coopers and Lybrand, Accra. With ESB's assistance, new accounting and budgeting systems have been installed, qualified staff have been recruited to strengthen its accounting and internal audit activities, financial controls have improved, and management information and submission of accounts are more timely than before and meet acceptable standards. Housing and Vehicles 6.17 Funds for the housing project were reallocated to complete urgent rehabilitation work on the distribution system. IDA and ECG agreed to do this because the housing work experienced considerable delays as a result of lengthy internal procurement procedures and the lack of understanding of IDA procurement guidelines. It was also felt that financing for housing could be obtained from cedi resources. The allocation for vehicles increased ECG's transport fleet by 189 vehicles and provided spare parts for other vehicles in the pool. VRA 6.18 The painting of the Akosombo plant proceeded smoothly after problems of paint application on steel structures and equipment were resolved. As rehabilitation of the diesel power generation plant at Tema, originally planned under this Project, was funded by an ODA grant, resources were reallocated to ECG for other Project components including urgent rehabilitation work initially not included in this Project. 6.19 VRA's compliance with the legal covenants on its financial performance, particularly relating to its overdue bills for service to ECG, its debt service coverage ratio, and the revaluation of its assets was satisfactory. A comparison of VRA's appraisal estimates and its actual financial performance are found in Part III, Project Results (No. 6). Annex 2 gives VRA's audited financial statements for 1985-1990. Studies Sectoral Organization 6.20 To improve the performance of the power sector, funds from the Project Preparation Facility were allocated to finance a study to determine the merits of merging VRA and ECG. The study was conducted by ESB in 1985. They concluded that a merger of VRA and ECG offered the best prospect for the future development of the sector. However, GOG, with the concurrence of IDA, considered that a merger would have strained VRA's capabilities since ECG's position was extremely weak financially and managerially and required major reforms and external assistance to  - 11 - establish it as a sound public utility. Consequently, the merger did not proceed but was retained as one of several sector organization options to be considered in light of ECG's performance in the next few years. Tariffs 6.21 In an attempt to put the sector on a sound financial footing, a tariff study of the power sector was conducted by consultants selected by GOG, Coopers and Lybrand (UK). The objective was to develop tariffs which reflect the economic, i.e. long run marginal costs (LRMC) of supply, are affordable to its domestic consumers, generate sufficient revenue to ensure financial viability and are easy to administer. The consultants identified serious problems of affordability in applying LRMC tariffs to many residential customers and recommended phasing-in full LRMC over 25 years. Following agreement reached between GOG and IDA on the study's recommendations, a uniform national tariff structure, based on LRMC principles, was introduced. The level of tariffs recommended by the consultants was substantially adopted in 1988 following reviews by MFP, ECG and VRA and approximated to about 75% of LRMC. At this time, GOG allowed ECG to increase its tariffs to meet its established target rate of return of at least 8% on currently valued net fixed assets in operation to ensure the financial viability of the country's hydro system. With ECG's average sales revenue lower than projected, reflecting some customer resistance to the large tariff increase, ECG was unable to meet this target. Given the absence of institutional arrangements that support a proper process of setting and maintaining tariffs, current Government procedures and legal arrangements do not yield electricity prices which enable ECG to meet its financial covenants nor do they reflect the long run marginal cost of electricity. As for VRA, it has achieved a 9% return on net fixed assets since 1988. Akosombo Hydro Plant 6.22 Reliability of the present Akosombo units has deteriorated in recent years and studies conducted under the Project confirmed that VRA had to undertake a major retrofitting of the 25-year old Akosombo hydroplant by the early 1990s to avoid the risk of major breakdowns. The rehabilitationlretrofit of existing facilities were incorporated in VRA's investment program and supported by IDA under the VRA Power VI Project (Credit 2109-GH). Distribution Expansion Plan and Extension to the Northwest and Northern Regions 6.23 A system expansion study was undertaken by ESB and served as the basis for the sector's development program. VRA undertook an extension of the 161 kV system from Kumasi through Brong Ahafo to the northern region to interconnect with Burkina Faso, to the upper east region and to Wa, the upper west region's capital under the Northern Grid Extension Project (Credit 1759-GH) and the VRA Power VI Project. Further studies on the expansion of electricity supplies to all parts of the country were undertaken through the National Electrification Planning Study funded under the VRA Power VI Project. Generation Expansion Plan 6.24 System planning studies were carried out and recommendations were made that VRA invest in additional thermal generating facilities to firm up and complement hydro energy to meet future load. The expansion program, based on average hydrological conditions, called for 400 MW combustion turbines to be commissioned in four phases through 2006. Under this program, the first phase of 100 MW combustion turbines would be commissioned by 1992 to meet expected demand through 1995 and a second thermal increment of 100 MW would be added by 1996 to enable VRA  - 12 - to meet expected demand through the year 2000. Owing to unexpected above average rainfall in 1989 (the second highest since the dam was built), by the end of 1989 the Akosombo reservoir was almost full. This led to the decision (made under the VRA Power VI Project) to delay the commissioning of the first 100 MW phase of the thermal complementation by at least two years from 1992 to 1994. Return on Investment 6.25 The goals of the Project to halt the declining condition of the supply system and make the electrical facilities more reliable to render effective support to the economic recovery of the country was met and the delivery of electric service has improved. Distribution losses remained high due to technical and non-technical reasons including system overload, poor maintenance, and illegal consumption. 6.26 The return on investment estimated at appraisal was 30% using the existing tariffs as a measure of benefits. Upon closer examination of the annex to the appraisal report providing information on the basis of this calculation, it was discovered that the cost of purchased power was omitted resulting in an underestimation of the costs and a high rate of return. Adjustments were made to the assumptions made at appraisal and benefits were measured based on revenues from the incremental sales of electricity after the project using 1986 sales as the base and the average tariff in effect. This rendered a negative return on the project because the average tariff ($0.03 per kWh) was insufficient to cover the LRMC of the bulk supply of power ($0.044 per kWh). However, assuming the consumers' willingness to pay at $0.06 per kWh (as compared to $0.14 per kWh estimated and used to justify a subsequent project, the Northern Grid Extension Project, Cr. 1759-GH) in lieu of the average tariff, the project yielded an internal rate of return of 33.5% (Annex 3). This compares favorably with the opportunity cost of capital for Ghana estimated at 10% and illustrates the need for a tariff policy that reflects the LRMC of power. 7. Project Sustainability 7.1 Despite many constructive measures undertaken through this Project and improvements in ECG's operations, ECG still experiences corporate efficiency problems including a long backlog of customers awaiting connection, illegal connections and theft of electricity, long lags in billings and collections and frequent service interruptions due to system overload or poorly maintained equipment. These problems are caused mainly by tariffs that are insufficient to cover the cost of service, inadequate system and personnel management techniques, and bureaucractic operating procedures. 7.2 The obvious risk of sustainability is ineffective management of the power utilities due to internal weaknesses and excessive dependency on government. The lack of autonomy of ECG from Government limits their ability to generate sufficient revenue and pursue a profitable operation because tariff adjustments and payments for electricity are delayed by the Government and other public sector agencies. 7.3 IDA, in addition to providing assistance to enhance the reliability and add new capacity to existing power systems in Ghana, should explore together with the Government and the utilities options that will bring about reforms leading to the commercialization and improvement of the incentive structure of ECG and proper definition of the roles between the Government and the utilities.  - 13 - 8. IDA Performance 8.1 Overall IDA's performance was satisfactory throughout the project cycle. Together with ECG, VRA and the Government, it correctly identified the power sector requirements, properly appraised and designed the Project, provided assistance in defining the terms of reference for the rehabilitation work, institutional support, and studies, and closely monitored project execution. An average of three supervision missions a year went to Ghana during the early years of project implementation. From 1988, yearly supervision missions were conducted together with field work for other projects in the power sector in Ghana. This effort led to timely identification of problems and solutions linked to the reorganization of the power sector, tariffs, the organization and management of ECG, and the programming and selection of investments. The dialogue and rapport between the Ghanaian officials, consultants, and IDA staff was constructive. 8.2 It is important that country economic dialogue and power lending operations address the issue of autonomy for ECG. Independence from the Government would allow it to better adopt policies necessary to implement recommendations for improving management and operating systems, which together with an effective approval process for tariff adjustments will ensure sustainability of the institution and attract and retain highly qualified and skilled staff. 9. Borrower Performance 9.1 ECG and VRA were the beneficiaries and implementing agencies for the Government on this Project. Following the resolution of problems causing initial delays in project execution, they implemented their component in accordance with the covenants set forth in the Development Credit and Project Agreements. VRA and ECG effectively managed the resources provided for the rehabilitation work and for technical assistance for operational support and the studies. 10. Proiect Relationships 10.1 IDA's relationship with Government, ECG and VRA on the project was good. Adequate liaison and communications were established under previous operations and maintained under the Project. Coordination with contributing agencies, donors, and consultants was good. 11. Consulting Services 11.1 Overall, the performance of the consultants for the rehabilitation work and technical assistance component was satisfactory. The assistance provided by ESB to ECG was constructive resulting in the creation of a twinning arrangement between these two utilities. Since this relationship was established in 1983, ECG has shown substantial improvements in the engineering and project supervision areas but still requires assistance to improve its management, operational and financial performance. A review of ESB's terms of reference and training and transfer of technology procedures under the ongoing ECG Power V Project would lead to the identification of process weaknesses and the adoption of more useful methods to correct these problems. 12. Project Documentation and Data 12.1 The Development Credit and Project Agreements were adequate for achieving project objectives. IDA's Staff Appraisal Report also provided a useful framework for the Bank and the Borrower during project implementation although it did not provide any description of the scope of  - 14 - work for the studies. IDA supervision and back-to-office reports and the appraisal reports of suucceeding power projects were readily available and provided relevant information for the preparation of the PCR.  - 15 - PROJECT COMPLETION REPORT REPUBLIC OF GHANA POWER SYSTEM REHABILITATION PROJECT (CREDIT 1628-GH) Part II. Project Review from the Borrower's Perspective 1.0 Summary of Implementation Results 1.1 The credit 1628-GH was divided between the Power Sector Ministry, The Volta River Authority and the Electricity Corporation of Ghana, which received the greatest share. 2.0 ECG Component 2.1 The implementation results for each component of the credit are briefly summarized in the following paragraph: (a) Engineering The rehabilitation of ECG's distribution power system accounted for 45% of the credit funds. The funds available were inadequate to cover the complete rehabilitation of the system and as a result were directed towards the total rehabilitation/replacement of the 33kV and 11kV systems with the balance of available funds being utilized to effect improvement in the worst affected portions of the low voltage system. The overhaul of the 33kV and 11kV systems was remarkably successful with a dramatic improvement in system reliability being achieved in the period 1987 - 1989. The main elements of this programme involved:- - Replacement of obsolete 33kV and 11kV switchgear on the system. - Overhaul of all remaining 33kV and 11kV switchgear. - Repair and reinstatement of 33 kV underground cable faults. - Reconstruction of all 33kV overhead lines which had collapsed due to theft of tower component members and storm damage. - Reinforcing of the 11kV systems in the urban areas. The effect of this programme was a reduction in widespread fault outages. In association with this programme all protection equipment was checked and repaired. All updated protection coordination schemes were implemented. At the distribution level approximately 300 distribution rehabilitation jobs were  - 16 - undertaken involving the commissioning of distribution substations and construction of LV networks. The effect of these jobs was naturally selective to the areas involved and was insufficient to cover the full extent of the rehabilitation work required at this level. (b) Vehicles A total of 3m US Dollars was spent on the acquisition of approximately 200 new vehicles which more than trebled the Corporation's fleet. In addition to new vehicles, a three year quota of spares was also acquired which contributed to the high reliability and availability of the fleet. (c) Office Equipment This programme was directed at redressing the problem of the lack of basic office equipment requirements such as typewriters, photocopiers, cash registers, drawing office equipment, safes etc. rather than towards a modernization of office systems. For the limited expenditure in this area, which also included an upgrade of the mainframe computer, the improvement was remarkable. (d) Training The most significant step forward in the training area was the establishment, staffing and equipping of a full-time training facility in Tema. In addition to ongoing upskilling courses being conducted, the training school is now conducting a formal apprenticeship training programme for Electricians, linesmen, cable jointers and electrical fitters. This will lead to the gradual improvement of performance at artisan level in ECG over the coming years. (e) Civil Works The civil works programme which covered the construction of 10 nos. senior staff bungalows in Accra was deferred to a future project and now as part of the Power Five Project is nearing completion. 3.0 Performance of the World Bank Personnel 3.1 The World Bank showed great interest in the Project at all stages and through a number of missions encouraged and supported the Project. 3.2 The response time to queries and requests was always speedy and of a supportive nature. 3.3 There were a number of changes in Bank personnel throughout the project and though the replacements in each case displayed equal enthusiasm there was sometimes a change of emphasis or priorities.  - 17 - 4.0 Summary of Borrowers Perspective of the Project 4.1 The Project was first conceived in 1980 and the feasibility study of the extent of power system rehabilitation necessary was carried out in that year. However, due to a number of historical factors project implementation did not commence until 1986. the results of the 1980 feasibility study were by that time out of date and in spite of the urgency on all sides to get the Project started, a new feasibility study should have been carried out in 1986. The effect of this was that the original ICB tenders offered were small compared to requirements despite a large availability of unallocated funds in the credit. In summary the gap between the preparation of the feasibility study and project implementation was too great. 4.2 The Rehabilitation Project had a dramatic effect on the performance of the power system in Ghana. However it was known that the 1628-GH funded Project was only the first stage of the overall rehabilitation of ECG's distribution system. In these circumstances the follow-on Power Five Project should have been ready to start on completion of the subject project. As the situation developed with the initial Rehabilitation Project being completed in early 1990 and the following Power Five Project construction commencing in early 1992, the power system has been allowed to stagnate and deteriorate. This had a serious effect on public opinion and as a result on revenue collection programmes. In the case of future follow-on projects it is essential that the gap between completion on one and start-up of the next is minimized. 4.3 Procurement procedures worked well during the Project. As expected few suppliers were prepared to operate open accounts with the Electricity Corporation necessitating the extensive use of letters of credit. This was expensive and time consuming and it is suggested that up to a certain level of transaction procurement procedures should be examined to establish World Bank guarantee procedures to enable open accounts to be operated. This system would allow speedier and cheaper procurement procedures to be established. 4.4 The statutory requirement in Ghana for SGS inspection to be carried out on all deliveries caused considerable delays in the Project and this was not adequately allowed for in programming activities. 4.5 The establishment of a separate organization in ECG to manage the Rehabilitation Project was a major success in achieving higher levels of performance expected from ECG crews. There was considerable disquiet among staff and unions over the proposed use of local and foreign contractors on the Project. Following agreement on targets with ECG it was agreed that the use of contractors would be restricted as long as the targets were  - 18 - achieved but in areas where delays were becoming evident the use of contractors would be extended. This system worked well. 4.6 The Central Stores of ECG were in a poor state both physically and organizationally. There was concerns about trying to put the Central Stores back into effective operation and at the same time try to manages the rehabilitation materials. For this reason a completely separate rehabilitation stores was established in Tema which worked so effectively that it is now to become the Central Stores. 5.0 VRA Componen Under the credit 1628-GH, VRA was allocated an amount of SDR 2.01lm (US$2.1m) in 1985 to finance the foreign cost of the project. This portion of the Credit 1628-GH was utilized in procuring anti-corrosive paint and thinner as well as painting of the underlisted equipment and structures located at the Akosombo Powerhouse. - Power Transformers (6 No.) - Gantry Cranes - (2 No.) - Spillway Gates - (12 No.) - Intake Gates - (7 No.) - Penstocks - (6 No.) - Trashracks - (6 No.) - Generator Hatch Covers - (6 No.) - Spillway Hoist Cabinets - (2 No.) - Draft Tube and Spillway Stoplogs - (8 No.) The anti-corrosive paints and thinner were purchased from GECAD of United States whilst the painting works was contracted to Sadelmi of Italy. The project commenced in July 1987 and was completed in April 1990. The breakdown of the total project cost of US$2,142,178.78 on completion was as follows: - Paints and Thinner (Purchases) - US$ 501,986.14 - Paint Application US$,640,192.64 At the of completion, the initial allocation of the Credit 1628-GH was equivalent to US$2,618,400.00 due to the variance in the exchange rate of the dollar to SDR.  - 19 - PROJECT COMPLETION REPORT REPUBLIC OF GHANA POWER SYSTEM REHABILITATION PROJECT (CREDIT 1628-GH) Part Ill. Statistical Information 1. Related Bank Loans and/or Credits in the Power Subsector Project Title/ Year of Credit No. Purpose Approval Status Volta River Authority (Ln. Development of the power sector. 1961 Completed 0310-GH) Power Distribution (Cr. 0118- Expansion of ECG's distribution 1968 Completed GH) system. Volta River Authority Electric Development of the power sector. 1969 Completed Power (Ln. 0618) Second Power Distribution (Cr Expansion of ECG's distribution 1971 Completed 0256-GH) system. Volta River Authority Kpong To add 160 MW to the system's 1977 Completed Hydroelectric (Ln. 1380-GH) installed capacity; extend the network to tie in Kpong with the VRA grid; extend power lines to the southwest; reinforce and expand capacity between Tema and Accra; provide additional reactive power compensation for the system's 161 kV grid; and assist in the resettlement of 7,000 residents of the reservoir area. Electricity Corporation of Development of the distribution system 1977 Completed Ghana (Ln. 1381-GH) through the provision of new subtransmission lines, new substations, expansion of existing substations, and improvement of the distribution network, particularly in Tema; rehabilitation of the existing transmission and distribution system; replacement and expansion of the vehicle fleet; engineering services for ECG; and a power sector study focussing on a tariff structure to reflect the marginal cost of power.  - 20 - Project Title Year of Credit No. Purpose Approval Status Northern Grid Extension To provide a reliable and economical 1987 Ongoing. Project (Cr. 1759-GH) electricity supply by reinforcing the southern grid, by extending the transmission system to economically important northern areas of the country and by reinforcing and expanding distribution facilities in these areas. Electricity Corporation of To help establish ECG as a 1989 Ongoing. Ghana Power V Project (Cr. commercially-oriented entity, capable of 206 1-GH) delivering a reliable and economic supply of electricity to its customers and also to assist the Government to develop a comprehensive sector development strategy and long-term electrification program. Volta River Authority Power To maintain the high standard of 1990 Ongoing VI Project (Cr. 2109-GH) reliability of the country's electricity supply; meet projected domestic and export dernand through the year 1995 including an interconnection with Burkina Faso; and implement its ongoing program of institutional development. 2. Project Timetable Item Planned Revised Actual Identification 09/80 Preparation 03/81, 04/83 Appraisal Mission 06/81 05/83, 11/84 Credit Negotiations 12/81 09/83 08/85 Board Approval 02/82 11/83 09/85 Credit Signature 10/85 Credit Effectiveness 1984 02/86 Credit Closing 06/91 Credit Completion 12/90 Issues Raised at Each Stage of the Project Cycle Preparation: March 1981: delayed tariff increases; ECG's uncertain financial situation and lack of foreign  - 21 - exchange; ECG's inability to retain trained staff April 1983: organization of the power sector and the merger of the two utilities, ECG and VRA; sector financial rate of return; tariffs; foreign exchange resources for ECG; ECG's financial position; foreign exchange reserves of VRA. 3. Credit Disbursements Cumulative Estimated and Actual Disbursements (US$m) Fiscal Year End 198 1987 198 1989 1990 1991 Appraisal Estimate 3.9 12.1 19.4 24.5 27.2 28.0 Actual 1.6 12.2 22.0 31.0 34.1 34.9 Actual as % of Estimate 41 101 113 127 125 125 Cancelled amount: $1,008.93 (SDR745.53) Date of final disbursement: October 30, 1991  - 22 - 4. Project Implementation Action Appraisal Estimate Actual GOG Based on sector legislation studies Dec. 31, 1985. Complied start implementation of measures for reorganization of power sector Settlement of overdue public sector Dec. 31, 1986. Resolved as part of ECG capital bills; other bills settled within 60 restructuring and clearing system under Fifth days of billing date. Power Project, August 1988. Annual review of VRA and ECG Starting Jan. 1, Satisfactorily complied. rates to ensure higher rates or 1986. minimum 25 % contribution to investment. After completion of tariff study, June 30, 1986. Satisfactory agreement under ECG Power V agreement on financial objectives Project with Government on financial and earnings for VRA and ECG; objectives for power sector and on minimum adopt criteria and schedule for rate of return on annually revalued net fixed adjustment rates. assets in operation. ECG Revalue fixed assets. After tariff studies Satisfactorily completed in 1987. are completed. Public sector overdue bills settled Dec. 31, 1986. Improved position. Targets revised under by Dec. 31, 1986 and other bills Dec. 31, 1987 ECG Power V Project. settled within 60 days from the billing date; receivables other than from the Borrower and parastatals enterprises outstanding no more than 120 days by Dec. 31, 1986 and no more than 90 days from Dec. 31, 1986 and thereafter. Debt service coverage minimum Satisfactory following December 1988 1.5 times. capital structuring. VRA Annual revaluation of fixed assets Satisfactory. and debt service coverage minimum 1.5 times. Overdue bills for service to ECG Dec. 31, 1986 Satisfactory settled by 12-31-86, and other bills settled within 60 days of billing date.  - 23 - 5. Proiect Cost and Financing A. Proiect Cost (USSm) Appraisal Estimate Actual Local Foreign Total Local Foreign Total Item Costs Costs Costs Costs Costs Costs (USS million) (USS million) ECG Rehabilitation: Generation a/ 0.3 2.5 2.8 0.0 0.0 0.0 Distribution 2.4 8.1 10.5 0.7 21.0 21.7 Vehicles and spares 0.0 4.7 4.7 0.0 4.0 4.0 Technical assistance & training 0.5 2.6 3.1 0.0 6.0 6.0 Office equipment 0.0 0.3 0.3 0.0 0.7 0.7 Housing 0.5 0.2 0.7 0.0 0.1 0.1 VRA Rehabilitation: Generation 0.3 1.5 1.8 0.0 2.4 2.4 Substations 1.5 9.7 11.2 0.1 0.0 0.1 Physical contingencies 0.6 3.0 3.6 0.0 0.0 0.0 Price contingencies 1.5 8.1 9.6 0.0 0.0 0.0 Ministry of Fuel and Power Vehicles and Spares 0.0 0.0 0.0 0.0 0.2 0.2 Studies 0.0 0.5 0.5 0.0 0.5 0.5 Total cost 7 41.2 48 8 0 34.9 35.7 B. Proiect FinancinR (USSml: Apmraisal Estimate Actual Local Foreign Total Local Foreign Total Item Costs Costs Costs Costs Costs Costs (USS million) (USS million) IDA 0.0 28.0 28.0 0.0 34.9 34.9 Italian Government 0.0 10.0 10.0 0.0 0.0 0.0 VRA 2.7 3.2 5.9 0.1 0.0 0.1 ECG 42 0.0 A9 02 2-2 01 7.6 412 48.8 2i49 35 7 a/ Rehabilitation of the Tema Diesel Plant for implementation by VRA. Converted at SDRI = $1.2917  6t Pfo)ect Resuhe A. Efficincy Indicatom 1986 1966 1987 1988 1989 1990 ECO Sales (GWh) 964 934 995 1,097 1,203 1,249 System ioes (GQWh) l11 249 276 225 259 314 Numbor of consumere 266,666 264.047 239,889 271,400 288,539 304,8t19 Numberof staff 4,807 4,641 3.812 3,639 3,190 3,106 Numbor of consumers per employee 66 66 63 76 90 98 Number of employ... per VYih a 6.0 6.0 3.8 3.3 2.7 2.6 VRA Sales (WiWt) 2,69 4,262 4,661 4,700 4,936 6,228 System Ioes (GWlh) 141 126 112 109 126 180 Numbor of staff 2,429 2,462 2,443 2,407 2,321 2,266 NumberofemployeesperaWehsales 1,074 1,72 1,867 1,963 2,127 2,317 R. Flnancial Indicators 1966 1986 1967 1968 1989 1990 SAR Ent. Actual SAR Est. Actual SAP Eet. Actual SAR Est. Actual SAR Est. Actual SAR Est. Actual ECG Sale (VWYh) 866.0 964.0 900.0 934.0 900.0 994.0 900.0 1,097.0 900.0 1,203.0 900.0 1,249.0 Average rovenue (Cedle/kIit) 27 26 3.1 4.2 3.1 6.3 3.1 7.2 3.1 7.9 3.1 6.6 Tota revenuee (C million) 2.364.0 2,387.0 2,768.0 3,960.0 2,759.0 6,276.0 2,780.0 7,934.0 2,781.0 9,56.0 2,762.0 10,794.0 Totalexpenese(C millon) a/ 1,685.0 1,393.0 2.26t.0 6,249.0 2,268.0 9,138.0 2,432.0 9,212.0 2,613.0 6,846.0 2,786.0 11,464.0 Notlnoome(C mlhlon) 469.0 126.0 490.0 (4,408.0) 601.0 (5,007.0) 328.0 (4,4e3.0) 148.0 306.0 (23.0) (1,122.0) Operating ratIwo(%) 77.0 62.6 80.0 80.1 74.0 151.8 76.0 110.0 63.0 86.0 93.0 99.0 Debt f%ofdobt&equity 69.0 186.3 63.0 (223.2) 48.0 66.5 48.0 0.6 44.0 0.6 44.0 0.6 Debt tl Co ooverageratlo(times) 2.9 4.0 2.9 0.3 2.9 (0.8) 2.5 2.4 2.2 2.6 1.9 1.5 Current ratio 2.8 0.6 3.0 0.4 2.4 0.3 2.4 u.4 2.2 0.4 1.7 0.4 Rate of return on average revabuod 26.0 634.0 26.0 437.7 25.0 (39.2) 18.0 (5.1) 13.0 7.7 17.0 0.4 net ftixd _"te In operation (%) VPA sale. (GWM) 3,182.0 3,066.0 3,607.0 8,466.0 3,607.0 12,529.0 3,607.0 20,802.0 3,607.0 28,899.0 3,507.0 37,233.0 Average rewnue(Cedte/kWht) 1.2 1.1 1.3 2.0 1.4 2.7 1.4 4.4 1.4 6.9 1.4 7.1 Total revenue (C milion) 3,944.0 3,272.0 4,718.0 9,037.0 4,666t.0 12,666.0 4,926.0 20,782.0 4,996.0 32,166.0 5,062.0 37,280.0 Totu txpense (Cm lmion)e/ 1,911.0 2,066.0 2,146.0 6,914.0 2,279.0 8,074.0 2,432.0 11,246.0 2,681.0 14,873.0 2,739.0 19,866.0 Net Income (C miNIon) Z033.0 1,206.0 2,573.0 3,123.0 2,687.0 4,691.0 2,498.0 9,63.0 2,414.0 17,292.0 2,323.0 17,394.0 Operatlng ratio (%) 26.0 46.7 27.0 64.0 29.0 45.1 33.0 42.6 38.0 42.4 39.0 46.3 Debt e% of debt &equny 41.0 31.9 30.0 29.3 31.0 26.5 26.0 23.6 22.0 24.7 18.0 23.3 Debte rvloecoveoragratio(times) 2.0 1.8 2.1 2.3 2.3 1.5 2.6 2.5 2.6 3.7 3.3 3.7 Currentratio 1.4 1.1 1.4 1.6 1.4 1.4 1.4 1.2 1.4 1.7 1.4 1.6 Ratoftretumon avrag revaiued 11.0 6.8 12.0 6.6 11.0 6.7 10.0 9.1 9.0 9.6 8.0 9.2 net fixed *xtt in operation (%) a/ Inckuding Intert ctwge-.  - 25 - C. Financial Appraisal Impact Estimate Actual Financial Rate of Retum 30% 33.5% Purpose as Defined D. Studies at Appraisal Status Impact of Studies Akosombo Hydro Plant ND Completed Rehabilitation/retrofit under VRA Power VI Project. Distribution Expansion Plan ND Completed Extension of facilities under the VRA Northern Grid Extension Project and the VRA Power VI Project. Further studies on the Northern Electrification Planning Study under the VRA Power VI Project. Generation Expansion Study ND Completed Recomendations carried out under VRA Power VI Project. Tariff Study To set electricity prices Completed Recommendations served as the basis for after consideration of the tariff increases, rate of return on net long-run marginal cost; fixed assets as weU as on-going tariff recommend allocation of discussions. the sector; recommend allocation of surpluses between extention at the utilities or payment of dividends. Sector Organization Determine merits of Completed Reorganization of ECG and transfer merging ECG and VRA. of some responsibilities to VRA. ND - not defined in the SAR  - 26 - 7. Status of Covenants Deadline for Covenant Subiect Compliance Status Development Credit Agreement - GOG Section 3.04 Sector legislation and Complied. reorganization studies; upon completion, discuss conclusions and roecom- mendations with IDA. Section 4.01 (a) Separate accounts, Part Complied. C (Studies). Section 4.01 (b) Annual audits, copies Complied. to Association six months after end-FY. Section 4.01 (c) Statements of expendi- Complied ture accounts included satisfactorily. in annual audits. Section 4.02 Based on studies (3.04 From Dec. 31, Complied; reorgani- above), start implemen- 1985. zation of ECG done tation of measures for with technical assist- reorganization of power ance from Irish sector. Electricity Supply Board and with transfer of some responsibilities to VRA under the Northern Grid Extension project. Section 4.03 Settlement of overdue Dec. 31, 1986. Resolved as part of ECG public sector bills; capital restructuring other bills settled and clearing system under within 60 days of Fifth Power Project. billing date. Section 4.05 (i) Annual review of VRA Jan. 1, 1986. Satisfactory agreement and ECG rates to ensure reached under Fifth Power higher rates or minimum Project. 25% contribution to investment. Section 4.05 (ii) After completion of June 30, 1986. Satisfactory agreement tariff study, agree- (Fifth Power Project) with ment on financial ob- Govemment on fmancial jectives and earnings objectives for power sector for VRA and ECG; adopt and on minimum rate of criteria and schedule return on annually revalued for adjustment rates. net fixed assets in operation. Section 4.06 No new sector invest- Satisfactory. ments exceeding $25 million before the end of the project without IDA agreement.  - 27 - Section 4.07 Review foreign ex- June 30, 1988. Undertaken in context of change resources. appraisal of the VRA Power VI Project. Proiect Aereement - ECG Section 4.01 (b) Annual Audits - copies 6 months after Satisfactory. to the Association. end of each fiscal year. Section 4.01 (c) Audit of Statements of 6 months after Satisfactory. Expenditures from end of each Credit account included fiscal year. in annual audits. Section 4.02 Revalue fixed assets. After tariff Satisfactorily com- studies are pleted. completed. Section 4.03 Public Sector overdue Dec. 31, 1986, Improved position - bills settled by Dec. 31, Dec. 31, 1987. see above (DCA Section 1986 and other bills within 4.03). Targets revised 60 days from the billing date; under Fifth Power Project. receivables other than from the Borrower and parastatal enterprises outstanding no more than 120 days by Dec. 31, 1986 and no more than 90 days from Dec. 31, 1987 and thereafter. Section 4.05 Debt service coverage Satisfactory following minimum 1.5 times. December 1988 capital structuring. Proiect Aereement - VRA Section 4.01 (b) Annual audits - copies 6 months after Satisfactory. to the Association. the end of each fiscal year. Section 4.01 (c) Audit of Statements of Not applicable. Expenditures from Credit account included in annual audits. Section 4.02 Annual revaluation of Satisfactory. fixed assets. Section 4.03 Overdue bills for service Dec. 31, 1986. Satisfactory - see (DCA to ECG settled by Section 4.03 and PA-ECG 12-31-86, and other bills Section 4.03). settled within 60 days of billing date. Section 4.05 Debt service coverage Satisfactory. minimum 1.5 times.  - 28 - 8. Use of IDA Resources A. Staff Input Planned Revised Actual Through appraisal n.a. n.a. 49.1 Appraisal through Board approval n.a. n.a. 93.5 Supervision n.a. n.a. 61.8 B. Missions Month/ No.of Days- Special- Types of Proiect Cycle Year Persons Field ization Ratinr Problems Through Appraisal 09/80 2 6 PE, ES - - 03/81 1 3 LO - - 03/81 3 29 FA, PE - - 09/82 3 12 PA, PE - - EC 02/83 2 24 FA, PE - - Appraisal through Board 06/81 3 14 FA, PE - - 11/81 1 5 FA 05/83 3 25 FA, PE, ED 10/84 1 11/84 4 24 FA, PE, EC, DC Board through Effectiveness 10/85 3 21 EC, PE, 02/86 Supervision 1/ 04/86 6 24 FA, PE 2 ECG's financial position; delay in appointing a consultant to conduct the tariff study. EC, OA 07/86 3 9 FA, PE, EC 10/86 1 S EC 12/86 2 22 FA, EC 2 ECG's poor financial position; qualified 1985 accounts. 03/87 1 5 FA 2 ECG's financial position: customer receivablews, ECG's indebtedness to VRA; ECG's ability to meet debt service and finance local construction costs. 03/87 1 7 ED 04/87 2 6 PA, EC 2 Unfilled positions, unsatisfactory financial position of ECG. 07/87 2 22 PA, EC 1 Parastatal arrears, unfilled positions (Managing Director, Finance Director). 09/87 1 6 ES 11/87 3 20 FA, EC 1 Billing,collection and parastatal arrears to ECG. EG  - 29 - Monthl No.of Days- Special- Types of Proiect Cycle Year Persons Field ization Ratin! Problems 02188 2 4 FA, PE 1 Re-examination of the revised organization structure; comprehensive plan to improve metering, billing and collection; marketing strategy; tecruitment of the Director of Finance; poor condition of stores and the need for effective procedurs for the disposal of scrap and obsolete items; 08/89 1 2 FA 1 Tariff increase. 06/90 1 5 PE 11/90 2 4 FA, EC 1 n.a. - Not available 1/ Exact number of days uncertain as supervision/preparation for other projects took place at this time Specialization: DC-Division Chief, EC-Economist, ED-Training Specialist, ES-Energy Specialist, FA-Financial Analyst, GE-Geologist, LO-Loan Officer, OA-Operations Assistant, PE-Petroleum Engineer, PS-Petroleum Specialist, Rating 1 - No significant problems; 2 - Moderate problems  -30 - ANNEX Page 1 of 2 PROJECr CdMPLETION REPORT R.EPUBLIC OF GHANA POWER SYSTEM REHABMLITATION PROJECr (CREDIT 1628-GH) Electricity Corooration of Ghana Audited Income Statement, 1984-1990 (Cedi million) 1984 1985 1986 1987 1988 1989 1990 Purchases (from VRA) 799 1,039 1,158 1,266 1,319 1,459 1,560 Generation (GWh) 33 31 25 3 3 3 3 Total Generation (GWh) 832 1,070 1,183 1,269 1,322 1,462 1,563 Average Purchase price (c/kWh) 0.6 0.7 2.0 2.7 2.8 2.9 3.1 Sales Increase % 15.4% 27.5% -2.1% 6.4% 10.4% 9.7% 3.8% Energy Sales (GWh) 748 954 934 994 1,097 1,203 1,249 Losses 10.0% 11% 21% 22% 17% 18% 20% Average Price (Cedis/kWh) 2.0 2.5 4.2 5.3 7.2 7.9 8.6 Revenue: Energy Revenue 1,484 2,387 3,960 5,276 7,934 9,556 10,794 Levy on Street Lighting 0 0 0 0 62 77 86 Other income 11 13 524 116 (228) 213 201 Consumer Contribution Amortization 1 1 2 4 4 15 28 Total Revenue 1,496 2,401 4,486 5,396 7,772 9,861 11,109 O9eratina Expenses Purchased Power from VRA 443 764 2,259 3,440 3,696 4,233 4,817 Generation 48 159 307 60 39 43 108 Distribution/Others 69 142 235 307 637 932 1,016 Transport 23 40 76 111 283 307 471 Administration 193 265 678 1,517 1,231 1,043 1,928 Bad Debts Written Off 0 0 0 780 0 0 384 Depreciation 9 23 38 1,975 2,683 1,904 2,293 Total Expenses 785 1,393 3,593 8,190 8,569 8,462 11,017 Operating Income 711 1,008 893 (2,794) (797) 1,399 92 Less: Interest 112 255 2,656 948 643 383 437 Amort. of Exchange Fluct. Debt 174 628 2,645 1,265 3,023 711 777 Net Income 425 125 (4,408) (5,007) (4,463) 305 (1,122) _._ ......._ . ...... ........... ...... ........... .. ...__.....B ....... ....._.... ... Allocation of Net Income: Retained Earnings 425 125 (4,408) (5,007) (4,463) 305 (1,122) -