Document of

The World Bank

FOR OFFICIAL USE ONLY

Ci oxS1- OY

Report No. P-4370-CH

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT OF SDR 5.2 MILLION

TO THE

REPUBLIC OF CHANA

FOR A

NORTHERN GRID EXTENSION PROJECT

January 15, 1987

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRE1NCY EQUIVALENTS

Currency Unit Calendar 1985 From Jonunry 1986 From September 1986

US$1 054.054 ?90.O 0128-154Cedi (¢) 1 US$0.0lA5 US$0.01t 1IS$O.0073-O.0066

Second WindowAuction Rate

FISCAL. YEAR

Januarv 1 - December 31

ABBREVIATIONS AND ACRONYMS

AfDB = African Development BankAKOTEX = Akosombo Textile CompanyCDC = Commonwealth Development CorporationCEB = Communaute Electrique du BeninCIDA = Canadian International Development AgencyECG = Electricity Corporation of GhanaEECI = Energie Electrique de la Cote d'lvoireEIB = European Investment BankESB Electricity Supply Board of IrelandCOG = Government of ChanaMFP = Ministry of Fuel and PowerNEB N National Energy BoardPNDC = Provisional National Defence CouncilSONABEL Societe Nationale d'Electricite du BurkinaUNDP = United Nations Development ProgrammeVALCO = Volta Aluminum CompanyVRA = Volta River Authority

FOR OFFICIAL USE ONLY

GHANA

NORTHERN GRID EXTENSION PROJECT

CREDIT AND PROJECT SUMMARY

Borrower: Republic of Ghana

Beneficiary: Volta River Authority

Amount: SDR 5.2 million (US$6.3 million equivalent)

Terms: Standard

Relending The Government would relend the full amount of theTerms: Credit to VRA at the prevailing (currently 8.23Z) Bank

interest rate for 20 years including 5 years of grace.VRA would bear the foreign exchange risk on the Credit.

Project The proposed project would assist Ghana to provide aDescription: reliable anti economical electricity supply by reinforcing

the southern grid, by extending the transmission systemto economically important northern areas of the country,and by reinforcing and expanding distribution facilitiesin these areas. The proposed project consists of:

(a) construction of 161 km of single circuit 161 kVtransmission lines on the southern grid (Akosombo-Tafoand Akwatia-New Obuasi) to alleviate load shedding,increase transfer capabilities to Cote d'Ivoire andreduce system losses;

(b) construction of 581 km of single-circuit 161 kVtransmission lines (Kumasi-Techiman-Tamale-Bolgatanga, with a spur to Sunyani) to extendthe grid to the north;

(c) construction of 161 kV substations at Sunyani,Techiman, Tamale and Bolgatanga with provision at theBolgatanga substation for a possible future line toOuagadougou in Burkina Faso;

(d) construction of 60 km of single-circuit 161 kV lighttransmission lines (Sunyani-Mim) for initial 33 kVoperation;

(e) construction of 33 kV subtransmission lines ands.epdown substations to connect presently isolateddiesel systems to the grid;

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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(f) installation of distribution facilities and associatedequipment to expand supply in 10 towns; and

(g) associated engineering and project managemoent services.

Project The main benefit of the project would be the Tirovisioa ofBenefits reliable power supply at lower cost to ten agricultural andand Risks: commercial centers in the northern areas, thus significantly

reducing present infrastructural bottlenecks ig growth.There are no unusual risks associated with the proposedproject.

Estimated Cost: - (US$ million)Local Foreign Total

161 kV Transmission Lines 7.3 38.4 45.7161 kV Substations 1.0 16.4 17.433 and 11 kV Subtransmission 1.9 10.7 12.6iL kV and LV Distribution 2.9 9.5 12.4Engineering, Management Services and

Training 4.2 2.8 7.0Housing 3.0 2.1 5.1

Total Base Cost 20.3 79.9 100.2Contingencies: Physical 2.1 8.0 10.1

Price 6.6 13.6 20.2Total Project Cost 29.0 101.5 130.5

Interest during Construction - 17.4 17.4Total Financing Required 29.0 118.9 1479

Financing Plan:AfDB - 38.3 38.3CDC/EIB - 36.7 36.7CIDA 7.5 7.5TDA - 6.3 6.3Japanese Ex-Im Bank - 5.0 5.0VRA 29.0 25.1 54.1

Total 29.0 118.9 147.9

af VRA is exempt from all taxes and duties.

Estimated Disbursements:

IDA FY 87 88 89 90 91 92

Annual 0.16 1.16 2.21 1.92 0.79 0.06Cumulative 0.16 1.32 3.53 5.45 6.24 6.30

Rzte of Return: 18%

Staff Appraisal Report: No. 6301-GH

Map: Ghana - Power Sector Installations IBRD 19767

INTERNATIONAL DEVELOPMENT ASSOCIATION

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT

CREDIT TO THE REPUBLIC OF GHANA FOR ANORTHERN GRID EXTENSION PROJECT

1. T submit the following report and recomuendation on a proposeddevelopment credit for the equivalent of SDR 5.2 million (US$6.3 millionequivalent) on standard IDA terms to the Republic of Ghana to help financethe Northern Grid Extension Project. Additional external financing for theproject would be provided by the African Development Bank (AfDB)US$38.3 million equivalent, the European Investment Bank (EIB) jointly withthe Commonwealth Development Corporation (CDC) US$36.7 million equivalent,the Canadian International Development Agency (CIDA) US$7.5 millionequivalent, and the Japanese Export-Import Bank US$5 million equivalent.

PART I - THE ECONOMY 1/

2. An economic report entitled "Ghana: Towards Structural Adjust-ment" was distributed to the Executive Directors in October 1985. Asummary of the economic situation is presented in this section. Basiceconomic data are summarized in Annex I.

3. Ghana once enjoyed a fairly high standard of living compared withmost other West African nations. However, the poor economic policies,combined with droughts and the increase in oil prices, contributed in the1970s and early 1980s to a decline in gross domestic product. Given thepopulation growth rate of about 3% per annum, real per capita income haseroded significantly to its present level of $400 (1985). As a result,about half the population is estimated to live in absolute poverty. Thecountry's basic needs indicators, once the best in Africa, are now nobetter than those of other Sub-Sahara African countries with comparable percapita incomes. Modern health services are available to only about a thirdof the people, and only 47% have access to safe water. Although theeducation system is well established and primary schooling has been freesince 1962, 50% of adult men and 70% of adult women have had no formaleducation.

1/ This Part is the same as Part I of the President's Report for theEducation Sector Adjustment Credit which was approved by the ExecutiveDirectors on December 9, 1986.

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Structure

4. Ghana is comparatively well endowed with natural and humanresources. The country has a good supply of land suitable for growing treecrops, most importantly cocoa; cereals and starchy staples; and consider-able fishing and forestry resources. The economy is based primarily onsmall-scale agriculture production. Agriculture accounts for half of GDPand provides incomre for about 701 of the population. Productivity Isgenerally low becarabe of inadequate support services, lack of fertilizersand other inputs, and poor transport. Ghana is the world's third largestproducer of cocoa, which accounts for about two-thirds of the country'sexport earnings.

5. The country has valuable mineral deposits, particularly gold, butalso diamonds, bauxite, manganese and offshore oil. Ghana still importsmost of its petroleum, mainly in the form of crude oil, which is refineddomestically and used chiefly for transport fuel. Hydropower generatesmost of Ghana's electricity, some of which is exported to neighboringcountries.

6. Manufacturing output in Ghana increased substantially afterIndependence in 1957 due to government policies which encouraged importsubstitution behind high protection. As a result, Ghana's manufacturingcapacity is relatively large, diverse and long established compared to mostother African countries. In spite of some recent improvement, however,capacity utilization is relatively low for lack of sufficient domestic andimported raw materials and poor management, particularly in the publicsector. Services, which account for 40Z of GDP, are dominated by wholesaleand retail trade. The country's transport infrastructure was once rela-tively well developed, with railways in the more populous south and areasonable road network throughout. However, years of neglected main-tenance have significantly eroded the value of this investment.

Past Economic Developments - The Inheritance

7. Throughout the 1970s, Ghana's economy was poorly managed. Largebudget deficits, necessitated partly to support a sprawling, inefficientpublic sector, led to a marked acceleration in domestic inflation. Giventhe reluctance to move the exchange rate, the fixed nominal rate becamegrossly overvalued, shifting relative incentives away from exports(including cocoa) into import trade. The resulting deterioration in exportperformance, combined with a growing disenchantment on the part of aiddonors with Ghana's performance, caused a perpetual foreign exchange crisisthat pushed successive Governments into increasingly restrictive importregimes. What was once an economy with ample imports became one starved ofthe main fuel for its growth. The erosion of the tax base due to decliningexports and imports, and the related drop in economic activity forcedsevere cutbacks in Government operations and maintenance and capitalexpenditures. There was a marked deterioration in what was once fairlywell developed economic and social infrastructure. This, in turn, furtherreduced the country's productive capacity.

8. A tendency to respond to shortages with controls and rationingworsened the problem by eroding the incentives to produce and save, dimin-ishing the capacity of public sector entities to maintain the level andquality of services, and creating a vast parallel black market with itsrelated corruption, smuggling and tax evasion. Declining real wages,political instability and reduced economic opportunities led talented andskilled Ghanaians to leave the country, depriving it of scarce managerial,administrative and technical resources.

9. To add to all its difficulties, Ghana was subjected in the early1980s to three other problems. First, a prolonged and severe droughtcreated the worst food shortages since Independence. Second, the externalterms of trade sharply deteriorated following the increase in petroleumprices, and a softening in prices of Ghana's major exports (cocoa andgold). Third, the sudden return of over one million Ghanaians from Nigeriaseverely strained the food and employment situation. The cumulative effectof the downward economic spiral and these most recent "shocks" to thesystem can be seen in the trends in key economic indicators between 1970and 1982: per capita real income declined by 30%; import volumes dropped bya third; real export earnings fell 52%; domestic savings and investmentdeclined from 12% and 14% of GDP, respectively, in 1970 to almostinsignificant levels; inflation ran at 44% per annum over the period.

The Economic Recovery Program, 1984-86

10. A Provisional National Defense Council (PNDC) was constituted

when Flight Lieutenant Rawlings took power on December 31, 1981. The PNDCintroduced an economic recovery program which was developed in closeconsultation with the IMF and the World Bank. The program was formallypresented at the November 1983 meeting of the Ghana Consultative Group, thefirst in 13 years. The IMF has supported the program with two successiveStandby Arrangements, totaling SDR 419 million, covering the periodJuly 1983 - December 1985, and a further SDR 179 million from theCompensatory Financing Facility. A third stand-by arrangement totalingSDR 81.8 million and covering the period from October 1986 to September1987 was approved by the IMF in October 1986. IDA has supported theprogram with an Export Rehabilitation Credit and two Reconstruction ImportCredits, in all totaling SDR 212.7 million. Total assistance from membersand observers of the Consultative Group, including IDA, has risen sharply,with commitments totaling $416 million in 1984 and $495 million in 1985.

11. The Economic Recovery Program's major objectives have been:(a) to raise relative prices in favor of exports and production; (b) torestore fiscal and monetary discipline; (c) to initiate the rehabilitationof the country's productive base and economic and social infrastructure;and (d) to encourage private investments. The most important measure takenwas the movement towards a more realistic exchange rate. The cedi depre-ciated from ¢2.75 - US$1.00 in April 1983 to ¢60 - US$1.00 by October 1985.In January 1986 the Government made significant progress towards reachingan equilibrium exchange rate by moving to e90 - US$1.00. On September 19,1986, tne Government began a foreign exchange auction covering

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approximately two-thirds of the transactions. Cocoa, petroleum, publicdebt service, and a limited amount of essential drugs have been excludedtemporarily. Capital transactions and imports under the special importlicense (SIL) system are also still excluded, though the latter will beprogressively phased into the auction market. The rote set in the auctionhas ranged between a128-151 - US$1.00. Administered prices have beenadjusted to reduce the distortions arising from the overvalued exchangerate, the most critical being a near doubling of the cocos producer priceannounced in May 1985, followed by a 50% increase in May 1986. Petroleumprices have been raised in line with changes in the exchange rate. Inaddition, price controls are being dismantled. Interest rates have beenadjusted in stages to the point that they became positive in real terms in1965. As part of the Government's policy of trying to maintain positiveinterest rates, in August 1986 deposit rates were increased across theboard by 2 percentage points, with the exception of 24-month deposit rateswhich were increased by 3 percentage points. The rates on 12-month timedeposits have more than doubled since October 1983 to the present level of20%. Lending rates were increased on average by 2-3% by unifying them atthe maximum rate of 232. In spite of the increase, interest rates areslightly negative in real terms against current price performance. In thearea of fiscal policy, the Government's efforts have concentrated on elimi-nating subsidies; resource mobilization through improved tax collection andselective increases in consumption taxes and charges; and more adequateprovision for maintenance and capital expenditures. In addition, publicsector salaries and wages, and statutory minimum wages have been raised tooffset partially the drastic erosion in real income. In 1986, after someinitial uncertainties and confusion over implementation were sorted out,the Government implemented a wage increase which reversed in a substantialway the severe decompression in salary level differentials between thehighest and lowest paid workers in the civil service.

Response of the Economy

12. The initial response of the economy to the policy reforms wastemporarily crippled by the severe drought in 1983 and insufficient aid in-flows. Nevertheless, the Government continued and even broadened thereform program. After a real decline in output in 1983, economic perfor-mance sharply improved on several counts in 1984, benefitting to a largedegree from the return to normal rainfall, but also from better policies.The economy grew by nearly 11%, led by a sharp expansion in foodcrops.Cocoa production (crop year 1984/85) rose by only 8% from the historicallow of the previous crop year. Wholesale and retail trade, and manu-facturing output increased in line with overall growth, reflecting higherimport levels and the restoration of power supplies. Preliminary estimatesfor 1985 indicate a growth in GDP of about 6%, spurred primarily by higheroutput in mining, manufacturing, and construction. Given the higher base,growth in agriculture was only 3% but cocoa output is likely to rise to220,000 tons in the 1985/86 season, an increase of 28% over 1984/85reflecting the improvement in the producer price and more favorableweather.

The Budget

13. The Government's fiscal position has improved markedly. Revenuesas a share of GDP rose from 5% In 1983 to 11% in 1985. The gain primarilyreflected the impact of the depreciation of the exchango rate on taxes oninternational transactions, higlher oxcise taxes, and increased license andregistration fees. Recurrent expenditures have risen from 7% of GDP in1983 to It% of GDP in 1985. There was a much needed increase in capitalexpenditures, which rose from negligible levels to 3Z of GDP In 1985. Theoverall budget deficit has been contained at about 2% of GDP. Foreignfinancing has increased so that domestic bank financing has dropped to 0.6%of GDP.

Money and Credit

14. Growth of the money supply was severely curbed in 1983 and 1984to around 40% per year, but picked up considerably In 1985 when broad money(112) grew by 58%. Net foreign assets declined, but the expansion indomestic credit in 1985 (69%) was double the level of the previous year. Asharp rise in cocoa financing accounted for about half of the increase.reflecting the early start of the season and higher purchases. The growthin bank credit to the public sector was slightly under 9%, about the sameas in 1984. Credit to the private sector continued to expand sharplyreflecting the higher demand for cedi credit for imports and the recoveryof economic activity in mrnufacturing and construction.

Prices

15. Improved food supplies and the resulting sharp drop in prices wasa major reason for the deceleration in inflation, from an annual averageincrease of 122% in 1983 to 40% in 1984. This trend continued in 1985 withan average increase in the consumer price index of only 10%, despite anexchange rate depreciation of about 50% in this period. The consumer priceindex is expected to increase to about 20-25% in 1986, partially becausefood prices will resume a more normal pattern, but is still moderate giventhe large devaluation of the exchange rate which occurred in January andSeptember.

Balance of Payments

16. The current account deficit of the balance of payments widened in1985 to 4.6% of GDP as imports continued to recover. Export earnings alsorose by 12%, reflecting higher volumes of cocoa, timber, and electricityexports. On the capital account, preliminary estimates indicate that aiddisbursements were lower than the levels in 1984. This was a result ofseveral factors, including a shift in the structure of aid commitments awayfrom quick disbursing programs and commodity assistance, and processing andimplementation delays on the part of both donors and the Government. Thusnet aid is estimated to have fallen slightly from 3.4% of GDP in 1984 to 3%of GDP in 1985. After taking into account other official and privatecapital movements, the overall deficit in 1985 amounted to US$98 million.

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This was financed by net IMF purchases of US$122 million. There was also afurther reduction in external payment arrears. The balance of paymentsposition in 1986 will benefit from the large increase expected in cocoaexporto and lower prices for crude oil imports. As a result, the currantaccount deficit is projected to increase only slightly in nominal terms. Asharp rise in aid disbursements is expected in 1986, which would permit afurther reduction in the overall deficit.

Devwlopment Program

17. In addition to achieving an appropriate incentive framework,public expenditure policy is an equally important component of the Govern-ment's development strategy. The neglected state of Ghana's economic andsocial infrastructure had become a critical bottleneck to the reformprogram's efforts to generate a strong supply response. Recognizing thisweakness, the Government's Economic Recovery Program for 1984-86 initiatedrehabilitation programs in key sectors - cocoa, timber, gold mining, andtransport infrastructure. Results are beginning to show, particularly inrailway transport which had been constrainiing evacuations of cocoa andmineral exports. At the same time, the Government has begun to prepare athree-year rolling development program, beginning in 1986, based on areview of public expenditures conducted Jointly with the Bank in the springof 1985. The highest priorities in the area of recurrent expenditures areto restore the viability and efficiency of public administration and toexpand significantly support to health and education. In addition, ade-quate allocations need to be provided for operations and maintenance. Tomeet these needs, annual average recurrent expenditures during 1986-88would have to be about 202 higher in real terms than the levels budgeted in1985. The initial work on the capital side indicates substantial rehabili-tation needs of the strategic economic sectors -- agriculture, mining, andeconomic infrastructure. Consequently, there is a large number of projectswith high returns on incremental investments. The only area where signifi-cant new investments have been identified is oil exploration, which wouldbe financed primarily by foreign investors.

External Debt and Creditworthiness

18. Ghana's medium- and long-term external public debt outstandingand disbursed at end-1984 amounted to US$1.1 billion, about 20% of GDP.Bilateral creditors account for slightly less than half of the total,multilateral sources for about 402 (Bank loans and IDA credits comprise 2BZof total debt), and suppliers credits for only 10%. Despite the predomi-nance of soft loans, Ghana's debt service burden in the coming years islikely to be very heavy, for severa] reasons: first, amortization ofpreviously rescheduled debt began in 1983; second, there is a relativelylarge amount of short-term debt, including US$195 million of paymentarrears at June 1985 which are to be cleared by 1990; and third, thereported debt excludes the use of Fund credit under the recent StandbyArrangements. Preliminary estimates indicate that by the end of 1985medium- and long-tenm external public debt, outstanding and disbursed wasroughly US$1.5 billion. The debt service ratio on medium- and long-tenm

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public external debt increased Erom 29% in 1984 to 44% in 1985. IncludingIMF charges and arrears payments, the share was 60%. In 1.986 the debtservice ratio is expected to be larginall lower because of improved exportperformance. There is little scope for rescheduling since most debt isshort-term oil financing, payments to the IMF and other preferredcreditors, and already reuchedulod debt.

19. In spite of the considerable gains which have been made, Ghana'seconomic situation remains difficult. That consideration plus thecountry's dependence on, and hence vulnerability to, fluctuations in cocoaearnings, make it desirable that future debt service obligations be kept aslow as possible. In addition, Ghana's per capita Income Is relatively low(US$400). Consequently, Ghana will have to depend on IDA resources forBank Group borrowlng over the next few years. In order to help ensure anadequate flow of foreign exchange into Ghana and to supplement thecountry's resource mobilization efforts, it also would be appropriate fordonors to provide assistance on highly concessional terms and to finance asignificant portion of local project costs.

PART II - BANK GROUP OPERATIONS IN GHANA 2/

20. Until March 1983 when lending was resumed after 18 months' hiatusthe Bank Group's assistance to Ghana was project oriented with a strongemphasis on export promotion and rehabilitation of basic infrastructure.The acuteness of the economic crisis of the past several years and themagnitude of structural distortions led the Government to develop a programof far-reaching economic reform which was announced in April 1983, anldthese factors have resulted in a major shift in our strategy which issummarized as follows:

(a) to assist the Government, supported where appropriate throughtechnical assistance and program lending, to improve incentivesfor production, to increase the efficiency of economic managementand to restore in the medium term a sound financial basis forgrowth;

(b) to promote the long-term growth and development of the economy byunderpinning structural adjustment lending with infrastructurerehabilitation and sector adjustment operations within a frame-work of appropriate sectoral policies, the latter encompassingindustry, agriculture, education, and public enterprise;

2/ This Part is the same as Part II of the President's Report for theEducation Sector Adjustment Credit which was approved by the ExecutiveDirectors on December 9, 1986.

(c) to improve the Bank'" knowledge of tho couintry'ti 1incentive

structure, expenditure policies, nnd intittitlonnl processes 1oan to lmnrove the Hank's contribution to the fturther devolopmentof the Ftonomic Recovory ProRrnm nnd mo Chnr the Bank'H recom-mendations nro consistont with the cnuntry'" lmplmmentntlnncapacity; aind

(d) to contribute tn improved aid effectiveness in Chnnai by ncting aRthe focal point for old co"rdlnat1on between donorN and Ghana Asthe Government strengthens its own planning and Mid coordinationnbility.

21. Based on the strategy as outlined above, a strtcturnl ndl]ustmentcredit is now at an advanced stage of preparntion as the first In a seriesof such operations to support changes in incentive policy and improvementsin economic management. A public expenditure review, an agriculturalsector review, and industrial qeCtor study have been completed and anenergy assessment has been substantially completed, all of whieh airecontributing to forming the basis of preparing a SAL operation. Aneconomic memorandum (Report No. 5884-GH dated October 7, 1985) has beendistributed, and another is being prepared. As part of the preparation forSAI., a 1986-88 development plan and 1987 import program are beir; zeviewedin close coordination with IMF. Over the medium-term IDA 'ending will alsoinclude sector operations and complementary, mainly infrastructural,project lending which will be increasingly policy oriented, focusing onsectoral strategies, Investment programs, public sector reforms and insti-tutional improvements. Finally, as described below, the on-going projectportfolio also supports the development of sound economic growth in theproductive sectors as well as the rehabilitation of infrastructure.

22. In response to the Government's announcement of a major economicreform program in April 1983, the Bank approved a series of program creditsdesigned to provide critically needed imports, particularly to exportsectors and supporting economic infrastructure such as transportation.These included two credits for export rehabilitation and related technicalassistance, and two reconstruction imports credits. The credits also laidthe base for policy reforms in critical areas such as cocoa producer pricesand marketing, price and distribution controls, and public expenditures.Since 1962, when the Bank Group financed its first operation in Ghana, theBank has made 10 loans totalling US$189.7 million and 35 credits totallingUS$688.2 million (including three African Facility Credits for US$62million. In addition, Ghana participated in a Bank-financed regionalclinker project covering three countries (Togo, Ivory Coast and Ghana). AnIFC investment of US$55.0 million in Ashanti Goldfields Corporation inGhana was approved in June 1984. Annex II contains a summary statement ofBank loans and IDA credits as of September 30, 19B6.

23. Energy has been a major focus of Bank Group lending to Ghana(20.1% of commitments). Projects financed in this sector include threehydropower generation and three power distribution projects, and a powersystem rehabilitation project. A project aimed at strengthening Ghana's

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technical capacity to accelerate petroleum exploration was approved inMay 1983. Another project providos technical assistance and financing ofimmediate requirements for rehabilitation of Ghana's sole refinery. Afollow up project with a component of improving petroleum productsdistribution system is being prepared. The next most important sector inthe Bank Group's program in Ghana is transportation (19.5Z of commitments)with four road projects, a railway rehabilitation project, and a portsrehabilitation project. The two reconstruction import credits and exportrehabilitation project also provided emergency imports to the roadtransport and port subsectors. The Accra District rehabilitation projectsupports the transport subsector in the Accra area as well as thestrengthening of the administrative and financial basis of the Accra CityCouncil and the improvement of a poorer section of the city.

24. In agriculture (14.9% of commitments), the main thrust of theBank Group's operations has been to assist the country in achieving greaterself-sufficiency in agricultural production, particularly food and rawmaterials for agro-industries, and rehabilitating the cocoa subsector. Anagriculture rehabilitation project under preparation will focus onstrengthening the Ministry of Agriculture, food security issues, andpricing policy for crops other than cocoa. A third cocoa project is beingprepared, the main components of which are research, input supply, anddisease control as well as support to policy reforms which are beingaddre. -I in the SAL. In the field of water supply, three projects hav,yincreased and improved water supply in the Accra-Tema metropolitan area andadjacent rural areas, with the most recent one helping to carry out emer-gency repairs and maintenance on main water pipelines. Two credits havefinanced investments in manufacturing and agro-industry undertaken bysmall- and medium-sized enterprises. The recent industrial sector adjust-ment credit aims to improve capacity utilization through provision ofimported inputs and sectorwide adjustment measures, including trade libera-lization which will be carried through in the SAL. While most Bank Grouplending has focused on financing supporting economic infrastructure andrehabilitation, there is recognition of the need to support the socialsectors. A credit to meet rehabilitation needs mainly in health with anemergency import component for education is ongoing, and a project aimed atsupporting the Government's education reform effort was recently submittedto the Executive Directors. In addition, a project to support theGovernment's state-owned enterprise reform program, following the actionsto be taken in this area under the SAL, is under preparation.

25. The country's past economic difficulties adversely affectedperformance of a number of Bank Grclp-financed projects as described ingreater detail in the Project Performance Audit Reports. Delays in imple-mentation caused disbursement performance to lag behind appraisalestimates. Annual gross disbursements over the four-year period FYB1-84averaged about 21Z of outstanding loan/credit commitments. However, theGovernment and the Bank have taken measures to improve implementation anddisbursement records. First, a Central Project Monitoring Unit (CPMU)established within the Ministry of Finance and Economic Planning in October1985, has proved to be very effective. Second, quarterly rather th..n

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semi-annual comprehensive project implementation reviews with CPMU haveimproved project lmplementation. Third, seminars and training on theBank's procurement and disbursement procedures not only for the Ghanaianauthorities concerned but also for some suppliers represented in Ghana havebeen productive. Fourth, improved coordination between suppliers,commercial banks and procurement agents has also helped to acceleratedisbursements. These actions, along with increased project implementationexperience and general progress of the economy, are reflected in improveddisbursement performance in FY86 of 38Z of outstanding commitments, whichis expected to improve further in FY87.

26. Given the need to focus Ghana's public expenditures on high-priority rehabilitation and maintenance and on adequate provision for non-salary recurrent costs, improved aid coordination is now assuming increasedimportance. In this connection, the Bank has chaired the Ghana Consul-tative Group meetings annually since 1983, organized an industrial sectoraid coordination meeting in May 1986, and co-sponsored with UNICEF asimilar meeting for the social sectors for interested donors in September1986. During the first half of 1987, a.LOther Consultative Group meeting isscheduled, and aid coordination sessions are planned for telecommunications,water supply, transport and agriculture.

PART III - ENERGY AND POWER SECTURS

Energy Resources and Consumption

27. Ghana has substantial energy resources, of which fuelw-od andhydropower are the most important. Forests cover about 8.8 millionheztares, three quarters of the country's land area, and are concentratedin the high forest zone in the southwest, where most of the timber industryis located. Ghana's total technically exploitable hydroelectric potentialis estimated at 10,000 GWh annually (2,000 MW), derived mainly from threemajor river systems (Volta, Tano, Pra) in the central and western regions.The currently installed hydro plant capacity is 1,072 NW, based on two damson the Volta River. Proven reserves of petroleum are less than 2.5 millionbarrels; offshore deposits of both crude oil and natural gas have beenidentified at Saltpond, Tano and Cape Three Points, but their size remainsto be confirmed. Further field evaluation work is being carried out underthe ongoing Energy Project (Credit 1373-GH, May 1983). Ghana has no knowndeposits of solid hydrocarbons. Solar energy is plentiful with mostregions receiving in excess of 1,900 hours of annual sunshine. Thispotential has not yet been exploited to any extent. Wind regimes aremoderate, and insufficient for energy purposes based on existing tech-nology.

28. Net energy consumption in 1985 is estimated at 3.1 million tonsoil equivalent, the bulk of which is fuelwood (70 percent) followed bypetroleum products (22 percent), agricultural residues (5 perceut) andelectricity (3 percent). Commercial energy consumption increased steadily

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throughout the 1970s and early 1980s despite the deteriorating economy,spurred by subsidized petroleum products and low real prices forelectricity. However, consumption declined sharply after 1982 because ofshortages of both petroleum and electricity, but recovered as supplyconditions normalized in 1985. The transport (43 percent), industry andmining (20 percent) and household (18 percent) sectors account for mostcommercial energy consumption. Energy sector issues have been examined inconsiderable detail as part of the UNDP/World Bank Energy Sector AssessmentProgram.

Energy Sector Organization

29. The Hinistry of Fuel and Power (MFP) has principal responsibilityfor petroleum and electricity. It supervises the state-owned GhanaNational Petroleum Corporation (GNPC), Ghana Oil Corporation (GOIL), andthe refining company, Ghanaian Italian Petroleum Corporation (GHAIP), whichdeal with the full range of oil related activities, as well as the twopower sector entities -- the Volta River Authority (VRA) and theElectricity Corporation of Ghana (ECG). VRA supplies electricity in bulkto ECG, the Volta Aluminum Company (VALCO), several mines, the AkosomboTextile Company (AKOTEX), and Akosombo Township. VRA also exportselectricity to Communaute Electrique du Benin (CEB) and Energie Electriquede la Cote d'Ivoire (EECI). ECG distributes the electricity lit receivesfrom VRA, and also operates 19 isolated diesel stations. To strengthenoverall energy sector planning, GOG has recently created the NationalEnergy Board (NEB). MFP is responsible for establishing and supervisingimplementation of overall policy for the power sector and is currentlypreparing a statement of sectoral development policy for inclusion in theproposed structural adjustment program. MFP has recently submitted to IDAa preliminary statement of financial objectives for the power sector whichwill provide the basis for regulating the future performance of ECG and VRA(para. 51).

30. Since its foundation in 1961, VRA has operated as a quasi-enclavewithin Ghana, and is a well managed entity. ECG, set up in 1967, with morecomplex responsibilities than those of VRA, has suffered from ineffectivemanagement anid has failed to perform satisfactorily in recent years. In aneffort to improve overall sector effectiveness, the Electricity SupplyBoard of Ireland (ESB), acting as consultant to GOG under the ongoing PowerSystem Rehabilitation Project (Credit 1628-GH, September 1985) studied thesituation and concluded that a merger of VRA and ECG offered the bestprospect for the future development of the sector. COG, with theconcurrence of IDA, considered this to be premature, but retained it as along-term objective. In the short term, attention will be focussed uponimproving the efficiency of ECC.

31. To enhance cooperation between ECG and VRA, GOG announced thesetting up of joint committees covering the use of services and facilitiesin areas such as computing, transportation, procurement and training. Amechanism whereby ECG could purchase foreign exchange from VRA has alsobeen established. ESB has also carried out a complete diagnostic study of

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ECG's problems and provides the basis for improving ECG's performance.Following discussions with IDA in July 1986, ESB is assisting ECG inimplementing the agreed recommendations.

32. In order for the proposed project to be successful, substantialdistribution investment is needed in the project area. Traditionally, thiswould be undertaken by ECG. However, as ECG is about to embark upon amajor rehabilitation of its existing system and improvement to its internalmanagement, the involvement of ECG in the proposed project would risk bothdeflecting ECG from these tasks and the timely implementation of theproposed project. Although the project area (Brong Ahafo, Northern andUpper Regions) is geographically large and diverse, its electricityconsumers comprise less than 2 percent of ECG's present market. The timelyrealization of the benefits of electrification will require considerablestrengthening of the present distribution arrangements in the project area.Furthermore, considerable skill and resources will be required to maintainthe existing diesel-based service through 1990, including investment in newdiesel generating units.

33. Consequently, COG, VRA and ECG have agreed that the project willbe implemented by VRA and that VRA will take over from ECG theresponsibility for all power sector activities in the project area fromJanuary 1, 1987. As it will not be possible for VRA to take physicalcharge of all power operations in the project area on this date thetransfer will be phased over the first half of 1987, using ECG's serviceson an agency basis. VRA is establishing a separate department or "profitcentre" for its new responsibilities to which will be transferred theexisting fixed assets of ECG in the project area, at an agreed valuation.This transfer would not prejudice the longer-term organization of the powersector and would be reviewed by GOG, VRA and ECG after 3 years (i.e. during1990). In staffing the new department VRA is giving priority to ECG staffin the project area; satisfactory arrangements would be made for staff notso recruited, either by transfer within ECG, preferential consideration bycontractors involved in project construction, or by severance. Someredundancies are accepted as inevitable but explicit local cost provisioncould not be made in the proposed project as the exact numbers and theirentitlements to severance pay are not yet known. It was agreed atnegotiations that this matter would be addressed in the context of ongoingstructural adjustment discussions. VRA's consultants have already carriedout a survey of ECG's installation in the project area as a basis for theirvaluation and to determine the resources required to maintain power supplyin the project area till completion of the proposed project. Costestimates will be available by December 1986 and VRA will then present asatisfactory proposal for their financing to the Kuwait Fund forDevelopment which has already agreed in principle to finance theseinvestments. At negotiations GOG submitted a satisfactory program andtimetable to implement the transfer of responsibility, including drafts ofthe minor legal amendments to the VRA and ECG Acts.

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Energy Policy and Pricing

34. Government energy policy is designed to: (i) reduce the cost ofenergy supplies to the economy in the short term through rehabilitation ofinstallations in the petroleum and electricity sub-sectors; (ii) reducedependence on petroleum imports; and (iii) improve forestry management toprovide an adequate long-term supply of fuelwood. Other sector objectivesinclude promotion of more efficient energy use through demand managementand strengthening of institutions and the planning process in the sector.

35. Prices of petroleum products and electricity fell sharply in realterms from the mid 1970s till 1983, as a result of high domestic inflationand over-valued exchange rates during that period. After the majordevaluation of the cedi in 1983, domestic energy prices were increased verysharply to bring them back into line with their international equivalents.Subsequent increases have generally kept up with the successivedevaluations since then. Electricity pricing policy and tariffs arediscussed in paras. 50-52.

Existing Electricity Supply Facilities

36. Ghana's total installed public generating capacity is about1,122 MW. Two stations on the Volta River, owned by VRA, at Akosombo(912 MW), and Kpong (160 MW), comprise 95 percent of installed capacity,and are capable of providing firm energy of 4,792 GWh/year. The remainderconsists of diesel units in 19 isolated centers that are generally in poorcondition, anu! the 30 MW Temn diesel plant being rehabilitated underCredit 1628-GH.

37. VRA's transmission system is shown on Map 19767, and comprisesover 1,300 km of 161 kV lines connecting the Akosombo and Kpong hydroplants to the VALCO smelter, other industrial loads at Tema, to ECG and tothe mines in southern Ghana. A 161 kV interconnection with CEB linksAkosombo to Lome, Togo. The Cote d'Ivoire is also interconnected to theVRA system through a 225 kV transmission line.

38. ECG distributes power in the urban centers supplied from aninterconnected grid in the southern part of Ghana, and operates theisolated diesel plants. In recent years service within the interconnectedgrid has deteriorated due largely to poor maintenance and inadequatereinforcement of the distribution system, resulting in an unsatisfactorylevel of losses (over 15 percent). The isolated systems in small townshave even more serious problems, arising from the age of the generatingunits and lack of fuel and spare parts. Most of these centers do not have24-hour supply and there is a high level of suppressed demand (para. 76).

39. Total captive generation capacity is estimated at about 30 MW,mostly in the mining and timber industries, hospitals, the Ghana Water andSewerage Corporation and some commercial enterprises. With the exceptionof the sawmills, it is mainly used for standby purposes.

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Access to Service and Consumption Trends

40. ECG hae about 240,000 customer connections of which about 70percent are concentrated in the five cities of Accra, Kumasi, Tema,Takoradi and Cape Coast. There are about 20,000 customers in the townsnorth of Kumasi which are not connected to the VRA grid. Only about 15percent of the population has access to electricity. ECG's peak sales of1,018 GWh were achieved in 1978, but have since declined. Sales fellsharply in the period 1982-84, mainly because of the severe drought thatnecessitated a program of load shedding for almost nine months during1983-84, but have since recovered following the lifting of restrictions onconsumption in September 1984. However, ECG's 1985 sales of 946 GWh werestill below their all-time peak.

Electricity Exports

41. Ghana exports over 70 percent of its electricity production toits neighbors and to the enclave aluminum smelter owned by VALCO that wasset up to take advantage of the plentiful hydropower from Akosombo. VRA'ssales to VALCO which peaked at 3,300 GWh/year in 1980 and 1981 were haltedby the unprecedented drought of 1982-83 that forced a complete shutdown ofthe smelter for over 18 months. Supplies to CEB were maintained, albeit ata sharply reduced level. These were restored to their normal level ofaround 500 GWh per year in late 1984. After completion of a tie-line in1983, Ghana was able to start exporting to Cote d'Tvoire, which was alsosuffering power shortages arising from the drought.

Sector Development

42. Ongoing Rehabilitation. Rehabilitation of the power sector is anessential element of the overall economic recovery in Ghana. This isbeing tackled under the ongoing power project (Credit 1628-GH), and theprocess will be further reinforced by the proposed project. Therehabilitation of ECG's distribution system is under way and a satis-factory package of technical assistance and training to improve ECG'soverall management has been agreed (para. 31). The problem of interpublicenterprise indebtedness is being tackled with the assistance of the Bank ofGhana and will also be addressed under the forthcoming structuraladjustment program and public enterprise reform project.

43. Future Sector Needs. Now that the decline in the economy hasbeen reversed, attention has turned to the medium term, and priorities arebeing adjusted to promote expansion of the power system. In 1984, VRA'sconsultants (Acres International, Canada), carried out a comprehensive20-year system expansion planning study to define a medium term investmentprogram for the power sector. In 1985, the Bank also undertook a review ofVRA's investment options for the period 1986-1995. Briefly, these studiesconfirmed (i) the adequacy of present generating capacity, with somethermal complementation required in the 1990s as the domestic load grows,and (ii) the need to reinforce the existing grid and extend it northwardsto supply towns now on diesel-based supply.

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44. VRA is discussing with SONABEL (Burkina Faso) the possibility ofinterconnecting the VRA and SONABEL systems by extending the 161 kV systemfrom Bolgatanga to Ouagadougou, a distance of 200 km including 25 km withinGhana. SONABEL is currently developing the 15 MW Rompienga hydro project,and is considering development of the 16 MW Bagre hydrosite. Even withthese projects, Ouagadougou could still absorb 10 MW (80 GWh annually) ofelectricity from Ghana, starting in the mid-1990s. Preliminary studiesindicate that Ghanaian hydropower would be more economic than the presentdiesel generation in Ouagadougou. From Ghana's perspective such a linewould not only increase export revenues, but also the returns to theproposed project b: increasing capacity utilization in the early years.

VRA - The Implementing Agency

45. VRA is governed by a Board appointed by the Head of State, and iscomposed of a Chairman and seven other members, including VRA's ChiefExecutive, the Managing Directors of ECG and VALCO, and a VRA staff member.VRA's organization and management is satisfactory. At the end of 1985, VRAhad about 1,600 employees directly engaged in electricity operations. VRAhas been able to build up and retain good staff in spite of low salariesbecause of its financial and managerial independence, and relatively goodworking conditions. It has an active program of staff training at its ownschool, and staff are also sent on management programs both in Ghana andabroad. In addition it has recently started sending younger professionalstaff for longer periods of on-the-job training with a Canadian utility.

VRA's Financial Position

46. Accounting and Audit. VRA's accounting and budgeting systems aregenerally satisfactory and provide timely and reliable financialinformation. VRA's electricity operations are financially separate fromthe other operations (lake transport, resettlement and other lakeactivities) for which it is respons_ble and for which separate accounts arekept. VRA maintains its accounts in accordance with appropriate inter-national standards. It also undertakes an annual revaluation of fixedassets using an indexation formula agreed with the Bank Group; VRA hasadjusted satisfactorily the cedi value of its long-term foreign debt,following recent devaluations. VRA's accounts have always been auditedwithout qualification and the audited accounts have been submitted to theBank Group within the agreed 6 months of the fiscal year end; VRA wouldcontinue to do this under the proposed project. VRA's present auditors(Coopers and Lybrand, Accra) are satisfactory.

47. Past Financial Performance. VRA's financial performance from thestart of operations in 1968 through 1981 was generally satisfactory withrates of return on average equity in the range of 5-6 percent, slightiybelow the level agreed with the Bank Group at that time. Since 1981, VRA'ssales have been adversely affected by the deteriorating economy andprolonged drought, while the impact on VRA's operations of substantial cedidevaluations were not offset by timely and adequate rate increases. Thedrought forced VRA to cut off supplies to VALCO for 18 months from

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June 1983, to reduce exports to Communaute El ctrique du Benin (CEB) and tointroduce domestic rationing. Consequently, VRA's rate of return in 1983was negative. Subsequently, VRA was able to raise rates charged todomestic consumers and CEB. and to renegotiate its contract with VALCO insuch a way as to raise the rate to at least USdl/kWh while giving priorityto the domestic market. Following these rate increases and improvedrainfall, VRA's rate of return on average equity rose to about 3 percent in1984 and 6 percent in 1985, with similar rates of return on revalued netfixed assets.

48. As of December 31, 1985, VRA's capitalization was US$369 millionequivalent; the debt/equity ratio was satisfactory at 32/68 but liquidity(the current ratio was 1.1) needed to be improved. Accounts receivablewere excessive, at almost 6 months' billings, and much of the problem restswith ECG. Under the power supply agreement between VYA and ECG, the lattershould settle its bills within 30 days of receipt. Moreover under theongoing power project (Credit 1628-GHl), ECG agreed to clear its overduebills to VRA and an action plan has been formulated to achieve this in1987. The plan will require ECG to substantially improve its collectionperfornance, particularly from the private sector. A major revenuecollection drive has already begun. This is expected to recover ¢ 900million (US$6 million) in arrears in the first half of 1987. Furthermore,the Water and Sewerage Corporation, ECG's major public sector debtor, isexpected to clear its overdues during the first quarter of 1987, enablingthese to be passed on to VRA. VRA agreed during negotiations to ensure thatfuture billings to all its customers are settled in accordance with therespective power supply agreements.

49. VRA is permitted to operate a US dollar account in New York, intowhich are paid dollar revenues from VALCO and from exports, and from whichVRA services its foreign debt and finances operational and capital foreignexchange requirements. Following a poor year in 1983, VRA had to obtain aUS$6 million short-term loan from its US bankers to meet foreign exchangecommitments. Given average rainfall from L986 onwards, this account isforecast to be in surplus. Under adverse hydrological conditions, on theother hand, VRA could again be faced with a shortage of foreign exchange tocover debt service. Consequently, VRA has agreed to set aside funds (acontingency fund) in foreign exchange, equivalent to not less than its futureannual foreign debt service obligations. This fund would be built upinitially by annual appropriations from VRA's earnings through 1990 to anamount equivalent to about US$35 million and would then be adjusted inaccordance with the level of VRA's debt service obligations.

50. Tariffs and Financial Objectives. VRA's average rate is expectedto be about ¢ 1.7/kWh (USU1.9/kWh) in 1986 following substantial domestictariff increases from April 1986. Current average prices to Ghanaianconsumers range from ¢ 2.7/kWh for ECG and the mines, to i 4.1/kWh forAKOTEX. VRA's domestic bulk supply rates include the recovery of the costof diesel generation in provincial centers, which VRA reimburses to EGG sothat the burden of these costs is spread amongst all domestic consumers.VRA's supplies to VALCO are presently billed at slightly over USdl/kWh.

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The price of sales to CEB is USA4/kWh until March 31, 1988 when thecontract is due for renegotiation. Up to October 1985 supplies to Coted'Ivoire were billed at USd4/kWh, but a new long-term contract remains tobe negotiated. ECG's average rate in 1986 is expected to be ¢ 5/kWh(USt5.6/kWh).

51. The need to ensure an adequate level of financial resources,including foreign exchange, to meet the operational, maintenance anddevelopmental needs of the power sector as a whole, led to an agreementunder the ongoing power project (Credit 1628-OH) to undertake a tariffstudy. The study would also examine t.he extent and the method of "taxing"the consumer surplus enjoyed as a result of the low economic and financialcost of electricity in Ghana, so as to enhance COG's resource mobilizationefforts and assist broader national developmental objectives. Based on thestudy, an agreement should have been reached with the Bank Group byJune 30, 1986 on appropriate financial objectives and earnings requirementsfor VRA and ECG. However, delays in appointing consultants to undertakethe tariff study meant that work did not start until October 1986. Pendingthe outcome of the tariff study Government has, however, identified anumber of broad but satisfactory measures that will form the basis forformulating objectives consistent with the aim of providing an efficient,economic and affordable national supply of electricity: the highestpriority will be given to resource mobilization by charging a nationaltariff that covers supply costs and a reasonable contribution to thesector's investment requirements and that also produces a dividend onequity; the present 102 tax on residential electricity consumption will beextended to all Ghanaian customers and VRA's foreign currency earnings willbe subject to power sector priorities - VRA debt servicing and ECG's andVRA's operation and maintenance requirements. As part of its currentreview of public enterprises, Government would also establish performancetargets for VRA and ECG.

52. Under the ongoing power project (Credit 1628-OH), and pending theoutcome of the tariff study, both VRA and ECG are required to generate atleast a 25 percent internal contribution to investment. However, for VRA abetter measure of the efficiency with which it manages its largecurrently-valued fixed asset base would be a rate of return on such assets.In order to ensure adequate liquidity over the project period (1986-90),VRA has agreed to earn a rate of return of at least 8 percent annually onits currently valued net fixed assets in operation. The appropriateness ofthis level of earnings would be re-examined following completion of thetariff study.

53. Future Financial Position. VRA's estimated capital requirementsduring the implementation period of the proposed project (1986-90) amountto US$253 million equivalent, of which about 67 percent consists of theongoing project (Credit 1628-GH) and the proposed project. Of the amountrequired, about 48% would be raised from donors, including IDA. At currenttariff levels and assuming average hydrological conditions, VRA should beable to generate the remaining 52 percent from internal funds afterproviding for debt service, an annual dividend to GOG, working capital, andcontributions to the proposed contingency fund.

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54. VRA has several projects in the capital program for water supplyand housing. While they are not dir ct power expenditures, VRA considersthem vital for continued efficient operations. The costs of these worksinclude foreign exchange components to be financed from VRA's foreignexchange account. VRA may also wish to embark upon further projects, asyet undefined, before 1990. Therefore, during negotiations VRtA agreed toreview with IDA, 3 months before the commencement of each fiscal year untilthe project is completed, the composition of its capital expenditureprogram for the following five years, together with a related financingplan.

55. Under average hydrological conditions, VRA's future financialposition should be satisfactory. VRA's current tariffs are adequate, underpresent inflation and exchange rate assumptions, to produce an annual rateof return on currently valued net fixed assets of at least 8 percentthrough 1990. VRA's debt/equity ratio should improve from 27/73 in 1986 to25/75 in 1990 as a result of a continuing level of earnings and fixed assetrevaluation. Liquidity indicators (debt service coverage, current ratio)should also be satisfactory through 1990. However, to protect its futureviability, VRA has agreed not to incur: (a) future long-term borrowingswithout IDA agreement, unless future debt service is estimated to becovered at least 1.5 times by future net revenues; and (b) short-termborrowings in excess of 10 percent of cash operating expenses.

56. Project Area Finances. Following the proposed transfer ofgeneration and distribution responsibility in the project area to VRA, thelatter would maintain separate accounts for the project area. Prior to1991, operating losses are unavoidable, given the high cost of diesel-basedsupply and the uniform national tariff. While some reduction in losses isexpected as a result of more efficient operation, VRA would meet theselosses through 1990. On completion of the project there should be aprogressive improvement In project area finances. However, an increase intariffs will be necessary to achieve an acceptable rate of return on theproject area investment, and this is being addressed in the ongoing tariffstudy.

Bank Group Role in the Power Sector

57. History of Involvement. The Bank Group has been closely involvedin the development of Ghana's power sector for nearly 30 years. The firstof three Bank loans to VRA was made in 1962 to assist in the financing ofthe Akosombo dam and power plant. Lending to ECG began soon after itsformation in 1967 and the ongoing power system rehabilitation project(Credit 1628-GH) is the seventh operation in the sector. The amount ofBank group lending for power projects in Ghana to date (US$150 million)exceeds that for any other sector and has helped finance virtually all themajor power sector investments since Ghana's independence. The Bank'sparticipation in the Akosombo and Kpong hydro generation projects wasespecially important in mobilizing the large amounts of cofinancing neededfor these ambitious projects.

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58. Two Project Performance Audit Reports (PPAR) have been preparedon Ghanaian power projects. An early PPAR covered the first four projects.The second PPAR of June 6, 1985, covering the fifth - VRA's Kponghydroelectric project (Loan 1380-GH), and sixth - ECG's Third Power project(Loan 1381-CH and Credit 689-GH), emphasized the need to fully utilizeexisting facilities before lnvesting in additional capacity; this is amajor objective of the ongoing power project.

59. Strategy and Rationale for Involvement. The Bank's continuedassociation with the sector is essential to secure the implementation ofthe necessary institutional reforms and financial strengthening startedunder the ongoing power project (Credit 1628-Gi). Bank Group participationin the proposed project is important to the success of the EconomicRecovery Program in the northern areas of Ghana, and would help to removeinfrastructure bottlenecks in that region. Furthermore, Bank Groupparticipation would assist COG to obtain timely funding for the sector's1986-90 investment program. As the proposed project would lay the basisfor an eventual interconnection with Burkina Faso, it is also consistentwith the Bank's efforts to promote regional cooperation In the electricitys ctor.

PART IV - THE PROJECT

60. The project was prepared by VRA, and was appraised by IDA staffin April/May 1986. Negotiations were held in Washington in October 1986.The Ghanaian delegation was headed by the PNDC Secretary for Fuel andPower, Mr. E. Appiah Korang. Supplementary data on the project arepresented in Annex III.

Project Objectives

61. The proposed project would assist Ghana to:

(i) improve the reliability of the country's electricity supply,reduce system losses and increase its electricity exportpotential by reinforcing the southern transmission grid;

(ii) accelerate the economic development of the north by bringinghydro-based grid supply to the main centers in the threenorthern regions, which at present have only limited supplyfrom diesels;

(iii) strengthen the sector's institutional arrangements by con-solidating in VRA responsibility for implementation andoperation of all aspects, including distribution, of thenorthern grid extension project, leaving ECG free to concen-trate on the rehabilitationi of the southern system; and,

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(iv) lay the basis for an eventual interconnection with BurkinaFaso that would permit the export of additional Chanaianhydro-onergy.

Project Description

62. The proposed project consists of the following components atlocations shown on Map 19767:

(a) Transmission

(M) construction of 161 km of single circuit 161 kV transmissionlines between Akosombo and Tafo and Akwatia and New Obuasito reinforce the southern transmission system;

(iI) construction of 581 km of single circuit 161 kV transmissionlines to extend grid supply to the north including thefollowing line sections: Kumasi to Techiman, Techiman toSunyani, Techiman to Tamale, Tamale to Bolgatanga;

(iii) installation of 161 kV substation facilities including: lineconnections at the existing Akosombo, TWao, Akwatia, NewObuasi and Kumasi stations; and new stations at Sunyani,Tamale, Techiman and Bolgatanga, including variable reactorsto provide voltage control; and

(iv) Construction of 60 km of single circuit 161 kV lighttransmission line (for initial 33 kV operation) betweenSunyani and Mim and installation of associated 33/11/0.4 kVsubstations in the Mim area.

(b) Subtransmission and Distribution

(i) construction of 173 km of 33 kV lines, and installation of33/11 kV substations to connect four isolated systems to thecentral grid;

(ii) rehabilitation of the existing 11 kV and LV distributionfacilities and addition of new facilities to increase byabout 30 MVA the distribution system capacity in tennorthern towns -- Techiman, Sunyani, Berekum, Wenchi, Him,Tamale. Pong Tamale, Bolgatanga, Navrongo and Bawku; and

(iii) adaptation of the shield wires on the 161 kV transmissionlines for 33 kV use so as to supply various smaller urbancenters.

(c) Engineering, Management and Consulting Services

provision of consulting engineering and management servicesand training for the project.

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Project Coat

63. The total project cost in antimnted at US$130.5 mIllionequivalent of which 78 percent (US$101.5 mlllion) IR the foreign component.The estimate is based on 1986 prices and includes a physilcal contingency of10 percent and price escalation averaging 7 parcent and 10 percont annuallyfor foreign nnd local costs, respectively. VRA is exempt from all tnxoeand duties.

Project Financing

64. The IDA Credit of US$6.3 million would finance the foreign costsof engineering and management services and a part of the distributioncomponent, amounting to about 5 percent of the project cost. The ITACredit would be onlent by COG to VRA for 20 years including 5 years ofgrace at the prevailing (presently 8.23 percent) IBRD interest rate. COGwould be repaid in US dollars, and VRA would be responsible for the foreignexchange risk on the IDA Credit. VRA would also be responsible for meetingany cost overruns, including any extra costs incurred if the 4-yearImplementation schedule is not achieved. The execution of a satisfactorysubsidiary financing agreement between COG and VRA is a condition of Crediteffectiveness.

65. Cofinancing amounting to US$87.5 million equivalent is availablefor the proposed project. An AfDB loan to VRA of US$38.3 millionequivalent (at 9.75 per cent for 20 years including 5 years grace) for thefirst phase of the project (grid reinforcement and extension to Techimanand Sunyani) was approved in June 1986. CDC and EIB (jointly US$36.7million equivalent) and CIDA (US$7.5 million equivalent) would financeother transmission and subtransmission components. The CDC and EIB loansto VRA would be repayable over 17 years with 5 years grace with interest at8.5 percent and 5 percent respectively. The CIDA grant to the Governmentwould be onlent to VRA. The Japanese Export-Import Bank would finance US$5million equivalent of the distribution component of the project at 6.4percent with 10 years repayment period including three years grace. VRAwould finance all local costs (US$29 million equivalent) of the project,the rest (US$7.7 million equivalent) of the foreign cost and interestduring construction (US$17.4 million equivalent). However, the Saudi Fundmaintains its interest in cofinancing this project and may provide up toUS$5 million equivalent to finance a part of the distribution work. It is,therefore, likely that a substantial portion of VRA's foreign exchangefinancing requirement may be met by other donors. The effectiveness of thecofinancing agreements is a condition of credit effectiveness.

Project Implementation

66. Status of Preparation and Execution. The transmission andsubtransmission components of the proposed project are fully designed,based on over three years of studies covering the technical and economicfeasibility of extending grid supply to northern Ghana. Substation siteshave already been selected and no problems are foreseen in arranging line

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rights-of-way which parallel existing ronds between the towns on landlargely controlled by the Government. Preparation of the distributioncomponent by VRA with assistance of consultants is underway. However, asche required lead time ror distribution works is less than fortransmission, tharn is adequate time for VRA to complete the proparation ofthe distribution component.

67. VRA, which would be the executing agency for the entire project,has proven to be effectivo nt meeting schedules on past Bank projects. VRAhas assigned responsibility for project execution to its EngineeringDepartment, whose staffing and resources are adequate for this ta6k. Thedepartment comprises about 20 engineers supported by an expatriateconsultant. VRA has engaged Acres International (Canada) to assist in bidevaluation 1 monitor procurement, and provide consulting services asrequired during project execution. VRA is engaging consultants to assistin the preparation of the distribution component. The VRA implementationschedule covers slightly more thatn 4 years for the overall project.

68. Procurement. VRA intends to base the procurement for the projectas much as possible on supply and erect contracts to shorten the sehedule,minimize unit costs, and lessen the need for external consultants. VRArecently advertised the following 161 kV transmission bidding packages:line conductors and accessories; towers including line erection; trens-formers and reactors; breakers; and the remaining substation equipmentincluding installation material. The 33 kV transmission work has also beenadvertised on a supply and erect basis. Bids are to be submitted byFebruary 3, 1987 in accordance with ICB guidelines, dividing the work intotwo phases - system reinforcement and Brong Ahafo region, to be financed byAfDB; and Northern and Upper regions to financed by CDCfEIB and CIDA.

69. Distribution materials and equipment will be procured through acombination of ICB, international shopping and tied Japanese bidding.Distribution installations in new areas will be made by contractorsappointed following LCB procedures while VRA staff will bc responsible forthe rehabilitation of existing facilities and connection of customers.Housing would also be erected by local contractors and financed by VRA.Foreign engineering and management services would be provided in accordancewith IDA guidelines.

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70. Procurement arrangements are summarized in the following table:

Procurement Arrangements(US$ Milllon)

Inter.Project Component ICB Shopping LCB Other a/ TotalTransmissionSubstations 96.9 - - - 96.9SubtransmissionDistribution 6.3 b/ 1.0 2.3 8.0 s/ 17.6

(1.8) (1.0) - - (2.8)Engineering, Management 9.5 9.5and Training - - - (3.5) (3.5)

Housing - - 6.5 - 6.5Total 103.2 1.0 8.8 17.5 130.5

4AM-JI-.§ SL22_ ..S;L..a/ Including VRA force account.b/ Including US$4.5 million VRA-financed.Ct Including US$5.7 million Japanese tied procurement.

Note: Figures in parentheses denote IDA Credit.

71. Disbursements. The proposed Credit would be disbursed against100 percent of foreign expenditures for vehicles, equipment and supplies toestablish VRA's distribution arrangements in the project area, and forconsultant engineering and manavement services and training. A provisionhas been made for up to US$0.6 million retroactive financing of consultantservices for project preparation since May 1, 1986. As there is nostandard profile for West Africa power projects, the disbursement schedulefor the Credit has been based on a standard East Africa Power SpecificInvestment profile, which is appropriate for this project. Disbursementsare expected to be completed by end-1991.

72. Monitoring and Reporting. VRA has established a ProjectExecution Unit within its Engineering Department, reporting to theDirector, Engineering. VRA is familiar with the Bank's reporting require-ments, from earlier and ongoing projects. VRA will submit standardizedproject progress reports satisfactory to all cofinanciers, and duringproject implementation IDA would liaise as appropriate with cofinanciers.

73. Environmental Aspects. The proposed project would not have anymajor adverse environmental effects. Most of the 161 kV and 33 kV trans-mission lines will traverse relatively sparsely populated areas. It isexpected that sawmillers will utilize any larger logs cleared fromtransmission rights-of-way. Provision of grid supply will eliminate airand noise pollution caused by diesel generation in the 10 towns now servedonly by diesels.

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Project Justification, Benefits and Risks

74. Justification - Grid Reinforcement. Demand growth in the westernand southern areas of VRA's existing grid and the interconnection withEnergie Electrique de la Cote d'Ivoire (EECI) have nearly fully loaded thepresent grid and reinforcement of some sections is necessary to meet demandreliably in the late 1980s. Due to the indivsibility of transmissionprojects, these AfDB investments wlll significantly raise the capacity ofthe network, giving VPA the means to reliably transmit additional energy toboth its domestic and export markets.

75. Grid Extension. The project would serve economically importanturban centers in the Brong Ahafo, Northern and Upper Regions of the countrywith combined populations of over 2 million people. These are the fastestgrowing urban areas in Ghana, accounting for 27 percent of the urbanpopulation outside Accra. Brong Ahafo is a major timber and cocoaproducing region of the country, while the Northern and Upper Regions areimportant food producing areas. The urban centers in all three regions areexpected to experience significant economic growth under the influence ofthe Government's economic recovery program, since they are the majormarketing and processing centers for agricultural products and the supplycenters for a wide range of goods and commercial services.

76. At present, electricity supply in the project area is provided bydiesel powered generating stations owned and operated by ECG. Supply isunreliable and costly: many generators are over 20 years old; onlyone-third of the potential peak load is served; service is generally 12-18hours per day, sometimes less, excluding unplan;.ed interruptions which arefrequent; and there is widespread use of autogeneration. The present costof this unsatisfactory and inefficient supply is about US#20/kWh, of whichfuel accounts for almost USi15/kWh, compared to a generation cost ofUS1-4/kWh for hydro power from the grid (depending on water conditions),and a USt4-6/kWh fuel cost using new diesels. Forecast demand for theproject area is about 25-30 MW by 1992, growing at 8 percent per year. Inseveral major centers (Tamale, Bolgatanga and Sunyani) there is a 5-yearbacklog in new consumer connections, due to ECG not having the generationcapacity to meet demand.

77. Benefits. Using the cost savings achieved under this project asopposed to the diesel alternative as a partial measure of the consumersurplus from reliable grid supplied electricity in the project area, theaverage willingness to pay, after adjusting for the impact of higher costson effective demand, was estimated at US414/kWh. On this basis, the IERRof the overall project would be about 18 percent. This would rise shouldexports to Burkina Faso take place in the early 1990s. The highest returncomponent of the proposed project is the extension to Techiman/Sunyani (24percent), while the lowest is Tamale/Bolgatanga (14 percent).

78. A 10 percent increase in project costs would reduce the IERR toabout 16.5 percent; a 10 percent higher than forecast load atcommissioning would raise the IERR to 19 percent, while a 10 percent lower

- 25 -

load would reduce it to 11 percent. A two-year delay in completion reducesthe IERR to 15 percent. These returns understate the true returns to theproposed project, as they do not include benefits arising from the provi-sion of piped water supply that is presently unobtainable in Tamale, andextremely inadequate in Bolgatanga, because of power blhortages.

79. Risks are normal for this type of project. A satisfactorysolution (the installation of variable reactors) has been proposed by VRA'sconsultants to deal with the technical problems of voltage control arisingon a long lightly-loaded transmission line. The coordination of projectimplementation and the maintenance of satisfactory future service in theproject area require improved institutional and operational arrangements,which would be introduced under the project.

PART V - RECOMMENDATION

80. I am satisfied that the proposed Credit would comply with theArticles of Agreement of the Association and recommend that the ExecutiveDirectors approve the proposed Credit.

Barber B. ConablePresident

AttachmentsWashington, D.C.January 15, 1987

ANNEX I

- 26 - Page 1 of 2

GHANA

ECONOMIC INDICATORS

GNP PER CAPITA IN 1985: USS400 1/

GROSS NATIONAL PRODUCT IN 1984 1/ ANNUAL RATE OF GROWTH

Ct Constant Price.)Cedis Mil. % 1979-84

GDP at Market Prices 279,000 100.0 -2.0

Gross Domeatic Investment 16,661 6.0 -5.9

Gross National Saving 8,860 3.2 -14.7Current Account Balance 7,801 2.8 --

Export of Goods, NFS 18,767 6.7 -10.4

Import of Goods, NFS 21,027 7.5 -8.7

OUTPUT AND LABOR FORCEOutput in 1984 Labor Force, 1983Cedis Nil. xMil.

Agriculture 141,904 51.3 2.584 57.2

Industry 23,434 8.5 0.691 15.3Services 1111150 40.2 1.242 27.5

GDP at Factor Cost 276,488 100.0 4.517 100.0

GOVERNMENT FINANCE

1984 1985

Cedis Nil. a of GDP 2/ Cedis Mil. S of GDP 2/

Total Revenue and Grants 22,641 7.9 40,311 11.5Total Expenditure and Net Lending 27,485 9.6 47,891 13.6

Overall Deficit (-) -4,844 -1.7 -7,580 -2.1

MONEY, CREDIT AND PRICES1977 1978 1979 1980 1981 1982 1983 1984 1985

Money and Quasi-money 3,044 5,131 5,942 7,949 12,029 14,837 20,497 28,552 44,987

Bank Credit to Government 3,203 5,636 4,903 6,518 10,649 11,057 21,059 22,819 24,825

Bank Credit to Private Sector 560 739 796 940 1,342 1,558 2,841 6,104 10,517

(Percentages or Index Numbers)Money and Quasi-money as% of CDP 27.3 24.4 21.1 19.4 15.7 16.7 10.7 10.2 12.8

General Price Index

(1977-100) 100.0 173.1 267.3 401.2 868.6 1,062.4 2,357.4 3,304.2 3,647.2

11 Atlas Methodology.2/ Ratios are calculated on a recently revised GDP series.

ANNEX I

- 27- Page 2 of 2

BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1981-85)

1984 1985 l1CUSS Million) USS Million S

Trade Balance -102 -112 Cocoa Beans & Products 382 64.5Exports f.o.b. 566 633 Cold 114 19.3Imports c.i.f. 668 745 Residual Oil 31 5.3

Timber 23 3.9Invisibles (Net) -113 -190 Electricity 18 3.1Services -186 -250 Manganese 7 1.2Transfers 73 60 Diamond 5 0.8

All Other Goods it 1.9Current Balance -215 -302

Total 591 100.0Capital AccountGrants 141 87Official Capital (Net) 88 33 EXTERNAL DEBT, DECEMBER 1985Private Capital (Net) -12 6Capital n.e.s. 2/ -12 -78 US$ Bil.

Overall Balance -121 -98 Total Outstanding andDisbursed N&LT 1.5

Net IMF 214 122Arrears Payments -61 -57Other 33Gross International

Reserves (End of Period) 3, 199 126

DEBT SERVICE RATIO FOR 1985 4/ S

February 1973 - June 18, 1978 Total Outstanding andUSs1 - 01.15 Disbursed MKLT 51.6

Total Outstanding andSince Aug. 26, 1978, US$1 - e 2.75 Disbursed inc. payment arrears 60.0Since April 21, 1983, US$1 - 024.69Since Oct. 10, 1983, US$1 - 030.00 IBRDtIDA LENDING (December 31. 1985)Since March 25, 1984, US$1 - 035.00Since August 25, 1984, US$1 - 038.50 IBRD IDASince December 3, 1984,US$l - 050.00Since April 19, 1985, US$1 - 053.00 Outstanding & Disbursed 122.87 252.76Since August 12, 1985, USS1 - 057.00 Undisbursed 0.01 337.74Since Oct. 7, 1985, USS1 - ¢60.00 Outstanding, incl.Since Jan. 11, 1986 US$1 - #90.00 Undisbursed 122.58 590.50Since Sept. 19, 1986Second Window Auction US$1 - ¢128-151

1/ Estimates.Z/ Includes errors and omissions.1 Including gold at national valuation.4/ As t of exports of goods and non-f;._tor services (includes IMF debt).

ANNEX II

-28- Par Iofi

THE STATUS OF BANK GROUP OPERATIONS IN GHANA 1/

STATEMENT OP BANK LOANS AND IDA CREDITS (As of September 30, 1986)

Loan or Amount (USSMillion)2/Credit Fiscal Lear CancellationNumber Year Borrower Purpose Bank IDA Undimbursed 3/

Ten loans and thirteen credits fully disbursed 189.7 107.4901-GH 1979 Republic of Ghana Second NIB 19.0 0.191009-GM 1980 Republic of Ghana Volta Region Ag.Dev. 29.5 18.461029-GH 1980 Republic of Ghana Third Highway 25.0 0.231170-GH 1981 Republic of Ghana Railway 29.0 5.991327-GH 1983 Republic of Ghana Reconstruction CIMAO 9.3 10.441342-GH 1983 Republic of Ghana Water Supply 13.0 4.31373-GH 1983 Republic of Ghana Energy Project 11.0 8.291393-GH 1933 Republic of Ghana Reconstruction Import Cr. 40.0 3.261435-GH 1934 Republic of Ghana Export Rehabilitation 40.1 17.03P009-GH 1984 Republic of Ghana Export Rehabilitation 35.9 22.011436-GH 1984 Republic of Ghana Export Rehabilitation

Technical Assistance 17.1 8.651446-GH 1984 Republic of Ghana Petroleum Refinery Rehab.

and Technical Assistance 6.9 5.191498-GH 1984 Republic of Ghana Second Oil Palm 25.0 22.561564-GH 1985 Republic of Ghana Accra District Rehab. 22.0 20.731573-GH 1985 Republic of Ghana Second Reconstruction

Imports Credit 60.0 29.45A003-GH 1985 Republic of Ghana Second Reconstruction

Imports Credit 27.0 25.61601-CH 1985 Republic of Ghana Road Rehabilitation and

Maintenance 40.0 44.02AOOI-GH 1985 Republic of Ghana Road Rehabilitation and

Maintenance 10.0 9.831628-GH 1986 Republic of Ghana Power System

Rehabilitation 28.0 31.041653-GH 1986 Republic of Ghana Health and Education

Rehabilitation 15.0 13.451672-GH 1986 Republic of Ghana Industrial Sector

Adjustment Credit 28.5 23.21A013-GH 1986 Republic of Ghana Industrial Sector

Adjustment Credit 25.0 18.081674-GH 1986 Republic of Ghana Ports Rehabilitation 4/ 24.5 27.8

Total 189.7 688.2 369.19of which has been paid 74.4 5.4Total now outstanding 1i5. U')3

Amount sold 0.4of which has been repaid 0.4 0.0

Total now held by Bank& IDA 119.3 682.8

Total undisbursed 0 369.19 369.19

11 The status of the project listed in this part is described in a separate report on all Bank/

IDA-financed projects in execution, which is updated twice yearly and circulated to the

Executive Directors on April 30 and October 31.

2/ Prior to exchange adjustments.3/ Calculated at the exchange rate applicable on September 30, 1986.4/ Not yet effective as at September 30, 1986.

- 29 - ANNEX III

GHANA

NORTHERN GRID EXTENSION PROJECT

SUPPLEMENTARY PROJECT DATA

Section I: Timetable of Key Events

(a) Time taken to prepare the project : Nine months(b) Project prepared by . VRA(c) First presented to IDA September 1985(d) Departure of appraisal mission April 1986(e) Negotiations . October 1986(f) Effectiveness (planned) . May 1987

Section II: Special IDA Implementation Actions

NONE

Section III: Special Conditions

(a) Transfer to VRA of power sector activities in the area tobegin January 1, 1987 (para. 33);

(b) VRA to ensure that billings to all customers are settledin accordance with respective power supply agreements(para. 48);

(c) VRA to set up contingency fund to cover foreign debtservice obligations (para. 49);

(d) VRA to earn a rate of return of 82 on currently valuedassets (para. 52); and

(e) VRA to annually review with IDA its five-year capitalexpenditure and related financing plan during the projectperiod (para. 54).

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