F JIE CJtIY 1l Report No. P-605

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized RESTRICTED F JIE CJtIY 1l Report No. P-605 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF GHANA FOR A POWER DISTRIBUTION PROJECT May 29, 1968

2 INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOt1ENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF GHANA FOR A PM2ER DISTRIBUTION PROJECT 1. I submit the following report and recommendation on a proposed credit in an amount in various currencies equivalent to U.S.$10 million to the Re-public of Ghana for a power distribution project. PART I - HISTORICAL 2. In August 1966, the Government of Ghana requested assistance from IDA to finance a development program to be executed by the Electricity Corporation of Ghana (ECG). A reconnaissance mission visited Ghana in September 1966 and advised the government on the data required for an appraisal. An appraisal mission visited Ghana in April and again in September It recommended that the proposed project would be suitable for an IDA credit of about $10 million. Negotiations were held in Washington in April The Ghanaian delegation was headed by His Excellency E. 14. Debrah, Ambassador to the United States from Ghana, and included among others Mr. R.K.O. Djang, Secretary, Economic Committee of the National Liberation Council, and lhr. E.Q.H. Acquah, Managing Director of the ECG. 3. This would be the Association's first credit to Ghana. A Bank loan for $47 million was made to the Volta River Authority (VRA) in 1962 for the construction of the Volta hydroelectric scheme. The project was substantially completed by early 1966, about one year ahead of the schedule and at a total cost somewhat below the original estimates. After the 1962 loan, the Bank was unable to lend to Ghana, owing to serious questions regarding general economic performance. The following is a summary regarding the Volta project loan as of April 30, 1968: Amount Loan No. Year Borrower Purpose (U.S. $ million) 310 GH 1962 Volta River Power 47.0 Authority Of which has been repaid to Bank and others 0.7 Total now outstanding 46.3 Amount sold 0.1 of which has been repaid Total now held by Bank 46.3 of which undisbursed 0.3

3 4. In addition to the proposed credit, consideration is being given to projects to provide two additional generators for the Volta River scheme and to develop fisheries. 5. So far, IFC has made no investment in Ghana. PART II - DESCRIPTION OF THE PROPOSED CREDIT 6. Borrower - Republic of Ghana. Beneficiary - Electricity CorDoration of Ghana (ECG). Amount - US$10 million equivalent in various currencies. Purpose - Rehabilitation and expansion of ECG's distribution systems in four main cities and in 16 smaller urban centers; construction of 33/11 kv overhead transmission lines; purchase of meters, service and construction vehicles, tools and testing equipment, and engineering and management consultant services. Amortization - Repayment in 50 years including 10 years of grace. Payments would be made in semi-annual installments commencing March 1, 1978 and ending September 1, Service Charge - 3/4 of 1%. Relending Terms - The Republic of Ghana would relend the proceeds of the credit to the ECG at 6-1/4% per annum, to be repayable in 20 years, including a grace period of three years. PART III - THE PROJECT 7. An ayppraisal report entitled "Appraisal of the Distribution, Expansion and Development Program of the Electricity Obrporation of Ghana" (TO-629a) is attached. 8. During the period , demand for electricity in Ghana has grown at an average rate of 13% per annum. Sales are concentrated principally in four major cities which account for about 90% of the total demand. Tbtal generating capacity amounts to about 678 MW. Of this, 588 MWJ is owned and oierated by the Volta River Authority (VRA), su3 plying to an aluminum smelter, gold and diamond mines, and to ECG. ECG owns about 90 I*T of generating capacity.

4 In conformity with its agreement with the Bank in connection with the Volta loan, the Government established ECG as an autonomous corporation to take over the assets and liabilities of the Electricity Division. ECG's main function is to purchase electricity in bulk from VRA, distribute it to consumers other than the aluminum smelter and diamond and gold mines and also to generate and distribute electricity in areas not served by the VRA transmission system. 10. ECG has under way a long-range program for developing its transmission and distribution facilities to meet the expanding demands upon it. This program was initiated in 1966 and the present stage is expected to be completed in It consists essentially of rehabilitation and expansion of the distribution systems in Accra, Tema, Kumasi, Secondi- Takoradi and in 16 smaller urban centers. It also includes provision for 33/11 kv overhead transmission lines, expansion of existing and construction of new diesel generating stations in areas which are not served by the VRA transmission system, buildings, service and construction vehicles, meters and other equipment. 11. The total cost of the program is estimated at about $42.2 million, including a foreign exchange component of about $29.8 million. ECG will generate earnings during this period to cover all of the local currency requirements and to provide sufficient funds to purchase from the Government about $4.7 million as a contribution toward the foreign exchange costs. The remaining foreign exchange requirements of $25.1 million will be covered to the extent of $7.5 million by credits already obtained from Germany and the United Kingdom, $10 million provided by the,roposed IDA credit, and $7.6 million to be provided through future external borrowings. 12. The amount of the IDA credit, which will be applied to expenditures under the ongoing program from July 1968 through early 1970, was all that could be committed to this project from the limited amount of IDA funds remaining available. Further IDA assistance to this program covering expenditures in may be considered at a later date. In any case, the works to be executed through early 1970 would fully serve their purpose even if the remainder of the program through 1972 could not be financed and had to be postponed. 13. With the assistance of its consultants, ECG should be able to execute the proposed project satisfactorily. Procurement would be on the basis of international competitive bidding. Tenders on this basis have been received covering about 90% of the equipment and construction requirements during the period, but no contracts have yet been awarded. Disbursement of the proposed credit would be made only for actual foreign exchange costs of equipment, material and services, and the foreign exchange component of erection costs as specified in the contracts awarded. 14. The proposed ;roject would enable ECG to meet the expanding power demand and to make fuller use of Volta power, a lower-cost energy source than the diesels at present in use. It would rehabilitate the distribution system, thus reducing distribution losses. It would also bring about some

5 - 4 - standardization of equipment which should allow for lower inventories and reduced maintenance-costs. 15. ECG began its operations on a satisfactory financial basis, with ample working capital and a conservative debt/equity ratio of 31/69. The decree establishing ECG directs it to prescribe its tariffs so that its revenues will be sufficient to produce a reasonable return on the fair value of its assets. During negotiations, it was agreed with the Government and ECG that this return should be at least 8% and that all necessary action, including tariff adjustments, would be taken to ensure this. ECG's proposed financing plan for the period July 1, December 31, 1972 is reasonable. About 40% of total construction requirements for this period would be met from net internal cash generation (including funds accumulated prior to July 1, 1967). This would be after payment of debt service and dividends of 5% - 6% on the Government equity capital, commencing in mid The debt/equity ratio, would increase to about 50/50 by 1972, still a satisfactory ratio. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 16. The draft Development Credit Agreement between the Association and the Republic of Ghana, the draft Project Agreement between the Association and Electricity Corporation of Ghana, and the Recommendation of the Committee provided for under Article V, Section I (d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 17. These draft Agreements contain provisiors normally included in agreements for power projects. Particular attention is drawn to the provisions requiring the Borrower and ECG to take all action required to ensure that EGG's revenues are sufficient to produce a reasonable return on the fair value of its assets (Section 2.06 of the Project Agreement and Section 4.01 (c) of the Credit Agreement). Detailed arrangements for the implementation of the undertaking concerning revenues and tariffs referred to in paragraph 14 will be embodied in an exchange of letters. 18. The Borrower and ECG would undertake to consult the Association regarding proposed appointments to the posts of Managing Director, Chief Financial Officer and Chief Engineer of ECG (Section h.01 (d) of the Credit Agreement and Section 2.03 (b) of the Project Agreement). PART V - THE ECONO.W 19. The report "Economic Stabilization in Ghana" (AF-75a) was distributed to the Executive Directors on May 29 (R 68-83). 20. The report does not attempt a new assessment of Ghana's longterm balance of payments prospects and capital inflow requirements, since the econonw is still in a period of transition. It concludes that, at

6 - 5 - at least until further progress has been made on rescheduling Ghana's external debt, Ghana could responsibly borrow only on concessional terms, confirming the conclusion of the report "Stabilization and Development in Ghana" (AF-57a) of March 14, After two years' experience of the stabilization program, it can be said that considerable progress has been made towards the restoration of stability, but the process is not yet complete. It appears that the brunt of adjustment has fallen most heavily on the level of investment, both public and private. Reduced public investment is not, however, a cause of concern, because the public sector was clearly overexpanded and the smaller volume is of improved quality. Some of the basic prerequisites for greater development effort have been met but low Central Government savings and the balance of payments constraint, with insufficient export growth, have emerged as impediments to development, at least in the short-term. However, Ghana has come a long way in strengthening the public sector's capacities to implement and improve investment, which should lead to a rising level of project aid. Investment planning in the private sector is quite active, but implementation of these plans is severely hampered by the foreign exchange shortage. Ghana's balance of payments position received some relief from a rescheduling, negotiated in December 1966, of payments due through the end of 1968 on medium-term external debt. The creditor countries agreed in principle to hold a second Aid Group meeting at the end of 1968 to consider relief of the external debt burden in subsequent years. Ghana was also helped through total commitments of US$17.5 million in 1966 and US$49.2 million in 1967 as long-term aid from Denmark, Germany, United Kingdom and United States of America. These commitments, which include PL-h80 assistance, have a weighted average term of 34 years, including a grace period of eight years, and an average interest rate of 2.3%. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 22. I am satisfied that the proposed credit complies with the Articles of Agreement of the Association. PART VII - RECOMMENDATION 23. I recommend that the Executive Directors adopt the following resolution:

7 - 6 - RESOLUTION NO. IDA 68- Approval of Development Credit to Republic of Ghana in an amount equivalent to US $10,000,000 RESOLVED: THAT the Association shall grant a development credit to Republic of Ghana in an amount in various currencies equivalent to ten million United States dollars (U.S. $10,000,000) to mature on and prior to September 1, 2017, to bear a service charge at the rate of three-fourths of one per cent (3/4 of 1%) per annum, and to be upon such other terms and conditions as shall be substaptially in accordance with the terms and conditions set forth in the form of Development Credit Agreement (Power Distribution Project) between the Republic of Ghana and the Association and Project Agreement (Power Distribution Project) between the Association and Electricity Corporation of Ghana, which have been presented to this meeting. Robert S. McNamara President Attachment Washington, D.C. May 29, 1968