FILE CO%py FOR OFFICIAL USE ONLY. Public Disclosure Authorized

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Report No. 1196a-GH Ghana: Electricity Corporation of Ghana (ECG); Appraisal of the Third Power Project March 1, 1977 Regional Projects Department Western Africa Regional Office FOR OFFICIAL USE ONLY FILE CO%py Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS us$ 1 = Cedi (0) 1.15 Cedi (0) 1 = us$ o.869 Cedi ( ) 1 = Pesewas (P) 100 Cedi (0) 1 million u US$ 869,565 WEIGHTS AND MEASURES 1 Kilometer (km) o mile (mi) 1 Meter (m) 2= feet (ft) 1 Square kilometer (km ) = square mile (mi 2 ) 1 Kilogram (kg) = pounds (lb) 1 Ton (1,000 kg) = short ton (sh ton) 3) long ton (lg ton) 1 Barrel (bbl; mi) = 42 US gallons (gal) 1 Kilowatt (kw) = 1,000 Watts (W) 1 Megawatt (MW) = 1,000 kw 1 Gigawatt (GW) - 1,000,000 kw = 1,000 MW (=106 kw) 1 Kilowatthour (kwh) = 1,000 Watthour (Wh) 1 Gigawatthour (GWh) = 1,000,000 kwh = 1,000 M4h(=10 6 kwh) 1 Kilovolt (kv) = 1,000 Volts (V) 1 Kilovolt ampere = 1,000 Volt amperes (1 kva) 1 Megavolt ampere (MVA) = 1,000 kva GLOSSARY OF ABBREVIATIONS GDP = Gross Domestic Product KfW = Kreditanstalt far Wiederaufbau VALCO = Volta Aluminum Company VRA = Volta River Authority ECG = Electricity Corporation of Ghana CEB = Communaute Electrique du Benin EECI = Energie Electrique de la C6te d'ivoire SWEB = South Western Electricity Board GOVERNMENT FISCAL YEAR July 1 - June 30 ECG's FISCAL YEAR Calendar Year

3 FOR OFFICIAL USE ONLY GHANA ELECTRICITY CORPORATION OF GHANA (ECG) APPRAISAL OF A POWER PROJECT TABLE OF CONTENTS SUMMARY AND CONCLUSIONS Page No. 1. INTRODUCTION THE SECTOR... 1 General Economic Background... 1 Sector Organization... 3 Electric Service Coverage... 3 The Market... 4 Existing Facilities... 5 Sector Planning... 5 Rural Electrification... 6 Tariffs THE PROJECT... 8 Project Costs... 9 Project Financing Items for Bank/IDA Financing Procurement Disbursement Project Execution Construction Schedule JUSTIFICATION General Consumption Forecast Least-Cost Solution Basis for Economic Evaluation Rate of Return THE BORROWER Organization and Management Personnel Training Operations Accounting and Financial Planning Billing and Receivables Inventories Audit Insurance This document has a restricte distribution and may be used by recipients only in the performance of their official duties. Its contsnts may not otherwise be disclosd without World Bank authorization.

4 II 6. FINANCES Past Finances Financing Plan Future Finances Fiscal Impact AGREEMENTS REACHED This report was prepared by Messrs. B.M. Thiam, S. Alber-Glanstaetten, J. Gilling and R.W. Bates.

5 LIST OF ANNEXES 1. Detailed Project Description Attachment 1: Construction Schedule 2. Cost Estimate (by category of materials) 3. Cost Estimate (by component of expenditures) 4. Disbursement Schedule 5. Demand and Energy Requirements in Ghana Tariffs Table 1: Scheduled Tariffs prior to October 1, 1976 Table 2: Scheduled Tariffs since October 1, 1976 Table 3: Outline of a Study to Analyse the Cost of Supply to Different Consumers and the Tariffs Charged to Different Consumers in the System 7. Demand Forecasts, Rate of Return Calculations Table 1: Incremental load Forecasts Table 2: Demand Forecasts, Rate of Return Calculations Table 3: Benefit and Cost Streams Figure 1: Generation and Distribution cost/kwh vs. Discount rate Figure 2: Costs and Benefits per Kwh incremental consumption 8. Organization Chart 9. Past and Future Finances: Table 1: Income Statements Table 2: Forecast Fund Flows Table 3: Balance Sheets Table 4: Debt Service Schedule 10. Assumnptions Underlying Financial Forecasts 11. Performance Indicators IBRD Maps Nos.: oR

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7 GHANA ELECTRICITY CORPORATION OF GHANA (ECG) APPRAISAL OF THIRD POWER PROJECT SUMMARY AND CONCLUSIONS Introduction i. The Ghana Government and Electricity Corporation of Ghana (ECG) have requested the Bank to help finance a further phase of development in the power sector, comprising ECG's development project and priority items of the Government's rural electrification program; the works consist mainly of expansion to the sub-transmission and distribution facilities; in addition, the project provides for improvements to ECG's operations and management. ECG is the Government-owned enterprise which distributes throughout the greater part of the country the electric energy that it purchases from the Volta River Authority (VRA); however, in the remoter centers which have still not been reached by the main VRA transmission network, ECG generates its own power. A Bank loan/ida credit of US$ 18.0 million in total -- 50% loan and 50% credit -- is proposed for the project; for the loan ECG would be the Borrower and the Government would be the Guarantor; for the credit, the Government would be the recipient and would relend it to ECG. The Government of Ghana is at the same time requesting a Bank loan of US$ 39 million to help finance the next generating station at Kpong (see Appraisal Report 1299-a-GH). Previously, two IDA credits totalling us$ 17.1 million were made to ECG; two Bank loans totalling US$ 53 million were also made to VRA as participation in the construction of the Akosombo hydro-power plant. All these IDA and Bank operations were completed satisfactorily and without undue delay. The Bank's audit observations on these past operations are being addressed in paras. 2.07, 5.06, 6.12 and Institutions ii. Two organizations, VRA and ECG, are responsible for providing public supplies of power in Ghana. VRA was created under a special Government Act in 1961 to construct and operate the Akosombo hydroplant on the Volta River; VRA supplies bulk power to ECG, to the smelter of the Volta Aluminum Co., (VALCO) at Tema, to several gold, diamond,manganese and bauxite mining industries (the mines), to the township of Akosombo and to the Communaute Electrique du Benin (CEB); the latter supplies Togo and Benin. ECG, established in 1967, supplies electricity to ai consumers other than those supplied by VRA, requiring up to 30 MVA at a voltage-not exceeding 34.5 kv. As of December 31, 1974, ECG had 138,000 consumers; of the total energy sold by ECG in 1974 (774 GWh), industrial consumers accounted for about 54%, residential consumers for 27% and commercial consumers 17%, and other consumptions 2%.

8 - ii - Tariffs iii. To be able to establish a sound tariff policy, the marginal cost of electricity supply at different locations, distribution voltage levels and type of load of the ECG system should be determined. In order to achieve on the average prices that would reflect the marginal cost of electricity in Ghana, the present ECG tariffs would need to be increased by an average of 70% in real terms. A tariff increase of this order of magnitude would not be feasible in the short run. During negociations, it was agreed to complete a power sector study by June 1978 and to derive therefrom a tariff structure reflecting as closely as possible economic costs. The project iv. The project proposed for Bank/IDA financing comprises (a) about 250 circuit km of 33 kv sub-transmission lines; about 6 circuit km of 11 kv lines with 11 MVA of distribution transformers; (b) about 32 km of low tension (380/220 V) distribution lines; (c) 11 new 33/11 kv substations with about 150 MVA of transformer capacity; expansion of about 6 existing 33/11 substations with 60 MVA of additional transformer capacity; (d) miscellaneous supply materials; (e) vehicles; and (f) US$ 46h,ooo of engineering services equivalent to 105 man-months at US$ 4,400 per man-months. Included in item (a) is a sizeable component (18% of total project cost) for the rural electrification scheme from Kumasi to Kumawu. v. The project provides for the distribution of power in the Sefwi- Wiawso-Bibiani area which is expected to be fed from the VRA grid through an 80 km 161 kv line to be constructed by VRA under the proposed third Bank loan to VRA (see appraisal report 1299-a-GH). Project Costs vi. The project is estimated to cost 30.7 (US$ 26.7) million including a foreign exchange component of 20.7 (us$ 18.0) million. The costs, which include overall allowances for physical and price contingencies of 3.0% and 22.2% respectively, exclude import duties and other related charges; ECG is exempted from these charges. ECG called for bids in mid-july 1976, and bids were opened in mid-september 1976; this has allowed the project cost estimates to be based on actual bid prices. Project Financing vii. A Bank loan/ida credit of us$ 18.0 million in total (50% loan and 50% credit) is proposed; this would finance the foreign exchange component of the project. The recipient of the credit would be the Government of Ghana, which would relend part of the proceeds to ECG at standard Bank terms. Total local costs amounting to about US$ 8.7 million equivalent would be financed by customer contributions and ECG's internally generated funds. Retroactive financing of up to US$ 1.5 million is recommended to cover the foreign exchange component of initial payments for engineering consulting services for project preparation work and for project expenditures expected to be made before Loan/ Credit signing.

9 - iii Procurement viii. Equipment supplies, erection and related services to be financed out of the proceeds of the proposed loan/credit would be procured under international competitive bidding in accordance with the Bank/IDA Guidelines, except for about US$ 500,000 equivalent of sub-transmission and distribution equipment and materials which for standardization reasons would be procured from the suppliers of the equipment under the previous program; it is recommended that the Bank agree to this procedure provided that the prices are reasonably in line with those obtained for similar items under international competitive bidding. Disbursement ix. The proposed loan/credit would be disbursed against the CIF cost of equipment and materials and the foreign exchange cost component of erection and services. Disbursement for any locally manufactured purchases would be made on the basis of 100% ex-factory. To allow sufficient time for the submission of final invoices, a closing date of December 31, 1980 is proposed. Project Execution x. ECG has hired the South Western Electricity Board, UK (SWEB) as their consultants to assist them in the design and procurement, as well as the supervision of the execution of the project. Construction of sub-transmission lines and sub-stations will be executed by contractors; low tension facilities will be installed by ECG's own force. Contracts were awarded in February 1977; supplies would be delivered during 1977 and 1978, and construction would start late in 1977 to early 1978 with phased completion from 1978 to the end of Justification xi. The average annual growth rate of total ECG consumption is forecast at 11% for the period and 8% thereafter. This load growth will require expansion of VRA generating (Kpong) and transmission facilities along with reinforcement and expansion of the ECG distribution network. The proposed project would (a) reinforce the distribution network to meet the increased demand of existing consumers and to connect new loads; (b) replace existing diesel generators now run by ECG or by some industries for own use; and (c) provide for review and implementation of staff planning and training, revaluation of inventory and fixed assets, and a study of tariff structure and levels all needed to improve ECG's efficiency and viability. xii. The proposed subprojects constitute the least cost solution to deliver the load forecast for a period of 15 years when compared with reasonable alternatives, taking into account the standardization of voltages adopted in Ghana and other local conditions such as the need for underground installations in some congested areas. xiii. Each subproject has been evaluated as part of an overall investment program necessary to meet the long term load growth. This program includes

10 - iv - generation, transmission and distribution. The return on investment has been found as the discount rate which equalizes eosts (capital and operating) and benefits. Revenues for new consumptions, fuel savings for existing selfgeneration and other benefits of new consumption, would not reflect the real economic benefits in view of consumers' willingness to pay the higher costs of alternatives for at least part of the same service e.g. kerosene for cooking and lighting, candles, etc. Current tariffs are based on the lov cost of Akosombo hydro-energy and do not allow consumers to reveal their willingness to pay a price for electricity based on the now higher long run marginal cost of Kpong. xiv. Direct evaluation of benefits has been done whenever possible, such as the fuel substitution by electricity (water pumps, diesel generation, etc.). Otherwise, the present underevaluated tariffs have been used as a proxy of benefits, which would represent the most pessimistic rate of return evaluation. On this basis, using a shadow exchange rate, of 1.7 cedis (1.48 times the market rate) the resulting rate of return of the overall project is 10%. If benefits not evaluated directly were assumed to be valued at marginal cost (70% greater than present tariffs and roughly comparable to 75% of tariffs paid in Liberia), the return of the overall project is about 14%. Organization and Management xv. ECG's management is generally competent. All senior staff have had a long-term association with ECG; however, the position of Chief Engineer has been vacant since This situation undoubtedly has had a negative influence on ECG's operations. Maintenance is very often delayed; this results in frequent breakdowns and power failures, particularly in the low voltage grids of Accra. ECG's operations are expected to improve under the Project. Finances xvi. Outside its own operations, ECG executes and operates rural electrification schemes on behalf of the Government. While the Government has regularly reimbursed the capital expenditures related to the schemes, it did not do so for operating losses, although it had agreed to it. However, in November 1976, the Government undertook to pay past operating losses by the end of xvii. Between 1968, ECG's first year of operation, and 1971, ECG's financial performance was excellent. However, in 1972, ECG's financial performance commenced to deteriorate and since then profitability has shown serious decline; rate of return on partially revalued assets which was slightly below the required 8% in 1972 and 1973 fell to 3.3% in Following poor operating results, ECG's liquidity was reduced to such levels that the entity was unable to fully meet its debt service obligations in 1974 and 1975 in respect of onlent IDA and Kreditanstalt fur Wiederaufbau (KfW) credits (IDA credits 118 & 256-GH and KfW Credits I & II); the total amount unpaid at the end of 1975 was about US$ 6.2 million. During negotiations the Government confirmed that it agreed to extend final maturities of the IDA and KfW II Credits to 1982 and 1984 respectively. The Government also agreed to ECG settling outstanding amounts of the IDA and KfW I Credits by the end of 1977.

11 v xviii. ECG will be the Borrower for the Bank loan of US$ 9.0 million and the Beneficiary of almost all of IDA Credit, In fact, the Government confirmed during negotiations that of the US$ 9.0 million IDA Credit it will retain US$ 100,000 for the power sector study (para. iii), it will onlend US$ 3.7 million relating to the Kumawu scheme on a grant basis and it will onlend the remaining US$ 5.2 million on standard Bank terms. xix. The Government just approved ECG tariff increases of about 29% effective October 1, This action was taken in parallel with a 60% increase in VRA's bulk tariff to ECG, effective September 1, The new ECG tariffs plus further tariff increases of 3-15% p.a. during are expected to restore ECG's liquidity and its rate of return performance of 8% on revalued assets as stipulated under the previous Credit 256-GH and reconfirmed under the proposed Bank/IDA loans. xx. ECG's financial position is expected to be excellent during the project construction period. The level of Bank borrowing is more related to Ghana's foreign exchange than ECG's own needs. Should the projected liquidity materialize, it was agreed that dividend payments would be made after ECG's ownl requirements, including contributions to investment needs, have been met. xxi. Subject to agreement on the conditions set out in Chapter 7, the project is a suitable basis for a Bank loan and an IDA credit of US$ 9.0 million each at standard terms.

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13 GHANA Electricity Corporation of Ghana (ECG) Third Power Project 1. INTRODUCTION 1.01 The Ghana Government and Electricity Corporation of Ghana (ECG) have requested the Bank to help finance a further phase of ECG's development, consisting mainly of expansion to the sub-transmission and distribution facilities; and improvements to ECG's operations and management. ECG is the Government-owned enterprise responsible for electricity distribution to the general public throughout Ghana. ECG distributes electric energy that it purchases from the Volta River Authority (VRA) throughout the greater part of the country, however, in the remoter centers which have still not been reached by the main VRA transmission network, ECG generates its own power A Bank loan/ida credit of US$ 18.0 million in total (50% loan and 50% credit) is proposed; this would provide the foreign exchange needed (see para. 2.01) to meet part of ECG's development project and some priority items of the Government's rural electrification program. This would be the third Bank group operation to ECG, the fifth in Ghana's power sector. Tn 1968, IDA Credit 118-GH (us$ lo million) helped ECG to rehabilitate and expand the distribution systems in Tema, Sekondi, Takoradi and Kumasi. In 1971, Credit 256-GH of US$ 7.1 million assisted ECG in financing (i) the further expansion of all four main systems mentioned above, (ii) the installation of new systems, and (iii) the construction cf 33/11 kv lines and substations to interconnect ECG's own systems and also connect ECG's systems with the VRA main transmission system from Akosombo. The Bank has also participated in the financing of the construction of VRA's Akosombo hydropower plant through two loans, 310-GH in 1962 for us$ 47 million and 618-GH in 1969 for US$ 6 million. All these IDA and Bank operations were completed satisfactorily and without undue delay. OED's audit comments on aspects of (i) merging the two power authorities, (ii) revaluation of assets, (iii) rate of return, and (iv) overstaffing are being addressed in paras 2.07, 5.06, 6.12 and 6.13 respectively The proposed Bank/IDA project is based on studies carried out by the Borrower's own staff in The Bank and IDA were instrumental in formulating the project through identification and pre-appraisal missions in The appraisal of the project was carried out in November-December 1975 and the present report has been prepared by Messrs. B.M. Thiam, S. Alber- Glanstaetten, J. Gilling and R.W. Bates. General Economic Background 2. THE SECTOR Ghana covers an area of about 240,000 km, extending about 400 km from west to east between Ivory Coast and Togo, and about 700 km from north to south between the Sahelian country of Upper Volta and the Gulf of Guinea. In 1976, the population was about 9.8 million; this has been growing at an

14 - 2 - average of about 2.6% per annum. Ghana's 1975 GNP is estimated at current prices at about us$ 1460 which compares favorably with that of most other West African countries; recent GDP growth rates have been -3.8% in 1972, +4.6% in 1973 and +4.9% in Despite a rise in cocoa prices, Ghana's balance of payments position deteriorated drastically in 1974; this was mainly due to (i) the four-fold increase in the oil import bill between 1973 and 1974, (ii) increases in the price of non-oil imports, and (iii) loosening of restrictions on imports; the current account deficit in 1974 was about US$ 187 million compared to a surplus of US$ 128 million in 1973, and the overall deficit of about us$ 187 million against US$ 145 million surplus in However, in 1975, the current account deficit diminished to US$ 45 million and the overall surplus was US$ 132 million The Government has issued general guidelines for a Five-Year Development Plan covering the period , pending the preparation of a more detailed plan; however, a 5.5% average GDP rate has been set. While the plan recognizes the country's dependence on a single commodity--cocoa-- which accounts for about 60% of the country's export earnings and 30% of Government revenues, it also stresses the need for economic diversification, for which the availability of a sufficient and reliable supply of electric energy represents a major ingredient. In this respect,ghana has had a substantial advantage over most of the other West African countries in that it has been possible through the utilization of the large hydro-power source of Akosombo on the Volta River to generate enough cheap power not only to supply a large aluminum smelter, but also to a large part of the country. This advantage became even more pronounced in recent years when large increases in fuel costs forced countries using oil to generate their electricity to increase dramatically the retail price of their energy. Until the end of the present decade, Ghana should continue to benefit from electric energy at a cost far below those experienced in most other West African countries. However, when the Akosombo output is fully absorbed by existing demand, and less economic hydro sources (e.g. the Kpong hydro-plant downstream from Akosombo on the Volta River) have to be tapped, this particularly advantageous position will deteriorate Ghana's total hydroelectric potential is estimated at about 1,500 MWl/ of which 882 MW (60%) is generated from the existing Akosombo hydro-plant generating facility. Although drilling (mainly off-shore) has been conducted, no oil resources have been discovered. Petroleum product consumption in 1975 amounted to 800,000 metric tons; this was supplied from the Tema refinery, the capacity of which is 1.4 million metric tons per year. Ghana does not have any coal deposits, the forests do, however, contribute substantially to domestic needs for charcoal. 1/ This hydro potential represents about 9,000 GWh/year, of which 5,400 GWh corresponds to Akosombo.

15 -3- Sector Organization 2.o4 Two organizations, the Volta River Authority (VRA) and the Electricity Corporation of Ghana (ECG) are responsible for providing public supplies of power in Ghana. The VRA supplies bulk power to ECG, to the smelter of the Volta Aluminum Co. (VALCO) at Tema, to several gold, diamond, manganese and bauxite mining industries (the mines), to the township of Akosombo and to Communaute Electrique du Benin (CEB), which supplies Togo and Benin. ECG is responsible for the distribution of power to all other consumers throughout Ghana VRA was created under a special Government Act in 1961 in order to construct and operate the Akosombo hydro-plant on the Volta River. The Act provides for a Board (appointed by the Head of State) consisting of a chairman and seven members, including VRA's Chief Executive. The broad delegation of powers laid down in the Act enables VRA to take any action necessary to conduct its affairs (electricity generation and bulk selling) in accordance with sound financial and public utility practices. In addition to generating and selling bulk electricity, VRA is also responsible for some non-power activities (transport on Volta Lake, and research and development activities related to the Volta Lake). Since its incorporation ten years ago, VRA has worked efficiently and has progressively improved its performance ECG supplies electricity to all consumers requiring up to 30 MVA at a voltage not exceeding 34.5 kv. As of December 31, 1974, ECG had a total of 138,000 consumers. ECG's load in 1974 consisted of 54% industrial consumption, 27% residential consumption, 17% commercial consumption, and 2% for other consumption. ECG's organization and overall management aspects (personnel, training, operations, Accounting System, billing, inventories) are fully analyzed in Chapter 5 and ECG's past and future finances in Chapter The feasibility of merging ECG and VRA has been under consideration off and on since the mid-sixties. As by now both ECG and VRA have developed into relatively mature organizations with distinctly different functions, a merger therefore is not expected to bring about major net benefits. Electric Service Coverage 2.08 About 100 towns in Ghana receive a public power supply; with the exception of Akosombo which receives its supply from VRA, all towns are served by ECG. Some 2.25 million people representing about 25% of the total population live in these towns and nearly half (i.e % of the total Ghanaian population) live in a household with a connection. About 263,000 people live in rural communities with an electricity supply, representing about 4% of the total rural population. Only some 10% of these (less than half of 1% of the total rural population) have a connection.

16 -4 - The Market 2.09 The total electric energy consumption and generation in / were as follows: % of total GWh Consumption ECG Residential Commercial Industrial Other Total ECG VALCO 2, Mines Akosombo Township & Textiles 30 o.8 CEB Total Consumntion 3, Losses and own consumption VRA 90 ECG Total Generation 4.6 2/ of which 4_110 VRA 4, / ECG (own generation) / ECG (Rural electrification) / As shown in Annex 5, during the period , total electricity consumption increased at an average of 6.5% per annum and ECG's consumption at 9.2% per annum 3/. In 1974, ECG's consumption represented 21% of total consumption in Ghana and in 1981, it is expected to be 30%. 1/ Figures corresponding to 1975 could not be considered as typical as they are affected by a substantial decline (8%) in VALCO's consumption due to the recession in the aluminum market. 2/ Referred to total generation. 3/ Annual growth rate of ECG's consumption for the period was 10.2% (see para. 4.03)

17 -5- Existing Facilities VRA 2.10 VRA's present facilities consist of the Akosombo hydro-plant; 920 km of 161 kv transmission lines and several 161/34.5 kv substations. The installed capacity of Akosombo is 912 MW consisting of six units; its longterm dependable generation and output are respectively estimated at 5400 GWh and 762 MW. ECG 2.11 ECG's present facilities consist of 33 and 11 kv lines and cables with 33/11/0.4 kv substations feeding the power from either VRA's transmission lines or ECG's own diesel plants; in November 1975, ECG had 28 diesel plants with a total installed capacity of 81 MW; the main diesel plants are those of Tema (33 MW installed) and Accra (15 MW installed but of low dependability). The quality of service is generally satisfactory although there are shortcomings, the reasons for which are explained in para Overall 2.12 The dependable power and energy in Ghana including 30 MW from ECG's Tema diesel plant are presently about 792 MW and 5,600 GWh respectively. An additional contribution of about 25 to 30 MW and 100 to 150 GWh from the standby generating facilities of the mines could also be added, but this should not be considered as firm. Sector Planning 2.13 The two corporations in charge of the Power Sector in Ghana have each been making separate plans for the development of the subsector concerned: VRA for hydro-generation and transmission lines, and ECG for subtransmission and distribution systems. The two corporations coordinate their actions mainly through their Boards of Directors; the Managing Director of ECG is a member of VRA's Board and VRA's Chief Executive is a member of ECG's Board. VBA 2.14 VRA has undertaken several studies to determine the construction and timing of the next least-cost generation facility taking into account the capacity of Akosombo and future power requirements. In 1975 the consultants, ACRES (Canada), completed a study showing that (i) Ghana will face power and energy deficits from 1978 onwards unless new generating facilities are commissioned, and (ii) after considering such alternatives as the Bui 1/ hydro-scheme and thermal power plants, the construction of a hydro-electric plant at Kpong downstream from Akosombo on the Volta River would be the least-cost solution. Consequently, VRA has decided to build Kpong 2/ and has approached the Bank and 1/ Bui is located upstream of Akosombo, on the Black Volta. 2/ Kpong is planned to have an installed capacity of 4 x 40 MW, a firm output of 140 MW, an annual generation of 970 GWh, and is expected to be commissioned in late 1980.

18 several other agencies for the financing of the project; a third Bank loan to VRA is under consideration, mostly for the financing of the Kpong project. VRA, in collaboration with Energie Electrique de Cote d'ivoire (EECI) 1/ is furthermore studying the feasibility of an intertie with the Ivory Coast grid by If constructed, this would allow the exchange of power and energy between the two countries and would result in substantial cost savings. Meanwhile, the feasibility study of the Bui hydro-electric project is underway. This would determine whether Bui is the least-cost alternative for electricity generation after Kpong As regards the transmission lines, VRA assisted by the Italian consultant, Italconsult-CESI, has completed the study of the long-term development of the Ghanaian high voltage grid. The short and medium-term developments of this grid consists of (i) an 80 km extension of the 161 kv grid westward to the Sefwi-Wiawso-Bibiani area where one of the schemes of the project is located; (ii) a 40 km/69 kv extension of the VRA grid from Asiekpe to Ho; (iii) a small 20 kv extension from Lome (Togo) to electrify the Ghanaian township of Aflao; (iv) reinforcement of VRA's substantions to take care of local load increases; (v) reactive power compensation in Prestea and Kumasi to reduce losses; and (vi) additional transmission facilities between Tema and Accra. ECG 2.16 Distribution system planning is not normally done on long-term basis; this is due to the uncertainties of the load growth pattern. For the short and medium-term, the proposed project has been drawn up; in addition, ECG proposes to complete some relatively minor reinforcements and small extensions to existing schemes. Rural Electrification 2.17 Although there is no explicit long-term program of rural electrification 2/ for the country as a whole, the Government favors rural electrification in general and annually orders ECG to carry out specific works within the amounts available from the national budget 3/. ECG has been carrying out the Government's rural electrification requests, year after year without evaluating and informing the Government about the financial and economic viability of these investments. During negotiations the Government agreed to exchange views with ECG on the financial and economic viability of rural electrification projects. 1/ EECI is the Electricity Corporation of Ivory Coast. 2/ ECG definition of "rural" is financial, and covers any scheme which is financed directly by the Government and for which ECG acts partly as an agent. 3/ For FY 1975/76, the Government has authorized capital expenditures of 4.8 million (about US$4.2 million); more than half this amount is to supply power from the VRA grid to Ho in the Volta region.

19 -7- Tari ffs 2.18 Current electricity tariffs in Ghana are based on the low cost of hydro-power supplied by VRA from the Akosombo dam. The era of cheap electricity will end as successively more expensive hydro-plants at Kpong (1980) and possibly Bui (1985) and thermal plants thereafter are brought online. ECG's tariffs are based on the VRA bulk supply tariff plus the costs of distribution and operation and are of two types (for details see Annex 6). The small residential, commercial, and industrial consumers pay a simple kwh charge in a declining block tariff. Large consumers pay a monthly maximum demand charge and an energy charge per KWh which decreases with KWh consumption per KVA of maximum demand Tariff restructuring and increases in level are needed to reflect the incremental cost of power in Ghana. Examination of the power and energy forecast in Annex 5 shows that the load factor of the VRA/ECG system is very high (86% in 1974) and will continue to be high in the future (82% in 1985). This is due to the significant proportion of the Valco aluminum smelter load in the total system load. Because of this high load factor, the overall system capacity is limited by hydro-energy capability (kwh) rather than by kw capacity. In view of this, there is no need, for the time being, for a tariff structure which distinguishes between peak and off-peak consumption or to encourage power intensive industries Surplus hydro-energy at a zero marginal cost in the short run will be available until 1985 given the present load forecast and commissioning date of Kpong (year end 1980). While this surplus hydro-energy exists it should be made available to industrial consumers for steam generation on an interruptible basis at a price competitive with the cost of fuel oil. Consequently it will provide benefits to Ghana equal to cost of fuel oil saved. On the other hand, the existing special low tariffs for firm power to industrial consumers should be eliminated because they lead to uneconomic utilization of electricity. During negotiations, the Government and ECG agreed to eliminate the special low tariffs for firm power to industrial consumers and replace them by the normal industrial tariff at the expiration dates of the present contracts To be able to establish a sound tariff policy, the marginal cost of electricity supply at different locations, distribution voltage levels and typesof load of the ECG system should be determined. Given the ECG inadequate information system, it is not possible to make a judgment on the cost of distributing electricity to the different classes of consumers. During negotiations ECG agreed to undertake a study of these costs as part of an overall power sector study as outlined in Annex 6 to establish a framework for future tariff policy. In order to achieve on the average prices that would reflect the marginal cost of electricity in Ghana, the present ECG tariffs would need to be increased by an average of 70% in real terms. In view of this extremely large tariff increase, it would not be feasible to implement marginal cost pricing in Ghana's electricity power sector in the short run.

20 An allowance for the power sector study has been made in the cost estimate for consultants' services. The results of the study should be presented for review by the Bank before June 30, 1978 with a view to derive therefrom a tariff structure designed to reflect the marginal cost of power, taking into account social and wider economic considerations. This was confirmed during negotiations. 3. THE PROJECT 3.01 The project proposed for Bank financing comprises the main components listed below; further details are given in Annex 1. (i) Subtransmission lines About 230 circuit km of overhead and about 20 km of underground 33 kv lines; about 6 circuit km of 11 kv overhead lines with about 11 MVA of distribution (33/0.4 kv and ll/0.4 kv) transformers mounted in such lines as described in the Annex. (ii) Distribution lines About 32 km of low tension (380/220V) distribution lines. (iii) Substations 11 new 33/11 kv substations with about 150 MVA of transformer capacity; expansion of about 6 existing 33/11 kv substations with about 60 MVA of additional transformer capacity. (iv) Miscellaneous supply materials About US$ 2.6 million worth of miscellaneous equipment and material for rehabilitating the existing subtransmission and distribution system. (v) Vehicles About us$ 1.49 million worth of vehicles (heavy, medium and light trucks, station wagons) to replace and expand existing transportation facilities. This component would not have been considered in the project if ECG were not suffering from the shortage of foreign currency in Ghana (more than 70% of ECG's existing service vehicles are at least four years old and need to be replaced). (vi) Consultants' services About us$ 464,000 in engineering services--equivalento about 105 man-months at US$ 4,400 per man-month--required for the execution of the project (see para. 3.10) and US$ 100,000 to cover two man years for the power sector study (see para. 2.22).

21 The project provides for the supply of power to the Sefwi- Wiawso-Bibiani area (see Annex 1). This area is expected to be fed from the VRA grid through an 80 km 161 kv line to be constructed by VRA under the third Bank loan which is now under consideration. It is important to achieve an adequate coordination between the construction of the Sefwi-Wiawso-Bibiani scheme by ECG and that of the 161 kv line by VRA. In this respect, a letter of intent for the construction of this 161 kv line will be a condition of disbursement for that part of the proposed loan/credit financing the Sefwi- Wiawso-Bibiani scheme. Project Costs 3.03 The project is estimated to cost 30.7 (us$ 26.7) million including a foreign exchange component of (us$ 18.0) million. The costs which are summarized below and set out in detail in Annexes 2 and 3 exclude import duties and other related charges. ECG is exempted from these charges.

22 Foreign Local Total Foreign Local Total % of --In million Cedis-- -- In million us$-- Total 1. Aboso Glass Factory (7.5 km of 33 kv double circuit line and 2 x 33/11 kv substations) 0.9 o o Teshie Housing Program (5.7 km of 33 kv double circuit line, 4.7 km of 33 kv cable and 1 x 33/11 kv substation) 1.3 o Weija Waterworks (8.5 km of 33 kv double circuit line, 2 x 33 kv/11 kv substations) Tema (3.7 km of 33 kv single circuit line, 11.2 km of 33 kv cable, 2 x 33/11 kv substations) Sefwi-Wiawso Scheme (86.5 km of 33 kv single circuit line and 7 x 33/11 kv substations) Kumasi-NSuta-Kumawu Scheme (91 km of 33 kv single circuit line, 4 x 33/11 kv substations) Supply of materials (for spares, reinforcement of existing schemes and future development) Supply of service vehicles Engineering services Total Base Line Cost Physical Contingencies o Price Contingencies Total Contingencies TOTAL PROJECT COST ECG has called for bids at mid-july 1976, and bids were opened in mid-september 1976; this has allowed the above cost estimates to be based on actual bid prices.

23 Since the various components of the project are well defined, a 5% allowance for physical contingencies appears justified for the equipment and materials to be used for these facilities. No such allowance has been included for interchangeable items like small distribution equipment and service vehicles; consequently, in relation to the total base line cost the overall allowance for physical contingencies amounts to 3.6%. Price contingencies have been allowed separately for foreign and local components 1/; the assumptions lead to an overall allowance for price contingencies of 28.2% on the base line costs plus physical contingencies. Project Financing 3.o6 A Bank loan/ida credit of US$ 18.0 million in total (50% loan and 50% credit) is proposed; this would finance the foreign exchange component of the project. The recipient of the IDA credit would be the Government of Ghana which would relend, at terms of the proposed Bank loan, part of the proceeds to ECG which would also be the borrower of the Bank loan (see para. 6.07). Total local costs amounting to about US$ 8.7 million equivalent would be financed by customer contributions and ECG's internally generated funds. Retroactive financing is recommended for US$ 1.5 million to cover the foreign exchange component of (i) initial payments for engineering consulting services and (ii) for payments related to letters of intent issued by ECG in February 1977 (see para. 3.10). Items for Bank/IDA Financing 3.07 The proposed Bank loan and IDA credit of US$ 9.0 million each would be applied as follows: BANK LOAN IDA CREDIT (us$ - million) I. Rural Scheme (Kumawu) II. Non rural schemes a) Equipment, materials, and vehicles b) Erection of lines and substations and related works III. Consultants IV. Unallocated Total / For the'foreign component, the following rates were used 10% in 1976, 8% in , and 7% in 1980; for the local component the rates were 30% in 1976, 18% in 1977, 1978, 1979, and The latter percentages were derived from the nature of works, i.e. erection of distribution equipment to be implemented.

24 Procurement 3.o8 Equipment, supplies, erection and related services to be financed out of the proceeds of the proposed loan/credit would be procured under international competitive bidding in accordance with the Bank's Guidelines, except for about US$ 500,000 equivalent of subtransmission and distribution equipment and materials which for standardization reasons would be procured from the suppliers of the equipment under the previous program; it is recommended that the Bank and IDA agree to this procedure provided that the prices are reasonably in line with those obtained for similar items under international competitive bidding. Disbursement 3.09 The proposed loan/credit would be disbursed against the CIF cost of equipment and materials and the foreign exchange cost component of erection and services. Disbursement for any locally manufactured purchases would be made on the basis of 100% ex-factory. The estimated schedule of disbursement is given in Annex 4. To allow sufficient time for the submission of final invoices, a closing date of December 31, 1980 is proposed. Project Execution 3.10 As part of the project ECG has hired the South Western Electricity Board, UK, (SWEB) in accordance with terms of reference acceptable to the Bank, as their consultants to assist them in the design of the project items, the preparation of tender documents, the tendering, the bid analysis, the preparation and administration of contracts, as well as the supervision of the execution of the project. Construction of subtransmission lines and related substations will be executed by contractors and low tension facilities will be installed by ECG's own force. The preliminary design, the preparation of bidding documents, the opening of bids and their analysis have been completed late With the approval of the Bank, ECG issued letters of intent within the bid's period of validity and subsequently made the required payments (see also para. 3.06). Construction Schedule 3.11 Contracts were awarded in February 1977; supplies would be delivered during and construction would start late in 1977 (and in early 1978 for some items) with phased completion from 1978 to the end of The attachment to Annex 1 shows the construction schedules for the main project items; these are based on past experience and are realistic. General 4. JUSTIFICATION 4.ol In support of the Government's development policy (see para. 2.02), the power sector is gearing up to supply the required demand for electricity in the medium term. This will require an expansion of the generating and transmission

25 capacity by VRA (Kpong and power transmission facilities) and provision by ECG of the distribution facilities to support the forecast demand growth. Specifically, the Project would : (a) extend and reinforce the subtransmission lines and distribution networks so as to meet the increased demand of existing consumers and new loads; (b) replace diesel generated power by cheaper hydro-power by integrating to the main network isolated areas heretofore serviced either by ECG itself or, in the case of some industries, by individually-owned generating units; and (c) provide for review and implementation of staff planning and training, revaluation of inventory and fixed assets and a study of tariff level and structure The economic justification which follows is based on the fact that (a) the individual sub-projects are required to serve the expected demand growth (para. 4.03) and (b) they constitute the least cost solution (para. 4.05). As indicated in para. 4.o8 it is not possible to evaluate the real rate of economic return on this project, therefore, the attempts that have been made to evaluate benefits based on the present prices of electricity in Ghana (para through 4.13) are intended to demonstrate the inadequacy of the present tariff levels vis-a-vis the marginal cost of electric power in Ghana. To correct this situation it is proposed (a) to eliminate the present special industrial tariffs (see para. 2.20) which do not even cover the generating cost of Kpong power and (b) to undertake a comprehensive power sector study (see para. 2.22). Consumption Forecast 4.03 The forecast of total ECG load growth is shown in Annex 5. This forecast is based on extrapolation of the past trends for each type of consumer and on the expected new consumer developments not included in the overall trend, such as specific industrial projects. The average annual growth rate for total ECG consumption is forecast at 11% for the period and 8% thereafter. Overall growth rates and composition of the ECG load are summarized in the table below.

26 % Annual Growth Rate % Total ECG Consumption Actual Forecast Actual Forecast Residential o Commercial Industrial Other Overall ECG %Total Ghanaian net generation (VRA + ECG generation - losses) o4 Consumption forecasts for each of the areas served by the sub-projects have been made on the basis of the general trend for the nonindustrial loads (residential, commercial, etc.) and on the basis of the specific information available for the main industries and some special services (such as water pumping) to be supplied. In the case of the industrial and special services load, an important part of the expected electricity consumption would come from substituting for direct fuel energy consumption, such as that of water pumps, sawmills, glass furnaces, etc. the electricity which would become available at lower cost as a result of the project. Details of the demand forecast for the specific subprojects are given in Annex 7. Least-Cost Solution 4.05 The proposed subprojects consist basically of 33 kv subtransmission lines of several conductor sizes in accordance with their expected loadings, and the corresponding substations. They constitute the least-cost solution to deliver the forecast load for a period of 15 years when compared with reasonable alternatives, taking into account the standardization of voltages adopted in Ghana and other local conditions such as requirements for underground installations in some congested areas. It is assumed that after these lines would reach their full capacity, the ECG sub-transmission system of which the proposed subprojects form part, would be reinforced according to future requirements. Basis for Economic Evaluation 4.o6 The energy to be distributed through the project facilities would require in the long-run the necessary expansion in the generating and transmission system of VRA. Consequently, for economic evaluation purposes the cost components include the investment and operating cost of the three main elements of the power system: generation, transmission and distribution, irrespective of the institutional separation between VRA and ECG. This approach has also been used in the appraisal of the Kpong hydro-electric project.

27 Each subproject has been evaluated as part of an investment program which includes generation/transmission, the 33 kv subtransmission financed by the proposed loan, and additional low voltage facilities and future substation reinforcement required to support load growth to the capacity of the 33 kv lines. Details of program costs are given in Annex 7. 4.o8 Current ECG tariffs, if taken as the sole proxy for benefits, would not reflect the real economic benefits obtained by consumers as evidenced by their willingness to pay. The current tariffs are based on the low cost of Akosombo hydro-energy and do not reflect the long-run marginal cost. The willingness to pay a higher price for an undefinable percentage of incremental consumption is demonstrated by the actual use of more expensive substitutes (diesel generation for own use, oil for cooking, candles, etc.) In view of this situation, direct evaluation of benefits for substitution loads of the industrial and water pumping energy requirements has been made on the basis of the value of fuel savings and on the reduction in production costs of the glass factory 1/ by use of electricity. For the rest of ECG's supply, benefits have been estimated on basis of present ECG tariffs, since no other direct method of evaluation could be satisfactorily applied. For purposes of comparison, an assumption has also been made that consumers would be willing to pay a price approaching long run marginal cost which is 1.7 timies the average existing tariff and roughly 75% of the tariff level in Liberia. 4.1o Among the benefits obtained from fuel energy substitution, the use of electric boilers at Tema textile industries has been considered. In this case surplus hydro-energy will be used to replace oil in the oil fired boilers for steam production. It is expected that sufficient surplus hydroenergy will be available as a result of Kpong project until The use of firm hydro-energy for replacing oil would not be economically justified because the long run marginal cost of electricity is about three times the fuel cost required to produce the same amount of heat, when power and fuel costs are expressed in economic terms, as indicated in Annex 7. The electricity for oil substitution would only be justified as long as surplus hydro-energy (with zero marginal cost) is available. In the context of the Kpong project it was agreed that VRA would agree to offer ECG surplus power on disconnectable basis. Rate of return 4.11 The economic rate of return for each subproject and the overall project has been estimated by finding the discount rate which equalizes incremental costs and incremental benefits, both costs and benefits being expressed in economic terms. A shadow rate of exchange of 1.7 Cedis/US$1(1.48 time the market rate) has been adopted. No shadow pricing has been applied to the local labor concerned because skilled and semi-skilled labor as required in this project is fully employed. Details of specific assumptions made in the rate of return calculations are shown in Annex 7. 1/ Electric furnaces reduce defects on production due to better heat control.

28 The table below provides the results of the rate of return of the overall project and individual subprojects for the estimated cost and load forecast Rate of Return % ECG Elimination of 1.7 x 1976 Tariff 1/ Special Tariff 1/ ECG Tariff 1/ Accra-Teshie Accra-Weija Kumasi-Kumavu Sefwi-Wiawso Tarkwa-Aboso Tema Overall In the first column of the above table, benefits are estimated on the basis of existing tariffs and other proxies. The second column shows the effect on the rate of return when normal industrial tariffs are charged to industrial users served by the Tema grid, instead of special contract rates. Both columns indicate clearly that the rate of return for the whole project is reasonable 2/, despite the gross undervaluation of benefits that occurs when using current tariffs as a proxy (paras and 4.09). As a further yardstick for comparative purposes, the third column of the above table illustrates the return for each subproject when benefits are valued at 70% higher than the current tariff levels i.e. approaching long run marginal cost. Long run marginal pricing is still reasonable considering that it corresponds to only 75% of the tariffs charged in Liberia (see Annex 7), which has the lowest tariffs among neighboring countries 3/. This analysis confirms the recommendations referred to in paras and 2.22 concerning the use of surplus hydro-energy on a disconnectable basis, the elimination of special tariffs for firm power and the carrying out of a study for ECG's tariffs. 1/ Refers to the portion of benefits (approximately 30% of total in col. 1) for which there is no fuel substitution, replacement of existing diesel generation, or other proxy. 2/ The rates of return on the Kumasi-Kumawu and Sefwi-Wiawso-Bibiani schemes reflect their predominant rural character; the rate of return on the latter is slightly higher than the former because it includes more productive uses of electricity, i.e., sawmills, metal working, etc. 3/ Annex 7, Table 2, page 8 shows the overall rate of return as a function of percentage increase of ECG tariff to show the effect of intermediate tariff increases.

29 THE BORROWER 5.01 Unlike the two previous Bank group operations, which were IDA Credits ( GH), the present operation consists of (i) a Bank loan for which ECG will be the Borrower and the Government the Guarantor, and (ii) an IDA Credit for which the Government will be the Borrower and ECG the Beneficiary (see also para. 6.07) ECG was established in 1967 following the Government's undertaking under loan 310-GH to reorganize the Electricity Division of the Ministry of Works and Housing as a Government-owned public utility with power to conduct its business according to commercial principles. The Ministry of Works and Housing supervises ECG, which is directed by a Board of seven members including ECG's and VRA's Managing Directors, and representatives of the Ministries of Finance, and Works and Housing. Organization and Management 5.03 ECG's headquarter operations are organized in four departments (Engineering, Accounting, Internal Audit, and Administration), and a small tariff section; in addition there are ten regional offices, the most important of which are in Accra and Tema. All these units are ultimately responsible to the Managing Director, who is ECG's Chief Executive. Functional control over the regional offices is also exercised by ECG's department heads (see also Annex 8). 5.o4 ECG's management has performed moderately well, leaving many necessary improvements to be implemented. ECG's new Managing Director is a dynamic and competent engineer who took over the job in early 1975 after a long career in utilities which had brought him to the position of Director of Engineering in VRA, which he filled until he was asked to take over his present job. The managers heading the Accounting, Internal Audit and Administration Departments are also competent; they all have had a long term association with ECG. The position of manager of the Engineering Department has been vacant since 1971, and this situation undoubtedly has had a negative influence on the efficiency of ECG's operations. During the negotiations, ECG confirmed that a Chief Engineer will be engaged by July 1, Present provisions (Credit 256-GH) on Bank consultation for future appointments of Managing Director and Chief Engineer have been confirmed. Except for an expatriate engineer, seconded from Germany for the operation of ECG's main control center, all the utility's management is Ghanaian Whereas top level positions appear adequately filled, middle management is weak and many vacancies exist. This is especially apparent in the Accounting Department where there are key vacancies in the sections dealing with the financial accounts, budget and stores. In order to attract adequately qualified staff for these positions, ECG has recently raised compensation levels for accountants; however, whether the salaries are now adequate to attract the required staff is not yet known. During the negotiations, ECG agreed to fill the vacant accounting positions by July 1, 1977.

30 Personnel 5.06 For several years up to 1973 ECG managed to stabilize its staff at about 4,800, but additions during 1974 brought the utility's establishment to its present size of about 5,200, with an employee to customer ratio of 1 to 27. Although reflecting a 33% improvement over the situation in 1969, this figure - as crude a measure for the staffing as it may be - indicates continued overstaffing. More acceptable ratios about 1 to 50 are found in Nigeria, Senegal and Ivory Coast. However, while overstaffing applies mostly to the lower level of staff, there is a lack of staff at the middle management level (see para. 5.05). The UK aid authorities have been asked to provide a manpower expert to determine ECG's future manpower needs and propose policies to adjust to these needs. It is understood that this request is being favorably considered. During negotiations, ECG gave assurances that (i) with the assistance of experts, it would draw up by January 1, 1978, and thereafter implement a staff plan, and(ii) until such plan has been agreed with the Bank, ECG will not increase overall staff numbers. Training 5.07 ECG has never carried out a systematic survey of its training requirements; there is no senior staff member in charge of training. This situation necessarily leads to unclear objectives and lack of comprehensiveness and coordination in this important aspect of ECG's operations. However, the programming of foreign training for the engineering personnel is relatively well developed. All other staff are essentially trained on the job with occasional participation in specialized courses at local institutes. For several years ECG has been building a training school at Tema which was expected to be completed by the end of 1976; the school will be mainly for vocational training of its junior staff. ECG is fully aware of the need to streamline and to improve its training programs, and it has requested the UK aid authorities to provide a training expert. During the negotiations ECG agreed to carry out a survey of its training requirements by July 1, 1977 and appoint a senior staff member in charge of training. Operations 5.o8 While ECG's operations are generally satisfactory there are shortcomings, particularly in respect of maintenance which is very often delayed; this results in frequent breakdowns, power failures and unsatisfactory voltage regulation, particularly in the low voltage grids of Accra. The main reasons for this situation are: (i) the absence of an engineering department manager since 1971 (see para. 5.o4), (ii) the lack of a local training school (see para. 5.07), (iii) the lack of a good fleet of service vehicles; three quarters of ECG's present fleet of vehicles are old and need to be replaced, and (iv) frequent shortages of spare materials. The project will be of major help in rectifying the shortcomings of ECG's operations. Performances indicators to be used during supervisions are shown in Annex 11.

31 Accounting and Financial Planning 5.09 ECG's accounting system was established and instituted by Coopers & Lybrand in the late sixties and the corresponding manuals are still being followed. The standards of accounting in ECG are adequate. Due primarily to the lack of staff, financial planning and control are weak and accounting is delayed. It is expected that with the recruitment of adequately qualified staff (see para. 5.05) the weakness will be corrected. Billing and Receivables 5.10 ECG's billing is on a monthly basis. ECG's accounts receivable improved from the equivalent of about 5-1/2 months revenue in 1970 to 3-1/2 months in The main element in this relative success was the institution of a central payment facility for Government accounts. Since then accounts receivables have increased, and in 1975 amounted to about 4 months revenues; this has been due to frequent breakdowns of ECG's electronic billing machines in Accra and more recently to teething troubles of a new consumers-based billing system. Increased collections from residential consumers is clearly the key to better performance. The new billing system was expected to have produced accurate and timely billing data by mid-1976 which should give ECG an adequate lever to start a vigorous disconnection program. During the negotiations ECG agreed that it would take such measures which would ensure that the level of its accounts receivables would, by December 31, 1977, be reduced to a sum not exceeding 3 months' billing revenue and thereafter be maintained at such level. Inventories 5.11 ECG's stock levels have increased from 2.4 (US$ 2.1) million in 1970 to 6.1 (us$ 5.3) million in The 1974 level represents material requirements for about 18 months; this is high. At the same time, ECG is critically short of vital items (insulators, transformers, meters, etc.), which is probably partly related to Ghana's import licensing system. However, ECG also acknowledges that its inventory management has been suffering from a lack of qualified personnel. Reorder levels and stock values in particular need to be reviewed. During negotiations ECG agreed to undertake by December 31, 1977 with the assistance of experts: (i) a revaluation of its inventories, and (ii) a review of its inventory management and valuation system; and after consultation with the Bank, implement the appropriate recommendations for improvements.

32 Audit 5.12 In accordance with the terms of previous IDA Credit, ECG's external audit is carried out by Messrs. Coopers & Lybrand in association with a local firm of chartered accountants. This arrangement is satisfactory. In addition to the audit per se, ECG's auditors provide management letters containing suggestions to overcome system weaknesses discovered during the course of the audit. ECG is continuing to build up an internal audit section to complement the work of external auditors and which emphasizes (i) control of the application of accounting procedures and (ii) physical stock taking. Insurance 5.13 ECG's insurance policies provide protection against losses of goodsin-transit, fire in buildings, third party claims on vehicles and other property, and workmen's compensation. Transmission and distribution lines are not insured; this is in line with accepted public utility practices. 6. FINANCES 6.01 Outside its regular activities ECG executes and operates rural electrification schemes on behalf of the Government; ECG keeps separate accounts for these works. As of December 1975 rural assets represented about 7% of ECG's regular Fssets. While the Government reimbursed ECG for capital expenditures, it has not reimbursed ECG for operating losses in these areas, and as of end- December 1975 the Government owed 2.8 million in this respect ECG's past financial performance related to its regular activities with a forecast of the entity's future finances is set out in the Statements given in Annex 9.

33 Past Finances 6.03 Between 1968, ECG's first year of operation, and 1971, ECG's financial performance was excellent; rates of return were well above the required 8%; the financial position of the entity was sound and financial indicators were above reasonable levels. Based on the excellent results of 1971 a dividend was paid to the Government in However, in 1972, ECG's financial performance commenced to deteriorate and since then profitability has shown serious decline; rate of return on partially revalued assets which was slightly below the required 8% in 1972 and 1973 fell to 2.6% in 1974 and despite a 20% tariff increase in August 1975, improved only marginally to 3.3% in The major factors contributing to the decline have been a slowing down in the growth of energy sales from 12% to 8% in 1974/75, large increases in employment related expenses, following substantial salary and wage settlements, and a doubling of fuel and lubricant expenses. Personnel and fuel expenses account for about 50% of ECG's operating expenses. Following poor operating results, ECG's liquidity was reduced to such levels that the entity was unable to fully meet its debt service obligations to the Government in 1974 and 1975 in respect of onlent IDA and KfW credits (IDA Credits 118 and 256-GH and KfW Credits I and II); the total amount unpaid at the end of 1975 was about (us$ 6.2) million. Salient features of ECG's finances during this period of financial decline ( ) are set out in the table below: Actual Electricity Sales (GWh) Average Revenues (P/kWh) Operating Ratio Rate of Return (%) Quick Ratio Debt/Equity Ratio 52/48 48/52 47/53 46/54 Debt Service Coverage o.6

34 o4 To assist ECG in regularizing its debt service obligations, the Government confirmed during negotiations that it agreed (i) to permit ECG to settle all amounts due on the onlent IDA I and KfW I Credits by the end of 1977 and (ii) to extend the final maturities of the onlent IDA II and the KfW II Credits from 1977 to 1982 and 1984 respectively. This is satisfactory Concerning the Government's undertaking under Credit 256-GH to reimburse ECG for rural operating losses, the Government confirmed during negotiations to settle all past amounts due in three equal semi-annual installments commencing in December 1976, and ending in December The Government further confirmed that it agreed that ECG submit yearly estimates of future operating losses and that on this basis, provisions would be made in the Government's budget. Financing Plan 6.06 ECG's capital investment and working capital requirements during the period, along with the sources from which they would be met are summarized below: us$ % ---- Million---- Requirements Proposed Project Other Works Future Program Sub-Total Investments Working Capital Additional Cash for Dividends/Future Capital Works Total Requirements Sources Net Revenues Plus: Depreciation Plus: Consumer Contributions Less: Debt Service Internal Cash Generation Proposed IDA/IBRD Lending Future Borrowings Total Sources

35 As indicated in para. 5.01, ECG will be the Borrower of the Bank loan of US$ 9.0 million. Of the US$ 9.0 million IDA Credit, the Government would retain US$ 100,000 for the power sector study (para. 2.22), would onlend to ECG US$ 3.7 million related to the rural Kumawu scheme on a grant basis and would onlend the remaining US$ 5.2 million for items not related to rural schemes on standard Bank terms The Bank loan would carry the prevailing interest rate (8.5% p.a.), a 3/4% commitment charge and a term of 20 years including four and half years grace. ECG is expected to start a further three year phase of development in Aggregate foreign exchange borrowing of 18.8 (US$ 16.3) million, on the grounds of country requirements, have been assumed for these works. Future Finances 6.09 In order to allow VRA to raise the necessary local capital required for the financing of the next hydro-electric scheme at Kpong, the Government approved a 60% increase in VRA's tariffs to ECG, effective September 1, The Government also approved, effective October 1, 1976, a 20% tariff increase in ECG's domestic and a 33% increase in ECG's industrial/commercial tariffs, equivalent to an average increase of about 29% The main assumptions underlying ECG's projected finances are: (i) VRA will increase tariff levels to ECG, during , 10-25% to meet its additional financial obligations for Kpong and to earn a 7-9% return on the Government's investment; and (ii) ECG's operating expenses other than purchased power will grow 10-25% p.a. 1/, reflecting system growth and inflation. Additional detailed assumptions are shown in Annex 10. On this basis, ECG is expected to achieve the following operating results: Electricity Sales (GWh) 941 1,096 1,277 1,465 1,698 Average Revenue (P/kWh) Operating Ratio Rate of Return (%) Asset Revaluation (%) Quick Ratio Debt/Equity Ratio 32/68 34/66 31/69 27/73 27/73 Debt Service Coverage / Should actual operating costs be higher, the Rate of Return mechanism (see para next page) would provide automatic coverage.

36 The existing revenue covenant of an 8% return on net fixed assets plus 5% working capital minus customer contributions was confirmed during negotiations. It is estimated that in order to maintain this 8% return, ECG's tariffs would have to increase - in current terms - very moderately in 1978 (3%) and thereafter 7-15% per annum. In recognition of the present uncertainty caused by high inflation rates in Ghana, ECG and the Government agreed during negotiations to take compensating tariff action within three months of an event which would cause ECG's operating expenses, excluding purchased power, but including debt service to increase by more than 10%. In order to assess well ahead required tariff action ECG agreed during negotiations also to submit to the Bank each year full financial forecasts by July 31. Finally, during negotiations the Bank suggested for further consideration by the Ghanaian Authorities to introduce an automatic tariff adjustments mechanism. Automatic tariff increases have been used in other countries to avoid the political difficulties of drastic and sudden tariff increases Assets have not been fully revalued since A partial revaluation, taking into account increases in ECG's long-term debt, following exchange rate changes, took place in ECG has always agreed in principle to a revaluation of assets but has delayed implementation because it could not agree with the auditors on a regular, reliable and inexpensive revaluation method. It was confirmed during negotiations that ECG will revalue its 1976 assets by indices satisfactory to the Bank by June 30, 1977 and keep assets on current values thereafter. The resulting asset values would be adopted for purposes of the rate of return calculation (see para. 6.12). Should the actual revaluation of the 1976 assets yield a different net fixed asset value than the estimated 69 million, the 8% return target would be adjusted proportionately. It was understood that assets will be maintained at current values by applying to local and foreign assets indices for local and international inflation. The financial projections assume a 40% revaluation in Thereafter, an annual revaluation of 11% has been assumed reflecting the weighted average of local (20%) and international (7%) inflation rates ECG's financial position throughout the forecast period is expected to be satisfactory. Debt/equity ratio would remain at around 30/70 which provides for an ample margin for further borrowing. ECG is also expected to retain a generous liquidity position which can be explained by (i) the profile of the project's financing plan with 71% Bank borrowing, and 29% internal funding and (ii) by ECG's requirement for full payment of the consumer contribution at the start of construction. ECG's borrowing from the Bank Group is in fact primarily determined by Ghana's foreign exchange. As indicated in the financial plan (para. 6.06) ECG is expected to accumulate about US$ 14 million in cash by This projected liquidity should enable ECG to resume paying dividends to the Government (see also para. 6.14). During negotiations it was agreed that such payments would be made after ECG's own requirement, including contributions to future investment needs, have been met During negotiations ECG agreed that the debt limitation covenant of Credit 256-GH, stipulating that no new long-term debt would be incurred

37 unless ECG's revenues covered the maximum future debt service 1.5 time, be extended to the proposed loan. Fiscal Impact 6.14 The project will affect the Government budget by (i) interest earnings on the portion of the IDA Credit which will be onlent to ECG, and (ii) disbursements for local currency element of the rural Kumavu scheme. Interest earnings are estimated at US$ 2.1 million, whereas, the local cost component of Kumavu amounts to US$ 1.8 million. No income or import tax revenues are expected, because of ECG's tax exemptions (see para. 3.03). Should ECG's projected liquidity in fact materialize, dividends payments in the order of million per year may become available to the Government (see para. 6.12). 7. AGREEMENTS REACHED 7.01 As a condition of disbursement for that part of the proposed loan/ credit financing the Sefwi-Wiawso-Bibiani scheme, a letter of intent for the construction of the 161 kv line feeding this scheme should have been signed in order to ensure an adequate coordination between the construction of the 161 kv line and that of the distribution scheme (para. 3.02) Under the proposed third Bank loan to VRA: (i) VRA will offer ECG surplus hydro-power for industrial steam production on disconnectable basis (para. 4.10); and (ii) The Government agreed to allow ECG to pass on VRA's tariff increases to its own customers During negotiations, assurances were obtained from the Government and ECG that: (i) The Government will exchange views with ECG on the financial and economic viability of rural electrification projects (para 2.17); (ii) ECG will make surplus hydro-energy available to industrial consumers on an interruptible basis for steam generation (paras and 4.10); moreover, the existing special low tariffs for firm power to industrial consumers will be replaced by the normal tariff at the expiration dates of the present contracts (para. 2.20); (iii) As part of an overall power sector study, a study of generation, transmission and distribution costs, and tariff structure will be carried out and presented for review by the Bank before June 30, 1978 (para.2.22).

38 (iv) (v) (vi) The Government will onlend that portion of the proposed IDA Credit which is related to the Kumawu rural scheme on a grant basis and will onlend to ECG the portion of the credit unrelated to rural works at standard Bank terms (para. 6.07); The Bank will continue to be consulted on appointments of Managing Director and Chief Engineer (para. 5.04); and Compensating tariff action would be taken should an event occur which would increase operating expenses by more than 10% (para.6.10) During negotiations, assurances were obtained from ECG that: (i) (ii) The post of Chief Engineer will be filled by July 1, 1977 (para.5.04); Measures will be taken to fill the vacant key accounting positions (para.5.05); (iii) A staff plan agreed with the Bank will be drawn up by January 1, 1978 and thereafter implemented (para.5.06); (iv) A survey of training requirements will be completed by July 1, 1977 and a senior staff member will be appointed in charge of training (para.5.07); (v) By June 30, 1977, assets will be revalued in the 1976 accounts, kept on a currently valued basis thereafter and these values will be applied for purposes of the rate of return calculation (para.6.11); (vi) The level of accounts receivable will be reduced by December 31, 1977 to a sum not exceeding three months'billing revenue and thereafter be maintained at that level 6para.5.10); (vii) (viii) (ix) (x) (xi) With the assistance of experts a revaluation of the inventories and a review of the inventory management valuation system will be completed by December 31, 1977 (para.5.11); The annual accounts will continue to be audited by independent auditors (para.5.12); A rate of return of 8% on the rate base as specified in Credit 256-GH will continue to be carried pending the full revaluation of 1976 assets; each year by July 31, financial projections will be submitted to the Bank/IDA (para.6.12); Dividends will only be paid to Government after ECG's requirements (including investment needs) have been met (para.6.12); and Long-term debt limitation will be observed (para.6.13). With the foregoing agreements the project is suitable for a Bank loan of US$ 9.0 million for 20 years including 4-1/2 years of grace and an IDA Credit of US$ 9.0 million.

39 ANNEX 1 Page 1 of 3 pages GHANA Electricity Corporation of Ghana (ECG) Third Expansion Phase Detailed Project Description 1. The proposed ECG Third Phase project consists of (a) constructing 33 kv, 11 kv and LV overhead lines and related substations for specific electricity requirements and for rural development; (b) laying 33 kv underground cables and reinforcing substations at Tema for industrial requirements; (c) supply materials and service vehicles; and (d) securing consultant services. (a) Constructing 33 kv, 11 kv and LV overhead lines and related substations Five lines are planned: (i) From Tarkwa to Aboso: This 33 kv 95 mm 2 cu equivalent double circuit line of 7.5 km will link the Volta River Authority 161/33 kv substation at Tarkwa to a 33/11 kv 2 x 10 MVA substation to be built at Aboso. This line will enable the Aboso Glass Factory to be supplied with the electricity needed (9 MW, 24 hours/day) to expand from the present output of 37 tons/day of bottles to 60 tons/day by end of 1977 and 90 tons/day in (ii) From Accra to Teshie-Nungua (east of Accra): This component of the project consists of a 5.7 km double circuit line (33 kv, 95 mm 2 cu equivalent), two 2.35 km 33 kv cables and a 33/11 2 x 10 MVA substation to be built at Teshie. The Ghana State Housing Corporation is presently implementing a six-phase construction program of 2,200 dwellings at Teshie; completion is expected for This construction program includes houses, a 200-bed hospital, six schools, commercial buildings; overall this development will require about 1.7 MW in 1979 and about 9 Gwh/year by 1980; 1/ The African Development Bank has given a loan in Units of Account of 5 million (about US$ 6 million) to finance this expansion of the factory.

40 ANNEX 1 Page 2 of 3 pages (iii) From Accra to Weija Waterworks of GWSC (west of Accra): This 33 kv, 95 mm 2 cu equivalent double circuit line of 8.5 km is intended to supply, through a 33/3.3 kv 2 x 5 MVA substation, the GWSC (Gha a Water and Sewerage Corporation) pumping station at Weija_ and an irrigation area that is located 6 km beyond Weija. From the waterworks to the irrigation area, only a single circuit line is envisaged. The initial (1979) requirements of the Weija waterworks are about 2.5 MW and 12 GWh/year; the requirements of the irrigation project, which is sponsored by the Ministry of Agriculture (Irrigation Department), are about 1.5 MW and 9 GWh/yea,.; (iv) From a Volta River Authority 161/33 kv substation near Asanwinso to the Sefwi-Wiawso-Bibiani area: This 86.5 km, 33 kv 95 mm 2 cu equivalent single circuit line will supply existing industries (sawmills at Sefwi- Wiawso; bauxite at Awaso; gold at Subin; and a metal and wood complex at Bibiani) through seven 33/11 kv substations with a total installed capacity of MVA; related LV distribution lines are also included. This component, which is also a first phase rural electrification scheme, will bring electricity to seven townships and about 30,000 people. The electricity requirements of the area are estimated at about 7.1 MW and about 35 GWh/year by 1980; (v) From Kumasi to NSuta and Kumawu: This 91 km, 33 kv 95 mm 2 cu equivalent single circuit line is intended to supply about 15.3 GWh in 1980 with a maximum demand of about 4.1 MW through four new 33/11 kv substations and 15 new 33/11 kv/lv substations with a total installed capacity of MVA; related LV distribution lines are also included in the component. This line would allow the electrification of rural areas (12 townships with a total population of about 40,000 people) and the shutting down of two of ECG's isolated diesel generating plants; it would also supply a sawmill (2.5 MW) planned to be constructed at Kumawu, a quarry, a tire retreading factory, water pumping stations, and schools. 1/ This water pumping station is a component of a project co-financed by IDA (Credit 499-GH).

41 ANNEX 1 Page 3 of 3 pages (b) Laying 33 kv Underground Cables and Reinforcing Substations at Tema This component of the project includes laying 11.2 km of 33 kv cable of 3 x 240 mm 2 cu equivalent, equipping two new 33/11 kv substations (2 x 20 MVA transformers each) reinforcing two 33/11 substations 2 x 20 MVA transformers and 2 x 10 MVA transformers), and constructing 3.7 km of 33 kv overhead line (95 mm 2 cu equivalent). In addition to meeting the electricity requirements of the Tema Steelworks (about 12 MW by 1979 and 54 GWh/year), these works will help realize cost savings, since electrode boilers will be substituted for the existing oil-fired boilers which would be put on standby; industries concerned are Tema Textile Ltd. (about 13 MW at commissioning date and 42 GWh/year); sale of electricity for these electrode boilers will be done on an interruptible basis using surplus hydro energy when available (see para. 4.10). (c) Supply Material and Service Vehicles (for values see Annex 2) (i) Spares for the plant involved in constructing the above lines and substations and in laying the above cables; (ii) Spares for the existing 33 kv, 11 kv and LV distribution grids; (iii) Materials required for the Accra low voltage reinforcements; (iv) Miscellaneous distribution materials (not in stock) for a three year development of ECG's distribution networks; (v) Service vehicles (more than 70% of ECG's existing service vehicles are at least four years old and need to be replaced). (d) Securing Consultant Services These services are required for (i) preparing the specifications and tender documents for the project, (ii) analyzing bids, (iii) supervising project execution and moreover (iv) for carrying out a oower sector study aiming at proposing a sound tariff policy.

42 GHANA Electricity Corporation of Ghana (ECG) Third Expansion Phase Construction Schedule Aboso Glass Factory XXXXXXXXXXXXXX XXXXX- 2. Teshie Housing Program XXXXXXXXXXXXX XXXXX 3. Weija Waterworks (and irrigation) XXXXXXXXXXX 4. Tema XXXXXXXXXXX 5. Sefwi-Wiawso-Bibiani Scheme XXXXXXXXXXXXXX- 6. Kumasi-NSuta-Kumawu Scheme XXXXXXXXXXXX-- 7. Supply of spares and materials for XXXXXXXXXXXXX reinforcement and development program 8. Supply of service vehicles XXXXXXX _~~~~~~~~ _ - Preparation of specifications and tender documents; bids' evaluation and award of contract XXXX Manufacturing, shipping and delivery > Construction of facilities concerned rt

43 ANNEX 2 GHANA Electricity Corporation of Ghana (ECG) Third Expansion Phase Cost Estimate (by category of materials) Foreign Local Total Foreign Local Total --- Million Cedis Million US$ kv, 11 kv, and LV overhead lines and 11 kv underground cables /11 kv substations (without transformers) Supply and installation of transformers (33/11 kv, 33/0.4 kv and 11/0.4 kv) Supply of spares for the proposed project Supply of spares for ECG's existing grids Supply of materials for the Accra low voltage reinforcement Supply of materials for normal development over a 3-year period Supply of service vehicles Engineering services Total Base Line Cost Contingencies (Physical and Price) TOTAL PROJECT COST

44 ANNEX 3 GHANA Electricity Corporation of Ghana (ECG) Third Expansion Phase Cost Estimate (by category of expenditures) Foreign Local Total Foreign Local Total --- in Millions Cedis in Millions US$ Construction of 33/11 kv and LV overhead lines and underground cables Construction of and equipping 33/11 kv distribution substations Supply of materials Supply of service vehicles Engineering services Total Base Line Cost (in mid-1976 prices) Contingencies (Physical and Price) TOTAL PROJECT COST

45 ANNEX 4 GHANA Electricity Corporation of Ghana (ECG) Third Expansion Phase Disbursement Schedule Estimated disbursements on the proposed loan are expected to be made approximately as follows: in US$ million Equivalent st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total 1977 _ The cumulative disbursement at the end of each quarter is approximately as follows: in US$ million Equivalent- --- lst Quarter 2nd Quarter 3rd Quarter 4th Quarter

46 ANN~EX 5 GHANA Electricity Corporation of Ghana (ECG) Trhird E~xpansion Phase Demand and Energy Requirements ( ) Actual Forecast h Maximum Demand (MW) VALCO boo 400 o 400 4oo 400 ECG - Interconnected System ~ Isolated Stations , Mines Akosombo (Township & Textiles) CEB Subtotal Losses (+) Diversity(-) TOTAL Estimated Generation Peak Firm Capability Reserve Surplus (+) - Deficit (-) Gross Energy Consumption Sales VALCO 2,012 1,919 2,264 2,626 2,734 2,518 2,700 3,329 3,329 3,329 3,329 3,329 ECG - Interconnected System ,003 1,171 1,366 1,518 1,578 1,665 - Isolated Stations Mines Akosombo (Township & Textiles) CEB Subtotal 2,826 2,855 3,260 3,798 4,020 3,874 4,224 5,109 5,394 5,566 5,648 5,759 (Annual growth in %) (1.0) (14.2) (16.5) (5.8) (-3.6) (9.0) (20.9) (5.6) (3.2) (1-5) (1.9) Losses (+) go /TOTAL Gross Consumption (Generation) 2,902 2,929 3,344 3,898 14,110 3,966 4,366 5,279 5,583 5,764 5,854 5,975 Firm Energy ,626 5,632 5,636 5,642 5,647 5,653 5,658 5,665 6,644 Balance +1,181 +1,154 +2,279 +1,728 +1,522 +1,670 +1, * -189* +669 N.B. - In order to set out the balance of power and energy of the hydroelectric grid, excluding the isolated stations, the latter were assumed to be self-sufficient so as to cover just the corresponding electricity requirements. * Energy deficit to be made-up by drawing down reservoir Level of Volta Lake.

47 ANNEX 6 Table 1 Page 1 of 2 pages GHANA ELECTRICITY CORPORATION OF GHANA SCHEDULED TARIFF PRIOR TO OCTOBER 1, 1976 All tariffs on monthly basis 1. Domestic US$ up to 30 kwh (per kwh) kwh (per kwh) over 60 kwh (per kwh) minimum monthly charge Commercial a. Maximum demand less than 100 kva up to 50 kwh kwh (per kwh) over 100 kwh (per kwh) b. Maximum demand not less than 100 kva demand charge per kva maximum demand minimum demand charge Energy charge - per kva maximum demand up to 170 kwh (per kwh) to 340 kwh (per kwh) over 340 kwh (per kwh) Combined Premises up to 50 kwh to 100 kwh (per kwh) over 100 kwh (per kwh) Industrial a. Maximum demand less than 100 kva Energy charge up to 50 kwh to 100 kwh (per kwh) over 100 kwh (per kwh)

48 ANNEX 6 TABLE 1 Page 2 of 2 pages b. Maximum demand not less than 100 kva US$ 1. High voltage metering demand charge per kva maximum demand Minimum demand charge per month Energy charge per kva maximum demand up to 170 kwh to 340 kwh over 340 kwh Medium voltage metering demand charge per kva maximum demand Minimum demand charge Eniergy charge per kva maximum demand up to 170 kwh (per kwh) to 340 kwh (per kwh) over 340 kwh (per kwh) Street lighting (per kwh) Flat rate lighting - maximum three lamps each lamp less than 40 watts each lamp 41 to 60 watts

49 ANNEX 6 TABLE 2 Page 1 of 2 pages GHANA ELECTRICITY CORPORATION OF GHANA SCHEDULED TARIFF SINCE OCTOBER 1,1976 All tariffs on monthly basis 1. Domestic US$ up to 30 kwh (per kwh) kwh (per kwh) over 60 kwh (per kwkth) minimum monthly charge Commercial a. Maximum demand less than 100 kva up to 50 kwh kwh (per kwh) over 100 kwh (per kwh) b. Maximum demand not less than 100 kva demand charge per kva maximum demand The maximum demand charge per month shall not be less than Energy charge - per kva maximum demand up to 170 kwh (per kwh) to 340 kwh (per kwh) over 340 kwh (per kwh) Combined Premises up to 50 kwh to 100 kwh (per kwh) over 100 kwh (per kwh)

50 ANNEX 6 TABLE 2 Page 2 of 2 pages 4. Industrial US$ a. Maximum demand less than 100 kva energy charge up to 50 kwh to 100 kwh (per kwh) over 100 kwh (per kwh) b. Maximum demand not less than 100 kva i. high voltage metering demand charge per kva maximum demand The maximum demand charge per month shall not be less than Energy charge per kva maximum demand up to 170 kwh to 340 kwh over 340 kwh ii. Medium voltage metering demand charge per kva maximum demand The maximum demand charge per month shall not be less than Energy charge per kva maximum demand up to 170 kwh (per kwh) to 340 kwh (per kwh) over 340 kwh (per kwh) Street lighting (per kwh) Flat rate lighting - maximum three lamps each lamp less than 40 watts each lamp 41 to 60 watts

51 ANNEX 6 Table 3 Page 1 of 3 pages GHANA ELECTRICITY CORPORATION OF GHANA Outline of Draft Terms of Reference for a Tariff Study for Ghana's Electric Power Sector Objective The purpose of the study is to derive a tariff structure for the sale of electricity to customers of both VRA and ECG which reflects as closely as possible the costs to the national economy of meeting the demand for electricity and to determine the appropriate levels of tariffs which should be charged to the various categories of customers of both VRA and ECG having regard to: (i) financial requirements of VRA and ECG; (ii) Government social policy and development objectives, and (iii) the economic costs of other forms of energy such as petroleum products, their prices, the substitutability of different energy sources, and the resultant cross elasticity of demand. Guidelines for Study Execution Analysis of Cost Structure (a) The relevant costs are not financial costs to ECG and VRA of expanding and operating its system to meet the demand but the incremental costs to the economy. Strictly speaking, therefore, shadow prices (for capital, labor and foreign exchange) rather than actual prices to VRA/ECG should be used as appropriate for measuring costs and any taxes on VRA/ECG's inputs should be deducted and subsidies added back. However, the consultant cannot be expected to calculate the appropriate shadow prices to use but must rely on guidelines from the authorities. Failing this, he will have no alternative but to use the actual prices of inputs (duly corrected for taxes and subsidies), although it is suggested that, in any case, the opportunity cost of capital for discounting future costs should be taken as 12%. (b) It is expected that the first step would be to analyse the long run and short run marginal costs of generating, transmitting and distributing electricity at different places, times and voltage levels to different consumers over the next few years. This would require due attention to the daily and seasonal variations in forecast system demand and, to the extent possible, in forecast demands of various consumer classes. Much of the required information for this purpose may have to be specially collected, e.g. by taking sub-

52 ANNEX 6 Table 3 Page 2 of 3 pages station readings, by enquiring about shift working, seasonal work patterns, etc., and by statistical analysis of available load curves. The basis for the estimates of marginal costs would be the development program for the period , the proposed operating regime and proposals for subsequent expansion. (c) For the time periods when demand does not come up against the system capacity constraint (allowing for the reserve margins set to maintain security of supply) marginal costs would be simply marginal running costs (short run costs) grossed up to allow for losses at the different voltage levels and, where relevant, in different regions. The relevant losses are incremental losses, even if they can be estimated only approximately, not average losses. (d) At periods when an increase in generation would bring the system up against the security constraint, the marginal cost of meeting demand would be the addition to all system costs resulting from adding to generation capacity and/or storage, transmission and distribution in order to provide the increased supply with an unchanged probability of failure. These are long run costs. (e) It would also be necessary to study the incremental costs attributable to poor power factors for these types of consumer (the larger ones) who can be expected to improve their power factor in response to suitable tariff incentives. The most important cost to concentrate on is the extra MVA capacity required to cater for these poor power factors. Existing Tariffs (f) It is envisaged that the next step would be to examine the existing tariff structure and rates and compare them with the structure of marginal costs of supply derived from the foregoing analysis. Large differences between the two may be an indication that the existing system is giving the wrong price signals to consumers. Examination of the existing system should pay particular attention to the types of metering in use and the quality of meter maintenance, since this would provide some guidance to what types of tariff are feasible. Other features to look for in examining the existing system are whether it is difficult to administer, conducive to disputes or conducive to fraud, since these will provide useful pointers to improvement in devising the new tariff structure. New Tariff Proposals (g) With the information thus collected, if should be possible to make a first set of proposals for changing the existing tariff system so that the incentives (and disincentives) it provides to consumers correspond more closely to the schedule of marginal costs derived. These proposals would consist of a classification of consumers and a tariff (or set of tariffs) for each class, together with any connection charges and changes for reactive power which can be justified. They would have to be modified as necessary to take

53 ANNEX 6 Table 3 Page 3 of 3 pages account of the following: (i) Any strong arguments for slanting electricity tariffs because of price distortions (e.g. of substitutes for public electricity supply) elsewhere in the economy which are likely to affect electricity sales in the absence of such slanting. (ii) The availability of surplus hydro energy when short run marginal costs are applicable and lower cost interruptible power can be sold to industries. (iii) The need for VRA and ECG to meet rate of return covenants. (iv) Any income redistribution objectives of the government, e.g. the provision of a low price social block for low income consumers. (v) Practicality and cost. There is a trade-off between the cost of administering any tariff structure (which depends largely on the cost of metering and billing) and the extent to which it can reflect the structuring of marginal costs. Complex metering, for example, since the response of small consumers to the extra incentives (or disincentives) it offers would not justify the expense.

54 ANNEX 7 Table 1 Page 1 cf 2 pages GHANA Electricity Corporation of Ghana Third Expansion Phase Incremental Load Forecast Undiversified Maximum Demand (kw) Consumption GWh Accra-Teshie , , Growth rate until % 12% Accra-Weija (i) Weija Waterworks , , , , , ' 4, , Growth Continuing until % 7% (ii) Irrigation , After 1984 Growth rate until % 2% Kumasi-Kumawu (i) Industries 1978 _ , , Growth rate until % 6%

55 ANNEX 7 Table 1 Page 2 of 2 pages Undiversified Consumption (ii) Towns Maximum Demand (kw) GWh , , C-'owth rate until % 6% Sefwi-Wiawso-Bibiani (i) Industries , (ii) Towns Combined Growth rate towns and industries 10% 10% until 1994 Tarkwa-Aboso Glass Factory , , , Tema Expansicn and Reinforcement (i) Firm load , , , Growth rate until % 3% (ii) Interruptible load , , , , , , , Surplus power will not be available after 1984.

56 GHANA ANNEX 7 Table 2 Page 1 of 8 pages Electricity Corporation of Ghana Third Expansion Phase Demand Forecasts, Rate of Return Calculations Introduction 1. The material given in this Annex provides an amplification on the assumptions, methodology, and issues discussed in Chapter 4. Demand Forecast 2. Domestic loads were forecast using the following assumptions: (i) for the Teshie housing development, 0.5 krw maximum demand per dwelling with a 50% load factor and no demand diversity at system peak; (ii) for the rural development areas of Sefwi-Wiawso and Kumawu, 18 watts per capita maximum demand with no diversity from system peak and a 45% load factor. 3. Industrial loads were forecast on the basis of written requests from industries for immediate and their forecast of future needs. Consideration was also given to the industrial potential of the areas served by each subproject. 4. In general load growth on the facilities provided by the project was assumed to continue until the capacity of the line was reached - approximately 15 years in most cases. If the line capacity had not been reached in 15 years it was assumed to remain constant thereafter. This approach was used because of uncertainty of demand for newly served areas and the consideration that if the project could not be justified with 15 years load growth, it was likely an uneconomical project in any event. Accra-Teshie 5. The Ghana State Housing Corporation is undertaking a construction program at Teshie of 2,200 dwellings in 6 phases to be completed in This portion of the ECG project will supply power to these dwellings (houses and apartments), to a 200 bed hospital, six schools and to commercial premises. Estimated demand is 1.7 MW and 9 GWh by Given the proximity to Accra and the potential for the area, a 12% growth rate in consumption has been forecast. Accra-Weija Scheme 6. Power is required to increase pumping capacity at Weija waterworks and for an irrigation project 6 km beyond Weija. The water works is ovned by the Ghana Water and Sewerage Corporation and supplies the Accra-Tema area. The expansion of pumping capacity is part of a Bank financed scheme while the irrigation project is sponsored by the Ministry of Agriculture. Power requirements for the two schemes are estimated at about 4 MW and 21 GWh initially in

57 ANNEX 7 Table 2 Page 2 of 8 pages mid-1979 and growing at 7% for the water works and 2% for irrigation. Kumasi-Kumawu Scheme 7. The extension of the interconnected system from Kumasi to the Kumawu area would enable ECG to (i) electrify 12 small townships with a combined population of about 40,000 people; (ii) replace existing diesel generation in two of its own plants at Kumawu (where at present supply to a population of about 7,000 people is possible during only some eight hours a day) and Mampong (population 14,000); (iii) replace existing diesel generation by the Ghana Broadcasting Corporation at its important TV and radio relay station near Jamasi and to provide additional power to the station; and (iv) provide power to a proposed sawmill to be established at Kamawu. Demand is forecast to grow at 6% per year starting from the 1979 base of 4.1 MW and 15 GWh. Capacity of the Kumasi-Agona line will be reached in about 15 years. Sefwi-Wiawso-Bibiani Scheme 8. Economic development in the Sefwi-Wiawso-Bibiani area, for which the Government gives high priority, has been impeded by the lack of power. The supply of power to the area will relieve severe power problems currently experienced by industries in the area, enable them in consequence to increase production, eliminate the need to burn oil in high-cost Diesel generators, allow the establishment of new industries, and supply seven townships having a total estimated population of 30,000. There are four major companies already in existence, which develop minerals and timber -- two of the main natural resources of Ghana -- and are almost entirely export oriented earning significant sums of foreign exchange. In addition the companies support large communities, often with developed infrastructure. Currently, they use about 5,000 metric tons of oil a year. The generators are old, and give rise to breakdown and disruption of production. With the supply of public power, an important new timber-processing plant will be constructed in the area. Additionally, it will be possible for ECG to close down old diesel generators presently supplying two villages. The existing and new industries will provide a financial floor to the project from which to develop and electrify smaller rural communities thus supporting the Government's rural electrification policy. This component of the project will allow ECG to make a significant extension of its interconnected system into the western part of the country. 9. A 161 kv transmission line appraised and proposed for Bank financing in the VRA Kpong project will supply the area. Justification of the Kpong project is thus related to demand in this area. Demand is forecast to grow from 7.1 MW and 34.4 GWh in 1979 by 10% per year. The capacity of the ECG sub-transmission lines will be reached in about 15 years. Tarkwa-Aboso Scheme 10. The Aboso Glass factory is currently being converted from an oil fired production process to electric kilns. The conversion is being financed by an ADB loan equivalent to $5 million for the production of glass bottles. The electric kilns have higher thermal and production efficiency, permit higher quality control and reduce maintenance costs by 50%. The Aboso glass factorv is presently supplied with 1 MW of VRA power via the State Gold Mines. The provi-

58 ANNEX 7 Table 2 Page 3 of 8 pages sion of a separate supply will allow the Gold Mines to increase production in addition to perm-itting the increase of production of bottles from 3,000 tons per year to about 21,000 tons by Bottles are currently in short supply in Ghana and 12,000 tons would have been imported in 1975, if import licences had been granted for the entire quantity demanded. Tema Expansion and Reinforcements 11. The upgrading of supply to 33 kv from 11 kv and the direct connection of two textile firms and a steel works to the VRA substation will permit (i) increases in production, (ii) the use of electrode boilers for steam generation using surplus hydro energy, and (iii) will relieve existing facilities to allow for additional load growth in Tema. Tema steelworks is planning to install a foundry, to rehabilitate its existing steelworks and to install an additional furnace to increase production. Additional firm power requirements are expected to be 12 MW and 54 GWh The Ghana Textile Manufacturing Company is installing electrode boilers for steam generation. GTMC demand will increase from 7 MW and 42 GW.h Similarly, Tema Textiles is installing electrode boilers thereby increasing demand by 13 MW and 83 GWh. Methodology for Comparing Costs and Benefits 12. The study life was taken as 33 years corresponding to the physical life of the facilities provided by the project. Salvage value was assumed to be nil. All costs and benefits were expressed in 1976 US dollars with local components converted at a shadow exchange rate of 1.70 cedis/$. Present values were computed as at the beginning of Generation Costs 13. The long run marginal cost of generation in Ghana will rise as Kpong, Bui, and thermal plants are brought on line according to the Acres Engineering Power and Energy Studies report for VRA of May Firm loads for each ECG project component must bear the long run marginal cost of generation as explained in Chap. 4, para The calculation of the long run marginal cost as of the beginning of 1976 is based upon the costs of Kpong as given in the Kpong appraisal report and Acres' estimates of the cost of Bui and steam-electric thermal plants which are at present the most economical means of meeting projected load growth. The long run marginal cost is expected to remain constant as thermal plants are added and as economies of scale offset real price increases in capital costs. The capital costs of generating plus the necessary transmission facilities together with operating and maintenance costs are summarised below: Average Capital Cost Installed Annual Gener- Trans- Annual On-line Project Capacity Energy ation mission O&M Fuel MW GWh $/kw l0b$ $mills/kwh 1980 Kpong , Bui 170 1,040 1, / Steam-electric /1 Based on crude oil price of $12/bbl.

59 ANNEX 7 Table 2 Page 4 of 8 pages 14. The service life of Kpong and Bui are taken to be 50 years while that of steam-electric plants, 25 years. Average incremental costs based on the sector forecast shown in Annex 5 were calculated as an adproximation of the longrun marginal cost. The result is shown in Figure 1 for various discount rates. As a point of reference, the average incremental cost of energy from Kpong is 20.3 $mills/kvih but the total average incremental cost including future generation plans is 22.9 $mills/kwh as at the beginning of The cost of generation and transmission is shown as a present value for 6% and 11% discount rates in Table 3. It is necessary to present the cost in this manner because the average incremental cost per kwh for generation and transmission depend on the discount rate. These costs can not be treated as discrete cash flows but must be considered as economic costs which depend on the discount rate. The discount rate cap not be fixed priori because of the joint nature of the distribution and generation investments. An overall rate of return must be found; thus, it was necessary to treat generation costs as shown in Figures 1 and 2. Low Voltage Distribution Costs 16. Low voltage distribution costs must be included in the overall program to supply electricity to final residential and commercial consumers. These costs will not be incurred for industries taking 33 kv supply. Total distribution costs of $300/kV7 were used in the appraisal of the Kpong report for subtransmission and low voltage. Low voltage is typically 50% of total distribution cost; therefore, $150/kW of annual incremental demand has been added to project costs for subtransmission. Additions to low voltage facilities is much more closely in phase with annual increases in peak power (x4) demand as these facilities are installed primarily to serve new customers and investments are less lumpy. Additional Transformers 17. Additional transformer capacity must be added during the study life to some subprojects in order to permit loads to grow to line capacities. The cost is estimated to be $10/kVA. These costs do not add substantially to program capital investment costs. Valuation of Benefits Liberian Tariff as a Proxy for Benefits 18. The 1976 Tariff and distribution of consumption in Liberia is shown below using a shadow exchange rate of 1.2 L$/US$. % consumption $US/kwi- Domestic Commercial Industrial Government and Street lighting average

60 ANNEX 7 Table 2 Page 5 of 8 pagls 19. The mix of consumption in the towns served by this project has been assumed to be the same as for ECG overall in 1981 in order to compute the average value per kwh using 75% of the Liberian tariff as a proxy for benefits of consumption in these towns. ECG 1981 % US$/kWh Domestic (including 10% tax) Commercial Industrial Street lighting average 20. The average price which will be paid under the 1976 ECG tariff in US$ at the shadow exchange rate of 1.70 cedis/$ is: ECG 1981 % US$/kWh Domestic (including 10% tax) Commercial Industrial Street lighting average A comparison of the table above and that in para. 18 shows that the street lighting and commercial rates are quite similar under both methods of valuation but domestic and industrial consumption are valued 135% and 148% more, respectively, using 75% of the Liberian tariff as the proxy for benefits, while the overall increase in value of benefits is 70%. Interruptible Electricity for Steam Generation 21. If electrode boilers are used to generate steam which is currently produced by burning oil, the benefit attributable to the use of electricity is the resource cost saving to Ghana. This saving is the crude oil plus refinery and transportation costs but excluding taxes and dealer margins. If the quantity of steam produced is increased in the future and the industrialists' choice is between oil and electricity, then the benefit of electricity consumption can be measured by the consumer cost of the oil alternative which includes tax and dealer margins. 22. The value of electricity used for steam generation in place of oil is shown below. Official Rate Shadow Rate Cedis US$ Cedis US$ per kwh oil equivalent Resource cost saving - existing steam generation Consumer cost saving - additional steam generation These values are based on the 1975 crude oil price of $13.50/bbl.

61 ANNEX 7 Table 2 Page 6 of 8 pages Firm Industrial Loads At Tema 23. All loads at Tema other than the interruptible load for steam generation at Tema are treated as firm loads which bear the long run marginal cost of generation and transmission in addition to the project costs. The benefits of the firm consumption are valued at the 1976 tariff since there is no substitute for this supply or other proxy for evaluation. Diesel Generation Savings 24. Fuel and operation and maintenance costs will be saved for existing diesel generators. Savings will be $/kwh based on the following assumptions. $ /kmh O&M Fuel at 0.3 kg/kwh and $147/ton Existing generators at many locations must soon be replaced at a capital cost of $500/kw capacity. Diesel Pumping 26. The alternative to ECG supply for pumping at Weija is diesel pumping. If the engine is coupled directly to the pump, the cost of the electric motor is saved. The energy equivalent cost of diesel pumping is estimated to be. V,/kwh elec tricity eulivalent capital cost O&M Fuel Total Specific cost and benefit assumptions relating to particular subprojects are discussed below. Aboso Glass Factory 28. The ADB appraisal report of the loan for the Aboso Glass Factorv assumes the price of electricity will be at the 1975 rate of cedis/kwh in calculating projected income. The anticipated rate of return is about 20% by Assuming all other costs for the Glass Factory remain constant and a minimum acceptable financial return of 12%, the maximum value of electricity is about 3.4 times the budgeted amount or $/kwh at the shadow exchange rate. ssuming that the 1976 tariff increase is passed on to Glass Factory customers this value becomes $/kwh in 1976 terms.

62 ANNEX 7 Table 2 Page 7 of 8 pages Rates of Return 29. The rate of return for each subproject and for the total project was determined by finding the discount rate which equalized the present value of costs and benefits. The present values were normalized to a per kwh basis by dividing the present values of costs and benefits by the present value of consumption, that is: PV(costs) = PV(benefits PV(consumption) PV(consumption) PV(costs) = PV(project) + PV(additional capital) + PV(generation + transmission PV(benefits = PV(oil savings) + PV(capital contributions) + PV(other savings) + PV(revenues) 30. Rates of return for each subproject are as follows: Non-substituable load valued at Special 1976 Load Tariff 1.7 x 1976 Tariff Eliminated Tariff (1) (2) (3) 1. Accra-Teshie Accra-Weija Kumasi-Kumawi Sefwi-Wiawso-Bibiani Tarkwa-Aboso Tema Overall 10.0% 10.5% 14.2% 31. In column (1) the 1976 tariff is used to value consumption benefits for which there is no substitution such as diesel pumping at Weija or evidence of willingness to pay such as with the Aboso Glass Factory. In column (2) consideration is made of eliminating the special load tariff for the three industries served at Tema and setting the tariff for firm power at the normal industrial tariff. The interruptible load is still valued at the cost of oil saved by using electrode boilers. In column (3) all firm load consumption for which there is no substitute or other proxy is valued at 1.7 times the 1976 ECG tariff. The firm load at Tema is valued at the full industrial tariff. ECG revenues account for approximately 30% of total benefits in column 1. The graph below shows the variation of the overall project rate of return with increases in ECG tariff over the average 1976 level following the elimination of the special load tariff.

63 ANNEX 7 Table 2 Page 8 of 8 pages 32. The main conclusions that can be drawn from the rate of return calculation are that tariff levels and structure require review and adjustment in order to prqwvid economically efficient price signals to consumers. This is particularly true for the special load tariffs Variation of Rate of Return with Increase in ECG Tariff W X Q 10,0_ Increase in average value of ECG tariff (times 1976) for portion of benefits valued using ECG revenues as proxy.

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67 GHANA ELECTRICITY COnPORATION OF GHANA TIURD EXPANSION PHASE ORGANIZATION i CHIEF mm -SECRETAR_Y CHIEF INTERNAL F ACCOUNTAT amd + No on I ENGNEER LEGAL OFFICER [- ' _. ~~~~~~~~~~DEPUTY SERVICES BUGETI financial CHIEF PLANNING & OPERATiONS & POWER COMMERCIAL SEVS STOllES ACCOUN35 SlOllES DEVELOPMENT CONSTRUCTION STATIONS ENGINEER REGIONAL MANAGERS ACCRA TEMA TAKOHADI KUMASI KOFORIOUA CAPE COAST AMAL HOLGATANGA HO SUNYANI World Baiik-16123

68 GHAMA ELECTRICITY CORPORATION OF GHANA TIIIRD EXPANSION PEASE INCOME STATEMENTS ANNEX 9 Table ACTUAL FORECAST Y1O ENERGY SALES GWH AVG PRTCE PER KWH , ,038 0, , THILOUSAND CEDT!, 4110 OPE:RA II NG RFVENI $ B A A524 42'52 IOIAL SALES RElV THFER _ Q. -.- _ D TOTAL DO4 _ _123Y2 _ _ _ Q62Q _85200 _ld OPERATrNG EXPENSES PURCHASED POWn q GIUATION AO STANDhY 10( q DIE'RIBuIrTlON t30 IRflNSI 3I'I : AtiMIN RECION ADMIN--HEAi OFFICE OTHER BULK TAXI" INCUEASES 0 0 1i o DEPRECIATION TAXES Q Q _ - -._ 22DQ D A_4D A-120D roi AL _ lY l _ Q OFERATING INCOME OTHER INCOME NE _._ _ ,D _ D. 460 _ 6Q 5030 NET INCOME BEF INT q TNT CHARGED OF Y2 _ S Q NET INCOME FUTURE TARIFF INCREASES(%I) RATE OF RETURN ON AV. NET FIXED ASSETS ON ECG RATE BASE OPERATING RATIO f REV/GROSS PLANT DEPREC/GROSS PLANT JANUARY 31, 1977

69 ANNEX 9 Table 2 GHiANiA ELECTRICITY CORPORATION OF GHANA THIRD EXPANSION PHASE FORECAST FUND FLOWS (o '000) 1P L 982 TO TAL INTERNAL. SOIJRCES NET INCOME BEF IN DEPRECIA1'ION CONSUMER CONTRIB - 50 _ 2305._.5D _. _sn 2505 _. 50 5Q 6060 TOTAL OPERATIONAL RE QU:[REMENTS.0i90 WORKING CAPITAL -702 : D-E:EEB'r SER1,IC E D2IVI _DENDS _ Q 2Q _2000 _ TOTAL Q125. _ _ _1562 _ NET AVAIL-ABLE ::'ROM OPERATIONS CONSTRUCTION 6:1.91 REQUIREME:N'T'S :Rll:'SED PROECT F LJ'TURE FR OJECT OTHER SOO SOO TOTAL Z _14400 gqi&400 63:1.() B.LANCE TO FINANCE i0F'1NANCE D BY: ::RO:11::''O.;E.:D LOAN ) FUTTR LOAN OTH-ER BOlRROWINGS _ _ TCDT Al ' ERRORS & OMISSIONS 0 0 O SURPLJ US (DEFICIT) 6580 Oi F::lUNDWS AC(ClJ MlU.L A'T'EDL NE'T' AVAILABLE 6720 FROM OPE:RATIONS/ CONSTRREU4]:ON 1i26 4 I :LANT IN C[F11::R-% DEBT SE:RVICE COVER i 2.7 JANUARY 31, 1977

70 ILECTRICITY GHAXA CO.PORArl0a OF GAbAA THIRD EXPANSION PHASE BALANCE SHIEETS ANNEX 9 Gr.ulA ~~~~~~~~~~~ t ASSETS / PLANr IN OPERATION LESS: DEPRECIATION 143Z3 l D _2623B _ NET PLANT ' , WORK IN PROGRESS LIT 1U9381M3TS 0 0 a UO 480 UO 4U CURRENT ASSETS CASH ANDi BANKS 7630 OPERArIONAL REQLJ TEMPORARY SURF' ACCOUNTS REC INVEN'TORIES ER00 t URAL SLRT=XFICATION loo OTHER II _ _ _ _ 4 A _ Q 49Q TO-TAL TOTAL LIABILITIES EQUITY CAPITAL : RETAINED EARNINGS RESERVE-RURALS : RESERVE-MAINTENANC ) REVALUATION RESER._Z _ _ TOTAL LONG TERM DEBT CUR'NT LIABILITIES ACCOUNTS PAYABLE RURAL ELECTRIF. _ _ a _ 0.. Q TOTAL CONSIJMER CONTRIBUT.. S1; _10468 _ S _ S. l TOTAL I387fl DEBT/DEBT A EQUITY DEBT/EQUTT ,- -0.I 0.8 O.. 0.* -b tr CURRENT RATIO RECEIVARLES/REV X : 9245 RECEIVABLES-DAYS NET/GROSS PLANT X PLANT INCREASE X ANNUAL REVALUATION JANUARY 31, 1977

71 GHANA ELECTRICITY CORPORATION OF GHANA THIRD EXPANSIOil PHASE DEBT SERVICE SCHEDULE (0 '000) ANNEX 9 Table l J` 3I R DEBT STATEMENI IDA- L8 *l;h AMORT'EZArION tt0 -BALANCE INTEREST (6.25%) t500 IDA-256--GH AMORrIZATION BALANCE S INTERES1 (7.25%) KFW-I AMORTIZAIION BALANCE INTEREST (5.5%) KFW-- II AMORTIZAInON BALANCE : INTEREST (7.25%) BICC BAL.ANC1E INTEREST (6.0%) t BRITISH SUPPL]ERS' BALANCE t INTEREST (8.0%) PROFPOSED LOAN BORROWINGS -AMORTIZATION BALANCE : l INTEREST (8.50%) t COMMITMENT CHGE (0.7n5) LIC-X LliIC :IJLJRE l_oan 4530 BORROW INGS BALANCE INTEREST(8.50%) COMMITMENT CH(3E (0.75%) ( I:rDC--X OO IDC DEBT iummary BO)RROWJNGS REPAYMENTS BALANCE COMMITMENT FEES INTEREST INTEREST g CF DEBT SERVICE IIDC TOTAL OFENING AVE INT X JANUARY 31, 1977

72 ANNEX 10 Page 1 of 2 pages GHANA ELECTRICITY CORPORATION OF GHANA THIRD EXPANSION PHASE Assumptions Underlying Financial Forecasts 1. General: The 1976 forecast of operating expenses, other than purchased power, and working capital are based on actuals up to June Projections of operating expenses are shown in constant terms. Price contingencies are shown separately. 2. Energy Sales: Forecasts are based on appraisal estimates which are substantially in line with ECG's own projections and the projections prepared by consultants (Acres) within the framework of the Kpong feasibility report. The 1976 estimate is in line with actual sales up to June Average Revenue/kWh: The basis is the expected result of the tariff increase of October Future Tariff Increases: Projections are tailored to provide ECG with the additional revenues to achieve the required 8% return on ECG's rate base. 5. Purchased Power: The basis is the forecast power purchases times the average VRA rate resulting from the September 1976 increase. Additionally an overhead allowance of 0.2 Mills/kWh has been added. 6. Generation and Standby: The 1976 estimates were increases 10% p.a. to reflect the sales growth to ECG's minor centers supplied by diesel stations. 7. Distribution, Transport and Administration: The 1976 estimates are held constant to reflect the targets under the proposed project to increase staff productivity and to renew ECG's vehicle park. 8. Future Bulk Rate Increases: Projections are based on VRA's revenue requirements to meet its agreed rate of return targets. 9. Price Congingencies: Estimates are based on the recently concluded three year contract with ECG's unions implying salary/wage increases of 25% in 1977 and 5% thereafter. A new contract has been assumed for Unit fuel costs have been assumed to increase 10% p.a. Miscellaneous materials are expected to increase initially 25% p.a. with yearly rates dropping to 15% by 1980.

73 ANNEX 10 Page 2 of 2 pages 10. Depreciation: 5% on average gross fixed assets, an approximate reflection of historical values. 11. Other Income: A constant sum of 0 300,000 has been assumed to reflect income from installation charges and miscellaneous fees and profits ,000 have been allowed for investment income. 12. Debt Service: Interest - on existing debts as per actual loan documents. For the proposed Bank and on-lent IDA Credit, the Bank's standard terms have been applied. Future borrowing is estimated to cost 10% p.a. 13. Amortization: On existing debts, the scheduling is in line with the Government's approval (i) to require payments of all arrears on the on-lent IDA I and KfW I Credits by 1977 and (ii) to extend the maturities of the on-lent IDA II and KfW II Credits from 1977 to 1982 and 1984 respectively. The Bank's standard terms have been applied to the proposed lending to ECG. 14. Construction Program: Proposed project as per appraised cost information and construction program. The next major investment program has been estimated on the basis of unit investment cost of US$ 300 (1976 prices) per kw demand. This basis has been derived from the cost of the proposed project. Minor miscellaneous investments have been estimated at roughly 0 500,000 p.a. as per ECG's information for 1976/ Plant in Operation: The proposed project is assumed to be fully in service by the end of Investments: Entry reflects ECG holding 96,000 ordinary shares of a local cable manufacturer. 17. Cash-Operational Requirements: Estimates reflect requirements of 1 month payroll and fuel expenses, 2 months purchased power expenses and 3 months debt service. 18. Accounts Receivables: Starting in 1977 estimates are based on 3 months billing. 19. Inventories: Held constant at 1976 levels to reflect ECG's efforts to control further increases. 20. Rural Electrification-Receivables: 1976 entry reflects the Government payment of as the first installment. In 1977 the Government is expected to have reimbursed ECG fully. Thereafter, regular settlement has been assumed. 21. Accounts Payable: Estimates are based on the mid 1976 result. As ECG will actually be paying VRA's September 1976 billing in 12 monthly installments, 0 790,000 are therefore judged to remain outstanding in this respect at the end of Accounts payable are estimated to grow at 600,000 p.a. reflecting approximately the growth rate in sales. 22. Rural Electrification-Payables: 1976 entry reflects Government advances for capital works in rural areas.

74 ANNEX 11 GHANA Electricity Corporation of Ghana (ECG) Third Expansion Phase Performance Indicators A. EFFICIENCY INDICATORS I. Sales (kwh'000) per employee 160)to be determined after staff plan study is completed as recommended in para II. Distribution losses (in %) B. STAFFING PROFILE (a) % of daily rated employees 46)to be determined after staff plan study is (b) % of university and voca- 25)completed as recommended in para tional trained staff C. MARKET DEVELOPMENT (Sales-GWh) Minor centers All centers ,096 1,277 1,403 1,465 1,550 D. FINANCIAL INDICATORS Operating cost (excluding energy to be determined once the assets are revalued purchased and depreciation) to as recommended in para revalued fixed assets Financial rate of return Operating ratio Receivables on total revenue from energy (%) % material in stock to sales to be determined after revaluation of inventories and review of inventory management system as recommended in para.5.11 I

75 U VOLTA PTt ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~TA _e, fi U's MAY 1''76I~~~~~~~~~~~~~~~~~ '. 0 K N. * S~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~a \ S jjn t W > > a o 5'40- jg H ANA. Ofako Q L A PROJECT ~> LOCATION, f _r-g.-~... A t- STATION, TESHIE 7 AirporT / =. f~~~ POWER HOUSE 5@ it y? Q j;tr'35'b > 1 D nv CUoom Nn N uag. a G H A N A WE-JA 3sWATERWORKS = ' q LA 7 t D -PRGJECT MILITARY INTHE ACCRA AREA OPEN P1O _r / t 5 7 \ t _ 4 ;f >, I; ROJECT Q;, X # WORKS ;,! COMPONENTS MIN itryof AGRICULTURE LAObLc IEESTON-AR,EA-; rn 33kv rchris Overhead Lmnes hris~~~~ovsvborg Cables lees!b3ti e<- altf;tby tit rl 0sl dxiexi*in #- / J B = ;; J ; t :_' t T "'.' z nar M.Z PA; * Botianow 33kv ~~~~~~~~Un,dergrovnd f & VRA : RFLF MAIN 0 STATION,161/33kv 0 n >,; 2 * - r' & ACCRA ; a F; > 9 2 e S i<0 A 331T1 kv Subsrations., ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~---Roods -~~~~~~~ U -t---', Roitroods u 0 R Rivers NUn 61Ž11 NA,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~v

76

77 7Lf i_a /._. : _t ' _. I_ 1I R D OtJA ~~~~~~~~~~~~~~~--~~~~~~~~L ~~~~~~~~ ~~MAY GHANA {~~~~~~~~~~~~~~~~~~~~~~~~~~ {1~~~~n 09 Oc,vev ACCRA 0-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- TEM SUBTANSMSSIO, GRIDfl! ;v'' < ;.tw'.s;'-. A, -- 33kv Undergroun Ca'eble,,.Hs;A, o,,...a.0 Wi'' Ai Resnforcemeet of Substations 1k v Ca blie s *A ; fa 5 ~~~~~O Consuner Transformer Stations '. * Rood Netmork U*u tx i O OO J;zi ; iu o0 FEET gij> m v tn oo ~m*_t<G A