Document of The World Bank

FOR OFFICIAL USE ONLY

Report No:ICR0000320

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-26820 IDA-2682A)

ON A

CREDIT

IN THE AMOUNT OF SDR 124.1 MILLION (US$175.6 MILLION EQUIVALENT)

TO THE

GOVERNMENT OF GHANA

FOR A

THERMAL POWER PROJECT

September 27, 2007

Energy Group Sustainable Development Department Africa Region 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.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective 09/15/2007)

Currency Unit = Cedis

Cedis 1.00 = US$ 0.00011 US$ 1.00 = Cedis 9,260.00

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS AFD Agence Française de Développement

BADEA Arab Bank for Economic Development in Africa CAS Country Assistance Strategy CDC Commonwealth Development Corporation CCGT Combined Cycle Gas Turbine DCA Development Credit Agreement DSC Debt Service Coverage DSUP Distribution System Upgrading Project EC Energy Commission ECG Electricity Company of Ghana EF Energy Foundation EIB European Investment Bank ERP Economic Recovery Program ERR Economic Rate of Return FRR Financial Rate of Return FY Fiscal year HV/LV High Voltage/Low Voltage ICB International Competitive Bidding ISR Implementation Summary Report KFAED Kuwait Fund for Arab and Economic Development KWh Kilowatt hour MW Megawatts MoE Ministry of Energy MoFEP Ministry of Finance & Economic Planning MoP Memorandum of the President MSSA Management Support Services Agreement O & M Operation and Maintenance PRSC Poverty Reduction Strategy Credit PURC Public Utilities Regulatory Commission

RoR Rate of Return SAP Staff Appraisal Report TK-1 Takoradi Thermal Power Plant TK-2 Takoradi International Power Company TTL Task Team Leader VALCO Volta Aluminum Company VRA Volta River Authority

Vice President: Obiageli Katryn Ezekwesili Country Director: Mats Karlsson

Sector Manager: S. Vijay Iyer Project Team Leader: Fanny Missfeldt-Ringius

ICR Team Leader: Fanny Missfeldt-Ringius/Kofi-Boateng Agyen Program Assistant: Lily Wong

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.

GHANA

THERMAL POWER PROJECT

CONTENTS

A. Data Sheet

A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph

B. Key Dates .................................................................................................................... iC. Ratings Summary ........................................................................................................ iD. Sector and Theme Codes ........................................................................................... iiE. Bank Staff................................................................................................................... iiF. Results Framework Analysis ...................................................................................... iiG. Ratings of Project Performance in ISRs .................................................................... vH. Restructuring (if any)................................................................................................. vI. Disbursement Profile ................................................................................................. vi1. Project Context, Development Objectives and Design.............................................. 12. Key Factors Affecting Implementation and Outcomes ............................................. 53. Assessment of Outcomes ......................................................................................... 124. Assessment of Risk to Development Outcome........................................................ 165. Assessment of Bank and Borrower Performance .................................................... 176. Lessons Learned ...................................................................................................... 217. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ......... 22Annex 1. Project Costs and Financing......................................................................... 23Annex 2. Outputs by Component (page 1 of 2) ........................................................... 24Annex 3. Economic and Financial Analysis ................................................................ 28Annex 4. Bank Lending and Implementation Support/Supervision Processes ........... 35Annex 5. Summary of Borrower's ICR and/or Comments on Draft ICR.................... 37Annex 6. List of Supporting Documents ..................................................................... 50

MAP IBRD No. 35689

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A. Basic Information Country: Ghana Project Name:

GH-Thermal Power SIL 5 (FY95)

Project ID: P000926 L/C/TF Number(s): IDA-26820,IDA-2682A ICR Date: 08/01/2007 ICR Type: Core ICR Lending Instrument: SIL Borrower: GOVT OF GHANA Original Total Commitment:

XDR 124.1M Disbursed Amount: XDR 120.2M

Environmental Category: B Implementing Agencies: Electricity Company of Ghana Volta River Authority Ministry of Energy Co-financiers and Other External Partners: European Investment Bank (EIB) Commonwealth Development Corporation (CDC) Arab Bank for Economic Development in Africa (BADEA) Kuwait Fund for Arab and Economic Development (KFAED) B. Key Dates

Process Date Process Original Date Revised / Actual Date(s) Concept Review: 04/09/1993 Effectiveness: 11/17/1995 11/17/1995 Appraisal: 06/30/1993 Restructuring(s): 02/27/2004 Approval: 02/16/1995 Mid-term Review: 05/15/1998 05/15/1998 Closing: 06/30/2001 12/31/2006 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Unsatisfactory Risk to Development Outcome: Substantial Bank Performance: Moderately Unsatisfactory Borrower Performance: Moderately Unsatisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Moderately Satisfactory Government: Unsatisfactory

Quality of Supervision: Unsatisfactory Implementing Agency/Agencies: Moderately Satisfactory

Overall Bank Performance:

Moderately Unsatisfactory

Overall Borrower Performance:

Moderately Unsatisfactory

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C.3 Quality at Entry and Implementation Performance Indicators

Implementation Performance Indicators

QAG Assessments (if any) Rating

Potential Problem Project at any time (Yes/No):

Yes Quality at Entry (QEA):

None

Problem Project at any time (Yes/No):

Yes Quality of Supervision (QSA):

Moderately Unsatisfactory

DO rating before Closing/Inactive status:

Moderately Satisfactory

D. Sector and Theme Codes

Original Actual Sector Code (as % of total Bank financing) Power 100 100

Theme Code (Primary/Secondary) Decentralization Primary Primary Environmental policies and institutions Secondary Secondary Other financial and private sector development Primary Primary Regulation and competition policy Primary Primary E. Bank Staff

Positions At ICR At Approval Vice President: Obiageli Katryn Ezekwesili Edward V. K. Jaycox Country Director: Mats Karlsson Olivier Lafourcade Sector Manager: S. Vijay Iyer Mary Oakes Smith Project Team Leader: Fanny Missfeldt-Ringius Carlos Algandona ICR Team Leader: Fanny Missfeldt-Ringius ICR Primary Author: Kofi-Boateng Agyen F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document)

"The objectives of the proposed project are to: enable VRA to maintain the country's electricity supply by providing the generating capacity to meet the electricity demand in Ghana; enhance operational efficiency through transmission and generation systems improvements; moderate demand growth through economic demand-side management programming; strengthen the institutional capabilities of the power sector and of VRA by supporting its ongoing program of institutional development to meet the requirements for the mid 1990s and beyond. The institutional strengthening will include facilitation of distribution system improvements, development of new regulatory arrangements for the sector, and measures to encourage private

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sector participation in the development of power supply; and to assure the financial viability of Ghana's power sector."

Note, however, that the PDO in the DCA of June 30, 1995, as per Schedule 2 is as follows:

"The objectives of the proposed project are to: (a) increase VRA's generating capacity to meet increasing electricity demand, (b) improve VRA's operational efficiency and strengthen its institutional capacity, and (c) improve the Borrower's management of power sector."

Revised Project Development Objectives (as approved by original approving authority)

"The objectives of the Project are to: (a) increase VRA's generating capacity to meet increasing electricity demand, (b) improve VRA's operational efficiency and power sector financial sustainability and strengthen its institutional capacity, (c) facilitate distribution improvement, (d) strengthen institutional capabilities in the power sector, and (e) improve the Borrower's management of the power sector."

The revision is as per amended DCA.

(a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Availability of Takoradi I (TK-1) Value quantitative or Qualitative)

0% (no power plant at Takoradi) 90% 72%

Date achieved 12/31/1994 12/31/2006 12/31/2006

Comments (incl. % achievement)

TK-1 did not meet its targeted average monthly availability at project completion. Since inception of operation, the plant’s availability has been somewhat below 70% average monthly availability. Data is updated compared to last ISR.

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised

Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Improved financial and operational performance in VRA operations

Value (quantitative

or Qualitative)

Rate of return (ROR): 6.0%

Debt Service Coverage (DSC): 3.5

Transmission Losses: 5.0 %

ROR: 4.5% DSC: 1.5

Transmission Losses: 4.0%

ROR: -4.67%; DSC: 0.08;

Transmission Losses 4.5%

Date achieved 12/31/1993 12/31/2006 12/31/2006 Comments The ISR uses 2003 as baseline value. For the ICR it was found more applicable

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(incl. % achievement)

to use the project start as baseline value. The actual financials at project closure differ from the last ISR, as accounts were not fully finalized.

Indicator 2 : Improved financial and operational performance in ECG operations

Value (quantitative or Qualitative)

ROR: -6.17; DSC: 0.65; Distribution Losses: 26%

ROR: 3.8%; DSC:1.5; Distribution Losses: 21%

ROR: 2.09%; DSC:0.56; Distribution Losses: 24%

Date achieved 12/31/2003 12/31/2006 12/31/2006 Comments (incl. % achievement)

The actual financials at project closure differ from the last ISR, as accounts were not fully finalized. There has been some improvement on distribution losses, but ECG financials have not reached their target value.

Indicator 3 : DSUP is being completed on schedule.

Value (quantitative or Qualitative)

First seven contracts awarded on 7/20/2004 (12 days after effectiveness following project restructuring).

DSUP completed. DSUP completed.

Date achieved 12/31/2004 12/31/2006 12/31/2006 Comments (incl. % achievement)

Due to the appreciation of the SDR against the US$, an amount somewhat in excess of what was originally agreed could be deployed for equipment.

Indicator 4 : ECG Management Support Services Agreement (MSSA) is completed. Value (quantitative or Qualitative)

Draft ECG MSSA prepared and discussed.

MSSA process completed.

Request for Proposal stage of ECG MSSA.

Date achieved 12/31/2003 12/31/2006 12/31/2006 Comments (incl. % achievement)

Studies undertaken to complement quality of information for MSSA, funding of contract by Government, and changes to MSSA structure have delayed completion.

Indicator 5 : VRA's Debt Sales Ratio or Receivables days reduced. Value (quantitative or Qualitative)

180 days 122 days 177 days

Date achieved 12/31/2003 12/31/2006 12/31/2006 Comments (incl. % achievement)

While VRA's Debt Sales ration has been slightly reduced, the value is far off its target.

Indicator 6 : ECG's Debt Service Ratio or Receivables days reduced. Value (quantitative or Qualitative)

185 days 122 days 138 days

Date achieved 12/31/2003 12/31/2006 12/31/2006 Comments (incl. % achievement)

Data updated compared to last ISR. The receivables were reduced, and but did not reach the target value.

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G. Ratings of Project Performance in ISRs

No. Date ISR Archived DO IP Actual

Disbursements (USD millions)

1 06/30/1995 Satisfactory Satisfactory 0.00 2 04/05/1996 Satisfactory Satisfactory 6.98 3 06/20/1996 Satisfactory Satisfactory 7.23 4 06/27/1997 Satisfactory Satisfactory 53.31 5 02/25/1998 Unsatisfactory Unsatisfactory 77.76 6 07/06/1998 Unsatisfactory Unsatisfactory 94.58 7 02/02/1999 Satisfactory Satisfactory 117.83 8 03/30/1999 Satisfactory Satisfactory 117.83 9 12/21/1999 Satisfactory Satisfactory 133.78

10 04/13/2000 Satisfactory Satisfactory 134.04 11 12/18/2000 Satisfactory Satisfactory 135.17 12 06/29/2001 Satisfactory Satisfactory 141.28 13 12/28/2001 Satisfactory Satisfactory 141.63 14 06/13/2002 Satisfactory Satisfactory 142.35 15 12/16/2002 Satisfactory Satisfactory 143.59 16 06/02/2003 Satisfactory Satisfactory 148.00 17 12/02/2003 Satisfactory Satisfactory 148.09 18 05/28/2004 Satisfactory Satisfactory 150.70 19 12/15/2004 Satisfactory Satisfactory 155.37 20 06/15/2005 Satisfactory Satisfactory 158.96

21 06/30/2005 Moderately Unsatisfactory Moderately

Unsatisfactory 159.36

22 12/21/2005 Moderately Unsatisfactory Moderately

Unsatisfactory 162.10

23 06/30/2006 Moderately Satisfactory Moderately Satisfactory 163.95 24 12/28/2006 Moderately Satisfactory Moderately Satisfactory 167.18

H. Restructuring (if any)

ISR Ratings at RestructuringRestructuring

Date(s)

Board Approved

PDO Change DO IP

Amount Disbursed at

Restructuring in USD millions

Reason for Restructuring & Key Changes Made

02/27/2004 Y S S 149.67

As a result of an unexpected drop in costs for completing the project as appraised and substantial compliance with project agreements, a request to restructure and re-allocate the savings was approved. The cost savings facilitated the maximization of project benefits through investments to reduce

vi

ISR Ratings at RestructuringRestructuring

Date(s)

Board Approved

PDO Change DO IP

Amount Disbursed at

Restructuring in USD millions

Reason for Restructuring & Key Changes Made

distribution losses in key heavy load areas and improve the quality of supply to the end user.

If PDO and/or Key Outcome Targets were formally revised (approved by the original approving body) enter ratings below: Outcome Ratings Against Original PDO/Targets Moderately Unsatisfactory Against Formally Revised PDO/Targets Moderately Unsatisfactory Overall (weighted) rating Moderately Unsatisfactory

I. Disbursement Profile

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1. Project Context, Development Objectives and Design (this section is descriptive, taken from other documents, e.g., PAD/ISR, not evaluative)

1.1 Context at Appraisal (brief summary of country and sector background, rationale for Bank assistance) 1. As a result of the prevailing global economic conditions and an apparent mismanagement of the country’s economy in the mid 70s to early 80s, Ghana - which once enjoyed a relatively high living standard compared to other countries in the sub-region - was faced with a severe economic downturn which resulted in substantial declines in income. The Government consequently initiated an Economic Recovery Program (ERP) in 1983, under which it instituted significant and wide-ranging policy reforms. By the early 90s, fiscal deficits were under control, and the necessary incentives for growth had been created. However, in order to reach and sustain the objectives of its development program, Ghana needed to strengthen the foundation it had built for increased and long-term growth, and also ensure equitable distribution of the increased growth levels across the country. 2. This required the Government to maintain fiscal discipline and substantially increase investments in physical infrastructure to support the envisaged economic expansion and continue the reform of public enterprises to perform their functions more efficiently. As an integral part of the injection of physical infrastructure, the provision of appropriate levels of reliable supply of power was seen as fundamental to Ghana’s continued progress in the diversification and growth of its economy. The provision of additional power supply would also serve Government’s goal of increasing electrification rates in the rural areas and urban centers. In order to achieve this goal, the Government had begun the process under the National Electrification Project. The World Bank's Fifth and Sixth Power (P000953 and P000836) credits, whose objectives included: (i) increased electricity access especially in the northern regions; (ii) retrofitting the Akosombo Dam to improve efficiency of generation; and (iii) improved management and operations of the distribution companies, were designed to help these electrification efforts. 3. The Volta River Authority (VRA) owned the existing generation and transmission capacity. It sold electricity to the Electricity Company of Ghana (ECG), the Volta Aluminium Company (VALCO), local mining companies, Togo and Benin, and distributed electricity in northern Ghana. At project preparation, about 24% of Ghana’s population (estimated to be about 15 million) had access to electricity1. The main source of power, the Akosombo Dam, had a firm capacity of 808 MW with sustainable average annual energy production of about 4,900 GWh. Due to increasing demand, VRA produced around 6,400 GWh per year. By 1995, peak demand and annual energy requirements were forecast to be about 1,000 MW and 6930 GWh. Demand for power had thus outstripped available supply. Moreover, dam reservoir levels had been depleted because more than the sustainable energy output had been produced over several years. The combination of poor power sector management, over-drafting of the dam reservoir and a concurrent drought leading to low inflows into the Akosombo Dam reservoir had also led to severe power shortages. During years of drought (such as 1986/1987), the over-reliance on hydropower entailed the need for load shedding, with serious consequences for the entire economy due to unavailability of power.

1 In 2007, about 50% of Ghana’s population has access to electricity.

2

4. In order to meet the total demand in the coming years, the sector needed a combination of improved reservoir management methods, improved sector management, initiation of demand-side management and installation of additional capacity to complement the existing hydropower. The Country Assistance Strategy (CAS) for fiscal year 1995-1998 had identified shortages and unreliable power as key constraints to growth in agriculture, mining, financial services, and manufacturing, sectors forecasted to be the sources of growth in Ghana. Having noted these gaps, the World Bank complemented Government’s efforts by assisting in: (a) the identification of the least-cost expansion strategy for the national power grid; (b) the development of a suitable power sector regulatory framework; (c) the opening up of the generation market to independent power producers; and (d) improvement of the internal efficiency of the commercial operations of electricity distribution. 5. The identified gaps were to be addressed under a new project. The Thermal Power Project was therefore designed to respond to Ghana’s economic growth program, through increasing access to least-cost and reliable electricity and the removal of constraints to private sector-led growth in the energy sector. The World Bank was supporting the rehabilitation and extension of the transmission and distribution networks. By 1993 it was therefore logical to complete the circle with investments in the generation sector and the required sector reforms to complement the investments in Ghana’s power sector undertaken through the Fifth Power Credit (P000953), and the Sixth Power credit (P000836).

1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) 6. “The objectives of the proposed project is to: enable VRA to maintain the country's electricity supply by providing the generating capacity to meet the electricity demand in Ghana; enhance operational efficiency through transmission and generation systems improvements; moderate demand growth through economic demand-side management programming; strengthen the institutional capabilities of the power sector and of VRA by supporting its ongoing program of institutional development to meet the requirements for the mid 1990s and beyond. The institutional strengthening will include facilitation of distribution system improvement, development of new regulatory arrangements for the sector, and measures to encourage private sector participation in the development of power supply; and to assure the financial viability of Ghana's power sector.” 7. Note, however, that the PDO in the DCA of June 30, 1995, as per Schedule 2 is as follows: "The objectives of the proposed project are to: (a) increase VRA's generating capacity to meet increasing electricity demand, (b) improve VRA's operational efficiency and strengthen its institutional capacity, and (c) improve the Borrower's management of power sector." The project was developed and brought to the World Bank's Board before the introduction of the results framework methodology and selection of key performance indicators became Bank policy. The original project formulation therefore did not have any key indicators. Following Credit restructuring in 2004, however, baseline indicators were introduced as part of the bi-annual monitoring exercise through the ISR. They were however, not reflected in the amended Development Credit Agreement. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification 8. When the project was restructured in 2004 to include a distribution component, the PDO as per amended DCA was revised as follows: "The objectives of the Project are to: (a) increase VRA's generating capacity to meet increasing electricity demand, (b) improve VRA's operational efficiency and power sector financial sustainability and strengthen its institutional capacity, (c)

3

facilitate distribution improvement, (d) strengthen institutional capabilities in the power sector, and (e) improve the Borrower's management of the power sector." In addition, a set of key results indicators was endorsed. By 2004, the notion of results framework and results indicators had been developed as part of the Bank's proactive initiatives on project management. The following performance indicator was thus incorporated in project documents when the project was restructured in February 2004: • Percent availability of new generating capacity (330 MW Combined cycle plant); 9. The following indicators were designated as intermediate outcome indicators: • Improved financial and operational performance in VRA operations as measured by: (a)

annual rate of return on average net fixed assets in operation; (b) debt service coverage; (c) transmission system losses; and (d) debt-sales ratio or receivables days reduced.

• Improved financial and operational performance in ECG operations as measured by: (a) annual rate of return on average net fixed assets in operation; (b) debt service coverage; (c) distribution system losses; (d) debt-sales ratio or receivables days reduced.

• Distribution System Upgrading Project/(DSUP) is completed on schedule. • ECG Management Support Services Agreement/(MSSA) is completed.

1.4 Main Beneficiaries (original and revised, briefly describe the "primary target group" identified in the PAD and as captured in the PDO, as well as any other individuals and organizations expected to benefit from the project) 10. The project’s main beneficiaries were the VRA and the Ministry of Energy. The ECG was added as beneficiary when the project was restructured in 2004. Following their establishment, the Public Utilities Regulatory Commission/(PURC) and the Energy Commission (EC) also became beneficiaries of the project. Implicitly, the beneficiaries were Ghana's population at large who benefited from improved energy services.

1.5 Original Components (as approved) 11. Component 1 - Generation and associated transmission and institutional development: (i) The construction at Takoradi of a 330 MW combined-cycle gas turbine (CCGT) power plant, consisting of two combustion turbine generators of 100 MW each, and a heat recovery boiler and a steam turbine generator to produce an additional 100 MW; (ii) 360 km of single and double circuit 161 kV transmission lines and necessary sub-stations; (iii) consulting and engineering services to manage and supervise the project from design to commissioning, managerial and technical services for the operation and maintenance of the power station and technical assistance for the institutional development of VRA to manage plant. 12. Component 2 - Power sector reform: Support to the Ministry of Energy for the development and establishment of suitable regulatory arrangements and policies to attract private participation in the power sector. Following studies undertaken, the Public Utilities Regulatory Commission (PURC) and the Energy Commission (EC) were established by Acts of Parliament in 1997, namely Act 538 and Act 541 respectively. The PURC, under Act 538, is responsible for electricity tariffs while the EC has responsibility for regulating the technical aspects of the electricity supply industry. 13. Component 3 - Electricity demand-side management: Development and implementation of market-based policy instruments, institutional arrangements, and program

4

specific interventions to promote and sustain electricity demand management through improvements in energy use by consumers. 14. Component 4 - VRA’s institutional development: support for VRA’s program of institutional development and upgrading of: (i) its capabilities with training and technical assistance through equipping VRA’s Akuse Training School; (ii) development of training programs and technical assistance to upgrade VRA’s capabilities in thermal power generation operations and management; and (iii) the environmental monitoring training required for the implementation of the project’s Environmental Impact Mitigating Program.

1.6 Revised Components 15. The original components were not formally revised. However, the project savings amounting to about US$15 Million were re-allocated to a new component, the Distribution System Upgrade Project (DSUP). The latter targeted improvements to the distribution system through (i) investments in sub-transmission and High Voltage/Low Voltage (HV/LV) networks, (ii) training for ECG staff in tariff formulation; and (iii) treasury management which were required to improve reliability of supply. The Board approved the revision to the components in February 2004, and US$15.0 million was reallocated to ECG for these activities. Further US$8.0 million of the original Credit amount was re-allocated to VRA for reinforcement of its transmission network and construction of additional transmission lines for evacuating power from the Takoradi Thermal power complex.

1.7 Other significant changes (in design, scope and scale, implementation arrangements and schedule, and funding allocations) 16. Three significant changes are worth mentioning: 17. Technical design changes during implementation: The project’s original design of the generation equipment envisioned: (i) the suggested “once through” cooling system to dissipate waste heat from the generators was replaced by the installation of a cooling tower system, as a result of the concern by financiers that the waste water discharge may impact on marine life. The concern was related to raising the temperature around the area of the outlet to higher levels, which in turn could affect the fishing population and thus fisheries in the vicinity of the plant; (ii) the building for housing the combustion turbines, which was useful for preservation purposes, was also not installed initially, but was retrofitted later by VRA. These design changes were effected in line with best practice engineering at the time. However, an expert review of plant operations (2006) suggests that the plant’s availability may have been negatively impacted by these variations in the original design. 18. Demand-side management: Two years into the implementation phase, the Ministry of Energy, in accordance with the Government’s policy of building the domestic private sector’s capacity and encouraging them to participate in the development of the sector, transferred the promotion of energy efficiency programs to the non-governmental Energy Foundation (EF). The Ministry established EF in association with the major business associations in Ghana and USAID in November 1997. Only 10% of the original allocation was disbursed, and the remainder was re-allocated to the Power sector reforms component. 19. Closing date extensions: It is worth mentioning that at the time of the original closing date (June, 30, 2001), while the construction of the power plant and transmission lines were essentially complete. The ‘soft components such as policy reform were taking much longer to implement. With no other ongoing operations in the sector to maintain the reform dialogue, the

5

first extension seemed logical. The extension coincided with the initiation of the Poverty Reduction (PRSCs) era in Ghana, which then served as the key vehicle for re-instituting dialogue on difficult power sector issues which impacted on macroeconomic stability.

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry (including whether lessons of earlier operations were taken into account, risks and their mitigations identified, and adequacy of participatory processes, as applicable) 20. The project’s overall Preparation, Design and Quality at Entry is rated moderately satisfactory. 21. Overall project preparation was thorough and comprehensively reviewed the basic framework conditions. The relatively long period between the end of appraisal and Board approval was a result of the Bank team's insistence for government to institute measures to ensure the plant's construction followed standard operating procedures and that the country's framework conditions were adequate for financially sound operation of plant. With respect to the former, the Bank thus assisted Government to put in place a Design Review Board; and an Operation Review Board. These two were comprised of international experts and were tasked with assisting VRA in monitoring progress, mitigating anticipated delays, providing technical advice. The time it took to put these boards in place may have contributed to the delay in getting Board approval after appraisal was completed. With respect to the second, the Bank insisted on necessary tariff increases to be effected, which was a condition for submitting the project to the World Bank's Board for approval. This is the main explanation for the delay between project appraisal in 1993 and project approval in 1995. 22. Country Context: During project preparation, the World Bank supported investments in Ghana’s power sector under the National Electrification (P000953), and the Sixth Power credits (P000836). Lessons learned during their implementation were incorporated and included: (i) the need to improve the utilities’ commercial practices; (ii) timely approval of cost-recovery tariffs through reduction of government’s influence on tariff-setting; and (iii) availability of counterpart funds were appropriately incorporated in the design. The PDOs were consistent with the FY96-98 Ghana CAS2 and the Government’s economic program, a key element of which was the reform of the public enterprises sector and increased infrastructural investments to remove constraints to growth. 23. Integrated Energy Sector Strategy: The Staff Appraisal Report (SAR, 1993) and Memorandum of the President (MOP, 2004) provided accurate overviews of the power sector and identified adequate options for meeting the sector’s priorities. With the assistance of the World Bank the Government updated Ghana’s Power Sector Master Plan and articulated its strategy for the improvement of the energy sector in a document titled the “Energy and Ghana’s Socio-Economic Development”. The project’s design was based on this and the World Bank’s 1992 Energy Sector Review, and the 1993 “The World Bank’s Role in the Electric Power Sector” reports. These documents had identified Ghana’s energy sector priorities to ensure a financially viable, efficiently-managed sector capable of delivering a reliable and economic supply of

2 The CAS had among its objectives "accelerating action on poverty reduction", "restoring and maintaining macroeconomic stability", and "fostering private sector development through the provision of enhanced infrastructural services".

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electricity and introducing private sector participation to the power sector. There were also extensive studies covering tariff policy, power plant technology, and environmental impacts whose findings were integrated into the design of the project. The project was thus designed on the basis of a solid background analysis, an adequate and inclusive participatory process on the part of both Government and the World Bank, and due incorporation of lessons learned by the Bank from previous experiences in Ghana. 24. Regulation of the Energy Sector: The project identified delays in the mobilization of resources from within the sector because of insufficiently high tariffs, which did not cover the full cost of operation. It was well recognized that the introduction of thermal power would lead to even higher costs of operation, thus increasing the need to establish fully cost reflective tariffs from the outset. The tariff issue was thoroughly assessed by the joint Bank-Borrower team by a detailed tariff study (1992), which built on an earlier study (1986), which introduced Long-Run Marginal Costing (LRMC) methodology to Ghana's energy sector. To mitigate this risk, Government - which was the tariff-setting entity - in a first step agreed to increase average tariffs schedule by 76 percent (ahead of the project's presentation to the World Bank's Board in January 1995), and in a second step revised its tariff policy by setting up an independent regulator. Necessary levels of tariff increases had been determined at project appraisal in June 1993. But Government only fully endorsed this tariff increase in January 1995, which then paved the way for Board approval of the project also in January 19953. 25. Project Scope and Objective: The objectives were relevant and clear. The components were appropriate and clearly linked to the achievement of the project’s developmental objectives. But no key performance indicators were identified during appraisal, as this was not practice at the time. 26. Suitability of Implementing Agencies: The implementing agencies were very experienced in project development and implementation of Bank-financed projects, and VRA was rated as a well-run hydro utility, the Ministry of Energy was experienced in coordinating and implementing development activities and ECG had previously satisfactorily implemented both internally and externally funded projects. Although VRA was rated highly, the combustion turbines were a new technology to Ghana and their ability to oversee its design, construction, and efficient operation and management constituted a significant risk to achieving project developmental objectives. The matter was subject to lengthy discussions during project preparation. As an alternative during preparation the attempt was made for IFC to attract a private developer to sponsor the project. However, no interested and qualified private party could be found, given the difficult framework conditions in Ghana's energy sector at the time. 27. To hedge against the risk of VRA’s lack of experience with thermal power, the following measures were incorporated: (i) thorough background work to identify an appropriate technology; (ii) institution of an Operation and Maintenance (O & M) contract for management and supervision of the project from design to commissioning of the combustion turbines; (iii) the institution of a Design Review Board and an Operation Review Board comprised of experts in combustion turbine technology to respectively provide an independent and objective review and evaluation of the construction works; and monthly review of performance of the O & M contractor; and (iv) training of VRA staff to take over the O & M of the plant after contract completion. Given the significant risk posed by the introduction of the new technology, substantial provisions should have been made for longer-term expert assistance on the design,

3 For a complete overview of tariff schedule adjustments and electricity tariff increases see Annex 1-7 and Annex 1-8 of the project's Staff Appraisal Report (January 18, 1995, Report No.12252-GH).

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commissioning, supervision of the thermal plant and training of VRA staff. Pressure as a result of the energy crisis Ghana faced during the period the plant was under construction contributed to VRA’s seeming rush to commission the plant into service and subsequent acceptance of sub-quality products which affected plant performance. 28. Thermal Power Plant: The decision to use a cooling tower system instead of the “once through” system approved at concept design for the combustion turbines should have been based on a more thorough analysis. The failure of the cooling tower system to function effectively as a result of construction defects may have led to the ingestion of sodium-laden mist into the generation equipment contributing to the rust problems the plant has faced. While the switch to a cooling tower system may not necessarily have been a wrong decision because other countries used similar systems that are known to be performing well, adequate provision should have been made in this case to assure proper construction. An independent review of the plant’s operations carried out in 2006 emphasized the need for the Bank to ensure technical decisions “with regard to addressing environmental issues based on sound technical reasoning and value engineering.” We were unable to locate any documentation on the analysis underlying the switch from the once through system discharging into the Gulf of Guinea planned at concept design.

29. Procurement (recruitment of main consultant for thermal plant, and packaging): Given the specialized nature of the power plant’s construction, commissioning into service and its management and operations, a different selection method instead of the QCBS method may have been more appropriate, to select the project consultant who was overseeing the project contractor.

2.2 Implementation (including any project changes/restructuring, mid-term review, Project at Risk status, and actions taken, as applicable) 30. The project’s overall Implementation is rated moderately unsatisfactory. 31. Component 1 - Generation and Associated Transmission and Institutional Development: implementation of this component was marked by: (i) delays of construction and completion of power plant; and (ii) challenges regarding performance of power plant. 32. Delays of construction and completion: the contract for construction had stipulated that the first turbine be operational by July 1997 and the last turbine by September 1998. However, the completion of this component was delayed by 781 days corresponding to somewhat more than two years. Only by November 2000 had the 330 MW combined cycle plant, been fully commissioned and commenced operation (see table further below). 33. The main causes of the delays in the implementation of contract design and construction of two combustion turbine generator included: (i) changes in the joint venture partnership of the main contractor General Electric (GE) and Nouma Cimi Montubi (NCM) due to NCM's financial difficulties and eventual bankruptcy; (ii) time required for replacing NCM with Stone & Webster (S & W), who took over the work from NCM; (iii) poor project coordination between GE and S & W and lack of on-site inspections; (iv) delays in resolving conflicts and lack of expedient conflict resolution mechanism; (v) late issuance of GE civil engineering drawings for approval prior to construction. The delays in the completion of the contract for the design and installation of steam turbine generator and the required auxiliary equipment were identified as (vi) GE's transfer of the Heat Recovery Steam Generators (HRSGs) and the Distributed Control System (DCS) scope into the scope of work of S & W without VRA pre-approval; (ii) GE's award of HRSG contract without VRA approval; (iii) late award of civil works contract and of the cooling water sea pipeline's contract; and (iv) incorrect phasing of the steam turbine generator and excessive steam turbine vibrations. Despite VRA's high performance, as evaluated during the

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initial assessment, this list of problems also points to significant deficiencies in project management, operations and management of the plant by VRA and its representatives. 34. The delays in construction and completion of the power plant delayed the envisaged thermal complementation to hydro power in Ghana. Indeed, the deep energy and economic crisis of 1997/1998, which was caused by a hydrological drought, may have been moderated if the thermal plant had been available on time. 35. All other generation-associated investment such as the 161 kV Prestea-Obuasi transmission line, the marine fuel pipeline for supplying fuel to the plant and associated sub-stations were completed in line with their projected schedules. 36. The total cost to complete the plant was about US$217 Million, a 7% cost overrun. While this overrun seems reasonable, the causes of the cost overrun point to deficient project management in the review of design drawings, acceptance of changes to original designs, inspection and acceptance of delivered equipment and work undertaken by firms engaged under the Credit. Take-over Dates Turbine Generator Contract Stipulated Date Actual Date Delays (days)

Combustion Turbine Generator no. 1

July 15, 1997 December 27, 1997 162

Combustion Turbine Generator no. 2

September 9, 1997 January 27, 1998 138

Steam Turbine Generator

September 9, 1998 November 10, 2000 781

37. Performance of power plant: the overall performance of power plant since inception of operation in 2000 has been below the market reference best practice. This has been attributed to construction defects, inadequate supervision, poor plant operations and management, lack of funds to procure fuel for firing the plant and a dearth of the appropriate expertise in VRA. To address the poor performance, a number of actions have been identified under a Performance Enhancement Strategies study that was financed by the project and have upon implementation led to improvements in plant availability. The lessons learned by VRA under the implementation of this component combined with private sector experience introduced by Government, through a "single-responsibility, date-certain, turnkey EPC contract" with a top-line contractor has been instrumental in the relatively trouble-free performance of the Takoradi II (TK-2) plant. This component is rated moderately unsatisfactory. 38. Component 2 - Power Sector Reform: The technical assistance to initiate sector reforms was well implemented by the Ministry of Energy. As a result, a relatively robust regulatory framework for the power sector was instituted with the promulgation of two laws to set up: (i) the Public Utilities Regulatory Commission (PURC) as an independent tariff-setting agency; and (ii) the Energy Commission (EC), which licenses sector operators. The project provided extensive capacity building to staff of these regulatory agencies, which has enabled the PURC to finalize electricity rate setting guidelines and implement a transitional plan for electricity rate increases for 2001-2004. In line with the policy to increase tariffs to economic levels PURC started approving tariff levels in September 1998, and until about 2004, the levels had risen by about 350% and 250% for residential and non-residential customers, respectively. While inflation rates have slowed in Ghana, rising global oil prices have led Government to interfere in the PURC’s work of ensuring the adjustment of tariffs on a timely basis. A consequence is the 2006-2007 energy crisis, as the power utilities face immense difficulties in

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raising the commensurate financing for capital investments and working capital. The project assisted the Energy Commission (EC) to develop licenses and standards for the sector and introduced a framework for private sector participation in the generation and distribution sub-sectors. Support for staff training and advisory services to Ministry of Energy for the continued implementation of the power sector reform agenda were effective initially. The creation of the EC however depleted the Ministry’s staff and marginalized its function. 39. The sector reforms also sought to attract private investment to the power sector, and there has been a private investment in generation under a public-private arrangement which has resulted in the establishment of the TK-2 plant, however, nationwide, the scope has been limited. Efforts to introduce private sector management in distribution since 2001 has not materialized due to various reasons, but mainly as a result of Government wavering on implementing its own policy. This component is rated moderately satisfactory on the basis of the establishment of the PURC and EC and the roles they have played in sector reform. 40. Component 3 - Electricity Demand-Side Management: The Project successfully financed: (i) a Monitoring & Targeting Energy Management Scheme to assist industry’s energy management capabilities; (ii) an Industrial Energy Assessment Center at the Kwame Nkrumah University of Science & Technology (KNUST) where training and equipment were provided for energy management and industrial process improvement advisory services to industry; (iii) energy audits for 12 large users including government agencies and private enterprises leading to the identification of average consumption patterns and the installation of occupancy sensors to help ensure efficient use of power. The Ministry of Energy has ensured sustainability of this component through its collaboration with the local private sector and USAID to establish the Energy Foundation, a non-governmental organization, whose main function is the creation of public awareness on efficient use of energy. This component cannot be rated against its PDO, as insufficient data are available (see section 5.1 on project files). 41. Component 4 - VRA Institutional Development: Under this component the project supported VRA's program of institutional development. Particular emphasis was given to the building of an Environment Impact Mitigating Program, as recommended by environmental assessment undertaken in the context of project planning for Takoradi Thermal Power Plant. Training evidently also included thermal power plant operation and management. In late 2007, VRA's environmental department is considered as the leading department in this area of any power utility in West Africa. The Environmental Impact Assessments (EIAs) produced by VRA are being used as best practice documents throughout Sub-Saharan Africa. Environmental safeguards have been fully mainstreamed into VRA's operations and reflect international best practice4. Similarly, the training of thermal power plant operation and management has been successful. This is reflected in the fact that VRA was able to undertake its own root-cause analysis and implement a comprehensive plant rehabilitation plan. Moreover, VRA is in the process of completing the construction of its own 125 MW thermal power plant at Tema without any substantial help from outside. For these reasons this component is rated as satisfactory. 42. Component 5 - Distribution System Upgrade (DSUP): The targeted investments in sub-transmission and distribution investments envisaged under this component have been completed by ECG according to schedule. The improvements in reliability of supply in the areas targeted under this project have contributed to a decrease in distribution system losses from 26%

4 In 2007 Ghana's energy sector has also been selected as a pilot country for OP/BP 4.00, "Piloting the Use of Borrower Systems to Address Environmental and Social Safeguard Issues in Bank-Supported Projects", because it is considered as one of the well advanced countries in Sub-Saharan Africa.

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(2003) to 24% (end 2006). However, the targeted reduction in distribution losses as per intermediate outcome indicators was 21%. Given the limited size of investments, this target has to be viewed as unrealistic. Moreover, it is unlikely that the 2% actual reduction of losses can be attributed to the project. Finally, the Management Services and Supply Agreement (MSSA) - another intermediate outcome indicator - was not put in place, despite completion of all necessary upstream work, because changes of ECG management in mid-2006 led to improved operations, and in mid-2007 the MSSA was not longer deemed necessary by Government. It is unclear why implementation of the MSSA was chosen as a performance indicator was chosen for the project, because the MSSA was funded by the Swiss Government under a distinct and separate project. The overall implementation of this component is rated moderately satisfactory.

2.3 Monitoring and Evaluation (M & E) Design, Implementation and Utilization 43. While the PDOs were generally clear and relevant to Ghana’s economic growth program, during appraisal, no baselines were taken. This reflected Bank practice at the time, but could have been better sharpened during the restructuring of the project. The VRA, however, has kept up-to date information since project effectiveness in quarterly reports detailing progress on financial management and procurement, safety, plant availability, etc. The information has been utilized to monitor the impact of the plant operations on the community and the Ghana’s power sector development program. 44. The baselines and measures of key performance indicators were formally included during project restructuring in 2004. The performance indicators for the ECG component could have been enhanced by measuring the level of distribution losses in the areas targeted under this project for end of project comparisons. VRA, ECG and the Ministry’s respective M & E capacities have been strengthened through the provision of equipment, including IT systems, improved staffing levels and relevant training to design, and collect key performance data at regular intervals in order to effectively monitor and evaluate all aspects of company and sector performance. The capacity of the VRA has been sufficiently strengthened to the extent that they have developed a robust M & E system which complements its operational efficiencies and provides real-time information to key stakeholders. The Ministry of Energy is currently relied upon to feed sector M & E indicators to the National Development Planning Commission (NDPC), which is in charge of Ghana’s development planning.

2.4 Safeguard and Fiduciary Compliance (focusing on issues and their resolution, as applicable)

45. There were no major deviations from key safeguard and fiduciary issues and the implementing agencies were generally in compliance with Bank requirements throughout implementation.

46. Environmental Safeguards: The main environmental issues as identified during the design phase included: (i) the effect of spent cooling water from the plant on marine life and consequent effects on the fishing industry near the plant site; (ii) air quality impacts; (iii) effects of loss of site land on a handful of families who farmed at subsistence levels; and (iv) potential oil spillage. The project introduced new technology into Ghana and the operators needed to be vigilant to ensure any negative environmental impacts arising out of the plants’ operations were mitigated. Environmental management has been satisfactory, implemented as agreed in the environmental mitigation plan as reviewed and approved at project inception. The VRA’s environmental unit was strengthened and upgraded and is today at the forefront in Ghana on environmental practices. In partnership with the Environmental Protection Agency, it has

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instituted environmental safeguard practices which have led to IDA’s acceptance of some aspects of Ghana’s environmental systems as equivalent to IDA’s.

47. Resettlement: The project did not require any resettlement of households, but appropriate compensation was paid for loss of land for transmission line right of way, and to a small number of families who were farming at subsistence levels near the plant site. The VRA did set up clinics, built community schools, a market and a cold storage facility for the fishing industry, and constructed paved roads linking towns and villages in the plant vicinity.

48. Financial Management and Procurement: The VRA and ECG generally kept good records on financial management, procurement and disbursement practices. Their financial audits were provided and on-time in line with the DCA and issues raised by their external auditors were addressed on time. However, a number of issues need to be noted: (i) in the context of the construction of the Takoradi 1 power plant, VRA should have notified the Bank of several changes. Particular reference is made in this context for VRA to have notified the Bank with regard to addition to the contracts for gas and steam turbines in lieu of reducing the contract values by corresponding amounts of liquidated damages; (ii) A post procurement review (2007)5 of contracts awarded under the DSUP component revealed that in an apparent effort to expedite project implementation, a number of large goods and equipment packages were procured using the shopping method instead of ICB. There was no evidence of mis-procurement by the Borrower as the Bank provided required non-objections. The objective to save time through the use of shopping was however not realized (see also section 5.1(b)).

2.5 Post-completion Operation/Next Phase (including transition arrangement to post-completion operation of investments financed by present operation, Operation & Maintenance arrangements, sustaining reforms and institutional capacity, and next phase/follow-up operation, if applicable) 49. The project has financed a power station enhancement strategies study which provided recommendations addressing improvements to O & M arrangements and institutional capacity deficiencies. VRA has since 2005 implemented these recommendations, which have led to improvements in plant availability and the amounts of electricity dispatched. In order to ensure a high level of plant availability going forward, the study has prescribed the allocation of additional financial resources to assure the availability of critical and long-lead spare parts, contracting of supplementary technical expertise, and continued staff training. The VRA indicated having consequently allocated funds and instituted plans to keep the plant functioning at a high level, however, this was before its recent financial problems. 50. In order to sustain sector reforms initiated under this project, the independence of the PURC needs to be assured through: (i) targeted capacity building of the staff and commissioners, and revision of the legislation establishing PURC to allow for an independent source for funding its operations; (ii) strengthening of the EC and the Ministry of Energy to improve, among others, updates of the national strategic energy plan, to include utilization of alternative energy sources and the institution of a robust regulatory framework to attract independent power producers. With the on-going effort to curtail power deficits, the diffused and unclear roles and responsibilities of sector agencies could lead to future sector problems unless Government takes

5 World Bank/Procurement Department (2007). Ghana Thermal Project/ DSUP. Procurement Post Review of 7 (No.) Goods Contracts and 1 (No.) Consulting Contract. Credit No. Cr 2682-1-GH, Project ID: P000926. June 22, 2007, Accra, Ghana.

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steps to clarify state sector agencies’ roles and responsibilities. The introduction of targeted subsidies to low-income consumers of electricity must be re-instituted in view of the high cost of power in a high thermal/low hydro generation regime. Also to further assure financial viability of the utilities, the pace of promoting energy efficiency should be increased and performance-based management practices, which have been discussed for over 10 years, implemented. The Ghana Energy Development & Access project and the on-going budget-support program (Poverty Reduction Strategy Credit series) should serve as platforms for continued dialogue with Government for sustaining sector reforms and strengthening the institutional capacities of the power sector agencies. 51. Follow-up activities: The TK-1 plant’s turbines are to be converted to use natural gas which involves among others, the design, fabrication, and construction of a gas pipeline from Nigeria to the Takoradi power station and conversion of the turbines to receive natural gas. The lessons learned and experiences gained during the implementation phase of this project will come in useful in the supervision of the gas turbine conversion contract. It is imperative that continued oversight by properly trained staff and sufficient resources are made available to mitigate the risk of failure. The VRA have entered into a take-or-pay arrangement with the West African Gas Pipeline Company, and once the gas is available it would require that the plant is operated at an optimal level in order to keep the costs to operate the plant low.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation (to current country and global priorities, and Bank assistance strategy) 52. The project’s developmental objectives continue to be highly relevant to Ghana’s development priorities as detailed in its Poverty Reduction Strategy (PRS) and the Bank’s CAS. Specifically, both strategies focus on maintaining macroeconomic stability and increasing production and employment, through the removal of constraints to private sector-led growth. The project clearly identified improvements in power supply as key to growth.

3.2 Achievement of Project Development Objectives (including brief discussion of causal linkages between outputs and outcomes, with details on outputs in Annex 2) 53. The project partially achieved its developmental objectives as summarized below: (a) To enable VRA maintain the country's electricity supply by providing the generating capacity to meet the electricity demand in Ghana: The project partially met this objective, and with a significant delay. VRA installed the envisaged additional generation capacity – a 330 MW combined cycle thermal plant (which supplied 17% of power supply in 2006). An additional 220 MW open cycle generation plant financed under a Public-Private Partnership arrangement (facilitated by regulatory framework set up under the project) has also been built. The associated marine fuel pipeline, sub-stations and transmission lines financed under the credit have been used for evacuating power from the plant and for trade with power utilities in 3 neighboring countries (Côte d’Ivoire, Togo and Benin). There have been several instances where plant availability and the quality of performance have been below industry levels, leading to remedies being put in place to improve and sustain plant operations. Nonetheless, when electricity supply from the hydro plant has gone below projected levels, the thermal plant has provided increased supply and complemented the hydro sources. The additional generation capacity suffered installation delays and hence power supply from the plant into the national grid was unavailable for long periods even after the last unit was commissioned in December 2000. However, its availability has

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improved. The plant’s average monthly availability has increased from a low of 47-52% in 2000-2001 to a high of 62-78% in 2004-2005; by 2006, it had risen to 88%. The plant’s improved availability and consequent dispatch into the national grid has contributed to attenuating the severity of load-shedding experienced in Ghana since mid-2006 as demand growth has outstripped the rate of increase in generation capacity. (b) Enhancing operational efficiency through transmission and generation systems improvement. The project partially met this objective. VRA enhanced its operational efficiency through the 500 km transmission lines (compared to the 360 km end of project target) and substations constructed and utilized in evacuating power from the plant and facilitating electricity trade with Côte d’Ivoire, Togo and Benin and allowed for relative system reliability while maintaining transmission losses at acceptable levels, currently around 4.5%. At project inception, the baseline transmission system loss was 5%. In 2007, however, VRA’s finances are in disarray, because tariffs are below cost recovery, VRA has lost over US$300 Million over the last 2 years, and has been unable to finance the full cost of fuel purchases required to operate its thermal plants. As a result VRA was unable to achieve the targeted rate of return and other key financial performance targets. (c) Moderating demand growth through economic demand-side management programming. This objective was partially achieved. The project has enabled EC and Ministry of Energy to initiate steps to moderate demand growth through legislation and public awareness creation. While the component was discontinued in 1997 after EF was set up by the Ministry of Energy, business associations and the USAID to undertake demand-side management and energy efficiency promotions. At the time it was discontinued, the project had assisted in undertaking energy audits for at least 29 private and public enterprises and created access to credit arrangements for industries in the procurement of energy efficient electrical equipment. The EC has developed legislation mandating the use of energy efficient electrical equipment and have carried out a study that point to savings of over 100 MW during peak hours if end users switch to using compact fluorescent lamps (CFLs). The government has committed to financing the replacement cost for all ministries, government departments and agencies. (d) Strengthen the institutional capabilities of the power sector and of VRA by supporting its ongoing program of institutional development to meet the requirements for the mid-1990s and beyond. This objective was partially achieved as the project helped Government set up a regulatory framework aimed at attracting private investment into the sector, including the establishment of the PURC, and the EC. However recent decisions by Government to absorb tariff increases awarded by PURC have seriously undermined the financial viability of the sector. At the current bulk supply tariff VRA is unable to cover the fuel cost of running the Takoradi thermal plant and relies on Ministry of Finance & Economic Planning to pay for fuel to run the plant. VRA has incurred a massive financial loss of US$160 million in 2006 and has accumulated major payment arrears to its suppliers, and its financial situation continued to deteriorate in 2007. There has been only a single private investment in the power sector between1995-2006 and the sector’s current financial disequilibrium makes it hard to attract new and additional private investment in generation. The key to sustaining the relatively modest gains achieved under the sector reforms lies in Government resolving to letting the PURC operate independently, PURC formulating tariffs that target subsidies to low-income consumers, and approving electricity tariff levels to keep pace with the rising cost of generation. (e) Facilitation of distribution system improvements. The project did not achieve the targeted reduction in losses from 26% to 21%. Sub-transmission and distribution network have, however, been improved and have led to reliable supply and decreases in distribution losses in targeted areas such as Accra, Tema and Kumasi, the major load centers in Ghana. The distribution system losses were reduced to about 24% as at end 2006 despite significant load shedding during the last

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six months of 2006. This component did not meet the set financial targets. However, the achieved targets were an improvement over the baseline figures. ECG has turned modest profits over the last few years. However, the capital, treasury and management investments made under the project are yet to be reflected in significant reductions in non-technical losses. Efforts to introduce an MSSA arrangement into ECG operations are stalled.

3.3 Efficiency (Net Present Value/Economic Rate of Return, cost effectiveness, e.g., unit rate norms, least cost, and comparisons; and Financial Rate of Return) 54. At appraisal, an economic justification of the 330 MW combined cycle plant at Takoradi (TK-1) was undertaken in the context of its role as part of a least-cost system expansion plan for the power sector. Costs included the capital and operating costs of the proposed sequence of plants, as well as transmission and distribution costs. Benefits were based on an estimation of customer willingness to pay for incremental electricity supply. Overall, the Economic Rate of Return (ERR) of the investment program for the entire power system was calculated to be 18%. 55. Apart from the addition of a 220 MW simple cycle plant (TK-2 brought on line in 2000), none of the planned additional generation capacities have been realized. It is unlikely, however, that the decision to delay capacity additions will continue into the future. In fact, construction is already under way on a new diesel plant at Tema and on a hydroelectric project at Bui, and negotiations are ongoing with the private sector for the construction of additional combined cycle thermal plants. Once additional capacity is available, it is likely that the role of the T1 plant will change, especially if some of the new plants have lower operating costs. Hydrology will also play a role, since the bulk of the capacity in the system will continue to be provided by the dams at Akosombo and Kpong. Consequently, the ex-post evaluation of the Takoradi Thermal project focused on the incremental contribution of the power plant to the supply of electricity during the period from 1996 (when construction commenced) to 2006 (the latest year with actual supply data). A residual value of the plant at the end of the evaluation period was estimated based on an assumed 20 year life. 56. Briefly, the evaluation looked at the differences in terms of investment, operating costs, and amount of electricity supplied between the with-project scenario (which included TK-1, the 220 MW of single-cycle generation at TK-2, and Akosombo and Kpong hydroelectric plants), and a without-project scenario which included only the TK-2 plant and the hydro-electric facilities. Where demand exceeded supply, generation at TK-2 was assumed to increase to fill the gap up to the limits of its capacity. The reduction in unserved demand attributable to the TK-1 plant was valued at the economic value to customers assumed at the time of appraisal (viz. 8 UScents/kWh for high voltage customers, 8.5 UScents for residential, and 11.6 UScents for non-residential), less the fully allocated costs of transmission and distribution. These values were escalated to take into account real increases in the costs of petroleum-based fuels over the evaluation period. The net result of the differential analysis was an estimated ERR for the TK-1 project of 26.4%. 57. Extending the analysis into the future would undoubtedly improve the ERR of the project, since the average willingness to pay for power supply exceeds the marginal cost of generation at the TK-1 plant. However, the analysis becomes more complicated as additional plants are added to the system, and it is difficult, without detailed simulation analysis, to predict the likely future dispatch of the TK-1 plant. Arguably, as one of the most efficient plants in the system, it is likely to be base-loaded (assuming that transmission constraints are overcome). However, new plants might also adopt more efficient technologies, which could relegate the T1 plant to a lesser role. Given the highly satisfactory returns to date, it was considered unnecessary to extend the analysis into more speculative realms.

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58. The FRR of the project to date can only be viewed in the context of the total system. Since tariffs for bulk supply are established on the basis of estimated average costs of generation, the incremental revenue from the TK-1 plant is unlikely to cover incremental costs in a hydro-dominated system. If the value of the incremental output were based solely on the average bulk tariff (excluding Valco), the FRR would be the same as the ERR at the bulk supply tariff – i.e. 3.7%. This compares unfavorably with the 8% on-lending rate for the IDA credit under the terms of the loan. 59. Because electricity tariffs in Ghana are set by the regulator, it is impossible to specify what the average revenue per kWh might have been in the counterfactual case of a system without the TK-1 plant. Hence, rather than assessing financial returns based on a with/without project comparison, the operating cash flow for the system was compared to the total program of capital investments in generation and transmission over the project period. On this basis, the FRR of the project to date is negative; NPV at a 10% discount rate is minus US$176.7 million. Assuming however that, in the future, VRA’s tariffs are set at full cost recovery, the FRR of the generation and transmission investments over a 20 year period would be 13.5% (nominal).

3.4 Justification of Overall Outcome Rating (combining relevance, achievement of PDOs, and efficiency) Rating: Moderately Unsatisfactory 60. The comprehensive background analysis that preceded appraisal, the key technical advice provided to Government, the stakeholder inclusion and utilization of lessons learned from on-going sector investments combined to respond to the Government’s economic program and has ensured the continued relevance of the PDOs. The project however only partially achieved its objectives, given: (i) the significant lapses in adding generation capacity to the power supply system; (ii) the difficulties in achieving financial sustainability in spite of enhancements to system reliability both for transmission (VRA) and distribution (ECG); (iii) the uneven application of domestic electricity tariffs and unclear signals for private participation in power generation which have in 2007 led to deep sector viability issues (despite the establishment of a best practice regulatory framework); and (iv) the unachieved targeted improvements to the sub-transmission and HV/LV distribution network which has resulted in minimal decreases in distribution losses. This notwithstanding, the economic rate of return of the Takoradi power plant, which is about 8% higher than at appraisal, indicates that economically the project was more beneficial to the overall economy than originally anticipated. The reason for this is that Government failed to develop major planned power plant as per least cost expansion plan. This in turn made the Takoradi thermal plant so much more valuable (see section 3.3 on efficiency).

3.5 Overarching Themes, Other Outcomes and Impacts (if any, where not previously covered or to amplify discussion above) (a) Poverty Impacts, Gender Aspects, and Social Development 61. The additional capacity injected into the national grid and the improvements in operational efficiencies have played a contributing factor to increased access to electricity in Ghana - access has increased from 24% at appraisal (est. population of 15 million) to over 50% (est. population of 20 million) by 2006. Complemented by rehabilitation of the distribution network and extensions to the distribution network, electricity supply is now available to many more residents. In addition, power is available to social institutions, such as schools and clinics in many rural areas, which has contributed to improving social services in these areas.

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62. While the increased access has allowed for the spread of energy services to previously unconnected areas, the new capacities have also meant the generation mix has changed, with more thermal energy being injected into the power system. One consequence has been the significant rise in tariff levels, such that the cost of services may not be affordable to a large number of rural residents where the incidence of poverty is more pronounced. The tariff-setting agency’s attempts at introducing a lifeline-tariff system to cushion the impact of high tariffs on low-income customers have been unsuccessful and have been suspended. The Bank and Government undertook a Poverty and Social Impact Assessment (PSIA) and have agreed a plan (under the PURC tariff setting guidelines) to ensure the gains from the increased access to electricity are not eroded on account of the relatively high cost of energy services. (b) Institutional Change/Strengthening (particularly with reference to impacts on longer-term capacity and institutional development) 63. The project has ensured a tangible degree of institutional development within the power utilities, regulatory agencies, the Ministry of Energy and the private sector. Knowledge transfer in the operations and maintenance of combustion turbine technology was substantial and utility staff’s capacity has been enhanced to the extent a number of VRA staff at the power plant have moved on to the international market; the environmental support has led to VRA being a leader in environmental mitigation plans development in the sub-region (IDA now accepts most environmental systems as equivalent to IDA safeguard systems). The regulatory agencies which were established under the project have matured and have instituted robust tariff regimes and introduced best practice regulations for electricity operators. However, the Government's actions have interfered with the tariff regulator’s moves to assuring financial viability of the sector. The local private sector’s capacity in transmission and distribution network construction was enhanced and will serve them well in future construction activities both outside and in Ghana. Similarly, opportunities were opened up for financial intermediaries in financing power factor equipment and improving access to credit for industries. (c) Other Unintended Outcomes and Impacts (positive or negative) 64. Not applicable.

4. Assessment of Risk to Development Outcome Rating: Substantial 65. There is no doubt that the additions to total generation capacity in Ghana, and the generally improved operational efficiencies as a result of the transmission and distribution network improvements have had an important developmental impact on Ghana. However, these are not likely to be sustained, if the major financial issues facing the sector are not addressed in a timely manner. Additionally, ensuring high levels of plant availability will continue to be a significant risk without financial and human resources to sustain plant operations. The Government has under a performance enhancement study, put in place plans to mitigate the above risks. VRA has established funds dedicated to continued staff training, engagement of as-needed expertise, stocking of long-lead spares, and proactive maintenance of plant equipment. But unless VRA’s current financial situation is rectified, adequate funds will not be available to mitigate the identified risks. 66. Despite initiatives such as PURC's recent proposal that utilities initiate tariff reviews as needed instead of the previous annually mandated submission of tariff requests, the regulatory

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reforms which were instituted to allow for independent tariff setting will continue to face difficulties. The transparent licensing and attraction of private operators into the sector will be difficult to sustain in the face of unclear sector agencies’ roles and responsibilities. The envisaged signal to private investors is unlikely to be attained in the face of these difficulties. The political situation in Ghana is relatively stable and the project has been implemented without significant deviations from the original PDOs under two governments with different democratic philosophies, as such the risk to the PDOs on account of political volatility is low. The VRA has benefited from institutional capacity building for thermal power and on environment, which is more than likely to be sustained.

5. Assessment of Bank and Borrower Performance (relating to design, implementation and outcome issues)

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry (i.e., performance through lending phase) Rating: Moderately Satisfactory 67. The Bank ensured that the Borrower was part of project design and preparation and supported preparation by providing comprehensive technical, economic, financial management, and engineering advice leading to a relatively well designed intervention that was responsive to the Government’s economic program, and forward looking in addressing constraints to the desired growth levels (see also section 2.1). Institutional development was given the desired attention and has led to the strengthening and development of, for example, VRA’s environmental unit into a fully functioning and well-performing unit. The long delay between the end of appraisal (1993) and Board approval (1995) is due to the Bank's insistence to raise tariffs to levels that would ensure that thermal power plant could be operated in a financially sustainable manner. In view of the fact that thermal power plant was a technology which was new to Ghana, a longer-term contract for consulting services to assist supervision of power plant construction could have improved implementation. Arguably, the supervision contract should have been extended to include the first full scheduled plant overhaul to ensure that the project cycle was completely covered. Instead, the supervision contract lasted only 3.5 years, which did not cover full plant completion. However, VRA’s reputation of a first rate hydro operator may have overshadowed the rating of its ability to supervise and run a thermal plant. (b) Quality of Supervision (including of fiduciary and safeguards policies) Rating: Unsatisfactory 68. The absence of an adequate skill-mix in the Bank’s supervision teams and the frequent changes to the task team contributed to the unsatisfactory supervision of the project during certain periods of implementation. During periods task teams lacked skills in thermal plant technology. During the project's supervision period of 12 years, it had 8 TTLs.6 Frequent changes in team

6 The project was extended three times in total. The original closing date was June 30, 2001. The first project extension lasted until December 31, 2002. The second project extension lasted until December 31, 2003. The third project extension, which was combined with a restructuring of the project, lasted until December 31, 2006.

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composition and TTLs led to inadequate implementation support and advice to VRA. Although the Bank team, Government and the implementing agencies entered into a series of dialogues and agreed plans to rectify the problems identified, the time to implement agreed remedies generally took longer than anticipated. Clearly, supervision in the initial phases of the project and close to project closure was significantly better than during the middle part of project implementation. Overall a rating of unsatisfactory Bank performance is viewed as appropriate for the following reasons: 69. Softening of Sector Dialogue: Over time, the Bank gave less and less attention to ensuring cost recovery tariffs as other issues such as privatization and radical sector reform came to the fore. At the level of the Bank team there was a dilution of responsibilities as the number of players was enlarged in terms of energy management in the Bank. As there had been no new energy project planned in the early 2000s, this provided in addition no further incentive for Government to pursue rigorous energy sector policies. The tariff dialogue with Government particularly weakened during the last four years of the project lifetime, leading to a difficult financial situation of both VRA and ECG in late 2007. As the indicators in the datasheet indicate, neither VRA nor ECG fulfills the financial performance indicators. 70. A Quality of Supervision Assessment was conducted in October 2004. The project was rated Moderately Unsatisfactory on account of delays in construction of the power plants and the lack of a comprehensive Bank response to assist the Borrower resolve both sector and project-specific issues. 71. Restructuring in 2004: When the project was restructured in 2004 - with the aim of making available cost savings towards a distribution component - it had already been extended by 2 years and 8 months. At restructuring, just about 15% of the Credit amount was uncommitted and available. This restructuring was undertaken too late in the project cycle. It would have been appropriate to have undertaken such restructuring either during the project's Mid-Term Review or following completion of plant construction in 2000-2001. The needs in the distribution sector notwithstanding, the support by the Bank of the Government's decision to re-allocate funds to a newly appraised distribution component instead of addressing the technical and operational difficulties being experienced at the just completed thermal power plant appears not justified against the background of the project's PDO's. 72. Project Filing: Although there is some evidence that the project supervision teams during the first 3-4 years of supervision systematically filed information, it appears that the Africa region's filing of this information itself was unsatisfactory. Very few documents are filed in Iris, and without any visible strategy behind this. The hard copies filed in the Bank's archives lack any system. When the ICR team requested the hardcopy files for the Ghana Thermal Power project from archives, they were mixed with at least one-third of files from countries unrelated to both Ghana and the energy sector. Moreover, for the period of 2003/2004 files were only available from the Borrower, as in this instance the Bank energy team apparently did not keep any records. AFTEG's own procurement archive, on the other hand, provided very useful documentation. Against this background it has been difficult to assemble a full picture of the project for the purposes of this ICR. More importantly, however, for supervision of project it meant that the frequently changing TTLs could not readily acquaint themselves with the key issues concerning the project at any given point in time. (c) Justification of Rating for Overall Bank Performance Rating: Moderately Unsatisfactory

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73. The moderately satisfactory preparatory and appraisal work done at project entry and improved supervision in the last 2 years of project implementation notwithstanding, the flawed supervision during key phases of implementation, the overall Bank performance is assigned an overall moderately unsatisfactory rating.

5.2 Borrower Performance (a) Government Performance Rating: Unsatisfactory 74. During preparation and appraisal, the Government was a key partner in proposing actions to ensure the achievement of its economic goals, for which improved energy sector performance, an independent regulatory framework and increased access to electricity were key objectives. The Government’s proactive stance, however, waned during implementation as the relatively high cost of thermal power became manifest with the increase in global crude prices, and consensus on domestic political engagement became difficult to achieve. This led to instances of political interference in tariff-setting and failure to implement agreed sector reforms on time. There is no doubt the difficulties developing country government’s face, like in the Ghanaian case, when moving from a regime of low hydro-based tariff levels to significant thermal generation tariff levels. End user tariff levels were increased in 1998-1999 to about US$0.08 kWh as compared to average end user hydro-based tariffs of US$0.03. Nonetheless, once the policy was made, the length of time it took to implement the project only compounded the problems of the sector. Delays in adding more generation capacity as envisaged under the sector reform program, due to,