Document of The World Bank FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA IDA-2682A) ON A CREDIT

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY Report No:ICR IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA IDA-2682A) Energy Group Sustainable Development Department Africa Region ON A CREDIT IN THE AMOUNT OF SDR MILLION (US$175.6 MILLION EQUIVALENT) TO THE GOVERNMENT OF GHANA FOR A THERMAL POWER PROJECT September 27, 2007 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 (Exchange Rate Effective 09/15/2007) Currency Unit = Cedis Cedis 1.00 = US$ US$ 1.00 = Cedis 9, FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS AFD BADEA CAS CDC CCGT DCA DSC DSUP EC ECG EF EIB ERP ERR FRR FY HV/LV ICB ISR KFAED KWh MW MoE MoFEP MoP MSSA O & M PRSC PURC Agence Française de Développement Arab Bank for Economic Development in Africa Country Assistance Strategy Commonwealth Development Corporation Combined Cycle Gas Turbine Development Credit Agreement Debt Service Coverage Distribution System Upgrading Project Energy Commission Electricity Company of Ghana Energy Foundation European Investment Bank Economic Recovery Program Economic Rate of Return Financial Rate of Return Fiscal year High Voltage/Low Voltage International Competitive Bidding Implementation Summary Report Kuwait Fund for Arab and Economic Development Kilowatt hour Megawatts Ministry of Energy Ministry of Finance & Economic Planning Memorandum of the President Management Support Services Agreement Operation and Maintenance Poverty Reduction Strategy Credit Public Utilities Regulatory Commission

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

4 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... i C. Ratings Summary... i D. Sector and Theme Codes... ii E. Bank Staff...ii F. Results Framework Analysis... ii G. Ratings of Project Performance in ISRs... v H. Restructuring (if any)... v I. Disbursement Profile... vi 1. Project Context, Development Objectives and Design Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1. Project Costs and Financing Annex 2. Outputs by Component (page 1 of 2) Annex 3. Economic and Financial Analysis Annex 4. Bank Lending and Implementation Support/Supervision Processes Annex 5. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 6. List of Supporting Documents MAP IBRD No

5 A. Basic Information Country: Ghana Project Name: GH-Thermal Power SIL 5 (FY95) Project ID: P 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/ /17/1995 Appraisal: 06/30/1993 Restructuring(s): 02/27/2004 Approval: 02/16/1995 Mid-term Review: 05/15/ /15/1998 Closing: 06/30/ /31/2006 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Moderately Unsatisfactory Substantial Moderately Unsatisfactory Moderately Unsatisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Moderately Satisfactory Government: Unsatisfactory Implementing Quality of Supervision: Unsatisfactory Moderately Satisfactory Agency/Agencies: Overall Bank Performance: Moderately Unsatisfactory Overall Borrower Performance: Moderately Unsatisfactory i

6 C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Project Yes at any time (Yes/No): Problem Project at any time (Yes/No): DO rating before Closing/Inactive status: Yes Moderately Satisfactory D. Sector and Theme Codes Sector Code (as % of total Bank financing) Quality at Entry (QEA): Quality of Supervision (QSA): Original None Rating Moderately Unsatisfactory Actual Power 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: ICR Primary Author: Fanny Missfeldt-Ringius 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 ii

7 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 0% (no power plant at quantitative or Takoradi) Qualitative) 90% 72% Date achieved 12/31/ /31/ /31/2006 TK-1 did not meet its targeted average monthly availability at project Comments completion. Since inception of operation, the plant s availability has been (incl. % somewhat below 70% average monthly availability. Data is updated compared to achievement) last ISR. (b) Intermediate Outcome Indicator(s) Indicator Indicator 1 : Value (quantitative or Qualitative) Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Improved financial and operational performance in VRA operations 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% Actual Value Achieved at Completion or Target Years ROR: -4.67%; DSC: 0.08; Transmission Losses 4.5% Date achieved 12/31/ /31/ /31/2006 Comments The ISR uses 2003 as baseline value. For the ICR it was found more applicable iii

8 (incl. % achievement) Indicator 2 : Value (quantitative or Qualitative) 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. Improved financial and operational performance in ECG operations ROR: 3.8%; ROR: 2.09%; ROR: -6.17; DSC:1.5; DSC:0.56; DSC: 0.65; Distribution Distribution Losses: Distribution Losses: 26% Losses: 21% 24% Date achieved 12/31/ /31/ /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. First seven contracts Value awarded on 7/20/2004 (12 (quantitative days after effectiveness DSUP completed. DSUP completed. or Qualitative) following project restructuring). Date achieved 12/31/ /31/ /31/2006 Comments Due to the appreciation of the SDR against the US$, an amount somewhat in (incl. % excess of what was originally agreed could be deployed for equipment. achievement) 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/ /31/ /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/ /31/ /31/2006 Comments (incl. % achievement) Indicator 6 : Value (quantitative or Qualitative) While VRA's Debt Sales ration has been slightly reduced, the value is far off its target. ECG's Debt Service Ratio or Receivables days reduced. 185 days 122 days 138 days Date achieved 12/31/ /31/ /31/2006 Comments Data updated compared to last ISR. The receivables were reduced, and but did (incl. % not reach the target value. achievement) iv

9 G. Ratings of Project Performance in ISRs No. Date ISR Archived DO v IP Actual Disbursements (USD millions) 1 06/30/1995 Satisfactory Satisfactory /05/1996 Satisfactory Satisfactory /20/1996 Satisfactory Satisfactory /27/1997 Satisfactory Satisfactory /25/1998 Unsatisfactory Unsatisfactory /06/1998 Unsatisfactory Unsatisfactory /02/1999 Satisfactory Satisfactory /30/1999 Satisfactory Satisfactory /21/1999 Satisfactory Satisfactory /13/2000 Satisfactory Satisfactory /18/2000 Satisfactory Satisfactory /29/2001 Satisfactory Satisfactory /28/2001 Satisfactory Satisfactory /13/2002 Satisfactory Satisfactory /16/2002 Satisfactory Satisfactory /02/2003 Satisfactory Satisfactory /02/2003 Satisfactory Satisfactory /28/2004 Satisfactory Satisfactory /15/2004 Satisfactory Satisfactory /15/2005 Satisfactory Satisfactory /30/2005 Moderately Moderately Unsatisfactory Unsatisfactory /21/2005 Moderately Moderately Unsatisfactory Unsatisfactory /30/2006 Moderately Satisfactory Moderately Satisfactory /28/2006 Moderately Satisfactory Moderately Satisfactory H. Restructuring (if any) Restructuring Date(s) ISR Ratings at Restructuring Board Approved PDO Change DO IP Amount Disbursed at Restructuring in USD millions 02/27/2004 Y S S Reason for Restructuring & Key Changes Made 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

10 Restructuring Date(s) ISR Ratings at Restructuring 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 vi

11 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 (P 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 electricity 1. 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. 1

12 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 demandside management and installation of additional capacity to complement the existing hydropower. The Country Assistance Strategy (CAS) for fiscal year 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) 2

13 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 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 3

14 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 Only 10% of the original allocation was disbursed, and the remainder was reallocated 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 4

15 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 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 CAS 2 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". 5

16 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 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 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 GH). 6

17 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 subquality 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 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 7

18 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 substations 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 July 15, 1997 December 27, Generator no. 1 Combustion Turbine September 9, 1997 January 27, Generator no. 2 Steam Turbine Generator September 9, 1998 November 10, 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 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 energy crisis, as the power utilities face immense difficulties in 8

19 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 subsectors. 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 practice 4. 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. 9

20 (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 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 10