Document of The World Bank
FOR OFFICIAL USE ONLY Public Disclosure Authorized
Report No: 39713-GH
PROJECT APPRAISAL DOCUMENT
ON A
PROPOSED CREDIT
IN THE AMOUNT OF SDR 59.1 MILLION Public Disclosure Authorized (US$90.0 MILLION EQUIVALENT)
AND A
PROPOSED GRANT FROM THE GLOBAL ENVIRONMENT FACILITY TRUST FUND
IN THE AMOUNT OF US$5.5 MILLION
TO THE Public Disclosure Authorized REPUBLIC OF GHANA
FOR AN
ENERGY DEVELOPMENT AND ACCESS PROJECT
June 25,2007
Energy Unit Sustainable Development Department Africa Region Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS
Currency Unit - Cedis Cedis - us$o.oool US$1 - Ct 9,073
(Exchange Rate Effective March 12,2007)
FISCAL YEAR
January 1 - December 31
ABBREVIATIONS AND ACRONYMS
ACGF Africa Catalytic Growth Fund AfDB African Development Bank AGSI Association of Ghana Solar Industry BST Bulk Supply Tariff BDS Business Development Service BSPs Bulk Supply Points CAS Country Assistance Strategy DA Designated Account DANIDA Danish Development Agency EAA Environmental Assessment and Audit EC Energy Commission ECG Electricity Company of Ghana ECOWAS Economic Community of West African States EL4 Environmental Impact Assessment EMP Environmental Management Plans EPA Environmental Protection Agency FM Financia1 Management GDP Gross Domestic Product GEF Global Environment Facility GHG Greenhouse Gas Emissions GoG Government of Ghana GPOBA Global Partnership on Output-Based Aid GPRS I1 Ghana’s Growth and Poverty Reduction Strategy for 2006-2009 HVDS High Voltage Distribution System IFC International Finance Corporation IFMIS Integrated Financial Management Information System IFR Interim Financial Reports MDBS Multi Donor Budget Support MDGs Millennium Development Goals FOR OFFICIAL USE ONLY
MIGA Multilateral Investment Guarantee Agency MoE Ministry of Energy MoFEP Ministry of Finance and Economic Planning MSME Micro, Small, and Medium Enterprises MSSA Management Support Services Agreement NEF National Electrification Fund NED Northern Electricity Department NES National Electrification Scheme PCT Project Coordination Team PIM Project Implementation Manual PIP Projec t Implementation Plan PPB Public Procurement Board PPMED Policy Planning, Monitoring and Evaluation Department PRSC Poverty Reduction Strategy Credit PURC Public Utilities Regulatory Commission PVI Performance Verification Index REA Rural Electrification Agency REF Rural Electrification Fund RPF Resettlement Policy Framework SCADA Supervisory Control and Data Acquisition SECO The Swiss Secretariat for Economic Affairs SHEP Self-Help Electrification Program SHS Solar Home Systems SSA Sub-Saharan Africa SWERA Solar and Wind Energy Resource Assessment UNDP United Nations Development Programme UNEPNREL United Nations Environmental Program/National Renewable Energy Lab VRA Volta River Authority WAGP West African Gas Pipeline WAPP West African Power Pool
Vice President: Obiageli K. Ezekwesili Country Director: Mats Karlsson Sector Manager: S. Vijay Iyer Team Leader: Paivi Koljonen Program Assist ant: Lily Wong Chun Sen
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 Energy Development and Access Project
CONTENTS
Page A . STRATEGIC CONTEXT AND RATIONALE ...... 1 1. Country context ...... 1 2 . Sector context ...... 1 3 . Key sector issues and strategy ...... 3 4 . Rationale for Bank and ACGF involvement ...... 7 5 . Higher level objectives to which the project contributes ...... 8 B. PROJECT DESCRIPTION...... 9 1. Lending instrument ...... 9 2 . Project development objective and key indicators ...... 9 3 . Project design and components ...... 9 4 . Lessons learned and reflected in the project design ...... 13 5 . Alternatives considered and reasons for rejection ...... 14 C . IMPLEMENTATION ...... 15 1. Partnership arrangements ...... 15 2 . Institutional and implementation arrangements ...... 16 3 . Monitoring and evaluation of outcomes/results...... 18 4 . Sustainability and replicability ...... 19 5 . Critical risks and possible controversial aspects ...... 20 6 . Credit conditions and covenants ...... 22 D. APPRAISAL SUMMARY ...... 25 1. Economic and financial analysis ...... 25 2 . Financial performance of the sector ...... 26 3 . On-lending terms ...... 27 4 . Technical ...... 28 5 . Fiduciary ...... 28 6 . Social ...... 28 7 . Environment ...... 29 8 . Safeguard policies ...... 29 9 . Policy exceptions and readiness...... 3 1 Annex 1: Country and Sector Background ...... 32 Annex 2: Major Related Projects Financed by the Bank and other Agencies ...... 36 Annex 3: Results Framework and Monitoring...... 38 Annex 4: Detailed Project Description ...... 43 Annex 5: Project Costs...... 56 Annex 6: Implementation Arrangements ...... 57 Annex 7: Financial Management and Disbursement Arrangements ...... 65 Annex 8: Procurement Arrangements ...... 80 Annex 9: Economic and Financial Analysis ...... 93 Annex 10: Safeguard Policy Issues...... 106 Annex 11: Project Preparation and Supervision ...... 110 Annex 12: Documents in the Project File ...... 112 Annex 13: Statement of Loans and Credits ...... 114 Annex 14: Country at a Glance ...... 116 Annex 15: Incremental Cost Analysis ...... 119 Annex 16: Overview of Macroeconomic Environment and Financial Sector ...... 126 Annex 17: Map IBRD 35486 ...... 131 GHANA
ENERGY DEVELOPMENT AND ACCESS PROJECT
PROJECT APPRAISAL DOCUMENT
AFRICA
AFTEG
Date: June 25,2007 Team Leader: Paivi Koljonen Country Director: Mats Karlsson Sectors: Power (60%); Renewable energy Sector Manager: S. Vijay Iyer (17%); Central government administration Project ID: PO74191 (13%); Micro and SME finance (10%). Lending Instrument: Specific Investment Loan Themes: Infrastructure services for private sector development (P); Rural services and infrastructure (P); Climate change (S); Small and medium enterprise support (S); Other public sector governance (S). Environmental screening category: Partial Assessment Global Supplemental ID: PO70970 Team Leader: Paivi Koljonen Lending Instrument: Specific Investment Loan Sectors: Renewable energy (100%) GEF Focal Area: C - Climate change Themes: Rural services and infrastructure (P) Supplement Fully Blended?: Yes Project Financing Data [ ] Loan [XI Credit [XI Grant [ ] Guarantee [ ] Other:
For Credit: US$90.0 million Total Bank financing (US$m.): 95.5 Proposed terms: Standard, 40 years maturity with ten years grace period. Financing Plan (US%m) Borrower:
Republic of Ghana Ministry of Finance and Economic Planning P.O. Box M40 Accra, Ghana Tel: (233) 21 665 587; Fax (233) 21 667 069 Email: minister @ mofep. pov. nh
Ministry of Energy P.O. Box T40, Stadium Post Office Accra, Ghana Tel: (233) 21 667 090; Fax: (233) 21 668 262 Emai1:moen @ energymin.gov.gh
Responsible Agencies:
Electricity Company of Ghana, Ltd. (ECG) Electro-Volta House P.O. Box 521 Accra, Ghana Tel: (233) 21 676 727; Fax: (233) 21 666 262 / 676 761 Email: ecnho @g;hana.com
Volta River Authority (VRA) Electro-Volta House P.O. Box M77 Accra, Ghana Tel: (233) 21 666 037; Fax: (233) 21 664 705 Email: paffairs @vra.com
;Y 08 09 10 11 12 13 innual 1.56 6.68 16.73 32.55 22.79 9.69 hmulative 1.56 8.24 24.97 57.52 80.31 90.00
'y I 08 I 09 I 10 I 11 I 12 I innual 0.43 1.13 1.48 1.38 1.08 hmulative 0.43 1.56 3.04 4.42 5.50 Project implementation period: Start: October 1,2007; End: May 31,2012 Expected effectiveness date: September 28, 2007 Expected closing date: November 30, 2012 Does the project depart from the CAS in content or other significant [ ]Yes [XINO respects? Does the project require any exceptions from Bank policies? [ ]Yes [XINO
Is approval for any policy exception sought from the Board? [ ]Yes [XINO
Does the project include any critical risks rated “substantial” or “high”? [XIYes [ ]No
Does the project meet the Regional criteria for readiness for [ ]Yes [XINO implementation? See Section 9 in part D of the PAD for details. Project development objective:
To improve the operational efficiency of the electricity distribution system and increase the population’s access to electricity; and (b) to help transition Ghana to a low-carbon economy through the reduction of greenhouse gas emissions.
Global Environment objective:
To support transition to a low-carbon economy through the reduction of greenhouse gas emissions (GHG) in line with the United Nations Framework Convention on Climate Change and its Kyoto Protocol, to which Ghana is a Party (GEF OP5 and 6).
Project description:
The project has three components:
(a) Sector and Institutional Development.
This component will finance technical assistance and capacity building to (i)enhance the capacity of the power sector regulator to perform its mandate of economic regulation of the power sector entities; (ii)provide ECG with the management and staffing capacity to implement the required operational and financial performance improvement measures that complement the project’s distribution investments; (iii)enhance the Government’s existing mechanism for monitoring the performance of VRA and ECG, through annual corporate performance contracts that define the Government’s targets for the companies’ financial and operational performance; (iv) build MoE’s institutional capacity for better coordination of the energy sector; (v) develop renewable energy projects and a competitive framework for contracting Independent Power Producers; (vi) increase MoE’s capacity for effectively managing the project, and for monitoring and evaluating the project’s outcome; and (vii) enhance environmental management practices.
(b) Electricity Distribution Improvement.
The component will finance investments and interventions to improve quality and reliability of electricity distribution, reduce distribution losses, and equip ECG with modern tools to help the company improve its customer service and commercial operations. The component will cover both the upgrading of ECG’s distribution system and the company’s capacity for commercial and technical operations.
(c) Electricity Access and Renewable Energy.
This component will help establish a new institutional and policy platform from which to launch an innovative, multi-faceted approach for expanding electrification in Ghana. This includes establishment of an independent Rural Electrification Agency (REA), which will coordinate all rural electrification programs and determine areas to receive electrification based on transparent eligibility criteria and commercial principles. In addition, the project will finance various sub-components of the access program including: (i)connecting about 134,300 new customers to grid electricity supply in about 1,093 peri-urban and rural towns and villages; (ii)providing grants to eligible developers to develop renewable energy projects such as small hydro, wind, and biomass; (iii)line-of-credit facility and output-based grants for solar-PV systems; and (iv) capacity building in Government agencies, rural banks, and private sector to enable development of renewable energy projects.
Which safeguard policies are triggered, if any?
The project is a pilot for the World Bank’s and the AfDB’s “use of country safeguard systems”. A review of the Ghanaian social and environmental safeguard systems concluded that they are equivalent to those of the two financing institutions, with minor gaps, for environmental assessment and physical cultural property. The review found other areas where the Ghanaian system lacked “equivalency” and, therefore, the project has triggered the use of the World Bank’s guidelines governing:
Natural Habitats (OP/BP 4.04) Involuntary Resettlement (OPBP 4.12) Safety of Dams (OPBP 4.37)
Significant, non-standard conditions, if any, for:
Board presentation: No conditions.
Credit eflectiveness:
(a) The Subsidiary Agreements have been executed on behalf of the Recipient and the project implementing entities.
[b) The co-financing Agreement between the Recipient and IBRD acting as an implementing agency 3f the GEF has been executed and delivered, and all conditions precedent to its effectiveness or to the right of the Recipient to make withdrawals under it have been fulfilled.
:c) The Recipient and each project implementing entity have adopted their respective project .mplementation plans, in form and substance satisfactory to the Association.
:d) The Recipient has given effect to PURC’s November 2006 approved tariff adjustments. (e) The Environmental Protection Agency has completed and issued the “Sector Specific Guidelines for Environmental Impact Assessments” for the energy sector, in form and substance satisfactory to the Association.
(0 The Recipient has established the Project Steering Committee, with a composition and terms of reference satisfactory to the Association.
(g) The Ministry of Energy has appointed a project coordination team and interim access secretariat staff responsible for implementing Parts C.2 and C.3 of the project, all with qualifications and terms of reference acceptable to the Association. Covenants applicable to project implementation:
Disbursement conditions:
For component C.l(a): ECG has established a separate cost center for its rural electrification business with separate accounts.
For components C.2(a) and C.3: Government has adopted the Rural Electrification Grants Manual, in form and substance satisfactory to the Association.
Solar-PV loans under component C.4(a): ARB Apex Bank has: (a) designated staff, with qualifications and terms of reference acceptable to the Association, dedicated to implement its respective part of the project; and (b) adopted the Solar-PV Financing Manual, in form and substance satisfactory to the Association.
Financial pe?formance covenants:
(a) ECG shall maintain a ratio of current assets divided by current liabilities of not less than 1.2.
(b) ECG shall not incur any new debt, unless it produces for its following fiscal year a reasonable forecast of net revenues equal to at least 1.3 times the company’s estimated debt service requirements for such fiscal year.
Dated Covenants:
(a) Electricity Tariff Adiustment. The Recipient shall: (i)by March 31, 2008, complete the cost of service and tariff study to be carried out under Part A.l of the project; and (ii)by June 30,2008, adopt an action plan, acceptable to the Association, to achieve full cost recovery electricity tariffs; and (iii)thereafter, implement the actions specified in the said action plan within the timeline specified in the plan.
(b) ECG and VRA Reviews and Performance Contracts. (i)by March 3 1,2008, the Recipient shall complete the technical and operational reviews of ECG and VRA to be carried out under Part A.l of the Project; and (ii)By December 31 of each year during the implementation of the project, commencing by December 3 1, 2008, the Recipient, through MoFEP and MoE, shall enter into performance contracts with ECG and VRA, on terms and conditions acceptable to the Association. (c) Bulk Power Supply Contract. by December 31, 2008, the Recipient shall ensure that VRA and ECG enter into a bulk power supply contract, on terms and conditions acceptable to the Association.
(d) ECG Management Support Services. by October 3 1, 2008, the Recipient shall cause ECG to appoint consultants to provide management support services to ECG.
(e) Renewable Enerm Law. by December 31,2008, the Recipient shall submit to Parliament a renewable energy bill.
(f) Solar-PV Line of Credit. The Recipient shall cause the Apex Bank to deposit all repayments of the principal amounts of Solar-PV Loans extended through the revolving line of credit facility established under Part C.4(a) of the project, for the purpose of providing additional consumer credits and/or grants for Solar-PV systems in accordance with the provisions of the Solar-PV Financing A. STRATEGIC CONTEXT AND RATIONALE
1. Country context
1. The Government ofGhana (the Government) is committed to reducing poverty by increasing per capita income and decreasing income disparities between urban and rural areas. A recent Living Standard Survey has shown that Ghana’s overall poverty level declined from 5 1.7 percent in 1991 to 28.5 percent in 2005. However, in rural areas where access to modem infrastructure services is lower, the poverty level is much higher than in urban areas, 39 percent and 11 percent respectively. More than 60 percent ofGhana’s population lives in rural areas.
2. Ghana’s population ofabout 22 million inhabitants has a per capita income ofonly US$450 (2005), which is about 40 percent below the average ofUS$745 for Sub-Saharan Afiica (SSA). The Government has set a target ofachieving middle-income status by 2015. Per capita income will have to more than double over the next eight years in order to achieve this status, attaining a level ofat least US$1,000. Reaching this target will require GDP growth at an average annual rate of 8 - 10 percent during the target period, about double the yearly average between 2004 and 2006 (five percent). Most ofthis growth will have to come from the private sector, which currently faces substantial infrastructure constraints’.
3. A recent study on infrastructure in Ghana has indicated that improved access to and quality ofkey infrastructure for business development -- particularly telecommunications and energy -- are crucial determinants for unleashing the country’s potential for economic growth, and thereby reducing poverty. Also the study suggests that improved infrastructure conditions can play a leading role in harmonizing economic growth rates among regions where there currently is a large divide between rich and poor. However, the study indicates that this harmonization may be difficult in Ghana. Not only are infrastructure services seriously short in supply but their quality and reliability are poor. In particular, deficiencies in the energy sector, which the proposed project will address, have reached crisis proportions.
2. Sector context
4. Studies both inside and outside ofGhana have called attention to serious deficiencies in Ghana’s infrastructure sector, especially the energy sector. The Global Competitiveness Report shows that Ghana ranks very low in the quality ofenergy service, about 84th out of 104 countries. Furthermore, a survey ofthe Association ofGhana Industries in 2006 cites load- shedding in the electric power sector as the most serious obstacle to doing business in the country. The above mentioned infrastructure study notes that Ghana’s power system has not been able to meet 25 percent ofthe electricity demand oflarge industries and the situation could worsen. For example, the study estimates that a 50 percent cut in service provision could result in shortfalls ofUS$45 million per month for the four largest industries alone.
1 Antonio Estache, and Maria Vagliasindi, Infvastructurefor Accelerated Growth in Ghana: Investments, Policies and Institutions (Draft), April 2007. 1 _-
5. Ghana9s~tate~owned power co~pa~~,the Volta River A~thority(VM5 ~enera~esboth hy~ropowerand the~alpower. The co~~panyalso has the sole responsibil~t~for ~~ans~~jtti~~~ electricity, VRA's t~ans~~$s~ongrid ~4,~~~ kin) feeds into the co~ntry's two main d~st~~~t~o~i systems. The ~lec~ri~jty~on~pany of~ha~ia (ECG), a key insti~~t~onalfocal point of the project, ~i~n~~~smast o~~~~~n~'spower distribu~ionwith a cListomer base of 1.4 ~i~1lio~~.The Nvrthcm Electricity ~epa~nient(N~D~~ a de~~mc~t of VU3 d~~~r~~~tes power in the no~h~~ part of the count^^ which accounts for about two ~h~r~softhe ~ou~~~y~s land mass but is less dcnseIy pop~~~te~than the South. NED $uppl~eseleetr~c~~~ to about 2~~~000customcr~.
6. Since 1989, Ghana has been oper~t~n~phased, i o~y~t~~e~rogra~s, under the National ~lect~~catio~Scheme (NES), to extend the reach of electricity to all parts ofthe country over a 30-year period. The first phase of the N S, the Nat~o~alElect~~catio~ Project (NEP)?, ~o~pl~tedin ~~0~? electrified all district ea~ita~sas welt as towns and villagcs along the routes to these capitals. Thc second phase, the ~e~f-~el~E~ectri~c~tion Pro~a~~ (SHEP), started in 2001. Under the SHEP, conim~~~ti~slocated 20 km from the nat~o~a~grid are qua~~~edfor ~~e~tri~c~tio~~if they pay for all the required poles, Alto~$ther~these pro~ra~~have ~~~~~ri~~d more that? 3,000 ca~~u~jtiesnearly daub1~1~~the o~eral1~~at~ana~ access from 28 percent in 1989 to the cuncnt lcvcf of about 54 percent. ~o~~e~~er~the NES has based most of the e~pan~~~nto date OR power from the grid. Future e~pan~~~n\vi11 require new ~p~r~a~he~for co~~n~ctj~~~po~e~t~alcusto~ers located too far from the grid for conn$ctio~to be e~o~~a~~ica~~~ viable, 3. Key sector issues and strategy
Issue 1: Lack of an adequate, reliable power supply necessary for accelerated economic growth
7. Maximum demand in the country’s power system was 1,405 MW in 20064. However due to constraints on supply, VRA’s available generating capacity was only 1,155 MW, with a capacity deficit of 250 MW. Deficiencies in power supply result from a combination of two principal factors that have made Ghana’s power system vulnerable to supply disruption. First, the system lacks sufficient diversity in power sources for security of supply at an affordable cost. The second factor constraining both power availability and reliability is the lack of a tariff that allows VRA and ECG to recover the short-run marginal cost of supply. Without a set of coordinated policy changes, operational improvements and investments, deficiencies in electricity supply could constrain the economic development required to meet the Government’s ambitious targets for a major poverty reduction.
8. In 2006, hydropower accounted for 60 percent of power generation, down from 70 percent in 2005 due to low water flows. The two alternatives to hydropower are oil-fired thermal power, which accounts for about 30 percent of supply, and electricity imports from other countries in the region, which contribute the remaining 10 percent of supply. The increasing reliance on thermal power at the escalating international price of oil has been very costly for VRA. And the option of increasing power imports is limited5.
9. Given the precarious condition of the natural resources on which the power system depends, which is outside the Government’s control, a prudent strategy for averting a supply crisis would be to focus on measures within the Government’s control to manage demand and supply, the most important being the price of electricity. However, the Government’s pricing policy has exacerbated rather than alleviated the crisis. Power companies in Ghana face limited autonomy, inadequate performance incentives and weaknesses in financial operations, including revenue collection.
10. The price of electricity in Ghana is way below the short-term marginal cost of electricity, which is about US$. 15 per kWh. This cost is nearly double the average end-user electricity tariff, currently about US$.O82 per kWh. Furthermore, it is five times the tariff of only US$.03 per kWh for VALCO, the aluminum smelter, which accounts for about 15 percent of the power that VRA transmits6. Tariffs well below cost tend to increase power demand, accelerating both the depletion of scarce water resources and the downward spiral of VRA’s and ECG’s finances. VRA and ECG do not have sufficient funds to maintain and expand the power system. The result has been a combination of high losses and system failures7. In particular, VRA’s financial
4 VRA, Long-Term Demand and Supply Balance (2006-2020).
5 For example, Cote d’Ivoire has recently ceased exports to Ghana due to its own power shortages.
6 Although the Public Utilities Regulatory Commission (PURC) has in 2006 approved an increase of the average retail tariff, Government has decided to subsidize the tariff through the budget.
7 Losses in the distribution network are 26 percent compared to an industry standard of about 14 percent for similar systems. ECG estimates that these losses consist of 10 percent technical losses and 16 percent non-technical 3 situation has deteriorated to the point such that, without substantial tariff increases and external financial support from Government, the company might not be able to continue operations.
11. In addition to low tariffs, technical and commercial losses have further reduced the funds available to the power companies for their operations. For example, tariffs cover about 90 percent of ECG’s costs. However, the losses in the distribution network absorb about 26 percent of the power the company receives from VRA. Furthermore, due to deficiencies in commercial systems, ECG collects only about 80 - 87 percent of the power that it bills. The improved performance of ECG is critical to the financial viability of the power system because the company has to generate revenues that eventually will pay for new power generating capacity and the cost of supplying new customers connected to the national electricity grid8.
12. Strategy. The Government has both a long-term strategy and a short-term action program to improve the availability and reliability of power. The long-term strategy is the regional integration of Ghana’s energy system through two major multinational energy projects -- the West Africa Gas Pipeline (WAGP) and the West Africa Power Pool (WAPP). In the short-term, the Government is addressing the power capacity deficit and financial crisis on several fronts, including a crash investment program to install thermal capacity this year, load curtailment, demand side management measures, and increases in power tariffs.
13. The WAGP is currently under construction and should bring Nigerian gas to Ghana in 2008. This gas would diversify Ghana’s hydro-based power system with a cleaner burning, lower cost source of thermal power, which also would have environmental benefits. In addition, the ongoing WAPP will enhance cross-border power trade in West Africa in two ways. First, it will strengthen interconnecting power lines from C6te dIvoire to Togo and Benin along the Ghanaian Coast. Second, the WAPP will establish new interconnection lines within Ghana to transfer lower cost, gas-fired power generated along the Ghanaian coast, northwards, into Burkina Faso and other Sahel countries.
14. To reduce the current capacity deficit in power supply, the Government has an ongoing program of rapid additions to thermal power capacity. Earlier this year, the Government installed 50 MW of thermal power capacity under its direct oversight. The Government expects to install an additional 76 MW during 2007. In addition, the private mining companies are installing emergency power plants and intend to bring on stream 80 MW of capacity sometime in July. Moreover, VRA is constructing a 126 MW thermal power plant at Tema. Altogether, the expected additions to capacity amount to 332 MW. Although this amount of expected capacity exceeds the current capacity deficit of 250 MW, it would still leave the system short of capacity given that electricity demand is increasing.
15. The Government is not relying on increased power capacity alone as a short-term solution to capacity deficiencies. In addition, the Government plans to maintain a program of rotating load curtailment -- 12 hours off every two days. And an indication of the Government’s losses. Of the non-technical losses, estimates indicate pilferage of electricity accounts for 6 percent, billing inefficiencies for 6 percent, and inadequate metering for 4 percent.
8 Although NED’Stariffs cover only 48 percent of its costs and its collection rate is about 86 percent, the company is small and its performance, while in need of improvement, is far less critical to the overall power supply situation than the respective roles of VRA and ECG.
4 seriousness in resolving the supply crisis was the temporary suspension ofVALCO’s operation in March 2007, in order to save power. Furthermore, the Government has begun a serious program ofdemand-side management, including the establishment ofmandatory efficiency standards for room air conditioners; programs for energy efficient, compact fluorescent light bulbs; and measures for improving industrial energy efficiency. However, even with all ofthese actions -- barring exceptional rains and substantial tariff reforms -- power cuts are likely to remain a fixture ofGhana’s power system for some time.
16. To alleviate the financial crisis in the power sector, the Government plans to support ECG and VRA with their investment and working capital needs. Already the Government has committed to transferring about US$180 million to these companies in 2007. Also, the Government plans to establish a reserve fund to bridge a possible shortfall arising from either retail tariffs that fall below cost recovery or supply agreements to bulk customers that would prevent the power companies from becoming financially viableg. Currently, the Government is targeting tariff subsidies to residential consumers only. For non-residential consumers, the Government increased tariffs by about 20 percent in May 2007 -- which is the increase PURC approved in 2006 -- and plans to pass tariff increases on to the residential consumers in August 200710.
17. The Government also plans to improve efficiency ofrevenue collection by installing pre- paid meters in all Government entities. This type ofmetering is an efficient, technical solution to resolving the problem ofchronic indebtedness to ECG. At the same time, in order to better manage the flow offunds in the power sector, the Government will revamp the sector’s financial clearinghouse for transparent tracking ofsettlements between the power companies and their bulk customers, including public sector entities, and the mining companies. The new clearinghouse arrangement should help eliminate cross-indebtedness and improve the cash flow within the energy sector. However, given growing consumption, bulk supply and retail tariffs will have to increase further to reflect the cost ofdeveloping new capacity required, combined with the increasing share oftotal supply provided by thermal generation.
18. The reduction ofsupply deficits and losses, as well as future expansion ofelectricity access will require investments in upgrading and expanding the distribution networks, which the proposed project supports. To ensure efficient use ofthese investments, the Government has agreed to strengthen ECG’s management capacity under a Management Support Services Agreement (MSSA) with a private firm or a qualified electric utility company, funded in part by the proposed project.
9 PRSC-5 Letter of Development Policy, dated April 17, 2007. lo The Government also increased retail petroleum prices, with the price of gasoline rising by eight percent and that of diesel oil by four percent. 5 Issue 2: Large disparities in electricity service provision between urban and rural areas constraining opportunities to reduce income disparities
19. Ghana's overall national electrification rate of54 percent (2005) is significantly higher than the average of21 percent for Sub-Saharan Africa but current disparities in access between rural and urban areas are striking. Only 20 percent ofthe population in rural areas has access to electricity compared to 82 percent in urban areas. And even in some sections ofurban areas, where power lines are nearby, only half ofthe population is connected to electricity supply. Figure 2 shows household access to electricity by region in Ghana. In addition to the urbdrural divide, there are significant differences within rural areas as well. Based on regional data, electricity access seems to correlate with income level, such that the poorest rural areas, particularly the Upper East and Upper West, have the lowest levels ofaccess.
Figure 2: Household Access to Electricity by Region (2000)
100 90 80 7n
Source: Antonio Estache. and Maria Vagliasindi, Infrastructure for Accelerated Growth in Ghana: Investments, Policies and Institutions (Draft), April 2007.
20. Past rural electrification programs under the Ministry ofEnergy have focused on extensions ofthe national power grid. Further access expansion will require continued grid extension as well as more intensive use ofthe grid. However, achieving major reductions into urbdrural imbalances also will require connecting poorer communities, using innovative approaches for off-grid electricity service and a variety ofproviders in addition to ECG and NED. Yet the current institutional framework is not set up to meet this new challenge of multiple service approaches and providers. Furthermore, in the past, decisions on which communities to electrify have been subject to political considerations rather than transparent selection criteria.
2 1. Strategy. The Government is now initiating the third phase ofits electrification program. Under this phase, it will develop investment appraisal and funding mechanisms to increase the transparency ofthe program, promote private sector innovation, and ensure that the program does not impose an uncompensated financial liability on the distribution companies. Also, in order to reach consumers with lower incomes than in the past, the next phase ofthe 6 Government’s electrification strategy must place greater emphasis on removing identified obstacles to consumer connections after the power lines have arrived in their area, such as the high cost of connection and household wiring.
22. On the institutional side, the Government is planning to allow both grid-based electrification and off-grid alternatives to co-exist and complement each other. In addition, through innovative credit facilities, the Government wants to promote renewable energy alternatives in areas that are outside the reach of the national grid. For example, one of the mechanisms of this new approach, in remote rural areas, will be to find ways of reducing the upfront cash cost of solar lighting equipment for consumers and improve the business environment for entrepreneurs to develop small solar energy businesses.
23. The investment needed to reach the Government’s target electrification rate of 75 percent by 2015 is an estimated US$500 million. Most of the funding for this investment will come from public sources in the form of grants or concessional loans to cover the capital costs. Currently the identified actual and potential funding under the project amounts to about US$210 million. However, a key focus of the project, in addition to contributing investment funding, will be to serve as a catalyst for obtaining the additional financing required, through its program for major institutional change to increase the size, scope, and funding sources for electrification.
4. Rationale for Bank and ACGF involvement
24. There is a strong rationale for IDA’Sinvolvement as a development partner in the proposed project. For more than 40 years, IDA has supported Ghana’s power sector with nine lending operations, helping to finance virtually all major investments in Ghana’s energy sector since the country’s independence. Furthermore, IDA’Sinvolvement has encompassed all key segments of the power system. IDA has financed development of the Akosombo and Kpong dams and power plants; rehabilitation of the transmission systems; increases in thermal generating capacity; and extension of the national grid to northern Ghana. Also IDA funding has supported ECG in improving the company’s distribution networks in urban centers and helped bring electricity to district capitals and some rural areas. Furthermore, together with IFC and MIGA, IDA is supporting the development of a regional power market in West Africa.
25. The Africa Catalytic Growth Fund (ACGF) complements IDA support. Ghana qualifies for ACGF support since: (a) it has demonstrated its commitment to improve economic governance; (b) the project addresses a binding constraint to economic growth (energy sector); and (c) the presence of ACGF will help to crowd in other resources (donor and other private sector) to break this constraint to growth. The Government, IDA and ACGF already have begun to explore ways that this partnership could help to accelerate the development of electricity infrastructure to support the country’s objectives for poverty reduction. In May 2006, the Government hosted a round-table discussion focused on scaling up resources to support Ghana’s Growth and Poverty Reduction Strategy II (GPRS II)for 2006 - 2009. ACGF support for the energy sector was an important part of these discussions.
26. The round-table discussion recommended the acceleration of power sector reforms with firm timelines for several key actions. The first is the development of a new institutional framework for expanding rural electricity access. The second is a review of the tariff methodology to ensure cost recovery for power companies in light of the increasing share of expensive thermal generation in the energy mix. The third is the development of a transparent framework for public/private partnerships to encourage private investment in the energy sector. 7 Finally, the combined, IDA, GEF, and ACGF support under the project will serve as a catalyst to both donor and private sector financing. The resulting scale-up of resources could allow Ghana to reach even higher target rates of electricity access than those planned under the project.
27. The World Bank Group and other donors have supported the Government’s reform program for the energy sector under the Poverty Reduction Strategy Credits (PRSCs) and Multi- Donor Budget Support (MDBS). Recent developments, however, clearly demonstrate the need to advance reform efforts. In particular, there is a need to improve the energy sector’s financial viability; strengthen the management of the sector institutions; clarify the roles and responsibilities of institutions that make policy and implement projects; and re-focus the model for expanding rural access to electricity. The project will help advance reform on all of these fronts. The Government’s sector policy letter of May 17, 2007, demonstrates the Government’s commitment to support the activities under the project (this letter is in the project files).
5. Higher level objectives to which the project contributes
28. The higher level objective to which the project contributes is reducing poverty through combination of measures to increase economic growth and reduce inequalities in income. This objective is the core of the Government’s GPRS. In support of this objective, the GPRS 11 emphasizes working toward the development of an energy sector that would ensure secure and reliable supply of high-quality energy services for all Ghanaian homes (urban and rural), businesses, industries and the transport sector. Government’s objective is to increase electricity access from 54 percent to 75 percent by 2015 with the ultimate aim of universal access.
29. The project is consistent with the Africa Action Plan in three ways. First, the project is aligned to and supports the national priorities for shared growth. Second, the project will support the Clean Energy Investment Framework launched in 2006, with the goal of accelerating investments that will increase energy access but at the same time reduce global carbon emissions. The project’s provisions for mini-grids based on renewable energy and solar home systems for rural areas will take place within this framework. And finally, through the ACGF, the project will demonstrate partnerships for leveraging the scaling up of development finance for Ghana’s power sector.
30. The project will help advance the Bank’s Country Assistance Strategy 2004 - 2007 (Report No. 27838-GH of February 20,2004) for Ghana, which the Bank has aligned with the GPRS 11. In particular, the CAS has cited deficiencies in the supply and quality of energy services as a major bottleneck to achieving Ghana’s economic objectives and has targeted the sector for substantial reform. Furthermore, the CAS has included the project as key element in its lending program. By increasing access to electricity, the project will contribute to the provision of infrastructure that could lead to new business opportunities and thereby support the CAS objective of accelerating economic growth and employment. The project will contribute to breaking the constraint to growth so that growth can be sustained at or above 6 percent. Also the project will contribute to the achievement of the MDGs for human development (also part of the CAS) by: (a) reducing imbalances in access to electricity between urban and rural areas; and (b) improving the financial viability of the power sector, thereby reducing the sector’s current fiscal burden, creating space for social investments.
8 B. PROJECT DESCRIPTION
1. Lending instrument
3 1. The proposed lending instruments are a five-year Specific Investment Credit and a Global Environment Fund (GEF) Grant. As indicated earlier, grants from ACGF and GPOBA will complement the project’s funding and serve as a catalyst for greater funding from donors and the private sector, which will help to expand access beyond the level that the project envisages. The project will seek to facilitate “carbon financing” for purchases of carbon emission reductions.
2. Project development objective and key indicators
32. The project’s development objective is to improve the operational efficiency of the electricity distribution system and increase the population’s access to electricity. The project will measure progress towards achieving these objectives according to two main indicators.
Improvement in ECG’s technical and commercial performance as measured by the Performance Verification Index (PVI)”.
0 Increase in the national household electrification rate,
33. The global environmental objective of the project is to support Ghana’s transition to a low-carbon economy through the reduction of greenhouse gas emissions (GHG)12. The project will assist this transition through the development of renewable energy for the expansion of access to electricity, where economically justified. Furthermore, improvements in the operational efficiency of the distribution system are likely to generate additional GHG reductions subject to carbon financing. The main indicator for meeting the project’s global environmental objective will be tons of carbon dioxide (C02) emissions avoided, calculated over the estimated lifetime of renewable energy equipment that the project will install (Annex 15).
3. Project design and components
34. The design of the project’s components reflects not only the needs of the power sector but also the current framework of coordinated ongoing and planned assistance of the World Bank and other donors to the sector. In addition, it takes into account institutional capacity and the related current financial situation of the power companies. For example, the project does not contain a component for investments in the expansion of power generation capacity or the transmission system in the main power grid. Instead, the project addresses the current supply constraint though managerial, technical and commercial improvements to make more efficient use of existing capacity and reduce losses, which in turn will help bring about a marginal increase in supply. Furthermore, the project promotes sector policies that support the financial viability of Ghana’s power companies so that eventually they will have the resources for
11 PVI (in percentage terms) is the ratio of revenue recovered and energy units received in the distribution system adjusted to the average end user retail tariff. Increase in the PVI would indicate efficiency improvement both through reduction in losses and improvement of commercial performance.
This objective is in line with the United Nations Framework Convention on Climate Change and its Kyoto Protocol, to which Ghana is a Party (GEF OP5 and 6). 9 preventive maintenance and system expansion, which should help to avert electricity supply crises in the future.
35. The project has three main components: (a) sector and institutional development; (b) distribution improvement; and (c) electricity access and renewable energy. The component for sector and institutional development is broad-based and critical to meeting the project’s development objectives for increased efficiency of power supply and expanded access to electricity. Without improvements in key areas of policy, such as the adequate pricing of electricity, and management improvements in the operation of the distribution system, even with new investments in power infrastructure, the performance of the power system would probably continue to deteriorate.
36. For the distribution system, the project will focus on the upgrading of facilities necessary for access expansion, technologies to improve operational performance and a backlog of investments that normally would have been part of ECG’s preventive maintenance program to preserve and improve operational efficiency. The project’s support of expanded access to electricity will target both intensified use of existing facilities, extension of the grid to new areas, and innovative off-grid options, depending on population density, electricity needs, and affordability of service. Due to the multiple initiatives for new electricity access in rural areas, the rural electrification program will require a completely new regulatory and financing framework. The key platform for launching this new approach will be the establishment of a Rural Electrification Agency (REA), which will manage a related Rural Electrification Fund (REF).
37. The total estimated project cost is about US$210.6 million13, of which US$194.0 million will support investments in physical infrastructure and US$16.6 million will be technical assistance and training. The financing plan for the project includes financing from ACGF, GEF, AfDB, the Swiss Government, GPOBA, the Government and ECG14. The following sections summarize the key elements of the project’s components as well as their individual costs. Annexes 4 and 5 provide the detailed project description and financing plan respectively.
Component A. Sector and Institutional Development (cost: US$14 million)
38. Through technical assistance, capacity-building, and studies, this component will strengthen the capacity of key institutions participating in the project as follows.
PURC, for designing and implementing instruments necessary for improving the financial performance of the power sector, including an effective electricity tariff regime, and development of a tariff scheme and standardized power purchase agreements for renewable energy.
MoE, for building institutional capacity to improve coordination of the energy sector and donor-support; managing the project effectively; monitoring/evaluating the project’s results; and developing a competitive framework for attracting Independent Power Producers.
13 Including a Project Preparation Advance of US$l million.
14 GPOBA concept note received eligibility but final approval will be at the commitment stage in early 2008. 10 0 ECG, for improving operations and management, including the enhancement of management capacity through private sector support and through MoE, facilitating the establishment of a monitorable performance contract between the company and its shareholder, the Government.
VRA, through MoE, for facililating the establishment of a monitorable performance contract between the company and its shareholder, the Government.
0 The Energy Commission, for designing, implementing, and monitoring a new Renewable Energy Law, including financial incentives; conducting renewable energy resource assessments; increasing awareness of renewable energy alternatives to fossil fuels; and promoting the efficient use of biomass fuels.
EPA, MoE, and VRMNED, for executing their respective responsibilities for environmental management and monitoring, and ensuring effective use of Ghana’s environmental country systems, including transition from consultant-provided capacity to in-house permanent capacity.
0 The Interim Access Secretariat and REA, for planning and implementing a multifaceted program for increasing access to electricity.
Component B. Electricity Distribution Improvement (cost: US$94.4 million)
39. This component will support investments in infrastructure to improve the operational efficiency of the distribution system. This improvement will require investments and interventions that will improve the system reliability by reducing system interruptions and outage times as well as lowering technical and commercial losses. An ancillary impact of the investments will be the removal of supply bottlenecks in sections of the distribution network. The component will cover both the upgrading of ECG’s distribution system and the company’s capacity for commercial and technical operations. IDA, AfDF, ACGF and ECG will finance this component.
40. The project will finance the construction of eight new 33/11 kV substations along with the feeders; the construction and strengthening of bulk supply points; and upgrading of existing substations in several targeted distribution areas. The component also covers additions/replacement of distribution transformation capacity, construction of 11 kV connection lines and rehabilitating low voltage lines. It also includes the reconfiguration of parts of the Low-Voltage Distribution System into a High-Voltage Distribution System (HVDS) in peri- urban areas of Accra to improve quality of supply and reduce losses. Subject to the results achieved in this project of the HVDS system, ECG plans to replicate it later in other areas.
41. In addition, the component will finance commercial and technical upgrading of the system by improving revenue cycle management with better metering and testing; establishing 15 new, fully-equipped customer service and call centers; replacing faulty meters; continuing the installation of pre-payment meters in the Western, Central and Volta regions; and extending the SCADA and information technology (IT) systems for rural networks and for the Takoradi and
11 Kumasi areas. In addition to investments, the component will finance design and supervision engineering services and training to ECG operational staff.
Component C. Electricity Access and Renewable Energy (cost: US$101.2 million)
42. A key contribution of this component will be to set up a new institutional, regulatory, and financing framework for access expansion in addition to providing financial support to various sub-components of the access expansion program. With assistance under this component, the Government will establish a Rural Electrification Agency (REA), providing oversight of rural electrification, with MoE retaining its policy functions. The REA will manage a Rural Electrification Fund (REF), which will be the financing mechanism to future access expansion.
43. The new framework for electricity access expansion will provide greater transparency in the selection of rural electrification projects. It also will develop multiple service options and providers, tailored to the diverse areas of Ghana that do not yet have electricity service. The REA will also conduct rural electrification planning based on economic and financial principles. The existing utility companies, cooperatives, and private sector will be the service providers responsible for the construction and operation of the sub-projects under this component. In the interim period prior to establishment of the REA, MoE will set up an Access Secretariat.
44. This component also will support investments in multiple options for electricity tailored to geographical location, potential level of electricity demand, and distance from the existing grid. Specifically, it will: (a) provide financing for investments, technical assistance and training in support of intensifying the use of the existing ECG and NED distribution networks (75,700 connections); (b) extend these networks where economically viable (58,600 connections); (c) develop new, isolated mini-grids serving towns and clusters of consumers far from existing networks (20,000 connections); and (d) supply solar photovoltaic (PV) lanterns and systems for lighting in remote rural areas (10,000 households).
45. To stimulate the market for off-grid systems, the project also will introduce new financing mechanisms to encourage the development of small, private energy businesses and make electricity access more affordable to consumers. Because of the relatively high upfront cost of the Solar-PV systems, only a small percentage of rural households in Ghana will have the cash to pay for them outright. Therefore, the project will establish a financing mechanism that combines long-term consumer credits with a capital subsidy for low-income consumers. This mechanism will follow a “dealer saleskonsumer credit model”, which will consist of a tripartite agreement for the installation and maintenance of Solar-PV systems involving dealers, the consumers, and participating rural banksI5. In addition, a grant from GPOBA will provide partial subsidies to the poorest consumers to make solar home systems more affordable.
l5 A designated Apex bank will manage this program and the associated project funds. According to the operational model, an established dealer in PV systems will install a Solar-PV system in rural household and following verification, by the Apex bank, of proper installation, the dealer will receive payment for the installation of the system and the required service that the dealer will provide. The consumer will enter into an agreement for term financing of the subsidized capital cost of the system, with a participating rural bank. The rural bank will receive the funds for the consumer credit program from the Apex bank. See Annex 16 for an overview of Ghana’s financial sector.
12 46. Finally, the component will support capacity building for the Access Secretariat under MoE, and later REA, when established, to implement such a new access expansion framework. The GEF grant will support building the capacity of the Apex Bank and participating rural banks for expanding the solar PV market. Furthermore, GEF funding will provide business development services to small and medium size enterprises to develop renewable energy projects, and support the Association of Ghana Solar Industry.
4. Lessons learned and reflected in the project design
47. Electricity distribution. There are several lessons learned from experience with the reform of state-owned power distribution companies that are applicable to the project. First, improvements in commercial operations to ensure payments for services are necessary for private sector participation. Second, annual customer satisfaction surveys are useful not only for monitoring results but also for keeping stakeholders engaged. A competent, domestic, civil society organization is generally best placed to conduct such surveys and to provide external monitoring feedback. The project has incorporated these lessons by providing the necessary financial support for ECG.
48. Electricity access. An ESMAP report16 has highlighted the main lessons from successful rural electrification programs in the developing world. First, it is important to establish an effective implementing agency dedicated to rural electrification. Second, system design should place a strong emphasis on cost recovery, with price levels sufficient enough to make rural distribution companies financially sustainable. Third, subsidies should target connections, not cons~mption’~.Fourth, the establishment of rural electrification schemes should have clear selection criteria. Fifth, in order for connections to be affordable, it is usually necessary to reduce the initial connection fee or spread it over a period of several years. Sixth, the design of the schemes should focus on ways to reduce construction and operating costs while maintaining service quality. Seventh, rural electrification policies should allow both grid-based, rural electrification and off-grid alternatives to co-exist and complement each other. The project has incorporated all of the above lessons in the component for expanding access to electricity.
49. Renewable energy systems. This project has reviewed and incorporated lessons from past Solar-PV projects in Ghana and elsewhere. The fee-for-service model to deliver solar home systems (SHS) in Ghana under the UNDP/GEF was not financially sustainable for the service providers, because the monthly charges (US$2) were too low to cover the operating and maintenance costs of the systems. The project’s design has taken into account lessons learned from a successful program for rural electrification in Sri Lanka, which used IDA re-financing to provide long-term financing and credit to renewable energy projects. The project’s design also has incorporated lessons learned from the China Renewable Energy Development Program, where small-scale SHS systems are the dominant solar products for the “dealer saledconsumer credit model,’’ given the low ability to pay in rural areas. A recent DANIDA supported solar project has shown that rural banks should participate in the program design from the very beginning. The project has incorporated this lesson by involving the rural banks at the preparation stage.
l6 ESMAP report “Challenge of rural electrification: strategies for developing countries”.
l7 Angel-Urdinola, Diego F. and Wodon, Quentin, Do Utility Subsidies Reach the Poor? Framework and Evidencefor Cape Verde, Suo Tome, and Rwanda, September 2006.
13 5. Alternatives considered and reasons for rejection
50. Institutional development alternatives. The project team considered several institutional alternatives that would connect more customers, and improve ECG’ s financial performance. The main alternative was to target assistance only to upgrading the company’s distribution and customer services facilities. However, the team rejected this alternative because it would not address the lack of commercial orientation of operations, which has been the major cause of operational deficiencies. The Government and the project team agreed to strengthen institutional performance through strategically-focused management support services in key commercial operational areas for ECG. In addition, they agreed that better operating results would require redesigning the existing corporate performance contracts between the Government and ECG as well as improving the monitoring of the targets. The Government and the project team selected this approach to capacity building for ECG because it builds on existing structures in the sector and has proven effective in other countries such as Kenya.
5 1. Investment alternatives. The project initially planned to finance improvements in VRA’ s transmission system. However, because of the company’s serious financial difficulties, the Government decided to delete the component. At the time of project appraisal, VRA did not have the financial strength to provide adequate counterpart financing or incur significant additional debts. Furthermore, VRA’s financial problems stem, among others, from Government’s choice to subsidize the tariff and subsequent delays of payment of the subsidy to VRA. Therefore, a more appropriate solution to improve operational performance at present is the Government’s agreement to support critical investments through an equity injection to help recapitalize VRA. At the same time, VRA will also benefit from investments under the WAGP and WAPP projects.
52. Access expansion alternatives. As an alternative to the project’s revamping of the rural electrification program, the Bank team considered merely continuing Ghana’s successful rural electrification program based on grid extensions. However, the team rejected this alternative because the implementing agency for the current program is the Ministry of Energy and this arrangement mixes policy with execution functions. The mixture of these functions, which runs counter to best practice principles of separating commercial operations from policy in order to depoliticize investment decision-making, already has led to political interference in the selection of some communities for electrification. As indicated earlier, with outreach to more remote areas, the cost of rural electrification is increasing, and alternative models of off-grid options become more attractive. In light of this, multiple providers, either public utilities, private entrepreneurs, or community-based organizations, will all play an important role in access expansion. If multiple access provision options are to be developed, these would constitute different policy, regulation, financing and execution options.
14 C. IMPLEMENTATION
1. Partnership arrangements
53. There are several development artners participating in Ghana’s energy sector. Annex 2 provides a summary of their activities’! These partners are collaborating in the design of their respective assistance programs, in order to simplify procedures and share information to enhance the effectiveness of planned investment and capacity building activities. These partner organizations belong to the energy sector working group that meets regularly under the leadership of the MoE. The following partners will provide financing for specific components of the project:
Africa Catalytic Growth Fund (ACGF), which will provide US$50 million to support the project activities and to help scale up support from other development partners and private sector. GEF, which will provide US$2 million for capacity building for MoE, PURC and the Energy Commission for the development of a renewable energy regulatory framework; and US$3.5 million for capacity building in the private sector and the Apex Bank to develop renewable energy projects. 0 Government of Switzerland (SECO), which will provide US$12 million to support the ECG’ s Corporate Strengthening Program, access, and capacity building for PURC and MoE. 0 AfDB, which will provide US$18.25 million to support the activities in the project’s distribution component. 0 GPOBA, which will provide US$6 million for renewable energy development”.
54. The partners have agreed to carry out joint supervision missions when practical. To increase harmonization and reduce transaction costs, the project’s implementation agencies will prepare one set of progress reports and annual work plans and budgets that they will share with all the financing partners.
55. As part of the equivalency assessment of the environmental and social standards applicable to energy systems in Ghana, the project will strengthen Ghana’s environmental country systems. Both IDA and AfDB have agreed to apply these to the project after the Government has implemented the necessary gap-filling measures.
56. Finally, the project will seek to explore synergies with related projects. One of these is the Small Towns Water Supply and Sanitation Project (approved in 2004), which is providing water supply and sanitation services in many of the same rural towns where this project will extend electricity access. The project will coordinate with the Health Insurance Project, which plans to provide solar panels to clinics. It will also continue to collaborate with the UNEP Solar and Wind Energy Resource Assessment (S WERA) project for renewable energy resource assessment.
l8 These partners include SECO, AFD, AfDB, USAID, JICA, MCC, and UNDP. l9 Yet to be approved. 15 2. Institutional and implementation arrangements
57. Overall Project Responsibility. The Ministry of Energy (MoE) will be in charge of coordinating the overall project. The Ministry’s responsibilities will include monitoring and evaluating the project’s progress and the achievement of the project’s development objectives, along with the preparation of related reports. A key report is the Annual Work Plan and Budget that MoE will prepare in October of each year. It will contain all eligible project activities and expenditures planned for the following fiscal year, including a specification of the source or sources of financing for each activity and the percentage of financing of each activity from the different financing sources. MoE also will be responsible for ensuring the implementation of the project’s environmental and social management plans.
Figure 2.1: Project Implementation Framework
Minister of Energy STEERING COMMITTEE 1
COMMITTEE
I Power Sector Reform Secretariat MoE PROJECT COORDINATIONTEAM (PCT) Overall project coordination and components AI, A3, A4
riPPMED (M & E) I I VWED
Grid Extensions Access through Intensification Corporate Strengthening Solar-PV Access Financing (component C2) (component C1) Program (component A2) (component C4)
Renewables & Mini Distribution System Upgrade Grids (component C3) (component B1)
Capacity Building (component C5) Upgrade (component B2)
Access through Intensification (Cl)
58. Operating under the chair of the Minister of Energy, a Project Steering Committee will meet at least twice yearly to review the project’s progress, address implementation issues, and report its findings to the Cabinet and the co-financiers. The Steering Committee will consist of senior managers of the implementing agencies and representatives of the PURC, the Energy Commission, the Environmental Protection Agency, the Ministry of Finance and Economic 16 Planning and representatives of electricity consumers. The Steering Committee will have a technical sub-committee consisting of the Project Managers and Coordinators of the implementing agencies. Monitoring and evaluation for the project will be the responsibility of MoE through its Policy, Planning, Monitoring and Evaluation Department (PPMED). The Director of the PPMED will assume the responsibility of Monitoring and Evaluation Coordinator. The Coordinator will receive and analyze data and will submit regular M & E reports monitoring the project’s achievement of its objectives to the Steering Committee. Annex 3 provides a detailed overview of reporting arrangements.
59. Ministry of Energy. In addition to the overall coordination of the project, MoE will also be responsible for the implementation of the Sector and Institutional Development Component (except for the ECG corporate strengthening activities) and the Access Component (except for the sub-components that ECG and the Apex Bank will manage). To carry out these responsibilities effectively, the Ministry has established a Project Coordination Team (PCT).
60. A Project Coordinator will head the PCT, which will have a staff that includes a procurement specialist, an accountant, and an environmental advisor. MoE’s Project Implementation Plan will define: (a) institutional coordination with other agencies involved in the project’s implementation, including ECG, VRANED, PURC, the Energy Commission, the Environmental Protection Agency and the Apex Bank; (b) day-to-day execution of the project; (c) disbursement and financial management arrangements that will build on departmental regulations and procedures arising from the Procurement Act, Finance Act, and Audit Act whenever possible; (d) procurement arrangements; (e) environmental and social safeguards management procedures; and (f) monitoring, evaluation, reporting and communication arrangements. The formation of the PCT is an interim measure to increase the MoE’s capacity to coordinate a greater variety of activities in the power sector than in the past. While MoE’s permanent employees will carry out the M & E activities, the project will finance the staff costs of the other PCT members until such time that the MoE has developed adequate regular organizational framework for sector coordination following recommendations of a study to be financed under the project.
61. MoE will establish an interim Access Secretariat to implement and monitor the grid extension and mini-grid activities under the Access component for the first 18 months. The Secretariat will include a project manager, a deputy manager, a legal advisor, a planning engineer, and project officers handling both new extensions to the grid and isolated mini-grids based on renewable energy. The Secretariat will use the services of the procurement specialist, accountant and the environmental advisor in the PCT. In addition, ECG’s Engineering Department will be responsible for managing procurement and construction supervision for the grid extension component. MoE will implement sub-components for grid extension, mini grids and capacity-building for electricity access expansion initially through the interim Access Secretariat and later through REA that the Government will establish by December 2008. Annex 6 discusses the details of the specific implementation arrangements for these sub-components.
62. The Government will finance the staff and operating costs of the Secretariat. The staffing will take place before the IDA Credit becomes effective. It eventually will evolve into an autonomous Rural Electrification Agency (REA), which will be responsible for rural electrification and related renewable energy development.
63. ECG will be responsible for implementing the entire Distribution Component; the sub- component of the Access component that provides for connecting new customers through more 17 intensified use of ECG’ s existing distribution network, and the ECG corporate strengthening program under the Sector and Institutional Development component. More specifically, ECG’ s Department of Engineering will manage the Distribution Component. Its permanent staff consists of a project manager, a design manager, a construction manager, a procurement manager, and a disbursement specialist. ECG will use staff from its project Accounting Unit to manage the project funds designated for the project activities that ECG will handle. The sub- component for expanding access through intensifying the use of ECG’s grid will have its own project manager -- a permanent staff member of ECG’s Rural Electrification Unit, which is under the Department of Engineering. ECG’s senior management team will supervise the corporate strengthening program. ECG will finance all staff costs.
64. VRA’s Northern Electricity Department will be responsible for implementing the sub- component of the Access component covering the northern part of the country through intensification of supply within NED’Sexisting power grid. For the management of this sub- component, VRA has an experienced Project Implementation Unit (PIU) within its permanent organization, consisting of a project manager assisted by a deputy project engineer and procurement officers. Furthermore, the PIU has access to key staff in other areas of project management, including finance and environmental impact, from the relevant departments in VRA. VRA will finance all staff costs.
65. The Apex Bank will implement the Solar-PV sub-component, including management of the IDA line-of-credit and the GPOBA grant on behalf of the Government. Annex 6 provides the detailed arrangements of the implementation of this sub-component. To incorporate the Solar-PV business within its organization, the Apex Bank will designate staff from its Credit, Microfinance, Training, MonitoringEvaluation, and Finance/Accounting departments to manage this component.
66. For procurement activities, the Apex Bank will use the procurement specialist of the ongoing Rural Financial Services project. The Apex Bank will hire independent inspection agents, approved by the Energy Commission, to verify that the equipment meet technical standards and installations are properly completed. The inspection agents will be funded through the project.
67. The Government and the project team have agreed that Apex Bank will hire a full-time project coordinator, at the cost of the project, to supervise the activities that it will implement under the project. To increase coordination of activities, MoE’ s Project Coordination Team will approve the Apex Bank’s annual work plans, budget, and training plans. The Apex Bank will report quarterly on implementation to MoE.
3. Monitoring and evaluation of outcomeshesults
68. The monitoring of the project’s results indicators and the overall evaluation of the project’s impact will be the responsibility of the PPMED within MoE.
69. The Director of the PPMED will assume the responsibility of Monitoring and Evaluation Coordinator. The Coordinator will receive and analyze data and will submit regularly monitoring reports to the Steering Committee and the Project Coordinator. The reporting frequency will be quarterly and based both on the flow of information from other divisions within MoE and data received from the implementing agencies.
18 70. The Monitoring and Evaluation Coordinator and colleagues from other departments in MoE will visit project sites regularly to supervise and verify the status of the project’s activities. Project management meetings within MoE will discuss the reports that result from these visits. Furthermore, the PPMED will contract with a local consulting firm to conduct a mid-term survey and a final survey on project completion. The MoE will submit reports on both surveys to the Project Steering Committee and the funding agencies.
71, The following entities will be the data sources for the project’s key indicators.
0 MoE ECG VRA/NED 0 TheApexBank 0 The Energy Commission PURC
72. The Project Managers/Coordinators of each implementing agency will be responsible for preparing quarterly progress reports on procurement, financial management, and implementation of environmental and social management measures (RAPS,construction and related environmental and social impacts, etc.), and the achievement of the project’s monitoring indicators. The officers will submit these reports to MoE and the funding agencies. The officers also will prepare the annual work plans and budgets for the components their respective institutions are responsible for and submit these to MoE in September of each year for inclusion into the Annual Work Plan and Budget for the entire project.
73. The Monitoring and Evaluation Coordinator at MoE will consolidate the monitoring indicators in the reports they receive from the implementing agencies, in order to prepare quarterly M & E reports for submission to the Steering Committee and the funding agencies. As part of its reporting, MoE will monitor the status of “gap-filling measures” for environmental equivalence and acceptability identified in the “Diagnostic Report” at six-month intervals. These measures are necessary to make Ghana’s Environmental Assessment procedures equivalent to the procedures that the World Bank and the AfDB require for the projects they finance.
74. The corporate performance of the ECG and VRA will have a significant impact on the achievement of the project’s objectives and outcome indicators. For example, poor financial performance of ECG may hinder the implementation of improvements to the distribution system, causing project failure in achieving loss-reduction targets. To mitigate this risk of non- performance, the PCT will monitor and report on corporate level performance through its quarterly progress reports. In addition, a system of performance contracts between the companies participating in the project and the Government will monitor and enforce corporate level performance. Special audits by external auditors will determine the companies’ compliance with their obligations under these contracts.
4. Sustainability and replicability
75. Sustainability. The improved reliability of power supply and increased access to electricity that result from the project can only be sustainable if the power companies operating the main grid, new mini-grids and the Solar-PV companies remain financially viable after the project’s completion. To sustain reliable power supply to the distribution system from the main
19 grid, the financial recovery of VRA, supported by development partners under the Multi Donor Budget Support (MDBS), the Poverty Reduction Strategy Credits (PRSCs) and the WAPP is critical. And to prevent a future financial crisis, tariffs need to allow both VRA and ECG to fully recover their cost of supply.
76. For all components that will intensify the use of the existing grid and some of the components for grid expansion in the project areas2’, ECG will need to recover only operating and maintenance costs because IDA and ACGF financing will cover capital costs. However, financial projections show that ECG may not be able to fully recover even these costs. The main reason is that current tariff structure provides for a significant cross-subsidy in the distribution service margin (DSM) for low-volume residential customers who are likely to represent the major part of consumption under the access component. Hence, the DSM for these customers is less than half of the average DSM. During the transition to cost-recovery tariffs and ECG’s commercial viability, the Government may need to provide ECG with a budget transfer in the project areas.
77. The increased connection volume in rural areas will reduce the cost of electricity supply per consumer and thereby enhance sustainability. To bring about this increase, the project will help to improve the affordability of electricity access by promoting the use of low-cost technologies such as the installation of ready-boards rather than complete household wiring. This system provides instant access to electricity without costly internal wiring.
78. Studies with financing from SECO and JICA have demonstrated that a combination of competitive bidding procedures and low-cost technologies can reduce connection costs by 30 - 40 percent. In light of this finding, the project will conduct design studies to define the appropriate technologies for different areas depending on the level and type of customer demand. For the development of Solar-PV systems, the project’s design has enhanced the likelihood of their sustainability by incorporating equipment, installation, and service into one dealer package to avoid past problems in other countries with lack of maintenance and repair services.
79. The GEF contribution targets the establishment of a favorable policy and regulatory framework for renewable energy, and the provision of advisory services to the private developers of renewable energy technologies. In addition, the REF, funded by IDA and other donors, will provide capital grants to private developers for renewable energy investment. This strategy ensures project sustainability by enabling greater private sector participation in renewable energy after completion of this project.
80. Replicability. The project supports the development and initial implementation of a commercially oriented framework for scaling-up electricity access, using a combination of grid- based and off-grid approaches. It also supports emerging business models that engage the private sector in providing electricity services. Once these models demonstrate success, they can be replicated nationwide in Ghana and in other Sub-Sahara African countries.
5. Critical risks and possible controversial aspects
8 1. The overall risk rating for the project is substantial based on moderate risks for the successful completion of the project’s components and substantial risks to meeting the project’s
*’ See Section C, Economic and Financial Analysis. 20 development objective. The substantial risk rating is due not only to factors within the project but important external factors that will affect its outcome.
82. In particular, the availability and reliability of grid-based power will depend not only on the financial sustainability of ECG but also on the flow of adequate, reliable power to the distribution system from VRA. Therefore, the successful implementation of the financial recovery program for VRA and other developments outside the project, including timely implementation of the WAGP and WAPP projects, are imperative.
83. Key elements within the project that entail substantial risks are the need for major policy measures, such as substantial tariff increases, which the Government in the past has been reluctant to implement consistently, and the dependence of planned expansion of electricity access in rural areas on new business models as yet unproven in Ghana. The table below identifies the detailed risk factors, their ratings, and associated mitigation measures.
I MainRisks Risk Rating Risk Mitigation Measures I
Opposition to tariff increases. S Government has confirmed its commitment to bring electricity tariffs to cost recovery levels within an agreed timeline, beginning with passing on the PURC approved November 2006 tariffs, as stated in its Letter of Development Policy accompanying the PRSC-5.
0 Support under the MDBS and PRSCs. Power sector performance deteriorates during S Support under PRSCs, WAPP, and MDBS project period because GovernmentNRA unable program. to improve VRA’s finances.
Non-payment and delays in payment from the t0 S Government has agreed to strengthen public sector consumers to VRA and ECG. “clearinghouse- mechanism” under PRSCJ. S GoG will monitor ECG’s performance through the enhanced performance contracts that it will put in place in 2008. Project will review performance at mid-term and make necessary adjustments to strengthen ECG. Electricity supply deficit situation continues. S This risk is external to the project; depends partly on hydrological conditions in the region. Gas from WAGP is expected to be available in mid-2008 to reduce dependence on hydro. Rural consumers cannot afford electricity S The project reduces the cost of connections connections. through capital grants and low cost technologies.
21 Risks of not achieving the components ’planned results:
REA will not be established. M 0 The Government has agreed to set up REA by December 2008. The project will provide extensive TA to assist GoG to establish REA.
Private sector firms are not interested in M 0 The project will provide capital grants to developing mini-grids or selling solar systems in developers and favorable consumer financing rural areas. options through rural banks. 0 The project will provide advisory services to private sector firms. The MoE has already received more than 20 proposals from the private sector to develop renewable energy systems.
MoE’s limited financial management and M MoE has agreed to a capacity-strengthening procurement capacity delays implementation and plan, which the project will finance. processing of payments. MoE will prepare a FM manual before effectiveness.
The GPOBA funding does not become available. L t GPOBA concept note has received eligibility, :and GPOBA has approved funding to further prepare the GPOBA application, which will be evaluated at the commitment stage early 2008. 1 In case GPOBA funding will not be approved, the team will approach other donors. GEF has expressed willingness-to-pay for partial subsidies.
Delays in co-financiers’ disbursements. Each co-financier will finance specific project components and implementation schedules are consistent with the co-financiers’ approval rocedures. Overall Rating S: Substantial; M: Moderate; L: Low i
The project does not have any controversial aspects.
Credit conditions and covenants
The effectiveness conditions are:
The Subsidiary Agreements have been executed on behalf of the Recipient and the Project Implementing Entities.
The co-financing Agreement between the Recipient and IBRD acting as an implementing agency of the GEF has been executed and delivered and all conditions precedent to its effectiveness or to the right of the Recipient to make withdrawals under it (other than the effectiveness of this Agreement) have been fulfilled.
The Recipient and each Project Implementing Entity have adopted their respective Project Implementation Plans, in form and substance satisfactory to the Association. 22 The Recipient has given effect to PURC’s November 2006 approved tariff adjustments.
EPA has completed and issued the “Sector Specific Guidelines for Environmental Impact Assessments” for the energy sector, in form and substance satisfactory to the Association.
The Recipient has established the Project Steering Committee, with a composition and terms of reference satisfactory to the Association.
MoE has appointed a project coordination team, and interim secretariat staff responsible for implementing Parts C.2 and C.3 of the Project, all with qualifications and terms of reference acceptable to the Association.
Disbursement conditions:
Actions before disbursement start for intensification (component C.1(a) of the project):
(a) ECG has established a separate cost center for its rural electrification business with separate accounts.
Actions before disbursement start for grid extension and isolated grid components (components C.2 (a) and C.3 of the project):
(b) Government has adopted the RE Grants Manual, in form and substance satisfactory to the Association.
Actions before disbursement start for Solar-PV loans under component C.4(a):
(c) Apex Bank has: (a) designated staff, with qualifications and terms of reference acceptable to the Association, dedicated to implement its Respective Part of the Project; and (b) adopted the Solar-PV Financing Manual, in form and substance satisfactory to the Association.
Financial performance covenants:
ECG will for each fiscal year, beginning in 2008, maintain a current ratio (current assets divided by current liabilities) of not less than 1.2.
Except as the Association shall otherwise agree, ECG will refrain from incurring additional debt unless an agreed projection of the company’s net revenue for the following year exceeds the following year’s debt service obligations by a factor of at least 1.3, beginning in 2008.
Dated Covenants:
Appointment of Financial Auditors. The Recipient shall, and shall cause the Project Implementing Entities to, not later than six months after the Effective Date, appoint the independent auditors.
Procurement Audits. The Recipient shall, not later than six months after the Effective Date, appoint independent procurement auditors, for reviewing the procurement of goods,
23 works and consultants’ services financed under the Project, including the reviewing of procurement procedures and processes.
The Recipient shall, not later than three months after the end of each Fiscal Year furnish to IDA an audit report on the procurement of goods, works and consultants’ services carried out under the project, prepared by the independent procurement auditors.
Electricity Tariff Adjustment. The Recipient shall: (i)by March 31, 2008, complete the cost of service and tariff study to be carried out under Part A.l of the Project; (ii)by June 30,2008, adopt an action plan, acceptable to the Association, to achieve full cost recovery electricity tariffs; and (iii)thereafter, implement the actions specified in the said action plan within the timelines specified in the plan.
ECG and VRA Reviews and Performance Contracts. By March 3 1,2008, the Recipient shall complete the technical and operational reviews of ECG and VRA to be carried out under Part A. 1 of the Project.
By December 3 1 of each year during the implementation of the Project, commencing by December 3 1,2008, the Recipient, through MoFEP and MoE, shall enter into performance contracts with ECG and VRA, on terms and conditions acceptable to the Association.
Bulk Power Supply Contract. By December 3 1,2008, the Recipient shall ensure that VRA and ECG enter into a bulk power supply contract, on terms and conditions acceptable to the Association.
ECG Management Support Services. By October 31, 2008, the Recipient shall cause ECG to appoint consultants to provide management support services to ECG.
Renewable Energy Law. By December 3 1,2008, the Recipient shall submit to Parliament a renewable energy bill.
Solar-PV Line-of-Credit. The Recipient shall cause the Apex Bank to deposit all repayments of the principal amounts of Solar-PV Loans extended through the revolving line of credit facility established under Part C.4(a) of the Project, for the purpose of providing additional consumer credits and/or grants for Solar-PV systems in accordance with the provisions of the Solar-PV Financing Manual.
89. Implementation and Reporting Milestones:
(a) MoE, VRA, ECG and the Apex Bank will prepare quarterly progress and Interim unaudited Financial Reports (IFRs).
MoE, VRA, ECG and the Apex Bank will participate in a mid-term review of the project in mid-2009.
Each implementing agency will prepare an annual project work plans and budgets for their respective components and submit them to the MoE by September 30 of each year. MoE will aggregate the work plans and budgets and submit them to the co-financiers by October 30 of each year.
24 D. APPRAISAL SUMMARY
1. Economic and financial analysis
Economic analysis
90. The project’s appraisal prepared an analysis of the net present value (NPV) and economic internal rate-of-return (EIRR) for the investments under the Distribution Component and the Access Component. The following sections summarize the methodology, assumptions and results of these analyses.
91. Distribution Component. The appraisal evaluated the NPV and EIRR of investments for ECG. On the cost side, the appraisal calculated the total investment, operating and maintenance costs associated with the component as well as the incremental cost of related generation and transmission. The latter estimate, at US$0.12 /kWh, reflects the fully allocated cost of gas-based thermal supply. On the benefits side, the appraisal calculated the value of the investments to the consumers of electricity based on the average retail tariff of US$O. 103 per kWh that PURC approved in September 2006 plus the consumer surplus of electricity access, amounting to a total of US$0.53 per kWh. For the economic evaluation of the Distribution Component, the appraisal prepared a separate analysis for each of the company’s regional networks in addition to an analysis for the upgrading of the network as a whole and the total ECG component, including the cost of institutional development. The calculations assume an economic cost of capital at 10 percent. The results show very high EIRRs, amounting to 232 percent for the ECG component as a whole.
92. Access Component: Grid-based electricity. The appraisal calculated NPVs and EIRRs for electricity access expansion resulting from more intensive use of the existing distribution system as well as grid extension projects under the SHEP-4 program. Also the appraisal prepared a separate economic evaluation for each phase of expanded access under the SHEP-4 Program. On the cost side, the appraisal calculated the incremental cost of extension, including capital investments, operating and maintenance expenses for the distribution system plus associated costs of power generation and transmission. The basis for the analysis of benefits is the estimated income compensated demand curve for a cross-section of new users of electricity. The demand curve consists of a value for the substitution effect of using electricity plus the value of the incremental demand likely to result from consumer access to lower cost electricity, due to the use of new technologies that the project will introduce. Overall, the estimated average willingness-to-pay (WTP) for electricity is at US$0.53/kWh.
93. The economic analysis of the component shows an NPV of US$164 million and a related EIRR of 82.3 percent for investments to increase electricity access by more intensive use of the existing grid. For the extension of the grid under the SHEP-4 program as a whole, the analysis indicates an NPV of US$89.2 million and lower associated EIRR of 18.4 percent, which is still appreciably above the assumed 10 percent cost of capital. The EIRRs are higher for intensification than for grid extensions because the cost of connecting a new consumer is lower (US$300 per customer vs. up to US$l,OOO per customer for grid extension).
25 94. Access Component: Solar-PV development. The economic analysis for this sub- component used a similar analysis to that for the grid based electricity access components but taking into account survey data showing that solar-electrified households in rural areas continue to use kerosene lighting although at about half the level of non-electrified households21. The resulting income compensated demand curve indicates a WTP for solar lighting equivalent to US$1.93/kWh. Comparing this with the actual cost of the system (including battery replacement at five-year intervals and annual maintenance costs) results in an ERR of 2 1 percent for household solar installations.
Financial analysis
95. The appraisal prepared a financial analysis of the project’s Distribution Component and Access Component. In addition, the appraisal evaluated the financial condition of the two main entities likely to have a substantial impact on the project’s outcome, VRA and ECG.
96. Distribution Component. The appraisal calculated a financial NPV and a Financial Internal Rate-of-Return (FIRR) for the sub-components to upgrade the distribution systems of ECG. On the cost side, the appraisal included the investment cost, plus an estimate of operations and maintenance costs of the new facilities, plus the incremental financial cost of power purchases from VRA. On the benefits side, the appraisal’s calculations consisted of the following.
Incremental revenues to ECG resulting from the increase in the distribution system’s energy output as a result of the incremental investments enabling ECG to meet growing demand. Savings in the additional cost of power resulting from the system loss reduction due to related investments.
97. The calculations assume a weighted average cost of capital amounting to 8 percent. The NPV for the entire ECG sub-component is US$681 million with a corresponding FIRR of 22.3 percent, which is substantially higher than the weighted average cost of capital.
98. Access Component. On the cost side, the appraisal calculated the financial cost of expanding access, including the capital cost of investments, operations and maintenance expenditures, and the associated cost of incremental power generation and transmission. The main benefits that the appraisal calculated are the incremental tariff revenues resulting from access expansion.
99. The results show none of the investments will have an acceptable FIRR without some support from the Government or much higher tariffs.
2. Financial performance of the sector
100. VR4. Without a major program to address VRA’s deteriorating financial condition, the company could run out of funds for operating the country’s main generating plants and the sole transmission system in a matter of months. This precarious financial condition has resulted from a combination of natural resource constraints and energy policies that do not promote security of
21 Obeng, G. Kwame, Survey Of Electricity and Kerosene Consumption In Rural Communities, Ghana, Nkrumah University Of Science And Technology, Kumasi, Ghana, October 2006. 26 supply: (a) constrained hydro-electric supply due to low inflows to Lake Volta, which has forced VRA to cut back on hydro-electric generation and rely more heavily on costly thermal generation; (b) tariffs that fall well below cost recovery levels; and (c) increasing demand and system inefficiencies due to in part to low tariffs and the lack of financial accountability. Provisional financial statements for 2006 show sales of US$474 million (4,302 billion cedis) and a net loss of US$198 million (1,799 billion cedis)22. Between 2005 and 2006, the Government’s equity in VRA fell by US$220 million, despite the Government’s financial support for fuel purchase. If this trend continues, the value of the Government’s equity will decline by a further US$1.6 billion over the next six years and two years later will plummet to negative US$600 million.
101. To rectify this situation, the Government has committed, under the policy statement appended to the PRSC-5, to the recapitalization of VRA23. In addition, the policy statement commits the Government, through PURC, to move to full cost recovery tariffs. These actions would not ensure the company’s survival but would at least place it on a track toward financial recovery. To cover cash flow requirements, VRA would still need to incur substantial short-term borrowing, which may require even further upward adjustments of the tariff.
102. ECG. The appraisal has determined that ECG’s financial outlook during the project’s implementation period will be satisfactory if the Government implements the tariff increase approved in September 2006 or continues to subsidize the difference between the old and the new tariff. Preliminary figures for 2006 show sales of US$314 million (2,875 billion cedis) and a net operating loss of about US$34 million (313 billion cedis). Despite negative operating profits, the appraisal’s projections show that the company will generate sufficient cash flow to cover its cash operating costs, working capital needs and priority capital investments (including requirements for the proposed project) and debt service commitments.
103. Annex 9 provides the details of the projected financial performance for 2007 - 2012. The figures presume the establishment of full cost recovery tariffs for both ECG and VRA beginning in January 2009. On this basis, ECG’s financial performance would be fully satisfactory throughout the period. The company would be in compliance with proposed project financial covenants, and would also have a substantial cash reserve to finance additional necessary capital investment^^^.
3. On-lending terms
104. The Government will on-lend about US$40 million to ECG. The interest rate will be 5.3 percent and the repayment term will be 17 years, including a grace period of five years. ECG will bear the foreign exchange risk on the on-lent amounts. In addition, the Government will provide about US$18 million to ECG as a grant under the Access Component. The Government will provide about US$5 million and US$3 million as a grant to VRA/NED and the Apex Bank respectively under the Access Component.
22 Volta River Authority, Highlights of Financial Performance, Survival Scenario. Figures in cedis converted to US$ at the rate of US$1=9,073 cedis.
23 Development Policy Letter dated April 17, 2007.
24 The projections of ECG’s financial performance reflect a capital investment program of about US$200 million over the period 2007 - 2012, which is considered the minimum needed to maintain satisfactory operating conditions. However, ECG has identified a capital investment program well in excess to this amount. 27 4. Technical
105. The project will adopt conventional and standard equipment and techniques for the electricity sector. In this regard, there are no major technical issues facing the project. However, the project will promote the use of low cost designs and techniques where appropriate to reduce rural electrification investment and operating costs. These will follow the recommendations in two ESMAP-financed studies “Reducing the cost of grid extension” (Report No. 227/00) and “Sub-Saharan Africa: Introducing Low-cost Methods in Electricity Distribution Networks” (ESMAP Technical Paper No. 104/06).
5. Fiduciary
106. Procurement. Bank staff carried out an assessment of the capacity of MoE, VRA, ECG and the Apex Bank to implement procurement actions for the project. The assessment shows “Low Risk” for VRA and ECG, and “High Risk” for the MoE and Apex Bank. The MoE and Apex Bank have agreed to implement the necessary actions to strengthen their procurement capacity (Annex 8).
107. Financial Management. Bank staff has completed a Financial Management (FM) assessment of the Accounting unit of the Ministry of Energy and a FM review of the Volta River Authority (VRA), Electricity Company of Ghana (ECG), and the Apex Bank. Both the assessment and the review have shown that VRA, ECG, and the Apex Bank have satisfactory systems in place to meet the financial management requirements and obligations under the project. The risk rating for these institutions is “Low”. However, the accounting unit of the MoE does not have adequate systems in place that meet the minimum financial management requirements of the World Bank for the purpose of the project. The assessment concluded that the risk for the project would be “Moderate” if MoE implements the agreed actions to mitigate the identified risks and weaknesses (Annex 7).
6. Social
108. One of the positive social impacts of the project is improved reliability of electric power supply, which will directly benefit current customers and indirectly help to promote additional private investment by industries that are currently less inclined to open or expand operations in the country because of the limitations of the electricity transmission and distribution system. A second social benefit is increased access to electricity in rural areas, through grid extension or off-grid generation.
109. Negative social impacts will be limited. Chief among them will be loss of land and fixed assets, loss of crops2’, and in relatively few cases, displacement of families and businesses because of right-of-way clearing and acquisition of land for towers, and substations. A Resettlement Policy Framework (RPF) has been prepared to ensure that sub-projects minimize displacement and that affected persons receive compensation at replacement cost for loss of land, crops, buildings and other assets.
25 Usually only temporary, as VRA and ECG generally permit farming to continue in rights-of-way except on access roads. 28 7. Environment
110. The project is likely to have several positive environmental impacts. The improved efficiency of the distribution system due to investments under the project will reduce overall demand on power resources and alternative fossil fuels. The emphasis of the project on expanding access with renewable energy sources rather than fossil fuels will have favorable impacts on local air quality and noise levels, as well as reduce greenhouse gas emissions.
111. There are also several potentially adverse impacts, which are associated with the construction and operation of power lines. These impacts are typically modest and relatively easy to manage through good engineering and construction practice. The prohibition on conversion of critical natural habitat in OP 4.04 will apply to this project and power lines could possibly have negative impacts on other natural areas as well as on physical cultural property and landscapes (visual impacts). Pesticides are not an issue, since VRA and ECG do not, as a matter of policy, use herbicides to clear or maintain rights-of-way.
112. In addition to the above, there are potentially more complex impacts, though comparatively they are likely to be less significant in terms of area affected. These include: the impacts of (a) solar panel and battery systems (in the disposal of lead-acid batteries); (b) small hydro through changes in hydrologic regime (impacts on downstream water uses and aquatic ecosystems, obstruction of fish passage, inundation of terrestrial habitat); (c) wind-powered generators, in terms of visual impact, as well as possible mortality of birds and bats; and (d) biomass through impact on local air quality and ash disposal.
8. Safeguard policies
Safeguard Policies Triggered by the Project Environmental Assessment (OP/BP/GP 4.01) Natural Habitats (OPBP 4.04) Pest Management (OP 4.09) Cultural Property (OPN 11.03, being revised as OP 4.11) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OD 4.20, being revised as OP 4.10) Forests (OPBP 4.36) Safety of Dams (OP/BP 4.37) Projects in Disputed Areas (OP/BP/GP 7.60)26 Projects on International Waterways (OP/BP/GP 7.50)
113. The project is a pilot for the World Bank’s and the AfDB’s “use of country safeguard systems” rather than those of the two financing institutions, where Ghanaian standards are equivalent. A multi-disciplinary team from the Government, the World Bank, and the African Development Bank conducted a review of the Ghanaian social and environmental safeguard systems and concluded that they are equivalent to those of the two financing institutions, with minor gaps, for environmental assessment and physical cultural property. The review found the following areas where the Ghanaian system lacked “equivalency”.
26 By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties’ claims on the disputed areas.
29 Conversion of critical habitat or the requirement for a benefitkostlanalysis of alternatives to this conversion.
Law and practice on land acquisition, and resettlement and compensation.
Dam safety regulations.
114. As a result of these differences, the project has triggered the use of the World Bank’s guidelines governing natural habitat, resettlement of indigenous peoples, and safety of dams. In addition, the Government has agreed to fill other identified gaps to achieve and sustain acceptability of Ghanaian systems as outlined in the tables below.
Table 8.1: Agreed gap-filling measures required to achieve acceptability
I’ By whom Effectiveness
Energy sector guidelines. EPA will complete and issue the “Sector Specific EPA Guidelines for EIA” for the energy sector, prior to effectiveness. Bulk transmission of power. Approve the “Policy Framework for VRA N (completed) Environmental and Social Management of Bulk Transmission Line Projects in Ghana.” Captive generation and rural electrification. Prepare and issue an MoE N (completed) “Environmental and Social Policy Framework for Captive Generation and Rural Electrification” setting forth MoE policy and procedure for applying Ghana’s 7 EIA system in MoE’s rural electrification and rural access programs, prior to negotiations. Power distribution. Prepare and issue an “Environmental and Social Policy ECG and Framework for Electricity Distribution” setting forth ECG policy and procedure NED for applying Ghana’s EIA system in ECG and NED electricity distribution projects, prior to negotiations. Staffing and capacity building. Prepare staffing and capacity-building plans ECG and that provide for adequate capacity for environmental and social impact MoE management to be in place before any disbursements begin on investments in the components for which ECG and MoE are the implementing agencies.
30 Table 8.2: Agreed gap-filling measures required to sustain acceptability.
Action to be taken By whom By when Quality of Instruments. Conduct a review of the quality of EIA instruments prepared under the project: EIAs, PERs, EAA Department of September 2008 and scoping reports/TORs, EMPs, etc. and communicate results EPA. annually thereafter, to MoE, VRA and ECG. Provide recommendations for continue with these tasks improvement. periodically. Capacity-Building. Transition from consultant-provided MoE, ECG, EPA, WB. During 2007 and 2008. EIA capacity to in-house permanent capacity in MoE “Electricity Group” and ECG, through staffing, training, refinement of environmental frameworks prepared in connection with the project. Procedures. Issue the updated EA Procedures Manual. EAA Department of June 2008. EPA. Resources for monitoringthe energy sector. Review the EPA. December 2007. adequacy of resources (staff, equipment, and budget) allocated to EA in the energy sector in EPA headquarters and regional offices, and optimize as appropriate.
115. As part of its reporting to the World Bank, MoE will monitor the status of identified gap- filling measures for equivalence and acceptability at six-month intervals. MoE will forward copies of its monitoring reports to the project’s financiers.
9. Policy exceptions and readiness
116. The project does not require any exceptions from Bank policies.
117. Regional criteria for readiness for implementation.
Readiness Criteria I Status (a) Financial management assessments have been Completed. completed and action plans prepared. (b) Procurement capacity assessments have been Completed. completed and procurement plans agreed during negotiations. (c) Environmental assessments and resettlement policy Completed. have been disclosed in Ghana and at Info Shop. (d) Project implementation teams have been ECG and VRA/NED have established teams. MoE and established. the Apex Bank will establish them before effectiveness. (e) Project implementation plans/manuals have been MoE has prepared a draft Implementation Manual while prepared. ECG, VRA/NED, and the Apex bank will prepare their Manuals before effectiveness. (fj Baseline data available for M & E. Completed. (g) Bidding documents have been prepared for the first ECG has started preparing bidding documents for its year’s activities. components. (h) Co-financing arrangements are in place. SECO has approved its financing; ACGF funds have been released; AfDB will appraise in July; GPOBA has approved project concept and is expected to approve funding at the end of 2007 subject to availability of funding. GEF council approved the funding in June 2006 and CEO endorsement was obtained on June 20,2007.
31 Annex 1: Country and Sector Background Ghana: Energy Development and Access Project
The Electricity Sector
1. Electricity demand: Per capita electricity consumption, at an estimated 358 kWh per year is below the Sub-Saharan weighted average of 457 kWh per year. The industrial sector (including the government-owned aluminum smelter, VALCO, load when operating) is the largest consumer of electricity, followed by residential consumption and then the commercial sector. Excluding VALCO, residential customers consume the largest portion with 54% of the supply as of 2003. Most of the residential customers are urban households whose consumption is growing 11% annually. Commercial and service sectors consume 10% of electricity supply and the annual average growth rate is 9%.
2. Electricitv sumlv: Total generation capacity in Ghana was 1,895 MW in 2005, of which 1,140 MW was from hydropower, and 570 MW from thermal plants. In addition, 185 MW was contracted from C8te d’ Ivoire through imports. Table 1.1 depicts the energy demand and supply balance. Table 1.1: Electricity Demand/Supply Balance
Actual Actual Actual Forecast I2006 2007 2008 2009 2010 CaDacitv Demand IMW) Total Domestic 1,000 1,096 1,130 1,255 1,445 1,564 1,677 VALCO 159 105 225 225 225 CEB (Contractual Supply) 35 35 35 35 35 CEB (Additional VRA Supply) 44 44 45 45 80 80 80 CEB (Wheeled) 35 35 35 35 35 35 35 SONABEL 1 1 1 1 19 Total Capacity Demand 1,405 1,476 1,821 1,940 2,071
Available CaDac itv IMW)
Akosombo 725 725 420 420 840 840 840 Kpong 105 105 140 140 140 140 140 Bui Total Hydro 830 830 560 560 980 980 980 Therm4 Takoradi Thermal (T1-TAPCO) 320 320 300 300 330 330 330 Takoradi Thermal (T2-TICO) 110 220 220 220 220 220 330 Power Imports 165 150 40 40 10 Power Wheeled to CEB 35 35 35 35 35 35 35 126 MW Tema (TT1 PP) 100 100 100 100 OECF Barge 125 MW 60 120 120 Mines Reserve Plant 80 80 80 80 50 MW Emergency diesel 50 50 50 50 20 MW Emergency diesel (Kumasi) 10 20 20 20 56 MW Emergency diesel 50 50 50 50 330 MW Tema Thermal 200 300 Future Thermal Total Available Capacity 1,555 1,I 55 1,445 1,935 2,185 2,395 Reserve Capacity (MW) (250; (31) 114 245 324 Reserve Capacity (%) +31% 14% -1 8% -2% 6% 13% 16% Required Reserve Capacity (%) 25% 25% 25% 25% 25%
32 3. In 2006, generation capacity reduced due to: (a) low inflows into the Akosombo Dam; (b) the decommissioning of the Tema Diesel plant; and (c) unreliable supply from Takoradi power plant and C8te d’Ivoire. The Government has responded to the reduced supply by rationing the available power since September 2006. It is also seeking to add further thermal capacity in 2007 to reduce the supply shortfall. For example, plans are underway for the private financing of additional capacity at the privately owned Takoradi I1(TICO) thermal power plant to turn it into a combined cycle plant, in addition to future private investments in generation to keep up with demand requirements.
4. The impact of the electricity shortage on the economy is still being assessed, but early indications suggest that the projected growth rate in 2007 cannot be achieved. Businesses and households have to bear the high cost of resorting to alternative energy sources and the reduced levels of supply. The industrial and service sectors, which jointly account for nearly 75% of Ghana’s GDP, rely critically on electricity and displacements in availability are bound to impact the operations of the sectors. Therefore, organized development of the sector, leading to steady improvement in the provision of reliable and affordable electricity services and increased access to modem energy services, will be important to Ghana’s economic performance. Additionally, because of its size and resource requirements, the sector also has a significant fiscal and macroeconomic impact.
5. Institutional Framework: The Ministry of Energy (MoE) is responsible for energy policy formulation and implementation, while the Energy Commission, set up under Act 541 in 1997, is responsible for energy policy and strategy advice, national energy planning, licensing, and technical regulations. The Public Utilities Regulatory Commission, set up under Act 538 in 1997, regulates electricity tariffs and customer services. The electricity generation and transmission functions lie with Volta River Authority (VRA), while electricity distribution in the Southern part of the country is the responsibility of the Electricity Company of Ghana (ECG), the Northern Electricity Department (NED) is responsible for distribution in northern Ghana. ECG has about 1,200,000 consumers and NED about 230,000. The sole private involvement in the sector is the joint venture arrangement between VRA and CMS (USA) to add on a 220 MW simple cycle thermal plant to generation.
6. Regional Integration: Regional energy integration has added a new dimension to the sector’s development. Ghana is one of the key players in the regional push towards energy trade. The Parliament of Ghana ratified the ECOWAS Energy Protocol in June 2004 to pave the way for the financial closure of the West African Power Pool (WAPP). Both WAPP and the West African Gas Pipeline (WAGP) are critical to enhance energy security in Ghana, since the WAGP provides its beneficiaries Ghana, Benin and Togo access to natural gas resources in Nigeria. The WAPP strengthens Ghana’s integration in the regional transmission network to enable optimization of hydro and natural gas resources. Ghana plays a prominent role in this market in view of its physical location and political significance.
7. Transmission: Ghana’s transmission system consists of a 161 kV double-loop grid, which is 3,684 km long and contains 36 substations or “bulky supply points” (BSP) (including those at Kpong and Akosombo). The transmission voltages used in the Ghanaian grid are 69 kVA, 161 kVA, and 225 kVA. The Ghanaian grid was interconnected with the power grids of Togo and Benin in 1972 and C8te d’Ivoire in 1983.
33 8. Ghana’s transmission system is old. Forty percent of the system is 40 years old, 20% almost 25 years old, and the remainder about 15 years old. Although overall transmission losses are not excessive (3.6%), the transmission system is in need of overhaul and expansion because of long delayed routine rehabilitation. Delays in rehabilitation have occurred due to tariff levels that have been insufficient to cover the costs. The ongoing Coastal Transmission Backbone project, part of WAPP, will increase the transmission capacity both in the southern and northern parts of Ghana. This project will substantially improve the possibilities to supply reliable electricity in most parts of Ghana.
9. Distribution. The distribution system consists of 6,000 km of 33 kV and 6,100 km of 11 kV lines (overheard and underground) and 22,000 km of low voltage lines (overhead and underground). In urban areas, Bulk Supply Points (BSPs) deliver power to the 33 kV network from where the main substations (33/11 kV) supply the 11 kV primary distribution lines. 1U0.4 kV substations deliver power to the secondary distribution network. 33 kV is used as sub- transmission voltage for bulk supply to the distribution network, but some distribution transformers and large consumers are also directly energized from this voltage. In rural areas, the 33 kV system forms the bulk of the primary distribution system supplying distribution transformers. NED uses a low cost “shield-wire system” for 34.5 kV distribution in its supply area in the northern part of Ghana. Due to high demand growth and delayed routine maintenance, the distribution networks are overloaded resulting in high losses and service interruptions. Total energy losses in the ECG networks are about 26% of energy output. A large part of these losses are “non-technical”, Le. they derive from pilferage of electricity, billing inefficiencies, and inadequate metering.
10. ECG’s voltage profiles are poor and consumers get 180 volts or even lower at times instead of the standard 220 V. As a result, consumers cannot run appliances at all or are at considerable risk of damaging them. The current system, typically a 500 kVA transformer, transports the electricity from a distance at 400 volts and serves around 400 customers. By the time the customer is served, it is at low voltage through long, sometimes sagging lines that are prone to break down or being tapped into by theft.
11. Rural Electrification: In 2004, Ghana’s rural electrification rate reached 54%, significantly higher than the average of 21% of Sub-Saharan Africa. Since the late nineties Ghana has spearheaded numerous innovative programs to extend reliable energy access to rural areas. The MoE instituted a National Electrification Scheme (NES) in 1989 as the principal instrument to achieve its policy of extending the reach of electricity to all parts of the country over a 30-year period. The first phase of the NES entailed the electrification of all district capitals and towns/villages en-route to the district capital under the National Electrification Project (NEP). The other pillar of the NES, the Government’s Self-Help Electrification Program (SHEP), which supplemented the NEP commenced in 2001. Under the SHEP, communities located 20 km from the national grid are qualified for fast-track electrification if they procure all the required low voltage poles. Because of these programs, more than 2,000 communities have been electrified, and access increased from 28% in 1989 to 54% of the population in 2004.
12. The NES is implemented by the Ministry of Energy (MoE), which procures equipment and hires works contractors. MoE then hands over the assets to ECG or NED as the case may be depending on the assets geographical location. ECG and NED are responsible for the operation and maintenance (0 & M) of the assets. To date, the bulk of resources for the ongoing NES have come from donors. The MoE also manages the National Electrification Fund (NEF),
34 established in 1989. The NEF collects about US$575,000 annually through a levy on electricity bills. With these funding sources, the government currently provides almost 100% capital subsidy to the NES. At the current tariff level of US$2/month for customers consuming up to 50 kWh/month, ECG and NED claim that they cannot recover the 0 & M costs for rural electrification.
Renewable Energy
13. The Energy Commission is in charge of the exploitation of Ghana’s renewable energy resources for which it utilizes funding from the Energy Fund (Act No. 541). The Energy Fund raises about US$500,000 a year from a levy of 5 cedis or 0.06 US cents/liter on petroleum products. However, this amount is insufficient to support large-scale renewable energy development. The draft National Renewable Energy Strategy, together with the draft Strategic National Energy Plan 2006 - 2020, set a target to achieve 10% of renewable energy in the energy mix by 2020, including wind, mini-hydro, modern biomass resources, and Solar-PV.
14. Ghana has significant potential for hydropower, biomass, wind and solar power. The unexploited hvdropower potential may be in the order of 2,000 MW. Government has identified nearly 20 medium to large hydro sites (20 - 400 MW each), which could support the installation of 1,243 MW of generating capacity. In addition, studies have identified over 70 small hydro sites (< 10 MW). Ghana has large biomass resources. The annual production of wood residues from logging and sawmills is estimated to be around 1 million tons, and crop residues around 1.1 million tons. Hence, there is a large potential for biomass co-generation from wood wastes and agriculture residues. A recent UNEP/NREL Solar and Wind Energy Resource Assessment project (SWERA) estimated more than 2,000 MW of wind energy potential in Ghana, mainly along the Togo border. The private sector has shown interest. For example, a Swiss wind developer, NEK, plans to build a 50 MW wind farm near Accra. Ghana is rich in resources, receiving an average annual solar radiation of 16 - 29 MJ/m2, with an annual sunshine duration of 1,800 - 3,000 hours. To date, the development of Solar-PV and solar water heaters has been mostly funded through grants and concessional loans from donors and government programs (DANIDA, Spanish, and UNDP/GEF). As a result, nearly 5,000 Solar-PV systems with a working capacity of 1 MW have been installed.
Challenges ahead
15. Looking forward, the challenge will be to enable the country to: (a) serve existing electricity customers better; (b) ensure financial viability of the sector; and (c) generate the opportunity and means to bring more power to more people. Accordingly, the major challenges before Ghanaian policymakers are in the areas of (a) efficiency of asset use; (b) commercialization; (c) rapid scale-up of energy access; and (d) institutional restructuring and capacity enhancement.
35 Annex 2: Major Related Projects Financed by the Bank and other Agencies Ghana: Energy Development and Access Project
Related World Bank Projects
Project Credit No. Sector Issue IP rating DO rating lending Co-financing (US$ mn) Ghana, EIB, Power/ Kuwait Fund for WAPP APL-1, 4092-GH Regional Satisfactory Satisfactory 40 Arab Economic Phase 1 Integration Development (WAED) Power/ WAPP APL-1, 42130-GH Regional Satisfactory Satisfactory 45 Ghana Phase 2 Ghana, NNPC, 50 (Partial Chevron, Shell, B-006-0- WAGP I Oil& Gas/ Satisfactory Satisfactory Risk SoBeGaz, GH Regional I Guarantee) SoToGaz, I Integration I MIGA Ghana, EIB, Thermal Power Marginally Marginally 26820-GH 175.6 CDC, CFD, project2' generation satisfactory satisfactory KFAED, BADEA, ODA PRSC-4% 4186-GH Not applicable Satisfactory Satisfactory 140 MDBS partners 110 MDBS partners PRSC-5 Proposed Not applicable N/A N/A Micro, Small Employment and Medium 4139-GH creation in Satisfactory Satisfactory 45 IFC Enterprise MSMEs prgiect Rural Financial 3374-GH Rural finance Satisfactory Satisfactory 1 5.1 1 AfDB,IFAD Services Environmental Governance Proposed Environment N/A N/A 41 N/A project Trade & Employment Investment 3 114-GH creation/ Satisfactory Satisfactory 50.5 Ghana Gateway Power dist. for Small Towns Increase water Water Supply supply and 3971-GH Satisfactory Satisfactory 26 Ghana and Sanitation I sanitation Project services Strengthen Health management of Insurance Proposed N/A N/A 15 Ghana National Health I Project 1 1 Insurance I
21 Closed on December 3 1,2006.
28 Closed on June 15,2006. 36 Related development partner projects
1. JICA (US$5 million) has financed a Master Plan Study on Rural Electrification Using Renewable Energy Resources in the Northern Part of Ghana and is currently financing a Power Distribution System Master, including a GIS mapping, and certification of Solar-PV equipment and installation.
2. Agence FranCaise de Dbveloppement (AFD) is financing a study on the institutional arrangement for rural electrification, the recommendations of which have been included in this project. AFD is likely to finance a new investment project in the energy sector in 2008.
3. The US Millennium Challenge Account (MCA) approved a US$547 million anti-poverty program in Ghana, of which rural electrification is a component under the infrastructure package.
4. The Indian Export-Import Bank has provided US$15 million for rural electrification.
5. The China Exim Bank provided US$81 million for rural electrification and US$57 million for pre-payment meters for ECG.
6. UNDP is sponsoring an LPG program, the implementation of Multifunctional Platforms (MFPs) to promote productive uses for energy, and improved stoves through its Small Grant Program. A Global Village Partnership (GVP) initiative is ongoing, which is to identify priority areas for development, including for energy. UNDP and the World Bank are co-sponsoring this initiative.
7. The UNEPNNF Africa Renewable Energy Enterprise Initiative (AREEI) offers rural energy entrepreneurs a combination of enterprise development services with modest amounts of start-up financing.
8. UNEPNREUGEF are financing a “Solar and Wind Energy Resource Assessment” (SWERA).
9. IFC/GEF are financing “Lighting the Bottom of the Pyramid” to provide assistance to the Solar-PV development.
10. The Spanish government has provided 5 million Euro to install Solar-PV systems in public buildings such as schools, clinics, and police stations in remote rural areas of Ghana.
11. USAlD is providing TA for the development of rules and regulations for the operation of the secondary gas market.
12. The Government of the Netherlands (through 0ret.nl) has provided financing for rural electrification.
37 Annex 3: Results Framework and Monitoring
Ghana: Energy Development and Access Project
Institutional arrangements for results monitoring
1. Monitoring and Evaluation (M & E) for the project will be the responsibility of the Ministry of Energy through its Policy, Planning, Monitoring and Evaluation Department (PPMED). The Director of the PPMED will assume the responsibility of Monitoring and Evaluation Coordinator. The Coordinator will receive and analyze data and will submit regular monitoring reports to the Project Coordinator. The reporting frequency will be quarterly and based both on the flow of information from other divisions within MoE and data received from the implementing agencies, the PURC and the Energy Commission. The Monitoring and Evaluation Coordinator and colleagues from other departments in MoE will visit project sites regularly to supervise and verify the status of the project’s activities. Project management meetings within MoE will discuss the reports that result from these visits.
2. Project indicators will be derived from the following data producers:
MoE ECG VRA/NED The ARB Apex Bank
Additional data may be derived, as required from:
Energy Commission PURC
3. The Project Managers of VRA, ECG, and the ARB Apex bank and the Project Coordinator at MoE will be responsible for preparing quarterly progress reports on construction, procurement, financial management, implementation of environmental and social management measures (RAPS, construction and related environmental and social impacts, etc.), and the achievement of the project’s development objectives and related monitoring indicators. They will submit these reports to the Steering Committee and the funding agencies. The PPMED will consolidate information on the project’s results indicators from the reports they receive from the implementing agencies, in order to prepare consolidated quarterly M & E reports for submission to the Steering Committee and the funding agencies. The Steering Committee will use the progress reports and the M & E reports to monitor project implementation and to make changes if necessary.
4. At the time of the project’s mid-term review and completion, the MoE will contract to a local consulting firm to carry out a thorough evaluation of the project’s achievement of its development objectives and results indicators. MoE will submit the mid-tern and final evaluation reports to the Steering Committee and the funding agencies.
38 Assessment of M & E capacity
5. The appraisal mission’s assessment of Ghana’s capacity to monitor the key outcomes of the project concluded that the existing M & E system at MoE offers an adequate starting point for using sectoral M & E systems to monitor the progress of the project. The assessment further noted that overall the MoE has established good upwards/downwards linkages of data flow, though they would benefit from being formalized in a sectoral M & E framework with a more systematic approach to data collection and dissemination. The MoE indicated that such an initiative is currently underway.
6. However, there is need for capacity development. Thus, the project will finance the provision of the recommended training on managing basic M & E systems, including collecting and analyzing data. The MoE has already made inquiries at GIMPA, which is one of the institutions in Ghana, which offers training on M & E. In addition, the National Development Planning Commission (NDPC) has planned training of MoE staff in relation to the sectoral M & E guidelines that they have drafted. The training is foreseen to take place in 2007. The assessment further recommended that the project organizes a workshop with key M & E stakeholders to identify a set of core sector indicators. This is planned to happen at the time of the project’s launch workshop after effectiveness.
Implementing arrangements for results measurement in the project
7. The project will use the indicators discussed in the tables below to measure the achievement of its objectives. The tables also indicate the agreed data collection and reporting arrangements and the institutions responsible for these tasks.
39 Table 3.1: Results monitoring framework
Ghana Electricity Sector Goals Relevant Indicators of Government Goals
Universal access to reliable electricity. Universal access to electricity (ultimate aim), Government will monitor its with an increase from 54% (2005) to 75% by own indicators as part of the 2015. GPRS . This is expected to contribute to Government’s goals of sustained growth of Meet a greater percentage of the electricity Additional resource over 6% a year, achievement of the MDGs, jemand of large enterprises to contribute to mobilization efforts to cover and reduced inequality. rustained economic growth. funding shortfalls. PDO Project Outcome Indicators Use of Project Outcome Information
To improve the operational efficiency of the m ECG’s Performance Verification Index To monitor project electricity distribution system and increase (PVI)~~. implementation, to make the population’s access to electricity. changes if necessary, and to National household electrification rate3’. help inform ex-post Global environment objective: Reduce decisions. greenhouse gas emissions through removal of m Tons of coz emissions avoided, calculated barriers to renewable energy markets. over the estimated lifetime of renewable energv eaubment installed under the Droiect. Intermediate Outcomes Intermediate Outcome Indicators Use of Intermediate Outcome Monitoring Component A: Sector and Institutional Development - ECG’s annual accounts receivable3’. Assess the performance of ECG to allow program - Improve distribution sector’s commercial - ECG‘s revenue collection rate (% of sales adjustment as required. performance revenue collected).
- Improve electricity tariff regime . Annual ratio of ECG’s revenues over its cost.
Component B: Distribution Improvement
- Reduce energy losses in ECG’s distribution - Annual distribution losses3*. Assess implementation networks progress to facilitate - Annual average hours of unplanned program adjustment if - Reduce distribution line forced outages distribution line outage per consumer. warranted.
Component C: Access Expansion
- Expand electricity access to new areas - Number of new consumers connected through Measure effectiveness of grid. the access expansion - Expand the use of renewable energy program and make - Number of new consumers connected through adjustments as needed. renewable energy ~ff-grid~~.
29 PVI (in percentage terms) is the ratio of revenue recovered and energy units received in the distribution system adjusted to the average end-user retail tariff. Increase in the PVI indicates efficiency improvement both through reduction in losses and improvement of commercial performance.
30 Household electrification is defined as having electricity in one’s residence, using GoG convention.
31 Excluding Government Ministries, Departments and Agencies, and Ghana Water Company Ltd.
32 Annual distribution losses are measured as the (ECG’s annual GWh purchases minus its annual GWh sales) divided by annual GWh purchases.
33 Off-grid includes solar home systems (SHS), Solar-PV systems for commercial and public sector customers, and solar lanterns. 40 I I I
3m C -5C 22 d 4 4 4
0 5 0 vi 8 0 3 2 -V I- r c0 0 A /$ c" c V
0 go - 06 00 A 0 vi 8 II s 2 V j: 1; I I
W
z Io I
Inn P
I 1 Annex 4: Detailed Project Description
Ghana: Energy Development and Access Project
1. The project’s development objective is to improve the operational efficiency of the power distribution system and increase the population’s access to electricity. The project has three principal components:
Component A: Sector and Institutional Development (US$14 million); Component B: Distribution System Improvement (US$94.4 million); Component C: Electricity Access Expansion and Renewable Energy Development (US$ 10 1.2 million).
2. The total project cost amounts to US$210.6 million of which the IDA Credit will finance US$90 million (including US$ 1 million Project Preparation Facility).
Component A - Sector and Institutional Development (US$13.99 million: IDA, US$6.05 million; SECO, US$6 million; GEF, US$0.75 million; and Government, US$1.2 million).
Implementing Agencies: Ministry of Energy (Parts Al, A3, and A4) and ECG (Part A2). Beneficiaries: MoE, Electricity Company of Ghana (ECG), Volta River Authority (VRA), the Energy Commission, the Public Utilities Regulatory Commission (PURC), and the Environmental Protection Agency (EPA).
3. A1 -- Regulatory Capacity Strengthening (US$1.76 million: IDA, US$1.3 million; SECO, US$200,000; GEF, US$25,000). This sub-component will enhance PURC’s capacity to perform its mandate of economic regulation of the power sector entities and consists of five parts.
(a) Technical and operational reviews of VRA and ECG (IDA-financed). This activity will analyze VRA’ s and ECG’s performance and capacity in planning, engineering, operations and maintenance, corporate and customer service, and to propose measures for improving their performance. The activity will increase PURC’s knowledge base for regulating the operations of VRA and ECG. In particular, it will thus strengthen the Commission’s capacity to review VRA’s and ECG’s tariff applications and monitor their performance. The results of the reviews also will feed into the design of the targets in the enhanced Performance Contracts between the Government and the Boards of VRA and ECG.
(b) Electricity cost of service and tariff study (IDA-financed). This study will review the cost of generation, transmission, and distribution and propose cost reflective bulk supply and retail tariffs levels and structures.
(c) Public education and communication campaigns (IDA-financed). This part will consist of activities to help PURC design and implement a campaign to inform consumers of tariff setting procedures.
43 (d) Develop renewable energy tariff methodology and scheme, and standardize Power Purchase Agreement for small-scale renewable energy projects (below 10 MW). PURC will coordinate this activity with the Energy Commission (GEF-financed).
(e) Training; and workshops (IDA & SECO-financed). This fourth part of the sub- component will consist of activities that will provide learning opportunities for several commissioners and senior staff, such as study tours and short-term training courses.
5. A2 - Corporate Strengthening Program for ECG (US$6.7 million: IDA, US$0.98 million; SECO, US$5.7 million). The project will provide ECG with the management and staffing capacity to implement the required operational and financial performance improvement measures that complement the distribution investments in component B. The component consists of two parts to improve ECG’ s operational performance: a Management Support Service Agreement (MSSA) and institutional development and capacity building.
(a) MSSA for ECG (SECO-financed). This agreement will provide a three- to five-year technical assistance program to enhance ECG’s management capacity and introduce the company to good commercial management practices. The MSSA should facilitate achievement of the operational and financial targets that the Performance Contract between the Government and ECG’s Board of Directors will include. In parallel, the project’s Distribution Improvement Component will provide funds to implement the efficiency measures necessary to achieve the operational targets. The Government will select a team of experienced individuals from a private firm or power utility company to support key management functions in ECG.
(b) Institutional Development and Capacity Building (IDA-financed). This part of the sub- component will provide technical assistance, studies, and capacity building for ECG management and senior personnel. The findings of the technical and operational reviews for ECG will help to identify specific activities to improve the company’s performance, which ECG’s Board will approve. The component will also finance studies to support the setting-up of ECG’s rural electrification cost center and to define future distribution investment needs.
6. A3 -- Sector Policy and Strategy Development (US$1.96 million: IDA, US$1.24 million; SECO, US$lOO,OOO; GEF, US$500,000; and GoG, US$l10,000). This sub-component will have three parts: overall power sector development; renewable energy development; and project management and related studies.
(a) Power Sector DeveloDment (IDA-financed). This part of the sub-component will enhance the Government’s existing mechanism for monitoring the performance of VRA and ECG, through annual corporate performance contracts that define the Government’s targets for the companies’ financial and operational performance. It will also strengthen the MoE’s capacity to monitor the performance of the power companies and coordinate power sector development in general. In particular, this first part of the sub-component will finance the following activities.
(i) The preparation of the enhanced corporate performance contracts for ECG and VRA, which will incorporate the findings of the technical and operational audits
44 that the project will implement and the design of monitoring and reporting arrangements.
(ii) The development of an institutional strategy for the MoE to build its institutional capacity for better coordination of the energy sector and donor support to it.
(iii) Energy development studies, including development of a competitive framework for contracting Independent Power Producers.
(b) Renewable Energy Development (GEF-financed). This second part of the sub- component will consist of technical assistance and studies to enhance the capacity of the Energy Commission to promote the increased use of renewable energy to meet the energy needs of the economy34. These activities are as follows:
(i) Development of a Renewable Energy Law along with detailed regulations, implementation strategies, institutional, implementation and monitoring arrangements.
(ii) Renewable energy resource assessments and dissemination of the results to private sector to develop renewable energy projects.
(iii) Information and awareness campaigns for decision makers, utility companies, the private sector and consumers to promote renewable energy development, energy efficiency and environmental impact assessment.
(iv) Development of a policy and regulatory framework for the development of biofuels and woodfuels.
7. A4 -- Environmental, Social and Project Management (US$3.2 million: IDA, US$2.1 million; and Government, US$1.1 million). This sub-component will focus on increasing MoE’s capacity for effectively managing the project, and for monitoring and evaluating the project’s outcome. It will consist of four parts: project coordination; environmental monitoring; monitoring and evaluation of project outcomes; operation of the interim Access Secretariat; and project studies.
(a) Project Coordination. This part of the sub-component will finance transitional capacity- building measures and operational assistance to increase coordination of power sector operations until the MoE has put in place permanent arrangements based on the institutional development study that the project will finance. It will support the following activities to facilitate project and sector coordination: (i)consulting services (project coordinator, procurement specialist, financial management specialist and environmental advisor)35; (ii)equipment -- office equipment
34 The Energy Commission licenses and carries out technical regulation of energy operators.
35 Environmental advisor for 18 months in the Project Coordination Team to provide interim environmental and social impact management capability to MoE and ECG until permanent staff are engaged in ECG and REA.
45 and vehicles; (iii)operating costs such as fuel, vehicle maintenance, and travel; and (iv) training and workshops.
(b) Environmental Monitoring. This second sub-component will provide technical assistance, consulting services, and training to MoE, EPA, ECG and VRA, in environmental management practices. It has two parts:
(i) Technical assistance to EPA for: (a) annual reviews of the quality of the Environmental Assessments prepared under the project in the use of country systems pilot; (b) an assessment of EPA’s internal resource allocation for Environmental assessment^^^; (c) development of Environmental Management Plans (EMP) and public consultation guidelines and provision of related training37; (d) incremental operational costs for intensified monitoring of compliance with environmental assessment regulations and guidelines.
(ii) Training for professional development of VRA’ s social and resettlement officers.
(c) Monitoring. and Evaluation of Proiect Outcomes. This sub-component will finance technical assistance and training to the staff of PPMED and MoE in monitoring and evaluation of project outcomes. In addition, the sub-component will finance short-term consultants to conduct mid-term and completion assessments of the project’s progress and its achievement of its development outcomes.
(d) ODeration of Interim Access Secretariat. This sub-component will finance the staff (Access Manager, Legal Advisor, Planning Engineer, Renewable Energy Expert, Secretary and Driver) and operation of the interim Access Secretariat at MoE to manage the electrification programs for one year-and-a-half until the establishment of REA, with the government’s own funds.
Component B -- Electricity Distribution System Improvement (US$94.4 million; IDA, 40.5 million; ACGF, US$15 million; AfDB, US$18.2 million; ECG, US$20.7 million).
Zmplementing Agency: Electricity Company of Ghana Beneficiary: Electricity Company of Ghana
8. This component contains two sub-components that together will help to improve the operational efficiency of the distribution system. The component will target investments and interventions that aim to improve quality and reliability of electricity distribution, reduce distribution losses, and equip ECG with modern tools to help the company improve its customer service and commercial operations. These two-sub components are: (a) the distribution system upgrade, focused on improving the technical aspects of the sub-transmission and distribution system; and (b) the commercial and technical capacity upgrade, which will provide for more responsive customer service, improved billing and collections for power supplied; and
36 US$15,000 consulting services, US$5,000 travel, US$5,000 consultation workshops.
37 US$30,000 in consulting services, US$lO,OOO consultation workshops, US$15,000 training.
46 information technology for greater analytical use of the customer database workflow planning, and other mechanisms available to modern power utilities for enhancing efficiency and customer relations.
9. B1 -- Distribution System Upgrade (US$68.9 million: IDA, US$33.1 million; AfDB; US$18.2 million; ACGF; US$4.7 million; and ECG; US$12.9 million).
(a) Activities financed by IDA (with co-financing from ECG)
(i) Upgrade and construction of 33/11 kV substations; 33 kV and 11 kV overhead lines and switchgear in selected areas. This activity will improve the outreach of the distribution system, and its reliability by helping to reduce both outages and technical losses. The sub-component will focus specifically on resolving the overloading problems that have been experienced in the Sowuthum, New Adenta, Dowoda, Kwabenya, and Burma Camp substation areas in Accra, and Dahwenya substation area in Tema. This sub-component will also involve construction of a double-circuit 33 kV line to link the planned Bulk Supply Points and the relevant substations. It will also involve erection and rehabilitation of associated 11 kV networks. The above investments will help disperse load demand to the new bulk supply points, serve new communities, and improve load management and operational efficiency.
(ii) Addition or replacement of distribution transformation facilities and materials required for network maintenance and expansion. This involves an injection of over 500 distribution transformers and 11 kV and Low-Voltage line extensions. The investments will help ECG to augment distribution capacity to match demand, correct voltage drops, and maintain a reasonable redundancy factor.
(iii) Rehabilitation of Low-Voltage lines. The sub-component will rehabilitate these lines in selected areas to sh-engthen the distribution network, reduce technical losses.
(iv) Reconfiguration of Parts of the Low-Voltage Distribution System into a High- Voltage Distribution System (HVDS) for the peri-urban areas of Accra and Tema. This part will finance the replacement of selected smaller capacity transformers with larger transformers that step down voltage from 11 kV to 220 V at several points along a supply line instead of at one point only. This part of the sub- component will also finance the replacement of the existing long, low-voltage lines, in selected areas with shorter, insulated, aerial bunched cables. There are several advantages to this reconfiguration. It will reduce technical losses due to reduction of output currents. Moreover, the high-voltage lines and the insulated low-voltage lines make it difficult, if not impossible, to commit theft, leading to non-technical loss reduction. Other advantages include improvement in quality of supply due to improvement of tail-end voltage and reduced interruptions in supply as breakdown of small capacity transformers will have an impact on far lesser customer connections as compared to large capacity transformers that ECG currently deploys in distribution networks.
47 (b) Activities financed bv AfDF (with co-financing from ECG)
(i) Upgrading and construction of 33/11 kV substations and 33 kV and 11 kV overhead lines and switchgear in selected areas. This sub-component will involve construction of a second Bulk Supply Point (BSP) in Kumasi to relieve capacity constraints. Also, this activity will involve construction of two new 33/11 kV primary substations in Kumasi to relieve the existing facilities, which are heavily loaded and to provide for future load growth. This sub-component will also finance upgrading of the existing Mallam BSP to facilitate better evacuation of power. Construction of new 33 kV feeders along with associated 11 kV lines will also be undertaken. Thus, this activity will improve the outreach of the distribution system, improve reliability in terms of reduced outages and help reduce technical losses.
(ii) Rehabilitation of Low-Voltage lines in selected areas. The focus of this rehabilitation will be to strengthen the distribution network, and thus reducing technical losses.
(iii) Reconfiguration of parts of the low-voltage distribution system in the Takoradi and Kumasi areas. The transformation of this system into a high- voltage distribution system in these areas of activity will expand similar investments described in Bl(a) (iv) above.
(c) Activities financed bv ACGF (with co-financing from ECG)
(i) Addition and replacement of distribution facilities and other materials required for network maintenance and expansion. This complements and augments support described above.
(d) Activities financed bv ECG
(ii) Provision of shunt capacitor compensation in selected parts of the network. This component will reduce reactive power requirements, improve voltage profiles, and improve power factors. It will thus reduce technical losses and improve the quality and reliability of supply.
10. B2 -- Commercial and Technical Capacity Upgrade (US$25.5 million: IDA, US$7.4 million; ACGF, US$10.3 million; ECG US$7.8 million).
(a) Activities financed bv IDA (with co-financing from ECG)
(i) Establishment of new ECG customer service centers and district offices. This activity will include the provision of vehicles for the project’s implementation team. It also will bring customer services closer to customers.
48 (ii) Replacement of faulty meters in the entire coverage area of ECG . The provision of new meters will help facilitate correction of customer metering and billing problems. The project will also provide for automatic meter testing and calibration facilities for ECG. In-house meter testing capabilities are essential to keep the metering function efficient. In addition, the project will address re-routing of service tails to improve the quality of service and sanitize the metering of energy consumption.
(iii) Extension of local area networkdwide area networks to district offices and customer service centers and development of applications for material management. This sub-component will reduce the lag time in submission of bills, facilitate correction and validation of bills, and improve overall business process efficiency through Information Technology platforms and applications.
(iv) Provision of construction and installation equipment and technical and office tools. This component will help improve ECG’s in-house capabilities for network construction and switchgear installation. It will also help ECG to manage the project activities and to monitor improvements in service quality and reliability that will be introduced by the project.
(v) Training and capacity building for ECG operational personnel. This sub- component includes various training programs to enhance the operational capacity of staff in areas of project management, engineering, procurement, SCADA operations, energy efficiency management, tariff design etc..
(vi) Design and supervision. This sub-component will finance design and supervision engineering services to facilitate efficient design of the project components and effective supervision of their implementation.
(b) Activities financed by ACGF (with co-financing: from ECG)
(i) Establishment of an ECG-wide trouble call center. This sub-component will specifically address the issue of unscheduled outages and will help improve the response time of ECG to customer complaints. Apart from helping to reduce the average customer interruption duration, this will also help address complaints that relate to commercial operations of ECG such as billing, new service connections etc..
(ii) Technical support to supplement the network and database management system. This sub-component will help ECG retain the services of an expert for a period of one year to train staff and facilitate the ongoing development of the FACIPLUS38network database and distribution management system. This activity will improve ECG’s operational capacity in low-voltage network planning in the Western, Eastern, Central and Volta regions.
38 FACIPLUS: A network database and management tool.
49 Extension of the pre-payment metering system from the Accra region to the Western, Central and Volta regions. This sub-component will help reduce non-technical losses and improve revenues.
Secondary substation metering and provision of summation current transformers. This sub-component will provide ECG with the necessary equipment to meter energy flows from primary and secondary substations. It will improve ECG’ s operational efficiency and reduce losses.
Marketing, customer education, and customer perception surveys. The assistance will help ECG to improve its communication with its clients to ensure effective implementation of its commercialization initiatives. The customer perception surveys will help ECG to design mid-course corrections to the project as warranted.
Development of secondary automation and supervisory control and data acquisition (SCADA) systems for rural networks and for the Takoradi and Kumasi areas. This sub-component will help reduce down-time on faulty rural lines in the Western, Eastern, Central and Volta region networks and in the Kumasi and Takoradi networks. It will also reduce network congestion, facilitate effective load management and provide crucial data that can be used for network design and energy audit.
Component C -- Electricity Access and Renewable Energy Development (US$101.2 million: IDA, US$42.5 million; ACGF, US$35 million; SECO, US$5 million; GPOBA, US$6.25 million; GEF, US$4.75 million; and private equity/loans, consumers, rural banks, US$7.75 million).
Implementing Agencies: MoE, ARB Apex Bank, ECG, and VRA/NED Beneficiaries: ECG, VRAPNED, rural banks, and rural energy consumers
11. A major contribution of this component will be assistance in establishing a new institutional and policy platform from which to launch an innovative, multi-faceted approach for expanding electrification in Ghana. In this context, the component will establish an independent Rural Electrification Agency (REA), which will coordinate all rural electrification programs and determine areas to receive electrification based on transparent eligibility criteria and commercial principles. This component has the following five sub-components that correspond to the various options that REA will employ to provide access to electricity service, depending on the location, size and income level of a given target population.
12. C1 -- Intensified use of existing distribution systems (US$24.6 million from IDA). This sub-component will make it possible for ECG and NED to add new consumers in peri-urban and rural areas where grids already exist. The sub-component will finance the strengthening of the 33 kV network, construction of 11 kV and Low-Voltage distribution networks, transformers, poles, connection services (drop lines, meters, etc.) and associated equipment in selected towns in the Eastern, Western, Ashanti, Volta, Central, Greater Accra regions, and in Northern Ghana. Based on an independent evaluation of ECG’s and NED’Spre-feasibility studies the sub-
50 component will cover all towns in these districts where the estimated average cost per connection was below US$300. This sub-component is divided into three parts: one for each of the two distribution networks -- ECG and NED -- and a third for design and engineering services covering both networks.
(a) ECG (US$19.5 million). The first part of the sub-component will support ECG’s program to intensify electrification in 412 rural and peri-urban towns of 38 districts in the Eastern, Western, Ashanti, Volta, Central, and Greater Accra regions, with connections of about 55,000 new customers. ECG will procure four supply and installation contracts to construct these projects -- one each for the Central, Volta, Ashanti, and EasterdWestedGreater Accra regions. This component will also provide engineering services for detailed technical design and supervision of the program.
(b) VRA/NED (US$5.1 million). The second part of the sub-component will support NED’S intensification projects in 15 1 towns/villages in four NED-covered regions of Ghana (Northern, Upper East, Upper West, and Brong-Ahafo region), with connections of about 20,000 new customers. NED will procure the materials internationally in four packages, and hire local contractors for installation. This component will also provide engineering services for detailed technical design and supervision of the projects.
13. C2 -- Grid Extensions (US$50.4 million: IDA, US$10.3 million; ACGF, US$35 million; and SECO, US$5 million). The second sub-component will finance the extension of power lines and equipment required to connect new consumers to electricity supply, including distribution lines and transformers. In particular, the project will finance the construction of 33 kV and 11 kV lines to connect the project areas to the national grid, step-down transformers, low-voltage distribution networks and consumer meters. The sub-component will support the connection of about 530 rural towns and villages in 26 districts in the Eastern, Western, Ashanti, Central, Volta, and Great Accra regions. The grid extension projects together will have the capacity to connect about 59,000 new customers. The three co-financiers of this component have divided the districts and towns for their support as follows.
(a) IDA financing will support grid extension projects in 143 rural towns and villages of 7 districts in the Eastern, Western, Ashanti, and Central regions, with connections capacity of about 24.000 new customers.
(b) ACGF financing will support grid extension projects in 298 rural towns and villages of 12 districts in the Eastern, Western, Ashanti, Volta, and Great Accra regions, with connections capacity of about 3 1,000 new customers.
(c) SECO funding will connect new customers in 89 rural towns and villages in seven districts in the Central region.
14. IDA, ACGF and SECO will disburse their funds to a designated account at MoE initially and later to the Rural Electrification Fund as its start-up capital -- once it is established with adequate management and operating policies to provide capital grants to implement projects that meet established economic viability criteria. The Rural Electrification Fund will eventually
51 develop into a permanent mechanism for financing rural electrification by eligible public and private electricity providers. However, for this project, the Government has pre-selected the above-mentioned towns and villages from an existing list of electrification projects. These projects will be implemented by ECG. An independent consultant has validated the costs3’.
15. C3 -- Mini-Grids and Grid-Connected Renewable Energy (US$9.1 million: IDA, US$3.1 million; and private sector US$6 million). This sub-component will provide RE grants to eligible developers to develop 5 - 7 mini-grid systems, such as village hydro, and 2 - 3 grid- connected renewable energy such as small hydro, wind, and biomass (1 - 10 MW). The larger projects will feed into the grid. Combined, these systems can provide electricity to about 20,000 new customers. Studies carried out during preparation have identified several potential mini-grid sites, which have lower lifetime costs than diesel generation and grid extensions. The final selection of the sites will be based on business proposals from mini-grid developers. In addition, this sub-component also supports Solar-PV systems for public institutions such as schools and clinics. REA will concession out installation to public institutions to the private sector to supply, install, and maintain Solar-PV systems. The project will coordinate closely with the IDA- financed Health Insurance Project, which plans to provide solar panels to clinics.
16. Typically, the developers of mini-grids are local entrepreneurs or community-based organizations. These project developers usually lack access to long-term loans to match the long payback period of such projects. To enable the development of mini-grids, the project has adopted an innovative mechanism to provide capital subsidies and long-term loans. First, part of the IDA Credit will be disbursed to the Rural Electrification Fund -- once it is established with adequate management and operating policies. The sub-component will provide partial capital subsidies to developers that meet established minimum requirements of financial and technical competence as outlined in the REF Operational Manual, and whose projects meet established economic viability criteria. Second, to provide access to additional debt financing as required, the project has arranged for the developers to access financing through the IDNIFC Micro, Small, and Medium Enterprises (MSME) Project. The MSME project improves credit terms for small and medium enterprises through a joint partial credit guarantee and a line of credit facility that provide a credit risk sharing mechanism and liquidity support to the participating banks, so that the banks can provide MSMEs loans with longer maturity periods.
17. C4 -- Solar-PV systems (US$10.9 million: IDA, US$3.1 million; GPOBA, US$6 million; and rural banks and consumers, US$1.75 million). This sub-component will focus on removing several barriers to providing solar-based electricity to rural areas, including technical problems, consumer awareness of the advantages of the systems, the inadequate development of a market for them and the lack of financing sources to make these systems affordable for low-income consumers. These systems typically will be Solar-PV systems (2.5 - 200 Wp), which are practical for providing small amounts of lighting in areas away from power lines.
18. Because of the high upfront cost of solar home systems (SHS), only a small portion of rural households will be able to purchase them on cash basis. To overcome this barrier and ensure sustainability of the systems, the design of this sub-component has three innovative features. First, it will support a dealer saleskonsumer credit model, where dealers compete for
39 Hifab AB, 2007.
52 customers in an open market, most of whom will finance the purchase of the solar s stems through affordable consumer credit or microfinance from participating rural banks4J . Second, the sub-component will bundle supply, installation, maintenance, and battery replacements into one service package to ensure project sustainability and loan repayment.
19. The sub-component will not finance any equipment directly but will use the following financing incentives to stimulate the greater use of Solar-PV systems.
(a) Line-of-Credit Facility (IDA: US$3 million). This activity will establish and operate a revolving line-of-credit facility. Part of the IDA Credit will be on-lent to participating rural banks, through ARB Apex Bank Ltd, to provide the necessary long-term liquidity for financing consumer loans for SHS41. The IDA line of credit will provide 80% long-term liquidity to participating rural banks, through ARB Apex Bank, for consumer loans, and the rural banks will contribute 20% of the loans. The participating rural banks will bear the repayment risk. Repayment of the line-of-credit will be retained in a revolving fund to provide additional consumer credit (and grants if needed) to purchase Solar-PV systems, which will be managed by ARB Apex Bank on behalf of the government. This line-of-credit allows rural banks to refinance loans with repayment terms of up to three years so that the consumers' monthly payment for a SHS is commensurate with their current payments for kerosene and batteries and rural banks do not over-extend their own funds, which are short-term in nature.
(b) Solar-PV Grants (GPOBA: US$6 million). These output-based grants42will provide partial subsidies to consumers to make solar home systems (SHS) affordable and ensure adequate demand as an incentive to suppliers to move into remote, relatively poor areas. The participating rural banks will administer the grants, which will provide about 50% of the full cost of SHS including supply, installation, maintenance, and battery replacement; the balance is paid by consumer down payment of 10% and consumer loans of 40%.
20. C5 -- Capacity Building (US6.2 million: IDA, US$1.2 million; GEF, US4.75 million; and GPOBA, US$0.25 million). This sub-component will have three parts. First, it will provide technical assistance to the Access SecretariaVREA to design and supervise projects for increasing access to power and hire transaction advisors for grid-connected renewable energy projects. Second, the component will provide business development support to the private sector to develop renewable energy projects, and support to AGSI for training and Solar-PV promotion. Third, the component will provide capacity building and implementation support to the ARB Apex Bank and participating rural banks to provide credit to support the development of the Solar-PV for rural areas.
(a) Technical Assistance to Access Secretariat and REA (IDA US$1.2 million). This part of the sub-component will assist the MoE and REA in developing the required new institutional,
This model builds on successful experience from Bangladesh and Sri Lanka.
41 Compliance with OP 8.3 is discussed in Annex 16.
42 The GPOBA concept note has received eligibility, but final approval of the GPOBA grant will be determined at the commitment stage pending incorporation of GPOBA comments and availability of funds.
53 regulatory, and financing framework for access expansion, including establishment of the Rural Electrification Fund as a long-term financing mechanism for future access and renewable energy development. It will also assist the Government in articulating the rural electrification policy to clearly define grid extension plans and off-grid areas, which will allow off-grid project developers to plan ahead. It will assist in the development of access expansion strategies and support to the Access Secretariat and REA in managing the REF (excluding expenses for the staff at the Access SecretariamEF).
(b) Support to REA and, until its establishment, MoE to carry out renewable energy feasibility and development studies, develop a rural electrification master plan and regulatory instruments for renewable energy mini-grids, and prepare bidding and contracting documents for grid-connected renewable investments (GEF US$1.2 million).
(i) Studies and technical assistance for renewable energy development. This includes consulting services for development of regulatory guidelines and rules for renewable energy mini-grids; a rural electrification master plan to clarify roles for grid and renewable energy off-grid (US$500,000).
(ii) Preparation of bidding packages and hiring transaction advisors for grid- connected renewable energy projects (US$750,000).
(c) Capacity-buildinn to the Private Sector for the development of Renewable Energy Projects (GEF US$2.8 million).
(i) Matching grants (US$2.3 million). The project will provide up to 50% in a matching grant to renewable energy project developers (such as wind, biomass, small hydro, and Solar-PV). Eligible activities include business plans, market development, feasibility studies, loan application documentation, environmental and social impact assessment of small and mini-hydro projects, set-up of local Solar-PV dealership, etc. Each sub-project will have a maximum ceiling. The detailed rules and procedures for the matching grants will be developed in the Operational Manual prior to disbursement of this sub-component.
(ii) Technical assistance to the Association of Ghana Solar Industry to conduct Solar- PV promotion campaigns and training programs to local Solar-PV dealers (US$0.5 million).
(d) Capacity-building and Implementation Support to ARB Apex Bank and participating Rural Banks (GEF US$700,000).
(i) Management of the IDA line-of-credit and GPOBA Solar-PV grants. This includes set-up costs, operating costs, consultant costs, etc..
(ii) Development of financial products; design of tripartite agreements between rural banks, dealers and consumers; promotion of Solar-PV systems; training courses, study tours, etc..
54 (e) Monitoring and Verification Services (GPOBA US$150,000). The project will assist the ARB Apex Bank to engage approved inspection agents to check that solar equipment and installers meet minimum technical standards, and to verify that the consumer installations are properly completed, before participating rural banks make payment to dealers.
55 Annex 5: Project Costs
Ghana: Energy Development and Access Project
IGEF AfDB 7-rACGF GPOBA Private
0.75
18.21 15.00 18.21 4.68
10.33
35.00 6.25 7.75
35.00
6.00 6.00 1.75 0.25
50.00 6.25 7.75
Status of co-financing:
SECO (Swiss) has approved its co-financing. GEF council approved US$5.5 million in June 2006 and the Chief Executive Officer of GEF endorsed it on June 20,2007. GPOBA is expected to approve its funding in December 2007. AfDB has confirmed the availability of US$18.25 million for the distribution component. ACGF has approved US$50 million. GoG and ECG confirmed their co-financing at negotiations.
56 Annex 6: Implementation Arrangements
Ghana: Energy Development and Access Project
Ministry of Energy (MoE)
1. The responsibilities of MoE will include overall project coordination and management of the project’s components for which it is the designated implementing agency.
Overall project coordination
2. Steering Committee. MoE will be responsible for organizing the semi-annual Steering Committee meetings under the chairmanship of the Minister. The Steering Committee members will consist of senior managers of ECG, VRA, the ARB Apex bank, PURC, the Energy Commission, and members of private industries. The Steering Committee will:
0 review progress made towards achieving the Project’s objectives;
facilitate the coordination of project’s activities among the entities represented in the Steering Committee, giving particular attention to removing any obstacles to the implementation of the project; and
provide comments on reports prepared by the agencies responsible for implementing the project’s various components for the benefit of the Government and the co-financiers.
3. Technical Committee. MoE will organize the quarterly meetings of the project’s Technical Committee, under the chairmanship of the Project Coordinator. The Technical Committee will consist of the Project Managers of each implementing agency.
4. Project Coordination Team (PCT). The MoE, through its PCT, will prepare and furnish to the co-financiers, for their approval, not later than October 3 1 of each year during the implementation of the project, an Annual Work Plan and Budget for the project. This document will contain all eligible project activities and expenditures planned for the following fiscal year, including specifying the sources of financing for each contract for expenditures eligible for financing from each such source and the percentage of financing of each contract from each source. The PCT will prepare the report based on submissions from each implementing agency. The PCT, through the Ministry’s Monitoring and Evaluation Unit, will be responsible for monitoring the achievement of the development objectives for the project as a whole. Towards this end, the PCT will collect and analyze data for assessing the achievement of the target indicators of progress with respect to meeting development objectives, as specified in the project’s results matrix (Annex 3).
5. Finally, the PCT, in coordination with the Environmental Protection Agency (EPA), will ensure the implementation of all necessary environmental and social monitoring and management activities in accordance with the environmental and social management plans and
57 Resettlement Action Plans. As part of its reporting, MoE will monitor the status of gap-filling measures for equivalence and acceptability at six-month intervals. MoE will annually forward copies of the EPA review of the quality of environmental assessment instruments prepared under the project to the World Bank and AfDB.
Management of components
6. The MoE through the PCT will manage sub-components A1, A3, and A4 of the Sector and Institutional Development Component. The PCT will be responsible for all procurement, contract management, financial management of project funds, preparation of progress reports, updating of project costs and financing plans. In this context, the PCT will:
Take responsibility for quality control and obtaining “no-objections” from the co- financiers as well as dissemination of the studies to relevant stakeholders and monitoring the implementation of agreed recommendations of the studies.
Approve all annual training plans for entities and benefiting institutions under components Al, A3, and A4.
Monitor, in consultation with MoFEP and the State Enterprises Commission, ECG’s and VRA’s performance under the enhanced performance contracts that will be put in place under the project.
7. The PCT will work closely with the PURC, the Energy Commission (EC), and the EPA on activities benefiting these institutions. The PURC, EC and EPA will prepare the first drafts of terms of reference (TORS) and tender documents for consulting assignments and participate in the evaluation of proposals. Annually, in September, the PCT will prepare an annual work plan and budget for the activities it manages as an input to the project’s overall annual work plan and budget. The PCT will prepare quarterly progress reports and interim financial management reports and send them to the co-financiers for review.
8. The PCT will report to the Minister of Energy. In addition to the Project Coordinator, the PCT members include a Procurement Officer, an Accountant, an Environmental Advisor, and Monitoring and Evaluation Officers. The Environmental Advisor will be engaged for 18 months to provide interim environmental and social impact management capability to MoE and ECG until REA and ECG appoint permanent environmental staff. In keeping with the Ministry’s normal reporting structures, the Accountant will be placed in the Finance and Administration Department and report to its Director. The monitoring and evaluation officers are in the Policy, Planning Monitoring & Evaluation Department and report to its Director. The procurement Officer and the Environmental Advisor will report directly to the Project Coordinator. The PCT will draw on additional expertise as required from the Ministry’s Departments. While the monitoring and evaluation officers are permanent employees of the Ministry, the project will finance the staff costs of the other PCT members until such time that the MoE has put in place adequate institutional arrangements for sector coordination activities following the recommendations of a study to be financed under the project. The graph below shows the organizational structure of the Ministry of Energy.
58 Figure 6.1: Organization Structure of the Ministry of Energy [GiiGiF)
Coordination
Chief Director
I I I I I I Director, Director, Director, Power Petroleum HR
HR: Human Resource PPME: Policy, Planning Monitoring & Evaluation F & A: Finance & Administration R, S & I:Research, Statistics and Information
Electricity Company of Ghana, Ltd. (ECG)
9. ECG will be responsible for implementing the Distribution Component in its entirety. Also, ECG will implement the sub-component of the Access Component that provides for access through more intensified use of ECG’s existing distribution network, and its own corporate strengthening under the Sector and Institutional Development Component. More specifically, ECG’s Department of Engineering will manage the Distribution Component. Its permanent staff consists of a project manager, a design manager, a construction manager, a procurement manager, and a disbursement specialist. ECG will use staff from its project Accounting Unit to manage the project funds designated for the project activities that ECG will handle.
10. The sub-component for expanding access through intensifying the use of ECG’s grid will have its own project manager - a permanent staff member of ECG’s Rural Electrification Unit, which is under the Department of Engineering. ECG’s senior management team will supervise the corporate strengthening program. ECG will bear all staff costs. The project will finance the services of engineering consultants to assist in the detailed engineering design and construction supervision of the investment components.
11. ECG’s project managers for distribution and rural electrification will attend the quarterly Technical Committee meetings; supervise the preparation of annual work plans and budgets for submission to MoE; provide the required data on progress monitoring indicators to MoE; and prepare quarterly progress reports, incorporating the interim financial management reports prepared by the Accounting Unit.
59 12. ECG’s project managers will ensure that the project is implemented in accordance with the provisions of the environmental and social safeguard instruments and the Resettlement Policy Framework (RPF). The project managers will ensure that ECG will: (a) prepare, disclose and implement any necessary Resettlement Action Plans in accordance with the RPF; and (b) prepare and disclose any necessary Environmental Impact Assessments; and (c) prepare, disclose and implement any necessary Environmental Management Plans, and obtain any necessary EPA approvals and permits. ECG will appoint an Environmental Officer to assist the Project Managers with the above tasks. It will appoint the Officer 15 months after effectiveness with its own financing. The project will provide training to ECG on the implementation of environmental management and monitoring activities.
Volta River Authority (VRA)
13. VRA’s Northern Electricity Department (NED) will be responsible for implementing the sub-component of the Access Component covering the northern part of the country through intensification of supply within NED’Sexisting power grid. VRA will rely on its experienced Project Implementation Unit (PIU) within its permanent organization, consisting of a Project Manager assisted by a Deputy Project Engineer and procurement officers. Furthermore, the PIU has access to key staff in other areas of project management, including finance and environmental impact, from the relevant departments in VRA. VRA will bear all staff costs. The project will finance the services of engineering consultants to assist in detailed engineering design and construction supervision.
14. NED’Sproject manager will attend the quarterly Technical Committee meetings; supervise the preparation of annual work plans and budgets for submission to MoE; provide the required data on progress monitoring indicators to MoE; and prepare quarterly progress reports, incorporating the interim financial management reports prepared by VRA’ s Accounting Department.
15. NED’SProject Manager will ensure that the project is implemented in accordance with the provisions of the environmental and social safeguard instruments and the Resettlement Policy Framework. The project manager will ensure that VRA’s environmental department will: (a) prepare, disclose and implement any necessary Resettlement Action Plans in accordance with the RPF; and (b) prepare and disclose any necessary Environmental Impact Assessments; and (c) prepare, disclose and implement any necessary Environmental Management Plans, and obtain any necessary EPA approvals and permits. The project will provide training to VRA’s environmental and resettlement staff on the implementation of environmental and resettlement management and monitoring activities.
Specific Implementation Arrangements for the Access Component
Overall responsibility
16. Interim Access Secretariat. The Secretariat will manage the Access Component for the first 18 months. Its staff will include: Project Manager, deputy Project Manager, Legal Advisor,
60 Project Engineers for rural electrification and renewable energy, and Support Staff. The Government will finance the staff costs from its budget.
17. Rural Electrification Agency (REA). The Government will transform the Interim Access Secretariat into a permanent REA by December 2008, through an act of Parliament. MoE will maintain the policy-making function. REA will provide oversight of the Government’s rural electrification program and manage the Rural Electrification Fund (REF). The REF will be established concurrently with the REA. The capitalization of the REF will come from increased levies on electricity bills, budget allocations, and grants from development partners. The REA will have its own Board, staff, and operational guidelines. The main functions of the REA will be to: a Develop rural electrification strategies and development plans, and propose regulatory guidelines. a Manage the REF, which will rovide partial capital grants to service providers that meet established eligibility criteriaB3 . a Sign legal agreements with service providers. a Supervise the implementation of rural electrification projects that have received grant funding from the REF. a Set up technical and operational standards and ensure their enforcement. a Coordinate with EPA to ensure compliance with environmental and social safeguards policies.
Responsibilities for the various sub-components
18. Component C1 -- Intensified use of existing grids. ECG and VRA/NED will implement this sub-component of the project. They will sign a Project Agreement with the World Bank and be responsible for procurement, financial management, and construction supervision of their respective projects. The Government will pass on part of the IDA Credit to ECG and VRA/NED respectively, as a grant under a Subsidiary Finance Agreement. This grant will cover the capital cost of the intensification projects. To facilitate the effective implementation and ring-fencing of the resources, ECG, which will receive the major part of the funds under this component, will establish a separate cost center for rural electrification. This designated cost center will allow ECG to identify the revenues and expenditures linked to subsidized rural electrification projects. This sub-component will finance a study to aid ECG in the establishment of the cost center. After the completion of the sub-components’ activities, Government will hand over the related assets to ECG and VRA/NED respectively. After the
43 The REF will have an Operational Manual that defines the method for calculating grant amounts for various types of projects based on transparent criteria, the eligibility criteria for the grants, the process of evaluating and selecting project proposals, the approval and administrative arrangements, etc..
61 project’s closing, these companies will be responsible for the operation and maintenance of the assets using their own resources and the revenue generated by the assets.
19. Component C2 -- Grid extensions. The donors for this sub-component initially disburse funds into a designated account at the Access Secretariat of MoE. The account will transfer to the Rural Electrification Agency (REA) once it is established and will provide the initial capitalization of the REF. The Access SecretariadREA will be responsible for developing project selection criteria, evaluating proposals from ECG and VRA/NED. Following evaluation of the proposals, REA will provide grant funds from the REF to cover 100% of capital cost of each approved sub-project based on appropriate contractual arrangements between the companies and MoE/REA as defined in the REF operational manual. After the Access SecretariatREA has approved the funding, ECG and VRA/NED will be responsible for procurement of the necessary goods and works and managing construction. The Access SecretariatREA will disburse funds against contractor invoices certified by ECG’ s and VRA’ s respective Supervising Engineers. ECG and VRA/NED will be responsible for the future operation and maintenance of the grid extension projects.
20. Component C3 -- Mini-grids. IDA initially will disburse funds for the mini-grid sub- component to the Designated Account at the Access Secretariat of MoE (same account as for grid extensions). The account will transfer to the Rural Electrification Agency (REA) once it is established and will provide additional capitalization of the REF. The MoE/REA will support mini-grid development via: (a) establishing transparent, competitive selection criteria; (b) evaluating proposals from potential service providers; and (c) providing partial capital subsidy from the REF to eligible project developers. Private sector companies and cooperatives will be responsible for procurement. Commercial practices, as agreed with the World Bank or other donors, will be applied to the construction and operation of the sub-projects. The Access Secretariat/REA will disburse funds against invoices from the project developers following certification by a Project Engineer.
21. Component C4 -- Solar PV systems. The ARB Apex Bank will be the implementing agency for the Solar-PV sub-component and will manage the related IDA-financed line-of-credit and GPOBA grant on behalf of the Government (see Annex 16). The ARB Apex Bank will sign a Project Agreement with the World Bank and a Subsidiary Financing Agreement with the Government. For the management of this sub-component, the ARB Apex Bank will designate staff from its Credit, Microfinance, Training, M & E, and Finance/Accounting departments. The Government and the project team have agreed that the ARB Apex Bank will hire, with project funds, a full-time project coordinator to supervise the activities that the ARB Apex Bank will implement under the project. For procurement activities, the ARB Apex Bank will use the Procurement Specialist already engaged under the Rural Financial Services project. The ARB Apex Bank will report quarterly on implementation to the MoE’s Project Coordinator.
22. Figure 6.2 shows the flow of funds for the installation and financing of Solar-PV systems. The ARB Apex Bank will disburse funds to eligible solar dealers, through participating rural banks, based on the criteria to be specified in its Operational Manual. The ARB Apex Bank will submit its annual work plans, budget, and training plans to MoE’s PCT for approval.
62 Figure 6.2: Flow of Funds for the Solar PV component:
World Bank
ARB Apex
Participating Independent /4*v Rural Bank PV Systems Solar-PV //// Inspector /*M4 Systems +4c Dealer (Accredited)
23. The participating rural banks will request financing from the ARB Apex Bank after providing evidence of the installations of systems in households that have requested financing. The ARB Apex Bank will hire independent inspection agents, approved by the Energy Commission, to verify that the dealer has completed the proper installation and that the installed equipment meets technical standards. To obtain funds from the ARB Apex bank for the installation of each Solar-PV system that requires extending credit to the consumer, the participating rural bank would have to provide the following documentation to support its request.
(a) Dealers Invoice. (b) Inspection Report with Client’s attestation. (c) List of Loan Agreements. (d) Formal Request stating amount involved by dealer. (e) Installation and service agreement per dealer.
24. The ARB Apex Bank will operate a Designated Account into which the World Bank will periodically disburse proceeds of the Credit. On receipt of claims from participating rural banks, the ARB Apex Bank will withdraw funds from the account and make payment to the rural bank
63 after having satisfied itself that the rural bank has provided adequate evidence to enable the ARB Apex Bank to replenish the Designated Account. For replenishing the account, the ARB Apex Bank will retain the documents presented by the participating rural banks for inspection by World Bank missions and annual audits.
25. The ARB Apex Bank will retain the repayments to the IDA line-of-credit in a revolving fund to provide additional consumer credit (and grants if needed) to purchase Solar-PV systems beyond the end of the project.
26. Component C5 -- Capacity-building for access expansion. As indicated above, the Access Secretariat will manage the technical assistance and training programs for access expansion initially and later transfer this responsibility to the REA when it is established. The Access SecretariaWA will plan and organize the training courses for the various institutions and private sector participants. This will include the identification of appropriate courses or training providers, designation of participants, requests for the World Bank’s no-objections and arrangements for the payment of course fees, travel and subsistence. The Access SecretariaVREA will prepare annual training programs for the Access Component and send them to the World Bank for approval during the last quarter of each year. Group training courses organized in Ghana by accredited training providers are preferred to overseas courses. More participants will be able to attend them and the overall cost will be lower. MoE will hire consultants to include renewable energy in the rural electrification planning, and transaction advisors for grid-connected renewable energy projects. For the sub-component business development services to renewable energy project developers, MoE/REA will contract the same private sector firm, which has already been competitively selected under the IFC/LDA-funded Micro, Small and Medium Enterprise Project, which will manage a renewable energy window under the existing Business Development Services (BDS) Fund for matching grants following a BDS Operational Manual to be agreed by the Bank. Finally, MoE/REA will provide GEF grant to the ARB Apex Bank for implementation support and capacity building.
64 Annex 7: Financial Management and Disbursement Arrangements
Ghana: Energy Development and Access Project
A. Executive Summary
1. In accordance with the Financial Management Practices Manual issued by the Financial Management Board on November 3,2005, Bank staff carried out a Financial Management (FM) assessment of the accounting unit of the Ministry of Energy (MoE), the Volta River Authority (VRA), Electricity Company of Ghana (ECG) and ARB Apex Bank. The objective of the assessment was to determine whether the FM arrangements at MoE, VRA, ECG and ARB Apex Bank were adequate to ensure that the entities: (a) will use the funds only for the intended purposes in an efficient and economical way; (b) will prepare timely, accurate and reliable periodic financial reports; and (c) safeguard the assets they acquire under the project.
2. The assessments were undertaken by a World Bank Financial Management team, and included interviews with key staff responsible for financial management at MoE, VRA, ECG and ARB Apex Bank, as well as the completion of standard Bank FM Assessment Questionnaires. The assessment also draws on earlier work carried out under various projects in Ghana.
MoE
3. MoE’s accounting unit is headed by a professionally qualified accountant (the Chief Accountant) who reports to the Chief Director, the administrative head of the ministry. The chief accountant is assisted by five senior accountants, two assistant accountants, one each for government and project accounts, and a number of accounts officers. The unit operates a manual accounting system which is complemented with spreadsheet applications using MS Excel for reporting. The system is not documented in any accounting manual or departmental instructions as required by the Financial Administration Act (FAA).
4. The financial management assessments concluded that the accounting unit of the MoE does not have in place systems that meet the minimum financial management requirements of the World Bank for purposes of implementing the project. The FM team however, working in conjunction with the counterpart, proposed satisfactory mitigating measures to upgrade project accounting within the MoE to the required standard. Although initially rated substantial, the residual FM risk within the ministry was upgraded to moderate, as detailed below.
ARB Apex Bank
5. ARB Apex Bank, the “Central Bank” for the Rural Banks in Ghana, was assessed on account of the role it is required to play in supervising and coordinating the provision of finance to prospective consumers under the Solar-PV Systems sub-component of the Electricity Access Component of the project. The Finance and Accounts Department will have responsibility for managing the proceeds of the Grant under the project. The department is headed by a qualified accountant, who is assisted by three other part-qualified accountants. The ARB Apex bank has a
65 comprehensive accounting procedures manual which covers: (i)budgeting; (ii)accounting; (iii) audit; (iv) accounting for grants; and (v) reporting. The most recent audits conducted by independent auditors indicated unqualifiedclean audit opinions.
6. The assessment concluded that the FM arrangements at ARB Apex Bank meet the minimum requirements for FM for Bank financed projects, with overall risk rated low to moderate.
ECG and VRA
7. The assessment of the FM arrangement at ECG and VRA concluded that the two entities both have satisfactory systems in place to meet the FM requirements and obligations under the project. Overall risk rating was assessed as low in each case.
B. Overview of Program and Implementation Arrangements
8. The World Bank will provide support through three components: (i)Sector and Institutional Development to be implemented by MoE and ECG; (ii)Distribution Improvement will be implemented by ECG; and (iii)Electricity Access, which will be implemented by MoE, ECG and VRALNED. A sub-component of the Electricity Access component, micro-finance for individual Solar-PV systems, will be managed by the ARB Apex Bank. Detailed implementation arrangements are set out in Annex 6.
C. Country Issues
9. The Government of Ghana has implemented several reforms in response to the findings of the Country Financial Accountability Assessment (CFAA) for Ghana, carried out in 2001 and updated in June 2004. Some of the key actions taken include the enactment of.
1. Financial Administration Act 2003, in response to the identified weakness of the fragmented legal structures that governed public financial management. 2. Internal Audit Agency Act 2003, to set up modern internal audit in all government departments. 3. Public Procurement Act, to improve the efficiency of public procurement systems and practices.
10. The enactment of these laws is intended to remove weaknesses in the regulatory frameworks for procurement, financial administration and internal audit. It is recognized that the process of implementation of these regulations and procedures will take time, involve continuous capacity building and demand greater accountability. Risks still remain in the areas of
Enforcement of the enacted laws. . Effectiveness of independent oversight. 11. The summary risk analysis is based on the assessment of the financial management units of MoE, ECG, VRA, and ARB Apex Bank, the institutions responsible for the financial management of the various components of the project.
66 D. Risk Assessment and Mitigation
Table 7.1: Risk Assessment and Mitigation
Risk Rating Risk Mitigatioaemarks Condition of Negotiation or Effectiveness (Y/N)
(a) Delay in the implementation of S Government has introduced a new N New Financial Administration Act comprehensive legal framework for public (FAA). financial management -- the Financial Administration Act (FAA) with related regulations for implementation. There is need for close monitoring to ensure effective implementation of this Act. (b) Non-compliance with statutory H Government needs to institute measures that N regulations and non-enforcement of would ensure the systematic review, update and penalties. enforcement of penalties for non-compliance. (c) Government agencies may not S Government has passed legislation, Internal N Audit Agency Act (IAAA), for all Government Ministries, Departments and Agencies (MDAs) to establish internal audit function within their offices. Assistance will be provided to strengthen the Internal audit of MDAs to meet the Act’s requirements and for the benefit of the I project. Overall Inherent Risk Is(
Risk Rating Risk Mitigatioaemarks Condition of Negotiation or Effectiveness (Y/N)
Key staff are professionally qualified, but not may not have any knowledge of sufficiently experienced in handling Bank Bank disbursement procedures projects. Staff will be encouraged to participate and/or minimum required in Bank’s periodic FM and disbursement qualification. workshops. Risk therefore rated no higher than M. MoE will be required to ensure that qualified accounts unit may leave, resign staff will be at post at all times and to promptly from employment or be transferred. replace staff, who may resign or leave or be transferred from MoE. Appropriate training will be Drovided to anv staff redacements. Electricity Company Finance and Accounting staff of the I L The Project Accounting Unit is headed by a N Project Unit may not have any professionally qualified accountant and five knowledge of Bank disbursement part-qualifiedaccounting assistants. procedures and/or minimum The Unit has experience with Bank-funded required qualification. projects and is conversant with Bank’s disbursement and reporting requirements. Staff will be encouraged to participate in Bank’s
67 I periodic FM and disbursement workshops in order to update their skills. Voltu River Authority Project Accounting staff may not L The Project Unit is served by a professionally N have any knowledge of Bank qualified Accountant and five part-qualified disbursement procedures and/or accounting assistants. The Unit has experience minimum required qualification. with Bank funded projects and is conversant with Bank’s disbursement and reporting requirements. Staff will be encouraged to participate in Bank’s periodic FM and I I disbursement workshops in order to update their skills. ARB Apex Bank Finance and Accounting staff may M Qualified staff are already in place. Staff will be not have any knowledge of Bank provided training in Bank’s FM and disbursement procedures. disbursement procedures. Staff will be encouraged to participate in Bank’s periodic FM I and disbursement workshops. Funds Flow Ministry of Energy (a) Delayed preparation and 1s Regular periodic training will be provided to submission of withdrawal ensure staff of the MoE become familiar with applications to the World Bank for Bank procedures, and submission of applications the release of funds. to the Bank will be monitored for timeliness. Again, residual risk rated M. (b) Accounting policies and The unit will be assisted to document all policies The preparation of procedures are not documented in a and procedures, as derived from the FA Act 654, the Project Accounts manual. 2003, FAR and the Accountant General’s manual as part of the guidelines for producing Departmental PIP will be an Instructions/financial management and effectiveness accounting procedures manual. Residual risk condition. rated M. (c) Internal audit (IA) function at the Government is in process of setting up a modern Ministry is not professional. IA unit within Government, with assistance N ifrom donors. Electricity Company Delays in the preparation and L Previously satisfactorily handled. Expected to N submission of Withdrawal be the same. Applications. Undocumented Accounting Policies I L An accounting manual documents the N accounting policies, procedures and processes. ECG has an independent Internal Audit N Internal Audit function. Directorate, headed by a qualified Internal Auditor and other staff. The directorate has oversight responsibility for the internal audit of project transactions. Voltu River Authority Delays in the preparation and L Previously satisfactorily handled. Expected to N submission of Withdrawal be the same. Applications. Undocumented Accounting Policies L An accounting manual documents the N and Procedures. accounting policies, procedures and processes. Non-existence of7poorly managed L VRA has an independent Internal Audit N Internal Audit function. Department, headed by a qualified Internal Auditor and other staff. The directorate has
68 oversight responsibility for the internal audit of project transactions. Risk Rating Risk MitigatiodRemarks Condition of Negotiation Board or Effectiveness (Y/N) ARB Apex Bank Delays in preparation and M Key operating staff will be given training in N submission of Withdrawal completion of appropriate forms for withdrawal Applications. of funds. Continuous training in Bank’s FM and disbursement procedures and processes. Undocumented Accounting Policies L ARB Apex Bank documents its accounting N and Procedures. policies and procedures in an Accounting Procedures Manual. External Audit Project audit reports submitted late. M TOR for audit will be ready within three months Dated covenant -- of project effectiveness; auditors will be TOR for audit of appointed in another three months. project will be ready within three months MoE, ECG, ARB Apex Bank and VRA will of effectiveness for institute mechanisms where their respective review by the Bank. audit programs for the relevant year will be Appointment of agreed with their respective auditors prior to auditors to be year end and monitored to ensure compliance. finalized within six Auditors’ contracts will be for one year and months after project renewable contingent on timely completion and effectiveness. submission of audited reports and satisfactory performance. Use of the entities’ existing auditors may be considered. Reporting and Monitoring (a)., Delays in the submission of L Support will be provided to the participating Formats of IFRs agreed InterimFinancial institutions to improve overall FM. agreed at Management and other relevant negotiations. reports. MoE, ECG, ARB Apex Bank and VRA will be encouraged to institute good records management practices to facilitate production of timely and relevant reports. ECG operates a computerized system, which also produces Financial statements. VRA operates a computerized system, which also produces Financial statements. ARB Apex Bank prepares periodic management reports every month. The IFR formats for the project components will be agreed.
(b) Preparation of Financial M The MoE will be assisted to restructure its chart Statements is a new activity to be of accounts and accounting records to capture undertaken by MoE under the project components/activities to facilitate the project. production of annual Project reports. Financial Statements and other management reports as required under the FA and FAR and to meet donor requirements.
69 Risk Rating Risk Mitigation Condition of Negotiation Board or 1 Effectiveness (Y/N) Information Systems Delays in providing requisite M In the absence of computerized systems, information to management and to periodic supervision visits will assist MoE to the staff of the Bank. institute good records management practices to facilitate easy and speedy retrieval of information for management decision purposes and meet reporting requirements of donors and Government. If appropriate, the ministry may continue to use Excel, or acquire temporary low level software for use in the interim, pending connection to the government’s Integrated Financial Management Information System (IFMIS), depending on the proposed timing for linking into the IFMIS. Delays in providing requisite VRA uses computerized accounting system to information to management and to maintain transaction information. The system the staff of the Bank- also produces Financial and other reports. Delays in providing requisite ECG uses Sun Accounting Software to capture information to management and to transaction details and produce financial reports. the staff of the Bank, Delays in providing requisite ARB Apex Bank uses the GLOBUS software information to management and to for all its accounting and treasury transactions. the staff of the Bank. The same software is used to produce the periodic and year-end Financial Statements. Overall Control Risk Ministry of Energy M Volta River Authority L Electricity Company of Ghana L ARB Apex Bank L/M
Ratings: H - High, S - Substantial, M Modest 2 - Low
70 E. Strengths
12. Ministry of Energy: The accounting unit of the MoE has a qualified Chief Accountant with responsibility for the supervision and management of the Finance and Accounting function. He is assisted by other accounting staff. The accounting unit:
9 Has staff with experience in government accounting. . Operates within the established policies and procedures of the Accountant General.
13. Electricity Company of Ghana: ECG has a Project Accounting Unit, within a Project Directorate, headed by a professionally qualified Accountant. The Unit has experience with managing Bank-funded projects. The Unit is familiar with the Bank’s disbursement procedures and requirements. Its accounting policies and procedures are documented in a manual. ECG uses a computerized system based on the Sun Accounting Software to maintain its accounting and transaction information. The Unit produces quarterly financial reports for management.
14. Volta River Authority: VRA has a Project Accounting Unit, within a Project Directorate, headed by a professionally qualified Accountant. The Unit has experience with managing Bank-funded projects. The Unit is familiar with the Bank’s disbursement procedures and requirements. Its accounting policies and procedures are documented in a manual. VRA uses a computerized system to maintain its accounting and transaction information.
15. ARB Apex Bank: The Accounts Unit is headed by a qualified Accountant assisted by three part-qualified Accounting Officers. The Accounting Policies and Procedures are documented in Accounting, Inspection and Audit manuals, which guide staff in the performance of their day-to-day functions. Accounting and Treasury transactions are captured and managed with the GLOBUS software. The same software is used to produce periodic and annual Financial Statements.
F. Weaknesses and Action Plan
16. In spite of the strengths outlined above, significant weaknesses exist. These are noted below and proposals made for their resolution.
17. Ministry of Energy: MoE or Units under its control will manage some components under Components A and C. It is expected that a new independent entity, the Rural Electrification Agency (REA), will be established to implement component C. However, MoE will have the responsibility in the meantime of administering the component through a Rural Electrification Secretariat (RES) until the establishment of the REA is completed. Private ConsultantslECGNRA will in this arrangement provide Procurement, Supervision and Contract Management Services to MoE pending the formal establishment of REA.
71 18. Likewise, the MoE’s Project Coordination Team will need to have a qualified Accountant as a member, to take specific responsibility for accounting for the project funds made available to the Ministry.
Significant Weaknesses Action Responsible Person Target Completion date No Dedicated Project Dedicate a Project Accountant. MoE. Before Accountant to control project effectiveness. funds under components A and D. Staff job description, duties, Prepare job descriptions, duties, Before responsibilities, lines of responsibilities, lines of effectiveness (part communication and communication, supervisory of the accounting supervisory authority are not authority and qualification and Chief Accountant, MoE. manual). immediately available or experience for key staff of the properly documented. ‘Project’ Accounting Unit of MoE.
G. Implementing Entities 19. The project will be implemented by four institutions, namely the Ministry of Energy (MoE), the Electricity Company of Ghana (ECG), the Volta River Authority (VRA) and the ARB Apex Bank.
20. Ministry ofEnergy: The Accounting Unit of MoE, under the Chief Accountant of MoE, has responsibility for maintaining the accounting books and records of the project. The unit will be managing the funds of a Bank-funded project for the first time and will need assistance until it is comfortable with the processes and procedures.
21. The Project Accounting Units of VRA and ECG have responsibility for maintenance of accounting books and records. These units have experience in the management of project funds under Bank-funded projects.
22. ARB Apex Bank: The Finance and Accounting Unit will directly manage Bank funds for the first time and will have to be provided assistance/guidance until it is comfortable with the processes and procedures.
H. Project Financial Management 23. Financial Management of the project will be undertaken by the project units of ECG, VRA, the accounting unit of the MoE and the accounting and credit unit of ARB Apex Bank. The participating institutions will maintain streamlined systems with appropriate and sufficient internal controls to manage project transactions and reporting obligations.
24. The policies, rules and procedures specified to implement project and institutional objectives will be documented in the Financial Management section of the Project Implementation Manuals to be prepared by the implementing agencies. With the
72 exception of the MoE, the Financial Management Manuals already exist, and cover at least the following aspects.
(a) Budgeting and forecasting procedures. (b) Records specification and support documentation. (c) Major transaction cycles and authorization procedures. (d) Chart of accounts and account coding structure. (e) Financial reporting processes. (f) Fund disbursement and replenishment procedures. (g) Flow of funds to participating agencies and payment to service providers.
25. Each implementing institution (ECG, VRA, MoE and ARB Apex Bank) will prepare un-audited quarterly interim financial reports as the basis for project financial monitoring and control of the respective components/sub-component under its management.
I. Budgeting
26. Financial Management activities for each year will commence with the determination of project activities to be carried out and eligible expenditures to be financed during the year (i.e., the annual work plan and budget). The implementing entities (MoE, VRA, ECG and ARB Apex Bank) will establish their individual program/activities, budgets and work plans, in accordance with their normal budgeting and approval procedures. Thus the project expenditure estimates of the Ministry of Energy would be included in a ministry-wide budget for incorporation in the national budget, while the Boards of Directors for ECG, VRA and ARB Apex Bank would approve the expenditure estimates for the project components under their management.
J. Accounting
27. The implementing entities will be responsible for maintaining the accounting books and records of transactions for the activities they implement. The entities will maintain records adequate to support project accounts as well as to track commitments and safeguard assets. Where appropriate, the Chart of Accounts of an implementing entity will be customized to facilitate the preparation of relevant quarterly and annual financial statements, highlighting the following information. . Total project expenditures by componenthub-component and activity for the quarter and accumulated to that point in the life of the project. Total project expenditure by expenditure category. . Total financial contribution from each donodco-financier. Total financial contribution by GoG or the respective entity. Schedule of assets (acquired under the project) by location etc.
73 28. Quarterly and annual financial statements will be prepared in accordance with International Accounting Standards (IASs). All accounting and control procedures will be in accordance with the documented manuals of procedures, as regularly updated.
29. Accounting staff of the implementing entities will be afforded the opportunity to learn more about financial management and disbursement procedures for Bank financed projects whenever such training is scheduled, usually with partner institutions.
K. Flow of Funds 30. Each implementing entity will establish a Designated Account with a Commercial Bank under terms and conditions acceptable to the Bank. They will maintain the Designated Account in US dollars to receive disbursements from IDA Credit, GEF and ACGF Grant accounts opened by the Bank on behalf of the borrower. An initial advance will be disbursed into each Designated Accounts on request and subject to compliance with conditions that are specified in the Financing Agreements and additional instructions that are provided in the respective Disbursement Letters.
3 1. In addition to the Designated Accounts, MoE will maintain a project account to receive GoG counterpart funds as and when needed to support project implementation.
32. Implementing entities will execute their respective budgets as approved in respect of the project components and activities and make payments for approved and authorized transactions to contractors, suppliers and service providers.
33. The accounting teams of the implementing entities will be responsible for making monthly replenishment requests to the World Bank in accordance with the Bank’s disbursement guidelines and policies.
L. Financial Reporting and Monitoring
34. Each implementing entity will prepare quarterly un-audited Interim Financial Reports (IFR), highlighting actual performance against target, in the areas of finance, procurement (including complaints from bidders), and project progress. The financial management system in place at ECG, VRA, and ARB Apex Bank is capable of producing these reports, while the MoE can use Excel for the production of its reports until a more appropriate solution is agreed upon. The report formats have been discussed. The reports include.
Quarterly Interim Financial Report
35. The quarterly Interim Financial Report consists of a statement of cash receipts by source and expenditures by main expenditure classifications/categories for the period and cumulatively to the reporting date; cash balances of the project; and supporting schedules comparing actual and budgeted expenditures. The quarterly report will also give details of expenditure by component/activity within component.
74 Quarterly Physical Progress Report
36. The quarterly Physical Progress Report would include narrative information on outputs, output indicators and would link financial information with physical progress and report on issues that require attention.
Quarterly Procurement Management Report
37. The report would compare procurement performance against the procurement plan as updated. The report should also provide information on complaints by bidders, unsatisfactory performance by contractors and any contractual disputes if any.
38. Each implementing entity will prepare and submit these reports in respect of the componenthub-component it manages. The reports will be submitted to the Bank within 45 days after the end of each quarter. Annually, the MoE will prepare a ‘project-wide’ summary of performance by collecting the necessary source of information from the other implementing agencies, indicating how far the project in total has progressed to that point, milestones, and any critical actions to be undertaken in the ensuing year.
M. Disbursement Arrangements and Methods
39. The proceeds of the Credit, GEF and ACGF Grants would be disbursed over a 5- year period. A period of four (4) months after closing date is allowed to make disbursements for goods and services received by the closing date(s) of the IDA credit, GEF and ACGF Grants. Proceeds from the IDA credit would be allocated to expenditure categories as follows.
75 Table 7.2: IDA Disbursement Table
Percentage of Expenditures to Amount of IDA be Financed by Financing Allocated Category (expressed in US$) includin taxes
(la) Works and Goods under Bl(a) and B2(a) 35,4 18,000 85%
(lb) Works under Cl(a) 18,000,000 100% (IC)Works, goods and consulting services under Cl(b) 5,000,000 100% (2a) Goods under A4(a) 84,000 (2b) Goods and consultants’ services under C2 (a) 1,700,000 100% (3a) Consultants’ services, including audits under Al(a)-(c) , Al(e), A3(a), A4(a)-(c) and C5(a) 4,471,077 I100% (3b) Consultants’ services, including audits under A2(b) and B2(a) 1,160,000 90% (3c) Consultants’ services, including audits under c 1(a) 800,000 100% (4a) Training under Al(a)-(c), Al(e), A3(a), A4 and C5(a) 676,923 100% (4b) Training under A2(b), B2(a) 1,150,000 100%
(5) Solar-PV loans under C4(a) 3,000,000 100%
(6) RE Grants under C2(a) and C3 11,300,000 100%
17) Operating Costs under A4(a) - (c) 224,000 80%
(8) Refund of Project Preparation Advance 1,000,000 100% (9) Unallocated (contingencies) 6,016,000 TOTAL AMOUNT 90,000,000
Table 7.3: ACGF Disbursement Table
Category ACGF Grant Percentage of Expenditures Allocation to be Financed by ACGF (expressed in US$) (including taxes) (1) Works and Goods under B 1(c) and B2(b) of 15,000,000 100% the~~~. Project~-.... (2) RE Grants under C2(b) of the Project 35,000,000 100% TOTAL AMOUNT 50,000,000
76 Table 7.4: GEF Disbursement Table
Catego r y GEF Grant Percentage of Expenditures Allocation to be Financed by GEF (expressed in US$) (including taxes) (1) Goods under Component C5(d) 100,000 100%
(2) Consultants’ services, including audits 1,800,000 100% under Component Al(d), A3(b), C5(b) (3) Consultants’ services, including audits 400,000 100% under Component C5(d) (4) Training under Component C5(b) 200,000 100%
(5) Training under Component C5(d) 200,000 100%
(6) Matching grants under Component C5(c) 2,800,000 100%
TOTAL AMOUNT 5,500,000
Disbursement Methods Designated Account
40. As indicated under ‘Flow of Funds’ above, MoE, ECG, VRA and the ARB Apex Bank will each maintain a Designated Account (DA), with a Commercial Bank acceptable to IDA, to receive proceeds of the Credit. The Designated Accounts will be maintained in US dollars. Disbursement will initially be transaction based, with the possibility of converting to report-based disbursement allowed, subject to satisfactory IFR reporting and reliable expenditure forecasting.
41. The initial deposit into the DA and how to access it, will be specified in the Disbursement Letter. The financial resources made available through the Designated Accounts will be used to finance agreed project activities only.
Use of Statement of Expenditures (SOEs)
42. Disbursements for all expenditures would be against full documentation, except for items of expenditures under contracts below: (i)US$lOO,OOO equivalent each for consulting firms; (ii)US$50,000 for individual consultants; (iii)US$250,000 equivalent for goods; (iv) training; and (v) incremental operating costs for which disbursements would be based on statement of expenditures (SOEs). Supporting documentation for SOEs would be retained by the accounting units of ECG, VRA, MoE and ARB Apex Bank for review by IDA missions and external auditors when required.
Direct Payments
43. The Bank may make payments direct to a third party (Le. Consultants, Contractors and Suppliers) at the request of the borrower in a prescribed format to the Bank for
77 eligible expenditures incurred under the project. We anticipate that ECG, VRA and to a lesser extent MoE, would avail themselves of this method of disbursement.
Special Commitments
44. The Bank may make payments to a third party for eligible expenditures under a Special Commitment entered into, in writing, at the borrower’s request and on terms and conditions agreed between the Bank and the borrower (in this instance MoE, ECG and VRA).
N. Auditing Arrangements 45. Independent and qualified auditors acceptable to the Bank would carry out the annual financial audit of all project expenditures. The appointment of the auditors must be finalized within six months of effectiveness of the project. As it is the responsibility of the Auditor General of Ghana to audit government entities, selection of the independent auditors will be done in collaboration with the Auditor General. Existing auditors of the implementing entities can be considered for the audit of the project expenditures, provided that the TORSof their existing assignments meet the Bank’s requirements, or can be modified as appropriate. One audit report covering the activities financed by the project will suffice for each implementing entity.
46. The audit shall be carried out in accordance with international standards of auditing and the auditor’s reports and opinions, including the Management Letter and the annual Financial Statements must be submitted to the Bank within six months of the close of fiscal year audited.
0. ActionPlun
47. (i)Dedicate one person (with approved job description) as the Project Accountant at MoE by effectiveness. (ii)Prepare MoE’s Project Accounting Manual by effectiveness. (iii)Open DAs by effectiveness. (iv) Confirm project audit arrangements within 6 months of effectiveness.
P. Conditionalities
48. Effectiveness Condition. MoE will prepare a Project Accounting Manual and dedicate one person (with approved job description) as Project Accountant within the ministry.
Q. Financial covenants
49. (i)Quarterly progress reports including procurement, physical and financial progress will be prepared and sent to the Bank no later than 45 days from the end of each quarter.
78 (ii)Annual audit reports will be prepared and submitted to the Bank by June 30 of each year.
R . Dated Covenants
50. Finalization of auditors to be made within six months of effectiveness.
S. Supervision Plan
5 1. During the first year of the project implementation, intensive World Bank supervision will be required, particularly for MoE and ARB Apex Bank, in order to ensure that the project financial management arrangements are operating effectively given that this would be their first Bank-financed project. The first supervision mission after effectiveness will take the form of a Financial Management Specialist visiting MoE, VRA, ECG and the ARB Apex Bank to review systems and procedures so as to ascertain that the systems’ integrity have been maintained. Subsequently there will be a minimum of two supervision missions per year for MoE and ARB Apex Bank on one hand and one supervision mission for each of VRA and ECG on the other, in addition to the quarterly desk reviews of IFRs.
T. Conclusions
52. The proposed FM arrangements for the project to be managed by the MoE, ECG, VRA, and ARB Apex Bank meet the minimum requirements for financial management under OP/BP 10.02.
79 Annex 8: Procurement Arrangements GHANA: Energy Development and Access
A. General
1. Procurement legal and institutional framework in Ghana has improved substantially since the Bank carried out Country Procurement Assessment Review (CPAR) in 200344. The Parliament of Ghana approved the Public Procurement Bill on December 18,2003 and the President signed it into a Public Procurement Act on December 3 1,2003. The Parliamentary Accounts Committee (PAC) invited public input in March 2003 and received comments from a broad cross-section of stakeholders, including the Bank. The Bill was widely discussed in the media, in roundtable conferences, and in meetings with the PAC. The final version of the Public Procurement Act has been assessed as a good UNICTRAL-based procurement law.
2. The Act includes most of the features of good public procurement practice, i.e., (i) effective and wide advertising of upcoming procurement opportunities; (ii)public opening of bids; (iii)pre-disclosure of all relevant information including transparent and clear bid evaluation and contract award procedures; (iv) clear responsibilities and accountabilities for decision making with segregation of executive and oversight responsibilities; and (v) an enforceable right of review for bidders when public entities breach the rules. The Public Procurement Act (PPA) is comprehensive and covers all procurement in the public sector.
3. The PPA created the Public Procurement Board (PPB), an autonomous regulator empowered to set rules and oversee public procurement practices by all public sector bodies. In turn, the PPB has issued standard bidding documents and set rules for open, competitive procurement across government, developed a website to enable posting of bid notices and contract awards and other procurement documents. At the same time, challenges remain in several areas such as dissemination of regulations, training of government staff and the private sector, establishment of procurement plans tied into the budgeting process, and audits of main spending entities. Progress is being monitored under the PRSC for Ghana.
4. Procurement Guidelines: Procurement for the project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under “IBRD Loans and IDA Credits” dated May 2004 (revised in October 2006); “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004 (revised October 2006); and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract
44 The main findings of the CPAR included: (i)lack of a comprehensive legal framework; (ii)use of merit point system for evaluating bids for works contracts; (iii)use of “bracketing” for evaluating bids for works contracts; (iv) excessive use of single source; (v) repetitive use of same firms under selective tendering procedures; (vi) lack of procurement planning; (vii) poor record keeping; (viii) weak oversight of procurement; (ix) poor contract management; (x) poor stores management; (xi) weak procurement capacity; and (xii) weak budget commitment control leading to contract payment arrears.
80 to be financed by the Credit, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank and are outlined in the Procurement Plan.
5. Standard Bidding Documents and Manuals: The Bank’s Standard Bidding Documents (SBDs) will be used for all tenders for procurement of goods and works under International Competitive Bidding (ICB). Domestic preference would be used under ICB in accordance with Clause 2.55 and Appendix 2 of the Bank’s Guidelines.
6. In recognition of the quality of the legal framework, procedures in the Ghana Public Procurement Act (PPA) would be used for National Competitive Bidding (NCB) proc~rement~~.The standard documents for the procurement of goods can be used provided that: (a) the standard documents are used for NCB without pre-qualification only as they do not incorporate clear provisions on the pre-qualification of bidders; (b) margin of preference is not applicable; (c) bidders are given a minimum of 30 days to submit bids from the date of availability of the bidding documents; (d) foreign bidders are not excluded from participating in the bidding process; and (e) where required by the set thresholds and procurement methods, concurrent No-Objections are sought from the Bank after internal clearances have been obtained in response to the PPA. In the case of consulting services, the Bank’s Standard Request for Proposals (SRFP) and standard time-based and lump-sum contracts will be used for all assignments involving international competition. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for goods to be procured, will be highlighted in the Project Implementation Manual (PIM).
7. Procurement of Works: The project’s Access component will finance: (i) upgrade of distribution network and intensification in about six regions. The combined value of the works contracts to be procured using ICB method of procurement is about US$29,3 18,000.
8. The Distribution Network Upgrade component will finance: (i)construction of BSP in Kumasi; (ii)construction of new primary substations; (iii)upgrade of Mallam BSP; (iv) upgrade of existing primary substations; (v) construction of 33 kV and 11 kV feeders; and (vi) HV distribution at selected locations. The value of the works contracts to be procured using ICB method of procurement is about US$50,820,000.
9. The Distribution Commercial and Technical Capacity Upgrade component will finance: (i)construction of 15 customer service prior centers and 4 district offices; (ii) supply and installation of secondary automatiodrural SCADA on rural networks; (iii) supply and installation of SCADA (Supervisory Control and Data Acquisition) in Takoradi and Kumasi; and (iv) installation works as and when required. The value of the works contracts using ICB method of procurement is about US$9,425,000.
45 Foreign bidders will not be disqualified from bidding under NCB procedures.
81 10. The ACGF will finance grid extension to five regions. The value of the works contracts is about US$33,667,000 and may be procured using ICB method of procurement. It will also finance HV conversion under the Distribution Network Upgrade.
11. Procurement of Goods: Access Component: (i)overhead line materials and accessories; (ii)distribution transformers; (iii)service connection materials; (iv) wood poles; and (v) vehicles. The value of the goods contracts to be awarded on the basis of ICB and two project vehicles and office equipment to be awarded on the basis of Shopping is about US$4,000,080.
12. Distribution Network Upgrade Component: (i)distribution materials; and (ii) shunt capacitor compensation. The value of the goods contracts to be awarded on the basis of ICB is about US$12,500,000.
13. Distribution Commercial and Technical Capacity Upgrade component: (i) vehicles for customer services centers; (ii)establishment of trouble call center; (iii) equipment for FACILPLUS system extension; (iv) prepayment metering system to three regions; (v) automatic meter testingkalibration benches; (vi) metering and summation current transformers; (vii) marketing and customer education; (viii) network construction installation equipment; (ix) tools and equipment; (x) office equipment; (xi) system application and developmentAicensing; and (xii) pick-up vehicles. The value of the goods contracts to be procured using ICB and NCB methods is about US$10,550,000.
14. Procurement of non-consulting services: Procurement of non-consulting services will follow procurement procedures similar to those stipulated for the procurement of goods, depending on their nature. The applicable methods shall include NCB and Shopping.
15. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, are presented in the Project Implementation Manual.
16. Selection of Consultants: Access Component: (i)design and supervision for ECG; and design and supervision for NED. The value of these contracts is about us$l,ooo,ooo.
17. Distribution System Upgrade Component: (i)separating RE cost center; (ii) review of ECG investment program; and (iii)capacity building and training. The value of these contracts is about US$780,000.
18. Sector and Institutional Development Component: (i)rural electrification strategy and capacity for access secretariat; (ii)implementation and monitoring of renewable energy bill and resource assessment for energy commission; (iii)technical and operational audits of VRA and ECG; (iv) electricity cost of service and tariff study; (v) regulatory capacity building; (vi) project manager; (vii) preparation of RAPS;(viii)
82 development of access expansion strategies; (ix) services to support the REF; (x) capacity building and training; (xi) TA for renewable energy development and regulatory guidelines rules for renewable energy mini-grids; (xii) transaction advisors for development of large-scale renewable energy projects; (xiii) rural electrification master plan; and (xiv) other small studies. The value of these contracts is about US$4,870,000. The preferred method of selection for consultant services would be the Quality and Cost Based Selection (QCBS) method. Consulting assignments costing less than US$200,000 may be procured by using Selection Based on Consultants Qualifications (CQS).
19. Services for tasks that meet the requirements of paragraphs 3.8 through 3.11 of the Consultants’ Guidelines may be awarded using the Single Source Selection method. Services for which a team of Consultants are not required and meet all the requirements set forth in paragraph 5.01 of the Consultants Guidelines would be procured under contracts awarded to individual consultants in accordance with the provisions of paragraph 5.1 through 5.3 of the Consultants Guidelines. Short lists of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultants Guidelines.
20. Capacity Building and Training Programs are geared towards building capacity and improving management and staff skills. Overall strategy focuses on conducting training, and support for training activities through seminars, workshops, and training in the region and abroad based on individual needs as well as group requirements. All training and workshops will be carried out on the basis of programs which shall have been approved by the Bank on an annual basis, and which shall, inter alia, identify: (a) the training and workshops envisaged; (b) the personnel to be trained; (c) the institutions which will conduct the training; and (d) the duration of the proposed training. The detailed annual training program should outline categories of training, number of trainees, duration of training, staff months, timing, and estimated cost of the training.
21. Others -- Grants. The project will finance sub-projects under the Access component on a demand driven basis. Sub-projects will be subject to review and approval submitted to the relevant approval agency. Approval arrangements for selecting and funding proposals, including procurement, will be carried out in accordance with procedures detailed in the Operational Manuals. The types of activities eligible for financing under the sub-projects are described in the Operational Manuals.
22. Operating Costs: For MoE and the ARB Apex bank, expenditures made for operational costs such as fuel, office stationery, vehicle maintenance, travel costs and per diems, among others, excluding staff salaries will follow Ghana Government practices in line with the Public Procurement Law or, whenever these Laws do not apply, commercial practices commonly used for the same.
83 B. Assessment of VRA, ECG, MoE and ARB APEX Bank Capacity to Implement Procurement
23. Some procurement activities under the Access Component will be carried out by NED through VRA’s Engineering Services Department (ESD). VRA has established a Project Implementation Unit -- PTU headed by a Project Manager, assisted by a deputy who will be the project engineer. The project manager reports to VRA Management and liaises with the MoF, the MoE and the WB on implementation issues. The PTU is staffed by key resource persons from relevant departments in VRA who will be co-opted into the PIU. This will include an office engineer in charge of overall contract administration, electrical and civil construction engineers, a design review coordinator and an environmental coordinator. The procurement function is staffed by an electrical engineer with extensive knowledge and training in the WB procurement procedures, including procurement planning and management of the procurement cycle.
24. Procurement activities under the Distribution Component and some of the Access component will be carried out by the Planning Division of the ECG’s Department of Engineering. This division is staffed by a project manager, a design manager, a construction manager, a procurement manager, and a disbursement specialist. The procurement function is staffed by a team of four in-house procurement staff (three electrical engineers and one economist). The project manager has gained some experience in Bank procurement having been involved in the Thermal project but has had no formal training in WB procurement procedures. However, two of his staff (including the procurement manager) have taken a formal three-week training in procurement in the Administrative Staff College of India (ASCI). Arrangements are under way to formally train eight (8) additional staff including the project manager in World Bank procurement procedures before credit effectiveness.
25. Procurement activities will be carried out under: (i)the Sector and Institutional Development Component mainly by a Project Coordination Team (PCT) at MoE; (ii) capacity building sub-component under the Access Component by an Interim Access Secretariat to be established under the oversight of the MoE; (iii)intensification and grid extension components by ECG/NED; (iv) isolated grid component by the private sector or cooperatives; and Solar-PV by the ARB Apex Bank.
26. The Project Coordination Team at MoE will include procurement and accounting staff reporting to a Project Coordinator. The TORSof the procurement specialist have been developed.
27. The interim Access Secretariat is expected to eventually develop into an autonomous Rural Electrification Agency, who would be responsible for rural electrification and renewable energy development. The Access Secretariat is yet to be established but the proposed staffing would include a project manager, a legal advisor, a finance officer and a monitoring and evaluation officer. It would use the procurement officer in the PCT who would be supported by an administrative officer and
84 administrative assistant. Contract management responsibilities for the access grid intensification and extension activities would be handled by ECG’s Rural Project’s Division on behalf of MoE.
28. An assessment of the capacity of the VRA, ECG and the MoE to implement procurement actions for the project has been carried out by Amadou Tidiane Toure, Lead Procurement Specialist, in February 2007. The assessment reviewed the organizational structure for implementing the project and the interaction between the project’s staff responsible for procurement and the Ministry’s relevant central unit for administration and finance. The appraisal mission validated the findings and conclusions of the assessment.
29. The assessment concluded that VRA and ECG were in compliance with the procurement law, had a procurement unit in their permanent organizations, had adequate internal technical and administrative controls and anti-corruption measures, and satisfactory appeal mechanisms for bidders. Some of the staff who will implement the proposed project have undertaken procurement training.
30. The assessment shows a “Low risk” for VRA and ECG and “High risk’ for the MoE. Since the MoE will be responsible for managing about US$lOO million under the project, the overall risk assessment is “High”. The prior review thresholds will be set to reflect this rating if the capacity of the MoE to handle procurement is not strengthened to an acceptable level. Bank staff and independent auditors will carry out annual Procurement Post Reviews (PPRs) and the risk rating and the prior review threshold may be revised based on the findings of the reviews.
3 1. Further, an assessment of the capacity of the ARB Apex Bank, (incorporated under the Companies Code, 1963 (Act 179) as a public company limited by shares) to implement procurement actions for the project was carried out in May 2007 by Anthony Mensa-Bonsu, Procurement Specialist. The assessment reviewed the organizational structure for implementing the project and the possible interaction between the project’s staff responsible for procurement and the Ministry’s relevant central unit for administration and finance.
32. The assessment concluded that ARB Apex Bank did not have any direct working links with the Ministry of Energy and its units for administration and finance. It was also not in compliance with the procurement law, since it did not have established entity and review committees as required by the law. Neither did it have an established procurement unit or experienced staff who can fully conduct procurement using the Bank’s Guidelines. Its experience with World Bank procurement strategies derive from the limited involvement of two staff members in procurement activities under the Rural Financial Services Project for which ARB Apex Bank was a beneficiary. As a Bank, however, it has support and control systems. It also has adequate internal technical and administrative controls and anti-corruption measures, and satisfactory appeal mechanisms for bidders, when using its own procedures. However, none of its staff has attended any
85 procurement training course. The assessment, therefore, shows a “High risk” for ARB Apex Bank for conducting procurement actions.
Action Plan
33. The key risks for procurement are:
For ECG: (i)poor record filing; (ii)limited number of staff conversant with the World Bank’s procurement guidelines; (iii)inadequate/outdated technical specifications and absence of up-to-date information on new technologies offered by the existing market; and (iv) ECG’s cash flow problems resulting in its inability to pay for customs fees and taxes to clear imported equipment through customs. As a result, ECG has been paying up to the equivalent of US$400,000 per year in demurrage charges at the port.
For MoE: MoE will face challenges in implementing procurement under the two components that fall under its direct responsibility, while at the same time carrying out the coordination of the overall project. Since none of the MoE personnel involved in the preparation of the project have previous experience with WB procurement procedures, MoE needs to hire/appoint a qualified staff with prior experience in World Bank operations. The main issues and risks are: (i)absence of Manuals and instructions for the handling of procurement; (ii)limited familiarity with the WB’s procurement guidelines; (iii)lack of experience in procurement planning; and (iv) lack of project management and coordination capacity. The risk of delayed procurement implementation and or mis-procurement is high under the components being implemented by the MoE.
For the ARB Apex Bank: The main risks are: (i)non-compliance with the Procurement Law; (ii)limited exposure to World Bank procurement strategies; (iii) lack of established procurement presence in the Bank; and (iv) minimal staff involvement in procurement.
34. The proposed Action Plan to address the above deficiencies include:
For all components: (i)preparation of a Project Implementation Manual (PIM), which describes their organizational structure for implementing the project, including a section on procurement which describes the organizational arrangement for the management of procurement, detailed terms of references for the staff, the functional relationships and interaction between the project’s staff responsible for procurement and the relevant units for administration and finance, and clear instructions and guidance for the management of procurement records; (ii)a project launch workshop will be held for key staff of the implementing agencies, including the tender committees. The workshop will include sessions on Bank procurement policy as well as the Public Procurement Act. The focus will be to orient key staff on the principles of good public procurement planning and practice and to discuss the procurement arrangements under the project; and (iii)setting of standard processing times.
86 For ECG: (i)professional development program and subscription to journals to enable the technical staff to catch up with the latest technologies in the areas relevant to the project; (ii)the PIM will include a section on a marketing strategy towards the rural customers of the rural access component; (iii)training of relevant ECG staff in the application of the WB procurement procedures (regional procurement training in GIMPA, Ghana or ESAMI, Tanzania), as well as the Ghana Public Procurement Act (training by the Ghana Public Procurement Board); and (iv) to deal with the effect of ECG’s cash flow problem in the implementation of works contracts, ECG could either: (a) consider using the “supply and erect” (supply and installation) type of contracts, so that the contractors would take care of the custom clearance for equipment that need to be imported as part of works contract; (b) explore the possibility of a 100% financing of contracts under the Credit (under Country Financing Parameters); or (c) seek Government of Ghana waiver from the payment of customs fees and taxes for specified items.
For MoE: (i)the PIM will include a section on the coordination mechanism for the components under the direct responsibility of the MoE and for the project as a whole; (ii)training of relevant staff in the application of the WB procurement procedures (regional procurement training in GIMPA (Ghana) or ESAMI (Tanzania), as well as the Ghana Public procurement Act {offered by the Ghana Public Procurement Board}); (iii)other areas of training would include project management; (iv) until the establishment of a project management team and its staffing with a qualified procurement specialist, technical assistance is required to support the MoE in the planning and management of procurement under the project. The ECG procurement team will assist the project team to process procurement in the interim.
0 For the ARB Apex Bank: Under the project, ARB Apex Bank, the “Central Bank” for the Rural Banks in Ghana, will supervise and coordinate the provision of finance to prospective consumers under the Solar-PV Systems sub-component of the Electricity Access Component of the project. This responsibility does not call for a dedicated professional procurement presence in ARB Apex Bank. In fact, with the exception of motor-bikes, office stationery and equipment, hiring an Inspection Agency for monitoring the use of the funds, etc., no major procurement activities are expected. For this reason, it was agreed that ARB Apex Bank will continue to rely on the support of the Bank of Ghana Procurement Officer, as obtained under the just- ended Rural Financial Services Project.
C. Procurement Plan
35. MoE, ECG, and VRA, at appraisal, developed draft procurement plans for project implementation, which provide the basis for the procurement methods. The draft plans have been discussed and accepted by the Bank after making the necessary refinements. The project entities shall update the procurement plans annually as part of the preparation of their Annual Work Plan and Budget in consultation with the Bank or as required to reflect the actual project implementation needs and improvements in institutional
87 capacity. MoE, ECG and VRA will disclose their respective plans after Bank’s approval in the Bank’s external website. The Plans will include relevant information on supply and installation of plant and equipment, goods, works and consulting services under the project as well as the timing of each milestone in the procurement process.
D. Frequency of Procurement Supervision
36. In addition to the prior review to be carried out by the Bank Country Office in Ghana, the capacity assessment of the Implementing Agencies has recommended a project launch workshop and a minimum of two supervision missions annually to visit the field to carry out post review of at least 20% of all contracts below the prior review threshold.
E. Details of the Procurement Arrangements Involving International Competition and Direct Contracting
1. Goods, Works, and Consulting Services
37. List of contract packages to be procured following ICB and direct contracting:
Table 8.1: Contract Packages
Access component (ECG):
Ref. Contract Procurement P-Q Domestic Review Expected No. (Description) Method Preference by Bank Bid-Opening (yes/no) (Prior/ Date Post) 1. Upgrade of Distribution ICB No No Prior 0910 1/08 Network & Intensification in Central Region 2. Upgrade of Distribution ICB No No Prior 09/04/08 Network & Intensification in Volta Region 3. Upgrade of Distribution ICB No No Prior 09/08/08 Network & Intensification in
Western Regions 4. Upgrade of Distribution ICB No No Prior 0911 0108 Network & Intensification in Ashanti Region 5. Grid Extension to Abura ICB No No Prior 09/15/08 Asebu, Cape Coast & &moa Districts -- Central Region 6. Grid Extension to Aowin ICB No No Prior 09/17/08 District --Westem Region
ACGF-financed
7. Grid Extension to Nzema ICB No No Prior 04/06/09 East, Bibiani & Mpohor Wassa Districts -- Western
88 8. Grid Extension to Amansie No 04/08/09 West, Kwabre, Asante Akyem North, Sekyere East & Atwima in the Ashanti 7 I Region 9. I Grid Extension to Wassa No Prior 04113/09 Amenfi, Jomoro, Juabeso Districts --Western Region 10. Grid Extension to New No Prior 04115/09 Juaben & Birem South in Eastern Region, Ho in Volta Region & Ga in Greater Accra Region 11. Procurement of Load No Prior 09/02/09 Isolators & Boosters
Access component (VRA/NED):
Contract Procurement P-Q Domestic Review by the (Description) Method Preference Bank Opening Date (yesho) (PriorPost) No No Prior Line Materials &
No No Prior I Distribution Transformers I 12 (iii) I Procurement of Service I ICB No Yes Prior Connection Materials (for 20,468 customers) 12 (iv) Procurement of Wood ICB No Yes Prior
Distribution component:
Category I: Civil Works, Supply and Installation:
1 12 4 5 6 17 8 I Contract Procurement P- Domestic Review Expected (Description) Method Q Bid-Opening 1 (Prior / Date Post) Construction of Six Primary ICB No Prior 03/15/08 I Stations 14 I Construction of 33 kV & 11 kV ICB No Prior 04/10/08 Feeders 15 Upgrade of five existing Primary ICB No NoPrior 02/28/08 Suhstations 16 I HV Distribution at selected ICB No Prior 05/20/08 locations in Accra, Takoradi, Tema and Kumasi N
89 Category 11: Supply of Goods:
Ref. Contract Procurement Domestic Review Expected No. (Description) Method Preference by Bank Bid-Opening (ydno) (Prior I Date I I I1 Post) 1 1 17 I Distribution Materials/ I ICB I ’No I No I Prior I 04/15/08 Transformers 18 Vehicles for Customer Service ICB No No Prior 02115/08 Centres 19 Replacement of faulty meters, & ICB No No Prior 06/01/08 Re-routing of concealed service tails 20 Supply of Automatic Meter ICB No No Prior 05/10/08 TestingKalibration Benches
ACGF-financed (with ECG co-financing):
1 12 14 15 16 17 18 I Ref. Contract Procurement P-Q Domestic Expected No. (Description) Method E‘r;;nce rszk Bid-Opening LOT 1 1 I 1 (Prior / I Date I I Post) 21 I Distribution Materials/ 1 ICB I No I No I Prior I 04/15/08 I Transformers 22 I Establishment of Trouble Call I ICB I No I No I Prior 1 05/01/08 Centre for ECG 23 Prepayment Metering System ICB No No Prior 06/25/08 to Western, Central and Volta Regions 24 Secondary SS metering and ICB No No Prior 07/20/08 provision of summation current transformers 25 Marketing and Customer NCB No No Prior 06/25/08 Education 26 Secondary AutomatiodRural ICB No No Prior 07/20/08 SCADA for control of rural I networks 27 I SCADA for Kumasi & I ICB I No I No I Prior I 08/08/08
38. ICB contracts estimated to cost above US$200,000 per contract and all direct contracting will be subject to prior review by the Bank.
2. Consulting Services
39. List of consulting assignments with short-list of international firms.
90 Table 8.2: Consultants’ Contracts
Access component:
1 12 14 15 16
Ref. No. Description of Assignment Selection Review Expected Method by Bank Proposals (Prior 1 Post) Submission Date 1 Design & Precontract Works for ECG QCBS Prior 11/15/07 2 Supervision for ECG QCBS Prior 04/15/08 3 Denim & Siiwrvicion for NED OCRS Prior nu7in~
Sector and institutional development:
1
Ref. Description of Assignment Selection Review Expected No. Method by Bank Proposals (Prior / Post) Submission Date 4 Technical and operational audits of VRA QCBS Prior TBD and ECG c Electricity cost of service and tariff study QCBS Prior TBD 6 Consulting services for development of QCBS Prior TBD access expansion strategies 7 Consulting services to support TBD Prior TBD implementation of the REF (excluding staff costs at the Access SecretariatKEF) 8 Tariff methodology for renewable energy TBD Prior TBD Droiects and standardized PPA for small iekwable energy (GEF) 9 Consulting services for separating ECG I TBD Prior TBD RE cost center 10 Review of ECG investment program for TBD Prior TBD mid-term review 11 Consulting services for developing TBD Prior TBD enhanced corporate performance contracts for ECG and VRA 12 Consulting services for Institutional TBD Prior TBD strategy for MOE 13 Energy development studies, including TBD Prior TBD development of a competitive framework for PPs 14 Consulting services to prepare, implement TBD Prior TBD and monitor a Renewable Energy Law with regulations and action plans (GEF) 15 Consulting services for the preparation of TBD Prior TBD policy and regulatory framework for biofuel and woodfuels (GEF) 16 Consulting services for a resource TBD Prior TBD assessment and providing information needed for private sector to develop renewable enerm Droiects (GEF)
91 17 Consulting services to prepare policy and TBD Prior TBD regulatory framework for biofuel and woodfuels (GEF) 18 Project Coordinator, Procurement TBD specialist, Accountant, Environmental Advisor, etc. 19 Technical and financial transaction QCBS Prior TBD advisors for development of 1 - 2 large- scale renewable energy projects (> 10 MW) including development of a bidding package (GEF) 20 A rural electrification master plan (GEF) QCBS Prior TBD
Distribution component:
1 12 14 5 16 I Ref. No. Description of Assignment Selection Expected Method I Proposals I ;?.;zk(Prior / Post) Submission II Date Prior 08/08/08 Extension Network Design and Construction Su rvision Review of Technical Specifications, Construction Standards & Guidelines I 1
40. Consultancy services estimated to cost above US$100,000 per contract for firms and single source selection of consultants (firms) for assignments estimated to cost above US$50,000 will be subject to prior review by the Bank.
41. Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.
92 Annex 9: Economic and Financial Analysis Ghana: Energy Development and Access Project
Part A: Economic and Financial Analysis of Project Components
1. Distrz’butionNetwork Rehabilitation. The distribution component of the project consists mainly of investments in the ECG distribution network aimed at reducing technical and non-technical losses in the system. Proposed investments include the expansiodupgrading of overloaded substations in the primary load centers (mainly Accra, Tema, Kumasi and Takoradi), related construction of 33 kV and 11 kV lines, installation of reactive power compensation, and selective installation of HV distribution lines with small capacity transformers. The component also includes an assortment of initiatives generally grouped under the heading of “institutional development” (metering, SCADA, training, tools and equipment, etc.) which are deemed necessary to ensure that the potential benefits of reducing capacity constraints are realized.
2. Financial benefits of the project include incremental revenues to ECG as a result of increased capacity to meet growing electricity demand, as well as savings in the cost of purchased power as a result of reduced losses. Economic benefits include the value to customers of additional and more reliable supply of electricity, net of the incremental costs of generation and distribution. For purposes of the EIRR analysis, the value to consumers is assumed to be equivalent to the tariff plus the consumer surplus associated with having access to electricity (derivation of consumer surplus -- see pages 95 - 98). The incremental cost of distribution is assumed to be equivalent to the distribution service margin, while the incremental cost of generation is assumed to be the fully-allocated cost of incremental thermal power (US$O. 12kWh).
3. ECG has carried out an assessment of the financial and economic rates of return based on the above parameters. Separate assessments were carried out for each of the primary regional initiatives, for the application of HV distribution technology on selected sections of the network, and for the project as a whole. Owing to the difficulty of isolating the impacts of individual investments on load flows and losses, the assessment addressed the impacts of the company’s overall network improvement program -- which includes the proposed component as priority actions. The Association has reviewed these calculations and is satisfied that they accurately reflect the costs and benefits of the ECG component. Similar parameters were used to evaluate the proposed NED investments. Overall, the FIRRs and EIRRs of the proposed distribution component are in excess of the financial and economic opportunity costs of capital (the weighted average cost of capital in the case of financial returns, and a 10% economic cost of capital in the case of economic returns). The findings of the analysis are summarized in the table below. Differences between regions in terms of the IRR relate primarily to whether the investments focus primarily on the removal of capacity constraints or on the reduction in technical losses:
93 Table 9.1: Assessment of Financial and Economic Rates of Return
4. Access Expansion Projects: The economic analysis of the access expansion component of the project focused on an assessment of whether the customers’ willingness-to-pay for electricity supply exceeded the associated incremental capital and operating costs. The issue of whether the proposed investments were the least-cost method for satisfying electricity demand was addressed in previous analyses which established physical and demographic criteria for determining whether new areas were best served by grid extensiodinfill or by isolated networkdgeneration sources. The access expansion projects put forward by the borrowers had previously been screened using these criteria, and the analysis was not repeated for this appraisal.
5. The EIRR for the access components was estimated by comparing the incremental costs (investments, 0 & M expenditures for the distribution network, and costs of generatiodtransmission) of the value to the customer of having access to electricity supply. The latter was measured as the average customer willingness-to-pay for alternative energy sources (batteries, kerosene lamps, etc.), together with the willingness- to-pay for additional consumption induced by the availability and relatively low cost of electricity supply (e.g. fans, television viewing, increased light supply). Two types of access expansion packages were evaluated: (i)grid intensification projects in existing service areas (connecting an estimated 55,000 customers in the ECG service area and 20,000 in the NED service area, at an estimated capital cost of US$24.25 million); and (ii)grid extension projects into new service areas under the SHEP-4 Residual Project (1,017 towns, estimated cost US$170.4 million). The third package of access expansion projects, which includes off-grid renewables, will be demand driven and as such there is insufficient detailed information on costs and customers to support an assessment of ERR at this time. However, each project proposal will have to meet the test of adequate ERR, based on assumptions similar to those used in this analysis, prior to receiving government support. The final package of access projects is the provision of subsidized access to home Solar-PV units which are dealt with separately at the end of this section.
6. Of these packages, the grid intensification projects are to receive a significant share of their financing from the project. Grid-extension projects defined under the SHEP-4 program will be partially funded (up to approximately US$50 million equivalent). Residual projects will be financed as and when additional donor financing is identified. However, the GEDAP project will also support the development of an institutional framework for the implementation of the grid extension projects, and the
94 appraisal therefore reviewed the estimated EIRRs not only of the investments being financed under GEDAP but also of the as yet unfunded grid extension packages.
7. Proiect Costs -- Grid Intensification and Extension: The estimated capital cost and disbursement schedules for the projects were supplied by ECG46and NED. Given that the cost estimates were based on a sampling of the target regions, ECG suggested that cost estimates should include a 15% margin for contingencies. Incremental operating and maintenance costs of the new networks were assumed to be 1.5% of the capital cost. While this is somewhat higher than the average 0 & M expenditures of ECG, it is likely more representative of the costs of servicing lines and equipment in regions outside the major centers.
8. The incremental costs of generation and transmission were drawn from the analysis of VRAs generation mix and operating costs based on their projected system supply-demand balance for 2007 - 2016. Incremental generation costs of serving the new connections were taken as the fully-allocated cost of thermal generation, viz, US$O. 12kWh as used above for the assessment of distribution rehabilitation benefits. Generation and transmission costs were held constant in real terms after 2016 owing to the considerable uncertainties involved in projecting beyond a 10-year period.
9. Proiect Benefits -- Grid Intensification and Extension: The benefits of incremental consumption by newly connected customers were derived by estimating the income-compensated demand curve for a cross-section of new users and uses, and measuring the value of the substitution effect of electricity supply plus the value of incremental demand induced by having access to lower-cost electricity. The income- compensated curve reflects only the substitution effect of price changes on the consumption of goods, eliminating any impacts associated with the effect of price changes on income by assuming that income effects of price changes are fully compensated. The shape of the curve was assumed to be of the form
Q = A + H*Y + B*lnP = A’ + B*lnP
where A, H and B are constants, and are derived from observed behavior of households with and without access to electricity supply, and from the observed income elasticity of demand.
10. Estimation of the demand curve drew extensively on a survey carried out in rural Ghana during the summer of 200647. The survey covered the energy consumption patterns and expenditures of households in small rural communities including those that had and did not have access to electricity supply. The survey indicated that the main differences in energy consumption between electrified and non-electrified households --
46 ECG, Report on Pipeline of Projects for Access Component of GEDAP, Engineering Department, November 2006. 47 George Yaw Obeng, “Survey of Electricity and Kerosene Consumption In Rural Communities”, Ghana”, Kwame Nkrumah University of Science And Technology, Kumasi, Ghana, October 2006.
95 and hence the most likely substitution effects -- were the use of dry cell batteries (mainly for listening to radios) and the use of kerosene lamps for lighting in non-electrified households.
11. Use of dry-cell batteries among non-electrified households was extensive, with the average household spending 11,500 cededmonth on batteries and listening to the radio on average 6.3 hours per day. Assuming that the average rating on a radio is approximately 5 watts, this is equivalent to an energy cost of 12,140 cedes (US$1.31) per kWh. However, the total kWh equivalent of energy consumption using dry-cell batteries was small -- 11.4 kWh per year or less than 1 kWh per month. Interestingly also there was little induced consumption in electrified households. In fact, radio use dropped in electrified households, presumably replaced by greater use of other entertainment media such as television and mini-stereos. It was therefore assumed that Q2 for entertainment was equivalent to Q1. Hence the only difference between electrified and non-electrified households was the price paid for the kWh consumed.
12. The second component of substitution potential is lighting. Here the conversion of kerosene lighting to equivalent units of electric lighting in order to determine the degree of substitution effect is complicated by the relatively poor quality of light produced by kerosene lanterns. Hence, a kWh equivalent of kerosene consumption is not equivalent to a kWh of electricity consumption in terms of the amount of “light” supplied. Since customers are essentially purchasing lighting, the comparison must be based on output rather than input. Little information is available which addresses the comparative lumen output of kerosene lamps vis-a-vis electric bulbs in terms of relative output of useful “light”. Most studies focus on the relative efficiencies of the two lighting sources in terms of energy output vs energy input. The only direct reference found was a study, which equated the light from a kerosene lamp to that of a “2 watt flashlight bulb”. A second reference indicated that a kerosene lamp provided 32 lumens of light, as compared with 580 lumens for an incandescent bulb. Based on this information, it was postulated that a kerosene lamp produced the equivalent of 32/580 = 5.5% of the light of a 50 watt bulb. Hence, in order to place the kerosene and electric light options on an equal footing, it was postulated that a kerosene lantern was equivalent to a bulb rated at approximately 2.5 watts.
13. The survey found that the average non-electrified household had 1.9 kerosene lamps which were used for an average of 11.7 hours per day48. Assuming an output equivalent to a 4.5 watt bulb, this would be equivalent to a monthly lighting consumption equivalent to 3.1 kWh. These households consumed on average 2.8 liters of kerosene per month at an average cost of US$1.39 per liter or the equivalent of US$1.30 per kWh of lighting equivalent.
14. The demand curve of electrified households was also drawn from the survey. Looking only at the consumption of lighting, it was found that the equivalent
48 Interestingly, the use of kerosene lamps throughout the night was quite common, with the average household burning lamps for over 9 hours per night. This would suggest that safety might be almost as important as lighting in terms of the perceived utility of the lamps.
96 consumption of electrified households was 37 kWh per month at an average cost of US$O.O4l/kWh (the then-applicable lifeline tariff divided by 50 kWh per month). The survey did not specifically address the income elasticity of demand for electricity for these applications. However, the survey findings with respect to mean and standard deviation in electricity consumption among electrified households indicated very little difference among households in terms of total demand, which suggests either incomes were consistent or that there was little income elasticity of demand. For purposes of this analysis, the income elasticity of demand was assumed to be 0.25. Using these data, the formula for the demand curve for lighting was derived to be as follows:
Q = -.084 + .024*Y - 8.8*Ln( P)
15. The level of compensating income (C) was then calculated for a number of points along the demand curve from the initial P (US1.30) to the final known price (US$0.041), using the formula:
CO was taken as US391 (current per capita income), PO as 1.30, and QO as 3.1. The difference between PO and the final P was divided into 100 equal steps, so that P1 was equal to 1.30 (-) [(1.30 - .041)/100] and so on, with PlOO equal to .041. The level of compensating income at each P was calculated in a step-wise manner by substituting CO and P1 into the demand function to give the value for Q(Ck-l,Pk), and substituting these into the equation for ck to give the new level of C. The area under the reconstructed demand curve was then approximated to give a measure of the total economic benefit to the consumer associated with the use of electricity -- in this case, US23.92 or the equivalent, on average, of US0.643 per kWh. The income compensated demand curve is shown graphically in the figure below.
Table 9.2: Income-Compensated Demand Curve -- Lighting Rural Ghana
Income-Compensated Demand Curve - Lighting Rural Ghana
1.400
1.200 1 .ooo
0.800 II 0.600 fn 0.400
0.200
5.00 10.00 15.00 20.00 25.00 30.00 35.00 40.00 Q=kWh
97 16. The final component of electricity demand is consumption that is induced by access to electricity, Le., household applications such as television viewing, electric fans, or refrigeration that would not be feasible without grid access. Surveyed households with grid access consumed, on average, 10 kWh of electricity for these purposes. While customer willingness-to-pay for the induced consumption may be higher than the price actually paid by electrified ho~seholds~~,it was conservatively assumed that willingness- to-pay for this consumption was equal to the tariff.
17. Drawing together the willingness-to-pay for substitutes (dry-cell batteries, kerosene lamps) and induced consumption (incremental lighting, other consumptive uses) gives a weighted average willingness-to-pay on the part of electrified households of US$0.53 per kWh = [(US$1.31*1 + US$0.64 * 37 + US$0.041 * 10)/48].
18. Economic Rates of Return: The measures of benefits derived above were used to measure the overall benefits of grid access for each of the access expansion packages. The total number of new customers was taken from data supplied by ECG and NED in their descriptions of the access projects. Average monthly consumption per customer was taken from the survey findings, and assumed to increase at 3%/yr over the life of the project5'. Incremental benefits were compared with incremental capital and operating costs over an assumed 25-year project life. The findings for each of the access packages are summarized below.
US$ million Intensification US $24.3 74.6% 147.0 SHEP-4 -- Total US$170.4 16.4% 67.5 SHEP- 4 -- Years 1 and 2 US $48.2 25.1% 61.8 SHEP-4 -- Years 3 to 6 1JSs122.2 10.8% 5.6
19. Switching values were also calculated for each expansion package with respect to key input assumptions. These included capital cost, average customer willingness-to-pay, and average cost of generatiordtransmission. The results are summarized in the table below and indicate that the projects to be financed under GEDAP (Intensification and Years 1 and 2 of the SHEP program) are relatively robust, the later SHEP projects are more sensitive to changes in the underlying assumptions.
49 For example, the survey included a small sample of households with solar electricity. 44% of these households owned a television, which they watched on average 0.9 hours per day.
This growth rate is lower than that projected for the system as a whole. However, given that the program will target rural areas with relatively low per capita incomes, it was judged reasonable to assume that demand would grow more slowly than in the country as a whole.
98 Table 9.4: Economic Analysis -- Switching Values
Project Capital Cost WTP Generation (% of Base) US$/kWh (US$/kW h) Base Value 100% 0.53 0.12 Intensification 267% 0.403 0.24 SHEP-4 -- Total 148% 0.305 0.327 SHEP-4 -- Years 1 and 2 232% 0.509 0.140 SHEP-4 -- Years 3 to 6 106% 0.188 0.433
20. Willingness-to-pay, especially when there is a severe income constraint, does not fully reflect the benefits of access to electricity. Other benefits which are more difficult to express in economic terms include improved health and safety, increased income- generating opportunities, higher quality medical care, and improved conditions for teaching and learning to name a few. Hence, the fact that some of the sub-projects might not meet hurdle rates for EIRR does not necessarily mean that they should not be implemented. However, the analysis does suggest a need for a more careful review of some of the components of the packages (specifically the latter phases of the SHEP-4 program), as well as a need to encourage low cost supply technologies, and seek out opportunities for high value-added applications of access.
21. Solar-PV Units: The analysis of the economic and financial viability of the Solar- PV pilot followed a methodology similar to that described above. In the case of solar- electrified homes, however, survey results51indicated that solar was used as only a partial substitute for kerosene lighting. Solar-electrified homes continued to use kerosene lamps but at only about half the level of non-electrified households. The willingness-to-pay analysis therefore considered the value of the substitution effect only with respect to the differential in kerosene use between the two types of households. The income compensated demand curve derived on the basis of these parameters (Le., where P1 and Q1 are based on the avoided cost and kWh output of kerosene lamps, while P2 and Q2 are based on the observed cost and kWh output of solar lamps) indicated a willingness-to- pay for solar lighting equivalent to US$1.93/kWh. Comparing this with the actual cost of the system (including battery replacement at 5-year intervals and annual maintenance costs) yielded an EIRR for the solar installation of 21%.
22. Financial Rates of Return: While the access projects show relatively high economic rates of return, the financial benefits are much lower, as are the corresponding financial rates of return. The financial analysis of the access projects compared the incremental tariff revenues with the incremental costs of capital investments, operation and maintenance of the distribution network, and cost of generation and transmission. Based on anticipated tariffs (see discussion of Financial Viability of the Borrowers), the financial rates of return on the access components are negative. Net present values, based on an 8% financial cost of capital, are summarized below. The present values are separated between the capital component (potentially borne by the government), the
51 George Yaw Obeng, “Survey of Electricity and Kerosene Consumption in Rural Communities, Ghana”, Kwame Nkrumah University of Science and Technology, Kumasi, Ghana, October 2006.
99 operating and maintenance costs of the distribution companies (borne by ECG and NED), and the incremental costs of generation (borne by VRA).
Table 9.5: Financial Analysis of Grid-Based Access Projects
23. Given the government’s policy of uniform national tariffs for grid-connected customers, it will be necessary for the government to either raise all tariffs to a sufficient level that the costs of grid extension are covered, or to provide capital and operating subsidies to the utilities in order to cover their losses on new connections.
24. In the case of Solar-PV units, the FIRR analysis was based on the financial return to the customer, as represented by the total cost of the solar installation versus the corresponding annual savings in kerosene consumption. Assuming no capital or operating subsidy, the incremental cost of the solar system over a 20-year period was US$821 per household, or approximately US$41 per year. This is equivalent to approximately 10% of average annual rural incomes. While this might be easily affordable for some higher-income households (particularly in view of the better quality of lighting provided by the solar lamps), widespread uptake of the solar option would be facilitated by the types of capital and financing subsidies foreseen in the design of the Solar-PV component.
Part B: Financial Viability of VRA and ECG
25. The following sections discuss in turn the recent and projected financial performance of VRA and ECG, including their expected capacity to meet co-financing and debt service obligations associated with the project. The analysis is based on data available at the time of the appraisal mission in March 2007.
B.l -- Volta River Authority (VRA) 26. The financial viability of VRA was reviewed in early 2006 as part of the appraisal of the WAPP APL1, Phase 2, which was approved by the Executive Directors in June 2006. At the time, it was noted that the combination of high fuel prices and non- compensatory tariffs (in particular the heavily subsidized tariff to VALCO) were threatening the near-tern financial viability of the company. Agreements were reached at that time for the government to provide interim financial support to VRA, until such time as the West Africa Gas Pipeline (WAGP) was completed and the thermal plants could be converted to lower-cost natural gas. Since that appraisal, two factors have combined to
100 further erode VRA’s financial situation: completion of the WAGP has been delayed, with full flow now expected in November 2007, and low inflows to Lake Volta have forced VRA to cut back on hydro-electric generation and rely more heavily on costly thermal generation. In 2006, hydro generation represented only 60% of total supply as compared with 70% in the previous year. Despite significant government support in the form of fuel purchases, the company incurred losses of over 2 trillion cedis in 2006 (approximately US$230 million) and was obliged to resort to short-term borrowing (a net of 55 1 million cedis) in order to cover cash flow deficits.
27. The combined impact of increased use of thermal power generation together with non-compensatory tariffs eroded VRA’s financial position to the point where any discussion of continuing with the status-quo became pointless. The value of the government’s equity in VRA fell by US$220 million between 2005 and 2006, despite the financial support provided. Unless significant changes are put into place, the value of this equity will fall by a further US$1.6 billion over the next 6 years, and by the end of 8 years the value of the government’s ownership will be negative US$600 million. Even this is based on the assumption that the government will pay the capital cost of the proposed 110 MW emergency diesel plant, relocation of the Osagyefo Barge, and the capital cost of Bui Dam. To rectify this situation, the Government has committed, under the policy statement appended to the PRSC V credit, to the recapitalization of VRA. In addition, the policy letter commits the government, through PURC, to move to full cost recovery tariffs.
28. Projections of VRA’s financial performance (and through association, those of ECG) were prepared based on the assumption that the government would provide US$175 million in additional equity financing to VRA during 2007 and 2008, and that PURC would implement full cost recovery tariffs not later than December 3 1, 2008. The highlights of VRA’ s financial performance under these assumptions are given below52.
52 Comprehensive spreadsheets are available in project files.
101 Table 9.6: Volta River Authority -- Highlights of Financial Performance
VOLTA RIVER AUTHORITY Highlights of Financial Performance Full Cost Recovery Tariffs from
2004 2005 2006 2007 2008 2009 2010 2011 2012 DESCRIPTION Actual Actual Preliminary Projected Income Items:
Power Sales (GWh) 7,050 7,704 8,950 8,688 9,449 10,109 10,862 12,786 12,242
Average Tariff ($/kWh) 424 422 48 1 498 518 859 908 899 1,099
Power Sales ($ Billion) 2,991 3,251 4,302 4,327 4,893 8,684 9,864 11,488 13,458
Operating Cost ($ Billion) 2,930 3,879 7,216 9,461 6,984 8,065 9,182 10,741 12,639
Operating Income/(Loss) ($ Billion) 437 (508) (1,799) (4,987) (1,930) 796 876 961 1,476
Net Incomd(Loss) (c? Billion) (47) (532) (2,118) (5,600) (3,218) (1,210) (1,877) (2,205) (2,329) Operating Ratio (%) ** 98% 119% 168% 219% 143% 93% 93% 93% 94% Cash Flow Items: Cash/Cash Equivalents at Year End (e Billion) 278 232 129 (437) (830) (1,034) (1,610) (384) 1,872
Debt Service Costs (e Billion) 534 482 302 1,062 1,656 2,312 3,121 3,571 3,912
Net Capital Investment ($ Billion) 55 137 492 920 2,589 3,540 1,721 188
Debt Service Coverage (Ratio)*** 1.oo 1.28 0.65 (5.28) (1.64) 0.11 3.00 3.25 6.30 Balance Sheet Items Average Net Fixed Asset ($ Billion) 24,745 24,046 23,345 28,350 35,843 44,929 53,109 60,769 71,774 Return on Average Net Fixed Assets in Operation (%) 1.77% -2.1% -7.7% -17.6% -5.4% 1.8% 1.6% 1.6% 2.1%
Working Capital (0 Billion) 1,244 1,213 150 (4,649) (7,797) (11,006) (13,123) (13,527) (13,399)
Current Ratio (Ratio) 3.07 1.79 1.05 0.37 0.26 0.30 0.27 0.35 0.44
* Assumes governmentI eauitv.I contribut s of cedis 800 billion in each of 2007 and 2008 ** Operating cost/operating revenue *** Cash flow from current yea's operations divided by current year's debt
29. Key assumptions used in the analysis include the following:
SupplyDemand balance and generation mix presumes that VALCO will not be supplied from the grid. This allows a reduction in the proportion of total generation supplied by thermal plants, and also allows deferral of new thermal capacity.
Capital Investment Plan provided by VRA in March 2007. Investments which were not implemented in 2006 were transferred to 2007. The CIP includes 2.8 trillion
102 cedis of investment over the 2006 - 2012 period, of which 1.6 trillion would be financed from external borrowing and the balance from internal funds flow.
Gas is available from the WAGP in late 2007.
Conversion of Takoradi 2 gas turbines to combined cycle is completed by the end of 2009.
The price of crude oil delivered to VRA averages US$64.50/bbl in 2007 - 2012. Delivered price of natural gas is calculated in accordance with the formula specified in the contract -- approximately US$5.40/mmBTU during the initial years of the contract.
Accounts receivable remain constant in proportion to sales -- approximately 200 days sales equivalent. Accounts payable, which are currently approximately 45% of cash operating expenses, are held constant to avoid excessive erosion of working capital.
There will be no further forgiveness of amounts outstanding under HIPC loans.
New loans will carry an interest rate of 5.5%, and repayment terms of 17 years including 5 years grace.
30. While the above-noted actions would not immediately restore the viability of the company, they will at least ensure its survival and place it on a track to financial recovery. The scenario is far from ideal, as VRA will still need to incur substantial short- term borrowing to cover cash flow requirements, which in turn will place upward pressure on the tariffs. In addition, the current ratio is projected to remain below covenanted levels owing to the build-up of short-term loans, which suggests that further actions will be needed in order to bring the company into compliance with the requirement of its existing loans.
B.2 -- Electricity Company of Ghana
3 1. ECG’s financial performance has been marginally satisfactory in recent years. While the company incurred operating losses each year from 2002 - 2005, it maintained a positive cash flow from operations and was able to maintain a significant capital investment program. The recently approved increase in distribution service charges (DSC) -- which was covered by the government during the latter half of the year -- resulted in a modest profit for the company in 2006. However, given that the Government does not propose to extend further debt forgiveness on HIPC loans, ECG will have to begin to make provision to repay the principal and interest due and accrued on these loans in 2004 - 2006.
32. In terms of the financial outlook for the company, operating losses are expected to recur in 2007 and thereafter as load growth will be suppressed by the anticipated need for load-shedding and by the higher prices for power purchases necessitated by VRA’s weak
103 financial position. In the near term, the company is forecast to have adequate operating cash flow to cover co-financing of the investment program as well as debt service obligations. In addition, it is assumed that the government will, through PURC, implement full cost recovery tariffs by the beginning of 2009. Highlights of projected financial performance under these assumptions are given in the table below. Pro forma financial statements are in the project files.
Table 9.7: Electricity Company of Ghana -- Highlights of Financial Performance
Full Cast Recovery Tariffs Prom January 2009* - - - - - 2004 2005 2006 2007 2008 2009 2010 2011 2012 DESCRIPTION Actual Actual Preliminary Projected Income Items:
Power Sales (GWh) 3,542 3,779 3,912 4,125 4,691 4,987 5,485 5,903 5,845
Average Tariff (ekWh) 720 723 735 a79 a79 1,371 1,419 1,403 1,691
Power Sales (e Billion) 2,551 2,731 2,873 3,626 4,123 6,837 7,785 8,281 9,884
Operating Cost (@Billion) 2,741 3,045 3,097 3,801 4,163 6,781 7,719 8,212 9,817
Operating Income/(Loss) (6 Billion) (189) (313) (222) (173) (38) 60 70 1 73 73
Net Income/(Loss) ((1 Billion) (184) (239) 78 (192) (48) 40 45 1 51 4 Operating Ratio (%) ** 107% 112% 108% 105% 101% 99% 99% , 99% 99% Cash Flow Items:
CasWCash Equivalents at Year End (e Billion) 283 305 361 683 817 1,660 2,115 2,522 3,243 Debt Service Costs (e Billion) 36 285 187 175 193 ' 189 222 Net Capital Investment (e Billion) 323 339 528 138 412 637 315 177 186
Debt Service Coverage (Ratio)*** 8.97 NA NA 1.70 1.92 6.59 376 351 4.64 Balance Sheet Items Average Net Fixed Assets (e Billion) 5,191 5,493 5,761 6,358 7,017 7,631 8,384 , 9,068 9,702 Return on Average Net Fixed Assets in Operation (%) -3.6% -5.7% -3.9% -2.7% -0.5% 0.8% 0.8% I 0.8% 0.7% Working Capital (e Billion) 746 437 582 a94 1,189 1,503 1,927 i 2,390 2,889
Current Ratio (Ratio) 1.62 1.23 1.30 1.41 1.51 1.35 1.40 j 1.47 1.46 *Assums government equity contribution s of cedis - - 800 billion in each of 2007 and 2008 ** Operating cost/operating revenue *** Cash flow from current year's operations divided by current year's debt service costs
33. Key assumptions used in preparing the financial forecasts include the following:
Capital investments of 1.9 trillion cedis are planned for the 2007 - 2012 period, including completion of projects currently underway, and the company's planned program for capacity expansion (which includes, inter alia, investments to be financed under the project). The analysis assumes that ECG will finance 785 billion cedis of investments through external loans.
104 The IDA loan is assumed to be on-lent to ECG for a period of 17 years, including 5 years’ grace, at an interest rate of 5.3%.
Accounts receivable will remain constant relative to sales at approximately 200 days sales equivalent.
Accounts payable will remain constant relative to cash operating expenses.
0 Other operating expenses are assumed to increase in proportion to inflation plus real growth equivalent to 25% of the growth in electricity sales. In other words, increasing operating efficiency is assumed as a result of economies of scale and efficiency gains resulting from the proposed management contract.
Customers are expected to contribute the equivalent of 20% of the cost of additions to fixed assets. These contributions are amortized over a 20-year period.
105 Annex 10: Safeguard Policy Issues
Ghana: Energy Development and Access Project
This annex is in two parts. Part A covers the use of country safeguards systems that were found to be equivalent to those of the Bank and consists of the Executive Summary of the Safeguards Diagnostic Review. Part B explains the arrangements for compliance with Bank safeguards policies for which Ghanaian systems were found not to be equivalent.
Part A: Use of Country Safeguards Systems
Ghana is one of the countries being considered for piloting the use of country environmental systems, specifically in the proposed Ghana Energy Development and Access Project (GEDAP). GEDAP will be governed by the new operational policy53(OP 4.00) on “Piloting the Use of Borrower Systems to Address Environmental and Social Safeguard Issues in Bank-Supported Projects.” In accordance with OP 4.00, staff from the World Bank, in collaboration with staff from the Ghana Ministry of Energy (MoE), Ghana Environmental Protection Agency (EPA), Volta River Authority (VRA), and Electricity Company of Ghana (ECG), carried out an equivalence analysis and acceptability assessment of applicable Ghanaian environmental systems, in the latter half of 2005 and early 2006. The work was done in partnership with the African Development Bank (AfDB) in order to facilitate use of country systems in Ghana by both banks and to progress toward harmonizing their respective safeguards requirements.
The development objectives of the project are to: (a) improve the operational efficiency of the electricity distribution system; and (b) increase the population’s access to electricity. The Project will contribute to the global objective of mitigating climate change through the reduction of greenhouse gas emissions, in line with the United Nations Framework Convention on Climate Change and its Kyoto Protocol, to which Ghana is a party. A grant from the Global Environment Facility (GEF) has been applied for and, if it is approved, the funds will support technical assistance in promoting use of renewable energy sources. Moreover, the efficiency enhancing measures in the distribution sector are likely to generate additional greenhouse gas emission reductions, which may be eligible for carbon finance. The project has three components.
Sector and Institutional Development to provide technical assistance and capacity building for improving the power sector regulatory framework, strengthening MoE’s and ECG’ s institutional performance, developing renewable energy framework, and assisting in project implementation and monitoring.
Distribution System Improvement. This component will be implemented by ECG, and will build on the ongoing work under the Distribution System Upgrading Project (DSUP), which is part of the Thermal Power Project (P000926).54 Key investments focus on the
53 OP/BP 4.00 can be viewed at this website: http://wbln0018.worldbank.ordInstitutional/Manuals/O~Manual.nsf/tocall~9CED1645FB433885256FCD00776B 19?0penDocument.
54 This project closed in December 2006.
106 improvement of energy service quality and resulting financial flows by rehabilitating the existing networks, improving the quality of service delivery, implementing loss reduction measures and enhancing commercial capabilities.
Electricity Access and Renewable Energy. This component is proposed to be implemented initially by an Interim Access Secretariat under the MoE, which may later be developed into a Rural Electrification Agency with a separately administered Rural Electrification Fund. The component will complement the Government’s efforts to achieve its electrification goals through grid extensions and renewable sources (mini-hydro, solar and wind).
Five World Bank safeguards policy areas are applicable to the project: (a) Environmental Assessment; (b) Natural Habitats; (c) Physical Cultural Resources; (d) Involuntary Resettlement; and (e) Safety of Dams. The equivalence analysis, which was based on a review of legislation, regulations, guidelines and procedures, concluded that Ghanaian systems for environmental assessment (EA) and physical cultural resources (PCR) are in most respects equivalent to the World Bank’s and AfDB’s policies and procedures. EPA, MoE, and VRA have activities already underway to further strengthen environmental assessment in the energy sector which, although undertaken for the borrower’s own purposes, will enhance equivalence. Ghana’s policies for natural habitats, involuntary resettlement, and safety of dams differ significantly from those of the World Bank and AfDB.
The acceptability assessment addresses only the two policy areas in which World BanMAfDB and Ghanaian systems are equivalent. It is based on field visits to VRA and ECG projects, review of the safeguards documents and permits associated with projects visited, evaluation of EPA’ s institutional capacity and the three implementing agencies, discussions with agency officials and non-governmental organizations (NGOs), and meetings with communities in the vicinity of transmission lines. The assessment confirms that, with a modest number of gap- filling measures, Ghanaian EA and PCR systems can be used in preparing and implementing GEDAP. For these areas, OP/BP 4.00, Piloting the Use of Borrower Systems to Address Environmental and Social Safeguard Issues in Bank-Supported Projects, will apply. For the three areas judged not equivalent, the following World Bank operational policies will apply to GEDAP: (a) OP/BP 4.04, Natural Habitats; (b) OP/BP 4.12, Involuntary Resettlement; and (c) OP 4.37, Safety of Dams.
The following actions have been carried out prior to project negotiations to fill minor gaps in equivalence and achieve acceptability.
VRA management will approve the “Policy Framework for Environmental and Social Management of Bulk Transmission Line Projects in Ghana.”
MoE will prepare and issue an “Environmental Policy Framework for Captive Generation” setting forth MoE policy and procedures for applying Ghana’s EA system in MoE’s rural electrification and rural access programs.
ECG and the Northern Electricity Department (NED) will prepare and issue an “Environmental Policy Framework for Distribution” setting forth ECG policy and
107 procedure for applying Ghana’s EA system in ECG and NED electricity distribution projects.
ECG and MoE will prepare staffing plans that provide for adequate environmental and social impact management capacity to be in place before any disbursements begin on investments in the components for which they are the implementing agencies.
6. The following action will be carried out prior to project effectiveness to fill additional minor gaps in equivalence and achieve acceptability.
EPA will complete and issue the “Sector-Specific Guidelines for EA” for the energy sector.
7. The following actions will be undertaken to sustain acceptability during and after implementation of the project55.
Table 10.1: Actions to be undertaken to Sustain EAAcceptability
Action to be Taken By Whom By When Carry out a review of the quality of EA instruments Environmental March 2008 and prepared under GEDAP: Environmental Impact Assessment and Audit annually thereafter, Statements, Preliminary Environmental Reports (EAA) Department of Continue with these (PERs), Scoping Reportsmerms of Reference (TOR), EPA. tasks periodically. Environmental Management Plans (EMPs), etc., and communicate results to MoE, VRA, and ECG. Provide recommendations for improvement. Transition from consultant-provided EA capacity to in- MoE, ECG, EPA, World During 2007 and house permanent capacity in MoE “Electricity Group” Bank. 2008. and ECG, through staffing, training, refinement of environmental frameworks prepared in connection with
Issue the updated EA Procedures Manual. EAA Department of EPA. June 2008. Review adequacy of resources (staff, equipment, and EPA. December 2007. budget) allocated to EA in the energy sector in EPA Headquarters and Regional Offices, and optimize as appropriate.
8. As part of its reporting to the World Bank, MoE will monitor the status of gap-filling measures for equivalence and acceptability identified, at six-month intervals. MoE will annually forward copies of the EPA review described immediately above to the World Bank and AfDB.
9. MoE conducted a stakeholders’ consultation workshop on a draft of this report in Accra, Ghana, on August 15,2006. Copies of the draft were made available to the public in advance of
J5 Component A includes funding to support EPA in the annual EA instrument review and the review of resource allocations, to develop improved procedures for public consultation and EMP implementation monitoring, and to train EPA regional office staff in the new procedures. Component A will also support a consultant in the MoE Project Coordination Team to provide MoE and ECG with environmental and social impact management capacity for approximately 18 months, until the permanent staff recommended in the staffing plans are in place.
108 the workshop. Workshop findings and recommendations have been included in this final version that has been disclosed both in-country and at the World Bank Infoshop in Washington, DC.
Part B: Arrangement for Other Safeguards Policies
OP 4.04 -- Natural Habitat
10. The Credit Agreement will require compliance with OP 4.04. Compliance will be achieved through including potential effects on critical natural habitat and other natural habitat in the sub-project screening criteria and EA procedures that will be followed by VRA, ECG and MoE. The project will not finance sub-projects that involved significant conversion or degradation of critical natural habitat as defined in the OP. For proposed sub-projects that would result in significant conversion of other natural habitat, the EA for the sub-project will include the analyses of alternatives and benefits and costs called for in the OP, and, if the sub-project proceeds, its design will include appropriate mitigation measures that will meet the OP’s objectives. MoE has issued a Protocol for Compliance with World Bank Requirements that specifically covers OP 4.04 and OP 4.37.
OP 4.12 -- Involuntary Resettlement
11. The project will not involve large-scale resettlement, but various of its sub-projects are likely to necessitate acquisition of land, buildings and other fixed assets, and crops (usually only temporary, as VRA generally permits farming to continue in rights-of way except on access roads). In relatively few cases, displacement of families and businesses may occur because of right-of-way clearing and acquisition of land for towers, substations, and generation sites. A Resettlement Policy Framework (RPF) has been prepared to ensure that sub-projects are planned to minimize displacement and to compensate affected persons at replacement cost. Besides setting forth the principles to be applied in asset acquisition and resettlement, the RPF will provide guidelines to the implementing agencies on preparation and implementation of Resettlement Action Plans (RAP) where they are needed. The Credit Agreement will mandate compliance with the RPF and with any RAPSprepared thereunder. VRA already has capacity for and experience in carrying out land acquisition and resettlement in accordance with OP 4.12. The safeguards frameworks and staffing plans for ECG and MoE will provide comparable procedures and capacity.
OP 4.37 -- Safety of Dams
12. The project will not be financing dams large enough to necessitate a dam safety panel. The Protocol discussed in conjunction with OP 4.04 above will provide for design review of small hydro projects by a qualified civil engineer.
109 Annex 11: Project Preparation and Supervision Ghana: Energy Development and Access Project
Key institutions responsible for preparation of the project:
Ministry of Energy, Volta River Authority, Electricity Company of Ghana, and ARB Apex Bank.
Bank staff and consultants who worked on the project included:
110 Bank funds expended to date on project preparation:
1. Bank resources: US$46 1,000 2. Trust funds (GEF): US$55,000 3. Total: US$5 16,000
Estimated Approval and Supervision costs:
1. Remaining costs to approval: US$5,000 2. Estimated annual supervision cost: US$120,000
111 Annex 12: Documents in the Project File
Ghana: Energy Development and Access Project
Safeguards:
1. Safeguards Diagnostic Review for Piloting the Use of Ghanaian Systems to Address Environmental Safeguard Issues in the Proposed World Bank-Assisted Ghana Energy Development and Access Project (GEDAP) -- Equivalence and Acceptability Report, the World Bank, December 2006.
2. Land Acquisition and Resettlement Policy Framework for GEDAP, VRA, January 2007.
3. Volta River Authority: Framework for Environmental and Social Management of Bulk Transmission Line Projects in Ghana, 2007.
4. The Electricity Distribution Company of Ghana Ltd: Environmental and Social Policy Framework for Electricity Distribution, March 2007.
5. Resettlement Policy Framework (draft, February 2007; revised, May 2007).
6. Capacity building recommendations for compliance with Ghana EL4 requirements for the Electricity Company of Ghana, ECG, February 2007.
7. Capacity building recommendations for compliance with Ghana EL4 requirements for the Ministry of Energy, MoE, February 2007.
8. Protocol for compliance with World Bank operational policies: OP 4.04 -- natural habitats and OP 4.37 -- safety of dams, MoE, February 2007.
Fiduciary:
9. Procurement capacity assessments of MoE, VRA, ECG, and ARB Apex Bank, March - May 2007.
10. Financial management capacity assessments of MoE, VRA, ECG, and ARB Apex Bank, March 2007.
11. Overview of Ghana’s Rural Banking System, William Steel, January 2007.
Project Design:
12. Letter of Sector Policy from Ministry of Energy dated May 17,2007
13. Revenue Management Improvement Study for ECG and NED, Price Waterhouse Coopers (2007).
14. Distribution Network Improvement Study for ECG and NED, HIFAB (2007).
15. The West African Regional Transmission Stability Study. Volume 2, Masterplan Prepared for USAID and ECOWAS Secretariat, Nexant, July 2004.
16. Transmission System Audit, Main Report, Volta River Authority, September 2006.
112 17. George Yaw Obeng, Survey of Electricity and Kerosene Consumption In Rural Communities, Ghana, Kwame Nkrumah University of Science And Technology, Kumasi, Ghana, October 2006.
18. ECG, Report on Pipeline of Projects for Access Component of GEDAP, Engineering Department, November 2006.
19. Power Distribution System Master Plan Study for Ghana, Inception Report, Chubu Electric Power Co., Inc., February 2007.
20. Evaluation of Distribution System Upgrade Component of Ghana Energy Development & Access Project, Preliminary Report, Electrotech services, Ghana, March 2007.
21. Reducing the cost of grid extension (ESMAP Report No. 227/00).
22. Sub-Saharan Africa: Introducing Low-cost Methods in Electricity Distribution Networks (ESMAP Technical Paper No.104/06).
23. Challenge of rural electrification: strategies for developing countries (ESMAP).
24. VRA unaudited financial statements for 2006.
25. ECG unaudited financial statements for 2006.
26. Pro forma financial statements for VRA and ECG.
27. Development Policy Letter for PRSC-5 dated April 17,2007.
28. GEF Project Executive Summary, GEF Council Submission, August 2005.
Reference:
29. Diego F. Angel-Urdinola and Quentin Wodon, Do Utility Subsidies Reach the Poor? Framework and Evidence for Cape Verde, Suo Tome, and Rwanda, September 2006.
30. Proceedings of the International Grid-Connected Renewable Energy Policy Forum February 1- 3, 2006, Mexico City, Mexico, May 2006.
31. An Investment Framework for Clean Energy and Development: A Progress Report, Vice Presidency for Sustainable Development, September 2006.
32. Antonio Estache and Maria Vagliasindi, Infrastructure for Accelerated Growth in Ghana: Investments, Policies and Institutions (Draft), April 2007.
113 Annex 13: Statement of Loans and Credits
Ghana: Energy Development and Access Project
Difference between Expected and Actual Original Amount in US$ Millions disbursement
Project ID FY Project Name IBRD IDA GEF Cancel. Undisb. Orig. FrmRev'd
PO93610 2007 YGH-eGhana SIL (FY07) 0.00 40 39.96 PO92986 2006 GH-Economic Management CB 0.00 25 23.26 2.47 GH-Multi-Sector HlV/AIDS - M-SHAP PO88797 2006 (FY06) 0.00 20 17.22 2.47 PO85006 2006 MSME Initiative 0.00 45 45.36 2.95 GH-Small Towns Water Sply & Sanit PO84015 2005 (FY05) 0.00 26 16.47 5.12 PO82373 2004 GH-Urban Env Sanitation 2 ( FY04) 0.00 62 58.88 15.15 PO81482 2005 GH-Com Based Rural Dev (FY05) 0.00 60 29.61 3.77 PO73649 2003 GH-Health Sec Prgm Supt 2 (FY03) 0.00 89.6 0.42 -11.00 PO7 1157 2004 GH Land Administration (FY04) 0.00 20.5 14.28 8.43 PO69465 2000 GH-Rural Fin Srvcs SIL (FYOO) 0.00 5.13 0.24 -0.28 -0.39 PO67685 2002 GH-GEF Northern Savanna (FY02) 0.00 7.6 1.65 1.58 -0.40 PO56256 2005 GH-Urban Water SIL (FY05) 0.00 103 89.32 39.62 PO50623 2002 GH-Road Sec Dev Prgm (FY02) 0.00 220 35.17 -2.48 PO50620 2004 GH-Edu Sec SIL (FY04) 0.00 78 53.74 21.37 PO45188 1998 GH-GEF Forest Biodiversity SIL (FY98) 0.00 8.7 0.20 0.20 pooO970 1999 GH-Trade Gateway & Inv SIL (FY99) 0.00 50.5 18.7 16.35 10.53 Total 844.73 16.3 444.56 105.07 9.73
114 Ghana: Energy Development and Access Project
Statement of IFC's
Held and Disbursed Portfolio
(In US Dollars Millions)
Held Disbursed FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2006 Barclays Bnk GHA 30 0 0 0 0 0 0 0 2006 Newmont Ghana 75 0 0 50 0 0 0 0 2005 Scancom 40 0 0 0 20 0 0 0 2005 School Fin Facil 1.03 0 0 0 0.25 0 0 0 2001 Diamond Cement 2.5 0 0 0 2.5 0 0 0 2000 ELAC 0 0.1 0 0 0 0.1 0 0 1998 AEFNCS 0 0 0.53 0 0 0 0.53 0 1997 AEFPTS 0 0 0.31 0 0 0 0.31 0 1996 AEF Tacks Farms 0.43 0 0 0 0.37 0 0 0 1994 AEF Shangri-la 0.93 0 0 0 0.93 0 0 0 1991 GHANAL 0 0.22 0 0 0 0.22 0 0 1990 AAIL 0 2.55 0 0 0 2.55 0 0 1989 CAL Bank Ltd 0 0.87 0 0 0 0.87 0 0 Total Portfolio: 149.89 3.74 0.84 50 24.05 3.74 0.84 0
Approvals Pending Commitment Loan Equity Q uasi Partic 2005 Scancom 0 0 0 0 2004 Takoradi I1 60 0 0 0 Total Pending Commitment: 60 0 0 0
115 Annex 14: Country at a Glance Ghana: Energy Development and Access Project
Ghana at a glance 2/20/07 Sub- Key Development Indicators Saharan LOW Ghana Africa income Age distribution, 2005 (2005) Male Female
Population, mid-year (millions) 22.1 741 2,353 70.74 1 Surface area (thousand sq. km) 239 24,265 29,265 6.2-e4 Population growth (%) 2.0 2.1 1.8 5.2-E4 Urban population (% of total population) 46 35 30 4.2-44 30-24 GNI (Atlas method, US$ billions) 10.0 552 1,364 GNI per capita (Atlas method, US$) 450 745 560 2.2-24 GNI per capita (PPP. International$) 2,370 1,961 2,486 10-14 a O4 7 GDP growth (%) 5.9 5.3 7.5 20 10 0 10 20 GDP per capita growth (%) 3.6 3.1 5.6 percent
(most recent estimate, 2000-2005)
Poverty headcount ratio at $1 a day (PPP, %) 45 44 Under-5 mortality rate (per 1,000) Poverty headcount ratio at $2 a day (PPP. W) 75 ' 75 Life expectancy at birth (years) 57 46 59 Infant mortality (per 1,000 live births) 68 100 80 Child malnutrition (% of children under 5) 22 29 39 150 Adult literacy, male (% of ages 15 and older) 66 73 Adult literacy, female (% of ages 15 and older) 50 50 iw Gross primary enrollment, male (% of age group) 90 99 110 Gross primary enrollment, female (% of age group) 67 87 99 60
Access to an improved water source (% of population) 75 56 75 0 1880 1885 2OW 2W4 Access to improved sanitation facilities (% of population) 18 37 38
OGhana mSub-Saharan Afrlca
Net Aid Flows 1880 1890 2000 2005
(US$ millions) Net ODA and official aid 192 563 600 1,358 Growth of GDP and GDP per capita (K) Top 3 donors (in 2004): United Kingdom 35 22 80 264 r laT Netherlands 5 25 28 153 Japan 3 72 103 115
Aid (Oh of GNI) 4.3 9.7 12.4 15.7 Aid per capita (US$) 17 36 30 63
Long-Term Economic Trends
Consumer prices (annual % change) 50.1 37.3 25.2 15.1 GDP implicit deflator (annual % change) 51.1 31.2 27.1 15.0 I IGDp85 -GDP O0 per capita Exchange rate (annual average, local per US$) 9.6 326.3 5,455.1 9,072.5 Terms of trade index (2000 = 100) 83 100 60 1980-80 1980-2000 2000-05 (average annual growth %) Population, mid-year (millions) 11.3 15.5 19.9 22.1 3.1 2.5 2.1 GDP (US$ millions) 4,445 5.686 4,972 10,720 3.0 4.3 5.1 (% of GDP) Agriculture 57.9 44.6 35.3 37.5 1.o 3.4 5.0 Industry 11.9 16.6 25.4 23.2 3.3 2.6 4.6 Manufacturing 7.6 9.6 9.0 8.3 3.9 -3.2 1.4 Services 30.2 36.4 39.3 39.4 5.7 5.7 5.3
Household final consumption expenditure 63.9 65.2 66.6 61.3 2.8 4.4 7.6 General gov't final consumption expenditure 11.2 9.3 7.6 15.3 2.4 4.8 -7.0 Gross capital formation 5.6 14.4 23.9 29.0 3.3 1.3 10.7
Exports of goods and services 8.5 16.9 49.1 36.1 2.5 10.1 4.1 Imports of goods and services 9.2 25.9 67.6 61.7 0.6 10.4 5.0 Gross savings 4.5 7.0 15.5 22.0
Note: Figures in italics are for years other than those specified. 2005 data are preliminary estimates. .. indicates data are not available. a. Country poverty estimate is for 1999. b. Aid data are for 2004.
Development Economics, Development Data Group (DECDG). 116 2000 1Mt5
i ,938 2,802 3,031 5,752 422 -2,741
92 82
-119 -355 -5 4 .I 0 Control af ctirruatitron
284 1,951 15 leci
26 Li 30 1 172 22 4 18 7 25 3 Technology end 1tnfrastruc;ture 2000 2m 4 5 -2 9 Paved roads f% of totail t84 f79 rle phone 30 30 ,mpeoplef 17 93 33 33 ports ed exports) fS 36
6,116 8,739 Agncultuml land (% of land area) 54 65 388 285 Forest area (*A of land area, 2000 and 2005) 26 8 24 2 3,5w NatioRalfyprotected areas (% of land ana) 5.8
1230 82 5 Freshwater feswms per caaprta (cu meters) 1,399 15 7 72 Frebhwaler ~i~hdm~al(aof internal resources) 32
168 107 GO2 rgrni*SXMl~ per capita (rnt) 0 30 5.36 0 0
4.8 50
Energy u3e per caprta (kg of od equl~a~efl~~ 397 400
IDA 42% , 8 0 B i
30 234 204 305 Private -or ~~v~lo~rnen~ 2QM1 2008 47 48 Time required to start a business (dap) - 87 Cost to start a business (% of GNI per cap@) - 496 24 Tjme required to register property (days) - 382 24 Q r
MIGA Gross exposure 15 174 101 155 New ~u~tanlees Q QQ 16
Note Figurns in italics are for years other than those specifred 2005 data are ~e~r~ina~estfrnates MORS7 tndicates data are no2 availa~lo - mdimcates ~$e~a~i~kf not ap~~~~ie De~$Ia~entEconorni68, ~e~elo~rnan~Data Grwp (DECDG) 1895
50 0
35 27 22
54 61 65 63 $3 JZ 35 37 44 71
122 1 IO 112 132 75 61 65 6.5 11 70 84 53
340 40 44 44 47
Goal 6: halt and begin to reverse the spread of HIVIAIDS and other m@ordlseasas Prevalence of HlV (% #f ~pula~ionages 1549) 23 ~~~~e~~i~~prevalence (9$ of women ages 75-49) 23 20 22 25 Incidence of tuhrwlosrs (per 100.000 people) 223 206 Tuberculosis cases detected under DOTS (96) 16 38 37
lnable ~CCBBBto bgsic needs 5s 75 IS 18 32 I 24 2 56 02 03 04 t 2000 PPP $ per kg of orl squ 4% 41 50
3 4 17 93 Internet users @%r7 OW paopl5) 0 0 2 17 Personal ~rnpu~Qr~(per 1,000 people) 0 7 3 5 Youth N~~~P~O~Q~~(%o of total labor force ages 25-24) r7.1 15.9
Educetion indicatom (%) :T indicatom (per 1,000 people)
1w 1 rm . 'W m. I
Note Figures m itaim are for year; other than those s~~~ rndrcaies data am swt available U20J07
~eve~~pm5n~Eoooamics, D$~e~o~~~Data Group JDECDG) Annex 15: Incremental Cost Analysis Ghana: Energy Development and Access Project
Broad Development Goals
1. The global objective of the project is to assist Ghana mitigate climate change through the reduction of greenhouse gas emissions. The development objective is to provide increased access to affordable, clean, and efficient energy services. The GEF project intends to assist Ghana in establishing an enabling environment and facilitating market development to attract private investment in large-scale commercialization of renewable energy and energy efficiency improvement.
Baseline
2. Ghana’s rural electrification rate reached 54%, higher than any other Sub-Saharan African country. To date, however, grid extension has been the main approach to increase energy access. The government has an ambitious plan to achieve universal access by 2020. Ghana’s rural electrification is at a cross-road. The cost of rural electrification will be increasing, with outreach to more remote areas.
3. Under the baseline, meeting the broad development goals will require high-cost grid extension and/or diesel genset mini-grids in concentrated but remote areas, and kerosene and dry cell batteries in dispersed rural areas.
4. Increasing access rate from 54% to universal access requires alternative models where off-grid options become more attractive. Renewable energy (RE) can play a major role in providing electricity services in rural areas, and Ghana is endowed with rich renewable energy resources. In addition, many cost-effective energy conservation opportunities exist. To date, however, utilization of REEE is quite limited, except large hydro, due to a number of barriers. Without these barriers being removed through this project, renewable energy development such as small hydro, biomass, wind, and Solar- PV and energy efficiency will continue to be the minimum and access to electricity services in remote rural areas will continue to be very low.
5. Without GEF contribution to the IDA credit, it is likely that the rural electrification and renewable energy efforts will not be well integrated, which will mean that renewable energy will play only a marginal role in the larger rural energy access effort.
Global Environment Objectives
6. The global environmental objective is the reduction of GHG emissions by removing the major barriers to the development of renewable energy in Ghana. This project design is consistent with GEF OP5 “Removal of Barriers to Energy Efficiency
119 and Energy Conversation”, and OP6 “Promoting the Adoption of Renewable Energy by Removing Barriers and Reducing Implementation Costs”. Proposed GEF funding supports OP6 strategic priorities -- increased access to local sources of financing for renewable energy and energy efficiency, and promoting power sector policy frameworks supportive of renewable energy.
7. The project will directly help reduce C02 emissions through the implementation of large-scale grid-connected, mini-grid, and stand-alone renewable energy projects, such as small hydro, biomass, wind, and Solar-PV, as well as energy efficiency projects.
8. For the planned 1 - 2 large-scale grid-connected renewable energy projects, such as small hydro and wind, the marginal baseline power would be provided through gas- based combined cycle power plants, which have an emission factor of 670 g C02 per kWh56.An assumed operating time of 5,000 hours per year of the hydro scheme of 50 MW and 2,000 hours per year of the wind farm of 20 MW would result in annual savings of around 200,000 tons C02 emissions per year. An assumed lifetime of 25 years results in around 4,857,500 tons C02 emissions.
9. For the planned mini-gridrenewable energy projects, such as small hydro and village hydro (2 MW), biomass (3 MW), and wind (3 MW), the marginal baseline power would be rovided from diesel power plants, which have an emission factor 1330 g C02 per kWh? An assumed operating time of 5,000 hours per year of the hydro plants, 6,000 hours per year of the biomass co-generation plants, and 2,000 hours per year of the wind projects, would result in annual savings of around 45,220 tons C02 emissions per year. An assumed lifetime of 25 years results in around 1,130,000 tons C02 emissions.
10. Each Solar-PV system displaces at least kerosene and candles for lighting, resulting typically in C02 savings of 60 kg on average for a solar lantedsolar home system for household each year. Assuming the project targets at 10,000 solar home systems, this results in avoided emissions of 600 tons per year, or 15,000 tons over an assumed lifetime of the Solar-PV systems of 25 years.
11. In this project, it is expected that some electricity generated by renewable energy will be used to support productive uses, which would displace more fossil-based electricity and the associated emissions. In addition, the ESCO energy conservation projects would also result in C02 emissions from improvement in energy efficiency. Based on the experience from the GEF China ESCO project, the average C02 reduction from an ESCO project is estimated to be around 70 tons C02 per US$l,OOO investment. Assuming 5 ESCO projects with a total investment cost of US$1 million, this would result in 70,000 tons of C02 emissions. However, Ghana’s energy sector is quite different from that in China, this only serves as an indicative estimate.
56 IEA (2004): COz emissions from fuel combustion, COzemissions from electricity and heat production from natural gas.
57 IPCC Guidelines for National Greenhouse Gas Inventories.
120 12. Therefore, total direct benefits from renewable energy projects only would be in the range of about 6,000,000 tons of CO2 emissions avoided over the life of the equipment installed.
13. Indirect global environmental benefits of the project will be further assessed during project implementation, when the project can demonstrate how much renewable energy is able to replace fossil-based energy services. Given that this project is intended to establish a framework and provide technical assistance and capacity building activities, it is expected that REEE would be replicated without further GEF interventions.
14. The agreed cost of barrier removal for REEE is the GEF contribution of US$5.5 million. Several additional domestic benefits attributable to the project activities include: meeting the energy needs of presently un-served local communities and quality of life enhancements.
GEF Alternatives
15. To date, utilization of REEE is quite limited, except large hydro, due to a number of barriers, including a lack of enabling policies and regulations, access to financing, information, know-how and human capacity. Without these barriers being removed through this project, a widespread renewable energy and energy efficiency development is unlikely to take place. This GEF project intends to address these policy, financing, institutional, information, and capacity barriers, and play a catalyzing role to help Ghana tap its renewable energy potentials.
16. GEF support is sought for sub-component Al(d), A3(b), and C5 -- capacity building. Under the Access Component, C 1 (intensification) provides US$23 million baseline costs from IDA; C2 (grid extension) provides US$10 million baseline cost from IDA; C3 (isolated grids) provides US$3 million incremental cost from IDA and US$6 million leveraged funds from the private sector; and C4 (Solar-PV) provides US$3 million incremental costs from IDA and leveraged funds of US$6 million from GPOBA, and US$1.8 million from rural banks and consumers.
17. Component Al(d), A3(b), and C5(b) intends to remove the policy, capacity, and information barriers to accelerate grid-connected renewable energy such as small hydro, wind, and biomass, off-grid renewable energy such as mini-grid hydro, biomass, and solar home systems. This component will assist the government in: (1) developing a comprehensive renewable energy policy and regulatory framework; (2) coordinating grid vs. off-grid options for rural electrification; (3) building capacities and increasing awareness for decision makers, utilities, and consumers to promote renewable energy, energy efficiency, and environmental impact assessment for small hydro projects; and (4) conducting resource assessment and providing information needed for the private sector to develop renewable energy projects. GEF will contribute US$1.25 million to this component to support TA activities, while IDA will contribute US$lO.O million baseline cost for rural electrification investment. It would not occur without GEF support.
121 18. GEF will contribute US$1.25 million to this component to support TA activities with a break-down of (i)US$0.2 million to PURC on renewable energy tariff; (ii) US$0.05 million to MoE to develop standardized PPA; (iii)US$0.5 million to EC on development and implementation of Renewable Energy Law, resource assessment, and awareness campaign; and (iv) US$0.5 million on rural electrification planning and policy to inclusion of renewable energy. IDA will provide US$1 million baseline cost for TA to REA on access expansion, and US$70,000 incremental cost to EC on development of renewable energy law.
19. Component C5(b) also intends to remove the policy, capacity, and financing barriers to accelerate large-scale grid-connected renewable energy such as small hydro, wind, and biomass above 10 MW. This component will: (1) assist the government in developing a bidding package for a pipeline of renewable energy projects, which includes the feasibility studies, well-designed PPAs, tariff levels, etc., for private sector investment in these projects; and (2) hire international technical and financial advisors who can provide transaction advisory services to the government to negotiate the first two pilot projects. As a result, 1 - 2 pilot large-scale grid-connected renewable energy projects would be developed. GEF will provide US$0.75 million to hire transaction advisors for grid-connected renewable energy projects. As a result of TA, US$35 million is expected to be leveraged from the private sector and financial institutions for grid- connected renewable energy investment.
20. Component C5(c) intends to provide technical assistance and advisory services to the private sector to develop renewable energy projects. This includes small-scale grid- connected or mini-grid renewable energy such as small hydro, wind, and biomass below 10 MW, ESCOs conducting energy conservation projects, and Solar-PV dealers. While the mini-grid renewable energy technologies are the least-cost options compared to diesel genset (particularly at current high diesel prices), there is limited development to date due to a number of substantial barriers. First of all, they are new technologies, and developers are usually local small and medium entrepreneurs who require hand holding to get the project operational. Secondly, they are capital intensive, compared to diesel genset, therefore, require long-term financing which local banks cannot provide right now. GEF resources are requested to provide TA to address the first barrier, and IDA funding will be provided to address the second barrier. This component will: (1) provide cost-shared business development support to both local renewable energy developers, ESCOs, and commercial banks, and provide cost-shared grants for Solar-PV dealers to build a wide distribution network across the country; and (2) support AGSI to conduct marketing and awareness campaign and provide training. As a result, 2 - 3 mini-grid renewable energy systems, including small hydro, biomass co-generation plants, andor pilot wind farm, 5 - 7 village hydro systems, and 10,000 solar lanterns and systems would be developed. GEF will contribute to US$2.8 million for the TA activities.
2 1. Component C5(d) aims to remove financing barriers to accelerate stand-alone renewable energy systems such as Solar-PV systems (2.5 - 200 Wp). In Ghana, a 50-Wp solar home system costs US$800 (Solar-PV prices have increased substantially recently due to a global shortage of supply), accounting for the replacement and 0 & M costs over
122 15-year lifetime, the NPV of the life cycle cost for a 50-Wp Solar-PV system is estimated to be US$lS/Wp. Based on a recent willingness-to-pay survey conducted in a JICA study, an un-electrified household spends about US$6.6 as the average monthly expenditure on kerosene, batteries, and candles, and the NPV of baseline costs is estimated to be US$15/Wp. Therefore, the incremental cost is US$3/Wp. However, this project did not request for GEF resources to pay for the incremental costs. Rather, GEF support is requested to remove barriers. This component will build capacity and support implementation to the ARB Apex Bank and participating rural banks. As a result, 10,000 solar lanterns and Solar-PV systems would be installed. GEF support of US$0.7 million is requested for the TA activities.
Incremental Cost Matrix
22. The matrix below summarizes the incremental costs and benefits of the project. The incremental cost of the project is US$11.57 million, of which US$5.5 million is requested from GEF for TA activities only to remove barriers to the widespread deployment of renewable energy in Ghana, and US$6.07 million from IDA GEDAP. This project will also leverage US$6 million from GPOBA, which will be committed no later than January 2008, and US$42.8 million from the private sector, commercial banks, rural banks, and consumers in renewable energy investment. The total project costs are US$46.77 million, including US$35.2 million baseline costs from IDA GEDAP and government. Without these barrier removal activities, it is very unlikely that the large- scale national replication of renewable energy and energy efficiency would take place.
Table 15.1: Incremental Cost Matrix
Baseline Alternative Increment Activity Component A1(d), There exist policy, Remove these barriers Barriers to renewable A3(b), C5(b): RE capacity, and through technical energy removed, and policy framework. information barriers to assistance and capacity increased investment in renewable energy. building. renewable energy.
Rural electrification Grid and off-grid Off-grid renewable continues to be grid- options will be energy plays an based. coordinated under rural important role in rural electrification. electrification.
Cost: US$1 M from Cost: US$2.32 M Cost: US1.32 M IDA. GEF: US1.25 M GEF: US$1.25 M IDA: US$1.07 M IDA: US$0.07 M Component C5(b): No grid-connected 1 - 2 pilot large-scale Policy, capacity, and Large-scale grid- renewable energy grid-connected RE financing barriers connected RE. projects, due to policy projects. removed. Increased barriers. investment in large- scale RE development.
cost: US$O Cost: US$0.75 M Cost: US$0.75 M GEF: US$0.75 M GEF: US$0.75 M Leveraged funding from Leveraged funding from
123 private sector and banks: private sector and banks: US$35 M. US$35 M. Component C5(c): Limited mini-grid A number of mini-grid Increased mini-grid RE, Mini-gridRE, ESCOs, renewable energy, all RE projects developed EE investment, and solar dealers. for self-consumption, by providing technical Solar-PV. energy conservation and financial support to activities. the private sector.
Limited capacities of Long-term financing Policy, capacity, and local SMEs. available. financing barriers removed. No long-term financing Increased financing for available. ESCOs and EE activities. Solar dealers concentrated in Accra Increased dealers and distribution networks.
cost: usso Cost: US$2.8 M Cost: US$2.8 M GEF: US$2.8 M GEF: US$2.8 M Component C5(d): Limited solar home Increased investment in Increased investments in Solar- PV. systems. solar home systems and Solar-PV. off-grid wind turbines.
Consumers cannot Long-term consumer Financing barriers afford the high up-front credit available. removed. costs. Improved maintenance services.
cost: US$O Cost: US$0.95 M Cost: US$0.95 M GEF: US$0.7 M GEF US$0.7 M GPOBA US$0.25 M GPOBA US$0.25 M
C1. Intensificaiton. Rural electrification continues to be grid- based.
Cost: US$23 million from IDA. C2. Grid extension. Rural electrification continues to be grid extension.
Cost: US$10 million from IDA. C3. Isolated grids. Limited renewable Increased renewable Increased renewable snergy mini-gnds. energy mini-grids. energy mini-grids.
cost: US$O Cost: US$3 million Cost: US$3 million IDA: US$3 million IDA: US$3 million Leveraged funds from Leveraged funds from private sector: US$6 private sector: US$6 million. million. c4. Solar-PV. Limited Solar-PV Increased Solar-PV Increased Solar-PV systems installed. systems installed. systems installed.
124 cost: US$O Cost: US$3 million Cost: US$3 million IDA: US$3 million IDA: US$3 million Leveraged funds from Leveraged funds from GPOBA: US$6 million GPOBA: US$6 million and rural and rural bankskonsumers: bankskonsumers: US$ 1.8 million. US$1.8 million. Project Management cost: us$1,200,000 Govt. US$670,000 IDA: US$530,000 Global Environment Rural energy access is Renewable energy is Significant GHG Benefits expanded primarily integrated in rural emissions achieved. based on grid extension. electrification efforts.
Renewable energy is Renewable energy is Direct emission unlikely to be widely replicated. reduction of COP incorporated in the rural Policy, financing, reaches 6 million tons electrification scheme. institutional, over a 25-year period, information, and and more COP emission Renewable energy capacity barriers reductions from remains undeveloped. removed. potential future Barriers not removed. replications.
Baseline carbon Alternative carbon Barrier removal for emissions from gas, emission: 0 ton of C02, market development of diesel, kerosene, renewable energy. Domestic Benefits candles, and batteries: 8 Increased access to Improved livelihood in million tons of COZ electricity in remote remote rural areas. over a 25-year period. rural areas, improved economic activities and Increased job Local air pollution from incomes, and better opportunities in local natural gas and diesel local environment from communities. genset. renewable energy use.
Sustainable business Avoided air pollution models and long-term from diesel genset. financing encourage buildup of local RE industry and job creation. costs Baseline costs: US$35.2 Proiect costs: US$46.77 Incremental costs: M from IDA GEDAP M US$11.57 M: and government. GEF: US$5.5 M GEF: US$5.5 M IDA GEDAP: US$40.6 IDA GEDAP: US6.07 M M Govt. US$670,000 Leveraged funding from Leveraged funding from GPOBA: US$6 M and GPOBA: US$6 M and private sector and private sector and commercial banks: commercial banks: US$43 M. US$42.8 M.
125 Annex 16: Overview of Macroeconomic Environment and Financial Sector
Ghana: Energy Development and Access Project
Solar Market and Financial Development Approach:
Compliance with OP 8.30
Project Objectives
1. Component C of the project is to expand electricity access, and the sub- component for solar photovoltaic (PV) systems is intended to reach areas not served by the grid, as well as to expand the market for renewable energy in Ghana. The high up- front cost of solar home systems (SHS) means that few rural households can purchase them on a cash basis. The project will establish a “dealer credit sales model”: interested consumers purchase SHS from a commercial dealer and pay for the purchase with the help of a loan from eligible rural and community banks (RCBs), supported by US$3 million IDA Credit and output-based grants designed to promote affordability and equity with capital subsidies for grid electricity5*. The objectives of the Solar-PV sub- component are to promote the use of alternative energy sources to alleviate poverty and to develop new funding mechanisms for relatively poor households and enterprises, consistent with OP 8.30.
Market Development Approach
2. Solar-PV systems represent an important part of MoE’s strategy to make energy available throughout the country, including remote communities that cannot be reached by grid extension within the next decade. Incentives for Ghana’s nascent private solar industry to move into those areas and reach a sustainable scale would include assistance with capacity-building and marketing; output-based, pro-poor subsidies for systems sold, installed and maintained; and facilitating RCBs to develop microfinance methodologies and loan products to assist potential clients in financing their purchases.
3. Based on discussions with all parties, the mission concluded that the relatively high actual and perceived costs (by international standards) warrant relatively high initial subsidies to provide adequate incentives to serve communities where no grid extension (or SHEP program) is planned for at least 5 - 10 years. Since lack of proper maintenance has been a cause of failure in other solar programs, maintenance and one battery replacement are
58 SHS generally also includes solar powered small equipment such as solar powered water pumps, battery or mobile phone recharging, and solar lanterns. Global Partnership Output Based Aid (GPOBA) will provide a capital subsidy to bring down the initial SHS cost for rural communities that are not expected to have grid access in the next 5 to 10 years. The subsidy will have a pro-poor design with higher subsidy rates for the smaller systems.
126 included in the SHS package over the three-year loan period. The output-based grants in eligible communities help to cover these maintenance costs. These subsidies will be reviewed periodically and adjusted in the light of actual costs and e~perience~~.
4. Financial Market: The financial market also has to be developed to offer loan and savings products suited to financing Solar-PV systems and lanterns. With predominantly short-term deposits and a legacy of 62% primary and secondary reserve requirements, RCBs have little experience with term and non-conventional lending. The ARB Apex Bank is already launching a Microfinance Support Initiative (under the Rural Financial Services Project, RFSP) to help some of its 123 member RCBs develop microfinance programs to reach the rural poor. The ARB Apex Bank is ready to work with GEDAP to extend this program to RCBs serving targeted communities and to methods that would enable clients to accumulate the necessary savings. Substantial product development and capacity building will be required to introduce a 3-year term loan for solar systems. In addition, the Project will enable them to refinance 80% of the loan funds from an IDA line of credit, to overcome the market imperfection that inhibits term lending.
Policy Framework
5. Macroeconomic Environment: Ghana has made considerable progress in laying the foundations for sustainable growth and poverty reduction through steady reforms since the mid-l980s, resulting in per capita output growth averaging 1.6 percent per annum and increased private sector activity. Real GDP growth averaged 5.2 percent during 2002 - 2004, rising to an estimated 6.2 percent in 2006, and the central government debt to GDP ratio fell from 70 percent in 2005 to 42 percent in 2006. Social indicators have improved in parallel with the economic reforms: the poverty headcount fell around 7 percent between 1997 and 2003, and inequality decreased. Poverty remains predominantly rural.
6. Financial Sector: Government commitment to financial sector reforms since the late 1980s includes the Financial Sector Strategic Plan (FINSSP; 2003), which reformed the regulatory and institutional environment. Current efforts to address underlying market failures are supported by the IDA Economic Management and Capacity Building (EMCB) project (approved in FY06), and the IDNIFC Micro, Small and Medium Enterprises (MSME) Project (FY06), which will provide capacity building to commercial banks and make IFC/IDA partial credit guarantees and a line of credit available to support SME lending by commercial banks. The commercial banking system has seen increasing competition in recent years, though it remains largely dominated by a few major banks that target mainly urban middle-income and high net-worth clients. Hence the RCBs (plus NGOs and informal mechanisms that help RCBs extend outreach) are particularly important in expanding access to financial services to the broader population.
59 Grants for eligible communities are to be set initially at 50% for solar lanterns, US$400 for small solar home systems (SHS), and US$600 for larger systems. These grants are pro-poor in that they constitute a larger share of the cost of smaller systems most likely to be used by the poor.
127 7. Rural and Community Banks: The RCB system has grown substantially in size and strength since 2001, with support from the IDA/IFAD/AfDB RFSP. As of 2006, 97 of 121 RCBs were “satisfactory” and 24 “mediocre”; none was distressed (23 distressed RCBs were closed in 1999). The ARB Apex Bank (owned by and serving the RCBs) has grown rapidly under RFSP, with assets growing from (686 billion in 2002 (its initial year) to $414 billion in 2006. Outreach by RCBs has also grown impressively, with depositors rising from just over 0.5 million in 2001 to over 2 million in mid-2006. The number of borrowers grew from 139,325 in 2001 to 340,459 in June 2006. As the predominant type of licensed financial institution outside the urban centers, RCBs provide the backbone of access to finance in rural (and peri-urban) areas, accounting for half of all the microfinance clients in the country and on the order of 60% of the depositors, savings mobilized, and loan portfolios of all rural and micro finance institutions.
8. Interest Rate Regime: Under Ghana’s liberalized interest rate regime, and with the consumer price index dropping from about 40% annually in 2000 to the low teens in 2006 - 2007, interest rates on 9 1- and 182-day Treasury Bills have declined from over 30% to about 10 - 12% in 2006 - 2007. While the prime rate has also fallen to 12.5%, interest rates charged by private financial institutions to SMEs remain in the range of 20 - 30%. Commercial interest rates are expected to decline over time as banks begin to compete for loans, especially as the decline in interest income from Treasury Bills has raised bankers’ attention to other sources of bank income.
Justification for Subsidy
9. The participating RCBs will make independent credit evaluations of rural SHS borrowers. The interest rate will be market based, so there is no credit subsidy to borrowers of the line of credit. However, GPOBA is expected to provide US$6 million capital subsidy for SHS purchases in communities that will not have grid access in 5 to 10 years. The capital subsidy is needed to: (i)encourage SHS dealers to market in remote areas where income levels are low; (ii)achieve some parity between areas served by the grid, which enjoy heavy capital subsidies; (iii)gain acceptance of Solar-PV systems as a viable alternative energy; (iv) bring the purchase and maintenance of these systems within reach of remote, poor consumers; and (v) promote the environmental and health benefits of renewable energy and reduced use of kerosene. The level of subsidy is targeted to make SHS affordable, including solar lanterns as a viable alternative for the very poor (with a subsidy of 50% to 60%, if the very poor can save enough to make the purchase, they would earn it back within a year through reduced energy expenditures). A microfinance rotating saving scheme is one method to support the purchase which participating RCBs will be facilitated to establish. For the higher income families or small income generating activities, the subsidy and the line of credit will be available.
10. The subsidy is intended to partially cover the costs of maintaining the systems and battery replacement over the three-year loan period. The subsidy level will be reviewed one year after implementation as well as at mid-term review, so adjustments can be made based on market experience. It is expected that the subsidy would come down as
128 increasing scale of provision and growing competition bring costs and prices down and expand demand to self-sustaining levels at commercial prices.
Credit Line
11. The IDA line of credit is to support the development of a term-lending product in RCBs suitable for financing Solar-PV system package consisting of equipment, installation, three years of servicing and one battery replacement. Rural borrowers do not have access to consumer loans because: (i)commercial banks and other mainstream financial institutions do not have the outreach nor the interest to serve rural customers; (ii)financial services in rural areas are weak and the institutions do not have term-loan lending products; and (iii)the deposit base of RCBs is overwhelmingly short-term. The line of credit provides the RCBs with partial refinancing to enable them to extend longer term loans. Participating RCBs will have to meet performance-based eligibility criteria consistent with those of CBRDP6'. They will be permitted to use up to half the line of credit for loans to clients (largely peri-urban) outside the grant-eligible communities to purchase solar systems on a fully commercial basis. This is also intended to encourage greater utilization of solar for income-generating investments.
12. It will be implemented by the ARB Apex Bank, which is owned by the RCBs (independent unit banks) and helps link them to the commercial banking sector (e.g., through check clearing services) and provides capacity building and other services. The World Bank has long supported RCBs, most recently under the Rural Financial Services Project (RFSP; with IFAD and AfDB), which helped create the ARB Apex Bank to link RCBs to the commercial financial system, provide capacity building and monitoring of RCBs, and develop new financial products (such as microfinance and financing for SHS) so rural banks can better service their customer base. It will be implemented consistent with the existing IDA line of credit for income-generating investments by poor farmers and rural households being administered by the ARB Apex Bank under the Community- Based Rural Development Project (CBRDP). Technical assistance through the GEF grant will provide complementary capacity-building by assisting the ARB Apex Bank to develop and implement long-term loan and savings products and good-practice microfinance programs with participating rural banks in the poorer parts of the country. Repayments of the IDA line of credit will be retained in a revolving fund, which will be managed by the ARB Apex Bank on behalf of the government, to continue the financing
An Operational Manual has been drafted to govern the implementation of the Solar-PV sub- component and the GPOBA grant. As implementing agency for the sub-component, the ARB Apex bank will be compensated for the incremental costs involved. The total budget for implementing the line of credit and the grant, and establishing a revolving fund with the loan repayments, has been estimated at US$0.5 - 0.6 million, which will be paid partly on a quarterly basis and partly based on performance in disbursing and/or recovering the funds. To be eligible to participate in the IDA line of credit, the RCBs must serve the qualified rural communities and have a monthly CAMEL rating below 3.6 for the past 12- month period. The ARB Apex Bank uses a CAMEL rating scale of 1 (Strong) through 5 (Unsatisfactory). A rating of 3.6 or higher means the RCB is marginal (some risk of failure) or unsatisfactory (high risk of failure). The Results Framework and Arrangements for Results Monitoring covers the implementation of the Solar-PV systems and includes monitoring of the financial and operational performance of RCBs (e.g., CAMEL rating; portfolio at risk).
129 and incentives for Solar-PV systems as specified in the Operational Manual after the project completes. ARB Apex Bank may allocate a partial portfolio guarantee fund and insurance coverage.
13. Lending Rates: The IDA credit will be on-lent from the Ministry of Finance to the participating rural banks through ARB Apex Bank at a variable interest rate of the 182-day Treasury bill rate plus 25 to 50 basis points61. The rural banks will charge the SHS purchasers commercial interest rates (on a declining balance basis). IDA will re- finance 80 percent of the consumer loans, while the participating rural banks will finance 20 percent from their balance sheets. The participating rural banks will bear the consumer’s repayment risk. This line of credit will enable RCBs to combine their short- term funds with longer-term liquidity to extend loans for up to three years, to make monthly payments more affordable.
Selection of Communities
14. MoE has initially identified 11 Districts (most in the northern part of the country) with the lowest rates of grid connection in which to target communities under the Solar- PV sub-component. Verification and market studies are to be undertaken in these Districts to locate those communities that meet the eligibility criteria, which include: (i) no extension of the grid planned for at least 5 - 10 years (and no SHEP); (ii)served by rural banks that are rated satisfactory; and (iii)having an adequate level of potential demand (in terms of population size and willingness-to-pay). In addition, a process will be established to screen and verify additional communities that may be proposed, whether by solar dealers or local District Assemblies, recognizing that there are off-grid communities with little prospect of connection throughout the country (including, for example, islands in the Volta Lake), which may be served by solar systems.
Coordination with IFC
15. IFC has been regularly consulted during the preparation of the GEDAP project and has been consulted for this sub-component. IFC is in the final stage of approval for the Micro, Small and Medium Enterprise Project (the IDA portion was approved in FY06) for partial credit guarantees and a line of credit to commercial banks for term loans to SMEs, which could include solar companies (this line of credit is not available to rural banks). The Matching Grant Fund being established under the IDA/IFC MSME Project will be utilized to manage a window specifically for matching grants for capacity- building of renewable energy companies (including solar dealers). For further details, please refer to: Ghana Rural Banking System, William Steel, January 2007 (in the Project Files).
61 Rates would be adjusted at regular intervals (e.g., semi-annually; to be finalized with ARB Apex Bank). Alternatively, a fixed rate could be pegged to the prevailing rate on 2 - 3-year bonds. The intention is to provide the CBRDP and GEDAP IDA lines of credit on the same terms, for simplicity.
130 MAURITANIA GHANA ENERGY DEVELOPMENT AND ACCESS PROJECT MALI NIGER MAIN ROADS TRANSMISSION LINES (OVERHEAD): BURKINA FASO EXISTING SUBSTATIONS: SECONDARY ROADS Area of map 225 kV 161/69 kV RAILROADS BENIN 161 kV GUINEA 161/33kV PORTS
69 kV NIGERIA 161/11kV NATIONAL CAPITAL TOGO 33 kV 69/33 kV REGIONAL HEADQUARTERS CÔTE GHANA POTENTIAL HYDRO POWER PLANTS D'IVOIRE 69/11kV DISTRICT AND SUB-DISTRICT HEADQUARTERS WITH UNINSTALLED CAPACITY LIBERIA 33/11 kV HYDRO POWER PLANTS REGION BOUNDARIES Accra WITH INSTALLED CAPACITY INTERNATIONAL BOUNDARIES Gulf of Guinea
R e W 3° 2° 1° d h 0° 1° V i ol te ta V o l t BURKINA FASO a
11° BawkuBawku 11° TumuTumu NavrongoNavrongo BongoBongo ZebillaZebilla BolgatangaBolgatanga REGION LawraLawra SandemaSandema EAST
JirapaJirapa S UPPER isi UPPER WEST li PwaluguPwalugu GambagaGambaga BENIN NadawliNadawli REGION WalewaleWalewale
n w a p ul K WaWa 10° W 10°
h
i GushieguGushiegu t e
KulpawnKulpawn V
o
l
t
a SabobaSaboba SaveluguSavelugu KoulbiKoulbi
TolonTolon TamaleTamale YendiYendi ZabzuguZabzugu NORTHERN REGION
i ka t Da O BoleBole DamongoDamongo 9° JualeJuale 9° BimbilaBimbila
B la c k JambitoJambito V CÔTE NteresoNtereso o l ta SalagaSalaga D´IVOIRE LankaLanka TOGO NkwantaNkwanta
KintampoKintampo
8° BRONG-AHAFO 8°
REGION Kete-KrachiKete-Krachi REGION WenchiWenchi AtebubuAtebubu KwameKwame DansoDanso ru NewNew DroboDrobo P TechimanTechiman NkoranzaNkoranza Sene KadjebiKadjebi BerekumBerekum SunyaniSunyani JasikanJasikan EjuraEjura Lake Afr Dormaa-AhenkroDormaa-Ahenkro am Volta
sum HohoeHohoe BekyemBekyem MampongMampong Obo KenyasiKenyasi OdonkawkromOdonkawkrom KpanduKpandu 7° No.1No.1 ASHANTI REGION 7° TepaTepa OfinsoOfinso AgonaAgona i EASTERN y MankransoMankranso a GoasoGoaso EffiduaseEffiduase D EjisuEjisu KumasiKumasi NkawieNkawie MpraesoMpraeso KonongoKonongo JuasoJuaso HoHo
n i f KuntanaseKuntanase REGION O BibianiBibiani MansoManso BekwaiBekwai im BegoroBegoro NkwantaNkwanta Bir JuabesoJuabeso AbiremAbirem AsawinsoAsawinso SenchiSenchi AkosomboAkosombo DDamam To ObuasiObuasi KibiKibi OdumasiOdumasi Togo
KroboKrobo VOLTA AkatsiAkatsi KadeKade KoforiduaKoforidua KpongKpong DamDam AdidomeAdidome NewNew SomanyaSomanya AsuasoAsuaso AdubiaseAdubiase SuhumSuhum DenuDenu 6° AkropongAkropong SogakofeSogakofe 6°
o DunkwaDunkwa OdaOda
n AwisamAwisam KetaKeta
a AsamankeseAsamankese DodowaDodowa EnchiEnchi T AsankranguaaAsankranguaa NsawamNsawam a r JamuroJamuro P FosoFoso AdaAda WESTERN AmasamanAmasaman TwifoTwifo PrasoPraso EsikumaEsikuma TemaTema REGION SwedruSwedru GREATER To ACCRAACCRA Côte D’Ivoire CENTRAL REGION AjumakuAjumaku ACCRA TanosoTanoso TarkwaTarkwa AbatumesoAbatumeso WinnebaWinneba a DunkwaDunkwa r ApamApam b o k SaltpondSaltpond n DaboasiDaboasi HemanHeman A 0 50 100 150 CapeCape ElminaElmina 5° HalfHalf AssiniAssini CoastCoast KILOMETERS 5°
TakoradiTakoradi This map was produced by the Map Design Unit of The World Bank. AximAxim AgonaAgona The boundaries, colors, denominations and any other information IBRD 35486 JunctionJunction Gulf of Guinea shown on this map do not imply, on the part of The World Bank JUNE 2007 Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries.
3° 2° 1° 0° 1°