GHANA Public Disclosure Authorized FILECO PY

R E ST RI C T E D

Public Disclosure Authorized ONYE EE:KE -'IYPtrvu~m1wasprepared for usewithin the Bank. It maynot be publishednor mIiyit be quotedas representingthe Bank'sviews. The Bankaccepts no responsibilityfor the accuracy or completenessof the contentsof thereport.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized

PRELIMINARY APPRAISAL OF THE VOLTA RIVE'

HYDROELECTRIC PROJECT

GHANA Public Disclosure Authorized FILECO PY

June 30, 1960 Public Disclosure Authorized

Departraent of Tethnical Operations CURRENCY EQUIVALENTS

U.S. Cents 1 = Ghana Pence 0.857 U.S. $1 = Ghana Shillings 7 Pence 3 U.S. $2. 80 = Ghana I 1 U. S. $2. 8 million = Ghana i 1 million PvRELIiJNirtY A.PP7,HAISALOF TIE VOLTA RIVER HYDROELECTiIC PROJECT

GHANA

TABLE OF CONTENTS

Page No.

SUTVIiARY i - ii

I. INTRODUCTION 1

n,-.,- m\r4 ~ 4 m-rM4- T' Mr'vrmr AmThMnTTnM A TT7h ,-nT:,jA Trr' nDCr T-nrTI 1

III. POWERMARKET 2

Existing Installation 2 Proposed Transmission Network 2 The Non-SmelterLoad in the Accra-TemaArea 3 The SmelterLoad 4 TotalDemand and GeneratingCapacity Required 4 IV. THE PROJECT 5 The VoltaBasin 5 Descriptionof the Project 5 Engineeringand GeologicalStudies 6 Water Requirements 6 ConstructionSchedule 7 Cost Estimates 8 Scheduleof Expenditure 9

V. FINANCIALASPECTS 9 Financing 9 Tariffs 10 FinancialProjections 10 Ten-Year Return on the Investment 11 Long-Term Return on the Investment 13 Effectof an 80,000-tonSmelter 14 Effect of a 210,000-tonSmelter 15 GeneralConsiderations 16 VI. ECONOMICASPECTS 18 VII. CONCLUSIONSAND RECOSMENDATIONS 20 LIST OF ANNEXES

1. Power Demand in Accra-Tema Area: (Estimated Maximum Demand and Plant Capacity; and Estimated Electricity Sales)

2 PowTer Station Tnstalled Capacity and Maximum Demand.

3. Construction Schedule

4. Forecast Summary Income Statements and Cash Flows Based on a Smelter Tariff of 2.5 Mills.

5. Forecast Summary Income Statements and Cash Flows Based on a Smelter Tariff of 3 Mills.

6. Forecast Summary Income Statementsand Cash Flows Based on a Smelter Tariff of 3.5 Mills.

7. AlternativeThermal Power Station Costs.

8. Summary Estimate of Ancillary Investments.

9. The Effect of Power Prices on the Cost of Aluminum.

I'.) Calcala'tio of Long-Term Rate of Return.

Map of Ghana GHANA

PRZLYi!LWARATAPPRAISAL OF TIH. VOLT)1ARI-v_R FIf-ROUS-U.CTRIC PROJi1ECT

SUMMARY

The Governmentof Ghana asked the Bank to appraise the Volta River Project as though it were consideringfinancing the project and to indicate the effects of various smelter tariffs on the returns that might be expected from the project.

ii. The project comprisesthe Droposed AKosombo dam, a 539 i{ui power plant (wfvithprovision for 294 I.Tadditional capacity) and transmission lines to Accra and Tema to supply power to a proposed aluminum smelter and to the Accra-Temaarea. The dam would be 370 feet high above foundationlevel and 2,100 feet long, creating a reservoir 300 miles in length, with a total storage capacity of 120 million acre-feet. Excluded from the project, as appraised in this report, is a proposed 700 mile transmission netwrork, as the expected power demand it would supply would not justify, for some years, the initial capital cost required. The project has been investigatedby consultants,Kaiser ,ngi- neers & Constructors,Inc., of the U.S.A.

iii. Based on average rainfall, adequate water from the catchment area in Ghana would be availableto operate the initial four unit (589 ISrT) plant. Since water from tributaries of the Volta River rising in neighboring territorieswould be required to operate the project when fully developed (883 1MW),steps should be taken to determine wThether sufficient water could be diverted to affect the project seriously.

iv. The project, which would take about four years to construct, is scheduled to be completedby December 1965 but, in view of possible constructiondifficulties and the chance that two dry years in succes- sion might be experiencedduring the reservoir filling period, the date of beginning operationshas been assumed as January 1, 1967, in this report. v. The project is estimated to cost fG 58.3 million of which the foreign exchange componentwould be apnroximatelyfG 40 million. vi. For financing the constructionof the project it has been aosumed in this report that the Government'scontribution would be fG 30 million and the remainder would be borrowed at 651interest for a period of 25 years, includinga 6 year grace period. vii. The Governmenthas establisheda secretariatto coordinate general planning of the project. The Governmentproposes to set up a Volta River Authority to carry out all the steps necessary to construct the project and to operate it after completion. Consultingengineers would design and supervise constructionof the project. Expatriate staff would be required for key positions in the proposed Authority. - ii - viii. The power market would consist of the 120,000 ton aluminum smelter requiring 303 MiWand other consumers (Accra-Temaarea) requiring 59 MWin 1967 and 163 MWby 1976.

ix. The financial return on the project would not be attractive in the initial years of operation,particularly when the cost of ancillary invP.tm-nt.- is tikPn innto aeeoin1 aowpvv'r_t.hpe rptirn nve.r t,hp longer run is more substantial and benefits other than financial would accrue to the Government and the economy. It is for the Government to decide whether the longer-termreturn and benefits outweigh the initial losses and the uncertainties faced in so substantial an inv

x. If the Government decides to proceed with the project, it is recommended that the measures set out in paragraph 82 be taken. I. INTRODUCTION

This report presents an appraisal of the proposed Volta Ri"rer hydroelectricproject and has been prepared at the request of the Govern- ment of Ghana. The appraisal is concerned with the technical,financial adf1 ecOnvoc soundncssof the proposPednr6iect. with the adequacy of the organizationalarrangements for its execution and management, and with the assumptionsand cost estimates upon which a decision to carry out the project might be based.

2. The nroijet as presented to the Bank would include a dam at the Akosombo site about 60 miles above the mouth of the Volta River; a power plant with 589 Hdlinstalled; transmission lines to Accra and to the port of Tema, where a proposed aluminum smelter wtouldbe constructedby VALCO, a consortiumof aluminum companies;and a 700 mile transmission network to supply the principal cities, towns and mines of Southern Ghana.

3. Data on the technical features of the project and its estimated cost have been obtained from a comprehensiveengineering report prepared by Kaiser Engineers and Constructors,Inc., who are the Government'scon- sultants for the project, from a report prepared by Cooper Brothers and Co. on Kaiserts estimated costs, from an engineeringreport prepared for the Volta River Preparatory Commissionby Sir W~illiamHalcrow and Partners and from a field trip made by Bank staff.

II. ORGANIZATIONTO CONSTRUCTAND OPERATEPROJECT

4. A secretariat with a small non-technical staff has been set up by the Ghana Governmentto coordinategeneral planning of the project. The Governmentproposes to set up a Volta River Authority to carry out all steps necessary to build the project and to operate it after completion. Consultingengineers would design the project and superviseits construction.

5. The successfulexecution and operationof the project will depend, in large measure, upon the type and characterof the authority which the Government establishesto have responsibilityfor this important project. The authority should have the freedom, under broad delegationsof policy laid down in the legislationestablishing it, to make decisions and take the actions necessary for the success of the project. It should have the freedom necessaryto conduct its affairs in accordance WTithsound financial and public utility practices.

6. The most successfulagencies of this type are governed by a board of directors of several members. It is irmportantthat the board, while being responsiblefor overall policy and programing, should appoint adrministrativeand technical staff to Thom the execution ofLwork and operation of facilities would be delegated. Qualified senior staff, having the experiencenccessary to manage and operate a project of this nature, are not available in Ghana and it iwouldtherefore be essential to retain expatriate staff for many years. It is important also that the authority should have the power to fix tariffs and otherwise to main- ain a sound fiinancial position. - 2 -

7. U4hilein some cases authoritiesof this character are respon- sible for both generation and distributionof po:Jer,it would seem preferable that the responsibilitiesof the Volta River Authority should be restricted to the generation and transmissionof electricity,including sales to the smelter, and that distributionshould be the function of the EThetrinity epnartmPent. ifhich is fully conve'.n± with fhe,leal problems involved in distributingelectricity to the widely differing types of consumer in Ghana. In view of the importantrole which the ElectricityDepartment would have in selling the output of the project, that Department should, as quickly as possible,bc put on an efficient and economic basis. Considerationshould be given to the reorganization of the Department as an autonomous public corporation.

III. POWER MARKET

Existing Installations

8. All generation of electricityin Ghana at present is by diesel plants located in the towns or at the mines which they serve. The plants supplyingthe public are controlledby an ElectricityDepartment directly responsibleto the Ministry of Works and Housing. The load on the plants controlledby the ElectricityDepartment was about 29.2 NI at the end of 1959 and in addition the mines had a demand of about 36 YU..

9. It is not expected that the demand of the mlnes, all of which are supplied from their own well maintained and operated power stations, will change significantlyin the forseeable future. The mining companies have expressed the view that they would not take power from the Volta project unless they could be assured that the supply would be entirely reliable and wiouldshow some savings compared with their own generating costs, whlichare understood to range between 15 and 20 mills per kwh.

Proposed TransmissionNetwork

10. In addition to the transmissionlines from the Akosombo power station to the smelter, Tema and Accra, a netwgork planned to supply a demand estimated at 190 Ml has been proposed to serve southern Ghana including Kumasi, Takoradi and the mining companies. It must be assumed that the mines would not purchase Volta power in the near future because of the high cost shown in the following paragraph. Exclusive of the mines, the network beyond Accra and Tema would supply a widely distributed demand estimatedby the Bank to reach 36 N,1Tin 1967, rising to 87 14Win 1976, with annual energy requirementsof 106 million kilowatt hours in 1967 and 304.8 million kilowatt hours in 1976. These estimates are lower than those of Kaiser. (See Annex I).

11. The cost of this transmission network is estirmated by Kaiser to be approximately1G 11 million and, assuming interest at the rate of 6% per annum, depreciationat 3% per annum and operation and maintenanceat ;G 200,000 per a-nnum,the annual charges would amount to 26.3 mills per kwh sold in 1967 and 7 mills per kwh sold in 1976. If the cost of generation is added to these costs it is clear that the price of potwerdelivered from the network Twouldbe uneconomic in 1967 and for some years afterwards. - 3 -

12. The constructionof the proposed network beyond Accra and Tema should therefore be deferred until developmentof the load justifiesthe large capital expenditure required. In this report only the transmissior lines to Tema, Accra and the smelter are considered part of the project.

The Non-Smelter Load in the Accra-Tema Area

13. WTithso limited a history of power sales available the extent to which the load in the Accra and Tema areas will increase in the future is difficultto assess with precision. Studies of the power market have been made by the ElectricityDepartment, their consulting engineers, Preece, Cardew and Rider, and by the Kaiser Engineers and Constructors, Inc. These studies, which were made availaobe to the BDwk mission, may be summarizedas follows:

a) In February 1958, Preece, Cardew and Rider estimated the load would increase from 5.7 MWin 1956 to between 35 and 55 MW through 1967, an annual increase during this period of 15% -20%.

b) The ElectricityDepartment estimated the load would increase to 46 MWby the end of 1965, an annual increase of 20% per annum through 1962 and thereafter an increase of 15% per annum through 1965.

c) Kaiser Engineers and Constructors,Inc., agreed with the estimate of the Electricity Departmentup to 1965 but estimated the load thereafter would increase at an average rate of 21% per annum through 1980. The Kaiser estimate shows the total load for the area covered by the transmissionline network and does not segregate individual towns and cities; it indi- cates that the load will reach 88 MW by 1965, 210 MW by 1970, 500 MIWin 1975 and 1,200 MWby 1980, excluding the mining and smelter loads. On this basis the known hydro power potential of the Volta basin, if developed, would be fully utilized by 1980 without any provision for the aluminum smelter or present- ly known mining demand.

1h. For reasons given in Annex 1 the Kaiser estimate of a continuous annual increase of 21% per annum for a period of 15 years is considered by the Bank to be unduly high. The projections proposed by the Electricity Department have therefore been accepted up to 1965; and thereafter, to allow for rapid increases of load in the new town and port of Tema, close to the projected aluminum smelter, and in Accra, the center of Government and commerce of the country, a rate of 12-1/2% per annum has been assumed until 1970. After 1970, when the load in Accra would approximate54 IMWand in Tema 32 MT, the rate of growth has been reduced to 10% per annum through 1976, when the load of Accra would be 96 1MWand Tema, 57 MW.

15. Including transmissionlosses the combined loads of Accra and Tema on the power station, when it commencedoperation in 1967, would be 63 Hl and would rise to 163 1MWin 1976. The sales to the Electricity Department for both cities would amount to 233 million kilowatt hours in 1967 and 603 million kilowatt hours in 1976. The estimates loads and sales are given in more detail in Annex 1. _4_

16. The ElectricityDepartment has ordered ten 3 MiWdiesel units for installationin the Tema power station as an interim measure to meet the demand in the Accra-Tema area until the hydro station comes into operation. These uriLbs would then be transferredto up-country power stations.

The Smelter Load

Li. As the initial and ultimate production capacities of the smelter have not been finally decided, it has been necessary to make assumptions as to the size of the smelter and of the smelter load to be supplied by the project. These assumptions,based on the best informationavailable at present, are that:

a) the capacity of the smelter would be 120,000 long tons of aluminum per year, consistingof 4 pot lines each of 30,000 long tons;

b) the energy consumption (measuredon the high voltage side of the transformers)would be 10 kwh per pound of aluminum pro- duced during the breaking in of each pot line and 9 kwh per pound thereafter;

c) the project would not be ready to supply power before January 1967 (the reasons for this assumptionare given in Para. 36); and that

d) each newpot line would be started up as the breaking in of the previous one was completed; the first pot line would start up on January 1, 1967, the second on October 1, 1967, the third on July 1, 1968, the fourth on January 1, 1969 and the plant would be in full operation after July 1, 1969.

18. On these assumptions the saelter demand at the power station is estimated to be 78 MWin 1967, to reach 303 I@Win 1969 and to remain at that level unless the smelter capacity were increased. The energy consumption would amount to 630 million kwh in 1967 and reach a level of 2,419 million in 1970.

Total Demand and Generating Capacity Required

19. The combined demand on the power station in 1967, inclusive of transmissionlosses, of the smelter and of other consumers, would be 141 IVJ and it would increase rapidly to 395 MDtTin 1970 when the smelter load reached its maximum. Thereafter until 1976, with a constant smelter load, the relatively small annual increase of 10-15 MDJ would be due entirely to the non-smelter demand.

20. As it would be essential for the supply to the smelter to be firm, i.e. continuouslyavailable, it would be necessary to maintain in the power station a reserve capacity equal to the largest generatingunit in operation. Since it is proposed to install four units of 147.2 IfJ each, totalling 589 nilinitially, there would be ample reserve capacity - 5 - in the station to supply the maximum demand of 141 MW in 1967 but by 1975 when the demand is expected to increase to 451 MW a fifth unit would be required. Because of the large size of units proposed there wouid be a relatively large amount of capacity (and investment) idle. The amount of this capacity is shown year by year in Annex 1. It would be advisable to review the size of the generating units to be installed to determine whether some savings could be made through use of smaller units, which would leave smaller idle capacity.

TV. THE PROJECT

The Volta Basin

21. The drainage basin of the Volta River above the Akosombo damsite comprises an area of 152,000 square miles. Of this 90,000 square miles, or about 60%, lie in territories outside Ghana.

22. Records for 23 years show that the mean annual rainfall in the basin is about 42 inches, the minimum being 37.4 inches and the maximum 49.1 inches. The maximum recorded peak flow at the damsite between 1936 and 1959 was 393,000 cusecs and occurred in 1947. The highest flood in recent times, as determined from high water marks, occurred in 1917. Its estimated dischargewas 520,000 cusecs. The average flow of the river is about 41,500 cusecs. Although 60% of the area of the Volta River watershed lies outside of Ghana, more than two-thirds of the flow of the river at Akosombo is contributedfrom the area within Ghana.

Descriptionof the Project

23. The project, which would have an ultimate capacity of 883 1W, would be a major undertaking judged by any standards. It would consist of a rockfill dam about 244 ft. above low water (maximum of 370 ft. above foundations)with a crest length of 2,100 ft. The reservoir, which would be wholly within Ghana, would be 300 miles in length and would have a total storage capacity of 120 million acre feetl/butbecause of the tur- bine intake level, 50 million acre feet would be useful storage. Also included in the project would be a separate spillway 2,200 ft. long; a rockfill saddle dam 1,100 ft. long and 120 ft. high; a power station on the right bank of the river in which four generating units with a total capacity of 589 MLW/ would be installed initially; and four double circuit

1/ This compares with the 39 million acre feet in Lake Mead created by the Hoover dam in the U.S.A. and 120 million acre feet in the reservoir of the Kariba dar on the Zambesi River in Africa.

2/ In the Kaiser report the initial installation is described as 512 MW comprising four units of 128 MW each. As these units would have a continuous overload capacity of 15%, their effective capacity would be 147.2 MW each and four would provide 589 MW. - 6 _

165 KV transmissionlines, 44miles long, to Tema and one doublecircuit 165 KV transmissionline, 18 mileslong, from Tema to Accra. Provision would be made in the power stationfor two additionalunits.

24. The proposedvoltage of 165 KV for the transmissionlines is not a generally accepted standard and the use of one of the standard operating voltages would seem to offer the opportunity for wider compe- titionin tenderingfor high voltageequipment. Kaiser proposed the 165 KV line as being more economicthan a standardvoltage for a marketdemand of the size it forecast. Since that demandis not likelyto be realizedfor someyears. a reconsiderationof the proposeddesign might show savingsin both the purchaseprice and constructioncosts.

25. Provisionwould be made in the spillwayfor crestgates by which the level of the reservoircould be raised11 ft. for flood controland to gainmore storage. These gates would not be requiredfor the initial stageof 589 MW; it has been assumedthat they wouldbe installedfor the fifthturbine (and their cost has been included in that of the fifth unit). Withoutthe gates the operatinghead on the turbinesin the power plant would be 209 ft. The spillwayis designedto discharge560,000 cusecs withoutexceeding the normalmaximum controlled level of the lake. The spillway would also be able to discharge a flood of 1.2 million cusecs with a 10 ft. rise above this level.

Engineering and Geological Studies

26. The engineering studies made by the consultants are adequate in scope and detail for estimating the cost of the project and to serve as a basis for its final designs.

27. Extensive subsurface investigations have been made to gain know- ledge of the geological character of the damsite. These studies show that the rock in the foundations and abutments is satisfactory for the type of dam and other structures proposed.

28. An independentboard of consultants,selected by Kaiserwith the approval of the Government, inspected the site and studied the plan of developmentas proposedby Kaiser. It concludedthat the designand layout of the projectare satisfactoryand that the site is suitablefor the type of dam proposed. WaterRequirements

29. For the operationof the initialinstallation of four unitsof 147.2 SW each in the power plant,about 26,000cusecs would be required from the reservoir.The inflowinto the reservoirin a year of average rainfallis estimatedto be 41,500cusecs, which after evaporationwould providean averagedischarge from the reservoirof about 38,500cusecs. The very large capacityof the reservoirwould providepluriannual storage and,unless an unprecedentedsuccession of dry yearswere experienced wouldbe sufficientto maintainthis dischargecontinuously. - 7 -

30. If the power plant should be expanded to six units, the require- ment of water Twouldincrease to 38.000 cusecs. This amount of water could be obtained from the reservoir,provided no substantialdiversion or con- sumptive use of the water in the Volta drainage basin occurred.

31. Only about one-third of the water flowing past the Akosombo site originatesin the part of the watershed located in neighboringterritories; consequentlythe flow required for four units could be supplied from the rainfall on the watershed lying wholly in Ghana and the operation of the four units could be maintained even in the unlikely event that all of the water from neighboringterritories were diverted to other uses. However, if six units were installed in the power stationthe major part of the ,water nnt-ering Chanra ,-'-r-A--hbing torrittoieswrould be requ-i-red

32. Since VALCO is expected to ask for an option on power for a 210,000-tonsmelter, the Governmentmust be sure that enough water will be availableto generate the required power. Four units in operation would provide enough power even for the enlarged smelter, but only at the cost of reducing to virtually zero the amount of power that could be sold to other consumers. Hence the Government,before agreeing to such an option, should investigatethe extent to which water could be economicallydiverted to other uses and not returned to the streams in the neighboringterritories, so as to determinewhether the flows into the reservoirwould be adequate for operationof six units. Judging from the limited informationnow available about the topography of the watershed,the type of land and other factors in neighboringterritories, the amount of water that could be diverted would probably be relatively small.

ConstructionSchedule

33. The consultantsestimate that the project could be completedin about four years. Assuming that contractsfor the main civil works can be awarded by April 1, 1961, so that mobilizationof equipmentand staff for the constructionof the project can begin shortly thereafter,the scheduleddate for completionwould be December 1965. (Rainy seasons start in June and end in November.) A major problem will be the removal of a deposit of sand up to 100 ft. thick overlayingthe bedrock in the 7Test channel of the river between an island in the river and the '.lestor right bank. The sand deposit, which must be removed before the rock and earth fill for the dam can be placed, would have to be removed by dredging during the first low water season. (In order to maintain the proposed constructionprogram, orders for the dredges would have to be placed well in advance of the award of the main civil works contracts.) After the removal of the sand deposit, the upstream and downstreamrockfill cofferdams wrouldbe constructed. The area between the cofferdamswould then be filled with impervious core material and rockfill and the cofferdamswould become an integral part of the dam. !1henthe West channel had been closed, the flow of the river would be diverted through the East channel. Before closure of the East channel wTithcofferdams, a tunnel 25 ft. in diameter would be constructedaround the East or left abutment. It would carry the river flow after the East channel had been closed and provide water for the downstreamusers until the power station came into operation. - 8 -

34. To meet the completiondate of December1965, the West channel cofferdams would have to be completed during the dry season November 1961 to June 1962; otherwisethe constructionschedule would be delayed auout one year.

35. The important dates which must be met to assure completion of the project by December 1965 are:

a) Award main civil works contracts by April 1961 b) Complete West channel cofferdams by June 1962 c) Start filling reservoir by June 1964 d) Complete filling reservoir by November 1965 36. The above schedule has been based on a normal constructionprogram. Power production would be delayedabout one year if one or more of the followingcontingencies were to arise: a) failureto removethe river sand duringthe firstlow river flow workingseason;

b) exceptional floods delaying construction or damaging cofferdams; or c) two consecutivebelow-average rainy seasonsoccurring during reservoir filling.

In view of these contingencies, it would seem imprudent to assume that power production would begin before January 1, 1967. That date has been assumed in this report. Cost Estimates

37. The cost estimates shown below are based on figures prepared by Kaiser and reviewed by Cooper Brothers. Interest during construction was computed(by the Bank) on the assumptionthat 1G 28.3 million(US$79.2 million)would be borrowed.

Equivalent Items LG US Dollars Tthousands) Reservoir clearance, resettlement, healthmeasures, site preparation:4,950 13,860 Housingand accessroads: 3,976 11,133 M'aincivil works: 16,795 47,026 Powerplant equipment: 10,381 29,067 Transmissionlines and substations:4,500 12,600 Contingencies: 7,208 20,182 Engineering, overheads andworking capital: 4.,166 11,665 Interestduring construction on assumed borrowings - 1961 through 1966: 6,290 17,612 Total: 58,266 163,145 Of the above total, anproximatelyfG 40 million (US$112 million equivalent) would represent the foreign exchange component.

38. In arriving at the above cost estimate for the project, the Bank adopted, as being realistic,the Cooper Prothers estimate which was some 10% above that of Kaiser. The Cooper Brothers estimate was adjusted by eliminatingthe transmissionnetwork beyond Accra and by calculating

total investment.

39. A contingency sum calculatedat 2C; of the estimated total cost of the works at Akosombo a-ndtransrmiission lines to Accra, Tema and the smelter has heen included. This sum should be adequate to cover unfore- seen difficultieswith the project, exclusive of the transmissionnetwork, as planned in the Kaiser report, and includes allowancesfor increases in labor costs, plant and materials.

Schedule of Expenditure

40. The followingtable shows the estimated rate of expenditureon the project in thousands of Ghanaian Pounds.

Year £G

1959 418 1960 3,237 1961 11,596 1962 12,255 1963 10,158 1964 9,761 1965 7,530 1966 2,548 1967 763 Total 58,266

V. FINANCIAL ASPECTS

Financing

41. To meet the estimated capital requirementsof the project, EG 58.3 million, it has been assumed the Governmentwould provide fG 30 million on a basis which would require no fixed return and indeed no return at all in the initial years. It has been assumed that the balance would be met by 25-year loans at 65,interest. On the basis of the estimated loan withdrawals over the constructionperiod and a 3/4,k commitmentfee on the unwithdrawn loan balances, the aggregate amount of borrowings,including interest and commitmentfees through 1966, would total fG 28.3 million. Amortizationwould start in June 1967 and would be completed in December 1985. - 10 -

42. It has also been assumed that the Government'scontribution of fTG 30 il'lionwould b paid in er structon peiod on a pro ratn basis wgith the loan funds. The Governmentts cash contribution of LG 30 million, w~ithinterest capitalizedat 5% through 1966, would be equivalent to a total investment of approximately TG 36.5; million.2/

f.spari

43. In consideringthe tariffs to be charged for electricity supplies from the Volta River project, it should be borne in mind that the construction of the project at the present time could not be justified unless a large-in1n-strJ al c1emanri- such as the demand of the proposed smelter, were associated with it, Without the smelter load, the cost of generating the relativelysmall supplies required by other consumerswould be prohibitive. The appropriatedevelopment to meet these requirementsalone would be the constructionof a modern steam powierplant at Tema with transmissionto Accra. In annex 7 the costs of electricityproduced from such a plant are estimatedto be about 15 mills (or l.29d) per kwh. Clearly this figure, w-hichhas been assumed in the financial forecasts in this report should be regarded as the maximum price which the Ghana ElectricityDepartment should be called upon to pay for electricitysupplies from the Volta River project.

44. It has also been assumed that the smelter tariff wiouldhave to be in line with the price the aluminum industry is paying and can obtain poWer for in other parts of the world. (See Annex 9 for a discussion of the effect of the price of power on the cost of aluminum.) For purposes of calculationthree different tariffs, viz. 2.5, 3 and 3.5 mills, have been used. On a kMh basis, the non-smeltertariff is about 5 times the smeltertariff. On a demandcomparison, which takes into accounta smelterload factorof nearly100% againsta non-smelterload factorof about45%, the priceper Klwsupplied to the non-smelterload is still about 2-1/2times the priceper KJWsupplied to the smelter. FinancialProjections

45. Annexes 4, 5 and 6, whichassume a 120,000ton smelter,show ten-yearforecasts of summaryincome statements and of cash flowsstarting with 1967,the initialyear of operation.These forecasts are based on smeltertariffs of 2.5, 3 and 3.5 millsper kwh, respectively,with the non-smelter tariff remainingat 15 mills,as previouslymentioned.

46. The revenuesfrom the smelterwould reach their peak after 2-1/2 yearsof operations.The revenuesfrom other consumersare basedon the load growthassumptions showqn in Annex 1. The annualaverage revenue per kTwrhsold, including both smelter and non-smelter loads, wrould decline somewhat during the first three years; thereafter it would slowly increase due to the assumed steady growth of the non-smelterload. The average revenues per k,h sold emphasize the relatively high charges made for the non-smelter load, and indicatethe degreeto -whichthe profitabilityof the project dependson the size of the non-smelterload and on the tariffcharged to non-smelterconsumers.

1/ Five percent has been used because it approximatesthe rate of return on the Governmenttspresent investments in London. - 11 -

47. As sho-wn in the income statemrents, there would be losses; After depreciationand interest only on the assumed borrowings (but without any interest or dividends paid on the Ghana investment), in the first years of operation, which on a cumulative basis would not be eliminated until the seventhyear in the case of the 2.5 mill smelter tariff, the fifth year in the case of the 3 mill smelter tariff, or Lv fouu±tvhyear iJr.th case of the 3.5 mill smelter tariff.

48. As shown in the cash flow statements,there would be cash deficits in the first years of operation,which would require several years to be ellmina-ted.i^he "Jovernnmientwo-'d tao& m--ke arran-embents to me-etthnsp- temporary deficiencies. The deficienciesresult from the assumptionused here that the smelter would pay only for the power actually used for each pot line until that pot line had been broken in, and only thereafter would the power committed to it be paid for, whether used or not. The deficits would not occur if the power contract provided for full payment for the entire block of power committed to the plant from the start-up of operations. In negotiating a power contract,therefore, the Government should try to get agreement on payment from the start for the entire commitment to the plant or, if that is not possible, should insist on the shortest possible breaking- in period for each pot line.

49. The cash flow statements show that, by the end of the tenth year, after providing JG 5 million for the installation of the fifth unit, there would be cash accumulations of some fG 4 million, tG 8 million and £G 12 million, with smelter tariffs of 2.5, 3 and 3.5 mills, respectively. These accumulations should not be taken to mean that the project would have earned a satisfactoryreturn. As shown in subsequentparagraphs, the project would earn a very low return. The cash accumulationsresult (in accordancewith the assumptionmade in this report) because no provision has been made for the Government to receive either interest or dividends on its contributions to the cost of the project. If the contributionwere made on another basis - for instance 5% cumulative preference stock - dividends (to Government) woulld prevent cash accumulations for many years. It is important, however, to permit the accumulation of funds sufficient to cover a reasonable portion of the cost of the expansion of the power system related to the project.

50. If the smelter remained at 120,000 tons no additional generating capacity beyond the five units would be required until the early 1980's, at which time cash surpluses would be large and would be accumulating rapidly. The authorities would thus be under pressure to reduce tariffs to the non- smelter consumers. The Government must bear in mind that the lowering of such tariffs would make the project even less profitable than it already appears and could well preclude the generationof the financial resources required for future expansion of power facilities. Ten-Year Return on the Investment

51. Annexes 4, 5 and 6 show the returns on net fixed assets in operationl/andon Ghana's investment.

1/ Gross income as a percentage of fixed assets in operation after depreciation, - 12 -

52. The return on net fixed assets in operat-on based on a 2 r.ll smfelter tariff would be negative in the first year of operation.s and would thereafter rise from about 1% in 1968 to somewhat less than 6% in 1976. With a 3 mill smelter tariff, the return would again be negative in 1967 but would rise from about 1-1/2% in 1968 to about 6-1/2% in 1976. With a Jo J S.LIIe.J. ar-1 f II ee UU.a, wa-LLU ±±±tO L It PgL . .LU £±.. ,DL., in 1967 to somewhat over 7% in 1976.

53. The followingtable shows the return on Ghana's investmentl/during the first 10 years of operations. At the 3 mill smelter tariff there would he no rntin'n in t.he ini ti-l y re-

Returns on Ghana's Investment (first ten years of operation) Equivalent Compound Annual Return on Ghana's Investment Annual Return on Ghana's to Equal Cumulative Net Earn- Investment (in year shown) ings through year shown (1) (2) Smelter Tariff of 2.5 mills 1967 Negative Negative 1970 1.3% Negative 2/ 1973 3.5% Negligible- 1976 5.9% 1.6% Smelter Tariff of 3 mills 1967 Negative Negative 1970 2.5% Negative 1973 4.7% 1.30% 1976 7.1% 2.6% Smelter Tariff of 3.5 mills 1967 Negative Negative 2' 1970 3.7% Negligible- 1973 5.9% 2.2% 1976 8.2% 3.3%

1/ Including interest during constructionat 5% (paragraph 42).

9/ Less than 1/2 of 1%. - 13 -

54. The significanceof these returns (on the Ghana investment)may be illustratedby comparing the annual net earnings assuming a 3 mill smelter tariff with the annual interest on the same sum invested at 5G.

Dcficie.ny ^r qm, iat- Year Net Earnings Surplus (+) Deficiency ------______(fG 000) ------1967 (1,730) 3,556 3,556 Q68 ( 649) 2-475 6 o31 1969 594 1,232 7,263 1970 923 903 8,166 1971 1,166 660 8,826 1972 1,431 395 9,221 1973 1,720 106 9,327 1974 2,035 + 209 9,118 1975 2,198 + 372 8,746 1976 2,573 + 747 7,999

With a 2.5 mill smelter tariff, the annual deficiencieswould be somewhat greater and, conversely,with a 3.5 mill smelter tariff the annual deficiencieswould be lower. In addition,if the interest were higher than the 5% assumed above, the deficiencieswould be even greater.

Long-term Return on the Investment

55. The major significanceof the forecastsmade so far is that they show that the earnings of the project would be very low for many years after operation begins. They also show that the project, at any of the three tariffs tested, would face a problem of liquidity at the start of operationsand, on the basis of the 2.5 or 3 mill tariffsfor severalyears thereafter.Potential lenders for the projectare bound to take a seriousview of theseforecasts. 56. The returnof the projectto Ghanamust, however,be considered over the entireassumed 50-year life of the project. Such a calculation may be made on a discountedcash flow (or presentworth) basis, using the followingprincipal assumptions: l/

a) Sales of power to the 120,000-tonsmelter - stableafter smelter reaches maximum capacity in 1970; no power commitmentfor an enlargedsmelter.

2J See Annex 10 for a fullerstatement of methodsand assumptionsused in calculatingthe returnover the assumedlife of the project. - 14 -

b) Sales to other consumers - volume increases 10% per annum until average waterflow available for Akosombo is absorbed, estimated to occur by 1986; rate maintained at 15 mills through 1980 and reduced to 12 mills thereafter.V1

c) Operating cost - Stable until the fifth unit comes into operation; thereafteran increase of EG 80,000 to provide for costs of operating an additional unit; then stable until the sixth unit comes into operation when another EG 80,000 is added.

57. on these assumptions, the total project investmenrt would, with a 3 mill tariff for the smelter, earn a return of about 7-1/2% over a 50-year operating period; it would have repaid the entire investment with compound interest at 6% by 1994, an operating period of 28 years, or at 7% by 2004, an operatingperiod of 38 years. On Ghana's investment,the return would be 7.7% with a 3 mill tariff and approximatelyone-half of one percent higher or lower mith the tariffs of 3.5 and 2.5 mills.

Effect of an 80,000-tonSmelter

58. The forecasts discussed so far have been based on a smelter of 120,000 tons. The outlook for the project would change substantiallyif the smelter had a larger or a smaller capacity,and other important issues would arise.

59. If the smelter were limited to a capacity of 80,000 tons, the engineering of the power project would have to be reconsidered,particularly the size of the generating units. Assuming that capital requirementsand operating costs remained the same, tariffs for an 80,000-tonsmelter would have to be about 50% greater than those charged to a 120,000-tonsmelter to provide the project with comparablereturns on investmentduring the first ten years of operation. Tariffs of 2.5, 3 or 3.5 mills to a 120,000-ton smelterwould have to be increasedto 3.75,4.5 or 5.25 mills,respectively, for an 80,000-tonsmelter. If, on the other hand, the same tariffs were applied, the position during the first ten years of operationwould be sub- stantially worse than in the case of the 120,000-tonsmelter, as may be seen in the table in paragraph 62.a below; and the returns over the entire assumed 50-year life of the project would also be lower. The 80,000-ton smelter would leave an additional 100 W of spare generating capacity which could be taken up by non-smelter consumers at a tariff higher than the smelter tariff; but this spare capacity would not be needed until about 1982, and the additional revenues would thus come too late to of2l-et fully the low returns of earlier years.

/ Twelve mills would be the estimated cost (including a 6% return on investment) of alternative thermal power for the then assumed size of the market. - 15 -

6o. This report does not include a detailed analysis of tne project based on a srmelter of 80,000-ton capacity because it has been assumed that the Government would find the returns too low to justify the project. More- over, the Bank understands that an 80,000-ton smelter would be considered by VALCOonly as a short-term interim facility, not as a permanent plant.

Effect of a 210,000-ton Smelter

61. If. around 1972, the capacity of the smelter were increased from the assumed 120,000 tons to 210,000 tons, the full development of Akosombo's power potentialwould be required. This would involve additional capital expenditures of about EG 10 million. It has been assumed in this report that these outlays would be met as far as possible from cash surpluses and that the balance would be obtained from 20-year borrowings at 6%. On this basis, the additional borrowings would aggregate EG 10 million, EG 7.5 million or EG 6 million on a 205, 3 or 3.5 mill smelter tariff, respectively. The amount of borrowings would of course also depend on the timing of the expansion of capacity.

62. Assuming that such an expansion of capacity occurred in 1972, the returns on Ghana's investment over the assumed 50-year life of the project would be 6.85!at the 2.5 mill tariff; 7.6% at the 3 mill tariff; and 8.4% at the 3.5 mill tariff.

62,a The returnswhich the Governmentmight expect on its investment in the project, assuming three different smelter capacities,are illustrated in the following tables. y The net earnings of the project over its first ten years of operation,expressed in terms of equivalent compound annual return, would be greatly improved the larger the smelter capacity, as shown below:

80,000-Ton 120,000-Ton 210,000-Ton Smelter Smelter Smelter

at 2.5 mills negligible 1.6% 22% at 3.0 mills 1.1% 2.6% 3.h% at 3.5mills 2.0% 3.3% 4.5%

As has alreadybeen noted in paragraphs55 and 56, returnsover the first 10 years of operationand over the assumed 50-year life of the project, which are shown in the tables, should not be compared with each other. They are calculated in differentways and serve quite different purposes. The method used here for calculatingthe long- term return on investment is, of course,not the only one; but it has the irnportantadvantage that it makes the return comparablewith the return on Ghana's financial investmentsabroad. The method used in calculating the return in the first 10 years, i.e. the return on the initial investment,would be inappropriatefor calculatingthe return over the assumed whole life of the project. - 16 -

However, the returns on the project over the long-run, expressed in terms of present worth, would not vary substantiallywith the size of the smelter. This is shown below:

80,0Qn-Ton 120.000-Ton 210,000-Ton Smelter Smelter Smelter

at 2.5 mills 6e9% 7.2% 6.8% at 3.0 mr-ills 7e2% 7,7% 7.6% at 1A mills 7.6% 8.2% 8.4%

This smaller spread results from the fact that the larger smelter would bring about an earlier commitment of the full capacity of Akosombo and hence bring closer the day when sales of Volta power to non-smelter consumers, at a higher tariff,would be limited and revenues would cease to grow. The earlier the smelter expansion took place, the greater the advantage to the project; the later the expansion occurred, the smaller the advantage (if any) of the 210,000-tonsmelter would become. Similarly,the lower the tariff charged to the smelter, the more quickly the spread would narrow and, indeed, disappear altogether. At the 3.5 mill tariff, the return on the project with a 210,000-tonsmelter (based on a present value calculationusing a 6% per annum discount factor) would remain greater over the entire assumed 50-year life of the project than in the case of a 120,000-tonsmelter. But at 3 mills, the balance of advantagewould remain with the larger smelter only for 35 operatingyears; and at 2.5 mills, only for 25 operating years.

63. The direct returns on the investmentwith various smelter capacities, measured in this and the preceding sections,would not of course be the only benefit Ghana would receive from the project. Other factors, cited in Chapter VI of this report, must also be taken into account, particularly tax revenues and the greater likelihood that, with a larger smelter, VALCO or its associateswould go into bauxite and alumina production.

General Considerations

64. Several suggestionsemerge from the preceding assumptionsand calculations,which ought to be taken into account in negotiating arrange- ments with VALCO.

a. The higher the tariff negotiated for sale of power to the smelter, the higher would be the returns on the project and on Ghana's investment. Since the returns at any tariff likely to be attractive to the smelter would not be very attractiveto Ghana, the Government should make every effort to get the highest possible tariff. Another reason for seeking a higher tariff is to reduce the number of years in which the project would operate at a loss and the time required to achieve revenues large enough to cover debt service. Moreover, at some tariffs, for instance at 2.5 mills, power revenues from the smelter alone would never be large enough to cover debt service. These factors are bound to weigh heavily with potential lenders. - 17 - b. If the smelter were to remain limited to a capacity of 80,000 tons, it is doubtful that the Government would be justified in proceeding with the project at this time.

c. The return on the project with a 210,000-ton smelter would, in the early years of operation,be more attractive than the return with a 120,000-ton smelter. Over the entire life of the project, the returns would be better with a 210,000-tonsmelter only with tarifffsof about 365 mills or better. Noreover, the longer the delay in expanding the smelter, the lower the returns would be. It follows that the Government should seek to cu,i-iint'VALCO to a smelter larger than 120,000 tons, only if VALCOcommits itself to an early build-up of capacity. d. It is understood that VALCO, if it decided to build a 120,000-ton smelter, would ask for an option on power to supply a 210,000-ton smelter. Ghana would not benefit from such an option unless it were exercised. The Government should therefore seek means of pressing VALCO into an early use of the option. One means might be to limit the period during -which the option could remain un- exercised and to charge a substantial commitment fee for its renewal, beyond the initial period. e. Both the Government and VALCO would have an interest in a long- term contract. It is doubtful, however, that Ghana would benefit from a contract to supply power at a fixed tariff for more than 20 or 25 operating years. Over so long a period the real value of a fixed tariff is almost bound to decline. Aside from this, however, consideration should be given, in negotiating the duration of the contract, to the size of the smelter and the tariff that would be charged. Thus, for instance, the earlier the effectiveness of the commitment to increase the capacity of the smelter, the longer the duration of the contract Ghana would be justified in negotiating. And, the higher the tariff agreed upon, the smaller the risks of a long-term contract at a fixed tariff. f. Debt service charges on the project would be payable in foreign exchange. In the event of the devaluationof the Ghanaian pound, the project authority would have great difficulty in servicing its debt. This danger could be avoided if the contract with VALCO provided that power sold to the smelterwould be paid for in foreign exchange or if the tariff to the smelterwere denominated in foreign exchange and the power paid for in Ghanaian currency at the exchange rate in force from time to time. A provision of this nature would safeguard the financial prospects of the Volta authority in the event of devaluation and thus increase the attractiveness of the project to potential lenders. - 18 -

.T?r,Vt L ACOVl1,rr 1\Tr)1\IrTr OI-V ASP-.T-AC!DODTpPr

65. In addition to the investmentin the project proper, dealt with in the previous sections,there are substantialancillary investmentswnich have to be made in order to carry out the project, such as resettlement, compensation,housing, water facilitiesat Tema, and new dreedgiigaui purt works. These are all directly attributableto the project but not charge- able to it and hence not included in its cost. The cost of these ancillary investments, and the returns to be realized on then, should be taken into account in consideringthe return on Ghana's investment.

66. The cost of these ancillary investmentsis estimated at JG 11.h million, as shown in Annex 8. At the present levels of port dues, water rates and house rentals, these facilitieswould operate at a loss. It is the expressed policy of the Governmentto improve this situation,but there is no firm informationat the present time on which to base an estimate of the rate of return, if any, that might be realized as a result of higher rents and other charges. It is safer to assume that revenues from port dues, housing and water rents, will be merely sufficientto cover operating costs and to amortize capital, but not to provide a return on the investment. The effect of taking these ancillary investmentsinto account in assessingthe return on the total investmentand on Gnlanalsinvestment is to reduce the return (on a discountedcash flow basis) by about 1% per annum over the assumed 50-year life of the project. At the 3 mill rate, this would mean a return of roughly 6-1/2% on the overall investment (in money terms, say fG 2.5 million in 1976), and fractionallyless or more at the 2.5 mill or 3.5 mill rates, respectively.

67. This return would be the largest single, but not the only, benefit the economy of Ghana would obtain from the project. Another substantial benefit would be the income taxes collected from the smelter. These would of course depend on the profitability of the smelter and on the tax regime still to be negotiatedbetween the Government and the smelter consortium. If the present tax system,which includes a tax deferment of several years, were to be applied, the tax receipts from a 120,000 ton smelterwould be somewherebetween fG 1 and 2 million per annum, after the tax deferment is over. Not all this tax income would be clear gain; offsetting it would be the additionalGovernment services, such as schools, hospitals,police protection, sewage, etc., which would have to be provided for the increased size of the community.

68. In addition,the national income would benefit from the expenditures of the project, the smelter and associated services,on local labor (to the extent not previouslyemployed) and materials. During the construction period the direct contributionof increasedemployment and purchases of local materialswould be greater than when the project facilitieswere completed. In the operational stage, the economy would benefit from the employmentby the smelter of an estimated 1,600 persons; the power plant would require very few employees; additionalemployment in associatedser- vices cannot be readily estimated. If all these factors are taken together, it is doubtful if they would add as much as fG 1 million per annum to the national income. - 19 - o9. One deductionwould also have to be made in estimatingthe effect of the project on Ghana's national income, namely, the interest that would be foregone on the capitalGhana invested in the project, which Ghana might otherwisehave continued to invest abroad. If this were EG 40 million including expenditure on ancillary facilities, Lhe apvprvi-a te deduction would be about EG 2 million.

70. On all the assumptions and estimates made above, it appears unlikely that the net contributionof the project to national income would exceed EG 3.-)miliurn per- yea, in say- --,-,nh -r of operation this would be equivalent to about 1% of Ghana's present national income and an even smaller percentage of the national income at that time. The con- tributionwould be reduced if the power rate to the smelter were less than 3 mills.

71. There would also be some indirect benefits to the economy not measurablein monetary terms. It is possible that other industries in which regularityof power supply is a significant considerationwould be attracted by the project to Ghana. The project would bring an increase in the general level of labor skills to the project area. The presence in Ghana of a number of important foreign industrialcompanies might lead them to pursue other investment opportunitiesthere, in aluminum fabricating, for example. Finally, although this report is based on the assumption of a 120,000 ton smelter, using imported alumina, account should also be taken of the possibility that at a later stage an alumina plant might be built to use Ghanaian bauxite and that the smeltermight eventually be enlarged to a capacity of 210,000 tons. These developmentswould increase tax yields and employmentopportunities, without a commensurateincrease in the cost of Governmentservices.

72. Even taking all the intangiblebenefits into account, the overall balance of costs and benefits is on the positive side to only a modest extent at best.

73. One benefit frequently ascribed to the project would not be obtained on the assumptionsmade here, namely, cheap power for non-smelter consumers. It has been assumed that the project would have to charge these consumers as much as they would pay if they obtained power from the best thermal alternative. 'While this is less than present generating costs (to which distribution costs must be added in computing rates to final consumers), the same reduction could be gained, wiith far less capital outlay, by adopting the thermal alternative. - 20 -

VII. CONCLUSIONSAND RECOM]NDATIONS

74. The Volta River project, includingtransmission lines to Accra and Tema, is technicallysound. As presented to the Bank, the project, if begun in April 1961, would be completed in December 1965. However, i: two successivelow flood years occurred during the reservoir filling period, scheduledin 1964 and 1965, operationwould be delayed one year. There- fore, it would be prudent for Ghana to assume, as was done in this report, that power would not becone available until January 1967.

75. The proposed 700-mile transmissionnetwork should be excluded from the project because the expected power demands which it would serve would not justify, for some years at least, the initial capital cost required. On this basis, reasonable estimates of the capital costs of the initial investment (589 SW) amount to EG 58.3 million. It has been assumed that the Government of Ghana would make available fG 30 million on a basis which would not require a fixed return and the rest would be obtained through 25_year loans at 6p interest,with repayments of principal starting in 1967.

76. The returns on Ghana's investmentin the project, over its assumed 50-year life and assuming a 120,000-tonsmelter, would be of the order of 7-8/, dependinv on the tariff charged to the smelter. This is not an attractivereturn. Furthermorethe financialposition would be very poor indeed in the first years of operation,a fact which would not be an attractionto potential lenders. The financialbenefits of the project would not begin to be appreciable for many years to come.

77. A full appreciationof the return must take into account the ancillaryinvestments which the Governmentmust make, if the power and smelter projects are to be carried out. If these investmentsdo not yield returns adequate to meet operating costs, capital replacementsand the cost of capital, the overall return on total investmentwould be lowered accordingly. In the absence of evidence to the contrary it has been assumed that housing and water rents, port charges, etc., would be sufficient to do no more than cover depreciationand operating costs. On this basis, it has been calculatedthat Ghana would earn on its investmentin the project and ancillaryworks, 6-7% per annum, about 1% less than the return on its capital contributionto the project alone.

78. Taking into account its other contributionsto national income, including income taxes from the smelter at a rate still to be negotiated, it anpears unlikely that the project would, in say the tenth year of operation, contributemore than about l$ of national income at today's level and even less at the level then prevailing. In addition it would provide indirect benefits from increased employment,improved labor skills, the diversificationof industry and an increased and more reliable supply of power. - 21 -

79. The Governmentmust decide whether these benefits would be sufficient to outweigh the uncertaintiesfaced and the income foregone when so considerable wn i±1vus-tn-iew.is iade in a singLeproject. IT i c'a that there would be no net gain, and probably a net loss, during the first decade of operation, when financial returns would be very low and net tax benefits, if any, would be small. However, the benefits in later years.wouldbe greater, when the power capacity has been more fully utilized, when the tax deferral period has expired nnd when (And if the al rmmnnl enterprise has become a balanced and integrated operation. A fuller evaluation of these prospects would require more precise informationthan is now available.

80. The foregoing conclusion has been based on calculation which assumed a smelter of 120,000-ton capacity. If the smelterwere to be built and were to remain with a capacity of only 80,000 tons, the returns would be lower, especially so in the first decade of operation. On the other hand, a larger smelter, of say 210,000-tonscapacity, would bring larger returns if the expanded capacity were brought into operation soon enough. Paragraphs 62.a-64 of this report make certain suggestionswith respect to the interplayof tariffs, sizes of smelter and time, which the Government should take into account in negotiatingwith VALCO.

81. The financial calculationshave been based on three alternative power tariffs to be charged the smelter, on which agreement still remains to be reached. The tariffs assumed for other users, as a group, represents the estimated cost of alternativethermal generation. The calculations thus offer no cost advantage to non-smelter consumers of Vo2a power compared with the alternative thermal development. The assumed charge of 15 mills, until 1981, is probably lower than present costs, but power at this price could be achieved without Volta, as could the assumed lowering of the tariff to 12 mills in 1981.

82. If, after taking the foregoing into account, the Governmentof Ghana decides to carry out the project, a number of steps should be taken by the Government so as to provide a more definite basis for further planning and for arrangementsfor financing constructioncosts. These may be summarizeda 8 follows:

(a) A suitable organizationshould be set up to construct and operate the project (paragraphs5-7 inclusive).

(b) The Electricity Department should be placed on a sound utility basis as quickly as possible and consideration should be given to convertingit into an autonomous public corporation (paragraph7).

(c) The constructionof the proposed 700-mile transmission network, for delivery of power other than to Accra, Tema and to the smelter, should be postponed until the demand justifiesits cost (paragraph12). - 22 -

(d) Considerationshould be given to the adoption of an international standard voltage for transmissionof power so as to obta4. poosble eono.iPc in npni.tl costs (paragraph2L).

(e) The size of the proposed generatingunits should be re- examined with a view to determining Whether their size could be reduced and hence reducing the amount of idle nanacitv (narazraoh 20).

(f) The Government, before making a commitment to supply the power needed for a 210,000-tonsmelter, should investigate whether upstream diversions of water in neighboring territories might seriouslyreduce the potential power output (paragraph31).

(g) The price of power for non-smelteruse should be determined by the full cost (includingthe cost of capital) of produc- ing power from alternativethermal plants with capacities appropriateto the size of the non-smelterdemand (paragraph 143).

(h) The power contract with the smelter should provide for paynent for the committedblock of power for the entire smelter, whether it is used or not. Moreover, it would be desirable that such payment be made from the outset, or if this is not obtainable,the Government should insist on the shortest possible breaking-inperiod for each pot line (paragraph48).

(i) In negotiating with VALCO on the duration of the contract,the size of the smelter, and other matters the Government should take into account the considerationsset forth in paragraph 64. ANNEX1 Page ;i

VOLTARIVER HYDROELECTRICPROJECT

Power Demand in Accra-Tema Area

Estimated Maximum Demand andl Pla-dtCa-pacity, and Ejstinatcd Electrjcity Sales

1. The Kaiser report does not forecast ssparattely the demand of the Accra-Temaarea but applies to the entire area which w,xouldhave been served by 4he e-'arged nct-ilk,1 1-1- thi -report (-in n granh 19 ) recommends post- poning.

2. The Kaiser forecast is based on a series of assumptions involving estimates of:

(a) Residential consumption- based on population growth, the proportion of urban to rural population,the ratio of cus- tomers urban and rural to total population, a rate of growth of per capita consumption.

(b) The proportionof industrial,commercialand other uses to residential.

3. It is evident that the controllingassumptions are those for residentialconsumers since the total for others is assumed to vary in direct proportion for the years 1970-1980.

4. The following table shows the comparison between the actual sales to domestic consumers in the netwgorkarea for 1958/59 and the Kaiser projections for 1970, 1975, 1980.

Populationof Residential Residential Network Area kwh Sales kwh Sales millions million Per Capita

1956/59 3.15 40.1 12.7 1960 3.25 n.a. n.a. 1970 4.03 250 62.1 1975 4.42 600 135.7 1980 4.94 1,425 288.5

Note: All data from Kaiser t'ElectricPower Load Growth Report" March 1960 except the 1958/59 line, which the B,nk has inserted in order to provide a link for comparing actual sales in 1958/59 with the Kaiser projections.

5. No basis was offered for the assumptionthat the ratio of custom- ers to population in the network area would increase from 1 to 20 in 1960 to 4 to 20 in 1980, but this does not appear to be unreasonable. However, Kaiser's estimate of 135.7 kwih per capita residentialsales in 1975 is about equal to the level attained in France in 1958 when the gross national product exceeded $1,000 per capita. ANNEX 1 Page 2

6. It would be more realistic to assume that, when Ghana's per capita income approached that reached by such developingareas as Argentina,Cuba and VenezuelaT in lQh)l (aholit &S00 per capita in 1950 dollars), Ghanats residential conslumptionwould approach their level of use, 80-100 kwh per capita. Uhana's per capita income is ==!isOly to reach such a level before 1975. Even if it reached this level in 19?5 the estimates of consumptionin the Kaiser report for that year should be reduced by as much as o0%and would result in figures comparable with the estimates in this report.

7. Total consuimption (excluding the smelter) is assumed by Kaiser to rise from 90 kwh per capita in 1960 to 258 kwh in 1970, to 98 kwh in 1975 and to 1,008 kwh in 1980.

8. The Kaiser estimate for 1980, excluding the smelter, exceeds the present per capita consumption (includingaluminum smelters) of Australia, France, and West Germany, but does not reach that of the United States, Canada, Sweden and Switzerland. The maximum demand exceeds the hydroelectric potential of the Volta river projects when fully developed.

9. The Bank's projections of maximum demand and electricity sales in the Accra-Tema area are as shown in the attached table. VOLTA RIVER HYDROELECTRICPROJECT L 1 Page 3

Estimated Maximum Demand and Plant Capacity (in megawatts')

YEAR 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976

Capacity 589 589 589 589 589 589 589 589 736 736

Non-smelterload 63 71 80 92 101 111 122 134 148 163 Smelterload 78 237 303 303 303 303 303 303 303 303

Total 141 308 383 395 404 414 425 437 451 466 SpareCapacity 448 281 206 194 185 175 164 152 285 270

Capacity above requiredreserve 301 134 59 47 38 28 17 5 138 123

Note Smelter load includes transmissionlosses Akosombo-Tema Non-smelterload includes Accra and Tema and transmissionlossea Capacityeach generatingunit = 147.2 MW

Estimated Electricity Sales (in millions of Kilowatt Hours)

YEAR 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 Non-smelter 233.6 264.9 300.5 340.8 374e9 412.3 453.6 498.9 5h8.8 603.7 Smelter 630.0 1434.6 2367.0 2419.2 2419.2 2419.2 2419.2 2419.2 2419.2 2419.2

Total 863.6 1699.5 2667.5 2760.0 2794.1 2831.5 2872.8 2918.1 29,68.0 3022.9 ANNEX 2 GHANA VOLTA RIVER HYDROELECTRIC PROJECT PowerStation Installed Capacity and Maximum Demand

MEGAWATTS 800 800

736 MW

700L - 700

600 - Insta/led Capacity 589 MW 589 MW 600

500 - - 500

Firm Capacity 442 MW

400 - - 400

300 -Smelter Maximum Demand 300

200 _ - 200

loo r/-= loo

0 I I I I I I I I I 0 1966 '67 '68 '69 '70 '71 '72 '73 '74 '75 '76 77 YEAR JUNE 1960 IBRD 692 G H A N A VOLTA RIVER HYDRO-ELECTRIC PROJECT

CONSTRUCTION SCHEDULE

Year 1961 1962 1963 1964 1965 1966 High Water Season -

Place Main Contract April 1st, 1961

Mobilize

Open Cut and Drive Diversion Tunnel Tunnel Lining Conduit and Gates Remove Sand West Channel Drive and fill sheet pile cells West Coffer dam rockfill Dewater Coffer Dam w Prepare foundations, drill and grout Place rockfill to El. 290 Place core and filter material to E1.290

Construct Saddle Dam

Remove sand East Channel Drive sheet piles _ East coffer dam rockfill - Prepare foundations, drill and grout _ Place rockfill to El. 290 Place core and filter material to El. 290 -

Concrete: Power House - Intake Penstock anchors Spillway -

Mechanical: Penstocks _ Intake Power House Spillway

Transmission Lines and Substations

Reservoir Filling December 1965 z First Power Generated D e m

JUNE 1960 IBRD 693 V 0 L T A P I ' r R P P 0 J F C T

Yorecest Su-mary Income Statements asd Cash Flows

Based on a Smelter T.aiff o^ 7,5 Mills

hears Ending Decease- 3i 1,67 1668 1969 1970 1971 1025 1973 197Th 1976 1976

Sales (;Sillioss of Kwh) Smelter 630.0 1,434.6 2,367.0 2?,19.2 2,619.2 2,419.2 2,419.2 2,619.2 2,6,19.2 2,419.2 Sen-Smeltsr 233.6 264.9 300.5 360.6 376.9 612.3 453.6 498.9 648.8 603.7 Total 863.6 1,699.5 2,667.5 2,760.0 2,794.1 2,631.5 2,872.8 2,918.1 2,96e.0 3,027.9

Average Revenue per Kwh Sold iulSills 5.88 4.49 3.91 4.04 4,18 4.32 4.47 4.64 4.81 6.00 ------In Thousands of Ghana Pounds------

Operating Revenues Smelter (2.5 Mills/Kwh) 562 1,281 2,113 2,160 2,160 2,1i6o 2,160 2,160 2,160 2,160 Non-Smelter (15 Mills/Kwh) 1.251 L419 l,6v 1 826 2 oo8 2 209 2 430 2 673 2 940 3 234 Tstal 1,813 2,700 3,723 6 , 9,100

Operating Expenses Cost of Operations 620 620 620 620 620 620 620 620 700 700 Depreoiatios 1,360 jc 1,'S^ 1,3n 1,360 j -C _ ____ Total 1,970 119 1,970 1,970 1,97 1,970 1,970 1,970 2,;is 2,

Gross Inomse (157) 730 1,753 2,016 2,198 2,399 2,620 2,863 2,950 3,244

Interest 1,686 1,635 1,582 1,525 1,464 1,400 1,332 1,260 1,184 1,103

Net Earnings (1,893) (905) 171 491 734 999 1,288 1,603 1,766 2,141

Cumulative Net Earnings (1,843) (2,748) (2,577) (2,086) (1,352) (353) 935 2,538 4,304 6,445

Cash Generation 2,l)1. Net Earnings (1,343) (905) 171 491 734 999 1,288 1,6030 1,766 Depreciation 1 350 1 350 1 350 1 360 1 360 1 30 1,30 135 17450 1 450 Total (493) u4U t6 tE t; 26 t 3,216

Less: Amortization of Debt 830 881 936 991 1,062 1,116 1,134 1,256 1,332 1,413 Additions to Plant ------20 2 5 2- 00 - Total 930O 9-3 69 ! 1,052 1,116 3tE3 E 3,293 1,332 1,613

Cash Surplus or (Deficit) (1,323) (436) 587 856 1,032 2 233 (1,17) (S03) 1,884 2 178 Sim:ulative Cash Surplus or (Deficit) (1,323) (1,759) (1,172) (322) 710 1,943 897 94 1,978 46156

Gross Inoame as % of Set Fixed Assete in Operation _ 1.19% 2.91% 3.42% 3.32;% 6.27% 4.78% 5.36% 5.17% 5.896 Net Earnings as % of Onana' s Investment - o.47% 1.34% 2.01% 2.74% 3.53% 4.39% 4.84% 5.8)6%

Times Debt Service Covered by Internal Cash Generation - - 1.23 1.34 1.I1 1.69 1.58 1.67 1.75 1.87

P cipaal_sum 8 ptions: Initial Plant: 669 I04 (foar 167.2 MMunits) Csost of Additiomal Unit: AG 6 million, financed sout of internal mash generation Plant in O ation Janpary 1, 1967 Smeltorize:120,010 too caaPoity Start Up of Smelter: January 1, 1967 Smelter Prime: 2.6 Mills (0.711) Capital Requirements: _G 58.3 million1 Non-Smelter Price: 15 Mills (1.26d) Fsonsaamg 1AG28.3 million mroig 25 year loan Depreciation: Dam and power plant - 2f per ansam 6 yer graces,rioi Transmission facilities - 3% par amnun 67' interest ,nat,ring 1967-1985

AG 30 million coaatriblt-d by Ghana ANtIS 9

V O L T A R I V E R P R O J E C T

Forecast Summary Income Statements and Cash Flows

Based os a Smelter Tariff of 3 Mills

Years Bnding December 31 iyv6 196o .t65y 1970 1971 1972 1973 1974 1575 1976

Sales (Millions of Kwh) Smelter 630.0 1,434.6 2,367.0 2,419.2 2,419.2 2,619.2 2,419.2 2,419.2 2,619.2 2,IJ19.2 Non-Smelter 233.6 264.9 300.5 340.8 376.9 417.3 453.6 498.9 548.8 603.7 Total 83.6 1,699. 2,667.9 2,760.0 2,796.1 T, 31. 2,872.8 2,918.1 2,96.0 3,022.9

Average Revenue per Kwh Sold in Hills 6.24 4.87 4.35 4.48 6.61 4.75 4.89 5.05 5.22 5.40 -Tm------_------In Thousands of Ghana Po-ands------

Operating Revenues Smelter (3 Mills/Kwh) 675 1,537 2,536 2,592 2,592 2,592 2,592 2,592 2,592 2,592 mon-Smelter (15 MiLls/Kwh) 1,251 1 619 1,61 1 826 2 ,o0 2 209 2 630 2 673 2 960 3 236 Total 1,92 4,116II,, 3 41O 4,5801 4353 t 3

Operating Expenses Cost of Operations 620 620 620 620 620 620 620 620 700 700 Doprsaiailh. 1,351 1,251 1,A351C 1.351 1,351 1.3501 li2 1 e O ||Em Total 1,970 1,970 1,970 1,970 1,970 1,970 1,970 _2,20 _2,10

Gross Income (44) 986 2,176 2,648 2,630 2,831 3,052 3,295 3,382 3,676

Interest 1,686 1,635 1,582 1,525 1,464 1,400 1,332 1,260 1,184 1,103

Net Earnings (1,730) (649) 594 923 1,166 1,631 1,720 2,035 2,198 2,573

Cumulative Net Earnings (1,730) (2,379) (1,785) (862) 304 1,735 3,455 59490 7,688 10,261

Cash Generation Net Earnings (1,730) (649) 594 923 1,166 1,431 1,720 2,035 2,198 2,573 Depreciation 1 350 1,350 1 3590 1,350 1 350 1r350 1,350 1 390 1 !50 1 450 Trotal (380) 701 1-4fi993 2,273 43516 2/70T 3,070 3,36 4g83

Less: Amortization of Debt 830 881 934 991 1,052 1,ti6 1,18b 1,256 1,332 1,413 Additions to Plant ------2 500 2 500 _ _ Total 730 9391 1,092 1,116 4333 4756 1,332 ],113

Cash Surplus cr (Deficit) (1,210) (180) 1,010 1,282 1,464 1,665 (614) (371) 2,316 2,610 Cumulative Cash Surplus or (Deficit) (1,210) (1,390) (380) 902 2,366 6,031 3,12 3,066 9,362 7,972

Gross Incose as S of Net Fixed Assets in Operation - 1.60% 3.61% 4.16% 4.57% 5.04% 5.57% 6.16% 5.93% 6.61% Net Earnings as % of Ghana's Investment _ _ 1.63% 2.53X 3.19% 3.92% 4,71% 5.57% 6.02% 7.o5%

Times Debt Service Covered by Internal Cash Generation - _ 1. 1.51 1.58 1.66 1.75 1.85 1.92 2.06

Principal Assumptions:

Initial Plant: 589 MW (four 167.2 MWunits) Cost of Additional SnLt: 1G 5 million, financed out of internal cash generation Plant in Operation: January 1, 1967 Smelter Size: 120,000 ton capacity Start Up of Smelter: January 1, 1967 Smelter Price: 3 Mills (0.26d) Capital Requirements: 1G 58.3 million Nom-SmelterPrice: 19 Mills (1.29d) Financise: 1G 28.3 million borrowings 25 year loan Deproiation: Da,n and power plant - 26 per ananu 6 year grace period Transmiosion facilities - 3S per coum 6% interest Maturing 1967-1985

L0 30 million contributhd by Ghana V0 1.7 "I R IV EP R P 0RQJ7 C T

Saoreoost S-wasry T-ose Stateo nto and _oon Flows Based on a Smelter Tariff of 3.5 Aills

Years Ending December 31 1007 ('y ±6 196U9 1 97 .71 7 i9,o . ,

Sales (Millions of Kwlh) 1 Smelter 630.0 1,434.6 2,367.0 2,419.2 2,419.2 2,419.2 2,719.2 2,719.2 2,4 9.2 0,11)3,2 Non-Smelter 233.6 267.9 300.5 340.8 374.9 712.3 1953.6 1798.9 57).8 603.7 Total 6 3.6 1,699.5 2,667.5 ,76 2,831.5 ,872o 2,918.1 T 3,9-0

Average Revenue per Kwh Sold in Mills 6.61 5.29 .90 1,.92 5.04 5.17 5.31 5.46 5.63 580o

------In Thousands of Ghana Pounds---_-______-__ operating Revenues Smelter (3.5 Mills/Kwh) 788 1,793 2,959 3,027, 3,024 3,024 3,027 3,027 3,202) 3,02), Non-Smelter (15 Mills/Kwh) 1,251 1,719 1 610 1 826 2,008 2,209 2 430 2 673 970 3 231 Total 2,039 3,212 51735 5,032 75j95,233 5, 47• 5,67 54555 sts Operating Expenses Cost of Operations 620 620 620 620 620 620 620 620 700 700 Depreciation 1,050 1,350 ;,35u ;,3Su 1,0)0 0,0203 AiSSO *l0 ±abm ±4i_" Total 1,970 1,970 1,970 1,970 1,970 1,970 1,970 1,970 2 2,150

Gross Income 69 1,242 2,599 2,880 3,062 3,263 3,784 3,727 3,3.4 7,108

Interest 1,686 1,635 1,582 1,525 1,467 1,400 1,332 1,260 1,184 1,103

Net Earnlogs (1,617) (393) 1,017 1,355 1,598 1,863 2,152 2,467 2,630 3,005

Camulative Net Earnings (1,617) (2,010) (993) 362 1,960 3,823 5,975 8,h42 11,072 7,3377

Cash Generation Net Earnings (1,617) (393) 1,017 1,355 1,598 1,863 2,152 2,467 2,600 3,005 Depreoiation 1 350 1,350 1 350 1.350 1 350 1,350 1 350 1 350 1 ,' i 15o Total (267) 957 2,367 2,709 29457 3,213 J5028 3,1777 (117 1766

Less: Amortization of Debt 830 881 934 991 1,052 1,116 1,184 1,256 1,332 1,413 Additions to Plant ------2 500 2 500 - Total 830 P, 935 97 1,052f 1,116 31787B 3,256 1,332 67713

Cash Surplus or (Deficit) (1,097) 76 1,433 1,374 1,896 2,091 (182) 61 2,746 3,072 Comulative Cash Surplus or (Deficit) (1,097) (1,021) 412 2,126 4,022 6,179 5,937 5,958 3,746 13,738

Gross Income as % of Net Fixed Assets in Operation 0.11% 2.02% 4.31% 47.89¢6 5.3226 5.61% 6.35% 6.972 6.69% 7.39•' Net Earnings as % of Ghanals Investmant - - 2.78% 3.71% 7.38% 5.1i0 5.89% 6.76% 7.20% 8,230'

Times Debt Service Covered by Internal Cash Generation - 1.03 1.57 1.68 1.35 1.83 1.92 2.02 2.09 ?.21

Principal AseanpDions:

Initial Plant: 589 MW(four 147.2 units) Cost of Additional Unit: tO 5 millin, fInhancednot of internalcash gewrration Plant in Operation: January1, 1967 Nmelter Dice: 120,000 tonl capacity Start Up of Smelter: January 1, 1967 Smelter Price: 3.5 M4ills (0.30d) Capital Requoirementa: EG 58.3 nillion Non-Smelter Price: 15 Mills (1.29d) Financing: EG 28.3 million borrowings 25 year lan Depreciation: Dam and power plant - 27 per ann.-i 6 year grace period Tra-saisoion facilities - 3-,per anr,t 6% interest Moatoring 1967-1985

EG 30 million cantriboted by Ghana VOLTARIVER PROJECT

Altermtive Thernal Power Station

161 i2 12Th 1972 1272 127I5 19,76 127. Total Averaze Maxim Deaand MW 59 67 76 86 95 104 115 126 139 153 368

Installrd Capacity IW 75 75 105 135 135 135 165 165 195 19?5 195

Unit Sales khw x 106 233.6 264.9 300.5 340.8 374.9 412.3 453.6 498.9 548.8 603.7 663.7 4,695.7 426.9

Capital Cost EG 5,330,100 7,310,100 8,300,100 8,300,100 9,290,100 10,280,100 10,280,100 11,270,100 12,260,100 12,260,100 12,26o,100

Interest }G 290,000 379,000 468,ooo 498,000 528,000 587,000 617,000 646,ooo 706,000 736,0o0 736,000

Operation and Maintenance lG 213,200 292,400 332,000 332,000 371,600 411,200 411,200 450,80o 490,400 490,400 49c,400

Depreciation EG 161,000 211,000 260,000 277,000 293,000 326,000 343,000 359,o0o 392,000 409,000 405,000 Fuel EQ 673,000 766,o0o 8_3_3,oo0 942.000 1.032,000 1,115.000 1,227.000 1.34.0_oo 1.460.000 1.605,000 1,762,000

Total Annual Costs EG 1,337,200 1,648,400 1,893,000 2,o4g,000 2,224,600 2,439,200 2,598,200 2,804,800 3,048,400 3:,240,400 3,39,,400 26,680,6So0 2,425,509

Unit Costs - Rills 16.0 17.3 17.6 16.8 16.7 16.5 16.0 15.7 15.6 15.1 14.3 15.9

Interest Credit for Depreciation E 5,000 16,000 30,000 46,ooo 63,ooo 82,000 101,000 123,000 146,000 169,000 191,,000

Annual Costs After Interest Credit for Depreciation EG 1,332,200 1,632,400 1,863,000 2,003,000 2,161,600 2,357,200 2,497,200 2,681,800 2,902,400 3,071,400 3,203,400 25,705,600 2,336,873

Urnt Costs - Nills 16.0 17.2 17.3 16.4 16.1 16.0 15.4 15.0 14.8 14.2 13.5 15.3

1I ANI3EX8

SUMiARY ESTIJIATESOF ANCILLARYINVESTMENTS

;G million

Compensationand resettlement(excess over the TG 3.5 million that will be charged to the project) 0.7

Downstream compensation 0.5

HIousingfor smelter labor 4.0

Water supply for smelter 0.7

Port works allocable to project 5.0

Extra dredging 0.5 11ML ANNEX 9

The Effect of Power Prices on the Cost of Aluminum

1. The amount that aluminum companies will be willing to pay per

±S-wLI Uepelaus I±a±gLy -X-uPO UloetJvIthe of the4l1-_V llte±r _ r t- -_ the raw materials supplies and to the market for aluminum.

2. Although the design of the pot line may change materials consumption from plant to plant, broadly speaking the consumptionof alumina, coke and pitch, cryolite and other materials per pound of aluminum should be about the same in any well-managedsmelter. However, the cost of these materials will vary from plant to plant by the amount of the freight differ- ential between the plants. Naintenanceand pot lining expenses and direct labor costs also may vary somewhat from plant to plant depending upon labor rates and labor efficiency.

3. The kwh consumption per pound of aluminum varies from plant to plant depending upon the pot design and the type of rectifiers used ranging from 10 kwh in older plants to less than 8 kwh in the most modern plants, with an industrialaverage of about 9 kwh. The cost of power is one of the principal variable factors which could be used to offset any disadvantagesof location. A change of 0.5 mia in the price per kwh would represent a change of 0.450 per pound of aluminum; or if the snelter is assumed to have a direct production cost of 12-15¢ per pound (excluding interest and depreciation),a change of less than 4%.

4. The capital cost of a smelter would be about $0.42 per annual pound of capacity and on the assumption that it would be financed 50% with equity and 50% with borrowed funds at 6% interest,depreciationcharges and interest would add about 2.6¢ and 1.2¢ respectivelyper pound to the cost of aluminum.

5. If the smelter is to earn a 10-15% return on equity after taxes of 40%, the margin between the net sales price and the total cost must be 3.4-5.2¢ per pound of aluminum. On this basis an increase of 0.5 mill in the power cost becomes more significant,representing up to 13% of the margin. If the margin were reduced from 5.2¢ to 4.750 the return on equity would be reduced to just under L4%after taxes. ANNEX10 Page 1

Calculation of Long-Term Rate of Return

Method

1. In this report, the long-term rates of return on the project have been calculatedby the discounted cash-flow (or present worth) method of calculatinginvestment returns. This method deri-vesa single rate, showing lehe-net yield of th proje+ to the iwrestor over the entire estimated life of the project, after provision for repayment of the capital invested.

2. The principle used in this calculationof the rate of return is the same as that used in calculating the present worth of an annuity. First, a stream of estimated cash outflows and inflows for the project is computed. Such a computationfor the project is set out in Table 1, assuming a 120,000-tonsmelter and a tariff of 3.5 mills. The assumptionsunderlying these figures are set out in paragraph 3 below. Next, a column of net cash inflows or outflows is computed. In the case of a calculationof the return on the investment as a whole, total cash investment expenditure is shown as an outlay, but-no account is taken of debt service. On the other hand, in the case of a computation of the return on the investment by Ghana, only Ghana's cash expenditures are shown during the construction phase while debt service is included as an outlay later on. The stream of net cash inflows and outflows related to Ghana t s investment (including investment in ancillary facilities) is shown in Column (3) of Table 2. The problem now is to find the rate of discount,which, when applied to these flows over the applicable time periods, equates inflows and outflows. The appropriate rate is found by trial and error. Table 2 presents an example of how this is done. In this example inflafs and outflows, on a present worth basis as shown in Column (4), are approximately equated at a rate of 7%.

Assumptions

3. The calculationsin Table 1 have been made on the basis of the following assumptions:

Cash Investmentsin Fixed Assets and Working Capital - The entries in Columns (1) and (2) indicate the cash outlays (shown in parentheses)to be made for the purposes for the project. They do not include interest during construction. Outlays from funds obtained from borrowing and funds provided by Ghana are shown separately. It is assumed that in 1961-65 the two sources of finance will be drawn on pari passu. The entries for the years 1959-67represent the amount of initial outlays needed to build the project and equip it with 4 generatingunits (147.2 IW each) and an outlay of EG 500,000for working capital in 1967. The entries for 1973/74 a d 1980/81, amounting to a total of PG 5 million in each case, represent estimated outlays to add one additional generatingunit in each period. ANMNEX10 Page 2

Cash Receipts - The entries in Columns (3) and (4) represent the amounts to be received from the sale of power in each of the years. Smelter receipts are based on a rate of 3.5 mills erekwh. I\Tnn-1mP.terreceipts are based on sales at 15 mills per kwh tlhrough 1980, and at 12 mills per kwh thereafter. The non-smelter receipts are expected to grow in accordance with the estimated growth in demand through 1986, the year in which the project, with a 120,000-ton smelter, is expected to be fully loaded.

Cash Expendi tures - Costs of operation in Column (5) include only cash operating expen-_JanJd do not Mnclude debt service payments or non-cash items such as depreciation. Costs of operation are estimated at EG 620,000 for the four-unit plant, rising to IC 700,000 and EG 780,000 per year for five and six units, respectively. The debt service shown in Column (6) is the estimated annual installrients of interest and amortization payable on loans of fG 28.3 million at 6% repayable in 19 years beginning in 1967.

Ancillary Facilities - The figures for ancillary investments in Colum ( 77T2epresent estimated cash payments by the Government for ancillary investments (see Annex 8). Ancillary receipts in Column (8) are the estimated net cash receipts of the enterprises operating the ancillary investments after deducting cash operating costs. These net cash receipts have been estimated to be 2% per annum of the ancillary investmentson the assumption that the investmentswould earn only enough to cover cash operating costs and amortizationof the investment over a 50-year period.

Possible Alternative Calculations

4. The tables attached hereto show the calculationson one possible combinationof circumstances. The figures given in the text of the report, showing returns on an 80,000-tonand on a 210,000-tonsmelter, at different smelter tariffs, and for the returnswithout counting ancillaryinvestments, were computed by the same method. The figures in the example given may be modified to derive rates of return based on a wide variety of assumptions. TABLE 1

Cash FlowsResulting from 120.000-Ton Smelter at 3.5 Mill Tariff

(1) (2) (3) (4) (5) (6) (7) (8) Cash Investments in Fixed Assets Working Capital Cash Receipts Cash Erenditures Ghana Non- Costs of Debt Pncillary Year Borrowings Ancillary Contribution Smelter Smelter Oeeration Service Investments Receipts

------In Thausards of Ghana Pounds------… 1959 (418) 1960 (3,237) 1961 (5,400) (5,849) (4,500) 1962 (5,587) (6,020) (5,200) 1963 (4,330) (4,874) ( 200) 1964 (3,977) (4,551) ( 100) 1965 (2,682) (3,368) ( 700) 1966 ( 920) (700) 1967 ( 763) 788 1,251 620 2,516 1968 228 1,793 1,419 620 2,516 228 1969 2,959 1,610 620 2,516 1970 228 3,024 1,826 620 2,516 228 1971 3,024 2,008 620 2,516 Z28 1972 3,024 2,209 620 2,516 1973 228 (2,5CC) 3,024 2,430 620 2,516 228 1974 (2,500) 3,024 2,673 620 2,516 1975 228 3,024 2,940 700 2,516 228 1976 3,024 3,234 700 2,516 1977 228 3,024 3,557 700 2,516 228 1973 3,024 3,913 700 2,516 1979 228 3,024 4,304 700 2,516 228 1980 (2,500) 3,024 4,735 700 2,516 1981 228 (2,500) 3,024 4,167 700 2,516 228 1982 3,024 4,583 780 2,516 1983 228 3,024 5,042 780 2,516 228 1984 3,024 5,546 780 2,516 1985 228 3,024 6,100 780 2,516 228 H 1986-2016 3,024 6,711 780 (Inclusive) 228 0 ANNEX10 Page 4 TABLE 2

Calculation of Return on Ghana's Investment in Pr-oject and Aneiwlary Facilities with 120,000-Ton Smelter and Tariff of 3.5 Mills

(l) (2) (3) (4) Cash Cash Present Surplus Surplus Years Value or or frcn of 1 at (Deficit) (Deficit) Base 7% Annual Current F rsu... t Year Year Discount Value Worth

1959 0 1.000 ( 418) ( 418) 19i60 1 .935 ( 3,237) (3,027) 1961 2 .873 (-.0,349) (9,035) 1672 3 .816 (11,220) (9,156) 1963 4 .763 ( 5,0743) 1964 5 .713 ( 4,651) (3,316) 1965 6 .666 ( 4,068) (2,709) 1966 7 .623 ( 1,620) (1,009) 1967 8 .582 ( 1,632) 950) 1968 9 .544 304 165 1969 10 .508 1,661 844 1970 11 .475 1,942 922 1971 12 .444 2,124 943 1972 13 .415 2,325 965 1973 14 .388 46 18 1974 15 .362 289 105 1975 16 .339 2,976 1,009 1976 17 .317 3,270 1,037 1977 18 .296 3,593 1,064 1978 19 .277 3,949 1,094 1979 20 .258 4,340 1,12D 1980 21 .242 2,271 550 1981 22 .226 1,703 385 1982 23 .211 4,539 958 1983 24 .197 4,998 985 1984 25 .184 5,502 1,012 1985 26 .172 6,056 1,042 1986 27 .161 9,183 1,478 1987 28 .150 9,183 1,377 1988 29 .141 9,183 1,295 1989 30 .131 9,183 1,203 1990 31 .123 9,183 1,130 1991 32 .115 9,183 1,056 1992 33 .107 9,183 983 1993 34 .100 9,183 918 1994 35 .094 9,183 863 1995 36 .088 9,183 808 1996 37 .082 9,183 753 1997 38 .076 9,183 698 1998 39 .071 9,183 652 1999 40 .061 9,183 615 2000 41 .062 9,183 569 2001 42 .058 9,183 533 2002 43 .055 9,183 505 2003 44 .051 9,183 468 2004 45 .048 9,183 441 2005 46 .044 9,183 404 2006 47 .042 9,183 386 2007 48 .039 9,183 358 2008 49 .036 9,183 331 2009 50 .034 9,183 312 2010 - 51 .032 9,183 294 201 52 .030 9,183 275 2012 53 .028 9,183 257 2013 54 .026 9,183 239 2014 55 .024 9,183 220 2015 56 .023 9,183 211 2016 57 .021 9,183 TOTAL 3n 0

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