Energy and Water

Abstract

This chapter will focus particularly on the energy and water sub-sectors in the industrial sector of the economy. The discussion will not delve deeply into the economic characteristics and performance of the sub-sectors due to limitations of space, but it will aim to review their development over the last few decades. In the sections dealing with the energy sub-sector the focus will mainly be on woodfuel/charcoal and electricity which means that oil/gas will be excluded except in the introductory overview. It is clear that oil/gas developments are of the utmost importance to the Ghana economy, but the issues involved are so complex that it was decided to omit detailed consideration. Some aspects of the oil/gas industry are included in Chap. 8 dealing with mining and the minerals sub-sector, and others are included in Chap. 12 covering international trade. There will be some overlap with matters which are also dealt with in the chapter covering environment (Chap. 17) but this will be kept to a minimum. There is an appendix to this chapter which provides some historical background to the Akosombo hydroelectric project and its links to bauxite and alumina mining and processing operations.

Appendix to Chapter 15: The Akosombo Dam and Ghana’s Aluminium Industry

The development of the hydroelectric capacity of the Volta River as a basis for the economic transformation of Ghana was a vision which was central to Kwame Nkrumah’s ambitions for Ghana both before and after independence in 1957. The first detailed plans for the building of a dam on the River Volta for the generation of electricity and linked to the establishment of an aluminium industry are contained in the ‘Bird Report’ of 1949. However, the earliest records of the energy potential of the Volta came in the writings of Sir Albert Kitson in 1915 (Moxon 1969, Chap. 4).³ Duncan Rose was a British mining engineer with South African connections who had acquired bauxite concessions at Yenahin in Ashanti and Mpraeso in Kwahu. He joined forces with Alcan (Aluminium Ltd. of Canada which had its own extensive bauxite concessions in Ghana), and in 1949 Alcan took a 25 per cent share in West African Aluminium Ltd (WAFAL). In March 1951 British Aluminium (with bauxite concessions in both North Borneo and Ghana—at that time still called the Gold Coast) produced a joint report with Alcan favouring the development of an integrated scheme in Ghana producing hydroelectric power, using this to manufacture 210,000 tons of aluminium, with a surplus of 50,000 kWh of electricity available for public use. The implementation of this report was dependent upon support from both the British and Gold Coast governments. A Volta River Panel was established in 1950 with technical input provided by Sir William Halcrow and Partners and its preliminary report concluded that (a) the aluminium smelter was the key to the whole scheme, (b) the necessary port facilities would best be located at Tema and (c) that exploration of the potential for irrigation of the Kpong Plains should be undertaken. The full report, published in August 1951, recommended that the dam should be publicly owned and that the smelter and alumina plant should be located at Tema; however Alcan took the view that the smelter should be privately owned. At the end of 1951 the Gold Coast government, of which Kwame Nkrumah was by this time Leader of Government Business, announced that work was to proceed with the construction of the harbour at Tema. In November 1952 the British Government published a White Paper setting out the main features of the proposed integrated aluminium scheme.

This 1952 scheme included the dam at Akosombo, a harbour at Tema, a smelter at Tema (which would also involve the alumina plant),⁴ and development of the road and rail network to connect bauxite deposits at Yenahin and Mpraeso to Tema. The total capital cost of this scheme was put at £144 million with contributions from the Gold Coast Government of £40 to £45 million, from the British Government of £57 million (a loan repayable over 80 years) plus a non-equity holding of £11 million in the smelter, and from the aluminium companies of £43 to £48 million (for the smelter with a 60-year contract for the purchase of electricity). British buyers would be offered 75 per cent of the aluminium at ruling prices over a period of 30 years.

A Preparatory Commission was established, separating the scheme as a whole into five components: the bauxite mines, railways and other communications, the dam and power station, the alumina factory and smelter, and the new seaport at Tema. In July 1954 the contract for the construction of the harbour at Tema was signed, and another contract was signed for the construction of a new bridge over the River Volta a few miles below the planned dam site. However, the full report of the Preparatory Commission was not published until 1956, containing much information about the proposed dam which would have an initial output of 360,000 kWh with a construction cost of £67.25 million (25 per cent higher than the 1952 figures). The 1956 report gave a full investment cost for the entire scheme (including contingencies) of £306 million (of which £72.5 million was accounted for by road and railway communications and the harbour at Tema). The original estimate made by Duncan Rose and associates in 1939 had been £2.5 to £3.5 million, but a good deal of the difference between the 1939 and 1956 figures would have been accounted for by inflation. In March 1956 the British Government announced that due to the significant increase in costs it would be unable to provide support for the ‘Volta River Project’, suggesting that World Bank support should be sought. The 1956 Alcan annual report expressed the view that “as against the Volta’s estimated seven years of construction for a 120,000 ton scheme costing £185 million, a similar project in Quebec was only going to take three years to produce 150,000 tons of aluminium per annum at a cost of £50 million” (Moxon 1984, p. 85).

In July 1958, following preliminary discussions at the highest level of the US Government, Kwame Nkrumah (by now Ghana’s Prime Minister) had his first meeting with Edward Kaiser of the Henry J. Kaiser Company of Oakland, California. Within a few weeks an agreement had been reached between the Government of Ghana and Kaiser that there would be a complete review of the project covering “proposals and estimates for the power plant, bauxite mine, aluminium smelter, railway connections and power transmission and, if possible, new power consuming industries were to be suggested” but excluding “such subjects as lake-side resettlement, new town sites, health measures and new ports” (Moxon 1984, p. 93). The review was completed within six months and contained three major changes to the scheme as compared with the proposals of the Preparatory Commission: (a) the site for the dam reverted to that identified by Kitson in 1915, with a 1,000 feet breadth rather than the 3,740 feet breadth which had been proposed in the 1956 report, with the construction period cut from seven to three years and with an initial capacity of the Akosombo dam to be 588,000 kWh (half of which could be available for other industries, households etc.); (b) the smelter would be located at Tema, substantially reducing infrastructure investment at the alternative site at Kpong; (c) for an initial period of perhaps ten years alumina for the smelter would be imported (from Jamaica and the USA) reducing the required initial investment cost by £60 million. A new company, the Volta Aluminium Company (VALCO), was formed in the latter part of 1959 which would be responsible for the development of the aluminium smelter.

It was in 1959 that the World Bank was brought into the discussions about financing the project. A key issue in the negotiations which followed was the tariff of charges for the sale of electricity by the generators and for the purchase of electricity by the smelter. The estimated total amount of investment which was envisaged at this time amounted to £60 million, and of this the World Bank was to provide £14.25 million at an interest rate of 5.75 per cent over 25 years. A further £10.75 million was to be provided by the US Government—£7.25 million from USAID’s Development Loan Fund at a 3.5 per cent interest rate over 30 years and £3.5 million from the US Government’s Export-Import Bank at 5.75 per cent interest over 25 years. The UK Government agreed to advance £5 million at a 6 per cent interest rate over 25 years, making the total from these three sources £30 million. The Master Agreement for the whole scheme was initialled in November 1960. In September 1960 the invitation to tender had been issued for the Akosombo Dam and in February 1961 the contract was awarded to the Italian company Impregilo, which was on the point of completing work on the Kariba Dam in central Africa.

Even at this late stage there were some further complications which endangered the funding of the scheme. Most of the negotiations had been undertaken during the Eisenhower government’s tenure of the White House, and the incoming Kennedy administration raised questions relating to the funding of the southern Ghana electricity distribution network (which had a price tag of £10 million bringing the total cost to £70 million) and to Ghana’s development of stronger economic ties with the Soviet Union. These concerns were settled and the final funding package consisted of US loans of £47 million (£13 million for the power project and £34 million for the smelter), World Bank loans of £17 million, British Government loans of £5 million, Ghana’s equity investment of £35 million and VALCO’s contribution of £12 million—a grand total of £116 million. The documents confirming these arrangements were signed in Accra in January 1962, and again in February in Washington DC.

VALCO had been formed in 1959 as a consortium of aluminium interests, brought together by Edgar Kaiser, with a view to the development of a smelter in Ghana. In addition to Kaiser Aluminum and Chemical Corporation the consortium included Alcan, Alcoa (the ALCOA), Olin Mathieson (associated with Rockefeller) and Reynolds Metals (with connections to Duncan Rose and WAFAL going back to 1949). By 1961 only Kaiser and Reynolds remained from the original members of the consortium, and VALCO was then owned 90 per cent by Kaiser and 10 per cent by Reynolds. VALCO had guaranteed the purchase of round the clock electricity amounting to about half of the output of the Akosombo generation at an annual cost of around £2.5 million (sufficient to defray a substantial proportion of the £70 million capital cost of the power generation). It would take six years to reach full capacity operation, with initial electricity purchases accounting for 100,000–200,000 kWh. Kaiser and Reynolds contracted to provide imported alumina and to purchase exported aluminium ingots in the same proportion as their ownership of VALCO for 30 years—worth in excess of an estimated £1,000 million. It was only accidentally that VALCO found the potential significance of the local Ghanaian market for aluminium cooking utensils, and this source of demand had not been included in the project design.

At Akosombo the first turbine started generating electricity in September 1965, and Kwame Nkrumah was overthrown as President of Ghana in February 1966. The water level in Lake Volta reached its maximum ‘design level’ in 1968. The long saga associated with the establishment of the dam, and of the associated investments, was approaching its end when the first stage of the political development of Ghana came to an end. Following the political upheaval of early 1966 negotiations were completed for the regular sale of electricity from Akosombo to the neighbouring states of Togo and Dahomey (now Benin), providing further justification for the electricity generation.

Writing in 1983 Moxon explains that the Akosombo Dam was, at that time, producing 1,000 GWh per annum less than the designed output level (5,625 GWh) on a regular basis due to hydrographical issues not foreseen at the time of its planning. This regular shortfall is in addition to the periodic problems of water shortage, due to drought, which was particularly significant in 1983. A second hydroelectric scheme at Kpong, 15 miles downstream from Akosombo, was commissioned in 1981–1982 adding a further 1,000 GWh annual generating capacity, but in the event only compensating for the shortfall at Akosombo rather than supplementing planned generation capacity (Moxon 1984, Chap. 27).

A paper produced by Nyarko and de Bruijn in 2008 reviewed the competitiveness of the Ghanaian aluminium industry (Nyarko and de Bruijn 2008). Their conclusions were as follows:

Ghana’s aluminium industry has substantial potential for investors, but must innovate and upgrade existing products and processes in order to remain competitive. The huge quantities of good quality bauxite at four major locations in the country, namely Awaso, Nyinahin, Mpraeso and Kibi constitute a national advantage. The continuous supply of cheap and reliable electricity, which provided the base for the industry in Ghana in the first place, is a national challenge. Without the reliable supply of the basic input of cheap electricity to VALCO, the basic factor advantage is being eroded. Ghana’s drive towards becoming a middle income country by 2015 can be supported by an integrated aluminium industry which consists of the mining of bauxite, refining the bauxite into alumina, smelting the alumina into aluminium, and the fabrication of the aluminium into semi-finished and finished products. The VALCO smelter at Tema is not integrated with bauxite mining and still imports alumina from Canada and the United Kingdom while Ghana still exports raw bauxite for processing into alumina. The reasons for the lack of integration are attributed to various causes. While many blamed Kaiser Aluminium for breaching the Master Agreement of 1962 by its failure to establish the alumina plant, the company defended itself by faulting the Government of Ghana for inability to supply the agreed amount of power for full-capacity production. Others hold the opinion that world conditions and the level of Kaiser’s operations in Ghana did not make such a venture a profitable one. (Nyarko and de Bruijn 2008, p. 24)

These sanguine comments provide an informed view of the prospects for the aluminium industry in Ghana, but recognise that it still has realistic development potential given the right circumstances.

In 2009 the World Bank published a major review of the sub-Saharan African aluminium industry, including Ghana as one of the major case studies (Husband et al. 2009). It is apparent that Ghana has become a comparatively small part of the sub-Saharan African aluminium industry, particularly with the development of Guinean bauxite deposits and of the South African and Mozambican processing capacities (see Tables A15.1 and A15.2). The established assets and capacities which exist in Ghana provide the basis for potential future development of an aluminium industry. However, as the discussion of the electricity sub-sector of Ghana’s energy sector in this chapter has made clear, by the 2010s the Akosombo dam and its hydropower capacity no longer features in the generation of electric power for the development of an aluminium industry. The development of the Ghanaian economy and of electricity generation and consumption has given a new and completely transformed context as compared with that which existed in the 1950s and in the decades which followed.

Table A15.1 Bauxite production in Ghana, Guinea and Sierra Leone, 1990, 2000 and 2015 (thousand tonnes and per cent of global total)

Table A15.2 Aluminium production in sub-Saharan Africa, 1968–2006: selected years (thousand tonnes)

The World Bank study by Husband and associates outlines some of the complexities of the Ghanaian story:

Aluminum ingots and semis were consistently one of Ghana’s top exports—along with gold and cocoa—since the development of the smelter. It is only since 2003, when serious long-lasting power shortages became a semi-permanent feature of life in Ghana, that aluminium could no longer play its historic role (although due to power shortages, there were large declines in aluminium production in 1983 and 1998). However, it may be difficult to assess the contribution of aluminium in recent years given the power subsidies Valco has received, either implicitly or explicitly. While it is not entirely clear when these subsidies began—that is, when the opportunity cost of power exceeded the price paid by Valco—it seems likely that they were substantial as early as 1998 (Werhane and Gorman 2005, p. 18). Moreover, in several years the cost of producing this power was substantially more than that paid by Valco, as indicated by the large government transfers to the VRA to keep it solvent. (Husband et al. 2009, p. 28)

This study estimated the implicit subsidy to VALCO in relation to aluminium output to be between US$70 million and US$138 million in 2002 and in the order of at least US$23.7 million in 2006 (Husband et al. 2009, p. 54). For 2006 the simulated contribution to the Ghanaian economy of the VALCO smelter was estimated at US$78 million in directly generated value added, with an additional US$109 million in indirectly generated value added. Employment generated both directly and indirectly by the smelter was put at 2,860 (Husband et al. 2009, p. 54).