The Electricity Company Of Ghana Action Plan Finance Essay
Electricity generation, transmission and distribution in Ghana mainly involve three institutions that work in an interrelated manner. Volta River Authority (VRA) generates the electric power through hydro and thermal plants and, until recently, also had responsibility for the high voltage transmission system. The Ghana Grid Company (GRIDCO), created as part of reforms in the power sector, now has responsibility for the high voltage transmission so as to have that separated from generation entities. It is the least known of the institutions. The Electricity Company of Ghana (ECG) distributes the energy produced to most consumers through low voltage transmission lines. It is the institution that is in direct contact with most of the public. Figure 1 below shows the main processes of the power distribution in Ghana.
The ECG is a limited liability company owned solely by the Government of Ghana and has the responsibility of supplying and distributing electrical power in the southern part of Ghana. It was established in November 1997 as Joint Stock Company based on the companies code in accordance with the 1993 Corporate Act (Act 461) of Ghana. The company has its headquarters in Accra, a total workforce of 5,281 with a customer base of 1.7 million (ECG annual report 2008).
Vision
The ECG’s vision is “to be among the leading electricity distribution companies in Africa in terms of quality, safety and reliability”.
Mission Statement
The mission statement of the company is “to provide quality electricity services to support economic growth and development in Ghana”.
The primary objective of the company is to supply electrical energy to people in its areas of operation. In discharging its various duties, the company has executed a number of national electrification programmes on behalf of the government. The ECG is a monopoly in the electricity distribution sub sector of Ghana. The tariffs that clients pay for the supply of electricity services are regulated by the state owned company called Public Utility Regulatory Commission. The ECG charges commercial rates to its clients which are subsidized by government.
Organizational structure
The company is run by the Board of Directors, Principal Officers and Advisors. The company’s Board of Directors are appointed by the Government of Ghana. The Principal Officers and Advisors control and run the eight directorates of the Company. These directorates are Engineering, Operations, Customer Services, Materials & Transport, Finance, Audit, Legal Services and Human Resources. Figure 2 below depicts the organizational structure of the ECG.
Fig.2: The Organizational Chart of ECG
Board of Directors
ManagingDirector
rector
Divisional Managers (3)
Divisional Managers (6)
Director Legal Services
Director Customer services
Divisional Managers (3)
Employees
Employees
Director Human Resource
Director Customer services
Director Material and Transport
Director Material and Transport
Director Audit
Director Finance
Director Engineering
Director Operations
Divisional Managers (6)
Divisional Managers
(3)
Divisional Managers (2)
Divisional Managers (2)
Divisional Managers (3)
Divisional Managers (3)
Divisional Managers (5)
Divisional Managers (3)
Lower managemt &
Employees
LOwer
Managemt &
Employees
Lower
Managemt &
employees
Employees
Lower
Managemt &
Employees
Lower
managemt &
Employees
Lower managemt &
Employees
Lower
Managemt &
Employees
Lower
Managmt
&
Employees
Board of Directors
The Board of Directors as at 29th June, 2009 was composed of the following persons:
Ing.Sqn. Ldr. Clend Sowu (Rtd.): The chairman of the Board. He is a Consultant Engineer and a Retired Military Officer.
Mr. Cephas Gakpo: The Managing Director of the company
Mr. Bernard Allotey Jacobs: A Media Practitioner
Barimah Kwame Nkyii XII: Omanhene Assin Aimanim Traditional Area, Tax Ecpert.
Dr. Kwaku Osafo: Economist/Engineer
Mr. Samuel M. Codjoe: Lawyer
Mr. Anthony Gyampo: Educationist
Mr. Kwabena Adjei: Businessman, Communication Professional
Hon. Dr. Nii Oakley Quaye-Kumah: Member of Parliament for Krowor Constituency, Veterinary Surgeon
Mr. Jake Kofi Anre: A Lawyer and Secretary to the Board
Directorates of ECG
The Engineering Directorate is responsible for the planning and designing of the distribution network. The directorate is also responsible for the procurement and implementation of investment projects.
The Operations Directorate is responsible for delivering quality reliable and safe supply of electricity to customers, maintain the network regularly in order to reduce the number of interruptions and outages, respond quickly to faults and use modern technology to operate the distribution system;
Materials & Transport Directorate has responsibilities of managing all activities regarding materials received for projects and other ECG operations. In addition, the department has to manage all operations regarding Transport (Vehicles).
Customer Services Directorate has responsibilities of gathering all information about Power Purchases, Power Sales, Average End-User-Tariff (EUT), System Losses, Revenue Collection, debtors’ position at the end of each year and customer population.
Audit Directorate is responsible of operational, commercial and financial activities of ECG. With Technical Audits, physical inspections and reconciliation of materials usage are carried out. The directorate is also responsible of Audit investigations on fraud and corruption. Lastly, it support Management about operational activities and give directives to address them.
Legal Services provides legal services to the ECG. The Director is the Secretary to the Board of Directors and maintains a Board Secretariat to provide secretarial services to the Board of Directors. He is involved in the prosecution of people involved in the illegal activities against the ECG to reduce system losses.
Finance Directorate has responsibilities of analyzing and reviewing financial data, reporting financial performance, preparing budgets and monitoring expenditures and costs for the ECG as a whole.
Human Resources Management Directorate has responsibilities in the following areas: Staffing (Employment and Recruitment, Personnel records, Compensation); Training and Development and Industrial Relations (Health and Safety).
The ECG is a Strategic Enterprise in the sense that it is the only electricity distribution company that supplies electricity to the whole of Ghana. Secondly it offers employment to over 5,000 Ghanaians, making it the largest employer in Ghana.
SITUATIONAL ANALYSIS
The analysis of the performance of ECG as described below is based on available information up to year 2008.
The Impact of Global and National Forces on ECG’s Operations
The worldwide economic recession (Credit Crunch) affected both the economy of Ghana and ECG’s operations. The year saw rapid hikes in crude oil and metal prices which resulted in the high cost of power generation from thermal sources and sharp increases in the cost of materials and equipment required for capital investment projects.
The Ghana Cedi also depreciated against the major world trading currencies especially the US Dollar, the Euro, and the British Pound. Since most of the inputs for ECG’s capital investment projects were imported, prices consequently increased relative to energy sales which were generally denominated in the Ghana Cedi. The cost of investment projects therefore increased from 12% to about 20%. The U.S dollar for instance appreciated in value against the Ghana Cedi from a rate of $1: GH¢0.92 in July 2007 to $1: GH¢1.49 in June 2009 [1]
The inflation rate in Ghana also contributed to the high cost of operations and subsequently affected the company’s profitability. The inflation rate has increased over the period from an average of 10.73% in 2007, 16.46% in 2008 to 19.86% in 2009. This resulted in increases in labor cost and other local raw material inputs. Details of the inflation rate is attached as appendix 1
Financial, Operations and Human Resources Performance
Profit and Loss
The ECG has made an operating profit of GH¢25,089,202 in 2008. Prior to this year, the company had been making losses. In 2006 and 2007 for example, the net operating losses were (GH¢3,429,300) and (GH¢8,657,716) respectively.
Current Assets
The stocks level at year 2008 was GH¢135,851,792. This was an increase of 99.8% over year 2007 figure. The Accounts Receivables also increased by 50.5% to GH¢258,033,418 in 2008. The table below depicts the status of the Current Assets of the company over the three year period from 2006 to 2008.
Current Assets
2008 GH¢
%age change
2007 GH¢
%age change
2006 GH¢
Stocks
135,851,792
99.8
67,999,841
39.3
48,800,300
Debtors
258,033,418
50.5
171,411,587
16.2
147,503,100
Prepayment
8,323,294
184.6
2,924,574
– 48.4
5,665,800
Short Term Investment
16,358,519
108.5
7,845,126
12.0
7,002,600
Cash and Cash Balances
49,473,765
42.6
34,690,929
16.4
29,796,100
468,040,788
64.3
284,872,057
19.3
238,767,900
The increases in the stocks and debtors depict a weak inventory management and credit policy of the company.
Debtor/Sales Ratio
The Debtor/Sales ratio which is an expression of customer debt in days of billing was 130 days in 2008. It deteriorated from 138 days in 2006 to 162 days in 2007 representing a decrease of 17.4%. Although there was an improvement from 162 days in 2007 to 130 in 2008, the figure is still too high.
Loans and Suppliers Credit
The ECG through the Government of Ghana has secured the following loans and credit from the World Bank and other suppliers for investments in its distribution network. This has increased the company’s debt situation tremendously.
DSUP – $15m financed by IDA, & ECG (2003-2007)
GEDAP – $94.5m financed by IDA and partners, AfDB, & ECG, (2008-2012)
GEDAP Extension – $70m for Ashanti Region, financed by IDA (2010-2014)
French credit – Euro 65m for Tema and Kumas. Financing from the french govt. (2008-2012)
Norwegian credit – Euro 60m for Greater Accra and Eastern regions. Financing from the Norwegian govt. (2008-2012)
El Sewedy credit – 16.5m from El Sewedy T&D (2010-2011)
As at December 2008, an amount of GH¢171.92 million was outstanding in suppliers credit.
Systems Losses
System loss is a power loss in its course from the source to end users. In 2007 the systems loss was 24.03%. This increased to 25.58% in 2008 as result of poor transmitting system and also theft through illegal connections. The ECG’s performance in this area is declining and this is adding onto the cost of operations of the company. The table below shows the trend of the systems losses over a three year period from 2006 to 2008.
System losses units (GWh)
Year
2005
2006
2007
2008
Total Purchases
5045.4
5252.8
5145.6
5799.4
Total sales
3762.0
3978.4
3909.1
4315.8
System losses in %
24.26
24.03
25.58
Human Resources Capacity
ECG’s staff strength at the end of the year 2008 was 5,281. This was an increase of 6.07% over year 2007 figure of 4,929. Staff turnover over the year period is showed in the table below.
Employee turnover
Year
2006
2007
2008
Employee turnover
3.02%
3.27%
3.53%
The percentage of employee turnover increased from 3.27% in 2007 to 3.53% in 2008. The reasons assigned for this increase upon our investigation are lack of motivation and incentives to the employees.
Evaluation of ECG
This section of the Plan tries to come out with a range of expected fair market values for ECG incase the government find it necessary to privatize it.
The main purpose of this evaluation is to give all stakeholders especially government and management of the company a fair market range of values within which the ECG can be sold.
ECG, as already mentioned above is a public monopolist and as such not listed on the Ghana Stock Exchange (GSE). As a result of this, the market Comparison Method of evaluation can not be used. The only feasible formulas to use would be the Asset Appraisal Method and the Discounted Cash Flow Method.
Asset Appraisal Method
This method involves revising all the asset and liabilities of the company including Goodwill. Using the 2008 audited financial report of the company, we can easily get the values of the asset and liabilities of the company at Net Book Values (NBV) and not the Revised Values.
Since we are not in a position to revalue the company’s assets and liabilities we are solely relying on the NBV of these assets and liabilities. The NBV of assets and liabilities for the 2008 financial year were given as follow:
2008
GH¢
Current Assets 468,040,788
Fixed Assets
Plant, Property and Equipment 1,171,197,452
Goodwill 2,021,653,890
Total Asset 5,008,661,390
Less Current Liabilities (259,567,145)
Value ECG 3,401,324,985
Calculating the value of Good
Goodwill is calculated based on the Supper Profit Method. This involves determining a value for the expected future profit of the company. Here, some past profit of the collected based on the 2008 report and an average is taken. We then make adjustments to reflect future profits. Thus, expected future expenses and income are adjusted.
Years Net profit/Loss
GH¢
1999 17365,259
2000 (7,583,807)
2001 152,973,046
2002 (451,974)
2003 (483,609)
2004 (269,686)
2005 (305,425)
2006 (475,200)
2007 (48,836,581)
2008 11,598,017
Total 123,530,040
Average profit for the 10 years =
Expected Future Operating Expenses
Looking at the operating expenses of the company over the years, the average expenses over the years is around GH¢6,574,530. Since expenses are expected to increase over the coming years, a 10% adjustment is made to reflect future changes. This 10% was chosen based on the increasing trend of operating expenses from 1999 to 2008. This brings the total future expected operating expenses to (GH¢6574530 +GH¢657453) GH¢7,231,983.
Expected Future Income
Again, looking at the operating income over the years, the average income for the 10 years is GH¢54,145,602. Since the expected income are expected to increase as a result of the stabilization of the Ghanaian Cedi against major foreign currencies, stable world price of crude oil, materials, and of course the discovery of crude oil in Ghana. Taking all these factors into consideration, a 15% adjustment is made to reflect these changes. Therefore the future operating income is (GH¢54,145,602 + 8,121,840) GH¢62,267,442
GH¢
The number of years of purchase which depends on the bargaining powers of both the government who is the owner of ECG and the would-be private investor on the reputation of the company.
ECG, as earlier discussed, serves both the Ghanaian Economy and other two countries in West Africa (Togo & Benin). It also has the potential to expend to other countries as a result of the discovery of crude oil in Ghana. With all the above reputations and potentials, we have decided to fix the number of years of purchase at 30 years.
The Goodwill for the company would be
Limitation of this method
The value of the fixed assets used in the valuation might have some composition of non-productive assets and therefore would affect the fair market value of the company.
Discounted Cash Flow Method
This method takes into consideration the time value of money. Thus, discounted cash streams of future cash flow. Here, the first thing we do is to forecast the future cash flow by making adjustments to 2008 cash flow of the company.
From the cash flow statement (2008), the net cash flow was GH¢15,819,658. Since cash inflows are expected to increase over the next few years due to expansion and reduction in operating expenses, an upward adjustment of 15% is made to the net cash flow for the next five (5) years. Thus, from 2008 up to 2013. Expected net cash flow from 2013 upwards can not be forecasted due to uncertainty.
Discount Rate
The company is at the moment using a discount rate of 10%. Due to the possibility of inflation and exchange rate fluctuations, have decided to fix the discount rate between 12% – 15%.
According to the discounted cash flow method:
FMV = Present value of cash flow up to the terminal year + Present value of terminal value.
Year
Expected Net Cash Flow
GH¢
2009
18192607
2010
20921498
2011
24059722
2012
27668681
2013
31818983
Using the NPV formula which is given as: NPV =, we can now calculate NPV at both rates of discount (12% and 15%).
NPV @ 12%
=
But Terminal =
NPV =
NPV (12%) = GH¢2,200,234,081
NPV @ 15%
=
But terminal value =
NPV = GH¢1,708,064,531
Interpretations
Since the Asset Appraisal Method gave us the highest value of GH¢3,401,324,985 it would be considered. We are therefore concentrating on the Discounted Cash Flow Method range of values to determine the value of the company. This therefore means that the value of ECG, must be in the range of GH¢1,708,064,531 and GH¢2,200,234,081.
SWOT ANALYSIS
The investigations conducted on the ECG revealed the strengths, weaknesses, opportunities and threats as summarized in the table below.
STRENGTH
Competent Work Force
High level of technical expertise
Government Support
A monopolist (large customer base)
Facilities (i.e. warehouse)
Availability of donor funds
Installation of prepayment meters
Customer Call Center
Vast Distribution network system
Low cost of production as compared to countries in the sub region
Availability of electrical fault detection technology
WEAKNESSES
High turnover of professional and technical staff
Uncompetitive conditions of services
Lack of rule enforcement
Poor Communication
Lack of team work
Not clear defined job descriptions
Talents in the company not used to the best advantage
No effective Research and Development (R&D)
Weak Inventory Management
High network distribution losses
Mismanagement of resources
OPPORTUNITIES
Potential to expand (nationwide and other countries)
Potential of quality power delivery
Political and Economic stability
Staff training and development
West Africa Gas Pipeline
Oil discovery on the coast of Ghana
THREATS
Government Interferences
Government determination of Tariffs
Fluctuations in the exchange rates
Effects of inflation
Natural Disasters (i.e. rain storms)
Increasing World prices of metals, materials and equipment
WEAKNESSES OF THE THREE MAIN DEPARTMENTS THAT NEEDS TO BE RESTRUCTURING BASED ON OUR ANALYSIS
MATERIALS AND TRANSPORT DEPARTMENT
Weak Inventory Management
Unstructured Procurement Unit
Increases in the world prices of metals, materials and equipment
Mismanagement of Company resources
Effects of inflation on local procurement
Fluctuation in the exchange rate
OPERATIONS DEPARTMENT
No effective research and development
High network distribution losses
Unreliable and low quality of power supply
Inadequate training and development of operations staff
Inadequate staff
HUMAN RESOURCES MANAGEMENT DEPARTMENT
High turnover of staff
Talents in the Company not being used to the best advantage
Poor Communication
Lack of team work
Uncompetitive conditions of service
Lack of rule enforcement
No well defined job description
Excess labor force
STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGIES
Based on the SWOT analysis, the following strategic alternatives are recommended to bring about turnaround for the Material and Transport Directorates; Human Resource Directorate and the Operations Directorate.
MATERIAL AND TRANSPORT DIRECTORATE
Assets Reduction Strategies:
Divesting Specific Assets – Assets that are in surplus with respect to the future requirements of the company should be sold off. Unproductive and obsolete assets such as transformers, power cables, electric conductors and meters should be sold.
Reducing Inventory – Material costs should be reduced through improved buying practices, better utilization of materials and efficient inventory management. Inventory of the company such as transformers, meters, cables, conductors and wooden poles should be managed based on Vital Few Trivial Many Principle. This will help the company to avoid holding too much inventory, which is cost to the company and also prevent the company from holding too little inventory which can make the company loose customers. Not only that but also, the reorder level should be fixed between the maximum order level and the minimum order level to prevent the inventory from reaching the danger level.
Reducing Debtors (Accounts Receivables) – There should be a credit policy to help in the effective administration of the debtors. Customers’ credit worthiness should be well determined. Debts should be collected within 30 days. There should also be a debt recovery plan.
Reducing Cost – The Company should adopt Total Cost Management (TCM) control strategy as a way of reducing cost. There should be intelligent optimization and not just cost cutting in the areas of direct costs; overheads; procurement costs; production costs; selling and distribution costs; inventory costs; personnel costs. There should be speedy execution of contract bids and procurement processes to avoid additional costs being incurred as a result of lapse of deadlines. The introduction of e-Procurement should also be used to facilitate the procurement process. The company should also enter into forward contracts to reduce costs.
Debt Restructuring – Arrangements should be made for third party (government) to service the debt on behalf of the enterprise. There should be selective sale of assets and the revenue that would be realized from the sale of these assets should be used to offset the debt owed to suppliers.
Legal Restructuring – Specific legal steps should be taken to privatize the company.
HUMAN RESORCE MANAGEMENT DIRECTORATE
Organisational Restructuring – There should be a merger of the engineering and operations directorates to ensure harmonization of action plans towards the achievement of corporate objectives. Information technology should also be used to make the hierarchical organizational structure flat. A strategic planning unit should be created and headed by a corporate strategist to lead the process of strategically positioning the company towards the achievement of the company’s goal.
There should be appropriate job descriptions, specifications and schedules matching with the qualifications, experiences and skills of employees so to get the best performance out of them. Furthermore, training and development should be a routine exercise for the company. Rules and regulations should be explicit, easily accessible and discipline enforced to ensure compliance with set standards.
Labour Redundancy – Management should develop a Redundancy Implementation Plan considering the economic climate and political mood of the country, since the implementation of the redundancy plan could be a complex and time consuming process. Staff Performance Appraisals methods such as the Balanced Scorecards should be used to identify and declare non performing staff redundant. Compensation packages should be prepared for such redundant staff, and contingency plans made for unforeseen circumstances in the event of strikes.
OPERATIONS DIRECTORATE
Physical Restructuring – It is recommended that this Directorate should be merged with the Engineering Directorate to bring about efficiency and effectiveness. The size of budget for Research and Development should be increased. Investments in distribution networks should be increased to improve quality and reduce losses of electric power. There is also the need to improve upon the monitoring of customers consumptions to be able to detect theft of electric power. The technical staff strength should also be augmented and given the appropriate technical know-how so to be able to cope with the growing demands of the proposed merger of the Operations and Engineering Directorates.
Safety equipment should be made available for the staff to use in protecting themselves in order to reduce the rate of accidents.
Proposed Timeline for implementation of Turnaround strategiess
TURNAROUND STRATEGIES
2010
2011
2012
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Discussions with Management
Assets Reduction
Reducing Cost
Debt Restructuring
Legal Restructuring
Organisational Restructuring
Labour Redundancy
Physical Restructuring
Conclusion
ECG plays a vital role in the socio- economic development of Ghana and there is no doubt that any Turnaround would yield enormous benefits to the Ghanaian economy. Hence, for the above recommended strategies to bring about any meaningful Turnaround, it calls for commitment and support of management of ECG and the government of Ghana. Not only that but also, for efficient and effective implementation of the strategies, there is the need for expert knowledge and advice. It is therefore hoped that the necessary support will be given for the desired results to be realized in ECG.
Privatization Option
The public sector in Ghana has suffered setbacks which are largely attributed to ineffective and in efficient management. When we consider the case of Ghana Electricity Company, noticing the trend of losses of the company over time and the failure to meet the objectives or purpose of its formation, in view ,it is suggested that it would be better for the ECG to involve expatriates into their operations, this can be done by private sale of there shares to the foreign multinationals who have got the technical and financial knowhow and experience in the distribution of energy to buy into the private share of the organization ,Government should endeavor to have multinational partnership in the operation of the privatization by giving them of shares in the enterprises. There is need for good follow up on privatized enterprises. This would make the organization to be more effective and efficient in their operation. The federal Government should encourage this multinational to participation in the distribution of power in Ghana. This would be done by establishing a power sector reforms which will allow the involvement of foreign multinationals expatriates in the distribution of power. These reforms would include the provision the necessary Infrastructures which would enable the reduction in establishment costs, rationalization of power tariff, mobilization of private capital for power generation and transmission and lower capital-power generation ratio. In order to achieve these goals, distribution companies. A State Electricity Regulatory Commission would also be also set up to monitor the operation of the company. The desire to involve the private sector in the management and provision of infrastructure and services which will prompt multinational company to buy private share of the organization. .
Private placement occurs when a company makes an offering of securities not to the public, but directly to an individual or a small group of investors. Such offerings do not need to be registered with the Securities and Exchange Commission (SEC) and are exempt from the usual reporting requirements. Private placements are generally considered a cost-effective way for small businesses to raise capital without “going public” through an initial public offering (IPO)
The ECG should sale 49 of its shares to a multinational partner would be able to participate in the core business of energy distribution in Ghana. Also the Government should provide the Infrastructures that would be attractive to investors, to the distribution of energy.
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