Shedding light on Uganda’s Umeme debate

Last week I wrote an article for The Independent explaining why the Ugandan parliament’s recommendation to cancel the contract of the country’s main electricity distributor, Umeme, is so terribly misguided. Discussion of the electricity sector tends to be technical, dry, and confusing, littered with acronyms and figures. But we cannot allow the density of the topic to leave us vulnerable to populist oratory, political witch-hunts, or outright ignorance of politicians. There is too much at stake for Uganda’s energy sector, and too much at stake for the Ugandan public.

How kicking out Umeme hurts Uganda

MPs have generators and other coping resources if the energy sector fails but their voters and industrialists could incur ruinous costs

Parliament’s recommendation to cancel the Ugandan government’s contract with the country’s main electricity distributor, Umeme, has reinvigorated the debate over the company’s performance, as well as issues of sovereignty and national interest. The debate has been characterised by both misunderstanding and misinformation, sprinkled with a dash of deceit.

Umeme bears the brunt of the Ugandan public’s frustration with power supply, but both the assignment of blame and the debate are myopic; Uganda’s most severe challenges in the energy sector do not lie with Umeme.

In fact, the Umeme debate is a costly distraction from the sector’s most pressing issues.

The cancellation of Umeme’s contract would be very costly for the country and ordinary citizens who would suffer most. The question is why, considering Umeme’s record of relatively impressive performance, is the company being hounded out of the Ugandan market? What will investors in capital-intensive sectors like energy, infrastructure and the nascent oil and gas sector, make of politicians’ overtures to a policy of re-nationalisation?

Umeme; small part of energy sector

When then-electricity public utility, the Uganda Electricity Board (UEB) was “unbundled” in 2001, three main arms of the sector; generation, transmission, and distribution, were created. They now run distinct successor companies.

Distributors, Umeme, are responsible for making new connections to the electricity grid, maintaining and repairing existing connections, and billing customers for electricity consumed. Because Umeme deals directly with electricity users, both individual and industrial, it becomes the public face of the energy sector. But Umeme only controls a portion of it. Without effective power generation, distributors are useless.

Thus, the generation sector is where much of the action, and much of the cost of lectricity, lies. Generation contributes at least 70% of the costs included in the electricity bill each customer receives. Uganda’s energy generation potential is enormous, as the country is blessed to be the home of the Nile River, which provides massive hydropower potential. Much of thecountry’s existing power generation infrastructure is old, however, and the delay of much needed hydroelectric projects has translated into higher costs.

Owen Falls Dam, now known as Nalubaale power station, was completed in 1954. During the colonial period, the Uganda Protectorate, with her advantageous positioning at the source of the Nile, was seen as the most promising generator of power in the region, although the British colonial government focused on developing industry in Kenya. The Owen Falls Dam, therefore, was originally designed in large part to supply Kenya. Owen Falls fell into severe disrepair in the 1970s, and was operating at less than half capacity when the National Resistance Movement came to power in 1986.

Investments in the past two decades, including the long-delayed Bujagali project, in addition to an expansion of Owen Falls, with Kiira power station coming online in 2003, have increased generation capacity. But generation remains below potential capacity and, with Uganda’s rapidly growing population and economy, additional investments, such as those being made at Karuma, are required to ensure demand does not outstrip supply.

Like Owen Falls Dam, much of the existing electricity distribution system also dates back to the 1950s. This network relies heavily on open-wire cables. Open-wire cables are relatively inexpensive to install, but prone to damage and outages caused by short-circuiting. Corrosion of uninsulated conductors can also make maintenance quite costly. Trying to distribute power through an outdated network is like trying to fetch water with a reed basket: inefficient at best. This is just one of the challenges distributors face in Uganda, and distributors are tasked with maintenance, updating, and extension of the network.

After years of high losses, low collections and generally poor management of power distribution, the government of Uganda signed a support agreement with Umeme in 2004. At the same time, UMEME obtained a supply license and distribution license from the Electricity Regulatory Authority (ERA), a lease agreement with the Uganda Electricity Distribution Company Limited (UEDCL), and a power sales agreement with Uganda Electricity Transmission Company Limited (UETCL).

Umeme is thus like a building manager hired to collect rent from already unhappy tenants. While the manager can change the odd light bulb and maintain the cleanliness of the property, he should not be held accountable for the dilapidated condition of the landlord’s property. But holding Umeme accountable for failures that are sector-wide, both historical and contemporary, is exactly what parliament is trying to do. The public is quick to follow suit, because it is Umeme that comes knocking at their door to collect.

But let’s interrogate the key concerns raised by parliament. Key components of Umeme’s contracts and negotiations, and those which are under most intense debate currently are a) buy-out provision in the case of early termination of contract, b) the escrow account, and c) performance targets.

Key points in the Umeme debate

The buyout provision

The buyout provisions cater for three types of termination: government initiated, Umeme initiated, and “natural termination”. In each case, the government of Uganda pays Umeme.

In case of the first, the Ugandan government pays Umeme a percentage of un-depreciated investment capital. It pays between 106% and 120% of Umeme’s net investment, depending on the year of contract termination. This payment includes compensation for future profits that government has forced Umeme to forego. In the case of the second, the government pays between 80% and 94% of net investment, again depending on the year of contract termination. Finally, in the case of the third, government pays 105% of net investment.

The Parliamentary committee that recommended termination of the Umeme contract described the concessions as “lopsided” and the buyout provisions as “abnormal”. It made no reference to similar or related contracts elsewhere in Uganda, or beyond.

In fact, governments, especially in countries with high political or financial risk, must provide assurances on the security of investments in order to attract investors. Further, providing compensation for future profit foregone in the case of government default is standard practice. This kind of insurance policy, in the form of buyout provisions, is common for other investments in Uganda and in the sector in particular, including Bujagali.

Moreover, the investments made by Umeme, or any other distributor for that matter, are largely investments made in Uganda. These investments will continue to benefit the country even if Umeme is gone. To illustrate the point, consider this analogy. Imagine you own a large plot of land but have been unable to manage it. You have therefore hired someone with technical and financial expertise to invest in the planting and harvesting of your crop, say, maize. Your investor provides fertiliser for the soil, installs an irrigation system, and even constructs a processor. The land that had once sat fallow is now productive and profitable, thanks to her efforts. She takes home a portion of the profits, but also shares profits with her partners and stakeholders (including you) and increases the availability of nutritious food for the community.

Assuming you wanted to take over her now profitable business, would you simply throw her out? Probably not. You would repay her at least for the equipment she had installed on your land, and perhaps other less tangible investments. After all, they are investments made on your land that you will continue to benefit from. If you did go ahead to remove her without compensation, you would certainly have a very difficult time finding anyone to take her place. Word of your reputation with investors would spread fast.

In the absence of a buy-out clause in your contractual agreement, investors would not want to invest in your land or your power sector. Buy-out clauses are essential to attracting investment. Such provisions are especially critical in countries like Uganda that, for reasons fair or unfair, are considered medium or high in terms of political risk.

An argument can be made that the terms of the buy-out could have been better for the Ugandan government, but the simple fact is that the government agreed to these terms. An analogy again clarifies the point. Assume you were to sell your plot of land and agreed with a buyer on a price. If you later learn that you could have gotten more money for your land, something you would have known if only you had done proper research, the mistake can only be yours. You would have no basis for demanding more money from your buyer. Parliament is right to question the process through which contracts are drawn, but a mistake on the part of government, if indeed one was made, cannot itself be grounds for terminating the contract.

The escrow account

Like the buy-out agreement, the escrow account reduces the risk that investors will incur losses imposed by government. The escrow account provides a source of revenue for Umeme to draw upon in the event that government defaults on electricity payments to government entities. Indeed, government has defaulted numerous times, demonstrating the importance of such a provision.

Historically, a lot of government public utilities have failed because of government non-payment for services. By December 2012, for example, government institutions owed National water & Sewerage Corporation (NW&SC) about Shs40 billion.

The Ministry of Defense, police, and prisons are the main consumers of electricity on the side of government, and also the primary defaulters. After Umeme shut off power to police due to non-payment in 2012, police responded by impounding Umeme vehicles.

The performance targets

Another complaint leveled against Umeme by parliament is under-performance. Umeme negotiates performance targets with the Electricity Regulatory Authority (ERA), and these targets are re-negotiated every seven years. The first negotiation was in 2005, and the most recent was in 2012. The targets and figures listed in the ad-hoc committee report are outdated both because they include information only until 2011 and also because the targets themselves were renegotiated two years ago. Umeme’s targets for the year 2012, the final year of the first period, and 2013 were the following:

Performance target 2012 Target 2012 Performance
Percentage of electricity lost 28% 26%
Investment US$65 million US$166 million
Revenue collections 95% 94%
New connections 60,000 220,000
Operating allowance US$42.5 million US$46 million (balance covered by Umeme)

The new targets for 2018 set even higher standards for losses, investment, and operating costs, and thus far Umeme is on track to achieve them. Losses today are at an all-time low of 20.5%, and collections nearing 100%, and connections exceed 220,000. The company has also installed 50,000 prepaid meters (Yaka). At least by the standards the ERA has set, Umeme is performing adequately.

Return to `dark ages’

Having considered some of the main complaints voiced by MPs, let’s turn to the consequences of their recommendation – to cancel the contract. The costs of a government-initiated cancellation of the contract are immense and numerous. The cost incurred by government to cover the buy-out payment, amounting to 120% of Umeme’s investment to date, is only one such cost. The buy-out payment may in fact represent only a fraction of government’s long-term losses.

Cancelling the contract with Umeme necessarily involves replacing the distributor. Having demonstrated willingness to terminate contracts, however, the Ugandan government is likely to have even less bargaining power than with the 2004 contract. Delays will likely ensue, and investors will demand insurance for what they will rightly perceive as a high likelihood that government will renege on its contractual word. These delays will affect distribution in the short term, and far worse service provision can be expected until the next contract is signed and at higher tariffs. Ordinary Ugandans will be literally left in the dark.

Rattling investor confidence not only affects the terms of future contracts with distributors, but also with investors elsewhere in the energy sector, including those investing in power generation.

Karuma is the next major hydropower plant, with expected installation capacity of 600MW. Uganda is counting on this plant to cover her rapidly expanding generation needs. After several years of delays and the collapse of negotiations with Norway’s Norpak Power Ltd, Chinese company Sinohydro has been awarded the contract to construct Karuma. However, financial closure has not been reached. If Uganda reneges on the contract with Umeme, it is entirely possible the Karuma project will be delayed even further, in exactly the way Bujagali was. These are delays the energy sector, Ugandans, and Ugandan industries, can simply not afford.

Already, the recommendation of MPs to cancel the contract has likely shaken investor confidence. Umeme itself relies on investors and banks to either invest in or lend money for its operations. If Umeme’s future is called into question, it will become more difficult for the company to meet its investment targets. Again, it is ordinary Ugandans who will suffer most.

The focus of the energy debate should not center on Umeme as a company or the particular agreement signed with government, but on policy and planning for the sector as a whole, with special attention to power generation. Umeme is a convenient and popular punching bag, one that politicians have been happy to hold before the public.

These same politicians are now baying for Umeme’s blood, but their assault is short-sighted, even from a purely self-interested perspective. Remove Umeme and politicians themselves will take the blows of public frustration at an energy sector that will be on its knees. Even those who want to replace Umeme – take a close look at the business interests of Umeme’s strongest critics – will find themselves facing increased upstream costs. Public anger now will pale in comparison with what will happen if Umeme gets the boot. Distribution would likely collapse and investors across the sector would retreat or demand even higher premiums. The premium on investor risk will affect not only the electricity sector, but also the oil sector where the stakes are equally high.

The ultimate victim of this political witch-hunt is not actually Umeme, but the Ugandan public. That the Ugandan public has been tricked into championing its own future losses is most tragic of all. As parliamentarians park fancy cars in their new parking yard, cut their hair in parliament’s new salon to the humming of generators, and enjoy pensions and pay raises that allow them to privately overcome the failures of the public sector, their constituents will be left powerless and Ugandan industries incurring potentially ruinously steep costs. Having in just three years passed legislation curtailing freedom of assembly, dress, and association, among others, this parliament seems hell-bent on using the remaining two years to take the country back to the dark ages, quite literally.

 

Winners and losers in Uganda’s 2013-2014 Budget

BTTB 2013-214

Winners (increased % of budget): Works and Transport, Energy, Public Administration

Losers (decreased total spending): Tourism, Trade and Industry, ICT, Social Development (what is that?), Education

Background to the Budget 2013-2014 available here.

Looks like we are focusing on physical capital at the expense of human capital. Will it pay off?

This Week: Oil Roundtable

It’s official. Uganda has oil.

But how much and what kind? What does it mean for Uganda’s future? Who is calling the shots? Will it boost development, or will the oil curse strike again?

For answers to these questions and more, please attend a groundbreaking roundtable on Uganda’s oil sector, sponsored by Kampala-based think tank Fanaka Kwa Wote and the U.S. Embassy Kampala.

What: Oil Roundtable
When: Thursday, March 19th, 9:30am to 12:00pm
Where: Protea Hotel, Acacia Road, Kampala
Who: Panel of experts and interested parties, including:

Professor Jacqueline Lang Weaver, University of Houston
Mr. Stephen Birahwa, MP Buliisa and Member of the Committee on Natural Resources
Mr. Brian Glover, Managing Director of Tullow Oil
National Environmental Management Authority
Uganda Ministry of Energy and Mineral Development
Uganda Ministry of Finance, Planning and Economic Development

Moderated by Managing Editor of The Independent, Andrew Mwenda.

Who needs electricity? Come on baby, light my fire

Does lack of electricity lead to more sex? Which leads to more babies? This is the argument Uganda Planning Minister (Ministry of Finance), Ephraim Kamuntu, has recently made according to the BBC’s “Uganda Blackouts ‘Fuel Baby Boom'”. Without TV or other entertainment, Ugandans are falling into bed and making babies, leading the country to hold one of the highest population growth rates in the world, or so the story goes.

Meanwhile, in the U.S. condom sales are up, apparently for related reasons. What’s the cheapest form of entertainment? No electricity and no entrance fee required (legally anyway), and it keeps you warm so you can reduce your heating bill! But in these times of financial hardship, U.S. consumers are apparently wary of accidentally ending up with a costly bun in the oven…hence condom purchases…

A few questions though…

In Uganda, sure, it may be dark, but you still have your seven other kids bounding around the house, how much time do you really have to sneak off and procreate some more?

Also, what about the men (and some women) who stay out in bars till 3am? They are there in numbers…I know because I can hear them when the Ntinda hotspots keep me awake at all hours of the night (and morning)…

Most importantly, what about countries with equally poor access to electricity? Why isn’t their population growth rate as high as Uganda’s? India, for example, has a population growth rate of 1.4% (according to the UNDP), and yet nearly 490 million people live without electricity.

Finally, I think population growth will fall only when couples have incentives to have fewer kids, or disincentives to have more kids. While in a taxi yesterday, the driver told me he had 14 children with three women. And wanted 2 more with a different woman. I am sure he makes far less than most couples in the U.S., but there is still no incentive (as he sees it) for him to stop making babies, electricity or no electricity.

Sorry Dr. Kamuntu, your argument falls flat. How many kids do you have by the way?

Life after m7: No energy to generate energy

The following is a feature published in the Daily Monitor April 25, 2008, by Angelo Izama, a great friend and brilliant journalist and analyst.

Angelo Izama

Visitors to Uganda who fly into Entebbe International Airport at night are often struck by how dark the place is.
Night flights these days also show something else; the bright lights of the Chinese-rebuilt residence of the President which stands out in contrast to the kerosene powered homes around it.
Darkness could be amusing for tourists on their first trip to Africa who fantasize about elephants leaping out of roadsides and whose only introduction to Uganda are paperback digests ( mostly written by former tourists or resident ones) that fail to inform the thrill seekers that Idi Amin is no longer President here.
However the lack of electricity to light streets, homes and businesses is not a funny joke propped up as a tourist accessory. For its 31 million people Uganda generates and uses less electricity than a small division of Hyundai industries, just one of the many big enterprises in a country with which Uganda was at par a short forty years ago.
Since the use of electricity is an important measure of how economies are performing Uganda’s case has been one of stagnation and regression.
Whenever critics of the government single out the power sector for bludgeoning the government at pulpits and radio studios, they are told to be optimistic because Uganda has made a “recovery” from a politically darker past when Amin was actually an Entebbe resident himself.
“You cannot always be pessimistic” said Energy Minister Daudi Migereko in a phone interview on Monday about the state of the energy sector. But even he admits the present situation is trying on the patience of the discipleship or cadres who are the foot soldiers of the revolution started by Yoweri Museveni.
Uganda has registered negative growth in the energy sector. Electricity production today is lower than at independence 45 years ago and much lower in the last half decade when a series of unpunished blunders turned load shedding into a way of life.
But a far more serious problem facing the country is not its candlelight economy: It is the affliction of low expectations and even lower standards that have made mediocre performance acceptable particularly within the government. Even if the administration wanted it simply does not have the energy to take the country to another energy production level.
It must be noted that the back peddling in the energy sector is occurring in a period dominated by what many Ugandans, their neighbors and the world community consider the most progressive government in the country’s history. The World Bank, which according to Migereko (and his predecessor Syda Bbumba) has been a lousy partner, has been selling Uganda and its reform process one of the brightest spots in Africa.
However progress tended to be measured in terms of a stable currency, stable government and tons of paper reforms. Uganda remains one of the biggest missed opportunities in Africa and the energy sector is a microcosm of this colossal squander. According to Engineer Hilary Onek, a leading authority on hydro-power dams, the country’s potential is in the region of 28,000 megawatts of electricity. The distance between the 120 megawatts being produced today and that potential is what a new government would have to cover.
Add to this are commercially viable oil deposits which could theoretically power the country, with its young and enterprising population into a truly great industrial nation. There is also talk of exploiting uranium for power generation, but this is viewed by some as an alarming prospect to allow a country that cannot not even keep inventory of military arsenal to handle radio-active material.
The crisis of Uganda has therefore been the inability of its managers to reel in progress and it is on the change in management and not the conditions that progress will ultimately depend. Ironically the hamstring on progress has come on the back of too much politics and too little government.
The Museveni government reaped where it sowed. Both human and material resources in the hands of the state have been disproportionally allocated to regime maintenance and if progress were to be measured by longevity in power then NRM and Museveni have been extremely successful.
The energy sector has been a victim of this politically purposed state which has prioritised spending on defence and political projects. The reality is that lack of electricity itself does not affect the stability of the state or Mr. Museveni’s ability to stay on for 20 more years if he so wished.
Only 6% of the country is connected to the national grid – not enough to turn the lack of energy into an electoral issue but more of a middleclass nuisance. Uganda’s rural electrification program has been an expensive joke, sucking in as much money as would build another dam on the River Nile.
Logic would have it in fact that rural progress is ultimately a political risk for states with weakening legitimacy like that of Yoweri Museveni whose electoral margins have been dropping by 10% in the last three elections. Peasant to commercial farmer transitions, which require increased electricity for semi-processed value addition, come with consolidated demands for better and more reliable services from the state which ultimately translates into political pressure.
Weak state structures in a fluid political system easily buckle under this kind of pressure.
The question then arises whether or not the current administration with its huge political wage bill which has been the price of stability will be able to mobilise future legitimacy on economic progress which would require re-awakening the economy with its potentially volatile political stakeholders without serious risks to regime stability.
The answer is no. Only a new administration will have the political capital to recalibrate the purpose within the state from one in which political stability is not an end in itself but simply a requirement for economic and social progress. Current energy projects can therefore not succeed in unlocking their own potential or the wider gains of reliable electricity for a country starved of it.
Framers of Uganda’s soon to be launched National Industrial Policy have emptily written that the “political leadership in Uganda is unequivocally committed to industrialisation, economic transformation, modernisation, and diversification” on one hand and then go right ahead in the next section to say that “electricity [is] judged to be the most severe impediment.”
The somewhat muddled policy paper has all the fluff that accompanies a dreamy government document but is a good example of how Uganda is running on optimism and little else.
In the energy sector these good intentions have been extended to sheer fantasy.
Uganda has drafted a nuclear energy bill even if just a quarter of a million Ugandans have a power connection compared to over 3 million who carry cellular phones and can therefore afford electricity connection if only they had access. The nuclear generated electricity would be transmitted by wireless, perhaps? The demand is there but without mobilising it through a grid, it remains a dream.
According to Migereko the strategy of the country is to generate enough electricity from the various hydro, thermal and biofuel projects so that supply is forever ahead of demand but the truth is that government today subsidises power consumption in billions of shillings every year- in effect sustaining demand by paying for it.
So what is this talk of 11% growth in demand? Clearly demand itself must be mobilised. Official figures in “Discover Uganda” a public relations document produced for the Commonwealth Summit last year puts Uganda’s labor force at 13 million. It is anyone’s guess what percentage of the able and willing do work in an environment where there is at least one light bulb.
One of the biggest scandals in Uganda is not the corruption or impunity of state-based actors but underemployment of those able and willing and skilled which like the country’s vast energy potential remains locked up and chained to the vagaries of leadership in government.
Most Ugandans may have only heard of the National Oil and Gas Policy which is the framework for managing the exciting prospect of oil in the Albertine graben (western Uganda). Again the policy itself has been excellently written but the potential problems in the sector [which have all to do with the politics of oil in Uganda] are telling of what is to come.
Some of these problems are immediate. According to the government it will build a mini-refinery by Christmas next year. Such aggressive timelines have dominated the rhetoric of President Museveni and in the energy sector embarrassingly so. The Oil and Gas Policy requires setting up of a national petroleum company and a regulatory agency first. This is unlikely to be accomplished properly in the next 18 months.
The proposed refinery according to Migereko will “happen” on time but judging from the speed with which procurement of badly needed thermal energy has taken (an average of 3 years for heavy fuel generators which are yet to be set up) there is very little hope here except for the uniquely optimistic.
The Minister admits that the capital intensive sector he is heading attracts the corrupt like hyenas to a deer feast – one of the major headaches for any Ministry – but truth be told, a serious government or one desperate to succeed would not be stopped by rent seekers who are everywhere in the world.
Instead corruption-inspired load shedding has become a Ugandan way of life. One of the biggest heists in Ugandan history will be the fake dam extension project at the Owen Falls Dam for which reliable information suggests Ugandan officials from the Ministry simply (hopefully inadvertently) acted to avail more water from Lake Victoria to downstream countries.
The dam extension known as Nalubaale has been draining the water from lake leading to a drop in levels but despite all the blabber about fighting corruption, no investigation was instituted and the Minister in charge at the time (Syda Bhumba) was sent to the Labor and Gender Ministry instead.
This scandal is a low even for the notoriously corrupt Ugandan government described by peer reviewers at the World Bank as a government of “Ali Baba and the Forty Thieves.”
When a new President sits at Mr. Museveni’s desk his biggest challenge will be to inspire genuine change, something Mr. Museveni has been talking about for 21 years.
aizama@monitor.co.ug