Learning from hits, misses after unbundling UEB

Dr Frank Sebbowa 

What you need to know:

  • The Bujagali and Umeme concessions had provisions for re-negotiation of some terms,  unfortunately instead of a calm examination of what can be obtained at the negotiation table the Ugandan side (especially Parliament) has often allowed the media to sensationalise how bad the other side is, hence creating a hostile negotiation environment. 

What did not work so well in the past regime, among others, was the delay in the concessioning processes.

While many firms expressed interest in the Kiira/Nalubaale generation concession, only two bidders submitted proposals and a consortium of Eskom (an offshoot of Eskom South Africa) and Globeleq (representing the British Commonwealth Development Cooperation) emerged winner. 

Eventually Globeleq left the project to Eskom to focus on the then forthcoming distribution concession bid. A lot of incentives were provided to keep Eskom at the negotiation table.

Again, several firms expressed interest in the distribution concession but only Globeleq remained by the time of bid submission. Other players opted out after due diligence found the former UEB distribution network too dilapidated and losses, especially commercial and theft, untenable. 

Government had not done any substantial study of the network it was concessioning. Thus, issues such as amount of capital investment required, system losses, available salable energy and customer base were all a matter of conjecture and led government to concede to some unfavorable terms. 

The Bujagali Power Plant development took long. The project was conceived in 1994 but actual construction only started in 2007 and was completed in 2012, not to mention a number of headwinds along the way. 

For instance, when its financing was finally nailed down, global infrastructure investment appetite for Africa was at its lowest while on the other hand, the Chinese industrial growth curve was at its highest (thus an attractive destination for international finance) and a severe drought had made negotiations for Bujagali complicated.

The plant was thus delivered at a greater than expected financial cost, which implied higher tariffs until the agreement extension re-negotiation of 2019/20. 

What are the key lessons from this? 

Critical assessment of global appetite for investing in the local economy should be a priority before important decisions are made. 

While Uganda had assumed that global bidders would be interested in what was on offer because of a good regulatory framework, the reality was quite different. Chinese industrial growth imposed extra pricing costs on the construction of Bujagali. 

The lesson here is that the benefits of expectations management as well as disclosure of public project risks in the long run far outweigh the protection of commercial terms in contracts. 

Disclosure is, therefore, the best option. The recent and previous criticism of the concessioning agreements and Bujagali energy costs is mainly rooted in failure to make timely disclosures related to capacity charges. 

The Bujagali and Umeme concessions had provisions for re-negotiation of some terms,  unfortunately instead of a calm examination of what can be obtained at the negotiation table the Ugandan side (especially Parliament) has often allowed the media to sensationalise how bad the other side is, hence creating a hostile negotiation environment. 

Our ignorance of the nature and shape of UEB is often termed bad faith for Umeme which came to redeem Uganda from the rampant load shedding. 

Additionally, our limited understanding of global financing during the Chinese building boom is now taken as bad faith for the Bujagali financiers. 

There are no perfect deals for all sides but compromises on both sides can lead to amicable win-win situations.

The errors 

Prior to the Electricity (Amendment) Act 2022, it was not clear who was answerable for demand and supply planning.  UETCL did not have any studies showing where the demand was going, given Uganda’s heavy hydro dependency and economic boom. 

The absence of well-articulated plans and commitment to address demand led to Aggreko’s standby thermal plants’ deployment in 2003/05, which by their nature, were expensive but much cheaper than the total absence of electricity to the economy.

The take away lessons here are: balancing demand and supply planning is critical in timely deployment of new plants and should be clearly provided for in the relevant law to the best placed entity. 

Merit order development of the available green resources should be planned and adhered to so as to avoid unsolicited capture through political influence and rent seeking.

Provision of some live generation standby capacity in the installed operational generation is critical to avoid deploying expensively hired diesel fired standby thermal plants, and provision of ready to go Heavy Fuel Oil or gas turbine plants in the generation mix is prudent since drought can negatively impact a hydro dominated system such as Uganda has. The crisis of the expensive Heavy Fuel Oil plants was further precipitated by the delay of Bujagali from 1994 when the memorandum of understanding for its development was drawn. 

Along with this process, came corruption claims which have affected how prospective investors for new projects perceive Uganda as an investment destination and the price the country pays.

For instance, one of the claims is that government invested $20m while private investors put in $10m. This is laughable because at $30m you cannot build Bujagali. The non-cash $20m was equity in kind that from the beginning was never intended to earn dividends. 

The private investors actually put in $179m and took a loan of about $700m to achieve project financial closure to enable construction of the power station. 

Lenders, who also approve the Bujagali dividend payments, are credible international entities such as AfDB and IFC. 

These are all strictly regulated in their global operations. While they lent to the project on given terms, they were persuaded to accept the 2019/20 debt restructuring after concession terms such as extension of loan repayment period were agreed given that Uganda set itself a hard task of selling energy to industrial consumers at US$ 5 cents. 

Projects such as Bujagali often require a Special Purpose Vehicle (SPV) and the tender documents provided for this. 

It is not true that a one Byenkya owns the SPV. As a matter of fact Byenkya, Kihiika and Co Advocates were simply a hired law firm that drafted the documents and established the SPV in the names of Bujagali Energy.

The commissions

The tender documents, which were approved by the Solicitor General included a clause making all project taxes a pass through cost to tariffs. 

To turn around now and ask for taxation would lead to contract breaches and litigation. Any discussion of Bujagali that excludes its time of procurement and construction cannot be in good faith. 

At the time of procurement Uganda was using emergency thermal plants at $30 cents per KWh. 

Thus the energy this project came to replace (at between $7.4 to 8.3 cents per KWh) was costing taxpayer $900m per month to stem the daily electricity load shedding of more than 12 hours. 

Note that the 2016 feed-in tariff (of $9 to 10 cents per KWh) for hydropower approved by ERA is still higher than the Bujagali tariff agreed much earlier.

As noted earlier, at the time of its construction, the global cost of materials was adversely affected by the overheated industrial boom in China. 

Now that the Chinese development boom has plateaued, prices of construction material then cannot be compared to the prices now.

Whether we like it or not Bujagali opened the way for private sector investment in Uganda’s green field power plant development industry and should be recognised as a pioneer and partner. 

The agreements entered into with Bujagali Energy provided a take or pay clause as long as the company proved that its plant availability factor was above 96 percent. 

Bujagali Energy has maintained a plant availability factor of 99.98 percent for the last 10 years. 

To avoid paying for unused energy, UETCL should have taken this in its merit order dispatch regime. Merit order dispatch of power plants world over takes into account associated agreements and costs. This would additionally serve to reduce the cost of energy from Bujagali.

The other key highlight of the first reforms is the flaws in UETCL’s single buyer model, which the new Act seeks to address by introducing the Bulk Buyer Model that allows direct sales between generators and consumers. 

The former, while useful in the initial stages of opening up the market, became an encumbrance as the market matured.  We await the regulations by ERA to implement the opened window for generators to sell energy directly to some consumer categories. 

This will obviously have implications for some already licensed entities whose forecasts anticipated Umeme as the collector of revenue for the sector.

Energy generating firms have approached ERA, as the regulator, demanding to negotiate direct supplies to industries at more efficient prices.  This provided a clear wheeling tariff (price payable for using a third party’s power network to transfer energy to a consumer) and was approved by ERA. 

To further compliment the Bulk Buyer model, where possible, Umeme or the main grid distributor should be incentivised to increase its energy offtake through projects that serve domestic and commercial consumers. 

If the revenue base for the main distributor is reduced as generators bypass Umeme, the latter might reduce investment in services to the two categories of consumers, halting the presently good pace of growth in the national universal access numbers for grid electricity.

Reflecting on the past and future 

The unbundling of UEB into UEGCL, UETCL and UEDCL, and the creation of four other entities (ERA, REA, UECCC and EDT) at the beginning yielded some excellent results with significant private sector investment in the generation and distribution of electricity. 

The previous financial burden to taxpayer has been transferred to consumers to a large extent. However, it is clear that delayed investments in generation has negatively impacted the public perception with the largest blame (reputational risk) falling on the distribution concessionaire Umeme.  

Umeme has to some extent suffered from its own success. Whereas revenue collection climbed to more than 98 percent, leading to huge profits, consumers continue to grumble. 

The bureaucratically burdened rural electrification programme, which took a long time to kick off, also meant that people lost faith and investors saw the opportunity to introduce home solar systems and other devices. 

Therefore, it is appropriate that after more than 20 years of operating the sector under the 1999Electricity Act as guided by the Energy Policy 2007, it is important that both policy and law undergo a thorough review to accommodate changes in the operations environment. 

The new law is here; but the implementing regulations of areas being targeted needs greater care and consideration of the consequences. It is important to note that most of the Power Purchase Agreements and Power Supply Agreements (including those for plants that have not yet been commissioned) expected continuity of UETCL and Umeme with particular roles.  

Where divorce is inevitable (as the case seems for Umeme) the process need not be acrimonious since provisions for such were included.

Fortunately for Umeme the bigger part of the compensation money will go to Ugandans (through shareholding) and other individual shareholders. 

But we need to manage the process carefully. If you divorce Umeme in 2023, you pay much more than if you let its concession term run though to 2025. 

It is easy to forget where we were in the 2000s.  Indeed, 20 years later, we are in a much better place as a result of reforms regardless of mistakes made. 

It is imperative to point out that when divorcing with entities that participated in building our electricity supply industry, we should be guided by independent scientific studies to stem damage to our future economic endeavors. 

When Parliamentarians and or senior government officials pre-determine and declare the end position the investigations become futile and other parties also become hostile with possibilities of costly overseas litigation.  

Dr Frank Sebbowa has more than 40 years of  experience in power supply and also served as the executive director of Uganda Investment Authority between  2012  and 2016.