How Museveni makes the most of big-ticket projects

In the 1990s, Uganda had a moribund, state-run power sector. As part of its reform agenda oriented towards creating a market economy based on private ownership, the World Bank began advocating for privately-owned companies to revive the country’s ailing electricity system.

Under its 1999 Electricity Act, the NRM government agreed to liberalise the electricity market and turn to largescale private firms to alleviate serious power supply problems. In 2002, the government released its power strategy, which prioritised greater foreign private company participation in the construction of hydroelectric dams as well as investment in power distribution.

In fact, in 2001, the government had on the advice of the World Bank awarded a contract to a United States energy giant, AES (Applied Energy Services), to build a new dam on River Nile. After this scheme—referred to here as Bujagali 1—collapsed in 2002–2003, the government, again in consultation with the bank, awarded another contract to an international consortium, Bujagali Electricity Limited (BEL), to build and operate a hydropower dam—Bujagali 2—on the Nile.

In 2005, and on the bank’s advice, a major concession was awarded to another foreign consortium, to be known by its acronym Umeme (the Kiswahili word for electrical power) to invest and manage electricity distribution.

During the 1990s and 2000s, both the NRM government and these foreign companies cooperated closely, especially as their mutual interests dovetailed.

But they diverged in the 2010s when private profit exceeded public benefits and as major financial liabilities were created for the government.

In the past decade, President Museveni has looked to Chinese state companies to build new hydropower plants instead of relying on much-criticised World

Bank-supported private Western consortia. However, profit-making Chinese dam construction firms are producing additional budgetary burdens on the government while access and affordability outcomes remain limited.

This chapter provides a political account of the relations between the NRM government and Western and Chinese firms investing in the construction of hydropower dams (generating nearly 90 percent of Uganda’s electricity) as well as distribution networks. It focuses, especially on the relations between President Museveni and these international companies and how their respective interests and interactions have shaped electricity outcomes.

The next section outlines our main argument, namely, that cooperation between the Museveni government and the World Bank and later China’s Eximbank regarding electricity provision has benefitted foreign firms at the expense of domestic consumers and public finances.

Although in Uganda’s semi-authoritarian political system, Museveni has had the final say in the making of electricity deals, the greater bargaining strength of World Bank and Chinese-supported foeign companies vis-à-vis the President and his advisors has influenced power sector contract negotiations.

We also argue that Museveni’s strong personal involvement in electricity governance involving limited parliamentary and public consultation has tarnished his reputation as a reforming leader protecting and promoting the national interest.

Outline of the argument

There are two key interconnected themes in the governance of energy in Uganda. The first concerns the specific terms of power sector contracts negotiated by foreign firms with the NRM government. These contracts, we contend, have been structured more in the interests of foreign companies than to the electric power needs of Ugandan citizens.

The World Bank was at the forefront in urging the government and most prominently the President to adopt a market and private sector approach to electricity provision. But in the 1990s and 2000s, foreign capital was reluctant to invest in Uganda’s dilapidated power sector unless it was assured of guarantees covering various commercial, financial and hydraulic risks. The Bank advised the government on the required risk-mitigation measures, which were incorporated into power purchase and concession agreements signed with foreign investors.

For instance, foreign firms require guarantees of a fixed and high rate of return on investment. They required an assurance as well from [the] government to bulk-purchase all the electricity they generated and bulk-supply all the power they needed for distribution. And they sought buy-out clauses, which would make it costly for the government to terminate contracts.

In addition, the Bank was closely involved with the government in implementing pricing reforms to improve cost recovery and operational efficiency. Cost-reflective tariffs would cover the full cost of supplying electricity and generate the desired returns on investment for foreign profit-seeking companies.

With the backing of the World Bank as well as several Western embassies, especially from the UK and the United States, companies from these countries held the upper hand in their negotiations with the government. International firms were able to win important contractual terms and conditions, which minimised their investment risks, as well as enabled them to achieve high-profit levels.

The Bank had also for several years been cultivating the President and senior Finance and Energy ministry officials to its pro-market ideas, making the latter ideologically disposed to accepting the specific power sector contract terms that for[1]eign companies required as a condition of local investment.

Concession agreements

As we will see in the case studies, because so few foreign companies were interested in investing in Uganda’s decrepit power sector, the successful bidders were able to virtually dictate the terms of the power purchase and concession agreements they desired. Noteworthy, too, was that non-transparent contracts were kept secret and therefore unavailable for public scrutiny.

Explicit emphasis was placed on the contracts and concessions awarded to BEL and Umeme to expand electricity generation capacity, rehabilitate and strengthen distribution infrastructure as well as implement cost-covering tariffs.

Only with the commissioning of Bujagali 2 in 2012 did the government’s key policy goals of ensuring affordable consumer tariffs and expanding access to electricity assume prominence on the reform agenda. However, various contractual guarantees, anti-risk measures and cost-reflective tariffs have negatively impacted the achievement of access and affordability objectives.

For instance, the high rate of return on investments, which was factored into the tariff, contributed to persistently elevated consumer power prices and, in consequence, low access to electricity. Contracts also allowed ‘for the pass-through of all costs to the tariff.’ Foreign companies were able to recoup their investments as well as the cost of their loans directly from the tariff. Transferring all these and other costs to the retail tariff led to rising prices stifling business as well as making electricity expensive for domestic households.

On the other hand, international firms derived high profits from their investments at the expense of local consumers. As Bosshard noted in his critique of Power Purchase Agreements (PPAs) in developing countries, they provided ‘sweetheart deals for private investors, guaranteeing them high profits at low risk, while entailing major costs for the public’.

The Electricity Regulatory Authority (ERA), established in 2000, was given the mandate to oversee foreign companies to ensure they complied with their licences. The ERA was responsible for setting the end-user power tariffs after computing the generation, transmission and distribution companies’ reasonable costs.

The retail price of electricity had to cover the full cost of provision under the system of cost recovery, which was essential to the profitability of foreign capital.

Up to 2012, an inexperienced ERA was hardly able to constrain the operations of foreign businesses in the power sector. In recent years, however, ERA officials have expressed concern that the cost-reflective tariff placed a heavy burden on consumers and industries. The regulator now includes among its core focus areas affordable tariffs and accelerating access, which it seeks to achieve mainly through cutting generation and distribution costs.

However, protecting electricity consumers from ‘unrealistic’ costs has led to considerable friction between the regulator and especially Umeme, the monopoly power distributing company.

On the other hand, Finance ministry officials as well as the ERA have sought to constrain BEL’s huge generation costs on the tariff by re-negotiating agreements, especially with the foreign consortium’s financiers.

Overbearing presidency

Our second main theme relates to President Museveni’s prominent involvement, initially with the World Bank and later with China, in key aspects of the governance of electricity. Uganda is a semi-authoritarian state, where since 1986 political power has been concentrated and centralised in the hands of the President.

From the early 1990s, President Museveni became committed to developing Uganda’s electrification by partnering with Western firms, in the belief that this would help promote industry, citizen well-being and legitimise his leadership.

By developing close working relations with him, the World Bank enhanced the centrality of the President in electricity decision-making. Because of his prominent position, foreign company representatives often directly approached the President, with numerous meetings involving foreign firms, Museveni and his small circle of advisors taking place at the State House. Museveni has been ultimately responsible for approving which companies obtain power sector contracts and concessions.

As we will see, this was most evident regarding Chinese dam construction companies, where Museveni personally selected which companies should be awarded contracts, a decision also informed by political considerations. For instance, and as detailed below, he was able to choose Chinese firms which were being fronted by close political allies and family members. Alternatively, he turned against Chinese companies being supported by political rivals.

However, and as noted above, the much stronger bargaining strength of international economic actors has meant that they have been able to determine the specific terms and conditions of contracts favourable to the interests of foreign companies.

Mr Museveni has also generally allowed international firms operational independence and hardly intervened in their operations. Moreover, he has avoided breaching contracts regarding foreign firms he was critical of. Such interventions would have undermined Uganda’s credibility among foreign investors as well as damaged the country’s cordial relations with the West and China, whose diplomatic and political benefits have been important for Museveni’s preservation of power.