World Bank report dooms merging electricity bodies

The World Bank has questioned the government move to bundle and nationalise Uganda Electricity Generation Company (UEGCL), Uganda Electricity Transmission Company (UETCL), and Uganda Electricity Distribution Company (UEDCL).

A report delivered to the Finance ministry by the International Finance Corporation (IFC) at the start of the last quarter of the 2021/2022 financial year raised the red flag about the prospect of merging into a single entity the three agencies in Uganda’s electricity sub-sector. The IFC is an international financial institution that belongs to the World Bank Group. 

In the report, a copy of which Saturday Monitor has seen, Mr Jumoke Jagun-Dokunmu—IFC’s regional director for eastern Africa—offers technical opinions on why thegovernment must break ranks with the plan. The report—addressed to ministry’s Permanent Secretary and Secretary to the Treasury (PSST) Ramathan Ggoobi—follows the Cabinet’s resolution in February 2021 to merge nearly 180 agencies, commissions, authorities, and entities in an austerity measure that would save government about Shs988b.

Background

In 2019, the plan to merge or revert government agencies to parent ministries was halted hardly a year after being floated and consented to at the Cabinet level. The plan came into being after the Internal Security Organisation (ISO) submitted a report on November 25, 2019. The report revealed wastage of resources through overlapping functions between line ministries and agencies.

ISO recommended reforms by way of abolishing and merging agencies with overlapping roles with a view of eliminating wasteful expenditure and using the savings for other purposes, including the enhancement of civil servants’ salaries.

Players in the electricity sub-sector were eventually sucked into the conversation. This came nearly two decades after the government engaged in bold reforms that involved unbundling, and privatising large parts of Uganda’s power sector.

The sector reforms were led by the World Bank Group and other international development agencies. They were part of a public sector restructuring and privatisation strategy intended to make the power sector financially sustainable and efficient. The move also set out to meet the country’s growing demand for electricity, increase network coverage, improve the reliability and quality of electricity supply, attract private capital and entrepreneurs, as well as harness regional power trade opportunities.

Factors that drove the need for the reforms included low efficiency characterised by high levels of system losses (estimated at up to 40 percent), unreliable power supply constraining business development, extremely low access to the grid, and the Uganda Electricity Board’s (UEB) inability to service its debts.

Past efforts to turn around UEB’s financial and operational performance—including some supported by the World Bank Group through the International Development Association (IDA)—had failed to generate adequate cash flows to sustain the required operation, maintenance, and capital investments. The reforms were also triggered by major sector vulnerabilities that hamstrung growth and left more than 90 percent of the population without access to electricity.

Dr Kabagambe Kaliisa, a former Permanent Secretary in the Energy ministry, who now serves as a senior presidential advisor on oil and gas, says the purpose of the unbundling was to attract private sector participation.

“The intention was that if the private sector is coming to do generation, let there be a separate legal entity in a generation, transmission, and distribution,” Dr Kaliisa says, reasoning that “if these private companies are competing to enter the sub-sector, there is a different entity to deal with them to avoid conflict of interest.”

Unbundling gains

As of the late 1990s, Uganda had just 180MW of installed generation capacity and a six percent electricity access rate. It was among the lowest in Sub-saharan Africa at the time. To compound matters, technical and commercial losses exceeded 40 percent, bill collection rates were estimated at 50-60 percent, and tariffs—at US Cents 5.6 equivalent per kilowatt-hour (kWh)—fell well below the cost of service.

Consequently, the government established the Electricity Regulatory Authority (ERA) in 1999 upon unbundling UEB into three companies (UEGCL, UETCL and UEDCL). Management of existing generation assets was transferred to Eskom Uganda in 2003 before the main distribution grid was transferred to Umeme—the first unbundled electricity distribution network to attract private sector investment under a 20-year concession in 2005. Only UETCL was retained as a government company and the sole buyer of electricity in Uganda.

Despite some initial difficulties, experts say these reforms have yielded concrete and solid results. They add that these gains have put Uganda on the map as having one of the most successful power sector frameworks on the African continent.

The reforms are said to have been more instrumental in enabling the introduction of independent power producers into the generation segment. They did this by improving the efficiency and financial resilience of the sub-sector.

The unbundling of UEB into specialised entities along the electricity value chain brought significant benefits. According to World Bank data, electrification efforts implemented to date have increased the country’s access rate from nine percent in 2005 to 41.3 percent (including off-grid access) in 2019. Umeme, for one, added more than 1.2 million new grid connections between 2005 and 2020, exceeding the 700,000 connections added by Rural Electrification Agency (REA) and its service providers since 2001.

At crossroads?

The 2019-2025 regulatory period has a target to achieve an average of 300,000 annual connections (based on a nine percent growth rate) subject to government financial support under the newly launched Electricity Connection Policy (ECP). Umeme connected 200,000 customers under ECP in 2019, which declined to 59,600 in 2020 due to limited government funding for free connections, compounded by Covid-19 restrictions and fiscal effects.

It is readily apparent that the sub-sector has reached a critical juncture; yet the government is dilly-dallying on the future of these concessions. The government says it is evaluating the sub-sector development model to further improve sector outcomes mainly on two fronts—accelerating access growth and lowering user tariffs (The aspect of a reduction in tariffs was extensively addressed by Gen Salim Saleh’s 2009 report that alleged Umeme was cooking its books).

To achieve these objectives, the government is exploring options such as re-bundling the public electricity utilities involved in electricity generation, transmission, distribution, and rural electrification, and nationalising the main distribution concession.

The concession, which was awarded to Umeme Ltd to lease and operate distribution assets, expires in March 2025. Another concession extended to Eskom Uganda (a subsidiary of Eskom Enterprises—the investment arm of South Africa’s state-owned power utility) to manage generation assets runs its course in December 2023.

Against merging

While it is widely believed that the lapsing of the concessions will pave the way for re-bundling, a 27-page IFC report advises otherwise. The report came against the backdrop of a meeting IFC held with Uganda’s delegation during the World Bank Group/IMF 2021 annual meetings. It came hot on the heels of a follow-up meeting with IFC country manager Arif Amena in 2021.

The report focused on the benefits and risks of reversal to a state-owned distribution utility and whether the current framework has succeeded in enhancing governance in the sector. The re-bundling of the entities would constitute a reversal of the “first generation” reforms, which provided a foundation for concessions, and supported the observed improvements in efficiency, transparency, and sector governance, Mr Jumoke wrote.

He added: “A merger is unlikely to impact the tariff given that only a small portion of revenues required by UETCL and UEDCL are passed through to the tariff (six and one percent respectively).”

Mr Jumoke revealed that the electricity tariff is largely driven by capital expenditures in power generation and distribution assets, which accounted for 55 percent and 28 percent of the tariff respectively as of the end of 2021. Of the 28 percent distribution cost, only eight percent is a return on investment allocated to Umeme. To him, a lack of institutional capacity, prevailing governance issues, and the related fiscal challenges due to a majority government ownership may likely limit the sector’s ability to continue to attract and deploy private capital on competitive financing terms.

“Uganda has had previous experience with a monopoly structure (UEB) that produced very poor outcomes,” he further warned.

The report also stressed that although the market context has changed and key sector fundamentals have improved, reverting to the vertically integrated utility (merging) exposes the sector to performance risks from vulnerabilities such as those posed by governance challenges in Uganda. It proceeds to note that evidence from reformers across emerging markets shows that regulation has functioned more effectively where distribution utilities were privatised compared to where they remained state-owned.

“This is because the presence of a private operator heightens the need for effective oversight to ensure compliance with investment obligations and performance indicators, ensure adequate cash flows, and safeguard consumers’ interests,” it reads in part.

Improving the grid

The distribution segment is the backbone of the electricity sub-sector. This owes to the fact that it sits atop the cash waterfall where revenues that are collected allow its credit standing as well as the ability to pay Independent Power Producers (IPPs). As such, a reversal to public management carries a potentially significant risk of derailing progress made in efficiency. The report further notes that this hampers access and affordability efforts.

The government, however, appears intent on revising the 1999 Electricity Act to implement the new structure. Dr Kaliise poses one critical question: “Will the government have all the capital it needs to invest in generation, transmission and distribution so that it drives the sector as the key investor?”

The IFC insists that there is a significant risk of losing momentum on efficiency, financial discipline, access to private sector expertise, and capital if a merger is implemented. It also adds that state-owned distribution utilities are more exposed to politically motivated interference, which can adversely impact service delivery and the financial sustainability of the company.

“The lack of institutional capacity, prevailing governance issues, and the additional related fiscal challenges resulting from a majority government ownership could limit the ability of the sector to continue attracting and deploying private capital on competitive financing terms,” the IFC report spells out, adding, “Boards in state-owned utilities tend to be political rather than merit-based appointments, and less accountable than in private utilities that answer to multiple stakeholders. These factors undermine oversight and strategic planning, often with detrimental impacts on financial discipline.”

To avert the current challenges the government faces with the concession, IFC recommends that the government restructures the distribution sector to minimise fragmentation by reducing the number of providers to at most three outside of Umeme.

“Retain the private distribution concession and adjust terms. Improve transparency and financial management. Efficient processes are needed to ensure concessional resources are disbursed, material procured and costs reimbursed promptly,” the report notes.

To increase electricity demand, it suggests that Uganda must stimulate productive use of electricity and expand the grid—notably by bringing private investors into transmission. Such undertakings would limit oversupply and redirect fiscal resources to access while generating cash flows to support the planned growth in grid investments.

“Simplify the structure of the distribution sector. Having the government as a majority shareholder in the private distribution main concession would add little value and is undesirable as it opens the sector up to the same governance risks faced by wholly owned state utilities.”

Sizing the impact

Mr Selestino Babungi, the Umeme managing director, says the merger is likely to bring a lot of confusion unless a proper evaluation is done by the government.

“With the merger, it means UETCL, UEGCL and UEDCL will be no more, so it changes the configuration of the company,” he told Saturday Monitor, adding, “So, if UETCL is no more, it means they must sign new agreements under different terms with the new company, which is a load of work.”

Mr Babungi also revealed that the merger will impact “the power purchase agreement signed between the Independent Power Producers and UETCL.” It, he added, “must all change.”

Dr Kaliisa, however, argues that the merger will not affect running concessions (agreements) between the government and the private players in the sector, adding that the agreements will remain unhurt.

“An agreement is an agreement for some time as the contract has been agreed, so you cannot unilaterally say I am going to change terms and conditions in an agreement when it was agreed by the two parties,” he reasoned, adding that the merger does not mean private players will be kicked out of business.

He clarifies: “That one is not necessarily the case because you can leave the private sector in place and you merge existing [government] companies, but while the private sector is running, as long as you have now a strong regulator to oversee them.”

Dr Kaliisa also says nothing was off the table and that “where renegotiations and amendments of agreements are required as a result of the merger, the government and the private players can come together…and figure out a way forward.”

Attempts to speak to Ms Evelyn Anite (junior Trade minister) and Ms Ruth Nankabirwa (Energy minister) were futile by press time. The Energy ministry spokesperson, Dr Patricia Litho, however, opted not to offer a comment on account of having not received a copy of the report that was dispatched on March 18.

What next?

In March, the government said it was embarking on the move to merge the three electricity agencies. The Finance ministry said the move to merge the agencies and create a national power utility company that will generate, transmit and distribute electricity across the country was aimed at streamlining the operations of the three firms.

The government says the agencies have been struggling with poor management and high operational costs. Unending concerns over poor distribution and exorbitant costs of access to electricity haven’t also helped matters.

Appearing before the parliamentary Natural Resources Committee on March 10, Ms Anite said the merger will create a company solely owned by the government. While 49 percent of shares would be owned by the Finance ministry, Ms Anite further said the Energy ministry would own 51 percent of shares.

“Government’s position is that we have one power company, we more or less go back to a better version of Uganda Electricity Board where the utility is provided by the government,” Ms Anite told the committee, adding, “President Museveni has directed that electricity be a preserve of the government.”

Statista—a data company—in a 2021 report indicated that Uganda is in the top 10 of countries with the highest tariffs in Africa. Ms Anite told the parliamentary committee that several countries on the list are those that have privatised their electricity distribution.

“Umeme is doing the role of distribution and the President’s directive is that we should not have middlemen,” she said, adding, “The major key areas of industrialisation where consumption is high have been divided between UEDCL and Umeme through concession.”

Mr Fred Muhumuza, a senior economist, however, believes the merger will prove costly to the taxpayers. He particularly cites salvaging costs that will arise out of the termination of many agreements.

“I know what they are trying to cure, but it cannot be cured through a merger. The merger of such a sector, I would agree with the World Bank, would be very problematic because terminating these power purchase agreements is very expensive in terms of costs of settling them,” Mr Muhumuza said.

While the government claims the merger is meant to reduce the costs of running the sector, Mr Muhumuza argues that the drivers of the high costs the government now meets in running the sector are the power purchase agreements (PPAs). These PPAs compel the government to pay for the power it is not using (deemed energy).

“These agreements are legal; not just business cases, and these agreements were designed in a rush,” he said, adding, “A merger cannot undo those agreements, especially those with very expensive termination clauses.”

Rationale of merging

In February, legislators on the Parliamentary Committee on Natural Resources asked the Energy ministry for a comprehensive study, justifying the government’s move to merge and streamline electricity agencies.

The lawmakers, however, were hesitant to support the proposal, challenging the ministry’s competency to manage the agencies when they are merged and streamlined.

Ms Irene Batebe, the ministry’s Permanent Secretary, told the committee that the move will help eliminate duplication and redundancies of programmes shared by sister agencies.

“The mere fact that some parishes have electricity poles standing without lines; these are the things we seek to address by streamlining the agencies,” she said.

Ms Batebe added that the inefficiencies that existed, especially in REA, informed the decision to absorb it and make it a department in the ministry to help with better oversight.

She also noted that a study was conducted to ascertain the viability of merging and streamlining the electricity agencies. “We are, however, preparing to undertake a comprehensive assessment on the new direction of the electricity agency merger. The intention is to harmonise all these sub-sectors to operate efficiently.”

Whereas each of them will operate as separate departments, Ms Batebe said that Uganda Electricity Generation Company (UEGCL), Uganda Electricity Transmission Company (UETCL), and Uganda Electricity Distribution Company (UEDCL) will be merged into one public limited company. This, she added, will aid in supervision of their duties without interfering with each other.

When Uganda Electricity Board (UEB) was unbundled, paving the way for the enactment of the 1999 Electricity Act, it was hoped that the sub-sector would rid itself of monopolistic structures. This would consequently create market conditions that would open up for competition and provision of quality services for customers.

More than two decades after the unbundling of the sub-sector, opinion on the matter remains firmly split. Observers say the International Finance Corporation’s (IFC) report will only add fuel to the fire not least because as an investor, there is a conflict of interest to be picked out.

The assumption that a merger will stop the Independent Power Producers (IPP) from investing in the energy sector also rests on a cornerstone of conjecture.

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