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    World Bank report dooms merging electricity bodies


    August 1, 2022 - The Daily Monitor

     

      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.

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