Below is an analysis of the strengths, weaknesses, opportunities of the power sector reform, particularly with respect to the Umeme concession.
- The power sector reform, which includes the Umeme concession, has created a solid legal and contractual framework on which a vibrant power sector is emerging in Uganda. The reform included the unbundling of the electricity sector, the formation of the Electricity Regulatory Authority (ERA) and the involvement of the private sector investors and operators, including Umeme. The results are palpable: in the 8 years between 2005 and 2012 Uganda will have roughly doubled the number of electricity connections and more then doubled the effective generation capacity. Therefore, more new generating capacity and customer connections were added in the last 8 years than since the formation of UEB in 1950s. Moreover, all of this was achieved with private rather than government funds. That is a significant success for Uganda and provides a strong foundation for the coming years.
- Significant backing from the World Bank Group. The World Bank Group has for a long time provided guidance, support and funding to Uganda's power sector. World Bank has advised the Government on the sector reform, which has created the Umeme concession. The World Bank Group has also acted as an enabler of the Umeme and Bujagali transactions by providing guarantees, insurance and debt funding. The World Bank has chosen to support these transactions due to their importance to the development of Uganda, while ensuring that their structure and terms are equitable and in line with the international market.
- Well structured Umeme distribution concession arrangement, in line with best international practice. Infrastructure investments run over long periods of time, which needs to be guided by appropriate concession agreements. That was achieved in the Umeme concession, with clearly defined rights, responsibilities and appropriate contractual mechanics. In negotiating the agreements the GOU team, led by the Privatisation Unit in Ministry of Finance, was supported by specialized and experienced international advisors. The financial advisor was Fieldstone, probably the most accomplished infrastructure finance advisory firm in Africa, the legal advisor was Hunton & Williams, which regularly represents many governments in Africa and Asia, and the technical advisor was PA Consulting, a renowned international engineering and power sector consultancy. Please see Appendix A for the Request for Proposals, the formal bid document prepared for the Umeme concession by the GOU transaction advisors.
- Strong and reputable sponsors which provided Umeme with solid capital backing, expertise and long-term vision. Umeme was jointly owned by CDC Globeleq and Eskom Enterprises, both well known players in the energy sector in Africa. CDC Globeleq (now called Globeleq) is owned by Actis Capital LLP, a UK investment fund which, among other, counts UK DfID as its investor. Eskom Enterprises, owned by Eskom of South Africa, sold its stake in the Umeme to Actis in late 2006, but remains active in the electricity sector in Uganda via the concession of the Nalubaale and Kiira dams.
- Appropriate contractual mechanics and incentives. The Umeme concession has created strong incentives for the company and its shareholders to improve the efficiency of the distribution system. For example, unless Umeme reduces losses, improves collections and operates within the constraints of the allowed operating costs that were locked-in for 7 years, it loses money. These incentives have resulted in significant efficiencies gained in the first 7 years, and will result in further benefits over the remainder of the concession.
- Ongoing power supply shortage. Umeme just distributes electricity, i.e. it does not produce it. However, Umeme's performance is often judged through the reliability of power supply (or lack thereof). The first reason for the current electricity shortfall is the very strong growth in demand: 10% per year since 2005 (compared to 5% in Kenya). The second reason is insufficient new power generation. This was primarily caused by the stoppage in the development of the Bujagali project in 2001, whose construction eventually started only in 2007. As a result, Uganda had to depend on diesel fuelled thermal generation, which has led to increased tariffs and large government subsidies. These difficulties were further exacerbated by the drought, which caused the hydro plants to reduce their output over time (particularly in 2006-2009).
- Need to streamline sector decision making. The upcoming commissioning of the Bujagali power project will eliminate the current load shedding. However, to meet the rising energy demand of Uganda's fast growing population and developing economy, we now need some 40MW of new capacity to come online every year. To ensure that load shedding does not come back, we need new projects to come online on a regular basis. This requires clear, competent and swift decision making in the sector. GOU is looking into how that central role for planning and delivering new projects can be strengthened, by looking into the current roles and responsibilities of the MoEMD, ERA and UETCL.
- Operational challenges in electricity distribution. The greatest challenge for Umeme is the reduction of distribution losses, which contribute to a higher tariff and operational inefficiency. At 28% Umeme's losses are still relatively high (compared to 16% in Kenya), approximately half of which are so-called commercial losses caused by various forms of power theft. The new 7-year tariff targets for Umeme will be ambitious, but also realistic, and will deliver significant improvements. However, to ensure success in this regard, GOU needs to cooperate with Umeme for the benefit of the sector (see Opportunities below).
- Improvements in customer service. In recent years Umeme has delivered a number of customer service initiatives (toll-free contact centre, quicker fault response, no waitlists for electricity connection, etc.). Further initiatives are being implemented, such as nationwide rollout of prepayment metering, e-billing and multiple payment options, better response times, etc. These measures will start making an impact in 2012 and beyond.
- Cooperation in reducing electricity theft. Widespread electricity theft causes a significant burden to the sector and increases the tariff for the regular customers. This requires a change of culture on which GOU and Umeme need to embark together. The result of this will be a more efficient electricity distribution, better quality of supply and a contribution against rising tariffs.
- Umeme IPO. Listing Umeme on the Kampala Stock Exchange will be a significant new step in the development of Uganda's capital markets. GOU strongly supports such a development by which Uganda's pension fund and individual investors will become owners of Umeme and benefit from its long-term growth.
- Growth in new connections. Umeme has doubled its customer base over the first 7 years of the concession and plans to (at least) double it again over the next 7 years. Such a rollout of new connections, and the expansion and strengthening of the network is central to the continued development of Uganda.
- Rural electrification. Umeme has expressed a strong interest in a closer cooperation with REA. While the two organisations have been working together for a number of years, their closer cooperation would bring significant scope for stronger rural electrification results. GOU will be closely following their discussions and will push for an arrangement that can produce the best results.
- Development of local talent in Umeme. Already in the past years Umeme has hired, trained and promoted local talent, including to very senior management positions. In the coming years, with the projected growth in investments and expansion of the network, that trend will only continue. The formation of strong Ugandanhuman resource in Umeme is not only important for the development of the company, but also for the sector as over time staff migrates to other organisations.
- Sector instability. The current shocks that the energy sector is going through - late payments to electricity generators, highly politicized atmosphere around the sector, calls for renegotiation or termination of agreements with foreign investors - create significant instability. Such instability negatively affects the attractiveness of the Uganda power sector as an investment destination. Uganda is looking to attract 2-3 billion US Dollars into the power sector in this decade, much of which will need to come from the private sector. The current instability can, unfortunately, weaken Uganda's hand in attracting this investment on favorable terms. Therefore, the current instability needs to be surmounted as quickly as possible.
- Insufficient new power generation. The single most significant threat to the power sector in Uganda are delays of new projects, which would cause ongoing load shedding and slow down economic growth. Therefore, GOU and other sector stakeholders need to align their efforts to focus on creating an environment in which projects will be developed quickly and efficiently.
- Dependence on large projects. Uganda has tremendous hydropower potential that can contribute significant new generating capacity at favourable prices. That is a legitimate and appropriate strategy for Uganda to follow, both in terms of large and small hydro projects. However, the development of large projects is quite complex and can be subject to significant delays, as has been seen with the example of Bujagali. For that reason Uganda should aim to develop a reserve margin - surplus generating capacity over and above the level of demand - in order to provide stability required for the economy as it grows and industrialises.