Government’s plan to buy Bujagali dam

By Agather Atuhaire

Why are experts against it?

Uganda’s electricity sector is grappling with a problem most of its sector experts are accustomed to debating about; finding the best way to lower the cost of generation.  The options being debated include an unusually tricky question; whether the government’s alleged secret plan to buy the 250MW Bujagali Hydroelectricity Dam from its developer and operator, the Bujagali Energy Ltd (BEL), an Independent Power Producer consortium, makes sense.

At stake is about US$ 900 million in construction investment borrowed from over 8 international development banks and more money to cover BEL’s mark-up price.

If uninterrupted, BEL’s interest in Bujagali would run up to 2042. Then it would, all factors remaining constant, revert to government ownership. Over the period, however, the cost of Bujagali electricity would keep rising from the current US$11 cents/kwh to peak at 16 US cents in 2022.

That is unacceptable to some experts. They want government to take full ownership of the power plant now and, possibly, pass on the generated electricity to the transmission company at US 2 cents which the fully government-owned Kiira and Nalubaale dams currently charge.

Such a move, another group warns, would push the government to the position it was in when it first grappled with the problem of high tariffs in the early 2000s. It was forced to subsidise electricity consumers to the tune of US$623 million over a seven-year period from 2005 to 2012.

The subsidies were abolished in January 2012 and the tariff increased by almost 50% to Shs524.5 per unit for domestic consumers. Still, that was much lower than the Shs1000 per unit they paid before the first power from Bujagali came on stream. The current debate comes at a time when ERA has just adjusted the tariffs upwards by about 2% on average. On April 10, domestic consumers saw the highest rise; from Shs531.5 per Kwh to Shs544.9 or 2.5%. An average urban household uses about 1Kwh per day. This makes the recent tariff hike insignificant.

Affordable versus available

But this debate comes at a wrong time; when, after years of grappling with scarcity, Uganda’s electricity supply is now slightly higher than effective demand; at 670MW effective generation compared to 540MW maximum demand. This means although electricity generators still roar most of the time in the capital Kampala and other towns, there appears to be no urgency to act and all the time to debate at leisure.

That is what happened on March 24 when parliament approved the government’s request to borrow $1.435 billion (Approx. Shs4.3 trillion) for the construction of the 600MW Karuma Hydropower Plant on the river Nile. The money is from the Export–Import (EXIM) Bank of China and comes payable over a 25 year period at an average 3% interest rate. The work is being executed by Sinohydro Corporation Ltd, a Chinese firm.

The Karuma approval followed approval for US$483 billion (Approx. Shs1.5 trillion) to build another hydropower plant on the Nile; the 180MW Isimba Hydro Power Plant.

Both dams are part of President Yoweri Museveni’s frantic efforts to build hydropower dams, thermal plants, and exploration of solar and geothermal power options. Not everyone is happy with Museveni.

Two schools of thought appear to be emerging; the first says we need more electricity generation capacity, but it must be affordable. This group includes consumers, many members of parliament, and civil society organisations. They oppose Museveni’s borrowing spree.

The MPs want the government to use to find cheaper and more sustainable means of financing these projects like resourcing the energy fund.

“The Energy Fund should be significantly resourced to cushion the expensive capital required to realise the much desired investments this is a smarter and more sustainable way of subsiding the sector,” some of them said in a committee’s report on the Energy Ministerial Policy Statement of financial year 2014/2015. Indeed, the initial plan was that Karuma would be a public project fully financed by the government through the energy fund and oil revenues to provide cheap electricity and neutralise the high tariff.

The ministry of Energy reported to the Natural Resources Committee of parliament that there was shs771 billion (about $310 million) on the Energy Fund at the beginning of the current financial year. The government also so far has got $925 million from the oil sector through signature bonuses, Capital Gains Tax and Stamp Duty.

But the ministry explained that the Energy Fund money was already being used to fund Karuma Hydropower Project and other power projects since the loan finances only 85%.

They point at the 250MW Bujagali Hydropower Dam on the River Nile at Jinja which was commissioned in 2012. At the time, Uganda was facing a major energy deficit and was depending on thermal plants charging as much as 22 U.S. cents/kwh.

Under the plan, BEL is to sell Bujagali power to the government-owned transmission company at 11 US cents/kwh in the first 13 years.

Therefore, the Minister for Energy and Mineral Development, Irene Muloni, assured Ugandans, power tariffs would reduce once all the five units of Bujagali Hydropower Dam come on board. It has not happened. Instead Uganda has the highest domestic electricity consumer tariffs in the East African region.

The other group says we need more electricity generation capacity urgently at whatever cost. This includes the electricity generators and distributors. They say, unless more electricity generation capacity is acquired urgently, the country will again start experiencing a shortfall next year since demand grows at more than 10% per year. Karuma and Isimba, they say, must come on stream latest 2018.

Buying Bujagali

President Yoweri Museveni used to belong to the group that wants electricity urgently at whatever cost. When funding for the Karuma Dam from Exim Bank was delayed and before parliament approved the loan, he injected in government’s 15% contribution of US$253 billion, to enable construction to continue.

But he too appears to be feeling the relief the country got when the 250MW Bujagali Hydroelectricity Dam was commissioned in 2012 and some of the costly thermal generation plants were decommissioned. He too has begun to address the issue of lower tariffs as a priority.  The reports gained momentum when Museveni, while meeting investors recently said that something needs to be done about the “unfavourable terms” that government entered with the operators of the plant—BEL.

Despite the open discussions, Energy Ministry officials deny that taking ownership of Bujagali is on the cards. Even the Minister of State for Energy, Simon D’Ujanga, told The Independent he has no knowledge of such a plan.

But the said plan has attracted immense criticism with many saying such a move is unwise and makes no economic sense. Sources familiar with it say the plan to buy the plant was first pitched to President Museveni by NRM legislators. They argued that the current high power tariffs are vote losers and becoming unaffordable for their voters.

But the MPs’ position is being opposed by some sector experts. They argue that government would rather spend that money; if it has it, on financing other projects instead of buying back Bujagali.

“I see no economic logic of any kind,” said economist Fred Muhumuza formerly employed by the ministry of Finance. He said it makes no sense for the government to pursue Public Private Partnerships if in the end it is going to buy them back.

Another economist, Lawrence Bategeka says the alleged plan to buy Bujagali will raise questions about Uganda’s planning systems.

“If we had the money why didn’t we finance the project ourselves in the first place?” Bategeka asked.

He says such an illogical move should not even be under consideration. He says buying Bugjagali will, in fact, not lower the cost of electricity because the cost of buying Bujagali will be high.

“The investor if interested in selling will set the price very high where he can get the same profits he would get at the end of 30 years,” Bategeka said, “and there will also be operation and maintenance costs.”

The agreement is that BEL constructs the dam, operates it and transfers it to government at $1 after 30 years. BEL has managed the project for barely three years after its commissioning in October 2012.

Bategeka says what would make sense would be using the money that government wants to buy Bujagali with to finance another electricity project to expand generation. Bujagali, Bategeka says, could be expensive because it generates more than 50% of the power currently consumed in the country.

“Maybe competition would force Bujagali to bring the tariff down to an acceptable level,” he added.

Johnson Kwesigabo, a lawyer formerly working with the Electricity Regulatory Authority (ERA) also says Buying Bujagali would be an illogical and expensive venture. He says it is unclear where the government will get the money to buy back a dam which was constructed at US$ 900 million yet the investor would also want to be compensated for their Return on Investment.

Electricity scarcity looms

Kwesigabo says government has taken some unwise decisions in the Energy sector which he says are responsible for power shortage and the high tariff. He advises government to concern itself with generation and connecting all Ugandans to the grid instead of lowering the tariff of the electricity that is accessed by only 15% of the population.

The countries that concentrated on a low tariff, Kwesigabo says, are now dealing with issues of inadequate electricity supply.

“It is wise for government to use that money to expand generation and the grid,” he said, “the money that was spent on thermals would have constructed another dam and that would in turn lower the tariff.”

Energy ministry permanent secretary Kabagambe Kaliisa agrees with them. He told the East African Newspaper that it’s more logical to build more power dams that are already in the pipeline than to buy back the existing projects.

Sometimes the debate gets confusing as the groups look at the same problem but from different perspectives.

For example, all groups agree that Uganda has one of the highest consumer prices for electricity per unit in the East African region. Only the rates in Rwanda are higher.

But the technocrats at the ERA offices in Kampala insist Ugandans are lucky to be paying that rate.

They say the tariffs could easily have been higher if the current huge drop in world oil prices had not slowed the pace of global price increases and the rate of domestic inflation was anything but the current 4%.

According to the PRO of the Electricity Regulatory Authority (ERA), John Julius Wandera, if the current dollar appreciation against the local currency had come together with high inflation and high fuel prices, the consumer price of electricity would have increased significantly.

And there is more. According the experts, lower power tariffs are in fact not good for the economy as they discourage private investment into the sector.

The new CEO of Uganda’s sole national power distributor UMEME, Selestino Babungi, made this point in an interview with The Independent.

He said: “Drawing from the Eskom experience in South Africa low tariffs may not be necessarily good news in the long term”. (See page 32-33)

In some cases, the debate has led to power sector experts having one foot in each camp.

While most technocrats in the Energy ministry say Museveni’s favoured financing mode for the new generation capacity –borrowing, leads to the unwarranted high electricity tariffs, they also oppose his buying into a plan for the government to buy Bujagali.

The technical position is supported by MPs who argue that government is better off borrowing and constructing power projects itself than leave them in the hands of private investors.

They argue that government has a higher chance of borrowing at a lower rate than private investors. Kwesigabo says that the reason Bujagali power is expensive is because the loan component was high at 75% and with high interest. Once again the government is promising that the tariff will go down once Karuma and Isimba dams are complete. Electricity from the two dams, according to the ministry, will be US cents 5 and 4 US cents respectively. Few believe them. They remember the promises made on Bujagali that have not been kept.