The Independent Uganda: You get the Truth we Pay the Price
THE LAST WORD: Why the country and its president are fighting the wrong enemy on electricity tariffs
THE LAST WORD | Andrew M. Mwenda | A large cross section of Ugandan elites is angry, very angry. It thinks the price (tariff) it buys electricity at is too high. So it has been looking for a villain to blame and has identified Umeme, the private utility licensed to distribute electricity. President Yoweri Museveni, who many Ugandans accuse of owning the company, has also joined the anti-Umeme coalition. Last year his villain was Bujagali Electricity Limited (BEL), the largest hydro electricity generator in Jinja. So the villain is a moving target and this explains why the debate on causes of high electricity tariffs is a toxic combination of high emotion and little knowledge.
The villain in the electricity tariff is not a person (Museveni’s critics would want to blame him, he likes to blame civil servants who negotiated the licenses). Neither is it a company (Umeme or BEL who have recently become the punching bags). It is our government policy on pricing electricity consumption. Our government, based on advice by World Bank and IMF, decided that it does not have enough money to invest in generation and distribution of electricity. It sought private investors into the sector.
Private investors were reluctant to invest in Uganda’s electricity sector because our country’s risk profile was high, the market uncertain. These fears were not unfounded but delving into them now will divert us. So for today let us say that they demanded government guarantees three things: a fixed rate of Return on Investment (ROI), bears the foreign exchange risk and agrees to bulk-purchase all the electricity generated and bulk-supply all electricity needed for distribution.
In a normal market, an investor identifies an opportunity, raises capital and takes the necessary risk to turn into a profitable investment. If she produces a product consumers do not like or produces more than what the market can take, she suffers the consequences of her decision. The electricity sector has many structural circumstances that make it impossible for private capital holders to venture into it without the aforementioned government guarantees.
Hence, for those who produce electricity, government signs a Power Purchase Agreement guaranteeing to buy all the installed electricity capacity at a fixed price over say, 30 years. If water levels in Lake Victoria fall and the dam at Bujagali produces only 100MW government guaranteed to pay BEL for the entire 250MW installed capacity. This is the infamous “hydraulic clause” we fought ferociously in the late 1990s and succeeded at foiling AES Nile Power from developing Bujagali dam. It delayed the investment for 10 years with heavy costs in blackouts that still haunt my conscience. Now I appreciate the necessity of certain provisions that sound obnoxious to the uninitiated.
If wires collapse and all the electricity cannot be transmitted and/or distributed, government still pays BEL for a full 250MW. The same applies to Umeme. If consumers demand less electricity than BEL is producing, government guarantees to pay the company for 250MW. The same applies to Umeme. To an ordinary mind these guarantees sound an unfair bargain. But they are the unavoidable and necessary cost a poor country with a high-risk profile pays to attract private investors into its electricity sector.
Private investment comes with other costs. First, it borrows expensively compared to government; the high interest on their loans is transferred to the consumer through the tariff. For example, most of the private generation facilities are just coming on board. The investors are still servicing these high interest loans and are also doing accelerated depreciation, which is all billed to high tariff.
Secondly, private investors demand a high ROI in countries with a high-risk profile. In our case, it is 20% for Umeme and 19% for BEL. Third, investors raise capital in dollars but electricity in Uganda is sold in shillings. So the foreign exchange risk for the depreciation of the shilling is born by the consumer through the tariff. All these costs are a result of government policy, not private companies that generate and/or distribute power.
This path of using private investment to generate and distribute electricity has paid off for Uganda. It has lowered the country’s risk profile and attracted private capital into our generation and distribution market. However, it has also led to high tariffs that stifle investment in manufacturing and inflict untold damage on the environment as people cut trees to burn charcoal for cooking. The blunder is to threaten such investors the way Museveni recently did with Umeme. It raises the country’s risk profile making it expensive to attract private capital from debt and equity markets.
How does Uganda price electricity without increasing her risk profile? Government has already returned to building and operating dams beginning with Isimba and Karuma. Yet we need massive investment in transmission and distribution to evacuate and supply the 800MW of electricity coming on the grid at the end of this year. That requires investment of $800m in transmission and another $1.5 billion in distribution. Does government have this money? Recently the central bank was complaining that our debt is about to reach the proverbial 50% of GDP.
There is a second risk: if Karuma and Isimba power is not consumed (because we haven’t invested in distribution or don’t have buyers) government pays. So the choice in getting cheaper electricity is between a government subsidy or a high tariff or a combination of both. Government will be driven by politics to prefer subsidies to a high tariff. Once you begin subsidies, they are difficult to remove. But either way the final cost is born by the taxpayer/consumer.
The real challenge of Uganda is one of policy attitude towards electricity. Our government can look at electricity as a service like any other such as air travel, telecommunications, data, etc. and price it using market mechanisms. Here it would let the tariff reflect the cost of investment and a risk adjusted rate of ROI. This decision will discourage manufacturing and inflict damage on the environment.
However, government can look at electricity as a public good or service like roads, recognizing it has powerful implications on manufacturing growth and environmental sustainability. Thus it can use taxes and borrowed funds to build dams, transmission and distribution lines and connect everyone to the grid. There would be no direct financial ROI. Government would bear the interest and depreciation costs, so the tariff would only reflect operational costs of running the system. Ethiopia is doing this and China did it. As the South Africans would say, we can also “did it”.
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amwenda@independent.co.ug
Even with my extreme hate for president Museveni’s politics, I am not blind enough not to ask myself, “what is it that has made him rule for this long?” President Museveni is not a “random” person, he’s a “thinker.” That does not mean that he’s always right but rather that he can be a sophist at times. Looking back to his question, “The investor claims to have invested $500m in distribution infrastructure. If they invested so much money why do the technical losses don’t decline?” It is a fundamental and legitimate question borne out of a long standing frustration. The idea of guarantying Return On Investment by the Ugandan government to UMEME must have taken into consideration the high risks in the electricity industry and thus, it was prudent to mitigate any losses that could accrue. By guarantying a 20% ROI, the Ugandan government was showing “good spirit” to an otherwise “bad intended” company. Government was helping UMEME get rid of its adverse loss development risks, thereby stabilizing its balance sheet and reducing the volatility of its financial results. Mwenda is raising a number of issues as to why it was important for Uganda to offer a 20% ROI on the UMEME deal. It is true that it is very difficult for start up businesses to make profits and given the conditions of the Ugandan economy, it was only fair and economically logical that UMEME received a “tax cut.” However, UMEME had operated in other jurisdictions before, thereby, it could take care of its losses from across its other businesses. The Ugandan government was intended to “shoulder” this burden, but it so seems, UMEME was hell-bent on finding ways and means of “exploiting” this “good spirit.”
UMEME states it has invested $500million. Mwenda shows that in just twelve years there has been an increase from 290,000 subscribers to 1.2million subscribers. And research shows that from 2016 to 2017, electricity rates increased by 22%. Ironically, UMEME has followed this by drastically reducing on its staff. So, one asks, ‘even with the tax cut of 20%, a reduction in employees, an increase in both rates (charges) and the number of subscribers’, why aren’t the “losses” declining? Museveni is not asking about “making profits” he’s about “losses declining.”
UMEME could be telling the truth, that indeed, they are making losses, however, what does it tell about their “business strategists?” Why would someone “invest heavily” where others have shown fear to invest?” Why would someone invest “heavily” in a highly “risk infested” industry being compounded by an uncertain and volatile economy? The good riddance from UMEME would have been to make “incremental investments” and thereby spreading its would be losses over a reasonable period of time- say, investing $25m per year over 20years. But to invest $500m all at once was a very “thunderous” (if not “scandalous”) move in a country with a blurred business trajectory. The reverberations thereof, can be shocking and at times, heart stopping. Museveni’s heart must have stopped. My sinister mind, however, tells me that UMEME must have looked at the loopholes within the agreement and went for the kill.
What could have happened? It is very possible for government officials to connive with investors (a case in point, Bank of Uganda officials conniving with DFCU in the sale of Crane Bank.) It wouldn’t, therefore, be uncommon if UMEME connived with ERA officials to state that the investment was worthy $500m if there were to be a “substantial cut” for ERA officials. It is also not uncommon for government officials to be “frontrunners” of “International businesses.” My gut feeling is that within the 20% return on investment, there is a “cut” for state officials and so is with the $500m investment, there is a “cut” for the ERA officials. It is possible that UMEME officials got/tried to “outsmart” even the “backdoor” dealers, by continuously declaring “losses” and this is what could have caused Museveni’s “madness.” (I can’t imagine Museveni having “true intentions” for Ugandans. I cringe from the inside.)
Mwenda might find Ugandans a “hopeless lot”, looking out for excuses at the slightest opportunity. But what about of the unworthy investors? It is true that investors feed off “optimism” but “boundless speculation” could prove dire for both the business and its intended market (niche.) There is a “Luganda” saying that ‘akuwola a kamyu nga asuubira ente’, literally meaning, ‘investing in a rabbit but hoping for a cow.’ UMEME could have invested in the “Ugandan rabbit” hoping that that rabbit could give birth to a “UMEME calf.” The prospects of this happening might not be beyond the imaginary boundaries of Mwenda and others of his ilk. But it is the dubious means and ways of trying to make this rather “rapturous birth” into a “reality”, that is causing Ugandans a lot of agony. UMEME could have thought that by “tax avoidance” and, or “tax evasion,” they were being smart. But was the investment of $500m all at once, SMART? That is, was it Specific, Measurable, Achievable, Realistic and Timely?
Like I said last week, the “bad taste” in the UMEME deal was in the “pudding.” The environment in which the signing took place was shrouded in both mystery and intimidation. That means, it can only work in “mysterious” and “intimidating” environments. Ugandans can make one of these two choices: 1.) For “eternity”, to live in fear and they let this contract continue, or 2.) For “inevitability”, to let the free forces of the market to prevail and, therefore, allow in other competitors?
It is a choice the Israelites made when the followed Moses out of Egypt.
It is a choice the eventual Americans made when they left British lands.
It is the choice the Tutsis made when they followed Fred Rwigyema back to Rwanda.
It is a choice of not settling for less.
What is your choice?
EVERYBODY has a right to express their opinions or more aptly to defend a cause. That bar is set higher with certain people and institutions more so the MEDIA whose outreach and influence is usually far reaching than that of an ordinary person.
That M 9 has penned two articles in the space of one week (8 days) in what seems to be a defense of UMEME is instructive. Such an article or the contents thereof, may be of a better quality than what M 9 has come up with, would ordinarily be the work of PR department, and this would probably appear as an advert in the relevant media.
Through his efforts , M 9 is telling all and sundry of the woes that UMEME is being dragged through and telling us how ungrateful UGANDANS and most especially their president, are for the GOOD that UMEME has done, under untold pain, to bring the electricity sector to where it is from the lows of where it was, at a time when no investor was willing to touch it with the proverbial 12 foot pole.
What M 9 firstly forgets is that almost everything has a PRICE. And once the price is right, both parties are up for business. Secondly, a business arrangement, like most arrangements , is meant to be mutually beneficial to both or more parties.AN agreement is usually only entered into where it is felt that all the parties are satisfied with the terms and conditions of their arrangement.This , however , does not mean that it is a 50/50 arrangement , where the level of satisfaction is the same for both parties.
Each party therefore tries to extract the maximum that they can out of the said arrangement, without the other party walking off.
How much one party is able to get from the arrangement depends on the position from which it is negotiating, the negotiating skills it has, and in some cases even factors like how charitable the other party is where it gives more than it takes.
A negotiation carried out by a proxy , for instance, may mean that because of other vested interests , the person negotiating does not push as far as they would ordinarily push if it was their own thing.A person working in a super market will push a customer to buy an item, because their earnings are not dependent on a sale, as much as a person working in an insurance broker would push a sale, because their earnings are somehow tied to the sale.
HAVING said that, you end up with what can be called good contracts and bad contracts for either one or both the parties to a contract.
The type of contract that UMEME must have entered into is not an “off the shelf” type of contract, say as we have with most building and civil works projects, or even much simpler ones like tenancy agreements where one has standard clauses with very few insertions and save for a few variables, one contract can be used from one project to another, albeit with a few alterations and additions or omissions.
THIS would have been a long drawn out and negotiated contract, almost from scratch, with each clause being negotiated and tailored to suit a unique situation.At the end of the day, both parties should come out with a document that reflects all the factors and one that is mutually acceptable and safeguards the interests of all parties involved.These terms will have KEY factors which would have influenced and formed the basis of the contract among these as it is turning out, the ROI (Return On Investment) including revision up or down thereof, unless it is fixed for the duration of the contract, the duration of the contract, performance targets, payments, termination, revision of terms, extension of contract,penalty clauses, reviews and a host of other factors.
SO, from the said terms, term reviews measured against set targets should be able to inform the parties how they are performing, eg number of customers, revenue, amount of power distributed, infrastructure etc etc. With such reviews in place, one should not just wake halfway through a 20 year contract, only to realise that the other party is not meeting the set standards.Such issues should have come up a long time ago, and the provider should have been informed of their shortcomings and told to meet the shortfall , explain why they have not met the said target/s, and for them to come up with a plan to meet the target, and if any penalties are included , to show cause why they should not pay the penalty.
WE are already seeing something similar with the RAILWAYS provider, where the client is just waking up and telling the provider they are terminating their contract, seemingly no warnings , no penalties or any sort of action from the employer for half the time the contract has been in operation.
AND now, we come to the “business end” of the UMEME contract.
IT is a well known fact, something that has been acknowledged by M 9 and M 7 that corruption exists in all spheres of life, even in religious institutions. M 9 and M 7 have even gone further to say that this corruption is indeed “beneficial” to the economy, and rather than hinder, does actually enhance growth.
SO I will approach it from that angle and try to show how it was involved in the UMEME contract and how it has been beneficial to the economy.
CORRUPTION for instance takes place at all stages in the life of a contract; there are those who are involved in certain stages, and there are those who will be involved at most or all the stages. THE UMEME contract as I have said, bribes were solicited right from the “invitations for expression of interest”. This is almost like a shop asking you to pay money to look at the goods on display. Contracts go through various stages, and with the UMEME contract, as with many big contracts, there is the ” pre qualification stage”, where the credentials of the prospective tenderer are looked at to determine their suitability – technical in terms of equipment and manpower, finances and experience in similar projects among other things.
ONCE this is over, then the tender documents are issued to enable the prospective tenderer to submit a quote.Some contract have a two or even a three stage process, where you have the pre-qualification stage, then the tendering and some contracts have a “negotiation” stage, before or after the contract. I will not go into these details at this stage.Needless to say, all these stages involve some bribery/ corruption.
CORRUPTION/BRIBERY also continues during the life of the entire contract, since there has to be valuations/certificates to enable the contractor to be paid, these have to be approved and paid. There may be requests for say , extension of time, variations , fluctuations , approval of materials, certification of quantities among several things that take place during the life of a contract. ALL these are the subject of bribes.
THE bottom line is though that , no matter how much a contractor pays by way of bribes, being as it is that they are in it to make money, they have to recover their money.SO, as they say ” somethings gotta give”; either the price is INFLATED, or the quality is compromised.OR else the contractor goes bust.
IN this case however, the contractor and the bribe taker are on a WIN WIN situation, but it is the TAXPAYER who pays the price.
AS is the case with UMEME, the cost of all these cumulative bribes is the hike in the TARIFF.
THIS follows the law of PHYSICS in MATTER, it is not lost, it just changes form
IN a recent article by ONYANGO OBBO in the MONITOR, he claims, as is a known fact, that government owes several suppliers money, which it has not paid for a long time. He says that even the president, who says he would not be caught doing business with HIS own government, wonders why these businesses continue doing business with a government that takes long to pay, if at all.
LIKE BILL CLINTON said ” it is the ROI ( rate of return ) STUPID!!!!!!!!!!!!!
IN most businesses , the higher the risk, the higher the rate of return (ROI). Most , if not all, apart from the new entrants into the government supply/tender business know the rules very well. Chances are that a person who is demanding say 100 million from government, supplied goods or services worth 10 million , if at all (AIR). Once they factor in the money they have or will pay in bribes, their investment may go up to say 25-50 million. So at the end of the day, they know that their ROI is likely to be in the region of 200-400%.At that rate, everyone would fall over themselves to invest in such a venture, the risks notwithstanding.
THIS effectively is what has played out with UMEME.
They must have had to pay bribes right from the word go and even now, the fracas about whether to renew or not is informed by the desire for some people to take bribes. Someone has to produce a report which will be used to determine whether UMEME has/is meeting its targets and whether the contract should be renewed/extended or not. AND this report may not be based on what is actually on the ground , as much as what UMEME is willing to pay.
AND then, there are other people who have now come in, and seeing the “CASH COW” that UMEME is , want part of the “PIE” and most likely have other companies they want to front.
THIS M 9 and M 7, is the dividend we are all having to pay for your much touted beneficial/developmental corruption.
You can not have your cake and eat it at the same time.
AS they say ” you make(s) your bed ( of roses or thorns) you lie(s) in it.
NO TWO WAYS.
ULTIMATELY, this takes us full circle to M 9 s initial remarks, and probably the gist of his two quick fire articles : That UGANDANS including their clueless president are an ungrateful lot. HERE is UMEME risking limb and all coming to invest in a shark infested economy like UGANDA ( never mind that it was the darling of World Bank and IMF and with an economy growing at rates not since the ASIAN TIGERS).They have gone on to achieve what was thought unachievable and transformed what was a dead sector into a thriving entity and extended power to areas never imagined before, growing numbers to sky levels.
WHAT M 9 forgets or omits to say that UMEME is dealing with human beings, who have a penchant for wanting ever more ; the more they get, the more they want.
LIKE KAKYAMA said, the RWANDESE who were previously in UGANDA, most of whom were born in refugee camps, had the choice, after many had got an education, risen to high ranks both in the civil service and the army as well as in business, some of whom had naturalized and become BATOORO, BAGANDA, BANYANKOLE, ITESO, anything but be a MUNYARWANDA, to stay in UGANDA, some enduring abuse from the natives.
BUT they chose to go back to their homeland, through a period of uncertainty , with a possibility of losing all including their lives. YET they chose to take the hard choice. Were they an ungrateful lot? NO. They just wanted better. IT has been reported in the past that KAGAME almost made our old man of the clan M 9 a ” persona non grata” for daring to suggest that KAGAME was pressing his ministers and government officials too hard to achieve better results, yet in M 9s opinion , “they were doing well/good enough”.
KAGAME is said to have been incensed and told M 9 , that was not good enough and he expected and it was possible to do better.
THIS is how the world has got to where we are , because people refused to accept what would have been considered good enough , and sought something better, no matter how unthinkable at the time. That is how cars have evolved, that is why we had the industrial revolution, that is why man is going into space.
THIS is where we are.
UGANDANS feel that the rates are capable of coming down and it is up to UMEME to prove to us that they have/are doing all that is within their powers and ability to provide us with the best deal, and if someone else can prove and demonstrate that they can, as a “sitting tenant”, UMEME can match or counter their claim.They have all the advantages an incumbent has, and the deal is theirs to lose.
SO the ball is in their court, and they need to demonstrate this rather than fight their corner through the press albeit with PRO BONO defenders like M 9.
Ejakait, you say what I have all along knew but feared to put down for fear of these greedies tracing my IP address and doing me a Dr Obuku. However, I could not have expressed the corruption involved in contracts as succinctly as you so brilliantly describe. I also take this opportunity to respectfully request your assent to use part of your clarification in a book I intend to publish. It is an exercise in futility to expect any meaningful development, be it national or personal with these sharks in charge. Only a child,drunk or idiot would be so fooled. It is also arithmetically impossible for Uganda to develop. Over 5 decades ago, Mr Zadoki Balyana (my primary 4 teacher) taught us something in Civics that haunts me to-date. It went thus: My Country is a cart without engine. It is we who push it. Its journey is from PP (pit of primitivity) to PP (peak of progress). We have 3 groups of people namely: GC (good citizens) pulling and pushing uphill towards PP, PC (passive citizens) who idle and don’t care which direction My Country takes and BC (bad citizens) who pull downhill towards the Pit of Primitivity. PC are known to join the BC but never GC. So as long as the GC number is small and weak and poor, no progress towards Peak is possible. Incidentally, you cannot operate (no matter how much you steal and stash) outside My Country neither can you move uphill to Peak alone leaving My Country for others to do as they wish…pulling up or down. What foxes me most is these highly learned guys who fail to reason with their primary school logic. According to one Dr mbu who deputises Mutebiile, if a bank extorts from depositors and debtors and sells their collaterals and pockets the ill-gotten proceeds as the people wallow in poverty caused the banks, mbu it is progress. No progress is progress if few have and the many don’t. He who will return old time cooperatives is he who will be en route to progress otherwise…. let the poor multiply. figures,statistics,theories and principles are meaningless if they don’t produce food.
RWASUBUTARE , thanks for a wonderful piece and a shame for people like MR BALYANA who do not get the credit they deserve, its just amazing the analogy he makes, and more so that you are able to reproduce it so many years later. Of course the brain at that age , before it gets into complicated issues like trying to acquire a studio in good old Fort and only denied by the eagle eye of Galas commission, is like a sponge and soaks up everything , and keeps it permanently.
AS to using my material, the honor would be mine and you are free and welcome to do so even without making attributes.I will endeavour to get you a device that can help you by pass some of those snoopers.