WORLD BANK IS CONNIVING WITH UREA TO SAVE UMEME

World Bank is reportedly conniving with UREA (Uganda Regulatory Electricity Authority) to save Umeme from termination of contract. In summary, UREA aims at giving UMEME monopoly powers over distribution of power in Uganda, yet UMEME has mismanaged the distribution exercise.  Apparently, UREA fed lies to the researchers to make UMEME look good in the eyes of World Bank.

One of the tricks UREA is using is politicking; instead of politicians/Members of Parliament discussing how to make a new grid they are busy discussing sector governance issues in what they call a diagnostic study.

The Diagnostic Study Report has been prepared by Ricardo Energy & Environment, a trading name of Ricardo-AEA Ltd, in association with ICEA, France, and MRC, Spain, under contract to The World Bank Group dated 28/09/2018.

In this report there is a disclaimer that states: “Ricardo Energy & Environment accepts no liability whatsoever to any third party for any loss or damage arising from any interpretation or use of the information contained in this report, or reliance on any views expressed therein.

Ricardo Energy & Environment (“Ricardo”), in association with ICEA and MRC-Consultants, was appointed to undertake an assignment called “Distribution Sector Diagnostic Review and Directions for Future Reforms for Long-term Sector Development and Acceleration of Electricity Access Expansion” for Uganda by the World Bank Group in September 2018.

According to the report, the overall objective of this assignment is to support the Government of Uganda to accelerate electricity access and enhance distribution sector efficiency and financial sustainability through
recommending appropriate institutional reforms.

As it is, the material below summarizes the work that has been undertaken and provides the conclusions and
recommendations of the study.

Key recommendations

The study identified that the current structure of Service Providers in the electricity distribution
sector is a major barrier to maximizing electricity access and achieving sector efficiency and financial
sustainability.

However, whilst organisational reform of the structure is vital, it is – in itself – insufficient
to fully address the range of barriers that have been recognized. Further planning, legal, regulatory and
other changes also need to be made.

The key recommendations resulting from the work carried out can be identified as falling into one of
four categories as follows:
• Category 1 – Institutional arrangements
• Category 2 – Policy Framework
• Category 3 – Legal Framework
• Category 4 – Regulatory Framework.

The balanced scorecard analysis carried out in this study concludes that the distribution sub-sector should be restructured so that there should be no more than three Service Providers covering the whole country (as illustrated in options shown below) and that option 2 with “one national service provider for the whole country” would deliver the best financial and economic results for Uganda.

However, the political economy analysis identified that the level of resistance to a structure with one private utility operating the main grid in the whole country was likely to be a barrier to successful
implementation.

As such, this study concludes that the most adequate, efficient and effective way to deliver the best financial and economic results for Uganda whilst ensuring stakeholders’ acceptance at all levels is to implement Option 2 above  under a PPP (Public Private Partnership) Model2 for the ownership and operation of all main grid distribution assets with the Government retaining majority share ownership of the resulting vehicle. Further details of how this
could be implemented using UEDCL are provided below.

Such a model would deliver significant benefits:

(i) the Government would retain an operational role in the distribution sector whilst benefiting from private sector expertise,

(ii) the newly formed utility would have long-term bankability i.e. it is more likely to be able to secure access to attractive financing deals than both existing and potential future Service Providers and will avoid financing difficulties as the end of a concession period is approached,

(iii) theGovernment would be in a better position to influence expanding access expansion in areas which are commercially challenging forth e main grid, and (iv) under such a model it would not necessarily be required to enter into a competitive bidding process, which by nature would be lengthy, costly, and politically challenging.

Institutional Arrangements:

Other Recommendations
• Regardless of the number of Service Areas (although one such area covering the whole country is optimal as highlighted above), this service provider – (or these service providers – should operate all of
the main grid within its (their) service areas.

• Unless the PPP model described earlier is implemented, then this service provider (or these service providers) should be a private sector utility selected by a competitive process or processes.

• Should the PPP model by taken forward then an effective implementation route would be for UEDCL to be given ownership of all of the main grid across the whole country. A private sector partner would then be sought – by a competitive process or otherwise – which would become part-owner of the company (although the Government
of Uganda would retain majority ownership). The resulting special purpose vehicle (SPV) would own and operate main grid assets into the future. The only financially sustainable model for the whole
country where UEDCL retains an operational role in the distribution sector is the PPP model.

• If the PPP model is not adopted then ownership of all of the main distribution grid should be held by UEDCL – but UEDCL should not remain an operator of distribution assets as its technical andcommercial performance is not in line with best practice, nor with levels and standards that would be expected to be delivered by
private operators.

• Existing mini-grids not connected to the main grid should carry on as
at present remuneration is linked to performance”. More background on PPPs is available here:

Should this role be retained, then REA’s activities should fall under the scope of regulation of the ERA – which requires REA to have a legal identity. REA does not necessarily need a legal identity if it purely
becomes an agency in charge of leveraging funds for main grid, mini-grid, and SHS projects (as suggested in the
analysis).

• ERA should be provided with a range of sanctions with varying levels
of severity that could be applied to Service Providers who fail to comply with licence requirements

Regulatory Framework
• ERA should continue to develop output-based incentive arrangements to encourage capital and operational expenditure efficiency, higher levels of quality of service, and increased electricity access to the grid.

• Lifeline tariffs should be rolled-out throughout the country, when possible

• Tariffs in areas served by mini-grids should be permitted to differ from
those charged in the main grids including allowing innovative tariff structures

Diagnostic review of the distribution sector

Background

The level of grid access to electricity in Uganda has more than doubled over the last decade, increasing
from 11% in 2010 (NDPII) to 22.1 % in 2017 (UBOS). This represents a significant improvement, but
also means that access expansion needs to be substantially accelerated to achieve the SEforALL target
of universal access in 2030.

However, recent improvements in technology mean that off-grid solutions (such as solar home systems)
are now often providing a similar level of service to conventional grid schemes, at a competitive cost.
This is reflected in the ESMAP Multi-Tier Framework (MTF) for electricity access which focuses on the
level of service and price at which electricity is made available rather than on the method used.
Hence, when the share of off-grid solutions which are estimated to provide a similar level of service to
households to grid connection are included, the access rate to electricity of reasonable quality in
Uganda is assessed to be 36% (with the potential that recently collected information may indicate that
access is in excess of this).

Sustainable Energy for All (SEforALL) is an International Organization working with leaders in government.

Ricardo Energy & Environment Report is based on previous performance – together with the REA 2017-2027 Master Plans and the Umeme Limited 2017-2025 Business Plan which together aim to further accelerate electricity access – it is expected that there could be approximately 3 million new customers in total by 2027 which means that:

• Access to electricity from the grid would grow to no more than 40% by 2030, and would
fall back to 30% by 2040 (unless there was continuing investment) as the current pace of efforts
would soon be offset by demographic growth;

• Total access to electricity of reasonable quality (including off-grid) would increase to no
more than 60% by 2030 and would fall to 50% by 2040 (again driven by demographic changes
and unless balanced by continuing investment)

The combination of these two plans from REA and Umeme would help to achieve no more than 60%
access rate by 2030 and involve USD billion 1.6 of capital investments to be financed and installed
made over the next 10 years and for challenging willingness-to-pay assumptions for rural households
to be met.

Overall, in order to achieve 100% of access to electricity by 2030 (including approximately 50%
of grid access), it has been estimated that a minimum of USD billion 5.5 of investment would be
required (including a minimum of USD billion 2.6 for distribution infrastructure, and a minimum of USD
billion 2.9 for new grid and off-grid connections).

Key benefits from previous reforms to lock in:
Whilst there are significant barriers to improvements to the distribution sector, there have clearly been
significant benefits from the reforms that were introduced following the Electricity Act, 1999. These
include:

1) Technical, financial, and access expansion achievements from increased private sector
participation in the distribution sector. Since the private sector took over responsibility for
operating most of the distribution network from UEB, there has been significantly improved
performance levels, increasing number of connections, and significant amounts of investment
in the distribution sector

2) Range of technical solutions considered for electrification. RESP I and II have encouraged
a multi-pronged attack on encouraging increased electricity access. Thus, as well as grid
extensions, there has been a significant interest in the development of mini-grids in areas where
access is difficult and expensive. In parallel with this, there has been an organic increase in the
penetration of home-based approaches

3) Cost-reflective tariffs and financial sustainability. An important component of the legal and
regulatory framework is the principle of cost reflection in tariffs. Umeme Limited with its
dominant position in this sector has been able to recover the vast majority of its costs in its
tariffs. This approach is a clear benefit and has withstood some challenges over the period that
it has existed.

4) The legal framework is very detailed and well structured. Whilst the evidence suggests that
this is true, it is a necessary, but not sufficient requirement, for the achievement of policy goals.
In fact, the analysis completed throughout this report indicates that such goals are not being
fully met.

5) A transparent and well-documented regulatory framework. The economic and technical
regulatory framework can be regarded as very comprehensive – as confirmed by the analysis undertaken during this assignment and that of regional bench marking exercises.

6) Success stories of solar home system solutions. The level of activity, technical and
commercial innovation, and growth in the solar home system industry in Uganda is remarkable.
Whilst there has been some government support to this market – for example, by not charging VAT on
such systems – the majority of the activity has been stimulated by a vibrant set of organisations
entering this market either sourcing equipment or providing a supply chain to customers or,
indeed, both.

Key barriers to the acceleration of access expansion
Key barriers to the acceleration of electricity access and to improvements in the efficiency of the
distribution sector have been identified. These fall into one of four classifications as follows:

• Socio-economic considerations
• Institutional setup
• Policy framework
• Legal and regulatory framework

The barriers are listed in Figure 1 below.Organisational structures in the distribution sector.
Alternative organisational structures for the distribution sector.

Recommendations for improvements to the distribution sector are provided in this report. These indicate
that having more than one Service Provider in a service area is inefficient, and that many of the existing
Service Providers are not of a sufficient size to deliver adequate financial and operational performance
or to ensure, where appropriate, the rapid increase in grid connected electricity access.

In these circumstances, a set of alternative organisational structures for the distribution sector have been
developed in order to assess adequacy to address these deficiencies. A range of factors have been
used to establish these structures, of which some of the most important are service area population,
population density, the characteristics of the distribution network, overall capital and operational cost
levels based on the nature of the area and customers supplied, and the financial return required.

Financial assessment
To assess the financial sustainability of the Service Providers in each of these options a financial model
has been developed. In order to ensure comparability between the options a series of common
assumptions have been developed and have been applied to each of them. It has also been necessary
to establish measures which outline the resulting financial out-turns. Some of these are illustrated below

As shown:
• The variation in cash generation between each of the options over the period 2025 to 2040
• The extent to which it would be necessary for there to be external financial support to one or
more of the Service Providers over this period
• The costs of supply in 2030 for each of the options. This Report will continue until it is fully published on this website.