Uganda energy assessment

7r- ESN4A _np 'SedtorM+/an2aement Assistance Programme Ug2anda Energy Assassment Report No. -193,'96  JOINT UNDP/ WORLD BANK ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP) PUJRPOSE The Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) is a special global technical assistance program run by the World Bank's Industry and Energy Department. ESMAP provides advice to governments on sustainable energy development. Established with the support of UNDP and 15 bilateral official donors in 1983, it focuses on policy and institutional reforms designed to promote increased private investment in energy and supply and end-use energy efficiency; natural gas development; and renewable, rural, and household energy. GOVERNANCE AND OPERATIONS ESMAP is governed by a Consultative Group (ESMAP CG), composed of representatives of the UNDP and World Bank, the governments and other institutions providing financial support, and the recipients of ESMAPs assistance. The ESMAP CG is chaired by the World Bank's Vice President, Finance and Private Sector Development, and advised by a Technical Advisory Group (TAG) of independent energy experts that reviews the Programme's strategic agenda, its work program, and other issues. ESMAP is staffed by a cadre of engineers, energy planners, and economists from the Industry and Energy Department of the World Bank, The Director of this Department is also the Manager of ESMAP, responsible for administering the Programme. FUJNDING ESMAP is a cooperative effort supported by the World Bank, UNDP and other United Nations agencies, the European Community, Organization of American States (OAS), Latin American Energy Organization (OLADE), and public and private donors from countries including Australia, Belgium, Canada, Denmark, Germany, Finland, France, Iceland, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Sweden, Switzerland, the United Kingdom, and the United States. FURTHER INFORMATION An up-to-date listing of completed ESMAP projects is appended to this report. For further information or copies of completed ESMAP reports, contact: ESMAP c/o Industry and Energy Department The World Bank 1818 FI Street, N.W. Washington, D.C. 20433 U.S.A.  UGANDA ENERGY ASSESSMENT DECEMBER 1996 Power Development. Efficiency & Household Fuels Division Industry and Energy Department The World Bank 1818 H Street, N.W. Washington, D. C. 20433 This document has restricted distribution and may be used by recipients only in the performnance of their official duties. Its contents may not otherwise be disclosed without UNDP or World Bank authorization.   CURRENCY EQUIVALENTS Currency Unit = Uganda Shilling (USh) 1 US$ = 900 USh (February 1994) 1 US$ = 1,000 USh (March 1996) ABBREVIATIONS AND ACRONYMS ESMAP Energy Sector Management Assistance Progranmme (UNDP/World Bank) EU European Union FAO Food and Agriculture Organization GDP Gross Domestic Product GMU Grant Management Unit (APE Project) GNP Gross National Product GOU Government of Uganda GTZ Gesellschaft fir Zusammenarbeit (German Cooperative Development Agency) HEPP Household Energy Planning Programme IBRD International Bank for Reconstruction and Development (World Bank) ICB International Competitive Bidding IDA International Development Agency (World Bank Group) IFC International Finance Corporation (World Bank Group) IPP Independent Power Producer JEEP Joint Energy and Environment Programme (Uganda) JICA Japanese International Cooperation Agency KCJ Kenya Ceramic Jiko LPG Liquefied petroleum gas LRMC Long-Run Marginal Cost MAAIFP Ministry of Agriculture, Animal Industry and Fish Production MCIC Ministry of Commerce, Industry and Cooperatives MFEP Ministry of Finance and Economic Planning MIGA Multilateral Investment Guarantee Agency (World Bank Group) MOH Ministry of Health MNR Ministry of Natural Resources MTWA Ministry of Tourism, Wildlife and Antiquities NEAP National Environmental Action Plan NFS Norwegian Forestry Society NGO Non-Governmental Organization NORAD Norwegian Agency for International Development NRC National Resistance Council (Parliament) NRSE New and Renewable Sources of Energy ODA Overseas Development Administration (UK) RC Resistance Council (national administration system at village, parish, district and regional level)  SIDA Swedish International Development Agency UEB Uganda Electricity Board UNDP United Nations Development Programme UNEP United Nations Environment Programme UNIDO United Nations Industrial Development Organization USAID United States Agency for International Development USIKA Improved stove organization WEIGHTS AND MEASUREMENTS GJ Giga Joule (1,000 million joules= 10 9joules) GW Gigawatt (1,000 million watts = 109 watts) GWh Gigawatt hour (= I 9 watt hours) Joule Amount of energy to move 9.81 kg one metre kcal kilocalorie (4.19xl 0-' MJ) kg kilogram (1,000 grains; 2,205 pounds) kW kilowatt (1,000 watts) kWh kilowatt hour (1,000 watt hours) MJ Mega Joule (I million joules = 10O joules) MT Metric tonne (1,000 kg) MW Megawatt (I million watts = 106 watts) MWh Megawatt hour (= 10 watt hours) TJ tera-Joule (one million mega joule) tons metric tons (1,000 kg) TOE tons of oil equivalent (10.2 million kcal 42.5G GJ) 1m3 stacked wood = stere = 0.7 m3 solid wood Im' solid = 600 kg (0.6 metric tonnes) 1 m' stacked = 420 kg (0.42 metric tonnes) I kg wood = 15 MJ (air-dried) 1 kg charcoal = 30 MJ I kg coal = 30 MJ 1 kg fuel oil = 42 MJ Moisture content of freshly cut wood = > 60% on air dry basis Moisture content of air dried wood = 15% on air dry basis FISCAL YEAR January 1 -December 31  PREFACE The Government of Uganda has requested ESMAP's assistance to undertake an assessment of the energy sector and recommend a development strategy for the sector. Despite the rehabilitation effort undertaken bv the present Government in recent years, the Uganda energy sector is still a constraint to the country's economic development. Meeting the energy demand of rapidly growing urban and rural sectors will require substantial private and public investments; the challenge is for this to be done efficiently, to maximize economic growth and development. This report identifies major issues and outlines options for increasing efficiency in the petroleum, power, renewable and traditional energy sub-sectors. Chapter I discusses the role of the energy sector in the Uganda economy; Chapter II focuses on the best alternatives to ensure cost effective supply and maximum competition in the petroleum sub-sector; Chapter III looks at the reforms needed in the power sub-sector to improve the performance of the public power utility, promote the participation of the private sector and expand electrification; and Chapter IV concentrates on options for improving production and utilization of renewable and traditional energy to raise the welfare of the population and reduce pressure of biomass consumption on the environment. The report was discussed at a Workshop on Energy Sector Assessment and Power Sector Reforn Options for Uganda held in Kampala on August 19-20. 1996. The Report of the Rapporteur General of the Workshop is attached as Annex 4.5. This report is based on the findings and recommendations of an energy assessment mission that visited Uganda in February 1994 and a follow-up mission to review the renewable energy sector which took place in May 1995. The team consisted of Peter Eglington (Mission Leader), Emilia Battaglini (Economist), Luis Cosenza (Power Utility Specialist), Kevin Fitzgerald (Household Energy Specialist) Ken Homby (Petroleum Downstream Specialist), Keith Openshaw (Woodfuels Specialist), Rene Ribi (Power Generation Specialist), Jack Ruitenbeek (Environment Specialist). Mike Bess carried out the renewable energy review. The mission worked closely with the Energy Task Force established by the Ministry of Natural Resources and was joined by local consultants during the field work. Valuable input during the preparation of the report was received from John Besant-Jones, Michel Del Buono, Peter Dewees, Richard Dosik, Gregory Fazzari, Willem Floor, Winston Hay, Mangesh Hoskote, Paivi Koljonen, Eleodoro Mayorga-Alba, Robert van der Plas, Karen Rasmussen, Bocar M. Thiam, and Godfrey Turyahikayo. The draft report was prepared by Emilia Battaglini. This report was updated and completed by Paivi Koljonen. Secretarial support was provided by Janine Littleford, Nina Jones and word processing by Linda Walker-Adigwe and Vonica Burroughs. The energy assessment team wishes to express the greatest appreciation to the Govermment of Uganda and to the, enterprises and organizations operating in the Uganda energy sector for their participation in this study, their cooperation and assistance.   TABLE OF CONTENTS EXECUTIVE SUMMARY .........................................................i 1. THE ECONOMY AND THE ENERGY SECTOR . ..................................................I A. The Energy Sector and the Economy .......................................................... 1 B. Energy Demand and Resources ..........................................................3 C. Energy Sector Organization .........................................................5 D. Energy and Environment ..........................................................6 2. THE PETROLEUM SUB-SECTOR ..........................................................8 A. The Petroleum Market Place ..........................................................9 B. Cost-Effective Supply Strategy and Investment Requirements .......................13 C. Competition in Supply ......................................................... 15 D. Safety and Environmental Management ......................................................... 16 E. Management of Strategic Stocks and Government Ownership in Oil Companies ......................................................... 18 F. Illegal Imports ......................................................... 19 G. Ethanol Blending Program ..20 H. Petroleum Exploration ..20 3. POWER SUB-SECTOR .............................................. 22 A. The Power System .............................................. 22 B. Institutional Change .............................................. 26 C. Private Sector Participation .............................................. 35 D. System Development .............................................. 41 E. Extending Electrification .............................................. 45 4. RENEWABLE AND TRADITIONAL ENERGY . ................................ 48 A. Biomass Supply, Consumption and Prices .............................................. 49 B. Coordination and Rationalization of Programs .............................................. 53 C. Off-Grid Electrification .............................................. 53 D. Sustaining Biomass Supply .............................................. 55 E. Improving the Efficiency in Charcoal Production and Biomass End-Use .............................................. 57 F. Biogas Program .............................................. 64 Annexes 1.1 Uganda Energy Balance, 1990; Consumption of Modem Energy; and Modem Energy Per Capita .65 1.2 Energy Demand Projections .67 2.1 Consumption of Petroleum Products .70 2.2 Petroleum Product Demand Forecast .71 2.3 Comparison of Cargo-Size Freight vs. Cost of Working Capital .73 2.4 Physical Data on Kenya Pipeline Company (KPC) .74  2.5 Total Petroleum Product Storage in Uganda, m3 ................................................... 75 2.6 Petroleum Price Monitoring System ..................................................... 76 2,7 How Would An ICB Operate? ..................................................... 80 2.8 Pollution From Petroleum Product Wastes ..................................................... 82 2.9 Air Pollution From Vehicle Emissions ..................................................... 85 2.10 Water Pollution From Petroleum Product Spills ................................................... 88 2.11 Alternative Petroleum Supply Routes ..................................................... 91 3.1 Uganda Power Facilities ..................................................... 96 3.2 Major Hydro Sites on The White Nile ..................................................... 98 3.3 Electricit) Tariffs of July 1993 ..................................................... 99 3.4 Financial Results of UEB ..................................................... 100 3.5 Issues in Distribution ..................................................... 103 3.6 The Agreed Curve ..................................................... 106 3.7 Recommendation for Studies Concerning Hydrological Issues of the Nile ........ 109 3.8 The Residential Market in Uganda Estimating the Number of Potential Electricity Users. .l11 4.1 The National Biomass: Study Preliminary Results and Estimates of Biomass Supply ..................................................... 115 4.2 Fuel Consumption ..................................................... 119 4.3 Comparative Urban Cooking Costs in Central and Eastern Uganda, 1994 ......... 123 4.4 Economic Evaluation of Improved Stove and Charcoal Kiln Programs ............. 125 4.5 Report of the Rapporteur General ..................................................... 127 MAP IBRD 22738 Uganda Third Power Project  EXECUTIVE SUMMARY A. THE ENERGY SECTOR - 1. Total energy consumption in Uganda is estimated at about 5 million tons of oil equivalent (toe). About 90 percent of this is biomass -- wood, charcoal and agricultural residues -- which provide energy to most households and many industrial and commercial establishments. With an estimated population of about 18 million, Uganda's per capita total energy consumption (0.3 toe) is comparable to that of Ethiopia but lower than Kenva's and Tanzania's. Given the low income of most of the population, it is difficult to envisage a rapid switching to modern fuels such as kerosene and LPG, a characteristic of many developing countries. 2. The modern segment of the energy sector - electricity and petroleum - is small. Few people have access to modem energy supplies and the country has one of the lowest per capita consumption levels of modem energy in sub-Saharan Africa (0.02 toe). Despite Uganda's vast hydropower resources concentrated on the White Nile River, only 5 percent of the population has access to electricity. With continued strong economic growth and concurrent high energy demand grow-th, projected at about 7 percent per year, Uganda needs to accelerate its efforts to utilize its domestic energy resources, mainly hydropower, and promote cost-effectiveness in the supply of petroleum products. 3. The Ministry of Natural Resources (MNR) is responsible for the management and development of the country's water, forests, energy and mineral resources. MNR has the responsibility for setting policies and strategies for commercial energy and currently supervises and regulates both the power and petroleum sub-sector operations. The state-owned Uganda Electricity Board (UEB) is responsible for power generation, transmission and distribution. Petroleum procurement and distribution are handled by five major international oil companies, of which two are part government- owned; and one local company. 4. To ensure effective policy making and oversight of the energy sector, the MNR should continue to build its capacity, in particular, with respect to monitoring the operations in the petroleum sub-sector, ensuring commercial orientation in the power sub- sector, and promoting energy conservation. In addition, the Governnent should increase its capacity to develop an efficient regulatory framework for the energy sector and evaluate options for private sector participation. 5. Neglect of the energy sector, like all areas of infrastructure, is a legacy of nearly 15 years of political turmoil, civil strife and economic decline. Over the past few years, the Governnent has worked to implement an economic recovery program which gives high priority to the rehabilitation, expansion and maintenance of infrastructure. The economy has responded favorably to the reform program. Real GDP increased by an average of 6.4 percent per year over the period 1987-1995.  - 11 - 6. Meeting the energy demands of a growing economy on a sustainable and efficient basis and improving the living standards of the population is a major challenge to the Government. This report seeks to identify the critical issues facing the energy sector and discuss options for increasing its contribution to Uganda's economic well being. The main findings are summarized below. B. PETROLEUM 7. If the economy continues to grow and modernize, petroleum demand can be expected to rise rapidly from the current low level of some 400 million liters per year. Since Uganda does not have its own oil resources, all petroleum requirements are met by imports. The cost of these imports is already high -- about US $65 million in 1994/1995 - - and will increase with increased consumption. Given the importance of adequate energy supplies for economic growth, and the substantial impact of oil imports on Uganda's balance of payment, providing incentives for improved efficiency in supply is critical. With the removal of controls on foreign exchange and petroleum prices in 1993 and 1994 respectively, the Government has already provided incentives for supply rationalization. Nevertheless, to ensure long-term competitive and enviromnentally sound development of petroleum operations, a number of issues require further consideration. These include: - Cost-Effective Supply Strategy. Ensuring that petroleum products are supplied at the lowest possible cost while assuring a reasonable degree of supply security; * itCompetition in Supply. Ensuring adequate competition in the marketplace through price and product quality monitoring; * Strategic Stocks Storage: Safety and Management. Improving the safety and environmental management at the Jinja storage facility and choosing the most efficient arrangement for the management of strategic stocks; * Government Ownership in Oil Companies. Reducing potential conflict of interest by Government ownership in oil companies. Cost-Effective Supply Strategy 8. In a liberalized and competitive petroleum market, such as Uganda's, the oil companies are expected to minimize their costs by selecting the most cost-effective supply modes. However, in the interest of consumers, the Government should ensure that the cost-effectiveness criteria is not compromised because of market failures. To this end, the Government should compare the costs of different supply modes and encourage the oil companies to adopt the most beneficial strategy and to make the required investments. This strategy should be balanced with an assurance of security of supply. The Energy Assessment mission carried out a preliminary examination of three alternatives to determine the least-cost supply mode to meet the forecast demand. The  - 111 - analysis indicated that the least-cost mode is a two-route supply arrangement involving: (i) for Kenya sourced products: pipeline to Kisumu and self-propelled barges to Port Bell; and (ii) for Tanzania sourced products: a continuation of existing arrangements. It actually provides three supply routes, because minor quantities could be supplied also from Eldoret by rail, and maintains use of the Uganda Railway Corporation's (URC) existing investments. Furthermore, the deployment of barges should add flexibility, as purchases will be possible anywhere on Lake Victoria. This alternative is also the least investment intensive of those studied, and reduces the risk of disruptions by diversifying supplies through at least two alternative routes. This point is important also in providing leverage in negotiating inland transportation tariffs. In the mission's view, a substantial portion of imports should be supplied through Tanzania for security reasons (25-30%), even though the Kenya Pipeline Company's (KPC) new pipeline from Eldoret to Kisumu and the lowering of the pipeline charge have improved the competitiveness of the Kenya route. Competition in Supply 9. The elimination of foreign exchange and petroleum price controls should have spurred competition between the six oil companies currently operating in Uganda, and resulted in the lowest possible pump prices. However, two years after the liberalization, the experience is inconclusive. Therefore, the possibility of collusion both in procuring product offshore and supplying it to the Uganda market, or other failures that may distort prices should not be overlooked. The Government should ensure that a reasonable degree of competition is maintained so that an adequate share of the benefits of the deregulation are passed on to consumers. The Petroleum Division of the MNR has been given the dual responsibility of monitoring supply costs and the corresponding pump prices to determine if the desired forces of competition are at work. However, the MNR has neither enough institutional capacity nor adequate information to effectively carry out such monitoring at present. On MNR's request, therefore, IDA has agreed to provide technical assistance to implement a price monitoring system, under the energy component of the Third Power Project (Cr.2268-UG). MNR should proceed expeditiously in procuring the required technical expertise to design an effective monitoring system and to train MNR staff in its implementation. In addition to price monitoring, the Government should also oversee that the quality of products sold in the country conforms to established standards. Effective enforcement mechanisms should be examined as part of the design process for the monitoring system. Strategic Stocks Storage: Safety and Management 10. Safety. While good safety and environmental management practices are generally followed in petroleum operations, and while environmental concerns are not a major constraint on activities in the sector, there are areas where environmental management could be improved. The Jinja strategic storage facility emerges as requiring the most urgent attention. At present, the operation of the facility is clearly a hazardous undertaking. Its fire protection capacity is minimal and because the facility lacks oil-spill  - iv - response and handling equipment, any spillage in loading or unloading, tank failure, earthquake, lightning, faulty truck or simple accident could cause a major problem. Not only are the plant personnel at risk, but the tanks, their contents (current replacement cost of the products is US$ 4.4 million), and possibly the surrounding area, could be victims of a possible accident. 11. To mitigate the risk of a major environmental or safety emergency, a complete rehabilitation with emphasis on installing adequate fire protection and oil-spill response facilities should be carried out. To minimize safety risks during the rehabilitation, which could take up to 18 months, all the storage tanks have to be emptied by selling off the entire inventory of products, a move which would also provide funding for the required works. 12. However, it is not sufficient to deal with the environmental management issues of the Jinja facility in isolation. Rather, the Governmnent should carry out an analvsis of the overall framework for rationalizing the management and operation of strategic stocks. At present, the Jinja facility is not operated efficiently, product losses, for instance, are unacceptably high, and product turnover is haphazard. This raises the issue whether a change in the management of the strategic stocks is required. Two alternatives emerge as worthy of further analysis: (i) management of Jinja by the oil companies; and (ii) incorporating strategic stocks into oil company storage. 13. Management of Jinja by Oil Companies. Government ownership and operation is often justified on the grounds that the Government needs to control the country's emergency stock. However, inevitably, during a supply emergency, the Government would have to co-operate with the oil companies to mitigate the problem and to administer any emergency allocation plan. The main argument against Government operation is that it requires the Government to build up its own capacity in an area where the private sector already has adequate expertise. This includes staff who are well-trained in oil terminal operations, acceptable standards of safety maintenance, fire protection and oil-spill response; as well as knowledge and experience of the oil business, ranging from oil accounting, to loading-rack operations, to checking product quality. The oil companies already have the required expertise available in Uganda and can obtain additional technical support from their parent companies when needed. 14. If the management of the strategic stocks is provided by the oil companies, the storage facilities can be owned either by the Government or by the oil companies. Under the current supply arrangements (Port Bell is the main receiving terminal) the Jinja facilities may be too poorly located for the oil companies to desire ownership (about 80 km from Karnpala). However, when new product tankage needs to be build, any alternative locations should be compared to rehabilitating and converting the Jinja facility for commercial purposes. The "sunk-cost" in this facility could compensate for the higher transportation costs to Kampala, and make the facility appealing to the oil companies. Should the conversion not be feasible, but the Governnent decides to  - v - maintain the Jinja facility as a storage for strategic stock, the most efficient mode of operation appears to be a leasing arrangement with a consortium of the oil companies. 15. Incorporating Strategic Stocks into Oil Company Storage. In some countries, dedicated strategic storage facilities have been abandoned in favor of using the existing oil company terminals to provide storage for strategic stock. The oil companies carry a certain amount of stock above their operational requirements. for which service, they are reimbursed for the additional working capital as well as for a portion of product loss and operating costs. As additional facilities are required, the companies build them and are allowed a fair return on their investment. 16. The Government should carefully examine the feasibility and cost- effectiveness of incorporating strategic stocks into existing oil company storage. Government Ownership in Oil Companies 17. At present, the Government owns 50 percent of Agip and Total, which together have a 30 percent market share. Because sales to the large parastatals are usually based on bid tenders from the oil companies, there is a perceived conflict of interest by having a Government interest in the oil companies. The Government should consider divesting its holdings. C. ELECTRICITY 18. Much has been done to bring the power sector back from the depths to which it had fallen during Uganda's years of civil strife. Unfortunately, the results on the institutional side have been far less satisfactory than on the physical side. Although improvements have been made, UEB remains inefficient, provides poor quality service and is still in precarious financial condition, unable to earn a profit, service its debts or contribute significantly to meeting its investment needs. Moreover, electricity is currently available to only about 5 percent of the population; the great majority of the people are either not within reach of the electricity system, or cannot afford the service. 19. In the pursuit of strengthening the power sub-sector's contribution to economic and social development - to meet the energy needs of a growing economy and provide more of the population with the benefits of electricity - the following issues must be addressed: Institutional change -- Establishing institutions that operate efficiently, provide high quality service and are financially sound; Private Sector Participation -- Making greater use of the resources of the private sector;  - vi - System Development -- Choosing a least-cost path for expanding system capacity to meet the needs of a growing economy and take advantage of export markets; Extending Electriflcation -- Widening access to electricity by opening the way for non-grid connected conventional and non-conventional sources of supply, and extending the grid where viable. Institutional Change 20. The need for change seems most pressing in two areas: (i) sub-sector organization, particularly concerning the relations between the government and the operating utility; and (ii) addressing UEB's operational and financial difficulties, the major part of which originates from the distribution and commercial functions. 21. Sub-Sector Organization. The establishment of a new relationship between the Ministry and UEB, based on arm's-length regulation of the utility's operations and finances, could do much to inject a measure of autonomy, commercial orientation and accountability into the sub-sector. The regulation of operations and tariffs would be the most crucial components of the new relationship. 22. The twin keys to successful operations regulation are the establishment of credible performance targets and the maintenance of accountability for the achievement of these targets. One way of meeting these requirements is through the use of perfor-mance based management contracts. Such contracts contain not only performance targets but explicit reciprocal obligations on the part of the regulator (government) to. for example, allow tariff increases, and obtain foreign loans if the enterprise performs as agreed. The regulatory mechanism must ensure that tariffs are (i) regularly reviewed and (ii) adjusted in accordance with sound economic and financial criteria. The choice of criteria for tariff adjustment may be less important than the establishment of a transparent and automatic process for their application. 23. Strengthening UEB. UEB's operational and financial problems lie largely in the areas of distribution and commercial operations. UEB also suffers frequent system breakdowns due to problems in the rehabilitation and maintenance of the generation and transmission facilities. While UEB now seems to be moving in the right direction to address these problems, the slow progress and uncertain outcome of UEB's ongoing efforts raise the issue of whether greater institutional change is required. Three change scenarios seem particularly worth exploring: contracting out UEB's distribution and commercial operations to a management firm; establishing a new distribution company separate from UEB; and contracting out the whole UEB to a management firm. 24. Contracting Out Distribution and Commercial Operations. This would involve contracting with a qualified firm to manage all or a part of UEB's distribution and  - vii - commercial operations. The principal advantages of contracting out are: it provides a means of putting operations into the hands of new and experienced managers with responsibility for change; signals an end to business as usual; and facilitates the introduction of changes (e.g., in staffing) that would have been difficult to make otherwise. 25. Establishing a Separate Distribution Company. Creating a new utility for distribution is a more radical option but one which perhaps offers the best means of breaking with the past and creating an institutional environment conducive to change. Transferring responsibility for distribution and commercial operations to a new. specialized enterprise, would create a dedicated institutional base for reducing losses and improving the quality of service, expanding the distribution system along rational lines, and improving billing and collections. 26. Contracting out the whole UEB. While contracting out the distribution and commercial operations to private management or establishing a separate distribution company would have the potential of addressing key financial problems, these measures would not address problems in the operation, maintenance and development of the generation and transmission systems. In addition, the major drawbacks of creating a separate utility are that breaking up existing institutions and creating new ones is never easy; the transition would involve difficult issues (e.g., the valuation and transfer of assets) that would have to be carefully worked out; and the separation of distribution from generation and transmission, in a system as small as Uganda's could potentially involve the loss of economies of scale and encumber coordination between the distribution and generation/transmission functions. 27. Moreover, putting the distribution - a core function - in the hands of others, is something which is very difficult for any utility management to contemplate. The 1995 consultant study recommended against contracting out for this reason. and also because it "...would be premature for UEB to decide on any contracting-out option until it has modernized its system, procedures and controls ...in order to put these activities on a sound, efficient and controlled basis." However, this view appears to beg the basic question of UEB's ability to "heal itself' in the absence of the sort of change that would be involved in contracting out. 28. Therefore, it would appear more realistic to consider contracting out the whole UEB to a management firm or consortium. This approach would help avoid potential coordination costs between the distribution and generation/transmission functions. It would also address comprehensively all managerial, operational, and development planning problems of UEB; and at the end of the contracting out period, give to the Government, a solid information base to decide on the best institutional arrangements for reforming the power sub-sector.  - viii - Private Sector Participation 29. The power sub-sector clearly needs a great deal of technical, managerial and financial help. Other developing countries in similar circumstances have been turning increasingly to the private sector for a variety of contractual services, financing, construction and operation of projects. 30. Provision of Services. In addition to contracting out the management of specific functions where UEB's performance is most in need of improvement, there are a wide range of ways in which Uganda can draw more heavily on the private sector for critical services. At one end of the spectrum lies the possibility of private sector management of the entire UEB operation under contractual arrangements, as discussed earlier, and as has been done elsewhere in Africa. Toward the other end, lie the more limited, traditional services provided by the private sector such as: (i) employing consultants in line as well as advisory positions to fill key skills gaps; (ii) twinning arrangements; (iii) making greater use of contractors for operations that are now carried out by force account; and (iv) turning over UEB's non-core activities (e.g., the provision of staff housing) to the private sector. 31. Independent Power Projects (IPPs). Projects in which private investors, either alone or in conjunction with existing public utilities, finance, build, own and operate generating plants are an increasingly important phenomenon in many developed and developing countries. In most cases, private investors provide equity and debt financing on a project or limited-recourse basis, relying on the prospective earnings of the project itself to meet operation and maintenance expenses, service debt and provide a return on equity. Export projects are something of a special case. Since they earn foreign exchange, they can be set up on an "enclave" basis, which promotes financial sustainability by allowing earnings to be deposited abroad in escrow-type accounts from which direct payment is made to suppliers and creditors and to meet other obligations. Such an arrangement is usually very attractive to investors. Uganda has already moved towards IPPs when it entered into negotiations with a private investor group for the Bujagali project. To set up Bujagali along the lines of an export project implies the need for a trilateral relationship, with Uganda providing the site in return for royalties and taxes on the IPP earnings; Kenya providing the market under the terms of a power purchase agreement, presumably backed up by performance guarantees; and the IPP agreeing to finance, construct and operate the plant. 32. To find out whether Uganda can in the near term obtain private investment in the power sector will not be easy. While the necessary institutional arrangements need not be fully in place before trying to attract IPPs, certain minimum conditions must be established. Even when this is done, the process of stimulating investor interest, negotiating project arrangements and raising financing is likely to be difficult and time consuming. However, given the pressing need for capital, technology and management, this is a process well worth initiating. As a first step, Uganda should clearly and explicitly commit itself to private participation by revising the Electricity Act to end  - ix - UEB's monopoly status and clearly open the door to private investors, domestic as well as foreign. To this end, the Government has already shown decisiveness by initiating the revision process. While the new legislation may contain minimum conditions for IPPs, it probably should not go beyond this since the Government will need a maximum of flexibility in negotiating financial and other terms on a project-by-project basis. 33. Approach to Increasing Private Sector Contribution. In conclusion, the following actions could form elements of a strategy to maximize the contributions from the private sector: improve UEB's financial situation; introduce management contract for UEB; revise the Electricity Act; create a separate regulatory body with "teeth": contract out UEB's staff housing, pole manufacture, and distribution line construction activities; identify generation projects for IPPs to be bid on a competitive basis; evaluate feasibility of leasing and/or contracting out distribution areas; prepare bidding documents; and strengthen the Government's capacity to evaluate private sector proposals. System Development 34. Institutional change is a necessary but not sufficient condition for improving the efficiency and reliability of the power system to meet the growing needs of the economy. Advantage must be taken of the long-term potential for developing a major export industry based on one of Uganda's principal resources, hydro-power. 35. Meeting Uganda's Needs. The power system has been running nearly flat out during the past 2-3 years. As already discussed, contracting out parts or the whole UEB could inject a measure of efficiency to ease the current constraints in generation capability. In the meantime UEB should mount a major stop-gap effort to: (i) drastically increasing revenue collection (e.g. pre-payment meters) and reducing accounts receivable (equivalent to almost one year's billings); (ii) reducing non-technical losses by completing the physical inventory of customers and updating the customer database; and (iii) reducing technical losses through a concerted program to strengthen the distribution network and its maintenance and operation. However, definitive relief from current capacity constraints will only come with the conmmissioning of the first phase (2x40 MW) of the Owen Falls Extension, scheduled for 1998. The need for further additions to capacity can be illustrated in terms of two simple load growth scenarios: (i) 7.5%, a "high" growth rate but one somewhat lower than the rate at which total supply increased during the 1986-91 recovery period; and (ii) 5.5%, a "low" growth rate reflecting the 1992-94 rate of increase in total supply. 36. These scenarios indicate that Uganda could need additional capacity before the year 2000, just to satisfy the requirements of the domestic market. Capacity could be expanded at least cost through the installation of three additional units at the Owen Falls Extension, which has been designed to accommodate five 40 MW units. However, this appears to require a change in the way water is managed at Owen Falls in order to ensure that the flow is adequate for the additional units. Negotiations for the  - x revision of the present "Agreed Curve" operating arrangements with the other riparians should be urgently pursued. The generation Master Plan is expected to review these and other options on a least-cost development basis. 37. Export Potential. Uganda's vast hydropower potential could be developed for export markets, since there is not likely to be a need for a large-scale hydro development for the domestic market in the next 10 years or so if the Owen Falls Extension is expanded to full capacity. Though UEB now exports about 25 percent of its total generation, Uganda's future as an energy exporter could be much brighter. To realize this potential, in addition to securing a change in the Agreed Curve, Uganda will need to: (i) reach agreement with Kenya or other neighboring country on the purchase of an economic quantity of electricity at an economic price; (ii) identify a least-cost site for development; and (iii) make satisfactory arrangements for the construction, financing and operation of the new plant. However, UEB's financial weakness and operational shortcomings mean that Uganda's best hope of developing its export potential appears to lie in enlisting the assistance of the private sector, which has already shown interest in developing the Bujagali site. Extending Electrification 38. The benefits of electricity are today available to only a small fraction of the population living in the capital and the larger towns. The requirements for extending service are best viewed by distinguishing between "urban" and "rural" electrification -- i.e.. between areas already served by the grid or located close to it, and areas remote from the grid that are unlikely to be reached by it in the foreseeable future. 39. In urban areas the basic task is one of strengthening and extending the existing distribution network. While UEB has been increasing the number of connections to its system, this has often been done in an unplanned way; a technically and economically sound distribution rehabilitation and expansion plan covering, say, a five year period should be prepared. 40. The electrification of rural areas remote from the grid, where the bulk of the population live, is quite a different matter. It has been neglected for decades, although with increasing disposable incomes, there exists considerable scope for electricity supply. It is, however, unrealistic to think that more than a fraction of the rural population could be reached by the conventional, extend-the-grid approach. A more promising course is to rely, instead, on "alternative", "non-conventional" or "complementary" approaches to electrification. These include small diesel or gasoline generators for private or public supplies, and car batteries to provide small amounts of electricity for lighting, radio, and even television, as well as the use of photovoltaic technology and other renewable energy systems for domestic and other small scale uses. The private sector has already taken a lead: substantial numbers of solar photovoltaic systems and diesel- and petrol-driven generators have been imported into Uganda and installed in various parts of the country to provide electricity to households, industries and commercial establishments. Further  - xl - opportunities exist for the establishment of decentralized power systems based on small- scale hydropower, sales by auto-generators (such as sugar and tea factories), and photovoltaic technology. These systems -- i.e. small integrated power systems that are not connected to the grid -- may be an option for larger load centers which are located away from the grid. There is a market niche for private investment. both domestic and foreign, to set up these types of community-based generation and distribution systems. D. RENEWABLE AND TRADITIONAL ENERGY 41. Uganda is richly endowed with renewable energy resources. These include plentiful biomass supplies, extensive hydrological resources, favorable solar conditions, and large quantities of biomass residues from agricultural production, among others. With the exception of biomass, Uganda utilizes only a fraction of its renewable energy resource potential. Considerable Government, donor, NGO and private sector interest has been shown over the past fifteen years to develop Uganda's renewable and traditional energy sector. The results have been meager. Much more concerted and coordinated efforts should be carried out to develop the efficient use of Uganda's renewable energy resources. 42. The review of renewable energy demand and activities in Uganda highlights three major issues: * Coordination and Rationalization of Programs. The proliferation of donor-driven, uncoordinated, often ad hoc projects and programs in renewable energy in Uganda has not had any major positive effect on the country's energy balance or environment; * Biomass Supply and End-Use Efficiency. Biomass energy is of far more importance to Uganda's economy than previously noted, particularly in terms of industrial energy, however, the efficiency of both end-use and production could and should be improved; * Biogas Program. Recommending an end to biogas programs due to the present economic constraints of biogas as a viable energy option. Coordination and Rationalization of Programs 43. Numerous programs with few discernible results have caused cynicism among Ugandans, the Government, and donors as to the potential of traditional and renewable energy. Its actual contributions to the country's development remain unclear, largely due to the lack of coordination and information-sharing of widely dispersed, isolated projects lacking fora to share project information such as project goals, strategy, planning, execution, lessons learned, and actual outcomes. Much duplication of effort, ignorance of previously established baseline information, and the proverbial "reinvention  - xii - of the wheel" has resulted from this state of affairs. This is unfortunate, as traditional and renewable energy can contribute substantially to economic development in Uganda. 44. It is therefore suggested that all previous energy projects and activities be reviewed, inventoried, and analyzed in an in-depth study. Stock should be taken of all activities in the traditional and renewable sector to rank results and their outputs. The objective of this exercise should be to establish some objectively verifiable indicators to help form a rational base for future activities by ranking and prioritizing projects and investments, on which basis donor support can be channeled. The study should compare in-country projects and programs to similar studies and projects already enjoying regional success, as well as the comparative successes of intra-country activities. The private sector, particularly in the charcoal production, agro-industry and photovoltaic sectors, should be invited, to contribute their expertise. This study could then provide the Government and all interested parties with a framework to encourage the rational, economical and environmentally sustainable development of traditional and renewable energy in Uganda. 45. The above activity would also contribute to building the well needed analytical capability at the MNR for policv and strategy formulation in the areas of traditional and renewable energy. Biomass Supply and End-Use Efficiency 46. Firewood, charcoal and crop residues are the most widely available and exploited energy sources in Uganda. They provide almost all of the energy used to meet the basic needs of cooking and water boiling in the rural residential sector and is the fuel of first choice in many industries and conmnercial establishments. This can be expected to continue for many years to come given the high price of modem energy sources, and the limited and unreliable supply of electricity. 47. Uganda has the phvsical and agro-ecological potential to supply biomass at current levels of demand. However, much of the supply is in remote areas far from urban centers, and agricultural encroachment tends to reduce the country's forest stock. Preliminary NBS (National Biomass Study) results show that there is not sufficient annual yield of woody biomass to meet demand in those regions that contain major urban centers, thus, fuelwood needs to be transported from other regions at a significant cost. In an effort to reduce the cutting of forests in the face of an increasing biomass demand, an effort should be made to create an enabling policy framework to provide incentives for increased private sector farm tree planting. This would not only produce wood and wood products for sale but would also help increase agricultural productivity. Some initiatives are already underway, but increased efforts to clarify land ownership and tenure rights are crucial for farmners to make long-term investments in agriculture and silviculture. 48. Efficiency could and should be improved in biomass end-use. Industry has already shown a willingness to move towards more energy-efficient utilization and  - xiii - the Government can accelerate these trends through catalyzing the provision of investment credit. technical assistance and training, and imports of energy-efficient equipment. In the household and commercial sectors, the Government needs first to analyze the results of previous work in the improved stove area, and focus on the most enthusiastic and receptive groups. Experience of stove programs around the world indicate that in addition to a rapid payback period, which appears to be necessary for successful dissemination of stoves, successful efforts are those that maintain consistent, long-term. and high level commitment to stove manufacture and dissemination, and pay attention to targeting markets, and design stoves that consumers actually want. Improving the quality of stoves would also contribute to reducing indoor pollution, which affects the health. particularly, of women and children. 49. With respect to charcoal production, proven techniques exist to dramaticallv improve efficiency -- by improving kiln construction, firing, and tending practices -- if only producers were organized so they could be reached more easily with new methods. Improvement can be obtained also from existing earthen kilns by training charcoalers in improved kiln management practices, which would increase yields from each charge and raise the charcoalers incomes. Biogas Program 50. Biogas remains an expensive energy option. Its applications will remain experimental so long as less expensive fuelwood is available. Since there is no clear demand from consumers for biogas. and since small and medium sized biogas applications will not be able to compete financially in the marketplace against wood and electricity. the Government should not extend its biogas program.  - xiv - Uganda Energy Assessment Summary of Recommendations Priority Issue |Recommendation Petroleum Sub-Sector Supply Strategy and Investment Requirements Analyze altemative supply routes and determine the least-cost mode. Encourage oil companies to maintain two supply routes (according to mission's analysis, self propelled barges from Kisumu to Port Bell would provide a cost effective alternative). Oil companies to build additional product tankagc to meet future demand. Competition in Supply Implement a petroleum product price and quality monitoring system. Strategic Stocks Storage: Safetv and Management Improve environmental management at the Jinja strategic storage facilities. Carry out a comprehensive evaluation of how to improve operational management of strategic stocks including the following options: (i) incorporating strategic stocks into oil company storage; (ii) oil company ownership of the Jinja facilities which could be converted into combined operational and strategic stock storage; and (iii) leasing the Jinja facilities to the oil companies. Government Ownership in Oil Companies Examine means to reduce possible conflict of interest by divesting Govemment ownership in oil companies. Power Sub-Sector Institutional Change Establish an arm's length relationship between MNR and UEB to increase commercial orientation in UEB's operations. Strengthen UEB by contracting out distribution and commercial operations. or creating a separate distribution company, or contracting out the whole UEB through management contract. Private Sector Participation Make greater use of the resources of the private sector through management contracts, twinning arrangements and independent power producers. Revise the Electricitv Act to end UEB's quasi regulatory function and create a separate regulatory body. ldentif,v generation projects for IPPs to be bid on competitive basis. Strengthen Govemment's capacity to evaluate private sector proposals.  - xv - Prioritv Issue Recommendation System Development While new institutional arrangements are finalized, implement stop-gap measures to reduce: (i) technical losses through strengthening distribution network and its operation and maintenance; and (ii) non-technical losses by drastically increasing revenue collection and reducing accounts receivable. Increase capacity in accordance to least-cost expansion plan. Begin discussions with potential purchasers of Ugandan electricity to capitalize on export potential. Extending Electrification In urban areas, prepare a distribution rehabilitation and expansion plan. In rural areas, promote use of alternative and renewable energy options, such as mini-hydro, solar. and battery recharging. Promote decentralized power systems to be build, owned and operated by co-operatives and/or domestic or foreign investors. Renewable and Traditional Energy Coordination and Rationalization of Programs Review all previous activities to identify critical success factors and rank results and outputs to help form sound basis for future programs. Biomass Supphl Create an enabling policy franexvork to provide incentives for increased private sector farm tree planting. Improve Efficiency in Charcoal Production Organize charcoal producers and provide them with training and skills in modem production techniques. Improve Stove and End-Use Efficiency Identify success projects in Uganda and abroad for replication and promote the production of low-cost efficient stoves that consumers really want. Biogas Program End non-viable program.   1. THE ECONOMY AND THE ENERGY SECTOR 1.1 Uganda's weak economy and poor social indicators are the legacy of nearly 15 years of political turmnoil and economic decline. Since 1987, the Government has been implementing an economic reform program supported by a large number of donors. The program is promoting prudent fiscal and monetary management, improving incentives to the private sector, reforming the regulatory framework, and developing human capital through investment in education and health. Economic recovery and stabilization have been successful and this hard-won stability has been maintained for the past three years. However, the stability is precarious, and a continuation of good policies and further improvement are therefore required. 1.2 Economic growth has picked up since 1987. GDP grew at an average annual rate of about 6.4 between 1987 and 1995. In 1995, the per capita income had risen to about US $250. Agriculture, which makes up half of the GDP, dominates the growth figures, employs more than 80 percent of the labor force and accounts for virtually all exports, mainly coffee and tea. The industrial sector, which includes agro based industries, such as coffee, cotton, sugar, beverages, as well as manufacturing industries has been growing rapidly. The share of industry in GDP is around 14 percent. The service sector makes up the balance of the GDP. 1.3 Uganda's 18 million people are largely rural but urbanization is likely to accelerate with economic growth. Provision of adequate infrastructure services, including power and energy is a key to both urban and rural growth. To this end, the Government is focusing on a major effort build up its infrastructure which suffered significant damage during the years of political turmnoil. A. THE ENERGY SECTOR AND THE ECONOMY 1.4 Recent Economic Developments. Over the last few years, the Government of Uganda has been successful in stabilizing the economy and introducing reforms under its Economic Recovery Program. In fiscal year 1995, the GDP growth rate was about 10 percent, thus substantially exceeding the annual population growth rate of about 3 percent. The exchange rate was unified and the auction system removed in November 1993. With the liberalization of petroleum prices in January 1994, all price controls have been eliminated. The Government's efforts to control inflation have also been successful and the annual inflation rate fell to 6.5 percent in 1995, from nearly 60 percent in 1992. The dollar inflow which followed the foreign exchange liberalization, partly resulting from the improved coffee export earnings and increased investments, caused a rapid appreciation of the Uganda Shilling, which rose to 900 to the dollar in February 1994. By March 1996, the Shilling had depreciated to about 1,000 to the dollar.  -2- 1.5 Energy/Economy Linkages. The energy sector plays a critical role in the development of the economy. It is a major component of the country's infrastructure, and supports economic activity and social development. It also contributes significantly to financing public expenditures as petroleum taxes provide about 30 percent of total fiscal revenues. Revenue from electricity sales taxes contributes around one percent of total revenues. Energy sector does not currently contribute significantly to exports; electricity sales to Kenya are negligible and amount to only US $1.5 million -- less than one percent of total exports -- but could be much higher and significantly improve the trade balance. Assuming, for instance, that the Kenya tariff was re-negotiated at US cents 5 per kWh and given the current export volume, the annual earnings would increase to US $14 million. 1.6 On the other hand, the energy sector draws on the country's resources, using foreign exchange to import petroleum products and equipment, and also to service its extemal debt, especially in the power sub-sector, which also uses a large portion of the project aid Uganda receives. The oil import bill in 1994/1995 was about US $65 million, which was equivalent to 15 percent of the value of earnings from merchandise exports. About one third of total import support funds (grants and loans) was used to pay the oil import bill. Assuming an annual GDP growth rate of 6 percent for the next few years and the industrial sector growing at about 9 percent, petroleum imports are to increase 7-8 percent per year, implying a commensurate rate of increase in the oil bill. 1.7 Energy Sector Investment. The Rehabilitation and Development Plan for 1993-1996 included US$232 million for energy sector investments. This was 15 percent of the Plan total. According to the Plan, donor assistance provided US $216 million or 93 percent. Rehabilitation, expansion and maintenance of the economic infrastructure were high priority in the Plan, along with the promotion of new investments. The Government's medium term public investment strategy relies on: (i) concentrating investment resources on those activities/sectors in which Government must play a leading role, such as the provision of public/social services and the elimination of infrastructure bottlenecks (such as those in transport, energy and marketing facilities); (ii) ensuring that expenditures within the priority sectors are cost-effective; and (iii) withdrawing from activities which can be carried out by the private sector. Table 1.1 summarizes the 1993-1996 energy sector investments.  - 3 - Table 1.1: RDP 1993-1996 - Energy Sector (US$ million) 1993/94 1994/95 1995/96 Total Tot. Energy Projects 59.76 80.38 91.57 231.71 Power II Donors 15.2 7.1 - 22.3 Power III Donors 23.0 48.3 64.2 135.5 UEB - 3.3 8.2 11.5 Urban Power Network Rehab. Donors 7.0 12.7 13.2 33.0 UEB 2.8 1.0 1.0 4.8 Masaka-Mbarara Transm. Line Donors 6.6 2.2 - 8.8 0. Falls-Kampala Transm. Line Donors 3.3 5.7 5.0 14.0 Grid Extension to Tanzania Donors 1.7 - - 1.7 Biogas Energy Devt. Program Donors 0.2 - - 0.2 Selected Mining Projects Petrol. Exploration Promotion Donors 0.7 0.7 MNR 0.1 - - 0.1 Geothermal Energy Project Donors 0.4 - - 0.4 Selected Forestry Projects Biomass Study Phase II Donors 0.1 0.2 0.1 0.4 B. ENERGY DEMAND AND RESOURCES 1.8 Energy Demand. Biomass, primarily fuelwood is the main energy source in Uganda (see Table 1.2). Biomass supplies thirty times as much energy (on a final energy end use basis) as petroleum and electricity combined, and three and a half times as much final energy to both the industrial and commercial sectors as electricity and petroleum combined. The use of modem energy has been estimated at about 0.02 tons of oil equivalent (toe) per capita, which is low even by the standards of sub-Sahara Africa. The per capita use of modem energy in Tanzania and Kenya, for instance, is 0.04 and 0.1 toe respectively. Access to modem energy sources is limited to urban areas. On average, only 5 percent of the population have access to electricity: less than 2 percent in rural areas, and about 40 percent in the capital city of Kampala. Electricity generation is predominantly hydro (160 MW peak). About 400 million cubic meters of petroleum products are imported annually (See Annex 1.1)  - 4 - Table 1.2: Final Energy Demand (Effectively Utilized Energy): 1994 (in giga joules/GJ) Biomass Petroleum Electricity Total 1. Household Urban 3.3 0.1 0.9 4.3 2.8% Rural 130.7 0-3 0.1 131.1 85.0% Sub-Total 134.0 0.4 0.9 135.4 87.8% 2. Industrial 7.1 0.9 1.2 9.2 6.0% 3. Commercial 4.3 0.5 0.6 5.4 3.5% 4. Institutional 3.4 0.2 0.3 3.8 2.5% 5. Transport 0.0 0.4 0.0 0.4 0.2% Sub-Total 14.8 2 2.1 18.8 12.2% Total 148.8 2.4 3.0 154.2 100.0% 96.5% ,.5% 2.0% 100.0% Source: Mission estimates. 1.9 Energy Demand Projections. The Energy Assessment Mission developed two energy demand forecasts: a Base Case and a High Case. In the Base Case, assuming an annual GDP growth rate of 6 percent, demand for electricity and petroleum is projected to increase at around 6 - 7 percent per year. The consumption of traditional energy is expected to increase at a rate equaling population growth -- about 3 percent per vear. Table 1.3 shows the Base Case Forecast and Annex 1.2 provides assumptions and detailed Base Case and High Case forecasts. Table 1.3: Energy Demand Forecast (% annual growth, Base Case) 1990-1995 1996-2005 1990-2005 1992-2012 Total Energy Demand 3.0 3.0 3.0 3.0 Electricity 8.0 6.2 6.8 6.3 Petroleum Products 2.1 6.8 5.2 6.9 Woodfuel 2.9 2.9 2.9 2.9 Source: Annex 1.2 1.10 Energy Resources. Uganda is richly endowed with renewable energy resources but their utilization is low. These include plentiful biomass and hydrological resources, favorable solar conditions, and large quantities of agricultural residues. Uganda's comparative advantage in modem energy resources is hydro power, which is concentrated on the White Nile River, as it descends from lake Victoria. The total hydro potential is equivalent to at least 2,000 MW of which only 150 MW has been developed at the Owen Falls plant (commissioned in 1954). Geothermal resources have been identified in the west of the country but their economic viability is not yet known. No petroleum resources have been discovered. There is no coal and, although peat exists, the quantities have not justified exploitation. Woodfuel and other biomass are plentiful in many areas of southern Uganda, but localized deforestation is affecting some peri-urban regions, which have to import wood from the surplus regions. Given the low per capita  - 5 - income, switching to modern, commercial fuels such as kerosene and LPG is not affordable for most households at present. Table 1.4: Uganda's Energy Resources Total Resources Primary Use Source Toex 106 % Toe x 106 % Fuelwood 5,023 85.1 3,995 88 Crop Residues (1) 686 11.6 514 11.3 Coffee Husk 7 0.1 5 0.1 Hydropower 188 3.2 27 0.6 TOTAL 5,904 100.0 4,541 100.0 (1) Including Bagasse Source: Mission Estimated based on National Energy Balance, 1990 (See Annex 1.1). C. ENERGY SECTOR ORGANIZATION 1.11 The Ministry of Natural Resources (MNR) is responsible for the management and development of the country's water, forests, energy and mineral resources. Within the energy sector, MNR sets broad sector policies and strategies and currently supervises and regulates the power and petroleum sub-sectors. As part of the civil service reform program, MINR has been reorganized and its functions redefined to improve effectiveness.' However, the pace of the restructuring should be accelerated and the MNR should continue to build its capacity to ensure effective policy making and oversight of the energy sector. In particular, the MNR should strengthen its capacity to monitor operations in the petroleum sub-sector, to ensure commercial orientation in power sub-sector operations, and to promote energy conservation and efficiency programs. In addition, the Government should increase its capacity to evaluate options for private sector participation. 1.12 The state-owned Uganda Electricity Board (UEB) is responsible for power aeneration, transmission and distribution, and is the largest state corporation in the country with about 3,400 employees. The distribution of petroleum is in the hands of sister companies of six international oil companies and one local company. The Directorate of Mineral and Energy includes three departments: Energy, Geological Surveys and Mines, and Petroleum Exploration. The Department of Energy, headed by the Commissioner for Energy, includes four divisions: Petroleum Supply, Electric Power, New and Renewable Energy, and Energy Efficiency, each headed by an Assistant Commissioner. Issues related to the management of gazetted indigenous forests, partly for woodfuel production, are dealt with by the Forestry Department, which is located within the Directorate of Environment.  - 6 - D. ENERGY AND ENVIRONMENT 1.13 Concerns about the rapidly degrading environment and the need for prudent natural resource management led the Govermment to launch the preparation of a National Environment Action Plan (NEAP) in 1990. The NEAP process identified, analyzed and is currently prioritizing environmental problems and opportunities and has developed a comprehensive national strategy for participatory, sustainable development based on sound environmental management. The NEAP programs focus on institutional capacity building particularly at the central and district level, training, legislative reforms, and awareness-building. They also include broadly defined projects in the areas of 'resource productivity enhancement", "bio-diversity management", "environmental education" and "environmental health and pollution management". 1.14 In the energy sector, the efficient provision and use of energy can contribute importantly to environmental sustainability. This linkage is evident in both the traditional and modem energy sectors. Efficient and reliable distribution of modern energy reduces the need to over-cut forests for woodfuel; efficient end-use reduces the need to increase supplies. Also, the "lifeline" tariff for electricity can effectively target those lower income groups that are most affected by environmental degradation. On the other hand, the energy sector may also create environmental problems, through, for example, the development of energy resources, or through toxic emissions and wastes from petroleum.. 1.15 A preliminarv assessment of a wide range of potential environmental problems associated with the energy sector reveals that environmental issues are not generally a major constraint on activities in the sector. Uganda is fortunate in that, many of the environmental problems experienced elsewhere in the world have not yet reached significant levels. In setting priorities within the energy sector, the following considerations are relevant: (a) in the past, air pollution has not received much attention. Although historical emission levels may not generate obvious problems, future emissions (especially of lead from petrol and sulfur and particulates from diesel) may become a problem. (b) water pollution on Lake Victoria, especially the kind associated with potential catastrophic oil spills, would be a high priority if based solely on political criteria or on human safety concerns. From an environmental perspective, however, the ecological and economic impacts associated with ongoing dumping of untreated sewage and improper disposal of oily wastes is a significantly greater problem (see Annex 2.6). (c) land degradation from energy sector activities is generally not significant, although environmental degradation from fuelwood gathering is often  -7- politically perceived to be of significance. A greater environmental concern is land degradation from agriculture encroachment. Possible environmental impacts associated with hydroelectric development are generally readily contained and, if re-settlement is limited, have little effect on other economic activities. The major issues associated with the possible regulation of water levels in Lake Victoria and of the Nile River itself are, for the most part, political in nature (see Annex 3.1 2).  - 8 - 2. THE PETROLEUM SUB-SECTOR 2.1 With continued strong economic growth, and the concurrent increase in petroleum demand, Uganda will have to ensure that adequate, reliable and affordable supplies are available to all sectors of the economy. Given Uganda's present low per capita petroleum consumption (17 kg), it is not unreasonable to assume that it would increase significantly as the economy modemizes. Since Uganda does not have its own oil resources, all petroleum requirements have to be met by importing finished products. The costs of these imports are already high -- representing some 15 percent of foreign exchange earnings in 1995 -- and will undoubtedly increase as demand increases. Given the importance of energy supplies on economic growth, and the substantial impact of oil imports on Uganda's balance of payment account, providing incentives for efficiency improvements is of vital interest to the economy. With the removal of controls on foreign exchange and petroleum prices in 1993 and 1994 respectively, the Government has provided incentives for supply rationalization. Nevertheless, to ensure long-term competitive and environmentally sound development of petroleum operations, there are a number of issues that require further consideration. These include: * Cost-Effective Supply Strategy and Investment Requirements. Encouraging oil companies to maintain least-cost supply strategy while assuring a reasonable degree of security in supply. * Competition in Supply. Ensuring adequate competition in the marketplace through price and product quality monitoring. * Safety and Environmental Management. Reducing environmental and safety hazards in oil operations at lake Victoria and improving environmental management at the Jinja strategic storage facilities. * Management of Strategic Stocks and Government Ownership in Oil Companies. Choosing the most efficient arrangement for the management of strategic stocks and reducing potential conflict of interest by Government ownership in oil companies. 2.2 While these four issues should be considered as the most important in the petroleum sub-sector at present, the following issues also deserve consideration: * Illegal Imports * Ethanol Blending Program * Petroleum Exploration Each of these issues will be discussed below, following a review of the salient features in the petroleum sub-sector.  - 9 - A. THE PETROLEUM MARKET PLACE 2.3 Recent Consumption Trends. Petroleum products demand in Uganda is low compared to neighboring Kenya and Tanzania. According to preliminary official data, the total consumption was about 445 million liters in 1995. From 1984 to 1989, the consumption of petroleum products increased by an average of 8 percent per year. Then, from 1990 through 1992 consumption decreased by 8 percent annually, despite a rapid increase in the number of motor vehicles (to an estimated 50,000 in 1992) and an annual average GDP growth rate of about 5 percent. One reason for the declining consumption may have been the significant real price increases in 1988-90. Another reason may have been the omission of smuggled products in the official data -- estimated to make up as much as 10 percent of total consumption. It is also possible that the efficiency of fuel use has improved as new vehicles have been imported. Since 1992, demand has increased rapidly, and consumption in 1995 was some 30 percent higher than in 1994 (preliminary 1995 data). A significant increase in the consumption of aviation fuel appears to account for the growth. Annex 2.1 provides historical consumption data. 2.4 Demand Projections. The Energy Assessment Mission developed product demand forecasts for the period 1994-2010. These forecasts used the 1993 actual demand (including un-accounted for sales) as the base line and considered the annual GDP (6% and 7%) and population (3%) growth rates, and improvements in end-use efficiency as explanatory variables. The forecasts project petroleum demand to rise at an average annual rate of 6 to 8 percent. This implies that in 15 years the total annual demand could more than double from the current 400 million litres to more than 900 million litres, putting significantly increased pressure on the supply capacity. The Base Case and High Case scenarios are summarized in Table 2.1 below. Table 2.1 Petroleum Product Demand Projections: 1994-2010 (million litres) Fuel Av. Diesel Oil Gasoline Kerosene LPG Fuels TOTAL Base Case 1994 99 17 140 33 1.3 25 315 2010 360 48 385 46 6 69 914 % growth rate p.a. 8.4% 6.8% 6.5% 2.1% 9.8% 3.8% 6.6% High Case 1994 101 17 141 33 1.4 25 319 2010 451 68 471 46 10 107 1153 % growth rate p.a. 9.9% 9.0% 7.8% 2.1% 13% 6.6% 8.1% Source: Annex 2.2. 2.5 Marketing and Distribution. Product marketing and distribution is within the private sector. Six companies market products to consumers, of which one is an independet Ugandan: Shell (39% of market); Total (23%); Agip (9%); Caltex (12%); Esso (10%); and UPET (7%). The Government has a 50 percent stake in Total and Agip. The distribution system, including 287 retail outlets, has considerable excess capacity and  -10- rationalization is underway, with a number of outlets having been closed recently. The service stations are in relatively good repair and the oil companies have either already made or are planning further improvements and upgrades. Shell and Total are the only marketers presently selling aviation fuel. 2.6 Supply Channels. The oil companies import finished products through two ports: Mombasa in Kenya (70% of supply) and Dar es Salaam in Tanzania (30%). The oil companies' respective offshore trading companies usually act as suppliers, except for UPET, who makes independent arrangements. Because of the relatively small size of the Ugandan market, the products are imported on General Purpose vessels (20-25,000 tons) on two-port discharge voyages; or in part-cargoes with other oil companies.2 For the most part, the sister companies of the Uganda oil companies in both Mombasa and Dar es Salaarn3 provide storage terminals for the received products. From Mombasa, white products are transported by pipeline through Nairobi to terminals in Eldoret (about 110 km from the Uganda border) and Kisumu (on Lake Victoria, about 90 km from Ugandan border).4 White products are transported further from Eldoret to Uganda by rail (10%) and by truck (90%), and from Kisumu by truck. Black products and LPG are transported from Mombasa by truck. From Dar es Salaam, both white and black products are transported to Uganda by rail; the wagons are loaded on a rail-ferry to cross Lake Victoria from Mwanza to Port Bell. From Port Bell and the Kampala terminals, oil companies truck products to local depots in the capital city region. Terninals in other parts of the country are usually supplied directly from Kenya and Tanzania (Annex 2.5). 2.7 There are two principal reasons to maintain the two supply routes. First, two routes provide diversification of sources; Uganda is land-locked and there has been past experience with disruptions of supply through Kenya. Second, two routes also provide a degree of competition, and should moderate the level of tariffs charged on the alternative route. Until recently, the landed cost of Tanzania-sourced products was some 2 This type of ocean freight is slightly more costly than shipping products on one-port discharge voyages. However, this higher ocean freight cost (US$ 1.50-2.50/t before AFRA adjustment or an average of about US$ 3.00/t after adjustment) must be balanced against the lower cost associated with a smaller amount of working capital tied up in inventories. A calculation of the actual cost differences, shown in Annex 2.3., shows that at present there is estimated to be an advantage of 0.11-0.15 US cents/litre from using fully loaded GP vessels rather than using part-cargoes for the replenishment of products. The exceptions involve the use of the Bulk Oil Terrninal in Dar for UPET, Esso and sometimes Shell. Although the Shell-BP Tanzania company is 50% owned by Shell, it is operated by BP and is not totally used by Shell-Uganda. Esso uses Bulk Oil under a special arrangement whereby products are purchased from Bulk Oil CIF Kampala. This is done so that Esso does not have title to the products as they cross Lake Victoria by rail-ferry where there is a risk of oil-spill. UPET also uses the KOBIL Oil Company terminal in Mombasa. The pipeline is owned and operated by the Kenya Pipeline Company (KPC). KPC requires that all products transported in the pipelines be owned by Kenyan companies. Consequently, at this time, the Kenyan sister companies of the Uganda oil companies must be in the supply chain. Detailed physical data on the Kenya pipelines and their terminals are shown in Annex 2.4.  - Il - 1.1-1.6 US cents/litre (6%-9%) less than Kenya-sourced products. The condition of the Tanzania Railroad, its tank wagon capacity and the efficiency of Uganda's Railways Corporation (URC) will determine whether the Tanzania route can compete with the newly extended pipeline to Kisumu, especially as the owner of the pipeline, Kenya Pipeline Company Ltd. (KPC), has reduced its charges. 2.8 The Government operates a strategic storage facility at Jinja that has three 10,000 m3 tanks, one each for petrol, kerosene, and diesel. The facility can receive products by rail and truck but can dispatch only by truck. 2.9 Cost of Imports. In 1995, petroleum product imports (preliminary data) cost about US $65 million, which is an 17 percent increase over 1994. Because of the high cost of petroleum and because the Government was concerned that the oil company traders were charging too much for their services, at least one study looked at the possibility of a centralized International Competitive Bidding system (ICB).5 The study estimated that an ICB system could yield annual savings of about $3.8 million. However, the study may have overestimated the potential savings, because it did not address the possible risks of dependency on one supply route, nor the costs of operating the ICB. Moreover, the study was undertaken prior to the deregulation of pump prices and foreign exchange, two elements which are expected to reduce the costs. The Government therefore shelved the option of a centralized ICB system in favor of a liberalized market strategy to try to reduce supply costs. 2.10 Prices and Taxation. Pump prices of petrol, kerosene and diesel are high when compared to neighboring Kenya and Tanzania. The price in Kenya, for example, is less than one-half of that in Uganda. The retail prices in Uganda range from 4 to 5 1/2 times their CIF landed cost at the seaboard in Kenya and Tanzania. The principal reasons for the high prices are high inland transportation costs from the seaboard -- about one- third of the CIF Kampala cost of the product -- and high wholesale and retail costs because of the small size of the market. Another reason is the high taxes levied on petroleum: tax rates of the respective CIF prices range from 175% for petrol, 130% for diesel and 90% for kerosene.6 As a result, almost half of the retail price for petrol and diesel are taxes. Yet an additional reason for the high prices has been the oil companies' relatively high margins before the liberalization. Given the significant price differential between Kenya and Uganda, smuggling has developed quickly, particularly in the eastern regions of the country. It is estimated that about 10 percent of the petrol, kerosene and diesel consumed in Uganda was illegally imported in 1993. It is, thus, estimated that the Recommended Changes in Government Policy in the Petroleum Sector of Uganda, December, 1993 by P. A. Dubrule. 6 Duty is charged on an ad valorem cost basis, CIF Uganda terminal, on the volumes leaving the oil companies' terminals anywhere in the country. Resident Customs officers are located at all oil company terminals. The oil companies are required to maintain a substantial positive balance with the URA to insure that the trucks leaving the terminals will be passed by the Customs officer.  - 12 - Government lost about 10 billion shillings in revenue from petroleum taxes. Table 2.2 below provides the cost structure for petrol, diesel and kerosene. Table 2.2 Petroleum Product Cost Structure (as % of retail pump price) Petrol Diesel Kerosene FOB Gulf 17% 19% 22% Shipping to Mombasa 3% 4% 4% Inland Transport etc. 10% 11% 13% L!2anda Wholesale 17% 21% 23% LUganda Retail 4% 4% 5% Uganda Taxes 49% 42% 33% Retail pump Price 100% 100% 100% Source: Ministry of Natural Resources, 1993. 2.11 The Government deregulated the retail price of petrol, kerosene and diesel in January 16. 1994. This, coupled with the liberalization of the foreign exchange market has opened the door to competition.7 Oil companies are currently re-negotiating their rail and truck transportation contracts and efficiency studies are underway. (More retail outlets will probably close.) They are also investing in storage terninals to improve safety and pollution control. The marketing companies are making repairs and beautifying the service stations. 2.12 However, during the two years of liberalization, the competetive pressures on pump prices have been weak. In the first few months, retail prices fell slightly in Kampala and other urban districts and remained unchanged in the rest of the country. No major changes in price have been reported between Kampala and the rest of the country during the following months, which means that oil companies are allowing some cross- subsidization. Pump prices started to increase over the sunimer 1994, and the MNR expressed concern that the oil companies were not passing all the benefits of liberalization to the consumers. The rise in prices could, however, be partly explained by the increase in international petroleum prices, although the appreciation of the Uganda shilling over the dollar (more than 10% between March and June 1994) should have offset it. On the other hand, pump prices declined slightly in February 1995, despite an increase in world crude oil prices. Table 2.3 compares product prices before and after the liberalization. The foreign exchange controls were eliminated in November 1993. Dollar accounts may be maintained. Dividends may be remitted. Letters of Credit are no longer required by offshore suppliers. Payments are made by bank draft or telegraphically. As a consequence, the oil companies are no longer incurring foreign exchange losses from their sales in Shillings, as was previously caused by delays in being granted foreign exchange for imports. This will encourage imports to be made in larger cargoes, and less frequently. Also, there will be a savings of 3% of the CIF Kampala cost (0.7 US cents/litre) for a Letter of Credit/Import License that was allowed in the old pricing formula. In addition, the oil companies will save the cost of tying up working capital for a cargo import for at least 50 days, which is worth 0.1 US cents/litre. This can be calculated as follows: Assume US$ 165/M3 CIF x M3/1000 litres x 4.3125% (current LIBOR Interest) x 50 days/365 days = 0.1 US cents/litre.  -13 - Table 2.3 Petroleum Product Pump Prices in Kampala (Ush/litre) October December March June September February 1993 1993 1994 1994 1994 1995 Petrol 890 870 910 920 910 Diesel 830 820 800 830 795 790 Kerosene 710 710 690 750 700 670 Crude Oil (Dubai, S/b1) 14.7 12 12.2 16.7 15.5 16.6 Pr. Gasoline (CIF Europe $/tonne) 165 150 175 190 175 170 Exchange Rate USh=l$ 1170 1146 1080 963 921 935 Source: MNR, Ministry of Finance, Bank of Uganda, Petroleum Economist. B. COST-EFFECTIVE SUPPLY STRATEGY AND INVESTMENT REQUIREMENTS 2.13 In a liberalized and competitive petroleum market, such as Uganda's, the oil companies are expected to minimize their costs by selecting the most cost-effective supply modes. However, in the interest of consumers, the Government should ensure that the cost-effectiveness criteria is not compromised because of failures in the market. The Government should compare the costs of different supply modes and encourage the oil companies to adopt the most beneficial strategy and to make the required investments. This strategy should be balanced with an assurance of security of supply. The evaluation of the costs of different supply alternatives is also useful for price monitoring purposes. The issues to be addressed in determining the least-cost supply strategy concern: (a) the most cost-effective supply alternative; (b) the most efficient ratio between Kenya-sourced and Tanzania-sourced products; and (c) the least-cost investment requirements (public and private) in the short and long term, to ensure that sufficient capacity is available in the supply chains to meet the forecast demand. 2.14 Supply Alternatives. The Energy Assessment Mission carried out a preliminary examination of three alternative cases of two-route supply to determine the least-cost supply mode to meet the forecast demand. These were: Alternative 1: continuation of the existing arrangements through Kenya and Tanzania and the purchase of new trucks and tank wagons to transport increased quantities. Alternative 2: for Kenya source: a new pipeline from Eldoret to Port Bell (or Jinja) and for Tanzania source: continuation of the existing arrangement, i.e. rail and rail-ferry. Alternative 3: for Kenya source: pipeline to Kisumu and self-propelled barges to Port Bell and for Tanzania source: continuation of existing arrangements. 2.15 The analysis indicated that Alternative 3 is the least-cost supply mode. It effectively provides three supply routes, (because minor quantities could be supplied from Eldoret by rail), and maintains use of URC's existing investrnents, (i.e., the trucking fleet can be utilized effectively as some trucks can shift from transporting white products  - 14 - to transporting fuel oil). Furthermore, the deployment of barges should add flexibility, as purchases will be possible anywhere on Lake Victoria. This alternative is also the least investment intensive of those studied, and reduces the risk of disruptions by diversifying supplies and providing leverage in negotiating inland transportation tariffs. URC should pursue petroleum product transportation by rail at all times even in the face of strong competition. The recent URC policv to take responsibility for product losses in excess of 0.5 percent should attract new business. In addition, by maximizing the use of the rail- ferry on Lake Victoria, URC would take the maximum advantage of the investments already made (Annex 2.1 1). 2.16 Import Ratio. The construction of the new KPC pipeline from Eldoret to Kisumu, directly on Lake Victoria and the lowering of the pipeline charge (US$40/ton), makes this route the most viable one for sourcing products from Kenya, and could be more economic than the Tanzania route. However, even if the Tanzania route was slightly more expensive, it should be maintained to handle a substantial (25-30%) share of the Ugandan market for supply security. 2.17 Investment Requirements. Additional products tankage will have to be built in Uganda to meet increased demand. In accordance with the Supply Alternative 3, new tankage should be built at Port Bell. It lies only nine kilometers from downtowkn Kampala and is already the principal termninal for supplies from Kenya and Tanzania. The Port Bell option, however, should be compared to rehabilitating and converting the Jinja facility for commercial purposes. The "sunk-cost" in this facility could compensate for the higher transportation costs to Kampala. In both cases, the investments would be made by the private sector. The long-term goal is further to eliminate the oil company terminals in the heart of Kampala. Outside of Kampala, the need for additional tankage will depend on the oil companies' supply and distribution logistics, but is also influenced by the demand growth rates and any minimum stock requirements the Government considers necessary. 2.18 The long-term investment profile of the facilities required for Alternative 3 above would include: barges with a capacity to transport about 250.000 to 300,000 tons per year, either from Kisumu or Mwanza; and the rehabilitation of the existing storage facilities and building of new storage, tankage, terminals and loading/unloading racks. All these investments would be provided by the private sector. Moreover, the general use of barges on Lake Victoria increases the possibilities of sourcing product from Mwanza and delivering it at either Port Bell or Jinja. A jetty at Kisumu, (with an estimated cost of US$ 3.5 million), a component of a Bank project under negotiation with Kenya, could serve all markets around the Lake, including Mwanza on the Tanzania side.  - 15 - C. COMPETITION IN SUPPLY Price Monitoring 2.19 The elimination of foreign exchange and petroleum price controls should spur competition between the six oil companies and result in the lowest possible price. Two vears after the liberalization, the market has become more competitive, but there are also signs that prices have not always adjusted to changes in world oil prices, thereby not providing the correct signals to consumers. Therefore, the possibility of collusion between the oil companies, both in procuring product offshore and supplying it to the Uganda market, or other market failures that may distort prices should not be overlooked. The Govermment should ensure that the oil companies' behavior promotes competition so that the benefits of deregulation are passed on to the consumers. 2.20 The Petroleum Division of the MNR has been given the dual responsibility of monitoring supply costs and the corresponding pump prices to determine if the desired forces of competition are at work. However, the MNR has neither enough institutional capacity nor adequate information to effectively carry out such monitoring at present. On MNfR's request, IDA has agreed to provide technical assistance to design and implement a price and quality monitoring system, under the energy component of the Third Power Project (Cr.2268-UG.). MNR should proceed expeditiously in procuring the required technical expertise to design the monitoring system and a mechanism for cost recovery, as well as an adequate legal framework for implementation and enforcement. The MNR should also proceed with the required training and institutional arrangements for the establishment of a permanent monitoring body. 2.21 The price monitoring system should monitor prices at the port, the border and the pump. To implement such a system it is necessary to: (a) establish an accurate price build-up for CIF Kampala price comparisons to check offshore price differences; and (b) initiate an on-going pump price monitoring system to check whether competition or collusion is at work. 2.22 CIF Kampala Price Monitoring. The CIF Kampala cost for each product can be calculated using publicly available information, such as quotations for FOB prices, ocean freight, and insurance costs. Other required information include: the handling, transit and product loss charges; and working capital costs. This will provide a reference cost which can then be compared to the actual costs incurred by the oil companies. The NINR should make funds available to purchase the sources where the various cost quotations can be obtained; Platt's weekly summaries, for instance. Since portions of the CIF Kampala cost to the oil companies are covered by various invoices (i.e., inland transportation billed and paid separately), the MNR would need to obtain the actual data regularly from each of the oil companies who must be assured that the information will be held confidentially (Annex 2.6).  - 16- 2.23 Pump Price Monitoring. In order to monitor prices at the retail level, the MNR should monitor prices at the service station. Oil companies have pump price data for their various service station locations which may be obtained by the MNR on a weekly basis. 2.24 In the event that the monitoring indicates the oil companies are being over-charged by their suppliers (compared to FOB prices); or by their providers of ocean freight (compared to the ocean freight cost calculations, while considering their two port discharge operations); or in the event that there are signs of collusion or price fixing, the Government should establish methods to sanction anti-competitive behavior. Such methods include the resorting to centrally administered ICB or regulated prices (Annex 2.7). Adequate enforcement mechanisms should be examined as part of the system design process. Product Quality Monitoring 2.25 In addition to price monitoring, the Government should oversee that the quality of products sold in the country conform to established standards. It is recommended that the quality monitoring be initiated expeditiously by the Bureau of Standards, since it appears to be in the best position of reaching all service stations.9 A complete set of petroleum product specifications should also be compiled. More complicated tests, such as the sulfur content of petrol, kerosene, diesel and fuel oil, and the octane number rating of petrol, could be handled by the laboratory of the Mombasa or Dar es Salaam refineries. The cost of the tests and enforcement monitoring should be passed on to the oil companies. D. SAFETY AND ENVIRONMENTAL MANAGEMENT 2.26 Without appropriate practices for the handling and use of petroleum products, several environmental problems may arise, including: (a) possible health hazard from improper disposal of toxic petroleum product wastes; (b) air pollution; and (c) environmental damage from oil-spills. In addition, adequate fire protection is essential in oil operations. 2.27 Petroleum products wastes are generally handled in accordance with good operating practices in Uganda. A number of market and non-market incentives exist that encourage efficient environmental management. The major policy goal should, therefore, be to ensure that appropriate preventive measures are followed. Annex 2.8 discusses waste management policies in greater detail. With regards to air pollution, the main source in Uganda is vehicle emissions. Though the situation is not of grave concern or high priority at present, Annex 2.9 discusses possible longer-term goals. Potential environmental damage from oil-spills and fire explosions indicate two main areas for 9 The system would require the testing of API gravity, flash point and Reid vapor pressure for petrol; and the purchase of a few inexpensive pieces of testing equipment.  - 17- concern: (a) oil-spill response, fire protection and standards of safety maintenance at product storage facilities; and (b) oil-spill response on Lake Victoria. These two issues are discussed below. Oil-Spill Response, Fire Protection and Safety Maintenance at Storage Facilities 2.28 These issues concern mostly the Jinja strategic storage facility, since the oil companies generally appear to meet oil industry standards, and many are in the process of investing in various oil-spill prevention, evaporation-reduction or fire- protection projects for their terminals. By contrast, the present operation of the Jinja facilities is hazardous. Its fire protection capacity is minimal and because it also lacks oil-spill response and handling equipment, any spillage in loading or unloading, tank failure, earthquake, lightning, faulty truck or simple accident could cause a major problem. Not only are the plant personnel at risk, but the tanks. their contents (current replacement cost of the products is US $4.4 million), and possibly the surrounding area. 2.29 To mitigate the risk of major environmental or safety emergency, a complete rehabilitation with emphasis on installing adequate fire protection and oil-spill response facilities should be carried out. These works could take up to 18 months and cost around US $0.4 million. During the rehabilitation, all the storage tanks must be emptied to minimize safety risks by selling off the entire inventory of products at Jinja, a move which would also provide funds for the required works. This should not pose any supply security risks, since the two supply routes operate well at present. However, since the Government considers strategic stocks to be important for the security of a land- locked country, it could ask the oil companies to increase inventories during this period when strategic stocks are drawn down. Alternatively, the Government could ask the oil companies to re-open their closed terminals in Mbale and elsewhere, if necessary. Oil-Spill Response on Lake Victoria 2.30 The ferries and dock area have neither equipment nor established procedures to follow in case of an oil-spill.10 At dockside, also fire protection is inadequate. To reduce the hazards of a potential oil spill, URC should install oil-spill response equipment and develop an oil-spill response emergency plan and train personnel in its implementation at Mwanza and Port Bell, and also at Kisumu, given the possible use of self-propelled barges. 10 URC was scheduled to get two sets of fire-fighting equipment by April 1995, and the oil-spill containment equipment by September 1995. It is understood that URC has ordered an oil-spill containment boom; however, this by itself is not sufficient. A work-boat launch is necessary to deploy the boom and to be equipped with oil skimming facilities. A Transvac Vacuum unit and small boats with spray equipment should also be procured. Approved dispersants and adsorbent materials should also be on hand (Annex 2.10).  -18- E. MANAGEMENT OF STRATEGIC STOCKS AND GOVERNMENT OWNERSHIP IN OIL COMPANIES Management of Strategic Stocks 2.31 In addition to addressing the environmental and maintenance problems of the Jinja facility. the issue of the most efficient means of managing operational stocks should be examined. An efficient operation of any storage facility requires, for instance, that the stored products are completely turned over every six months to ensure adequate product quality. The turn-over at Jinja involves only one-half of the stored volume, mainlv because the market in the Jinja area is too small to facilitate an adequate turn- over. (It would take one year to turn over the diesel tank, and 3.5 years for the kerosene tank). The products would, therefore, have to be transported to Kampala, which is about 80 km from Jinja. This would incur excessive transportation costs to the oil companies and effectivelv discourage them from procuring from Jinja. Additionally, because of the haphazard turn-over, Jinja's current product losses are very high, worth about US $100,000 per year or about 10 times the economic level. Over and above these operational efficiency issues, a well-run facility should have adequate product testing facilities and well-trained staff with expertise in oil operations. 2.32 This raises the issue whether a change in the management of the strategic stocks would be beneficial. Two alternatives emerge as worthy of further consideration: (a) management of Jinja by the oil companies; and (b) incorporating strategic stocks into oil company storage. 2.33 Oil Company Management Of Jinja. Government ownership and operation is often justified on the grounds that the Government needs to control the country's emergency stock. However, inevitably, during a supply emergency, the Government would have to co-operate with the oil companies to mitigate the problem and to administer any emergency allocation plan. The main argument against Government operation is that it requires the Government to build up its own capacity in an area where the private sector already has adequate expertise. This includes staff who are well-trained in oil terminal operations, acceptable standards of safety maintenance, fire protection and oil-spill response; as well as knowledge and experience of the oil business, ranging from oil accounting, to loading-rack operations, to checking product quality. The oil companies already have the required expertise available in Uganda and can obtain additional technical support from their parent companies when needed. 2.34 If the management of strategic stock is provided by the oil companies, the facilities can be owned either by the Government or by the oil companies. Under the current supply arrangements, the Jinja facilities may be too poorly located for any oil company to desire ownership. However, given the significant "sunk cost" in the Jinja facility, it could also be considered an alternative to building new storage in other locations to meet future requirements. However, since this option requires the rehabilitation of the facility and incurs increased transportation costs, the Government  - 19- should determine whether using Jinja as a commercial storage is part of the least-cost option for storage capacity expansion. Should this not be the case, the Government should investigate the cost-effectiveness of treating the Jinja facilities as strategic storage in a leasing arrangement with a consortium of the oil companies.. 2.35 Incorporating Strategic Stocks into Oil Company Storage. In some countries, separate strategic storage facilities have been abandoned in favor of using the oil company terminals to provide storage for strategic stock. The oil companies carry a certain amount of stock above their operational requirements. For this service, they are reimbursed for the required additional working capital as well as for a portion of product loss and operating costs. As additional facilities are required, the companies build them and are allowed a fair return on their capital investment. In other countries, where the government has mandated minimum stock requirements for each product, joint storage facilities are common. In such cases, the capital could be provided by the oil companies in proportion to their market share, and the terminal could be operated by the companies on a rotating basis. The oil companies recover all operating costs plus a fair return on any investment. 2.36 The Government should carefully examine the feasibility and cost- effectiveness of incorporating strategic stocks into existing oil company storage. However, if it decides to maintain the Jinja facility as a storage facility for strategic stock, the most efficient mode of operation appears to be to lease the facility to the oil companies. To this end, the Government should request proposals from the oil companies to operate, rehabilitate and maintain Jinja on a strategic storage model basis. The lease contract would determine each party's responsibilities and how the oil companies are compensated. Since strategic storage is provided mostly for the benefit of the consumer, the consumer should bear all the costs. Government Ownership in Oil Companies 2.37 At present, the Government owns 50 percent of Agip and Total. These two companies together have a market share of 31 percent, giving the Government a control of 15 percent of the market. Because many of the large consumer accounts in Uganda are parastatals and these sales are usually based on bid tenders from the oil companies, there is a perceived conflict of interest by having a Government interest in the oil industry. There appears to be little or no reason for Government investment in these oil companies and the Government should consider divesting its holdings. F. ILLEGAL IMPORTS 2.38 During the past couple of years, the Anti-Smuggling Unit of the URA (Uganda Revenue Authority) has made considerable strides in curtailing petroleum smuggling at the eastern border: it has impounded trucks, arrested people and audited service stations. Trucks transporting petroleum products to Kampala are now required to form a convoy of 8-10 trucks at the border before being allowed to continue. After an  - 20 - appropriate time period, Customs checks the oil companies' terrninals to verify the arrival of the trucks. Trucks that are in transit through Uganda to Rwanda and eastern Zaire are, however, a problem, since the Customs have limited possibilities to control them. Given the large price differentials between Kenya and Uganda, a certain amount of smuggling is to be expected. In order to further discourage smuggling, however, it would be worthwhile to investigate whether harmonization of prices in border areas with adjacent countries could reduce illegal imports without reducing fiscal revenues. G. ETHANOL BLENDING PROGRAM 2.39 With a view to reducing the high petroleum products import bill, the Government has seriously considered producing ethanol at the main sugar estates. A study envisioning the construction of two ethanol plants, one at Lugazi Sugar Estates and one at Kikira Sugar Estates, was completed in November 1992, and concluded that the projects were not viable.'2 The oil companies have also raised doubts on the viability of the program and indicated that they would participate only if the Government guarantees full cost recovery. The Government should not offer any incentives for potential ethanol producers and should not guarantee a market. Instead, the Government should steer clear of this project and pursue other measures for reducing fuel consumption, for instance by encouraging end-use efficiency, including better maintenance of vehicles. H. PETROLEUM EXPLORATION 2.40 No oil discoveries have been made, though three main sedimentary basins have been identified in the west of Uganda, and several others in other regions. The western basins have sediments of around 4,000 meters in depth and are potential prospects for petroleum discoveries. However, only aeromagnetic, gravity and surface geological surveys have been conducted and no seismic survey or exploratory drilling has been pursued. Product sharing legislation is in place and the MNR has prepared a promotional package to attract companies to explore in Uganda. Several companies have expressed interest but none has made concrete proposals. A perceived problem has been whether any discovery would be marketable. A large discovery, adequate to underpin either a refinery or a pipeline would be very attractive to the private sector because of the high prices of petroleum products in Uganda. However, smaller discoveries might have to be moved to refineries abroad by tankers, thus incurring prohibitive transportation The economic analysis included in the study indicated that the projects were not viable at that time for several reasons, namely: (a) the plants were to be owned by the sugar estates and, hence, partly owned by the Govemment, which may have caused some financing difficulties; (b) the anticipated loan financing had an exposure fee of US$ 300,000; (c) Govermnent import duties of 25% were assumed to apply to all imported plant equipment; (d) the CIF landed Karnpala cost for petrol was USh 277 per litre (23.1 US cents/litre) which was required as the ethanol selling price. Since then, the foreign exchange market has been liberalized and the CIF landed Kampala cost of petrol is USh 255 per litre (22.2 US cents/litre).  - 21 - costs. Although the potential for petroleum discovery is present in the Ugandan portion of the African Rift system, there is also a high risk of failure; this is truly a frontier basin. 2.41 Uganda has already build up a considerable capacity in oil exploration promotion and further institution building efforts could be deferred until an oil discovery is made. The Government should focus its efforts on promoting Uganda's oil potential to the small independent oil companies, because the major players may be only moderately interested in Uganda at this time, given the low world oil prices and more promising prospects in other parts of the world.  - 22 - 3. POWER SUB-SECTOR 3.1 Much has been done to bring the power sector back from the depths to which it had fallen during Uganda's years of civil strife. With the support of IDA and a number of other multilateral and bilateral donors, who have provided generous financial support and a wide array of technical assistance, the government has invested heavily in rehabilitating the sector's infrastructure and rebuilding its institutions. On the physical side, the results have been broadly satisfactory. While progress has been much slower than hoped, the work of rehabilitating the country's prioritv generation, transmission and distribution facilities is now well advanced. Unfortunately, the results on the institutional side have been far less satisfactory. Although improvements have been made, UEB remains inefficient, provides poor quality service and is still in a precarious financial condition, unable to earn a profit, service its debts or contribute significantly to meeting its investment needs. Therefore, the sector lacks the institutional strength to play its role in the economic and social development of the country: to meet the energy needs of a growing economy and provide more of the population with the benefits of electricity. 3.2 The principal issues facing the sector are, thus: * Institutional Change -- Establishing institutions that operate efficiently, provide high quality service and are financially sound. Private Sector Participation -- Making greater use of the resources of the private sector to help address sector issues. * System Development -- Choosing a least cost-path for expanding system capacity to meet the needs of a growing economy and take advantage of export markets. * Extending Electrification -- Widening access to electricity by extending the grid and/or opening the way for non grid-connected conventional and non-conventional sources of supply. The principal options for dealing with these issues are examined below, following a brief review of the current situation in the sector. A. THE POWER SYSTEM Electricity Supply Utility Facilities. For all practical purposes Uganda and UEB depend on a single hydro power source, the Owen Falls plant which opened in 1954 and originally had an installed capacity of 150 MW (IOxlS MW). The dam, powerhouse and generators  - 23 - have been undergoing intensive rehabilitation since 1986. This work, which was originally scheduled to be completed by 1990, is now expected to take until 1997. When completed, it will raise the capacity of the plant to 180 MW; it will be capable of generating some 1000-1,100 GWh/year under present operating arrangements. UEB operates also a mini-hydro plant at Kabale, and eight small diesel generating plants in isolated svstems (units of less than 200 kW each). The transmission facilities include 887 km of high voltage lines, mostly at 132 kV. There are 6,110 km of primary distribution lines at 33 and I 1 kV, 540 MVA of power transformers and an undeternined amount of distribution transformers. The transmission and distribution systems have also benefited from intensive rehabilitation works under which many lines have been replaced and new transformers installed. during recent years. The general system map in Annex 3.1 shows the locations. and a list of facilities is reproduced in Annex 3.2. 3.4 A second power plant, the Owen Falls Extension, is also now under construction. The Extension's installed capacity will be 80 MW (2x40 MW) initially, with provision for adding another 120 MW. The anticipated energy production will be between 500 and 600 GWh/year, raising system generating capability to some 1,500- 1,600 GWh/year. The Extension was intended to be in commercial operation in 1995, but is now scheduled for commissioning in 1998. 3.5 Utility Operations. The system operates inefficiently and provides poor quality service to consumers. Losses are very high, with some 215-250 GWhlyear, or about 25 percent of total generation, having gone unaccounted for over the past three years (1992-94). Excluding exports, losses appear even higher, amounting to about 30 percent of energy sent out to Uganda over the same period. While these are all losses to UEB, they are not all losses to the economy. UEB's billings are notoriously inaccurate and it is estimated that as much as one-third of amounts reported lost are non-technical losses reflecting consumption by unregistered or illegally connected consumers. Nevertheless, at an estimated 20 percent or so, the apparent technical losses to the system denote an extremely inefficient operation. 3.6 Power outages are frequent, as are brownouts (periods with unsatisfactory voltage levels, generally below 90 percent of nominal value) and wide voltage fluctuations. Customer service by the utility is slow or non-existent. The outages are caused both by system breakdowns and deliberate load-shedding by UEB. In either case, they impose severe costs on the economy and on the system's customers, as also do the frequent voltage fluctuations that shorten the life of light bulbs, and damage motors and appliances. Since no data on service quality is systematically collected, evidence of the extent and trend of the problem is almost entirely anecdotal. Most recently, such evidence indicates some improvement in the situation, as might be expected in view of the progress made in system rehabilitation. Industrial and commercial consumers indicated they were experiencing fewer difficulties when informally surveyed in mid- 1994 and UEB reported at the same time that load shedding due to distribution deficiencies and faults at Owen Falls were down sharply.  - 24 - 3.7 Non-Utility Facilities. Many industrial and commercial enterprises have their own emergency generators but the number of plants owned and operated by industry and by private users is not known with precision. The largest privately-owned facility is a 5 MW hydro plant at Kilembe, built to serve a copper mine which is shut down at present. At present the plant serves only the community, and acts as backup in emergencies for UEB facilities. A few thousand photovoltaic installations are believed to be in use in rural areas, where they mainly supply lighting to residences and small organizations. There is no evidence as to whether, or to what extent, small gasoline generators or car batteries are used for such purposes, as they are in many parts of the world. Consumption of Electricity 3.8 Consumption. Only a small part of the population of Uganda is supplied with electricity and national consumption is very low. Service is currently available to only about 5 percent of the population of 18 million. The great majority of the people are either not within reach of the electricity system, or cannot afford the service. On a per capita basis. the national average electricity consumption is a very low 44 kWh per year. The average is made up of a relatively high energy consumption in the Kampala-Entebbe district (approximately 170 kWh per inhabitant) and consumption of less that 10 kWh/year per inhabitant in most outlying districts. Of the' officially reported 110,000 electricity users, more than half are in the capital, Kampala, and most of the remainder are in the major towns (according to a recent UEB survey, the real number of consumers may be as low as 67,000). 3.9 Most of the electricity is consumed by residential or service sector users. Productive uses account for a small proportion of the total. The main categories of users are residential (55% of total energy billed in 1995), commerial/general (24%), industrial (20%), and street lighting (1%). The bulk of the electricity (72%) is consumed by the 12 percent of the population that lives in the Kampala metropolitan area, and in the nearby cities of Entebbe and Jinja. The towns in the outlying districts have a much lower density of energy consumption. In sum, electricity serves mainly the capital region, and a few of the other major towns. 3.10 UEB's sales records point to the not unexpected picture of sharply increasing loads during the period of recovery from civil strife beginning in the mid 80s, followed by much slower growth in recent years ( Table 3.1). UEB's reported sales in Uganda increased by about 8 percent annually during 1986-90, rose sharply again to about 500 GWh in 1991 but have stagnated since then. However, UEB's sales are an uncertain guide to actual consumption trends, depending as they do on the vagaries of its billing practices. A better picture may perhaps be derived from looking at the difference between total electricity production and exports (presumably the two most reliable statistics reported by UEB) which indicates the amount of electricity (including purported losses) supplied to the Ugandan market. "Total supply" rose more rapidly than reported sales in the earlier years and has continued to increase in recent years, albeit at a  - 25 - slower pace. This picture seems to better accord with other indicators, such as the number of connections, which has continued to increase in recent years. 3.11 The rapid load growth in the recovery years was led by residential consumers. However, reported sales to residential consumers peaked in 1991 and appear to have dropped off since then. Sales to commercial consumers have also been flat in recent years. The recent weakness of sales in these categories has been offset by growth in sales to industry and in the catch-all "general" category of consumers, and may, thus, indicate problems in customer categorization. Table 3.1: Electricity Supply and Demand, 1986-95 (GWh) 1995 1986 1990 1991 1992 1993 1994 Preliminary 1. Production 637 738 785 994 978 1017 1057 2. Exports 231 166 150 289 259 252 195 3. Total Supply to Uganda (1-2) 406 572 635 705 719 765 862 4. Sales 299 408 504 485 473 489 488 Residential 139 274 328 263 272 286 267 Commercial/ general 108 84 100 142 127 116 120 Industrial 41 45 65 73 71 82 98 Other 11 5 1 1 18 3 5 2 5. Losses (3-4) 107 164 131 215 246 276 374 Note: Losses appear to have increased significantly in 1995. However, this may be due to the preliminary nature of the 1995 data and deficiencies in thc billing records. 3.12 Resources. Uganda is well endowed with resources for power generation. Most important are the hydro power resources of the White Nile along which six major sites, with an estimated total capacity of 1,800 MW, have been identified between Owen Falls and the border with Sudan (see Annex 3.3 for details). In addition, there are an unidentified number of mini-hydro sites on the tributaries of the Nile, and a number of geothermal occurrences south of Lake Edward, which might be developed on a small scale to supply power in areas remote from the UEB grid. Uganda also has excellent solar and other renewable energy resources (see Chapter 4). Institutional Framework 3.13 Structure. The power sector is regulated by the Electricity Act of 1964, which makes the Government (the Ministry of Natural Resources) responsible for policy formulation and operational oversight while leaving UEB a fair degree of autonomy in the conduct of day to day operations. The Act gives UEB a monopoly in generation, transmission, and distribution of electricity in Uganda. It also allows UEB to sell power  - 26 - abroad. In practice, UEB not only operates both at the retail and wholesale levels in Uganda and exports power in bulk to the neighboring countries but also engages in a wide range of ancillary activities, such as manufacturing electrical products and building staff housing. While the Act does not give UEB an explicit regulatory function, it does require anyone who wishes to produce or sell electricity outside their own premises to obtain a license from UEB. 3.14 Performance. In addition to the operating difficulties already noted, UEB has also been a very weak financial performer. UEB's financial statements indicate that during the last five years, 1990 to 1994, two years ended with net operating losses, and three years showed a nominal profit. However, as the auditors' qualifications note, the financial statements do not include sufficient allowances for bad debts and for doubtful accounts receivable. If suitable allowances were made, it is estimated that the 1994 accounts might show a substantial loss and a negative rate of return. Be this as it may, UEB's financial situation at present is clearly such that it cannot earn an adequate rate of return, service its debts, and contribute significantly to the financing of needed investments. It is, thus, not a financially viable entity at present. 3.15 UEB's problem has not been low tariffs. As the result of sharp increases in 1992 and 1993, and the rising value of the shilling, UEB's average tariff now stands at the equivalent of about USh 98 per kWh, which is in line with the Long-Run marginal Costs of Supply (LRMC).'3 Rather, UEB's financial difficulties stem mainly from high system losses, inaccurate billing and poor collections. In recent years, UEB has been sending out bills for only about two-thirds of the electricity it has supplied to the domestic market and collecting payment for only about half of the amounts billed -- i.e.. it has been receiving revenue for only about one-third of the power supplied to Uganda. With billings so far exceeding collections, accounts receivable have been far above the 3 months' level agreed with IDA (UEB's tariff schedule is reproduced in Annex 3.4). 3.16 High staff costs have also contributed importantly to UEB's financial difficulties. From 1989 to 1993 the number of employees increased by 40 percent to 3374 while the number of customers increased by 17 percent from 94,000 to 110,000. The ratio of customers served per employee has deteriorated from 39 to 33. This ratio is a commonly used indicator, which, for a reasonably efficient utility, should be in the 100- 200 range. Salaries and wages have continued to increase both in terms of remuneration per employee, and as a proportion of the total operating expenditures of UEB. While in 1989 salaries and wages made up 22 percent of total operating expenditures excluding depreciation, by 1994 they had risen to 43 percent (Annex 3.5). B. INSTITUTIONAL CHANGE 3.17 While much of today's difficulties can be traced to Uganda's years of civil strife and disruption, the fact that sector performance remains so weak after many years 13Estimated in 1990 at SO.07/kWVh. SAR, Third Power Project, para 1.17.  - 27 - of physical recovery and much technical support makes a clear case for significant institutional change. The need for change seems most pressing in three areas: (a) sector organization, particularly concerning the relations between the government and operating entities; and (b) the execution of the distribution and commercial functions, which lie at the heart of UEB's operational and financial difficulties. Sector Organization 3.18 Experience indicates that the power sub-sector functions best where the operating entities are autonomously managed, commercially oriented and accountable for their performance. This is not the case in Uganda. Although under the Electricity Act UEB is autonomous in principle, the Minister not only has the authority to give UEB directions on matters of policy but also must approve changes in tariffs or other major measures. He also appoints its Board of Directors, which consists entirely of public officials who serve at the Minister's decision, and which appoints UEB's chief executive, the Managing Director. As regards commercial orientation, no organization which "loses" one-quarter of the value of its total production and fails to collect payment for another quarter, can be mistaken for a commercial enterprise. Finally, as concerns accountability, the Ministry lacks the resources necessary for effective oversight over what is Uganda's largest bureaucracy which, like most such organizations, often moves in its own ways. 3.19 The establishment of a new relationship between the Ministry and UEB, based on arm's-length regulation of the utility's operations and finances in accordance with well structured criteria, could do much to inject a more meaningful measure of autonomy, commercial orientation and accountability into the sector. Having established "rules of the game" would benefit both institutions, giving UEB greater operational autonomy while enabling the Ministry to not only exercise effective oversight but also to devote a greater share of its attention and resources to its primary policy function. 3.20 While arm's-length regulation length can often best be achieved through the establishment of an independent regulatory agency, given the scarcity of technical and managerial resources in Uganda it may be more practical, at least initially, to think of locating the regulatory function in an administratively distinct office of the Ministry. Whatever the location, the principal objectives of regulation would be to ensure that: * the supply of electricity is adequate to meet the needs of a growing economy, * electricity is generated, transmitted and distributed as efficiently as possible, * high levels of reliability are maintained, * access to electricity is expanded to the extent economically feasible,  - 28 - * revenue is sufficient to cover economic cost, and * entry to the sector is open to all who can contribute to the achievement of the above objectives. 3.21 Regulating Operations. Operations can be regulated by influencing either the conduct or the performance of the operating enterprises. Conduct regulation relies on direct control of enterprise behavior through, e.g., the detailed vetting of operating budgets and investment plans. It has been the approach traditionally emploved in most developing countries where, as in Uganda, power operations have been reserved to the public sector. It has rarely been successful because it blurs the distinction between regulation and management, deprives enterprise managers of real responsibility and opens the door to political interference. 3.22 For these reasons, there has been increasing interest in performance based regulation, which aims to secure desired outcomes by setting targets and providing incentives. The twin keys to successful performance regulation are the establishment of credible targets and the maintenance of accountability for the achievement of these targets. To be credible, the targets must be set in terns of performance indicators that are objective and measurable and, like all good targets, must reflect a judicious balance between what is desirable and what is achievable in a given time frame. Targets should be selected and framed to cover the areas of perfornance most in need of improvement. They may include some or all of the following: o Supply: kWh generated. peak demand met Efficiency: fuel consumption; reduction of line losses; staff per kWh sold - Reliability: reduction in number/duration of outages and brownouts; voltage maintenance * Access: number of new connections * Investment: physical implementation of projects; adherence to project budgets * Finances: rate of return; self-financing of investment; reduction of receivables 3.23 Performance based regulation is most likely to be effective where targets are established by mutual agreement between the regulator and the operating enterprise; where the enterprise is given both the resources and the incentives to meet the agreed targets; and where there is a suitable mechanism for ensuring accountability. The targets, resources and incentives should be defined in contracts. These contracts include: (a) performance contracts that define the relationship between the Government and  - 29 - government employees managing a utility (box 1); and (b) management contracts that define the relationship between the Government and a private firm contracted to manage a utility (box 2). Such contracts contain not only performance targets but explicit reciprocal obligations on the part of the regulator (government) to, for example, allow tariff increases, and obtain foreign loans if the enterprise performs as agreed. Because the targets are mutually agreed upon, they are more likely to be realistic and to reflect a real commitment on the part of the enterprise than targets handed down unilaterally by the regulator. And because they contain verifiable, numerical targets, performance and management contracts provide a means of ensuring that enterprise managers know exactly what they will be held accountable for and how it will be measured. 3.24 While both performance and management contracts aim to improving efficiency, the experience of these two types of contracts has not been alike. A recent World Bank study found that management contracts, though not as widely used, have been more successful than performance contracts.14 The main weaknesses of the performance contracts studied were that they: (a) did not reduce the manager's information advantage: instead, managers were able to use their knowledge of the firm to negotiate soft targets that were easy to reach; and (b) did not include rewards and penalties that could motivate managers and staff to exert more effort. In addition, government regulators often lacked the power to enforce the contract terms reliably. The most successful management contracts, on the other hand, involved competitive bidding for the contract to reduce management's information advantage; established meaningful rewards and penalties, usually linking the contractor's fee to the firm's performance; and elicited a strong commitment from both parties. For example, they covered longer periods, included the possibility of renewal, and provided for arbitration of disputes. Overall, the World Bank study concluded, that, the greater the participation of private agents in ownership and management, the better the enterprise performance. 14 Bureaucrats in Business, a World Bank policy research report; World Bank 1995.  30 - Box 1: Examples of Performance Contracts France: The first contrat-plan was signed with Electricite de France (EdF) in 1970 and is considered the contract plan model. It reduced government control by allowing greater regulation by market forces. This was in response to EdF's entering the competitivc industrial-heating market, adopting a profit-center approach and decentralizing financial management. After 1987. EdF expanded its scope for competition by exporting its surplus capacity to other European utilities. Its contract plan therefore focused more on increasing efficiency and reducing costs. Five-year contract plans regulate the companx by comparing actual performance against key obiectives such as productivity targets, rate commitments. sales and investment strategies, self financing and debt strategies, and wage and salary scales. Objectives are set by each department's corporate plan, and efficiency is encouraged by comparing performance of similar units. Rates are based on the marginal cost of system development. Price increases are limited to a ceiling negotiated with the General Directorate of Consumption and Competition. and are determined by the inflation rate minus a percentage for producti', it, gain. India: In India performance contract - or memoranda of understanding - are used at both national and state level to give incentives for improved performance by generation. transmission. and distribution utilities. For India's National Thcrmal Power Corporation. the performance contract specifies such desiderata as generation efficiency, forced outage reductions. and plant construction schedules. The incentive is increased funding and access to improved generation technology. In the case of the State Electricity Boards. performance contracts set out conditions for customer service. distribution loss targets. and reductions in load shedding in exchange for increased funding from the central government (and the World Bank). Participation by each SEB is voluntary. Morocco: Since 1987 a new form of regulation has been introduced for the national power utilitv Office National de IVElectricite (ONE) which signs a 3-year renewable contrat-programme with the govemment. The contract owes much to the 1984-88 contract plan of EdF and ONE's objectives, and govemment obligations are portrayed in general terms. In the first 3-year contract. ONE undertook to satisfy its supply obligations at least cost within specified financial and economic parameters. and the Govemment undertook. inter alia. to raise tariffs to permnit a minimum level of self- financing (30% after 1990), to grant greater financial autonomy and to contribute to the financing of ONE investment. The physical and financial performance indicators included: level of productivity of personnel, level of productivity of equipment. number of workers per installed kW in production, profit level of the grid, consumption of inputs, average level of value-added. rate of return on fixed assets, ratio of financial equilibrium. debt/equity ratio. debt service ratio, ratio of self-financing to investments, and level of investment financing by extemal loans. Box 2: Sample of Management Contracts Enterprise Countrv Contractor Sector Successful Manila Termina Philippines ISTSI (domestic) Ports Mumias Sugar Kenya Booker Tate (UK) Sugar Hino-Pak Pakistan Consortium (UAE, Japan) Auto/truck assembly Domestic Appliances Pakistan Al-Futtain (UAS) Electrical appliance assembly Guyana Sugar Corp. Guyana Booker Tate (UK) Sugar SONEG Guinea SEEG (Guinea and France) Water SNE Central African Republic SAUR (France) Water Shepheard Hotel Egypt Helnan (Denmark) Hotel Cairo Sheraton Egypt Sheraton (USA) Hotel Nile Hilton Egypt Hilton (USA) Hotel Sofia Sheraton Bulgaria Sheraton (USA) Hotel Hotel Stadt Germany InterContinental (USA) Hotel Sri Lanka plantations Sri Lanka Domestic contractors Tea, rubber Borderline Linmine Guyana Minprod (Australia) Bauxite mining Mount Kenya Textiles Kenya AMSCO (Netherlands) Textiles Naga Power Plant Philippines Ontario Hydro (Canada) Electricity State Gold Minig Co. Ghana Canada-Guyana Mining (Canada) Gold mining Light Rail (LRTA)Philippines Meralco (domestic) Transport Failures Nzoia Sugar Kenya Arkel (USA) Sugar Sanata Textile Limited Guyana SOE (Chinal Textiles Source: Bureaucrats in Business, World Bank Policv Research Report, 1995.  - 31 - 3.25 Tariff Regulation. The regulatory mechanism must ensure that tariffs are (a) regularly reviewed and (b) adjusted in accordance with sound economic and financial criteria. 3.26 Ideally, tariffs should: * provide power producers with correct signals about the true economic costs of supply, thus encouraging them to make least-cost operating and investment choices, * guide consumers to use electricity only to the extent economically justifiable, thus encouraging conservation, * generate the internal resources necessary to maintain the sector's financial health and contribute to meeting its investment needs, and * be affordable by as broad a segment of the population as possible, including the poor to whom electricity is being supplied more on social than on economic grounds 3.27 In practice, tariff regulators seek to approach these ideals by using adjustment criteria that focus either on financial results or on the cost of service. The more traditional approach is to adjust tariffs on the basis of such familiar financial criteria as rate of return on assets or contribution to investment. This approach has the double advantage of using well known and usually readily available financial data for tariff calculation. and of linking tariffs directly to desired financial outcomes. Its principal disadvantage can often be the granting of tariff increases on a "cost-plus" basis to power producers, giving them no incentive to improve efficiency and reduce financial costs to economically justifiable levels. 3.28 The other, more recent, approach is to link tariffs directly to the economic cost of supply, using marginal-cost or avoided-cost models. The avoided-cost model, for example, establishes the cost of energy and capacity at different times of day and in different seasons (important for a hydro-dominated system, such as Uganda's). To provide incentives for maintaining operating costs at efficiency levels, energy charges for hydro plants are adjusted with reference to O&M costs at the most efficient plants in the system while, for thermal plants, adjustment is made on the basis of cost indices determined by the most efficient fossil-fueled units. To promote least-cost development, capacity charges are adjusted to reflect changes in the cost of generating and other equipment required for system expansion using the best technology. The principal advantage of this approach is that it provides the correct economic signals to producers and consumers, and strong incentives for cost containment. The principal disadvantage is that the cost calculations can be difficult to make, and difficult to understand.  - 32 - 3.29 The choice of criteria for tariff adjustment may be less important than the establishment of a process for their application that is as transparent and as automatic as possible. To begin with, the criteria should be carefully defined, fully disclosed and clearly explained to the general public as well as to the effected entities. Secondly, a regular process for tariff review and adjustment, on at least an annual basis, should be established. Fixed periods of time should be specified for the various stages in the process, including the preparation and submission by UEB of tariff increase proposals justified in terms of the established criteria; review of the proposals by the regulatory authority; public comment and/or public hearings; and announcement of the regulator's findings. If tariffs are adjusted regularly according to accepted technical criteria, much of the political sting will be taken out of tariff adjustment. Box 3: Price Regulation Price regulation is the most important mechanism that governments have for rewarding or penalizing regulated monopolies. An ideal price regulating system will provide incentives td invest and improve service and will reward improvements in efficiency, while at the same time passing on the largest possible share of the resulting savings to consumers. In short, ideal price regulation will achieve outcomes very similar to a competitive market. Schemes to regulate the price of basic infrastructure services include rate of retum, price caps, and benchmark regulations. Each of these pricing schemes has its own inccntive properties. Briefly, under rate of return regulation, prices are set so that the firm can recover its costs and make a fair rate of return. This scheme has been criticized on the grounds that it induces a firm to inflate costs, invest excessively, and engage in cross subsidization by shifting costs from services in which it faces competition to those regulated services in which it does not. Price caps and benchmark regulations both potentially work better than rate of return in motivating producers to reduce their costs and pass some of the savings on to consumers. Under price cap regulation, regulators impose a ceiling, often based on the retail price index, on the average tariff increase for a pre specified basket of services in which the firm has a monopoly. The regulator can periodically change the pricing formnula so that improvements in efficiency are passed on to the consumers. In theory, this avoids the problems inherent in rate of return regulation, since firmns are protected from inflation and have no incentive to expand their asset base inefficiently; but, to the contrary. they can capture any benefits from improved efficiency that lowers costs below the price ceiline in the period between adjustments in the pricing formula. Benchmark regulation works on a similar principal, except that prices are set according to the costs of a similar firm elsewhere or a hypothetical efficient firm. Again, management has an incentive to improve efficiency. because the firn reaps the benefits until prices are renegotiated. Strengthening the UEB 3.30 As already discussed, UEB's operational and financial problems lie largely in the areas of distribution and commercial operations. The persistence of high system losses and poor quality service despite the recent rehabilitation of the distribution system suggests that the problems are more than physical. Inadequate planning, leading to the haphazard growth of lines and connections, and the inadequate organization of maintenance appear to be among the root causes of poor performance on the distribution side. Similarly, numerous organizational and management shortcomings ranging from the lack of an accurate customer database to inadequate systems and controls for meter reading and cash collection, have been identified on the commercial side. 3.31 In 1994, UEB, working in close collaboration with the World Bank which had become increasingly concerned at the worsening of accounts receivable, adopted a series of "emergency" measures aimed at redressing the shortcomings in its cornmercial operations. These included appointing a new Chief Commercial Manager and having  - 33 - him report directly to the Managing Director; reorganizing and decentralizing the Kampala District service function; introducing special collection and disconnection tearns and creating and commissioning an independent unit to monitor their performance; and, perhaps most importantly, re-registering all customers in order to create an accurate client data-base. A consultant study in 1995 l broadly endorsed UEB's efforts and recommended they be strengthened by, inter alia, merging the distribution and commercial functions; replacing the existing billing/collection system with a modem computer customer accounting system; and thoroughly revamping meter reading processes and procedures. UEB generally accepted the consultant's recommendations and adopted a monitorable plan to implement them. 3.32 While UEB has undertaken some remedial measures, they have been slow to take hold and they have not, as yet, shown any appreciable impact.'6 Receivables continued to rise in 1994 and the first quarter of 1995, reaching the equivalent of 8.7 months' billings in March, with the result that the target agreed with IDA of reducing them to the 3 months' level had to be abandoned. The slow progress and still uncertain outcome of UEB's ongoing efforts raise the issue of whether greater institutional change is required. Three change scenarios seem particularly worth exploring: contracting out UEB's distribution and commercial operations to a management firm; establishing a new distribution company separate from UEB; and contracting out the whole UEB to a management firm. 3.33 Contracting Out Distribution and Commercial Operations. This would involve contracting with a qualified firm to manage all or a part of UEB's distribution and commercial operations. This has been done by a number of utilities facing problems similar to UEB's including, for example, the distribution company in Ghana which has employed a European utility to run its billing, collection and customer service functions. The principal condition for success with contracting out, in addition to the selection of the "right" contractor, appears to be the negotiation of a contract that carefully spells out the contractor's authority and responsibility. The contractor must have adequate authority to manage --i.e., to make the changes in the organization, practices and procedures, and staffing necessary to make a difference. The contractor also needs to be held responsible for the achievement of specified, monitorable performance targets. 3.34 The principal advantage of contracting out is the placing of operations in the hands of new and experienced managers with responsibility for change who can, by signaling an end to business as usual, facilitate the introduction of changes (e.g., in staffing) difficult for the utility's own management to make. The principal disadvantage, in addition to the difficulties of contractor selection and contract negotiation, is the 15 Customer Services Management Project, ESBI International Consultants Ltd., Dublin, Ireland. As regards the re-registration of customers, for example, a 1987 study (Coopers & Lybrand) reported that "UEB had recently begun an enumeration of customers".  - 34 - placing of function in the hands of others, a very difficult adjustment for any utility management to contemplate. The 1995 consultant study recomnmnended against contracting-out for this reason, and also because it "....would be premature for UEB to decide on any contracting out option until it has modernized its system, procedures and controls in order to put these activities on a sound, efficient and controlled basis." However, this view appears to beg the basic question of UEB's ability to "heal itself' in the absence of the sort of change that would be involved in contracting out. Saying that contracting out would be premature until UEB has put its distribution and commercial functions in good running order is a bit like advising someone who is ill against calling in a doctor until he/she is well again. 3.35 Establishing a Separate Distribution Company. Creating a new utility for distribution is a more radical option but one which perhaps offers the best means of breaking with the past and creating an institutional environment conducive to change. Transferring responsibility for distribution and comrnmercial operations to a new, specialized enterprise, would create a dedicated institutional base whose sole business would be reducing losses, improving the quality of service, expanding the distribution system along rational lines, and rectifying the critical need in billing and collections improvements. In such a company, distribution and commercial operations would cease to be the least glamorous and rewarding component of a multi-purpose organization, and a competent and competitive staff trained in these functions and looking toward them for career advancement could be created. A specialized institution could more directly and easily be held accountable for expanding service and for its quality and cost to consumers. The distribution company wvould buy power in bulk from UEB (or any other power producers). To succeed, it would have to be assured under the regulatory system of sufficient autonomy to charge retail tariffs that provide a sufficient margin over the bulk tariff to enable coverage of operating and investment costs. 3.36 Separating distribution from generation and transmission is a common arrangement throughout the world which has generally worked well where the distribution enterprise has had sufficient autonomy to operate commercially, and by imposing adequate tariffs. It is also an arrangement that can facilitate the entry of private power producers by providing them with a customer who is not also a competing producer. Drawbacks to this approach include the difficulty to break up existing institution and create new ones including the valuation and transfer of assets within a given time frame. Additionally separating distribution from generation and transmission may also encumber co-ordination in a small system, such as Uganda's. 3.37 Contracting Out the Whole UEB. While contracting out the distribution and commercial operations to private management or establishing a separate distribution company would have the potential of addressing key financial problems, these measures would not address problems in the operation, maintenance and development of the generation and transmission systems. Hence, a major disadvantage of contracting out only the distribution and commercial functions, is, that the generation and transmission operations of UEB would not benefit from it.  - 35 - 3.38 Therefore, it would appear more realistic to consider contracting out the whole UEB to a management firm or consortium. This approach would help avoid potential coordination problems between the distribution and generation/transmission functions. It would also address comprehensively all managerial, operational, and development planning problems of UEB; and at the end of the contracting out period, give to the Government a solid information basis to decide on the best institutional arrangements for reforming the power sub-sector. C. PRIVATE SECTOR PARTICIPATION Options for Private Sector Participation 3.39 The power sector clearly needs a great deal of technical, managerial and financial help. The traditional sources of such assistance to Uganda, bilateral and multilateral aid donors, have contributed a great deal but their impact has been limited and their resources are constrained. Other developing counties in similar circumstances have been tuming increasingly to the private sector not only for a wide variety of contractual services but for the financing, construction and operation of major investment projects. 3.40 This section considers different options by which the private sector could take an active role in the development of Uganda's power sector as well as contribute to efficiency gains by imparting state of the art management skills transfer. Given the current size and condition of the Uganda power system, the most promising private participation options include: (a) provision of services; (b) decentralized power systems; and (c) independent power projects. 3.41 Provision of Services. In addition to contracting out the management of specific functions where UEB's performance is most in need of improvement (e.g., distribution and commercial operations), as already discussed, there are a wide range of ways in which Uganda can draw more heavily on the private sector for critical services. These involve according the private sector varying degrees of management responsibility. At one end of the spectrum lies the possibility of private sector management of the entire UEB operation under suitable contractual arrangements, as has been done elsewhere in Africa. Toward the other end lie the more limited, traditional services provided by the private sector such as: (a) employing consultants in line as well as advisory positions to fill key skills gaps (b) twinning arrangements, under which a suitable foreign utility would provide a team of experts to support UEB in specified areas over a number of year; (c) making greater use of contractors for operations that are now carried out by force account; and (d) turning over UEB's non-core activities (e.g., the provision of staff housing) to the private sector either through contractual arrangements or by privatizing (selling) them. 3.42 Decentralized Power Systems. Decentralized power systems are essentially smaller integrated power systems that are not connected to the grid. An  - 36 - important feature of the African power sector is that there are many load centers in semi- urban areas located away from generation resources. Consequently, there is a niche market for private investments, both domestic and foreign, to set up community-based generation and distribution systems in these semi-urban areas. Such decentralized power systems may provide scope for the next wave of private investments in Africa in general and Uganda in particular. 3.43 Independent Power Projects (IPPs). Projects in which private investors, either alone or in conjunction with existing public utilities, finance, build, own and operate generating plants-- are an increasingly important phenomenon in many developed and developing countries. In the developing world, the main reason behind the growth of IPPs has been the inability of the traditional sources of capital --governments and aid donors-- to meet the growing development requirements of the power sector. IPPs have been moving in to help fill the gap, mainly in Latin America and in Asia, where they have been attracted not only to countries with large power markets that are considered good credit risks (e.g., China, Chile, Malavsia), but also to some smaller countries whose creditworthiness is more doubtful (Guatemala, Jamaica, Belize). However, the value of IPPs lies not only in their ability to raise significant amounts of capital but also on the fact that private participation brings with it the latest technologies and management expertise, and the assurance that plants will be completed rapidly and operated efficiently. While most IPPs have involved thermal plants, private investors have been showing increasing interest in hydro. IFC has approved financing for seven hydro projects and over twenty projects in ten developing countries are proceeding with private funding. 3.44 In most cases, private investors provide equity and debt financing for IPPs on a project or limited-recourse basis, relying on the prospective earnings of the project itself to repay their investments. While the investments are usually not directly guaranteed by governments, back-up or "counter" guarantees for the commitments of power purchasers, fuel suppliers and other public sector entities whose perfornance is critical to the success of the projects are often called for. Where country credit and/or other risks are seen as high, guarantees from bilateral and multilateral agencies may also be essential to the successful financing of at least the first IPP. The process of negotiating the numerous, interlocking agreements is often a long and difficult one. 3.45 Export projects are something of a special case. Since they earn foreign exchange, they can be set up on an "enclave" basis, the essence of which is that earnings are deposited abroad in escrow-type accounts from which direct payment is made to suppliers and creditors and to meet other obligations. Such an arrangement is usually very attractive to investors. Uganda has already moved towards IPPs when it signed a Memorandum of Understanding with a private investor group for the Bujagali project. To set up Bujagali along these lines implies the need for a trilateral relationship, with Uganda providing the site in return for royalties and or taxes on the IPP earnings; Kenya providing the market under the terms of a power purchase agreement, presumably backed up by performance guarantees; and the IPP agreeing to finance, construct and operate the  - 37 - plant. While this is a familiar model, with two countries involved the negotiating process could be even more complex and protracted than is the case with other types of IPPs. Enabling Environment 3.46 International experience with IPPs indicates the type of environment that would have to be created in Uganda to attract them. The policy frameworks in countries that have successfully attracted IPPs are anchored in the following fundamentals: (i) government commitment to private participation by articulating unambiguous support for private participation; (ii) mostly competitive bidding for IPPs because of transparency of the process and because competition attracts seasoned and committed developers willing to supply at attractive prices (the danger of negotiated deals is that they may produce high prices); and (iii) Government support to facilitate project development and financial closure. 3.47 In considering investment in the power sector, private financiers are mainly concerned with security and profitability. Security is likely to be deemed adequate only where there is a clear government commitment to private participation and where this has been spelled out through the establishment of a legal framework which explicitly encourages private entry, protects private investment and provides for the equitable settlement of disputes. A regulatory regime that provides clear rules of the game is essential for both security and profitability. To meet their concerns about profitability, private investors need to know that they will be able to charge realistic tariffs, that power purchasers (e.g., distribution companies) will be able to honor their contracts; that fuel will be regularlv available at reasonable cost; that they will be able to repatriate their earnings; and that they will be able to exit the country on reasonable terms. 3J.48 The creation of an environment attractive to private investors may seem a daunting proposition. Two facts need to be borne in mind in this connection. The first is that many of the conditions sought by private investors are, in any case, required for the efficient functioning of the power sector (e.g., transparent regulation and adequate tariffs). The second is that it has been possible to meet these requirements in a large number of countries, from China to Chile, having very diverse political, economic and social conditions through a combination of commitment and financial ingenuity. Thus, the term IPP covers a broad range of legal, financial operating arrangements designed to fit particular circumstances. For example, where selling to the grid has posed too great a market risk, projects have been structured to supply power to particular creditworthy industrial consumers (who may in turn be important investors in the project). Or, where fuel supply has appeared to be a major risk, energy conversion agreements have been devised under which the IPPs, in effect, earn a fee for processing fuel that is supplied to them (see box 4. on the Philippines experience). And, where an exit strategy has seemed essential to one or both parties, IPPs have been organized on a BOOT (Build/Own/Operate/Transfer) basis, which provides that investors shall recover their investment over a fixed period after which the project is transferred to the government.  - 38 - 3.49 The process of finding out whether Uganda can in the near term attract private investment in the power sector will not be an easy one. While the necessary institutional arrangements need not be fully in place before trying to attract IPPs, certain minimum conditions must be established and, even when this is done, the process of stimulating investor interest, negotiating project arrangements and raising financing is likely to be difficult and time consuming. 3.50 However, given the pressing need for private capital, technology and management, this is a process well worth initiating. To do so, Uganda will need, first, to clearly and explicitly commit itself to private participation in the sector. The means that the Electricity Act will have to be revised to end UEB's monopoly status and clearly open the door to private investors, domestic as well as foreign. While the new legislation may contain minimum conditions for IPPs (e.g., conceming project feasibility and the credentials of the sponsors), it probably should not go beyond this since the government will need a maximum of flexibility in negotiating financial and other terms on a project- by-project basis. The Government of Uganda is in a process of revising the Electricity Act to clearly indicate its commitment to private sector participation. Legal Framework 3.51 Uganda's Electricity Act does not, per se, appear to pose significant hurdles for private participation. The potential for private participation in Uganda's power sector is significant in both the generation and distribution parts of UEB. However, the mode of private participation in generation is different from that in distribution. That is, private participation in the production of electricity is possible through independent power producers, while private participation in the provision of electricity services is possible through either a performance based management contract or a lease arrangement with an option to purchase the existing system. The attached diagram, Figure 3.1, illustrates the scope for private participation under existing legal framework. which is codified in the Electricity Act of 1961.  - 39 - Figure 3.1: Scope for Private Participation under Existing Power Sector Legal Framework egulation Consultativeounci Sec. 110-i Generation Sec. 13(3Xa) . . . ~~Inside or.outside Uganda Electricitv Uganda rransmission Sec. 17 (I i\,c. 13(3)(b) Distribution Customer End Users ccne 3.52 It appears that the Act has provision for sector regulation, private participation, and retail rate regulation. Some of the salient aspects of the Act are as follows: - Section 3 of this Act re-establishes the Uganda Electricity Board (UEB) as a vertically integrated power utility with monopoly rights (Section 17 (1)) over generation, transmission, and distribution. * Section 9 (a) allows UEB to "take electricity from any person inside or outside Uganda" and Section 13(3) permits UEB to enter into a contract "to take electricity from any person outside Uganda" and "to take bulk supply of electricity from a licensee" subject to Ministerial approval of the terms of the contract. * The Act allows UEB to grant a "license" to generators with capacity exceeding 10 kW provided the electricity produced is used for the generating entity's own consumption. * The Act also authorizes UEB to permit a licensee to generate and supply electricity to other users, in which case the UEB regulates the "manner in which electricity" is supplied, tariffs to be charged, accounting and auditing requirements, and recording and reporting requirements. * The Act requires the establishment of a Consultative Council comprised of twelve members appointed by the Minister for an initial two year term with eligibility for reappointrnent. The Council is required to provide an advisory role to UEB and the Minister regarding issues related to electricity distribution, tariffs, and increasing access to electricity.  - 40 - Although it appears that the Council is well positioned to act as an independent regulator of the power sector, the current Act does not provide the Council "regulatory teeth" The Council does not have any role in issuing "licenses", dispute resolution, or contract approval. However, to the extent a contract affects tariffs, the Council could be engaged in an advisory capacity. The Minister has a rather overarching role in the power sector: make regulations regarding electricity supply (Section 18(4)), dispute resolution {Section 19(2), Section 21 (3), Section 22 (3)}, eminent domain (Section 37(6)). 3.53 Although the Act does not "per se" appear to create barriers to private sector entry; the multiple roles of UEB as an "owner", "operator" and a "regulator" of the power sector has a dampening effect on investors' enthusiasm. 3.54 Because UEB has this "quasi" regulatory function, in that it issues licenses and regulates the operation of the licensees, there is a need for an investigation of the scope for separate regulation. One option for creating a separate regulatory entity would be to vest the Consultative Council the powers and authority to regulate UEB and decentralized power systems. At a minimum, the regulatory authority should: (a) establish transparent rules for setting prices, issuing licenses, and safeguarding the consumers' interests; (b) apply the same principles to all entities; (c) be an independent body and maintain an arms-length relationship with the government; and (d) provide adequate appeals mechanisms for disputes. Regulation of IPPs 3.55 IPPs are regulated indirectly through the competitive procurement process as well as the Government's review of all the contractual documents. Essentially, IPP regulations can be through contracts and hence there is no immediate need for formal on- going regulatory review. Traditional cost-of-service regulation is bound to discourage private participation, and may indeed, make financing projects very difficult. However, the technical and engineering aspects of IPPs can and should be regulated. These requirements can and should be incorporated in the license issued by the regulator to generators.  -41 - Box 4: An Example of Private Power Project in the Philippines: the Navotas Gas Turbine Project The Philippines offers a very good example of opening power generation to the private sector both in terms of number and variety of projects implemented. A key element of the rapid growth of IPPs in the Philippines was the enactment of an executive order in 1987 allowing the private sector to invest in electric power generating facilities, which included cogeneration, grid-connected plants, and plants located outside the national grid svstem that may sell power directly to end users. Since 1991, when the first IPP was commissioned. the state-owned utility National Power Corporation (NPC) has signed 33 agreements with the private sector, 13 of which were completed by the end of 1993. A total of 24 projects for about 2,500 MW were scheduled to be in operation by end 1994. Five different schemes have been adopted: BOT (build, operate, transfer); BTO (build, transfer and operate): BOO (build/own/operate); ROL/ROM (rehabilitate, operate and lease/maintain); and OL (operate. lease). In most projects NPC has taken the fuel supply and cost risk through Energy Conversion Agreements (see below), and the market risk (through "take or pay" contracts) leaving the developer with only the project'country risk. The Project The first IPP contract in the Philippines was for the Navotas Gas Turbine Project. The project, a 210 MW gas turbine power plant, was commissioned in January 1991. The project, costing US $41 million, was developed by Hopewell Project Management Company Ltd. of Hong Kong using a BOT scheme and with limited-recourse financing (no govemment guarantees). The project was financed with equity from Hopewell. Citicorp. Asian Development Bank, IFC and with debt provided by ADB, IFC and a syndicate of commercial banks. The plant was built in twelve months. Under BOT arrangements, Hopewell Energy Philippines Corporation (HEPC), a private company, owns and operates for twelve years and then will transfer full ownership and control to NPC. Under the twelve-year contract. HEPC supplies electricity to NPC. NPC provides the site, the fuel to the plant at no cost and pays HEPC for all the energy it takes. NPC pays a tariff consisting of a capacity fee and a fee for energv delivered from the plant. D. SYSTEM DEVELOPMENT 3.56 Institutional change is a necessary but not a sufficient condition if Uganda is to have what it now lacks -- an efficient, reliable power system capable of expanding to meet the growing needs of the economy. Developing such a system will be a great challenoe while the longer-term institutional arrangements are finalized. It will involve reducing losses and improving service; formulating a least-cost generation expansion plan; and building up the required capability to implement such a plan on time and within budget. However, the power sector also holds out great opportunity in the form of the long-term potential for developing a major export industry based on one of Uganda's principal resources, hydro-power. Meeting Uganda's Needs 3.57 Easing Current Constraints. The power system has been running nearly flat out during the past 2-3 years. In 1995, UEB's energy production of 1,057 GWh and its peak load of 161 MW were close to the maximum capacity of the Owen Falls plant. This tightness was reflected in the need for regular load-shedding and in UEB's voltage  - 42 - and other service problems already noted. The completion of work on the last two units to be rehabilitated at Owen Falls, which should be done by 1997, will provide some additional headroom over the next few years by raising installed capacity to 180 MW. However, definitive relief from capacity constraints will only come with the conmmissioning of the first phase (2x40 MW) of the Owen Falls Extension, hopefully in 1998. 3.58 While the completion of these two projects is the main item on UEB's current expansion agenda, its short term strategy. regardless of the institutional arrangements to be made, should also include mounting a major stop-gap effort to reduce technical and non-technical losses. Technical loss reduction could significantly increase UEB's ability to supply its customers with its existing resources. A 50 percent reduction in estimated technical losses, from 20 to 10 percent, would, for example, make some 85 GWh available to the market. To achieve this, a concerted program to strengthen the distribution network and its maintenance and operation is required. Such a program was prepared in 1992, and should be implemented. To reduce non-technical losses, UEB should complete the physical inventory of customers and update its customer database. (Annex 3.6) 3.59 Load Growth. The fact that UEB's current sales data do not provide a reliable indication of recent consumption trends, contributes significantly to difficulties in load forecasting. While the least uncertain consumption measure, "total supply" (Table 3.1) sent out to Uganda (generation minus exports), indicates some load growth, a good deal of demand may have been suppressed by the capacity constraint, suggesting that load growth could resume a rapid rate as and when this constraint is eased. On the other hand, since many consumers do not pay for their electricity currently, a more stringent billing and collection procedures could result in consumers cutting back on their use of electricity, thus shifting the demand curve downward. Because of these uncertainties, two simple growth scenarios illustrate the likely ranges: (a) 7.5%, a "high" growth rate but one somewhat lower than the rate at which total supply increased during the 1986-91 recoverv period; and (b) 5.5%, a "low" growth rate reflecting the 1992-94 rate of increase in total supply. 3.60 As Table 3.2 indicates, under either scenario the energy and, especially, power balances remain tight until 1998, when the first unit (40 MW) of the Owen Falls Extension is expected to come on line. Thereafter, at the lower growth rate, the energy balance remains comfortably positive through 2004. However, at the higher rate, by 2004 demand is pressing close on supply. As for power, the Owen Falls Extension promises briefer respite. At the lower growth rate the reserve margin begins to fall below the comfort level of one 40 MW unit by 2000; and demand overtakes capacity by 2003. At the higher rate, the reserve margin becomes tight by 1999 and is gone by 2001. 3.61 To ease the supply constraints, there is also a need for drastic improvement in customer management to reduce wasteful consumption by consumers who are not planning to pay for their use. In addition, UEB should seriously investigate  - 43 - whether energy efficiency and Demand Side Management (DSM) measures could be used as alternatives to capacity additions. Table 3.2: Energy and Power Balances, 1994-2004 Energy Balance (GWh) 1994 1996 1997 1998 1999 2000 2004 1. Production 1017 1100 1100 1363 1577 1577 1577 OF 1017 1100 1100 1100 1100 1100 1100 OF Ext. 263 477 477 477 2. Total Supply for Uganda 749 5.5% 834 880 928 979 1033 1275 7.5% 866 930 1000 1075 1156 1537 3. Exports (1-2) 268 5.5% 266 220 435 598 544 302 7.5% 234 170 363 498 421 40 Table 3.3: Energy and Power Balances, 1994-2004 Power Balance (MW) 1994 1996 1997 1998 1999 2000 2004 4. Installed Capacity 171 180 180 220 260 260 260 OF 171 180 180 180 180 180 180 OF Ext. 40 80 80 80 5. Dependable Capacity* 153 162 162 202 220 220 220 6. Peak load 161 5.5% 179 189 199 210 222 274 7.5% 186 200 215 231 248 330 7. Reserve (4-6) 10 5.5% 1 31 51 50 38 (14) 7.5% (6) 20 45 29 12 (70) *Installed capacity minus one small unit, 1994-97; or one large unit, 1998-2004. 3.62 Capacity Needs. While strictly illustrative, these forecasts indicate that Uganda could need additional capacity before the year 2000, and is almost certain to need expansion of its system within a year or two thereafter, just to satisfy the requirements of the domestic market. By reducing power losses, capacity could be made available for  - 44 - productive uses. Thereafter, capacity could be expanded at least-cost through the installation of additional units at the Owen Falls Extension, designed to accommodate five 40 MW units. However, this seems to require a change in the way water is managed at Owen Falls in order to ensure that the flow is adequate for the operation of the three additional units. 3.63 At the time of the construction of the original Owen Falls project, Uganda and the other riparians agreed that the plant would be operated so as to maintain the natural flow of the Nile --i.e.. as if there were no dam. To implement this agreement, a so-called "Agreed Curve" was drawn up on the basis of historical data showing the relationship between the river flows and the level of Lake Victoria (Annex 3.7 and 3.8). Operating the plant according to the Agreed Curve means that a large quantity of water must be uselessly spilled, thus substantially restricting the generating capacity of the site. This has led many to urge that the Agreed Curve be re-negotiated to permit the dam to be operated as most darns are: to store water until needed at times of peak demand, and to pernit the use of Lake Victoria as reservoir. Estimates as on how much this would increase generating capability varies, but 15-20 percent over what is possible under the Agreed Curve seems conservative. Such an increase would be roughly equivalent to 225- 300 GWh/year. 3.64 It seems that a change in the Agreed Curve, to which the riparians must agree, will have to be made to permit the operation of the three additional units at the Owen Falls Extension. In 1990, Uganda informed the riparians that "(a) it proposed to build an extension at Owen Falls, and intends to continue operating the power plant and the dam so that the river has a flow regime as if the darn had not been built, but (b) to rain maximum benefits from the existing station and the extension and, in the absence of objections from any of the riparians, would change the operating arrangement to utilize the lake as a reservoir as was the intent when the dam was built." In 1991, Egypt responded that it had no objection in principle but that any change in the operating regime would have to be subject to negotiation. Such negotiations should be urgently pursued. Export Potential 3.65 Uganda's vast hydropower potential could be developed for remunerative export markets, since there is not likely to be a need for a large-scale hydro development for the domestic market in the next 10 years or so if the Owen Falls Extension is expanded to full capacity. Though UEB now exports about 25 percent of its total generation Kenya, this export market is neither firm nor remunerative, since the exports are essentially a residual -- i.e., what is left over after the "needs" (including losses) of the domestic market have been met. Because UEB has had little capacity to spare, it has usually been able to export only during off-peak hours and so has been unable to meet its contractual obligations to Kenya. While Uganda agreed in 1964 to supply Kenya with 30 MW of firm power, in 1990-94 it actually exported no more than 17 MW. This presumably gave rise to little remorse on the Ugandan side, since the tariff agreed with  - 45 - Kenya is a derisory $0.02/kWh. Exports to Tanzania, which began in 1994 (15 GWh), and to Rwanda which began in late 1995, are small but the price is right. 3.66 Uganda's future as an energy exporter could be much brighter. While Kenya is already exploiting all its hydro sites of any significance, Uganda has untapped resources that far exceed its needs so that the development of trade should be in the interest of both countries. To realize this potential, in addition to securing a change in the Agreed Curve, Uganda will need to (a) reach agreement with Kenya on the purchase of an economic quantity of electricity at an economic price; (b) identify a least cost site for development; and (c) make satisfactory arrangements for the construction, financing and operation of the new plant. While the Hydro Master Plan now under preparation should provide the necessary information about the various sites and their development costs, accomplishing the other two steps will not be easy. Given the prevailing relationship between Kenya and Uganda, and UEB's inability so far to secure a satisfactory price for its current exports, it is difficult to be sanguine about the prospects for negotiating a power purchase agreement. In addition, UEB's financial weakness and operational shortcomings mean that it is in no position to contemplate undertaking a major new project on its own account. 3.67 In these circumstances, Uganda's best hope of developing its export potential appears to lie in enlisting the assistance of the private sector. The fact that one independent power producer has already expressed interest in constructing and operating a large plant at Bujagali lends credence to this prospect, which is discussed further below. E. EXTENDING ELECTRIFICATION 3).68 As already noted, the benefits of electricity are today available to onlv a small fraction of the population living in the capital and the larger towns. This is all too typical of the situation in many African and other developing countries where the scope for electricity service is narrowly constrained by low income levels and the shortage of resources. Even within these constraints, however, there is much room for improvement. Rough estimates prepared for the Assessment (see Annex 3.9) suggest that the number of people who could afford electricity and have homes suitable for the installation of electrical service is more than double the number presently served. Given the critical role that access to electricity can play in economic and social development, the extension of electrification warrants high priority in the government's development efforts. 3.69 The requirements for extending service are best viewed by distinguishing between "urban" and "rural" electrification --i.e., between areas already served by the grid or located close to it, and areas remote from the grid that are unlikely to be reached by it in the foreseeable future. 3.70 Urban Service. In urban areas the basic task is one of strengthening and extending the existing distribution network. While UEB has been rapidly increasing the number of connections to its system, this has often been done in an unplanned, ad hoc  - 46 - (not to say haphazard) way that has further overloaded the system --e.g., by excessively extending low voltage lines. The 1992 distribution study made detailed recommendations for improving planning and design. This study needs to be re-visited and up-dated with a view toward preparing a technically and economically sound distribution rehabilitation/expansion plan covering, say, a five year period. Such a plan would, identify and cost the most economic line extensions, prioritizing them in accordance with their economic returns. It would thus provide UEB with guidance on the level of investment that is economically justified and on the most rational allocation of whatever investment funds become available. 3.71 Rural Service. The electrification of areas remote from the grid, where the bulk of the population live, is quite a different matter. UEB has no plans for rural electrification and it is unrealistic to think that more than a tiny fraction of the rural population could be reached by the conventional, utility extend-the-grid approach. A more promising course is to rely, instead, on "alternative", "non-conventional" or "complementary" approaches to rural electrification --i.e., on the wide variety of possible means by which rural communities and families can be provided with, or obtain for themselves, some form of limited alternative electricity supply pending the arrival of a conventional service. Such rural electrification is now taking place on an extremely limited scale in Uganda. 3.72 In Uganda, as in many developing countries, however, a variety of entrepreneurial or self-help methods of providing small scale electricity supplies to rural families have emerged. These include small privately owned generators running on diesel, gasoline or kerosene to provide supplies to households, commercial enterprises, small industries, workshops and farms and car batteries to provide small amounts of electricity for lighting, radio, and even television.'7 Although the electricity supply provided is minimal, it clearly meets a strongly felt need amnong rural and peri-urban families unable to obtain a conventional supply. It also includes the use of solar photovoltaics (PV) and other renewable energy systems for domestic and other small scale uses as discussed in Chapter 4. The private sector appears to have taken the lead in photovoltaic electrification. Several thousand PV units have been reportedly installed in private homes over the past few years. Given Uganda's favorable solar radiation levels, photovoltaic technology has the potential to provide power to even larger numbers of homes and institutions, and its use should be actively encouraged. Car batteries are widely used by rural and peri-urban families throughout the developing world. They are recharged for a fee at recharging centers where the electricity is obtained from the grid or a diesel generator. Their widespread use is reported from Kenya, The Gambia, Senegal, Sri Lanka, the Yemen, Peru and a variety of other countries. The batteries are usually standard 12 volt car batteries with capacities in the range of 60-120 Ah, but in some countries purpose-designed batteries are used. In Sri Lanka, for example, a system known as the Prasakthi unit was designed by the National Engineering and Research Center in the middle 1980s and sold at S27. In Zimbabwe, a commercial firm produces a 14 Ah battery with a specially-designed warning system to help prevent excessive discharge which shortens the battery life.  - 47 - 3.73 In addition, small private decentralized supply systems are found in a variety of other developing countries and appear to emerge spontaneously where there are no legal obstacles to the provision of such supplies. A 1986 World Bank study found, for example, some 17,000 small private electricity supply systems in Indonesia. 3.74 The coming into use of these small scale electricity supply systems represents a significant mobilization of private resources in the rural areas. It also enables rural families to obtain some of the key benefits of rural electrification in areas which cannot presently be reached by conventional rural electrification. As such, these approaches deserve to be encouraged by the Government as part of its efforts to improve rural living standards. This means', essentially, legally opening the market to private, small scale suppliers; adopting no-hassle licensing procedures; removing other bureaucratic obstacles; and enabling private suppliers to charge whatever tariffs the market will bear.  - 48 - 4. RENEWABLE AND TRADITIONAL ENERGY 4.1 Uganda is richly endowed with renewable energy resources including plentiful biomass and hydrological resources, favorable solar conditions, and large quantities of agricultural residues. With the exception of biomass, Uganda utilizes only a fraction of its renewable energy resource potential. Considerable Government, donor, NGO and private sector interest has been shown over the past fifteen years to develop Uganda's renewable and "traditional" energy sector. Unfortunately, these efforts have generally been uncoordinated and ad hoc. Frequent changes in Government administrative responsibility have led to duplication in activities and inconsistencies in terms of programs, projects, and policy development and implementation.'9 The Government is now making an effort to redress past inconsistencies, and to develop a comprehensive energy policy which will foster sustainable economic growth. The principal issues the Government needs to tackle in the renewable and traditional energy sector include: * Co-ordination and Rationalization of Programs. Establishing verifiable indicators from past activities to form a sound basis for future activities and investment. * Off-Grid Electrification. Encouraging decentralized grids, and the use of solar photovoltaic and mini-hydro technology and making greater use of the private sector. * Sustainable Supply. Exarnine the policy framework for forestry production in an effort to encourage private tree planting and private forestry expansion to promote woody biomass as a cost-effective and sustainable national resource. * Efficiency in Charcoal Production and Biomass End-Use. Disseminating skills and techniques to improve charcoal production methods. improving charcoal and wood stove technologies, and improving efficiency in agro based industries. * Biogas Program. Recommending an end to biogas programs due to the present economic constraints of biogas as a viable energy option. l The ternm "traditional" is used here to refer primarily to biomass fuels used in a traditional way, mainly in domestic/household and informal sector applications. 19 The energy portfolio was downgraded from ministerial level to departmental level in 1992. As shown in several presentations to Parliament, the Department of Energy has lost numerous staff, and has had major problems of retaining trained staff.  - 49 - Each of the above issues are discussed below after a review of biomass supply, consumption and prices. A. BIOMASS SUPPLY, CONSUMPTION AND PRICES20 4.2 Supply. Biomass. principally fuelwood and charcoal, is in quantity terms the most important energy source in Uganda, accounting for about 90% of primary energy supply. Current work under the Uganda National Biomass Survey (NBS)21 points to localized problems in supplies under the present economic and forestry policy regime, despite the country's physical and agro-ecological potential to supply biomass at current aggregated levels of demand. 4.3 The Energy Assessment Mission estimated the annual sustainable supply of biomass on the basis of the preliminary results of the NBS at about 29 million tons, which is equivalent to approximately 8 million tons of oil (Uganda's total annual energy consumption is equivalent to some 5 million tons of oil.). Wood accounts for 72 percent of the total, with crop residues providing 18 percent and dung 10 percent. (Table 4.1). Annex 4.1 provides additional details of estimated biomass supply. Table 4.1: Estimated Annual Sustainable Supply of Traditional Fuels, in 1993 Million Air dry tons Percent Wood Biomass 21.0 72.0 Residues 5.4 18.5 Animal Dung 2.8 9.5 Total Supply 29.2 loo 4.4 Of the estimated total annual supply, woody biomass such as bushlands provide 30 percent and woodlands 20 percent. Agricultural areas provide the balance, half coming from fallow land and the other half from arable lands, mainly small farms. Tropical high forests supply 2 percent of annual yield, but because most of these forests 2 The discussion below focused on biomass. Hydro and solar energy issues are discussed in section E under off-grid electrification and biogas is discussed in section F. Wind energy is currently used in limited extend for water pumping. The economic potential of wind energy for large scale applications would have to be assessed in a separate study. 21 The NBS is an inventory of woody biomass and crop residues which is being undertaken with the support of the Norwegian Forestry Society.  - 50 - are away from population centers, they are not a significant source for fuelwood or charcoal. Most fuelwood and charcoal come from woodlands, bushlands and farmlands.22 It is likely that the estimated supply is on the low side, because the nine regions the mission used as a basis for the estimates are areas under stress and contain major urban 23 centers . It is therefore possible that the final NSB estimates may be slightly different. 4.5 The annual yield of crop residues, which is approximately the same as the growing stock (because they come from annual crops) is over 5 million tons, 90% of which is from farrn land. Demand surveys indicate that very little crop residues are burnt in households. The use of residues is more widespread in industries. For instance, the sugar industry uses bagasse and a clay factory in Kampala uses coffee husks, although much more could be used. No estimate of dung production has been made in the NSB, for it is not burnt as a fuel. Calculations using the Ministry of Agriculture's 1990-1991 data for the number of domestic animals, place the estimated dung production at just over 3 million tons, which is equivalent to about 2.8 million tons of air dry wood. 4.6 Consumption. Woodfuels provide the energy for cooking and water boiling for most rural and many urban homes. They are also important for rural industry, especially for the production of building materials, such as bricks, and commercial enterprises in urban areas, such as restaurants and bakeries. The reliance on woodfuels is expected to continue for many years to come, given the high prices of petroleum fuels and the limited availability of electricitv. The mission estimates that the total woodfuel and biomass consumption was around 16 million tons of fuelwood equivalent (tof) in 1994. Table 4.2 provides a break-down of the consumption figures and Annex 4.2 provides further details. 22 According to Plumtree and Carvalho, (Deutsche Forest Consult 1991), the 1991 estimated demand for sawlogs is 190,000 m', which in weight terms is about 130,000 tons. Tropical High Forests (and plantations) can easily sustain this demand, so logging is not causing deforestation, although it may be causing some degradation. The principal cause of THF deforestation is clearing for agriculture. In order to slow down the deforestation rate, agricultural productivity must increase, and farm trees could play a role in this. 23 Two other estimates have been made of woody biomass. One was based on the analysis of satellite imagery for Africa with very little ground truthing, (World Bank 1993). It estimated the growing stock and yield in Uganda to be 981 million tons and 80 million tons respectively. The other was made by the Ministry of Agriculture and Forestry in 1988, based on the estimated growing stock and yields from different land use categories. The estimated growing stock and yield is 550 million tons and 19 mill. t. respectively. Both of these two estimates neglect the short rotations of "bush" wood in the yield calculations.  - 51 - Table 4.2. Estimate of Consumption of Woodfuels and Biomass, 1994 Location 1994 Consumption estimates-all sectors ('000 tons fuelwood equivalent) Crop residues Collected Purchased Charcoal Total Wood Rural 981 11,527 151 304 12,963 Urban - non Kampala 19 245 197 944 1,404 Kampala 1 47 69 1,424 1,542 Total 1,001 11,819 417 2,672 15,909 Sources: Mission estimates. (see also Annex 4.2). 4.7 Biomass Supply/Demand Balance. The estimated sustainable supply of biomass is almost twice the level of demand for Uganda as a whole. While these estimates must be considered with caution, they indicate that fuelwood supply problems are not country-wide but localized. Indeed, concern that urban demand for charcoal and fuelwood is leading to environmental destruction, especially around the highly urbanized areas beside Lake Victoria, have been partially confirmed. The preliminary NBS results indicate that the local available supplies of woody biomass are not adequate to meet demands in major urban centers. Wood have to be imported from other regions. On the country-wide level, however, using the Mission's estimate of demand growth, at 3 percent per year, a supply surplus should persist well into the next century. This analysis accounts for other uses of wood, such as construction, and for some conversion of woodlands and forests to agriculture. 4.8 Comparative Energy Costs. Energy cost comparisons carried out by the mission indicate that biomass is often the least expensive energy option for both households and energy-intensive industries. Many urban households that responded to the Pilot Survey mentioned that they were cooking with electricity before the electricity tariff hike in the summer of 1993, but switched to charcoal because electricity became expensive. Table 4.3 shows that the cost of cooking with electricity is roughly double that of cooking with charcoal. Since the prices of woodfuels and electricity reflect their economic costs of supply, the reported substitution away from electric cooking to charcoal in urban areas serves to remove uneconomic cooking demand from the electricity system. 4.9 As may be expected from the relatively high cost of petroleum products, cooking with paraffin and LPG is 3 to 4 times more expensive than wood or charcoal. Even if duties were eliminated on paraffin and LPG, displacement of woodfuels by paraffin and LPG would double urban household fuel expenses.  - 52 - Table 4.3: Comparative Urban Cooking Costs in Central & Eastern Uganda, 1994 Fuel Cost Annualized Heating Stove Fuel Cost USh/Utilized Stove Cost Total Cooking Cost Unit Value Effic. Ush/unit MJ Ush USh/Utilized MJ (MJ) % Financial Financial Financial Financial Economic Fuelwood Traditional stove kg 16.0 17 63 3 0 23 23 Improved stove 16.0 25 63 16 5.000 17 17 Charcoal Traditional stove ka 30.0 25 112 15 2.500 15 15 Improved stoves 30.0 30 112 12 6,854 13 13 Paraffin liter 34.1 45 889 58 5,576 59 44 LPG kg 45.2 55 1.778 72 21,053 74 39 Electricity kWh 3.6 70 70 28 7.925 29 29 Notes: See Annex 4.3 for assumptions. 4.10 Uganda has two cement plants, one in Tororo and one in Hima. Both plants are gearing up towards previous (pre-civil strife) production levels but are hampered by the high cost of fuel, which accounts for a major proportion of the final cost of cement. Until the 1 970s, the Tororo plant used about 17,000 tons of charcoal annually, which it imported from Kenya. It has now switched to fuel oil. When these two plants have completed their rehabilitation and expansion according to current plans, their energy demand will be on the order of 375,000 GJ per annum, or the equivalent of over 120,000 tons of coal, or a similar quantity of charcoal. Because energy is such an important cost element, it will be crucial to carefully evaluate how to meet the plants' future energy needs at least cost. According to the data the Mission compiled, oil would the most expensive option. Imported coal from South Africa is the next most expensive option, while charcoal produced in a sustainable manner from wood grown at private plantations appears to be the least expensive option. Table 4.4 compares these three options. Table 4.4: Comparison of Energy Requirements and Costs for Cement Production Hima and Tororo Cement Plants under Full Production Assumptions Item Charcoal Coal Fuel Oil US$/tonne delivered $54 $100 $375 Energy (GJ/tonne) 30 30 42 End-use efficiency 50.0% 50.0% 65.0% Energy demand (GJ/yr) 3,750,000 3,750,000 3,750,000 Energy demand (tons/yr) 125,000 125,000 89,286 US$ cost per yr $6,793,478 $12,500,000 $21,763,393 Source: Tororo Cement Plant, Shell Oil Company, UPET, Ministry of Finance and Economic Planning ("Annual Statistical Bulletin - 1994", "Census of Manufacturing Enterprises: 1989 (updated 1994)", "Background to the Budget 1994-95"), ESD field surveys and interviews.  - 53 - B. COORDINATION AND RATIONALIZATION OF PROGRAMS 4.11 Renewable energy development received much attention in Uganda and as a result many pilot activities have taken place. However, lack of coordination, little exchange of information and experiences, limited follow-up, and very limited monitoring and evaluation of these projects and programs has occurred. Therefore, the actual contributions to the country's development of these projects and programs remain unclear. Much duplication of effort, ignorance of previously established baseline information. and the "reinvention of the wheel" has resulted from this state of affairs. This is unfortunate, as traditional and renewable energy can continue to contribute substantially to economic development in Uganda. 4.12 It is therefore suggested that all previous household and renewable energy projects and activities be inventoried and analyzed in an in-depth study. Stock should be taken of all activities to rank results, outputs and critical success factors. The objective of this exercise should be an attempt to establish some objectively verifiable indicators of what has worked and what has not to help form a sound base for future support and investment by prioritizing projects and investments, on which basis donor support can be channeled. The study should compare in-country projects and programs to similar studies and projects already enjoying regional success, as well as the comparative successes of intra-countrv activities. The private sector, particularly in the charcoal production, agro- forestry and photovoltaic sectors, should be invited to contribute their expertise This study could then provide the Government and all interested parties with a framework to encourage the rational, economical and environmentally sustainable development of traditional and renewable energy in Uganda. 4.13 The above activity would also contribute to building the well needed analytical capability at the MNR for policy and strategy formulation in the areas of traditional and renewable energy. C. OFF-GRID ELECTRIFICATION 4.14 While Uganda has plentiful hydropower, solar and biomass resources, it has one of the world's lowest levels of electricity development. However, considerable scope exists for accelerating electrification. The country's rural cash economy is growing rapidly and with it the demand for power. Some of this demand is currently met by small petrol and diesel generators, and photovoltaic svstems. While no studies have been undertaken in this area, it is estimated that considerable suppressed demand for power exist as Uganda's rural cash economy rebounds after years of stagnation. As experienced in other countries, such as Kenya, many rural and peri-urban households, industries and commercial establishmnents are willing to invest in obtaining electricity. 4.15 It is unrealistic to think that more than a tiny fraction of the rural population could be reached by the conventional approach of grid extension. A more promising course is to rely, instead, on alternative approaches to rural electrification.  - 54 - Opportunities exist for developing small-scale hydropower, solar photovoltaic systems, biomass, and co-generation by sugar and tea factories to provide electricity. Potential for private participation in the provision of these services is significant. To unleash these opportunities the Government needs to explicitly encourage private entry. To meet concerns about profitability, private investors need to know that they will be able to charge realistic tariffs, particularly in rural and peri-urban areas, where the costs of electricity supply may exceed that of the grid system (see Chapter 3). Faster development of electrification could also be achieved provided the Governrment allowed less strict standards for power generation and distribution in rural and peri-urban areas. 4.16 Mini-Hydro. Uganda has large unexploited hydropower capacity on both the Nile and Zaire River watersheds. Numerous sites for the possible development of small and micro hydropower have been identified. Yet, with the exception of the Mokobu and Kabale small hydro-electric stations, almost nothing has been done. 4.17 Solar Photovoltaics. The private sector is the major player in the development of solar resources in Uganda. An estimated 3,500 photovoltaic household units have been installed over the past eight years entirely by the private sector, without donor or governnent support. An estimated 2,000 photovoltaic units had been sold for private use (e.g., rural household lighting, livestock fencing, etc.) over the last three years only. In addition, NGOs have installed over 300 solar systems (ranging from solar refrigerators to solar units for lighting and water pumping), and the rapidly growing tourism sector is expanding its use of photovoltaics in and around parks and reserves. Solar water heating systems have been tested on a pilot basis and have been placed in many tourist lodges. 4.18 Projects are currently being put forward by Government, by donors and NGOs, and by the private sector. By removing tariffs and duties on photovoltaic panels in the 1995 tax bill, the Government indicated its commitment to promoting the use of photovoltaics. However, this policy should be streamlined to remove remaining impediments: inverters are still subject to duty and imported batteries are subject to heavy duties. Although extensive regulation should be avoided to promote increased private sector involvement, system quality standards should be developed and the information disseminated to discourage unscrupulous suppliers. 4.19 Biomass. Off-grid development need not be restricted to hydropower and photovoltaic technology. Biomass already provides electricity in the sugar and tea industries. Uganda's plentiful biomass supplies, including coffee residues, bagasse and wood, could potentially provide the energy to raise steam for power generation. The viability of using biomass for power generation should be examined. In addition, some industries may be able and willing to sell their excess power either to the national grid or to surrounding dwellings and institutions. 4.20 Decentralized Power Systems. Decentralized power systems are essentially smaller integrated power systems that use, generally, renewable resources to  - 55 - generate power and that are not connected to the grid. As discussed in Chapter 3, there is a market niche for both foreign and domestic private investment, to set up community- based generation and distribution systems in semi-urban areas. D. SUSTAINING BIOMASS SUPPLY 4.21 While the overall wood and other biomass supply is in excess of demand, some densely populated regions are experiencing shortages. The size and extent of these shortages cannot be determined without a national energy supply and demand survey. The Household Energy Planning Program (HEPP), undertaken in 1989-1990, was intended to be a comprehensive study of household energy issues and options in Uganda which would provide the basis for designing a household and biomass energy strategy. Much of the work performed by the HEPP team, especially the stove field trials and charcoal kiln review, was of quality. However, the household energy demand survey was very inadequate and could not be used as a basis for planning. In addition, the HEPP study failed to build analytical capability for policy formulation within the Ministry. To obtain up-to-date information and to complement the HEPP and NBS studies, the Government could consider a small integrated household/renewable energy demand and supply survey, which should include not only biomass, but all forms of renewable energy. However, even without detailed data, efforts could be designed, based on experience in other countries and past experience in Uganda, to ensure sustainable supplies to meet future demands. 4.22 Rationalizing Biomass Supply. With the population growing rapidly and little disposable income to switch to modem energy, demand for biomass will continue to be high. The Government should examine the entire policy framework for forestry production in an effort to encourage private tree planting and private forestry expansion to promote woody biomass as a modem, acceptable, cost-effective and sustainable national resource. Particular efforts could be made to provide incentives for increased private farm tree planting. This would not only produce wood and wood products for sale but would also help increase agricultural productivity. Some initiatives are already underway, but an increase in the level of the effort is required, including: (a) clarification of land tenure and allocation of bushland and woodlands to cooperatives and/or individuals; (b) an adequate supply of seedlings from good seed sources; (c) demonstration units showing farmners the benefits of silviculture, and making market data (present and future demand, supply and production costs) available to them; (d) agro- forestry/forestry and environmental training for farmers, and education in schools and institutes of higher learning; and (e) reformning the Forestry Service. 4.23 To provide incentives for increased private sector farm tree planting, land ownership and security of tenure, should be clarified. Well-defined property rights are crucial for farmers to make long-tern investments in agriculture and silviculture. Non- gazetted "government" woodlands and shrublands could be allocated for agricultural development or as forest land. The ownership of forest lands should be investigated with a view to selling or leasing some to conimunities, companies or individuals.  -56 - 4.24 The provision of good seed strains can increase tree productivity and health considerably. Many existing tree seeds both in the public and private sectors are of dubious provenance and quality. Certified seeds should be made available to farmers and schools. Advice and instruction should be given on direct sowing, nursery practice and planting out.24 4.25 To encourage farmers to plant and manage trees for sale, training and demonstration on the practice of silviculture should be undertaken. Farmers should have access to farm gate prices, market demand for the various wood and tree products, growing. transport, and production costs, and delivered price estimates. Market data on industries usine wood and other biomass energy should be collected and made available to the rural producer. 4.26 Extension efforts and training should be expanded to teach management of existing biomass resources. The teaching of tree planting and management, energy conservation and environmental awareness has been proposed for schools and a syllabus is being dra-wn up for a pilot project in 15 schools. This initiative should be supported with equipment. funds and facilities for teacher training. Yield from existing tree resources could further be improved if simple techniques were taught to farmers, charcoalers and wood cutters; and appropriate (hand) tools to cut and prune the trees were made available.2' 4.27 The Forestry Department has three principal functions, namely the commercial production of forest products; advising the government on policy matters; and providing advice and services to people. To perform these functions it relies on budgetary support from the Government, to which proceeds from the sale of forest products are handed over. Because the revenue from fuelwood and other forest products sales should be adequate to run the conunercial section as a self-financing enterprise, the Government should investigate whether parts of the commercial sector of the Forestry Department could be sold or leased to communities, or the private sector. As part of the donor sponsored "Forestry Rehabilitation Project" a Farm Forestry project was supposed to establish over 1,000 nurseries in 26 districts for the production of 27 million "farm" seedlings annually. This project, valued at US$7.7 million was to be jointly run by DANIDA and CARE. This project ran into administrative problems and DANIDA withdrew, leaving only US$0.2 million. A similar initiative is still required, but the emphasis should be changed to direct sowing of tree seeds and farmers raising their own seedlings with perhaps a surplus for sale. 25 Many woodland trees regenerate naturally from stems and roots by coppicing. To encourage coppicing, trees should be cut at a specific distance from the ground, preferably with a saw rather than an axe, and the coppice regrowth should be reduced to encourage one or two vigorous stems. There is also a preferable season in which to cut the wood. Likewise in order to encourage natural regeneration, anirnals should be excluded in the formative years. Similarly, different species have different rotation ages for maximum yield production, but this should be tempered to market demands.  - 57 - E. IMPROVING THE EFFICIENCY IN CHARCOAL PRODUCTION AND BIOMASS END-USE Improving Charcoal Production 4.28 The production of charcoal is a large-scale economic activity. It employs perhaps 20,000 people on a full-time basis. Located in the rural areas, it generates possibly over USh 16 billion every year (over US$17 million), with a quarter of that going to rural land holders, half to producers and another quarter to local authorities and Government in taxes and revenues. In addition, a large number of people are employed in transporting, distributing and marketing charcoal. This makes charcoal an important rural cash commodity. Even more benefits could be derived, if the current production methods - use of inefficient traditional earth pit kilns that require damp soils, and constant tending - were improved. 4.29 There have been many efforts to improve the efficiency in charcoal production. The Government and the donor community have initiated several programs since the late 1960s. In addition, every forestry sector support program since 1981 has sought to address the need to improve efficiencies of charcoal production through training, technical assistance, improved tools, and credit. Nevertheless, few results can be seen today from these efforts, largely because the efforts have not reached a critical mass of charcoal producers. 4.30 A major problem for disseminating techniques for improving the efficiency in charcoal production is that most charcoal (over 70%) is produced by dedicated, itinerant charcoalers (i.e., people engaged in charcoal production full-time, as their sole or major economic activity) on an independent basis. If, however, the producers were organized so that they could be reached more easily with needed training and skills, in harvesting and production techniques -- e.g. improving kiln construction, firing, and tending practices -- efficiency improvements of charcoal production on the order of 30 percent or more could be achieved. Since charcoalers are often lacking in investment capital, they do not have spare cash available for purchasing materials needed for improved kilns. A revolving fund to finance kiln materials, therefore, would address a substantial barrier to effective dissemination of improved methods. 4.31 Additionally, a kilns program along the lines of that described in the HEPP study would result in 1/3 of all charcoal consumed in Uganda being produced in kilns that are twice as efficient as traditional methods. Such a program would attempt to replicate the experience of the most successful improved-kilns dissemination efforts in eastern and central Africa. This target may not be out of reach as a great deal of improvement can be obtained from existing earthen kilns by training charcoalers in best- practice techniques. This should interest charcoalers, as it would increase yields from each charge and effectively raise their incomes. A detailed evaluation of this program, in Annex 4.4, shows that it should yield a high rate of return on investment.  - 58 - Improving Household, Institutional and Industrial End-Use Efficiency 4.32 There are significant opportunities for improving end-use efficiencies in households, institutions as well as in industrial and commercial enterprises. Reduction by a third of consumption should be possible through efficiency improvements at points of consumption. While little external support has followed from several donor-sponsored studies on end-use efficiency, the private industries has moved forward on their own. The priority for Government action in this area is to carefully review all previous efforts particularly relating to dissemination of energy efficient or "improved" wood and charcoal stoves, identifv the critical success factors and replicate successful programs. 4.33 Charcoal Stoves. Charcoal is mainly an urban cooking fuel used by more than 1.5 million households and commonly burned in a traditional metal Sigiri. with an average efficiency of about 24 percent. At least eighteen separate projects, project components and/or programs have been undertaken on improved stoves since 1984. Unfortunately, "little concrete or long-term benefits have resulted from these efforts."26 A number of improved charcoal stoves with efficiencies around 30 percent were introduced by NGOs in the 1980s, spurred by the success of similar programs in Kenya. In Uganda, however, the results have been marginal. The Assessment Mission estimates that only about 15 percent of homes in Karnpala use improved charcoal stoves and only some 10 percent of households outside of Kampala. The fall of relative charcoal prices may have contributed to the low saturation rate of improved stoves in urban households. Yet, low- income households spend as much as 10 percent of their income on fuel, and the improved stoves could pay for themselves in charcoal saved over very short periods. 4.34 Because of lack of quality control, monitoring and testing, the actual performance (i.e., energy efficiency) of stoves in households is not known. Stove quality varies, and consumers have limited possibilities to assure themselves of performnance. Recent tests by the Forest Department indicate this clearly: at least one stove model is being sold to consumers as improved despite its being less efficient than the traditional Sigiri stove. In an effort to promote greater use, there should be a real attempt to provide incentives for quality stove production. Technical and testing results for improved stoves could be disseminated and the stove testing by the Forest Department should continue. Public education may also help. 4.35 Wood Stoves. The three-stone fireplace, the least efficient technology for consuming fuelwood, is common throughout Uganda. These stoves also contribute to indoor pollution and consequently to women's' and children's' health problems. As with improved charcoal stoves, at least ten donors (NGOs and bilateral agencies) have tested and promoted improved wood stoves, primarily for rural dwellers. Wood stove trials and dissemination have mirrored charcoal stoves in that most of the designs are modeled on 26 Ministry of Natural Resources, "Presentation to the National Resistance Council (Parliament) in 1994- 95 'Background to the Budget"'.  -59- Kenyan examples. All wood stove donor efforts have been components of wider programs such as settlement schemes, agricultural extension prograrns, women's projects and health programs. These projects seem to have produced meager results: rural and urban households outside of Kampala interviewed for the Pilot Survey27 used three-stone fireplaces exclusively to burn wood and crop residues. In addition, the HEPP survey and the Pilot Survey both indicated that only 15 percent of the wood stoves in Kampala were improved. These findings may indicate that wood users are generally not too concemed about wood scarcity, or that the stoves that were introduced were not appropriate for the local cooking practices. Moreover, given that most rural households collect rather than buy their fuel wood, the incentive to use efficiently is not great. 4.36 On a more promising note, the Joint Energy-Environment Program, an NGO funded entirely by a Dutch charitable group, appears to be approaching improved rural stove dissemination the right way. Between March and November 1993 they trained 176 stove builders who built over 11,000 stoves. The concept was to train trainers in stove building and kitchen practices who would then disseminate these skills in their own villages. Some villagers reported that prior to stove use and improved practices, a 7- member household would consume 5 bundles of wood every two days, but with the improved stove, the time period was extended to five or six days. Program staff reported that the program was most successful in areas of scarce fuelwood (and high fuel costs), where the population had cash enough to pay a small fee to the stove builder. The stoves are constructed out of mud/clay and other gathered materials, and were therefore inexpensive enough for a rural population. This effort appears to be well targeted to receptive markets. The community participation approach is well suited to building household commitment to use the stoves effectively once in place. This kind of experience and conimitment to stove dissemination deserves full support and the Government should carefully monitor its results for possible duplication. 4.37 Institutional and Commercial Stoves. Several international NGOs have worked in Uganda on improved institutional stoves. The most noteworthy effort was through the Bellerive Foundation (Aga Khan Foundation), using their Kenyan-developed institutional brick and cement stove design with molded, fitted pots. Bellerive alone helped install over 20 institutional stoves in schools in and around Kampala. A recent Forest Department survey indicated that at least 100 schools and hospitals have installed energy efficient institutional stoves since 1991.28 As fuel comprises as much as 10 percent of these institutions' recurrent budget expenditures, this is not surprising. 4.38 Tests carried out by Bellerive on their Ugandan program, and results from similar activities in Kenya and Tanzania, showed reductions of wood fuel use on the 27 A pilot Household Energy survey was carried out during the Energy Assessment Mission of February 1994 to provide indicative estimates of fuel use in urban and rural households in the Central and Eastern regions of Uganda (see Annex 4.3). 28 Bellerive Foundation, "Proceedings from the Masinde Workshop", Ministry of Natural Resources, Forest Department estimates, Ministry of Education interviews.  - 60 - order of 30-40 percent with the new stoves. Given this, and the large amount of wood fuel utilized by institutions, considerable savings could be achieved by promoting the dissemination of improved institutional stoves. 4.39 In the commercial sector. wood and charcoal are widely used in hotels, restaurants, breweries and bakeries. Improving the efficiency of the stoves used could result in significant savings. The estimated annual consumption of wood and charcoal in commercial establishments is summarized in Table 4.5 below. Table 4.5: Estimated Commercial Woody Biomass Consumption in 1994 Comm. Establishments Char ('000 GJ) Char ('000 tons) Wood ('000 GJ) Wood ('000 tons) Hotels, Rests. & Bars 2,989 100 2,874 192 Bakeries 0 0 465 31 Breweries 0 0 1,109 74 Sub-Total Commercial 2,989 100 4,448 297 4.40 Future Course of Action to Improve Stoves. It is estimated that the continued momentum of the existing stove improvement programs could lead to the replacement of 25 percent of old charcoal stoves. However, to raise the saturation level to as much as 50 percent, which would be comparable to the most successful stove dissemination efforts previously realized in eastern Africa, a much more concerted campaign focusing on support to stove makers, stove certification, and stimulating the adoption of efficient stoves, should be carried out. With respect to wood stoves, well targeted dissemination efforts in rural areas, similar to the Dutch program, should be able to reach 15 percent of wood-using rural homes over a 15 year period. Households cooking with improved stoves may be assumed to achieve 45 percent wood-use reductions and 35 percent charcoal-use reductions. Assuming that the improved charcoal stove cost about USh 7,500 more than a Sigiri, and the improved wood stoves USh 5,000, the potential economic returns of successful dissemination projects could be very high (Annex 4.4). 4.41 A recent review of the experience of over 50 stove programs around the world indicates that in addition to a rapid payback period, which appears to be necessary for successful dissemination of stoves, successful efforts are those that maintain consistent, long-term, and high level commitment to stove manufacture and dissemination, and pay attention to targeting markets, and design stoves that consumers  - 61 - actually want.29 It is important to continue research and development of improved stove designs by having stove producers work closely with stove users.30 Emphasis must be placed on flexibility of design, customer feedback, and service. Moreover, projects must include training of manufacturers in business operations and practices -- projecting the number of units to be sold, the number of units and parts to be produced and inventoried, and estimating needed production capacity. Certification and demonstration activities such as stove fairs and cooking competitions at community events have proved to be effective at convincing people to adopt improved stoves in other Eastern African countries. 4.42 Given the limited success of NGOs in disseminating improved stoves, the Government has an important role to play in reviewing, evaluating and coordinating improved stove activities, while leaving the actual supply of stoves to private enterprise. Government can serve as a: * testing agency for technologies to gauge their actual perfornance; * promoter an certifier of the technologies which actually save energy and which are acceptable and beneficial to consumers; * promoter of technical assistance to stove producers to improve and maintain quality; and * coordinator, monitor and evaluator to track developments in the market and facilitate the rapid dissemination of the best energy saving technologies and techniques. 4.43 Industrial End-Use Efficiency. The industrial biomass consumption in Uganda is higher than in any other country in the region. Limited availability and high prices of petroleum and electricity have stimulated biomass demand. Presently, in final energy terms, Ugandan industry consumes twice as much biomass energy (in GJ) as petroleum products, and over five times as much as electricity. Uganda's commercial sector consumes twenty times as much biomass as all other forms of energy combined (also in final energy terms). 4.44 Key industries which rely primarily and sometimes exclusively on biomass include tea production; construction industry including brick, tile and lime; tobacco curing; sugar refining/jaggeries; and fish smoking. Barnes Douglas, Keith Openshaw, Kirk Smith, and Robert van der Plas, "What Makes People Cook with Improved Stoves", FPD Energy Series Working Paper #60, the World Bank, 1993. 30 Stove makers are the key players on the supply side of any successful dissemination effort. Programs that involve stove producers early in the design process and employ standardized parts that can be easily produced stand a better chance of succeeding than those that do not pay attention to the production process. Designs that incorporate manufactured components such as pre-fabricated ceramic liners not only allow better quality control, but also last longer and require less maintenance than hand-made stoves.  - 62 - 4.45 Uganda's tea production has doubled over the past three years as more areas are rehabilitated and new areas are planted. The tea industry has converted almost entirely to wood; the twelve of the country's thirteen major tea factories consume over 30,000 tons of fuel wood for drying, fermenting and power. Wood consumption will continue to increase as more expansion occurs. These factories are extending their own tree plantations to meet demand, although they still buy considerable quantities. 4.46 The construction industry has grown at an average rate of over 7 percent since 1990.31 Brick and tile production have doubled over the past six years and accounted for 230,000 tons of wood consumption in 1994. Extensive deposits of limestone and growing demand in the construction industry have led to an annual average increase in lime production of 29 percent since 1989. Most lime is produced by small- to mediurn-scale enterprises, using energy-inefficient lime kilns. An average of two kilograms of wood are used per kilogram of lime produced. This makes lime production the main consumer of wood, accounting for nearly 650,000 tons of wood in 1994. While studies have been conducted on improving efficiency, particularly in the brick and tile industry, little has been done. Considerable scope exists for improving production techniques and efficiency of end-use. As with charcoalers, the starting point for improving end-use efficiency in this sub-sector will be in promoting the organization of producers, so they can be reached more easily with new ideas and methods. 4.47 Over sixteen thousand rural Ugandans use fuel wood to cure tobacco in over 9,600 bams. Approximately half of these farmers use the energv-inefficient "flue" curing method. Approximately 2,500 farmers have converted to more energy-efficient barns since 1989. Considerable scope exists for reducing unit energy consumption. and consequently, British American Tobacco (BAT), Uganda's largest tobacco agent, has begun to promote tree planting among tobacco farmers, following BAT's lead in Kenya and Malawi. 4.48 The two major sugar refineries currentlv utilize small amounts of wood to raise boiler temperatures to bum bagasse. In addition, at least 39 smaller-scale sugar "jaggeries", which produce between 15-20 percent of the sugar consumed in Uganda, utilize large quantities of wood. "Jaggery" is produced primarily over open fires and occasionally with old boilers. Energy efficiencies are very low. This industry consumers nearly 100,000 tons of wood annually. The sugar refining industry provides a good example of what can be done to improve the efficiency of energy use. In 1994, the Lugari Sugar Estate, where bagasse currently provides 90 percent of energy, embarked upon an energy efficiency program to reduce the moisture content of bagasse. As a result, the efficiency of bagasse use has increased by over 10 percent (by reducing the moisture content from 50% to approximately 15%). A similar approach has been taken at Kakira Sugar, where power generated from bagasse currently meets 60 percent of its total power 31 Mining, of which lime is the major economic component, has grown by over 9% per annum since 1991 (see "Background to the Budget", various years, Statistics Dept., MFEP).  - 63 - needs. Larger sugar refineries could achieve similar recovery rates on bagasse through better management and a more efficient bagasse drying methods. 4.49 Fish is Uganda's major protein staple. An estimated 40 percent of all fish 32 is smoked mainly over open and sometimes enclosed fires. An estimated 130,000 tons of wood is consumed. Major efficiency improvements have been made in other countries in similar circumstances and with similar fish demand (e.g., Malawi, Tanzania, Zimbabwe). In Uganda, however, production will need to be first organized and rationalized before major efficiency improvements can be made. 4.50 The estimated biomass consumption in industries is summarized in Table 4.5. Table 4.5. Wood Consumption in Ugandan Industries in 1994 ('thousands tons and in TJ) Industry Tons ('OOOs) ('000 GJ) % Total Lime 646 9,696 54.7% Bricks & Tiles 230 3,443 19.4% Fish 134 2,004 11.3% Sugar/Jaggeries 95 1,426 8.0% Tobacco 63 938 5.3% Tea 31 210 1.2% Sub-Total Industry 1,198 17,717 100.0% Source: Forest Department, Ministry of Finance and Economic Planning (various publications), Uganda Lime Producers Association, NORAD, World Bank,UNDP ESMAP studies, British American Tobacco (BAT), Uganda Tea Growers Corporation, Fisheries Department, ESD field interviews and surveys. 4.51 Government and donors can accelerate efficiency improvements in industries through promotino such mechanisms as provision of investment credit (e.g., for retrofitting boilers), technical assistance and training in demand-side management and fuel switching, and energy audits to indicate wAhere improvements can be made. The private sector should be encouraged to provide energy audits and other energy services to industries. Source: Fisheries Department. Earlier estimates made by the Tearn indicated 70% of all fish caught was smoked. Later information from experts in the field show that the earlier estimate was probably true several years ago. Now, however, with improved transport and handling facilities (including refrigeration), probably no more than 40% of all fish is smoked. Wood consumption figures have been revised accordingly.  - 64 - F. BIOGAS PROGRAM 4.52 The Ugandan Government has undertaken two biogas programmes since the early- 1980s. A third programme was initiated through the Church of Uganda in the early-I 980s. The latest biogas programme under the GOU/IDA Power II and III Projects is now coming to a close. Both the initial and current programmes have been expensive, and have not demonstrated any economic viability, particularly for units installed in households. 4.53 While a potentially interesting energy option, the viability of biogas needs to be carefully examined. For instance, biogas can only realistically be targeted towards institutional (e.g., schools and hospitals) and commercial consumers, given the high capital costs and maintenance requirements. However, these institutions rarely meet the requirements for biogas digestion, unless they are dairies or abattoirs. Among the requirements for sustainable biogas digester operation are an adequate year-round supply of water, a system of stall-feeding of cattle which enables dung to be easily collected, a suitable temperature regime (above 20 C), and the willingness of the owners to carry out the substantial cleaning and management of the digester. For many institutions, purchasing wood, instead, may be both a more inexpensive and manageable task, requiring little, if any, capital investment. 4.54 Given these factors, biogas remains an expensive energy option. Its applications will remain experimental so long as less expensive fuel wood is available. Since there is no clear demand from consumers for biogas, and as it is clear that small and medium sized biogas applications will not be able to compete financially in the marketplace against wood and electricity, the Government should not extend its biogas program.  Uganda Energy Balance, 1990 (mtoe) Fuelwood Chercoal Crop Residues Coffee hulls Gasoline Aviation Turb Kerosene Diesel Heavy LPG Hydro Electricity Total (incl Bagasse) fuel (automotive) Fuel Oil Indigenous Production 5023 0 686 7 0 0 0 0 0 0 188 0 5904 Flare and Loss 0 0 0 0 0 0 0 0 0 0 0 0 0 Gas Injection 0 0 0 0 0 0 0 0 0 0 0 0 0 Imports 0 0 0 0 92 14 35 88 13 0 0 0 242 Exports a O O 0 0 0 0 a 0 0 -17 -17 Bunkers 0 0 0 0 0 0 0 0 0 0 0 0 0 Stock Change 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Supply I 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Supply 2 0 0 0 0 0 0 0 0 0 0 0 0 0 Primary Energy Supply 5023 0 686 7 92 14 35 88 13 0 188 -17 6129 %AII Prlmary Energy 82.0% 0.0% 11.2% 01% 1.5% 0.2% 0.6% 1.4% 0.2% 0.0% 3.1% -0.3% 100 0% Charcoal Production -815 228 0 0 0 0 0 0 0 0 0 0 -587 Petroleum Refining 0 0 0 0 0 0 0 0 0 0 0 0 0 Gas Manufacture 0 0 0 0 0 0 0 0 0 0 0 0 0 Power Generation Useful Energy 0 0 0 0 0 0 0 0 0 0 -63 63 0 Losses 0 0 0 0 0 0 0 0 0 0 -124 0 -124 Trans and Dlst Losses 0 0 0 0 0 0 0 0 0 0 0 -19 -19 OwnUse/Losses -214 -12 -172 -2 0 0 0 0 0 0 0 0 -399 Other Conversion I 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Comverslon 2 0 0 0 0 0 0 0 0 0 0 0 0 0 NetSupplyAvallable 3995 216 514 5 92 14 35 88 13 0 0 27 5000 % Net Supply Available 79.9% 4 3% 10.3% 0.1% 1.8% 0.3% 0 7% 1.8% 0 3% 0.0% 0.0% 0.5% 100.0% ResidentiaVCommercial 3247 216 482 0 0 0 35 0 0 0 0 16 3996 Industry 732 0 33 5 0 0 0 1 13 0 0 4 787 Transport 0 0 0 0 92 14 0 87 0 0 0 0 193 Agriculture 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Consumptlon 16 0 0 0 0 0 0 0 0 0 0 7 24 Non-Energy Use 0 0 0 0 0 0 0 0 0 0 0 0 0 OtherConsumptloni1 0 0 0 0 0 0 0 0 0 0 0 0 0 pz XI Other Consumptlon 2 0 0 0 0 0 0 0 0 0 0 0 0 0 w > Total ConsumptIon 3995 216 514 5 92 14 35 88 13 0 0 27 5000 CD Stat. Diff. 4 0 01 0. 07 1 0 0. 0 0.