Uganda - Fourth Power Project

Report No. PID9256 Project Name Uganda-Fourth Power (@) Region Africa Regional Office Sector Electric Power & Other Energy Adjustment Project ID UGPE2984 Borrower(s) GOVERNMENT OF UGANDA Implementing Agency Address UEB AND THE MINISTRY OF ENERGY AND MINERAL DEVELOPMENT Uganda Electricity Board (UEB) Amber House, P.O. Box 7069, Kampala, Uganda Contact Person: Mr. Paul Mare, Managing Director Tel: 256 41 254071 Fax: 256 41 235119 Environment Category B Date PID Prepared December 12, 2000 Projected Appraisal Date October 10, 2000 Projected Board Date March 30, 2001 1. Country and Sector Background Uganda's economic performance has been impressive. The average real rate of GDP growth has been about 6.9 percent per annum since 1990/91, resulting in an annual 3.7 percent increase in real GDP per capita and over a 20 percent decline in poverty (headcount index) from 1992 to 1997. The annual average consumer price inflation has fallen from 24.6 percent in 1990/91 to -0.2 percent in 1998/99. The reform program implemented since President Museveni came to power in 1986 has aimed at establishing fiscal discipline, opening up the economy and promoting reliance on market forces. It has been successful in establishing fiscal discipline and restructuring public expenditure. Progress has been made on trade liberalization, privatization, civil service and financial sector reforms and an impressive decentralization effort is ongoing. Further, the high stock of debt that constrained economic development in Uganda has become a smaller obstacle as a result of Uganda's participation in the Heavily Indebted Poor Country (HIPC) initiative.The energy sector, however, remains a constraint to increased and equitable growth. The modern segment of Uganda's energy sector - electricity and petroleum - is small. Recent surveys indicate that the quality and adequacy of power supply is perceived by private sector managers as the most binding constraint to private investment. Expansion of generating capacity has not followed the rapid economic growth which Uganda has experienced during the recent years. Although shortages have reduced after the commissioning of 80 MW at the Kiira hydro power station in August 2000, supplies still have to be curtailed during the daily peak periods. Furthermore, few people have access to modern energy supplies and the country has one of the lowest per capita consumption levels of modern energy in Sub-Saharan Africa. Despite Uganda's vast hydropower resources concentrated on the White Nile River, only 5 percent of the population has access to electricity. About 72t of the total grid electricity is consumed by 129 of the domestic population  concentrated in the Kampala metropolitan area, and in the nearby towns of Entebbe and Jinja. With continued strong economic growth and concurrent high electricity demand growth, projected at about 8 percent per year, Uganda needs to better utilize its domestic energy resources, mainly hydropower. As regards petroleum fuels, Uganda is dependent on supplies from Kenya and Tanzania. Import and transport costs for delivery to Kampala result in significantly higher prices in Uganda than in other Sub-Saharan African countries. The Government liberalized the downstream petroleum sector in 1994, but the legal and regulatory framework governing the sector is still inadequate and the capacity to monitor the sector is weak. Some six years after the liberalization, government still has no law or mechanism to enforce anti-competitive behavior. The petroleum sub-sector is an important contributor to government revenue and oil imports have a substantial impact on Uganda's balance of payments. Electricity Sector Reform and PrivatizationIssuesThe Uganda Electricity Board (UEB) was established in 1948 as a quasi independent vertically integrated monopoly to generate, transmit, distribute and supply electricity within Uganda and other countries in the region. UEB is a public enterprise 100% owned by the Government. With enactment of the Electricity Act of 1999 it no longer has a legal monopoly in the power sector, but it still continues to undertake generation, transmission and distribution activities in the country. These include the Nalubaale and Kiira hydro power stations, with 180 MW and 80 MW installed capacity respectively, and about 10 MW in diesel and mini-hydro capacity. The system also includes some isolated diesels, an interconnected 132 kV and 66 kV transmission network, a 33 kV sub-transmission network, and a distribution network at voltages 11 kV and below. Total generation was about 1,350 GWh in 1999 and system peak was 242 MW in August 2000. Consumer demand at peak times exceeds available generating capacity. UEB has about 2,000 employees serving less than 170,000 customers, which are heavily concentrated in the major population centers around Lake Victoria. UEB has for a long time suffered from poor financial performance and operating efficiency, low productivity, and inadequate funds for required investments. These inefficiencies have left the utility in a weak position. It is, by normal standards, close to insolvency. It has not been able to generate an adequate cash flow from its present average retail tariff of about US 5.6 cents/kWh. Poor collection has also been a major problem. Over the past year, however, the performance of the utility has improved, owing to the efforts of a new management team with private sector experience - in place since April 1999.System losses, both technical and non-technical, are high at 35%. This, together with the poor collection performance, resulted in UEB realizing only around 50% of the value of the electricity generated in 1999 for sale in the Ugandan market (excluding exports). Although UEB has undertaken campaigns to reduce electricity theft and engaged private debt collectors, non-technical (or commercial) losses due to illegal connections and non-payment of utility bills continue to remain serious problems and management efforts will have to be further reinforced. Various factors such as an inadequate billing system, inaccuracies and the existence of un-metered supply have exacerbated the problem. The public sector, which consumes roughly 10% of the electricity, is a major defaulter on its payment obligations to UEB. In order to reduce the technical losses to economic levels, heavy investments in the network, especially distribution, will be needed over the coming years.The major cause for the poor state of the power sector has been the lack of management and -2 -  financial autonomy of UEB from the Government. This led to the lack of commercial business orientation, accountability and modern utility management practices. Government influence has prevailed in tariff-setting, investment decisions, and personnel deployment, among others. Under such a politicized environment, introducing the management and operational autonomy and performance incentives needed to improve electric service to consumers proved difficult and it was only recently that UEB's management has been given more autonomy. Government StrategyImprove Power Supplies. Government's long-term strategy is to develop Uganda's large hydro power resources through Independent Power Producers (IPPs). Based on the current status, the first IPP plant (Bujagali) would be operational around the year 2005/6. To meet the growing demand in the meantime, UEB is constructing a new hydroelectric generation plant, known as the Kiira power station (formerly the Owen Falls Extension), adjacent to, but not connected to the existing Nalubaale plant. The plant will be completed in three phases. The first phase, financed under the on-going Power III project, comprised the construction of a new dam, power house, diversion canal, civil works for generating units 11 through 15, and the installation of 80 MW (Units 11 & 12) of generating capacity. These two units were commissioned in August 2000, increasing the total installed system capacity to 260 MW. The second phase (Unit 13), financed by SIDA and NORAD, is scheduled for completion at the end of 2002 and will increase the installed system capacity to 300 MW.Since it is possible to install two additional units at Kiira with a short lead time, the Government has requested IDA financing for the final third phase. Acceleration of installation of these units would provide additional capacity by 2003, thus significantly improving the supply situation before the first IPP comes on-line. Given the high system losses, UEB is in parallel with its supply expansion program also implementing a distribution strengthening and technical loss reduction project, financed by the African Development Bank (AfDB).Increase Access. The government has adopted, in consultation with the Bank, a commercially-oriented approach -- with the government playing the role of a market enabler -- towards rural electrification. The main elements of this strategy are: (i) level playing field for private sector participants; (ii) enabling regulatory framework; (iii) cost recovery and cost-based tariffs; and (iv) transparent subsidy transfer and financing mechanism. In line with this approach, the Government has initiated discussions with the Bank on the Africa Rural and Renewable Energy Initiative (AFRREI) for financial support for rural electrification. The analyses carried out by AFRREI so far have concluded that Uganda offers good prospects for and would benefit from private sector led, commercially oriented rural electrification. However, the necessary institutional and regulatory enabling environment needs to be established first. This will be supported under the Energy for Rural Transformation project, scheduled for appraisal in early 2001, at which time the Government's recently completed Rural Electrification Strategy will begin implementation.Restructure and Privatize. Realizing the negative impact on economic growth of the weakness of the power sector, Government has started implementation of a comprehensive reform and privatization program. The program includes the unbundling of UEB's generation, transmission, and distribution businesses into separate companies, the establishment of a legal and regulatory framework necessary for private sector participation and the creation of an independent power sector regulator. Government has adopted the following structure for the power -3 -  industry: One distribution company to be concessioned to private sector; One generation company to be concessioned to private sector, including the existing Nalubaale and Kiira hydro stations; A separate transmission company acting as a single buyer that will hold existing power purchase agreements (i.e. Bujagali and the future generation concession company). The Government's medium term objective is, however, to allow for direct contracting between distribution companies and future generators.Details of the program and the specific implementation steps have been agreed between the Government and the Bank based on the recommendations of a Power Sector Restructuring and Privatization Study, completed in May 1999 and subsequent sector studies. So far, progress on implementation has been satisfactory, with the Government initiating a number of actions as summarized in the table below. Reform EventTarget date:Review London Economics Study & agree with WBG on Reform AgendaApril 1999 (actual)Cabinet Approval of the Reform AgendaJune 1999 (actual)Parliamentary Approval of Legal / Regulatory Framework (Electricity Law)November 1999 (actual)Hiring of Privatization AdvisorsApril 2000 (actual)Appointment of RegulatorApril 2000 (actual)First draft lease/power sales agreement for the distribution concessionSeptember 2000 (actual)Request for Proposal for Privatization of DistributionFebruary 200lAwarding of Concession for the Privatization of DistributionAugust 200lElectricity tariffs, which were last adjusted in 1993, have been declining in real terms, and stand now at about US cents 5.6/kWh. An increase, though necessary to improve UEB's financial position and to finance a portion of required investments, has been difficult to justify to consumers at a time when UEB has been forced to ration supplies. Following the improvement brought about by the additional electricity from the Kiira station, tariff increase is at an advanced stage of consideration, and is intended to be effected before commencement of the project. Petroleum Sector Development IssuesUganda Liberalized its downstream petroleum sector in January 1994. Oil marketing companies have benefited from the liberalization, but this has not enhanced competition or lowered consumer prices, nor has it improved product quality. One reason for this situation is that the regulatory framework governing the sector is inadequate and the capacity to monitor the sector is weak. With German financial assistance, the Government has, however, introduced an updated Downstream Petroleum Bill to govern the sector. The Bill is before the Cabinet and is expected to go to Parliament next Spring for enactment into Law.Because Uganda is land-locked, the cost of delivering petroleum products to markets is significantly higher than in other sub-Saharan African countries, mainly because of the transit cost of products imported through Kenya and Tanzania. This problem is aggravated by the lack of competition in bulk transport in Kenya. The cost of oil imports was about $122 million in 1999. If the economy continues to grow and modernize, petroleum demand can be expected to rise rapidly from the current low level of some 500 million liters per year. Given the importance of adequate energy supplies for economic growth and the substantial impact of oil imports on Uganda's balance of payment, providing adequate incentives for improved efficiency in supply is critical.Government StrategyThe Government is committed to improving the functioning of and enhancing competition in the sector through a number of measures: (i) active monitoring and market information dissemination to public; (ii) establishment of a legal and regulatory framework; and (iii) attracting new entrants to the market. To this end, Government has requested IDA assistance in implementing the law including - 4 -  setting up a competent body to monitor petroleum operations. The assistance under the proposed project would include technical assistance in preparing and setting up the new regulatory framework and monitoring arrangements, capacity building, and acquisition of monitoring equipment. 2. Objectives The objectives of the project are: To improve power supply to meet demand by supporting least-cost investments. The project would bridge the electricity supply deficit by 2003, after which the private sector is expected to take over financing of expansion. The project also aims to build capacity for the reform processes in the power sector in preparation of privatization; and To build capacity for the adequate monitoring of the liberalized petroleum sub-sector and for improving regional energy trade. The project complements three other planned and ongoing Bank operations, which are supporting GOU's power sector reform and privatization program. 3. Rationale for Bank's Involvement With Bank participation, sector reform would be accelerated by making its continuation a condition for credit approval and by increasing Government's capacity to implement reform and privatization. Several donors (NORAD, DfID, GTZ, SIDA, JICA, AfDB, NDF) have assisted the Government and UEB in financing needed investments and providing technical assistance to sector reform. A broad based sector reform, such as the privatization of the power industry can only be achieved with the financial and coordination resources of the Bank. The Bank will also facilitate the adoption of an optimal power system expansion sequence to meet demand and mobilize donor resources for investments. Finally, Bank participation would increase transparency in procurement and Uganda would also be able to capitalize on lessons learned by the Bank from similar projects in other countries. 4. Description The project has four components: A. Power System Expansion and Rehabilitation (Part A) Al. Investment: - Installation of two 40 MW generating units (units 14 and 15) at the existing Kiira hydro power station (unit 15 is subject to confirmation of its viability before disbursement begins) - Civil works and hydromechanical equipment for generating unit 13 - SCADA & Telecommunications System - Rehabilitation of Nalubaale (formerly Owen Falls) substations - Rehabilitation of Transmission substations A2. Institutional Support - Design and Supervision of Units 14 & 15 - Supervision of Unit 13 - Technical and economic studies B. Environmental Monitoring (Part B) - Environmental monitoring plan -5-  - Environmental officer C. Power Sector Development and Reform (Part C) - Water Management Study - Consumer Satisfaction Surveys and Energy Efficiency Awareness - Sector Studies and Preparation of Future Projects - Training of the staffs of the Electricity Regulatory Authority (ERA) and MEMD - Equipment for ERA and MEMD. - Consultants' Services D. Petroleum Sector Development and Reform (Part D) - Petroleum product quality monitoring equipment comprising: (a) mobile quality testing laboratory: and (b) testing equipment for a stationery laboratory. - Specialized advisory services to MEMD - Training of petroleum monitoring cell staff. - Equipment for petroleum monitoring cell at MEMD 5. Financing Total ( US$m) Total Project Cost 97.29 Planned IDA credit: $ 66.3 million. Co-financing: NDF and NORAD. 6. Implementation Implementation Arrangements:Power System Expansion and Rehabilitation Component- UEB initially and after privatization the generation and transmission companiesEnvironmental Monitoring:- UEB initially and after privatization the generation and transmission companiesPower Sector Development and Reform:- Ministry of Energy and Mineral Development (MEMD)Petroleum Sector Development and Reform:- Ministry of Energy and Mineral Development (MEMD) 7. Sustainability The proposed investments will be sustainable if the power industry is placed on sound financial footing. This calls for sector reform to ensure that the power sector entities are run on sound business principles. To this end, the project is part of the Bank's energy sector assistance strategy to help the Government implement its reform program including restructuring followed by divestiture to the private sector of the power distribution and generation functions. 8. Lessons learned from past operations in the country/sector Key lessons learned in PCR for Power II:1. Bank's over optimism about UEB' s implementation capacity led to an unrealistic timetable for project implementation.The project will finance assistance for project implementation, including procurement.2. Measures to improve institutional and financial performance have to be initiated up-front and be comprehensive. Weaknesses in power sector management, including lack of autonomy and commercial orientation of UEB's operations, should have been - 6 -  addressed.Government has already initiated a comprehensive reform and privatization program. A detailed implementation plan for the privatization of UEB has been agreed upon.3. The Bank should have been more decisive in enforcing compliance with financial covenants, especially the covenant requiring UEB to maintain an agreed relationship between accounts receivable and its annual operating revenues.Project will focus on ensuring that an adequate management is in place through the privatization process. Global lessons: Three main lessons emerge from the Bank's power sector operations: 4. Increasing private participation relieves government budgets, improves service quality and expands access. Government has initiated, with Bank and donor support, the reform and privatization of the distribution and generation functions through the Privatization and Utility Reform project. The proposed project will facilitate privatization through improving supply capacity. 5. Implementing reform requires political commitment. The Government has demonstrated its commitment to reform by starting the implementation of a satisfactory Power Sector Reform and Privatization program and the enactment of a new Electricity Law. The project will provide technical assistance to Government. 6. Expanding access to modern energy requires specific focus on reform design and implementation.The government has adopted a satisfactory commercially-oriented approach -- with the government playing the role of a market enabler -- towards rural electrification. 9. Program of Targeted Intervention (PTI) N 10. Environment Aspects (including any public consultation) Issues : An Environmental Analysis was carried out in April/May 1999 in consultation with stakeholders. In June 2000, a Bank pre-appraisal mission visited the project area and met with government officials and environmental groups to discuss the content of the EA and an Environmental Monitoring Plan. The findings of this pre-appraisal mission have been incorporated into the final EA report dated August 31, 2000.The pre-appraisal mission confirmed the findings of the EA that the project would not have any major environmental impacts because it did not involve construction of new structures - the two generating units would be installed in an existing power house. The mission also established that initial concerns about potential environmental impacts - including mosquito breeding and uncontrolled future growth of the water hyacinth, which may impair water discharges- related to the installation of units 14 and 15 will not materialize. First, the units will be installed in two existing bays which were constructed as part of the Power III Project and which are covered in the meantime by steel plates. Hence, there will be no environmental impacts due to mosquito breeding in open construction pits. Second, at the time of the pre-appraisal mission, the water hyacinth had been almost eliminated in the project area through mechanical removal. UEB has access to water hyacinth harvesting equipment at the power station. Furthermore, using funds from the Power III Project, UEB has constructed a concrete surfaced road at Rippon Falls (upstream of the Kiira power station) for safe removal of the wet water hyacinth by truck, and installed a water hyacinth boom in Rippon Falls, a safety boom at the entrance of the power canal, and a floating boom before the intake structures.The project will not involve resettlement or cultural heritage issues.The only environmental mitigation measure required under the project is a decommissioning plan (including restoration of the project -7 -  area), which will have to be prepared and implemented by UEB at the end of the project. Such a plan is a requirement under Uganda law. This will involve the removal of temporary infrastructure such as sewage lines, electricity lines, buildings, construction materials, used oils etc. The scope of the decommissioning plan will depend on the amount of temporary infrastructure to be transferred from the ongoing Power III which will be come clearer towards the end of Power III. Transferring the use of facilities from Power III to the proposed project will eliminate any negative environmental impacts due to the demobilization and remobilization of construction contractors to the site, and minimize the risks associated with construction and rehabilitation services. As part of this decommissioning plan, an environmental audit will be conducted to assess the extent of potential environmental liabilities.Consultative Approach:Government: UEB, the Ministry of Energy and Mineral Development, the Ministry of Finance and Planning and theMinistry of Water, Lands and Environment were involved from the outset and have been closely consulted throughout the project to ensure their effective participation. The project has been prepared by UEB and MEMD.Private Sector: A survey of 243 randomly selected private enterprises was carried out in early 1998. The sample is representative for 5 major economic sectors: commercial agriculture, agro-processing, manufacturing, tourism, and construction. The survey identified inadequate infrastructure, particularly the shortage of power, as the leading constraint to the expansion of private sector investment in the economy. Results led to the acceleration of the proposed project. The Uganda Chamber of Commerce and the Uganda Manufacturers' Association have been consulted on the project.The new Electricity Act was widely distributed to the various stakeholders, including the private sector and the Government took their comments into consideration in finalizing the Act. Other consultations have been carried out, including potential private investors - the first investor conference was held in Kampala in June 2000 and a second one in London in October.Parliament and Civil Society: In April 1998, GOU organized a seminar on privatization for members of Parliament as well as journalists and civil society to sensitize them. The proceedings from the seminar were taken into account in designing the privatization process. In late 1998, following concerns about the integrity, transparency and efficiency of the privatization program, the Parliament launched comprehensive investigations, which led to substantial institutional reforms in the program. Parliaments collaboration will also be essential to pass relevant legislation. Environmental Agencies: The Fisheries Resources Research Institute (FIRRI), Enviro & Industrial Consult (U) Ltd., Makerere University, the Assistant Commissioner, Survey and Mapping Division in Entebbe, the Water Resources Department (WRD) and the National Environment Management Agency (NEMA) have been consulted on the project. Their proposals have been included in the design.Labor Unions: Government has briefed the representatives of the labor unions and a Member of Parliament for Workers on the sector reform and UEB's privatization and consulted on their potential impact on workers. Two key recommendations emerged: (i) the need to inform workers of individual PEs early in the divestiture process and to keep them informed throughout; and (ii) fair and prompt payment of retrenchment benefits and severance to those workers made redundant as a result of the process. The Utility Reform and Privatization project will address these concerns through its comprehensive communications program and through the policy, guidelines and financing of - 8 -  retrenchment benefits.Other Donors: Donors supporting the power sector programs have been consulted during the preparation of the project. 11. Contact Point: Task Manager Paivi Koljonen The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: (202) 473-3229 Fax: (202) 473-5123 12. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. This PID processed by the InfoShop during the week ending December 29, 2000. -9-