THE WORLD BANK ENERGY WEEK 2006 (6 – 8 MARCH, 2006)

1. THE WORLD BANK ENERGY WEEK 2006 (6 – 8 MARCH, 2006) CHALLENGES FACED IN INCREASING MODERN ENERGY ACCESS: THE CASE OF UGANDA. KEY NOTE ADDRESS BY: HON. SYDA N. M. BBUMBA MINISTER OF ENERGY AND MINERAL DEVELOPMENT, GOVERNMENT OF THE REPUBLIC OF UGANDA 6TH MARCH, 2006. THE WORLD BANK WASHINGTON D.C.

2. BACKGROUND • Greatly honoured to have been invited to give a key note address • An opportune moment to share Uganda’s experiences • Uganda has spearheaded energy sector reforms in Sub-Saharan Africa • Aim was to create a financially viable and efficient power sector that could accelerate electricity access • Uganda is also implementing a large rural electrification project with World Bank support • National electricity access is 9%, but rural access is only 3% • Market-led reforms involved the enactment of a new Electricity Act in 1999, restructuring of the vertically integrated electricity utility company and the privatisation of business in generation and distribution. • Government’s role now virtually restricted to that of creating an enabling environment, which includes policy, regulation and general oversight.

3. BACKGROUND cont’d • We are still grappling with more questions than answers with regard to this route we have chosen to take. • Have the reforms created any impact? • Has there been improved service delivery? • Why have we not been able to increase investments to increase generation capacity to enable us meet demand and confidently expand access? • Virtually the answers to all these questions are in the negative. Why? • What has gone wrong? • Is it correct that the government’s role should be confined to merely creating an enabling environment? • Shouldn’t there be some strategic interventions by Government ?

4. IMPACT OF POWER SECTOR REFORMS - OUR EXPERIENCE • To increase electricity access, there must be several prerequisites to realise the objective. • First there must be adequate generation capacity • Secondly, there must be adequate financing to ensure that this required capacity is built and the associated access infrastructure (transmission and distribution network) is put in place. • Thirdly, electricity services must be affordable. • Following the reforms; our expectation was that the process of realising projects by the private sector would be on a fast track. • Today, apart from the two concessions of the existing generation and distribution, there is negligible progress in new private sector projects.

5. IMPACT OF POWER SECTOR REFORMS- OUR EXPERIENCE cont’d • This is inspite of the fact that there has been a lot of private sector interest to participate in developing large hydropower and other small renewable energy generation projects. • So, why has this interest not translated into implementation of projects? • One of the main reasons has been the differences in perception between ourselves and our development partners, especially the World Bank. • Government attracted three independent power producers for the Bujagali (250MW), Kalagala (450MW) and Karuma (150MW) hydro projects.

6. IMPACT OF POWER SECTOR REFORMS- OUR EXPERIENCE cont’d • WORLD BANK NEW ISSUES INCLUDED: • Uganda’s macro-economic stability would be overturned by such massive investments. So, our development partners forced us to settle for one project, i.e. Bujagali. • Did Uganda actually have the demand to warrant even one project of 250MW? On this, unending studies were carried out by the World Bank Group. • Bujagali became a subject of demonisation by environmental groups which had other agenda .This debate was allowed to derail the implementation of the project for seven years to the point when the developer, AES, which was also experiencing a financial squeeze at that time, decided to withdraw . • RESULT:Uganda is now experiencing an unprecedented energy crisis as the prolonged drought is playing havoc with the water levels of Lake Victoria

7. IMPACT OF POWER SECTOR REFORMS- OUR EXPERIENCE cont’d • Our two power stations have total installed capacity of 380MW, but only 135MW can be generated now due to the drought. It is estimated that this will fall to 80MW by June this year if the drought conditions persist. • We have now been forced to go for the expensive thermal (diesel) power, something that could have been avoided if our plans for hydro power projects had not been derailed by theoretical debates. • So how can we talk of increased access with this expensive un affordable thermal power?

8. IMPACT OF POWER SECTOR REFORMS- OUR EXPERIENCE cont’d • Another challenge associated with generation projects has been difficulties in financial resource mobilisation. • The Bujagali project took almost 7 years to reach financial closure before the sponsor withdrew. • Government has also promoted and received interest in small, grid connectable renewable energy projects to the tune of over 100MW consisting of mainly small hydros and sugar bagasse co-generation. • A weak local financial market, inadequate guarantees and weak equity positions of some sponsors have contributed to the stalling of project implementation. • Mechanisms, such as a Credit Support Facility to support local participating financial institutions, are now being instituted to enable these projects to move • Therefore, while a lot of start-up has been made, it has not translated into our expectations as we initiated the reform process almost 10 years ago.

9. MANAGING THE TRANSITION • As we went about implementing the reforms, it was assumed that we could break away from the traditional public sector service delivery and go straight into private sector delivery models. • This is the way our World Bank supported Energy for Rural Transformation (ERT) project was designed. Our experience to-date has proved this assumption wrong. • It takes time to package good projects and arouse the interest of the private sector. In addition local business entrepreneurship requires time for sensitisation and capacity building to be able to participate, plus the for usual caution that is common with investors entering an uncertain rural market. • Our recommendation is that in implementing reforms, there must be a recognised transition process • Therefore, resources should be allocated to both the market-oriented reform initiatives as well as public sector delivery efforts.

10. TARGETING POVERTY REDUCTION • It is established that electricity access to rural areas contributes to poverty reduction by catalysing productive uses of energy and enabling increased incomes among the population, thus resulting into economic growth. • Electricity services are also essential for improved social services, i.e, health, education and water supply, as well as facilitating telecommunication services. • There has been a debate between developing countries and our development partners as to what should come first: demand to justify extending electricity or supply of electricity to excite economic activities and provide the services? • In our view, the two are not mutually exclusive. Uganda’s experience is that extension of electricity to an area which did not necessarily have existing demand at the time of project implementation helped the development of viable load centres within a short time due to the economic activities excited by the availability of electricity.

11. TARGETING POVERTY REDUCTION cont’d • Our development partners should support an access planning approach that incorporates both aspects. Where there is already demand, the private sector can be supported to go there. • Where there is need to supply electricity first in order to excite demand, resources could be channelled through the public sector to extend the infrastructure and then bring in the private sector as implementation proceeds in one way or the other (e.g. new company, existing distribution service provider, cooperative, etc). • Without looking at both approaches, we cannot achieve equitable distribution while we run the danger of keeping some of our population in poverty.

12. CHOICE OF APPROPRIATE DELIVERY MODELS. • One of the major challenges is how to achieve equitable distribution, which is politically and socially desirable, while the reforms emphasize private sector infrastructure development and service delivery. • In Sub-Saharan African countries, while the majority of the rural population is poor, there are still evident economic disparities which will make certain areas or regions unviable for profit motivated private sector concessions. • Recently, in Uganda, we packaged five distribution projects selected from different regions for private sector bidding. These were meant to be pilot concessions to gauge the appetite of the private sector. Three of the five projects, from better economically endowed areas, got bidders while two, from less endowed regions, received none. Yet, these two areas and many others like them have to be served.

13. CHOICE OF APPROPRIATE DELIVERY MODELS cont.. • We have found it prudent to make a determination of such disadvantaged areas and provide plans for their electrification on a non-profit basis, where communities can participate in the installation, operation and maintenance of the local infrastructure. These could be grid connected or remote, off-grid communities. This would be under a cooperative management approach. • The next challenge in this aspect is how to appropriately design the system in such a way that the tariffs charged can cover all the operational and maintenance costs and cover any loan repayments incurred. • This calls for appropriate low cost technological choices for electrifying the poor and financing approaches that would include capitalisation of community in-kind contributions (labour, way leaves, materials, etc) as equity.

14. CHOICE OF APPROPRIATE DELIVERY MODELS cont.. • Another challenge has been that of accessing basic electricity services to the dispersed households which can only be served using solar PV systems. Main issue is affordability. In Uganda, we have piloted several approaches that include direct commercial sales with a performance based subsidy, promoting small systems (e.g two lights) and medium term (2 – 3 years) consumers financing. • We have found a lot more promise in medium term consumer financing. The critical issue is to create the right synergies between large financial institutions, equipment suppliers and rural based micro-finance institutions. In Uganda’s case, realising the lack of scale up using purely commercial sales by equipment vendors, a protracted negotiation with the World Bank has resulted into an agreement in principle to use commercial/development banks to provide medium to long-term financing to companies for leasing equipment or rural micro-finance institutions for providing solar systems on loan.

15. CHOICE OF APPROPRIATE DELIVERY MODELS cont.. • To hedge the attendant risks, a guarantee fund for the banks is being established under the ERT project. • To increase affordability, subsidies will be provided for targeted areas. The bottom line, in our view, is that scaling up PV access will require targeted incentives that bring the service within the monthly budgets of consumers for the needed energy services.

16. CONCLUSION • Many countries in the Sub-Saharan African region have taken, or are taking, up the challenge of implementing energy sector reforms. • In all this, the aim is to create a sector that can respond appropriately to the needs of increasing modern energy access, especially electricity services. • For those countries like Uganda, which spearheaded the reforms in the region, the reality on the ground does not show that there has been a tangible move forward. • The only conclusion that can be drawn is, therefore, that there is a need to re-examine and redesign the strategies and the programmes that we have put in place with the help of our development partners, basing them on the realities of each reforming country other than the “one-size-fits-all” prescription which, apparently, is now being applied.

17. I THANK YOU