POWER GENERATION THE CHALLENGE OF OUR TIME

Two things struck me while deep inside the cavernous bowels of the 600MW Karuma power dam on a recent visit to then northern Uganda facility.

One, that it is an amazing feat of engineering.

Basically some of the River Nile’s waters will be diverted underground, a 70 meter drop at the bottom of which it will turn six turbines and finally be ejected about 8 km to rejoin the mighty river on its journey north.

"And just to get a sense of the extent of the work already done, in preparation for the dam enough rock to fill 15 Namboole stadiums was evacuated to make way for the $2.2b project. The Karuma power dam is only one of two such dams on the continent, with the second being the Ruacana power station in Namibia.

My second realisation was that considering the size of Karuma, which will be the biggest power project in the country when commissioned at the end of 2019, we have a long way to go to meet the stated target of 17,000 MW generation capacity in the next ten years.

With only 20 percent of Ugandans connected to the grid, it is clear there is a lot of suppressed demand locally. This is before you consider, the potential uses in the mining, agro-processing and other industries or the unserved external markets of South Sudan and Eastern Congo and those looking to bridge their own capacity gaps in northern Tanzania, Rwanda and Western Kenya.

The real challenge for this country is how to finance these projects.

Given the average cost of $3m per MW according to the recent large hydro-power projects it will cost $51b or twice the current size of the Uganda economy to finance this ambition. Of course all the power will not be generated by tapping our hydro-electric power generation capacity, at last count 4000MW along the Nile alone.

Internally with a tax to GDP revenue of 14 percent and savings to GDP of 15 percent our scope for local mobilisation of the resources needed to rather limited. On the up side it also means there is also a lot of leeway to collect more revenue or to encourage more savings by the citizens.

However even with oil revenues, this unlikely to be managed fast enough.

So we are going to have to rely on loans and private capital to meet our obligations.

It has to be said that we had it relatively easy with the financing for the Karuma and 183 MW Isimba dam as we were dealing with one financier.

With a past project the 250 MW Bujagali dam there were multiple financiers led by the World Bank’s private sector lending arm the International Finance Corporation (IFC).   Multiple financiers is standard practice for big projects, as the lenders seek to mitigate the risk by sharing the burden with other partners. Despite the best efforts of the government and the project promoters, the financing was still pricey. As a result government has had to help refinance the project to ensure a lower tarrif.

The point is, the way to get cheaper money is to lower the perceived risks of such projects.

"In working out risk of a project financier’s look for four broad parameters does the project resonate with their mission, is the project viable, can it support the desired return and finally is the management credible and competent....

This last part is important in view of the government’s plans to recreate the old Uganda Electricity Board (UEB) by merging the distribution, transmission and generation companies as part of a wider restructuring of the government departments, agencies and commissions.

The restructuring being sold as money saving initiative may in fact cost the government more in lost specialisation.

For instance Umeme, the company that runs the distribution concession has done in the last 13 years of its concession what its predecessor UEB could not do in almost 50 years of operation. It has revamped and expanded the distribution grid, it has added a million consumers to the grid from the 280,000 they found in place, it collecting almost all the money due to its from clients and has reduced losses on the grid significantly.

They have been able to achieve this because they have specialised distribution of power which is different from transmission and generation.

This improved competence has opened them up to external financing and allowed them to invest heavily about $600m since the concession opened in 2005.

Umeme in its own right, is going out into the open market to tap the markets for cash to finance its capital expenditures and this is not by mistake. Over the last decade or so they have developed verifiable competence in what they do and their ability to do it profitably, year after year and as a result they tick the aforementioned boxes of what financiers are looking for in potential clients.

Using this as an example, this why a return to the old UEB would be a bad idea. While UEGCL is now building capacity to build and manage power generation facilities, subsuming them in amorphous structure would not only throw away the benefit of specialisation but will short circuit an ongoing process of creating capacity for it to stand on its own and drive our ambitious power generation targets.