Energy Response

AUGUST, 2006
PREAMBLE

The mandate of the Ministry of Energy and Mineral Development is to; "establish, promote the development, strategically manage and safeguard the rational and sustainable exploitation and utilization of energy and mineral resources for social and economic development." This mandate is expressly derived from the Constitution of The Republic of Uganda that stipulates under National objectives and Directing Principles of State Policy xxvii (iii) that "the state shall promote and implement energy policies that will ensure that people's basic needs and those of the environment are met".

Therefore, Mr. Speaker, this August House has a crucial role to play and consequently, choices to make, in order to uphold this constitutional mandate regardless of the political divide or affiliation. The effects of a weakening energy sector are brutally cross- cutting and non-discriminatory.

Mr. Speaker pursuant to its constitutional mandate, the Ministry of E & MD in 2002 came up with an Energy Policy. In her forward, the then Minister HON SYDA.N.M BBUMBA (MRS) had this to say "maintaining the current growth and, ultimately, achieving sustainable development is a challenge that calls for long- term strategic planning. Energy planning and development is a key input in the overall strategic planning cycle. In the past, this important linkage could not be adequately addressed since the energy sector lacked a comprehensive integrated policy framework. Annual Ministerial policy statements accompanying the budget drove the sector. This holistic energy policy will go a long way in laying the foundation for the country's development"

Mr. Speaker Sir, as to whether the spirit behind this statement is a reflection of the times is any body's guess. For the 2006/ 2007 Ministerial Policy Statement is the usual rhetoric, and we are highly doubtful that the budgetary requirement of 244 billion that the Ministry is seeking will enable it execute its mandate to the required levels.

Mr. Speaker, it should be brought to the attention of this House that the defunct U.E.B under the able leadership of Hon SIMON Dujanga, who now happens to be the Minister of State in the Ministry of Energy, had long done the sequencing of the construction of hydro power plants along the Nile. Government disregarded this plan, and instead got pre-occupied with the privatization of U.E.B the effect being the undue delay in hydro-power development and the resultant cost in load-shedding and lost production that we are now grappling with in shame. Even with implementation of the President's new promise, we must remain deeply concerned.

ENERGY SECTOR

Hon. Speaker, you will recall, that when the Shadow Minister of Finance Planning and Economic Development prepared the Opposition response to the 2006/ 2007 Budget, he pointed out that Uganda's energy shortfall stands at 800 Mw as opposed to the 200Mw that the Minister of Finance presented in his Budget. It is, therefore, important to note, that Uganda's installed capacity stands at about 350mw, yet the actual power being generated is 170 mw.

Mr. Speaker while presenting the State of Nation Address, the President did aver that Uganda was going to build two hydro power stations, within 44 months i.e. Bujagali and Karuma unfortunately; this reflects 'the usual fire brigade approach' that has characterized this Government's long-standing disregard of institutional plans.

I) BUJAGALI HYDRO ELECTRIC POWER PROJECT

This Bujagali project is envisioned to have a 250mw generating capacity, and is welcome. However, Mr. Speaker and Hon. Colleagues, the amount of water that can be drawn from Lake Victoria today and for the next so many years is only 750 cubic meters per second. This spillage translates into 120mw from both Nalubale and Kira power stations. Thus, Bujagali being only 5KM down stream we should not expect more than 130mw for quite a while. This scenario raises so many questions. i.e.

1. What will happen to the unutilized capacity for as long as the water levels remain low?
2. Assuming government under the power purchase agreement is to pay the investor for the unutilized capacity, what will be the cost and what is its sustainability?
3. Assuming the tariff is passed onto the distribution chain, will it Bujagali electricity be affordable to both the domestic and industrial consumers?
4. Taking into consideration the above, is Bujagali power project "Uganda's Energy Dream solution" as the President wants the Nation to believe?
II) KARUMA HYDRO POWER PROJECT
This project is designed to deliver approximately 200mw into the grid on completion. However, unlike Bujagali, owing to its additional reservoir of Lake Kyoga, the amount of water for power generation at Karuma makes this project the more logical of the two options. One then wonders why Government continues to give precedence to the Bujagali Dam in spite of the risks and costs. Surely, why not Karama first, when the investors for this Dam have their funds at hand.

(iii) THERMAL GENERATION

In a desperate measure to mitigate the power crisis that has since shattered our economy, the Government of Uganda licensed AGGREKO to install a 50Mw light fuel-diesel generator at Lugogo in May 2005. Mr. Speaker, this light fuel generator consumes an average of one hundred and eighty thousand litres of fuel daily. Inevitably, the cost of this power translates into an exorbitant tariff when put into the distribution chain at market price. Mr. Speaker and colleagues, what is strange but true is that because the pricing is unaffordable the Government had to buy down the tariff with a monthly subsidy of Seven million United States Dollars from the Energy Stabilization Fund which has since run out. With the depletion of this fund, government has been forced to borrow money from the World Bank to sustain this subsidy until Bujagali Power project is commissioned. What rings in our mind is WAS THIS DECISION RATIONAL AND IN THE INTEREST OF THE NATION? In a desperate measure to mitigate the power crisis that has since shattered our economy, the Government of Uganda licensed AGGREKO to install a 50Mw light fuel-diesel generator at Lugogo in May 2005. Mr. Speaker, this light fuel generator consumes an average of one hundred and eighty thousand litres of fuel daily. Inevitably, the cost of this power translates into an exorbitant tariff when put into the distribution chain at market price. Mr. Speaker and colleagues, what is strange but true is that because the pricing is unaffordable the Government had to buy down the tariff with a monthly subsidy of Seven million United States Dollars from the Energy Stabilization Fund which has since run out. With the depletion of this fund, government has been forced to borrow money from the World Bank to sustain this subsidy until Bujagali Power project is commissioned. What rings in our mind is WAS THIS DECISION RATIONAL AND IN THE INTEREST OF THE NATION?

iv) RENEWABLE ENERGY GENERATION
We in the opposition are very supportive of the renewable energy development program. If implemented rationally and without undue political interference the areas that are not easily accessible to the existing grid will be serviced. However, if we look at the spread out of the mini- hydro sites that are prioritized for development, 90% are in the western region leaving out the Elgon region. Which has great potential? Secondly, we are cognizant of the wonders co-generation in sugar mills has done in Mauritius. In this regard, we urge Government to get out of the illusion that having three sugar mills in the country is the critical mass desired to consolidate the sugar industry. We propose that Government designs a vibrant sugar policy with special emphasis on the Acholi, Lango and Teso sub regions for co-generation and post- war reconstruction.

V) RURAL ELECTRIFICTION

Mr. Speaker, rural electrification parse is a noble concept for it takes power to the rustic economy where 80% of our population derive their livelihood. However, for this concept to outlive its intended design, the agrarian question ought to be addressed in a more holistic and realistic manner as opposed to the PMA, NAADS etc resource guzzling approaches whose results you can hardly measure quantitatively and qualitatively. We say this against the backdrop of the ever rising poverty levels, unaffordability of the rural folk to getting connected, and the fact that some lines since their installation have never seen electricity run through them.

VI) PETROLEM SUPPLY AND DISTRIBUTION SUB- SECTOR
Mr. Speaker, we appreciate the Ministry's efforts to streamlining this very important sub-sector, i.e. through the Petroleum Supply Act 2003 and liberalization of the sector that had for quite a while been in the hands of Multi- National players who transacted more or less as a Cartels to the consumers.

However, Mr. Speaker and Colleagues, much as progress has been made in the sub -sector, we wish to put it to this House that the profit margin on white Petroleum products in Uganda remains the highest in the SUB -REGION. This, coupled with a high tax regime per litre of fuel, leaves the population grumbling because of an upward trend in the cost of living and production, and cut in savings

We in the Opposition believe in innovative management we therefore propose that Government should immediately create a FUEL CONSUMPTION FOR ELECTRICITY FUND out of which a win-win situation will emerge. We propose that the fund be based on a Shs50 per litre profit forfeiture by the oil companies, and a Shs50 per litre tax forfeiture by Government. With an annual fuel consumption of 700million litres, these forfeitures will generate Shs70billion.

With the Fund operational and prudently managed, any financial institution commercial or otherwise-across the globe will provide upfront financing for a number of power projects without much ado. All it will take is commitment and amending some sections of the Petroleum Supply Act 2003 i.e. sections 6, 26, 35 and 44 among others.

VII) PETROLEUM EXPLORATION AND DEVELOPMENT SUB-SECTOR

Mr. Speaker Sir, energy supply is a global challenge that we as a country must adequately prepare for. Mr. David.J.Oreilly Chairman and Chief Executive Officer of Chevron Corporation, one the World's leading petroleum giants, recently put this challenge in clear perspective when he said, and I quote:

"Energy will be one of the defining issues of this century. One thing is clear: the era of easy oil is over. What we all do next will determine how well we meet the energy needs of the world in this century and beyond? Demand is soaring like never before. As populations grow and economies take off, millions in the developing world are enjoying the benefit of lifestyles that require increasing amounts of energy. In fact, some say that in 20 years the world will consume 40% more oil than it does today. At the same time many of the world's oil and gas fields are maturing. And new energy discoveries are mainly occurring in places where resources are difficult to extract, physically, economically and even politically. When growing demand meets tighter supply, the result is more competition for the resources.

We can wait until a crisis forces us to do something. Or we can commit to working together, and start by asking the tough questions: How do we meet the energy needs of the developing world and those of the industrialized nations? What role will renewable and alternative energies play? What is the best way to protect our environment? How do we accelerate our conservation efforts? Whatever action we take, we must look not just to next year but to the next 50 years".

Mr. Speaker, and Honorable Colleagues, going by the above citation, we need not belabor the importance to our Nation of the oil discovery in the Albertine region. All that we demand is that this process of exploration, production and the consequent legalities should be handled in a transparent manner as enshrined in our Constitution. Therefore, the notion that the agreements signed between Hardman Resources Ltd, Energy Africa Ltd, Tullow Oil and the Government of Uganda are classified should not arise.

Mr. Speaker Sir, going by the Ministerial Policy Statement, Government has already signed Production Sharing Agreements with the aforementioned companies. Under what legal Framework did the Government proceeded to sign these agreements? Section 244 (2) of the Constitution of the Republic of Uganda provides that:

"Subject to this article parliament shall make laws regulating

a) The exploitation of minerals and petroleum.
b) The sharing of royalties arising from mineral and petroleum exploitation...." Under which confidentiality provisions of the laws enacted thus far did Government act?

That aside, Mr. Speaker, we would wish to bring to the attention of this August House that Production Sharing Agreements are an extremely complicated model for a poor country like Uganda , yet it is the system favored by the oil corporations.

In theory, the State has ultimate control over the oil while a foreign company or consortium of companies extracts it under contract. In practice, however, the actions of the state are severely constrained by the stipulations in the contract.

In a production sharing agreement, the foreign company provides the capital investment in exploration, drilling and eventually the construction of infrastructure. The initial production

of oil extracted is then allocated to the company, which it sales to recoup its costs and capital investment. This oil is referred to as cost oil. Going by the recent interview the "Minister" in one of the dallies, the proportion of oil production in any year that will count as cost oil is between 50-60%. This is unnerving, because, once the costs have been recovered; the remaining profit oil is divided between the State and Company in agreed proportions.

At a later stage, we shall functionally demonstrate the intricacies that the government may have got entangled in. Bearing in mind the level of corruption in our country, and the mismanagement and corruption associated with oil production in other African countries, we demand that the existing Petroleum Production Sharing Agreements be tabled before this August House for perusal.

Recommendations

1. Government should review its strategy of involving the private sector in the development of the electricity sub-sector, by legislating several benchmarks that will regulate the financial and cost norms of the Power Purchase Agreements that normally bear inherent risks. In particular, we urge Government to firmly regulate the following to avoid piling undue cost factors in any PPA:-

I. Financing charges - interest rates on loans borrowed by the investor.
II. Inflation factor and foreign exchange risks.
III. Return on equity and incentives such as on deemed generation.
IV. Operation and management costs.

These are areas that lead to corruption in negotiations of PPAs, and are sources of high tariffs and abnormal profits for investors.

2. The single buyer model currently in operation in the electricity sector (Uganda Electricity Transmission Company Limited), in our considered opinion, is a recipe for inefficiency. Therefore, since the trend is to develop several mini hydro's across the country and to introduce an energy mix, Government should undertake to develop the transmission grid and ensure that it is managed at the regional levels, in order to enhance efficiency and create equal opportunities. In other words, government should adopt a Multi Buyer Model.

Government should immediately create an Electricity Fund from petroleum sales as we proposed above. In readiness for our entry into the oil Production Cartel, Government should also immediately, through open consultation start developing a National Petroleum Fund Management Policy, and a Petroleum Trust Fund to enable prudent management of Petroleum income and effective Investment in our future.

4. Energy development and petroleum exploration attract huge sums of money and vested interests. Therefore, being susceptible to corruption and high level Political interference, we urge Government to practice TRANSPARENCY to its highest calling if we are to develop resilient home growth solutions to our problems.

CONCLUSION.

In conclusion, Mr. Speaker and Honorable Colleagues, the challenge before this House is enormous and the manner in which we handle it could either drive the country forward, lead to stagnation, or to total halt in major economic activities. It is therefore, our humble submission that we adopt a BI - PARTISAN Modus Operandi to sort out this energy crisis once and for all, without recourse to apportioning blame. Mr. Speaker, it is our sincere desire that the Ministry's Policy Statement be given additional time on the near future in order to generate consensus on the way forward.

Hon. Speaker Sir, Hon. Members, I thank you all, and I beg to move.

Harry Kasigwa (MP)
Shadow Minister for Energy and Mineral Development