The Uganda Distribution Concession Energy Week ...siteresources.worldbank.org/.../Tenenbaum_EW05.pdfThe Uganda Distribution Concession Energy Week Washington, DC 15th June 2005 Emmanuel

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THE REPUBLIC OF UGANDA

URU Utility Reform Unit

The Uganda Distribution ConcessionEnergy Week

Washington, DC 15th June 2005

Emmanuel NyirinkindiDirector

Utility Reform Unit, Ministry of Finance, Planning & Economic Development

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Overview of the Ugandan Power Sector

• Prior to the introduction of power sector reforms, the Uganda Power Sector was dominated by a public vertically integrated utility, the Uganda Electricity Board (UEB), established under the 1964 Electricity Act. UEB assumed both a regulatory role and a monopoly to generate, transmit and distribute electric power in Uganda

• The installed capacity in Uganda is about 300 MW, over 98% generated by the hydroelectric plants at Owen Falls ( with a potential of 380MW -180 MW Nalubaale station and 200 MW Kiira station) on the Victoria Nile.

• Currently, less than 8%, are connected to the grid system. In the rural areas only about 3% of households have access to electricity, of which less than half is provided through the national the grid

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Power Sector Restructuring and Privatisation Strategy

• In June 1999, the Cabinet of Ministers approved the Power SectorRestructuring and Privatisation Strategy (PSRPS), the principal objectives of which are:– to make the power sector financially viable and efficient– to meet the growing demands for electricity and to increase

area coverage– to improve the reliability and quality of electricity supply– to attract private capital and entrepreneurs; and– to take advantage of export opportunities

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Power Sector Reforms – Milestones & Status1. Cabinet Approval of the Power Sector Restructuring Jun 1999

and Privatisation Strategy (PSRPS) 2. Electricity Act Passed by Parliament Nov 19993. Commencement of the Implementation of the Uganda Apr 2000

Electricity Board (UEB) Privatisation4. Appointment of Commissioners of the Electricity Apr 2000

Regulatory Authority (ERA)5. Unbundling of the UEB and Establishment of Generation, Apr 2001

Transmission and Distribution Companies6. Issuing of Final RFP with Transaction Documents Apr 20027. Final Proposals Submitted Jul 20028. Signing of Electricity Generation Concession Nov 20029. Signing of Electricity Distribution Concession May 200410. Transfer of Operations to Concessionaire March 2005

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Power Sector Reforms – Distribution ConcessionThe Concessioning Process

The implementation of the privatisation of UEB formally commenced on 1st April 2000. As part of the process the Government undertook the following key activities

• Financial, legal and environmental due diligence, • Inventory and valuation of UEB assets and liabilities • Distribution and transmission investment needs analysis • Drafting of licences, regulations, concession and power sale

agreements • Financial and tariff modeling.

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Power Sector Reforms – Distribution ConcessionThe ConsortiumGlobeleq Ltd.• A member of the CDC group of companies – a long term

development partner of Uganda• The fastest growing power company in emerging markets • Power company management contracts and investments in

Africa, Asia and Latin America

Eskom Enterprises (Pty) Ltd. - the non-regulated part of Eskom• Ranked among the top five power utilities in the world• Supplies 95% of South Africa's electricity and more than 60% of

Africa's electricity. • Already a development partner in Uganda with the generation

concession

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Electricity Regulatory Authority (ERA)

Government of Uganda

UEGC

Bujagali

Other IPP (future)

UETC

Trans Operator

System Operator

Export / Import

UEDC

Umeme Ltd.

(Distribution Concessionaire)

Licence for Ownership

Power Sales Agreement

Lease Agreement

Supply Licence

Distribution Licence

Support Agreement

KenyaTanzania

Customers

Power Sector Reforms – Distribution ConcessionThe Contractual Structure

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Power Sector Reforms – Distribution ConcessionThe Contractual Structure

• A new concession company, Umeme Ltd., has been established by the Consortium – Globeleq (56%) and Eskom (44%),

• The concession involves Umeme and other parties entering into a number of agreements– Lease and Assignment Agreement– Support Agreement– Power Sales Agreement– Licences for

• Ownership• Supply, and • Distribution

.

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Power Sector Reforms – Distribution ConcessionThe AgreementsThe Lease and Assignment Agreement includes the following features• 20-years Concession to maintain and operate the electricity

distribution network owned by UEDCL and to collect revenues fromall connected customers based on the tariff set by the Electricity Regulatory Authority (ERA).

• An obligation to make minimum annual investments in system rehabilitation and reinforcement of US$65m over the first 5 years with at least US$5 in the first 18 months

• Ownership of the assets to remain with UEDCL• The obligation to return control of the assets, including all new

investments, to UEDCL at the end of the lease, but with a payment for any un-depreciated new assets

• An obligation for UEDCL to complete the investments already financed and presently under implementation (e.g. AfDB Urban Power Rehabilitation Project)

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Power Sector Reforms – Distribution ConcessionThe Agreements.The supply and distribution licences provide for• An exclusive right to supply electricity in an area up to 1.0 km beyond

existing distribution lines, with other firms being free to compete to supply electricity beyond this area

• An obligation to provide service within the area of exclusivity• An obligation to make a minimum of 60,000 new connections in the

first five years of the concession and 25,000 new connections per year thereafter when the supply of electricity should be sufficient to meet demand without consumers experiencing a drop in the qualityof supply.

• Quality of supply and customer service standards

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Power Sector Reforms – Distribution ConcessionThe Agreements.

Direct support will be provided by the Government through

• The investment of US$ 3 million in poles and transformers in each of the first two years of the concession.

• The provision of up to US$ 5 million in funds which will be used to finance capital investments.

By agreement with the Consortium, all benefits of such concessional financing shall flow directly to the consumer

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Power Sector Reforms – Distribution ConcessionThe Tariff

• Under the Electricity Act the tariff is set by independent authority• The tariff reflects the actual costs of supplying electricity to each

class of user• There are incentives on Umeme to reduce costs and operate

efficiently – charge through of operating costs capped• The government is providing up to $US 11 million of concessional

funding in the first two years to assist in keeping the tariff down• Improved operating efficiency by Umeme will further help to keep the

tariff down– Distribution losses to be to be reduced from current 29% - each

1% reduction saves approximately USh 600 million– Uncollected debts to drop from 25% to 7.5% in seven years –

each 1% improvement generates over USh 1.5 bn in revenue

GOVERNMENT OF ROMANIAGOVERNMENT OF ROMANIA

MINISTRY OF ECONOMY AND COMMERCEMINISTRY OF ECONOMY AND COMMERCE

PERSUADING THE INVESTORS THAT PERSUADING THE INVESTORS THAT

ROMANIAN ENERGY SECTORROMANIAN ENERGY SECTOR

IS RELIABLE, STABLE, PREDICTABLE IS RELIABLE, STABLE, PREDICTABLE

AND TRANSPARENTAND TRANSPARENT

MARCH 2005MARCH 2005

Success in the PRIVATIZATION directly depends on the commercialSuccess in the PRIVATIZATION directly depends on the commercialenvironment promoting the real competition. For this, important steps

where taken in Romania in the energy sector in setting up of a:

Credible Government commitment, supported by donors coherent programs (WB – role in Road Map, PRG, adjustment lending support, and structural assistance, support of achieving the environment targets, use of carbon fund, IFC support)=GOVERNMENT APPROVED AND PUBLISHED STRATEGY – ROAD MAP

Clear market modelClear market model, with well defined rules and non, with well defined rules and non--discriminatory discriminatory treatment;treatment;

Clear restructuring pathClear restructuring path: DEREGULATION BY: DEREGULATION BY UNBANDLING;UNBANDLING;RELIABLE REGULATORY FRAMEWORK. Establishment of independent

regulatory authorities, and implementation of clear, stable and transparentregulatory framework allowing the investors to draw up predictable business plans;

ROMANIAN ENERGY SYSTEM FROM INTEGRATED MONOPOLY ROMANIAN ENERGY SYSTEM FROM INTEGRATED MONOPOLY STRUCTURE TO A COMPETITIVE ENERGY MODELSTRUCTURE TO A COMPETITIVE ENERGY MODEL

A STALE PREDICTABLE CLEAR TARIFF AND PRICING MECHANISMA STALE PREDICTABLE CLEAR TARIFF AND PRICING MECHANISM: :

Distribution tariff definition to reflect the value of the company, and to give

confidence to investors in the implementation of the regulatory framework:

definition of the initial RAB as Enterprise value paid (electricity), or

publishing of the “initial implicit RAB” (natural gas)

definition of rate of return for the first two regulated periods-WACC,

providing to the investors WB-PRG for the first two electricity

distribution companies

Supply tariffs: a clear competitive market mechanism (avoid unfair

competition) i.e bilateral contracts, mechanism for balancing and spot

market, energy market exchange

Securing a competitive environmentSecuring a competitive environment:: Competitive =Competitive = AttractivAttractiv = = Reliable Reliable

market modelmarket model = = Transparency and equal treatment.Transparency and equal treatment.

Sequence of approach: performing performing major reformmajor reform beforebefore the privatization is the privatization is

launched;launched;

ROAD MAP is the STRATEGIC GUIDE LINES and driving force into the

implementation of the main objectives:

1. Defining of the energy market model : TPA, bilateral contracts, energy

market exchange;

2. Regulatory frame work for market operation: for distribution: tariff

mechanism based on recognized costs but justified and guaranteed return

(WACC), incentives for performances (price cap), full path through for

supply of electricity;

3. Market liberalisation: gradual opening to 100% opened market by 2007

(actual opening is 55% for electricity and 50% for gas);

4. Regional integration: Romania part of the South East Europe (SEEE);

5. Privatization as a key pillar of the market liberalization.

Why was important for Romania to use PRG:Why was important for Romania to use PRG:1. To create a success story in the Romanian privatization in the energy

sector by promoting the first important sample of privatization of the first 2 discoms;

2. To stimulate interest and confidence for the privatization of the other 6 discoms (same regulatory framework covered by PRG is applying for all discoms);

3. WB – PRG offers a stronger message to the investors than any other alternative form of guarantees;

4. To realize significant savings for the consumers: the WACC has been reduced form 14% to 12% for the first regulatory period, and form 12% to 10% for the second regulatory period. It saved for all consumers over the country, for the first two regulatory periods about 200 mil.$;

5. To impose more accuracy and stability on the actions of the regulator and authorities;

PRG structure:PRG structure:

GOVERNMENT OF ROMANIA/MPF

WORLD BANK PARTIAL RISK GUARANTEE STRUCTURE

ENEL (51%)

ELECTRICA (49%)

BANAT&

DOBROGEADISCOMS

L/GBANK

(1)

PRIV

A TIZ

ATIO

N

AGR

E EM

ENT

(2)

GO

V ER

NM

ENT

(MPF

/ME C

) SU

PPO

RT

A GR

EEM

E NT

ANRE

REGULATION

WB(4) INDEMNITY

AGREEMENT

(6) L/G

(7) L

/G R

EIM

BUR

SEM

ENT

&

CR

EDIT

AG

REE

MEN

T

(5) L

/G G

UAR

A NG

E EAG

REE

MEN

T

1. PRIVATIZATION AGREEMENT between Government of Romania/(MEC) and ENEL2. GOVERNMENT SUPPORT AGREEMENT between MPF/MEC AND BANAT and DOBROGEA DISCOMS 3. PROJECT AGREEMENT between WB and BANAT and DOBROGEA DISCOMS 4. INDEMNITY AGREEMENT between GOR and WB 5. L/G GUARANTEE AGREEMENT between L/G BANK and WB 6. L/G "Standby letter of Credit" irrevocable issued by L/G BANK7. L/G REIMBURSEMENT and CREDIT AGREEMENT between MPF AND L/G BANK

(3) PROJECT AGREEMENT

HOW WORKS THE PRG ?:

1. GOVERNMENT SUPPORT AGREEMENT: defines the risks to be guaranteed and claims mechanism

2. LETTER OF GUARANTEE: pays the discoms in case of claims;

3. L/G bank (issuing the L/G): pays the discoms in case of claims;

4. GOVERNMENT: through the Ministry of Public Finance (MPF) has the obligation the primary obligation to pay;

5. WB: repays the bank if MPF does not repay the L/G bank. WB backstops the Government

REFLECTIONS ON PRGREFLECTIONS ON PRG::

narrow focusnarrow focus of PRG of PRG –– minimize scope and term of guarantee cover, and set minimize scope and term of guarantee cover, and set

up conditions to be fulfilled by the operators before making recup conditions to be fulfilled by the operators before making recourse to the LG; ourse to the LG;

clarity criticalclarity critical –– otherwise confusion and investors may even try to exploit the otherwise confusion and investors may even try to exploit the

guarantee;guarantee;

cooperation governmentcooperation government and regulator: they have to work together and even and regulator: they have to work together and even

interact with the investor in order to achieve clarity;interact with the investor in order to achieve clarity;

decision on the momentdecision on the moment of use of PRG: when the maximum benefit is of use of PRG: when the maximum benefit is

secured; secured;

limit the periodlimit the period of validity of the PRG/LG to the level of confidence of the of validity of the PRG/LG to the level of confidence of the

implementation of the regulatory framework,implementation of the regulatory framework,

force the regulatorforce the regulator and the authorities to stay focused on the Implementationand the authorities to stay focused on the Implementation

REFLECTIONS OF THE Independency of the regulatorREFLECTIONS OF THE Independency of the regulator a key for success: a key for success:

TThe independence of regulation, mindful ofhe independence of regulation, mindful of

the tension between returns on muchthe tension between returns on much--needed investment vs. the economic needed investment vs. the economic and social costs for the economy in the near term;and social costs for the economy in the near term;

the remit of the regulator managing the introduction of market the remit of the regulator managing the introduction of market pricing pricing mechanisms whilst ensuring the security of supply;mechanisms whilst ensuring the security of supply;

Independence of Regulation ("Independence of Regulation ("QuisQuis CustodietCustodiet Custodies").ANRE'sCustodies").ANRE's credibility credibility is a function of the expertise of its personnel; the clarity andis a function of the expertise of its personnel; the clarity and sanctity of its sanctity of its charter; the volume of its resources; marketplace in which ANREcharter; the volume of its resources; marketplace in which ANRE has to be has to be credible (most especially foreign investors who have considerablcredible (most especially foreign investors who have considerable experience e experience of regulatory regimes) is evolving rapidly. Inevitably the role of regulatory regimes) is evolving rapidly. Inevitably the role of the regulator of the regulator touches in the broad strategy for the sector. In line with EU retouches in the broad strategy for the sector. In line with EU requirements, this is quirements, this is assumed to be moving towards a "fully" liberalized sector which assumed to be moving towards a "fully" liberalized sector which suggest not suggest not only should credible market mechanism be used wherever possible only should credible market mechanism be used wherever possible but that the but that the regulator has to have the authority to drive this through.regulator has to have the authority to drive this through.

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PRIVATIZATION GUARANTEES FOR REGULATORY SYSTEMS FOR POWER DISTRIBUTION

IN UGANDA AND ROMANIA

Farida MazharLead Financial Officer

PROJECT FINANCE AND GUARANTEES (PFG)INFRASTRUCTURE ECONOMICS AND FINANCE (IEF)

Energy Week March 15, 2005

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Overview

• The first two Partial Risk Guarantees (PRG) by the World Bank for Concession and Asset Sale structures

• First PRG backstops for regulatory frameworks (Regulators not parties to the PRG transactions)

• Uganda transaction effective and Romania to be signed in March

• PRG complemented by MIGA support in Uganda, and IFC support in Romania

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Uganda Power Distribution Concession UEDCL Concession Structure

• Lessor: Uganda Electricity Distribution Authority (UEDCL)

• Lessee/Investor: UMEME (JV CDC Globeleq (56%) Eskom Enterprises of South Africa 44%)

• Concession Term: 20 Years• Transfer Date : 1st March 2005

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Uganda Power Distribution Concession PRG Terms

• Amount: US$ 5 million (revolving facility)• Term: 7 years (to match the first Regulatory review period)• PRG Support: To provide support for loss of regulated

revenues resulting from a Guaranteed Event (loss of revenue formula pre-defined)

• Special Features: Provisional payments pending dispute resolution

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Uganda Power Distribution Concession PRG Guarantee Coverage

1. Regulatory Framework:– Non-Compliance by the Regulator of the pre-agreed tariff

framework relating to the distribution tariff– Full pass through of the bulk electricity supply from UETCL– Timely adjustments of tariffs (45 days after tariff submission)

2. Government Payment Arrears:– Non-payment of GOU Agencies Electricity Bills (60 days)

3. Termination Payments:– Buy Out amount for undepreciated investments resulting

from Early Termination of the Concession due to Breach of Concession Agreements by GOU and its entities

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Escrow Account

IDA

CITIBANKUGANDA

UEDCLRent

Rent offset

Escrow draw

Escrow overflow 1

LC draw

LC repayment

LC replenishment

GOU

UMEME

1 In case Escrow Account balance is higher than required

LC repayment/within 12 months

Uganda Power Distribution ConcessionEscrow and PRG-Backed L/C Security

Structure

Optional GOU repayment

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• Helped to implement the first Power Distribution Concession in Sub-Saharan Africa

• Catalyzed US$ 65 million investment commitment from UMEME in expansion of network

• ‘Honest broker’ role• Complemented IDA Credit of US$ 11 million for

additional network investments and MIGA shareholder equity insurance of US$ 45 million

Uganda Power Distribution Concession Catalytic Effects of the PRG

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Romania Power Distribution Privatization Privatization Structure

• Majority asset sale of two distribution companies –Banat & Dobrogea Discoms

• Enel Spa of Italy 51% shareholding Electrica (SOE) to retain 49% shareholding

• Equity injection by Enel for purchase price & recapitalization of the two Discoms.

• Closing Date: April 15, 2005

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Romania Power Distribution Privatization Regulatory Framework

• Distribution License for 25 years• Supply License for 8 years (renewable) for captive

consumers (subject to EU policy)• Revenues Regulated by ANRE (on the basis of Price

Cap/Price Basket methodology introduced in Jan 2005)

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• Beneficiary: the two Discoms• Amount: Capped at Euro 60 million• Term: 5 years (three years of the first regulatory period and

the first two years of the second regulatory period)• PRG Support: To provide a Guarantee for loss of regulated

revenues resulting from a Guaranteed Event• Provisional payments pending dispute resolution• Guaranteed Events: Non compliance by the Regulator and

Change or Repeal by the GOR of the Pre-Agreed framework relating to :– (i) The distribution tariff formula; and – (ii) The full pass through of the electricity costs; and– (iii) Pass through of PRG-related costs.

Romania Power Distribution Privatization PRG Terms and Risk coverage

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GOVERNMENT OF ROMANIA/MOPF

ENEL

ELECTRICA

BANAT&

DOBROGEADISCOMS

L/GBANK

PRIV

ATIZ

ATIO

N

AGR

EEM

ENTS

GO

VER

NM

ENT

(MPF

/MEC

) SU

PPO

RT

AGR

EEM

ENT

ANRE

REGULATION

WBINDEMNITY

AGREEMENT

L/G

L/G

REI

MB

UR

SEM

ENT

&

CR

EDIT

AG

REE

MEN

T

L/G

GU

ARAN

GEE

AGR

EEM

ENT

PROJECT AGREEMENT

Romania Power Distribution Privatization PRG Structure

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Romania Power Distribution Privatization Catalytic Effects of the PRG

- Helped to facilitate the signature of the privatization agreements allowing GOR to meet IMF and EU conditionalities

- Helped to reduce investor risk premium by 2% p.a. resulting in lower retail tariffs

- Helped to lower the investor return threshold for 2 more Discom privatizations without the PRG (4 more in the pipeline)

- ‘Honest broker’ role