Parliamentary intervention in government contracts has been consistently counterproductive because MPs do not look at all sides
(…continued from last week)
I argued in this column last week that
parliamentary intervention stopping the signing of oil contracts is
likely to make a bad situation worse. First, experience shows that it is
easy for anyone, leave alone oil companies, to buy off MPs. Therefore,
their current posturing does not impress me. Second, even if some MPs
are genuine in their interventions, most of them are poorly informed to
guide the contracting process to a better outcome. This is largely
because they have done little or no research to understand the
intricacies of these contracts. And they have not even bothered to seek
the services of technically competent people to help them.
One of the most contested tenders that
drove this lesson home was AES’s attempt to sign a $500m Power
Purchasing Agreement (or PPA) to construct a 250MW hydro-power dam at
Bujagali. I worked closely with MPs on the Committee on National Economy
to improve the PPA with AES. We did a lot of research and reflected
deeply on the issues. I became an ardent crusader of the cause to
improve the quality of the PPA. We had very strong and legitimate points
for our objections.
First, we argued the price per kilowatt
hour of electricity of 6.9 US cents was too high given that average
international cost was 3.9 cents; second, we felt the hydraulic clause
where government of Uganda guaranteed a certain level of water-flow from
Lake Victoria was preposterous; third, we pointed out that since the
Norwegian company, NORPAK, was offering to build a 200MW dam at Karuma
for $300m, it was unreasonable for Uganda to get an extra 50MW at
Bujagali for an extra $200m; fourth, Bujagali was going to displace a
large part of the population while Karuma, given its underground
tunnelling, would not; fifth, that the Bujagali dam was going to destroy
white water rafting which was a natural beauty but also a source of
tourism revenue for the country then and most especially in the future.
One Saturday, I had a thrilling showdown
on Capital Gang with the Managing Director of AES in Uganda, a young
American called Christian Wright. I presented the arguments above with
the passion of an activist, the eloquence of a preacher and the
conviction of a fanatic. Wright found it difficult to make his arguments
and walked out of the studio distraught. Now I know why I won the
debate that easily. The issues Wright was raising were very complex and
could not easily be explained through radio sound-bites. They also
needed a more sophisticated audience knowledgeable about international
financial risk management.
For example, Uganda is considered a very
risky destination for investment. So lenders ask for higher interest on
their loans, a factor that increases the cost of any project. The price
of electricity is determined by the age of the dam (after 15 years
electricity tariffs tend to go down by 30 percent since the investor
would have completed his/her loan obligations). New dams also cost
higher because of current construction costs. Finally, government has to
guarantee a particular amount of water flow (for roads it would be
traffic flow) short of which government would compensate the investor.
These guarantees are necessary for big investments. They also exist in
countries like UK in the management of trains.
If a vocal populist and an informed
project analyst faced off on a radio show with our Kampala audience
about today’s Bujagali dam, the populist would still carry the debate.
For example, government retained the hydraulic clause. It also paid the
initial $75m equity for the investor, Bujagali Electricity Limited (BEL)
before financial closure (how could government pay equity of a private
investor? the populist would shout). It has also guaranteed the investor
a 19 percent rate of return on capital (how can government do that when
all other investors take the risk to make profit or losses, the
populist would add) etc. Explaining these clauses and placing them in
the context of the investment risk we are perceived to have before an
audience that wants to hear only that which pleases them is a Herculean
task.
When I walked out of the studio, I found
Wright outside. He pulled me by my shoulder and spoke to me with a
passion and calmness that has haunted me for 13 years. “Andrew,” he said
somewhat pensively, “I do not know what is motivating you to oppose
this project. Possibly you are convinced it is bad for your country and
many of your points are legitimate. However, this is a fair deal for
Uganda and if you help kill it, you will keep this country in darkness
for the next 10 years.” I remember vividly quoting this warning to my
editor, Charles Onyango-Obbo (he did not appear at the show that day)
and both of us laughing at Wright’s attempts “to blackmail me” with the
threat of darkness for 10 years.
Today, I look back at that conversation
with both shame and understanding. Wright was only 28, I was 26. I
continued with my campaign; on radio, TV and in The Monitor.
Yet he never made this personal. One day he took me out to lunch and
repeated his warning of 10 years of darkness; there was never anger in
his voice, only frustration. When the president of AES Corporation
visited Uganda, Wright organised lunch for me with his boss. There, the
AES president told me that one of the MPs on the Committee on National
Economy, whom I had been fighting the battle with, had asked him for a
bribe. Was he lying? I don’t know.
Because of our efforts, the then Energy
Minister, Richard Kaijuka, went to parliament three times and his
project was thrown out. Like in all other cases, allegations circulated
that Kaijuka had “eaten” something. Finally, our efforts and AES’s
problems in the US helped to successfully kill the project. I felt
triumphant that we had “saved” the country. But how much money had we
saved? Looking back, it was a Pyrrhic victory. Wright was accurate in
his prediction. Bujagali was supposed to begin operation in 2002. It is
now 10 years later that it is coming on board. Now I can see that even
if we valued everything we were asking for, Uganda would not have saved
$50m. In trying to save that, we delayed 250MW of electricity for 10
years. The cost of this genuine effort is mind boggling.
AES had offered to sell a kilowatt hour
of electricity at 6.9 US cents; BEL, its successor on the project, 10
years later, is going to sell it at 12 US cents (at least for the first
16 years). The cost of the project in 1999 was US$ 500m; now it is
$900m. In fact on almost every line, the terms in the PPA with BEL are
worse than for AES.
However, the biggest costs are the
productivity gains lost due to load-shedding of industries, mills and
factories; the bad reputation of Uganda as a destination for such large
scale investments as many investors just gave up on us; the cost of
electricity subsidies which, since 2005, stand at a staggering Shs 2.0
trillion; the cost on the profitability of foreign and domestic
investments which profits would have been reinvested in the country; and
finally, the cost of Karuma power project which was supposed to begin
immediately after Bujagali was completed. In trying to save Uganda
US$50m, those of us who campaigned successfully against AES destroyed
value of not less than US$ 5.5 billion in the last 10 years. In military
science, this is called a war of attrition. It is one of those pranks
of history that a well-intentioned and legitimate effort to do good for
the country inflicted 1050 times more economic harm on Uganda than the
benefits it sought to promote.
But Bujagali was not the only contract. I
worked on the tender to contract an international firm to do
pre-shipment inspection. The battle between Cotecna, SGS, Bivac and
Intertake Services consumed the media, parliament and the bureaucracy
for three years and ended in no deal at all. I also worked on the tender
for the National Identity Card project, another to install biometrics
for the Electoral Commission and yet another by the National Social
Security Fund to develop Nsiimbe Estate. I also worked on the sale of
Nile Hotel, Uganda Commercial Bank (UCB), Sheraton Hotel, etc. In all of
them, there was either unnecessary gridlock or costly delays. In all
these cases, the costs of fighting perceived corruption exceeded the
benefits.
But in all these later contests, I had
learnt my lessons and changed sides. Experience had increasingly taught
me to doubt both the efficacy of these battles and the motivations of
many MPs. Then sometime in 2002, parliament passed a resolution stopping
Bank of Uganda Governor Emmanuel Tumusiime-Mutebile from selling UCB.
Parliament does not have such power. Mutebile ignored them. The MPs had
good points, but they ignored alternative views. Some could have been
genuinely convinced about government ownership. However, many preferred
state control of the bank because they were beneficiaries of political
loans.
I organised debates on Andrew Mwenda
Live (a radio talk-show on KFM at that time), to drum up support for
Mutebile and Ministry of Finance officials. UCB was consuming billions
of shillings from the taxpayer in nonperforming assets that government
would be called upon to rightoff. The deal went through and Stanbic Bank
bought UCB. Last year, Stanbic Bank that bought UCB made Shs 150
billion in profit and paid over Shs 180 billion in taxes to government.
The lesson is simple but powerful: you don’t necessarily need a perfect
deal to get good returns.
This is the major weakness in my
Masters’ thesis at the University of London.It focused on the corrupt
ways in which privatisation was done and concluded that it would lead to
a patrimonial private sector akin to the state enterprises it sought to
eliminate. I remember my supervisor, Prof. Chris Crammer, warning me
that I was being too harsh and rushed in my conclusions. He felt that
the medium to long term future of privatised public enterprises could be
different from my predictions. He told me that a process does not need
to be perfect to produce good economic outcomes. He gave me an A. Now
with the benefit of hindsight, I can see he was right, I was wrong. I
still wonder why he did not give me a C.
It would be foolhardy to imagine that
parliamentary oversight on oil contracts will improve the quality of our
PSAs. On the contrary, I have estimated the value and opportunity lost
in parliamentary contests over government tenders that I have covered as
a journalist to be above $16 billion in the last 13 years. Many times, a
poorly negotiated deal may be better than no deal at all as the example
of Bujagali above demonstrates.
Besides, I do not think our parliament
has the technical competence to assess the financial technicalities of
PSAs. One institution with such capacity is the IMF. It has studied
previous PSAs and concluded that government got very good deals compared
to countries like Ghana which many Ugandans think is a paragon of
democratic accountability.
Let me do what I rarely do i.e. explain
myself in order not to be misunderstood. I am not suggesting abolition
of parliamentary oversight. I am simply stating a fact that it has not
produced and is unlikely to produce better results for this country.
This is not to say it should be stopped; rather it is to stimulate
debate on how, given our specific political context, we can structure it
to produce better outcomes. The problem with a significant section of
our political class is a lack of any effort at original thinking; to try
and relate institutional theory to our practical experience so that the
solution is tailor-made to solve our specific problems.
For example, one way to make
parliamentary oversight work better in Uganda is to create clear
timelines within which a committee’s investigation on a major government
contract can be done and completed. This should be short to avoid time
delays e.g. one month. If the committee cannot finish its work in one
month, the executive’s contract is given a go-ahead. During the
hearings, MPs on the responsible committee should be locked up in a
hotel (like jurors in America) with no access to any telephones, friends
and families until they finish their work. This would shield them from
lobbyists trying to influence them.
I do not have all the answers. We need
to begin a conversation on these matters based on our experience. We
have spent decades parroting textbook theories that were developed out
of other people’s experiences. The formal institutions we have adopted
from developed countries work well in their places of origin because
they are held together by a dense network of informal relations, norms,
values and shared cultural understandings. Copying and pasting them on
our nations without reference to our realities is one of the major
causes of our institutional failures.
Whatever the weaknesses in the PSAs
today (and I think they are not many), protracted parliamentary and
court contestations are not the solution because they are likely to make
matters worse. To solve the problem of a fragmented decision making
process, I think the President was right to sanction the signing of oil
agreements.
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