About me.

Andrew M. Mwenda is the founding Managing Editor of The Independent, Uganda’s premier current affairs newsmagazine. One of Foreign Policy magazine 's top 100 Global Thinkers, TED Speaker and Foreign aid Critic

Wednesday, August 29, 2012

Can MPs improve oil contracts? Part II

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.

The lesson that parliamentary interventions make bad contracts worse was brought to me vividly between 1998 and 2002 and beyond. That was when I was covering government tenders and contracts for The Monitor (now Daily Monitor). It became apparent to me that each successive parliament got increasing resources for research assistants/assistance, office space, computers etc. Yet input into the policy process has been consistently declining. This disproves the obsession of international donors who seem to believe that our primary problem is money; and that if you increase funding of parliament, you will get better outcomes in performance.

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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