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

Get government out of business

The best way to improve service delivery in Uganda is to concession most of it to the private sector

Since 1995 the government of Uganda has been trying to build a hydro-power dam at Karuma. Attempts to get a private company to do the work ended in futile debates with international donors and local politicians. Then the government decided to build a 600MW hydro electricity dam at Karuma at a cost of US$ 1.2 billion itself. A committee comprising officials from the ministries of finance, energy and environment evaluated three companies; China Water and Electric Corporation (CWEC), Synohydro Corp, a private Chinese company, and an Iranian company Perlite Construction out of the six companies that bided for the contract. CWEC won.

However, as happens in every such bid in Uganda, one of the losers claimed that members of the evaluation committee had been bribed. The process was halted to allow an investigation. Many Ugandans think that such interventions are aimed at fighting corruption. In the mid to late 1990s, I also naively held this view. But experience has taught me that to understand how corruption works in Uganda, one has to study how the formal institutions of democratic accountability work.

There are many institutions in Uganda with power to directly or indirectly cancel a contract – IGG, PPDA, Parliament, the press, intelligence organs etc. Thus when anyone loses a tender, they can petition any of these institutions and cause a new tendering process. However, because of the jockeying that follows, interested parties pay bribes across the board to get a favourable outcome. The result is actually not to resolve the problem but to cause unnecessary delays and institutional paralysis. Paralysis is the mechanism through which thieves thrive; but it also justifies personalised interventions, often by the president himself. The lesson I learnt is that by decentralising power across many institutions of accountability, President Yoweri Museveni has effectively centralised and personalised it – institutional paralysis justifies and legitimises personalised interventions.

CWEC is the international arm of China Three Gorges Project Corporation (CTGC) which is a Chinese government owned corporation. CTGPC was the company behind the largest hydropower project in the world, Three Gorges Dam. CTGPC has built Xiluodu, Xiangjiaba, Baihetan and Wodongde dams with installed capacity of 38,000 MW. CWEC has successfully undertaken hydropower projects in Ghana, Ethiopia and Sudan. The track record is good. However, even Jesus Christ, if he tendered to supply anything in Uganda, would have his contract halted.

The solution is to this conundrum is to – as far as possible – get the state out of the business of doing things. In this specific case, the government of Uganda should not be evaluating bids to contract a company to build the dam. Rather it should hire a private power producer to build the dam and give them a Power Power Purchasing Agreement (PPA). Let the debate be on the way the private producer prices electricity rather than how a construction company is going to do the job. Five years ago, government contracted Bujagali Electricity Limited (BEL) to build Bujagali Dam. BEL hired Salin to do the work. The project is going to be completed this month without any change in the contract price at the time of signing.

The government of Uganda does not have a single construction project where, over the last ten years, the price agreed in the contract was the same price at the time of completion. In nearly every major government project, the price at the time of signing the contract changes along the way such that by the time of completion, it is 40, sometimes 70 percent higher. This is the story of Gayaza Road, Jinja-Kampala, Masaka-Mbarara, Kabale-Kisoro, Bugiri Road, Northern Bypass – the list is endless. When shall we learn?
The worst you can do to an extremely corrupt state with multiple centres of power in an ethnically divided society is to give it a bigger role in the economy. What you actually get is what economists call “the tragedy of the commons”: A struggle by different groups to grab as much as possible and as quickly as possible from the common resource pool before anyone gets their fingers on them. The virulence of the political debate in Uganda (like on oil last October) may suggest that our country has a vibrant civic life. But it also underscores a deeply entrenched political pathology: that lacking an encompassing national vision, our divided elites come to the state in search of particularistic advantage. Vibrant debate does not actually reflect struggles over accountability but the opposite – an anarchical struggle by private interests to grab public resources for private ends.

Secondly, someone convinced the President that when government produces electricity, it will be cheaper. Yet government dams hide many costs. A private power producer will put a cost – return on equity – to the amount of capital they invest in the project, price the cost of interest on loans and add the replacement cost of the dam i.e. depreciation. All these costs go into the tariff. On the other hand, because government is not a business, it will not be looking for a return on equity since it will be using taxpayers’ money. Currently, government of Uganda does not include the cost of interest payments in the electricity tariff or factor in depreciation. This makes electricity cheaper for the consumer. But it means that government is indirectly actually subsidising it.

If government wants its citizens and industrialists to get cheaper electricity, this is certainly not the best way to subsidise it. For example, by front-loading US$ 1.2 billion to build Karuma, the government is foregoing many other alternative uses to which such an amount of money can be deployed. On the other hand, if government wants to hide the costs of equity, interest on loans and depreciation, it can contract a private power producer to build the dam and pay him an annual check to cover these costs. Assuming these costs amount to US$ 60 million per year, over 30 years, Bujagali would cost government US$ 1.8 billion. Rather than front-load US$ 1.2 billion to build the dam right now, government can pay a check of US$ 60m per year to a private power producer for the next 30 years. This is a much cheaper option.

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