OFF-GRID RENEWABLE ENERGY POLICY FRAMEWORK AND AVAILABILITY OF LOCAL BANK LENDING IN Assessment Report

CLIMATE ECONOMIC ANALYSIS FOR DEVELOPMENT, INVESTMENT, AND RESILIENCE (CEADIR) Contract No.: AID-OAA-I-12-00038, Task Order AID-OAA-TO-14-00007

October 26, 2018 This report was made possible by the support of the American People through the United States Agency for International Development (USAID). It was prepared by Crown Agents USA and Abt OffAssociates.-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda 1

DRAFT – CONFIDENTIAL

Recommended Citation: Mugimba, Crystal, Martina Akello, Fazel Reza, and Luswata Paulo. 2018. Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda. Washington, DC: Crown Agents USA and Abt Associates, Prepared for the U.S. Agency for International Development.

Front photo source: USAID Power Africa

Crown Agents USA Ltd. 1 1129 20th Street NW 1 Suite 500 1 Washington, DC 20036 1 T. (202) 822-8052 1 www.crownagentsusa.com With: Abt Associates Open Capital Advisors

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda i OFF-GRID RENEWABLE ENERGY POLICY FRAMEWORK AND AVAILABILITY OF LOCAL BANK LENDING IN UGANDA

CLIMATE ECONOMIC ANALYSIS FOR DEVELOPMENT, INVESTMENT, AND RESILIENCE (CEADIR)

Contract No.: AID-OAA-I-12-00038 Task Order AID-OAA-TO-14-00007

Economic Policy and Global Climate Change Offices Bureau for Economic Growth, Education and Environment U.S. Agency for International Development 1300 Pennsylvania Avenue NW Washington, DC 20523

Prepared by Crystal Mugimba (Open Capital Advisors); Martina Akello (Open Capital Advisors); Reza Fazel (Open Capital Advisors); Paulo Luswata (Consultant); and Nadia Scharen-Guivel (Abt Associates)

October 26, 2018

DISCLAIMER This report is made possible by the support of the American People through the United States Agency for International Development (USAID). The authors’ views expressed in this publication do not necessarily reflect the views of USAID or the United States Government.

TABLE OF CONTENTS

Table of Contents ...... i List of Figures ...... i List of Tables ...... ii Acronyms and Abbreviations ...... iii Acknowledgements ...... iv 1. Introduction...... 1 2. Energy Access in Uganda ...... 2 3. Policy and Regulatory Framework Influencing Public Investment in Off-grid Renewable Energy ...... 2 4. Factors affecting Private Investment in Off-Grid Renewable Energy ...... 4 4.1. Domestic Investment Potential...... 4 4.2. Access to Debt Financing from Local Banks ...... 4 4.3. Availability of Bank Loans and their Lending Terms and Conditions ...... 6 5. Conclusions on Local Lending for Renewable Energy ...... 8 Annex A: National Budget Approval Process in Uganda ...... 9 Annex B: Key Development & Energy Policies ...... 10 Annex C: Key Government Agencies and Stakeholders with Renewable Energy Impacts 13 Annex D: Summary of Initial Bank Research and Consultations .. Error! Bookmark not defined. Annex E: Recent Examples of Debt Deals in Off-Grid Renewable Energy in the Region ... 15 Annex F: High-Level Analysis of Bank Industry Exposure Potential ...... Error! Bookmark not defined. Annex G: Typical PAYGO Business Model ...... Error! Bookmark not defined. Annex H: Breakdown of Ugandan Banks by Ownership ...... Error! Bookmark not defined. Reference List ...... 16

LIST OF FIGURES

FIGURE 1: Cumulative Unit Sales of Solar Home Systems in Uganda, by Company and Location ...... 1 FIGURE 2: PAYGO Monthly Payments vs. Average Monthly Energy Spending ...... 1 FIGURE 3. Relationships Among Government Entities With Electricity-Related Responsibilities ...... 3 FIGURE 4. Steps to Increase Domestic Bank Lending for Off-Grid RE ...... 5 FIGURE A-1. Budget Setting Process ...... 9 FIGURE G-1. Typical PAYGO Business Model for Off-Grid Electricity (Simplified) ...... Error! Bookmark not defined.

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda i LIST OF TABLES

TABLE 1: Electricity Targets in Key Documents ...... 3 TABLE D-1. Summary of Initial Bank Research and Consultations ...... Error! Bookmark not defined. TABLE D-1. Summary of Initial Bank Research and Consultations ...... Error! Bookmark not defined. TABLE E-1. Recent Debt Deals for Off-Grid Renewable Energy in East Africa Region...... 15 TABLE F-1. High-Level Analysis of Bank Industry Exposure Potential .... Error! Bookmark not defined. TABLE H-1. Breakdown of Ugandan Banks by Majority Ownership ...... Error! Bookmark not defined.

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda ii ACRONYMS AND ABBREVIATIONS

CEADIR Climate Economic Analysis for Development, Investment, and Resilience DCA Development Credit Authority (USAID) DFCU Development Finance Company of Uganda ERA Energy Regulatory Authority (Uganda) GoU Government of Uganda MEMD Ministry of Energy and Mineral Development (Uganda) MOFPED Ministry of Finance, Planning and Economic Development (Uganda) NDP II National Development Plan II (Uganda) NPA National Planning Authority (Uganda) OPIC Overseas Private Investment Corporation (United States) PAYGO Pay-As-You-Go RE Renewable Energy REA Rural Electrification Agency (Uganda) RESP II Rural Electrification Strategy and Plan II (Uganda) SACCO Savings and Credit Co-operative Society SE4All Sustainable Energy For All SHS Solar Home System SME Small and Medium Enterprises UECCC Uganda Energy Credit Capitalization Company UOMA Uganda Off-Grid Market Accelerator USAID United States Agency for International Development

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda iii ACKNOWLEDGEMENTS

This work was funded by the USAID Power Africa Initiative. Power Africa and the USAID Bureau for Economic Growth, Education, and Environment (E3) Global Climate Change Office (GCC) and Economic Policy Office (EP) provided technical and management support. CEADIR would like to specifically thank Dr. Eric Hyman (E3/EP; the Contracting Officer’s Representative) and Maria Hilda Rivera (Power Africa). CEADIR would like to thank Oscar Ankunda at the USAID/Uganda Mission. All three provided helpful comments. The authors would like to acknowledge the input of numerous experts in the areas of off-grid energy, finance, and energy access in Uganda, particularly those who made necessary introductions, shared information, and edited this document: Andreas Zellar (Open Capital Advisors), Frank Ssebowa (Frank Consult), and Nicole DeMarsh (Open Capital Advisors). The authors would also like to acknowledge the technical and editorial guidance of the following CEADIR staff: Dr. Marcia Trump (Chief of Party), Pablo Torres (Operations Manager), and Deborah Dangay (Communications Lead).

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda iv 1. INTRODUCTION

The U.S. Agency for International Development (USAID) funded Climate Economic Analysis for Development, Investment and Resilience (CEADIR) Activity helps governments, the private sector, and civil society make the business and economic case for investing in climate change mitigation and adaptation. In collaboration with USAID/Uganda and USAID/Washington’s Power Africa office, CEADIR will provide technical assistance and training to help commercial banks in Uganda scale up off-grid renewable energy (RE) lending and link banks to clean energy companies, developers, and potential investors. The goal is to facilitate commercial lending from financial institutions in the renewable off-grid electrification sector. This report provides an overview of the current state and potential of the off-grid RE market in Uganda. It examines the country’s regulatory and policy framework as well as the key agencies and actors that influence investment in off-grid RE. The paper further examines the key challenges to scaling off-grid RE solutions, with a specific focus on access to finance through local financial institutions. It includes an initial overview of the current availability of local lending in the sector.

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda 1 2. ENERGY ACCESS IN UGANDA

Over 30 million Ugandans, 70 percent of the population, lack access to grid electricity (World Bank 2016). Bringing power to these households continues to be a central focus of the Government of Uganda (GoU) policies, development partners, and the private sector. Although government documents contain different targets for electrification, many refer to universal electricity access in the coming decades. Meeting this goal will require significant public and private sector investment as well as coordination and innovation in on- and off-grid RE and commercial lending. This chapter outlines key themes related to electricity access in Uganda. The limited access to grid connections, large country size, and dispersed rural population make grid extension too costly in many areas. Approximately 80 percent of the population lives in rural areas. Only 20 percent of the rural population has access to the electric grid (World Bank 2016). At the projected 3 percent annual population growth rate, the total number of households in the country, which is currently just under 8 million, will expand to more than 12 million by 2030. Given that only about 2 million households are connected to the grid in 2018, the Ugandan electricity market will need to connect to close to 10 million households by 2030 to achieve universal electricity access (Heteu 2015). Existing GoU efforts including the new “Free Connection” policy, are expected to connect 3 million new households to the national grid by 2027 (REA 2018b). However, current government estimates indicate that 30 percent of the population is unlikely to be reached for the next several decades (REA 2018a). Biomass is the largest source of energy for most Ugandans. Almost 90 percent of the total energy consumption is from biomass, including fuelwood (78.6 percent), charcoal (5.6 percent), and crop residues (4.7 percent). Electricity contributes less than 2 percent of total energy consumption, while petroleum products account for 9 percent. Hydropower comprises 84 percent of the electricity generated (MEMD 2015). Off-grid electrification is largely led by private companies, mainly for pay-as-you-go (PAYGO) solar home systems (SHSs). Off-grid, distributed RE from private sector companies can reach unconnected rural households at a lower cost than grid extension (Heteu 2015). Uganda has over 200 off-grid RE providers. Over 1.5 million off-grid RE systems have been sold in the country, reaching almost 1 percent of the total population or approximately 15 percent of households (Uganda Bureau of Statistics 2017). Private companies today provide a range of commercial off-grid RE products, ranging from small solar lanterns to mini-grids.1 The most common offerings in today’s market are SHSs that provide a household with two to five lights, a phone charger, and radio. A typical system costs approximately US$100, a considerable cost in a country where more than half the population lives on less than US$3 per day. Since many households cannot afford to buy these systems, SHS companies use a PAYGO business model that allows households to pay for the electricity they use. Figure 1 lists unit sales SHS from select predominant operators in Uganda. It shows up-front cash price ranges for their products and their distribution branches. SHS distribution centers are predominantly found in the higher-density regions of Western and Central Uganda.

1Mini-grids are usually defined as systems with a capacity of 10 kW to 10 MW while microgrids are smaller than 10 kW.

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda 2 FIGURE 1: Cumulative Unit Sales of Solar Home Systems in Uganda, by Company and Location

Source: Uganda Off-Grid Market Accelerator (UOMA) (2018).

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda 1 Figure 2 compares typical monthly costs of various PAYGO solar systems and the alternatives of kerosene for lighting plus use of external, phone-charging services. FIGURE 2: PAYGO Monthly Payments vs. Average Monthly Energy Spending

Source: UOMA (2018)

The mini-grid industry in Uganda is still nascent; it serves few customers and faces challenges in scaling up to meet the national demand. There were 11 operating mini-grids in the country serving a total of 4,000 households at the beginning of 2018, but only one mini-grid was privately owned and operated. Most of the mini-grids are solar or battery hybrid grids, although some donors were considering pilot mini-grids based on small-scale hydropower.2 Several additional sites for mini-grids are currently up for tender. The limited private sector participation in mini-grids in Uganda is due in part to: • Insufficient policy and regulatory framework for mini-grid concessions, influencing risk sharing instruments such as guarantees; • Need to de-risk the business model for developers and financiers to reduce consumer prices for power from mini-grids; and • Diversity of mini-grid models by size, ownership, management, and customer base.

2 Small hydro includes mini hydro, usually defined as 100 to 1,000 kilowatts (kW) and micro hydro, which is 5 to 100 kW.

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda 1 3. POLICY AND REGULATORY FRAMEWORK INFLUENCING PUBLIC INVESTMENT IN OFF- GRID RENEWABLE ENERGY

Government policies for off-grid electrification have helped the industry develop by encouraging private investment in off-grid RE. Some public sector agencies have been able to allocate more government funding to the off-grid RE sector such as the Rural Electrification Agency developing the Uganda off-grid strategy, and the Uganda Energy Credit Capitalization Company (UECCC) running Phase III of the Energy for Rural Transformation program. The program has working capital facilities for domestic banks to lend to PAYGO, technical assistance facilities, and support for advocacy through industry associations. The budget-setting process is summarized in Annex A while Annex B includes details of relevant policies. The following government agencies have mandates that include off-grid RE: 1. The Ministry of Energy and Mineral Development (MEMD); 2. The Rural Electrification Agency (REA); 3. The Energy Regulatory Authority (ERA); 4. The Ministry of Finance, Planning and Economic Development (MOFPED); and 5. Uganda Energy Credit Capitalization Company (UECCC). Annex C provides more information on each of these entities. Figure 3 illustrates the relationships among these and other government ministries and agencies involved in the energy sector.

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda 2 FIGURE 3. Relationships Among Government Entities with Electricity-Related Responsibilities

Ministry of Energy Ministry of Finance, Ministry of Trade, Ministry of Water & and Mineral Planning & Economic Industry & Environment Development Development Cooperatives

Uganda Energy National Electricity Rural Private Sector National Uganda National Credit Uganda Revenue Environment Regulatory Electrification Foundation Planning Bureau of Capitalization Authority Management Authority Agency Uganda Authority Standards Company Authority

Key

Official relationship and reporting Uganda Uganda Uganda requirements Electricity Electricity Electricity Generation Transmission Distribution Frequent interaction, no official Company Ltd Company Ltd Company Ltd reporting requirement

Unfortunately for stakeholders in the space, there is no single guiding policy or framework for off-grid energy access in Uganda. Tellingly, most of the documents reviewed make little, if any, reference to off- grid electricity at all. This is evidently a large hurdle for partners looking to work with the government on the off-grid space. Without explicit targets or mandates, government entities are not incentivized nor empowered to tackle off-grid energy. Table 1 summarizes electricity-relevant public sector documents, including their implementing organizations and associated electricity access targets. TABLE 1: Electricity Targets in Key Documents

Relevance to Off- Implementing Energy Document Overarching Goal Grid Renewable Organization(s) Targets Energy

Uganda Vision National Planning Transform Uganda into 80% access by No mention of off- 2040 Authority (NPA) middle-income country 2040 grid RE Launched 2013 and MEMD Second National Lead to an average Development growth rate of 6.3% and Increase access No mention of off- NPA and MOFPED Plan 2013– per capita income of to 30% by 2020 grid RE 2020 $1,039 by 2020 Launched 2015 Rural Facilitates access for Electrification 26% access for Accelerate pace of rural off-grid RE, with Strategy and REA rural areas by penetration roles for private Plan II 2022 sector partnerships Launched 2013

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda 3 4. FACTORS AFFECTING PRIVATE INVESTMENT IN OFF-GRID RENEWABLE ENERGY

4.1. DOMESTIC INVESTMENT POTENTIAL

Despite rapid recent growth in off-grid RE investment in sub-Saharan Africa, it was estimated that an additional $26 billion in financing is needed through to 2030 for SHS in the region. This amount includes grant, equity, and debt financing. More than half the total, $13.8 billion, is forecast to be through debt financing. In Uganda, projected loan capital requirements for off-grid RE are over $800 million dollars through to 2030 (Catalyst Off-grid Advisors 2018). Annex D contains examples of debt deals in the last few years. A major challenge in the next two to three years is commercial banks’ understanding of the market opportunity, and increasing institutional capacity to identify and manage these loans. Banks that develop deep sectoral knowledge and design lending products and processes for off-grid RE lending could benefit from the lending opportunities.

4.2. ACCESS TO DEBT FINANCING FROM LOCAL BANKS

To date, off-grid RE companies operating in Uganda, particularly PAYGO companies, have been mainly financed through foreign currency loans from international sources. This financing is risky because their revenues are domestic currency-based, and will be worth less in foreign currency if the domestic currency loses value. Their loan repayments will then have to be repaid in more costly foreign currency. Loans denominated in foreign currency are untenable for companies that do not export, particularly small companies. Consequently, domestic loan capital, concessional international finance, or grants are needed to scale up off-grid RE. Companies have had limited success in mobilizing local currency debt for off-grid RE in Uganda for the following reasons: 1. Low domestic bank interest in lending for off-grid RE. Domestic banks have limited understanding and experience in off-grid RE lending. As Figure 4 shows, many steps may be needed to increase the willingness and capacity of risk-averse domestic banks to enter this market.

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda 4 FIGURE 4. Steps to Increase Domestic Bank Lending for Off-Grid RE

Source: UOMA (2018)

2. Mismatch between existing loan products and the requirements of RE companies. Banks typically offer terms to the off-grid RE sector that are similar to those for large infrastructure and utility-scale power. These terms do not meet the financial needs of PAYGO companies. For example, common business loan products in Uganda have repayment periods (tenors) that are too short to allow RE providers to recoup their investment costs and achieve desired returns. They often have high collateral requirements that are difficult for new or small companies to accept. PAYGO companies often require working capital loans or tailored loan structures. They need foreign currency upfront to import technologies and long-term local currency loans to finance receivables from low-income customers, who are often rural and low- income. Payments from their customers are made in small amounts of domestic currency amounts, often over 12 to 36 months, exposing the companies to significant foreign exchange risks. 3. Due diligence processes that are not aligned with RE business models and their cashflow or foreign exchange constraints. Banks may want external de-risking measures (such as loan portfolio guarantees) or credit enhancements. 4. Small and medium enterprises (SME) management decision processes: • Limited experience of senior management in RE service delivery and obtaining commercial capital. • Limited middle management staffing to keep accurate records and prepare documents needed for the bank’s due diligence process.

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda 5 5. Lack of well-defined and consistently applied product standards. The Uganda Bureau of Statistics is in the process of adopting global standards3 for pico-scale4 solar products (such as photovoltaic lanterns) and smaller SHS systems. However, there are no global standards for component-based systems.5 This lack of standards for the component-based system and inconsistent regulation for plug-and-play kits6 makes it more difficult for banks to assess the technical quality of loan applicant products and their potential value as collateral. In addition, the Uganda Bureau of Statistics lacks the capacity to enforce product standards effectively, which contributes to consumer and investor uncertainty by allowing low-quality products and services to remain on the market. 6. Lack of data and key performance indicators. The lack of standard PAYGO portfolio performance definitions, key performance indicators, and reporting methods may also constrain lending.

4.3. AVAILABILITY OF BANK LOANS AND THEIR LENDING TERMS AND CONDITIONS

There are 24 licensed commercial banks in Uganda ( 2017a), all of which must follow the Basel capital and liquidity requirements—currently Basel II and soon to be tightened under Basel III. Approximately 29 percent of these 24 banks are either subsidiaries or branches of international banks. Banks are classified by the government from Tier 1 to Tier IV, based on their available capital. The minimal capital requirement is US$6.6 million for Tier I (commercial) banks and US$265,000 for Tier II (credit institutions) (Bank of Uganda 2018b). There are additional classification criteria based on whether or not a bank can participate in the clearinghouse,7 carry out foreign exchange transactions, and accept customer deposits. Through bank websites and interviews with branch staff, CEADIR identified the terms and conditions of available RE loan products from 16 randomly-sampled banks in Uganda. In most cases, only high-level information relating to the 2018 borrowing terms was available. The team found that eight of the banks engaged in off-grid RE lending. Key findings are summarized below. • Interest rates. Most of the banks analyze off-grid RE lending as standard bank lending rather than sector-tailored lending. Annual interest rates typically ranged from 18 percent to 22 percent per year for Tier I institutions, but were substantially higher (as much as 48 percent) for Tier II institutions (the projected inflation rate in October 2018 was 3.8%). Tier 1 banks typically set a base rate and added a margin to reflect the client’s risk, the range was undetermined in initial conversations and would be further explored as engagement continues. Tier 1 banks had lower base interest rates for foreign currency and domestic currency loans, especially for international banks with local presence given their easier access to internal hedging products. Lower tier banks lent in domestic currency at a fixed interest rate that was charged on a declining balance. This often makes the effective rate even higher.

3 Most commonly applied global standards are by Lighting Global (World Bank 2018). 4 Pico solar systems are those below 10Wp 5 Component based systems are systems where different parts such as the battery, bulbs, wiring panel are sold independently and then assembled when installed in the customer's house. 6 Plug and play kits are portable pre-configured, pre-wired systems that are then installed in customer houses. 7 Bank of Uganda defines a clearing house as an intermediary between buyers and sellers of financial instruments.

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda 6 • Average loan sizes and loan tenors. Typical bank loan sizes for off-grid RE were small compared to debt investments from other private investors. The sampled banks offered off-grid RE loan amounts ranging from $5,000 to $15,000. The loan tenors were short—two to three years. These small sizes and short loan tenors suggest a higher perceived risk within the industry. • Facilities utilized.8 The banks in the sample use at least three facilities in financing the off-grid RE sector. • The USAID Development Credit Authority (DCA) provides partial portfolio loan guarantees backed by the U.S. Treasury to reduce the risks for commercial bank lending to new sectors and new borrowers. DCA charges a fee based on the size of the guarantee agreement and an annual fee for loan commitments under the guarantee. , , Opportunity Bank, Development Finance Company of Uganda (DFCU) Bank, and Ugafode Finance had DCA agreements for certain loan portfolios. However, only Centenary Bank and Finance Trust Bank had DCA agreements specifically for electricity lending. At the time of CEADIR’s interviews, Finance Trust Bank was considering opting out of the DCA as it had not used the guarantee and found it costly. • The Uganda Energy Credit Capitalization Company (UECCC) had a Solar Loan Program for certain financial institutions (Centenary Bank, Finance Trust Bank, Post Bank, Pride Microfinance Bank, Tujijenge Uganda Limited, Hofokam Limited, and EBO Savings and Credit Co-operative Society Limited). This program facilitated on-lending to households and commercial enterprises for solar home systems. It also provided training and pool loan capital funds that financial institutions could access for on-lending for off-grid RE and grid-connected customers. UECCC charged the financial institutions a subsidized fixed interest rate of around nine percent per year. • The SUNREF East Africa Program has financed small and medium-sized RE power plants built by companies and independent energy service providers since 2011. The Agence Française de Développement (French Development Agency) provided the funds for on-lending by domestic banks. Most of the loan capital has been used for grid- connected RE investments, which tended to be larger than off-grid. Diamond Trust Bank provided the loan for the first SUNREF investment in Uganda in 2017—a biomass boiler for a textile manufacturer. • Collateral and other conditions. Most banks required borrowers to provide hard assets as security (e.g., land titles or premises owned by the business). Banks that offered asset financing required the financed asset to remain under the ownership of the bank until the loan was fully repaid. Some banks accepted cash deposits from borrowers as security.

8 Based on initial consultations and individual facility websites.

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda 7 5. CONCLUSIONS ON LOCAL LENDING FOR RENEWABLE ENERGY

A forthcoming CEADIR assessment will address RE lending challenges and opportunities. Preliminary findings of that report highlighted the importance of: • Continuing consultations with banks to understand their experiences in greater detail; • These consultations will inform CEADIR’s detailed examination of the challenges and processes for off-grid RE lending at specific banks. It will then be used to offer tailored trainings and technical assistance to selected financial institutions to help them reduce barriers to lending and streamline their loan processes for off-grid renewable energy. • Connecting banks with a pipeline of potential off-grid RE companies seeking finance; and • Despite the many off-grid RE businesses in Uganda, banks often struggle to find bankable projects. A database of off-grid RE businesses and events that gather representatives of banks and off-grid RE companies could increase the pipeline of off-grid RE loans that banks offer. • Engaging with development partners to identify challenges and opportunities to customize their existing loan guarantee facilities or establish other de-risking arrangements. • Based on the findings of the in-depth consultations, CEADIR will provide guidance to USAID and UECCC on the challenges financial institutions encounter with their facilities. These findings may also be useful to other development organizations seeking to introduce new mechanisms.

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda 8 ANNEX A: NATIONAL BUDGET APPROVAL PROCESS IN UGANDA

The budgetary preparation process runs from May to October and is an interactive process with stakeholders led by MOFPED (Parliament of Uganda 2001). The process follows seven steps as illustrated in Figure A-1. FIGURE A-1. Budget Setting Process

Sector Resource Resource First budget Consultative Parliament Budget working availability allocation circulated workshops presentation approval groups

First, the The government The MTEF is then A consultative Sector working These different The parliament Directorate of then broadly communicated in workshop is groups are then sectoral budgets then debates and Economic Affairs allocates these a ‘First Budget organized , organized for are presented to approves the at MOFPED resources Call Circular’ to bringing together various issues the parliamentary budget before it determines the between sectors the different parliament, such as Energy, committee in is read out in the available based on ministries and accounting Agriculture, charge and national budget resources in priorities and the entitled officers from the Education, and defended by speech by the consultation with ruling party. government different Health with ministers and Minister of Uganda Revenue Sector ceilings agencies between ministries and representatives respective Finance on behalf Authority and are also set based January and parastatals, from ministries government of the President Bank of Uganda. on previous year, March by development and government agencies in May projected MOFPED to partners, civil agencies to additional receive feedback society, and finalize the BFP resources, and and finalize private sector to and submitted to policy priorities. Sector Budget discuss and share Cabinet for These are then Framework Paper the economic approval and summarized into (BFP) clearly performance of ownership. the Medium- linked to the set the country, Term Expenditure priorities and discuss the Framework sector ceilings. budget strategy, (MTEF) for and MTEF. approval by the Cabinet. Source: Parliament of Uganda (2001).

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda 9 ANNEX B: KEY DEVELOPMENT AND ENERGY POLICIES

NATIONAL

Uganda Vision 2040

Policy objective. Uganda Vision 2040 focuses on improving economic growth while addressing key challenges for the country’s socio- economic development. Key takeaway. Vision 2040 endeavors to strengthen fundamental areas of the economy to catalyze growth. The Vision anticipates that the energy sector will continue to be a driver of socio-economic growth. Notably, although there is substantial reference to the national grid, the Vision makes no reference to off-grid RE. As a result, the National Planning Authority—the owner of the document—has limited mandate or incentive to focus on off-grid RE and has not included any targets for off-grid electrification since this was not explicitly mentioned in the document.

Second National Development Plan (NDP II)

Policy objective. The NDP II focuses on strengthening core sectors that will enable the country to transform into a middle-income country, leading to a 6.3 percent increase in average growth rate and per capita income increase of $1,039 by 2020. Key takeaway. There is no direct mention of the role that off-grid RE solutions might play in increasing electricity access. The NDP II emphasizes that the government will address infrastructure challenges in electricity and transport through increased investment to reduce costs. This includes investment to scale main grid generation capacity from 850 megawatts to 2,500 megawatts by 2020. It also includes exploring other electricity sources such as solar, biogas, and wind energy to increase efficiency in energy consumption and reduce pressure on natural resources. There is no mention of plans for off-grid RE or its role as a means to increase electricity access.

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda 10 ENERGY

The Energy Policy (2002)

Policy objective. The policy is intended to enable the electricity sector to “meet the electricity needs of Uganda’s population for social and economic development in an environmentally sustainable manner” (MEMD 2002).9 While the focus of many of the policy’s priorities is on on- grid and extractives, there is some reference to RE and off-grid technology. Specifically, “mini-hydros” are mentioned under priority #2: “Diversify power generation sources to ensure security of supply,” although the policy does not specify whether these are intended to be on- or off-grid. Further, solar photovoltaic is among the intervention technologies listed under priority #3: “Increase access to modern energy in rural areas.” Key takeaway. The policy’s priorities and budget only extended 10 years, expiring in 2012; the policy has not been updated since its inception. It is currently being reviewed by the MEMD and development partners, who have commissioned technical consultants and working groups to put together an “Off-Grid Strategy” that will be included in the updated version of this policy. This strategy will attempt to outline specific off-grid targets and define key questions such as the “minimum level of service” for access.

The Renewable Energy Policy (2009)

Policy objective. This policy focuses on making modern electricity services a substantial part of electricity consumption and, more concretely, increasing RE use to 61 percent of total energy consumption by 2017. Key takeaway. The policy expired in 2018 but may be renewed and covered under the aforementioned upcoming off-grid strategy policy. The policy promoted several technologies appropriate for off-grid, including solar, biomass, and small hydro. It also highlighted that further work is required to promote these technologies, including improving government frameworks, increasing research and development, and raising public awareness (MEMD 2007).

Rural Electrification Strategy and Plan (RESP II) 2013-2022

Policy objective. The RESP II is intended to accelerate the pace of access and service penetration, with an explicit target of 26 percent of rural households by 2022. It is also designed to facilitate access to modern energy services to replace kerosene use in homes for lighting, traditional cooking, and heating by 2030.

9 This policy is the latest version. An update is currently being drafted.

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda 11 Key takeaway. The REA is implementing this plan and acting as the central hub for planning, stakeholder management, and partnerships with private sector operators. This plan gives the government greater responsibility to absorb the financial risk of rural electrification while enabling the private sector to play a complementary role.

FINANCE

The Financial Institutions Act (2004; Amendment Act—2016)

Policy objective. The Financial Inclusions Act encompasses laws related to financial institutions, including their operation, regulation, and control by the to ensure financial solidity. Key takeaway. No specific policies are related to lending in the electricity sector, including off-grid RE, but some key general lending provisions such as collateral requirements and loan performance have been important for banks to note when evaluating a possible investment, especially for off-grid RE (Bank of Uganda 2018a). For example, the Act prohibits a bank from purchasing a non-performing asset, which is defined as overdue principal and interest for 90 days. Particularly as banks are presented with creative structures and special purpose vehicles that package together end-consumer loans, this can be tricky to identify and important to note as such structures will be subject to legal review and approval. Additionally, the 2016 Amendment Act provides for agent banking and access to the Credit Reference Bureau, which enables banks to consider direct lending to end-consumers for off-grid solar solutions. Further, both capital and asset/liability-matching regulatory requirements limit the size of exposure to a single borrower and limit the length of the period for which banks can lend. These limitations affect most commercial banks’ ability to lend to off-grid RE projects due to their often large size and long tenor needs.

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda 12 ANNEX C: KEY GOVERNMENT AGENCIES AND STAKEHOLDERS WITH RENEWABLE ENERGY IMPACTS

Ministry of Energy and Mineral Development (MEMD)

MEMD has the mandate to manage the development and utilization of energy and mineral resources in Uganda. It is responsible for formulating related energy policies and overseeing the establishment of power generating infrastructure and mineral exploration investment. While its focus is largely on on-grid, MEMD’s mandate also includes off-grid RE though this responsibility is often left to the Rural Electrification Agency.

Rural Electrification Agency (REA)

REA is a semi-autonomous organization that functions as the secretariat for the Rural Electrification Board. It is mandated to operationalize the government’s goal for rural electrification set out in the Electricity Act in 1999. REA implements government projects for rural electrification under the RESP II (REA 2013). This includes on- and off-grid solutions including grid extension, independent micro-grids, solar photovoltaic systems, and energy generation projects.

Energy Regulatory Authority (ERA)

ERA is responsible for the regulation, licensing, and supervision of licensed or registered companies for generation, transmission, distribution, and sales of electricity. ERA’s mandate is outlined in the Electricity Act of 1999. The authority implements this mandate through its 10-year Strategic Plan; the most recent was issued in 2014. ERA has a pivotal role in off-grid RE, controlling regulation and policy for mini-grids and off- grid systems, which are still being framed. There are currently no established tariffs for off-grid solar. ERA conducts negotiations for fixed tariffs on a case-by-case basis for off-grid solar supply systems.

Ministry of Finance, Planning and Economic Development (MOFPED)

MOFPED coordinates development planning, mobilizes public resources, and ensures accountability for the use of these resources. MOFPED leads the budgetary process for allocating resources for off-grid electrification programs implemented by the ministries. It is also responsible for taxation and subsidy policies in every sector, including electricity.

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda 13 Uganda Energy Credit Capitalization Company (UECCC)

UECCC is a government company that reports to MOFPED. It was established to facilitate investment in Uganda’s RE sector by catalyzing private sector participation through the Uganda Energy Capitalization Trust. The Trust is the funding mechanism of UECCC; it was set up to pool resources from the government and development partners for RE projects (UECCC 2018). The company is structured to provide financial and technical support through several products, including the following: • Loan facilities working with participating financial institutions to enable households and commercial enterprises to afford access to both on-grid and off-grid solutions, such as solar home systems; • Project financing for grid projects for rural electrification; and • Credit enhancement instruments such as guarantee facilities, re-financing, and working capital funds to help reduce risks to primary lenders and other financial institutions to increase private sector access to finance.

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda 14 DRAFT – CONFIDENTIAL

ANNEX D: RECENT EXAMPLES OF DEBT DEALS IN OFF-GRID RENEWABLE ENERGY IN THE REGION

TABLE E-1. Recent Debt Deals for Off-Grid Renewable Energy in East Africa Region

Amount Investor Company Date (million $) ElectriFI, TRINE 10 Azuri 20.0 2018 Bamboo Capital Partners11 BBOXX 50.0 2018 responsAbility12 Mobisol 12.0 2017 Stanbic Bank, CDC Group, Netherlands Development M-KOPA 80.0 2017 Finance Company (FMO), Norfund, Triodos, responsAbility, Symbiotics13 Banque Populaire du Rwanda (Atlas Mara)14 BBOXX 2.0 2017 1. Source: Location is based on 50 percent ownership or more. 2. Orient is unique as the majority shareholder is Ugandan with 49 percent, an international investment fund with 42 percent, and two individuals (whose origin is unclear) with 9 percent. Sources: Bank websites: Barclays Bank (2018); Standard Chartered Bank (2018); Citi Bank (2018); (2018); (2018); DFCU Bank (2018); Centenary Bank (2018); Finance Trust Bank (2018); (African Union for Housing Finance (2018)), (2018); Commercial Bank of Africa (2018); Diamond Trust Bank (2018); Commercial Bank (2018); Equity Bank (2018); ; NC Bank (2018); ABC Bank (2018); Cairo Bank (2018); Bank of Africa (n.d.); Ecobank (2018), UBA Bank (2018), (2018), Guaranty Trust Bank (GTB) (2018).

10 Azuri Technologies (2018). 11 BBOXX (2018). 12 responsAbility (2017). 13 M-KOPA Solar (2017). 14 BBOXX (2017).

Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda 15 REFERENCE LIST

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Off-Grid Renewable Energy Policy Framework and Availability of Local Bank Lending in Uganda 16 Commercial Bank of Africa. 2018. “Investor Information.” Commercial Bank of Africa. https://cbagroup.com/financials DFCU Bank. 2018. “About Us.” DFCU Bank. https://www.dfcugroup.com/about-us/ Diamond Trust Bank. 2018. “About Us.” Diamond Trust Bank. https://dtbu.dtbafrica.com/contact-us/ Ecobank. 2018. "Group". 2018. Ecobank Transnational. https://www.ecobank.com/group Equity Bank Ltd. Uganda. 2018. “Particulars of Shareholding.” Equity Bank Ltd. Uganda. https://www.equitybankgroup.com/investor-relations/particulars-of-shareholding Finance Trust Bank. 2018. “About Us.” Finance Trust Bank. https://www.financetrust.co.ug/?/about/about.ftb Guaranty Trust Bank Uganda. "About Us | GTBank Uganda". 2018. GTBank Uganda. https://www.gtbank.co.ug/home/about-us/ Heteu, Pépin. 2015. Uganda’s Sustainable Energy For All (SE4All) Initiative-Action Agenda. Kampala: Ministry of Energy and Mineral Development. Kenya Commercial Bank. 2018. “About Us.” Kenya Commercial Bank. https://ke.kcbgroup.com/about MEMD (Ministry of Energy and Mineral Development). 2015. Ministry of Energy and Mineral Development, Strategic Investment Plan (2015–19). Kampala: Ministry of Energy and Mineral Development. ———. 2007. The Renewable Energy Policy for Uganda 2007–2017. Kampala: Ministry of Energy and Mineral Development. ———. 2002. The Energy Policy for Uganda, September 2002. Kampala: Ministry of Energy and Mineral Development. http://library.health.go.ug/publications/leadership-and-governance-governance/policy- documents/energy-policy-uganda M-KOPA Solar. 2017. “Breaking Records in Financing Off-grid.” M-KOPA Solar Press Release, October 10, 2017. http://www.m-kopa.com/breaking-records-in-financing-off-grid NC Bank Uganda Limited. 2018. “About Us.” NC Bank. https://www.nc-bank.com/about-us/ Orient Bank. 2018. “About Us.” Orient Bank. https://www.orient-bank.com/about-us/ Parliament of Uganda. 2001. The Budget Act, 2001. Kampala: Uganda Legal Information Institute. https://ulii.org/system/files/legislation/act/2001/2001/Budget%20Act%202001.pdf REA. 2018a. Draft Off-Grid Strategy. Kampala: Rural Electrification Agency. ———. 2018b. Rural Electrification Agency Statement at East Africa Energy and Infrastructure Summit. Addis Ababa. ———. 2013. Rural Electrification Strategy and Plan, 2013–2022. Kampala: Rural Electrification Agency. http://www.rea.or.ug/resources/strategy%20and%20plan%202013-2022.pdf ResponsAbility Investments AG. 2017. “Solar Electricity for 15,000 Tanzanian Households and Businesses.” responsAbility, September 25, 2017. https://www.responsability.com/en/solar- electricity-15000-tanzanian-households-and-businesses Standard Chartered Bank. 2018. “About Us.” Standard Charted Bank. https://www.sc.com/en/about/ Tropical Bank. 2018. "About the Bank | Tropical Bank Official Website." Tropical Bank. https://www.trobank.com/about-the-bank/ UBA Bank (United Bank for Africa). 2018. "UBA Bank." UBA Bank. https://www.ubagroup.com/ir/shareinfo/capitalstructure

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