PARLIAMENT OF

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REPORT OF THE COMMITTEE ON NATIONAL ECONOMY ON THE PROPOSAL BY GOVERNMENT TO BORROW EURO 37.I MILLION FROM THE FRENCH AGENCY FOR DEVELOPMENT (AFDI AND EURO 35.O MILLION FROM KREDITANSTALT FUR WIEDERAUFBAU (KFWI THE GERMAN DEVELOPMENT BANK TO F'INANCE THE MASAI(A - a POWER TRANSMISSION LINE

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DECEMBER 2017

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1 M Srr 1.O INTRODUCTION Hon. Speaker, Hon. Members, the Committee on National Economy considered the request by Government to borrow Euro 37.I Million from the French Agency for Development (AFD) and euro 35.0 Million from Kreditanstalt Fur Wiederaufbau (KFW) the German Development Bank to finance Masaka - Mbarara Power transmission line in accordance with Rule 166 (2) (b) of the Parliamentary Rules of Procedure.

The request was presented to this House by the Hon. Minister of Finance, Planning and Economic Development on 24.5.2017 and was accordingly 'o referred to the Committee on National Economy for consideration. The Committee considered and scrutinized the request and now begs to report.

2.O METHODOLOGY The Committee held meetings with; i. The Ministry of Finance, Planning and Economic Development; ii. Ministry of Energr and Minerals; and iii. Uganda Electricity Transmission Company Limited Officials

The Committee studied and made reference to the following Documents; i. The Minister of Finance, Planning and Economic Development's brief O on the loan request; ii. Financing Agreement; r iii. Project Implementation Plan; iv. Appraisal Documents; v Resettlement Action Plan; and Environmental and Social Impact Assessment Committee also undertook field inspection visits to Mbarara and Masaka implementa sites to appraise the project Cb w t\*+ 3.O BACKGROUND The current restructuring and reforms in the electricity subsector have registered positive results in the country. The total installed electricity generation capacity increased from 595MW in 2OlOlIl to 85OMW in 2OI3l14.

The growth in overall installed capacity in recent years has largely been due to additional capacity at Bujagali (250 MW) in 2012. According to the National Budget Framework Paper FY20 LB I 19, the overall, electricity generation capacity in Uganda has increased to 929.6MW and access to electricity is at 22.5o/o. o Despite the registered progress country wide, the current power generation sites and transmission lines have changed little over the past forty years. Uganda electricity subsector is currently characterized by insufficient generation and transmission capacity to meet demand, which is growing steadily.

The present electricity situation in South - Western Uganda is characterized,by; voltage at l lkVand 33kV nodes, under normal loading is as low as 8.9kV and 2334kV respectively. This is lower than the acceptable lower limit; the technical losses associated with the 33kV and 1lkV feeders are about l7o/o of a the total power delivered.

A big proportion of the industrial enterprises, businesses and institutions do not have either sufficient or uninterrupted access to electricity from the national grid. Uganda's electricity consumption per capita is also still low, estimated at only 80kwh per capita at the end of 2012, which is significantly than Africa's average of 578kwh per capita and the world,s average of 72kwh per capita. This level of consumption compares poorly with tries like Kenya at 133 kwh, Ghana at 246 kwh and Zambia at 551 kwh per capita. \-1

3 I\ffl/ w The key ener$/ subsector challenges in Uganda still remain the lack of a good mix of ener$/ sources in power generation; Lack of adequate and reliable power supply, weak sector finances, increased access and sustainability of hydro resources, low level of access to electricity ; high distribution system losses of more than 3Oo/o, inadequate infrastructure for generation, transmission and distribution; low level of ener$/ efficiency; high tariffs; unreliable and inefficient supply; inadequate Institutional and regulatory capacity. Failure to meet these challenges has led to poor operating performance and unsustainable operations.

O To combat the challenges being faced within the electricity sector, GoU launched the National Development PIan II in which strategies were laid down to increase generation capacity from the current 85OMW in 2013 to 2,5O0MW in 2O2O and prepare for achievement of the required 41,738 Mega Watts by year 2040 and to expand the transmission grid and voltage from the current 1300km to 275OKm and 132kV to 22OkY and 400kV respectively.

The proposed Construction of the Mbarara - Masaka Transmission Line project to be supported by financing from the KfW of Germany (5JW and AFD is meant to support the Government stratery by improving service quality and reliability to existing customers, expanding the capacities of the transmission system to o meet the growing power demand in Masaka, Mbarara and its environs; and reduce system losses. The project will increase electricity availability and connectivity; increasing supply quality and quantity for the manufacturing, industrial activities and service delivery in the area which will result in to increase in the Gross Domestic Product (GDp) of the country. ( ,") /vt

f\rkl (L 4 4.O THE PROJECT AND COUNTRY STRATEGY

The project is in line with the National Development Plan II (NDP II) which aims at achieving "Vision 2O4O", a long-term vision of Uganda. The goal of the NDP II is to lead the country to become a middle-income country by 2O2O, with a focus to promote ambitious infrastructure investment in Energr, exploitation and expansion of the national electricity power grid network; and promoting ener$/ efficiency and use of alternative sources of energr. The Project will hence contribute to the NDP II interventions that will take substantial steps towards implementation of the Uganda Vision 2O4O through the construction of 400KV transmission lines between Mbarara and Masaka and Extension of two O substations of 22OI<\I to develop the national electricity grid.

5.O PROJECT OBJECTTVE The objective of the project is to construct a 40OKV transmission line between Masaka and Mbarara located in the south-west part of Uganda to improve the Ugandan electric network and to allow increases of electricity transmission; enhance the security of electricity supply in south - west of the country; and contribute to the interconnection between Uganda, Rwanda and Kenya.

6.0 PROJECT DESCRIPTION: The project is composed of three components mainly; o i. Transmission Line 4O0kV works. ii. Extension of the Substations 22Oky works. iii. Supervision and Monitoring of works implementation c[ Jt--.t

t- 5 tF+r The 400kV Masaka-Mbarara transmission line that will initially be operated at 22OkV will cover a distance of about 135km from the proposed 220kV Masaka West Substation up to the proposed 22OkV Mbarara North substation.

This project is expected to increase voltage reliability, security and stability in Western Uganda and will form part of the Northern corridor infrastructure projects, completing the 22O kV interconnection in the Nite Equatorial Lakes Subsidiary Action Program (NELSAP) region and hence provide adequate capacity for power exchange in the region. a Component 1 -Transmission line 4OO kV T-line (l32l This component includes the cost of constructing the transmission line; equipment and infrastructure including accessories such as the conductors, insulators, and tower parts. Government of Uganda through the Uganda Electricity Transmission Company Limited (UETCL) will construct a 400 kV transmission line from Masaka West Substation up to Mbarara North substation. The line will be constructed as a 40O kV infrastructure but operated at 22O kV. From this, a double circuit 22O kV transmission line to Mirama substation in Ntungamo district, and eventually to Rwanda (a new Birembo substation) is to be built. The proposed Masaka-Mbarara 4OO kV project is therefore expected to complete tlne 22O kV ring in the NELSAP region o and hence provide adequate interconnection for power exchange in the region.

The existing 132kV Masaka- Mbarara transmission line is operating at approximately 8O7o transmission capacity, transferring just over 70 MW to southern and Western regions of the country. To improve the transmission capacity and for larger transfer of energr to above S0OMW there is need upgrade the line to higher voltage capacity of 22OkY and eventually 4 -tt\ vol q r tF#r Component 2 - Extension of Masaka and Mbarara substations

In every transmission line project there is the offtake and entry into the transmission network through the interconnection configuration. The substation works are required for the Masaka to Mbarara transmission line interconnection with the existing transmission system at Masaka and Mbarara which if not implemented would have otherwise left the line isolated from the transmission system.

The Extension of Masaka and Mbarara Substation therefore includes the cost a of terminating / connecting the line onto the existing substation facilities including installation of equipment such as the 2x22OkY line Bays, Associated Civil and earthworks, Associated Control, Communication and Protection Installation within the Masaka and Mbarara Substations.

Component 3 -Supenrision and Monitoring of Works Supenrision (Consultancyf

This component is for the allocation of the consultancy contract fees for UETCL's project engineer who shall be responsible for execution of the EPC contract and construction supervision throughout the procurement, o engineering, installation, testing, commissioning, and defect liability periods

7.O PROJECT COST AND FINANCING Government of Uganda is seeking financing for the implementation of the transmission line, associated substations and supervision consultancy services from the Development Agency (AFD) and the German Developmenf CU

7 Cost: The total cost of the project is estimated at US$ 94.2M (Euro 84.7M) (See Table 1). KfW and AFD will jointly fund the project with a combination of concessional loans. KFW - Euro 37.lM, ADF - Euro 35.0M and GoU - Euro 12.6M (See Table 2)'. Government of Uganda will fund land purchases, compensation of properties, taxes and the RAP Implementation consultancy servlces.

Table 1: Estimated Costs of the Projects No. Item Euro Millions o/o

1 Component 1- Transmission Line 400kV 57 67.3 works o 2 Component 2 - Extension of the Substations 3.9 4.6 22OkV works 3 Component 3 - Supervision and Monitoring 2.2 2.6 of works implementation 4 Contingencies (15%) 9 10.6 5 Land purchases, Compensation, Way leaves 8.6 to.2 6 Taxes 4 4.7 TOTAL 84.7 100.o Source: Project Appraisal Documents o Item No. 4 - Contingencies (lSolof Includes lo o/o contingency on Physicat uncertainties such as: o Unforeseen cost variations as a result of changes in ground conditions. o Unforeseen design changes. / o Unforeseen diversions and survey requirement on the transmission

. lrrlreseen changes in the environment. @

1 rFt 8 Physical contingency will not be part of the contract price and will be assessed after due approval from the consultant, GoU, and the financiers.

It also includes 57o contingency on price to cater for inflation and fluctuations in foreign exchange currencies.

Land Purchases, Compensation, Way leaves.

The cost for RAP compensation as per the approved valuation report is summarised in the table 2. o Table 2 - RAP Compensation Costs per District District No of PAPS Total (UGXI 1,207 40,548,900,135 40 2,71O,399,1 1 1 Kiruhura 40 8,996,870,977 Mbarara 505 40,727,O13,390 Total L792 92,883,193,603

Table 3: Financing Plan of the Project.

No. Considered Financing Plan Euro (Millionl o/o 1 AFD 37.1 43.8 2 Kfw 35.0 4t.4 3 Government of Uganda 12.6 L4.8 o Total 44.7 lOOo/o Source: Project Appraisal Documents

The 3 table indicates AFD and KfW will finance 43.8o/o and 4l.4Vo of the Proj respectively, with GoU financing 14.8o/o of the project to ca for RAP implementation and Taxes.

9 tlft 8.O TERMS AND CONDITIONS OF THE LOAN The terms and conditions attached to the AFD and KfW loans are shown in table 4 and 5.

Table 4: KfW Loan terms Loan Amount Euro 35.0mi11ion Maturity Period 15 years including {a grace period of five (5) years Interest Rate 1.85% p.ao/o per annum Commitment fee O.25o/o p.a. on undisbursed Loan amounts o Management Fee O.5o/o of the Loan amount

Source: Draft Loan Agreement between GoU and KfW

Table 5: AFD Loan terms

Loan Amount Euro 37.1Million

Maturity Period 25 years including of a grace period of seven (7) years

Interest Rate Indicative Fixed Interest rate of 1.25o/o per annum Commitment fee Determined at each interest period 0.5% p. a on undisbursed Loan amounts. a Appraisal Fee O.5o/o of the loan amount. Source: Draft Loan Agreement between GoU and ADF

r$h g 10 8.1 CONDITIONS OF EFFECTIVENESS OF THE LOANS

In addition to the entry into force of the loan agreement by the submission to the Lenders of the Attorney General's legal Opinion on the legal validity of the loan documentation to the Government, the following conditions are attached to the loans;

a) A copy of a duly passed Resolution of Parliament of Uganda approving the borrowing; b) An evidence of authority for the person(s) who will make, sign and deliver documents necessary for the implementation of the Loan Agreement, together with an authenticated specimen signature of o each such person. c) Evidence that the drawdown of the facility will not breach any borrowing limit or any limit binding on the borrower. d) A certified copy of the contract duly executed between the final beneficiary and contractor for component 3 of supervision and monitoring of works. Resettlement: The project will involve acquisition of land and way leaves for the implementation of the project. It is a condition precedent to the loan that government provides counterpart funds in the Budget and the funds should have been released in to the project account. Construction works will only commence after compensation of the affected land owners and prior to o demolition of any structures.

1O.O PROJECTIMPLEMENTATION

The Uganda Electricity Transmission Co. Ltd (UETCL) is the Executing agency /. / for the Project. The project is being implemented by the UETCL Project f_f-t Implementation Units (NPIUs) on behalf of Ministry of Energr (the s rvisory/ Ministry) -- t0 V (\ L1

( er--" 11.O THE LOAN AND THE CURRENT DEBT SITUATION OF THE COUNTRY

Uganda's public debt has increased over the years and as at end of June, 2Ol7 stood at Ushs 34,409.83 billion, which is equivalent to 38% of GDP. The external debt amounted to Ushs 22,358.63 billion while the domestic debt amounted to Ushs 12,051.2 billion. The External debt exposure stood at US$ 11.37 billion equivalent to 43.3o/o of GDP, of which US$ 6.23 billion was outstanding and disbursed, while US$ 5.15 billion was committed but undisbursed.

At the end of June, 2OI7 , the PV of public sector debt to GDP stood at 27 .lYo , the PV of external public and publicly guaranteed (PPG) debt to GDP stood at 14.4o/o while the present value of domestic , a debt to GDP stood at 13.19o/o. I2.O OBSERVATIONS AND RECOMMENDATIONS i. Slow implementation of electricity generation and transmission projects. The Committee observed that Government has prioritised the implementation of electricity generation projects in the country by both public and private actors. However, implementation of generation and transmission projects have not been able to move at the sarne pace, to ensure that all the power generated by both the public and private actors is fully evacuated and connected to the national grid.

The committee reconmends that the Ministry of Energy and I Mineral Development (MEMD| and Uganda Electricity Transmission company Limited (uETcLf should ensure that for new and upcoming power generation projects, plans for evacuating power from these plants should be prepared well in advance, and timely implemented to ensure that the built power plants are fully utilised. This will save the country from incurring losses as a result of that is not consumed.

(\ t l1 Low Disbursement rates among UETCL debt financed Projects. The Committee noted the low average disbursements (30%) of UETCL Loans against Original Project lifetime as at 3l"t March 2016. The low disbursement rates are attributed to poor project preparedness of UETCL especially through the lack of sites for contractors to start the works, delays in government counterpart funds, delays in compensations of Project Affected Persons (PAPs), among others. The Committee recommends that Government should ensure that all proposed electricity projects presented before Cabinet should be scrutinized to ensure that preparatory phases such as feasibility studies and compensation of Project Affected Persons (PAPs| have o been carried out before they are further submitted to Parliament for their approval.

lll Inadequate Government Counterpart Funding. The Committee noted that the majority of debt financed projects require government counterpart funding for payment of taxes and for compensation of project affected persons. The Committee recommends that Government should make a firm commitment to provide counterpart funding for all debt financed projects and have it ring fenced. All future debt financed projects whose counterpart funding is not provided in beneficiary sector o budgets should not be submitted to Parliament for approval. lv. Fulfilment of Loan Conditions. The Committee observed that t has been slow in fulfilment of loan effective conditions upon of loan agreements in order to trigger disbursement of committed funds for the implementation of debt financed projects

The Committee recommends that Government should ensure dy fulfilment of loan conditions of the financing agreement for this

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<-_ loan in order for the committed funds to be released promptly to guarautee timely implementation of this project.

v Way-leaves compensation. The Committee noted that the financial requirement for way-leaves compensation continue to escalate as new projects are embarked on. The Committee recotnmends the following; a. UETCL should complete way leaves acquisition process before engagement of the contractors. This will minimize redundancy of the equipment on site and possible interest charges on the idle equipment. o b. Government should consider acquiring a central corridor for infrastructure projects to reduce on repeated compensation whenever infrastructure projects are implemented to accommodate among others power lines, water pipes, and communication infrastructure and road reserves. c. As a matter of urgency the Ministry of Lands Housing and Urban Development should enhance the capacity of the valuation department which is now thinly manned to cope with the demand for land valuation especially for infrastructure development projects. d. Government should consider setting up a land Ombudsman to o arbitrate in cases where there is disagreement in land valuation.

of feasibility studies of Energy Projects. The Committee observed the slow development of feasibility studies for energr projects -/ particularly in generation and transmission segments. While some 1-'L progress has been registered on the mini-hydros, large projects have / hitherto taken too long in the development phase

GU h ,f fi=w The Committee recommends that the Ministry of Energy and Mineral Development and uETcL, accelerates the development of feasibility study reports and a catalogue of all projects in the energy/power sector in the generation and transmission segments in order to make them ready for investment and in order to attract long-term financing in the energy/power sector. Government should further utilise domestic resources to finance feasibility studies of infrastructure projects instead of using loan financing. vlr Dependency on consultancies. The committee observed the high dependency on consultancy services in conducting feasibility studies and o designing transmission lines projects by UETCL despite their successful implementation of several electricity transmission projects. There has been slow progress in translating this success into building sufficient capacities within UETCL conducting feasibility studies and designing electricity transmission projects. Over dependency on consultancies poses an agency risk especially where the consultants objectives do not coincide with UETCL objectives, which tend to cause delays in project implementation.

The committee recommends that UETCL scales up plans for building the capacity of UETCL staff especially in conducting o feasibility studies and designing electricity transmission projects in order to cut down on the exorbitant amounts of project funds spent consultancy ser:eices towards conducting feasibility studies and transmission projects.

Delays in payment of Project Affected Persons (PAPsf. The Committee observed that experiences from similar projects have exhibited continued lays associated with payments to Project Affected persons (pAps) 09 15

a especially to those land owners that have agreed to the valued compensation rates. The committee recommends that Ministry of Energy and Mineral Development and UETCL should transparently ensure that UETCL scales up the processing of Project Affected Persons payments, to ensure that the transmission corridor is handed over to the contractors in time. Once the acquisition is finalised, UETCL should further expedite the process of registering the acquired rights and secure the corridor, in order to guard it against future encroachmeut, abuse and losses. o lX Refusal to grant Right of way to Transmission line projects by Project Affected Persons (PAPsl. The Committee observed that although the project has an existing Resettlement Action Plan for existing Project Affected Persons (PAPs), experiences from similar projects have shown that land owners continue to reject electricity transmission projects from being implemented on their land. The rejections are out of the perceived health impacts from the high voltage transmission lines or because of the injury caused on their land by high voltage transmission lines traversing through. o The Committee recommends that UETCL ensures that it utilises its communication strategy in order to provide adequate and timely tion to the Project Affected Persons (PAPs) on issues such as th impacts of high voltage transmission lines so that the pAps obsenre the 3O meter way leave. UETCL should further ensure that any grievances arising from the PAPs are dealt with in a timely and adequate manner.

1,6 Ob tFFr x. Cost overruns. The Committee observed that this project has significant civil works on the construction of the electricity transmission line, compensation issues of Project Affected Persons (PAPs) for the acquisition of the right of way that might affect the timely implementation of this project. In addition, the Construction and material costs for this project could also escalate while problems of price fixing and collusion could arise.

x1 The committee recommends that MEMD & UETCL streamlines and shortens the time between the design and construction phases to minimize on price fluctuations. rn addition, MEMD & UETCL should a work closely with the procurement agency to reduce restrictions for contractors to increase competition and avoid possible ganging up for price frxing.

13.O CONCLUSTON Rt. Hon. Speaker, Hon. Members, the Committee therefore recommends that the request by Government to borrow Euro 37.1 million from the French Agency for Development (AFD) and euro 35.0 million from Kreditanstalt Fur wiederaufbau (KFW) the German Development Bank to finance the Masaka - Mbarara power transmission line project be approved subject to the above o recommendations. I beg to _W

( tFtr )J-- REPORT OF THE COMMITTEE ON NATIONAL ECONOMY ON THE PROPOSAL BY GOVERNMENT TO BORROW EURO 37.I MILLION FROM THE FRENCH AGENCY FOR DEVELOPMENT (AFDI AND EURO 35.O MILLION FROM KREDITANSTALT FUR WIEDERAUFBAU (KFWI THE GERMAN DEVELOPMENT BANK TO FINANCE THE MASAI(A -MBARARA POWER TRANSMISSION LINE

NO NAIVIE CONSTITUENCY 1 Hon. Bbumba Syda Namirembe C/P Nakaseke North County(

2 Hon. Bategeka Lawrence VIC.P Hoima Municipality a3 Hon. Tayebwa Thomas Ruhinda North ff 4 Hon. Muyanja Johnson Senyonga Mukono South County

5 Hon. Kamara John Ninzeyimana Bufumbira North

6 Hon. Kalule Sengo Emmanuel Gomba East County

7 Hon. Igeme Nathan Nabeta Jinja Municipality

8 Hon. Migadde Robert Ndugwa Buvuma Islands County J] I Hon. Okello Anthony Kioga County nlz_ 10. Hon. Musoke Paul Sebulime Buikwe County North ry#lk e 1 Hon. Kibalya Henry Moris Bugabula South t2. Hon. Guma Gumisiriza David Ibanda North County 13 Hon. Nambeshe John Baptist Manjiya County ( I4 Hon. Ikojo John Bosco Bukedea County

15 Hon. Angura Fredrick Tororo South County ( q 16 Hon. Katoto Hatwib Katerera County NO NAME CONSTITUENCY SIGNATURE t7, Hon. Amero Susan Amuria Woman Rep

18. Hon. Mandera Amos Buyamba County

19. Hon. Babirye Judith Buikwe Woman Rep '0 _* 20. Hon Seguya l. John Bosco Mawokota County South

21. Hon.Anne Mary T\rmwine Ntoroko Woman Rep

22. Hon.Katwesirye Oliver Koyelryenga Buhweju Woman Rep

23 Hon.Akamba Paul Busiki

CO Hon.Adeke Anna Ebaju National Female Youth 25 Hon.Nauwat Rosemar5r Amudat Woman Rep

26. Hon.Atiku Bernard Ayrvu county

27. Hon.Lakot Oruni Susan (capt) UPDF

28. Hon. Jack Wamanga Wamai Mbale Municipality

29 Hon. William Nzoghu Busongora North

30 Hon. Herbert Edmund Ariko Soroti Municipality

31 Hon. Jimmy Akena Lira Municipality - -. -32 Hoh.Naigaga Mariam DWR Namutumba 33. Hon.Ayepa Michael Labwor County

34. Hon.Lokeris Samson Dodoth East

35 Hon.Kajara Aston Mwenge South z"(