THE REPUBLIC O F UGAN D A
OFFICE OF THE AUDITOR GENERAL
www.oag.go.ug | E-mail: [email protected]
KAMPALA UGANDA Entebbe Airport
KENYA
KALANGALA DISTRICT
MWANZA ELECTRICITY FERRY WATER ROADS TANZANIA
A VALUE FOR MONEY AUDIT REPORT ON THE IMPLEMENTATION OF KALANGALA INFRASTRUCTURE SERVICES PROJECT (KIS)
A REPORT BY THE AUDITOR GENERAL
DECEMBER, 2019
THE REPUBLIC OF UGANDA
Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS)
A Report by the Auditor General
December, 2019 AUDITOR GENERAL’S MESSAGE
24th December 2019
The Rt. Hon. Speaker of Parliament Parliament of Uganda Kampala.
VALUE FOR MONEY AUDIT REPORT ON THE IMPLEMENTATION OF KALANGALA INFRASTRUCTURE SERVICES PROJECT (KIS)
In accordance with Article 163(3) of the Constitution, I hereby submit my report on the audit undertaken on the Implementation of Kalangala Infrastructure Services Project (KIS) under Ministry of Works and Transport.
My office intends to carry out a follow-up at an appropriate time regarding actions taken in relation to the recommendations in this report.
I would like to thank my staff who undertook this audit and the staff of the Ministry of Works and Transport (MoWT) for the assistance offered to my staff during the period of the audit.
John F.S. Muwanga AUDITOR GENERAL TABLE OF CONTENTS
LIST OF TABLES...... II ABBREVIATIONS...... III EXECUTIVE SUMMARY...... IV
CHAPTER ONE...... 1 INTRODUCTION...... 2 1.1 Background to the audit...... 2 1.2 Motivation...... 2 1.3 Description of the Audit Area...... 2 1.4 Audit Objectives...... 3 1.5 Audit Scope...... 4 1.5 Audit Scope...... 4
CHAPTER TWO...... 5 DATA COLLECTION METHODS...... 6
CHAPTER THREE:...... 7 SYSTEMS AND PROCESS DESCRIPTION...... 8 3.1 Roles and Responsibilities of Key Players...... 8 3.2 Process Description...... 8
CHAPTER FOUR...... 11 FINDINGS AND RECOMMENDATIONS...... 12 4.1 Project Planning, development and Procurement...... 12 4.2 Delivery of expected outputs under KIS...... 15 4.3 Monitoring and supervision...... 20
Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) | A Report by the Auditor General I LIST OF TABLES
Table 1: Showing KIS funding and sources...... 4 Table 2: Showing capital investments by KIS against support payments from GoU as at 2016...... 13 Table 3: Showing comparative total repayment amounts using other funding sources...... 13 Table 4: Total development costs...... 15 Table 5: Ferry services support payments based on the two options...... 16 Table 6: Performance of KIS under the water component...... 17 Table 7: Showing CPI’s used by KIS and Actual core CPI’s from UBOS...... 21 Table 8: Rate per trip used vs actual based on UBOS Core CPI...... 21 Table 9: Undetected ferry costs by GoU from KIS payments...... 22 Table 10: Showing excess ferry services support payments due to wrong base rate application...... 22
LIST OF FIGURES
Figure 1: Power connections by KIS target vs actual...... 18
Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) II | A Report by the Auditor General ABBREVIATIONS
GoU Government of Uganda IDC Industrial Development Company IA Implementation Agreement IAA Implementation Agreement as Amended InfraCo Infrastructure Management Company KIP Kalangala Infrastructure Services Project KIS Kalangala Infrastructure Services Limited KTC Kalangala Town Council MoFPED Ministry of Finance Planning and Economic Development MWE Ministry of Water and Environment MoWT Ministry of Works and Transport UDC Uganda Development Company UGX Uganda Shillings UNRA Uganda National Roads Authority
Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) | A Report by the Auditor General III EXECUTIVE SUMMARY
The Government of Uganda (GoU) entered a In 2018, a decision was taken to transfer Memorandum of Understanding with InfraCo the disbursements and management of the Limited (“InfraCo”) in September 2005 to develop, Programme to Ministry of Works and Transport expand and maintain key infrastructure services (MoWT). There was however no clear budget lines on Bugala Island in Lake Victoria for the benefit of for the KIS support payments. BIDCO Oil Company, Kalangala district residents, and businesses. This was in fulfilment of the MoU The objective of this audit was to evaluate the signed between GoU and BIDCO in April 2003 implementation and performance of Kalangala where, Government agreed among other things Infrastructure Services Project (KIS) in the delivery to develop, maintain and operate infrastructure of expected outputs. on Bugala Island that would facilitate the smooth implementation and operation of the KEY FINDINGS BIDCO Project. InfraCo formed a local company, It was observed at the time of audit that KIS had Kalangala Infrastructure Services Limited (KIS) put in place the planned infrastructure; as an integrated multi sectoral utility limited • The road from Luuku – Kalangala – Mulabana liability company registered in Uganda to be the (65.6 km) was upgraded from Class “C” to Class implementing agency/vehicle for the Kalangala “B” Gravel Standards. Infrastructure Services Project (KISP). • The ferry landing sites at Bukakata and Luuku In January 2009, upon approval of the were reconstructed. Development Plan submitted by KIS, GoU signed • Two ferries with a capacity of two hundred and an Implementation Agreement (IA) with Kalangala six (206) passengers each had been constructed Infrastructure Services Limited (KIS). KIS was and were operational. designed as a PPP to achieve the economies of • A 1.6 MW hybrid solar/diesel power generating scale necessary to attain project finance, operate plant was constructed at Bukuzindu with efficiently and serve the island residents’ with transmission and distribution lines serving the improved access to safe water, safer transportation major settlements on Bugala Island. and more reliable renewable solar powered • KIS had rehabilitated and expanded the electricity. The implementation of the project was Kalangala Town water supply system and to last for 15 years with the total project investment constructed four small piped water systems in estimated at USD 49.56 million1. Kagulube, Murole, Kasekulo and Mulabana.
In 2011, an amendment was made to the These infrastructure services have greatly Implementation Agreement (IA) through which GoU facilitated the implementation of the Oil Palm acquired 45.7% ordinary shares valued at US$6.5 Project by BIDCO, improved the connectivity million, InfraCo retained 54.3% valued at US$7.7 between Kalangala District and mainland via million and Industrial Development Company (IDC) Bukakata, and generally improved the quality of worth of US$7.5 million of preferential shares. life in the District. GoU was required to pay in advance annual and quarterly support payments to KIS for ferry and However, the audit identified gaps that need to road services respectively. The support payments be addressed to ensure smooth implementation were disbursed through UNRA for years 2012 to of this and similar projects as further discussed 2017. below;
1 Kalangala Infrastructure Services LTD, Project profile. Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) IV | A Report by the Auditor General i) Project planning and development road development costs upon completion of the GoU did not undertake its own independent road construction works. assessment of the infrastructure services gaps on Bugala Island so as to evaluate the best In addition, with the road support payments spread possible service delivery options as a basis for the over 13 years, projections show that GoU will spend investment decision. The government investment a total of UGX120.25Bn which is considered costly decision was based on the Research Market given that KIS is not responsible for maintaining Analysis report and a Development plan presented the road. With proper planning, evaluation and by InfraCo which was also not subjected to an negotiations, government could have explored independent feasibility assessment to verify the better cost effective delivery options. assumptions and/ or analyses presented. Ferry Component KIS was directly sourced by MoFPED without any At the time of audit (October 2018) KIS had not consideration of any other alternative provider paid to GOU annual license and ferry operating to compare the costs and benefits to establish fees amounting to USD 275,000. The Agreement the best option as required by the procurement however did not provide for penalties for delayed regulations. payment of annual ferry operating fees. In addition, it was established that following the Ministry of Finance Planning and Economic amendment of the Implementation Agreement, Development (MoFPED) could not therefore ferry service support payments were adjusted confirm that the infrastructure investment option from the ferry traffic (passengers and vehicles) chosen for Kalangala was the most economical, based payments to per trip payment terms. efficient and effective for both GoU and the citizens Through interviews, KIS indicated that it was less of the island. cumbersome to monitor number of trips compared to monitoring passengers and vehicles. ii) Delivery of expected outputs under KIS However on further analysis of relevant The construction phase of the project commenced documentation, it was noted that a passenger in 2011 with the ferry component and concluded in manifest is prepared for each trip which could have June 2016 upon final completion of the road works. been used to compute the traffic based payment. An evaluation of both options reveals that the per Road Component trip option is more costly which resulted in GoU The road construction works that were expected to paying UGX 16.3 billion more in the first six years be executed within a period of twelve (12) months of the ferry operations. were completed after three years in March 2016 resulting in a two years delay. The IAA provided that in the event of KIS failing The implementation agreement and its to provide a ferry service as a result of GoU’s amendment however did not provide for remedies default in payments, KIS would be deemed to have / penalties for delayed completion of the road operated a ferry service. construction works. The analysis of records It was observed that GoU had spent a total of UGX revealed that during the construction phase of the 871 million in respect of deemed trips arising from project, GoU had paid UGX 40.85Bn in form of road 308 none performed trips for the year 2017. support payments against a total of UGX 40.16Bn reported to have been incurred by KIS as actual
Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) | A Report by the Auditor General V Water Component There was no evidence that the various agencies The water performance agreement signed had nominated representatives to constitute the between GOU and KIS did not specify the required oversight committee. Whereas, Mott MacDonald water system designs, capacity, target population, was appointed by KIS as an independent monitor and timelines to be met by KIS. for ferry operations on behalf of GoU, and installed The annual plans and performance reports for GPS monitoring devices, none of the government the water components showed that KIS had agencies was keenly monitoring the ferry service constructed five of the eight agreed water systems level operations. on Bugala Island which were operational with There was no mechanism in place for Mott installed capacity of 21,500 cubic meters of water MacDonald to independently certify the passenger production per month. and vehicle traffic levels achieved by the ferries.
From a review of the performance reports, it Due to weaknesses in monitoring and supervision, was observed that actual monthly average it was established that GOU had made erroneous consumption was at only 4,750 cubic meters payments to KIS amounting to UGX 13.039 billion (22%), serving approximately 8,720 inhabitants as a result of application of wrong base factors representing 16% of the Island’s population. and UGX 564 million due to application of wrong CPIs. Power Component It was observed that the company had constructed In addition, GoU did not recover UGX 686.7 million a power plant with a capacity of 1.6MW (per hour) resulting from a decrease in the cost of operating which was operational in Bukuzindu, Kalangala ferry services as provided for by the IAA. district. At the time of the visit in September 2018, the extended grid length stood at approximately 140 Kms with 67 transformers installed. The power performance reports for KIS revealed that the company had attained the customer connection target set at three thousand (3000) customers by year 4 (2018) as set out in the power license agreement.
Through interviews and document review, it was observed that KIS faces a challenge of low utilization as the maximum load attained during the period under review was 0.4 MW per hour putting average utilization capacity below 25% of installed capacity. iii) Monitoring and Supervision It was noted that the oversight committee had not been operationalized as required under the Implementation Agreement.
Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) VI | A Report by the Auditor General KEY RECOMMENDATIONS • MoFPED should ensure that for any future investment project of this nature, feasibility studies are properly undertaken to establish the possible alternatives and related costs to inform their decisions.
• Government of Uganda through MoFPED should ensure that for any future project of the kind, a competitive procurement process is conducted to obtain the best possible alternative.
• GoU should ensure that, deliverables for such projects are clearly defined and remedies or penalties for non-performance specified.
• MoFPED and MoWT should consider renegotiating the road support payments with a view to reducing the final obligation.
• MoWT should ensure that outstanding annual operating ferry fees are recovered as and when they fall due.
• MOWT should ensure that the agreed annual ferry service support payments are paid in time to avoid penalties (deemed trips).
• The water and power service delivery options should be reviewed to improve on their economical reach and utilization.
• MOFPED and MOWT should ensure that the oversight committee is fully operationalized as set out in the implementation agreement.
• MoWT should make arrangements to review the computations for the support payments with a view of recovering excess payments.
OVERALL CONCLUSION The infrastructure services developed by KIS have greatly facilitated the implementation of the Oil Palm Project, improved the connectivity between Kalangala District and mainland via Bukakata, led to significant developments and generally improved the quality of life in the District.
However, the omissions made during planning and procurement and existing gaps in the Implementation Agreement (IA), 2009 and the Implementation Agreement as Amended (IAA), 2011 posed implementation challenges to KIS. The KIS services are being offered at unrealistic costs to GoU.
To ensure proper implementation of the project, it is important that the Government through the MoFPED invokes the re-negotiation clause such that KIS services are offered at reasonable costs.
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CHAPTER ONE Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Services of Kalangala Infrastructure Audit Report on the Implementation Money For Value General (KIS) | A Report by the Auditor Project CHAPTER ONE
INTRODUCTION 1.2 MOTIVATION Bugala Island is the largest of the 84 islands 1.1 BACKGROUND TO THE AUDIT in Kalangala district that make up the Ssese The Government of Uganda (GoU) entered a archipelago in Lake Victoria, covering 275sq Memorandum of Understanding with InfraCo km with a total population of 54,293 persons3. Limited (“InfraCo”) in September 2005 to develop, The Islands main economic activities include; expand and maintain key infrastructure services fishing, agriculture (oil palm growing, & timber), on Bugala Island in Lake Victoria for the benefit of and tourism as the location and climate makes it BIDCO Oil Company, Kalangala district residents, attractive for the holiday makers. and businesses. This was in fulfilment of the MoU With the Islands faced with basic infrastructure signed between GoU and BIDCO in April 2003 challenges such as; poor road surfacing; unsafe where, Government agreed among other things and unreliable ferry links; and limited access to to develop, maintain and operate infrastructure power and safe water, the Government of Uganda on Bugala Island that would facilitate the smooth entered into an implementing agreement with KIS implementation and operation of the BIDCO to avert the situation. KIS was to develop, expand Project. InfraCo formed a local firm by the names and maintain key infrastructure services to and of Kalangala Infrastructure Services Limited (KIS) on Bugala Island for the benefit of its population, as an integrated multi sectoral utility limited institutions and businesses. liability company registered in Uganda to be the implementing agency/vehicle for the Kalangala The project in its ninth year of implementation Infrastructure Services Project (KISP). has completed expansion and rehabilitation of the 65.6 Km main Island road; constructed KIS is jointly owned by GoU through UDC (45.7%) power generating plant and transmission lines; and InfraCo (54.3%) of ordinary shares. In addition, rehabilitated the Kalangala town council water the Industrial Development Company (IDC) also supply system; constructed and is operating two holds preferential share in KIS. In January 2009, ferries linking Kalangala to the main land via upon approval of the Development Plan submitted Bukakata. by KIS, GoU signed an Implementation Agreement with Kalangala Infrastructure Services Limited Owing to public concerns that the project has (KIS). not been implemented in accordance with the Implementation Agreement, and reports of KIS was designed to achieve the economies of unrealistic support payments as well as gaps in scale necessary to attain project finance, operate the oversight and monitoring of the contract, the efficiently and serve the island residents’ with office of the Auditor General decided to undertake improved access to safe water, safer transportation a value for money audit of the project. and more reliable renewable solar powered electricity. The objective of the audit was to assess the The implementation of the project was to last for 15 performance of the project, identify challenges years with the total project investment estimated and suggest recommendations to improve at USD 49.56 million2. performance.
2 Kalangala Infrastructure Services LTD, Project profile. 3 UBOS, National population and housing census, 2014 Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) 2 | A Report by the Auditor General 1.3 DESCRIPTION OF THE AUDIT AREA The Kalangala Infrastructure Services Project (KISP) is managed as a Public Private Partnership (PPP) between the GoU and Kalangala Infrastructure Services Limited (KIS) established by an Implementation Agreement (IA) signed by the two parties on 16th January 2009 and later amended through the IAA in 2011. KIS is categorized into two sub projects namely; Kalangala Infrastructure Services (KIS) for (road, ferry and water components) and Kalangala Renewables (KR) for the power component. The project aimed at providing public infrastructure services and utilities to the residents of Bugala Island, Kalangala district in a manner that is economically and commercially viable using private capital4.
KIS is a limited liability company registered in Uganda and is the implementing agency for Kalangala Infrastructure project under a Public Private Partnership (PPP) arrangement whose total cost is estimated at US $49.56 million. GoU’s participation in this project was through UDCs’ acquisition of 46% of the ordinary shares in KIS valued at USD6.5 million. The other shareholders of KIS are Infrastructure Management Company (InfraCo) with 54% of ordinary shares valued at USD7.7 million and the Industrial Development Company (IDC) with USD7.5 million worth of preferential shares.
The components were integrated into a commercial enterprise to achieve the desired economies of scope and scale. GoU was to be represented through an independent expert/monitor to supervise the project and an Oversight Committee with members drawn from MoFPED, MoWT, MWE, MEMD and Kalangala DLG to provide the oversight role during project implementation.
Mandate Kalangala Infrastructure Services Limited (KIS) operations are mandated by the Implementation Agreement signed with GoU in 2009, and as amended 2011.
Objectives of KIS5 The project objectives as reflected in the infrastructure components provided by KIS included the following; • To expand and rehabilitate the 65.6km main Island road and upgrade it to class ‘B’ gravel road. • To provide two new ferries to operate between Bukakata and Luuku linking Kalangala to the main land and to rehabilitate and reconstruct the ferry landing sites at Bukakata and Luuku. • To construct a hybrid power generating plant at Bukuzindu to generate 1.6 MW for Kalangala inhabitants. Construct both transmission and distribution lines through Bugala Islands to serve all major settlement areas. • To rehabilitate and expand the Kalangala Town Council water supply system and construct water transmission and distribution supply network for 5 major fish landing sites.
4 Industrialization Sub-sector Monitoring report, October 2014, Page 50. 5 Industrialization Sub-sector Monitoring report, October 2014, Page 50.
Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) | A Report by the Auditor General 3 Funding Kalangala Infrastructure Services Project was funded through the following sources as shown in Table 1 below;
Table 1: Showing KIS funding and sources Equity Loan Total UGX Equivalent Source (USD) (USD) (USD) (1USD =UGX 2,595) UDC 6,500,000 - 6,500,000 16,867,500,000 InfraCo 14,108,116 - 14,108,116 36,610,561,020 IDC 7,500,000 - 7,500,000 19,495,125,000 Nedbank - 5,000,000 5,000,000 12,975,000,000 EAIF - 7,000,000 7,000,000 18,165,000,000 Total 28,108,116 12,000,000 40,108,116 104,113,186,020
Source: OAG analysis of KIS audited financial statements.
1.4 AUDIT OBJECTIVE To evaluate the implementation and performance of Kalangala Infrastructure Services Project (KISP) in the delivery of expected outputs.
1.4.1 Audit Questions The following questions were addressed through the audit: • Was the planning and procurement for KIS undertaken in a manner that ensured the selection of the most cost effective investment option? • To what extent has KIS delivered on the expected outputs? • Are the monitoring arrangements effective in ensuring delivery of the expected outputs by KIS?
1.5 AUDIT SCOPE The audit focused on the implementation of Kalangala Infrastructure Services Project (KIS) by Kalangala Infrastructure Services Ltd in Kalangala district under the Ministry of Works and Transport covering the period from inception (2005) to date (2018). All the four components including ferry, road, water and power were assessed. The audit team also interacted with officials at Uganda National Roads Authority (UNRA), Ministry of Water and Environment (MWE), Ministry of Finance Planning and Economic Development (MoFPED), Kalangala Infrastructure Services Ltd (KIS), and Uganda Development Corporation (UDC) to ascertain their roles in the implementation of KIS and determine any challenges faced. Field visits to Kalangala Island were undertaken to assess project implementation, and engage the local stakeholders on project’s performance.
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CHAPTER TWO Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Services of Kalangala Infrastructure Audit Report on the Implementation Money For Value General (KIS) | A Report by the Auditor Project CHAPTER TWO
AUDIT METHODOLOGY
The audit was conducted in accordance with the International Organization of Supreme Audit Institutions (INTOSAI) Performance Auditing Standards and the Performance Auditing guidelines prescribed in the Office of the Auditor General (OAG) Value for Money (VFM) audit manual. The standards require that the audit be planned in a manner which ensures that an audit of high quality is carried out in an economic, efficient and effective way and in a timely manner.
2.1. DATA COLLECTION METHODS The audit team reviewed documents, carried out interviews and physical inspections to address the audit objective. The various methods of data collection and analysis used to address each audit question are detailed below;
AQ1: Was the planning and procurement for KIS undertaken in a manner that ensured the selection of the most cost effective investment option? The audit team reviewed the planning and procurement documents relating to KIS, interviewed officials from MoFPED, MoWT, and management of KIS to assess how well the planning and procurement process for the provision of infrastructure services to Kalangala Island were done.
AQ2: To what extent has KIS delivered on the expected outputs? The audit team reviewed implementation and progress reports, interviewed officers from KIS, MoWT, MWE, Kalangala DLG, and residents of Bugala Island to assess whether the terms of the Implementation Agreement (as amended) were adhered to, and whether the set targets were realised.
Field inspections to Bugala Island were also undertaken to assess the physical performance of the project components relating to the road, ferry, water, and power services.
AQ3: Are the monitoring arrangements effective in ensuring delivery of the expected outputs by KIS? The audit team interviewed officers from MoFPED, MoWT and MWE to establish the mechanisms put in place to monitor KIS activities during construction and operationalisation.
Monitoring and review reports were also reviewed to assess the effectiveness of the supervision mechanisms in place especially for road and ferry services where GoU makes quarterly and annual support payments respectively.
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CHAPTER THREE Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Services of Kalangala Infrastructure Audit Report on the Implementation Money For Value General (KIS) | A Report by the Auditor Project CHAPTER THREE
SYSTEMS AND PROCESS DESCRIPTION vi. The Transport Licensing Board, vii. The Ministry of Justice, and 3.1 ROLES AND RESPONSIBILITIES OF viii. Kalangala Infrastructure Services Limited KEY PLAYERS (KIS) 3.1.1 Kalangala Infrastructure Services Limited (KIS) The functions of the Oversight Committee are provided In implementing the Project, Kalangala for under paragraph 4.2 of the Implementation Infrastructure Services Limited (KIS) was engaged Agreement to include; to design, develop, construct, finance, insure, own, • Coordinating communications between the operate and maintain the project in accordance Parties with respect to the interface and coordination with the applicable Laws of Uganda and the terms required under the Implementation Agreement, of the Agreement. • Providing policy guidance on issues relating KIS is also required to report to the Oversight to the implementation and operation of the Project, Committee on the status of the Project. • Resolving disputes and grievances between the parties. 3.1.2 Ministry of Finance The MoFPED represented the GoU in signing the 3.2 PROCESS DESCRIPTION agreement with KIS and paragraph 12.1(i) of the KIS being a Public Private Partnership had to agreement provided that the Ministry has full be implemented in accordance with PPPs’ best power and authority to execute and deliver the practices. agreement with KIS on behalf of GoU. 3.2.1 Planning 3.1.3. Over-sight Committee This comprises of project inception and feasibility Paragraph 4.1 of the Implementation Agreement studies; provided that the parties shall establish an Over- sight Committee comprising of a representative • Project Inception from the following; GoU through MoFPED was required to comply with i. The Ministry of Works and Transport the prescribed procedures in identifying a project (MoWT), represented by the offices of the Engineer that addresses the identified needs in line with the in Chief and the Chief Mechanical Engineer, objectives of the NDP. This process requires that ii. The Ministry of Water and Environment a project team is appointed to identify the service (MWE), represented by the Directorate of Water need or gap, screen the possible service delivery Development, options and propose the best option in addressing iii. The Ministry of Agriculture, Animal the service need. Industry and Fisheries (MAAIF) represented by the The team then conducts a preliminary cost benefit Vegetable Oil Development Project, analysis of the proposed option there by establishing iv. The Ministry of Energy and Mineral the strategic objectives, projected cost, rationale for Development (MEMD) represented by the the proposed option, projected outcomes and how Electricity Regulatory Authority (ERA), the project should be managed. v. Kalangala District, represented by the A self-capacity internal assessment of the District Engineer and the Chief Administrative Contracting Agency (CA) is undertaken and in case Officer (CAO), any gaps are identified, service of a Transaction Advisor (TA) is secured.
Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) 8 | A Report by the Auditor General • Project Feasibility study as amended (2011). KIS with support from GoU A feasibility study is undertaken to assess was to mobilize the required resources through whether the project is feasible as a Public- both equity and external borrowing, undertake Private Partnership. The team tasked with construction work, manage and operationalize the project identifies and defines the function delivery of infrastructure services under the ferry, which the private party is to perform on behalf road, water, and power components of the project of government. An assessment of the option of as stated in the Implementation agreement. performing the function through the private party KIS was allowed to subcontract some of the is done to project the impact in terms of costs and construction works where deemed necessary benefits to GoU. The assessment also establishes upon approval by GoU. GoU on the other hand and evaluates the projected full costs of the through the responsible agencies was to supervise Project when performed through a private party the operations of KIS while ensuring that the road against established GoU mechanisms. The team and ferry service support payments are duly paid then assesses the expected inputs and outputs and on time. for the project and the comparative benefits and challenges of each option. This assessment helps 3.2.4 Support Payments determine the type of PPP option, assess the GoU is expected to pay KIS a subsidy (Ferry capacity of the private party in delivering the project Service Support Payments) to enable the company and then file a feasibility report for consideration to provide transportation services to passengers, and approval of the proposed investment option. vehicles, and cargo on the ferry routes free of Bid documents are prepared to commence the charge. The Ferry Service Support Payments are procurement. paid as a lump sum in advance prior to the start of each year. The payments are calculated by 3.2.2 Procurement multiplying the minimum number of ferry Trips Government is expected to invite interested parties for the year with the unit rate per trip. The rate to submit proposals for provision of services in per Trip is derived by adjusting the base rate with accordance with the PPDA Act, 2003. The proposals adjustment factors that include the movement in submitted are then screened for those that meet fuel price, CPI, UGX/USD exchange rate, and the the minimum qualifications. The Contracting LIBOR rate. Agency with the help of the Transaction Advisor verifies the financial and economic stand of the Road support payments are made on a quarterly bidders, their ability to secure credit and their basis over thirteen years based on the claim technical and professional capability to deliver the schedule submitted by KIS. The schedule is project. The CA then engages the best evaluated generated using a financing module that inputs private party through negotiations for contracting the total road costs, interest on borrowed funds, terms that are favorable for both parties into an and return on investment on equity and may be Implementation Agreement. adjusted for changes in the 6-month LIBOR rate.
3.2.3 Project Implementation Implementation of the project is expected to be done in line with the terms and conditions as spelt out in the Implementation Agreement signed between KIS and MoFPED in January 2009, and
Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) | A Report by the Auditor General 9 3.2.5 Monitoring and Evaluation The Implementation Agreement provided for creation of an Oversight Committee within 60 days following the project commencement. This committee was to review progress of project implementation and also provide policy guidance to KIS. In addition, the respective government agencies for water (MWE), Power (ERA), ferry and road (MoWT/ UNRA), were required to issue KIS with respective implementation licenses. These agencies were required to monitor and ensure that the terms and conditions in the licenses are observed by KIS during project implementation. The agencies were also required to continuously monitor and track the project’s performance to ensure quality delivery of infrastructure services and meeting the project objectives.
In addition, the IA required contracting an independent monitor for purposes of supervising and reporting to GoU the performance of KIS in terms of service delivery levels. MoWT/UNRA were to use the independent monitors assessment reports in addition to their own verification processes to confirm the support payment claims by KIS before effecting the payments.
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CHAPTERFOUR Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Services of Kalangala Infrastructure Audit Report on the Implementation Money For Value General (KIS) | A Report by the Auditor Project CHAPTER FOUR
FINDINGS, CONCLUSIONS AND 4.1 PROJECT PLANNING, DEVELOPMENT RECOMMENDATIONS AND PROCUREMENT The Implementation Agreement recognizes the Government of Uganda signed an Implementation KIS concession as a PPP. For any development Agreement with Kalangala Infrastructure project of this nature, it would be good practice Services Limited (KIS) in January 2009 for the for government to appoint a team to undertake provision of key infrastructure services to Bugala project inception and a feasibility study. Island in Kalangala District. During the audit we observed that KIS completed the rehabilitation 4.1.1 Project planning and development and upgrade of the road from Luuku – Kalangala During the feasibility study, GOU was expected to – Mulabana (65.6 km) from class “C” to Class “B” assess the infrastructure services gaps on Bugala Gravel Standards in 2016, and rehabilitated and Island, screen the possible service delivery options, reconstructed the ferry landing sites at Bukakata conduct a preliminary Cost Benefit Analysis and and Luuku. assess the proposed intervention options. The project also constructed the two (2) ferries The assessment would establish the projected full which are operational with carrying capacity of costs of the project whether performed through a (206) passengers each on the Bukakata – Luuku private party or established GoU mechanisms and route making a combined total of (16) crossings compared the benefits and challenges associated per day. with either option.
The project has also completed the construction of Through interviews with officials from MoFPED, a 1.6 MW hybrid (solar and diesel) power generating MoWT and KIS, the audit team established that in plant, transmission and distribution lines through the Implementation Agreement signed with BIDCO Bugala Island to serve the major settlements. in April 2003, GoU committed to providing key The project rehabilitated and expanded Kalangala infrastructure services to Bugala Island. BIDCO Town water supply system, and constructed through its subsidiary Oil Palm Uganda Limited small piped water systems in Kagulube, Murole, (OPUL) introduced InfraCo to MoFPED which then Kasekulo and Mulabana. entered into a MoU with GOU to develop the project for delivery of infrastructure services to Bugala The above infrastructure services developed by Island. KIS, a company established by InfraCo to KIS have greatly facilitated the implementation be used as a vehicle for the implementation of the of the Oil Palm Project by BIDCO, improved project generated the Research Market Analysis the connectivity between Kalangala District report, and a Development plan for infrastructure and mainland via Bukakata, led to significant services Project which formed the basis for the developments and generally improved the quality government investment decision. of life in the District. It was noted that MoFPED did not undertake In spite of these developments, it was established an independent preliminary assessment of the through the audit that there are gaps in the possible service delivery options and associated implementation of the project which need to be costs to come up with the most cost effective addressed to ensure effective delivery of the investment option for the infrastructure gaps that expected outputs. had been identified.
Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) 12 | A Report by the Auditor General There was no evidence that the ministry validated the assumptions and or analyses presented by the company in their Development Plan and Research and Market analysis presented to it for consideration.
Through interviews with the agencies responsible for road and ferry services (MoWT), water (MWE), and power (MEMD)) it was noted that the gaps in project inception and feasibility studies for provision of Kalangala infrastructure services were caused by the failure by MoFPED to consult widely at the inception stage of the Project.
As a consequence, MoFPED could not confirm that the infrastructure investment option chosen for Kalangala was the most cost effective for both GoU and the residents of the island. For instance a review of support payments made during the construction phase (from September, 2012 to June, 2016) for both ferry and road against the total capital costs for the same components indicated the possibility that GoU would have fully financed these activities as analyzed in Table 2 below.
Table 2: Showing capital investments by KIS against support payments from GoU as at 2016 GoU Support payment during Capital Investment by KIS Variance Component construction phase (UGX) (UGX) (UGX) Road/Ferry landings 40,162,218,593 40,853,493,884 691,275,291 Ferry 19,803,408,564 40,863,933,092 21,060,524,528 Total 59,965,627,157 81,717,426,976 21,751,799,819 Source: OAG comparative analysis of comparative funding options
As shown in the table 2 above, GoU had incurred UGX 81.72 billion in support payments compared to the development cost of UGX 59.96 billion incurred by KIS in putting up the infrastructure. Overall GOU had spent a total of UGX 21.75 billion more than it would have required to directly finance the infrastructure. A proper evaluation of the financing options would have guided GoU on the most cost effective option.
Using the road component costs, the audit team further made a comparative analysis using other probable alternative sources of funding available to GoU as set out in table 3 below;
Table 3: Showing comparative total repayment amounts using other funding sources Reported Road Probable Total Investment cost Repayment amount %age of the Initial Funding Source Interest rate (KIS financial reports) (13 years) Investment (UGX) (UGX) KIS Option Based on Current 40,162,218,593 120,250,820,255 299% repayment schedule World Bank – IDI option 40,162,218,593 Max 1% 42,879,420,024 106.7% World Bank IBRD 40,162,218,593 2% 45,709,059,919 113.8% Option ADB 40,162,218,593 3.3% 49,554,029,614 123.4% BOU T/Bill Rate 2011 40,162,218,593 13.2% 84,545,256,005 210.5% Source: OAG comparative analysis of comparative funding options
The table above shows that there were other comparatively fair possible alternatives that could have been explored by Government of Uganda assuming the Project met the funding requirements and conditionalities.
6 Road and landing site reconciliation statements provided by KIS. 7 ibd. Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) | A Report by the Auditor General 13 Management Response The MoFPED should have undertaken the This concept was derived from a need identified by procurement process to identify the most BIDCO to support the oil palm Project and improve economical private party with a sound technical, the livelihoods of the people of Kalangala District. financial and professional capacity to deliver the Under the project design, KIS was to provide project. The best evaluated party should then have financing and recover from sale of services to the been engaged through negotiations for contracting public except for the road where a grant would be terms that are favorable for both parties. applied to ensure that it is not expensive (less than 26 Billion). Through a review of project documents, it was noted that KIS was directly sourced by MoFPED. Project planning was overtaken by the design There was no consideration of any other alternative of the project as the investor confirmed that he provider to compare the costs and benefits to would recover his investment at a controllable establish the best option. rate direct from the public and with no recourse to GoU resources. From inception, the project was According to MoFPED, direct sourcing of KIS was a generally a private venture with deep charitable the best option as they considered the island a overturns and promised affordability of all services high risk investment area that would not attract using grants from output based subsidies. any other investor.
Therefore, the project was not subjected to The use of the direct sourcing option to secure the feasibility study since the investor would shoulder services of KIS deprived government the option of any losses that could occur. The project was evaluating other probable alternatives. conceptualized as a Private investment Venture. The principle reason of optimal allocation of risks between parties privy to the contract was therefore Recommendation not attained as all the borrowings for KIS were MoFPED should ensure that for any future guaranteed by Government of Uganda. investment project of this nature, feasibility studies are properly undertaken to establish the Management Response possible alternatives and related costs to inform The direct sourcing of KIS was due to the terms their investment decisions. of the MoU and Project Development Plan (PDP) whereby the investor would secure the financing Wide consultations should also be undertaken and recoup by selling the services to the public on throughout the development process of similar a cost recovery basis for a given period. Projects. The KIS alternative was preferred because it offered 4.1.2 Securing services of KIS very attractive terms including grants to make the Government was expected to invite interested services affordable. This is what was depicted in parties to submit proposals for provision of the background documents that formed the basis infrastructure services on Kalangala Island in for approvals without competition. accordance with the PPDA Act, 2003. Section 88 of the PPDA Act, 2003 requires that any Recommendation agency undertaking any form of procurement Government of Uganda through MoFPED should not addressed by the Act should write to the ensure that for any future project of the kind, a Authority seeking guidance on how to handle the competitive procurement process is conducted to procurement. obtain the best possible alternative.
Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) 14 | A Report by the Auditor General 4.2 DELIVERY OF EXPECTED OUTPUTS UNDER KIS The construction phase of the project commenced in 2011 with the ferry component and was concluded in June 2016 upon final completion of the road works. According to the KIS audited financial statements (2012- 2016), the total development costs incurred for the four components amounted to UGX 138,579,161,5008 as detailed in Table 4 below;
Table 4: Total development costs Component Amount (UGX) Power 42,188,131,683 Road/Ferry landings 40,162,218,593 Water 8,286,385,004 Ferry 19,803,408,564 Remittance to InfraCo 2,595,000,000 Development expenditure by 2012 22,790,177,706 Financing fees/costs 2,753,839,950 Total 138,579,161,500
Source: OAG extracts from KIS audited financial statements (2012-2016).
A detailed implementation assessment of the four project components is discussed below.
4.2.1 Road Component The Implementation Agreement required KIS to upgrade the 65.6km Kalangala main island road from class “C” to class “B” gravel. Accordingly KIS signed a contract for road works with Spencon Services Limited in April 2012 at a contract price of UGX 19,758,945,590. This was expected to be completed in a period of twelve (12 months i.e. by March 2013) as per the IA. The GoU committed to make road support payments over 13 year period as per the provisions of the IA&IAA.
Through a review of road supervision reports, inspections and interviews conducted with stakeholders in Kalangala, the audit team observed that KIS upgraded the 65.6 km main island road from Luuku - Kalangala – Mulabana to Class “B” Gravel standards. The field inspections done by the audit team in September 2018, found the road in a fairly motorable state with some maintenance works done by UNRA. The final contract price for the road was UGX 26.03 billion upon securing a variation. The road construction that was scheduled to take one year under the Implementation Agreement was completed after three years in March 2016 resulting in a two years delay. The implementation agreement however did not provide for remedies/penalties for delayed completion of road construction works.
The terms agreed upon for the road costs in the IA as amended put the final capital cost of expanding, rehabilitating and upgrading the 65.6km main island murram road to class “B” gravel at 35.6 Billion. This translates into a unit cost of UGX 540 million9 per kilometre. With the road support payments in the IAA spread over 13 years, the final road total cost is projected at UGX 120.25Bn which translates into a unit cost UGX 1.8 billion10 per kilometre for the Murram road.
8 Capital costs extracted from KIS audited financial statements (2012-2016). 9 Cost per km based on the total capital costs for the road component of UGX 40,162,218,593. 10 Cost per km based on the total repayments per the road support payment schedule updated in 2016, amounting to UGX 120,250,820,255.
Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) | A Report by the Auditor General 15 Through document review, it was observed that UNRA had assessed the cost of similar road works at 80 Million per kilometre. A related assessment by MoWT dated January 2019 puts the cost at 200 Million per kilometre. The above analysis shows that the cost of upgrading a 65.6km road was high compared to similar road works.
As shown in Table 2, by the time road construction was completed in March, 2016; GoU had paid UGX 40,853,493,884 in form of road support payments against UGX 40,162,218,593 incurred by KIS as actual road costs. In addition, there was no clear budget line for the KIS road support payments under the Ministry of works as it is budgeted under output 040505 – operational and maintenance of MV Kalangala ship and other delegated ferries. The option of delivering the road infrastructure through a normal procurement of a contractor to undertake the road works could have been more cost effective.
4.2.2 Ferry Component The Implementation Agreement required KIS to build and operate two (2) ferries between Bukakata and Luuku landing sites linking Bugala Island to the main land. The agreement also required KIS to pay annual license and operating fees of USD 1,000 and USD 25,000 respectively per vessel. Government had to pay a subsidy (Ferry service support payment) to KIS to provide transportation services for passengers, vehicles and cargo at no cost to users. The support payment was to be paid in lump sum and in advance prior to each year of operation.
Through field inspections, review of progress reports and interviews with KIS management, the audit team established that KIS reconstructed the two landing sites and was operating two passenger service ferries. The first ferry (MV Pearl) started operations in August 2012 and the second (MV Ssese) in October 2015. Each ferry has a carrying capacity of 206 passengers and operates a daily schedule of four round trips (eight crossings). The IA however did not specify the capacity of the vessels and the timelines in which the ferries were to be delivered.
Through the review of the Implementation Agreement as Amended, the audit team established that ferry service support payments were later adjusted from the ferry traffic (passengers and vehicles) based payments to per trip payments. An analysis of both options revealed that the per trip option was more costly to GoU as analysed in the table 5 below;
Table 5: Ferry services support payments based on the two options Amounts based on original Actual payments based on Year terms in IA (Traffic volumes) Variance (UGX) IAA (per trip option) (UGX) (UGX) 2012 2,059,873,728 940,965,000 1,118,908,728 2013 6,751,528,926 5,792,695,765 958,833,161 2014 8,331,317,400 6,435,402,700 1,895,914,700 2015 9,690,495,038 9,027,077,684 663,417,354 2016 14,030,718,000 8,255,887,065 5,774,830,935 2017 14,277,874,000 8,347,829,816 5,930,044,184 Total 55,141,807,092 38,799,858,030 16,341,949,062 Source: OAG analysis of actual ferry service support payments and computations based on terms in IA.
The change in the method of computation of ferry service support payments from ferry traffic to per trip based resulted in GoU paying UGX16.3 billion more in the first 6 years of the ferry operations.
Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) 16 | A Report by the Auditor General In addition, through analysis of KIS audited financial statements and interviews with MoWT and UNRA officials it was established that by the time of audit (October 2018) KIS had not paid annual ferry operating fees amounting to USD 275,000.
Similarly the GoU had not made timely support payments for the ferry service within the mandatory 30 days as set out in the IA for all the six years reviewed. The Agreement however did not specify the penalties to KIS for delayed payment of annual ferry operating fees.
The delay for payment of the annual ferry operation fees was attributed to lack of ownership by any government agency in ensuring that due fees are collected. In addition, the Government’s failure to pay ferry service support payments on time resulted in a payment of UGX 871 million for 308 non performed trips but claimed as “Deemed trips11” by KIS in 2017. The IAA provided that in the event of KIS failing to provide a ferry service as a result of GoU’s default in payments, KIS would be deemed to have offered the ferry service.
4.2.3 Water component The performance contract between KIS Ltd and MWE of August 2009 required the company to rehabilitate and expand Kalangala Town Council Water Supply System. The contract also required KIS Ltd to construct, own and operate bulk water systems in Kagulube, Murole, Kasekulo, Mulabana, Bwendero, Bugoma, and Kibanga-Mabuga on Bugala Island.
The agreement did not specify the required water system design specifications, quality parameters, capacity, target population, and timelines to be met by KIS. The annual plans and performance reports for the water component showed that KIS had constructed five of the agreed eight water systems on Bugala Island and these are operational. Table 6 below shows KIS performance under the water component.
Table 6: Ferry services support payments based on the two options Average Estimated Design Capacity No Water System Status consumption Population Served (m3)/Month (m3)/Month (Persons) Kalangala Town 1 Council water Complete 12,000 3,500 4,850 system Kagulube water 2 Complete 5,000 300 1,480 system Murole Water 3 Complete 2,500 450 1,090 System Kasekulo Water 4 Complete 1,000 350 750 System Mulabana Water 5 Complete 1,000 150 550 System Bwendero Water 6 Design Stage - - - System Bugoma Water 7 Not started - - - System Kibanga-Mabuga 8 Not Started - - - Water Total 21,500 4,750 8,720 Source: OAG analysis of KIS water department reports.
11 Trips KIS was unable to operate due to delay in ferry service support payments by GoU. Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) | A Report by the Auditor General 17 The table above shows that, KIS had so far completed five water systems with installed capacity of 21,500 cubic meters of water production per month but on average, only 4,750 cubic meters (22%) are consumed. The current total population served by KIS is approximately 8,720 people representing only 16%12 of the Island’s population.
According to KIS, the slow progress in construction and expansion the water systems was attributed to the component not being economically viable for the private operator. For instance, according to the financial statements, during the year 2017 KIS incurred total operational expenditures of UGX 856 million to generate water but only realized aggregated sales revenues of UGX 169 million under the water component.
This has resulted in KIS targeting only populated areas such as trading centres and landing sites which has left the other remote and isolated settlements unattended to. The audit team also observed that the assets previously owned by KTC water supply system were not valued prior to handing them over to KIS Ltd yet the agreement provides that at the end of the engagement period, all the project assets shall be a property of the company.
4.2.4 Power Component In January 2009, ERA granted KIS Ltd a license to design, construct, own and operate electricity generating facilities in Kalangala District for 25 years. The company was required to construct a hybrid power generating plant with an installed capacity of 1.6 MW per hour (i.e. Diesel 1MW and solar 0.6 MW), construct transmission lines to serve all major settlement areas on Bugala Islands and connect 3,000 customers by the fourth year of operation. The license did not specify the grid length to be constructed.
Through document review, field inspections and interviews with KIS Ltd management team, the audit team noted that the company had constructed a power plant with a capacity of 1.6MW (per hour) which was operational in Bukuzindu, Kalangala district. Whereas the license did not specify the grid length of transmission lines to be constructed, the extended grid length stood at approximately 140 Kms with 67 transformers installed and operating at the time of audit field inspections. The power performance reports for KIS revealed that the company had attained the customer connection numbers of (3,000) as set in the power license agreement by the fourth year of operation as shown in the Figure 1 below:
Figure 1: Power connections by KIS target vs actual
Source: OAG analysis of KIS customer connection statistics
12 8,720 people served *100/54,293 (Island’s total population). Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) 18 | A Report by the Auditor General Through interviews with the KIS Ltd power The passenger levels are also impacted by the bad management team, it was observed that, the state of Masaka-Bukakata road. maximum load attained during the period under review was 0.4 MW per hour putting average KIS has surpassed its targeted customer utilization capacity below 25% of installed capacity. connections numbers for utilities but has not The company was in the final stages of connecting realized unit consumption expectations due to Oil Palm Uganda limited to the grid which could improved efficiency of electrical gadgets and potentially raise the demand to 40%. appliances (both domestic and commercial – Interviews with users revealed that power supply bulbs, refrigerators, TVs, motors etc.) and the was largely stable with very minimal or no outages slow growth in industries. in the areas visited. The issue on non-payment of operating fees was The low capacity utilization levels are a result of brought to the attention of KIS and consequently most (99%) of the users utilizing power for only the Ministry recovered USD 100,000 from the lighting. The performance report for August 2018 quarter 1 certificate and the balance of USD 175,000 showed that only 28 of the 3,129 connections were was to be recovered in the Quarter 2. using power for commercial purposes. The delays in support payments were a The unutilized (idle) capacity (deemed power) consequence of UNRA halting the payments resulted in KIS power operating expenses of pending guidance from Attorney General. In (UGX 6.71 Bn) for the calendar year 2017 which other cases the delays are occasioned by delayed was higher than the revenues generated of (UGX releases from MoFPED. 1.03Bn). This implies that much as the intended connection targets were met, KIS Ltd still faces Audit Comment a challenge of making the power component Information provided by the ministry and KIS economically viable. in June 2019 indicated that operating fees of US$ 275,000 had been fully recovered (through Management Response deductions at source by the MoWT) from support The unit cost of UGX 1.8bn per Kilometer (based payments due to KIS. However, the ministry on total payments of 120Bn over 13 years) did not provide URA receipts as evidence that it assumes that the road payment was done upfront was delivered to the authority and was silent on disregarding the 13 year financing cost/Time Value recovery of the operational fees for the current For Money. operating year 2019.
Management takes note of the observation. For future projects, clarity will be provided and deliverables in terms of quality, specifications and functionality will be adhered to. This project’s outputs were in terms of a road upgraded and a number of ferry trips upon which the payments are based.
The per trip passenger averages are affected by the hazardous cargo trips that do not take passengers due to safety concerns and the random medical emergency crossings. KIS operates 2 trips per day (Monday to Saturday) dedicated to hazardous cargo. Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) | A Report by the Auditor General 19 Recommendations Through interviews and analysis of claims for • GoU should ensure that for similar support payments, the audit observed that there future projects, clarity is provided on expected were weaknesses in the monitoring arrangements deliverables in terms of quality and quantity put in place for the project as further discussed specifications, timelines, and functionality. below. • The oversight committee had not been • GoU should ensure that any future projects constituted as KIS and the responsible GoU signed include provisions for breach of contract agencies had not nominated their representatives for either parties. to the committee. • An independent expert (Mott MacDonald) • Ministry of Finance Planning and Economic was appointed by KIS as required by the IAA and Development should consider renegotiating the regularly reports to KIS. The records available road support payments with a view to reducing the showed that the independent expert installed the projected 13-year obligation. GPS monitoring devices and regularly submitted periodic reports relating to ferry operations • MoWT should always ensure that (Number of trips, passenger and vehicle data). outstanding annual operating ferry fees are However, there was no evidence that the recovered as and when they fall due. independent expert was verifying claims for support payments as envisaged under the IAA. • MoWT should liaise with MoFPED to ensure The contract between KIS and Mott MacDonald that the agreed annual ferry service support lacked clarity in respect to the role of the payments are paid in time to avoid deemed trips independent expert in verification of information payments. provided by the company relating to the support payments. • GoU should review the water and power service delivery options to improve on the As a result of the above weaknesses, the existing economical reach and utilization. monitoring arrangements could not detect erroneous payments amounting to UGX 14.29 billion made by GoU to KIS through MoFPED, 4.3 MONITORING AND SUPERVISION MoWT and UNRA as detailed below; As part of the monitoring arrangements, the Implementation Agreement provided for the 4.3.1 Excess payment due to application of creation of an Oversight Committee (OC) to oversee wrong CPIs project implementation. Through analysis of support payments and The component licenses also provide that the corresponding claims, the audit team established respective government issuing agencies should that KIS applied wrong CPIs as one of the monitor KIS Ltd operations and ensure adherence components of the adjustment factor which went to terms laid out in the licenses. In addition, the undetected through the payment approval IAA required KIS Ltd to appoint an independent process. This resulted in an overpayment of UGX expert with the approval of GoU. 564,382,537 as presented in Tables 7 and 8 below. The independent expert was to monitor and certify the number of trips made by each ferry on the regulated routes in any Ferry Service year and to verify the information provided by the company in relation to the claim for payment.
Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) 20 | A Report by the Auditor General Table 7: Showing CPI’s used by KIS and Actual core CPI’s from UBOS Year CPI’s Used By KIS Core CPI’s (Source: UBOS) Base CPI Base CPI
2012 149 194 149 189 2013 149 198 149 194 2014 149 214 149 208 2015 149 218 149 212 2016 149 226 149 226 2017 103 159 106 158 2018 103 164 106 164 Source: OAG analysis of CPIs as reflected in the ferry support payments and UBOS CPI’s.
Using the CPI’s in the table above as obtained from UBOS, the audit team recomputed the per trip rates and compared them with the ones used by KIS as shown in table 8.
Table 8: Rate per trip used vs actual based on UBOS Core CPI Rate used/Trip Adjusted rate Excess per Trip Value Year No trips (UGX) (UGX) (UGX) (UGX) 2012 1,950,638 1,931,418 19,220 1,056 20,296,479 2013 2,022,627 2,006,858 15,769 3,338 52,636,915 2014 1,983,647 1,963,296 20,351 4,200 85,474,443 2015 2,044,342 2,025,727 18,615 4,900 91,213,500 2016 2,698,215 2,700,869 (2,654) 5,200 (13,800,800) 2017 2,745,745 2,712,132 33,613 5,200 174,787,600 2018 2,842,141 2,812,569 29,572 5,200 153,774,400
Total 564,382,537
Source: OAG analysis of actual ferry service support payments and computations based on terms in IA.
4.3.2. Support payments not subjected to half year review Deductions Ferry service support payments are paid as a lamp sum in advance prior to the start of each year that the ferry service in being operated. At mid-year a review is undertaken and if it is determined that there is a decrease in the cost of providing the ferry service, GoU is entitled to deduct such amount from the subsequent Ferry Support Payment for the following Ferry Service Year. If on the other hand there is an increase in the cost of providing the ferry service, KIS is entitled to request for additional payment.
From the review and analysis of support payments records provided by KIS for the period (2012- 2018), it was established that KIS had made additional half-year payment requests in respect of increased cost of providing ferry services which were subsequently paid. On the other hand, for the instances where there was a decrease in the cost of providing ferry service, GoU did not offset such amounts from the subsequent ferry service support payments. As a result a total of UGX 686 million remained un recovered. Details are shown in Table 9 below.
Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) | A Report by the Auditor General 21 Table 9: Undetected ferry costs by GoU FROM KIS payments Amount billed and paid Half year review Amount Variance (Amount not Year (UGX) (UGX) recovered - UGX) 1 2013 6,751,528,926 6,541,256,792 210,272,134 2 2014 8,331,316,681 8,274,542,953 56,773,728 3 2016 14,030,718,000 13,611,015,600 419,702,400 Total 686,748,262 Source: OAG analysis of ferry support payments.
4.3.3 Excess payment due to inappropriate application of base factors Annex 1 of the IAA provided for an initial base capacity tariff of UGX 1,650,000 for years (1 – 4) and UGX 1,900,000 for years (5-13). Upon application of a new base tariff of UGX 1,900,000 for the years (5-13), it was expected that the corresponding parameters for fuel, CPI, exchange rate and LIBOR rate had to be adjusted to correspond with the new base year.
It was observed that following the revision of the new base tariff rate in 2016 to UGX 1,900,000, KIS did not adjust the corresponding parameters and instead continued to apply parameters corresponding with the March 2011 base year in the computation of Ferry support payments for the years (2016- 2018). This resulted in excess ferry service support payments of UGX 13 Billion to KIS as shown in Table 10 below;
Table 10: Showing excess ferry services support payments due to wrong base rate application OAG Recomputed rate per trip using Per Trip Rate Used adjusted base Variance Total Excess Paid Trips Year “B” factors at “D=B-C” “E=(D*A)” “A” (UGX) application of new (UGX) (UGX) base rate “C” (UGX) 2016 5,200 2,698,215 1,900,000 798,215 4,150,718,000 2017 5,200 2,828,724 1,946,048 882,676 4,589,915,200 2018 5,200 2,846,807 2,020,059 826,748 4,299,089,600 Total 13,039,722,800 Source: OAG analysis of ferry service support payments.
Management Response • MoWT did not establish an oversight committee at the time of takeover in 2017 as it deemed the committee to have been in place since the agreement was signed in 2009. However, efforts through correspondences by MoWT to access prior oversight committee arrangements between UNRA and MoFPED yielded no results.
• An oversight committee, as outlined in the agreement will be formed after the review process is completed and cabinet has pronounced itself on the matter. In the interim, MoWT has put in place an adhoc project monitoring unit to monitor the project performance.
• An inter-ministerial committee comprising MoWT, MoFPED, MoJCA, and UNRA was constituted to review the agreement and advice on the way forward. The draft report was submitted to management for discussion, review and submission to cabinet for further guidance.
• Management has instituted the process to recover the excess payments to KIS through the quarterly certificates submitted for processing.
Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) 22 | A Report by the Auditor General Recommendations • GoU should ensure that the oversight committee is constituted and operationalized.
• GoU should review the IA to establish proper monitoring framework with defined responsibility centres to monitor respective components of the project and keep track of KIS operations especially support payments.
• MoWT should make arrangements to review the computations for the support payments with the view of recovering excess payments.
• The process of appointing the independent expert should be reviewed to enhance his independence and duty of care owed to GoU as provided for by the IAA.
Value For Money Audit Report on the Implementation of Kalangala Infrastructure Services Project (KIS) | A Report by the Auditor General 23
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