After Umeme’s 20-year concession: What next?

Umeme Limited’s public split from the government is akin to a public divorce, both sides must interpret the terms of their agreement before bidding farewell to one another after twenty years of ‘marriage.’

The private power distributor intends to close its government business by the end of March 2025, but it is likely that it will need to keep running for a few months after that concession while awaiting government audits for its buyout amount, which is equivalent to money that Umeme has not recovered during its concession.

This sum is approximately $225 million (Shs881 billion) as of January 2024, according to Energy Ministry’s Permanent Secretary, Engineer Irene Bateebe. With power tariffs that are built into its concession, Umeme has been able to reduce this buyout amount from the initial figure that was around Shs1.1 trillion.

Government records show that in the event that the concession between the two parties comes to a natural end, the buyout amount would be paid within 91 days. If this does not happen, the state will then be obligated to pay 20 percent interest annually on the outstanding buyout amount until it is paid in full, subject to an audit from the Auditor General.

“If VAT [Value Added Tax] or any other sales tax is required to be charged by the company [Umeme] on the buyout amount, the government of Uganda shall pay taxes in addition to the buyout amount so that the company [Umeme] receives full benefit of the relevant buyout amount calculated,” the Energy Ministry’s committee disclosed in 2011, in a report to Parliament, after examining Umeme’s contract.

Umeme mediated a lease agreement for the state’s Uganda Electricity Distribution Company Ltd. (UEDCL) assets to manage, maintain, and improve retail electricity sales, distribution infrastructure, and associated customer services in 2004.

This was after the industry’s structure was altered from a single buyer model to an open relationship involving generators, transmission operators, distributors, and customers through the Amendment of the Electricity Act, 2022.

However, Umeme got into a heated dispute with the government over the power tariff that was written into its concession, availing it 20 percent return on investment. This is because Umeme’s power tariffs and returns on investment are correlated; the higher the return on investment, the higher the power charges, according to the energy committee’s 2011 report to parliament after reviewing Umeme’s contract. 

The government considered this untenable. President Museveni was actually taken aback by the fact that such ugly agreements were made without his knowledge.

Consequently, the government started enticing factories to move from Umeme’s “expensive” power to Uganda Electricity Distribution Company Limited’s (UEDCL) “less expensive” power, arguing that Umeme’s unwillingness to lower electricity tariffs undermines the country’s industrialisation goal and, eventually, efforts to reduce poverty among the population.

As a result, Umeme’s shareholders are now anticipating what might occur on June 1, 2025—the day it will formally stop providing services to the government, the day it will either go out of business or launch a new endeavour.

According to Keith Kalyegira, the former chief executive officer of Capital Markets Authority (CMA), Umeme faces the risk of turning into a shell company with shrunk value if the government fails to pay it during the duration of its concession because the company’s ideal business is pegged on a government concession. This is because the company will not be generating any cash. 

The government might be compelled to issue Umeme a contract extension of probably five months or so, if delay in its payment to the company arises, according to insiders in Uganda’s Securities Exchange (USE) to avoid penalties of revoking its agreement with the company. 

This is because the state is notorious for payment delays caused by a lack of cash at hand and a backlog of bureaucracy. 

“There are so many questions, though. Will employees come to work the following day of the close of the concession? Will they delist or bid for renewal? It is a publicly held entity where the national pension fund owns 24 percent of the business. All its shareholders are on the wait on what might possibly happen afterwards,” Crested Capital chief executive officer Robert H. Baldwin, said.

But Umeme has shielded itself from this speculation that might sway its stock movement on both the Uganda and Nairobi Securities Exchanges.

The company has an Anti-Insider Trading Policy to ensure that any transactions in the company’s stock by directors, significant shareholders, contractors, senior management, and staff members who have access to confidential information, as well as those connected to them, are carried out in an ethical manner and do not harm the interests of other present or potential investors.

While its Umeme’s departure boils up, the government has already started preparing the Uganda Electricity Distribution Company Limited (UEDCL) to assume former’s power distribution responsibilities within the country.

Several stock brokers predict that the government will pay current Umeme shareholders three times the closing market share price, or more than $200 million (Shs783 billion).

“We recognise that many stakeholders have concerns about the risks due to the transition process over the next 24 months. However, with commitment from both the government and Umeme, we anticipate a smooth process for continued service delivery, operational efficiencies, and settlement of the buyout amount per contract,” Selestino Babungi, Umeme’s managing director, told the company’s shareholders, last year.
What are Umeme’s options?

Unless Umeme acquires another business between now and March 2025, its concession will expire.

The government plans to implement the second wave of reforms, which will include minimal involvement from the private sector in the energy sector and the consolidation of various electricity segments into a single national utility.

If and when the government demands a public-private partnership—which is currently undergoing negotiations—Umeme would have an upper hand against other bidders due to the experience it has garnered in the last 20 years of its operations.

Victims of the separation
Breadwinners from Umeme will definitely be impacted by this divorce because, in the event that the company’s operations are merged with UEDCL after the buyout, the latter is unlikely to hire all of Umeme’s employees, which some analysts are referring to as a “myriad of politics and economics.” 

In Umeme’s 2022 annual report, the company notes that direct costs associated with the distribution and sales of goods and services sold to customers totalled Shs1.25 billion, up 0.9 percent from Shs1.24 billion in 2021. 

Administrative costs totalled Shs213.3 billion, while maintenance and repairs came to Shs34.2 billion. The company made payments to Uganda Electricity Transmission Company Limited (UETCL) totalling Shs1.15 trillion for the purchase of electricity and Shs9.2 billion for the generation levy.

“The staff head count increased to 2,301 fulltime employees, with 75 percent of these employed in the Network Assets Function that looks after the network. To further build staff capacity, we conducted technical, non-technical and management development programmes,” Mr Babungi, told the company’s shareholders last year, in a report.

This can be attributed to the company’s 2022 annual report stating that it was required to invest Shs111 billion in the distribution network due to requirements set forth by the concession, as well as obligations to shareholders and lenders. 

The buyout money will be distributed to its shareholders following a thorough assessment by the CMA, which, according to Denis Kizito, director of market supervision at the CMA, will evaluate all of the company’s liabilities before paying any shareholder.

According to recent remarks made by Ms Ruth Nankabirwa, the Energy Minister, the Ministry’s technical committee, the Attorney General, the secretary to the Treasury, Uganda Electricity Distribution Company Limited, Uganda Electricity Transmission Company Limited, the Privatisation Unit, and the Electricity Regulatory Authority (ERA) are all involved in the negotiations.

This is the same committee that oversaw the smooth exit of Eskom Uganda Limited, the South African company that had operated the Jinja dams, Kiira and Nalubale. 

UEDCL’s uphill task
Is UEDCL prepared to don Umeme’s boots, is the key question. The electricity regulator states that UEDCL is prepared and that the government’s investment to support the company’s operations is the only roadblock, preventing financial deficits in the industry that does not require any lag.

“What is happening now is that Umeme is giving back UEDCL its equipment and it knows how to do this business, which it has done together with Umeme for decades,” said Eng Ziria Tibalwa Waako, the chief executive officer of the Electricity Regulatory Authority (ERA).

Mr Paul Mwesigwa managing director of UEDCL said after takeover, they will spend $110 million (Shs420 b) on new procurement to rejuvenate the company’s service delivery.

“Currently, UEDCL spends Shs50 billion on operations and procurement annually and with increased budget, the money will be used to replace worn out Umeme infrastructure,” he said.

He said the funds will be utilised to buy a new fleet of vehicles for better mobility, maintenance costs, meters, transformers, insulators, and other network-related infrastructure. He also added that by replacing outdated infrastructure, this will increase efficiency in the value chain for the distribution of electricity.

The benefits of this move are questioned by financial analysts, who claim the transition will cost the state a lot of money and take approximately a year to materialise because government agencies are plagued by bureaucracy.

The escrow account, which was established under the Lease and Assignment Agreement to reimburse Umeme in the event of contingencies, lacked sufficient funding, according to the December 2023 report of the Auditor General. 

As of June 30, 2023, the closing balances of the US dollar and Uganda shillings accounts were $8,121.52 and Shs21, 247, respectively. 
“The year-end funds are less than one percent of the anticipated $20 million expected at the end of the concession period of 31st March 2025,” Mr John Muwanga, the Auditor General wrote in his 2022/23 financial year examination of UEDCL’s operations, adding that the company lacked a succession plan for both its board and senior management.