Tough road ahead as Umeme edges closer to its exit

On one sultry afternoon in early February 2012, Umeme top executives took their places inside the office boardroom on Rwenzori House’s second floor for a crunch meeting. The agenda was informed by the fact that the company was making headlines for all the wrong reasons.

Its concession was only in the seventh year, but persistent power outages had lawmakers questioning its status as a monopoly power distributor. The lawmakers were not the first to call Umeme into question. In September of 2009, Gen Caleb Akandwanaho (Salim Saleh ), the Presidential Advisor on Military Affairs and President Museveni’s brother—had in a report titled “Electricity Tariff Reduction” faulted the company for not honouring its commitment to reduce tariffs by offering a flat rate to domestic consumers, bulk purchasing for commercial consumers, and installing prepaid metres.

The recommendations of the Saleh report weren’t implemented, leaving many people in 2012 to wonder what might have been. A former Umeme executive told this publication that after navigating the “highly stressful period”, they were convinced that the concession was going to run its course.”

A few days before the said former executive and his associates took their place in the Rwenzori House boardroom in February 2012, something had happened. A London-based energy expert had shared with the company’s executives a pithy analysis of a proposal submitted to the Energy ministry. Ferdsult Engineering Services Ltd (FESL), described by some as a run-of-the-mill engineering firm, had authored the proposal.

It was evident that FESL wanted a piece of the pie of the concession. When an insider at the Energy ministry tipped Umeme, the company sought a second opinion from the London-based expert.

FESL had in fact submitted the proposal to the Energy ministry in May 2011. In the document, the company detailed the problems plaguing the country’s electricity distribution system at the time.

Notable were the high power distribution losses, high billing and collection losses as well as high power tariffs. Some of the issues illuminated were the making of Umeme and others structures.

FESL further offered solutions, including detailing a $150 million investment plan (or Shs715 billion in today’s currency adjusted for inflation) over a seven-year period. But first, the company needed an audience with the Energy ministry’s top brass, specifically Ms Irene Muloni—the line minister. It was hoped that upon convincing Ms Muloni, she would broker a meeting with the President.

To Umeme’s advantage, Energy ministry officials didn’t accord FESL any sort of audience. Yet Umeme executives remained unsettled by their probable competitors.

Not that FESL’s proposal stood a chance, anyway. After all, Gen Saleh’s damning report was gathering dust on the shelf somewhere. Umeme executives nevertheless suspected the company was working with someone inside the Electricity Regulatory Authority (ERA), the power regulator, who was feeding them handy information.

Living another day

During the meeting, the executives mulled over the analysis and detailed an action plan to stave off the bad press. In October of that year, the company was listed on Uganda Securities Exchange after the Capital Markets Authority approved its Initial Public Offering price of Shs275 per share.

The listing on the stock exchange, according to multiple sources, served Umeme in many ways. Most importantly it cemented the company’s financial position, but also reinforced the conversion of ownership from a private limited company, as at incorporation on May 6, 2004, to a public company on June 12, 2012, under the Company’s Act.

Umeme Ltd was formed in April 2004 by two companies—CDC Globleq Holdings (Conco) Ltd with 56 per cent and Eskom Enterprises Ltd with 44 per cent. The latter, however, pulled out in March 2005 and—later in April 2006—sold its shares to the former. The deal raised eyebrows after it did not attract Capital Gains Taxes.

The government, through Uganda Electricity Distribution Company Ltd (UEDCL), signed a 20-year lease and assignment agreement with Umeme Ltd, starting May 17, 2004. Ms Muloni signed as UEDCL’s managing director. The concession agreement[s], copies seen by this publication, were amended in 2006.

Today, the beleaguered National Social Security Fund (NSSF) is the biggest Umeme shareholder with a 23.34 per cent stake. Allan Gray Ltd, Kimberlite Frontier Africa Master Fund and Utilico Emerging Markets Ltd followed in that order as per the company’s latest annual report.

“Pulling the plug on the concession was one thing and perhaps easy to do,” an Energy ministry official told the Monitor, adding, “What scared everyone, including His Excellency, was the buyout amount.”

The official proceeded to note: “Everyone was making noise—cancel the concession, terminate the concession. And we almost succumbed to the pressure, but the money we had to pay to them for the premature termination of the contract was obscene.”

To make matters worse, according to the concession, in case of early termination of the concession the government would have to pay the appropriate buyout amount in “US dollars no later than 120 days following issuance and receipt of the termination notice.”

Furthermore, if the buyout amount is delayed 150 days following delivery of the termination notice, “the government would pay the company interest on any outstanding amount of the buyout at a rate of 20 per cent for the period from and after 91 days after the buyout date.”

Any taxes accruing as a result of the transaction would be paid by the government so that Umeme receives the full benefit of the buyout amount calculated.

While government technocrats are not strangers to negotiating contracts with ludicrous clauses, including waiving national sovereignty in case of disputes which the Auditor General has red flagged in separate audits, one official in the Attorney General’s office told Daily Monitor that “the buyout clause was a major baffle.”

Time relieves, reveals

The buyout amount, calculated and agreed to by both sides, would include the cost of modifications that is underappreciated and under-recovered by Umeme at the time of reverting the distribution network to UEDCL.

This would be multiplied by a percentage equal to 120 per cent from the end of the initial period through the 13th anniversary of the transfer date, such a percentage declining two per cent per annum after that to 106 per cent on the 20th anniversary.

For instance, between 2011 and 2012—when the government first hazarded the idea of terminating the concession—Umeme claimed it had invested $80 million (Shs381 billion in today’s currency adjusted for inflation).

With all variables considered therein, the government would have to pay Umeme $1.77 billion (Shs8.4 trillion in today’s currency adjusted for inflation) as the buyout amount within 91 days.  Short of this, a 20 per cent interest per annum on any outstanding amount would accrue.

On the other hand, if Umeme initiated the contract termination having invested $80 million, the buyout amount would still be as high as $1.26 billion ($1.6 billion/Shs6 trillion in today’s currency adjusted for inflation).

If the concession ran its natural course of 20 years with Umeme having invested $80 million, the buyout amount would be $84 million ($102 million/Shs400 billion in today’s currency adjusted for inflation).

The clause on the buyout remained a sticking issue for years. Inside closed-door meetings, according to sources, the buyout amounts rattled many in government. This included Mr Museveni who on several occasions publicly railed against the company, accusing it of high power tariffs and failing to improve electricity access countrywide.

As of today, Energy ministry sources say, Umeme claimed to have invested in the region of $700 million (Shs2.5 trillion) and with their concession running out in two years—around May 2025—the government is looking at $200 million (Shs732.8 billion) as the buyout amount.

The Auditor General will undertake an audit in the coming months to make clear what the final amount is.

There are also unanswered queries regarding the Escrow account held in Citi Bank in London where UEDCL has been funnelling money since 2005, as per the concession, to cushion Umeme in case of eventualities. The management and withdrawals from the account have for long spells elicited suspicion.

According to the concession, the company annually submits an investment plan to the regulator, ERA, which reviews, approves or disallows the plan. UEDCL, the owner of the distribution asset, is required to keep a keen eye on these capital expenditures. Umeme then recoups its investments from the sale of power to the consumers. But owing to the need to keep the end-user tariff reasonably low, ERA staggers this recouping over a long-term period.

In an email to our inquiries, Umeme’s head of communications Peter Kaujju said they have invested approximately $750 million (Shs2.7 trillion) over the last 17 years.

“The bulk of these investments have been channelled to the improvement of the distribution network in line with the capital expenditure programmes over the years. We have accomplished several critical projects to achieve supply reliability, growing demand, enhance public safety, reduce energy losses to 16 per cent from 38 per cent in 2005 and improve efficiency in operations,” he added.

During the 17-year period, Mr Kaujju detailed that they have rehabilitated and constructed 74 substations to enable 97 per cent distribution to the grid.

 “We have more than doubled the distribution network size to 44,000km, from 16,000km in 2005. We have also increased transformer zones to 14,000km from 6,000km in 2005. We have increased the customer base seven-fold to 1.7m from 250,000 in 2005 and this number will grow to over 2m customers by the end of 2023. The electricity distribution efficiency has greatly improved to 85 per cent from 50 per cent through the reduction of energy losses.”

Exit wounds

Were the government to terminate the concession back then with the company’s $750 million investment, the buyout amount would be north of $13 billion (Shs47 trillion). It would also be payable within 91 days and accrue a 20 per cent interest per annum on any amount outstanding.

In 2019, Umeme unveiled a $450 million (Shs1.6 trillion at today’s exchange rate) investment plan in among others grid connections running until 2025.

Mr Sidronius Okaasai Opolot—the junior Energy minister— told MPs on the parliamentary committee of Natural Resources early last month that, accordingly, they had directed Umeme to halt any new investments in light of ongoing plans not to renew the concession.

“To manage the concession buyout and minimise suffocating expenditure of the government when the Umeme concession ends, it is important that additional investments by Umeme be regulated and or halted to reduce the final buyout amount,” Mr Okaasai averred.

As per the concession, UEDCL maintained the right to terminate the concession on eleven grounds, including Umeme not living up to contractual obligations. Umeme also had the right to pull the plug on nine grounds.

In early December last year, the Energy ministry wrote to Umeme notifying it of the decision not to extend the concession in 2025 pursuant to section 3.13 of the lease and assignment agreement. Operations would revert to UEDCL. The announcement elicited public consternation as it was construed as a termination.

The ministry’s Permanent Secretary—Ms Irene Bateebe—told this newspaper that they are currently implementing second-generation power sector reforms to achieve numerous targets including enhancing connections.

“We entered a concession agreement with Umeme and the terms are very clear. It is not true, as some people claim, that we are terminating the concession. No. it is coming to its natural end, and the government had the duty to notify them. We also have a leeway to evaluate,” Ms Bateebe said.

Asked about the company’s exit plan and buyout amount, she said: “The discussions are in early stages and it would be premature to make conclusions bearing in mind the concession runs until 2025.”

Multiple sources talked to for this story however intimated that there are several layers to the discourse. One source indicated that President Museveni, “having been easily excitable” in the early years of his 37-year rule wholeheartedly agreed to the neo-liberal agenda of the Structural Adjustment Plan (SAPs). This included the haphazard privatisation and divestiture of state enterprises, which has “now come back to his senses that it was a mistake”, our source added.

The plan

The President, the source added, has argued multiple times behind closed-door meetings that the country’s electricity system—from generation to transmission to distribution—is of “strategic importance” and should not be solely left in private hands who are profit-oriented.

As such, the source revealed, besides not being pleased with the terms of the concession and prevailing high tariffs, the President has criticised Umeme publicly and “offered guidance on what needs to be done.”

The second layer is that donor agencies—the World Bank, which along with the International Monetary Fund, in the late 1980s bulldozed the desperately-in-need-of-aid NRA/M government to sign onto the SAPs which culminated into the unbundling of the then vertically integrated Uganda Electricity Board (UEB), has since made U-turn and advised the government to re-nationalise its power system.

At the time of unbundling UEB about 180,000 households were connected to the grid representing 12 per cent of electricity access. Today, there are slightly two million households connected, out of the nine million households in the country according to the Uganda Bureau of Statistics (Ubos).

“Whether this is good progress is a matter of perspective. It depends on how you look at things,” one donor agency official argued when asked about making a U-turn on the reforms they shoved down the government’s throat more than two decades ago,” the official said, adding, “The dynamics of 1999/2000s are different from today, and when we advised the government on what to do there were different dynamics. Can Uganda do better? I think yes. How I think the government now has the more technical know-how to decide this course.”

Inside government policy planning quarters a similar debate is raging. One official intimated: “We benchmarked with neighbouring countries, and no doubt we are in a better place. But is it the place to be? That is debatable. But when you compare with the likes of Ghana, Kenya, and Tanzania on their electrification rate, you see that we are lagging behind.”

Following the enactment of the first generation electricity sub-sector reforms—the Power Sector Restructuring and Privatisation Strategy—supported by the World Bank and the Norwegian Water Resources and Energy Directorate, in 1999 UEB was split into Uganda Electricity Generation Company Limited (UEGCL), Uganda Electricity Transmission Company Limited (UETCL), and UEDCL which leased its assets to Umeme.

The reforms birthed the Electricity Act, of 1999, which also provided for the creation of a power sector regulator, ERA, established in 2000.

Back to the future?

Two decades down the road, from about 2018, the Energy ministry went back to the drawing board to review these reforms. This culminated in the amendment of the Electricity Act, of 2022, which coincided with the ongoing merger of government agencies. It in fact reinforced the merger of UEGCL, UETCL, and UEDCL to form the Uganda National Electricity Company (UNEC).

The finer details of the UEGCL-UETCL-UEDCL merger are ongoing amid lobbying on who would be its first top managers. Insiders say they expect the entity to be up by 2025. UNEC will then inherit the country’s distribution system, which will be operated either as a Public Private Partnership (PPP).

“Cabinet has guided and directed that UNEC must have 51 per cent of this joint venture and the private actor 49 per cent,” one official said. “If Umeme wants to stick around they could come back as that private player or could also enter into another joint venture with more actors and come on board.”

This, Ms Bateebe, confirmed but said “it is too premature to make conclusions.” She also allayed fears of ongoing plans derailing, citing examples of Kenya’s Kenya Power and Lighting Company (KPLC), a public limited liability company in which the Kenya Ministry of Finance owns a 50 percent stake; and Tanzania’s Electric Supply Company Ltd (TANESCO) running as a purely state parastatal since 1964.

“We know it won’t be easy at the start, but we have built enough capacity over the years. And with the right management, board, and corporate governance structure it will work,” Ms Bateebe told the Monitor.

As for the private investor that will own 49 per cent stake under the new arrangement, there is talk of a Chinese company with political connections on standby to enter into a PPP. But sources say, it is too early to write off nor celebrate Umeme’s exit as many did last December.

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