The Independent (Kampala)

1 December 2012

Uganda: Umeme Wins Again in Messy Electricity Sector

Photo: New Vision
Umeme officer doing maintenance work.

Just days after a parliamentary committee recommended termination of its contract over inflated claims, Umeme is set to again raise the cost of electricity to consumers

Ugandans have just days to Dec.07 when review of the application from the nation's sole electricity distributor, Umeme, ends and it gets another nod from the government to raise consumer tariffs. The move is a direct snub to the latest report by the Members of Parliament recommending the cancellation of the contracts of power distributor, Umeme and generator, Eskom. It is also the latest example of confusion that haunts the electricity sector.

While some of the recommendations by the eight-member committee, the Adhoc Committee on Energy (ACE) appointed on Aug 24 by the Speaker of Parliament, Rebecca Kadaga, to investigate the sector might be on point, they come at a wrong time--some experts say they do not stand a chance and others that they would be a drawback to the sector that is already in a bad condition.

At the time the committee was instituted, demonstrations over intermittent power outages were the order of the day. And the MPs mandate was to investigate issues of high electricity tariffs, faulty billing systems, poor quality of service by the sole-national power distributor Umeme, and the government subsidies to thermal generation plants.

Apart from delivering their report very late--it came after a whole year later instead of the planned 60 days--their 161-page report is an attempt to bite what the government cannot swallow. The adhoc committee also regurgitated recommendations of the Salim Saleh report yet almost all the issues raised in that report were never addressed.

The MPs recommend that government cancels the concessions of Umeme and Eskom because, for instance, they argue that the Attorney General did not peruse the Umeme agreements which were drafted by transaction advisors and that as a result, the agreements were skewed in favour of Umeme citing especially the abnormal 'buy out amounts'.

Umeme's contract was designed in such a manner that the power distributor Umeme gets compensated if it pulls out for whatever reason, government cancels its contract, or it is naturally terminated. The basis for the unfair compensation clauses to the government derived from the investment that Umeme was expected to inject into the sector. The MPs in their report describe the 'buy out amounts' as scandalous and abnormal.

Exaggerated claims

Umeme claims it has injected about US$ 130 million into the sector. But MPs say Umeme has exaggerated its level of investment in order to up its compensation incase their contract is terminated. They say that if this amount of investment was real, it would have turned around the sector--resulting into new connections, distribution efficiency and thus substantial reduction in the losses. Instead, the MPs say, Umeme has failed to reduce power losses on the grid.

The MPs want the Umeme contract terminated, and the distribution segment of the electricity supply chain to be managed under a PPP with the government maintaining a 51 percent stake.

But these recommendations have not excited many and experts say that the report is just another one destined to gather dust on the parliamentary shelves. Others say the recommendations in the report were influenced by other interests like potential competitors of the two companies. They say it is the reason the report was hurriedly leaked to the public.

A similar report by the President Yoweri Museveni's brother Kaleb Akandwanaho aka Salim Saleh dubbed the Saleh report raised hairs when it put Umeme on spot and called for radical changes in the sector.

Following its recommendations, several government players in the energy ministry sat and established an implementation strategy of the report but Umeme and all the other players put on spot managed to weather the storm.

Not so surprising, Umeme is not an ordinary company--tycoon and Uganda Investment Authority chairman, Patrick Bitature is its board chairman. And on the same board is James Mulwana, who is not just a respected industrialist in largely agrarian Uganda, but a politically well-connected man.

And the company made a smart move too. With all and sundry calling for termination of its contract, Umeme, formerly owned by Actis Capital, a subsidiary of the Commonwealth Development Corporation (CDC) that is owned by the UK government, floated its shares on the Ugandan stock exchange. Local and foreign individuals and entities bought into it when it offered a Shs 170 billion Initial Public Offering (IPO). As the IPO closed down, Umeme announced a 35 percent oversubscription.

Indeed when Charles Chapman, the Umeme managing director was unveiling the IPO, he was a very different man from the one that had appeared before the same MPs that made him sweat profusely. This time he almost seemed to chuckle away as he said that the IPO was great news for Ugandans as well as for Umeme.

Cancelling Umeme's contract now, means facing Ugandans that have invested in the power distributor. That is why Dickens Kamugisha, the Executive Director of African Institute for Energy Governance (AFIEGO) says that the MPs' recommendations cannot be implemented.

"You cannot have a parliament that allows a company to first float its shares to the public then recommend that its contract be terminated," Kamugisha told The Independent, "in any case it is possible the IPO might have been intended to circumvent such a move, you will now hear people saying that you cannot cancel the concession."

Kamugisha's AFIEGO and over 1000 others have been frustrated in court over the Umeme issue. They challenged Umeme to make public their concession, but Umeme refused citing confidentiality. They took the power distributor to the High Court on grounds that its concession had unfavorable terms and sought its cancellation but the court has not helped matters--the case has been dropped by several judges and was postponed until Umeme floated its shares successfully.

With the IPO concluded, Kamugisha is less optimistic that his court battle or the MPs recommendations can fell the hulk of a pylon that Umeme is now.

"The MPs recommendations are not going to be effective, they will be ignored," Kamugisha adds. He says years after the Saleh report which exposed the wrongs of Umeme, the government has never taken any action and nothing will be done even now.

He adds that although the Saleh Report showed that the Umeme tariffs were unfairly high and needed to be slashed by upto 30%, the government instead increased them by over 30%. The same report also recommended instituting an investigation into what Umeme had invested but up to now nothing has ever been done.

Bukenya Matovu, the head of communications, ministry of Energy, says that it is one thing to recommend and another to implement the recommendation.

Matovu wonders whether the MPs know the legal implications of cancelling those agreements. "Cancelling is impossible, I can't see it happen," Bukenya says, "If you cancel, where will you get all that money to compensate Umeme? What is the cost of cancelling visa-visa for instance amending or revisiting?"

He adds that one would have expected a more rational way of approaching the issue through available mechanisms like referring the matter to the attorney general who approved the agreements.

"If the cancellation is unilateral," Bukenya says, "it means that the government has to compensate all the money they would have made until the end of their contract."

He says that some of the things that are being cited by MPs like the failure of Umeme to cut losses are things that take a long time and require a lot of resources to be addressed.

"You have to invest in the infrastructure, new power lines and so on. When Umeme came in, the losses were at 45 percent, they have been reducing so you cannot say because there is a problem here and here let us cancel."

But Kamugisha disagrees. While he is aware that the government would require a lot of money to compensate Umeme, he says that it would be better to act now than wait as the money accumulates as Ugandans get stuck with poor services.

"If we are to pay Umeme, we need to first investigate and ascertain its real investment as the Saleh Report recommended," he noted, "but in my view, we have to look at the benefits of allowing Umeme to stay and the liability of terminating Umeme's contract."

He says that however as things stand, the country is held hostage especially after Umeme floated its shares.

The MPs did not spare anyone in the sector; they also want the Electricity Regulatory Authority (ERA) dealt with because of inefficiency and failure to address most of these problems.

Benon Mutambi, the executive director, Electricity Regulatory Authority (ERA), is just a few months on the job and has decided to duck the issues. He told The Independent that he has not looked at the report, which is highly improbable and a sure sign of incompetence it happened. His claim that he is not be in the best position to comment about the report is equally untenable because he is the regulator. Instead, he told The Independent, the role of ERA as a regulator as he sees it is to licence companies, set terms and conditions for the licencee, but not to sign contracts.

He however noted that we need to look at whether the licencee can deliver the desired performance or whether they agree to. "I agree that performance has to do with the efficiency in collection of debts and all these other things but as far as we are concerned Umeme is ready to perform," he said, "we have been establishing new performance targets that we believe will move the sector in the right direction."

What Mutambi did not go deep into is the run-ins ERA has had with Umeme. Last year when ERA reviewed Umeme's targets especially the bit on cutting losses, officials at the power distributor almost run amok and threatened to terminate the contract. In a show of force, Umeme sought the attention of the energy minister and ERA who were forced to back-off.

When The Independent contacted Henry Rugamba, Umeme's head of communication, about the company's position on the Parliament Comment Report, he declined to comment saying that they had not seen the report.

In case of Eskom, the report notes that the concession of the Nalubaale and Kiira Hydropower generation plants, which were operating at the highest efficiency levels in the region, was misconceived. The MPs recommend that government terminates the concession because despite Eskom's reported level of investment, the generation capacity of the two plants has continued to deteriorate, from 280MW in 2002 when Eskom took over to 140MW to date.

The MPs also note that world over power plants or generation is managed either under direct government control or a PPP and they cannot understand why government went ahead to hand such a sovereign responsibility to a foreign company.

They also criticise the fact that while government pays huge sums of money for operation and maintenance of the two plants, the tax payer has to also bear the burden of funding the Uganda Electricity Generation Company Limited (UEGCL). "It is the Committee's strong conviction that UEGCL has the technical expertise to run and manage the generation of power more efficiently," the report notes.

Kamugisha also says that Eskom itself is a South African government company that manages almost 100 percent of their electricity. He adds that in neighbouring Kenya, Kengen was generating 360 MW from thermal using the same amount of fuel that Uganda used to generate 170 MW. "ERA failed to set the standard on the amount of fuel used to produce thermal," he says.

But Mutambi notes that he couldn't understand where the MPs were basing on their position about Eskom, which has been able to supply power 96 percent of the time in the year. "I would think that that is a good indicator for performance," he said.

Given the challenges of the electricity sector, the Parliament Committee report is almost a lackadaisical job but it makes several recommendations that point to overhauling the entire sector including availing power to all Ugandans. However, precedent shows that the government's heart, represented by the attitude of the regulator, is elsewhere. The current Energy minister, Irene Muloni, was a top manager in the defunct Uganda Electricity Board, was involved in negotiating its unbundling, and as Managing Director of one of its successor arms, Uganda Electricity Distribution Company Ltd (UEDCL) in 2004, brought in Umeme. Criticism of the manner in which the Umeme concession was signed, therefore, is an attack on her role in it.

Kamugisha faults ERA and the government questioning how Umeme has even failed to install prepaid metres. He adds that while the biggest percentage of Uganda remains in darkness, Uganda is busy exporting power to Kenya and Rwanda. For instance, two transmission lines are being constructed one for 200Kilovolts from Jinja to Kenya and another from Mbarara to Rwanda. "While electricity is regarded as security in other countries, in Uganda it is as if the strategy is for external consumption," Kamugisha adds.

He says that the biggest cause of the trend is reliance on private companies whose main goal is to make profits. He cites the completion of the 250MW Bujagali power dam, which has led the electricity tariffs to shoot up instead of coming down because the investor has to recoup their investment. The result is that Ugandans cannot afford electricity.

According to a research by AFIEGO, since 2006 when a 40km power line extension was constructed off the main grid deep into Ruhama county in an area called Kiyora, of the 1000 people there, only 27 people had power but of these, only 3 were paying Shs 15,000 in power bills, the rest paid much lesser than this. That is why for him, the Parliament Committee report did not even scratch on the sore that the electricity sub-sector in Uganda is. For now, however, Umeme and Eskom do not care what AFIEGO or another entity thinks.

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