Monday, May 7, 2012

NOW UMEME CAN START EARNING ITS KEEP


It has been a while since I was loadshed.
As one person said, the power is now too much and we don’t know what to do with it. That sentiment will change when we gets our next bill.

With the power generation situation improving – Bujagali is now feeding 100 MW onto the grid with an additional 50 MW coming on in a matter of days. Power distributor, Umeme is taking a well-deserved breather from all the criticism they have endured over the last 12 months – until they post the next bill.

In order to bring greater efficiency into the power sector the government split up the old Uganda Electricity Board (UEB) into its component parts -- generation, transmission and distribution.

It hived off the generation function to a consortium led by South African firm, Eskom the distribution to UK investment fund Actis, which fully owns Umeme. Government retained the transmission function.

Now that the dust has settled somewhat, it’s as good as any a time to re-examine the Umeme issue.

A lot of criticism of Umeme was misplaced, but Umeme being the face of the electricity sector, the entity that interacts directly with the users, it suffered the brunt of the attacks.

Over the last few years attacking Umeme for loadshedding would be akin to blasting the airtime vendor for dropped calls and no network, which is the responsibility of the telecommunications companies.

What does not seem to be public knowledge is that Umeme has actually exceeded all targets set for it at the beginning of the concession.

Under obligation of the concession Umeme was required to invest $65m (sh163b) over the first five years of the concession but has invested double that figure to date. Umeme was expected to sign on 75,000 new customers within five years to date the distributor has signed on 200,000. A case of too many users chasing too little power, this overzealousness may have set them up for a fall. Umeme was also tasked with reducing systems losses from about 40%. Losses are now down to 28% through improvements to the grid and reductions in power stealing.

Umeme seven years into its 25 year concession will for the first time, have enough power to go around and then some. For the first time Umeme will have the chance to show us what they have got.

There is still a lot of work to be done, money to be invested and people to be connected to the grid, a figure Umeme has lifted to 12% from the previous five percent.

The unbundling of UEB and the privatizing of its various parts was a novel approach to our privatization process. Breaking up the old parastatal while not necessarily creating competition, government expected that the benefits of specialization would accrue to the consumer.

The huge amounts of investment that were then required to rejuvenate the constituent parts therefore needed credible investors with not only the financial muscle but a long term view of the sector.

It is not by mistake that some of our biggest investors are in the power sector – Umeme and Bujagali Electricity Ltd. Our other biggest investors are in the oil, telecommunications and banking industries.

Capital is a coward.

Onlookers may think that capital flows towards the highest returns but the truth is that quality capital does not look at profit in isolation but measures it against the risk it would have to stomach to make that return.

In the famous words of billionaire Warren Buffett “Rule number one, never lose money. Rule number two, see rule number one” In Buffett’s book risk is measured in how likely he can lose his capital.

You may brag about your double digit returns – I hear in Uganda it is 40%, when wooing investors, but they are looking beyond that to the more normal commercial risk to things like political risk.

It’s in Africa where coups still happen, governments still expropriate foreign assets and mobs can torch foreign owned businesses. And we pay for that risk through higher costs, lower tax collections and/or smaller investments.

The point is that Uganda’s infrastructure needs – road, rail, telecommunications, energy, going into the future are huger than anything we have known before.

Africa is the next big frontier of investment and whether we will be at the top of the table winning the choicest investors or feeding off the crumbs of South Africa, Mauritius and Nigeria will depend on how we treat the current crop of our investors.


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