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Monday, August 27, 2012

UMEME; A PRIVATISATION CASE STUDY

Umeme is the messenger we love to hate.

At the tail end of the electricity value chain, Umeme has borne the brunt of the criticism for the inability of power generation capacity to keep pace with our insatiable demand for electricity.

There was a time when the then Uganda Electricity Board (UEB) used to generate and distribute 60 MW and people probably don’t remember loadshedding as an event, since supply was infrequent and unsteady.

Attempts were made in the 1990s to add some generation capacity – the then Owen falls dam’s capacity was increased to 180 MW and the network got a partial overhaul. We even  built a second 200 MW dam that never quite lived up to the hype. But the economic growth of the nineties meant that supply was inadequate and loadshedding entered our vocabulary.

As a response to these shortcomings in the sector government broke up UEB into its generation, transmission and distribution arms. The idea was that by breaking it up we could bring the benefits of specialization to the industry and therefore greater efficiency.

The government sold off the generation business to South Africa’s Eskom and the distribution to a consortium led by the Commonwealth Development Corporation (CDC).  Actis Capital a spinoff of CDC later took over Umeme.

"Since it took over the business accounts have jumped by more than half to 458,000 at the end of last year from 292,000 in 2005, while the Umeme has invested almost $150m over the same period....

The largely dilapidated distribution network Umeme inherited notwithstanding a general lack of power hampered their operations. With the coming onto the grid of the Bujagali’s 250 MW Umeme has suffered fewer arrows in its back.

Looking back the privatization of the government’s distribution business ranks next to the banks, the breweries and hotels as a success story, in terms of getting the service to more and more clients and returns to government.

Its still early days but adding more than 200,000 consumers to the grid more than the government parastatal did in 40 years, collecting virtually all the money billed  compared to one in every five shillings going missing seven years ago and paying sh21b into the treasury last year are not achievements to be smirked at.

The private sector works where parastatals fail not because of the poor quality of the management but because of the different incentives to the respective managers.

The public sector manager can get away with running a loss making corporation as long as services are delivered to an acceptable level often in support of a political over a commercial objective. So public corporations provide a service, often times inefficiently at a low cost that cannot cover expansion or maintenance of equipment. And if the corporation is not a monopoly it locks out competitors with its artificially low tariffs.

The private sector manager on the other hand is not only supposed to extend his service as widely as he can, winning more market share, he has do it efficiently so the business can be profitable – he has to maximize revenues while managing costs.

"While both managers are interested in keeping their jobs the private sector manager does through growing the business sustainably while the public sector manager keeps his shirt by kowtowing to the powers that be regardless of the quality of service delivered...

Of course there is a need for government regulation, to save the private sector from its own excesses and even some strategic intervention, for example investing in sectors that may not show a return for the private sector in an acceptable time.

But government should make these investments with a view to selling them off to allow private capital to maximize their potential.

The concession still has more than a decade to run before it expires and we can expect Umeme will be looking to extend its reach at the least cost possible to itself and therefore its clients to ensure the viability of the business.

However sector players anticipate that the approximately 70MW surplus the country is now enjoying will be wiped out within a year and a half, barring any new power generation coming on line and we will be back to loadshedding.

The pressure now should be on the Electricity Regulatory Authority (ERA) to ensure a conduicive environment to attract more investment into the power generation sector.

2 comments:

  1. How do u measure success? Having been against privatization from te beginning we are witnessing the final stage where all the commanding heights of the economy is in the hands of foreigners, so the question remains success for definitely not indigenous Ugandans!

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    1. i measure success as a customer -- my power supply is more assured than it was this time last year. I measure success as the govt -- which received sh21b in taxes last year, i measure success as a nation -- more efficient distribution of available power will ensure continued economic growth.

      Whether Umeme is run by Ugandans or not as a consumer i do not care. Ugandans had their chance and they screwed it up.

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