GOVT MUST GIVE ITS COMPANIES A CHANCE TO WORK

The recent Auditor General’s report was, as ever, an eye opener about how government its departments and authorities conduct their financial affairs.

It is mind boggling how parts of government get away with financial mismanagement year after year and nothing seems to be done to the responsible officials.

I was particularly interested in the state enterprises performance.

"Of the 24 state enterprises the Auditor General reported that just under half or 14 of the 29 enterprises showed a profit. For many the quality of the earnings didn’t stand up to scrutiny, when viewed against their asset bases, but that is a story for another day....

No details were given of the individual company accounts but one wondered how Uganda Electricity Generation Company ltd (UEGCL), Uganda Electricity Transmission Company Ltd (UETCL) and Uganda Electricity Distribution Company ltd (UEDCL) continue to be loss making.

The three companies are as a result of three way split of the former Uganda Electricity Board (UEB). The thinking was that the unbundling of the dinosaur would improve specialisation and make the component parts much easier to flog off to private operators.

So with Eskom taking over the Kiira and Nalubale dams and Umeme taking over the power distribution, UEGCL and UEDCL remained as custodians of the assets that the government had leased to the private players. The transmission function remained with government.

You are loss making when your expenses exceed your revenues. In that case you are not making enough money --- often a failing of the marketing department or your costs are unrealistically high.

The financials of UETCL and UEDCL were not available online.

But UEGCL’s numbers were and they showed that the company earned income from the concession fees paid to it by the operators of power generation plants and some grants. I suspect this is the same for the other two entities.

Depreciation and amortisation is the greatest expense, wiping out UEGCL’s entire income. When you add on staff and admin costs it sinks UEGCL further in the red.

So either UEGCL’s is not pricing its services well enough or costs have run amok.

"As it turns out UEGCL is not allowed to charge depreciation on the assets in the concession – dams, which it owns. The depreciation they booked was for assets that were used to supervise the projects and not on the fixed assets like the dams...

While if fully provided for this would sink UEGCL further in the red, adding it to the portion of the tariff due to UEGCL would increase their top line considerably.

More importantly it would mean these would be funds the company would revert to, to finance other hydro-power developments. Depreciation is not paid out but retained in the company to at least finance replacement of existing assets.

But one can understand the logic of removing these charges from the books. It artificially keeps the tariff low but compromises the ability of UEGCL or the other companies to carry out their mandate sustainably...

What it means that under the current arrangement for all subsequent power plant developments UEGCL will have to fall at the feet of government to provide the required funds, unnecessary if they were allowed to charge for it.

Given the government’s shifting priorities this is not an ideal situation for any manager to be in.

It’s no surprise then that government is now resorting to expensive loans to finance its power expansion ambitions. A classic case of the chicken coming home to roost. Because it seems expedient to bury our head in the sand and keep tariffs artificially low, this short sightedness then comes back to bite us and actually hampers the appropriate roll out of new power plants in the future.

This year the 183 MW Isimba and the 600 MW Karuma power projects are coming on line and one can expect that government will continue with this pattern of doing things in attempt to keep tariffs low.

We have a set target to increase power generation to 17000 MW by 2028, this means that under the current arrangement UEGCL will be unable to budget to build or cooperate in the building of new plants unless government provides the funds.

We can expect the convoluted process to construct Isimba and Karuma to played out in subsequent power generation projects because UEGCL’s has its hands tied.

Essentially what government is doing is not allowing UEGCL to succeed. It is hard to see how the company will break even under the current circumstances and therefore compromise its capacity to fulfil its mandate...

As I said I couldn’t see the financials of the other two companies but it would come as no surprise if they are treated the same.

And one last thing that unlike other Independent Power Producers (IPP), UEGCL is not allowed to add a Return on Equity (ROE) to their portion of the tariff. Again for the reason that it would raise the tariff to uncomfortable levels. This too hobbles UEGCL’s long-time viability and usefulness to the country.

"Across the border in Kenya UEGCL’s counterpart KENGEN relies on its own resources to expand power generation. It is no wonder that KENGEN, a profitable company in its own right, has greater generation capacity than Uganda despite our greater potential to generate power – at least hydro-electric power...