It’s about nine months to go before the Umeme concession comes to a close at the end of March 2025.
Negotiations with government for an extension broke down
last year and the decision was made not to extend the concession. The major
sticking point was the negotiated return on investment which, has been around
19 percent for the duration of the concession.
President Yoweri Museveni is pushing for US5cents tariff and
a high rate of return for the distributor is seen as contrary to this aim.
It would make sense then to return the concession to Uganda
Electricity Distribution Company Ltd (UEDCL), a wholly owned government entity
and then lower the return on investment and therefore the tariff.
But first some background. At the end of the last century
government decided to unbundle the Uganda Electricity Board (UEB) into its
constituent parts – generation, transmission and distribution. This was done mainly
to attract more investment into the sector and benefit from efficiencies that
come with specialization.
"Billions of dollars have since been invested in the sector since 2000 and while there are still some concerns, the industry’s efficiency has dramatically improved from the days of daily loadshedding and minimal coverage. Consumer accounts have leapt tenfold to two million accounts during the period of the Umeme concession which begun in 2005.
Government now thinks the private players who have since entered
in the sector in generation and distribution, have served their purpose and it
now makes sense to take back these operations.
Already Uganda Electricity Generation Company Ltd (UEGCL)
has taken back the Kiira-Nalubaale generation complex and the Namanve thermal
power generation plants. UEDCL has taken over several concessions – Ferdisult,
Bundibugyo Energy Cooperative Society, Pader Abim Community Multipurpose Energy
Society and Kyegegwa Rural Energy Cooperative Society Ltd.
The theory is of course, that the government entities can receive
lower rates of return, which will serve the eventual goal of lower tariffs.
Government would be advised to tread carefully on this one, because one of UEB’s challenges is that it charged an unreasonably low tariff,
which did not allow it enough cash to run its day to day operations or
invest for the long term. The idea then and what’s been pandered now is, that
even if they are allowed a low rate of return, low depreciation charge, it’s
not a problem because government will take over all the heavy lifting.
"If there is one thing we learnt from transferring our assets
to the private sector where proper provisions are made, they become net
contributors rather than a drain on the treasury. To miss this lesson is to
ignore the lessons of UEB...
It therefore boggles the mind that government contrary to its desire to lower the tariff by cutting out the intermediaries is looking to contract another company to take Umeme’s place. Privately some people will say this a scheme that has been in the making a while and goes back to the failed attempt through parliament to throw Umeme out in 2014.
The argument is that
UEDCL does not have the capacity to run the sector.
This again is to ignore the history of the sector.
First of all the assets that Umeme is utilizing belong to
UEDCL. Secondly, when Umeme begun its concession it begun with three workers of
its own – The CEO, CFO and a consultant from Ernst & Young, with the rest
taken over from UEDCL. Currently Umeme’s staff complement is more than 90
percent Ugandan, they will not leave the country with them, they will be taken
over by UEDCL. So unless we are arguing that Umeme staff are hopeless, the
argument of inadequate human capacity should not arise.
The challenge for UEDCL maybe however, its ability to source
financing, the size required to maintain the current grid and expand it
further. The Public Financing Act
requires that all government loans be passed by parliament, this and the
attendant bureaucracy would make it that more difficult to run the grid.
With the kind of cash flows that Umeme enjoys, financing
should not be an issue for UEDCL, but for the provision of the PFA. Umeme has
enjoyed government guarantees for most of its financing a practice that we
would do well to provide for UEDCL.
"I am not the biggest fan of government owning businesses but if UEDCL is going to take over the function, government should give them a fighting chance of making it work...
