Between Umeme and Parliament

Given that technical and non-technical losses in Kenya are 17 percent, Tanzania 20 percent, Rwanda 22 percent and Burundi 25 percent, the targets set for Umeme by ERA are going to make Uganda have the least losses in the region by 2018. Parliament should seek to hold Umeme to account on these targets rather than seek to cancel their concession.

But political interference in the tariff market has not gone away.  Over the last one year, there has been no approved tariff. Why? Because ERA drew a new tariff which it asked government to approve. Yet ERA is not obliged to seek such approval. This means that ERA is not or does not feel independent, the very factor that scared away investors in the sector in 2001.

You cannot judge something that you cannot measure. That is why in all serious companies and contracts, parties are given clearly defined performance targets against which to measure the results of their work. In the case of the Umeme concession, they have five targets set by ERA: on connections, collections, loss reduction, investment and operation and maintenance costs.

On each of these targets, Umeme has either achieved them or surpassed them. This is not to say Umeme has no problems. One can find one million and one faults with Umeme. However, judgment of its performance can only be based on set targets – otherwise we risk subjecting it to the arbitrary whims of individual consumers and politicians.

Under the concession agreement, Umeme was supposed to have reduced electricity losses from 38 percent to 28 percent in the first seven years of the contract. They have reduced them to 24 percent by end of this year – four percent above target.

They were supposed to have invested US$65 million in the first seven years; they have invested $130 million. They were supposed to make 60,000 new connections in the first seven years; they have made 220,000 connections. They were supposed to increase collection of revenue from 75 percent to 95 percent; they are collecting 98 percent of total electricity sold as per 2013. They have exceeded their operation and maintenance costs because over achieving their connection and collection targets.

As I write this article, the Uganda electricity distribution network is still poor and in urgent need of massive investment. Heavy rain is enough to make some lines go off. There is still rampant theft of transformers and electricity wires. Even though Umeme has been investing in these lines and new transformers much more needs to be done.

Uganda has a distribution network of 26,000km of lines, with 67 substations, 8,000 transformers (of which 7178 have been installed by Umeme) and 370,000 poles. Of these, Umeme has replaced 200,000 poles and there are 60,000 more poles urgently needed to replace those that are in bad shape.

Secondly, 16 percent of the network needs replacement. It is not practically possible to finish this work in one or two years, even if one had the money and desire to. Currently, the estimated cost to fixing these problems is US$500 million.

Assuming Umeme invested this money in just two years to solve these distribution network problems; who would pay for it? Of course it is the consumer through the tariff. Is the Ugandan consumer willing to accept another tariff increase? If the tariff were increased, what would be the response of parliament, the mass media and the political marketplace? Is it not possible that we would see demonstrations in Kampala? Is the Yoweri Museveni administration, already beset by constant public demonstrations in the city willing to suffer the political costs of increasing a tariff?

Again it is politics stupid. Politics demands that there should be a balance between the rate of investment in improving the network and the tariff Ugandan consumers are willing to pay. If you are Umeme, you know that your customers are angry with you for all the wrong reasons.

First, Umeme contributes the least to the tariff. Out of the total price for electricity paid by consumers, Umeme takes only 15 percent – 85 percent goes to generation companies and the transmission company. Yet the consumer, largely because he/she pays this money to Umeme transfers all their frustrations onto the distributor.

One would suggest that government helps Umeme get concessional loans – or government makes the investment in the distribution network in order to subsidise the consumer. This is because the medium term reliability of the business of electricity distribution depends on ensuring that the consumer can afford the service. For now, the threats by parliament to cancel the Umeme concession are counterproductive.

For example, right now Umeme is in negotiations with the International Finance Corporation (IFC) and other banks to raise US$470 million over the next four years to invest in refurbishing the network. The aim is to correct existing network problems and reduce power outages.

Yet at the same time, these negotiations and plans are being undermined by threats from parliament to terminate the contract. And this is in circumstances where parliament is ignoring clearly defined performance targets given to Umeme by the government all of which Umeme has not only met but in many cases actually exceeded.

According to a PriceWaterHouseCoopers report into the utility company, Umeme’s performance has contributed to savings for the customer in the form of reduced tariffs (otherwise they would have been higher) and to the Government in reduced subsidies.

In real terms, between 2005 and 2012 Umeme has: Saved the Ugandan electricity consumer approx. Shs808 billion as a result of reducing revenue collection losses; paid Shs2,024 billion to UETCL through the costs of buying electricity; generated Shs125 billion in direct taxes and Shs99 billion in indirect taxes to the government of Uganda; directly employed over 2,000 people through permanent and/or contracted positions; made payments of Shs194 billion to UEDCL for renting the distribution network; spent Shs 278 billion through wages, staff costs and dividends; invested  US$166 million into the electricity distribution network. This investment will revert to UEDCL at the end of the concession. What more do these MPs need?

amwenda@independent.co.ug