Dark days ahead for Uganda

The risks to reliable electricity distribution that Uganda faces as we transition from Umeme to UEDCL

THE LAST WORD | Andrew M. Mwenda | The refusal of government to renew the Umeme concession continues to intrigue me. It is a policy decision of monumental stupidity.

First, the government has had to borrow $118m to pay out Umeme. Yet this figure is going to be contested via arbitration in London. I can bet Umeme will win and be award $240m they are asking for plus costs of the suit and other damages. So, I imagine government will pay about $300m at the end of the day. This is money government does not have and will have to borrow.

Yet, there was an alternative to government takeover that would have been cheap. If government wanted local ownership, they could have asked Umeme to issue more shares on the stock market and get NSSF to buy all of them. This would have increased NSSF shareholding in Umeme to 85% and raised interest-free capital for investment in the network. Instead, government has borrowed expensive money to buy back Umeme and will have to borrow more expensive money to invest in the network. Does it make sense?

Let me give a background. When Umeme took over the distribution network in 2005, its shareholders invested $40m of their own money. Why? Because no one was willing to invest in the company or lend it. Why? The electricity distribution business was seen as not viable because there were high technical and commercial loses (40%), connections were few and collections of revenues were low. Only IFC gave $25m because of the influence of the World Bank. The first time Umeme tried to borrow money in 2008, no bank was willing to give it a penny.

The much-reviled Umeme turned the sector around in a short time. In 2005, UEDCL had 290,000 subscribers. Government expected this to grow by 10,000 customers per year, and 15,000 customers per year after Bujagali came on board in 2012. In fact, that is the target given to Umeme in the concession. By 2012, Umeme was connecting 10,000 customers per month. When Umeme did its IPO, it sought to raise $50m from institutional investors. Its IPO was oversubscribed by nearly 40%. On the SPO, it sought to raise $100m but got offers of $400m. When, in 2016 Umeme put out a request for funding to local and international lenders worth $190m, it got offers from them worth $300m. A sector that could not raise debt or equity funds for investment had become a hot cake.

When Umeme launched the IPO, a share was being sold at sh216. Within two years, it was selling at sh580, the best performing stock on the Kampala Stock Exchange. Its shareholders were being paid dividends every year. It became the anchor of Uganda’s fledging stock exchange. Why did government remove it when it could raise both cheap debt and equity without seeking a sovereign guarantee? Well, the government argued that the return on investment of 20% paid to Umeme was too high. I agree and Umeme had negotiated it down to 10%. Why did government turn this down?

Besides we need to look at Uganda’s risk profile.

The Uganda shilling has been relatively stable to the dollar for the last 10 years. The Bank of Uganda has been very successful at controlling inflation. Yet the government sells ten-year treasury bonds at 17%. Why would an investor in Umeme accept 10% when they can quit the company and just buy government bonds? The price of its own bonds is enough signal of the risk associated with Uganda and hence rate or return investors are willing to accept.

Handing Umeme over to UEDCL, a company owned and managed 100% by the government is a big risk. It is possible UEDCL will prove me wrong, and I pray they do. But for now, I am convinced UEDCL is unlikely to ensure a reliable distribution of electricity. This will not be because the managers at UEDCL are incompetent. Rather, it is because powerful individuals who hung around the state of Uganda like vultures around an animal carcass will turn UEDCL into their cash cow. How?

In 20 years, Umeme revenue grew to sh2.2 trillion. It is this success that generated political interest to control its huge revenues and therefore its vast procurement budget. The decision to take it back to government is to allow the myriad wheeler dealers who have come to dominate our politics to have access to this money. It will therefore require incredible skill for the leadership at UEDCL to navigate this treacherous political terrain and still serve the public good.

Let us not forget that as a private company, Umeme could hire staff and procure equipment without interference from the state. This locked the wheeler dealers out of its lucrative procurement deals. It allowed the company to hire, retain and promote staff based on proven competence. It also allowed Umeme to procure materials at a cheaper cost. A piece of equipment, like a transformer, that a private citizen can buy at sh500m would cost Umeme sh550m. It will cost government of Uganda via UEDCL sh1.9 billion to buy. Why?

Contests over procurement mean that bidders must factor in the costs of bribes to government officials and the costs of delays in payment that plague state institutions. The bigger cost comes from contestations over award of contracts. Losers will appeal to PPDA, IGG, State House Anti-Corruption Unit, Parliament, and/or seek court injunctions. This is not to mention vociferous campaigns conducted in traditional and social media plus myriad other wheeler dealers with power to influence the award. All this creates uncertainty and delays that can last two to five years. In these circumstances, UEDCL will find itself in a position where it cannot repair broken lines and build new ones. The country will sink into darkness. These hidden costs mean the 20% rate of return Umeme was getting was peanuts.

The transfer of distribution back to the state is meant to recreate the opportunities for political patronage lost to privatization. It follows, therefore, that jobs and procurement contracts will be dished out as favors to rent political support: buy off opponents, reward support and penalize disloyalty. It is possible I am being unfairly pessimistic and cynical. I write this warning in the hope that those who read it will be reminded of the risks we face and be energized to avoid the doomsday scenario I have painted.

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amwenda@ugindependent.co.ug