Speculators fighting `Umeme’

By Haggai Matsiko

Minister Muloni warns against forces behind MPs demand for cancellation of electricity generation, distribution concessions

It is hard to single out a Managing Director in Uganda, who has had as rough a time as Charles Chapman’s four years at Umeme, the country’s major power distributor. In just this short period of time, Ugandans have attacked Umeme, traders have demonstrated against it, parliament has fought it and a cabinet minister—Hillary Onek—has accused the company of conning Ugandans.

The company is a subject of two parliamentary investigations, whose recommendations, all damning, have sought to terminate the company’s 20-year distribution concession.

The report also recommends the termination of the 20-year concession of power generator, Eskom.

The report has stirred even more public rancour against Umeme largely fuelled by poorly-estimated bills and a fresh wave of power cuts.

Intense as the public anger might seem, Chapman seems to be cutting through it with utmost ease. He has dismissed the report as being behind the times.

His confidence is steeped in the power distributor’s figures but, mainly, in the knowledge that the Energy Minister says that the economy would collapse if the Umeme contract was cancelled.

“In summary,” Muloni recently warned cabinet, “if the concessions (of Umeme and Eskom) are terminated and placed into the hands of speculators, the power sector will inevitably collapse and the entire economy may collapse with it. The recommendation is not tenable!”

Muloni was presenting her response damning recommendations by to the parliamentary Adhoc Committee on Energy following its 2011-2012 investigation into the energy sector.

“Due to the gross legalities and manipulations encountered surrounding the procurement of the Umeme Concession and the scandalous provisions of these power distribution agreements signed between Government of Uganda and Umeme Limited,” the committee notes “this contract should be terminated.”

The report which carries these recommendations was compiled by the Jacob Oboth-led Adhoc Committee. It was handed to the Speaker of Parliament, Rebecca Kadaga on Nov.15 and tabled in parliament on Dec.4.

Simon Mulongo, Ajedra Aridru, Medard Lubega Ssegona, Ann Maria Nankabirwa, Elijah Okupa, Andrew Baryayanga and Betty Ongom Amongi are the other members of the committee.

Kadaga instituted the committee to among others investigate issues of power losses, tariffs, subsidies and power generation, the power concessions and to establish the extent to which the recommendations of the report on the General Salim Saleh Committee instituted in 2009 to investigate the electricity tariffs has been implemented.

Kadaga’s directive came on the heels of a July 21 2011 motion by Mohammad Nsereko calling for the creation of a committee to investigate the Energy Sector after it emerged that government wanted parliament to approve Shs 61 billion for a thermal power subsidy.

However, the report has just resurfaced for debate on the parliamentary floor.

Scandalous concessions?

The legislators are concerned that, under Umeme, power losses are still high despite the company saying it has invested hundreds of billions. The legislators say that the power distributor has exaggerated its investment and want the Auditor General to audit it.

But most importantly, the legislators say Umeme’s concession has very unfavorable provisions for government.

The contract provides that Umeme must be compensated whether the government terminates its contract, Umeme choses to walk away from the contract, or if the contract comes to its natural end.

In the event of a natural end, Umeme gets 100 percent of its investment, if the termination is caused by Umeme due to, for example, failure to decrease losses to agreed targets, Umeme gets eighty percent (80%) of the un-depreciated and un-recouped investments subject to verification and approval by the regulator.

Here, therefore, Umeme loses 20% as part of the invested amount in the period outstanding.

If the government opts and initiates to terminate the Umeme concession for no justifiable reason, then Umeme gets paid 120% of the un-recouped or un-utilized investment.

The reasoning behind these terms, The Independent understands, is down to the fact that in the event of either of these scenarios, all the investments made by Umeme into the distribution network will revert to government.

The legislators find these provisions “scandalous.”

Reeling off the distributor’s fresh figures, Chapman has described the report as being behind the times. He presents figures show that the utility distributor has surpassed all the targets set for it under the concession.

Umeme claims it has cut electricity losses from as high as 41 to 24 percent, where their target was 28 percent in the first seven years of the contract.

They have also made 220,000 new connections yet their target was 60,000. Currently, collection of revenue is up from 75 percent to 98 percent of total electricity. And they have invested US$130 million instead of the US$65 million that was set for them.

Figures aside, Muloni’s conclusion about the fate of Umeme in the face of a damning parliamentary report, is the clearest signal of why Chapman can afford to be even more confident.

For Ugandans angry about Umeme and calling for the cancellation of its concession, the ministers response, seems to rest the case.  Chapman has in the past suggested that most of the anger directed to Umeme, especially over power outages, is misdirected.

Chapman likens the challenge Umeme faces to that of “a waiter in a restaurant, who has to go into the kitchen (power generation) and has to share the food around.

“We have to allocate it (power) and that is very disappointing for our customers,” Chapman says.

Chapman had been hopeful that with Bujagali coming on board, the power distributor would have more power to distribute.

“We are hopeful that when we go to the kitchen this time there will be more power to spread around our customers,” Chapman says.

But with the ever spiralling power demand, Bujagali has proved to be a drop in the ocean. And at 24 percent, power losses are also still high.

On top of punching holes in the legislators report and accusing them of ignoring some information given to them, Muloni piled praises on Umeme.

“Colleagues,” Muloni told the cabinet meeting, “Umeme has its weakness which we have to deal with in the sector and in Government in general. However, it is a fact that Umeme fulfilled the targets set in the Concession Agreement.  Whether the targets were low or otherwise, that is an area to deal with separately and action has been taken.”

Therefore, she added, a decision to terminate the Umeme Concession agreements has far reaching implications and needs to be carefully examined.

Muloni reportedly told cabinet that before reforms in the energy sector, only about 25% of the expected revenues would be collected from the consumers. Umeme was now collecting 95 %.

With such a collection rate, Muloni added, there are sufficient funds in the sector to pay power generators especially when the tariff level is a right one.

Muloni warns

Muloni explained that terminating the Umeme contract would not only get the government in trouble with Umeme but power generators like Bujagali, it would get the country in the bad books of the World Bank and other potential investors.

She explained that financing of Bujagali HPP was premised on the existence of a credible distribution company which is capable of collecting revenue from power consumers and therefore able to pay the power generators.

The facts on the ground show that Umeme has been able to do this,” Muloni said. She noted that the smaller distribution companies, including Ferdsult, which has expressed interest to operate the Umeme Concession, are struggling and are defaulting on their payments for the electricity which they buy from Uganda Electricity Transmission Company Limited (UETCL) for distribution in their concession areas.

“Termination of the Umeme Concession will create instability in the power sector which may force Bujagali Energy Limited to call on Government to buy out the 250 Megawatt power plant,” Muloni added, “Consequently, buy-out amounts have to be mobilized for both Umeme and Bujagali. Other generators could follow with buy-out demands.”

For the World Bank, Muloni explained that the Umeme concession is backed by a World Bank Partial Risk Guarantee (PRG) secured to mitigate any political risks that would affect the operation of the concession.  In the event that the concession is terminated, she explained, the World Bank would pay up Umeme for the amount guaranteed and consequently government would be obliged to pay the outstanding amount to the World Bank.

However, even after payment, Muloni notes that such a decision would lead to a situation where Multilateral Agencies would no longer be forthcoming to provide insurance and other guarantees for future projects in Uganda.

As a result, Muloni told cabinet that investors would relocate their investments to countries that are more investor friendly with Uganda being viewed as a high risk investment destination.

“Termination of the Umeme and Eskom concessions will send a very negative signal and may see a drastic fall in the appetite for investors in Uganda’s power sector,” the Energy Minister emphasised.

In their report, the legislators also accuse a number of government officials including; former ministers Kamanda Bantaringaya, Syda Bbumba and Gerald Sendaula, among others, whom they want punished for their roles in the concessions in question.

Eskom reacts

Apart from these officials, the legislators also want the 20-year concession of power generator, Eskom, terminated too.

Like Umeme, the legislators fault Eskom of exaggerated investment. Apart from demanding that Muloni takes up the matter of evading payment of Capital Gains Tax by Eskom Enterprises when it sold its shares to Globleq, the MPs claim that despite Eskom’s ever increasing investments, power generation at the two Jinja-based dams, Kiira and Nalubaale that the company maintains and operates, has been going down.

They argue that Eskom Uganda Limited in 2002 took over the two plants, they were generating 280 MW but since then the generation capacity has significantly reduced to 140 MW.

“The Committee accordingly recommends the immediate termination of the Eskom Power Generation Concession…” they conclude.

The two dams have a capacity to generate 380 Megawatts (MW) but Eskom has at most generated only 180MW.

Uganda has an installed power generation capacity of 818.5MW from hydro, thermal, biomass, and diesel plants and actual peak demand of 487MW. Its current generation is, however, only 558.5MW. The difference is, therefore, partly due to poor performance by Eskom.

But Eskom Uganda Managing Director, Nokwanda Mngeni, told The Independent last year that the low productivity of the two plants was down to the fact that one of the plants was too old and faced water level limitations.

“Plants are usually designed to last 50 years, which it has made,” she said of the dam which was commission in 1954. Without water restrictions from the Directorate of Water, Nokwanda said, Eskom can generate up 280 MW.

But critics insist Eskom is not doing enough partly because of the absence of tough laws, regulation and a tough and capable regulator.

While Eskom takes a fair share of the beating in the report, the biggest share was reserved Umeme. The public anger too, is mainly levelled against Umeme.

Commenting about the report, Dickens Kamugisha, the Executive Director of African Institute for Energy Governance (AFIEGO) told The Independent that Umeme cushioned itself against such recommendations when it successfully listed on the stock exchange. Umeme listed on the Ugandan bourse and later on the Nairobi one, last year.

“The MPs recommendations are not going to be effective, they will be ignored,” Kamugisha said.

He added that the government had failed to implement the Saleh report, which raised even more critical issues.

Kamugisha’s AFIEGO and over 1000 others have been frustrated in court over the Umeme issue. They challenged Umeme to make public their concession, but Umeme refused citing confidentiality. They took the power distributor to the High Court on grounds that its concession had unfavorable terms and sought its cancellation but the case has been dropped by several judges and was postponed until Umeme floated its shares successfully.

Critics like Kamugisha and the legislators dismiss government fears over cancellation arguing that it would be better to act now than wait as the money accumulates as Ugandans get stuck with poor services.

Benon Mutambi, the executive director, Electricity Regulatory Authority (ERA), also told The Independent that while there were issues, as regulator, it had established new performance targets that would move the sector in the right direction. Part of these targets will see Umeme cut losses to as low as 14 % in 2019.  With Muloni’s latest response, it is not hard to tell that both Umeme and Eskom are still here to stay.