Umeme: Have investments resulted in the intended benefits?

By The Independent Team

Experts with insider knowledge of Umeme Ltd operations say some issues were not brought to the attention of relevant government bodies prior to signing the lease and assignment agreement granting Umeme license. Although the agreement obliges Umeme Ltd to invest US$65 million over a period of five years, they say, there are other hidden obligations that government was to undertake. Umeme management responds.

Umeme given free money?

Allegation: The Government gave Umeme US$11 million (Approx. Shs 22 billion) under the agreement. The excuse for this was that the network was bad and it needed upgrading before Umeme could start investing their funds. The question is if the government had money to upgrade the network, why did it bring private investment in form of Umeme? The government borrowed the US$11 million from IDA and funded Umeme. To hide the transaction from public criticism, Uganda Electricity Distribution Company Ltd (UEDCL) was made to appear as if it was the one borrowing and receiving the materials. Once the materials were received, UEDCL passed them on to Umeme free of charge.

UMEME Response: As mitigation against impacts on the tariff, government of Uganda through UEDCL agreed long before the concession to procure and provide materials to inject into the network. The investment required to refurbish the network is well over US$100 million as verified by the external firm contracted by Government of Uganda (LAMAYA). It is worth noting that these materials are not treated as part of UMEME’s investment into the distribution network.

Allegation: At the time Umeme took over net receivables from customers amounted to the tune of Shs80 billion (US$45 million). This value of asset was sold to Umeme at only US$4.7 million (About Shs8.2 billion). So really did Umeme need to bring in any new investment? Couldn’t they just collect this money progressively and invest it and claim to have brought in investments.

UMEME Response: As part of the negotiation, both parties looked at the account receivables position and UMEME paid the fair value agreed between both parties. It is worth noting too that of the Shs80 billion, 20 billion was attributed to government usage and written off and of the Shs60 billion balance Shs40 billion has so far been written off. The balance Shs20 billion is still being collected and as we speak we are in the final stages of writing off another close to Shs16 billion.

Boss earns Shs 100m per month?

Allegation: Where as it is true that the tariff has escalated because of thermal generation, there is another dimension or component contributing to the high tariff which nobody has talked about. This is called Distribution Operational and Maintenance Costs (DOMC). These are costs other than generation costs (like staff costs, Administration costs, R&M). Since Umeme came on board, the DOMC of the distribution has doubled compared to the days before concession. This is despite the fact that Umeme laid off about 500 (1/3) staff since it took over. So what is it that has caused those other costs to double when the network is still the same like before concession used to run and with only 2/3 of the work force? You may want to cross check but the salary of the expatriate employees for each one is in excess of US$30,000 (Approx. Shs 60 million) per month while the Managing director gets about US$50,000 (Approx. Shs 100 million). All this funded by the Ugandan Electricity consumer.

UMEME Response: The distribution Operation and maintenance costs tariff factor was fixed for the first seven years of the concession. The total figure that we incur today on DOMC is over US$32M as opposed to the US$25M provided for. This difference is borne by the company and thus has no relation to the end consumer tariff.

Allegation: Escrow account; as part of the agreement it was provided that the lease payments to the government for using assets leased by Umeme should be paid to the Escrow account in Citibank. On day one of Umeme operations in Uganda, government was required to fund that account with an opening balance of US$2.5 million. That amount was paid to the account. All payments meant to be paid to government as lease fee is paid to this account. The amount is allegedly to protect Umeme Investment. Umeme has access to this account. Under circumstances like a government department not paying bills on time, failure to approve tariff in time by the Uganda Electricity Regulatory Authority (ERA), Umeme has a right to remove amount from this account without reference to anybody. Remember these are public funds received for use of public assets. Umeme has already revoked that provision and has accessed money meant for that account four times since they started operations.

UMEME Response: The Escrow account was instituted as a mechanism for handling transactions between the concessionaire and concessioner and to also guard against termination. That is to say that should there be a claim, the first point of call would be the escrow account. There is a contractual requirement to maintain this account at a balance of US$ 2.5 million and today the balance on this account is US$ 8 million. The escrow account has trustees and therefore no one can withdraw this money without access to trustees.

No Umeme investment?

Allegation: There is doubt as to whether Umeme has brought in the investments they claim to have brought in. The thinking is that they just collect money from the bills and debtors they got free of charge and reinvest it.

UMEME Response: All remittances from the investor are identifiable and audited by UMEME external auditors. As previously highlighted, the inherited accounts receivable have not yielded money for the investor.

High tariffs

Allegation: Under the current high tariff and shortage of adequate power to distribute, Umeme has sought to take advantage of this situation and reap more from the government. For example under the renegotiated agreements Umeme is paid by the treasury for all power stolen by consumers through meter by passes or illegal connections, and also to be paid for all money they cannot collect from consumers. The funny argument they are advancing for this is that with high tariff more customers will steal power and default on their bills and hence government must compensate them. But you wonder what they came here to do. Were they not supposed to put structure in place to stop thefts and improve collections irrespective of the level of the tariff?

UMEME Response: This is not true. There is a formula for computing losses that are included in the tariff €” this formula is also available in the concession agreement. Today, the losses factored into the tariff are at 31.7%.

Umeme dodging taxes?

Allegation: Tax Evasion: URA needs to check tax evasion.

UMEME has published accounts available in the public domain. They are audited and are compliant with the IRSA standards.

Money wired out?

Allegation: Capital flight: Information indicates huge sums of money is being wired from Umeme accounts and yet Umeme was supposed to bring investments here.

UMEME Response: I am not aware of this.

Allegation: There are many other issues that remain shrouded and in the final analysis, after Umeme has ripped off this country they will pack and go and leave the country in a mess. Part of the amendments they are seeking to effect now is to allow them to pull out anytime and be paid for whatever they term as their investments made to date.

UMEME Response: This concession had full private sector participation and has proper concession agreements and both parties’ interests are protected to avoid that type of a scenario.

Secret deals?

Allegation: The transaction was carried out privately and I doubt that many people in the Ministry of Finance or Energy know the thinner details of what is going. By the time we realise it will be too late and may cost us heavily. Only the Privatization Unit was largely involved and what they care for is to privatise. Their performance is judged by that. The case of privatising electricity distribution was complicated because the then Director of Utility Reform Unit in charge of privatising utilites was also a member of the Board of the company then distributing power. Many issues raised by technical people were suppressed by the then Director, Mr. Nyirikindi. He has since left the ministry.

UMEME Response: The concession agreement was not a secret, it had full participation by the private sector, was signed by the then Minister of Finance, Dr. Ezra Suruma, the Electricity Regulatory Authority and UEDCL. This privatisation process involved active participation by the World Bank who provided transaction advisors to assist the government of Uganda to handle the privatisation process.

Privatisation wrong?

Allegation: Where as the policy of privatisation is generally agreeable and good, it should not be at any cost. In a crisis like the one we are in, that sector would rather be in the hands off government.

UMEME Response: This is a policy matter that we cannot comment on. Policy development lies in the domain of the Executive arm of government which is the cabinet chaired by the HE the President.

Allegation: Umeme was a consortium between Eskom and CDC. The latest information available is that Eskom pulled out the deal. It may also be interesting to note all the Directors of Umeme at start of the company have since resigned and replaced by new ones except only one called Luka Buljin. Recently CDC has also passed shares to some other entity not yet known.

UMEME Response: Movement of directors is a normal phenomenon in any business. However, the movement of Board Directors on the UMEME board has been in the interest of Uganda as we now have two Ugandan representatives on the board of directors.

Umeme restructuring:

Allegation: The negotiations for Umeme restructuring were concluded and amendments to the agreements signed at the end of 2006. Umeme is, however, trying to take advantage of the power crisis at the time and make money which is very unfair given the high tariff. Ministry of Finance hired a consultant to advise on the restructuring. The draft report of the consultant (Hunton & Williams) addressed to Mr. Sebabi, currently Director of Utility Reform Unit points out unfair demands by Umeme, for example requesting the government to pay them for losses for uncollected and stolen power, etc. Furthermore in the restructured deal, Umeme inserted a clause whereby they can unilaterally pull out of Uganda without any penalties and yet be paid for any investments they have made. This is dangerous because the idea was to get a long term investor to guarantee stability. None of the issues raised by the consultant were addressed because Umeme threatened to pull out if any of its demands were changed because of the consultant’s advice.

UMEME Response: To address the question of stability, the Concession agreement is a 20-year agreement. All plans by the shareholder have also taken on a long term view on investment and business development.

Rural Electrification Schemes:

Allegation: These schemes (also called Presidential schemes) have been built in many parts of the country under the President’s promises whenever he travels upcountry especially in places which have potential for development. The idea was to connect these places to the main grid (now leased to Umeme). About Shs 30 billion has been injected into such schemes. Some schemes are complete while others are still under construction. Now Umeme said that these schemes cannot be connected to their grid because they were not included in the agreements they signed. Umeme is demanding and getting payment from GoU every year if they connect these schemes to the main grid, otherwise the poles and wires will remain hanging without power. A funny clause was put in the agreement that Umeme can only connect up to only 2 kms from the main grid (2 kms footprint). It is that funny clause they are trying to exploit and extract money from government. Already negotiations are underway with Electricity Regulatory Authority of modalities of paying Umeme for every scheme connected to the main grid.

UMEME Response: There are agreements between ERA and UEDCL to take on any schemes they construct under the Rural Electrification Agency.

We do have proper structures in place to co-opt these schemes into our system. The UMEME footprint is 1KM beyond the grid. However, we take on other schemes once approved by REA and are not aware of payments by ERA to take them on.