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Thursday 17th of April 2014 09:22:59 PM
 

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Between Umeme and Parliament

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Why Parliament and government should be kept out of business to allow private investors to deliver electricity

Two weeks ago, an ad hoc committee of parliament recommended government cancels its contract with Umeme for the distribution of electricity in the country. The committee raises many complaints against the concession agreement and Umeme’s performance; a few correct, some legitimate, others completely wrong, many erroneous and most of them ill-informed.

In fact, by relying on many erroneous and ill-informed arguments to recommend an arbitrary cancellation of the concession, the committee inadvertently demonstrates why it was vital for Umeme to insist on the very provisions in the concession that parliament feels are unfair to the Ugandan people.

The background: when government decided to unbundle Uganda Electricity Board (UEB) into three separate entities to manage electricity generation, transmission and distribution, it hired an international company called Fieldstone Private Capital Group Limited to help handle the matter.

 

After two years of work, government put out a tender for generation and distribution concessions. Five companies expressed interest and came to Uganda to do a due diligence on the sector. After studying our political and regulatory framework all of them pulled out without submitting a bid.

What were the issues? They are largely of a political nature. Uganda had subsidised the electricity tariff for a very long time. The electricity tariff had remained unchanged from 1993 to 2002. The prevailing price then was far below the actual cost of generating, transmitting and distributing electricity; it’s value having been eroded by inflation and foreign exchange depreciation.

The country had also ignored or condoned rampant power thefts. Thirdly many people who were in default were not being taken to task. Note: in Kenya, for example, the electricity tariff is subject to constant adjustment every year to both domestic inflation and foreign exchange depreciation.

Consequently, Ugandan electricity consumers took it for granted that electricity was cheap and that its price could not change. Secondly, there had grown and consolidated a culture of impunity where thieves and defaulters could steal and/or refuse to pay and remain untouched.

These were causing high nontechnical losses in the sector. To compound this, UEB had spent decades with little or no investment in improving the distribution lines, transformers and meters. This had led to high technical losses making the sector unattractive to investors. UEB was a government parastatal and no one cared whether the tariff covered the costs of electricity production.

The solution to this conundrum was doubled edged: to reduce technical losses would demand heavy investment in upgrading the power lines and transformers, meters and even more investment in human resource. If any private investor did this, they would have to charge this cost through the tariff.

Second, to reduce nontechnical losses required that the investor would have to ruthlessly clampdown on power thefts by raiding homes and small businesses to apprehend illegal connections, hire a security force to curb thefts of power lines, transformers and tampering with metres and finally ruthlessly cut off power to many defaulting customers to force them to pay. This operation would destroy the image of any investor before his customers.

Besides these measures had political implications. Potential investors feared that the public would not accept increases in the tariff because a culture of consuming cheap electricity had penetrated the political consciousness of consumers. Investors complained that the regulator did not have capacity to make the independent decisions.

This is because the Electricity Regulatory Authority (ERA) had once increased the tariff and government intervened and suspended it. Indeed, if you look at the books of UEDCL, you will find a back-to-back debt it owes generation and transmission companies which has never been recovered. UEDCL could not collect money because the minister stopped it from doing so for political reasons.

The Commonwealth Development Corporation (CDC) put these issues in writing, rising issues of political risk, foreign exchange risk and revenue collection risk. However, they said that if these issues were addressed, they could bid. Government decided to talk to them.

After the bidding, they formed a consortium with Eskom, one of the other bidders. Both are parastatals, one owned by the British government, the other by the South African government. No private investor was willing to risk their capital in such a tense political climate.

The negotiations between government on one had and CDC and Eskom on the other lasted three years. Government promised to protect the investor from regulatory and political risks and the concession was designed by escalating the penalties government would pay in case of a breach.

This was the first distribution concession in Africa. CDC and Eskom feared that if anyone attempted to increase the tariff, especially at a steep rate, it would cause thefts, defaults and illegal connections. So the concession made it clear that government could not increase the tariff for more than 10% in any given year and not more than 20% in any three consecutive years.

Thus, although the public and parliament accuse Umeme of seeking to increase the tariff rapidly, Umeme has been against it and this is enshrined in the concession agreement. In fact rapid increases in the tariff are a violation of the concession, which should force Umeme to pull out.

The question then was: if the tariff was going to remain stable and change only by not more than 20 percent every three years, who was going to pay for the mismatch between the existing tariff and actual cost of production, transmission and distribution? The answer is government through the subsidy.

Even after government had agreed to these demands, Umeme was reluctant to join and asked for an 18 months concession as a trial run to see whether government would honour its word. They agreed to invest a nonrefundable $5 million in these 18 months.

Five months to the end of that period, in March 2005, power supply declined by 50 percent due to low water levels in Lake Victoria. This forced government to bring in thermal generators, a factor that escalated the cost of electricity, thus making increasing the price of subsidies.

To avoid bankruptcy, government decided to increase the tariff by 22 percent in March 2005, then 35 percent in May 2006 and another 43 percent in November 2006. Thus, in less than two years, government increased the tariff by 98 percent contrary to the concession agreement. Again, Umeme had all the rights to terminate the concession. Government would have been forced to compensate them fully. Indeed they threatened to do exactly that, a factor that triggered negotiations with government.

Umeme argued that such a sudden hike in the tariff was going to increase illegal connections and defaults, making it difficult for the company to reduce nontechnical losses. The result was that government suspended the loss reduction targets to keep Umeme involved. It is only after electricity supply constraints were eased in 2009 that ERA began to set collection and loss reduction targets. In 2009, losses fell from 35 percent to 30 percent and in 2010 they fell to 28 percent. This year the losses have fallen to 24 percent and in 2018, Umeme has a target to have reduced them to 14 percent.

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?

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Comments (26)Add Comment
Who is to blame?
written by pacol, December 01, 2013
A very well informed Engineer told me that if you want to bring this Government down just tell all Ugandans to switch on their Flat irons at exactly the same time! So Ssabalwanyi where have you been putting tax payers money where electricity developments are concerned? Now he runs to the Chinese to finance the project!
AM DOING UMEME'S PR
written by derek, December 01, 2013
Mr Mwenda your article is coincidentally very similar to observer's jeff mbanga 26 Nov 2013 opinion and today's sunday vision p busharizi's opinion.Its tempting to think Umeme Public Relations dept issued the three of you work of defending it. True govt has poor track record delivering services + very crude corruption but umeme isnot the solution. The poles u speak of are under UETCL or sometimes customers pay for their own poles,umeme subcontracts all its duties to other companies which also have to make a profit inaddition to umeme's own profit this all makes power more expensive.....
AM DOING UMEME'S PR
written by derek, December 01, 2013
....Reconstituting UEB with primary aim of providing affordable power to uganda's economy with profits enough to cover production/transmission and mgt costs and putting it under professional mgt like pricewaterhousecooper contracted mgt shud be the way to go. Power like education,health,water should be provided with minimum profiteering.
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written by derek, December 01, 2013
Umeme profit+umeme subcontractor profit+UETCL profit/mgt costs+UEGCL profit/mgt costs+ESKOM/other power generators profits/mgt costs= very expensive uneconomical power tariffs. uganda has the highest power tariffs in eastern africa hoping to industrialise and compete attracting investors with countries like ethiopia with much cheaper power and larger labour force....Mr Mwenda u sometime back wrote of s.korea transformation seeming to praise korean govt directly intervening in the economy directly subsidising local industries even with gross corruption in korea then. Some wud argue similarly G.O.U should take over umeme and subsidise power to give ugandan manufacturers a chance to compete with ethiopia,kenya and tz manufacturers.
Well explained Article
written by D.Oduki, December 01, 2013
Well written & clearly explained article. Thank you Mr. Mwenda.
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written by Diane Kenneth, December 01, 2013
Too long
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written by robert , December 02, 2013
Subsidies promote laziness! They should go
lacks balance and typical
written by ngombe, December 02, 2013
When i read this article in the monitor, i didnt check for the author, but knew it was Mwenda because of his predictability, so i came to the independent to confir my suspecion and wasnt dissappointed. Whether Mwenda is championining a political or an economic cause the end result is the same, his emotions override objectivity and is subjective at best. The mumber crunching tells the story, how can you you be so partial in an issue that is at the core of development. Governments have always and will always be significant stake holders in issues of power, bse for investors the economic motive is supreme, yet power distribution is a political concern and will always be. actually the secret to industrialisation and development lies in low cost power sources.
i challenge you to take survey
written by ngombe, December 02, 2013
ask how many people have bought there own power poles and end connection cable (solido) while connecting power and you will be alarmed by the results and this constitutes a significant infrastructure cost in the numbers you have crunched here.
Half Truths
written by OJA, December 02, 2013
What Andrew writes are half truths..partly true and partly not...I am always going to ask myself, in all this intriguing economic manouevres and political calculations, who is the main beneficiary? Knowing the type of political actors we have, of course the answer is obvious!! Andrew has besides, come short of saying that electricity is too costly in Uganda and the government invests little in it despite the massive potential Uganda has.
My advice to Andrew is that let him go to Ethiopia, study why there is a lot of investment in power generation in that country. Then he can come back and advise his benefactors in Entebbe to do like the Ethiopians, that is, in case he learns something crucial in his Ethiopian tour and investigative research. That is not too much of a demand, is it?
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written by Ali Pong, December 02, 2013
I agree UMEME has done some good work, but the reduction of losses cannot entirely be attributed to UMEME. The changing economic situation also contributes to loss reduction in that as poverty reduces, people are less inclined to steal power. And there has been massive poverty reduction in Uganda since 2000. Secondly, if a government agency such as UETCL builds a substation (eg Kawanda, Namanve, Rugonjo, etc) this has the effect of improving reliability of supply with very little contribution from UMEME. Of course, UMEME sells more energy as a result. I suggest UMEME should compensate government, in areas where projects by government agencies benefits UMEME.
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written by Ali Pong, December 02, 2013
It also matters where the so-called investment actually goes- some of that money goes into purchase of office furniture, cars and other items not directly related to the grid. You neglected to mention that UMEME is compensated for the investments, which encourages them to classify every cost as investment.

You state that the distribution networks is 26,000km long as if to suggest all this was built by UMEME. Well, most of those lines were built during UEB era. In addition, most of the newer distribution lines are constructed by other companies such as Ferdsult, REA, UEDCL, not UMEME.
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written by Winnie, December 02, 2013
As usual Andrew is always at his best.now whats wrong with UMEME?1st of all the share price has doubled,who is going to pay for breach of contract?where will the workers go if their contract is terminated?Ugandans have developed this habit of assuming that they know everything soon we shall be like the foolish Galatians.
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written by Staff Gen. Adam Kifalisso, December 02, 2013
Where is patriotism in Andrew's rhetoric defending companies that are looking for profits from poor humans , the 5 million Umeme initial investment is peanuts from what m7 and goons rob from state coffers
Ugandans need affordable power and subsidised one to protect forests and bring some civilisation in the rural areas,
Uganda is getting most of electricity from hydro power and many of our neighbours from gas and oil power generation yet our neighbours pay less per kilowatt .
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written by Kim Jong Un, December 04, 2013
The problem with this narrowly-focussed case-making is that on the one hand it fails to dispel the accusations against you of being the typical corporate shill, and on the other it fails to elevate the level of debate!

From the look of things we can't do anything about UMEME directly. So why keep trying? What is so special about electricity generation? Why do homes keep using UMEME power to light up, when solar would do it just as well and more cheaply? If Mwenda championed a debate about the benefits of alternative power sources and how to promote them, I think I would clap for him. But this? Ah, man!
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written by G.X, December 04, 2013
Before we say Andrew has 'eaten' does anyone doubt or have any issues with the FACTS he has presented? Has he cooked the figures? Is there anything he has presented as factual but isn't. Reading through some of the comments I can see why we have the level of representation that we do in the legislature and executive.
We seem to be more concerned with politicking and pointless attacks on character than discussing logical solutions to issues.
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written by G.X, December 04, 2013
Derek almost every big business will sub contract or outsource some of its operations 1) To say that umeme sub contracts ALL its duties is extremely naive on your part..and incorrect 2) To say that's the reason for the high tariffs is equally ludicrous. companies outsource to bring down costs not to raise them look to Andrews article for clarification on the high tariffs.
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written by G.X, December 04, 2013
Truth is cancellation of the concession would have far reaching consequences for the country (e.g. it wud hurt our credit rating with the World bank in addition to the large sums of money we would have to pay the investor) & there is absolutely no advantage in doing so since other investors aren't exactly clamoring for the opportunity to come invest in the power network given this political climate. So....are u ready to trust your electricity network back to the govt?
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written by FRIENDS OF UMEME, December 05, 2013
I appreciate the boardroom figures in this article and they are what any technocrat will yap about for relevance. What is on the ground is that we buy our own poles, we pay for the cables (solidos) and then these become property of Umeme! The same principle with water....a very unfair game if you ask me but i dont see this opinion in the article meaning that the Umeme PR machinery is at work.
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written by derek, December 08, 2013
G.X its not naivety ur assumption that subcontracting always reduces expenditure shows ur poor grasp of reality. Umeme's contract is structured in such away that Umeme has very little incentives to efficiently run its operations as any loss it incurrs govt has to pick up the bill. Govt runs NWSC, URA,UNRA decently enough and its not that farfetched it can run a new Umeme.
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written by Gerry J, December 18, 2013
I think the issue is not the government, the opposition, or say donors, for that matter, BUT YOU INDIVIDUAL UGANDANS!!! Focus on the solutions, start proposing options based on Uganda and its dynamics and make that change required to make it happen. I would not like to keep complaining for the next 20 years. After you take a dump, you do not sit on the toilet and complain that your bottoms are dirty...YOU CLEAN UP!!!!
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written by Gerry J, December 18, 2013
Electricity is indeed a complex subject yet quite simple to understand once all is in perspective. each country in the world faces various challenges and benefits. For example their landscape alone and geography will determine price of their electricity - for example in India, the northern area is very mountainous with various rivers suitable for damming with minimal environmental issues and as such suitable for Hydro which is the cheapest form of electricity. As such India's electricity, is among the cheapest in the world. Denmark on the other hand is does not have these advantages and as such is among the most expensive, however their GDP is much higher and they focus more on solar etc.
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written by Gerry J, December 18, 2013
Example - and I suggest you chaps do your research) -
Conversions to UGX at 2500/= to the dollar
Denmark $0.40 UGX 1,000
Nigeria $0.18 UGX 450
Tanzania $0.17 UGX 430
S. Africa $0.16 UGX 400
Kenya $0.15 UGX 385
Mozambique $0.13 UGX 335
US $0.12 UGX 300
Ethiopia $0.06 UGX 158

Examples above do not include VAT, regulatory body levies or for S.Africa, municipal council markups (as they are the distributors of electricity in their specific regions as opposed to Uganda's single supplier model - imagine Masaka Municipal council handling distribution...!!!! and that, would be VERY interesting to see!!!)
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written by Gerry J, December 18, 2013
SO for once I do agree with various points put forth, by Mr. Mwenda. Our Generation is below par, we need to increase that considerably. Build more cheap supply - i.e Dams (for the record, average global price per Dam is approx. $1m per GW capacity, so for 2000MW which we desperately need spend $2Bn, and our GDP is just $4-5Bn per year!!!,
Transmission is a bit on the stable side (however invest in the fibre optic line as every other transmitter in the world does - and get me my cheap internet) - however, fundamentally, we desperately need more lines to areas such as KaBong, Bundibugyo, etc
Then Distribution - focus on industry areas first, as most revenue comes from there, then use revenue to sort domestic
These are some solutions - benefits (MANY!!!!!!!!)
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written by G.X, December 19, 2013
Gerry J how i wish Uganda had more people like you
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written by Rhwny, April 11, 2014
Can anybody convince me that our parliamentarians have the technical aptitude or socio-political and socio-economic awareness that is necessary to even decipher the letter of the UMEME concession agreement? In short, our lawmakers are simply proponents of the culture of "short-sighted dependence syndrome" by continually encouraging their constituents to depend on government handouts (subsidies) and profitless investments in our utilities sectors. The tax payer (and there are only a handful of us) unfairly but ultimately has to bear the burden for the many when short-sighted interventions are effected. Lawmakers, please think beyond your next election bid and act in the interest of our country. Please!

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