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Inside the Umeme power tariff scandal

By Andrew M. Mwenda & Molly Lister

Did minister Onek touch a live wire?

Sometime early this year, then minister of state for micro finance, Gen. Salim Saleh, went to meet the Deputy Permanent Secretary in the Ministry of Finance, Keith Muhakazi. He had a couple of documents with him which, he claimed, showed that there was huge fraud by the electricity distribution company, Umeme.

In the meeting, sources say, Saleh claimed there was a big racket involving Umeme and some people in government which involved manipulating the electricity tariff and the subsidy to swindle government of billions of shillings.  Muhakanizi confirmed the meeting in an interview with The Independent.

After Saleh had presented his evidence, Muhakanizi called the ministry’s technical team and some people from top management. The technical staff explained to Saleh the structure of the tariff, how it is calculated and how it is subsidised.

However, finance officials got different impressions of Saleh’s reaction to the explanation. Some say he seemed satisfied. Others say he looked doubtful. It is possible that although the explanation made him doubt his initial conviction about the existence of theft, the general may not have felt satisfied that everything was alright.

Sources close to Saleh say, the general, who is also President Yoweri Museveni’s younger brother, continued his investigations. In mid June, with more information on the ‘racket,’ he went to Museveni and told him his suspicions.   Sources say Museveni asked him to talk to the Minister of Energy, Hillary Onek.

Details of the discussion between Onek and Saleh are unclear. What is known, however, is that since joining the ministry, Onek has had problems with both the tariff and the subsidy. He thought something was fishy with the tariff and the subsidy and made this clear to his ministry’s officials. Ministry officials say his early meetings with them were charged. The officials tried to explain to the minister but he, like Saleh, remained unconvinced.

On June 18, Onek wrote to the Inspector General of Police, Kale Kayihura titled: ‘The sudden resignation of Mr. Paul Mare from Umeme.’ The letter was copied to the president, the minister of internal affairs and the minister for security.

‘Paul Mare, an employee of Eskom (South Africa) became the Managing Director of Uganda Electricity Board (UEB) early 1999,’ the letter said, ‘He was instrumental in the unbounding of UEB into four successor companies€¦’ The letter says the generation and distribution companies ‘have been claiming heavy losses and subjecting government, under unfair contracts, to pay them in addition to revenue, enormous amounts of money as subsidy.’

‘When I joined the ministry this year,’ the letter went on, ‘I began asking questions and seeking justification for the current high tariff of electricity. I have not been satisfied with their explanations. To my surprise, on 20th May 2009, Mr. Paul Mare, the architect of the system, suddenly resigns. He is likely to leave the country soon.’ ‘I am of the strong view that he should be restrained from leaving the country before a thorough investigation is done on his activities in Umeme and the energy sector.’

It is this letter that kicked off the storm. Police anti-fraud squad raided the offices of Umeme, Electricity Regulatory Authority (ERA), Uganda Electricity Transmission Company Limited (UETCL) and confiscated their computers. Police also raided  the home of Mare. They also raided the office of the energy ministry Permanent Secretary, Fred Kaliisa, and confiscated his computer too. In a statement to The Independent, Kayihura would only say that the police are just supporting Onek in his investigation.

In addition to the investigations led by the police, Onek appointed a commission of inquiry into the alleged racked. Chairing it: Saleh!  In a press conference on Tuesday July 28, 2009 at ERA, Onek announced, ‘despite the intervention by GOU to alleviate a very high tariff to the end consumer by injecting over 212bn UGX every year to buy down this tariff, for some inexplicable reason Uganda has the second highest tariff in the world.’  According to the statement, Onek’s preliminary findings show that, ‘1. Certain laws were not respected, 2. Procedures were undermined, 3. Cheaper sources of electricity were discouraged, and 4. The whole concessioning process with special reference to distribution was managed by unpatriotic Ugandan individuals with absolutely no respect for the stated NRM goals of creating a sustainable and efficient energy sector.’

The question then is: Who earns this high tariff? Industry experts clarify neither Umeme nor Eskom are beneficiaries of the tariff.   Although the high tariff is paid by the customer to Umeme, it is used by Umeme to purchase power from UETCL, which is 100%-owned by the Uganda government. UETCL, aided by the government subsidy, buys electricity from power generators (such as Aggreko and Jacobsen) and sells it to Umeme.

Uganda’s power tariff remains the highest in East Africa. Comparatively, the Tanzanian domestic power consumer pays shs 52 per unit, while in Rwanda, domestic electricity consumers are charged shs 389 per unit.  The Kenyan domestic power consumer pays shs 38.75 per unit for the first 50 units after which consumers pay between shs 166.26 and 345 per unit depending on consumption. Kenya, Tanzania and Rwanda’s power sources are a combination of hydro, geothermal, gas, methane, solar, wind, and thermal, a practice that mitigates power price increases.

And who benefits from the subsidy? The subsidy is paid by government to UETCL who uses it to buy power at the commercial rate from private power generation companies such as Aggreko and Jacobsen.  UETCL then sells that energy to Umeme to distribute and provide to consumers.  The  Shs 92bn allows UETCL to sell the energy at a bulk supply tariff (determined by Electricity Regulatory Authority, ERA) thereby buying down the tariff to an acceptable price level for consumers.  In addition to the subsidy to UETCL, the government pays Shs 8 to 11bn Ush per month to Umeme to cover power losses.  This added to the Shs 92bn comes to around Shs 212bn annually.  It is noticeably odd that despite the high government subsidy, Uganda’s power tariff is still so high.

How did the high tariff and the subsidy come about? In 2005, Uganda suffered a prolonged draught. This led to a significant reduction in the water levels in Lake Victoria.  Consequently, electricity generation at the two hydro electricity dams in Jinja fell from 260 MW to about 135 MW. The country faced a huge energy crisis.

Meanwhile, government had in March 2005 entered a contract with Umeme for seven years to manage the distribution of electricity. The running costs of Umeme (operations and maintenance) are fixed for the duration of the contract. The only variable costs are inflation and the exchange rate.

The original contract required government of Uganda to guarantee a minimum amount of electricity to Umeme. When electricity generation fell precipitously in 2005, government was unable to meet its contractual commitments to Umeme.

Indeed, the contract stipulated that either party (government and Umeme) could walk out of it if either of them did not meet its obligations during the first 18 months. So Umeme had an easy exit option.

Government, supported by the International Finance Corporation (IFC) of the World Bank, decided to renegotiate the contract. The guaranteed minimum electricity clause was removed. Instead, government promised to increase power generation by a given amount of megawatts per quarter. On its part, Umeme agreed not to penalize government for its breach of contract or to be compensated for the megawatts Uganda had guaranteed but was not providing.

Unable to provide adequate electricity with low water levels, government decided to hire thermal energy generators ‘ hence Aggreko and Jacobsen. At time, hydro electricity cost the consumer Shs 180 per kilowatt hour (Kwh). When government began negotiations with thermal producers, it became clear that the cost per Kwh for industrial users would rise to Shs 800 and for household users to Shs 650.

It is here that the subsidy came about. Initially ministry of finance officials wanted to pass on the full cost of electricity to the consumer. This would have increased the cost of electricity four times. Umeme argued that this would increase electricity theft and thereby undermine its ability to reduce commercial losses as per the contract. Others in government felt a market price of energy would cause huge problems for manufacturers leading to a business slump. The politically minded thought it would stir a political crisis as households would rise up in arms.

The total cost of purchase of electricity by UETCL is about US$ 380m per year. The revenue from electricity sales by Umeme is about US$ 250m. There is thus a difference of US$ 130m. Yet government puts up Shs 92 billion (US$ 50m) per year as the subsidy to buy down the tariff. This left a shortfall of about US$ 80m. The World Bank gave Uganda US$ 210m to use over a period of three years to meet the shortfall until Bujagali comes on board. These interventions reduced the tariff for the consumer to Shs 426 per Kwh.

Since the tariff was set in 2006, it has never been changed. The cost of the tariff is calculated on the basis of the cost of installing the plant (which is fixed) and the cost of inputs (fuel). The cost of fuel is determined by the cost of oil on the international market and the dollar exchange rate.

‘When we were negotiating with the thermal producers,’ the Executive Director of UETCL, Erias Kiyemba told The Independent, ‘the price of crude was US$ 70-80 a barrel. By September last year, it reached US$ 147. Equally, in 2006 the price of the dollar to the shilling was 1800. In May this year, it was Shs 2300.’

According to Kiyemba, when the cost of fuel increased last year, the cost of generating power from the thermal plants went up. This meant that the Aggreko and Jacobsen would charge more for the power they were supplying. Since the tariff to the consumer is fixed, ERA and UETCL asked the ministry of finance to increase the subsidy. The alternative to increased subsidy would be to reduce the amount of electricity bought. Yet in order not to interrupt businesses, government had decided that it should increase electricity supply so that there is no load sharing during the day.

It is on this basis that it was decided that the subsidy be increased. So every time the price of fuel or the price of the dollar goes up, the cost of thermal electricity increases, thus causing variations in the cost of generating thermal power.  According to Kiyemba, the invoice per thermal plant varies between US$ 5m to 8m per month depending on the cost of fuel or the price of the dollar. Since the tariff for the consumers is fixed, it is the subsidy that varies.

It is possible that it is this variation in the subsidy that confused Onek and Saleh to suspect fraud. Observers think that it is this confusion that made Onek to order a crackdown without first establishing a viable basis for his actions.  Those who know him well say Onek is a sober and calm guy unknown for taking such precipitate actions. So why did he act in such an unusual way?

Sources in the energy sector have told The Independent that when he was appointed minister, Onek called a brainstorming meeting with all the players. During the first meeting, the new minister complained that the tariff is high and should be reduced by 50%. ‘People were startled and wondered how the minister could reach such an arbitrary figure,’ a source said.

Some observers say that having received instructions from Museveni and knowing that Saleh was backing him, Onek may have been carried away by a sense of invulnerability. Such a feeling can cause even a sober man to act with impunity. But why would Onek, a man with a good professional experience and academic knowledge of the energy issues act like this?

Some observers say that while Onek may understand things at the technical level (he is a hydraulic engineer), he may not be able to appreciate the complexities of the commercial and legal issues that underline the sector.

When The Independent talked to Saleh, he did not say there is a racket. Instead, he said: ‘There is a school of thought that believes that the tariff is too high.’ But if the tariff is too high, why seek to block Mare from leaving the country? Umeme is not a beneficiary of either the tariff or the subsidy. The people to hold accountable are government officials who signed the contracts and the generators of thermal power.

Industry experts think that the actions of the minister may put the entire commercial energy sector at risk. Uganda’s energy sector has the highest private sector investment in hydropower projects of any country in Africa and it depends on these investments for current and future power generation. Bujagali Dam, now delayed until 2011, is the latest of these projects.  Because of Onek’s actions, a top industry lawyer says, investors are concerned.  This is likely to destabilize the entire sector, which relies on power generation from private companies.

For example, since Onek kicked off the storm, the police anti-fraud squad has conducted raids on numerous energy sector offices.  Their targets so far include Mare’s home, the offices of ERA, UMEME, UETCL and Kaliisa. Computers have been confiscated. Monday last week, police attempted to raid the offices of Jacobsen but were told to come back with a proper warrant.

Sources in the ministry of energy say that a week after raiding Kaliisa’s office, police returned his computer. In a dramatic reversal, policemen asked the PS energy what to do since they had found nothing during their investigations. Kaliisa advised them to go and talk to Onek who had ordered the raids.

A well-placed source told The Independent that Onek later went to Kaliisa seeking advice. Sources say Kalisa advised him to hire an audit firm with an international standing. The PS drafted a letter for the minster to Deloitte and Touch, requesting them to investigate the alleged fraud.

Meanwhile, people have began to distance themselves from the police raids. Inspector General of Police Maj. Gen. Kale Kayihura, for example, told some senior government officials that he knew nothing of the raids. However, sources The Independent talked to say he did.

Uganda electricity tariffs are the second highest in the world after Sweden.  It also carries the highest losses in the region. According to Mare, technical losses at Umeme are about 16-17%. The same estimate goes for commercial losses bring the total to 34%. Mare says that Umeme found total losses above 40%.

According to industry experts, technical losses in Uganda are high because the network is over 50 years old and has seen little or no investment in upgrade. So it is dilapidated, overloaded and its high voltage backbone is not adequate. It is not possible to transmit high MW power into an infrastructure that doesn’t have the network and capacity to carry it.

According to the contract with government, Umeme was supposed to invest US$65 million in the first five years to improve the network. Although Umeme claims that it will surpass this mark by this year’s end, i.e. ahead of schedule, Uganda Electricity Distribution Company Limited (UEDCL) say this is not true. Who is right? A proper independent audit is needed.

Equally, Umeme was also obliged to connect 60,000 users in the first five years within a restricted geographical area already covered by the network plus 1 km. Umeme say they have connected over 100,000 users in just four and a half years.  They recently partnered with the Rural Electrification Agency to connect users in rural areas.  Umeme also claim to have increased collection to 93%, up from 70-80% at the time of takeover.

Regardless of contractual obligations, for many, the investigation has been a long time coming. Consumers have long complained about load-shedding, poor service, and unnecessarily high energy tariffs.

Attempts to talk to Onek were futile. In Kitgum last week for the burial of his brother, Onek promised repeatedly to speak to The Independent upon his return, but didn’t answer calls and deflected repeated requests for an interview.  Multiple sources in the energy sector believe that Onek has goofed big-time and he knows it.

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