Why MPs, government should keep off Umeme

Umeme board chairman Patrick Bitature (L) and managing director Charles Chapman address journalists in Kampala early this year. Photo by Faiswal Kasirye. 

By Andrew M. Mwenda

In Summary

Parliament and government should be kept out of business and allow the market through private investors, to deliver electricity.

Two weeks ago, an ad hoc committee of Parliament recommended that government cancel 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.

The issues
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 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 clump down on power thefts by riding homes and small businesses to apprehend illegal connections, hire a security force to curb thefts of power lines, transformers and tampering with meters and finally ruthlessly cut off many defaulting customers off power 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 if these issues were addressed, they could bid. The 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, another 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 hand 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 to concession made it clear that the government could not increase the tariff for more than 10 per cent in any given year and not more than 20 per cent 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 per cent 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 non-refundable $5 million (about Shs12.6 billion) in these 18 months. Five months to the end of that period, in March 2005, power supply declined by 50 per cent 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.

Tariff increased
To avoid bankruptcy, government decided to increase the tariff by 22 per cent in March 2005, then 35 per cent in May 2006 and another 43 per cent in November 2006. Thus, in less than two years, government increased the tariff by 98 per cent 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.