UMEME: Why the president is misinformed about electricity distribution market and tariffs
President Yoweri Museveni’s letter to the minister of Energy has provided considerable grist to the anti-Umeme mill. There is no company providing a public service in Uganda that has been as successful in business and as equally hated by many as Umeme. This is because Umeme made a fundamental error: it invested in business success but ignored both customer relations and stakeholder engagement.
Let us begin with Museveni’s allegations: he claims the Umeme concession was “messed” up and this explains why the electricity tariff is high. That the Auditor General had in 2005 estimated power losses at 28% but this mysteriously was changed to 38%. That today commercial losses are 1% and technical losses are 17.3%. He wonders why technical losses do not decline in spite of Umeme investing over $500 million in the network.
Museveni then condemns the provision that guarantees Umeme a Return On Investment (ROI) of 20%, and even suggests that he is surprised it is billed to the tariff. He instructs the Umeme concession should not be renewed. This is the most uninformed letter by Museveni I have ever read. The President even gives instructions against renewing the Umeme concession before listening to the investor.
I have never known Museveni to act on a subject of this type (where economic facts and figures as opposed to emotional feelings of the masses on the streets guide his decisions) with such vitriol. The president was wrong on basic facts. Sector losses are 16.8%, of which commercial losses are 6.8% not 1% and technical losses are 10% not 17%. Umeme cannot be a big contributor to the tariff because they take 25% of total revenue generated by the sector.
I have spent years defending Umeme and typical of Ugandan discourse, many people say the company pays me to do so. As I await the first cheque to hit my account, I feel the Museveni outrage (shared by many) should be addressed. Umeme inherited the distribution concession from Uganda Electricity Distribution Company Limited (UEDCL), then a limping organisation without money to invest in the network. In just 12 years, it has transformed electricity distribution into a successful business, and the numbers are staggering.
In 2005 when Umeme took over, there were 290,000 electricity connections accumulated over 50 years from 1954 when Uganda began generating electricity. In just 12 years they have increased it to 1.2m. Revenue was Shs160 billion (Shs 320 billion in 2018 prices). Now it is Shs1.6 trillion.
Uganda’s generation capacity was 190MW, now it is 880MW. There were only 5,000 transformers and now they are 13,000, not to count those that have been replaced. The losses were 38%, now they are 16.8%, saving the country $70 million annually and making Uganda the best performer in the region.
Museveni writes: “The investor claims to have invested $500m in the distribution infrastructure. If they invested so much money why do the technical losses not decline?” But how could Umeme reach five times more customers and distribute five times more MWs of power without investing in transformers, sub-stations, poles and wires? Technical losses have fallen from 20% to 10%. The cost of investment to reduce technical losses to below 5% would exceed any sought benefits and increase the tariff unnecessarily.
Why are so many Ugandans angry with Umeme? I suspect the company thought that business success alone is enough to win public trust. Museveni suffers this weakness too, believing that economic growth and investment figures can win public trust. Listen to his State of the Nation speeches – they are a litany of numbers. For Umeme, it also failed to appreciate that success would attract other interested companies to take the concession from them. These could be the ones who have formed behind-the-scenes lobbyists against Umeme.
Uganda’s electricity distribution market is a far cry from 2002 when government advertised to privatise it, thanks to Umeme. When government invited expressions of interest, six international firms responded. After doing due-diligence, all of them refused to invest. Only the Commonwealth Development Corporation, a British government parastatal, had the courtesy to reply government of Uganda, stating the reasons why it was not worth anyone’s while to take over the country’s distribution business. Government invited them on bended knee. Many of the provisions in the concession that some people find obnoxious were informed by our nation’s high-risk profile at the time.
Having fed Uganda’s cow, and now it is glittering before any investor, our country has forgotten where Umeme dragged it from. Ugandans now think UEDCL was doing a great job. The past always looks rosy as I meet many Ugandans online who even argue that Idi Amin presided over a golden period of Uganda’s economic growth and Museveni is presiding over economic retrogression. In many ways, Museveni’s letter on Umeme is a triumph of his opponent’s approach to public policy – rely on emotions not facts.
Umeme should always remember that they are a monopoly providing a service critical to their customers. If I am angry with Airtel, I can shift to Africell or MTN. If DFCU Bank gives me a bad service, as they are doing now, I shift to Stanbic and Barclays.
Umeme has a guaranteed ROI of 20%. This is both good and bad. It is good in the sense that as long as they perform and meet or exceed their targets in loss reduction and operational costs, they earn the 20% or even more. It is bad in that should they fail to achieve the set target, their ROI would be lower. This is a win-win deal for everyone – consumers, taxpayers and government.
Finally, Museveni complains that it is Umeme’s ROI that has led to a high tariff. Previously he has said it is Bujagali. Yet Umeme’s ROI has very little influence on the tariff. Last year its total revenue was Shs1.6 trillion of which Shs 1.2 trillion was paid to Uganda Electricity Transmission Company Limited. This means Umeme contributes only 25% to the tariff. The real cost is with the policy government of Uganda has adopted on power.
Government can decide – like the one in Ethiopia did – to treat electricity as a public good for environmental or industrial reasons or both and make it free or heavily subsidise it. But this would require it to abandon its other priorities such as road building, free education/health and increases in salaries of government employees. However, this is a bigger debate to exhaust here so we reserve it for another day.