How the president’s criticism of the electricity distributor is likely to undermine investor confidence in Uganda
THE LAST WORD | ANDREW M. MWENDA | President Yoweri Museveni recently repeated his claim that officials of the government of Uganda who negotiated the Umeme concession sold the country. It is a belief common among a large section of the Ugandan elite including many inside government. It is also a belief that is grossly mistaken.
Many Ugandans behave like a man who fell in a deep pit and called on the neighbour for help. The neighbor got a rope and threw it to him for rescue. During the tangle to pull him out, the rope injured the man’s hands, his legs got bruises etc. After the rescue the man keeps complaining against the neighbour because of the wounds inflicted on him during the rescue.
In 2001, Uganda’s electricity distribution network was dilapidated and needed a massive investment. But government did not have money. So it advertised internationally for a company to come take a concession. Six companies replied – two from Spain, one from France, another from UK, another from USA and a sixth from South Africa. All were invited to come and do a due diligence. They found the network and policy environment so bad that all of them just walked away even without the courtesy of informing government of Uganda about their findings – except one.
CDC, a British government parastatal wrote to government of Uganda its findings. They argued the network had gone for 30 years without much investment and was therefore moribund. Technical and commercial losses in the distribution system were 38% and growing. The biggest source of commercial losses were illegal connections and government not paying its bills. It needed a massive investment, but that would require to increase the cost of electricity to recover the investment. Yet the price of electricity had not changed in a decade in spite of inflation and foreign exchange depreciation. Ugandans were accustomed to cheap electricity that had no relationship to the cost of production, transmission and distribution – and believed the price is cheap and does not change.
As part of the reforms, government had put in place a regulator who was supposed to be independent. But when the regulator increased the cost of electricity, Ugandans had demonstrated on the streets. Government had responded by suspending the increase and thereby demonstrating the impotence (as opposed to the independence) of the regulator. Reducing commercial losses would require the company to police illegal connections but that would ruin its relations with the communities in which it operated. And it would require government to pay its bills, yet there was no way to force government to pay if it defaulted.
Government was stunned. Our distribution network was not viable as a business. It sent a delegation to London to literally beg CDC to come to its rescue. CDC was skeptical and insisted it would come and invest only $5m (non-refundable) for three years and begin reforming the management of the system.
If government demonstrated its commitment to its own reforms CDC would extend the concession to seven years. The World Bank offered money on an escrow so that if government did not pay its bills, CDC would pay itself. But CDC was not convinced and to share the risk invited Eskom of South Africa as a partner. Umeme was born.
Because of these risks and Uganda’s national risk profile, Umeme negotiated a rate of return of 20% on its dollar investments. In the first five years, government violated many of the terms of the agreement. I will not go into the details but Umeme did not leave. Slowly it built a robust business on our distribution network. When it decided to list on the stock exchange in 2012 and 2017, investors flocked to Uganda to get a piece of the Umeme pie. A business that companies were not willing to take for free in 2001 was now attracting vast sums of investor money. Some of the world’s leading equity funds with over $1.6 trillion worth of investible cash were kneeling to buy its shares. It was oversubscribed by 63%.
Because of this public listing, today 36% of Umeme is owned by Ugandans, of whom 23% are workers saving with NSSF. Given the president’s interest in East African integration, it is important to also add that 55% of Umeme is owned by East Africans. Therefore, a significant share of the high returns to Umeme actually go to the people of Uganda and their cousins in East Africa. This is not to say that the Umeme concession did not have weaknesses. However most of these were a result of the weak negotiating position Uganda occupied at the time, not a result of incompetence or corrupt intent as the president and some Ugandan elites claim.
Under the first concession agreement, Umeme was supposed to have reduced electricity losses from 38 percent to 28 percent in the first seven years of the concession. They reduced them to 24 percent. They were supposed to have invested US$65 million in the first seven years; they invested $130 million. They were supposed to make 60,000 new connections in the first seven years; they made 220,000 connections. They were supposed to increase collection of revenue from 75 percent to 95 percent; they reached 98 percent. It is on this basis that the concession was renewed.
As I write this article in May 2021, total losses have fallen to 17.5% compared to Kenya 23% up from 17% seven years ago, Tanzania above 30%. They have invested $700 million in the network, increased connections from 250,000 to 1.5 million, revenue collections are 99.9%, with total revenues of Shs1.7 trillion, with their assets now at Shs2.6 billion. And it employs 1,600 direct employees and 900 contractors. Now they have more than 14,000 transformers, 44,000 km of lines. And the company relies on local staff – with only five expatriates out of over 2,000 employees.
In a 2015 World Bank review of the electricity sector in Africa, it was found that only Uganda’s tariff covers the costs of capital investment and operation expenses and makes a profit. The second country was Seychelles which was breaking even. Across the entire continent all other nations of Africa make losses and have to subsidise their power to citizens and businesses. At the heart of Uganda’s success in the electricity market has been Umeme. It is, therefore, saddening that the president continues to listen to people who do not understand how far he has succeeded in reforming Uganda’s electricity sector, making it a star and an example in the whole of Africa.