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.
amwenda@independent.co.ug
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