Hurdles in the transition from Umeme to UEDCL

Where will the money come from?

On December 31, 2024, the ministry of Energy and Mineral Development (MEMD) and the Electricity Regulatory Authority (ERA) handed over the electricity distribution licenses from Umeme to Uganda Electricity Distribution Company Limited (UEDCL) at the Uganda Media Centre in Kampala.

The award of the license is one of the last activities before government reclaims the role of being the main electricity distributor after it relinquished that duty 20 years ago.

As such, public expectation on what is to come when UEDCL takes over from Umeme is split – with some pointing to UEDCL’s cash-strapped vault as a significant challenge that will likely take the sector a couple of steps back, while others seeing Umeme’s exit as good riddance for the poor quality of service they have had to endure for years.

Nevertheless, UEDCL has reassured the public that better days are ahead. At a public hearing in October 2024, Paul Mwesigwa, managing director of UEDCL, said the company had built enough experience within its set-up, especially after acquiring five electricity distribution concessions outside Umeme’s operational areas over the last 10 years – that had prepared it to run Uganda’s power distribution network when Umeme’s 20-year concession expires at the end of March 2025.

After acquiring Ferdsult Engineering’s power concessions in 2017, UEDCL had also taken over the same from Bundibugyo Electricity Cooperative Society (BECS), Kyegegwa Rural Energy Co-operative Society (KRECS), Pader-Abim Community Multi-Purpose Electric Cooperative Society (PACMECS) and Kilembe Investments Limited (KIL).

As a result, noted Mwesigwa, UEDCL’s customer numbers and revenues had grown while it built enough expertise as its model of operation achieved commendable results, all of which were enough to attract the confidence of the market as it sought to acquire the sixth and largest electricity distribution concession in Uganda – Umeme Limited’s.

Uganda’s government decided not to renew Umeme electricity distribution concession as part of a cabinet plan to have all the three major components of the country’s electricity supply industry – the generation, transmission, and distribution – operated and maintained by government companies. UEDCL is now set to run Uganda’s distribution network of 33kV lines and after it acquires the licenses today.

To do so, UEDCL needs Shs 4.02 trillion ( just over $1 billion) to finance the operational and capital costs for three years starting April 2025. This revenue requirement will be sourced through the two main components: the power tariff and debt (loans).

UEDCL is seeking a loan of $435 million from the ministry of Finance, Planning and Economic Development, whose expenditure will be split in two. The biggest portion of this debt – $225 million – will go towards the compensation of Umeme’s unrecovered investments, otherwise known as the buyout amount. This figure is subject to changes.

The Office of the Auditor General is still computing the buyout amount, although it had earlier been noted that this process would be completed by December. The ministry of Finance has agreed to pay Umeme this money on time. The second component of the loan UEDCL is looking for – $210 million – will be channeled towards capital investments in the network.

MONEY SOURCE?

Under its calculations, UEDCL is looking at borrowing this amount at no more than 6.4 per cent per annum. And it is hoping the loan tenure will be at a minimum of 10 years.

UEDCL says it needs this money to revamp a large part of the distribution network. It says that 36.7 per cent of the distribution transformers have surpassed their expected lifetime of 30 years while the network still has transformers that are more than 80 years old. Meanwhile, 10 per cent of the utility poles require immediate replacement.

One of the tough questions UEDCL has to answer is where the money will come from. Uganda is already burdened by a high public debt stock, totaling $25.6 billion as at June 30, 2024, which is 46.9 per cent of the country’s gross domestic product.

The level is close to the East African cap of 50 per cent. Already, Uganda’s electricity industry eats up the lion’s share of the country’s debt component. The ministry of Finance says more than 90 per cent of the loans it has amassed over the last five years have been channeled to the electricity generation and transmission companies.

Through the Uganda Electricity Generation Company Limited (UEGCL), government is now managing some key generation assets it took over from private developers such as the 380MW Nalubaale- Kiira complex from South Africa’s Eskom Limited, and the 50MW Namanve thermal power plant from Jacobsen Elektro. Government also plans to take up the thermal plant from Electromaxx.

The electricity transmission network has always been under government’s ambit, although some space is being ceded to the private sector. It is not clear how government intends to finance UEDCL’s activities, considering it has limited space to take up more debt.

One thing is clear though: if Umeme Limited’s buyout amount is not paid out before March 2025, then UEDCL will not be able to take up the concession of running Uganda’s electricity distribution network, according to the agreements signed.

Ruth Nankabirwa, the minister of Energy and Mineral Development, said the government has set aside a budget for UEDCL to operate effectively when Umeme’s concession ends.
She said, “Government cannot take a strategic decision to end Umeme’s concession without the money for UEDCL.”

CONTENTIOUS BUYOUT AMOUNT

The buyout amount is the capital investments that Umeme would have sunk into the electricity distribution network but not recovered at the end of the concession. Umeme recovers the money it has invested in the network mainly through the power tariff that consumers pay.

The terms of the agreement Umeme signed with the government of Uganda note that Umeme would only hand over the concession if the buyout amount, which is listed as an asset on the company’s books, is paid in full. Any delay in paying the buyout amount will attract interest.

Available figures from Uganda’s government and Umeme, which is listed on the Uganda Securities Exchange (USE) and the Nairobi Securities Exchange (NSE), show a disparity. For example, while the UEDCL has an indicative figure of $225 million as the buyout amount, Umeme estimates the amount to be $240 million at the end of June 2024.

There is, however, a certain separate amount that Umeme is pursuing, which, it says, the Electricity Regulatory Authority has declined to approve for the company to recover. Umeme is seeking $145 million as investment it made in Uganda’s electricity distribution network between the years 2008 and 2021 that it says it has not yet recovered.

As such, Umeme’s managing director, Selestino Babungi, who is also one of the biggest individual shareholders in the company, has asked the ERA not to move ahead with calculating its buyout amount until the $145 million case is resolved.

If this matter is not resolved before the end of the concession, it is likely Umeme will include this amount in the final buyout amount. For good measure, Umeme and the government have in the past disagreed about the recovery of different investments. Some of these disputes have ended up at the Electricity Disputes Tribunal.

Why, then, do Umeme’s figure and that of the ERA differ even after there is an agreed expenditure plan before investments are rolled out? Two reasons are common, which are usually the source of contention: unforeseen expenses that Umeme makes after the budget has been approved, and investments that Umeme agreed to make but did not.

PRESUMPTIVE FIGURES

To be clear, whenever Umeme prepares its annual budget for another calendar year, its figures are usually simply presumptive. What the company cannot clearly predict is when, for example, a transformer will blow up, and the magnitude of the damage. So, when Umeme makes this investment outside the approved budget, it will require the regulator to allow it recover it in the tariff.

In other incidents, Umeme has been found not to make investments it had earlier agreed to. Now, as the audit into Umeme’s investments draws to an end, the potential disagreement on the buyout amount has the hallmarks of a long legal battle if a solution is not found quickly.

For example, as part of the agreements that Umeme signed with the government at the beginning of the concession, an escrow account was opened in Citibank N.A., London. The account, whose amounts were capped at $20 million, was initially funded by UEDCL and, thereafter, by Umeme’s monthly deposit of rental payments due to UEDCL.

One of the objectives of the escrow account was to act as a fallback position for Umeme in the event that the government does not meet its financial obligations.

There is a problem, though. The escrow account is operating on zero balance. It appears Umeme is left with only one option: to engage government or seek redress in an international court of arbitration.

This article first appeared on the Deep Earth International website