Chinese rival throws Umeme into panic over contract
Umeme officials unearth illegal underground power connection cables. Over the last 12 years, Umeme has increased revenue collection from 80 per cent (2005) to 99.9 per cent (2017). FILE PHOTO
A Chinese company is secretly angling to manage Uganda’s electricity distribution network once Umeme Uganda Limited’s concession expires in 2025.
To that effect, it has approached Uganda Electricity Distribution Company Limited (UEDCL), which in 2005 leased the power distribution network to Umeme.
An attempt to reach UEDCL’s managing director, Joseph Katera, to find out more about the Chinese company were futile by press time.
However, UEDCL’s director for finance, Mr Paul Mwesigwa, last week said he had “not heard about” a Chinese company picking interest in Uganda’s power distribution business.
But what is clear is that on December 1, 2017, Mr Katera wrote to the Ministry of Finance permanent secretary Keith Muhakanizi on the financing options for investments in the electricity distribution network.
Government options
Therein, Mr Katera said presented two options.
The first is to let Umeme do all the investment required to improve and expand the power distribution network – as it has been doing.
The other option is to gradually reduce the investments Umeme makes.
Government would then invest more of its own money in the network.
“We have carried out our analysis, which shows the second option is more affordable,” Mr Katera wrote.
His letter came at a time Umeme has resorted to soft power to get key policymakers vouch for its retention to manage the network.
Last December, Umeme reiterated that it is most competent to manage the business.
Additionally, it said between 2017 and 2025, the distribution network would require an investment of $1.2b (Shs4.3 trillion).
It can only raise that kind of amount through borrowing.
However, with the clock ticking faster towards 2025, lenders could be skeptical to lend it money.
In the event that Umeme gets some long term debt financing but UEDCL does not grant it another lease, Uganda would have to pay Umeme 105 per cent of money it would have invested but was yet to recover through the retail tariff.
The government would have to pay the money within three months of the expiration of the concession.
Failure to pay it would mean it attracts interest – something that would make the amount usurious.
The government is unlikely to have that kind of money then, which would leave it with no option but to renew Umeme’s concession.
According to sources, UEDCL is exploring its options.
This, sources add, is what informed its excitement over the Chinese interest, though it has been agreed that the name of the company be kept secret.
Though the letter Mr Katera wrote does not refer to any Chinese company, it is understood in that context.
The plan is to have the Chinese give the government money, without openly showing it, which money the government would then need to invest in the network.
A Memorandum of Understanding (MoU) to that effect between Uganda and the Chinese company will be drafted.
With less and less of Umeme’s money being invested in the network, when the concession expires naturally in 2025, the buyout amount would be considerably lower.
The buyout amount currently stands at between $321 million (Shs1.1 trillion) and $258 million (Shs934.7 billion), depending on whom between Umeme and the Energy ministry, respectively, one chooses to believe.
On December 9, last year, when this newspaper asked Umeme’s deputy managing director, Mr Sam Zimbe, if Umeme was aware of Chinese interest in the distribution network, he took his breath and then said he was unaware.
“I am not aware of Chinese expressing interest,” Mr Zimbe said.
“What I am aware of is the government is happy with Umeme...”
Mr Zimbe added, perhaps in jest, “If the Chinese want to take over, they can buy NSSF [National Social Security Fund] shares.”
Umeme shareholders
NSSF is the single largest institutional shareholder in Umeme, with a 23 per cent stake.
Many individuals altogether hold a 42 per cent interest.
The rest of the stock is held by, among others, Kimberlite Frontier Africa Master Fund (6.6 per cent), Allan Gray 5.5 per cent, and Investec Asset Management Africa 4.8 per cent.
Utilico Emerging Markets Limited holds 4.3 per cent, The Africa Emerging Markets Fund (3.4 per cent), the International Finance Corporation – IFC – 2.8 per cent), Duet Fund 2.8 per cent, Coronation Global Opportunities Fund 2.6 per cent and Kattagat Trust 2 per cent.
The Chinese must be aware of all this and the fact that they can buy shares on the securities exchange.
Rather than take that route, they are readying to pay the buyout the investment Umeme would not have recovered by the end of the concession.
It is reportedly because of the Chinese manoeuvers that Umeme has engaged in a publicity blitz, highlighting its achievements from 2005 to date.
Umeme achievements
For instance, it has increased the number of entities connected to the grid from 292,000 in 2005 to 1, 064,547 as of September 2017.
It has reduced energy losses from highs of 30 per cent to 17.5 per cent.
It achieved this through, among other means, introducing prepaid billing – making sure domestic customers paid in advance for the power they will consume – and, in some cases, offsetting amounts government departments owe it from what it collects from retail users and should pass on to the Uganda Electricity Transmission Company Limited from which it buys bulk electricity.
Energy losses are factored in the retail tariff.
Revenue collection
Over the last 12 years, Umeme has increased revenue collection from 80 per cent (2005) to 99.9 per cent (2017).
This it achieved by going after those who owe it money
Andrew Aja Baryayanga, the Kabale Municipality MP, who closely follows happenings in the electricity sector, said competition will mean companies have to improve their performance to remain relevant in the market.
Unfavourable terms
UEDCL, reportedly believes the Chinese terms will be better for Uganda.
It, like many other Ugandans, believes the Escrow Agreement and the Support Agreement between UEDCL and Umeme are skewed in Umeme’s favour.
Umeme and UEDCL signed an Escrow Agreement on February 18, 2005 with Irene Muloni, then the managing director of UEDCL, signing on behalf of UEDCL and Luka Buljan, then a director of Umeme, signing on behalf of Umeme.
The Escrow Agreement provided for the establishment of an Escrow Account in Citibank N.A., London in the United Kingdom.
Though the account was to be in UEDCL’s name, through Clause 3 of the Escrow Agreement, UEDCL granted a first lien and security interest in the account in favour of Umeme.
Clause 11 of the Escrow Agreement provides that Citibank N.A., London shall be entitled to a $50,000 (Shs181m) fee in the first year of the agreement and thereafter to $20,000 (Shs72m) per annum, a fee that was to be paid by UEDCL – within 30 days of Citibank London delivering the invoice to UEDCL.
Clause 12.1 of the Support Agreement, which was signed in May 2004 by Gerald Sendaula, then the Finance minister, and David Grylls, a director in Umeme, provides that in case of the natural termination of the agreement, the buyout amount shall equal 105 per cent of the cost of the modification that is un-depreciated and unrecovered by the company through the tariff as of the date of transfer.
Clause 9.5 of the support agreement provides that should any proceedings be brought against the government, Uganda shall unconditionally and irrevocably not claim diplomatic and consular immunity or privileges unless the action is against its aircraft, naval vessels and other defence assets.
Settling dispute
Clause 9.2 of the support agreement provides that in case of a dispute, it shall be conducted in Uganda.
However, if Umeme desires that it should be conducted outside Uganda, it shall be conducted in London – though in such a scenario Umeme shall pay all costs of the arbitration as and when incurred by the government of Uganda.
UEDCL has also in the past accused Umeme of not paying for the depreciation of the assets it got from UEDCL, which means once Umeme leaves, UEDCL would have challenges replacing or maintaining what will be left.
Besides UEDCL, many a key player in the sector has spoken out against Umeme’s guaranteed 20 per cent return on investment (ROI) – profit.
Many say though they appreciate that at the time Umeme got the concession the sector was high risk, this has since changed, thus, the 20 per cent ROI is unreasonably high and that the next operator should be granted a lower rate.
With the Chinese, UEDCL reportedly believes such clauses would not be part of whatever agreements will be signed between UEDCL and the Chinese.
