Thursday May 8 2014

Umeme sale: Many unanswered questions

By Karoli Ssemogerere

Newspaper readers woke up to news on Monday with a media notice announcing the suspension of trading in shares of Umeme, the electricity distribution concessionaire, with six years left on its distribution agreement. Umeme distributes electricity to 450,000 rate-payers in the country’s economic heartland (the size of a medium Western city).

Depending on whom you talk to, Umeme has been struggling since the Uganda Electricity Transmission Company Limited (UETCL) began delivering more power to the distribution stations it leases from the Uganda Electricity Distribution Company. Most of the old creaky infrastructure could not hold the new loads. At least two sub-station fires have been reported this year, causing city-wide blackouts.

This sale is likely to raise eyebrows for a number of reasons. It is a documented fact that Umeme’s splashy IPO’s main purpose was to retire debt owed to one of its largest shareholders. Second, Umeme has been keeping up appearances, which include glossy adverts that dominated the print media in the run-up to its Annual General Meeting. Third, Umeme has been projecting a rosy picture of its balance sheet by paying out a healthy cash dividend.

A thoughtful piece in the New Vision of May 7, summarises this problem as a leveraged company with a loan of $190 million or 93 per cent of its net assets. It adds that the dividend cash outlay of Shs27 billion is more than current cash on hand or Shs14 billion. Borrowing to pay dividends is a costly strategy partly blamed for the crises that rocked the energy and telecommunications sectors in the United States before the onset of the financial crisis that rocked the US. Companies using rosy projections borrowed against their future earnings in order to return “value” to their shareholders, which was nothing more than employment of accounting gimmicks to steal; it landed a few corporate executives in prison.

The New Vision story does not disclose Umeme’s loan coupon rate which could be as high as 12 per cent strangling cash flow over a short amortisation period. Uganda Clays, once a doyen of the construction sector, has never recovered from a bad loan issued to finance the construction of Kamonkoli factory at 19 per cent. Loans to private entities are priced higher because the operational risks are higher.

Umeme’s net borrowing of Shs475 billion is alarming. This is 30 per cent of Uganda’s entire road sector budget even though Umeme is only serving 450,000 customers and not without a litany of complaints. With a huge maintenance backlog and a weak technical cadre, Umeme has resorted to a costly employment of outside contractors to play catch up. The quality of work is poor. Transformers are blowing and poles are giving way at the knees falling to the ground during this rainy season. The public is irate and has taken to physically engaging Umeme managers in Masaka, Lira and other towns. In many homes, the flow of current is very low, wreaking havoc to electricity appliances. Without a consumer protection law, most of Umeme’s customers have nowhere to run to.

If the above were not enough, one wonders the tenacity of the new foreign investors to invest in a company whose concession has been recommended for termination by Parliament. Are the current owners pre-selling their “termination” or “break-up fee” estimated at $300 million? Is this the real value?

Unfortunately, many of these shenanigans ultimately have deep financial implications for Ugandans. It is already a problem that Uganda’s retail electricity tariff is one of the highest in the world. Entire sectors like agri-business, including maize milling and food processing cannot break with today’s power tariffs. For the working public, saving with Umeme through NSSF, the collapse of value of NSSF’s 8.1 per cent shareholding, which should be the correct status should Umeme fail or lose its concession, is a major concern. The recent report by the IGG already blames the Board of NSSF for investing in Umeme’s IPO without the Solicitor General’s approval.

Approving Umeme’s share sale should also be a concern for the Capital Markets Authority. CMA’s approval may only cover the public float; and this new private sale needs to be scrutinised as well. This is an important test for new CMA CEO Keith Kalyegira who was part of the institutional setup at NSSF that advised the fund to buy Umeme stock.

Ugandans would also want to hear from Umeme’s regulator, ERA, with whom Umeme has been battling over financial issues and modification of its tariff. Does Umeme have enough resources to carry out its core business for which it has been licensed by ERA? Are MPs comfortable that their decision to cancel Umeme’s contract is simply being ridden roughshod over with impunity?
Lastly, as a minimum, the minister of Labour owes social responsibility to the employees of Umeme who must be strained working in the dark, and without direction on the future of their company. Ms Karooro Okurut should be communicating on their behalf and Speaker Rebecca Kadaga cannot keep Umeme off Parliament’s Order Paper.

Mr Ssemogerere is an Attorney-at-Law and an Advocate.