Tuesday May 13 2014

Why MPs advised government to end Umeme contract

Umeme staff place a transformer in Namuwongo recently.

Umeme staff place a transformer in Namuwongo recently. Photo by Faiswal Kasirye 

By Nelson Wesonga

Parliament- Between 2004 and 2005, Umeme Uganda Ltd signed five agreements with the government to distribute electricity around the country.

These were the Lease and Assignment, the Support, the Power Sales and the Escrow Agreements (2005) as well as the Power Supply Licence (in 2005) agreements.

Through the Lease and Assignment Agreement, the Uganda Electricity Distribution Company Limited (UEDCL) leased its assets to Umeme to operate for 20 years.

According to the Support Agreement, the government is to support Umeme in designing, insuring, rehabilitating and maintaining the electricity distribution network.

The Power Sale Agreement provides that the Uganda Electricity Transmission Company Ltd (UETCL), which buys bulk power from electricity generating companies, avails Umeme electricity to distribute.

The Escrow Agreement provided that UEDCL would open an account with Citibank (London) where it would deposit monies to serve as security, should some government departments not live up to their obligations to Umeme.

The Power Supply Licence provides for the performance targets which the Electricity Regulatory Authority (ERA) sets for Umeme.

All these concession agreements are meant to run for 20 years.
However, on March 28, Parliament recommended that the government terminates the concession.

MPs argued that, contrary to constitutional provisions, the Attorney General’s Chambers did not draft the agreements.

Mr Fred Ruhindi, the deputy Attorney General, had, however, told the Ad Hoc Committee on Energy (ACE) on March 19, 2012 that the “the Attorney General’s office reviewed all the legal documents, participated in the negotiations with the bidder and cleared all the drafts of the agreements”.

Article 119 of the Constitution provides for the AG “to draw and peruse agreements, contracts, treaties, conventions and documents by whatever name called, to which the government is a party or in respect of which government has an interest”.

Who brought Umeme on board?
Ms Elizabeth Nakkungu, the Commissioner of Legal Advisory Services, had in December 2011 told the House Ad hoc Committee which was set up to look into the energy sector, that it is the Privatisation Unit (PU) of the Ministry of Finance which procured and contracted transaction advisers to do the work.

When Daily Monitor asked Mr Jim Mugunga, the spokesperson of the Finance ministry, for comment, he said: “That is the position of the committee, they are better placed to expound.”

“During the time, the state of the sector and return from the international market (as informed by the international tender process) Uganda got a competitive deal and this is the position put to the committee with the relevant facts,” Mr Mugunga said during an interview on May 2.

But the House still adopted the view contained in its ACE report that “the concession agreements, while generally conforming to the basic standards, were crafted to strongly favour the private concessionaire at the expense of Uganda in terms of return on investment, arbitration, buy-out conditions on termination of the contract…This contract should be terminated.”

Mr Ruhindi had told ACE in 2012 that: “The terms of the contracts listed as negotiated and agreed upon, were considered acceptable to the government at the time otherwise the Attorney General would not have approved the contracts for signing”.

Legal take
Putting the issues in perspective, Mr Phillip Karugaba, a lawyer in private practice, explained to Daily Monitor that one needs to take into account that a concession is long-term transaction.

Throughout the concession period, he says, the government would be trying to draw in investment from the concessionaire.

This would require the concessionaire to invest money from the start to the end of the concession.

The agreements are structured to ensure that there is investment along the whole life of the concession and that at the end of the concession, there will be a good distribution network. That is the background to the buy-out clause.

“If I am to invest in the last year of the concession, I cannot possibly get a return on my investment. So the clause says the government must pay me my unrecovered, undepreciated investment,” Mr Karugaba said, observing further that “such late investment maybe necessary to maintain the network to ensure that the government receives a good network at the end of the concession”.

“It is only reasonable. That is the mechanism in the concession. From that perspective I think it (the agreement) is fair,” Mr Karugaba said on April 16.

Section 2.1 of the Support Agreement makes a provision for the ‘Buyout Amount’ that should be paid upon termination of this agreement.

In case the government initiates the termination within the first 13 years of the agreement, Uganda would have to pay Umeme 120 per cent of the amount it would have invested in network assets but which it did not have recovered through retail tariffs at the time the buyout clause is invoked.

WHAT GOVERNMENT SAYS

Parliament in March advised the Executive arm of government to update the House in three months on the steps taken to implement the recommendation to terminate the concession agreements.
Energy minister, Ms Irene Muloni, has in the past told the media that the government would not terminate the concession – because it would lead to the collapse of the energy sector since there will be no company to collect electricity dues from electricity users.

WHAT DOES THE COUNTRY STAND TO LOSE?

As of December 31, 2013, the undepreciated amount of the company’s investments – according to Umeme’s audited accounts – was $172 million (Shs438.6 billion). Therefore, 120 per cent of this figure works out to about Shs526.3 billion.

That would be the amount Uganda might have to pay Umeme should the government now give Umeme six-months’ notice of an early termination of the concession as Parliament has demanded in line with the provisions of the concession agreements.

That amount of money can cover the entire Ministry of Agriculture, Animal Industry and Fisheries 2014/15 budget projection.

If, on the other hand, Umeme initiates the termination within the first 13 years, Umeme would have to pay Uganda 80 per cent of the undepreciated modifications it would have made to the network but would not have recovered through the tariffs. This would work to about Shs350.8 billion.

After the 13th year, the ‘Buy-Out Amount’ will reduce by 2 per cent annually until the concession closes naturally in 2025.
West Budama South MP Jacob Oboth–Oboth chaired ACE. He maintains that while Parliament is not against the principle behind the ‘Buy-Out Amount’, the percentages spelt in the current agreements are unfair.

“The agreements are not fair to Uganda. Uganda’s negotiators did not have any leverage because they were negotiating on the basis of the status report they had got from Mr Paul Mare (former MD of the Uganda Electricity Board which was unbundled to enable the privatisation of energy sector), a report that claimed the whole electricity network dilapidated,” says Mr Oboth–Oboth.

He says that as a result of that, “Uganda’s negotiators looked at the concessionaire – Umeme – as a saviour”.

Section 4.4 of the Support Agreement requires that Uganda ensures Umeme and its direct contractors can repatriate either capital, dividends or any other proceeds from the business.

Speaking at a public event in Kampala on May 6, Mr Selestino Babungi, Umeme’s chief finance officer, said 97 per cent of the money that Umeme collects from consumers in Uganda remains in Uganda.

This, Mr Babungi said “encourages economic growth of the country, which creates multiple employment opportunities, which helps to grow more of local companies…”

Section 4.9 states that the government shall support Umeme’s effort to secure loans, from, say the World Bank, at concessionary rates, to finance the company’s investment in the distribution network.
The agreement makes an allowance for disputes and how to resolve them.

Section 9.3 provides that should the parties be unable to amicably resolve a dispute between them, the issue shall be settled by arbitration in a tribunal fashioned along the lines of the United Nations Commission and International Trade Law (UNCITRAL). The tribunal’s decision would be final and binding.

In case the issue involves an amount of money above $7 million (Shs17.8 billion), the arbitration shall be done in London in the United Kingdom.
Mr Karugaba says it is common these days to go for international arbitration.

“It is very common to have foreign arbitration…it should be in your interest as a country. It reassures the investor that the arbitration will be done in a neutral jurisdiction with experts on the subject. An investor may be quite uncomfortable litigating against government in Uganda. Expertise may also be lacking,” says Mr Karugaba.

He adds that it is common for an arbitration clause to say that the award will be final and binding.

This, he argues, is of commercial benefit because it is not in a business’s interest to have a dispute going on for too long.
The other clauses that informed Parliament’s recommendation to terminate the agreements are Section 2.1 (U) (ii) of the Lease and Assignment Agreement, which states that should Umeme be indebted to, say its Ugandan shareholders by the time of terminating the agreement, the government will either pay off or cancel the debt(s).
Section 9.5 of the Support Agreement removes the immunity of the government from claiming its assets in case Umeme brought any legal proceedings against it.

“This provision was meant to ensure Umeme is paid at whatever cost…in case of legal proceedings brought by the company against government,” states Parliament’s report. “To this extent the provision of Section 9.5 of the Support Agreement is unfair and a nullity.”

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