What it would take to replace Umeme

Tuesday April 24 2018

What it would take to replace Umeme

Umeme has invested in a number of infrastructure which has consequently fed into the cost of electricity. Photo by Edgar R Batte 

By Christine Kasemiire

MPs on the Natural Resources Committee last week suggested that Uganda Electricity Distribution Company Limited (UEDCL) replaces Umeme, the beleaguered power distributor.
This all happened in a meeting organised by Umeme at Lake Victoria Serena Hotel, south west of Kampala in Kigo, Wakiso District.
Particularly, the MPs tasked UEDCL managing director, Joseph Katera to explain what UEDCL needs to take over electricity distribution, a subject that has attracted debate over the last few years.

UEDCL monitors Umeme activities, among which include distribution of electricity and maintenance of some infrastructure.
According to Katera whereas UEDCL has the human resource capacity to take over distribution of power, it is more than it meets the eye as the company would need an annual injection of at least $100m (364b), if it is to take over Umeme operations.

Related content

“If you give us $100m per annum, we can take over. So I throw the ball back into your court,” he said during the meeting, explaining that the money would be injected into building the network, so as to achieve efficient electricity supply.
Before the arrival of Umeme, Mr Katera said, government had invested so little into growing the electricity sector, which together with the failure by government agencies to pay their bills, immensely affected the network.

“People keep saying UEDCL was doing badly, but take note that [between 2001 and 2005], UEDCL was not getting a single shilling from government to invest into the network. We tried everywhere [but nothing came through]. So when you compare the two situations [then and now] it is not fair,” he said.
The electricity sector, which was being managed under Uganda Electricity Board, was collapsed into different agencies with UEDCL being tasked with the responsibility of distribution.


However, this role is currently under the mandate of Umeme. Other companies included Uganda Electricity Transmission Company Limited, Electricity Regulatory Authority and Uganda Electricity Generation Company Limited, among others.

What it would take to replace Umeme

Massive investments in the distribution network have also had to feed into end-user tariffs.

In the meeting, MPs suggested that UEDCL replaces Umeme, which they claim has failed to provide affordable power to Ugandans and failed to extend power to rural areas.
Only 7 per cent of rural Uganda has access to electricity, according to data from Rural Electrification Agency.
Umeme is currently distributing power under a 20-year concession, which has about seven years to expire.

This means that UEDCL will have to sit out and wait for the expiry of the concession or engage government with the view of cancelling Umeme’s concession, which would invite a lot of costs.
If UEDCL was to take over from Umeme before the expiry of the concession, Ugandans would have to borne a 10 per cent payment for capital recovery and a 10 per cent payment for the cost of maintenance.
The country would also have to pay $330m (Shs1.2 trillion) as a buyout clause in case the concession is terminated before 2025.

Such complicities have had a serious impact on the electricity sector pushing up end-user tariffs with no end in sight.
Therefore, according to Katera, Uganda must invest in the electricity sector with lower expectations on return on investment.
“What Umeme invests [comes with a] 20 per cent return. But if we [invest with expectation] of low return on investment, then it would have an impact [on end-user tariffs],” he say.

Ugandans, according to Julius Wandera, the public relations manager of ERA have also had to pay loans that were secured to fund the operations of different companies that were curved out of UEB in 2005.
Early last week, Ziria Tibalwa, the ERA chief executive officer, informed a media briefing that the cost of power is likely to stay high because of expensive recoveries on existing loans and low levels of consumption.
Uganda has about 1.1 million customers connected on the national grid. Therefore, she said, the proposed takeover by UEDCL would only be a change in management and not the cog of the business troubles.
She also said that unlike Umeme, it would be hard for UEDCL to easily access credit because the company has to be capitalised to prop up its credit worthiness.

“It [UEDCL] would need capitalisation to be credit worthy,” she said, adding that UEDCL should be able to access large capital just like Umeme.

State minister of Finance General Duties, Ajedra Gabriel, admits that UEDCL has the expertise but government would have to borrow heavily to enable the company takeover in the event that the Umeme concession is cancelled.

“We would have to borrow to facilitate UEDCL to take over distribution,” he said.
However, there is a likelihood that electricity prospects might improve as government adds two dams - Karuma and Isimba - to the national grid.
To do this, government will need Shs2.6b to evacuate the power that will be generated by the two dams, according to Energy minister, Irene Muloni.
But even, the two dams have been built using loans, which accordingly will be recovered from Ugandans through end-user tariffs.
Ugandans have been paying for a number of redundancies including power losses that are incurred by the distributor.

For instance, in 2017, electricity users paid Shs267b for the 17 per cent power loss, which is still above ERA’s 14.5 per cent.
However, amid all this, Umeme has continued to invest in the distribution network, especially in smart metering, which according to Selestino Babungi, the company’s managing director is part of the long term plan to cut electricity losses.

During a meeting in Kigo with MPs on the Parliamentary Natural Resources Committee, Babungi said the concession still has seven years within which they would focus on improving supply efficiency and safe power distribution.
However, key among the issues is the rate of return on investment, which according to Tibalwa must be reduced to cut back on the challenges that are currently stressing the economy.

High cost of recovery

Last week, Ziria Tibalwa, the ERA chief executive officer, sad in a media briefing that the cost of electricity will remain high due to low consumption and high capital investments (in terms of loans).
According to Tibalwa Waako, whereas government needs to bring down the cost of electricity to boost industrialisation, there is need to understand that the cost of capital recovery (interest on loans) continues to be high, a situation that has not been helped by low demand for power. She said that as long this remains as is the cost of electricity will stay high until when capital investments have been recovered and a substantial increase in demand is realised.
A unit of electricity currently costs Shs718.75 for domestic users and Shs369.5 for larger and industrial users.

During release of its 2017 financial results, Umeme revealed that government had arrears it had failed to clear.
However, the distributor has taken action, according to Tibalwa by withholding lease payments to Uganda Electricity Transmission Company Limited. Consequently, Umeme has withheld Shs60b in lease fees from UETCL.