Govt to audit Umeme investments to ascertain buyout amount

Government is planning to name a multi-sectoral committee that will audit Umeme investments and assets, multiple sources within the Ministry of Energy, who asked to stay anonymous because they are not authorised to speak about the matter, have told Monitor.

The committee, sources say, will be charged with determining the amount that government will need to successfully execute  the Umeme buyout.  

Mr Solomon Muyita, the Energy Ministry communications manager, yesterday confirmed the auditing process, noting a committee, which shall comprise of technical persons from the Auditors General Office, Finance and Energy ministries and Electricity Regulatory Authority, is expected to be named by Energy Minister Ruth Nankabirwa. 

Umeme yesterday confirmed government had decided to see out its full term of the 20-year concession without the option of a renewal. The concession expires in 2025. The announcement ended months of speculation sparked by mixed pronouncements from government officials. 

Sources also indicated that Umeme had been informed of the decision not to renew its concession in October following a Cabinet meeting in the same month.  

In a public notice yesterday, Umeme indicated it had “formally received written communication from [government], notifying it that the current concession will continue to run until its natural end in March, 2025 … after which, there will be no renewal”. 

In a follow up interview to understand the company’s exit plan, Mr Selestino Babungi, the Umeme managing director, declined to comment on the matter, noting that the company was working within certain guidelines and would continue to operate until 2025. 

Umeme has invested close to $760m in the electricity distribution system. In

its 2021 financial report, Umeme noted that in the event of a natural termination of concession and subject to, and in conjunction with, the retransfer of the distribution system to UEDCL or its designee, government would pay to the company immediately available funds, the buyout amount equaling 105 percent of the cost of modifications, undepreciated and unrecovered through tariff as of the date of the retransfer.

The law requires Umeme to, among others, disclose to shareholders and the public any new developments, which are not public knowledge and, also, which may lead to material movements in the price of its securities.

Mr Muyita said Umeme will be solely responsible in dealing with its public shareholders whose shares are held on the USE.     

Umeme is a publically traded entity listed on the USE and is cross-listed on the Nairobi Securities Exchange. 

Mr Keith Kalyegira, the Capital Markets Authority chief executive officer, said yesterday since Umeme listed in 2012, there were no guarantees of renewing the concession, noting that  the risk of non-renewal remained a factor to shareholders since the IPO.  

However, he noted, the 27 months remaining to the end of the concession provide enough time to make sufficient arrangements for shareholders to determine which direction to take.

“We can’t discuss withdrawing from the Exchange right now because we have to wait for strategic direction from the company… and find the most optimal way forward,’ he said. 

Asked how the announcement will impact the Umeme stock and the Exchange in general, Mr Paul Bwiso, the USE chief executive officer, said such information always affects price movements, noting that the withdrawal from the stock exchange, will follow official rules and processes for listing and delisting a company, which are expected to be initiated by Umeme.

“As long as it is a listed company, it continues to carry out its listing obligations until 2025. So, it has a timeline within that shelf life where it will come back to the public. Its shareholders are the ones to make the right decisions on where they want to go,” he said.

Impact on markets

Stephen Kaboyo, Alpha Capital managing partner                                                      

One key factor that shapes market trends is what is called the announcement or headline effect. 

This comes about when significant piece of news or public announcement either by government or a regulatory body relating to a particular company is released.

In the Umeme case, the headline effect is likely to spur investor reaction negatively because of the uncertainty created with no particular details on the management of the public stock going forward. 

It is correct that the non-renewal of the concession appears as a risk factor in the prospectus, however, given the Ugandan institutional and public investors account for more than 45 percent of the company, a clear process of handling those investors must be defined.

In addition, the news comes at the time of a bear market where generally stock prices have been on the decline.

The announcement is going to compound the decline of the Uganda Securities Exchange further. If it had come when the market was stable then the impact would be minimal. 

But now that the announcement comes when the market is in a decline, it will have drastic effect of trading activity.  

Umeme has been one of the blue chip companies in terms of corporate earnings, so the headline announcement has the potential to cause serious disruptions.

Additionally, the announcement doesn’t not give details in terms of the exit strategy, especially, for the investors. This in itself creates investor panic. 

Institutional and individual investors hold significant shares in Umeme. They ought to be provided with a clear exit mechanism. They should be given details to reduce the risk sensitivity and panic. 

The company has almost three years to exit but three years is a very short time to put things in one place. 

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