What you need to know:
- While nothing has been cast in stone, in this explainer we explore different permutations and what they would mean for the wider market.
In the past few days, the grapevine has been buzzing with news that the government will not renew a concession with Umeme after the current deal runs its course in March of 2025.
While nothing has been cast in stone, in this explainer we explore different permutations and what they would mean for the wider market.
What do we know about the situation around the concession?
In a November 9 statement, Umeme rubbished widespread speculation that the government has made a final decision not to renew its concession once it expires. The power distributor holds a 20-year concession from the government. Its natural term expires on March 30, 2025. We know that to date, this position remains unchanged.
Umeme has said it will “promptly issue a public notice once written communication is received from the government on the future of the … concession.” In the statement, the power distributor said its attention had been drawn to comments attributed to the Energy minister on November 2 at the Power Forum 2022.
The comments were to the effect that the government would not renew the contract. That notwithstanding, Umeme says it remains committed to performing its obligations as per the existing concession and will continue to operate and maintain the electricity distribution system in line with prudent utility practice to ensure continued service delivery.”
So what happens in the event that Umeme leaves?
Uganda Electricity Distribution Company Limited (UEDCL) is the government entity on whose behalf Umeme Ltd runs the electricity distribution infrastructure.
Mr Paul Mwesigwa, the UEDCL managing director, says the company has built a specialised capacity to manage electricity distribution. He adds that when Umeme’s contract with the government expires in 2025, “we are ready and prepared to manage the activities because, currently, we monitor on behalf of the government the distribution network investment run by Umeme.”
Mr Mwesigwa said UEDCL’s technical department, headed by engineers with experience in “managing network activities and planning for the network including connectivity across the country” , can hold the fort.
Does UEDCL have the capacity to fill a void occasioned by Umeme’s departure?
Mr Mwesigwa believes it does. He told Sunday Monitor that UEDCL has for a decade been running an electricity distribution business in areas where Umeme did not reach. He also said the company has since 2013 successfully operated in more than 74 districts that Umeme found not to be commercially viable such as Kyenjojo, Kagadi, Moyo, Adjumani, Nakapiripirit, Moroto, etc.
While UEDCL, currently runs its business with at least 380 manpower base, Mr Mwesigwa says it would absorb 90 percent Umeme’s manpower if the latter leaves.
“When the concession comes to an end, we expect to have another recruitment to expand,” he said, adding: “We are talking about taking over all the Umeme staff, and the office facilities that Umeme is operating.”
In 2013, the government commissioned the Rural Electrification Programme, under the Ministry of Energy, to extend electrical power to hard-to-reach areas. UEDCL was then assigned the responsibility to develop and manage the network.
What does Umeme’s ledger look like?
Whereas Umeme’s total investments made since 2005—as of December 2021—stood at $547.5m with a recovery of $331.94m, the government has indicated that it will not renew the concession Umeme was granted in 2005. This is in spite of the financial feats the power distributor has tucked under its belt.
Umeme’s investment and turnover have grown over the years. In August, for example, it revealed that its half-year pretax profit by June had jumped to 33 percent. This followed a spike in energy sales and a drop in its operational costs.
For the first six months of this year ending June 30, Umeme’s pretax profits rose to Shs92.8 billion compared to Shs69.6 billion recorded in the same period last year.
It also said the steep rise in profits was largely on account of higher electricity sales that rose nine percent year-on-year and a 6.5 percent drop in operating costs driven by a reorganisation of the business and efficiency gains from investment in technology.
So why is the renewal of its concession with the government not assured?
Despite Umeme’s financial success, the government says the grid remains horrible. This has complicated efforts to evacuate more electricity to customers. President Museveni has in the past openly criticised Umeme over the poor distribution network and the high electricity tariffs, which he said have continued to stifle industrialisation and the government’s job creation and poverty reduction efforts.
For example, during last year’s Labour Day celebration, he said once Umeme’s concession ends, government will take over power distribution. He added that power for industrial parks will go straight from generation to the factories without any third party.
Will there be any implications if the government severs tie with Umeme?
Yes. In the event that there is termination of the agreement, Umeme receives compensation irrespective of the cause. Where the government causes the termination, Umeme gets paid a higher percentage than it gets paid when it is the cause.
The government will need approximately $311m (about Shs1.16 trillion) once its concession to distribute power is not renewed.
Although the Energy ministry recently sought Shs256.2 billion as part of the money to start the (Umeme) buyout in phases, Parliament wants the government to focus on assessing the status of Umeme instead.
Mr Solomon Muyita, the Energy ministry’s spokesman, said thus about the current impasse: “The [Energy] minister was quoting a Cabinet decision taken not to renew the Umeme contract and that is true. So, a follow-up Cabinet meeting will be held to discuss the transition process and takeover of Umeme’s assets.”
According to Mr Muyita, the meeting will see to it that a committee is appointed to oversee how the transition should proceed. This is informed by the fact that such a process involves auditing Umeme’s investments and payouts that have to be made. Once that committee produces its report, the Cabinet will then make a final decision based on the report.