The Permanent Secretary of the Energy minister, Ms Irene Bateebe (right), Ms Ruth Nankabirwa, the minister of Energy and Mineral Development (second right), and other officials follow proceedings at Lugogo National Control Centre in Kampala ahead of the official network handover from Umeme Ltd to Uganda Electricity Distribution Company Limited, dubbed “The big switch’’ on March 31. PHOTO | COURTESY OF MINISTRY OF ENERGY
It was a matter of when, not if power distributor Umeme would tender a notice of disagreement to the ministries of Energy and Finance in line with the Lease and Assignment Agreement (LAA) under which the company leased the country’s electricity distribution infrastructure for 20 years starting March 1, 2005.
Under the LAA, Umeme that handed back the power infrastructure to the asset owners, the Uganda Electricity Distribution Company Ltd (UEDCL) on March 31, is required to submit a notification of discontentment, in this case over the payout amount, by the eleventh day after the handover.
The company notified the Energy ministry last Friday of the disagreement over the buyout amount of $118.3m (Shs432.5b).
The company is seeking an additional pay of $116m (Shs424.1b) to round off the original claim of 234.7m (Shs858.1b) submitted during the audit process to determine the buyout amount.
In the notice made public yesterday, Umeme indicated that: “As stipulated in the dispute resolution clauses of the concession agreements, the parties shall attempt in good faith to settle such dispute within 30 days commencing April 11.”
“In the event that no agreement is reached within 30 days, or such further period as may be agreed upon between the parties, the matter shall be referred to arbitration in London.” The Ministry of Energy’s Permanent Secretary, Ms Irene Bateebe, last evening confirmed receipt of Umeme’s notice. “We will start a reconciliation process as per the LAA,” Ms Bateebe told this publication.
The reconciliation is specifically over the buyout amount and whether there are additional monies payable to the company, which, buoyed by the highly criticised concession agreement, threw a stone in the bush in yesterday’s public notice floating the idea of, if discussions fail, opting for arbitration in London. Either way, there are costly considerations for both parties going the arbitration route. Chief among them for both parties is the hiring of seasoned international lawyers to buttress their local legal counsel, in the government’s case, from the Attorney General’s office, during the lengthy deliberations. As if not bad enough for Uganda, the government on a separate front is embroiled in arbitration proceedings with the former old metre gauge concessionaire, Rift Valley Railways (RVR) for termination of its concession in 2017. RVR dragged both the governments of Uganda and Kenya for the London-based arbitration seeking damages in the region of $2b (Shs7.3 trillion), which proceedings have been ongoing for close to five years.
However, in Umeme’s case, it is the clauses in the concession inked 21 years ago by government technocrats that gives the former carte blanche to determine whether or not to go for international arbitration in any dispute of a value of over $7m (Shs25.5b). Ms Irene Muloni, then UEDCL's managing director, signed on the government's behalf. Umeme Ltd was formed in April 2004 by two companies; CDC Globleq Holdings (Conco) Ltd with 56 percent and Eskom Enterprises Ltd with 44 percent, but the latter pulled out in March 2005 and later in April 2006 sold its shares to the former,
The contention
The buyout, money payable to Umeme to hand over government power infrastructure it leased, is another divisive clause in the 2004/2005 concession agreements, amended in 2006. Calculating the buyout amount, it was agreed, it would start in the nineteenth year of the concession if it was allowed to run its natural course.
The government nursed ambitions of terminating the concession from as early as 2009, on the recommendation of the Gen Salim Saleh-led committee's report, but the amount payable to Umeme would nearly bankrupt the ever-debt-distressed Treasury. The buyout amount, calculated and agreed to by both sides, would include the cost of modifications that is underappreciated and under-recovered by Umeme at the time of reverting the distribution network to UEDCL.
This would be multiplied by a percentage equal to 120 percent from the end of the initial period through the thirteenth anniversary of the transfer date, such a percentage declining 2 percent per annum thereafter to 106 percent in the twentieth anniversary. For instance, between 2009 and 2012 when the government heavily toiled with the idea of pulling the plug on the contention, Umeme claimed to have invested $80m ($104m/Shs380b in today’s currency adjusted for inflation).
With all variables considered therein, the government would have to pay Umeme $1.77b ($2.3m/Shs8.4 trillion in today’s currency adjusted for inflation) as the buyout amount within 91 days, short of which a 20 percent interest per annum on any outstanding amount would accrue. On the other hand, if Umeme initiated the contract termination having invested $80m (Shs292.4b) the buyout amount would still be as high as $1.26b ($1.6b/Shs5.9 trillion in today’s currency adjusted for inflation).
However, if the concession ran its natural course of 20 years with Umeme having invested $80m (Shs292.4b) the buyout amount would be $84m ($102m/Shs307.1b in today’s currency adjusted for inflation.
With the prohibitive buyout amount in mind, the government decided to run its natural course for 20 years. The decision not to renew or renegotiate the contract was taken by Cabinet in 2022, and preparations for the May 31, 2025 handover started, albeit haphazardly.
Knowledgeable sources told Daily Monitor last evening that the reconciliation revolves around Umeme’s earlier claim as at last September. The company was separately allowed to claim for $9.7m (Shs35.4b) invested in the period leading to March 31, which has been audited; what is allowable and what is not, a. report due for presentation.
Auditor General Edward Akol on March 27 presented the report of the buyout detailing $118.3m (Shs432.5b) as payable to the company, exclusive of applicable taxes, down from $201m (Shs734.8b) detailed in the draft report in February.
The assumption with the final figure is that the audit team co-currently studied both Umeme’s books and the regulator, Electricity Regulatory Authority (ERA)’s reports—what it allowed the former to invest, and what it disallowed as billable investments. ERA maintains Umeme Ltd invested in the region of $756.7m (Shs2.8 trillion), of which $608.6m (Shs2.3 trillion) was capital recovery as at end of the concession, and only $148.m (Shs541.1b) as unrecoverable costs at the end of the concessions, yielding a buyout amount of $155m (Shs566.7b).
Factoring in other variables of what is allowed as investments, the company further wrote down the buyout amount to $127.7m (Shs466.9b), which was further revised downwards to $118.3m (Shs432.5b) during the final audit.
Sources close to Umeme told this newspaper they have a strong case during the thirty-day reconciliation, and at arbitration considering the up and downward movement of the figures. On the other hand, Energy industry sources maintain they maintain an upper hand, and the company’s case can only be sustained if the government kowtows, including watering down reports by the regulator, ERA.
Matters are not helped that several fat cats in government, some involved in the matter, publicly bought shares in Umeme when it listed.
Pondering what next for Umeme? For Umeme, which listed on the Uganda stock market to raise finances in 2012 and at the Nairobi stock market in 2017, what next for the company will be decided at the next much billed Annual General meeting on May 22. It also then that the shareholders will decide what to do with the $118.3m (Shs432.5b) and the extra Shs424b if it is paid. Ugandan investors hold 39.2 percent and foreign investors 60.8 percent of the 1,624,278,005 shares. The company’s shareholder inventory shows that 1,475 large investors hold 99.33 percent of the shares, and 5,068 smaller ones jointly own a 0.68 percent stake. The company late last month suspended trading on the Uganda Stock Exchange (USE) for a fortnight to allow the Umeme-UEDCL transition.
Yesterday, the USE issued a statement extending trading—buying and selling—on Umeme’s bourse for another 30 days. “The extension of the suspension is intended to allow for good faith settlement of the dispute between the two parties as per the concession agreements, failure of which, the matter will be referred to arbitration in London,” the USE said in the notice. Umeme’s head of communications, Mr Peter Kauju, last evening referred this newspaper to their notice of dispute. “There is nothing much we can add further than that, but we are confident that discussions during the reconciliation will be fruitful,” he said briefly. After all is said and done, the company remains left with few options; delisting from the stock exchange and transitioning to a private company, winding up, or transitioning into a company doing other business. These options will be determined by the company’s shareholders.
About umeme buyout
On March 27, the government revised the loan request to buy out Umeme, from more than $190 million, to more than $118 million. The decision was based on the Auditor General Edward Akol’s Special Audit Report for the end of lease and assignment between UMEME Limited and Uganda Electricity Distribution Company Lim-ited (UEDCL).
The State minister for Finance, Planning and Economic Development (General Duties), Mr Henry Musasizi tabled the report in Parliament for adoption. The House on March 20 approved the government’s request to borrow over $190m from Stanbic Bank to buyout Umeme, pending confirmation from the Auditor General.
Possible action.
In the event that no agreement is reached within 30days, or such further period as may be agreed upon between the parties, the matter shall be referred to arbitration in London– Umeme.
