June 5, 2023

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Big Story: Gov’t Potentially Owes UGX1.5Trillion to Umeme on Concession Loss

4 min read

Electricity distributor Umeme Ltd is owed by government close to US$400 million (1.5 trillion Shillings), equivalent to a whole month’s national revenue, as investment costs that are yet to be recovered by the company.

And, if Umeme was to close business today either due to cancellation of its 20-year concession or loss of business or any other circumstance, the government of Uganda would have to look for the money and pay Umeme. 

It would take Uganda Revenue Authority one month to collect the money to pay Umeme.

Uncertainty is now growing surrounding the future of the company, whose current concession ends on February 28, 2025. The concerns of Umeme’s security of tenure came out at last week’s Annual General Meeting where hitherto whispered discomforts between the company and the state were openly discussed.

Umeme manages a government resource, like other companies in distribution, transmission and generation, a similar arrangement in the oil and gas industry, where oil companies are licensed by the government to exploit a public resource on its behalf. 

So any investment that that the company makes belong to the government, according to the license issued to it by the Electricity Regulatory Authority -ERA. 

Umeme Ltd, an incorporated limited liability company under the Companies Act, 2012, holds two licenses from ERA, Licence No. 047 and Licence No. 48, to carry on the business of electricity distribution and supply. 

Under the concession, Umeme is also required to operate, maintain, upgrade, and expand the Distribution System within Uganda “and such contiguous areas as Umeme and ERA may agree.”

This concession requires Umeme to maintain and operate the distribution network; to collect revenues from customers based on the prevailing tariffs set by ERA in accordance with the licences and the privatisation agreements.

“The licenses require Umeme to make investments in upgrading, expansion and maintenance of the assets forming the distribution network; and to return control of the distribution assets, including new investments, to UEDCL at the end of the concession,” according to ERA. 

Umeme, which has a kind of monopoly to supply 95% of the generated electricity in Uganda, is expected to recoup its investment back through revenues from user-tariffs. 

However, Umeme is not supposed to set its own user-tariffs, which makes it hard for the company to determine or influence how much investment to recoup.

Blessing Nshaho, Umeme’s chief corporate says the expenditures that Umeme makes are audited by independent professional firms before ERA approves them. 

And it is from here that it is determined how much will be refunded to Umeme. 

To-date the company has invested US$ 700 million.

For this year, Umeme, has tabled a US$ 219 million (Shs 813.2 billion budget) for the year 2021, with slightly more than half of it being for capital investments in the grid while US$ 60m (Shs 222.4bn) will cater for net operating costs. 

They had last year issued a 5-year investment plan of US$ 400 million for up to 2025.   

Nshaho also dispels the view Umeme overcharges the customers, saying the tariffs are set by the regulator, but adds that government also still subsidises electricity, through taking up some expenditures. 

He says that the profits are determined by ERA because the regulator determines what costs will be deducted when calculating profits.

ERA agrees that they have the mandate to determine what expenses to be considered when Umeme is calculating its profit.

ERA Director of Corporate and Consumer Affairs, Julius Wandera says according to the contract, Umeme’s rate of return on investment was fixed at 20%, adding that the regulator does not determine the profits.

Wandera also explains that Umeme cannot be allowed to recover all their investments at once or when they want because, they would have to do this by increasing the tariffs.

“All Umeme’s investments are recovered through the tariff. If all the money is recovered at once, the price of electricity would be unmanageable,” says Wandera.

Wandera also also confirms that all the investment expenses Umeme makes are verified by ERA before allowing it to deduct it or not in determining the rates.

The management and the board of the company are however hopeful that the concession will be renewed. 

They are however, worried that currently, it is hard to get new investments when lenders are not sure that Umeme will continue in business after 2025, yet they make long-term investments. 

The company has also been assuring the thousands of shareholders it has, that if it were to close business today, each shareholder would be paid UGX600 per share before returning all the assets to the government. Each share was acquired for UGX275 in 2012. 

The government would also pay back all outstanding investment the company the company is yet to recover, which currently is between US$ 300 and 400 million.

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