Is there a case for Umeme’s concession renewal?

President Museveni has thrown a spanner in the works. He doesn’t think the renewal of the Umeme concession in 2025 is warranted. He wants an option for cheaper distribution of electricity in Uganda. His concern? The cost of power remains high and energy losses – at 17.5% (June 2017) – are being factored into the price. Essentially, of the power that is generated, about 17.5% of that is being “lost” in distribution and someone has to pay for it. This, he squarely blames on Umeme but yet calls for the IGG to investigate. That would make it the third investigation into the operations of Umeme. The first was conducted by a Salim Saleh commission that recommended the termination of the Umeme concession and nationalization. Then comes a probe by MPs. It also recommended the termination of the Umeme concession. The third is what is being asked by President Museveni.

There are potential complexities to the latest call by the President to investigate and not renew Umeme’s concession. The first being that Umeme has evolved and has some local shareholding, including the NSSF – about 23%. Additionally, all investigations seem to focus on Umeme instead of the entire electricity value chain. The second is that Umeme has already signed Power Purchase Agreements with Karuma and Isimba Power Projects to distribute electricity from the two dams. That is about 750MW. Recently, the government also agreed to restructure the Bujagali Hydro Power loan, that would see the power generated remain constant, instead of rising. The other challenge is whether Umeme can be blamed for all the energy losses in the sector?

If the concession is not renewed, this happens

Umeme has argued that even for it to enter the next phase of investment, it will need to get financing – a loan from the IFC. It has to be a long-term loan. Any uncertainty that the concession will not be renewed means Umeme will get that amount at a premium. That investment – about Shs1.1trillion – needs to be in place before power from Isimba and Karuma “goes live”, otherwise the cost of power may remain high.

At the end of the concession period, that investment amount, if it has not generated a return will have to be paid by the government. The power supply has improved over the years. However, Umeme still has challenges – as I have argued before – in building a smart grid that is resilient. Umeme also still needs to be “better responsive” to customer complaints.

Umeme, a listed company, now faces uncertainty and so will the rest of the investments in the electricity sector. The power generators in the sector (Eskom, Bujagali, Karuma – coming soon – & Isimba – coming soon) want to be guaranteed a return on investment. Umeme provides them that certainty that there money will come through. Important to note that both Isimba & Karuma are each 80% funded by loans from China’s EXIM Bank. These loans – totaling $1.9bn – needs to be paid back over a period of between 15 years and 20 years. Before they turn into white elephants, those loans need to be paid back.

For investors that have bought into Umeme, this uncertainty may be one that could – COULD – see the value of their shares plunge and by the time the concession expires in 2025, they COULD be lower than initially projected. By 2025, will investors have recovered most of the money they invested in Umeme? Investors were however warned about investing in Umeme – in the prospectus before Umeme went public – due the concession expiring in 2025. What will be important to watch is whether there will be a dash to sell shares before the concession expires.

Warning to investors in the 2012 IPO prospectus

The question though is whether Umeme has ticked most of the boxes to warrant a concession renewal?

The box Umeme hasn’t seemed to tick is “helping” reduce the electricity tariff. President Museveni seems to question whether Umeme’s million dollar investments are “true”. Well, the burden of proof is with the investigations team on whether these investments have been made.

The renewal discussions provide one opportunity. The government has the opportunity to renegotiate the concession terms, even before 2025. Otherwise, the uncertainty in the sector could be made worse in 2025 and perhaps lead the government into more expensive power by then.

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