Uganda could be forced to pay millions of dollars to independent firms managing the country’s power sector as a consequence of flawed concession agreements.

As legislators, last week Thursday, began debate on a parliamentary probe committee report, which recommends termination of power distributor Umeme and generation asset manager Eskom’s concessions, the country faces costly options.

In the case of Umeme, which went public only last November, terminating its concession would see the government pay $148 million in severance costs at the very minimum.

The report shows that the private firms assigned key concessions not only got the contracts under questionable circumstances but have also, in connivance with government officials, engaged in practices that have undermined any value they added to the sector.

It also recommends the termination of Eskom’s 20-year management concession for the Kiira and Nalubale hydropower stations.

Uganda’s electric power parastatal, the Uganda Electricity Board, was broken into separate generation, transmission and distribution businesses over 10 years ago as part of a liberalisation process that was intended to increase efficiency through private sector participation.

That process culminated in South African power conglomerate Eskom taking over management of the generation assets while Umeme clinched the power distribution business.

The report faults Umeme for involvement in various illegalities and implicates government officials in the signing of contracts that are not in the best interests of the country.

The probe team unearthed several irregularities among them the fact that the signatures placed alongside the directorship of Globleq Holdings Ltd and Eskom Enterprises (the partners in the concession) were the signatures of lawyers Ezekiel Tuma and Allan Shonubi respectively, who came from the very law firm that the government had appointed as transaction advisors during the procurement of the concession.

The report further states that the Umeme Ltd that finally signed the concession is not the one that bid, having been formed 11 days before the signing ceremony.

Given the irregular manner in which the procurement of the concession was conducted, the report concludes that there was possible connivance between well-placed Ugandans and the concessionaires.

Umeme was formed in 2004 by CDC Globleq Holdings (Conco) Ltd with a 56 per cent shareholding and Eskom Enterprises (PTY) Ltd with 44 per cent.

In 2006, however, Eskom sold its shares to Globleq and in October 2009, ownership of Globleq was transferred to CDC Group of the United Kingdom.

That same month and year, Globleq was renamed Umeme and two months later, Umeme’s ownership was transferred to Actis Infrastructure. However, the bidding process and negotiations for the concession had started in 2001.

Six companies bid for the electricity distribution concession. These were: CDC Capital Partners (UK), Eskom Enterprises (PTY) (South Africa), Union Fenosa International (Spain), Cinergy Global Power (USA), Electricity Supply Board International (Ireland) and Tata Power (India).

Tata Power, Union Fenosa International and Eskom Enterprises in partnership with CDC Capital Partners were the only prequalified companies.

While the report recommends termination of the concession, one catch is the buyout clauses that make it expensive for the government to terminate the contracts regardless of how the concessionaire is performing.

According to the concession agreement, the government will pay buyout amounts in dollars in all case scenarios — whether it is the government that initiates the termination process or Umeme; or when the contracts come to natural end. The buyout will be determined using underpreciated and unrecovered costs.

Going by Umeme’s claim that it has invested $130 million in the past seven years and recovered only $7 million, terminating the contract today would translate into a termination penalty of $148 million that would have to be paid within 91 days of such a decision.

The report argues that the country would be better off terminating the concession now than holding on and paying more later after Umeme’s investments have increased.

Umeme would not be drawn on its likely course of action at this stage. “We have been waiting for that report to be discussed. Let them discuss it and then we can comment,” said Henry Rugamba, Umeme’s spokesman.

The firm had committed to invest $65 million in the first seven years to improve the distribution network.

READ: Pull the plug... and pay Umeme $65m fine

However, a review of Umeme’s supposed investments found that they included computers, motor vehicles, furniture and other peripherals that do not directly improve or expand the distribution network which they classified as distribution operation and maintenance costs for purposes of computing retail tariffs.

The Electricity Regulatory Authority says those costs don’t qualify for inclusion.