Moves to throw the switch on Uganda’s current power distribution concession have come unplugged.

Reason: the taxpayer could bleed as much as $65 million in exit fees to the concessionaire.

Sources familiar with recent plans by the Ugandan parliament to force an end to the four-year marriage with power distributor Umeme say the substantial exit penalty contained in the small print of the concession agreement, would see the consumer tariff almost double as the utility attempts to recover the loss.

The cost is provided for in the agreement, which for example obliges the government to settle the unamortised investments and the unrecovered amounts among other costs if both parties fail to agree.

Privatisation Unit officials say that in the unlikely event that a decision to terminate the concession is reached, it would also have a direct high-risk implication on other Independent Power Producer projects ) in the energy sector.

These projects, especially the 250MW Bujagali power station’s business plan, are hinged on the premise that the distribution and supply system, going forward, will be managed by a private party.

Equally, reverting to the original state monopoly as suggested by some parties would require additional public investment in the network.

These costs would again have to be recovered through additional consumer tariffs.

The mounting criticism of Umeme’s power distribution performance was fanned by a recent inquiry whose report said the distributor had unnecessarily raised the consumer tariff by as much as 44 per cent, translating into Ush188 per unit of power consumed.

Those facts notwithstanding, all investment promotion agencies The EastAfrican sounded out said terminating Umeme’s contract would be a policy reversal that would erode investor confidence in Uganda.

“For Uganda to develop, we need the private sector in infrastructure development. We are living in a global village and competing for investors, so termination will not be helpful in any way,” said Jim Mugunga, public relations officer at the Privatisation Unit.

Uganda has a liberalised investment climate that allows foreigners to pursue investments of their choice with limited government control and no official restrictions on financial accounts. 

“Buying off the concession would not solve our problems, rather it would multiply them. In any contract, it is worthwhile to sit at the table and review the circumstances,” said Mr Mugunga.

Ministry of Energy officials who would not go on record for fear of contradicting their new boss, Hillary Onek, said the best option was to review the concession.

“We know Umeme has had its problems, but we should try to help them instead of terminating their contract,” said one official.

But Mr Onek has made his stand clear, saying he backs parliament on terminating Umeme’s contract, which has failed to control power losses currently standing at 32.6 per cent and has kept the tariff high. But he says the termination should be done “scientifically.”

Already a special committee headed by Gen Caleb Akandwanaho, aka Salim Saleh, has been set up to investigate power tariffs and recommend the method of termination.

Umeme is a joint venture between South Africa’s Eskom and Globeleq that manages the transmission and distribution of power in Uganda. It started operations in March 2005. Globeleq owns 56 per cent of Umeme and Eskom 44 per cent.

“We have submitted our proposal to the committee and we are preparing to go for a review,” said Umeme spokesperson Charlotte Kemigyisha. 

According to the agreement, the two parties are supposed to review the concession after seven years, in 2012.

By that time, the losses should be at 28 per cent, and it is envisaged that cheap electricity will be available from the Bujagali project, enabling tariffs to go down. 

“We are fulfilling our contractual obligations. By the time of the review, we should have cut the losses to 28 per cent,” said Ms Kemigyisha.

Umeme has performed well in some areas like collection of revenue, where it surpassed the revenue target to collect 95 per cent against the set 75 per cent.

The targets for collections were at $65 million as of July this year against the same amount set for March 2010 in the 20-year concession signed in 2004.

Ministry of Energy officials argue that though it is true that Uganda has the highest tariffs in the region, this has to be put in perspective of the energy mix.

The thermal to hydropower supply ratio is 30:70, accounting for 80:20, respectively, of the costs on the tariff.

The cost of thermal power generation is $0.20 to $0.35 per kWh, compared with $0.06 to $0.10 per kWh for hydropower generation.

Thermal, although highly subsidised, is thus responsible for the high tariff and Uganda being a landlocked country does not compare with either Kenya or Tanzania in generating thermal power.

Uganda’s tariff stands at Ush62 for the first 15 units and Ush426 for subsequent units and Kenya’s is Ush38 with a maximum of Ush348.

Umeme says it is not interested in a high tariff either because the more customers they have, the higher the revenue. Only 25 per cent of the tariff goes to Umeme, while 75 per cent is for generation.

On the option of reverting to the former Uganda Electricity Board, officials said this would only be possible if the government were ready to pay a higher subsidy than it already is to keep tariffs down and deal with inefficiencies.

Under UEB, the government was subsidising costs heavily and the public was merely paying a token, said Mr Mugunga.

In a period of seven years, the government promulgated a new Electricity Act and established the Electricity Regulatory Authority, unbundling UEB into companies responsible for generation, transmission and distribution.

Meanwhile, details in the probe report show the consumer tariff was based on inflated fuel consumption figures for the thermal plants that were brought in to supplement dwindling hydro supplies, system loss figures and above market rates for money borrowed to meet working capital requirements.

The probe found that making adjustments on these heads and a number of other items could knock as much as Ushs 188 off the consumer tariff which would translate into a 44 per cent reduction.

At the time the energy sector was almost dysfunctional under UEB, whose operations were hampered by debt and operational inefficiencies.

The concessions were intended to attract badly needed investment, cut down the high level of losses and lower the tariff.

Mugunga argues that the concessions are long-term agreements and their overall impact on the sector may not be realised in the short term.