Evaluating financial, tariff implications of Umeme’s concession termination

By Dr. Peter Twesigye

As the clock ticks toward March 31, 2025, Uganda finds itself at a critical juncture in its energy sector. The impending conclusion of Umeme Limited's 20-year electricity distribution concession has ignited heated debates. 

At the center of these discussions is the contentious buyout amount the government must pay Umeme for its unrecovered investments—a figure that has drawn sharp divisions among parliamentarians, government officials, consumers, and civil society organisations. 

Beyond this immediate financial obligation lies a broader question: how will this transition shape Uganda’s electricity tariffs and its economic future?

At the heart of this debate lies a complex interplay of legal, financial, economic, and national risk exposure. 

Under the terms of the concession agreement, Uganda is required to compensate Umeme with 105% of the underappreciated and unrecovered cost of its investments by the retransfer date. 

This buyout amount is more than just a settlement; it will serve as the initial asset base for UEDCL, which will allow it to provide service in the future. 

In essence, this figure represents a financial bridge between Umeme’s past investments and UEDCL’s future operations, reflecting the amount future users (the ones receiving the service after the concession ends) owe to Umeme (the departing owners), making it a cornerstone for determining electricity tariffs and ensuring service continuity.

The valuation of Umeme’s unrecovered investments has become a pain point. Umeme claims USD235.96 million, while the Auditor General—representing the government—has pegged it at USD190.99 million. 

This USD45 million gap, representing a 23% difference (and potentially more to be added), isn’t just a number; it’s a flashpoint that could escalate and ignite disputes and costly legal battles. 

Resolving this disagreement amicably is crucial not only to avoid arbitration but also to maintain investor confidence in Uganda’s economic stability.

The buyout figure will directly influence future electricity tariffs. If the government adopts the Auditor General’s valuation of USD190.99 million, it will result in a long-term equilibrium tariff of 9.7 cents per kilowatt-hour (kWh). 

On the other hand, accepting Umeme’s higher claim could push this to 10 cents per kWh, equating to a 3.12% equilibrium tariff increase, which would be needed for investments to keep the same level of supply reliability.

Beyond tariffs, how Uganda handles this transition will send a powerful signal to investors about its reliability as an investment destination.

A harmonious resolution would reassure current and prospective investors, while a contentious fallout—such as arbitration or judicial proceedings—could heighten perceptions of risk to foreign investors and a higher cost of capital. 

My analysis shows that to obtain the same tariff equal to the one resulting from considering Umeme’s valuation and the current estimate of the cost of capital with AG’s estimate, a cost of capital of 11.57% needs to be paid. 

This is 157 basis points higher than the base estimate of 10.0%. So, if the Government pays the Auditor General’s buy-out amount estimate, but the cost of capital rises by 157 basis points, then the tariff is equal to paying Umeme’s estimate and keeping the original cost of capital unchanged. 

From this, it means that, for example, if a dispute with Umeme regarding the buy-out price results in an increase of the perceived risk by an investor of more than 157 basis points, the resulting upsurge/increase in the cost of capital has a tariff impact that outweighs the difference between the two valuations.

Adding urgency to these negotiations are steep penalties stipulated in the concession agreement for delayed payments.

If the government fails to pay (in full) within 30 days of March 31, penalties and interest rates on overdue amounts will escalate from 10% to as high as 20%, depending on the delay period.

Such penalties could exacerbate Uganda’s financial obligations and strain public resources further.

Moreover, failure to honor these commitments could lead to lawsuits in international courts or debt collection efforts by ruthless venture capital firms—scenarios that would impose even greater costs on Uganda’s economy and global reputation. Umeme also retains the right not to retransfer assets until it’s paid in full.

By addressing these challenges decisively and transparently, Uganda can turn this transition into an opportunity to strengthen its energy sector and set a precedent for effective management of public-private partnerships.

To manage this high-stakes transition effectively, I have outlined some recommendations that could be explored:

(a) establish a strong, dedicated negotiation team comprising legal, financial, regulatory, and energy experts to reconcile valuation differences transparently and negotiate amicably with Umeme

(b) secure financing proactively: the government must secure and arrange financing mechanisms promptly to avoid penalty interest and ensure timely payment.

(c) keeping stakeholders informed throughout the process will help maintain public trust and investor confidence

(d) continuously capacitate UEDCL to take over distribution responsibilities is essential to prevent service disruptions

(e) build strong governance systems within UEDCL, and

(f), partnerships with private sector will be crucial.

The choices made now will reverberate for years to come. Will Uganda navigate these turbulent waters with foresight and resolve?

Or will it falter under the weight of missteps? The nation watches closely as its leaders chart a course through one of the most consequential transitions in its modern history.

The writer is a senior academic at the University of Cape Town’s Graduate School of Business