Umeme costs were inflated — Saleh Report

KAMPALA - Today Monday (March 31), Umeme Ltd will be exiting Uganda’s power sector after running it for 20 years. In the third of our four-part series, we continue exploring the findings of Gen. Salim Saleh’s committee that was set up to investigate the reasons behind Uganda’s high power tariffs.

The original Umeme agreement was signed by then finance minister Gerald Sendaula on behalf of the Government, Irene Muloni (now Bulambuli district Woman MP) for Uganda Electricity Distribution Company Limited (UEDCL) as the managing director, while former director David Grills signed on behalf of Umeme. 

However, when it came to the amendment contract, where several clauses were completely scrapped and replaced with those favouring Umeme in 2006, former finance minister Ezra Suruma signed on behalf of the Government. 

Muloni was still the signatory for UEDCL, while Paul Mare, the then managing director and Ian Williams, the then chief finance officer, signed on behalf of Umeme. 

The original losses at unbundling and concession varied from a figure of 19% to 28% according to presentations to Saleh's committee. However, loss figures, used to establish the concession terms in the contracts, were fixed at 38% in 2006. 

Since each 1% loss was equivalent to an annual loss of $3.2m annually as advised by the permanent secretary of the finance ministry, the range of 10 percentage points (38-28) is equal to $32m annually. 

The report noted that in the first four years of existence, Umeme could have defrauded the Government of sh452b through inflated refund claims for distribution losses. 

Another contentious clause in the agreement is the one that put Umeme’s return on investment at 20% per annum, which would push up both the tariff and the buy-out amount at the end of the contract.

Apart from the inflation of the distribution losses from 28% to 38% under the amendment, as well as the closure of the escrow bank account that was meant for monitoring money invested by Umeme in the electricity sector, Gen. Salim Saleh’s committee also made other findings. 

The committee noted that following the removal of the company escrow account, the Electricity Regulatory Authority (ERA) was not able to verify all the claimed investments because it could not:

• Quantify the impact of the claimed investment in the grid on losses. 

• Project how much more investment is still needed in order to reduce the technical losses to acceptable levels.

• Refl ect what percentage of these investments directed into reducing the distribution losses. 

As at the end of 2008, $10m of disallowed investment was earning a return on investment in the tariff. Until the date of the report, consultants were still trying to verify these investments while consumers paid for them in the tariff. 

As of July 2009, Umeme claimed to have invested $67m in the grid, but the committee noted that it did not go through the escrow account and all efforts to reinstate the account were opposed by Umeme. 

The question the committee asked was: “Why did Umeme close the escrow account which was supposed to act as a tool of transparency?” 

The committee noted that unverified investments were embedded in the tariff and needed to be investigated to ensure that funds meant for operation and maintenance of the grid were not being treated by Umeme as investment for which a return is embedded in the tariff. 

Information provided to the committee by Umeme indicated that they had invested a total amount of $67m in capital as at the end of July 2009, thereby surpassing their contractual target.

Gen. Salim Saleh

Infrastructure maintenance 

UEDCL, in their submission, said Umeme neglected the maintenance of the distribution overhead power lines networks in all the regions in Uganda where they operate.

Fuel consumption 

For thermal plants, the committee said it was necessary to validate how the fuel consumption rate was raised from 0.26 litres per kilowatt hour to 0.277 per kilowatt hour at the extension of the Kiira plant in January 2009 despite the written rejection of this increase by the board and management of ERA. 

This increase caused a loss of 620.500 litres per month which, at 24-hour generation, was equal to $5m per month. 

For example, the additional cost for a 12-month extension of the Kiira Aggreko plant translated into approximately $6m. 

ERA stated in its submission that M/S Aggreko as a licencee had been problematic to the regulatory function, especially on willingness to provide relevant information and data. 
It was impossible for ERA to regulate Aggreko. 

Recommendations 

The committee recommended a probe on why privatisation unit officials in the finance ministry, while negotiating the amendments to the 2006 concession agreements, removed Umeme loss and collection targets and contractually committed the Government of Uganda to compensate 99% of any distribution losses incurred by Umeme. 

The committee also wondered why the advice of officials from the finance ministry, on the restructuring of the distribution concession by ERA in 2006, was ignored during these negotiations. 

The committee also tasked the Government to establish the real baseline distribution system losses as at concession in 2004 during the handover from UEDCL to Umeme, the actual verified investment level as September 2006, the source of the information responsible for any misreporting of investment levels and how the excess funds arising out of this anomaly were treated in the books of accounts of Uganda Electricity Transmission Company Limited and Umeme. 

The committee also tasked the regulator to ascertain the reasons leading to the raising of the contracted system losses to 38% in 2006 and why, despite the Government borrowing of $11m from the International Development Association a loan to procure loss reduction materials to be installed by Umeme, there was no visible impact in the Umeme reported system losses. 

The committee noted that given the inconsistencies and variances in the submissions concerning the investments in the grid by Umeme and the fact that the return on these investments was embedded in the tariff, the forensic investigation should ascertain the following:

• Why the company escrow account originally envisaged by the first concession agreement as a mechanism to track any new investment financing by Umeme and enable the independent monitoring of any disbursements to the grid from these funds by ERA from a bank point was closed. 

• Why, despite several requests from the regulator to have this account reopened, the distributor, Umeme, refused.
 
• If Umeme is earning a return on investment on the International Development Association (IDA) loan to Government 

• Establish the income tax reporting of Umeme over the years. 

Return on investment allowed in the tariff 

The committee noted the investigation should ascertain the real levels of investment and the following should be undertaken thereafter: 

• Refl ect the true return on investment in the tariff based on audited investments per year. 

• Make adjustments for refund of already-allotted returns paid within the tariff over the period of the concession based on unverified investments. 

The committee recommended the verification of meters that were imported and distributed into the system, and which had been reported to have been faulty by the Umeme engineers.

Questions on faulty metres 

• Did Umeme distribute to customers’ meters that its engineers had believed faulty, in part being calibrated to trip at higher speeds than the industrial benchmarks?

• Did Umeme alert the public that faulty meters had been installed? Was there any recall scheme announced for these faulty meters?