Umeme deal: Private individuals took over Attorney General’s duties

KAMPALA - Today, Umeme will be exiting Uganda’s electricity sector after 20 years of operations. In a four-part series, New Vision has been exploring the impact of Umeme for the two decades it ran the power sector.

In part four, we bring you the findings of Parliament’s committee that audited Umeme after seven years.

On August 24, 2011, the then Speaker of Parliament set up an ad hoc committee to probe the problems that were bedevilling Uganda’s power sector. 

The committee was chaired by current defence minister Jacob Oboth-Oboth. Other members were current gender minister Betty Amongi, Simon Mulongo, Medard Ssegona, Okupa Elijah and Engineer Ajedra Aridru, among others. The committee investigated Umeme and travelled to Kenya and Ghana for benchmarking. 

In 2012, the committee presented its findings about Umeme.

Unfair contract

The committee said during the negotiations, drafting and signing of the Umeme agreement on May 17, 2004, the role of the Attorney General was usurped, and he played a peripheral role.

According to the committee,  the Attorney General (AG), who was constitutionally mandated to offer legal advice, was sidelined and substituted by American firm Hutton and Williams, which was procured by the privatisation unit of the finance ministry under the leadership of David Sebabi.

The American firm, who were hired as transaction advisors, negotiated and drafted the agreement on behalf of Uganda instead of the AG. The American firm also discussed what the AG’s opinion would be in the agreement.

The negotiations were also held in Washington DC as opposed to Uganda where the business being negotiated was located. The committee noted that Ugandan team admitted to having lacked the technical expertise to negotiate.

It was also noted that the Umeme that secured the bid is not the Umeme that eventually signed the contract. The firm that won the bid was an unregistered CDC-Eskom consortium.

Strangely, Umeme was incorporated on May 6, 2004, and it signed the contract 11 days later on May 17, 2004, yet negotiations had been on since 2001. At the incorporation of Umeme, there was also no sign that foreign firms CDC, Globeleq and Eskom had granted powers of attorney to the Ugandan lawyers who signed on their behalf.

The committee said it was also strange that the Governmnet strangely provided the investor with the initial $5m capital. In case of early termination before the 13th year, the Government would pay Umeme the amount invested multiplied by 120%.

Umeme’s first General Manager Paul Mare addressing a press conference on the issue of receiving an additional investment of $15 million from its shareholders Globeleq.

In case of termination after the 13th year, it would be multiplied by 106%. In case Umeme terminated the contract, it would pay nothing. The agreement also provided for arbitration in London, in case Umeme disagreed on amounts above $7m.

This raised the question of sovereignty where Uganda’s immunity over its assets abroad is waived.

According to Umeme, the tendering process was not transparent. Tendering started in 2001, and six firms responded: CDC Capital Partners (UK), Eskom Enterprises (South Africa), Union Fenosa International  (Spain), Cynergy Global Power (US), Electricity Supply Board International (Ireland) and Tata Power (India).

Those prequalified were Tata, Union Fenosa and CDC-Eskom. In the end, an unregistered CDC-Eskom were chosen.

Was CEO a double agent?

The committee questioned the role of Umeme’s first CEO, Paul Mare, who had earlier presided over the dismantling of UEB, before later running Umeme as CEO in 2004. 

The committee concluded that Mare was a forerunner of the companies that took over Umeme. It should be noted that before being appointed UEB boss, Mare had worked with Eskom, one of the shareholders of Umeme at the time it took over the power sector in Uganda. He was hired as a billing expert to negotiate for Uganda.

The committee believes he covertly worked for Eskom.

“It was on the biased and doctored information on losses/ dilapidated network provided by Mare as a UEB billing expert that the Government based on to sign the distribution concession to Umeme,” the report read. 

Team that raised costs

The committee noted that a group of people known as ‘prominet persons’ met and arbitrarily increased the threshold of the power losses from 33% to 38%, thereby committing the Government to pay Umeme more money for losses. This team reportedly overruled energy minister Daudi Migereko’s position and changed the clauses. Migereko was away.

The team in question was led by former energy ministry permanent secretary Kabagambe Kaliisa.

Other members were David Sebabi, the manager of the privatisation unity in the finance ministry, Engineer Elias Kiyemba (manager UEDCL then), Mare (Umeme), Sam Zimbe  (Umeme), Buljan (Umeme).  

Jacob Oboth Oboth

The team reportedly met in November and changed clauses in the concession agreement without any legal mandate. The MPs said they pressed Sebabi to produce any legal instrument or terms of reference that mandated them to change the clauses, to no avail.

The ERA boss had also advised that in the worst-case scenario, the losses could be capped at 35%.

Kamanda Bataringya, the minister who acted when Migereko was away, is accused of having colluded with the team of ‘prominent persons.’ The committee concluded that the decision was fraudulent. The MPs recommended Kaliisa and his team be held responsible for this action.

From the time of the amendment to 2010, the Government was paying Umeme $4m for each 1% loss per annum. This, the committee said, gave Umeme to overstate the losses and get paid exorbitant sums of money by the government. The committee further accused ERA of sleeping on the job when this happened.

Negligence in governmnet

The Government was faulted for having relied on Mare’s advice as the UEB billing expert to arrive at wrong decisions. The committee concluded that an independent survey could have mitigated the situation.

Return on investment

The committee noted that Umeme’s 20% annual return on investment that was to be factored into the tariff was very high and that no reasonable person would enter into such a contract. 

Most international financing institutions were charging less than 10% per annum. Umem had borrowed from the International Finance Corporation at 8.5%.

The committee noted that things like office furniture were being counted as part of this investment on which the 20% return was being calculated.

“ No reasonable person would approve office furniture and fittings as part of the core investments in a power distribution system,” the report read.

Finance ministry not competent

The committee said the process of privatising the electricity was mismanaged by the finance ministry, especially its privatisation unit, which was accused of ignoring technical advice from the energy ministry.

The committee noted that ERA, UEDCL, and UETCL were under the control of the finance ministry, yet it lacked technical capacity to oversee them. It, therefore, called for immediate transfer of management of these companies from the finance ministry to energy. It was noted that finance appoints the boards of these agencies. 

The committee called for the disbanding of ERA to create a competent commission to oversee all players in the sector.

The MPs noted that ERA, which was supposed to be an independent regulator, lacked the technical and institutional capacity to monitor the losses for which the government was paying Umeme. Instead of doing independent surveys, ERA was relying on data submitted to it by Umeme.

The committee said Umeme had no commitment to reducing losses since they were earning from them.

Former Permanent secretary Minister of Energy and Mineral Development, Kabagambe Kaliisa, before the State Enterprises and Commission Committee of Parliament, July 3, 2009. Kaliisa was responding to queries on exploration of oil in Uganda.

Threats against MPs

The committee noted that during the investigations, threats were made to the members, and some cases were reported to the Police. The unnamed people who threatened the Police were working for powerful forces in the sector.

Subsidies

Subsidies were introduced in 2005 when the government onboarded expensive thermal power to complement the hydro, whose generation level had drastically reduced. The reason for the subsidy was to keep the tariff affordable amid high generation costs starting in the year 2005.

The subsidies paid by the Governmnet started from sh53b in 2005 to sh633b in 2012. In this seven-year period, the Government paid sh1.99 trillion to power producers and Umeme. To prevent tariff increases due to declared losses by Umeme, the Government paid Umeme sh 8b-sh11b every month. During this entire period, Umeme was paid sh878b. 

The Government would channel the money for subsidies to Uganda Electricity Transmission Company Limited (UETCL). UETCL would then purchase power from generators and sell it to Umeme for distribution. Umeme would then later claim for refunds due to unverified distribution losses.

In 2005, Umeme received sh25b for losses, but in 2011, it had increased to sh430b. In 2012, the Government discontinued the subsidies because they were not sustainable.

This led to a rise in tariff by 36% for domestic consumers, while for industrial users, it was 69%. The subsidies had helped to keep the tariff at sh385.6 per unit for domestic users instead of sh845.8, which would have been paid without them. Through subsidies, therefore, the Government was paying 55% of the tariffs for Ugandans.

Monopoly

The contract agreement of May 17, 2007, created Umeme monopoly, locking out other players who could have given it competition. The nature of the agreement almost made it impossible for Umeme to get a competitor. It was noted that competition would have compelled Umeme to make improvements in the sector.

Tariffs

The committee noted that despite the promise to lower tariffs in the beginning, they had instead risen to become the highest in Africa and the second highest in the world. It was noted that between 2005  and 2011, power tariffs for domestic consumers had risen by 133%.

For medium industries, it had risen by 129% and 132%.  For large-scale users. The tariff was being calculated based on inflation, foreign exchange, distribution losses and other factors.  

Failure to manage losses

The committee blamed Umeme for failure to reduce losses as agreed in the original agreement. As per the original agreement, Umeme was supposed to reduce losses by 0.83% annually for seven years, but this did not happen until a year before review when it ‘miraculously’ dropped to 28%. The committee said these losses could have been doctored for payment.

According to information submitted by ERA, at the time Umeme got the concession in 2004, losses were at 28%, but by 2008, they had increased to 40%. They continued at an average of 35% until 2011.  

In the energy sector, you arrive at the loss after subtracting the energy sold from what is generated. If you generate 100MW and sell 80MW, then the loss is 20%. The losses can be technical and non-technical.

Technical losses are a result of losses in distribution lines and transformers, illegal connections, theft, and inadequate conductor capacity. The non-technical losses are a result of the inefficiencies of the utility manager.

The committee noted that the country was generating about 250MW and 100MW was being lost, with government compensating Umeme about $3.2m for each percentage loss annually.

Even after the losses were reduced to 28% in 2012, Uganda had the highest power loss in Africa. Uganda’s peers such as Kenya, Tanzania, Burundi, Rwanda, Sudan and Egypt had kept losses between 16-20%.

Government investment

The committee noted that whereas the privatisation of the distribution was meant to attract private investment in the network, the Government continued to inject money into the network, sometimes using borrowed funds.

For example, $6m for poles and $11m on modifications in the network. Ideally, Umeme should have refunded this money, but it was somehow exempted.

Later, the government also borrowed sh36b from the African Development Bank to invest in the sector. The team asked the Auditor General to verify Umeme’s earnings on these Government loans.