When Gen. Saleh’s audit uncovered rot in Umeme

DAMMING REPORT 

On Monday, Umeme will be exiting Uganda’s power sector after 20 years. In a four-part series, New Vision explores the electricity firm’s entry into Uganda and the impact it will be leaving. 

Today, we explore the findings of a Gen. Salim Saleh-led inquiry into the operations of Umeme in 2009. The inquiry was prompted by an outcry over the high electricity tariffs announced in 2008.

Five years after Umeme was given the concession to distribute power in Uganda, a committee led by Gen. Salim Saleh carried out an investigation after an outcry over high tariffs. 

In 2008, the Electricity Regulatory Authority (ERA) announced new tariffs, sparking public outrage. According to the announcement, Uganda’s domestic power rates increased from sh426.1 to sh515.4, making them the highest in East Africa. 

Tanzania had sh52 per unit; Rwanda, sh389 and Kenya had sh38.75 per unit for the first 50 units and between sh166.26 and 345 per unit for the rest. 

It was against this background that the committee was formed to find out why tariffs were not reducing despite the promise by Umeme at the time of the concession. 

The committee concluded that the Government had been misled into signing a bad deal that cost both the Government and the consumer huge sums of money. 
On October 5, 2009, Saleh handed over the report to energy minister Hilary Onek and the findings were damning.

Umeme was not well procured 

The first red flag raised by the inquiry was the manner in which Umeme was procured. According to the report, for both Eskom and Umeme, there was no evidence to show that the procurement process was competitive. 

The report indicated that the negotiations were carried out without a framework first being agreed upon by the government side. As a result, the Government did not achieve the best outcome for the country.

Tracking account closed 

Secondly, Umeme’s funds invested in Uganda’s power sector were supposed to be independently monitored by regulatory body ERA and other agencies through an escrow account in the bank. 

It was to help track any new investment and any disbursements from a bank. To ERA’s surprise, the account was closed without any explanation. Despite several requests from the regulator to have this account reopened, Umeme refused. 

The escrow account would have helped to ascertain the investment in the sector. According to the committee, disbursements from this account above $500,000 were to be approved by ERA. 

Because of the absence of this escrow account and the attendant monitoring of disbursements by ERA, there was no way of ascertaining the investments the Government was supposed to base on to compensate Umeme.

Amount invested questioned 

According to the initial deal signed on May 17, 2004, the company was supposed to invest a minimum of $65m in the first five years. In the first 18 months, it was also supposed to have invested a minimum of $5m. 

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

During the first five years, Umeme was also supposed to connect at least 60,000 clients to the national grid. By July 2009, Umeme claimed to have invested $67.4m in the network, surpassing their five-year contractual target. 

This amount could not be verified by the committee due to absence of a proper tracking system. 

According to the committee report, two years after the initial agreement, there were fears that because of low power generation, Umeme would walk out of the sector, resulting in the Government compensating it with colossal sums of money. 

In the initial agreement, the Government was supposed to ensure that enough electricity was generated and supplied to it. Failure to do this would result in Umeme walking away and being compensated about sh4 trillion. 

It should be noted that around 2006-2007, Uganda was generating insufficient power due to a drop in water levels of Lake Victoria. The concession agreement was, therefore, hastily amended and questionable clauses introduced to prevent Umeme’s walkout. 

The clauses, according to the committee, inflated the power losses for which the Government was to compensate Umeme annually. 

However, when it came to the amended 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 financial officer signed on Umeme.

Compensation for losses 

The elephant in the room was the compensation for the losses in the network vis-a-vis the power received from the generator. The committee found out that the original power losses at the time of the concession were 19%-28%, for which the Government was to compensate Umeme. 

ERA and UEDCL documented them to having been between 27% and 30%. However, loss figures in the amended concession agreement were raised and fixed at 38%. 

The energy ministry said each 1% loss was computed at $3.2m annually, but ERA told the committee that each 1% loss is equivalent to sh10b annually. 

This means the Government was paying over sh100b annually. The government rebates or compensation for the losses were being made to Umeme through the Uganda Electricity Transmission Company Limited and ERA. 

The committee concluded that the 38% loss in the agreement was inflated and misled policymakers in Government when budgeting for rebates/compensation, subsidies and marking up the tariff. 

Prior to the revising of the losses to 38%, the energy minister, in a separate letter dated November 17, 2006 to his finance counterpart, questioned the rates and asked to have it reduced. 

A week later, all these positions were overruled by a group of what the then finance ministry privatisation unit boss, David Sebabi, referred to as prominent persons. 

This led to the exacerbating of the contracted loss figure, which the Government used to compensate Umeme. From January 2005 to September 2009, the Government had paid over sh370b for losses yet Umeme claimed to have invested $64.7m. 

According to the committee, the Concession Support Agreement signed between the finance ministry and Umeme required the company to provide ERA with an acceptable loss reduction action plan within 60 days from November 2006. 

The objective was to ensure that the losses leading to the rebates were properly regulated. The committee did not see any evidence of any approval of such a plan despite several documented requests by ERA. 

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

By July 2009, Umeme said it invested $67.4m in the national grid.

Distribution 

The committee noted from submissions of ERA and UEDCL that the amount invested by Umeme at the time of the amendment was $4.9m instead of $10m. 

At the time of the writing of the report (2009), no verification of the extra $5.1m having been invested at that time had been submitted. 

The committee sought to ascertain the identity of officials responsible for the misreporting of investment levels which led the Government into succumbing to the threats by Umeme to abandon the concession in 2006 and thereby committing to pay 99% of all commercial losses incurred.

Loan for items 

The committee noted that under the Uganda Electricity Board, the Government borrowed $11m from the International Development Association (IDA) and lent it to UEDCL to procure materials to be installed by Umeme. Umeme inherited the loan in the form of equipment and materials purchased for the sole purpose of reducing losses and, hence, buying down the tariff. 

The committee, however, noted that the materials procured under this loan had not been fully accounted for as per Umeme’s submission. 

Questionable sales to consumers 

The committee noted that some of the IDA loan-financed materials were used by Umeme in commercial schemes that were directly financed by Ugandan electricity consumers. 

Umeme, in its submission, indicated a figure of $5.9m as coming out of the original $1m value of the materials in question. 

The committee observed that lease fees for all UEDCL materials, including IDA-financed equipment, are embedded in the tariff paid by the customer. 

Customers were paying for transformers and other power connection materials in these commercial schemes which were already bought by the Government. 

It was noted that lease fees and return on investments in the tariff are what pay for these materials. 

The committee recommended that consumers should not be made to pay twice for these materials firstly on acquisition of the equipment and again through the tariff in these consumer schemes.

Consumer meters 

The committee established that several meters procured by Umeme in 2009 were rejected by the testing engineers within Umeme itself. 

The meters were reported to be calibrated to trip at higher speeds than the industrial benchmarks, hence measuring more energy consumed than what was actually used. 

It questioned the impact of this on the tariff charge to the consumer and the number of these meters that were imported and distributed in the system despite having been rejected as faulty by the Umeme engineers.