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Author: Peter Twesigye, Research Lead: Power Market Reforms and Regulation, University of Cape Town
Original article: https://theconversation.com/ugandas-electricity-distribution-is-changing-hands-whats-at-stake-253412
Uganda’s electricity sector is at a turning point, as Umeme Limited’s 20-year concession draws to a close. Umeme was the first private distribution operator in anglophone Africa. For nearly two decades, the listed company was the dominant distributor of electricity to the country’s 2.3 million clients. However, Uganda decided in 2022 not to renew the licence on expiry, citing high power tariffs and low electricity access rates.
Umeme’s departure and the transfer of distribution assets back to the state-owned Uganda Electricity Distribution Company (UEDCL) has sparked controversy. It centres on a US$235 million compensation claim by Umeme. The final settlement could shape power tariffs, the sector’s financial sustainability and investment needs in the country. Peter Twesigye, who researches power market reform, regulation and utility performance in Africa, examines the big questions.
The numbers behind the controversy
The flashpoint is the amount the government must pay Umeme to bring the business back under state control. Umeme has demanded US$235.96 million. It says this amount represents its undepreciated and unrecovered investments: costs it hasn’t got back through electricity tariffs or transfers from government.
The auditor general, representing the government, initially pegged unrecovered investments at US$190.99 million and gave parliament the green light to seek loans to repay Umeme. This was however revised down to US$118 million, which the government has paid. The outstanding gap is more than US$117 million, a 50% difference, which is very large.
Umeme has, for now, accepted the US$118 million, but has disputed this as the final settlement. It will claim more money and potentially also penalties arising from the government’s failure to pay in full by 31 March 2025. Umeme’s board has a fiduciary duty not to lose shareholders’ capital.
The buyout amount is more than just a settlement. It will serve as the initial asset base for Uganda Electricity Distribution Company Ltd, which will allow it to provide a service in the future. It will influence the setting of electricity tariffs and the company’s ability to secure funding for investments to ensure service continuity. This benefit is often misunderstood.
What’s at stake
At the heart of this debate lies a complex interplay of legal, financial, economic and national risk exposure.
It will have far-reaching implications for affordability and industrial competitiveness in Uganda, particularly for energy-intensive sectors. A higher asset base reflects greater invested capital, enabling revenue sufficiency to cover the cost of capital, operating expenses and depreciation. This financial strength allows the utility or sector to maintain service delivery, improve electricity reliability and quality, and expand the network to meet demand without relying on subsidies.
A lower asset base on the other hand reflects under-investment. This could create the risk of poor service delivery and limit the company’s ability to expand or modernise infrastructure. Most importantly it could deter private investors in the sector due to the limited revenue recovery opportunities. The sub-sectors affected could include electricity generation, transmission or distribution.
Uganda’s prior success in attracting investments in generation was partly due to the presence of Umeme. The utility provided robust governance, commercial and revenue collection guarantees. With its exit, Uganda will find it more challenging to draw in private capital under public governance arrangements.
For now, the government has adopted the auditor general’s lower valuation of US$118 million. Based on my tariff model analysis, this will give rise to a long-term equilibrium distribution tariff – reflecting cost and state subsidies – of 9.2 cents cents per kilowatt-hour (kWh). That is 7.94% lower than Umeme’s 10 cents per kWh.
It may appear to be a small reduction in tariff in the short term. But it may prove unsustainable in the long term as there are significant infrastructure investment needs. To meet them, the company will need continued direct state subsidies, which Umeme did not get.
It remains to be seen whether the government can keep providing subsidies.
Read more:
Why merging Uganda’s electricity sector agencies is a bad idea
Beyond tariffs, how Uganda handles this transition matters. It could send a signal to international investors about its reliability as an investment destination. A harmonious resolution would reassure current and prospective investors.
A contentious fallout, such as arbitration or judicial proceedings, could heighten perceptions of risk to foreign investors. It could also push up the cost of capital to 15.82%, or 582 basis points higher than the base estimate of 10%. This would stem from perceived fears of expropriation of investments by the government.
Any default on Uganda’s part could trigger punitive financial penalties immediately. These are contractual commitments and obligations, so it’s up to courts of arbitration to decide. If the government fails to pay (in full) within 30 days of 31 March, penalties and interest rates on overdue amounts will escalate from 10% to as high as 20%, depending on the delay period.
Failure to honour these commitments could also lead to lawsuits in international courts or debt collection efforts by ruthless venture capital firms. These scenarios would impose even greater costs on Uganda’s economy and global reputation.
Penalties could add to Uganda’s financial obligations and strain public resources further.
Limited options for Uganda
The avoidable financial and legal penalties would be costly for consumers and the national treasury. Another potential impact to watch is the country’s overall investment risk profile. This could influence the future cost of capital (interest rates) and premiums that investors would charge.
It is imperative not to raise the cost of capital for Uganda, which still lacks adequate electricity infrastructure. If the dispute over the buyout price results in investors wanting a higher return for their risk, the impact on tariffs would be even worse than paying the price Umeme wants.
What Uganda should do
By addressing these challenges decisively and transparently, Uganda can turn this transition into an opportunity. It can strengthen its energy sector and set a precedent for effective management of public-private partnerships. The government should explore these recommendations:
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establish a negotiation team of legal, financial, regulatory and energy experts to reconcile valuation differences transparently and negotiate amicably with Umeme
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secure financing proactively to avoid penalty interest and ensure timely payment
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keep stakeholders informed, to maintain public trust and investor confidence
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equip Uganda Electricity Distribution Company to take over and prevent service disruptions
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build strong governance systems within the utility
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work in partnership with the private sector.
The choices made now will be felt for years to come.
Peter Twesigye does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
