Issue 719 - Page 9

By Andrew M . Mwenda
The Last Word

Museveni ’ s Umeme mistake opiNioN

Why the refusal to renew their concession is not a big loss to Ugandan workers and investors and a boom to foreigners

For some strange reason ( s ), President Yoweri Museveni has a very hostile attitude towards Umeme , Uganda ’ s main electricity distributor . Sources say the president has sworn never to renew their concession when it expires in 2025 . This is in spite of the fact that during negotiations between him and Umeme , both sides agreed to solve the most contentious issue in the concession – the Rate of Return ( ROR ) to the investor . In the current concession , Umeme ’ s ROR is 20 %. In the meeting with Museveni , I am reliably informed , Umeme agreed to cut it down to 10 %. There is a rumour that a Chinese or Turkish investor has promised to take over the concession at a ROR of 7 %. I find it difficult to believe the genuineness of this investor , if this claim is true . This is because Uganda government is selling its long-term bond ( 10 years ) at 15 % rate of interest . Even though the Umeme ROR is in U . S . dollars , even at 15 % interest in Uganda shillings ( if one calculates the long-term depreciation of our currency ) such a ROR would be better than a $ 7 % in U . S . dollars . Therefore , the president is either misinformed or has other reasons . However , his stance on Umeme has created great uncertainty . Umeme is a publicly listed company on Uganda ’ s fledging stock exchange . When it launched its Initial Public Offering ( IPO ), the price per share was Shs240 . At its height , the share of Umeme reached Shs560 . When the president began his threats to Umeme , investors got scared . Since then , the price per share of Umeme has fallen to Shs250 . This represents a drop of more than 50 %. Rarely has a well performing company financially without internal management or business crisis witnessed such a sharp drop in its shareprice . The point is that Umeme is owned 23 % by Ugandan workers through the National Social Security Fund ( NSSF ). Ordinary Ugandan investors own another 13 % – making 36 % of the shares in Umeme nationally owned . East Africans combined own 56 % of the shares of Umeme . In a country where multinational capital owns all the commanding heights of the economy – finance , telecommunications etc ., it is a source of pride that Umeme is the only large company in Uganda with a strong national ownership . Hence the fall in the share price of Umeme as a result of the President ’ s reckless statements is a huge loss to Ugandan workers and investors . NSSF alone ( read Ugandan workers ) has lost a huge percentage in its share value . Local ownership also means that even when the investor is guaranteed a high rate of return , the beneficiaries are citizens who consume and / or invest their proceeds back in the country . If government pays its own citizens , especially a multitude of workers , high sums of money , the country loses nothing . It is like a husband hiring his wife in the family business . However high the wage she is paid comes back to the family ’ s coffers . It is , therefore , intriguing that Museveni is hostile to a company a significant share of whose stock is held by Ugandans while silent on all other companies who are 100 % owned by foreigners and whose rate or return is more than 20 %. Some of these companies have made huge profits and shipped them abroad , yet it is difficult to find any substantial value they have brought into the country that without them the difference would have substantial . In the mid-2000s MTN had a rate of return above 50 %. Museveni ’ s fixation on Umeme is mostly misguided even though he had a strong point on the ROR at 20 % for donkey ’ s years . Uganda ’ s negotiators should have de-risked the investment after the first five years and even de-risked it more after the IPO and the Second Public Offering ( SPO ). Of course , it could also be the case that an attractive ROR is the one that made Umeme ’ s IPO and later its SPO attractive to investors . This , one may argue , brought huge sums of money into the company as equity to invest in expanding and improving the network that has many technical problems . Museveni ’ s main complaint against Umeme is that the company ’ s ROR has made the electricity tariff very expensive . This can only be partly true because Umeme ’ s contribution to the tariff ranges between 27-33 %. The biggest contributor to the tariff is generation which represents 70 % of the tariff , with transmission taking only 5 %. If Uganda needs to reduce the tariff , it should focus on when it is giving concessions to generate electricity . But given the high cost of building dams , the electricity tariff in Uganda is a matter of the ideology driving energy policy . In 2015 , the World Bank published a study of electricity dynamics in 39 African countries . Only Uganda ’ s electricity tariff covered both capital and operational expenses and made a profit . Second to Uganda was Seychelles , which brokeeven : the tariff paid for both the capital and operational expenses and left no profit . In the rest of the continent , countries could not recover the cost of capital and operational expenses through the tariff . So , they all depended on government to subsidise electricity . At the time , I celebrated Uganda ’ s position because I don ’ t like subsidies . But on deeper reflection , I have had to change my mind , recognising that my free-market beliefs do not fit Uganda ’ s case , especially our ambitions to industrialise and to reduce reliance on fire-wood . Uganda ’ s energy policy is based on the ideology of the free market – the belief that electricity is like any other good sold in the market ; so , the price charged should therefore reflect the cost of capital investment and operating expenses and then make a profit for the investor . An alternative vision would say that electricity is a public good like a road or security and serves other public purposes . For instance , we need an affordable tariff to stimulate industrialisation ( making manufactured goods competitive in international markets ) and to protect the environment ( since reliance on firewood for cooking is accelerating deforestation ). Under this second vision , government can set the tariff below the cost of producing , transmitting and distributing electricity and use a subsidy to pay the balance . This is what is happening in most of Africa . Uganda does not need to subsidise domestic consumption of electricity . This is because the poorest Ugandans have already shifted to solar for lighting . The country needs to think of affordable alternative sources of energy for cooking away from charcoal and fire wood . Our country needs a very low tariff for manufacturers .

amwenda @ ugindependent . co . ug
May . 20 -26 2022 7