REPORT SHOWS HOW GOVT LOST SHS 452 BILLION IN UMEME DEAL
Tuesday, 20 October 2009 20:37 By Andrew M. Mwenda
Who is to blame?
When General Salim Saleh presented the report of his investigations into the high cost of electricity in Uganda to Energy Minister Hillary Onek on October 5, the focus was on the numbers.
Minister Hilary Onek
"We have identified areas of cost reduction that should lead to a reduction in the tariff by Shs188 from Shs426 per unit. This implies a substantial reduction of 44%," Saleh, who chaired the Interim Review of Electricity Tariff Committee of six, told the minister and board members in the boardroom of the Electricity Regulatory Authority (ERA) in Kampala.
The Independent has since obtained the highly guarded report and noted that whereas it accuses Umeme of defrauding government of Uganda to the tune of Shs 452 billion over the last four years by over-declaring losses, it misses or glosses over other major considerations.
According to the report, when Umeme took over the concession from Uganda Electricity Distribution Company Limited (UEDCL), total electricity losses were at 28% while Uganda Electricity Regulatory Authority (ERA) put them at 30%.
The committee shows that the government's lack of capacity to negotiate led it to contract to compensate Umeme for technical and commercial losses which Umeme inflated to 40%, thus getting rebates (refunds on losses) on 10 to 12 percent. The committee said that Umeme did this in collusion with ministry of energy and finance officials.
The report argues that given that one percent in losses is worth Shs 10 billion per year, and given that government contracted to refund 99% of the losses, using the base line losses reported by UEDCL (who are the supervising entity of Umeme) at 28% losses during unbundling, 10 percentage points (38-28) equals Shs 100 billion annually lost in rebates.
However, according to the agreement between government and Umeme, at the time of the concession, total losses (both commercial and technical) were estimated at 33%. This figure was arrived at after a study on UEDCL by an independent consultant hired by government of Uganda. This was the figure put into the concession agreement and used to calculate the tariff. Indeed, the concession agreement had a loss reduction schedule agreed to by the parties which said that the losses should fall continuously to 28% by 2012.
Industry experts, however, told The Independent that when Umeme inherited the UEDCL billing system, it realised that the losses, especially commercial ones were much higher than anticipated in the concession. It complained to ERA. ERA then hired a Norwegian consultant, NORCONSULT who found that the losses were actually 40%. It recommended that Umeme changes the entire billing system. When Umeme found that there were 70,000 accounts that were billing zero meaning that there were 70,000 clients who were consuming but not paying for electricity, it was decided that both parties revise the figure which was adjusted to 38%.
Another area of contention between government and Umeme is over the amount of investment the private concessionaire has so far made. According to the concession, Umeme was supposed to invest US$ 65m over five years. The report says that Umeme claims it has so far invested US$ 67m, more than promised and ahead of schedule. But the report also says some values of investments are yet to be accepted by ERA. The committee observed some inconsistencies in the data which was first submitted to it. Umeme subsequently reconciled it, the report notes.
The report takes issue with Paul Mare's role as a Trojan Horse in the whole matter. It argues that he was brought in as MD of UEB (1999-2001). When the privatisation and unbundling of UEB was being undertaken, he was its head. After unbundling UEB into five successor companies (Generation, Transition, Distribution, UEB Asset Management, and ERA), he became MD of the generation company “ UEGCL (2001) and the distribution arm, UEDCL (2002-2004) before finally becoming MD of Umeme (2004 -2009). Over this period, the report notes, Mare was actually working for Eskom.
It notes further that over the same period, at least 13 senior management/technical staff of former UEB were laid off, leading to loss of vital historical company data.
As a result, the report notes, the information on system losses submitted by Mr Mare did not reflect the actual status and it debased the values of the successor companies.
Indeed, government sources The Independent spoke to claim that Umeme made huge profits but declared losses. However, the report fails to provide any evidence of this claim promising that the truths will come out when the forensic audit of the computers that were confiscated comes out.
Can this be possible? Umeme has since 2006 been 100% owned by Globeleq which is a subsidiary of ACTIS, the private investment arm of the British government's Commonwealth Development Corporation (CDC). The primary aim of CDC is not profit maximisation but promoting development in poor countries, ACTIS to support private sector investment. Analysts wonder why a development arm of the British government would cook books: To benefit who?
Industry experts told The Independent that when Umeme took over from UEDCL, it found that the company had always presented qualified accounts (meaning the auditors could not ascertain the accounts to be true and accurate). Today Umeme presents real audited accounts by Ernest and Young. It would require collusion with the auditors for Umeme to cook its books.
Umeme is also getting a loan from the International Finance Corporation (IFC) of the World Bank to invest in the network. This would, hopefully, not be possible if Umeme's books were not in order.
UEDCL has also hired a consultant, NEK-CONSULT, to establish how much money Umeme has actually invested in the network.
Despite all this, the million dollar question is: why is a section of government and Umeme in a fight?
The committee report says that government had weak capacity when it negotiated with Globeleq for the concession. However, Uganda's negotiating team was helped by the World Bank, an institution with some of the world's best negotiators on energy sector agreements in poor countries.
Indeed, all the negotiations and re-negotiations of the deal were conducted in Washington DC because of the World Bank's involvement. Indeed, according to the concession, if technical and commercial losses reached 40%, the agreement would be automatically revoked by government of Uganda. Since the committee claims that the combined technical and commercial losses of Umeme are 40%, in effect they are suggesting the agreement is supposed to be automatically terminated.
It is possible that part of the problem of the energy sector in Uganda is how the privatisation was carried out.
Previously, the sector had only one actor, Uganda Electricity Board (UEB). When it was unbundled, seven new actors came into play: UEDCL, ERA, ESKOM, UEB Asset Management Company, Uganda Electricity Generation Company, Uganda Electricity Transmission Company and Umeme. Each of these companies has a board of directors, staff, vehicles, allowances and other expenses. It is possible that footing the bill of such a large group of beneficiaries is partly responsible for the high costs in the energy sector leading to a high tariff.
See full committee summary starting below.
Summary of tariff reduction report before main report was compiled
The background elucidates the problems identified in the Uganda
Electricity Board, the process of unbundling into the three successor companies namely UEGCL, UETCL and UEDCL.
It compliments this with the following:
The report shows that despite the reforms;
a. The losses for which Government of Uganda rebates UMEME have increased from 27% to 40% during the period of the reforms since 2002.
b. The tariffs have increased since the unbundling to unsustainable levels.
c. The rebates have reached unsustainable levels having attained a peak of UGX 11 billion per month.
2. Genesis of how the reform process was hijacked and used to defraud government of Uganda.
The report shows the particular causes of the failure of the reforms namely:
The external control of the reform process
A Trojan horse in the names of Paul Mare who became UEB boss in 1999, sacked most top management and skewed figures to persuade government of Uganda of the need for unbundling. Subsequently the report then delves into the following:
i) How he undertook the unbundling of UEB into successor companies of generation and distribution in 2001.
ii) How he went on to become the first Managing Director of UEGCL and subsequently concessioned its activities to Eskom.
ii) How he then went on to UEDCL as Managing Director and then concessioned it to Eskom and Globaleq in what came to be known as UMEME.
iv. How the Government of Uganda undertook the concessioning process based on sector information that was definitely suspect since Mr Mare was crucial in determining what this information contained and was at the time and still is to-date an employee of Eskom.
v. That rebates to UMEME were actually composed of a commitment made by GoU to refund 99% of all losses reportedby UMEME.
vi. That each 1% loss equates to 10 billion shillings per annum.
vii. How information of system losses based on submissions to the committee range from 22% to 40% at the time of concessioning thus showing that about 18 percentage points in reported losses are highly suspect.
viii. The report shows that this fraudulent representation of losses has cost GoU Shillings 374 billion since January 2005 to September 2009.
ix. It further shows that given the quarterly projections the rebates shall reach a total of Shillings 452 billion.
Limited manpower in negotiation teams
The report shows how inexperienced Ugandan civil servants especially those co-opted from non line ministries like Ministry of Finance exacerbated the problem of lopsided concession agreements.
The report delves into the interference from Ministry of Finance and Ministry of Energy in influencing the regulator into licensing and implementing wrongly derived decisions.
The functions of the Energy ministry and the regulatory authority were usurped by the Finance ministry and the Privatisation Unit with due reference to legislation and negotiation of concession contracts.
All subsequent contracts were supervised outside the aegis of the Ministry of Energy.
The above points caused the following disturbing occurrences:
1.Billing losses were skewed by UMEME to enhance the losses reported to ERA. This was done principally by reporting billing data to ERA which data was deferred to cross over to the next quarter benchmarks.
In effect 40% of read meters were shown as NOT billed to ERA. The formula for calculating losses attracting rebate is (Energy bought minus Energy Billed).
Based on evidence acquired by the committee out of 301,000 meters in the entire country, only 260,000 meters were read at least once each quarter. Out of these ONLY 157,000 meters were reported to have been billed leaving out of reports to ERA 103,000-111,000 meters which is 40% of all read meters each quarter.
Given that the level of intrusion to audit billing records was curtailed by the concession amendments this information was impossible to come by until the forensic raids were undertaken this year on UMEME.
Umeme MD Charles Chapman
2. The losses presented by the sector over the years are shrouded in contradicting loss figures. Each of the key players namely UEDCL, ERA and UMEME gave the original loss figure for distribution at 28%,30% and 40% respectively.
a. Each 1 percentile in losses equals 10 billion shillings per annum
b. That GoU contracted to refund these losses up 99%.
c. The Minister of energy capped these losses at 30% but was overruled by the P.S Energy, the Privatisation Unit and UMEME meeting a week later when this group of prominent persons (as referred to by Mr David Sebabi in his presentation to the committee) who raised accepted loss figures to 38%.
If we use the base line losses reported by UEDCL (who are the supervising entity of UMEME) at 28% losses during unbundling, 10 percentage points (38-28) equals 100 billion shillings annually lost in rebates.
3. The UMEME investment claims
UMEME gets a return on investment of 20% in the tariff. They so far claim to have invested 67 million dollars. The checking mechanism to audit and track the UMEME investments was the company escrow account which was scuttled by UMEME in collusion with GoU officials. This account was supposed to be monitored by ERA.
Only USD 5 million ever passed through this account at the beginning of the concession in 2004. As a result of the removal of the escrow account the following happened:
a. GoU was misled to believe that at 2006 December UMEME had invested $10 million yet it had only invested $4.9 million. GoU was pressured to sign unfair terms in the concession amendment later that year that diluted the regulatory powers of ERA to monitor UMEME.
b. The IDA loan of $11 million that was borrowed by GoU in 2001/2002 and on lent to UEDCL to procure loss reduction equipment was abused. These materials were handed over to UMEME. Despite this the losses increased to 40% and the tariff was increased. As initially UMEME claimed a 20% return on investment in the tariff on the IDA 11million funds. They recently rectified it to lease payments but no proof exists of UMEME refunding the monies they misrepresented as their own and earned return on these funds in the tariff.
c. Customers were made to pay directly for equipments like transformers yet the payments were already in the tariff.
d. That the $67 million claimed by UMEME may be as low as27 million only and yet the tariff allows for 67 million returns on investment.
4. Consumer meters
The evidence adduced is that meters were imported in the country,tested and rejected by UMEME engineers many times and that UMEME went ahead and installed these meters to unsuspecting customers.
5. Infrastructure maintenance
UMEME neglected the maintenance of the distribution overhead power lines in all regions in Uganda where they operate in addition to scaling down maintenance crews on the distribution lines. Because faults were not immediately attended to technical losses rose.
6. Fuel consumption rates
These were not reflective of the manufactures benchmarks and were arbitrarily raised in the case of Aggreko from 0.26 litres per kilowatt hour to 0.277 litres per kilowatt hour despite the written objection by the board of ERA. In the case of Mutundwe this has led to an increase of 620,500 litres per month equal to $452,344 per month. In a year this will be $5,428,128 (10.8 billion shillings) lost to fraudulently accepted fuel consumption rates.
7. Fuel logistics costs (FLOC)
These are the transport costs of fuel to the thermal generation sites.
These have been treated fraudulently resulting in instances where the transport costs of plants in Jinja are higher than the plants in Kampala despite the former being nearer to the coast than the latter. This has occurred with both Aggreko Diesel plants and Jacobsen HFO plant. The differences between actual and quoted transport costs.
8. The fraudulent procurement of CST 380 HFO oil
Jacobsen is using CST 380 oil but payment for this oil is based on CST 180 HFO oil which is $30 per tonne more expensive.
In this instance GoU is losing $240,000 per month on this plant which should consume 8,000 tonnes every month of HFO at 24 hour production.
9. The report alludes to the fact that given the extent of repairs, importation of spares and the lack of a manufacturer's warranty for this plant, GoU through the energy ministry purchased second hand machines at the price of a brand new machine.
10. The report also states that the fuel consumption difference warranted by the manufacturer of the Jacobsen plant and entered into the power purchase agreement was a much lower 0.216 litres per kilowatt hour than the currently used rate of 0.2798 litres. Thus GoU is currently paying for an excess 2,317,000 million litres losing 3.2 billion shillings per month.
11.The Duration of HFO licences and PPA's
It is noted that these plants are heavy industry developments and all submissions to the committee state that in order to further reduce the tariff longer periods should be accorded to them. Almost half of a US cent is shelved from the bulk supply tariff with every additional year allocated to HFO plants. All advice by the Minister of Energy and Mineral
Development and the electricity regulatory authority on this issue was ignored by the Ministry of Finance and UETCL over the years.
Specific measures to reduce the tariff
Interim tariff reduction has been set at 188 shillings per unit to the end domestic consumer. This will be achieved by undertaking the following:
a. Addressing the billing system by showing the real losses at billing.
Note: This is not immediate as UMEME might dispute until the forensic audit confirms this. GoU should consider reclaiming these funds and prosecution of individuals responsible.
b. Collection losses
Removal of this allowance for collection losses as it is misplaced. Collection is a function of the efficiency of UMEME as it is an indicator of debt collection. Since 1% loss equals 10 billion in the tariff annually, at current losses its removal lowers tariff by 11.06 shillings.
c. Return On Investments component.
Unverified investments are earning profit in the tariff. The real level of investments is around $27 million including the 11 million GoU loan. Using the real level to determine the tariff component of return on investment will lower tariff by 14.89 shillings.
d. Working capital allowances in the tariff.
It is proven that UMEME collects payments within 45 days from customers but contracted with UETCL that it requires 92 days. For this it demands a working capital component in the tariff of 92.4 billion shillings every quarter. Reducing this lag time to 45 days will reduce 17.7 shillings in the tariff.
Further more the working capital rate used is 20%. This should be reduced to the market borrowing rate of the dollar which is 10%. This will reduce a further 7.3 shillings bringing it to a total of 25 shillings reduction.
e. Income Tax Allowance for UMEME embedded in the tariff
UMEME is allowed money on account of income taxes. There is no evidence of any payment of income tax (corporation tax) to URA since 2004 because UMEME always reports losses.
The removal of this allowance in the tariff will reduce a further 7.2 shillings per unit.
f. Adjusting losses reported.
1. UMEME states to the committee that they will now reduce losses to 28% by December 2009.
2. UEDCL says losses were actually 28% in 2004 at handing over UMEME
3. ERA states that losses were 30 % in 2004.
Given the above if UMEME can reduce losses by 10% from 38% to 28% then losses should be put at 20%. However reducing reported losses to 28% will reduce 24 shillings in the tariff.
g. Under the amended agreements UMEME takes 25% of increased revenue from growth in demand. This is equal to 4.2 billion annually.
Removal of this incentive to UMEME will reduce the tariff by 3.5 shillings a unit.
h. Debt servicing by UEDCL, UEGCL and UETCL.
Since GoU pays subsidies the inclusion in the tariff of debt repayments is self defeating.
This waiver will reduce 45 shillings in the tariff.
i. Loan amortisation to UEDCL
These companies are not remitting these monies collected in the tariff to the Consolidated Fund. This means the loan amount stays constant as reported during quarterly tariff setting. Proper amortisation or the removal of this in the tariff will reduce 29 shillings.
j. Reduction of Eskom operation and maintenance costs. These O&M costs are pass-through costs. Audited accounts show Eskom O&M costs to be 8.15 billion and yet they quote 13.57 billion. The difference adds up to 7.5 shillings in the tariff.
k. Benchmarking the Jacobsen fuel consumption rate down to Industrial standard of 0.21 litres per kilowatt hour will reduce 15.4 shillings.
i. Removal of the 5% fuel handling fee will reduce the tariff by 5.6 shillings.