The Government of Uganda will renew Umeme Limited’s electricity distribution concession, Hon Matia Kasaija the Finance, Planning and economic Development minister, has confirmed, ending months of uncertainty and speculation.
“With respect to power distribution, the distribution concession with Umeme Limited will be renegotiated and extended to ensure further investment, and also lower electricity tariffs,” Kasaija told MPs and the whole country at the reading of the 2019/20 budget speech yesterday, June 13th 2019, at Kampala Serena Hotel.
He said the decision is to enable Umeme promptly undertake the necessary investments needed to facilitate government’s ambitious targets to connect 300,000 customers annually to the grid, with a goal of attaining access to electricity by 30% of the population by end of 2020 and 60% by 2026.
Government, under a reinvigorated industrialization policy also plans to build fully planned and serviced Industrial Parks in 22 locations across the country that will host both medium and large scale industries. In the 2019/20 budget, Kasaija has provided UGX428.68 billion- out of which UGX147 billion will go towards extending electricity to the parks, UGX103 billion towards, the development of supportive export infrastructure in export processing zones and industrial parks while UGX178 billion will go towards supporting science technology and innovation.
Government is banking on the recently launched 183 MW Isimba Dam and the expected commissioning of the 600 MW Karuma Dam sometime this year – altogether raising Uganda’s generation capacity to 1,767 MW by end of 2019, to feed this mega-industrialisation push.
Umeme investors welcome Kasaija’s decision
Richard Byarugaba, the NSSF Managing Director, welcomed the pronouncement by government as “Great news!”
“The largest workers investment in the Uganda stock exchange is now secured,” he said.
NSSF is the largest shareholder in Umeme with a 23% stock in the power distributor.
The bourse is yet to react to the announcement by government, but it is expected that institutional investors who have been on the edge, will rush in to absorb more Umeme shares.
Currently, according to a May 30th, 2019 report by investment bankers Crested Capital, Umeme is the hottest stock on the bourse with a dividend yield of about 13.63%.
Umeme’s total dividend for 2018 is UGX40.90 per share,
Umeme to invest up to USD1.5 billion over 10 years
The announcement comes as relief to Umeme who have been looking to the decision so as to start arranging financing for numerous investments needed for the sector, both to cover the remaining 6 years of the current concession and beyond.
In a recent interview with CEO East Africa, Patrick Bitature the UMeme board chairman, said Umeme will need to invest between USD1 billion and USD1.5 billion over the next five to ten years, so as to create a robust enough distribution network to last the country for over 20 years.
Bitature said that over the next 6 years, Umeme estimates to invest up to USD450 million in capital expenditures (CAPEX) alone.
“From our estimates, achieving the above targets, shall require significant investments focusing on uptake of new capacity, increased access, and driving efficiencies in the business operations. The resulting large geographical footprint shall require opening more service centres, building more substations, extending lines, injecting more transformers and recruiting more people on the ground,” Bitature said.
Bitature argued that investing for the long term allows the power distributor to amortise the costs over a longer period, thus resulting in a downward pressure on the end-user tariff.
“We are looking for longer term funding of 15 to 17 years and then we can spread that cost- amortize it over time. That shall have a lowering impact on the tariff,” he said.
According to recent estimates by Ministry of Energy and Mineral Development, when Isimba and Karuma HPP are commissioned and fully absorbed/utilized, it is expected that the weighted generation tariff will reduce from the current US Cents 6.47/kWh (UGX243.43) to US cents 5.34/kWh (UGX200.93), representing a reduction of 17.45%, which shall be reflected in the end-user tariffs.
Bitature also said that Umeme was willing to reconsider their rate of return- currently at 20% since the investment environment had greatly improved, since 2005 when the concession was signed.
“Today the perceived high risk of the country is much lower than then, so it is easier to attract capital. The policies of this country have been very stable, the movement of foreign exchange, the amount of inflation etc. the risks in many of the areas have been mitigated.
If the high rate of return is the pain in the thigh of the government and the public, we are willing to consider a few points on our rate of return, as long as it makes business sense- for our customers and shareholders,” he told CEO East Africa Magazine.
Over the last 13 years, Umeme has invested $627m (UGX2.4 trillion) into doubling the distribution network to over 34,000km from the 16,000km it inherited and grown customer connections by more than 4 times- from the 290,000 inherited to 1,291,811 by end of 2018.