How Museveni can help Umeme and its investors out of the Actis trap

March 27, 2018 in Business, Companies, Editorial, Investment, Markets, Opinion by Editor

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When Uganda power distributor Umeme first went public in June 2012, the decision came against a backdrop of discontent with power tariffs and claimed investment in the power distribution network.

The risks around Umeme came to life again with the revelation this week of a memo from President Museveni to energy minister Irene Muloni in which he orders that the power distribution concession should not be renewed when the current contract ends in about 12 years’ time.

The memo is actually premised on the findings of the Saleh report on the power sector that raised pretty much the same issues.

While Museveni echoes the feelings of many Ugandans on power tariffs, what he and the general public may not realise is that the current Umeme is substantively different from the company that signed the concession in 2005. The key and only villain, the investment firm Actis has long bolted from the barn, leaving innocent investors carrying the burden of its sins.

After initially reducing its stake in Umeme from 60 to 15pc in 2014, Actis made a clean break when it sold the remaining shares to a couple of fund managers. That leaves NSSF as the single largest shareholder in the company followed by ordinary investors who hold another 40pc.

Terminating the concession would therefore be punishing the thousands of hardworking individuals who placed their faith in a scheme that was being manipulated by ruthless international confidence tricksters.

Actis managed to pull-off a lopsided agreement that for long allowed it to collect money from the treasury by making losses. That essentially took away any incentive for it to improve the distribution network until parliament passed a resolution calling for the termination of its concession.

Umeme’s losses were profitable for it because under the agreement, treasury was obliged to reimburse them for technical and commercial losses that were largely speculative since there was no definite formula for accurately assessing their extent.

As the heat rose on the company, principal shareholder Actis, with the help of local collaborators, succeeded in convincing the government to allow the company to list shares on regional stock exchanges.

That move, effectively booby-trapped Uganda and many investors into placing their fortunes with a company that was selling what Ugandans typically describe as ‘air’. For one, Umeme had no tangible assets beyond the 20-year agreement allowing it to manage and expand the distribution network. At the time of listing, that agreement had only thirteen years of life left. At the end of that period, the field would be open and the highest bidder would walk away with the prize.

Acutely aware of this fact, Actis cleverly transferred the risk to unsuspecting investors and capital markets that were hungry for a listing across the region. Just two years later, in May 2014, Actis would offload 45.1% of its 60.08% stake in Umeme for a handsome $85.5 million.

That left Uganda’s NSSF holding 23.17% of the stock and ordinary shareholders with 41.93%, carrying sixty-five percent of the risk were Umeme to fail for any reason. Actis made a clean break way back in 2016 and is no longer around to suffer the consequences of its actions.

Museveni and his cabinet must now carefully way their options taking into account the interests of Actis’ victims. The current shareholders in Umeme must also look for pragmatic concessions that will make a restructured and more durable concession attractive to their detractors.

Over the years, Umeme has further gotten embedded in Uganda’s power sector with off-take agreements for Isimba and Karuma hydropower stations that will come online later this year. These agreements, were a precondition for securing 85% of development cost from the China Eximbank. Coupled with Umeme’s own borrowing, terminating their concession is a delicate affair.

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