Affordable and abundant availability of power is a pre-requisite for economic development, with the potential to have a multiplier effect on GDP growth.
To drive the affordability agenda, efficiency of the Electricity Supply Industry is one of the pillars which needs attention. For instance, 1% of power losses are equivalent to US$ 3.5m of lost sector revenues. In addition, the power sector investments, require significant capital spending to enable industrial growth and economic competitiveness. Over the years, Umeme has been at the centre of driving electricity connectivity, accessibility and efficiency in Uganda. In the four-part series, we explore the impact of electricity sector reforms of 2000, Umeme’s achievements and the future of the power sector. In this article, we assess Umeme’s performance on efficiencies, investments and general service provision.
Sector inefficiency led to the reforms. At the time of the sector reforms in early 2000, reports indicated that the challenges to Uganda’s electricity sector were inefficiency in the operations manifested by high energy losses (about 40%), low revenue collections (80%) and cost inefficiencies, with the sector depending on government subsidies to survive. The distribution sector was not financially viable, with limited capital expenditure to improve the systems. Few customers were connected to the national grid, with those connected experiencing intermittent electricity supply.
In the wake of the New Millennium (before 2005), the regulatory authorities struggled with establishing a system to enhance revenue collection which was almost below 80% of billed revenues, leading to significant increase in receivables and bad debts. Basically, some consumers were not paying for the electricity services provided to them.
The metering then was not as sophisticated as today and many locals used these loopholes to tap free electricity. Many an intervention were established but they could hardly push the levels of collection above average. The ratio continued to struggle citing issues of poor accountability, fraud and corruption in the different agencies in line with electricity distributions a common characteristic of government entities.
The inception of Umeme Limited and subsequent awarding of the 20-year concession has been a milestone in the revenue collection position in the power sector. In just its first year of 2005, the collection rates shot up to 80%. This followed steady rise in percentage collection from 5%, 7% to a cumulative upsurge of over 24% in the past 13 years of operation. But how did Umeme reach this milestone?
A few years ago in 2011, Umeme established a pre-paid billing system dubbed ‘Yaka’ as a strategy to improve service, reduce energy losses and improve cash collections. The post-paid billing system had issues of meter readings, billings, bill delivery and disconnections that users deemed unfair which had forced consumers into devising other means of accessing power. It was piloted in areas around Kitintale, Mutungo- Luziira, Nakawa Division. The prototype succeeded and was later extended across the country.
The innovation of Yaka further boosted the revenue collections to about 98.9%. Yaka enables consumers to budget for what they are going to use, deters accumulation of unforeseen debt, as was the case under the postpaid environment.
But payment of ‘Yaka’ became an issue as customers had to search for service points to get service. Customer queues, especially at peak hours, were common at the few Yaka vending points. Some areas were very far which meant costs of acquiring a Yaka coupon had increased further. To address the challenge, in 2012 Umeme installed an open payment platform that would integrate with any payments services provider for real time tokens vending. Through the platform, Umeme rode on the mobile money revolution and integrated with MTN Mobile Money, Airtel Money, M-Sente, Africell Money, PayWay, 16 of the 24 licensed banks, VISA and other points of sale providers.
With this success of payments integration, Umeme closed all its 33 cash offices in 2015. Consumers now enjoy the convenience of paying for their electricity any time, from any corner of the world, as long as there is an internet connection.
This is the reason Umeme’s all-time high revenue collection of 100.3% was recorded in 2013. The company has averaged 98.9% revenue collection, above the Electricity Regulatory Authority target average of 97.8%.
Due to internet connectivity in addition to other technology challenges, consumers sometimes complain of systems availability and speed.
Energy loss reduction
Energy losses are defined as the amount of electricity that is purchased but not billed to customers. This is manifested by direct theft through illegal connections and technical network configurations.
Prior to 2005, these losses were estimated in excess of 40%, negatively impacting the financial performance of Uganda Electricity Board (UEB) then. Umeme has systematically reduced these losses to 17.5%, as published in their June 2017 interim financial statements. It is important to note that energy losses impact electricity tariffs and viability of the operators. The impact of 1% energy losses is equivalent to US$ 3.5m, thus the 20% reduction to 17.5%, has positive impact of US$ 72 million (Ugx 259 billion) per annum. Either electricity tariffs should have been increased or government should have provided subsidies to fill Ugx 259 billion gap.
Fighting energy losses is not an easy task as it involves hard fights with those involved in moving them to legal paid for electricity consumption. The Wuuyu campaign, use of technology, whistleblower lines, operations and field audits are some of the innovations used over the period.
With such a cocktail of initiatives, Umeme reported energy losses of 17.5%, way below that of other power companies in East Africa like that of Kenya Power of 18.8%, did not come easy.
Attracting capital investments into power sector
Umeme was demutualized on 28th June, 2012 issuing an Initial Public Offering of 622,380,000 shares (38.3% of its issued share capital) on the Uganda Securities Exchange at a share price of Ugx.275 per share, four times lower than Kenya Power Company of Nairobi then.
Listing on the stock exchange has provided Umeme with a platform to raise capital for its investment plans. Since inception, Umeme cumulatively invested over US$ 500m in the electricity distribution system.
The impact of the investments is evidenced by by the improved electricity supply reliability, customer connections increased from 290,000 to 1.1 million; energy losses reduced from 38% to 17.5%; improved revenue collections to 99% from 80% and general service improvements through use of technology.
Umeme also became the first international company to cross list shares at the Nairobi Securities Exchange. This followed a successful IPO which was oversubscribed by 37%.
According to Paul Bwiso, C.E.O of USE, Umeme’s shares have been the most traded shares in 2017 attributed to the fact that unlike other shares on USE, all of its shares are tradable. This guarantees shareholders’ liquidity and profitability. They can easily sell their shares whenever they feel like.
To further improve its service, the company has been an early adopter of technology trends. For instance, Umeme is active on social media platforms; facebook, whatsapp, twitter, ebilling and mail among others. The Umeme Mobile App, simplifies the customer service engagements, while Yaka integrated with multi-channel payment platforms enhances consumer convenience.
Also, the ESG strategy, focuses on ensuring zero harm to the environment while the company business is in harmony with the community it is servicing. These initiatives enhance shareholder value.
Role model replicated in other power companies on the continent
Uganda is not alone in reforming its electricity supply industry. Built on this success, development agencies led by the World Bank have been advocating for the Uganda model in other countries. Ghana is in the middle of the reforms and restructuring its industry, Nigeria has already restructured, Rwanda is reforming among others.
Interim Financials Impacted by Impairments
Yet revenue grew by 6.9% year-on-year to Ugx. 704.4 billion in 2017 attributed to a 6.7% increment in units sold, Umeme recorded an after-tax loss of Ugx. 47.5 billion compared to a profit of Ugx. 54.4 billion in the same period in 2016, on accounts of receivables impairment of Ugx 115 billion. Per Interim Results press release, the one-off impairment was on account of amendment to the company’s operating license. It was imperative to note that the economic fundamentals for the half year were strong, with reduction of energy losses to 17.5% from 19% in 2016, increased electricity demand by industries at 8%, increased customer connections at 22% compared to 2016.
Despite the improvements, some challenges of the electricity distribution sector still require attention like, improving on customer response times, continued restoration of worn out network equipment like poles, further reduction in electricity theft and conversion of the remaining 300,000 consumers from post paid to pre-paid (Yaka) system.
To drive and sustain efficiency calls for;
An enabling regulatory framework from ERA would boost Umeme’s service. The extra power Umeme utilizes beyond targets should carry on as Umeme did in previous years would boost the sector and push the company to expand further especially with rural electrification. The regulator has a mandate of ensuring a financially viable and sustainable electricity sector. The regulatory actions should enhance and drive sector growth, to attract further financial resources, than contain it. Investors consider the regulatory environment, an important factor in determining which country or sector to deploy their capital. Uganda is still yearning for private capital to compliment government fiscal resources.
The judiciary though deserves a part on the back for the launch of the Utilities Court under the High Court, to expeditiously deal with power thefts and vandalism cases. However, more supportive prosecution to curb energy theft is urgently required. Uganda’s judiciary and its components should assist Umeme and reinforce their penalties on energy theft charges as the current punishment is not sufficient enough for them.
Even in the new proposed law of Ugx. 10million fine and a 10-year jail sentence, isn’t sufficient enough to cover the US$ 3.5 million Uganda loses whenever a unit of energy lost.