In Uganda’s evolving electricity sector, the termination of Umeme’s 20-year distribution concession marked a defining moment in the country’s approach to public-private partnerships. Signed in 2005, the Umeme concession was intended to inject efficiency, private capital and managerial expertise into the distribution arm of the power supply chain. Two decades later, the government’s decision not to renew the contract and to buy out the company’s unrecovered investments sparked a broader conversation about investor confidence, contractual stability and the future of private participation in Uganda’s energy sector.

The Umeme buyout did not occur in isolation. It sits within a complex web of contracts that govern Uganda’s liberalized electricity market most notably the Power Purchase Agreements (PPAs) that underpin private investment in generation. While PPAs have provided predictable revenue streams for independent power producers, the buyout of Umeme signals a shift in how the government perceives and manages risk across the energy value chain. The question that now arises is whether Uganda is de-risking or rerisking its energy sector through this decision.

This article examines the Umeme buyout through the lens of de-risking the strategic effort to minimize financial, political and contractual risks to attract sustainable energy investment. It explores how Uganda’s experience with concession and power purchase agreements reflects both the opportunities and vulnerabilities of private sector engagement in essential infrastructure. 

Ultimately, it argues that Uganda’s credibility as an investment destination will depend on how consistently it upholds its contractual obligations and reassures investors that policy shifts will not undermine long-term commitments.

UNDERSTANDING DE-RISKING ENERGY INVESTMENT 

“De-risking” refers to measures taken by governments and institutions to reduce the uncertainties that discourage private investment in infrastructure. In the energy sector, investors face an array of risks. These include political, regulatory, financial and operational risks. For developing countries like Uganda, where public resources are constrained, private capital is vital to achieve energy access. Yet, investors demand clear assurances that they can recover their costs and earn predictable returns.

De-risking mechanisms therefore serve to make projects bankable, mitigating perceived risks and making financing feasible. In Uganda, these strategies have been applied across both generation and distribution projects, including major initiatives such as Bujagali Hydropower, Karuma and Isimba Hydropower and the Umeme concession. Common strategies include:

• Power Purchase Agreements (PPAs):

PPAs are the cornerstone of de-risking for energy projects. In Uganda, the Bujagali Hydropower Project involved a 30-year PPA between Bujagali Energy Limited (BEL) and the Uganda Electricity Transmission Company Limited (UETCL) guaranteeing the purchase of electricity at a fixed tariff. This agreement provided revenue certainty for investors and facilitated financing. Additionally, the government provided a sovereign guarantee to cover any payment defaults by UETCL further enhancing the project’s bankability.

Various jurisdictions have adopted the same among which include Ethiopia’s Grand Ethiopian Renaissance Dam (GERD) which similarly employed a PPA with the Ethiopian Electric Power Corporation, providing stable revenue streams and government guarantees to mitigate risks associated with payment defaults.

• Government guarantees

The Karuma Hydropower Project received a sovereign guarantee from the Ugandan government to secure financing, covering repayment obligations of loans from China’s Export-Import Bank (Exim Bank) amounting to $1.4 billion covering 85% of the project’s cost. Escrow accounts were established to facilitate loan repayments and provide security in case of default.

• Tariff adjustment formulas:

Thetariff adjustment formulas for Uganda’s flagship hydropower projects that is Isimba and Karuma are strategically designed to de-risk energy investments by ensuring predictable cost recovery for investors while promoting long term affordability. For Isimba Hydropower plant, the tariff is set at 4.16 US cents per kilowatt-hour (kWh) for the first 15 years allowing investors to recoup capital and operational costs. After this period, the tariff drops to 1.01 US cents/kWh, passing on the cost savings to consumers. Similarly, Karuma Hydropower plant follows a tiered kWh for the first 10 years and then to 1.17 US cents/kWh thereafter. This gradual reduction in tariffs reflects a de-risking mechanism where early stage returns provide investment security while long term affordability supports sustainable energy access and economic growth.

• Political Risk Insurance (PRI):

In the case of the Bujagali Hydropower project, the PRI played a critical role in derisking the investment and attracting private sector participation in what was at the time one of the largest infrastructure projects in Uganda. The Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group provided PRI coverage valued at up to $115 million over a 20-year term specifically for equity investors. This coverage was designed to mitigate several high-impact risks common in developing markets including expropriation, currency inconvertibility and transfer restrictions, adverse regulatory changes and breaches of contract by the host government. The PRI worked in coordination with a World Bank IDA Partial Risk Guarantee (PRG) which supported commercial lenders by covering payment risks associated with government obligations. Together, these instruments significantly improved the project’s risk profile, reduced transaction costs and helped mobilize private capital that might otherwise have been deterred by Uganda’s country and sector-specific risks. The Bujagali case thus demonstrates how carefully structured risk mitigation tools can unlock large-scale energy investments in emerging markets.

• Blended finance and concessional funding:

Uganda’s Karuma and Isimba Projects combined concessional loans from China’s Exim Bank with equity from the Ugandan government and other stakeholders, reducing the overall cost of capital.

These strategies among others collectively reduce perceived and real risks making projects attractive to domestic and international investors. However, de-risking is not static. It depends on the credibility of the host government and its willingness to uphold agreements under political or economic pressures. The Umeme buyout invites scrutiny as to whether Uganda’s broader investment framework remains predictably de-risked or is gradually tilting toward policy uncertainty.

UGANDA’S POWER PURCHASE AGREEMENTS (PPAS)

The liberalization of Uganda’s electricity market in the early 2000s established a singlebuyer model, with the Uganda Electricity Transmission Company Limited (UETCL) as the central off-taker of power generated by independent producers. To secure financing for generation projects, UETCL entered into long-term PPAs with investors such as Bujagali Energy Limited, Eskom, Jacobsen among others. These PPAs guarantee the purchase of power at predetermined tariffs, often denominated in U.S. dollars ensuring predictable cash flows that enable investors to service debt and attract further capital.

While this model has succeeded in expanding generation capacity from hydropower to thermal and renewable source, it has also introduced financial strain. UETCL’s obligations under multiple PPAs have resulted in substantial capacity payments even when power demand falls below supply. Consequently, the cost of electricity remains high for consumers prompting criticism that PPAs have locked Uganda into expensive long-term commitments.

Despite these challenges, PPAs remain essential instruments of investor protection. They embody the principle of contractual certainty that private investors can rely on state backed agreements over the lifespan of a project. 

However, the Umeme buyout disrupts this perception of stability. Even though the buyout involves distribution rather than generation, its execution and the political messaging surrounding it could indirectly influence how investors assess the sanctity of Uganda’s PPAs.

THE UMEME CONCESSION AND THE BUYOUT

Umeme Limited entered Uganda’s power sector through a 20-year concession signed in2005 under which it leased the distribution assets owned by the Uganda Electricity Distribution Company Limited (UEDCL). The agreement required Umeme to operate, maintain and expand the distribution network in return for revenue from electricity sales. The government retained ownership of the assets and regulatory oversight through the Electricity Regulatory Authority (ERA).

Over the years, Umeme’s performance attracted both praise and criticism. On one hand, the company invested heavily in network rehabilitation, reducing energy losses and improving billing efficiency. On the other hand, consumers frequently complained about high tariffs, recurrent outages and perceived corporate profiteering. Politically, the concession became increasingly unpopular and the government eventually resolved not to renew it upon expiry in 2025.

The buyout clause in the concession agreement provided a legal mechanism for termination. It requires the government to compensate Umeme for its unrecovered investments, ensuring fairness and avoiding a breach of contract. Yet, while the buyout follows legal procedure, it sends a complex message to investors that long-term energy contracts in Uganda, even if performing, may be susceptible to policy reversal once political pressures mount. This perception can elevate the risk premium on future projects, undermining the very de-risking framework that Uganda built over two decades.

THE INTERSECTION BETWEEN PPAS AND THE BUYOUT

The interdependence of energy contracts means that the treatment of one contract affects confidence in others. While PPAs and concessions operate at different stages of the value chain i.e generation versus distribution, they are bound by a shared principle which is predictability of returns and government performance. Investors in generation projects may now wonder whether Uganda’s decision to buy out Umeme signals a broader willingness to alter contractual relationships unilaterally, particularly if tariff or political concerns intensify.

This uncertainty can have ripple effects. Lenders may demand stronger guarantees, higher interest rates or shorter payback periods to compensate for perceived country risk. Developers might also seek international arbitration clauses or political risk insurance increasing transaction costs for Uganda. The buyout therefore becomes not merely a domestic policy choice but a regional signal about how Uganda balances public accountability with private sector reliability.

Conversely, one could argue that the buyout presents an opportunity for Uganda to rethink its contractual framework. If the government manages the transition transparently and honors all financial obligations, it can demonstrate that Uganda remains a credible partner capable of recalibrating public-private partnerships without undermining investor confidence. The credibility of this process will be crucial for sustaining future PPAs and attracting green energy investments under new financing models.

COMPARATIVE INSIGHTS FROM OTHER JURISDICTIONS

Uganda’s energy sector challenges resonate across the region where countries have adopted diverse strategies for balancing private participation with state oversight. Examining Kenya and South Africa in particular reveals critical lessons for de-risking future energy investments.

KENYA

Kenya’s PPAs offer a valuable model for de-risking private investment in the energy sector through clear contractual structures and embedded state oversight. These agreements reduce investor uncertainty by providing long term revenue predictability via a two-part tariff i.e a capacity charge, which ensures recovery of fixed costs and return on equity and an energy charge based on actual electricity supplied. This separation of revenue streams mitigates both demand and operational risks. The PPAs also define developer obligations for project design, construction and operation and include penalties for delays or underperformance promoting accountability and operational discipline. 

Crucially, Kenya enhances creditworthiness through robust payment security mechanisms such as letters of credit or sovereign guarantees, thereby reducing the risk of off-taker default. Regulatory oversight by bodies like the Energy and Petroleum Regulatory Authority (EPRA) ensures that while private capital is mobilized, public interest remains protected.

For Uganda, where the government seeks to attract more private investment into the energy sector, these practices present actionable lessons. By adopting similar risk allocation mechanisms, Uganda can strengthen the bankability of energy projects. This includes refining its PPAs to provide clearer separation of capacity and energy payments, institutionalizing performance based penalties and establishing stronger payment security frameworks especially for private off-takers. 

Moreover, enhanced regulatory oversight and contract transparency can reassure investors while safeguarding consumer interests. Integrating these elements would help Uganda deepen private sector participation while reducing the financial burden on the state and ensuring long-term sector sustainability.

SOUTH AFRICA

In contrast to more balanced energy investment models, South Africa’s experience particularly the dominance of the state utility Eskom demonstrates the risks posed by political interference in energy markets. Moves towards municipalization, distribution buyouts and repeated government bailouts have created uncertainty around contract enforcement and long-term investor protection. These actions have introduced unpredictability into the sector, blurring the line between policy and commercial decision making. As a result, private investors have increasingly priced in higher political and policy risk leading to elevated risk premiums and more cautious engagement. 

For Uganda, the key lesson is the importance of insulating the energy sector from political disruptions. To maintain investor confidence and attract long term private capital, Uganda should focus on ensuring regulatory independence, honoring contractual commitments and minimizing ad hoc government interventions. Building transparent, rules-based frameworks for power procurement, distribution and tariff setting will help safeguard investor interests while supporting sustainable sector development. By learning from South Africa’s challenges, Uganda can avoid creating uncertainty that undermines private sector participation and instead foster a stable, investment friendly energy environment.

IMPACT OF THE UMEME BUY OUT ON INVESTOR CONFIDENCE IN UGANDA’S ENERGY SECTOR

The Umeme buyout has had a significant and multifaceted impact on investor confidence in Uganda’s energy sector revealing the delicate balance between state intervention and private sector participation in strategic utilities. Initially, the Umeme concession had been heralded as a model for private investment in public infrastructure demonstrating that capital inflows, efficiency gains and improved service delivery were achievable through well-structured public–private partnerships. However, the government’s decision to terminate the concession and initiate the buyout though provided for under the contractual framework triggered mixed perceptions among investors. While some viewed the move as a legitimate exercise of sovereign rights and a step toward greater public control, others interpreted it as an indication of policy inconsistency and potential political risk.

The uncertainty surrounding the buyout process particularly the valuation of Umeme’s investments, the timeline for compensation and the lack of a clear successor framework for private participation in distribution has heightened investor caution. For many investors, the episode raised critical questions about contractual sanctity, regulatory independence and the reliability of Uganda’s investment climate especially in a sector that depends heavily on long-term capital commitments. The perception that the government could alter or prematurely terminate concession arrangements despite legal provisions for compensation has eroded confidence in the predictability of future partnerships.

Moreover, the buyout has cast a shadow on ongoing and prospective energy investments, including those tied to PPAs. Developers and financiers now assess Uganda’s energy sector with a sharper focus on political and regulatory risk premiums often demanding stronger guarantees, enhanced dispute resolution mechanisms or government-backed risk mitigation instruments. 

Consequently, the buyout underscores the urgent need for a coherent de-risking framework anchored in transparent policies, enforceable contracts and consistent regulatory conduct to restore investor trust and ensure the sustainability of private financing in Uganda’s energy transition.

LOOKING AHEAD AFTER THE UMEME BUYOUT

The Umeme buyout provides a pivotal opportunity for Uganda to recalibrate its approach to private sector participation in the energy sector and to reinforce investor confidence. Moving forward, the government must ensure policy consistency, regulatory transparency and contractual integrity to reassure current and prospective investors. 

Embedding clear de-risking mechanisms within future concessions and PPAs, including predictable compensation procedures and standardized dispute resolution frameworks will be critical. In addition, leveraging risk mitigation tools such as partial risk guarantees, political risk insurance, and blended finance solutions can further protect private investments from operational and political uncertainties. 

Open dialogue and consultation with investors and sector stakeholders should remain central to all future decisions ensuring that changes in ownership or policy are implemented transparently and collaboratively. By translating the lessons of the Umeme buyout into longterm strategic reforms, Uganda can create a stable, credible and investor-friendly energy sector that encourages private participation, promotes efficiency and supports sustainable growth for years to come.

The Umeme buyout represents more than the termination of a concession. It is a test of Uganda’s capacity to manage public-private partnerships while sustaining investor confidence. Comparative insights reveal that the key to success lies in predictability, transparency and fair treatment of private operators. Countries that have aligned strong contractual frameworks with responsive regulation, such as Kenya have maintained vibrant investment climates even amid political and economic changes.

For Uganda, de-risking energy investment is not merely a financial exercise but a strategic commitment to trust, policy consistency and adherence to contracts. By honoring compensation obligations, communicating decisions transparently and harmonizing sectorwide agreements, Uganda can ensure that the Umeme buyout strengthens rather than undermines investor confidence. 

Ultimately, the country’s long-term energy ambitions i.e universal access, sustainable growth and regional competitiveness depend on its ability to balance public interest with contractual integrity in a way that inspires both domestic and international investment.

The writer is a corporate & commercial lawyer, passionate about the energy sector – Email: jjembalisa@gmail.com