OFFICE OF THE AUDITOR GENERAL

THE REPUBLIC OF UGANDA

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF THE

UGANDA ELECTRICITY DISTRIBUTION COMPANY LIMITED FOR THE YEAR ENDED

31ST DECEMBER, 2013

OFFICE OF THE AUDITOR GENERAL

UGANDA

i

TABLE OF CONTENTS

List Of Acronyms ......................................................................................................................................... ii

Report Of The Auditor General on The Financial Statements Of Uganda Electricity Distribution

Company For Year Ended 31st December 2013 ................................................................................... 1

Detailed Report Of The Auditor General on The Financial Statements Of Uganda Electricity

Distribution Company For Year Ended 31st December 2013 .............................................................. 4

1.0 Introduction ................................................................................................................................ 4

2.0 Background Information ........................................................................................................... 4

3.0 Audit Objectives.......................................................................................................................... 5

4.0 Procedures Performed ............................................................................................................... 5

5.0 Audit Findings ............................................................................................................................. 6

ii

LIST OF ACRONYMS

DOMC Distribution, Operating And Maintenance Costs

ERA Electricity Regulatory Authority

GIS Geographic Information System

GOU Government Of Uganda

IT Information Technology

KVA Kilo-Volt-Ampere

KWH Kilowatt Hour

LAA Lease And Assignment Agreement

LIST Lira Service Territory

PPDA Public Procurement And Disposal Of Public Assets

REA Rural Electrification Agency

ROI Return On Investment

UEB Uganda Electricity Board

UEDCL Uganda Electricity Distribution Company Limited

UETCL Uganda Electricity Transmission Company Limited

USD United States Dollars

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF THE

UGANDA ELECTRICITY DISTRIBUTION COMPANY FOR YEAR ENDED 31ST DECEMBER

2013

THE RT. HON. SPEAKER OF PARLIAMENT

I have audited the accompanying financial statements of the Uganda Electricity Distribution

Company Limited (UEDCL) for the year ended 31st December, 2013. These financial statements

comprise of the Statement of financial position as at 31st December, 2013, Statement of

comprehensive income, Statement of Changes in Equity, Statement of Cash Flows for the year

then ended and a summary of significant accounting policies and explanatory notes.

Management responsibility for the financial statements

The directors are responsible for the preparation and fair presentation of these financial

statements in accordance with the International Financial Reporting Standards and the

requirements of the Ugandan Companies Act and for such internal controls as the directors

determine are necessary to enable the preparation of financial statements that are free from

material misstatement, whether due to fraud or error.

Auditors’ responsibility

My responsibility as required by Article 163 of the Constitution of the Republic of Uganda and

Sections 13 and 19 of the National Audit Act, 2008 is to audit and express an opinion on these

statements based on my audit. I conducted the audit in accordance with the International

Standards on Auditing. The standards require that I comply with the ethical requirements and

plan and perform the audit to obtain reasonable assurance on whether the financial statements

are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and

disclosures in the financial statements. The procedures selected depend on the Auditor’s

judgment, including the assessment of the risks of material misstatements of financial

statements whether due to fraud or error. In making those risk assessments, the Auditor

considers internal controls relevant to the entity’s preparation and fair presentation of financial

statements in order to design audit procedures that are appropriate in the circumstances, but

not for the purpose of expressing an opinion on the effectiveness of the entity’s internal

controls. An audit also includes evaluating the appropriateness of accounting policies used and

2

the reasonableness of accounting estimates made by management, as well as evaluating the

overall presentation of the financial statements.

I believe that the audit evidence obtained is sufficient and appropriate to provide a basis for my

audit opinion.

Part ‘‘A’’ of this report sets out my opinion on the financial statements. Part ‘‘B’’ which forms an

integral part of this report presents in detail all the significant audit findings made during the

audit which have been brought to the attention of management.

PART "A"

Opinion

In my opinion, the financial statements give a true and fair view of the financial position of the

Uganda Electricity Distribution Company Limited as at 31st December, 2013 and its operating

results and cash flows for the year then ended in accordance with the International Financial

Reporting Standards and the Companies Act, 2012.

Emphasis of Matter

Without qualifying my opinion, I draw your attention to Note 22 to the Financial Statements in

which going concern issues are disclosed in detail:

Going Concern Issues

During the year ended 31st December, 2013, the Company had negative shareholders’ funds of

UGX.15.4 billion (2012: UGX.6.8 billion), and its current liabilities exceeded its current assets by

UGX.34.5 billion (2012: UGX.61.8 billion).These conditions indicate the existence of a material

uncertainty which may cast significant doubt on the Company’s ability to continue as a going

concern. Although Management indicated under Note 22 to the financial statements that the

Company has substantial liquid investments to continue to generate income in the foreseeable

future, there is a risk of the income being wiped away by the losses.

Report on Other legal requirements

As required by the Companies Act, 2012, I report to you, based on my audit, that;

i. I obtained all the information and explanations, which to the best of my knowledge and

belief were necessary for the purpose of my audit.

3

ii. In my opinion, proper books of account have been kept by the Company, so far as

appears from my examination of those books; and

iii. The statement of financial position and statement of comprehensive income are in

agreement with the books of account.

John F.S. Muwanga

AUDITOR GENERAL

25th March, 2015

4

PART "B"

DETAILED REPORT OF THE AUDITOR GENERALON THE FINANCIAL STATEMENTS OF

UGANDA ELECTRICITY DISTRIBUTION COMPANY FOR YEAR ENDED 31ST DECEMBER

2013

This Section outlines the detailed audit findings, management responses and my

recommendations in respect thereof.

1.0 INTRODUCTION

Article 163 (3) of the Constitution of the Republic of Uganda, 1995 (as amended)

requires me to audit and report on the public accounts of Uganda and all public offices

including the courts, the central and local government administrations, universities, and

public institutions of a like nature and any public corporation or other bodies or

organizations established by an Act of Parliament. Accordingly, I appointed M/S PKF

Certified Public Accountants, to audit the accounts of the Company on my behalf and

report to me, so as to enable me report to Parliament.

2.0 BACKGROUND INFORMATION

The Uganda Electricity Distribution Company (UEDCL) is a limited liability company

incorporated in March 2001 in Uganda under the Companies Act, following the

implementation of a power sector reform and privatization policy, which resulted in the

unbundling of Uganda Electricity Board (UEB), into Generation, Transmission and

Distribution successor companies. The UEDCL owns an electricity distribution network of

up to 33KV. The Company is wholly owned by the Government of Uganda (GoU) and

has two shareholders, the Minister of Finance, Planning and Economic Development and

the Minister of State for Finance in charge of privatization.

UEDCL was privatized by the GoU through a 20 year concession, by bringing on board,

UMEME Ltd, a private investor in the electricity distribution and supply business.

Following the signing of the concession agreement, the UEDCL continues to own the

grid network of 33KV, while the assets are leased to UMEME Ltd.

UEDCL’s core business activities are summarized as follows:

Electricity distribution

Administering the Lease and Assignment Agreement (LAA)

5

Operating and maintaining the electricity off-grid stations in Moyo, Moroto, and

Adjumani, until divestiture.

Management of the pole-treatment plant.

Supervising the completion of the rural electrification schemes.

In the event of termination of the concession, UEDCL should be in position to take

over the business.

3.0 AUDIT OBJECTIVES

The audit was carried out in accordance with the International Standards on Auditing

and accordingly included a review of the accounting records and agreed procedures as

was considered necessary. In conducting my review, special attention was paid to

establish whether:

a. The financial statements have been prepared in accordance with consistently applied

Generally Accepted Accounting Principles and fairly present the income and

expenditures for the year and of the financial position as at the end of the year.

b. All Company funds were utilized with due attention to economy and efficiency and

only for the purposes for which the funds were provided.

c. Goods and services financed have been procured in accordance with the PPDA Act.

d. Sufficient internal controls have been applied consistently throughout the year to

safeguard the assets of the Company and mitigate the risk of misstatement of the

financial statements.

e. Management was in compliance with the Government of Uganda financial

regulations.

f. All necessary supporting documents, records and accounts have been kept in respect

of all Company activities, and are in agreement with the financial statements

presented.

4.0 PROCEDURES PERFORMED

a. Revenue/Receipts

Obtained all schedules of receipts and reconciled the amounts to the Company

cashbooks and bank statements.

6

b. Expenditure

Vouched transactions to establish whether documentation in support of expenditure

agreed with the amount and description on the vouchers and/or applications and

bank statements, and was properly controlled and accounted for.

c. Internal Control System

Reviewed the internal control system and its operations to establish whether sound

controls were applied throughout the period.

d. Procurement

Reviewed the procurement of goods and services by the Company during the period

under review and reconciled with the approved procurement plan.

e. Fixed Assets Management

Reviewed the use and management of the Company’s assets during the period

under review.

f. Financial Statements

Examined, on a test basis, evidence supporting the amounts and disclosures in the

financial statements assessed the accounting principles used and significant

estimates made by management and evaluated the overall financial statement

presentation.

5.0 AUDIT FINDINGS

5.1 Going Concern Issues

Note 22 to the Financial Statements indicates that during the year under review, the

Company had negative shareholders’ funds of UGX.15.4 billion (2012: UGX.6.8 billion)

and its current liabilities exceeded its current assets by UGX.34.5 billion (2012: UGX.61.8

billion).These conditions indicate the existence of a material uncertainty which may cast

significant doubt on the Company’s ability to continue as a going concern.

Although Management indicated under Note 22 to the financial statements that the

Company has substantial liquid investments to continue to generate income in the

foreseeable future, this is likely to be wiped away by the losses, if measures are not

taken to reverse the conditions that are eroding the shareholders’ funds.

7

Management explained that the directors were of the opinion that the Company was

well placed to continue in business for the foreseeable future and the financial

statements were prepared on a going concern basis (Note 1 to the accounts refers).

I advised Management to devise measures of reversing the trend of losses the Company

is currently experiencing.

5.2 Compliance with The Companies Act, 2012

Section 7 (7) of Table F (Code of Corporate Governance) of the Companies Act 2012

requires an audit committee to be composed of the chairperson and at least three other

persons of reputable integrity not being members of the board. However, at the time of

audit, the Audit and Risk Committee was composed of three members who also serve on

the UEDCL Board. In the circumstances, the members are exposed to the risk of conflict

of interest in discharging their duties.

Management undertook to ensure that the Board of Directors takes up the matter with

the shareholder for implementation.

I have advised the Chairperson of the Board to ensure that the Audit and Risk

Committee of the Board is properly constituted in accordance with the Companies Act.

5.3 Inadequate Controls in the Billing System

During the field verification at Dokolo field office, it was noted that the Station Manager

had no access rights to review online, the work input of junior staff to pro-actively asses

any irregular transactions or errors that could have been made. In addition, due to poor

network connections and limited concentrators, the Manager could not review online,

the customers using electricity at any one time to detect any questionable connections.

It was also noted that when a token is detected in the database as a result of collusion,

the existing customer tokens continue supplying power to the customer instead of

disconnecting both tokens.

In the absence of access rights to validate work of junior staff entered into the system

by the Station Manager, any irregular transactions and errors might go undetected

which in turn may negatively impact on the overall performance of the station.

8

Management explained that as part of the prepaid system rollout, some of the access

rights at inception were minimized for control purposes until the system stabilizes.

Management further indicated that since the pre-paid system had been running for less

than a year, some of these facilities were to be enhanced to improve the performance

and the business benefits.

I have advised Management to ensure that area managers are given specific access

rights to review the work of their subordinates to enable them detect any errors or

irregular transactions. Management should also consider enhancing network connections

and concentrators to enable monitoring of electricity consumption in the area.

5.4 Unestablished Power Loss at Dokolo Area Office

During the review of reports at Dokolo area office, it was noted that there were

substantial energy losses in Lira Service Territory (LIST) in the year under review.

Station Management attributed the losses to wrong meter installations by Uganda

Electricity Transmission Company Limited (UETCL). However, there were no details of

how Management intended to reduce these losses. The table below gives a summary of

the losses during the year:

Month Bulk supply

units (KWH)

Billed total

(KWH)

Distribution

Loss (%)

July 2013 223,658 19,832 91.13%

August 2013 178,573 27,598 84.55%

September 2013 154,555 27,208 82.40%

October 2013 111,452 26,756 75.99%

November 2013 171,163 28,012 83.80%

December 2013 216,377 35,046 83.80%

With the inefficiency in the pre-paid system, such energy Losses may be an indication of

illegal connections and high power theft without notice.

Management indicated that the high energy losses had been investigated and it was

found that the UETCL meter at Lwalla – Kaberamido feeder metering point had an

improper metering unit and there was need to install a check metering unit and a new

9

meter. Management further explained that this requirement had been communicated to

UETCL and REA.

I await the outcome of Management’s intervention in this regard.

5.5 Asset Valuation

An asset verification exercise revealed variances between the amounts presented in the

asset register and the approved costing for the particular items that were available to

district offices. Efforts to reconcile the asset ledger balance and exact cost considered by

UMEME Ltd were not successful because of insufficient information regarding final

material and labor costs among others.

Further review of the costing details revealed that UMEME Ltd constructs over 80%-90%

of the assets through contractors who are paid mainly labor cost while materials are

supplied by UMEME Ltd as well as paying project staff salaries. The absence of a proper

linkage between the costing model developed by UMEME Ltd and the assets passed on

to UEDCL, made it difficult to ascertain the actual costs of these assets and what would

be claimed by UMEME Ltd as a return on investments.

Management explained that the mandate of UEDCL was limited to verifying the fitness

for purpose, existence & quality of the investment and not auditing the price at which

inputs are bought and operationalized. Management also undertook to take up the

matter with the Regulator with a view of formulating a standard cap on cost of labor and

other overheads.

I have advised Management to conduct a special assets verification audit to ascertain

the values of the assets added to the grid by UMEME Ltd to date. The assets passed on

to UEDCL should be separated from those claimed by UMEME Ltd as a return on

investment.

5.6 Unjustified Asset Upgrade

It was noted that most transformer installations were upgrades of transformers from

lower KVa to higher ones for example from 25kva to 50 KVa or from 50Kva to 100 KVa.

This upgrade requires a justification of increased number of existing users or anticipated

10

new connections. However, it was noted that there were no justifications in a number of

upgrades which makes the new transformers idle.

A case in point is where, a 50kva (2009 manufactured transformer – assuming installed

in 2010) was replaced with a 100kva transformer at Mityana police/Airtel mast, without

proper justification. There have been no new customer connections in the area. In the

circumstances, there is a risk that UMEME Limited up-grades transformers without clear

justification to attract higher returns on investments.

Management explained that ERA had instituted new regulations and guidelines for

categorization of investments that earn ROI and those that are DOMC. Management

further indicated that it had been agreed with UMEME that all major investments would

be vetted by UEDCL prior to their approval by ERA to avoid haphazard investments in

upgrades.

I have advised Management to follow up on this undertaking and ensure that all

upgrades on the system are justified by UMEME before they are implemented. In

addition, management should liaise with relevant stakeholders and ensure increased

transformer capacity is matched with additional connections.

5.7 Improper Credit Notes

The Financial Policies and Procedures Manual requires that, “Credit notes are to be

initiated by the Sales and Marketing department which advises the Accounts and

Administration officer to prepare a credit note. It is then checked by the Manager Pole

Plant and Stores Management before it is sent to the Finance Manager for approval. It is

after the Finance Manager’s approval that the details on the credit note can be entered

in the system by the Senior Accountant.”

However, a review of the appropriateness of credit notes raised revealed that these

controls were not being adhered to. There is a risk that invoices and possibly debt may

be inappropriately cancelled when still outstanding.

Management attributed the anomaly to an oversight and undertook to comply with the

Financial Policy in this regard.

I have advised Management to ensure that credit notes which are not approved by an

authorized signatory are not processed.

11

5.8 Status of Prior Year Recommendations

I reviewed the status of implementation of the prior year’s audit recommendations and

noted that Management had acted on many of them. However, some of them remained

partially implemented while others have not been handled at all, as summarised in the

table below:

Finding Status Management Comment

Going Concern uncertainty Not Implemented No severe contingency over going

concern.

Investment of funds on the

Escrow USD Account

Not Implemented Money withdrawn by UMEME and

UEDCL has implemented a review

Interest on the Escrow US

Dollar Account

Not Implemented Money withdrawn by UMEME and

UEDCL has implemented a review

Non-compliance with loan

agreements

Not Implemented The lease fees to finance the loan was

suspended from the tariff

Long outstanding obligations Not Implemented Tripartite meeting with UETCL to take

place

Inadequate Maintenance of the

fixed asset register

Not Implemented Project to include asset addition by

UMEME, has commenced.

Long outstanding Work in

Progress(WIP) balances

Partially

Implemented

Implementation in progress.

Long outstanding debtor

balances

Not Implemented Bad debt write-off is being

implemented.

Payment of salaries to staff

whose contracts had expired

Implemented

Unclear benefits to Board

members

Partially

implemented

Now fully implemented in FY 2014 with

a training program and budget

available

Weak controls on Plant,

Property and Equipment

Partially

implemented

Implementation of GIS is underway by

October 2014. All these issues will be

captured and resolved.

No investment Policy Partially

implemented

Fully implemented as per the Financial

Policy & Procedure Manual; section

18.3

Poor procurement planning for

equipment under construction

of schemes

Implemented

Fraud at Moroto off-grid station Implemented

I advised Management to endeavor to address all issues raised in the previous reports

as they are intended to enhance efficiency of operations, accuracy of financial reporting

and compliance with the applicable legislation.

12

FINANCIAL STATEMENTS