Tuesday, July 4, 2017

On Uganda’s Electricity Supply and Economy.

Dr. Fred K Muhumuza’s Open Letter to the President on “Uganda’s weak and sick economy” in the Daily Monitor of Friday 23rd June 2017 highlighted the structural challenges related to Uganda’s recent slow economic growth and low demand for electricity. (http://www.monitor.co.ug/OpEd/Editorial/Letter-to-President--The-economy-is-actually-weak-and-quite-sick/689360-3983062-6dmq0iz/index.html) 

I will not purport to be a spokesperson or representative of the President’s Office, but since the letter was an open one, I felt I should add my two cents to the debate on Uganda’s electricity supply and economy at large. Does Uganda have excess capacity today? No. Total available capacity of generation plants in Uganda was 715MW in 2015 according to the Performance Report of the Electricity Regulatory Authority for 2010 – 2015. This available capacity comprises 250MW Bujagali, 265MW Nalubale/Kira Complex and many other licensed independent power producers, small hydro projects e.g 3.5MW WENRECO in West Nile. Apart from the 10MW solar project in Soroti that was commissioned late last year, there isn’t a substantial amount of generation capacity that has been commissioned in the last 24 months. Uganda’s total available capacity is slightly over 750MW. So do we have excess capacity today? No, we don’t. Shall we have excess capacity in the next one or two years when Isimba and Karuma projects are fully commissioned? I guess that is the issue Dr Fred Muhumuza is raising. 

For starters, he posits that we are paying a high opportunity cost for investment in these energy projects. Opportunity cost is the alternative forgone when a choice is a made. If i buy a bottle of beer at Ugx 5,000, the alternative I have foregone is a basket of mangoes or a pack of maize seed, which i could have bought with the same Ugx 5,000. So the question that economists need to help us answer is, the funds invested in the energy projects, if invested in another venture, for example buying meals and milk for all school children in public schools, would Uganda earn better returns on investments and higher multiplier effects compared to investment in Isimba HPP and Karuma HPP? Or to put it clearly, would we prefer government stimulus spending to be on public capital assets like energy projects or on re-current budget expenditure that may create aggregate demand for imports not necessarily locally produced goods? I believe the public infrastructure investment option is a better deal in the medium and long term term. I gather Keynesians (followers of John Maynard Keynes, the famed grandfather of macroeconomics) also believe that when governments choose to spend to stimulate the economy, the efficiency of allocation of these resources in the short term is not the main agenda. The main issue is to get the economy moving, and efficiency is sorted out in the medium and long term. 
The public investment in energy projects has also had strong local content linkages for example the bulk purchases of cement on the local market, transportation and logistics contracts, employment of skilled and semi-skilled personnel on construction works etc. Can we do more as far as local content is concerned? Yes we can. The Buy Uganda and Build Uganda strategy and the implementation of the Local Content Policy can only take us to better places. In this regard, I am convinced that public infrastructure investment is bound to improve productivity and efficiency in the wider economy in the medium and long term despite the minimal turbulence in the short term.

Where will the demand for this electricity come from? Some may ask. Uganda’s population is surging. One million babies are born in Uganda every year, in tandem with our 3% annual population growth rate. Total population is projected to rise to 50 million and 100 million in 2020 and 2050 respectively. This creates more demand for food, medical care, educational services, public facilities etc. This demand is a strong incentive for private firms (milk processors, maize millers, commodity factories etc.) and traders to produce more, increase their production capacity, increase their trade stocks etc. to meet this ever growing demand for milk, cereal, pampers, clothing, corn, shelter, water etc. All these private firms and traders need and or will need more electricity to expand their production capacity to meet production targets, in line with population growth and increased demand. 
The mining industry, industrial parks and regional power pools are strong potential demand centers for this electricity. For perspective, 183MW (Mega Watts) is equivalent to 183 million watts. A watt is a unit of power. The bulb in your bedroom is rated in watts, indicating for example 30 watts or 100 watts. If you run the 183MW Isimba HPP you should be able to switch on 4 million bulbs/lights each rated below 50 watts. Do we believe in the next decade, we won’t have enough households, business premises, street lights, offices etc. to consume this electricity? UMEME, the electricity distribution company indicated 19% growth in customer numbers for FY 2016. The projection is that they will cross the 1,000,000 customers mark in 2017. Year on year growth was 13% in 2014. The demand for electricity is there, and seems to be growing. 
The other key issue around energy projects is their turnaround time! How long, on average, does it take to deliver an infrastructure project, from pre-feasibility, through feasibility and design stages, to construction and commissioning? Industry practice is that depending on size and complexity, this ranges from 4 to 10 years!  This is premised on the assumption that the financing is readily available and the contracting firms are doing an excellent job! With this potential electricity demand, it is only prudent that government runs ahead of the pack, to invest massively in energy and other infrastructure projects. Failure to do so, would indeed create fertile ground for the economy to get sick and weak in the medium and long term.
Agaba Rugaba

Twitter; RugabaAgaba

On Timothy Kalyegira and US Mission to Uganda's "A Report to the Ugandan People"

Timothly Kalyegira’s column in the Sunday Monitor of 18th June 2017 (http://www.monitor.co.ug/Magazines/PeoplePower/-US-embassyUgandans-Chinese-/689844-3974784-kecnc5/index.html)drew my attention to the recently released “Report to the Ugandan People” by the US Embassy in Kampala. Whereas Timothy didn’t not have many charitable things to say about Ugandans (the intended receipts of the report), I agree with him that the report was well structured, clutter less, incisive and colorful. It makes for easy reading and understanding on what the U.S government supported programs are up to in Uganda. 

A few highlights from the report (https://ug.usembassy.gov/our-relationship/report-to-the-ugandan-people/)that covers their last fiscal year (from October 2015 to September 2016), the US government and associated agencies spent $850 million on five key focus areas namely Health, Stability, Prosperity, Justice and Democracy, and Education. Health, at slightly over $500m took the lion’s share, accounting for approximately 60% of the total spend. Stability (which covers defense spending, peace initiatives, refugee programs etc.) came second with $280m accounting for 33% of total spend. The other three focus areas shared the remaining 7% of the total spend in the fiscal year. Other key nuggets in the report are that average age in Uganda is now 14 years, implying that if you sum up all the ages of the 35 million Ugandans and divide this sum by the total population, you get 14 years! This reinforces our position as the country with the youngest population in the world. 80% of our population is below 18 years, and total population is projected to rise to 50 million and 100 million in 2020 and 2050 respectively.

I am not tempted, like my friend Timothy to suggest that our average Ugandan is na├»ve and clueless, consigned to a life of in-ability to be competitive in the Ugandan economy and the global scene at large. The Ugandan population, and by extension the Uganda government have the right ingredients at hand and or in the pipeline, to harness our potential for full scale production and economic activity to raise millions out of poverty and provide quality social services like health and education. There are two avenues that I believe the US Mission in Uganda and its partner’s may need to engage in and or support in the short and medium term as they work in partnership with the Uganda government to ensure a better and brighter future for all Ugandans.

As noted in the “Report to the Ugandan People”, over 70% of the Ugandan population rely on agriculture for income and food. It is also well known that the majority of these are small holder farmers on small acreage of land, with minimal or no mechanized equipment or technology to boost agriculture production. Whereas the wheat farmer in Kansas, America has access to a futures market, agricultural subsidies, machinery, fertilizer, etc. to boost productivity and quality in their farming enterprise, the average Ugandan farmer is up against the vagaries of climate change, poor farm inputs, high labor and technology costs etc. in their attempt to graduate from subsistence farming to commercial farming. I believe that the US Mission in Uganda can share best practices of the Futures Markets/ Commodity Exchange Markets so that local farmers have supply contracts and are guaranteed good prices for their produce in the short and medium term. This should be a good incentive for local banks and insurance firms to offer credit and insurance products to farmers to boost production. The warehousing initiative, as highlighted in the report is a good place to start. Could it be possible for the US government program to underwrite some private firms to invest in large warehousing facilities at district level, as a first step to decentralized commodities trading and futures market? I believe this would go a long way in building the foundation for all-inclusive economic growth.

 The second proposition is on Energy. The Report highlights some of the energy efficiency initiatives currently undertaken by Power Africa including hybrid solar-diesel power project in Kalangala. There is a multitude of opportunities and projects in the energy sector that would undoubtedly enhance access to electricity and value addition across the country. Renewable energy projects like solar and wind at district level targeting health and education facilities would go a long way in improving service delivery at these social facilities. Small/ mini hydro projects and mini-grids targeting production zones, upcountry industrial zones, commodity processing plants, emerging urban centers etc. have potential for strong multiplier effects across the economy. Power Africa may have to cast its net wider in partnering with private developers and government agencies in harnessing the opportunities for energy supply, distribution and access in Uganda. It is evident that support to both the energy and agricultural sectors , coupled with Government of Uganda’s massive investment in public infrastructure, will yield dividends for the wider population, boost incomes and competitiveness on the regional markets. May be then, US Mission’s “Report to the Ugandan People” will highlight success stories that will be pleasant reading for my friend Timothy Kalyegira.


Twitter - @RugabaAgaba

Monday, October 27, 2014

On Betty Kamya and her Maria Antoinette tendecies.

Ugandans Aren’t Lazy And Mediocre, They Lack Exemplary Leadership.
I was disappointed by Madam Betty Kamya’s opinion in the Daily Monitor of Thursday 23rd October 2014. It was a rebuttal penned to express her disappointment to the Daily Monitor editorial of October 6 titled MPS should reject tax on paraffin. In her piece, Betty dismisses Ugandans as a lazy bunch of mediocre folks that deserve no mercy or welfare from the state at all.
The suggestion that people can sell wild mangoes and or throw seeds through their house windows to grow food crops is unfortunate. We need to probe the status quo of the Ugandan rural economy to make sense of poverty that continues to prevail there. The Ministry of Finance Planning and Economic Development in their Poverty Status Report May 2012 indicate that 24.5% of Ugandans are living below the poverty line and thus can’t afford to consume 3000 calories of food a day. Then, 43% Ugandans are not necessarily poor but are “Insecure non-poor” or “vulnerable” and thus can easily slide into poverty due to inflation, poor harvests, heavy rains/floods or prolonged drought or high taxes on basic commodities like paraffin, maize flour etc.
Secondly, the Background to the National Budget 2013/2014 indicates that close to 67% of non-monetary GDP is from the Agricultural sector. Considering over 75% of Ugandan population is involved in agriculture that accounts for slightly over 20% of national GDP and 67% of the non-monetary GDP, it is clear that a sizeable number of Ugandans actually engage in economic activities that don’t involve exchange or utilisation of money. They eke their living on the land and rarely interface with money in the economy. They are subsistence farmers par excellence. These are the people Betty is calling poor, lazy and mediocre. This is quite unfortunate coming in from one of our leaders. Uganda’s problem is actually not it’s so called “lazy and mediocre” people, but a lack of leadership. Leadership that is deficient of the populism but is exemplary in all matters economics and production. If the community members see the LC 1 chairman or LC3 councilor taking good care of his banana plantation, diversifying to coffee or fruit trees or engaging in productive commercial farming, they are more likely to learn from this exemplary leadership and thus engage in economic activities that shall not only earn them income to effectively demand for goods and services in the economy e.g. paraffin, clothes, iron sheets, solar lights  but also give them the dignity they deserve as citizens of Uganda.
This sad state of affairs has now given rise to the “rental-democracy” where voters clamor for sugar, salt and soap not issues during elections. With this, Ugandans haven’t gotten the exemplary leadership they deserve, they have either ended up with leaders that dismiss them as “lazy and mediocre” or rent their support using soap, paraffin and salt during election time. The closest we have come to this kind of exemplary and people-centered leadership has been President Museveni’ s paradigm to popularize the 4-acre model of agricultural production that would guarantee many a house-hold a sizeable amount of income every year. The challenge is that this grand strategy has not been customized or well-articulated by his army of advisors and ministers, to suit the local context of millions of households that do not own even two acres of land! This would require a message of efficiency and increased productivity on small land holdings. This is also best explained by the former Minister of Finance Prof Ezra Suruma in his new book “Advancing the Ugandan Economy, A Personal Account”. He posits that the provision of roads, schools, national security, law and order and public health does not necessarily satisfy the basic needs of people. People need stable sources of income e.g. employment or small business, commercial farming to allow them afford their personal basic needs. In traditional agrarian and peasant economies like ours, we need exemplary leadership both on the farm in rural countryside and within elite circles of government and corporate Uganda to foster economic transformation and help our people get to the promised land. Madame Betty Kamya’s dismissive reference to Ugandans as lazy and mediocre doesn’t fit that bill.

Agaba Rugaba
Political - Social Commentator
Twitter: @RugabaAgaba

Wednesday, August 27, 2014


NSSF and UMEME are back in the news, for both the bad and good news depending on which side of the fence you sit on all matter pensions and public utilities! NSSF continues to be clocked in institutional inertia, while UMEME has hit profitability turbulence at the time when all macro-economic parameters are said to be a positive trajectory. NSSF faces a parliamentary probe on among other things, its investment in UMEME, while UMEME continues to have the parliamentary recommendations on terminating its concession agreement hanging over its head. The two corporate giants are undoubtedly joined to the hip by the rumblings at Parliament Avenue. But amidst all this “trouble”, NSSF should be encouraged and supported by all and sundry to actually take up majority ownership of UMEME. 
According to their unaudited financial statements for the six months ended 30th June 2014, UMEME’s net profits are down by 19% to Ugx 38 billion compared to Ugx 47billion last year! That is a $4m drop in profits within six months. After making Ugx 84 billion in profits last year, the projections were that UMEME would hit the Ugx 100bn mark this year. That means they should have been in the range of Ugx 45 billion – Ugx 55 billion at half year! They have only managed to make Ugx 38 billion compared to Ugx 47 billion in the same period last year. This is due to increased repair costs and foreign exchange losses. Cash generated from operations also fell by 40% from Ugx 52 billion in June 2013 to Ugx 31 billion in June 2014. UMEME says this is due to increase in capital projects inventory, and Government of Uganda staggering arrears of Ugx 34.5 billion! In the six months period to 30th June 2014, UMEME also borrowed Ugx 87 billion ($35m) from the IFC – Stanbic – StanChart Credit Facility which attracts interest to the tune of 19% per annum! They also paid final dividends for the year ended December 2013 to the tune of Ugx 27m in July 2014. How does NSSF fit in this mix? NSSF with its 231,722, 771 shares, an equivalent of 14.27% of total shareholding is the 3rd largest institutional investor in UMEME Limited. We need to encourage NSSF to pick up the remaining shares owned by ACTIS (through its UMEME Holding Limited) so as to have the pension fund as the largest shareholder of the utility company. NSSF is a custodian of workers savings and investments, it is only logical that Ugandan workers’ money is also at the heart of spurring economic growth by financing the expansion and capital expenditure on energy infrastructure. UMEME, because of its shareholding structure (including World Bank’s IFC and Private Equity Funds) continues to finance its Capital expenditure/ investment projects using expensive foreign currency denominated loans. For example, UMEME borrowed $35m in the first 6 months of 2014 from the IFC – Stanbic – StanChart credit facility, and intends to borrow another $25m within the second half of 2014. 
This debt attracts interest rates premised on either the LIBOR Rate or Treasury bill rate and margins set by these banks! This works favorably for the banks NOT UMEME and its shareholders. The borrowing and financing costs of UMEME’s investment projects hurts profitability both in the short and long term. NSSF collects in excess of Ugx 600 billion ($240m) a year. Why can’t NSSF extend shareholder loans to UMEME at lower rates in the range of 12 -15%? In an economy of 5% inflation, surely 15% rate of return is still good business. The bulk of UMEME profits continue to be siphoned off by private equity funds and banks (through loan interest rates and bank overdraft charges). With NSSF as majority shareholder, these earnings and profits would accrue to Ugandan workers and savers. UMEME’s CAPEX programme requires affordable long term capital which NSSF has in plenty. This paradigm works in the interest of both firms. NSSF continues to lock the bulk of its cash in fixed deposits accounting for over 80% of total investments! UMEME offers NSSF an opportunity for long term equity investment that offers healthy benefits in dividends. NSSF has already earned over Ugx 5billion in dividends in the last two years. This is equivalent to 25% of the net book value of the Social Security House. Furthermore, with majority shareholding, NSSF would be in position to influence the board structure and local content policy at UMEME for example the human resource, local contractors and repair/maintenance service contracts, procurement etc. All this offers better benefits to both the NSSF members and the wider economy at large. But what are the risks? For starters, Minister Maria Kiwanuka’s reservations on UMEME’s dividend policy are worth noting. UMEME has already declared an interim dividend to be paid by end of December 2014 for anyone who will be on their shareholders register by that time. This poses a risk of people rushing to buy UMEME shares because of the dividends announcement not its sound fundamentals! 
This is risky in the long term. The last thing we want is NSSF end up with a bulk of shares whose price is inflated by dividend announcements not the robust operational performance of the utility firm. UMEME is also equally cash strapped. As indicated earlier, their net cash from operating activities has fallen by 40%. By end of June 2014, UMEME had Ugx 36.6 billion as a bank balance, but Ugx 4.4billion of that was customer security deposits, Ugx 14.2 billion was the net cash from their Statement of cash flows, and Ugx 18 billion was a bank overdraft! In July 2014, UMEME paid Ugx 27 billion to its shareholders as final dividends for the year ended December 2013. It is clear; the dividends were paid using part of the cash from the bank overdraft! In essence UMEME is borrowing to pay dividends and also borrowing to do Capital expenditure. Ideally, they should be using the profits not expensive loans to finance the capital expenditure projects. NSSF’s long term funds could come in handy in this regard, but the only way to ensure NSSF doesn’t get its hands burnt by “UMEME fire” is to first attain majority shareholding at the utility firm.

Tuesday, June 10, 2014


The aftermath of this year’s State of Nation Address has been characterized by mixed reactions and reviews across the political and social divide. Most of the reviews have been scathing and largely dismissive of the President’s speech as mere rhetoric that punctuated the annual political “ritual”. I think this State of the Nation Address was actually spot on, with fundamental issues and statistics brought to the fore by the President. The address was largely stimulating and insightful on the salient issues in our economy.
For starters, during last year’s address, President Museveni tackled the ten (10) bottlenecks to social transformation for example developing human development through education and health, developing infrastructure, developing the private sector, modernizing agriculture, regional integration etc. In this year’s address, he did a rejoinder to last year’s speech and comprehensively addressed the key sectors of the economy that are key to wealth and jobs creation i.e. agriculture, services, ICT, industry and manufacturing. The context given to the agricultural sector was spot on. The issues of markets, quality, value and returns on investment are integral to our agricultural sector and I think it was insightful to contextualize these issues in regard to both global demand and regional markets for our agricultural produce.
The total headcount/ employment numbers per sector i.e. 841,704 and 2,684,290 for the industrial and service sectors respectively was also an insightful nugget. Youth unemployment continues to be a big challenge in our economy! For long, we have been seeking the head count per sector and the number of jobs created per year. It will be interesting to see the growth in the head count in the next financial year since we now have some benchmark figures for comparative purposes. This is integral to designing the best policies and programs that support inclusive economic growth i.e. GDP growth that creates both jobs and wealth for the wider population.
The other key insight was the number of agricultural inputs e.g. seedlings distributed to households that are engaged in agriculture (68% of total households as per 2002 Census).  This is fundamental since many a household lack the basic agricultural inputs and start-up capital to engage in commercial farming. This thus calls for the need to re-organise NAADs so as to reinforce these efforts to drive both profitability and efficiency in the agricultural sector.
Perhaps the most insightful statistic from the address is the reduction in poverty from 24.5% in 2009/2010 to 19.7% in 2012/2013! For starters, the Ministry of Finance in the Poverty Status Report May 2012 defines poverty as a situation where one can’t afford to buy and consume food worth 3,000 calories per day based on the CPI food basket. That implies that for a household of five, the daily consumption would be 15,000 calories of food per day. But the same report indicates that a sizeable percentage of Ugandans who are not necessarily poor are vulnerable to falling back below the poverty line in case of unemployment, poor harvests, job loss, reduced incomes or challenging economic conditions. The economy has performed below expectation for the last 3 or so years. It would also be interesting to establish the correlation between the 5% average economic growth rate per annum for the last 5 years and the 5% fall in poverty levels of the 5 year period! It is apparent that the population growth seems to be eating into the GDP growth that would buttress poverty reduction and wealth creation. It is in this context that the President’s emphasis on building sustainable agricultural enterprises for both wealth and job creation is key for both the short and long term.
Agaba Rugaba
Civil Engineer and Socio-Economic Commentator
Twitter; @RugabaAgaba

Tuesday, May 27, 2014


The cover story of last week’s edition of The Independent magazine covered  UMEME’s “secondary IPO” and insinuated that it is a game changer for Uganda’s economy! This was further reinforced by Andrew Mwenda in his The Last Word column where he argued that the privatization drive orchestrated by the World Bank and IMF Structural Adjustment Programmes in the early 1990s set ground for the unprecedented economic growth that has defined President Museveni’s last 20 or so years in power.  We need to probe these arguments and indeed see whether the positive euphoria depicted in regard to the unfettered privatization of public enterprises and private capital flows unleashed by both globalization and financialisation have created tangible value for ordinary Ugandans!
First, let us look at the implications of the private-equity funds entry into our financial markets! When these funds bought into UMEME, there weren’t any net capital inflows into the economy! There are no clear indications that any capital gains taxes will be collected by the Uganda Revenue Authority.  These equity funds mobilized their resources from off-shore markets and ACTIS is also taking the proceeds of the share sale to offshore markets and emerging economies. ACTIS, with its 20% shareholding is not re-investing the proceeds from the share sales into the Ugandan economy! Secondly, since the third - largest shareholder NSSF increased its shareholding by use of funds mobilized from the local economy here, it is clear this UMEME share-sale, shall have a net capital outflow effect on the economy. The same is true for the retail investors who intend to increase their shareholding. ACTIS won’t be re-investing the share proceeds in UMEME or the Ugandan economy for that matter; they are heading off to Brazil and other emerging markets! If ACTIS was using some of the proceeds to advance cheap credit or a shareholder loan to UMEME towards its Capital expenditure and investment plans, then we would suggest that this is a game changer for both UMEME and the Ugandan economy! Unfortunately, this is not the case.

But why are private equity funds interested in UMEME?  UMEME is making lots of profits! It is a cash cow! The demand for electricity is going up (which is understandable considering the low coverage country wide). UMEME’s pending service applications have more than doubled from 1,398 in 2012 to 3,008 by close of 2013. UMEME intends to invest  a lot of cash  in the distribution network by extending power lines and transformers to more and more rural and urban areas so that when the generation capacity goes up in the next 5 or so years, they are in position to  connect thousands and thousands of customers and households on the grid! UMEME’s Annual Report 2013 indicates that they are running a World Bank funded Output Based Aid (OBA) project to accelerate connections in rural areas. This is further reinforced by the CEO UMEME Charles Chapman’s comments that they intend to massively build the distribution network before Karuma comes on board. UMEME has created jobs both directly and indirectly. Its headcount was 1,375 by end of 2012 fetching over Ugx 45 billion in wages and pension contributions. UMEME also paid over Ugx 190 billion in cash to local suppliers and contractors for various works and supplies. Furth more, UMEME sold electricity worth over Ugx 965 billion thus creating value in the economy that generated over Ugx 170 billion in VAT as tax revenue for the government coffers! So it goes without saying, UMEME has created enormous value in the economy and is also making billions for its shareholders.  

So why is ACTIS exiting and new big boys coming to town? For starters, they want to have a piece of the UMEME profits-cake! In its 2014 outlook, UMEME intends to pay 50% of profits as dividends. UMEME made Ugx 57 billion in net profits in 2012. They increased this to Ugx 89 billion last year 2013. You can be sure they will hit the Ugx 100bn mark in 2014! So surely the private-equity funds are looking at the over Ugx 50 billion to be paid as dividends in the next 12 months!  Secondly, UMEME has investment and CAPEX plans in excess of $440m (Ugx 1.1 Trillion) for both the short and medium term.  As part of this strategy, UMEME has secured borrowings under a credit facility arrangement with the World Bank’s lending arm IFC , Standard Chartered Bank and Stanbic Bank to the tune of $190m. The interest rates for this credit are LIBOR rate + margin set by the facility agent (Standard Chartered Bank) if the drawings are in dollars or Treasury Bill Rate + margin set by the facility agent if withdrawn in Uganda shillings. According to the UMEME Annual Report for 2013, by year end, the applicable interest rate on UMEME borrowings from the credit facility arranged by the IFC –StanChart – Stanbic Consortium was at 19.2%!! This is a very good return by all accounts. This is what these big equity funds are targeting. UMEME offers them opportunities for extending credit at healthy returns on investment. This is not alien to UMEME. UMEME used the proceeds from the IPO in 2012 to clear shareholder/ACTIS loans. So the equity funds have two bites at the cherry here, first, the huge dividends accruing from the increased profitability of UMEME and then the opportunity to extend “cheap” loans to finance UMEME’s expansion drive.

This gives rise to two big challenges on our hands; one is that electricity will increasingly be expensive. UMEME will be forced to seek ERA adjustment to the tariffs to cover both their operational costs, financing costs and the 20% return on investment enshrined in the concession agreement. Secondly, we are increasingly locking ourselves in the “too-big-to-fail” phenomenon that defined the financial and derivatives market in the West just before the financial crisis. UMEME has done investment to the  tune of $224m (over Ugx 500 billion) in the last 8 years and intends to push that up to Ugx 1.1 Trillion in the next 10 years. $172m or 76% of UMEME cumulative investment as at end of 2013 was undepreciated asset base. UMEME recovers its investments through the tariff methodology and at the end of the concession period, is entitled to buy-out amount to be paid in cash. Can government afford to compensate UMEME for the future undepreciated asset stock at the end of the concession agreement? Of course not! We don’t have that kind of money.  Government will have no choice but to extend the UMEME concession agreement by another 10 or 20 years!

What is the way forward? We need to applaud NSSF’s buy-in on UMEME but also put limits on shareholding levels for offshore investors and private equity funds. Foreign equity funds and off shore investors shouldn’t own more than 50% of the firm. Let UMEME be owned by NSSF, local cooperatives, local pension funds, UPDF SACCOs, Teachers SACCO etc.  Tanzania has laws on limitation of shareholding on corporations in the country; we haven’t seen any capital flight or loss of FDI in Tanzania due to such legislation. This argument that the state needs to move out of the production of goods and services for public consumption is at the heart of the current crisis orchestrated by the free market fundamentalism crusade. The economies in the Far East have demonstrated that the developmental state model embraced by China is the way to go for developing economies if they are to achieve shared prosperity. We need new approaches that are more communal and collective so that we all ride the wave of this growth and profitability accruing from the efficiency and innovation of entrepreneurship.
Prof Mahmood Mamdani in his paper presented at the 2012 Annual  Joseph Mubiru Memorial Lecture organized by the Bank of Uganda, quoted one of Andrew Mwenda’s favorite authors,  Karl Polanyi‘s The Great Transformation. Mamdani argued, “Polanyi was the first to point out that self-regulating markets are bound to lead to a social catastrophe. Polanyi began with the observation that the market is much older than capitalism. It has been around for thousands of years. Markets have coexisted with different kinds of economies and societies: capitalist, feudal, slave-owning, communal, all of them. The distinguishing feature of all previous eras has been that societies have always regulated markets, set limit on their operation, and thus set limits on both private accumulation and widespread impoverishment. Only with capitalism has the market wrenched itself free of society. A consequence of this development has been gross enrichment of a few alongside mass poverty. A corollary of this process, we may say, is that regulation is now seen as the task of the state, and not of society.”
The effect of this privatization of public goods and services paradigm, is that we now have these multi-billion equity funds that are owned by just a handful of rich and elite families in the west. When these guys come to town, it aint a game changer in the sense that Andrew wants us to believe, it is actually game over for Uganda.

Rugaba Agaba
Civil Engineer and Socio-economic Commentator
Twitter @RugabaAgaba

Monday, May 19, 2014


For once, we may want to look at the UMEME glass as half full not half empty.  This is what I came up with. A  quack-intellectual attempt at financial analysis and investment appraisal!
If I had Ugx 10,000,000 today, I wouldn’t buy a plot of land in Matunga or Mukono or put it on a Fixed Deposit Account in a bank to earn 12% in interest a year! I would buy UMEME shares currently going for Ugx 340 per share. WHY?
If you bought UMEME shares worth Ugx 10,000,000 you would get 29,411 shares. (Ugx 10,000,000 divided by Ugx 340 price per share).  If you buy these shares by 8th June 2014, you will be entitled to a dividend. UMEME is paying Ugx 16.8 per share as a part of the dividend for FY 2013. The proposed total dividend per share for year ended December 2013 is Ugx 24.8. A portion of this, Ugx 8 per share was paid in June 2013 as an interim dividend, so they are paying a balanced of Ugx 16.8 per share mid this year 2014.  So, with 29,411 shares this would fetch Ugx 494,105 (Ugx 16.8 multiplied by 29,411 shares) in dividend earnings within one month of buying! If we offset 15% withholding tax (WHT) charged on this dividend earning, we will be left with Ugx 420,000 in cash. So we can comfortably say that after an initial investment of Ugx 10,000,000 in share purchase, we have Ugx 420,000 cash in earnings within one month! This means that our initial investment/ cash outlay is Ugx 9,580,000. (Ugx 10,000,000 less Ugx 420,000 in dividend earnings) We can say that our 29,411 shares actually cost us Ugx 9,580,000.
So now we go into the subjective stuff. If you had Ugx 10,000,000 today, you could alternatively invest it on a Fixed Deposit Account with a bank at 12% or buy a plot of land in Mattuga or Mukono. For the land investment, if you are lucky, the value of your land will appreciate to Ugx 15,000,000 by 2019! Real estate valuations rarely go up by more than 50% in low end real estate! A property in Ntinda can easily appreciate by 50% or 100% within 5 years but this is not possible for real estate  in a Mukono or Matunga neighborhood. Most likely the value will be Ugx 12,000,000 or 13,000,000. But let us use Ugx 15,000,000 for our analysis.
Since 12% is the interest rate or opportunity cost of capital, we shall use it to discount (or bring the future to the present) all our future values and future cash flows!  If the value of the land shall be Ugx 15,000,000 in 2019, what is its value today? It is not the Ugx 10,000,000 you have paid Jomayi Estates for the Land! It is the value you get after bringing this future value of Ugx 15,000,000 to today, the present day! We shall use 12% to discount the future value of the land. Why 12%? Because it is the opportunity cost of capital or the interest rate that you could have earned if you had fixed it with the bank on a Fixed Deposit Account. It is an opportunity cost of capital because you have now made a decision to buy land not do fixed deposit at interest rate of 12% with the bank!
We have already suggested a value of Ugx 15,000,000 in 2019 (5 years from now) for the land bough for Ugx 10,000,000 today. Using the interest rate/ opportunity cost of capital of 12% to discount this future value of the land to today/ to establish its present value, the value of Ugx 15,000,000 in 2019 is equivalent to Ugx 8,511,402 today! The other way to look at it to say if you had Ugx 8,511,402 today and you invest it at 12% per annum, you will have Ugx 15,000,000 in 2019 (in a period of 5 years). So it is clear that the land a negative net present value. Why? Because its value today/ present value of Ugx 8,511,402 is less than the Ugx 10,000,000 paid for it/ paid to acquire the asset. For something worth Ugx 8,511,402 today, we are paying Ugx 10,000,000! That is not a good investment.

Let us now look at the UMEME option as illustrated in the a table
UMEME paid a divided of Ugx 15 last year 2012. They are paying Ugx 24.8 for 2013. We can suggest that in the next five years, they will pay dividends to the tune of Ugx 30, Ugx 35, Ugx 40, Ugx 45, and Ugx 50 for 2014, 2015, 2016, 2017, 2018 respectively. I wish to think these are conservative estimates. The dividend would be paid in the successive year/ period. Just like the 2013 dividend is being paid in 2014, the 2014 dividend would be paid in 2015. The same is true for all the other years under consideration. Secondly, UMEME share price was at Ugx 275 one year ago, it is now at Ugx 340. It has gained Ugx 65 in one year! If we make another conservative assumption, that UMEME shall be trading for Ugx 500 in 2019. If we assume that its share price shall gain value by Ugx 160 in the next 5 years, then we can do the analysis and investment appraisal. So the 29,411 shares would be worth Ugx 14,705,500 in 2019 (assumption is Ugx 500 share price in 2019 multiplied by the 29,411 shares)
We shall discount both our future divided earnings and future total share value using 12% as our opportunity cost of capital. Our discount factors are based on 12%. (Refer to table below). The dividend earning in 2015 of Ugx 750,000 (Ugx 30 per share multiplied by 29,411 shares less Withholding tax) is equivalent to Ugx 669,750 today (2014). If you had Ugx 669,750 today, and invested it at 12%, you would have Ugx 750,000 one year later (in 2015)! The Ugx 1,250,000 dividend earning in 2019 is equivalent to Ugx 708,750 today. Why? Because of the fundamental concept of the time value of money! A shilling today is better than a shilling tomorrow! A dollar today is better than a dollar tomorrow. So the sum of the present values of both the future value of your UMEME shares in 2019 and the dividend earning s over the next 5 years is Ugx  11,841,394 compared with the initial investment outlay of Ugx 9,580,000! In essence what is happening is that for an investment worth Ugx 11,841,394 today (sum of present values), you are paying just Ugx 9,580,000! This translates to a net present value of Ugx 2,261,394. This is good investment by all standards. 

The UMEME Investment Scenario.
It is clear that based on the assumptions made, UMEME is a better investment than buying land or fixing the Ugx 10,000,000 on a fixed deposit account.  The assumptions are not wild assumptions; they are very conservative in light of UMEME’s growth potential. A dividend payment of Ugx 30, Ugx 35, Ugx 40, Ugx 45 and Ugx 50 per share for the years 2014, 2015, 2016, 2017 and 2018 respectively is a bit conservative considering UMEME’s growth and profitability. Secondly, UMEME seems bent on paying dividends every year (including an interim divided every 6 months) and this will surely continue to drive up the share price. UMEME‘s profitability can only keep going up! They are implementing the pre-payment YAKA model which is important for their working capital requirements! Finally, the demand for electricity is going through the roof and their losses are coming down implying that they are going to be selling more electricity in the years ahead!
If you want to make a quick buck, UMEME is the stock to buy. If you are pessimist, then you can sit on the fence and watch other devour up this investment apple.
Twitter; @RugabaAgaba

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