Sunday, April 27, 2014


It's that time of the year when banks are required to publish their financial statements for the previous year. Uganda’s banking sector has witnessed exponential growth for the last two decades with the liberalization of the economy. As of last financial year 2012/2013, banking accounted for slightly over 4% of GDP. Private banks have made billions and billions of shillings in profits for their shareholders. Stanbic Bank, Crane Bank and Centenary Bank made profits in excess of Ugx 100bn, Ugx 60bn and Ugx 50bn respectively for the year ended December 2013.  The banking sector is dominated by private and foreign owned banks. Uganda’s banking sector is the classic case of a poisoned chalice. On one hand, we’ve had massive FDI in the financial sector,  corporation tax revenue charged on banking profits, employment opportunities for Ugandans and technology/skills transfer to Uganda from developed economies like UK, South Africa etc. On the other hand, the bulk of the banking profits have been repatriated.
Uganda’s only government owned bank is the Uganda Development Bank Limited. Its mission is to profitably finance enterprises in key growth sectors. According to their 2012 Annual Report, they indicated that they had developed a strategic plan aligned to the Uganda National Development Plan and the Vision 2040. However, their financial statements for the year ended 2013 and their Annual Report for 2012 tell a whole different story on whether they are aligned to providing development finance to key sectors that will foster economic development (not just economic growth) that is premised on both quantitative and qualitative measures.
The bank’s net profit for 2013 is Ugx 515 million compared to the Ugx 3.67 billion in 2012. This indicates a very huge slump in profitability. This has been due to a Ugx 900m fall in interest income for 2013 compared to the interest income in 2012.Furthermore, the personnel expenses and other operating expenses increase by a combined Ugx 3 billion. It is worrying for a bank with an asset portfolio worth Ugx 147 billion to be making only Ugx 515m a year! That translates to a very miserable 0.35%  Return on investments (RoI)!!. That is too bad. The industry average is 4%. For every Ugx 100 worth of assets owned by your average bank, the net income from these assets per year is Ugx 4!
Secondly, for the last two years (2011 and 2012), the UDB has had cumulative fair value gains in investment property and net foreign exchange gains to the tune of Ugx 7 billon and Ugx 5 billion respectively. For the year 2013, the bank suffered net foreign exchange losses to the tune of Ugx 1.4 billion and fair value gains to the tune of Ugx 1.5 billion. Fair value gains are simply a virtual gain or income recognized on the value of their investment property. For example if you bought land in Seeta two years ago at Ugx 100m, you have an option where you would still indicate it in your books at its historical cost/ value of Ugx 100m or you could carry it in your books of accounts at its fair value or market value today which could be Ugx 120m, so the fair value gain would be Ugx 20m. This is the same scenario with Uganda Development Bank. The bulk of their income in the last two years has also come from this fair value gains on their investment properties after revaluation of the said properties. UDB owns investment property (two residential houses in Munyonyo and Commercial Towers in the Central Business District) worth Ugx 29 billion as at 31st December 2012. Furthermore, UDB suffered Ugx 3bn impairment loss on loans and advances made to customers! An impairment loss arises when the book value of a loan is higher than the amount that can actually redeemed from the loan. If you indicate in your books of accounts that your loan book is worth Ugx 100m but the market conditions and real indications are that you will only redeem Ugx 80m, then you suffer an impairment loss of Ugx 20m!
The government owned UDB also has a strange liability and equity structure compared to other many private banks operating in Uganda. It has total liabilities and equity amounting to Ugx 147 billion. Equity accounts for slightly over 70% of this. In many private banks on the Ugandan market, customer deposits are the biggest liability financing the banks biggest asset, the loan book. Uganda Development Bank needs to explore other opportunities for raising funds for long term financing. These may include pension funds from private corporations, savings by cooperative groups and long term loans from regional banks like AfDB.
The other salient issue that needs key focus is the architecture of their loan book. Despite their mission to align long term financing to key growth sectors in the economy, the reality on their financial statements is different. Loans to Trade and Commerce sector account for 50% of the bank’s loan book. That means that for every Ugx 100m that the bank has loaned out, Ugx 50m has been loaned to the Trade and Commerce sector. We all know that the bulk of the business in the Trade and Commerce deals with sales and merchandise of imported finished goods. This has not only led to economic growth that is deficient of jobs but also led to capital flight and foreign exchange losses due to the high import bill.  Tourism and Hotels account for 21% of the loan book while, 10% goes to Food processing. A miserable 4% is what is loaned to Agriculture enterprises! This is the paradox. Why isn’t the bank lending majority of its resources to agriculture that offers a competitive advantage in regional market economics and also employs the majority of Uganda’s 35 million people?
The other disturbing detail is that over 60% of all loans are for periods less than one year. This means the bank is putting the bulk of its funds to providing short term loans! Business are going to UDB for financial services that they ought to get from your ordinary bank not a development finance bank! This goes against the spirit of the development financing which should be more focused on medium and long term project financing requirements. Only 8% of the bank’s loan book is allocated to projects with periods exceeding 5 years! There is need for a paradigm shift at the Uganda Development Bank Limited. We need to adopt the China model of state capitalism and create indigenous capital and wealth creation. UDB needs to source long term capital to finance long term projects that foster job creation, economic development and transformation.

Rugaba Agaba
Rugaba Capital Limited

Sunday, April 13, 2014


By end of 2011, UMEME had 13,384 authorized shares. Authorized shares are the maximum number of shares that a company/corporation is authorized (by its constitutional documents in accordance with company law) to issue or allocate to shareholders. So UMEME had 13,384 of these. UMEME had issued all its authorized shares, thus issued shares were 13,384 too. Authorized shares were equal to issued shares. Each share was valued at $1000 (Ugx 1,704,776)The dollar rate considered was Ugx 1,708.7763 per dollar. So the total issued share capital was $13,384,000 an equivalent of Ugx 22.87 billion (at Ugx 1,708.7763 per dollar). This means that each UMEME share was valued at Ugx 1,708,776. (Ugx 1.7 million)

The famous Wall Street bull
The famous Wall Street bull

In 2012, the shareholders (UMEME Holdings Limited / ACTIS), at their annual general meeting resolved to do a share split. For every share, they resolved to create 100,000 shares. Thus they created 13,384 x 100,000 = 1,338,400,000 shares. They also resolved to create a further 461,600,000 authorized shares (Company law and their constitutional company documents allow them to do that). So their total authorized shares were now 1,800,000,000 shares = (13,384 original authorised shares + 1,338,400,000 shares from the share split + 461,600,000 newly authorised shares ). So from 13,384 authorised and issued shares in 2011 to 1,800,000,000 authorised shares in 2012.

Of the newly authorised 461,600,000 shares, they issued 285,478,005 shares to the public at Ugx 275 per share through the IPO. This fetched them Ugx 78.5 billion. With this, they earned Ugx 70.292 billion as share premium. Share premium is just a profit on sale of shares. If you have 100 shares each valued and sold at Ugx 1000, your issued share capital is Ugx 100,000. If you later sell 50 of your shares at Ugx 2,000 per share, then share premium per share is Ugx 1000 (Share price - share value), and your share capital would be the Ugx 200,000 = (Ugx 100,000 issued share capital + Ugx 100,000 share premium). So the capital structure of a company can also grow or change from the sale of shares at huge profits/ share premium.

UMEME fetched Ugx 78.5 billion from the IPO and made a profit / share premium of Ugx 70. 292 billion. Why did they make a profit on share sales? Well, because each share after the split was valued at Ugx 17.08 thus for every Ugx 275 you paid for that UMEME share, Ugx 257.92 was share premium/ profit. (Ugx 275 - Ugx 17.08). Why Ugx 17.08 per share? Because the original issued share capital of Ugx 22.87 billion divided by the 1,338,413,384 shares after the share split and before the resolution to authorise another 461,600,000 shares meant that each UMEME share was worth Ugx 17.08 before the IPO.

Like they say, the rest is history.
Twitter: @RugabaAgaba

Thursday, April 10, 2014

UMEME and Uganda’s Political- Economic Ecosystem.

The 3rd quarter of the FY 2013/ 2014 will be remembered for among other things, as the period when the Uganda Parliament recommended the termination of the UMEME Concession Agreement.  The dominant rhetoric was that we are stuck with UMEME; the MPS claimed that either way the contract terminates, whether at UMEME’s or Government discretion we have to pay UMEME hefty compensations.

The recommendation to terminate UMEME’s contract came hot on the heels of the release of their 2013 financial results. The statement indicate that profits after tax for 2013 were at Ugx 83.67 Billion up from Ugx 57billion and Ugx 23 Billion in 2012 and 2011 respectively. At the heart of this increased profitability is the fact that the government removed all electricity subsidies and thus all electricity costs are charged upon the consumers. Secondly, UMEME has been selling more and more electricity. According to their press statement on the 2013 performance, UMEME sold 2,118 GWh of electricity! 1GWh is equivalent to 1,000,000 Kwhs. The KWh is the unit of electricity that UMEME uses to bill you for consumption at your house. It is just a product of using a 1000watts (1KW)-rated electrical gadget or equipment for one hour. E.g. if you run your electric water heater rated at 1000w (1KW) for one hour, you will have consumed 1KWh or one unit of electricity. If you switch on your 100w bulb in your lounge for 10 hours, you will have used 1000Whours which is equivalent to 1KWh, a unit of electricity. So in the Last year 2013, UMEME sold 2.118 Billion units of electricity up from 1.937 billion units of electricity in 2012.

So it is clear, UMEME has a healthy and stable market for its utility service. Sales revenues are going up, and so are the profits to the shareholders. But the big question is whether Ugandans are benefiting from the growth and profitability of UMEME now and in the future. Part of the resentment that UMEM faces from both the general public and the political leadership here is that people feel they are just a corporate giant or ogre out- there to suck us dry and leave us to die!
UMEME has grown its YAKA (pre-paid customers) from 17,000 in 2012 to 52,000 in 2013! The YAKA system is one of the most polarizing innovations UMEME has introduced. Many customers are complaining about the speed at with which the units run down! At the heart of YAKA (pre-payment system) is UMEME’s desire to push up its working capital portfolio. Traditionally, working capital is the difference between a business’ current assets and its current liabilities. Current assets are assets that are cash or cash equivalents or can easily be turned into cash within 12 months. For example if you have a shop selling soap and cooking oil, the cash in your drawer/ cash box is a current asset and so is the stock/ inventory of soap and cooking oil in your shop  since this can easily be sold and turned into cash.
UMEME, with its 52,000 prepaid customers, if each pays Ugx 50,000 a month before consumption, which means UMEME has Ugx 2.6 billion (or slightly over $1m) in cash! According to UMEME’s Annual Report 2012, its annual salary and wage bill is Ugx 36 billion. This translates to an average of Ugx 3 billion every month. So, UMEME with its YAKA is able to raise over $1m or Ugx 3 billion in a month, which is enough to cover the current or short term liability of staff salaries and wages. It is in this context that people need to understand why UMEME is on journey to go pre-paid payment on full scale.

Secondly, we need to look at the ownership or shareholding of UMEME. UMEME is majorly owned by UMEME Holdings Limited (60%) which is wholly owned by ACTIS a private equity fund, which is also majorly owned by CDC the Commonwealth Development Corporation which is wholly owned by the UK government. NSSF Uganda owns only 8%. When UMEME listed on the stock exchange, it earned a share premium of over Ugx 70 billion. Share premium is simply a profit on the sale of shares. If you have a company and it has 100 shares each valued at 100, then the share capital would be Ugx 10,000. However, if you sell half the shares (50 shares) at Ugx 200 each, then share premium would be 100 on each share and Ugx 5,000 in total (50 shares multiplied by Ugx 100 share premium on each share). This share premium or profit on sale of shares went into paying off its shareholder debts. The whole Ugx 70 billion in profits from sale of the shares when UMEME listed on the USE was used to pay off it’s the loan owed to its Shareholder ACTIS. This loan was at an interest rate of 12%! This indicates why UMEME insists on earning over 20% in returns on investments.  The bulk of the big shareholders in UMEME are foreign corporations! It is for this reason that UMEME seems to stir strong resentment from the wider public.
By end of 2013, UMEME’s had made cumulative investments worth Ugx 224billion up from Ugx 166 billion last year. In 2012, 80% of cumulative investments have been made to network and substations. As of end of last 2012, UMEME had 7,509 distribution transformers and over 26,000KM of both distribution and low voltage lines. So it is clear UMEME has really sunk in real hard cash in our economy. It is only fair they earn healthy returns on their investments and capital expenditure. The current concession agreement put their return on investment at 20%! This implies that if UMEME invests $1m today, it expects to it to grow $2.5m in five years!

UMEME’s biggest challenge is the energy Losses at 24.3% for 2013 down from 26% last year. The implication of this is that since UMEME sold 2,118 billion units of electricity representing a 75.7% performance, the 24.3% which was lost is equivalent to 680 GWh or 680 million electricity units. This is enough electricity to cover the demand by all the domestic consumers on the grid! In 2012, domestic consumers used 455 million units of electricity! The electricity losses are bigger than the electricity consumed by domestic customers. Electricity is lost through technical losses, distribution losses and power theft! So it is clear that the wider public is also sucking on UMEME cream thus affecting their operating efficiency and capacity to meet concessions targets. This is what politician ought to address too.  You can’t build sustainable economies when people don’t want or can’t afford the utilities and thus resort to theft and illegal connections to tap the utilities. The recent standoff between NWSC and Mulago Hospital is a clear example. Government institution and the wider public must be able to meet their utility bills so as not to harm the cash flows of investors and utility companies!  

Agaba Rugaba
Socio-economic Commentator
Twitter @RugabaAgaba