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

Disclaimer; This article is for information and illustrative purposes only and does not purport to show actual results. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are current opinions as of the date appearing in this material only and are subject to change without notice. Reasonable people may disagree about the opinions expressed herein. In the event any of the assumptions used herein do not prove to be true, results are likely to vary substantially. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate its ability to invest for a long term especially during periods of a market downturn. No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those discussed, if any. No part of this article may be reproduced in any manner, in whole or in part, without the prior written permission of the author. This information is provided with the understanding that with respect to the material provided herein, that you will make your own independent decision with respect to any course of action in connection herewith and as to whether such course of action is appropriate or proper based on your own judgment, and that you are capable of understanding and assessing the merits of a course of action.

Wednesday, May 14, 2014


I read with keen interest and watched in awe as Mr. Morrison Rwakakamba the Presidential Assistant on Research and Information made arguments against the liberalization of the pension sector in Daily Monitor 9th May 2014 and NTV Fourth Estate Sunday 11th May 2014 respectively. Chris Obore, a fellow panelist on the latter forum summed it up well when he referred to the arguments as a classic case of ideological anarchy prevalent in the NRM party and by extension the government. Though harsh on the surface, the scathing review by Chris Obore may actually be the best description of the status quo in Uganda today on all matters economics, education, health, pensions, infrastructure development, social policy etc.
For the last 20  or so years, social policy in Uganda has been structured to telling people that they need to bear market risks and fend for themselves to finance their home construction, education for their kids, medical care  etc. Having adopted the IMF and World Bank inspired Structural Adjustment Programmes of the 1980s, the Ugandan state pulled out of all sectors that are key to social protection e.g. housing (for civil servants, lecturers, teachers etc), job creation, banking (for mobilizing citizens savings), medical care, utilities (for economic production), tourism, agriculture etc. So it is surprising that a state that has been absent from all these key facets of social policy, can now be expected to be the guarantor and overseer of the pension sector.
The URBS Act 2011 Article5, Section 1 (h) indicates promoting long term capital development as one of its core functions!  This is re-echoed by The Ministry of Finance Planning and Economic Development in their press statement in the Daily Monitor of 12/05/2014. The key issue we need to probe here is whether this long term capital “freed up”  by liberalization of the pension sector, will be allocated to sectors and ventures that will spur “job-creating  economic growth and development”. The prospects don’t indicate that this will be the case. For a long time, because of the unfettered financialisation, a lot of the long term capital that would ideally be going into production of tangible goods and products needed for both domestic consumption and exportation has ended up in buying financial assets e.g. government debt. None of these government securities are owned by local SACCOs or Community Cooperatives etc. They are majorly owned by off shore investors and banks! The pension funds will follow the same paradigm like their banking cousins! The investment in financial assets e.g. fixed deposits, treasury bills and bonds has not generated benefits to the wider society! If you look at the banking sector, on average, 70% of their asset portfolio comprises of the loan book and government securities! These assets are backed by customer deposits. So, who are the banks lending to? According to the Bank of Uganda State of The Economy Report, March 2014 ,Trade and Commerce take the lion’s share of private sector credit. Trade and Commerce in Uganda deals primarily in importation of finished goods to sell off through wholesalers and retailers. Ideally, these banks and pension funds would be financial intermediaries, to collect spare cash (savings) in the economy and link it to the agricultural firms and industrial corporations to produce the goods we need. This would help foster job creation, technology and skills transfers and further generate foreign exchange by exporting to regional markets like DRC, Rwanda and South Sudan. But this is not happening.
This requires Social policy, Industrial policy and a developmental state akin to the Ethiopia and China Model. It requires robust ideological conviction to make that choice on what approach to adopt! We have failed to regulate the banking sector into buttressing our agricultural and industrial sectors, we are surely not ready to regulate and marshal the pension sector into providing the required long term capital to spur agriculture and industrialization which are integral to job creation for millions of our youth. Jobs are the most fundamental facet of social protection!
Agaba Rugaba
Civil Engineer and Socio-economic commentator.
Twitter; @RugabaAgaba