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


David Mugabe said...

Good stuff! Infact until just a year ago, Tanzania has been the largest destination of FDI in EAC now overtaken by Uganda. They are also now reviewing their minerals law to rope in more from this sector that was witnessing massive capital flight

Rugaba Agaba said...

Thanks Bro. That is the way. I doubt our nations will do much progress with capital and wealth in the hands of foreign entities and equity funds.

mickey okot said...

A good offering here. The incentives to reverse the course of increased foreign participation in local corporations ,unfortunately does not exist with those that have the wherewithal to change it. So outcomes , will not align with what is good for society more broadly. It is the viscous nature of capitalism. Impossible to overcome