Tuesday, November 15, 2016

UMEME A VINDICATION OF THE SHIFT TO A MARKET DRIVEN ECONOMY?

Last week Umeme Holding Ltd (UHL) sale of half it shares to National Social Security Fund (NSSF) and their announced intention to offload their remaining shares brings to a close one of the most successful chapters in the country’s privatisation process.

The privatisation of state owned enterprises was based on the premise that old parastatals were a drain on the treasury, that they needed huge investment outlays the government could not afford and that we did not have the managerial capacity locally to turn them around. The last issue beyond inadequate managerial capacity was that local managements were not properly insulated from the interference of the state.

"The opposition to the privatisation process argued that we were selling the family silver, never mind that it was badly tarnished, to foreigners for a pittance. In doing so forgoing any leverage the government had over the economy and that it wold cost us jobs, earnings and prestige to sell...

Thankfully the economic reality was that the government really couldn’t afford to carry the load of these resource draining black holes in the face of more pressing needs – getting the economy back on its feet, rehabilitating roads, ensuring security and providing social services. Forcing the government’s hand to sell.

If the same debates were happening now the opposers of privatisation would have won the day.

The liberalisation and privatisation of the power sector was always going to be a sensitive issue because of its potential strategic importance to the economy. At that time we were only generating about 200 MW, the then Uganda Electricity Board (UEB) was covering less than three percent of the population and power availability was sporadic.

A law was enacted to break up UEB’s monopoly before it was unbundled into its generation, transmission and distribution components. The break up of the former UEB was important to bring specialisation to the various functions and to make it easier to sell, as resuscitating the whole UEB would have cost too much and increased the risk to potential investors.

The generation arm was leased to South Africa’s Eskom and the distribution arm to a consortium led by the UK’s Commonwealth Development Corporation (CDC). Later Actis, a spin off from CDC took over Umeme.

Under the arrangement the assets of Umeme still belong to government, but Actis was given a 20 year concession to run them from 2005.

"Half way through the concession Umeme has accomplished a lot of what the privatisation was intended to -- widen power consumption, deliver a more efficient service and increase revenues to government. And as a bonus they have sold their shares to Ugandans who have benefitted from its increasing profitable operations...

Of course the naysayers will point to the sh500b they got from share sales and dividends and say we got the short end of the stick. But this would be to ignore the growth in the economy and improvements in welfare to individual households and businesses that came with adding almost 700,000 accounts – the projection is there will be a million accounts by year end.

And not to mention the increase in wealth for the thousands of shareholders who have rode the company’s share price from its Initial Public Offering (IPO) of sh275 to the current sh525 a share price. Shareholders almost doubled their money when one considers capital gains and dividend pay-outs since 2012.

And then as if that is not enough they mentored a management cadre that will take this project to the next level.

The now disbanded privatisation unit could not have asked for a better poster boy for the process than Umeme.

The private sector is not the panacea for all our problems. But as a creator of wealth through the manipulation of land, labour and capital, no other economic system comes close. But for it operate for the benefit of all the people,  we need to understand what motivates it and leverage this to our own benefit.

In their pursuit of profit companies seek to maximise revenues and minimise costs. Governments on the other hand, ultimately, are looking to deliver goods and services to its people to improve their standard of living.

These two goals need not be mutually exclusive.

Government needs to create a conducive environment – good legal and policy environment, efficient infrastructure and productive human resource, these coupled with growing market demand should attract the kind of credible investors – internal and external, we need to move this economy to the next level.

"Unfortunately for us our appreciation of the private sector – how it works and what it needs to work well, is rudimentary at best or bordering on total ignorance at worst. We have an unhealthy, even envious suspicion of money makers, which does not allow us to make the necessary concessions required to allow businesses to thrive...


Let us study the Umeme deal in more detail and maybe use it as proforma for attracting investors into our infrastructure, agriculture and social services sectors. And who knows, with sufficient exposure to international best practice we will not only appreciate business better but we will incubate our own crop of super businessmen.

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