THE BUJAGALI TAX WAIVER

 Almost a decade ago in 2016 President Yoweri Museveni made it known that he wanted the power tariff to be charged to big industrial concerns to be not more than US5cents.

At the time the biggest drivers of the tariff were Bujgali Uganda Ltd (BUL), distributor Umeme and South African firm Eskom, which had the concession to run the Kiira-Nalubale power complex.

Folding Kiira-Nalubale into the Uganda Electricity Generation Company Ltd (UEGCL) last year and the end of the Umeme Concession in March were in aid of Museveni’s wish.

In addition, government allowed a refinancing of BUL’s debt, extending the repayment period so the interest payments can be lower, with the savings reflected in the tariff.

But it was also established that because in the contract BUL was guaranteed a certain capacity charge, to lower what BUL charged,  government committed to giving Bujagali a tax waiver for the duration of the loan, whose tenure comes to an end in 2030.

"According to the Auditor General’s report, which parliament commissioned last year, with the tax relief BUL would charge UETCL 19.58 percent less for power generated. An Electricity Regulatory Authority (ERA) report pointed out that without the tax waiver end user tariff would increase by 4.7 percent...

Parliament’s Finance Committee while deliberating the Income Tax Bill 2025, however think that BUL should not have an extension of the waiver, which ends in June, arguing that BUL have been overcharging consumers since their 250 MW dam was commissioned in 2012, have redeemed much of their investment already and that previous tax waivers have not caused an appreciable reduction in the tariff.

This means that if government wanted to lower the tariff, it would cost BUL money and threaten the viability of the concession which runs out in 2042.

But first let us go back to the beginning of Bujagali and why it produces the priciest power in Uganda. At the end of the 1990s American firm AES Nile Power started the process of trying to develop the Bujagali dam. The country was in the throes of frequent loadshedding, as the Kiira-Nalubale power complex’s 380 MW was below peak demand.

The novelty of the investment in Uganda attracted political opposition and unfair sniping from the environmental lobby, delaying development and AES run out of time and surrendered the project.

A consortium fronted by the Aga Khan took over the project and the dam was commissioned in 2012 putting an end to the daily loadshedding we had become accustomed to.

A lot of the contracts in the power sector were negotiated at time of uncertainty. There were barely 500,000 customers when Bujagali came on line, the economy was still recovering from years of mismanagement and civil war and no one else wanted to commit the nearly $900m needed to develop Bujagali. The government did not have the money to do it and traditional lenders like the World Bank did not think Uganda needed an additional 250 MW...

During intense conversations to renegotiate the BUL concession a decade ago, when Museveni first started pushing for the US5cents tariff, several options were explored including buying out BUL totally, but this option would not have the desired effect of lowering the tariff, in fact quite the contrary. Hence the tax waiver.

The bottom line is that the tax waiver is still required to achieve our goal of cheaper power for Uganda. We forget the ripple effect affordable and available power has on the general economy, which it can be argued far outstrip the tax losses.

At the height of the loadshedding in the early 2000s it was estimated that businessmen were losing at least 30 days of production annually. This was an average, the reality was much worse and included the increased cost of running diesel generators to do business.

 

DOING BUSINESS IN UGANDA IS HAZARDOUS BUSINESS

The recent Umeme debacle has taken me back years, reminding me how difficult it is to do business in Uganda.

Umeme last week announced they would dispute the $118m (sh433b) government had paid them, arguing that they have got strong grounds for the full payment of what they claimed -- $234m. And an additional $9m for works in progress is also being negotiated.

Umeme’s 20 year power distribution concession came to a close at the end of March. Under the terms of the concession they were supposed to be paid any unrealized monies from the investments they made that had not been paid for through the tariff.

The Auditor General’s recommended figure was half what Umeme had claimed. The AG arrived at his figure because the regulators who were supposed to be overseeing the concession, claimed there are investments they did not sign off on and therefore Umeme was not due compensation for them. So maybe they should park them up and go with them?

Questions should  be asked of the regulators of how billion shilling outlays were made without their knowledge. It is not as if Umeme was smuggling in stock into the bar to sell as their own, without the owner knowing.

"Businessmen are not saints and hence the need for regulation. But I fear that while as a nation we claim that we are a private sector led economy, our government and specifically its bureaucrats, go out of their way to make it difficult to do business in this country...

Either there is a wholesale ignorance of how businesses operate, which would be a hard sell – this is not 1970s Uganda or that they are intentionally throwing up hurdles for business for ulterior motives. Your guess is as good as mine.

It reminds me of the privatization process and how we lost a lot of value and prize investors because our officials and politicians just did not get it. Or didn’t they?

The winner had to be the attempted sale of the Coffee Marketing Board (CMB). The sector had just been liberalized so CMB’s market share had plummeted to about 10 percent. Nevertheless the Privatization Unit (PU) were touting its near obsolete four million bag a year processing plant and the land on which the CMB sat in Bugolobi as the key assets.

"During the first round of bidding Swiss trading firm, Sucafina, bid $8m, the highest for the offered 49 percent of the company. MPs were jumping up and down calling Sucafina daylight robbers and other less charitable names from the communist lexicon. All because the net asset value of CMB being offered was an inflated $40m. The politicians ordered PU to cancel the bid and retender the offer. This time Sucafina was the only bidder and offered only $4m. The politicians huffed and puffed and, as if to cut off their nose to spite the face, they cancelled the whole sale of CMB.

Needless to say CMB collapsed with its processing capacity and the site is now being sub optimally used for other things. Maybe we would like to check whether it still belongs to the Government of Uganda.   

Who knows if Sucafina had taken over CMB, Uganda would have made bigger inroads into the global processed coffee market. Now we are busy fighting shadowy types who are trying to corner our coffee market.

The MPs publically failed to make the distinction between net asset value, the stated value of the company on the books, when you subtract liabilities from assets and what the market is willing to pay. The latter being a function of market share and how much remedial work they would have to do to get the company up to full speed among other things.

Of course, the cheaper the businessman can get it the better for him. But us on the other side of the table as the sellers, beyond the dollar amount, need to factor in the improvements in service, tax revenues and job creation that passing on these tainted assets to a more efficient producer would mean.

Providing the investors with the right environment can be wildly beneficial for the improved living standards of the citizen.

Another privatization that had politicians snorting and grunting was the sale of the Uganda Commercial Bank (UCB). The bank, which controlled about 80 percent of deposits was a load stone on the industry, its inefficiencies affecting the whole sector.

While it was profitable at the time of its sale this was only managed by some clever accounting. The government extracted sh100b in bad debt and filled  the hole with bonds, and to ensure it did not build up its stock of bad debt, a moratorium was placed on all lending. For income UCB was just buying double digit yielding government paper. Who would not be profitable under those circumstances?

The politicians at the time fought its sale, arguing that it was giving up too much of the economy to foreign interests. Well the alternative was to keep it and sink the banking industry permanently.

After a failed attempt to steal the bank by some local players, the central bank took it over and sold it to Stanbic.

In 2019, 

about 20 years after the bank was sold, Stanbic paid the treasury $22m in tax on profit, about the amount they bought the bank for in 2002, and every year since they have paid more than $20m in taxes. But that is the smaller benefit to the economy. By being more efficient than its predecessor they are lending to the private sector. Last year Stanbic’s loan book stood at sh4.2trillion or about $1.1b. The government’s budget in 2001/02 was about $1.3b.

Whether business is foreign or local, is not a concern of the man on the street, who benefits from improved services, jobs and the services that come with the increased taxes. But rather it is the interest of an elite, who want to usurp these assets for themselves and the rest be damned.