KEITH MUHAKANIZI: HOW WOULD UGANDA HAVE TURNED OUT WITHOUT ECONOMIC REFORM

Prompted by the recent passing of Keith Muhakanizi I got to thinking what would have happened to Uganda if we had not bitten the bullet and made the hard decisions in the 1980s and 1990 required to resurrect the economy?

First of all what did Uganda look like in 1986, when we can safely say the real recovery of the economy begun.

"Going by the first budget read by then finance minister Professor Ponsiano Mulema it is hard to tell objectively what Uganda was like...

“It was, however not possible to get reliable statistics. Such figures as we now have are rough estimates based on the few statistics available and lots of assumptions,” Mulema siad in the budget speech he read in August 1986.

He however managed to report that the industry had broken down due to poor management, inadequate working capital and was unable to get enough hard currency to buy raw materials, spares and other inputs. Coffee exports amounted to about 2.5 million bags but he suspected this was an understatement of the true production as a lot of coffee was being smuggled by individual and official agencies. Mulema also told the National Resistance Council (NRC) that sh402.5b in revenues were collected that year at the official rate of sh1400 to the dollar this came to about $287m or just over a trillion shillings at today’s rates. PS Ramathan Goobi would be unreachable if he had a resource envelope that light today.

Total budget that year was sh514.3b or $367m or about sh1.4trillion in today’s money. The 2023/24 budget is set to touch sh50trillion and we will still have a cash squeeze.

Numbers aside the anecdotal evidence draws a better picture. Everything was in short supply.

"It was not uncommon for grown men and women to cut work, on a predetermined day, to line up outside the Resistance Council I (RC1) chairman’s house for a piece of a bar of soap, a liter of kerosene or a kilo of sugar. While driving, your main preoccupation was to fall in the porthole that would cause least damage to your car, you couldn’t dodge them all (sound familiar?). Keeping left was a luxury car owners could not afford. At Makerere University when water run out, you went to Katanga to fetch from the protected well there. Being run over by a car as you crossed Bombo road wasn’t a concern as there was little traffic in those days. There were several wells around Kampala for this purpose. (Do you know he well nearest your home today?) Electricity was a rumour and we didn’t even have generators or power inverters...

I am sure living in today’s Uganda you cannot get the picture.

At a macro level as described by Mulema there was little economic activity – of the 80 factories surveyed at the time only 10 were working at 30 percent capacity, therefore there was little tax revenue -- Revenue collections to GDP stood at around five percent and therefore government had little to no leeway to provide public goods.

Government therefore had to suck up to the money men – The World Bank and the International Monetary Fund (IMF) for a start, who had the resources we badly needed. But in order for them to open the money taps we had to bring government expenditure under control, privatise the inefficient public companies and liberalise the economy, by for one, breaking up government monopolies. That was the cost of their money more painful than the few percentage points of interest that would be due on some of those funds.

There were some idealists and armchair economists who thought we need not suffer the pain of the reforms to get the economy back on its feet. That if the donors want to help us it should be unconditional aid, they give us the money, don’t ask for repayment and let us spend it as we saw fit. The naivete of these people boggles the mind.

So, let us say we had taken that route, what would have happened?

Chances are in lieu of tax revenues the government would have printed more and more money – it was already doing that. Mulema reported that currency in circulation had grown 90 percent in the preceding year. And then inflation would have taken off. Inflation is a disincentive to business because you can not plan and discourages lending. The net effect of which would be that the government would be unable to provide essential services, services critical for lifting people out of poverty. Shortages of everything would persist and we would continue with our sub-human existence and we would be worse off than we were in 1986.

"We would be a cross between Eritrea, with its scarcity commodities and services and Zimbabwe, with its hyperinflation and useless currency....

What people don’t know or choose to forget that the economic reforms that pulled us out of the hole were not only necessary to unlock the donor vaults but at the heart of then they were good economics – control government spending and the let the private sector be central to economic growth.

While it is true that no country has developed using aid, the initial aid is useful to get the economy up and running. To take us to the next level, to transform our economy will require to improve the productivity of our labour, land and mobilise more of our own resources, which arguably will need the next level of policy beyond monetary discipline.

 

KEITH MUHAKANIZI AND THE PASSING OF AN ERA

Last week the permanent secretary in the Office of the Prime Minister (OPM) Keith Muhakanizi passed on in Milan, Italy where he had sought treatment for a long-time ailment.

But he is better known for his time at the finance ministry, where his role in the reconstruction of our economy since the early 1980s is indisputable.

While work to begin economic reforms begun with the Obote II government, the National Resistance Movement (NRM) government is the one which really had to roll up its sleeves after 1987.

The first budget of the NRM in August 1986, painted a really bleak picture of the economy.  

"Revenues were thin as coffee exports, Uganda’s top tax earner at the time, were largely being smuggled; money in circulation had jumped 90 percent in the previous year, fuelling the already triple digit inflation, a situation not helped by the floating shilling, which was depreciating everyday for lack of foreign currency. As Uganda’s industrial base had been gutted and most things even the bare essentials like bar soap, sugar and cooking oil had to be imported, the depreciating shilling was a nightmare....

So, while the beginning of Structural Adjustment Programme (SAP) had already begun, “The financial programme failed …. the government was not particularly disciplined and therefore expansion in money supply to finance unplanned and in many cases irregular government spending,” then finance minister Professor Ponsiano Mulema reported in the 1986 budget speech.

It would take more than a few paragraphs to describe the dire straits into which the economy had sunk. No less a figure than Singaporean prime minister Lee Kuan Yew, credited with leading his island nation from “third world to first in one generation” did not give Uganda a chance in 1988,

“When I met the leader of Uganda, I knew I was meeting a leader whose world has collapsed and may not be put back together for another 100 years,” he said in an interview at the time....

This is the situation the young economist Muhakanizi found himself in. There are many people who were involved on getting Uganda back on its feet but for longevity, former Governor Emmanuel Tumusiime Mutebile, Muhakanizi’s predecessor as finance permanent secretary and secretary to the treasury Chris Kassami, stand out. Muhakanizi was the understudy of his predecessors, an uncharacteristically vocal one at that.

In 2006 I interviewed Muhakanizi to commemorate the 20 years since the currency reform. The interview was at his farm in Sembabule where I drove for miles without seeing anyone, before getting to his door. I joked that even the loudness of the Bakiga would do him no good here in trying to talk to his neighbours.

He dismissed the explanation that Bakiga are loud because they had to communicate across valleys in Kigezi, explaining that the loudness of the Mukiga comes from confidence, which confidence comes from being the first place that the colonialist succeeded in titling land in Uganda, after futile attempts in Buganda and Busoga.

The psychology of a man who has his own property is very different from another who is beholden to another, for even the land on which he lives.

I have to admit I have never tried to verify this claim. As far as I was concerned, it was as good an analysis as any and I was not going to let the facts get in the way of a good story.

But this is a critical element to the turn around of Uganda’s economy. When the NRM came to power among the things they did was to stop the IMF program signed onto by the Obote II government. Their revolutionary fervor could not allow them to kowtow with the Bretton Woods institutions, the symbol of “western Imperial hegemony”.

"But President Yoweri Museveni, a quick study, soon realized that with empty coffers, no means to fill them and a political project that was about to die before it begun, later in 1986 called in then, central bank governor Leo Kibirango and Mutebile, then chief economist in the planning ministry, to chart a way forward. These two of course were already branded the “imperialist agents” whose voices had been drowned out by the “revolutionaries”....

Mutebile, a mukiga, was more forceful in his argument than Kibirango and thankfully, Museveni saw the logic of an about turn on the course the economic direction. The rest as they say is history.

But the devil is always in the detail. And it was left to technocrats like Muhakanizi and others to do the “dirty” work.

This entailed the freeing up of the foreign exchange market, the liberalization of produce marketing, the privatization of the state enterprise and bringing much needed discipline to government spending.

There were many moments when the government wavered, seduced by populism, and it took the combined efforts of the three – Mutebile, Kassami and Muhaknizi to show the politicians the error of their ways and reset the course.

The results are there for all to see in the more than three decades of unbroken economic growth – the last time the economy contracted was in 1985.

Muhaknizi, his strongly held convictions making him a polarizing figure, in his later years at the helm of the finance ministry maybe run into the limits of his own powers. The major criticism against him was that the market friendly policies he fronted seemed unable to translate into a transformation of the whole economy, especially the agricultural sector, in which seven in ten Ugandans derive a livelihood. Failing health and the conservatism that comes with age, maybe blamed for his seeming inability to embrace a new turn in the road.

"But it would be a very hard man to disagree that the net effect of his favoured policies have been positive for the economy and have set the basis for the economy’s future take off. And as such his passing – as the last of COO of the finance ministry involved in the reconstruction of the economy, although he was not in the finance ministry at his end, may very well signal the end of an era or at least a major milestone in this country’s economic journey.

Fare thee well Keith Muhakanizi.

LIGHT AT THE END OF THE TUNNEL FOR THREE WAYS

Jeff Baitwa has been to hell and back.

Draining court battles and the near-death experience of his company are an understated snapshot of the journey he has been on.  But he can now see light at the end of the tunnel and his business, BroGroup Ltd seems set to return, stronger and wiser.

While the rest of us after university, in the mid-1990s, set out to find jobs, brothers Oscar and Jeff started Three Ways Shipping, which is now the flag ship of their BroGroup holding company. They struggled to get a foothold in the highly competitive clearing and forwarding business, building the business to the point that, at the height of its success about a decade ago, they were reporting top line revenues of $30m(sh110b) and were employing at least 750 people across a network that stretched from the Mombasa and Dar es Salaam to their operations in western Uganda, where they were gaining a foothold in the oil & gas industry.

"Ironically, the oil & gas industry almost did in all their hard work. After the commercial viability was determined in 2006 the frenetic work around the exploration slowed to a crawl. Critical legislation, a tax dispute with UK-based explored Tullow Oil and negotiations surrounding the development of the oil fields, most especially the pipeline to Tanga in Tanzania, were to blame for the slowing momentum in the sector...

The slowdown badly affected Three Ways Shipping, which had positioned itself as the leading local logistics company servicing the sector.

Their bankers put them under receivership in 2016, before the company extricated itself from it in 2019.

In the meantime, the company found itself in a debilitating court battle with their client telecom company, MTN, which is still winding its way through the court system, but which Jeff thinks, is about to be resolved.

Just as the company battered and bruised, was girding its loins to begin a comeback, the Covid pandemic happened, setting them back deeper into the hole they had found themselves in. In Uganda and globally the Covid pandemic prompted a worldwide lockdown, that started around March 2020 and only last week did the World Health Organisation (WHO) announce the pandemic was finally over.

“I think we are over the worst now,” Jeff told Business Vision last week in his office on Jinja road. But not without pain.

In order to resuscitate the group, the brothers have had to invite new shareholders, offshore investment firm, Delux Group, which took a 20 percent stake in the company and brought in much needed financing to tide the company over its earlier challenges.

“The new investors are college alumni, some of whom are Ugandan who saw our situation and thought they could help us get back on our feet not only with resources but with their own experience,” Jeff said.

As a result, Jeff is now co-managing the company with Daniel Pettersson and a new, Chief Financial Officer (CFO), Chief Operations Officer (COO) and Human Resource Manager have been hired.

“Before our challenges we were servicing multiple industries -- trade, infrastructure, produce oil & gas and not only in Uganda but in Kenya ana Tanzania. In Kenya and Tanzania, we are already working through joint venture partners,” he said.

Already in Uganda, the BroGroup is in a joint venture partnership with the Johannesburg Stock Exchange (JSE) listed Grindrod Logistics Africa, focused on freight forwarding business opportunities.

"With BroGroup’s ducks lined up, Jeff is confident about the company’s future, but this hope is tempered by the experience of the last decade.

“During the challenging times I have better come to appreciate the need for self-belief, perseverance, patience as personal attributes. Also, good friends, supportive family and supportive workers and all those who stuck with us in various ways during the period,” Jeff said. “The relationships we developed have remained largely intact and we are grateful for that.”

It started as a two-man operation – Oscar in the UK taking orders and Jeff in Uganda doing last mile deliveries – it was called Equator Freight Services. That was in 1996, 27 years ago.

Jeff says, these last few years were as close as the company has ever come to being shut down and maybe that is what was needed for it to bring in new partners and reach for the next level of its potential.

"In the immediate future the group will be focused on the oil & gas sector, where first oil is expected by 2026, but there is a lot of logistical work needed to be done over the next three years and hopefully carry everyone along with them.

“We will be looking to employ local, buy as much as we can from here and even source funding locally. We will try and get as many opportunities to locals in a sustainable manner,” he said.

In the medium to longterm they are going to see more corporate evolution as they mature.

“I may still be the MD for the next two, max five years. We are trying to drive the business so that management is more independent from the shareholders,” he explained.

Jeff thinks they are definitely out of the woods, never mind that the enduring lesson from the Covid pandemic is to hope for the best but expect the worst.

HOW WOULD A CORRUPTION FREE UGANDA LOOK LIKE

This week President Yoweri Museveni responded to critics to his easter messages on a number of subjects, not least of all corruption.

The President pointed out that there are institutions mandated to fight corruption and he as the president would be overstepping his mandate to start hunting down the corrupt. He nevertheless pointed out that he set up institutions to fight corruption though complained that some had been infiltrated by the very corrupt they were meant to be fighting.

"The argument that corruption should be fought based on evidence is hard to fault and it is as it should be. The seduction of public lynchings and arbitrary arrests and jailings should not be encouraged. Such methods may win a few cheap points with the people but will eventually lead down the dangerous path to destruction and chaos...

What about if the government was to give all the corrupt amnesty? That they come forward confess their sins, refund our monies and we live happily ever after.

This would be useful in helping us start from a clean slate and secondly serve as the basis for a determined attack on the corrupt. The deal would be you come forward or we come after you hammer and tongs.

And this would not be very difficult. Random lifestyle audits will easily uncover the corrupt. Our public officials have become so emboldened they are not afraid to live in palatial mansions, by their cars from the showroom rather than the bond, send their children to study abroad and holiday in exotic locations, right before our eyes.

I remember almost two decades ago during the Uganda Revenue Authority (URA) probe, officials uncovered living a life way beyond their known incomes resorted to blaming “relatives abroad” for their massive wealth.

An amnesty for the corrupt is not unusual. During the early 2000s government passed a law granting Amnesty to people fighting against the government. The condition was that you would publicly renounce your insurgency against the government, get a certificate, on condition that were you to backslide your amnesty would be revoked and the full force of the law would be brought to bear on you.

This was offered to people who had committed despicable crimes -- rape, maiming and mass killings, why can’t the same be offered to our corrupt?

Of course, the practicality of publicly confessing your corrupt ways could be a challenge, your children’s classmates will not let them forget...

But assuming we could go past this stage, what would a corruption free Uganda look like?

For starters many public servants would have to cut back on their budgets. They would have to look for cheaper houses to rent, mothball or sell altogether, their monster private four-wheel drive cars, suspend weekly visits to the farm and much more of their ostentatious living.

This will have repercussions not only for the redeemed public servants but for their wider social networks.

The story is told of the minister who used to customarily ferry people to the village every weekend he was travelling. When he lost his position, he started going to the village on random days of the week to dodge his constituents’ demand for lifts.

Kampala at night, may not be as happy as it is now. Many years ago I met a big night club owner at Kigali airport. We were both returning home. I suggested to him that Kigali would do with good nightclub like has in Kampala. With a wave of his hand he dismissed my suggestion, “There are no corrupt in Kigali, who do you think come to my place?”

Which makes you realise that the biggest beneficiaries of corruption in our government are among us in Kampala and not in the rural areas.

So, a halt to corruption would be good for rural Uganda. Schools would be built and resourced, health centers the same, feeder roads would be opened up and maintained, essentially rural Uganda and the more marginalized urban dweller would be have access to the tools that would help him climb out of despondency and poverty.

"There would be much gnashing of teeth in the hills of Kampala as our public servants take a marked cut in their lifestyles and maybe because they would have to rely on public services, would ensure they worked well – after all they cannot afford treatment in Nairobi or Delhi or Johannesburg....

It would be interesting to see how long our public servants would continue with this class suicide before they fought to return to business as usual.

That is the challenge with fighting corruption in this country, it is now baked into our DNA to the point that the enforcers of the law are themselves part of the racket. As if we don’t know that.

REALIGNING THE STATE WITH THE PEOPLE’S ASPIRATIONS

Last week Karomoja affairs minister Mary Goretti Kitutu was charged in the Anti-corruption court and spent the Easter weekend in Luzira.

This happened because she was the alleged mastermind of the Karamoja iron sheets scam that has held our attention over the last few weeks. Minister Kitutu, it has been reported, dished out hundreds of iron sheets meant as relief aid for Karamoja, to her well-heeled minster colleagues and other senior government officials, who among other things used the sheets to roof their animal pens.

This column has had a thing or two to say about corruption since it begun almost 20 years ago. Looking through the archives I came across this gem (If I may say so myself) from September 2014 which run under this very headline, in which I tried to put this whole corruption thing in perspective.

Beyond showing that the more things change the more things stay the same, a less cynical me thought there was hope for the anti-corruption fight, with a hopeful ending that I think has been overtaken by events. You will be the judge.

Read on dear reader.

What is corruption? Corruption is the employment of public goods for personal enrichment.

 

Or maybe we should add, employment of public goods for personal, family and friends’ enrichment.

By this definition corruption goes beyond stealing money, but will include employing company facilities – using official cars to ferry charcoal or official computers to do private consultancies or official time to do private errands.

 

To complete the definition we might add, corruption is the employment of public/company goods for personal, family and friends’ enrichment. And you can be sure we have not covered all the bases.

 

Corruption comes from a misalignment of ambitions between the government officials and the public or between the employees and shareholders or clients. If you can align those two ambitions, corruption need not exist. I think.

 

The theory is that governments are in place to improve the welfare of their people, be it in terms of improved security, services and infrastructure. Generally governments are, or should be, in the business of creating a conducive environment for their people, to not only survive but thrive.

 

It is not automatic.

 

"For government to execute its mandate, its bureaucracy needs to one, appreciate the end goal and two, make their own personal ambitions subservient to this overarching goal...

Without the latter it will matter little if everyone understands the former.

 

So, under what circumstances do personal greed override the well-meaning intentions of the government?

 

It progresses slowly but increases in pace as more and more people are roped into the scam.

It starts when the bar of what is considered corrupt is raised. One minister famously complained that he had only eaten a few hundreds of thousands of dollars when others had eaten more. That the press should stop witch-hunting him!

 

Proceeds on to when public officials get away with more and more without getting caught. When we hear official so-so and the other have stolen billions of shillings, it rarely is the case that they did it in one fell sweep. Often times the stolen billions are the cumulative effect of years of “hard” work.

 

And then when the bosses start co-opting subordinates in their shady deals.

 

The story is told of former Zaire now Democratic Republic of Congo president Mobutu Ssese SSeko. Whenever he wanted some money from the central bank he would send his personal assistant with a note for say $10,000, the personal assistant would trot over to the central bank, but only after adding a zero to the request to make it $100,000. The central bank governor would unlock the vaults,  but only after adding his own zero to make it $1,000,000.

So at the end Mobutu pocketed his $10,000 (maybe even tipped his PA $100!), the PA got $90,000 and the central bank boss got $900,000. Makes you wonder whether Mobutu was truly the richest man in Zaire.

 

And finally, the institution becomes a machine for the promotion of private enrichment for its officials. It may even hire out its competence to people outside.

Of course, the logical conclusion to all this is that eventually the government is captured, it forgets its original raison d’etre and becomes a free-for-all-but-the-people eating spree.

By this time even inserting your most upright citizens to cause a clean-up is an exercise in futility, as the “eating” networks are so pervasive and coordinated, that the most righteous individual will soon be subsumed by the sheer magnitude of the racket.

And the people?

Well, they will get a few crumbs when the officials charge down to the village in government monster four-wheel drives or pay fees in decrepit schools, in a bad state because they do not get enough funding from the government or a few contributions for weddings, whose standards have been blown out of all reasonableness by the example of these thieving officials' own parties.

"Actually, the worst thing that can happen is not that the government becomes a machine feeding off the people’s sweat for the enrichment of the few. The worst thing that can happen is that the whole population – the thieves and victims, slowly but with increasing pace accept this state of affairs as the new normal....

When your brightest minds clamour for government jobs over the private sector, where the jobs are more enriching – in the sense of professional development and advancement, you know all is lost.

Thankfully that last part has not happened in Uganda. Not yet!

 

TAKE A LONG-TERM VIEW ON THE POWER SECTOR

Last week the South African power company Eskom’s 20-year concession to run the Kiira-Nalubaale power complex came to a close.

The plant was handed over to Uganda Electricity Generation Company Ltd (UEGCL) who will continue to run it on behalf of government for the benefit of the consumers.

Eskom’s involvement begun following the unbundling of the Uganda Electricity Board (UEB) into its constituent parts of generation, transmission and distribution at the end of the last century. Given the major overhaul the sector needed and government’s financial handicap, the idea in breaking up UEB was to attract private investment into the sector and benefit from the specialization that comes with the operation of individual parts of the value chain.

These objectives have been largely been met.

"Since 2000 more than $5b has been invested in the sector in terms of increased generation capacity and extension of the distribution network. For government this was a win-win situation since the private sector put up most of this investment, in addition government has seen increasing tax revenues from the sector and of course increased the electricity coverage in the country....

As an indicator when Umeme took over distribution the number of accounts stood at under 300,000. This number has now grown to more than 1.6 million. Umeme’s concession too is not being renewed when it comes due in 2025.

What has happened is a complete turnaround of the sector through the judicious use of private capital.

The sector has been good to all the investors who have been involved, no doubt.

Part of the reason government is not renewing the various concessions is because of the drive to push the cost of power from the generator to below US5cents. President Yoweri Museveni has set this as a goal for the sector and his people have advised that taking back the industry will go some way in bringing down the tariff.

"What they may not be telling the President is that while a lower tariff is desirable, even yesterday, it has repercussions on the maintenance and replacement and eventually the long-term sustainability of the sector...

The tariff charged by Kiira-Nalubaale has been the lowest of all the generators at about US1cent per unit of power. This low tariff has helped reduce the average tariff across the sector but at the expense of the health of the plant.

An audit of the power plant before last week’s hand over showed that the Eskom had only invested $51m on the plant over the last 20 years, woefully below what they should have been investing. According to the World Bank they should have invested at least two percent annually of the initial investment, which would have been at least $5.4m a year in the case of Kiira, which was built for $270m.

"By maintaining an artificially low tariff, UEGCL has inherited a plant that is in urgent need of $10m worth of remedial works and a potential $150m refurbishment bill for Nalubaale, which will be making 70 years next year....

The US1cent tariff allowed Eskom barely enough to operate and maintain the plant and not much else. To illustrate, one power unit has gone unused for ten years – from 2013, meaning no power has been generated there. Instead, it was being canibalised for spare parts.

We all want lower power tariffs, especially since our power demands have grown exponentially since 2000. We now need to charge multiple phones and devices, power TVs and cookers, not to mention keep multiple security lights on through the night. But we have to be careful not to settle for short term comfort at the expense of long-term sustainability.

Again, ask Eskom. In 2000 when we were being ravaged by daily load shedding, South Africa Eskom’s home country did not know the meaning of load shedding. However, a system inherited from the apartheid era, which while adequate for serving the white minority was beginning to buckle under the strain of the new demand from black majority.

While the political demand was to bring more and more black communities onto the grid, not enough attention was placed on how to do it sustainably, first of all using the existing generation capacity and provide for increasing this capacity.

Between 2000 to 2022 Eskom South Africa has only increased generation capacity to 45,000 MW from 43,000MW. In the 10 years prior Eskom’s generation capacity grew by 3,000 MW. While the headlines about Eskom’s failing revolve around corruption, pandering to short term comfort over long term sustainability is central to the problem.

As a result, Eskom now peak time demand has surpassed supply by as 6000 MW, which is three times Uganda’s total generation capacity, and the economy is suffering for it and the ruling Africa National congress (ANC) is paying a political price.

"The private sector rescued the sector and brought it to this stage, which for all intents and purposes, is barely the take off stage. To ensure that the take off is not aborted we need a realistic tariff which maybe painful in the short term but as the economies of scale kick in (assuming we have increased our generation capacity sustainably) the lower tariff will come....

AGENCY BANKING AND THE QUEST FOR FINANCIAL DEEPENING

A very quick measure of an economy’s dynamism is the amount of money in circulation -- money in our hands, pockets and under our mattresses versus the total amount of money including that being held in the banks.

The less the money in circulation compared to the money in banks, the better for an economy. Banks play an intermediary between those with the money and those who need the money. Money in your pockets is not helping you or anyone else, its just seating there. But you shift that money in to an account and the bank can on lend it to someone who needs it to consume or produce.

"The trick is to create a mechanism to liberate people from their cash and pool it in a place that those in need can have access to it. The more efficiently society can do this the better for the economy...

On Monday last week the Ugandan Bankers Association (UBA), the Agency Banking Company (ABC) and German aid agency, GIZ hosted an event to assess the rollout and impact of agency banking in northern Uganda over the last five years.

Five years ago Bank of Uganda opened the doors to agent bankers, who collect deposits, effect withdrawals among other financial services for their clients.

The rationale was simple. Since it costs too much -- $300,000, by some estimates to open a bank branch, why not coopt the business community in providing banking services.

This had the effect of increasing the banks’ reach into our communities and easing the pressure on their banking halls.

Similar was found in northern Uganda though not at the scale we see in Kampala.

Since the central bank’s approval of agency banking UBA and its partners have been working to popularise this mode of financial services in northern Uganda.

Ravage by war during 1990s and early 2000s northern Uganda proved a challenge for banks to spread their branches. With little urbanization and populations spread far and wide across the region the traditional model of bank branches would be a hard sell or at least would take longer than desirable to make a traction.

The study showed that the number of agencies or distribution points increased to 692  by end of 2022 from nothing five years prior. This reduced average distance from user to agent to 1.8 km from 6.8km increasing the value of transactions during the period by 18 percent. As a result, just under a thousand jobs were created directly by the agent banks.

The numbers may be a bit underwhelming, understandable coming from a low base, but the researchers also pointed out that agency banking found better traction in the region’s urban rather than rural areas.

 A raft of recommendations were made among which were that agent banking should be further promoted in the region through sensitisation of agents and the users,  reduction of initial cost of investment for agents and organize the agents into associations with a view to improving the business model.

Invariably the model will be greatly helped by improvements in telecommunications technology and the uptake of these technologies by more people.

"The ground has been set and its possible the north will leap frog the rest of the country in adopting agency banking and therefore getting financial services to more people than the rest of us who were hung up on branch networks. From there it will be a small step to adopting fintech....

Returning to the earlier explanation about money being more useful in banks than in pour pockets, believe it or not there was a time our salaries were paid to us in cash. God forbid you were paid on a Friday.

Today they post salaries to your account. If you don’t drain your account immediately someone will use your money to consume or produce.

And this is more important than we appreciate. According to central bank figures more than half the local currency in circulation is in our hands – sh14trillion of sh24trillion in February 2022, the most recent figures available. In more advanced economies this figure is much lower at under 10 percent. That makes a world of difference.

"It suggests that money is transmitted more efficiently from those who have to those who need it and has a huge bearing on the cost of borrowing. Banks make their money mostly through lending, if their cash holding increase they will be under pressure to get it out of the door quicker and hence a lowering of lending rates...

The rise of mobile money can only be a boon for agency banking as it will quicken transactions and widen access.

Its still early days for agency banking in Uganda, but the initial signs are very promising.

 

KIIRA-NALUBAALE MAYBE UEGCL’S POISONED CHALICE

At the beginning of this week South African power company, Eskom ceremonially handed over the Kiira-Nalubaale dams, they have been running for the last 20 years, back to Uganda.

And on Saturday, a day after the concession is over, they will officially hand over the 380 MW plant to Uganda Electricity Generation Company Ltd (UEGCL).

At the beginning of the 2000s the Uganda Electricity Board (UEB) was broken up into it constituent parts of generation (UEGCL), transmission (UETCL) and distribution (UEDCL). In addition, a regulator, Electricity Regulatory Authority (ERA) was created to oversee the sector.

The idea was that more investment could be attracted into the sector and  we would benefit from the specialization that would come with one operator focusing on distribution or generation. A consortium of investors and operators won the deal to distribute power and formed UMEME Ltd while several private operators set up generation plants. UETCL remained operated by government.

"A dark cloud hung over what would have been a joyous occasion at the hand over of the plant, because as it turns out, UEGCL is inheriting a plant that is in urgent need of remedial work and the prospect of multimillion dollar rehabilitation of the Nalubaale dam, which will make 70 years in operation next year...

Immediately UEGCL will need at least $10m (sh37b) to make repairs, which are a result of a back log of maintenance works that have gone undone over the last few years.

A battery of issues await UEGCL’s takeover, which may lead to financial loss, danger to workers’ and the general public and reputational damage to UEGCL, if not handled promptly.

Eskom clearly did not look after the plant very well. More than half the rehabilitation work on the dam of $51m was done over the last five years, with the under investment in the plant falling to as little as  $91,174 in 2017.

As an indicator of how woefully inadequate these outlays were the World Bank has recommended that between 2.0 and 2.5 percent of the initial investment should go into equipment and civil works annually. Given that the Kiira dam cost us about $270m, annual maintenance costs should be at least $5.4m. Eskom averaged about $2.5m a year in maintenance costs, explaining the backlog of headache UEGCL is set to inherit.

"Eskom officials argue that they could not manage that level of investment because ERA set their tariff artificially low, from which they would have got funds to finance a higher commitment...

The Kiira-Nalubaale plant  have the lowest tariff at just over US 1 cent per unit of power of any  generator who sells to the grid. Other generators are earning at least US7cents. This is mainly because of the finance costs of the plant have long been recovered.

The ultra-low tariff from Kiira-Nalubaale has been convenient for ERA to keep the weighted average tariff low but if Eskom are to believed, has prevented them from investing properly on the plant.

It did not help too, that for years there have been questions about Eskom’s capability to execute the concession properly, its parent company having been rendered bankrupt in 2019.

The aforementioned should have a bearing on what government pay Eskom as compensation for the non-renewal of the concession, but will not as deficiencies in the original concession agreement means government cannot fine Eskom for these breaches of the concession agreement. Parliament is currently mulling over a government request to pay Eskom sh45b in compensation.

So UEGCL will have to shoulder these urgent remedial works, after they have seen Eskom out the door on Saturday.

"Clearly ERA will have to revise their thinking on suppressing the tariff, if UEGCL is to fund these remedial works and a long overdue refurbishment of the Nalubaale dam, which it is estimated will cost $150m....

Over the years UEGCL has been in running battles with ERA to allow them charge for depreciation of the plants and a small return on equity. Charging these would ensure that UEGCL would when need be have enough internal resources to rehabilitate and even develop new projects.

As it is the UEGCL will have to go bowl in hand to beg for fund from the finance ministry to pay for Nalubaale’s overhaul, totally unnecessary if the tariff had been adequate over the last 20 years.

Government currently strapped for cash may not be very accommodative of new charges on the consolidate fund, especially if it could have been avoided.

President Yoweri Museveni has made it a goal to bring generation tariffs down to the magic US5cents, but this has to be achieved within reason and be adequate enough to allow the sector stand on its own feet.

While talks to give UEGCL an adequate tariff that will allow them room to maneuver and guarantee the future sustainability of the sector, are in advanced stages, one cannot help but think that the Kiira-Nalubaale handover to UEGCL, which has been profitable for the first time over the last two years, may very well be a poisoned chalice.