PRIVATISATION: THE GIFT THAT KEEPS GIVING

Last week two of Uganda’s most successful privatization companies, Stanbic bank and power distributor Umeme, released their 2023 results.

 A bit of background on both to put this into context.

In the heat of the privatization process in the 1990s it was clear that two companies had to be privatized if they were to provide the ripple effect the economy badly needed – Uganda Commercial Bank (UCB) and Uganda Electricity Board (UEB)...

UCB was the biggest bank with more than 100 branches and controlling more than 80 percent of deposits. This dominance had a net negative effect on the industry and the economy, as UCB was inefficient – it took up to three months to cash check from one branch to another and was seating on a mountain of bad debt that threatened to bring the whole sector down and the economy with it.

Detractors of the bank’s eventual sale argue that by the time of its sale it was profitable – it made sh19b in its last year, but what they neglect to say is that most, if not all, of the income came from treasury bills and bonds. Government had forbidden the bank from lending because every time they did, the stock of bad loans only increased.

Any fool can be profitable by buying government paper, but that is not the role of a commercial bank. A good commercial bank collects deposits and passes them on as loans to people who need capital. This intermediary role is critical in growing any economy.

Since UCB’s sale to Stanbic in 2002, the South African based bank has exceeded the wildest dreams of the government or its new owners.

Stanbic reported that revenues were up last year to sh1.3 trillion up from sh1.1trillioni n 2022. Profits followed suit coming in at sh421b from sh366b the previous year.

But two things stood out for me from last week’s results and in my mind cement the benefits of the banks privatisation.

To begin with bank’s lending to customers stood at sh4.2trillion, made possible in no small part to sh6.3trillion in customer deposits the bank holds. In the year Stanbic took over the bank had sh500b in assets against total liabilities of sh470.3b.

"No doubt a lot of this growth comes from momentum, the economy has averaged six percent growth over the last three decades, but you have to give the managers at Stanbic some credit because their asset base has shown a compounded average growth of aboutr 15 percent since 2002...

The second thing that stood out for me is that the bank paid the tax man sh132b. This is important because the government sold the bank for $20m or sh76b at today’s exchange rate. Going by the current trajectory of the banks growth, in five years they will be paying the equivalent of two UCBs in taxes.

These two, that they are lending multiples of what UCB did and paying increasingly more tax, seal the deal for me. This is before you go into how many people they employ, the businesses they have supported and grown over the years.

I shudder to think what the economy would be like if UCB existed with all its deficiencies to this day. Would it have been turned around? Maybe. We had all the qualified human resource at the time to do it—it was not run down by village bumpkins. But it would take time – I doubt we would have sorted ourselves by now, time we did not have then or now.

 On its part Umeme took over the distribution arm of the former UEB and its results have been just as amazing, if not more so.

Connections to the grid are touching two million accounts from less than 300,000 when they took over the concession. It helps of course that power generation capacity is three times more at about 1400MW than when they took over, but the efficiencies they have brought to the sector are not to be huffed at. They collect almost all their billings and have reduced technical losses by more than half to the current 16.2 percent.

In addition, they have joined mobile phone company MTN – another poster boy of the liberalization process, in earning revenues of more than sh2trillion and have made a few Ugandans wealthier by sharing in their success on the Uganda Securities Exchange (USE), not unlike Stanbic.

And finally over the last decade alone they have invested nearly two trillion shillings or $526m in rehabilitation and expansion of the network.

And that last point was a major consideration for privatization. Because not only were these companies hemorrhaging money, government  then or now, did not have the money to make the necessary investments to see these companies achieve their full potential.

By bringing in credible investors with access to the deep pockets of the west, government was able to hit two birds with one stone; one, expand services to more people and two, get paid while doing it.

Have the investors of Stanbic and Umeme made money along the way? Of course, which is as it should be. It was the best of both worlds. By aligning foreign capital with our strategic goals – strengthening the financial sector and expand electricity coverage respectively, the people were the winners.