BANKS AS THE SOLUTION TO OUR PROBLEMS

Last month the Uganda Bankers Association (UBA) had their annual general meeting, in which they reported on the sector’s status.

Generally the industry is still making money hand over fist.

 The industry made a net profit of sh1.41trillion off revenues of sh6.82trillion, a credible net margin of about 20 percent, in this hard economy. As a sign of the times bad loans were up above five percent, as a lot of the bad debt carried over from the pandemic continue to be resolved. Despite that, lending to the private sector grew 7.5 percent, a normalization from 2022’s 19 percent growth, that could be attributed to a recovery after the covid lockdown.

But the real story of the last week was the demonstrations on the street by youth urging an end to corruption.

For the last decade or so this column has singled out corruption as the biggest challenge for seeing the economic growth of the 40 years spread more equitably among Ugandans. Corruption concentrates wealth in a few hands, hinders service delivery and distorts markets, all leading to the unfair distribution of the economic gains we have made as a country since 1986. Hence the youth harping on the issue. Corruption is denying them opportunity.

While the banking industry is battling corruption in its own ranks (last week the second financial fraud forum was convened in Kampala) the banks can and are helping with leveling the playing field for beneficiaries of economic growth.

Or at least, that is what the numbers suggest.

The last year’s results in and of themselves, do not say much about the industry’s role in economic growth, leave alone distribution of this growth.

However, if you look back five years even a decade, there are clues that point to this benevolent tendency.

We know while the economy has grown in leaps and bounds over the last 40 years, most of this growth has come from services, construction and manufacturing, which growth has mainly been seen in the urban areas, that is how more than half of Uganda’s GDP is generated in Kampala.

The problem with this is that more than 70 percent of the population are rural based and derive their livelihood from agriculture. Agriculture over the last 40 years has rarely if ever grown beyond single digits annually, if ever.

While there are structural issues that ensure this persists and which affect the ability to finance the sector, for instance that we are mostly a small holder farm economy, the banks have been increasing support to the sector.

A decade ago agriculture accounted for eight percent of the industry’s loan book, but last year this share had increased to 13.8 percent. In nominal terms, the loans dealt out to agriculture more than quadrupled to about sh3 trillion from about sh650b in 2013.

We can debate about which part of the value chain – production, logistics or agroprocessing these funds are going to, but it would be full hardy to support one part of the value chain if production, where most Ugandans are employed, is not growing.

By inference while the sector’s share of GDP has dwindled to about 20 percent from more than 70 percent in 1986, in nominal terms its producing more and more. The successes in coffee and milk production are but one example.

So the trick for this country is how can we facilitate this increasing of shift of resources to agriculture from the banks?

The risks in supporting production are many. As mentioned above most of our farmers are small holders and still use traditional farming techniques whose yields are anaemic. Secondly, farmers need to be helped to negotiate with the market from a stronger position. And finally, access to market must be improved in terms of improved infrastructure.

The banks that have increased their interest in agriculture are finding they have to spend considerable sums to train farmers in improved farming methods and business practice. In the absence of a nationwide extension services system government would do well to offset these costs for the banks, as one way to lower the cost of loans but with the same stroke increase the adoption of improved farming practices across the country.

The government water for production scheme should be rolled out with more urgency. A World Bank report in the last decade showed that the biggest investments in agriculture should be in extension services and irrigation.

While the government struggles to beef up its extension services, relief to the banks already doing this would make sense.

The point is that while financing to the sector can make meaningful change, some things have to be set in place to speed this up.

THE CASE FOR UEDCL TAKEOVER OF UMEME

It’s about nine months to go before the Umeme concession comes to a close at the end of March 2025.

Negotiations with government for an extension broke down last year and the decision was made not to extend the concession. The major sticking point was the negotiated return on investment which, has been around 19 percent for the duration of the concession.

President Yoweri Museveni is pushing for US5cents tariff and a high rate of return for the distributor is seen as contrary to this aim.

It would make sense then to return the concession to Uganda Electricity Distribution Company Ltd (UEDCL), a wholly owned government entity and then lower the return on investment and therefore the tariff.

But first some background. At the end of the last century government decided to unbundle the Uganda Electricity Board (UEB) into its constituent parts – generation, transmission and distribution. This was done mainly to attract more investment into the sector and benefit from efficiencies that come with specialization.

"Billions of dollars have since been invested in the sector since 2000 and while there are still some concerns, the industry’s efficiency has dramatically improved from the days of daily loadshedding and minimal coverage. Consumer accounts have leapt tenfold to two million accounts during the period of the Umeme concession which begun in 2005.

Government now thinks the private players who have since entered in the sector in generation and distribution, have served their purpose and it now makes sense to take back these operations.

Already Uganda Electricity Generation Company Ltd (UEGCL) has taken back the Kiira-Nalubaale generation complex and the Namanve thermal power generation plants. UEDCL has taken over several concessions – Ferdisult, Bundibugyo Energy Cooperative Society, Pader Abim Community Multipurpose Energy Society and Kyegegwa Rural Energy Cooperative Society Ltd.

The theory is of course, that the government entities can receive lower rates of return, which will serve the eventual goal of lower tariffs.

Government would be advised to tread carefully on this one, because one of UEB’s challenges is that it charged an unreasonably low tariff, which did not allow it enough cash to run its day to day operations or invest for the long term. The idea then and what’s been pandered now is, that even if they are allowed a low rate of return, low depreciation charge, it’s not a problem because government will take over all the heavy lifting.

"If there is one thing we learnt from transferring our assets to the private sector where proper provisions are made, they become net contributors rather than a drain on the treasury. To miss this lesson is to ignore the lessons of UEB...

It therefore boggles the mind that government contrary to its desire to lower the tariff by cutting out the intermediaries is looking to contract another company to take Umeme’s place. Privately some people will say this a scheme that has been in the making a while and goes back to the failed attempt through parliament to throw Umeme out in 2014. 

The argument is that UEDCL does not have the capacity to run the sector.

This again is to ignore the history of the sector.

First of all the assets that Umeme is utilizing belong to UEDCL. Secondly, when Umeme begun its concession it begun with three workers of its own – The CEO, CFO and a consultant from Ernst & Young, with the rest taken over from UEDCL. Currently Umeme’s staff complement is more than 90 percent Ugandan, they will not leave the country with them, they will be taken over by UEDCL. So unless we are arguing that Umeme staff are hopeless, the argument of inadequate human capacity should not arise.

The challenge for UEDCL maybe however, its ability to source financing, the size required to maintain the current grid and expand it further.  The Public Financing Act requires that all government loans be passed by parliament, this and the attendant bureaucracy would make it that more difficult to run the grid.

With the kind of cash flows that Umeme enjoys, financing should not be an issue for UEDCL, but for the provision of the PFA. Umeme has enjoyed government guarantees for most of its financing a practice that we would do well to provide for UEDCL.

"I am not the biggest fan of government owning businesses but if UEDCL is going to take over the function, government should give them a fighting chance of making it work...

RUNNING FOR FUN CAN BE PROFITABLE

Last week the latest edition of the KH3 Kampala-Jinja relay was run with much funfare, huffing and puffing.

The relay kicked off at about 6 am from the Kira town roundabout, with the 36 teams snaking their way through the back roads of Wakiso, the greenery of Mukono and Mabira, sugar cane fields of Lugazi and finally ending lakeside in Jinja after dusk.

Easily

500 runners made the event and hotel rooms were at premium at the lake shore town, which did not seem very prepared for the invasion of guests, not only from Kampala, but from as far afield as Ethiopia, Kenya, Nigeria, Rwanda and Togo...

While the organisers insist it is a fun run, local authorities and the tourism ministry need not take them at their word.

I could not help comparing it with the world reknown Comrades marathon, which was run earlier last month in South Africa.  The grueling run – this year over 85 km, had people not only joining the race from all over the world but was watched by thousands more on television inside and outside South Africa.

With all due respect, the scenery surrounding the Comrades marathon did not hold a candle to that seen on 96 km Kampala-Jinja relay last weekend and yet the wider world had no clue about this event, which has been run since 2004.

While comparisons maybe unfair – for the Comrades marathon, the missed opportunity for marketing the country in general and Jinja town in particular is criminal, to put it politely...

My friend Amos Wekesa – Uganda's chief tourism evangelist , has been crying himself hoarse for years, calling for better marketing of the country. If one did not know better, one would think there are no events or attractions to show, hence our anaemic marketing.

Accompanying the Kampala-Jinja relay should put all such thoughts to rest.

Anyone who has been to the United Arab Emirates (UAE) cannot stop and marvel at how those countries have conjured an oasis of fun and excitement from the bareness of the Arabian desert. Their dune rides are underwhelming, their cities, concrete jungles trigger claustrophobia and their hospitality very contrived.

If you gave the Kampala-Jinja run to them to showcase, I can bet good money, the whole world would be beating down their doors to have a piece of the action.

And this is not about resources.

For almost 20 years the run has existed without the help of government – not to discount the police patrols that escorted the runners along the route. The participants and corporate Uganda (who have also failed to capitalise on the run) have carried the weight of making it happen annually.

This is about being strategic and executing said strategy.

To state the obvious tourism can be a big driver of investment, both foreign and local. Beyond the few dollars the tourists spend when here, tourism allows people to come see for themselves, to disabuse themselves of the myths, especially the unfair ones and make first hand assessment of our localities, warts and all....

An investor is always looking for a return on his money, but at the back of his or her mind are the questions would they want to work in the place or not? Are the people hospitable? Is the weather benign? and at the end of the day, can we put our feet up and relax in peace?

The world media that many people are exposed to, again both locally and abroad, uses broad brush strokes, bad caricatures of the reality on the ground, almost always ignoring the subtler nuances that would make a place more attractive, if not likable.

In this day and age of social media one would think the work of the relevant authorities has been eased considerably.

Off the top of my head these are my two pence on how Uganda and the local authorities can maximize the benefits of the Kampala-Jinja run.

1.       Say it loud, say it proud

For weeks before the event there should be a communications strategy telling people about the relay, that include the route, the history of the places along the route, the best places to take pictures and even provide extra bandwidth along the route, just in case all 500 participants decide to fire up their social media at once. Which one would hope would happen more often than not.

 

2.       Convenience is key

A friend was once told that when the tourists google Uganda they can not see enough public toilets along our major highways. And since many tourists may retirees who would need the bathroom more often this is a major disincentive to making the trip. We are human beings and our motivations can be as basic as that. Along the route use was made of the loos of private homes. Thank God for the hospitality of the residents, but we cannot leave such important issues to chance.

3.       Roll out the red carpet

While it was understandable that rooms were hard to find in Jinja on the day the relay came to town, it is inexusable that even in some of the establishments they had not rumped up the supply of eggs, fish and beer to accommodate the new numbers. It suggested the town – its authorities and businesses, are not working together. With a little bit of effort people may have spent more, stayed longer and even made a mental note to return before next year’s event.

And all along the route were people prepared, participants would have bought fruits, meat and beverages rather than carry all their supplies from Kampala.

I know how it goes. They say God gives meat to those who have no teeth. This event fell into the laps of the government, local authorities and businesses and they are still with mouths agape, frozen in the headlights and unable to maximize its potential...

We can do better. We have 360 more days to work it out.

TO BUILD OR RENT? THAT IS THE QUESTION

Last week a Kenyan writing on X formerly Twitter, seemed to put the age old question “to build/buy a house or rent” to rest.

The writer, Martin Tairo Maseghe, argued that if he wanted to buy a kshs7m (sh200m) house in Embakasi a Nairobi suburb, he would have to raise 20 percent or kshs1.4m as down payment, then at a mortgage rate of 12 percent payable over 20 years he would fork out kshs61,660 a month.

This did not make sense, he continued, pointing out that typical rents in the area for the similar house were Kshs35,000. It did not make sense to pay almost 80 percent more than the rent in the area to pay off the house.

In fact he thought, it made better sense to take the Kshs7million and buy a seven year bond, and at 13 percent earn himself Kshs76,000 a month and with that rent  himself a better house in the higher end suburbs of Kileleshwa and Lavington, a better environment than the Embakasi house that he would have bought.

The logic seems obvious until you scratch the surface a little.

But first, wealth accumulation is the outcome of winning the contest between investment and consumption. Consumption in the short term makes you look rich – living in Lavington versus living in Embakasi; while investment will mean delaying consumption for a future date as you accumulate assets, income generating assets in the present.

If you are not impressed with your financial status, check on how you spend your money, do you consume more of your money than invest it. You are suffering now because your decisions over the last five, ten, 20 years have been biased towards consumption and away from investment.

 Back to Mr Maseghe. To simplify his argument he overlooks two things.

One, that the rent in Embakasi or Kileleshwa for that matter will not remain the same for the next 20 years. While interest payments will remain stable at kshs61,600 a month more or less. And the bond coupon is guaranteed to remain at kshs76,000 a month for the next seven years.

Straight out of campus I landed on a two bedroom house for which I paid sh200,000 a month. That was 30 years ago. That same house today is renting for sh1.2m a month, the rent went up six fold in the last 30 years.

The second thing he overlooked is that the value of the property will most likely rise during the duration of the mortgage. With few exceptions, the stock of land is not increasing, but with growing populations the need for land is increasing. A simple supply and demand equation points to increasing property values over time. Its an almost mathematical certainty.

Again when I left university, to buy a bungalow in the out of the way Naalya estate one needed to put down sh27m. Yes!

Today with the benfit of improved infrastructure, Naalya is no longer a Kampala back water and for those same bungalows, you will be lucky to raise any interest with the current owners if you offer sh150m.

While property appreciation is not immediate cashflow, it still is an improvement in value from the original price and can be liquidated or even better, remortgaged to extract more money.

"Wealth is more about what you own than what you earn, the accumulation of which takes time and sacrifice. A big salary is good, but if you have dreams of being wealthy, the question has to be how much of that salary are you keeping for yourself ie buying assets?

If all our spending decisions are weighed against whether one is spending to consume or invest, we can hopefully make decisions that will be better for us in the long run.

While you will immediately impress the little brown girls with your move to Kileleshwa, in the long run the guy in down market Embakasi will come out on top, as when your bond matures and they return your Kshs7m, there will be no property in Embakasi leave alone Kileshwa that the money is good for.

While your friend who bought in Embakasi, bit the bullet for a few years, when there was a deficit between the prevailing rent and his interest payments, will be laughing all the way to bank, maybe having rented out the Embakasi house and with a new mortgage bought a house in a pricier location.

There are really no short cuts to building enduring wealth. There will always be some discomfort at the beginning of the journey, especially because you cannot hang out with your look-rich friends on Bandali rise, but you will get used to the pain in a few months and it will not matter in a few years...

 So, it should be back to the drawing board for Mr Maseghe, especially if he is interested in living in Kileleshwa one day.

 

THIS IS HOW TO SOLVE UGANDA'S DOMESTIC ARREARS ISSUE

Domestic arrears owed to Ugandan private sector and individuals have nearly touched sh8trillion but government has only allocated sh200b in the current budget to settle these.

Using a straight line analysis if government owes your business a million shillings they will pay you sh25,000 towards clearing the debt this year.

"Interestingly interest does not accrue on these debts, so government can sit on your money indefinitely and let inflation lower the burden on them. You try that with Uganda Revenue Authority (URA)...

Government is still the biggest client to many suppliers in Uganda. In a small economy like ours this is inevitable. If you want to make serious money you have to deal with government.

Everybody should be ambitious, but when your ambition leads you to deal with government? The graveyard of corporate Uganda is filled with the corpses of businesses that went into business with government.

In fact often times when businesses plead for government bailouts, all they are asking is for government to make good on its obligations to them. Which pleas often fall on deaf ears and hence the growth of corporate Uganda’s graveyard.

The irony of it all is that government cannot seem to able to help itself, despite refusing to pay off its debts it continues to build up more debt, totally oblivious to the heap of debt it still has and its effects on the economy.

These are not only numbers with a lot of zeros attached to them, but has a far reaching effect on the economy and its continued sustainability.

A recent media report showed that the number of tax payers by income group who earn sh100b and above had fallen to only six in 2022/23 from 125 in 2019/20. A lot of the attrition can be attributed to the covid pandemic but the jump in what government owes to the private sector I believe, has more to do with it.

During the same period the domestic arrears have jumped from below five trillion shillings to their current levels.

It is a no brainer. If business attrition is accelerating with no sign of slowing down, revenues will follow suit, infrastructure development and social services will suffer, leading to increasing poverty and inequality and then chaos. It is a straight line logic that is impossible to argue against.

You therefore wonder why a seating government would allow such a thing to get out of hand, especially with the demonstrations in Kenya as a backdrop.

The Kenyan demonstrations are against the current finance bill, which lays out how government will raise revenues to finance the budget. The new taxes in the finance bill have acted as a trigger for the demonstrations. Kenyans pushed to the wall are saying they have no waist left to tighten their belts around.

President William Ruto’s administration unfortunately is suffering the effects of at least two decades of reckless debt accumulation – Kenya’s debt to GDP is about 70 percent and runaway corruption, which has left more and more Kenyans desperate for survival.

It would be nice to do a thorough forensic audit on how the domestic arrears keep mounting year on year in Uganda, but we may not have time for that right now.

At last count the verifiable domestic arrears were about half of the total stock (one wonders why the issue of verifiable debt should even arise?) so about sh4trillion can be verified.

Government should issue a bond for whatever duration say ten or even 20 years of sh4 trillion. Let say they name it the domestic arrears bond. The current 10 year bond has a coupon rate of 16.7 percent, the new bond can be issued at even 15 percent, as long as government removes the 10 percent withholding tax on it and the market will snap it up.

"This would do two things, most immediately the funds will be available to lessen what government owes to the private sector, while at the same time pushing the final debt repayment further back into the future....

In 2014 the budget was sh15trillion it has since grown five fold since then. By extension paying off sh4trillion 10 years from now, assuming the same rate of economic growth, will not be a big deal. Meanwhile government’s annual bill would be about sh600b in coupon payments to the bondholders, well within its means when you consider the wastage of public funds we experience daily.

But even more beneficial is that there will be an injection of economic activity with this pay off. Businesses will be back in business, banks will get paid, which money they will again lend out into the public. Invariably consumption will go up and tax revenues will come in. It is a win whichever way you look at it.

This is not rocket science and has been discussed already at the highest levels of government.

History shows that economies are only as vibrant as their private sectors. It’s the private sector that creates wealth and jobs, pays taxes and stabilizes nations. If you have a weak private sector it is only a matter of time before things head south.

This is not a revelation. This is textbook stuff. So who is trying to bring this government down?