MAYBE NSSF SHOULD BE LOOKING AT BUJAGALI TOO

At the end of July Total energies announced it had acquired SN Power, subsidiary of a Norwegian renewable energy company Scatec. In so doing it acquired SN Power’s 28.3 percent stake in the 250 MW Bujagali Hydropower plant.

SN Power acquired a 65 percent stake in Bujagali in 2018 from US private equity firm Sithe Global for a $277m (sh1 trillion), valuing the project at just over $400m at the time.

According to people who are familiar with the project, Bujagali’s value stands at just over $600m today or about sh2.3trillion.

"Bujagali is a particularly lucrative project because according to their power purchase agreement, which was signed off before it development started in 2008, it provides that they are paid for the capacity of the dam rather than for power generated...

So if we have no demand for their power, we pay for the unused power regardless.

On the surface of it, an unfair arrangement but was the kind of agreement needed to unlock the billion dollars required to develop the project at the time. International financiers require incredible guarantees to invest in places like Uganda which they see as carrying too much risk, be it economic, political or geopolitical.

It helps that a project like Bujagali has proved incredibly lucrative for its investors and may shift perspectives surrounding the risk of investing in Uganda.

I would not hold my breath for that though.

We may tear our hair out at the “unfairness” of the situation but that is the way the world goes around you either take it or leave it.

Leaving it,  would have stifled our growth over the last decade and who knows where we would be today.

"Before the commissioning of the Bujagali dam we were suffering daily load shedding, a World Bank report commissioned around that time estimated that businesses were losing at least 30 whole days of productivity due to power outages...

What is true of course is that those “unfair” conditions do not come up when they are investing in their home countries.

For one they will be borrowing in their local currency and billing their power in those same currencies. So exchange risk is not an issue.

In 2012 when Bujagali was commissioned, the average dollar rate that year was about Shs2,510, today its about sh3,750 or that the owners of Bujagali are paying their financiers today almost 50 percent more than they were paying for every dollar in 2012.

And that is just exchange risk. When you look at our economics and politics from the outside, the universal metrics of stability and continuity don’t apply.

So the best thing we can do is to have local investors who have a more nuanced view of our risks and know how to mitigate against them to finance such major but critical projects.

It is the difference between Aliko Dangote building the world’s biggest refinery in Nigeria and our own refinery whose financing has been up in the air ever since it was conceived.

In Uganda thankfully we have National Social Security Fund (NSSF) the biggest financial institution wholly owned by us.

With three quarters of its portfolio committed to fixed income assets – mostly government paper, running NSSF profitably seems like a no brainer.

NSSF has always argued that because they are dealing with people’s retirement savings, they do not have the luxury of going after risky projects. Given the way the Fund’s other parts of the portfolio – equities and real estate, are struggling, the smart thing may have been to just pour everything into  government securities.

But prizing a share of Bujagali for ourselves would fit nicely into that near-no-risk.

To begin with the Power Purchase Agreement (PPA) guarantees payment whether Ugandans consume that power or not. This coupled with the high tariff of $0.083 would have NSSF laughing all the way to the bank. As if that is not enough over the 12 year duration of the concession, BUL has being paying out 90 percent of revenues in dividends.

But also given that the concession is still on until 2042 and yet local demand is doubling every nine years, this is as good a deal as government paper...

To whom much is given much should be expected.

NSSF needs to get first bite of the cherry at such lucrative deals. It will be good for its investors but will also give the country a better negotiating position when at the table with foreign investors. The Fund will also benfit much in terms of improved technical capacity when it moves more determinedly into such  mega deals for which its is the best suited in our current circumstances.

 

UGANDA ECONOMY CONTINUES TO GROW, WHERE?

Last week auditor firm PWC issued their “Uganda Economic Outlook -2024”. The annual report which comes after the reading of the budget painted a net positive picture of the economy for the coming year.

"The economy grew by six percent in 2023/24 higher than the previous year’s 5.3 percent, and is expected to grow even faster at 6.6 percent in 2024/25 mainly driven by investments in the oil sector...

Our growth rates are even more mouth watering when seen against world figures of 2.9 percent.

In addition growth in household consumption more than doubled to 8.2 percent compared to the 3.6 percent growth of the previous year. Which suggests that the economic growth is being driven by improvements in our pockets, helped by a slowing down of inflation and a stable exchange rate.

But structural issues persist that ensure that this good fortune is not spread more equitably. PWC noted that most of the GDP growth is being driven by manufacturing, construction and mining sectors, in addition to the investments in the oil sector.

This means that the agricultural sector which employs almost four in every five Ugandans is not growing as fast as it should to support our huge rural populations.

"This a damning statistic but in it lies a huge opportunity and the hope that Uganda’s economic growth is not about to plateau soon...

First of all the continuous economic growth of the last 40-odd years is nothing to be frowned about. The last time the economy contracted was in 1985. Economic growth is critical to support development – a general improvement in the welfare of a population.

You can have economic growth without development but you cannot have development without economic growth.

By adopting liberalsied economic policies in the 1990s Uganda set the foundation for the economic growth rally we are seeing by unlocking private initiative. The problem is that while the market is the most effective way of growing wealth it does a horrendous job of distributing that wealth.

The market left to its own devices will see the rich grow richer and the poor grow poorer.

That’s where government comes in. by taxing the increasing economic activity they distribute the wealth or at least the ability to take advantage of this improved economic activity by funding public goods like law based governance, security, social services and infrastructure development.

In an economy like ours whose size has grown faster than the population, the fact that inequalities are widening is an indictment on government’s capacity to distribute the wealth. From an almost equal distribution of wealth or poverty in 1986, Kampala alone accounts for more than half of the nation’s GDP today.

Improvements in security, infrastructure, school enrollments and health care mean more people are getting half a chance of climbing the ladder, where there was none 40 years ago.

But if the tragedy at Kitezi waste disposal site last weekend is anything to go by, government still has a long way in delivering services to the least of our brothers. Most of that waste is generated by the top half of Kampala population, for who as long as they are spared the inconvenience of their garbage, could not care less where it is taken.

The Kitezi dump site is a public infrastructure that has been neglected as long as it provided a home for the rubbish fetched from the gates of the urban elite. The same urban elite were supposed to ensure Kitezi was run effectively and sustainably, but as long as it was far from public view (out of sight of the urban elite) we really did not care what happened there --  never mind that it was supposed to have been decommissioned a decade ago.

At time of writing this 34 people were confirmed dead, but those who know the area suggest this is a gross understatement.

Reports reveal the issues of waste have been neglected, underfunded and generally ignored.

"The Kitezi disaster can serve as a useful analogy of how the economy has been run to benefit the urban elite, either normally by making their life easier or by them creaming off the top jeopardizing the welfare of the lesser members of society.

Just because at a macro-level everything looks ok, doesn’t mean a Kiteziesque implosion of the economy is not an inevitable consequence, if we continue to sweep bad things under the carpet – corruption, domestic arrears for example.

 

 

UGANDA, BEWARE OF WHY NATIONS FAIL

The current move by parliament to have sittings in four regions of Uganda is disturbing and part of an established trend, where public officials seek to extract the maximum they can from the treasury and Ugandans be damned.

Last week parliament announced it is going to have sittings in West Nile, Lango and Karamoja ostensibly to bring the workings of parliament nearer the people. They would spend at least three days a week in each region. In the face of it, a noble endeavor but it can be argued there are more cost effective way of doing this.

This means parliament will have to provide for the more than 500 MPs to make the upcountry trips, in addition to about 200 staff, per diems all around. It has been reported that, at the minimum this will saddle Ugandans with a bill of sh5b a day.

"We should be concerned, because this is part of a trend of shifting resources away from production to consumption, a trend that history has shown does not end well...

In their book “Why Nations Fail” authors Daron Acemoglu and James Robinson, after researching centuries of data on political evolution, came to the succinct conclusion that nations fail when their institutions are more extractive than inclusive.

Invariably extractive institutions derive from extractive politics where the power elite use these institutions to consolidate their power.

Extractive institutions are those that concentrate wealth and opportunity in the hands of a few as opposed to inclusive institutions in which broad based participation is encouraged, property rights are protected, which in turn foster innovation, investment and economic growth.

It does not take a nuclear scientist to work out that the inevitable outcome is poverty and wealth inequalities for the greater majority of the population.

It’s a vicious cycle, which if let alone leads to social chaos and political instability.

"These are serious issues, especially in this time when the economy is still struggling to recover from the Covid-pandemic, money is short and for many hopelessness is beginning to set in...

The lessons of the book, written in 2012, endure and we would be best advised to pay attention.

Uganda’s economy has grown by an average of six percent for the last 38 years, the longest single stretch of unimpeded growth in the history of the country. The challenge is that this growth is not being equitably enjoyed.

As it is the urban populations – despite our incessant whining, have been the biggest beneficiaries of this growth. So much so that, more than half the nation’s economic output (and I fear this is an understatement) is concentrated in Kampala.

This means that while the rest of the nation is struggling to get into middle income status -- $1,100 the per capita GDP of Kampala is easily over $5,000.

We have historical antecedents to this, the colonial state concentrated opportunities in a few hands, educating a handful of Ugandans for instance – there were 300 A-Level students at Independence and focusing infrastructure on extraction of raw materials rather than on availing access to markets for all.

Our post-independence governments have continued the trend, perpetuating the cycle of benefits accruing to a small group disproportionately.

"This move by parliament is just a symptom of this disturbing trajectory towards a failed nation....

There are hundreds, if not thousands of school going children or sick in those very same regions that would prefer that money is channeled towards education and health services.

The education ministry says it would take about sh14m to build a primary school classroom, so about sh98m to build seven classrooms add another two million for the head master’s office to round off the number to sh100m. So the sh5b a day spent on MPs pontificating and fulminating means 50 primary schools go unbuilt, a primary school every third district. So the three days the want to deliberate per region would account for a primary school a district.

Do we want to go into the beneficial ripple effect of educating a few hundred kids a district?

Or that Mulago spends about sh200,000 per out patient annually and therefore 75,000 out patients would be denied treatment at Mulago because we chose to splurge on an upcountry junket  for MPs.

Whichever you look at it, this is an ill-conceived expenditure we can do without, as a poor country trying to make sure everyone benefits from the miraculous recovery and growth of the last four decades.

Let us be serious. We are already on a very slippery slope, what with all our corruption, for us to indulge in such flights of fancy. Whether we continue to the slippery slope’s logical conclusion or not, will depend on how our political elite and public servants are restrained from gouging themselves at the public trough.

 

THE ECONOMICS OF THE OLYMPIC GAMES

The 1984 Olympics in Los Angeles, US were the first games I watched.

That edition was famous for the US Carl Lewis winning four gold medals. It was also the year Kenyan Julius Korir won the steeplechase, starting a string of nine straight golds in the event by our Kenyan neighbours, that lasted until the Tokyo Olympics in 2021.

So last week very much older, I settled in and gleefully arranged my remotes close at hand to enjoy two weeks of the Olympic smorgasbord.

I was not disappointed in week one.

US gymnast Simone Biles cemented her place as the greatest gymnast of all time, leading the US to gold in the team event and winning the women’s all-around event for herself. And at the time of writing she was in the finals of three other events and looking like a sure deal to bag gold in all.

The South Sudan men’s basketball team gave a good account of themselves against the US team, going down 103-86. This match was much anticipated, as only days ago it took a Lebron James three pointer in the final second of the game to squeeze past our northern neighbours 101-100.

We shall not say much about the women’s volleyball event.

But I have since developed an interest in the economics of sport and it was interesting understanding what it took to put these Olympics together.

For starters it is estimated that about €9billion (sh36.3trillion) was spent to make the Games happen, most of which was from private funding.  France did the new and upgraded the infrastructure which accounted for less than a half of the total budget...

The projections are that the economic benefits to the Paris region over the duration of the games and beyond will between €7 and €11billion (upto sh44trillion) due to a boost in tourism, job creation and infrastructure improvements.

There will be 329 gold medals on offer and the 48 Athletics winners will each walk away with $50,000.

For me the beauty of these games is that the private sector is picking up most of the tab. That means that except for a few vanity projects, these monies will be efficiently spent and show a return, with less impact to the public purse than if the government bankrolled the whole event.

The funding of sports in any society is out of the surpluses that economy can generate. The bigger the economy the more they can fund sports.

Governments used to see sports as a way for the  youth to expend energy and not pay attention to politics, but in the last few decades or so the rise of professional sports has shown that sport can be bona fide economic activity, which while making the youth busy can afford them real livelihoods. In a few instances beyond their wildest dreams or if they had taken the traditional white collar career path. Potential gold medalist Carlos Alcaraz has already made about $8million in prize money this year alone.

  And he is only 21.

But these suplurses especially from the private sector, are far from being charitable handouts. The private sector wants to see a return, often in terms of marketing benefits.

In Uganda where our sports administrations are volunteer based, it’s hard for the private sector to pour money into sports, because they cannot see a return on their investment.

Apart from regulatory oversight, sports does not need government to thrive. The US the world’s greatest sporting nation has no sports ministry. And yet they have sent just over 500 athletes to the Olympics.

The US sports associations have become adept at creating sports events, marketing them and selling them to corporate America. Basketball, American football and baseball are now multibillion dollar enterprises. At the Olympics the US is dominant in gymnastics, swimming, track and field.

And after conquering America they are spreading their wings abroad.

Our sports officials – assuming they want the best for their sports, would be wise to take a leaf from the US model of financing sport and its applicability in a country where there are more pressing needs than sports to fund.

So while I ooh and aah at the athletes performance, never mind marveling what it took to get into that demigodesque (see the women volleyballers) shape, a look under the hood at the economics of sport is just as entertaining if not more so, for me.