BUJAGALI TAX WAIVER MAKES SENSE FOR UGANDA

The story of Bujagali dam best illustrates the saying “No good deed goes unpunished”.

 A little background will put the Bujagali dam issue in better perspective.

At the beginning of the century government unbundled the Uganda Electricity Board (UEB) monopoly into its constituent parts of generation, transmission, distribution. It then leased its assets in generation and distribution and opened up the sector to private investors. Government then created Electricity Regulatory Authority (ERA) to oversee the liberalized sector.

As a result of these reforms about $4b (sh15.2trillion) has been invested in the sector since 2000.

While we now have unlimited power supply, a far cry from the daily loadshedding we were suffering before Bujagali dam was commissioned in 2012, it has come at a price.

"The pricing of finance for these investments have been high and understandably so. The perceived risk of investing in Uganda, which was emerging out of decades of instability, made the cost of finance high...

Now that we have unlimited supply the challenge is how to reduce the end user tariff, especially for business and industry. President Yoweri Museveni has made it his stated aim to bring it down to $5cents a unit of power.

In pursuit of this target government  helped Bujagali Energy Ltd (BEL) refinance their debt, which was helped by government offering a tax waiver on its corporate profit. This helped lower what Bujagali was charging for the power it generated.

The initial five year tax waiver lapsed in 2021/22 and parliament has been reluctant to renew it, giving two annual extensions pending an audit into Bujagali’s finances.

 "The continued refusal to allow the tax waiver has far reaching repercussions not only for our effort to lower local tariffs but also future investment in the sector and the economy at large...

According to the original power purchase agreement, of the $11cents BEL was charging, the larger proportion $6.7 cents went to debt repayment and shareholder return, $2.3 cents for taxes and government repayments and about $1.0 cents for operations, maintenance and administration.

The scope for reduction in the tariff is in refinancing the loan – extending the tenure of the loan or suing for a lower interest rate and waiving taxes. While these two did not bring the tariff below the magical $5cents it was a good start.

A denial of the tax would not necessarily hurt BEL as they would pass it on to the customer, raising the tariff.

But as a part of the condition of refinancing, the government of Uganda was supposed to offer the tax waiver for the duration of the loan, which now ends in 2032.

We may not take it seriously, but for businesses and countries that want to play on the bigger stage, reputational risk is a big deal. Reneging on a contract attracts reputational risk. Reputational risk can add a few percentage points on our loans, which could mean millions of dollars in additional interest payments.

While we appreciate parliament’s attempts at oversight of the electricity sector, we need to keep in mind we are playing in a bigger field, where our laxity on matters of reputation will be frowned upon.

It has happened before.

"The initial developer of the Bujagali dam, US firm AES Nile Power found their project stalled by parliamentary sniping and the heckling of environmentalists. Economic crisis in South America where AES had its other developments forced them to pull out of Uganda in 2002, pushing back the development of the dam. AES Nile Power would have completed construction by 2007, five years after they ground broke in 2002.

Building of the current dam started in 2008 and was completed in 2012.

While for us Africans we don’t take time seriously, in the global environment we operate in, time is money. It should come as no surprise to us that we often times get the short side of the stick in negotiations because we do not take time seriously.

We need to focus on the bigger picture. While BEL will enjoy tax relief, the ripple effect through the economy of cheaper power would be invaluable in improving living standards of Ugandan consumers.

 

THE MUSEVENI ECONOMIC LEGACY

Last week I was involved in an online conversation about the economic achievements of President Yoweri Museveni’s administration. The conversation was prompted by the impending 80^th birthday of the President, which happened on the weekend.

It is a subject that should and will be discussed well into the future.

A brief recap of history is important.

When the National Resistance Movement (NRM) came to power in 1986 they found an economy in shambles, brought to its knees by the years of instability and economic contraction of the 1970s and 1980s.

"To resuscitate the economy, the NRM fought to bring inflation under control, privatized government parastatals to get them back into production and liberalised the economy to unlock individual initiative, which, up to that point, was discouraged by insecurity and suppressed by government monopolies. The government also worked to rehabilitate infrastructure and provide other public goods like security, health and education....

No less a figure than Singapore’s founding father Lee Kuan Yew in 1988, dismissed Uganda’s case as hopeless and did not think its fourtunes would be restored in a 100 years.

Since that January day in 1986 the economy has been on an unbroken growth streak, production has not only been restored but expanded, macroeconomic stability has been achieved and the economy is diversified away from an overreliance on coffee.

The economy still has a long way to go. The widening wealth disparity has to be addressed urgently, before it threatens national stability, by fighting corruption and increasing the productivity of the rural areas.

There is not enough space in this column to address all the achievements of the last four decades but off the top my head two initiatives were key in turning the economy around.

The first was ensuring security. This is critical to allow for investment by local and foreign businessmen. It would make no sense to invest in a home or enterprise if you are not sure that you will be alive next year or even the next day. The Kampala urban sprawl is evidence of this. 

In 1986 Kampala stopped at Kibuye roundabout in the south, Wandegeya in the north, Lugogo in the east and just before Natete in the west. As people have grown confident in the future of the house they have invested in homes and businesses that has grown Kampala more than tenfold from its 600,000 population in 1986.

The second was the liberalization of the economy. In those days there were government companies in everything from supermarkets to petrol stations, from housing estates to fishing boats. And all these were virtual monopolies in their sectors, ineffective, inefficient and draining the lifeblood from tax payer.

By privatizing these and opening the market to competition, government not only turned on the production taps but also harnessed the market to create sustainable growth.

Professor John Kay in his seminal book “The truth about markets” explained that the market is really a series of experiments by businessmen every minute, every day, every time. The experiments that work grow and those that don’t are dropped by the way side. Out of this chaos, creative destruction, which mirrors the evolutionary process, is born growth and wealth. No central authority anywhere in the world can replicate these multitude of experiments with any success, which is why governments all over the world fail at business.

People who pander for central control of the economy are often a small clique, who have failed in the market, but are connected to government and see government involvement as a way to get back in the game. It is to their benefit and not to the benefit of everyday man.

"Forced by necessity more than conviction the NRM liberalized the economy and in so doing unlocked the individual initiatives of local and foreign businessmen and the economy has been better for the experience...

Currently we are at a cross road.

While the market is the most effective mechanism for growing wealth it is probably the worst for distributing that wealth. Distribution of wealth is government’s role by taxing economic activity and using revenues to finance public goods. If the economy is growing as Uganda’s is but inequalities continue to persist and growth it is an indictment on government’s competence or lack of in the distribution of the wealth that is created.

Government distribution of wealth does not mean standing at the corner and dishing out money. Distribution often entails giving the population the means to take advantage of the economic opportunities that come with economic growth by keeping them safe, educating them, providing health services, access to markets through developing infrastructure, both hard and soft and for the most marginalized, a leg up by providing social security.

Museveni’s legacy will be cemented by the equitable distribution of the economic gains of the last 40 years.

As it is now the biggest beneficiaries are people living in urban areas, who are educated and can leverage this to get employment or compete in the market as businessmen. Given the system that the NRM uprooted that gave access to a few – there were barely 5000 students in University in 1986, often to the detriment of the majority, the beneficiaries continue to be a few.

"Going into the next four decades the economy must continue to grow, there can be no development without growth, but there has to be a more systematic and consistent effort to ensure this growth is shared out more equitably...

Happy birthday Mzee!

CHINA TOWN: A SIGN OF THINGS TO COME

Last week China Town opened its doors for business and were swamped by hundreds of Ugandans.

It reminded me of a time when Shoprite opened for business at Ben Kiwanuka street and people bought everything off their shelves days before Christmas 2000. Interestingly most of the shoppers were traders who were buying goods in bulk and going on to sell them in their shops.

Local businessmen, then like now, complained about the new competition that they were practicing unfair competition and not sourcing goods locally. 

But prior to Shoprite’s entry, when Metro Cash & Carry opened shop at the UMA show ground, local traders were up in arms because among other things, they got their own customs bonded warehouse. Local traders saw this as favouritism and screamed blue murder.

Uganda Revenue Authority (URA) at the time explained that Metro Cash & Carry was importing huge volumes, the example I remember was about toilet paper, and therefore deserved and could afford to maintain their own customs bonded warehouse.

"Our traders now like then, adopt a do-it-yourself approach and still import small quantities as opposed to if they came together, bulked their imports and benefitted from economies of scale...

In fact when China Town starts buying from local producers, they – local producers, may prefer to deal with them rather than the small traders, because they will take huge volumes at once. As for the customers they voted with their feet last week and will most probably continue to do so.

Many years ago this column listed Charlie Lubega as one of the savviest businessmen in Kampala. Lubega’s Ange Noire discotheque was on the cutting edge of entertainment technology, upgrading his equipment and the club’s ambiance regularly long before the competition in the form of Silk came to town.   

In so doing Lubega increased the barriers to entry, shutting out pretenders, while keeping his patrons wowed.

Our local traders can learn a thing or two from Lubega.

"You cannot stop the forces of competition, especially since your customers don,t care whether you are made in Uganda or not. What you can do is to understand the competition, present and potential and confront them or turn tail and run.

It is only in the last decade or so that we have got locally owned supermarket chains to which a lot of middle class Kampala have gravitated towards. While they maybe pricier than downtown offerings, middle class Kampala has decided the higher prices are a small price to pay, rather than fend off pick pockets and car part thieves, looking for parking, pushing and shoving with the unwashed masses.

Our local business have been learning over the last three decades, in a most practical way the meaning of competitive advantage.

They have learnt that businessmen with better financing and more efficient supply chains can squeeze them to the periphery of the economy, where the pickings are thin and unsustainable.

What they have not quite mustered is how to respond to this existential threat.

It is easy to appeal to government and nationalistic sentiment, but once these have lost their buzz, you will still be faced by the same overwhelming competitors.

By the way, the government will make the appropriate sounds, but only for a while, because its interest is that Ugandan consumer can get goods cheaply and the ease with which they can collect revenue from these multinationals, as opposed to going door to door in kikuubo and being threatened by strikes when local traders don’t like EFRIS.

So what is the local businessman to do? Like Ange Noire’s Lubega they need to adopt a long view. They need to ask themselves  what they can do, which no foreigner can do better than them and control that space or at worst find a way of collaborating rather than fighting these forces of competition, which are here to stay.

I don’t think we import matooke, and I can count on one finger how many foreigners are growing matooke locally. The question would be how we can improve our production and distribution so that no one can take that away from us. Because believe it or not someone can produce matooke cheaper and package it better somewhere in the world and we would be a ready-made market for them. They will come and wipe out our matooke industry and we will wonder what happened. You laugh.

Secondly, they need to be at the forefront of promoting efforts to increase demand in Uganda. One of the reasons South Africa has the most advanced financial system on the continent is because during apartheid when everyone was not buying South Africa, they made local resource mobilization a priority and credit easily available to everybody so the internal market could sustain their businesses.

While credit is a double edged sword it allows consumers to live beyond their means and in so doing support local industry. As it is now we do not have enough local demand to build really robust industries.

So for instance while my kids need 2 liters of milk a day, I only buy half a liter because that is all the cash I have. If however I could buy the rest on credit, my children would be healthier, develop a taste for milk and become stronger consumers in the future.

"The competition is coming whether we like it or not. It is futile to fight it by trying to close it out. We can however focus on what we have a competitive advantage in, sharpen that competitive advantage and make it unattractive for others to even think about competing. Leave the contested ground to others. That way we will be winners....

Government on its part should map out these areas of competitive advantage and look to support entrepreneurs in those areas.

NIGHT AMPURIRE; START WHERE YOU ARE, WITH WHAT YOU HAVE

A few weeks ago a local TV station highlighted the plight of Night Ampurire, a market vendor in Kitoro. One of many market vendors, Ampurire’s stood out because of her rickety pickup, which she used to transport her water melons for sale at Kitoro market on Entebbe road.

The pickup she uses for her deliveries has to be a wonder of the world. Badly beaten up, its tire bald as a babies bottom, the foam all that is left of the car’s upholstery, it squeaked and groaned with every move.

It is a car where you have to have a prayer on your lips when you turn the ignition, you never know on any given day whether it will start or not.

"As if the precariousness of the car’s condition was not bad enough, Ampurire had to juggle shifting manual transmission gears with placating her four month old baby, who sometimes rode in her lap and sometimes she held her down with one hand in the passenger seat, while steering with the other...

In the accompanying interview she told how she saved for the car, which she bought for sh3.5m, how she repairs it herself and how it is enables her look after her family. She has four children.

Her story came to light again last week when telecom company MTN gifted her a new pickup.

 Ampurire’s story left me in awe of the woman, her indomitable spirit and unflappable will to make something of herself, despite her obvious personal limitations, a backfiring economy and the public around her, which did not give her half a chance.

When faced with hardship financial or otherwise the easier thing to do is to lie down and die. It takes a certain will to look around and use whatever it is you have available, to climb out of your hopelessness and misery. And it is always impossible until you do it.

My favourite story of a nation that has pulled itself up by the bootstraps, is that of South Korea.

 After the Korean war, which split the peninsula into North and South Korea, the two countries had been literally razed to the ground.

The market oriented South Korea faced with this predicament, determined that to pull themselves out of the poverty they would have to export to foreign markets. This made sense because the poverty in their internal market could not be a driver of economic growth, at least for a few years after the war.

But South Korea with barely any natural resources to speak of, had nothing to immediately sell to foreign markets. Or so it seemed.

They sold the only thing the 20 million South Koreans had in abundance and that was a renewable resource – human hair.

Since then South Korea has grown into a high tech hub with such brands as Samsung, LG Electronics, Kia and Hyundai now driving their economic growth.

"Ampurire is not the only one hustling out there. For every Ampurire who captures the national imagination there are easily 10,000 just like her – the real salt of the earth, working anonymously,  keeping their noses to the grinding stone and trying to make an honest living....

We know that while the economy continues to grow, the benefits of this growth are not enjoyed equitably. A lot of this has to do with government corruption and the subsequent failure of service delivery, which makes it difficult for the lesser of our society to climb the ladder.

But as people like Ampurire show us that with improved access to market, we need not wait for government to educate and treat us to climb out of poverty.

But as we saw with Ampurire’s story it is not a walk in the park. Individuals will have to gird their loins, take the leap of faith to take advantage of the opportunities within our reach.

Another major lesson from Ampurire’s story is that whether we try or we don’t, the time will pass. Ampurire decided to save for her car, dropping any coins she could spare in a savings box until she had accumulated enough to buy the car.

Whether she saved or did not save, the time would have passed. And while she has been struggling with a car that was worse for wear, it is safe to say she would have been worse off had she not had the car. Of course the only reason she crossed MTN’s radar was because of the car.

Interestingly most of us have discounted all the blood and sweat she shed and think she is lucky. We should know better.