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Lessons from Umeme’s SPO

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Why Uganda should move to privatise NSSF and other remaining publically owned or supervised enterprises

Last week, Umeme issued a Secondary Public Offering (SPO) on the Uganda Securities Exchange (USE) to institutional investors (individual investors have their turn this week). The response by the market has been unprecedented. Thirty international companies with a good reputation offered to buy the company’s shares. Only 20 were given a piece of the Umeme cake. And even with these, the shares were oversubscribed by over 250%. Consequently, on average each of these companies got about 38% of what they asked for. This means that if any company wanted to buy shares worth $10m it was allocated only $3.8m.

Among the companies vying for a piece of the Umeme cake was Investec from South Africa with offices in London. It has taken 18% of the company and thus becomes the largest shareholder in Umeme. When the transaction is completed, the previous owner, Actis, through its local subsidiary Umeme holdings Ltd, could become second biggest shareholder with 15% and NSSF will be the third highest shareholder with 14%. 

Investec is the largest equity fund in Africa with over US$ 100 billion under management. Farralon Capital from San Francisco is an American equity fund with over US$ 50 billion under management while Allan Gray from South Africa has over US$ 10 billion under management. The other main investor is Coronation from London, also a billion dollar fund.

The total funds under management by the companies that bid to grab a piece of Umeme are in excess of one trillion dollars. Considering that Uganda’s GDP is US$21 billion, the Umeme SPO is a game changer for the country.

First, its SPO has attracted equity funds with the biggest pockets on the global financial marketplace. Second, electricity distribution is the least attractive area for investment in poor countries. Last week showed that Umeme has become a focal-point in making Uganda known in the investment market.

Third, given that these equity funds invest in other sectors, the Umeme SPO may open their eyes to other attractive business opportunities in our country. Finally their sheer presence is a signal to many other investors that Uganda is a place to invest and get a risk-adjusted return.

How did we get here? I have been arguing that Umeme has been a game changer for Uganda. Indeed, it is one of the critical points in the hidden source of success of the Yoweri Museveni administration – privatisation.   Museveni has presided over an extremely corrupt and incompetent state in the management of some critical public goods and services especially in health and education. However, through privatisation and liberalisation, he was able to liberate the economy from the dead hand of a corrupt and incompetent state and, equally, to free many economic activities from the ill-informed passion-driven arguments of Uganda’s chattering classes.

The privatisation of Uganda Commercial Bank opened the doors for the growth of a robust financial sector. Thus, between 1995 and 2012, the total assets of banks grew from Shs 700 billion to 17 trillion; deposits have grown from Shs 400 billion to Shs 11 trillion; profits from Shs 10 billion to Shs 550 billion; wages and other staff costs from Shs 20 billion to Shs 500 billion and the number of employees in the sector from 567 to 11,000. These results can be seen in telecommunications, insurance, and every other major sector of the economy except agriculture.

To be fair, Museveni has ironically presided over impressive effectiveness in the public delivery of water and media services. For example, this year, the National Water and Sewerage Corporation (NWSC) won the Distinction Water Leaders’ Award for exemplary service to communities in developing countries in Paris. This month alone, NWSC won the Best Africa Utility 2013/14 which was a recognition for its strategic direction that has led to improved expansion of infrastructure to more urban centres, improved revenue performance and community accountability. The corporation is often hired for consultancy work in other countries.

The New Vision Printing and Publishing Company (now listed on the USE), with its six newspaper titles, magazines, commercial printing business, radio, television and a strong digital presence is one of the most successful government-owned, commercially driven media houses I know of in the whole world. Thus NWSC and New Vision are evidence that even in an ocean of failure lie islands of success. But overall public sector performance in Uganda has been characterised by gross corruption, incompetence, indifference, apathy, foot-dragging and complacency.

Thus, the game changer for Uganda under Museveni has been privatisation of state run companies and liberalisation of sectors of the economy where the state previously enjoyed a monopoly.

That is why every progressive Ugandan should fight for the complete withdraw of the state from any role in the management of the National Social Security Fund (NSSF), the reform of public sector pensions from government to membership contributions and the liberalisation of entire sector. This will bolster long term savings and render irrelevant our dependence on foreign aid and its attendant problems.

Uganda faces a choice over NSSF. It can open the sector up and allow savers to take their money where they think they can get a good return. Of course this requires a strong regulatory framework and a regulator is already in place.

This may force NSSF to collapse and people employed there to lose jobs. However, Uganda’s strategy should not be based on protecting companies and jobs but the momentum for sustained growth. Because in the long term, a job protection strategy is a loser; the winner is a job creation strategy.

Liberalisation of pensions will open the doors to private pension funds, many of them international, which will bring new management skills, technological and organisational innovations that will increase the factor productivity – for capital and labour.  Uganda’s biggest challenge is changing the mind-set of our people. Years of socialist and pseudo-nationalist ideologies have led people to look at the state as the provider of many goods like roads, railways, telecommunications, energy, schools and hospitals – a Santa Claus of sorts.

Many Ugandans are angry with Umeme because they do not want a private investor to dominate the electricity distribution market which they think should be owned by the state.

However, Uganda’s experience shows that the private sector can deliver many services previously thought to be a responsibility of the state – and even do it better.

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Comments (13)Add Comment
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written by Tina, May 26, 2014
Andrew you are running too fast.
1.The technical team in the financial/Economic sector have done their best to stabilize the economy but we seem comfortable in our traditional way of doing business perhaps that's what saved us from the financial crisis that hit Europe and USA despite their "glittering" economy.
2. The UMEME deal sounds good to sharp b/ness people but looks artificial to the common man it appears that they took advantage of our naviety to make a good deal.
3. Why would a company sell off its shares if the feature looks good?it appears to the lay man that their goal was to hit a jackpot which they did and are now off to Cameroon.

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written by Tina, May 26, 2014
4. Most of the business deals in Uganda are brokered by business men who have questionable reputation therefore causing doubts on the authenticity of some deals.
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written by Rajab Kakyama, May 26, 2014
@Tina "Why would a company sell off its shares if the feature looks good? it appears to the lay man that their goal was to hit a jackpot which they did and are now off to Cameroon." Tina your thinking cannot be further from the truth. Reflecting back on how Umeme came into existence, I have guided my mind with the three stages of money laundering and I think Umeme was more interested with the 2nd and 3rd stages, but first- PLACEMENT – introducing the illicit funds into the financial cycle. Even if the funds already were in a bank or brokerage account (as in cases of embezzlement or frauds), it is that first step as illicit funds that we will view as placement.
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written by Rajab Kakyama, May 26, 2014
However, the most common example of placement is the drug dealer who needs to get large quantities of smaller currency bills into the banking system.
LAYERING – the moving and transferring of the funds in order to disguise the origins and true ownership of the money. This phase can be the most important and the most difficult – it truly separates the pros from the amateurs. Here the money can change accounts, form, ownership, country, etc. It can go into and out of trusts and shell companies, it can buy or sell real estate or hard goods, it can move through different jurisdictions – anything to confuse or eliminate a paper trail.
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written by Rajab Kakyama, May 26, 2014
And finally, there is
INTEGRATION – this is when the criminal takes economic advantage of the illicit funds and they appear to have come from legitimate sources. Maybe the drug dealer buys a mansion, or a high end car, or a yacht, or even planes to move drugs and other money (in the case of the planes, they will likely be bought through a front or shell leasing company, who will rent it to a front or shell freight company, so that when a plane is ultimately impounded by law enforcement somewhere, it cannot be traced back to the dealer).
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written by Rajab Kakyama, May 26, 2014
Umeme are big money launderers.
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written by OPIO, May 27, 2014
TWALA ERI MWENDA. Fact is the entire global economic trend in all countries world over has been going in similar direction of liberalisation and privatisation over last few decades leading to overall global economic growth in almost all countries. So pliz dont start giving m7 any credit for it. U could have had a monkey in the presidential seat for all 30 long yrs instead of m7 and it would have turned out exactly the same. m7 would maybe have gotten credit during his long stay had he used the gains 2 aggressively invest in social services and social infrastracture. Kibaki, Zenawi and others did it with even much shorter stays in power . TWAKOOOWA
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written by OPIO, May 27, 2014
i dont know much abt economics like andrew but i know these foreign investment funds r not really interested in the company Umeme but rather 2 enter uganda's electricity mkt. Today only 15% of ugandans have access to electricity which means the trend can only keep going upwards to cover the remaining 85% in the far future. These funds invest money 4 their clients for the absolute long term, maybe 50-60 yrs .Unlike we shortsighted Africans, these whites invest not just for themselves but rather even for their unborn grandchildren to benefit. The one thing u cannot deny mwenda, is that 1st family members have deep mucky involvement in umeme. Naye 1 day EBINTU BIJJA KUGWA when all is exposed.
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written by simo, May 27, 2014
@Tina, Rajab and Opio, you are all right.Cant this be hear -say since journalist have this tendency of making gold out of charcoal?Andrew,would you start selling the independent & yr Radio station in Rwanda if they were making you profits?Cant government run Umeme like the NWSC and the New vision you talked of ?It is POSSIBLE! ,These are Ugandans running these institutions,not aliens,so hiding behind foreign companies for better management won't help.
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written by simo, May 27, 2014
Let those companies come,i will only be happy if their eyes turned to other sectors.Governments should not run away for social services.It is their only pie to their citizens.The subsidizes made by your friend Kagame to his people do not need one to have rocket science intelligence.In your view,such is possible in Rwanda,in Uganda go - privatisation even i hear from you always in health(privatise Mulago Hospital),education e.t.c
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written by simo, May 27, 2014
Why should Ugandans pay highly for their own rights(social services) yet they are taxed and the state is using their resources since it has no businesses where to get money at the expense of corrupt leaders?Advise the President to use the Norwegian method, tax highly,let all citizens get free social services .There i will be with Mzee 100% but as now,the "kadigidi' you are playing is not rational to the state of affairs.
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written by Ocheto, May 29, 2014
Why is that the same people who upon taking leadership positions will initially correctly claim that Uganda is endowed with resources but continues to fall short of its potential but will later on come up with all many of excuses, never implicating their own sorry performance? Because it is expedient for them to dwell on and treat the symptoms and never the disease. Everybody knows (they teach this stuff even in school) the problems Uganda faces are of having a dysfunctional political system. The power sector has always been profitable except for the fact the political leadership throws its spanner in it inevitably muddling it up. It is all a too familiar story.
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written by Winnie, May 30, 2014
1. Ugandans dont understand big and long term investments they always think someone wants to steal from them thats why most offshore investors invest in Treasury Bills,Bonds,Shares coz they understand how it works.
2. Ugandans should get used to terms like brokers,middlemen,commision agents these terms sound satanic but they are normal in the business world.
3. UMEME 's services had improved one receives messages about their account balances,there are always updates on any power interuptions may be ugandans are just used to the poor quality services.

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