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URA’s unnecessary headquarters

The new URA headquarters. PHOTO PPU

THE LAST WORD: Why government of Uganda’s approach of owning buildings to save on rent is economically unproductive

THE LAST WORD | ANDREW M. MWENDA | Last week President Yoweri Museveni officially opened the new Uganda Revenue Authority (URA) head office building in Nakawa. As a work of art, the building is majestic. As a source of national pride, it is inspiring. At 22 floors high it is the tallest building in Kampala, a beautiful piece of architecture that improves our city’s skyline. But as an economic investment, the building is a disaster.

According to Molly Kamukama, the Principle Private Secretary to the president, the building will save URA “a whopping Shs 7.4 billion in rental expenses” – per year. Kamukama added that it took a “record fours years” to construct this building. In 2015, a Chinese firm built a 52 storeys building in 19 days. Two years would have been record time in Uganda’s circumstances, not four.

According to URA, the building cost Shs 139 billion to construct. This does not include the value of land. Given that URA will save Shs 7.4 billion per year in rental expenses, it will take 19 years to recover the cost of construction alone i.e. a rate of return of about 5% on gross income. Even an incompetent businessman will tell you it is a bad investment. URA has built a white elephant.

However the story even gets worse. If you are a private investor, you would deduct 20% cost of managing and maintaining the building i.e. Shs1.5 billion per year. Then you would deduct 20% as rental tax to URA on your gross revenue minus your maintenance costs i.e. Shs1.2 billion. Therefore your net rental income would be Shs4.7 billion per year. It would take 30 years to recover the cost of building the URA headquarters i.e. a rate of return of 3.3%.

We can be fair to URA and also include the appreciation in the value of the building as part of the rate of return on investment (an unrealised gain – but a gain nonetheless). How much can such a building appreciate; especially in Kampala? Given the size of the building and the size of our economy, I do not see many investors who can afford to buy it. With a limited market for buyers, the rate appreciation in its value must be very low indeed.

To understand this better, just imagine URA decided to sell that building to a private investor on the understanding that it would pay rent of Shs7.4 billion per year. Only a thief who did not make that money (and therefore is not interested in calculating the rate of return) would pay Shs139 billion for a building whose annual rent is Shs7.4 billion. A private investor would look at the rate of return on alternative investments before making such a decision.

Imagine a lazy investor that does not want to do any bothersome business. He just gets his Shs139 billion and puts it either in a fixed deposit in a commercial bank or buys ten years treasury bonds. Any of these lazy investments can earn him an interest rate of 15%. This amounts to Shs21 billion per year while sitting on the balcony sipping coffee, playing golf, globe-trotting and indulging other hobbies.

If URA were a private company the board and CEO would have been fired. The building may have improved Kampala’s skyline but it is a business disaster. In fact we could have had that same building in a better way. URA would have asked private firms to bid to build a headquarters for the authority to rent. It would also have insisted that only Ugandan nationals are qualified to bid.

URA would have put it in the bid that it has Shs7.4 billion to pay in rent per year. This would have made investors careful about the size and finishing of the structure. If URA got such a deal, it would actually pay Shs7.4 billion in rental income and earn Shs1.2 billion back in rental tax. Since the investor would certainly be a company, URA would even earn more from profit tax and withholding tax on dividends. By building her own headquarters, URA has not saved any money on rental income. It has lost it.

There is a strong feeling across the world that governments need to own the buildings in which their offices are located. This may increase the prestige of government but it is rarely economically productive. Government ownership of office buildings reduces the size and dynamism of the real estate market in any country, a factor that may please citizens but harms the economy. It is hard to build a real estate market in a city where the government is a big landlord.

One of the factors that drove Uganda’s rapid economic growth rates in the late 1990s all through to 2010 was the progressive withdraw of the state from real estate by selling government pool houses. This created a huge market for houses, led to a renovation boom and improved the quality of housing in Kampala. When government sells off her houses to its nationals and pays them rent, there is no net deduction from the economy. Instead assets that were previously not being traded and from which there was no rental income now become part of market operations.

If there is a lesson to learn from the new URA building and from the sale of government pool houses, it is that the private sector can do better than government in the real estate market. Government should sell all its remaining buildings like Farmers’ House, Amber House, Embassy House etc. They are ugly, dirty and most rundown buildings in Kampala. Sell them to private investors and soon government officials will be working from well-renovated premises.

Today every government institution is building its own headquarters. In doing this they are shrinking the size of our real estate market, freezing the market for rental income and reducing income available to the private sector. If government wants to save money from rent, it should buy or build embassies and residencies for our embassy staff abroad. This is because each and every coin it sends abroad to pay for rent is a net deduction from our economy to the economy of the host country.

If nearly all government offices were owned by the private sector, our nationals would be earning huge sums of income from their real estate. URA would be collecting a lot in taxes. This is the kind of ownership structure that promotes economic dynamism.

*****

amwenda@independent.co.ug

12 comments

  1. Honestly i see nothing wrong with
    URA building its own headquarters .
    1.Is saving 7billion a year a profit or loss to URA?I thought it was a saving.
    2.Did URA borrow money to build its headquarters or it was in their long-term plan?
    3.Andrew dont you think that service providers like cleaners;catering,stationery will get some business in that building resulting into employment?
    4.During construction don’t you think thousands were employed?
    5.don’t you think that companies that bidded to provide services like,electrical,Ict,plumbing paid taxes?
    6.don’t you know that its always prestigious for any company to own a office actually its a sign of progress.
    7.How was URA going to benefit by renting?
    8.Why r u doubting URA’s announcement of savings on rent?
    9.interms of savings businessmen ‘s time don’t u think a one stop centre is good for business?

    • All your arguments are right. Challenge is our real estate business by private businessmen will stagnate especially if gov’t departments, agencies and ministries follow the same example. The economy grows by government spending.

    • 3,4 and 5 can be attained either way. And prestige is not a big deal!

  2. Muwenda is always negative but let me inform him that renting by government bodies as such decrease safety and ownership .Alot of money has been embezzled and still inflated in rents of government departments and organisation
    Me I support what has been done by Ura and waiting Judicaiary .Muwenda if I may ask why did you not write your paper in your mother tangue also?

  3. ejakait engoraton

    VERY elaborate article in utter stupidity.

    YES , analysed for the economic/financial angle M9 has a point.

    BUT in life , not all investments are made for profit.

    IF I have my 80 year old relative who needs treatment at a cost of 100m to save their life , and I had the money I would pay it without a second thought. I would not go into the semantics of the returns on my investment even if the resulting treatment would only result in prolonging life for only one year.

    What makes M9s article even more st***d is that only last week in the same newspaper in article entitled “Ugandas growing public debt” the same M9 was justifying governments expenditure and borrowing in order to finance even projects that were otherwise not financially productive.

    IF life was such that everytime we needed to make an investment or even just a purchase , we took out our calculators or went to a financial or investment consultant, then I just do not know where we would be.

    We would have to work out which has better financial returns between eating cassava and matooke, meat and beans wearing a 10,000 shirt and a 100,000 one..

    In an interview at some point, M9 said one of his most prized possessions was a pen ( I forget the brand- a Mont Blanc I think)!!!!!!.

    Reading this article, you would wonder if it is the same person who wrote this article who wrote these same words.Like I have said on many occasions before, M9 suffers from what I call SELECTIVE STUPIDITY and for some reason he takes us his long suffering readers as fools.

    QUOTED FROM AN ARTICLE BY ANDREW MWENDA , THE INDEPENDENT JANUARY 21 2019 UNDER THE HEADING “UGANDAS GROWING PUBLIC DEBT”

    “In the scheme of things , other than buyers remorse , what value does that add to your life.
    Now to the final question: do our investments in transport and energy infrastructure have a good rate of return? It depends on what you are looking at. In terms of economic return, some do, some do not. But I do not think the only reason a country develops infrastructure is about dollar returns. For example, Uganda built a road from Sorori to Moroto and from Moroto to Nakapiripirit, which I suspect has no viable return in a strict economic sense. But it has an important social return of taking services to Karamoja and integrating that region into this nation. The opposition can argue, quite convincingly, that we can invest in productive regions first, and the gains therefrom can finance investments in Karamoja. But the opposition does not argue that.

    Equally, Uganda has invested heavily in rural electrification. It does not strike me as an investment with a positive return on the dollar. But taking electricity to the rural poor has political value: politicians win votes, a factor we cannot avoid in a democracy. Secondly, it may have a positive impact on education (kids in villages do not have to read on tadooba (wick candles) and ruin their eyes, health (rural people do not have to suffer chest infections inhaling kerosene smoke), and environment (it may reduce the burning of trees). One would have to look at all these factors before concluding that a particular investment does not have a good return.”

  4. ejakait engoraton

    WHEN I was studying, which is a very long time ago I had my lecturer who was teaching us estimating in Quantity Surveying.

    He told us that in estimating and in working “cost benefit analysis” there are some factors that are hidden both on the cost and on the benefit side.

    HE drove a BMW and every two years he used to change his car.

    SO he went about explaining to us the benefits that he got from owning a car as opposed to going by private transport, some benefits that were not visible to a naked eye, more so to a stupid brain.

    HE told us that by owning and moving by car he enjoyed some of the following benefits;

    He suffered less from colds and coughs and other communicable diseases which he would have contracted if he moved by public transport.

    HE lost less working time since he did not “break down ” as often as a person who used public transport.

    He bought less umbrellas since he just used one from his house to his car and from car to the office.

    He polished his shoes less since they did not get soiled like those of someone going on a bus, and therefore bought less shoes over a period of time.

    HE was able to travel between jobs faster and therefore did more work and earned more money than someone who moved by public transport..

    He spent less time travelling , therefore spent more quality time with his family

    These were only a few of the items he listed. BUT he said when he weighed the benefits(mostly invisible) against the costs, the benefits far outweighed costs.

    BUT M9 will see this only when it suits his argument at any particular point in time.

  5. ejakait engoraton

    AND lastly M9 wonder if you have ever heard of the term “MULTIPLIER EFFECT”

    IF it was all about return on the dollar as you termed it in your other article, NSSF would take all the funds and look for the best performing returns on international markets and invest the money there and just wait for their returns.

    That is why the government , in their wisdom, in the NSSF act stipulate how and where the fund can invest its(the workers ) money, which guidelines are not based purely on dollar returns.

  6. “ akezimbila tekaba kato” URA has become of age they now proudly have a place they call home so bravo and congs am not an economist but I know economics is not a natural science so those calculations don’t matter. The author should know that for an institution like URA to own such a marvelous structure is a pride for every Ugandan.

  7. in economics this was called “ceteris paribus” – all things remaining the same. Unfortunately things never stay the same.

    URA promises the hq will boost service delivery and reduce the cost of compliance. the objective wasn’t to reduce costs

  8. ejakait engoraton

    SOMETIMES I wonder if when MWENDA writes his articles he remembers things he has said in previous articles.

    MWENDA writes as if his articles are what we call “stand alone” articles, that is an article which has no bearing or reference to an article one has previously written. One just gets up one morning and thinks of a subject and goes on to spew out all sorts of rubbish conveniently forgetting or in reality not knowing how the things he is saying relate to what they have previously written

    IN this manner MWENDA ends up shooting himself in the a**e!!!!!!!!!!

    MWENDA has at every opportunity claimed that the economy is and has been doing very well over a very long period of time, no doubt courtesy of the good policies put in place by M7.

    ON the other hand he does not realise that the barometer of an economy and how well it is doing is its real estate industry. For all the money made by organisations , it must be worth wile to invest in real estate – BRICKS and MORTAR. And any worth wile investment in real estate/property must have good returns; either through income earned or through real appreciation of the asset ( or a combination of both).

    AND for all the figures that he gives and the fact that they do not add up, dose he realize the YELLOW ELEPHANT in the room that is making all these disparities- CORRUPTION.
    Under normal circumstances, that building could have been delivered at maybe 75% or less of the price at which it was delivered, so I wonder if you can factor that in in your calculations.

  9. So much for the hash comments, let’s try and give Mwenda a chance to explain is economic theories which I think are probably googled.

    Comparing Uganda’s economy development or growth to that of the developed world is unrealistic and often leads to such unfounded conclusions or suggestions. He is the same person saying that corruption is good for our country but fails to hit out that it manifests more in government than private dealings, unless you want drug money like the example you give of Miami etc.

    So if u think corruption is good for our country, please encourage your friends in government to spend more. But what beats my IQ is that you always refer to Rwanda has a model for Africa’s growth. Where do you stand Mr. Mwenda?!
    All your opinions are always aimed at appeasing those you work for .

  10. Importantly, by government building their own headquarters, they are further entrenching the poverty and insecurity causing myth that to get anything done, you have to live and work in Kampala.
    There is no strategy to spread development by steering activities to other regions of Uganda. Despite our high levels of corruption, Uganda is one of the only countries in the world where politicians do not steer investment to their people/villages. We keep playing king of the (one) hill in ironically one of the most hilly countries.
    Why really must URA be headquartered in Kampala? Why should they require that level of human capital concentration? Why is mtn headquartered here? It is a telecoms company that even once had the operations department of mtn Rwanda in Kampala!
    We seem to have a fascination with legacies that only remind people of who we were but do not do much to continue providing services beyond the lifetime of the vision bearer. Look at Uganda house whose tower has at most 25% occupancy.
    If the billions were spent on district URA bureaus (a desk two chairs and a file cabinet) URA collections would go up.
    My favourite example of a well designed (though non-functional) organisation is nrm. Despite the dismal office headquarters, that hydra is nationwide and lies dormant like a stage 4 cancer in remission.
    Instead of phallic compensational gestures Uganda should look at more breadth and depth in the penetration of their services. After all, I have heard it said, it is not so much the size as how you use it.

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