Bail outs: Market forces, UDC Better

The ongoing debate on bail outs, hand outs or economic stimulus, has understandably caused a public uproar. It is alleged that a whooping sh1.3 trillion of the taxpayers' money is needed to bail out about 60 citizens who are in economic distress.

Whoever sent the list out must have miscalculated the reaction of the masses. On the other hand, however, they succeeded in getting the matter to the fore of national discourse. It is now a top agenda item for not only the Executive but also anyone with a few cents to add to the discussion, via whatever platform.

What is apparent though is the fact that the population is mad at the attempts by a club of "the super-rich" to seek Government help despite that they continue to live and operate as if all is normal. Their lavishness erodes any positive consideration the general population may dig deep to find. The masses are mad because they have failed to find evidence as to whether the "super rich" and their businesses are in distress as a result of conducting impactful, national economy related businesses, or merely due to personal reasons.

This is, therefore, a hard sale for the distressed, as it is for the Government, which has recently preached caution and advocated for deeper analysis of the matter. As a country, we need to come to common agreement that we have a situation on our hands that may not necessarily require a lone silver bullet to fix.

En route to finding the appropriate antidote, President Museveni has prescribed cataloguing those in distress. His priority list has manufacturers and exporters. The President argues that if these are not rescued then our competitiveness as a country in trade, manufacturing and commerce will be affected. Does that mean, therefore, that the President has promised to fork out over sh1.3 trillion of the taxpayers' money to bail out the "super rich" without due consideration of more factors than mere cataloging of the distressed?

In my view, the President extended guidance in principle. He did not promise or sign off the money. He invited those concerned to look hard and deep at the real issues; work out modalities, prioritise implementation if necessary.

Drawing lessons from our history, related to the same situation, may also help to avoid recycling the same old, non-productive approaches used a few years ago. It should be recalled that over the years, the Government, through various initiatives, has offered bail outs to companies and persons who were described as local entrepreneurs, to enable them play their rightful role in ensuring a self-sustaining economy largely driven by the private sector. Resources were aggressively sought and identified to support this initiative. In some cases, laws were passed to accommodate the bailouts. Several individuals and companies, both private and public, benefited. These included manufacturers such as Sembule Group, BM Steel, United Garment Industries (UGIL), and Phoenix Logistics.  

For these companies, the Government paid off loans, guaranteed and or gave cash injections to kick start operations and facilitate rebuilding and re-equipment.

The list of individuals who benefited from bail outs is as repetitive as it is depressing and I am sure the UCB archives at the Non-Performing Assets Recovery Trust (NPART) and UDB makes for interesting reading for scholars of the sector.

Suffice to add that most of those "rescued" picked the money and partly used the same to relocate or start similar business lines in neighbouring countries or opted to do other stuff offshore. Others merely reverted to old habits that led their entities to default. The ultimate loser then was the taxpayer.  

So, to mitigate against possible similar reoccurrence and make bailouts more effective, we should deliberately deploy fresh and well thought-out approaches than have been used before. We need measures that will ensure that local entrepreneurs do not interpret the bailouts as some form of "sharing the national cake" and hence a license to live large instead of using the resources for the intended purposes.

Most of the formerly bailedout businesses became further indebted and made it back on the distress list. Others merely closed shop and the proprietors moved on scot free.

This points to a possibility of other underlying issues, than debt repayment, that need to be addressed. It is a call to examine the appropriateness of the intervention instead of throwing money into at a bottomless pit while further burdening the taxpayer. A rush to deploy bailouts without governing policies, guidelines and enabling laws or binding agreements will lead to a vicious cycle of temporary relief to individual firms but no benefit to the country.

To further depart from past failure, the bailouts should not shield defaulters who took excessive business risk without appropriate insurance, diverted or wasted business resources, stripped company assets or hid them away for personal enrichment. The principle of the bailouts should not be to shield the directors or individuals from taking responsibility of their acts.

This time around, we should also differ from the unconditional cash hand outs and adopt bailouts in form of loans, guarantees, bonds or stocks. By placing rescued companies under management appointed by the Government, we will provide additional insurance for the taxpayers.

By issuing new shares or stocks to the Government as a condition for the bailout, rescued businesses can enable quick and less costly rejuvenation, capitalisation and operationalisation of the new Uganda Development Corporation (UDC). Or indeed the Government may create any other special purpose vehicle for this role as well as assign monitoring and supervision to a selected competent body.

Finally, the various forms of bailouts should be explored, to enable the Government meet its objective of rescuing the entities yet allowing the Ministry of Finance, Bank of Uganda, UDB and any relevant bodies to set strict requirements before recapitalising these firms. Such options are replacement of management, restructuring to remove bottlenecks, restrictions on executive pay and staff pay increases until certain performance benchmarks are met or until the Government is repaid. In some cases, it may be prudent to allow some businesses to fail gracefully without spreading contagion.

Radically, and in the absence of clarity regarding modalities governing the bailouts and where there may be evidence of zero-risk to the overall national economy, the best option may be to do nothing and let market forces prevail. Then the mismanaged institutions will either fail or be absorbed by stronger firms. This is a strategy that has to an extent been used by the Bank of Uganda in dealing with insolvent banks, leading to a better and solid banking sector interest rates aside. The banks either meet the Central Bank's liquidity standards and follow the rules, or opt to sell off, merge with, or be taken over by stronger and better managed institutions. Why not apply the same measures to businesses in similar circumstances?

The writer is the spokesperson of the Ministry of Finance and Economic Development