Friday,October 30,2020 09:09 AM
  • Home
  • Opinion
  • Privatisation: Beyond the cash, through the years

Privatisation: Beyond the cash, through the years

By Admin

Added 15th May 2017 12:19 PM

The persistent and negative undercurrents on the state of RVR (Uganda Railways’ concessionaire) as well as the barrage of issues relating to the non-performance (as per contract) of the Chinese investors in Kilembe Copper Mines are all cause for concern.

Privatisation: Beyond the cash, through the years

The persistent and negative undercurrents on the state of RVR (Uganda Railways’ concessionaire) as well as the barrage of issues relating to the non-performance (as per contract) of the Chinese investors in Kilembe Copper Mines are all cause for concern.

By Jim Mugunga

UTL, Kilembe mines and RVR are three formerly Government entities that were privatised and are now struggling to the extent that there is need for us to re-assess our post-divestiture business practices. 

The persistent and negative undercurrents on the state of RVR (Uganda Railways' concessionaire) as well as the barrage of issues relating to the non-performance (as per contract) of the Chinese investors in Kilembe Copper Mines are all cause for concern.

The last quarter of 2016 was the beginning of the peak of UTL's woes. A prolonged parliamentary probe has technically drained the human and financial capacities of managers at the company to keep the company afloat. Subscribers disconnected while suppliers and workers have became more unsettled.

The telecom company remains exposed to court cases as a result of non-settlement of bills. Matters were not helped when UTL and Uganda Communications Commission (UCC) traded accusations and blame publicly climaxing into a threat to cancel the license.

That the allegation to the effect that Uganda Police Force is planning to shift all its telecoms connectivity capability to other providers further chisels at the argument that the entity is of strategic telecom-cum-security interest.

A few years, before we got to this stage, UTL managers cried out to shareholders (including government) to help reverse the dire financial situation of the company. Realising minimal progress, some top managers quit. Later, five directors resigned en-mass. Last week UTL was placed under receivership.

Definitely this is just the start of a long, tedious journey for UTL. In my view, no company of its size, level of exposure, multitude of issues and lack of re-investment yet operating in a fast evolving technological environment would withstand such trouble. UTL thus far has proven to be resilient.

So, how did we get here? How did Uganda which is widely documented to have posted successes through privatisation across sectors like hospitality; banking, beverages and agro-processing end up with a limping UTL?

Records show that Uganda's success with privatisation was unmatched in Africa largely because of full government support and a robust technical team.

The country won international acclaim and was the reference point for privatisation south of the Sahara. Our technocrats shuttled foreign countries advising on strategy and best practices in the implementation of the concept.

They taught and built up national capacities and shared our experiences. They were retained to prop up African nations lagging behind. Neighbouring Rwanda and Ethiopia were among the various countries that benefited from Uganda's expertise in the field.

The world recognised our achievements. Ironic now but Uganda won the Africa Privatisation of the Year Award, 2000, for the divestiture of UTL!

From the above, it is apparent that we had a working model but the execution of the business plans post divestiture failed. For example, as a nation, we retained shareholder rights in UTL but hardly invested in the business.

We eroded its profitability by taking free services and this is partly responsible for the state of affairs at UTL. The same applies to most entities where Government elected to retain an interest but play an almost zero role in the capitalisation process and the invoice settlement obligations to these businesses are ignored.

As you read this, UTL, Kilembe and Uganda Railways are under huge strain. They are either at various levels of collapse or are heavily weighed down by operational, structural and financial challenges.

Back to the basics, we need to find out why Uganda adopted the privatisation process in the first place. What was the legal framework under which it was governed and implemented? What was the state of the entities to be privatised and that of the economy?

Privatisation meant a shift, total or partial, in any activities or functions previously performed by the state, to non-state actors. In other words, it was the limited or absolute ceding of government responsibilities for production and services to the private sector. Privatisation was never intended to stand alone.

It was part of multiple solutions and intrinsically linked to, but distinct from, related concepts such as liberalisation, deregulation, commercialisation and corporatisation.

The idea was to try as much as possible to expose the public sector to market principles. For example, deregulation or liberalisation was intended to relax operational space, rules and regulations to allow private companies to operate in areas that were previously limited to the public sector alone.

Today, it is almost impossible to imagine that years ago the state fully controlled the access and trading of foreign exchange. That we can now effortlessly walk into a bureau and buy any currency is rooted in the decisions taken in the past to make sure that government exits and removes the monopolistic regulations that made it the sole player in this monetary segment.   

Commercialisation on the other hand, was the practice where a public owned company would be given full autonomy to operate like a private one (in respect of management and application of business-type decisions) without any change in ownership.

A case in point here is the Housing Finance Bank. Under corporatisation, public enterprises were given the legal status of a private company, although the Government still retained ownership. Under this category is the Uganda Property Holdings Limited (UPHL) whose mandate is to manage the nation's real estate locally and abroad.

The justification for the push into the kind of privatisation that Uganda undertook can be put into three major categories: economic, social and moral or political reasons. Economically, privatisation provided many economic benefits at both the micro and macro levels to consumers, firms, government and the whole society.

At the micro level, privatisation has now proved to have increased enterprise efficiency and productivity. The New Vision, Dairy Corporation and Sheraton Hotel are such examples. These all point to enhanced product and service quality, expanded range of choice to consumers, innovation, cost cutting and a rise in company profitability.

Privatisation further availed Uganda with the opportunity to adopt a combination of correct incentives such as curtailed political interference; competition, reinvestment, greater accountability and control mechanisms to public enterprises hence ensuring value for money for the taxpayer.

At the macro-level, privatisation generated real cash from the sale of the assets of the unprofitable, mismanaged enterprises. The process successfully generated billions of shillings that were paid out to settle salaries and wages, terminal benefits, pension and other forms of severance bills, for instance, non-performing public enterprise liabilities.

The divestiture receipts also provided the seed capital to spur private sector growth and undertake real infrastructure development. When the private sector such as Sembule, BM Technologies and Basajja needed bail outs to survive in business and productivity, the privatisation proceeds were the first point of call.

Indeed at the point when sections of donors did not believe in the vision of the executive to ensure national self-sufficiency in hydro production capacity, the privatisation process provided in excess of $27m then for the start of the National Energy Fund.

This single action, to those in the know, is widely credited for the commencement of Bujagali Hydro Station.

Elsewhere, it should be recalled that prior to the advent of privatisation, the Capital Markets were literally non-existent. Yes, the Bank of Uganda helped by allowing the first product to be offered but ultimately the big push came with funding of operations, education and awareness and listings that were all successfully implemented as a result of the divestiture efforts.

Privatisation increased the capitalisation of local stock market through Initial Public Offers (IPO). To date, these account for 100% of all IPOs on the Uganda Securities Exchange (USE). The capitalisation of the USE as at May 3, 2017 stood at sh21.3 trillion.

The positive impacts of privatization can, however, be easily lost when reviewed from the economic environment of today and by focusing sales receipts and weaknesses exhibited among the likes of UTL, RVR and Kilembe Mines. When we cease to see the policy in its totality, its benefits are eroded.

But of course it is all not rosy. When governments across Africa failed to invest in divested enterprises where they retained interests, they failed the momentum for the turn-around of these businesses and played in the hands of political opponents to attack the policy.

For example, some have argued that the sale of strategic national assets that belonged to Uganda Airlines and Uganda Railways is morally indefensible and amounted to loss of sovereignty.

They reason that privatisation created local monopolies primarily in the utilities sector like Umeme and NWSC which "exploit" the wananchi. They also point out, albeit wrongly, that many divested assets were acquired by "foreigners" who funnel the profits outside the country without making any significant local investments.

The reality is, however, different. For example, Serena Hotel previously Nile Hotel, has been improved from a miserable dungeon with a terrible history to a plush five star hotel with newer facilities and amenities added. Investments, employment, training and other improvements by MTN, Century Bottling Company and Nile Breweries are here to stay. The divested companies of this caliber account for the largest single block of taxpayers to URA.  

The political opponents of privatisation have argued that it leads to higher unemployment as a result of retrenchment. They choose not to mention that the divested companies work smarter, within qualified numbers and a wage bill that is not blotted.

Evidently, divested companies highly motivate and re-skill their employees because they categorise them as assets. Privatisation also greatly reduces public sector corruption by removing unnecessary red tape, increasing institutional sensitivity to consumer tastes and improving customer service.

The broader ownership of shares in privatised enterprises, further empowered employees while increasing their overall participation in the management of the economy. The shareholders of The New Vision, a listed company, have more access and input into the management of its affairs now than was the case before the company opened up to the public.

This is the same case with DFCU, Stanbic Bank and Umeme, among others. In return, these companies enjoy a relatively higher level of governance, better performance and of course pay and invest better for their shareholders.  

Further, while some of the outputs and impacts of privatisation may be quantifiable, tangible and immediate, others (for instance personal liberty and welfare gains) may be less measurable and long term. This implies that the time of evaluation of the process is crucial.

Thirdly, in reality and across the globe, there is a litany of successful and failed privatisation programmes with varying degrees of contributing circumstances and weight. Therefore, any attempt at judging the effectiveness of a particular privatisation policy must not only selectively consider certain factors, but also include an appreciation of the context in which the privatisation occurred.

The way in which the policy of privatisation was conceived, designed and implemented, and the political, economic, social and institutional milieu in which it occurred had and continues to pose profound effects on its expected benefits.

Uganda's privatisation story was the prism for resolving or escaping short term economic crisis, without giving adequate attention to and planning for, its long term implications. Governments in Africa resorted to privatisation as a means of satisfying lender or donor conditionalities for receiving aid, loan or debt cancellation.

In Uganda, no legislative or long term tools were put in place by the then Parliament, the architect of the PERD Act, to ensure continued mandatory capitalisation of entities where government elected to retain an interest.

Indeed, no affirmative action was prescribed for divested sectors deemed to be of strategic interest and this situation prevails to date, hence the circumstances affecting UTL and RVR.

That said, with limited options available to a government increasingly desperate for more revenue and a lower wage bill against the backdrop of local demand for more efficient public service delivery, the key issue is not whether or not to privatise but how, and how much to  privatise so as to distribute benefits (and costs) more equitably.

Public-private-partnerships (PPPs) have emerged as an innovative approach to governments for harnessing the expertise or strengths of both the public and private sectors in financing projects, delivering infrastructure and providing services.

The major advantage of this policy approach is that it allows both parties, especially governments, to capitalise on the unique advantages of each sector, while sharing or distributing risks equitably. Privatisation was a lot more premised on the capacities of the private sector.

Under joint ventures and PPPs, the Government is able to exploit the efficiency of the private sector or markets while at the same time able to curb its excesses.

This may signify the beginning of the end of an era for privatisation, but definitely not its benefits such as revenues; investments, efficiencies, technological and human resource capacities.

Modern challenges demand for newer, improved, solutions. Privatization lives on recharged and reloaded under PPPs, joint ventures and concessions. They are today's tools. Tomorrow another set of challenges, another set of solutions.

The writer is the spokesperson and Senior Public Relations Officer at the Ministry of Finance

Related articles

More From The Author

More From The Author