Lessons from Umeme’s SPO

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.
amwenda@independent.co.ug

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