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.