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Bailouts: Government lifelines or handouts?

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In a recent letter, President Museveni stopped the auctioning of Pearl of Africa Hotel, an establishment under Aya Group that is facing financial difficulties with a view of government financial support. PHOTO/ FILE

If businessman, Mohammed Hamid, the owner and chairman of the executive board of directors for the Aya Group is given a ‘bail out’ as acknowledged by President Museveni, earlier, he will be the fourth high-profile businessman to get government intervention under unclear circumstances. 

In 2010, Hassan Basajjabalaba, a businessman, received substantial government compensation. His company was awarded about Shs21 billion after a controversial cancellation of his contracts to manage markets in Kampala. 

In 2016, businessman Patrick Bitature, the proprietor of Simba Group of companies experienced financial distress resulting from a South African money lender, Vantage Mezzanine Fund II Partnership who he owed $26m, [Shs100.65 billion]. Government opted to settle the loan on his behalf. 
Fast-forward, Dei Group, founded by Mathias Magoola, was allocated Shs70 billion by Parliament, but Mr Magoola sought a larger sum of $600 million to clear his debts. 

And now, the focus shifts to Aya Group. In a recent letter, President Museveni stopped the auctioning of Pearl of Africa Hotel, an establishment under Aya Group that is facing financial difficulties with a view of government financial support. 

Several public and private companies have received government assistance during times of distress, but it remains unclear whether these were bailouts, payouts, or donations, as the criteria for this support are not clear. Critics also question the selective nature of this support, particularly towards privately-owned businesses.

Typically, a government bailout is aimed at preventing the collapse of an entity that could significantly impact economic stability. Such assistance often comes with conditions such as restructuring, repayment plans, or changes in management. This method is backed by clear process. 

For instance, in 2016, the government intervened in the financial crisis of businessman Sudhir Ruparelia, whose business Crane Bank was taken over by the Bank of Uganda (BoU) due to undercapitalisation. 
Although the business did not succeed, a well-organised process was in place to ensure the situation was managed effectively.

Payouts, on the other hand, refer to a financial distribution or compensation given to individuals, companies, or stakeholders, while donations are largely charitable contributions.
However, the initial ‘bailout’ examples mentioned earlier appear to have skipped the rigorous process that Crane Bank went through. Thus, some members of the public perceive them as either payouts or donations, which dilutes the meaning of bailouts.

This concept of government bailouts dates back to 2007 when government injected $25 million to rescue Uganda Telecom (UTL) from insolvency. 
The aim according to government was, and still is to protect broader economic stability. For instance, in UTL case, government aimed at maintaining essential communication services, and protect jobs. 
For Mr Hamid, the reason is due to his significant investments in tourism as stated in President Museveni’s letter. 

Despite the good intentions, the lack of clarity in the process has led to skepticism. A section of the public questions whether privately-owned businesses truly received bailouts, payouts, or donations, citing a lack of clear criteria and visible success in supporting these businesses.
Mr John Walugembe, the executive director of the Federation of Small and Medium Enterprises, specifically identifies the Aya Group as a prime example of opacity.

“Aya has not provided significant employment since it was established. If employment were the primary criterion, Aya would not qualify. Perhaps other criteria were considered, but in Aya’s case, such an argument is weak. A hotel does not employ as many people as a manufacturing business. Why would you allow a factory to collapse?” he questions.

Katikamu South Members of Parliament (MP), Hassan Kirumira, further cites additional examples of government financial support being shrouded in cloudiness: “Dei has been operational for less than a year and is currently seeking funds. This is concerning because the funds are not even earmarked for production but rather to repay a loan,” he said during a programme titled “Morning at NTV” on NTV Uganda.

The selective application of ‘bailouts’ is marked by clear examples, such as the lack of response to a plea from MPs who petitioned the parliamentary trade committee to urge the government to bail out Sembule Steel Mills, which owed Shs7 billion to the Bank of Baroda. However, this appeal was unsuccessful, and since then, the establishment has remained inactive.

Steel Rolling Mills faced significant financial challenges and requested government assistance, but they did not receive the support. 
BMK Group, owned by the late Bulaimu Muwanga Kibirige, operates in various sectors, including hospitality and real estate. The entity sought government assistance during financial hardships over failure to pay Shs1.5b debt, but was not granted a bailout.

No results 
Moreover, experts assert that the purported bailouts of these companies have not yielded the expected success, as the supported companies have not demonstrated significant improvement since receiving the financial intervention.
“We keep injecting money into it despite its continuous losses. The likes of UTL; I do not know if it is still surviving,” said Julius Mukunda, the Civil Society Budget Advocacy Group (CSBAG) boss, during the Morning at NTV show.

Mr Mukunda continued, “Bailing out companies, whether private or public, is not inherently a problem. It can be good economics, as it has been done successfully elsewhere where companies have rebounded and become profitable. However, there must be clear criteria for determining eligibility for government assistance. One of these criteria should be the amount of taxes the company has contributed to the country. If a company has contributed nothing, it should not qualify for a bailout. Without clear criteria, everyone will start requesting a bailout. If you act arbitrarily, you will end up bailing out anyone who asks.”

He stressed, “Why couldn’t we bail out Sembule or Greenland Bank? There are many other local enterprises that we, as a country, should have been very interested in investing in.”

Side effects
Moreover, bailouts, if not managed well, can impact investor confidence, according to Deloitte tax consultant Martin Makumbi.
“If you are bailing me out and I am not paying interest, it will certainly give me a competitive edge because I am not being penalised for the funds I have utilised,” he explains.

As Mr Mukunda noted earlier, bailouts have taken place in other countries as well. For example, the U.S government bailed out Ford Motor Company during the financial crisis of 2008-2009 under the Troubled Asset Relief Programme (TARP). Experts agree that this action exemplifies a true bailout, as it involved conditions such as stringent oversight, restructuring requirements, and commitments from Ford to enhance financial viability and preserve jobs in the U.S. automotive sector.
To address this, Mr Walugembe emphasises the need for Uganda to enact a comprehensive policy with clear safeguards just like the U.S. government.