What you need to know:
- In asking Parliament to reject the loan request, given the concerns raised by the FIA and the Committee findings, the Committee also demanded action be taken against officials behind the proposal.
- The government had sought parliamentary approval to borrow up to €500 million facilitated by little known AMAROG Capital Ltd, Sovereign Infrastructure Group and other financial institutions.
Parliament on Thursday thwarted attempts by the government to borrow more than Shs2 trillion (€500m) amid serious concerns that the latter is waiving the country’s immunity to lenders.
The lawmakers reason that in such a case, lenders can easily take over state assets in the event that the economy is pushed to defaults.
The government had sought parliamentary approval to borrow up to €500 million facilitated by little known AMAROG Capital Ltd (ACL), Sovereign Infrastructure Group (SOVINFRA) and other financial institutions to finance the 2022/2023 Budget, which has less than two months to expire.
The House Committee on National Economy has equated some of the government’s borrowing at commercial rates to clear loan obligations (including to the central bank) to a “Ponzi scheme.”
In the budget support loan request, the government presented a list of outstanding unpaid invoices for the current financial year (FY) as at May 11 amounting to Shs7.1 trillion. Among the unpaid invoices is Vote 130: Treasury Operations valued at Shs5 trillion.
The House committee learnt that part of this is the more than Shs2 trillion in form of advances from the central bank to the government.
“The committee deems this as borrowing to pay back another loan, which leads to high interest costs to government,” it noted before “recommending that government sticks to borrowing to finance critical productive elements of the budget to avoid Ponzi scheme practices … which are eventually very expensive.”
Part of the loan from the loan request to be borrowed from SOVINFRA and ACL was to finance what the Finance ministry called the approved supplementary budget for FY2022/2023. This is to a tune of Shs1.52 trillion. Parliament found that this creates an excess of Shs826.5b. The conflict in facts and figures, lawmakers say, poses a risk of mismanagement of the realised funds.
On May 23, the Finance minister presented a motion seeking House approval for the government to borrow more than Shs3.3 trillion. This included the IMF quota allocation, Special Drawing Rights (SDR), and the facility from ACL and SOVINFRA. This, Finance minister Matia Kasaija further revealed, was to finance the “government of Uganda Budget for the FY2022/2023.” Parliament approved the IMF loans.
Although Parliament had been informed that two lead arrangers, SOVINFRA and ACL had offered the best terms among eight other creditors, it raised strong reservations about their capacity.
SOVINFRA is a company organised and existing under the laws of the state of Delaware, USA, while ACL is a company organised and existing under the laws of Kenya.
“The Committee was concerned about the capacity of the two lead arrangers to mobilise and raise such an amount of money. In its own due diligence, an Internet search revealed scanty information on SOVINFRA.
On the other hand, the Internet search on ACL confirmed its legality as per the draft financing agreement as being domiciled in Kenya off their website…,” the House report reads.
Per information on their website, Parliament found that ACL is an advisory and debt capital raising firm headquartered in Nairobi, Kenya, which provides corporate finance and advisory services to middle-market clients in Kenya, East and Sub-Saharan Africa.
Their typical client, the House notes, is a private company with revenue of $10m (Shs37b) to $100m (Shs371b) seeking a capital or advisory transaction of a minimum of $5m (Shs19b).
Upon expressing concern about the proposal by the government to borrow an amount higher than the company’s typical maximum of $100 million, the committee was informed by the Finance minister that the Financial Intelligence Authority (FIA) did due diligence on the two lead arrangers.
The FIA, the committee added, found them suitable to mobilise resources required by the government.
The committee demanded a due diligence report, which was provided by the Finance ministry. Upon receipt of the due diligence report, however, the committee noted that the FIA had a number of specific concerns.
Both ACL and SOVINFRA, FIA found, are relatively new companies, with limited demonstrated experience in structuring innovative funding options for national governments.
Whereas the respective company directors appear to have extensive experience in structuring financial transactions, this was reportedly on account of their previous work experience and occupations.
Several of the self-reported projects in the documents provided for the due diligence were undertaken by companies where SOVINFRA’s founders were previously employed.
The other transactions provided as evidence of completed deals in Kenya, FIA investigators found, appear to be mere proposals that are yet to be approved.
They, therefore, could not be independently verified in terms of status, amounts involved and the role played by ACL and its partners.
ACL and SOVINFRA did not provide audited books of accounts despite a request by the Finance ministry for both companies to do so.
SOVINFRA instead provided pro-forma financial statements (cash/income projections) for the years 2021-2024, which could not be relied on as these are just estimates.
Whereas both entities’ role would essentially be limited to arranging the proposed transaction, which may not require a lot of financial resources, lack of clarity on their financial position was of concern.
More red flags
The due diligence further established that whereas SOVINFRA is reported to be working in partnership with Gan Wood Securities, available information shows that the services of Lerry Knox, the chief executive officer and co-founder of Sovereign Infrastructure Group, were terminated by Gar Wood Securities on December 19, 2022. This was for allegedly engaging in an unauthorised private securities transaction.
In asking Parliament to reject the loan request, given the concerns raised by the FIA and the Committee findings, the Committee also demanded action be taken against officials behind the proposal.
“The Committee further recommends that the officials who sourced and presented this loan proposal be investigated for their possible linkage with the mentioned lead arrangers,” the lawmakers recommend.
Mr Ramathan Ggoobi, the Finance ministry’s permanent secretary, did not respond to our request for a comment on the development and potential sanctioning of officials from his ministry by the House.
The Committee also expressed reservations about the timing of the loan requests and the time granted to the House to scrutinise the deal. As such, the Committee wants the government to prioritise the available resources for the remainder of the current Budget while sourcing a credible financier.
To acquire the loan, the government had to fulfil a number of conditions. These include legal advice or clearance of the agreement by the Attorney General, approval of the deal by Parliament, a certificate signed by an authorised signatory of the government setting out the full name, title and specimen signature of each representative of the government authorised to sign on its behalf, the Finance Agreement, and any documents to be delivered by the borrower.
Other conditions included a certificate issued on the official letterhead of the government and signed by the Finance minister, confirming, among other things, that the borrowing of the facility would not breach any restriction on the government’s sovereign borrowing powers.
Controversially, the interest and fees payable by the government under the Finance Agreement had to be exempt from all tax in Uganda.
The government also had to provide evidence that the fees and if costs required to pay per the agreement have been paid or would be paid prior to the first utilisation date of the loan facility.
Parliament found that the condition on the tax waiver contravenes Section 83 of the Income Tax Act and contradicts the country’s domestic resource mobilisation strategy.
Section 83 of the Income Tax Act imposes a tax on a non-resident person, who derives any dividend, interest, royalty, natural resource, payment of management charge from sources in Uganda.
The lawmakers noted that the loan is a commercial agreement and non-concessional where the parties are expected to make profit.
Consequently, the MPs recommended that the government always negotiate for the tax regime to apply to non-concessional loans to ensure Ugandans benefit from the gains in the commercial transaction.
Sovereign immunity waived
Elsewhere, the government per Clause 17 of the financing agreement had to “unconditionally and irrevocably” agree that the execution, delivery and performance of the agreement constitute private and commercial acts.
Consequently, the government will not claim immunity should any proceedings be brought against it or its assets in any jurisdiction in connection with the agreement.
Further, the government had to waive any right of immunity which it or any of its assets now has or may in the future have in any jurisdiction in connection with any such proceedings. This essentially means the lenders could attach an asset to recover their cash in case the government defaulted and/or could not claim immunity in both proceedings against it or such assets. This also eroded any such immunity acquired by government or its assets after the execution
“The committee is concerned with the number of loan agreements which the government is signing with different lenders indicating an increased waiver of immunity with regards to the assets and property of Uganda within and outside Uganda,” the lawmakers note, adding, “This means the government of Uganda irrevocably and unconditionally agrees to waive immunity over Uganda or its properties to which it or may become entitled to at any time whether under sovereign immunity or otherwise from any suit.”
Whereas a number of critical assets have been excluded from the application of the clause, the committee noted that this was not sufficient and recommends that the government should always negotiate and ensure that sovereign immunity is not waived.
In scrutinising the deal, legislators also found that the government and lenders, without approval of Parliament, could substitute the basis for determining the rate of interest.
“Changing the basis for determination of the interest rate will affect the terms and conditions of the loan. This will ultimately offend Article 159(2) and (3) of the Constitution, which require that the terms and conditions of the loan shall not come into operation unless they have been approved by a resolution of Parliament,” the House report notes.
Standard Chartered cash
In November 2022, Parliament approved a request by the government to borrow $464 million (about Shs1.7 trillion) from the Standard Chartered Bank and other financial institutions to finance infrastructure and development needs of the Budget.
The loan had two components, including €182.7 million guaranteed by the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), and €272.33 million guaranteed by Nippon Export Investment Insurance (NEXI).
The House Committee found that, to-date, the bank has only disbursed €146 million of the part guaranteed by ICIEC and the balance of €36 million is to be disbursed in May 2023.
Standard Chartered Bank could not disburse the remaining balance of the loan amounting to €273.03 million, and has since proposed different financing terms higher than what was negotiated and approved by Parliament.
While the bank has cited new developments in the market, Parliament reckons the move is irregular given there was a binding agreement between the two parties.
It notes: “The committee wonders how the bank could just freely walk away from its own agreement. The committee recommends that sections of the agreement that provide for consequences to breach of contract be invoked to force the bank to adhere to the agreement and compensate [the] government for wasted time and resources that were invested in negotiations and agreement.”
The Committee further recommends that the officials who sourced and presented this loan proposal be investigated for their possible linkage with the mentioned lead arrangers.