Deconstructing the sale of 146 Obote-Amin parastatals

In his May 1, 1970, Labour Day address at Nakivubo National Stadium, former President Milton Obote officially declared Uganda’s ‘Move to the Left.’ This followed a two-year consultative process that started with Uganda Peoples Congress (UPC) delegates’ conference held in July 1968 in Kampala. Two foreign presidents — Zambia’s Kenneth Kaunda and Tanzania’s Julius Nyerere — addressed the conference for good measure.

The move laid out in the Common Man’s Charter detailed how and where the country should be. Politically, Uganda would be a unitary, democratic and republican state. Economically, it would be an independent state, capable of making independent developmental decision. Consequently, Ugandans would actively engage in every sphere of the economy — from production, to industry, to manufacturing.

As such, government immediately acquired 60 per cent shares in all banks, insurance company, and credit institutions. Only state-owned enterprises/parastatals would carry out all import and export business except oil products. There was a caveat though: government would acquire 60 per cent in the oil companies, and workers through trade unions or parastatals would acquire 60 per cent stake in any manufacturing outlet.

The move, some say, saw 78 companies nationalised in addition to the already existing parastatals established before and after Independence. Barely a year later, Obote was ousted by his army commander Idi Amin in the coup propelled by the British. 

Some theorists have argued that by removing Obote — an Anglican but socialist — and replacing him with a Muslim, Uganda’s former colonial power signalled that its economic interests far outweighed religious ones. One of the justifications Amin provided for the coup was “to return confidence in the country’s economic progress.” Immediately he embarked on undoing some of Obote’s policies such as government’s 60:40 ratio acquisition in all companies. Yet it didn’t take Amin that long to also embark on a nationalisation spree that brought him on collision path with Britain and her capitalist allies. This culminated in his overthrow in 1979.

Before and after Independence — until about 1989 — parastatals were an integral part of the economy. But thanks to a perfect storm that included the 1970s collapse in commodity prices, and mismanagement coupled with political turbulence from 1966 to the late 1980s, parastatals morphed into loss-making ventures which deeply burdened the treasury. When President Museveni assumed power in 1986, there were 146 state-owned enterprises. One hundred thirty-eight (138) of them were majority holdings, with a further eight minority state holdings.

Enter divestiture 
Offloading these parastatals into private hands — call it privatisation — was among the list of conditions imposed on Uganda and a dozen other poor countries around the world emerging out of conflict. This was under the Structural Adjustment Programmes (SAPs) championed by World Bank, International Monetary Fund, and World Trade Organisation (the Washington Consensus). 

Dr Fred Muhumuza, a development policy analyst who worked in the Finance ministry in the 1990s, says the SAPs were tailored to address government’s excessive borrowing. But — he adds rather menacingly — we are back to the same situation. Mr Jim Mugunga, the Finance ministry spokesperson, says “the SAPs were used as templates around the world” and it was a case-by-case basis with “each individual country’s needs…weighed more on what was required.”

Officially, privatisation commenced in 1992 with enactment of the Public Enterprises Reform and Divestiture Act to guide the process. In November that year, Uganda American Insurance Company was repossessed by America Life Insurance. Elsewhere, East African Distilleries was sold to International Distillers and Vintners for Shs731m (today’s currency). Later in December, Shell (U) Ltd was acquired by Shell Petroleum Company Ltd in a debt equity swap at Shs12m.

Offloading the parastatals took among other forms auction, management buyout, asset and share sales, and transfer of ownership to private sector. There were also State enterprises which were liquidated or struck off the registrar of companies. These included Agro-Chemicals, Domestic Appliances, Hamilton, Itama Mines, Lebel (EA) Ltd, Sukulu Mines, TICAF, Uganda Air Ltd, Uganda Aviation Services, Uganda Fish Marketing, Uganda Farm Machinery Ltd, and Uganda Tourism Development Corporation.

Others were Ugadev Holdings Ltd, Uganda Wildlife Development Corporation, Uganda Toni Services, Gobbot (U) Ltd, Uganda Transport Company, People’s Transport Company, Uganda General Merchandise Ltd, Infra Africa Traders, Lint Marketing Board, Paramount Manufacturers, and Toro Development Corporation.

In February 1993, Lake Victoria Bottling Company Ltd was divested to Crown Bottlers through share sale at Shs6.4b; in August, Uganda Securico Ltd was sold to Securiko (U) Ltd, and in October Agricultural Enterprises Ltd was divested to Commonwealth Development Corporation through a joint venture deal of Shs12m. In May 1994, Uganda Tea Corporation was repossessed by Metha Group while Steel Corporation of East Africa was divested to Madhvani Group and later in 2000 fully acquired it through pre-emptive rights at Shs363m. Six months later, Blenders (U) Ltd was sold to Unilever Overseas Holding BVC at Shs494m.

The World Bank hoped that the divestiture of 146 parastatals would raise at least $500m — adjusted for inflation, approximately $1 billion in today (Shs3.5trillion)— but by end of 2006, the move only raised $167m or $221m in today’s currency adjusted for inflation (approximately Shs781b). The trifling sales proceeds, two officials said and some documents seen indicate, was a result of among others asset stripping, asset undervaluation, and defaulting on payment by some buyers, especially regime cronies.

We could not immediately establish how much has since been raised in the 15 years, but it is likely insignificant because records such as the Finance ministry’s 2017 divestiture report show few assets were divested during the period. Former junior Finance minister for privatisation, Manzi Tumubweine, admits that there were some missteps. “Where we went wrong was to sell 146 enterprises at the same time,” he says, adding: “It was a mess.”

Cheap sales meet vested interests
In August 1994; Hotel Margherita was divested to Reco Industries Ltd for Shs365m, White Horse Inn was divested to Kabale Development Company Ltd registered to among others Mr Amos Nzeyi and Dr Ruhakana Rugunda for Shs600m, Tumpeco was divested to GM Company Ltd, Mt Moroto Hotel was acquired by Kodet International for Shs40m, Rock Hotel was acquired by SWISA Industries Ltd for Shs300m, and in December, Uganda Cement Industry was divested to Rawals Group of Industries for Shs20b in today’s currency.

In 1995; Lira Hotel was acquired by Showa Trade Company Ltd registered to former Northern region NRM vice chairperson Sam Engola for Shs250m, Soroti Hotel was sold for Shs150m to Speedbird Aviation Services Ltd linked to an NRM cadre in Teso, Acholi Inn was sold to Laoo Ltd for Shs235m, while Hilltop Hotel was sold for Shs35m to Three Links Ltd, a company linked to a top NRM honcho.

Mr Mugunga defended the sale prices as “fair value that would come from advertising of a specific asset which informed the sale.” He adds: “Some hotels had been either run down or neglected.” Documents we have seen show that some of the liabilities included caretaker fees, terminal benefits, bad and doubtful debts. 
“People may want to use two lenses — Uganda pre- and post-divestiture — but not to use post-divestiture lenses to look at pre-divestiture, and pass judgment,” Mr Mugunga notes.

Mr Tumubweine says vested interests were not easy to know.  “SAP one, two, and three looked at how we could revive the economy and the guiding principle was that government should get out of productive sectors, and rather stick to things like infrastructure, and to create an environment where people can produce.”
But what about Uganda Commercial Bank (UCB) and Uganda Airlines? Mr Tumubweine says people were not looking at them from infrastructure point of view to create economic development. 

“People were only looking at economic success per say as an entity of its own. For instance, spending on politics is expensive but if you spend on it to create good governance to spur production it is worth it. 
“I opposed the sale of UCB, and I was taken to different offices and told to stop this nonsense. My argument was that we needed such a bank that would lend to groups like farmers and youths cheaply, but we were few against the idea of the sale. And I resisted it as long as the bank was under my ministry, then it was transferred to Bank of Uganda and it was sold,” he adds.

Stinking drive
UCB underwent a cycle of dubious transactions — in which some of President Museveni’s relatives were named — until it was acquired by Stanbic Bank for $19.5m in 2001. UCB was the largest bank at the time with 67 branches across the country. Stanbic would later use this infrastructure to become the largest bank in Uganda today. 

President Museveni specifically likened the non-performing State enterprises to “dead people that required burying.” But it did not take long for the divestiture process to be hijacked by regime cronies. These included Musevenu’s blood relatives, and NRA/NRM party cadres. Our analysis of the documents indicates that at least 10 State enterprises were undervalued or sold to government employees, NRA/NRM cadres, and senior government officials including MPs, Cabinet ministers, and presidential advisers.

In other instances, the government supported particularly Asian investors including Mehta and Madhvani to among others reclaim their properties and recapitalise. The affected entities included Nyanza Textile Industries Ltd (Nytil), Papco Industries Ltd and Uganda Airlines, which the President justified as “strategic intervention in vital sectors generating employment and fighting poverty through helping businesses that generated wealth.”

According to a research paper titled: Assessing Privatisation in Uganda by Dr David Kibikyo, between the 1990s and 2006, government had offered bailouts to the tune of $95m—in today’s value, $125.7m (Shs444b)—split among Mehta, Madhvani and Sekhar Mehta, and yet Uganda Airlines Corporation (UAC) needed $500,000 to fund her operations at its liquidation but was denied.

“On three occasions, UAC was bailed out to the tune of $3m. The fourth time, however, there was no alternative but to sell ENHAS shares in order to raise the money. Several other parastatals Nytil, Papco, and a Private Local Bank (ICB) solicited for support in vain. In only one case, the local exporter of hides and skins, government guaranteed the loan. These activities negatively impacted on the economy and the privatisation process in particular,” wrote Dr Kibikyo, who is the current Vice Chancellor of Busoga University.

Nytil was sold to Picfare in 1996 for Shs2b while Papco Industries Ltd was divested to Praful Chandulal Patel (authorised agent of Lake CK Patel family) in 1999 for Shs100m. One senior official speaking anonymously told Daily Monitor that besides external pressure (World Bank/IMF) and the vested interests from within, there was also another aspect of President Museveni wanting to undo most of what Obote and Amin did.

“Are you so surprised that the narrative today is as if Uganda started in 1986? Some of these parastatals should have been kept, and there are numerous examples elsewhere like in Kenya and Tanzania, but in the end the liberators decided. They tried to rewrite history and it is the tragedy the country has to live with for years.” 

Pressing the reset button 
Consequently, former Finance minister Ezra Suruma, who was involved in discussions on the SAPs in the late 1980s, says we ended up “foreignalising the economy.”  Today, all sectors are dominated by foreign companies and which are the largest taxpayers. These include MTN, Airtel, Vivo Energy (formerly Shell), Total Uganda, Nile Breweries, Uganda Breweries, and Stanbic Bank. A 2007 World Bank report titled “Bank Privatsation in sub-Saharan Africa: The Case of UCB” concluded that after its sale, it become more “solvent, efficient, and improved the access to banking for some parts of the population”.  The report is almost oblivious to the fact that Stanbic built on UCB’s infrastructure to becoming the largest bank today. 

Regardless of the liberalisation of the banking sector, the sector remains perforated with a number of thorny issues. Top of them are the high interest rates, which Dr Muhumuza attributes to the economy generally being “risky.” 
“I don’t think our problem of the high interest rates can be resolved by creating a government bank. Such a bank would recapitalised by a government without money, and borrowing expensively from commercial banks where they have crowded out the private sector. So if government borrows at 16 per cent , it means they will have to lend out at 25 per cent for their business to make sense or find a way of subsidising the capital.”

And once you have an economy dominated by foreign banks, Dr Muhumuza adds, then you cannot complain about profit repatriation because even when they need to support government investments they have to mobilise capital from their home countries in Europe.
“If interest rates are two per cent in Europe why don’t they lend us at the same rates here?” Dr Muhumuza wonders. “I think we need a broader conversation on the SAPs; that when government lives large beyond its means — as it was then — it distorts the entire economy.”

2007  report
A 2007 World Bank report titled Bank Privatsation in sub-Saharan Africa: The Case of UCB,  concluded that after the sale of the bank, it become more “solvent, efficient, and improved the access to banking for some parts of the population”. 
The report is almost oblivious to the fact that Stanbic built on UCB’s infrastructure to becoming the largest bank today.  But regardless of the liberalisation of the banking sector, the sector remains perforated with a number of thorny issues. Top of them is the high interest rates.