Ghosts of privatisation haunt Uganda 30 years later

The government eventually revived the national carrier trading as Uganda National Airlines Company Limited in 2019.
“I was among the people who buried the old airline but here I am among the midwives delivering a new baby,” President Museveni said on April 23, 2019 while receiving the first two Bombardier CRJ900 aircrafts for revival of the national carrier.
However, barely months to the new airline’s second anniversary, what most people feared would happen unfolded.

The Works and Transport minister, Gen Katumba Wamala, late last month sent the company’s top management and board on “forced leave” pending investigations into allegations of corruption, mismanagement, political interference, including influence peddling in hiring of staff connected to regime power brokers.

Gen Katumba said there is no crisis at the company but to some analysts, such a tumultuous start for a new airline venturing into the already turbulent skies globally is bad for business.
The latest Auditor General’s report detailed that the airline posted a Shs102.4b loss in the last FY 2019/2020 due to grounding of the aircrafts on account of closure of aviation space occasioned by Covid-19.

The first Uganda Airlines Corporation (UAC) started by former President Idi Amin in 1976 weathered turbulent times of late 1970s and the 1980s, into the 1990s until it was liquidated in May 2001 and all its assets disposed of.

At the time of liquidation, UAC was technically bankrupt to the tune of $11m. Its books of accounts had not been audited since 1994, it had suffered severe losses of its market share on all routes, and the brand of the company had been immensely damaged by mismanagement and corruption.

The last nail in company’s coffin was in 1996 when its lucrative ground handling business—the Uganda Airlines and Entebbe Handling Services (ENHAS) was creamed off—acquired by then State Minister of Finance Sam Kutesa, now the minister of Foreign Affairs—as part of privatisation.

Former Finance State Minister for Privatisation Manzi Tumubweine told Daily Monitor that with hindsight, liquidating UAC was a bad idea. 
He said he tried to warn against the airline’s initial sales plan on, among other grounds, national pride but was overruled. Proponents of the new airline, including the President cited, among others national pride.

A year after the National Resistance Army (NRA)—now NRM—captured power, President Museveni, who during the rebel war against the Obote II government professed Marxist ideals, swiftly embraced the capitalist agenda in May 1987. 
For an economy that was on its knees, the Bretton Woods Institutions appeared to offer what government hoped would revive an ailing economy after a devastating war in Central Uganda. The SAPs were first floated to the Obote government in 1981 they failed to catch-on. 

Some researchers have posited that the IMF and World Bank sold the SAPs to many third world countries in Africa and Asia as the cure to their under-development problems. In other cases, the SAPs were conditionalities to acquire new funding.

“In order to survive in leadership, President Museveni changed drastically from Marxist to capitalist,” wrote David Kibikyo, now the Busoga University Vice Chancellor, in his 2008 PhD thesis titled Assessing Privatisation in Uganda. 
“He immediately abandoned the 10-points programme and was ready to implement the SAPs without reservations.”

Prof Ezra Suruma, who at the time served as director of research at Bank of Uganda (BoU), told this newspaper that the political turbulence of the mid-1960s to 1986 had greatly destroyed the economy, and there was need for a fresh start. “Shops were empty,  there were no cars on the roads, there was no forex, among many other things, so we needed help,” Prof Suruma said. 

“The only help on the horizon was from the World Bank and IMF; I remember the first loan of $100m we got was to help us with our Balance of Payment position, and to get essential commodities into the country.”
The IMF describes the SAPs as “macroeconomic adjustment and structural reform” programmes with the objective of sustaining high and broad-based economic growth in which the poor are able to participate. 

Prof Suruma added that the SAPs were essentially “about restoring a market-led economy.” That was also the time of “Reganomics”—the economic policies, including among others, unrestrained free-market activity, pushed by former US president Ronald Regan.

The conditionalities tied to these economic policies have been termed as the “Washington Consensus.” Among them included removing price controls and state subsidies, encouraging foreign direct investments, devaluation of currencies (to make exports cheap and imports expensive), and privatisation or divestiture of all or part of state-owned enterprises.
“There were many good outcomes, for instance liberalisation. Government had been in the business of setting prices for commodities, forex, transport, but all that was to change.

Important to note is that all conditionalities had impacts,” Prof Suruma said. However, he added: “Privatisation stood out and became the major talking point.” 
At the time of NRA/M capturing power in 1986, there were 146 state-owned enterprises—138 majority holdings and 8 minority state holdings. Government was the biggest employer, for instance Uganda Commercial Bank (UCB) at its peak in 1992 employed 3,770 people all of whom would later be terminated.

The state-owned enterprises in almost all sectors of the economy had been established before and after independence in 1962 to, among others, balance the weak private sector, propel national building, and promote indigenous entrepreneurship.

Many of the state-owned enterprises performed poorly owing to the pre-NRA political turbulence. When the NRA took over, the situation worsened with gross corruption, mismanagement, and nepotism and cronyism.

According to Mr Paul Lakuna, a research fellow at Makerere University’s Economic Policy Research Centre (EPRC), at the time many of the enterprises were “quite inefficient”; they had become conduits for employing relatives, friends and politically connected, so it was wise to unload some of them since they were actually weighing down the already burdened government.

“So, the question was who we were going to sell them to; who was going to buy them?” recalled Prof Suruma. 
“My argument was that we should take a measured approach; for instance, in the case of UCB—which was the largest bank—to be sold to Ugandans, but there were people who had their own agendas.”

Privatisation started unofficially in 1989 with the divesting of six companies, including Nile Breweries, Shell Uganda Ltd, and Lake Victoria Bottling Company, but officially it commenced in 1993 with enactment of the Public Enterprises Reform and Divestiture (PERD) Act to guide the process; divestiture took several forms such as auction, management buyout, asset and share sales, and transfer of ownership to private sector.

The exercise, according to a 2001 paper titled ‘Corruption and Cronyism in Uganda’s Privatisation in the 1990s’ authored by Roger Tangri and Andrew Mwenda, was marred by malpractices and manipulation involving regime politicians and well-connected individuals.

“The transfer of assets in an enterprise from public to private ownership, not only did this prove to be the least successful component of Uganda’s otherwise well-performing economic reform programme, it also sullied the public reputation of government as a result of corruption and cronyism in the divestiture process,” the authors noted.

There were some scandals. ENHAS, which was Uganda Airline’s most lucrative business, was sold neither to the highest bidder—Dairo Air Services— that offered $6.5m nor to the second highest bidder, South African Alliance Air that floated $4.5m; it was acquired by Mr Kutesa.

UCB—the largest bank then with 189 branches, and handled 45 per cent of the total banking deposits—was first converted into a limited liability company in 1997. 
In 1998, it was partially, 49 percent, privatised to a Malaysian company Westmont Land.  
A 2002 parliamentary enquiry heard that Westmont mismanaged the bank which compelled BoU to step in by placing a resident supervisor in November 1998, and later seized the bank in April 1999 before expiry of the three-year management contract.  It was further revealed that Westmont had lent Shs35b to Greenland Bank without proper securities and beyond limit levels and without consulting Bank of Uganda as the representative arm of government that owned 51 per cent of the shares in UCBL. 

In April 1999, UCBL was seized by BoU from Westmont, and then re-privatised in 2001. Then, Greenland Bank was also closed.
In the case of Uganda Grain Milling Company, the highest bidder, a Kenyan-based frim, UNGA millers was bypassed and the company sold to President Museveni’s brother, Gen Salim Saleh, under Caleb International on grounds of national jingoism.

A haunted economy
The former head of the Privatisation Unit, Mr Jim Mugunga, who is also the Finance ministry spokesperson, said:  “The process may have had corruption, but there were many administrative challenges, and it caused a review of the entire privatisation; a Parliament audit was caused which led to the unit.”

As regards the success of the exercise, Mr Mugunga told Daily Monitor that “it depends on the glasses one chooses to wear.”
“One school of thought has argued that it was the right thing to do. Perennially, I think it was the vaccine we needed for the pandemic we had back then,” he said. With almost all state-owned enterprises sold to foreign buyers, Prof Suruma said we ended up “foreignalising the economy.”

As such, capital flight—when assets or money rapidly flow out of a country— has become a sticking issue. 
According to 2014 estimates by the Finance ministry, Uganda loses about $400 million (about Shs1.05 trillion) annually in capital outflows in form of dividend payments to the shareholders.

Dr Fred Muhumuza, a development policy analyst, who also served in the Finance ministry at the time of privatisation, said: “The government then, like now, was living beyond its means. The World Bank lent you money to sink into loss making ventures; today, government is busy scavenging around for money to invest in loss making ventures yet the argument then was that government had no business doing business.”

Other parastatals divested

Besides Uganda Airlines, which was resuscitated, government divested Uganda Development Corporation—established in 1952 by Governor Andrew Cohen as the industrial investment arm, citing inefficiency and corruption, only to admit that it was a mistake and eventually revived it.

Uganda Railways Corporation’s assets, including land and houses around the country were grabbed mainly by individuals with state connections, and attempts to revive the railway operations as an integral transport mode for a landlocked country have lurched from one crisis to another.

Uganda Electricity Board, which initially had been divested to South African state-owned enterprise—ESKOM, was in 1999 following enactment of Electricity Act unbundled into Uganda Electricity Generation Company Ltd (UEGCL), Uganda Transmission Company Ltd, and Uganda Distribution Company Ltd (UEDCL), and the Electricity Regulatory Authority (ERA).

Twenty-two years later, government is pondering merging the UEGCL, UETCL, and UEDCL back into one unit in ministry of Energy as part of the wider campaign of rationalisating of agencies, commissions and authorities, to reduce public expenditure. Meanwhile, for the last five years, President Museveni has been crying foul about UEDCL’s concession agreement to Umeme, which he says is a raw deal for the country. He has hinted on renegotiating or terminating the concession but it’s both risky legally and financially.

Prof Ezra Suruma then said it was time to start thinking about getting the economy back into local hands. “The key is that we have confidence in ourselves as a country; only domestic investment can grow the economy. The capital that runs the economy needs to be our capital,” he said.

The contest then, he added, was between communism and capitalism but time has showed us that both principles—as in the case of China and the United States—are learning from each other. “The idea of laissez faire is not tenable, and cannot work.”

Dr Paul Lakuna, however, argued that privatisation went wrong not just in Uganda. “In Russia, we saw the emergency of overnight billionaires; the oligarchs—who took advantage of the situation of the inside information they had. Important is to correct these things; the many failures were as a result of a lapse in the system.

Dr Fred Muhumuza said privatisation offered immense lessons for the country “but which are not being applied.  He said the same bloated public service that the SAPs intended to cure is “the norm today which defeats any understanding, and actually I think government could make use of some new SAPs.”

As a result of an expanding public expenditure, the government is borrowing considerably laying itself in another maze whose exit will be difficult to find.

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