Can Uganda Handle New Economic Challenges?

Via EconoMonitor, an article on Uganda’s challenges ahead:

Back in the 1970s, Uganda was one of the worst run economies in the world. Uganda suffered through a lost decade when Idi Amin was in power in the 1970s. Thankfully, Uganda’s economic performance dramatically improved when a President Yoweri Museveni new government armed with serious economic reforms took power in the country in January of 1986.

In the 31 years since then, the Uganda government orchestrated an amazing economic turnaround. The economy grew at an average rate of 8% between 1990 and 2013. Poverty fell almost in half (from 62% in 2002 to just 33% in 2012). In many ways, Uganda’s is still doing relatively well today. The economy is growing three times faster than an average sub-Saharan African economy.

None of this was easy. But Alexander Betts and Paul Collier note that Uganda has been able to turn the refugee spillover from numerous military conflicts in east and central Africa into a positive economic opportunity. In contrast with President Trump’s ban on refugees, Museveni institutionalized an inclusive vision over a decade ago with the 2006 Refugee Act for Uganda.

Since then this progressive policy has been a godsend for refugees fleeing the violent horrors of war. John Aglionby notes that Uganda’s open door policy allows refugees to start businesses, obtain land, travel freely around the country and gain access to education and health care. Uganda’s open door policy also helps host communities in Uganda, which benefit in a number of ways. By settling in often neglected areas of the country, refugees become catalysts of economic growth. They provide bigger markets for local farmers and prompt improvements in infrastructure. These benefits also include building new roads, schools and health care centers. In short, Uganda’s refugee policy has been a win-win for Uganda and refugees.

But the future is more problematic. For starters, Uganda’s open refugee policy has arguably reached its logical limit. That’s because no one expected the flow of refugees pouring into Uganda to be so big. What has changed is the escalation of the civil war in South Sudan. For the first two and a half years of the conflict, which began in 2013, the flow of refugees was arguably manageable at fewer than 100,000 a year. But the refugee flow changed in July of 2016 when the South Sudan conflict heated up. Since then almost 600,000 refugees have crossed into Uganda. That brings the total number of refugees settling in Uganda to over 850,000, making Uganda the largest recipient in Africa of fleeing migrants.

Filippo Grandi, the UN’s refugee chief, argues that the situation in Uganda has now reached a “breaking point.” The daily total of new arrivals in March of 2017 averaged almost 3,000. This rising refugee flow is exerting many different pressures. One is on land. Until the middle of 2016, most refugees were given plots of land. Those plots are getting smaller and smaller. Tensions are rising as newcomers threaten to outnumber native Ugandans. And a massive drought is exacerbating the crisis. To add insult to injury, the UN appeal for aid for South Sudanese refugees in Uganda had only reached 10% of the target by March of 2017.

To make matters worse, John Aglionby notes that Uganda is struggling with its own homegrown demographic time bomb. The UN notes that Uganda has the third fastest growing population in Africa with an alarming fertility rate of about 6 children for every mother. The University of Denver estimates that Uganda’s population of 39 million will double in just 15 years.

That’s a lot of mouths to feed. While three quarters of the population work in agriculture, one might think the problem is covered. But Fergus Ryan notes Uganda’s farmers are struggling to feed this booming population. In fact, too many are subsistence farmers in this largely agrarian country. Bruce Robertson, who runs Gulu Agricultural Development Company (GADC) in Uganda, notes that previous attempts at commercial farming in Uganda have gone awry largely because there simply is not enough arable land available. Another problem is sorting out who actually owns the arable land. The UN notes that competing land claims result from the rebel Lord’s Resistance Army killing 100,000 people and displacing 2.5 million more people.

Poor infrastructure also frustrates more efficient commercial agricultural production in the country. Take the roads. On a good day it may take just over an hour to drive 40 km from Entebbe international airport to the capital of Kampala. But on a bad day it takes 4 hours to make the journey.

As a result, farmers have little incentive to move beyond subsistence and increase production when shoddy roads prevent orderly distribution of their product lines beyond their village. Shipments of their crop to neighboring countries to earn foreign exchange is even more problematic.

Even where transportation links enable better market access, a chronic lack of electrical power infrastructure also impedes commercial farming. In fact, a lack of power (as well as shoddy transport) also undermines everything else in the economy. Only 20% of Ugandans have access to electricity. In a speech in Uganda in January 2017, IMF Chief Christine Lagarde described inadequate power generation (as well as shoddy transport) as bottlenecks impeding Uganda’s ability to boost the country’s overall GDP growth. Not surprisingly, the government has diverted funds originally earmarked for health and education to power generation and road projects. The good news is the Ugandan government is well aware of transport and power problems and is taking actions to beef up public investment. For instance, the government spends over 25% of the budget on investment, higher than the sub-Saharan average of 20%.

For the next three years much of this investment will go into developing the infrastructure for a Ugandan oil industry. The French company Total and China’s Cnooc are developing the oil fields with local support from Uganda’s Tullow company. The oil fields are estimated to have 1.7 billion recoverable barrels of oil. At full production, the oil fields are expected to produce up to 230,000 barrels a day. Tullow estimates the cost of production at $25 a barrel. Oil is expected to start flowing by 2020.

Infrastructure construction has started, with big spending expected to begin in 2018. Irene Muloni, the Ugandan oil minister, says the cost of building the upstream facilities and pipeline at up to $10 billion while the cost of a refinery could be another $4 billion. In addition, a deal has been struck with Tanzania for the pipeline to take the oil all the way through Tanzania and on to the sea. For this to happen, the pipeline will be 1,445km in length, thus making it the longest electrically heated pipeline in the world. The refinery will be built in Uganda, thus guaranteeing the security of supply. The refinery will have an initial capacity of 30,000 barrels a day – 7,000 more than Uganda’s demand. The surplus will probably be exported.

While the oil projects are expected to create 15,000 direct oil jobs, a multiplier effect is likely to provide lots of indirect employment as well, thus bringing the estimated total oil related jobs to 150,000. The hope is that 60-70% of the direct oil jobs will be Ugandan. In fact, there is a legal requirement that 48% of the services used by the oil industry will be Ugandan. But since Ugandans have virtually no capacity or experience in technical oil maters, regulations have been issued to waive the law in these areas. But Irene Muloni sees no reason why sectors like catering, transport and security should not be almost totally Ugandan.

Uganda’s next big challenge will be execution of the financial plan for managing the billions of dollars oil production will generate over the next 20 years. All profits are to be paid into a newly created oil fund, developed with the help of Norway which has a similar oil fund. The plan is for the proceeds to be used to fund infrastructure and other development projects. But given Uganda’s historic reputation for endemic corruption, John Aglionby notes that there is concern over the execution of the financial plan. Uganda’s law enforcement officials have addressed some of these concerns by recently arresting government officials who were soliciting bribes.

But even if Uganda can curb corruption, there is a larger problem of shoddy policy implementation. Things rarely move quickly in Uganda. For instance, the congested single lane road from the Entebbe airport to Kampala is filled with giant potholes that never seem to get filled. A Chinese state company’s efforts to build a new expressway alongside this dilapidated airport road are also painfully slow. The construction of a vaunted railway linking Uganda to the sea via Kenya has yet to start. Construction of a hydroelectric dams along the Nile River are behind schedule. To make matters worse, the civil service bureaucracy is not serious about tax collection. As a result, the amount of tax revenue it raises domestically is only 14% of Uganda’s $28 billion GDP, well below Uganda’s neighbors.

Patrick Mweheire notes that Uganda’s economy has been slowing down since 2014. But the World Bank estimates that if Uganda’s investments were better managed, annual growth could be 2.5% higher than GDP growth in the current 2011-2017 period. Better governance would take GDP growth above 7%, where it was in the 2001-2010 decade. Uganda’s economic reformers are well aware of the poor governance problem and have fired some incompetent senior officials. Economic reformers hope his new slogan of “kisanja hakuna mchezo – Swahili for “the period of joking around is over” — will inject new urgency in the bureaucracy.

A good place to stop joking around would be tourism. Winston Churchill once said Uganda’s natural beauty makes it the pearl of Africa. And yet Fergus Ryan notes that Uganda’s regional rivals are outperforming Uganda’s tourism industry. Foreign tourists prefer Kenya and Tanzania for safaris and trekking holidays and Rwanda to see gorillas. So Uganda needs to do a lot to improve its marketing. The other problem is Uganda is narrowly targeting upper class tourists. It costs $850 a night to stay in a hotel near Bwindi Impenetrable National Park.

That said, Fergus Ryan notes that there are pockets of success such as the Soroti solar plant in north eastern Uganda. Just 8 months after construction of the 34 acre plot began, the plant was supplying power to the national grid by December of 2016. Taken as a whole, the plant was developed, built, financed and commissioned in just two years. The blueprint of this success story should be replicated across the country and across Africa.

John Aglionby notes that there are also longer term success stories in Uganda. Take Umeme, the country’s main private power distribution and supply company. It is a rare example of a successful public private partnership (PPP) and cross-sector collaboration between the public and private sectors in Uganda. This partnership transformed a struggling business into an example of a regional best practice.

The main foreign investor was Actis – a private equity company focused on emerging markets. Actis took over Umeme in March 2005. Actis was not interested in a quick buck. It stayed in Uganda for 11 years. By the time Actis left Uganda, the number of customers tripled from 300,000 to 900,000. The proportion of the population connected to the grid had more than tripled (from 5% to 16%). The collection rate had risen from only 80% to 98.4%. Energy loses fell in half (from 38% to just 19%). And the number of network related fatalities fell from a peak of 17 in 2008 to zero in 2015 and 2016.

David Grylls, an energy partner at Actis, says the situation Actis stepped into was “pretty weak.” Previously, the problem was “a lack of attention” to customers, contractors and the public. That lack of attention changed. Actis took a socially inclusive 360 degree approach and got buy-in from all the stakeholders. In discussing the secret of doing business in Uganda, Grylls says: “Build relations, be consistent, deliver what you say you’re going to do, and live up to or exceed your part of the bargain.” This was especially true at the local level. As Umeme investor Bernard Tabaire notes, “You want as many local entities as possible to be in charge of the economy because they’re not going to run away at the first sign of trouble.”

In pondering Actis lessons for future investors in Uganda, John Aglionby notes that success is highly unlikely to be straightforward, but with a willingness to adapt when necessary, investors and the host country can both win. In a broader context, these two corporate success stories should inspire the Ugandan government as it tries to implement new structural reforms.

This entry was posted on Friday, August 4th, 2017 at 5:46 am and is filed under Uganda.  You can follow any responses to this entry through the RSS 2.0 feed.  You can leave a response, or trackback from your own site. 

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