This Selected Issues paper and Statistical Appendix analyzes poverty and social development in Uganda. The paper reviews recent poverty and inequality trends, examines how poor people are coping with risk and vulnerability, analyzes the relationship between economic growth, structural reform and poverty, and describes the government policies in these areas. The paper also provides a brief overview of major institutional developments in Uganda’s financial sector since 1993 with regard to the legal, accounting, and general regulatory framework in which financial institutions operate.

Abstract

This Selected Issues paper and Statistical Appendix analyzes poverty and social development in Uganda. The paper reviews recent poverty and inequality trends, examines how poor people are coping with risk and vulnerability, analyzes the relationship between economic growth, structural reform and poverty, and describes the government policies in these areas. The paper also provides a brief overview of major institutional developments in Uganda’s financial sector since 1993 with regard to the legal, accounting, and general regulatory framework in which financial institutions operate.

III. Net Subsidies to Public Enterprises in Uganda15

78. The reform of public enterprises (PEs) affects financial transactions between the government and PEs. Moreover, since savings in net subsidies or financial support to PEs provide scope for increasing expenditures in priority areas within a sustainable fiscal deficit, successful public enterprise reform is important for Uganda. This chapter discusses the evolution of net subsidies to PEs in Uganda between 1992/93 (July–June) and 1997/98, and identifies their causes and main recipients, thus permitting a preliminary assessment of the possible financial savings from public enterprise reforms.

A. Definition of Net Subsidies

79. Net subsidies to PEs are subsidies from the government to PEs net of subsidies to the government from PEs. The subsidies from the government to PEs are of two types: direct and indirect. Direct subsidies include cash equity injections from the government, donor grants, and asset transfers. Indirect subsidies include equity support, favorable financing terms, favorable fiscal terms, and others. Equity support is used to absorb PEs’ financial losses and is equivalent to bailouts, with the government assuming the bank debt of PEs or converting it to public enterprise equity (often carrying little prospect of paying dividends). Favorable financing terms to PEs involve loans from the government at below-market interest rates, exchange rate risk borne by the government, and loans guaranteed by the government charging preferential fees. Favorable fiscal terms are subsidies that arise from tax exemptions and tax arrears that may be forgiven subsequently. Finally, other subsidies include special privileges to bid on government contracts, concessions that enable PEs to charge higher prices than those offered by competitors, and the financing of operational losses incurred by PEs under the government’s initiative. Offsetting government subsidies to PEs are subsidies from PEs to the government, that include interest arrears on unpaid services and services provided at below-market prices.

B. Net Subsidies to PEs in Uganda

80. As a percentage of GDP, net subsidies to PEs in Uganda remained quite stable during 1996/97–1997/98, after significantly decreasing to 2.6 percent of GDP in 1995/96 from 3.2 percent of GDP in 1994/95. In 1997/98, net subsidies were 2.3 percent of GDP, or U Sh 165.9 billion. Most of the subsidies from the government to PEs are indirect subsidies. In fact, with the exception of 1996/97, indirect subsidies have accounted for more than 70 percent of total subsidies to PEs, and usually have taken the form of equity support and favorable financing terms (Table 15).

Table 15.

Net Subsidies to Public Enterprises (PEs), 1992/93–1997/98 1/

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Source: Parastatal Monitoring Unit, Ministry of Finance, Planning and Economic Development, “Financial Flows Between Government and Public Enterprises in Uganda,” various issues.

Fiscal year begins in July.

This is a statistical discrepancy that arises because of partial consolidation of subsidies among PEs.

Net subsidies to PEs, excluding one-off subsidies required in the restructuring or recapitalization of the UCB and UPTC.

81. The government of Uganda recognizes that the amount of subsidies is substantial compared with the public expenditures allocated for poverty eradication programs.16 During the period 1994/95–1997/98, net subsidies to public enterprises averaged 2.7 percent of GDP whereas expenditures on health and education averaged 3.5 percent of GDP (Table 16). Moreover, the Parastatal Monitoring Unit of the Ministry of Finance reported that in 1997, subsidies were close to three times the total amount spent by government and donors over the previous eight years on feeder roads. The amount spent on feeder roads during 1990–97 (U Sh 75 million) allowed the rehabilitation of 9,000 kilometers of roads, more than 40 percent of the network of feeder roads in Uganda. This example illustrates the potential positive impact of savings in net subsidies on the financing of priority programs and underscores the need to expedite the necessary reforms.

Table 16.

Social Expenditures and Net Subsidies to Public Enterprises, 1994/95–1997/98 1/

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Fiscal year begins in July. Total expenditures include externally financed development expenditures; components do not.

Including the Universal Primary Education component of domestic development expenditures.

82. To understand the behavior of net subsidies, it is important to analyze the financial situation and reforms undertaken in the largest enterprises. Indeed, a sample of PEs during the period 1992/93–1997/98 shows that eight enterprises accounted for approximately 90 percent of total net subsidies.17 The five largest enterprises accounted for more than 70 percent of total net subsidies (Table 15),18 and three firms19 included in “Other enterprises” represented between 15 percent and 22 percent of total net subsidies. The following analysis focuses on the five largest enterprises: the Uganda Railways Corporation (URC), Uganda Commercial Bank (UCB), Uganda Electricity Board (UEB), Uganda Posts and Telecommunications Corporation (UPTC), and National Water and Sewerage Corporation (NWSC).

Uganda Railways Corporation (URC)

83. The fragile financial position of the URC during the 1990s has led to reduced service, less outlays on maintenance, and the accumulation of arrears. In 1997, the URC suspended freight service on the Northern and Loop Lines and suspended all passenger service. As a consequence, the operating network declined from 1,225 kilometers to 633 kilometers. The reduction in outlays for maintenance led to the deterioration of the railway track, especially the 330 kilometers of the line from Kampala to Kasese, where the frequency of derailments is reportedly high (two per one-way trip, on average). Despite the reductions in service and maintenance outlays, operating losses of U Sh 1 billion a year are incurred on this line. The accumulation of arrears resulting from the URC’s defaulting on its wage obligations has caused industrial strife and is the most important source of subsidies. In this regard, to avoid larger long-term liabilities, it is estimated that 50 percent of the URC’s workers should be laid off, with a cost of approximately U Sh 2.4 billion (Nirinkindi, 1998).

84. Over the period 1992/93–1997/98, net subsidies to the URC decreased from 0.6 percent of GDP to 0.4 percent of GDP (Table 15). Because the URC is not making principal and interest payments on loans from the government or donors, the most important subsidy to the URC—representing 40 percent of the total—has taken the form of favorable financing terms (Table 17).

Table 17.

Uganda: Net Subsidies to the Largest Public Enterprises (PEs), 1992/93–1997/98

(In billions of Uganda shillings)

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Source: Parastatal Monitoring Unit, Ministry of Finance, Planning and Economic Development, “Financial Flows Between Government and Public Enterprises in Uganda.”

Uganda Commercial Bank (UCB)

85. The UCB, which dominates Uganda’s financial sector, has had serious profitability problems associated with a large stock of nonperforming loans, during most of this decade. Nonperforming loans were linked to inadequate bank supervision and political interference in bank operations. As a result, the UCB was undercapitalized, contributing to periodic problems of liquidity and high intermediation costs (Sharer and others, 1996). The government provided substantial financial support to the UCB, with net subsidies representing between 0.5 percent and 1.2 percent of GDP during the period 1992/93–1996/97 (Table 15).

86. During 1992/93–1995/96 almost all the financial support of the government to the UCB was provided through indirect subsidies that took the form of equity support (Table 17). In an effort to recapitalize the UCB and to secure depositors’ funds, these subsidies were part of a restructuring process whereby the nonperforming loan portfolio was transferred to the Non-Performing Assets Recovery Trust (NPART). However, as the UCB continued to make losses and nonperforming loans deteriorated even further, the government shifted from restructuring the bank to accelerating its privatization.20 A major step was taken in this direction when the government recapitalized the bank by issuing bonds totaling U Sh 72 billion. The recapitalization was aimed at bringing the UCB’s negative net worth up to zero—with new investors expected to provide additional capital to bring the bank’s capital up to required prudential levels—and constituted a direct subsidy from the government to the UCB (Table 17) representing 1.2 percent of GDP in 1996/97 (Table 15).

Uganda Electricity Board (UEB)

87. In the 1990s, while Uganda was facing a crisis in its traditional source of energy (i.e., fuelwood), the UEB played a central role in finding alternative sources and in increasing the percentage of population with access to electricity, which is estimated to be about 5 percent. Priority was given to the optimum utilization of hydroelectric potential, the extension of the Owen Falls station project, and expansion of the national grid by constructing and/or rehabilitating transmission and distribution lines. To carry out these operations, the UEB received financial support from the government. As a result, with the exception of 1995/96 and 1996/97, net subsidies to the UEB represented between 03 and 0.7 percent of GDP during most of this decade (Table 15).

88. Most of the subsidies from the government to the UEB were implicit subsidies, taking the form of equity support, and favorable financing and fiscal terms (Table 17). Equity support was important between 1992/93 and 1995/96, and the practice of converting the UEB’s debt into equity was not continued during 1996/97 and 1997/98. Still, in the last two years, favorable financing terms have become increasingly important because the government has not charged interest on the UEB’s debt-service arrears and has not charged a guarantee fee on loans to the UEB. Finally, in 1997/98, the UEB benefited from more favorable fiscal terms because of tax exemptions on imported goods for the Power III Project (including the Owen Falls Power Station Extension Project);21 the budgeted net subsidies to UEB were equivalent to U Sh 10 billion (Table 17).

Uganda Posts and Telecommunications Corporation (UPTC)

89. Telecommunications were virtually nonexistent in the early 1980s, but in the 1990s the UPTC improved international and domestic links, and increased the availability of telecommunications equipment. The operation of the UPTC was facilitated by government subsidies, which represented 0.3 percent of GDP between 1992/93 and 1994/95. They declined subsequently in 1995/96 and 1996/97 to 0.1 percent of GDP, and later increased to 1.1 percent of GDP in 1997/98 (Table 15).

90. Subsidies from the government to the UPTC have taken several forms. In 1992/93 and 1993/94, the UPTC enjoyed monopoly pricing and the surcharge constituted an indirect subsidy that represented almost 50 percent of total subsidies received by the UPTC, equivalent to U Sh 9.6 billion and U Sh 12.4 billion in 1992/93 and 1993/94, respectively. In 1994/95, direct subsidies represented more than 70 percent of the financial support received by the UPTC, as the government contributed an equity injection of U Sh 6.4 billion and allocated U Sh 8.3 billion of unspent funds from a loan (from Spain) to rehabilitate the former UPTC building (Table 17).

91. The UPTC was restructured in 1998 and broken up into four companies: Uganda Telecommunications Ltd. (UTL), which will be privatized; Uganda Posts Ltd. (UPL), which will remain a public enterprise; Post Bank Uganda Ltd., and the Uganda Communications Commission (UCC), which will assume regulatory responsibility for the sector. Similar to the restructuring experience of the UCB in 1996/97, the restructuring of the UPTC led to substantial subsidies—in 1997/98, indirect subsidies attained their highest level in the 1990s. In particular, the UTL received a subsidy of U Sh 38.4 billion through a debt-equity conversion, and the government waived taxes worth U Sh 40 billion (Table 17).

National Water and Sewerage Corporation (NWSC)

92. Urban water supply and wastewater services are under the responsibility of the NWSC. The NWSC’s tariffs are high, but performance indicators are poor, with service level varying between 60 percent and 75 percent.22 Moreover, because of low billing efficiency and poor recovery costs, the NWSC has received financial support. Net subsidies to the company represented 0.3 percent of GDP between 1993/94 and 1995/96 (Table 15), but declined to negligible levels in following years. With the exception of 1997/98, approximately 90 percent of the financial support was given through direct subsidies, most of which were included in the budget (Table 17). These subsidies are foreign loans and donor grants negotiated by the government, and have an equity and loan component. Because the NWSC was cash strapped and technically insolvent, the corporation did not service its debt in 1997/98, and favorable financing terms became the largest subsidy, reaching U Sh 4.6 billion.23

C. Conclusion

93. Net subsidies to PEs have remained relatively stable in recent years. However, if the Government succeeds in reforming and privatizing the largest PEs, their reliance on budgetary support will decline. The stability of the financial support given to PEs during 1995/96–1997/98 largely reflected one-off subsidies required in the recapitalization and restructuring of the UCB and UPTC. Consequently, the underlying evolution of net subsidies—calculated excluding these one-off subsidies to the UCB and UPTC—shows a decline from 2.6 percent of GDP in 1995/96 to 1.8 percent in 1997/98 (Table 15). In the near future, if the URC, UEB, and NSWC are reformed, net subsidies to PEs should experience one-off increases as these enterprises are recapitalized or their debt converted into equity. In the medium term, a successful reform of these enterprises will lead to a reduction of net subsidies, increasing the scope for higher expenditures in priority areas.

References

  • Sharer, Robert L., and others, 1996, Uganda—Background Paper on Issues in Financial Sector Reform and Statistical Appendix, IMF Staff Country Report No. 96/51 (Washington: International Monetary Fund).

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  • Nirinkindi, E., 1998, “Fiscal Impact of the Parastatal Sector” (unpublished; Kampala, Uganda: Parastatal Monitoring Unit, Ministry of Finance, Planning and Economic Development).

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15

This chapter was prepared by Alejandro Lopez-Mejia and Mwanza Nkusu.

16

From data compiled by the Parastatal Monitoring Unit of the Ministry of Finance, Planning and Economic Development.

17

The size of the sample has been expanded over time as the number of “Other enterprises” increased. In 1992/93, the sample covered 8 PEs; the size was increased to 14 in 1993/94, to 20 in 1994/95, to 40 in 1995/96 and 1996/97, and to 41 in 1997/98.

18

The only exception was 1995/1996, when net subsidies to “Other enterprises” represented 41.6 percent of total net subsidies to PEs. This was largely attributed to a cash equity injection provided by the government to recapitalize the Uganda Development Bank (UDB) equal to 7 percent of total net subsidies to PEs.

19

The Civil Aviation Authority (CAA), Kakira Sugar Works Ltd. (Kakira), and Kinyara Sugar Works Ltd. (Kinyara).

20

In April 1998, the government sold 49 percent of its shares in the UCB. However, after revelations of malpractice, the government moved in early 1999 to repossess its UCB shares.

21

In 1995/96 and 1996/97, this subsidy was not present because the project was largely unimplemented.

22

In small towns, services are provided by the Directorate of Water Development. The service level has traditionally been below 50 percent, and sources of safe water range from protected springs, gravity flow schemes, wells, handpumps, and powered boreholes.

23

Data from the Parastatal Monitoring Unit of the Ministry of Finance, Planning and Economic Development.