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Finance

Ernst & Young 2018 profits fall by 16.9% as effects of 2017 Bank of Uganda suspension make full impact

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Geoffrey Byamugisha, the EY country leader. He will need to do more to steer EY through the after-effects of the 2017 BoU suspension

The 2017 Bank of Uganda suspension against Ernst & Young (EY) from auditing financial institutions may have ended, but its effects have lingered on, affecting the audit firm’s 2018 revenues and profits.

EY was in 2017 suspended for one year, due to a pre-qualification glitch. Apparently, according to Geoffrey Byamugisha, the EY country leader, their pre-qualification documents for 2017 were submitted to a wrong office at Bank of Uganda. As a result the  audit firm did not appear on the 2017 list of 104 pre-qualified external auditors for commercial banks, credit institutions, micro-finance deposit-taking institutions and foreign exchange bureaus & money remitters.

According to EY’s financials seen by this reporter, although EY survived 2017, barely unscathed, because the bulk of the 2017 audit work extends to the following year, the firm felt the full impact of the ban in 2018.

In 2017, EY registered a 14.46% rise in gross earnings- from UGX14.69 billion to UGX16.76 billion. Profit went up 22.5% from UGX2.91 billion to UGX3.56 billion.

However in 2018, gross earnings largely stagnated, declining slightly by 0.33% to UGX16.76 billion compared to UGX16.81 billion the previous year. However, profits declined considerably, by 16.9% from UGX3.56 billion in 2017 to UGX2.95 billion.

CEO East Africa Magazine, examined audited results of 23 out of 24 commercial banks and there was non-audited by EY. 

3 of the other ‘big 4’ audit firms ruled the audit ‘feast’.

Deloitte & Touche audited 8 banks, followed by PricewaterhouseCoopers who audited 7 banks. KPMG audited 6 banks while little-known Grant & Thorntorn audited 2 banks.

KPMG however dominated the big banks, auditing 4 of the 10 biggest banks- including Stanbic Bank, the biggest. Deloitte and PricewaterhouseCoopers each audited 3 of the top 10 banks.

So lucrative is the bank audit business, that Stanbic Bank alone in 2017 paid UGX869.9 million in audit fees. This increased to UGX 1 billion in 2018. 

A clause in the Financial Institutions Act (FIA)- Section 67, that allows financial institutions to use one external auditor for up to 4 years, is likely to lock out EY out of the lucrative sector for a little bit longer.

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Technology

World Bank’s IFC considering USD70 million loan to Umeme

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The International Finance Corporation (IFC) the largest global development institution and a member of the World Bank Group, has reported, they are considering lending up to USD 70 million (UGX263.2 billion) to Umeme Limited.

Umeme workers carry out new installations. To date, Umeme has invested $627m (UGX2.4 trillion), but plans to invest USD450 million in capex over the next 6 years and up to USD1.5 billion in 10 years so as to create a robust enough distribution network to last the country for another 20 years. The planned IFC USD70 million is therefore a major boost.

Umeme is Uganda’s largest power distributor.

In a disclosure posted on their website, IFC said they plan to raise a senior loan for up to USD 30 million from IFC’s own account, and up to USD40 million to be mobilized from other lenders- altogether USD 70 million.

IFC said in the disclosure that the debt financing will be used to support “Umeme’s next 6-year (2019-2024) capital expenditure program, which will mainly focus on: network upgrades to enable load growth and additional connections to support uptake of new generation, safety/reliability enhancements, and implementation of smart meters to continue improving collections and reducing commercial losses.”

“The Project will support the growing demand for electricity in Uganda, and contribute to ongoing efforts to increase access to electricity. This will help fulfil the Government of Uganda’s efforts to improve electrification rate from the current 27% to 60% by 2027, and complement the significant growth (almost double) in generation capacity expected by 2020 (from 183MW Isimba and 600MW Karuma dams, and small solar/hydros),” said IFC in their disclosure.

“In addition, the Project has potentially significant indirect and induced effects on value added and employment as Umeme’s network expansion plan focuses on zones with high electricity demand and economic growth potential. Finally, it will improve resilience of the main distribution network in Uganda and reduce losses, through adoption of advanced smart technologies, adequate maintenance and upgrade of ageing assets,” added IFC.

IFC further said that by availing more affordable commercial and institutional financing, which is not readily available in the Ugandan market, Umeme will be enabled to “increase the average maturity of its loans and free up cash flow for Capex.”

President Museveni launches commercial operations of the Soroti Fruit Factory, on the outskirts of Soroti town recently. Uganda had reinvigorated her industrialisation strategy and is relying on reliable and stable power from Umeme and other distributors to power this drive. According to IFC, the USD70 million loan to Umeme will support the growing demand for electricity in Uganda, and contribute to ongoing efforts to increase access to electricity and directly and indirect induce jobs and economic growth.

“IFC’s involvement and proposed structure will also provide comfort to existing commercial lenders to potentially increase their commitment to Umeme,” said IFC.

This disclosure, coming at the same time as government’s confirmation last week that it will renew Umeme’s 20-year concession comes in handy and is a growing show of confidence in the power distributor.  

The financing, if approved will bring, the total amount of lending to Umeme by IFC to USD185 million over the last 10 years. Umeme, which has previously been hailed by the World Bank as “by far the most successful Public Private Partnership “in the previous past has attracted up to USD 265 million in funding from the International Finance Corporation (IFC), Standard Chartered Bank, and Stanbic. 

In a recent interview with CEO East Africa, Patrick Bitature the Umeme board chairman, said Umeme will need to invest up to USD450 million in capital expenditure (CAPEX) alone. He however added that to create a robust enough distribution network to last the country for over 20 years, Umeme will need to invest between USD1 billion and USD1.5 billion over the next  five to ten years.

To date, Umeme has invested $627m (UGX2.4 trillion) into doubling the distribution network to over 34,000km from the 16,000km it inherited and grown customer connections by more than 4 times- from the 290,000 inherited to 1,291,811 by end of 2018.

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Finance

BoU Currency Scandal- URA tells BOU: “Don’t drag us into your mess”

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Amidst the raging scandal in which the Statehouse anti-corruption unit is investigating how illegitimate cargo, found itself on a chartered plane carrying new BoU banknotes, the Ugadna Revenue Authority (URA) whose customs officials cleared the cargo have said they did nothing wrong and instead asked BoU to own up their mess.

Full statement by Dickson Kateshumbwa, the URA Commissioner Customs, in verbatim:

In April this year, URA Entebbe Customs was informed by BOU of an impending import of Currency and requested to facilitate quick clearance. A private chartered plane arrived and as normal practice for sensitive cargo Customs facilitated clearance of the currency at the tarmac in presence of BOU Officials, BOU Security, Aviation Security, Police and other security agencies.

The consignment was offloaded, inspected and loaded on BOU vehicles and taken to Kampala under heavy security escort.

The same plane contained other cargo which belonged to various individuals / companies / organizations. As per normal customs clearance procedure, this cargo was offloaded into the licensed bonds at the airport and subsequently the owners made customs declarations, paid applicable taxes and Customs physically verified each consignment to ascertain accuracy and consistency with the declaration and released the goods to the owners.

Each consignment had its individual airway bill. Customs was not party to the airline charter arrangements between BOU, the airline and the other owners of the goods. It is not the responsibility of Customs to concern itself in logistical arrangements of importers or exporters. Our duty is to ensure that imported cargo through the airport is received and tallied with the cargo manifest, verified and is cleared in line with the Customs Laws as established under the East African Customs Management Act (EACCMA).

In this particular consignment like all others, our Customs staff followed the procedures to the dot and we can account for the cargo cleared fully. URA has provided the details of the information required by the investigators and we are available to offer any clarification if required.  

URA should not be dragged into logistical contractual failures or mistakes of BOU and their service provider.

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Government to renew Umeme Concession- Matia Kasaija

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Umeme engineers and workmen at work in the field. Over the last 13 years, Umeme has invested $627m (UGX2.4 trillion) into doubling the distribution network to over 34,000km from the 16,000km it inherited and grown customer connections by more than 4 times- from the 290,000 inherited to 1,291,811 by end of 2018. The decision by government to renew Umeme’s concession will allow Umeme to promptly prepare for up to USD1.5 billion investment in the network over the next 10 years.

The Government of Uganda will renew Umeme Limited’s electricity distribution concession, Hon Matia Kasaija the Finance, Planning and economic Development minister, has confirmed, ending months of uncertainty and speculation.

“With respect to power distribution, the distribution concession with Umeme Limited will be renegotiated and extended to ensure further investment, and also lower electricity tariffs,” Kasaija told MPs and the whole country at the reading of the 2019/20 budget speech yesterday, June 13th 2019, at Kampala Serena Hotel.

He said the decision is to enable Umeme promptly undertake the necessary investments needed to facilitate government’s ambitious targets to connect 300,000 customers annually to the grid, with a goal of attaining access to electricity by 30% of the population by end of 2020 and 60% by 2026.

Government, under a reinvigorated industrialization policy also plans to build fully planned and serviced Industrial Parks in 22 locations across the country that will host both medium and large scale industries. In the 2019/20 budget, Kasaija has provided  UGX428.68 billion- out of which UGX147 billion will go towards extending electricity to the parks, UGX103 billion towards, the development of supportive export infrastructure in export processing zones and industrial parks while UGX178 billion will go towards supporting science technology and innovation.

NSSF MD Richard Byarugaba receives a dummy cheque from Umeme MD Selestino Babungi earlier. NSSF, the biggest shareholder in Umeme has welcomed the decision to renew the concession as securing the workers’ investment in the utility company

Government is banking on the recently launched 183 MW Isimba Dam and the expected commissioning of the 600 MW Karuma Dam sometime this year – altogether raising Uganda’s generation capacity to 1,767 MW by end of 2019, to feed this mega-industrialisation push.

Umeme investors welcome Kasaija’s decision

Richard Byarugaba, the NSSF Managing Director, welcomed the pronouncement by government as “Great news!”

“The largest workers investment in the Uganda stock exchange is now secured,” he said.

NSSF is the largest shareholder in Umeme with a 23% stock in the power distributor.

The bourse is yet to react to the announcement by government, but it is expected that institutional investors who have been on the edge, will rush in to absorb more Umeme shares.

Currently, according to a May 30th, 2019 report by investment bankers Crested Capital, Umeme is the hottest stock on the bourse with a dividend yield of about 13.63%.

Umeme’s total dividend for 2018 is UGX40.90 per share,

Umeme to invest up to USD1.5 billion over 10 years

The announcement comes as relief to Umeme who have been looking to the decision so as to start arranging financing for numerous investments needed for the sector, both to cover the remaining 6 years of the current concession and beyond.

Umeme board chairman, Patrick Bitature. He says Umeme is committed and has a demonstrated capacity Uganda’s growth and development agenda

In a recent interview with CEO East Africa, Patrick Bitature the UMeme board chairman, said Umeme will need to invest between USD1 billion and USD1.5 billion over the next  five to ten years, so as to create a robust enough distribution network to last the country for over 20 years.

Bitature said that over the next 6 years, Umeme estimates to invest up to USD450 million in   capital expenditures (CAPEX) alone.

“From our estimates, achieving the above targets, shall require significant investments focusing on uptake of new capacity, increased access, and driving efficiencies in the business operations. The resulting large geographical footprint shall require opening more service centres, building more substations, extending lines, injecting more transformers and recruiting more people on the ground,” Bitature said.

Bitature argued that investing for the long term allows the power distributor to amortise the costs over a longer period, thus resulting in a downward pressure on the end-user tariff.

“We are looking for longer term funding of 15 to 17 years and then we can spread that cost- amortize it over time. That shall have a lowering impact on the tariff,” he said.

According to recent estimates by Ministry of Energy and Mineral Development, when Isimba and Karuma HPP are commissioned and fully absorbed/utilized, it is expected that the weighted generation tariff will reduce from the current US Cents 6.47/kWh (UGX243.43) to US cents 5.34/kWh (UGX200.93), representing a reduction of 17.45%, which shall be reflected in the end-user tariffs.  

Bitature also said that Umeme was willing to reconsider their rate of return- currently at 20% since the investment environment had greatly improved, since 2005 when the concession was signed.

“Today the perceived high risk of the country is much lower than then, so it is easier to attract capital. The policies of this country have been very stable, the movement of foreign exchange, the amount of inflation etc. the risks in many of the areas have been mitigated.

If the high rate of return is the pain in the thigh of the government and the public, we are willing to consider a few points on our rate of return, as long as it makes business sense- for our customers and shareholders,” he told CEO East Africa Magazine.

Over the last 13 years, Umeme has invested $627m (UGX2.4 trillion) into doubling the distribution network to over 34,000km from the 16,000km it inherited and grown customer connections by more than 4 times- from the 290,000 inherited to 1,291,811 by end of 2018.

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