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13 October 2011

Rationale for the Reform and Divestiture Policy

 State of the Public Enterprises Sector

Just like the state of the economy depicted above, the Public Enterprises were very inefficient and unable to generate enough resources internally to finance their operations. In particular, they were drawing investment and operating capital from Government thus increasing pressure on the budget, raising the level of public debt and accounting for a growing level of direct and indirect subsidies. At the time of formulating the Economic Recovery Program, specific measures were proposed aimed at restoring stability and efficiency of operations in this sector.

In line with the overall Economic Recovery Program, the Public enterprises sector policy noted that in the short run, the recovery of industrial output depends to a considerable extent, on how quickly the public industrial enterprises can improve their extremely low capacity utilization. It was further observed that, in the medium to longer-term, restructuring and rehabilitation of the public enterprise sector is essential for sustained industrial growth, including the divestiture of a large number of undertakings. The public industrial enterprise sector contained about 56 companies, most of which were operating below 20 percent capacity and two-thirds were making losses for an extended period of time. In addition to input shortages and deteriorated physical plant conditions, this poor performance reflected excessive political interference, lack of financial discipline, and deteriorated management quality and staff morale.

Below are some examples to demonstrate the state of affairs obtaining within the Public enterprises sector at the time the Policy was formulated.

a)    Increasing Subsidies to the PE sector

At the time of formulating the Economic Recovery Program, government was also concerned with the growing level of direct and indirect subsidies that were going it this sector putting undue pressure on the constrained rehabilitation resource envelop and was intent on controlling and if possible eliminating subsidy flows to commercially oriented Public Enterprises.

Direct subsidies represent resources that are extended to the Public Enterprises Sector by government through the National budget with authorisation of the relevant organs (example the Diary Corporation inflows above). Indirect subsidies on the other hand represent resources that are enjoyed by the sector without open approval and usually by the sector failing to either remit such resources to the relevant organs or paying a price that is below market price (examples are NSSF deductions not remitted and or taxes not paid).

In 1994 for instance, the PE sector net subsidies amounted to UGX 150 Billion[1] representing 8% of GDP compared to PE sector contribution to GDP of 5%. The Public Enterprises that had an estimated annual installed capacity of USD 1.2 Billion; had an output of only USD 0.4 Billion and a debt stock of approximately USD 1 Billion (out of a national debt stock of USD 3.5 Billion)

b)    Low Turn Over

Apolo Hotel which was established in 1969 by an Act of Parliament to provide first class tourism services in the country. At its initial stage the Hotel operated well until early 80 when its performance begun to decline   due to poor management. Consequently, the Hotel recorded a turnover of Ugx. 2.9 million against a total asset base of Ugx.18.9 million as at end December 1986. Government had to raise funds for the hotel rehabilitation and working capital to the tune of Ugx. 2.17 billion in 1987 [2]. At the time of its divestiture, the hotel had accumulated losses of Ugx. 23.8 million reducing government’s equity to Ugx.18.9 million only.

c)     Heavy operating expenditures

Dairy Corporation for instance, was set up by the Diary Industry Act of 1967 with the principal objects to spearhead dairy development and quality enhancement, operate as a licensing and regulatory body on behalf of Government and to play the commercial roles of collecting, processing and marketing milk and its by-products in the country. The mandate was executed with great success up to 1972 when milk collection countrywide peaked 19 million litres. Thereafter, the sector suffered decline like the rest of the economy. By 1977, the country was a net importer of milk and dairy products. Earlier attempts to rehabilitate the sector in early 1980’s were also rendered infective as the rehabilitated infrastructure was destroyed during the 1980 – 1985 war. In terms of production, by 1986, Dairy Corporation was producing 12 million litres of milk but milk collection was only 198,000 litres (1%). The bulk of the production (99%) was reconstituted milk from milk powder and butter oil provided by World Food Program.[3]

Financial performance reports thereof indicate that Dairy Corporation recorded net operating losses for the period 1998 – 2003. However, at different dates during the same period, government had injected a total of Shs.21.7 billion in form of loans and grants but the contribution value had been watered down to only Shs.7.1 billion due to accumulated losses (see Table 1 below).

 


[1] Source: Parastatal Monitoring Unit Subsidy Reports & Table 3 Provision of Subsidies by the State.
[2] Apollo Hotel Corporation, Directors’ Report and Accounts 31st December 1987.
[3] Dairy Corporation, Loans – Impact and Status October 1999.


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