Monday 20 August 2012

Are the Uganda Real estate Prices sustainable?

Are the Uganda Real estate Prices sustainable?
I recently went looking for purchase a plot of land with my peanut savings, so the broker on knowing the amount I had in mind- he called his network of brokers to look for me a cheap plot intimating “Ono sente tayina za CHOGM”  literally meaning he does not have CHOGM funds. This arguably among other factors could explain the exponential rise in real estate’s prices in Uganda. It is against this backdrop that I try to explore the sustainability of Uganda’s real estate bubble that characterized by rapid increases in valuations of real property
Unlike the stock market, where most people understand and accept the risk that stock prices might fall, most people who buy a house don't ever think that the value of their home might decrease. The laws of physics state that when any object (which has a density greater than air) is propelled upward, it will return to earth because of the forces of gravity act upon it. The laws of finance say that markets that go through periods of rapid price appreciation or depreciation will, in time, revert to a price point that puts them in line with where their long-term average rates of appreciation indicate they should be. This is known as mean reversion. Prices in the housing market follow this law of mean reversion too - after periods of rapid price appreciation (or depreciation), they revert to where their long-term average rates of appreciation indicate they should be. Home price mean reversion can be rapid or gradual. So yes, at some point property prices will come down. The when question is one that has not empirically be answered, therefore the scope is this piece is limited to the key factors that cause the bubble as well pointers to why it might burst.
Economically prices are driven by demand and supply. When demand Outstrips supply, the prices go high and reverse is true. To best understand the dynamics of real estate market, one ought to know the factors that affect both demand and supply of real estate. Assuming the supply is constant (same geographical stock of land), my analysis is limited to the key drivers of the demand side.
Land, real estate prices don’t follow the normal demand law, where the higher demand is driven by lower prices and vice versa. To the contrary, people buy more real estate when prices are high expecting them to rise further. This is primarily driven by speculation as well lack of alternative investments in other sectors like agriculture. The speculation will further stimulated by the huge expectations from the oil sector where the estimates place the value of Uganda's oil assets at a minimum of $75 billion. A substantial amount of this money is to be spent on public expenditure, with a good amount trickling into the property industry. Also worth noting is that a commercial exploitation of the reserves requires about US $10bn of investment which will also inevitably trickle down to  However; Oil trend significant oil revenues (worth 5% GDP) won’t happen until 2030. During the peak period – which is estimated at 15 to 40 years at maximum – revenues will be around US$ 1.1 billion. Often resource extraction often entails little job creation, unemployment rises.
The risk of rising debt levels is that they will likely strain the future oil proceeds. Debt levels increasing simply mean more taxes in future. Currently, Uganda’s post HIPC and MDRI debt is growing at an average rate of 17% per annum in nominal terms, whilst projected to rise to 20% per annum in the medium term and long term frameworks. If we can take a leaf from the Greece or any debt ridden country, austerity coupled with increased taxation only strains the demand levels with a trickledown effect on housing prices
It is reasonable to expect that the number of houses built will increase as approximately the same rate as population grows. However as  much as there is growing demand for real estate and an apparent Huge housing deficits, the structure of the population demonstrates high levels of dependency with over 60% of population below 18years. This coupled with the growing levels of youth unemployment will prospectively lead dwindling demand for non-consumables including land
Real estate bubbles are seen as an example of credit bubbles (pejoratively, speculative bubbles), because property owners generally use borrowed money to purchase property, in the form of mortgages. This is probably the case in Uganda, as in FY 2011/ 12 when the central bank initiated an inflation targeting tool- by increasing interest rates to curb the runaway inflation (30% in November 2011), construction sector grew in real terms at 1.7% in FY 2011/12 compared to 7.8% in FY 2010/11. Real sector activities continue to grow at 5.6% over the last 4 years.  Also notably banks have consequently revised their mortgage valuations way below the market valuations. This move was prompted by dip in housing prices in the center of town. This only points to fact that land and other real estates are wrongly priced primarily due to speculation. E.g. when will land of 1bn shillings in kololo ever pay back?
Speaking of inflation, arguably it could be here to stay primarily. There is an increasing shortage or scarcity of food inputs like land, energy, water etc. yet the demand globally is increasing due to increased population growth rate. Thus the structural changes around oil and food production may be here to stay. With persistent inflation, the consumption share of income of the already small formal sector(less than 10% of the economy) as well as others will increase reducing the available disposable income to clear mortgages or least buy off the overly priced properties.

 
Lastly corruption has a significant premium or call tax on the real estate pricing. Corruption which is estimated annually 10% of the national budget/ about 2.2% of GDP has played a significant impact on the boom in real estate activities. Since the introduction of declaring the source of income for all properties above 50Million, the land and real estate activities have dwindled. Corruption if not curbed in the long run impedes investment especially since it worsens the doing to business indicators as well global competitiveness index thus reducing investor appetite. The expansive Corruption trends will trigger increased citizen demand for accountability which consequently will reduce corruption as well lower demand for real estate products.

 
The Oil potential impact with standing, economic theory seems to suggest that the key drivers of real estate bubble that is corruption, private sector credit, remittances, among others like growth of an economy and expectations tend to be volatile in the long run. So given that real estate the real estate prices are growing faster than any macroeconomic variable, worryingly higher than real GDP growth which is a proxy for effective demand/ affordability, the bubble will inevitably burst unless government takes strong stands to regulate the real estate prices as well as put measures in place to control corruption. Construction and housing bubble will burst faster in medium term (5-10 years) than other real estate activities which will in the long run(10years plus) unless regulation happens. This recommendation is in sync with Joseph E. Stiglitz recommendation on the market failures_ REGULATE REGULATE ofcourse in moderation (checks and balances)

 

Tuesday 7 August 2012

Uganda’s District-lisation Model of service delivery is only Futile!!!!
http://www.africanexecutive.com/modules/magazine/articles.php?article=6759&magazine=400
Uganda had only 16 districts in Uganda in 1959. The number of districts increased in 1974 and 2000 to 37 and 56 respectively. In 2006 there were 80 districts. In 2011 we had 112 districts till Kampala was recentralised or made an independent accounting authority. At 111 districts, Uganda has the highest number of sub-national political units of any country in Africa. Indeed Uganda at 100+ districts surpasses Russia (83 federal states) to become the first country with the largest number of the highest level sub-national administrative units in the world. The Government now has now proposed to increase the number of districts by 25 putting the number at 136 districts.

Government’s vindication for creation is primary for enhancing service delivery and effective administration in tandem with the 179 article of the Uganda constitution of 1995. This however has stirred debate on whether ditrictlisation enhances service delivery. Against the backdrop of the discussion, I highlight a number of reasons as to why this model is only futile.

To start with each district LG structure in Uganda has five political levels: The district (LC 5);the county (LC4);the sub-county (LC 3);the parish (LC 2);the village (LC 1) coupled with a number of administrative positions as well as other political officers Each district has have following standardised 11 cost centres; Chief Administrator’s Office, Finance, Statutory bodies (including Council and its Committees),Production,Health,Education,Works,Natural Resources, Community Based Services, Planning and Internal Audit. This means the creation of a leads to a significant number of new posts at the district level. First, a whole new set of technical and administrative staff must be hired, including a Chief Administrative Officer (CAO), Resident District Commissioner (RDC), deputy CAO, deputy RDC, and a District Auditor, Clerk (and Assistant Clerk), Community Based Services Manager, Education Officer, Engineer, Extension Coordinator, Finance Officer, Director of Health Services, Information Officer, Inspector of Schools, Land Officer, National Agricultural Advisory Services Officer, Personnel Officer and Planner, among others. A new set of district councillors  representing special interest groups (such as women, the youth and the disabled), averaging out to around 12 per new district, must also go on the payroll. Finally, a new district must also accommodate a district Chairman. This in essence points to fact that starting up a district requires substantial investments most of which in the short run are rather administrative. The Local Government Finance commission has demonstrated that each district requires about 1.2 bn for start-up but Government can only avail 100mn which alone cannot set up a descent administration block.
The uncontrolled expansion is imposing a toll on the national budget especially since the local governments hardly raise any revenues. Eg Palissa has annual revenue of about Ushs. 130 million and is represented by 5 MPs who cost the nation about UShs. 900Million. so do we need all these MPs or least the 900mn can be used to improve services in districts. A district is allocated about 2million for school inspection annually.

On the contrary, despite the number of districts having increased by 39% from 80 districts in 2006 to 111 in 2011, the Local government share of the budget continues to dwindle. (For instance, over the MTEF 2006/07- 2013/14 over 69% of the budget is spent on centre programmes and only 31% on Local Government programmes.) As per FY 2012/13 only 21% of the national budget will be spent at the local government level. Also still most of the local governments depend on 90% central Government transfers. Also notably, despite the increase in the number of districts, services are increasing being centralised e.g. the procurement of drugs by NMS, the 10,000kms taken over by the UNRA, centralisation of Kampala city council by central government into KCCA among others.
An empirical paper by GREEN ELIOTT, “Decentralization and Conflict in Uganda”, London School of Economics in: Conflict, Security and Development 8, 4 (December, 2008) concludes that district creation is a platform for entrenching political patronage by the current regime to win elections. This is a synomyous to process to the old American practice of gerrymandering, whereby sub-national political units are altered in size or shape in order to alter the majority/minority status of certain political, racial or ethnic groups. A case in point arguably is when an opposition district is broken into several units and the ruling party spends our natonal treasury to win over the seats for the created units or least break an NRm district into several units. This districtlisation is the reason we have such a bloated parliament of 365 members, the majority over 70% being NRM members, rendering the pertitent discussions always ending up in favour of the ruling party.

The benefits of creation new districts(most of which are shortterm) with standing, there is limited evidence todate that creation of  districts ehances service delivery. So there is an evident need to evidence based policy rather than the politically driven policies. The latter always may not yield traction.

Thursday 2 August 2012

The Booming Ugandan Corruption bubble Requires the ASIan NO Nonsense corruption model  to Burst!!!!
With reference to the latest acquittal and discharge of 2 of the 3 former health ministers accused of mismanaging Shs. 1.6 bn meant for Global alliance for Vaccine and Immunisation(Gavi), a friend intimated that if the 2 are innocent, then Uganda’s corruption is so deep rooted that even the innocent looked guilty. The deep rootedness perception is in sync with the President’s outcry that Uganda is full of thieves” In that regard, we should treat all corruption alleged culprits as guilty till proven innocent rather than the other way round.
Corruption basically means the misuse of entrusted power for private gain. There are mainly 2 forms of corruption; Political corruption and administrative corruption. Uganda arguably is marred with both forms of corruption. Political corruption is when laws and regulations are more or less systematically abused; side stepped, ignored or even tailored by rulers to fit their interests. Public Financial management assessment 2008 notes that “Basic systems are in place, but non-compliance, violations and non-enforcement is common” which signals Uganda’s corruption is largely political. This is well demonstrated by the fact that the Ugandan government has a zero tolerance policy on corruption BUT yet again the president continuously alludes to entrenchment of corruption in his country. Similarly the African peer review mechanism noted that Uganda has the largest implementation gap that is the difference between the country's legal framework for good governance and anti-corruption and, the actual implementation/enforcement of that same legal framework. This perpetuation signals the lack of political will to tackle the problem, and has cemented the Impunity around the corrupt. 
In fact, when one reads “My time to eat by James Kemoli Amata” book, it immediately points to our corrupt banana republic- Uganda! Both domestic and international data sources of corruption allude to deteriorating or worsening trends of corruption in Uganda. The World Bank (2005) estimates that Uganda loses about 500 billion per year through corruption which represented 10% of the Budget. This implies Uganda loses a full budget year every 10 years to corruption!
The first Data Tracking Mechanism report on corruption by IGG highlighted implementation flaws at each stage of the budget cycle (planning, budgeting, accounting and reporting, auditing, and audit oversight) that lead to corruption. Virtually all spending agencies (local government or central Government) have been marred with corruption scandal at some point. The most prominent cases being the now 5 years old CHOGM, the HABA case, the UAC, NAADS, GAVI case, NMS, UNRA, NSSF the list is endless- of which these cases have common denominators or players. The IGG who publishes bi- annual reports to parliament has continuously lamented over parliament’s failure to discuss the reports he presents to them, consequently leading to non-closure of the corruption cases or least the reports will be “DEAD on ARRIVAL” by the time they are discussed.
The IGG notes syndicate corruption that is the interlinked corruption at every stage. The multicity of oversight bodies like audit offices, PAC, IGG, among others only espouses corruption rather than eradicate it. The very reason we see no service delivery at the end- because compromise likely happens at all oversight bodies. E.g. if the former accountant at OPM Kazinda is actually as rich as speculated yet he earned a salary of 1.1m UGX, it points to the fact that oversight bodies above him could have been compromised. A friend who formerly worked at LG centre (district) once told me auditor is always welcome by a brown envelope. Hypothetically Auditors, accountants, accounting officers (Permanent secretaries and CAOs), head of Government projects are rich way beyond their formal income streams. That said, the special institutions of control (ombudsmen, IGG, AG etc.) are also particularly weak, and prone to being overrun by informal politics in Uganda. Also a report from Uganda’s Inspectorate of Government (the Data Tracking Mechanism on Corruption) indicated that corruption has become worse in the police, judiciary as well as in health and education sectors.  If the enforcers or oversight bodies like judiciary or least legislature esp. PAC are corrupt, then how will corruption ever be solved? Against that backdrop- simple indicator would be “Do the PAC reports always reflect the Noise they make? Or rather the noise if for arm twisting?”
Contrary to decentralisation or creation of districts opening up voices for accountability, it exacerbates the corruption through increased networks of corruption. Anecdote evidence seems to suggest  that the presence of Inspector General of Government regional offices is confirmed to be strongly associated with reported corruption cases.
The 2011 Transparency International Index indicates a negative trend of corruption for Uganda, now ranked 143 out of 182 countries assessed from 127 out of 178 countries in 2010. Meanwhile in 2011 Rwanda continued to rank highly as the fourth least corrupt country in Africa and 49th in the world.
Although some researchers have argued that a minimal amount of corruption might be efficient because it removes government imposed or allocates scarce resources to those with the highest willingness to pay, the leading view is that on the overall; corruption has adverse effects on economic growth. Economically it affects negatively the investment climate, infrastructure (the pothole culture in Uganda), social equality as well as a tax/ significant effect on inflation which the poor as well end up paying for.
In a nutshell corruption is so politically entrenched in this country; in that there is fear that de- entrenching it will inevitably cost the current regime power.
1.      Given the lack of political will, Uganda needs a Kagame mould or Asian model of zero tolerance to register success against corruption.
2.      At the back drop of cases stalling in courts, and political interference, it is critical that While the investigation and prosecution of corruption (criminal in nature) is solely the responsibility of (1) CID in collaboration with the DPP or (2) the IG (with in-house police investigators), the Magistrate’s Courts Act (MCA), Chapter 16 makes provision under section 41 for any person to initiate criminal prosecutions, otherwise called private prosecution. There are accountability CSOs such as ACODE, ACCU, UDN and even the Uganda Law Society which have filed cases in public interest before.  However the Currently there is no law which enables private citizens in Uganda to pursue these matters by way of civil proceedings, there is need to review the laws in light of the current political interference in the judicial process
3.      As empowered by the leadership code, the IGG should validate civil servants mainly accounting officers’ income, assets and liabilities as well as those of his/her spouse, child or dependant.
4.      Use of targeted sanctions; in neighbouring Kenya and both the United States and European Union threatened targeted sanctions against stubborn political leaders in the administration who were suspected of blocking constitutional reforms and engaging in grand corruption. The sanctions included travel bans and revocation of visas for the leaders and their families.
5.      There is need for closure of the accountability cycle, the PAC reports should be followed through on time, as well the accountant general producing respective treasury memorandum.
6.      There is also need to rotate accounting officers to avoid continued collusion with suppliers or contractors. This has worked effectively in other countries as well as in some statutory agencies like URA
7.      Lastly the voice and accountability starts with you. You are the voice of change especially in light of the envisaged oil influx in a few years.  Otherwise given the prevailing corruption trends, Oil arguably will be a curse


Wednesday 14 March 2012

The PARADOX of PLENTY

With proven reserves of 2.5 billion barrels of oil so far confirmed in the Albertine Rift exploration areas, Uganda could be the next important oil producer in Africa. The discovery could elevate Uganda from a low income country to a lower middle income country within the next 25 years making Uganda more of an independent country. Oil defacto has far reaching effects, but I will try highlighting 5 reasons why Uganda will likely be locked in the PARADOX of PLENTY
As much as Uganda has the right vision on oil to invest in the newly found oil resource into infrastructure and other types of domestic capital necessary for economic transformation , the implementation precedence is worrying- as recently noted by the Global integrity report Uganda has the largest implementation Gap in the World. Implementation gap being the deviation between strategy and actual implementation. To be more specific, e.g. the concrete debt strategy aimed at addressing arrears (commitment of government beyond its planned budgets) among others has continued to be prevalent. Also to note in relation to this, is that on the fiscal side, Government of Uganda has become accustomed to use of supplementary budgets most of which are consumption oriented( refer to the budget performance report FY 2010/11 on the ministry of Finance website). Typical non-adherence to plans, budgets among others.

The oil sector is increasingly being politicized. The president often quoted as referring to oil as “MY OIL” spells concerns of running the oil management as his own. Recent cases of CHOGM, HABA case, fighter jets purchase, among others seem to have the president as the denominator. The recently sumbitted Petroleum Bill does not protect the independence of the Petroleum Authority. Although the Bill provides for the independence of the authority, it also empowers the Minister for Petroleum to give ‘policy directions’ to the Authority and requires compliance to those directions. The power of the Minister in this regard is not defined in the Bill and thus political interference is an obvious risk

Lack of transparency and accountability: The process of the petroleum bills presented to parliament on the 12th of February 2012(bills on the website- www.petroleum.go.ug ) was non-consultative enough- in fact no public consultation was carried out on bill, the upstream or the middle stream bill. The legislation does not contain significant oversight of parliament in the overseeing these institutions. As is Uganda is not yet a member of the EITI, and the bills in the current state don’t guarantee public disclosure of oil related information, and commercial confidentiality exist in these bills. The hasty signing of the oil contracts against the resolutions of parliament points to disregard of parliamentary oversight in the oil process. Lack of transparency exacerbates corruption. According to Transparency International, Uganda was ranked 80th least corrupt country in the world in 2001 but slipped to 127th out of 180 countries in 2010

Uganda credible economic growth levels of an average of about 7% has not translated in to inclusive growth but rather growth bound with social economic inequalities like regional inequality have continued to grow. Refer to the UNHS 2009/10. Economic forecasts seem to indicate that a country that grows at an average of 7%, should achieve middle income status in 10 years- using the 71 principle( 71 divided by average growth rate gives the number of years required for transformation). Oil undoubtedly will likely lead to high levels of growth but non-transformative growth is what we should expect if we are to project from historical paths.(Reference should be made to similar structure economies in Africa e.g. Equatorial Guinea,DRC , and Nigeria).
Oil resource and poor governance is a bad cocktail. Anecdote evidence from African oil economies seems to point to the realism of the likely curse on our economy BUT this is only conditioned on the bad political governance and is a long run phenomenon. Premised on bad governance, the resource curse is transmitted through 3 main channels: excessive domestic consumption, debt overhang, and real exchange rare over valuation. The resource boom when accountability is lacking allows politicians to expand public sector employment or to directly boost private consumption. Bad governance also discourages savings, increases overall spending which is normally reflected in the appreciated exchange rates. The resource rents in bad governance economies will end being misallocated and wasted as the resource base gets depleted while non-resource tradable sectors get marginalised.
In a synopsis, the risks above but limited to those, if not mitigated soon enough, the PARADOX of plenty will rein on our country. Not least mentioning that the recent signing of South Sudan- Kenya pipeline deal through Ethiopia is a clear indicator of lack of trust by neighbouring countries. Uganda could potentially lose out the comparative advantage of its oil resources in the region; Tanzania recently discovered oil which increases the number of neighbours with the oil resource. Kenya too is on the hunt.

CAVEAT: Polinomics (politics plus economics) = zero economics=politics. So if the political reform supports effective extraction, production and the rest of the value chain, then oil resource could be curse-less