Uganda Air Cargo Corporation for the Year Ended 30Th June 2019

THE REPUBLIC OF UGANDA

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF UGANDA AIR CARGO CORPORATION FOR THE YEAR ENDED 30TH JUNE 2019

OFFICE OF THE AUDITOR GENERAL UGANDA TABLE OF CONTENTS

List of Acronyms ...... 2 Opinion ...... 3 Basis of opinion ...... 3 Key audit matters ...... 3 Emphasis of matter ...... 3 1.0 outstanding debtors ...... 3 2.0 outstanding trade payables ...... 4 3.0 salaries payable ...... 4 Other matters ...... 5 4.0 sustainability of uganda air cargo corporation ...... 5 5.0 implementation of the approved budget ...... 6 Other information ...... 8 Management responsibilities for the financial statements ...... 8 Auditor’s responsibilities for the audit of the financial statements ...... 9 Other reporting responsibilities ...... 10 Report on the audit of compliance with legislation ...... 10 6.0 staff performance management initiatives ...... 10

LIST OF ACRONYMS

Acronym Meaning INTOSAI International Organization of Supreme Audit Institutions ISA International Standards on Auditing ISSAIs International Standards of Supreme Audit Institutions IESBA International Ethics Standards Board for Accountants IFRS International UACC Uganda Air Cargo Corporation

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF UGANDA AIR CARGO CORPORATION FOR THE YEAR ENDED 30TH JUNE, 2019

THE RT. HON. SPEAKER OF PARLIAMENT

Opinion

I have audited the accompanying financial statements of Uganda Air Cargo Corporation for the year ended 30th June 2019. These financial statements comprise the statement of financial position as at 30th June 2019, the statement of financial performance, statement of changes in equity and statement of cash flows for the period then ended, accompanying schedules and a summary of significant accounting policies and other explanatory notes.

In my opinion, the financial statements present fairly, in all material respects, the financial position of Uganda Air Cargo Corporation as at 30th June 2019 and its financial performance and cash flows for the period then ended, in accordance with International Financial Reporting Standards (IFRS) and the requirements of the Companies Act, 2012 of Uganda.

Basis of Opinion

I conducted my audit in accordance with International Standards of Supreme Audit Institutions (ISSAIs). My responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of my report. I am independent of the Corporation in accordance with the Constitution of the Republic of Uganda, 1995 (as amended), the National Audit Act, 2008, the International Organization of Supreme Audit Institutions (INTOSAI) Code of Ethics, the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (Parts A and B) (IESBA Code), and other independence requirements applicable to performing audits of Financial Statements in Uganda. I have fulfilled my other ethical responsibilities in accordance with the IESBA Code, and in accordance with other ethical requirements applicable to performing audits in Uganda. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.

Key Audit Matters

Key audit matters are those matters that, in my professional judgment, were of most significance in my audit of the financial statements of the current period. I have determined that there are no key audit matters to be communicated in my report.

Emphasis of Matter

Without qualifying my opinion, I draw attention to the following matters included in the Income statement.

1.0 Outstanding debtors

A review of schedule of debtors in the notes to the accounts (17) revealed that the Corporation had outstanding trade receivables of UGX.11,633,873,518 as at 30th June

2019. It was noted that debtors amounting to UGX.8,340,893,520 representing 72% has been outstanding for a period of more than two years.

Debtors represent idle assets that do not allow the management of the entity the resources to implement planned activities. There is a likelihood that UACC operations may come to a standstill with this trend of debtors.

The Accounting Officer explained UAC initiated efforts to recover the long outstanding debt of UGX.4,051,467,131.6 owed to it by Air Afrik Aviation, through Ministry of Finance, Planning and Economic Development (MOFPED), seeking to compensate the business community that lost money in South Sudan. UAC is also actively pursuing the settlement of other long outstanding debtors like LC Aviation, Foot Prints Travel, Light Air Services and RJM Aviation among others.

I advised the Accounting Officer to use all the available means and ensure that the debts are recovered.

2.0 Outstanding trade payables

A review of the Statement of Financial Position as at 30th June, 2019 on page 6 showed outstanding trade payables amounting to UGX.14,566,675,168 with over UGX.13 bn having been outstanding for over three financial years as shown below.

Particulars 2019 (UGX) 2018 (UGX) 2017 (UGX) Total Payables 14,566,675,168 13,494,313,856 13,119,149,465

There is a risk that the creditors may cease doing business with the entity and can also lead to litigation.

The Accounting Officer explained that there was no clear plan as at present of settling the payables considering that UAC is cash strapped.

I advised the Accounting Officer to engage all the relevant stakeholders including Government to ensure that the outstanding obligations are cleared to avoid litigation.

3.0 Salaries payable

A review of trade payables (note 5) on pages 20 and 21 of the financial statements revealed outstanding salaries to the tune of UGX.5,247,458,218. A huge chunk relate to staff salaries that have remained outstanding for a period of over 2 years.

Failure to pay staff salaries has psychologically affected the well-being and performance of staff. Besides, staff are denied their NSSF contribution and also accumulate interest on PAYE.

The Accounting Officer explained that even though some salaries are not honoured due to lack of funds, the Accounts department maintains a schedule and ledgers for each staff detailing the net outstanding to each staff. Management recently entered a deed of settlement with NSSF and initiated efforts to have interest on PAYE waived, citing delays in capitalization of the Corporation by MOFPED.

I advised the Accounting Officer to fast track the payment of employees’ salaries to improve their performance and ensure that statutory deductions are made to avoid eventual interest.

Other Matters

I consider it necessary to communicate the following matters other than those presented or disclosed in the financial statements:

4.0 Sustainability of Uganda Air Cargo Corporation

UACC is still 100% owned by the Government of Uganda and under the supervision of the Ministry of Defense and Veteran Affairs. It was established to offer Air Cargo Transport services and Air Passenger Charter services. The Corporation has continued to operate amidst a wide array of challenges. Between 2009 and 2013, the Corporation recorded outstanding performance in which period it expanded the fleet from one aircraft to four, two C130 and two Y12.

This performance was disrupted in June 2014, after the revocation of the Corporation’s Air Operator Certificate (AOC) by the Uganda CAA. The effects of the loss of the license were adversely strategic, while other operators e.g. Air Uganda ceased operations, Uganda Air Cargo has muscled on but in poor financial health. The Corporation suffered huge losses during the period 2014 to 2015 resulting into; erosion of operating funds, accumulation of fixed costs and loss of customer confidence by clients. The Air Operator Certificate was later restored.

The apparent failure by the shareholders to appreciate the potential of UACC and the benefits of airline operations to the national economy could lead to the collapse of the company.

The Accounting Officer explained that the Corporation is faced with a number of challenges noted below:

 Three aircrafts have remained grounded i.e. 5X-UDF, 5X-UYX and C130 requiring major overhaul. The cost for restoration of the three grounded aircrafts has been escalating over time. The longer the air crafts remain grounded, the more costly it is to restore. At the time of grounding the aircraft, the costs were US$8m compared to US$11m now. The challenge is caused by lack of capitalization and operating funds, therefore inadequate capacity due to limited aircraft carriage.

 The opportunities for these aircrafts have not been utilised. Consequently, the Corporation lost contracts with the United States Government and UNDP worth over US$11m a year in gross revenue. The Corporation is capable of providing the following services; air cargo freight, air passenger charters, medical evacuations, VIP charters, fun flights, aerial surveys, leisure/tourist charters, business charters, humanitarian/relief flights and international conference charters if funded adequately.

I advised that Government should consider recapitalization of the corporation to avoid further escalation of the costs of restoration of the aircrafts.

5.0 Implementation of the approved budget

Uganda Air Cargo Corporation (UACC) is a body corporate created under the Uganda Air Cargo Corporation Act (CAP 322) of the Laws of Uganda whose mandate is to establish and operate air transport services within or outside Uganda and to give instructions and provide for training in the flying and use of aero planes. It provides air cargo services to a number of clients including humanitarian agencies and private organizations. Destinations covered include Southern Sudan, Eastern DRC, Somalia, Congo, etc. with the Government of Uganda being a major client.

In order to achieve its mandate, the entity planned to implement and achieve a number of both recurrent and development deliverables under various programmes and projects. A review of the entity’s approved work plans and budgets revealed that the entity had an approved budget of UGX.41,937,497,120 out of which UGX.15,313,216,618 was realized representing only 37% performance. The key deliverables for the financial year 2018/19 were.

Table showing key deliverables for the entity for the year S/N Key deliverables Amount (UGX.) %age of approved budget i Revenue 15,313,216,618 37% ii Cost of sales/Direct expenses 11,722,760,071 28% iii Local staff salaries 2,529,104,090 6% iv Administrative expenses 1,347,927,402 3% v Directors fees and Board expenses 291,786,540 1% vi Depreciation of other assets 3,335,297,123 8%

UACC planned to achieve the above deliverables through implementation of 6 outputs. Based on the work performed, I noted the following in the implementation of all outputs/activities.

Observation Recommendation 5.1 Revenue performance

I reviewed the revenue estimates, current items and rates charged at I advised Accounting entity level for the financial year 2018/2019 and noted that out of the Officer to liaise with budgeted revenue of UGX.41,937,497,120 for the year 2018/19, the mother Ministry UGX.15,313,216,618 was collected representing performance of 37% with a view of of the target. The performance the revenue source is summarized in improving UAC the table below. performance.

Revenue Approved Actual Variance Percentage Source Budget receipts (bn) variance (bn) (bn) Sales 41.937 15.313 26.624 63.5 Incomes Total 41.937 15.313 26.624 63.5

Failure to collect all the projected revenue negatively affects implementation of planned activities.

The Accounting Officer explained that only 25% of the Corporation’s fleet is serviceable and further still the serviceable C 130 5X-UCF has been virtually underutilized as a result of the demand by the UN and UPDF to prefer third party, foreign passenger aircraft to rotate her troops.

Further, signing up for long term lucrative contracts with UN and other clients like the PAE requires a reliable back up aircraft (C 130) that has been grounded since 2014. Ad hoc work that the Corporation is in position to obtain is not sustainable. 5.2 Quantification of outputs/activities

I reviewed a sample of 5 outputs with a total budget expenditure of I advised the UGX.37,902,458,080 representing 90% of the total budget as Accounting Officer to indicated below: ensure that outputs Table showing activities planned and activities are Details Number Budget properly quantified Total Outputs 6 41,937,497,120 when preparing the annual plans and Outputs sampled 5 37,902,458,080 budgets. Percentage 83 90

Out of 5 outputs assessed/reviewed, 1 activity was not quantified to enable measurement of performance.

I observed that, in these cases, management reported in generic ways i.e. operating costs that include; crew handling and parking, crew training for both base and simulator, aircraft handling and navigation; administration expenses that involve promotion and advertising, training foreign and local staff, business development, tendering, clearing and forwarding etc.

Failure to plan and report on the quality/quantity of activities implemented renders it difficult to establish individual activity costs for each planned output and this curtails effective accountability when funds are subsequently spent.

The Accounting Officer explained that UAC regrets the anomaly. However all key deliverables as outlined in the budget are further broken down into their constituent revenue and cost centres. Going forward, expenditure shall be documented to indicate to which particular item it lies for easy analysis in establishing performance shortfalls. 5.3 Implementation of quantified planned outputs/activities

An analysis of the outputs/activities that were quantified revealed that out of the 4 quantified activities assessed, 1 activity representing 20% was fully implemented while 3 activities representing 80% were partially implemented. Details are in appendix 2.

Partially implemented outputs included; training foreign and local staff, business development, tendering, clearing and forwarding.

Results from of the entity performance are summarized as below.

Table showing level of implementation S Description Reporting Outputs Performance / in % N i ALL the planned Fully 1 20 activities have been Implemented achieved or realized (100%). ii A portion or some of Partially 4 80 the planned activities Implemented have been achieved or realized (less than 100%). iii The entity did not Not - - realise or achieve ANY Implemented of the planned activities (0%). Total outputs 5 100

Non-implementation of planned activities implies that the expected services to the beneficiary communities were not attained.

The Accounting Officer explained that although the planned activities were not achieved/implemented during the financial year, they have since been embarked upon and are under implementation.

Other Information

The Directors are responsible for the other information. The other information comprises the statement of responsibilities of the Directors and the commentaries by the Chief Executive. The other information does not include the financial statements and my auditors’ report thereon.

My opinion on the financial statements does not cover the other information and I do not express an audit opinion or any form of assurance conclusion thereon.

In connection with my audit of the financial statements, my responsibility is to read the other information and, in doing so, consider whether the other information is materially consistent with the financial statements or my knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work I have performed, I conclude that there is a material misstatement of this other information; I am required to report that fact. I have nothing to report in this regard.

Management Responsibilities for the Financial Statements

The Directors are responsible for the preparation and fair presentation of these financial statements in accordance with the International Financial Reporting Standards and the requirements of the Uganda Companies Act and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatements, whether due to fraud or error.

In preparing the financial statements, the Directors are responsible for assessing the Corporation’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting, unless the Corporation’s management either intend to liquidate the Corporation or to cease operations, or have no realistic alternative but to do so.

Auditor’s Responsibilities for the audit of the Financial Statements

My objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISSAIs will always detect a material misstatement, when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users, taken on the basis of these financial statements.

As part of an audit in accordance with ISSAIs, I exercise professional judgement and maintain professional scepticism throughout the audit. I also:-  Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the management.  Conclude on the appropriateness of Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Corporation’s ability to continue as a going concern. If I conclude that a material uncertainty exists, I am required to draw attention in my auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify my opinion. My conclusions are based on the audit evidence obtained up to the date of my auditor’s report. However, future events or conditions may cause the Corporation to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

I communicate with the Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that I identify during my audit.

I also provide the Directors with a statement that I have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on my independence, and where applicable, related safeguards.

From the matters communicated with the Directors, I determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. I describe these matters in my auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, I determine that a matter should not be communicated in my report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Other Reporting Responsibilities

As required by the Companies Act, 2012, I report to you, based on my audit, that:  I have obtained all the information and explanations which to the best of my knowledge and belief were necessary for the purpose of my audit;  In my opinion, proper books of account have been kept by the Corporation, so far as appears from my examination of those books; and  The Corporation’s statement of financial position and statement of financial performance are in agreement with the books of account.

Report on the Audit of Compliance with Legislation

The material findings in respect of the compliance criteria for the applicable subject matters are as follows:

6.0 Staff Performance Management Initiatives

Best Practices require that for purposes of staff appraisals, the corporation shall agree on evaluation guidelines and appraisal tools which may include a predesigned form to be filled by each employee.

The performance plan establishes an officer’s commitments for the assessment period. It is a record of the individual performance outputs, indicators and targets that contribute to the achievement of the organizational goals. It offers the basis or framework against which individual performance outputs/achievements shall be measured at the end of the assessment period. Uganda Air Cargo Corporation employs 56 staff. I undertook a review of the staff in post to examine how the entity has implemented the above initiatives and I noted the following;

6.1 Development of performance plans

Contrary to the best practices, I observed that none of the 56 staff in post at the beginning of the financial year 2018/19 filled in their annual performance plans. In the circumstances, the basis against which individual performance achievements can be measured at the end of the assessment period is not provided.

6.2 Completion of Performance Appraisals

I observed that none of the 56 staff in post at the beginning of the financial year completed the performance appraisals contrary to the best practices. In the circumstances, management is unable to determine the extent to which set performance targets are achieved and is also unable to enforce the rewards and sanctions guidelines as they largely depend on the performance appraisal process.

6.3 Completion of quarterly performance reviews

I noted that there were no quarterly performance reviews undertaken by the staff during the year under review. This inhibited management from evaluating and identifying performance constraints to take remedial action.

6.4 Completion of performance improvement plans

I noted that management did not undertake this activity during the year under review. Failure to identify performance gaps implies that performance improvement initiatives could not be undertaken.

6.5 A mechanism for monitoring of staff attendance

Para 1.5.3 (a) (1) of the UACC Staff Manual provides for normal office hours to be from 0800 hours to 1700 hours from Monday to Friday with a lunch break of 75 minutes starting at 1245 hours. Saturdays and Sundays to be regarded as rest days (tabulate) I noted that UACC has a mechanism in place to monitor staff performance.

6.6 Existence of rewards and sanctions committee

I noted that UACC does not have the rewards and sanctions committee as required by the guidelines. Lack of rewards and sanction committee implies that decisions on rewards for excellent performance and sanctions for poor performance may not be taken and handled in a timely manner.

The Accounting Officer explained that UACC’s 10 year strategic business and investment plan was approved by the Board in December 2016. Implementation of the plan has not been possible as the Corporation has to date not yet received the anticipated capitalization from Government to kick-start its existing business structure. It was further explained that while goals, objectives, strategies, targets and operational plans that ideally should be derived from the principle strategic plan are clear, evaluating and appraising distinct sections of the business and respective heads is not possible. For the time being, it is not possible to carry out performance appraisals, let alone endorse performance agreements for senior managers.

I urged the Accounting Officer to liaise with the relevant authorities and ensure that the strategic business and investment plan of the corporation is operationalized to enable the implementation of staff performance measurement.

John F.S. Muwanga AUDITOR GENERAL Kampala 27th December, 2019

APPEDICES

Appendix I-Table showing implementation of planned activities

S/N Key Deliverables Budget Actual Variance Comments

1 Revenue 41,937,497,120 15,313,216,618 26,624,280,502 Partially implemented 2 Cost of sales/Direct 28,923,405,280 11,722,760,071 17,200,645,209 Fully expenses implemented 3 Local staff salaries 2,818,622,400 2,529,104,090 289,518,310 Partially implemented 4 Administrative expenses 4,868,260,960 1,347,927,402 3,520,333,558 Partially implemented 5 Directors fees and Board 1,079,384,480 291,786,540 787,597,940 Partially expenses implemented 6 Depreciation of other assets 212,784,960 3,3345,297,123 33,132,512,163 Fully implemented