PARLIAMENT OF THE NEPU SI'C OF IJGANDA

REPORT OF THE COMMITTEE ON NATIONAL ECONOMY ON THE PROPOSAL FOR GOVERNMENT OF UGANDA TO GUARANTEE LINES OF CREDIT OF US$s MILLION FROM THE EXPORT.IMPORT BANK OF INDIA AND US$15 MILLION FROM THE AFRICAN DEVELOPMENT BANK (AfDBI TO UGANDA DEVELOPMENT BANK LIMITED (UDBLI

(/

($L- \

( \l^ & \S+-

ilrwl A DECEMBER 2018 .> tiln:a/ 1.O INTRODUCTION Rt. Hon. Speaker, Hon. Members, the Committee on National Economy considered the request by Government to guarantee lines of credit of US$S million from the Export-Import Bank of India and US$ 15 million from the African Development Bank (AfDB) to Uganda Development Bank Limited (UDBL) in accordance with Rule 175(21(bf of the Parliamentary Rules of Procedure.

The request was presented to this House by the Hon. Minister of Finance, Planning and Economic Development on 4ff December 2018 and was accordingly referred to the Committee on National Economy for consideration.

The Committee considered and scrutinized the request and now begs to report.

2.O METHODOLOGY

2.1 Meetings: The Committee held meetings with the following:

1 The Minister of Finance, Planning and Economic Development; and

11 The Uganda Development Bank Limited

2.2 DocumentaryReview: The Committee studied and made reference to the following documents:

1 . .The Minister of Finance, Planning and Economic Development's brief U *y' on the guarantee request; The African Development Bank (AfDB) Project Mission Appraisal Due Diligence Mission on Uganda Development Bank (26*, February 2Oi.3 | / 0 l---,-' - lst March 2018); iii. The Do11ar credit line agreement between the Export-Import Bank of India and Uganda Development Bank Limited; {u 1\ \u"ct 2lPage

t lV. The Sovereign Guaranteed Line of Credit agreement between the African Development Bank (AfDB) and Uganda Development Bank Limited; The Export-lmport Bank of India Sanction letter to Uganda Development Bank Limited in regard to the US$S million credit line; VI The Uganda Development Bank Limited Strategic Development Plan 2OI8-2O22; and vlI The Report of the Auditor General on the financial statements of Uganda Development Bank Limited for the year ended 31st December 2017.

3.O BACKGROUND

Development Financial Institutions (DFIs) are important instruments of Government through which socio-economic transformation is promoted. Development banks providing relatively low cost capital compared to commercial banks and also wider range advisory services, capacity building programs to SME's ,large private corporations, other state owned enterprises whose Iinancial needs are not best served by the private commercial banks. Playing multiple roles, all the literature reviewed confirms that Development Plnancial Institutions have helped promote, nurture, support and monitor a range of activities in many successful economies. However, despite the important roles DFIs play in the economy, Uganda has not adequately harnessed their role as strategic intervention vehicle to promote its socio economic transformation due institutional weaknesses within the development bank itself and low capitalization.

ganda Development Bank Limited (UDBL) 1S a limited liability com any incorporated under the Ugandan Companies Act and Statutory Instrument No.26. It is domiciled in Uganda and is wholly owned by the Government of the Repubiic of Uganda. The principal activities of the Bank are to profitably c&- 3lPage \\+

/ru,1 / promote and finance viable economic development in Uganda by providing finance in the form of short, medium and long term secured loans and investing in equity of viable businesses.

Uganda Development Bank Limited (UDBL) has a renewed vision of being the "Preferred and trusted development finance services provider for socio- economic development". More specific to its value proposition is its mission to "Accelerating socio-economic development through sustainable financial interventions" by providing access to affordable and long term financing and other tailored financial soiutions to address priority sector constraints.

The bank currently finances projects in various sectors of the economy that include; Agriculture (Production and Agro-Processing, Manufacturing, Education, Health, Tourism, Infrastructure and housing development. The bank's lending portfolio is mainly funded by Government of Uganda capital contributions, lines of credit from the Kuwait Fund (Loan of US$10.4 million and Grant of US$7 million), the Arab Bank for Economic Development in Africa (BADEA) US$4.5 million), Private Sector long term loan of US$6 million and the trade finance short term loan of US$ 10 million and the Islamic Development Bank Asset finance loan of US$ 1o million.

The BADEA and Kuwait Fund loans have been fu1ly utilized by the bank. In addition, the bank is also a beneficiary of the Government's Agricultural Credit Facilitv at the Central Bank totaling UGX 39 billion \H\- ffw ,l .-/K

4lPage

, : /{a'uf 4.O SELECTED KEY BANK PERFORMANCE INDICATORS Table 1 summarises the bank's performance against the 2Ol7 targets and the targeted deliverables for 2018 that will drive the anticipated development impact. Table l: Ke Selected UDB Performance Indicators 2017

2018 2017 P.dormdnc. 2016 Lfg.t Acluol lolgrt lrtud tunding roired U$ 67.1mn uS$ 37.7 mn tlSl 29 mn USt 26 mn

GraE$ loon porttollo U$rffi.fibn Usts212.60bn Utht206ur t st6 1E3,1bn loon opprovols ushs 232.29 bn ust* l67,mbn Ushs l30bn thtE 120 bn hcnrd$used U$r 109.37 U$i95r7bn UtuE8bn U$k 57.7 bn Cost lo income rolio wifh 65% 6r % 658 u% lmpohemenl

Corl irEotnt rolb *,llhod 45X 188 52fr 47fi itpoEnEnt Relum on equily 1% s% 3E 4E

Retun d1 As6h 3T 3t 2fr 3' Cuslorner Solidocllofl sco(e 80tr 12 y" 85% 62I l,loft Perfonnk€ toon rolb

Source: Annuo'l Report, 2017 (UDB)

5.O DEVELOPMENT IMPACT OF THE BANK

The overall goal of the UDB is to promote sustainable growth and remain a key player in social economic development. According to the bank's strategic development plan 2Ol8-2O22, thre envisaged development impacts of the bank are; crease contribution to the value of production in the economy.

11. Increase empioyment levels.

I11. Enhance human capital and health i.e. student enrollment, Access to ,/'f health services. lV, Increase foreign exchange earnings in the economy' w Increase tax contribution to the national tax revenue.G

I

@ 6.0 JUSTIFICATION FOR GOVERNMENT GUARANTEES TO PRIVATE ENTERPRISES

Given the crucial role of the private sector in the economic growth path of the economy, it is imperative that Government accords the necessary support to strengthen the sector. Through loan guarantees, Government has on several occasions supported the private sector to ease their access to finances to grow their enterprises. In the process of loan acquisition by private enterprises, Government assumes the debt obligation on behalf of the borrower and binds itself to pay the loan in the event that the borrower defaults on loan repayment.

As a result of Government's guarantee of the loan, the borrower therefore benefits from the favorable terms offered like lower interest rates, which they would otherwise not obtain by borrowing on their own. Often, without the Government guarantee, the loan cannot be approved besides the high interest rate it can attract due to the high default risk compared to interest charged on a loan guaranteed by government. Government on the other hand usually supports investors with a view that their contribution to the economy which include creating employment and widening the tax base will lead to social and economic development outcomes for the country. These were equally the expectations of Ugandans when the Government guarantees loans for the Uganda Development Bank.

6.1 Status of UDB Capitalization:

To-date, the authorized share capital of UDBL stands at UGX 500 billion as at close of last year. The total paid up capital is UGX 2OO,173,97O, made up of ct injection by Government of Uganda of UGX 166.5 billion and talization using the Kuwait Fund of UGX 33.67 biilion. The Bank however sti11 remains undercapitalized thus limiting the Bank's ability to carry out its siness of providing affordable short, medium and lon term loans to the (

tt_ 6l N/ \€.\

Jltw >_ private sector. Low paid up capital limits chances of accessing funds from lenders and capitalization through foreign sources. Table 1 shows the current capitalization of the bank.

Table 2: Status ofUDBL Ca talization Approved Conlrlbullonr / oulstondlng bolqnce Commllmenls (Ugrhr'000') (U9ih5'000') (Uqshs'm0') Approved 5hore cqpilol r00.000,000 100,0m,000 Prior yeors 41,284,547 58,715.453 200718 7 64.100 57,951.353 200819 I 7,1 13,659 40,837,694 2009110 7 ,606,661 33,231.033 2010/t l 1,423,694 31,807.339 2011112 1,683,998 30,123,34 t 20121t 3 30,123,34 r 2013114 8,246.788 400,000,000 421,876,553 20141t5 4,999,997 416,876,556 Tolol30 June 2ol5 43,'123.444 500,0m,000 4t6,876,556 2015116 2.999.988 413.876,568 KLrwoit Cqpilolisolion 13,876.568 400,000.000 TololCopltqllrqtion 30 June 20]6 100,000,000 500,000,0@ ro0.000,000 2016117 3,699,99 6 396,300,004 KLrwoil Fund conlribution 8,715,774 387,58r'..226 Tolol Cqpltollrotlon ot 3l December 20'16 112,415,774 500,000,0m 3a7,584,226 20t7ll8 50.500.000 337,OU,226 Kuwoii Fund contribution 7,101,303 329,9A2,923 IotqlCqpitollsollon ot 3'l December 2017 170,0 t7,077 500,000,0m n9,982,923 20r8/r9 9,000,m0 320,982,923 Kuwoil Fund contribulion 3,978,&55 317,004.068 Iotol Copltolisqtion ql Augu!t 20'18 1A2,9?5,932 500,000,0m 3',t7,004.068 2018/19 77,778,038 299,826p30 Iolol Cqpilollsotlon ol30 November 2018 ?]OO,t7g,glO I soo,ooo,om I 299,926,O3O Source: UDB Noaember, 2078

For UDBL therefore to have adequate resources for its business, the Government has to continue capitalizing the Bank using its own resources. This is to be supplemented with ngs on concessionary terms from extern S. lJ(L W e tK-k _/, a ttMf TlPage

# t;>-- w 7.O PURPOSE OF THE PROPOSED LINES OF CREDIT UDBL who are the executing agency has a pipeline of about UGX 306 billion of Small & Medium Enterprises (SMEs) that are in need of long-term dollar and UGX-based ftnancing. These SMEs are involved in businesses in sectors financed by the Bank mentioned above, with credit requirements between USD 100,000 to USD 5,000,000.

The funds will be used largely to increase capacity of the SMEs in the varrous sectors. Over 47 SMEs have applied to UDBL for financing and, it is estimated that about 30 - 47 SME's would benefit from the proposed Lines of financing, with an average contribution of about USD 0.2 Million to USD 5 Million per project. The individual SME projects will be co-financed by; i. Using the resources provided under the proposed Lines of Credit from the Export-Import Bank of India and the African Development Bank

(AfDB ), ii. UDBL's own resources ; and iii. Equity from the particular SME. Also it is noted that while utilising these facilities, UDBL may consider reaching out to some larger size SMEs.

7.1 Purpose of the ADB Line of Credit to UDB: The African Development Bank will extend a Line of Credit in an amount not exceeding Fifteen Million United States Dollars ($15,000,000) (or the equivalent in Ugandan Shillings) to the Uganda Development Bank Limited (UDBL). UDBL Shall utilize the proceeds of the Line of Credit for the purpose of on- lending solely in United States Dollars or Ugandan Shillings and exclusively to eligible projects in various sectors in Uganda with priority targeted sectors that include agriculture, manufacturing, human capital development (Education and Health) an accordance with UDBL's Policies, the AfDB Environmental o1icies and Guidelines, and the laws, regulations ll0--- (+A SlPage and requirements of the Regional Member Countries within which the operations from time to time will be located.

7,2 Purpose of the Export-Import Bank of India Line of Credit to UDB: Provision by Exim Bank of India a line of credit to Uganda Development Bank Limited (UDBL) of up to USD 5,000,000.00 (United States Dollars Five million only), will be used to finance import of engineering goods and services from the Republic of India to Uganda.

8.O LOAN TERIUS AND CONDITIONS The terms attached to the lines of credit from Exim Bank India and African Development Bank are presented in table 3 Table 3: Loan Terms

Facility Edm Bauk of India lmport flnance line ADB- Llne of credit for on Name of Credit lending to SMEs

Facility USD $ 5 million usD $ 15.0 million Amount

Currency United States Dollars (USD) United States Dollars (USD)

Mode Finalcing Buyer's credit Long Term SME financing

Borrower UDBL under Guarantee from GOU UDBL under Guarantee from GOU Tenor & Avallability Perlod: One year from rAvallablllty Period: Subject to Gestatiol the date of first disbursement under satisfaction of all Conditions Period the facility. Precedent, the Loan will be Availability period beyond one year will available for the first be subject to review by Exim Bank. disbursement up to one year from the signature date of the Repaynent Perlod: Up to 7 years. To Loan agreement. be decided at the time of each draw down, based on the request of the oAny undrawn down portion of the borrower and as agreed by Exim Bank. Facility Amount may be automatically cancelled at the end of the availability period. (" ( (--- IW t 0 elP &* C,, Faclllty E:

Sale Prlce a For amount drawn down for a tenor a Interest rate : up to 2 years:6 months USD LIBOR currently equivalent to 2.47o/o +250bps USD Floating: 6 months USD Libor currently equivalent to 2.47o/o For amount drawn down for a tenor +80bps. more than 2 years: 6 months USD LIBOR currently equivalent to 2.47o/o USD Fixed: Fixed Base Rate +300bps. +80bps.

In any case, the tenot shall ,rot a Fees: Commitment fee of O.25o/o exceed 7 years. per annum, front end fee equal to O.25o/o of the line of credit. Serwice fees at 1.OO7o, plus applicable taxes on accepted sanction amount payable at the time of each Late payment: l,ate payments of draw down interest andlor prlncipal will result in penalty interest of 2Vo per Additional interest by way of llquldated annum over and above the interest damages; 2o/o per annum over and above the applicable interest rate, payable in rate specified above on the amount case of default in paJrment of principal due and unpaid. interest or any other monies on respective due dates.

Tenor Up to 7 years a l0 Years, including 2 years of grace period

Source: Export-Import Bank of Indla & ADB Credlt Flndnclng Ag"eetnents

The borrowing rates are 5o/o and 3.3%o from Exim Bank of India and AfDB respectively. The Bank will lend the loans to SMEs at an average interest rate of % er to cover credit risk and operational costs inherent in lending and ia1 sustainability. t{?- tsfi

10 lPag

D- .>. ( /,UU w frt)-----, a.1 Conditions:

Conditions attached to the ADB Line of Credlt include; i. Compliance with, if applicable, central Bank's requirements including capital adequacy ratio; ii. Development of an environmental and social management system (ESMS) which shall be fully in compliant with AfDB's integrated Safeguard System (lSS); such a system must include an environmental and social policy approved and signed by UDBL's top management and cleared by AfDB; iii. Utilization of the funds should be made in observance of environmental laws in Uganda; iv. UDBL receipt of the necessary authorizations including authorizations from the Central Bank of Uganda, and any exchange control approval if so required; v. Maintaining throughout the life of the Line of Credit capital adequacy ratio as prescribed by the respective central Banks (when regulated) or the Bank of International Settlements, whichever is higher; vi. Maintain an operating efficiency ratio of 56% through the life of the loan; vii. UDBL must be in ful1 compliance with all laws, including those issued by Central Bank of Uganda, if the institution is regulated; viii. A11 sub projects and UDBL must be in full compliance with AfDB's environmental regulations and there should be no general environmental disputes; ix. The UDBL Board of Directors must observe sound corporate governance principles; x. UDBL must issue prior notification to AfDB and will require prior AfDB approval before any material change to UDBL's business' xi. Resolution of board of directors approving the terms of the line of credit; d L6gal opinions of reputable Ugandan counsel as required by AfDB.

11 P e (+, I \- W W >-. Conditions attached to the Exim Bank of India llne of linancing include; i. UDBL, at the time of utilization of the line of credit will provide a confirmation from an Authorized Signatory that the funds being drawn from the Exim Bank of India Line of credit is/will be disbursed to companies in Uganda/Africa for importing goods and services from India, in a format as may be mutually acceptable; ii. Within 30 days from the date of disbursement, an End Use certificate duly signed by a Statutory Auditor to be provided, in the format as may be mutually acceptable; iii. UDBL to be continued to be held 100% by the Government of Uganda during the tenor of the facility.

9.O THE LOAN AND THE CURRENT DEBT SITUATION OF THE COUNTRY

This loan will increase the country's outstanding total public debt, including publicly guaranteed debt that has been on the rise over the years. The provisional total public debt stock (at nominal value) as at end of June 2018 stood at Uc){ 42,084.7 billion (42.05% of GDP) (Bank of Uganda Annual Report 2Ol7 I 18). This is an increase of 2L.6 percent relative to June 2017.

1O.O OBSERVATIONS AND RECOMMENDATIONS

The Committee made the following observations and recommendations:

1O.1 Financial Credit and Long-term Financing: The committee noted the Govemment's objective of partly using Uganda Development Bank Limited as a channel to promote sustainable and inclusive growth of the Uganda Economy, produce quality jobs and strengthen industrialization in the country. Government participation in the ownership of development banks is a critical factor for their success and sustenance given the that goes beyond banking that they p1ay. t'M

P u

1tu,ry --J-_NfE.- ')-r. The committee recommends that given that the Vislon 2O4O clearly artlculates infrastructure as fundamental and industrialization as one of the vehicles to achieve the middle income status, lt is critical that Uganda Development Bank Limtted should be supported with a view to providing credlt facilities for long term infrastructure projects and industrialization to tealize Uganda Vision 2O4O,

1O.2 Operational and Financial Performance ofthe Bank: The committee noted that based on the Report of the Auditor General on the Financial statements of Uganda Development Bank Limited for the year ended 31st December 2017, the overall operatlonal and financial performance of the bank has been improving over the last five years; this is a reflection of the quality and commitment of the management, internal procedures and policies. However improvements in areas such as risk management and development of outcomes capturing and reporting are still required.

The committee recommends that the Uganda Development Bank Board should urgently devise appropriate and effective policles and strategies towards improving the bank's risk management and development of outcomes capturing and reporting,

1O.3 Financial Sustainability of UDB: The committee noted the Government's objective of partly using Uganda Development Bank Limited as a channel to promote sustainable and inclusive growth of the Uganda Economy, produce quality jobs and strengthen industrialization in the country. The committee recommends that in order for Uganda Development Bank Limited to enhance its capacity of providing development finance solutions as eashrined in its mandate, government should adequately capitalize the k to enable it attain the aut d share capital of

13 lP 8e NV# @ r atE

In addition , Govetnment should encourage shareholding or selling of the shares in Uganda Development Bank Limited to instltutions/investors as a way of raising more capital for the bank to enable it finance big infrastructure proJects that will facilitate the transformation to Uganda's desired levels of Development. However precautions need to be taken as lt brings on private sector shareholders that the Uganda Development Bank Limited is more on the socio welfare of the Citizens of Uganda other than the profit motive.

1O.4 UDB Staff Productivity: The committee noted that due to the limited availability of development banks in the country, Uganda Development Bank Limited's recruitment base is largely commercial banks whose skills are different from those of Development Banks. For a development bank to be fu11y successful it needs to not only produce good financial returns but also generate high development impact in a county'

The committee recommends that the Uganda Development Bank Limited Board should urgently optimize staff productivity and enhance their competencies to match those required in a development financial institution setting that addresses development challenges.

1O,5 Regional Presence ofthe Bank ln other parts ofthe country: The committee noted that Uganda Development Bank Limited has one office located in Kampala, which limits its access to mainly Kampala, therefore the upcountry are not catered for. There is need for the bank to em Ugandans "/ an all inclusive development plan for all regions in the country. e,u lPage

C A'y The committee recommends that the management of Uganda Development Bank Limited should consider the need to deepen the senrices of Uganda Development Bank Limlted by establishing aud equipplng regional specitic branches in Uganda as the case with Development Banks in Brazil, China and Ethiopia. Setting up branches countrywide will take Uganda Development Bank Limited services nearer to prospective emall, medium, and large entrepreneurs'

1s.o coNcLUsIoN

The Committee recommends that the request by Government to guarantee lines of credit of US$s million from the Export-Import Bank of India and US$ 15 million from the African Development Bank (AfDB) to Uganda Development Bank Limited be approved, subject to the above recommendations.

#g

(

-7-('

15 lPage c.'ltauat REPORT OF THE COMMITTEE ON NATIONAL ECONOMY ON THE PROPOSAL FOR GOVERNMENT OF UGANDA TO GUARANTEE LINES OF CREDIT OF US$s MILLION FROM THE EXPORT.IMPORT BANK OF INDIA AND US$15 MILLION F'ROM THE AFRICAN DEVELOPMEI'IT BANK (AfDBI TO UGANDA DEVELOPMENT BANK LIMITED (UDBL)

1 Hon. Bbumba Syda Namirembe C/P Nakaseke North

2 Hon. Bategeka Lawrence V/CP Hoima Municipality

3 Hon. Kajara Aston Mwenge South

4 Hon. Mangusho Cherop Lawrence Kween County

5 Hon. Yeri Apollo Ofuiono Tororo Municipality

6 Hon. Kiwanuka Keefa Kiboga East

/7 '7 Hon. Seguya Lubyayi John Bosco Mawokota South

I Hon. Musoke Paul Sebulime Buikwe North 9 Hon. Kabafunzaki Herbert Rukiga County l/Mlr

10. Hon. Etuka Isaac Joakino Upper Madi

11. Hon. Ayepa Michael Labwor County

L2, Hon. Katoto Hatwib Katerera County d L 13. Hon. Lokeris Samson Dodoth East t4. Hon, Kitatta Aboud Bukoto West 1 15, Hon, Elotu Cosmas Dakabela County

16. Hon. Rwemulikya Ibanda Ntoroko County

17, Hon. Bitangaro Kwizera Sam Bufumbira South fi{\ a$ ^ 18, Hon. Migadde Robeft Ndugwa Buvuma Islands 1 -\l \ 19, Hon. Tayebwa Thomas Ruhinda Nofth I I

20. Hon. Mandera Amos Buyamba County

2t. Hon. Wamakuyu Mudimi lgnatius Elgon County

22. Hon. Okello Anthony Kioga County

23. Hon. Dhamuzungu Geoffrey Budiope East

24. Hon. Guma Gumisiriza David Ibanda Nofth

25. Hon. Sematimba Simon Peter Busiro South

26. Hon. Akol Anthony Kilak Nofth

27. Hon. Okupa Elijah Kasilo County

28 Hon. Ariko Herbet Edmund Soroti Municipality

29. Hon. Kiyingi Deogratius Bukomansimbi South

30 Hon. Nambooze Betty Bakireke Mukono Municipality

31. Hon. Akena James Jimmy Lira Municipality , ///r*,,t 32. Hon. Baryayanga Andrew Aja Kabale Municipality

33. Hon. Kaluya Andrew Kigulu South

34 Hon. Nauwat Rosemary DWR Amudat {NA- 35. Hon. Katwesigye Oliver Koyekyenga DWR Buhweju I

36 Hon. Akamba Paul Busiki County 37. Hon. Atiku Bernard Ayivu County M4-/ 38. Hon. Okumu Ronald Reagan Aswa County ,J

39. Hon. Wadri Kassiano Ezati Arua Municipality

40. Hon. Kutesa Pecos Onesmus UPDF Representative