Uganda Manufacturers Association (UMA), through a letter to the Ministry of Finance, Planning and Economic Development, has called for immediate recission of the Excise Duty of 2.5% of $70 whichever is higher that was imposed on the plastic granules. “With the benefit of understudying the rest of Africa on the treatment of the same materials, Uganda should rescind part 1 of Schedule 2, Section (e), of the Excise Duty (Amendment) Act, 2021 that substitutes item 11 by imposed Excise Duty on plastic products and plastic granules at a rate of 2.5% or $70 per ton whichever is higher” it read in part.
According to UMA, the plastic granules are still vital to support production in the plastics sub - sector in Uganda, the recension should be effective from the 1st July, 2021 and to ensure that there are no stock-out situations for in-puts.
The UMA expressed their disappointment with the tax levy that was imposed on raw materials used by the plastics sub-sector, yet these are cannot be sourced locally. According to UMA, this will have “far-reaching consequences capable of eluding the gains so far attained in the sector, giving advantage to the importers and foreign competition as illustrated below;
- Distortion of the existing inter industry dependency and supply chain. The plastic subsector meets plastic packaging need of over 13,000 production units in services, manufacturing, construction and agriculture directly. This is supply of up to 70% of the entire economy especially the SMEs, who have over 95% of their packaging material being plastic. Any tax increment will mean a rise in the cost of packaging and ultimately a rise in prices of the final product. With the ever-declining disposable income and purchasing power, aggravated by the numerous lock downs and measures put forth to mitigate the spread of the covid-19 pandemic, a tax measure such as this only works to reduce our competitiveness.
- Distortion of the export promotion and import substitution efforts. A charge of 2.5% or $70 on the cost on raw material, coupled with the 15% or $3,500 cost of freight from Mombasa to factory would mean that Ugandan manufactured products using plastic packaging or plastic components will become 5% - 7% more expensive than their regional competitors both locally and in the export markets. This will start the destructive chain to destroy manufacturing in the Country, while eluding the benefits that would accrue to export earnings from manufactured products.
- Decline in consumer welfare. Plastic is a major household item among the mainstream Ugandan populace especially the low earning majority. Everything made of plastics and everything packaged in plastic containers made in Uganda will become 5% - 7% more expensive to the final consumers in Uganda. This will therefore serve to overburden an already struggling populace.
- Double taxation. The user of plastic packaging in the beverage sector already has excise duty on bottled drinks, an excise extended to them through price on packaging materials would be compounded excise while prices cannot be raised on the final product. Therefore, this only works to escalate the already dire position they are experiencing which affects their competitiveness against imported beverages.
- Burden on government parastatals. The UMEME, National water and sewerage corporation, the Ministry of water and environment as well as projects that promote water and sanitation, access to clean water and power extension will be adversely affected by the hike in cost which will be shifted onto the government.
- Effects on covid-19 treatment. The cost of PPEs and related items has been identified as a cost pusher on the efforts to manage the pandemic. PPEs are largely plastic materials which require granules for their production. An attempt to increase cost to such will be undermining government efforts to reduce the cost of covid treatment.
- Threat to regional integration. The policy would most likely cause retaliation from the EAC region against Ugandan products as URA would not have the capacity to segregate imported plastics and packaged items in plastic containers made from recycled plastics from other made from granules which the policy targets. URA to this moment has not demonstrated ability to track all the finished products packaged in plastic containers imported into the country mentioned in the nomenclature of plastics and those made from recycled plastics entering the country and thereby be able to make the assessments in a fair and levelled manner in line with good tax administration practice.
- Disastrous signals to investment in Plastic production. UMA also seeks to inform you, that one of the biggest challenges faced in the investment climate (especially since unemployment is considered a national security problem currently) is the intermittent policy reversals which scares away potential investor in the industrial sector. Since manufacturing is usually considered a long-term investment sector, mid – term policy changes affect planning and has adverse effects on cashflows and production.
- Uptake of recycled material. There are many Plastics Recycling companies in Uganda, whilst a number of plastic producers also have parallel recycling plants alongside their main plants. The current uptake of recycled material stands at 150,000 MT annually. This notwithstanding, quite a number of items especially for food grade and medical plastics cannot be produced from recycled plastic materials, needing the use of virgin granules. There is a system already under which 12,000 MT per month is purchased from recyclers for use in some non-food plastic items (flower pots, basins, etc).
- Regional precedence. Much as there is a regional policy on waste management and reduction in production and use of plastic carrier bags, there has not been any move that seeks to blanketly impose tax on raw material for production of plastics; instead, incentives have been offered to promote reuse and recycling as the case is for Kenya and Rwanda. UMA and the plastic companies are looking at alternatives to support the efforts of collection and ask for incentives for recycle companies and pledge to promote joint sensitisation on plastic disposal as well as collection centres.
Uganda Manufacturers Association (UMA) in partnership with the Capital Markets Authority organized a Business Networking Event, held on 25th March 2021 under the theme; Financing Options for Manufacturing starting in the UMA Multipurpose Hall.
Financing Options for Manufacturing was premised on the need to avail alternative sources of finance to industrialists who have suffered from devastating shocks occasioned by the restrictions imposed to curtail the spread of the novel coronavirus.
This event was an activation of the MOU that was signed between the Uganda Manufacturers Association (UMA) and the Capital Markets Authority (CMA) on the 17th February 2021.
The aim of the MoU, among others is to create awareness through education; clinics for our members to walk them through the processes required to access financing through the capital markets; to have discussions with the Ministry of Finance around the statutory hindrances to accessing financing such as withholding on local capital and related taxes; if removed could enable manufacturers to access more financing.
The Chief Guest, Hon. Matia Kasaija, the Minister of Finance, Planning and Economic Development thanked the CMA and UMA for organizing the luncheon that aimed at among other objectives, reach out to UMA members; educate them on alternative non-bank financing sources such as private equity, private debt, public equity, and public debt.
The Minister, in his speech, recognized the importance of the manufacturing sector which is also underscored in Vision 2040 to facilitate an export-led and internationally competitive economy, which can spur growth and provide employment opportunities to Ugandans.
Barbara Mulwana, the UMA chairman, in her speech, thanked the CMA for their awareness of long-term non-bank financing options which is ideal for family businesses that are set up for long-term generational wealth.
The UMA Chairman also called upon Government to halt the heavy taxes imposed on the manufacturers who are faced with a slowdown in business due to the Covid-19 pandemic. She also called upon The Minister of Finance to allocate more resources to the CMA to educate more traders to join manufacturing to widen the import substitution drive.
Daniel Birungi, the Executive Director of UMA called upon the Government to resolve market access challenges faced by Uganda's manufacturers when accessing Kenya and Rwanda. He noted that mobilizing capital for production is a waste in absence of a market for these products.
Capital Markets Authority’s CEO, Keith Kalyegira said that his Authority is cognizant of the fact that most businesses in Uganda are family-owned and are hesitant to bring on outsiders in their businesses. He added that the UMA business networking event offered a platform to address some of the fears and challenges faced by business owners to increase their uptake of non-bank financing or market-based financing options while retaining control of their businesses.
The event hosted five (5) panelists who engaged in an informative discussion around;
- Available Non-traditional-finance options:
- Preparations Ugandan companies need to take up financing under the capital markets
- Funding for startups / small businesses under the Capital Markets
- Challenges faced when dealing with Ugandan firms:
- The requirements to take on financing under the capital markets
- Valuations, mergers, and acquisitions to grow your businesses
- Examples of businesses that have benefited from Financing Options under the Capital Markets;
Available Non-traditional-finance options
Available Non-traditional-finance options by Ms. Gladys Makumi – Deloitte.
Private equity investors: These come as financial investors but with the addon of working with the businesses to improve their efficiency and profitability and work for 5 to 7 years. Some of the private equity funders provide some kind of debt and technical assistance where required and they also try to work with the company around strategy; enhance their personnel, systems, and route to market.
Mezzanine financers: This is usually used as a stop-gap measure especially where a business does not want to cede control of its ownership in the business. This is ideal for family businesses that do not want to give up any form of shareholding to third parties within their businesses.
They provide some form of funding that is debt-like in nature where it will have a certain interest rate but usually structured around a bullet structure where you may pay it back after the term of the loan. For instance; you take up the loan to either expand or make certain operations within the business and after some time and the business is stable, then you repay the loan.
Corporate Bonds: This is where a company has a good track record and has been able to raise funding through the capital markets in form of a corporate bond in the market.