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U.S. Department of State

Diplomacy in Action

2010 Investment Climate Statement - Uganda


2010 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2010
Report
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Overview of Foreign Investment Climate
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Strong economic growth, open markets, and abundant natural resources provide good opportunities for knowledgeable investors in Uganda, though significant challenges exist. The Government of Uganda (GOU) has won acclaim for its macroeconomic management in recent years, and is currently revising a range of laws and regulations to create greater government accountability, open markets, develop infrastructure, and build a more attractive environment for foreign investment. The GOU has also been working to attract investors through increased budget allocations for infrastructure development. The GOU is continuing its commitment to invest in roads, with plans to spend $559 million in 2009/2010. The budget law also scrapped taxes on a range of goods and services, including schools, hotels, hospitals, agro-processors, and heavy truck transporters.

Business analysts believe Uganda has the potential for larger amounts of FDI, but they emphasize the GOU must address challenges related to the country's weak infrastructure, largely poorly workforce, political interference, and high levels of corruption. Though Ugandan mobile telephone services have improved greatly due to strong private investment, electricity and road networks urgently need renovation and expansion. With an installed total capacity of just 300 megawatts (MW), Uganda's electricity network reaches only 10% of the population, and load shedding all over the country is common. The dilapidated road infrastructure, meanwhile, increases transportation costs and leaves the entire country, which is landlocked, vulnerable to bottlenecks and disruptions. A major business challenge stems from the fact that a two-lane highway from Kenya remains the primary route for 80% of Uganda's trade. Uganda's dependence on this route was ably demonstrated in late 2007 and early 2008 when election-related violence in Kenya virtually halted trade into Uganda for more than two months, causing a spike in prices of all commodities.

In this context, new infrastructure developments as a result of budgetary allocations and private sector investment are all welcome. As noted above, the GOU is now renovating roads along key trade corridors, including the northern trade route from Kenya. Further, Uganda is investing $106 million on a national fiber-optic backbone to take advantage of the arrival of undersea fiber-optic cables in East Africa. This will eventually result in decreased costs and increased internet speeds as ISPs switch over from expensive and slow satellite connections. A 250 MW hydroelectric dam currently being constructed at Bujagali falls will come on line in 2011.

Beyond infrastructure, investors note that Uganda's social services systems and infrastructure are lagging behind the demand generated by economic expansion and population growth, perhaps Uganda's greatest challenge of all. At 3.2% per year, Uganda's population growth rate is one of the highest in the world. At this rate, Uganda's current population of 31 million is expected to triple in the next 30 years. While creating potential markets for producers of child care, health, and education products, the country's population explosion is already putting an increasing strain on social services, infrastructure and land resources. Corruption, meanwhile, is a serious problem and the GOU's political will to fight it remains highly questionable.

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Openness to Foreign Investment
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In general, Uganda has an open climate for foreign investment, creating a level playing field for foreign and domestic firms and providing attractive incentives for medium and long-term foreign investors. The Heritage Foundation's 2009 Index of Economic Freedom listed Uganda's economy at number 63 of 165 countries, and as the fourth freest economy of 46 countries in sub-Saharan Africa, based on factors such as the ease of doing business, openness to trade, property rights, and fiscal and monetary policy.

After decades of violent internal strife, President Yoweri Museveni has established over 20 years of relative political stability and economic growth in Uganda. He encourages foreign businesses to set up operations in Uganda, particularly in value-added manufacturing and agro-processing. Toward this end, the GOU created the Uganda Investment Authority (UIA) in 2001 as the lead government agency assisting foreign and domestic investors. A revised Investment code has been presented to Parliament. This new legislation will allow UIA to become a more effective one-stop shop for investors by granting it new powers to obtain secondary permits for investor operations, to allocate government resources for investment, and to provide government incentives for rural investment.

The GOU has recently begun to move away from a much-criticized emphasis upon ad hoc, venture-specific incentives for potential investors in favor of an approach aimed at leveling the playing field for all investors. In line with this approach, Uganda now offers investment incentives and has begun implementing reforms to ease business transactions. Ugandan officials often speak of using their location in the heart of East Africa to become a trade and logistics hub, and recent GOU investments in the road infrastructure play into this.

The UIA is also currently implementing a plan to construct industrial parks in the country's largest population centers. The government is financing the project with a $27 million World Bank loan and $10 million budget allocation. The first park is currently being constructed eight miles east of Kampala in Namanve, with electricity, sewerage, roads, and telecommunications infrastructure funded by the project and the government. Others parks will soon be built in Kampala, Mbarara, Mbale, Gulu, and Soroti. The UIA says that land at these sites is available and applications for development are being accepted. The government will subsidize investor costs, based upon a formula including the amount to be invested and other factors such as the number of workers to be employed by the venture. UIA is in discussion with the Interior Ministry regarding the Kampala site, in the Luzira neighborhood, which would require moving the country's main prison, Luzira, to a different location. For more information on incentives for investment, see the section below entitled "Performance Requirements and Incentives." Investors can also find information on the UIA website, at www.ugandainvest.com.

According to UIA, Uganda has had most success recently in attracting investors from the Middle East and Asia. Firms from Singapore, the United Arab Emirates, India, Pakistan, and China all obtained licenses for cumulative investments worth hundreds of millions of dollars in 2009, though firms from traditional investor countries such as Kenya, South Africa and the UK also obtained licenses. Firms invested primarily in the telecommunications, manufacturing, finance and energy sectors. In total, UIA granted licenses to 358 projects worth $1.57 billion in 2009. Due to the effects of the global financial crisis, this figure is roughly half of the UIA’s initial 2009 estimate. (Note: Actual investments are typically lower than commitments).

Uganda's success in attracting investors from the Middle East and Asia has prompted the UIA to focus further on attracting investors from these locations and to claim that U.S. and European investors unfairly deem Uganda too distant and politically risky. President Museveni emphasizes that he wishes to counter Africa's poor image as a place to do business, and he often speaks of developing Uganda's infrastructure, cutting red tape and removing other impediments to investment. Infrastructure development and the passage of new legislation has not proceeded quickly, however. The President also downplays other serious challenges that discourage foreign investment, such as widespread government corruption and the urgent need to create a more highly educated workforce.

U.S. foreign investment in Uganda remains relatively small. In 2009, UIA licensed three new U.S. investments worth $6.1 million. This raises the cumulative number of U.S. investment projects in Uganda to 70, valued at $308 million. According to the Uganda Investment Authority, the United States normally ranks as the fifth or sixth largest investor in Uganda, roughly even with China, and behind the United Kingdom, Kenya, India, the United Arab Emirates, and South Africa.

Ugandan policies, laws, and regulations are generally favorable towards foreign investors, though the GOU is badly delayed in revising urgently needed legislation. The GOU is revising more than 20 commercial and bankruptcy laws, some of which date back to the colonial era, in order to cut down administrative delays and reduce the cost of doing business. This includes terms to revise the Companies Law, modernize and speed up bankruptcy procedures, strengthen intellectual property rights protections, expand and clarify provisions on mortgages, update commercial contract law, and modernize provisions for e-commerce and electronic signatures.

Most of these laws should have been passed in 2009, but are either still being drafted or awaiting Parliamentary review. Parliament is currently overwhelmed with other legislation deemed to be more urgent. As such, these key commercial bills may be delayed until after national elections scheduled for February 2011.

The Companies Bill 2008 was introduced in Parliament in November 2009 and when passed and signed into law will be a revision of the obsolete Companies Act, which remains the legal basis for the regulation of companies in Uganda. Under both the current and future draft laws, foreign investors may form 100% foreign-owned limited or unlimited liability companies and majority or minority joint ventures with Ugandan partners without restrictions. Licensing from UIA requires a commitment to invest over $100,000 over three years. (See “Performance Requirements and Incentives," below.) Most foreign investors establish themselves as limited liability companies. Ugandan law also permits foreign investors to acquire domestic enterprises or establish greenfield ventures. The new Companies Act will allow for the creation of one-man companies, permit the registration of companies incorporated outside of Uganda, and provide new provisions for share capital allotments and transfers. For a full description of the type of companies that firms are allowed to establish, readers are encouraged to visit the UIA website at www.ugandainvest.com or see the Business in Development Network Guide to Uganda, available at www.bidnetwork.org.

Ugandan courts generally uphold the sanctity of contracts, though judicial corruption and procedural delays caused by well-connected defendants are a serious challenge. At times, GOU agencies have proven reluctant to honor judicial remedies issued by the courts. Courts apply the principles of English common law. Regarding debt collection, under current laws, creditors can prove their debts to a court-appointed receiver for payment. Secured debtors receive payment priority.

In recent years, the Uganda Revenue Authority (URA) has improved its efficiency, boosted transparency, and increased tax compliance. Part of this success is due to an internal restructuring, though the URA has also grown more aggressive in collection, targeting large, often foreign-owned businesses, due to the relative ease of enforcing compliance. Government revenue comprised approximately 68% of the national budget in fiscal year 2009/2010, up from 50% four years ago. The URA has set up offices throughout the country to provide local points of contact to address taxpayer concerns. Individuals are taxed at rates between zero and 30%. Business entities are taxed at 30%, though mining companies are taxed at rates between 25% and 45%.

The Investment Code allows foreign participation in any industrial sector except those touching on national security or requiring the ownership of land. The Investment Code also allows licensing authorities to impose performance obligations on foreign investors to which nationals are not subject. While the code does not specify these obligations, UIA imposes requirements as to size of investment, staff training, local employment, local procurement and environmental protection. (See section below, "Performance Requirements and Incentives.")

The World Bank has recognized the challenges of operating in Uganda's business environment and provided a $70 million credit in 2006 for the Private Sector Competitiveness Project. This program will help Uganda improve its basic infrastructure for business development. The funds are distributed through the Private Sector Foundation (PSF), a private business advocacy group founded with funds from the United States Agency for International Development (USAID) and that are being used to revamp the entire land registry system. Due for completion in 2012, the project also aims to modernize Uganda's business registration service, and support the Uganda Law Reform Commission in the revision of the commercial legislation. Other aspects of the project focus on developing private sector capacity and skills; boosting private sector productivity; and raising the quality, standards, and reliability of micro, small, and medium-sized enterprises.

Foreign investors in Uganda should be aware that projects that could impact the environment require an Environmental Impact Assessment (EIA), carried out by the National Environment Management Authority (NEMA). The requirement for EIAs applies to both local and foreign investors. In 2007, President Museveni withdrew plans to allocate a protected forest reserve to investors for the expansion of sugar cane and palm oil plantations after violent domestic protests and international criticism from environmental groups. Likewise, environmental groups raised serious concerns over the 250 MW Bujagali hydroelectric dam, delaying the project and causing some potential partners to pull out of the project. The dam is being funded privately, with a loan guarantee from the World Bank's International Finance Corporation.

Uganda's lack of adequate electricity supply and poor road infrastructure are major impediments for investors, as road blockages, load shedding, and unexpected power outages generate unexpected costs for all businesses. Uganda currently has just 300 MW of operational electricity capacity, leaving some 90% of Ugandans with no access to electricity at all. Completion of the Bujagali dam in 2011 will relieve some pressure. The GOU is seeking investors for the construction of an additional 1,045 MW of electricity generating capacity in the next five years, though demand is expected to continue to outstrip supply due to Uganda's economic and population growth. As mentioned above, the GOU is continuing its commitment to invest in roads, with plans to spend $559 million in 2009/2010. While this is down slightly from the $680 million spent in 2008/2009, it is significantly higher than the $390 million spent in 2007/2008.

The telecom sector is booming after the GOU lifted a moratorium on new mobile telephone operator licenses. This has generated new competition, lower prices, expanded coverage, and greater telephone penetration among the population and throughout the country. Further, Uganda is investing $106 million on a national fiber-optic backbone to take advantage of the arrival of undersea fiber-optic cables in East Africa. This will eventually result in decreased costs and increased internet speeds as ISPs switch to fiber from expensive and slow satellite connections.

Index/Ranking 2009 2010
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TI Corruption Index2.5 (130/180)--
Heritage Economic Freedom63.5 (63/183)--
World Bank Doing Business106/183112/183
MCC Govt Effectiveness.43 (86%).28 (81%)
MCC Rule of Law.32 (74%).39 (73%)
MCC Control of Corruption.02 (51%)-.01 (48%)
MCC Fiscal Policy-.5 (55%)-1.0 (54%)
MCC Trade Policy75.2 (75%)72.1 (73%)
MCC Regulatory Quality.51 (94%).55 (95%)
MCC Business Start Up.867 (42%).898 (39%)
MCC Land Rights Access.633 (56%).741 (84%)
MCC Natural Resource Mgmt65.45 (51%)64.98 (64%)

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Conversion and Transfer Policies
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Uganda keeps open capital accounts, and Ugandan law imposes no restrictions on capital transfers in and out of Uganda. Investors can obtain foreign exchange and make transfers at commercial banks without approval from the Bank of Uganda (BOU, the central bank) in order to repatriate profits, dividends, and make payments for imports and services. The BOU prefers that investors make large transfers through the Central Bank itself in order to help it monitor and maintain the stability of the shilling, though this is not a requirement. Investors have reported no problems with their ability to perform currency transactions.

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Expropriation and Compensation
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There have been no cases of expropriation since the restoration of stability in Uganda in 1986. Ugandan law states that the interests of a licensed investor may only be expropriated when, according to paragraph 26 of Uganda's Constitution, it "is necessary for public use or in the interest of defense, public safety, public order, public morality or public health..." The Constitution also guarantees "prompt payment of fair and adequate compensation, prior to the taking of possession or acquisition of the property." The Constitution guarantees any person who has an interest or right over expropriated property access to a court of law. Uganda is a member of the Multilateral Investment Guaranty Agency (MIGA) and the International Center for the Settlement of Investment Disputes (ICSID).

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Dispute Settlement
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With donor assistance, the GOU has reformed the commercial justice system, which now includes mandatory mediation for all commercial disputes. This procedure was created to help reduce the current case backlog. Uganda opened the first Commercial Court in 1999 and has three commercial court judges and one deputy registrar. Also, in 2007, a new law allowed for Chief Magistrates and Grade One Magistrates to adjudicate more commercial disputes, easing the burden on the commercial court judges. The court strives to deliver to the commercial community an efficient, expeditious, and cost-effective mode of adjudicating disputes. Some investors complain that the process favors local companies and that political pressures can disrupt and delay the final outcome. Despite a lack of funds and space, the commercial courts dispose of disputes within about seven months, as opposed to the several years it used to take litigation to wind through the Ugandan judiciary. However, commercial court judges estimate that 80% of disputes are settled out of court to save time and money. In the past, foreign businesses have complained that some judges delay ruling on disputes involving politically well-connected parties. The Center of Arbitration for Dispute Resolution (CADER) can assist in commercial disputes.

Uganda is a party to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Pursuant to the Reciprocal Enforcement of Judgment Act, judgments of foreign courts are accepted and enforced by Ugandan courts where those foreign courts accept and enforce the judgments of Ugandan courts. Monetary judgments are generally made in local currency. Ugandan penalties may not be a sufficient deterrent since the penalties have not increased to account for currency depreciation. Pursuant to Section 73 of the Arbitration and Conciliation Act, the GOU accepts binding arbitration with foreign investors. The act, which incorporates the 1958 New York Convention, also authorizes binding arbitration between private parties.

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Performance Requirements and Incentives
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As noted above, there are no mandatory performance requirements in the Investment Code, but licensing authorities may impose obligations on a foreign investor as a licensing condition. The most basic licensing condition is that investors creating 100% foreign-owned enterprises should commit in their proposals to invest a minimum of $100,000 to their projects over a course of three years. This amount can include pre-investment activities and the cost of land, equipment, buildings, machinery, and construction. Foreign-owned banks and insurance companies are also subject to higher paid-up capital requirements than are domestic firms. Some foreign companies have also encountered difficulty in obtaining land due to complex land laws and a non-transparent land registry. (For more information on land ownership, see "Right to Private Ownership and Establishment," below.)

The GOU's fiscal incentive package for both domestic and foreign investors provides generous capital recovery terms, particularly for medium and long-term investors whose projects entail significant plant and machinery costs and involve significant training. In Kampala, 50% of allowances for plants and machinery and 100% of training costs are deductible on a one-time basis from a company's income. A range of annual deductible and depreciation allowances also exist, resulting in investors normally paying substantially less than the 30% corporate tax rate in the early years of their investment. In order to promote export-oriented manufacturing investment, the GOU included several tax incentives in the 2008/2009 budget. These included a removal of the import duty on plant and machinery imports, as well as for schools, hotels, hospitals, agro-processors, and heavy truck transporters. The GOU also provides a 10-year tax holiday for investors engaged in export-oriented production and, if the investment is located more than 25 KM away from Kampala, for agro-processing investors. In the 2009/2010 budget some of these incentives were enhanced and others were introduced. Import duty on trucks with a carrying capacity of at least 5 tons was reduced from 25% to 10% and trucks with a minimum capacity of 20 tons now have no import duty. Taxes on spare industrial parts were removed and as was duty on insulated milk tanks.

The Law Reform Commission, which prepared draft bills for the GOU, has proposed new legislation on investment incentives, but further steps have not been approved by other GOU stakeholders. The new legislation would include an exemption on withholding tax on interest on external loans, repatriation of dividends to provide relief from double taxation, exemptions from duty on raw materials, and a waiver of export tax. Foreign investors should consult UIA and carefully evaluate depreciation allowances by region and sub-sector prior to investing. The GOU will often work with foreign investors to provide additional incentives, including further tax reductions, government subsidies, or the provision of land.

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Right to Private Ownership and Establishment
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The Land Act of 1998 codified many of the complex land laws in Uganda. Foreign companies or individuals may not own land, but they may hold it under long-term lease. Currently, foreigners must seek cabinet approval through the UIA for land to be used for agricultural or animal production purposes, but UIA states this provision is due to be repealed because it contradicts Uganda's Constitution and the Land Act of 1998. The GOU has not initiated any changes to allow foreign investors to purchase freehold property, however.

Businesses generally deem acquisition of land with a clean title as one of their biggest challenges. According to the International Finance Corporation's 2009 Doing Business Survey, Uganda's property registration process ranked near the bottom, at 167 out of 181 countries surveyed, down two places from a year before. It is estimated that there are more than 8,000 fake land titles in Uganda. As noted earlier, the Private Sector Foundation, with credit from the World Bank, is in the process of creating a new land registry system by 2012. The PSF is also in the process of establishing five land offices throughout the country.

The issue of land and title in Uganda is complicated by the existence of four different land tenure systems: customary, "mailoland," freehold, and leasehold. "Customary" land refers to generally rural land governed by the unwritten, customary laws of a Ugandan tribe in a specific area. Such land is typically easy to obtain but difficult to use, as no titles or surveys of such land exist and contracts are difficult to enforce in courts of law. Further, banks do not accept customary land as collateral. "Mailoland" is land granted to individuals and churches mostly in central Uganda when it was administered as a British protectorate. Such land cannot be owned by foreigners and the use of such land is subject to the agreement of "bonafide" or "lawful" occupants, who do not own the land but have the right to reside there. Such land is also generally problematic for foreign investors seeking secure, court-enforceable, use of land. This has been further complicated by new legislation, the 2009 Land Bill, which gives occupants and squatters increased rights on "mailoland" at the expense of owner rights. (Note: "Mailoland" is primarily found in Buganda, a traditional tribal kingdom in central Uganda). Freehold land is the system in which registered land is owned permanently. It is only available to Ugandan citizens, though it can be leased to foreigners. It can be also used as collateral for bank loans. Leasehold land is land leased by freeholders and is most commonly used by foreign investors. Foreigners may obtain contracts for leases of between 49 and 99 years on such land. It can be used as collateral on loans, depending on the length of the lease.

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Protection of Property Rights
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Domestic private entities have the right to own property and businesses and may dispose of them at will. The mass expropriation of Asian properties under the Idi Amin regime in the 1970s was the largest violation of this right in Uganda's history. Over the past decade, the GOU has actively returned or provided compensation for confiscated property to those who lost it. The Departed Asians' Property Custodian Board, located in the Finance Ministry, reviews the claims for property lost during this period.

The Uganda Law Commission has drafted new intellectual property rights (IPR) laws regarding counterfeit goods, but the law is awaiting Cabinet approval and passage in Parliament. The new IPR laws will impose criminal penalties of fines and up to two years in jail for patent infringement and for selling counterfeit trademarked or copyright goods. Still, business people who have reviewed the draft complain that some gaps in protection remain, specifically the law's heavy reliance on the under-funded Uganda Bureau of Standards for enforcement. The Uganda Revenue Authority, Ugandan Customs and the Ugandan National Board of Standards currently share enforcement of the existing counterfeit laws. These groups admit they lack the funding and resources to carry out the job adequately.

Many counterfeit goods are manufactured in China, and producers there are becoming increasingly sophisticated. Bootlegged CDs, DVDs, and computer software are openly sold in Uganda's market places. American manufacturers of consumer goods, particularly of shoe polish, batteries, feminine hygiene products, and ink pens, complain counterfeiters are badly damaging their markets. They argue fake goods serve as a deterrent to future foreign direct investment and damage their brand names. The GOU is also losing hundreds of thousands of dollars in tax revenue every year due to understated custom duties from those transacting in counterfeit goods.

Ugandan customs, police, and prosecutors have initiated criminal proceedings against some recipients of illegal goods, but these cases have languished in court for several years without result. Under Section 32 of the Patents Statute of 1991, the Registrar of Patents awards patents for an initial period of 15 years, with a possible five-year extension if a request is made one month before expiration of the original term. Ugandan laws provide similar protections for copyright and trademark holders. Uganda signed the World Intellectual Property Organization's Patent Law Treaty in June 2002, but has not yet ratified it.

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Transparency of Regulatory System
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Ugandan laws and regulations are published in the Government Gazette, but the regulatory system lacks internal transparency and varies substantially by regulatory body. Government agencies often have hearings, both public and private, where interested parties have an opportunity to comment on draft legislation and regulations. Agencies do not always observe all legal provisions, however, failing to hold hearings, ignoring the requirement for public tenders, ignoring regulatory violations, or providing other types of assistance to well-connected local businessmen. The UIA provides assistance to potential investors in navigating the regulatory process.

Many Ugandan agencies require potential and current investors to cut through substantial amounts of red tape for normal business transactions. The International Finance Corporation's 2009 Doing Business report found, for example, ranked Uganda 111 of 181 countries for ease of doing business, down six places from a year earlier. The study found that it takes 25 days (and 18 separate procedures) on average to open a business in Uganda. Starting a business in certain sectors, such as mining, may take substantially longer. General infrastructure hindrances such as poor telecommunications and increasing amounts of traffic in Kampala slow down certain processes. Some government officials require that firms interested in government procurement contracts provide under-the-table, cash payments in person at local agency offices. Regulatory inefficiencies and corruption negatively affect foreign and domestic firms equally.

The Bank of Uganda is reasonably transparent, but the legal system is less so. Courts, particularly at the upper levels, have made independent judgments in the past. However, some parties to legal proceedings take advantage of the legal system's inherent delays and incoherence to manipulate judicial outcomes.

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Efficient Capital Markets and Portfolio Investment
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Capital markets are open to foreign investors. The GOU imposes a 15% withholding tax on interest and dividends. Credit is allocated on market terms, but lending to the private sector is relatively limited, and rates are high. This could change, as following the lifting of the moratorium on new banks in 2007, a number of new banks have entered the market bringing the current total to 21. Many banks have holdings of GOU Treasury bills and bonds that are often larger than their commercial loan portfolios. Rates of return on government-issued bills and bonds have declined over the past three to five years, causing banks to begin shifting their focus to commercial lending, however. During the 2008/2009 fiscal year, commercial bank lending to the private sector grew by 40.1%, according to the BOU. However, interest rates remain high. Rates for prime borrowers for domestic debt currently range from 17% - 19%. To further increase competition, the BOU has begun publishing interest rates for the various financial institutions.

The Capital Markets Authority Statute of 1996 and subsidiary regulations address the licensing of broker/dealers and of stock exchanges, and established the Capital Markets Authority (CMA) as the securities regulator in Uganda. The Uganda’s Securities Exchange (USE) was inaugurated in June 1997, and is now trading the stock of 11 companies.

Foreign-owned companies are allowed to trade on the stock exchange, subject to some share issuance requirements, and the Kampala exchange contains cross listings of four Kenyan companies: Kenya Airways, East African Breweries, Jubilee Holdings Ltd., and Kenyan Commercial Bank. The East African Development Bank also lists bonds on the USE. The CMA expects the listing of the National Insurance Corporation in 2010. Due to the global financial crisis, market capitalization of the USE declined by 9% from $3.1 billion to $2.8 billion.

The growth of the USE in 2009 was low, in part due to the current global financial crisis, which has negatively impacted investor appetite for emerging market assets. Large local businesses are reluctant to list on the stock exchange for fear that the disclosure requirements could expose them to greater tax liabilities. Additionally, some of Uganda's largest firms are family-owned operations reluctant to open up to outsider control. Eight companies currently provide brokerage services, including two American-owned firms, MBEA and Crested Stocks and Securities. The license to operate the exchange is held by the USE, a company formed by seven of the eight licensed broker/dealers and investment advisers.

In November 2003, the GOU enacted a collective investment law to allow investors to pool funds to be invested on the USE and in government treasury bills and treasury bonds. In December 2004, CMA licensed African Alliance Uganda to operate the first Ugandan collective investment scheme. Since 2004, the BOU successfully issued two-, three-, five-, and ten-year government bonds. The GOU hopes that by creating a benchmark yield curve it will encourage private companies to access the debt markets. These longer-term government bonds absorb excess liquidity from the market, and help bring down short-term interest rates.

Overall, the banking industry is well capitalized and has no serious non-performing loan problems. Tighter BOU supervision, including more stringent inspections and higher capital requirements, has helped the sector recover from a banking crisis in the late 1990s when several bank failures led to the closing of several institutions. Following a decade-long moratorium on new bank licenses, the BOU provided licenses to seven new institutions in 2007, bringing to 22 the number of banks in Uganda from just 15 a year before. The total size of the commercial banking system has risen to $3.8 billion in 2008, more than two times larger than a year previously. Most banks are foreign owned, including major international institutions such as Citigroup, Barclays, Stanbic, and Standard Chartered. Ugandan banks remain conservative and have been criticized for a lack of enthusiasm when it comes to lending to all but the largest blue-chip operations. Interest rates for 12-month corporate loans generally run between 19% and 25%.

The BOU remains one of the most respected central banks in sub-Saharan Africa for its success in keeping markets open, the shilling stable, and inflation relatively low. Its independence, however, has been called into question by evidence that the President has pressured the bank governor to cover debts incurred by politically connected businessmen. The GOU is urging donors to move their accounts from commercial banks to the BOU, claiming it is necessary to control levels of cash in circulation for monetary stability and inflation control purposes.

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Competition from State-owned Enterprises
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The GOU began a privatization program in 2001 that has resulted in the sale of 128 firms, with 30 remaining in state hands. Of these, 15 are scheduled for divestiture in the next three years. The program has attracted foreign investors primarily in the agri-business, hotel, and banking sectors. The GOU has shown a willingness to consider debt/equity swaps in which government ownership in companies is transferred to private sector minority shareholders on mutually acceptable terms. Though generally deemed successful, some observers question the transparency of certain transactions carried out in the name of privatization, arguing that the benefits of the most lucrative sales went to insiders.

State-owned enterprises currently exist in the mining, hotel & hospitality, agro industry, housing, and transport sectors. In some of these sectors, the GOU is not directly involved in the running of the business but remains a shareholder. The GOU is open to competition from private investors in all of these sectors. Uganda does not currently have a Sovereign Wealth Fund. However, that may change in the next decade as Uganda experiences an increase in revenue due to oil production.

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Corporate Social Responsibility
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In Uganda, corporate social responsibility (CSR) projects are expected from many of the larger foreign enterprises. This is especially true in the extractive industries and other sectors in which regular business operations do not directly benefit the community. While consumer buying habits are rarely based on CSR, some large corporations have experienced community pressure and social unrest when local residents do not see any direct benefit from their presence. While many enterprises in Uganda espouse some of the CSR principles under the OECD Guidelines for Multinational Enterprises, key areas such as combating bribery and corruption are routinely ignored.

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Political Violence
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The Governments of Uganda, the Democratic Republic of Congo (DRC), and southern Sudan began joint military operations against the Lord's Resistance Army (LRA), a Ugandan rebel group in DRC territory, on December 14, 2008. The operation was launched after LRA leader Joseph Kony failed to sign a Final Peace Agreement (FPA) aimed at ending the 23-year-old conflict. There have been no confirmed LRA attacks in northern Uganda since August 2006. Improved security in the north has allowed the vast majority of the 1.8 million internally-displaced persons there to return to or near their homes. In north-eastern Uganda, armed cattle rustlers of the Karamojong and related ethnic groups continue to raid cattle and propagate violence.

Approximately 28 people were killed and more than 100 injured during two days of rioting, from September 10-12, in Kampala in 2009. The riots were sparked by the GOU’s refusal to allow the King of Buganda to travel to the town of Kayunga north of Kampala.

The State Department has issued a Worldwide Caution with specific information for Americans considering travel to East Africa due to the region's continued threat risk from international terrorism along with the recent increase in terrorist attacks elsewhere in the world against perceived soft targets such as hotels, bars, restaurants, and places of worship. High levels of criminal activity throughout Uganda will remain. Spontaneous demonstrations can sometimes occur in Kampala and other cities. Although infrequent, these demonstrations can become violent and should be avoided. Though reconstruction and development activities of northern Uganda have intensified following the area's conflict, the region is still characterized by poor security services, varying road conditions, and a lack of emergency services throughout the northern region. Though security concerns are on the whole no greater than in previous years, American citizens considering travel, employment, or investment in Uganda should read the Country Specific Information available at www.travel.state.gov for current security information.

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Corruption
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Widespread corruption damages a business environment that would otherwise provide a fairly level playing field for foreign investors. Uganda fell a further four places in 2009 to 130 after falling 15 places in 2008 to 126 on Transparency International's (TI) corruption perceptions index. According to TI, a score lower than 3.0 indicates "rampant corruption." Uganda's score was 2.5. Uganda shares the same score with Honduras, Ethiopia, Guyana, Libya, Eritrea, and Mozambique.

In 2010, the U.S. Millennium Challenge Corporation's (MCC) scorecard placed Uganda's efforts to control corruption at 48% in its peer group, or just below average. Based on a similar ranking in 2007, the MCC board determined that Uganda qualified for "threshold country" funds to help the country improve this rating so that it might qualify for MCC funding. USAID and the Department of Justice just completed the MCC's two-year $10.4 million Threshold Country Program, which was designed to strengthen the capacity of Uganda's anti-corruption agencies and enhance prosecutorial efforts. While this program was effective at enhancing some of the technical capacity for fighting corruption, political will remains absent. This program is not being renewed for 2009/2010.

The nature of corruption in Uganda is complex. While outright bribe-taking (and requesting) does exist, the misappropriation of government funds and assets, graft, influence peddling, and the flouting of public procurement procedures also occur. Several high-profile government corruption scandals in recent years have resulted in few or no sanctions against the officials involved. Where the GOU has initiated criminal proceedings against high-level officials, the cases have dragged on it court with no resolution.

Foreign businesses are not specifically targeted for bribes and payoffs; nor are they immune. American firms have noted some difficulties due to lack of transparency and possible collusion between competing business interests and government officials in tendering processes. Reportedly, some foreign businesses have been urged to take on prominent local partners. Government procurement, particularly for defense items, is not transparent. In previous years, several high-profile government tenders for infrastructure projects were suspended following allegations of corruption. Some American firms, which are bound by the U.S. Foreign Corrupt Practices Act, suspect they have lost tenders to bidders from countries which have not criminalized the paying of bribes to foreign officials.

Anti-corruption legislation, regulations, and ethics policies do exist in Uganda, but much of it does not meet international standards as established in The United Nations Convention Against Corruption and the African Union Convention on Preventing and Combating Corruption. The Penal Code Act (Chapter 120, Laws of Uganda) and the Prevention of Corruption Act (Chapter 121, Laws of Uganda) criminalize the offering or receipt of bribes. Penalties range from fines up to $3,000 and/or up to 10 years in prison. Other legislation, including an anti-counterfeiting act, remains before the cabinet and has not yet been presented to Parliament. Anti-money laundering legislation has been presented to Parliament, but it is unclear when it will be passed. As this legislation was supposed to pass in 2009, some speculate that high-level officials are stalling the legislation because it could damage private interests of those who benefit from the status quo. Whistle blower legislation has been presented to Parliament per Uganda’s commitment to do so in its MCC Anti-Corruption Threshold Country Plan. President Museveni has appointed a cabinet level official and an Inspectorate of Government to focus on corruption, but meaningful progress remains elusive.

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Bilateral Investment Agreements
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Uganda is a member of the World Trade Organization. Uganda, along with its counterparts in the East African Community (EAC) -- Kenya, Tanzania, Rwanda, and Burundi -- signed a Trade Investment Framework Agreement (TIFA) with the United States in July 2008. Uganda has also negotiated bilateral tax treaties with several nations, including China and South Africa. The EAC also signed an Economic Partnership Agreement with the EU in 2007. As noted above, in 2007, leaders of COMESA approved the final steps leading to the launch of a customs union by December 2008. Currently, only thirteen of the nineteen COMESA member states are participating in the COMESA Free Trade Area (FTA). Uganda, though a member of COMESA, is not a participant. Uganda was among 26 countries which signed onto an initiative aimed at establishing an African free trade zone stretching from Cairo to Cape Town in October 2008. According to the initiative, the members of the EAC, the 20-member Common Market for Eastern and Southern Africa (COMESA), and the 14-member Southern African Development Community (SADC) will draft a roadmap for creating a single trading bloc that would speed economic integration and therefore help African economies compete in the global economy. Observers remain sceptical that the entire group of countries is truly interested in the initiative.

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OPIC and Other Investment Insurance Programs
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Uganda is a signatory to the Multilateral Investment Guarantee Agency (MIGA) of the World Bank and is a member of the International Center for the Settlement of Investment Disputes (ICSID). In 1965, the U.S. and Uganda entered into an investment incentive agreement. Both parties signed an updated agreement in 1998, but the Ugandan Government has yet to ratify the renewed agreement. In 2003, the Overseas Private Investment Corporation (OPIC) signed a master guarantee agreement with Citigroup to establish a lending risk-sharing facility in Uganda for local loans. In 2004, Export-Import Bank signed a similar master guarantee agreement with DFCU Bank. In 2007, the Export-Import Bank upgraded Uganda's financial guarantee availability to "long-term," which, at up to twelve years, is the longest guarantee available through the Bank.

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Labor
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Education and expertise are low in Uganda, though Uganda's universal primary education program is improving basic skills. Most urban Ugandans speak English, though many speak it only as a language second to one of 33 tribal languages spoken in Uganda. Labor unrest is sporadic in Uganda, and labor unions are not strong. Employers must contribute an amount equal to 10% of an employee’s gross salary to the National Social Security Fund (NSSF). Labor laws also specify procedures for termination of employment and termination payments. Foreign nationals must have a permit to work in Uganda.

Uganda cooperates with the International Labor Organization (ILO) and has ratified all eight ILO conventions.

The National Organization of Trade Unions (NOTU) is the largest labor federation, and includes about 15 unions. Its rival, the Central Organization of Free Trade Unions (COFTU), includes five unions. An estimated 855,000 of two million persons working in the formal sector belong to unions.

Uganda's Industrial Court is funded directly by the national budget (not through the Labor Ministry), and the President of the Industrial Court has the status of a judge. The Industrial Court has the power to re-instate employees who are improperly dismissed, and to impose fines against employers.

Approximately 100 district-based labor officers have responsibility for inspecting workplaces and processing worker and management complaints. This mechanism contributes to the enforcement of labor standards but its chronic lack of staffing and resources hampers its effectiveness.

In May 2007, the GOU launched its national child labor policy. Comprehensive anti-trafficking in persons legislation was passed in April 2009. There are active programs underway, with support from the ILO and the U.S. Department of Labor, to combat child labor, but the practice nevertheless remains a concern in Uganda, particularly in the informal sector. The United States continues to support the GOU's entire child labor and anti-trafficking efforts through the ILO and other implementing partners.

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Foreign-Trade Zones/Free Ports
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The Free Zones Bill of 2002, which will authorize the creation of Free Trade Areas (FTA) within Uganda, is still awaiting final Cabinet approval. Still, with a $24 million credit from the World Bank, the GOU is currently in the process of creating three FTAs: the Kampala Industrial and Business Park, Luzira Industrial Business Park and the Bweyogerere Industrial Estate. Incentives such as duty drawbacks, originally included in the pending Free Zones Bill, are reflected in the latest Finance Act (i.e., the 2008/2009 budget).

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Foreign Direct Investment Statistics
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The values quoted below should not be relied upon for any investment decision. The figures provided by the UIA are highly variable and inconsistent, both year-on-year and by sector. According to the UIA, the values tracked are only for projects listed. No investors provide periodic updates after the initial registration. Historically, actual investment has trailed planned investment totals by a factor of five. FDI statistics provided by the World Bank (revised). Any discrepancies with previous reports are a result of re-evaluations.

Net FDI ($ mln)FY04 FY05 FY06 FY07 FY08
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Inflows295.42379.81644.26797.27787.4
Outflows (Residual)00000
** Figures provided by the Uganda Investment Authority

Value of Projects Licensed by Uganda Investment Authority (listed in $ millions)
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Sector2005 2006 2007 2008 2009
Agriculture, Hunting, Forestry and Fisheries66.772.2128.9960.89203.27
Community, Social and Personal Services------41.0634.1066.35
Construction22.1232.46223.8358.10175.88
Electricity, Gas and Water.303---742.50173.3469.93
Financing, Insurance, Real Estate, Tourism & Business Services75.53351.6109.90380.89309.84
Manufacturing158.8291.2325.36641.23577.36
Mining & Quarrying20.410.4888.2530.3653.8
Transport, Communication and Storage81.97468.6444.81946.1284.35
Wholesale & Retail Trade, Catering & Accommodation Services------218.3355.9031.04
TOTAL425.8231,226.552,223.032,380.931,571.82



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