Tuesday, April 18, 2017

BUY UGANDA, BUILD UGANDA, ABOUT TIME

The recent announcement by the trade minister Amelia Kyambade that government is going to push a bias towards Ugandan goods and services is a timely one.

Currently Uganda is in the midst of an economic slowdown triggered by among other things, recent drought, an emphasis on huge infrastructure projects, delays in the development of the oil sector and plugging of certain leakages to government funds, which facilitated corruption.

One of the challenges for the Ugandan business is one of little internal demand for locally produced goods, which is further exacerbated by the free movement of goods and services through the East African Community (EAC).

"And because we are not producing, we are not creating jobs at a fast enough pace, out terms of trade are worsening as we continue to export raw commodities whose value fluctuates widely from year to year while we import higher value goods, a situation which does not favour our shilling nor our individual standards of living...

The objectives of Buy Uganda, Build Uganda (BUBU) include that in the next five years 20 percent of all government procurement by value should be sourced locally and that the 50percent of all shelf space in the market should be dedicated o Ugandan goods.

If executed well this is a useful initiative.

Government is the biggest client of any single group. A commitment by government to direct it’s sh24trillion budget towards production it can have a ripple effect through the economy.

But first our producers must produce.

Barely 20 years ago Vietnam was just making up the numbers in the world of coffee exports.
But beginning at the end of last century Vietnam’s coffee production jumped. They are now second only to Brazil as coffee producer, sending more than 25 million bags to market last year.

Uganda coffee exports have grown to just under 4 million bags annually over the last 20 years.
Vietnam were able to ramp up production by doing away with collective farms and letting the private sector play a more central role and in strategic government interventions especially in the provision of inputs and extension services.

That aside a sizeable amount of Vietnam’s coffee is consumed in-country and through their own initiatives have seen its coffee take first priority over other coffees in restaurants, schools and government offices.

"We like to talk about industrialisation but 50 years into our independence there is little we produce on an industrial scale. The BUBU initiative may be the kick we need to get off our backsides. The initiative if executed half decently should see government beefing up demand for our local products, which would have to scale up production....

The point is that to talk about industrialisation while not organising production means it will continue to be a pipe dream. And we are not even talking about huge land holdings being put under coffee. There will be a few farmers who can manage huge plantations but by increasing the productivity of our small holder farmers, who currently harvest about half a ton per hectare, well below their farms’ potential then the benefits of increased production will be more widely spread.

In business the effectiveness of one’s execution will depend on the human resource you have at your disposal, efficiency of the operations and the effectiveness of your strategic process. It wold not be stretch to say we are deficient as a country in three areas but we are particularly bad on strategy. 

Human resource is the essential ingredient but once your strategy is lacking or non-existent there is really nothing you can do about marshalling the other two components.

It is heartening to see in the coming budget government has not only earmarked funds to hire more extension workers but has also scrapped VAT on extension services. A lot more has to be done to make possible affordable agriculture finance, robust agro-processing and export promotion incentives.

Sticking with coffee, Brazil the world’s biggest producer of coffee – it produces three times as much coffee as Vietnam is so invested in the crop because of the ripple effect through the economy. It not only exports bean, but also has developed its own coffee brands that compete favourably at home and abroad. But Brazil is also on the cutting edge of coffee research and development which not only means they will always be increasing the productivity of their farms but has spawned alternative uses for the aromatic bean – from cosmetics to pesticides to fertilisers and even military applications.


All these are jobs from maximising the potential of one crop. Now imagine the magic we can conjure from all the crops we can produce in this country?

Tuesday, April 11, 2017

BITING THE BUJAGALI BULLET A CAUSE FOR SOUL SEARCHING IN UGANDA

It was reported from parliament last week that among the tax proposals government is laying on the table is a tax exemption on the income on the Bujagali Hydro Power Project for the next 16 years.

The genesis of this move has to have been the real desire to lower power tariffs as a spur to industrialisation.

As it is now Bujagali dam offers the priciest power of all our dams, mostly because the debt repayment element on our other dams is not a significant cost.

"Two years ago government threatened to buy off the dam as a way to lower the tarrif. At the time industry sources familiar with the subject that Kampala would have to come up with at least $1.4b to pay off the other shareholders on the project Sithe Global and the Aga Khan’s Industrial Promotion Services (IPS) and retire all the debt...

If they could do this with cash they wold have loped off $6.7 cents of the $11cents average tarriff Bujagali is selling power to the Uganda Electricity Transmission Ltd (UETCL). This $6.7 cents is what goes to debt repayments and shareholders.

With its various infrastructure commitments it’s understandable that government did not have that kind of money lying around. So that was a nonstarter.

As it is now of the $11cents sell-price to UETCL, the aforementioned $6.7cents is the largest components followed by $2.3cents for taxes and government repayments and $1.0cent goes towards operations, maintenance and administration.

The next best thing would be to extend the concession period to say another 50 years from the current 30. This would have the net effect of stretching out the debt over a longer period – we would pay more in debt over the longer period but projections show that the tariff will almost half to about $6.6cents.

One other thing would be to pay off all the debt, which comes to just over $500m and this would account for $3.8cents of the tariff. But again there is the sticky issue of where to find the cash. 

"Frenetic attempts last year to refinance the debt – essentially contract newer debt under more favourable terms fell flat as the treasury has very little wiggle room to contract new debt...

Government has resorted to a waiver of income tax on the project until 2033, a situation they probably did not want to find themselves in but really had no choice given the circumstances. If along with this waiver government forgoes its dividends from the project may just bring down to about $7cents a unit.

This might be the breathing space government needs until Karuma and Isimba come in at the desired $5cents a unit. Industry players are dubious that that will happen in the short to medium term.

Clearly the high Bujagali tariff is a function of the source of financing. When the 250MW project was being put together the demand for finance from Asia and the Middle East was at all-time highs, this also affected the mobilisation of plant and machinery. No sooner had they begun work on the dam than the global financial crisis exploded and the credit markets seized up.

As if that is not enough in risk profiling countries – determining their willingness to repay the loan Uganda’s relatively weak fundamentals means projects cannot access money at the low rates that Europe or Asia or even South Africa can.

Our infrastructure needs are urgent. We are still playing catch up for the lost 1970s and 1980s when no new infrastructure was built. This despite the population almost doubling during the period. That we need more infrastructure to generate more growth is hard to dispute.

The challenge as the Bujagali project has shown us is that we are hamstrung in our ability to raise affordable financing for these projects. High cost projects mean the economic benefits may not materialise as fast as we want them to.

If we had more long term savings available in the economy we would have been better placed to structure a better deal.

Which brings us around to the issue of pension reform. Pension reform is necessary not only for NSSF to work better – there are some initiatives they have in mind but can not implement for lack of a legal framework, but also as a means to mobilise more savings for deployment on such projects.

Concerns that foreign pension schemes can fold shop and disappear with our hard earned savings are valid and should not be ignored.

"The worry too that by fully liberalising the market we might not have say over the deployment of the resources, with private managers choosing to invest in real estate and services rather than manufacturing and agriculture – the productive sectors, are valid too...

Managers reporting to headquarters in the US, Europe, South Africa or even Kenya only care about showing a good bottom line in the short run rather than think long term. The law can be written in such a way that these pension managers behave in line with our development agenda.


The writing ios on the wall the issue of mobilising savings can not be put off any longer.