Monday, March 19, 2012

UGANDA’S HAZARDOUS BUSINESS ENVIRONMENT, PART II

Three years ago in this column I wrote under the headline “Uganda’s hazardous business environment” how a tirade by the then Energy minister Hillary Onek on the Bujagali dam project, was sending mixed signals about government’s commitment to the project and may very well jeopardize other major investments.

I argued that investors would rather settle for lower rates of return, which are assured than come to Uganda with its allure of double digit returns which are iffy at best. I wrote that uncoordinated troop movement by government agencies heighten the uncertainty of our investment climate, reducing the sums invested and lowering the quality of investors we attract.

So last week my jaw dropped to the floor in bewilderment on hearing what is happening to cement manufacturer Hima Cement.

Hima Cement, whose parent company is Lafarge one of the largest cement manufacturers, have two quarries – Dura and Hima, near the western Uganda plant.

Last year the company commissioned its new $120m factory that more than doubled their annual production to 850,000 tons of cement. An investment of this magnitude suggests the company was sure of its supply of limestone a key ingredient in the manufacture of cement from the two quarries they have running leases on at Hima and Dura.

You probably could have knocked Hima’s top bosses when they received notice from the new owners of the Hima quarry at the end of January, asking them to vacate the site so they can take possession.

It turns out that the Geology department in the Energy ministry transferred the lease in January working on the assumption that Hima’s lease on the quarry expired at the end of last year.

In this one transaction all civil service records of efficiency were shattered as the new company East African Gold Sniffing Company went from getting a prospecting license to full exploration license in 19 days – including three weekends, between 5th January to 24th January 2012. This process at the best of times takes months if not years to complete.

In a nutshell what this means is that if the cement producers lose the Hima quarry the 500,000 ton-a-year factory they commissioned last year will be rendered useless and they may as well dismantle it and take it elsewhere.

Is it conceivable that Lafarge would have plonked down $120m so close to the expiry of their lease and then forgotten to renew the lease?

And who are these officials in the geology department, which department has all Hima’s projections for their use of the quarry, who can jeopardize multi-million dollar investments so casually and get away with it?

Selling a country to investors is like any other sale. You have a product. You highlight its positives and while acknowledging its deficiencies, show the buyer how the pros far outweigh the cons. But more importantly the seller needs to understand the buyer’s context – his needs and wants, seen and unseen, so he can appeal to those parts of his psyche that will lead to a successful closing of the deal.

Any investor worth his salt assesses all potential deals with a view to preserving his precious capital, while looking to get the best possible return for the least possible risk – in that order.

Governments looking to attract investment to their shores need to understand this at a very visceral level.

Uncertainity is a major investment risk. The more certainity there is in the investment environment the better the businessman can project his returns, the cheaper the cost of capital and the more likely are the predicted returns to occur.

A correlation can probably be found that shows a decline in the character of foreign investment to your country the more uncertain the environment you have. With long term, sustainable investments on one hand and gamblers, speculators and money launderers on the other.

If our goal is sustainable development that will reduce poverty and increase affluence uniformly around the society then you want more of the former and less of the latter.

As it is we are seating on a time bomb. More and more youth are coming into the job market and we are doing less than a commendable job of finding them work. These idle youth will be the cause of future national instability.

Frustrating quality investors – Hima is the biggest single exporter and manufacturer in this country, is not the way to ingratiate ourselves with investors.

1 comment:

  1. Mr Busharizi's article was very erroneuous, in my humble opinion, and there are many outright lies in it. For one, when the GSMD Officers do not have much investor work to do and a Company's application is well presented technically with all the necessary documents, one can get an exploration license within less than a month. The prospecting license is really a carry over from the colonial days and like the physical beacons, serves little practical purpose in today's environment - of high-res GPSs and Remote Sensing and GIS data analysis,etc.,

    Mr Busharizi does not seem to recognise the fact that his readers are not idiots and the readers can know that the concerned officers in the GSMD must have had good-to-them, mining-act-based reasons as to why they could take such a shock and awe decision. And Mr Busharizi knows the basis on which the GSMD people acted as they did.

    And in this process, Mr Busharizi is doing no less harm than a well trained national economic saboteur would. And this does much harm as well as to the credibility of the 'news' that New Vision puts out. I got a message seeking clarification from one Mining Investor and at the end she actually said that she did not also believe that article - given her little experience with the Management of and Mines Section people at the GSMD.

    For example, when a lease has expired, the GSMD people have no legal basis to turn down an exploration license application for such an area. They could be sued and legally so. Everyone knows that smart people just took advantage of Hima managements's arrogance and incompetence and it must be Hima to deal with this and not the government on behalf of Hima Cement. Of course if the GSMD and Ministry management think the officers concerned could have conducted the affairs in another way, especially given that Hima is a valuable tax payer, that is another matter altogether. And we should be honest and know that the way Hima came out during and after the Dura saga, could not have made friends for them, out of many truly patriotic Ugandans.

    We should not forget that although Hima is a valuable investor, a valuable taxpayer, they are not a charitable organisation and the more taxes they pay, the more money they are making. They cannot be seen to be allowed to just use the Government of Uganda, anyway they like because they are paying a lot of taxes. This in itself would send many investors away, because investors would want to see the Mining Act enforced without preference to one company's previous status or political connections - as was seen to be done for Hima in the Dura debacle. Investors want to know that given a jurisdiction's legal mining regime, they can come in and set up business in any mining venture and compete with anyone. The contrary would not be good signals to investors. Actually to use Mr Busharizi's words, this is not the way to ingratiate ourselves with investors.

    Uganda is actually one of the best Mining Destinations the world over, where honest and serious investors are well respected and helped and that the GSMD, even in an environment where the GSMD staff is the least respected and facilitated in the Ministry, they really try to do their best, in the interests of Uganda, as the former Commissioner's testimony in PAC re Dura clearly brought out.

    The cost of doing mining business in Uganda is very low and the environment very welcoming and supportive, when approached with respect for the local people, honesty and straightforwardness. Local-area leaders in regions where deposits are located are now more aware of what the development of the resources in their areas can do for their people and the country; and once treated with respect and in an honest and straightforward manner, are very supportive of exploration and mining ventures. And so do the relevant Members of Parliament and Ministry Officials and the current President.

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