Wednesday, February 26, 2014

ON THE RIGHT WAY FOR GOVERNMENT INTERVENTIONS



It all seems very easy. If government is so keen on growing the economy why doesn’t it get into the business of doing business itself? After all it has sacks of money at its disposal?

If only life was so simple.

Last week President Yoweri Museveni commissioned a tomato processing plant in Nakaseke and launched a special economic zone in Kaweweta, also in Nakaseke. Almost at the same time the director of the Presidential Initiative on Banana Industrial Development (PIBID), Reverend Florence Muranga was being detained in parliament for not cooperating with the Public Accounts Committee (PAC), which was looking into the accounts of the project.

And in the letters page of the New Vision someone lamented the tax incentives BIDCO got to set up a palm oil industry on Kalangala island.

All these initiatives have two things in common they are all agro-based projects and they are being supported by government. What seems to determine the success rate is the nature of government involvement.

For two of the projects – the Nakaseke initiatives, it is too early to judge their results but for the banana project and BIDCO sufficient water has gone under the bridge to make a qualified assessment of their success or lack of thereof.

With the PIBID government decided to go it alone, staffing the project, financing research and bankrolling production. Eight years down the road and our super market shelves are not overflowing with its products. Or maybe they are still in development or their communications people are not doing their job.

BIDCO on the other hand, while braving sniping from the environmental lobby are single handedly lifting Kalangala into the formal economy, introducing farmers on the island to a new cash crop, providing market for their produce and yes their products are on our shelves.

A decade into the project and BIDCO have invested $150m, brought 20,000 acres under the crop, provide employment for about 40,000 directly and indirectly and have brought in additional $21m in taxes.

Government support in the project is in way of access to land, infrastructure development and some tax incentives that reflect the long term nature of the project.

The difference is as plain as night and day.

Where the government has identified credible investors, negotiated the support they will lend projects have more or less succeeded. But where government has jumped into the fray itself and tried to develop an industry the results have been dismal.

The old economists taught that there were three factors of production – land, capital and labour. This have to be manipulated for production to take place. Later the role of entrepreneurship and management, distinct from labour, was recognised as the missing ingredient in the equation. 

One reason government attempts at business collapse is because they are manned by technocrats.

A technocrat, unlike an entrepreneur needs the resources to be in place in order to start working. 

Often the technocrat has no sense of making a return on the capital that is entrusted to him, after all if the enterprise collapses he will be transferred to another enterprise. The entrepreneur, while he learns some of his best lessons from failure, needs minimal resources to kick off and will do everything to ensure the enterprise succeeds.

The urgency for job creation and economic growth is clear and present. Government needs to be thinking in terms of the most efficient deployment of the resources at its disposal – mostly capital and land and matching it with entrepreneurial and managerial capacity to get the desired outcome.

The model that seems to pip all the rest is for government to identify projects with long term and far reaching benefits to the economy, attract investors foreign and local to these investments, mitigate away as much of the risk as is justifiable and let them run with the project.

During the privatisation process of the 1990s, quite a few projects fell through because government in trying to appease the locals was unwilling to make the necessary concessions to allow credible businessmen to take some of our derelict companies.

A case in point was the Coffee Marketing Board (CMB) whose key asset apart from the land on, which it stood was the roasting plant that could handle Uganda’s entire export crop of four million bags at the time. Government wanted to flog half the company off, valuing its assets at about $30m. 

Two rounds of tendering saw the leading offer—both times by Swiss coffee trading giant Sucafina, plummet from $8m to $4m. The plant probably rusted and was sold for scrap and the buildings were home to the ill-fated Tri-Star Apparel project, which was also bedevilled by poor design and management.

Nothing is perfect as even the best designed projects can fail, but the odds seem strongly in favour of a hands off approach to its partnerships with the private sector, the two projects in Nakaseke may, with time, confirm or disprove this thesis.

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