WHAT WE NEED IS A STRONG VENTURE CAPITAL INDUSTRY

It gets a bit confusing.

The official statistics show the economy remains on a growth path, but on the ground business is slow, shops are shutting down and the real estate bubble is suffering a slow puncture.

"Clearly the overall economic picture is good, but not for everybody. It could mean either the economy is sputtering to a halt or is winding up for the great leap forward....

I choose to believe it’s the latter rather than the former.

One, because this is the only country I have and it would better if it worked and two, because the government is clearly committed to making the key investments in physical infrastructure that will power the economy to the next level.

On that second point however you can have all the infrastructure in place and nothing happens. It’s not automatic that because you have power that economic growth will ensue. The Bujagali dam is currently operating at an average of 65 percent of its capacity because demand for power is not uniformly higher.

As an economy one of our key challenges in ensuring sustainable economic growth, driven by the private sector and not on the steroids of government spending, is that while we have a lot of start-ups they don’t last for a combination of reasons, but most especially for lack of support from the environment.

Foreign Direct Investment is all very nice, but as along as indigenous capital is not given a chance to rise and thrive, the trickledown effect will always be a pipe dream.

People are coming to this realisation and a rethink of the liberal economic policies of the last two decades have been mooted. The suggestion is that we should bring back the parastatals, God forbid!

At the heart of their thinking is that government companies can be used to force lending rates down, channel cheap finance to businesses and invest in things like a national airline, which the private sector has failed to do.

The people pushing this agenda have either been seduced by the TGE (Tushabe gavumenti etuyambe) mantra or see these entities as easy ways to get jobs and contracts having failed to match up in the private sector or both.

If there has to be government intervention this intervention should come in bridging the gaps in the financial sector that will lend much needed support to Small and Medium sized Enterprises (SMEs).

As it is now we only have commercial banks, with their extortionist lending rates. In other economies in addition there are venture capitalists, private equity companies and any number agencies to help small businesses transition into bigger companies.

It’s important that small businesses are supported because you can’t have big businesses without first having small businesses. All big businesses started as small businesses.

Uganda Development Bank (UDB) is good. There is even a place for Uganda Development Corporation (UDC). But if government is really serious it needs to invest in the venture capital industry. And I am not talking about running out and starting a state venture capital fund but investing in creating the infrastructure – policy, regulatory and human resource, to support the industry.

Venture capitalists (VCs) not only provide the high risk capital to support start-up businesses but also hold the small companies’ hand in its transition to a bigger company.

Our commercial banks are not geared to provide this service. VCs mostly provide equity funds rather than loans, this means they only get paid when the business becomes profitable or is sold. VCs because they are intimately engaged and familiar with the business have an interest in seeing it succeed so not only will they pony up more funds during the company’s stages of development but will also provide technical assistance to ensure the company survives.

Commercial banks on the other hand need you to service your debt regardless of whether you are profitable or not.

Because even in the best of economies only about one in ten companies survive to see their fifth birthday, VC take on huge risk that commercial banks cannot justify to their investors. If VCs are competent the one company that comes good will pay for all the losses they took with the other companies.

Even in this industry governments are not the best promoters – I can just see billions of shillings going to relatives and connected people with nothing to show for it at the end of the day. But laying down the necessary infrastructure and even some small time attempt by a desk in UDB, maybe what is needed to set the private sector on to this potentially lucrative industry.

"As it is now Ugandans might be the most entrepreneurial people in the world, which they are, but the sink or swim environment in which the operate means that we are wasting this at a criminal rate considering the urgent developmental needs of this country...

So yes government needs to step in to grow indigenous capital but not by starting more parastatals.