Tuesday, May 28, 2019

IF UGANDA GOVT MUST GO INTO BUSINESS IT MUST THINK LIKE A CUSTOMER


Last week I happened upon a commentary by Kenyan economist David Ndii in which he, in not so many words criticized planners for thinking and acting like simply processing commodities was the way to add value to them.

Using the experience of coffee he demonstrated that roasting coffee is not necessarily where the value is created in the coffees you buy off the shelf.

He complained that the problem with planners is that they operated from the supply chain side and not from the value chain side, dooming many of their well-intentioned plans to death on arrival...

Ndii made the distinction between the two by explaining that supply chain analysis would involve thinking from the input side – availability of raw materials, the production process and getting it out to market, while value chain analysis would involve thinking from the final consumer’s angle and working backwards.

There is a world of difference between the two ways of thinking and their eventual outcomes.

I have abbreviated his commentary – and very badly I suspect, but with this information one probably can see why governments are bad at business.

The key motivation of governments is to stay in power, everything else has to define itself by how it meets that requirement. Given the short political cycles, governments are often keen for quick wins which don’t have to necessarily translate into service delivery – service delivery, believe It or not, may not be key to them staying in power.

Hence their preference for supply chain thinking. Just build the classrooms, clinics or whatever as tangible, physical evidence that we are working.

The businessman on the other hand is thinking, or should be, about the end consumer of his product or service. The theory that if you build it they will come, is a myth as any businessman will tell you.

Last week a report run that the lauded Soroti Fruit Factory was not operating. This was weeks after the management said they needed sh35b from government to pay off farmers and for use as working capital.

So all the fanfare of the opening was clearly to impress President Yoweri Museveni.

Even more bizarre in 2016, MPs visited an ice plant in Buyende near the Bukungu landing site in eastern Uganda. Government had splurged sh2.4b on an ice plant to fishermen preserve their catch.
The plant had been completed in 2011 and had not produced so much as an ice cube because it was not connected to the grid. I wonder whether it is working now.

When we joke about uncoordinated troop movements in government isn’t it that they are stuck in this supply chain thinking? Can you blame them given how governments think?

You see it too in the relaunch of Uganda Airlines. We are celebrating because we have got two planes – again supply chain thinking. If its promoters thought from the end consumers’ perspective they would do things very differently.

You see it with the Kiira Motors Corporation, whose stated aim is to commercialize a venture that started as university students’ assignment. Setting up an assembly line, never mind the viability of the enterprise as a standalone project, if we thought from the value chain side of things we would do the project very differently.

"All the people manning these projects are not stupid people, far from it, but clearly they have been caught up in government thinking...

It is not rocket science and makes the difference between success and failure for these projects. Governments out of some false pride may try to sustain these projects but the laws of economics eventually prevail and they have to throw up their arms in surrender and let them go.

The problem with this is by the time they give up they will have sent billions of much needed cash down the drain. Monies that would have shown a much better return if funneled into education, health, infrastructure and even security. (Already government has reneged on a agreement to boost teachers salaries)

The promoters of these projects tend to couch the rationale for these projects in nationalistic rhetoric and pay little to no attention to the value chain.

Let us assume that the planners are pushing these projects out of some honest omission, that they carry out no value chain analysis, what would we like to see so that these projects --- if the government really must do them, can have a decent chance of success?

"They should focus on the output they want to achieve and work backwards...

So in the case of the fruit factory in Soroti what do they want to achieve? Processed juices that can be marketable locally and abroad. Do they have to be the ones who build it? No.

In the case of the ice plant in Buyende what do they want to achieve? Higher incomes for fisher men in the open market. Do they have to be the ones to build it? No.

The Kiira Motor Corporation? Where is the market for the expected vehicles? Can we service those markets competitively and sustainably? How can we do it more cost effectively, because it’s not as if we have money flowing out our ears?

Uganda Airlines? We want to have more visitors to our borders (support tourism)? Do tourists come because we have a plane or because there is something to see in this country? Is the airline the best use of our money to achieve the stated aim?

Of course this is thinking from a business perspective, but we know, governments have weightier issues to deal with than business!

Monday, May 27, 2019

HOPEFULLY THE ANT WILL BE A BREATH OF FRESH AIR


This week a new party the Alliance of National Transformation (ANT) was launched bringing to 26 the registered political parties in Uganda.

The party is led by Major General Mugisha Muntu who broke away from Forum for Democratic Change (FDC) after he lost his bid to retain the leadership of that party in 2017.

Prior to that he was the army commander of the National Resistance Army (NRA) and did time as army representative in parliament.

Observers remain on the fence, but it is hoped that ANT will evolve into a credible party to break the duopoly of the NRM and FDC and give the people more choice during the elections.

We have seen opposition parties and coalitions come and go, with them barely denting the hegemony of the NRM over the last two decades or so.

"For ANT not to suffer the same fate as its hapless predecessors, it will have to do several things consistently over the next few years in order for it to at least overhaul the FDC as the top opposition party or at best be the ones to dislodge the NRM from its vaunted position.

There is a place for charismatic personalities in any political contest, but even more important is organization from the grassroots upwards that make the difference. There are no flukes.

While President Yoweri Museveni cannot be faulted on charisma, this is also backed up by a nationwide organization which can project his message ahead of himself. The power of incumbency cannot be wished away.

What the opposition has failed to do and continues to fail to do, is to commit to building those nationwide structures. The proof of this is there for everybody to see.

Apart from Museveni winning the presidency the NRM has 293 of the 426 seats in parliament and has 82 or three quarters of the 109 district chairmen to its name. In parliament the independents are then the most populous block with 66 seats followed by FDC with 36.

"These numbers are not just academic. These politicians and their separate networks provide the foot soldiers for their respective presidential candidates. Not even Museveni can visit every one of the people who have voted for him, but you can rest assured that either the party MPs, district or sub county politicians and their networks have done so in the course of a campaign.

If anyone wants to put up a credible challenge for the presidency this disparity in grassroot support has to be addressed urgently. And given the gap, bridging it may not even take years but a decade or two of diligent, consistent work in the trenches.

So if ever there was a man for the job it would have to be Muntu. While charisma may not be his forte, he knows from experience commanding the national army in times of war, what it takes to build an army, preempt or react to enemy action and eventually take and secure the high ground.

And he better than most would know that it does not come with a snap of the finger but with hard thankless work.

And he better than most would know that the adulation of the masses does not always deliver a result, so he will guard against being seduced by the praise singing of his most ardent supporters and keep his nose to the grinding stone building the network he and his party needs to become challengers...

It is romantic to think that one can sweep out the NRM, which has built its structures – however chaotic them may seem, over the last three decades by sloganeering and posturing for the cameras. 

Good luck.

Given, the opposition does not have the advantages the NRM had when it was building its own infrastructure. When the NRM rose to power they immediately suspended party activity, coopted some party bigwigs into government and basically had free rein to sell its vision around the country unchallenged.

The opposition are coming up against an opponent entrenched in its position and determined not only not to cede ground but to also win what little the opposition is hanging on to.

Given that the options for armed insurrection have narrowed it will require more intelligence than the hail and brimstone the current opposition seem to favour.

Tuesday, May 21, 2019

MOBILE MONEY BECOMING A FACTOR IN BANKING


The banking industry is back up again thriving and making money, hand over fist, if the industry filings, which ended at the end of last month, are anything to go by.

"Deposits were up, the loan books were bulging at the seams and bad loans as a percentage of total loans were down almost a third from 2017....

According to a report in the Business Vision on Thursday customer deposits grew seven percent to sh19.5trillion from sh18trillion, loans were up 10.3 percent to sh12.7trillion while non-performing loans were down by 32 percent.

If the bank is lending more to the public it helps the economy grow as this credit is invested in setting up or expanding existing operations and for consumption.

But the revelation of this year’s banking results has to be the Kenyan based Commercial Bank of Africa (CBA). The small bank with its headquarters in Nakasero has been outside the top ten banks in all measures, but last year burst through with some prodigious numbers that has had industry watchers seat up and take note.

Customer deposits were at sh134b were up 58 percent, more than eight times the industry growth average, growth in the loan book was almost double the industry’s growth rate and interest income jumped 36 percent as a result.

And while the industry net profit fell back 19 percent to sh751b from sh770b in 2017, for CBA profit made a quantum leap to sh567m in 2018 from a loss of sh1.3b the previous, a jaw dropping 143 percent jump. All this they achieved out of two branches.

"This was the first profit the bank had shown since it reopened for business in Uganda in 2014. It sold out its earlier operations in 1969...

So what happened to this bank? Are these results sustainable going into the future?

The public secret behind this numbers is MoKash, the mobile money service that it runs with mobile phone company MTN that allows the bank to receive deposits and lend money to the public over the mobile phone platform.

The bank received a license from the central bank in 2016 to provide the service and launched it to the public in October 2017.

With this single move they had access to the mobile phone company’s more than five million mobile money accounts, multiplying their account holders many times over. Currently MTN reports it has just under seven million mobile money accounts.

The way the service works is that MTN’s mobile money users can open a MoKash account and begin saving. A loan limit, how much the customer can borrow is adjusted depending on the customers’ savings account activity and later how his loan account behaves. Loans are dispensed within minutes of being applied for.

The interest rate is steep – nine percent a month, but is clearly not deterring borrowers from snapping up the opportunity.

Any banker worth his salt would see the veritable gold mine the bank is seating on. For a fraction of the cost of opening branches all around the country, they have roped in millions of accounts; for a fraction of the cost of administering regular borrowing clients, they have signed up thousands of new borrowers. The icing on the cake of course is that while cutting their costs down to the bone they are charging them multiples of the industry average – their lending rates comes to about 108 percent a year.

Or is the real icing on the cake that their bad loan provision is under one percent of their loan book?
One can expect their lending rates to come down as the competition enters the field and they perfect their business model.

But we shouldn’t be surprised. Across the border in Kenya telecom company Safaricom through its own MPesa service has been trailblazing these products not only in the region but are recognized world leaders in the extension of such financial services through the mobile phone.

"Last year revenues from MPesa made Safaricom Kshs75b(Shs3trillion) or 31 percent of total revenues. Essentially that one in every three shillings for the telecom company is coming from the financial end of the company a trend that continues to grow – it grew 19 percent last year and can easily be at par with the voice and other messaging products within five years...

In Uganda mobile money is doing what the banks have struggled to do for decades, there are currently more mobile money accounts – about ten million all told, than all the accounts in the banking industry which has about five million accounts.

What is most heartening is that mobile money has found a way to reach, and continues to reach, those who don’t have accounts or even had hope of getting a bank account, in a cost effective way that makes sense for all concerned.

As if we didn’t see it coming already it also signals a change of banking as we knew it.

When I first tried to get a bank account the high street bank conditions were so onerous I didn’t bother. They required an opening balance of sh300,000 and that I maintain a minimum balance of sh100,000. This made sense at the time because of the low technology adoption and labour intensive processes. This also why they used to open at 9 am in the opening and be done with business by 1 pm.

Now thanks to technology we have those same services at our finger tips and increasingly 24 hours a day, seven days a week – including public holidays.

CBA has obviously got first mover advantage, a situation that will not maintain for very long as other banks, taking a lead from CBA find a way to worm their way into that space.

Monday, May 20, 2019

US-CHINA TRADE WAR BAD FOR ALL, LESSONS TO LEARN FROM


On Monday this week the US triggered a 25 percent increase in tariffs on $200b worth of goods from China. In retaliation China has also said it will raise tariffs on $60b worth of US imports starting at the beginning of June.

The trade relations between the two largest economies have been contentious for years with both sides accusing each other of unfair trade practices.

There will be real costs to the US and Chinese economies – estimated in hundreds and billions of dollars, but also to other economies around the world.

By definition trade wars affect the flow of trade across borders and regions, this has the knock on effect of reducing incomes and therefore the living standards of people on either side of the trade war.

As a trade war bites jobs are lost as businesses are shut down and to add insult to injury, commodity prices go up pushing affected populations deeper in the hole.

"In addition to encouraging inefficiencies in the market, with higher prices businesses that were previously uncompetitive are revived or started to fill the gaps. That would not be a bad thing – as they may create new jobs, but as soon as they are up and running the businesses then join hands to maintain the status quo – the trade war, so that they can continue to thrive. The consumer who pays more for often lesser quality, is always the loser in the end....

To illustrate the point imagine that Kampala introduced a tariff for matooke coming from outside the city. The first thing that will happen is that matooke prices will jump. While for a while people will pay higher prices, they will with time more likely shift to other substitutes unaffected by the tariff.

The matooke plantations of central and western Uganda will be forced to lower the price of their price until it doesn’t make sense – when the sale price is lower than the cost of production and they will look for other markets or convert the plantations to grow maize or cassava.

This will have several repercussions for the matooke connoisseurs of Kampala, not least of which the price of matooke will increase even further as supply dwindles, but will also lead to many of the jobs in the industry being lost – from the loaders and off-loaders, the matooke peelers and cooks and even the livestock which will have developed a taste for the peels will have to be fed alternatives, lowering their production as they acclimatize to the new diet.

If the tariff is kept higher for longer some people will try and convert valuable real estate in Kampala into matooke plantations, since the higher prices of the food may make it a viable proposition to convert valuable real estate to growing matooke.

These investors who will be making a killing, will gang up and create a lobby group which will resist any attempts to lower or remove the tariffs on matooke, dooming the good citizens of Kampala to more expensive, poor quality matooke for the foreseeable future.

Is it conceivable that people of Kampala can ditch matooke altogether for posho or cassava or sweet potatoes? Stranger things have happened.

The truth is that trade wars affect the majority and benefit a small minority, who then fight to maintain or aggravate the trade war in total disregard to the plight of the everyday man.

Look around us, whenever a company or industry is supported against competition, which is what a trade war is about, it is generally inefficient – charges higher for lower quality goods and even the said benefits of jobs and supporting suppliers go to a small connected population.

"In US President Donald Trump’s fight to shore up industry in his country, the higher tariffs are being paid for by his own citizens. The retaliatory tariffs that China has lined up target his key political constituents, who will suffer a double whammy...

China has emerged as a leading economy because it has found a way to produce anything cheaper and in huge quantities, hence keeping costs down, the result being an improvement in living standards even in the US.

The world is changing. Lower value manufacturing industry’s have been moving east steadily, as more developed western economy go up the scale of value addition, into the knowledge industries. Trump is trying to subvert this trend because it seems easier than to invest in retooling the countries education system for the knowledge industries.

China too will suffer as the US is the biggest market in the world with not even Europe able to suck up the surplus that would come with such a war. One can expect jobs will be lost there as factories close or scale down production.

They say that an eye for an eye makes everyone blind.

Monday, May 13, 2019

WHO WANTS TO BE PRESIDENT OF UGANDA?


In the last week Presidential aspirant Robert Kyagulanyi has done the smart thing to get himself a spokesperson. In my mind this is a serious declaration of intent.

But in the last week too I have been working on a project that looks back to the eighties and how governments have been planning for the country. My conclusion is that no one can pay me enough to be the president of this country of ours.

"This country faces many challenges but top of the list has to be translating economic growth into improved livelihoods for all Ugandans...

Economic growth is a given in this country. The economy has been growing consistently since 1985 when there was last a contraction in the economy. In that year the economy contracted by 3.3 percent.

Most people think that in order to improve service delivery we need to contain corruption. Which makes sense. Corruption not only deprives people of proper services but has the dual effect of concentrating resources in fewer and fewer hands, aggravating the issue of the wealth and income inequalities.

The Auditor General recently reported that as much sh485b went unaccounted for – a euphemism for stolen, from the government coffers. If that money was used to lay roads, it would tarmac more than 100 kms of road at a million dollars or sh4b a kilometer. Opening up a road, leave alone tarmacking one, has huge economic ripple effects allowing access to markets for both producers and suppliers.

But looked at against the bigger picture of a sh32trillion budget, the Auditor General’s figure accounts for 1.5 percent of the budget. Seen in this light one wonders whether corruption is the real problem in service delivery. Of course it is possible the Auditor General did not capture the full extent of the “eating” in government, so let us double the figure, triple it even and you are not yet at five percent of the budget.

One can argue too that the amount that is eaten even if it’s not a major part of the budget maybe funds for key components of the budget without which everything grinds to a halt. That’s fair.

"Corruption – using a person’s position for private gain illegally, should not be condoned at all but given the figures, one begins to wonder...

But as earlier stated the national budget this year was sh32trillion or in simpler terms the government ear marked sh800,000 to spend on every Ugandan in this financial year. This was supposed to take care of everything – security, roads, power generation, education, health etc etc. of this amount half of it or sh400,000 went to servicing debt, so effectively the government planned to spend sh400,000 per Ugandan for the whole year.

If it hasn’t struck you yet, imagine living on sh400,000 a year or about a thousand shillings  or about $29 cents a day?

Finland spends the equivalent of sh40m per year on its citizens, Norway sh107m and even neighbours South Africa earmark sh77m per citizen annually.

Rational governments in this position can do one of two things. Either reduce on the people it is servicing – cut UPE, shut down free health care and rationalise police stations to serve the tax payers and ignore the rest; Or they can push for higher tax collections by charging higher taxes or roping in more people in the tax paying bracket.

That is why the question, Who wants to be the president of Uganda?

To be the president of Uganda you have to promise an improvement in living standards. Given the pitiful purse we now have that is not going to happen soon.

"In a democracy where you have to lean towards populism to win the vote, a campaign based on scaling back government programs will be a losing strategy, as will a campaign based on taxing more and more people – as it stands now only about two million of the 11 million workforce pay taxes on their incomes....

If I harbored presidential ambitions I would be agitating for government to widen the tax base, effectively put them under pressure to collect more taxes. I would achieve two things with this strategy, one, the government would become more unpopular – who wants to pay taxes and two, they would have done the heavy lifting for me, so that when I take over I can use the expanded treasury to improve service delivery.

QED!

Tuesday, May 7, 2019

LET US NOT LIE OURSELVES


Lately there has been a gathering momentum for government to restart state enterprises, everything from Uganda Airlines to the Uganda Commercial Bank and everything in between.

I have my own thoughts about the motives around this drive, but I will take its proponents’ reason at face value.

They argue, not necessarily in this order, that this is to curb the outflow of money from the economy, that the government needs to be more involved in directing the private sector, that it will create more jobs for Ugandans and markets for local suppliers among others. I am sure you will remind me if I have missed any.

"It is true of course that foreign investors repatriate their profits to their home bases every so often. First of all why should we be surprised or even offended by this? By definition the investors do not live in Uganda and need to have their returns sent to them where they are...

Secondly, how much they repatriate maybe over exaggerated.

Companies through the course of their business earn money, revenue, from which they meet their expenses – some foreign and hopefully a lot local, the net is profit. His profit in a competitive sector is about 20 percent of total revenues or less. This profit is taxed at a rate of 30 percent by the government. The rest of the money is the owners’ to do as he pleases, his payment for risking his capital. If they are interested in a sustainable business most of this money is ploughed right back into the local business and some of it is repatriated, about five percent or less of total revenues.

So you have to wonder about these massive outflows to themselves that people accuse foreign investors of.

Of course what is true is that there maybe huge payments to foreign suppliers, but that is a genuine cost of doing business. So for instance a bank may spend a lot of money on software or a telecommunications company on hardware or a manufacturer on machinery and chemicals.

The New Vision for instance last year out of revenues of Sh90b spent sh16.8b on raw materials – mostly imported paper, inks and other printing inputs. This is about a fifth of all its revenues. It paid taxes of sh1.8b and total dividend of sh1.9b or about two percent of total revenues. About half of this dividend payout went to the government as the majority shareholder.

And by the way according to the Auditor General’s report, of the twelve profitable state enterprises, only New Vision declared a dividend to its owner.

The point is that if these companies are repatriating funds, on closer scrutiny you may find most of those are costs of doing business than returns to its owners.

By logical extension if you set up local companies in the same industries in order to keep in business they will have to source a lot of their materials abroad until local alternatives are available. So they will send out just as much money as their “evil” foreign counterparts.

If you are in a competitive industry the local alternative to meets your requirements is always the best to ensure you compete favourably. A prudent businessmen would not source abroad what he can get locally.

"It was hilarious recently during an online discussion that someone suggested that the entrance of Uganda Airlines would lower the cost of travel as they will be charging in Uganda shillings. I argued that, that would not be good business sense if most of their inputs from ground fees to accreditation to international regulators to air space rights are charged in hard currency. I never heard back from him....

The argument that government should be more involved in the economy is beyond reproach.
However, they need not do that by going into business themselves. Governments set the environment for business through regulation, fiscal policy and enforcement.

In the case of Uganda Airlines it is probably cheaper for government to go to British Airways or Emirates or Brussels Airlines and negotiate a cheaper rate for people flying to Uganda (because we have it in our heads that people are not coming here because of expensive tickets!) than starting our own airline. It may take reducing taxes of them landing in Uganda, cheaper aviation fuel or giving them tax free status here, if we believe expensive fares are keeping tourists away.

And finally that state enterprises create jobs for locals. Sometimes I don’t know whether to cry or laugh. A cursory look around Uganda’s labour market shows that up to 90 percent or even more, of the workers around are Ugandans – even in the 100 percent foreign companies. So the issue of Ugandans not being employed in foreign companies does not stand up to scrutiny.

And secondly a company’s labour requirements are dictated by the market’s needs. If the market demands more of your product you hire more or if not you cut your labour force. Unless you are suggesting that government will employ or keep people on the payroll when they are doing nothing? 
Wouldn’t it be better if government just used tax payer’s money to pay unemployment benefits than distort markets and doom the economy to certain decline?

"Taking the proponents of this new “Move to the left” at their word, I suspect a lack of understanding of how business works and therefore how to improve the business environment....

The new boss of the Uganda Development Corporation (UIA) a former senior official at the National Planning Authority (NPA) Patrick Birungi was reported to have admitted recently that in the few days he has been at UDC he has learnt that it is much harder to do than plan.

Foreign investors are not angels. It may very well be some of them have devised dodges around our tax system. My feeling is that their greater premium on reputation is such that they are more likely than not to play by the rules than break them. A damaged reputation for them, more than for us, can cost them a lot of money.

And when they do break the rules, its often due to our negligence or in connivance with our own people. Let us fix those loopholes before we throw this baby out with the bath water.