KENYA OIL FIND AND IT’S IMPACT ON UGANDA

Last week Kenya announced it had discovered oil in the desolate Turkana area in the country’s northwestern region, throwing up ugly regional chest thumping that was not only uncalled for but missed the point of regional integration entirely.

Tullow’s Kenyan unit struck oil at a depth of about 1,000 meters. The company has a licence to prospect in an area over 67,000sqkm or about six times the size of the licences in Uganda.

“The oil that was discovered in Kenya is much lower than what has been discovered in Uganda,” Energy minister Kiraitu Murungi said, speculating that the deposits could be more than the hundreds of millions of barrels discovered in the neighbouring country.

"Of course minister Murungi is an honourable man and will be forgiven for being over effusive in his assessment of Kenya’s prospects, but any oil man worth his salt knows you cannot make such sweeping statements after drilling only one well....

In the earlier part of the last century around 1925, twenty seven oil wells were drilled in western Uganda. Oil was discovered but commercial viability could not have been determined at the time. They plugged up the wells and went away.

Uganda has determined commercial viability now after 63 wells have been drilled.
Some Ugandans have suddenly got into their heads that now that the Kenyans have discovered oil the long term viability of our own oil industry has been put in jeopardy.

Their argument suggests that because of the new find interest in Uganda’s proven reserves will wane when viewed against the less than certain results of the Kenyan wells.

To put the Kenyan find in perspective the Ngamia-1 oil well puts Kenya where we were at the beginning of the last decade a less charitable assessment actually suggests that they are where we were in 1925.

Ugandan experts suggest that Kenya’s development if fast tracked will be where Uganda is today in a minimum of three years.

All the above not withstanding we are not in competition with Kenya. Just as southern Sudan remained unbothered about our finds.

Going by current confirmed reserves of around two billion barrels it is expected that at the peak of our production that we will be drawing up to 200,000 barrels a day. Currently Uganda’s oil demand stands at about 34,000 barrels a day and regional demand many times over. A recent study said that by 2015 regional demand would have jumped almost fourfold to 37 million tons from ten million tons in 2010.

And these estimates are based on known demand, suppressed demand – that demand that only shows up when supplies have been established, may push these figures much higher.

"A real concern for Uganda may be if Kenya reneges on a deal signed in around 2007, which mooted the regional development of a second refinery to be located in Uganda. Uganda’s waxy oil dictates that if we built a pipeline to the coast for instance it would require heating to keep the oil flowing, with our irregular power supplies this could prove a challenge....

The commercial viability of a refinery has been established and with or without regional help we should be able to set it up ourselves. It is in our strategic interests to refine our own oil, capturing all the value that come with refining.

Not only may we be able to produce petrol, diesel, kerosene and aviation fuels the oil byproducts have uses in the pharmaceutical, plastics and cosmetic industries.

What would be useful for the region would for each of us to put aside our parochial interest and work at maximizing the leverage to the region that these new heaven sent bounties can afford us.

For example we might want to develop them together, maybe each country should take out equity in each others projects. This way we can guarantee each others markets for the projects, extract more value from our resources and attract credible investors.

If this region becomes an oil and gas producing region – Tanzania, Rwanda and Mozambique are far along the way to developing their own natural gas resources, we can begin to punch above our weight if well utilized. And that is where the focus should lie not in nursery ground my-daddy-is-stronger-than-your-daddy antics.

THE BEGINNING OF WARREN BUFFET'S BILLIONS

Although I had no idea, age 25 was a turning point. I was changing my life, setting up something that would turn into a fairly good-size partnership called Berkshire Hathaway. I wasn’t scared. I was doing something I liked, and I’m still doing it.

#KONY 2012: A CASE OF THE END JUSTIFYING THE MEANS?

At the beginning of this month the video Kony2012 was uploaded on to Youtube.

The video uses the plight of “night commuters” thousands of children who fled the surrounding villagers and descended on Gulu by night to escape possible abduction from their homes, to highlight the savagery of the LRA.

The video’s promoters have unabashedly called for more military aid to the affected nations to put rebel leader Joseph Kony out of action once and for all.

By the time of writing this article, the 30-minute video had been watched more than 84 million times, the video literally went viral.

The producers were hoping for 500,000 viewers when they uploaded the video. But a combination of strong emotional cues – read suffering children, the suggestion that viewers could make a difference by passing it on and the roping in celebrities from Justin Bieber to Oprah Winfrey to transmit the video, all made it possible for it to become the most viral upload in history.

However criticism of the video has also come in fast and thick as well.

The detractors have rounded off on how the video has simplified the suffering of the people in northern Uganda during the two decade long civil war and also how things have moved on, that the video is not relevant to the present time.

You know what they say, if you wake up and find your friend is an overnight success know he has not been asleep.

The footage from the video dates back to 2003 when a trio of US youth – Jason Russell, Bob Bailey and Laren Poole stumbled upon the “night commuters” after a failed bid to document the southern Sudan civil war.

Touched by the plight of these kids trapped in a war that was none of their making and with seemingly no sight in end, at least according to these “parachute” journalists, the young men went back to the US and started a campaign in campuses and highschools to spotlight the kids plight and rally support for a more determined effort against Kony.

They reached hundreds of thousands of children with their video and by 2008 it had become the top foreign policy issue for US students, according to Time magazine, on par with the anti-apartheid campaign of an earlier generation.
Since then Kony became the first individual to be indicted by the International Criminal Court, the US congress has passed a law directly targeted at the LRA and President Barack Obama has sent 100 special-operations troops to help bring Kony to book.

So the video’s recent success on social media was not an overnight success. In fact it is a perfect case study for the “tipping point” phenomenon.

Truth be told, by the time the filmmakers happened on the LRA insurgency in 2003 it was on its last feet in northern Uganda. The 9/11 attack on the World Trade Center, the subsequent isolation of the Khartoum regime – Kony’s backers for a long time and Uganda’s withdrawal from the DRC all conspired to ensure that the LRA’s days were numbered.

The video and the reaction to it makes one think.

To begin with Africa’s issues cannot gather much traction in western conscious unless we play to the stereotype that they can relate to: of war, disease, poverty and blood thirsty big men. The filmmakers played to this stereotype and while it offended our delicate African sensibilities, they got the more than the desired reaction from their target audience – the youth of America.

But isn’t that how you tell a good story? You find the audience where it is with its preset prejudices and misconceptions and graft your tale on, if you don’t you lose them.

It’s a classic case of does the end justify the means?

Secondly it is clear that the main stream media will never give Africa’s message a chance. It is telling that these middle class youth had had no inkling of the LRA and Kony in 2003 more than a decade after the insurgency begun, despite it having been reported intermittently on western media.

Fortunately the proliferation of social media today may give our stories a fair shake. We can circumvent the traditional media and get our message straight to the opinion leaders in western capitals.

And finally this story is a good illustration of the fact that no meaningful achievement comes without work driven by a far sighted conviction.

You may criticize Invisible Children’s co-founder Russell for his lack of appreciation of the nuances of the conflict and championing a cause he knows little or nothing about. You may criticize him for trying to bankroll his NGO with proceeds from the video – I heard they had already racked in about $5m. You may even criticising him of overlaying a good guy-bad guy Hollywood script on real human suffering.

But you cannot criticize him for not backing up his passion with action in the best way he and his friends knew how, something you cannot accuse some of the “leaders” nearer the action.

I suspect some of our averse reaction to the video is our sense of guilt at being unable to raise as much awareness – however slanted, about a situation that we lived with for years.

UGANDA CAPITAL SEATING ON A GOLD MINE

Last week I had a meeting on Lumumba Avenue. In planning to make my 10 am meeting I set off 30 minutes ahead of time from home. I was not anticipating any traffic but was providing for the street’s horrendous potholes.

Having braced myself for the rough ride on that road I was therefore pleasantly supplied when I found that the road had been freshly laid and uncharacteristically smooth ride I so enjoyed I almost passed my destination.

About a week prior to my trip KCCA boss Jennifer Musisi announced that they had collected sh520m in dues from tax operators in a single day – the most Kampala’s authorities had ever collected in one day in their history.

Meanwhile whenever I am in the Wandegeya area I can’t help but marvel at the speed at which the market is being put up. By this time next year I can bet they will have completed the project.

All these bode well for KCCA in more ways than just good PR.

A few years ago people involved with capital markets argued that KCC at the time, had sufficient revenues to flot a bond of the stock exchange. A bond is the way companies or governments borrow using the stock exchange. My friends argued that given the real estate KCC commands they could collateralize it and issue a bond against it. The major challenge they pointed out was that it was hard to verify the monies KCC was getting from its assets around the city and worse still whether city hall was getting all the money due to it.

But now the taxi operators paying straight into the banks a situation that may also obtain when the new markets are up are running, for the first time in a long time KCC’s revenues are looking more transparent.

It goes back to the old say, money follows towards good organization. KCC’s money woes have always been more a function of bad management than a general lack of money.

KCCA may not take advantage of this potential new funding options because they can get cheaper donor money and secondly in order to access this donor funding any bond issues are discouraged.

Besides now would not be a good time to borrow from the local markets, as yields on benchmark treasury bills are only just coming off historical highs. Often times corporate or municipal bonds are priced a few percentage points above treasury bill yield rates. In Uganda the 182-day bill is usually used as the reference point. At least week’s auction the yield on this bill was 19.81%.

But if inflation continues to fall prompting a reduction in treasury bill issues by the central bank, we can then expect a drop in yield rates making bond issues more viable.

That aside an argument can still be made for borrowing more dearly from local markets even if the donor money is cheaper because such issuances will help firm up the bond market infrastructure reducing our over reliance on foreign funding.

Beyond KCCA’s ability to have independently verifiable revenues they need to rejig their image to one of impeccable integrity. Investors want to know that they will be paid back whatever the circumstances, an impression the government and the central bank have managed to create over the years with their Treasury bill and bond auctions.

Regardless of what is happening in Uganda’s politics or economics investors, going by the record of the last 20 years, investors know they will be paid when the government paper they are holding comes due. We all like to keep our money where we are assured we will get it when we need it.

The point is we as a nation are not as helpless as we have been led to believe. We just need to get more organized and subsequently transparent in our dealings and the money will be there for the taking. And secondly relying on foreign capital – sensitive to its own political interests that may not necessarily be aligned to ours, is an unsustainable model.

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...

 Uncertainty is a major investment risk. The more certainty 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.

BIG MONEY EYES UGANDA

It is easy to feel a bit discouraged by Uganda’s prospects, what with our political circus, our crumbling roads and endemic corruption, who can be blamed. But investors with an eye on Africa choose to take a longer term view, judging that all these shortcomings are speed bumps on what they see as an inevitable growth path. 

 Speaking about Africa in general and Uganda in particular financial services firm African Alliance Group CEO Tony de Castro said, “The big thing here is the growth in population and what you want to do with it. It is estimated that the population of Uganda will have doubled by 2050, this kind of demographic change if harnessed has historically driven in economies in the north and Asia.” “Growth will come there is no question the only risk is timing. Do you jump in too early and miss the larger part of the move or do you jump in to late and entry becomes too expensive,” he added in a recent interview.

 De Castro a founding member of the 20–year old financial service group, is looking to invest more in Uganda and through the investment banking wing of his company’s operations facilitate the massive investments required to unlock this economies latent potential. “We have gone past the fixing stages we now need substantial investments in the fixed assets – transport, communications and energy infrastructure … everybody is underestimating the investment required but it’s going to be huge,” he said. 

 And it has already started, he said. He remembers Kampala at the beginning of the century very much less developed than it is today. “When we talk about the population doubling by 2050 most people seem to be operating as if the explosion will happen in 2050, but it is already happening,” he said. 

 His family, which controls the African Alliance Group, believes that the continent is on the verge of change and all for the better believing that the two major drivers will be the demographic changes and urbanization. “Uganda has reached the cusp, where capital is going to start coming in more and more significant amounts and not only because of the oil. Oil is supplementary to the economic growth we foresee here,” he said. 

 He is unsurprised by the criticism government is suffering. “Your way of thinking is one that wants perfection, but these transitions are never perfect … we tend to be self-critical in Africa but historically it is always messy, Africans want to be in the twenty first century but we forget it’s taken centuries for the north to get where it is,” De Castro counsels. With better technology it shouldn’t take Africa that long, he says, but it will still take time. 

 “Given what we see here we want to be big investors, we want to focus on big projects in infrastructure, energy, mining, insurance and housing investments that will service the coming boom,” he said. Local capital mobilization remains a challenge largely because the insurance industry was destroyed in the high inflationary years but he is confident it is on it way back. 

 Recently the company’s Uganda arm has been forced to shut down its unit trusts for lack of critical mass of investors. Unit trusts are collective investments schemes, which by pooling money from many investors can take advantage of economies of scale to cut costs and provide a better return. 

 “We shut down the High Yield Fund in 2010 and the Money Fund and Balanced Fund in 2011 owing to un- feasibility based on inability to achieve critical mass (approximately 4 Billion per fund) required to profitably operate these schemes,” African Alliance Uganda boss Kenneth Kitariko said. 

 “We have decided to focus on institutional mandates at this time where we believe we are better poised to add value, however, should the market conditions change in favor of running a retail product, we will certainly return to the market with Unit Trust products.” 

 De Castro does not see the inability to raise long term capital as a major stumbling block pointing out that during such transitions economies are often importers of foreign savings. So what is the major stumbling block he sees going forward. “The biggest challenge is decision making … take the first step. Not only at the highest levels but also at the bottom and middle levels. Make a decision whether good or bad but just make a decision,” he said.

POVERTY ERADICATION: RWANDA’S SILVER BULLET

Poverty is simple to eradicate. All you have to do is raise people’s incomes – either through job creation or improving the productivity of their shambas, make sure they save a portion of their income, which in addition to loans they can use to build income generating asset bases and voila! Poverty has been banished.

This prescription is fool proof. So why don’t more nations pull more and more of their populations out of poverty?

The formula is simple but it is not easy to execute.

Rwanda, though seems to be doing something right. Since 2005 the small east African nation has reduced the incidents of absolute poverty – people living on less than a dollar a day to 45% from 57% of the population.

But they are pressing for more,

“Actually we would have reduced this figure much more significantly if we were able to bring population growth down to two percent,” said Protais Musoni, cabinet affairs minister in the prime minister’s office told journalists in Kigali.

Development economists are fawning over Rwanda.

Oxford professor Paul Collier says what Rwanda has achieved in povery reduction laudable by any standards.

“Rwanda has achieved a hat trick; fast growth, fast poverty reduction and increasing equity among the population,” Collier told Rwanda’s 9th Leadership Retreat recently.

A poverty eradication program that is divided into two components, the Vision 2020 Umurenge Programme (VUP) and the Integrated Development Programme (IDP). The programs are targeted at the poorest of the poor and prosperity generation respectively.

Under the VUP government has planned interventions for Rwandans classified according to six traditional class categorisations, ranging from the extremely poor -- people who often need to beg to survive to the money rich – often landowners, have salaried jobs and own good housing.

The poorest three categories benefit from direct handouts and employment on public works while the upper categories benefit from access to credit for investment through micro-finance and savings cooperatives.

But the IDP threatens to be the real game changer.
About an hour’s drive out of Kigali is Nyagatovu model village, a snapshot of how the Rwandan countryside may look like in a decade or so.

The village – rows of two bedroomed homes, demarcated by murram roads and dotted with electric poles radiating power lines to the homes, has a population of 250 people, is not more than three years old.

Its inhabitants are the former residents of three nearby villages. Under the program the government swaps the villagers small land holdings for land in a consolidated field near the new settlement this is in addition to building each villager a house and giving them a cow.

“In order to get buy-in we get the residents to build their own kitchen and toilets. But they are also not stupid they know where they have come from and they grab this chance with both hands,” said Emmaniel Mugabo, a communications person with the local government.

Concentrated in these model villagers it is much easier to provide not only utilities but services to these new villages.

“They have access to veterinary and agricultural officers who provide valuable support,” Mugabo said.

The village has a communal kraal with up to 40 head of cattle. The cows provide manure for the fields, which in Nyagatovu’s case have been dedicated to matooke and more recently tomato green houses.

The residents have opened up about 40 acres of land out of a potential 300 acres and are now selling matooke to the nearby Kayonza market twice a week-- “Maybe about 300 bunches a week with some as heavy as 100kg,” the resident agronomist said. Every so often trucks come in from Kigali.

The difference in the people’s lives is visible, but also a reflection of how badly off they were.

“Before in our former village we used to charge our phones in the nearby trading center, now I charge my phone at home,” 25 year old village leader Jean de Dieu Ntirenganya said.

He looks forward to greater harvest in coming seasons and can’t wait to get a motorcycle for himself, but first things first, he is getting married in June.

“It is clearer what I can make of my life than before, this is the chance I have been waiting for,” he said.

With this “collectivization” the farmers productivity can rise exponentially and it is not impossible that Rwanda can become an exporter of food to the region – even Uganda. The potential is frightening.

“With increased agricultural production value addition becomes feasible,” said cabinet affairs minister in the prime minister’s office Portais Musoni. Clearly the foundations of agro-industry are being laid.

The government plans to roll out to each of the country’s thirty districts.

“We don’t see what we are doing as a subsidy but as a startup. It helps then jump out of the poverty trap and so far the progress is sustained,” finance minister John Ruwangombwa told journalists in Kigali.

“We see a strong correlation between urbanization and job creation,” Musoni said, pointing out that they have seen an increase of 370,000 since 2005 of non-farm jobs.

“Each time you double the settlement size you get an average of 6% increase in productivity,” Collier later said, arguing that in consolidating its progress in fighting poverty urbanization is the next step for the Kigali government.