GHANA’S FALSE DAWN, A LESSON FOR UGANDA

At the beginning of this month it was reported that Ghana was seeking help from the International Monetary Fund (IMF) because of its worsening economic situation triggered by its plummeting currency.

The Ghanaian unit, the Cedi had fallen as much as 40 percent against international currencies because of a large current account deficit – it’s spending more foreign exchange than its making and ballooning budget deficit –  the government is spending more than it collects in revenues.

"It is not a crime to ask for IMF help but it often suggests that your accounts aren’t quite what they are supposed to be....

Ghana and Uganda are not unlike each other in several ways. 

When Uganda was being feted as East Africa’s shining economy a few years ago, Ghana was receiving the same accolades on the west coast. Ghana – rich in Gold and Cocoa recently started producing oil. The theory was that Ghana, which had established a level of fiscal discipline would get more value for money when the oil came out of the ground. So was the thinking about Uganda.

But with oil around the corner, with the prospects being hyped by the oil companies, the government in Accra went haywire, raised public servants’ salaries, borrowed against future oil revenues and indulged in huge public works investments.

"Not only are the oil revenues not flowing as fast as first anticipated but these huge government expenditures are gobbling them up as soon as they gash out of the ground....

As if that is not enough last year Ghana issued a $750m bond on the international market whose interest payment in foreign currency, is putting added pressure on the Ghanaian treasury.

The parallels between Ghana and Uganda cannot be ignored. 

Uganda too is about to start production in the next five years or so. 

There is much need for the money to shore up our education and health services, build transport and energy infrastructure, not forgetting any number of vanity projects that are bound to start popping into people’s heads.

The government insists that when the oil money starts flowing the first call on the cash will be to finance infrastructure projects rather than go towards beefing up recurrent expenditures. Salaries constitute a huge portion of recurrent expenditures in the budget and are an easy target for politicians – you boost salaries and votes come in.

"Ghana’s politicians fell for this quick fix and now salaries account for two in every three cedis of revenue collected....

Insisting on infrastructure development can still lead to higher salaries but not instantly. By lowering the cost of doing business more taxes can be collected and these will find their way to the payroll.

Even in our everyday lives it is amazing how people lose their heads when they happen upon a windfall. They indulge in frivolous purchases, unplanned expenditures and value-for-money judgements go out the window.

It is no different for governments.

But in addition look forward to huge projects with little to no economic justification, padded with huge “commissions” and hidden costs.

Ruling elites, despite what they sell to the public are looking first and foremost to retaining power, more resources either via higher revenues, foreign aid or windfalls beyond enriching themselves are employed to this end.

"The details of the Ghanaian situation are  bound to show that political expediency rather than official incompetence is at the back of why the country’s economy does not look so rosy any more....

A fate we should not think we are immune to.

The Norwegians are the benchmark of how oil revenues can be employed for the benefit of the people without jeopardising the economic environment.

Norwegian oil revenues are stored away in an investment fund. Government has only access to four percent of the almost one trillion in fund assets annually to support the budget. This ensures that that the Norwegian kronor does not fluctuate unnecessarily with oil prices and also that the nation will benefit from its oil fields well after they have dried up.

Of course Norway  had the advantage of already being a rich country by the time the oil came around, but we  and Ghana, of course can derive some useful lessons from how they have employed their oil industry’s earnings.

For Ghana it will get worse before it gets better. Under an IMF program they will be forced to cut down on government spending, which could entail restructuring of the civil service, removal of subsidies and the cut back crucial social services, in effect making life harder for the common people.

My father told me there are two kinds of people in the world those who learn the easy way, from the experience of others and those who learn the hard way through their own experience. Let’s fall in the former category and take important lessons from Ghana’s apparent false dawn.

MUKONO-KATOSI ROAD ANOTHER WAKE UP CALL

In case you have been away, the botched Mukoni-Katosi road deal has been dominating our headlines.

These are the facts as we know them.

Government sought contractors to build the 74km road. The cost of the project was put at about sh165b. An American firm Eutaw Construction Company was declared the best evaluated bidder in March 2011. As part of the deal Eutaw was entitled to an advance payment of about sh25b meant for mobilising plant and equipment and generally getting work going.

But in order to get this money Eutaw needed insurance bonds to guarantee they will do the work. Eutaw got some insurance bonds and the money was released to the contractor by the Uganda National Roads Authority (UNRA).

It’s not clear when but after the payment was made in January things started going awry.

Several things emerged that put the whole contract at risk.

It was discovered that the insurance bonds purportedly issued by Statewide Insurance Company (SWICO) were forgeries. The question is does SWICO even have the balance sheet to support such a bond? Secondly, Eutaw turned out not to be the firm everyone thought it was. Checks with the only Eutaw company in the US that deals in construction, revealed that they had no Ugandan office and neither had it ever bid for a project in this part of the world. And finally “our” Eutaw had sub-contracted all the work to a Chinese firm in contravention of the rules governing such contracts.

At this point UNRA may have been best advised to call off the contract. They did not. They got back to Eutaw and asked them to make good on these irredeemable breaches of the original contract.

"At this point Eutaw went shopping for insurance firms that would underwrite the project, never mind that the horse had already bolted the barn...

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Through their insurance brokers Marsh Uganda they approached three firms, with Insurance Company of East Africa (ICEA) and UAP taking up the offer. Essentially they were shopping for a fall guy, someone who would carry the loss when the deal flopped.

Everything may have gone very well were it not for UAP cancelling the advance payment bond when they realised that the payment they were supposed to be covering had already been made. That in effect means the project now is uninsured and cannot proceed.

The plot thickened when less than a week after President Yoweri Museveni flagged off the project than the Finance ministry Permanent Secretary Keith Muhakanizi wrote on 9^th July 2014 requesting the IGG investigate the deal because it had come to his notice that the sh25b advance payment was paid out on the basis of a forged  insurance bond.

The police are now quizzing everyone in connection with the deal but the IGG in her report on the deal has roped in the Works minister Engineer Abraham Byandala as not beyond suspicion.

The devil – literally and figuratively, is in the detail.

Unfortunately as Ugandans this kind of corruption is par for the course. But to put into perspective this what sh25b can do for in Uganda.

"According to the finance ministry’s draft estimates for the  year a total of sh347m was budget for general staff salaries in the pre-primary, primary and secondary schools so this money can pay general staff salaries for 72 years. Or pay for immunisation services for 24 years or pay general staff salaries for the health sector for four years....

What is even more shocking is given the smoothness and impunity with which the scam was planned and executed clearly the players were very practiced, which means we are probably haemorrhaging hundreds of billions  a year in such schemes.

This is unsustainable situation that deprives our children of quality social services, our businessmen a conducive environment in which to operate, invariably stains our politics and is fast making his country ungovernable.

To paraphrase the best time to nip corruption was 20 years ago the next best time is now.

YOU WANT TO BUILD A FORTUNE? START NOW

At the end of the week we were rolling in the aisles after reading the alleged leaked prayer requests of the recently deposed managing director of Uganda Broadcasting Corporation (UBC), Paul Kihika.

Among his requests were that his new board be disbanded and the minister of information Rose Namayanja – his erstwhile boss, be reshuffled from her position. Is there such a thing as taking your faith too far? Or maybe misplacing your faith?

But what really caught my eye was his prayer “to build business that will bring over sh100m profit per month.”

I am going to imagine that Kihika understands the difference between sales or turnover and profit, basically what is left over when all costs are deducted from turnover.

Let us do the math.

The profit he envisages will amount to sh1.2b a year, a nice hefty sum. So what size of company would one need to generate such returns?

Banks are notorious for having low return on assets and Stanbic Bank is not typical but they may serve as a useful indicator. At the end of last year Stanbic’s total assets stood at sh3,242b and made an after tax profit of sh102b. A very rudimentary calculation would show return on assets of about three percent. Using this figure Mr Kihika would need to build a business with at least sh40b in assets.

The New Vision Printing and Publishing Company has an asset base of sh66b as of the end of 2013. It has taken 28 years to build,  has a staff complement of over 1000 workers and a distribution network that spans the nation, the globe actually, because the company has a website.

But assuming Mr Kihika has the cash on hand, how much would he need to generate his sh1.2b in annual profit.

At last week’s Bank of Uganda Treasury bill auction the weighted average yield or the return on the 364-day Treasury bill was 12.379 percent.  At this rate Kihika would need about about sh9.7b in cash, considerably less than the sh40b to realise his target,.

This is Uganda.

Going by the stories surrounding corrupt contracts and procurements it is more likely that someone will hit a “deal” of sh9.7b than stick it out over 28 years building a sh40b asset. It is not even risky – for every corrupt official convicted we would hazard 100 get away scot free.

The prayer request is probably not unusual and such lofty dreams should be encouraged. But we need to take it a step further, work backwards and calculate what – in addition to fervent prayers, it would take to fulfil our dreams.

We will assume Kihika is a man of upstanding moral rectitude.

After writing down his prayer request he should have gone to a financial planner to get a sense of what it would take to get him from where he was – in terms of financial standing, when he wrote the prayer to where he wanted to be.

Everybody should do that.

His advisor might ask him what his target date for achieving the dream, which would have to be viewed against his current age – he might want to enjoy his cash way before 28 years. On that basis he may score the business landscape for an enterprise that promises the rates of return to make his dream come to fruition. The sooner he wants the dream to happen the higher the rate of return he would demand.

A rule of thumb is that the higher the anticipated rate of return the riskier the venture will be.

Given his ambition it is unlikely he can achieve it without a functioning organisation, it’s unlikely there is a legal briefcase business model that can make this happen.

To cut a long story short there are no short cuts. When we see the wealthy among us, we see the finished product, we need to dig deeper to see what it took to get them to where they are.

You can be sure that along with spadefuls of faith, one needs copious amounts of elbow grease, because there will be no gain without sweat.