CORPORATE UGANDA NEEDS TO READ UP ON WARREN BUFFETT

US billionaire Warren Buffett last week released the annual report of his company Berkshire Hathaway.

Beyond the big numbers – net earnings were down marginally to $24.07b from $24.08b in 2015 and the announcement that his company has $86b in cash and near cash stored up, his annual letter to his shareholders always makes for good reading as it lays out his thoughts on business, corporate governance and investing.

This year he wrote about his confidence in the US economy’s prospects and about his more than half a century investment philosophy.

For the uninitiated Buffett is the world’s richest investor having built his wealth over the last 70-odd years threw shrewd investments in everything from insurance, manufacturing, media, consumer goods, energy and railways.

He has led his company Berkshire Hathaway for the last 51 years. He has almost all his $76b of net worth in the company. He built the company from a failed textile mill into a conglomerate now valued at about $440b through a series of equity investments and outright company purchases.

His stellar record as an investor – his company value has sky rocketed about 9,000-fold over the last half century, his having come out not only unscathed but stronger from every major financial crisis of the last half of the 20^th century means that when he speaks everyone, who is anyone listens.

"Corporate Uganda is currently suffering through a trying economic environment. Falling revenues, thinning margins and unrelenting competition from regional and international competition are making for many sleepless nights...

Buffett’s thoughts on the economics of business are insightful and well delivered but where he really stands out is on his emphasis on corporate governance as grower of company value is what sets him apart from many.

He thinks it all begins with company culture.

“Cultures self-propagate …. Bureaucratic procedures beget more bureaucracy, and imperial corporate palaces induce imperious behaviour. … As long as Charlie (Munger, vice-chairman) and I treat your money as if it were our own, Berkshire’s managers are likely to be careful with it as well.

“Our compensation programs, our annual meeting and even our annual reports are all designed with an eye to reinforcing the Berkshire culture, and making it one that will repel and expel managers of a different bent. This culture grows stronger every year, and it will remain intact long after Charlie and I have left the scene.”

Isn’t the challenge these days that many managers or employees don’t see the company’s fortunes as tied to their own? That what is good for the company is good for them? That the attitude seems not to be about building legacy but plundering the company as fast as possible, hopefully before they get caught?

And Buffett recognises that beyond culture the next filter for improved corporate governance is in the recruitment process.

“In looking for people to hire, look for three qualities – integrity, intelligence and energy. And if they don’t have the first, the other two will kill you...”

Enough said.

As a logical follow-on he puts a high premium on reputation – his own and his company’s.

“The priority is that all of us continue to guard Berkshire’s reputation. We can’t be perfect but we can try to be. As I’ve said in these memos for more than 25 years: “We can afford to lose money – even a lot of money. But we can’t afford to lose reputation – even a shred of reputation.” We must continue to measure every act against not only what is legal but also what we would be happy to have written about on the front page of a national newspaper in an article written by an unfriendly but intelligent reporter.”

And he doesn’t stop there.

“Sometimes your associates will say “everybody else is doing it.”… It is totally unacceptable when evaluating a moral decision. Whenever somebody offers that phrase as rationale, in effect they are saying that they can’t come up with a good reason. If anyone gives this explanation, tell them to try using it with a reporter or a judge and see how far it gets them.”

And finally he argues that companies may get away with poor corporate governance but the day of reckoning is never far behind.

“When the tide goes out you will know who has been swimming naked...

When the economy is in good shape everyone looks like a fantastic business manager. But the boys will be separated from the men in hard times, with those coming out the other end being those who have beefed up their systems, managed their costs and have enough built in buffers to weather the storm.

Buffett has been writing and speaking for more than a generation. The Chinese say that if you want to climb a mountain study all the possible routes and then ask someone who has been there.

Corporate Uganda would be doing itself a big favour if it read up on Warren Buffett aka the Oracle of Omaha.

THE EALA CAMPAIGNS SHOW THERE IS HOPE FOR UGANDA YET

The just concluded east African Legislative Assembly (EALA) final campaigns made for interesting television but on a much broader level suggested there is still hope for Uganda yet.

On Tuesday the EALA nominees made their last pitch to an animated parliament. MPs caught up in the occasion were chanting, cheering and heckling in equal measure and one couldn’t help feeling they were glad, gleeful even relieved to be on the giving rather than of the receiving end of the attentions they endure during their own campaigns.

It begun with the NRM nominations. As is now normal with NRM contests they were spirited and just only managing not to tip over in to nastiness and chaos.

For we on the sidelines we wondered what was all the fuss about. The East African parliament seats hundreds of kilometres in Arusha, Tanzania and while their deliberations have far reaching consequences for the rest of us mere mortals, they get so little coverage as to be literally ignored.

Of course the chief benefit is financial.

On the one hand members of EALA do not have to suffer the unwanted demands of their constituents and on the other hand by whatever measure you use these members can look forward to fat paychecks.

"According to reports the legislators can expect about $15,000 monthly (sh54m) in basic salary and allowances...

This is a lot of money.

But interestingly our brightest minds or most prominent businessmen showed little interest in putting themselves up for election to EALA.

In the late 1980s some really quality people put themselves up for election, suffering the ignominy of people lining up or not behind them up the levels of the political process to get a chance to get to the legislature.

One can argue after many years of being shut of the political process by shrewder operators and eventually the army, the elite of Uganda saw this as a chance to contribute to the country’s progress through politics.

However one has to remember that paychecks all around were wanting, while the consistent pay and easy living of government officials were there for all to see. In a depressed economy where the civil servant was the biggest working class and the parliamentarians were not grappling with consistent payouts one can see how politics was a credible enough meal ticket.

Fast forward to the present and the employment options are such that the best and brightest would rather take less pay than join the rough and tumble of politics.

Looking down the list of nominees to EALA it was safe to say the productive sectors of Uganda will not miss any of them.

This is good.

"If a society’s incentives are slanted towards public administration and not the productive sectors – agriculture, manufacturing and services; If the brightest minds highest ambitions are to work in the public service; if our brightest and sharpest are forgoing the meritocracy of the private sector for less in the public sector, then as an economy you know you are in trouble...

This can happen if the private sector is on its knees and therefore the economy is in dire straits or if the government is the only game in town, as in the days of communism, which means the economy is in the toilet anyway.

To everyone their own.

It therefore makes sense that for politicians to protect their tough they need to keep the economy ticking along so business can flourish and employ more and more people and even if MPs increase their pay the attraction will be limited for other potential, but otherwise gainfully employed people.

The Uganda economy has a long way to go – we are still not a middle income economy, but as an indicator of how far we have come, the EALA campaigns showed that there is still hope for this country.

AFRICA HAS DEVELOPED, AND CONTINUES TO DEVELOP, THE WORLD

Last week Gerald Capland writing in The Mail and Globe in response to his prime minister’s Justin Trudeau’s intention to rethink Canada’s African strategy pointed out that the west has been ripping off Africa for 700 years and that would be a good place to start from.

And he says beyond the colonial era the plunder continues and has in fact accelerated. In 2012 Africa received $1.3trillion from the west this includes aid, investment and income. But in the same year $3.3 trillion flowed the other way. We gave away more than we received.

If we go back in history colonialism was about extraction of raw materials to fuel home industries and to ease the pressure for jobs at home. Of course it was couched as a humanitarian effort to civilise the black man, but don’t tell that to the Congolese or South Africans or Algerians who suffered the worst excess of the era.

"The second world war so severely drained the colonial powers that they allowed independence to happen but by that time they had so rigged colonies to continue serving them that independent Africa continued to supply western industry and to serve as a cash cow for them...

For instance the infrastructure from the producing areas to the ports are better developed than the infrastructure between towns in our countries.

Of course the few leaders who took independence too seriously got overthrown or paid the ultimate price.

Fast forward to the present and many of Africa’s nations had shaken off the post-independence economic down turn and were beginning to look up again – with leaner governments, increased revenues and booming private sectors.

However, taking Uganda as an example we still continue to export raw coffee, cotton, tea and any number of commodities along the same roads and railways, to the same ports that the colonialists built.

This is important because development history shows that before you can become a great exporting nation you need to be able to trade with yourself first. This happened with US, with the European Union and even with the Asian nations. But somehow we are going to turn history on its head and become export led economies without being able to trade with ourselves first?

The global financial crisis was a god send. With demand for our exports falling in the west, the East African common market kicked in. To the point now that Kenya is Uganda’s biggest trading partner and a leading source of investment and not the UK or Europe as was the case before.

"But to subvert our independence there had to be willing accomplices. The elite in these nations who had gone through a colonial education system and continue to take lessons at the feet of the master either actively subverted efforts for greater self-reliance or unknowingly helped the project along, content with the status quo and unwilling or incapable to question why things are the way they are.
And this last scenario is particularly worrying...

As a nation we are poor because we are unable to aggregate our great wealth and employ it for our benefit.

They say that the estimated value of all the extractable natural resource in the Democratic Republic of Congo is worth $12trillion. This the equivalent of the USA’s GDP. But Congo’s per capita GDP is about $500. And why can’t the Congolese harness this wealth to benefit themselves?

In Uganda we have almost half the region’s arable land, about a fifth of our land is under water and we have two planting season’s annually but right now we are in the throes of drought induced starvation in many parts of the country.

The same can be said for any number of countries on the continent.

And why don’t we aggregate these resources of ours – human resource, land and capital? Because it is too difficult when factored against the handouts we get from abroad.

About a decade ago when we were making tentative steps towards beefing up our treasury bond and bill markets – avenues for domestic borrowing, those opposed argued why should we bother when donors can lend us or even grant us multiples of the money we could raise locally at much lower rates.

The detractors were ignoring the long term good of having the local mechanism to mobilise resources versus the expedient option to raise money from donors.

Thankfully the promoters of developing our local bond markets soldiered on because as sure as night follows day we continue to fall out with donors and they keeping cutting off or threatening to cut off their aid.

Where would we be if NSSF had not been launched in 1985? The fund now has assets totalling sh6.6trillion the biggest in the region. While most of NSSF’s assets are concentrated in fixed income products – bank deposits, bonds and bills, a process is under way to ensure more investments go towards companies and real estate. However a lot of the money the banks have to lend to the public come from NSSF. In fact since NSSF mechanism in place government to aggregate more resources should raise member contributions to seven percent of the income up from the current five percent.

A two percentage point increase in worker savings can increase monthly contributions to about sh80b or s120b a year. A net benefit of this may even be a lowering of lending rates.

"The point is that we have been made to believe that we are helpless, even hopeless. That we cannot develop unless we are helped from abroad. That our challenges are so vast that trying to mobile our resources will be wasting time so we should look abroad...

And we with our degrees, MBAs and PhDs have swallowed this thinking, hook, line and sinker – of course the token consultancy fees, free business class flights,  big salaries we earn as big fish in the small ponds we paddle in, are enough to deaden our thinking.

But then day of reckoning is fast coming.

AGRICULTURE IS WHERE IT IS AT

In his book Acres of Diamonds author Russell Conwell tells of the man who sold his land and went out to seek his fortune. After years of work and travel he returned convinced that making a fortune was not for him, only to find that the new owners of his land were now working a diamond mine on it worth multiples of what they had bought the land at.

As analogies go, that perfectly mirrors Uganda’s experience.

Last weekend the Vision Group had its inaugural Agriculture Expo at which suppliers and practioneers (actual and wannabes) came together to share and learn from each other. It was a wildly successful event – long overdue for an “agricultural economy” and a good eye opener to what opportunities are literally lying around us.

The numbers roll of officials’ lips – at least two in three Ugandans live off the land, agriculture accounts for at least 30 percent of economic output, the country has almost half the region’s arable land, we are blessed with two rain seasons annually (which maybe something we may have to revise in future) and so on and so forth.

But in those numbers is the explanation why income and wealth inequalities are widening.

"If 70 percent of your population is sharing 30 percent of your output that means there is a 30 percent that is wolfing down 70 percent of our output. Interestingly Uganda’s urban areas account for about 30 percent of the country’s population...

It is not a stretch of logic to see that most of Uganda’s GDP is generated and consumed in the urban areas.

How can this be?

To begin with urban areas mean concentrations of people. These people are easier and cheaper to serve with social amenities – education and health services and infrastructure – roads, power and telecommunications than the more dispersed rural populations.

The net effect of this is that urban populations can do more and more with less and less, while the opposite is true for their rural cousins. So for example for a cook in the village they have to gather firewood, light the firewood – whose heat cannot be regulated accurately, start cooking with flour which has been ground manually and then …. You get my drift. The amount in time, leave alone energy needed to prepare a meal means other activities have to be put on hold. A similar housewife in an urban area can whip a meal in a fraction of a time it takes for her counterpart in the village leaving her free to help with her children’s homework or go to evening school or just hang out with girls.

Its those time saving devices that make people more productive in urban areas and by extension richer.

There is very little our rural cousins can do about population densities in the short term. But they can improve their production methods immediately by using modern farming methods. And we are not talking about mechanisation.

Simple things like using good plant spacing, inter cropping, improved seeds and reducing post- harvest losses to begin with, would be a good start.

I remember about a decade ago the quality of coffee farmers’ harvests and hence their income, in the  south western Uganda improving in leaps and bounds because instead of drying their coffee on bare ground they were laying a tarpaulin on the ground before they poured their coffee on it. This was in the 21^st century...

We can do all this before we even start talking about inorganic ferterlisers, irrigation systems and value addition.

We are a small holder agriculture economy because the colonialists opted for that model of agriculture production than the plantation methods used in Kenya, Zimbabwe and South Africa. Which while it means our farms are less productive, also means we are more in control of our own food security.

It also means that improvements in farm productivity would directly benefit the average man than some big time farmer with hundreds of acres under ginger.

While we whine about being poor as a nation, pander after mineral wealth that is hard to exploit and wonder what curse has befallen our nation the acres of diamonds lie under our feet. And isn’t it true that we are already abandoning our lands to find our fortunes in the cities and abroad? And who will come from outside to show us what we left behind?

ARE UGANDA’S DEBT NUMBERS WORRYING?

In the last five years or so Kampala Capital City Authority (KCCA) has been laying tarmac on the roads around my home. Their work is extensive that between home and work my exposure to unpaved road is at most 100 meters most of which is within our communal compound.

This development means travel time to work has been from 30 minutes to just under 15 minutes without traffic, it has reduced visits to the mechanic considerably and beyond raising the average property prices has served to increase the economic activity in area. New construction, schools, shopping centers, bars are among the economic activities that have either sprouted up in the area or been boosted by the new paved road network.

Our own health serves as a good analogy for the health of economies. An economy is only as dynamic as the coverage of its transport network. The easier people and goods can get around the more efficient the economy is and therefore the more work that is done.

Since the body’s basic circulation infrastructure is laid out from birth, improving transport and communication networks can be analogous to how much water we take in. Adequate water intake means circulation is eased as waste is evacuated and build up of cholesterol and other blockages is minimised. Improvements in circulation show themselves in our lives in increased vitality and less ill health.

We have forgotten that when the roads are bad you cant move and the economy cannot grow.

"An indication of how far behind we are on average a middle income nation had at least 88.74 km of paved road for every 1000 square km of land area. In Uganda assuming about 4,000km of paved road our equivalent figure comes in at 16 km for every 1000 square km...

Averages can be deceptive but this means we need to increase our stock of roads at least five times to get to middle income status.

The 1970s and 1980s when little to no new roads were laid means that we are playing serious catch up and the need for speed is of the essence. And this goes for all other infrastructure – power generation, railway and water transport. Only in telecommunications are we ahead of the curve given international averages.

In appreciation of this deficiency government has gone out on a borrowing binge to finance the infrastructure development.

The Karuma and Nsimba dams will account for almost $3b between them, the standard Gauge Railway another $9b , this before you add all the road developments going on around the country which can account for easily another few billion.

The concern gaining momentum is how will pay for all this. Valid concern.

Given my localised experience it is clear that increased economic activity will follow their commissioning, and with increased economic activity the debt repayment sums will not look as daunting as they do now.

A sh500,000 monthly loan repayment requirement when you have sh2.5m salary looks more manageable when your salary doubles.

In 1986 our total debt was $1.4b which was more than half the GDP at the time and more than 3.5 times our export receipts. In that year we had debt repayment obligations of $45m. Today according to the latest IMF figures we estimate debt repayments will come in at sh1,682b or just under $400m this against exports of $2.7b.

But concern is in order given stories of over inflation of costs on all our major projects currently under way.

"If we do not get value for money for these infrastructure projects whether they come in at too high a cost or don’t deliver as they are supposed to, they may not generate the increased economic activity required to pay their way...

Even though I may be comparing oranges with fene, I choose to be optimistic about our prospects.

Between 1992 and 2011 China spent almost nine percent of its GDP on infrastructure development the net result of this – in addition to other things of course, is that the economy grew seven fold.

One, given our infrastructure deficit we are already underspending and secondly, that this sustained infrastructure spending will have to go on for at least another decade if China’s experience is to be considered.

Everyone wants to go to heaven but no one wants to die. The current cash crunch has a lot to do with our huge outlays on infrastructure. As they begin to come on line we can expect that more cash will start to flow.

Using China again, a graph of GDP against time shows that from 1978 when Deng Xiaoping declared “I don’t care whether a cat is a black or white one as long as it catches mice” to launch the country’s economic miracle it took 14 years up to 1992 before the graph got off the floor. During that time they were laying the foundation in infrastructure, training their people and getting over their communist hangover.

The process of development does not follow an exponential curve, at least at the beginning. 

MAKING OUR EDUCATION MORE PRACTICAL

Its examination results period. The anxiety among parents and their candidate children is at fever pitch.  A single line on a list will mean the difference between getting a “good” school, university or not. If the result is outstanding a trip via the newspaper for the now traditional mug shot is worked into the plot.

While distinctions and As are flying around like they are going out of fashion, increasingly the question is being asked about the products of our educations system.

Employers are tearing out their hair at how intending employees can barely read, write or count.

So somewhere outside the traditional  nursery-university path, we are looking to skilling people with practical skills that will make them employable on sight or even better, turn them into job creators rather than job seekers.

Which is all very nice but what about the bulk of the potential paper pushers we are ramming through our education pipeline, what can be done for them?

"First off as was pointed out to me a while ago, it is good that we are pushing out thousands of graduates a year regardless of the credibility of their scholarship. That even if we had thousands of graduates of the most mundane subjects ( I am not naming names), this army of job seekers have at least learnt the discipline of subjecting themselves to a higher authority, working to a time table and even seating still for an hour at a time. Invaluable skills for an aspiring industrial nation...

When you think about it or if you have ever been in a pre-school class you will appreciate the point.

Industry requires people who can take instruction, adhere to a laid out schedules and have some level of self-drive.

The British did not try to be too clever. They set a curriculum for us, which emphasised reading, writing and arithmetic. A solid foundation for higher learning and really all one needs – even today, to get by. Of course they then added some higher learning, which was exclusive well into the 1990s.

The thing with this kind of education is that it is based on rote knowledge, you are encouraged to cram predetermined facts.

But in the real world all questions are ambiguous, while they may require a solid knowledge base, they often require more creativity, team work and goal setting skills.

So for example you go into a history and they want to know when Vasco da Gama rounded the southern tip of Africa (1497) or in geography what kind of mountain the Rwenzoris are (block) or knowing that the complementary angles in aright angled triangle add up to 90 degrees (do you remember that?)

"But life’s questions are more open ended where there is often more than one answer and all of them correct....

So for instance in the work place an understanding of the office dynamics, historical and market context mean the answer to the question “How do we achieve 20 percent growth in sales?” can go in any number of ways.

Experience helps, but wouldn’t it be useful if our graduates could do more than regurgitate sterile facts maybe have the personal initiative, mental agility and intestinal fortitude to take on life’s challenges?

Going back to the British. Once they had churned out the cream of the readers, writers and counters they sent them to schools modelled after their own public schools in the UK.

Apart from teaching higher reading, writing and counting skills these schools singular characteristic was there extensive extra-curricular activities roster – sports, music and social clubs.

Beyond keeping hormones from running amok, sports for instance teaches concentration, team work, goal setting and performing under pressure, invaluable skills in the real world.

But also, all sport is an open question.

Will you win, lose or draw? How will you play? Who will play? How will we react to the opposition? The pitch? The crowd?

"In an increasingly competitive environment knowing how to read, write or count better than the next guy just won’t cut it....

You need the softer skills that are better taught on the playfields or camping site or in the choir.

To the extent that we are not doing this enough for our children is the extent to which our education system – the government, schools and parents, is letting us down.

THE VALUE OF DOING THE RIGHT THING

Last year a friend of mine was approached by tax collectors who looked over her business and determined that she should pay a presumptive tax of sh30m.

A presumptive tax is what the revenue collectors guess is due to them, in the absence of financial records, after a cursory look over your business.

Thankfully my friend had been diligent in keeping receipts of all expenses and she quickly had an accountant arrange her affairs. The books showed she had actually made a sh20m loss for the year, which means she owed the tax man nothing.

If anything the taxman owes her.

How many businessmen in this town, think they are “shrewd” by evading taxes but are actually shooting themselves in the foot.

When they are eventually caught, as they always are, they end up paying the sh30m assessed, this is on top of the sh20m loss. Which business can survive under such circumstances?

Another friend who suffered such a visit by the tax man a few years ago, formalised his business and started playing by the rules. Interestingly my friend now finds himself in the enviable position of getting more business because he can now show a tax clearance certificate – a requirement to do business with the more quality clients in town.

As if that is not enough the rigour to his record keeping that comes with being tax compliant gives him a better sense of the true worth of his business – than his ballooning bank account. As a result he could recently dismiss an offer of a few hundred thousand dollars to buy his business, because he knows it is worth a few million dollars instead, a fact he would not have known had he not formalised his accounts.

But it is not only the small businessmen suffering.

 Last week from parliament we heard that telecom company UTL, is staggering under sh700b in debt. UTL protest that the sad state of affairs has come about because of the main shareholders – Uganda and Libyan governments, not keeping up with investment programs, not paying for services rendered to them and generally neglecting the business.

The closure of Crane Bank, the central bank suggests, became necessary when an inexplicable hole was found in the books that the bank’s shareholders were unable to fill.

Or the attachment of a local TV station and its eventual sale by URA for non payment of taxes.

We can go on and on and on.

"The funny thing in all these cases, is when the day of reckoning comes we shall blame government, we shall blame the economy, we shall even blame it on the rain...

But on closer scrutiny will often show that the management often did not do what they were supposed to do.

While the phrase “Good Governance” has not really caught fire, sounding like one of those rallying calls by NGOs and other do gooders business people will be best advised to look deeper into the subject.

How do you determine the value of a company? One rough and ready way is to deduct the liabilities from the assets to get the net worth of the company.

However the market may pay less or more than the company’s net worth. Why? To use an analogy buyers of companies are looking to buy a money making machine. One where they can put in resources down one side and endless streams of money come out the other side.

A company is more valuable if it does not rely on a single person to operate but its business is based on systems and processes that can suffer the exit of anybody and still continue to mint money.

The sum total of these systems and procedures is what is called governance, the better they are the better the governance systems.

"There other considerations of course but to the extent that a company’s governance is good is how much more they will get paid over and above the company’s net worth...

So good governance is more than a catch phrase you put in business plans and project proposals to impress, it has real value to companies.

The temptation of course is to cut corners by not filing your taxes or the “savings” you will have made from not hiring an accountant to track your books or keeping your workers’ salaries artificially high because you are not remitting NSSF and instead treating yourself to the four wheel drive. After all how will people know you are working?

But it catches up with you either by the tax man or any number of regulators making your life a living hell or the eventual closure of your business.

But you argue that if you were to comply with all the rules and procedures you would have nothing left over for yourself.

Maybe you shouldn’t be in that business then?

South African privae equity man Vusi Thembekwayo says there are only four reasons to start a business – to sustain or improve your lifestyle, to live something for the next generation, to eventually sale it or to fulfil a certain philosophy.

The chances of success of a business improve in the order in which they are listed.

If one is going to eventually sell the business the more formalised its likely to be.

It is wisdom as old as the hills “It pays to do the right thing”