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”

THE CASE FOR SCHOOL FEES

In the last week the mad rush back to school has been further coloured by the horror at rising school fees demanded to join S1 and S5.

Parents have been lamenting the registration, tuition, development and any number of fees that school administrations are slapping on the financial obligations they want their intending parents to meet before their children can be allowed admission.

It’s understandable that coming from the festive season that financial matters would be sensitive. So much so that if parents had their way they would have government regulate how much schools, even private ones, can charge as fees.

I always have a problem when people try to subvert the forces of supply and demand. In this case it means that schools can charge high fees because there is not enough supply of quality schools and the effective demand – parents willing to pay, exist.

"By creating some arbitrary cap on school fees, especially if its falls below the cost of producing the service or not high enough to justify the investment, would discourage investment in the sector and create the very situation that is causing high fees in the first place, which is lack of schools...

In the 1980s there were people within government who thought land lords in Kampala were charging too  much rent.  They were pushing for government to cap rents in Kampala as way to stop the “lecherous capitalists”. Thankfully government shooed them away, arguing that to regulate rents would discourage much needed investment in the sector.

The result of this sensible policy is that not only do we have a large stock of housing available but also there are segments for all income levels. But to illustrate how big the housing deficit was in the 1980s, that despite three decades of investment the numbers show that we still have at least a 50,000 housing deficit in Kampala alone. This is the equivalent of 60 apartment complexes the size of Bugolobi flats.

If government hadn’t taken the leap of faith people’s garages would still be acceptable living quarters.

To bring school fees down two things have to be done.

To begin with government needs to improve the quality of its own schools.

Our private schools cannot compete with the best in the region in terms of learning environment and academic outcomes. This is because our private schools have a low benchmark to beat. A businessman need not do too much but just a little above the public schools to make money. So because our government schools are so bereft of facilities and teaching staff our private schools are not very much better.

This would entail government schools living up to the basic requirements required of schools. Its hard for government to crack the whip on school standards when its own establishments are the number one culprit.

Secondly, government should let the market decide the fees structure. School owners cannot hike fees indefinitely. The market cannot allow it.

As more investment flows into the sector standards will improve, as schools seek to differentiate themselves. Also the weak schools will fall by the way side and be taken over by new owners with the required muscle to carry on with the investment. Or they will be merged into bigger schools which can take advantage of the economies of scale to provide a more affordable service.

Government’s concern should be to get as many children getting a quality education as possible. 

Given its inadequacy in fulfilling this obligation it should not disallow the private sector from stepping in, until it gets its act together  -- if ever.

A case can be made for subsidising education. But one hesitates to begin the discussion as subsidies are easily abused and would further distort the sector.

"Parents’ pain is real. It is no consolation to them but the pain can be temporary, if we allow more and more investment into the sector or permanent, if in trying to keep fees artificially low we starve the sector of new development...

In the last case when government is forced to lift the fees cap – as it inevitably will, fees will jump to find their real level. But we need not learn the hard way.

THE FALL OF CRANE BANK AND THE FATE OF THE LOCAL BUSINESSMAN

Last week the central bank announced that dfcu would be taking over the liabilities and some assets of Crane Bank.

The Bank of Uganda took over Crane Bank in October last year after adjudging it to be “significantly undercapitalised”. In putting it under receivership and handing its liabilities to dfcu the central bank did so after coming to the conclusion that Crane Bank was insolvent – meaning it was unable to meet its financial obligations.

On the surface of it, the Bank of Uganda’s past experience means that Crane Bank’s clients will suffer the minimum inconvenience during the transition. It helps too that dfcu took over Global Trust’s business two years ago, a much smaller operation but which experience means dfcu is no stranger to such a transaction.

"However the distress will come with the change in cultures between the two institutions and on a wider scale, affect the future credibility of our local businessman...

Crane Bank was opened in 1995 to save Crane Forex Bureau, which was suffering some underhand competition from the banks.

The bank adopted much of the culture of Crane Forex Bureau, which was servicing the SMEs (Small & Medium Enterprises), whose distaste for red tape and regular liquidity needs is universal. It helped too that the founder, Sudhir Ruparelia had his roots in the SME sector, so his understanding of the sector’s needs were more than academic.

A cursory look over the bank’s books shows this bias towards the SME sector. As a business strategy it was hard to fault. In the last few decades the SME sector – retail, transport and real estate mostly, have been the fastest growing sectors of the economy. This rise has been mirrored by Crane Bank’s fortunes, which in the space of the twenty years grew to the third largest bank by assets in the country.

In a way Crane Bank served to bridge the dusty informality of downtown Kampala with the black tie conventionalism of the high street bank.

And one could say Crane Bank was winning, because in the last decade or so the high street banks have had to mix it up by going down town, to tap into this energy that was unleashed by a more liberalised and open economy.

Believe it or not, there was a time when all the bank branches in Kampala were on Kampala road and opened from 9am to 1 pm on Monday to Friday.

By force of will banks like Crane Bank and Greenland Bank before it, demystified the banking experience for hundreds, even thousands of new account holders.

"Maybe Crane Bank’s undoing was that as the SME sector grew and the bank along with it and their clients’ needs grew, there was a need for more formality and more prudent risk assessment. Failure to make the transition may have caused them to trip up...

The truth of what really happened will be known in the fullness of time.

It’s safe to say SMEs will suffer the brunt of the changes that are going to have to be made.

But even sadder is that an indigenous bank with its finger firmly on the pulse of the local economy has come up short, yet again.

One of the challenges in our economy is the inadequacy of our indigenous capital class.

We are very good at starting up businesses – in fact at one time we were judged the best in the world, but we struggle, even fail dismally, to grow our businesses to significant size.

According to a list of a hundred top tax payers only seven indigenous companies – not counting parastatals, made it onto the list.

The knee jerk reaction is to argue that foreign firms have access to cheaper funding compared to our local businessmen and hence the bias.

That is true to some extent, but what is even truer is that the foreign companies come with well-established systems and institutional frameworks that allow them to not only be more efficient but also take maximum advantage of opportunity.

"So our failures start with our business practice. And because our business practices are wishy washy we can’t get access to finance. Finance follows organisation not the other way around...

Crane Bank showed us that if we are organised we can even own our own banks, which relate to our own peculiar circumstances.

And the need for a credible indigenous capital class is not based on some corrosive xenophobia, but for desire to get more of our businessmen to the next level of achievement.

The lack of mentors in our society to lead others along the path they have taken, is a serious issue.

Brazil churn out thousands of quality soccer players annually because every child in Brazil knows an older boy who has made and more importantly, saw him work towards professionalism. Every Kalenjin kid in the Kenyan Rift Valley knows another kid who made it. Closer to home every kid In Kisubi or Budo or Namagunga or Gayaza knows what it takes to get a first division – it helps that they are of above average intelligence, but it helps more that they have seen not one or two or three people achieve but whole classes, year after year. That’s the mentorship we lack for our businessmen – forget the MBAs with their power point presentations.

For every member of America’s Fortune 500 list there are thousands who failed and hundreds who have not risen to their full potential.

It is a numbers game. That is why an indigenous bank is important. Because it is so integrated in the local economy and not driven by profit targets set in London, Johannesburg or even Nairobi they are the ones who can build that class of businessman – that is if they can stay alive long enough.