UGANDA CITY TRADERS: LOOK TO YOURSELVES RATHER THAN TO FOREIGNERS

In the 1990s city traders threatened to protest against Uganda Revenue Authority’s (URA) unfair treatment of them compared to foreign traders.

That time they were protesting the preferential treatment that supermarket chain Metro Cash & Carry was getting. According to them URA had licensed the South African firm’s warehouse as a bonded warehouse – meaning that goods were landed directly into their warehouses and taxes assessed and cleared there. This is opposed to what was happening to the average trader who had to first clear his goods from URA before taking physical possession of them.

The advantages of the former over the latter are quite obvious in terms of saving on time and other conveniences.

URA officials at the time argued that it was like comparing oranges and mandazis. That the volumes Metro imported were much higher than any single trader around and therefore it made sense to register their warehouses as bonded warehouses. Our local traders who could not as individuals even fill one container and therefore was not practical to do the same for them.

"I couldn’t help feeling a sense of déjà vu this week when I heard that our local traders were again up in arms against foreigners who were squeezing them out of the retail space...

Our traders argue that these foreigners were getting tax incentives and were therefore able to undercut them and were steadily driving them out of business. They have no proof of the tax incentives but assume that is how the foreigners are managing such low prices.

The spectre of the foreign businessman seems to loom large over our local businessman. And for good reason.

Many of these foreign businessmen may be front runners coming ahead of much bigger players. Prospecting so to speak for the big boys.

The advantages that come with this may include goods offered on credit, lower borrowing costs and the importation of large volumes of product, allowing them to benefit from economies of scale.

"Economies of scale, the principle that by spreading your costs – transport, labour and fixed costs over more units or volume, you can then sell a product for less than if costs had been spread over fewer units, is where our traders challenge is, rather than the assumed evil intentions of foreign competition....

We see it all around us. In a single mall on a single floor there can be a dozen shops selling clothes. 

Each trader not only has a small stock but also has rent, freight, labour, utility and tax charges to factor into their price. In more cases than are useful, they also have to factor in their air ticket – more than $2000 round trip to Guangzhou including accommodation, as an additional cost.

A “foreigner” on the other hand will cut out his air ticket. For the cost of a few megabites he can place an order to his supplier (probably the same one as our hapless traders) and have it shipped to Kampala. A 100 MBs go for about sh2,000.

We haven’t even begun to consider the reduction in rentals on price of a unit of floor space when considering a 30 meter square shop compared to 300 meter square shop floor.

Blaming foreigners is an easy thing to do. It is easy to mobilise against foreigners. The harder thing for our traders and their leadership to do is to look at themselves , re-examine their business practices, cut out their inefficiencies.

A major inefficiency of our business community is that too many businesses are sole proprietorships. 

The obvious implication of this is that they remain small for lack of adequate capital. This has implications on their ability to bargain with their suppliers and clients, borrowing terms or any number of issues that can lower the costs of doing business.

"There is an irreversible trend in world commerce that is beyond our power to turn back or resist. Barriers to trade are coming down and with it will come better competition...

Our business community has a choice either to continue as they are and hope to hide behind the government’s skirts whenever they are threatened by “foreign” competition or get smart, improve their business practices and become better competitors able to resist or at least collaborate with foreign businessmen.

In the first instance its only a matter of time before government hungry for more and more taxes hangs them out to dry. Or as in the second scenario they be able to hold their own in a rapidly changing world.

There is no plan C

BUY UGANDA, BUILD UGANDA, ABOUT TIME

The recent announcement by the trade minister Amelia Kyambade that government is going to push a bias towards Ugandan goods and services is a timely one.

Currently Uganda is in the midst of an economic slowdown triggered by among other things, recent drought, an emphasis on huge infrastructure projects, delays in the development of the oil sector and plugging of certain leakages to government funds, which facilitated corruption.

One of the challenges for the Ugandan business is one of little internal demand for locally produced goods, which is further exacerbated by the free movement of goods and services through the East African Community (EAC).

"And because we are not producing, we are not creating jobs at a fast enough pace, out terms of trade are worsening as we continue to export raw commodities whose value fluctuates widely from year to year while we import higher value goods, a situation which does not favour our shilling nor our individual standards of living...

The objectives of Buy Uganda, Build Uganda (BUBU) include that in the next five years 20 percent of all government procurement by value should be sourced locally and that the 50percent of all shelf space in the market should be dedicated o Ugandan goods.

If executed well this is a useful initiative.

Government is the biggest client of any single group. A commitment by government to direct it’s sh24trillion budget towards production it can have a ripple effect through the economy.

But first our producers must produce.

Barely 20 years ago Vietnam was just making up the numbers in the world of coffee exports.

But beginning at the end of last century Vietnam’s coffee production jumped. They are now second only to Brazil as coffee producer, sending more than 25 million bags to market last year.

Uganda coffee exports have grown to just under 4 million bags annually over the last 20 years.

Vietnam were able to ramp up production by doing away with collective farms and letting the private sector play a more central role and in strategic government interventions especially in the provision of inputs and extension services.

That aside a sizeable amount of Vietnam’s coffee is consumed in-country and through their own initiatives have seen its coffee take first priority over other coffees in restaurants, schools and government offices.

"We like to talk about industrialisation but 50 years into our independence there is little we produce on an industrial scale. The BUBU initiative may be the kick we need to get off our backsides. The initiative if executed half decently should see government beefing up demand for our local products, which would have to scale up production....

The point is that to talk about industrialisation while not organising production means it will continue to be a pipe dream. And we are not even talking about huge land holdings being put under coffee. There will be a few farmers who can manage huge plantations but by increasing the productivity of our small holder farmers, who currently harvest about half a ton per hectare, well below their farms’ potential then the benefits of increased production will be more widely spread.

In business the effectiveness of one’s execution will depend on the human resource you have at your disposal, efficiency of the operations and the effectiveness of your strategic process. It wold not be stretch to say we are deficient as a country in three areas but we are particularly bad on strategy. 

Human resource is the essential ingredient but once your strategy is lacking or non-existent there is really nothing you can do about marshalling the other two components.

It is heartening to see in the coming budget government has not only earmarked funds to hire more extension workers but has also scrapped VAT on extension services. A lot more has to be done to make possible affordable agriculture finance, robust agro-processing and export promotion incentives.

Sticking with coffee, Brazil the world’s biggest producer of coffee – it produces three times as much coffee as Vietnam is so invested in the crop because of the ripple effect through the economy. It not only exports bean, but also has developed its own coffee brands that compete favourably at home and abroad. But Brazil is also on the cutting edge of coffee research and development which not only means they will always be increasing the productivity of their farms but has spawned alternative uses for the aromatic bean – from cosmetics to pesticides to fertilisers and even military applications.

All these are jobs from maximising the potential of one crop. Now imagine the magic we can conjure from all the crops we can produce in this country?

BITING THE BUJAGALI BULLET A CAUSE FOR SOUL SEARCHING IN UGANDA

It was reported from parliament last week that among the tax proposals government is laying on the table is a tax exemption on the income on the Bujagali Hydro Power Project for the next 16 years.

The genesis of this move has to have been the real desire to lower power tariffs as a spur to industrialisation.

As it is now Bujagali dam offers the priciest power of all our dams, mostly because the debt repayment element on our other dams is not a significant cost.

"Two years ago government threatened to buy off the dam as a way to lower the tarrif. At the time industry sources familiar with the subject that Kampala would have to come up with at least $1.4b to pay off the other shareholders on the project Sithe Global and the Aga Khan’s Industrial Promotion Services (IPS) and retire all the debt...

If they could do this with cash they wold have loped off $6.7 cents of the $11cents average tarriff Bujagali is selling power to the Uganda Electricity Transmission Ltd (UETCL). This $6.7 cents is what goes to debt repayments and shareholders.

With its various infrastructure commitments it’s understandable that government did not have that kind of money lying around. So that was a nonstarter.

As it is now of the $11cents sell-price to UETCL, the aforementioned $6.7cents is the largest components followed by $2.3cents for taxes and government repayments and $1.0cent goes towards operations, maintenance and administration.

The next best thing would be to extend the concession period to say another 50 years from the current 30. This would have the net effect of stretching out the debt over a longer period – we would pay more in debt over the longer period but projections show that the tariff will almost half to about $6.6cents.

One other thing would be to pay off all the debt, which comes to just over $500m and this would account for $3.8cents of the tariff. But again there is the sticky issue of where to find the cash. 

"Frenetic attempts last year to refinance the debt – essentially contract newer debt under more favourable terms fell flat as the treasury has very little wiggle room to contract new debt...

Government has resorted to a waiver of income tax on the project until 2033, a situation they probably did not want to find themselves in but really had no choice given the circumstances. If along with this waiver government forgoes its dividends from the project may just bring down to about $7cents a unit.

This might be the breathing space government needs until Karuma and Isimba come in at the desired $5cents a unit. Industry players are dubious that that will happen in the short to medium term.

Clearly the high Bujagali tariff is a function of the source of financing. When the 250MW project was being put together the demand for finance from Asia and the Middle East was at all-time highs, this also affected the mobilisation of plant and machinery. No sooner had they begun work on the dam than the global financial crisis exploded and the credit markets seized up.

As if that is not enough in risk profiling countries – determining their willingness to repay the loan Uganda’s relatively weak fundamentals means projects cannot access money at the low rates that Europe or Asia or even South Africa can.

Our infrastructure needs are urgent. We are still playing catch up for the lost 1970s and 1980s when no new infrastructure was built. This despite the population almost doubling during the period. That we need more infrastructure to generate more growth is hard to dispute.

The challenge as the Bujagali project has shown us is that we are hamstrung in our ability to raise affordable financing for these projects. High cost projects mean the economic benefits may not materialise as fast as we want them to.

If we had more long term savings available in the economy we would have been better placed to structure a better deal.

Which brings us around to the issue of pension reform. Pension reform is necessary not only for NSSF to work better – there are some initiatives they have in mind but can not implement for lack of a legal framework, but also as a means to mobilise more savings for deployment on such projects.

Concerns that foreign pension schemes can fold shop and disappear with our hard earned savings are valid and should not be ignored.

"The worry too that by fully liberalising the market we might not have say over the deployment of the resources, with private managers choosing to invest in real estate and services rather than manufacturing and agriculture – the productive sectors, are valid too...

Managers reporting to headquarters in the US, Europe, South Africa or even Kenya only care about showing a good bottom line in the short run rather than think long term. The law can be written in such a way that these pension managers behave in line with our development agenda.

The writing ios on the wall the issue of mobilising savings can not be put off any longer.

MUSEVENI, BESIGYE TALKS A FLY IN THE OINTMENT

At the beginning of the is week it was reported that Kizza Besigye talking to  his party delegates in the eastern town of Soroti, revealed that progress towards talks with the government were in high gear.

That the issues to be discussed were, among others, the audit of the last election results and a post NRM Uganda. And that the Swedish government was set to play the mediator in the talks.

President Yoweri Museveni beat Besigye handily in last year’s elections and a petition against his election was dismissed unanimously by the Supreme Court. The NRM has an overwhelming majority in parliament.

"Attempts to mobilise the masses a la “walk to work” demonstrations of 2011 died on arrival. In the latest contest between the country’s two largest parties, the NRM engineered the failure of the FDC to send a representative to the East African parliament.
With this one stroke they let the watching public know who is boss while at the same time spreading dissension in the opposition ranks...

A cursory analysis suggests that Museveni and his NRM are holding all the cards in this battle of wills.

That the NRM would even entertain seating around the table with FDC to essentially give our away its advantage could only mean one of two things, but not both.

One that the NRM’s stranglehold over the political process was actually not as conclusive as we were led to believe. And they know it. So they are trying to buy themselves some time either by suing for a ceasefire with FDC or at worst forge some sort of alliance, also intended to buy them some more time at the helm.

The second possibility is that there were no talks to begin with and that this was just a play by Besigye to keep that agenda in the public eye.

A perfectly legitimate political manoeuvre.

A sluggish economy, the recent drought and now a host of plagues to our crops that threaten the livelihood of millions of Ugandans, could be a basis for the perception that the NRM does not hold the confidence of the people like it did before.

One could even drum up the recent high profile murders as a sign of the end of days for the NRM.

Who knows what sentiments are simmering under the surface in our bars, funerals, weddings and other social gatherings?

There is discontent but it would be stretch to believe that it is about to boil over and sweep Museveni and his NRM into the dustbin of history.

In 2002 when Kenya’s then President Daniel Moi was  letting go of the reins of power and anointing Uhuru Kenyatta as his successor there was a lot of relief and people cold not wait to see the back of the professor of politics. There seemed to be an overwhelming feeling, so think in the air you could cut it, that if there had been a choice to vote between a jerrycan and Moi, the latter would have come in a distant second.

We shouldn’t forget that Moi had not won the majority votes since 1992 when multi-party elections were reinstated. He had previously had the constitution amended to allow this to happen and prolong his stay another decade.

Even with his well-oiled, state funded campaign machine Moi knew he could not win a 50+one majority at the polls.

The point is that if the NRM were suffering severe weakness it would not be missed, hard to ignore.

"But as pointed out earlier, it is legitimate political tactics to seek to sow doubt in the population’s minds. But there is only so much you can achieve with this until the led demand tangible results...

The opposition and FDC in particular, need to get organised if they are to have any chance of forcing the NRM to the table. Organisation will bring the numbers, the sustained noise and the pressure that a dominant NRM can pay attention to.

No number of Hail Mary passes will get the opposition to the Promised Land unless they can back up their rhetoric.

UGANDA NEEDS TO TACKLE INEQUALITY URGENTLY

Last week Oxfam released a report we showed that income inequalities were widening instead of narrowing and as a result the top ten percent earn about 36 percent of incomes while the bottom ten percent take home a paltry 2.5 percent of national income.

It does not take a serious understanding of numbers to work out that there is something badly wrong with that picture.

From a moral point of view the question has to be asked, how a small number earn so much more compared to the rest of the population.

"But morality is not where you should be looking for the answer. It’s possible that most of the high earners do it through legitimate jobs and businesses, to blame them for their success would be to ignore basic economics and to pander to unuseful populism...

But the question still needs to be asked, how do a small number of us command the biggest amount of the country’s economic gains, leaving the rest to pick up he scraps?

The answer lies in how money is earned and how our economy is structured.

People get paid according to the value they bring to the market, their negotiating power and the size of that market.

Value is created through knowledge and experience. How much does one know and what can they do with what they know. That’s why it’s been observed that the more educated you are the higher income you can expect. Of course this depends on what you are educated in and its relevance to the market.

But you might be the best in a field where skills are in demand but your negotiating position is weak, either because you do not have a fair understanding of the demand for the value that you possess, extraneous circumstances such as issues about your credibility or health are such that you can’t ask for top dollar or there is a mismatch between your knowledge and experience and the job you are in or seeking.

And finally you van be the best at what you do and a good negotiator to boot but you are playing in a small market and therefore cannot be paid up to your true value. For instance Ugandan soccer player earning are not about to compete with the remuneration of their couterparts in Europe, China or even South Africa because there too few people who appreciate your skill.

Drilling it down to our current situation as described by Oxfam. Most low income earners are in the village rather than the urban areas. The majority of our farmers are using rudimentary farming methods – hence building little value into their output, have weak bargaining positions because of their low out put at individual level and their ability to aggregate their harvests and finally their immediate markets do not offer them much pay for their effort...

An urban worker on the other hand is more likely more educated and even specialised in what he does, leverages tools that maximise his out put, probably have some bargaining power – given the demand for their unique talents and play in a more concentrated and higher output market.

So to a plan start to redress our income inequalities is quite simple, though not easy to execute.

One, you need to increase the knowledge, the farming methods of our rural cousins. Quick wins can be managed by showing them better ways of planting their crops, maintaining their gardens, reducing post-harvest losses, forming groups to bulk their produce and increase their bargaining power with suppliers of inputs. This even before we start talking about irrigation, green houses and improved genetics.

This the job of extension workers. Studies done by the World Economic Forum in our region show that the returns from extension services can be as high as 80 percent. So if your farmer has been earning a million a year an improvement in extension services can see him earning an additional sh800,000.

As it is now according to a survey by the agriculture ministry of the four million households in Uganda on 700,000 have come in contact with an extension worker. Using Kakira Sugar Works as an example where they have one extension worker for every 90 outgrowers, we should have about 45,000 extension workers scouring the rural areas offering advice to farmers.

Once farmer productivity is up the rest of the value chain can kick in much easier that it would be to elevate our farmer.

Its amazing our the neglect our farmers suffer despite the fact that seven in ten Ugandans derive a livelihood from the land, they provide about half our export earnings and they are the natural platform from which we can stage our own industrial revolution.

The growth of the last 30 years has come primarily from rehabilitation efforts of the 1980s and 1990s and explosion in services and construction in recent years. Agriculture which we pay lip service to as the back bone of the economy has seen its importance dwindle from more than 70 percent in 1986 to under 30 percent of GDP today.

This would be ok if manufacturing was carrying the slack. But the truth is that our agriculture has continued to be subsistence, even our agricultural exports are of raw commodities and growth in the sector has remained firmly in the single digit range over the last three decades.

"Manufacturing has seen some progress but totally underwhelming seen against a 30 year horizon. This is sad because manufacturing and agriculture are the labour intensive industries that would smooth out income inequalities...

They say that the definition of madness is doing the same thing over and over again hoping for a different outcome.

Our inequality will persist, even widen in future as long as we do not address the issue of low rural incomes in a sustainable way.

The answer is not to give them fish but to show them how to fish.

THE UNDERRATED EFFECTS OF CORRUPTION

This week two officials from the finance ministry were arrested for allegedly soliciting bribes from an investor.

The officials, Charles Ogol and Geoffrey Turyamuhika, were allegedly caught red handed with $500,000 (sh1.8b) that was given to them by the investor in a sting operation organised by the police. Sources familiar with the case say some of their counterparts in the ministry took to the hills when they were arrested.

While the story got full media play, the cynics among us cannot help thinking this is a token gesture, a necessary sacrifice to assuage the masses baying for blood, but is unlikely to accelerate the momentum in the fight against the scourge.

"Uganda is currently in the throes of an economic slowdown, the worst we have since the 1990s. For years growth was driven by government spending and consumption. However a shift in government expenditure towards heavy infrastructure projects, a closing of some of the leakages by among other things, insisting on a single account per ministry housed in the Bank of Uganda rather than the myriad of accounts dotted around the banking sector and a shift of donor assistance away from budget to project support, has shown up our economy for what it really was – a mirage propped up by corruption rather than production...

The chicken have come home to roost.

In hindsight the footprints of corruption were there for everyone to see.

A real estate bubble, which until recently saw property prices in Kampala rise to higher than similar ones in Nairobi, whose output is almost as big as the Ugandan economy. Relatedly a construction boom that could not be accounted for by the rate of credit growth. And our exports showed no sign of keeping up with the growth in our import bill, even when oil prices fell through the floor.

Corruption is a terrible thing and not only from a moral standpoint.

It distorts markets, as the corrupt in an attempt to legitimise their ill-gotten gains have no sense of the value of things, paying too much and driving asset inflation. They also cripple legitimate businessmen who have to factor in the cost of money when pricing their goods and services but then are undercut by the corrupt who don’t have similar concerns.

And finally it concentrates resources in a few people’s hands to the detriment of the majority. So for instance five years ago Mulago required sh22.5b to treat 140,000 in patients. But in the public service sh88b was stolen by a handful of people. Assuming there were hundred people in the ring who stole the money, each would have received an average of sh880m or the cost of treating about 5,500 inpatients in Mulago for a year.

Clearly these kind of comparisons are not known for good reason. No one wants to put a human cost to these numbers, otherwise as a society we might muster an appropriate response against the thieves. But more worrying, we do not want to come face to face with the real cost, because all of us are waiting in line for our turn. We daren’t upset the trough before we have partaken of it.

"Everybody is in on this racket from the lowly street child to the university alumni to the bible slapping clergyman...

The theory that the government cannot stand without corruption is now being tested. While it has not been eliminated the signs are that there is not enough to go around. We can expect a few more officials thrown under the bus in coming weeks and months as resources dwindle.

Corruption will not stop because the corrupt find a conscience. Corruption will be brought under control by the pressure from the legitimate economic players – the workers and producers, who have been cut out from the loop, insisting that the playing field has to be levelled or there will be political consequences.

Expect the champions of corruption to push back – after all, who wants to give up the easy money and out of this contestation will come a cleaner society.

Of course it may very well go the other way. That the corrupt pushed to the wall, blackmail the government into causing the taps to flow again and we return to business as usual. A jump in speculation and consumption unsupported by production and a continuation of the mirage of economic growth...

Wishful thinking or the ravings of the lone voice in the wilderness? Time will tell.