OF BLUE FLIES AND FOREIGN INVESTORS

1994, my worst Christmas ever. I remember it like it was yesterday.

I had stayed over at the university for the first term holidays.

When Christmas day came I had not factored in that the food vendors around campus would also want to go and be with their families.

At lunch time I wandered through Wandegeya, with my tummy sunken to my spine, in search of a meal but no one was open.

In the end we found some left overs – that’s what they seemed to me, at the market.

My enduring memory from the day was the blue fly. Have you ever noticed how flawless the blue is on those flies? I noticed that day. Given the source of its sustenance how could the blue be so perfect?.

Fast forward to today it’s unlikely that a liquid university student today would suffer the pangs of hunger that I did on that Sunday afternoon.

"In 1994 I couldn’t afford a bank account – they insisted on a sh100,000 minimum balance. Nor a mobile phone – and Ericsson 628 was going for at least a million shillings. Nor a taxi cab – the minimum fare was a few thousand shillings, maybe sh10,000 then....

Given a similar situation now my options would be much more open.

Not only are there many more food outlets, off my mobile phone I could tell where they are, get a ride there and once there even pay for the meal off my phone. Or order in and have them deliver to my room. Or better still call some long lost relative, determine their availability on the day and go and share their Christmas lunch for the cost of only the cab ride to and fro.

In the quarter of century since then, the explosion in investment has made such stories --- my Christmas saga, the stuff of campfire tales and made the standard of living so much better for many people.

In an ideal world every nation should have its own resources to develop itself in the way that it sees fit. But we don’t live in an ideal world, Uganda more so, given our history of civil unrest and economic collapse.

When the NRA came to power in 1986 the economy was on its knees and their political project was in danger of being dead on arrival.

An initial attempt to be independent led them to trying all sorts of remedies, including letting the money printing presses run free, before the reality sunk in: Uganda needed resources to resuscitate the economy, resources that were not available at home. Hence the look outward. The rest as they say is history.

They sold off the dieng state enterprises, broke up the failing produce marketing monopolies and opened the economy to investors from far and wide. The net effect of these policies was to make Uganda an attractive investment destination both for local and foreign businessmen.

The results are really there for all to see.

I remember speaking to an official of the privatisation unit in the 1990s and he revealed that when he had to handover the Tororo Cement factory to the buyers, he was so embarrassed, the factory was in a dilapidated state and its machinery obsolete.

“I felt like a con man. The truth is we should have been paying some of these investors to take these bad companies off our hands instead of them paying us to buy them,” he moaned.

Today after tens of millions of dollars in investment --- the latest expansion to increase production 70 percent to the current three million tons cost $25m, the same factory is the largest producer in the country. The company says on its website that it directly employs 900 people and 16,000 indirectly, a far cry from the mothballed factory of two decades ago.

"The foreign investor has become such part of the fabric of our society as to now become clichéd. We actually take them for granted...

The interesting thing would be to look back to my 1994 Christmas lunch and as to who was around at all at the time and try and remember what life was like without them.

As a group the South African firms would serve as a useful case study, as they only started to stretch out into the continent around the same time.

Last year the top 20 South African companies paid more than a trillion shillings in tax to the treasury.

A run down the list shows that only Barclays Bank, now owned by South Africa ABSA group, were around with only two branches in Uganda, one on Kampala road and another on Luwum street and Nile Breweries, then a Madvhani owned company were in business.

So think about it, we had no MTN mobile phones, we didn’t have a Stanbic bank, we had no digital satellite TV, no Game or Shoprite stores and ESKOM was not generating our power from Kiira and Nalubale dams. And by the way it is not as if these firms came in to replace or muscle out existing players, all the above services were not being rendered – oh! Except bad power distribution by the Uganda Electricity Board (UEB).

These South African companies as far as I could tell, have laid out at least seven trillion shillings in investment over the last seven years in capital expenditures, property and equipment and intangible assets.

"One can safely say investors from China, UK, India, Netherlands and even Kenya in investing their money here, have not only found it very lucrative but have served to improve our standard of living through the products and services they provide and their contributions to the national budget...

On the other hand if these investors were in town on that Christmas lunch so many years ago I may not have appreciated the perfection of the blue fly!

LET US AIM FOR A HIGHER STANDARD

The exam result period is upon us.

Last week the Primary Leaving Exams (PLES) result were released to much drama and fanfare. A trend has now been established, one that has seen private schools overhaul the traditional schools atop the perch of success.

In the New Vision index which employed the average aggregate score of each school as a measure of success it took until the Mugwanya Preparatory School in 161^st position to see a “traditional” school. 

And it didn’t do badly at all managing 8.896 aggregate average for its 125 candidates.

"Assuming an investment of at least a billion shillings a school, you are looking at least sh160b investment in schools which was not there 10, 20 to 30 years ago...

It’s no secret that the investment in education in Uganda over the last three decades has been humongous.

Going by the success of these schools – academically and financially, I think we are fast approaching a saturation point. The competition is already intense and school proprietors using every trick book in the book – drilling the kids into examination automatons, culling underachievers and even blatant cheating are pushing the limits, but it will get even more intense.

The challenge of course is that these schools are mostly in the hands of businessmen, which is not a bad thing in itself except that they are mostly driven by the profit motive than creating well rounded individuals.

But first a brief diversion.

About 20 years ago a UNDP study identified education as one of seven sectors where Uganda has or can develop a strong competitive advantage. The others were health, agro-processing, ICT services, tourism, financial services and mining.

Education was singled out because the language of instruction is English and we have an easily adaptable system, whose output is in demand in a region where the education infrastructure is broken down or non-existent altogether.

It is already happening but our school proprietors need to be incentivised to think beyond our borders, in a systematic and sustainable way.

"But before we do that we need to standardise our curriculum, beef up our teacher education and enforce basic standards across the board...

We can take lessons from North East Asia’s success in developing an export driven economy over the last 70 years.

The original Asian tigers of Japan, South Korea and Taiwan rather than frown upon the profit motive of the private sector, first took time to understand its workings and then sought to leverage those same “shortcomings” to achieve their developmental goals.

Key to this was the insistence on export discipline and private sector competition.

These countries not only encouraged private sector competition, that’s why Japan and South Korea have multiple car makers, but pegged any state intervention or subsidies to their ability to compete in the international market.

Private sector competition as opposed to centralised planning, leads to innovation and cost effectiveness. And pegging subsidies to international market acceptance does away with the crony capitalism, because the international markets do not care whose relative you are in deciding to buy or not to buy your products. The combination produced ever improving products at affordable prices.

Education, arguably Uganda’s most developed sector, even more developed than coffee, because it churns out finished products at various levels, we can test this. It is both a matter of survival for our schools and the nation.

The aforementioned saturation of the market means that schools will or are already falling by the wayside. A situation we cannot afford as there is still a need to educate millions of children well into the future to achieve our developmental ambitions.

So let government support the export of educational services.

They can start by laying down the criteria for schools they will support in terms of infrastructure, teacher-student ratios, scope of what they can offer and extra-curricular activities.

In addition to existing tax benefits schools can benefit from they will enjoy other incentives, maybe higher asset depreciation rates than schools that don’t qualify to the extent that they have foreign students in their schools.

"Apart from bumping up our export numbers these schools will also raise the standard of our education for local students as our teacher education will be improved and curriculum beefed up. Also one can expect improvements will climb up the ladder not only making the country a regional education hub but also improving the quality of education available to more Ugandans than those who can afford to fly out...

It’s a potential gold mine for investors and the government that we are seating on here.

If we can do it with education we can then roll it out to health, ICT, financial services, tourism, agro-processing and mining.

Why not?

UGANDA MTN LICENSE RENEWAL: A REGIONAL TEST CASE

MTN’s licence expired in October and it has been negotiating its renewal before that and since.

But a recent communication to the regulator Uganda Communications Commission (UCC) from President Yoweri Museveni may scuttle what was believed to be a breakthrough in negotiations with the agreement of a $58m (sh220b) license fee for the next ten years.

The President at the end of October wondered why the UCC had agreed on the license fee, a sharp discount from the earlier proposed $100m and ordered UCC to explain themselves.

In this challenging time when government is looking for every coin it can get the president’s querry is within the bounds of reason.

On the surface of it a 42 percent discount seems like a huge comedown from the initial negotiating position of $100m.

But maybe not.

"No one doubts that initial leap of faith by MTN 20 years ago has paid off handsomely for them as a company, for the treasury and for us the regular users, not only of their service but for all mobile phone companies that have followed their lead into our market....

Coming in blind in 1998, the optimistic projections were that the telecommunications company which was playing second fiddle back home to Vodacom, might be able to hook up 89,000 lines in five years.

They surpassed that number within the first year of doing business in Uganda, tempting them to spread their wings further field, to the point that today they are the largest telecommunications company on the continent with total revenues in 2017 of  R133b (sh36trillion).

Here MTN, which is the market leader in 2017 booked revenues of sh1.6trillion paying the tax man is dues of sh450b in 2017 and sh3trillion over the last 20 years. In addition they contributed sh120b to rural communication fund, paid to the UCC and earmarked for the extension of telecommunication services up country.

With all these in mind and the potential future growth of the company, government wouldn’t look unreasonable asking for more.

However last year parliament passed the National Broadband Policy which seeks to achieve affordable and widespread fast internet access. For the private players this would required to lay down infrastructure to improve internet access countrywide, an investment that would not be immediately viable or in their respective rollout plans. The telecomm companies will be expected to shell out millions of dollars towards this investment – MTN’s share it is expected will be about $200m.

In view of this additional investment, which is separate from the two percent taken off gross revenues annually to finance rural extension, it is not surprising that MTN was motivated to negotiate the initial proposal further down.

In fact the $58m they settled on with the UCC is more than reasonable considering the regional trends.

Assuming the initial $100m for ten years comes to about $10m annually. The same license in Kenya for 15 years will cost players there $27m or about $2m a year. Tanzania is even more concessionary requiring a million dollars for a 20 year license or about or$50,000 a year.

Our two neighbours Kenya and Tanzania not only have larger economies $80b and $60b respectively they have larger telecommunications markets. Industry experts place the Uganda telecom market at about $850m compared to Kenya’s $3b and Tanzania’s $1b markets.

While it may seem that in West Africa where MTN has paid more,  $124m in Cote D’Ivoire and $94m in Nigeria, this was for 17 years in Cote D’Ivoire or about $7m annually. In Nigeria they got a five contract renewal in 2016 which cost them $94m or about $18m annually. However their operation in the West African nation has about 60 million subscribers to spread this cost over, which more than accounts for a perceived higher price than in Uganda where MTN has about 12 million subscribers.

"The hidden benefit to less expensive license in our region could explain why East Africa is on the cutting edge of mobile money developments. The mobile money ecosystem that has gone beyond money transfers to include loans, hire purchase and insurance was piloted and developed in this region by Safaricom and MTN.

It makes sense that companies operating in a conducive environment with fair fees will invest in research and innovation to the benefit of all.

Creating an enabling environment for investment is often a balancing act, where governments extract enough that they can finance their own projects but then not so much that businesses cannot thrive let alone survive.

The government is right to demand its just pound of flesh but we need to do this without throttling the goose that lays the golden eggs.

THE SMALL THINGS THAT MAKE A BUSINESS

On a recent visit to Mombasa I got into an altercation with a cab driver. I wondered why he didn’t have change. With incredulity written all over his face he asked back, “You don’t have M-Pesa?”

M-Pesa is the mobile money service offered by telecom giant Safaricom. It has become so successful that it controls 80 percent of the mobile money market in Kenya, drops $624m (sh2.3trillion) into Safaricom’s pocket and the value of transactions on the service last year amounted to the total GDP of Kenya or about $74b dollars.

They have created other spinoffs and not just stuck with money transfers, from offering credit to providing a payment system to starting up their own ecommerce site to offering taxi hailing services.

For me it’s an amazing case study of how monies can be mopped up and funnelled into the formal financial sector in a developing country.

But this is not a story about Safaricom, not directly at least.

This is a story about my driver, only identified as Bwanamkuu (The top boss) on the cab hailing app and what he represents in Kenya, that is different from Uganda, and why the Kenyan businessman and woman is way ahead of the curve as compared to their Ugandan counterparts.

"By preferring payment by mobile money, these small business are accumulating an independently verifiable record of their income. But given that easily eight in ten transactions in Kenya are done over mobile money, it also provides an independently verifiable record of their expenses...

This is important because the small Kenyan businessman, with a little bit of tweaking can now actually access financial services with these records.

One of the reasons small businessmen are struggling to get funding is because they have no records of their business that can allow financiers, be they lenders or investors, make an informed decision of their business. This can be the difference between getting money at 25 percent (high already) or not at all.

Think about it.

In the last two decades we have seen a proliferation of salary loans. Previously banks wouldn’t touch unsecured lending with a 100-foot pole, they only accepted property titles as collateral. But now, because they can get a record of your income, verified by your company and which they see streaming into your account monthly, they have greater confidence to lend to the salaried worker.

Now compare the Kenyan taxi driver, street vendor or service provider eg slasher, househelp, security guard and their counterparts in Uganda. They are more likely to get funding than our own would be on the strength of this deiffernce. Small on the surface of it but earth shifting when analysed properly.

If access to finance is a challenge for small businessmen around the world the adoption of these technologies will, with one swipe minimise that challenge significantly in coming years.

Already in Kenya mobile phone credit providers are reporting a spike in credit approvals between two and four am every weekday. Are these the youth borrowing for one-for-the-road? Maybe medical emergencies? Maybe delayed transactions carried over from the previous day?

None of the above.

As it turns out the market vendors borrow money at that time of the day to buy fresh produce from their suppliers before they go off to market. After they have sold their produce, normally by mid-day they repay the loan. At three am the next morning they are back to borrow again.

It is already happening but this adoption is going to revolutionarise not only individual incomes of Kenyans but the wider economy.

The challenge with economic growth are two fold. 

That often to shift the needle, you often need big ticket items – roads, railways, dams to be built and secondly, the major drivers of economies, these investments, often have little or far off linkages to the common man while they are under construction, so the growth recorded is concentrated in a few hands. Little trickle down is seen in the statistics.

Now imagine how the calculation of Kenya’s economy is going to shift dramatically to reflect these transactions, which it is reported are already as big as the Kenyan economy, and growing with no sign of reversing or even plateauing soon.

For the small businessman this is an absolute God send.

Small businessmen complain that they have no access to credit, leave alone that it maybe pricey. But that is a symptom of their lacking verifiable records that can be used to make an educated guess about how risky it is to be involved with them.

"But now the Kenyan businessman at every level, have access to credit, understands at a very visceral level what it means to maintain a good credit rating and more importantly why he needs to liberate his monies from  his socks, bras and from under their mattresses and plant them in a formal financial institution...

Kenya is leading the way on financial inclusion.

It was a useful real life experience how this is taking hold in practical terms and to get a sneak peak at our own future.

WHY DO WE FEAR THE MARKET?

It has been three decades since economic reforms kicked off with the currency reform of 1987.

Since then government has privatised its large portfolio of companies and broke up the monopolies that these controlled.

For a near bankrupt economy this was just what the doctor ordered.

The truth is government had no room to manoeuver other than shed these haemorrhaging companies, release their assets to productive players in a last ditch attempt to jump start the economy.

This is after the NRA straight out of the bush tried everything from price controls, commodity rationing, barter trade and came up against the reality that the only way to get the economy going was to fire up production, which its derelict companies were unable to do.

So with a lot of reluctance, they turned to the market for help.

"By privatising the companies and liberalising markets they improved the environment for doing business in Uganda...

Coffee farmers started getting paid in cash for their crop instead of the chits they got from the government marketing boards that would take months to be paid out, if ever. We stopped importing sugar, sodas, beers, blue band and even bread because were now producing them locally.  On shoulders of those initial reforms we have seen improvements in everything from banking to telecommunications; from education to health care (if you think our health services are bad now you should have been around in 1987), in everyone of these instances it was the private sector jumping where government was failing.

There have been mistakes of course. Neither the victors nor the bureaucracy they found in place had a clue about what it takes for a market driven economy to work optimally and their role in making this happen.

So they took advice from the donors who were driven by a desire to return the country’s economy to a functioning state rather than trigger transformation.

The trouble with the market is that left to its own devices, it is a terrible distributor of the value it creates, concentrating it with the owners of capital, to the detriment of labour and the poor.

A competent and patriotic state not only restrains the market players’ instincts for primitive accumulation but also facilitates them to be innovative and produce for the larger population.

The colonial state for instance facilitated the extraction of value for the benefit of the capitalists in Europe with little regard to the welfare of indigenous populations. That is how at independence we had about 300 A-level students out of a population of seven million people, if you extrapolate it today, with 40 million population we would have under 2,000 A-level students.

Without investing in people, governments cannot expect to cause economic transformation.

So the inadequacies in government over the last three decades means while we have had the longest continuous stretch of economic growth since the creation of Uganda, this has not been spread equitably.

It’s not difficult to see why this is so.

For starters with seven in ten Ugandans deriving their livelihood from the land, agriculture accounts for under 30 percent of GDP. Agriculture’s share of GDP has fallen sharply from almost 80 percent in 1986 as services and industry have grown as a proportion of the total economy.

In more developed economies agriculture accounts for an even smaller percentage of the economy but so do the people who depend on it for sustenance. Industry has sucked up the labour from the rural areas, which has led to consolidation of farms and greater mechanisation.

Relatedly while most Ugandans rely on agriculture, output in this sector has been anaemic, not keeping up with the growth in services and industry.

As a result in the last three decades the biggest beneficiaries of the economic growth have been urban dwellers, who have not only seen their incomes but also their standard of living rising.

It has been claimed that Kampala for instance accounts for 60 percent of the nation’s GDP since most of the value addition, services and industry are located there. If we were to be conservative and say half of Uganda’s $25b GDP is generated in Kampala and parcel this amongst the city’s two million daytime population the per capita GDP of Kampala is about $6000 almost ten times more than the national figure of $600...

This obvious inequality is being seen as a market failure, being held up as a red flag and reason for a greater state intervention in the economy and even more scary, a return to era of the state enterprise.

First of all what do you expect from a pig than a grunt. The market while being the most effective creator of wealth or growth is the worst distributor of these, as mentioned earlier.

There is nowhere in the world where the market left alone can result in an equitable society. It is the job of government to not only facilitate the development of the market but to distribute its gains to the people.

"If there are huge inequalities in a society, more so in a growing economy like Uganda’s, this is an indictment of government not on the market...

The market is doing fine, as evidenced by the continuous growth over the years. So it is counterintuitive to give more and more control of the economy to the same sector that has failed to facilitate equitable development.

Actually we should be more afraid of greater state intervention (read state enterprises) than the market. The market is the devil we know and the means to leverage it for transformation and equitable development are known and all around us.

There is a role for governments to play in facilitating growth and development by underwriting the security of person and property, infrastructure development and the provision of social services. In addition they can underwrite research and development.

All this on the basis of a national strategies aimed at exploiting our competitive advantages and creating new markets. They need not start state enterprises to do that.

The argument that countries in Asia relied on state enterprises to jumpstart their economies after the Second World War has its loop holes.

The more successful Asian tigers – Japan, South Korea, Singapore and Taiwan, relied on strategic support of the private sector to drive their export led growth agendas.

And secondly if those same countries were to copy what the western economies had done to develop, should they have tried their hand at colonialism and slavery, because it had worked for western economies?

LOOKING TO A PROSPEROUS 2019

Happy New Year to all our readers.

In the greater continuum of time a year is but a moment but for us living through it has far reaching repercussions for us.

There are things we did or things we omitted to do; there is the route we took or did not take when came to the fork in the road in our journey; Things we said or did not say. All of them but moments in our lives but whose consequences will live with us and generations to come long into the future.

"There is a lot to say about 2018 but I think the key issue that is going to lay a basis for 2019 and beyond is our attempt to resolve the frustrations around land in this country...

The land probe led Justice Catherine Bamugemeirere has been wading through the chaos of our land situation in this country. They have uncovered fraud and victimisation the total picture of which most of us have been unaware.

To state the obvious the land issue and its speedy and judicious resolution is key to our development ambitions.

It is a challenge enough that we do not have one uniform land tenure system across the country. To begin with most land around the country is owned privately. In other countries the government owns all the land and people lease it. This makes a big difference when it comes to public projects and planning of land use .

So we have freehold, mailo, leasehold and customary tenure systems.

That aside because of decades of sweeping land issues under the rag, powerful interest groups have grown around this resource that have proven not only to be a counter to government’s authority over the resource but have also been unafraid to take the law into their hands to resolve ambiguities over this resource.

This uncertainty has caused investors to pause, which attitude we least in a country that is in a hurry to develop.

"Land underpins all assets and therefore an uncertainty about the security of land rights means no meaningful investments can be carried out...

If I going to put down billion s of shillings to start a farm or construct an industrial park or factory or set up any productive asset I need for a start to be sure that the land I will buy for the purpose will be locked down against any unreasonable claims.

This is basic common sense. Which makes me wonder when some “investors” claim to have invested billions in a project and yet they have not even secured the property.

Uncertainity, which leads to unpredictability is not capital’s friend.

A resolution of out land issues and the development of a useful baseline from which to handle the various tenure systems is critical to unlocking the full potential of our land.

We have almost half the region’s arable land, yet the output of our farms is among the lowest in the region because not enough people want to invest in farms to raise output. They say that an aerial survey of our potential minerals showed that if we were to exploit our full potential, Ugandans would have to move out first, but we are not a great mining nation at all.

"Is it any wonder then that titled land sells at such premium even compared to elsewhere in the region? Relatedly is it any wonder that the urban areas, particularly Kampala continue to hog the benefits of the last three decades of economic growth?...

Unfortunately land issues all over the world are politically explosive and seating governments tend to pussy foot around them at best or maintain a bad status quo rather than do what is necessary to unlock its potential.

The Bamugemereire probe is not going to unfurl the mess in the land sector but we are hoping that it can at least create a base from which to start resolving the issues and allow for the full exploitation of  the land to our benefit.