WE ARE RICH, SPORTS PESA SUPPORTS THE CASE

As I agonized through the Manchester United -Everton match last weekend it struck me that the Everton shirt sponsor was sports betting house SportsPesa.

To distract myself from our dismal performance I looked up SportsPesa. The betting house is headquartered in Kenya with operations in Kenya, Tanzania, South Africa, the Isle of Man and the UK. Then I checked what they paid for the shirt sponsorship with Everton and it came down to £9.6m (sh46b).

As if that is not enough they have sponsorship deals with English premier league teams Arsenal, Hull City and Southampton, the Kenya national soccer team the Harambe stars, as well as league teams Gor Mahia and AFC Leopards and in Tanzania Simba and Young Africans.

In addition, they sponsor Kenya’s rugby sevens team, boxing, motorsport, athletics and golf. And they sponsor 100 grassroots teams around Nairobi for good measure.

I was amazed that a company with the bulk of its operations in Africa is able to splurge so much money, they must be pulling in big revenues.

There is a lot of controversy surrounding gambling and in our parts of the world, sports betting in particular. Beyond the moral questions, it is a drain on many youth’s earnings, the possibility of hitting the jackpot, sucking them in, addicting them in many instances and impoverishing them altogether.

Because the truth is in any betting game the odds are stacked in favour of the house. Punters may win once or twice but most of the time, the majority of the time, they will lose. And when you spread this among dozens, hundreds and even thousands of bettors it looks a sure deal for the betting houses that they will make money most times.

All that being said, what really got me thinking is that a company whose business is predominantly in Africa can throw off enough revenues to sponsor premier league teams.

That’s like saying your poor relative’s nephew offering to pay the fees of your urban schooling children until they are done with school. And even then I fear I understate the fact.

In my mind it throws out once and for all the notion that we are poor as a continent or its constituent countries, and firms up my belief that the problem is only that we have not aggregated our resources in meaningful sums to effect local change...

Think about it, the people in the betting houses, at least here in Uganda, are not predominantly your middle class or upper class people, but people who park their boda bodas outside the betting houses on match day or the night watchman coming to try out his luck or the street vendor who has made some money and hoping to multiply it before he goes home. Real bottom of the pyramid types.

The difference between SportsPesa and the rest of us is that they have a structure which can tap into these funds and funnel them into the business to the benefit of the shareholders and the token sponsorships and charities they support.

The betting houses here in Uganda are not too shabby either. In the recent economic slowdown sports betting remained a growth industry, giving many an exciting option to which they could divert their hard earned shillings.

SportsPesa was a startling example, but we see it over and over again. Most recently e-commerce firm Jumia sold shares on the New York Stock Exchange and raised about $200m in so doing. Most if not all their business is generated on the continent. Name any other multinational and it’s the same thing be they in beverages, telecommunications, finance or manufacturing.

They got organized to deliver a product or service and are laughing all the way to the bank.

True there are structural challenges, bureaucratic impediments and a deficient finance ecosystem but it is clear that our fate is not beyond salvage.

But first we have to get our mentality in order. Business success does not come by mistake, if it has, be sure it is not durable.

A few things to think about.

A business is successful because it delivers a good or service that is in demand in a cost effective way, that is that it sells its wares for more than the cost of producing and distributing them. Profit is a bye product of a job well done. So the focus should always be on delivering good products or service.

Secondly business owners need to decide early on in which category their business is in, defined by the founder’s mission. A business is started for four basic reasons – to sustain the lifestyle of the owners, to pass on to the next generation, to sell it to the market or to satisfy some overarching philosophy.

In the first two cases there is no incentive to grow beyond the needs of self and family, which puts a cap on the business growth potential. In the latter two cases the business owners have a huge incentive to organize, formalize their business not only so it can expand but so too, it can fetch a good price at the time of sale.

"The latter two are bigger missions which if the founders are bought into, means they will be able to weather the storms, overcome the speed bumps of setting up any enterprise. In the former two the staying power is not as great. Maybe explains why while Uganda is one of the most entrepreneurial countries in the world the attrition rate by the time of the first birthday for most businesses, is almost total...

On an individual and even national basis we need to understand and appreciate that there is a wealth of resources available here that we haven’t even begun to tap into, this is even before we start thinking of mining our natural endowments out of the ground.

So yes, if we are so keen on ensuring we get a better shake on the exploitation of our own resources rather than call for the throwing up of barriers against foreign agents we would be doing ourselves a world of good if we got organized first.

DOES IT MATTER THAT JUMIA IS AN AFRICAN COMPANY?

So last week e-commerce firm Jumia listed on the New York Stock Exchange. One of their biggest selling points is that they were an African company.

However, this kicked up a storm with some people pointing out that while the company’s business is all done in Africa they have French founders, they are domiciled in Germany and their technical support is located in Portugal or something like that.

My first thought was, they wouldn’t have used “African company" in their prospectus if it didn’t sell and given they do all their business in Africa why should we begrudge them claiming they are an African company?

Then I learnt that the funding ecosystem that is dominated by white males tend to take mental short cuts. That the danger of Jumia claiming to be African has set a dangerous standard for these financiers, who will look for companies run by white males in Africa to fund, ignoring in the large part, efforts by Africans trying to start and scale up their own companies.

Put that way I begun to see why we had our underwear in a twist but I also thought there were valuable lessons to take from the experience.

One, that there is a lot of money out there – more than we can conceive, desperately searching for a return. It was reported that up to this point Jumia had raised $800m from investors. That is about sh3trillion or more money than we spend on roads in Uganda.

But also that this money has a price. The founders of Jumia in getting this money had their interest in the company diluted to under 9.8 percent, I have seen some reports that between the two of them they owned two percent of the company at the time of listing. By the time of the Initial Public Offering (IPO) they clearly were not in control of “their” company.

At the time of the IPO South Africa’s MTN holding was the single largest investor in the company with 29.7 percent of the company the rest of the company was shared about 60 percent by investors from Germany, Belgium, France and Luxembourg and 9.8 percent was held by “others” which probably means some of the workers at the company.

"The founders could have refused to take in other investors and try and bootstrap the company from its own resources or rely on banks loans and the reality today would have been that Jumia would not have been as big as it is today or the company would be dead by now. It reached a valuation of $3b during its first days of trading on the NYSE....

So the question has to be for the African governments and businesses, how do we tap into these huge funds sloshing about to scale up our businesses?

African governments because companies create jobs, pay taxes and directly and indirectly enhance living standards of citizens; companies because growth is a survival strategy, if as a business you are not growing you are dying or will soon be killed by the competition.

I think first off governments need to create an environment in which local resources can be mobilized and aggregated into meaningful sums. Then they have to create an environment in which these funds can be deployed profitably, preferably a liberalized economy with the appropriate incentives for businesses to grow and thrive. And finally the government has to create the environment in which foreign funds can enter the country find bankable businesses and make an adequate return.

And somewhere in between we need to recognize that we cannot have our cake and eat it. That we cannot keep all the opportunities, even within our borders, to ourselves. That there will be people with more exposure or access to finance who come around, see the opportunity, that is passing us by or we are too lazy to do the work to actualize, take it up and run with it.

But we forget too that there those who visit see an opportunity and fail anyway. We fixate on the successes but for every Jumia there hundreds if not thousands of failures.

In addition, we need to formalize our businesses. Formalisation not only makes it easy to assess the business from afar but also represents a mitigation of the risk to the financier wanting to invest.

If we could do this one thing we would be shocked how much money is lying around, even here in our poverty stricken nation, that is just looking for a home.

Even if you are loss making just having clear records of the operations and basic systems in place are value in themselves. Jumia made losses the last two years but was still able to generate huge demand and raise $200m.

I think Jumia were within their rights to call themselves an African country and objections to that are largely moral. It would help if they were domiciled in Africa, employed African techies on the continent but thet they didn’t is probably a function of the gaps on the continent and were demanded by their financiers.

I am learning too that in the new world of the fourth industrial revolution the days of a company being situated in one country are dead and gone. It been happening for a while already but now with even a greater pace, companies have their operations spread across countries, even continents, and their financing and staffing requirements are just as diverse.

That’s the reality and as countries and businesses we ignore this to our own detriment.

UGANDA REGULATOR NEEDS LONG TERM VIEW OF THE ELECTRICITY SECTOR

The Electricity Regulatory Authority (ERA) recently set new targets for power distributor Umeme, which will have far reaching implications on the efficiency and viability of the sector as a whole.

ERA set as part of its targets the reduction of power losses from just under 14 percent currently to 11.47 percent over the next five years to 2023.

In addition, the regulator requires that Umeme collect 99.9 percent of energy billed from current levels of 99.62 percent.

This is as it should be. The reduction in power losses has been a constant struggle for Umeme. Power losses are divided between commercial and technical losses.

In the former instance this is from people who consume power and do not pay – less of a problem now because of pre-paid metering. The main culprits in this case are government institutions. 

Technical losses are a result of poor installations, substandard equipment and the natural losses that occur in moving electricity current from A to point B.

"Improved bill collection has been the biggest revelation of the Umeme concession. Under the old Uganda Electricity Board (UEB) barely half the money for power billed was collected. But it is still important to keep Umeme on its toes to collect all the billed energy, because if they don’t these losses show up as higher tariffs for the rest of the law abiding consumers.

However, while setting those targets ERA then proceeded to tie one hand behind Umeme’s back.

As part of its targets ERA restricted Umeme to Distribution Operation and Maintenance Costs (DOMC) of not more than $50m annually over the next six years up to 2025.

Is that reasonable? Maybe not when viewed against the $60m they spent last year and the $70m they intended to splurge on the network this year.

Because it costs money to keep losses down, including overhauling the network and ensure collections, which includes rolling out more prepaid meters.

This year with the almost 800MW coming on line with the commissioning of Isimba and Karuma dams one can expect Umeme will invest more in the network and with a bigger network we can expect higher DOMC.

But ERA argues that the distributor is asking for too much money, that a newer network which has built over the last 14 years should have lower costs. They say that Umeme has been allowed $41.8m this year let them utilize it and show it is inadequate.

Which would be a fair point if you were talking about stocking tomatoes at the market stall or offals at the butchery.

"In the last decade of so we have come to expect a certain level of service from Umeme. When the transformer in our neighbourhood blows up we are less willing to wait weeks for a replacement. We may give Umeme a day at most to cause the replacement. By cutting back on DOMC don’t be surprised if Umeme’s performance slips because it is struggling to keep up withal the demands...

But beyond our immediate discomfort this kind of attitude by ERA may mean that inadequate maintenance of the network will feed off itself until years from now the distributor may ask for $100m a year in DOMC, a situation that can be averted by adequately providing now.

ERA does this under some misguided attempt to keep tariffs low. A popular move but we all know that what is popular is not always right.

The problem with these artificial caps on goods and services is that a time comes when the pressure to lift the pressure to remove them finally is unbearable prices will not climb in a nice orderly fashion but jump causing more pain to consumers than if we had allowed them to rise steadily over time.

We saw it with their adamance not to allow UgandaElectricity Generation Company Ltd (UEGCL) to include depreciation, amortization and return on investment to the tariff they charge. This is in effect means that when we need to build new generation capacity we have to run to government because UEGCL is not financially sound enough to play a meaningful role in developing the country power generation capacity.

"I don’t know anyone who doesn’t want cheap power, but let us not keep it artificially low and jeopardize the long term viability of the sector....

ERA needs to take a long term view of the sector, build it towards self-sufficiency without compromising its attractiveness as an investment.

WE NEED TO STOP BEING CASUAL

Last week the kidnap of US tourist Kimberly Sue Endecott and her tour guide Jean Paul Mirenge came to a happy ending with their release from captivity, apparently unscathed.

For people in the industry it was a week of sheer terror. It was bad enough that the two were kidnapped but if in addition anything more untoward had happened to them, the industry was bound to suffer for a while to come.

We have been there before. In 1999 eight tourists and their guide were killed by suspected Interahamwe rebels in the Bwindi Impenetrable Forest National Park. Subsequently the park was shut down for four months. In that year tourist numbers to the park collapsed by almost half to 2,111 from about 3,500 in 1998.

It took another three years for numbers to recover to their pre-Bwindi murders.

One Jean Paul Bizimana was convicted in 2006 for the crime and sentenced to 15 years.

In 2001, 11 students of the Jimmy Sekasi Institute were killed during a tour of the Murchison Falls National Park by the Lord’s Resistance Army (LRA) rebels. Sekasi himself was also on the trip and was killed too. This event put paid to the Saraova group’s investment in Paraa Lodge and shut down the park for all practical purposes.

"Tourism is the country’s single largest foreign exchange earner and growing. In 2018 there were about 1.8 million visitors to Uganda brining in revenues of more than $1.5b....

Some determined if sporadic marketing, of the country has seen tourist numbers rise to current levels form 1.1 million a decade ago according to eth Uganda Bureau of Statistics (UBOS). Investment has followed suit with bed’s in the hotel industry up to 100,000 today.  

Ahead of the Commonwealth Head’s of Government Meeting (CHOGM) in 2007 we were scrambling to get 4,000 hotel beds of the quality befitting delegates of the event. Today a cursory count of the beds in the 3-to-5-s tar hotel range shows we have about doubled that figure since. And industry players will report there is still more room for quality hotels in the industry.

What we have invested so far and the industry’s long term potential demands that we treat the industry with a little more respect.

Reports following the recent kidnap suggest a casualness around our national parks that is not commensurate with the aforementioned facts.

For starters it was reported that at the time of her kidnap, as she went out for an evening tour of the Queen Elizabeth National, she went out without an armed guide. 

How does a tourist decide whether they will or will not go along with a guide? And we allow it? Was this done out of some sense of inferiority, pandering to a white tourist? Who knows better the lay of the land?

This casualness is even more disturbing when it turns out that kidnaps of locals in the area for ransom are a regular occurrence.

If we are this casual about this how much more have we missed around the security of these parks and sites?

Uganda is not situated in the ideal location. All around us we have neighbours whose security has broken down, do not wish us well or have their own internal contradictions spilling over into our space.

Unfortunately for us, our best attractions are located or straddle our borders with these same 

countries.

It doesn’t take a rocket scientist to work out that the odds are it’s only a matter of time before something bad happens there.

I am sure the minimum security presence or precautions we take have dissuaded criminals from trying anything or even prevented instances like the one that has h=just happened but as one security chief once said, with terrorism you just need to make one mistake and they succeed. The security in our national parks and tourist site should be treated with such vigilance.

There is a point to be made for non-intrusive security so that the tourists can enjoy their holiday – but non-intrusive does not mean absence.

Some investors may even be against new measures to beef up security around their operations, as they would take away from their bottom line, but the government which has a better view of the damage one freak occurrence can cost, must insist and if the operators think they can not comply they may be shown the door.

And these enhanced measures should not only be for foreign guests. In fact local tourists should be treated with sifter kid gloves.

"In this world of internet connectivity, a local visitor who gets into trouble can get the message out to the world just as fast as a foreign visitor. True the global news networks will not give it as much play, if any, unlike if it were a foreign tourist, but if you think about it Ugandans are often asked for recommendations of local sites by foreign visitors. A bad experience for one Ugandan may have just as debilitating an effect, as third party endorsements more than glitzy advertising are what people pay attention to...

The lesson of the recent kidnap is that given the tourism sector’s current and long term importance to the economy it cannot be business as usual.

The kind of numbers we are seeing coming to patronize our shores have been painstakingly built over decades but they can be decimated with one small misstep. Let us get serious.

TAPPING INTO FOREIGN CAPITAL FOR UGANDA’S BENEFIT

(This was initially posted online as a Twitter thread)

In 1962 when Uganda got independence the British left us with 1500 km of paved roads. Today 57 years later we have just crossed the 5000 km mark. Why should we care?

"Using population as an indicator in 1962 Uganda population was seven million and today we are 40 million. If population is up fivefold shouldn’t the road network have followed suit? We should have at least 7500 km of paved road by now...

Keep in mind that the British did the bare minimum, creating infrastructure to extract raw materials and service their own needs so even the 1500 km they left us was well below our requirements.

But let us stick with the 7500 km. To bring is to this level we would need at least $2.5b at $1m per km of road laid. Using current exchange rate that would be sh9.3trillion or about a quarter of our planned budget for 2019/20. The proposed 2019/20 budget is for sh40trillion.

Last year's budget for the works & transport ministry was sh4.7trillion, which of course didn't all go to roads. I think roads got about sh3trillion of that figure. So if we were to bridge the gap it would take about four years at the current rate of funding.

The challenge is that in three years we will be 44million going by our population growth rate of 3.3 percent, so the 7500 km will still not have brought us at par with our Independence day levels.

But an average middle income economy has five times as much road as we do, measured by km per sq. km of the nation’s surface area. Our figure is about 16 km per sq km versus 88 km per sq km for an average middle income nation.

This means that we need at least 25,000 km of paved road to compete with an average middle income economy, an additional 20,000 km of road or about an additional $20b to finance this. Uganda’s GDP is $25b.

Maybe we should just go slowly, do what we can now and somehow things will sort themselves out?

There are two problems with this. One, we are already behind schedule and two, the population of Uganda is not going to stop growing.
to let us catch up, in fact it is the roads and the economic activity they will throw off that will slow Uganda population growth.

"Also the reason we are not creating jobs as fast as we should, is because we have deficits in everything from roads to power generation to human resource capacities, which all have to be addressed. Ideally simultaneously...

The question is where will the funds to bridge all these deficits come from?

URA is expected to collect sh20trillion or $5.4b and government will borrow another $3b locally, which falls far short of our requirements.

There is much scope for mobilising local resources -- our tax to GDP ratio is around 14 percent but should be above 16 pct; our savings to GDP ratio is just as dismal.

But in the meantime what do we do?

Some estimates I have seen show that there is at least $135trillion of investable capital sloshing around the world today looking for a return.

The question is how do we position ourselves to tap into these funds, create a funnel so to speak and direct them our way?

By adopting a liberal economy we have already done some of the heavy lifting. More still has to be done especially in shifting mind sets to recognise foreign capital, if understood well and can be used as a tool for change. The operative word is understood.

And the rules aren't any different from those needed to attract local capital, only maybe that foreign capital's returns are denominated in hard currency, whose movement we need to understand as well to leverage for our own benefit.

And we need not reinvent the wheel ... South East Asia, post-World War II Europe and even China has done it ... why cant we?

.... TO BE CONTINUED

THE GOOD, BAD & UGLY OF PRIVATISATION

My column last week “We were right to privatize UCB,” threw up a lot of comment. Some of it illuminating but a lot of it based on rumour, urban myth and downright ignorance.

When the government set out to privatize state enterprises in the 1990s as a way to unlock their assets and stimulate the economy, it came up against loud, even shrill opposition. I learnt last week that opposition is still alive and kicking – despite the evidence to the contrary.

The critics argued that the government was in effect selling the family silver – never mind all of them were hemorrhaging money that would be more profitably used funding health, education and infrastructure rehabilitation; that foreigners would take over the economy – never mind that the economy was in shambles and teetering on the brink of bankruptcy; and that it would lead to a lot of job losses and social upheaval – never mind that most workers in these companies were not even being paid a living wage and many did no work to speak of.

"The critics were right to be worried about job losses, but those same companies have employed multiples more people than the old shells ever employed; The critics were right that foreign capital would dominate the economic landscape, but we are much better for it with improved goods and services, jobs and ever increasing revenues; the critics were wrong to rail against selling of the badly tarnished family silver, which were a drain on the treasury and disincentive to competition...

The benefits of the privatization in resuscitating these companies quickly, unlocking the value of their assets and jumpstarting the economy are hard to argue against once the facts are in your possession.

As a young reporter I covered the privatization process and below are some of the good, bad and ugly of the process, which if events had gone another way it is most likely we would be talking a very different language today.

THE GOOD: TORORO CEMENT

Previously the Uganda Cement Industries (UCI) the company whose plant had long ground to a halt was privatized in 1995. The value, to the investors who changed its name to Tororo Cement Ltd, was the lime deposits that came with the factory. The factory’s equipment had not only broken down, but was obsolete and a complete overhaul of the factory was required.

"The case officer in charge of the deal later said that the factory was so bad that he was relieved to be handing over the keys with one hand and embarrassed to be asking for a check in the other. He said he felt like a con man, that Uganda should have been paying these investors to take the companies off their hands rather than the other way around...

He could not leave the premises fast enough after the transaction was done.

But today Tororo Cement is the leading manufacturer of the building material and have completed an expansion of their plant that allows them to produce three million tons of cement annually. It has been at the center of the real estate boom of the last few years and now exports to the region as well.

THE BAD: Coffee Marketting Board (CMB)

This was one of the most difficult attempts at privatization. Around 1997 government begun the process of the divesting 49 percent of CMB. The company which until a few years prior, had monopolized the marketing of Uganda’s coffee.

Its share of the bean’s export trade had collapsed to less than 10 percent at the time, but the people at the privatization unit were touting the four million bag a year coffee roasting plant as the key asset for investors to look at, as well the land on which it stood in Bugolobi.

After the first round of bids Swiss coffee trading firm Sucafina was the highest bidder of four, with an offer of $8m. Unfortunatley the company had assets then with a book value of about $40m. MPs at the time thought Sucafina were indulging in daylight robbery and ordered the PU to cancel the process and retender the sale.

"At the second round of asking there was only one bidder left, Sucafina and this time they offered $4m, effectively giving us the finger. Needless to say parliament threw this one out, the company was boarded up and that was that. We effectively cut off our nose to spite our face.

THE UGLY: UGANDA AIRLINES

By the time Uganda Airlines came up for sale it was sucking sh10b (about $5.5m at the time) a month out of the treasury, flew one Boeing 737 (not the max) on a solitary route, the Entebbe-Nairobi route and its only claim to fame was it would keep time.

South Africa Airways (SAA) was the leading bidder and their proposal was to turn Entebbe into a regional hub, with flights flying out across the continent and beyond. The process was a start-stop-start again affair over almost five years. Rumours of some powerful types subverting the deal to pave the way for their own airline were whispered. Objections to handing over the routes to SAA, with some muttering about racism under their breaths, seem to have scuttled the deal in the end.

"Eventually President Yoweri Museveni shut down the airline arguing he couldn’t keep shoveling sh10b a month down the Uganda Airlines black hole and that we would be just fine without a national airline. We would not die. That was in 2002...

There were many more eventful privatisations – successful and failed. In some instances they even against good economic sense palmed off some companies to Ugandans, I can't think of one that is productive. There were some companies for which the industry economics were so bad that they failed to rise again and folded anyway.

I shudder to think what would have happened if those companies stayed in government hands. How much good money would have gone chasing bad money down those black holes, all because we wanted to hang on to the family silver.

WHY KENYA, UGANDA RELATIONS ARE KEY TO EAC

Last week President Museveni paid a state visit to Kenya on the invitation of his counterpart Uhuru Kenyatta.

It made sense that Museveni would overfly the capital Nairobi to start the visit in the Mombasa, the de facto gate way to the region. According to port authorities in 2017 Uganda accounted for almost a quarter of all trade through the port. Seven million tons out of a total of 30.35 tons of cargo that pass through Mombasa were registered to Uganda.

Museveni eventually went to Nairobi, riding on the Standard Gauge Railway (SGR) first leg.

During the visit a series of agreements to allow greater access of Ugandan – sugar, dairy and poultry products and Kenyan goods – beef in the respective countries were signed off. The intention to lease 

Uganda land to build a dry port in Naivasha, one of the terminal’s of the SGR was also announced.

"Before Tanzania came under British mandate after the First World War it was just present day Kenya and Uganda, stitched together by the Uganda Railway, which had landed in Kisumu in 1901. A steamer service led to the construction of an 11 km line from Port Bell to Kampala. The line via Malaba to Kampala was completed in 1931.

The real core of the east African community is Uganda and Kenya, where the trade figures between the two countries is concrete evidence of their symbiosis.

In 2017 trade between the two countries stood at more than a billion dollars. A similar figure for trade between Kenya and Tanzania is about $500m.

It is clear that our relation is not based on sentimentality. Even during the 1970s when diplomatic relations were at their lowest, trade continue along the common border and over Lake Victoria, that once relations normalized was easily reformalised in the 1980s.

If there is one country that has provided sustainable economic benefit to Uganda it has to be Kenya. Their demand for food alone is slowly transforming our agriculture from the limbo of subsistence it has been stuck in to more commercial enterprise.

We have had a few moments of madness in the past.

In 1976 Idi Amin decided it might be a good idea to revisit an old map of the region which had the Ugandan border starting at the Kenyan Rift Valley.  Kenya’s Jomo Kenyatta – father of the current president, massed his troops on our common border and swore, “Wacha ajaribu, atatutambua!” (Let him try and he will find out who we are).

A second time was at the end of 1987 when there was shoot out at the Busia border, that led to a border shut down for a few weeks. Both countries traded accusations with Uganda accusing Kenya of habouring anti-government rebels and Kenya claiming its neighbours troops had crossed onto their side.

Speculation mostly unproven, was that Kenyan commercial interests were unimpressed about noises from Kampala pushing for a resuscitation of our industrial capacity so as to wean ourselves away from Kenya’s manufacturers. Kisumu’s industry built up during the 1970s was targeted at supplying Uganda.

In both instances sanity prevailed quickly because there were real economic interests at stake beyond brotherly love.

"It has been proven time and time again, that trade relations are the more sustainable glue that holds communities together and prevent wars...

The Europeans put a stop to centuries of fratricidal conflict after the second world war, with the creation of the European Coal and Steel Community, the precursor to the current European Union, which has allowed the free movement of goods, service and people.

This has had the effect of creating specialisations, with countries doing away with what they cannot produce competitively, choosing to import what they don’t produce and export their surpluses. This interdependence means war or even diplomatic rows have little fuel to sustain them.

The opening up of our markets will come with some short term pain as some industries are outcompeted by more efficient ones across the border, as is already happening. But as suggested above it will sharpen our businessmen’s sense of what they can produce competitively, so that they specialize, scale up their operations and gear up to supply our neighbour’s $75b economy’s needs.

There are those who will argue that our industries will need protection as they are still in their infancy, they will say that is how industries elsewhere survived. What they do not talk about is the opportunity cost in effort, resources – human and financial, that will be expended in ensuring that these uncompetitive industries stay afloat.

"If there are public funds to be spent they will be best employed helping uncompetitive companies retool or wind up, than subsidizing them to stay afloat, because as we have discovered they can’t seem to wean themselves off the subsidies once they have started to enjoy them...

The people of the two countries will be the eventual winners working for competitive sustainable companies and enjoying better goods and service in return.

POWER GENERATION THE CHALLENGE OF OUR TIME

Two things struck me while deep inside the cavernous bowels of the 600MW Karuma power dam on a recent visit to then northern Uganda facility.

One, that it is an amazing feat of engineering.

Basically some of the River Nile’s waters will be diverted underground, a 70 meter drop at the bottom of which it will turn six turbines and finally be ejected about 8 km to rejoin the mighty river on its journey north.

"And just to get a sense of the extent of the work already done, in preparation for the dam enough rock to fill 15 Namboole stadiums was evacuated to make way for the $2.2b project. The Karuma power dam is only one of two such dams on the continent, with the second being the Ruacana power station in Namibia.

My second realisation was that considering the size of Karuma, which will be the biggest power project in the country when commissioned at the end of 2019, we have a long way to go to meet the stated target of 17,000 MW generation capacity in the next ten years.

With only 20 percent of Ugandans connected to the grid, it is clear there is a lot of suppressed demand locally. This is before you consider, the potential uses in the mining, agro-processing and other industries or the unserved external markets of South Sudan and Eastern Congo and those looking to bridge their own capacity gaps in northern Tanzania, Rwanda and Western Kenya.

The real challenge for this country is how to finance these projects.

Given the average cost of $3m per MW according to the recent large hydro-power projects it will cost $51b or twice the current size of the Uganda economy to finance this ambition. Of course all the power will not be generated by tapping our hydro-electric power generation capacity, at last count 4000MW along the Nile alone.

Internally with a tax to GDP revenue of 14 percent and savings to GDP of 15 percent our scope for local mobilisation of the resources needed to rather limited. On the up side it also means there is also a lot of leeway to collect more revenue or to encourage more savings by the citizens.

However even with oil revenues, this unlikely to be managed fast enough.

So we are going to have to rely on loans and private capital to meet our obligations.

It has to be said that we had it relatively easy with the financing for the Karuma and 183 MW Isimba dam as we were dealing with one financier.

With a past project the 250 MW Bujagali dam there were multiple financiers led by the World Bank’s private sector lending arm the International Finance Corporation (IFC).   Multiple financiers is standard practice for big projects, as the lenders seek to mitigate the risk by sharing the burden with other partners. Despite the best efforts of the government and the project promoters, the financing was still pricey. As a result government has had to help refinance the project to ensure a lower tarrif.

The point is, the way to get cheaper money is to lower the perceived risks of such projects.

"In working out risk of a project financier’s look for four broad parameters does the project resonate with their mission, is the project viable, can it support the desired return and finally is the management credible and competent....

This last part is important in view of the government’s plans to recreate the old Uganda Electricity Board (UEB) by merging the distribution, transmission and generation companies as part of a wider restructuring of the government departments, agencies and commissions.

The restructuring being sold as money saving initiative may in fact cost the government more in lost specialisation.

For instance Umeme, the company that runs the distribution concession has done in the last 13 years of its concession what its predecessor UEB could not do in almost 50 years of operation. It has revamped and expanded the distribution grid, it has added a million consumers to the grid from the 280,000 they found in place, it collecting almost all the money due to its from clients and has reduced losses on the grid significantly.

They have been able to achieve this because they have specialised distribution of power which is different from transmission and generation.

This improved competence has opened them up to external financing and allowed them to invest heavily about $600m since the concession opened in 2005.

Umeme in its own right, is going out into the open market to tap the markets for cash to finance its capital expenditures and this is not by mistake. Over the last decade or so they have developed verifiable competence in what they do and their ability to do it profitably, year after year and as a result they tick the aforementioned boxes of what financiers are looking for in potential clients.

Using this as an example, this why a return to the old UEB would be a bad idea. While UEGCL is now building capacity to build and manage power generation facilities, subsuming them in amorphous structure would not only throw away the benefit of specialisation but will short circuit an ongoing process of creating capacity for it to stand on its own and drive our ambitious power generation targets.

WE WERE RIGHT TO PRIVATISE UGANDA COMMERCIAL BANK

Last week Stanbic released their annual results which were really more of the same.

Revenues were up to sh661b from 636b in 2017. Profits followed suit growing 7.5 percent to sh215b in 2018 from sh200b in the previous year.

But the number which caught my eye was the income tax expense. These leapt 25 percent to sh81.5b from sh65.2b in 2017.

The Sh81.5b check to the treasury would be cause for celebration in itself but if we looked further it has much greater significance.

Using the US dollar sell rate as reported in the Friday New Vision of sh3,730, Stanbic’s tax bill amounted to about $21.9m.

In 2002 Stanbic Bank bought the Uganda Commercial Bank (UCB) for about $20m!

"This means Stanbic is now making more money, many times over the buying price and after all expenses are deducted, the net is then taxed and this year is about equal to what they paid for the whole bank 17 years ago!...

Let that sink in for a bit.

That assuming continued profitability from the bank and relatively stable shilling we can expect the Stanbic Bank to pay us annually from here on end, the equivalent of the price they paid for UCB those many years ago.

And I am sure UCB successor is not the only one ringing the tills at the treasury. The same can be said for the breweries, the hotels, Umeme and any number of enterprises that prior to their off-loading were dead weight on the government budget but are now more than carrying their weight.

A perusal of the press at the time showed that many of the fears people had of flogging off UCB were unfounded.

A Joshua Musoke writing in the New Vision of August 31, 2001 was concerned that selling the bank to a foreign bank would leave the small saver in trouble.

“What will happen to the thousands of civil servants and small time savers if UCB is sold to a private bank … whose opening and minimum account balances are beyond the reach of many Ugandans particularly in the countryside.”

The bank can speak for itself, but going by the way deposits have grown since Musoke put pen to paper that fear didn’t hold up. In addition, since then we have had no minimum balance accounts introduced across the industry.

Another reader who preferred to remain anonymous argued that since public confidence had returned to the bank, there was sh100b in new deposits that came from depositors fleeing other collapsing banks, and since it had become profitable again — it made sh19b in its final year, though he acknowledged this was due to the bank’s portfolio overweighed towards government securities, there was no need to privatize.

But for the bank to fufill its full potential to Ugandans it needed to make its money lending to the private sector, and not to the government, the core of its business. If they had maintained that stand to date they would have helped mightily in keeping inflation down without lending much to the private sector.

From near zero lending to the private sector in its final year of existence, in 2018 Stanbic’s loan book stood at sh2.5trillion or about $670m!

There is a lot wrong with our financial sector, not least of all that there is little to no support for startup enterprises and the small businesses are treated as inconveniences to be suffered rather than supported.

But that is a function of structural issues and a lack of entrepreneurs with the muscle to fill in those gaps.

"The privatization process was a response to the reality that state enterprises were proving a black hole for government funds, were not producing and causing a lock jam in the economy, as most of them our monopolies....

With it came better management practices and new money that could unlock the assets. In UCB at the time of its sale in its various branches it had a multitude of computer platforms many of which did not only not to talk to each other but were invisible to each other. So where at its peak the bank held more than half the industry’s deposits they were of little use as they could not flow efficiently from places of surplus to places where they were needed.

But the naysayers will not go away. They argue that by handing over the bank to foreign capital rather than hold on to it, we have abrogated our duty to direct the economy through the strategic allotment of funds.

And they could be right. But at the time it was a choice between resuscitating the dinosaur, empowering to stimulate the economy or hold on to it content to let it sleep so it does little damage to its surroundings, when foreign owned banks continue to do what banks are supposed to do anyway.

Private lenders are not averse to supporting government programs – the South East Asians have proved that for the last several decades. Its juts that it will take more intelligence than having a “supporter” seating in the CEO’s chair and receiving chits all day, because truth be told that’s what many people think government intervention should look like.

"Congratulations are in order to Stanbic but they are just the poster boy of a farsighted policy that has helped unlock some of the potential of this country, that is yet to reach its full potential in everything from beverages to manufacturing; hospitality to transport....

BAT WIN IN EA COURT FOR ALL OF US

On Tuesday this week British American Tobacco Uganda (BAT) won a landmark case in the East Africa Court of Justice (EACJ) where they challenged the Uganda’s discriminative excise duty levy on goods manufactured outside Uganda but in the Community.

Some background will serve this story well.

In 2013 BAT wound up its cigarette manufacturing in Uganda, they had a plant in jinja. They then started importing cigarettes for distribution in Uganda from Kenya. In 2017 there was an amendment to the Excise Duty Act which required that Uganda Revenue Authority (URA) charged imported cigarettes more than the ones produced locally.

BAT challenged this successfully in a judgement that not only saw BAT receive a sh325m refund on taxes they had already paid, but also declared null and void any provisions in the law that are contrary to the EAC laws.

Kiryowa Kiwanuka of K & K Advocates, which represented BAT, said after the ruling, that the net effect of this is to make the EAC one country for tax purposes.

It was his opinion that manufacturers around the region will be forced to compete on the cost of production and distribution and not on tax levels.

Clearly this is an earth shaking precedent we probably missed because we were focused on imaginary assassins this week.

"It is a double edged sword.

On the one hand one can now expect that our products that were suffering arbitrary barriers to entry in the EAC like sugar and milk, that will be a thing of the past.

On the other hand there are products we are producing that face direct competition from companies in other member countries, some of which can be landed in Uganda cheaper than we produce them here...

With a level playing field they may very have to become more efficient or fold altogether.

So one can expect in the region there will be companies very in support of the new ruling --- the exporters and other companies for whom the new wave of imports will pose serious existential threats.

The principle of the common market is that there will be free movement of goods, services and people through the region. The common market will then be attractive for investors to make a bet on.

The community has a population of about 170 million at last count, of whom 34 million are urban dwellers.  These are just numbers unless the requisite infrastructure and enabling legislation is in place to allow for it to be one market.

The challenge then for individual countries would be their ability to attract the investors to their shores. If you are a country which is irredeemably corrupt, have port hole ridden roads and the quality of your workforce is imbecilic you will fare badly against your better endowed members, in terms of attracting investors.

However, the theorists argue that the improvement’s in living standards of the people from the increased trade will more than offset the loss of investment.

So for example if Uganda becomes the hub of grain production and production in the region, because it can produce at much lower cost that its neighbours, investors in the sector in Kenya and Tanzania will either have to shut down or relocate their capacity to Uganda. There will be job losses in Kenya and Tanzania but there will be some relief at the cheaper products on the shelf.

The workers though might find themselves in the absorbed in the soda ash industry. Soda ash – sodium carbonate, is only mined in southern Kenya, and is a compound in many industrial uses like dyes, ferterlisers and synthetic detergents. The Kenyan indsutry will have to ramp up production to serve all of the region and any other such operations elsewhere in the region would have to shut down.

One big advantage that would come with a full operation of the open market would be that individual countries would be forced to stick to their competitive advantages. There is no point why anyone else in the region should be trying to produce matooke other than Uganda for instance. This specialization will encourage efficiencies that can only make us stronger as a region.

"And that is why too the freedom of movement of goods and services has to go hand in hand with the ease of movement of people, because if I have just been laid off from a steel making plant in Uganda I should be able to relocate to Kenya to work in their plants...

Some people may think it unfortunate that its BAT that won the case, but the benefits of the ruling are not restricted to them. We can all benefit.