LET US NOT LIE OURSELVES

Lately there has been a gathering momentum for government to restart state enterprises, everything from Uganda Airlines to the Uganda Commercial Bank and everything in between.

I have my own thoughts about the motives around this drive, but I will take its proponents’ reason at face value.

They argue, not necessarily in this order, that this is to curb the outflow of money from the economy, that the government needs to be more involved in directing the private sector, that it will create more jobs for Ugandans and markets for local suppliers among others. I am sure you will remind me if I have missed any.

"It is true of course that foreign investors repatriate their profits to their home bases every so often. First of all why should we be surprised or even offended by this? By definition the investors do not live in Uganda and need to have their returns sent to them where they are...

Secondly, how much they repatriate maybe over exaggerated.

Companies through the course of their business earn money, revenue, from which they meet their expenses – some foreign and hopefully a lot local, the net is profit. His profit in a competitive sector is about 20 percent of total revenues or less. This profit is taxed at a rate of 30 percent by the government. The rest of the money is the owners’ to do as he pleases, his payment for risking his capital. If they are interested in a sustainable business most of this money is ploughed right back into the local business and some of it is repatriated, about five percent or less of total revenues.

So you have to wonder about these massive outflows to themselves that people accuse foreign investors of.

Of course what is true is that there maybe huge payments to foreign suppliers, but that is a genuine cost of doing business. So for instance a bank may spend a lot of money on software or a telecommunications company on hardware or a manufacturer on machinery and chemicals.

The New Vision for instance last year out of revenues of Sh90b spent sh16.8b on raw materials – mostly imported paper, inks and other printing inputs. This is about a fifth of all its revenues. It paid taxes of sh1.8b and total dividend of sh1.9b or about two percent of total revenues. About half of this dividend payout went to the government as the majority shareholder.

And by the way according to the Auditor General’s report, of the twelve profitable state enterprises, only New Vision declared a dividend to its owner.

The point is that if these companies are repatriating funds, on closer scrutiny you may find most of those are costs of doing business than returns to its owners.

By logical extension if you set up local companies in the same industries in order to keep in business they will have to source a lot of their materials abroad until local alternatives are available. So they will send out just as much money as their “evil” foreign counterparts.

If you are in a competitive industry the local alternative to meets your requirements is always the best to ensure you compete favourably. A prudent businessmen would not source abroad what he can get locally.

"It was hilarious recently during an online discussion that someone suggested that the entrance of Uganda Airlines would lower the cost of travel as they will be charging in Uganda shillings. I argued that, that would not be good business sense if most of their inputs from ground fees to accreditation to international regulators to air space rights are charged in hard currency. I never heard back from him....

The argument that government should be more involved in the economy is beyond reproach.

However, they need not do that by going into business themselves. Governments set the environment for business through regulation, fiscal policy and enforcement.

In the case of Uganda Airlines it is probably cheaper for government to go to British Airways or Emirates or Brussels Airlines and negotiate a cheaper rate for people flying to Uganda (because we have it in our heads that people are not coming here because of expensive tickets!) than starting our own airline. It may take reducing taxes of them landing in Uganda, cheaper aviation fuel or giving them tax free status here, if we believe expensive fares are keeping tourists away.

And finally that state enterprises create jobs for locals. Sometimes I don’t know whether to cry or laugh. A cursory look around Uganda’s labour market shows that up to 90 percent or even more, of the workers around are Ugandans – even in the 100 percent foreign companies. So the issue of Ugandans not being employed in foreign companies does not stand up to scrutiny.

And secondly a company’s labour requirements are dictated by the market’s needs. If the market demands more of your product you hire more or if not you cut your labour force. Unless you are suggesting that government will employ or keep people on the payroll when they are doing nothing? 

Wouldn’t it be better if government just used tax payer’s money to pay unemployment benefits than distort markets and doom the economy to certain decline?

"Taking the proponents of this new “Move to the left” at their word, I suspect a lack of understanding of how business works and therefore how to improve the business environment....

The new boss of the Uganda Development Corporation (UIA) a former senior official at the National Planning Authority (NPA) Patrick Birungi was reported to have admitted recently that in the few days he has been at UDC he has learnt that it is much harder to do than plan.

Foreign investors are not angels. It may very well be some of them have devised dodges around our tax system. My feeling is that their greater premium on reputation is such that they are more likely than not to play by the rules than break them. A damaged reputation for them, more than for us, can cost them a lot of money.

And when they do break the rules, its often due to our negligence or in connivance with our own people. Let us fix those loopholes before we throw this baby out with the bath water.