ARE FARMERS & BANKERS SPEAKING AT CROSS PURPOSES?

Two events within days of each other, served to highlight the struggle of agriculture to take its rightful price as a key driver of the economy.

To begin with debate on the Coffee Bill begun in parliament’s agriculture committee. The bill that was presented to the house by government earlier in the year has kicked up a storm. One of the offending clauses in the bill was a provision that all coffee farmers be required to register their farms and coffee trees.

The bill stipulates that this will apply to farmers with 50 or more trees to make planning for the sector easier, as well as ease the delivery of services to them.

The bill also prescribes deregistration of coffee farmers who do not look after their farms or nurseries.

The critics have complained that the law is too restrictive and may fail efforts to grow production by disadvantaging small farmers, who would miss out on planned assistance to the sectors.

Related to this the Uganda Bankers Association had their annual conference where they grappled with the puzzle of why more isn’t being lent to agriculture.

"Going by Bank of Uganda statistics in the last 12 months lending to agriculture has accounted for 12% of total loans disbursed. Of that less than half or 36%, goes into production, which is what most people think about when they are talking about agriculture. The other 64 percent goes to processing and marketing of agricultural produce...

The theme of the bankers’ conference, “Derisking financing and investment in agriculture to provide youth employment and inclusive growth” was appropriate. Lending to agricultural production – in the way we do it in this country, is too risky.

Reporting on the meeting the New Vision had a headline “You do not understand us, farmers tell bankers”. I could imagine a banker reading the paper that morning and thinking the headline should actually be “You do not understand us, bankers tell farmers”.

It is an interesting relationship. The bankers are doing just fine without trying to push for business in agriculture. Lending to manufacturing, trade, real estate and personal loans accounts for seven in every ten shillings they lend, so from where I am sitting, the farmers have all the work to do to make the bankers take them more seriously.

At the very basic level the banker lends to those who can pay him back. This means one has to have a proven income that will be consistent into the future.

The challenge for most farmers is to prove that they even have an income. Secondly, given our overreliance on, rain, the natural fertility of the soils and the good nature of neighbours, vermin and pests not to raid our farms, a future income is hard to project.

A farmer in the Netherlands controls the climate and water intake of his plants by growing his crops in a greenhouse or zero grazes his cows and his feeding and milking process are automated. When such a farmer heads to the bank he will not only have his revenues, but a complete set of audited accounts going back a generation or two from which plotting projections will not be like playing the lottery. In addition either Dutch farmer will have invested in security of his property, giving the bank comfort that the future revenues have a good chance of being collected.

These are additional costs that will raise the cost of production, but will very well increase the value of the products.

Which brings us nicely around to the registration and regulation of farmers as proposed in the coffee bill.

The intention is that this will bring us in line with international standards of agricultural production. In western markets the concept of traceability is gaining traction. Buyers want to know where the coffee beans come from, are they grown organically, are child labourers being employed and a host of other qualifications we may shrug off but which could mean the difference between getting $10 cents more or less for your product.

So yes, the small farmer has cause for alarm.

If you have your five trees and are unregistered, coffee buyers would not want to mix your untraceable coffee with their own, for fear of a market backlash.

 A few years ago a tobacco exporter was blacklisted by international buyers because one consignment was contaminated with plastics and other debris. The exporter was able to trace where the problem well and remedy it, because all its farmers are registered. But this was after losing millions of dollars in export contracts.

I suspect all sugar outgrowers are registered too. For ease of management in that case, as we consume our won sugar.

Understandably opposition to these new proposals has its basis in the history of the crop, which was mostly grown on small holdings in Uganda. We have a choice to adopt the new law to our practices, however painful they maybe, with the promise of greater competitiveness of international markets or reject them and forgo increased revenues we would earn up and down the value chains.

Clearly leadership will be required to get the small coffee farmers on board. Either they expand their holdings – the Marie De Antoinette option or come together through cooperatives to adapt to the new regulations.

Coffee is obviously the pilot on this kind of law, one can expect it will be rolled out to all other crops and agricultural produce --- birth certificates for livestock, necessary, even critical, if our products are to compete internationally.

LESSONS FROM MUKWANO’S LIFE

Two weeks ago Arimali Karmali passed on. I never knew the man personally, but judging by the tributes to him, which continue to flow in, days after his death, he clearly was no mere mortal.

"Estimates of the wealth he controlled suggests he may have been a dollar billionaire. What was more striking was the testimonies of the people he had helped with scholarships or to set up their businesses or out of plain charity.

From my readings of the last few days this was what I was able to glean as business and life lessons from the man fondly known as Mukwano.

1.       Frugal with a purpose

I read somewhere that his wardrobe consisted of a handful of shirts and trousers. For a man so rich this is an interesting story in itself but it speaks to a deeper principle. There are only so many shirts you can wear or shoes you can lace up. Beyond the function of keeping you covered and presentable, clothes should really be logged in the consumption column of our lives.

"There are only two ways to spend money, either you consume it or invest it. What determines your eventual level of wealth or poverty is which way the balance of your expenditure falls. Clearly the old man, after more than a half century in business, was hardwired to invest more than consume and hence his spartan wardrobe.

The rest of us get sabotaged by the devil on our shoulders continually asking “What is the money for if not for eating?”

2.       Invest in networks

But what was more impressive about the man, were testimonies by the people from far and wide narrating how the man touched their lives – from businessmen to lawyers to former ministers, his tenants, his neighbours. It was amazing.

Wealthy men have died before in these parts I stand to be corrected, but I have never got the sense that they touched as many lives. Fair enough, maybe the people they helped didn’t want to speak out, so it is testament to Mukwano that his protégés and the beneficiaries of his largesse stand up to be counted.

Beyond that he clearly cultivated networks of partners that were not restricted to Uganda or even the region. Networks developed on trust -- deliberately, systematically and consistently cultivated, were key to keeping his business alive and thriving.

Our businessmen don’t seem to log trust in their asset columns and are ok with swindling their creditors, partners and clients at the drop a hat. It maybe explains why our businessmen rarely live beyond five years.

3.       Go into uncontested ground

It is clear that all through his business career Mukwano was a trailblazer. He led others followed. He was not corrupted with our copycat syndrome, where we go into businesses where other people are.

During the days of chaos and persistent shortages he was an importer, when things stabilized he shifted into manufacturing and then in his final years he resuscitated the tea sector in the Toro area. In between all that he manufactured plastic goods, bottled mineral water and built malls down town, pioneering a craze that is fast turning down turn Kampala into a concrete jungle from the dusty unpaved hovel that it was.

There are risks to this strategy. Being the first in a sector means you will have to pay for the lessons you would otherwise have learnt by following someone else. On the other hand if you can pull it off the rewards can be beyond your wildest dreams...

4.       Nothing is beneath you

Long before “Bottom of the pyramid” Mukwano was already there, servicing this sector through his soap, cooking oil, plastics and even mall developments. Maybe it was an easy decision to make, since in the 1980s not only were the wealth and income disparities non-existent, but the economy had ground to a halt to the point that most essential commodities were out of the reach of everybody. So going into bar soap and cooking oil manufacture was a no-brainer, and those be the gifts that keep giving.

"Unadulterated by elitist airs Mukwano saw where the need was and moved to fill it and everybody else be damned....

5.       Invest

It’s safe to say that Mukwano cut his teeth in the rough and tumble of the Idi Amin era, when shortages meant huge margins were to be had on the sale of products. He was not the only one enjoying these margins. But is one of a few, of the very many to come out of the era and thrive in subsequent years.

The difference between him and his failed contemporaries, is that he was not seduced by the urge to consume and live large. When everyone was eating their money as fast as they made it --  a symptom of the insecurity of the time, Mukwano saved and invested his surpluses – a lot in land,  to the point that people say he could be the biggest land lord in Kampala today....

It’s interesting isn’t it, that our richest individuals never accumulated land as a way to get rich. They got rich through trading and stored their wealth in land. We tend to invert the process.

Mukwano walked this earth for at least 80 years. The above do not even scratch the surface of the lessons to be learnt from the man. He was real life proof that hard work and prudent use of money can lead to financial success the kind of which we can’t even wrap our minds around.

In death his only crime was to leave us without an account of his life, but it is hard to begrudge him his peace.

RIP Mukwano.

AIRTEL GAINING ON MTN, UTL FLOUNDERS

Going by recent events, the industry to watch in the next few years will be the telecom industry. Not only for the speed of innovation in the technologies employed, which is interesting in itself but also for the possible reconfiguring of the sector as the competition heats up.

The government’s UTL is all but buried.  The government’s uncoordinated troop movements not helping its cause.

UTL, which was hived off from the original Uganda Posts & Telecommunications Corporation to prepare it for privatization has been a case study of how not to privatize a state enterprise.

Already mismanaged to begin with, about 20 years ago a controlling stake was sold to a shadowy investor with implied ties to Germany’s Deutsch Telekom, who failed to come through. They then flogged off their stake to Libyan investment fund, Lap Green.

The Arab spring, the fall of Muammar Gadaffi and the freezing of all Libyan assets, put paid to Lap Green’s usefulness, forcing government to take it over in 2017 and put it under administration last year.

"The company is sh700b in the hole, with assets of around sh350b. It has failed to meet it obligations to its creditors and for all intents and purposes should be shut down, were it not for vague references to its strategic value to the country...

The public tug-of-war between the company’s administration and government makes it even more unlikely to attract a credible investor. Government is really only postponing the inevitable.

But the real action seems to be playing out between South African based MTN and Indian Airtel.

In a recent publication it was gleefully announced that Airtel, for the first time in 2017 and again in 2018, was more profitable than MTN, although the South African firm was still pulling in more revenues and continues to grow its revenues faster than its closest competition i.e. MTN’s revenue growth stands at 18.5% in the last three years vis-a-vie Airtel’s growth of 17.2%

According to the report, which was not disputed by Airtel, in 2018 they made a profit of sh338b up from sh245b the previous year, while MTN managed sh220b profit last year compared to sh152b the previous year. That trend however is reversed when you look at revenue growth. While the revenue gap between Airtel and MTN was sh282b in 2017, MTN stretched this to sh340b in the year ending 2018.

Taking the report at face value, it’s clear that the competition in the telecom industry is much more cutthroat than was previously thought. Which throws up some interesting possibilities for the clients, industry and the country as a whole.

MTN is only just recovering from a bruising run-in with the government, which inadvertently or not, coincided with negotiations surrounding its license renewal. The company had a 20-year license as Second Network Operator that expired last year and yet has not been finalized.

Government has set a $100m fee to renew their mandate for the next ten years.

So the revelation about Airtel’s recently achieved parity should have the government licking its lips for the day their own license comes up for renewal. As a public service operator it has been paying $100,000 for its license for five year terms.

But the figures also throw up another fact. For a while now, MTN has been blamed for having an adverse effect on the Uganda shilling. That every time they repatriate dividends to the parent company the shilling is hit. But clearly Airtel is repatriating more money than MTN and therefore just as “guilty”.

But for the industry, there may be lessons to learn from Airtel. The brand parented in India, has been able to manage some operational efficiencies, which allow them a profit margin of 28 percent, twice as high as that of their South African rival. And they were able to achieve this while fighting to win market share from their main rival. Could it also be a factor of Airtel’s cost sensitive business model – which maximizes returns by driving aggressive bargains with third party suppliers? While MTN has over the years placed big bets on network coverage and innovations like mobile money?

"These factors notwithstanding, from a consumer’s perspective, Airtel seems to have more pricing wriggle room than MTN and given the price sensitivity in the market, they are better positioned for a price war....

On a more philosophical note these recent events show that the industry is the perfect poster boy for the liberalization of the economy that the government launched more than two decades.

Competition has not only broadened the range of services – from voice calls to financial services, it has driven the cost of services down, without compromising the quality of service and those who cannot keep up the pace are kicked to the side.

That being said the industry can be more attractive if government leveled the playing field so that investors can make an objective assessment from afar of the viability of the industry.

In the mean time we best advised to sit back and enjoy the ride.

GOVT NEEDS TO FIND ITS LOST COURAGE, STOP FLIP FLOPPING ABOUT

Last month we looked over the budgets of the last 33 years. The budget which is a plan of how government will spend money and make it, is a good indicator of a government’s priorities.

Inheriting empty coffers, the NRM in the 1980s had to make hard, unpopular decisions to jump start the economy. They understood and rightly so, that without an economy all their talk of restoring peace and order, democracy and lifting the Uganda society out of its perennial cycle of poverty, disease and war would just be hot air.

First they got the National Resistance Council members, the equivalent of our MPs to pay taxes on their incomes. For the first two years in the house their allowances were going untaxed. Imagine trying to get our current crop of MPs to pay taxes.

The government went against other interest groups – removing taxes on coffee exports, liberalizing trade in all commodities, licensing forex bureaux, privatizing state enterprises, the 1990s bank closures.

 "Everyone of these initiatives took bravery, as they were vested interests in their perpetuation, who fought hard and dirty to maintain the status quo, even if this would be detrimental to the economy....

Government, thinking that because it was in power it could subvert the laws of economics, tried printing money to jump start the economy. This triggered an inflationary spiral that sent the economy into a tail spin. Thankfully commonsense prevailed and the madness was stopped only when inflation hit 240 percent.

With that kind of inflation, prices were doubling every three months. To give you a sense of this, if your kid’s school fees was a million in January, it would have doubled to sh2m for second term and doubled again to sh4m by third term!

If they had remained on this treacherous course we would have ended up like Zimbabwe.

In November 2008 inflation hit 79.6 billion percent per month (who was counting?). What this meant is that if you went to the ATM to withdraw money, by the time you completed the transaction the money you had requested would have lost all its value  – prices were doubling every two thousandth of a second!!!!

If Zimbabwe, which in 1982 already had a per capita GDP of 1,105, could be brought to its knees by political expediency, imagine if Uganda with a per capita GDP of $258 in 1986 had listened to the popular opinion and continued to print money as if it was going out of fashion, where would be now?

To cut down inflation government had to cut its spending. The groups interested in government continuing to let the taps flow, fought back criticizing the move as an IMF imposed policy that was bad and would cripple the economy irredeemably.  We are still here.

Government decided that in order to drive coffee exports Coffee Marketing Board (CMB), which had a monopoly to buy and sell all Uganda coffee had to be shut down. Another vicious fight ensured with the CMB beneficiaries warning of a collapse of the coffee industry and by extension the economy. Coffee accounted for more than 50 percent of tax revenues and 80 percent of exports then. We are still here.

Government decided that in order to unleash the economy’s full potential and save it some much needed cash, the state owned enterprises, only a hand full of which were operating at 50 percent capacity let alone making a profit or paying taxes, but a constant drain on the treasury, had to be cut loose. The naysayers stayed with the IMF line, complaining that the new owners would asset strip the new companies and take off leaving us with the shells. We are still here and many of the companies that were sold as going concerns are key drivers of the economy.

What is popular is not always right and what is right is not always popular. Government will do well to remember this.

"The Tenant & Landlord’s Bill awaiting presidential ascent is one search capitulation to populism, which will cause us immeasurable pain, avoidable pain...

The provisions that caught my eye were that landlords be restricted to charging in shillings and that they will not be allowed to raise rents by more than 10 percent a year.

Whichever way you dress them these are attempts to introduce rent controls, which if followed through will lead to disastrous outcomes, as night follows day.

These rent controls will serve as a disincentive to much needed investment. As it is now we have a shortage of quality housing of about a million houses. There is a shortage in commercial property too.

Contrary to popular opinion our real estate developers are still playing catch up. So with this discouragement they will slow down and create the very conditions the honorable members were trying to avert, which are a continued shortage in the market that will inevitably lead to higher rent.

The rules of the market are like any other natural laws. You can be successful at subverting them but only for a short period and at very high cost.

Take the law of gravity for instance, what goes up must come down. But airplanes – tons of steel and rubber take off every day and stay in flight for hours at a time, but this is at great energy cost. The designers of planes however, understand the laws of gravity and work with them and several others – the Bernoulli principal for instance, to keep the plane in flight. They do not ignore these natural laws and hope to attain their aims, rather they work with them.

"Our honourable members have good intentions, but we also know that the road to hell is paved in good intentions....

If MPs really wanted to help the “suffering” tenants, they should be focused on how to help increased supply of housing or commercial properties.

They could exercise their minds on how government can help lower developer costs and mortgage rates.

But even in that they need to understand market dynamics.  It is not rocket science.

GOVT NOT HELPING HOUSING SECTOR WITH PRICE CONTROLS

Parliament last week passed the Landlord & Tenant Bill 2018 which was first brought to the house in 2016.

While the bill had some laudable provisions to regulate relations between landlords and their tenants – notice for eviction, security deposits and the landlord’s right to access the premise, it had some potentially regressive clauses.

But first a bit of context.

Three decades ago there was an acute shortage of housing in Kampala and the country generally.

"In Kampala a garage was considered acceptable accommodation for the corporate types of the day, there used to be a phenomenon called “goodwill” where people paid seating tenants to move out of their flats in Bugolobi or Bukoto and intending tenants paid up to a year in advance to secure an apartment...

All these have changed for the better as the stock of housing has increased. Classic supply and demand economics. When the supply is low the owners of the houses can set the price but when the supply increases the bargaining power shifts towards the tenant.

The increase in housing has been little thanks to government development, who have barely built a thousand units in the last 30 years. Individuals and private investors have jumped in to fil the gap, which while it is reported that there is still a deficit, it is much less than it was before.

That private sector players have jumped in to fill the gap did not happen by mistake.

For one, real estate development being a long term investment the relative peace of the last decade has made it a viable option.

Just as important was government’s resolve top fend off calls in the 1980s for it to institute rent controls or to discourage of payments of rents in hard currency.

The call for rent controls was because the rates were high – the aforementioned garages were being rented out for the equivalent of $200 in some places. The politicians of the day thought this was unfair and thought they could curb the landlord’s “greed” by fiat.

No one has dollars so why are you charging in dollars they argued then. But many landlords were absentee landlords and didn’t want anything to do with the inconvertible Uganda shillings, which was being ravaged by inflation rates of up to 240%, so as a hedge they asked of rent in dollars.

"By refusing to what seemed like commonsense but was disastrous economics, government gave the private sector the confidence that if they invested in the real estate sector they would get a fair return....

So they went out and built and as they did rents became more manageable and the quality of housing improved. Which corporate worker now rents a garage?

This context was clearly lost on the MPs last week when they passed provisions banning the charging of rent in dollars and capped rental increments at 10 percent annually.

These measures were intended to keep rent affordable but could very well have the opposite effect.

Nothing good ever comes from subjecting the market to non-market forces. Let’s assume the MPs get their way and landlords cant charge in dollars and are restricted to a maximum of ten percent annual increments, how will the land lords react?

First off the people borrow in hard currency not because it is sexy but because they can get lower borrowing rates and the exchange risk can be passed on to the client.

The exchange rate has been relatively stable in recent years – except in 2015 when the shilling depreciated 40%. So the landlords will continue to borrow in dollars but will now raise rent every year by the required 10 percent as hedge against future fluctuations in the currency. What this means we can expect rent to double every eight years. The crazy thing though is that if I am a landlord in the same location and I will increase my rents like my neighbor even if I don’t borrow in foreign currency.

For intending landlords they may very well decide that the economic gymnastics of trying to stay ahead of the dollar would be too much and decide to invest elsewhere. So there will be slow down in rental properties in the market and in classical supply and demand style rents will go up everywhere as the bargaining power switches back in the landlord’s favour.

What if the MPs had thrown out the proposals for landlords not to charge in hard currency and to restrict rental increments to 10 percent, what would happen?

The landlords would continue to borrow in dollars and charge in dollars. They would build more units increasing supply and reducing their bargain power. A situation would reach where landlords would be forced to find alternative hedging mechanisms against the currency fluctuations or get out of the market all together as tenants would resist pay in dollars.

"If MPs wanted to achieve their goals they would use an understanding of the market to keep rents low. It’s really about increasing the rate of real estate development.I They could legislate against the impediments hobbling the construction sector.

They could for instance mandate government to subsidise or take over the laying down of infrastructure in real estate developments, which costs can account to up to 50 percent the building costs. They could capitalize the mortgage finance industry, lowering their cost of capital and therefore bring mortgage rates down. They could provide other tax incentives for developers and investors in the sector as a means to increase the pool of housing and brig down rents.

The temptation to resort to price controls in its various forms is always high, but it is bad economics and eventually turns out to be bad politics as well.

The fact that MPs could pass such a law tells me that they are not enough landlords in the house. Previous laws which have gone against the producers tells me too that there are not enough producers in the house.

That means that MPs are dominated by consumers, unwilling to make the hard decisions in favour of producers or landlords that will take this economy forward. That is a very scary thing.

UGANDA SHOULD THINK THROUGH NATIONAL HEALTH INSURANCE SCHEME

It was announced this week that government had given the health ministry the green light to bring a national health insurance bill to parliament.

According to the proposed bill workers will have to fork out five percent of their income and their employers top that up with another five percent.

There was an immediate and loud reaction against the proposal by the workers.

Their protestation revolved around the cost of the new tax on their income. Some arguing and rightly so, that under their private health schemes they pay much less than the government is looking to extract from them...

The argument that as an insurance scheme, which will mobilise the largest pool of insurance funds in the country, the five percent monthly levy on their gross income was extortionist. Especially since they have little faith in the government’s ability to utilize these resources optimally. The government’s corrupt record not helping the cause.

In Kenya they have the National Health Insurance Fund (NHIF) which was started in 1966 as a department in the health ministry until 1998 when it was converted into a state corporation to provide affordable health care for Kenyan adults.

At the highest tier – Kenyans earning more than a monthly Ksh100,000 (sh4m), pay Kshs1,700 or 1.7% of their salary as premium to the fund.

Rwanda has a health insurance scheme where every adult is expected to contribute according to their means, with the highest contribution being about $8 monthly (sh30,000).

National Health Insurance is not a new phenomenon, its traced back to pre-World War I Germany, so one wonders why our planners are looking to gorge out our eyes with their proposals.

No one is against a national health insurance scheme as most formal employees are already beneficiaries of an existing scheme, it’s the rates that are clearly ridiculous and raising suspicions.

As suggested earlier if there are at least two million workers in the formal workers one should expect the premiums on the health insurance to fall drastically compared to what is being paid in the private sector.

One other concern was that given the poor state of government facilities formal workers would have to pay twice or now thrice – incomes are taxed for PAYE, taxed to support national health insurance and employers would still have to subscribe to private providers anyway.

But in countries where the national health insurance has worked membership to it entitles card holders to service in private facilities as well, so those concerns would be put to rest if our health ministry is planning the same.

"If done well this may even serve the purpose of widening the tax base, removing the burden on formally employed workers and even increase the economy’s productivity....

If every adult is supposed to pay at least sh100,000 let’s say, it will force some of those Ludo “champions” crowding trading center verandahs to become gainfully employed in order to pay their health insurance dues.

It would also be wise to take the fund out the health ministry to administered separately.  This may help allay the people’s fears that the funds will be managed by the health ministry. Of course we would expect that the new agency’s administrative costs don’t balloon out of reason. NSSF would be a good model to emulate.

This may also help improve standards in the health sector. A requirement maybe that to qualify for payouts from the fund health facilities need to meet certain basic criteria of infrastructure and staff.

A well run agency can actually be a game changer in improving health standards in this country.

On the other hand it might be the very thing that brings the health sector to its knees. The verification of claims and the pay out of those claims can be a huge source of corruption. They could on one hand connive with health operators to inflate costs and put huge pressures on the fund. On the other hand they may accumulate huge arrears to the sector and fail the health sector altogether. Operators in other industries from logistics to telecommunications to electricity have horror stories to tell about arrears they have had for years with government that go unpaid.

We keep our fingers crossed that it will be the former rather than the latter scenario that plays out.