THE QUEST FOR IDIGENOUS CAPITAL

A couple of events happened in the last few weeks that made me think about the urgency of building indigenous capital.

On Monday, December 6, telecom company MTN listed on the Uganda Securities Exchange (USE). Since the last week of October MTN had offered its shares to the public in an initial Public Offering (IPO). When the results of the IPO were announced two weeks ago I was one of those whose jaw hit the ground that the offer was not fully subscribed and was kicking myself for not having bet the house on the IPO because I would have got full allocation.

But it also made me wonder at how local individual investors had missed the chance to be invested in the fastest growing industry in our economy....

A week or so later the new board of the Uganda Development Corporation (UDC) was sworn in. UDC has fallen far from its glory days when it was driving the government’s investment agenda and its resuscitation is one we should all be cheering on.

And finally two industries SangaVetChem and East Africa Medical vitals, producing animal health products and latex products respectively, were launched. They were unique because they have local directors partnering with foreign capital to meet local pressing needs.

Building an indigenous capital class is one of our most urgent challenges today. We have Idi Amin to thank for stalling the development of indigenous capital. In 1972 Amin expelled the Asians for reasons best known to himself but which he sold as a move to liberate the local economy. At one of the most disastrous attempts at asset relocation in the history of the continent, he then shelled out shops and businesses to his cronies.

"If ever there was proof that the African’s problem was not lack of capital this initiative proved it as the new businessmen soon ran the businesses into the ground, helped in no small part by the growing insecurity of the time...

Many people think that if Amin had not done what he had done the Ugandan economy would have been controlled by the Asians. This does not hold up to scrutiny.

At the time of the expulsion there were an estimated 50,000 Asians in Uganda. Across the border in Kenya there were 180,000 Asians and no one would say the Kenyan economy is overrun by Asians.  While the Asians there have thrived, Kenya has a more vibrant and credible indigenous capital class than we do.

The reason is simple business like any other skill has its rules. And like any other skill it is best learnt by somebody who knows it. Amin’s expulsion of the Asians meant we were denied the opportunity unlike the Kenyans to apprentice at their feet.

Our businessmen have tried to reinvent the wheel, with little success, so much so that when the Asians returned in the early 1990s in less than two decades had reinstated the previous imbalance, as if they had never left.

So what to do? The issue is building our own capital without disenfranchising anyone else, we tried that and failed.

It is erroneous to say there is a lack of capital in Uganda. The challenge is more that we have been unable to aggregate in meaningful amounts. NSSF, which has grown to a sh15trillion Fund and the biggest in the region is proof of this.

 "The real challenge for the growth of our businessmen is that they have not adopted the habits and traditions, as opposed to knowledge to build and grow businesses...

Here are a few obvious facts. A country is only as viable as its private sector. Success in business is not guaranteed. Therefore, to develop a vibrant business community we need more people going into business, so that by the law of averages we will have more successful businesses.

For starters we could start teaching financial literacy in primary school. We need to make reading financial statements second nature – you will be shocked how many CEOs can read a balance sheet leave alone act on it. This will achieve several things but most importantly demystify the language of business—accounts and secondly, ingrain in all our school going children that there is another alternative to the 9-5 job.

While the capitalist societies don’t have a similar formal process, they have had the benefit of decades of mentoring by businesspeople who had already hacked the process, they are not reinventing the wheel.

For those of us long past primary, government should invest more in business support services. Improving the quality of our businessmen will cure a lot of ills – lack of finance, high mortality rate of our businesses and the inability of our businesses to compete.

"The indigenous businessman is important because, more of his profit will remain in country – without forcing him, he will have a more national perspective than the manager answering to London, Johannesburg or Nairobi has and our politics will be much more predictable....

We will not build this class by bankrolling our cronies, as Amin so aptly demonstrated, but by helping them to acquire the business skills required to not only produce goods and services, but also raise capital locally and drive our goods and services into foreign markets.

UEGCL ON A PROFITABLE TRAJECTORY BUT …

Last week Uganda electricity Generation Company Ltd (UEGCL) had it’s annual general meeting during which it was reported the company was firmly in the black for the third year in a row, a healthier situation from five years ago when they relied on government handouts to stay afloat.

UEGCL, which owns all of governments power generation plants, saw their fortunes turn around when revenues from power sold at Isimba dam started gushing through. We can expect too that when Karuma finally come son line they will be on a irreversible trend to financial sustainability. Or not.

A cursory look over the company’s financials show that it made a profit of sh92b in the year to June this year compared to sh2.8b in the previous year. The quantum leap in profit – 3,100 percent, was due to foreign exchange gains—sh71b on their foreign denominated debt. While this was a happy situation, it was an unusual one as they often make exchange losses, with the last profit was registered in 2019. Nevertheless, the profit from operations was a healthy sh21b still almost a tenfold increase from the previous year.

UEGCL’s major revenue source was Isimba, which accounted for sh139b or 82 percent of the total revenues of sh170b.

Also while total assets slipped to sh7trillion from sh7.1trillion shareholder equity was up to sh833b from sh741b helped in no small part by continued reduction of accumulated losses on the company’s books. UEGCL has been profitable since 2019, three years in the 20 years of its existence.

But the management will be forgiven for not fully breaking out the champagne.

The company’s mandate does not stop at running government’s power generation assets but extends to building and acquiring new assets. It goes without saying this means the company needs money to do this.

"As it is now UEGCL cannot fulfill its full mandate because while it is provided for in their books government does not allow the depreciation and a Return on Equity (ROE). If they kept the depreciation on their plant and machinery, they would be better able to replace the existing infrastructure. As it is now to replace dams like Kiira and Nalubale UEGCL would have to run to government for funding which means UEGCL cannot stand on its own feet...

By allowing them some ROE the generator can then develop new assets either on their own or in partnership with other players.

The financial self-sufficiency of UEGCL is important because to begin with they are already behind schedule in meeting the country’s power generation needs. The National Development Plan II (NDPII) envisaged that we would have power generation capacity of 2500MW by 2020. There is a current installed capacity of 1,252 MW. While this is more than enough for now – peak demand is about 750 MW, going by current growth in demand and if we maintain the status quo we will be back to load shedding by 2027. While this may seem a while away, Uganda’s recent experience shows that it takes seven to ten years to develop a power generation project, so the time to start planning for new capacity was yesterday.

Government too can help improve UEGCL’s financial position by carrying the exchange risk on the foreign loans it contracts. While this year was good for UEGCL with some exchange gain registered more often than not in recent memory there have been more exchange losses than gains. This is important because UEGCL bills in shillings, if they were charging us in dollars for power this would not be an issue.

If they did just these things – allow UEGCL keep the depreciation, allow too for ROE and shield them from the exchange risk of repaying the loans, the company’s financials will improve markedly and allow them to go to market on their own to finance developments.

"It is not unusual. Across the border UEGCL’s Kenyan counterpart Kengen are not only wildly profitable -- $148m (sh533b) but have developed generation assets worth $2.2b (sh8trillion) over the last 10 years...

The government is currently borrowing on behalf of the sector, because they can get cheaper money as the industry companies have wanting balance sheets, companies will UEGCL which can then collect the the money from tariffs and send to government which then pays the creditors. The mere friction of passing through many hands rather from operator straight to creditor presupposes inefficiency, which we pay for in the tariff.

Maybe one last thing would be to convert the debt we have incurred on projects like Isimba and Karuma into equity, essentially government takes them over as a way to further boost the company balance sheet.

For a long time we had challenges with developing our generation capacity, hence our prolonged load shedding a decade or so ago. Drastic action by government has brought us to the happy place we are now, with surplus generation capacity. While transmission and distribution companies need help as well, UEGCL anchors the sector, now power generated no power to transmit or distribute.

To prevent future pain let government take the needed action to make sure UEGCL is sustainable well into the future.

 

BOMBS ON ADF AND THE LARGER QUESTION OF REGIONAL INTEGRATION

Two weeks ago our own Uganda People’s Defence Forces (UPDF) attacked Allied Democratic Forces (ADF) bases in eastern Congo.

Reports had it that the artillery and airstrikes were concentrated on an area of about 150 square kilometers. The ADF cannot have enjoyed the experience and while news is scanty, given the area that was flattened fatalities must have run in dozens never mind casualties.

Unfortunately, the operation is open ended with no time frame set to pacify an area, mostly dense tropical forest, bigger than the whole of Uganda.

The repercussions on our budget will be negative but we have to trust that this is a sacrifice we have to make with the long term in mind.

"For starters the security threat that the ADF pose cannot be overemphasized, but even more important is the security threat of having huge lawless, ungovernable areas bordering us. If it is not the ADF it will be someone else who has evil intentions on us using the Congolese jungles as his launch pad...

It does not help that there are more than 1 hundred armed militia’s roaming the area praying on the population and one would imagine happy to sell their “expertise” to the highest bidder. The emergence of these militias is not all down to criminal intent. In an area where the state has been absent for coming to half a century people have to protect themselves and sometimes in so doing they may just decide to prey on weaker neighbours and soon there is a full scale arms race in the area. And what is to stop them one day cross our imaginary borders and attacking on Ugandans?

The sustainable thing to do is to bring the area under some kind of central control by force initially, which should have been the job of Kinshasa but more importantly by creating an environment in which economic activity can flourish.

Sustainable peace comes from interdependence. Trade is right up there as one of the best ways to create interdependence. When we have no mutual benefit to ourselves war and predation become a real possibility.

So the collaboration with the Kinshasa to improve the road network in eastern Congo is actually what we should be focused on. Any military victories will be temporary but making movement in the area easier is not only useful from a security perspective but will automatically encourage the movement of people, goods and services.

An interesting story from the Mobutu Ssese Seko era explains why DRC – larger than western Europe, has less tarmaced roads than Uganda. During a state visit to neighbouring Central African Republic, then president Jean Bedel Bokassa drove Mobutu through wide, tree lined streets to his palace. At some point Mobutu, who was supposed to be impressed by this show of development, couldn’t hold it any longer, “My friend these goods roads of yours are how you will be overthrown!” he said.

This egocentric thinking has doomed the DRC to confusion and poverty.

"As it is now DRC and mostly the eastern expanse is fast becoming Uganda’s largest trading partner accounting for up to $400 million in exports. We have seen in our own lifetimes how little tarmac can totally change the economy of neighbourhoods and regions....

The 200 km of paved road that we shall help build in the region are just a tip of what is necessary to unlock the vast potential of that region and may very well serve as a useful stimulus for our economy to rebound in coming years.

If in these times when roads are not usable year around we are doing almost half a billion dollars in trade it is conceivable that we can more than double that with the most basic of road infrastructure in place.

Improved economic activity in the area will make joining up in militias less attractive and once the communities have tasted peace and stability will be loath to support any militias.

"Of course for the DRC they have to step up. Uganda’s presence is at best temporary, we would rather have our sons and daughters back home than roaming the jungles of Congo with a target on their backs....

Which brings us to the wider question of regional integration. It starts with recognizing that our borders, really only lines on paper, do not insulate us from the poverty and underdevelopment on the other side. That shared prosperity of first border communities and then whole regions is how will keep our worst excesses from consuming us all.

If it takes a handful of disheveled types running around playing war, to quicken the cause for integration so be it.

 

 

OF ENTEBBE AIRPORT, THE EU AND CHINA

Last week two news events far apart but very related caught my eye.

At home, there was an uproar about reports that China had taken over Entebbe International Airport, because we had defaulted on loans to expand the facility.

The story, which went global faster than it takes to say Shokolobangoshe, was dismissed by government who argued that the grace period on the facility only comes due next year and so it was technically impossible to default on a loan you haven’t started paying for.

My attitude to the whole hoolahbalooh is we needed money to expand the airport, which we did not have, we went out begging to the usual suspects and they turned us away, China offered and set their terms, otherwise we would not have got the money. That being said we are obliged to repay the loan – if only because it is good manners, rather than resort to cosmetic nationalism to get out of our obligations. But that is just me...

Later in the week the European Union announced a €300b (sh1,242trillion) plan to invest up to 2027, in the development of infrastructure abroad. All the commentators said that this was in response to China’s Belt and Road Initiative (BRI), a plan of more than 13,000 infrastructure projects across 165 countries to connect china to the rest of the world.

China’s intent announced in 2013 was clear, to gain access to the natural resources it so badly needs to fuel its own growth, gain some international influence as well and improve our connectedness.

So the analysts saying the EU are playing catch up suggest EU is seeing its influence, drawn from the colonial times, is fading or being eaten away by China looking to bankroll infrastructure in Africa, Asia, Latin America and Eastern Europe.

It’s an interesting twist of fate.

When Europe was colonizing everything that moved in the last century, extracting the resources that now underwrite their wealth, China was in isolation, its stature as the leading global power that it enjoyed in the middle ages long forgotten.

Colonial Europe built a lot of infrastructure around Africa, we have them to thank for the Uganda railways for instance, which infrastructure run unashamedly from high resource centers to the coast and on to the factories of Europe or the plantations of the West Indies and the US....

When they were building this infrastructure there were no conditions of democracy or human rights to set this up, these colonies after all were appendages of their home countries and democracy and human rights were only for them at home. The same standard was not upheld for the inhabitants of the  colonies.

China has serious considerations at home. It needs to grow its economy to improve the living conditions of its billion-plus people, to put off till the future this urgent would have serious repercussions to national stability there.

The infrastructure they are helping lay down across the world is not free, and the western media have warned against recipient countries falling into debt traps and have gleefully highlighted instances where the China’s lenders have had to come in to exact their pound of flesh.

Hence the disproportionate play on the half story about Entebbe airport received around the world last week.

China are not doing what they are doing for charity but out of self-interest, which often dovetails with our own interests. The massive infrastructure outlays we require to lift our people out of poverty is only denied by people who may not want the best for us.

Development history shows you cannot develop without transport an energy infrastructure of course this has to be underpinned by an educated and healthy population.

Many years ago I will never forget, then finance minister Saida Bbumba running around to get commitments from regional leaders, that they would take any excess power that Uganda would fail to consume from the 250 MW Bujagali Dam. This was a condition for the funding required to build the dam.

At the time we were suffering day long loadshedding, the Nalubale dam was creaking under the weight of our growing demand and yet we were barely 200,000 clients or less than one in 20 homes connected to the grid.

Somehow they thought we did not need more power and the Bujagali dam would only be viable if Kenya, Tanzania and Rwanda would promise to take the excess power! You had to wonder why someone would think that Ugandans do not need power. That there was no effective demand. Umeme’s financials over the last 16 years would beg to differ.

"Concerns about the opacity of some the Chinese dealings cannot be dismissed and given our public officials corrupt tendencies, it is right to scrutinize all and every deal we get into with China. But we should be careful not to throw out the baby with the bathwater...

And before I forget China is going to spend at least four times or €1.2trillion in their own BRI up to 2027.