WALKING THE TALK ON DRIVING EXPORTS

A few weeks ago our officials and businessmen trooped to the Democratic Republic of Congo(DRC) to announce Uganda to the newest member of the East African Community (EAC), in a series of meeting held in Goma, eastern DRC and in the capital, Kinshasa.

We would be amiss if we did not look covetously at our only western neighbour’s vast bounty of natural resources, 90 million population and $60b economy and want to position for the opportunity.

"The way we have seen opportunities go begging in Southern Sudan and even Somalia, where we have contributed in their stabilization with blood, sweat and tears, can very well be replicated in DRC. It is not automatic that because we are their neighbours and that we have historical trade links we will be the biggest beneficiaries of the entry of DRC into the EAC.

Previously government has been content to let our businessmen sink or swim in foreign lands. If there are businessmen who have made an impression abroad it has been largely due to their won effort. Hopefully with last week’s meeting in DRC government is beginning to understand what its role has to be in supporting its businessmen to make inroads in foreign markets.

This is an important discussion. With a population of under 50 million, we do not have a big enough market to support a credible industrial base that can employ our people and raise living standards all around. We need to reach beyond our markets to support our planned industries.

The EAC is a good start. But government needs to be more deliberate in helping our businessmen penetrate even our neighbour’s markets. To feed those markets our businessmen will have to expand their production capacities, which will create more jobs not only in the factories but along the whole value chain.

We need not reinvent the wheel. The South East Asians did it in the second half of the last century and are now the world’s biggest exporters, all this on a natural endowment base that does not hold a candle to our own natural endowments.

It did not happen by mistake. At the time their planners determined that they must export to survive they were plagued with the same issues are we are now poor, unskilled, fast growing populations that were a ticking political time bomb if not put to good use.

They too started by aggregating their markets, using that as a launch pad for their products into the world.

"But the more successful countries went a step further. In negotiating market access, providing transport and communication infrastructure, concessional funding to business targeting foreign market among other things....

Bringing those learning here, how would we help our businessmen penetrate the DRC market?

As part of a national strategy to promote exports first to our neighbours and then beyond, we need to look at our current capacities and target markets where our products – food, cooking oil, cement, soft drinks, beer and plastics, can find virgin markets, in our case South Sudan and Eastern DRC and facilitate trade at a policy level, which policies will inform the nature of interventions to make in the targeted markets.

 

"Government’s plan to partner with DRC in building more than 200km of road network in the east of giant central African neighbour is a good start. But it is only a start...

Eastern Congo alone is more than twice the size of Uganda. In Uganda we have about 6000 km of paved road and we are not doing well. That’s just to show how 223 km in eastern DRC is a molecule in the ocean.

They have an extensive network of airfields however, so the two governments may consider how to upgrade these for interregional travel.

What businessmen have said is key too is some sort of export guarantee scheme. The way it works is based on the reality that to promote international trade, credit has to be allowed, an export guarantee scheme would allow our exporters some relief incase their deal goes south.

The trouble our traders have suffered in South Sudan should be a lesson. This is important because once credit is allowed a lot more business can be done and our businessmen can quickly expand their market share.

In addition, we need to facilitate the collaboration with financial institutions. Carrying wads of cash around only puts our businessmen at risk and increases the chances of fraud. What is taken for granted now in travelling to better countries is that you can deposit your money in Kampala and still go and transact in Europe or Asia. We should move quickly to make this possible in eastern Congo.  Maybe we can facilitate the mobile companies to do this for starters.

Many years ago I remember enjoying a Nile Special beer in Bunia, Eastern Congo. It was a sight for sore eyes. The only problem was there wasn’t much to go around before the bar run out and the entire had run out. New supply was not expecting more stock for a week.

There probably hundreds of opportunities going begging like that today.

BUDGET POINTS TO BIG TEST FOR GOVERNMENT

On Tuesday finance minister Matia Kasaija read his 2022/23, sh48trillion budget.

There were some highlights, like that the economy grew at 4.5 percent, faster than the previous year's 3.5 percent and is expected to grow at 6.5 percent in coming years. The dark clouds came in the way of the jump in inflation to 6.3 percent.

The Parish Development Model (PDM) has breathed some new life in our budgeting process -- the more than 10,000 parishes around the corner will each receive sh100m to support data collection, production and financial inclusion. It will be interesting to see which parishes or districts are able to execute the model better.

"In Kenya the devolution of government, a higher level of PDM, and now about a decade old has seen the capital city, Nairobi's share of GDP fall to about 25 percent from more than 50 percent a decade ago as a result of the regions deciding and executing on their development priorities. There has been a disparity of course, in execution, with the better regions seeing tangible developments in quality of social services and infrastructure.

The PDM may very well be the answer to how we can more equitably distribute the economic growth we have been enjoying over the last three decades, but whose benefits have really been concentrated among the urban elite.

The cynics will not be blamed for not giving it a chance, because of the failure of previous initiatives and because of endemic corruption in our society. They will be wrong in the first instance and the money may very well be with them in the second instance.

Comparing the PDM with past initiatives, is like comparing passion fruits and oranges. Previous initiatives were not well thought through and were really dead on arrival. The PDM on the other hand is well thought out beyond the finances committed to the project. Unlike other initiatives that focused only on dishing out cash, the structure and mechanisms for execution have been laid out.

Execution of the project will be hampered by corruption, but the hope is that when the people at the grassroots are clear about what is due to them and what it is for, they will be better able to hold the respective officials to account and ensure things are done. Government should consider also having a competition to see which parishes or districts utilise the funds best as a way to spur results.

"But the big test in the next financial year is how government responds to the rising inflation...

In October 2011 inflation peaked at 30 percent, the highest it had been since 19 years prior, in 1992. Government brought prices under control by being unflinching in its resolve to control money supply, even if it hurt the private sector, the hangover from which we are still paying for.

The inflation this time is a different animal. Unlike 2011 when it was a result mostly of  government campaign spending, regional food shortages also played a part. This time around government spending isn't an issue -- government spent less than it was projected to spend in the last budget, but external factors like rising oil prices,  supply disruptions caused by the Covid lockdowns and the Russia-Ukraine war are the major drivers of price increases not only here but all around the world.

When your inflation is internally generated by say, government printing money, to bring inflation under control you suck excess money out of the economy. The challenge with that is that it also puts the brakes on the economy, putting the brakes on the economy is the last thing we want to do now. Coming out of the Covid lockdown the natural response is to turn on the taps and let the money flow to let the economy recover.

But the current inflation is not being driven by excess money in circulation as explained above. And so sucking up excess liquidity is not going to be very useful especially as it would slow economic recovery...

In this case government will be crossing its fingers that the food harvests are good so that food inflation does not add itself to imported inflation.

But most importantly, government has to hang on to its resolve to maintain discipline in its spending, because if government loses the plot and starts printing shillings, inflation will run out of control and we can very well see a return to double digit inflation, which will set us back another few years.

Thankfully, unlike Kenya we have come out of the campaign season. In our eastern neighbour bowing to political pressure the government has done some questionable things, including providing a fuel subsidy, they have now been forced to lift because they can not afford it, expect a crazy jump in pump prices in Kenya after July 1st.

In Turkey the government hesitation to take the painful but much needed steps to bring prices increases under control last year has seen inflation jump to 70 percent -- this means prices are doubling every 12 months!

"It bears repeating, inflation not only has an immediate impact on our cost of living but also discourages saving or investment and encourages speculation, which in turn feeds the price increases. A vicious cycle that when it gets out of hand is hard, without much pain to rein it in.

There will be a lot of snake oil salesmen, suggesting all sort of remedies to the price increases, (they have already started), but the only solution in the current circumstances is for government to be doubly vigilante on how it spends as we wait for the international storm to wash over.

 

WHEN THE GOVT DOESN’T LOVE YOU BACK

Off the Jinja-Tororo road, about 11 km from Tororo town is the 89 MW Electromaxx thermal power plant.

Recently the deep throbbing chug of the plant’s turbines have been restricted to a few hours a week, to keep the engines in good order, as the country has little use for the plant’s power, thanks to an oversupply of hydroelectric power from our dams on the River Nile.

The plant is reported to have cost $60m (sh200b) to set up.

About a kilometer up the road from the plant is the proposed site for a 10,000 barrels per day refinery. The thinking is that Electromaxx can import crude oil, refine it to get the Heavy Fuel Oil (HFO) to run their thermal power plant – and one other in Arua, and the rest – petrol, diesel, kerosene and bitumen, they can sell on the open market.  It makes economic sense, as it costs almost the same to land a barrel of HFO as one of crude oil in Tororo, the difference is the additional fuel products they can distil from the crude oil and sell on the market.

"It works on paper, but Electromaxx did not factor in Uganda’s officialdom...

The project has gone silent for the last three or so years, because somebody has decided that this plant will be competition for the much larger one in western Uganda and has decided to hold on to the license. A license they were supposed to get long before the 20,000 bpd refinery in western Uganda. The western Uganda refinery will be fed out of Uganda’s own crude deposits.

Electromaxx has already committed to $40 million in clearing the site, initial civil works, some of the plant already at the scene and signed commitments to import the crude oil from Nigeria. Four years of trooping from government office to government office has proven futile.

In the meantime, a six-year facility to finance the deal is being serviced on a monthly basis, straining Electromaxx and its parent company, Simba Group’s cashflows to breaking point. Simba Group’s founder and chairman is Ugandan businessman Patrick Bitature.

Electromaxx have been here before.

At the beginning of the century they were frustrated from getting a license to develop the aforementioned thermal power generation plant, in one instance told to their faces that such investments can only be managed by “foreign investors”. After failing to win the Namanve thermal generation plant, Simba Group sued government for their right to develop the plant. The Tororo plant was a compromise site they were awarded to drop the suit.

Since then they have not only increased the installed capacity of the Tororo plant from the initial 20MW to 89 MW but have also continued to set up an 8MW thermal power plant in Arua that has gone some way to ease the power situation in the region.

"Aggravating the Group’s cashflow situation is the government holding on to millions of dollars in payments due to the Tororo and Arua plant...

According to people intimately involved with the project, supplying government has been a nightmare that has held back the growth of the group, which up to that point was growing at prodigious pace on the back of its telecom and real estate portfolios.

This single event has led to a bruising battle with South African-based financiers Vantage Capital over the last few weeks, who have resorted to a public battle to recover a $10m debt to Simba Group they made out in 2014. Vantage Capital’s attempt to take over Simba Group’s shares, they had held as collateral for the loan, was frustrated by the Uganda Registration Bureau Service (URBS), who denied their request on account of them not being legal entity in Uganda. The court upheld URBS position and sent the two antagonists to arbitration.

It’s widely known that Bitature and his Simba Group, saw their fortunes take off with the entrance of MTN into this market. Previously a night club operator, forex bureau owner and tour and travel agent, his partnership with MTN, where he was the initial sole dealer of their airtime allowed the Group to spread its wings in to the region – providing the same services for Safaricom in Kenya, Vodacom in Tanzania and brief ill-fated foray into Nigeria. In addition, he got into the hotel business before the Commonwealth Heads of Government meeting (CHOGM) in 2007.

He is a local investor clearly on the rise.

  "His misadventures with the government lend credence to the perception that government is willing to bend over backwards for foreign investors but for local investors not only do they leave them sink or swim but even go further to actively frustrate them....

According to the budget government owes suppliers almost sh5trillion, some of these debts going back years.

The Simba Group situation is particularly galling because his refinery in Tororo fits in very well with the current flavour of the month – value addition. Is it possible that if Simba Group had had their refinery up and running by now we may not have been suffering the current pump prices that are now dangerously close to sh6,000 a liter?

OF MIDDLE INCOME AND MAKING IT COUNT

During his state of the nation address President Yoweri Museveni reported that Uganda had finally crossed into middle income nationstatus.

The president said that by the end of this month Uganda’s GDP per capita would be $1,048, more than ten dollars above the accepted level of $1,036 required for a nation to cross into middle income status. To be officially recognized he said we would have to keep the economy growing for at least another three years, he said.

As expected the chattering masses went into overdrive, complaining that the economy is doing badly and that they are not feeling their country’s new status in their pockets.

Their cynicism aside this is nevertheless an important landmark for our economy.

"We are on a development journey and the attainment of the middle income status is an important milestone. It’s like going to school, the attainment of the middle income status is like completing P7, it’s an important event, but in and of itself not very useful for a person, in terms of becoming a self-sufficient economic player. Friends and family will acknowledge the accomplishment but the celebration will be mooted and maybe restricted to your immediate family. Attaining middle income status, like passing PLE, is not an end in itself but nevertheless an important rite of passage.

In 1986 Uganda had a GDP per capita of $250 or about a quarter of what is reported now. The progress becomes even more impressive when you consider that during the same period the population has about tripled, in other words if we still had the population of 1986 our GDP per capita would be more than $3000 and we would be eying upper middle income status already.

In the aid community they are always clicking their tongues at our high population growth – 3.3 percent at last count, which means our population doubles every 25 years. They complain that our high population growth rate is putting the brakes on our development.

In more developed countries bringing population growth rates under control it has been shown, came after, reductions in maternal mortality, fertility rates, infant mortality, in that order and only then did we see population growth rates slow and even reverse.

These developments speak to improvements in the health care systems, which comes with huge sustained investment in the sector. 

For a country to do that, it needs to be generating revenues from taxing ever growing economic activity.

High population growth rates are only a symptom, a symptom of poverty. Solve the poverty question and population growth will be history.

Which is why I don’t pay much attention to GDP per capita. It is a useful indicator of progress or lack of thereof, but to my mind the better indicator is the UN’s Human Development Index (HDI). The HDI measures living standards of a population by looking at among other things life expectancy, education and purchasing power parity.

The HDI recognizes, to paraphrase the great teacher, man was not made for the economy but the economy was made for man. The benefits of the economy should accrue to all the citizens and not to a small well positioned few.

 In 2019 the last available figures, Uganda’s HDI was 0.544. The better a country, the nearer its HDI is towards one and further away from zero. Uganda was ranked 159 out 189 countries, which shows how much more work we have to do and partially why explains the middle income status is not more widely felt.

But we are not alone. Tanzania with a GDP of about $55b ranks below Uganda at 163, Ethiopia with an economy thrice the size of Uganda’s was ranked 173. On the flip side Mauritius with a GDP of under $20b is ranked 66^th with a HDI of 0.804.

Norway is at the top of the pile with a HDI of 0.957.

"A growing economy is a prerequisite for development as measured by the HDI. In Uganda we have hacked the economic growth equation, according to World Bank figures, the last time the Ugandan economy contracted instead of grew was in 1985, the challenge of course is to ensure that this growth is more equitably distributed...

It shouldn’t come as a surprise. Most of Uganda’s growth has come from services – retail trade, financial services, construction but also manufacturing, which are mainly found in urban areas. With an urban population of 22 percent it’s not surprising that the benefits have been concentrated among a relative few.

As a country we have to keep the economy growing, so that we can collect more revenues, which we can use to improve services and infrastructure, spreading opportunity more equitably. Middle income status is not to be snorted at, but we need to look to improving the living standards of everybody not just an urban few.

THE CURIOUS CASE OF PATRICK BITATURE VS VANTAGE CAPITAL

The first inkling that we mere mortals had that local businessman Patrick Bitature maybe in trouble, was with the publication of an advertisement on 18^th May announcing the auctioning of his prime properties – two hotels and a block of apartments, for money he owed.

On the same day Bitature responded to the advert, dismissing it as having no legal basis and we thought that was that.

But before we had caught our breath, on 23^rd May, Vantage Capital on whose behalf the above mentioned advert was published, took out a full page ad to explain the genesis of the saga and how, while the high court had ruled they were not a legal entity in Uganda and therefore could not move on Simba Group’s assets, they were determined to collect their pound of flesh.

At issue is a $10m (sh37bn) loan lent to Simba Group in 2014 which Vantage says has gone bad and they want to collect on.

In their ad they claimed that the loan agreed to with Bitature was supposed to be serviced on a quarterly basis, but that Bitature had not paid a cent. This claim was refuted by Bitature a week later in a full page ad, claiming on his part that the terms of the loan were such that repayment was due in 2017 and after negotiation for an extension, again in 2019.

These were not your normal commercial bankers, hence the mezzanine financing. Mezzanine financing is by definition more flexible than the usual commercial bank loans and cheaper than paying using equity.

It was curious of course that having required payment every quarter, Vantage waited till 2017 to move on Bitature and his Simba Group, wouldn’t we all love lenders like that?

It was also curious that despite the beginning of a court ordered arbitration process, Vantage moved to transfer Simba Group’s shares it had held as security to the loan, a process Uganda Registration Services Bureau (URSB) refused to do because there was an ongoing arbitration process and also because Vantage was not registered in Uganda.

Vantage had chosen London as the arbitration venue and were in the process with Simba Group of agreeing on the composition of the panel.

For URSB to transfer the shares to Vantage, at the bare minimum, the recipient had to be a legal entity, able to sue and be sued, in Uganda.

Vantage as was their right challenged URSB’s action in court. But the court’s hands were tied.  On 9^th May while agreeing with URSB that Vantage was not registered in Uganda, the court said, in effect, that had that not been the case, it may have looked favourably on Vantage’s appeal to move on Simba Group to recover what was due to them.

They promptly moved to appeal the ruling. But curiously again, barely two days after lodging their notice to appeal they published the above mentioned ad to auction Simba’s properties.

Interestingly, a major regional bank already has mortgages on those properties and has first charge, a first right on action on them, a fact that Vantage knew before it did the deal in 2014. This happens with mezzanine financing all the time – lending to entities whose assets are already mortgaged. Their comfort when they do these deals comes from holding the borrower’s shares as security.

"By taking control of Simba Group, Vantage would be able to restructure the debt with the bank or sell off the group, debt and all, to others interested in owning the group, valued according to some estimates at more than $150m. Vantage’s core competence is not running other businesses, but rather restructuring their balance sheets, selling them off to show a return to their investors and moving on to the next deal....

So it is curious what Vantage’s agents in the country were trying to achieve by advertising Simba’s properties, embarrassing Bitature and bringing into the open a matter, that is purely a business dispute.

The way it seems to me, both parties are jostling for leverage and time.

Vantage have chosen to move now. It is hard to justify a non-performing loan on your books for eight years, someone’s bonuses or even job maybe on the line because of this debacle. Because of this and other motivations, it is clear Vantage is looking to force the issue, bring it to a conclusion sooner rather than later. With the courts not playing ball, they have clearly chosen to appeal to the court of public opinion and embarrass Bitature into “good” behavior.

Bitature on his part, riding on the ruling that Vantage has no legal standing in this country, may have bought himself some precious time. Time to organize himself.

Covid was a blow to his hospitality businesses, with occupancies only just beginning to creep up from the grave, but even before Covid, he is owed millions of dollars by the Uganda government, emanating from his power generation plants in Tororo and Arua, debts going back to before Covid.

Everyone who owes money – and Bitature has not denied that he owes Vantage money, should repay what he or she owes.

Bitature cannot afford not to come to an amicable settlement with Vantage, because in the rarefied atmosphere of high finance that he operates in, trust counts more than any asset. It is in his best interest to pay off Vantage, if only because to default now would easily see him blacklisted by financiers far and wide.

Vantage on its part has brought the bare knuckles world of international finance to our door. The warning is clear, that if you want to play with the big boys you better be ready to flex.