THE REASONS BEHIND THE INDIAN RISE

Earlier this week history was made when Rishi Sunak became prime minister of the United Kingdom. History was made because Sunak is of Indian origin.

Kenyans have claimed bragging rights, as Sunak’s father was born in Kenya. His mother is from Tanzania. It will not be a stretch if Uganda claimed a few of his uncles.

But Sunak is only the most recent of high performing individuals who claim Indian origins.

Understandbly, it’s in the private sector, which is more of a meritocracy that the Indians (writing of Indian origin is painful) have excelled.

"A list has gone around of Indians who have led more than 20 globally renown companies in the last decade or so. Google, Microsoft, IBM, CitiGroup, Pepsico, Nokia and Motorola are included among that number. No mickey mouse organisations. And these are the ones we see in the news, there easily hundreds other flying just under the radar in companies, academia and every other occupation you can think about.

This is no mean feat. Not only because these are among the biggest companies in the world, but because they have achieved all this as immigrants. While most of them have adopted the citizenship of whichever country they work, they are still considered outsiders.

Sunak’s achievement is therefore even more remarkable, never mind that he ascended to the highest office in the UK government through a party vote. It would be interesting to see whether he could lead the Conservative Party to victory in a general election.

Given the numbers of Indian super performers around the world, we can agree that this is no fluke.

To begin with is the population of India, about one billion and the that of their diaspora, more than 30 million by some accounts. Success is a numbers game. For every Sunak there are probably thousands of others who would have been PM, had they not taken a wrong turn at school or in their career or in their marriage. The trick therefore is to put out so many, increasing the probability that at least a few will come through.

This has been true from the reproductive process. Millions of sperm have to be expended to produce one child.

It goes without saying that all these high performers are well educated, but even more importantly they have all gone to the best universities be it in the US or the UK. This is important, even critical, because to climb up the corporate ladder takes a lot of “know who”. In western economies this often boils down to which university you went to and who was there when you were there. Getting a western education is more about where you go to school than just going to school there. The same is true everywhere you look.

The power of the network is what we ignore or are ignorant about. Its what makes the difference between climbing up the ladder or not. You can bet Sunak with his first-class degree from Oxford or all these CEOs were not necessarily the brightest of their respective cohorts. But they plugged into powerful networks that recognized their worth and usefulness to the collective.

"There is value in good people, talking good things about you when you are not there....

The biggest network the Indians find themselves in is that they are English speakers. English is the international language of commerce and trade, spoken by billions of people, whose numbers are growing every day. The more people you can communicate with the more influential you can potentially be.

There is something to be said about the phenomenon of the tiger mum, used mostly to describe immigrant mothers from south east Asia – China, Japan, South Korea, but could as well apply to Indian immigrant mothers. The way it is told, these mothers instill an iron clad discipline in their children and not only push their children to excel in academics, but even chart their academic path. Their children do no indulge in whatever catches their fancy but are pushed from an early age to excel in English, math and science.

The Indians have been immigrants for decades and have only just hacked the system. Given the above we can expect that hundreds of more Indians are going to make the transition, now emboldened by the example of their predecessors and within a generation it will not be unusual for Indians to run Fortune 500 companies or lead the major nations of the world.

Is it systematic? Not as far as I can see. They are not like the Chinese who we here send hundreds of youth to study abroad, return them and insert them in their own systems.

At the bottom of it maybe is that India places no restriction on its citizens movement in and out of the country, and dare we say, they may be even relieved if some go away and never come back...

I think it’s the purest form survival of the fittest. Their vast numbers and emphasis on education means it was always going to be a matter of time before Indians

This will one day make for an interesting study if its not already being studied.

VIPERS SC; A CASE STUDY FOR SPORTS TEAM OWNERS

I have never watched a Vipers SC football match, ever.

A function of me not making the habit of watching live soccer matches – I have only watched one half of a live match. This was between the Uganda U-23 and Zimbabwe, maybe 20 years ago.

Vipers SC is enjoying major success. Last weekend in the southern DRC city of Lubumbashi, in the CAF Champions League, they wrestled favourites TP Mazembe to a goalless draw. In the ensuing shootout they overcome major nerves to beat TP Mazembe – who are five times Champions of Africa, in front of their home crowd. The final score, 4-2.

The victory meant that for the first time in Vipers SC history, they will play in the group stages of the tournament. While the local press were excited by the guaranteed sh2.1b they are set to earn, I marveled at the work it has taken to get that to that point.

I have had my eye on them for a while now. And not for their on-field prowess.

This is the story of Vipers SC, as I know it.

In 2001 teacher and entrepreneur Lawrence Mulindwa opened St Mary’s Boarding Secondary School - Kitende off Entebbe Road. The school first made a name for itself by churning out high scoring candidates at O- and A-level, upsetting the dominance of the traditional schools.

But it also started to dominate in soccer, emerging the best soccer secondary school in Uganda ten times and in east Africa 13 times, including 11 times in a row between 2004 and 2014...

Mulindwa did not stop there. He took over straggling Bunamwaya FC changing it to Vipers SC. This served as a useful up taker of his school’s talent. The team has won the premier league five times since 2010.

The success of his team makes for good reading on the sports pages, but the real untold story is the behind-the-scenes work needed to bring on this success.

Starting with a school to source and nurture talent was an inspired move. Owning a team to funnel that talent was the logical next step.

And in case Mulindwa had not made believers of us yet, he went and built a 25,000 capacity stadium to house Vipers SC, the biggest built in the country in almost three decades – Mandela Stadium was opened in 1997. And it is the only privately owned one that meets CAF’s standards to host its matches.

And suddenly Mulindwa, if it wasn’t clear before, was no ordinary soccer team owner.

Mulindwa’ stated ambition is to make Vipers SC the best team in Africa. If that is so the work has only just begun.

His actions suggest he understands what it takes to build a soccer team from the ground up. He has understood correctly that for success to happen the team has to be driven by an “impossible” vision, have a pipeline of talent and has to be able to sustain itself beyond his own means.

And this last part, building a self-sustaining organization to support the team, is what will give Vipers SC the best chance of attaining the dream, and ensuring that it joins the continental dynasties of the game.

There are richer teams on the continent than Vipers Sc that have not attained the heights they have. More than money will be the way the team improves its institutional capacity, its corporate governance. It’s a cliché these days but one that cannot be ignored.

At the most basic level it means the club will formalize how it earns and spends its money and how it plans for long term viability. The team will become an asset on the books like the stadium. The organization will supersede the team and must supersede its owner.

This is true because I suspect the team has gone as far as it can go on the will power of one man. But I am sure Mulindwa knows this and is working towards this end, otherwise he will not realise his dream.

As an indicator the most successful team in African football is Egyptian team Al Ahly. Al Ahly was started in 1907 and is thought to be the most valuable team on the continent, valued at $28m(Sh104b). In 2021 they had a budget of $129m(sh477b) and a transfer budget of $12.7m (sh47b).

It has a seven-man board, management and branches dotted around Egypt. It is no wonder that they are among the most successful teams in the world by trophy count –115 and have endured for so long. Long after their founders and their children were dead and buried.

Al Ahyl boosted by its tens of thousands of paying members and corporate sponsors is gone beyond being a soccer team with teams in the national basketball, handball, tennis and gymnastics leagues.

To be the best on the continent Al Ahyl are the ones to watch.

 

 

BANKS IN FOR A ROUGH RIDE AND WHY WE SHOULD CARE

Last week the Bank of Uganda announced the fourth increase of the Central Bank Rate(CBR) in as many months to 10% in a bid to beat back inflation, which rose in September into the double-digit range for the first time in more than a decade.

In July 2012 inflation stood at 14.3% working its way down from a high of 30% in October of the previous year.

Inflation or a general rise in prices, is caused by too much money chasing few goods. This may arise because there are general shortages of goods or because there is more money in circulation than necessary.

The most recent inflation has been driven by external shortages, a hangover from the covid-19 lockdown and accelerated by the war between Russia and Ukraine. Another major driver was the increases in global oil prices earlier in the year.

The short-term way to fight inflation is to decrease money supply, which is what the Bank of Uganda is attempting to do by increasing the CBR. In determining lending rates banks take a cue from the CBR, when it goes up they raise rates when it goes down they follow suit. A raising of rates tends to lead to a slow down in borrowing but even more worringly an increase in loan defaults..

Predictably we have seen increases in lending rates to keep up with the Bank of Uganda’s recent actions. This has the effect of dampening the demand for credit.

"Whereas the borrowing public may grit their teeth at the banks’ speed to respond, which they have little choice as the cost of their money is pegged to the CBR, banks are bracing themselves for hard times ahead....

According to a Uganda Bankers’ Association (UBA) report released earlier this year, in 2021 lending to the private sector grew by eight percent but this growth was down from 12% the previous year. This was on account of low economic activity through the worst of the Covid-19 lockdown last year.

An increase in lending rates, apart from the bad press, invariably leads to a rise in bad loans. Bad loans not only affect banks’ profitability but also their appetite to lend.

The full effect of the higher lending rates will be felt in 2023 as the BOU’s anti-inflationary actions have come in the second half of the year. We can reasonably expect that rate of growth in lending will slow down or fall off altogether.

Other instruments at the central banks disposal to check the growth rate of money supply are treasury bills and bonds.

In 2021 bank investments in these and other tradable securities grew by 10%, much higher than the rate of increase of lending to the public.

That maybe where the danger is for the borrowing public, this more than the higher lending rates. That given a choice between lending to government and lending to the riskier private sector and individuals that banks will shift their attention more towards government paper.

Sadly, this has been a trend in the making with the ratio of how much of customer deposits do they lend out falling to 61% last year from 71% in 2015.

In case anyone needed any convincing, the overall health of the banking sector is key to whether growth continues at acceptable levels or not in this economy. A stressed banking will hamper its ability to support the private sector. While the investing in government paper is critical to stabilizing the macroeconomy, that is not supposed to be the core activity of the sector.

The truth of the matter is that while the central bank has the sole right to print money, it’s the banking sector that actually determines money in circulation through its lending practices. The ability to execute this function depends on the health of the sector.

The knee jerk reaction would be to blame the banks. This would be wrong.

The central bank’s major mandate is to ensure there are no dramatic increases or decreases in prices, they do this with the limited tools at their disposal, designed to reduce money in circulation. The more sustainable thing in the inflation equation is to increase production to balance the money in circulation. The nature of this jump in prices is a function of things happening outside out borders and therefore the central bank cannot control.

“Unfortunately, restoring inflation to low and stable levels involves taking medicine with some temporary side effects. The fight against inflation is not a painless battle,” wrote deputy bank of Uganda governor Michael Atingi-Ego in the press last week...

The hope is that the banking industry comes out the other side intact as it will be needed to reignite the economy.

UGANDA ECONOMY 1962-2022: WHAT A RIDE

The story goes that an official Ministry of International Trade & Industry (MITI), responsible for the rehabilitation of Japan after the second world war, was asked what he thought were the effects of the French revolution on world history.

He thought for a bit and then answered, “Its too soon to tell”. The French revolution happened around 1789.

The anecdote may or may not have happened, but was used to show how farsighted Japanese planning is.

Yesterday we commemorated 60 years of Uganda’s independence from colonial rule. While 60 years is not as good a psychological divide as 50, it’s a good time to take stock of progress or lack of thereof.

According to World Bank figures the Uganda economy has grown to a GDP of $40.43 billion at the end of 2021 from $450m in 1962. This is an average annual growth rate of just under eight percent....

If you break it down into 20-year segments the fastest economic growth recorded was between 2002 and 2022 at 9.84%. The next fastest growth period was between 1962 and 1982 – 8.21% and finally the 1982-2002 period which grew by 5.34%.

Drilling a bit more under the surface makes for interesting observations, conclusions.

The first two decades of independence had as its major economic events were the declaration of independence to begin with which saw the expansion of services and unleashed a suppressed initiative from Ugandans. Obote’s attempts to “move to the left” – embrace socialism did not gain traction partly because they were not thought through but also because he run out of time with the 1971 coup which brought Idi Amin to power.

The descent into chaos under Amin seemed not to have dented the post-independence growth momentum, with GDP per capita peaking at $258 in 1977 before collapsing to $100 in 1980. This suggests that the economic foundations set up by the colonial administration and the first Obote administration were robust enough to hold for about five years before terminal decline set in. The reality on the ground of course was economic hardship was already being felt.

The expelling the major commercial class and the descent into widespread insecurity meant businesses were operating below their full capacity or shutting down all together. This is important because it’s the private sector that grows wealth and not the government. So, if you hobble the private sector, even the government fails to play its distributive role of using taxes to uplift the living standards of its people through provision of law & order, social services and infrastructure.

Saddled with an economy that had regressed into subsistence and the breakout of the bush war in 1981, the 1982 – 2022 period started off on a false note. The last contractions of the economy happened in 1984 and 1985.

The return of stability in central and western Uganda after 1986 allowed the pullout from the decline of the previous 15 years to begin in earnest...

During this period major economic shifts came with the currency reform, the liberalisation of the exchange rate, the liberalization of commodities trade, brining inflation under control, the opening up of the telecommunications sector to introduce mobile phones and the sale of Uganda Commercial Bank (UCB). This among other initiatives unleashed individual initiative and attracted foreign direct investment.

The breakup of the state monopolies and the subsequent liberalization of the economy, underpinned by increased stability led to sustained growth of the economy. During this period too there was a coffee boom in 1994, with the failure of the Brazilian crop, which did a lot to boost coffee production and exports. In one year, the 1998 season Uganda exported more coffee than it produced, with the coffee from DRC making up the difference.

A period of dramatic rethink of our economy nevertheless only managed to bring us past the 1977 GDP per capita $248 level in 2004...

The next 20 years after 2002 as has been mentioned the economy raced to its fastest average growth rate as the liberalization policies begun to kick in, but probably more importantly the northern Lord’s Resistance Army (LRA) insurgency came to a close, allowing the northern region’s economy to reintegrate into the national economy.

Despite the war on terror, global financial crisis and more recently the Covid-19 pandemic the economy has continued to grow, with GDP per capita at $858 at the end of 2021 and poised to cross into the middle-income nation status. It helps that GDP was rebased twice during the period 2014 and 2019.

Growth is a given in this economy, as there remains a lot of untapped or unrecorded potential.

The challenge for the next 60 years is to ensure that this growth is more equitably. A situation of high growth and high inequality like Uganda is an indictment on the government. The business community builds the wealth and the government distribute it. Distribution is not by some brainless mathematical allocation of cash but by using taxes to spread the opportunities around.

Improvements in and spreading of education and health services raise the earning capacity of the population; infrastructure development opens up opportunities to more people and law & order ensures that what we work for we can keep. In as far as government is failing or unable to provide this is the extent to which income and wealth inequalities persist in an economy....

One last thing, assuming we can maintain our growth momentum on GDP per capita from the last 20 years – 6.44% by 2082 our GDP per capita will increase to over $36,000.

POWER TARIFF INCREMENT SHOULD BE DONE MORE FREQUENTLY

 The first increment in power tariffs in four years is likely to cause some grumbling as expected.

The logic behind the increments can not be faulted.  The Electricity Regulatory Authority (ERA), listed as reasons for the tariff increases an Increase in inflation, depreciation of the shilling, increases in fuel prices and a larger than expected reliance of thermal generation power in the last quarter.

"Over the last three months inflation has registered a 6.52 percent upward movement, the Uganda shillings has depreciated 6.92 percent and international fuel prices have jumped by almost a half...

In recent years an increase in tariffs seemed counterproductive to efforts to keep the economy afloat and revive it during and after the Covid-19 pandemic. In a situation of collapsed demand and profit margins the last thing businesses wanted was an increase in power tariffs.

It helped too that Isimba dam came on line just before the pandemic. A lower cost generation plant that helped keep tariffs low.

There are more considerations than a mere mortal like me would know, but I believe as a matter of course our tariff should be allowed to float – go up or down, according to some index, which takes into account the four major drivers of tariff as outlined above.

The knee jerk reaction would be to resist these regular changes, but in the long term it would let us adjust our behaviour and does not mean tariffs will always be heading up.

The well-known experiment of the two frogs comes to mind. One frog was thrown into a beaker of boiling water and understandably jumped out immediately. The second frog was put in a beaker of cold water but which was seating on a fire. It took much longer for the second frog to jump out of the beaker. In some narrations it actually boiled to death.

The point in a roundabout way, is that to allow the prices to respond to the reality on the ground, is the more humane thing to do than try to hold them to a favourable level out of some misplaced sense of charity...

Our recent experience with fuel prices and longer experiences with the exchange rate have borne this out.

Since the beginning of the year the petrol prices have broken the sh5,000 a liter barrier and quickly there after the sh6,000 a liter barrier. There has been much gnashing of the teeth in the hills of Kampala and beyond, as fuel prices crept up. People pointed to neighbours Kenya, where Nairobi committed to subsidise fuel prices and hold them to more affordable levels. Kenya under the new government has dropped the subsidy like a hot potato and prices jumped -- not unlike the frog in the hot water beaker, to reflect the market price.

The cost of subsidizing fuel prices has left a hole in the Kenyan economy, which they will struggle to fill for some time.

In this era of environmental orthodoxy, the argument that keeping power prices down to encourage use of power and discourage use of charcoal is an easy sell.

But keeping prices low prevents the forces of supply and demand to actually bring prices down.

Higher prices, more accurately market sensitive prices, will encourage investment in the sector, spreading the cost of production and lowering eventual tariff to the consumer.

We are living proof of that. Barely 20 years ago we only had two dams Nalubale and Kiira, charging well below production costs. A liberalization of the sector and adjustment of tariffs to be more realistic has seen an explosion on power generation capacity to include solar, thermal in addition to hydro-power electricity we generate.

By the laws of supply and demand if we still had only two dams with a combined generation capacity of 380 MW power would be expensive, maybe not in tariff terms, because the government would be keeping it low, but in opportunity cost that comes with economic activity that has been lost for lack of adequate power supply.

"We suffer that opportunity costs even today. With electricity coverage now of about 25 percent, imagine how much more economic activity would happen if half the population had access to power....

Thankfully its not up to me, but if it was, I would cause an adjustment in tariffs – up or down, every month. Maybe that’s why I will never be in charge.

NSSF PLAYING IN A SMAL POND

In recent weeks NSSF has been showing off the real estate developments they are involved in.

Residential estates in Lubowa and Temangolo, which will bring more than 7,000 housing units to the market – 2,417 and 5,000 respectively over the next few years, are bound to change the housing market irreversibly. Their initiative to have a rent-to-own model, with longer tenures with comparable offers, should send shockwaves through the industry.

As it is now most homeowners go through the arduous process of building their homes brick by brick, literally, years after the start of the build occupy it when it is half done (which is illegal) and put in the finishing touches at leisure.

We build our houses like this because we can. Enforcement of the building code is lax. Also because we cannot afford to buy our own houses, mortgage terms are too onerous and anyway there were not enough houses to buy.

You can see why the NSSF estates become a more attractive proposition, their seemingly high prices notwithstanding. At the Lubowa estates entry price is $150,000 (sh570m).  NSSF management argues that the additional cost of laying down infrastructure – roads, water and electricity, is the reason the prices cannot be lower.

But one has to wonder too, what is NSSF doing building houses?

In an ideal world NSSF with its mountains of cash should be funding developers to build, but not itself building. They should stick to their expertise, which is collecting money and investing it. Some would even argue that it should even outsource the investment function.

NSSF finds itself with two problems. The first is that it has too much money. A nice problem to have. The Fund is the biggest in the region with assets under management of sh17.2trillion. This too much money is a problem because NSSF needs to pay its members annual interest.

While by law they can get away with paying interest of 2.5 percent, the management has committed to paying two percentage points above the 10-year inflation average. This year they posted an underwhelming 9.65% down from 12.15% last year. Us members used to double digit interest for more than a decad,e have been spoilt rotten.

In the same week NSSF Kenyan counterpart reported they would be paying 10% to their members the highest in the last seven years they have ever paid out.

NSSF’s real estate portfolio -- 7% is dwarfed by the 78% committed to fixed income portfolio. NSSF is the biggest uptaker of government paper. But arguably this honey moon may not last. Government could lose its borrowing appetite or that appetite not grow as fast as NSSF’s need to fix money. Hence one of NSSF’s motivation to move into alternative investments, as its ability to invest outside the region is restricted.

 

Secondly, the natural partners for NSSF, are the National Housing Construction Corporation (NHCC). NHCC have already played their part in the Lubowa project. The land on which the project stands was surrendered to NSSF for monies it owed the Fund.

In an ideal world NSSF would have an equity stake in NHCC as a way to bring building costs down. NHCC borrowing from NSSF to build would just increase the price. The first phase at Lubowa estate, which is 10% of total project cost, cost $73.3m.  

NHCC financial statements are hard to come by, but in 2011 NHCC had assets of $70m. Assuming the asset base has doubled in the interim, NSSF would have to take over NHCC and add even more equity to finish Lubowa...

The truth is NSSF is playing in a really small pool compared to its potential.

Next to government it has the best business model of any company. It mobilises savings from many people with a promise to keep this safe, with interest, ready for one when they retire. As such they are the biggest pool of long-term savings in the country. Stanbic Bank at the end of last year had savings of just over sh6trillion, mostly short-term deposits, about a third of NSSF’s war chest.

So it needs partners of comparable heft in order to deliver a quality, affordable product to the public.

Which leaves the government. For starters the government would do well to underwrite the infrastructure costs on these developments. NSSF boss Richard Byarugaba suggested at the Annual Members Meeting that this would easily lope off 30 percent of the cost of the project, a savings they would happily pass on to their members.

NSSF through no fault of its own, and its struggle to show a return to its members, is exposing the glaring deficiencies in the real estate industry. Government will be well served if it took note.