OF MICHAEL JORDAN AND THE CREATION OF VALUE

When I was a kid Michael Jordan was god. This especially since the only time I saw him was in the few highlight reels on TV, where he twisted himself this way and that way on his way to the basket. He played for the Chicago Bulls and won six NBA titles with them.

I watched the Bulls a few years ago, live at their home court, the United Center, and it was a yawner. Probably because I had to watch the whole match and not the highlights only, but obviously because the-long-retired Jordan was not playing.

A few weeks ago, it was reported that Jordan had off loaded the Charlotte Bobcats, a team he took control of thirteen years ago, for $3b (sh11.1trillion). That is just a number until you place it the context of what he reportedly paid for it, $275m in 2010. What made the deal even more spectacular is that he is said to have only put up $25m of his own cash with the rest being him taking over the team’s existing debt.

And this for a team that never won a championship.

Observers say a lot of the value came from the increasing revenues from broadcast rights that have inflated team valuations around the major sports leagues of the world, allowing them to pay they stars millions of dollars a year.

Last week there was a report that Manchester United’s Marcus Rashford was set to put pen to paper on a new £375,000 (sh1.7b) a week contract.

But before these team owners could benefit from the largesse of the broadcast media they had to be organized.

Many of these teams started off as pet projects of one rich man or the other. It was their Corporate Social Responsibility (CSR) to the communities in which they operated. These teams were then passed on to businessmen, when the original owners passed on or they became too expensive to sustain. Businessmen seeing the opportunity that came with earnings from the gate took them over, invested in their infrastructure and built national and international communities around them.

With more eyeballs on their teams, they could attract sponsors. This took time. In the case of the English Premier league this was the progression from the end of the second world war to the beginning of the premiership as we know it in 1992.

"With the entrance of TV the real inflation in valuations begun. And now with the internet and non-traditional players like Amazon jumping into the fray, where, we wonder, are the limits to this cash bonanza....

In Uganda of course our sports are largely amateur. The owners or patrons have failed miserably to make them money spinners, content to eat the crumbs government throws their way.

Some owners are making a real go at it – Vipers FC, KCCA and maybe Arua Hill. Rugby has some serious sponsors but the infrastructure is still wanting. Golf have managed to have corporate Uganda falling over themselves to sponsor weekend events (is it because the check signers are also golfers?). Beyond that nothing.

The individual owners trying to do the right thing are being weighed down by the mediocrity of the rest.

We have said many times in this column that money follows organization, though people think when the money comes then they will get organized. The problem with money is that it magnifies what you are, so if you are disorganised you only become more disorganized and the opposite is true.

Going by the way the trends in sports have gone in more developed economies we still have a long way to go.

We are still in the age when the sports team is just a vanity project of some rich man with some shillings to spare. We still need to get to the point when a business is formed around a sports team, with the purpose of onfield success but more importantly business success.

As the Jordan story above has shown, even if a team’s trophy case is bare but it is commercially viable there is always a chance that they will turn things around someday, because they will survive to see that day.

"The Denver Nuggets have seen little joy since they were formed in 1967, but this year won the NBA Championships for the first time. The way they were able to wait through those years is because they are commercially viable...

What is stopping us from doing that here, organizing businesses around sports? The obvious answer of course is that our business culture is still very rudimentary. We all want to own 100 percent of a small thing rather than a small piece of a big thing.

Imagine a group of people came together to build a sports team that would be successful in ten to 20 years. They would pool resources to set up and finance the team, eventually build it infrastructure. If they start from zero it could take longer.

Imagine pouring resources into an endeavour for years without the guarantee of a return. What kind of promoters would they have to be? They would be long term thinkers and it would help if they had some extra cash lying around.

The model of the big man running the team should be dumped by the way side. It has serious limitations that will mean it will not go further than being a big fish in our small pond.

 

 

DRC STABILITY SHOULD NOT BE A PASSING INTEREST

Last week we were reminded, by the attack on Mpondwe Lhubiriha Secondary School in which at least 40 people were killed, that instability in the Democratic Republic of Congo(DRC) will have to be dealt with one way or another, it will not go away by itself.

For us mere mortals we wonder about the Allied Democratic forces (ADF). How do they continue to terrorise our people? Why can’t we just go into the Congo and fish them out? What is the ir problem with us?

"To answer these questions with any seriousness we probably have to go all the way back to the 19^th century, when Belgium’s King Leopold carved out the vast mass of land at the center of the continent for his personal enrichment. DRC is bigger than the European Union by land mass. DRC is almost eighty times the size of Belgium...

In the years when it was he is personal fiefdom, between 1885 and 1908, he put the natives to work in building arguably the biggest rubber planation in the world. Leopold terrorized the Congolese to ensure they met rubber production quotas including conscripting whole villages to work for him, wiping them out if they did not, mutilation, child slavery, rape and any number of depravities humans are capable of. It is estimated that up to 15 million Congolese died during the period.

Leopold did not coat his intentions with high sounding motivations like bringing civilisation to Africa. He did not think the African deserved any courtesy.

International pressure – maybe by those missing out on the Congo’s huge bounty, was used to pry the Congo from King Leopold greedy fingers and hand it over to Belgium.

It goes without saying Congo’s modernisation project got off to a less than enviable start. The Belgians like other colonialists did the bare minimum for the Congolese, focusing more on extraction of its natural endowments.

When they left in 1960, they ensured this extraction continues by putting in place lackey’s like Mobutu Sese Seko. Mobutu famously chided Emperor Bokassa of neighboring Central Africa Republic for building good roads in his country.

“These same roads will be used to kick you out,” Mobutu told him. Mobutu’s philosophy means that today most of DRC is unreachable by land and to get around you have to fly. DRC is easily the most connected country on the continent by air.

The net effect of this thinking is that public goods like security, justice and social services can not be delivered to the people. As a result poverty is endemic, poverty like we have no conception of in Uganda. Invariably this leads to lawlessness and insecurity...

So, its not hard to understand why Eastern DRC, more than 2000km from Kinshasa – about twice the distance from Kampala to Mombasa, is the way it is. There are dozens of militia groups running around, set up to protect areas from other militias but they in turn terrorise others for survival.

The UN have had a mission in the area for the last 20 years, which has failed spectacularly in pacifying the area. An impossible task for a handful of foreigners to do in an area the size of Buganda region.

It is useful that DRC has joined the East African Community (EAC). This could attract more investment to eastern Congo. At the bare minimum if we could open up the road infrastructure and trade can flow more seamlessly, wealth can be created for more people in that region and then we will have a real chance of stamping out lawlessness in eastern DRC.

As it is now if we were to do it by force, we would need to raise a full army or two in the area to have half a chance.

That is how history goes. In more “developed” countries they battled lawlessness and terror for centuries before a critical mass of people were created for whom peace and stability was critical. These people – middle and upper classes, had the reins of power and the ability and will to enforce the law.

Sadly, history suggests that it will get worse before it gets better. History also shows that the thing with history is that we do not learn from history.

BUDGET 2023/24: PAYING LIP SERVICE TO PRIVATE SECTOR GROWTH

Finance minister Mathia Kasaija read the 2023/24 budget last week. For decades now the budget reading is not an event that brings Kampala to stand still.

 In a liberalized economy where government does not control prices of anything, the entertainment value of the budget reading is that much reduced. Believe it or not there is a time the finance minister had power over the price of fuel, milk, sugar and even bread.

By letting price be determined by market forces prices have found their natural level according to the forces of supply and demand. Low supply leads to higher prices which lead to more investment, which increases supply and lowers prices, but overall, a state of dynamic equilibrium is achieved that no government can manage by announcing prices from time to time. As a result, and its plain for all to see we have hardly no shortages in anything to speak of.

"In my mind that will be the biggest legacy of the NRM when history is written. With this single stroke they liberated us from the shenanigans bureaucrats would get up to, in playing around with market prices, and unleashed the individual efforts of businessmen which has proved the doubters wrong. The beneficiaries of price controls complained loudly to anyone who would listen that the liberalisation of the economy would lead to higher prices, hoarding by the business community and general pain and suffering for the population. Thank God government had the cojones not to listen to the populists but to follow the science.

But you know if you are going to do something you better go the whole way or your halfhearted attempts will negate all the good you have achieved.

What everyone kept harping on was that nearly half of the sh52trillion budget – sh25trillion would be going to debt servicing. And this debt servicing would account for 86 percent of all revenues collected domestically.

If you are falling deeper and deeper into debt the way to extricate yourself is to negotiate yourself out of the debt or for easier terms or to raise your income so servicing the debt is not so painful.

The best route for you and your furture credit worthiness is maintain the current contracts but raise your revenues to pay meet your obligations.

The assumption is that the debt you contracted has helped you increase incomes, in the case of a nation it has facilitated the growth of the business community, who create jobs and pay taxes. Essentially you want to be good to the private sector.

"But what do we see?  A government intent on taking from the private sector with both hands, not only is government chasing businessmen down the streets to pay taxes, which is as it should be but is also not paying them for goods and services delivered...

There is a deafening silence in the budget speech about the extent of the domestic arrears, about sh8trillion.

A strategy to slow the accumulation of these or to draw them down urgently does not feature in the government’s key objectives on page 10 or the section on “Supporting private sector growth” on p13, where they seem to have shifted to ignoring businesses that supply them and focus on small and medium size enterprise. There is however, passing mention on page 38 that government has ringfenced sh215b to pay domestic arrears.

You don’t know whether to laugh or cry. There are no expletives a businessman, watching his life work going down the tubes, can hurl at government at this state of affairs.

From a purely arithmetic perspective, this means that if I have supplied government with one million worth of goods I can expect sh26,875 this financial year, in payment from government. That is not an error. The math is beyond reproach, if I may say so myself.

Government is the biggest consumer of goods and services, so when government refuses to pay there will be hundreds of businesses affected directly and thousands affected indirectly. And the saddest thing is that many of these businesses whether government pays or not have to do business with government anyway. But for how long?

It is so bad now that lenders are looking with jaundiced eye at any government purchasing orders. Previously, (must have been in the 1960s), government was good for the money, so you could take your order to the bank and the lend you money to fill the order. Not anymore.

So how will government get the taxes it needs to pursue its development agenda?

URA can only squeeze so much, before tax evasion or outright protests begin. A classic case of shooting the messenger.

"Government needs to hold officials accountable who contract services when government can not pay. But more urgently government must steal, beg or borrow and pay off our business people as a way to save them from collapse at a micro level and at a macro level to ensure the economy keeps ticking along...

Even if government did not contract anymore debt at the current rate of payment it would take 37 years to clear this debt.

It boggles the mind that our government thinks this is a sustainable situation.

 

WHAT WE DON’T KNOW ABOUT THE CORRUPT

My man, I will call him Jack, has fallen on “hard times”.

This time two years ago, he was a high-flying government official, with huge budgets at his beck and call. Needless to say he was dipping his hands in the kitty and his lifestyle had grown to match – he had a palatial mansion in a Kampala suburb and one in the village. He and his wife had matching four-wheel drives bought from the showroom. His children had done the international school circuit and now were studying in foreign universities, whose annual fees would pay for at least 34 undergraduate students at Makerere. This is what we know or can discern. It may be the tip of the iceberg.

He had worked in government for the last 30 years or so and his known salary – even if you add all the allowances he gets, could not sustain his lifestyle, at least the one that was open to the public.

I would pay to see his balance sheet.

Two years ago, he left government and the reality begun to set in.

I am going to hazard some assumptions.

"Let us say he had a sh50m a month lifestyle, which would come to sh600m a year. His expenses included maintaining his palatial homes, paying schools fees and upkeep for his three kids abroad, maintain his farm in the village, paying the salaries of a phalanx of workers here and in the village and of course sharing his money with needy relatives and friends. In addition, there was some construction works going on here and there. He did not have a rambunctious nightlife, as far as a I knew, but then again you never know what he got up to in his mansion after dark....

He has easily another 20 years of working life in him but can not be employed in the public service again and he has no skill that the private sector would need.

So, he has had to resort to his savings and investments to stay afloat.

The funny thing with life is, when things are good, we don’t put aside anything or enough for a rainy day.

Assume Jack maintained his sh600m lifestyle he would need assets of about sh3.2b. I got that number by using the 18.5 percent annual yield on the 20-year bond. If his assets were in shares on the Uganda Securities Exchange (USE) he would receive dividend yields of between 0 and 14.3 percent at current rates. Assuming he has all investment in the highest yielding shares he would need assets of sh4.3b to sustain him and his family in the way they have been accustomed to.

If he had invested in real estate at the average return of between two to five percent a year, he would need assets of at least sh12b. If he was doing business returns can much better or much worse, but it would still be a stretch to find a business which would net him sh50m a month especially since he has not built it up over the last so many years.

The New Vision SACCO with which I am intimately familiar, has been in operation for 18 years. Last year they managed a net profit of sh976m, this off sh11b of assets or about 9 percent return on assets, but even then, only made a dividend payout of about sh120m. And this is not indicative of usual businesses as the SACCO works off a very low-cost base and is exempt from corporate taxes on its profits.

So, the “hard times” for Jack have come in the way of drastically scaling down his lifestyle, as he has significant amount of dead assets, assets not making a cash return even though they maybe appreciating, we think. But don’t cry for him yet he scaled back lifestyle may mean he is down to spending sh20m a month, though he would be best advised to take a panga to those costs even more...

All the land or assets in the world will count for nothing if it is not generating incomes when you need the cash.

I know too he has been selling off some of his assets to plug his expenditure holes, but that is a slippery slope, because if you sell assets where will future income come from?

We forget that even when these officials are pilfering our taxes, they most probably consume more than they invest, the way we mere mortals behave with our hard-earned income. It’s a natural thing when you think the taps will continue flowing long into the future.

It is hard to sympathise with such retired public officials, instead we wonder what they did with all the money they were “eating”.

And that’s the point, they ate the money.