BIG BUSINESS CRITICAL TO REGIONAL INTEGRATION

TITUS Naikuni, the Kenya Airways CEO, could not help himself the other day. “Didn’t I tell you? Five years ago I said we would be a billion-dollar company in 10 years; now we are here,” he said directing his comments at a journalist during a recent press conference.

He was referring to the company’s turnover for their just-concluded year in March.

Well, he stretched the truth a little. Kenya Airways market valuation will have to jump five-fold to become a billion-dollar company.

The company whose tag is “The Pride of Africa,” turned over a Kshs85.8b just over sh2,200b of which about sh88.4b was the net profit. Put into perspective, the airline’s total sales last year is the equivalent of Uganda’s national budget for three months.

The airline does 380 flights a week, its 377 pilots fly their 31 aircraft fleet and last year they flew three million passengers to and from more than 50 destinations on the continent, Asia and Europe.

To sustain that size of company, lack of growth is not an option. CEOs like Naikuni, will be licking their lips at plans to have a Free Trade Area that stretches from Libya to South Africa within three years.

This was announced last week after meeting in Johannesburg of the leaders from the regional trade blocs, EAC, COMESA and SADC.

The merger of these three blocs will account for more than 500 million people and a $1 trillion economy.

I think it is safe to say that for the continent to unite, business has to thrive and with mutually shared economic interests, the politics will follow. As it is now, trade within Africa accounts for less than a tenth of all trade the continent does.

One can assume that the larger impetus for this merger is coming from South Africa, whose companies already have a head start. More importantly, the leadership understands that the only way to fulfil a pledge to create five million jobs over the next 10 years will only happen if South Africa Inc. grows.

The same pressure is felt in Kenya and even Egypt.

Governments have to create jobs to keep their citizens occupied and away from any seditious thoughts. Governments creating jobs by building a huge public administration, is a model that can only take you so far.

The more sustainable way is to create an enabling environment for your businesses to thrive, therefore creating more jobs and everybody is happy.

Companies do not expand beyond their borders out of some romantic sense of adventure. They do so because there is little scope for more growth in their own markets either because of increased competition or because the economy has reached maturity or both. Expanding beyond borders is a survival tactic.

An unintended consequence of this need for growth leads to political union, because companies for operational ease, would like to work in a uniform environment.

Borders come down, currencies are discarded in favour of a single legal tender and free movement of labour is allowed. Our own regional multinationals – all Kenyan by the way, leverage their economic muscle to influence policy to their advantage.

The potential for a region’s integration has a lot to do with the presence and viability of the region’s companies.

Companies like Kenya Airways will be the drivers of Africa’s integration.

However, the growing capacity of businesses to influence the affairs of state often has politicians up in arms, which raises a dilemma.

Governments see a stronger business community as a counter to their power and are often reluctant to help business grow. On the other hand, they need business to pay taxes and employ their citizens.

As long as politicians don’t run rogue and shoot up the whole place, the continuous interaction between governments and business ends up with businesses getting what they want, which is not always bad for the rest of us.

On the balance of things, the more companies we have like Kenya Airways, that become billion-dollar companies, the better for us.

UGANDA: FOCUS ON LABOUR PRODUCTIVITY

The dust is beginning to settle on Maria Kiwanuka’s first budget speech.

I like the heavy emphasis on infrastructure funding – most of it dominated by sh800b plus to get the Karuma power dam under way and of course roads, there are also plans to get a Malaba to Kampala standard gauge railway line up and running and there was mention of earmarking money for water transport.

As a landlocked country communications – transport and telecommunications, are critical to our survival and eventual prosperity. The cheaper these are the better it is for our businesses and the population in general.

Our infrastructure is woeful and that is plain for anybody to see, but what is even more abysmal is the little issue of our labour productivity, the amount of goods and services a worker can produce in a given time.

You have heard it before, the Ugandan worker is the least productivity in the region, that is compared to their Kenyan and the Tanzanian counterparts.

According to figures released last year it would take one Kenyan to do the work of six Ugandans or a Tanzanian to do the work of four Ugandans. It gets worse when you compare our worker to a South African or a western European.

Statistics by the International Labour Organisation (ILO) indicate the value added per worker in Sub Saharan Africa is a twelfth of that by a worker in the industrialised world.

To begin with a lack of productivity does not necessarily point to laziness – though we all know about our deficient work ethic, productivity is a product of capital, labour and technology.

On these three parameters we have serious deficiencies.

We are failing abysmally to mobilize capital – we have a savings rate of less than 10% of GDP, our labour is largely manual and unskilled and our use of technology, be it in terms of improved management and operational methods or application of advanced equipment, is pitiful.

To illustrate, a subsistence farmer working his land using a hoe under the hot morning sun is less productive that the average formal worker, using computers or employed on an assembly line – in terms of value added or income earned. The difference between the two is the differing application of capital and technology to their labour.

Your cousin in the village may think you are a lazy bum because you do not break a sweat when you work in your air conditioned office, but he will be using the wrong measure, sweat in this case, to judge productivity.

He would be better served by adopting better agricultural practices and organizing with his farmers into bigger groups to take advantage of scale to improve his own productivity – even get someone else to do the grunt work for him and increase his own productivity.

The last I read the US has the most productivity workers, adding $63,000 of value per person in 2006 – it is not a coincidence that America leads the world in innovation in all areas of life. Innovation increases productivity.

So looking at the budget from this perspective there is an indication that the planners are thinking about productivity – they may not be able to communicate it, but I can discern the intention.

On the labour side money was provided for A-level universal education, vocational and entrepreneurial skills training, more money for drugs and the rehabilitation of Mulago hospital and for capital there was the start of a venture capital fund as well as more money for transport and irrigation infrastructure in terms of technology commercialisation of improved seeds and planting material could count for that. I abbreviate of course.

Maybe we could do more in retooling our education curriculum, lowering the cost of finance and aggressively promoting research and encouraging technology transfer. In short government can and must do better to focus on the issue of labour productivity. To dismiss Ugandans as lazy is to abrogate its responsibility.

Productivity is particularly important for Uganda because we have one of the fastest growing populations in the world and at the same time one of the youngest – meaning we have too many dependants or non-productive members of society.

THE NEW FINANCE MINISTER’S LOADED BRIEF

Last week President Yoweri Museveni appointed Maria Kiwanuka, Finance and Economic Development Minister in what many consider an inspired appointment.
Kiwanuka a former World Bank economist turned media owner, it is hoped will bring a better understanding of business by government.

There in will be her biggest challenge in government.

If we learn anything from the cold war it’s that a country is only as strong as its private sector. The collapse of the Soviet Union and its satellite states put to rest the fallacy of central planning. What the free market does is harness the individual efforts of the population by allowing numerous experiments, failures and recoveries driven by the learnings from previous failures. This process throws up a sort of spontaneous order or what Adam Smith called the Invisible hand, where everyone working in their own self interest advances society.

This process cannot be planned, no central authority can initiate all the experiments and therefore replicate the learning that comes from these failures needed to advance society. The Chinese unlike the old bureaucrats of the Kremlin, have been very smart to understand this.

"The proper role of government is to ensure the sanctity of property rights and ensure that certain basic rules are adhered to....

So strengthening the private sector should be a government’s first target. Government’s strengthening of the private sector does not mean going into business, but creating the enabling environment that allows business to grow and thrive and part of this enabling environment is removing the walls of suspicion between the government bureaucrats and businessmen.

Government bureaucrats by virtue of their everyday jobs are not wired to think like businessmen. A bureaucrat does no work if there are no resources, a businessman on the other hand does not make a lack of resources be a reason for no activity. He goes out and finds or creates the resources. This is at the heart of the perennial tension between the two groups, everywhere.

If Kiwanuka with her experience in business, can lower the walls of suspicion between government and business she would have done more than her job.
Government needs to understand that to have private sector led growth we need to construct the necessary hardware – physical infrastructure and more importantly software – the institutions and attitude to business.

On the other side of the coin Kiwanuka will do a great service to this country if she can sell to her colleagues the benefits of formalizing their busineses.

It is estimated that up to 70% of our economy is in the informal sector, most of our businesses are unregistered, do not have bank accounts and die with the founders.

By formalizing more of our businesses, credit, training and partnerships with larger concerns will be more readily available.

Kiwanuka will do well to press for lowering the costs of business registration, according to recent survey it takes three times longer for a business to be registered in Uganda than in neighbouring Rwanda.

For the same reasons as above, the bigger concerns should also be encouraged to formalize their operations. For example she can initiate a drive to have more of them listed on the stock exchange.

In Kenya companies that list on the stock exchange enjoy a lower corporate tax rate, but beyond that they have access to a large pool of resources and easily attract investors and partners from across the globe.

"Our business may be content to remain small because the founders’ personal needs are catered for but that is not a sustainable model in an increasingly open market...

Our business men need to grow to remain viable and their growth is capped by the level of informality.

It is a tall order for anyone, but with her experience in a business that continues to thrive in Uganda’s hostile business environment, we are in order to expect that she will help t he business community’s plight better than any of her predecessors.

Being a government functionary is often a thankless job and she may have to forgo the gratification that comes with growing a business, her sense of achievement may come from intangible things she can make happen that may not even be attributed to her when history is written, but it is a job someone has to do and for now the responsibility is hers.

A PEEK INTO THIS YEAR’S BUDGET

Budget day this year has been set for next Wednesday, June 8th .

It will be a welcome break – at least for me from all the wolo …. Sorry, politicking we have been suffering over the last six months.

At close range, caught up in the daily rat race the negatives get largely magnified and the positives seem like temporary reprieve from the hard times.

I like budget season because it is the one time in the year that we step back and see the forest from the trees.

In the budget we expect the Finance minister to announce that despite falling marginally below expectations, the economy grew by 6.4% compared to the planned 6.6%. Last year the economy grew by 5.2%.

Continued economic growth is critical. You cannot have poverty eradication without growth in the general economy. You might argue about whether the benefits of growth are spread equitably, but as long as the economy is growing there is hope for us.

The minister will also announce that despite a sh46b shortfall in revenues collected during the last 12 months, our share of revenues as percentage of GDP has grown to 13% from about 12.5%.

These increased revenue collections means we are relying less and less on donor funding. When I started my business journalism career, donors carried more than half our budget now the minister will announce that in the just concluded year donors paid out sh2,300b or about a quarter of our total budget. A much larger budget it must be added than when I started out.

Indications are that this will reduce further to about a fifth of the budget over the next five years.

The importance of this gradual progression cannot be underestimated. For one it means we are increasingly take control of our budgetary prioritization. I will never forget the then Energy minister Syda Bumba being made to jump through hoops, running around the region getting commitments from regional governments that they will buy our power, as a donor condition to finance Bujagali dam. The donors were unconvinced that there was sufficient local demand for a mere 250 MW. With our own resources such ignomity will be avoided.

Secondly, in the long term, an improved democracy will only take effect when we shoulder more or even all of our budget with our taxes.

Exciting in the budget for me is the allocation of funds, sh830b to kick off the Karuma power project, money for the construction of the oil refinery, rehabilitation of the Tororo-Pakwach railway line and commencement on a standardized gauge railway line from Malaba to Kampala, all important projects to ease the process of doing business in Uganda.

It is obvious that if the commendable growth figures this country enjoys are to trickle down to the people, we need to get a handle on the corruption issue. It is bad enough that we are constrained by how much money we can spend on the critical areas of social services and infrastructure development, without adding the grubby fingers of public officials looting the state coffers.

I was encouraged that the vote for accountability this time around will be increased by more than 50%. We can gnash your teeth all you want at the Inspector General of Government and Auditor General or any other of agencies but if they have no money you might as well be pissing into the wind.

An increased in budgetary allocation is a start – the highest increase after energy and mineral development who will see their budget tripled. Let us man our agencies and equip them the best we can to tackle corruption with the seriousness it deserves because truth be told it is a national security issue.

History shows that that the trajectory of development is not a straight line, it moves in waves. Your best case scenario is that you take three steps forward and two steps back, but as long as the trend is upward there is hope.

This has been a testing financial year, but you have to give it to the irrepressible human spirit to continue to survive and even thrive, in less than ideal conditions.

RIOTS, ENCROACHERS POINT TO STRUCTURAL PROBLEMS

Two years ago I “reported” that the “Revolution is here” following the man handling of then Wakiso district boss Ian Kyeyune by an irate mob.

The mob was venting its frustration for the poor state of Busabala Road by making Kyeyune seat on the road and covering him with murram from the same road.

I argued in that article that because of corruption government service delivery was badly flawed and as a result the poor in society have no hope of improving their station in life either because they cannot get affordable quality education or health care and cannot get their goods to market for lack of roads or transport networks.

I warned that the pent up frustration with the seeming hopelessness of their lives is not targeted at the richest of the rich in our society but to everybody they perceive as better off than them regardless of tribe or religion.

This week the issue of encroachers at the Lubigi wetland came into focus when the police evicted them forcefully.

It is convenient to suggest that these encroachers are doing the bidding of their richer patrons but that would be to gloss over the fact that there is a growing underclass in Uganda cut off from the opportunities that have come with the last 25 years of economic growth and trying to get by anyway they can.

Projecting into the future today’s encroachers on public land will spawn tomorrows grabbers of private property a la Zimbabwe.

“The revolution is here and we best heed its warning and nip it in the bud, while we can,” I wrote in August 2009.

If we needed any more proof that this not an intellectual exercise the latest chaos on our streets triggered by the walk-to-work protests was it.

Who are this mass of people who can have us living in terror on Mondays and Wednesdays? Where did they come from?

You might dismiss them as drunks and drug addicts but they are the most manifest symptom of a system gone wrong. There is a reason after all why the middle class stayed at their desks and were not out protesting, not because they have any particular love for the system but because for them grumble as they might, they can see a light at the end of the tunnel.
And that is the crux of the matter. Beyond the rhetoric people, need to feel a sense of hope, to believe that if they work hard enough, long enough, smart enough their lot and that of their families will be improved. A population without hope is a population with nothing to lose.


Averting the revolution – because I don’t think it has assumed an irreversible momentum yet, is simple but not easy. It has been done before.

Since colonial times a mix of minimum education and health services, adequate transport infrastructure and a ready market for rural produce has lifted millions of Ugandans from their agrarian backgrounds into the middle class.

Somewhere along the way we lost it.

This time tested social climbing ladder has lost a few rungs preventing those at the bottom any chance of ascendance. In their frustration those at the bottom will decide to shake the ladder or worse still light a fire. Because after all, if they cannot have what you on the upper rungs are having let us all miss out.

I understate the case of course.

Our government’s commitment must be to replacing the rungs in the ladder, but first root out the evil – corruption, that is causing the rungs to go missing.

Annually billions of shillings are pilfered by government officials and their allies. This ill-gotten wealth is fuelling Kampala’s construction boom, sustaining ostentatious consumption and doing very little in the way of investment in agriculture.

We do not want the government back in business. But government needs to see how to direct more resources into rural transport networks, agricultural research and extension services, facilitate marketing and provide greater incentives for agro-industries.

Throwing money at the problem is the easy part,the hard part will be planning and executing plans that show results and judging by recent events, uncharted territory for us.

FOCUS ON EXECUTION

President Yoweri Museveni was sworn in last week for another five year term.

His speech after the occasion did an adequate job – I thought,of laying down his government’s priorities in the coming years.

The target is to be a middle income country by 2016.

A middle income country by World Bank standards has a per capita income of between $1,000 and $12,000.

Currently per capita income in Uganda comes in at $460. So the president is saying that over the next five years we are going to more than double the size of the economy, this would mean an annual economic growth rate of just under 15%.

That is an ambitious goal – even for China. But I am not complaining. I like that such an ambitious goal has been set, I think we wallow below mediocrity because we have low goals as a country, chest thumping at lifting a few more people out of the a-dollar-a-day bracket, for instance.

There is the sticky issue of population growth, which at current rates means our population will be up by a fifth in five years, but that is a discussion for another day.

But let us take the president at his word, what would we need to do to double our economy over the next five years?

I like that his government is going to focus harder on physical infrastructure – roads, railway and other transport communication and power generation. There will also be more resources shoveled at education and health services.

But I wills tick with physical infrastructure. To understate the obvious, energy is critical if we are to have half a chance of matching the president’s lofty goal. To paraphrase from physics, a country will descend into disorder, chaos or back to its natural state without an injection of power.

Museveni sees us increasing our power generation capacity sevenfold when Bujagali, Karuma and several other power projects come on line within the next five years.

But at 500 kwh per person in five years we would still badly lag middle income countries on the continent Algeria currently at 820, Namibia at 1,336 or South Africa at 4,380.

Yes, we will have to gird our loins if we are to have half a chance at middle income countryhood in the next few years.

In America where business competition is cut throat and managers cannot afford to blink under pressure, the study of management and leadership is very advanced.

At the beginning of the last decade the buzz word in US companies was execution or getting the job done. The movement came during a time when American industry was taking a hiding from Japan Inc and forced America to rethink the notion that to solve problems you need to throw more and more money at them.

Literature abounds on the subject but the basic formula for getting the job done comes from the efficient interplay of strategy, operational processes and human resource.

Obviously Museveni has a sense of this pointing out that “To achieve these goals we need discipline and the rule of law”.

We need to streamline our public sector, dare I say, cut it down to a third of its current size and the savings be invested in making the remaining workforce more productive and responsive the business community.

We need to cut out corruption, maybe paint all corrupt officials pink making them a laughing stock – whatever high priced suit they wear.

And we need to get our act together yesterday because the oil bonanza is around the corner. You know what they say about money, it does not make you a better or worse person it just magnifies your current attributes. So one shudders when one thinks about what we did with CHOGM money and what will happen when the really big monies come around.

Doubling our economy in five years is not impossible, especially since we are starting from a low base. We have issue of wealth disparity which urgently be addressed but to have a good chance of redistributing wealth we need to create more of it.

Let us look back five years from now, the record will show that whether we met the target or not will have been determined by our level execution or lack of thereof.

STANBIC WIDENS THE CASE FOR PRIVATISATION

The then Uganda Commercial Bank was one of the public enterprises shown up as the reason why government should have no business in business.

The bank had a sh100b hole on its books thanks to loans gone bad – many of them to connected individuals who were unable or unwilling to pay back.

An initial tender process for a sale of a majority stake in the bank saw widespread interest. The only catch was that all bidders pointed out that the bank’s 50-plus branch network was unviable with the most inviting bid suggesting that 15 branches was an optimal number to keep.

Government rescinded the offer promptly falling into the hands of “Malaysian” firm Westmont Bhd, which promised to keep the banks countrywide network running when it took over the bank.

Shenanigans involving the now closed Greenland Bank, saw the bank being taken over by the Bank of Uganda and eventually sold to the one-branch-but-asset-heavy Stanbic Bank for about $20m.

That was nearly ten years ago. Since then Stanbic has invested heavily to make the bank a seamless operation and rather than shut “useless” branches in the rural areas have actually opened new branches.

In fact in releasing this year’s results bank boss Philip Odera said at the heart of the reason Stanbic profits dipped sh23b to sh72b in 2010 is because they had invested 21 new mini branches and 44 new ATM machines.

If you had gone to sleep at the height of the privatization of UCB and woken up on Thursday when Stanbic announced its annual results you would have been forgiven for thinking you were delusional.

As an aside Stanbic’s 2010 profit came in at about $30m. But more importantly services are being delivered and to add icing to the cake there is a 20% of the very profitable enterprise is in public hands. We may argue about the composition of the public holding Stanbic shares, but as they as you may take a horse to the water but you cannot force it to drink.

Interestingly the trust that was created to recover the bad debts is in danger of failing to collect sh82b due to lack of a law allowing the debt to be sold off to a private entity.

The former UCB is a useful test case for our privatization process. Everything that could go wrong did go wrong and in hindsight a lot has gone right that would otherwise not have gone right under its previous ownership.

As a rule public enterprises are less efficient than private enterprises in providing stakeholder value. And we are not talking only about profit but also of service delivery to its clients.

This could come as no surprise as public enterprises pander to politicians whose objectives are often times opposed to enhancing profits or service delivery. That is not an entirely bad thing as politicians may task the enterprise to deliver services to places that would otherwise not be commercially viable.

And that is where private enterprises fall short. As maximisers of the profit they are the more efficient model, however if left to their own devices profit making or enhancing shareholder value can be achieved to the detriment or exclusion of a demanding public.

In an ideal world companies should strike a happy balance between the two, the social responsibility of the public enterprise and the wealth creating private company.

I think that private enterprise works in the manufacturing and services is a moot point, but in Uganda we should explore this model in provision of health services for example.

In Lesotho a new 425-bed hospital is being built by a private consortium of investors and medical workers that is intended to operate at the same cost to the population as the soon to be demolished national referral hospital.

Beyond providing affordable medical care the new hospital will provide specialized care, that is until now handled abroad.

Government will provide annual fixed service fee and in turn the hospital will take in any patients in any condition up to 20,000 inpatients and 310,000 outpatients annually.

Beyond the medical staff at the new hospital other local investors have an equity stake in the project.

An independent authority will monitor standards and ensure both government and the private operator meet their ends of the bargain.

The hospital opens in October and it would be worth watching its progress as it is the first such arrangement on the continent.

Clearly we need to shake off our socialist pretensions – like we did in the 90s and focus on the end result of what we want from social services. Privatisation if handled well works in manufacturing and commercial services why not in social services as well?