UGANDA'S AGRICULTURE CHALLENGE

Uganda’s agriculture accounts for under 25% of the country’s economic output but at least two in three Ugandans rely on it for a livelihood.

You need to look no further to explain the poverty numbers of this country.

In simple terms for every ten shillings of output produced in Uganda three is shared by the majority or about 70% of the population. The remaining seven shillings are distributed among the remaining 30% of the population. A sure recipe for wealth and income inequalities.

At the bottom of the issue is that of low productivity of our farms, the equivalent output of an acre of land is relatively lower than other places in the world.

And the reasons our farmers are unproductive is because we have not graduated from rudimentary agricultural practices. Our agriculture is labour intensive, relies on rain, is carried out on increasingly smaller farm holdings using next to no fertilizer.

To redress this issue should be straight forward.

Improve agricultural practices, halt the fragmentation of land and preferably consolidate land holdings to create greater efficiencies by exploiting economies of scale.

For all our shouting for mechanization, using a tractor on less than an acre of land, which is about the size the majority of farmers eke a living from, is impractical and financially unviable.

President Yoweri Museveni’s announcement that the government is considering the scrapping of NAADS and the bolstering of cooperatives to aid the farmers, is borne of the frustration at the lack of improvements in the general welfare in rural Uganda.

With all fairness to NAADS it really wasn’t given a chance to do its thing, with the least of its worries in adequate financing.

We are hoping for a return to the co-operative model of yester year where not only did they provide a ready market for farmer harvests but also provided heavily discounted inputs and on credit.

But of greater importance is the resuscitation of the extension services function in the agriculture ministry. Capital is important for farmers but knowledge to improve their practices and constant mentoring would eventually lead to higher incomes anyway.

I am very skeptical of government programs, as a rule.

Governments care more about inputs – classrooms, health centers built because it looks good in manifestos and less about quantitative or qualitative outputs.

So if the intervention is going to be through privately owned and run cooperatives, that is a step in the right direction.

Government can help with training of officials and maybe providing auditing oversight, but to pour money into these structures would only guarantee their failure like many other well-meaning initiatives that have come before.

A politically expensive but critical initiative would be to tax all land, especially farm land. This will have the desired effect of getting people to work harder on the land, because defaulting could lead to confiscation and secondly, it would create a more vibrant land market, because those who can’t pay tax can sell it to people who will put more productive use to it.

For agriculture to become more productive there has to be more efficient land use. Agriculture that is more capital than labour intensive. With a population of 35 million we do not need 25 million farmers to feed us.

In the US at end of the Second World War there were 30 million farm jobs or 20% of the population were farmers,  now there are an estimated 1.3 million farm jobs for a population of 300 million Americans. The US is more than food sufficient.

Renew the cooperative movement to provide markets and tax the land to compel farmers to extract more and more value from their holdings and see productivity figures skyrocket.

Of course this is easier said than done but until we face up to the changes needed in rural Uganda our poverty figures will persist.

UGANDA'S NSSF BETWEEN A ROCK AND HARD PLACE

The National Social Security Fund (NSSF) while continuing to post profits is hampered by red tape and dogged by political sniping that would make it uncompetitive in a liberalized environment.

Last week NSSF held the first ever annual meeting of its members.

The management reported a near three fold jump in annual profits to sh239b in 2012 from the previous year’s sh84b. This on the back of a doubling of revenues to sh264b from sh134b and a growth in members numbers to 500,000. And as was announced earlier this year they paid members 10% on their money for last year.

Companies with more than five employees are mandated by law to contribute to NSSF. Employees contribute five percent of their gross pay and their employers’ contribute double the amount. NSSF then pools these resources and invests them in such a way as to show a return for its members.

According to NSSF 96% of workers who start contributing with the fund end up qualifying for retirement benefit – a lump sum payment when one turns 55, while the remaining four percent die or benefit for the disability benefit.

"Going forward NSSF boss Richard Byarugaba pledged to pay his members an annual interest of two percentage points above the average inflation rate of the previous decade....

Last year’s spike in inflation means the ten year average was about nine percent a situation that will change towards a lower average when this year’s inflation is factored in, meaning the interest on member savings could dip next year. In February annual inflation came in at ….. .

“That is the bare minimum you can get, just beating inflation,” African Alliance boss Ken Kitariko said.

But he said it was hard to blame NSSF management when their hands were tied.

“It’s actually extreme grief. You can’t have people crunching numbers then an official in the ministry or a unionist raise questions. By their its nature investment is time sensitive you can’t afford delays.”

Kitariko suggested that  either “the government cuts them loose, allowing them to do their job unhindered or they outsource the bulk of their  money to external fund managers who will not be hampered by red tape and politicking.”

The world’s richest and arguably best investor Warren Buffett has since 1976 managed an average annual return that is 19% higher than the treasury bill rate and 6.1% higher than the stock market during the same period in the US a country with an economic growth rate that is a fraction of what Uganda has exhibited in the last two decades – an annual average of about six percent.

"Industry sources agree that at the heart of  NSSF’s underwhelming returns is the nature of its investments.... 

Every eight in ten shillings under the fund’s investment is locked up in fixed income investments. These, like government paper, corporate bonds and fixed deposits, are the safest investment options but also have the lowest returns of all assets classes. The remaining 20 percent is divided unequally between real estate and equities.

NSSF’s management has plans to shift the balance more towards real estate and equities but argue that there is a shortage of local investment projects to absorb their billions.

‘Take for instance Temangalo the plan is to put up 5,000 units each of between sh50 to sh120m and sell them off. But that maybe practically difficult to achieve because as it is now a major mortgage lending bank in this town only does 200 mortgages a year,” NSSF boss Richard Byarugaba said.

He said a proposal for members to use their savings as down payments on mortgages may help matters but it is still being ironed out and this may helps matters.

Because of this dearth of investable projects the option to invest abroad is gaining traction.

“Our collections are growing exponentially,” Byarugaba says. “Largely because we are collecting more of what is due to us and less because the economy is growing. We have to invest to show a return … in a way we are becoming a victim of our own success.”

But some observers are refusing to be taken in by NSSF’s lamentations.

“Uganda is a virgin investment destination, opportunities are slapping us in the face at every turn. What NSSF has to do is to get innovative,” one analysts familiar with the industry said.

“According to the NSSF act it has two major objectives to manage fund for the financial benefit of its members and secondly, to help develop Uganda. You will shore up those returns but looking away from the traditional avenues.”

The observer said there was much scope for branching out into land banking, arguing that land was a finite resource whose value is bound to rise annually, build-to-sale residential properties, venture capital and private equity funds.

While acknowledging the bureaucratic hurdles and sniping from politicians as a major impediment to NSSF unlocking the full potential of its assets, he said this would not change if one was allowed to invest abroad.

NSSF is sensitive to criticism that it needs to invest more in Uganda before it can go out side.

At the annual meeting the fund’s chairman Ivan Kyayonka pointed out that sh2.4trillion  is fixed in local banks, lent to local companies and to the central bank and so the issue of not investing locally does not stand up to scrutiny.

“Liberalization is here and unless government wants to kill off the fund they need to rethink their engagement with it. It has the potential to play a transformative role in this economy if it is not saddled with  political baggage and held back by bureaucratic red tape,” another observer said.

UGANDA NSSF’S SEARCH FOR ELEPHANTS

Last week National Social Security Fund (NSSF) held its first members meeting.

At the meeting the fund’s management said the fund now had assets of more than three trillion shillings or just over a billion dollars, was growing at the rate of sh50b a month.

The funds investments are skewed heavily towards fixed income assets – treasury bills and bonds, fixed deposits and corporate bonds, which account for eight in every ten shillings with NSSF, with real estate and equity investments accounting for less than a fifth of the funds gargantuan portfolio.

Understandably it was good year for NSSF given the high interest rates and government paper yields, profit rose almost three fold to sh239b from the previous year’s sh84b.

They have set themselves an unambitious target of paying members an interest of two percentage points above the average annual inflation over the previous ten years.

The idea of course is that members should earn a real return on their money over the long term.

They are obviously hedging their bets.

As the fund’s hoard of cash grows it becomes increasingly difficult for NSSF to show an attractive return for its members, this coupled with the fund’s bias towards low yielding, safe investments will make it difficult for a while for the fund to show real juicy returns.

This may not be a problem of the management’s making.

The funds tumultuous history meant that managements scared of public criticism stuffed the portfolio with treasury bills and bonds, not only were they safe but has good double digit returns.

For the more ambitious managers like current boss Richard Byarugaba and David Jamwa before him attempts to better balance the portfolio have come up hard against the dearth of investable projects in this country.

If NSSF was to liberate just a tenth of its fixed income investments this would come to sh240b.  It is not in NSSF’s mandate to lend directly to business unless those businesses issue a bond or sell shares.

They could buy property but thanks to the overinflated price of real estate the returns on these would minuscule.

So the fund is looking to invest their funds outside Uganda starting in the region and then later on further afield.

The question came up during the annual meeting, why would NSSF want to invest abroad when we have such dire need for affordable funds at home? How can we invest abroad when we need the money here?

Chairman Ivan Kyayonka was quick to point out that their fixed deposits in commercial banks all sh717b of them and another sh100b or so in corporate bonds were all invested locally so they cannot be accused of not investing locally.

But the sheer volume of money under NSSF’s command means that there is an urgent need for huge investments in order to show an overall return.

Luckily for NSSF the ten year moving average inflation rate will dip this year and so they may lower the interest next year from the current 10% , but think about it with sh2,621trillion in accumulated members funds the fund still needs to see a  return of about sh300b annually to cover operating costs and interest

The world’s richest and arguably best investor Warren Buffett calls it elephant hunting. He this year committed $23b to take over H.J. Heinze – the tomato ketchup manufacturer.  With up to $45b in cash last year it’s only this magnitude of investments that will ensure he shows an adequate return for his investors.

By the way since 1976 Buffett has shown average annual return of 19% in excess of the treasury bill rate and the 6.1% in excess of the stock market index.

If he tried to peg his returns to the US two percent inflation rate he would long have been laughed out of business.

HOW THE OTHER HALF STEALS IN UGANDA

Last year's rising lending rates led to a build up of bad loans in the banking system.  But that was not all.

A leading multinational bank discovered to its horror that when their borrowers started defaulting the properties that were mortgaged to secure these loans were grossly overvalued.

Banking officials would connive with valuers and borrowers to over value properties to be mortgaged allowing the bank to lend more money than the borrower qualified to.

So for instance your house would be fairly valued at sh100m but for purposes of the scam it is valued at sh150m. The bank lends you the Sh150m the officials get their cut and you get your millions. The trouble begins when the borrower goes into default and the bank tries to sell off the property and the values don’t add up.

This bank had to write off in asset values more than sh50b  or the amount budgeted by government to treat the 140,000 in patients expected at Mulago this year for two years.

The bottomless greed of our civil servants continues to capture the headlines but the private sector has its fair share of fraud, breathtaking in the audacity of the scams and mindboggling in its frequency.

It is estimated that at least sh160b of civil servants pensions have gone missing due to officials in the Public Service Ministry. The officers including permanent secretary Jimmy Lwamafa have been charged in relation to this.

Another sh50b has also slipped between the cracks at the Office of the Prime Minister. A lot of this money was intended for northern Uganda rehabilitation.

Stories of the substandard road construction, school buildings and unequipped health centers are not unusual, no longer headline grabbers.

However it is an open secret among service providers and suppliers that private companies are bleeding billions of shillings in underhand payments annually.

But the nature of the crime makes it hard to get any hard and fast numbers.

“CEOs don’t want the extent of the problem to come out,” Mustapha Mugisa, a certified forensic investigator said. “A lot of these businesses are built on trust like banks and talk of fraud can cause a run on the banks, so many of them write them off as losses and keep quiet.”

Mugisa said that globally companies lose at least five percent of annual turnover to fraud.

“But in Uganda where controls are weak it can go as high as 15 to 20% of turnover,” Mugisa said.

Put another way our 25 banks which in 2011 reported a total turnover of about sh2 trillion  would lose at least sh300b between them.

Telecom giant MTN is in court in a case in which it is alleged some of its staff and a local clearing and forwarding firm are supposed to have connived to fleece the company of $3.8m (sh10b).

Bankers Stanbic earlier this year unearthed a Sh600m pension related scam and the alleged perpetrators are being prosecuted.

“I look at the margins that allow for this circus to go on and I just laugh,” one service provider speaking on condition of anonymity said.

“A tenders value can amount to sh800m but the officials doing the procurement demand sh250m, leaving the service provider with sh550 to do the work and make some profit. And the work gets done. But the companies have to pay VAT on the sh250m. It means companies would cut down costs significantly if they could rein in their procurement, logistics and marketing departments,” he said.

He said the channels of fraud are basically three.

The “kickback” can be factored into the tender price or one has to pay someone to become a listed supplier and in addition contracting officials can ask for advances ahead the deal being commissioned.

“What we see in the civil service is nothing. It is happening at a frightening level in corporate Uganda,” a top executive at a leading company said.

“It’s so bad that our company has at least 12 people on remand in Luzira as we talk.”

The official said out of desperation, “we are seriously considering hiring people whose background we are familiar with, from families we know, which sad because there are hardworking, honest, young people out there who will miss out on opportunity because a few bad ones.”

“Going forward corporates also have to do lifestyle audits, how does a man earning sh800,000 a month buy his girlfriend a sh100m car and no eyebrows are raised?” the official asked.

“And of course the law has to catch up. The laws on IT fraud are extremely weak to none existent. We need not only harsher punishment but that cases be expedited, let’s have an IT court martial.”

He said the punishment meted out to four Bulgarians recently who were sentenced to ten years each for hacking into ATMs could have been stiffer.

“We need harsher punishments, let’s make an example of these people.”

The NGOs have not been spared the scourge.

“The scams are many and range from sourcing multiple funding for one project, exploiting vulnerable communities, who derive no benefit from the funds solicited in their names, funding workshops and trainings whose outputs are dubious … it easy money, it’s the biggest racket going in town,” a former NGO worker said.

It’s not clear whether the funding agencies are complicit in the fraud but the implementing officers – often Ugandans are making money  hand over fist.

“NGOs are in tatters. The money is made in logistics, procurement, marketing and communications,” another supplier said.

“These are not a few thousands here and there – beer money. In total its billions of shillings gushing into the economy on a monthly basis unsupported by production. It has a destabilizing effect on the economy. What do you think the property inflation of recent years is about?”

UGANDA'S ANTI-CORRUPTION FIGHT TRUDGES ON

Last week former junior health minister Mike Mukula’s conviction by a lower court for embezzlement was quashed by a higher court.

Earlier this year Mukula was sentenced to four years in prison for embezzling sh210m. His co-accused former Health ministers Jim Muhwezi and Dr Kamugisha were acquitted while, state house official Alice Kaboyo pleaded guilty, paid a fine and was set free.

The acquittal of his colleagues, Mukula’s conviction and eventual acquittal has been met with mixed reactions.

On the one hand were the anti-corruption crusaders who saw Mukula’s case as sign that the struggle was beginning to rope in the “big fish” and for the first time government may actually be serious about the issue. They also argued that regardless of the political undertones of his case an irreversible momentum was building up that would engulf even the “connected” ones who continued to sidestep the course of justice...

On the other hand were the conspiracy theorists who saw Mukula as a sacrificial lamb. A peace offering to the public which was getting increasingly restless at the inaction against runaway official corruption. The argument was that Mukula while a big enough fish has not been the biggest beneficiary of corruption in this town and it did not help that he is not as “connected” as other alleged perpetrators.

Who is to say which is which?

The fight against corruption was never going to be an easy one.

"We can expect moments of elation as officials are hauled before the courts and stripped of their auras of invincibility. We may even see some of them convicted and bused off to Luzira. But we can also expect that some will be acquitted despite being found guilty in the court of public opinion or dodge the bullet on a technicality or survive serious punishment out of the “incompetence” of our law enforcement agencies...

At best the fight will not progress in an unbroken straight line. Expect a start-stop-start again progressions that will test our patience and try our souls. The worst of course is that even the most promising cases will suffer still births, because the truth is the corrupt are not lining up like ducks waiting to be picked off, but are actively fighting for their own survival.

However as we have said on these pages before everyone who is interrogated by the police but not charged, charged but not convicted, convicted but later on acquitted is progress at the most fundamental level – they cause the so-far unscathed corrupt to pause and better still dissuades the  soon-to-be corrupt from contemplating a life in crime. At the end of the day we want the momentum to be slowed and that no more new entrants enter the ring. If at the bare minimum this happens, the fight would have achieved unimaginable good.

However it would be foolhardy to get our hopes up too high about the success of this campaign.

"What is clear is that theft of public funds has gone on for so long that not only has almost everyone been coopted into the scam but that a lot criminal behavior is now been accepted as normal behavior...

How you do you explain how the public, relatives and friends look on as poorly paid public servants accumulate wealth at prodigious speed and not only do we not reprimand them but are glad to partake of the obviously ill-gotten wealth?

Because we are all complicit in this evil it makes the fight that much more difficult. And once every one is in on the deal, politics comes in and you might as well forget about routing the problem from our midst.

Two things however may work to sustain the fight against corruption. To begin with, judging by the tip of the iceberg that is on public show, these corrupt officials have amassed colossal sums, which are a threat not only to the smooth running of the economy but can prove a threat to national stability.

Think about it. What would you stop at to keep yourself out of Luzira if you had a few billions of shillings stacked away somewhere? Kill a witness here or there? Pay an investigator, judge, prison warden, MP? Your unwillingness to go to jail will be in direct proportion to the amount of wealth you have accumulated and will reflect the desperation you will display.

In addition we might take comfort in the fact that there is no honour among thieves. There is no coalition of the corrupt. If we turn the screws long and hard enough this edifice of graft will come crumbling down like a house of cards. The only problem is that there will be a lot collateral damage.

No one said the fight against corruption would be easy, but hopefully it will be worth it.