HOW UGANDA SHOULD SET UP FOR US INVESTORS

In the last two weeks or so, two events help illustrate the challenges our economy faces.

African leaders trooped to Washington at the behest of US President Barack Obama. The highlight of the historic occasion was Obama’s committing $33b to shift the relationship between the US and Africa away from humanitarian aid towards a more equal footing.

The second event is the ongoing saga of the Mukono-Katosi road. The details have been written about extensively but one couldn’t help but come to two conclusions. 

One, that after everyone has taken his cut its amazing how unnecessarily high our projects cost and secondly, that there clearly is a well-oiled machinery, a whole industry that feeds off government projects and procurements their intention, not always to deliver a service.

The more incidents like the Mukono-Katosi road the less likely Obama’s $33b will come through – at least for Uganda.

This is why.

When you look at a breakdown of Obama’s pledge to Africa this is what it looks like; $14b will come from US companies and will include $5b from Coca-Cola to extend its production capacity around the continent, conglomerate GE has pledged $2b, which may go to any number of things from generators to train engines, hotel chain Marriot has ponied up an additional $200m and IBM threw in an  $66m for technology services to a bank in Ghana.

In addition there was $12b for Obama’s Power Africa initiative that will come from the private sector, World Bank and Sweden.

And finally there was $7b targeted at improving trade across the Atlantic which included $3b in financing for the US Export-Import Bank to aid US exports to Africa over the next two years.

The impression these pledges give is that ahead of the summit the US government must have gone around to its captains of industry and said, “Look guys we have to give something. What are you working on in Africa that we can present?”

It’s a learning point for us. The US projects its influence not only by its military might but through its business community.

The rationale for a US military intervention is quite straight forward but for the private sector there has to be a business case. Projects must show a return and must be big enough to justify choosing them against projects in China, Asia or Europe.

See GE’s pledge. At the time of writing this column the giant company, founded by Thomas Edison in 1892 had a market value of $259b or more than twice the GDP of East Africa. Assuming a 10 percent return on investment on the $2b they have pledged in business, this would come to $200m or about a two US cents appreciation on a GE share, which sold for about $25.88 before lunch on Friday. 

This kind of investment does not make or break careers.

It’s obvious that for the US to be more interested in the continent, beyond being dragged kicking and screaming to the table because the Chinese are making determined inroads into Africa, we need to aggregate our markets and pool our resources...

With the East African community we are moving at a handy speed towards merging our markets but there is great opportunity for aggregating our resources through our capital markets.

By reinvigorating our capital markets and with strategic action from government we can fund a lot of our priorities namely infrastructure and human resource development to the point that investors can seat up and take notice.

The explosion in mobile money – grown to sh2.2 trillion from nothing in less than a decade, shows it is a fallacy that we do not have resources, what has been lacking is the mechanism to beyond pooling them together can transform them into long term, lower interest capital that can be channeled to key projects.

A deep and vibrant capital markets industry will also investors to test our market either through buying bonds or investing in listed companies.

The mechanism of doing that will be a story for another day. But it is clear that to deal more evenly with the US we need to scale up everything and then the real money will begin to flow

GHANA’S FALSE DAWN, A LESSON FOR UGANDA

At the beginning of this month it was reported that Ghana was seeking help from the International Monetary Fund (IMF) because of its worsening economic situation triggered by its plummeting currency.

The Ghanaian unit, the Cedi had fallen as much as 40 percent against international currencies because of a large current account deficit – it’s spending more foreign exchange than its making and ballooning budget deficit –  the government is spending more than it collects in revenues.

"It is not a crime to ask for IMF help but it often suggests that your accounts aren’t quite what they are supposed to be....

Ghana and Uganda are not unlike each other in several ways. 

When Uganda was being feted as East Africa’s shining economy a few years ago, Ghana was receiving the same accolades on the west coast. Ghana – rich in Gold and Cocoa recently started producing oil. The theory was that Ghana, which had established a level of fiscal discipline would get more value for money when the oil came out of the ground. So was the thinking about Uganda.

But with oil around the corner, with the prospects being hyped by the oil companies, the government in Accra went haywire, raised public servants’ salaries, borrowed against future oil revenues and indulged in huge public works investments.

"Not only are the oil revenues not flowing as fast as first anticipated but these huge government expenditures are gobbling them up as soon as they gash out of the ground....

As if that is not enough last year Ghana issued a $750m bond on the international market whose interest payment in foreign currency, is putting added pressure on the Ghanaian treasury.

The parallels between Ghana and Uganda cannot be ignored. 

Uganda too is about to start production in the next five years or so. 

There is much need for the money to shore up our education and health services, build transport and energy infrastructure, not forgetting any number of vanity projects that are bound to start popping into people’s heads.

The government insists that when the oil money starts flowing the first call on the cash will be to finance infrastructure projects rather than go towards beefing up recurrent expenditures. Salaries constitute a huge portion of recurrent expenditures in the budget and are an easy target for politicians – you boost salaries and votes come in.

"Ghana’s politicians fell for this quick fix and now salaries account for two in every three cedis of revenue collected....

Insisting on infrastructure development can still lead to higher salaries but not instantly. By lowering the cost of doing business more taxes can be collected and these will find their way to the payroll.

Even in our everyday lives it is amazing how people lose their heads when they happen upon a windfall. They indulge in frivolous purchases, unplanned expenditures and value-for-money judgements go out the window.

It is no different for governments.

But in addition look forward to huge projects with little to no economic justification, padded with huge “commissions” and hidden costs.

Ruling elites, despite what they sell to the public are looking first and foremost to retaining power, more resources either via higher revenues, foreign aid or windfalls beyond enriching themselves are employed to this end.

"The details of the Ghanaian situation are  bound to show that political expediency rather than official incompetence is at the back of why the country’s economy does not look so rosy any more....

A fate we should not think we are immune to.

The Norwegians are the benchmark of how oil revenues can be employed for the benefit of the people without jeopardising the economic environment.

Norwegian oil revenues are stored away in an investment fund. Government has only access to four percent of the almost one trillion in fund assets annually to support the budget. This ensures that that the Norwegian kronor does not fluctuate unnecessarily with oil prices and also that the nation will benefit from its oil fields well after they have dried up.

Of course Norway  had the advantage of already being a rich country by the time the oil came around, but we  and Ghana, of course can derive some useful lessons from how they have employed their oil industry’s earnings.

For Ghana it will get worse before it gets better. Under an IMF program they will be forced to cut down on government spending, which could entail restructuring of the civil service, removal of subsidies and the cut back crucial social services, in effect making life harder for the common people.

My father told me there are two kinds of people in the world those who learn the easy way, from the experience of others and those who learn the hard way through their own experience. Let’s fall in the former category and take important lessons from Ghana’s apparent false dawn.

MUKONO-KATOSI ROAD ANOTHER WAKE UP CALL

In case you have been away, the botched Mukoni-Katosi road deal has been dominating our headlines.

These are the facts as we know them.

Government sought contractors to build the 74km road. The cost of the project was put at about sh165b. An American firm Eutaw Construction Company was declared the best evaluated bidder in March 2011. As part of the deal Eutaw was entitled to an advance payment of about sh25b meant for mobilising plant and equipment and generally getting work going.

But in order to get this money Eutaw needed insurance bonds to guarantee they will do the work. Eutaw got some insurance bonds and the money was released to the contractor by the Uganda National Roads Authority (UNRA).

It’s not clear when but after the payment was made in January things started going awry.

Several things emerged that put the whole contract at risk.

It was discovered that the insurance bonds purportedly issued by Statewide Insurance Company (SWICO) were forgeries. The question is does SWICO even have the balance sheet to support such a bond? Secondly, Eutaw turned out not to be the firm everyone thought it was. Checks with the only Eutaw company in the US that deals in construction, revealed that they had no Ugandan office and neither had it ever bid for a project in this part of the world. And finally “our” Eutaw had sub-contracted all the work to a Chinese firm in contravention of the rules governing such contracts.

At this point UNRA may have been best advised to call off the contract. They did not. They got back to Eutaw and asked them to make good on these irredeemable breaches of the original contract.

"At this point Eutaw went shopping for insurance firms that would underwrite the project, never mind that the horse had already bolted the barn...

.

Through their insurance brokers Marsh Uganda they approached three firms, with Insurance Company of East Africa (ICEA) and UAP taking up the offer. Essentially they were shopping for a fall guy, someone who would carry the loss when the deal flopped.

Everything may have gone very well were it not for UAP cancelling the advance payment bond when they realised that the payment they were supposed to be covering had already been made. That in effect means the project now is uninsured and cannot proceed.

The plot thickened when less than a week after President Yoweri Museveni flagged off the project than the Finance ministry Permanent Secretary Keith Muhakanizi wrote on 9^th July 2014 requesting the IGG investigate the deal because it had come to his notice that the sh25b advance payment was paid out on the basis of a forged  insurance bond.

The police are now quizzing everyone in connection with the deal but the IGG in her report on the deal has roped in the Works minister Engineer Abraham Byandala as not beyond suspicion.

The devil – literally and figuratively, is in the detail.

Unfortunately as Ugandans this kind of corruption is par for the course. But to put into perspective this what sh25b can do for in Uganda.

"According to the finance ministry’s draft estimates for the  year a total of sh347m was budget for general staff salaries in the pre-primary, primary and secondary schools so this money can pay general staff salaries for 72 years. Or pay for immunisation services for 24 years or pay general staff salaries for the health sector for four years....

What is even more shocking is given the smoothness and impunity with which the scam was planned and executed clearly the players were very practiced, which means we are probably haemorrhaging hundreds of billions  a year in such schemes.

This is unsustainable situation that deprives our children of quality social services, our businessmen a conducive environment in which to operate, invariably stains our politics and is fast making his country ungovernable.

To paraphrase the best time to nip corruption was 20 years ago the next best time is now.