RAISING OUR OWN FINANCING, WELCOME NEWS

Last week during the Uganda-Rwanda Business Forum. Rwanda’s Paul Kagame said among other things that before looking to the outside for help we should look to raise resources at home.

As if on cue Kampala City Council Authority announced that it is looking seriously into issuing a municipal bond to fund investments in the city. A municipal bond is debt taken out by local governments and is often backed by the revenues they collect from their various activities.

Both events are more than welcome news.

Uganda’s saving rate is about 12% of GDP below the sub-Saharan average of 16%. This has far reaching implications for how much and how fast we can develop and the course our development will take.

But in order to tap the markets you have to have the mechanism to do so. In Uganda we have the Uganda Securities Exchange (USE), which has been in existence for close to 15 years. During this time several local and regional companies have sold shares, issued bonds and it has served as a secondary market for Treasury bills and bonds.

"The challenge of employing the USE to raise funds for both corporate Uganda and the government has arisen from structural issues but more importantly mindset inadequacies...

Structurally many of these entities be they corporate or government have not been in shape or have not seen the urgency of using the markets to raise cash.

Companies relying on huge margins have been financing their own expansion through cash and rudimentary lending instruments. But the opening up of the East African market and the entrance of Chinese entrepreneurs has slashed margins, forcing our businessmen to the edge of extinction.

Under the circumstances our businessmen have two alternatives, wither to sell out to the foreign invaders or stand toe-toe and box it out. IN the first instance our businesses are not big enough to provide a credible barrier to entry for foreign companies and secondly, they are so disorganised it’s hard to determine their real value in order to purchase them.

These two same reasons also means that a last ditch attempt to fend off the new entrants is doomed to failure. In such circumstances business expansion becomes a survival mechanism, our businessmen need to scale up their operations to take advantage of economies of scale to push down costs and pass on the savings to the consumer to stay afloat.

But how do you scale up when you don’t even have a real time appreciation of the state of the business, for lack of organised books?

And if you cannot borrow from the banks, imagine how much more difficult it would be to borrow from the markets?

Similarly in government structurally issues abound, for instance it’s not collecting all the revenue it can partly because our economy is largely informal – it is estimated that seven in every ten shillings of economic output comes from the informal sector but also, and related to the first reason, we are highly corrupt.

But the government’s mindset has to be a major stumbling block.

"For the last three decades or so government has been busy pigging out on cheaper financing from the donors, that the idea of borrowing at double digit rates – never mind that it was in Uganda shillings, just didn’t set our officials hearts racing...

However we have since learnt the limitations of foreign aid. To begin with your priorities are not necessarily the donor nations’ priorities. 

In early part of this century the donors made government jump through hoops to prove that there was a market for power form the planned 250MW Bujagali dam. Then energy minister Sayida Bumba was hopping around the region’s capitals trying to sign them to commit to taking up our excess power. That was when less than five percent of population were on the grid. Somehow the donors thought that the vast majority of Ugandans had rejected power?!

Similar differences in opinion slowed increased funding to our road network, the introduction of universal education and health services and increased funding to the army.

Borrowing domestically has its major drawbacks, government competing with the private sector for funds being the major one. So the key would be that as you look to get money from the public we should increase the public’s saving rate.

Currently workers are required to save five percent of their salaries with the National Social Security Fund (NSSF). As a result of this single initiative, and a lot of elbow grease by NSSF, the fund is the largest financial institution in the country.

In addition to continuing to induct more workers into NSSF, a revision of saving rate, maybe having workers save up to 20 percent of their income – employers need not double that or even match it, would bring a lot more funds into the formal financial sector, not only pooling available resources but also putting downward pressure on lending rates.

It’s a cliché that bears repeating – no one is going to develop this country for us. We need to look more and more to ourselves to finance our ambitions and last week’s announcements – by Kagame and KCCA, are cause for optimism.

THE ICC, UHURU BLUFF AND COUNTER BLUFF

Kenyan President Uhuru Kenyatta’s appearance at the International Criminal Court last week was the latest instalment in an intricate game of geopolitics that has been playing itself out since he became a person of interest for the court.

In post-election violence in 2007 at least 1000 were killed in ethnic fuelled fighting, some of which Kenyatta is being accused of orchestrating. Kenyatta has continued to protest his innocence.

In writing this I am at a bit of a disadvantage because Uhuru has not yet appeared before the court. But the wider issues of what this means for us remain relevant regardless of what transpired during appearance at the ICC on Thursday.

Last week’s visit to the Hague was for two status conferences to determine whether Kenyatta’s trial should go on or not. The ICC prosecutor also accuses the Kenyan government of refusing to release critical information that is critical for its case against Uhuru, a claim that was examined last week.

By the time Uhuru was charged for his alleged crimes in January 2012, he was not yet the president of Kenya and even attended pre-trial hearings in the Hague.

Uhuru has maintained that the case was an attempt to trample on Kenya’s sovereignty and and his campaign team used this tack very effectively to turn his presidential campaign around in 2012.

Once he assumed the presidency his case at the ICC took on a different dimension.

"Intense backroom manoeuvring managed several diplomatic coups among which were the African Union resolution that no African leader should be tried while still in office and a thawing of attitudes towards Uhuru by western capitals, which had previously warned of grave consequences if the Kenyan people voted him in as President...

Maybe no one among the Kenyan elite thought it wold come to this.

A Kenyan commission into the post-election violence recommended a tribunal be set up to try the perpetrators of the violence. When parliament shot down the recommendation and Nairobi sat on its hands, the commission’s findings – including a sealed envelope with the names of suspects, was forwarded to the Hague.

The prosecutor’s case against Uhuru is seen to be floundering. They have complained that the Kenyan government is being uncooperative, while a few witnesses have recanted their testimonies.

Some observers argue that the latest summons of the Kenyan President the court hoped would see him hiding behind the AU resolution, automatically triggering the issuing of an arrest warrant. By turning up at the Hague, Uhuru called the Court’s bluff and the dismissal of his case some say is imminent.

Be that as it may, the case speaks to two critical issues that bedevil this continent.

The baggage that we carry from a colonial era that ended more than a half a century continue to stalk our politics. The issues of self-determination and a recognition that while we might have attained political independence, western economies continue to jerk our strings, will continue to be a constant theme on the continent; the rabbit in the hat our politicians can conjure to distract the masses from the real issues.

And also among the real issues the notion that we all deserve justice, from the least to the mightiest in the land. Thousands remain displaced in Kenya, because to try and resolve their issues will throw up some uncomfortable truths that the political elite do not have the stomach to stand.

The first will be resolved when we can fulfil our promise as a continent – a promise many argue is deliberately stalled by external players, and determine our own destiny or at least negotiate as partners with the more developed nations.

The second’s resolution is related to the first. That is when the continent's people will be empowered, partly through improved economic standing to demand their own rights, demands that the politicians will be sensitive to because the length of their tenure will depend on it and not the advantage of incumbency.

Clearly this will take time.

"As it stands this case sets an important precedent.That international justice will reach beyond national borders in pursuit of justice. Of course the argument will always be that this justice is being applied selectively, but it also means that impunity could become a thing of the past or at least human rights abusers will at least be more discrete. Small consolation for the down trodden masses but progress none the less...

It is also a sad testament to the weakness of our own political classes. Uhuru need not have been forced to go through this whole circus if Kenya had constituted a credible tribunal to pursue suspects.

We watch with bated breath as to what will happen to Uhuru and his deputy William Ruto, also in the Hague facing charges related to atrocities committed during that moment of madness in Kenya’s history, as this case will irreversibly change the way we think about international justice.

WITH THE STANDARD GAUGE RAILWAY; LOOK BEYOND COST

The region’s leaders emboldened by their growing economies and a helping hand from China have gone on an infrastructure building spree unprecedented in the region’s history.

"Years of unfocussed politics means that these massive developments are in fact attempts at playing catch up, as our infrastructure has not kept up with the region’s population growth...

On Wednesday President Yoweri Museveni and his counterparts Paul Kagame from Rwanda and Salvar Kiir from South Sudan launched the Ugandan phase of the region’s standard gauge project.

The standard gauge railway line will be wider than our old line, a fact which its champions say means trains on this line will be able to carry heavier loads and travel faster.

Railways are critical for our ambitions to rise to a high income nation. Railway transport is the most cost effective means of transport over land, allowing for bulk transportation of raw materials for industry and manufactured goods to market.

History shows that railway transport was the key driver of the industrial revolution during the 19^th century. 

It slashed travel times by up to 90%, did the same for freight costs, made settlement and development of the interior possible – previously populations tended to huddle along coastal areas and waterways, farmers shifted away from subsistence farming to supply the huge populations of non-farmers in the new cities and since food was able to reach previously famine prone areas it lowered deaths due to starvation significantly, leading to population increases across Europe.

The benefits of rail transport continue to accrue.

In the US it is estimated that for every dollar of rail there is a two dollar return to the economy. In addition for every railway freight job supports about five jobs in factories, power plants, distribution and other sectors of the economy.

"To illustrate how far we have to go, the UK with a land area as big as Uganda’s had 20,000 miles of rail by the end of the 19^th century, we barely have 200 miles of usable track...

The task ahead is enormous and speed is of the essence. 

But we should guard against being stampeded into projects without a care for the rationale or eventual cost.

For example the first phase of the standard gauge in Kenya from Lamu to Nairobi is set to cost $3.7b. On the surface a reasonable figure,  but when examined against the international average spent on similar railway tracks per km there seems to be cause for alarm. The international average is between $3.5m and $5m per kilometre, a figure affected by cost of materials and terrain. But the Kenyan 480 km track will cost $7.7m per kilometre!

Using the highly inflated Kenyan number Uganda’s 238km Malaba-Kampala line should come in at under $2b.

It is important that this project comes in as cheaply as possible because the cost benefits of rail transport maybe lost as the eventual operator of the railway will raise his charges to recover the initial cost.

With high construction costs the concession may become unfeasible for a private operator and government maybe force to take on the loan itself. An added cost to the tax payer we did not ask for.

We need to think very carefully about who will run the new railway line, especially in light of the above concerns.

The potential benefits to the economy of an effective and extensive railway network cannot be overestimated but these benefits may be lost if the initial planning, financing and construction of the project produces a railway line that cannot be run profitably.

IMPROVING UGANDA AVIATION INFRASTRUCTURE MORE COST EFFECTIVE

Regional transport ministers have agreed on a battery of initiatives to slash the price of travelling in the region.

Among the suggestions is to scrap VAT on airlines be scrapped, promoting budget airlines and implement an open air space policy in the region.

Under current regimes countries national airlines or designated carriers are shielded from competition often to the detriment of the customer. Prices are uncompetitive and safety standards are not adhered to.

Transport costs in increasing order are water, rail, road and air. The lower value, bulkier cargo will be shipped by water with the higher valued, least bulky cargo saved for air transport.

The cost of transport is key to a landlocked country like Uganda. So governments like ours have to be bolder in lowering transport costs.

It has been done before. In the 1980s coffee accounted for more than half the tax revenues to the treasury. But in order to make our coffee more competitive on the world market the government removed the export tax on coffee. Three decades later the net effect of this is that we export more coffee than we did in the 1980s but also collect much more than the pittance we used to collect in taxes from taxing the associated industries.

One of the lessons of liberalisation is that we have to lose some to get more. Not always but often enough for it to make sense.

The challenge of course with air travel unfortunately is that we cannot make unilateral decisions on our side of the pond, but countries have to agree for the decisions to be make an impact. Take the issue of open skies, where among other things airlines from other countries, other than national carriers or designated carriers will be able to take on traffic, needs the permission of both countries.

Increased competition would invariably bury the Entebbe-Nairobi route’s reputation as one of the most expensive in the world per kilometre.  

So for instance not having a national carrier to do the Nairobi route would not be a problem because we would allow British Airways or Ethiopian or Emirates to take passengers from Entebbe for Nairobi. That doesn’t happen now hence the spike in prices after the closure of Air Uganda.

Increased competition would invariably bury the Entebbe-Nairobi route’s reputation as one of the most expensive in the world per kilometre.

Observers suggest that an open skies policy and a scrapping of some taxes could lower ticket prices by as much as half.

The challenge of course is whether the Kenya government, which has a stake in Kenya Airways which has benefitted disproportionately from the high cost fares in the region would let its advantage go away like that.

The concern is not unfounded. Whenever there has been a gap on the Entebbe-Nairobi route Kenya Airways has not been averse to hiking its prices. And they have fought tooth and nail to retain the choice time slots in the face of competition. In fact about a decade ago they drove a hard bargain with East African Airlines that was trying to muscle in on their routes on the route, by cancelling their contracts with local ground handlers Entebbe Handling Services (ENHAS), an affiliate of East African Airlines. The airline folded soon after that.

 

However long protracted negotiations may take to eventually bear fruit, it will be a smaller price to pay than trying to revive Uganda Airlines.

Thankfully the sources familiar with last week’s events in the cabinet retreat report that plans for the revival of Uganda Airlines has been put on the backburner for the time being.

"My opposition to a state owned airline is against the background of the inability of the government to run even a kiosk. An airline is an expensive proposition – by the time of the closure of Uganda Airlines it was gobbling sh10b or about $5m a month and it was only flying one route. Such monies would be better spent equipping our health centers and schools and opening up murram roads....

Given the experience of the Air Uganda, private investors are more likely to avoid us like the plague.

The truth is if we are suffering with high fares we brought it upon ourselves and the casualness with which our regulators sunk Air Uganda is proof enough of how they will be even more careless with tax payers money in a state airline.