KENYA AIRWAYS A CAUTIONARY TALE FOR UGANDA AIRLINES CHAMPIONS

Kenya Airways last week announced a horrific $252m (sh882b) loss last year, blaming low tourism numbers and competition, while observers in addition, point to judgmental errors in route expansion and cost indiscipline as key to the airlines’ latest woes.

The airline saw a marginal growth in revenue to Ksh110b (sh3.3trillion) from Ksh106b (sh3trillion) the previous year which was not helped by a near 25 percent jump in costs.

A cursory look at their financial statements shows their fleet ownership costs doubled, as did their finance costs and they took Ksh7b (Sh210b) loss from realised and unrealised losses on their fuel derivatives bets.

Being a huge consumer of aviation fuel Kenya Airways seems to have bet fuel prices would rise last year and took out insurance (derivatives) to guard against that eventuality. However world oil prices have been falling since June, making the airlines’ derivative positions expensive to maintain or dispose of.

As if that is not enough the airline now has a negative net worth, its liabilities exceeding its assets. The company says it will look to borrow $200m and sell off some of its aircraft to raise an additional $100m.

"The aviation business is a volatile one in the best of times. It did not help, that Kenya has had several high profile terrorist attacks in the last two years, keeping tourists away or that the middle east airlines have made aggressive inroads into the continent, but one can bet that if you put the company’s expenses under a microscope you will find a lot of fat, wastage and downright theft embedded in the system...

Rumours of fat deals to favoured contractors, planes leased irregularly from connected individuals and hush money being doled out to people in the know abound.

In an increasingly competitive environment there can be no excess, companies need to be lean and mean so that they can not only fend off competitors’ maneuvers, like price wars but also initiate some aggression themselves.

Except for the Nairobi-Entebbe route where Kenya Airways has a freehand they are most likely taking a beating on all other routes on which they face competition.

With an eroded balance sheet, the pride of Africa is exposed and it maybe that only the Kenya government can fork out some more money to pour down that black hole.

Stripped to the bare essentials business is simple. For long term sustainability you need to make more money than you spend. The difference is profit, which may be parcelled out among the shareholders and ploughed back into the company to drive growth.

In a competitive environment the profit margins can grow increasingly thin, hence calling for increasing levels of efficiency and a healthy pile of retained profits. Companies can either hang in there giving as good as they get and hope to weather the storm or sell out, abandon the business. 

These are strategic decisions, which are not made any easier by the hard facts on display, but can be complicated by sentimentality and misguided loyalty to the business.

Which brings me around nicely to the champions of the revival of Uganda Airlines. The sum total of their argument for the return of the airline, which went under at the start of the century, is that it is an infrastructure such as roads or railways or ferries that government has to put in place regardless of its direct return on investment.

"That there is the fallacy of the argument. If the enterprise is not profitable it will not sustain itself and rely increasingly on the treasury for capital infusions just like Kenya Airways is doing and South African Airways is doing with disturbing regularity.
We are talking hundreds of millions of dollars. Money that would show a better, more sustainable return for this country by educating or treating a few thousand children....

One wonders which market research these people are referring to in pushing for a billion dollar investment on when British Airways with a monopoly over the non-stop Entebbe-London route only last week announced they were pulling out of this market?

It is not a crisis that BA has left our market, there a dozen other airlines flying out of Entebbe. A better way to spend money on the aviation industry would be to upgrade Entebbe airport which barely manages to handle three jumbo jets when they land at the little airport within minutes of each other.

Given what we know about our government’s workings, it is not a stretch to think that a stateowned airline would just increase the surface area for corruption,  especially as such an airline will not breakeven for at least a decade if it does at all. It really has nothing to do with improving access to Uganda for tourists or someone hazarded last week, to make our coffee more marketable.

If it was up to me we would put this “Force Uganda Airlines Back” to bed for at least the next decade or it put it down all together.

OBAMA WALKS TIGHT ROPE IN AFRICA VISIT

US President Barack Obama’s landmark visit to Kenya had him sticking to the script -- extolling democracy, hinting on human right concerns but all the while being careful not to upset key regional allies in the fight against terror.

At a press conference in Nairobi he chastised Kenya for not respecting Lesbian, Gay, Bisexual and Transgender (LGBT) rights, a rejoinder by his counterpart Uhuru Kenyatta to the effect that it was a non-issue for him and his countrymen, put paid to that discussion.

In Addis Ababa, he wondered with a wry smile why Presidents would want to stay on forever, that he believed he could win a third term himself but not only can’t he run again as there is a two-term limit in the US, but also because he is really looking forward to shedding the trappings of power. But this was said to an audience that did not include any of the intended objects of his derision.

"The history of the US shows that where their national security issues are concerned they are not averse to overlooking the “puny” issues of democracy and human rights. Every US President’s foreign policy preoccupation is to diffuse or obliterate any threat to the country – as with all other presidents, the difference is that with the US they have the means to enforce their will around the world...

With the collapse of the Soviet Union and the end of the cold war, the US’ main security threat comes from unconventional armies that can pack a disproportionate punch to their size. Not since America’s interventions in central America in the 1970s and 80s — an attempt to prevent communism taking hold in their back yard, has the US thrown all caution to the wind like it has in its war against terror.

Which brings us around to Obama’s choice of countries to visit during this trip.

Kenya was an obvious choice. His father was Kenyan, Obama hadn’t visited since 1987 and it would be nice to visit as POTUS (President of the US). Romanticism aside, Kenya is at the frontline of the war against terror with its involvement against Al Shabaab in Somalia and their history of horrific terror attacks – in 1998 and again in 2013, as well as numerous other smaller but no less significant attacks, along the coast and on its north eastern frontier.

During the planning of the trip there might have been concerns about the sticky issue of Uhuru and his deputy William Ruto being before the International Criminal Court (ICC) for crimes against humanity during the post-election violence in 2007. The ICC dropping the case against Uhuru earlier this year must have caused a sigh of relief at the US State department.

We shouldn’t forget too that a senior US official had urged Kenyans not to vote Uhuru in 2012 because of the ICC case hanging over his head.

Ethiopia is also heavily committed in Somalia, but it also is the latest leading economic light on the continent. But they too are not perfect. Western human rights and environmental organisations incessant criticism of their treatment of dissenting views and journalists, as well as their disregard for environmental sensibilities in its huge infrastructural projects – the Gilgel Gibel III dam is a case in point, mean under other circumstances POTUS may have given Addis Ababa a wide berth.

For the same reasons that he visited Kenya and Ethiopia, he would have visited Uganda, Bururndi and even Rwanda, but then again maybe not.

"With Uganda the US may not have forgotten that we signed into law the anti-homosexuality bill against the White House’s best advice, even if the courts later overturned it on a technicality. Burundi’s just concluded election was held under a cloud, seen by many as an attempt by Pierre Nkurunziza to extend his tenure beyond the constitutional two term limit. And in Rwanda of course, moves are in advanced stages to lift the constitutional term limits.

Maybe for Obama these transgressions were a bit too much for him or for the constituencies he panders to back home and far outweighed the heavy lifting they are doing in the Horn of Africa and Darfur in Rwanda’s case.

Whichever way you look at it, Obama’s African trip was going to come  with a mine field of issues wherever Airforce one set down, but in the end sentimentality won over real politic to make the trip possible.

We are not complaining.

GRIM TIMES AHEAD FOR AFRICA

While we were fixated on our slumping shilling, around the world another trend with far reaching implications for our country and continent was taking hold.

The US economy is finding its legs again, after the global financial crisis.

The same cannot be said for the EU, which looked into the abyss a few days ago with the near exit of Greece from the Euro zone. China is finding its economy succumbing to gravity – the scramble last week to avert a stock exchange crash cost more than $120b (sh420trillion), was ominous. And just when we thought we had heard it all the International Monetary Fund (IMF) has warned Japan that its debt burden about $11 trillion or about thrice the size of its economy, is unsustainable.

Apart from making for good television, these coincidences have conspired to send commodity prices – oil, gold, coffee and others falling through the floor.

"The strengthening dollar is causing a drop in world prices, as is the failing demand in the EU, China and Japan...

Already casualties are all around us.

Nigeria is struggling to balance its budget with the price of crude oil falling to $48.62 a barrel by the time of writing this story. To balance its budget a barrel of crude oil needs to be at $122. The other giant oil producer Angola have s lashed the budget by a third and has had to go, cup in hand to Beijing to contract another $25b in oil backed loans while rescheduling other debt due to the second largest economy in the world.

At home, coffee exports in May fell to $35.91m from $30.58m from the same time last year, part of the reason the shilling has fallen 27% since the beginning of this year.

A combination of political expediency and post-colonial interference  means Africa has suffered a lot of civil strife, this and the limited access for manufactured goods has failed any projects to capture more value for our commodity exports.

Clearly the chicken are coming home to roost.

We will rue missed opportunities to build the capacity to diversify our economies when the going was good, when we chose instead to splurge on vanity projects and high living.

Despite our falling shilling Uganda is actually more diversified in its exports than Nigeria or even Angola, which both rely on more than two-thirds of their revenues from a single commodity.

This latest global crisis has exploded a few myths. That the EU is past its teething pains and is a cohesive whole. That China’s economy will continuing growing at prodigious rates well into the future, carrying us all along. And that there will always be demand for our raw materials.

This is the umpteenth wake up call for Uganda and countries like ourselves.

"We need to reconfigure, our infrastructure, which is all targeted at exporting out of the region; we need to reconfigure our production, which again is targeted at western industry and we need to reconfigure our thinking, which looks outwards rather than inwards, for ideas and inspiration...

Luckily we have the East African Community (EAC). During the global financial crisis of a few years ago a slump in demand for our exports to the EU, was cushioned by an increase in trade within the region. It helped too that the South Sudanese couldn’t get rid of their dollars fast enough.

Improving trade through better infrastructure, less red tape and a focus on our competitive advantages, could insulate us much better in coming years from the vagaries of the world markets.

But beyond that internally we need to run mean and lean operations. We cannot go along subsidising the corrupt at the expense of the majority and expect to be nimble enough to adjust to a rapidly changing global economy.

If we are not utilising the full potential of our human resource, it’s because the money for building infrastructure, financing social services is being gobbled up by a handful of people. The net effect of this is that the majority are not being provided the tools to climb the social ladder – quality education and health care and good infrastructure, as a result in a time of crisis our response is not as good as it can be because all hands cannot be on deck.

When the US faced down the global crisis they looked to themselves to revitalise their economy, essentially reorganising their economy, giving relief to the worst hit and everyone pitching in the best way they could. Of course there were casualties. And of course there are people who were hard done. 

But oftentimes these people were going along for the ride when the things were good and not adding value to themselves or taking advantage of opportunities to do so and when the tide went out they were found to be swimming naked.

They say you should not fail to take advantage of a crisis. This is our crisis let us not let it go unexploited.

KAWERI COFFEE PLANTATION: UGANDA’S BEST KEPT SECRET

Tucked away in the hills just outside Mubende town is Kaweri Coffee Plantation, a 2,512 hectare (6,207 acres) operation that is arguably Uganda’s best kept secret.

In the late 1990s the German company Neumann Kaffe Gruppe (NKG) was looking to start a robusta plantation. After assessing several options in South America, Asia and Africa they settled on Uganda.

“Uganda was chosen partly because it is part of the Greater Congo Basin, which is where the robusta coffee has its origins,” said Kaweri Coffee Plantation managing director Etienne Steyn.

NKG, which accounts for one in every ten kilogrammes of world coffee demand, got land in Mubende and set about setting up a plantation to rival similar operations in Brazil and Mexico.

 Planting of 1800 hectares of coffee was completed between 2001 and 2004.

“All coffee nurseries within the district, and as far as Mbarara, were exhausted to meet the required number of seedlings needed for planting”. We now have our own nurseries,” Steyn said on a recent tour of the plantation.

There are currently about 1.8m trees on the plantation on 1650 hectares, now under coffee. Another 685 hectares (27% of the farm) is occupied by natural highland rain forest and is fast becoming a sanctuary for all sorts of wildlife – serval and civet cats, bush babies, vervet and colobus monkeys, various antelopes such as Reedbuck, duiker and bush buck, many rare species of butterflies and many species of birds.

"Steyn said that the plantation, which harvested its first crop in 2005, is set to produce 2,500 tons of coffee this season. This means Kaweri will account for two in every hundred bags of coffee produced in Uganda, the largest single producer of coffee in the country...

According to the Uganda Coffee Development Authority (UCDA) there are about half a million coffee farmers in Uganda.

But Kaweri is not only the single highest coffee producer in Uganda but may also have the highest productivity per unit area than any other operation in the country.

According to Steyn the farm’s productivity is about 2.2 tons per hectare compared to the national average for the robusta of half a ton per hectare.

Better farming methods and the judicious use of research are at the heart of these high productivity numbers at Kaweri.

“Every month we take leaf samples and send them to UK for analysis, in addition annually we take soil samples for analysis in Brazil. From these we are able to determine accurately what fertilisers and other inputs we have to apply in different parts of the farm,” Steyn said.

The farm does not however employ irrigation as there are no streams or surface water on the farm and in 2013, Geophysical surveys showed no underground water was available for irrigation purposes.

Kaweri markets a washed robusta and has the largest wet processing plant on the continent with a capacity to process 350 tons of coffee cherry daily.

Internationally Kaweri has distinguished itself as having produced a robusta coffee that is traded by name: Colobus (Screen 18), Turaco (Screen 15) and Reed Buck (Screen 12) coffees, which allows the farm to command a premium over and above the normal prices.

Kaweri does not employ the use of outgrowers although it employs at least 600 people throughout the year and up to 3000 during the peak harvest period of six months.

“During harvesting we often exhaust all the available labour around the farm and have to go further afield to hire workers to harvest the crop,” Steyn said.

The nature of the robusta tree is such that it is unlikely that mechanised harvesting will replace manual labour, so for the duration of the 99-year lease NKG has on Kaweri we can expect that it will continue to serve as a source of employment throughout the year.

Beyond creating jobs for people in the area, Kaweri supports the surrounding communities and the farm has drilled  eight boreholes, built a new primary school in nearby Kitemba village and has helped in transferring know-how to local coffee farmers.

“Support activities include the establishment of extension services, development of professional farmer organisations, capacity building on value addition processes and market access as a result they are today marketing in bulk directly to exporters – cutting out the middleman and getting paid more,” Steyn said.

"Steyn, himself a former coffee farmer in Zimbabwe said, it would an uphill task for local farmers trying to replicate the scale of the $20m (sh52b) Kaweri plantation....

Speaking from his experience in Zimbabwe he said commercial farmers have little support in Uganda.

“We had farmer associations in every district which provided extension services, lobbied for our interests, facilitated in warehousing. In addition there were agricultural banks whose services were structured taking into account the industry and its nuances,” Steyn said.

Despite a compensation case that is still winding its way through the courts and hangs over the project like a dark cloud, the farm’s target is to achieve production of 3,500 tons a season.

Industry players are genuinely impressed by what is happening in Kaweri.

“It’s a massive, well run operation and is a good story of what can be done in this country. Its just sad we don’t have a local testimony like that,” said Andrew Rugasira, founder and Chairman coffee processor Good African Coffee.

ZIMBABWE’S INEVITABLE U-TURN A LESSON FOR ALL

Around 2000 or thereabouts Zimbabwe started a crude land distribution that dispossessed white framers of their land and handed them over to black farmers – mostly supports of the ruling ZANU-PF.

This had the desired short term effect of ensuring yet another ZANU-PF victory at the polls and the undesired long term effect of crippling the once vibrant economy to the point now that the Zimbabwean dollar is officially no longer legal tender in that country and the country, once the breadbasket of southern Africa, is now living of food handouts from its neighbours.

At the time the white farmers were hounded out of Zimbabwe they owned 70 percent of all arable land, a scandal in itself but the greater scandal is the colonial legacy that set up this unjustifiable imbalance of a key resource.

"The need for land distribution in principle is undeniable in former colonies like Zimbabwe, South Africa and even neighbouring Kenya. Zimbabwe chose the populist way of redistributing land where a more pragmatic solution, which recognises the economic importance of the existing players would have been taken into account...

The difficulty for economics is that it is difficult to carry out experiments like in a lab, but when countries like Zimbabwe come along they confirm or negate economic theory, unfortunately at the expense of the citizens of that country.

The main lessons that come from the Zimbabwean experience are that in trying to redress economic injustices uprooting the productive players needs to be done systematically so as not to disrupt the economic engine you hope the disadvantaged will benefit from.

Ugandans need no lectures in this as the uprooting of the Asian commercial class in the 1970s set the country so far back to the point that even 30 years of consistent economic gains have not repaired the damage.

And secondly when political expediency wins over good economic sense the consequences will be such that the political gains will only be a pyrrhic victory.

The chicken have come home to roost. It was reported this week that Harare is now making open overtures to the banished farmers to return and take back their properties. Lands minister Douglas Mombeshora last week said a select group of farmers will be invited to take over farms with “strategic economic importance” and that black beneficiaries of the redistribution will start paying compensation to the about 4000 farmers dispossessed almost two decades ago.

Only in Zimbabwe can a politician make such an about turn and survive.

In Uganda we are currently grappling with a shilling whose fall has only be stalled after determined action by the central bank.

The dollar has risen to sh3300 against the shilling from around sh2600 at the beginning of the year.

With our huge import bill – we import almost twice as much as we export in value, one can see why such dramatic movement would cause an uproar.

Essentially the local currency is falling through the floor because there is too much shilling chasing too few dollars.

Officials say a lower export receipts, specifically the collapse of south Sudan market, the slowdown of investment into the oil sector and reduce donor inflows are affecting dollar supply. Demand for hard currency is being fuelled by our huge investments in dams, roads and railways.

It is this delicate balance that we need to look to for a solution to our tanking shilling.

Either we put a hold to our infrastructure projects, which is out of the question as they are critical for future economic growth or produce more for export, which will take a while as, for example, expanding the acreage under coffee may take a few years to see results.

"The long and short of it is that it may take a while – weeks, even months, before pressure on the shilling is lifted...

The quick fix would be to decree that the central bank of Uganda defends the shilling at all costs, which would bring temporary relief. But once our reserves are drained the shilling would collapse way beyond the sh4,000 to the dollar mark we so dread and send the economy into reverse.

The moral of the Zimbabwe story, which can become our own if we succumb to populism, is the economy has laws which you subvert at your own peril.

THERE IS NO MONEY TOO MUCH TO FINISH

Last week US rapper 50 cent, real name Curtis Jackson, filed for bankruptcy which is an acknowledgement that he cannot fulfil his obligations to his creditors.

He filed for bankruptcy under chapter 11 of the US bankruptcy code, which will allow him time to reorganise his affairs and work out a plan for how he will pay off his debts. My understanding is, under this law his businesses are protected from his creditors for a limited time.

So essentially 50 cent will not be begging on the streets any time soon or even ever, but that he has got into this situation should be an eye opener for all of us.

"As is often the case with people living large but teetering on the edge of financial destruction, it takes one calamity to bring the façade crashing down around their ears. The trigger for 50 cent’s bankruptcy filing was a case he lost recently in which he was ordered to pay $5m. The case involved the releasing of a sex tape on the internet without the permission of the lady in the tape...

Earlier this year 50 cent’s net worth – the difference between his assets and liabilities, was put at $140m.

A clue as how he might have hit dire straits was the revelation that he has assets and debts in the range of up to $50m (sh175b) but most of the debt is consumer debt. Essentially that 50 cents high living has been propped up by borrowing.

There are only two ways to spend money, either you consume it or you invest it. If you invest it well, your money will work for you and will continue to be the gift that keeps giving. If you yours pending is slanted towards consuming, it I s only a matter of time before poverty comes knocking – even for 50 cent.

Of course our relationship to money comes from our background. 50 cent like most top rappers comes from a back ground of poverty, crime and absentee fathers. This background comes with a lot of baggage but also with a warped mentality about money and how to spend it when you get it.

No one should assume the riches come easy to rappers, because those at the top of rap industry work as hard as any world class achievers, however the money can come in very fast once they break through. And then their old context kicks in, with these artists splurging on alcohol, babes and cars, as of to announce to the world that they have arrived. With a lack of expert advice – they tend to surround themselves with other disturbed youth from their old neighbourhood, it is often a matter of time before they are in trouble however inconceivable it may seem when they are the height of their powers.

There used to be a program on TV called MTV Cribs in which a tour of one celebrity or the other’s home was profiled.

They profiled 50 cent’s 52-bedroom mansion which he bought in the 2003 for $4.1m. It was the former home of boxing champion Mike Tyson – another celebrity with a troubled past who squandered his fortune on the fast life. The tour was surreal for one thing the palace seemed unlived in only serving as a lodge for members of the G-Unit, a collection of rappers he promotes. It was big enough though to host his collection of high priced cars which included Ferraris, Bentleys and Mercedes.

This was in sharp contrast to another artist singer-songwriter Moby, a much more modest house, with less than 12 rooms all told, whose interior décor epitomised the say “less is more”. In the living room area, which had no carpets or rags gratuitously flung around he had two chairs facing out the windows that over looked acres of forest.

Moby, whose career has not made as much for him as 50 cent, could afford bigger and grander, but his money is probably packed in investments that will keep his $32m net worth growing.

Two men in the same industry. Two men making sums they would not have dared dream about in their younger years. One is sliding down the slippery slope to poverty while the other is on a steady rise to wealth that will ensure that his family for generations to come will never want for anything.

This is not rocket science. The discipline might not be easy to execute but the formula is simple – slant your expenditure towards investment rather than consumption.

ISIS IS COMING! THERE IS CAUSE FOR ALARM!

Regional security chiefs meeting in Kampala have warned that the terrorist outfit the Islamic State of Iraq and Syria (ISIS) has recruited up to 5,000 Africans, many of them East African, to fight in the middle east.

This is not an unusual development as Al Qaeda before it, called on Muslims from around the world to join it freeing the holy lands.

But ISIS is not Al Qaeda.

With victories over the Syrian and Iraqi armies, ISIS took control of major oil fields capable of producing up to 500,000 barrels of oil a day.

Whereas recent airstrikes have severely degraded this capacity – recent estimates put ISIS production at about 10,000 barrels a day, it makes ISIS all the more dangerous because it has resources that do not depend on the goodwill of supporters or the blackmail of “allies”.

"The issue of resources is key to explaining ISIS growing global influence. Every crackpot terrorist operation is keen to be in their good books, because owing allegiance to ISIS may result in a flow of resources to them...

In the 1990s New York Times journalist Thomas Friedman referred to the super-empowered individual, he even made specific reference to the Osama bin Laden. Bin Laden had not risen to his full notoriety by the time Friedman’s book “The Lexus and the fig tree” was published in 1999, though he had already made his mark on our collective conscience with his commissioning of the twin bombings of the Nairobi and Dar es Salaam, US embassies in 1998.

Friedman explained that by leveraging new technologies these super empowered individuals could fight against nations.

ISIS is an extension of this phenomenon. With terrorist groups commandeering valuable resources to finance their terror campaigns they are able to project their will much wider than before.

Which is why the thought that ISIS is training east Africans is enough cause for shivers to run down our spines.

ISIS’ methods are so brutal that even Al Qaeda, to which it first paid its allegiance, criticised them for being too brutal. They have filmed and transmitted with maniacal glee, their execution methods, which have ranged from throwing victims from high rise buildings, to dousing a caged prisoner in fuel and setting him alight, to employing a bazooka to execute one victim. And we haven’t even talked about their beheadings of mostly western prisoners.

Beyond the obvious sense of terror they provoke, ISIS is even more dangerous because with the resources it commands it can strengthen all sort of organised criminals.

Al Shabaab it was once suspected, were financing their activities using the proceeds from poaching activities.

ISIS can’t sell their oil on the open market so they have linked up with smuggling rings to help them. Observers say that ISIS has sold a barrel for as little as $20 to smugglers who ghost it into Turkey and Iran. World fuel prices now hover at about $50 a barrel.

The huge profits that these smuggling rings make strengthens them, emboldens them and builds up their capacity to go about their other businesses.

So if ISIS manages a foothold in the region expect a rise in organised crime.

"Already coming out of the trial of suspects responsible of the 2010 bombings indicate cross border regional linkages not only been the terrorists but also with established organised crime rings.This is a different kind of war for which our security need to reorient themselves...

The battle lines are not fixed. The enemy is indistinguishable from members of the general public. And any response risks alienating governments from the very populations they are seeking to protect.

Good intelligence gathering is paramount. Greater transnational collaboration is critical. And increased personal vigilance by every citizen is imperative.

The war against ISIS rages on. To the extent that they can be pinned down, they will pose little threat to us. But we cannot take that for granted.