A SOLUTION FOR UGANDA’S BUSINESSES?

The numbers are quite disheartening.

Only one in a hundred businesses in Uganda make it past their fifth birthday. There are a handful of businesses with a nationwide presence. The same goes for companies that have transcended a generation – passed on from founder to son/daughter and continued the legacy.

This is a cause for alarm for several reasons, not least of all that if we cannot create viable businesses, we cannot create jobs or expand the tax base or create wealth sustainably. Never mind the negative effect to democracy that we do not have a viable indigenous capital class.

We have tried everything over the last three decades.

"Palmed off juicy assets during privatisation to locals only for them to accelerate, rather than reverse their downward spiral. We have tried seeding businessmen -- small and connected, with some start-up capital, only for that too to come to naught. We have offered preferable tax terms and concessions to our own but wapi!..

It would be funny if it weren’t a scandal, that during the fastest growing phase of economic growth in our history we have little to nothing to show in the way of solid businesses.

If it is any consolation we should keep two things in mind.

Even in the US, the bastion of freewheeling economics, start-up statistics are not very much different in relative terms. What helps there is that the process of creation-destruction is ongoing, non-ceasing , a numbers game which ever y so often throws up a Facebook, Google, Microsoft, Coca Cola or GE.

And secondly that Uganda is one of the most entrepreneurial countries in the world only second to Chile at last count. This is good because it means we on average have no fear of going into business for ourselves.

Believe it or not our companies don’t sputter and grind to a halt for lack of money but more for a lack of entrepreneurial and managerial capacity.

So what is the solution?

I think I might have stumbled upon it last week in the form of the book “The Start Up J Curve” by Howard Love.

Love, a serial entrepreneur and venture capitalist, after years of starting up his own companies or helping others has distilled his experience into a model of how startup companies go from inception to maturity.

His six phases of the J-curve starts with creation, dips down into “long cold winter” or the “valley of death”, the phase when after you start a company reality hits that your idea is not so brilliant and requires much more work than was anticipated.

If you manage to survive the valley of death and pull out, you can then scale up your business and eventually reap a rich harvest either by selling the company or earning serious money from it.

This model is important the author says, and the sequencing of events more so.

His suggested order is product development, then creating a business model – how the business makes money, around the product and once those are sorted you can then begin to scale and eventually cash in.

"He makes the point that startups fail because either entrepreneurs jump to soon to create a business model before they have created a product that is acceptable to the market. Or try to scale the business before you have determined the business model or even got the product right...

And it each phase of the J-Curve there specific tasks to perform and targets to aim for before you can go to the next stage. To short circuit the process is increase the certainty of failure.

How many times have we seen startups taking out huge office space – scaling, before they have even tested their product in the market or nailed down a business model?

He also has some interesting thoughts at how to finance each stage of the process. All finance is not the same and what may work at the creation phase – angel funding will not necessarily work when it comes to scaling the business, where venture capital may be more desirable. And vice-versa.

No one can tell anyone about how a business will turn out. The mere fact that businesses are different, start at different times and in various locations alone mean no two experiences can be the same.

But they also say if you want to climb a mountain study all the routes to the top and then ask someone who has already been there.

"That last part – finding mentors, is notoriously difficult in our context, because as described at the beginning there is a dearth of businesses that have gone beyond providing a lifestyle for their founders...

During the grand finale of the NSSF Friends with Benefit show I learnt that NSSF has 1.5 million members out of a workforce of 15 million Ugandans. This statistic is a proxy for the size of the formal economy to informal economy. That the informal economy is ten times the size of the formal economy.

This could be significantly changed if more businesses could go from inception to maturity. Just imagine if we had 1000 companies of the Vision Group’s size – the size having been achieved by successfully charting the J-Curve, how qualitatively better the economy would be?

LESSONS FROM KASESE

Last weekend a crisis that was on a slow boil in south western Uganda burst into full eruption when police and army units attacked the palace of the Omusinga of Rwenzururu, Charles Mumbere.

A series of attacks on security personnel and civilians in the districts of Kasese, Bundibugyo, Notorko and Kabarole in recent months has caused unease in the region. The taking refuge in the palace by some of the perpetrators of these attacks served as an excuse for security agents to storm the palace.

In the process between 60 an d100 people were killed, including 16 policemen and Mumbere was arrested and charged with murder in a Jinja court.

Since then numerous commentators are have highlighted certain issues critical to understanding the issue.

One, that the resistance of the Rwenzurru comes from a fight against marginalisation by Kampala and the Toro Kingdom under which they were. Secondly, that among the Bakonjo there is a difference of opinion about engagement with the central government and finally , that the genesis of the situation also lies in a certain amount of lethargy with which our own government goes about enforcing the law.

Last week I had the benefit of reading second prime minister Kirunda-Kivenjinja’s Uganda: The crisis of Confidence. In the section of the build up to the 1979 invasion of Uganda by Tanzanian forces and a combination of anti-Amin forces several things appeared obvious to me.

One, that the Uganda army at the time, after eight years of decay was incapable of any meaningful stand against the invaders. And secondly were it not for the Tanzanian army’s involvement it’s doubtful that Uganda exiles would have been capable of such a swift ejection of the Field Marshal on account of their disorganisation.

"For every romantic tales of success of rebel movements in Cuba, Mozambique or even Uganda there are dozens even hundreds of “rebel” movements that have been unsuccessful, the hopes of their buccaneering leaders dashed against the formidable defence of a coherent state or floundered for lack of strategy beyond wishful thinking...

The time for forcing government’s hand by force are long gone in Uganda.

People in disagreement with Kampala are going to have to use a little more brain and a lot less brawn to have their way. It is easier to resort to violence than intelligence in resolving disagreement. The hope being that if you can catch your opponent by surprise or overwhelm them with force or both, you can impose your will.

But what happens when you don’t surprise them or overpower them?  It can only end badly for you.

Given that the government, like any other around the world, has literal monopoly on large scale violence and that this government is more coherent than others before it, to hope to force into concession is not unlike bashing your head against a wall.

Now one needs to organise, mobilise and harass the government by civil means, if only because in the last three decades or so the NRM has built a countrywide organisation, that while not always working as one, is easily mobilised in the face of external aggression.

So why haven’t divergent views managed to organise to the point that the government would be forced into concession?

"Because it is too hard. It is too hard to formulate a durable message. It is too hard to sell it to a largely apathetic population. It is too hard to organise around it. And it is too hard to stay the course in the face of stiff resistance from government...

One understands the romantic notion of a smash-and-grab attack, the reality is that it is unlikely to happen today in Uganda.

This is by no means to diminish the unnecessary loss of life and the tense situation being experienced in south western Uganda.

But unpalatable as it sounds, if one wants to win concessions from government, any seating government, one needs to be a bit more organised, a bit more systematic and a lot more tenacious.

WHAT THE MOODY’S DOWNGRADE MEANS FOR UGANDA

A few day’s ago credit rating agency Moody’s downgraded long term issuer rating of the Uganda government to B2 from B1, which means the country has been judged more risky to lend to and will be more expensive for us to borrow on the open market.

The downgrade came as a result of our increased borrowing, which has worsened our debt to GDP and revenue levels.

However the agency upgraded the country’s outlook to stable from negative based on continued economic growth, improved financial management and the shift towards development from recurrent expenditure.

To understand this use yourself as the analogy. In determining whether to lend to you or not a bank first looks at your income. In principle the higher the income the more you can borrow. For countries they consider GDP – the economic output, the higher this number is the more you can borrow. Uganda’s GDP stands at about $20b (sh70trillion).

But the bank would go further to determine how much of your income is actually available for debt repayments. They try not to take more than half of your take home pay. If you have little or no debt the more they can lend you. So for Uganda because we have been on a borrowing spree lately, and mostly of non-concessional loans, our ability to borrow more is less.

On an individual level the more money is going towards repaying debt the more at risk you are too any shocks in your personal life – accidents, medical emergencies or other unforeseen expenses. 

"Similarly as a country we have left ourselves little room for manoeuvre in case of any nasty surprises like depreciating shilling or lower than anticipated growth...

So a banker looking at your personal statement would worry about you more, the more indebted you are. Same as a country.

It helps of course if year on year your income is growing. This means less of your money will goes towards debt repayment, not only allowing you more money for you to spend yourself but also making you a prime candidate for more loans in future. Moody’s notes that our economy is growing slower than in the past --  about 4.3 percent on average 2012-2014 compared to 7 percent 2009-2011. 

As if that is not enough we are not collecting enough revenue – 13.4 percent compared to our peers who collect about 23 percent of GDP.

Also your banker would worry if you are not in formal employment, where incomes are predictable. 

Moody raises this concern in questioning the soundness of Uganda’s institutional strength, noting that the greater institutional strength a country has the more likely it is to take on more debt since the mechanism for raising money to repay the loans are in place.

However the banker maybe more optimistic of you long term, if your debt has not been frittered on high living and frivolous expenditure but on building up a viable business or your asset base. Moody’s says just as much of Uganda noting that the shift towards infrastructure development and away from recurrent expenditure – salaries, allowances and official perks, may lead to greater economic growth and hence improve our credit worthiness.

So on one hand our ability is borrow is reducing but the prospects for our economic growth are improving.

Uganda is not unlike the child in class who though is stuck nearer the bottom of the class than the top, is promising if only he could focus more in class and exercise more diligence in his homework. 

Under the current circumstances for the kid to make it to University a lot of things outside the kid’s control have to line up -- the weather, the seating arrangement and the degree of difficulty of the exam.

This is as opposed to the brightest kid in the class for whom none of those factors will matter on the day. He will thunder the exams or pass at worst. The possibility of failure is slim to none.

"Moody’s thinks that if the infrastructure developments generates economic growth and the country begins oil production an upgrade in the future is likely....

They also warn that further dramatic depreciation of the shilling could make debt repayments onerous -- already 16 percent of the budget, and affect economic growth.

Debt is a double edged sword it can be used to boost consumption -- bad debt or for investment -- good debt.

But an investment is only that when it shows a return if not it can become a white elephant.

But it can also turn into a bad investment if you pay too much for it, meaning for one that you will be servicing the debt longer than necessary tying down crucial funds, which could have been deployed elsewhere.

It's clear our development momentum has not attained irreversibility. Just because we have access to more funds should not mean we throw discipline out the window.

We are still at the bottom of the class. We need to focus and work harder than the brighter students if we are to keep up or even catch up.

OUR PEOPLE PERISH FOR LACK OF KNOWLEDGE

It has been reported that 36 districts are facing food shortages. The poor rains mean harvests have been poor and livestock have not been as productive.

The spin off from this, we can expect a jump in inflation in coming months and as the Bank of Uganda scrambles to contain that an increase in lending rates will follow, restricting borrowing, business growth and leading to distressed companies.

The long and short of it we should not be oblivious to the plight of these distressed districts.

But we need to ask, how is it that a country with 20 percent of its surface under water and almost half the region’s arable land ever have food insecurity issues?

There are many factors but the one bandied around most is that most of Uganda’s agriculture is dominated by small holder, low productivity farms.

These farmers who are mostly subsistence farmers due to land tenure systems and low adoption of modern agricultural methods are barely eking out a living.

Interventions by the state have been haphazard and sporadic and failed to improve productivity. While others point to the low investment in agriculture as at the back of the sectors woes.

"Both sides are correct but like the blind men set the task of describing the elephant they are each snatching at parts of the problem without appreciating the whole...

At the bottom of the low productivity of our farms is the poor farming methods of our farms. We are talking of such basic things as spacing, use of manure and basic irrigation.

On Tuesday in our Harvest Money pullout which was dedicated to irrigation I learnt that one can dig a pit among a cluster of plants and fill with water at least twice a week and it will irrigate the surrounding plants. To take it a step further you can fill it with compost manure and as the water sips out into the surrounding farm will carry along with it nutrients from the manure.

We are not talking about cutting edge fertilisers and sprinkling gizmos. Basic improvements in our farm practices can cause significant improvements in productivity and that is before you look at improved seeds and increased application of fertilizer.

"According to a World Economic Forum research done in east Africa irrigation increases productivity by 90 percent compared to farms which don’t employ irrigation, fertiliser increases yields by 61 percent and the use of mobile based market information can raise incomes by up to 30 percent.
Increased productivity will lead to a need for markets. Small farmers can be encouraged to form cooperatives to bulk their produce to better negotiate in the market....

So why isn’t this all happening?

It is happening because our farmers don’t know better.

When we talk about investing in agriculture, arguably the single best investment we can make is in extension services – some studies have shown returns on investment in extension services of more than 80 percent.

According to agriculture ministry numbers only 700,000 of the four million agriculture households had been in contact with an extension service worker. At the Kakira sugar plantations they have one extension worker for every 90 farmers. Going by that we should have at least 40,000 extension workers scoring the countryside helping our farmers improve their methods.

There are issues of market failure but that those are a lesser problem to the low productivity of our farms.

It should be obvious by now. Our people are being caught seemingly unawares by and unable to cope with the changes in the weather for lack of information. Radio announcements and indifferent politicians will not spread the word.

AN INTRIGUING WAY TO FIGHT CORRUPTION

Last week the Indian government announced it would be withdrawing the largest denomination notes from circulation as a way to combat corruption ahead of state elections.

Indians have until December 30 to turn in their big notes to their nearest bank. And that the deposit of large sums would have to be accompanied by an explanation as to their source.

The logic is that these large denomination notes allow for ease of storage and movement of large sums facilitating money laundering and tax evasion.

Why didn't we think of this before?

"Imagine if the government woke up one day and said they had demobilised the sh50,000 and sh20,000 note and that everyone in possession of them should hand them in to be replaced by smaller denomination bills...

To begin with, just like in India there would be a jump in deposits across the banking industry. According to reports deposits jumped a record six percent in the last quarter as connected types reacted to a leak about the impending move.

As shown above the move brings more of the money in circulation into the financial sector, which may have an effect on lowering lending rates and it's a move unlikely to adversely affect the majority, none of whom come in contact with big notes, but only that small group of people hanging on to large amounts of cash not earned above the table.

One they would have to suffer some discomfort and answer uncomfortable questions why they have such huge amounts in cash and, after the transition shifting those sums will become that much more difficult

Currently sh50m in cash is ten bundles of sh50,000. But if the highest denomination were sh10,000 you would need 50 bundles. A much more cumbersome weight to lug around. But why not reduce the denomination to sh1000 altogether?

The reason for the huge notes in the first place was to ease the movement of money by people who operate in large volumes like traders. But that was the argument being made when payments, even salaries were made in cash. UCB and one other bank were the only ones with a countrywide network, ATMs and mobile money were non-existent.

By having smaller denominations it would force more people to get bank accounts or at least mobile money accounts. So if for instance I have brought my cows, milk or matoke to town for sale the buyer either writes me a check for my millions, does a transfer to my account via his mobile phone or pays me using mobile money.

"Meanwhile for those with questionable hoards of cash it will be more expensive to store. In effect if we made the highest denominator  sh1,000 it will take you fifty times more space to store your loot. Corruption can not be eliminated but by making it a bit more difficult to operationalize would help reduce it considerably...

But the world can learn from us too.

About two years ago government announced the single account in Bank of Uganda for all ministries.This would replace the thousands of ministry accounts peppered around the banking industry.

Now ministries can only see releases from the central bank against predetermined work plans unlike previously when the finance ministry would release money on a quarterly basis as per the budget.

With one fell swoop the tap of money that was leaking out of government was turned off, bringing general inflation under control and returning sanity to asset prices.

"It has also revealed that a lot of our consumption has been buoyed by this hot money. Otherwise how do you explain the tightness in cash when the government budget has more than doubled in the last five years?...

Previously these numerous accounts were "hard" to keep track off with money disappearing into them never to be seen again, financing land speculation, conspicuous consumption by a small group of officials in government and general financial indiscipline.

The argument from some quarters is that there has been a huge shift of resources to development projects, a lot of whose money is spent abroad but the recurrent budget -- salaries and supplier payments has also grown with the general budget so that argument doesn't real stand up to scrutiny.

This calls to mind what happened in the early 1990s when government improved it's fiscal discipline by shifting to cash budgeting and the outcry that followed.

Even then businesses collapsed, banks were stressed and a whole industry of air supply was badly wounded.

The political pressure was intense both from outside and inside government to loosen the fiscal straight jacket government had imposed on themselves.Thankfully the government didn't buckle in its resolve. One can imagine that even now the pressure is intense to see a return to easier times. And again government should not waiver in its resolve.We will get over it.

"The reason to clamp down on corruption can not be overemphasized. The proceeds from corruption concentrate money in a few hands, distorts the markets discouraging genuine business and ultimately possesses a security risk as the beneficiaries will do anything to keep the rackets ticking over....

Of course the beneficiaries while they may be few are very loud and boisterous and create a perception that the sky is about to fall, but past experience has shown this is not true.

KIGGUNDU AND THE BUILDING OF INSTITUTIONS

Thursday was the last day in office of Dr Badru Kiggundu’s tenure as head of the Electoral Commission (EC).

The event went largely unnoticed, overshadowed by our  latest scandal, the whodunit surrounding the death of social worker Kenneth Akena over the weekend. Two people – Matthew Kanyamunyu and his partner Cynthia Munwangari remain in custody as suspects in the incident.

The story has more twists than a Kisoro road and the public – never mind what social media says, is no closer to the truth  as to what happened on that fateful evening.

But back to Kiggundu and his place in history.

Engineer Badru Kiggundu was appointed chairman of the EC, seemingly out of the blue in 2002. The former dean of the technology faculty seemed an unlikely replacement for Aziz Kasujja, whose term at the EC came to an unceremonious end a year after the 2001 polls.

"Looking back to the time, quite a few people felt the engineer would find himself out of his depth.
That the unrelenting intrigue and political gymnastics that come with the position, would bamboozle the linear logic of his scientific mind, frustrate him and soon have him scampering for the hills in bewilderment.
They clearly underestimated the man. He oversaw the contentious 2006 polls, bounced back to shepherd the 2011 elections and finally the most recent at the beginning of this year, where logistical snafus had people seeing conspiracies at every turn. This is not counting the myriad of elections at local government level and the hundreds of by elections that we have become accustomed to.

But Kiggundu’s legacy is more than just about the man but as a builder of the foundation of electoral practice.

We may raise an eyebrow about the way this election was carried out, frown at the result of that poll or sneer at the seeming favaroutism of another, but precedent has been set for better or worse, which will give us a chance as a country to improve our process going into the  future.

It’s not automatic but at least there is a better chance of progress.

We forget that between Independence in 1962 and 1980 the country had only on general election. But in the 20 years from 1996 to date we have had five presidential elections.

The critics might pooh it away as mere ritual but that is to ignore or not understand how culture is established. Culture is the way things are done. It is not written into existence, but practiced over long periods to the point that a new baseline is set. Suggestions mooted last year that maybe for lack of money we should not hold this year’s elections, did not see the light of day, as a standard had already been set and should be observed regardless of circumstance.

The Democratic Republic of Congo which was supposed to have a general election in December has opted not to with little repercussion to the establishment, because elections are still a novelty in our western neighbour and can be done away at the convenience of the ruling elite.

In the US the most crude of electoral malpractice, ballot stuffing, vote buying and intimidation have been reported down the ages. Much of it has been worked out of the system through improved legislation and the employment of technology.

But this would not have happened if they had not retained the culture of having an election every time it was due.

Elections are not democracy but it is one of the most critical pillars of democracy.

Kiggundu was not a saint and neither did he claim to be one. If Uganda matures into a better democracy his role over the last 14 years would have pride of place in the history books about the process.

"In a world where a person’s worth is measured by the size of his bank account, it is easy to dismiss his contribution. Future generations with no sense of history may relegate him to a footnote. But regardless of what happens, serious chroniclers of our time will find the record of Kiggundu’s era provides useful material to make head of tail of our time....

Kiggundu and his team have laid their brick on the wall of history. No one can take that away from them.

UMEME A VINDICATION OF THE SHIFT TO A MARKET DRIVEN ECONOMY?

Last week Umeme Holding Ltd (UHL) sale of half it shares to National Social Security Fund (NSSF) and their announced intention to offload their remaining shares brings to a close one of the most successful chapters in the country’s privatisation process.

The privatisation of state owned enterprises was based on the premise that old parastatals were a drain on the treasury, that they needed huge investment outlays the government could not afford and that we did not have the managerial capacity locally to turn them around. The last issue beyond inadequate managerial capacity was that local managements were not properly insulated from the interference of the state.

"The opposition to the privatisation process argued that we were selling the family silver, never mind that it was badly tarnished, to foreigners for a pittance. In doing so forgoing any leverage the government had over the economy and that it wold cost us jobs, earnings and prestige to sell...

Thankfully the economic reality was that the government really couldn’t afford to carry the load of these resource draining black holes in the face of more pressing needs – getting the economy back on its feet, rehabilitating roads, ensuring security and providing social services. Forcing the government’s hand to sell.

If the same debates were happening now the opposers of privatisation would have won the day.

The liberalisation and privatisation of the power sector was always going to be a sensitive issue because of its potential strategic importance to the economy. At that time we were only generating about 200 MW, the then Uganda Electricity Board (UEB) was covering less than three percent of the population and power availability was sporadic.

A law was enacted to break up UEB’s monopoly before it was unbundled into its generation, transmission and distribution components. The break up of the former UEB was important to bring specialisation to the various functions and to make it easier to sell, as resuscitating the whole UEB would have cost too much and increased the risk to potential investors.

The generation arm was leased to South Africa’s Eskom and the distribution arm to a consortium led by the UK’s Commonwealth Development Corporation (CDC). Later Actis, a spin off from CDC took over Umeme.

Under the arrangement the assets of Umeme still belong to government, but Actis was given a 20 year concession to run them from 2005.

"Half way through the concession Umeme has accomplished a lot of what the privatisation was intended to -- widen power consumption, deliver a more efficient service and increase revenues to government. And as a bonus they have sold their shares to Ugandans who have benefitted from its increasing profitable operations...

Of course the naysayers will point to the sh500b they got from share sales and dividends and say we got the short end of the stick. But this would be to ignore the growth in the economy and improvements in welfare to individual households and businesses that came with adding almost 700,000 accounts – the projection is there will be a million accounts by year end.

And not to mention the increase in wealth for the thousands of shareholders who have rode the company’s share price from its Initial Public Offering (IPO) of sh275 to the current sh525 a share price. Shareholders almost doubled their money when one considers capital gains and dividend pay-outs since 2012.

And then as if that is not enough they mentored a management cadre that will take this project to the next level.

The now disbanded privatisation unit could not have asked for a better poster boy for the process than Umeme.

The private sector is not the panacea for all our problems. But as a creator of wealth through the manipulation of land, labour and capital, no other economic system comes close. But for it operate for the benefit of all the people,  we need to understand what motivates it and leverage this to our own benefit.

In their pursuit of profit companies seek to maximise revenues and minimise costs. Governments on the other hand, ultimately, are looking to deliver goods and services to its people to improve their standard of living.

These two goals need not be mutually exclusive.

Government needs to create a conducive environment – good legal and policy environment, efficient infrastructure and productive human resource, these coupled with growing market demand should attract the kind of credible investors – internal and external, we need to move this economy to the next level.

"Unfortunately for us our appreciation of the private sector – how it works and what it needs to work well, is rudimentary at best or bordering on total ignorance at worst. We have an unhealthy, even envious suspicion of money makers, which does not allow us to make the necessary concessions required to allow businesses to thrive...

Let us study the Umeme deal in more detail and maybe use it as proforma for attracting investors into our infrastructure, agriculture and social services sectors. And who knows, with sufficient exposure to international best practice we will not only appreciate business better but we will incubate our own crop of super businessmen.