AGGREGATING RESOURCES: THE CHALLENGE FOR AFRICA, UGANDA

On Wednesday Uganda Christian University launched a think tank, the African Policy Center, which will conduct research meant to inform public policy, biased towards a Christian world view.

Dr James Magara presented on the think tank’s role in the Africa of the 21^st century. The problems of Africa Magara said, come down to the fact that we have been doing a lot of doing, unaccompanied by much thinking.

Adopted from Second World War America, think tanks are often independent organisations which set themselves the task to research and disseminate knowledge often with the aim of influencing the powers of the day.

"This attempt speaks to the wider challenge of Africa and more specifically Uganda. We are poor, backward and even hopeless, because we have not aggregated our resources, be it our labour, our markets, our political activism, our finances or in this case our thinking...

We see it all around us.

Look at the classical factors of production.

Barley a quarter of all land in Uganda is titled. This is a disturbing statistic because without recognisable property rights for the majority of Ugandan households it is difficult to unlock the full value of the land we live on. One way to unlock this land is to aggregate these holdings into bigger holdings either through acquisition or cooperation. It is economies of scale such as these that see the US with only three million farmers, down from 30 million after the Second World War, can be the world’s largest exporter of food.

The labour movement is thin on the ground in Uganda. While serving as a useful counter to capital, labour movements have had the unintended consequence of leading to greater efficiencies in the work place through innovation and automation.

And finally capital. Our lending rates are too high, we have too little capital to finance our own projects and our financial markets are shallow, restricted to a handful of products, leaving out the majority of consumers, because we have not brought together our monies in meaningful ways. We save less than 15 percent of our GDP in the formal banking system, while the east Asian countries at least double that figure. Aggregating capital in this way not only makes it easily accessible and cheaper but attracts even greater pools as well.

In the more developed western economies they have taken this a step further, with the creation of capital markerts, which supply patient money to their businessmen. All the capital markets on the continent do not have market capitalisation – the value of all the shares listed on an exchange, equivalent to that of the Brussels Stock Exchange (about $3.7trillion).

But they have gone a step further, and despite some recent hiccups, have been pushing aggressively to consolidate their politics. See the United States and the European Union. This allows them to not only consolidate their markets but to project their unified will allowing them to have more influence on world affairs disproportionate to the populations of their countries.

The disaggregation of our resources is by design and by accident.

 "And why have we failed to aggregate our resources? A lack of leadership or more specifically a dearth of leadership, which sees uplifting the wellbeing of their respective people as their raison d’etre...

Since independence through design or accident of history, our leaders have not been the sharpest knives in the draw. As a result they have found little use for knowledge or gone out to promote research and its resulting knowledge used to inform decision making.

In fact they have been willing consumers of other people’s thinking, the Bretton Woods institutions or Brussles or even Moscow, knowledge we cannot have been generated for altruistic purposes least of all for our benefit.

The African Policy Center has a noble mission, it will run itno a lot of roadblocks –opposition from established players or inertia from the intended recepients stuck in their old ways. But no one imagines the road ahead will be smooth.

WHO WOULD WANT TO INVEST IN UGANDA?

Last week the finance ministry announced the cancellation of the Rift Valley Railways (RVR) concession and took back the management and operations of the railway services.

The governments of Kenya and Uganda had privatised the running of the railway line from Mombasa to Kampala more than a decade ago, as a way to increase its efficiency and move more cargo onto rail and off the roads.

In correspondence The New Vision has seen between government and the concessionaire last year,  government alleged nine breaches of the concession contract among which were default on concession fees, failure to meet volume targets, failure to rehabilitate and operate the Pakwach line and failure to rehabilitate rolling stock.

In addition investment minster Evelyn Anite said the country had lost $700m (sh2.5trillion) in the course of the deal without elaborating further.

RVR responded to the claims showing proof of how they had met the requirements, which letter was summarily rejected and met with a letter announcing the cancellation of the concession in April this year.

A letter from RVR’s lawyers MMAKS advocates pointing out that the attorney general had issues an interim order prohibiting the termination of the concession until today, 16^th October 2017 was clearly ignored by the finance ministry. The interim order was to allow for an arbitration to proceed as stipulated in the contract.

Uganda’s action comes not very long after Kenya decided to cancel the concession on their side under similarly unclear circumstances.

"Understandably the whole affair has left a bad taste in the mouth of Qalaa Holdings. The Egyptian investment group was the main partner in the concession, which they salvaged from the previous operator South African Sheltham Rail Corporation....

Karim Sadek, Qalaa Holdings’ managing director of their Transportation Division says his company has invested $320m in the whole concession since 2010, he maintains that they have lived up to their side of the agreement and still thinks the Uganda side of the concession can still be salvaged.

“We have reputation and good working relations with the partners on this investment, which we would not like to see lost,” Sadek told the Business Vision.

Sadek says the concession was frustrated at every turn by the Kenyan bureaucracy, which made no effort to hold up their end of the Public Private Partnership (PPP) agreement, taxed them to support the road infrastructure and made financial demands on the operators that made the concession unviable.

“Uganda has been very helpful on many fronts we think going to arbitration can help us iron out any outstanding issues, paving way for the continuation of the partnership in Uganda,” he said.

He believes that an arrangement where they operate the Uganda leg, with right of passage to operate between Mombasa and Malaba would ensure that the efficiency gains that have been made so far would not be lost.

In hindsight Sadek now sees that the environment would have made it hard to operate under the best of circumstances.

“On the Kenyan side there has been great hostility from the management and total indifference from the policy makers, no attempt at all to make this deal work. We were aware that there were challenges in making the concession work but we had bought into the narrative that it was Sheltham’s lack of capacity that had failed the earlier attempt. We didn’t see the ecosystem failing us the way it did.”

He says despite the circumstances they managed to reduce transit times for good to Kampala from Nairobi to 15 days from the prior 21 days, while offloading wagons had been reduced to three hours from 21 days.

However government officials with intimate details of the process warn that government is taking too much for granted and could stand to lose not only money but international good will.

“The biggest issue was that we did not put in place an independent regulator who would independently monitor the concession and two, someone to who either party Qalaa or government, could refer any disagreements. The works ministry undertook to do this but they never got around to it.”

As a result Uganda Railways Corporation became the de facto regulator, which constituted a conflict of interest as they were also owners of the assets and there was always a sense that the old URC wanted to take back the service.

That being said he advised that, “Government needs to allow for prearranged mechanisms to dissolve the deal to take their course. The lenders for instance, we don’t hear anything from them and yet they have a first right to take over and even find another operator.”

"It is déjà vu all over again. We have seen this inability to work harmoniously with investment partners before...

We make the mistake of seeing investors as individual entities who we can mishandle as we please. But we forget – because we must know, that there is a whole ecosystem behind the size of investors we are looking for to bridge our infrastructure deficits or build factories or open service industries.

To begin with they come with partners, as a way to share risk, and then these often have financiers behind them and all these often have the backing of governments. So when an investment goes wrong for other reasons than that the project was not viable one is stepping on more toes than they see.

This is a very real challenge because as it is if we take back the railway we will still have to go back to the same lenders to get funding for our plans.

Something has to give.

"We cannot continue running rough shod over genuine businessmen and then wonder, why we keep attracting crooks or why we are not getting enough investments coming in or why we can not create the jobs we so badly need...

KENYA, THE TEETHING PAINS OF DEMOCRACY

Recent events in Kenyan have elevated the political scene of our eastern neighbour to the point of high drama.

With barely days to go to the October 26^th repeat poll opposition leader Raila Odinga announced he was withdrawing from the presidential race. Legally that would have forced the country’s electoral commission, IEBC to cancel the current process and call for new nominations.

The election that was concluded on August 8^th and which saw President Uhuru Kenyatta retain his seat, was thrown out by the Supreme Court in September and a fresh poll between the leading contenders ordered.

But within hours of Odinga’s announcement, the high court in Kenya allowed for other candidates who were in the initial race to get back on the ballot.

And while we were still trying to wrap our heads around what this all meant, a senior elections official Roselyn Akombe, threw in the towel on Wednesday, saying that there was no way a credible election could be delivered under the circumstances.

As if to back her up the  IEBC chief Wafula Chebukati said that while his team was ready to oversee the elections next week, he cast doubt on whether a free and fair election could be held given the pressure from both sides of the political divide.

And all this was happening under a cloud of violent demonstrations, where several people have been killed in the capital, Nairobi and in Kisumu, Odinga’s western Kenya stronghold.

"The Kenyan experience is the saddest thing to watch unfold. Especially as barely a decade ago they descended into a post-election bloodletting that accounted for more than 1,000 lives and saw tens of thousands more displaced from their homes....

Analysts think there may be more casualties if violence erupts again this time. In the last decade despite the massive infrastructure projects and the economic growth the country has enjoyed, the inequalities in the country have only widened. An immediate outcome of this is that there is an army of unemployed youth roaming around with nothing to lose and are easily incited to widespread, indiscriminate and senseless violence.

It is plain for anyone to see that Kenya is going through a painful transition from the big man politics of founding father Jomo Kenyatta and his successor Daniel arap Moi’s time to a more democratic society where power has been devolved away from the center and people are no longer cowed from expressing their views and choosing their allegiances.

The four decade long rivalry between the Kenyatta and Uhuru family’s only serves as useful backdrop for the changing realities in Kenya.

Long standing tribal fissures are coming under strain as a more educated and connected youth take their place in running the affairs of the country. Historical economic contradictions are being challenged as old money based on land and industry, is being challenged by new fortunes being made in services. The old political class is giving way to the new, in a more than messy progression that while it is unlikely to see the country impode on itself, will leave Kenya badly scarred by the time the dust settles.

And a constant thread running through all these changes, and even accelerating them, is the increasing exposure of the everyday Kenyan through internet connectivity to the outside world, raising their expectations of their aspirations, leaders and country.

The history of the world is peppered with examples of the violent conflict between those seeking to maintain the status quo and those looking to overturn it, in response to new realities.

With the benefit of hindsight we wonder why the key players of the time did not see the oncoming upheavals, whose signs were there for everyone to see, and maybe avert disaster?

Easier said than done.

"When you are in the thick of things, multiple variables and actors at play and fighting for survival, the big picture, the long view, even legacy are abstract concepts....

Kenya is staring into the abyss. For theirs and all our sakes we hope level headed minds prevail to pull them back from the edge.

SPORT AS AN INDICATOR OF PROGRESS

Last week the Rugby Cranes qualified for the 2018 Seven-a-side World Cup, winning all their matches against teams from Tunisia, Morrocco, Ghana, Zambia in a dominant display that was able to overcome a hiccup against Zimbabwe at Legends Rugby club in Naguru.

A few meters away at the Lugogo Indoor Stadium City Oilers defended their title as FIBA Zone V Club Champions to book a place in the African Club Championships in December.

While the Uganda Cranes fell short of keeping their hopes alive for a first ever berth in the Soccer World Cup in Russia next year by drawing against Ghana, they showed enough presence to keep the promise that it’s only a matter of time before they appear on the world’s greatest sporting stage.

"In recent years our sportsmen have been enjoying a rich vein of form. Arguably we are on the cusp of regaining our past reputation as a sporting nation....

For a country to be a sporting nation two ingredients must be in place – a deep pool of talent and the organisation to channel that talent into glory.

Our country’s rich ethnic mix ensures that we have a deep talent pool, we don’t have to import our talent. The playgrounds of schools and neighbourhoods are bursting with talent.

A nationwide public school system and network of public sporting facilities was the foundation on which the early successes of the 1960s and 1970s were built. However these fell into disrepair starting in the Idi Amin era and have continued downhill ever since.

This meant that the early promise of pioneers like boxers Eridadi Mukwanga, Leo Rwabogo and John Mugabi and hurdler John Akii Bua, saw no follow through with no younger athletes coming in the wake of their pioneering steps.

It is possible that just like Kenya, whose middle distance athletes burst on the scene around the same time, that now we might have been a power houses in one discipline or another.

Almost four decades after the glory days, we are seeing a resurgence in sports that in some way is hard to reconcile with the facts on the ground.

Our public schools no longer serve as a pool for sporting talent and sporting facilities from Arua to Soroti from Gulu to Kabale have fallen into such disrepair as to be almost irredeemable or worse still have been disposed of to the highest bidder and only remain as blurry memories in the minds of old men and women.

In addition sports has not enjoyed a big budget from the state in the last four decades as more pressing priorities of infrastructure reconstruction and the resuscitation of social services took precedence over supporting the “luxury” of sport.

What is happening now that is different is that we have come to the realisation, like the rest of the world, that sport has great value as a vehicle for commercial interests.

So our sports men have dusted up the remnants of our sporting infrastructure, brought them up to a reasonable standard and started practicing again. Some benefactors have supported these budding sportsmen, not always in a very structured way and the results are beginning to show.

Which bring us to the second condition for sporting success – organisation.

"Given the above scenario it is clear that recent success has come inspite of many shortfalls that still remain in the sports ecosystem. To sustain or build on this success our sports administration have to become more organised. As it is now our sports are run by volunteers at best and self-seekers at worst who on one hand are in the job for the “love” of the sport or looking to make some quick killings – per diems and sport equipment grants they can then flog on the open market for a few shillings...

This organisational capacity is important. We have it backwards when we think that we are disorganised for lack of money, while actually we lack money because we are disorganised.

It comes as no surprise then, that our best funded sporting associations or events are the more organised ones, but even in those the funding taps would have opened even more had they been even more organised.

A winning sportsman cannot be created in isolation of his surroundings that’s why the countries of the Eastern bloc are floundering today  despite their history of great sports achievement.

WHAT IF UGANDA HAD DONE THINGS DIFFERENTLY AT INDEPENDENCE

Fifty years ago at independence the economic challenges of the founding fathers were clear – to accelerate and sustain economic growth and spread the benefits around equitably.

At current prices the GDP per capita of Uganda was $62 and the total economic output was $449m, according to World Bank figures. The economy was biased towards agriculture with just over half of all GDP coming from agriculture with services accounting for 36.18 percent, industry 12.61 percent and manufacturing 7.56 percent.

The structure of the economy has changed since. In 2016 services assumed pole position accounting for 55.8 percent of GDP, agriculture’s share plummeted to 24.4 percent, industry is up to 19.7 percent and manufacturing saw some growth to 8.8 percent.

During the same period the economy has grown to $25b from $449m in 1962. The population too has grown more than fivefold to 41.5 million from 7.2 million at Independence.

"Clearly one goal has been met with economy growing about 55-fold during the period or at about 7.7 percent growth per year on average. The argument can be made that the economy would have grown even faster were it not for the chaos of the 1970s and 1980s....

Kenya which has been relatively stable during the same period saw its economy grow more than 80-fold to $70.5b in 2016 from $868m in 1962. This makes for an average annual growth of about 8.4 percent.

A 0.7 percentage point difference between the growth averages may look insignificant but when you stretch over half a century it’s the difference between the size of the Kenyan economy doubling six times while ours only doubled five times.

So we not only started from a lower base but also because seeing as our economy fell below 1970 levels by 1986, new growth was only seen around the late 1990s, when the economy recovered to its previous heights.

The economic prescriptions in 1962 would still obtain today – increase agricultural production to not only raise rural household incomes but also to serve as a base from which to launch industrialisation; boost school enrollments to prepare the future workforce for industry; expand the infrastructure to support these ambitions among other things.

Even if Idi Amin had not upset the apple cart with his coup in 1971, we were already toying with centralising the economy – a disincentive for private initiative, and like other sub-saharan African countries would have taken us till the 1980s to liberalise the economy and attract private capital.

The motivation was purely political and not based on hard economics. The idea that the government should control the commanding heights of the economy in order to foster development for Ugandans rather than continue to feed the “imperialists” insatiable appetite for profit.

What ended up happening was mismanagement and corruption as government used state enterprises as avenue for patronage and looked the other way as their allies gutted them for personal gain.

Using the same method we put a halt to productivity gains in the agricultural sector to the point that the proportion of agriculture to GDP suggests not only that we are not producing very much more than we were per capita at independence but also indicates that we have failed to launch a credible agro-industry sector.

Kenya probably shows what would have happened to us had our momentum not been interrupted by the messy 1970s and 1980s.

But even better is the island nation of Mauritius, which had a smaller economy than either Uganda or Kenya at $213m. With no natural endowments except the weather and the soils, it has grown its economy to $12.2b in 2016. The World Bank’s figures for Mauritius GDP start in 1976 at $706m, so it safe to say that 14 years prior their economy may have been around the size of Uganda’s at Independence.

Given the figures the Mauritian economy grew by a factor of 17 in 40 years from 1976 to date, representing an annual average growth rate of 7.38 percent.

But while the size of their economy is nothing to write home about the per capita GDP of $9,627 – their population has grown to 1.2 million from 700,000 in 1962, set them apart from most on the continent.

How did they do it?

"The graduated from a monoculture economy that grew only sugar, went into textile manufacture —importing cotton from Madagascar and further afield, following the same principle became a hub from small industry by exploiting Export Promotion Zones, promoted themselves as a premium tourist destination – they have more than a 300 five-star hotels, and have set themselves up as an offshore financial hub – they have more deposits in the banks than the GDP of the country....

Maybe it helped that they were an island nation isolated from the madness of the continent, but clearly there was a clearness of purpose by its founding leaders in 1968, which allowed even encouraged  private industry and a democratic traditional that has ensured the sustainability of their economic model.

UNDERSTANDING A MAD SEPTEMBER

It might not be the wisest thing to try and analyse the events that occurred in parliament this week, seeing as emotions are still raw, but when is it ever a good time to have hard conversations?

This week we saw unprecedented scenes of rowdiness and outright violence in parliament, surrounding the proposed amendment of the constitution to lift the age limit, beyond which any one can contest for the highest office in the land.

First on Tuesday, when triggered by suspicion that junior minister Ronald Kibule had entered the house with a gun, a full blown fist fight broke out, the likes we have only seen on TV in Asian and Eastern European parliaments.

A black out on live coverage of the house should have warned us that worse was to come on Wednesday.

Security agents flooded the house to eject MPs who had been suspended from proceedings by speaker Rebecca Kadaga for their role in the previous day’s fracas. When the footage finally came through revolting MPs were seen trying to fend off security with microphone stands from atop tables and chairs.

"The theatrics were sad to watch easily understandable, but not justifiable, when seen against the political reality of our time...

In their seminal book “Marketing warfare”, Al Ries and Jack Trout likened marketing strategy to warfare.

But first they pointed out that the real battle in marketing was not about beautiful marketing campaigns or even selling more goods, than the competition but about dominating or at least carving a niche for oneself in the perception of the target market.

This is important because for people being creatures of emotion, when perception comes up against fact, perception wins. This has a lot to do with the way we make decisions, forever tempted by shortcut a tendency, which has its roots in our evolutionary struggles.

Back to Ries and Trout. The authors argue in the market’s perception there are four distinct positions to hold.

At the top of the pile is the market leader, whose main preoccupation is to fend off all comers using all the resources at their disposal --- capital and talent. Then come the challengers, whose obsession should be only to dislodge the market leader. Then there are those who don’t have the resources to challenge for the top, their mission is to occupy uncontested ground with the hope they can grow strong enough to launch a challenge on the summit too. And finally there are the guerrillas who carve out niches for themselves that neither of the aforementioned are really interested in and seek to dominate these niches.

These positions are not set in stone. A misstep from the leader can see him tumbling down the ranks or a sudden interest in an occupied niche may see a leader dislodge a guerrilla.

Seen in this context to understand this week we have to set aside moral judgements and see it as yet another step in the fight for the perception, hearts if you like, of the watching public.

On the one side is the ruling NRM, confident in its strength in numbers and ability to deploy the force of the state, has shown itself ready, and willing, to fend off any attacks on its dominant position. The ruling NRM cannot afford to show weakness but at the same time has to restrain itself. No one likes a bully.

"On the other hand are the opposition weak in number and organisational ability, have sought to project the perception that despite their disadvantages, they can threaten the status quo and that the fight they are in is worth throwing the rule book out of the window for. Their hope is to evoke public sympathy for themselves, force the government into disproportionate violence  and  eventually trigger a popular uprising a la the Arab spring....

I would like to think that the fighting in the house was not planned, especially on Tuesday, but as former heavyweight boxer Mike Tyson said, “Everyone has a plan till they get punched in the mouth”.

It is too soon to say whether there has been a shift in public perception away or to either party – it’s not one way traffic, but one can safely say that the repercussion of this one mad week in September, will reverberate through time. For better or for worse.

IMF FROWNS ON UGANDANS PILING INTO REAL ESTATE

The International Monetary Fund (IMF) reading from an analysis of Ugandan’s investing habits since 2008 point out that we are investing more and more money in the least productive assets in the economy, namely real estate.

The IMF says investment in real estate has grown about 70 percent last year from over 50 percent nine years prior.

The boom in real estate development has been one of the main drivers of economic growth over the last two decades or so.

This explosion has brought Mukono and Entebbe closer to Kampala and has also swallowed up the previously outlying areas of Luzira, Namugongo and Nansana.

In the city center it has turned the streets beyond Kampala road into a warren of high rise buildings that have changed the daylight hours.

"The sad thing though, is it seems that bubble has done its course. A lot of space goes begging – in the city and in the residential areas and the rise in land prices has slowed or reversed altogether. In its wake it has left a trail of tears within households and among lenders....

How do you know you are in the middle of a boom? When anyone and everyone can make money, when everyone looks like a financial genius, you know you are slap bang in the middle of a boom. You also know it when no one believes it will ever end, that the good times will keep on rolling on.

But what has made our real estate boom particularly nasty is that a lot, if not most of it, was fueled by hot money, money got from less than legitimate means. The signs are everywhere you look.

How do you have a five story building on prime land in the city unoccupied for going on three years now and it has not been attached by the banks? How do you build apartments in the middle of the slam and still quote top dollar? How do you buy a house at multiples of the going rate for comparable property not only in a Kampala but even in the region?

In an environment of high mortgage rates, high cost of amenities and low purchasing power, the genuine real estate developers have found themselves on the sidelines having to sing for their supper. 

It would be funny if it wasn’t sad.

However the market has a way of correcting itself. When there is little supply it creates an incentive to invest. The trick really is to be at the beginning of the trend before it catches on and everybody piles in, then you can sell for a handsome profit and then either move on or wait for the inevitable burst of the bubble and buy at the bottom of the cycle.

Easier said than done.

 A cursory look at the mathematics shows that even at the best of times the returns are not as dramatic as they are hyped to be.

If you built a two-bedroomed apartment for sh100m and depending on location, you may get up to a million shillings monthly or sh12m a year. But this is the top line or gross revenue, this before you have removed costs you have incurred over the period. And god forbid you have taken out a loan to finance the build.

Of course others have decided to build and sell, a higher level of complexity and risk than the rental market. A friend once who was in the build-to-sell business learnt that it doesn’t make sense to sell finished houses because the buyers will talk you down on any number of things – they don’t like the burglar proofing, they don’t like the tiles, the kitchen is too small, the ceiling is too low and on and on. And each complaint means you might have to climb down from your earlier price.

There is money to be made as a property developer, but it helps if you have access to cheap money and can manage scale.

But real estate has a place to play in our portfolios. Real estate can be a store of value, preserver of capital to the extent that if you had the money hanging around you might blow it and have nothing to show for it afterwards.

It can be the end of your wealth accumulation cycle. That you make your money in trade and commerce and finally lock it down in real estate.

"And that was what the IMF was getting at. There are better returns in trade or industry. The attraction of real estate is the myth that you will just build your units rent them out and see the money rolling in with little effort. While with setting up an enterprise of the other kinds will need day to day supervision and planning that sounds like too much work...

Clearly the sustainable solution is for all of us learn how to do business and not get seduced by the possibility of the quick and easy return.