OF UGANDA’S GROWING DEBT BURDEN AND OTT

This week African leaders trooped to Beijing, China for the third edition of the Forum on China-Africa Cooperation (FOCAC) .

FOCAC is aimed at strengthening relations between the world’s latest super power and our continent.

A relationship that has accelerated the development of infrastructure – energy, transport and communications on the continent but which has drawn a lot of criticism from the traditional development partners who argue Africa is being sucked into a debt trap.

In the same week, the Uganda Revenue Authority (URA) reported that had collected just under sh30b in the month of July from the new mobile money and social media taxes – sh22b and sh4b respectively.

The two events are related and have caught our loudest commentators in a contradiction.

"The reason China’s influence is growing on the continent is because of the seeming bottomless purse they carry around to finance multi-billion projects in the aforesaid sectors. Projects, which it is in little doubt are badly needed, if the continent is to transition to the next stage of development...

To illustrate it is expected that the new National Cement Ltd and Hima plants in Tororo will require between themselves an additional 20 MW to power their operations. The Osukuru Industrial complex in Tororo, which will house a phosphate fertiliser, sulphuric acid and steel manufacturing plants will need at least 12 MW. Power we scarcely have now.

This is before you factor in that only about 20 percent of the population is connected to the grid.  To connect at least half the population you have to at least double our existing generating capacity of 850 MW.

Similarly in roads we have about 5000 km of paved road but need at least three times that number to catch up with next door neighbour Kenya. And they too have a deficit of paved road.

This great need set side by side with our low revenue collection in relation to our GDP, about 14 percent against a Sub-Saharan Africa average of 16 percent makes it clear that to the extent that our revenue collections are lacking we will have to borrow to finance the things we must do.

The challenge of this government, and many on the continent is that their economies are largely informal, with most workers and businesses outside the tax bracket.

"Seduced by easy donor money – it is easier to fly to western capitals to sign up loans (per diems all around) than to negotiate with population to pay tax, African government have paid lip service to widening the tax base...

And for good political reason.

The recent uproar – concentrated on social media about paying OTT, is a good example. And so have attempts to levy taxes on property, held by a few urban elite. And any attempt to collect more tax for that matter.

Given a choice between antagonising certain constituencies and negotiating loans, governments often choose the latter.

Critics argue of course that the taxes they pay are being swindled by pudgy fingered officials, who then proceed to enjoy their ill-gotten wealth right under our noses.

There is no doubt that corruption is a blight on this government’s record, no matter the pragmatic reasons for letting it run rampant.

But simple arithmetic suggests that we pay so little tax and government in its attempt to do everything, spreads these little monies so thin as to not be effective at doing anything.

The sh32trillion budget this year comes down to spending about sh800,000 per Ugandan for the whole year. When broken down even further the government will spend sh57,000 on each Ugandans health needs and sh53,000 per Ugandan on security.

And that is even before the thieving officials have curved off their pound of flesh.

And how much do we Ugandans contribute to this princely sum in taxes? Sh400,000 per person per year.

"Interestingly the critics of increased borrowing from China are most probably the harshest opponents of any tax changes. They are keen to eat their cake – pay as little tax as possible, while demanding first rate services from government, that is, have their cake....

My two cents on the subject. We don’t want government to tax us more because even with corruption service delivery will improve making it hard to unseat them. And we oppose the increased borrowing from China for the same reason. Other racist sentiments aside.

OF OIL AND THE LACK OF BEEF IN UGANDA

It isn’t news or it shouldn’t be. First oil will not be seen by  2020 as earlier expected.

The rule of thumb is that for first oil it takes three years from the signing off of the Final Investment Decision (FID). The FID comes after commercial viability of the reserves has been ascertained and the Front End Engineering & Design (FEED) of the necessary infrastructure has been done. This helps determine the amount of investment needed.

"Given that we are at the tail end of the year, if the FID can be managed by December 31^st then we can talk of 2021 at the earliest for oil to flow...

But fixating on first oil as a signal for the oil money to start flowing is  wrong.

During a recent New Vision function to consult stakeholders on the progress of our Oil & Gas Journal, a Tuesday pull-out, that has been running for almost a year now, Petroleum Authority boss Ernest Rubondo said tis thinking would be to miss the boat entirely.

To illustrate Rubondo told of the supplier to the oil camps who was in a dilemma because there was not enough beef of the required standard in Uganda to meet the camps’ demand in a year or so.

I had to do a double take.

Not enough beef in Uganda for a few hundred people in the oil fields?

As it turns out there is only one company in the country that can supply the amount of beef, processed to the quality that they demand in the country, but even it will not be able to satisfy the increased orders.

Our regular abattoirs do not meet the health standards to supply the oil camps. Because think about it if I am hiring the top oil geologist, or whatever they call them, to come all the way out to God forsaken Uganda and even further afield to western Uganda, to help me make hundred million dollar decisions, I can’t afford him reacting to the food in the area. So the food he eats under my care has to meet the highest standards and more.

So if we don’t have enough meat, how can we have enough fruit, eggs or even drivers and house help to support the industry.

About $20b (sh70trillion) or double this year’s national budget, is going to be spent in setting up for first oil over the next five years.

The investments are broken up into oil production, which for now means preparing the Tilenga and Kingfisher oil fields. The commercialisation of the crude that is produced in these fields, whose biggest projects are the pipeline and refinery. In addition there are the investments to support the above which include the Kabaale airfield and the “oil” roads.

We have neither the expertise nor the experience to play a meaningful role in the financing or construction of the above. But in the provision of services like hospitality & catering, security, logistics and even waste management it is possible that local companies and individuals can participate meaningfully.

But Rubondo pointed out that whether we have the capacity locally or not the functions will still be carried out with or without us...

Like the beef supplier who was willing to import the beef to cover the deficit of local beef, the industry will find people from outside the country to do the job.

The point is that to take advantage of the billions of dollars that are set to flow through the industry you have to be set up and ready long before first oil.

This involves formalising our businesses to take up contracts or be attractive to foreign partners wanting to work here. Relatedly it means stepping up the capacity of our companies financially and in human resource in order to play.

It has been an interesting journey since commercial viability of our oil reserves was established in 2006, 12 years ago. Some people thought they could stampede us into producing oil in three years later, in the absence of a legal framework or local capacity.

"Government’s insistence that we do everything properly, even if it takes forever has been the right way to think. In fact reasonable delays will allow us be better prepared to maximise the opportunity that comes with the industry for our local benefit...

Forget first oil. Be ready now. If you are not, it will be too late by the time the first oil starts making its way down to the coast.

THE SKY IS NOT THE LIMIT FOR NSSF

This week National Social Security Fund (NSSF) announced it would pay out a record 15 percent interest on member savings.

The highest it had ever been was 14 percent a decade ago.

The good performance was anchored by an improvement in general economic growth, a rebound in regional markets, which was boosted by shilling depreciation during the period. In creased member contributions helped as well.

The Fund had revenues of sh1.6trillion before member interest and taxes, compared to sh912b last year and member contributions during the year passed the trillion shilling mark as well to come in at sh1.05trillion, up from sh917b.

"What was interesting in that last number was sh500m of it came from a new contributions stream, the voluntary contribution scheme, targeted at the informal sector and those companies that do not fit in the minimum of five employees’ bracket liable for mandatory contributions...

Given the new opportunity one can expect that these contributions are going to grow by leaps and bounds. Especially once people realise that NSSF is offering the best returns on savings of any financial institution.

Some people have already seen the light. NSSF boss Richard Byarugaba during the Annual Members Meeting on Tuesday revealed that there is up sh22b being held in the Fund by retirees looking to take advantage of the lucrative interest payments.

There are still some concerns about NSSF’s lopsided portfolio, which is weighed heavily towards fixed income assets, and whether despite the stellar interest the Fund is offering, there is enough protection against the tumbling shilling.

As it stands now the fixed income part of the portfolio, mostly treasury bills and bonds account for 75.33 percent of the portfolio, while high is an improvement from last year’s 77 percent. The equity portion – share in listed and private companies, increased to 18 percent from last year’s 16 percent. While real estate’s share of the portfolio slipped to 6.53 percent from last year’s seven percent.

The concentration on fixed income leaves the portfolio exposed to averse movement in the yields of these instruments.

The management is aware of that and have a strategic plan to shift the balance to better diversify the portfolio but also to take advantage of better returns in equity, which are proven in a growing economy to have the best returns in the long term.

The challenge of course, is to find investable projects locally which can move the needle in a portfolio as large as NSSF’s, which almost touched the ten trillion mark last year.

Rebalancing the portfolio cannot be achieved with snap of a finger but new real estate projects in progress and in the pipeline, planned share offers after more than a five year hiatus and planned in to infrastructure investments in partnership with the government should help the cause.

On social media this week someone pointed out that while the 15 percent is laudable it might not mean much in real times.

The critic showed that If he Shs60m last year with the dollar exchange rate at Shs3,000,  he would be worth $20,000. With the 15% interest, that would now be Shs69m. But if the dollar rate is now Shs3,800, the dollar figure for his enhanced savings would now be worth $18,157 with my juicy interest. It is actually a 9.2% reduction in my savings after interest when converted to dollars.

It’s hard to argue with the math. But has been pointed out to me recently, NSSF savers or any contribution schemes to which employers contribute, are way ahead of the game.

"Of sh60m the critic uses an example only a third of it is actually savings that come from the employees’ pocket. So from the time your account is credited you have already locked in a 200 percent return – the employers’ contribution being pure profit, accounting for any reasonable fluctuation in shilling value...

Of course the law and NSSF can help by finding more dollar denominated investments so that our returns can move in step with the dollar movements.

The real positive is that NSSF seems to have turned the corner on its poor governance record and has become a more trusted institution. The management needs to hold on to that good will and the even the sky is not the limit.

ETHIOPIAN AIRLINES HAS GOT IT RIGHT

This month Ethiopian Airlines announced a profit of $229m (sh800b) for the year that ended in July. They are the only profitable airline on the continent.

But what was making news this week was the news that Ethiopian Airlines is signing up partnerships across the continent to set up or take a stake in existing airlines.

According to the reports Ethiopian Airlines has taken significant stakes in regional airlines, in the case of Mozambique Airlines has full ownership. Chad, Guinea, Malawi, Mozambique and Zambia have already put pen to paper. It is reported that Djibouti and Nigeria are on the verge of signing on.

"As if it was not clear yet what Ethiopian Airlines strategy was, at the beginning of the month they signed up with worldwide courier DHL with a view to making Addis Ababa the main logistics hub on the continent...

Ethiopian Airlines’ ambition is to become one of the biggest airlines in the world and to that end they intend to double their fleet current 108 plane fleet in coming years. The current activity on the continent is aimed at that target. They are off to a good start, last year they flew 10.6 million passengers to 125 destinations around the world.

Started in 1945, the airline, regardless of regime, has been run along strict corporate lines and its expansion through partnerships around the continent is the logical conclusion seeing as the airline covers the most destinations on the continent.

Already Ethiopian Airlines counts in addition to Bole International Airport in Addis Ababa, Malawi’s Lilongwe international airport and Togo’s Lome Airport as its hubs.

They more than any other airline, have reached a stage where the colonial boundaries that balkanise the continent are an inconvenience that can, and must be transcended. But they are also showing that more than high sounding speeches, trade and commerce is what is going to bring the continent together and ensure it takes its rightful place at the high table of world affairs.

In truth a continental or even regional airline will make more economic sense and therefore ensure long term viability.

Their growing capacity also means that they are now developing secondary industries like training, aircraft maintenance, which they have been doing for themselves and other airlines for years and are soon embarking on making parts for airlines. As a spin off they are already considering setting up an aerospace industry.

"Given the history of the airline, run on sound corporate lines and with a long term strategic view of the industry both locally and internationally, it is a safe bet that they will take advantage of this first mover advantage to cement their dominance of the continent’s skies....

Especially as South African Airways and Kenya Airways are floundering under the legacy of previous poor governance set ups as and Egypt Air is failing to get any traction.

Ethiopian Airlines serves many lessons for parastatals – it is 100 percent government owned, across the continent.

One, that the parastatal is created to serve clients, who may not necessarily be nationals and is not set up to serve the interests of a small connected clique.

Secondly, that for long term viability, profit cannot be a by the way. Like any business, cost effective management is critical. As it is now Ethiopia is suffering a foreign exchange crunch because of the huge debt repayments that are coming due, but the airline goes on as usual. It does not rely on the benevolence of the Ethiopian state to stay afloat.

And finally great endeavours take time. Ethiopian Airlines is in its 73^rd year. What we celebrate today has come after years, no decades, of disciplined action anchored by strategic thinking. The airline did not get where it is through wishful thinking but through a brutal and honest assessment of the marketplace at every turn of their history.

Assuming they continue as they are, but most likely they will only get better, it is not a stretch of imagination to foresee that they will be the only airline worth talking about in a decade or two in Africa.

Word on the grapevine is that they had actually offered to help Uganda set up its own operation. But the model they had sold us was one where the CEO and finance manager would be their appointees. Our people did not find palatable, for obvious reasons.

NEWS – NSSF IN RECORD 2017/18 INCOME, MEMBERS LOOK FORWAD TO GOOD INTEREST PAY OUT

KAMPALA – National Social Security Fund (NSSF) earned a record sh1.6trillion before members’ interest and taxes in 2017/18 a 77 percent jump from last year’s sh912b due to an increase in investment income and higher member contributions, the financial institution has said.

The Fund’s assets under management rose to sh9.98trillion up 26 percent from the same time last year when Sh7.92trillion was reported.

“Uganda experienced improved economic growth of 5.8 percent compared to 3.9 percent the previous financial year, which meant that generally, the investment environment saw significant improvements at macro level, “ NSSF boss Richard Byarugaba said in a recent news conference.

“We were also aggressive in the market, seizing opportunities present by growth in regional markets especially in Uganda and Kenya.”

Growth in income was buoyed by higher interest income and strong recovery in regional equity markets. The shilling’s depreciation during the period also boosted investments in the region.

“For the first time in in the Fund's history, we recorded over a trillion shillings in collections from our members. This is a result of steady rise in compliance levels, now at 81 percent over a three months’ period, and contributions from the Fund’s voluntary members,” Byarugaba reported.

The Fund, the largest in the region by value, saw contributions grown 14 percent to Sh1.05trillion from sh917b the previous year.

Costs continue to be kept under control with the cost to income ratio declining by a percentage point to 12.6 percent from the previous 13.4 percent. Costs of administration remained unchanged at 1.3 percent of total assets.

Benefits pay out rose to sh360b from Sh278b in 2016/17.

Members eagerly await the announcement of the interest on their savings which will be unveiled at the 6th Annual Members meeting set for Tuesday 28^th August in Kampala. The Fund has committed to paying at least two percentage points above the 10 year inflation rate moving average.

Last year the Fund paid its members 11.23 percent.

ENDS.

MAKING SENSE OF UGANDA POLITICS

So if you jetted into Uganda and asked “What’s Going on?” depending on who you were talking to you would get two answers that broadly follow these lines.

In no order of preference.

Story One – The ruling NRM is facing an existential threat. Their unpopularity is growing. 

Honourable Robert Kyagulanyi alias Bobi Wine is perceived as the lightning rod for this dissension and his challenge should be snuffed out. There is a critical mass of people who want a change away from the NRM and in this situation of growing inequality and economic sluggishness, is the time to strike.

Story Two – The opposition is scrambling for relevance. They need to create a state of tension literally or at least create the perception of it. Having failed to make political gains in the house or at the local government level this is their last ditch attempt. Bobi Wine committed a crime, his political importance or not, and he is not such a major factor nationally as the opposition wants us all to believe.

As you are chauffeured from the airport both narratives play out.

On the one hand you can see evidence of a poor country. The standard of housing. The unpaved highway. The small enterprises by the road side. The age of the cars, trucks and mini-vans. The street kids with their emaciated, supplicating hands once you reach Kampala. You wonder about all those gun totting policemen.

On the other hand you can’t help but notice the bustling energy of the people. The Entebbe expressway, while pretty standard engineering, the green that straddles it takes your breath away. 

Kampala city when you get to it seems organised. And thankfully you see little evidence of a personality cult being rammed down the people’s throats by the president of the day.

As with everything in real life the truth is a mixture of both. And is why we are where we are today.

"When history is written all we are going through now, the uncertainty and sense of confrontation will, if it makes the history books, be summarised in a sentence. Something to the effect that growing unrest in response to a slowing economy and long administration of the NRM set in motion  a series of events which led to blah, blah....

Or that in the third decade of the NRM administration protests intensified but were soon neutralised as the economy improved and the government focused on narrowing the economic inequalities by curbing corruption and increased investment.

Which of the two scenarios will play out history will tell.

The point is that we are living history, which while it will be abbreviated into a single line in the textbooks it will cost time, lives and property. Not forgetting reputations and ambition. We are in the forest, we can’t see the forest for the trees. We can’t see the broader picture because we are too enmeshed in the detail.

But if history is to be our guide and assuming prosperity and democracy are to be the end result, we probably aren’t even seeing the light at the end of the tunnel yet.

A lot of things still have to go right.

"The economy needs to shift more towards industry, which is our hope of employing more of the tens of thousands of youth flowing out of education system annually. When we have the majority of the population gainfully employed in the economy, our politics will change. It may not be that we will have the traditional stratification of labour versus capital, but hopefully there will be some cross cutting issues about the economy or environment that will transcend our tribes and religions, that will act as the bedrock of a new political order.

But before we get there the drama will continue fuelled from within and without, stocked by the political actors desire to remain or gain power. Depending on the economy the youth bulge will either peak in a decade or two or continue to mushroom, with real consequences for our politics.

Or it could all go wrong and we descend into a dystopian bleakness from which there is no return.

Only time will tell.

RWANDA OR THE REST OF THE EAC, WHO IS RIGHT?

This week the US followed through on a threat to suspend Rwanda’s duty free exports of textiles to its shores.

The suspension comes following a demand by the US earlier this year for the East African Community (EAC) to shelve imposing higher tariffs on second hand cloth imports. EAC countries had resolved to ban the importation of second clothes by 2019, starting by increasing taxes on their importation.

The EAC is a major second hand clothes market accounting for 13 percent of global imports of second hand clothes or about $274m (one trillion shillings) in 2015. So a halt to this trade would move global markets in the second hand clothes industry.

US lobby group Secondary Materials & Recycled Textiles Association (SMRTA) did not wait around to see what would happen, petitioned the office of the US trade representative. They argued that this ban would cost up to 45,000 jobs – a figure that has not been verified, and $124m in exports from the US.

Of course they did not mention that the reason the EAC was going down this path was a means to resuscitate the textile industry, which employed tens of thousands a few decades ago, as a means to climb out of poverty to the level of middle income economies.

"Uganda, Kenya and Tanzania capitulated and will not been banning second hand imports. Rwanda stuck to its guns and hence the suspension...

On a purely technical note the US is within its rights to demand that if it allows free access to its market they should expect the same. But if there was any genuine desire to uplift the EAC out of poverty then the current action paints another picture of what their “development” agenda is.

For development – the general improvement in the people’s welfare to happen two things must happen – Economic growth and improved household incomes.

Both have to happen because you can have economic growth without a general rise in household incomes, but it is near impossible to have an increase in people’s incomes without economic growth.

The mere building of roads, dams and railways can move the needle on economic growth. It is then how efficiently this infrastructure and the institutional capacity surrounding is employed to improve the business environment that creates jobs and therefore raise incomes.

"Viewed against this is Rwanda correct to stick to it guns? President Paul Kagame also argues that it’s a matter of dignity, how can Rwandans dress in the cast offs of other people? Or Kenya, Tanzania and Uganda showing greater pragmatism in forgoing internal markets for the promise of the huge US market?...

Kenya already exports $600m worth of textiles to the US annually, which is not a figure to thumb ones nose at especially for little economies like ours. Their local industries have been totally decimated by the second hand clothes market. They are probably calculating that if they can get a firm foothold in the US market they will be able to increase investment in their textile industry more than if they had tried to sate the local or regional markets.

Rwanda on the other hand is thinking that if it can protect its local market it can serve as a launching pad into export markets. Also that in the event of fall outs with the US or European markets their local market while not absorbing all the output of their industries would serve as a useful buffer, keeping the industry afloat as they wait for a change in relations. But given that its neighbours have done a U-turn on banning second hand clothes, Rwanda cannot count on its neighbours as market for its textiles and apparel.

It will be interesting to see how these two scenarios unfold in coming years.

That being said the US market is not one to pass up, its challenge is the volumes and strict timelines it demands of its suppliers. The Kenyan press recently reported that the textile exports to the US were beginning to slip because they clients were demanding increasingly shorter turnaround times from time of order to time of delivery.

"As a country if we are going to take maximal advantage of the Africa Growth Opportunities Act (AGOA) – since we have ceded out internal market to the second hand clothes industry, we need to check the whole value chain, from research into high yielding seeds, to farm practices, post-harvest handling and manufacturing to the logistics of getting it to US markets....

This is important because while second hand clothes trade will show up on GDP growth figures it will not create as many jobs as a well-oiled cotton to textile industry would, hence there will not be a significant increase in general income levels.

Economic growth is good, desirable even critical but wit will mean nothing to us if it does not show up in our wallets and purses.