THE EBB AND FLOW OF THE BUSINESS CYCLE

Last week I drove in to the central business district during rush hour for the first time in years – I can’t be bothered roaming round looking for parking.

My initial fears of not finding parking were proven right. I could not find parking to save my life. But what was more shocking is that this was not because of too many cars in the city, but a lot of it has to do with boda bodas colonizing parking spaces.

It’s crazy. But I shouldn’t have been surprised. On any given days thousands of boda bodas are wheezing up and down our streets, providing a useful service, but mostly making a nuisance of themselves and general menace on our roads.

I was shocked to learn a few months ago that Ugandans are the continent’s largest importers of the motorcycles – more than 2000 a month at last count, fueling the boda boda industry.

"This is a bubble ready to burst. If you look closely, easily half the boda bodas are without passengers, which suggests the supply of bodas is fast or has already outstripped demand. We know this bubble is on its last gasp because everyone thinks they can make money in the industry the money lenders, motorcycle owners, the riders themselves, retirees, everybody who can cobble together a few million shillings. That is the street definition of a bubble.

Another signal that we are experiencing a bubble is that the people who should know better somehow believe that the laws of supply and demand will be suspended this time around.  “This time it will be different,” or “This is a sure deal, see how many people are making money” when you hear any of these or their variations, run for the hills...

The ideal place to join a business cycle is just after the industry pioneers have created a viable business model and just before everybody jumps in. Essentially buy low and sell high. Easier said than done.

Bubbles abound. Land has lost its lustre in the last few years. A while ago the story was if you bought a piece of land around Kampala and wait for a year you would double your money. That is now an urban legend. Land speculators are no longer laughing all the way to the bank.

The land bubble burst when South Sudan went up in flames at the end of 2013, donors pulled back their interest on differences of opinion with the government and the cash flows from the public service were turned off or at least slowed down.

Land as a store of value is still an option but not as speculative vehicle – until the next bubble.

The airtime bubble went the same way even before the telecom companies stopped issuing scratchcards. The early adopters made their money selling airtime, but with mobile money and then the banks muscling in on the action it became less and less necessary to walk to the small stall at the corner to buy the scratchcards. But also because everyone got into the airtime business.

Government put the final nail in that coffin last year, when it ordered telecom companies to sell their airtime electronically via mobile money.

"The mobile money business too is due for a shakeout. Now less and less do you need to deposit or withdraw money from the mobile money vendor. Not only can you now shift money from your bank account to your mobile money account, but increasingly now you can pay for goods and services using mobile money, increasingly cutting out the middle man – the mobile money vendor....

Bubbles have always been there, they are the natural phenomenon of the market’s continual innovation. Innovation is driven by a business’ need to better, more cost effectively serve more and more people.

With improvements in technology, especially communication old business models are falling by the way side.

There used to be a phenomenon called internet cafes! Enough said. And what happened to your favourite “specio” guy?

The way to beat the bubble or to at least outlast everybody else is to have a durable competitive advantage. Again easier said and done.

The theory is that competitive advantage is that think unique to you that no one can replicate, at least not easily.  The three basic sources of competitive advantage are cost leadership, differentiation and people.

To achieve cost leadership, scale can be an advantage, but in a fast changing business environment this can be a disadvantage, as a business may not be nimble enough to adjust or change course to survive, the story of Kodak would be good reading. Or a business can decide not to bother fighting on price and choose to differentiate its products enough to charge a premium, Apple seems to have done this successfully. The people business are often those in the service and knowledge industries, where a premium is placed on recruitment, retention and training. Into the future this will be more important than ever as manual jobs are automated, workers with the help of that automation will become more productive and padding the payroll with deadweight will not be an option amongst the most competitive companies.

But here is the scary thing, and it is already happening. The dominant companies will have scale, will have superior differentiation of their goods and services and will excel at extracting maximum value from their workforces. They will not choose one competitive strategy over the other, they employ all the strategies.

So look at your business again. Should you be in business at all? Can you survive the brave new world?

NSSF'S CHALLENGE IS THAT OF UGANDA

Uganda's National Social Security Fund (NSSF) reported a sh405b loss for the year that ended in June 2019 on the back of unrealised losses on their equity positions and foreign exchange losses.

Last year the Fund reported a sh240b surplus for the year which prompted them to pay out a record 15 percent interest on member savings. NSSF has said they will announce the new interest rate at the member meeting on 27th September but they have warned that, understandably, they will not match last year's rate.

Their accounts show they will be paying out sh978b in interest this year to their members down 11 percent from last year's sh1.1trillion.

They are confident that they will beat a promise they made to their members five years ago that they will pay out at least two percentage points overt he 10 year average inflationary rate. The average inflationary rate of the last ten years was 6.7 percent.

A cursory look over their accounts shows that entire loss was attributable to fair value losses on their investments of sh169b and currency losses of sh247b for a total loss of sh416b, variables not really under the management's control.

Interestingly their dividend income sh77b was up 45 percent from last year's sh53b. Interest income was up 19 percent with rental income slipping marginally to sh10.7b  from sh10.9b the previous year.

The telling detail is that only 6.82 percent of the dividend income comes from Uganda. This is interesting because whereas all the regional bourses in which NSSF has an interest in all suffered double digit losses during the period under consideration, the Uganda Securities Exchange (USE) was down the least. So if our equity holdings were biased towards the USE instead of Kenya there would be less of a loss.

And that is the challenge and one governments needs to stop sidestepping and address squarely. NSSF does not invest abroad leaving opportunities begging in its backyard, it invests abroad for lack of opportunities at home.

As has been mentioned earlier its portfolio is biased heavily towards government debt, in fact of all government's bond issues NSSF holds 40 percent and it is also the biggest holder of outstanding shares on the USE.

Government needs to actively encourage our biggest companies to list on the USE, which would, at the bare minimum, reduce NSSF's foreign exchange risk. Some estimates have it that the market capitalisation on the USE can more than double over the next five years if the government took a proactive stand on the issue.

The counter argument is that last year the fund made sh313b in currency gains. Ironically the losses came about because the Uganda shilling this year fared better not only against the US dollar, but also the Rwanda Franc, the Kenya and Tanzanian Shilling. An anomaly seen against its record over the last several years.

The benefits that would come with a more vibrant capital market, it can be argued too far outweigh the currency gains that would be made investing abroad. Those gains are not permanent as this last year has shown.

This being as it is, it still raises questions about NSSF's asset mix. As it stands now 79 percent is in fixed income, mostly government paper, 15 percent in equity and six percent in real estate.

It was not all doom and gloom for the Fund though. Total revenues were up 20 percent to sh1.25trillion from last year's sh1.04trillion. Its assets under management were up 13 percent to sh11.3trillion from sh9.9trillion. During the same period the economy grew by six percent. And the Fund was able to cut its expenses to assets to 1.28 percent from 1.31 percent the previous year.

Every so often the Fund's asset allocation throws up a surprise but on the whole NSSF is doing the best it can -- given the circumstances.

IT’S DÉJÀ VU ALL OVER AGAIN IN THE OIL SECTOR

Most people have forgotten but if the hype was to have been believed, we would have seen first oil in 2009, ten years ago.

The commercial viability of oil reserves were determined in 2006, when it was estimated that we had about 2.5b barrels of oil under western Uganda’s Albertine graben. Now we are talking about reserves of about 6.5 billion barrels of which about a third are recoverable.

"Seeing what we have been through since, it’s inconceivable that we would have had first oil in three years as the promoters of the hype suggested...

We since managed to put in place key legislation to govern the sector, we are building the oil roads – 12 roads that will cost us $600m to lay 700km and scores of local suppliers and craftsmen are being readied to supply and work in the industry.

We are only just beginning to get set for oil, imagine what things would have looked like if we had been stampeded into kicking off oil exploitation a decade ago? A disaster. Things can still go badly wrong even now – we will not know how ready we are until the action starts, but there is some consolation that we are better off now than a decade ago.

Also in that period we have gone to court to settle a tax dispute with oil explorer Heritage Oil, a tax dispute too, which had put the development of the sector on hold while it was being resolved.

The broad outlines of the tax dispute were that Government was claiming $404m in capital gains tax that Heritage Oil should have been liable for, were it not that they had sold their interest in Uganda and fled the country, leaving Tullow holding the bag.

How Heritage managed to get Tullow to pay and leave without fulfilling their tax obligations has been the stuff of barroom banter ever since.

Almost a decade later we arrive at another impasse, triggered by a difference of opinion about capital gains tax as Tullow seeks to pair back its interest in the oil fields and raise funds to finance its share of the investment required to develop them.

"I would imagine government technocrats are suffering an acute case of once bitten twice shy...

Following the grief they got for having let Heritage “go” and the no holds barred, bare knuckled fight that it took to wangle the tax from them, government bureaucrats are understandably reluctant to put a foot “wrong” this time around.

The current impasse has been created by a difference of opinion – again, as to what Tullow’s liability in terms of capital gains tax, would be. Last year it was agreed that the buyers – Total and CNOOC, would shoulder some of the liability but there is disagreement there too as to whether this will be treated as an allowable expense for tax purposes down the road or not.

There was a finite time frame for resolution of this issue, which expired last week but one.

The oil companies argue that the tax being quibbled over is small change compared to the benefits that will accrue from the industry over the period of exploitation and that government should let the matter go – insistence on the capital gains tax be paid before the Financial Investment Decision (FID) can be signed off.

Their supporters – many of whom have invested millions even billions in readiness, are critical of government bureaucrats who they complain have no clue of what is needed to not only bring investments to our shores but to also make it work.

"Whatever the case first oil has been pushed further back. The rule of thumb is that first oil will come three years after the signing of FID, which now with the latest setbacks looks unlikely this year. The optimistic outlook therefore is for first oil in 2023, assuming FID is signed next year...

Beyond our own experience with the oil industry, down history the sector’s players have not covered themselves in glory from Nigeria to Russia to Brazil to Iraq. The industry continues to struggle with the perception that they parachute into a country gut the resources, regardless of the damage to communities, the environment and move on to the next find. They repeat until fabulously rich.

As a country, we are at a cross road, one of many we have already crossed or will cross well into the future.

Powerful interests – national and international, are watching keenly and actively trying to get involved. The stakes are high. How it t urns out will very well determine whether Uganda leverages its oil for the improved living standards of its people or like a long parade of other countries, concentrate the returns among a few chosen ones willing to play ball.

SA XENOPHOBIC BACKLASH CAN HAPPEN ANYWHERE

It has been traumatic watching, even from afar, the latest flare up in xenophobic violence in South Africa this week.

In one video, a group of youth set upon a helpless lady, pummeling her with punches and kicks, buffeting her from side to side in a corridor of torture. The 25 second clip spared the end – they had already started stripping her of her clothing.

I couldn’t begin to watch the one of the young man set ablaze, staggering about in agony as people looked on in morbid fascination.

"The madness is a culmination of the apartheid policy, which dispossessed the local communities and actively worked to prevent them from rising above their imposed poverty and a corrupt African
National Congress (ANC) government, which has failed to deliver on promises to improve social services and infrastructure in black communities, the badly needed rungs needed for the majority to climb up the social ladder....

There really is no sugar coating apartheid, it was an evil, criminal system that not only materially deprived the majority but also traumatized several generations ingraining complexes that have found full expression in an irrational xenophobia.

Sadder even is that politicians in South Africa have rose to prominence on the back of, maybe not xenophobia, but a variation of the hate agenda, tapping into the anger of a younger generation.

It is a messy business. Resolving it will take much pain, selfless leadership and foresight.

But we should be careful not see it as something that is happening over there and not likely to happen here.

It has been suggested that ethnic tensions are unlikely to be as vicious in Uganda as in other places, the thinking being that there are too many tribes in Uganda and there is no duopoly as the one found in Rwanda or Burundi that could trigger widespread bloodletting. Thank God.

"In Uganda the combination of economic growth not equitably distributed and one of the most youthful populations in the world, means a flare up of social unrest along the lines of the haves and have nots is more likely...

Bad politics leads to bad economics. In countries where income and wealth disparities are widening, the main culprit is the government. It either means government has failed to stimulate economic growth or If they have, they have failed to spread the love around equitably so everyone has a better than good chance of climbing the social ladder.

In Uganda we know how to grow the economy. We can do it in our sleep. We have enjoyed the longest period of sustained economic growth in the history of this country over the last 33 years – the last time the economy contracted was in 1985. As a result the economy has grown more than six fold during the period while the population has tripled.

Of course it can be argued that we were coming from a very low base, so paving a few kilometers of road or adding 100MW power to the grid or adding $100m to our export receipts would show up as significant in growth figures, but then why then don’t smaller economies show the same sustained growth?

The challenge then is to ensure every Ugandan feels these quantitative improvements on a macro level in their own incomes and standard of living.

First off despite the progress made on the macro level we really are still far behind where we need to be. The government plans to spend sh40trillion this financial year or about a million shillings per Ugandan. On health government plans to spend sh65,000 per Ugandan for the whole year.

You don’t have to do any deep analysis to realise that there is a shortage of resources to begin with.

Government finds itself between a rock and hard place. Does it provide quality services to less of the population or do as it is trying to do now, provide less than adequate services to a larger population?

From a purely mathematical angle it would make sense to offer quality services to a few people in the population. These few will be more productive and increase the resources – through taxation, that government can spend on more and more people.

But politics dictates that you have a mass product no matter the quality of the service. In this scenario you have a near universal feeling that government services don’t work, defeating the political argument for mass service delivery.

Corruption affects service delivery through theft of resources, diversion of resources, absenteeism and any number of dodges that cause government service to fall short in the context of resource constraints.

"If service delivery is not adequate you have fewer people climbing out of poverty, increased disenchantment with the political elite, which may very well lead to easy mobilization of disgruntled groups against those seen to be benefitting from the status quo...

They say never underestimate the stupidity of the people in large numbers. The analysis doesn’t have to be true of who the beneficiaries of the system are, to rile the mobs and cause mayhem as South Africa is showing now.

South Africans are not stupid, they are lashing out at the unfairness of their lot, which has its origins in a historical injustice and perpetuated by a corrupt political elite today. But they don’t know it.

UMEME HALF YEAR RESULTS SHOW PROMISE BUT …

Power distributor Umeme last week released its half year results, which showed that the demand for power continues to grow, with the sub-text being that in this context the need for an efficient distributor and a smooth running of the sector cannot be overstated.

According to the unaudited accounts for the six months to the end of June revenues grew to sh816b from sh741b during the same period last year. This was attributed to a seven percent increase in power consumption during the period, which should not come as a surprise with the commissioning of the 183 MW Isimba power project in April.

"An additional 93,580 customers were hooked up to the grid bringing the distributor’s client numbers up to 1.4m....

Profit after tax grew marginally to sh61.2b from sh61.1b during the same period last year, mainly due to a near doubling of their income tax bill to sh51.8b in the first six months of 2918 compared to sh26.3b at the same time last year.

Energy losses on the grid inched up to 16.9% from 16.8% last year, breaking a falling trend in Umeme’s fight to bring down losses – commercial and technical.

The accounts show that Umeme spent less on repair and maintenance expenses, sh16.1b compared to sh21.7b and this may be responsible for slip in technical losses.

Umeme says as much, “Despite the efforts to improve efficiencies as measured by cost to serve per customer and operating costs per MWh, the regulatory allowance for operations and maintenance costs were insufficient thus constraining our service levels.”

Electricity Regulatory Authority (ERA) at the beginning of the year, allowed Umeme distribution operation and maintenance costs (DOMC) of not more than an annual $50m for the next six years. Umeme protested that this was unrealistically low given that last year they spent $60m and were planning to spend $70m.

Umeme argued that the increasing customers coming to the grid and the new supply – about 800MW this year alone, necessitated a bump up in costs.

"ERA on its part argued that given that the network was virtually all new now, efficiencies from the new equipment should be able to kick in and hence no need for higher DOMC...

Umeme resubmitted their proposals and a public hearing was held in the middle of August. ERA say they are still scrutinizing the proposals but argue that if Umeme had not omitted certain detains during the first submission they may not have been in the current situation.

The liberalization of the electricity sector begun with the unbundling of the Uganda Electricity Board into its constituent parts -- generation, transmission and distribution. The generation and distribution parts were passed to private operators while government retained the transmission function.

However, the challenge of creating competition in the sector was a difficult one, not least of all because there was a small customer base then, which meant that a regulator there  to ensure the customers get value for money was always going to be a powerful entity.

As it is, unlike in the banking or telecommunications industries, other liberalized sectors that have a regulator, ERA sets tariffs and by extension regulates the costs that feed into the tariff. An imperfect necessity.

Imperfect because when you allow market insensitive players to determine or cap market sensitive parameters it rarely turns out well for the industry or for the consumer.

A necessity because if you left the private sector up to its own devices it may exploit the consumers and indulge in other anti-competitive shenanigans.

Uganda’s explosion in power generation capacity comes as a result of allowing the private sector to invest in the sector. This would not be possible if investors were not confident that there would be an effective distributor to not only take up their power but also to grow customer demand into the future.

Hence Umeme’s efficient operation is central to the industry.

"It is in all our best interests that the current impasse comes to a speedy resolution. Umeme’s inability to invest appropriately now and into the future can have long term repercussions for the industry and in fact subvert what ERA is trying to achieve – affordable tariffs for everyone....

ERA is taking its lead from President Yoweri Museveni’s wish to see an end user tariff of less than US5 cents sooner than later. The details of how to achieve this has to be arrived through ERA and its stakeholders in a way that is not only timely but sustainable.

Forcing tariffs down in the short term with some cosmetic changes may actually endanger the sustainability of the sector, discourage new investment and create a situation where tariffs increase in the future because we have to pay for the omissions created in the past.

FORGET THE MAFIA, FOCUS ON UTL

The dust has settled now since last week’s less than surprising revelations that junior finance minister Evelyn Anite feared for her life, threatened by a Mafia, cartel or cabal working within government and against her.

She attributed this to her resolute stand in the UTL saga. UTL was put under receivership last year. Attempts to flog it off to one investor or another have come to naught. Anite called for an audit of the company which under the law of receivership she cannot do. When a company goes into receivership the interests of the creditors supersede those of the owner.

Anite disregarded this point of law and tried to ram through an audit of her own, which was frustrated at every turn. She argued that as the line minster she wanted to know the true state of the enterprise, which among other thing she feared was being stripped off its assets illegally.

"The problems of  UTL while they seem to have burst into the public conscience in the last few months have been simmering under the bonnet for long before it was hived away from the old Uganda Post & Telecommunications Corporation (UPTC)...

Lack all other parastatals then and since the parent company was dogged by political interference and bad management. UTL was seen as the jewel in the crown the others –  Posta Uganda and Post Bank, the other companies that resulted from the split were seen as weighing down UTL.

But as it turned out without its monopoly of the sector, UTL could not compete in the cutthroat world of competition and was relegated to back bench and sometimes totally forgotten as a player in the industry. This despite its huge asset base in infrastructure, buildings and land. Which just goes to show management and insulation from political interference is key.

The botched up privatization of the company has seen it change hands from a shadowy group, which claimed association with German telecommunications management consulting firm, Detecon to the Libyans and back wholly to government.

In the mean time the industry has gone so far ahead of the floundering company as to make It unattractive as an investment option.

"The public haranguing of the company’s administrator by Anite has only served to drive its market value further down....

Everyday that is spent squabbling overt UTL makes it more certain that it will be liquidated, its assets sold off to pay for its liabilities and the company closed all together.

This is not the first time that uncoordinated troop movements by our ruling elite has doomed companies to the graveyard of history.

Two companies spring to mind.

At the end of the last century government tried to sell a controlling interest in Coffee Marketing Board (CMB). It had fallen into disuse with the liberalization of coffee marketing in the country. As a going concern, like UTL it was struggling. It had a book value, mostly comprised of its land, storage facilities, its aging office block in Bugolobi and near obsolete four-million bag a year processing plant.

The companies book value flattered to deceive at about $40m misleading MPS that they were being conned when bids were put out for 49% of the company and Swiss coffee trader Sucafina offered $8m, the highest of three bidders. MPs jumped in cancelled the tender offer and called for a redo the bid. The second time around Sucafina were the only bidder and they this time offered $4m. That was the end of that. CMB eventually just drifted off, fell of the coffee industry map.

Uganda Airlines taking to the skies again this week was a good reminder of what happened to its predecessor. The old Uganda Airlines had been reduced to flying one route – the Entebbe-Nairobi route and was a constant drain on state resources. Fueled by pseudo nationalism MPs warded off suitor after suitor for the airline – British Airways and South African Airlines among them, arguing that they were offering too little for the tarnished family silver.

With the failure to get a credible investor government shut down the airline.

"Interestingly again the political elite have pushed for a revival of the airline even as there is no business case for it, hiding behind vague nationalistic sentiment...

The point is, as Anite is learning, politics cannot override everything, especially economics and business. When the politicians try to subvert the laws of economics and business they may be seduced by the initial gains but these are only temporary and only dig us deeper.

UTL is dead we should bury it to stop it stinking up the place.

THE MOBILE PHONES UNDERSTATED ROLE IN ECONOMIC GROWTH

A friend recently did a trip up and down the country. Having done this several times before, he was shocked to discover, this time around, that he could not roll into a town unannounced, so to speak, book himself into a hotel for a night. Like in the good old days.

Being a celebrity counted for nothing. There was not a quality room– clean linen, working shower and solid door, to be had.

This did not happen only once but in several towns in the west, north and east of the country. And he couldn’t work out what was happening.

"In 1999 Uganda’s GDP growth jumped to 8.1% from 4.9% the previous year. There was no coffee boom or bumper harvest that year. In fact El Nino, the weather phenomenon characterized by flooding and prolonged rains had ravaged the crops up and down the country. In addition we were suffering a lot of bad press for our incursion into Congo and some donors had pulled the plug on their funds in a huff...

But in that year Uganda became the first country in sub-Saharan Africa where mobile phone coverage exceeded the number of land lines.

Up to this point Uganda had about 50,000 landlines on the Uganda Posts & Telecommunications Corporation (UPTC) network. In November 1998 South African company MTN –mobile telecommunications network then, entered the market and triggered the explosion in the uptake of mobile phones.

The correlation between the near doubling in GDP growth in 12 months and the widespread use of mobile phones is anecdotal at best, but may provide useful grist for a study.

Fast forward to today and the same parallels may be drawn to explain my friend’s travails on his travels.

But before we talk about mobile phone coverage there is the improvement in trunk roads around the country. In the last few years hundreds of kilometers of trunk roads have been worked on, creating a tarmac lattice around the country, making movement that much easier.

So it’s possible that the inns around the country are full, from travelers who can begin their trip later in the day and stopover in the major towns before a final push for home in the morning.

Add to that the phenomenon that now transport is available to any part of the country from Kampala any time of the day or night.

But I would like to think too that since now mobile communication has grown beyond voice calls as it was in 1999, to now include texting, social media and even mobile money, economy is beginning to reap the benefits of these improved communication means.

The last one is particularly interesting, it has become such a part of our lives that we take it for granted.

In 1998 if someone called you and said he was hard up for money, he was in Mbale say and you were in Kampala, how quickly could you get the money if you had it on you? You could go down to the bus park and find someone to deliver the money to so-and-so’s shop. People got a bit clever and to move money over such distances they would buy airtime, text the code and the recipient would find a way to flog the airtime for money where he was.

Hard to imagine if you were not there, when today the request can be honoured in under five minutes.

Given this scenario, is it no wonder that we now have a proliferation of bars springing up around every surburb and seemingly doing a rip roaring business day in, day out? There are even Sunday night theme nights these days!

"In the 2017/18 financial year sh73 trillion or more than twice that year’s sh30trillion national budget was transacted across all mobile money platforms. This figure was up 37% from the previous year’s sh53trillion. The figures are not out yet for the last financial year but assuming the same rate of growth, at least sh100trillion moved around all mobile money platforms in 2018/19....

If money can move around faster it stands to reason that there will be increased economic activity, the production, distribution and consumption of goods and services. And this is happening in a time when it is widely acknowledged that there is an economy-wide cash squeeze.

So the nephew on campus can now send a message to his favourite uncle Ben on a Friday night for beer money or you can order for and pay for a cab to pick up your better half and deposit him/her at your location without a word said or a physical exchange of cash or if you are an operator of a night spot you can advertise it online for the cost of only a few megabytes and or probably get a better response than before.

So it’s possible that my wandering friend has come up against the underrated power of the mobile phone, its growing uptake and use that make consumption easier and forced an uncomfortable night in the back seat.