LESSONS FROM TUNISIA

We have looked on as events in Tunisia have progressed rapidly from what seemed like isolated demonstrations, building up into nationwide social unrest that forced now ex-president Zine al-Abidine Ben Ali to flee his nation last weekend.

The small North African country of 10 million, wedged between volatile Algeria and back-from-the–cold Libya, has gone largely unnoticed known more for its soccer prowess than anything else. Its impressive social indicators, reputation as a premium tourist and investment destination did little to prepare the outside world for the implosion of the last few weeks.

Even insiders while acknowledging a quiet unease and a simmering resentment at growing corruption and crony capitalism, remained content in the belief that the population’s desire for continued stability would mitigate against any widespread unrest.

Obviously they had badly underestimated the local discontent at the status quo.

The straw that broke the people’s back was the self immolation of a high school dropout, who was stopped by authorities from selling vegetables in a local market because he had no license. An event that probably happens everyday in markets around Tunisia – the expulsion not the subsequent burning.

He was called Mohammed Bouazizi, and he did not set out to start a revolution, but his protest against a system that had become desensitised to the plight of the everyday man while its leaders flaunted their ill gotten wealth, resonated with disaffected masses.

With the benefit of hindsight the events in Tunisia have followed an all too familiar pattern: Government delivers goods and services, people’s welfare improves, government rests on its laurels, people want more, government uses security services to keep them quiet, people’s resentment grows and overflows at a seemingly minor irritation.

If companies exist to make a profit then a government exists to uplift the welfare of its people. But no sooner have the needs of a people been met than the people want more and more. Governments often become victims of their own success.

The only way governments can stay ahead of the game is by not losing touch with the people, which is where democracy comes in.

The example of Singapore is instructive. In his seminal book “From the Third world to First” former prime minister Lee Kuan Yew describes how his country has faced up to this challenge.

By first of all firing up the economy and then ensuring almost universal home ownership, quality and affordable health care and education services and social security Lee Kuan Yew’s party has held sway over Singapore’s politics since independence from Malaysia in 1965.

It should be noted though that by liberal democratic standards Singapore borders on an authoritarian state.

Government taxing the productive sectors to provide public goods, which in turn facilitate the unproductive parts of the economy to become productive is a recipe that should work, has worked and can work.

In pre-independence times, regardless of what the colonialists’ motives were, basic social services and infrastructure were set up that saw a generation lift themselves out of poverty and take over the leadership of this country.

It is doubtful whether that progression will be replicated looking at current circumstances. I would love to be proved wrong.

Governments manage the hopes of people through the economy. If the economy is run well that is, provides opportunities for people to improve their lives, then there is hope and often times that’s all we need.

But when the economy is mismanaged and a critical mass of people see no light at the end of the tunnel, while at the same time a connected clique is benefiting disproportionately, then you have a time bomb on your hands.

And today with developments in technology not only can people communicate much better, share there experiences and discover the commonality of their plight but mobilization of discontent is that much easier.

The truth be told, ordinary citizens don’t really care what government is doing as long as things are ok it’s only when deficiencies in service delivery appear that governments come under attack.

One more thing about Bouazizi. When his vegetable cart was confiscated, the policewoman who oversaw the incident not only refused t the $10 fine he offered, but also slapped and spat at him. Which goes to show when the revolution comes the trigger will not be where we are looking for it and the smallest government agent could be the one who pulls it.

THE CHALLENGE OF HOUSING UGANDA

Last week the high court threw out a petition by Naguru housing estate tenants to block their eviction by government.

The government has offered the area to developers planning a satellite city on the more than 150 acres of prime land. It is claimed that there are currently 100,000 residents of the area.

Related to this issue is the often bundied around number that there is at least a 50,000 house deficit in Kampala alone – to put this in perspective this is the equivalent of about 60 housing estates the size of Bugolobi flats.

It is no secret how we fell behind in keeping up with the country’s accommodation needs. Housing is a long term investment that can not be encouraged by the social and political unrest of the 70s and 80s.

With such pent up demand it would be interesting to find out why the private sector has not jumped in more aggressively to bridge the deficit.

National Housing Construction Corporation (NHCC) has only recently got some private sector interest on board, but shackled by the structural deficiencies of the environment are trudging along as best they can.

"The challenge for many home builders and real estate developers is one that of access to affordable finance. Mortgages rates run in double digits ensuring that, assuming a generous 15 percent interest over 15 years you will end up paying more than one-and-a-half times in interest than the original principal....

The banks in their defence point out that with official interest rates at just under ten percent it’s unrealistic for them to charge any less, seeing as they load their administrative costs, risk and margins above this benchmark rate.

In addition the banks are suffering a shortage of long term funds and by the law of supply and demand mean these funds will come with a built in premium.

Aside from those among us who can out of pocket put down billions of shillings in cash to develop property, many developers have found a way around high lending rates, borrowing in hard currency, which allows interest rates of as little as 5 percent.

The challenge of course, is the exchange risk – the chance that the shilling can lose value against the dollar say, forcing up your finance costs in shilling terms, they mitigate against this charging tenants in dollars.

A temporary measure that has persisted longer than it should.

The day a big time developer finds a way to hedge against exchange risk and charge in shillings, then the market will be irreversibly changed. Who thought for instance 14 years ago that we would be paying for air time in shillings?

The issues dogging real estate development therefore are mainly structural and can be addressed by our planners.

To begin with, credit where it is due. The decision in the 80s not to impose rent controls must be lauded. Were rent controls imposed therefore discouraging new investment in the sector, our housing situation would be far worse than it is right now...

Seeing how NHCC’s most recent projects in Kiwatule and Namugoona were snapped up, it is clear that there is no lack of effective demand for new developments. The challenge then for government is to incentivise developers.

One way is to underwrite the laying out of infrastructure – roads and utilities, in big housing estates. This will not only lower the cost of development but also lower the cost of the individual units.

In addition we need to get pension sector reform out of the way. By allowing other players beyond NSSF to collect workers savings this will boost the pool of long term savings in the financial sector for onlending to developers and for mortgages.

Running concurrently government needs to stream line the land tenure system and its administration, as well as create greater efficiency in our court systems to tackle issues of foreclosures and land generally.

I like Equity Bank’s attitude. The management starts from the principle that everybody has a right to financial services and then work backwards from that premise to tailor products for anybody and everybody. Their success in Kenya – where they control more than half the bank accounts, speaks to the success of this mindset.

Let us commit to the premise that every Ugandan has a right to decent accommodation and work backwards to effect this.

Construction is already one of the main drivers of the economy because of its ripple effect through the economy in job creation, as market for local produced materials and on a more intangible level, improved housing improves the emotional wellbeing of populations reducing the risk of instability.

WE HAVE COME A LONG WAY

They say we tend to overestimate what we can achieve in a year and underestimate what we can achieve in ten years.

We are into the new decade and a cursory glance to where we were ten years ago makes for interesting reading.

In the last ten years the size of the economy has doubled. According to official statistics the size of the economy, as measured by Gross Domestic Product (GDP) rose to sh20.6 trillion from as of 2009/10 from sh10.5 trillion in 2000/01.

The naysayers will have their doubts about these figures and in a way their sceptism will be warranted, because the same figures show that our individual share of this economy only grew by less than 50% during the same period. This variance can be accounted for by the fact that over the last 10 years our population has grown. Assuming a 3.1 percent annual growth over the year Uganda’s population would be up more than a third today from a decade ago.

But also during the period the structure of the economy continued to change. The agricultural sector share of the economy plummeted to less than a 15 percent compared to just over 40 percent in 1999/00. The share of services and industry grew to fill the hole.

This should come as no surprise as our agricultural sector continues to remain largely subsistent and even where, there are attempts at commercialization very little value is added beyond the basic post harvest processing.

First of all given the economic history of the world it’s a natural progression for economies to shift away from agriculture to industry and eventually to services, so a transformation of the economy is under way.

For instance there were 30 million farmers in the US after the Second World War a figure that has fallen to under a million currently, as people have concentrated in the urban areas – where they are more productive and agriculture has become more large scale and mechanized.

"The worry in our situation of course, is that the bulk of our people live in the rural areas and as the statistics suggest, are not benefiting as much from the economic growth gains of the last ten years...

It is no surprise that services have risen to pole position in our economy. In the last ten years there has an explosion of in the telecommunications and financial industries.

In the last ten years we have seen teledensity – the number of people with access to telephone services as percentage of the population, jumping to the current 30 percent from under ten percent at the beginning of the last decade.

The importance to communication can not be underestimated in driving economic growth. Businessmen have now cut out the cost of unnecessary trips, have been able to respond quicker to market demands and now with the introduction of money transfer services have cut down the cost and risk of transferring money.

The increase in bank branches to 381 currently from 167 in 2001 is the most manifest sign of the increase in financial services over the last ten years. But the real telling statistics is the increase in deposits and credit to the private sector that has ensued.

Deposits are up to sh5.2 trillion in December from sh697.1b in January 2000, lending has followed a similar trend jumping nine-fold to sh5.1trilling from sh567b during the same period.

The numbers for in manufacturing, construction, the hospitality business, electricity and water supply will show an almost similar growth pattern.

In my mind two things are clear. One, that tremendous growth – while tempered by our population growth, has happened in the last ten years.

Also interesting to me is that we have achieved this growth despite our low indicators in road and rail coverage, availability of power, under developed financial and commodity markets and other deficiencies.

Looking forward to the coming decade we are going to have to sustain this growth curve while also improving the distribution of these benefits around the population.

For starters the infrastructure deficits need to be narrowed and the fight against corruption needs to be intensified – because the leakages in public finance is slowing the distribution of economic gains, concentrating them in the hands of a handful of well positioned and connected individuals.

In addition we need to not only nurture new entrepreneurs but push our existing crop to a higher level through education and support, for you can have all the roads and markets in the world at your feet but with out these individuals the benefits will never be enjoyed.

There is a lot that we can criticize in this country – not least of all that the growth of the last decade is being enjoyed disproportionately by an urban elite, but the general trajectory seems in the right direction all we need do is maximize the benefits to the wider population.

2011, RUN OUR AFFAIRS LIKE A COMPANY

In the coming year let us conduct our affairs like a well run company.

In some parts of the world to tell the future you may tea leaves or animal entrails, to have an insight into a company’s future we read their financial statements.

The financial statements – the profit & loss, the balance sheet and the cash flow statements are like an x-ray into the business allowing even an outsider a better than good idea of a company’s fortunes.

For the experts, bear with me – and I stand to be corrected.

The profit & loss (P&L) tells us whether a company has a healthy relationship between its revenue and costs. A healthy relationship would be profitable with revenues coming in higher than costs and unhealthy one vice versa.

The balance sheet – a statement of assets and liabilities, is where the durability of the company can be found. A business with more assets than liabilities can be said to be healthy and have a future while a company with liabilities more than its assets, has no future or a bleak one at best. I am speaking in general terms of course.

They say profit is an opinion but cash is reality and that is where the cashflow statement comes in. The cashflow statement gives an account of how the money is entering and exiting the company. You can be profitable all you want but if you are not collecting what’s due to you while paying your dues it’s a matter of time before you will be out on the street.

Without knowing the aforementioned many of us focus more on the P&L part of our finances. We want to earn more so we can spend more, essentially improve the standard of our living. Interestingly the more we earn the more spend. It is the rare person or country that will have expenditure holding steady or growing slower than earnings.

The best companies retain part of their profits or invest in new plant and machinery to increase production and marketshare.

Unlike most individuals the best companies focus on their balance sheet, because as said earlier it’s the balance sheet that ensures longevity. If a company suffers a bad year it can either dip into retained earnings or sell off assets to tide themselves over. When an individual loses his or her job many are reduced to abject poverty, because they did not save or build their asset base.

Another lesson we can learn from the best companies is that they are adept at converting liabilities into assets. These assets then throw off higher incomes allowing them to retain more earnings and invest in more assets, a veritable virtuous cycle of prosperity.

We on the other hand take out loans to finance consumption. Essentially we eat the money with no new income created. We therefore find our unchanged income constrained in paying off new debts, which prevents us from saving or buying new assets, therefore no new or lower income – the vicious cycle of poverty.

Investors while valuing companies look at income but more importantly they look at the balance sheet to see whether existing income is sustainable or can be raised. Using the same measure on ourselves it’s all very nice that we are pulling in multi-million shilling incomes but does our balance sheet indicate sustainability of this situation?

One more thing about the balance sheet, the quality of an asset is determined by how much income it is earning. It is all very nice to have tracts of landing in the village but if they are not making money chances are they are costing money and cease to be an asset.

Unrealised income is all very nice, for example that you bought land for sh1m two years ago and the same land is now sh5m today, but this does not put bread on the table. So the best companies are always seeking to “sweat” their assets, make sure they are producing and if not liquidate.

So in the New Year the bottom line is not the bottom line. In our personal lives we should focus on the balance sheet: It is not how much we earn that counts but how much we keep.

Have a prosperous New Year!

HIGH INCOME IS NOT WEALTH

Last week the finance ministry released a report on Uganda’s progress on the Millennium Development Goals (MDGs).

On the whole the progress in areas like increased primary school enrollment, access to clean water, gender equality and women’s empowerment and reduction in child mortality compared to ten years ago.

Among the findings of that report was the fact that proportion of Ugandans living on less than a dollar a day has plunged to 23% from 36% over the last five years. What this means is that as a country we have reached the target rate of poverty set out by the UN in 2000. The target date for achievement of these was 2015.

As I have argued before I think the dollar a day measure of poverty is cow manure. As far as I am concerned one-dollar-day is an easy target and personally do not doubt that we have attained these target. I think it’s a scandal that we can even have people living on less than a dollar a day or even $10 for that mater.

It is not hard to see why we struggle to meet this basic of targets.

During a conference last week the National Development Plan was criticized for its lack of clearly defined strategy for transforming the country’s economy – put bluntly our planners are involved in wishful thinking.

Also there seems to be a lack of understanding of what will make for sustainable poverty eradication. We are focusing on income from jobs or trade rather than on encouraging building income generating assets. The difference between the two is worlds a part.

Of course for political purposes raising incomes is the easier target – and hence the UN’s one dollar a day standard.

Back to first principles there are four levels of financial health. At the bottom rung is poverty, at this level one can not provide the basic necessities of life on their own income and is forced to rely on handouts to bridge their financial deficits. The next level is one of financial freedom where a regular income ensures that one can provide for self, in this category is most salaried workers, most of whom are a salary away from poverty.

Financial security, is where an individual may or may not have a regular income but his income from his accumulated assets adequately provides for his daily expenses. It is at this level that one can honestly talk of pulling out of poverty.

To be rich is an extension of being financial secure, but this time ones assets are throwing off more income than you or your family can consume.

Seen in this light you want to ask yourself whether you are out of poverty or not. And understandably this standard would be hard to attain, hence its unpopularity politically.

Let us assume as a country we aim at financial freedom for all by 2050, what it would take to attain that.

It goes without saying we have to sustain the current level of macro economic stability, especially keeping inflation rates down.

In addition we have to significantly lower the cost of doing business.

Improve our transport networks – getting the train up and running for goodness sake, eliminate power shortages, improve health services, restructure our education to provide market relevant man power and eliminate onerous licensing processes among other things.

The idea would be that not only would businessmen have a better chance of making successes of their enterprises – selling more and employing more, but the cost savings would be passed on to the consumer who would then have wider options for his money.

We would also restructure our financial sector creating incentives for more savings, liberalise the pension sector and support venture capitalists whose job it is to back start ups.

And eventually as a nation we need to be more committed to promoting entrepreneurship and financial literacy.

To take our businesses to the next level they need to be more structured and therefore our businessmen need education and mentoring. The days of hit and miss businessmen are gone as the economy becomes more formalized.

At the very personal level widespread financial literacy – the ability for instance to distinguish between income and wealth, is critical. For a long time now our salary and other income earners have been blundering through life, thinking that because they have a regular paycheck they have arrived only to be reduced to destitution at retirement.

Lets raise our sights beyond a dollar a day after all achieving arbitrary and meaningless benchmarks is not what we are here for.

LET’S DO A PILGRIMAGE TO ISRAEL

I have thought for quite a while now that Uganda’s economic planners should make a pilgrimage to Singapore and Dubai. I haven’t been to Singapore but have read the founding father Lee Kuan Yew’s book “From Third World to First: The Singapore story” and believe it should serve as the prototype for development. I have been to Dubai and what they have been able to conjure out of the desert in terms of infrastructure and a general corporate dynamic some say is unmatched except maybe by Hong Kong, is just a wonder. 

The harnessing of the private sector while itself becoming a super efficient state is something we badly need to learn. And now I add Israel to the list of must visit countries for the men and women of the Planning ministry. 

 “Start-Up Nation: The story of Israel’s Economic Miracle” is a book that tries to deconstruct the economic success of the Jewish state. To appreciate the miracle of Israel understand that this is a country, were it a square would not be as wide as the distance from Kampala to Masaka. Mostly desert, it was described by Mark Twain as a “desolate country … a silent mournful expanse.” 

It has a population of seven million people most of whom are at least second generation immigrants. Since independence in 1948 Israel has lifted itself from a besieged backwater to a high tech hub, while growing its economy fifty fold and this despite fighting three wars and being in a state of perpetual tension, “Totally unmatched in the economic history of the world,” according to Israeli political scientist Gidi Grinstein. 

 At the bottom of small Middle Eastern country’s success is the entrepreneurial spirit of its people. It has more start up companies per capita than any place else in the world. The amount of venture capital investment per person – another indicator of entrepreneurship, is nearly thrice that of the US and more than thirty times that of the European Union. Innovation that often comes with start ups, is the only proven way of economies to stay ahead and provide for the increasing demands of not only a growing population but of rising demands that come with a higher standard of living. This boom in entrepreneurial activity flies in the face of the perception of Israel, as not only being at the heart of an unstable region but that Israel’s very existence is not assured by its belligerent neighbours.

 A complicated subject. The roots of this national spirit of entrepreneurship and innovation, authors Dan Senor and Saul Singer find in some rather unlikely places. The fact that Israel – like the US, is a nation of immigrants who by definition are risk takers is key and has some useful lessons for immigration policy makers. When added to the crucial role played the Israel Defence Forces (IDF) in fostering an informal approach to authority, a unique attitude to failure and serves as a demanding culling selection process of the country’s best talent, the country has come as close as one can get to formalizing the process of entrepreneurship. 

 The development of the military and avionics industry – an unintended consequence of an arms embargo, nurtured a cadre of high tech engineers and laid the foundation for the huge concentration of the high tech industries in Israel today. A booming venture capital industry, initially promoted by the government, means local entrepreneurs have access not only to funds but to the mentorship needed to grow business and make them competitive on the international scene. Everything was not planned at the inception of the Jewish state by wise man Ben Guiron, but forced into a corner by real existential questions, Israel like few other countries in the world has literary taken the lemon of its circumstance and turned it into lemon juice. Which makes me wonder, what would have happened if the early Zionists had taken up Britain’s offer to settling in Karamoja?

TO BATTLE CORRUPTION, PAY UP

THE Inspector General of Government, Raphael Baku, this week released the annual report on corruption in Uganda.
I have not read the entire report but there was nothing to raise any eyebrows.

Infact, it was rather understated in cementing the perception that corruption is alive and kicking. On 94.8 fm’s Talk of the Nation this week, the issue of teacher absenteeism came up.

I heard how dedication to the vocation was lacking and teachers these days do not appreciate the huge responsibility they bear. The suggestion was that they don’t make teachers like they used to.

And then again on Press Chat on the same 94.8 fm, Richard Baguma narrated a heartbreaking but hilarious story of how in his earlier days as a public servant he went to the bank to check whether his salary had made his account.

"The teller took one look at his account balance and, writing it down on a slip of paper, said his salary had not made the bank yet. It had, but it was so little as not to register with the lady behind the counter....

Earlier this year I saw a list of salaries for various levels of civil servants and at first thought the civil service pay was not so bad after all, until someone pointed out the figures published referred to annual salaries.

I believe that corruption is thriving because we do not pay our public servants enough. They may be other reasons but they are all secondary.

Abraham Maslow’s hierarchy of needs is a useful framework from which to analyse human motivation. Basically, his theory suggests that human motivation is dictated by the pressing needs of a person.

At the bottom of the hierarchy are the basic physiological needs of food, water and breathing, climbing up to safety needs – family, health and housing, and on to belonging needs to esteem needs – achievement, respect, confidence to the ultimate, the self actualised person where issues of morality, creativity and lack of prejudice reside.

The theory says that if you do not fulfill the needs at one level it is difficult to rise to the next level and even if you do, chances are you will always regress to the lower level to resolve the needs unattended to at that level. It is impossible to belabor this point.

"As long as the Government continues to pretend to pay, people will continue to pretend to work while devising other means to meet their basic needs. It is blindingly obvious....

The lowly paid civil servant lives in Nakasero, Bugolobi and Ntinda, is building in Namugongo and Buwate and is unstintingly loyal racking up five, ten, 15 years in the civil service.

This would be an illusion if they were conjuring this lifestyle out of their payslips.

In arguing against corruption, some sanctimonious people argue that if you signed up to work for that pay you should honour your contract or get out.

And I suggest to them that if the Government is unwilling to up the pay and yet wants to plug the leakages maybe they should hire monks, who are sworn to poverty and celibacy....

But of course government planners, being civil servants, know all this.

The argument that there are no resources to improve civil service pay, fly in the face of the fact we are willing to shell out sh500b-plus to host CHOGM, a four-day event, which has had little residual benefit to the majority of the population.

The high profile figures we see getting billion shilling kick backs are the tip of the iceberg. The incessant gnawing away at public resources by lesser cadres pilfering a few thousand shillings from the office imprest, soliciting a bribe here and there to conveniently look away when the law is being broken, is where the real havoc is being wrecked.

There are the rare, blameless individual, but we can not organise society on the strength of a few outliers.

This in no way justifies corruption. If we are serious about fighting corruption let’s pay our civil workers the minimum to survive through the month and then, the fight against corruption will truly have begun.