SELL MABIRA TO SAVE IT

Mabira forest is back in the news.

Four years ago it emerged that the Sugar Corporation of Uganda, Lugazi (SCOUL) had wanted a piece of the forest to expand their sugar production. This sparked off angry protests that culminated in a failed demonstration and a few deaths. The government backed off the issue. And so did the protestors. Until now.

President Yoweri Museveni has once again sparked off angry debate by declaring his intention to cede some of the forest to the Mehta family’s company.

The environmental lobby has jumped on this and has even threatened to sue the government if it attempted to do as planned.

Putting our natural resources to optimal use for the benefit of Ugandan citizens on the one hand and the need to conserve forest cover and our natural diversity on the other seem to be the underlying principles of the two positions.

I don’t think these positions need be diametrically opposed as they are being presented now.

In fact Ugandans’ best chance of saving the natural endowment that is Mabira forest is to privatize it...

As it is now Mabira forest like many other forests around the country is being encroached upon and its trees being felled for a variety of reasons most especially for firewood.

National statistics show that Uganda is losing its forest cover by almost ten percent annually at this rate of doing things it is estimated that in 20 years we will have no forest cover to think of.

There is no reason to believe Mabira is not being decimated at all.

The reason for this plundering of the natural resource is not hard to find. To begin with we get most of our energy from firewood and charcoal and secondly, the public stewards of these natural resources are not up to the task of warding off the pressure for fuel – mostly for lack of resources but also because they – the forests are public goods.

There once were four men Everybody, Somebody, Anybody and Nobody. There was work to be done and Everybody thought Anybody would do it but it turned out that Nobody did it instead of Somebody.

That is the way public goods are treated. The truth be told we are frothing at the mouth because it is a big company – Asian at that, that wants to take over the forest for their business. We are however not emotionally charged by the smalltime encroachers eating away at the forest year after year, maybe because they are black Africans?

Twenty, thirty even fifty years from now if things continue our children and grandchildren reading history will look at the bare land that was once Mabira and wonder what the farce was about. It will be gone anyway.

The solution and it’s not an original one, is to concession off the forest to private operators. These maybe tourist, pharmaceutical, research, conservation or any enterprise
that at once conserve the natural environment and show return on their own investment.

So for instance if you concessioned off a quarter of the forest to hotelier. It would be in the best interest of the hotel to keep the environment intact and doing so would have to invest resources in the protecting, regenerating and even expanding it.

SCOUL need not be disqualified from this process as well as long as they can show how they conserve the environment.

Understandably there will be some clearing involved to make way for the infrastructure to support any enterprise but this would be nothing compared to the saved forest cover from creeping, unplanned human activity going on.

The concession would be audited every so often against the conditions laid down by government and it would be renewable every few decades or so.

"We all know that our public enterprises are ill equipped – materially and morally, to conserve our environment, so let us not fool ourselves that because it is in government hands it is safe for all eternity...

We need to weed ourselves of this knee jerk reaction against private interests and look for creative win-win solutions if if we are to secure not only Mabira but also other pieces of our natural heritage.

URA SPEARHEADING TRANSFORMATION OF THE ECONOMY

The Uganda Revenue Authority(URA) has lurched onto a new way to collect income tax.

Starting in June this year URA has taken advantage of property transactions – cars, land and buildings to collect income tax. How it works is if you want to buy a property, when paying stamp duty to effect the transfer URA will check whether you are tax compliant if not the y will deem the sum you paid for the property as undeclared income and will slap a 30% tax on it. This is for transactions over sh50m.

It is estimated that up to 70% of the Ugandan economy is in the informal sector, meaning a lot of transactions are done under the radar, mostly done using cash, whose source is also hard to pin down.

Our money makers to secure this money in solid assets, buy land and houses, explaining Kampala’s property boom of recent years.

Personally I think this initiative is long overdue. URA’s overreliance on international trade to meet its targets was not going to be sustainable in the long run. Of course URA is one of the major beneficiaries of a depreciating shilling but that is a short sighted approach to taxes.

In order to become a middle income country by 2020 we must widen our tax base and rely more on income tax than import duties.

One benefit of taxation that is rarely discussed is its impact on a nation’s productivity.

Fortunately we have recent history to call on. In 2006 government scrapped graduated tax. The arguments that it was too expensive to collect and was regressive won the day. It also helped that it was an election year. When political expediency comes up against economic good sense, the former often wins the day, to the long term detriment of nations. Ask the US.

Five years down the line the fall out is a reduction of productivity, as villagers feel no compulsion to produce more than they eat and city youth with no incentive to work, resort to stone throwing as a welcome past time.

We forget why graduated tax was introduced. In order to get us to grow cash crops for British industry the colonial government introduced poll tax, payable by every able bodied man. The only way to get the money to pay the tax was to grow coffee, cotton or tea. That is how we became a big coffee and cotton growing nation. Do not believe that our forefathers grew these crops out of the goodness of their hearts.

Arguably we are unproductive because we are not taxed enough.

I know URA is going to come under a lot of heat from the urban elite to drop this initiative altogether and I will be impressed if the tax authority gets any overt political backing. But they are just scratching the surface in potential collections they can extract from the people.

For example we have a few landed families wallowing in poverty despite the square miles of land that have been passed down the generations. The land which is encumbered by unlawful occupants is a dead weight on both parties for the similar reason that neither can unlock the full potential of the land’s value.

In the west all landowners are taxed. The net effect of this is that as a land owner you need to make a choice, does it make financial sense to hold on to the land or not. If it doesn’t you sell it off to someone who can put it to productive use and pay the tax.

With this single move the supply of land in the market will increase lowering prices and increasing national productivity – since all land will be productive or at least more than is now.

And what will happen to the now landless masses? With their “new found wealth” the y can go and rent land or rent housing either way there will be more incentive to work.

This move will be even more politically explosive than what URA is currently implementing, but if we are serious about graduating into a first world country, these tough decisions have to be made yesterday.

As a country we are poor not for lack of resources but because we do not put our resources to optimal use. URA can help us with this by taxing everything that can be taxed, and when history is written the URA like the IRS in America, will be go down as having been a major driver of Uganda’s future prosperity.

FIX THE INCENTIVES TO FIX THE ECONOMY

If there was any doubt the economy was in trouble the doubling of sugar prices last week dispelled them.

While just a symptom of a larger problem, the sugar price hike was loaded with symbolism.

"The older generations will remember the days when sugar granules were as big as rice grain, not as sweet on the tongue and was a luxury more than a staple at the breakfast table. A queue formed instantaneously outside the neighbourhood shop (there were no malls or supermarkets then) on the rumour that the owner had just got sugar...

Sugar shortages would remind us of those days.

The sugar price hike has its roots in the expectation of a lower than projected sugar production at Kinyara Sugar Works, the second biggest sugar producer in the country.

A refusal by some outgrowers to grow sugar cane this season on account of poor prices for their cane has dampened Kinyara’s projected output for the year, that may lead to a shortfall of up to 21,000 tonnes this year. It is estimated that as a country we consume about 370,000 tonnes of sugar annually.

Looking to cash in on this development some traders moved in to corner the market, buying large volumes and hoarding it in anticipation of higher prices. President Yoweri Museveni put paid to this little scheme when he announced last week that in light of the shortages his government will reduce restrictions on sugar importation to bridge the gap.
Since then we have seen a normalization of prices.

But as I said the shortage is only a symptom of major structural problems in the economy.

Our economy is geared towards consumption and away for from production. Its basic common sense that if you keep consuming all you produce or you consume more than you produce, disaster is not far away. Ask the US.

"As an illustration we have a 140 megawatt (MW) electricity deficit at night as opposed to a 50 MW deficit during the day. This statistic is very telling because it means that when our factories are working during the day we need less power than when we are cooking, watching TV or boiling tea at night...

Its not a straight correlation but an indicator of what ails this economy.

Compare this with the electricity utility in the UK where the power consumed by factories is more than the power consumed by commercial offices, state schools, hospitals and domestic use combined, with some to spare. This despite the fact that the UK’s economy is largely dependent on its financial services sectors.

Despite our posting laudable economic growth figures over the last quarter century on closer scrutiny services – financial, telecommunications and transport and the construction sectors, manufacturing growth trails all these.

Some people may argue that the manufacturing-driven economic model is obsolete but they would be wrong.

The beauty of manufacturing is that it can create many low skill jobs quickly, while at the same time pushing up the productivity of the work force. To try and leap frog the industrial age and into the information age is a stretch for a country like Uganda. To begin with the information age work is better educated and secondly the ICT industry does not create as many jobs as the factories. So there is no getting around it we have to start manufacturing to benefit from increased job creation and improved productivity of our workforce.

"Given that over the last quarter of a century we have been rehabilitating our economy, the low capitalized service industries were bound to take off first. But it is also true that during the last 25 years there structure of our incentives have been tailored towards easier things like services and rent seeking rather than more durable, capital intensive manufacturing...

All over the world it takes less money and effort to set up a bank or telecommunications company or consultancy service than it does to set up a factory, which will require major concessions on land, importation of capital equipment and financing to get off the ground.

In addition the management of this process by the bureaucrats will require dedication to a long term vision and attention to detail, unlikely in this part of the world where the incentive is for extracting rent and commissions from investors.

It’s unnecessarily too much trouble establishing durable industry, see the fate of the Bujagali dam, which would have been running at full capacity four years ago, or the BIDCO oil palm plantation on Kalangala or the Madvhani’s attempts to grow sugar in northern Uganda.

As a country we need to embrace big industry within limits of course, if we are to avert such incidentals as sugar shortages in the 21st century!!!

TAKE ADVANTAGE OF THE "CRISIS"

Many years ago at Singo military training barracks deep in Luwero (at the time) the question was put to a group of 1000 fresh A-level graduates, “Which are Uganda’s cash crops?”.

Drilled in an education system, even then well past its sell-by date, the eager faced young men and women belted out the usual – Coffee, tea and cotton. There wasn’t very much else we were exporting in the early 1990s.

“What about maize, cassava, mangos, beans?”

The point was made. Anything can go for cash. But frozen in our colonial mold as producers of raw materials for western industry we could not see past the usual suspects 30 years after independence.

Last week in an exclusive interview with the Business Vision, central bank Governor Emmanuel Tumusime Mutebile pointed out that Ugandan export receipts had risen more than 13 times in the last 25 years.

As recently as 1997 analysts were projecting that as a result of increasing export diversification, coffee would fall below 50% of our total exports. In 2009 total exports of goods and stood at $1.5b of which coffee accounted for $280m.

Also last week it was announced that Makerere University Technology Faculty’s designed and developed battery powered car was due to be launched soon.

Our car is not the first battery powered car in the world – there are a few thousand in production already, but as a signal of what our scientists can do, it was a potent symbol.

Still wed to the notion that labour is muscle driven we forget or overlook our huge potential as exporters of services and knowledge based products. We think our exports have to be trucked out in containers.

We cannot be blamed because in addition to our pre-independence mindset, we are still firmly stuck in the pre-industrial age...

The selling of our basic education services to the children of the East African Community counts as an export, if we define exports as a foreign exchange earners. More than a decade ago health, financial and IT services were identified as fields in which Uganda could develop a competitive advantage.

The beauty of such services is that they are little affected by the weather, seasonality or disease, like our favourite export crops are. But we have seen little effort in boost the marketability of these services.

Increasingly we are talking about a knowledge economy, where knowledge is a product created by a knowledge worker as opposed to a manual worker. An economy graduates up the scale if more of its knowledge is embedded in its systems and does not walk out the door – or country in this case, with the knowledge in its head, hence the term brain drain.

Last week again there was news of a looming famine in Somalia, Northern Kenya, Ethiopia and Southern Sudan. A lot of it to do with conflict in the area but also massive crop failure as has not been seen in the last 30 years.

Uganda long touted as the breadbasket of the region, is going to feel the pain too, some because of crop failure due to erratic rains but mostly because our own food is going to be in such great demand that we can expect a continued increase in food prices for at least the next 12 months.

This should not be. Our agricultural institutes do some very useful research – ask the breweries, we just seem to have failed to bridge the gap between research and its widespread applicability....

Our difficulty in appreciating the knowledge economy is that it turns traditional economics – the management of scarce resources, on its head. How do you manage a resource – knowledge that is infinite, using traditional economics?

The point is that for a country like Uganda – landlocked, underpopulated and poor, we need to make a break with a lot of what we learnt in the past.

Right now we are in the throes of a “crisis”, but there is no better opportunity than a crisis to rejig our way of doing things.

We did it 20-odd years ago with the remodeling of the economy – who would have thought we would buy dollars off the street? This crisis is an opportunity we should not allow to go unexploited.

NO SHORT TERM REMEDY FOR SHILLING, ECONOMY

The shilling fell to historic lows last week on a rumour that central bank governor Tumusiime Mutebile had handed in his resignation. This came hot on the heels of the Bank of Uganda boss’ published reservations on the management of the economy.

Since then importers, read Kampala City Traders Association (KACITA), have been up in arms and have threatened strike action if government does not do something about the shilling. It was even suggested that the government should hold the shilling at a certain price.

The President has since penned his opinion on this current “crisis”. Given his first hand experience with the economy over the last 25 years he is understandably dismissive of suggestions that this is a crisis and has counseled that we need to stay the course, make the long term beneficial decisions and steer clear of short term populist measures whose repercussions could unwind years of economic gain.

Whether we keep a long term view or succumb to pressures for short term remedies will be determined by our politics. Let us wait and see.

There are several reasons the shilling-dollar relationship has not been in the our favour in recent months. A slow down in inflows -- investment and tourists, ahead of the February polls, lower export earnings from traditional sources – the main coffee season is over, and election related overspending. Internationally the dollar has been strengthening on growing uncertainity about the viability of the Euro zone, a hint of recovery in the US economy and rising oil prices.

As a country we can influence our level of fiscal discipline or lack of thereof and to some extent the rate of inflows into the country, we have little if no say about what happens on the international currency markets.

"The shillings decline is a symptom of structural deficiencies in our economy. At a fundamental level our currency will appreciate or depreciate depending on external demand for it. Are we producing, can we produce, stuff that will be in demand externally and therefore increase demand for our shilling, therefore causing appreciation?...

As it is we are still exporting raw coffee, tea, fish and labour. We are a commodity exporting country. The problem with commodities is that it does not take much science to replicate them and therefore they are not very expensive.

For instance fifteen years ago Vietnam was not a coffee exporter of any reckoning but have since boosted production to the point that they are second only to Brazil in Robusta coffee exports, affecting Uganda’s major forex earner.

As I see it we have two options either we grow more coffee so we can export more raw beans at lower and lower prices per kg or we start processing our own coffee and exporting it as a higher value product.

The more sustainable solution is the latter but this will take a lot of government support in low cost financing, funding of research and development and marketing abroad. A solution we should have started on yesterday and will take another generation before sustainable results are realized.

"Uganda is also especially vulnerable to currency movements because many of our manufacturing inputs are imported. In fact only a few days ago Ugandan manufacturers got another extension for some semi processed imports to continue being classified as raw material imports into the East African Community. So they suffer less tax...

In the long term we are going to have to reexamine the structure of our manufacturing sector before the unforgiving hand of the market lays down the law.

Many of our manufacturers are assemblers and packagers of already finished goods. They continue to “manufacture” goods they have no competitive advantage being involved in. This is critical because as it is now China is fast becoming the factory of the world – there are very few things that can be manufactured cheaper than in China because of their economies of scale and cheap labour.

Our manufacturing needs to be angled more towards agriculture where we have a decided competitive advantage. To reengineer our manufacturing sector in that direction cannot be done overnight.

In short there is no real short term relief to our currency woes. Politics can dictate that we put a plaster on a broken economy, but it will be a short term solution that will give the false impression of relief but in the long term come back to haunt us.

As for those people suggesting government should hold the shilling exchange they need to think again. Trader turned philanthropist George Soros cemented his reputation in the 1990s when he bet against the pound, judging rightly that UK’s economic fundamentals could not hold the pound to a certain level. The Bank of England pumped in billions to support the pound but eventually had to give up and allow the pound to find its market determined level. It is said Soros made at least a billion dollars on that trade. He did it again during the Asian crisis in 1997.

"Rest assured the moment the Bank of Uganda attempts to defend the shilling, speculators – not Soros, Uganda is too small for him, will beat a path to our shores. And when we invariably fail to defend our shilling 4000 to the dollar will not be a far off fantasy....

WHY THE US MUST GO TO WAR

BOOK REVIEW: PETRODOLLAR WARFARE
AUTHOR: William R. Clark
AVAILABLE: Amazon.co.uk

Two events this week could not have been better timed as I read the book “Petrodollar Warfare”.

One, Barrack Obama’s announcement that he would be withdrawing the bulk of the US soldiers from Afghanistan by this time next year and secondly, the ongoing Greek debt crisis that is causing sleepless nights for Eurozone’s finance ministers and putting the single currency under a lot of stress.

This book has as its central thesis that US is waging war and has done so across the world since the early 1970s, to protect oil sources.

Oil is the fuel that drives America economy who with less than five percent of the world population consumes one in every four barrels of oil produced, so it kind of makes sense that it cannot afford the the world’s oil reserves – mostly in the middle east, to fall into hostile hands.

But the even more potentially dangerous relationship is the connection between oil and the viability of the US dollar.

To step back into history.

After the Second World War world currencies were backed by gold, meaning every unit of currency was backed by a country’s gold reserves. However as a fallout of the Vietnam war the US went into so much debt, debt it found it could not honour because it did not have enough gold-backed dollars – in short the US actually went bankrupt.

To avert the catastrophe then President Richard Nixon pulled America off the gold standard, which allowed him print dollars to pay off his country’s obligations. However there were problems with this arrangement not least of all that the dollar was effectively worth less than before it reneged on the gold-standard but more importantly because it was the world’s reserve currency, everybody was saving their surpluses in dollars.

"To maintain the dollar’s preeminence the Nixon administration impressed upon Saudi Arabia and therefore OPEC (Organisation of Petroleum Exporting Countries) to sell their oil only in dollars. This did two things, it meant that oil sales supported the dollar and also allowed the US access to exchange risk free oil. To buy oil all America has to do is print more dollars. Free oil...

With an oil -backed currency, subsequent US administrations have thrown fiscal prudence to the wind and lived beyond their means, spending more than they collect in revenues and importing more than they export. The net result today, is that from being the biggest creditor nation, the US is now the biggest debtor nation and their budget is hundreds of billions in the red.

In classical economics the strength of a currency is determined by the strength of a given economy. Does the country export in goods and services more than it imports? Does the country produce more revenue than it consumes, is its budget in the black or at least balanced? Given these parameters were the dollar not backed by oil it would today not be worth the paper it is printed on.

So America propagates war to protect its oil supplies but even more importantly to safeguard the strength of the dollar.

The book wades through history in an attempt to prove this hypothesis and does quite a good job of it.

It shows that Saddam Hussein’s most recent problems and his demise were fuelled by his desire to see Iraq’s oil paid for in Euros not in dollars, forget about weapons of mass destruction. Recent sabre rattling by the US about Iran under the guise of protesting their nuclear development program, were actually because Tehran proposed a euro-denominated oil exchange and were willing to host it.

"The author also examines the neo-conservatism doctrine as practised by the Bush administration, which professed that there is no moral right except the right of the superior to rule over the inferior classes!...

While examining the concept of peak oil he raises the specter of the real danger of a world without oil and dismisses some alternative energy proposals doing the rounds.

It is a fascinating book whose only failing may be that the book’s flow is broken by continous references in the text to sources. The logic is compelling and gives a much needed alternative view to the world view propagated by western media and should be essential reading for all leaders of nations – actual or aspiring.

BIG BUSINESS CRITICAL TO REGIONAL INTEGRATION

TITUS Naikuni, the Kenya Airways CEO, could not help himself the other day. “Didn’t I tell you? Five years ago I said we would be a billion-dollar company in 10 years; now we are here,” he said directing his comments at a journalist during a recent press conference.

He was referring to the company’s turnover for their just-concluded year in March.

Well, he stretched the truth a little. Kenya Airways market valuation will have to jump five-fold to become a billion-dollar company.

The company whose tag is “The Pride of Africa,” turned over a Kshs85.8b just over sh2,200b of which about sh88.4b was the net profit. Put into perspective, the airline’s total sales last year is the equivalent of Uganda’s national budget for three months.

The airline does 380 flights a week, its 377 pilots fly their 31 aircraft fleet and last year they flew three million passengers to and from more than 50 destinations on the continent, Asia and Europe.

To sustain that size of company, lack of growth is not an option. CEOs like Naikuni, will be licking their lips at plans to have a Free Trade Area that stretches from Libya to South Africa within three years.

This was announced last week after meeting in Johannesburg of the leaders from the regional trade blocs, EAC, COMESA and SADC.

The merger of these three blocs will account for more than 500 million people and a $1 trillion economy.

I think it is safe to say that for the continent to unite, business has to thrive and with mutually shared economic interests, the politics will follow. As it is now, trade within Africa accounts for less than a tenth of all trade the continent does.

One can assume that the larger impetus for this merger is coming from South Africa, whose companies already have a head start. More importantly, the leadership understands that the only way to fulfil a pledge to create five million jobs over the next 10 years will only happen if South Africa Inc. grows.

The same pressure is felt in Kenya and even Egypt.

Governments have to create jobs to keep their citizens occupied and away from any seditious thoughts. Governments creating jobs by building a huge public administration, is a model that can only take you so far.

The more sustainable way is to create an enabling environment for your businesses to thrive, therefore creating more jobs and everybody is happy.

Companies do not expand beyond their borders out of some romantic sense of adventure. They do so because there is little scope for more growth in their own markets either because of increased competition or because the economy has reached maturity or both. Expanding beyond borders is a survival tactic.

An unintended consequence of this need for growth leads to political union, because companies for operational ease, would like to work in a uniform environment.

Borders come down, currencies are discarded in favour of a single legal tender and free movement of labour is allowed. Our own regional multinationals – all Kenyan by the way, leverage their economic muscle to influence policy to their advantage.

The potential for a region’s integration has a lot to do with the presence and viability of the region’s companies.

Companies like Kenya Airways will be the drivers of Africa’s integration.

However, the growing capacity of businesses to influence the affairs of state often has politicians up in arms, which raises a dilemma.

Governments see a stronger business community as a counter to their power and are often reluctant to help business grow. On the other hand, they need business to pay taxes and employ their citizens.

As long as politicians don’t run rogue and shoot up the whole place, the continuous interaction between governments and business ends up with businesses getting what they want, which is not always bad for the rest of us.

On the balance of things, the more companies we have like Kenya Airways, that become billion-dollar companies, the better for us.