THE BUDGET: THE DEVIL IS IN THE DETAIL

The shocking murder of MP Ibrahim Abiriga and the arrest of former Inspector General of Police General Kale Kayihura overshadowed a budget reading which in years gone by would have been a celebratory one.

Minister Matia Kasaija’s sh32.7trillion budget maintained an emphasis on infrastructure development with works and energy ministries between them hogging a fifth of the budget.

The more than decade long push on infrastructure Kasaija suggested are beginning to pay off as the economy seems to have pulled out of the doldrums, growing by 5.8 percent the highest rate since 2010/11’s 6.7 percent.

Last year the economy squeaked out a 3.9 percent improvement in output, lower than the previous year’s 4.7 percent.

Growth in industry and services helped lift the economy off the floor but also agriculture whose growth doubled from the previous year buoyed by good weather, seed distribution and improved extension services.

The devil of course is in the detail.

While agriculture grew at 3.2 percent, according to Uganda Bureau of Statistics (UBOS) figures from 2016/17 agriculture accounts for 24.9 percent of GDP. About eight percent of all agricultural output comes from cash crops. It is not clear whether UBOS is using the primary school definition of cash crops as coffee, tea and cotton. Food crops account for 54 percent of all agricultural output.

This statistic is a double edged sword.

"While it implies that our farmers are able to sustain themselves it also indicates why that may be all they can do. A greater proportion of cash crop production would suggest more rural incomes for the farmers. Without higher incomes in the rural areas through improved productivity or higher crop prices poverty will continue to bite....

You raise productivity through better farming practices and in addition higher crop prices come with easier access to market.

It is not difficult to see why our farmers do not rise up to their productive potential.

To begin with the agriculture sector budget is 0.3 percent of the total budget. The argument that the infrastructure being laid down around the country services agriculture is a valid one. But for agricultural incomes to start rising meaningfully there has to be an emphasis on improved inputs for farmers, extension services and irrigation.

The research institutions get less than 10 percent of the sector’s meagre budget while curiously the discredited NAADS secretariat gets a fifth of the sector’s budget.

Away form the much flogged agriculture budget something happened in this budget that seems to have gone unnoticed.

Last year the government committed to rein its domestic borrowing to under a trillion shillings overshot this resolution by 70 percent and expect to borrow even more from domestic markets.

On one hand it explains why lending rates continue to remain in double digits. Why should lenders invest in private sector project appraisals when they can just shovel over their surplus funds to the government for double digit returns?

On the other hand as the finance minister pointed out some donor funding did not come through and they had to raise the budgeted finances from the local market.

It is safe to say that the donor taps may never flow like they used to a decade or so ago. With improved revenues on our part and differences of opinion on the country’s development priorities this pattern of increased domestic borrowing can be expected to continue. And that is really as it should be.

"No country developed on aid but through mutually beneficial arrangements in trade and investment that were fair and enduring...

Therefore to mitigate against crowding out the private sector government should be looking to mobilise more savings into the formal sector.

There was no mention of that in the finance minister’s speech.

The new tax measures while much criticised were an attempt at expanding the tax base – the levies on mobile money and social media expected to rope in an additional sh400b, with non-tax payers being called upon to shoulder their responsibility.

The mandatory savings written into law by a previous government, was a stroke of genius which has made NSSF the biggest fund in the region. Members now save five percent of their gross and increase in this figure would do a world of good for the workers when they hit retirement and for the private sector who may see lending rates go down as a result.

In the short term we need to keep our fingers crossed for good weather so that the good times can keep rolling on. In the longer term we need to mobilise more of our own resources so as to determine our own development priorities.

THE STATE OF THE NATION ADDRESS: SAYING WHAT WE HAVE FORGOTTEN

At the beginning of the state of the nation address President Yoweri Museveni pointed out that over the last decade or so expenditure on infrastructure has been ramped up significantly following a decision by the government to take over the development budget from the donors.

He reported that the expenditure on roads had jumped to sh4.78trillion in the current budget from sh398b in 2005/06. A similar movement was seen in funding electricity, from sh176b to a peak of sh2.858trillion last financial year to now sh2.77trillion.

During the same period revenue collections have grown to sh12.7trillion from sh2.23trillion.

What is interesting about these numbers is that the rate of growth in the budgets of roads and infrastructure far outstripped the rate of growth in tax revenues or even the general economy....

The GDP of the country grew to $25.53b in 2016 from $9.01b in 2005.

The budget on roads and electricity grew by a compounded annual average of 25 and 28 percent, while the budget grew 17 percent and the economy at a compounded rate of 10 percent.

When national budgets grow faster than the economy it is an indicator that someone is playing catch up.

In our case the deficit in infrastructure caused by the two decades of turbulence during eth 1970s and 80s needs no explaining.

What it also suggests is that while the new investments played some role in pushing up GDP numbers that when they are all commissioned, up and running we can expect a sustained jump in economic growth over the next few decades.

The caveat of course is that we cannot continue at the same rate of growth in GDP, until we bridge the deficit, which we are not about to, and that we maintain effectively what we have already built.

Infrastructure enables economic activity and unlocks suppressed demand. The experience in our life time of mobile telecommunications and even the uptake of generated power is testament enough.

When we were trying to get funding for the 250MW Bujagali dam, which would have double our power generation capacity when it came online, then finance minister Syda Bumba was made to jump through hoops by the donors, hopping from capital to capital to get written commitments that the Kenyans, Tanzanians and Rwandese will consume the “excess” capacity of Bujagali.

But with little help from our neighbours we have consumed all Bujagali’s power and when the 183MW of Isimba dam come on line later this year it will not have been a moment too soon.

Of course this emphasis on infrastructure development has kicked up a lot of criticism. The major criticism being that it was responsible for the cash crunch in the economy, with a lot of the contract fees going abroad.

In the “good old days” when most construction was on schools and health centers, our local contractors got their fair share of the business and the money was very much in evidence. But the bigger infrastructure projects are beyond their scope and understandably not as much money as previously is flowing in.

We can write this down to “There is no gain without pain”.

Another major criticism has been that this new infrastructure may prove redundant as there is little economic activity to justify their construction, hence the joke about building roads to dry cassava.

What comes first, the economic activity or the infrastructure? Is it a chicken and egg situation?

I want to believe that when the infrastructure in place the economic actors will appear to take advantage of it and with them will unlock the aforementioned suppressed demand.

Another caveat is in order. This assumes that we get value for money in our infrastructure, that they are durable and of good quality to facilitate existing and new economic activity.

And that has got be a greatest challenge. That corruption is delaying projects, inflating their costs and affecting their quality.

The China situation is a good one to look to.

"When Deng Xiaoming declared that “To be rich is glorious” kicking off the China’s economic boom they committed as much 8.5 percent of its GDP on infrastructure development...

From 1978 to 1990 when the GDP eventually took off the economy grew at about nine percent a year.  This was when a lot of infrastructure was being laid down. In the following 20 years when the infrastructure was commissioned the economy grew at compounded average of 15 percent. It has since slowed to about six percent from 2010 to 2016. This can be attributed to the larger economic base.

Because the truth is there can be no industralisation without infrastructure development. Like sinking a foundation of a building you will have to pour down a lot of material before you can even lay the first course of bricks.

Infrastructure is not everything, there is the quality of the human resource and the institutions, infrastructure issues are probably the easiest to resolve, but little happens before you have infrastructure.

FOREIGN COMPANIES NEED TO SPREAD THE PROFIT

Telecom companies have had a torrid time lately, having to take criticism for events that many times were not of their making but for which they became convenient targets.

In the latest incident MTN bore the brunt of the public anger following a reported decision by its service provider Chinese firm, Huawei, to outsource some of its services to India. The net import of this decision it was said would mean job losses in Uganda. While the soon to be affected engineers are not employees of MTN it was convenient to attack the South African based company.

We then found out that Airtel’s partner Nokia had carried out a similar manoeuvre transferring jobs to India and costing 29 engineers locally their jobs.

There may be some disagreement but outsourcing functions is a long established way of creating efficiencies with in companies. So for instance in the case of the telecommunications companies their core function is to market service not to maintain equipment. So you outsource that function to a company’s core function is operating and maintaining equipment.

"The logic is that in focusing on what you do best you can cut out a lot of wastage that would come from the distraction of learning and trying to do other things...

However outsourcing can take another form. That while I am an expert at what I do, there may be others of comparable skill who can do it more efficiently, often less expensively. This last bit is probably what the telecom service providers did. By consolidating all their operations from various countries to India they can get out more for less input.

No sooner have they got over this they may come under attack for increased fees on mobile money transactions or data fees or dropped calls or suspension of SIM card registration or any number of things that may or may not be their fault.

"It is obvious that why the criticism of these companies can be very vehement and virulent is because they are “foreign” companies. They may argue that they are incorporated locally, they employ a lot of Ugandans, they own buildings, they support local business ecosystems and on and on. But it is a truth of public relations that when perception comes up against fact, perception wins all the time....

So the trick for these telecom companies and any other “foreign” company for that matter is to shift the perception that they are not local companies.

How to do that?

Last month Ghana’s MTN unit launched he sale of shares there. The company is looking to float 35 percent of MTN Ghana on the stock exchange there in a few weeks, which was a condition of the renewal of their license. Nigeria MTN is soon following suit.

With that single swoop perception will be changed about these companies as a critical mass of people will now feel real stakeholders in the company.

We have seen it happen locally. By Stanbic Bank listing shares on the exchange it took the sting out of losing the tainted silver of Uganda Commercial Bank (UCB) Stanbic. The same can be said for power distributor Umeme, who prior to their listing on the exchange was coming under attack for issues in the electricity sector, which were often times not their fault.

It seems a simple solution but the truth be told foreign companies have no need for locally sourced funds or for inviting partners into the business, which are the traditional business reasons for floating shares to the public.

They also do not want to attract more shareholders, which would invariably lead to too much scrutiny of the business, often not in favour of their home offices. But they would not say that in public.

What I am suggesting is a PR exercise, but they argue that it is too costly a price to pay for public relations. And they fear too by leaving the value of the company to rise and fall with local market perception is too risky. What they are really saying is that it is easy to go on with business as usual, with minimal interaction with the public, than open ourselves up and put in the extra work to manage that process.

"But in an increasingly connected world bad press in the remotest part of the network can affect a company’s fortunes on the London or New York Stock exchanges, maybe even more so, because as they say the lies will be half way around the world while the truth is still lacing up...

But if they were to look beyond their grasping fingers, allowing more locals to share in those same fortunes will allow them a critical mass of if not blind supporters, at least the benefit of doubt when the rabble rousers come calling. As they invariably do.

It’s true foreign companies don’t need our money. But there is something to say about being good corporate citizens that goes beyond painting zebra crossings, kissing orphaned babies and digging pit latrines in rural schools.

PLASTICS: AN OPPORTUNITY AND A HAZARD

Enid Musimenta, looked up from the pile of rubbish she was sorting through as we approached.

Atop one bank of the Kireka landfill that straddles a stream, Musimenta said she had been working there for about two years. She sorts rubbish, more specifically, plastics, piling them into heaps before bagging them.

Here biggest heap is of the now ubiquitous mineral water bottles, a smaller one of jerry cans, basins and other harder plastics and an even smaller one of glass bottles.

“I work to fill a pickup. It takes me about a month,” she explains of the work that involves, tiptoeing through rubbish that contains everything from glass shards, tin cans and other sharp objects, in her weather beaten bathroom sandals.

She earns sh300 (US 7 cents) a kilo gram of rubbish collects and pockets about sh150,000 ($40) for her month’s work.

She is not alone. I counted six others women, men and children scurrying around the hips of rubbish in the late morning heat.

Later I saw two men pushing a bicycle loaded with sacks of plastic, heading for a nearby delivery point.

Plastics are convenient packaging material because of their lightweight, they are inexpensive and are adaptable.

"As a result their use in Uganda, where most packaging was old newspapers barely 20 years ago, has grown exponentially. Meanwhile we have invested little to no money disposing of plastics. They clog our public drain systems, degrade our soils and kill livestock...

The convergence of private initiative and a need to conserve the environment may help turn back the plastic tide.

A few kilometres away from Musimenta’s work station is the Plastic Recycling Industry (PRI) plant in Kinawataka in the eastern side of Kampala.

The plant, with up to 30 tons of waste plastic piled above head level in the yard, is clearly overwhelmed by the material it collects everyday, brought in by private companies and community based organisations.

"We process about 20 tons of plastic daily," plant manager James Ongwech said on a tour of the facility, a subsidiary of Coca Cola Beverages Africa (CCBA).

“Our aim to process at least 100 percent of the plastic we (CCBA) generate. So far we have just managed 30 percent,” 

CCBA the bottlers of Coca Cola products and Rwenzori Mineral Water estimate that through their operations they generate about 800 tons a month.

Inside the factory the sorted bottles are washed and then shredded into plastic flakes which are sold to local manufacturers or exported.

"Last year eight companies that are involved in exporting plastic flakes to China and Europe showed receipts of $4m...

But CCBA which through collaborations with local governments and community based organisations thinks if it can expand operations they may go into recycling the plastic into utensils, furniture and other household and industrial items.

What is potentially a lucrative sideline for CCBA pales in comparison to the benefits that would came with or the disaster that would be averted with a reversal in plastic pollution trend that threatens to bury the city.

“The real issues is how can we change our habits so that we dispose of our rubbish more efficiently. Can we for starters learn to separate our   waste into organic and inorganic, so that it’s easier to process?” CCBA’s public affairs & communications director, Simon Kaheru wonders.

Industry sources estimate that at least 1,400 tons of waste is dumped at Kiteezi dumpsite, on the northern outskirts of Kampala. Of the waste that is ferried to Kiteezi everyday only two percent or about 30 tons is plastic. Or about 900 tons a month or 10,800 tons annually.

“There is great opportunity but we should also be concerned that if we do not get a grip of the challenge it could overwhelm us, destroy our beautiful environment and everybody will be the worse for it,” Kaheru said.

THE ARSENAL DEAL AND RWANDAIR

Last week Rwanda was in the news with their breakthrough shirtsleeve sponsorship of English Premier League’s Arsenal Football Club.

The “Visit Rwanda” logo on the left sleeves of Arsenal players will be viewed by more than 30 million people on match days.

Clearly this deal is to supplement Rwanda’s efforts to promote itself as a top tourist destination. Other components of this strategy are Rwanda’s improving hospitality and conferencing infrastructure, its cleverly packaged tours and events and its airline. More about the airline later.

About twenty years ago a UNDP sponsored consultant, I forgot his name, did a study on where Uganda can maximise its potential in order to make a great leap forward in its development.

"He highlighted eight areas – agro-processing, health, education and financial services, tourism, ICT, mining and electricity generation. While he got paid, he might weep when presented with the little progress we have made on all this fronts...

But seeing how Rwanda is progressing on the tourism, health and ICT fronts, I sometimes wonder whether they are not using that same presentation for their own purposes.

The way they have focused on tourism is probably their highest visibility effort. They have zeroed in on making Rwanda not only a leisure tour destination but are also focussed on MICE (Meetings, Incentives, Conferences and Exhibitions).

In recent months with the completion of the Kigali Convention Center in 2016 – a five star hotel, conference hall and information technology park, they have hosted several high profile conferences. The Gorilla Naming ceremony, an annual event gaining in popularity also keeps the visitors coming as do their hiking trails.

And they have developed this systematically, over the last two decades to the point that the small east African country has seen their visitor numbers almost reach two million from zero.

Which brings us nicely around to their national airline. In order to boost their tourism they needed a regular transport in and out of the country, seeing as for a long time the only airline servicing them was Sabena Airlines, which became SN Brussels.

So in 2002 – coincidentally barely five years since the UNDP consultant was in Kampala, they launched Rwanda Express, which became RwandAir in 2009.

According to recent reports the airline is yet to make a profit and were it not for government support would have gone bankrupt by now. One may argue about how long the government can continue to support the airline, which has swallowed more than $150m in government handouts in the three years to 2016 and whose losses have eaten into the airlines capital to the point that its technically insolvent.

"But I think it stands to reason that without RwandAir their MICE strategy would have no legs.
Clearly they have a long term strategy. And for them clearly, a long term strategy is longer than the near 20 years of the airlines existence...

But they also recognise that people do not come to your country just because you have an airline. Think about it, you haven’t been to Moroto or Arua or even Garuga, just outside Kampala, because there is a road that leads to it.

You travel for a reason, because there is something to do or see where you are going. Hence their deliberate effort to package their natural endowments and create new reasons to fly to Rwanda.

The business plan for the revival of Uganda Airlines is being held close to the works’ ministry’s chest. For good reason. They don’t want people poking holes through their plan before government has released a cent.

But the outer outlines of the plan are in the public domain. The justification for the airline can be distilled down to these three points that, visitors by air to Uganda have increased fivefold since the collapse of the old airline – 1.5 million from about 300,000 in 2000, so a national airline is now viable; more visitors will come to Uganda once you have an airline and the clincher, that it need not be profitable because it is like a road, whose benefits are the spinoffs in increased tourism and exports, I saw a figure like an economic return of  30 percent being hazarded by the promoters...

With that last one, they hope with one stroke, to silence all the naysayers and remove the necessity of a business case for the airline.

What that means is that the managers will be under no pressure to make the airline self-sustaining, like Ethiopian Airlines for example. In fact Ethiopian Airlines is the spoiler, as all other airlines on the continent are loss makers our national carrier promoters can point to in justifying the revival of our own.

The promoters are putting out some low ball figures -- $400m (sh1.5trillion) to get it up and running, and once government commits the first few millions of dollars, they will have to continue to shell out the hundreds of millions of dollars more over the next few decades to keep it afloat.

It reminds me of the builder many years ago who gave us a low quote for building the foundation of our home. The figure grew day by day, by the time I worked out what was happening it was too late and we just had to bite the bullet and go all the way.

It’s doubtful if we knew the full extent of the financial commitment we would have started building then.

So while we look to RwandAir’s “success” at driving numbers to its shores, we need to deconstruct the underlying strategy.

Years ago we reportedly paid a million dollars to get some mentions on CNN, whose impact on the news network’s viewers was questionable, Rwanda is reported to have shelled out about $40m on the Arsenal sponsorship over three years.

It may not see tourists bashing down the door to enter Rwanda but you can bet the awareness of a country called Rwanda will rise significantly in the next three years.

UGANDA’S PROBLEM: WE PAY THE WRONG GUYS

The sugar industry in Uganda is under siege. Not only has cane production plummeted as a result of some dubious decisions by the trade ministry to license an unsustainable number of sugar factories in the Busoga region. But also because officials are looking the other way as sugar is smuggled over our eastern border and sold in our shops at knock down prices.

As a result our own producers cannot sell their stock, which has now grown into mountainous piles in their warehouses.

Thousands of jobs stand to be lost, billions of dollars in revenue have gone unpaid and as our politicians and technocrats drag their feet on the subject, the sugar industry is in the intensive care unit. And recovery is not guaranteed.

This is sad because the sugar industry is the best example in the last 30 years, of what success can come from Public, Private Partnership and provides a useful model of what our industrialisation path can look like.

The sugar industry while leveraging our natural endowments of land, human resource and weather has not only created sugar but also spinoffs like industrial alcohol and electricity.

Contrast this with the speed with which the parliament have proposed to double their basic pay in the new budget. One has to commend them for their uncharacteristic stealth in presenting a fait accompli, with not a whisper getting out as they put the scheme together.

According to the proposal an MP’s basic pay is set to more than double to sh24m from the current sh11m. This will amount to a threefold increase in the house’s total wage bill in the coming year.

The audacity of the proposal even as a negotiating position takes ones breath away.

As my friend likes to say, “The lightening that is going to strike these people is still doing press ups!”

As with an individual, it is easy to tell by a country’s expenditure patterns whether future prosperity is a mathematical certainty or a distant pipe dream.

There are only two ways to spend money either you consume it or you invest it.

In the former case there is no real return except for a full stomach or the passing pleasure of a new toy. In the latter case there is the possibility of a return on the investment, which can be reinvested and if repeated with even passable results will lead to wealth.

In the case of nations consumption often takes the form of shelling out money on recurrent expenditure – salaries, official travel and incidentals. While the investment is seen in the development budget, in the building of infrastructure both hard and soft.

Using the above example and applying it to the near death experience of the sugar industry versus the “eat, drink and dance, for tomorrow you die” mentality of the MPs, is it a surprise that we are writhing in the throes of an economic downturn?

Of course the role of parliament is crucial in any functioning democracy. It makes laws to ensure safety of person and property and holds the executive wing of government to account, restrains them from running rough shod over the population. They are supposed to serve with an eye on the greater good of society.

Clearly

our MPs cannot be mistaken for the paragons of selflessness and public service....

History is littered with the economic carcasses of societies that diverted resources away from the productive sectors to the non-productive sectors of society. It never ends well.

 It’s not economics, it’s just plain common sense.

GLOBALISATION IS HERE, FASTER THAN WATCHING PAINT DRY

In recent weeks we have been entertained as the rivalry between the distributors of Plascon and Sadolin has played out on our radios.

The clever ads are only the surface of a competition for a share of the multibillion shilling Uganda paint market.

Last year AkzoNobel South Africa Ltd went into an agreement with Regal Paints Ltd to distribute its Sadolin brand of paints.

But even before the paint had dried on the agreement The Common Market for East & Southern Africa (COMESA) Competition Commission (CCC) announced it was investigating the partnership to determine whether it , “is likely to affect trade between member states and has as its object or effect the prevention, restriction or distortion of competition within the common market.”

Previous distributor Sadolin Paints East Africa was acquired by Japanese firm Kansai Plascon and gave up its right to distribute Sadolin. They now distribute the Plascon brand of paints.

"The CCC notice, which was issued earlier this year, with a 23^rd February 2018 deadline for interested parties to submit their views on the subject, came five months after AkzoNobel announced its new partnership in Kampala...

And now towards the end of May no decision has been made on the partnership, eight months later.

While AkzoNobel officials previously dismissed the CCC’s interest as a formality it can have very serious repercussions for the partnership.

According to the CCC, breech of their anti-competition rules can lead to the agreement being cancelled, a fine to up to a tenth of turnover and liability for claims by customers or competitors who claim they have been harmed by the uncompetitive behaviour.

This is just one example and maybe one of the few that affect us in Uganda.

Another one is the takeover of the company that owns Java House by middle eastern private equity firm,  Abraaj Group. But that is unlikely to raise as much attention as fate of the Sadolin paint brand in Uganda.

This is something that our businessmen may not have factored in their operations, that trying to expand into the region or go into partnership with other players, can come up for scrutiny from regulators far from home.

The idea of regulating competition has gained in importance since the rise of the super companies in the US at the beginning of the last century and the growth of the multinational corporation after the Second World War.

It is a recognition that big companies can take unfair advantage of their size and reach to squelch smaller competitors and perpetuate monopolistic tendencies. This denies the consumers choice, discourages innovation and frustrates the market vibrancy. All of which have adverse effects on the customers and revenue collections.

It is also recognises that companies can grow their dominance in one market unfairly, eventually spreading this dominance to the other markets. In signing up to these protocols we need to not only understand what they entail but also appreciate what they mean in practical terms. Often times we will sign anyway as we have little choice if we are to belong.

The idea that the market through its own mechanism can regulate against competition and in fact become more and more efficient is fallacy that has long been disproved. The truth is that market leaders, like any other wielders of power, tend to concentrate power to themselves. Hence the need for an “independent” adjudicator to step in and ensure an even playing field is maintained.

The need for a regulator is also a recognition that while the market has been shown to be the best mechanism for wealth creation, it is the worst distributor of these gains. Hence the role of government in the collection of and distribution of taxes to help the trickle-down effect along.

"Unfortunately you can have a booming private sector and impoverished population because either government is not collecting taxes and therefore has nothing to distribute or it is collecting the taxes or its agents are pilfering them...

So these are the kind of rules we would have to succumb to as we open our markets to the region and the world.

The argument against regulating markets is that the regulators, often bureaucrats, are not in touch with the market and therefore slow to respond or risk going overboard when they try to pre-empt market imbalances.

There is also a mutual distrust of each other. With market participants seeing regulators as shakedown agents, levying fees that makes it increasingly difficult to show a return. The regulators of their part are always suspicious of market players’ demands for concessions as attempts to cheat governments of revenues.

The tension will always exist. None of the parties either the market players or the regulators are going away.

The case of AkzoNobel will be one to watch in coming months, as it can very well determine the long term shape of our paint market and also make us seat up and take notice of the COMESA Competition Commission headquarted hundreds of miles south in Lilongwe, Malawi.