DO NOT UNDERESTIMATE THE POWER OF SMALL BEGINNINGS

The New Vision Staff Savings & Credit Coop – an organization I am intimately familiar with, last week released its financial results for 2018.

The organization which turned 13 last month has seen the savings of its members grow to sh4.6b from sh62.4m at the end of the last year; its top line has exploded to sh1.3b from sh2.4m and its profitability following suit to end last year at sh701m from sh2.3m in 2005. Its asset base now stands at sh7.8b from sh66.1m in its inaugural year.

These results which represent double digit compounded annual growth over the last 13 years, have come from collecting member savings – now about 1,500 strong, lending the same monies back to them and any surpluses are invested in government paper – The coop’s account with the central bank stood at sh2.3b at the end of last year.

Growth has slowed in recent years, a natural progression as any organization grows bigger, but even using conservative estimates, continued growth would see it double its asset base over the next ten years.

If you had told the founders of the SACCOS those many years ago that the enterprise would be a 100 times bigger by assets today, they would have laughed you out of town.

There several pointers I take away from this SACCOS’ “success”.

1.       1 + 1 =11

The minimum savings per member per month is sh60,000, some savings multiples of this figure and most save more than that. It is just enough to ensure members save regularly but not enough to expect a huge pot at the end of the year. But spread across 1,500 members this comes to a minimum of sh90m per month, what is actually received maybe double that amount in savings alone.

The incentive to save is real as members can only borrow up to three times their savings. Which means the more you save the more you can borrow.

Most members have benefitted from this lending to further their academics, buy land, build homes and help with their household necessities. While they would have eventually come around to achieving all these, I believe, it would have taken a lot longer. By getting some of their base needs out of the way they can now move to planning for more serious investments, which as the coop grows will be able to help them finance.

The larger point is that the whole is larger than the sum of the individual parts. That synergy works and when it does one plus one is not two, but 11...

2.       Keep It simple, stupid!

Everything that the SACCOS does is dictated by three objectives – to provide a safe savings space for its members, to avail credit at affordable rates and finally to serve as an investment vehicle for them.

As the  SACCOS has grown in its capacity to help its members save and borrow, it has also grown as a viable investment for its members – probably the best they have ever had.

A recent revaluation of the shares showed that the members who had bought their shares by 2008 had seen the value of their sh10,000 investment grow to sh1.59m by the end of 2016 or a 88 percent compounded annual growth rate during the period.

But there is no rocket science in achieving these results. As stated above members saved, they borrowed money from the same pool and any surpluses were invested in government paper, which has been offering double digit returns throughout most of the life of the Coop.

Could they have seen higher returns if they had dabbled in more esoteric investments? Maybe. But the risk would have been higher, losses more frequent and performance more volatile.

 But who is going to lose his job for consistent double digit returns in a depressed economy?

3.       Service first, profits later

Profit is good, but it is only an opinion and only comes after the delivery of a service. While we all budget for profit the best way to get it is indirectly, by focusing on service.

Members can withdraw or borrow any working day of the week. Going forward with the technologies available there is no reason by this time next year it’s not a 24-hour, seven day a week service. Interestingly the more available their money is available to them members will save more, lending will go up and as long as costs are managed and our asset allocation doesn’t go haywire, profits should continue to roll in.

4.       It’s the vision thing

The vision of the New Vision SACCOS is “To be a vehicle for financial freedom for our members”.

The simplicity of it belies the enormity of the task. Financial freedom for the members means that the income they would get from the SACCOS – interest on their savings, dividend payouts and the appreciation in the value of their shares, sometime in the future would be enough that they would not need a salary from anybody else.

This year the coop will pay out sh380m in interest and dividends, which if split evenly among the 1500 members should come up to just under sh255,000. But the lowest paid staffer at the New Vision grosses about sh10m annually. There is still a long, long way to go.

Thirteen years is but a blip in the greater scheme of things. Given the enormity of the task, this is not the time for the SACCOS to rest on its laurels. In the pursuit of our elephant we cannot be distracted by the smaller game meat that crosses our path.

THE BUFFETT LETTER AND DANGOTE

Last week US billionaire investor Warren Buffett released his annual letter to the shareholders. A much awaited document that he has penned for almost half a century as the head of Berkshire Hathaway, it spells out in detail his philosophy on business and life.

As he has done over the last several years in his annual letter, he laments that there re no big companies, selling at price that would meet his criteria and tempt him to commit some of the $112b held in cash by the company.

At 88 he has learnt over a long investing career, that started when he was 11, that waiting for the good deal may very well be the best use of his time and his investable capital...

Buffett is a billion air many times over and this is thanks to his investing process, which entails looking for good companies selling at discounted prices to their intrinsic value and holding forever. 

His search from value has been fine-tuned over the years to the point that is company is valued at just over $500b today or 20 times the size of the Uganda economy or thrice the size of the East African Community.

Which brings me around to our African billionaire Aliko Dangote. The Nigerian’s wealth has evolved from a commodities trader to a huge industrialist. The cornerstone of his empire has been his cement manufacturing operations strewn across the continent – his Obajana operation alone churns out 1000 trucks of cement daily.

The jewel in the crown will soon be the 650,000 barrels a day refinery that is under construction outside Lagos that will cost $12b. Uganda, using current estimated reserves, will be pumping out 200,000 barrels per day.

While not an exact fit Dangote may be the continent’s Buffett in the way he seeks out assets, in our case natural resources, and invests to extract their full value.

Anybody who knows anything knows that Africa is not poor, the challenge is that unlocking the value of its people and natural resources has been subverted by bad politics, foreign interference and poor business skills...

Africa as Dangote is showing, so dramatically, is a deep value play and the best people to fully unlock that value have to be us. Africa does not conform to the modern investment critea that are employed in western boardrooms. Investing in Africa takes a faith that the atheist west has long lost. Investing in Africa requires that’s its people are seen as useful partners and not statistics in market research report.

So why don’t we have more Dangotes around Africa.

It helps that Dangote came from a longline of businesses. One can only guess that every generation has improved on the business quality. So if Dangote’s forefathers started with trading cowrie shells in the Trans Saharan trade their descendant has overlaid industry on that foundation of business practice.

It helps too that he is Nigerian. In the most populous nation on the continent you either do big or go home. With this outlook ingrained in his DNA it should come as no surprise he has no qualms jumping onto his private jet to explore opportunities not only in West Africa where he has presence in Nigeria, Ghana, Cameroon and Benin but further afield in South Africa, Zambia and Tanzania.

He is more of a hands-on manager compared to Buffett, who rarely leaves is Omaha, Nebraska base to visit the constituent companies of his conglomerate. But maybe that is what is needed, face to face meetings with his mangers on site, if only to drum in his vision and their part in fulfilling it.

Apart from the aforementioned retained earnings in his company, a lot of the financing for Buffett's ventures is got from his insurance companies, whose “float” – the premiums policy holders pay out net of claims, is the gun powder he uses for his acquisitions.

The way the story is told Dangote borrowed $3000 from an uncle to start his first business. Four of his companies are listed on The Nigeria Stock Exchange (NSE) and given the scope of his holding one can expect that he is not averse to mining the money markets of Europe to finance his ambitious expansion plans.

He has on several occasion dismissed suggestions that his success has been driven in no small part by his closeness to the Nigerian establishment, but even if that was so we know dozens of people close to the establishment who have had and still have access to hundreds of millions and have squandered the opportunity. That Dangote can parlay this alleged advantage into huge economic success – he is the largest private sector employer in Nigeria, tells you a lot about the man.

"Value investors like Buffett and Dangote are happy to invest when there is blood running in the streets, they are greedy when others are scared. It takes a lot – risk, pain and sweat to develop such a mentality and maybe that is why there is only one Dangote in Africa.

THE PEOPLE ARE CALLING YOUR BLUFF

Last week Major General Matia Kyaligonza and his body guards got into an altercation with a traffic police woman on the Kampala-Jinja road – to put it mildly.

The hapless police woman whose “crime” was to call them to order for breaking the traffic laws – making U-Turn where they were not supposed to, was roughed up for her trouble.

This would have been filed away as another urban legend surrounding the General were it not that it was caught on camera, with the general’s identity hard to deny.

"This country has a torrid history of military abuse. The worst excesses counted back four decades ago, when soldiers had no qualms disposing of people permanently or bundling them into the boots of their cars and driving them off to unknown destinations but certain ends.

The fact that the manhandling of Sergeant Esther Namaganda almost broke the internet on Sunday; the fact that she even could go and report the senior officer to the nearest police station; the fact that the general’s actions have been called in question loudly and publicly is a sign some would say, of how far we have come as a country.

Even more important for me is that the people are calling the bluff of the bush war veterans, “You said you went to fight for a restoration of democracy, so that is the standard we will hold you to”. Which is as it should be.

Holding those in power accountable has also been aided immeasurably by social media, where now everyone is a media house to record and transmit the happenings around them at will.

"Democracy is not an event but a process, which involves among other things, compelling the powerful to conform to the rules. Progress is never achieved in a straight line and progress often doesn’t look like it, often a case of two steps forward and four steps back...

Of course some people will argue that the only crime the general committed was getting caught, that these violations are happening every day. While very much in the public eye but far from the cameras which would alert the chattering masses to the transgressions.

Well even that is progress, that the perpetrators of the violations chose to do them under the cover of dark or away from prying eyes.

There was a time centuries ago that the kings of Europe used to have the power of life and death over their subjects, when France’s Louis XIV could declare L’etat c’est moi (I am the state) and King Leopold could use the state machinery to subjugate the people of his private possession Zaire, now the Democratic Republic of Congo and still sell it back to Belgium for a tidy profit.

These despots did not relinquish their hold on power out of the goodness of their hearts. They were compelled to do so first by the parliaments they set up, which in themselves were concessions to mounting pressure for a say in the governance of their countries, and then by the people as communication improved, word could get around faster and people could be mobilized easier.

"One thing that can be said for the NRM though is that while they were the initiators of opening the political space by, their experiment with direct democracy, sticking to electoral cycles, maintaining a vocal if not rowdy parliament and eventually lifting the ban on political parties, they have often enough shown themselves willing to go where the wind blows – not always in directions they would have liked or preferred...

Every so often there is push back, but they have their have often shown presence of mind, even sense of occasion, to sheath their claws before things got too far out of hand. Not always, but enough times to allow progress to continue.

But it is like they say, when you give a man an inch he will take a mile or that after you have given the people some they, like Oliver Twist, will beg, even demand for more. That is the natural order of things.

It is the sign of the times. Everywhere not only in politics, but also in the economy, in society generally the old command and control structures are coming under scrutiny, under threat even, and it will take a different mindset to not only appreciate these changes, but leverage them or step out of their way all together.

GOVT MUST GIVE ITS COMPANIES A CHANCE TO WORK

The recent Auditor General’s report was, as ever, an eye opener about how government its departments and authorities conduct their financial affairs.

It is mind boggling how parts of government get away with financial mismanagement year after year and nothing seems to be done to the responsible officials.

I was particularly interested in the state enterprises performance.

"Of the 24 state enterprises the Auditor General reported that just under half or 14 of the 29 enterprises showed a profit. For many the quality of the earnings didn’t stand up to scrutiny, when viewed against their asset bases, but that is a story for another day....

No details were given of the individual company accounts but one wondered how Uganda Electricity Generation Company ltd (UEGCL), Uganda Electricity Transmission Company Ltd (UETCL) and Uganda Electricity Distribution Company ltd (UEDCL) continue to be loss making.

The three companies are as a result of three way split of the former Uganda Electricity Board (UEB). The thinking was that the unbundling of the dinosaur would improve specialisation and make the component parts much easier to flog off to private operators.

So with Eskom taking over the Kiira and Nalubale dams and Umeme taking over the power distribution, UEGCL and UEDCL remained as custodians of the assets that the government had leased to the private players. The transmission function remained with government.

You are loss making when your expenses exceed your revenues. In that case you are not making enough money --- often a failing of the marketing department or your costs are unrealistically high.

The financials of UETCL and UEDCL were not available online.

But UEGCL’s numbers were and they showed that the company earned income from the concession fees paid to it by the operators of power generation plants and some grants. I suspect this is the same for the other two entities.

Depreciation and amortisation is the greatest expense, wiping out UEGCL’s entire income. When you add on staff and admin costs it sinks UEGCL further in the red.

So either UEGCL’s is not pricing its services well enough or costs have run amok.

"As it turns out UEGCL is not allowed to charge depreciation on the assets in the concession – dams, which it owns. The depreciation they booked was for assets that were used to supervise the projects and not on the fixed assets like the dams...

While if fully provided for this would sink UEGCL further in the red, adding it to the portion of the tariff due to UEGCL would increase their top line considerably.

More importantly it would mean these would be funds the company would revert to, to finance other hydro-power developments. Depreciation is not paid out but retained in the company to at least finance replacement of existing assets.

But one can understand the logic of removing these charges from the books. It artificially keeps the tariff low but compromises the ability of UEGCL or the other companies to carry out their mandate sustainably...

What it means that under the current arrangement for all subsequent power plant developments UEGCL will have to fall at the feet of government to provide the required funds, unnecessary if they were allowed to charge for it.

Given the government’s shifting priorities this is not an ideal situation for any manager to be in.

It’s no surprise then that government is now resorting to expensive loans to finance its power expansion ambitions. A classic case of the chicken coming home to roost. Because it seems expedient to bury our head in the sand and keep tariffs artificially low, this short sightedness then comes back to bite us and actually hampers the appropriate roll out of new power plants in the future.

This year the 183 MW Isimba and the 600 MW Karuma power projects are coming on line and one can expect that government will continue with this pattern of doing things in attempt to keep tariffs low.

We have a set target to increase power generation to 17000 MW by 2028, this means that under the current arrangement UEGCL will be unable to budget to build or cooperate in the building of new plants unless government provides the funds.

We can expect the convoluted process to construct Isimba and Karuma to played out in subsequent power generation projects because UEGCL’s has its hands tied.

Essentially what government is doing is not allowing UEGCL to succeed. It is hard to see how the company will break even under the current circumstances and therefore compromise its capacity to fulfil its mandate...

As I said I couldn’t see the financials of the other two companies but it would come as no surprise if they are treated the same.

And one last thing that unlike other Independent Power Producers (IPP), UEGCL is not allowed to add a Return on Equity (ROE) to their portion of the tariff. Again for the reason that it would raise the tariff to uncomfortable levels. This too hobbles UEGCL’s long-time viability and usefulness to the country.

"Across the border in Kenya UEGCL’s counterpart KENGEN relies on its own resources to expand power generation. It is no wonder that KENGEN, a profitable company in its own right, has greater generation capacity than Uganda despite our greater potential to generate power – at least hydro-electric power...

THE HARVEST MONEY EXPO AS AN EYE OPENER

Last weekend the Vision Group and its sponsors hosted the third Harvest Money Expo at Namboole, an event that brings together exhibitors and farmers – current and potential, in an increasingly popular event that is fast becoming the premier event on the agricultural calendar.

This year’s theme was “Farming as a business” and given the stated ambition to shift the sector away from subsistence to commercial production, there is no reason why that is not a constant theme going forward.

At the expo where exhibitors were set up all around the exterior of the stadium, the thousands of visitors who walked through the gates were exposed to everything from tractors to seed varieties to agricultural processing plants and machinery to agricultural financing products.

It was a revelation to see what is available to farmers on the market on one hand and on the other the magnitude of interest in the subject by people from all walks of life, gender and age.

As seven in ten Ugandans derive their livelihood from the soil, what happens or not to agriculture has an effect on Uganda’s fortunes.

"The anaemic growth in output of agriculture when seen against the progress in construction, industry and services, means that the economic fortunes for the majority of Ugandans have been barely touched by the country’s 33 years of unbroken growth....

This should concern everybody because the growing income and wealth inequalities cannot go on for ever before they trigger insecurity and instability.

There is a lot to be done with the land tenure system, improving farming practices, promoting farmer cooperation and facilitating access to markets.

One of the major challenges of dealing with farmers in sustainable and scalable ways is that they remain largely informal. Being such an agricultural country it should be that agricultural enterprises are comprise the largest number. But this couldn’t be further from the truth.

So farms are often unregistered sole proprietorships or partnerships that are operated to meet this or that families’ subsistence needs, which even they don’t do well.

In Mityana around Africa’s largest coffee plantation Kaweri Coffee, coffee farmers have been organised into groups to improve their farming practices, bulk their crop giving them better bargaining power when the middlemen show up.

The Uganda Coffee Development Authority (UCDA) estimates that the average yield on our farms is 0.5 tons. The Kaweri farm does 2.5 tons per hectare and the local farmers do about half that. The trick has been in improved planting, husbanding and processing and organising of the farmers into groups not only for marketing of their produce and improved bargaining power with suppliers  but also as a forum for shared learning.

The last I heard the groups were planning to incorporate. A change in their status may very well signal an improvement in their fortunes as suppliers, traders and even financial institutions would find it easier and more convenient to deal with them.

"Like with business people the sector complain that there is no access to tailored agriculture finance.  While that is true, being incorporated with proper books would give financiers a better appreciation of the business and improved sense of the risk they would be underwriting....

Finance is scarce everywhere often because financiers cannot appraise the enterprise with any degree of certainty.

The issue of the agriculture in this country is one of failure to unlock the full potential of the bounty around us. We can’t do that because the sector --- starting from the ministry, is not geared for the job.

The proof is the foreign concerns who have entered the agricultural space and showing world class productivity and quality  – the aforementioned Kaweri coffee farm for one; Exclusive Cuts a company operating out of Kiwenda, Wakiso export up to five million flower seedlings a month to the flower auctions of Europe.

As the Harvest Money Expo showed – to me at least, the sector has to get organised to get access to inputs and capital that will help the country live to its full potential as the food basket of the continent. Further afield the demand for what we can produce is boundless, it’s a scandal that we continue to be a poor country.

KENYA OIL COMES A CROPPER

Seven years ago ( has it been that long ago?) then Kenyan energy minister Kiraitu Murungi gleefully reported that oil exploration firm Tullow had found sizeable oil deposits in northern Kenya and gleefully hazarded that these were  larger reserves than neighbouring Uganda (I wonder who gave the minister that impression?) which had established commercial viability six years prior.

Seven years down the road Kenya has ditched plans for a refinery to process their crude for lack of adequate resource.

Who is fooling who?

TECHNOLOGY AND THE CHANGING WORLD OF THINGS

What was it like the day after fire was discovered or the wheel was invented or the first gun was fired or the first printing press started rolling. Probably not any different than the day before, for the majority of the human race.

It took thousands of years between the first wheel’s creation in Mesopotamia and the widespread use of the wheels for carriages; It took more than 1500 years for gun powder to make its way from China to gain widespread use in Europe; It took 500 years between the invention of the printing press and its adoption in all world regions.

These and other inventions have change the course of human history, speeded up the process of human development and for better or worse have caused irreparable change when they have been widely adopted.

It is the greatest of understatements that the internet will pale in comparison, not only the scale of change it will engender but the speed with which this change will be adopted, so much so that in the next 10-, 20- or 50- years – not few centuries, when we look back we will not recognise the times we are living in now.

The first I heard of the internet is in the early 1980s that there was this computer network students off the east coast of Canada, on Prince Edward Island, would use to access libraries on mainland North America. That many people could read the same book at the same time. And they would read this in near real time – computing speed was much slower than, but still to my little mind at the time this was the stuff of science fiction.

While I grappled with this notion of clairvoyance then, my sons now, aged 10 and eight, would struggle to wrap their minds around the concept of a library as we knew it then, where one would go to a big room of books and borrow a maximum of three books for a week, to read at home. And that if someone had borrowed the book you wanted you would have to wait for them to return it before you could read it .

This difference in reality for these little boys – me three decades ago and my sons today,  is separated by more than time.

"It means for one, that with knowledge now so readily available, these kids can, will and do, know much, much more than we knew at their age; It means that their teachers are no longer the authority figures they used to be in our day, because today teachers standing in front of classroom may very well be spouting old news to a kid who has gone well past the bantu migrations or the rift valley formation or newton’s laws of physics in his random browsing of the internet at home....

It raises the age old dilemma that many have suffered with their richer parents, uncles or spouses, which is “What do you give a person for his birthday who has everything?”

Edgar Kasenene who started out as an IT engineer but now grapples with these questions in helping companies adopt for the new era argues that, “It’s not any more about facts but about creativity, what you can do with those facts, because facts have now been commoditized.”

In our day you would hear of a textbook that was the best for Geography, History or Mathematics and that there was only one copy of it and you didn’t have it. Facts were scarce. That is not an option now.

Everything we own or use is based on knowledge. If knowledge is now so prevalent it means the scarcity of things will soon be or is already in some instances non-existent.

So if there is no scarcity of information or knowledge leading to no scarcity of goods or services where does that leave economics, defined as the management of scarce resources?

Kasenene argues that the structures to manage our lives – at home, at work and in the world generally are designed to cope, manage or exploit scarcity. The status quo is redundant in a world where scarcity is not an issue.

Seen in this light, scarcity is a function of a lack of knowledge or ignorance.

So in my day (see how I refer to my day as if it is long gone? Because it is gone) having an education, speaking English or knowing how to do my tables was a competitive advantage. In this brave new world I have no competitive advantage of anyone with access to the internet, the winners are and will be those who can access this knowledge and creatively work with it to innovate and produce more.

"In workplaces all the manual jobs are or will be automated. Which makes one wonder whether factories will really bring jobs to economies like they did in the industrial age. That time is dead...

When we did field trips to the beer, soda and other factories in our younger days there were always people manning the lines, supervising processes and generally being around. Thankfully those same factories are still around. If you went there now there are not only fewer people on the factory floor but the output of these enterprises are multiples of what they were when their workforce was thrice or quadruple the size they are now. It is only going to get worse.

So what to do for us in working life staring into the abyss?

Kasenene says that career planning is out, things are changing so fast whole careers have been wiped out; Learning plans are in. That because of the speed of change we have to keep learning to remain relevant and not only a continued upgrade of our current skills but the acquisition  of other areas of knowledge and skills is imperative.

As is fast becoming evident these days, that no sooner have you learnt something – got your degree or master or PhD, than it becomes obsolete.

And finally this speaks to how we work in or run our companies.

The only way to continue to be relevant is to have an obsessive focus on the customers’ needs.  While management gurus like Tom Peters have been counselling this since the 1980s, it is now even more relevant. Because of the aforementioned explosion in information and options, the client does not need to stick with you – remember there is no scarcity and your competition can come from anywhere in the world from unrelated industries.

An innovation driven by evolving customer needs is the only way to remain relevant.

“Innovation is no longer a department it must become a way of life,” Kasenene said.