AFGHANISTAN AND THE FOLLY OF FOREIGN INTERVENTIONS

It has been almost a month since the US government made good on their intention to cut their losses in Afghanistan and flee the central Asian hellhole.

It will be 20 years tomorrow since terrorists – Mostly from Saudi Arabia, flew into the Twin Towers in the New York and the Pentagon to trigger the “War on Terrorism”. At the time the Talban were in control of Afghanistan and suspected of aiding Osama Bin Laden, the mastermind of the 9/11 attacks.

US President George Bush wasted no time in not only setting the cross hairs on Kabul and cobbling together a coalition of nations to invade Afghanistan, topple the government there and bring Bin Laden to justice. At least that is what he told the world. A claim, which came under question when he decided to throw Saddam Hussein’s Iraq in the mix under the pretext that he had weapons of mass destruction.

Bush declared victory in Iraq but not Afghanistan, his successor Barack Obama got Bin Laden and it was left to Donald Trump to negotiate an exit plan and current president Joe Biden to execute that plan.

Thankfully the US has not tried to claim victory in Afghanistan. It would be a pyrrhic victory if they did – it cost 170,000 lives and $2trillion dollars. While the US has emerged smelling more of manure than roses, a few billionaires have built their fortunes upon the rabble of Afghanistan...

It was always going to be a clumsy close to this chapter of US history. This had been their longest war the US has fought , the duration meaning they had put down some semi-permanent roots that could not be uprooted at a moment’s notice. As a result, they have had to evacuate many of their collaborators and support them for the foreseeable future at great cost to the blissfully ignorant US taxpayer.

Whichever way you look at it, this a misadventure, like Vietnam, the US will be anxious to put behind them as soon as possible.

Analysts have in past weeks mulled over why the US had to beat a hasty and messy retreat from Afghanistan, even if it was to great embarrassment to themselves.

Some thought in the current depressed global economy it is an expense they can barely afford – they spent $300m daily to execute the war; some think that it was a distraction from trying to contain China, which over the last two decades has grown to be the second largest economy after the US and threatening to overtake it within the decade; the more charitable ones think the US has seen the error of its way and this signals an end to their meddling ways abroad.

That last one should be dismissed out of hand, if only because the US has the world’s largest military industrial complex that has to be kept sated – the US’ defence budget is larger than the combined budgets of the next 11 biggest defence spending countries.

I think the first reason that the war was too expensive, falls on its face in the light of the huge military industrial complex’s needs.

There will always be money for war especially if it supports local industry. Bullets don’t rot on the shelf, they need to be used to be replaced....

Which leaves us with the China question. Before our very eyes China has risen from the ashes of Mao Tse Tsung’s cultural revolution to challenge US in economic might and world influence. After the collapse of the USSR in the 1980s and 1990s the US became the unchallenged super power, running rough shod over everybody else with their liberal economy and multi-party democracy prescriptions for all the world’s ills.

Now China has inserted itself into the vacuum, which came as a surprise, not because the US never saw it coming than out of arrogance, the thought that the Chinese would never amount to much.

Bombing Afghanistan into the stone age, while a lucrative distraction had to be put on hold to contain China, which is flexing its muscles – literally and figuratively in everywhere from the South China Sea to Africa and Europe.

I tend to believe this last theory more. After the better part of a century playing big brother in the world, the US would not know how to or countenance playing second to a resurgent China.

So in coming years look out for more economic wars with China – Trump was just the beginning; proxy wars – the US does not go to war with a country it can’t win against and invariably a new world order – fundamentalist terrorism will fade into the background, with the US and China playing the elephants and the rest of us serving as the hapless grass.

WHO IS KILLING LOCAL UGANDA BANKS?

In August the Bank of Uganda (BOU) announced that it would be raising the capital requirements of the financial institutions under its supervision, kicking up a lot of noise from the usual suspects.

BOU has tabled a six-fold increase in paid up capital for commercial banks to sh150b from the current sh25b, while microfinance, deposit taking institutions (MDI) will see their requirements jumping to sh10b from sh500m.

The central bank argues that these changes are long overdue, would strengthen the financial sector, allowing it to be more innovative and be able to finance more of our own development agenda.

The critics pointed out that these requirements would effectively shut out local businessmen from entering the sector, banging in the last nail in the coffin for foreign dominance of the sector. Their argument seems to be that foreign banks are not sensitive to local business and the repatriation of their massive profits is helping fund their home countries to the detriment of Uganda.

They are right to some extent, foreign banks by their definition have their owners abroad, which investors want to see a return on their investment and understandably prefer to be paid where they are – at home.

And true, it is very possible local businessmen will be shut out of the industry, not because they cannot raise the required sh150b but because they cannot work together to raise these amounts and run the banks properly...

Their concerns that foreign banks may not be sensitive to the local environment is debatable. What is true though is that targets for the management of these banks are set abroad and local managers will do everything in their power to meet their targets to win the juicy Christmas bonuses. That may very well mean sidestepping all risky projects and loading up on the less risky government paper. This argument also seems to suggest, wrongly I think, that local owners would be more willing to take risks on local businessmen at the expense of their bottom line. If this is true maybe that is why our banks cannot stand the test of time?

And on the issue of loading up on treasury bills and bonds the scope for this is increasingly narrowing. In the last treasury bond auction held in August government offered to sh200b and sh300b in three year and 15-year treasury bonds respectively. These were oversubscribed more than twice in each case, meaning that while the investors – many of whom are banks, had money to invest the BOU could only take about half of what they offered.

So while everybody with half a brain should be in bonds, with their double digit returns, that lucrative investment avenue is narrowing by the day. Which means bank managers will have to either report lower profits and kiss goodbye their huge Christmas bonuses or be more innovative in the products they offer their clients.

"An increase in capital requirements means banks will see the government paper as less of an option to show an adequate return on equity for their shareholders here or abroad...

Related to that, existing requirements that banks can not lend more than a quarter of their capital to one individual puts a cap on how much our banks can support local projects. At the current sh25b paid up capital the most a business man can borrow from such a bank would be under sh7b – not enough to build a mall, leave alone a mega factory that would create jobs.

Interestingly, it is worth noting that such products like salary loans only came into play at the end of the 1990s when the government raised bank paid up capital from sh30m to sh1b and then sh4b.

Banks make money by lending and the more money they have in capital the more they need to shovel out the door. It follows therefore that apart from thinking up new products to sell to the product they may very well be forced to lower lending rates, what everybody has been dying to see.

Logically the only people who would have a problem with this new arrangement would be the bank owners who don’t want to invest more in Uganda (they were reaping a lot more than they sowed and would like to keep that going without more risk to themselves) and the bank managers who would have to earn their keep – be more efficient and think harder, in order to keep looking brilliant at their local bar....

For the owners who don’t want to inject more they have the option of merging operations with other banks or selling off their golden goose altogether. Not a bad thing, especially if some of our local businessmen can pony up the money to buy them out.

Beyond the possibility of better service and lower lending rates, there is a real possibility that some of the owners may finally be resigned to sourcing their money on the stock exchange, essentially sell shares to the rest of us to raise the required amounts, allowing us in on this business that seems to make money effortlessly 24/7.

On the issue of the cementing foreign domination, that has been on for a while and now and may very well continue. If we have surrendered our industry to foreigners, we have only ourselves to blame. Would you rather maintain a weak banking industry, which cannot support local production because you are jealously guarding it from foreigners or invite foreign capital in and get better service? 

"Jealously guarding the industry from foreign money will only benefit the few local businessmen who will be able to raise the small capital requirements, shut out other competitors because of their connections in high places and reap massively from charging extortionate lending rates...

They say that nationalism is the last resort of the scoundrel. Do we for instance believe that our businessmen will charge us less to borrow and pay us more on our savings? Recent evidence of local banks does not suggest that and I don’t see what would change now.

But if we got our richest 100 Ugandans together, would they fail to raise the sh150b new requirement and the additional working capital to start a bank? If that is true, then BOU is in danger of building such huge banks here as not to find business.

But it is also not true that we do not have local industry players. Post Bank has a nationwide network and sh76b in capital; Housing Finance Bank has sh61b in paid up capital. If you merged these two government institutions and slapped on Pride Microfinance Ltd – paid up capital of sh25b, we would have an institution big enough to not only meet the new requirements but compete favourably in the industry.

 

 

MAKING SENSE OF THE MASAKA ATTACKS

Over the last few weeks news out of Masaka is of gangs running around unimpeded, attacking villagers with iron bars and pangas.

The brazenness of the attackers is such that at times they warn their victims ahead of time that they were coming and make good on their promise.

The events have moved from isolated incidents to a regular occurrence in the last month or so bringing into question what is going on.

In the last week the political and security leadership have come out publicly to address the issue. So far more than 20 have died and many others injured, while at the same time ten suspects have been charged in court.

"The chilling thing about the attackers is that they are not stealing anything during their attacks, although in one incident they sat down to help themselves to the food in the kitchen. This means they are not ordinary criminals....

Their intent is seemingly to sow fear in the area, to what end? It has been suggested that they are doing this to raise doubts about government’s capacity to keep people safe. These are the hallmarks of terrorism.

It reminds me of the Lord’s Resistance Army (LRA) which run rampage in northern Uganda for two decades. Led by Joseph Kony, they claimed that they wanted to overthrow the government and rule the country by the ten commandments, but by their actions -- lopping off lips, hacking off limbs, abducting children and killing villagers altogether, did not suggest they were interested in winning the hearts and minds of the population in the area.

They effectively terrorized the region until Sudan, under pressure from the US’ “war on terror” allowed Uganda to enter South Sudan and dismantle their rare bases.

With LRA there was evidence of a unified command, which is different from Masaka gangs, who seem to be small groups hitting different places simultaneously and stretching the security infrastructure to the point of ineffectiveness.

It may be early days but unlike the LRA, the Stockholm Syndrome – where the captives begin to sympathise with their captors, doesn’t seem to have set in yet. But for how long?

You have to feel for the everyday person in the affected areas. They are caught between their attackers, who seem to attack at will and leisure on one side and the government on the other which seems to be slow to move on this new threat.

If government does not clamp down quickly on the attacks, the hapless villagers will begin to negotiate with their assaulters to the detriment of any security operations.  Tier reality is much different from us reading our news off our smart phones, this a real existential threat and will develop coping mechanisms that may seem unpalatable to onlookers.

Looking at either side of this “conflict” you have to wonder on one hand who these assailants are who are preying on vulnerable people and not for monetary gain or political capital? They coordination of their action suggests there is some central command, what kind of people would lead such a group to terrorise local populations? Is it possible that the leaders are not from the region, therefore their lack of empathy for the villagers?

On the other side of the pendulum clearly there has been a laxity of security. No surprises there if only because we know how the police are so under resourced. One can imagine the large areas that are under one police stations jurisdiction in the Masaka area and the station may not even have one patrol vehicle. And these inadequacies cascade down to the investigation and the intelligence capabilities.

The truth is that on the whole Ugandans are law abiding citizens and therefore a semblance of peace/security can be achieved with little resourcing of the police. But this will not always be the case. With growing populations, environmental degradation and increased urbanization crime will follow as night follows day and the government will be caught flat footed as it has been in these latest incidents.

The Masaka incidents point to the fact that we need to beef up our civilian policing capacity if only in preparation for an uptick in insecurity deriving from the above change in our circumstances.

TURNING THE BUSINESS AROUND

Recently I got interested in a business turn around situation. Up to that point the business was being run as a lifestyle business, the income from the business was being used to sustain the owner.

Long story short, the need had arisen to  grow revenues and expand the business. The business had several underdeveloped revenue streams, a huge asset base whose potential had not begun to be tapped, no surprises there as it was being run very casually. Which was understandable because how much can one man eat?

The first suggestion was obvious, an audit of the business was required to establish what the business owned, its income and expenses.

The next thing was to clarify the ownership, the rights and obligation of the owners – existing and potential.

 This last part was as crucial if not more crucial than the audit.

"Our businesses fail more for lack of organisation than for lack of money. To the extent that businesses are organised in their set up, how they participate in the market and how they relate to their various stakeholders determines whether they are well funded or not....

Negotiating the shareholder agreement proved harder than initially thought. What share would each shareholder get? The issue of how much equity each would contribute to the deal? And how would the business be financed going forward, when its needs extended beyond the initial owner’s needs? How would the business be managed going forward and finally, the elephant in the room, how would each be paid by the business for their interest?

They say that in setting up a business the initial fifteen percent effort will determine the destiny of the business.   That the way you start the business may lock you into a path way into the future for better or for worse.

By insisting on the shareholder agreement at the beginning would clarify a lot of things down the road – how decisions are made, how owners can fund the business and get paid by the business. These three components alone are what determine the long term viability of the business.

For instance if the business need a capital injection of a million shillings how is it decided that the money is needed? If the all the shareholders can not afford their share but some of them can foot the full bill how do we handle that, especially how the rich ones get paid in the future? And when and how do the shareholders start to see a return from the business? 

The shareholder agreement and adherence to it is the beginning of formalisation of the business.

What happens with our average business? Mostly they are sole proprietorships, which are most likely to fail to grow beyond the founders needs. But if they are limited companies, with several people coming together to pursue opportunity the thinking at set up doesn’t not go far beyond what the business will be and what each owners rights and obligations to the business are.  Trouble starts when they become successful, the money starts flowing in and disagreements  begin about how much of the money each is entitled to. Never mind that the business may not have even broken even.

Taken a little bit further a time comes when the owners and the business can not keep up with the capital demands of the business, how do they fund it? By borrowing or inviting new shareholders or selling the business altogether.

The question often comes up, why should we want to expand at all, we are happy at our current size. For starters growth is a survival mechanism. If your business does not grow it is only a matter of time before a bigger business with larger economies of scale comes and runs you out of the market...

We have seen it in our own time. Trading centres are giving way to malls; Fruit juice companies have given way to bigger beverage companies; cottage industries are giving way to bigger manufacturing concerns.

Back to my friends who were hoping to turn around their business. We are hoping to move from informality to formality not only in the way the business works but in the way the owners think about their business. 

By getting organised not only can they maximise the existing revenues streams, but they can tap into the business latent potential through borrowing, inviting new shareholders or selling it off all together, most likely using a combination of the all of the above.

"The business may very well fail in the future, but the owners are determined that it will not be because they were disorganised and confused....

DO NOT DESPISE SMALL BEGINNINGS

A major challenge of the Ugandan economy is our low saving rates. While it has grown over the years to about 19 percent of GDP in 2019 according to the World Bank it lags behind neighbours Tanzania at 35 percent, Zambia at 40 percent.

While it is about level with the sub-Saharan average these are still dismal figures that need to be pushed up.

"Low savings rate affects the cost of borrowing, high savings rates lead to lower lending rates and vice versa...

The argument though is that we save, its just not in the financial sector. Our savings are in livestock, crops and real estate.

Saving in these “real’ assets is a hangover from a time when inflation would eat up the value of  ones savings faster than one could accumulate them or when banks were not credible, folding at the slightest crisis.

The challenge with continuing to save the way we do is that there cannot be any significant ripple effect. My chicken will lay eggs for me, my cow will produce milk for me and on the occasion that I slaughter it feed a few dozen people in the village.

Saving in a formal financial institution, which will then take your money and lend it to those in need of capital has more far reaching effects, aiding the expansion of businesses, speeding up growth and development.

I was therefore tickled silly when a few weeks ago I “happened” upon Mushanga SACCO in Sheema district, western Uganda.

It was not its new double storey headquarters that caught my eye, but that almost every adult in its surrounding area had an account with the SACCO. 

Suppliers and workers accept payment through their accounts at the SACCO, which accounts they can access via their mobile phone.

While the lending rates are rather steep – three percent a month, the SACCO membership have worked out that since this is levied on a reducing balance they can reduce the interest they pay out by accelerating their repayments. No financial literacy class would have taught this better than hard experience.

But even better for me is that the SACCO has incentivised its members to providing it with long term capital in the way of fixed deposit accounts and by selling shares.

The net effect of this is that the SACCO which turned 50 in 2019 has total assets of about sh23b with sh9b of this being member equity. Not bad for a SACCO whose members minimum obligation is to save sh10,000 monthly....

Essentially what Mushanga SACCO and hundreds of others like it are doing, is mopping up the small monies the high street banks can’t be bothered to go out and look for and funnelling them into the formal financial sector.

On a local level the SACCO is spurring the economy of the area by shifting monies from where it is not needed to those who need it. While the lending costs are still high one would like to think that as their cost of funds falls this will be addressed, for now they have an effective mechanism for financial intermediation  that will make the difference for the area more than if it were not there.

The lessons for me are many but off the top of my head two stand out particularly.

One, that it is not true that we can not build our own financial institutions to even compete with the high street banks sometime in the future. These SACCOs, most of which are in the rural areas, have shown that even our small monies when aggregated can be leveraged as a force for good and push our own development priorities.

Secondly, that if our big fish in the cities will not put their resources together to create the banks that serve our people, the small people in the villages and in the streets will not wait around but take matters in their own hands to get access to financial services.

The challenge for Mushanga SACCO and others like it is leadership. Bad leadership can scuttle this progress in less than a year with questionable lending practices and  reckless spending. These SACCOs just like their bigger brothers the banks, biggest asset is confidence. Bad management can irreparably damage this trust and collapse these institutions.

But barring bad management or averse government policy, these institutions can serve as a real force for rural and national  transformation. 

Looking to the distant future it’s not inconceivable that these SACCOs with a tradition of prudent management, sensitive to its stakeholders will form the seed of our own local banks

To take them to the next level while keeping them grounded in their rural roots, government needs to  handhold these institutions in the way of  innovative regulation, capacity building support and eventually fiscal incentives to ensure they grow to take their rightful place at the high table of the financial sector. 

THE OLYMPICS NOT JUST FUN AND GAMES

This week Peruth Chemutai gifted us with a happy moment in these bleak times.

The special police constable floated -- that is what it seemed like to mere mortals,  to gold in 3000 m steeplechase. She became the first Ugandan female medalist ever at the Olympics.

We have three ranked athletes in the men’s 5000m final later today as well as Winnie Nanyondo in the 1500m finals, so there may be more joy for Uganda yet.

With Chemutai’s win Uganda jumped into 46th position in the medal standings vaulting over more established sporting nations like Egypt, Israel and India.

"A look at the  medal tables serves as useful proxy for development or lack of thereof, in countries...

The top ten nations at this writing were China, US, Japan, Australia, Great Britain, Russia, Germany, New Zealand, Italy and France. While at the bottom of the log were Syria, Malaysia. Kuwait and Ghana. Of course other nations like neighbours Burundi, Rwanda, Tanzania and South Sudan don’t even win mention in the medal table.

Going by the table its clear that sporting success comes from the respective society’s economic surpluses. That the more successful countries have enough money left over after looking after their citizens’ basic needs to funnel into sports.

The top medal winning countries made a killing in sports such as gymnastics, swimming, rowing, weight lifting and equestrian sports among others. The common denominator in all these is the huge outlays required in building the facilities and supporting the athletes to train for these events.

Forbes magazine reported a few years ago that it costs no less than $20,000 (Sh75m) annually to train an archer or table tennis player for at least eight years to make it to the Olympics and not necessarily win gold. It cost about $100,000 annually for at least eight years to train a potential tennis professional.

Beyond the financial cost it takes at least 10,000 hours of systematic practice to attain world class standards in anything, in this case sport. Broken down that amounts to three hours a day, five days a week for ten years. Our sportsmen don’t match up to world standards because they have not done their 10,000 hours, but if you think about it how much would it cost to sustain that effort?

In most of these countries most of these costs are subsidised by their respective governments as well as corporate sponsorships. The national subsidies come from taxes.

On the above evidence our athletes are winning in spite of ourselves. Going by GDP, we are a poor country and hence how much our government spends on sports is miniscule and our corporates entities even less so. 

Kenya are beginning to fall behind, as diminishing returns set in on their natural model of raising athletes. For the first time since 1980 Kenya failed to win Olympic gold in the men’s steeplechase event.

Uganda, like Kenya are relying on our naturally endowed athletes from the east to rack in the medals, but this will only last so long. 

So what is Uganda to do to keep up the momentum? 

The more successful sporting nations have strong grass root structures, which were not primarily intended to build gold medalists, but to engage youth in beneficial activities and keep them away from crime.

This infrastructure has helped identify thousands of athletes who are then funneled into more specialised training.

So for starters we need to revive the schools'national competitions. Our schools are the most extensive network already in existence that we can leverage.

At the bare minimum this will identify talent, but strategies need to be formulated, financed and implemented to take these budding talents to the next level.

But most importantly our sports organisations have to get professional management. This mode of volunteer managers who are there because they were voted into office and not necessarily on merit, is an archaic model that will take us nowhere soon.

Otherwise congratulations again to our medalists at the Olympics – Chemutai, Joshua Cheptegei and Jacob Kilimo. We wish the latter two and Nanyondo good luck in their races later today.

OF THE OLYMPICS AND NATIONAL BRANDING

The Olympic Games started last week in Tokyo, a year behind schedule, to a muted opening ceremony to mark the times.

In empty stadiums, athletes in swimming, gymnastics, soccer, handball, tennis and hockey among others competed hard never the less.

During the Cold War the Olympics also  had a subtheme, the competition between capitalism and socialism. The Olympics was used as a big propaganda exercise, winning the most medals was meant to show to the world which was the more successful system.

That rivalry between the west and east is much toned down now and thankfully so, as we can now focus on the athletes performance without being distracted by weighty issues of geopolitics.

But the branding value of the Olympics for competing nations has not gone away. Starting with hosts Japan. This is the second time the Japanese capital hosts the sporting bonanza, the last time being in 1964, when the games were beamed live around the world for the first time. In better times the Olympics would be a show of organisational and technological advancement for the host nation. This time it may be a show of how Japan is able to host the Olympics in the midst of a pandemic.

The US is the biggest team as usual, flying in over 600 athletes. Russian athletes are not competing under their flag following a two year ban imposed on the country for drug doping infringements. However athletes not involved in the doping scandal are competing as The Russian Olympic Committee (ROC).

Countries and corporate entities put a lot of weight on the performance of their athletes, as they should.

"A brand, personal, corporate or national is built on four pillars – awareness, association, experience and loyalty. They basically follow in that order....

There is no brand if no one knows about it. So winning athletes raise the awareness of nations. One of the best stories of the games so far was of freestyle swimmer Ahmed Hafnaoui who upset the form book to win gold in the 400 meters freestyle, suddenly online searches for Tunisia went through the roof and Ahmed’s following on social media exploded. You will be shocked how many people out there can not point out Uganda on a map of the world, leave alone Africa.

Some may brush this aside as unimportant, but if you think about it why do you buy the groceries you do or shop from the shops you do or hire one mechanic and not the other? It starts with knowing them. As a country, company or person, being known is where the branding process begins.

Following on from being known is what the brand is associated with. Believe it or not Uganda continues to be associated with Idi Amin, it does not help that now Netflix has a docuseries with Amin squarely in the middle of it. The US, which has arguably the highest level of violent and organised crime and history of systemic racism is known more for other things – democracy and business. Their winners in the Olympics enhance the brighter side of the US. So having a dark past does not necessarily doom your brand.

Events like the Olympics create awareness and promote positive associations about countries. To experience or feel loyalty for those countries you would have to go there, the Olympics does little to help with that.

So for the US, which will be competing to top the medal table, the Olympics will cement the perception of world dominance. For China, ROC and the EU countries will look to place strongly too as a way to improve their perception as serious players on the world stage. Countries like South Africa, Tunisia, Kenya and even Uganda by winning will improve the perception that they are doing good things in their countries and deserve a second look.

The hardnosed bean counters will be rolling their eyes at the idea that national brands have even a passing effect on GDP, but they will be shocked.

It is not true that if you build it they will come.

"You can have the most green environment, the greatest number of animal species and still only manage a million tourists a year like Uganda, while the city  of Miami – a concrete jungle and the most violent city in the US attracts at last count, six million tourists a year....

As an example the most visited places are better branded – more people are aware of them and have positive associations attached to them.

For the individual athletes the Olympics is a test of their prowess and offers a hope of an improvement in their lives if they do well – that means they will be more widely known. For nations it will increase their profile and the positive associations surrounding them.

But that is half the work. The real work in brand building is that when you have made the brand known and created some positive associations it matters that you work hard at making sure the experience of the country matches or exceeds the associations  created...

I am a tourist, I have seen Stephen Kiprotich, Julius Cheptegei, Winnie Nanyondo and Halimah Nakaayi win on the world stage, so when I come to Uganda I am expecting the basics -- safety, comfort and convenience otherwise my experience will be soured and brand Uganda suffers. It is all connected.

So

"going to the Olympics should be more than cobbling together a bunch of athletes and sending them off with a hope and prayer, it should be seen in the context of a national branding strategy....

One interesting thing about the Olympics, or more specifically the US Olympic team – the US has no sports ministry.