POWER ONLY RESPECTS POWER

 Recent events locally and internationally have cemented the fact that power only respects power and two, that those involved in the game of power are always on the look out to extend their own and minimise their opponent’s advantage.

Locally we saw the National Resistance Movement (NRM) first coopting Democratic Party (DP) president Norbert Mao (Its not clear whether the party is coming along) to its agenda and then pulling out all stops to win the Soroti East constituency.

Internationally, we saw Russia continuing its campaign in Ukraine despite the world’s criticism. For Russia the campaign in Ukraine is not another thing on the day’s to do list but a real existential threat, the loss of which will come with consequences to dire to bare.

And finally, US house speaker Nancy Pelosi made a symbolic visit to Taiwan despite loud protestations by Beijing. US official policy remains for a one-China policy. Pelosi’s visit was a case study in the separation of powers in practice I the US government.

"In all these cases it is clear power seeks to always concentrate more power to itself and loath to allow it dissipate away from itself....

When you are at the top of the hill you have a strategic advantage and most of your effort is expended in defending that position from challengers. This may entail fending off the challengers’ attacks head on or spread dissension in their ranks with the aim of blunting their resolve.

Its not time to seat on your laurels once you have attained power, something the NRM knows all too well.

On one television talk show an opposition member was whining about the NRM wanting to win everything even a “small” constituency like Soroti East. For the leader nothing is too small, as losing even once can be blown out of proportion by the opponents to give them impression that this is the beginning of the end. And in the game of power, perception trumps fact often enough.

Another thing is that power is amoral. The end justifies the means. You cannot appeal to its better nature or shame it into good behaviour. For those out of power, raising moral objections to the actions of power is a way to appeal to the court of public opinion and hope the public will be disgusted enough to do something. Hope though, is not a strategy....

As we have seen in Ukraine, Russia on one hand is fighting the Ukrainian forces but also working to demoralize the public through “accidental” bombings of malls, theaters and residential areas. It is also working to weaken the EU’s unity by denying the gas, critical for heating in the coming winter season. Western observers are crying themselves hoars about war crimes, but the Russians are continuing along their merry way.

The issue of war crimes is also a hazy one. When war is declared who are the enemy? The man in uniform seeking to end you, is clearly an enemy combatant but what about the civilians who cheer them on, offer them refuge and would not be averse to shooting you in the back in support of their own forces? The theory is clear but in the chaos of battle, clarity is a casualty.

In the last week, the US killed Al Qaeda strong man Ayman al-Zawahiri believed to be responsible for the September 11, 2001 bombing of the Twin Towers in New York and the earlier bombing of the Kenyan and Tanzanian embassies in 1998.

Using high precision missiles fired from a drone Al Zawahiri was killed as he stood on his verandah. There were reports that the missiles do not explode but rather use blades to kill only the target, minimizing collateral damage. However, footage released later showed the top floor of the building Al Zawahiri was believed to be in, was flattened. Its hard to believe any one in his vicinity survived. War crime or not? Who decides?

Power only understands power. If there is no equal and opposite reaction, power will have its way.

The US argues that while the official policy is to recognize one China with Taiwan they cannot interfere with the working of the legislature for which Pelosi is the speaker of Congress. China would have cognitive challenges understanding how all arms of government do not work in unison. The truth of course is that Taiwan continues to exist as an independent nation because the US has promised to defend their independence. Without that you can rest assured they would be back in the China fold quicker than you can say Chiang Kai-Shek.

"The point is power operates according to a different moral code than the wielders of power preach to us. Power has little use for the golden rule – treat your neighbour as yourself. It has its uses, in indoctrinating Sunday schoolers.

MTN: END OF AN ERA, THE FUTURE SHOCKINGLY BRIGHT

Last week MTN CEO Wim Vanhelleputte gave an exit press conference to a group of journalists in Kampala, during which he looked back with pride on what the company achieved during his six years at the helm and looked forward with some optimism to the company’s prospects in coming years.

By any standard the company’s progress over the last six years is admirable but also point to a company which is yet to reach full maturity.

In Wim’s first year at MTN revenues stood at sh1.3trillion while last year the company made sh2.1trillion,a more than 50 percent increment. More interesting is that profit after tax jumped more than fourfold to sh387b from sh96b during the same period. Wim explained that the company as becoming more efficient, the economies of scale are beginning to kick in.

Total subscribers almost doubled to 15.7m today from 8.6m in 2016.

But what was even more impressive was that despite all the work and investment MTN has poured into Uganda – more than sh900b in telecommunication equipment alone, there is still a lot more opportunity...

Wim noted that data revenues were outpacing voice and even mobile money and yet they have not rolled out their 5G networks and only starting to lay down cable for their fixed data network.

As a proxy for the industry MTN may not be perfect, when Airtel opens its accounts to the public later this year, we will have a better sense of the total industry.

One can expect that data and the fintech arms of the industry will be the main drivers of growth in coming years. Last year for the first-time revenues from MTN’s voice service was less than half total revenues.

With the benefit of time it would be interesting to determine the ripple effect of these mobile phone companies to the economy. How they have affected us on a day-to-day level.

Almost three in every four Ugandans now has a phone.

When MTN set up shop in 1998 we had 50,000 landlines belonging to UTL and another about 5,000 Celtel moblie phone lines. With a population then of about 23 million, there was a phone line for every 400 Ugandans. It must be one of the fastest improvements in phone coverage in the history of the industry.

So in the Vision Group which has about 1200 workers we would have three phones to share. Unthinkable today.

But imagine what this meant in terms of losses of time and money.

"Whole industries like bodas bodas, delivery services and the whole money transfer industry would be stuck with snail mail. Our relationships would still be quite manual (which may not have been a bad thing) with having to travel from place to place to keep in touch. We would still have to line up in banks for service....

I remember in the 1990s reading Bill Gates book “Business at the speed of light”. Look it up. It has chapters like “Information flow is your lifeblood”, “Create a paperless office” and “bad news must travel fast” among others. These subjects are now common talk but were revolutionary in 1999 when the book was published.

Gates as the head of Microsoft at the time, of course, was at the cutting edge of the ICT industry, he could see things then, we are only beginning to appreciate now.

“A good flow of information and good analytical tools gave us insight into new revenue opportunities among volumes of potentially impenetrable data. It maximized the capabilities of, human brains and minimized human labor,” Gates said in the book.

So, while Uganda has been good to MTN, MTN and the mobile phone industry has been good to us. We need to get over ourselves and look to how the industry can be helped more so that it can lubricate the economy further.

Wim had his thoughts on the subject. His suggestion was to cut or remove altogether taxes on the low value end of the smartphone market. This would increase data usage which would increase usage from the current 30 percent of phone users. This will not only broaden information flow it would inevitably lead to a lowering of data prices.

Going by the experience of voice calls, it now costs for a 30-minute call what it used to cost for two-minute call ten years or so ago, because the there are more users, the economies of scale are kicking in and allowing telecom companies to charge less per unit time.

Secondly, he suggested that government should actively drive digital payments.  As it is now with more than half the economy informal, a lot of economic activity flies under the radar going untaxed and not helping as many economic actors as it would, if these monies flowed through the formal financial system which the mobile money networks will soon dominate...

Wim, the longest serving CEO of MTN’s local unit, moves on to take up a regional position, it would be embarrassing if we cannot build on the momentum he has created.

 

 

NORBERT MAO: AND THEN THERE WAS ONE

A deal between the ruling National Resistance Movement (NRM) and the Democratic Party (DP) received a mooted reaction from public. There was some initial surprise, even shock at the development, but that soon passed and we went back to our business.

Anyone who has followed the progression of the NRM over the last three decades was not surprised.

When the NRA took over Kampala in 1986, it showed itself to be a superior military force to the national army. But the NRM was politically weak.  President Yoweri Museveni while using the NRA to come to power recognized that to sustain his project he needed national political buy-in.

"Suspending the party activity of the traditional parties and coopting some of its leading lights, at once froze political parties in place, while strengthening the NRM politically. Ten years down the line and the first presidential election – where Museveni beat DP’s president Paul Ssemogerere in 1996, proved the success of this route....

The return to multi-party democracy in time for the 2006 presidential polls, came from external rather than internal pressure, a concession Museveni had to make to cause the lifting of presidential term limits. In case we had forgotten, the 1995 constitution had restricted the presidency to two five-year terms. It was thought by opening up parties would now gain traction and offer a more competitive political playing field.

But the party inactivity had taken its toll. The old leaders wanted to hang on, yet a younger cadre who thought their time had come, were banging incessantly at the door, demanding a place at the table. the infighting meant parties could not muster any credible challenge against a more organized and better resourced NRM. It did not help that opposition parties were seduced to adopt a big man model and forgot or ignored to build party structures and invest in the coherence of their organisations.

New parties fell away as soon as they sprouted, while the older parties were really just keeping up appearances, failing to make an impression in presidential elections or in terms of parliamentary seats.

The writing was really on the wall as far back as 2011, the last time DP and the Uganda People’s Congress (UPC) together fielded a presidential candidate. In that year Norbert Mao and Olara Otunnu were the flag bearers for DP and UPC. Between them they failed to win five percent of the presidential vote.

Mao run in 2021, but his campaign (0.56 percent) was overshadowed by the new energy of the National Unity Party (NUP), which crashed the party relegating even FDC to a distant third. NUP’s Robert Kyagulanyi won 35.08 of the votes to FDC Patrick Amuriat’s 3.26 percent.

We are wiser in hindsight of course.

"We have known all this intuitively, which explains the mooted response to the DP capitulation. The only cognitive discordance was caused by Mao in his speech at the event, repeatedly lauding Museveni’s courage in signing the agreement with DP. Less charitable people would have questioned Mao’s courage, bordering on shamelessness, in selling the party down the river....

More forgiving people will understand that DP is succumbing to the inevitable. DP’s glory days were in 1961, when it won the general election under Benedicto Kiwanuka. Ninety five percent of Ugandans were not born by then.

We want a credible opposition. Any country does. A good opposition keeps government in check. Governments that are left to their own devices tend to veer towards impunity and corruption. But opposition parties all over the world, even in the older democracies know that their place is not guaranteed, they have to fight to claim it. Any laws on the books that protect the opposition in more developed democracies were won through patience, perseverance, sweat and blood.

The ruling houses of Europe, whose kings had absolute power over the land and people, conceded these powers reluctantly. Those who did not read the signs, had their heads loped off and their bloodlines obliterated.

Given the obvious advantages of the ruling parties, the opposition parties have to invest in building structures to counter them. Any party that is not investing in that, will only last as long as the novelty factor of its new leader.

It’s a class the opposition will continue to take until they learn the lesson.

OF MBIRE AND WHY THE REST ARE POOR

Last week it was reported that Kampala businessman Charles Mbire bought about 23 million shares in Bank of Baroda.

 It was a timely buy because every one who has shares in the bank by 21 July will be eligible to a sh10 dividend per share. Do the math.

But for people like Mbire, who has been a major beneficiary of the growth of telecom company MTN, where he has a four percent stake, dividends are really the icing on the cake. While they will expect an annual dividend, beyond that they are looking at whether the underlying business can keep growing in value year on year. Wealth is what you keep not what you earn.

"For the majority of us mere mortals we get excited by the money we have in our hands, the truly wealthy get more excited by the growth in what they own. It’s a different reality that comes from a different mindset...

Every year the do-gooders tear their hair out at how wealth disparities are widening around the world.

In January international aid agency, Oxfam reported that the wealth of the top ten richest people has doubled since the beginning of Covid while 99 percent of humanity is worse off from the pandemic.

On the surface of it the difference between the top one percent and the rest is that the top dogs are the owners of capital while the rest are content to sell their labour. Capital is scalable, while labour is not – you can only work so many hours in a day, while money is not restricted by distance, space or time.

But on a deeper level it’s the mindset of the two groups that is the real difference.

Back to Mbire. On June 24 about three weeks ago he received his dividend check from MTN, along with more than 20,000 other shareholders. Given his four percent holding in the company, he would have come into about sh4b. While the rest of us mere mortals went off and partied away our money, Mbire took half of his takings and made a bet on Bank of Baroda.

I can hear you now, “But at least him he had a lot to invest, for me with my sh100,000 what did you want me to do? It’s too lito (little) to invest.”

My favourite American is Warren Buffett, the richest investor in the world. The story is told how he walked into the lift on his way to work one day and saw a coin on the floor, which had been ignored by all the other well-heeled occupants of the lift, he bent down picked it up, “This is the beginning of the next billion dollars,” he said as he held it up to the light.

It’s that attitude, more than luck or intelligence, that has informed the 92-year-old billionaire’s spectacular investment success since he bought his first share as an 11-year-old.

The truth is, our actions around small monies will be the same around big monies. Because our actions around small monies are not wealth creating, we will never reach a place where we are pulling down sh4b in dividends, leave alone investing half of it to buy other company shares and adding another few hundreds of millions of shillings to our bank accounts. There are no miracles.

Also, what Mbire sees that we do not see, is that he is buying a piece of a business. He does not need his name to be on the entrance of Bank of Baroda, he is in it for it s productive power and if no one knows he owns a piece of the company he is ok...

The wealthiest people in the world do not go it alone. My man Buffett owns 16 percent of the company Berkshire Hathaway, which accounts for most of his wealth. Last week the company was valued at $606b or about 20 times the size of the Uganda economy.

For the rest of us we are driven by ego rather than profit, we would rather point to that building or that company or that farm and say it belongs to us. We would rather own all of a small thing than a piece of a larger thing.

And finally, and related to all of the above, delayed gratification is not just a catch phrase but essential to wealth creation.

Mbire could have found a way to eat the sh2b but instead he has decided to postpone eating it or more precisely, is stretching his eating over many years into the future, essentially having his cake and eating it. For us mere mortals we just eat our cake....

While Oxfam is justified in lamenting the tax dodges exercised by the wealthy, and lower wages of workers maybe they should be focused too on bridging the gap in mindsets between the wealth and the poor. Because after all the orientation of the mindset is a learned skill not genetically passed down.

 

 

 

SRI LANKA, THE CASE FOR POPULAR THINGS NOT BEING RIGHT

In the last week we watched with jaws to the floor as the Sri Lankans overrun the presidential palace in Colombo and sent their president fleeing from the country.

This is the climax of months of protests at the poor handling of the economy and the general corruption of that government.

Looking back the government of Gotabaya Rajapaksa in anattempt to win some cheap popularity points, following elections in 2019 scrapped or reduced a raft of taxes including PAYE and VAT. In addition, he got the hairbrained idea to turn the country in to an overnight producer of organic crops and banning inorganic ferterlisers to push this agenda.

 

"In the 1980s some dismissed US President Ronald Reagan’s economic policies, leaning heavily towards liberalization of the economy, as voodoo economics. But Reagan would not hold a candle to Rajapaksa...

By cutting taxes government revenues were severely affected and government capacity to deliver services – security, health and education, hampered. Also, their ability to service their obligations, not only to foreign lenders but to the local private sector as well. By banning the use of ferterliser they affected food production and just as important the exports of tea their major foreign exchange earner. With exports receipts in the toilet, they failed to pay for their fuel imports.

As a result, the Sri Lankan economy has imploded triggering the worst crisis in the country, which won independence in 1948.

As we watched the masses taking “power” it occurred to me that many of the people who celebrated the cuts in taxes are the very ones trying to run the president and his cronies out of town. The irony.

These events cement the truth behind the saying “What is popular is not always right, what is right is not always popular.”

It offers a good lesson for countries all around the world facing unprecedented economic stress. Following the near universal lockdowns due to Covid of the last two years, countries around the world are trying to fire up their economies, which had slowed to near zero, a situation not helped by rising prices globally.

Its understandable that in the face of such pain people will come up with suggestions like government should reduce prices or that government should forgo taxes to keep prices down or that businessmen should be arrested for increasing prices.

"It is basic economics that when you try to subvert the laws of supply and demand, it never ends well. At best you can only provide temporary relief but even that relief will be washed away by the pain when the laws of supply and demand eventually prevail...

What is true is that if an economy has been run prudently and the gains from growth are equitably distributed to economies will be more resilient in such cases and even have intervention options that lessen the pain even for a little while.

While it serves little purpose to cry over spilled milk, such crisis expose gaps in our processes.

As a country we need to be more determined in collecting more taxes. And not through loading more and more taxes on existing tax payers but by roping in more economic players into the tax net. ON the flip side we need to take a microscope to our public expenditures, flush the excesses and keep only those expenses that work towards development.

As in everyday life so is with countries and governments. If you costs are under control, in hard times you will be much better able to survive and even thrive than your neighbour, who is borrowing money he doesn’t have, to buy things he doesn’t need, to impress people who don’t care.

The truth is that the economy is cyclical, as day follows night, when the economy is booming, as impossible as it seems during the good times, you know that bad times will follow. When you embrace that reality you will operate differently. You will spend prudently and save aggressively when times are good in anticipation of the inevitable bad times. You will then find that the bad times are not as bad for you as your neighbour is suffering and in the good times you will thrive spectacularly.

BANKING SECTOR IN 2021 AND ITS ROLE IN SUPPORTING ECONOMIC RECOVERY POST-COVID

By the end of  April 2022, all the banks completed their statutory reporting on the state of their finances in 2021 pointing to a recovery, a hesitant one but promising nevertheless.

According to analysis by the Uganda Bankers’ Association (UBA) consolidated industry results 2021, profitability (total comprehensive income) among the tier one banks grew strongly by 33 percent due to an overall growth in revenues of, 14 percent, coupled with a three percent reduction in costs.

"Concerns about bad debts ballooning out of control  at the expiry of  the all credit relief measures and other concessions afforded to borrowers, remain a concern and the industry view is cautiously optimistic mainly to support economic recovery in a post pandemic environment....

The industry saw a six percent rise in deposits, an indication that despite the Covid-related challenges of the last two years, the general public remains confident in the sector. While marketable and trading securities held by the banks grew by a tenth compared to 2020, private sector lending almost matched this, growing 8 percent although this was a drop from the previous year’s 12 percent growth, 

On an aggregate industry basis, shareholders  saw their return on equity drop  to six percent compared to nine percent in 2020 and from double digits previously. The above not withstanding some of the individual banks posted much higher ROE.

Understandably, bankers did not burst out of the gates to support businesses, who themselves were just finding their feet, after the partial lifting of the lock down last year. The loan to deposit ratio slid to 60 percent in 2021 from 63 percent in 2020.. Signs are however that in 2022 with the total lifting of the lock down in January, the industry is expected to be more aggressive in providing the much needed credit , lifeline to businesses.

The banking industry’s centrality in the economy through its dual role as a mobiliser/custodian of resources through deposits and allocation of capital through credit as well as facilitation of payments, means it must not only up its support to businesses, but equally support government and its domestic revenue mobilization, growth & development plans.

A 2019 study by audit firm PriceWaterhouseCoopers (PwC), commissioned by UBA showed that the banking industry contributed  24 percent ( sh3.9 trillion)  of the sh16.2trillion in tax revenues (withholding tax on government securities, exercise duty, VAT, employee taxes, corporation tax etc) collected that financial year composed of sh3,886 billion arising from financial sector transactions processed and sh639 billion of direct taxes borne by the banks themselves.  

Banks are equally pulling their weight in job creation. The study found that the industry employs about 17,000 people, spending sh690b in wages and salaries. The introduction of Agency banking, accounted for another 6,594 employees in 2019 with commissions paid out to agents amounting to over  sh2.6b

The industry paid  out sh860b for domestic goods and services supporting the sector, these being SMEs who provide various services to the industry.   

"The report further indicates that banking sector invested in communities up to a total of Sh8.258 bn spent on various community initiatives in the areas of education, health and financial literacy especially within the youth and women groups....

The report also covers the industry’s efforts & initiatives in technology & innovation, tackling financial crime, financial literacy & sectors where private sector credit is being channeled.

Finally, the report touches on determinants on interest rates as well what support can be provided by Government to ensure the cost of borrowing drops. These included risk sharing mechanisms including loan guarantees, more favourable tax policies, alignment & coordination of monetary & fiscal policies, especially around domestic borrowing and public expenditure by government, and reform of government and legal operational structures to reduce transaction costs among others.

As the country positions for growth & development in line with NDP III, the banking sector will be expected to bring out its full potential in supporting national socio-economic transformation. This direction is evidenced by the proposals put forward by the Central Bank in 2021 of raising the minimum paid up capital required of supervised institutions to enable banks build a solid capital base and expand credit to support priority sectors like manufacturing, tourism, services as well as oil & gas among others.

Financial institutions are further expected to mobilise funding via syndications which can be a good source of additional capital inflows particularly for large projects. By end of 2019, bank syndicated transactions stood at sh5.7 trillion.

THE LANDLORD & TENANT ACT: DODGING A BULLET? ONLY JUST!

In April President Yoweri Museveni assented to the Landlord & Tenant Act.

The law when it was introduced in 2016 among other things tried to limit rent increments and to restrict landlords to charging rent in shillings, a position this column opposed vehemently.

"No long term good comes from trying to control prices by administrative fiat. It is a tempting option for populists and demagogues but inevitably ends in tears....

This column argued at the time that the decision not to control rent in the 1980s was not only brave at the time, but farsighted and is responsible for the boom in real estate construction over the last three decades.

The housing situation was so bad in the 1980s that for lack of accommodation, whole middle-class families were shacking up in garages, but consoled themselves that at least they were doing so in the “upmarket” parts of Kampala.

By avoiding rent controls investors spread out of the city, introducing us to places like Naalya and beyond, Zaana and beyond and Munyonyo. We argue about the chaos of this urban sprawl, but that’s a discussion for another day. By allowing rent to be determined by the market, investors have found it worthwhile to build estates and apartment blocks, relegating middle class housing shortages to history.

Had government bowed to the populist rhetoric to place rent controls by people, some of whom are now landlords and probably charging in dollars, this real estate boom would not have happened and in fact we would be paying higher rents for the few hovels around.

Thankfully sense prevailed and the MPs adjusted the clauses that insisted on rent controls – putting a cap on annual rent increments and landlords charging dollars to the mutual agreement of landlord and tenant. In my mind they should just have eliminated the clauses all together rather than bite their tongues.

That being said government needs to come up with a strategy, or if its there, execute it, which recognizes the growing housing needs of the low-income earners.

A strategy, which takes into account the lack of affordable credit in shillings, incentives for developers among other things, is important. As it is there is a lot of uncoordinated troop movements as to suggest that there is no strategy for this critical sector to the economy.

For instance, in the recent budget finance minister Mathia Kasaija announced a threshold of sh2.8m in annual rent below which owners will not be liable to tax. That’s monthly rent of just under sh250,000. Landlords who collect more will be charged 12 percent on their revenues. Previously landlords were allowed their expenses including mortgage interest, so this will be a disincentive to real estate owners trying to rent out properties in their own names.

But even if you were a real estate company things were not better. The minister allowed only 50 percent of expenses as tax deductible and maintained a 30 percent tax on the net income.

With this move he discouraged people from taking out mortgages to develop real estate as individuals but must have real estate companies wondering whether its worth the pain. The people who will be left to develop the real estate sector are the few individuals who can develop property using cash alone, and we know who those are!

As mentioned earlier real estate development is a critical aspect of the economy. In our case it is so because most of the inputs are locally available – from the bricks to the wood to the cement and even the iron bars. So, encouraging the real estate sector is a way to create and maintain jobs along the whole value chain. The government should be encouraging developers help it provide housing, which they have failed to do, rather than discouraging them.

While the ideal would be for massive real estate developers, the reality is that the vast majority of our housing is being provided by private individuals so it makes little sense to discourage them when you are not providing incentives for the massive developers to come in.

But that this has become law also throws up another disturbing indicator. It suggests that those making these decisions – in government and our MPs, are either not landlords or that if they are, build their rental properties with cash.