Friday May 13 2016

Government should support local entrepreneurs to promote growth

By Stuart Oramire

I recently completed reading a book titled A Good African Story; How a Small Company Built a Global Coffee Brand written by a local entrepreneur and CEO of Good African Coffee, Mr Andrew Rugasira.

The intriguing story gives a detailed account of how Rugasira started his company by building a network of coffee farmers as a supply chain and navigating through a litany of challenges to finally become one of the first African entrepreneurs to sell his brand in some of the most respected chain stores across the globe.

Although some of the challenges that later affected this business can be traced to Rugasira’s business model - mixing business with philanthropy, especially at the formative stages of his business, most of the challenges he chronicles in his book represent the same dilemmas faced by most entrepreneurs in Uganda.

Little can be written about Uganda’s indigenous entrepreneurial class. This is not to say Ugandans are not enterprising people. In fact, in 2004, Uganda was ranked the second most entrepreneurial country in the world with a total entrepreneurial activity index of 31.6 per cent.

However, most entrepreneurs are encumbered with the challenges of high tariffs, high interest loans, corruption, red tape, limited energy and poor infrastructure. This makes it difficult to start and later grow a business entity in this country.

However, according to the World Bank doing business report (2014), Uganda is ranked number 132 out of 189 countries studied. This report provides annual reports benchmarking the regulations that affect private sector firms, in particular small and medium-size enterprises.

The economies ranking highest on the ease of doing business, therefore, are those whose governments have managed to create a regulatory system that facilitates interactions in the marketplace and protects important public interests without unnecessarily hindering the development of the private sector.

Uganda, for example, ranks lowly in terms of the number of days and cost of registering a business, high tariffs, high cost of energy etc.

It is, therefore, not surprising that the business mortality rate in Uganda is one of the highest with many business entities barely surviving their first year of existence. In fact, statistics show that 80 per cent of the indigenous traders are in the unregulated and unsupported informal sector with all its attendant problems.

A survey carried out in 2009 revealed that although most Ugandan traders lack requisite entrepreneurial traits like sincerity, innovation, business skills and effective management, it was largely due to factors such as lack of capital, unfair competition, inadequate government support, and poor infrastructure that adversely affect Ugandan entrepreneurs.

Uganda’s liberal market policy means an indigenous entrepreneur must compete with a foreign investor engaged in the same business.

Whereas competition is good because it enhances efficiency, better services, lower prices, innovations and more product choices, in Uganda’s case, the competitive equilibrium is not balanced.

A foreign investor who comes with assured equity from low interest loans back home and still enjoys incentives such as free land, tax holidays and other subsidies already has a competitive advantage over a local entrepreneur. For example, the government is currently toying with an idea of banning importation of cheap second-hand clothes.

This is a well-intentioned plan intended to promote growth of the nascent manufacturing industry in Uganda. However, with no reforms in the other factors of production linked to the manufacturing sector, Uganda will continue to rely on imported garments.

This is because the high cost of energy in Uganda diminishes competitiveness of our products and services. Hence, our local market will still finally give way to cheap clothes and other goods from China, India and South Africa where the same goods are produced more cheaply because of lower tariffs and low cost energy.

In today’s interdependent global economic system, no country can be self-reliant. Foreign direct investments can, if properly regulated, spur industrialisation, create employment opportunities, enhance export trade and contribute to economic growth and development. However, the organic growth of any country’s economy depends on how a country manages to harness and support its local resources, including local enterprises.

Government should, therefore, make deliberate interventions such as establishing support institutions that provide an enabling environment for local entrepreneurs to grow and thrive.

In China, for instance, there are banks that specifically offer low interest loans to local entrepreneurs.
The government can also establish a small and medium scale industries development agency like the Nigerian government did to provide financial aid, counselling, and other forms of assistance and protection to local entrepreneurs and small business start-ups.

Established corporate bodies also have a role to play; for example, the Uganda National Bureau of Standards should train local entrepreneurs in areas like consumer sophistication and product standards so that local traders can tap into regional and global markets.

Mr Oramire is a research fellow with Agency for Transformation.