A look at Uganda’s investment environment, high rate of businesses failure
Uganda has been named the most entrepreneurial country in the world by authoritative voices. Many businesses take off in any single year, but also many fail. In 2015, it was estimated that about 10 percent of Ugandans started a business whereas 20 percent of adults between 18 and 64 years had a discontinued business.
Uganda is said to be among African countries with the leading business failure rate along with Malawi, Angola, Zambia, Botswana, Ghana and Nigeria. Uniquely though, Uganda is better than only Angola and Malawi on business success rate while the country presents relatively better investment conditions than all the above countries except Botswana.
One of the indicators of the state of conditions for investment is the economic freedom enjoyed in a market. Economic freedom is the measure of the extent to which people are free to work, produce, consume and invest in the way they choose. According to the Washington based Heritage Foundation, a research and educational institution, by 2019, Uganda’s economic freedom score is 59.7; better than the Sub-Saharan average of 54.2 but lower than the world average of 60.8. Whereas Sub-Saharan Africa is overall Mostly Unfree, Uganda is ranked as Moderately Free. From the above cited countries, only Botswana performs better than Uganda on this score.
There are therefore some other major causes of business failure which are beyond the imposed market conditions but which rather arise from other factors. It is a high possibility that many Ugandan businesses are born out of absolute necessity as opposed to passion of their promoters.
After all, World Bank reports indicate that the vast majority of Uganda’s labor is employed in low productivity activities. There is therefore, on one hand, mass pressure to grow incomes, for most of the population, while at the same time people may lack sufficient capital to invest in ventures they are most passionate about and skilled for. Investment ventures are therefore started out of the basic requirement of personal survival, but along with capital inadequacies.
This state of affairs builds pressure on business start-ups mainly on two fronts. Firstly, the founders exceedingly prioritize day-to-day sales above strategic and long term goals such as building a reliable staff team to drive the business or the growth and sustainability of a stable client base and other similar foundations, since the primary objective of the business is to provide a means of daily livelihood for its promoters.
Then secondly, the above scenario is fertile ground for denying the business a chance to grow by continually taking out all the monies made and failing to build capital for the business. Against such circumstances, investments are highly likely to fail.
There are however other threats as well, even for businesses that begin on fairer ground. Enterprises that start out of careful planning and adequate capital investment may also fail due to lack of basic governance structures and systems. Over 50% of Uganda’s GDP is on account of the informal sector and the comparative average for Sub-Saharan Africa is only 38%.
A predominantly informal economy implies that majority businesses end up running without clear order, accountability nor proper assignment of responsibilities. They normally fail due to personalized operating styles, dependent on the founders with no room for benefit from advice of employed and skilled staff or any other would be advisory stakeholders.
For businesses with all the advantages of a good capital investment and structures that are well laid down, there is the challenge of likely failure to adapt. For example, Uganda imports a lot of merchandise including electronics, building materials, machinery as well as some consumables. With time, some investors taking advantage of a growing population and favorable labor availability are increasingly starting to produce some of these items in-country.
Importer businesses must quickly adapt and either form alliances with home producers and suppliers or divest from their long standing trades. They should forecast the future and refocus their strategy path, or they will fold.
To reign on business failure trends, Uganda could consider means of motivating enterprises to formalize. This may be in form of minimization of entity formalization costs and concessionary taxation terms for recently formalized entities.
It could be coupled with emphasis of financial literacy, focusing on entrepreneurs to impart basic business governance skills and other abilities that facilitate proper decision making to suit the ever changing market conditions of the current age. Entrepreneurs need to invest resources into proper strategic planning to guide their operating style and enable refocusing of their enterprises whenever necessary so as to maintain a reliable futuristic outlook.
Raymond is a Chartered Risk Analyst and risk management consultant
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