Our firms need straightening up and dedicated talent not cash handouts

Last week we argued that it was a bad idea for the UPDF construction brigade to build all government-funded roads, schools and hospitals, as directed by the President. The reasons are simple: Without competition, the brigade will set its own prices and inflate costs. Without capacity, it will feed a sub-contracting frenzy, fuelling corruption. And without contracts or the cash and connections to get them on the secondary market, local private construction firms will flounder.

 What then should we do? Let’s suppose that the overall objective is to build the capacity of local – and by this, I mean Ugandan – firms to do mega construction projects. Every 10 or so years a local Ugandan firm emerges, appears set for take-off, and then somehow fails. This was the case with Mukalazi Technical Services, then Zzimwe Construction Company, and others in this, and other sectors.

 The details are fuzzy but most firms fail due to both negative and positive cash flow. I’ll explain. Initially, the firms are small and lack the balance sheets to finance medium-to-large projects. Then the promoters run mad as soon as they get some ka money and are soon to be found with a bevy of nubile specimens, thongs barely holding booty together, on yachts in Dubai.

 It’s stereotypical, but sudden success leads to poor financial decisions, including wasteful splurges, and diversion of cash into other businesses. Yet these entrepreneurs are not fools. They often come from backgrounds of adversity, work hard, and create something out of nothing. Deeply suspicious, the instinct is to trust key parts of the business with relatives whose sense of entitlement, lack of hunger, and arrivalism usually trigger the road to ruin. The problem is how to manage success, and survive beyond the demise of the founder.

 There are two broad ways the State can help these local start-ups. The first, in their early days, is to provide access to cheaper finance to allow them to become more competitive, including in contract-financing. There are genuine concerns about the moral hazard of choosing winners in this way but this argument is usually blind to similar support rival foreign firms enjoy from their own state institutions.

 In addition, the concerns can be ameliorated by having a more transparent process of allocating capital through commercial and development banks, against good business plans. The partner banks should put in some of their own money to share in the risk and thus have an incentive to do better due diligence.

 The second, and perhaps more urgent way is to then provide technical support for these firms to manage growth and success. Here I propose some creative dictatorship. A firm that qualifies and receives funding, say from UDB, at low rates, gives the Uganda Development Corporation or a similar entity the right to convert that debt into equity down the line.

 A crack team of economists would then be deployed to sit inside these firms to keep an eye on the books and operations, as well as save the entrepreneurs from themselves and their relatives. This crack team can even be from the military so that they can be court-martialled, drawn, quartered and hanged if they go rogue.

 The idea would be to fatten these firms, clean them up, right-size them to become competitive, and prepare them to list a sizeable chunk of their equity on the local stock market. The owners would get their pay-day from this release of value (as would the crack economists), UDC would exit its positions with serious upside, Ugandans will have more companies to invest in, and there would be more local firms with the solidity to compete for big jobs and do them well.

 Beneficiary entrepreneurs found cavorting on boats in the Middle East on taxpayers’ money would have a block of concrete tied around their legs and sank in the Arabian Sea. Their companions, having previously declared undying love until the seas dry up, would have the option of joining them in this new deep-sea diving hobby.

 Most of the foreign firms currently winning big construction contracts here benefitted from internal competitiveness but also from cheap money and skilled managers. Our firms don’t need cash handouts but they need straightening up, a dedicated pool of talent, and cheap, patient capital.

 The army can concentrate on the really big projects in the short-term until we have local firms with sufficient capacity to take those on, too. Then the soldiers should return to their day job of keeping us safe and allow local business, with local diverse ownership, to thrive. Successful entrepreneurs can then eat their things in peace.

Mr Kalinaki is a journalist and poor man’s freedom fighter.

[email protected]; @Kalinaki