Hello

Your subscription is almost coming to an end. Don’t miss out on the great content on Nation.Africa

Ready to continue your informative journey with us?

Hello

Your premium access has ended, but the best of Nation.Africa is still within reach. Renew now to unlock exclusive stories and in-depth features.

Reclaim your full access. Click below to renew.

Caption for the landscape image:

Social and political stability need more local skin in the economy

Scroll down to read the article

Mr Daniel K. Kalinaki

Last week this column argued that antipathy towards immigrants, although low but growing, is fuelled, in the main, by rising indigenous economic frustration, not by a sudden erosion of Uganda’s famous hospitality.

Consider this: Someone flies into Kampala from a foreign country and says they want to set up a factory. It could be something as mundane as furniture or as esoteric as green hydrogen or super sanitisers that kill all viruses. You get the drift; the more complicated, the better.

They show a glossy presentation to the right people with the right keywords like value addition, import substitution, jobs creation, etc and soon after are given land in an industrial park.

The park has serviced roads, water, power, and is located near associated businesses. The punter then takes the title of the prime piece of land to the bank and borrows against it. From just an idea and a nice PowerPoint presentation, they now have more factors of production: land and capital.

They can now shop for manufacturers or present themselves as local partners to set up an operation. In the meantime, they can use the loan to set up a showroom and start selling imported product while they build the factory.

As ‘investors’ their 10-year income tax holiday allows them to be cheaper than local importers or producers from day zero. They might also enjoy access to ‘Exim’ banking facilities from their home countries that allow long grace and repayment periods, and very low interest rates. Within a few years, they are dollar millionaires. 

It’s a good gig if you can get it. To be fair, they are not merely extractors of value. They pay utilities, wages, raw material suppliers and so on, and might even create downstream value to distributors and retailers. But a large slice of their success is not in the invisible hand of the market but in the very visible hand that offered the free land which unlocked capital, and the tax exemption that increased the project’s bankability. Work ethic, enterprise and risk-taking matter, but they were built on core advantages.

Compare that runway to success with a local punter who, tired of working for others, ventures into entrepreneurship. Let’s say they decide to go into the furniture trade. Their little capital, gathered over years of trading labour for wages, has already been thinned by income taxes.

It is whittled down further by having to buy or lease a piece of land on which to set up their furniture workshop. This is the first poverty trap: without a large pool of capital, they don’t qualify as ‘investors’ worthy of free land in an industrial park; but the little they have then is locked away in real estate, diminishing their working capital.

Unlike the first punter in the industrial park, they often must also pay to be connected to the utilities, including three-phase power to run their machinery. Capital, meet friction.

To finance their capital requirements, they must turn to local lenders and pay double-digit interest rates with short tenors and stringent securitisation requirements. Limited liability? Wacha limited liability!

Having bet the farm on the capex loan, working capital must be borrowed from friends or shylocks at eye-watering interest rates. Did I mention that they don’t have a 10-year income tax exemption?

Even if they somehow overcome all these odds, they are one delayed client payment away from a loan recall or a URA penalty. Two years down the road, they run into their equipment supplier in Kampala. When they ask what she is doing so far away from the mainland, she sheepishly informs them that she has set up shop to make furniture locally. She’s an investor.

Foreign direct investment is important, as is technology and knowledge transfer. But policy making must ensure that indigenous entrepreneurs are carried along the value chain from mere traders to assemblers and manufacturers, or at least as equity investors.

The return on investment in local entrepreneurs is often higher given their higher propensity to reinvest locally. There are many entry points for intervention. They include better business skills training, easier, cheaper and more patient capital, easier business registration and compliance, ring-fencing certain economic sectors, as well as preferential treatment in others.

Poor people are easy to rule but harder to govern. Wealthier citizens, on the other hand, are harder to rule but much easier to govern. The choice is whether leaders seek to rule or to govern. Either way, long-term social and political stability depends on local skin in the economic game.