Setting up and successfully operating a business in Uganda presents unique opportunities and challenges. While Uganda is blessed with fertile land, abundant natural resources, a fast-growing middle class, low labour costs and English Common and Company Law, most businesses in Uganda never survive long enough to reach their full potential. Indeed, and especially for Small Medium Enterprise (SME) businesses that are the engine of growth for the economy, they rarely outlive their first anniversary.
Undoubtedly, Uganda attracts foreign investment. However, despite the many natural advantages that flow from this, even in such a competitive international market, there is still much room for improvement for Uganda. The questions that come to the fore are: What exactly is holding us back? And, more importantly, what can be done about it?
Some have argued that the exit of companies such as Nakumatt, Mondo Ride and Uchumi are a “red signal” about the complexity of the Ugandan market. This might explain why Uganda is ranked 116 in the World Bank Report on “Doing Business”. High interest rates, lengthy licensing procedures, corruption, uncompetitive withholding tax provisions and a slow contractual enforcement mechanism make running a business in Uganda a real challenge. This article will, first, examine the reliability of the Index in the Doing Business report. Second, it will provide an insight into Uganda’s business environment. Finally, it will outline the most promising areas of investment in Uganda’s market while recommending areas of improvement at a macroeconomic level to improve the ease of doing business and attract more investment.
Mr. Joseph Kiggundu, director of the Investment One Stop Centre at the Uganda Investment Authority is critical of the World Bank Doing Business Report. In an interview with the New Vision, he argued, first, that the ranking does not reflect the level of improvement on the ground in terms of business environment. For example, it does not recognise the increased access to electricity in Uganda. Second, a number of reforms are not well publicised since these have not been marketed by Ugandan regulators. This is further reinforced by the fact that some of the indicators upon which the report is based, are premised on the assumption that information is readily available.
While Mr Kiggundu’s reproaches have merit, they do not outweigh the significance of the Doing Business Report – which of course is widely read globally. And if the business conditions have indeed improved, then surely the Investment Authority, along with Regulators should be highlighting those improvements to the global investment community. Perception is often more important than reality. Therefore, if the reality has changed then those in charge need to make that point. And loud and clear.
The Doing Business report objectively assessed 190 economies on twelve indicators which include the following: (i) basis of procedures for starting a business (ii) getting permits from relevant regulators (iii) procedures for registering property (iv) access to credit (v) protection of minority investors (vi) enforcement of contracts and (vii) insolvency and trading across borders. Uganda’s lowest rankings in the Report are at Number 169 for starting a business, Number 168 for getting electricity, Number 135 for property registration and Number 121 for trading across borders. These indicators influence investment decisions, especially by international investors. In addition, they affect how businesses are run.
Of course, criticisms can be levelled at the comparative analysis methodology used in the Report. This was pointed out by Harry Schwarz, who argued that there are a host of problems in engaging in international economic comparisons in his paper, ‘Incomparable Comparisons.” This is because different countries operate in different climatic conditions, are at different degrees of development, and such a comparative model may not be the best benchmark for assessing business regulation. Nevertheless, there is still significant value in the Ease of Doing Business Report as it is a key factor investors look at when making investment decisions. Indeed, one can criticise the Report and its methodology but doing so will not aid the goal of attracting more inward investment.
As a finance lawyer advising Ugandan businesses especially SME’s, there are practical hurdles to doing business in Uganda. One such issue is the limited access to local currency credit because of high interest rates which can fluctuate between 21% to 30 %. The Governor Bank of Uganda, Professor E. Mutebile in an interview with the Independent said, “only large firms have access to credit on more favourable terms; smaller firms are unable to access long term capital from financial institutions.” He further commented that the length of proceedings for recovery of collateral continue to weigh down on bank’s credit risks.
This limited access to credit limit’s a company’s ability to expand and benefit from economies of scale. Further, most investors are concerned about the political climate in a country, the tax regime and the enforcement and settlement of disputes. For cross border transactions, processes in Uganda make it costly and time consuming. All of these issues have a direct effect on the liquidity or cash flow of a company. Regulation, if complicated as it mostly is in Uganda, frustrates investors who seek to transact seamlessly.
Some effort has been put into confronting these challenges. Mr. Joseph Kiggundu of the Uganda Investment Authority has spoken about the unique model of the One Stop Centre which has been established. “We now have over 12 government agencies and partners offering forty services through a well communicated Client Service Charter,” he said.
This is anticipated to reduce on the licensing processes for business setting up in Uganda. The services offered are intended to focus and further integrate electronic platforms with the Ugandan tax, Municipal and Immigration authorities. For instance, Mr. Kiggundu comments that their services are intended to co-operate with the Directorate of Citizenship and Immigration to offer five immigration related services.
These will be crucial in making it easier for foreign investors to set up a business in Uganda. In Rwanda it takes approximately two business days to register a company, while Uganda is yet to achieve that level of efficiency, the One Stop Centre launched by the Uganda Investment Authority is a step in the right direction for foreign investors looking to set up businesses in Uganda. Although, the Investment Authority is still underfunded and understaffed it would certainly benefit from increased levels of decision making in other government agencies to avoid referrals back and forth frustrating clients, says Mr. Kiggundu.
While other challenges like tax administration, contractual enforcement, trading across borders present difficulties and may only be dealt with at a regulatory macroeconomic level, there are still great prospects for investment in the natural resources and hospitality industries in Uganda. The Economist, reports that Uganda, boasts of some of the largest unexplored oil reserves in sub-Saharan Africa, although the development of the oil has moved slowly.
Uganda has seen an increase in Foreign Direct Investment to the tune of USD 1.3 billion in 2018, largely attributable to investments in the oil and gas sector. As Uganda awaits the final investment decision on the exploration of oil in the Albertine region, there is an unprecedented opportunity to provide support services in the oil and gas sector. This, alongside tourism and hospitality, present the best prospects for investment in the upcoming years.
The Investment One Stop Centre at the Uganda Investment Authority is a positive step that could see a reduction in the licencing processes. However, a better approach towards supporting businesses might be increased funding for the relevant regulators, for instance the Uganda Investment Authority. At a broader level, policy review should be done in tax administration, overall economic review of interest rates although these are still determined by banks trying to cover their high operational- overhead costs. This should be pursued alongside robust, faster and efficient contractual enforcement mechanisms.
Ultimately, doing away with many regulations and the related paperwork, cutting the number of agencies involved in setting up a business and making the whole process seamless would go a long way to attracting inward investment and supporting those businesses so they survive beyond their early years. Other countries have done it. Uganda can too.