THE ROLE OF UGANDA’S POLICY FRAMEWORK IN PROMOTING SUSTAINABLE GROWTH FOR SMALL AND MEDIUM SIZED LOCAL ENTERPRISES

By Sanne Schouwenburg, Challenges Worldwide ICS Team Leader in Kampala, Uganda (2016)

To hear more from Sanne, visit sanneschouwenburg.com

When volunteering for Challenges Worldwide (CW) as a team leader in Uganda I had the pleasure to welcome Jane Nalunga from the Southern and Eastern Africa Trade Information and Negotiations Institute (SEATINI) to one of our weekly team meetings. Jane was invited to discuss with us the linkages between trade, investment, policies, and local businesses.

CW works with small and medium-sized enterprises (SMEs) which are generally run by a single person or a by a small team. During our meeting with Jane Nalunga, she claimed that many small businesses do not survive their first 2-3 years of operation, mainly because of a recent lack of governmental support. Through supporting SMEs in Uganda, CW has identified numerous challenges companies are currently facing. This article will focus on those challenges while considering how Uganda’s policy framework could further contribute to sustainable growth for local enterprises. The aim is not to give a sound solution to current challenges, it is merely written to provoke thought on the subject.
The organisation Jane Nalunga works with, SEATINI-Uganda, was established in 2001 after feelings that African countries were marginalised in World Trade Organisation negotiations. Their main goal is to strengthen the capacity of different stakeholders including media, farmers groups, trade unions, and government officials to participate in and effectively influence trade negotiations and trade-related processes at regional, national, and international level. Currently, SEATINI is urging the Ugandan Government to support their local businesses and industries.

 Market Distortion

Before the 1980s Uganda had a closed economy in which the Government protected the local market. Taking Uganda’s cotton industry as an example Jane Nalunga describes how there used to be a large cotton industry near Jinja consisting of a network of backward and forward linkages between enterprises. This changed in the 1980s when Uganda took on a set of reforms in the shape of Structural Adjustment Programmes (SAPs). The World Bank started to give out loans to governments under certain conditions with the aim to liberalise Uganda’s market. Liberalisation was recommended in order to promote free movement of capital, open national markets to international competition, privatise public services and companies, deregulate labour relations, and improve competitiveness (Toissaint and Comanne, 1995). It is debatable whether these recommendations were beneficial for Uganda. According to Herbert Jauch [Jauch, 2009] – Labour Researcher for the Southern African Trade Union Coordination Council (SATUCC) – SAPs imposed severe hardships on the poor. Jauch claims that in Uganda – despite some (statistical) economic growth – the implied policies resulted for instance in the collapse of small enterprises and in trade unions losing sixty percent of their members since 1990 [Jauch, 2009]. The scope of this short essay does unfortunately not allow for an in-depth research on the criticisms of SAPs. However, this emphasises the importance of an efficient policy framework in guaranteeing a prosperous future for local enterprises.

 SMEs in Uganda

 Today’s marketplace in Uganda hosts a diverse mix of competition. Apart from the regular competition between local businesses, foreign competitors have become a considerable challenge for local enterprises. The case of the aforementioned cotton industry highlights this. When Uganda opened up its markets and removed taxes on foreign import, cheaper textiles started to be imported from abroad. These days most of the textiles to be found in the markets of Kampala are either of Chinese origin or are second-hand clothes donated by developed countries. It can be argued that this abundance of foreign products has distorted local supply and demand dynamics within the Ugandan economy.

Another example which demonstrates the pressure from imported goods can be seen in the case of Seven Seasons – a local social enterprise which has been supported by Challenges Worldwide. Seven Seasons produces banana juice made from a mix of locally grown bananas without any added sugar or other additives. The bananas are collected from sustainable farms, cut from the stalk, peeled, fermented, squeezed and filtered. The juice is then bottled and transported to the shops. Local competitors such as Splash and Quencher, on the other hand, use imported Indian concentrates instead of local fruit. A diluted version of these foreign concentrates is packed and sold on the local market. It is extremely difficult for Seven Seasons to compete against companies who use cheap imported concentrates. Evidently, Ugandan enterprises are capable of producing and selling syrup or diluted juice at a compatible price, as of their relatively low transport costs. However, Seven Seasons is not interested in selling syrup or diluted juice as their aim is to promote sustainable farming and to offer a natural juice without additives.

By identifying new domestic and international markets that give more importance to health and the environment, and by finding consumers that are willing to pay a premium, Seven Seasons has recognised a new niche. However, with the complexities of international trade, SMEs such as Seven Seasons will require support to internationalise and reduced barriers to export.

Kinawataka is another case of a social enterprise which struggling with competition. Whereas Challenges Worldwide has been helping this business to build capacity, the current policy framework does not allow them to compete with foreign import. Kinawataka is built on a concept which recycles straws and uses those to make new products. It takes a great deal of work to collect, sort, wash and restyle straws into products such as purses, bags, or baskets. However, visiting a local market you will find much cheaper Chinese baskets. Even though Kinawataka supports vulnerable women and sells environmentally friendly products, people will choose to buy the cheaper Chinese baskets. Locals are content with the cheap products that China is offering. Can we blame China for producing and offering cheap products? No.

In both cases, products could be sold in international markets where there is more demand for sustainable products and where more importance is given to social enterprises which support communities and the environment. This again underlines how important it is to make international trade accessible and to improve trade relations.

Using these two examples, Jane Nalunga suggests to regulate and tax foreign import, reverting to a closed economy. However, in order to maintain trade relations and support the growth of local SMEs, the government could, for instance, make use of subsidies or grants. Furthermore, the government could support SMEs by becoming a customer. In the case of Seven Seasons, they could provide their employees with locally produced banana juice, instead of purchasing a diluted juice made out of foreign production.

It is understandable that tax on imported products is seen as a beneficial move for Uganda. Apart from protecting local businesses, it is generally known that tax provides the much-needed revenue for funding public services such as schools and teachers, health care, and infrastructure. It has to be taken into account that while trade barriers might protect local enterprises and provide tax income, it also raises the price of products on the local marketplace. Furthermore, it cannot be expected from a foreign country, which has recently built a highway or a hospital, to accept trade barriers. There is a strong possibility that those countries will respond by setting up trade barriers against Ugandan export, which would be detrimental to the Ugandan economy.

 Evidently, trade barriers might damage trade relations with foreign countries and might therefore not be the right method to promote sustainable growth of local enterprises.

Innovation and Infrastructure

On a smaller scale, it is important to note that some Ugandan entrepreneurs lack skills in bookkeeping and are unaware of the link between bookkeeping and tax paying. Currently, when a local business owner is unable to show the Uganda Revenue Authority (URA) their books, they are doomed to pay a high fine which most cannot afford. Alternatively, with a healthy bookkeeping system, they might end up receiving tax instead of having to pay tax. By up-skilling SMEs, CW builds the capacity of SMEs in many areas, including bookkeeping. Whereas CW is forging a path that meets the needs of SMEs in Uganda, it might be helpful if the URA works alongside CW and serve as an informer towards entrepreneurs. The URA should not be considered the enemy of enterprises, but rather a tool through which entrepreneurs pay tax and which allows them to contribute to a better future for the country.

Finally, one of the most noticeable challenges Ugandan entrepreneurs are facing are the high phone and electricity bills. Local electricity, for example, is privately owned by a South African company. As electricity costs are linked to the US dollar, enterprises are forced to pay relatively high electricity bills. Businesses need electricity and wider infrastructure. If one wants a thriving economy, it is important to make infrastructure accessible to enterprises.

  Concluding Thoughts

It would be highly desirable to see the aforementioned issues included on the agendas of the Ugandan government. Business and trade can be enhanced, without having to rely on protective policies. Support can reach local entrepreneurs in many forms, starting with accessible infrastructure, education and stimulation of international trade.

For future analysis I suggest looking at improving certification and labelling, implementing warranties and improving quality standards of both locally produced and imported products.

Currently, Challenges Worldwide is encouraging and supporting enterprises to register, to do bookkeeping and to record accurate key performance indicators. With appropriate support from the Ugandan government, combined with an improved policy framework, CW and SEATINI-Uganda can continue to promote sustainable growth for local enterprises in a more efficient way.

References

Jauch, H. (2009) ‘How The IMF-World Bank and Structural Adjustment Program(SAP) Destroyed Africa. [ONLINE] Available at http://newsrescue.com/how-the-imf-world-bank-and-structural-adjustment-programsap-destroyed-africa/#axzz45y5oOTsM [Accessed April 16th, 2016].

 

Munk, N. (2013) ‘The idealist: Jeffrey Sachs and the quest to end poverty.’ Signal.

 

Toussaint, E., Comanne, D. (1995) ‘Globalization and Debt’, IMF/World Bank/WTO: The Free-Market Fiasco (Amsterdam: Notebook for Study and Research, IIRE).

 

Founded in 1999 Challenges Worldwide is the founding organisation behind the Challenges World, which includes the Challenges Group of Companies. Challenges Worldwide is a recognized global development charity focussed on  research and enterprise development and skills and is the delivery partner for the International Citizenship service.