The role of FDI and domestic investment in the development of Uganda's economy

The Uganda Investment Authority on June 21, 2017, organised an investment and consultative conference at Hotel Africana, Kampala. Morrison Rwakakamba, the Chief Executive Officer of the Agency for Transformation — a think and do tank on agricultural and environmental policy — made a presentation of the role of foreign domestic investment (FDI) and domestic investment in the development of Uganda's economy. Below is the full presentation 

The subject of investment and economic growth is at the core of millions of livelihoods in Uganda and our ability as a country to achieve and sustain structural transformation. 

That more domestic and foreign investment leads to economic growth and development is very much a settled question. Details on alignment of such investments to national interests, prioritisation of sectors and jobs stimulation are key. 

On the status of FDI, datasets from various sources show that Uganda's FDI was $1.418b in 2013 and $1.74b in 2012. The top FDI sources in 2013 were India (111 projects), China (62 projects), the United Kingdom (18 projects), Pakistan (16 projects), Eritrea (14 projects), Kenya (13 projects) and the United States (8 projects). The major recipient sectors of foreign direct investment during the year were mining and quarrying accounting for 49% (or sh1, 106.5b) of the total FDI. 

This was followed by information and communicationtechnology (18.1% or sh409b), finance and insurance (16.7% or sh377.3b), and manufacturing (7.6% or sh171b). Uganda Investment Authority current datasets (2016/2017) on FDI and domestic investment and sectors where investment is going show licensed projects. I did not find current data on actual projects that materialised off ground. Still, the pointed out numbers in past years have been mostly responsible for an average GDP growth of 5% over the past 20 years. 

Therefore, the bigger issue is how to expand and cleverly align foreign and domestic investment to deliver solid economic growth and structural transformation for Uganda. Structural transformation is critical to attainment of first world status. 

What do investors look for when making investment decisions?

Economists will say the bottom-line is profit and intermediaries will tell us it is the mark-up! Yes, but that is the end game. The process game is more critical. Merchants of capital are very curious and mostly steady. 

They keenly assess risk profile of countries before they invest. They look at trends mostly political, economic and social indicators. Documents like World Bank's Doing Business reports, Index of Economic Freedom ranking, transparency and accountability scorecards, corruption indexes, central bank's monthly monetary reports etc. are some of the documents they scrutinise. 

With all the information, they assess political stability to make decisions on long-term or short-term investments, amount of investment etc.  They assess macro and micro economic indicators (inflation, interest rates, GDP, percapita income, purchasing power parity etc.).

They look through the ease of doing business, profit repatriation, capital transfer etc. They look at property rights regime and access to cooperant factors like land regime etc. They look at investment codes and incentive regime.

They look at efficiency of justice system e.g. speed and fairness in settling of business disputes; they look at laws and practice in protection of intellectual property rights. They look at human resources capital (skills, language etc.). It is a long list and some factors keep changing. These factors for some include weather and social affinities. 

The face of country risk profile and how it impacts domestic and foreign investors. 

First, Risk profile scale affects service industry and manufacturing/ agricultural sectors differently. Most investors in services sector such as banks, insurance companies etc. do less capital investments and can easily repatriate profits in case of instability. They are big here but you cannot see their physical investment footprint. They, for example, only lease - from buildings they occupy, equipment they use, furniture etc. In case of any forms of instability, they can close next day. This is very much different for example manufacturing and agricultural sector. These invest heavily and have a long-term outlook and are, therefore, keen on long-term stability and certainty to invest meaningfully. And these are the sectors that have potential to create more jobs. Attracting these kinds of investors is a dream for every country. Domestic investors would play a big role here. 

Second; For domestic investors, risk profile is different. Because they are citizens, they mostly own land and understand political dynamics of their country - they are less sensitive to latent political risks and have vested interests to invest long term. In pursuing long-term investments in agriculture and manufacturing, focused incentives should be targeted to domestic investors. Through structured joint ventures, more foreign investors can be patterned with local investors to expand scale, skills transfer, among others. The potential for curated FDI is critical to expand in this area.  

Third; Foreign and domestic investors face different and mostly externalised credit incentives. Foreign investors working through special purpose vehicles or singularly have access to low priced credit in their home countries. Countries like Japan, Israel, Germany, Switzerland and Sweden - interest rates are less than 1%.  Bank of Uganda pushed bank rate down from 11% to 10% this week. But why are commercial banks keeping their lending rates at over 20%? Why are development banks still complex for small and medium level domestic investors? UIA as champion of investors should be at centre of these negotiations. 

Four; All over the world, political risk profile gravitates on issues of constitutionalism and political transitions. Uganda has a firm constitution and institutions that should work to guarantee stability and build confidence for long-term domestic and foreign investments.  

But how are we doing as a country? 

Uganda enjoys a unique location at the heart of sub-Saharan Africa in East Africa and lies astride the equator. Uganda enjoys pivotal trade partnerships that create a viable market for business (EAC + Ethiopia has over 286 million people). With poverty reduction and increase in purchasing power across these countries, - this is becoming a formidable market and investment destination. 

Potential investors (domestic and foreign) have access to well-regulated and highly liberalised economy in which all sectors are open for investment plus a free movement of capital to and from the country. 

According to official documents, including the 2013 Index of Economic Freedom. Uganda was ranked the eighth freest economy out of the 46 sub-Saharan Africa countries. A number of reports show that the business-operating environment allows the full repatriation of profits after the mandatory taxes have been paid, as well as 100% foreign ownership of private investments. The incentive regime is structurally entrenched in the country's tax laws making them nondiscriminatory and accessible to both domestic and foreign investment depending on the sector and level of investment.  

For example, the minimum capital investment required for a foreign investor to be eligible to invest in the country in virtually any sector, apart from those that may compromise the country's security, is $100,000.Uganda's labour is highly trainable, English speaking and the cost compares favourably in Africa. Details on how, where and how to invest in Uganda for both foreign and domestic investors are covered on Uganda Investment Authority website https://www.ugandainvest.go.ug/.  

Incentives to Foreign and Domestic Investors

Uganda's fiscal incentive package for both domestic and foreign investors providegenerous capital recovery terms, particularly for medium and long-term investors whose projects entail significant plant and machinery costs and involve significant training.  

For example, in Kampala, 50% of capital allowances for plants and machinery are deductible from a company's income on a one-time basis; elsewhere in Uganda, 75% of those capital allowances are deductible. 100% of training costs are deductible on a one-time basis. A range of annual VAT deferments, deductions, exemptions and depreciation allowances also exist, resulting in investors often paying no tax at all in the first year of their investment and usually paying substantially less than the 30% corporate tax rate in the subsequent years of their investment. 

The Government also provides a 10-year tax holiday for investors engaged in export-oriented production and, if the investment is located more than 25 kilometers away from Kampala, for agro-processing investors. 

Leverage points for domestic and foreign investors 

According to World Internet Stats, Uganda has 11,924,927 Internet users.1

At least 52.3% of Ugandans have access to mobile phones (19.5 million). Access to ferment of information delivers innumerable opportunities for investors to connect with consumers. 

The 2017 World Bank's Doing Business report ranks Uganda at 115 (from 150 in 2015) out of 189 countries. World Bank pointed this achievement to the introduction of a new computerised property registration system that made it easier to certify documents subject to a stamp duty, improvement in paying of taxes, trading across borders and staring a business. We can do more to strengthen our ranking if we continue reforms in the foregoing indicators and fiercely tackle indicators around dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, enforcing contracts and resolving insolvency. 

The Investment Code allows foreign participation in any industrial sector except those touching on national security or requiring the ownership of land. 

UIA requires a commitment to invest over $100,000 over three years. Most foreign investors establish themselves as limited liability companies. Ugandan law also permits foreign investors to acquire domestic enterprises or establish Greenfield ventures.  

The new Companies Act, which was passed in 2012, allows for the creation of single-person companies, permit the registration of companies incorporated outside of Uganda and provide new provisions for share capital allotments and transfers. 

Investors in priority sectors can get a 49-year lease in an industrial park without paying the usual $80,000 lease fee. 

Foreign investors could form 100% foreign-owned limited or unlimited liability companies and majority or minority joint ventures with Ugandan partners without restrictions. 

However, the Petroleum Act of 2013, allows  for goods and services in the petroleum industry that are not available in Uganda to be delivered via a joint venturewith a Ugandan company (defined as at least 51% of the companybeing owned by Ugandan citizens) owning at least a 48% share of the company. Going forward, Joint Ventures should move beyond oil sector into other critical sectors of the economy and UIA should help with convening local and foreign interests through business to business promotions and networking. 

Uganda is reforming its commercial justice system, which nowincludes mandatory mediation for all commercial disputes to help reduce case backlogs. In 2014, the court handled more than 220 commercial cases. 

Capital markets are open to foreign investors. The Government imposes a 15% withholding tax on interest and dividends. However, Credit is allocated on market terms, and rates are high. By early 2015, commercial rates stood at 21%. 

Uganda is a member of the World Trade Organisation. Uganda is also a member of the East African Community.

EAC countries have pledged to integrate financial systems and regulations, harmonise monetary and exchange rate policies, and establish common inflation and debt-to-GDP ceilings. 

There is a lot going on and Uganda Investment Authority stands the opportune junction to turn things in favour of more domestic and foreign investment for wellbeing of Ugandans. Here are some pointers to facilitate internal reflection, improvement on processes already on course and take on new initiatives. 

1. UIA should engage in monitoring of country's risk profile and provide analytical research and recommendations to other parts of government to facilitate reform and improve doing business environment.

2. UIA should use World Bank doing business indicators as base benchmark to tackle huddles that inhibit businesses. Working closely with KCCA urban authorities and line agencies across Uganda will greatly improve Uganda rankings.

3. Investment in visibility of UIA to the public is critical to expand its public image and influence. I have not looked at analytics in terms of how many people visit UIA website looking for information - but this should be maximized locally and externally. UIA is sitting on catches of information that the population is hungry for. Use all methods (media partnership agreements and social media) to get it out there.

4. UIA should scientifically test information it puts out for feedback from investors, prospective investors and citizenry. This will strengthen effectiveness of its communication. Types of information matter. For example, my cousin Dr. Joseph Beraho lives in Greenville South Carolina (USA). He recently indicated his wish to return home and set up a specialized hospital. He asked where he could find information to help him. I told him he should check UIA website. He was clear, beyond general regulatory and incentive information, are there stories of returnees who have succeeded in setting up businesses? "That is what would give me confidence".

5. Corporate governance and leadership training for small and medium domestic investors is critical. This should be tailor made. UIA must have a robust wing of Business development services that beyond generating ideas offers options for those seeking to invest - also builds capacity and facilitates business networks for them. Because some people in this country have money and have no idea where to invest it, they are lured into tactical investments in stocks, fixed deposits in commercial banks, real estate etc. Worryingly, people are investing in similar things (saloons, mini supermarkets etc.). UIA can tap into these local resources to redirect investments into strategic areas that generate steady and long-term profits, jobs and economic growth.

6. Build a database of Domestic Investors for strategic support. Build a model that won't scare these investors to share information with UIA. People are trapped into informality because of less informed fears about the taxman etc.! Taxation should come with incentives and be a tool to encourage and stimulate investment instead of inhibiting. A tax code can be a formidable tool to distribute incentives locally.

7. UIA needs to have a real mandate that makes it a real one-stop center for domestic and foreign investors. Servicing to investors is currently scattered across government. This limits the convening power of UIA and delays decision-making. A more robust law is necessary to empower UIA as a formidable and agile clearinghouse.

8. Uganda needs an expansive pubic land bank. UIA should be the custodian of government Land bank dedicated for investment. The incentive of land for long-term investment shouldn't be on paper. Ready leases should be available to facilitate quick turnaround time for investments.

9. Industrial parks in districts are a great idea. These have potential to turn districts into production centers. But UIA must prioritize- start on a few parks and finish them completely with embedded services (road networks, water and electricity connection etc.)/model paks.

10. UIA should have a role in appointment and reviewing performance of Investment and commercial attaches in our embassies. Attracting and negotiating investments should be central to our public servants in the diaspora.   

Conclusion

Uganda's greatest potential is its people. When we invest in them as a country, they will invest back - and generously. Thank you so much. God bless you. For God and My Country.