Doing Business in Africa: Uganda
In this AFKInsider series, we explore the regulatory conditions that an entrepreneur is likely to face when setting up a business in sub-Saharan Africa. AFKI presents Doing Business in Africa: Uganda.
Doing Business in Africa: Uganda
Bordered by Kenya, South Sudan, the Democratic Republic of the Congo, Rwanda, and Tanzania, Uganda is a landlocked country in East Africa that was ruled by the British from 1894 until 1962 as a protectorate.
While the economic consequences of British colonialism were largely the same in Uganda when compared to other parts of British East Africa, status as a protectorate gave Uganda a degree of self-government and local autonomy that was lacking elsewhere in much of British Africa. This status had important ramifications as it kept intact traditional lines of chiefly authority that remain important to this day.
During the colonial era, however, it allowed the politically important Baganda ethnic group that dominated the southern part of the country to fill key administrative positions and to take advantage economic opportunities as they arose under British rule.Given these advantages the Ugandan elite led by the ethnic Baganda were much slower than other subject peoples in the rest of colonial Africa to demand independence.
However, pushed by the British who were winding down their official empire, Ugandans began to organize politically in order to prepare for independence as a unitary state after briefly flirting with transforming into a federal state with a highly autonomous Buganda as one of its constituent parts.
Independence in 1962 kept unresolved the role of central versus local and tribal power, however, and in a series of political crises Uganda’s first attempt at democracy was replaced in fits and starts by an increasingly autocratic central government.
In 1966 Prime Minister Milton Obote suspended the constitution and assumed nearly all government power into his own person. A year later, in 1967, a new constitution was promulgated that abolished Uganda’s traditional kingdoms and declared the country a highly-centralized republic with a quasi-socialist governing philosophy imported by the Obote regime from neighboring Tanzania.
Needless to say this created a great deal of dissatisfaction and unrest and in 1971 Obote found himself the target of a military coup led by his onetime army ally, Idi Amin.
Amin, well-known today as one of Africa’s most brutal dictators, instituted a personalistic dictatorship and a cult of personality that allowed him to rule Uganda as a near absolute monarch for eight years between 1971 and 1979.
While in power Amin targeted the Acholi and Langi ethnic groups, expelled the country’s 80,000 Indians, and in general made ruin and death state policy in a way akin to the worst of the old Roman emperors.
After slaughtering 100,000 to 300,000 of his own people, Amin’s obsession with the threat posed by the exiled president Obote, whom he deposed in 1971 and who fled to neighboring Tanzania, led Amin to invade and annex part of that country in late 1978. This, of course, was a step too far and a victorious Tanzanian army forced Amin to flee to Saudi Arabia in 1979.
Upon Amin’s ouster fraudulent elections carried out by the victors led to Obote returning to power between 1981 and 1986. During this time he was opposed by former ally Yoweri Museveni, who led a successful guerrilla war against the government, leading to Museveni taking power in January of 1986.
After a ten-year reconstruction period in which stability and economic growth took root elections were held and Museveni, once a rebel commander, was returned to power as the elected leader of his country.
Since then and despite claims of election tampering by his defeated opponents, Museveni has more or less ruled as an elected strongman ever since who now rules in much the same way that neighboring Kenya’s Daniel Arap Moi did – e.g. through patronage, thorough control of the party system, and, increasingly in later years, via more authoritarian practices.
Ease of Doing Business
So how does all this influence business conditions? According to the World Bank, Uganda currently ranks 122nd out of 183 countries on its Ease of Doing Business Index – a measure created by the Bank to gauge the degree to which commercial enterprises encounter regulatory hurdles, legal threats to property, and the time and money spent on things such as registering a business, ensuring right of title to property, and acquiring licenses.
By way of comparison, the United States ranks 4th on ease of doing business, right after Singapore, Hong Kong, and New Zealand.
What does this ranking mean? Take, for instance, the Bank’s measure of how easy it is to start a business, which is depicted in Figure 1 below. From the figure one can see that the Bank defines business-creation costs as consisting of the time and money outlays involved in the series of legal steps necessary for the entrepreneur must take in order to legally establish an in-country firm. Using this framework, the Bank then tasks researchers to go through this process in order to establish in-country averages.
When this metric is applied to Uganda, the Bank finds that Uganda ranks 137th out of 183 in ease of starting a business, making Uganda one of the more difficult places on Earth to start a legal commercial enterprise. To start a business in Uganda one has to complete 18 bureaucratic procedures that take a total of 25 days at a total cost of about $432, with no minimum capital requirement imposed by the government for the start-up.
Figure 1:
How the World Bank Measures Ease of Starting a Business
Using similar metrics for other aspects of business operations, the Bank has ranked Uganda in a number of other areas. To obtain a construction permit, for instance, Uganda does marginally better and is ranked 133rd out of 183 as it takes the completion of 18 procedures, which takes on average 171 days at a cost of nearly $1,287. While not insurmountable for many Westerners, it is nonetheless a steep proposition for most citizens of Uganda.
Continuing in its assessment, the World Bank has determined that in order to obtain and register property, Uganda does much worse as it ranks 150th out of, again, 183 countries measured.
To register property in Uganda, the Bank finds, it takes the completion of 13 bureaucratic procedures that takes, on average, 77 days and costs 3.2-percent of the property’s financial value in fees and other costs to complete. This makes Uganda a moderately a fairly place in which to register property.
Uganda fortunately does much better when it comes to obtaining credit, where it ranks 46th out of 183—making the country one of the better in the world in this area. Here, as depicted in Figure 2, the Bank examines the legal rights of creditors and borrowers in secured transactions and bankruptcy law as well as the strength of credit information bureaus and exchanges.
When lenders have both strong legal rights and easy access to a wide variety of information about the client’s creditworthiness, reasons the Bank, the more available credit will be. When information on borrowers is significantly lacking – as is the case in most of Africa – legal protections for creditors must in turn be very strong. Uganda does well because creditor rights are relatively strong and there is a fair amount of information available on potential borrowers.
Figure 2:
How the World Banks Conceptualizes Credit Acquisition
When it comes to protecting investors and minority shareholders, Uganda unfortunately returns to form. Here, the country ranks 132nd out of 183 countries, largely due to the lack of requirements to disclose conflicts of interest by corporate officials. Uganda is also a moderately difficult place to bring shareholder lawsuits while director liability is weak compared to western countries.
Uganda unfortunately does better in the area of taxation. The World Bank estimates that pleasing the tax man in Uganda requires a total of 32 payments over the course of a year which, in turn, takes up to 161 hours to complete and can consume up to 35.7-percent of a company’s profits. Accordingly, Uganda’s tax burden is ranked 62nd out of 183 nations, making it one of the better in the world in this area.
When it comes to engaging in cross-border trade, Uganda once again reverts to form. In Uganda, to import goods into the country one is required to have eight documents for customs officials to inspect. On average, it takes a total of 34 days to import goods into Uganda with the cost amounting to $2,940 (excluding tariffs) per container shipped into the country.
The cost to export goods is roughly similar as Uganda requires six documents to be inspected by customs’ officials, while the total cost (excluding taxes) is $2,780 per container, with delivery taking up to 34 days from point of origin. Compared to global averages this nets Uganda a ranking of 148th out of 183 on ease of engaging in cross-border trade.
Uganda’s ranking improves however when it comes to contract enforcement, where it ranks 113th out of 183 countries ranked on this issue by the Bank. On average, reports World Bank analysts, it takes a total of 38 legal procedures to take a contract from dispute to resolution, at the cost of 490 days spent in court or otherwise attending to legal issues. The financial cost of pursing a contract claim, says the Bank, typically accounts for 44.9-percent of the value of the claim.
Finally, in terms of closing or liquidating a business Uganda ranks 56th out of 183 countries. Here it takes 2.2 years to close an estate or enterprise at a total cost of 30-percent of its value with an average recovery rate of 39.7 cents on the dollar.
Table 1 presents a summary of these rankings as well as Uganda’s overall ease-of-doing business rating. On all but obtaining credit, paying taxes, and closing a business Uganda ranks well below the median on global measures of business conditions.
Table 1:
World Bank Ease of Doing Business
Assessment and Rankings: Uganda
Prospects
Uganda at present remains what one might call a stereotypical developing African country. It is heavily reliant on agricultural production for its income and produces mainly coffee for export—it is in fact Africa’s largest exporter of the crop—along with tobacco, tea and other low-value agricultural commodities. Still, as in the rest of Africa, additional growth has come in the service sector—which now accounts for 52% of GDP—as well as in some light manufacturing. These other sectors, however, have not grown into major export earners.
Additionally, Uganda’s location and history continue to weigh heavily on its economy. It is of course landlocked, which makes its economy dependent upon access to global trade flows through its neighbors—something it has not always been able to count on.
In theory Uganda could serve as an important transport hub between the eastern DRC and ports in Kenya and Tanzania, but in practice years of instability and paltry investment in cross-border transport infrastructure has meant relatively little headway has been made in ending Uganda’s geography-imposed isolation.
Figure 3:
Uganda Economic Growth,
Percent Increase, 2003 – 2013
Still, as the chart above shows, growth has nonetheless been occurring in Uganda much as it has been in the rest of eastern Africa. That’s because the relatively stability—both political and macroeconomic—that have been brought by Museveni’s leadership have created the conditions necessary for some long-term investment to occur and for commerce to be carried out.
While inflation is now under much better control than it once was and poverty has been reduced to just 22% or so of the population, fiscal tightening over recent years has led to a slip in development outcomes in health and education that, if it continues, could grow worrisome.
One bright spot that could do much to transform the country, however, is oil. As in neighboring Kenya, oil and gas in significant quantities has been discovered, and the U.S. Energy Information Agency estimates the country holds up to 2.5 billion barrels of petroleum and perhaps 500 million cubic feet of natural gas—enough to supply the country’s domestic needs for many years as well as produce for exports. At present prices the oil alone would represent a windfall of $280 billion dollars—13 times the size of Uganda’s current GDP.
However, three obstacles remain to putting these newly discovered resources to economic use. The first is that though these reserves have been known about since 2006, they have not yet been put into production due to dithering on the part of the government on crafting a new hydrocarbon law.
This has prevented companies from moving forward with intensive appraisal and development plans for fear of what might be contained in the new law. Luckily, the Ugandan government seems to have finally nailed down language on the law, which is expected to pass soon, and so development of these resources should begin soon, perhaps as early as next year as the legal and regulatory environment surrounding oil and gas in Uganda becomes more clear.
Second, even if Uganda began production of oil and gas today there is no way to get it to global markets thanks to the country’s isolation and creaky transport links. Here, though, progress too is being made as just recently energy ministers and corporate executives met in Nairobi to hash out the details of a pipeline that would link up Uganda’s and Kenya’s nascent fields with those already in production in South Sudan. Terminating near Lamu on the Kenyan coast, such a pipeline would be a boon for the entire region, including Uganda.
Finally, third, the country is still a relatively insecure place administered by a man and political party that, while democratic in form, lacks much of what we might call a functioning democracy in the West.
In the northern part of the country the Lord’s Resistance Army run by rebel commander and war criminal Joseph Kony is a constant threat while, in the rest, the slow withering away of democratic accountability via the continued rule of Boss Museveni means that political tensions could eventually boil over into destabilizing political conflict.
This is because things like elections occur, but as in Kenya under Moi they do not seem to mean much as at no time has Museveni ever been seriously threatened by a loss of power. Indeed, he is so secure that when rumors recently circulated that he was grooming his son to take his place in a sort of planned dynastic succession the newspapers that printed them were shut down on orders of the government. This bodes ill for the future and it is very possible that Uganda could once again slide into despotic rule.
So, does Uganda have promise? That once again depends upon the amount of risk one is willing to accept. At best it has the potential to be a real performer, but as of yet its isolation and weak political system has kept the country from performing as it should. Reforms need to be made in order to ease burdens on business, which are significant, while continued investment into health and education need to be made. Perhaps oil wealth, if it comes, will allow all that to happen. On the other hand, it could just as easily be stolen by a corrupt, unassailable central government that increasingly uses fraud and force to get its way.
Jeffrey Cavanaugh holds a Ph.D. in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider, Mint Press News and BAM South.