IMG_2071“Tax the rich, end the wars, and restore honest and effective government for all”, Jeffrey Sachs [Munk, 2013].

Every Monday Challenges Worldwide (CWW) arranges a team meeting for all the CWW volunteers in Uganda. This allows CWW to discuss common issues and difficulties, to highlight important aspects of the programme yet to come, to check whether the volunteers are on track with their deliverables, and to go through budgets and stipends. Furthermore, the meeting includes a session of Chartered Management Institute (CMI) training, and it gives opportunity to invite guest speakers.

This week Jane Nalunga from SEATINI-Uganda (the Southern and Eastern Africa Trade Information and Negotiations Institute) joined the meeting to discuss with us the linkages between trade, investment agreements, policies, and local businesses.

SEATINI-Uganda was established in 2001 after realising that African countries were marginalised in the WTO negotiations and other global processes. SEATINI-Uganda focusses on strengthening the capacity of the different stakeholders, especially the government officials, CSOs, media, farmers groups, trade unions, and members of parliament to participate in and effectively influence trade negotiations and trade related processes at national, regional and international level.

CWW works with small and medium sized enterprises (SMEs) which bring about social change. Small Businesses in Uganda are generally run by a single, or up to fourteen people. According to Jane Nalunga, those businesses face numerous challenges. She names the lack of skills, the difficulty to access credit, and the lack of a proper policy framework to support small businesses as examples. Emphasising on the latter – which she names the biggest challenge local businesses are facing currently – Nalunga claims that the lack of governmental support has led to a situation in which small businesses do not survive their first 2-3 years of operation.

Challenges Worldwide helps local businesses to grow from small to medium sized, and even bigger. Without a proper policy framework, achieving growth is difficult. SEATINI-Uganda works on those policy frameworks and urges the Ugandan Government to protect their local businesses. Guided by Jane Nalunga’s examples – in which the challenges that local businesses face will be highlighted – this article will focus on the current policy framework. It will not give Uganda the solution to their current problems, it is merely written to provoke thought on the subject.

Competition within the Ugandan marketplace consists of local businesses, foreign businesses, and foreign businesses who are looking for markets in Uganda. Before the 1980s Uganda had a closed economy, in which the Government used trade barriers to protect the local market, for example by the use of tax on foreign import. Taking Uganda’s cotton industry as an example Jane Nalunga explains that there used to be a large cotton industry near Jinjia (source of the Nile) which consisted of a large network of backward and forward linkages between enterprises. Small businesses for example used to supply big businesses. 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 with conditionality’s – one of which was to liberalise and to open up 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, de-regulate labour relations, and improve competitiveness [Toissaint and Comanne, 1995]. It is debatable whether this recommendation was beneficial for African countries like Uganda.

Whereas Uganda has been singled out as one of the World Banks success stories, there exists a lot of criticism on SAPs from all over the world. According to Herbert Jauch [Jauch, 2009] – Labour Researcher for the Southern African Trade Union Co-ordination Council (SATUCC) – SAPs imposed severe hardships on the poor. Jauch claims that in Uganda – despite some (statistical) economic growth – the implied policies resulted in for example the collapse of small enterprises and to Trade Unions losing 60% of their members since 1990 [Jauch, 2009]. As the scope of this article does not allow for an in-depth research on the criticisms of SAPs, this article will focus on the challenges that local businesses are experiencing. More specifically, challenges that the CWW enterprises in Uganda are facing will be analysed against the current policy framework.

Taking the example of the cotton industry, 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 cotton you will find on the markets in Kampala is from Chinese origin. Locals either invest their money into this Chinese textile, or into second hand clothes offered in large amounts by developed countries. Apart from second hand clothes and shoes being known to have a negative effect on marketplace dynamics, backward and forward linkages between local businesses in the cotton industry have disappeared. It is clear that Uganda’s policy framework determines whether local business is vibrant or not and therefore Jane Nalunga insists that imported goods should be taxed to fight foreign competition.

To give a more relevant example Jane Nalunga used one of the businesses that Challenges Worldwide is currently working with – Seven Seasons. Seven Seasons produces sugar-free banana juice, from a mix of locally grown bananas. Jane highlighted the competition from abroad this local business is facing. Products like Splash and Quencher are juices that are both made in Uganda. However instead of using local fruit, a mix of imported Indian concentrates and water is used, this diluted version is sold on the local markets. If the fruit used for the juices would come from Uganda, money would be made across the chain. This is according to Jane the way to get out of poverty. Seven Seasons is currently supplying themselves with different types of local bananas. They are cut from the stalk, peeled, fermented, squeezed and filtered. The juice is then bottled and transported to the shops. Jane claims that such local businesses cannot compete with cheaper foreign products, unless the right policy framework is in place to protect those businesses. It is mysterious that products which travel all the way from India or China are offered cheaper than the locally produced products. Why have Ugandan enterprises not been able to produce their products at a lower cost? Evidently they do not have the high transport costs compared to foreign import. It could be assumed that if fruit syrups are imported from India, they could also be made available at the local Ugandan market at a more compatible price? If Ugandan consumers prefer to drink cheap diluted juice, Ugandan enterprises could produce syrup, sell syrup or sell diluted juice. Instead of taxing all imported goods and returning to become a closed economy, could competition be fought by educating entrepreneurs? It seems local enterprises could be cutting costs, and increase productivity and creativity. Furthermore, it can be noticed within enterprises CWW is working with that profit is often spend on personal matters, instead of keeping the money for a healthier cashflow. Education could be the key to solve this problem. Adding to this. Currently, when a local business owner cannot show the Uganda Revenue Authority (URA) that their business is running at a loss, or they are not showing anything, they are due to pay a high amount of tax, an amount that they cannot afford. The URA could be more helpful in providing assistance to the local business owners. Entrepreneurs could be made aware of the linkages between bookkeeping and tax paying.

Another challenge that enterprises in Uganda are facing are the high electricity bills. Local electricity is privately owned by a South African company, who is charging an amount which is linked to dollars. With the current exchange rates, people are charged too much and the price is only going up. Businesses need electricity, and therefore it could be made more accessible for them. Infrastructure in general should be accessible if one wants a thriving economy.

Jane’s third example also involves one of the businesses that Challenges Worldwide is working with, Kinawataka. Kinawataka recycles straws and uses those to make new products. Imagine the amount of work it takes to collect, sort, wash and restyle those straws into for example, a basket. Visiting a local market, there are much cheaper Chinese baskets on offer. Even though Kinawataka is a company who supports the community, supports women, sells a local product, and who is environmentally friendly, people will still choose to buy the Chinese basket. Locals are happy with the cheap products that China is offering. However this example shows that those products cannot compete with them. Can we blame China for producing and offering cheap products? Using this example, Jane Nalunga again emphasised that foreign import products need to be taxed.

It is understandable that tax on imported products is seen as a beneficial move for Uganda. Apart from protecting local business, tax is expected to bring money into de Government’s accounts. It is generally known that tax provides the much needed revenue to fund public services for its citizens, it pays for schools and teachers, for health centres and health care, for roads and infrastructure and major public expenditure in the budgets.

It must be taken into account that while trade barriers might protect local business and provide tax income, it also raises the price of products on the local marketplace. Furthermore, it cannot be expected from a foreign country who has just built you a highway for free, or who has built a hospital for free, or who has just sold you weapons, to except those trade barriers. There is a large possibility that foreign countries will respond by setting up trade barriers against Ugandan export. Furthermore, the reality in which some countries are already withholding on doing business with Uganda because of their clashing views on Gay rights, trade barriers might damage the trade relations with foreign countries even more. Is tax on foreign import really the solution?

In Kinawataka’s case, instead of taxing their competitors, products could be sold on international markets where there is more awareness, and where more importance is giving to the fact that this social enterprise supports the community and the environment. In international markets Kinawataka might find consumers who are very capable and willing to pay extra for their cause. Uganda’s policy framework could support this international trade by local businesses by making export less costly.

As the majority of taxes are currently collected from consumers and citizens – through Value Added Tax, Excise Duty and Pay As Your Earn – there could also be more focus on taxing foreign businesses who have invested in Uganda and who generate outputs and profits from this business.

Very few taxes are collected from the large flock of multinational companies that operate in Uganda. SEATINI-Uganda has published a paper in collaboration with Action Aid on Double Taxation Treaties (DTTs) in Uganda in 2014 [SEATINI-Uganda, ActionAid, 2014]. According to this paper, “the network of DTTs is one of the mechanisms used by companies to avoid paying taxes, leading to illicit financial flows and tax losses for Uganda”. Foreign businesses need to be taxed. Jane joked that the “big 5” usually refers to the 5 largest species in Africa. In Uganda they mean the 5 largest foreign enterprises; Ernsty & Young, KPMG, PWC, etc. While forming large competitors within the local market they are currently not being taxed.

Multinational companies are known to set up a subsidiary in a conduit country only to avoid being taxed in the country of operation. This way profit ends up in developed countries, with minimal tax payed in the countries where production happens. This phenomena is known as profit shifting. In Uganda many treaties have been signed following a model treaty that was developed by the OECD countries. Unfortunately, those treaties favour those countries, instead of developing countries.  SEATINI suggests that in developing the new policy on negotiation of DTTs, Uganda could draw on examples of treaties that have gone beyond the UN model – like the one’s developed in the Andean region in Latin America. The government of Uganda has been advised to thoroughly investigate and consider whether existing treaties are actually benefitting Uganda. [SEATINI-Uganda, ActionAid, 2014]. Negotiation of DDTs will be a step toward a shift from the current tax policy that continuously adds more taxes to the ordinary citizens who struggle to make ends meet.

It would be highly desirable to see the mentioned issues included on the agendas of politicians. This article has made various suggestions which could improve the existing policy framework in order to enhance business and trade, without having to include protective policies. Support can reach local entrepreneurs in many shapes, starting with accessible infrastructure, education and stimulation of trade through making export more affordable.

For future reference the benefit of improving certification, labelling, guarantees and quality standards of locally produced and imported products could be analysed. Quality certification must apply, especially on products that might carry a health risk. On the other hand it may be beneficial to obliged sellers to give a warranty on their products, and to put a ban on fake products.

Currently Challenges Worldwide is encouraging all enterprises to register, and to do proper book keeping. Within this process the challenges faced by the local businesses, and the reasons for lacking either registration or a book keeping system should be identified. This information will be useful for SEATINI-Uganda when addressing the local Government. I am convinced that through an improved policy framework CWW and SEATINI-Uganda can continue to promote sustainable growth for local SMEs 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.

SEATINI-Uganda, ActionAid (2014) ‘Double Taxation Treaties in Uganda – Impact and Policy Implications, (Kampala: SEATINI-Ugana).

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

Leave a Reply

Post Navigation