Easy money

In the unlikely event that my children ever ask me for my advice on the best way to become wealthy, my answer is simple: establish a bank in East Africa! Banks here are astonishingly profitable, consistently earning super-profits for their shareholders and super-salaries for their managers.

Now that the financial reporting season is over (and Kenya figures are available from blogger Bankelele if you are interested), the full extent of bank profitability has been revealed. Here are some simple figures, averaged across 5 representative banks in Kenya and Uganda:

Interest rate paid to depositors 2.7%
Interest rate charged to borrowers 18.3%
Return on capital invested 36.4%

Nice work if you can get it.

Years ago, when I was the Financial Controller at Tanganyika Wattle Company in SW Tanzania, I used to lead finance seminars for senior and middle management, focusing on company performance. These sessions were, more often than not, turbid affairs as we turned the pages of the business and divisional accounts, discussing budget variances, stock levels, costs of production and unit costs.... but one day, in desperation at the thought of another page-turning, painful and tedious review, I decided to do something different: I asked the managers present "Who owns this business?" This was in the days when stakeholder capitalism was on the agenda: business was not just supposed to be about its shareholders but also its different stakeholders: employees, suppliers, customers, communities and anyone else with an interest in an organisation's performance. After a brief silence, someone ventured the answer "CDC" (the 100% shareholder). "You're right." I said "Legally, CDC is the owner. But who else owns this business?" A lengthy silence followed. "You do." I said. This business is your past, present and future. You live here, with your families. If it fails, who loses? CDC does, but it's a big organisation. Who really loses?".

After that, we had a much livelier discussion than usual, focused more on the future than the past.

The great tragedy of capitalism as a form of organisation is that it diminishes the importance of society and promotes the culture of the individual. Businesses have incalculable numbers of intersections and relationships which go unrecognised and unrewarded. This, of course, is why banks and other huge organisations cannot be allowed to fail. Their connections and obligations to depositors and borrowers, suppliers and customers are so critical to society that the consequences of failure are unthinkable: yet we have allowed a system to develop that attaches no value, attributes no reward, and assigns few rights to legitimate stakeholders beyond shareholders, boards of directors and senior management.

The latest East African banking results are indicative of the skewed rewards to capital. Depositors (who entrust their hard-earned cash with a bank for safe-keeping) receive a return 10 times lower than shareholders. While it is true to say that the depositor's risk is lower than the shareholder's, by any standards, it is difficult to regard this as an equitable risk-sharing arrangement. Indeed, it exemplifies the gross imbalance in interests which is so deeply ingrained and entrenched in modern society.

Once upon a time, there were alternative forms of organisation: mutual societies, building societies, co-operatives, credit unions, but these have, by and large, been crowded out in the capital jungle, unable to withstand the fast-growing stems of short-term greed. So few alternatives to the privately-owned bank. So few alternatives to rampant capitalism and the culture of greed.

I hope my children don't ask me the best way to become wealthy.

The war on.... something or other

Last week, there was a very interesting editorial in the Economist, providing a strong argument for the decriminalisation of drugs. It's not a difficult argument to make: first, it drew attention to the abject failure of the high cost "war on drugs"; second, it highlighted the likely health and fiscal benefits from a properly managed and regulated trade in drugs; and third, it made the point that the criminalisation of drugs drives the trade underground and leads to increased crime and violence around the world. Recent drug-related violence in Mexico is widely reported, but the drug trade is now well-established in West Africa and, increasingly, there are rumours that East Africa is becoming a transit zone for drug smuggling, with all the attendant social risks this brings.

By coincidence, I have just re-read Ben Elton's novel, High Society, which centres on a hitherto-little-known politician's ultimately unsuccessful campaign to decriminalise drugs, set against the backdrop of drug use and abuse across British society. It's a very good novel, blending satire, humour and typically savage social observation. Indeed, while no-one, least of all Ben Elton himself, I suspect, would say that he is a great writer, he is a wonderful commentator on many of the big issues of our time. In one memorable passage, the lead character, Peter Paget, compares the absurdity of the "war on drugs" to the USA's failure with alcohol prohibition. "That one insane experiment [prohibition] tells us everything we need to know about drug control. People didn't drink less, they just drank illegally. They paid no tax, some of them went blind from wood alcohol, and they financed the birth of organized crime that has plagued American society ever since."

Each publication made a compelling case for decriminalisation: taken together, the argument is overwhelming. The "war on drugs" cannot be won.

So why are most Governments around the world so wedded to the "war on drugs"? It's an interesting question, for which there seem to be two main possible answers. First, they know it, but consider the social consequences of decriminalisation to be worse than fighting the long, expensive and inevitable defeat. Second, and a more cynical explanation, waging "wars" is a convenient way by which Governments are able to subjugate and control the populace, both through the erosion of hard-won civil and individual liberties (as has been so clearly demonstrated in the "war on terror") and through the creation of an external bogeyman, whose wicked and malign intentions threaten the very fabric of our society, and who provides the justification for excessive regulation and intrusion into the way in which individuals choose to live their lives.

Recently, I read an extraordinary item on the news: namely, that the British Government was seeking to introduce a system that required anyone leaving the UK to disclose their travel plans in advance. This will, apparently, assist in the control over two bogeymen, terrorism and organised crime. It probably will, but what sort of society do we want to live in? Every new regulation is justifiable, taken in isolation, but they make each one of us just a little less free than before.

The Moringa Tree

I am not generally a fan of new crops. My experience is that they seldom live up to their advocates' claims, but I am prepared to make an exception for the Moringa tree. Widely planted throughout East Africa over the last 10 years, it was hailed as the "Miracle tree" and, while it hasn't quite lived up to expectations, it retains a great deal of potential.


Native to Asia, Moringa Oleifera has a huge variety of uses. Its nutritious leaves can be used either for human or animal consumption. I can attest from personal experience that its seed pods, whose long slender appearance has led to the tree being called the Drumstick Tree, taste delicious when immature. The tree is drought-resistant. It can be coppiced annually for firewood and to stimulate new growth. And its seeds produce a high value clear, odourless and stable oil now in demand in the cosmetics industry. Here's proof:





The Body Shop recently introduced a Moringa line of products, using Moringa oil supplied by one of AAC's investee businesses, Earthoil. Located in Athi River, close to Nairobi, Earthoil produces a range of seed oils for export. Its Moringa seed is sourced from growers in Western Uganda, and cold pressed for export. At last, therefore, planters of the "Miracle tree" are reaping some financial reward: I hope that Moringa's other manifold benefits will be realised in time.

In my opinion, it has a great deal more potential than that other so-called wonder crop, Jatropha curcas. Quite apart from anything else, at least it's not toxic.

Religion and the decline of magic

"History's back in fashion", according to the FT. It is hard to see this as anything other than a good thing, unless of course, in trying to avoid perceived mistakes in the past, we make even worse mistakes in the present..... I have been giving this line of thought some consideration when I read statements criticising 1930s-style protectionism or advising that we must avoid the Japanese problems of the 1990s, as it seems to me that we can never know what the consequences would have been of an alternative course of action. Maybe, just maybe, the actions of our forebears spared us a worse fate. In conversation yesterday evening, an eminent investment professional remarked to me that history is the best laboratory for economics. In my view, it is certainly more robust than the curves and assumptions which riddle economic theory, but we should also recognise its limitations in such a rapidly changing world.

Following the brilliantly-written history of the British abolitionist movement - Bury the Chains - by Adam Hochschild, I have now finished reading a more demanding but no less interesting work: Religion and the Decline of Magic, by Sir Keith Thomas (pictured above). This work is a fascinating study of social change in 16th and 17th century England. Its central thesis is that popular belief in superstitition and magic (and ultimately religious belief) will gradually be eroded as scientific advancement provides explanations for natural phenomena.

At first, I began to think about this thesis in the context of East Africa - where belief in both religion and magic remain strong. Indeed, one of the least attractive features of life in East Africa is the extent to which unscrupulous people exploit widespread beliefs in religion and magic. Barely a day goes by without a quack pastor forming a new church offering heady homespun mixtures of salvation and forgiveness, all in exchange for the payment of lavish donations which, more often than not, are diverted into the pastor's pockets. These shameful deceits, however, pale into insignificance in comparison to the creation of myths supporting so-called "traditional medicine". These myths have recently given rise to the following reported abuses: the widespread murder of albinos in Tanzania, in the belief that albino body parts can cure certain diseases; the discovery, in Uganda, of children's heads in the foundations of new buildings, apparently in the belief that this will bring good luck to the owners; the frequent sexual abuse of young girls by HIV+ men across East and Southern Africa, in the belief that sexual intercourse with virgins is a cure for Aids. In today's world, where almost everything has a scientific explanation, how can such vile beliefs exist?

But is East Africa actually any different from anywhere else? It is widely reported that in the USA there is a significant minority who deny the theory of evolution. In China, there is a huge market for animal body parts as medicine. Astrology is popular everywhere. Homeopathy, crystals and the occult have countless aficionados. Global youth is addicted to fantasy entertainment. Far from rejecting magic and superstition, the human race seems to have embraced it even more closely in recent years.

The great anthropologist, Malinowski, observed that “...magic is dominant when control of the environment is weak” and this seems to represent the best explanation for its enduring power. We live in a world where most of us are unable to understand the technology around us. Modern science itself is magical: the astonishing advances in medicine, the ever-increasing power of the semi-conductor, genetic modification, the capacity of modern weaponry, the incalculable power within the atom - all of these lie far beyond our understanding and our control. Society is magical: achievement and wealth often appear to have little connection to effort, hard work and ability. Finance is magical: all the collective brains of regulators, of auditors and of bankers themselves were unable to understand the risks presented by ever-more-complex packages of financial derivatives.

In such an environment, is it really any wonder that people retreat towards superstition and magic? As Keith Thomas concludes - “If magic is to be defined as the employment of ineffective techniques to allay anxiety when effective ones are not available, then we must recognize that no society will ever be free from it.”

Perhaps this is history's fundamental truth: that despite all our scientific advances, we are destined to repeat our mistakes, time and again.

The Cherry Orchard and Anton Chekhov

Of all the plays I have seen and read, The Cherry Orchard – albeit in translation – is the best. Its carefully woven themes of social change, disintegration and loss alongside its humour and its optimism, entertain and enrich the audience. There are no heroes or villains, just a group of beautifully drawn characters trying to make sense of their lives and their relationships with each other. There are no moral judgments: the audience is free to draw its own conclusions. It is funny, sad, romantic, satirical, tragic – a truly wonderful work of art.

It is all the more remarkable due to the circumstances under which it was written: Chekhov completed the play while suffering from severe tuberculosis, which was to kill him only six weeks after its first performance. One can only imagine – just as with van Gogh’s final paintings– the hunger and the drive of the artist, the white heat of creativity in the final moments of life.

Last year, I adapted the Cherry Orchard to 1960s East Africa. It wasn't actually that difficult to re-set the play in East Africa, the principal change being the substitution of ethnic tension and the impact of decolonisation for the emancipation of the Russian serfs and the enormous social changes this caused. This is testament to the enduring nature of the play's principal themes.

I have to admit, however, that it was not a huge success. Like many of Chekhov’s works, the main dramatic events occur offstage and are described through dialogue and individual characters’ interpretations, and the resultant lack of on-stage action can make the play seem static (especially for audiences brought up on TV and cinema). Also, the nuances and subtleties do not lend themselves to the uneven quality of an amateur cast and production team.

At least, that's my excuse.

Hybrid Maize and the legacy of George Shull

White maize is by far the most important crop in East & Southern Africa. The grain is palatable; crop yields are high in comparison to alternative grain crops; labour demand is low. Well over 200 million people in sub-Saharan Africa rely on maize as their principal staple crop.

Remarkably, for a crop so critical to food security across half the African continent, maize is a relatively recent introduction. The Portuguese brought it to Africa early in the 16th century, since when it has spread throughout the continent. Its popularity owes much to its productivity : under the right conditions, commercial farmers in Southern Africa have achieved yields in excess of 10 MT/hectare for hybrid maize. Indeed, I remember during one visit to the Mpongwe farms in the Zambian copperbelt, the General Manager, Patrick Tobin, proclaiming his delight that he would soon be eligible to join the “ten tonne” club of Zimbabwean commercial farmers (though I never knew if such a club really existed).

But yields like this are only possible where farmers are using hybrid maize seed. Exactly 100 years ago, an American plant scientist, George Shull, published research into the phenomenon of hybrid vigour in maize (enhanced yields through hybridization). Within 20 years, hybrid seed maize offering significant yield improvements was on sale in the USA, and the technology quickly spread across the world. Everywhere, that is, except Africa, where hybrid maize still makes up only about 25% of the total area planted to maize – despite its manifest yield benefits. To put this statement in context, smallholder farmers using traditional open-pollinated varieties of maize, probably average yields of about 1 MT per hectare in comparison to Mpongwe’s 10 MT target – a factor of ten. This colossal inefficiency is a major contributor to the continuing food insecurity on the continent and, in light of the ever increasing population, a major risk to the future.

This is a simple example of why it is so important to invest in Africa’s seed industry, from breeder to multiplier through production, distribution and retail. Access to and utilization of improved maize seed has the potential to transform African agriculture. African Agricultural Capital (AAC) has already invested in four seed companies in the region and it is both my hope and my intention that AAC will continue to look actively for opportunities to invest in the seed sector in the future.

For more information on this and other important crops in sub-Saharan Africa, it is well worth reading Securing the Harvest, by Joe de Vries and Gary Toennissen. Both work for the Rockefeller Foundation and both were instrumental in the foundation and initial capitalisation of AAC. I owe them a debt of gratitude.

'Twas ever thus

This wonderful cartoon satirises French society just before the French Revolution – more than 200 years ago. The clergy and the nobility are riding on the back of the peasant. Words alone will never communicate as effectively as this simple picture, though Rousseau’s claim that “Man was born free, but everywhere he is in chains” comes close.

I was reminded of this cartoon when I read a very interesting article by Lucy Oriang' in Kenya’s Daily Nation. I quote: “There are only two tribes in this country [Kenya] – the rich and the poor. The difference lies in who pays taxes and who doesn’t, and who gets shot in the back by a policeman and who gets a security detail at public expense. It has nothing to do with your mother tongue.” (Her reference to taxes is, I presume, aimed at Kenyan parliamentarians who have opposed a proposal that MPs’ allowances (which are very substantial) should be taxed).

Of course, this analogy of the two tribes is not unique to Kenya: it persists, to this day, all over the world. In fact, it is now much worse than it was: there are many more people who live in bondage and slavery now than at the height of the Atlantic slave trade. What does seem to be missing, however, are campaigns, movements, politics and leaders who propose alternatives to our way of life. Even the recent financial turmoil, which has provided us all with a graphic demonstration of the impact of unalloyed greed, consumption and inequality at both a household and an institutional level, has not yet thrown up alternatives to the ways in which we are organized and governed as societies. Why is this? Was Francis Fukuyama right when, in his book The End of History, he presented the thesis that Western Liberal Democracy is the final form of societal organization to which all societies will ultimately conform?

In East Africa, the overwhelming majority of the population is poor: smallholders eking out a living on small plots of land given over to subsistence cultivation; the urban poor living in low quality housing with poor sanitation, struggling to make ends meet through petty trade or casual employment, or worse. The contrast between rich and poor is more stark than in wealthier European and North American economies. But there are other forms of injustice, inequality and dispossession which have developed and which contribute towards impoverishment of the majority. I am thinking here of the fragmentation of family life, the burden of personal debt, the de-skilling of populations who purchase ready-prepared dinners, who rely on mass media for their entertainment, who dispose rather than mend and recycle, and who are now coming to a slow but steady realization that their way of life is unsustainable….

This cartoon is just as accurate now as it was then. Sadly, it’s hard to believe that we will ever change.

The mystery of the devaluing Shilling

People keep asking me the same question. What will the impact of global economic turmoil be on Africa? How is it going to affect our economies? The general consensus seems to be that short term risks revolve around (1) a possible contraction in remittances from the African diaspora (2) reduced demand for commodities and African exports - including tourism and (3) a possible reduction in aid flows due to changes in allocations of donor country budgets. This sounds sensible, but you would think that each of these risks would take some time to affect the actual supply and demand of foreign exchange in East Africa - that the impact would not be immediate.

So what's happened? Well, over the last two months or so, both the Kenyan and Ugandan Shillings have lost more than 20% of their value against the US Dollar - after both having had a long period of stability (indeed strengthening) aganist the Dollar. It's hard to believe that the Dollar supply side has contracted sufficiently rapidly in such a short period, so it must be demand-driven. Bu where's the demand coming from? I'd like to know.

The next question, of course, is about impact, winners and losers. Exporters are quietly celebrating. For a long period during which local inflation was causing wage pressure without the benefit of any depreciation in local currency, exporters of major commodities (tea, coffee, horticulture and other agricultural products) have been struggling. Suddenly, the twin effect of a depreciating currency and rising international commodity prices look set to provide a substantial windfall. Importers, on the other hand, will struggle to pass on increased costs to consumers - and this presents a serious risk, especially in relation to oil and oil derivative imports. Inflation will rise, which will raise the cost of debt (which had been coming down slowly, even if still high by international standards).

Let's hope the exporter windfall brings in enough forex flows to stabilise the currencies. If not, then there's a real risk of forex shortages causing further depreciation, stimulating inflation and causing real damage to the regional economy. Let's hope!

AAC enters the blogosphere

My name is Tom Adlam and I am lucky enough to be managing African Agricultural Capital: an Investment Fund for - as the name suggests - agriculture-related businesses in East Africa. My team and I are based in Kampala, Uganda, and you can find more information at http://www.aac.co.ke/.

I want to use this blog to share personal experiences and information about business, working and living in East Africa with all of you out there who are interested. It is important for me, at this point, to stress that the views and opinions expressed in this blog are my own and in no way represent the views and opinions of African Agricultural Capital as an organisation. I will probably try to post a weekly update.

The inspiration for this blog comes from one of our investee companies, Sandstorm Africa (see http://www.sandstormkenya.com/) whose CEO Mark Stephenson has recently started his own blog. It's a fascinating read which you can find at http://www.sandbagman.blogspot.com/.

And, at least for today, that's about it. More news to follow soon.