An overview of the SME sector in Uganda
Uganda has no clear national policies for small and medium enterprises (SMEs), industrial development, and science and technology (S&T). However, government has put in place a Poverty Eradication and Action Plan (PEAP) out of which a number of strategies have been formulated. Nevertheless, at the United Nations Millennium Summit in New York in 2000, Uganda and 189 governments signed the Millennium Declaration, with eight goals, known as the Millennium Development Goals (MDGs) to be attained by 2015. Three of the MDGs are to:
a) Eradicate Extreme poverty and hunger (MDG No.1), that is, between 1990 by 2015, to halve the proportion of people whose daily income is less than US$ 1.00, and who suffer hunger.
b) Develop a global partnership to development (MDG No.8) by developing an open rules-based, predictable, non-discriminating and financial system; through debt relief and cancellation to make debt sustainable; by increasing and improving the quality of aid; and by having programmes to provide decent and productive work for youth, access to essential drugs and new technologies.
c) Ensure environmental sustainability by integrating sustainable development principles into policies and programmes and reversing loss of environment resource; by halving the proportion of people without sustainable access to drinking water and basic necessities by 2015; and by improving significantly the lives of slum dwellers by 2020.
Uganda benefits from the New Partnership for Africa’s Development (NEPAD) and the Africa Peer Review Mechanism (APRM) initiatives. NEPAD, embraced by the African leadership as the vehicle for collective action against poverty and ensuring economic progress, is intended to strengthen dialogue between government and the private sector on one hand as well as strengthen dialogue between government and development partners. NEPAD’s objectives are to:
a) Accelerate poverty reduction through attainment of the MDGs;
b) Promote African countries’ sustainable development, individually and collectively;
c) Promote the empowerment and integration of women in development; and
d) Promote sub regional and continental integration.
GoU and HE President Y.K. Museveni in particular, noted that there is need to create more jobs through strategic intervention in areas such as textiles and encouraging large-scale commercial farming, to broaden markets for Uganda’s agricultural and industrial products and, to guide peasants towards commercially viable and modern agricultural production in order for Uganda to create and access vibrant regional and global markets under the auspices of the East African Community (EAC), Common Market for the Eastern and Southern Africa (COMESA) and World Trade Organization (WTO) regimes.
During the opening of the 5th Session of the 7th Uganda Parliament on June 7, 2005 the President of Uganda informed the Nation that the industrial growth rate in Uganda has averaged at 10.2 percent p.a. since 1986 and the industrial sector employed 3.3 million people by 2004. That small and medium enterprises (SMEs) have registered a 10 percent growth in the last five years and created 150,000 jobs per annum while large-scale industries add 20,000 jobs p.a. That the cooperative societies have been revived and to date employ up to 80,000 people. However, that 300,000 people join the job market every year. Therefore that GoU was introducing “Bonna Bagaggawale” (all get rich or prosperity for all) Programme to enable each household earn at least UShs 20 million per annum through training in modern agro practices, establishment of agro production export villages, among others. The focus here should be on start ups and small scale enterprise development.
GoU’s Medium Term Transport Policy is geared to promoting transport road networks to boost agriculture and industrial production, trade and tourism as well as social services. The Strategy for Sustainable Maintenance of Roads 2004 estimated 10,850 km of national roads, 30,000 km of district roads, 2,800 km of urban roads and 30,000 km of community access roads to exist in the country. By 2003, district roads in fair conditions had improved to 67 percent compared to 15 percent in 1988 and, national roads in fair conditions had improved to 75 percent as compared to 6 percent in 1988.
The Transport Sector Performance Review report to the Annual Transport Sector Review Meeting held in Kampala from October 11 to 13, 2005 show that since 1986 GoU has rehabilitated 989 km of tarmac roads and constructed 628 km of new tarmac roads; 374 km of new tarmac roads are under construction while 278 km are under rehabilitation. In total 15,200 km of district roads have been rehabilitated while156 km of urban roads have also been rehabilitated.
Current hydro-power electricity supply capacity is estimated at 317MW and the local demand is expected to reach 650MW by 2010. In the 2005/6 budget GOU allocated: (a) UShs 20 billion to start an Energy Equity Fund for the construction of a large-scale hydro power station on River Nile and the World bank is estimated to provide a loan of about US$400 Million for the same, (b) UShs 22 billion for 50MW of thermal power generation, (c) UShs 20 billion for electricity extension to 16 district headquarters and completion of rural power projects, and (d) GoU finalized a strategy to have duty-free diesel for generators used by companies in the production process.
Industrial Development Strategy
Agriculture currently accounts for 36.3 percent of GDP while industry accounts for 20.4 percent. Agricultural output growth rose from 1.6 percent in 2003/4 to 2.1 percent in 2004/5 – it is the lowest growth compared to services and industry sector. Industrial output is estimated to grow at 9.1 percent in 2004/5 (highest since 1998/9) while services are estimated to grow at 7.2 percent. Investment is estimated to increase to 22.3 percent of GDP in 2004/5, of which private investment will increase to 17.3 percent of GDP. Annual foreign direct investment (FDI) growth has averaged over 20 percent in US$ terms since 1993/4
GoU has an Industrial Development Strategy, in which
a) An Innovation and Industrialization Fund, coordinated by the Uganda Industrial Research Institute (UIRI) and operationalized in 2005/6, will support (i) research and development (R & D) as well as incubation and commercialization of prototypes for small and medium enterprises (SMEs) and young entrepreneurs, and (ii) value-addition/ processing of agricultural products and other strategic sectors.
b) Government of Uganda (GoU) will avail more and cheaper and long-term financing to industrialists through UDB that will be reopened in 2005/6.
c) Ministry of Tourism, Trade and Industry (MTTI), through the Uganda Export Promotion Board (UEPB) will find a bigger and growing market for industrial products.
d) GoU has secured UShs 22 billion in 2005/6 for UIA to develop a modern and serviced park at Namanve, starting initially with 100 plots.
In conclusion, there is a need for a coordination mechanism to enhance the development of the small scale enterprises sector. In general, recently small scale enterprises development policy has become an important part of development studies. In some countries, they have become the backbone of the economy. For instance, it is well conceived that small and medium scale enterprises account for more than 90 percent of all enterprises in developing countries. Furthermore, the small scale sector played an important role in classic development success stories for example Japan, Taiwan and Hong Kong. It is also recognized that small scale industrial employment makes up a high proportional of the employment in the entire industrial and manufacturing sector as well as the entire economy. Potential for employment creation in a country like Uganda through small enterprises is large for several reasons.
Practically, the small scale sector is an important segment of Uganda’s industrial sector, as well as its agricultural sector, in terms of its contribution to employment, value output, regional development and growth.
The development of SMEs in various sectors in Uganda can go a long way in solving problems such as low level income, income in-distribution, unemployment, balance of payment deficit and so on. Meanwhile, the growth of the SME sector is important as a tool for transition in economic activity, from agricultural sector to the industrial sector. Thus, SMEs should be assisted to create and enhance efficient units that could support the policy of employment creation and/or bonna bagaggawale initiative.
Perception of Government Service Delivery by SSEs
a) Most feel that Government was not creating an enabling environment for their growth.
b) Connections to the electricity grid are expensive and the tariffs charged very high. Not withstanding the very frequent load shedding)
c) Government technocrats do not provide advice to SSEs and service delivery is generally poor.
d) There is little access to information to facilitate the growth of SSEs
e) The policy of liberalization posed a serious threat of big companies swallowing up small SSEs. f) Although SSEs had access to tenders, the system was susceptible to corruption.
Contribution of SME Sector
The small scale enterprise sector is a major economic sector in most African countries including Uganda. In Uganda’s case, it is estimated to contribute:
- Over 30% of GDP
- Over 30% of employment
- Over 80% of manufactured output.
Therefore the SSE sector is second only to Agriculture in generating employment and contributing to poverty alleviation. Note, there has not been a comprehensive survey of the SSE sector in Uganda for a long time (over 15 years). The above figures are only indicative.
State of the SME sector in Uganda
A recent UNESCO funded study had the following major findings on the SME sector in Uganda: (2005).
The majority of SSEs surveyed were sole proprietorships because they are easy to form, are managed by individuals and decisions are easy to make without consultation.
The majority of SSEs started business with own savings and accumulated family funds.
Gender involvements, on the average (77%) of the businesses were male owned with women businesses accounting for (23%). This of course varies from region and sector.
Most SSEs had capitalization levels of less than 50 million with the largest percentages in 1 – 5 million.
Most SSEs had machinery valued below UG. Shs 20 million. The tools, equipment and machinery in use were outdated, inefficient, are low capacity and in some cases inappropriate.
Most SSEs employed 3 – 10 employees who were mostly unskilled.
60% rented their work premises compared with 40% who owned their work places. Those renting were considering construction of own premises if they were to expand operations but were constrained by lack of investment capital.
Although 94% had mobile phones they lacked access to and use of computer, email, fax and internet for business. These were accessed at local internet cafes and secretary bureaus.
The largest percentage (64%) borrowed from MFIs. Some SSEs comprising 16.6% were able to get loans from banks like DFCU, Stanbic and Centenary all for working capital. There was complaint the MFI loans were unsustainable because the interest rates were high and that ranged from 28 – 48%, there was no grace period, had short pay back period usually not more than six months.
Market Penetration: 93% were producing for a localized market because of lack of capital to expand operations for export.
Only 20% of SSEs had good management and organizational set up. These contracted professional to plan their business, audit accounts and taxation advice. The majority operated without clear plans, had poor records and generally poor management.
All the firms needed technology and long term investment. They had visions and ideas for new products, or improvement of the exiting. They needed skills, bigger working space, machinery and equipment for increasing production capacity quality, and innovation.
Key Constraints of SSEs
SMEs reported the following as their key constraints
- Lack of access to long term finance for asset acquisition
- Obsolete equipment and machinery, thereby affecting quality and production
- Lack of design and innovation capability because of low skills and lack of specialization
- Poor managerial skills
- Hardly any use of ICT except the mobile phone
- Unskilled employees
- Low entrepreneurial capacity
- Competition from cheap imported products
All the above constraints present UGT with a good opportunity to work with SMEs so as to assist them overcome their constraints and grow thus contributing to economic development and poverty alleviation.