Type “UK Crisis” into Google Search and you’ll get 183 million items. According to Google, the UK is currently experiencing crises in Social Care, Financial Services, Constitution, Housing, Policing and Teaching, to name but six. Is it really possible that so many key areas are in crisis, or are we actually suffering from a crisis in hyperbole?
Here’s my very quick take on UK’s vote to leave EU.
I think a lot of voters felt very patronised by the political ‘elite’ of UK, EU and further afield over this subject. “Project Fear” inasmuch as it existed therefore probably backfired.
- It won’t be the financial cataclysm George Osborne suggested — weaker GBP great for exporters, and might make consumers think twice about some of their purchasing.
- There will be no emergency budget, and NHS spending won’t be slashed.
- It’s a good thing for EU as it will trigger some much-needed re-thinking of the whole ‘European Project’ in order to head off Czech, Netherlands and others that might be next to leave.
- Trade between UK & EU will barely be affected – UK will continue to buy a lot of EU’s exports; unless of course EU makes it hard for UK to export its own goods back to EU by raising tariffs. Nobody wants a trade war.
I’m buying GBPUSD at $1.33
I have just completed a little under a week in Nairobi. It was a very enjoyable and enlightening experience — as well as being my first footsteps in East Africa.
After a quick tour of the picturesque Karen Blixen Museum, I met with a couple of local VCs to discuss opportunities in the region. I was curious to establish what sort of businesses were being started in East Africa, what the local risks were and to try to start building a picture of the investing landscape generally. In no particular order:
- Bitcoin & Mobile Money. Kenya’s M-Pesa is according to some reports involved in 70% of Kenyan GDP. Given the 1% merchant fee, this means its owner, Safaricom, might be generating gross revenues of 0.7% of GDP from this mobile payment system. Copy-cats such as EVC (by Hormud Telecom) in Somalia have pretty much replaced cash: that country may indeed (somewhat ironically) to all intents & purposes be the world’s first cashless society. These high penetration rates probably mean that bitcoin (via payment systems such as the excellent Bitpesa) are going to find it hard to break in, except for transactions such as overseas remittances.
- Economic Openness. Of the big economies of the region (Kenya, Uganda, Ethiopia, Tanzania), Kenya probably offers the easiest path for overseas investors: it has been a relatively open economy for a long time, particularly compared with Ethiopia and Tanzania, so foreign investors can be fairly confident that what they put in, they should be able to get out again. Having said that, sadly there is still corruption so careful due diligence is key.
- China. Although this is changing, being less commodity-oriented than, say Zambia, the East African economies have been less adversely affected by the significant weakening of commodity prices. However, as with Zambia, China has made infrastructure deals locally that governments are already in some cases coming to regret. As in other African countries, when the Chinese offer money for infrastructure projects it turns out to be a bit of an illusion: they bring their own companies, who import Chinese workers & materials. Thus there is little or no “multiplier” effect (although clearly the local economy still benefits from the new road, railway or whatever).
- Logistics. Kenya’s not a small country: 45 million people covering an area a little smaller than Texas. Although it has some great roads, it also has some absolutely terrible ones. This means that getting raw materials & finished goods around the country becomes a significant challenge and represent a much larger cost than in Europe or the USA. Driving outside of Nairobi, I saw fully-laden trucks doing less than 10km/h – the road between Mombasa on the coast and Nairobi is, I hear, literally nose-to-tail with trucks crawling along. One study I was told about suggested that the most efficient form of transport here in some circumstances was still the donkey. Another study pointed out that small farmers in Kenya receive substantially lower prices for their goods than are available at the port or other main market-place — in some cases as much as 75% lower; but when these researchers investigated the costs for the farmer of actually getting their production to that market, they found little evidence that intermediaries were squeezing value from the farmers: transportation costs & losses due to theft, wastage, contamination etc were all far more important. This would suggest that there is massive scope for enhancing the incomes of small farmers by improving logistics — something that should not be beyond the wit of man.
- Education. As I mentioned in another post, Kenyans spend ~45% of their income educating their kids. Yet inconsistent teaching in public schools & very large class sizes means results can be very poor. Bridge International Academies, a company founded in 2009 and backed by Zuckerberg & Gates as well as Pearson has been seeking to address this problem. Bridge-trained teachers read scripted lesson plans & classes are much smaller than in state schools. Teacher absenteeism is substantially lower than in the state sector, too. The approach is not without its critics, as the WSJ article highlights: for example, many of the teachers are themselves barely out of school and the training provided is nowhere near as extensive as a ‘full’ teaching qualification. But the statistics speak for themselves: a 0.32 StDev gain in reading & a 0.51 StDev gain in mathematics.
- Agriculture. Kenya has 6 million small-scale farmers and agriculture represents more than 27% of GDP. Complex logistics are not the only problem: other issues include lack of price transparency, fraud & theft. It is difficult to quantify the impact these challenges have on productivity & farmers’ incomes; to date I have not been able to locate any studies that look at this.
- Manufacturing. Many Kenyans are self-employed or work for very small-scale enterprises making all sorts of goods including jewellery & other ‘craft’ type products. For some, this is subsistence-level whilst others may be substantially more successful. What they all have in common though is being limited in their access to markets. Given the existence of the internet and high local penetration for mobile money, there’s no real reason a Nairobi artisan couldn’t set up a Shopify shop and tap into global demand for ethically-produced, almost-unique items; yet in practice that doesn’t seem to be happening. What these artisans need is a “bridge” to the world.
I met with a number of businesses that are seeking to solve these problems, or helping other businesses solve them.
Many of my meetings were arranged by Growth Africa. They help early stage businesses hone their business plans, polish their presentation materials and raise working capital. I could not have been more impressed with the standard of the firms they’re working with and would recommend any young entrepreneur thinking of starting a technology business meet with them.
Below I feature the four early-stage companies I was most impressed by. Again, in no particular order. Although in some cases I highlight the positive social impact of these start-ups that’s not to say I don’t think they also all look like great standalone investments (subject to due diligence, of course).
Essentially, social selling. If you have a fan-base on Facebook, Pinterest or whatever, and you have products to sell (including digital music, event tickets or physical goods), why go to the trouble of setting up a separate shop on say Shopify (and risk losing the customer to a competitor) when you can sell direct from your FB page? Very smart, articulate founders; slick software; sensible revenue model. With 120 million Facebook users already in Africa, there should be plenty of scope for growth in this kind of application.
Soko offers jewellery from over 1,000 local artisans via a single portal; slick ERP software allows them to hold very low inventory of unfinished products. They can help artisans with training and also with working capital to invest in additional tooling. Finished jewellery is sold both wholesale & retail and the revenues are growing strongly. If you believe at all in “trade not aid”, this type of business is one NGOs should be taking a serious look at, as the positive impact on local communities can be huge.
By providing a platform that allows small-scale farmers to group together into collectives, tracking inventory levels, offering trusted transportation partners & connecting suppliers & consumers, iProcure is making the agricultural supply chain much more efficient. Again, the social impact to remote rural communities is potentially significant.
Although Uber exists in Nairobi as well (presumably) as in other African cities, there’s a problem. Star ratings for drivers are all very well, but the Kenyans don’t really trust them. Instead, they’d rather use their ‘usual’ driver. And if he’s not available, they’ll ask a friend if they can borrow theirs. Mara Moja has cleverly turned this into an app by using people’s social media profiles & relationships to highlight to a rider those drivers that are used by people in their network. According to their research, a Nairobi rider would rather use a 2-star rated driver with connections to their friends, than an unknown 5-star driver. Which is pretty amazing.
Investing in Africa has never been regarded as easy by most people; it still has significant challenges, but for sub-Saharan Africa excluding South Africa I’d say Kenya was a very interesting first port of call for anyone looking to play the “Africa Rising” story. Nairobi has certainly earned itself a reputation as the strongest local technology hub and from what I managed to gather over just a few days it is now spawning some very interesting ideas and startups.
My first trip to Nairobi, Kenya. I started my first day with a visit to the Oasis Kindergarten in the Kibera slum. Seven years ago, I heard Sarah Shucksmith speak at a Fitzwilliam College alumni event. I was deeply impressed that she had founded a school (the Sarah Junior School) in Kibera whilst still an undergraduate at Cambridge and decided to support her endeavours. After various challenges, the trustees located a suitable plot of land and re-opened as the Oasis Kindergarten. The kindergarten is a thriving community of happy 3-5 year olds in the middle of Kibera, a slum that houses anything from one to three million Kenyans; the real number’s anyone’s guess. Parents spend around £1 per week to send their kids here — a significant sum, given the monthly rent on a one-room dwelling in Kibera is around the same figure. According to government figures, indeed, Kenyans on average spend 45% of their disposable income on education.
It was not easy for Sarah & her husband Tom Voyha to bring this project to fruition: locating a plot of land large enough, in an area where each shack is tiny, was one challenge (the school occupies the same plot as 25 dwellings); various regulations as well as issues with title were also serious challenges. But they now have a successful school of 60 children, with a waiting list of parents eager to send their kids there, too. A short video of their journey can be viewed here. They’d love to expand, and have space to do so at the current site, with the aim eventually of replicating the same model elsewhere in Kibera and beyond. Only the school staff are paid salaries — not the trustees, so every dollar goes straight to the bottom line, unlike many other African charities where a paid bureaucracy takes its toll. I encourage you all to support this worthy cause. Their Facebook page offers additional information, including how to support Maisha Trust.
Reading today’s Guardian article, The Fall of Jersey leaves one hoping for better-quality journalism… or certainly some balanced reporting.
Oliver Bullough argues that Jersey is heading towards an abyss financially, as its government deficit is forecast to expand to £125mn by 2019. Let’s put the numbers in perspective to start with.
Checking the States of Jersey’s Annual Accounts, which are easy to find on the government’s website, I would draw attention to the following:
- Jersey’s forecast deficit of £125mn in 2019 represents around 3% of the island’s £4bn GDP. By comparison, according to UK’s ONS Britain’s general government deficit in 2015 was 5.1% of GDP and peaked in 2009/10 at 10.8%.
- Jersey has barely any external debt; UK has £1.6 trillion (87.5% of GDP).
- Jersey’s balance sheet shows £3.3bn (almost 100% of GDP) fixed assets. It’s almost impossible to find a comparable number for UK, but one figure suggests £158bn of liquid assets (8% of GDP).
- UK central government expenditure is running at 35%-40% of GDP; Jersey’s (£674mn) is substantially less than 20% of GDP.
So, Jersey starts from a much, much better position financially than UK.
Mr Bullough then goes on to conflate Britain & the United Kingdom: yes, Jersey’s status is peculiar but it is far from unique. In fact there’s a term for it: Crown Dependencies. All have their own governments and the power to levy their own taxes (yes, Mr Bullough, Jersey people do pay tax).
It is also rather inaccurate to describe Jersey as “London without the rules or the taxes”. Jersey has a well-regulated financial services industry and does levy taxes — just not the same taxes as UK. Whilst some people might describe this as “unfair tax competition” in almost all other walks of life, we see competition as a good thing, so why is tax competition not also a good thing?
The article also talks about the Tax Justice Network and studies that “highlighted Jersey’s role in sucking wealth out of countries that need it most”. Let’s think about that for a second: for a start, Jersey isn’t “sucking” at all. People bring their businesses, their wealth and themselves to the island for any number of reasons, but if we’re talking about the “countries that need it most” then I suspect often that’s exactly the problem: a lot of governments in the Developing World just cannot be trusted. Indeed, when Cyprus is “bailing in” depositors (effectively, expropriating their money) who could blame a government in the Third World for thinking it’s OK to nick a bit off the rich every now & again to pay for their profligacy (or even just their lifestyles)? So a wealth-creator based in one of those countries might seek to put her money somewhere safe, just so it’s out of their reach. That’s not necessarily tax avoidance, tax evasion or anything untoward — it’s prudent risk management. Situations like the introduction of exchange controls, re-balancing of fixed exchange rates etc (think China, Argentina for example) are other examples of where Jersey has something to offer. All the evidence suggests that once governments clean themselves up and demonstrate they can be trusted, capital flight ceases and indeed reverses.
There is also a continued willful misunderstanding about what “tax neutrality” means with respect to vehicles such as offshore funds. If a fund has investors from UK, France, USA, Singapore etc etc it’s really important that the investors aren’t taxed twice. That doesn’t mean they’re not taxed at all: rather, that they are taxed in their home jurisdiction, not Jersey. Hundreds of jurisdictions (including Luxembourg & Malta) offer similar structures for the same reason. Does that mean they’re “aiding & abetting” tax avoidance? I think not.
I have some sympathy for Richard Murphy when he says Jersey’s business model is “fucked”. Tax transparency, moves such as OECD’s initiative on Base Erosion & Profit Shifting and just a shake-up in banking & finance generally; all have served to threaten Jersey’s continued affluence. Indeed, Jersey’s Gross Value Added is already more than 10% smaller than it was in 2000, having shrunk in ten of the next 13 years. Almost exactly 100% of this reduction has come from a collapse in financial services (from £2.52bn in 2000 to £1.69bn in 2014, a 33% fall).
The article quotes Unite that, “it’s depressing… seeing where the island’s heading.” But in part, unions are to blame because as tax revenues fell after the new Zero-Ten regime was introduced, the local population (many employed by government) resisted the idea of cuts in employment or public services. Having got used to the drug of finance money, they could no longer imagine life without it. Ministers need to get more realistic about the way they articulate this to voters.
Mr Bullough then goes on to look at Jersey’s tourism industry: to be sure, numbers have collapsed from 1.5mn people in 1979 to 338,000 in 2014. I couldn’t find a good break-out of tourism (the GVA report shows “Hotels, restaurants & bars” as a single category but then doesn’t mention all the other income derived from tourists when they are here); however one thing I’m certain of: the average tourist today is probably spending several times as much as a tourist in 1979. The hotels have gone up-market, offering spa facilities, Michelin-starred restaurants and so forth. The flights between Jersey & UK have never been more packed in my six years here, so someone is still visiting.
On the subject of Jersey’s agriculture, I’m not sure where Mr Bullough was walking but I can confidently assure him there are a lot of cows here. But there do seem to be some issues with farming here, although it’s not really an area I know much about (so feel free to email me if you do!)
It’s a bit unfair to blame Jersey for the UK’s mortgage crisis. Yes, banks may well have used Jersey-domiciled vehicles to package up loans, but all these UK banks were regulated by the (then) Financial Services Authority & the Bank of England; if a balance sheet has a bunch of assets on it that are rather vaguely described, would you not, as regulator, ask questions about these? Furthermore, typically opaque investments attract a larger ‘haircut’ in regulatory capital calculations, meaning they might hide the true nature of the underlying assets but not necessarily help the bank give a false impression of the state of its balance sheet. I don’t have time to dig into the extent to which Enron was using Jersey vehicles to, “hide the extent of its debts”… will come back on that later.
I love the quote, “Jersey did not contribute a penny to cleaning up the mess it had made”. What mess? These were UK banks, lending in UK & elsewhere and regulated by UK regulators. If their regulators failed to notice what was going on under their noses, in what way does it become Jersey’s responsibility to clean up the mess?
It’s also not true that Jersey isn’t conscious of its dependence on financial services and isn’t trying to do anything about changing this. For example, one of Senator Philip Ozouf’s roles is to develop a larger information technology sector in the island. The recently-published Innovation Report identified some key issues for Jersey to resolve in order to make this a reality, and let’s face it — Jersey’s never going to be Silicon Valley… or even Silicon Roundabout, but technology business have the perfect ‘footprint’ for the island — high revenue, relatively low employment. With a little more commitment from government it’s conceivable this could be a 5% of GVA sector in the not-too-distant future.
No doubt, things need to change in Jersey, but I found the tone of this piece disappointingly shrill.
I first wrote this piece back in November 2014. I’ve edited it now to reflect the final resolution of the dispute with my mobile telephone provider, more than a year after I first questioned my Data Roaming bills from them. After much argument, they agreed to refund all my charges for a roughly seventeen month period. But only after I returned the offending SIM to them. I doubt I am the only person affected by this type of situation, but I probably am the most determined and fortunately was sufficiently knowledgeable to present good arguments. Notwithstanding that EU removes roaming charges soon, I would strongly urge telecoms regulators worldwide to investigate this matter as I do believe there is a possibility providers are knowingly distributing SIMs that cannot distinguish between ‘home’ and ‘roaming’ and are therefore over-charging customers.
I had an interesting and salutary experience when travelling in Germany in the autumn of 2014. I was using my Blackberry to read my emails, careful (I thought) to be connecting to WiFi in the airport, hotel and so forth.
When I got back to Jersey, I received a text message from my provider, Sure, alerting me that I had high mobile data usage. I was surprised, since I thought I’d been using WiFi almost all the time.
It seems that even when the little WiFi logo is showing on my phone, it may decide (according to Sure) that the connection is insufficiently stable and use GPRS instead.
When I challenged the bill, the only itemisation they were willing to provide showed dates & times of downloads during my stay. One of these — upon arrival in Munich and whilst I was still in the airport on WiFi — was for 500MB of data in a single transaction. I asked for more details and was told nothing further was available. Since I don’t watch movies on my Blackberry, it’s hard to imagine what that 500MB could possibly have been, notwithstanding that in any case I had been under the impression I was using WiFi not Data Roaming.
That really surprised me — in an era when all our electronic correspondence is (in all likelihood) being monitored by the security services, and when even our internet search history is being recorded, is my telecoms provider seriously claiming that they don’t know what IPs I connected to and/or what was being downloaded? I find that incredibly difficult to believe.
What makes it even more interesting is that effectively this means that Sure can just make up my bills — there is no challenge I can apparently make to these charges: as far as they are concerned, their word is law. Yet for fixed-line telephony there have been numerous examples of customers being billed for calls that were never made, so what sanction do I have?
Sure customer service representatives were totally implacable throughout the process, first patronizing me with a little lecture about “safe roaming” and then refusing to acknowledge there was any possibility that the SIM in my phone might be the culprit.
Undeterred, I dug deeper. Over the next fifteen months I was to end up sending or receiving over 150 emails on the subject in a three-way correspondence with Blackberry and Sure. Initially, I opened a support ticket with Blackberry; that was harder than it sounds as it required the mobile phone company’s co-operation. However, once the ticket was opened I was fairly quickly able to locate a Blackberry representative in their UK office who understood enough about the technicalities to see what I was arguing and be capable of performing the necessary analysis. In the ensuing months I ran countless diagnostics on my phone, uploaded dozens of log files to Blackberry and corresponded endless with their representative, a tremendously helpful chap called Matt. This culminated in me sending my Blackberry Passport to Matt and him obtaining a totally “clean” duplicate phone & SIM. By swapping my SIM into his clean phone, and the clean SIM into my phone he was able to demonstrate conclusively that indeed as I suspected from the beginning my phone was unable to detect when it was roaming, and that the culprit was the SIM card. Eureka!
At this point (the end of August 2015) one would imagine that Sure’s customer service department would have caved in and offered to refund my roaming charges. Incorrect. Instead, they argued that the pattern of usage didn’t imply a fault with their SIM and offered a goodwill gesture representing around 15% of the total cost. I rejected this offer, pointing out some examples where in fact the pattern of data usage for a phone that thought it was at ‘home’ in Jersey would be identical to what was being seen. Eventually, they revised their offer to 30% of the total cost. Again, I rejected this offer, arguing that they had absolutely no way of ascertaining which data usage was deriving from my SIM’s behaviour and in any other regulated market it was highly likely that a regulator would agree with me and force them to refund my charges in total. In mid-November they agreed to do so… though only once I had returned the offending SIM to them (“for analysis,” they claim).
For fourteen months I felt stonewalled. Yet from the behaviour of my phone I was convinced that something was amiss and Blackberry’s technical experts appear to have agreed with me. So what kind of company just keeps on trying to fob off a customer with excuse after excuse rather than take the complaint seriously and deal with it maturely? Most bizarrely, from Sure’s shareholders’ viewpoint, is the following fact: when I raised the initial complaint, the total data roaming charges were about £2,500. In the ensuing year or so while they were arguing with me, my phone racked up another £4,000 of roaming while Data Roaming was turned off. So by stonewalling me for so long they actually almost trebled the cost of resolving my complaint. Go figure.
According to a 2014 article by the Wall Street Journal, data roaming charges are forecast to earn the mobile phone industry $42 billion by 2018. Where fees per megabyte in a user’s home jurisdiction might be as low as $0.01, overseas this can leap to $18.00 — almost 2000 times as much. No wonder there is little interest amongst mobile phone companies to delve into the matter of whether their customers’ phones actually know whether they’re roaming or not.
During his interesting & thought-provoking talk he spent some time discussing small businesses. In the UK, according to a Parliamentary Briefing, Small & Medium Sized Enterprises (SMEs) represent 60% of private sector employment & 47% of private sector turnover.
During and following the Global Financial Crisis of 2008, banks withdrew credit from the private sector corporate market (amongst other things). Furthermore, according to Donovan, inter-company credit collapsed as large firms were no longer willing (or able) to extend credit to smaller customers.
When this happened, small companies were forced to shrink their balance sheets. One way to do that was to reduce inventories.
Now, anything that encourages smaller firms to be more efficient is probably a good thing, but given their significant contribution to GDP, what other consequences might arise?
Let’s consider basic materials such as oil, copper or grains. When times are good & the economy’s growing, the temptation for a manufacturer is to expand inventory in anticipation of both increased demand for their goods and (perhaps) because they believe the price of the inputs may rise as everyone else is doing the same thing. So as the growth phase gets underway, commodity demand growth accelerates. This is what we saw 2003-2007 (although the effect was further exacerbated by the creation of investable commodity products sucking vast sums of additional capital into a relatively small market). When growth stalls, the cycle goes into reverse: not only do manufacturers have lower actual demand for the basic materials inputs, but they have inventories that they run down. So commodity demand tends to fall off a cliff initially, before stabilising once de-stocking is complete. Again, this occurred during the last cycle 2008 onwards.
What Donovan is saying though is that there may be no resumption of the previous tendency to build inventories through the recovery. As a result, primary commodity businesses never saw the kind of ‘super-growth’ phase of previous recoveries – demand is essentially growing lock-step with the global economy. The ‘rising tide’ is indeed floating all boats, but the commodity boat is floating at the same rate as everybody else this time.
If he’s right, this might alter the way we need to look at natural resource companies from a valuation perspective.
A week ago, TalkTalk was hacked.
The company claims that hackers don’t have enough information from the hack alone to steal money from their customers. It’s unable to confirm how many of the 4 million customers were affected.
Having failed as a business to protect their customers’ confidential information (one for the Data Commissioner, surely) they have compounded this by treating their customers very badly. For example, they refuse to waive cancellation fees unless the customer has actually lost money. Their CEO is unrepentant.
Thinking about this the other day, it occurred to me that TalkTalk must have breached their own Terms & Conditions when they didn’t look after the data properly and that customers would be able to challenge them on this, and therefore terminate contracts without penalty. Turns out that is indeed the case, as This is Money explain in this helpful article.
Companies need to take data protection seriously. TalkTalk doesn’t Walk the Walk.
Customers should talk with their feet.