Quick Take on Brexit

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.

  1. 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.
  2. There will be no emergency budget, and NHS spending won’t be slashed.
  3. 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.
  4. 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

Kenya: Investment Landscape

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.

Mara Moja

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.

Jersey Is Not Bust, @OliverBullough

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.