Why bailing out Bitature again, is bad 

In the face of economic downturns globally, governments have stepped in as a white knight to save struggling businesses and investors.

The rationale for this support best known as bailouts is that the businesses in question represent the entrepreneurial culture of their societies and are the livelihood of their population because they provide jobs. Noble as the gesture is, it has proved to be fruitless in cases where governments have chosen to keep toxic businesses afloat, ventures that are better off left alone.

These businesses have underlying issues that are never addressed, and for that reason use the funds pumped into them to patch up holes in their balance sheets. Connoting that the ailing businesses find themselves back in their trifling position in a matter of years. This is evidenced in the case of American motor company General Motors [GM] which in 2009 got a $50 billion bailout from former US President Barack Obama’s administration when it reached its nadir during the financial crisis.

In the last 13 years; however, its share price has dropped by 17.3 per cent culminating in a dip in market valuation of $12.6 billion, not counting $11.2 billion the corporation has cost the US government in losses. This is because GM received a stimulus cheque but its underlying problems: bad business decisions, poor innovation and plunging, sales weren’t addressed.

Which validates the hypothesis among a section of economists that investors and businesses that invest poorly should be left to go bust because by design the economy spits out bad investments planted into it, and keeps the good ones, and any form of bailout merely delays the inevitable.

EXAMPLE OF SEMBULE

Back home in Uganda, we were faced with a similar scenario when Christopher Sembuya, one half of the Sembule brothers in a January 2014 NTV television interview, Tuwaye, hosted by Frank Walusimbi, disclosed that when they failed to pay off a long-term loan from Nairobi-based PTA bank, which they took out to expand their operations, they went under receivership.

The government, through Bank of Uganda, came to their rescue, fully paying off their creditor. All the same, the government bailout wasn’t enough to save the Sembule empire as up to the time of his death in 2022 Sembuya and members of his family appeared disgruntled in broadcasts reminding the current regime of the help they accorded them during the bush war.

They asked the government to come to their rescue one last time. No clairvoyance is needed to deduce that another bailout was going to yield the same fruitless result if the issues at the core of Sembule’s business empire weren’t addressed. Sembule Group was a conglomerate that was heavily invested in the steel, insurance, finance and banking, agriculture, electronics, media, and real estate industries.

Therein lay the problem, the investors over diversified their empire making it expensive to effectively manage/finance considering they had to operate during a murky period of war, insecurity, economic collapse, and financial restructurings; that is, the 1970s, 80s and early 90s.

This exposed them to more risk, and subliminally inferred that the proprietors could have resorted to brute force management schemes to oversee their business empire. In Warren Buffet, billionaire and maverick investor’s words: “Diversification is protection against ignorance”. “It [diversification] is a perfectly sound approach for someone who feels they don’t know how to analyze businesses.”

He continues to say that there aren’t that many wonderful businesses that are understandable to a single human being in all likelihood to trade in.

“It is a confession in our view [Warren Buf- fet and his business associate Charlie Munger] that you don’t really understand the businesses that you own”.

Another investor following the same script as Christopher Sembuya and his brother Henry Buule [Sembule] in business practices and in having an appetite for bailouts is Forbes-ranked millionaire Patrick Bitature. In an article ‘Government secretly giving bailouts?’ published in The Independent on September 5, 2016; it is avowed that Bitature was quietly paid $14 million [Shs 47 billion] by the government because his Simba Group was one of the companies that was high on a Shs 1.3 trillion [~$347.8 million] debtor list of local commercial banks.

Fast-forward to the present day, and highly reliable sources report that government is gifting the distressed businessman $66 million [over Shs 246.6 billion] as bailout money under the guise of buying his Electromaxx thermal plant in the West Nile region against the counsel of Auditor General John Muwanga.

This development and the businessman’s attempt at beguiling his South African creditor suggests that there is trouble in the smooth-talking investor’s empire. On July 31, 2023, Bitature was directed by the International Chamber of Commerce Court of Arbitration in London to pay his creditor — Vantage Capital an accrued sum of $35.8 million [Shs 133.8 billion], and costs amounting to $357,318 [Shs 1.3 billion], among others.

Interestingly, prior to this ruling Bitature tried to finesse his way out of paying this debt by using the Ugandan legal system to disregard Vantage Capital’s debt on grounds that the South Africans weren’t cleared to lend in Uganda. This filibuster led to Vantage Capital taking the case to London.

The cockroach theory in finance states that if bad news about a company comes to light, there will be more bad news lined up in the near future because where you see one cockroach, there will always be another cockroach. Going by this theory, it is evident that this debt isn’t Bitature’s only amount due; there will be more of his problems aired out in the open.

OVER DIVERSIFICATION

More so, the businessman’s entrepreneurial movements are identical to those of the Sembule Group. And even though he is more polished, their business strategies are alike because like Sembule, Bitature has got his hands a mile-deep in almost every ‘profitable’ sector in Uganda.

That’s not sustainable. His Simba Group is made up of: Simba telecom [telecommunications], Simba Properties Investment Company Ltd [real estate]; Simba Mining Company [mining], Electro Maxx [energy]; Simba Farms [agriculture], Ibanda University [education]; Rwenzori FM [media], Kampala Protea hotel and Naguru Skyz hotel [hospitality].

Besides that, he holds a slew of executive appointments that place him on the board of Umeme Uganda Limited, Bollore Logistics Uganda, Mulago national referral hospital; and an ambassadorial appointment — he is an Honorary Consul to Australia. With his schedule jammed with this calibre of commitments, it is highly unlikely that he could give his undivided attention to his business empire to make it consistently profitable.

Billionaire investor and Dallas Mavericks owner Mark Cuban had this to say about diversification on Alan Muray’s interview: “… you cannot diversify enough to know what you’re doing”.

On the matter of government bailing out businesses and Bitature particularly, senior research fellow at Economic Policy Research Centre, Paul Lakuma Corti had this to say, “Bailouts are not bad because government needs to intervene in critical sectors to save them, that is the work of government”.

He goes on to give an example: “Let’s say there are a million jobs in a sector, or, a company provides ten thousand jobs, there’s justification for a bailout”. Paul Lakuma goes on to warn that failure to do so would spread contagion in the financial sector in the case that a giant falls.

The economist, however, stresses the vitalness of due diligence in awarding bailouts and this he emphasizes is where the typical Ugandan bailout falls short.

“We are bailing out people who are damaged, people who aren’t employing many people or paying big salaries.” Lakuma observed that for the most part, Ugandan bailouts are based on ‘technical know-who’.

The research fellow advises that it is pragmatic for government to take control of the management of businesses they bailout until they become profitable, and pay their bailout in full; or take the private equity route of getting the business in question on its feet before selling it to an investor who can ably run it.

Nonetheless Lakuma approves of Bitature’s bailout because he is the poster child of Uganda’s corporate structure. And unlike other indigenous businessmen who run their estate like a family business, Bitature has shown that a local Ugandan can build a corporate structured business.

Taking everything into account, bail-outs and stimulus cheques come with a caveat which is: for the most part they keep bad businesses in the financial ecosystem at the expense of vibrant sprouting ones which would otherwise have benefited from the boost.

Bailouts also give businessmen/investors a false sense of entitlement as they inherently believe that the government should always come to their rescue in times of financial distress because they are mass employers. This encourages them to ignore sound financial and economic data in strategic business making.

kimaona@yahoo.com