Prologue – The Copy Cat Economy
One of the frustrations that many budding Uganda entrepreneurs often face is finding out that the range of possible business areas to venture into is severely limited. This is the reason why we have an abnormal number of petrol stations, supermarkets, bars, beauty salons and hardware shops. It is also part of the reason why urban real estate prices don’t make any sense at all – everyone is trying to sell the small plot they bought from someone else a few months prior at the kind of markup that would have ordinarily taken years if not decades to justify. Even those that manage to create innovative new businesses or pioneer new niches end up facing a huge array of copycat competitors especially if the barrier to entry is sufficiently low. Exhibit A of this has to be Sula and his rolex – from a single Wandegeya stand, this snack is as ubiquitous in Ugandan towns as boda-bodas.
Every now and then however, an entrepreneur manages to start a line of business that records decent revenues and margins and yet it doesn’t face near-instant copycat competition. The absence of immediate competition means the business avoids a profit-sapping race to the bottom that keeps many entities hovering between life and death. Of course, there are many would-be competitors but they are locked out of the “fun” by various factors which experts collectively refer to as a moat, derived from the castle defenses of olden times. For the entrepreneur or businessman that manages to set up such a moat protected venture, it is akin to hitting the jackpot in a casino with the key difference being the fact that luck is rarely the major factor in his/her case. Rather, the luck is often buttressed by hard work, persistence and a measure of brilliance/intelligence.
This is the story of a Ugandan business, Goch Limited, that hit a mini-jackpot that in turn eventually turned into a nightmare.
Chapter 1: The rise of the Ugandan Telecom Industry
It is impossible to tell the story of Goch without talking about the Ugandan telecom industry. For a long time, telecom services in Uganda were provided by a state-run corporation called the Uganda Posts and Telecommunications Corporation (UP&TC). What may not be obvious to some people reading this is that “state-run” was a serious misnomer; the correct term in all honesty should have been “state-misrun”. From its post-independence start as the East African Post and Telecommunications Corporation (EAPTC) to the advent of the first private cellular telephony provider Celtel in 1995, UP&TC only managed to install about 40,000 lines for a then population of 20.5 million (resulting in a miserable tele-density of 0.191 lines per 100 people). Like many Ugandans, I have firsthand experience of UP&TC’s incompetence: my parents applied for a telephone line for our home in Kisoro in 1997; it was delivered sometime in 2001 or 2002 – a few months after MTN had launched mobile phone services in Kisoro. Our home, for those that may be wondering, was less than a kilometer away from the Post Office which doubled as the local telephone exchange.
In 1997, the government – having accepted that the state of affairs was too dire to maintain the status quo – kicked off a massive sector shakeup by introducing telecom sector liberalization legislation. The next year saw two significant industry events – first, the breakup of UP&TC into several independent entities (Uganda Telecom, Posta Uganda, Post Bank and the sector regulator UCC) and secondly, the market entry of MTN as the Second National Operator. MTN experienced phenomenal early stage growth and quickly established the mobile phone industry as a key pillar of the economy. My own professional career is closely intertwined with MTN Uganda’s fortunes having worked there for just shy of 11 years.
A lot has been written about the impact of MTN and other mobile phone operators on the economy in terms of direct and indirect jobs and overall positive impact on other sectors. Many people look at the top operators’ financial reports and marvel at how massive their revenues are. Referring to the copycat economy explained earlier, a mobile operator is probably the ultimate moated business with all sorts of barriers to entry for competitors ranging from the eye-wateringly enormous capital investment required to get off the ground, the reluctance of governments to foster serious competition due to the risk of tax revenue loss and intangibles such as high customer brand loyalty especially in the absence of number portability. There is however another side to the telecom business that is related to the massive capital requirements and that is the complexity of running it all. Building and running a mobile phone network involves licensing spectrum from the regulator, acquisition of land or rooftop space for base stations (this has largely been superseded by the entry of dedicated tower companies and tower-sharing), building of base stations and transmission infrastructure (with multiple power sources), setting up of switching centers and international links, negotiating local and international interconnect agreements, setting up a distribution network for products such as airtime and devices as well as customer service facilities and so on. Note that the highly advanced switching equipment used requires continuous monitoring and frequent upgrades due to both capacity requirements as well as technology evolution while the radio network demands continuous fine-tuning (optimization). Whereas it is easy to look at a well-run mobile phone operator as a pure profit machine, the truth is that it is very easy to get things wrong and the Ugandan market has amply demonstrated that in the past.
At this point, you would be right to wonder what all this has to do with Goch. Worry not, we’re getting there. If you take a look at the level of complexity involved in running a mobile operator, you quickly realize that it would be very difficult for the operator to do everything themselves. Not only would it be difficult but it would be grossly inefficient. So, they generally all outsource a lot of the work, especially infrastructure rollout, to contractors with the right kind of expertise. If you’ve been following the narration above carefully, it won’t be lost on you that telecom service contracting has the potential to be a lovely moated business especially during the high growth phase of an operator’s lifecycle. In this case, apart from the specialized skillset required, the other barrier to competition is the exclusivity the telecom will grant the contractor for a particular period, usually renewable if their performance is good. Most contractors are hardly known by the public since they operate silently in the background. Goch was such a contractor.
Chapter 2: The Story of Goch Limited
Goch was founded by a young Ugandan gentleman called Gordon Ariho in 2007 as a vehicle to provide contractor services to telecom companies in Uganda and, hopefully at the time, the region. Gordon is a graduate of Electrical Engineering at Makerere University who cut his telecom teeth as a student trainee at MTN Uganda and later worked with the defunct Dehezi International, then Celtel (later Zain and now Airtel), Uganda Telecom and Ericsson RSSA. By any measure – and certainly to those who have had the opportunity to interact with him – he is an utterly brilliant individual. Having graduated at the top of his class, he went on to earn his Masters in Communication Engineering at Manchester University. By this time, he had already accepted a lecturer role at his alma mater Makerere where he remains till today.
What really sets Gordon apart from most similarly brilliant individuals is his nose for business. After setting up Goch, the company went ahead to win a variety of contracts with different companies such as Alcatel, ATX Technologies, Nokia, Warid Telecom, Eaton Towers, Reime, etc and even a few outside the country e.g. Tigo Rwanda as a subcontractor, FPG (UK), Gemtel (South Sudan), MGI (Switzerland). This was only possible because Goch ensured it had the right mix of skills and capacity for a wide array of telecom work ranging from base station construction to radio frequency planning and optimization. However, all these were comparatively small contracts that meant the company remained relatively small in terms of headcount and revenue. All this changed when Sure Telcom (later Smart Telecom) entered the market.
Chapter 3: The Story of Smart Telecom
Smart Telecom is owned by the Aga Khan Fund for Development, a subsidiary agency of the Aga Khan Development Network (AKDN). It started off life as Sure Telcom although its ownership at the time was unclear with many industry observers claiming it was a Singaporean firm. In 2013, Sure Telcom was granted an operator license by the Uganda Communications Commission. At the time, the market was deemed by many to be saturated with MTN, Airtel (having recently acquired Warid), Orange, UTL, K2 and Smile all active and battling in the marketplace for customers. There was even another telco called Itel that was preparing to throw its hat into the ring as well! Given the state of affairs, Sure Telcom (later Smart Telecom) ultimately decided to use an aggressive low-cost strategy that would then enable them to compete on price. The low-cost strategy saw the company adopt a number of measures including initially opting for Linux PCs for their staff and a high level of outsourcing including certain services that other operators at the time were handling in-house. While sourcing for contractor partners to handle this outsourced work, Smart Telecom came across Goch and almost immediately brought them on board to handle RF design. One of the reasons for Goch’s selection was because the negotiated monthly fee was completely aligned with Smart’s low cost strategy. At this point, Goch was focused on long term growth and it had full faith in the Sure/Smart-AKDN strategy. After a few months, with Smart highly impressed by Goch’s service delivery, the contractor agreement was revised and expanded to cover additional services including:
- running the Operations and Maintenance functions for the Radio Frequency (RF) and Transmission (TX) networks as well as power infrastructure
- Radio Frequency (RF) Planning & Optimization– a highly skilled activity but which Goch was perfectly positioned to handle having built capacity in this particular area.
Essentially, Goch took over most of Smart’s technical department work! For all this critical work, the contracted monthly fee was increased in line with the increase in number of active Base Stations (often referred to as sites). Though I am not in position to share precise figures, for Goch, this was essentially a jackpot. On the other hand, Smart was extremely happy to have got such an amazing deal which was in-line with their low-cost strategy. At the time, established players in this space would easily have charged more than triple for the same services for the same delivery terms as Goch. In short, it was a win-win for both sides. Jackpots though can be deceptive and for Goch, this sadly was one of those.
Prior to launching commercial services, Sure Telcom morphed into Smart Telecom which was the brand the company was using for its other regional operations in Burundi and Tanzania. Commercial service was launched in 2014 and for a while, the market responded favorably to the company’s low prices and decent internet speeds. However, dark clouds started to gather almost immediately.
As explained above, by the time of the launch, Goch was essentially handling all the technical cellular network work including Network Planning (RF and TX) as well as Network Operations and Maintenance. This work load forced the company to ramp up hiring and training of staff to ensure adequate human resource capacity for the work. At the commercial launch, the contract terms with Goch were on a rolling year basis and so Goch structured employee contracts in alignment with these terms.
For the first year of operations, the relationship between the two entities was quite smooth. Goch planned and delivered all the Smart sites that were required and the Network Operations Center was running quite smoothly. On the flip side, Smart was also paying Goch for services delivered like clockwork. With no objection from the Smart management, the contract was therefore renewed for 2015. On its part, Goch had no reason to suspect the relationship would deteriorate any time soon. They were sadly in for a shock. Later in the year (2015) Goch delivered its usual invoice – a process that had up to that point become a mere formality. However, this time round, Smart Telecom only paid a small portion of the expected figure. The Goch management team were understandably perplexed by this and so they sought clarification to which Smart said they would sort it out in the next payment run. Given the superb working relationship by this point as well as the fact that there was a valid contract in place, Goch decided to continue providing the contracted services. However, the supposed “one-off” now happened again the next month. Actually, from that point onwards, Smart Telecom never ever paid the full invoice amount to Goch again! It is quite hard to explain the level of pressure these partial payments put on Goch. To understand it, one must remember that Goch had specifically hired additional personnel because of this project and in so doing, its headcount had increased significantly . Speaking from my own experience (and many entrepreneurs will no doubt concur), the hardest part of running a business is ensuring payroll obligations are met every single month. How then does a company pay its staff if incoming payments are not being honoured? But for Goch, it was even tighter: for the field work they were performing as part of the services, the company was footing all the operational costs. However, Goch managed to see the year out running on reserves. In all this, the company continued to engage Smart in as civil a manner as possible. Numerous excuses were given and numerous promises were made. Ultimately, by the end of the year, Goch had only received a small fraction of the expected payments for services over several months. The question Gordon and his management team were continually asking themselves at this point was – will our contract be renewed?
Surprisingly – although with the benefit of hindsight, it wasn’t surprising at all given how they’d never have gotten a more affordable contractor– Smart Telecom quickly indicated that they were renewing the contract. At this point, Goch was certain that the unpaid monies would be paid in the near future and the normal smooth relationship would resume. But that didn’t happen. Instead, Smart actually reduced the amount they were paying to a laughably small fraction of the invoice amount. Far worse was to come a few months into the new year with the payments completely drying up. Smart’s response to invoices was essentially just loud silence. Goch was now working based on promises and accrued debts. It was at this point that Gordon actually liquidated some assets so as to make payroll.
It is probably worth stepping back at this point to consider what exactly was happening to Smart at this time. The market had proved to be extremely unforgiving with the incumbent giants (MTN and Airtel) unwilling to concede an inch. Orange had therefore retreated after selling its operation to Africell while iTel had not even launched. But Smart’s pains were to a large extent self-inflicted through their reluctance to invest the amounts required to set up an extensive network with excellent ISP service. In utilizing Goch, they managed to keep their operational costs to the bare minimum which should have allowed them to allocate funds to capital expenditure and adequate marketing. Granted, the competitive market was extremely harsh on new entrants (how do you breach a massive moat?) but that is most decidedly NOT justification for not paying suppliers and contractors on time and in full. Smart knew they had gotten an absolute bargain with Goch which is why they never sought to adjust the terms of the contract to reduce the rates. Also, note that Smart is owned by the Aga Khan Fund for Development. The least one can expect is that such an entity should honour its obligations and clear its dues especially those for critical services.
As it turned out, in doing its best not to breach the contract while receiving partial payments in return, Goch was trapped between a rock and a hard place. By the end of 2016, the reserves had run dry and so the company had to lay off its staff and terminate the contract.
Chapter 4: Goch vs Smart Telecom
In reading this, it is possible to wonder what the story is. Many of you will reason that businesses fail all the time and suppliers/contractors to failed businesses ultimately face the same challenges as Goch faced with Smart. However, there is something that everyone needs to be aware of – any civilized society has procedures in place to govern such situations. Failed businesses are required to go through the prescribed insolvency legal process during which assets are liquidated and creditors paid from the returns. Whereas creditors may not recover all their money through this process, it is at least an attempt to close matters as fairly as possible. But Smart has not been declared insolvent and neither has it been placed in administration. As of 2019, they still possessed a valid UCC issued license to operate a mobile phone network in Uganda. As such, it is a going concern that is obligated to cover its liabilities or go down the insolvency route.
Secondly, it is important for the public to know that Goch was forced to institute legal proceedings against Smart given the damage the unpaid dues had caused to the company. The case started in 2017 although very few people know about it not only because such cases rarely attract public attention but also because there is a conspiracy of silence from established media houses when certain entities are in the dock. More about this in the epilogue.
As is usually the case for commercial suits, Goch and Smart were referred to a mediator as the first step to resolve this issue. As luck would have it, Smart agreed to a payment schedule that would see them pay back the debt in full by the end of 2018. Unfortunately, as you may guess, Smart did not abide by the payment schedule. The few payments that came in were ridiculously small compared to the overall outstanding. Towards the end of 2018, when it was clear they were not going to have cleared by the end of the year, Smart requested for a settlement which would see them pay only about 60% of what they owed within two months. At this point, Goch was essentially desperate and so they agreed to the new plan despite the heavy loss that it would entail. Again, it doesn’t require a genius to guess what happened. They paid roughly a quarter of the settlement amount i.e. 25% of the agreed 60% and then went completely silent until the new year (2019) when they surfaced again requesting for an addendum to the breached settlement contract that would push the due date to the end of November 2019. Needless to say, even this addendum was not honoured. Intriguingly, information that Goch has obtained indicates that other creditors have been treated far better with many of them receiving their due payments in full. Further intelligence suggests that their financial position is not as precarious as they make it out to be with some of their bank accounts holding sufficient funds to clear Goch and move on.
In writing this piece, my major motivation is to expose how some small and medium enterprises that are supposed to be a source of employment for millions and an engine of growth for the economy face insurmountable obstacles in the form of unfair business practices and injustice at the hands of the high and mighty. In seeking justice, many receive rude reminders about how vulnerable and helpless they are. As a matter of fact, following the mediation process, some of Smart’s top managers openly threatened and harassed Goch’s personnel (and continue to). Others have made ridiculous propositions such as a proposal to close the matter by paying about 20% of the outstanding amount. An entity such as Smart owned by a well-funded, seemingly reputable backer such as the AKDN should not and must not be allowed to get away with cheating small businesses. As a matter of fact, a few minutes perusing the AKDN website will reveal that one of the objectives of the organisation is to help entrepreneurs in developing countries! The irony couldn’t be starker. Even more perplexing is witnessing how Smart in its dealings with local contractors and suppliers had clearly violated AKDN’s ethical framework. This Goch case is completely out of sync with these lofty ideals and a sad reminder that such ideals are often not worth the paper they are written on for many organisations.
It is now nearing the end of January 2020 and Smart still hasn’t cleared its debt to Goch. Goch itself is a shadow of former self having suffered from ramping up headcount, acquiring tools and spending millions on unavoidable operational costs only to learn the painful way that its “jackpot” deal was made with a bunch of fraudsters hiding behind the AKDN banner. The founder, Gordon, decided to take up PHD studies, partly as a way of dealing with the stress. Uganda needs people like him but it is hard to see how such exceptional people will choose their countries over greener pastures if they go through such situations with no protection at all.
And finally, it is worth noting that in mid-2019, we decided to give this story to the media so as to expose Smart for who they are. The first snag was that the media house famed for running such exposes is partly owned by the Aga Khan too… So we approached the other main media house and gave all the information presented here to one of their senior business journalists. Like all good journalists, he contacted Smart for their side of the story but was met with stony silence. Shortly afterwards however, he was contacted by one of Smart’s lawyers (a partner at one of Kampala’s top firms) and was told in no uncertain terms not to publish the story. It has thus never seen the light of day.