Taking out Insurance is prudent in business, to protect oneself from financial loss. Insurance creates “a hedge against the risk of a contingent, uncertain loss,” explains Wikipedia.
Taking out insurance may be as simple as simply paying for a “cover” from an insurance company. But what to do when the risks associated with doing business in our developing countries are so diverse and complex that a simple cover may not be available? How do you insure your business against the political risk associated with elections, which risks are nearly certain to feature every five years? How do you shield your business from rampaging youths that will burn it down or break into it at the encouragement of unabashed politicians who, for all practical considerations, are not arrest-able?
In the West, amazingly, such “covers” do exist. Beyond typical insurance there are programmes for covering the multitude of risks involved in investing overseas. The Overseas Private Investment Corporation (OPIC), for example, provides US investors with financing, political risk insurance, and support for private equity investment funds that may not be obtained from scared individuals or corporate investors. Thus backed up, U.S. businesses are able to venture into, and establish themselves in, emerging markets, in spite of the unique contingent of risks characteristic of developing nations.
Being a resident entrepreneur in a developing country without such a “cover”, I propose a few alternative mechanisms for protecting our businesses, most learned over the years through practical trial and error methods:
Keeping it small, manageable, until your systems are well-develop to cope with expansion
The bigger your business, the more difficult it is to manage, unless your systems are well developed. The risk of management failure, especially, poses the biggest threat.
A friend of mine explained succinctly how this happened to his business when he expanded it by opening an eating place and entrusted it to a “qualified” manager and “experienced”, new staff. Customers came in fast, eating sausages, eggs, chicken… but not from his inventory. He learned, soon enough fortunately, that all of his staff (cashier, store manager, waiters) quickly created a corruption cartel through which they shared the loot from eggs and chicken meat and sausages that they brought. So no one stole directly; staff just made their own “business” inside my friend’s. He fired them all and brought in untrained (un-corrupted) recruits, whom he coached personally and strengthened his controls and management systems.
Legal, regulatory and other market failures are common in our part of the world
Another friend of mine who invests in informal settlements (where real estate investments pay themselves off in two years but risks of all kinds run sky-high) told me that he relies on “agents” who operate extra-judicially. To collect rent from an evasive tenant the agent simply padlocks the door over the tenant’s padlock, or welds a steel barrier over the door. And to evict a stubborn, non-paying tenant: the agent pulls out the door. I reckoned I couldn’t play in that league, so have never invested in that “sector”!
Passive investment
Although passive investment, as a business strategy, aims to maximize returns over the long run with minimal buying and selling (to avoid taxes; to compound gains), there are unique opportunities in our part of the world that render themselves excellent passive investments even for short-term gains — a safe place to hold the surplus money you may not be in need of spending at the moment. For me, grain storage works very well, because, name the grain (maize, beans, rice, pulses), the price drops during harvest and climbs 50% or more three months on, during what we call off-season. So, when I have surplus cash, I buy grain during harvest, secure it in airtight bags and store it. When off-season hits, I sell. (By the way, my habit has now developed into a service; you can invest in the “fund”. Last year, we returned a >70% gain to investors).
Shares in publicly-traded companies are another possibility, if you have the skills to analyse and determine a good buy. Personally, I prefer the Buffet philosophy of buying undervalued stocks and keeping them long-term, making this option a diversification option.
Operational and administrative risks
In our environment, skilled resources are most often scarce and expensive, greatly reducing your chances of keeping a skilled/honest employee for long. During a period in the 90s when I ran a software development business, twenty-one of my skilled programmers (and programs) were poached by my clients, in particular by one client, for whom we developed a suite of software applications. I got mad enough one morning and faced off with the Managing Director, demanding a justification.
“How can a big company like you systematically steal staff from a tiny, struggling company such as mine? Do you know that I train a programmer for eight months before I send him or her to your site?”
The boss was polite. “How much loss have we occasioned you?” he asked. I gave him an estimate from my head. He responded by giving me a purchase order for a “database optimisation service” that I did not need to perform, of the exact amount, and asked me to send him an invoice. He paid.
That is rare, however. Most times, small businesses that depend on skilled labour that they have to nurture typically lose out big against the big guns. My way out, which I am not not sure can be replicated easily, was to morph my programming business into a platform (the Akili eT), distributed for online access, and available for use by our clients vide a licensing basis. Different developers add to or modify the platform, but we are not at risk to losing it to a client or when staff changes happen.
Now, two particular risk mitigation approaches that may be unique to our part of the world. The first one, multiple channels or operation bases: Recently in Kenya, two supermarkets nearly went out business, in the process also bringing down several companies that relied only on the two channels to distribute their products. At another level, businesses get burnt down to the ground during elections, depending on where losers take offence and vent out their wrath on innocent businesses, or loot them dry during chaotic riots. The way out: spread your egg selling points: shops in different towns with different political profiles; supermarket AND direct selling; online AND physical sales outlets.
Inflation and foreign exchange risks
When I was a small boy, I used to buy a loaf of bread for less than a shilling. As early as when I was 10, I could personally earn (with parental oversight) about KES 3 from picking coffee on a non-school day. I also remember that the KES/dollar conversion rate was about 7 to 1, as recently as the 70s. Today you need over KES 100 to buy a dollar.
Earlier, in 1904, my grandfather told me he used to earn KES 2 a month from manual labour, pulling a rickshaw. But his 2 bob was enough to buy a goat, a blanket, a shuka (sheet, used then as a wrapper) and leave some change (My grand-pa did not die poor!) Today, the loaf I could buy from one third of my “earnings” as a kid now costs over Shs 40, more money than most 10 year old kids could “earn”. Neither can casual workers today spare the surplus cash that my grand-pa had routinely, and invested wisely.
More scientifically, using an inflation calculator offered by fxtop.com I was able established that the equivalent of 100 KES on 1 January 2002 is now 467.15 KES – wow! You can check it out here: http://fxtop.com/en/inflation-calculator.php?A=100&C1=KES&INDICE=KECPI022009&DD1=01&MM1=01&YYYY1=2002&DD2=27&MM2=10&YYYY2=2017&btnOK=Compute+actual+value
I picked the 2002 starting date deliberately, because I made a small real estate investment then. Today, every KES 100 that I invested in that property is now worth KES 312,500, beating the inflation rate many times over, demonstrating that real estate is a good hedge against inflation and foreign exchange risks, in our part of the world. Of course, real estate will crash at some point. It has happened in now developed countries. My theory is that, as long as our population is migrating to the cities, land prices near urban centres will continue to grow — exponentially. From my experience, therefore, real estate (mostly buying plots and keeping them, undeveloped) has been the surest way of building up wealth, passively.
Photo by Alejandro Garrido Navarro on Unsplash
Haron Wachira 