UGANDA NSSF’S SEARCH FOR ELEPHANTS

Last week National Social Security Fund (NSSF) held its first members meeting.

At the meeting the fund’s management said the fund now had assets of more than three trillion shillings or just over a billion dollars, was growing at the rate of sh50b a month.

The funds investments are skewed heavily towards fixed income assets – treasury bills and bonds, fixed deposits and corporate bonds, which account for eight in every ten shillings with NSSF, with real estate and equity investments accounting for less than a fifth of the funds gargantuan portfolio.

Understandably it was good year for NSSF given the high interest rates and government paper yields, profit rose almost three fold to sh239b from the previous year’s sh84b.

They have set themselves an unambitious target of paying members an interest of two percentage points above the average annual inflation over the previous ten years.

The idea of course is that members should earn a real return on their money over the long term.

They are obviously hedging their bets.

As the fund’s hoard of cash grows it becomes increasingly difficult for NSSF to show an attractive return for its members, this coupled with the fund’s bias towards low yielding, safe investments will make it difficult for a while for the fund to show real juicy returns.

This may not be a problem of the management’s making.

The funds tumultuous history meant that managements scared of public criticism stuffed the portfolio with treasury bills and bonds, not only were they safe but has good double digit returns.

For the more ambitious managers like current boss Richard Byarugaba and David Jamwa before him attempts to better balance the portfolio have come up hard against the dearth of investable projects in this country.

If NSSF was to liberate just a tenth of its fixed income investments this would come to sh240b.  It is not in NSSF’s mandate to lend directly to business unless those businesses issue a bond or sell shares.

They could buy property but thanks to the overinflated price of real estate the returns on these would minuscule.

So the fund is looking to invest their funds outside Uganda starting in the region and then later on further afield.

The question came up during the annual meeting, why would NSSF want to invest abroad when we have such dire need for affordable funds at home? How can we invest abroad when we need the money here?

Chairman Ivan Kyayonka was quick to point out that their fixed deposits in commercial banks all sh717b of them and another sh100b or so in corporate bonds were all invested locally so they cannot be accused of not investing locally.

But the sheer volume of money under NSSF’s command means that there is an urgent need for huge investments in order to show an overall return.

Luckily for NSSF the ten year moving average inflation rate will dip this year and so they may lower the interest next year from the current 10% , but think about it with sh2,621trillion in accumulated members funds the fund still needs to see a  return of about sh300b annually to cover operating costs and interest

The world’s richest and arguably best investor Warren Buffett calls it elephant hunting. He this year committed $23b to take over H.J. Heinze – the tomato ketchup manufacturer.  With up to $45b in cash last year it’s only this magnitude of investments that will ensure he shows an adequate return for his investors.

By the way since 1976 Buffett has shown average annual return of 19% in excess of the treasury bill rate and the 6.1% in excess of the stock market index.

If he tried to peg his returns to the US two percent inflation rate he would long have been laughed out of business.

HOW THE OTHER HALF STEALS IN UGANDA

Last year's rising lending rates led to a build up of bad loans in the banking system.  But that was not all.

A leading multinational bank discovered to its horror that when their borrowers started defaulting the properties that were mortgaged to secure these loans were grossly overvalued.

Banking officials would connive with valuers and borrowers to over value properties to be mortgaged allowing the bank to lend more money than the borrower qualified to.

So for instance your house would be fairly valued at sh100m but for purposes of the scam it is valued at sh150m. The bank lends you the Sh150m the officials get their cut and you get your millions. The trouble begins when the borrower goes into default and the bank tries to sell off the property and the values don’t add up.

This bank had to write off in asset values more than sh50b  or the amount budgeted by government to treat the 140,000 in patients expected at Mulago this year for two years.

The bottomless greed of our civil servants continues to capture the headlines but the private sector has its fair share of fraud, breathtaking in the audacity of the scams and mindboggling in its frequency.

It is estimated that at least sh160b of civil servants pensions have gone missing due to officials in the Public Service Ministry. The officers including permanent secretary Jimmy Lwamafa have been charged in relation to this.

Another sh50b has also slipped between the cracks at the Office of the Prime Minister. A lot of this money was intended for northern Uganda rehabilitation.

Stories of the substandard road construction, school buildings and unequipped health centers are not unusual, no longer headline grabbers.

However it is an open secret among service providers and suppliers that private companies are bleeding billions of shillings in underhand payments annually.

But the nature of the crime makes it hard to get any hard and fast numbers.

“CEOs don’t want the extent of the problem to come out,” Mustapha Mugisa, a certified forensic investigator said. “A lot of these businesses are built on trust like banks and talk of fraud can cause a run on the banks, so many of them write them off as losses and keep quiet.”

Mugisa said that globally companies lose at least five percent of annual turnover to fraud.

“But in Uganda where controls are weak it can go as high as 15 to 20% of turnover,” Mugisa said.

Put another way our 25 banks which in 2011 reported a total turnover of about sh2 trillion  would lose at least sh300b between them.

Telecom giant MTN is in court in a case in which it is alleged some of its staff and a local clearing and forwarding firm are supposed to have connived to fleece the company of $3.8m (sh10b).

Bankers Stanbic earlier this year unearthed a Sh600m pension related scam and the alleged perpetrators are being prosecuted.

“I look at the margins that allow for this circus to go on and I just laugh,” one service provider speaking on condition of anonymity said.

“A tenders value can amount to sh800m but the officials doing the procurement demand sh250m, leaving the service provider with sh550 to do the work and make some profit. And the work gets done. But the companies have to pay VAT on the sh250m. It means companies would cut down costs significantly if they could rein in their procurement, logistics and marketing departments,” he said.

He said the channels of fraud are basically three.

The “kickback” can be factored into the tender price or one has to pay someone to become a listed supplier and in addition contracting officials can ask for advances ahead the deal being commissioned.

“What we see in the civil service is nothing. It is happening at a frightening level in corporate Uganda,” a top executive at a leading company said.

“It’s so bad that our company has at least 12 people on remand in Luzira as we talk.”

The official said out of desperation, “we are seriously considering hiring people whose background we are familiar with, from families we know, which sad because there are hardworking, honest, young people out there who will miss out on opportunity because a few bad ones.”

“Going forward corporates also have to do lifestyle audits, how does a man earning sh800,000 a month buy his girlfriend a sh100m car and no eyebrows are raised?” the official asked.

“And of course the law has to catch up. The laws on IT fraud are extremely weak to none existent. We need not only harsher punishment but that cases be expedited, let’s have an IT court martial.”

He said the punishment meted out to four Bulgarians recently who were sentenced to ten years each for hacking into ATMs could have been stiffer.

“We need harsher punishments, let’s make an example of these people.”

The NGOs have not been spared the scourge.

“The scams are many and range from sourcing multiple funding for one project, exploiting vulnerable communities, who derive no benefit from the funds solicited in their names, funding workshops and trainings whose outputs are dubious … it easy money, it’s the biggest racket going in town,” a former NGO worker said.

It’s not clear whether the funding agencies are complicit in the fraud but the implementing officers – often Ugandans are making money  hand over fist.

“NGOs are in tatters. The money is made in logistics, procurement, marketing and communications,” another supplier said.

“These are not a few thousands here and there – beer money. In total its billions of shillings gushing into the economy on a monthly basis unsupported by production. It has a destabilizing effect on the economy. What do you think the property inflation of recent years is about?”

UGANDA'S ANTI-CORRUPTION FIGHT TRUDGES ON

Last week former junior health minister Mike Mukula’s conviction by a lower court for embezzlement was quashed by a higher court.

Earlier this year Mukula was sentenced to four years in prison for embezzling sh210m. His co-accused former Health ministers Jim Muhwezi and Dr Kamugisha were acquitted while, state house official Alice Kaboyo pleaded guilty, paid a fine and was set free.

The acquittal of his colleagues, Mukula’s conviction and eventual acquittal has been met with mixed reactions.

On the one hand were the anti-corruption crusaders who saw Mukula’s case as sign that the struggle was beginning to rope in the “big fish” and for the first time government may actually be serious about the issue. They also argued that regardless of the political undertones of his case an irreversible momentum was building up that would engulf even the “connected” ones who continued to sidestep the course of justice...

On the other hand were the conspiracy theorists who saw Mukula as a sacrificial lamb. A peace offering to the public which was getting increasingly restless at the inaction against runaway official corruption. The argument was that Mukula while a big enough fish has not been the biggest beneficiary of corruption in this town and it did not help that he is not as “connected” as other alleged perpetrators.

Who is to say which is which?

The fight against corruption was never going to be an easy one.

"We can expect moments of elation as officials are hauled before the courts and stripped of their auras of invincibility. We may even see some of them convicted and bused off to Luzira. But we can also expect that some will be acquitted despite being found guilty in the court of public opinion or dodge the bullet on a technicality or survive serious punishment out of the “incompetence” of our law enforcement agencies...

At best the fight will not progress in an unbroken straight line. Expect a start-stop-start again progressions that will test our patience and try our souls. The worst of course is that even the most promising cases will suffer still births, because the truth is the corrupt are not lining up like ducks waiting to be picked off, but are actively fighting for their own survival.

However as we have said on these pages before everyone who is interrogated by the police but not charged, charged but not convicted, convicted but later on acquitted is progress at the most fundamental level – they cause the so-far unscathed corrupt to pause and better still dissuades the  soon-to-be corrupt from contemplating a life in crime. At the end of the day we want the momentum to be slowed and that no more new entrants enter the ring. If at the bare minimum this happens, the fight would have achieved unimaginable good.

However it would be foolhardy to get our hopes up too high about the success of this campaign.

"What is clear is that theft of public funds has gone on for so long that not only has almost everyone been coopted into the scam but that a lot criminal behavior is now been accepted as normal behavior...

How you do you explain how the public, relatives and friends look on as poorly paid public servants accumulate wealth at prodigious speed and not only do we not reprimand them but are glad to partake of the obviously ill-gotten wealth?

Because we are all complicit in this evil it makes the fight that much more difficult. And once every one is in on the deal, politics comes in and you might as well forget about routing the problem from our midst.

Two things however may work to sustain the fight against corruption. To begin with, judging by the tip of the iceberg that is on public show, these corrupt officials have amassed colossal sums, which are a threat not only to the smooth running of the economy but can prove a threat to national stability.

Think about it. What would you stop at to keep yourself out of Luzira if you had a few billions of shillings stacked away somewhere? Kill a witness here or there? Pay an investigator, judge, prison warden, MP? Your unwillingness to go to jail will be in direct proportion to the amount of wealth you have accumulated and will reflect the desperation you will display.

In addition we might take comfort in the fact that there is no honour among thieves. There is no coalition of the corrupt. If we turn the screws long and hard enough this edifice of graft will come crumbling down like a house of cards. The only problem is that there will be a lot collateral damage.

No one said the fight against corruption would be easy, but hopefully it will be worth it.

LET OIL SPUR UGANDA'S KNOWLEDGE INDUSTRY

Last week Ugandan Tutus Mawano emerged one of three winners in a continental computer applications innovation competition.

His innovation “Ffene” is a low cost business management application aimed at helping small business owners to file better books of accounts and monitor the business remotely.

As the demands of society increases productivity, the amount you extract for every unit of input, has to increase too.

So if you were previously man and wife subsisting off a piece of land, when the children come along, you have to find a way to extract more from the piece of land to sustain all of you.

"Innovation is critical to any developing and growing society. Innovation is what will allow you to extract more and more value from less and less of the natural resources available....

Innovation is built on knowledge. The more knowledge a society has the more innovative it can be.

An interesting article “Ideas trump resources when it comes to city growth” published in “The Atlantic Cities” Magazine last week extended this same point further in a way that is relevant for Uganda.

The article was a commentary on a previous article that had noted that, currently in the US the parts where the economy is on the rise are the states or cities based on extractive industries like mining and oil drilling.

“The real winners of the global economy have turned out to be not the creative types or the data junkies, but the material boys: countries, states and companies that have perfected the art of physical production in agriculture, energy and , remarkably, manufacturing, ” one David Brooks argued in the New York Times.

However the rebuttal in Atlantic Cities argued that,  its not resources but ideas that powered advanced economic growth,bnoting that “Large endowments of natural resources and of extractive industries can pose a powerful barrier to knowledge accumulation, educational excellence and advance economic development,” an apt description of the ‘resource curse’.

A study, which contrasted cities with and without extractive industries showed that the cities with extractive industries tended to have lower levels of entrepreneurship and lower growth in economic activity.

However, they always are the exceptions to the rule, countries or cities which have extractive industries but have shown progress in the three key indicators of regional economic development --  GDP per capita, average wages and per capita income.

Countries such as Canada, Norway and Australia have done well to exploit their resources for sustainable growth in sharp contrast to Russia, Venezuela and the Middle East the article says.

They have done this by

investing their windfalls on building “institutions and social structures which harness knowledge, accumulate the human capital, and generate the innovative capacity that powers economic growth.”

The articles points to Houston in the US and Calgary in Canada, as examples of the cities that have exploited their natural resources well. Houston has developed a cluster of high value added technology oil related industries, to the point that it is the home of a large number of technology workers and software engineers specializing in oil. Calgary has built itself up as a knowledge hub and as a result is the most affluent city in north America.

We have already earmarked our petrodollars for infrastructure development as a first priority ploughing into social services, research and innovation would guarantee not only sustainable development but that more people will enjoy the benefits of this finite resource.

For starters there is no reason why Uganda cannot become the hub of agricultural research in the region, especially since agriculture will still be an important sector long after the oil has dried up.

They say don’t count your chicken before they hatch, but in the case of money you need to know how you will spend before you get the income. Otherwise the 

when our oil dollars turn up we will be like pigs at the trough and when its all said and done we will look back and wonder where it all went – Nigeria style!

TO BE WEALTHY IS GLORIOUS

“To be rich is glorious,” the words of former Chinese leader Deng Xiaoping, credited with launching the world’s most populous nations economic growth of the last three decades.

The beginning – and lesser known part of that quote is that, “Socialism is not poverty.”

It’s that time of the year again when Forbes magazine releases its list of the world’s richest individuals.

The numbers continue to boggle.

The 1,426 billionaires who made the list this year have a combined wealth of $5.4trillion (I will not bother to convert into shs). If they were a country they would be the fourth largest economy, coming in after Japan and  ahead of Germany. The richest man in the world is Mexican oligarch Carlos Slim whose $73b net worth is about 90% the size of the East African Community economy or four times the size of Uganda’s GDP.

Interestingly if they spread the dollars evenly among these billionaires they would each have $3.8b and this would make three in four of the billionaires wealthier than they are now.

The US with 442 billionaires has the largest share then Asia-Pacific 386, Europe 366, Americas 129. Africa has 20 billionaires.

Beyond the headache that comes from trying to wrap one’s mind around the numbers, of greater concern to some is the concentration of wealth among a handful of individuals that this annual list represents.

I am not one of the concerned people.

A lot of the concern comes from a lack of understanding of how wealth is created and retained.

The reason why these billionaires or two in every 100,000 human beings control such prodigious amounts of wealth, is because they are doing something that the rest of us are not willing to do. Unlike us mere mortals they worked smarter, thought better or sacrificed longer. To everyone according to his output is fair reward.

Of course there are a few heirs who were fortunate enough to win the genetic lottery but they are in the minority.

People who begrudge these captains of capitalism their billions also labour under the mistaken impression that these ladies and gentlemen have stashed all their net worth in vaults under their mattresses.

It’s only poor people who hold cash.

The networth of these billionaires is held in their companies. They became rich by making products or providing services, their wealth is a measure of how helpful they have been to more and more people.

And finally the haters wonder why one person would need all those billions, after all we live in one house, sleep in one bed and eat with one mouth at a time.

For the poor man money is for spending, for the rich man – read billionaire, money is for making more money.

A survey done in America in the eighties showed that the average millionaire there owns a car that is not valued at more than seven percent of their net worth,  by extension a billionaire’s car would be an even smaller fraction of his net worth.

The billionaire understands that there is no money that is too much to be finished. And that it takes a lot of effort to just retain, leave alone grow his net worth. The way to do that is to serve more and more people through his companies and investments. In effect money is the byproduct of being a more helpful member of society. So if you are poor it is because you are not a helpful member of society.

One last gripe against the masters of the universe an extension of the criticism that they are hoarding their billions, is that they are mean and unwilling to share. Ironically Bill Gates has given away $28b since 2007 and in the process its estimated that his billions may have saved up to 5.8 million children through his charity’s work against malaria, polio and its vaccine programme. Not only does he remain the second wealthiest man on the planet his wealth has grown by almost a fifth during the period .

Clearly Jesus Christ had it right when he said “It is in giving that we  receive.”

It is unlikely that you will get any volunteers for a campaign to beatify members of the Forbes list, but one can make a compelling argument for the potential of a nation’s economy by the number of dollar billionaires it has. Needless to say Uganda is doing badly.

For a person to accumulate billions, capital has been effectively deployed for years,   generations even. The more people that can do this in an economy the better . Beyond providing much needed goods and services, they create jobs, finance social services and  infrastructure development through their taxes.

We need to keep our envy in check and instead of vilifying durable wealth understand how it is created, hopefully reproduce the process so we can become more useful members of society.

So Xiapong did have a point, to be rich is truly glorious.