UGANDA CLAYS: HOW DID IT COME TO THIS?

An otherwise good investment executed poorly has led to the imminent takeover of tile maker Uganda Clays by the National Social Security Fund (NSSF), inside sources have told the Business Vision.

In a bid to meet growing demand, Uganda Clays Ltd raised money from the public and banks to construct their $15m (sh39b) Kamonkoli plant in eastern Uganda.

“At the time UCL had more than two thirds of the market share but was not effectively meeting demand, so building another plant made sense. It was a good idea,” said a source intimately familiar with the Kajansi based company’s operations.

The choice was between beefing up the Kajansi operation or looking elsewhere. Given that Kajansi’s clay reserves were only good for another 20 years it made sense to find another site. Kamonkoli with its estimated 100 years of clay reserves seemed a promising prospect.

But UCL’s management at the time were clearly not up to the task of making this new investment work.

“The investment was clearly not thought through very well,” the Business Vision’s source said. “To begin with the market research was bad. The anticipate demand from eastern and northern Uganda that was supposed to anchor the investment did not materialise. When they tried to export to Kenya they found the competition was selling at a quarter the of UCL’s price.”

As if that was not enough UCL had little room for manoeuver as the use of heavy fuel oil to fire up the kiln in Kamonkoli was very costly. But even more importantly the clay at Kamonkoli was not as good as that at Kajansi requiring the use of an additive, which meant additional costs.

And that was only the operating costs.

Besides raising about sh10b from its shareholders in a rights issue in 2007, UCL also borrowed from the banks.  Unfortunately instead of getting long term financing they settled for the pricier, short term loans.

This meant that their debt repayments accounted for an average of sh4b a year since 2009, this meant that in four of the five years these costs accounted for more than four in every ten shillings of gross profit, which is was historically high for the 60 year old company. In 2008 the company reported debt repayment costs of sh97m or under two percent of gross profit.

It did not help that revenues did not jump to match the spike in costs.

But one more eventuality must have made the company wonder whether the project was not cursed from the start.

In December 2007 postelection violence in Kenya shut down the route to Mombasa for weeks. This was a problem because the Kamonkoli plant was being imported through Kenya, construction and eventual commissioning of the plant was therefore held up for months, with the attendant cost implications.

"The coincidence of calamities may have accounted for the then managing director John Wafula, who stepped aside at the end of 2010 and his successor  Charles Rubaijaniza, who resigned barely a year later...

In 2010 NSSF loaned the beleaguered company an unsecured loan of sh11.05b with a tenure of 10 years and a two year grace period. The interest on this loan was 15% per year. The company used the money to pay off their creditors, buy spares for the Kajjansi and Kamonkoli plants.

“But they were so focused on restructuring their debt that they forgot they would need working capital. As a result they could not meet their obligations to NSSF and hence the situation UCL is in now,” our source said.

So earlier this month it was announced at the UCL AGM that NSSF was converting the loan to shares raising its interest in the company to 66% from 32.5% previously, as a result they would double the number of chairs the hold on the board to six out of the ten.

“We know that things have been on a decline in the last couple of years, but as major shareholders, we believe in the long term sustainability of the company. We may have to reengineer the way the business operates,” said NSSF acting managing director Geraldine Ssali during the USCL AGM.

“If we pull out, the company will close.”

Ssali suggested that radical changes like moving the Uganda Clays Kamonkoli branch in Mbale to Kampala, the use of managerial contracts and a keen study into the methods the company uses to fire its clay based products may be necessary.

With the hope that the internal dynamics may have been brought under control Uganda’s oldest ceramic tile manufacturer will still have to grapple with totally different market environment, where its market share has been whittled away by private players and changing roofing demands.

“Uganda Clays is still a the market leader in the clay products segment, easily 80% of that market. The problem is that segment is dwindling. There are many more options now for roofing alone than there were say 10 years ago, so its share of the universal roofing’s market is very much smaller. They don’t dominate the sector,” an industry source said.

The new equity composition of the company will see the other shareholders interest in the company halved.

“Our interest shall be diluted but the debt shall go. We have requested NSSF to get better quality board members otherwise they will have more power to do what they have been doing, which is nothing,” said Andrew Muhimbise, general manager of Rats Network Investment Group.

The company, which was the first to have listed on the Uganda Securities Exchange (USE) in 2000 has had a relatively inactive counter with most of its shares held as investments by local and regional institutions.

It was listed at sh4,000 share which price rose to sh11,000 before a 1-for-100 share  split saw its price coming down to sh113 and adding a bit more action on the counter. At the close of business yesterday a share of the company was trading at sh20.

The moral of the story is,

“Despite being a monopoly, complacency can run a business into the ground,” said Ken Kitariko, the CEO of investment bank African Alliance.

SERIOUSLY, LET’S SELL THE COUNTRY

The painful beauty of the free market is that, what doesn’t work is discarded to make way for that, that works.

Actually this the basic mechanism that drives evolution in the natural world. So capitalism does not hold the patent to creative destruction.

As in the natural world as in business when we try to oppose this natural selection process we do it at great cost to the general system before eventually failing or at least falling back to earth. Think price controls, centralised planning and jet airplanes.

Companies which fail go bankrupt – fail to meet their obligations and are liquidated – their assets are sold off to pay the creditors. What causes problems often isn’t that the company does not hold valuable assets, after all what would the liquidators be selling off, but that they run out of cash.

Thanks to creative accounting and other dodges a company can keep up the illusion of wellbeing before it is exposed and comes crashing down.

Last week UK supermarket chain Tesco’s had to admit that their profits were over stated by at least £250m (about one trillion shillings) leading to a collapse of its share price and not before the scandal had accounted for its chairman.

It’s a whole debate about why otherwise upright and competent workers indulge in this kind of fraud. I tend to lean towards the side that argues that, the incentive structure for top executives has been skewed towards delivering a profit and away from providing service to the customers and clients.

So managers understate expenses or defer them to a later period or scrounge on capital investments so their profit-pegged bonuses can continue to balloon. Our banks are not averse to such practices.

So what about a country? When our politicians clearly don’t have our best interests at heart, the technocrats are pigging out on our taxes with no corresponding benefit to ourselves and generally making us wonder whether we don’t deserve better the country has stopped working.

If a country doesn’t work, we can’t liquidate it in the way we would a company.  But maybe we can lease it out to a serious firm for a fixed period of time, with definite expectations framed by pre-negotiated targets.

What would Uganda look like on the market.

An advert for the job would probably describe the country as small economy -- $20b GDP, poor infrastructure, a functionally illiterate population, and little internally generated revenues but nevertheless with potentially, commercially viable deposits of all sorts of natural resources, huge energy sources and millions of acres of unexploited land.

"The country’s potential will have to be weighed against the huge investments in infrastructure – social and physical that will have to be made to unlock the aforementioned potential to come to a fair concession fee. It might turn out that we will have to pay the investor to take us off our own hands! ....

Top of the new manager’s to-do list would be to cut expenses and increase revenues. Unbundling the huge public administration sector would have to be a priority, knocking off two birds with one stone – cutting the wage bill and making more savings on the reduced “eating”.

Next he would want to pour the billions of dollars required in power generation, road and railway construction in the short term, education, health, law and order over the long term. Interestingly we may get these services free because with increasing economic activity and reduced theft it will be more possible than it is now.

But it will also be in his own interest to have a locally productive workforce as these would be cheaper than employing the expat-set with their insistence on living in Kololo, chauffer driven four wheel drives and private club memberships.

To ensure that he works for our benefit we have his incentives pegged to improvements in the quality of life of the people, measured in terms of social indicators like access to quality education, health services and opportunities for economic advancement rather than the misguided parameter of lifting people above the dollar-a-day poverty line.

We will have the manager reporting to us through an annual general meeting, a national video conference even. His contract will be renewable every five years.

One can expect that there will be a lot of disruption in the beginning as the manager tries to regularise our daily lives -- shutting out boda boda from the center of town, ensuring everyone liable for tax pays and evicting rogue investors from our wetlands.

But once the basics are in place they would serve as an effective springboard to the Promised Land.

The key to success is to extract our politicians from the process. Once they are out of the way with their parochial world view, progress can be made.

Of course the danger is that once the manager becomes entrenched in his position he may turn to dictatorship or worse into a monarchy and we might have nothing to say about it. I guess we will cross that bridge when we get there.

WE CANNOT CONTINUE LIVING AT THE MERCY OF GOD

At the beginning of this month the police in northern Uganda arrested a key suspect in the February murder of police officer Joseph Bigirwa.

The suspect Joseph Olanya it is alleged shot and killed Bigirwa, as the policeman tried to foil a robbery at Gaz petrol fuel station in Kajjansi.

It was suspected that Olanya had fled to South Sudan. He was arrested last month for allegedly staging a car robbery at Karuma along the Gulu-Kampala highway.

By a stroke of luck he was recognised by a detective as he sought bail in Gulu and detained.

Last week Kampala businessman Erias Sebunnya Bugembe was killed near his home in Muyenga while out on his morning exercise. The police has ruled out that the death was accidental and are searching for the alleged murders.

Sandwiched in between these two events were probably dozens, even hundreds of crimes committed most of which may go unresolved.

Is it the case of a more pervasive media presence or is that the incidents of crime are rising in our society?

According to the police “Annual crime and traffic/road safety report 2013” reported criminal cases were down to 99,959 in 2013 from 100,465 in the previous year. This could suggest two things, the obvious, that crime rates are down year-on-year or that crimes are happening and people are reporting to police less than the previous year.

According to data aggregation site Numbeo, Uganda is not in the top 20 unsafe countries to live in. In Africa we are a safer country to be in than South Africa, Kenya, Nigeria and Somalia. However we are ranked the 23^rd unsafest nation out of 139 countries polled.

"Most safe societies rely on the goodwill of their citizens to keep the peace. And for the most part this works. But that is not enough...

The general lawlessness of the 1980s was brought under control, thanks to more disciplined security forces.

On the surface of it, it could be suggested that the beefing up of the police force to its current 40,000-man strength from a paltry 14,000 at the beginning of the decade could be a factor.

But the truth must also be that we are generally not a lawless society. You are not likely to get mugged in broad daylight on our high streets and even at night there is a general sense of safety and security.

Most safe societies rely on the goodwill of their citizens to keep the peace by being upstanding members of society. And for the most part this works. But that is not enough.

Assuming the crime levels are down to zero the security forces have to be prepared to tackle insecurity whenever and wherever it arises.

And that is the challenge for Uganda.

As it is we have about 100 police staff for every 100,000 Ugandans. This does not compare well with most policed state Russia, which has 564 police staff for every 100,000. More liberal democracies like Denmark at 197, Canada at 202 and the United Kingdoms, 262 suggest our police force is  woefully undermanned.

But police numbers are not everything, in fact a case can be made for smaller police forces but well equipped with the latest equipment and crime fighting techniques.

Thankfully the ID project has been launched and this single initiative will change policing forever. 

Up to this point our police were working in the dark. Even if they dusted up the crime scene and lifted some thumb prints the robustness of their database is questionable.

If increased numbers and police presence serve as a deterrent to criminals, having good information systems is what will keep criminals off the street once they are apprehended.

But finally improving the police is not an issue for the police alone.

The long term way to combat crime is to ensure that income and wealth inequalities within society are minimised. This is done by while creating an enabling environment for businesses to thrive,  improving and increasing access to education, health and other social services for the majority of the people. On average better educated, healthy people are paid more.

I couldn’t find any statistics to back my claim but it’s possible that many, if not most crimes are committed out of necessity. If more people are earning a decent wage because of their enhanced capabilities it isn’t a stretch to expect they will have no incentive to steal or commit other crimes.

So back to the case of Kampala businessman Bugembe, more commonly known as Kasiwukira, the chance of the police apprehending the culprits is not very good (I would love to be wrong about this). If significant headway is made on the case it may be more out of luck than anything else, just like in the capture of Olanya aka Bucherman the alleged killer of police officer Bigirwa.

The point is that as the population grows and by extension the levels of criminality rise, we need to rely less on the goodwill of the people to keep our society safe. A more equitable economy and a better equipped police force will be the key.