THE RETURN OF THE IPO AND WHY IT IS GOOD FOR UGANDA

Last week pharmaceutical firm, CIplaQCI listed on the Uganda Securities Exchange (USE), the latest initial Public Offering (IPO) since Umeme in 2012.

Also during the week the government announced that they will require all telecommunications companies to list on the exchange shortly.

In neighbouring Tanzania and in Ghana and Nigeria as well the government’s there made it a requirement of their licenses, so Uganda is not reinventing the wheel.

The government here said this would be a way to increase ownership of successful companies by locals as well as retain some of the money that is repatriated to their head offices as dividends.

Listing a company is how the owners of the company get paid for all the hard work they have done in building the said enterprise. It can also be a way for them to raise money, patient money from the market.

"But also for political reasons it can be a way for companies to ingratiate themselves with a critical mass of the public. This is a big deal for investors, especially foreign investors, who can become the target of unwanted publicity just because it is always easy to mobilise against foreigners....

The badgering Umeme received a few years ago when they were wholly owned by British private equity firm Actis comes to mind. After they had turned around the distribution business, locally connected entities started lobbying for their contract to be terminated on the basis of some fuzzy logic about how they won the contract. Thankfully these agitators were beaten off. Actis eventually listed on the USE and sold out entirely.

Interestingly the entity that was lobbying for their ouster mismanaged the small concession they were running and as if that is not enough gave it up altogether. I shudder to think where we would be if they had won their battle to run Umeme.

But I digress (or do i?).

One of the four reasons to start a business is to eventually sell it. The other three being to sustain yourself, to pass it on to the next generation or for philosophical reasons.

If you start a business with the eventual plan to sell it, you will build it differently from a person with a business intended to finance his lifestyle. You will build a business whose value is not mainly derived from you. You will build systems in the business, which will ensure it will continue to survive even thrive without you.

The story of Cipla is interesting in this respect. The Ugandan founders of the original business Quality Chemicals, a drug marketing business out of Katwe, in order to expand into the drug making business paired up with Indian firm CIPLA.

This would not have been possible if Quality Chemicals was not worth buying with a credible market share and systems that could be scaled up to win more market share. An intending buyer of the size of CIPLA for any company be it your chicken farm or coffee farm or even wholesale shop are buying potential future earnings. 

"The prospect of growing future earnings, predicated on a scalable business, is what buyers are looking for...

So companies that come to the USE are those that the market think are viable businesses with healthy future prospects.

This is important for us because the more viable business a country has the better. A country is only as viable the strength of the it’s business community. Because businesses are what unlock the potential of our people, land and capital.

I thought about this two weeks ago when I visited the Goodwill Ceramics Ltd in Kapeka, easily the largest floor and wall tile manufacturer in the country.

For their raw material – 90 percent of it, they use clay from Kanungu, Rukungiri and Karamoja . Trucks had offloaded huge heaps of this clay in the factory’s back yard. I am sure it is a special clay but to the common eye it is just soil. But it has been here with us all along. So why has it taken until the 21^st century for us to employ it meaningfully?

The Goodwill Ceramics plant has the capacity to satisfy this country’s daily requirement of tiles and more, throughout the year.

The years of upheaval aside, the reason our businesses cannot exploit such opportunities right under our feet, is because from inception they are designed as lifestyle businesses. Which is not in itself a bad thing, most businesses around the world are started on this premise. The difference is that the ambitions of our founders do not grow and therefore the business remains stunted or they just don’t know that the fortunes of their companies depends on the visions they habour between their ears.

Of course it’s much easier to manage a small corner shop than a supermarket or a chain of supermarkets. The human resource and capital issues just grow with the company. And some point the founder may be forced to relinquish day to day control of his baby because he has reached the level of his competence and needs to bring in new talent.

"Growing a big company means we are going to have to see our businessmen grow beyond their egos, which given how small our businesses are anyway, are not very big...

Obviously bigger companies employ more people, should pay more taxes but are the ones which will unlock the vast potential of our land.

Shortcuts like government trying to do it itself will fail invariably because governments motives, anywhere in the world cannot support sustainable business development.

Our businessmen have to grow for their businesses to grow. There can be no quick fixes.

So the dearth of IPOs is a true reflection of the sophistication of our businesses and the environment they work in.

KAPEKA: AN UNLIKELY INDUSTRIAL AREA

If the boss of Goodwill Ceramics Ltd is to be believed his products are causing upheavals in the Uganda tile market.

The $30m (sh115b) factory tucked away in Kapeka, about 60 km from Kampala, started operations in April and is already making serious inroads into the local market.

“The feedback we have from the market is that our tile are too hard,” said Goodwill Managing Director Yang Frank with a chuckle.

“That with other tiles they can use simple cutting tools but with ours they need more serious equipment.”

This speaks to the durability of his product.

A straw poll of hardware dealers in Kampala confirms the perception that the tiles are of better quality than those imported from China and the pricing putting downward pressure on tiles in the market.

"The factory has the capacity to produce 40,000 square meters of tiles a day in 200 different variations. They have built up their operations to 28,000 square meters a day. They sell under half their daily production at 12,000 square meters. In storage they have enough tiles to supply all of Uganda for two months...

But this is only one of the establishments setting up in the Liao Shin Industrial park in Kapeka, which covers over five square miles.

Around the corner Ho & Mu Food Technology have just done their initial export run to China of candied dry mangoes and factory manager Majorie Mugenyi is confident of future prospects.

“Our capacity is to process 20 tons daily into four tons of candied dry mangoes. This will be expanded to 40 tons,” she said in an interview, with plans to expand into pineapples, jackfruit and passion fruit.

So far they exported all the initial 180 kg of fruit to China but are looking to Europe, Canada and the region as potential future markets.

The factory was closed for maintenance but she said at peak production they employ a hundred people from the surrounding areas, nine in ten of whom are women.

By the end of the year the industrial park promoters project that ten companies will have come on line, producing everything from vegetable oil, animal feeds, industrial alcohol, electronics and textiles.

At full capacity the industrial park will employ 15,000 people.

It is an interesting snap shot of what form our industrialisation may take.

Looking at the portfolio of industries lining up to take up space at the Kapeka facility, the vast majority are looking to exploit the country’s natural endowments, be it clay in the case of goodwill ceramics or fruit or vegetable oil or textiles.

Yaheye International Investment Group has the capacity to process 3,000 tons of maize annually and for now is processing maize into flour for the domestic and regional markets. It is however planning to triple it capacity and go into the manufacture of animal feeds, industrial starch and alcohol.

But more importantly they are setting up for export and as a consequence the investments being planned for not less than $10m in the park. This is important because if we are going to generate jobs and boost tax revenues we need to think about producing for export. Import substitution has undeniable benefits in saving foreign exchange but producing for exports --- especially food means you have to adhere to international quality standards and produce industrial quantities to sustain the related industries.

Ho & Mu have ten acres of mango, about 3,000 trees, under development, but will still need to reach out to farmers as far afield as Kasese and eastern Uganda for their supplies.

"The sad thing for the existing factories is that they do not have reliable power, despite the reported surplus in production by our dams...

Goodwill Ceramic reported that since their inception in April they had suffered 113 power outages the equivalent of 15 days without power during the period.

Efforts are underway to increase the existing 22kva line to 133 kva, which everybody thinks should come with an improvement in supply but not necessarily reliability.

It is an interesting venture in the heartland of the Luwero Triangle, which if managed well and with proper support from government should see a transformation not only of the area but of the country, as similar parks are set up around the country.

WITH THE ECONOMY WE HAVE TO BITE THE BULLET

The challenge of Uganda is that we don’t have enough money! Surprise! Surprise!

The annual budget is sh32trillion, which means government has committed to spend about sh800,000 per Uganda for this year. On education, health, security, building roads and all other things government spends on. As Ugandans we are contributing about sh400,000 of this sum in taxes with the sh400,000 deficit coming from borrowings – locally and abroad.

I repeat this statistic because when I first broke it down it shocked me to the core. And it still does.

Put in this perspective is blindingly, obvious to me, that the government budget is too small. And secondly that with such a small kitty how is government expected to achieve anything.

I mean they have earmarked sh57,000 for each Ugandan’s health needs and  for our protection they have committed the princely sum of sh53,000 per Ugandan for the whole year.

Putting aside our official’s propensity to dip their fingers in the till, how can anything get done to any satisfactory measure with these statistics?

"This numbers look starker when viewed against our population growth and development ambitions.
As it stands now our population is set to double every quarter century. So it’s 40 million now and will be 80 million in 2043 and 160 million in 2068, assuming the current growth rate continues, which it will unless we get a grip on poverty. A story for another day...

All these multitudes deserve good health, education and other social services as well as good infrastructure and a coherent government.

The World Health Organisation recommends that countries should see health expenditures – both in the public and private sector, of about $84 (sh310,000) per person a year. According to the latest statistics available in 2015 Uganda health expenditure came in at $46(sh170,000), just over half the recommended average.

Using these figures private expenditure on health is about sh117,000 per person annually. Assuming the ratio of public to private health expenditure remains the same government would have to double its budget just to meet the bare minimum requirements.

This in health but similar increases or more are warranted from everything from the gender ministry to Uganda National Road Authority (UNRA) to energy budgets. Just to get us to where we can all live bearable lives.

The next question is, where do we find the money to ramp up our spending?

URA a year or two ago set themselves the task of ferreting all the tax dodgers in the informal sector. We were shocked to hear that among the tax dodgers URA  has its eye on accountants, lawyers, doctors and all those professionals who go into self-employment, they counted them as being in the informal sector.

The recent taxes on mobile money were an attempt to tax incomes that were proving hard to find.

This was probably one of the less radical tax initiatives – despite the howling, this government could have suggested.

There is a lot of money in land. Tax all the land I say. People with idle land will be forced to put it to use or lease or sell it to others who can. With that single stroke we will increase production which in turn will bring in more revenue.

Of course the issue of land is always politically sensitive. So the leader who bites that bullet will either be working themselves out of a job or be ready to pull out all the stops – forget tear gas, to enforce his will.

"The writing is on the wall. These are desperate times – or about to be, and therefore require desperate measures...

We will not be the first.

China’s chairman Mao in a race to industrialise determined that his country needed to produce more steel. In this effort people were required to have a backyard smelter in order to meet the steel production of individual collectives. To meet those quotas people ended up smelting everything cutlery, fixtures and furniture.

The result, this was the beginning of one of the world’s largest steel industries, but the unintended consequence was that in an effort to fire up those millions of backyard smelters, the impact on the environment was so devastating that the repercussions continue to date.

There are no shortcuts.

There will be short term pain and woe onto those living in the era of transition, but as they say there can be no gain without pain.

And it will be an other generation of politicians that will benefit from our sacrifice, because there be no romance without the finance.

OF UGANDA’S GROWING DEBT BURDEN AND OTT

This week African leaders trooped to Beijing, China for the third edition of the Forum on China-Africa Cooperation (FOCAC) .

FOCAC is aimed at strengthening relations between the world’s latest super power and our continent.

A relationship that has accelerated the development of infrastructure – energy, transport and communications on the continent but which has drawn a lot of criticism from the traditional development partners who argue Africa is being sucked into a debt trap.

In the same week, the Uganda Revenue Authority (URA) reported that had collected just under sh30b in the month of July from the new mobile money and social media taxes – sh22b and sh4b respectively.

The two events are related and have caught our loudest commentators in a contradiction.

"The reason China’s influence is growing on the continent is because of the seeming bottomless purse they carry around to finance multi-billion projects in the aforesaid sectors. Projects, which it is in little doubt are badly needed, if the continent is to transition to the next stage of development...

To illustrate it is expected that the new National Cement Ltd and Hima plants in Tororo will require between themselves an additional 20 MW to power their operations. The Osukuru Industrial complex in Tororo, which will house a phosphate fertiliser, sulphuric acid and steel manufacturing plants will need at least 12 MW. Power we scarcely have now.

This is before you factor in that only about 20 percent of the population is connected to the grid.  To connect at least half the population you have to at least double our existing generating capacity of 850 MW.

Similarly in roads we have about 5000 km of paved road but need at least three times that number to catch up with next door neighbour Kenya. And they too have a deficit of paved road.

This great need set side by side with our low revenue collection in relation to our GDP, about 14 percent against a Sub-Saharan Africa average of 16 percent makes it clear that to the extent that our revenue collections are lacking we will have to borrow to finance the things we must do.

The challenge of this government, and many on the continent is that their economies are largely informal, with most workers and businesses outside the tax bracket.

"Seduced by easy donor money – it is easier to fly to western capitals to sign up loans (per diems all around) than to negotiate with population to pay tax, African government have paid lip service to widening the tax base...

And for good political reason.

The recent uproar – concentrated on social media about paying OTT, is a good example. And so have attempts to levy taxes on property, held by a few urban elite. And any attempt to collect more tax for that matter.

Given a choice between antagonising certain constituencies and negotiating loans, governments often choose the latter.

Critics argue of course that the taxes they pay are being swindled by pudgy fingered officials, who then proceed to enjoy their ill-gotten wealth right under our noses.

There is no doubt that corruption is a blight on this government’s record, no matter the pragmatic reasons for letting it run rampant.

But simple arithmetic suggests that we pay so little tax and government in its attempt to do everything, spreads these little monies so thin as to not be effective at doing anything.

The sh32trillion budget this year comes down to spending about sh800,000 per Ugandan for the whole year. When broken down even further the government will spend sh57,000 on each Ugandans health needs and sh53,000 per Ugandan on security.

And that is even before the thieving officials have curved off their pound of flesh.

And how much do we Ugandans contribute to this princely sum in taxes? Sh400,000 per person per year.

"Interestingly the critics of increased borrowing from China are most probably the harshest opponents of any tax changes. They are keen to eat their cake – pay as little tax as possible, while demanding first rate services from government, that is, have their cake....

My two cents on the subject. We don’t want government to tax us more because even with corruption service delivery will improve making it hard to unseat them. And we oppose the increased borrowing from China for the same reason. Other racist sentiments aside.

OF OIL AND THE LACK OF BEEF IN UGANDA

It isn’t news or it shouldn’t be. First oil will not be seen by  2020 as earlier expected.

The rule of thumb is that for first oil it takes three years from the signing off of the Final Investment Decision (FID). The FID comes after commercial viability of the reserves has been ascertained and the Front End Engineering & Design (FEED) of the necessary infrastructure has been done. This helps determine the amount of investment needed.

"Given that we are at the tail end of the year, if the FID can be managed by December 31^st then we can talk of 2021 at the earliest for oil to flow...

But fixating on first oil as a signal for the oil money to start flowing is  wrong.

During a recent New Vision function to consult stakeholders on the progress of our Oil & Gas Journal, a Tuesday pull-out, that has been running for almost a year now, Petroleum Authority boss Ernest Rubondo said tis thinking would be to miss the boat entirely.

To illustrate Rubondo told of the supplier to the oil camps who was in a dilemma because there was not enough beef of the required standard in Uganda to meet the camps’ demand in a year or so.

I had to do a double take.

Not enough beef in Uganda for a few hundred people in the oil fields?

As it turns out there is only one company in the country that can supply the amount of beef, processed to the quality that they demand in the country, but even it will not be able to satisfy the increased orders.

Our regular abattoirs do not meet the health standards to supply the oil camps. Because think about it if I am hiring the top oil geologist, or whatever they call them, to come all the way out to God forsaken Uganda and even further afield to western Uganda, to help me make hundred million dollar decisions, I can’t afford him reacting to the food in the area. So the food he eats under my care has to meet the highest standards and more.

So if we don’t have enough meat, how can we have enough fruit, eggs or even drivers and house help to support the industry.

About $20b (sh70trillion) or double this year’s national budget, is going to be spent in setting up for first oil over the next five years.

The investments are broken up into oil production, which for now means preparing the Tilenga and Kingfisher oil fields. The commercialisation of the crude that is produced in these fields, whose biggest projects are the pipeline and refinery. In addition there are the investments to support the above which include the Kabaale airfield and the “oil” roads.

We have neither the expertise nor the experience to play a meaningful role in the financing or construction of the above. But in the provision of services like hospitality & catering, security, logistics and even waste management it is possible that local companies and individuals can participate meaningfully.

But Rubondo pointed out that whether we have the capacity locally or not the functions will still be carried out with or without us...

Like the beef supplier who was willing to import the beef to cover the deficit of local beef, the industry will find people from outside the country to do the job.

The point is that to take advantage of the billions of dollars that are set to flow through the industry you have to be set up and ready long before first oil.

This involves formalising our businesses to take up contracts or be attractive to foreign partners wanting to work here. Relatedly it means stepping up the capacity of our companies financially and in human resource in order to play.

It has been an interesting journey since commercial viability of our oil reserves was established in 2006, 12 years ago. Some people thought they could stampede us into producing oil in three years later, in the absence of a legal framework or local capacity.

"Government’s insistence that we do everything properly, even if it takes forever has been the right way to think. In fact reasonable delays will allow us be better prepared to maximise the opportunity that comes with the industry for our local benefit...

Forget first oil. Be ready now. If you are not, it will be too late by the time the first oil starts making its way down to the coast.

THE SKY IS NOT THE LIMIT FOR NSSF

This week National Social Security Fund (NSSF) announced it would pay out a record 15 percent interest on member savings.

The highest it had ever been was 14 percent a decade ago.

The good performance was anchored by an improvement in general economic growth, a rebound in regional markets, which was boosted by shilling depreciation during the period. In creased member contributions helped as well.

The Fund had revenues of sh1.6trillion before member interest and taxes, compared to sh912b last year and member contributions during the year passed the trillion shilling mark as well to come in at sh1.05trillion, up from sh917b.

"What was interesting in that last number was sh500m of it came from a new contributions stream, the voluntary contribution scheme, targeted at the informal sector and those companies that do not fit in the minimum of five employees’ bracket liable for mandatory contributions...

Given the new opportunity one can expect that these contributions are going to grow by leaps and bounds. Especially once people realise that NSSF is offering the best returns on savings of any financial institution.

Some people have already seen the light. NSSF boss Richard Byarugaba during the Annual Members Meeting on Tuesday revealed that there is up sh22b being held in the Fund by retirees looking to take advantage of the lucrative interest payments.

There are still some concerns about NSSF’s lopsided portfolio, which is weighed heavily towards fixed income assets, and whether despite the stellar interest the Fund is offering, there is enough protection against the tumbling shilling.

As it stands now the fixed income part of the portfolio, mostly treasury bills and bonds account for 75.33 percent of the portfolio, while high is an improvement from last year’s 77 percent. The equity portion – share in listed and private companies, increased to 18 percent from last year’s 16 percent. While real estate’s share of the portfolio slipped to 6.53 percent from last year’s seven percent.

The concentration on fixed income leaves the portfolio exposed to averse movement in the yields of these instruments.

The management is aware of that and have a strategic plan to shift the balance to better diversify the portfolio but also to take advantage of better returns in equity, which are proven in a growing economy to have the best returns in the long term.

The challenge of course, is to find investable projects locally which can move the needle in a portfolio as large as NSSF’s, which almost touched the ten trillion mark last year.

Rebalancing the portfolio cannot be achieved with snap of a finger but new real estate projects in progress and in the pipeline, planned share offers after more than a five year hiatus and planned in to infrastructure investments in partnership with the government should help the cause.

On social media this week someone pointed out that while the 15 percent is laudable it might not mean much in real times.

The critic showed that If he Shs60m last year with the dollar exchange rate at Shs3,000,  he would be worth $20,000. With the 15% interest, that would now be Shs69m. But if the dollar rate is now Shs3,800, the dollar figure for his enhanced savings would now be worth $18,157 with my juicy interest. It is actually a 9.2% reduction in my savings after interest when converted to dollars.

It’s hard to argue with the math. But has been pointed out to me recently, NSSF savers or any contribution schemes to which employers contribute, are way ahead of the game.

"Of sh60m the critic uses an example only a third of it is actually savings that come from the employees’ pocket. So from the time your account is credited you have already locked in a 200 percent return – the employers’ contribution being pure profit, accounting for any reasonable fluctuation in shilling value...

Of course the law and NSSF can help by finding more dollar denominated investments so that our returns can move in step with the dollar movements.

The real positive is that NSSF seems to have turned the corner on its poor governance record and has become a more trusted institution. The management needs to hold on to that good will and the even the sky is not the limit.