THE POTENTIAL POWER OF NSSF

The problem of Africa is poverty. We are poor because we are incapable, unwilling or unable to aggregate our resources be it capital, land, human resource or markets.

We are reminded of what we are potentially capable of by NSSF.

Today the Fund has its annual members’ meeting, which will be held online.

Everybody is waiting with bated breath for what the Fund will pay its members for their savings. Last year NSSF shelled out 11 percent interest but Fund boss Richard Byarugaba said for the firs time in a decade we will not receive a double digit interest rate. 

While the Fund earned more this year than last, the fall in the value of its equity positions, triggered by  the faltering economy due to the Covid – 19 pandemic, means the Fund may only just meet its pledge to pay at least two percentage points above the 10 average inflation rate. The ten year average inflation rate is 6.2%.

"Given the regularity with which the Fund has surpassed this target in past years maybe we need to raise the bar a bit more...

but this is a discussion for another day.

But  back to the issue of solving the poverty issue of our times and how NSSF plays a role in it.

Ten years ago NSSF had sh1.6trillion under management but has now grown eightfold to sh13trillion. That is roughly a 23 percent annual growth rate .

Part of that growth is the increased contributions of the Fund’s members -- before the lockdown we were averaging about shs120b in contributions monthly and also the increasing efficiency of its operations.

But the bigger part of the growth is the compounding effect of the returns  on its portfolio.

There is every reason why the Fund should continue to grow at that rate into the future or at least the next ten years.

The new NSSF law winding itself through parliament will among other things open up to all workers, regardless of whether their employer has more than five employees or not. Secondly voluntary savers – mostly from the informal sector will be allowed in. Already voluntary savings from existing members are topping sh5b a month.

Assuming they maintain the growth rate, because of these new entrants and barring any accidents to the Fund – Its been a while since they had a scandal, we can expect the Fund’s size to jump beyond the sh100trillion mark in 2030.

An amazing achievement by any standards. Which brings us nicely around to how NSSF can be a force for fighting poverty with its growing financial muscle.

"You do not fight poverty by dishing out money. Free money is nice to receive but tends to leave you deeper in the hole you were in....

You fight poverty by creating an enabling environment for people to carry out economic activity.

Already NSSF contributes massively to anti-inflationary activities carried out by the central bank. It is the biggest single holder of government paper of any individual. It holds 40 percent of government bonds.

"Some people may huff at this but without NSSF’s ability to mobilise funds, keeping inflation under double digits like we have done for the last 28 years – except for the bleep in 2011, would have been a harder feat to accomplish....

Most of our money we do not even keep in banks and therefore hard to aggregate.

We take it for granted because for most of us we have never seen high inflation that was a reality before 1990.

NSSF’s power to influence the rate of price increases is an underrated part of its contribution to the economy and the alleviation of poverty.

On a more basic level they are lining up to overtake National Housing Construction Corporation (NHCC) as the biggest real estate developer  in the country. 

Work is already underway on the Lubowa project’s 2,740 unit and on Thursday Byarugaba said a contractor is already on site in Temangalo to kick start work on the the first phase – 600 units, of the 5000 unit project.

The amendment to the NSSF law will also allow for a creation of housing, medical and education products. Which makes sense because if they are going to be selling hundreds of units in coming years who better to take advantage of this than its own savers.

The education product will be designed to help members upgrade their skills and hopefully become more productive. Increasing productivity is a way to raise incomes.

This is not a story about NSSF. This is a story about what happens when we aggregate our resources. If in 1985, at its inception you had said NSSF would be the biggest financial institution three decades down the road you would have been laughed out of this town....

This is a story too about how we underestimate the power of our small sums and what they can achieve and what they promise when they are brought together.

The biggest pension fund in the world is Japan’s  Government Pension Investment Fund (GPIF), which has $1.42 trillion under management.

To put this in perspective this is almost 30 percent of  Japan’s GDP. Government pensions in Japan.

NRM CHAOS, HOW DID IT GET TO THIS?

In recent weeks the ruling National Resistance Movement (NRM) went to the country to choose its flag bearers for next years local and general elections.

It was a massive undertaking that covered almost 70,000 villages, saw hundreds present themselves to represent the NRM and thousands more turn up to vote.

Unfortunately, maybe unsurprisingly, violence, intimidation and other underhanded manoeuvres were reported, to leave enough people with a bad taste in the mouth. More on that later.

When the NRA/M marched into Kampala in January 1986, the totality of its membership was probably not more than 20,000, 34 years later it is a mass party with representation in every nick and cranny of this country.

Its detractors have argued that the party used state resources to set up the Resistance Council (RC) system, in the 20 years while the country was under the Movement system, which they then commandeered with the return to multiparty democracy in 2006.

The NRM on their part argue that they didn’t hijack the existing local government structures, but it is not their fault that most of the people manning those posts were sympathisers of the Movement anyway. A hard argument to counter.

Truth also is that that network is not very active through out the year and is activated during polls. Which means

"it comes as a surprise to most when the NRM comes out to play, even during these Covid times...

. Which is a bit of a relief to NRM planners because the cost of sustaining that network year-after-year would be astronomical. 

The NRM insist that they are a mass party. Judged against their rivals this not a hard claim to sustain. Despite the challenges that come with this and the financial constraints of it, the NRM insists on universal sufferage in choosing its flag bearers. Other parties prefer a collegiate system where delegates decide for the masses. The attraction for this is its cheaper and less messier.

Which brings us back to why the chaos in the NRM primaries. The NRM insist that overall the process went on much better than was depicted by the few incidents that hit the headlines.

But you know what they say,

when perception comes up against fact, perception wins all the time....

But even if we are to take them at their word, the little of the chaos we saw was chilling in its viciousness and worrying if it became more widespread. And the question persisted, “What is it about politics that makes it a do or die exercise?”

I think it is a case of the NRM being a victim of its own success. A victim, because this kind of chaos can get out of hand, engulf and bring down the NRM.

The success is that they have been able to build this amorphous organisation, literally from scratch. The challenge for the NRM is how does it manage this organisation to not only retain power but continue to be a political force regardless of whether the current champions are around or not.

"The internal frictions, represented by the chaos, need to be managed, brought to a reasonable conclusion so that the NRM remains a coherent force ready to take on all comers in the coming elections....

The life-or-death nature of the NRM primaries, unlikely to be replicated by any other party, is down to two major factors.

To begin with in many constituencies, becoming the NRM flag bearer almost guarantees onward election into parliament. As a result candidates invest a lot of money to get on the NRM ticket, rumour has it as much as sh500m, so a loss is the same as seeing your hard earned cash going up in flames. There are few Ugandans who would shrug off a sh500m loss.

To aggravate the situation, the way candidates raise this money through debt – often secured against family property, raises the stakes. A loss can mean a straight line drop into abject poverty...

Secondly and more worrying is that for many candidates, politics is the fall back position after they have become unemployable or have failed in business. The promise of a big salary and the leverage to extract money from the state – real or imagined, that comes with being an MP is a big attraction for these types. 

This combination makes for a combustible mix that understandably leads to the violence we see around.

Maybe the redeeming factor of the NRM primaries was that voting was by lining up, reducing the scope for vote rigging and other shenanigans. It was testament to the desperation of the time that some nevertheless tried to rig the vote anyway.

Looking to the future,  the NRM will do well to invest in dispute resolution within its ranks as a long term strategy to  retain party coherence. It is unlikely that the thirst for the NRM ticket will reduce in the next 10 years so somebody needs to be thinking about this seriously and systematically.

 

WHY YOUR RATE OF SAVINGS IS IMPORTANT

In the last week I had a back to the past moment – actually three. We had three full days without power, unheard of in the last ten years or so.

In classic case of turning lemons into lemonades a friend sent me this book, “The psychology of money” by Morgan Housel.

A long time ago I wondered, why don’t the rich tell the rest of us how to make money, some easy to use formula and we get on with it? Either they are hiding something or this making money thing is not for all of us. I wasn’t entirely wrong on both counts.

"Apart from thieves and flukers – lottery winners, the process of making money requires a certain kind of orientation of the mind....

It is less productive for someone who has made money through honest effort, to try and bring others up to speed on the process. Besides they know that a lot of what they know,  can not be taught but one has to experience it before they can appreciate let alone understand it.

It is not for everybody because not everybody can achieve the mental reorientation that many of these money makers have achieved in order to make money. Because, have no doubt, money making is not necessarily an inherent skill, it is a learnt skill that takes years of practice.

The book is worth its weight in gold with lessons flowing off every page. But the two that struck home for me were one, that making money and keeping money are different skills. Learning to make the money is easier than learning to keep it. Which explains why we have had so many people coming, flashing their money around and disappearing as quickly as they came. 

At this point the author made his own distinction between being rich and being wealthy. That richness shows and often entails a high spending lifestyle demonstrated by the clothes, cars, houses and instagram documented holidays. Wealth on the other hand is quiet, can even be invisible to the undiscerning eye and is normally demonstrated in bank balances and accumulation of income earning assets.

"To use an analogy being rich is like coins which make a lot of commotion when they drop disproportionate to what they can buy, who has ever heard a sh50,000 note fall?...

The author also made the point that there are thousands of ways of making money but only one way of keeping it – exercising frugality and paranoia. So you have to respect the people who make money and continue to grow it but can also make the mental shift to keep most of what they made. That’s what leads to inter generational wealth.

I hear them already, what’s the point of making money if you can’t enjoy it, they ask shaking their heads. We need to get away from the subsistence mentality that we eat all we make, there is a place for ensuring that the basics are catered for generations to come. Its a hard thing to wrap our minds around for a pre-industrial society like ourselves but the sooner we get with the program the better for us and our progeny.

“It is ingrained in us that to have money to spend money that we don’t get to see the restraint it takes to actually be wealthy,” the author wrote.

The second idea I took away from the book is that a person, community’s or country’s chances of achieving wealth is strongly related to their rate of saving. He makes the point that there are low income earners who become wealthy but not all high income earners can do the same.

And even more interesting is that while it is easier to save towards a goal, we need to save for savings sake. The logic is simple. Saving allows you to accumulate capital for future investment. We wonder how the Asians thrive. We have worked out that they probably have cheaper pools of capital, we haven’t made the connection between their frugal living and this cheaper capital. Now imagine when a whole society saves diligently and pool their resources together, to supporting each others business?

Saving is practice in delayed gratification. This is important in helping in the second part of wealth creation which is keeping more of the money you make. If you can save you can restrain your baser instincts, which would otherwise prompt you into a life of high living and arrivalism....

And as a  parting thought,  “Saving money is the gap between our ego and your income, and wealth is what you don’t see.”

FORGET THE MONEY, FOCUS

There is a book – “The Startup J-Curve” by Howard Love,  that is recommended reading for every businessman or anyone going into business.

In the book the author likens the path from start up to success using a J-Curve.

On start up most businesses go into “The valley of death” – the downward swoop of the j-curve, where revenues if any, are eaten by start up costs and is where most businesses flounder and die. One reason many business die here is because before their business model has ben shown to work, they are off investing in other things which prove a constant drain on much needed resources giving the initial enterprise a chance to survive.

When the business hits break even – on the other end of the curve opposite the beginning of the J, it is assumed the business model is workable and the businessman starts more than covering his costs, he is profitable and cash starts to flow. It is critical as a business that you recognise this point to prevent you from making questionable investment decisions before it.

I imagine the relief of surviving the valley of death and the excitement of the money flowing in does a lot of damage to businessmen’s brain. Because it is at this point that they start showing off or investing in questionable endeavours that soon lead to the company’s demise.

The other day I saw a financial services business, that is cash rich – high equity and little debt. They have now branched out of financial services into car washing, restaurant business and are actively looking further afield.

 A lot of money does that to people, even the brightest of us.

Compare and contrast this with another business which sold out a few years ago, making its owners millions of US dollars richer.

This business too went through its valley of death, when they came out the other side they didn’t try to be clever they invested in the same business, expanding their production at first before vertically integrating their own value chain –  animal breeding, pesticides, feeds and meat processing. They did not stray out of their circle of competence.

Billionaire investor

Warren Buffett advises that you need not only know your core competence but even more important, the limits of that competence.

So for instance if your business is stationary, when you emerge on the other side of the curve you may consider investing in paper making, printing or publishing. It would be full hardy for you to go into the taxi business or food processing, straying far away from your core business or competence.

This mistake is not unique to Ugandan businesses it’s the story behind failures of companies all overt he world.

A businessman friend of mine told me that in fact in some multinationals insist that their subsidiaries are financed by debt, because this instills internal discipline on the management. The banks want to be paid whatever the state of the business so businessmen are keen to control costs. 

But when there is too much equity and retained earnings financing the business, this is when the hair brained ideas start jumping out of the wood work.

The shopkeeper opens a garage or the farmer decides to go into commercial real estate or the telephone seller decides to try his hand at the coffee shop business.

Its what money does to us.

So to the financial services company it may be wise to shut down their car wash business and restaurant and expand into hire-purchase, asset leasing and even build up their capacity towards mortgage lending. These are all avenues of expansion that will not cost them much in the learning curve and have a better chance of at least retaining their shareholder’s value. 

But we know what it is too. We want to be seen to be making money, we want to look out the window and point at this or that business, this or that building or this or that car as proof that we are making money.

I saw a saying the other day that went, don’t tell other people your problems 80 percent of them don’t care and the other 20 percent are happy you have the problems. For money it can be paraphrased, 80 percent don’t care you are making money and the other 20 percent are resentful of your success. Progress in silence.

The moral of the lesson is that its not about looking like you are making money but making money. There is a big difference.

WHEN YOU WANT TO SELL YOUR BUSINESS

Sometime last year a friend offered me a share of his business.

The business provides consultancy services. He wanted to sell a 25 percent share in it for sh25million shillings.

I didn’t have the money neither was I interested in the business, but I was intrigued, I wanted to know more.

The accountants know how to do this better but I wanted to get a sense of whether the price asked was fair.

I thought I needed to have a good idea of his revenues, his profitability and his balance sheet.

He had a rough idea of his revenues – about sh115m in 2018, but this were not audited accounts and I didn’t get a sense that he had recorded all his income. He is the kind of guy you don’t pay cash on a Friday afternoon.

If his revenues were sketchy, his costs were all over the place and determining the company’s profitability was a gamble. His balance sheet? What is that? 

Without those three metrics I found it hard to even begin to determine whether sh25m was a fair price or not. It was also my excuse to decline the offer.

I didn’t think he took it well at the time, but last week almost a year later he came back. This time he wanted sh25m for 10% of the business.

This time it was a Whatsapp message and he attached his financials which went back three years.

His revenues last year stood at sh150m from which he had made sh32m profit and from his balance sheet I saw the net asset value of his consultancy was just over sh10m – though there was the worrying element of loans to directors – it was a sole proprietorship, which I thought gave it a more flattering valuation than it deserved.

I still wouldn’t buy it, but he was a step ahead of many businessmen in our town. I am looking forward to seeing his results in five years time.

We commit a lot of time and resources to our businesses, be it the corner shop/salon or airtime duka or the cloth and shoe selling business or the farm in the village.

But we don’t know how much we spend on our businesses and even whether we are earning anything from it. In a part of our brains the money that goes in is as if to charity and the daily cashflows are a sign we are doing well. 

We console ourselves by thinking at least we are doing something with our money, not like the neighbour who squanders all his money on booze, bitches and beaches.

If we look closely while you slog and agonise with no real return – probably digging yourself further in the hole, your drunken neighbour is at least having a blast when he does.

I think we should start our businesses with the idea of selling sometime in the future rather than to add another income stream to our paycheck.

Looks like a simple distinction but will totally change how we approach the business.

"If your business is just to earn you more money you will not make the necessary investments that will ensure its sustainability...

and you will be casual about record keeping, denying yourself the feedback loop that will allow you to do more of what is working and less of what is not.

But if you are going to sell the business one day, maximising revenues and therefore marketing will be important, minimising costs and therefore investing in an accountant or accounting systems will be critical and growing the company value and therefore investing the surpluses judiciously will be top of your agenda.

The man on the street thinks that the income statement is where the action is – that if we are selling more and more we are doing well.

The more astute businessman knows that what you keep of what you earn – assets, more than your income, is what will ensure growth and the sustainability of the business.

And when the buyers come knocking, while they will be buying a business model, they will gain some comfort by knowing the company has a sold asset base and little or managable debt that does not erode the company’s value.

"Our average business, which has a less than one in nine chance in surviving to its fifth birthday, collapse more for lack of internal discipline than that the market has gone against them...

Thankfully I was not my friend’s last resort for money. And he didn’t have to sell a portion of his business after all.

Because of his improved record keeping -- he still needs audited accounts, he was able to get a bank overdraft from his bank which has allowed him to not only keep in business but also opened his eyes to all the possibilities his bank has to offer in support of his business.

His mindset has now totally changed,

he s thinking from his company’s balance sheet rather than from the income statement. He is now in a marathon and not a sprint...

He is still a one man shop but that may very well change, he thinks, once covid-19 is out of the way. With that change his business has a better chance of seeing its fifth birthday and beyond.

KATO LUBWAMA AND THE GYMNASTICS OF GETTING INTO PARLIAMENT

Last week a video of the honorable Kato Lubwama aired where, in Luganda he said something to the effect that ““I have always told my people in Rubaga, I asked them to vote for me to ‘eat’. For now, I am asking them to vote for me and we ‘eat’ together.”

He went on to say that he was a brand in himself and didn’t have to ride on the coat tails of any party, if anything the parties should be lining up behind him.

I am sure Kato Lubwama had  a lot more to tell the good people of Rubaga South to win in 2016, but the aforementioned soundbites are what he is remembered for.

People in polite society clicked their tongues and shook their heads in bewilderment, more so when he won the seat.

I have met the honourable member of parliament once, before he had ascended to the august house, jokes were popping out of his ears all through lunch.

His humour was not of the thigh-slapping brand but the kind that requires you pay attention and seat still for the punchline. I wondered at the time how he could be a hit in downtown Kampala, but then later it occurred to me that he had actually tailored his humour for the people we were dining with, corporate types from a leading beverages company.

It takes intelligence to do that. Tailoring the message to the audience is a thing any self respecting politician needs to get a grip of.

So while I laughed with everybody else when I heard his campaign pitch in 2016, I paused to think when he actually won the seat.

Have you ever been in front of an audience and tried to draw a laugh? It is not easy. Among other things you need to know the audience, sensitive to the times and be keenly aware of ebb and flow of its mood. Lubwama has been doing this for years in the theaters that his constituents patronise.

So you dismiss Lubwama as a politician to your own detriment.

But it says interesting things not only about the voters of Rubaga South, at least the ones who swept Lubwama into the house, but all voters in Uganda.

There are people mostly the elite who want our elections to be “issue based”. By this they mean it should be based on issues of service delivery, human rights, economics and all those high sounding terms you come into contact with at higher levels of schooling.

But for the majority of the population they are thinking at a very granular level their issues are teacher absenteeism, lack of medicines at the health center and the dust on their roads. And also,

I suspect, elections are also a chance to stick a finger in the eye of their nose-in-the-air cousins who went to school or are from Kampala, whichever applies...

The Lubwama story reminds me of an analogy of leadership I came across years ago. 

It was a cartoon with two men looking down into the valley at a big mass of people walking, “There go my people. Let me go ask them where they are going so I can lead them there,” one of the onlookers told his friend.

I suspect Lubwama is the embodiment of this type of leadership and you cant argue with success.

The leadership gurus will argue that there are major shortcomings to this kind of leadership, that “What is popular is not always right and what is right is not always popular.”

"Leadership they argue is about understanding not only your people’s aspirations but also  selling them better or higher alternatives, which may be at the cost of great patience and sacrifice and offering to help the reach the promised land...

Some of our finest leaders understand their responsibility in this way, but are realistic enough to know they need to play to the gallery and once in power push the greater good they have envisaged for their people.

The danger is always one of managing expectations.

While you are laying the foundation for the long term vision how do you respond to your constituents when you are not at every funeral or the road remains dusty or running water continues to be a pipe dream (pun intended)?

So spare a thought for our politicians – a group ordinarily difficult to sympathise with, at the hoops they are having to jump through to catch their constituents’ eye, while trying to hang on to the last of their principles. 

Maybe they are better off laying their true motives on the table like Lubwama and hoping for the best.

MORE EVIDENCE THAT CENTRAL BANKS NEED TO BE INSULATED FROM POLITICS

Recently Zambian President Edgar Chungwa Lungu sacked the govenor of the Zambian central bank  Denny Kalyalya ostensibly because he refused to turning on the money printing presses.

With economic growth in reverse, inflation  threaten to gallop out of control and an election coming last year Lungu’s need for cash.

He has brought in a more pliable central bank boss Christopher Mvunga and is now probably more confident of retaining his seat in the next polls.

His actions are more surprising given the experience of neighbour Zimbabwe, a once proud economy that is now scrambling, with little success, to get off its knees.

Former President Robert Mugabe in a bid to hung on to power gutted the country’s productive sectors and resorted to printing money at a whim. The net effect has been, among other things, that Zimbabwe, the once food basket of the region, now needs food aid to feed its people and has gained notoriety,  a few years ago for experiencing hyper inflation the like of which had never been seen anywhere before.

Now Lungu is threatening to do the same.

Central banks’ major role is to aid price stability. When prices fluctuate wildly it is difficult for producers to plan or save which tends to discourage investment and hence development.

Politicians are all about getting into power and staying there once they have attained it. Unfortunately, left to their own devices they will do this by whatever means necessary.

Your politician, unrestrained by strong institutions or traditions would rather sink the economy if that will serve to keep them in power longer.

In the politicians’ mind their own survival now is more important than the long term sustainability of their countries.

We have seen it before.

"Politicians when it suits them put their heads in the sand and pretend as if the laws of economics, demand and supply can be suspended or expunged altogether in the service of their political ambitions....

Former President Hugo Chavez, whose country Venezuela has the largest known oil reserves of any country, thought he could be play the market.

When oil hit record levels -- $100+ a barrel a decade or so ago, he thought this was a permanent situation expanding government, poisoning the environment for business and set himself as a year around Father Christmas.

However, oil prices collapsed to below $30 a barrel constraining his ability to be everybody’s favourite uncle. The economy then went into a tailspin to a point that people are bathing in the streets, seeing as piped water is gone and diseases like Malaria, eradicated decades ago are back with a vengeance.

Norway went the complete opposite, socking away billions of dollars in oil revenues in their sovereign fund. They beat back the populists who called for a higher amount to be drawn from the fund – they restricted themselves to withdrawing not more than 4% of the national budget. As a result they have more than enough surplus to see them ride much easier than others during this Corona crisis.

Critics of disciplined economics say that the laws of economics are not the natural order and are conspiracy perpetuated by the Bretton Woods institutions, intended to shackle the lesser developed economies.

They often cloak these arguments in a nationalism, diverting blame from themselves onto foreigners.

"They say nationalism is the last resort of the scoundrel. But even nationalism is no match for the realities of supply and demand...

And that is why public enterprises fail all over the world and even when they function they do not do that optimally. Those handful that thrive are the exception that justify the rule.

One does not have to be a prophet to see that Lungu is leading his country down a dangerous path. The resulting low growth, hyper inflation and increased poverty will call for very unpopular policies – cuts in public spending, privatisation and liberalisation of the economy, which will then be blamed on the World Bank and International Monetary Fund (IMF).

Running a disciplined economy means one can not have all he wants, a country will be forced to cut its coat according to its cloth. If discipline is maintained economic growth can follow and a general improvement in living standards of the population.

Populist economic measure may cause the good times to roll, but only for a short while, before all hell breaks loose.

"Mugabe run the white farmers and industrialists out of town and distributed the land to his supporters. Their was rejoicing for a while as well as kudos from armchair revolutionaries on the continent. This has since turned to wailing and gnashing of teeth by the everyday Zimbabwean and a deafening silence from his cheering section on the continent....

Such advice will likely fall of deaf ears, Lungu’s political ambition will not be denied.