PRIVATISATION: THE GIFT THAT KEEPS GIVING

Last week two of Uganda’s most successful privatization companies, Stanbic bank and power distributor Umeme, released their 2023 results.

 A bit of background on both to put this into context.

In the heat of the privatization process in the 1990s it was clear that two companies had to be privatized if they were to provide the ripple effect the economy badly needed – Uganda Commercial Bank (UCB) and Uganda Electricity Board (UEB)...

UCB was the biggest bank with more than 100 branches and controlling more than 80 percent of deposits. This dominance had a net negative effect on the industry and the economy, as UCB was inefficient – it took up to three months to cash check from one branch to another and was seating on a mountain of bad debt that threatened to bring the whole sector down and the economy with it.

Detractors of the bank’s eventual sale argue that by the time of its sale it was profitable – it made sh19b in its last year, but what they neglect to say is that most, if not all, of the income came from treasury bills and bonds. Government had forbidden the bank from lending because every time they did, the stock of bad loans only increased.

Any fool can be profitable by buying government paper, but that is not the role of a commercial bank. A good commercial bank collects deposits and passes them on as loans to people who need capital. This intermediary role is critical in growing any economy.

Since UCB’s sale to Stanbic in 2002, the South African based bank has exceeded the wildest dreams of the government or its new owners.

Stanbic reported that revenues were up last year to sh1.3 trillion up from sh1.1trillioni n 2022. Profits followed suit coming in at sh421b from sh366b the previous year.

But two things stood out for me from last week’s results and in my mind cement the benefits of the banks privatisation.

To begin with bank’s lending to customers stood at sh4.2trillion, made possible in no small part to sh6.3trillion in customer deposits the bank holds. In the year Stanbic took over the bank had sh500b in assets against total liabilities of sh470.3b.

"No doubt a lot of this growth comes from momentum, the economy has averaged six percent growth over the last three decades, but you have to give the managers at Stanbic some credit because their asset base has shown a compounded average growth of aboutr 15 percent since 2002...

The second thing that stood out for me is that the bank paid the tax man sh132b. This is important because the government sold the bank for $20m or sh76b at today’s exchange rate. Going by the current trajectory of the banks growth, in five years they will be paying the equivalent of two UCBs in taxes.

These two, that they are lending multiples of what UCB did and paying increasingly more tax, seal the deal for me. This is before you go into how many people they employ, the businesses they have supported and grown over the years.

I shudder to think what the economy would be like if UCB existed with all its deficiencies to this day. Would it have been turned around? Maybe. We had all the qualified human resource at the time to do it—it was not run down by village bumpkins. But it would take time – I doubt we would have sorted ourselves by now, time we did not have then or now.

 On its part Umeme took over the distribution arm of the former UEB and its results have been just as amazing, if not more so.

Connections to the grid are touching two million accounts from less than 300,000 when they took over the concession. It helps of course that power generation capacity is three times more at about 1400MW than when they took over, but the efficiencies they have brought to the sector are not to be huffed at. They collect almost all their billings and have reduced technical losses by more than half to the current 16.2 percent.

In addition, they have joined mobile phone company MTN – another poster boy of the liberalization process, in earning revenues of more than sh2trillion and have made a few Ugandans wealthier by sharing in their success on the Uganda Securities Exchange (USE), not unlike Stanbic.

And finally over the last decade alone they have invested nearly two trillion shillings or $526m in rehabilitation and expansion of the network.

And that last point was a major consideration for privatization. Because not only were these companies hemorrhaging money, government  then or now, did not have the money to make the necessary investments to see these companies achieve their full potential.

By bringing in credible investors with access to the deep pockets of the west, government was able to hit two birds with one stone; one, expand services to more people and two, get paid while doing it.

Have the investors of Stanbic and Umeme made money along the way? Of course, which is as it should be. It was the best of both worlds. By aligning foreign capital with our strategic goals – strengthening the financial sector and expand electricity coverage respectively, the people were the winners.

 

THE USE, UGANDA’S OPEN SECRET

If you are to get a quick idea of a person’s financial health, look at how they spend their money.

There are only two ways to spend your money, either you consume/eat it or you invest it. Consumption needs no definition, but investing means committing money with the hope of a return in the future. The returns on investment can come as cash-on-cash returns – you earn cash from the investment or as capital gains – you invest in something and its price rises after you have invested.

Going by this, your financial health is dictated by the balance of how you spend your money. If you consume more than you invest you are not very healthy financially and the opposite is true. Essentially

your financial health is determined by how much of how much you earn you keep.

Shifting the balance is a process done over time and often begins with a shift in mindset, unless you are forced to save like many workers do with the National Social Security Fund (NSSF) in Uganda.

But many of us are at loss on what to invest in. As a result of this confusion, we follow the bandwagon into farming, real estate or business. For those who can not muster the monies to go into the above, they fall back on eating their kamoney, until they get a “big deal”.

Is it any wonder that corruption is in our DNA?  In our endevour to hasten the big deal we end up dipping our fingers in the till.

For the everyday man there is a way to sock away small sums, which over time can grow into huge investments.

The answer is the Uganda Securities Exchange (USE).

At the USE for as little as sh10,000 – National Insurance Corporation (NIC) shares are selling for sh6.5, one can begin on their investment journey, while they wait for the big deal.

They say the best time to start investing was 20 years ago and the next best time is now...

But don’t take my word for it.

If you invested sh10,000 in each of the 11 locally listed shares on 2 January last year, by year end you would have registered a return of sh4,400 according to share monitoring firm Simply Wallstreet. This was in dividends – a share of company profits,  and share price increases (capital gains).

While that may not be enough to whet your appetite, the devil is in the detail.

Of the 11 companies listed on the USE, all but three showed a positive return last year.

Of the eight winners, five of them showed double digit returns, with the lowest being Bank of Baroda at about 19 percent by the end of November and the highest being Stanbic Bank at about 73 percent, according to investment bankers Crested Capital. And among these winners, three of them their dividends accounted for between 25 and 50 percent of the gains.

Interestingly for two counters – MTN and Uganda Clays despite a slide in prices, the dividend payouts more than compensated for that to show a positive total return at year end.

Basically, that you can still win on the exchange even if the share prices dip, if the company is fundamentally sound and can afford a dividend payout...

In an ideal world if a company is doing well – revenues, profits and net asset value are growing, the share prices should follow suit. It doesn’t always work that way especially on the USE where trading is very thin – up to November turnover was only sh61b, with one counter Umeme accounting for almost half of this volume.

Trading is thin because most shares are held by institutional investors, who often buy to hold rather than trade. As a result price movements across the market are subdued.

So, while you can get some credible dividend yields – how much dividend you get compared to what you paid, the history of the USE is that it is rather sleepy in terms of price movements.

But there in lies a huge opportunity for long term players. If company profitability continues to grow while prices are indifferent, it means the shares are becoming increasingly good value for money.

Imagine you bought your house at sh100m ten years ago and were initially charging one million shillings a month in rent but ten years later rent has doubled to sh2m, the value of your house has gone up, at least twice, beyond the initial sh100m you bought it at. Even if no one knows until you decide to sell.

Before telecom company Airtel started trading at the end of the year, while profitability of the listed companies was up 24 percent, prices on average had only moved up  6 percent. Meaning prices had some way to catch up to earnings.

It is a no brainer. As long as companies’ earnings continue to outstrip price movements, it’s a mathematical certainty that somewhere down the line prices will begin to rise to reflect this reality. Next week? Next month? Nest year? Who knows but it will.

Historically the best returns for your money come from owning businesses. The USE is offering pieces of some of the best run companies in Uganda and the region – there are seven Kenyan companies selling shares on the USE, for a few shillings.

And we have not even talked about the treasury bonds and bills trading on the exchange with double digit returns.

So why isn’t the above not widely known? Wealth is silent.

THE FUTURE IS HERE. ONLY JUST.

Last week two of the region’s biggest telecos released their annual results. In the case of MTN it was the release of their annual report.

Kenya’s Safaricom continues to post jaw dropping numbers. The company, the biggest in the region, posted revenues of kshs311b (sh8.5trillion), net profit of Ksh62b (sh1.7trillion), this on the back of capital expenditures of Ksh96b(sh2.6trillion) most of this Ksh55b directed to setting up their new operation in Ethiopia.

But my favourite Safaricom numbers are those of their mobile money platform, M-Pesa. 

First off, every second 856 transactions are done over M-Pesa, these include transfers, withdrawals, business payments, remittances from abroad and lending. The network has a capacity to do 2600 transactions a second.

Think about the efficiency this brings to the Kenyan business environment. That’s why everybody from the lowly vendor on the street to businesses carry out transactions with M-Pesa. According to Safaricom 32 million Kenyans have an Mpesa account and three million businesses are signed up as merchants.

With that kind of network, it should probably come as no surprise that Kshs36trillion (one quadrillion Uganda shillings) flowed through it last year. To give some perspective this figure is about ten times the amount transacted on the MTN mobile money platform last year or just over half the GDP of Uganda.

And because Kenyans are so plugged into M-Pesa, withdrawals from the system is the only service not growing in double digits. Why withdraw when you can pay for everything off the phone?

Also interesting is that $20m in remittances from abroad came on the M-Pesa network and going by last year’s growth, this figure is set to double every five years, probably faster as the service gains traction.

MTN, the only network whose full results are publicly available, are beginning to follow the trend. In 2021 was the first time in the company’s history that revenues from voice slid below 50 percent of total revenues. A trend that continued last year but in addition revenues from voice came in less than in 2021, the first-time voice revenues have fallen year-on-year.

Meanwhile revenues from both data and fintech grew by 24 percent and 25 percent respectively, going by this, revenues will be doubling every three years, which further means revenues from data and fintech will each surpass voice revenues by 2026...

Unlike in the story books, in real life revolutions take time to happen.

This column has argued for a long time that one of the major challenges of our economy is that we do not aggregate our resources, be they land, labour or capital, into meaningful wholes that can then benefit the greater society.

For the longest time we have been gritting our teeth on how to get more Ugandans into the formal financial sector. This is important because all that money that is lying idle in our wallets and under our mattresses, if banked can be used to finance people who need the money.

And it is quite significant by some estimates more than half the money in circulation is lying around doing nothing.

With the introduction of agency banking the banks have managed to extend their reach, more than they have since independence. But now imagine that the 25 million or so mobile phones can extend this reach even further.

In the 14 years since mobile money was introduced to this country between them MTN and Airtel reported about two trillion shillings in deposits, at the end of last year. In MTN’s case assuming they maintain 25 percent growth in deposits they will reach Stanbic Bank’s current six trillion shillings by 2030...

Like in Kenya where twice the GDP of the country was transacted over M-Pesa last year, mobile money will soon be major component of our GDP.

By first mopping up our small monies and then reducing the friction that comes with using cash, the growth of mobile money is set to bring greater efficiencies to the economy.

I remember in the 1990s reading an article about a town in the UK that was going cashless. The story was that the town would issue cards to everybody, essentially debit cards and these would be accepted by all traders.  At the time we had only one Atm in the country, at Barclays Bank, Kampala Road and it would take stretch of imagination to imagine cashless society here.

It is still early days, but the people at MTN Momo are grappling with the challenge increasing transactions using their platform, they estimated less than a million of 11 million subscribers actually transact over the phone. But a 90 percent growth in transactions was reported last year, helped by the tripling of merchants to 173,000 last year from 53,000 in 2021.

In addition, they are looking to revamp their overdraft offering to go alongside their small loan product.

These two initiatives will not only digitize money but also provide a treasure trove of data can be mined to determine what works and what doesn’t in issues such as poverty eradication programs.

Now we do not have to go all the way to the UK – visa hustles and all, to see how a truly cashless society will look like.

A few years ago while in Mombasa I had to get an uber in the morning, when it was time to pay for my fare, the driver had no change.

Annoyed I asked him how he can start the day without change, “And you how can you not be on M-Pesa?” was his swift reply.

 

 

 

 

MTN AND THE FUTURE OF THE ECONOMY

Last week telecom company MTN released its 2022 results.

Revenues, profit were up and for investors in the company they will be paying out their final dividend for the year, which will have seen shareholders pocket a total of sh15.9 per share for 2022.

Everybody has their favourite numbers, I am always interested to see how the data and fintech subscribers and revenues are moving, especially against voice numbers.

First of all in 2021, it was the first time, that revenues from voice – what we pay to call, fell below half the companies total revenues. While these grew by 3.6 percent, data and mobile money revenues grew in double digits upsetting the status quo.

"In 2022 data and fintech revenues continue to gallop ahead while voice revenues slipped 0.5 percent, the first time in the company’s history that voice revenues did not grow...

The writing is on the wall voice is out and data and fintech are in.

It reminds me of former Safaricom CEO Bobby Collymore’s prediction when he took over the reins at the Kenyan telecom firm, that one day voice will be an add on, given away for free, that the action will be in data and fintech services. I could not relate at the time but it is coming to pass every day.

When Airtel lists its shares – they were supposed to do so by July last year, we will be able to tell whether this is an industrywide trend or restricted to MTN. I bet it shows across the industry.

This is an important, even critical, to the development for the economy.

Beyond the ever-increasing access to information that come with improved and more widespread data services is the fact that credible business transactions can be done quickly and safely using data.

The spoken word has its limitations. Information transmitted via this medium – unless recorded, can be dismissed or refuted in the future. The written word is more easily verifiable, hence the need for written contracts.

While its possible that most of our data is consumed by entertainment, it just as likely that its use in business is expanding.

"The efficiencies to the whole economy will creep up on us, because it is easy to take these new services for granted, but let us look back to an earlier time.

There was a time when there when we did not have mobile phones ( for those born after 2000, just believe it) and the country was good for about 50,000 landlines, many of which were down anyway.

So things we take for granted now like making and confirming appointments, deliveries, calling a cab these were all none existent activities. How did we go about these things? We did not. Booking appointments was done in person or by mail (if you had a post office box), deliveries? How! And you walked to where the special hires (do you remember those guys) to get a ride. The explosion in boda-bodas has been largely facilitated by the mobile phone. There were no bodas, expect maybe at the border.

Efficiency is the ability to do more work per unit of input. The input may be time or money or effort. So we are now doing more work than we used to because we can communicate better.

Taken to the next logical conclusion is the rise of mobile money or fintech as a sector. The efficiencies here are obvious ( at least to me). To give my friend or relatives money I had to meet them in person, send someone with their money or they send someone to pick the money Now for the cost of less than a return taxi fare I can move money around at the speed of light and the other minutes, which would have been spent going to and fro can be used for something else.

Some stoneagers would rather stand in line at the bank to pay their bills than pay the transaction fees charged when they pay online. They cannot be helped.

And these our most basic transactions in a day scale it up now to companies, schools and traders and the numbers begin to bogle.

In June last year it was reported that the total number of mobile money transaction stood at sh145trillion in the first six month so last year. To put this in perspective the national budget was about sh48trillion for the whole of 2021/22.

"By definition when money moves it moves to where is needed from where it less needed, broadly speaking. These trillions of monies a large part of it, was probably doing nothing under our mattress, in our socks and bras. It has taken mobile money companies to liberate them from those dark, smelly corners into the light of day...

MTN reported that last year fintech users grew about ten percent to 11 million users. Assuming they show the same rate of growth (my feeling is it will actually accelerate) we will be doubling mobile money users ever seven years. What seemed like a pipe dream a few years ago, becoming a cashless society,  is happening before our very own eyes.

The more of us who are signed on to mobile money and other fintech applications the faster transactions will be done in the economy. And if time is money it follows that the economy will be the better for it.

It probably explains why you can turn up at a bar on a Monday night in Kampala and it seems like the weekend – money is flowing more efficiently boosting consumption and inevitably production.