I WANT TO KNOW, CAN NSSF MAINTAIN IT'S GROWTH MOMENTUM

Last week National Social Security Fund (NSSF) announced an interest rate 

of 11% on member savings, which was a let down from last year's record 

15% payout.

Ironically because of the way the Fund's portfolio is constructed with eight in

every ten shillings parked in fixed income assets, mostly government paper, 

when there are fears of inflation the rates go up and NSSF booms. But when 

inflationary pressures ease, as happened last year, yields fall and NSSF suffers.

Which is what happened this year as average yields on their paper fell to just 

above 15% from more than 17% the previous year.

Nevertheless the Fund's total assets grew 14% last year, a bit of a slow down 

because over the previous four years assets grew an average of almost 16% 

annually, but this number grew faster than the economy's six percent.

Asset growth is important because assets throw off the revenues, which are 

used to pay interest to members but more importantly grow the asset base. 

Ideally more assets lead to high income, ploughed back into acquiring more 

assets, which leads to higher income. A virtuous cycle.

The question for me as a saver is, can NSSF continue this double digit growth

into the future, or at least until when I am ready to cash out?

NSSF's principal duty is to ensure the safety of member savings, so it should 

come as no surprise that whereas they are planning to reduce their dependence 

on fixed income assets, these will remain a major component of their portfolio.

As long as inflation remains under control we can expect that this asset class 

will show a real return for members. Real return is a return higher than inflation rate.

The government budget is currently financed 50% by debt, mostly treasury bonds,

so one can assume that well into the future yields on this government paper will 

remain in double digits, as government looks to meet its commitments on 

infrastructure, health and education. Or until oil start gushing out of the 

Albertine region. People familiar with that situation are not holding their breaths.

Higher fixed income yields are however a double edged sword. When these 

are higher share prices tend to suffer, why should a fund manager try to be clever 

betting on the stock market when government is offering double digit returns?

But also for the companies, higher yields on government paper mean that lending 

rates also rise, constricting expansion and growth. No wonder share prices suffer.

But NSSF is committed to building its equity portfolio to 25% from its current 19% 

as it reduces its exposure in fixed income to 70%.

In long term this makes sense. In a growing economy like our own, the smart 

money is buying shares in companies which will ride on the economy's growth.

NSSF's sh11trillion asset base is the largest pool of patient capital we have in this 

country. With more than half of its savers under 30 years of age, It can therefore afford 

the luxury of buying shares and holding these for the long periods it takes for these 

to mature.

The challenge though is that, because of its size NSSF cant find enough sizeable 

equity investments to move its needle.

But it’s well set up to play a pivotal role in the aforementioned oil sector. NSSF like 

it did in relieving UK private equity firm, Actis of its stake in Umeme a few years ago, 

may very well find itself in the thick of things in contributing funds to the refinery and 

oil pipeline projects.

And finally the Fund plans that in the next decade it will bring at least 7000 housing 

units to the market, which alone will make it the biggest rea estate developer in Uganda. 

This aside from the tens of thousands of square meters in commercial space they will 

be bringing online during the same period.

Granted, the cash on cash returns on real estate are anemic, but these will serve 

to swell the Fund's asset base, which it can leverage to get involved in bigger and 

more lucrative deals here and abroad.

And how all these grandiose schemes be financed?

Over the last five years savings contributions have been growing at annual average of 

11.9% to last years sh1.2trillion. What this means that this figure will be doubling at least 

every six years.

This is before you talk about realised income which last year came in at sh1.25trillion 

and doubling every five years.

The proposed amendments to the law that governs NSSF if passed, will only strengthen 

its position to collect more and be more attractive to members by providing more than 

the existing products.

According to the annual report released last week the management of the fund is 

becoming more efficient as measured by cost to income ratio -- 1.28% and expectations 

are that this should improve as the Fund's processes become more automated and 

its own agency service kicks in.

However, in answering our question, will NSSF continue to grow, the one metric 

that then Fund is best placed to capitalise on is that, out of a 14 million workforce barely 

two million have any form of social security.

SUCCESSION PLANNING, THE ELEPHANT IN THE ROOM

My man Warren Buffett turned 89 at the end of August. Over the last 78 years of his life – he bought his first share at 11, he has been building Berkshire Hathaway. The record though, shows he has been CEO of the biggest financial services company in the world since 1970.

Judging by his age, his is a long story. A 900-page tome about his life – “The Snowball: Warren Buffett and the business of life” was published a few years ago and should be essential reading at all business schools and for all business leaders.

Over the last 20 or so years he has kept not a few millionaires on tenterhooks about what his succession plans are for the $350b company he has cobbled together over the last half century.

Last year he appointed two vice chairmen Gregory Abel and Ajit Jain, a signal to the market that he had narrowed it down to two candidates to take over in the event that he gets “hit by a bus”. By the way he co-chairs the company with Carlie Munger, who will turn 96 in January.

"Buffett has had the luxury of longevity to mull over who he will hand the baton to when the time comes. Most business owners unfortunately, have mortality knocking at their door much sooner....

In the last few weeks two of our own businessmen have come face to face with this reality. For one it has been forced upon him and into the public domain, with an embarrassing family court battle and for the other, through the planned commemoration of the 25^th anniversary of his flagship enterprise.

Mohan Kiwanuka, who has over the last 30 or so years built a conglomerate of his own, had to fight off a court challenge from his son, who believes that Kiwanuka might not be in charge of all his mental faculties and as a result, doing things detrimental to the health of his company. The court ruled against the son in a family drama that we might not have seen the end of.

Sikander Lalani on the other hand was able to reflect in the company of friends and family, at a dinner to commemorate a quarter century of his Roofings Ltd, about his life journey and his plans for his enterprise beyond himself. If there were any differences of opinion about his plans within his family, there were nowhere in evidence.

The challenge of passing it on is never an easy one because it is psychological more than anything.

We often start our businesses as a way to make a living for ourselves and family. Depending on how it goes, the business is either dead within five years or progresses along the exponential curve – all the ups and downs smoothed out mathematically, that characterizes all successful business.

But in the early days when survival is key, there is never any time to think about the long term. It is there that the seeds of eventual bad blood are sown...

The building of the company has been a labour of love for the founder. He lives and breathes his organization. Why things are done one way and not the other, is often buried deep in his subconscious, inaccessible to even the closest family or partners. The vision for the company is not only never shared, but is a moving target in the founder’s mind. And then to compound it all the founder has a desire that the enterprise should continue after him just the way it is, preferably run by a blood relative.

And who can blame them. We have the same challenges with our children.

We want them to grow up and complete our unfinished business. You want him to follow in your footsteps into medicine, the law or engineering, never mind that he has no inclination towards any of that. And when he finally puts his foot down and chooses his own path, it is a crisis.

They suggest that in bringing up our children we should focus on giving them the building blocks – education, health and values, that will help them navigate life away from our protective, the kids would say, domineering, ways. Easier said than done.

Same with a business, the easier said than done part especially. Owners from as early as possible should prepare the business for the day when it will not be theirs.

"This conscious, psychological separation may on one hand mean, the business owner may be unable to lay down his life for his life’s work, during those times when the business is suffering existential threats. During these times the only difference between its survival or death is the sheer will power of its founder...

On the other hand, the step back is what will allow the owner to deliberately build systems that will ensure the business’ continuity after himself and more importantly will throw up some capable leaders, credible candidates to run the company when the founder steps aside.

That still leaves the issue of its ownership. We refer back to Buffett.

Given his longevity and surprising good health, surprising because he lives on soda and burgers, his children who were never directly involved with the business have charted their own paths and their taking over the running of the business is not an option.

In the aforementioned account of his life, he intends to give away all his interest in the company to charity, mostly through The Bill & Melinda Gates foundation, which may very well end his family’s interest in the business.

This would be anathema to most founders who would like to see their legacy live on in their businesses controlled by their children.

Buffett’s example is a classic case of separating himself from the business and ironically gives it the best chance of living on well after he has stepped down.

"With interests from everything from insurance to railways, furniture to food, paint to private jet leasing Buffett has not been a hands on boss, focusing more on choosing and overseeing good managers who can work under minimum supervision...

So while it has been a challenge to finger his successor the business has been prepared to run without him for the last fifty years.

NSSF GEARING UP TO BE UGANDA'S BIGGEST REAL ESTATE DEVELOPER

The Lubowa housing estate works are in advanced stages and Temangalo housing estate, which will kick off in 2020 are among the real estate development projects that will vault NSSF into the biggest real estate developer in Uganda over the next ten years.

"Between these two projects more than 7000 housing units --- 2,417 in Lubowa and 5,000 in Temangalo, will be brought to market over the next decade. By the time of their completion amendments to the NSSF Act will make it possible for members to have first call on the houses.

During the just concluded Annual Members Meeting NSSF announced that the 326-unit first phase of the Lubowa estates was under away and set for completion by next year.

The project that will involve the development of ten phases, spread over ten years, is already occupying a significant amount of contracting capacity with four construction firms currently employed on the $400m project.

Real estate developement of the size that NSSF has planned can have a huge ripple effect throughout the economy.

Most of the inputs sand, bricks, cement and iron bars will be sourced locally as wil the labour on the various sites.

"With proposed amendments to the law governing NSSF, the Fund's managment will be able to structure real estate products for its members that will jumpstart the mortgage finance industry....

It has been suggested over the years that members would using their savings be able to put down the crucial down payment on a houseb, alowing them to get further financing to buy a house. NSSF in the two orojects has planned low cost to high cost housing to cater for the whoke spectrum of their membership.

Beyond it personally building NSSF is piloting an offtaker concept -- 160 housing units in Kyanja, where a private developer builds houses to the Fund's specification, on completion NSSF buys the units. This could alleviate another bottleneck dogging the real estate development industry -- a lack of funding for developers.

"Operating under the PPDA rules, which govern all public sector procurement rules NSSF  is bound to ensure that not less than 30 percent of the value of works -- sub contracting, suppliers, equipment and ither services are ringfenced for Ugandans and resident entities ensuring local players a fair shake in getting work....

Other developments in commercia buildings like what is most likeky going to be the Fund's signature debelopment The Pension towers, a three tower development in Nakasero set for completion in 2022 and others inthe oipeline will also make NSSF the largest commercial space deveoper.

With a total asset portfolio of sh11trillion which is on course to double by 2025 the Funds plan to keep its real estate holdings at five percent means they couldnhave real estate developments around the country of a trillion shilings up from the current sh600b.

NSSF BEAUTIFULLY SET UP FOR A DIASPORA WINDFALL

Last week National Social Security Fund (NSSF) reported despite strong head winds it would pay its members 11 percent on their savings, a bit of a let down given the previous year's 15 percent payout but stil better than anything in the market.

But what may have far reaching ramifications for the economy as a whole, is the new NSSF product Diaspora Connect which will help Ugandans abroad save with the Fund.

The fund estimates that Ugandans sent home $700m (sh2.5trillion) last year.

For now this product allows previous savers with the fund who are working abroad, to credit their accounts using their credit or debit cards.

This is important because under the proposed amendments to the NSSF law prople can voluntary sign up to NSSF -- currently you have to be an employee, and any voluntary contributions will be accessible at 45.

"The challenge for many Ugandans abroad is
finding credible investment vehicles to sock away their hard earned monies. Stories abound of workers abroad sending back funds to build houses or start businesses only to discover to their horror years later that their money has been swindled by their relatives or friends....

NSSF as an investment ticks many boxes a Ugandan in the diaspora would be looking for in order to park his or her money.

To begin with the NSSF is set up by law and whereas the savings are not explicitily guaranteed by government, savers have some recourse if things go belly up. There is better safety of capital for ones savings than with a family member who it maybe uncomfortable to pursue through the courts of law.

In addition since 2012/13 the Fund has paid members a real return -- interest higher than the rate of inflation. This means that their savings are not losing value over time.

NSSF is commited to paying two percentage points over and abovrbthe tennyear average inflation rate. The figue they were working with this year was 6.7 percent so making their target 8.7 percent.

There maybe one caveat on this depending on what the saver's future plans are. If the saver doesnt intend to return to the country but one day cash out his savings and repatriate them -- change to hard currency so he can access them abroad the exchnage losses may make this option unviable. However, if he intends to return home his money will still have retained if not grown in value.

The perennial shilling depreciation against major currencies may actually play in his favour, as over time he will be saving more shilling for the same amount of dollars sent.

"Looked at another those increased remittances may very well help support the shilling and minimise exchange losses as well....

NSSF is planning for a modest ten percent increase in those remittaces next year. They expect to collect sh770m. It is estmated that there are 1.5m Ugandans in the diaspora assuming half of them, 750,000 are working adults sending $100 annually the ensuing $75m would be a health addition to the money they already send home.

But that is an extremely conservative estimate given that they sent home $1.4b in 2017 or  about $2000 each for those estimated workers.

Some people have worked abroad for 10-, 20-, even 50 years and have nothingnto come back to, so they are signed to living the rest of their days abroad. If they had a credible investment vehicle back home they could retire to some level of comfort back home at much lower cost of living.

On a macro level these increasing amounts could very well help the economy.

Currently 79 percent of NSSF's portfolio is invested in fixed income securities, mostly government paper. This money is used to support the budget which is biased heavily towards infratsructure development, health and education, the building blovks of serious economies.

In addition the Fund places billions of shillings with commercial banks which onlend these to the private sector stimulating economic growth.

The figure of $1.4b is understated it is believed with a lot more money comingbthrough informal means to provide substinence for people at home. While useful fornthenconsumption of family and friends it would be more useful for the economy generally if it was channeled through more formal structures as NSSF provides.

NSSF ANNOUNCES 11PCT INTEREST ON MEMBER SAVINGS

KAMPALA – Uganda’s National Social Security Fund (NSSF) on Friday announced that it would pay out an 11 percent interest on members savings, down from last year’s 15 percent but above their commitment to pay more than the average inflation rate of the last 10 years.

In 2014/15 NSSF pledged to pay two percentage point s or above the 10-year average inflation rate. The average inflation rate for the last 10 years is 6.7 percent.

This is the lowest interest payment by the Fund since the 10 percent given to members in 2012.

The lower rate came as a result of unrealized losses on their equity holdings during the year exchange losses on their investments abroad.

The local and regional stock exchanges on which the Fund is heavily invested showed double digit losses in their performance last year. The Uganda Securities Exchange shed 10 percent of its value, the Nairobi Securities exchange 14 percent and the Dar es Salaam Stock Exchange 21 percent. NSSF reported a sh168.9b unrealized loss from its equity holdings.

NSSF’s regional and international portfolio also suffered a sh247b foreign exchange loss as the Uganda shilling uncharacteristically strengthen against the US dollar and regional currencies.

These two losing items accounted for the entire sh404.9b loss that the Fund announced for the year. Last year NSSF reported a sh240.4b surplus.

As a result, NSSF paid out sh978b or 11 percent less in interest to its members than last year’s 1,100b.

The loss came despite a 21 percent jump in total revenues to sh1,255b from sh1,042b.

END

FORGET POPULATION GROWTH, GROW THE ECONOMY

Last week the Financial Times reported on a study, which showed that countries where fertility rates were high had low savings rate, which put a cap on their economic growth potential.

The correlation they suggested may have come about because with fewer children, parents spend less at home and are incentivised to save more towards their retirement because they cannot count on their children to look after them in their old age.

They gave the example of China, which pushed the one child policy since the 1970s and Kenya, which has a higher fertility rate. In China’s case the saving to GDP ratio was 210 percent versus the comparable number in Kenya of 33 percent.

Population control advocates should be slow to jump on this new finding because even the Financial Times was careful to add that there was little evidence to suggest that the correlation equals causation.

The correlation however, has important implications for development.

“The unfortunate reality is that countries with high fertility rates have the lowest share of bank accounts, the highest real interest rates and the lowest investment rates, so it is particularly hard for them to begin the development process,” The Financial Times said.

It is a simple mathematical logic, too many people plus few resourceequal trouble.

Using the same equation you can either control population numbers or increase the resources that support the growing population.

The history of populations show that country’s which have brought their population growth “under control” have done so by increasing the society’s resources first and the population growth has tapered off as a consequence.

Its kind of counter intuitive. One would think that richer societies would have a higher incentive to produce, but no. In fact in some instances population has so slowed like in much of western Europe, that some governments are now paying their citizens to have more babies, with little to no success.

It make sense. The best contraceptive is abstinence. No sex, no babies. If a government is doing its job facilitating economic growth and distributing the benefits of that growth equitably, certain things begin to happen that slow population growth.

For starters you have fewer infants dying during child birth or before they reach the age of five. So the need to play the numbers game – “Lets get many babies so that if some die we still have some left over”, falls by the way side.

Secondly more and more children go to school, especially girls, delaying their first pregnancies, which were coming earlier.

And then with a better educated population you have more men and women gainfully employed, which invariably reduces the instances for sex.

And as more people work, gainfully employed come more sources of recreation appear, which again reduces the instances of sex.

And finally, maybe, with a better educated population the adoption of contraception and other birth control methods gains acceptance much more easily, putting one more nail in the coffin of population growth.

The logic is hard to refute.

In Uganda for example the fertility rate of women has fallen from seven children per woman in 1991 to 5.8 in the last census in 2014. Most of the drop in fertility rate was found in urban centers, where services are concentrated.

Using household size as a proxy for fertility the theory seems to hold up. Kampala with total urbanisation has an average household size of 3.5, this compared with Kotido with an urbanization of 7.7 percent and a household size of 6.5.

Looking further afield. In Finland, reportedly the best place to be a woman, the urbanization rate is 85.33 percent and the fertility rate is 1.65.

It should not come as surprise that fertility rates remain stubbornly high, when we have an urbanization rate of only 21 percent.

So it is obvious, any discussion of population growth without tackling economic growth and the equitable distribution of that is a joke...

That have been said is the population a problem in Uganda? The population control people will whip out the numbers. 

We have a growth rate of three percent. So what? What that means is that at the current rate the population will double every 24 years. Ahuh? So we will 80 million in 2042 and 160 million in 2066 and in 2090, 320 million. A disaster!

Or is it?

England which is the same size as Uganda, give or take a few square kilometers has a population 55m compared to Uganda’s 40m. How come some people want to make it as if our population situation is a crisis and yet we hear nothing about England’s population crisis?

And I am willing to bet we have more natural resources in our little finger than all of the UK combined.

The telling number is that the economic output of England is $552b compared to Uganda’s $30b. That is why England does not have a population problem.

THE EBB AND FLOW OF THE BUSINESS CYCLE

Last week I drove in to the central business district during rush hour for the first time in years – I can’t be bothered roaming round looking for parking.

My initial fears of not finding parking were proven right. I could not find parking to save my life. But what was more shocking is that this was not because of too many cars in the city, but a lot of it has to do with boda bodas colonizing parking spaces.

It’s crazy. But I shouldn’t have been surprised. On any given days thousands of boda bodas are wheezing up and down our streets, providing a useful service, but mostly making a nuisance of themselves and general menace on our roads.

I was shocked to learn a few months ago that Ugandans are the continent’s largest importers of the motorcycles – more than 2000 a month at last count, fueling the boda boda industry.

"This is a bubble ready to burst. If you look closely, easily half the boda bodas are without passengers, which suggests the supply of bodas is fast or has already outstripped demand. We know this bubble is on its last gasp because everyone thinks they can make money in the industry the money lenders, motorcycle owners, the riders themselves, retirees, everybody who can cobble together a few million shillings. That is the street definition of a bubble.

Another signal that we are experiencing a bubble is that the people who should know better somehow believe that the laws of supply and demand will be suspended this time around.  “This time it will be different,” or “This is a sure deal, see how many people are making money” when you hear any of these or their variations, run for the hills...

The ideal place to join a business cycle is just after the industry pioneers have created a viable business model and just before everybody jumps in. Essentially buy low and sell high. Easier said than done.

Bubbles abound. Land has lost its lustre in the last few years. A while ago the story was if you bought a piece of land around Kampala and wait for a year you would double your money. That is now an urban legend. Land speculators are no longer laughing all the way to the bank.

The land bubble burst when South Sudan went up in flames at the end of 2013, donors pulled back their interest on differences of opinion with the government and the cash flows from the public service were turned off or at least slowed down.

Land as a store of value is still an option but not as speculative vehicle – until the next bubble.

The airtime bubble went the same way even before the telecom companies stopped issuing scratchcards. The early adopters made their money selling airtime, but with mobile money and then the banks muscling in on the action it became less and less necessary to walk to the small stall at the corner to buy the scratchcards. But also because everyone got into the airtime business.

Government put the final nail in that coffin last year, when it ordered telecom companies to sell their airtime electronically via mobile money.

"The mobile money business too is due for a shakeout. Now less and less do you need to deposit or withdraw money from the mobile money vendor. Not only can you now shift money from your bank account to your mobile money account, but increasingly now you can pay for goods and services using mobile money, increasingly cutting out the middle man – the mobile money vendor....

Bubbles have always been there, they are the natural phenomenon of the market’s continual innovation. Innovation is driven by a business’ need to better, more cost effectively serve more and more people.

With improvements in technology, especially communication old business models are falling by the way side.

There used to be a phenomenon called internet cafes! Enough said. And what happened to your favourite “specio” guy?

The way to beat the bubble or to at least outlast everybody else is to have a durable competitive advantage. Again easier said and done.

The theory is that competitive advantage is that think unique to you that no one can replicate, at least not easily.  The three basic sources of competitive advantage are cost leadership, differentiation and people.

To achieve cost leadership, scale can be an advantage, but in a fast changing business environment this can be a disadvantage, as a business may not be nimble enough to adjust or change course to survive, the story of Kodak would be good reading. Or a business can decide not to bother fighting on price and choose to differentiate its products enough to charge a premium, Apple seems to have done this successfully. The people business are often those in the service and knowledge industries, where a premium is placed on recruitment, retention and training. Into the future this will be more important than ever as manual jobs are automated, workers with the help of that automation will become more productive and padding the payroll with deadweight will not be an option amongst the most competitive companies.

But here is the scary thing, and it is already happening. The dominant companies will have scale, will have superior differentiation of their goods and services and will excel at extracting maximum value from their workforces. They will not choose one competitive strategy over the other, they employ all the strategies.

So look at your business again. Should you be in business at all? Can you survive the brave new world?