DRC ENTRANCE INTO EAC A GAMECHANGER

The Democratic Republic of Congo (DRC) was ad mitted to the East African Community (EAC) earlier this week in an event that probably did not garner as much attention as it should.

In 1997 after Laurent Kabila backed by Uganda and Rwanda overthrew Mobutu Seseseko word was that some investment bankers had come together to mobilise resources for the infrastructural development of our western neighbour.

The plan easily was going to cost billions of dollars and was intended to not only join every corner of the country to the Atlantic coast but to its neighbours as well, it was believed to be what the giant African nation to unlock its full potential.

Believe it or not the Congo’s road network for instance so bad that a trip that would ordinarily take a day on all-weather roads can take up to a week when the rain pours and turns it into a muddy morass. Rail transport is non-existent, water transport on the River Congo is dominated by rudimentary vessels and telecommunication services are not universal.

The aforementioned plan however, came apart when the Uganda and Rwanda fell out with Kabila and civil war resumed. To my knowledge the plan has not been resuscitated in the form I heard about then.

Interestingly they were not the first to habour such dreams. In the 1960s and American financier Edward Detwiler drew up a 50-year development plan that would involve the development of infrastructure and exploitation of the country’s mineral wealth. He had got audience with the then Prime Minister Patrice Lumumba who was looking favourably on the plan, before he was overthrown and murdered. The bill for the project at the time was $1.9b...

The attraction is clear. It has been estimated that the DRC’s mineral wealth is valued at $12trillion, at the time I heard this the US economy was $11trillion. To get an indication of the untapped potential of the DRC the current GDP of the country is $46b. What a scandal.

We have heard the numbers. With the entrance of the DRC the region’s GDP rise almost 20 percent to $267b and an additional 90 million people will join the market bringing it to about 300 million people. While most of DRC’s population is poor, it has huge urban populations that can be serviced by the region. Kinshasa alone has a population of 15 million more than thrice the population of Nairobi, which is the next largest city in the EAC.

Ever since the resuscitation of the EAC in 2000 trade between member states has grown to about 20 percent compared to six percent two decades ago. This freer movement of goods in the region has cushioned us from the global financial crisis of 2008 and even more so during the Covid pandemic.

That it is still very low compared to South Africa Development Community (SADC) where half of their trade is done within the community or Asia where the number is 70 percent or the EU which is even higher.

Intra-EAC trade is hampered by poor infrastructure and non-tariff barriers.

With the DRC the poor transport networks are a major hindrance.

Uganda in collaboration with DRC is in the process of developing 223km of road in eastern Congo, which it is estimated will more than double trade flows between the two countries.

Since people have forgotten the Ugandan experience, laying down roads in DRC – initially all weather and then tarmac, will have a transformative effect on the population of the country and the region. Congolese will have access to markets, raising their incomes and becoming a more formidable market for the region.

If you think about it the inadequacy of the transport infrastructure through the DRC is hampering communication between north Africa and South Africa, East and West Africa. A road and rail network will therefore be a game changer for the continent as a whole...

It would make more sense now for those investment bankers to dust off their business plans and raise money for the DRC’s infrastructure.

And by the way we have not even begun talking about exploiting that the country’s vast mineral potential yet.

 

THE NEW VISION SACCOS CROSSES THE SH10B MARK, SO WHAT?

The New Vision SACCOS held its annual general meeting last Friday. The highlight for me was that it crossed the sh10b in assets mark last year 17 years after its inception.

I remember vividly seven years ago marveling at another SACCO who assets stood at sh9b then, while the New Vision SACCOS’ stood at just under sh4b.

The management reported that members had saved sh4.8b a far cry from the sh62.4m members had pain stakingly saved by the end of 2005, the SACCOS first year of operation. The sh118m dividend payout was almost twice the total savings in the first year. Profit was about a billion shillings.

This are small monies comparted to those the bigger SACCOS are reporting and hopefully will be laughable when comparing with how the SACCOS will have grown in ten years, but it would not have happened if a mechanism for members to pool their money in a convenient and safe way had not been started.

And that is the key. When people say we are not saving enough as a society its not for lack of money but for lack of convenient mechanism to do so...

Thankfully with the help of SACCOS like at New Vision – there are more than 2,000 SACCOS in Uganda today, the gap between our monies stocked away under our mattresses and the formal financial sector can be bridged.

Apart from banks not being close to the people, I was surprised to learn that some people don’t save in banks because they are intimidated by the large banking halls and busy workers. The launch of the agency banking a few years ago is helping in that direction as well.

The real game changer however is the rise of mobile money. Last month MTN reported that their mobile money deposits rose by sh300b to more than sh950b. This trend is nothing to be frowned upon.

It has be said that of all the money in circulation in Uganda only about 20 percent is in the formal financial sector the remainder – 80 percent is under our mattress, in our socks and bras. In more developed economies the revers is more true.

When money is in your pocket it is doing nothing for you or anybody else, but when your money is in the financial sector it maybe earning you interest as well as helping other people with need for money. They access your money by borrowing from the banks.

Essentially the money is working. We can say the less the money in circulation works, by being employed in the formal financial sector, the poorer a country is...

Our low saving rate is one of the reason the lending rates in our banks are high. Banks make money by lending to government, businesses and individuals. If we all got our little monies and headed for the nearest bank, banks would be forced to bring lending rates down, because holding money is a cost so they cannot allow to seat around. So the banks would have to bring their lending rates lower to send money out the door as fast as they can.

Believe it or not this is already happening.  There is a time when interest rates were as high as 50 percent and you could not borrow without collateral!

My experience with the SACCO has shown this to be true. While you have to pay interest on savers money, they cannot borrow all of the money that comes in. At one time it was discovered that only 40 percent of the members had loans with the SACCOS.

As a manager you have a choice you either lend more to your members, more likely by lowering lending rates or you ship the money out, investing in other things outside.

So SACCOS should be supported mainly through capacity building, to grow stronger in their capacity to mop our excess liquidity.

SACCOS do not need handouts from government. In fact this may be detrimental to their effective management. They can grow under their own steam if they are managed well.

Banks shouldn’t worry. They will cut back on their branches, leaving a few to service SACCOS and such like small institutions, while servicing corporate borrowers and the government.

"If I dare to dream, the equity of the New Vision SACCOS grew by 20 percent last year, that means it will double every four years. So 16 years down the road the net asset value of the SACCO will be sh92b!

AND THEN THERE WAS ONE

With the passing of the speaker Jacob Oulanyah earlier this week one cannot but help feeling that we are seeing the evening of an era.

For context one has to go back to the 1990 Makerere University guild presidential campaigns when Norbert Mao beat the young NRA officer Noble Mayombo in a hotly contested campaign, the likes of which have not been seen since.

The University, then with a student body of less than 10,000, was undergoing fundamental changes, chief of which was that government was in the process of phasing out “Boom” . These student allowances were a hangover from a time when the economy was in good shape and there were fewer students at Makerere.

"In better times all students used to get allowances for being on campus, but by 1990 this had been whittled down to getting reams of paper and textbooks, which often ended up in stationary shops of nearby Wandegeya. There was also a transport allowance, given to the students at the end of term to go to their home districts...

However, the NRM had inherited an economy on its knees and some of these “luxuries” they could no longer afford. Scrapping them was a way to lower public expenditure, a requirement to benefit from badly needed donor monies.

It was in this context that the 1990 guild presidential campaigns were staged. That Mayomdo, who by default was the establishment candidate, took the race to the wire was credit to him, as the mood on campus was for an anti-establishment figure who would fight for the students’ “rights”.

Oulanyah also contested that election but stepped down to back Mao, while his campaign manager Adolf Mwesigye (Now the clerk to parliament), backed Mayombo. Oulanyah then became the speaker of the guild.

A student of agricultural economics, his oratory and command of the proceedings made it difficult not to see a bright future for the man from Omoro.

The same could be said for his boss Mao and for Mayombo.

Oulanya returned to university to study law, while Mao and Mayombo went on to public service.

Mao’s attempt to represent Gulu Municipality in Constituent Assembly in 1994 was thwarted by DP heavyweight Andrew Adimola. He eventually came to parliament after another acrimonious campaign against Betty Bigombe, who previously come painfully close to a peace settlement with the LRA.

Mayombo rose to the office of the permanent secretary in the defence ministry. He made it to the constituent assembly as an army representative after which he became President Yoweri Museveni’s ADC and then director of military intelligence. Unfortunately, his promise was cut short when he died at 42 in 2007.

Oulanya was the late bloomer. After law school he opened his own law firm before making it to parliament as the MP for Omoro county in 2001 as a Uganda People’s Congress (UPC) cardholder. He did this despite supporting Aggrey Awori’s doomed presidential bid. At the time northern Uganda was an anti-NRM stronghold, the people there aggrieved by the long drawn out Lord’s Resistance Army (LRA) insurgency...

The return of multi-party elections in 2006 came with the emergence of the Forum for Democratic Change (FDC) led by Kizza Besigye . Oulanya lost his seat to FDC’s Simon Toolit, which must have caused him much soul searching because he flipped his allegiance to the ruling NRM and retook his seat in the 2011 polls, the first time the ruling party had made an impression in northern Uganda.

After Mayombo’s passing on, Mao had previously stepped down from parliament to become Gulu district chairman in 2006, eventually Democratic Party boss.  Oulanya became deputy speaker I n 2011 and achieved his long held dream to become speaker of parliament in 2021.

These three men were the leaders of their generation. All three were gifted speakers. All three had commanding presences. All three were ambitious men, some said too ambitious for their own good.

We are wiser in hindsight but it should have been obvious in 1990 that these three young men would play key roles in the future of Uganda.  One feels they would have fed off each other’s personal ambitions – knowingly or unknowingly, to lift themselves higher up the political ladder.

With the demise of two of the trio one has to think we have been deprived of an epic finale to their story.

 

CHELSEA AT THE CROSS ROADS

Chelsea FC used to flatter to deceive until Russian Oligarch Roman Abramovich came along in 2003.

Abramovich who took the London club off previous owner Ken Bates’ hands for an estimated £60m (sh300b) in 2003, was, and at the beginning of the month asking for at least £3b (sh15trillion). This represents a more than 20 percent annual capital gains return on his initial investment. Nothing to be snorted at especially in Europe.

"But don’t cry for Bates, he in fact got a better return on the £1 he paid for the team, when he took it over 1982...

Bates inherited a team that was deeply indebted, had a bad reputation for hooliganism and was floundering in the lower levels of the league.

The coincidence of sport and business is never boring.

Since he took over the club Abramovich has invested about £1.5b (sh7.5trillion), which probably explains why the club is still loss making, a lot of its revenues going to servicing Abramovich’s debt to the club.  Chelsea last year made a £153m loss off revenues of £435m.

You can rest assured that the cashflows the club was throwing off, made the Russian’s decision to sell the club a very reluctant one.

Abramovich has been singled out as a supporter of Russian President Vladmir Putin, has been blacklisted and his assets frozen in Europe and America. Punishment for Russia’s invasion of Ukraine.

Chelsea’s financial success under Abramovich is due to its newfound success on the field – 16 trophies in England and Europe over the last 19 years, making it next to Manchester United the most successful club in England during the period.

The interesting thing about sports franchises is that their biggest assets are the players not the physical infrastructure that the club may own.

In Chelsea’s case their squad is valued at a billion pounds compare to its stated worth of about £2.5b.

Chelsea last year earned under ten million pounds from ticket sales – because of Covid restrictions, but made £154m in commercial revenues, which often comes from the sale of shirt sales and other merchandise sales. Hobbled by a 40,000 seater stadium they would make more money on match days with a bigger stadium. Arsenal’s Emirates stadium makes more than a hundred million pounds annually from ticket sales.

"But even with Covid-19 they shrugged off the loss of match day income pulling £274m from their broadcast rights. It is no wonder they can afford to pay Romelu Lukaku £325,000 a week....

But you have to worry for the Chelsea, whose new owner may have been announced by the time you are reading this column.

No one –  unless the Saudi bid won the day, has the deep pockets of Abramovich, willing to splurge, without promise of a return for years.

Chances are to come up with three billion pound asking price, the new buyer will have to take on debt and will be under pressure to pay this off. What often happens in these cases is they will freeze the wage bill, try, sell of some players and other assets of the club to pay down a large part of the debt as quickly as possible. This could very well have affected the club’s performance on the pitch/.

Given the momentum Abramovich has created a few more years without a title but qualifying for champions’ league will not make the new owners sad. Look at Arsenal, still a very profitable company despite not having enjoyed the success they were used to previously. Or Manchester United for that matter.

From a purely business perspective a club does not have to be successful on the pitch to show a return, especially if it has a rich history behind it.

Of course you cannot stretch that point too far. The loyalty of the fans is enhanced by victory.  This loyalty provides huge brand equity the business owners can leverage to boost commercial revenues....

Interestingly for the last two decades or so, with ticket prices going through the roof – a ticket now can go far as much as £100 (sh500,000), Chelsea’s ticket buyers are not the lowlier in society. In fact, it was reported a few years ago that there is a lot of tourist traffic during match days in the English Premier League, so you are more likely to passions do not run as high in the stands as 30 years ago.

The physical infrastructure are not to be dismissed as well. When not being used on match days can be used to host events like concerts, conferences and exhibitions or as stated above be used as tourist attractions.

Given how investors from far and wide are falling over themselves to be in the bidding for Chelsea, you just know Abramovich is letting go of a good thing.

 

SOBER DISCUSSION NEEDED ON RISING PRICES

Commodity prices have been on the rise in recent weeks and as expected there is a lot of chatter about and who is to blame for the inflation.

Government is the usual punching bag. This week prime minister Robina Nabanjja made a statement in parliament outlining the causes of the new inflation, mostly that the inflation is imported with increases in global oil prices and the supply chains, which have not yet recovered fully from Covid-19 lockdown. The ongoing war in Ukraine is expected to worsen matters as those countries account for 30 percent of world traded grain and other manufacturing inputs.

As a result, she explained, that there is very little scope for government to positively affect prices.

In reaction opposition MPs suggested a suspension of digital tax stamps on manufactured products as a way to bring prices under control. They also proposed that government should stop marking fuel for internal consumption, the cost of which is transmitted to the end users. Government marks fuel to prevent dumping. Fuel which is in transit to other countries is cheaper, since some taxes are not imposed on it, and if sold on the local market would disrupt genuine suppliers.

Recent investigations by this paper have shown that the increases come first due to the sharp increases in fuel prices we kick off the year with. A liter of petrol cross the sh5,000 mark in January for the first time. This was due to a combination of global fuel prices jumping to 14 year highs and the blockage of fuel trucks at the Kenyan border earlier this year. The health ministry had insisted that truck drivers needed to undergo covid-19 tests before they came into the country, which sparked a strike that affected fuel supplies, which we have not entirely got over.

"The Uganda Bureau of Statistics (UBOS) reported that in February petrol and diesel prices jumped 34 percent and 25 percent respectively...

Fuel prices feed into everything so its no surprise that this is a factor.

In addition, there were suggestions that some businessmen have cornered the market for inputs in the manufacture of bar soap partially explaining the doubling of bar soap prices in some places.

All this indicate make it clear for anyone to see that the causes of our current jump commodity prices is really out of government’s hands and will not give itself to any short term remedies.

In fact things will become worse before they become better as Kenyan transporters are set to raise transport fees by five percent.

That being said it is clear that as long as road transport dominates our trade as a country we will always be at the mercy of the wild fluctuations in fuel prices.

If the MPs really wanted to be useful they should address this issue, especially progress on the railway and water transport across the Lake Victoria.

As it is now it costs almost twice as much --$5250, to move 30 tons by road than it does by rail --$2,800. But because it takes about two weeks by rail compared to under a week by road, it’s no wonder businessmen would rather use road. The discrepancy in times in transit has a lot to do with underinvestment on our railways.

"MPs, if they were farsighted, should be pushing for investment in the railways, revamping of existing management and smooth operations as a matter of urgency....

While it does not seem to be an issue this time like it was in 2011, another major driver of inflation is rampant spending by government. MPs should keep an eye on this as a matter of course.

Some of the proposals the MPs are suggesting may even force government into populist measures that lead to worse inflation.

In the mean time for the rest of us the solution to rising prices is obvious, we need to cut our coats to fit the cloth.

 

MTN AND THE SIGN OF THINGS TO COME

Last week MTN publically released its results for the first time in its 23-year history in Uganda.

This was necessary as they are now listed on the Uganda Securities Exchange (USE), for which it is mandatory to report publically on the company financials at least twice a year.

The Telecom company reported that revenues grew 9.4 percent to break through the sh2.04trillion mark, the only Ugandan company to do so.  The increased revenues were driven mostly by data sales and fintech (mobile money services), which jumped 22 percent and 10 percent respectively.

New shareholders will share among themselves sh105b in dividends for owning the share for the last 25 days of last year. The dividends per share will be sh4.7. The total dividend paid out sh15 per shares, sh11 in dividends was paid out before last year’s share offer.

That was all very nice but the results also pointed to the new trends cementing themselves and bound to affect the way we relate and do business into the future.

For starters, for the first time in MTN Uganda’s history revenue from voice calls -- sh1.01trillon fell below half of total revenues. While voice revenues grew 3.6 percent compared to the previous year, this was dwarfed by growth in data and mobile money services....

More than a decade ago when Bobby Collymore took over the reins at Kenya’s Safaricom, he said in his first interview that, in the future voice services will be an add on, given away for free by telecom companies that the action was going to be in data and mobile money services. I couldn’t relate at the time but we see it come to pass before our very eyes.

While the growth in data and fintech can be blamed on the Covid-19 restrictions of the last two years, industry players are confident that the use of both services instead of falling back to pre-covid levels will in grow faster into the future.

To that end MTN is making smartphones available more conveniently through hire purchase schemes. More than 100,000 phones were acquired these schemes and have accounted for some of the increased data usage. Almost a million new data subscribers and 1.5 million new fintech subscribers were signed onto the MTN network.

Assuming this growth continues we are heading very quickly towards a cashless society, bill payments grew 58 percent and merchant payments grew by 14 percent.

Even more startling for me was that mobile money deposits grew by sh300b to sh960b, a 46 percent growth which in itself account for the total deposits of some of our smaller banks. While MTN cannot finance its business using these deposits they still constitute a huge proportion of the monies we saved under our mattresses or in our socks or bras, being brought into the formal financial sector and therefore more useful to the general economy. Assuming the current rate of growth continues these deposits will double every two years, if you extrapolate this into the future, it boggles the mind how big these deposits will have grown to.

It is obvious that MTN and telecom companies in general, will be a great driver of financial inclusion, resource mobilization and even economic transformation...

It happening already in parts of the country where early adopters are saving on their phones or running their accounts in their SACCOs via their phones, borrowing and investing off their phones.

One of the biggest factors in income inequalities is a lack of information. Ground down to its most basic level, you are poorer than your rich neighbour because you do not know something he knows. And once you have the information can you act on it? Now with data services becoming more and more pervasive we can get the information and with fintech going the same way we can act on what we know, in real time.

It follows therefore that it is in the economy’s best interest that tools such as smart phones are held by more and more people. In South Africa eight in every ten people has a smart phone, business there moves at the speed of light.

It was reported recently that Sweden has the most internet startup per capita of every country in the world. Looking back to how this came about, it was traced back to a government policy in the early 1980s that sort to have a computer in every house. The children of that time, who were exposed early on to the computer, leveraged their familiarity they had developed playing Space Invaders into programming and eventually building tech companies.

While there is momentum in adopting these new technologies government can speed it up by revisiting its tax regime around the ICT sector as a means to increase especially smart phone penetration and data usage. We will not be reinventing the wheel, oy has been done before and with great success.

NSSF AT THE CROSS ROADS

On Monday National Social Security Fund (NSSF) started registering members eligible for the mid-term access to their savings.

The new product, which came out of the amendment of the NSSF Act allows members who are 45 and over and have been contributing to the fund for at least 10 years to withdraw up 20 percent of their savings.

The amendment was triggered by the financial stress many were suffering two years ago when the Covid-19 pandemic set in.

"The NSSF management were dragged kicking and screaming to this point, understandably so because one, this is not what social security is about, giving temporary relief to members and secondly, because it was going to throw the business projections off significantly for the foreseeable future...

In the first instance you can bet that most beneficiaries will blast their money away, which is their right, but which may cause more problems for them than they already have.

Previous statistics show that 80 percent of NSSF members who cash in after 55, have nothing to show for their windfall in two years. There is no reason to thinks this will be any different.

There just over 41,000 beneficiaries of the midterm access and the average payout will be just over sh19m. Some of the bigger beneficiaries maybe snickering at this but what it means is that most of the beneficiaries will receive relative small monies. According to NSSF 57 percent of beneficiaries will receive less than 10m.

I don’t believe there is money that is too little to make a change or vice versa that there is too much that cannot be finished. We have heard stories of drivers and office assistants who are wealthier than their better paid bosses, because unlike their bosses who wait for big money to invest the lower cadre take whatever they have and save or invest it.

So for many beneficiaries the best thing they can do for themselves is to leave their monies in NSSF where it has been attracting double digit returns for about 10 years now.

Related to that, the amendment of the NSSF act is a major inflection point in the Fund’s history.

"NSSF is going to pay out about sh1.6trillion this year – sh900b for the usual benefits and an additional sh700b for mid-term access, making this the first year they pay out more than they receive in contributions. The Fund projected that they would collect about sh1.5trillion this year...

In subsequent years they will be paying an estimated sh300b under mid-term access and normal service will be restored.

Having gotten used to double digit interest on our savings, we may forgive NSSF for not paying that out this year but we will not want to hear it in subsequent years, which means the Fund’s management will have to think long and hard how under current circumstances they can continue to give double digit yields. This is when they will really have to earn their keep.

That being said we have to give credit where it is due. When NSSF was set in place in 1985 who would have thought that it would be bigger than its older cousins in the region today. By “forcing” us to save NSSF has served as a huge stabilizer of the economy, as it is now it is the biggest holder of treasury bonds and bills, which are often used to keep inflation away.

And now with more than 5000 housing units coming into play in the next decade or so, NSSF is set to become the biggest real estate developer in the country, which will have a ripple effect in the labour and financial markets.

"As the Fund expands Uganda the search for investable projects will become a real challenge and probably usher in the next phase of NSSF’s history where it will be more directly involved in the economy beyond ensuring macroeconomic stability....

The temptation of course when you get a bit more money is to become more aggressive and forget the strategy that got you to your current position. This often ends in tears. But NSSF is fast approaching a time when Uganda is too small for it and will have to seriously consider how it goes into such things as private equity investing locally and stretch itself more and more into the bigger regional economies. It is inevitable. This year NSSF is collecting about sh100b a month in contributions.

While we are all focused on midterm access monies a more fundamental change to the Act is making it mandatory for all employers to save for their workers and the inclusion of a voluntary savings product.

According to NSSF this should bring an additional sh90b a year, which I think is low as the majority of our 20 million workforce still needs social security.

For now, the excitement around midterm access dominates our headlines, when the dust settles and history is written this will have been a major turning point for NSSF.