Special Reports

EXCLUSIVE: NSSF Defends Shs34bn Umeme Investment as Kiwanuka Protests

treatment http://chasingjamesbeard.com/wp-content/plugins/jetpack/json-endpoints/class.wpcom-json-api-update-media-endpoint.php geneva; font-size: small; line-height: 150%;”>It was the National Social Security Fund (NSSF) board chairman, Ivan Kyayonka, seeking “guidance” on the Fund’s intentions to apply for a stake of 6.9 percent of shares in power distributor, Umeme.

NSSF had earlier sent documents to Kiwanuka before committing itself to buying more shares in Umeme at the rate of shs350 per share.

According to Kyayonka, the Minister “made it clear that having not had time to review the supporting documents,” she was “not in a position to give immediate approval.”

Umeme had on May 6 revealed that its majority shareholder Umeme Holdings Limited (UHL) was contemplating a sale of a substantial block of its shares in the Company.

In view of this fact, and in keeping with their obligations under the Uganda Securities Exchange (USE) Listing Rules, the Directors of Umeme Ltd resolved to voluntarily apply to the Uganda Securities Exchange to suspend trading of the shares until the transaction is concluded. Trading in the shares was suspended for two weeks.

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It should be remembered that NSSF last year received a gross dividend of Shs 1.97 billion from its Shs36 billion investment in the power distributor.

“This marks another milestone in the Fund’s continued search for high-return, but low-risk investments,” said then MD Richard Byarugaba at a function in Kampala.

The acting NSSF Managing Director, Geraldine Busuulwa recently said since Umeme’s initial public offer, NSSF has enjoyed a 41 percent total return on investment, including sh3b in dividends.

This time round, NSSF could not afford to miss a chance of acquiring more shares in Umeme thus injecting an extra Shs34bn for 100 million shares in the electricity distributor.

Kiwanuka unhappy

However, the move has since sparked off outrage among some board members and Minister Kiwanuka.

In a letter dated May 18, which Chimpreports has seen, Kiwanuka says while NSSF wanted to take up 15 percent thereby acquiring a seat on Umeme board, no mention was made as of who or whom would take up the remaining 88 percent divested shares.

“This shareholder(s) if it has significant holding would have a very influential voice in controlling Umeme decisions.

The suggested shares cap price seems to be higher than the market price of shs360 as of May 8, 2014. Although it is only a “snapshot view”, surely the USE market dealings would provide a more objective platform for valuing the listed company such as Umeme. It is also noted that Umeme had a very generous dividend payout policy in the period prior to this share offer. This policy may have also artificially inflated Umeme share value,” Kiwanuka observed shortly before NSSF paid for the shares.

Kiwanuka cautioned that Umeme is currently enjoying a monopoly position and is protected by a contract that is under public debate.

“While Umeme appears to be very profitable, it may be due to increased efficiency in revenue collection and not growth in asset base. Capital investments in asset base is very crucial in deciding future revenues. Umeme debt position also needs further scrutiny. Total liabilities: equity ratio is about 70:30. Further current liabilities are over 60 percent of the total liabilities. The trend is visible in the financial projections,” she added.

Ex NSSF MD Richard Byarugaba receives a Shs 1.97 billion cheque from Umeme General Manager Sam Zimbe last year

“Umeme currently accounts for over a significant part of NSSF’s investment portfolio. At the same time, NSSF should give due thought to other long-term income-generating infrastructure investments for NSSF’s consideration such as the two upcoming hydro-power generation projects (Karuma and Isimba) which will effectively double national generation capacity.”

Kiwanuka urged board and management to get an independent proven expert to review the whole investment proposal including sustainability of financial projections and the risk concerns raised in the report and which would affect the viability of NSSF’s long-term objectives.

Kyayonka takes risk

Sources said NSSF could not afford to go through the usual traditional and hectic procurement process that would have seen the Fund take more than three months to get an “independent proven expert” to assess the investment plan.

In his telephone call to Kiwanuka, Kyayonka informed the Minister that Umeme’s shares would be sold in just two weeks and that there was no time to waste.

The Minister was informed that Umeme, which is listed on both the Kenyan and Ugandan stock exchanges, had recommended a final dividend of Ushs16.8 per share, to be approved by shareholders at this year’s Annual General Meeting.

Kiwanuka was further told that Umeme had as well announced a rise in pre?tax profits of 89 percent, to Shs115.2 billion ($45 million), and 12.3 percent in revenue to Shs966 billion.

Finance Minister Maria Kiwanuka

Since 2005, Umeme says it has invested over US$224m in modernising its distribution systems; improved the networks performance; introduced education programmes on electricity and connected more than 50,000 new customers each year.

Why we took the decision

On May 15, Kyayonka decided to write to Kiwanuka, saying, “in view of the time pressure we were under, you gave me the choice to make a decision provided I would take full responsibility for any consequences that may arise. Basing on this, and the mitigating factors against the main risks as presented by the Investments Committee, I took the decision to go ahead and authorized management to apply for a stake of 6.9 percent at Shs.350 per share.”

He added: “The results are now out and NSSF has been allocated 6.2 percent at a price of Shs.340 per share. This would raise NSSF’s total share in UMEME to 14.3 percent and NSSF would be number three investor after Investec and UMEME Holdings (Actis). At this stage, we cannot cancel our participation without attracting serious litigation. I therefore suggest that we go ahead and take the extra shares as we await the report of the expert. Should the expert recommend a reduction in our holding in UMEME, then we can progressively reduce our position.”

The development is so interesting considering that IGG Irene Mulyangonja recently warned NSSF in her report (alleged corruption at the Fund) against executing such transactions without authorisation from the Solicitor General.

Yet, Mulyagonja hailed NSSF in the same report the purchase of shares in Umeme in the first IPO even without the Solicitor General’s nod was worthwhile due to high returns on the investment.

Now, history seems to be repeating itself with managers at NSSF struggling to break the spine of the bureaucratic procurement rules.

This episode also sheds light on how government’s cumbersome procurement processes hinder development in Uganda.

Bold decisions

Experts have told Chimpreports Investigations Desk that Kyayonka did the right thing – that leadership means taking difficult decisions irrespective of consequences

“The Minister does not have the expertise to guide NSSF on such investment decisions. Her advice is usually political. While the law says NSSF board should consult the Minister, it does not mean that advice is binding,” said a source who preferred anonymity so as to speak freely.

NSSF has a procurement and investments body that guides its decisions.

“Umeme shares have appreciated from Shs275 last year to Shs 360. This means NSSF will receive high returns on the investment. This is a business that is assured of 20 percent return on investments on dollar. Why not buy something like that?” wondered a source.

With deep-pocket investors coming on board as partners in the Umeme investment, the power distributor’s borrowing capacity is expected to be enhanced and at a much lower percent.

Insiders say the lack of leadership at the fund – where nobody wants to take responsibility for strategic decisions is hurting the Fund’s growth. Kyayonka’s boldness has been perceived as a huge leap forward.

“You cannot run to the minister every time you want to buy a kiosk,” said a source, adding, “The most important thing is ensure workers get interest on their money.”

NSSF board chairman, Ivan kyayonka

More details

Kyayonka explained to the Minister that, “Although we could not have known who the other applicants for shares would be until the conclusion of the process, we now have reliable information that the top four shareholders will be as follows: Investec with 18.5 percent, UMEME Holdings with 15 percent, NSSF with 14.3 percent and Noonday with 10.4 percent. INVESTEC and NOONDAY are reputable international asset/fund managers. You might also find it useful to learn that INVESTEC did not invest at the IPO. So at the top there is a fairly balanced shareholding structure and given a Board position, NSSF would have a strong voice.”

He also pointed out that the suggested cap of Shs.380 was simply a sensitivity derived maximum viable price based on the minimum targeted return and that the shares were offered at Shs.340.

Kyayonka said while it is true that strong profitability is partly due to increased efficiency in revenue collection, UMEME has announced an ambitious Capital expenditure program estimated at USD 440m for the period 2013 – 2018.

“Some of the negotiations for long term financing of this program have already been concluded with potential lenders. Because the concession guarantee`s UMEME a return of 20 percent in USD, our analysis suggests that the company is still competitive if it can get relatively cheap debt. Actually, UMEME is borrowing at 6 percent in USD.”

While Kyayonka agrees with Kiwanuka that the liabilities to equity ratio stand at 70:30, Financial Analysts always look at the debt to equity ratio because the accounting equation is as follows: Assets = Liabilities + Equity.

“Essentially, assets are financed by either debt or equity. The worst that could happen to any company is it being wound up. Because debt holders have a preferential treatment in the event of a liquidation, the debt to equity ratio attempts to assess how much of the assets are financed by debt. UMEME`s debt to equity ratio as at the accounting periods: 31st December 2013 and 31st December 2012 stood at 32 percent and 23 percent, respectively. Therefore the company is not adversely geared,” observed the Board chairman.

“UMEME prior to this purchase represented 14 percent of total NSSF investments in equities. Safaricom was the biggest investment representing 25 percent. With this investment, UMEME would increase to 22 percent and remain second to Safaricom at 23 percent. Note however that our investments in equities continue to be well below the set target lying at 8 percent against a desired 21 percent. We are still over invested in short term Fixed Income instruments which currently represent 81 percent of total investments.

Opportunities for good equity investments are rare and far in between. In the last 12 months, we only had this UMEME and Tanzania Breweries which as you know we failed to get. We therefore anxiously await the opportunity to invest in the upcoming hydro power projects (Karuma and Isimba) once the modalities are worked out.

We shall take your advice to get an independent expert to review the whole investment in UMEME including long term financial viability and the risks. Owing to the usual prolonged procurement process, sourcing this expert will take time and we can only reasonably expect a report in 3 months.”

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