By Andrew Muhimbise
Let me applaud NSSF Board and Management team for the 5th Annual Members Meeting, it was a fantastic accountability members’ management linkage where we interacted with the team managing our funds and it’s an excellent foundation from where we will together build on an unstoppable wave of governance which will ensure your funds continue to grow and benefit you.
This year’s Meeting theme was “COME & HAVE YOUR SAY” however you cannot effectively have your say when you aren’t informed, that is you don’t have the detailed financial statements prior to the meeting. The Annual Members Meeting in its current form is simply structured for the fanfare of announcing the annual Interest Rate (dividend). However, members need to know how payable Interest was delivered and determined.
I noticed that more than half of nine Board of Directors were not with us during this year’s meeting; it is not by coincidence most likely they also skip the quarterly or specified Board meeting that happen during the course of the year.
The Directors nonattendance is akin a groom missing his own ‘annual’ wedding, this is their most important meeting in the year where they face and account to you the members.
It is therefore highly likely they are not executing their mandate of effectively supervising your management team! In the next Annual Report there should be a table showing their performance and attendance so that in the future when corporate governance supervision is in your hands you can vote on them in such an Annual Members Meeting effectively dismissing those who are found wanting.
Financials breakdown and way forward
Report of the Directors: The Board of Directors acknowledges breach of the URBRA Act section 60 (2) on page 4 ( from Fund’s latest annual report] regarding appointment of a Custodian for internally managed investments. Is this breach beneficial or limiting to the Fund, how? And aren’t we paying fines for this deliberate breach?
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The Auditor, KPMG acting for the Auditor General, on page 6, points out a historical tax dispute amounting to 42 billion from 2013 as set out on page 61 note 35 b). Why is it not resolved yet? Both URA and the NSSF are supervised by the same Ministry, why not use that proximity to resolve this dispute henceforth, URA by holding onto NSSF cash of 25.3 billion as set out on page 35 under note 12 c) then has an upper hand as the Directors believe this money belongs to the Fund, sort this out as soon as possible and have this cash availed for Members’ business of strengthening their Social Security.
Interest Income: There was an actual efficiency drop in this actual asset return from 14.2% to 13.6% based on investment amount deployed as per balance sheet. Page 31 details the breakdown and it is noticeable that 90% is earned form bonds whose maturity ranges from anywhere from 1 to 15 years therefore there is Revenue resilience going forward as most income will come from funds deployed over a long term with known rates of return aka fixed income and this begs the following insights or questions regarding this 90% income stream:
What is the average return rate and duration tenure on the 5.6 trillion bond investment? , Cyclical business: yield after Elections has halved from the 20’s to the early 10’s, the long-term investments fix this, however your most of NSSF bond investments tagged in the high Election cycle?
Fiscal Risk: concentration of the Fund in Government of Uganda (GoU) Bonds could perpetuate fiscal risk, the Fund business is majorly as a Lender to the GoU.
The Fund’s low hanging income earning fruit which is lending GoU, could attract fiscal risk the fund way and this is how; GoU spends 12.3% of its National budget on debt interest payment and the treasury redemption where they rolled over debt of 5 trillion of debt principal for the past three years running after the enactment of the PFM Act, all this on a 28 trillion budget or 23 trillion budget excluding treasury redemption, where the FUND has 5.6 trillion invested. It is also worth noting the GoU credit rating was downgraded to B- from B:
How deep are we exposed to the 5 trillion treasury redemption which is 40% of the domestic outstanding debt considering we have 5.6 trillion invested in treasuries in this narrowing fiscal space considering recent debt crisis lessons?
How probable is it that the Fund might get entangled in a negotiated debt restructuring scenario where haircuts on interest are not alien, especially in light that GoU has ultimately power of The NSSF as an entity which ironically holds private sector members savings?
The Fund’s other glaring risk to this income stream is inflation, with June 2017 inflation for the Country at 5.6% compared to a member pay out rats of 11.23%, which was fantastic however over the long term how will this income stream in relation to whole income where it contributes 90% be immunized from the unpredictable inflation rate?
There was an actual efficiency drop in this actual asset return from 8.2% to 6.4% based on investment amount deployed as per balance sheet mind you excluding capital work-in-progress as laid out on page 49 note 24.
Page 31 details the breakdown and The Fund has only a paltry two properties earning visible income that is signature Workers house at 7 billion and Social Security House at 2.5 billion; ridiculous, isn’t it?
Points in the questions
Capital work-in-progress, The Elephant in the room which is basically money tied up in stalled projects like Lumumba Avenue, Labowa et al set out in detail on page 48. This amounts to 320 billion of which Lubowa accounts for 245 billion and Lubowa 65 billion both of these have stagnated since July 2015 as per note 23 on page 48, this is potentially 20 billion in lost rental income per annum on this stuck 320 billion:
What is the Management doing to unlock this treasure chest, including the renowned Temangalo? No-doubt the stagnation could be about vested interests and proxy bidding wars as in regards to procurement processes, How is the NSSF going to overcome this dilemma?
Real Estate viability and uptake Risk
The NSSF membership has an average gross pay of 850,000/= per annum, in mortgage speak they have a monthly allowance of 160,000/= for housing (30% of Net pay) meaning for a 20 or 30 years mortgage they can effectively afford a house of between 40 or 50 million.
Mind you the NSSF savers are the rich class of Uganda, with NSSF building small portions of highly priced real estate in a depressed market it misses the point on serving the market lower in the pyramid preferably their members in the higher echelons in the pyramid who could averagely afford a 50 million house which could be structured through the associated Housing Finance Bank therefore:
Can Management produce mass real estate on scale it can sale within the means of Ugandans notably their rich membership at a profit?
These are companies where the Fund has significant holding and these include: Housing Finance Bank, UMEME, Uganda Clays Limited and TPS (Serena Hotel) as laid out on page 47 note 21 and below I ask on each:
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Housing Finance Bank, on page 46 you say NSSF owns 50% of this Bank and that this neither gives NSSF controlling interest nor joint control, with the other holders at National Housing at 1% and the 49% held by our Supervisor the Treasury of Uganda; can’t the NSSF negotiate with any of the above to buy some shares or on joint control so you have the power and will to make things happen beyond what Mr Katamba is doing?
Also noted outstanding dividend, why is that?
UMEME, with now 23.2% NSSF is the majority shareholder of Uganda quasi monopoly power distributor and I recently the press reported on UMEME concession contract extension, is the NSSF in the lead here and how is that going?
Uganda Clays Limited, which is sluggishly returning from near death; What plan do you have on the debt equity swap on the 20 billion shareholder loan? Also noted outstanding dividend, why is that?
The march to Private Equity: Quantum growth
I have noted that the dividend yield on funds invested in purchase of shares in associated companies notably Housing Finance at 9% and Serena Hotel 18%, is it therefore safe to say there a trend we could read in here that is Private Equity or Association is a viable option to increase return in this income stream which contributes a paltry 6% of comprehensive income, yet has the ability to deliver quantum growth in income as it not fixed.
Asking MTN, Airtel, Standard Chartered, Shell and the other companies making massive profit in the country for shareholding is highly advisable besides the worst they can reply is a harmless NO and having The NSSF in mind as a potential investment partner.
The most efficient pension funds the world over have sizeable investments of their funds in private equity or what you call Associate where I saw commendable cash boosters especially in the credit lines to Housing Finance Bank and Uganda Clays, therefore question:
How much is NSSF actively allocating to building this Associate business asset class?
Editor’s note: The writer, is an Independent Securities Investor with a rough-cut image of speaking inconvenient truth to power. He was invited by NSSF Uganda’s Management to undertake an in-depth financial analysis of The Fund’s detailed Annual report for the period 1st July 2016 to 30th June 2017