NSSF asset liquidation under scrutiny

By Luke Anami and John Njiraini

Unconfirmed plan by the National Social Security Fund (NSSF) seems to have touched a raw nerve just when Kenyans were beginning to gain confidence in the running of the Fund.

A number of cross cutting events bordering on liquidating assets to raise investment cash have taken place at the pension scheme in the recent months.

Although on the surface they are viewed as part of NSSF’s operations, underneath they are now raising eyebrows that NSSF could be sinking back into the murky world of questionable under dealings that has seen the Fund lose billions of pensioners’ savings.

First came a major restructuring programme executed by Managing Trustee Alex Kazongo that saw the sacking of at least six senior managers and the hiring of another 17 top managers.

Restructuring

The restructuring, which was aimed at restoring public confidence, affected critical departments like finance, procuring, administration and human resources that were believed to be the epicentre of the rot engulfing the Fund.

Then early last month, NSSF placed a tender notice in local dailies that largely went unnoticed looking for a contractor to undertake the extension of Hazina Trade Centre to its initial intended design of 30 storeys.

The building, which is located in the city centre and currently houses numerous businesses including the ultra modern Nakumatt Lifestyle supermarket, will cost an estimated Sh5 billion to upgrade.

In the midst of the significant developments, it then emerged that NSSF has resolved to dispose its substantial stake in cement manufacturer Bamburi Cement, ostensibly because the company is facing serious competition from new players and its market shares has been on a downward spiral.

Though the Fund has strongly refuted the claims, which have caused the share price of Bamburi at the Nairobi Stock Exchange (NSE) to nosedive in recent days, observers reckon that all is not well considering that Bamburi has since expelled Kazongo from its board.

"Get it from me… the decisions to dispose off our shares at Bamburi have not been discussed by the board. We have not made any decision to do so," Adan Mohammed, chairman of the NSSF board of Trustees told Financial Journal on Friday.

But considering the events of recent months, compounded by the Fund’s tainted history of mismanagement and misuse of workers’ pension, questions are being raised on the logic behind NSSF’s intentions to dispose its 14.7 per cent stake in Bamburi valued at Sh10 billion. Notably, in the past, NSSF has been used as a cash cow by politicians seeking raise funds for political campaigns.

Risky investment

Already, NSSF is at risk of losing nearly Sh2 billion invested in the stock market through Discount Securities, which is under statutory management even though the Fund has reported progress in a recovery process it initiated then.

Could history be on the verge of repeating itself as the country gears for a general election next year?

Besides, if the scheme were to dispose the shares, where does the management plan to invest the extra funds assuming that Sh5 billion is spent on upgrading Hazina Trade Centre?

Traditionally, NSSF has preferred investing in shares but in recent weeks the performance of the NSE has been subdued due to various factors, including rising political temperatures.

Could it be the funds would be invested in some obscure venture given that NSSF is not subjected to policing by Retirement Benefits Authority, as is the case for other pension fund institutions?

Close industry observers also see the asset liquidation as a calculated scheme by well connected individuals keen bleeding the Fund.

In the past, well-connected people have made a kill by "borrowing" huge chunks of money from the Fund, depositing it in some bank to earn enormous interest before return NSSF’s money at no interest.

More importantly to note is the fact that by its nature of business of collecting workers pension every month, NSSF is highly liquid. This begs the question exactly why does the Fund plan to hold another Sh10 billion in liquid form?

Efforts to talk to Kazongo and get conclusive responses on what is happening at NSSF were fruitless after he failed to honour a promise to grant the Financial Journal an interview last week.

Though no official reason has been forthcoming on why NSSF is contemplating an exit from Bamburi, the perception created is that the cement maker is going through tough times due to increasing competition in the industry.

This theory could hold some truth. Over the past six years, the cement industry has witnessed the entry of at least four new players, causing major disruptions in a sector that was dominated by only three manufacturers.

Declining profit

In the process Bamburi, the largest manufacturer, has seen its market share decline from 67 per cent to about 56 per cent in a span of six years. Recently the company, which is majority owned by France conglomerate Lafarge, announced a 21 per cent pre-tax profit decline from Sh9.5 billion in 2009 to Sh7.5 billion in 2010.

But despite Bamburi’s woes, NSSF is also a shareholder at rival cement maker East Africa Portland Cement Company (EAPCC), but there was no indication of any plans to exit the firm.

As of 2009, NSSF commanded a majority stake in EAPCC of 27 per cent. Just like Bamburi, EAPCC has also been badly affected by the rising competition and its market share has declined from 37 per cent to 30 per cent within the same period.

This begs the question, if declining market share is the reason NSSF wants to exit Bamburi, why not do the same in EAPCC?

On the issue of Kazongo losing his seat on the Bamburu board, the explanation given is that of failure to attend board meetings and the fact that with less than 15 per cent shareholding, NSSF can no longer be guaranteed a seat on the board.

While this is valid, many wonder what were the reasons behind Kazongo’s failure to attend Bamburi’s board meetings. Could there have been bitter fallout, something that eventually triggered the decision by the fund to dispose its stake?

While at this juncture it might still be vague to decipher what transpired, what is certain is that NSSF has a penchant for making unsound investment decisions, at least going by the past events.

According to sources, one of the reasons why NSSF is contemplating selling its stake in Bamburi could be to raise funds to finance the extension of Hazina Trade Centre.

With a price tag of Sh5 billion, the Fund considers the building a key source of income if finished to its original design of 30 storeys.

Adan, however, disputed this assertion. "It is a lie to say the selling of Bamburi shares is the only means of raising capital to complete the construction. We do many tenders and the Hazina tender is part of the move. In any case cash flow is not one of the issues affecting us," he said.

Interestingly, it appears that NSSF has not learnt a lesson from past because the tender No 14/2010-2011 seems to be asking for one contractor to carry out all the works. It is critical to note that in the past NSSF has lost large sums of money in previous tender awards that did not separate the works.

The current situation where the scheme has lost the appeal against last year’s hefty arbitration award to a contractor – leaving pension contributors at the risk of losing close to Sh1 billion — is a case in point.

NSSF suffered a double blow after the court ordered that it pays Pan Africa Builders & Contractors Limited Sh800 million – Sh300 million more than the arbitrators initially awarded the firm.

This dispute arose when Pan Africa Builders and Contractors moved to court in 2003 claiming that NSSF had breached a 1999 contract to develop the Kitisuru estate through a downgrading process that saw its value drop from Sh1.9 billion to Sh888.4 million.