Financial institutions and fund managers in the region are lining up to cash in on Uganda’s cash-rich state pensions corporation when plans to privatise it are completed later this year.

Proponents of the proposed privatisation, including Finance Minister Maria Kiwanuka, say breaking up the National Social Security Fund’s monopoly will lead to increased efficiency, innovation and return on investment through increased competition in the pensions sector.

Critics say it is not clear how privatisation will spur the development of the new long-term fixed-income investments in Uganda such as infrastructure and municipal bonds that would be useful in turning the NSSF and the pool of pension cash in the country, into a strategic local financing option.

What privatisation is guaranteed to create, however, is a windfall for the fund managers, insurance companies and banks that have been lobbying the government to speed it up.

At a basic 0.25 per cent management fee, NSSF’s Ush3.5 trillion ($1.34 billion) represents close to Ush9 billion ($3.46 million) per year before expenses, but the big money is in attracting a share of the Ush50 billion ($19 million) monthly revenues from statutory pension contributions and locking it in long-term investments and annualised payouts.

At least 78 firms, including NSSF, have already applied for licences to manage retirement benefits schemes once the industry is liberalised. Despite NSSF’s monopoly, there is still a lot of growth in the sector through higher compliance and signing on of new savers.

Currently, only companies that employ five or more people are required by law to sign them up to NSSF, leaving hundreds of thousands working for smaller firms without pensions.

A World Bank report released last week revealed that 60 per cent of all formal jobs in Uganda are in micro-enterprises that employ fewer than five workers — and which are currently not required to sign up to the statutory NSSF pension scheme.

Few Ugandan firms run in-house pension schemes and employers are reluctant to stump up more than the 10 per cent they are currently required to pay by law.

However, 90 per cent of Ugandan workers who retire can only point to their NSSF pension, according to figures from the fund, suggesting demand for parallel and possibly private pensions and retirement savings schemes.

There is also the elephant in the room — the Uganda government’s public pensions scheme. Covering civil servants, the scheme has been fraught with corruption and mismanagement and has a black hole in its finances of about Ush300 billion ($115.3 million).

An ongoing investigation reveals that corrupt officials stole at least Ush150 million ($57 million) from the public pension fund in just over a year, suggesting that closer supervision could close the deficit.

However, with the government struggling to make payroll amid rising salary demands, it is not clear how much longer it can continue to shoulder the pension responsibility for its employees.

Many industry watchers who spoke to The EastAfrican said the success of privatisation, which now appears to be a matter of when, not if, will depend on the quality of the regulatory environment.

“Government needs a very strong regulator, otherwise you are finished,” a high-level official in the industry said. “You may as well forget the industry and hand it over to cowboys and commission agents.”

The board of the new Retirement Benefits Authority is led by lawyer Andrew Kasirye and includes Secretary to the Treasury Keith Muhakanizi, but it will undergo a learning curve in what is a new industry.

For NSSF, a liberalised sector offers hope of finally closing the door on the past, which continues to throw skeletons out of its corporate closet.

For instance the fund recently wrote down Ush3.8 billion ($1.4 million) on the value of the controversial Temangalo land and is still battling lawyers over legal costs from the lengthy court battle against Alcon.

For NSSF, however, privatisation will not be the panacea many have proposed as long as governance issues continue to weigh on decision-making and as long as government doesn’t unlock long-term fixed income investment options.

Every three or so years, a scandal hits NSSF. It usually involves the fund managers allegedly doing dodgy deals that cost the fund money, or politicians allegedly forcing the fund to do questionable deals that cost it money.

READ: Scramble for control as detectives probe Uganda's NSSF

Part of the problem is that NSSF, with its pile of cash, is a sitting duck for Kampala’s business cowboys and patronage peddlers. The fund, whose value recently hit Ush3.5 trillion ($1.34 billion), has monthly revenues of over Ush50 billion ($19.2 million) and rising.

The fund’s management structure is a bit schizophrenic; most of its money comes from workers, who pay five per cent of their salaries, and employers, who contribute another 10 per cent.

However, the government, whose civil servants are not contributors, controls the statutory contribution fund.

After the last such scandal, over the purchase of land in Temangalo five years ago, the government sought to improve the management of the fund by appointing a new executive team with a private sector background.

It also named five workers’ representatives to the 10-person NSSF board.

In theory, this was a progressive step to enhance transparency and corporate governance and to comfort workers by giving them seats at the table. In reality, it has turned out to be a farce.

NSSF finds itself in a Catch-22 situation; its repeated scandals fanned enthusiastically by the local press (nothing is as emotive as workers’ money) has cost it public support while improved management, especially under the current executive team, has grown its asset base and made it the biggest financial institution in the country after the central bank.

NSSF’s Ush3.5 trillion ($1.3 billion) in assets is about six per cent of Uganda’s gross domestic product (GDP). Twenty out of every 100 shillings in banks in Uganda — Ush686 billion ($263 million) in the last published accounts — is money deposited by NSSF.

NSSF’s problem is not money; it is how to spend it. In its last published accounts, the fund showed it held Ush1.38 trillion ($500 million) in government bonds and Treasury Bills; Ush385 billion in property and real estate; Ush78 billion ($30 million) in equity investments; Ush68 billion ($26 million) invested in associated companies and Ush62 billion ($23 million) in loans and advances.

The fund management has tried to realign its investment away from real estate, which has performed poorly, to fixed income, which is now 81 per cent of the portfolio, up from 60 per cent.

It has also reformed its treasury operations to squeeze more interest out of the banks but these actions have tended to treat the symptoms rather than cure the patient.

Many workers complain that NSSF lends their money to banks at about 10 per cent interest only for the banks to lend it to them at more than double the interest rate. There is merit in the argument, but the bigger issue is the lack of long-term fixed-income investment options in the country.

Ugandan officials have considered issuing bonds to fund large infrastructure projects such as power dams, railways and highways but cheap credit from China and their traditional offer of turnkey projects appears to have become the preferred financing option.

For instance, the $2.2 billion dollar 600MW hydropower dam at Karuma on the River Nile and the $350 million Kampala southern bypass were both awarded to Chinese firms whose bids included financing offers guaranteed by Beijing.

With few local investment options of a long-term nature, NSSF is increasingly looking outward to Kenya, where corporate and sovereign bonds are prevalent.

Without improvements in oversight and corporate governance, privatisation is likely to expose NSSF; only by creating long-term, fixed-income investments can the Ugandan government unlock NSSF’s large asset base into a strategic financing opportunity for the country.

Without these financing reforms, liberalisation of the sector will only weaken NSSF and erode a cash resources that could have been used to rebuild Uganda’s infrastructure.

While that will be good for the new private entrants, it would be a lost opportunity for the country and its workers.

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