Posted on October 29, 2020 by InVhestia

The effectiveness and efficiency of a country’s public sector is vital to the success of development activities in that country. To achieve a well oiled and functioning public sector one thing is critical, decisions made need to be driven more by analysis and quantification of intended impact and less by gambles and political agenda. At InVhestia we are proud to be a pioneer in supporting Governments and parastatals improve the quality of their decision making through financial modelling. While the majority of our work is private facing, we have realized that it can also inform the public sector. Financial modelling which sits at the core of what we do develops tools that can be used to remove the gamble from complex decisions, be they business choices or public policy. Over the last couple of years we have been involved in a number of assignments which show how modellling can support the public sector to improve effectiveness and efficiency.

Support for the Government of Zambia in Fiscal Regime Review and Setting

Zambia is highly dependent on mining as its major productive industry contributing to 68% of the countrys foreign exchange earnings, anything that affects their extractive sector significantly affects the countrys economy. Since 2018, through the Zambia Extractives Industries Transparency Initiative, InVhestia has been offering support to the Government of Zambia through capacity building in financial modelling focused on fiscal regime setting and in consultancy services. The consulting services have been geared towards reviewing the impact of changes in fiscal regime on Zambia’s earnings from the extractives sector and the impact on company returns. Whenever a Government is thinking about changing its taxes in the extractives sector, two factors need to be balanced, how the government take (total earning to the state) will change compared to company returns (these can be measured using the Net Present Value, Internal Rate of Return etc).

Through this work, we have seen improved skills in model build and review and in better engagement between the Government of Zambia and mining companies.

Benchmarking of Kenyan Mineral Royalty Rates with Peer Economies

According to the economic survey, the mining sector in Kenya contributes 0.8% to the country’s GDP. The State Department for Mining is mandated to provide regulatory oversight through the implementation of the Mining Act, 2016. In 2017 InVhestia was enaged to offer financial modelling support in seeking to establish whether royalties charged for gold, coal and titanium under the Act and accompanying regulations and gazette notices were adequate. Our report, as commissioned by the Extractives Hub and written in conjunction with Open Oil was presented to the then Cabinet Minister, Ministry of Mining. The high-level benchmarking exercise showed that Kenya’s fiscal regime falls broadly within norms observed in peer countries.

In preparation of the report we modelled out sample mines for the three resources under the Kenyan fiscal regime and compared the earnings to the Government to what other leading countries were charging and earning from similar resources.

Turkana Oil, should Kenyans be excited?

In 2018, InVhestia published an analysis on one of the oil blocks in Turkana which you can download here. In the report we sought to answer questions such as, how much Kenya will earn from exploiting the resource, how this will be split between the National and County Government and the community, the returns to the Contractor on the project among others.

The report and the accompanying model had critical analysis which at the time was useful in the debate around what formula should have been used to split the earnings from Oil. It also shed light on the feasibility of the project under different price scenarios.

Conclusion

The public sector requires financial models to inform strategic decisions. This is an effort that is also supported by the African Development Bank (AfDB) who launched a project on strengthening domestic resource mobilization through financial modelling for the extractive sector in transitional countries. One key objective is to enhance the capacity of state agencies to forecast and monitor revenues from projects and investments. While it would appear that the focus is largely in the mining sector, public policy in oil and gas, energy, transport and infrastructure, health, housing, planning, industrialization among other sectors can also benefit from the analysis of data through financial modelling.

More and more, financial modelling is proving useful to contribute to pertinent debates which in most cases, have a bearing on livelihoods of millions of persons. Johnny West from Open Oil put it well when he said, “Models can be great ‘rumour killers’, they may show that a country’s offshore sector is not going to save the entire economy, public finances, or end poverty. Or, they may demonstrate that a deal was actually OK.”

We are pleased to be pioneers in this space. We plan to share an update on our Turkana Report before the end of year. To join the mailing list, fill the form on our website.

Stephen Gugu, David Ndungu, Nyambura Ngumba

Should investors be worried about Kenya Power’s (KP) ability to perform?

Posted on October 2, 2020October 3, 2020 by InVhestia

COVID-19 has had a significant impact on the World and its economy. For Kenya Power, it has resulted in critical questions being asked around its financial performance. This is following recent headlines stating that the utility company is looking to get out of Power Purchase Agreements (PPAs) through the force majeure clause and further declaring a profit warning for the financial year ended June 2020. As an investor in Kenya’s energy sector, such messaging is worrying as regards the utility’s stability and its expected performance on its long-term PPA agreements.

We have prepared a report that seeks to investigate and answer the question of whether investors in Kenya’s energy sector ought to be worried about KP’s ability to perform on its commitments, especially to the investors. The analysis looks at KP’s historical financial performance from 2008 – 2019 (the micro view) and the demand-supply dynamics in Kenya’s power sector (the macro view) in a bid to answer this key question.

The analysis finds that operationally KP has performed well. Total revenues and operational profitability as measured by the EBITDA margin (Earnings Before Interest Tax Depreciation and Amortization) have increased over the focus period. Revenues have increased by 93% over the period, with EBITDA margins almost doubling from 12% to 20%. Once finance costs (debts service costs) are taken into account, however, KP has performed dismally. Its net profit margins have reduced from 5% to 0.2% over the same period, no wonder its share price has plummeted over the period by 92%. While this is concerning, we believe it is something that the utility can address, especially bearing in mind it is a monopoly for all intents and purposes.

What should worry investors, however, is the macro view. While over the historical review period peak demand and installed capacity have been growing in tandem, the key risk for KP is the Government of Kenya’s ability to deliver on proposed mega projects and the Big Four Agenda. KP signs long-term PPA agreements upon reviewing the demand forecasts, which are very much a factor of the Government ability to deliver on key projects. If these projects are not implemented on time and to the forecasted scale, KP will be left exposed and as a result not perform on its obligations.

Download the Full Report

Personal Development for University Students: The Launch of InVhestia Financial Modelling Competition 2020

Posted on August 6, 2020October 19, 2021 by InVhestia

‘Education is key to personal development and the future of societies. It unlocks opportunities and narrows inequalities. It is the bedrock of informed, tolerant societies, and a primary driver of sustainable development. The COVID-19 pandemic has led to the largest education disruption ever. We are at a defining moment for the world’s children and young people.’ These are the words of Antonio Guterres, the ninth Secretary-General of the United Nations at the launch of the policy brief: Education During Covid-19 and Beyond.

InVhestia has run an inter-university competition over the last 4 years. The initiative was launched when we realized financial modelling is not a widely practiced discipline and that revealed a skills gap in recent graduates entering the workforce. Over the years we have trained students in in various Nairobi based universities with top students getting internships and working on projects for institutions such as Open Oil, and getting internships at institutions like KPMG, InVhestia, HEVA Fund and Horizons Africa.

Last year, the FAST Standard Organization and F1F9 sponsored the competition which saw us reach more students than previous years. One of those students is Valentine Wahome, a 4^th year student at the University of Nairobi. Valentine sat in for the training session carried out by a former winner of the competition. “This was the first competition I’ve ever participated in. I learnt about the training session from a student leader. What stood out to me in the session was how easy and efficient working in Excel seemed. Our school curriculum teaches us to use notebooks and a calculator. I had a hard time understanding macros but I submitted my model. I did not think I stood a chance but figured I should give it a shot nonetheless,” he says. Valentine ranked as top 10 in the competition and secured an internship opportunity. “Through this experience, I’ve learnt that financial modelling does not only mean good Microsoft Excel skills but rather understanding the assignment at hand and what the business or investor wants to accomplish.” He sat his FAST Level 1 Certificate Test and passed.

We are launching our 5^th Edition of the competition, but this will be one like none other before it. Given the prevailing circumstances, we cannot go to the universities. However, we are going to leverage our digital learning platform to give the students access to top notch financial modelling content . “This year we are opening the competition up to students across the continent which is the positive outcome of going strictly online. We will give them free access to our courses and conduct webinars that they can access at their convenience. We are also looking for partners who will allow us to reduce the barriers as far as internet access and by increasing internship opportunities for the finalists. We believe this is the best time to invest in the personal development of the youth and build the next generation,” said Stephen Gugu, Principal at InVhestia.

We are pleased to be partnering with the FAST Standard Organization for another year and look forward to impacting even more students. We agree with Mr. Guterres that education is the key to the future of society.

Follow our LinkedIn, Facebook and Twitter pages to schedule important dates share with university students near and far.

If you would like to partner in this initiative, send an email to learn@invhestia.com

Financial Distress? Company Voluntary Arrangements

Posted on March 12, 2020March 12, 2020 by InVhestia

Every entrepreneur’s goal is to provide a solution to society by providing goods or services which are differentiated and which solve a specific problem. Such action assumes the business will remain a going concern. Along the journey of the business, poor economic conditions or poor management decisions affect the business resulting in its inability to service its obligations as they fall due.

If a company sustains a long period without paying its liabilities, the company is financially distressed; such companies experience decreased product demand as a result of not being able to stock sufficient and required inventory, which in turn is attributable to the company’s inability to meet obligations to suppliers. This situation leads to high cost of financing and unfriendly terms of trade.

WHAT HAPPENS TO A COMPANY IN FINANCIAL DISTRESS? PART VIII – INSOLVENCY ACT OF 2015

When a company gets into financial distress, it can be placed under administration. Part VIII of the Insolvency Act 2015 (the Act) requires appointment of a qualified person (appointed by court, the company or holder of floating charge) as an administrator to manage the affairs of company. The overall objective is to maintain the business as a going concern and avoid liquidation. However, administration isn’t always successful and liquidation becomes inevitable. Part VI of the Act guides on the liquidation process but liquidation is considered only after the administration process. While administration is an option available to restructure a company, the Act introduces other alternatives.

COMPANY VOLUNTARY ARRANGEMENTS (CVA) – PART IX OF THE INSOLVENCY ACT OF 2015

A company in financial distress doesn’t need to wait for the administration process. The directors of the company may propose to the company creditors a voluntary arrangement on how to settle the outstanding debt. In making the proposal, the directors of the company appoint a licensed insolvency practitioner to guide the CVA process.

THE CVA PROCESS

Step I – The Proposal

The company, through its board resolves to utilize CVA as a way to restructure the business. The board then makes a proposal to its shareholders and creditors for a voluntary arrangement with respect to its financial affairs. The directors must also nominate a Provisional Supervisor, “the Supervisor” who must be a licensed insolvency practitioner to supervise the implementation of the voluntary arrangement. The proposal should include the following:

Information about the company & background
A Statement of affairs
Proposed method for restructuring the outstanding debts: senior lenders, preferential creditors, and unsecured creditors. This would include waiver of interest and penalties, lengthened debt tenor, moratorium, haircuts, debt equity conversion among others
Impact of the restructuring process on the financial position of the business
Turnaround business optimization strategy

The Supervisor reviews the proposal and gives his opinion on whether it has a reasonable chance of success. Once the Supervisor is satisfied with the proposal, he files a report in court and asks the court for permission to convene a creditors’ meeting. The supervisor is also required to have confirmed the claims of the creditors prior to the meeting.

Step II – The Creditors’ Meeting

The main purpose of the meeting is to decide whether to approve the proposal as is, introduce modifications or reject it. A modification to the proposal may be approved if the company consents.

While the meeting is convened by the Supervisor, at the beginning of the meeting, the creditors must elect one of their own to be chairperson for the meeting. For voting purposes, the meeting is divided into 3 groups; secured creditors, preferential creditors and unsecured creditors

APPROVAL OR REJECTION OF THE CVA

Section 665 of the Insolvency Act of 2015 states that the proposal is approved if:

A majority of the members of the company present at the meeting approves the proposal (Shareholders)
A majority of the members of each group of creditors (number and value) present at the meeting approve the proposal. Approval by each group of creditors supersedes that of members in case members vote against the proposal

A proposal (with or without modification) takes effect as a voluntary arrangement by the company on the date in which the court approves and it is binding on the company and its creditors.

FIRST EVER CVA IN KENYA: UCHUMI SUPERMARKETS PLC AND THE ROLE OF INVHESTIA AFRICA LIMITED

Uchumi is currently facing financial challenges. Consequently, there is an urgent need to reorganize the business to be able to meet its financial obligations while responding to a highly competitive and evolving business environment.

In the reorganization process, management decided to liquidate a non-core asset, a 20-acre parcel of land in a bid to settle some of the debt partially and at the same time inject some liquidity into the business to finance working capital to enable the business to achieve revenue growth and consequently improve its cash flow position.

Uchumi Supermarkets PLC engaged InVhestia Africa Limited to prepare a debt restructuring plan. The proposal was presented to the creditors on 2^nd March 2020, at Bomas of Kenya.

The proposal recommended the following to each category of the creditors based on cash flows

Unsecured Creditors: 30% payment over six years on an annual basis, 30% discount or haircut and 40% conversion to non-cumulative convertible preferential shares
Preferential Creditors: 100% payment over six years on an annual basis
Secured Creditors: The proposal submitted included a mix of Lump sum payments, Full and Final Settlement (FFS), haircut or discount on the outstanding balance and restructuring the remaining balance over seven years

The table below summarizes the voting results of the Uchumi CVA proposal.

Written by James Wambua and Steve Ogada

MEDIA REPORTS

https://citizentv.co.ke/business/uchumis-agony-high-court-sets-repeat-creditors-vote-323858/

https://www.youtube.com/watch?v=MqizKIe9HyI&feature=youtu.be

https://www.youtube.com/watch?v=3573ww4PYPk&feature=youtu.be

https://www.youtube.com/watch?v=nPBF2e7dQdc&feature=youtu.be

From Chama to Conglomerate: What You Need to Know

Posted on February 20, 2020February 20, 2020 by InVhestia

My earliest memories of a chama include food in plenty and loud laughter followed by hushed tones in serious conversation. My mother and her lady friends have met consistently once a month for over 27 years. They are my “aunties”, the ones with no familial relation, every African has some. But a chama is so much more than meetings. According to the 2016 FinAccess report, 1 in 2 individuals in Kenya is a member of an informal financial group. As is mostly the case, it starts out to help meet a household need like school fees, or results from a group of friends who desire to grow their businesses, others have come together because they attended the same high school and feel the urgency to “jipanga”(loosely translated to financial planning to attain financial freedom). Wherever you go, in Africa, these groups exist. These are the people you invite to raise funds for your wedding, medical assistance due to unexpected illness or the final rites for your loved ones.

Longhorn Publishers together with author Mr Tony Wainaina recently launched the book “The Investment Group Handbook: From Chama to Conglomerate”. According to the Mr. Wainaina, this book is necessary because investment groups, or “chamas”, despite their numbers and value of assets pooled over the years, remain largely informal, fragmented and have no institutionalized support systems to help them unlock their potential. At the event, he said, “While saving and investing individually is good, doing the same with others works better because groups already exist in culture and help to solve challenges. Another key benefit is the peer pressure to meet your responsibilities.” People often leave their chamas due to changes in life priorities or due to disagreements. Others remain, but aptly put at the launch by Stephen Gugu, “have never seen the plot of land the chama bought 2 years ago.” Whether you fall in one of these categories or represent the other one person, here are some key take-aways from a panel discussion at the book launch.

Governance is a key issue for chamas. Are members like-minded? Do you have the same risk appetite? It is impossible to have the whole group be leaders and often the most outspoken member determines the way forward, but are they qualified? There should be structures and policies in place for each group. Just as no company runs itself, things will not just happen. Take your chama as seriously as you do your job. Often groups are reluctant to spend money but investing in professional services and hard work will pay off. The challenge of succession also needs to be addressed. Tony Wainaina, author of The Investment Group Handbook: From Chama to Conglomerate.
The principles in this book are what we have used ourselves. The most critical thing is clarity of vision because without it, execution is impossible. Building momentum takes time, it shouldn’t be considered as short term. It is important to individuals to be aligned, is the group for social safety or investment? Work within your circle of competence and avoid the scarcity mindset. Being positive and ambitious stimulates growth. Dr. James Mworia, CFA, Group Chief Executive Officer, Centum Investment Company PLC.
You cannot treat saving and investment as a luxury. If you are investing what you cannot afford, the pain will make you show up. It is not possible to create wealth in a comfort zone, there needs to be a sense of urgency. This may mean that some people need to leave their chama. We encourage people to move from a mindset of consumption to one of saving. Of all the formulas we learn in life, multiplication is most important. Consider this: How can I multiply money, ideas, my skills and my network? Waceke Nduati Omanga, Entrepreneurship Coach and Author and Founder, Centonomy Ltd.
Even the Bible says that lack of knowledge leads people to perish. Groups should get good advice and consider that success means various things to various people. Once good foundations have been set, and this includes an investing policy, we can begin to unlock the potential in chamas. It is also important to tell the success stories; we should do it more often and louder! Patrick Kariuki, Chairman of the Association of Investment Groups and Chief Operating Officer, Genesis Kenya.

And that is what this book sets out to do. Tony Wainaina looks at 3 Kenyan investment group case studies and details what has happened 6 years since he initially profiled them in the first edition of his book. As Mr. Wainaina puts it, “All this investor class requires is capacity building, and that starts with giving practical guidelines on what to do to improve their capability to create real, sustainable wealth.” The book is available for purchase at Text Book Center.

Written by Nyambura Ngumba

Author: InVhestia

Intro to Track Sheets

Creating Track Sheets

Track Sheet Conditional Formatting

Public Sector Modelling: Why Does It Matter?

Should investors be worried about Kenya Power’s (KP) ability to perform?

Personal Development for University Students: The Launch of InVhestia Financial Modelling Competition 2020

Financial Distress? Company Voluntary Arrangements

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