Category Archives: Kenya taxation

Pambazuka Lottery suspends Kenya business over tax

Today, the Pambazuka National Lottery (PNL) followed partner Sportpesa in suspending its operation in Kenya following a new 35% tax that came into force on January 1, 2018.

PNL, which is operated by Bradley Limited, interpretation of the tax change is that, whereas they had been paying out 55% out as prizes and 25% as a tax to charities, the new 35% tax makes operations impossible as their tax costs will be 115% before deducting any operating costs.

PNL was established in 2016, and the suspension announced on January 7 will allow any winners of prizes to claim them up to April 7, 2018.  The Pambazuka statement reads that “operating any lottery under this framework is not possible and therefore business operations are forced to close” but, as with Sportpesa, who had become arguably the leading betting company in Kenya, but who cancelled all local sports sponsorships last week, there is no mention of what the numbers actually are i.e revenue and taxes (in dollars or shillings), to compare how they were faring before the tax, to how unsustainable business will be under the new tax.

EDIT PNL’s directors say they had invested over two billion shillings (~$19.5 million) and employed over 500 people. 

Makueni County Healthcare

The Makueni County government is this week conducting new registration for a universal healthcare program in the 60 sub-wards in the county.  The Makueni University Healthcare program will provide essential health services to county residents at eight sub-county hospitals, and the county referral hospital.

It is being lauded and Makueni Governor Kivutha Kibwana who previously battled with the county assembly (parliament) that he was elected alongside in 2013, now appears to be enjoying a resurgence after his re-election on August 8 which he easily won, while 29 of the 30 county assembly legislators (MCA’s) were voted out.

The MCA’s had tried to impeach the Governor and he subsequently moved to dissolve the entire county government. A commission on inquiry looked into the disputes at Makueni and made some recommendations to the President, but as he never forwarded the report to the Senate for debate and approval, the situation was never fully resolved, until the 2017 election.

In promoting the Makueni health care program, the county government states the high level of poverty (60%) in the region as a reason why they set out to provide free health care to senior citizens (above 65 years of age) in the county through a pilot program in 2016. They deemed it a success and decided to expand it to universal health care and they have already enrolled another 33,344 households, excluding the senior citizens. The ongoing registration aims to net 180,000 new households and the benefits of the program will be improved health care with no out-of-pocket expenses for households which have previously resorted to selling livestock or land to meet family medical expenses. During the test phases, Kshs 138 million was expensed, with the bulk of that going to pharmacy expenses (33%), then inpatient (24%) and laboratory (15%) expenses.

The Makueni program will pay for emergency healthcare, laboratory, radiology, theater, cancer screening, drugs, and ambulance evacuation, among other expenses. The cost is Kshs 500 per year for a household and that will cover a nuclear family – beneficiary, spouse(s) and dependents of school going age. It is separate from the government’s national hospital insurance fund (NHIF), and Makueni will not cover services outside the county, such as scans, MRI’s, post-mortems, ICU, dialysis, and other specialized services not available within the county.

The ambitious and novel Makueni program is similar to one in Muranga county that sought to mobilize savings for county investments, but which was scuttled by regulators and wary investors.

The latest Auditor General (OAG) reports on Makueni noted that the county government received (2015) revenue of Kshs 6.3 billion (that included Kshs 5.9 billion from the national government) and that Kshs 5.4 billion was spent, leaving a Kshs 0.9 billion surplus. The OAG noted the disruption of the government activities but gave an adverse opinion on the Makueni county assembly (legislators) accounts while those of the county government (executive) were qualified. The executive was flagged for operating bank accounts at banks other than the Central Bank, and also for issues with the procurement of assets and construction of dams. The report on the assembly noted issues with lack of supporting documentation, hiring of professionals, including lawyers in the case against the governor, and trips that Makueni MCA’s had made to Mauritius, Boston, London, Malaysia Dubai and Singapore.

Safaricom CEO Leave and Impact

Safaricom is not expected to undergo major changes or see much impact following the shock statement released this week about CEO Bob Collymore leaving the company for a few months to undergo medical treatment.

“During this time, Sateesh Kamath, the current Chief Financial Officer for Safaricom who is also Mr. Collymore’s alternate on the Board, will take a primary role.  He will be supported by Joseph Ogutu who is the current Director – Strategy and Innovation, Safaricom. Mr. Ogutu will be responsible for Safaricom’s day-to-day operations until Mr. Collymore’s return from medical leave.

Following the news about the CEO’s leave, the Safaricom CFO had a session with investors, and according to a Citi report afterwards on the implications of the events:

We have no concerns over operations of the company in the CEO’s absence. Based on examples in other geographies, it would take a couple of years to derail a well-run company.The company may become exposed on the regulatory side. We think the regulation is likely to remain balanced with consideration of the contribution the company makes to the state (in taxes and dividends)

The discussion about succession and its impact at Safaricom comes exactly seven years after Collymore took over from Michael Joseph as CEO. He then made his formal debut announcing the half-year results back then, and that event will recur again tomorrow (Friday) when Safaricom releases its 2018 half-year results. Also at the results announcement, updates will be given on the e-commerce plans and international expansion of the M-pesa platform.

CFO Kamath with CEO Collymore and Chairman Nganga at the Safariom 2017 results announcement in May.

At the announcement of another year of record 2017 financial results announcement in May this year, company chairman, Nicholas Nganga announced that the expiring contract of Collymore had been extended for another two years. No interim CEO will be appointed at Safaricom, Collymore came to Safaricom from Vodafone, but an appointment of a CEO is one of the governance clauses that changed with the Vodacom buyout of Vodafone’s interest in Safaricom in the middle of the year.

The Safaricom Sustainability Report for 2017 which Collymore launched a month ago, noted that the company’s shareholding had experienced a decline in local and retail shareholders due to their profit-taking from the company’s high share price and a corresponding increase in investment stakes of foreign corporate investors due to Safaricom’s performance and strong fundamentals.

Moody’s places Kenya’s B1 rating on review for downgrade

Moody’s Investors Service has placed the B1 long-term issuer rating of the government of Kenya on review for downgrade.

 

Excerpts

The decision to place the rating on review for downgrade was prompted by the following key drivers:

  •  Persistent, large, primary deficits and high borrowing costs continue to drive government indebtedness higher
  • Government liquidity pressures risk rising in the face of increasingly large financing needs
  • Uncertainties weigh over the future direction of economic and fiscal policy, in part due to evolving political dynamics

Moody’s expects that Kenya’s government debt burden, which has risen to 56.4% of GDP in June 2017, up from 40.5% five years ago, will continue to rise due to persistently high primary deficits and borrowing costs. Pressures on the government primary balance, which posted a deficit of 5.3% of GDP in the latest fiscal year ending June 2017, come from elevated development spending and weak revenue performance. Unless a decisive policy response is introduced, the upward trajectory in government debt will see debt-to-GDP surpass the 60% mark by June 2018.

Due to the erosion in government revenue intake in the last five years and increased recourse to debt from private sources on commercial terms, government debt affordability has deteriorated. In the latest fiscal year, the government spent 19.0% of its revenues on interest payments, up from 10.7% five years ago.

A key focus of the review will be to assess the capacity and willingness of the government to address these budgetary challenges in a comprehensive, effective and timely manner.

What Next?

Moody’s would downgrade the rating if the review were to conclude that Kenya’s government debt and financing needs, and hence its fiscal strength and liquidity position, have eroded to levels no longer consistent with B1 rated peers. In particular, the rating agency would downgrade the rating in the absence of an effective policy response to these challenges.

Or

Moody’s would confirm the rating at B1 if the review were to conclude that the policy response offers the prospect for tempering the currently-anticipated upward trend in government debt and that liquidity risks are being effectively managed.

Reading the Tea leaves at Centum, Kenya Airways, Safaricom – Part III

Following up from last year, three companies that had their year-end in March 2017 – Centum, Kenya Airways, and Safaricom have just published their annual reports. Later this month, they will all have shareholders annual general meetings – Safaricom’s will be on September 15, Kenya Airways, who already had an EGM will have their AGM on 22 September, while Centum’s will be on September 25th at Two Rivers, Nairobi.

Notes from the annual reports.

Centum:

  • Has a massive 234-page annual report (up from 192 pages), and the company has 37,163 (last year 37,325) shareholders. 44 shareholders have more than 1 million shares.
  • Board changes at the AGM: New chairman Donald Kaberuka will meet shareholders, and this year Henry Njoroge Imtiaz Khan and Dr. James McFie all step down from the board.
  • Shareholders will also be asked to approve the incorporation of ten Ramani Arch companies as Vipingo subsidiaries, Rehati Holdings, Zahanati Holdings Greenblade Growers, and a Greenblade EPZ.
  • Centum will pay shareholders Kshs 1.2 per share dividend (up from 1.0 last year)
  • Had 86 billion assets. Profit was Kshs 1.5 billion for the year then added with other gains from value changes, this reached Kshs 6.1 billion.
  • Their auditors, PWC, flagged issues like loan impairment at Sidian, loans at Chase Bank, the value of unquoted assets, the value of goodwill, and the value of investment properties.

    Centum shareholders to meet at Two Rivers.

  • Centum has 35 billion worth of subsidiaries including Two Rivers Development (50% of lifestyle centre and 100% of water, ICT, apartments, and phase 2) , GenAfrica Asset Managers (73%), Almasi Beverages (52% of Investment holding company for Mount Kenya Bottlers, Kisii Bottlers and Rift Valley Bottlers), Bakki Holdco (Sidian Bank) and Vipingo Estates
    Associates: Centum sold off their entire 26.4% of KWAL (for Kshs 1.1 billion) while at Longhorn they raised their stake to 60%.
  • Unquoted investments include General Motors East Africa (GMEA – estimated Kshs 3 billion worth), Nas Servair (estimated Kshs 765 million) and Nabo. NAS, where they own 15% opened three Burger King restaurant franchise outlets in Kenya. Centum still owns 17.8% of GMEA after Isuzu bought a majority 57% stake from GM. They also own 25% of Platinum Credit that provides loans to civil servants and has 80,000 customers.
  • Their Lulu Field acquired 14,000 acres in Masindi Uganda for agriculture.
  • They own  27.6% of Nairobi Bottlers which accounts for 47% of the Coca Cola sold in Kenya.
  • In energy, they own 37% of Akira geothermal and 51% of Amu Power.
  • Managers earn more from performance bonuses than salaries.
  • They have borrowed Kshs 1.4 billion from Coca Cola Exports (for Almasi to buy crates and bottles), 3.1 billion from First Rand, Kshs 982 million from Cooperative Bank (for working capital), Kshs 573 million from Chase Bank (for infrastructure at Two Rivers and vehicles for Longhorn), and Kshs 440 million from KCB (for machinery at Mt. Kenya Bottlers)
  • They are owed Kshs 12 billion by related parties including 1.1 billion by Two Rivers Development, 3.1 billion by Centum Exotics, 3.3 billion from Centum development, 1.3 billion by Mvuke (Akira geothermal), 672 million at Vipingo Development and 533 million from Investpool Holdings.

Kenya Airways 

  • The report is 172 pages (up from 149 pages) and KQ has 79,753 shareholders (up from 78,577).
  • Going Concern: While their auditors KPMG have a material matter about KQ’s uncertainty as a going concern, the Directors have prepared the consolidated and company financial statements on a going concern basis since they are confident that the plans described above provide a reasonable expectation that the Group and Company will be able to meet their liabilities as and when they fall due and will have adequate resources to continue in operational existence for the foreseeable future. The Directors believe the plans above will improve the Group and Company’s profitability, cash flows and liquidity position. 
  • Sebastian Mikosz takes over as Group Managing Director & CEO, replacing Mbuvi Ngunze.
  • Tax treatment: the accumulated tax loss of Kshs 71 billion of Kenya Airways and Kshs 782 million of JamboJet will be carried forward for ten years and used to offset future taxable profits.
  • The fleet in 2017 had 39 aircraft down from 47. The board approved the sale of 6 aircraft, and 5 have since bene sold. Also, two Embraer 170’s were returned early to the lease owners while three Boeing 777-300 were leased for four years by KQ to Turkish Airlines with another two Boeing 787-800 leased to Oman Air for three years.
  • Borrowings Barclays Bank PLC – Aircraft loans 325 million at 4.87%, Citi/JP Morgan – Aircraft loans Kshs 71,649 million at 1.89%, African Export – Import Bank (Afrexim) – Aircraft Loans Kshs  21,050 million at 4.82%, and short-term facilities of 24,776 million at 8.58%, and Government of Kenya  24,540 million at 8.58%. The short term facilities were drawn down from Equity Bank, Jamii Bora Bank, Kenya Commercial Bank, Commercial Bank of Africa, I & M Bank, Chase bank, National Bank of Kenya, Diamond Trust Bank, Co-operative Bank, NIC bank and Ecobank for the financing of pre-delivery payments for ordered aircraft.
  • On Time Performance (“OTP”):  The top delays contributors were:1) Aircraft serviceability and availability;2) ATC restrictions and weather;3) Passenger and ramp handling;4) Crew shortage; and5) Connectivity due to new schedules with more efficient use of aircraft.
  • 13 incidents related to disruptive passengers/inappropriate behaviour were reported in 2016/17 financial year compared to 21 incidents reported in the prior year.
  • A total of 70 bird strikes were reported during the period under review compared to 63 cases in the prior year. Most of the reported bird strikes caused minimal damage to our aircraft, but several resulted in costly maintenance, parts replacement, and operational delays. These include two reported air turn back incidents and two rejected take-offs due to bird strikes.

Safaricom

  • The report is 144 pages (down from 172) and the company has 582,775 shareholders (down 600,000 shareholders last year and 660,000 the year before that).
  • At the AGM, shareholders will approve payment of a dividend of Kshs 0.97 per share (out of EPS of 1.21) – for a total dividend payout of almost Kshs 39 billion. Last year they paid Kshs 57 billion in dividends (35% of which went to the government to whom they also paid Kshs 84.3 billion in taxes and other fees).
  • Shareholders will approve a name change to Safaricom PLC. Also, they will vote on special board change resolutions following the Vodacom Vodafone deal; these  will mandate that the Chairman and all independent directors of Safaricom be Kenyan citizens, and also to require that a super-majority of the board (75% of directors) vote to approve changes to the business plans, appointments of the managing director and chief financial officer, and branding of the company – which previously Vodafone had a direct veto over.
  • Balance sheet of Kshs 108 billion down from 117 billion.
  • Bonga points (a loyalty scheme) now total  Kshs 3.3 billion (up from 3.2 billion) are a liability to be converted to revenue as customers utilize their points.
  • Safaricom also has deferred revenue of Kshs 3.4 billion from unused airtime and bundles (up from 2.7 billion) which include Kshs 243 million of managed services under the police contract.
  • For, the National Police Service communication project an amount of KShs7.5 billion was received during the year and the outstanding balance at the year-end was KShs4.47 billion.
  • The Group has short-term borrowing facilities with Commercial Bank of Africa, Standard Chartered Bank and Barclays Bank of Africa.
  • Safaricom has an active ESOP: 13.7 million shares historically valued at KShs193.2 million (2016: 30.4 million shares valued at KShs375.12 million) vested and were exercised by eligible staff.
  • Risks: their auditors, PWC, flagged  issues such as accuracy of revenue recognition, while
    Safaricom itself considers business risks including terror and cyber attacks, competition  (from companies like WhatsApp), the regulatory environment and weakened economic growth.
  • They have an Insider trading policy. Directors and staff are made aware that they ought not to trade in the company’s shares while in possession of any material insider information that is not available to the public or during a closed period.
  • Subsidiaries are One Communications, Instaconnect, Packet Stream Data Networks, Safaricom Money Transfer Services, East Africa Tower Company, IGO Wireless, Flexible Bandwidth Services, Comtec Training and Management Services, and Comtec Integration Systems – all 100& owned, while The East African Marines Systems Limited (TEAMS) is an associate company where they own 32.5%.
  • New products and innovations include Blaze, Flex and M-Pesa Kadogo under which they waived all charges for m-pesa transactions smaller than Kshs 100 ($1). 
  • Besides partnerships such as M-TIBA, Eneza and M-KOPA, they had others with women in technology, Little Cabs, athletics and music. Also, the Safaricom Spark Fund invested in six companies – Sendy, mSurvey, Eneza, Lynk, FarmDrive, and iProcure.
  • The company donated Kshs 381 million to the Safaricom foundation.
  • Twaweza – when we come together, great things happen– is the next phase of the Safaricom brand.