UGANDA, Kampala | Real Muloodi News | Last week, Government tabled before parliament a proposal to buy 150,000 preference shares in local construction firm Roko Construction Limited, valued at USh202.13 billion, to be paid for over five years.
However, the proposal has raised eyebrows among Members of Parliament on the Committee of Finance, Planning and Economic Development.
While meeting MPs on the Finance Committee on Tuesday, 12 July 2022, Roko Construction officials led by Mark Koehler, Roko’s Managing Director, justified the move saying it will be “an exciting investment” to have government as a preference shareholder to raise its liquidity prowess.
Conversely, MPs on the Committee, chaired by Hon. Keefa Kiwanuka, expressed concerns over the arrangement that would see government borrow in excess of USh202 billion, saying there is no guarantee of returns on the investment since dividends are only premised on profits, with little or supervision from government.
Why Government is Considering Purchasing Roko Shares?
When tabling the proposal, State Minister for Finance, Henry Musasizi, explained that the intention behind the purchase of the shares is to provide financial support to the company, and give it the necessary liquidity to meet its operational needs and other obligations.
Parliament discovered that Roko Construction Limited is facing severe liquidity challenges, making it difficult for Roko to execute contracted projects. Roko’s liquidity situation has adversely affected payments to its several suppliers and the financial sector.
As of May 2022, Roko had debts totalling USh202.4 billion.
It also has liabilities from bank guarantees of USh130.9 billion, indebtedness to financial institutions totalling USD35.7 million and 20.7 billion. The bank guarantees issued for ongoing projects amount to 130.9 billion, which would lapse as they are still executing the projects. The dues to local suppliers total up to 46.8 billion.
Musasizi says that the liquidity constraints of Roko have affected various government projects, including the Parliament of Uganda, the Inspectorate of Government, the Uganda Cancer Institute, and the Ministry of Finance.
What the Finance Committee Has to Say About the Proposal
At the Finance Committee meeting on Tuesday, a number of MPs voiced opposition to the government proposal.
“Why is Roko selling preference shares to government, yet the company’s Articles of Association do not allow buying of shares? This looks like a borrowing or a loan being advanced to Roko rather than an investment. This arrangement means that government cannot participate in decision making,” said Hon Xavier Kyooma (Ibanda North).
Butambala County MP, Hon. Muwanga Kivumbi says the construction firm could have explored other options such as seeking a financial undertaking with Uganda Development Bank instead of approaching Government.
Kashongi County MP, Hon. Herbert Tayebwa Musasizi suggested that Roko should join the stock market in search for shareholders to inject money into the operations of the firm, rather than selling preference shares to Government.
“Roko is a limited company that has been making profits. In 2018, they made profits of Shs790 million, Shs2.8 billion in 2019 and only made a loss of Shs3.4 billion in 2020. It should therefore, be able to finance its working capital,” Tayebwa said adding that, ‘This transaction only favours Roko with no monetary gain from government’.
Tayebwa went on to say, “This is an investment on the side of Roko, and a debt on the side of government. Whereas Roko has the privilege of paying dividends after profits, government has an obligation to interest on the money it borrowed from the bank. So why is government going to borrow money to pay Roko and at the end of the day, come out with nothing? Suppose the company does not make profits?”
Dr. Joseph Kibuuka, Roko’s transaction advisor, tried to reassure the MPs that Government’s interests would be well protected in the new shareholding agreement, with flexible terms of reference.
“This is an investment; it is not a borrowing from government. That is why we have a 4.35 per cent per value of preference shares that will go to government as a preference shareholder. This nature of transaction is that shares are redeemable within eight years and if government chooses to leave and asks us to redeem, then it is a decision both parties can take,” said Kibuuka.
Kibuuka also addressed MPs’ fears that under a preference shareholding agreement, government will not take part in decision making which could be detrimental to profit maximization and accountability.
“In the new governance structure, government will appoint two members to the Board on recommendation of the relevant ministries. One of the two members will chair the Audit Committee which creates an assurance platform into this transaction. The two members on Board will still have veto rights,” he said.
Should the deal go through, the proposed Government payment would consist of shares purchased at a par value worth USh150 billion and a share premium value estimated at USh57.6 billion.
Why Roko Construction Limited is in Debt?
According to Hon Musasizi when tabling the proposal, Roko’s liquidity constraints arose initially from delayed payments on major projects, failure to refinance expensive loans with cheaper external financing, and the impact of the COVID-19 pandemic on the construction industry.
Financing costs continued to rise, in addition to weak corporate governance and inadequate management.
Why Roko Should be Saved?
Roko Construction Company currently has projects with signed contracts worth USh1.064 trillion, of which USh696.6 billion are Government of Uganda projects.
“The consequence of the company’s collapse would therefore impact these projects negatively. The Uganda National Association of Building and Civil Engineering Contractors (UNABEC) estimates that government would incur an additional USh120 billion in placing these contracts with new contractors if the company was wound up,” Musasizi says.
The minister, therefore, appealed for authorisation from parliament to facilitate Roko Construction to implement its outstanding project contracts by injecting USh59.6 billion through the acquisition of 150,000 preference shares at a nominal value of USh1 million per share and a share premium of approximately USh57.13 billion.
He adds that the Ministry of Finance has already got clearance from the Attorney General.
He explains that the share premium is being paid because the government’s acquisition of shares will be paid for over five years.
The share premium comprises financing costs, and exchange rate costs associated with the payment of preference shares over five years and the conversion of USD42 million facilities from TDB to Roko construction.
President Museveni’s Involvement
The proposal before parliament shows that in 2019, President Museveni directed the Minister of Finance to negotiate the government’s acquisition of shares in the company.
“The president’s directive was premised on the following: the absence of a government-owned construction company, which subjected the government to the use of private companies that are nearly wholly foreign-owned and domiciled. The government currently spends 950 billion per annum on projects in the roads and power sectors that are implemented by foreign companies,” reads the proposal.
The other reasons given by the president were that Roko construction was implementing a significant number of government projects, and there is a need to build the capacity of local firms in strategic sectors and industries.
Section 23 of the Public Finance Management Act, 2015, provides that a vote cannot enter into a transaction or agreement that binds the government to a financial commitment for more than one financial year except in cases where the financial commitment is authorised by the president.
It was on this basis that the Speaker of the Parliament of Uganda, Anita Among referred the government proposal to the Committee of Finance for consideration.
The Background of Roko Construction Limited
Roko Construction Company, founded in 1969, is one of Uganda’s leading construction and Civil Engineering Companies.
In 2019, it was one of the largest taxpayers in the construction industry and was the first construction firm in Uganda to get the international certification standard.
Roko Construction Limited is popular for having executed major building projects such as Worker’s House, Crested Towers, the Namugongo Shrine, Bank of Uganda and Mapeera House, among others.
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