Uganda needs alternatives to infrastructure financing

Uganda’s infrastructure financing gap is widening. But the big question now is: How will Uganda plug that gap?
For years, government has been dependent on non-concessional loans to offset its funding needs. Now, calls for government to consider alternative sources of financing for her mega infrastructure projects are increasingly getting louder by the day.

Although these loans come in handy, there is a price to pay. Last financial year’s deficit, estimated at 4.8 per cent of Gross Domestic Product (GDP), according to the Ministry of Finance, is a result of an increase in development expenditure which rose to 8.8 per cent of GDP, up from 7.9 per cent last year.

The deficit was financed largely by both non-concessional and concessional loans, and to some extent through domestic borrowing, which increased from Shs612 billion last year to nearly Shs1.7 trillion this year.

Before the budget was read last month, Ambassador for the United States of America to Uganda, Debora Malac advised the government to resist the temptation to finance infrastructure projects using non-concessional loans.

These loans, according to Amb. Malac, are largely responsible for the escalating public debt levels which, according to 2018/2019 budget speech, is hovering at Shs40 trillion. This is nearly the total budget the government expects to raise to finance Uganda’s next national budget.

She also noted that over the past five years, the government has increasingly turned to non-concessional loans for project financing. Over this period, the debt to GDP ratio increased by 70 per cent.

Public debt
In financial year 2017/2018 alone, Uganda’s total debt increased by 22 per cent. According to Amb. Malac, some of these single-country non-concessional loans — from China and other Asian countries — do not have favourable terms for particularly Uganda.

“This is because if the country defaults, assets could be seized, an example we’ve seen in other countries,” she said, before adding, “Other agreements compel Uganda to use contractors from specific countries.”

Government position
“In line with the Medium Term Debt Strategy, our borrowing strategy is to contract concessional loans while restricting commercial loans to the financing of infrastructure and self - financing projects. This will help to ensure long term debt sustainability,” read the Budget Speech for Fiscal Year 2018/19 presented by Finance minister Matia Kasaija.

According to Mr Kasaija, Uganda compares favourably with its peers because most of its debt has been contracted on concessional terms. He said that the country’s debt has financed priority and productive sectors which will generate positive economic returns – a true assessment but with differing outcomes so far.

Although government will continue exercising caution while taking on new debt, “the rate of debt accumulation is expected to reduce in the medium term, as flagship infrastructure projects are completed.”

He continued: “To ensure debt sustainability in the short, medium and long term, government will continue to prioritise borrowing for mainly infrastructure development projects to address the existing infrastructure gaps for industrial enhancement, power transmission and distribution, transport and water for production; improve loan absorption as well as effective utilisation of the borrowed resources; including investing in export-oriented areas to boost exports which also increase our capacity to service external debt.”

This will be in addition to stringently vetting projects that will be financed by loans, including prioritising projects that enhance the productivity in the economy, demonstrate high economic returns and help generate future growth as well as minimise financing risks arising from commercial loans and associated volatility in exchange and interest rates.

Why Uganda needs alternative funding
In an interview with the Makerere University School of Economics Lecturer last week, Dr Fred Muhumuza, said the need for alternative financing is more pressing than ever. This is because the country’s ability to pay its debts is currently under question.

“The ability to pay is becoming an important factor. For that, Chinese financing will begin to slow down eventually. The economy is either slowing down or not growing fast enough. Our oil is also not coming off the ground and all that influences financing of infrastructure projects.

The problem, he argues, “is further complicated by the gestation of five to seven years that most project needs to take off,” a sign of institutional weakness and poor governance.

However, Dr Muhumuza said although Uganda is reliant on financing from China despite being expensive, there is no guarantee that other alternative financing would be any cheaper because cheaper funds are hard to come by.

Way forward, he says will be through the government scaling down its appetite to borrow for infrastructure.

In terms of geopolitics, Dr Muhumiza argued that the region will collectively have to up its game and become each other’s keeper for a perceived problem in one country will have an implication on financing in the entire region.

He says an Ebola outbreak or insecurity in one part of the region is enough to render the entire region unattractive for financing.
As for Mr Mubarak Nkutu, director membership at Uganda Manufacturers Association (UMA), Chinese financing in particular comes not only with added technological know-how but also boots the economic sector, especially construction. As a result of their financing in infrastructure, he says steel and cement sector registers a boost, promoting ‘Buy Uganda, Build Uganda’ initiative.

And for Uganda National Chambers of Commerce and Industry (UNNCI) Ag Secretary General, Mr Steven Kabagambe in an interview said in the short and medium term, there is no alternative but to partake Chinese financing. But the key thing, “is to learn as much as we can from their technology and use it to our advantage.”

Deputy director investment promotion at Uganda Investment Authority (UIA), Mr Martin Muhangi told Prosper Magazine that Chinese financing provides valuable expertise for the locals to learn from in addition to providing jobs. For that, “We need financing from China.”

Other sources
Whereas the government positions seems commendable, it is still badly lacking in terms of actual output. And not until the government translates its words into action, there is very little that can be read into its statement.

Speaking at the Best Practices for Project Financing in Uganda’s infrastructure sector at the USAID organised workshop held in Wakiso in recent weeks, Ms Malac said some of the agreements leading to accruing of loans do not appropriately reflect the value, cost and return. This leaves Uganda indebted at an amount that is far beyond the value of the infrastructure project.

Amb. Malac advises government to mobilise alternative financing from both within the domestic and foreign markets. These, she said, can be negotiated on case by case basis unlike non-concessional loans that tend to be at the mercy of the donor country.
However, some economists have poked holes in concessional loans saying although they are a “lesser devil” their impact on the economy is dangerous.

For example, World Bank /International Monetary Fund (IMF) loans are largely concessional. But the problem is the conditions attached to such financing modes.
Sometimes, it takes up to two to three years before the loan is paid out. While the project loan delays, the problem which the loan was meant to address gets aggravated. This means once the project starts, the proposed budget won’t be enough and requires additional costing.

Funding infrastructure
As a result, economists are opposed to over reliance on foreign funding, saying the country should begin financing its own infrastructure projects.

One way is by establishing a fund such as the road or energy fund. Over a period of three to four years of saving and where necessary investing the funds, it can be tapped for planned infrastructure development.

There was also unanimous consensus among the professionals that the funds being collected by the National Social Security Fund be employed in the development of infrastructure instead of borrowing from outside the country. The returns in terms of interest accrued from the loans will be due to the schemes and by extension the economy.

PPP dynamics
Public Private Partnerships (PPP) are hardly taking shape in Uganda although they are touted as the solution to Uganda’s infrastructures financing needs.

PPPs are long-term contractual agreements between the public and private sector for the provision of public services. They normally take a mode of blended finance - an approach involving a mix of both public and private sector capital in support of development.

Such partnerships became pronounced after the passing of the Public Private Partnerships Act, 2015, which provided the legal safeguards required to do business under this arrangement.
But Ambassador Nathan Irumba, the Seatini –Uganda executive director and Prof. Mwambutsya Ndebesa are skeptical about Public Private Partnerships (PPP).

Mr Irumba, a veteran specialist in trade negotiations, warns that PPPs are often agreed to hurriedly.
In an interview, Amb. Irumba, said: “PPPs tend to socialise losses and privatise profits.”

Nature of agreements
The nature of PPPs here guarantee the private individuals and entities the largest chunk of profits from the venture while government is expected to absorb all the losses should the deal go bad.
Uganda Debt Network report, titled: “Maintaining sustainable debt levels amidst growing public Infrastructure Investment” notes that over time, there has been a shift in focus among East African nations from Western world lenders to the Asian ones, with a special interest from China. One of the reasons for this shift is the flexibility with which China avails loans without conditions.

“The ease in accessing loans has made China the new lending friend. A number of key infrastructure projects have been implemented in Uganda thanks to “Chinese money”, for example; the Kamapa Entebbe expressway, Karuma and Isimba dams, and the extension of the Entebbe International Airport,” reads the report.

The report identifies the cost of borrowing and level of debt utilisation as key concerns.
Chinese loans come with big consequences. Should the recipient country default, it stands a high risk of losing control of key public assets and resources to the Chinese government, for example, Zambia lost its airport and Sri Lanka lost its major port. Such losses escalate poverty levels.

Debt Uganda owes China
According to the Ministry of Finance, the assertion that Chinese debt is huge compared to other funders is incorrect, given that the total outstanding debt Uganda owes to China is only 5.89 per cent of GDP as at end March 2018 compared to total public debt to GDP of 38.1 per cent. Government owes $ 3.9b to the World Bank as at end March 2018 compared to $1.6b for China. However, China is the largest creditor because of the size of their projectors unlike other funders who finance smaller but numerous projects. The largest funders are African Development Fund/ Bank.

Developments
Entebbe Airport delays
There was a delay in release of money from the Exim Bank of China to the contractor (CCCC), which led to a slight delay in the upgrade and expansion of Entebbe International Airport that has since been resolved.

Involve Ugandans
According to Mr Jim Mugunga, the director Public Private Partnership Unit at the Ministry of Finance who is also the acting director of the Privatisation Unit, Ugandans must be involved for blended finance to work.

“Days are gone when big infrastructure developments goes above the head of local governments. The opportunities must be open at the local government level. 70 per cent of the employees in those projects should be Ugandans,” Mr Mugunga said.

Long wait for SGR
The first phase of Kenya’s Standard Gauge Railway (SGR) running from Mombasa to the capital Nairobi, that cost $3.8b (Shs13 trillion), was commissioned in June 2017 and is operational, albeit with dreary project returns.

Kenya is currently finalising construction of the 120km line from Nairobi to Naivasha at a cost of $1.7b (Shs6 trillion). This was supposed to be followed by the 266km line from Naivasha to Kisumu port at a cost of $3.6b (Shs13 trillion), and later the 107km line connecting to Malaba expected to cost $1.7b (Shs6 trillion).

When a Kenyan government delegation led by President Uhuru Kenyatta travelled to Beijing late in April, it was expected they would close financing agreement for Naivasha-Kisumu and Kisumu-Malaba sections, or at least one of them, but they returned “empty handed”. The first phase of the SGR will cost Shs8.2 trillion.