How should Uganda finance infrastructure development?

Although Uganda has made progress in infrastructure development, the country still faces huge deficits across all sectors, including in transport, energy, water and information and communication technology that require financing beyond the public budget ceilings. These deficits affect the business climate and increase the cost of doing business with implications for enterprise growth and job creation. In addition, infrastructural deficits exacerbate poverty and inequality and could therefore hinder the attainment of the sustainable development goals (SDGs). Already, Government plans to spend about UGX 8.5 trillion or approximately 37.5 percent of the entire 2017/2018 budget on the works & transport (24.3 %) and energy & mineral development (13.2 %) sectors. These planned expenditures are huge and will necessitate the consideration of alternative and innovative financing vehicles to avoid crowding out other developments in the economy, such as service delivery in agriculture, health and education. Furthermore, in exploring a diversity of options for infrastructure financing, policy makers should be cautious not to draw Uganda into excess debt burden.       Moreover, the changing global environment with respect to development assistance has two implications: first, cheaper and patient financing is no longer readily available; and second, the drying up of traditional financing requires greater capacity in Public Investment Management (PIM), which was previously not necessarily true because traditional financing was accompanied by this capacity. In addition, the East African Community (EAC) convergence and macroeconomic constraints imply that Uganda cannot adequately finance all its infrastructure needs in the medium to long term through deficit financing alone.

There are various options that Government could consider with regard to financing infrastructure development. The first option relates to improving domestic revenue mobilisation. For long, Uganda’s tax effort has stagnated due to, among others, the narrow tax base; a large informal sector; tax exemptions; and institutional and regulatory weaknesses.  However, two innovations can support improved domestic resource mobilization efforts to support infrastructure development. The first concerns leveraging the contribution of non-tax revenues. The second concerns curtailment of capital flight. These are discussed a bit more detail hereafter. Unlocking the potentially large contributions of non-tax revenue will require reforms that will mandate self-accounting bodies to collect non-tax revenue and remit it to the centre rather than spend it at source. This strategy can mobilise an additional UGX 130 billion per annum.  With regard to capital flight, available evidence shows that for the six years during 2005 – 2010, cumulative losses amounted to USD 6,259 million in 2010 constant prices.  This loss of revenues is large and to put it in perspective, is sufficient to finance the current budget allocations for the ministry of works and transport by six fold.  Capital flight can be dealt with in two ways: first, strengthen the institutions of governance, including in the extractive sectors; second, strengthen the capacity of the local private sector and develop policy and regulatory frameworks to deepen local content in government procurement.

The second option for financing infrastructure development involves improving public investment efficiency. Currently, Uganda loses up to one-half of resources allocated to various infrastructure projects due to challenges in public investment management. This loss is caused by a number of weaknesses including inefficient planning, absorptive capacity constraints, poor project selection and execution, inflated unit costs, issues with compensation and fraud. In addition, projects are usually riddled with the propagation of self-interests, which lead to leakages and wastage. Consequently, there are large budget executions gaps in public investments, particularly in the transport and energy sectors.  One area where lots of government resources are lost is compensations. In this respect, carefully crafted land reforms that would allow government compulsory land acquisition but ensure that any rightful owners are fairly and expeditiously compensated and/or resettled.

The third option involves leveraging private financing opportunities. One source of private finance that can potentially play a critical role in infrastructure development is the pensions sector. The value of assets and member contributions at Uganda’s leading pension fund – National Social Security Fund (NSSF) – has grown tremendously over the past 10 years. It is estimated that member contributions reached UGX 6.7 trillion in 2015.  This amount is the equivalent of approximately 7 per cent of GDP. Although this figure is small by international comparisons, it represents tremendous growth in the pension sector. The advantage of borrowing from pension funds is that the government will be able to pay the loans in domestic currency, and the risk of fluctuating interest rates that comes with deprecating exchange rates for foreign currency denominated loans would be mitigated.

Relatedly, remittances could be a feasible window for improving Uganda’s external financing flows in the country. Uganda can draw lessons from Ethiopia, where a diaspora bond was successfully issued in 2011 to finance the grand renaissance dam, whose project cost was estimated at USD 4.8 billion. This experience shows that Diaspora bonds could be an important fundraising vehicle critical to the successful mobilization of revenues for infrastructure investments. However, considering the high domestic appetite for credible investments, as evidenced by the recent oversubscribed initial public offers for Umeme, Stanbic and Safaricom, Government should  consider, as a first step, floating a domestic infrastructure bond as a means of attracting long-term infrastructure financing.

The fourth option involves using oil revenues to ramp up investments in infrastructure. This option is well articulated in Uganda’s policy documents. Oil for infrastructure will boost the productivity of the economy by unleashing the productivity of capital and labour and mitigate any Dutch Disease effects by harnessing idle productive capacity to unlock the productive potential of the economy and satisfy any resource-induced demand. However, using oil revenues is subject to risks, particularly price volatility, which could result in investment uncertainty. Another risk relates to political capture. Mitigating these risks requires that Uganda focusses on building and strengthening the requisite institutional and policy space, ensure strict adherence to the rule of law, and eliminate rent seeking, political and elite capture to ensure transformative gains from expenditures of natural resources wealth.