Uganda Economic Update 9th Edition, JULY 2017 Infrastructure finance deficit: Can public-private partnerships fill the gap? CONTENTS PART ONE State of the Ugandan economy PART TWO Public Private Partnerships: A potential means to mobilize Uganda’s infrastructure finance 4 1.1 Economic activity in FY 2016/17 has been 29 4.1 First prerequisite: A strong Framework for PPPs subdued 29 1.2 Monetary policy attempts to stimulate the 4.2 Second prerequisite: The availability of long term 6 32 finance 32 economy in the context of low inflation 34 4.3 Uganda’s Experience with PPPs: Mixed results 10 1.3 A weakening external position deflated activity emphasize the need for closing the gaps in the in sectors with external links frameworks 12 1.4 Planned fiscal expansion foiled by perpetual 39 5. Creating the conditions necessary for Uganda to under-execution of projects maximize benefits from PPPs 16 2.1 Modest recovery if the impact of shocks recedes Statistical Annexes 2.2 Risks: The Immediate and Critical Arise from 20 Fiscal management Table A1: Key Macroeconomic Indicators 42 2.3. Addressing Uganda’s infrastructure finance 23 challenge: The need to look beyond the ordinary Table A2: Growth and Structure of the Economy 43 Table A3: Central Government Fiscal Framework 44 Table A4. Monetary indicators 45 Table A5. Inflation Rates 45 Table A5. Balance of Payments 46 List of Tables Table 1: Fiscal Operations 13 Table 2: PPI by Primary Sector: 1990-2016 26 Table 3: PPI by Investment and Primary Sector (US$ million): 1990-2016 27 List of Figures igure 1: Quarterly Real GDP growth volatile and on a declining trend recently 4 Figure 2: Construction and Services: The main drivers of economic growth 5 Figure 3: Contributions to annual GDP 6 Figure 4: Despite food price increases, inflation remains within target levels 7 Figure 5: Lower policy rates not yet fully reflected in lending rates 8 Figure 6 : Credit to the private sector: Acceleration since September 2016 8 Figure 7 : Increase in loans denominated in foreign currency since september 2016, mainly as a result of revaluation of these loans into 9 local currency Figure 8 : Uganda penetrates new export markets 11 Figure 9: Uganda’s domestic revenue collection: International taxes contribute highly, but fail to meet expectations in FY2016/17 14 Figure 10: PPP Project Cycle in Uganda 30 © 2017 International Bank for Reconstruction and Development / International Development Association or The World Bank Group 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. 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The material includes a brochure, a documentary video and a number of blogs relating to issues in the report. ii Abbreviations and Acronyms BoU Bank of Uganda ODA Official Development Assistance BOP Balance of Payments OECD Organization of Economic CBR Central Bank Rate Cooperation and Development CEM Country Economic Memorandum OPM Office of the Prime Minister CNOOC China National Offshore Oil Corporation PAPP Project Analysis and Public–Private CPI Consumer Price Index Partnerships CPIA Country Policy and Institutional PDU Procurement and Disposal Unit Assessment PFMA Public Finance Management Act COMESA Common Market for Eastern and PFM Public Financial Management Southern Africa PIMA Public Investment Management DRC Democratic Republic of Congo Analysis DSA Debt Sustainability Analysis PIMAC Public and Private Infrastructure EAC East African Community Investment Management Centre EU European Union PIMI Public Investment Management Index FDI Foreign Direct Investment PIMS Public Investment Management System FY Financial Year PPDA Public Procurement and Disposal of GDP Gross Domestic Product Public Assets Authority HIPC Highly Indebted Poor Countries PPP Public-Private Partnerships IBP Integrated Bank of Projects RAPs Resettlement Action Plans ICT Information and Communications RDP Reconstruction and Development Plan Technology REER Real Effective Exchange Rate IFC International Finance Corporation SBFP Sector Budget Framework Papers IMF International Monetary Fund SMEs Small and Medium-sized Enterprises MDRI Multilateral Debt Relief Initiative SSA Sub-Saharan Africa MFPED Ministry of Finance, Planning and SWA Sector Wide Approach Economic Development SWG Sector Working Group MDA Ministries, Departments and Agencies UEU Uganda Economic Update MoLG Ministry of Local Government UBOS Uganda Bureau of Statistics MTEF Medium Term Expenditure Framework UNHS Uganda National Household Survey NBFP National Budget Framework Paper UGX Uganda Shillings NCN Non-Concessional Borrowing USA United States of America NSSF National Social Security Fund URA Uganda Revenue Authority RWA Risk Weighted Assets UNRA Uganda National Roads Authority CCB Capital Conservation Buffer VAT Value Added Tax NDP National Development Plan WB World Bank NEER Nominal Effective Exchange Rate WDI World Development Indicators NPA National Planning Authority iii Foreword A key strategy that Government of Uganda has pursued over the past decade has been to increase the amount of resources allocated to capital investments in order to address a binding constraint on growth, the huge infrastructure deficit. That notwithstanding, Uganda’s existing fiscal space has remained insufficient to meet its infrastructure needs, with an infrastructure financing gap estimated at US $ 0.4 million per annum. I am pleased to introduce the Ninth Uganda Economic Update, which discusses how Uganda can potentially nurture the public-private partnerships to address Uganda’s infrastructure deficit. As is increasingly being experienced by many other countries across the world, these arrangements can help mobilize resources to help fill the infrastructure gaps, with a possibility of such arrangements bringing in private financing and facilitating the achievement of higher levels of efficiency in infrastructure investments. Yet, these arrangements may also carry risks, with a potential to drive significant deviations of the outcomes from their expectations. In line with the structure of earlier editions of the Uganda Economic Update, the report first discusses the general status of the economy, before discussing the PPP specific topic in greater depth. At present, Uganda’s rate of economic growth is at its lowest level for the past two decades, largely due to the impact of factors related to the upheavals in Uganda’s banking system, the ongoing impact of the drought on agriculture, the civil strife in South Sudan, and the increasingly volatile external environment. While the authorities continue to pursue an ambitious public investment program intended to address Uganda’s long-standing physical infrastructure deficits and to prepare for the long-awaited extraction of oil, this program has not been implemented as fast as desired. In addition, so far, it has not been able to catalyze higher levels of private investment growth. Therefore, in the five-year period up to FY 2015/16, overall investments have been growing at the average annual rate of only 4.3 percent. At this rate, these investments have been able to generate only very modest overall economic growth. In the short-term future, economic growth also faces significant risks, including those related to the suboptimal sequencing, financing and management of the large infrastructure investment program and to the ongoing impact of the shocks that have constrained Uganda’s growth in the recent past. To mitigate the financing risk, the Government ought to explore non-traditional approaches to large infrastructure financing. Public-private partnerships have the potential to provide the resources and also to facilitate the achievement of higher levels of efficiency and thereby to improve the quality of infrastructure assets and services and to ensure greater coverage. However, they also have limitations. Therefore, for Uganda to maximize the value of such public- private partnerships, it will have to draw on the lessons learnt while implementing these arrangements and from global best experience. These lessons underlie the importance of building sufficiently strong institutions to appropriately design and implement these partnerships. I sincerely hope that this edition of the Uganda Economic Update will stimulate debate and motivate a comprehensive set of policy actions to champion more efficient management of investments implemented through public-private- partnerships, thereby promoting increased economic growth and supporting the achievement of Uganda’s development objectives. Diarietou Gaye Country Director - Eritrea, Kenya, Rwanda, and Uganda; Africa Region iv Acknowledgements The Ninth Edition of the Uganda Economic Update was prepared by a team led by Rachel Kaggwa Sebudde and including Shyamala Shukla, Valeriya Goffe, Fiona Sterwart, and Joseph Mawejje (all of the International Development Association; Christopher Olobo (of the International Finance Corporation); and staff of Makerere University School of Economics, particularly Dr Ibrahim Okumu and Dr Nick Kilimani. The team is grateful to Kevin Carey and Mehnaz Safavian for the guidance provided related to the structure and messaging of the document. Barbara Nalugo and Barbara Katusabe provided logistical support, while Sheila Kulubya managed the communications and dissemination strategy. The Uganda country team provided useful feedback during the preparation of the report. Abebe Adugna (Practice Manager, Macroeconomic and Fiscal Management), James Seward (Practice Manager, Finance and Markets), Clive Harris (Practice Manager, Private) and Christina Malmberg Calvo (Country Manager) provided overall guidance on the project. The report benefitted from the insights provided by peer reviewers who included Jeffrey Delmon (Senior Private Sector Development Specialist, GCPPP) and Khwima Nthara (Program Leader, AFCW2). Close collaboration with external stakeholders was intended to ensure the relevance of the messages to policy makers and practitioners. These external collaborators included stakeholders from the Bank of Uganda and the Ministry of Finance, Planning and Economic Development, particularly the Public-Private-Partnership Unit and the Macro Unit. Irfan Kortschak provided professional editing services. v KEY MESSAGE As a result of a number of internal and external presents an assessment of the current state of the shocks, Uganda’s economy is currently growing at the economy, while the second part addresses a specific lowest rate recorded over the past two decades. During theme related to Uganda’s development challenges the first nine months of FY 2016/17, the economy grew and the manner in which these may be addressed . This at the annualized rate of 2.5 percent, considerably lower focusses on how the management of PPPs can support than the long-term average rate recorded over the past Uganda’s investment push by facilitating access to two decades, which stands at around seven percent. The private sector financing, by managing the risks intrinsic decline over the past five years is related partly to the in these arrangements, and by maximizing the economic increasingly volatile external environment and partly to and social value of these partnerships. This can only domestic policy responses to shocks and strains related be achieved if the Government is committed to building to the ongoing impact of the drought on agriculture, the appropriate set of frameworks to create a conducive the civil strife in South Sudan, and the upheavals in the environment for private investments and to adopting banking system. Therefore, current policy is focused on robust project identification, screening, procurement and the management of these impacts so that they do not contract management processes. exacerbate macroeconomic instability and on measures to stimulate the economy to increase growth. The Part 1: State of the economy Government remains strongly committed to an investment Through the first nine months of FY 2016/17, the push to accelerate and sustain high levels of economic Ugandan economy continued to suffer from the growth and to facilitate socio-economic transformation. negative impact of a number of internal and external The Government’s investment push is intended to shocks that have affected the country for several address binding constraints on growth, with the most years . In particular, in terms of external factors, Uganda’s significant of these constraints being Uganda’s huge economy has continued to suffer from the increasingly infrastructure deficit . The Government has been further 1 uncertain global policy environment for trade and motivated to increase capital investment by the prospect integration and the decline in commodity prices. Even of revenues from the exploitation of oil, which would though the policy frameworks held up well during the create new opportunities to allocate additional resources most recent election cycle in 2016, serious strains to finance critical infrastructure and also to invest in related to the macro instability resulting from the previous human capital. With the Government aware that it cannot election cycle in 2011 have persisted, exacerbated by achieve these objectives entirely with its own resources, it the stringent counter policy response, adverse weather has increasingly engaged in partnerships with the private conditions, civil unrest in South Sudan, and upheavals in sector. However, neither the expansionary fiscal strategy the financial system. Uganda’s economic policy makers nor the implementation of public-private partnerships have focused on managing the impact of these shocks, (PPP) can be justified unless these measures facilitate while at the same time attempting to seize opportunities the achievement of the intended objectives, including to stimulate the economy to achieve higher rates of higher rates of economic growth and increased domestic economic growth. resources, which in turn could drive a more rapid process By the end of March 2017, nine months into FY 2016/17, of development, including through increased human the annualized economic growth rate stood at only capital accumulation. 2.5 percent . This is considerably lower than the figure The first part of the Ninth Uganda Economic Update of 5.3 percent recorded for the same period in the 1. The World Bank’s Systematic Country Diagnostic, 2015, also identified the infrastructure bottlenecks, particularly in the power and road sector, access to finance, low level of skills, and the administrative burden of taxes as the key constraints to growth. vi previous year, continuing the downward trajectory that has persisted for several years. Due to the prolonged drought Grading a feeder conditions, the agricultural sector recorded a negative road in Ttuula, a growth rate of -3.0 percent during the first three quarters Kampala suburb of the year. The services sector, which has been Uganda’s (Sarah Farhat, 2015) principal driver of growth in recent years, grew by 4.2 percent. Growth in the industrial sector was mainly driven by an increase in manufacturing activities, with the retail and trading sectors starting to recover from disruptions to Uganda’s main market in South Sudan. However, the slow execution of government projects has continued to constrain sector performances. As a result, this sector grew by an annualized rate of 2.7 percent during the first three quarters. With the authorities projecting economic growth to have reached 3.9 percent for the full year, These developments had a significant impact on quarter-on-quarter GDP growth should have reached at access to funding from domestic banks and from least 13 percent in the fourth quarter of FY 2016/17. For external sources, with the rate of growth of credit this to have been achieved, economic activity should have to the private sector failing to register tangible rebounded very strongly with quarter-on-quarter sectoral improvement through the year. While the rate of growth performances reaching 49 percent in agriculture; growth of credit to the private sector had registered a 7.4 percent in industry; and 5.4 percent in services. negative annual growth rate of -1.1 percent by the end of September 2016, it had since begun to gradually Over the first eleven months of FY 2016/17, average recover, increasing to an average rate of growth of 5.2 annualized inflation stood at 5.6 percent, despite the percent during the subsequent quarter ending December impact of the prolonged drought on food prices and 2016, and to 6.2 percent during the quarter ended March other inflationary pressures. This low rate of inflation 2017. With the value of the shilling not very stable in justified an easing of monetary policies by the Central the recent past, the domestic commercial banks have Bank. While this policy action was partly intended to increased recognition of foreign exchange risks, which increase the availability of credit to the private sector, its has deterred agents from borrowing in dollars, given that impact was delayed and limited. Firstly, commercial banks the bulk of these agents were engaged in activities that reduced their lending rates only marginally, from 23.5 generate revenues denominated in the local currency, percent in June 2016 to 23.1 percent in February 2017, thus leaving them considerably exposed to risks related before a more substantial reduction to 20.5 percent by to depreciations in the value of the currency. The value April 2017. Secondly, commercial banks had introduced of loans denominated in foreign currency declined from more stringent borrowing conditions in response to an equivalent of US $ 1463 million recorded in June 2016 the increasing deterioration in the quality of credit that to US $ 1391 million. The value of funding received by commenced in the previous year. In addition, because the private sector from external sources was limited, as of Uganda’s limited financial depth, even disregarding the bulk of the increase in the value of these flows during the limited impact on interest rates, these policy actions the first half of the year consisted of reinvested earnings. have had only a limited impact on economic activity, with The total value of foreign direct investments amounted the proportion of the private sector having access to to US$ 426 million during the first half of FY 2016/17, commercial loans remaining low. compared to the figure of US$ 269 million recorded in the vii corresponding period of FY 2015/16. Out of this, the value a significant shortfall in revenue collections, of about 2.5 of new direct equity investments was US$155 million percent relative to the targeted level. The overall value of for FY 2015/16 and US$ 101 million for FY 2016/17. In collected revenues is projected to stand at 13.3 percent addition, the value of export of goods and services during of GDP by the end of the financial year, compared to the the first quarter of FY 2016/17 was lower than average, budgeted level of 13.5 percent. The largest challenge although there was a recovery during the second quarter to fiscal policy management remain the significant due to increased demand, with Uganda penetrating new under-execution of the development budget, which is markets in Asia. Under these circumstances, the value expected to remain below the target levels established of private investments is estimated to be slightly higher in the approved budget by over three percentage points than the figure recorded in the corresponding period of of GDP. The rate of execution of public investments was FY 2015/16. not good, especially for the projects funded by external partners, with 34 percent of the budget being absorbed Uganda’s external position has remained weak during these months. Therefore, even though there was during the first half of FY 2016/17, with the impressive over expenditure in the recurrent budget, largely due performance in terms of reducing the current account to expenditure to meet salaries for non-teaching staff in being more than offset by the decline in the value of tertiary institutions and to manage other emergencies, long-term capital and finance inflows. The combined total expenditure is expected to reach 18.6 percent of effect of the reduced cost of imports (especially oil) GDP, well below the level of 22.5 percent of GDP targeted and the increase in exports reduced the merchandise in the budget. The nominal value of the overall deficit trade deficit. Even though the balances on services and is expected to be about UGX 3,500 billion lower than income declined, the current deficit stood at 5.1 percent the projected level, leaving the fiscal deficit at only 3.5 of GDP by the end of December 2016, significantly lower percent of GDP. This would be almost 3 percentage than the figure of 7.4 percent recorded in the previous points lower than the level targeted in the approved year. However, with the decline in the strength of capital budget. About 77 percent of the deficit will be funded and financial flows, a deficit in the overall balance of through external borrowing. payments to a value of US$ 318.6 million was recorded by the end of December 2016, reversing the surplus of US$ In spite of the stimulus effect of monetary expansion 390 million recorded in the previous year. and some improvements in externally financed investments, recovery in private liquidity has been During the second half of FY 2016/17, a number of slow. As a result, the GDP growth rate during FY areas in Uganda’s external position improved, with this 2016/17 is estimated to remain below 4 percent, almost allowing Bank of Uganda to rebuild foreign exchange two percentage point lower than the authorities’ reserves . With stronger inflows related to services forecast . The estimated growth rate is also about half a and income transactions, the deficit on the current percentage point lower than the forecast in the previous account has been projected to decline further to a value World Bank Economic Update. This failure to achieve the equivalent to 4.8 percent of GDP by end of June 2017. forecast levels is primarily the result of the stronger than And with stronger disbursements of long term loans, anticipated impact of macroeconomic shocks on private particularly the non-concessional loans financing large sector activities and failure to achieve execution of public infrastructure projects, the overall balance of payments investments as planned during the year. Nonetheless, has been projected to have registered a surplus, the main driver of growth has been public investments, amounting to US $ 232 million, with this surplus allowing although this represents a smaller share of the economy the Bank of Uganda to increase foreign exchange than services, which account for close to half. reserves to a value sufficient to cover 5 months of import of goods and services by end of June 2017. The economic growth rate is forecast to increase to 5.2 percent in FY 2017/18, and to 6.0 percent in FY The execution of fiscal policy continues to be 2018/19, predicated on improved weather conditions, undermined by poor revenue collection performance, ongoing improvements to the banking system, and over spending in the recurrent budget and under- improvements to the execution of public investment execution of the development budget . In the context of projects. Global economic uncertainties will continue the slowdown in economic activity and the disruptions to to affect economic activity in Uganda into the midterm trade during the first part of the year, Uganda recorded future. However, in the context of weak global economic viii performance, Uganda’s economy will benefit from the low 2.5 energy prices, particularly if investors take advantage of the associated low cost of imported inputs. The lifting of the ‘new lending freeze’ by the World Bank will play a role in building confidence in the economy. However, growth is expected to be primarily driven by public investments, with private investment still constrained by low levels of % business confidence, the ongoing strife in South Sudan, shortfall in revenue collections in and the high cost of credit. On the other hand, FDI in the extractives sector is expected to increase, following FY 2016/17 the issuance of long-awaited exploration agreements, increased efforts by the Government to develop oil- related infrastructure, and the signing of the agreement between Uganda and Tanzania for the construction of the oil pipeline East African Crude Oil Pipeline Inter- Despite the generally favorable outlook, the growth Governmental Agreement (EACOPIGA) for exporting oil outlook is subject to a number of risks. These risks between Hoima and Tanga port. The construction and relate to the low revenue base, which is being further services sectors are expected to continue to be the main threatened by a renewed tendency for the Government drivers of growth. The stimulus effects from Uganda’s to grant tax exemptions; the suboptimal sequencing, large public investment program will offset negative financing and management of the large infrastructure effects of the weak external sector on the Ugandan investment program; an increase in the debt to GDP economy. ratio beyond the level of 50 percent if investments do not generate sufficient growth and revenues to service The authorities must maintain a delicate balance the growing debt; and to exogenous conditions, such as between leveraging fiscal policy to stimulate economic bad weather, regional instability, and the protracted low activity while at the same time ensuring the shocks growth of the global economy. Additional risks relate to do not transmit into macro policy slippages. Following the potential for a disorderly election aftermath in Kenya, the completion of two large hydroelectric power projects which could have an impact on regional trade, and to and key transport infrastructure projects including those ongoing global economic uncertainty, which could have in the oil region, the fiscal deficit is expected to decline an impact on exports, remittances and FDI. Finally, the to below five percent of GDP in the medium term. The high cost of and limited access to credit and financial present value of public debt to GDP ratio stands at about services are major constraints on Uganda’s ability to 36 percent, well below the threshold of 50 percent for achieve higher levels of productivity and diversification moderate performers like Uganda. An uncertain regional and to develop resilience to internal and external shocks. and global outlook will continue to have a negative impact on exports, remittances and foreign direct investments. Specific to Uganda’s investment driven growth agenda With the need for imported inputs for infrastructure is the risk to the financing of public investments. projects, the current account deficit will widen to between The Government’s rapidly expanding infrastructure 8 and 10 percent of GDP. development program must be appropriately managed and sequenced to avoid unnecessary hike in financing Accelerated growth should facilitate a further risks. Still, the total value of the investments required to reduction in poverty, with the poverty rate forecast support Uganda’s transformation is significant and it is to decline by an estimated 0.9 percentage points per unlikely that the existing fiscal space would be sufficient year in the period from 2016 to 2019. At this rate, it is to finance this need. This calls for the Government to expected to reach 28.8 percent by FY 2019/20, with most tap into non-traditional approaches to alleviate the of the decline being recorded in the Central and Western infrastructure financing gap. Among other means, the regions, thus widening regional spatial disparities. As Government ought to unleash the power in public-private of 2013, the poverty rate stood at close to 43.7 percent partnerships. in the Northern region and 24.5 percent in the Eastern region, compared to 8.7 percent in the Western region and 4.7 percent in the Central region. ix private party recovers its investments through user fees, Part 2: Public - Private Partnerships: government payments or a combination of both. PPPs A Potential Means to Mobilize can help governments overcome budget constraints in Uganda’s Infrastructure Finance two ways: through bringing in upfront private financing for capital investment with deferred government payments Uganda has pursued an investment-driven growth spread over project life and through wholly additional strategy to accelerate growth and to enable the sources of funding for infrastructure where user charges structural transformation of the economy . Over the can be levied, such as in toll roads or power projects. past decade, the Government has implemented reforms Middle income countries like Malaysia, Colombia, China, to improve the investment climate for the private sector Brazil, Mexico, and Turkey are increasingly reliant on and adopted an expansionary fiscal policy to address PPPs to finance their infrastructure projects. binding constraints to growth. At the same time, the Government has increasingly sought to leverage private PPPs can draw private financing and can also facilitate resources to enable it to close financing gaps and to the achievement of higher levels of efficiency, achieve higher levels of efficiency. Regardless of the thus improving the quality of infrastructure assets modalities adopted by the Government, it is critically and services. PPPs can support the much-needed important that these increased investments result in the crowding in of private sector investment, while at the creation and effective utilization of the productive assets same time assisting the Government to achieve its needed to support accelerated economic growth rates development objectives through improved use of assets and structural transformation. and better service coverage and quality. If structured and implemented appropriately, PPPs can also facilitate Infrastructure needs in Uganda are vast, and better risk management and include incentives to develop Government resources required to meet these needs innovative approaches to output delivery. The provision are insufficient. Addressing Uganda’s infrastructure of consistently high-quality services can be incentivized deficit would require sustained investment of almost US$ through the inclusion of performance and payment 1.4 billion per year in the medium-term to meet the gap. mechanisms into the agreement between the parties. Uganda’s budget is under strain with a fiscal deficit that However, PPPs come with a host of limitations, had been planned to increase to 6.5 percent of GDP which may lead to failure in the achievement of the in the next two years, before it starts declining. In FY key goal of increasing fiscal space. For example, in 2017/18, total expenditure on infrastructure has been availability-payments-based PPPs, the government pays anticipated to reach the value above seven percent of for the infrastructure. Even where users are charged for GDP, yet is still below the level required to close the services, governments often have to bear the demand, infrastructure gap. forex, interest rate and inflation risks, creating contingent While Uganda’s existing fiscal space is insufficient liabilities for the government. Contingent liabilities are to meet its infrastructure needs, it has been losing hard to estimate and government may end up bearing sizable amount of resources through inefficiencies. It more risk than they can effectively manage. Since PPPs has been estimated that Uganda has lost about US$ 300 involve fiscal risks that may result in outcomes differing million per annum in inefficient infrastructure spending greatly from the forecasts or expectations, it is important mostly through underpricing in the power sector. Other to have clear frameworks to assess these risks. inefficiencies observed include the inability to complete In addition, many of the benefits of PPPs depend projects within cost and on schedule. upon the government’s commitment to building the With insufficient fiscal space and inefficiencies appropriate frameworks and institutions to provide a constraining Uganda to meet its infrastructure conducive environment for private investment, and its development objectives, public-private partnerships ability to effectively use these frameworks to procure (PPPs) can help fill some of these gaps. A PPP entails and manage PPPs. The government needs to adopt a long-term contract between a private party and a robust project identification, screening, procurement and government entity to provide a public service with the contract management processes. With the complexity transfer of substantial risk to the private party. PPPs may of the PPP process, it is necessary to devote significant involve new or existing assets, with certain designated resources to the development of frameworks for responsibilities assigned to the private partner. The PPPs management to ensure that they facilitate the x achievement of the intended objectives. Therefore, in order to undertake a structured PPP program, Uganda 8.3 needs to build its institutions and skills. Uganda has embarked on this path by formulating a PPP Policy Framework, backed by the PPP Act of 2015. PPPs can only be successful to the degree to which they can attract long term financing. PPP projects % require significant upfront capital investment, often with back-ended revenue profiles resulting in the need Uganda’s share of all PPP projects for longer contracts of duration 20 years or more. The in the sub-Saharan African availability of long-term financing is extremely limited in Uganda. Neither the commercial banks nor Uganda’s single development bank have been able to play an shallow. The stock exchange has a market capitalization active role in providing long-term finance for the country’s of 5 percent of GDP, compared to 50 percent in development needs. Lines of credit have been provided neighboring Kenya. The Capital Markets Development to select banks by development institutions, but these Masterplan proposes a number of key reforms that may can only be viewed as temporary solutions. Thus, more transform the capital markets landscape in Uganda. sustainable sources need to be developed. These reforms include a review of fiscal barriers to capital markets development, the implementation of government The pension sector represents the largest pool of bond market reforms as a precursor to the development long-term domestic capital in Uganda. Thus, its role of corporate bond markets, a widening of the investor in supporting the provision of long-term finance needs base, the revision and amendment of the legal and to be enhanced. It is hoped that the proposed reforms regulatory framework for capital markets to ease to the pension sector to support competition and growth issuance of securities, and measures to make the market will play a key role in catalyzing the growth of long-term infrastructure more cost-effective. All of these reforms finance in Uganda. The National Social Security Fund can be expected to have a significant positive impact and (NSSF) is the largest investor in Uganda, holding assets should be implemented as a matter of priority. to a total value of UGX 6.5 trillion, or 85 percent of the market. However, the existing level of domestic supply Uganda can draw on the lessons learnt from its of financial instruments is insufficient for NSSF and other experience with previous PPPs. With investments in pension fund to invest in. 24 projects with a total value of US$1,830.69 million, Capital markets in Uganda are not yet sufficiently Uganda’s share of all PPP projects in the sub-Saharan developed to be able to supply the long-term resources African region amounts to 8.3 percent. The largest sector required to promote higher rates of economic in terms of PPI is the energy sector. The majority of the growth. To stimulate a more rapid development of the financing for these projects has been through debt raised capital market, the Capital Markets Authority (CMA) has by the private entity, backed by guarantees provided by formulated a Capital Markets Development Masterplan. the Government. In other cases, they have involved direct Domestic currency financing is limited and financing for government borrowing from bilateral and multi-lateral PPPs will require Uganda to work towards appropriate financing institutions. Uganda has had a mixed record de-risking of projects in order to attract equity and debt in the implementation of PPPs, with moderately positive financiers. Consequently, to provide greater comfort outcomes in the energy sector. In the transport sector, to investors, it will be important for Uganda to develop the first PPP arrangement for the Uganda-Kenya railways, robust processes for managing contingent liabilities involving Rift Valley Railways, did not yield satisfactory arising out of PPPs at project and aggregate levels, outcomes. Currently, the government is preparing to and providing sources of liquidity to meet any potential bring the Kampala- Jinja Expressway project to the payments should these liabilities be called. market. The PPP Policy Framework to provide the legal framework for PPPs was adopted by Uganda in 2010, with In the context of the very limited supply of long term the PPP Act being approved in 2015. resources, the capital market, which is the main intermediary for long term finance, has remained xi While Uganda has strong regulatory frameworks, process must be imbedded and well-coordinated actual implementation of these frameworks remains with the overall Public Investment Management sub optimal. The promulgation of the PPP Act in 2015 (PIM) process so that only economically feasible placed Uganda in the same league as South Africa investments that show promise as PPPs are taken and Kenya in terms of the legal frameworks required up for further detailed studies. It also requires to support PPPs. However, these frameworks need to establishing methodologies for detailed feasibility actually be implemented for Uganda to conform to global analyses, including value for money assessments good practice for the management of PPPs. There is and fiscal affordability assessments; streamlining a lack of institutions, human resources, and well-laid the procurement processes, including adding out processes and methodologies to implement the greater detail and competition into the process for framework with the result that the PPP program has been unsolicited projects; establishing robust contract slow to take off with little experience in PPPs other than management processes; and establishing robust in the energy sector. To maximize the value derived fiscal risks assessment both at the national level from its investments through PPPs and to manage the and at the project level. associated risks, Uganda needs to immediately establish the appropriate institutions and processes to actualize the (ii) Uganda’s PPP program needs to be appropriately existing policy frameworks. resourced to enable it to provide stronger leadership and direction, and for funding project The lessons from experience in Uganda and global preparation, providing viability support and a best practice emphasize a number of aspects that liquidity reserve to backstop any contingent must underpin a successful implementation of PPPs . liabilities. The Government of Uganda needs to These include ensuring that the selection of projects urgently set up the Project Development Facilitation is done well; the allocation of sufficient resources Fund. This will entail mobilizing budgetary and non- for the project preparation; the adherence to open, budgetary resources, including from bilateral and transparent and competitive processes; the use of clear multi-lateral donors. Revenue flows from projects, processes for determining public support; the ensuring including success fees, can be other sources of existence of capacity across all government officials, revenue for such fund. It will also entail setting up and the existence of sound institutional and regulatory the governance and operational framework for the frameworks. Uganda ought to take action in six major functioning of the fund. areas in order to achieve a more robust and better structured longer term PPP program that can guarantee (iii) Uganda should work towards building a robust improved outcomes from PPPs: PPP pipeline . There are several project ideas especially in the road, energy, residential and (i) To maximize the value derived from its commercial accommodation and other sectors investments through PPPs and to manage the which should be screened from the investment associated risks, Uganda needs to immediately and PPP perspectives. It is essential to move establish the appropriate institutions to actualize these projects forward, including through the the existing legal and policy frameworks . This development of a sustained project development entails creating capacity within the central PPP funding mechanism in the form of the PDFF and unit and the potential contracting authorities to to tie these projects to efforts on developing enable them to prepare, appraise and provide innovative financing mechanisms. oversight for PPP projects. The PPP screening xii (iv) Uganda should incorporate the principles of (vi) The use of innovative means to mobilize transparency and accountability into its PPPs domestic resources should be adopted as the programs to allow better citizen engagement development of the domestic financial markets and involvement in decision-making. Key is expedited in order to reduce the financing information related to both operational and risk for PPPs. For countries such as Uganda, pipeline projects at various stages of preparation where the domestic financial markets and capital and procurement should be placed in the public markets are still limited, financing for PPPs domain in a timely manner to increase the and options for credit enhancement are biased predictability of Uganda’s PPP program. Public towards foreign sources, which in turn makes the scrutiny is likely to incentivize government to foreign currency exposure a key risk for investors. adopt transparent and accountable processes, As the Government expedites the development consequently stimulating investor interest and of the pension sector and implements the Capital stakeholder support for PPP as a modality of Markets Master Plan, it should also make efforts to asset creation, operation and management, and mobilize domestic currency financing through the efficient and effective service delivery. Therefore, establishment of syndicates of commercial banks a communication strategy should be developed and large surplus institutions such as pension for the PPP program to sensitize both internal funds, particularly the NSSF, to finance PPPs. and external stakeholders and to engage them Innovative mechanisms such as infrastructure in dialogue through a higher level of stakeholder debt funds can also be formed. engagement and better disclosure policies. A structured communications program would ensure that prospective investors, contracting authorities and the general public are aware of the salient features of the PPP Act and the processes to be followed for projects, including processes related to procurement. It would also ensure that the Government’s pipeline and priority areas for PPP are fully visible. 1 5. (v) The creation of a PPP database should be expedited to disclose key information related to both operational and pipeline projects at various stages of preparation and procurement. This would increase the predictability of pipeline % projects and promote transparent and accountable the current deficit sto od of GDP by processes, consequently stimulating investor the end of December 2016 interest and stakeholder support for PPP as a modality for asset creation, operation and management, and efficient and effective service delivery. xiii PART State of the Ugandan economy By the end of March 2017, Uganda’s economy was growing at the annualized rate of 2.5 percent, compared to 5.3 percent for the corresponding year ending March 2016; this deceleration is the result of the ongoing impact of the prolonged drought, to a slow recovery in the provision of credit to the private sector by the banking system, and to disruptions to trade with South Sudan. Despite the impact of the drought on food prices, the inflation rate has remained moderate. This enabled the authorities to continue to ease their monetary policy stance, the effect of which gradually became manifest, with the commercial banks slowly reducing lending rates and accelerating the rate of expansion of credit to the private sector and money supply during the six months to March 2017. Uganda’s external current account deficit eased to a value equivalent to 5.3 percent of GDP by the end of December 2016, with the import bill being contained by low oil prices and exports increasing due to the advent of refined gold exports and to the penetration of new markets in South Asia. However, the overall external position remained weak due to the failure to attract higher capital inflows. On account of the huge under-execution of the budget during FY 2016/17, the fiscal deficit is expected to reach only 3.5 percent of GDP, far lower than the budget of 6 percent of GDP. With nearly 77 percent of this deficit funded externally, the crowding out effect on the private sector is relatively insignificant. The economy will grow at a rate below 4 percent this year, with this rate increasing to around 5-6 percent in FY2017/18 and FY 2018/19, predicated on the effect of the drought receding, the containment of the level of troubled assets within the banking sector, and improvements to the execution of public projects. With the performance of the private sector remaining subdued due to the ongoing impact of internal and external shocks public investments will remain the key driver of growth, with their effect boosting the construction sector in particular. The services sector is still the most significant contributor to total value added in the economy. With continued volatility posing challenges to long term finance and the financing of investments in Uganda, the Government needs to ensure that its investment program is soundly financed and generates real productivity improvements. To achieve this, the Government must address the deficiencies within the domestic financial system, explore the use of blended financing options and intensify efforts to tap into private sector capabilities through efficiently managing private public partnerships. Uganda currency (Sheila Kulubya, 2017) 1 Kampala city at night (Morgan Mbabazi, 2017) Combined with Uganda’s rapid population growth 1. Recent Economic rate, the recent decline in its GDP growth rate has resulted in Uganda recording a far less impressive Developments increase in average per capita income than its regional peers. In the period from FY 2011/12 to 2015/16, the average annual GDP growth rate stood at 4.5 percent, In FY 2016/17, economic activity was much more considerably lower than the long-term average (currently subdued than had been anticipated, continuing a 6 percent), and even lower than the average figure of trend that has persisted for the last five years. By the seven percent recorded in the immediate post-reform end of the first nine months of the year, the Ugandan period, from the 1990s to the early 2000s. At the same economy was growing at an annualized rate of 2.5 time, Uganda’s population growth rate has remained percent. This sluggish performance started to show high, with this rate standing at 3.0 percent per annum signs of improvement during the fourth quarter according to the most recent population census of the year. Commercial banks started to reduce conducted in 2014. Therefore, by FY 2015/16, Uganda’s interest rates and to increase their lending to the average annual per capita income was estimated to private sector, albeit at a very slow rate. However, stand at US$ 690, far lower than the average figure for a combination of bad weather conditions, the poor developing countries in the sub-Saharan African region, quality of credit, disruptions to trade with South which stands at around US$ 1,638. A range of external shocks over the past few years, including those related to Sudan, and low global demand continue to constrain the global economic and financial crisis, low commodity private investments. On account of this, activity in the prices, civil unrest in neighboring South Sudan, the poor agricultural and manufacturing sectors has remained quality of and limited access to credit in the domestic sluggish. Implementation of the public sector’s banking system and the recurrent drought conditions investment program failed to meet target, with this across Uganda, have contributed to the deceleration in mainly on account of low performance of externally growth. In addition, constraints related to inadequate, funded projects. Nonetheless, the construction and high-cost infrastructure and inefficient financial the services sectors remain the key drivers of growth. intermediation have continued to exert a dampening effect on economic growth. 2 Uganda’s economy has been negatively affected by civil strife and political turmoil in three neighboring countries, South Sudan, DRC, and Burundi 2.5 annual economic growth rate % during the first nine months of FY 2016/17 The difference between Uganda and its peers can be While it is estimated that Uganda’s poverty rate explained by the difference between the drivers of continued to decline in FY 2015/16, the ongoing growth in their respective economies . As in the case of economic deceleration has serious negative Kenya and Tanzania, Uganda’s economy is not currently implications given the high level of vulnerability to dependent on oil exports. Thus, it has escaped the poverty in the country. The proportion of households severe slowdown that has characterized the economies living below the international poverty line, which stands of Nigeria, Angola, and the Central African Economic at US$ 1.9 per day in 2011 purchasing power parity and Monetary Community (CEMAC) countries. However, terms, is estimated to have declined to about 31.8 as a landlocked country, it has not benefited from percent in FY 2015/16. This is almost 10 percentage increased openness to the same degree as the other points lower than the figure of 41.5 percent recorded two East African Community (EAC) neighbor countries. five years ago 2. However, more than 43 percent of the The second source of difference is the rate at which population live just above the poverty line, and are thus these countries have reaped a dividend from their public highly vulnerable to the risk of falling back into poverty investment programs. Like other landlocked countries in the case of economic shocks. This vulnerability is in the region, such as Ethiopia and Rwanda, Uganda is particularly pronounced given that the agricultural sector engaged in a public investment drive that is focused on has contributed to more than 79 percent of the decline in the development of infrastructure. However, these peer poverty over the past decade, with the agricultural sector countries have been able to generate a stronger growth remaining undeveloped and highly vulnerable to shocks, impact than Uganda due to the former countries’ high particularly shocks related to the unpredictable weather. rate of execution of their investment programs. Finally, While the structure of the economy is slowly undergoing Uganda’s economy has been negatively affected by civil a process of transformation, approximately three-quarters strife and political turmoil in three neighboring countries, of the population still depend primarily on low paying jobs South Sudan, DRC, and Burundi, making it difficult for the in the agricultural sector. Of this portion, the majority are Great Lakes region as a whole to gain economic traction. still employed in subsistence farming, which contributes to approximately 25 percent of the total value of GDP. 2. Using the National poverty line, which is slightly less than a dollar, this ratio is estimated to have declined from the figure of 24.5 percent recorded in 2009/10, to about 19.7 percent in FY 2015/16. 3 1 Economic activity in FY 2016/17 has be en subdued 1. During the first nine months of FY 2016/17, due to by adverse weather conditions, attacks on traders and the impact of the economic shocks described above, disruptions to the trading routes between Uganda and Uganda’s economic growth was particularly subdued. South Sudan, concerns regarding the social impacts of By the end of March 2017 three quarters into FY 2016/17, various projects, and upheavals in the banking system. overall economic activity was increasing at the meagre Therefore, the effect of an almost year-long easing of the annualized rate of only 2.5 percent, compared to the rate 3 monetary policy stance to stimulate the economy has of 5.3 percent recorded for the year ending December had only a very limited impact, largely failing to stimulate 2015. This growth is also considerably lower than the rate sufficient private sector credit uptake. recorded for the previous financial year FY 2015/16 as a whole, which stood at 4.7 percent. It is also dramatically In the context of these internal and external shocks, lower than the rate the authorities had forecast in the the rate of growth of both private and public budget, with the rate for this period originally projected investments has decelerated significantly, with at 5.5 to 6.8 percent. Thus, the economy has continued economic growth mostly driven by consumption . on a downward trajectory that has persisted for several By the end of December 2016, the total value of new years, with many analysts’ expectations of a recovery investments had declined to almost half the value in the post-election period having failed to be realized. recorded in the previous year. In terms of public Even though the policy frameworks held up well during investments, the total value declined from UGX 2,948 the most recent election cycle in 2016, after-effects from billion to UGX 1,424 billion. While the value of private the previous election cycle in 2011 persisted, including investments declined from UGX 16,983 billion to UGX diminishing levels of donor budget support and tighter 8,525 billion over the same time period. spending controls. On top of these semi-structural factors, the economy has been negatively impacted Figure 1: Quarterly Real GDP growth volatile and on a declining trend recently Source: Uganda Bureau of Statistics 3. Annualized growth rate has been calculated as the most recent four quarters, compared to the corresponding period of the previous year. 4 While the growth rate for all sectors of Uganda’s sector were self-employed, mainly in the services economy decelerated, the services sector continued sector, a dramatic increase from the figure of 40 percent to be the main driver of economic growth. At present, recorded in FY 1992/93. the services sector accounts for 51 percent of the total value added to the economy. For the six months to In the industrial sector, 5 the volume of activity in the December 2016, activity generated within this sector first half of the current fiscal year was 3.4 percent increased by 3.4 percent, relative to the level of activity greater than the volume realized in the corresponding in the corresponding period of 2015. Within the services period of the previous year. This growth was mainly sector, growth was driven mainly by the information driven by the manufacturing and construction sub- and telecommunications, real estate, social services sectors, which grew strongly, at the rates of 5.8 percent (including both health and education) and public and 3.0 percent respectively. Operators within the administration sub-sectors. Growth in the financial manufacturing sub-sector, including those involved services sub-sector decelerated, with increases in the in food processing and the production of industrial level of non-performing assets and a reluctance on the materials, started to recover from the effects of the part of the banking system to extend credit. Growth in the trade disruptions between Uganda and South Sudan. trade and repair services sub-sector also decelerated, In particular, these operators have benefitted from the largely due to the ongoing negative effect of the conflict lower prices of imported inputs, while the growth of in the South Sudan. A deceleration in the growth of the construction sub-sector has mainly been driven the services sector could have significant negative by increased public investment in infrastructure. The implications for poverty and employment picture, given growth rate for the mining and quarrying sub-sector 6 the increasing number of people employed in this sector, declined strongly, although this subsector still makes only as experience in other developing regions indicates a relatively insignificant contribution to total GDP, and (Ghani and Kharas, 2010) 4. By the end of FY 2012/13, thus this decline had only a limited impact on the overall 82 percent of Ugandan workers outside the agricultural economy. Figure 2: Construction and Services: The main drivers of economic growth 6.2% 7.0 5.6% 4.8% 6.0 4.6% 4.4% 5.0 3.8% 4.0 3.5% Percent 3.0 2.0 1.0 0 -1.0 -2.0 -3.0 -2.2% Source: Uganda Bureau of Statistics, 2012 and World Bank Staff Estimates 4. Ghani, Ejaz, and Homi Kharas. 2010. “The Service Revolution in South Asia: An Overview.” In the Service Revolution in South Asia, ed. E. Ghani, 1–32. New York: Oxford University Press. 5. According to the National Accounts, ‘Industry’ covers mining and quarrying, electricity supply, water supply and construction. Construction takes the largest share, 50 percent, while the share of manufacturing is 32 percent. 6. Mining and quarrying does not include oil activities. These are currently captured under construction. 5 The agricultural sector continued to perform poorly The authorities have implemented fiscal and monetary as a result of the harsh and unpredictable weather policies to manage the impact of these shocks. Public conditions related to the el nino and la nina weather expenditure, particularly on capital development, has phenomena . During the first half of FY 2016/17, the total been increasing steadily since FY 2011/12, following the value of activity in this sector was 4.5 percent lower Government’s adjustments to budget policies in an effort than the value recorded in the corresponding period to stimulate growth. As a result of these policies, the of 2015/16, continuing the downward trajectory that average annual value of public investments increased commenced in the previous half-year. The output of crops from 5.7 percent of GDP in FY 2011/12 to 8.5 percent declined most severely (by almost eight percent), with in FY 2015/16, with this figure originally projected to this decline having a significant impact on the welfare reach 9.8 percent in FY 2016/17 budget. However, both of the poor. Despite the provision of aid by a number of private investment and consumption have increased at development partners, a significant proportion of the lower rates, partly because of the challenges faced by population in a number of districts are facing hunger and the financial system, and the low execution and limited starvation. An increasingly unpredictable and drought- spillover from public projects. The total value of private prone climate; increased pest attacks 7; limited investment investments declined from the average share of 21.3 in irrigation; soil depletion resulting from limited fertilizer percent of GDP between FY 2011/12 and FY 2012/13, usage; and rising population pressures are exacerbating to 16.3 percent in FY 2015/16. This figure is expected the challenges faced by the agricultural sector. to decrease further to about 16.1 percent of GDP, in the current financial year. Figure 3: Contributions to annual GDP Source: Uganda Bureau of Statistics 1.2 Monetary policy attempts to stimulate the economy in the context of low inflation Uganda’s economy continues to be affected by a which was higher than 5.9 percent recorded in the same number of shocks that have had serious implications month in the previous year. The pressure largely came for price movements. Even so, the core inflation from the impact of the prolonged drought on food crops. rate has remained within the target range of about 5 Food prices have steadily increased since October percent. According to the Uganda Bureau of Statistics’ 2016, with the rate of increase reaching 23 percent by Consumer Price Index (CPI), the annualized headline May 2017 before declining to 18 percent by June 2017. (overall) inflation rate stood at 6.4 percent in June 2017, While this has contributed to instability, its impact has 7. During this financial year, a number of districts have recorded losses in output on account of the army worm attacks on particularly grains, but also seen to spread to other crops 6 been partially offset by a number of internal and external these movements, the average annualized inflation rate factors. For instance, largely due to the gradual pass during FY 2016/17 stood at 5.7 percent, with the core through of the low international oil prices, the energy, inflation rate (which eliminates volatile categories such fuel and utilities component of the CPI declined steadily as food crops and energy and utilities) at a slightly lower through 2016, before commencing to increase again in level, at 5.1 percent. Thus, the pass-through effect from the three months prior to March 2017, but have started the unfavorable climatic conditions for agriculture to the to decline in June 2017. With the combined impact of overall inflation rate has been limited. Figure 4: Despite food price increases, inflation remains within target levels Source: Uganda Bureau of Statistics Expectations that inflation will remain within the 2016 to 23.1 percent in February 2017, before they were targeted range have facilitated the Bank of Uganda’s reduced more strongly to 20.5 percent in April 2017 (see (BoU) decision to ease its monetary policies and Figure 3) 8. Secondly, the limited financial depth means to lower its policy rates over the past year or more . that these policy actions have had only a limited impact Continuing a trend that commenced in April 2016, the on economic activity, with the proportion of the private BoU lowered the Central Bank Rate (CBR) significantly at sector having access to commercial loans remaining low. several points throughout FY 2016/17. The CBR stood at 10.0 percent in June 2017, compared to the figure of 17 percent recorded a year earlier. So far, the lower policy 23.1 rates have reduced returns on financial assets, including both Treasury Bills and deposits, thus encouraging savers to seek alternative investments. Another intended goal of the lower policy rates was to boost private sector activity by reducing the cost of credit to the sector. However, in terms of this goal, the reductions in the policy rates have % had only a limited impact. Firstly, commercial banks have reduced their lending rates by only a very limited degree, Commercial banks lending rates in with these rates declining from 23.5 percent in June February 2017 8. The correlation between BOU’s policy rates and lending rates is 60 percent for Treasury Bills, 80 percent for the Bank and Rediscount Rates, and 90 percent for the CBR. 7 Figure 5: Lower policy rates not yet fully reflected in lending rates Source: Uganda Bureau of Statistics The stimulus policies have resulted in a modest characterized by the deterioration in the quality of loans acceleration in the rate of expansion of credit and and the increased recognition of foreign exchange risks, money supply after it had collapsed during the first the commercial banks have been slow to reduce their half of FY 2016/17 . According to data from BOU, 9 while lending rates. The greatest proportion of the loans they the rate of growth of credit to the private sector had provide to the private sector was going to the transport, registered a negative annual growth rate of -1.1 percent communications, business services; and personal and by the end of September 2016, it had since gradually household sectors. The value of credit provided to recovered, increasing to an average rate of growth the building, mortgage, construction, real estate, and of 5.2 percent during the subsequent quarter ending manufacturing sectors have continued to decline, with the December 2016, and to 6.2 percent during the quarter total value of credit received by the sectors being lower ended March 2017. In a heightened risk environment than in the previous year Figure 6 : Credit to the private sector: Acceleration since September 2016 Source: Uganda Bureau of Statistics 9. BoU, Depository Corporations Survey (previously known as Monetary Survey), April 2017. 8 In tandem with expectations, commercial banks’ faster rate, going up from 5.8 percent to 8.0 percent increased recognition of foreign exchange risk has over the same period. The dollar-denominated credit deterred agents from increasing foreign currency accounted for 44 percent of the total value of credit borrowing. Even though the denominated in foreign extended by commercial banks by April 2017, which is currency continue to contribute significantly to the growth only marginally lower than 44.6 percent recorded in April in total credit when converted into shilling, the stock of 2016. As has been discussed in previous editions of this these loans has been decreasing throughout most of report, 10 the loans denominated in foreign currency also FY 2016/17. During the first ten months, the total value create a significant exchange rate risk for borrowers, of these loans decreased by 3.7 percent, contrasting whose earnings are shilling-denominated, particularly in with the modest increase of 1.4 percent recorded during the case of entities operating in non-tradable sectors. the corresponding period in FY 2015/16. This is a very In the case of a depreciation in the value of the local significant reversal, and collaborates the fact that currency, it would become increasingly expensive for commercial banks have tightened lending conditions those sectors to service debt denominated in foreign due to the high level of volatility. The stock of loans currency. denominated in local currency has increased at much Figure 7 : Increase in loans denominated in foreign currency since september 2016, mainly as a result of revaluation of these loans into local currency Source: Bank of Uganda There has been a disturbing increase in the level credit risk, with the most significant factors relating to of non-performing assets, with this being the main the restrictions on the private sector’s cash flow resulting reason for slower credit and declining profitability from the Government’s delays in paying for goods and of the banking system, the overall high level of services supplied by this sector, the high cost of credit, capitalization notwithstanding. In FY 2015/16, the and the exchange rate volatility, all of which have made proportion of non-performing assets (NPAs) increased it difficult for an increasing proportion of businesses to an average of 4.4 percent, almost double the average to honor their commitments. This has resulted in an level recorded in the previous year. By December 2016, escalation of provisioning costs and the imposition of this figure had increased to10.5 percent, before declining tighter lending conditions by banks. However, with most to 6.3 percent in March 2017. Both domestic and banks maintaining capital adequacy ratios well in excess international factors have contributed to the increased of the required statutory minimums, the increase in NPAs 10. Most recently, see World Bank 2016 Uganda Economic Update, 8th Edition. Step by step, Let’s solve the Finance Puzzle. Washington D.C. February 2017. 9 has not resulted in the failure of most operators in the measures to ensure the soundness of the financial sector, banking system. Indeed, only one bank, Crane Bank, has including the introduction of a capital conservation buffer been subject to interventions and closure, with this bank (CCB) of up to 2.5 percent of risk-weighted assets (RWA) being severely undercapitalized due to poor governance. above the minimum capital requirements. Furthermore, all Domestic Systemically Important Banks will be required to Adoption of strengthened standards for capital maintain additional capital reserves to a value of between adequacy has helped stave off concerns regarding 1-3.5 percent of RWA in addition to the minimum capital undercapitalization, albeit with some increase in costs requirements and to the CCB. Since the cost of additional for the sector . Recently, banks have increased their capital is likely increasing on the margin, the increased capital buffers ahead of the requirement for increased capital buffers can be expected to have some impact on Basel III capital adequacy expected to become effective lending rates. this year. The BoU has implemented a number of other 1.3 A we akening external position deflated activity in sectors with external links Over a siginificant part of FY 2016/17, Uganda’s value of the imports resulting from the sustained fall in external position remained weak, with the impressive global commodity prices, especially oil. The total value performance in terms of reducing the current account of merchandise imports in the first half of FY 2016/17 was deficit being more than offset by the deterioration 16 percent lower than that recorded in the corresponding of long-term capital and finance. According to data period of FY 2015/16. Consequently, the total value of published by Bank of Uganda , the current deficit stood 11 the imports of goods declined from a level equivalent to at 5.1 percent of GDP by the end of December 2016, 19.6 percent of GDP to 16.7 percent over this period. At significantly lower than the figure of 7.4 percent recorded the same time, the total value of exports increased by 18 in the previous year, largely due to an improvement in percent in the six months to December 2016, primarily Uganda’s net export position. However, with the decline in driven by a growth in the value of non-monetary gold. With the strength of capital and financial flows, a deficit in the global demand starting to increase, efforts to diversify overall balance of payments to a value of US$ 318.6 million markets beyond the region started to pay off, with the value was recorded by the end of December 2016, almost fully of exports to Uganda’s new markets in the Middle East offsetting the surplus of US$ 390 million recorded in the and Asia growing strongly. In addition, domestic efforts previous year. to rejuvenate the production of major traditional exports, including coffee, began to have a positive impact. In the During the six months prior to the end of December quarter ending in December 2016, Uganda exported 2016, the first half of FY 2016/17, an improvement in 1,120,000 bags of coffee. This is a higher figure than has Uganda’s net export position resulted from a reduction been recorded in any year since 1999. This increase is in its imports bill and from a modest increase in its attributed to the improved quality of Uganda’s beans, with exports . The contraction in the demand for imports may farmers adopting improved drying methods; to increased have been due to a number of factors, including the strong coffee yields as a result of an extensive tree replacement depreciation in the value of the Ugandan shilling over the program; and to the promotion of coffee cultivation outside last two years, the delayed implementation of a number traditional hubs. of major infrastructure projects, and the decline in the 11. www.bou.or.ug; Statistics/External Sectors Statistics/Balance of Payments 10 Figure 8 : Uganda penetrates new export markets Source: Bank of Uganda In the area of Uganda’s net flows related to services as remitters for these flows adjusted to reduced domestic and income, it has recorded a less impressive uncertainties, following the completion of the election performance, due to a number of internal and external cycle in February 2016. factors . During the first half of FY 2016/17, the total value of travel reciepts, which includes receipts from The volume of net flows of longer term capital started tourism, amounted to US$ 458 million. This figure is 24 to increase during the first half of FY 2016/17, although percent lower than that recorded during the first half of it remains low. Thus, the position for the overall FY 2015/16. This decline was the result of a number of balance of payments did not improve significantly factors, including the impact of regional terrorist incidents compared to the previous year. During the first half of on consumer perceptions of the East African region; lower FY 2016/17, the total value of disbursements by project global incomes; the lingering impact of election-related grants stood at US$ 372 million, still lower than the uncertainties; the Kasese clashes in Western Uganda; figure of US$ 592 million recorded in the corresponding and an outbreak of avian flu. Uganda continued to benefit period of FY 2015/16. However, the overall value of FDI is from the low oil prices, with freight charges continuing on estimated to have increased from US$ 269 million to US$ a downward trajectory that commenced in 2012, reaching 426 million over the same period, with existing investors a value of US$ 498 million in the first half of FY 2016/17, making the decision to re-invest their earning. The value with this partially offsetting the negative impact of the of direct investment equity in enterprises remained low, other factors. Overall, the net value of foreign outflows at only US$ 101 million, significantly lower than the figure related to services increased by 4 percent compared to of US$ 155 million recorded in the corresponding period the figure recorded in the corresponding period of FY in FY 2015/16, with investors adopting a wait-and-see 2015/16. There were also increased outflows related to approach in the context of flows related to oil production. primary investment income, mainly derived from foreign With the interest rates on government securities declining direct investment. As a result, the figure for the net steadily, investors withdrew a total value of US$ 33 million outflow stood at US$ 421 million for the six-month period that had been invested in government securities during to December 2016, a dramatic increase over the figure of the first half of FY 2016/17. This more than reversed the US$ 225 million recorded in the corresponding period of US$ 36 million that they invested in these securities in the 2015. Only the value of personal transfers has increased, same period in the previous year. from US$ 497 million to US$ 563 million over this period, 11 The overall deterioration in the balance of payments During the second half of FY 2016/17, a number of position has been accompanied by a loss of foreign areas in Uganda’s external position improved, with exchange reserves, with this effect exacerbated by an this allowing Bank of Uganda to rebuild foreign adjustment in the value of the Ugandan shilling. The exchange reserves . With stronger inflows into services value of foreign exchange reserves decreased by US$ and income accounts, the deficit on the current account 166.5 million in the first half of FY 2016/17. Adjustments to is expected to decline further to a value equivalent to 4.8 the weakening external sector have involved a reduction percent of GDP by the end of June 2017. Furthermore, on in forex reserves, with the value of these reserves account of accelerated disbursements of long term loans, declining from 4.8 months of import cover to 4.3 months particularly the non-concessional loans financing large in the period from December 2015 to December 2016. infrastructure projects, the overall balance of payments The value of the shilling has remained stable in both is projected to have registered a surplus, amounting real and nominal terms for most of FY 2016/17, despite to US $ 232 million, with this surplus expected to have some volatility at the beginning of the year. By the end of allowed the Bank of Uganda to increase foreign exchange December 2016, the value of the Ugandan shilling relative reserves to a value sufficient to cover five months of the to the US dollar was 7.0 percent lower than it was at the import of goods and services by end of June 2017. same point in 2015, but its real effective value was only 3.0 percent lower. Harvest time for coffee, one of Uganda’s traditional export commodity (Morgan Mbabazi, 2016) 1.4 Planned fiscal expansion foiled by perpetual under-execution of project s The Government’s huge medium-term investment percent of GDP to 14.4 percent, partly compensating for program continues to dominate Uganda’s fiscal the decline in external grants, which were projected to policy management . The authorities remain committed to drop from 1.4 percent of GDP to 1.1 percent. Therefore, fiscal policies intended to boost growth by addressing according to the approved budget, the overall fiscal Uganda’s infrastructure deficit. As has been the case deficit had been envisaged to increase from 5.3 percent over the past four years, the Parliament approved an of GDP in FY 2015/16 to 6.4 percent, with more than expansionary budget for FY 2016/17, with a projected 80 percent of the fiscal deficit funded through external increase in total expenditure from 22.1 percent of GDP in loans, and with the bulk of these loans derived from non- FY 2015/16 to 22.4 percent in FY 2016/17. The value of concessional commercial sources. domestic revenues was projected to increase from 13.8 12 A combination of shortfalls in tax collections as well levels of insecurity in some parts of the country that as lower disbursements of external grants reduced saw a deputy inspector of police gunned down, the the amount of resources available to the Government Government increased recurrent expenditures beyond to spend by over a full percentage point of GDP, its original budget. Thus, a total of UGX 4,871 billion had compared to the budget, which had stood at 16.2 been released in the six-month period up to the end of percent of GDP. In the first nine months of FY 2016/17, December 2016. This was equivalent to 50.7 percent of the value of collected tax revenues amounted to Shs the approved budget, with this projected to increase to 9.24 trillion, representing a shortfall of about 2.5 percent 103.5 percent if these expenditures rise to the projected relative to the targeted level. The shortfall was largely UGX 9937 billion by the end of the financial year. due to the lower than expected level of international trade Notwithstanding the fact that supplementary spending taxes, with revenues in this category being the single could adversely affect the credibility and effectiveness of most significant contributor to tax revenues (see Figure the budget as a planning tool, part of this overspending 9). Within international trade taxes, the most significant was made possible through a supplementary budget, contributors to revenue are the petroleum duty and VAT which by end of May 2017 had amounted to UGX 762 on imports, with these accounting for approximately 40 billion. This amount of supplementary spending is percent and 30 percent of revenues respectively. While already above the threshold of 3 percent of the approved a surplus was recorded in the collection of petroleum budget 12, as was the case in FY 2015/16. A number duty, this was more than offset by shortfalls in other of activities financed through these supplementary categories, especially in the case of VAT on imports, the budgets could have been avoided if there had been value of which missed the target by 9.7 percent. The gap proper planning, as in the case of wages, for which the between the realized value of domestic taxes relative to supplementary budget amounted to UGX 97 billion. the targeted level during this period was much smaller, at 1.7 percent in the case of direct domestic taxes and 1.1 percent in the case of indirect taxes. Overall, the total value of the gap between the revenues collected and the targets stood at Shs 282 billion. With the shortfall expected to persist to the end of the year, it is projected that the total value of tax revenues collected will amount to 13.3 percent of GDP in FY 2016/17. This is a higher ratio than that recorded in FY 2015/16 (12.8 percent), but it is lower than the budget target of 13.5 percent. The external grants are also expected to reach 1.1 percent of GDP by the end of the year, compared to the target of 1.8 percent in the budget. This implies that the total overall value of resources available to the Government, can be expected to reach an amount equivalent to 15.1 percent of GDP, compared to the original budget target of 16.2 percent. Fiscal policy continues to be undermined by over spending on the recurrent budget, with this achieved through recurrent supplementary budget spending. Partly on account of spending pressures related to the food crisis in some parts of the country; increase of Northern Bypass easing movement in salaries for non-teaching staff; an outbreak of hostilities Kampala (Sarah Farhat, 2015) in the Kasese region in western Uganda; and increased 12. By end May 2017, the total supplementary budget for the year exceeded the threshold of 4 percent of the approved operational budget of UGX 18.4 trillion but within the 3 percent threshold when considering the total expenditure envelop which stands at UGX 26.3 trillion and includes statutory expenditures such as domestic debt refinancing, external debt repayments, interest payments, and domestic arrears. 13 Figure 9: Uganda’s domestic revenue collection: International taxes contribute highly, but fail to meet expectations in FY2016/17 Source: Uganda Revenue Authority The largest obstacle for fiscal policy to attain its has been affected by setbacks related to contract objectives has remained the significant under- management, land acquisition and social safeguards . execution of the development budget. Thus, overall expenditure is expected to remain below the target On account of the above developments, the nominal levels established in the approved budget by over value of the overall deficit is expected to be lower three percentage points of GDP. The rate of execution of than projected levels by about Shs 3,530 billion. public investments was unimpressive, especially in the case of Even against a lower nominal GDP, the fiscal deficit projects funded by external partners, with only 34 percent is projected to reach about 3.5 percent of GDP . This of the budget being absorbed during the first nine would be three percentage points of GDP lower than months of FY 2016/17. While the implementation of the the target level established in the approved budget. development budget was strong at the beginning of this The deficit will be funded mainly (up to 71 percent) fiscal year, it failed to keep the momentum through the from external sources. The lower deficit also allowed year. Some key investments, including the Karuma and the Government to borrow from the domestic market, Isimba hydroelectric power projects, had been carried amounts that are close to the limits it set itself within over from the previous year and had been expected to the budget. Through the first half of FY 2016/17, the be frontloaded into the first half of the year. However, Government had borrowed a total of UGX 827 billion from a number of issues related to assurance of quality of the domestic market, which is equivalent to 0.9 percent of work after the Karuma dam wall developed cracks and GDP. However, Government reduced its rate of borrowing the change of government’s supervision team, resulted during the second half of the year, such that this kind of into some delays. The physical progress at this dam is financing is expected not to reach beyond one percent of currently estimated at about 51 percent and it is likely GDP, hence slightly exceeding the figure of 0.9 percent that the contractor will seek permission for an extension of GDP in the budget. A key challenge with this financing of completion date from August 2018 to 2019. Meanwhile, strategy was the lack of coordination with the monetary the works and transport sector has recorded the lowest policy. With less pressure on the import bill required to rate of execution of their budget – by end of March 2017, support the Government’s infrastructure development the Ministry of Works and Transport had absorbed 22 program, the reduction in the fiscal deficit has translated percent of its budgeted resources while Uganda National directly into the lower external current account deficit, as Roads Authority absorbed 9 percent. The execution discussed in section 1.3. 14 Table 1: Fiscal Operations FY2016/17 FY2016/17 App. In percent of GDP FY2013/14 FY2014/15 FY2015/16 Proj. Budget Revenues and grants: 12.6 14.2 14.9 16.2 15.1 Domestic revenues 11.6 13.0 13.5 14.4 14.0 o/w Tax revenues 11.1 12.3 12.8 13.6 13.3 External Grants 1.0 1.2 1.4 1.8 1.1           Total expenditure 16.6 18.5 19.8 22.5 18.6 Recurrent 9.5 9.9 10.9 10.4 10.7 Development 7.1 6.7 6.9 9.8 7.1 Domestic Development 4.4 4.2 4.1 4.7 4.6 Externally Financed Projects 2.7 2.5 2.8 5.1 2.5 Net Lending & Investment 0.0 1.6 1.8 1.9 0.6 o/w Hydro-power Project 0.0 1.3 1.8 1.9 0.6 Other (e.g. Clearance of domestic arrears) 0.0 0.3 0.1 0.4 0.2 Float -0.5 0.1 0.4 0.0 0.0 Overall balance -3.5 -4.4 -5.2 -6.2 -3.5           External Financing 1.3 1.2 2.9 5.4 2.5 Domestic Financing 2.2 3.2 2.2 0.9 1.0 o/w Petroleum Fund withdrawals 0.2 2.1 -0.1 -0.1 -0.1 Memorandum items:         Nominal GDP (Shs billions) 70,458 77,845 84,907 92,878 92,734 Source: Ministry of Finance, Planning and Economic Development, IMF, and World Bank Uganda existing railway transport needs to be revamped (Morgan Mbabazi, 2016) 15 Economic activity progressing hand in hand with road works (Morgan Mbabazi, 2016) 2.1 Modest recovery if the impact of 2. Economic outlook shocks recedes Uganda’s economy is forecast to grow at the rate of about 5.2 percent over FY 2017/18. This will be a The World Bank forecasts that Uganda’s annual rate significant acceleration from the growth rate of 3.9 of economic growth will accelerate to around 5.2 percent estimated to have been realized during FY percent during FY 2017/18. As the adverse effects of shocks dissipate, economic activity is anticipated to have 2016/17 or the average rate of 4.5 percent recorded accelerated during the final quarter of FY 2016/17, with over the past five years. It is expected that the this pushing the annual rate of GDP growth up from the impact of internal and external shocks that have figure of 2.6 percent recorded midway through the year, to negatively impacted the economy in the recent past about 3 to 4 percent by the end of the year. The increase will start to dissipate. As a result, it is expected that will have been driven by improved macro-stability; private investments will increase. Together with the improved weather as rains started; the increased supply significantly increased pace of construction on public of credit to the private sector given that the commercial projects, this is expected to support an acceleration banking sector’s high level of liquidity; increased private in economic activity. This effect is expected to spill sector investment; and the ongoing implementation of over into the following year, FY 2018/19, during which infrastructure projects. These same effects should drive the economic growth rate is forecast to reach 5.6 growth into FY 2017/18, to a rate reaching 5.2 percent. percent, and into the medium term, when growth Over the medium term, if existing uncertainties related to could reach above 6.0 percent. Regional instability, fiscal management and other constraints on growth are poor weather conditions, global uncertainty, and addressed, Uganda’s rate of economic growth should gradually increase to 6 percent or above, an increase fiscal management remain the major downside risks. over the average rate of 4.5 percent recorded over the In the context of huge spending pressures, risks past five years. This will also be supported by a recovery related to imprudent fiscal management and the in FDI inflows to the extractives sector following the failure of the investment program to generate higher issuance of exploration agreements and the Government’s levels of growth if not properly implemented may lead renewed re-prioritization of the development of oil-related to unsustainable levels of debt. 16 Uganda’s economy is forecast to grow at the rate of about 5.2 percent over FY 2017/18 US$ 720 Uganda’s per capita income by FY 2019/20 infrastructure that has been followed by the signing of activity while at the same time ensuring the shocks the agreement between Uganda and Tanzania for the do not transmit into macro policy slippages . The construction of the oil pipeline East African Crude Oil fiscal budget for FY 2017/18 has been formulated with Pipeline Inter-Governmental Agreement (EACOPIGA) for the intention of delivering macroeconomic stability to exporting oil between Hoima and Tanga port. Therefore, it support inclusive and sustainable economic growth; is expected that the increased rate of growth will continue and facilitating socio-economic transformation. For to be driven by the construction and services sectors. these twin objectives to be achieved, two measures are essential: (i) strong efforts to achieve value for money The projected growth is expected to reduce poverty from the increased expenditure; and (ii) improved by an estimated 0.9 percentage points per year in budget execution to limit deviations from the planned the period from 2016 to 2019, with the poverty rate allocation of public resources. According to the Budget expected to fall to 28.8 percent by 2019/20. If these Framework Paper for 2017/18-2022/23, the Government forecasts are realized, Uganda’s average per capita plans to stimulate aggregate demand and supply through income is expected to increase to about US$ 720 by increased overall spending and an increased emphasis FY 2019/20. Economic growth is expected to have a on capital expenditures, with these expenditures disproportionately significant impact in the Central and expected to be reduced after major infrastructure projects Western regions, hence widening regional disparities. are completed. Therefore, following the completion of As of 2013, close to 43.7 percent of the population in the the Karuma and Isimba hydroelectric power projects, the Northern region and 24.5 percent in the Eastern region fiscal deficit is expected to decline to below five percent were living in poverty, significantly higher than in the of GDP over the medium term. Western and Central regions, where the figures stood at According to the FY 2017/18 National Budget, the 8.7 percent and 4.7 percent respectively. total value of expenditure is forecast to increase by 10 percent from UGX 26,360 billion, to UGX 29,008.5 The authorities must maintain a delicate balance billion. As a share of GDP, this expenditure is estimated between leveraging fiscal policy to stimulate economic to slightly increase to 19.7 percent of GDP, up from the 17 level of 18.6 percent estimated for FY 2016/17. With allocations to the health; water and environment; and the perceived need to implement priority infrastructure social development sectors were reduced by 0.3 percent, projects to facilitate private sector development and 13.6 percent and 13.3 percent respectively, relative to to enhance the productive capacity of the economy, sectoral budget allocations in FY 2016/17. The provision the infrastructure sectors (transport, energy and water) of insufficient resources to these sectors has the potential received the largest allocation, up to a value equivalent to exacerbate the dire living conditions of the poor and/ to 34.3 percent of the budget. Specifically, 21 percent or to reduce productivity at the household level. In a of the budget has been allocated for the development more positive development, allocations to the agricultural of transportation infrastructure, compared to 19 percent sector have increased by 4.9 percent, with this increase in the FY 2016/17 budget. In particular, the construction expected to support productivity improvements and of roads and bridges to ensure oil production by FY to enable a greater number of people to engage in 2020/21 has been prioritized, creating a monopoly over this sector. This, and the possibility that improved the increase in budget resources during this period. The infrastructure could raise farmers’ productivity and link allocation to the energy sectors decreased slightly, to them to markets, could raise average incomes and at 10.5 percent of the budget, from 11.6 percent allocated least partially offset the risks associated with the reduced in FY 2016/17, but its key aim remains to support the spending on the social sectors. completion of Karuma and Isimba hydroelectric power project and to construct power lines to support the With domestic revenues expected to grow only slightly distribution of electricity, especially in the rural areas. to reach the value of 14.5 percent of GDP during FY 2017/18, the Government intends to borrow to The need for improved infrastructure notwithstanding, finance the budget. The value of collected revenues the sustained reduction in allocations to the social has been lower than targeted levels for two consecutive sectors could have significant longer-term negative years. If the Government is unable to resist a new wave effects. While allocations to the education sector of demands for tax exemptions, it may continue to be increased by 1.2 percentage points, allocations to all the difficult for the Uganda Revenue Authority to meet its other social sectors have been reduced. In particular, targets. The fiscal deficit will reach a value of 6.4 percent Nakivubo channel draining Kampala (Sheila Gashishiri, 2015) 18 of GDP in FY 2017/18, with more than 80 percent of the there has been a correlation between this increase and fiscal deficit funded through external borrowing. The the low rate of growth of credit to the private sector. The value of net external borrowing is projected to reach total value of government domestic borrowing in the first 5 percent of GDP, with about three-quarters of this quarter of FY 2016/17 stood at Shs 678.6 billion, already coming from commercial sources (non-concessional in excess of the limit established by the annual approved loans). Domestic financing is projected to amount to 1.3 budget, with this limit being set at Shs 602 billion. The percent of GDP, consistent with the Government’s debt Government must manage future borrowing appropriately management strategy to limit its degree of dependence to ensure that it does not crowd out the private sector. on this expensive source of financing As fiscal authorities continue to reduce domestic debt issuance, they should resist the temptation to The fiscal authorities face a significant challenge in increase central bank financing . During FY 2016/17, their endeavors to finance proposed expenditures the Government’s decision to reduce issues of domestic while maintaining debt at a reasonable level to ensure debt was a welcome development. However, to close the that the cost of debt servicing does not reduce its gap, the Government opted for a higher level of reliance space to engage in critical expenditure. The budget on advances from BoU and a delay in the repayment of allocated a total of Shs 9,641 billion to meet the cost of earlier advances. As has been experienced in Uganda servicing debt falling due as well as unmet obligations during the 1970s and 1980s, and in many other countries, within the year (arrears) or beyond (debt). Of this, the central bank financing of the fiscal deficit can complicate cost of domestic debt roll-over is expected to reach liquidity management and undermine the credibility of Shs 4,999 billion, which amounts to 17 percent of the monetary policy, especially under an inflation targeting total value of the national budget, while the cost of debt regime that Uganda adopted since 2011. amortization and meeting domestic arrears constitute another 3.3 percent and 1 percent of the budget respectively. Up to 12 percent of the sectoral budget has In the medium-term future, the pattern of Uganda’s been allocated to meet the cost of interest payments, with economic growth can be expected to remain the same this allocation having increased sharply in FY 2017/18, as in the past decade, with the predominant source on account of increased debt levels and a shortening of of growth being increased economic activity in the the maturity spectrum of Uganda’s debt. The impact of construction and services sectors. The manufacturing this is complicated. The reliance on external borrowing sector is also expected to continue to expand, albeit helps reduce the impact in terms of the crowding out of from a very small base . Though still only contributing longer-term finance, but the Government is still engaging to a small proportion of GDP, the mining and quarrying in significant borrowing at the short end of the domestic sector could be a significant source of growth in future market. The increased allocation to meeting domestic years if the sector’s proven potential starts to attract arrears will be welcomed by the private sector, with a increased attention from investors. Growth in the output large number of private-sector operators facing liquidity of the agricultural sector is expected to remain subdued constraints as a result of having supplied goods and due to supply-side constraints, with this limited growth services to the Government, but not being paid on time.  constraining attempts to achieve a more rapid reduction in poverty. It is crucial to enhance the level of coordination In the context of global economic uncertainty, growth between monetary and fiscal policy to address in the value of foreign direct investment flows and challenges related to financing the expansive fiscal tourism and private transfers will remain subdued. policy . On the one hand, the authorities may be Combined with the increased imports of inputs for motivated to continue to ease the monetary policy in infrastructure projects, this will result in a further widening order to increase the availability of credit to the private of the external current account deficit to a value in sector. However, these measures will only be effective the range of 8-10 percent of GDP in FY 2017/18 and if they are well-coordinated with the financing needs of FY 2018/19. In the short term, the planned increase in the public sector. With increased public expenditure, public expenditure will most likely curtail a build-up of the Government’s domestic borrowing has increased international reserves beyond the current levels of about beyond the benchmarks established by the 2013 Public 4.0 to 4.5 months of import cover. Debt Management Framework. At least to some degree, 19 Table 2: Uganda / Macro poverty outlook indicators ((annual percent change unless indicated otherwise)         2014 2015 2016 2017 e 2018 f 2019 f 2014 2015 2016 2017 2018 2019 Real GDP growth, at constant market prices 5.1 5.2 4.7 3.4 5.2 6.0   Private Consumption   2.0 7.7 1.8 2.5 5.0 6.2   Government Consumption 7.5 15.5 -5.0 -1.7 0.5 -2.0   Gross Fixed Capital Investment 2.5 -0.5 8.9 2.8 5.5 6.5   Exports, Goods and Services 0.2 -2.4 3.6 2.5 5.5 6.5   Imports, Goods and Services -7.4 4.6 -3.8 -2.5 3.2 4.5 Real GDP growth, at constant factor prices 4.2 5.4 5.1 3.2 5.3 6.1   Agriculture   2.7 2.3 2.8 -1.2 2.5 3.2   Industry   6.3 7.8 4.7 4.0 5.5 6.2   Services   4.2 5.9 6.4 4.8 6.4 7.2 Inflation (Consumer Price Index)   4.3 5.2 5.5 5.5 5.0 5.0   Inflation (Consumer Price Index) 4.3 5.2 5.5 5.5 5.0 5.0 Inflation (Private Consumption   7.0 6.4 7.1 6.0 5.3 5.2 Deflator)   Inflation (GDP Deflator)   3.5 5.1 3.3 5.5 5.0 5.0 Current Account Balance (% of GDP) -7.9 -8.4 -6.6 -5.1 -4.5 -4.1 Financial and Capital Account (% of GDP) 6.1 3.2 3.4 2.8 2.3 2.1 Net Foreign Direct Investment (% of GDP) 4.1 3.3 2.2 2.1 2.2 2.2 Fiscal Balance (% of GDP)   -3.6 -4.4 -6.6 -4.3 -4.2 -4.3 Debt (% of GDP)     32.4 31.1 32.0 38.3 39.3 40.5 Primary Balance (% of GDP)   -2.0 -2.7 -4.7 -2.4 -2.0 -2.0 Poverty Rate a, b, c                 Poverty rate ($1.9/day PPP terms) a,b,c 33.7 32.7 31.8 31.1 30.0 28.8 Poverty rate ($3.1/day PPP terms) a,b,c 64.4 63.6 62.9 62.4 61.6 60.6                     Sources: World Bank, Macroeconomics and Fiscal Management Global Practice, and Poverty Global Practice. Notes: e = estimate, f = forecast, Data reported in financial years July-June   (a) Calculations based on 2009-UNHS and 2012-UNHS. (b) Projection using point-to-point elasticity (2009-2012) with pass-through = 1 based on GDP per capita in constant LCU. © Actual data: 2012. Nowcast: 2013 - 2016. Forecast are from 2017 to 2019  2.2 The immediate and critical risks mainly arise from fiscal management The economic outlook faces a number of immediate infrastructure development program. In the immediate and critical risks. In particular, these risks relate to term, as the Government accelerates investments in fiscal management in the context of the low revenue the development of infrastructure for oil production, base and the high spending pressures. If not managed considerable risks related to the financing of investments carefully, these risks could have implications on the remain. Government’s ability to finance its investment program and to manage its level of debt. In particular, in its If the Government’s huge investment program does not implementation of fiscal policy, the Government must result in the high rates of growth necessary to justify the move to contain leakages from the domestic revenue expenditure or if projects are delayed significantly (as has and to manage a range spending pressures. While the been the case in the past with several energy projects), Government is considering granting tax relief to a number this could result in rapid increases to the debt-to-GDP of domestic companies to stimulate the growth of key ratio, most likely to a level in excess of the threshold sectors of the economy and to address employment of 56 percent of GDP, the present value-debt threshold and export bottlenecks, this will adversely impact its for medium CPIA performers. According to an update revenue collection performance. Another risk relates to to the Joint World Bank/IMF Debt sustainability analysis the sequencing, financing and management of the public conducted in November 2016, Uganda continues to be 20 at a low risk of debt distress, with the present value of 2014/15 to 87 percent in FY 2015/16. public debt-to-GDP ratio projected to peak at about 36 percent in FY 2020/21.13 Uganda remains vulnerable to a number of exogenous shocks, including shocks related to fluctuations in the prices of its main exports and imports, regional Uganda’s level of debt sustainability remains insecurity, and volatile climatic conditions . Volatile vulnerable to a number of variables, with associated commodity prices and financial distress in industrialized risks leading to the downgrading of Uganda’s long- countries could have adverse effects on Uganda’s term debt risk rating by a number of credit rating firms . external position, exacerbating domestic inflation These variables include: (i) the rate of depreciation of the and complicating the financing of its budget. Private value of the shilling, which affects the cost of servicing investments could stagnate or decline if Uganda’s fragile external debt; (ii) the rate of GDP growth, fiscal revenue, regional markets are eroded by political tensions and and exports, which affects the ability to service debt; civil unrest in neighboring countries, particularly those and (iii) the strength of the institutions, which affects the related to the civil unrest in South Sudan, or to potential thresholds for assessing debt sustainability. In particular, disruptions to trade in the context of the upcoming in the context of Uganda’s rapid fiscal expansion, the elections in Kenya, as was the case around the 2007 continued failure to collect adequate levels of revenue elections. Uganda also remains vulnerable to risks has contributed to an increase in the risk of debt distress. associated with volatile climatic conditions and food In November 2016, Moody’s downgraded the long-term prices, particularly given the limited implementation of issuer rating of the Government of Uganda from B1 to mitigation measures involving irrigation systems. With B2, but changed the outlook from negative to stable. agriculture remaining the primary source of livelihood The downgrading of Uganda’s credit rating was based for more than 69 percent of the population, supply on Moody’s perceptions of the sustained erosion of disruptions resulting from change in weather patterns Uganda’s fiscal strength and the rapid increase in its could have significant negative effects on consumption debt burden to 33 percent of GDP, with this burden and livelihoods and could complicate the management of projected to increase to up to 45 percent of GDP by 2020. inflation. Indicators of reduced debt affordability include a rise in the debt-to-revenue ratio, which is expected to exceed Lastly, with poor performance in the area of domestic 250 percent by 2018, at which point interest payments revenue mobilization and considerable uncertainty are expected to consume 16 percent of revenues. This far regarding the commencement of oil production and exceeds the median level for B-rated countries, with the the subsequent flow of revenues, there remains median standing at eight percent. Nonetheless, Moody’s considerable risks to the financing of investments upgrading of the outlook to stable reflects the fact that in the country. On one hand, the Government’s rapidly Uganda’s credit fundamentals will stay at roughly the expanding infrastructure development program must same level as peers in the B2 category. be appropriately managed and sequenced to avoid unnecessary hike in financing risks. Even then, the In addition, the proportion of domestic debt has financing of public investments is highly dependent increased from 8 percent of GDP in FY 2009/10 to 14 on volatile sources of external financing, with the percent in FY 2015/16. While this proportion fell to 12 utilization of domestic resources currently limited by the percent during FY 2016/17, it is expected to increase to shallow capital market. Sustained increases in global 16 percent in FY 2017/18 . While this increase may assist interest rates could constrain the ability of the Ugandan in the development of the capital market, it risks crowding government to raise this financing, hence narrowing the out private sector investment, with the consequent scope for this financing. On the other hand, the total higher interest rates increasing the private sector’s value of the required investments required to support cost of borrowing. In recent times, with the increasing Uganda’s transformation is significant and it is unlikely development of longer term markets, the market has that that existing fiscal space would be sufficient finance expressed a preference for Treasury bonds rather than this need. This calls for the Government to tap into Treasury bills. Increased government borrowing has non-traditional approaches to alleviate the infrastructure increased the cost of domestic borrowing, with the share financing gap. Among other means, the Government of interest payments on the domestic debt in proportion to ought to unleash the power in public-private partnerships. total interest payments increasing from 81 percent in FY 13. Under the Country Policy and Institutional Assessment (CPIA), Uganda is classified as a medium policy performer, with a CPIA score of 3.73 (3-year average, 2013–15). All data refer to fiscal years running from July to June (e.g., FY2016 covers July 2015 to June 2016, abbreviated as 2016 in the figures and tables). External debt is defined as foreign-currency denominated debt for purposes of the DSA. 21 2.3. Addressing Uganda’s infrastructure finance challenge: The ne ed to look beyond the ordinary The Government of Uganda’s Vision 2040 statement with the Government endeavoring to remove binding expresses its aspiration of transforming Uganda from constraints on growth and to prepare for the production a predominantly agricultural and low-income country of oil. In FY 2017/18, total expenditure on infrastructure to a competitive upper middle-income country . In is anticipated to reach above seven percent of GDP. In order to manifest these aspirations, the Government the three-year period up to FY 2019/20, when the current has expressed its intention of implementing a number National Development Plan expires, this proportion of ambitious infrastructure projects, particularly in the is expected to gradually decline as the Government energy and transport sectors, but also to support the completes a number of key strategic projects. However, social sectors through improvements to water, education, over these years together, the equivalent value of and health infrastructure. Infrastructure is both capital- spending on infrastructure is expected to reach US$ 13 intensive and a long-term investment. While it requires billion. While this expenditure is significant, it is still below access to significant amounts of funding, it can also be the level required to close the infrastructure gap. It has expected to yield significant financial benefits over the recently been estimated that the annual infrastructure long-term. funding gap amounts to a value of around US$ 0.4 billion a year. The Government has already directed significant efforts to improve the quality of Uganda’s The development of infrastructure has also been infrastructure. However, Uganda still lacks the full affected by the inefficiencies in the management of range of capital goods required to provide the services public investment. Over the recent past, the Government and inputs to support the achievement of sustainable has implemented an expansive fiscal policy intended to development. Compared to other developing countries, address the infrastructure gap. However, these policies Uganda ranks relatively lowly in terms of many aspects have only been partially successful. On average, 36 of infrastructure development. According to the World percent of the planned expenditure over this period Economic Forum’s Global Competitiveness Report did not materialize, with the bulk of the recorded under of 2016/17, in terms of the basic requirements for expenditure being in the priority sectors of energy and competitiveness, Uganda ranks in 126 th place out of 140 transport 15. countries, with a score of 2.43 in terms of the report’s infrastructure index. This places Uganda behind a Challenges to the execution of budgets are number of other countries in the sub-Saharan African exacerbated by overall inefficiencies in the investment region, including Kenya, which ranks in the 98 th position, process, significantly eroding the value of these with a score of 3.35; Tanzania, at 118 th place, with a score investments, and hence reducing the overall value of 2.67; Ghana, at 111 th place, with a score of 2.88; and for money. It has been estimated that up to US$300 Ethiopia, at 115 th place, with a score of 2.78. million is lost annually due to inefficiencies in spending 16 . Increasingly, economic growth has been driven by The Government has also allocated substantial increased consumption. There are also indications amounts of funding for infrastructure. However, that there has been a decline in the level of efficiency Uganda continues to be affected by a large deficit of utilization of public capital. These investment in financing for infrastructure. By 2012, Uganda was inefficiencies must be addressed to facilitate the already spending approximately US$ 1 billion each achievement of an increase in the rate of accumulation year, an amount equivalent to six percent of GDP, on of capital and thereby to facilitate significant positive infrastructure 14. socio-economic transformation. This will only be achieved Over the past four years, the value of Uganda’s if public expenditure results in higher levels of actual expenditure on infrastructure has increased rapidly, capital accumulation for each unit of investment. 17 14. World Bank 2016, Seventh Uganda Economic Update; Uganda- From Smart Budgets to Smart Returns: Unleashing the power of public investment management, May 2016 15. World bank, 2012, Uganda’s Infrastructure. 16. World Bank 2016, Seventh Uganda Economic Update; Uganda- From Smart Budgets to Smart Returns: Unleashing the power of public investment management, May 2016 17. World Bank 2016, Seventh Uganda Economic Update; Uganda- From Smart Budgets to Smart Returns: Unleashing the power of public investment management, May 2016 22 Trade flows to benefit from improved roads (Morgan Mbabazi, 2016) 23 part Public Private Partnerships: A potential me ans to mobilize Uganda’s infrastructure finance Addressing Uganda’s infrastructure deficit would require a multi- pronged effort to raise capital to close the funding gap as well as to address inefficiencies to maximize value for money in these investments. 2 The estimated level of investment required for Uganda to close the infrastructure gaps amounts to almost US$ 1.4 billion per year in the medium-term. This is about six percent of Uganda’s GDP per year. It is also estimated that a total of about US$300 million is lost annually due to inefficiencies in infrastructure spending. If structured appropriately, public-private partnerships (PPPs) can help mobilize resources to help fill these infrastructure finance gaps, with a possibility of such arrangements bringing in private financing, development and management; as well as facilitating the achievement of higher levels of efficiency. Use of PPPs must be must be combined with a recognition of their limitations and the fiscal risks that may result in outcomes differing greatly from the forecasts or expectations. Therefore, it is important to have clear frameworks to assess, manage and backstop these risks. PPPs can be successful only if the Government is committed to building the right set of frameworks to provide the appropriate environment for private investments and adopting robust project identification, screening, procurement and contract management processes. PPPs can only be successful to the degree to which they can attract long term financing, especially given the availability of long-term financing is extremely limited in Uganda. The pension sector, representing the largest pool of long-term domestic capital in Uganda must be reformed so as to play the key role of providing long-term finance for PPPs in Uganda. Domestic currency financing is limited and financing for PPPs will require Uganda to work towards appropriate de-risking of projects in order to attract equity and debt financiers.   24 The Bujagali hydropower dam stands to support electricity generation in Uganda (Morgan Mbabazi, 2016) 25 Housing construction projects ably supported by private sector (Morgan Mbabazi, 2016) Around the world, an increasing number of 3. Public Private governments are delivering public goods and services Partnerships: by entering into partnerships with the private sector to close financing gaps and to improve delivery Big ‘pros’ But ‘cons’ as well capabilities. These arrangements can support the much- needed crowding in of private sector investment, thereby assisting governments to achieve their development objectives. Middle income countries such as Malaysia, Colombia, China, Brazil, Mexico, and Turkey are As international experience demonstrates, increasingly using PPPs to finance their infrastructure Uganda has the opportunity to leverage private projects. These countries have large economies and sector finance to address its infrastructure gap, they are therefore able to develop projects of a scale particularly through public private partnerships and quality attractive to private investors. They also have (PPPs). PPPs involve partnerships between well-developed financial systems to provide the funding the Government and the private sector to and the technical abilities to support the construction finance and manage infrastructure assets and of these projects. In these countries, projects involving to facilitate the provision of services over the partnerships with the private sector have an average long-term, with some transfer of risk (see Box value ranging from 0.4 percent to 0.7 percent of GDP. 1). PPPs work on the premise that the private This is almost twice the overall average value of projects sector’s involvement can result in greater value across all countries, with this average standing at 0.2 for money through the private sector’s superior percent to 0.4 percent of GDP. ability to improve efficiency by delivering projects on time and at cost, with enhancements In Africa, PPP projects have a much lower average in quality and coverage. value, with projects of this sort being concentrated in only a few countries. Over the past two and a half decades, 335 PPP projects have been implemented in Africa, with the total value of these projects amounting to US$ 59 billion. Projects in South Africa have accounted 26 335 PPP projects have been implemented in Africa, with the total value of US$ 59 billion that institutions that have surplus resources provide upfront capital that can be repaid later. (ii) PPPs can allow public expenditures related to the capital cost of infrastructure assets to be spread over time. In an effort to prudently manage their budget constraints, governments are not in a position to finance all desired projects, even in the case of commercially viable infrastructure projects. Alternative financing from PPs can overcome this constraint. (iii) PPPs can generate higher levels of revenue, and it is often easier for this to be achieved if these services are managed and operated by the private sector rather than for 85 of the total, the highest number of any single by the public sector country on the continent. Nigeria has accounted for 35 projects, while Kenya and Uganda account for 22 projects (iv) PPPs can help increase the quality of public projects. each. By 2013, the greatest proportion of these projects Assumptions regarding the viability of the projects was in the telecommunications sector, with projects in this are subject to assessment by the market of potential sector accounting for 75 percent of the total. However, investors, resulting in improved selection. the proportion of projects in the telecommunication sector (v) PPPs can facilitate the timely implementation of projects has been declining, with increases in the number of and minimize cost overruns. Because private sector investments in energy and transport. operators typically do not receive payment under a PPP Not only do PPPs enable governments to access contract until the facility has been completed and is private sector finance to make much-needed available for use, they are highly motivated to ensure investments, they also have a number of other that the project is completed within the defined time advantages. Generally, a PPP can be viewed as: “A frame. Thus, the PPP structure encourages the timely long term contract between a private party and a completion of projects. Transferring construction risk government entity, for providing a public asset or service, means that the Government should not bear the burden in which the private party bears significant risk and of any over-runs in construction costs, which in turn management responsibility, and remuneration is linked to results in improved efficiency. performance.” PPPs can be arranged in many different (vi) PPPs can play a role in ensuring that projects are formats, depending on the type of asset that is being appropriately maintained. Transferring performance risk constructed, the magnitude of the responsibility accorded to the private sector means that returns to investment to the private partner, and the mode of repayment of the are only realized if the asset performs according funds utilized to put the asset into use. Irrespective of the to contractual obligations, which in turn provides format, these arrangements generally carry a number of incentives for adequate maintenance. advantages, including the following: (vii) PPPs can play a role in facilitating innovation. PPP (i) PPPs enable the mobilization of additional sources contracts specify obligations to produce specific of funding for large scale investments, particularly outputs, rather than prescribing inputs. This creates investments in infrastructure, in an efficient manner so 27 opportunities and Incentives for innovative approaches. The use of competitive procurement processes Box 1 : Defining features of PPPs incentivizes bidders to develop innovative solutions to meet contractual specifications. A PPP is defined as a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and responsibility is linked to performance. There can be several PPP contract types, with various combinations of the following broad parameters: (i) Type of asset involved: PPPs can involve new assets (green-field projects) as has been the case for projects like Bujagali Hydroelectric Power Project. They can also be used to transfer responsibility for upgrading and managing existing assets to a private entity (brown field), with this mainly encountered during the privatization processes, as was the case of Nile Hotel and Conference Centre). (ii) Responsibilities accorded to the private partner: A central characteristic of a PPP is that it bundles together multiple project phases. Nonetheless, the functions for which the private sector is responsible vary and can depend on the type of assets and service. Typical functions can include a combination of designing, constructing or rehabilitating, financing, maintaining and operating. (iii) Payment mechanism: The private party can be paid by collecting user fees from service users, by the government, or by a combination of the two, with the common defining characteristic being that payment is contingent upon performance. The payment mechanism usually depends upon a combination of factors including functional and risk allocation features of the contract. (iv) Financing mechanism: PPP financing may come from the public, private or development finance institutions, or a combination of various sources. Source: World Bank, Reference Guide on Public-Private Partnerships Version 3.0, 2017 However, PPPs have their limitations that might result provision of guarantees. PPP agreements also contain in lower value for money for the government. If PPPs termination clauses which might result in significant are not selected and implemented appropriately, they contingent liabilities for the government. can also raise the cost of public investment if they turn out to be more expensive than would be the case if they PPPs may not be able successful in enabling the were implemented as publicly procured projects. Many provision of infrastructure, unless underlying projects may not be suitable for implementation under inefficiencies are exhaustively addressed. Although PPP arrangements, and others might not enable adequate PPPs can bring in financing, infrastructure deficits are transfer of risk resulting in fiscal commitments and ultimately caused by deficiencies in the governance contingent liabilities for the government. Even in projects and management of the sectors, through underpricing, which generate additional financing through the levy of inefficient operations and poor implementation. user charges, government may bear certain risks such as Introducing PPPs into a situation where there are major the demand, forex, interest rate and inflation risks through financial and regulatory will not fix the problem without improving governance and management of the sector. 28 4. Can PPPs deliver the expected outcomes? Bujagali hydropower dam (Morgan Both the benefits and limitations of PPPs discussed Mbabazi, 2016) above suggests that there are specific conditions required to exist for PPPs to contribute to the objective of raising additional infrastructure deliver PPPs and raising efficiency of these investments. It is clear that PPPs can only expand the fiscal envelope for the development of infrastructure if they result in improved efficiencies and/or improved collection of revenues compared to projects implemented through public provision and financing. Thus, the appropriate systems and frameworks must be in place to carefully analyze project proposals to ensure they are feasible, to ensure that they can attract private investors, and to ensure that they will provide value for money. These conditions are discussed in the sections that follow, with the aim to highlight the progress that Uganda has made in these respects and the gaps that need to be closed. 1 First prerequisite: A strong Framework for PPPs 4. Sound, transparent legal and regulatory frameworks responsibilities for the conduct of different functions and are an important prerequisite for the implementation processes. The PPP Act follows standard international of a sustainable PPP program. These frameworks practice, with the decision-making and facilitating should clearly define the roles and responsibility of all functions embedded within the Ministry of Finance, the participants in the program and the rules according Planning and Economic Development (MFPED), while the to which they interact. As such, these frameworks are line ministries fulfil specific core project implementation critically important to attract private investment. In a functions. high-cost and high-risk environment, the appropriate regulatory frameworks are required to ensure peace and Critically, the PPP Act 2015 centralizes the stability, the rule of law, transparency and accountability, responsibility for all potential PPP projects within property rights and the enforcement of contracts, and to the PPP Unit. This is a major improvement over instill confidence in investors. For example, it has been earlier practices, in which each ministry made its own found that a single standard deviation deterioration in the arrangements, often involving non-traditional procurement quality of regulations is associated with a reduction in approaches by private parties. The Act ensures that all the value of investments by four percent, while for each agencies adopt the same methodologies and processes additional project requiring adjudication by the courts due and empowers the PPP Unit to assess and manage the to differences between the public and private parties, the Government’s exposure to contingent liabilities and fiscal level of investments may decline by four percent . 18 risks related to the procurement and implementation of PPPs. The PPP Unit is responsible for identifying, Uganda has formulated a PPP Policy Framework, appraising, developing, procuring and monitoring PPP with this framework deriving its legal force from the projects. The PPP process is summarized in Figure 10 implementation of the PPP Act of 2015 19. The PPP below. Act seeks to regulate the identification, preparation, procurement, implementation, maintenance, operation, 18.World Bank, 2014. Moszoro M, G. Araya, F. Ruiz-Nuñez and J. Schwartz. Discussion Paper 2014.5 Institutional and Political management, monitoring and evaluation of PPP Determinants of Private Participation in Infrastructure. throughout the project cycle. It also creates an 19. Government of Uganda, Public-Private Partnership Framework institutional framework with appropriate roles and Policy, Ministry of Finance, Planning and Economic Development, September 2010. 29 Figure 10: PPP Project Cycle in Uganda Source: PPP Unit, Ministry of Finance, Planning and Economic Development 30 While the PPP Act establishes a sound framework Issues related to land ownership, acquisition and for the management of PPPs in Uganda, actual compensation processes remain a major constraint implementation must be improved if the Act is to fulfil on the development of infrastructure in Uganda. In its intended purpose. As is required by the Act, the the past, there have been difficulties in transferring PPP Committee has been established and is functional. the ownership of land from one entity to another on However, members of this committee require training in account of overlapping and conflicting land rights, key aspects of the management of PPPs to enable them lack of effective institutions capable of managing land to make well-informed decisions related to the approval transactions, and non-existent or weak markets that of projects at each stage of the process. In addition, do not facilitate the transfer of land ownership at the a number of key steps have yet to be taken, including appropriate price 20. With most land in Uganda being approving and issuing PPP regulations and guidelines, under the customary tenure system, challenges related staffing and resourcing the PPP unit, producing standards to the acquisition of this land used for infrastructure and manuals, creating a framework for assessing and development projects persist, especially for large managing fiscal commitments and contingent liabilities, areas of land for sizeable development projects. The formulating guidelines for disclosure of project and law provides for payment of compensation prior to the contract information, conducting capacity building taking of possession; and a right of access to the courts and training of PPP unit and contracting agencies, and for persons aggrieved by the decision. There exist establishing a project development/financing facility. challenges relating to the acquisition of right of way resulting into delays and raising the cost of the projects The PPP Act specifically permits direct procurement through compensation costs incurred in acquiring the in cases “where the circumstances do not allow for land. This often delays the completion of the projects. the use of competition.” However, the details of the For instance, there was delay in the construction of the implementation arrangements in such cases have yet Kampala-Entebbe Expressway due to disagreements to be fully defined. Independent originators may, under between Uganda National Roads Authority and an owner certain limited circumstances, approach the authority with of a property along the road who demanded UGX 48 a project concept that meets the authority’s objectives. billion in compensation, despite the fact that the UNRA Although it may be necessary to enable unsolicited had valued the property at UGX 4 Billion. While the Land proposals in limited circumstances, it is also essential to Acquisition Act allows the Attorney General to apply to provide detailed guidance and to incorporate competition the High Court to have the money deposited with the into the process to the fullest extent possible as required court in an escrow account, this provision has not been by the Act. enforced or applied. The PPP Act has also not been applied in all projects, The Government is proposing to amend the Land highlighting the need to urgently harmonize this act Act and certain articles of the Constitution to ease with other laws within sectors. This is the case for the the acquisition of land to facilitate the achievement projects in the electricity sector where the Electricity of national development objectives. Concurrently, the Act allows for private participation and establishes the Presidential Commission of Inquiry has been recently Electricity Regulatory Authority the role of receiving and instituted and tasked with reassessing the effectiveness processing applications for licenses for the generation, of land laws as these laws relate to the processes of transmission, distribution or sale of electricity. Most of the land acquisition, administration, management and existing Independent Power Producers have been given registration. In order to prevent disputes arising from licenses under this act. the value of compensation from stalling construction projects, the revision of the law should consider allowing In addition, the PPP Act 2015 contains weaknesses the government to proceed with the implementation of the related to dispute resolution, particularly during the project after the disputed amount has been paid into an procurement process of the private sector partner. The escrow account This should be done while the issues of Act establishes procedures for the settlement of disputes valuation are discussed and adjudicated upon. The law related to the implementation of the PPP, but it does not should also forbid the transfer of ownership of land for establish procedures for the settlement of disputes arising which a notice of acquisition has been issued in order to during the procurement process. Therefore, the parties curb the transfer of land to speculators. can only resort to traditional means of dispute resolution resulting in delays impacting the PPP process. It would be useful to establish a PPP Petitions Committee or tribunal 20. World Bank; 2015. Uganda Economic Update 6th Edition, “Searching for the “Grail”: Can Uganda’s Land Support its to resolve such conflicts within the shortest time frame Prosperity Drive? September 2015, Washington DC possible. 31 4.2 Second prerequisite: The availability of long term finance The availability of long-term finance is essential The provision of long-term finance requires the presence for the effective implementation of PPPs. This is of financial institutions with committed long term horizons because infrastructure projects almost always involve and the availability of a spectrum of financial instruments. long-term timeframes, with contracts usually running for However, these institutions and instruments are missing periods of 20 years or more. Thus, the private sector or underdeveloped in Uganda. In particular, Uganda’s must have access to finance for similar periods. Without banking sector has only a limited ability to offer long-term access to long-term funding in the domestic market, funding. a project sponsor will generally seek financing from the international market, borrowing in foreign currency The most sustainable sources of long-term capital in (usually US$), creating significant foreign exchange Uganda are the assets held by pension and insurance risks. In addition, in the aftermath of the financial crisis, companies. However, they are not being utilized to their international markets have also tightened. Banks are full potential, with the role of institutional investors such increasingly tightening liquidity in the case of emerging as pension funds and insurance companies remaining markets and shortening the periods of maturity for the undeveloped. On one hand, the insurance sector is financing that they make available. still too small to play an active role in the activation of long-term finance, as the market mostly consists of Thus, it is necessary to identify sources of long- general insurance, with life insurance and other savings term local currency financing for the development of products being relatively undeveloped. On the other infrastructure. Crowding in local investors minimizes hand, while the National Development Plan (NDP) for foreign exchange risks and provides opportunities for 2015/16-2019/20 and the Vision 2040 prioritizes reforms domestic investors to finance locally. At present, however, to the pension sector as a means to develop the financial local banks generally impose even stricter liquidity and services industry and the supply of long-term finance maturity conditions than do international banks. The most in Uganda, in practice, little progress has been made promising source of long-term local financing comes from with reforms that would support this sector in playing a institutional investors, such as pension and insurance more significant role 21, with coverage remaining at only 2 funds. percent of the population. This contrasts the situation in countries where the capital markets are well developed The availability of long-term funding is extremely making it possible to create various instruments that limited in Uganda, reflecting shallow financial and can be used to finance infrastructure, including through capital markets and the lack of the appropriate legal government bonds and securities with sufficiently long and regulatory frameworks to support its provision. term tenures to attract long term capital (see Box 2). Bank of Uganda staff demonstrating financial services in Uganda (Morgan Mbabazi, 2016) 21. World Bank, 2014; Uganda Economic Update 4th Edition, “Two Birds with One Stone — Reducing Vulnerabilities to Growth and Old-Age Security through a better Pension System”, Washington DC 32 Box 2 : Institutional Investors and Infrastructure Finance In Latin American countries such as Peru and Chile, the relatively developed capital markets and the presence of a number of institutional investors, such as pension funds, made it possible to issue project bonds or to structure other securitized instruments to meet these institutions’ needs (i.e. for investment grade instruments). Guarantees provided by monoline insurance companies assisted this model prior to the 2008 Global Financial crisis, but issuance has dried up since their subsequent demise. In Asia, the central provident funds, such as the EPF in Malaysia and the CPF in Singapore, have been active providers of long-term finance for infrastructure and other development projects. South Africa’s Public Investment Corporation is an example of an independent, specialist fund manager, with this entity making investments on behalf of other institutions, including pension funds, and including through the establishment of regional infrastructure funds. In regions with very limited capital markets and investors, governments and MDBs have had to act as the issuers or backers of instruments to provide the necessary investment quality, both in terms of credit levels and in terms of building the confidence of other investors. A clear project pipeline needs to be developed the standardization of approval procedures and reduce immediately to allow local banks and fund managers the complexity and time involved in raising finances. The to invest in the capacity and expertise needed to pension scheme investment regulations also allow for assess and invest in infrastructure deals. Investments investment in infrastructure assets, with URBRA open to in infrastructure, particularly during the construction discussions on how to facilitate well-designed financial phase, have significantly different characteristics from instruments. The NSSF would also welcome investment in the investments with which institutional investors have well-structured instruments. traditionally been involved. For it to be worthwhile for institutional investors to build the necessary expertise As Uganda develops its financial and capital markets, and capacities required to participate in PPPs, either in- it is likely that it would still require the backing of house or through cooperation with specialist partners and sovereign and multilateral development banks (MDB) asset managers, it must be clear to them that a pipeline to engage in term financing. Subsidies may be required of projects exists. Therefore, it is the Government’s role to to ensure the commercial viability of projects. Guarantees develop this pipeline. and other credit enhancement mechanisms may also be needed to provide acceptable risk/return profiles In the future, opportunities for such partnerships could for financing vehicles. Deals need to be specifically arise for Uganda either by refinancing existing projects structured with institutional investors in mind. Thus, or financing new ones. The financing of new projects engaging these institutional investors early in the (such as toll roads) could be facilitated by establishing project preparation process is essential. The African infrastructure debt funds, as the successful experience Development Bank (AfDB) issued a 10-year bond in 2012 of Colombia indicates. It may be possible for institutional to fund infrastructure and other projects in Uganda, with investors to partner with local commercial banks and / these bonds being acquired by NSSF. This demonstrates or international banks with a presence in Uganda and one manner in which multilateral banks can support thereby to draw on their experience to structure such countries to mobilize long-term finance. deals. Existing projects in the energy sector could be refinanced, with bank loans being rolled over into project With Uganda’s membership in the EAC, there could bonds. The NSSF and other pension funds could then be opportunities for it to leverage long-term financing invest in these bonds, freeing up bank capital to invest in from institutional investors within the EAC. For new projects. example, if attractive infrastructure bonds were offered in Uganda, pension schemes in Kenya and Rwanda could Significantly, Uganda already has an established invest in them. Pension fund investment regulations in regulatory framework for the issuance of project several EAC countries recognize regional investments bonds. The Asset-Backed Securities (ABS) regulation as being in the same category as domestic assets, issued by the Capital Markets Authority (CMA) allows for increasing the pool of potential institutional investor the issuance of bonds of this type. This should facilitate capital. 33 4.3 Uganda’s Experience with PPPs: Mixed results emphasize the ne ed for closing the gaps in the frameworks In terms of the implementation of PPPs, Uganda concession. The Parliament noted that there were flagrant has had a mixed record, with moderately positive illegalities and manipulations in the procurement of the outcomes in the energy sector in particular. Following concession and in the power distribution agreement, the liberalization of the energy sector, a number of public according to which the Government committed to private arrangements were initiated to support the newly increasing tariffs every quarter across all categories of separated roles of generating and distributing electric power consumption. power. In the area of distribution, the UMEME concession was initially partnered by Globeleq of CDC, UK, which In the electricity generation sector, Uganda has held 56 percent stake, and ESKOM, with 44 percent, engaged in a number of IPPs. These have included before ACTIIS took over 100 percent ownership in 2009. ESKOM’s 20-year concession to manage existing power Following an initial public offer in October 2012, UMEME stations, Kira and Nalubaale, on behalf of UEGCL; and is now fully divested to various local and international Kakira Sugar’s work on the 52 MW Bagasse power plant; shareholders, including NSSF. Accounting for more than on the Jacobsen Uganda Limited 50MW thermal plant; 75 percent of the distribution network in the country, and on the Bujagali Hydroelectric Power Project, one of UMEME’s most significant achievement has been to Uganda’s flagship electric power generation projects. improve the degree of efficiency in the distribution of These arrangements have supported the Government’s power. Since UMEME has been involved in distribution, objective of increasing the supply of electricity to meet there has been a reduction in system losses from 38 the rapidly expanding demand. Nonetheless, the level percent to less than 20 percent over a period of 10 years; of access to and the cost of power remain problematic. an increase in sales revenue collection from 65 percent This has raised questions related to the structure of these to 98 percent; and improved access to power in the contracts, including the method of establishing tariffs, serviced area. Additionally, it generated tax revenues to which allows for the pass-through of all costs to the a value of US$ 24 million (corporate) and US$ 33 million tariff, thereby skewing the risk allocation in favor of the (VAT) in seven years; paid fees to a value of US$ 110 investor and increasing the exposure of consumers and million in seven years; and made investments to a value the Government. There are also issues related to high and of US$ 100 million over the same period. During a period uneven tariffs. The Government is currently considering when shortcomings in the distribution of electricity and various options to restructure the financing of these the increased cost to the Government through subsidies projects so as to reduce the costs and to ensure more to keep the cost of power affordable to the public were affordable power (see Box 6). most significant, Parliament threatened to cancel the The majestic Nile river being harnessed for electricity (Morgan Mbabazi, 2016) 34 Box 3: Bujagali Hydroelectric Project PPA The Bujagali Hydroelectric Power Plant Power Purchase electricity deficit that existed in the period from 2007 Agreement (PPA) is a 30-year old availability-based to 2012 due to weak generation capacity at the time. agreement between Bujagali Energy Limited (BEL) and The plant’s annual production is 16 percent higher than the Uganda Electricity Transmission Company Limited the estimates. Uganda Electricity Distribution Company (UETCL) to generate power from a 250MW run-of- Limited has covered a much larger population than the-river hydro power project on the river Nile. This anticipated. The project has added substantially to agreement became effective in August 2012. The total existing installed capacity and energy to the national cost of the project, amounting to US$ 798 million, was grid; reduced power shortages; and improved service raised through equity by Sithe Global (a Blackstone reliability. Despite the cost increases, it was much better portfolio company) and a consortium of AKFED, than the alternative of high-cost thermal generation IPS Kenya and Jubilee Insurance (all AKFED Group which costed about US¢ 20-25/kWh. companies), which accounted for 22 percent of the Challenges: The project was commissioned 11 months total financing. The remaining 78 percent of financing behind schedule and at higher than estimated cost. In was borrowed from a group of financiers including alignment with the EIB’s procedures—the EPC’s bids IFC, EIB, AfDB, FMO, DEG, KfW, Proparco, AFD and were made public at their opening. In a situation of four commercial banks (Absa, BNP Paribas, SCB and limited competition and a large difference in bidding Nedbank) under a Partial Risk Guarantee cover. prices, the EPC price increased by US$90 million (19 Allocation of responsibilities and risks: The PPA percent) during negotiations. BEL has a high tariff allocated the responsibility for operating and structure, due to the relatively high project cost (US$ maintaining the dam project, the construction of which 3.6 million/MW) and a very short debt amortization had just been completed, to BEL, so long as the river schedule of 11 years, ending in 2023. The project tariff was running. BEL was also responsible for securing stands at US$ 0.106 per kWh. After the expiry of the equity financing, with the larger component of financing tax holiday in August 2017 and with an accelerated being the responsibility of the Government, which depreciation of the dam assets being claimed by BEL, borrowed the funds from various funding agencies. The the tariff is expected to rise to about US$ 0.147 per Project’s dispatch is determined by UETCL on the basis kWh beginning August 2017, increasing to US$ 0.159 of Uganda’s power needs and ability to release water per kWh by 2023, as debt repayments commence. This from Lake Victoria. The hydrology risk is borne by the could render the Government’s objective of providing off-taker, UETCL. affordable access to electricity void, with direct adverse effects on the Uganda’s competitiveness and growth, Repayment: Costs are fully recoverable. The Project’s thereby increasing the outlays for debt repayments. tariff is structured as a capacity payment only, intended to cover the Project’s ongoing costs (mostly debt Response: Adjusting the PPA parameters of the PPA service, equity returns and O&M), with these adjusted arrangements could help ensure the project meets its only if availability targets are not met. The PPA included objectives. The Government has proposed to reduce the a 5-year tax holiday that was intended to support cost Project’s tariffs, while respecting the current contractual recovery. structure by extending the Corporate tax holiday; refinancing the loans to extend maturities, along with Achievements: The Project has been operating possibly demanding for additional equity; and increasing satisfactorily, with an average availability of 98 percent, the capacity factor of Bujagali Project from 66 percent with an average capacity factor of 66 percent, and all (for 2015) to 84 percent, particularly if industrial demand payments from the off-taker made on time. The Project during off-peak hours could be increased. currently generates approximately 45 percent of the total power generated in Uganda, closing the major 35 Uganda’s experiences with PPPs in the transportation support the appropriate identification, preparation and sector have so far been underwhelming. Uganda oversight of projects to minimize the risk of projects initially engaged in PPPs in the railway sub-sector, falling into distress or being cancelled. A major PPP in followed more recently by the road sub-sector. The 25- the pipeline, the first transport sector project following the year Rift Valley Rail joint concession for the operation rail concession involves the Kampala-Jinja Expressway of railway in Kenya and Uganda was launched in 2006, Project, which is currently at the feasibility stage (see Box with this concession being intended to facilitate the 4). construction and provision of railway services to link Kampala to Mombasa. After 10 years, this concession The most significant challenge within the road sector does not appear to have fulfilled its obligations. In relates to whether tolls will be able to generate the particular, it appears to have failed to meet quality required income to service the payments. Uganda’s specifications and safety standards and to have experience with the use of tolls lies in the distant past, defaulted on the payment of concession fees. Although more than 20 years ago, for vehicles transiting the the concession recorded positive early results, including Kampala-Masaka road. Without a toll policy to set the a 60 percent increase in operating efficiency and 80 framework for tolling, the system faced a number of percent reduction in inland cargo transit time to Kampala, challenges until it was disbanded. The draft toll policy, the concession had to be restructured because the now resting with Cabinet for approval, will be crucial for SPV failed to meet its financial obligations. Thus, the closing this gap if and when road tolls are reintroduced. Government communicated its intention to terminate Initial studies on consumers’ willingness to pay suggest the concession. It has been argued that the structure of a level of UGX 70 per kilometer, which is perhaps too the concession, which bundled the network and rolling low to service the contractual payment obligations. A stock into a single concession, and the initial choice of detailed willingness-to-pay and affordability analysis concessionaire were the principal causes of the failure is currently being conducted to inform the Minister of of this PPP arrangement. There have been no other Works and Transport on the appropriate toll levels to be closed PPPs in this sector. This experience underscores introduced on the toll roads. A roads bill, which is pending the importance of building coherent frameworks to parliamentary approval, will provide the legal framework for tolling on Uganda’s toll road network. Box 4: Kampala-Jinja Expressway The Kampala-Jinja Expressway PPP is expected to be a 30-year greenfield design, build, finance, operate and maintain arrangement for a 77 km mainline from Kampala to Jinja and an 18km bypass to the south of Kampala city, costing about US$ 1 billion. As an alternative to the existing highway, it is expected to result in a high level of efficiency to both the national road network and to the East African transport corridor that provides the primary gateway for the flow of goods between Kenya and Uganda and neighboring Rwanda, DRC and South Sudan. A whole life arrangement to operate and maintain the expressway is being considered. In May 2014, the IFC was mandated by the Uganda National Roads Authority (UNRA) as the transaction advisor for the development of the Kampala-Jinja Expressway under a PPP arrangement. The feasibility study considered the allocation of key project risks as follows: (i) The financing risk is expected to be shared between the Government and the private partner. The project will be financed through debt and equity. Three development partners, the European Union (EU), Agencie Francaise de Developpement (AFD) and the African Development Bank (AfDB), will provide up to US$ 500 million to the Government to close a viability gap to buy down project capital costs. The residual funding needs for the project’s construction and operation will be provided by the private partner. The partner selected to design, build, finance, operate, maintain and transfer the expressway to the Government is expected to be procured through an international competitive bidding process. 36 (ii) The delivery of the project’s right of way is a risk fully borne by the Government of Uganda. Access to land for such large projects is associated with a high degree of risk in the case of infrastructure projects in Uganda. Similarly, the scale and complexity of the land acquisition and resettlement program for the Kampala-Jinja Expressway makes land acquisition a major risk to this project. The Government, through UNRA, is committed to developing the Resettlement Action Plan in accordance with IFC Performance Standards. (iii) Construction could involve delays that would result into cost overruns and time delays. This risk is expected to be fully borne the private partner. (iv) The private partner will bear all risks associated with operating and maintaining the expressway in accordance with pre-agreed standards. (v) The Government will bear the demand risk. The project structure under consideration by the PPP Committee is an availability-based payment mechanism with all the collected tolls being used by the Government to meet availability payment obligations. Any shortfalls or surpluses related to the agreed availability payment are a risk borne by the Government. Revenues for the repayment of debt are based on a proposed toll road rate for which the value proposition to those willing to pay the road toll is time savings, vehicle operating cost savings and a safety premium. (vi) Forex risk is expected to be shared between the private party and the government . This is a key risk and irrespective of who bears it, it needs to be clearly assessed. Uganda has expanded PPPs to several other sectors of consider amending the PPP act to specifically allow the economy, the vast majority of which are contracted local governments to participate in PPPs. This should at the national level. In addition to arrangements be followed by appropriate guidelines and regulations in the transport and energy sectors, Uganda has a specifically for local governments. number of PPP arrangements within the tourism and the telecommunications sectors, and for the construction and Overall, even with a recently developed formal PPP operation of office buildings and accommodation. The framework, Uganda still needs to put effort in closing vast majority of PPPs are still conducted at the national the implementation and remaining regulatory gaps. A level, given the limited capacities and limitations on number of these gaps arise from the fact that some PPP borrowing by sub-national governments. projects were initiated long before the formal framework had been established. Thus, they were arranged on Uganda has an emerging pipeline of projects which an ad hoc basis, which may have resulted in a failure need project development funding and technical, to address a number of critical issues. Others have financial, and legal expertise in order to ensure arisen because of the gaps in implementation and in that they are market ready. The Government is taking legal frameworks. For example, weaknesses in project a number of steps to mobilize funding to develop its design have arisen from a failure to ensure that project frameworks and projects by tapping into grant funding implementation has been preceded by comprehensive from bilateral and Multilateral institutions, including DFID, feasibility assessments. They have also arisen from PPIAF, the World Bank, the African Development Bank, the lack of standard treatment for proposals, whether the European Union and others. Some local governments solicited or not, with many unsolicited proposals being are currently engaged in small projects with private sector based on feasibility studies conducted solely by the participation, which may or may not qualify as PPPs. private sector and thus not necessarily capturing Others, such as Kampala Capital City Authority, Entebbe key risks for government; and from insufficient Municipality and around six sub-national governments capacities within MDAs to appraise projects and to have received assistance from the World Bank that successfully facilitate negotiations related to PPPs, could enable them to engage in PPPs after they have and the associated procurement, implementation and developed sufficient capacities. It will be important to management of contracts. Many of these issues emanate 37 Figure 11: Uganda fares modestly in Africa’s Infrascope Ratings Source: Economist Intelligence Unit, 2015 “Evaluating the environment for public-private partnerships in Africa; The 2015 Infrascope. from the weaknesses in the overall public investments be linked to the better embedded frameworks and good management processes in Uganda 22. Developing a practices in these two countries and an earlier adoption project as a PPP takes longer and costs more compared of a PPP Law and a structured PPP program. Kenya, in to projects involving traditional procurement. These particular, scores higher in terms of its ability to prepare projects also require a detailed assessment of known and projects, given the implementation of best practices contingent risks to ensure the affordability, bankability over the last 4-5 years under a World Bank lending and sustainability of the project. However, some of these project dedicated to the development of PPP frameworks processes are still missing in the case of projects in and projects. The assessment also matches that of the Uganda. Economist Intelligence Unit (EIU) evaluation conducted in 2015, which ranked Uganda in eighth place out of 15 The gaps in the framework and implementation countries surveyed in Africa (See Figure 12). However, become clear when Uganda is compared with Uganda scores better than either Kenya or Tanzania in peers. According to the Benchmarking Public-Private terms of its PPP contract management practices This is Partnerships Procurement 2017 study 23, Uganda falls very encouraging, implying that Uganda has the potential behind Kenya and Tanzania in terms of the maturity of to build up its structured program faster than either procurement processes related to PPPs, although it is Tanzania or Kenya. Uganda also seems to have much ranked higher in terms of processes for the management greater fiscal space to increase PPPs in the near future, of contracts. Kenya and Tanzania’s superiority seems to given its relatively low debt to GDP ratio. 77 km mainline from Kampala to Jinja and an 18km bypass to the south of Kampala city, will cost about Road construction works in Mukono along Jinja Highway (Morgan Mbabazi, 2016) US$ 1 billion 22. World Bank (2016), Uganda Economic Update. 7th Edition. From Smart Budgets to Smart Returns: Unleashing the power of public investment management. April 2016. Washington DC. 23. The Benchmarking PPP Procurement assessment measures government’s capabilities to prepare, procure, and manage PPPs, as well as the procedures for evaluating unsolicited proposals, across different countries. It can be found at http://bpp.worldbank.org/ data/exploreindicators/PPP-procurement. 38 5. Creating the conditions necessary for Uganda to maximize benefits from PPPs The fore-going discussion underscored the challenge Uganda faces in closing the massive financing deficit. This deficit arises from the need to provide infrastructure and social services crucial for the country’s social and economic transformation. With the infrastructure deficit large and expected to increase in the medium term, the traditional financing instruments are clearly insufficient to bridge the profound gap between existing public resources and financing requirements. By leveraging synergies between the public and private sectors, PPPs can mobilize additional sources of finance to fund the development of vitally needed infrastructure; to deliver on budget and on time to a greater extent than in the case of publicly financed projects; and to deliver higher quality services than in the case of publicly managed projects. Uganda has already started using PPPs and National Development Plan identifies PPPs as a key instrument to attract new investment and to deliver infrastructure more efficiently. Uganda has also already put in place an excellent legal and regulatory framework. The promulgation of the PPP Act in 2015 placed Uganda in the same league as South Africa and Kenya in terms of the legal frameworks required to support PPPs. However, much still needs to be done to ensure the appropriate and effective implementation of these frameworks. To implement a successful PPP program, Uganda must constantly seek guidance from the lessons of her own experience with the various projects it has implemented, combined with best practices from other countries. In summary, there are six key lessons that must be at the forefront of action in facilitating changes necessary to implement successful PPPs 24. First, the selection of projects must be done well. from independent and highly experienced advisers to Selection of PPP projects should involve careful identify investors and financiers and to assist in the analysis to verify that a project is likely to be feasible; oversight of implementation. to be attractive to the private sector; and to provide value for money. PPPs are not a panacea and many Fourth, competition is critical. Best practice PPP projects are not suitable to be implemented as PPPs. In programs adopt open, transparent, competitive particular, there are problems that PPPs cannot solve. bidding. Competition brings the best out of private For example, by itself, the establishment of a PPP will not investors and helps to ensure that the Government reform a sector with substantial governance and pricing achieves value for money. It also protects against problems. Where such problems exist, it is necessary for perceptions of corruption and bias that may result the Government to diligently implement sector reforms as in the case of direct negotiations and unsolicited part of the process of establishing PPP projects. proposals. Thus, direct negotiations and unsolicited proposals should be permitted only in the most limited of Second, a sound institutional and regulatory circumstances, when this is the only feasible approach. framework is critical for the success of PPP programs. The PPP Act mandates this approach, and it should be While Uganda has already put in place a legal framework implemented accordingly. through the promulgation of the PPP Act 2015, it must strengthen the corresponding PPP institutions to Fifth, the use of public support must be carefully thought implement this Act. In addition, it would need close the out and guided by a clear and transparent approach. gaps identified, including streamlining the processes with Global good practice demonstrates the need to allocate the laws within sectors, such as the Electricity Act and sufficient financial and human resources to assess, to specifically allow local governments to participate in approve, and monitor public liabilities associated with PPPs. PPP. Uganda needs to adopt and apply a policy for the provision of Government financial support for PPP, Third, successful PPP programs allocate appropriate including awarding guarantees and deciding which resources necessary for project preparation. Once projects will receive such support. projects are selected, the necessary financial and human resources should be assigned to carefully prepare Sixth, building capacity through solid training projects through budget allocations and other funding programs for staff involved in PPPs at different levels of sources. The Government has relied excessively on studies and analysis provided by investors and other governments, despite the potential for conflicts of 24. World Bank 2016, Tanzania Economic Update. The Road Less interest. Global good practice indicates the importance Travelled: Unleashing Public Private Partnerships in Tanzania. May of independent feasibility studies and transaction advice 2016. 39 government. This has to be complemented with a public in the road, energy, residential and commercial outreach campaign. This capacity building program plays accommodation and other sectors which should be an important role in enabling government staff, local screened from the investment and PPP perspectives. It governments and the public to understand the rationale is essential to move these projects forward, including for PPPs. Training will enable Government staff to select through the development of a sustained project the appropriate projects for PPP and to implement those development funding mechanism in the form of the projects well. In addition, an awareness campaign should PDFF and to tie these projects to efforts on developing be implemented to ensure that the public understands innovative financing mechanisms. the value and risks associated with PPP. In addition, it is necessary to strengthen the local financial sector to (iv) As a priority, Uganda ought to use innovative develop the skills and instruments needed to support means to mobilize local long term finances to PPP. improve the environment for PPPs, particularly the risk to foreign currency exposure. For countries Building on these lessons, the immediate major areas of such as Uganda, where the domestic financial markets action for Uganda are as follows: and capital markets are still limited, financing for PPPs and options for credit enhancement are biased (i) To maximize the value derived from its investments towards foreign sources, which in turn makes the through PPPs and to manage the associated foreign currency exposure a key risk for investors. As risks, Uganda needs to immediately establish the the Government expedites the development of the appropriate institutions to actualize the existing pension sector and implements the Capital Markets legal and policy frameworks. The frameworks Master Plan, it should also make efforts to mobilize within the PPP Act in 2015 need to be implemented domestic currency financing through the establishment for Uganda to conform to global good practice of syndicates of commercial banks and large surplus for the management PPPs. This entails creating institutions such as pension funds, particularly the capacity within the central PPP unit and the potential NSSF, to finance PPPs. The Government needs to take contracting authorities to enable them to prepare, steps to encourage and facilitate the listing of SPVs. appraise and provide oversight for projects. The It may also be essential to work through multilateral PPP screening process must be well-coordinated arrangements and to raise project bonds which with the overall Public Investment Management domestic surplus funds institutions such as NSSF (PIM) process so that only economically feasible could subscribe to. Alternatively, the Government investments that show promise as PPPs are taken should strive to create a debt vehicle to encourage up for further detailed studies. It also requires pension funds and commercial banks to invest in these establishing methodologies for detailed feasibility projects. analyses, including value for money assessments and fiscal affordability assessments; streamlining the (v) It is essential for Uganda to incorporate the procurement processes, including adding greater principles of transparency and accountability to detail and competition into the process for unsolicited allow better citizen engagement and involvement projects; establishing robust contract management in decision-making. Key information related to both processes; and establishing robust fiscal risks operational and pipeline projects at various stages assessment both at the national level and at the of preparation and procurement should be placed project level. in the public domain in a timely manner to increase the predictability of Uganda’s PPP program. Public (ii) Uganda’s PPP program needs to be appropriately scrutiny is likely to incentivize government to adopt resourced to enable it to provide stronger transparent and accountable processes, consequently leadership and direction, and for funding project stimulating investor interest and stakeholder support preparation, providing viability support and a for PPP as a modality of asset creation, operation liquidity reserve to backstop any contingent and management, and efficient and effective service liabilities. The Government of Uganda needs to delivery. Therefore, a communication strategy should urgently set up the Project Development Facilitation be developed for the PPP program to sensitize both Fund (PDFF). This will entail mobilizing budgetary internal and external stakeholders and to engage and non-budgetary resources, including from bilateral them in dialogue through a higher level of stakeholder and multi-lateral donors. Revenue flows from projects, engagement and better disclosure policies. A including success fees, can be other sources of structured communications program would ensure that revenue for such fund. It will also entail setting up prospective investors, contracting authorities and the the governance and operational framework for the general public are aware of the salient features of the functioning of the fund. PPP Act and the processes to be followed for projects, including processes related to procurement. It would (iii) Uganda should work towards building a robust PPP also ensure that the Government’s pipeline and priority pipeline. There are several project ideas especially areas for PPP are fully visible. 40 Statistical Annexes 42 Table A1: Key Macroeconomic Indicators Unit 2016/17 Indicator 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 measure proj Population Millions 31.0 31.9 35.1 37.6 38.7 39.9 41.1 42.3 GDP USD millions 20181.4 20262.5 23237.0 24993.0 27761.0 27531.0 24661.0 26549.0 Per capita GDP USD 651 635 662 665 717 690 600 628 GDP growth % 5.2 9.7 4.4 3.3 4.5 5.1 4.8 3.5 Gross Domestic Savings as % of GDP 19.7 19.5 17..7 21.7 19.9 21.9 24.3 23.1 Gross Investments as % of GDP 12.5 12.3 28.2 29.5 29.0 31.5 24.3 27.9 Inflation (period average) % 9.4 6.5 23.4 5.8 6.9 2.7 7.7 5.2 Exchange Rate (end-year) UGX/USD 2283.3 2623.2 2472.0 2593.0 2600.0 3302.0 3778.0 3278.0 External Sector                   Exports, f.o.b. Million USD 2,317.0 2,298.0 2,660.0 2,912.0 2,706.0 2,738.0 2705.0 2865 Imports - f.o.b. Million USD -4,117.0 -4,680.0 -5,241.0 -5,035.0 -5,074.0 -4,988.0 -4575.0 -5,048 Current Account Balance Million USD -1631.0 -1984.0 -2219.0 -1582.0 -2105.0 -1971.0 -1452.0 -1884.0 Balance of Payments (overall balance) Million USD 235.0 -597.0 759.0 337.0 378.0 -353.0 95.0 22.0 Gross Foreign Reserves Million USD 2384.7 2044.0 2643.8 2912.3 3394.0 2895.0 2962.0 2980.0 External Debt Million USD 2343.4 2904.9 3067.3 3742.9 4339.5 5103.1 7299.5 7541.6 Foreign Direct Investment Million USD 693.0 719.0 1244.0 940.0 1096.0 870.0 512.0 567.0 Monetary Sector                   Average Deposit Rate % 2.0 2.1 3.2 3.0 3.1 3.3 3.2 3.3 Average Lending Rate % 20.7 19.8 24.6 24.8 22.1 25.2 23.7 24.4 Growth in Money Supply (M3) % 23.6 25.7 26.1 6.6 17.4 15.9 7.7 5.8 Government Finance                   Total Domestic Revenue as % of GDP 10.5 13.6 11.2 11.3 11.6 13.0 13.5 14.0 Tax Revenue as % of GDP 10.3 10.9 10.3 11.0 11.4 12.6 12.8 13.3 Non Tax Revenue as % of GDP 0.3 0.2 0.2 0.3 0.2 0.3 0.6 0.6 Grants as % of GDP 2.1 1.9 1.9 1.4 1.0 1.2 1.4 1.8 Total Expenditure and net lending as % of GDP 16.7 19.1 15.6 16.2 16.6 18.5 19.7 21.9 Recurrent Expenditure as % of GDP 10.5 12.7 9.1 9.0 9.5 9.9 10.8 10.4 Development Expenditure as % of GDP 6.1 6.1 6.1 6.5 7.0 6.7 7.0 9.7 Fiscal Balance (overall) as % of GDP -4.0 -3.6 -2.5 -3.5 -4.0 -4.3 -5.2 -6.0 Table A2: Growth and Structure of the Economy Economic Activity 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 Real GDP Growth Rates (%) 5.2 9.7 4.4 2.7 5.2 5.1 4.8 Agriculture 3.2 2.9 1.1 1.8 3.0 3.0 2.6 Industry 7.8 11.4 3.0 4.4 3.9 7.9 3.1 o/w manufacturing 4.5 7.8 2.7 -2.5 2.2 11.0 0.4 o/w construction 12.5 15.0 3.9 10.8 5.3 2.7 5.8 Services 5.9 12.4 3.9 4.1 4.3 5.3 6.8 GDP Shares (% of constant GDP)               Agriculture 26.2 24.6 23.8 23.5 23.2 22.6 22.2 Industry 18.1 18.4 18.2 18.4 18.3 18.7 18.4 o/w manufacturing 8.5 8.4 8.2 7.8 7.6 8.0 7.7 o/w construction 5.8 6.0 6.0 6.5 6.5 6.4 6.4 Services 48.5 49.7 49.9 50.3 50.2 50.2 51.3 FISM and net taxes 7.2 7.3 8.1 7.9 8.1 8.1 0.0 GDP Shares by expenditure type (% of nominal GDP)               Final Consumption Expenditure 83.2 84.2 86.6 82.2 83.0 86.7 92.9 Households 73.8 74.6 73.9 74.4 74.8 77.8 82.7 Government 9.4 9.6 12.7 7.9 8.2 8.9 10.2 Gross Capital Formation 27 27 28 27 26 23.9 26.5 Gross fixed capital formation 26.6 26.5 28.1 27.1 25.9 23.5 26.1 Charges in inventories 0.4 0.3 0.3 0.4 0.4 0.4 0.4 Net exports -8.9 -11.8 -11.1 -8.5 -8.5 -8.2 -7.6 Gross domestic saving (% of GDP) 12.5 12.3 17.7 21.7 19.9 21.9 24.3 Public 2.9 3.3 2.4 3.1 1.4 1.5 2.3 Private 9.6 9.0 15.3 18.6 18.5 20.4 22 43 44 Table A3: Central Government Fiscal Framework (% of GDP) Item 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 budget 2016/17 est.                       REVENUES AND GRANTS 13.5 12.7 15.5 13.1 12.8 12.6 14.2 14.9 16.2 15.9 Revenues 11.0 10.5 13.6 11.2 11.3 11.6 13.0 13.5 14.4 14.0 URA 10.6 10.3 10.9 10.3 11.0 11.4 12.6 12.8 13.6 13.3 Non-URA 0.4 0.3 0.2 0.2 0.3 0.2 0.3 0.6 0.7 0.6 Oil Revenues 0.0 0.0 2.5 0.7 0.0 0.0 0.2 0.1 0.1 0.1 Grants 2.6 2.1 1.9 1.9 1.4 1.0 1.2 1.4 1.8 1.8 Budget Support 1.5 1.1 1.1 1.0 0.3 0.3 0.3 0.4 0.3 0.3 Project Support 1.0 1.0 0.8 0.9 1.1 0.7 0.9 1.0 1.5 1.5 EXPENDITURE AND LENDING 15.0 16.7 19.1 15.6 16.2 16.6 18.5 19.7 22.5 21.9 Current Expenditures 9.5 10.5 12.7 9.1 9.0 9.5 9.9 10.8 10.4 10.4 Wages and Salaries 3.4 3.2 3.5 3.1 3.3 3.4 3.5 3.5 3.6 3.6 Interest Payments 1.0 0.9 0.9 1.0 1.4 1.4 1.6 2.0 2.2 2.3 Other Recurr. Expenditures 5.1 6.4 8.2 5.0 4.3 4.8 4.8 5.2 4.7 4.4 Development Expenditures 4.8 6.1 6.1 6.1 6.5 7.0 6.7 7.0 9.8 9.7 Net Lending/Repayments -0.2 -0.1 -0.1 -0.1 0.6 0.0 1.6 1.8 1.9 1.6 Domestic Arrears Repaym. 0.8 0.2 0.4 0.5 0.1 0.0 0.3 0.1 0.1 0.2 OVERALL DEFICIT                     Overall Fiscal Bal. (excl. Grants) -4.0 -6.1 -5.5 -4.4 -4.9 -5.0 -5.5 -6.2 0.0 -8.1 Overall Fiscal Bal. (incl. Grants) -1.5 -4.0 -3.6 -2.5 -3.5 -4.0 -4.3 -5.2 -6.2 -6.0 Financing: 1.5 4.0 3.6 2.5 3.5 4.0 4.3 5.2 6.2 6.0 External Financing (Net) 1.6 1.9 1.5 1.9 2.2 1.3 1.2 2.9 5.4 5.3 Domestic Financing (Net) 0.0 1.7 2.3 0.0 1.1 2.3 3.2 2.2 0.9 0.7 MEMORANDA ITEMS                     Nominal GDP (Shs billions) 34504 40946 47078 59420 64758 70458 77845 84907 92878 93939 Table A4. Monetary indicators Monetary Aggregates                   M3 as % of GDP 18.3 20.5 22.4 19.0 18.6 20.1 21.1 20.7 19.8 M2 as % of GDP 14.3 15.9 17.1 13.0 14.0 14.9 14.3 14.3 13.7 M3 growth rate (%) 25.0 33.2 25.7 7.2 6.6 17.4 15.9 7.1 5.8 M2 growth rate (%) 26.3 32.1 23.9 -4.2 15.7 14.1 8.8 8.9 5.8 Domestic Credit                   Total domestic credit (% of GDP) 9.2 11.9 16.0 11.8 12.5 14.2 16.5 16.9 18.4 Private sector credit (% of GDP) 10.4 11.4 14.3 12.7 12.4 12.9 14.1 13.5 13.2 Total domestic credit growth (%) 64.1 54.7 54.1 -6.5 13.4 21.9 32.3 10.8 8.9 Private sector credit growth (%) 31.3 29.8 44.1 11.6 6.0 14.1 20.3 4.2 8.3 Interest Rates Structure                   Average TB rate (period average, %) 8.4 5.3 7.6 17.2 10.3 9.3 12.0 16.1 14.1 Average lending rate (%) 20.9 20.7 19.8 24.6 24.8 22.1 21.6 23.8 23.3 Average deposit rate (%) 2.1 2.0 2.1 3.2 3.0 3.1 3.3 3.2 3.4 Table A5. Inflation Rates (percent) Item 2008/9 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17   FY FY FY FY FY FY FY FY (Proj) FY (Proj) CPI (average) 14.2 9.4 6.5 23.7 5.8 6.7 2.7 7.7 5.2 CPI (end of period) 10.9 4.6 4.0 15.4 6.4 3.0 4.9 8 5.8 Food (end of period) 27.9 16.5 9.3 12.8 -1.4 7.2 6.1     Core Inflation (end of period) 8.9 6.7 5.7 19.5 5.8 2.9 5.4 7.9 5.5 45 46 Table A5. Balance of Payments (percent of GDP unless otherwise stated) 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 Proj.                   Current Account (incl transfers) -8.1 -9.8 -9.5 -6.3 -7.6 -7.2 -5.9 -7.1 Exports of goods 11.5 11.3 11.4 11.7 9.7 9.9 11.0 10.8 o/w coffee 1.3 1.8 1.9 1.7 1.5 1.5 1.4 1.5 Imports of goods -20.4 -23.1 -22.6 -20.1 -18.3 -18.1 -18.6 -19.0 o/w oil imports -2.5 -3.4 -4.1 -4.1 -3.9 -3.4 -2.6 -2.8 Services (net) -2.1 -3.4 -1.7 -1.6 -1.2 -2.5 -2.7 -2.2 Trade balance -8.9 -11.8 -11.1 -8.5 -8.5 -8.2 -7.6 -8.2 Income (net) -1.7 -1.7 -2.0 -2.1 -2.2 -1.6 -1.7 -1.7 Current transfers (net) 4.6 7.1 5.3 5.9 4.3 5.1 6.3 5.1 Capital and Financial Account 8.8 5.3 10.1 6.1 6.5 4.2 4.2 7.2 Capital account 1.0 0.8 0.8 0.1 0.3 0.4 0.5 0.5 Financial account 7.9 4.5 9.3 5.9 6.1 3.9 3.7 6.7 o/w direct investment 3.4 3.5 5.4 3.8 3.9 3.2 2.1 2.1 o/w portfolio investment 0.2 0.0 -1.1 -0.2 0.0 -0.6 -0.7 0.1 Overall Balance 1.2 -2.9 3.3 2.1 1.1 1.5 2.9 0.1 Gross International Reserves (million USD) 2384.7 2044.0 2643.8 2912.3 3394.0 2895.0 2962.0 2980.0 Gross international reserves in months of imports 4.4 3.2 4.3 4.5 5.1 4.3 3.6 4.2 For more information, please visit: www.worldbank.org/en/uganda Join the discussion on: ugandainfo@worldbank.org http://www.facebook.com/worldbankafrica http://www.twitter.com/worldbankafrica http://www.youtube.com/worldbank