Uganda Economic Update Seventh Edition, April 2016 From smart budgets to smart returns: Unleashing the power of public investment management Uganda Economic Update Seventh Edition, April 2016 From smart budgets to smart returns: Unleashing the power of public investment management This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank Group concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank Group encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. Cover photos: Great Lakes Film Production Ltd Cover design : Artfield Graphics Ltd, www.info@artifield.com Design and Layout: Artfield Graphics Ltd. Printed in Uganda by Artfield Graphics Ltd Additional material relating to this report can be found on the World Bank Uganda website (www.worldbank.org/uganda). The material includes a fact sheet, documentary video and a number of blogs relating to issues in the report. © 2016 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 www.worldbankgroup.org Table of Contents Abbreviations and Acronyms iv | Foreword v | Acknowledgements vi | Key Messages vii PART 1 The State of the Economy 1. RECENT ECONOMIC DEVELOPMENTS--------------------------------------------------------2 1.1 Growth remained modest due to uncertainties---------------------------------------------------------------------------------------------------------------------- 3 1.2 Heightened inflationary pressures induced monetary policy tightening ------------------------------------------------------------------------------------ 4 1.3 Cautious fiscal policy management out performed by election spending pressures---------------------------------------------------------------------- 9 1.4 Uganda’s external position weakened further -----------------------------------------------------------------------------------------------------------------------12 2. Economic Outlook------------------------------------------------------------------- 16 2.1 Economic growth prospects improve as Uganda returns to its investment path----------------------------------------------------------------------------16 2.2 Risks are mainly downward -----------------------------------------------------------------------------------------------------------------------------------------------20 PART 2 Moving beyond spending to creating productive assets 3. Can Uganda’s fiscal policy deliver its ambitions? --------------------------------------- 26 3.1 Fiscal strategy almost consistent with national development priorities ---------------------------------------------------------------------------------------27 3.2 smart budgetING IS undermined by implementation challenges -----------------------------------------------------------------------------------------------29 3.3 Fiscal under-execution matched by inefficiencies in investments and the economy-----------------------------------------------------------------------32 4. Why is Uganda not generating good returns on its investments?------------------------ 34 4.1 Inefficiencies in investment result in failed capital accumulation efforts across the world --------------------------------------------------------------34 4.2 Global Experience: How are PIM systems being improved around the world?-------------------------------------------------------------------------------37 4.3 Uganda’s PIM system: Works to some extent, but leaves room for improvement----------------------------------------------------------------------------42 4.3.1 Great ideas and plans undermined by weak appraisals and political considerations -------------------------------------------------------------------42 5. How can Uganda maximize value from its public investments? ---------------------------- 52 ANNEXES------------------------------------------------------------------------------- 59 LIST OF TABLES Table 1: Central Government Operations: FY2010/11 – FY2013/14 -11 | Table 2: Summary Assumptions for the Medium Term Outlook, Baseline Scenario-17 | Table 3: Reforms in public investment management: Addressing key gaps- 54 LIST OF boxes Box 1: Re-basing Uganda’s CPI: What does it mean? -5 | Box 2: Lower commodity prices is a double edged sword for Uganda -14 | Box 3: Accounting for the Uganda shilling depreciation during FY 2015/16 -15 | Box 4: Key Decisions are Moving Uganda’s oil Sector -20 | Box 5: Cost- benefit analysis is not just about the profitability of the project! - 39 | Box 6: Lessons on independent review in PIM systems - 40 | Box 7: Lessons of project ideas differ and projects enter budget process in variant form - 46 | Box 8: Public Investment Plan: It should do what its name says! form - 47 | Box 9: Lack of communication and coordination of public investments costly to the economy - 49 LIST OF FIGURES Figure 1: Construction and Services drive economic recovery 3 | Figure 2: Economic growth in East Africa - 4 | Figure 3: Inflation pressures led into tighter monetary policy and cost of credit - 7 | Figure 4:Acceleration of credit to private sector cut short as monetary tightening catches up with financial institutions activities - 8 | Figure 5: Private sector credit: Construction, Trade and Personal Loans get the lion’s share as borrowers prefer dollars - 8 | Figure 6: Performance of the recurrent budget in three quarters of FY 2015/16 (approved vs. released) -10 | Figure 7: Performance of the development budget in three quarters of FY 2015/16 (approved vs. released) -10 | Figure 8: Performance of the domestic revenues in the first half of FY 2015/16 -11 | Figure 9: Uganda’s external current account, direct investment and international reserves worsen in the face of uncertainties -13 | Figure 10: Proposed sector allocations maintain same priorities into FY 2016/17 -18 | Figure 11: Uganda’s fiscal policy becomes one of the most expansionary within the region in recent years -26 | Figure 12: Uganda lags regional peers in level of public expenditure 27 | Figure 13: The shift in infrastructure spending has exploded and will continue to be significant -28 | Figure 14: The share of budgeted resources that is actually used has declined 29 | Figure 15: Worsening gap between ex post budget allocation and funds released 30 | Figure 16: Energy and transport sectors have largest execution gaps 30 | Figure 17: GOU own financing of public investments increasing, as deviation of actual expenditures from budget increases -31 | Figure 18: Uganda’s investment contributing less to economic growth in recent years -32 | Figure 19: Additional capital generating less output over past decade 33 | Figure 20: The large efficiency gap in public investments costly to public capital -35 | Figure 21: Uganda fairs poorly in public investment management in relation to peers - 37 | Figure 22: The Eight Stages of the Public Investment Management Cycle - 38 | Figure 23: Uganda’s PIM System closely follows the budget process -44 | Figure 24: Uganda’s largest challenge lie in appraisal, managing and evaluation of projects -50 | Figure 25. The PIM Reform Action Plan Abbreviations and Acronyms ASYCUDA Automated System for Customs Data NCN Non-Concessional Borrowing BoU Bank of Uganda NDP National Development Plan BOP Balance of Payments NEER Nominal Effective Exchange Rate BPD Barrels per day NPA National Planning Authority CBA Cost-Benefit Analysis ODA Official Development Assistance CBR Central Bank Rate OECD Organization of Economic CEM Country Economic Memorandum Cooperation and Development CNOOC China National Offshore Oil Corporation OPM Office of the Prime Minister CPI Consumer Price Index PAPP Project Analysis and Public–Private Partner- ships CPIA Country Policy and Institutional Assessment PDU Procurement and Disposal Unit COICOP Classification of Individual Consumption Ac- cording to Purpose PFMA Public Finance Management Act COMESA Common Market for Eastern and Southern PFM Public Financial Management Africa PIMA Public Investment Management Analysis DRC Democratic Republic of Congo PIMAC Public and Private Infrastructure DSA Debt Sustainability Analysis Investment Management Centre EAC East African Community PIMI Public Investment Management Index EU European Union PIMS Public Investment Management System FDI Foreign Direct Investment PPDA Public Procurement and Disposal of Public FY Financial Year Assets Authority GDP Gross Domestic Product PPP Public-Private Partnerships HIPC Highly Indebted Poor Countries RAPs Resettlement Action Plans IBP Integrated Bank of Projects RDP Reconstruction and Development Plan ICOR Incremental Capital Output Ratio REER Real Effective Exchange Rate ICT Information and Communications Technol- SBFP Sector Budget Framework papers ogy SMEs Small and Medium-sized Enterprises IFC International Finance Corporation SSA Sub-Saharan Africa IMF International Monetary Fund SWA Sector Wide Approach KIIP Kampala Institutional and Infrastructure Project SWG Sector Working Group UEU Uganda Economic Update LIBOR London Interbank Offered Rate UBOS Uganda Bureau of Statistics MDRI Multilateral Debt Relief Initiative UNHS Uganda National Household Survey MFPED Ministry of Finance, Planning and Economic Development UGX Uganda Shillings MoLG Ministry of Local Government Economic USA United States of America Development URA Uganda Revenue Authority MDA Ministries, Departments and Agencies UNRA Uganda National Roads Authority MoLG Ministry of Local Government VAT Value Added Tax MTEF Medium Term Expenditure Framework WB World Bank NBFP National Budget Framework Paper WDI World Development Indicators iv Foreword Accelerating Uganda’s structural transformation and transition towards middle income status will require facilitating higher levels of growth, improving productivity, and creating jobs for the large and growing population. Policymakers in Uganda know this well, and a key strategy that Government has pursued over the past seven years has been to adjust the fiscal policy to provide more resources for capital development. In line with the National Development Plans, this strategy is expected to be continued into the medium term in order to address a binding constraint on growth, the country’s huge infrastructure deficit. The intention to increase the level of capital investment is further driven by the prospect of revenues from oil exploitation, which in turn, can generate revenues to finance infrastructure and human capital investments. This Seventh Edition of the Uganda Economic Update discusses the importance of accompanying this fiscal strategy with sound public investment management systems. Indeed, a key risk to Uganda’s fiscal strategy relates to the potential for public investments to fail to yield the expected growth and welfare dividend. Over the past decade, for every dollar invested in Uganda’s capital infrastructure, only seven-tenth of a dollar has been generated. This is far below countries that have successfully undergone structural transformation. As an example, every dollar invested in the development of the interstate highway network in the United States of America between 1954 and 2001, generated six dollars’ worth of economic activity. In other words, Uganda’s public investments are falling short of generating the desired economic return. The good news is that by improving public investment management, Uganda can greatly increase her economic growth rate and social impact of her investment strategy. Our forecasts show that the Ugandan economy will be growing at an average rate of about six percent into the medium term. Yet, if the country operated at a higher level of efficiency, this growth rate could increase to almost 10 percent per annum, thereby allowing Ugandans to enjoy middle income status within the next five years. Uganda, needs to invest in her ability to invest by transforming her public investment management system so that it generates more. This involves carefully scrutinizing public investments selection so that it actually improves public welfare; ensuring that investments are managed effectively and completed on schedule; and overseeing that infrastructure assets are operated and maintained efficiently and sustainably. I am pleased to introduce this Seventh Edition of the Uganda Economic Update series. I hope that it will serve as valuable input to policy debates, and motivate a comprehensive set of actions to increase the returns on public investments to catalyze much needed transformation of the economy. This is absolutely essential for boosting inclusive growth and accelerating poverty reduction in Uganda. Diarietou Gaye Country Director Eritrea, Kenya, Rwanda and Uganda Africa Region v Acknowledgements The Seventh Edition of the Uganda Economic Update was prepared by a team led by Rachel Kaggwa Sebudde. This team included Jean-Pascal Nganou and staff of the Department of Projects Appraisal and Public Private Partnerships of the Ministry of Finance, Planning and Economic Development and of the Makerere University School of Economics. The team is grateful to Kevin Carey and Apurva Sanghi for the guidance provided to the team on the structure and messaging of the Update and to the Uganda country team for numerous insightful comments and contributions. Asger H. Borg, Damalie Nyanja and Gladys Alupo provided logistical support, while Sheila Kulubya managed the communications and dissemination strategy. Albert Zeufack (Sector Manager) and Christina Malmberg Calvo (Country Manager) provided overall guidance on the project. The report benefitted from insights of peer reviewers including Yoichiro Ishihara (Senior Economist, GMF07); Jens Kromann Kristensen (Lead Public Sector Specialist, GGO19); and Emmanuel Cuvillier Senior (Public Sector Specialist, MENA). Close collaboration with external stakeholders was intended to ensure the relevance of the messages to policy makers and practitioners. These external collaborators included stakeholders within the Ministry of Finance, Planning and Economic Development and the Ministry of Energy and Mineral Development. Irfan Kortschak provided professional editing services. vi Key Messages Over the past decade, Uganda has planned an investment push intended to accelerate and sustain the high levels of economic growth and to spur transformation into a middle income country. Mandated by its National Development Plan (NDP), this move aims at addressing the binding constraints on growth, with the most significant of these being the country’s huge infrastructure deficit. The intention to increase the level of capital investment has been further driven by the prospect of revenues from the exploitation of oil, which would create new opportunities to allocate additional resources to finance critical infrastructure and also invest in human capital. While the resultant expansionary fiscal strategy has squeezed the fiscal space for spending on social sectors amidst low levels of revenue, it could be justified by the potential accompanying dividends, including higher growth and higher domestic resources, which in turn can drive faster development, including human capital accumulation. The fiscal strategy hinges on these investments generating the expected growth dividend. Is this happening? While the fiscal strategy of the early 2000s was accompanied by high growth rates, the recent increase in the size of deficits has not yet resulted in a similar acceleration to the economic growth rate. In order for capital investments to contribute to increased growth and improved productivity, they need to feed into higher public capital stock that facilitates reductions in the cost of production. This would then support the private sector to engage in higher levels of economic activity and to generate a greater number of productive jobs. This rate of economic and social return depends to a very significant extent on how effectively and efficiently public investments are managed. Following previous editions, the seventh Uganda Economic Update presents an assessment of the current state of the economy, before addressing a specific theme of significance for the country’s development. This edition focuses on how the management of public investments could be improved to maximize the economic and social value of these investments. Well- designed, well-managed, and well-implemented public investments are a sine qua non for Uganda’s economic transformation. Efficient management of public investments is essential also for ensuring that oil revenues will play a positive role in the country’s transformation. Part 1: State of the economy During FY 2015/16, the Ugandan economy faced a number of developments with anticipated challenges for economic management. This included the staging of a national election, and a slowing global economy and subsequent declining commodity prices. The latter developments were associated with policy adjustment in China and structural impediments to growth in big emerging market economies such as Brazil. During the year, the Ugandan authorities also commenced the implementation of a new NDP, which necessitated some adjustments in strategy. With such developments, some degree of macro volatility was inevitable, not least due to the uncertainties surrounding the elections, given the experiences from the 2011 elections, when inflation rose to a two decade-high. Uganda’s economic policy makers focused on managing these volatilities. Monetary policy coped well with what was anticipated. By September 2015, the Shilling had depreciated against the dollar by more than 40 percent, compared to the year before. This change in the Ugandan currency had not been experienced since the forex market was liberalized in 1994. The rate of inflation also went up to reach 8.5 percent by December 2015, with the expectation at that time that it would rise further, particularly because of the effect of the depreciating Shilling. To avoid inflation becoming embedded, the Bank of Uganda raised its policy rate by six percentage points over 12 months to October 2015. Interest rates on government securities and for lending to the private sector increased rapidly as the financial market re-adjusted to the tighter liquidity conditions. Despite policy success in containing spill-overs, the combined effect of the resultant volatility on private investments was quite severe, through the lower access to funding from domestic banks, as well as from external sources. The rate of growth of credit to the private sector declined from 24 percent per annum during the first quarter of the fiscal year to 8.7 percent by March 2016, reflecting the tightened money conditions. Surprisingly, the volatility in the Shilling did not deter agents from borrowing in dollars, even though the bulk of them were engaged in activities that provide incomes in Shillings, thus risking increased exposure vii with the depreciating currency. On the part of external sources, the private sector received lower funding through foreign direct investments, which is estimated to have declined from US$ 1.1 billion to US$ 0.8 billion between FY 2014/15 and FY 2015/16, and from remittances that decreased from US$ 1.3 billion to an estimated US$ 1.2 billion over the same period. In addition, Uganda realized lower than usual receipts from export of goods and services, due to a combined effect of low demand and low commodity prices. Under these circumstances, private investments are estimated to have reached levels that are far lower than had been anticipated. Uganda’s external position remained weak, largely due to the impact of the weak global economy; the associated sustained decline in global commodity prices; and the uncertainties related to an election year. The impact of reduced cost of oil imports lowered the goods trade deficit, but this was more than offset by the increased volume of imports required to support construction. Meanwhile, the declining global incomes and commodity prices also reduced the value of total exports receipts, which led to a widening of the trade deficit, increasing from an estimated value of 8.5 percent of GDP during FY 2014/15 to 9.3 percent. With the additional negative impact of the decline in services, income and transfers, the external current account is estimated to have reached a value of 9.6 percent of GDP during FY 2015/16. The execution of fiscal policy was generally effective, which resulted into spending closer than usual to the budgeted levels. According to figures released by the Ministry of Finance in May 2016, fiscal revenues and expenditures remained largely on target throughout the year. The anticipated fiscal expansion materialized, with the deficit remaining at high levels, at an estimated value of around 6.4 percent of GDP, which is only slightly lower than the originally expected value of 6.6 percent of GDP. Prudent fiscal management by the authorities was complemented by good performance in the area of revenue collection, for which the value reached 13.9 percent of GDP, compared to the budgeted level of 13.6 percent. With construction of two large energy projects taking off, the execution of the development budget was much better than in previous years, recording a small shortfall from the budget of 0.5 percentage points of GDP. Therefore, even though there was overspending in the recurrent budget, largely due to expenditure on election and security related measures, total expenditure is expected to have reached 22.1 percent of GDP, the level that was planned for in the budget. The stimulus effect of fiscal expansion and the stabilization of expectations was not enough to outweigh tightened private liquidity, hence GDP growth during FY 2015/16 is estimated at 4.6 percent, more than one percentage point lower than had been forecast by the authorities. The estimated growth is also more than half a percentage point lower than the forecast in the previous World Bank Economic Update. This was the result of a stronger than anticipated impact of macroeconomic volatilities on private sector activities during the year. The main driver of growth was public investments, which however represents a smaller share of the economy where services account for close to half. With macro-fiscal uncertainties related to elections now dissipating, the economic outlook is positive, with the rate of growth projected to reach approximately 5.9 percent in FY 2016/17, and to remain on an upward trajectory into the near future. The weak global economy will continue to affect economic activity in Uganda, as it has done during FY 2015/16. However, from this perspective, the economy will also benefit from the low energy prices, particularly if investors take advantage of the associated low cost of imported inputs. In addition, growth will also be driven by an intensification of investments by the private sector in the post-election period, particularly in oil-related activities. Yet the predominant driver of growth will be an increase in the economic activities of the construction sector, with this growth driven by Uganda’s significant investments in public infrastructure projects. The stimulus effects from this large public investment program will offset those of a weak external sector on the Ugandan economy, with carry-through to FY 2017/18, when the rate of economic growth is expected to increase to above 6 percent. Despite the generally favorable outlook, a number of risks could reduce the country’s growth outcome. The risks include the low revenue base, which is being further threatened by a renewed appetite for tax exemptions; the sequencing, financing and management of the large infrastructure investment program; an increase in debt beyond the threshold of 50 percent of GDP should the investments not generate sufficient growth and revenues to service the growing debt; as well as exogenous conditions, such as bad weather, regional instability, and protracted low growth of the global economy. Policy makers must strive to ensure that the infrastructure program results in efficiency and productivity improvements and in oil production capacities to exploit oil in a manner that generates economic opportunities for the maximum possible number of Uganda’s citizens. To achieve this, the appropriate selection, sequencing and good overall management of the financing and implementation of the Government’s huge infrastructure development program are vital. viii Part 2: Moving beyond spending to creating productive assets Uganda’s development plan and budgets clearly signal an investment-driven growth phase to enable structural transformation and development of oil resources. In line with national development objectives, the fiscal policy has been expansionary over the past five years. However, on average, up to 36 percent of the planned spending over this period did not materialize, with the bulk of this under-spending recorded in the priority sectors of energy and transport. Budget execution challenges are matched by overall inefficiencies in investments and consumption has increasingly become the largest contributor to increases in economic activity. There are also indicators that there is a decline in efficiency in utilization of public capital. Going forward, these inefficiencies in investment could limit the rate of accumulation of capital, as it has done in many other countries, thus curtailing the desired socio-economic transformation. If such inefficiencies persist, increased investments will not be converted into productive assets to support accelerated economic growth rates. The budget process suffers from an overhang of incomplete projects, which become perpetual, with continuing demands on the budget or even requiring additional resources when poorly implemented. When budget execution struggles, there is a high risk of stop-and-go cycles in investment, which can worsen volatility, especially when oil revenues come on-stream. Realizing the gains from the ambitious fiscal strategy will require addressing existing investment inefficiencies. The efficiency with which the capital stock is used is a powerful lever with which to increase growth. It has been estimated that if efficiency of infrastructure investments in Uganda was doubled, the economic growth rate would increase by nearly three percentage points. Therefore, it is vital that the country ‘invests in its ability to invest’. Converting investments into productive assets requires an effective management of public investments at all stages of the project cycle, from when a project idea begins to the management of the completed asset. To assess how Uganda performs in terms of public investment management (PIM), against good practices around the world, the World Bank, working with Ministry of Finance, Planning and Economic Development and other stakeholders, assessed Uganda’s existing PIM system. The overall conclusion: Uganda has made effort to build institutions, often inspired by universal best practice. While chasing best practice in every area, the focus can be placed on the essential “must have” features for sound functionality. In fact, as a result of previous reform efforts to improve the overlapping area of public financial management, Uganda’s PIM system has a number of good practice elements. Nonetheless, there is ample room for improvement, particularly in the preparation of projects, which determines projects ‘quality at entry’, and their execution. In terms of the overall quality of the institutional environment underpinning PIM, Uganda ranks in the 46th place out of 71 countries, well behind good performers in the region, such as Ghana (in 27th position) and Rwanda in (12th place). Deficiency in quality at entry explains the pervasiveness of problems from implementation delays; such as cost escalations, time-overruns; contract disputes; abandonment of projects; poor quality of some completed projects; and rapid depreciation of public capital stock. At present, the public investment practice involves ad hoc identification of projects, with project analysis only being conducted after the financing has been allocated, combined with inefficient management of the implementation and maintenance of the public assets that it produces. This Update recommends a systematic approach to building capacities along three pillars: A. Streamlining and strengthening the institutional arrangements for the management of public investments; B. Ensuring a shared understanding across institutions regarding what needs to be done and how it should be done by standardizing the information and documentation needed to guide the identification, formulation, preparation, appraisal, investment decision, execution, operation, monitoring and evaluation of projects across all implementing agencies; and C. Determining where gaps in the legal and regulatory environment exist and how they should be closed to strengthen mandates and the incentive structures. ix Good reforms are underway, but will need to be reinforced while building momentum to follow-through with a more sustained reform program. The Government should focus on addressing constraints that have the most significant impact on the achievement of good investments now and in the short term. At the same time, the Government should build momentum for reform actions to be implemented over a five year period. It is therefore recommended that the reform plan could move as follows: Immediate actions to progress PIM reform The six actions that Government can pursue immediately are: 1. Formalize and strengthen independent review of new project proposals. The new Project Analysis and Public-Private- Partnerships Department within the Ministry of Finance, Planning and Economic Development, can be nurtured and groomed to perform the role of an independent reviewer. This would strengthen the role of the Ministry as the gate-keeper with respect to spending of public resources to generate value. (Action A1 in the PIM Reform Action Plan below) 2. Build the capacities of Ministries, Departments and Agencies (MDAs) and other implementing agencies, particularly in the area of project preparation, appraisal, approval and monitoring phases. In the short term, training should be focussed on capacitating a core group of technicians across the different MDAs involved in the preparation and appraisal of projects within their own agencies. Building and sustaining the range of skills required for effective PIM system can be accelerated through the establishment of linkages with higher education centres. Susequently, building capacities at all levels of the Government, would require developing training programs targetting officials and staff at the basic, intermediate and advanced levels for all agencies, particularly those involved in preparing and implementing projects. (Action A2 in the PIM Reform Action Plan) 3 Document and implement good practice operational processes, starting with project preparation and appraisal. These will be used by all MDAs to ensure that they implement measures to achieve economic evaluation of projects. A key component of this exercise will be to establish a set of standard national parameters, including shadow prices, unit costs, and the discount rate, as well as standard criteria for project performance indicators, aimed at ensuring that projects are aligned with national strategies priorities. (Action B1 in the PIM Reform Action Plan) 4. Create a technical fund to facilitate feasibility studies during the pre-investment stage. This is a prerequisite for ensuring that agencies can actually undertake the required feasibility studies. Similar modalities could be adopted for both GOU and externally funded projects to ensure projects are properly prepared by the MDAs before they are submitted for consideration in the medium term fiscal framework. (Action B2 in the PIM Reform Action Plan) 5. Establish a standard framework for the monitoring and evaluation of all public capital investment projects under implementation. While MDAs currently undertake this function to some extent, and monitoring and evaluation is being done both by the MoFPED and Office of the Prime Minister, there needs to be a single entity and standard framework that can ease tracking and ensure remedial actions. The immediate step under this action could be to re-assess the existing portfolio of projects already under implementation and take action where financial and technical risks are highest. (Action B3 in the PIM Reform Action Plan) 6. Formulate a policy framework for PIMS. This will create the background for overall understanding of the PIM system across the various institutions of government, including the executive, parliament and the judiciary, and will thereafter be the basis for legal and regulatory changes for its implementation. (Action C1 in the PIM Reform Action Plan below) Medium term actions to progress reform of the PIM processes In the medium term, Government should consider implementing further improvements in efficiency and effectiveness in PIM. Four actions to achieve this include: x 1. Clarify roles, mandates and responsibilities of various entities within the PIM process. This will require re-evaluating the different entities, each of which has specific roles to play within the project cycle to remove redundant, un-coordinated, overlapping responsibilities, which leads to wastage and inefficiency. The outcome should be a mapping and re-engineering of the PIM processes to support the better implementation of projects. (Action A3 in the PIM Reform Action Plan below) 2. Develop an integrated bank of projects (IBP), to constitute a central database and depository for public projects, including pipeline projects, with clear criteria and a systematic approach for their inclusion. Such a data bank directly corresponds to the function of improving the quality-at-entry and having ready to go projects for implementation. It should contain information related to beneficiaries, sector statistics, technical parameters, demographics, information on poverty, social indicators, and other matters relevant to project formulation. In order to manage the IBP effectively, it will be necessary to build focussed systems capacity in technical (such as software management, data collection for project formulation at sector level) and in non-technical matters (such as the interpretation of information from the IBP to ensure it is used efficiently and appreciation of usefulness of the process to PIMS. (Action A4 in the PIM Reform Action Plan below) 3. Enhance the legal and regulatory framework required to support PIM. Implementation of the PIM system may expose gaps in the existing legal and regulatory framework that may warrant amendments or the enactment of new laws to strengthen the system. (Action C1 in the PIM Reform Action Plan below) 4. Develop a system for monitoring and ex post project evaluation of projects. A system to facilitate the evaluation of past project experiences and to formulate lessons learned to serve as input for future project designs and implementation is vital. To achieve this, it is equally vital to build capacities for managing the system. (Action B4 in the PIM Reform Action Plan below) The PIM Reform Action Plan xi 1 Part The State of the Economy As was expected in an election year, the Ugandan economy faced volatilities - currency depreciation, inflation, and high interest rates during FY 2015/16. Real GDP is estimated to have grown by 4.6 percent, with growth mainly driven by services and construction, as two key public projects took off. The growth disappointment was due to a sizable negative impact on private investment, which declined in face of a high level of uncertainty related to the staging of the national elections, the subsequent volatilities in domestic variables as well as volatile global economic conditions. Monetary tightening achieved the objective of lowering inflation, as the cost of credit further reduced the rate of growth of credit to the private sector. Surprisingly, dollar- denominated credit remained buoyant amidst a volatile domestic currency. The upside surprise was the materialization of the planned spending, especially on the capital budget, and the deficit remaining at the expected value of around 6.4 percent of GDP. Budget re-adjustments, amounting to almost five percent of original budget, were mainly due to election related supplementary spending. Uganda’s external position remained weak, largely due to the impact of the weak global economy; the associated sustained decline in global commodity prices; and the uncertainties related to an election year. The external current account deficit is estimated to have reached a value of 9.6 percent of GDP during FY 2015/16. The economy is projected to grow at approximately 5.9 percent in FY 2016/17 and thereafter to remain on an upward trajectory into the near future. This acceleration will be driven by Uganda’s significant investments in a number of public infrastructure projects and an intensification of investments by the private sector in the post-election period, particularly in oil-related activities. The main risks relate to the volatility of the global economy, particularly as the Chinese economy slows down. However, if the Government’s huge infrastructure development program is not implemented appropriately, it may result into low absorptive capacity; build-up of debt; and failure to achieve efficiency and productivity improvements in the economy. Poor implementation specifically threatens the ability of fiscal policy to facilitate the achievement of Uganda’s development goals. It is vital that policymakers strive to achieve a higher level of efficiency in the public investment management regime. 1 1. Recent Economic Developments The Ugandan economy is estimated to have grown at a rate of 4.6 percent during FY 2015/16, which was much slower than the projected rate of 5.8 percent. With the take-off of a number of the energy projects boosting public investment, the slower than anticipated growth can be attributed to the adverse impact of both domestic and external volatilities. The tightening of monetary policy was necessary to address inflation pressures, but raised the cost of credit, which affected private consumption and investment. Fiscal policy was implemented well, keeping overall expenditure within the budgeted levels, even though there were reallocations of funds to recurrent expenditures, mainly on account of election-related pressures. O ver the past five years, the Ugandan economy have reached US$ 740. While this is slightly higher than the recorded some positive growth, despite a average for low-income countries (US$ 629), it is less than number of challenges resulting from both half of the average for Sub-Saharan Africa (developing only) domestic and external factors. In FY 2014/15, countries (US$ 1,638). The number of households living below the rate of growth was 5.0 percent per annum. This growth the international poverty line, measured at US$ 1.9 per day rate sustained the momentum achieved after the economic in 2011 PPP terms, is expected to have declined further to growth rate had increased to 5.2 percent in FY 2013/14, from about 33.2 percent in FY 2014/15, from 41.5 percent five years 3.6 percent recorded in FY 2012/13, according to the Uganda ago. However, despite this impressive decline in the poverty Bureau of Statistic (UBOS)’s revised GDP series. This recovery rate, 43 percent of the population continues to live just above was mainly driven by a growth in consumption, since there was the poverty line and therefore remains highly vulnerable and a deceleration in the rate of growth of gross investments over at risk of falling back into poverty in the case of economic this period. To a certain extent, the economy stabilized, with the shocks. While the structure of the economy is slowly changing, rate of inflation declining from 23.5 percent in FY 2011/12 to approximately three-quarters of the population still depend 3.0 percent in FY 2014/15, even though increasing food prices primarily on low paying jobs in the agricultural sector, with the and currency depreciation began to exert an influence towards majority employed in subsistence farming, which contributes the end of the year. It was also challenging for policymakers to to approximately 25 percent of the total value of GDP. manage the impact of the unpredictable global environment, with Uganda’s external current account deficit increasing from a value of around 7.8 percent of GDP in FY 2012/13 to 9.6 percent in FY 2014/15. In addition, Uganda’s economy operated in the Uganda context of significant regional political challenges, mainly due recorded to the unrest in neighboring South Sudan and the Democratic a rate of economic Republic of Congo and to isolated terrorist incidents in Kenya. All of these factors had an impact on Uganda’s spending needs, growth of 4.6 % in FY exports, and remittances. 2015/16. A rate significantly lower than recorded in recent At an estimated rate of 4.6 percent during FY 2015/16, Uganda’s economic growth is far lower than the rate history and lower than that recorded in the decades following reform. With the low of regional peers in the East per capita income and high vulnerability to poverty, the rate African Community (EAC) of economic growth is not sufficient to reach the national target of achieving middle income status by FY 2019/20. In FY 2014/15, the average per capita income is estimated to 2 In FY 2015/16, Uganda began the implementation of its basis of revised data from the Uganda Bureau of Statistics this second National Development Plan (NDPII), the same rate is lower than 5.0 percent recorded for FY 2014/15. year that it conducted its national elections. The NDPII, which covers the period from FY 2015/16 to FY 2019/20, is the The services sector remains the main driver of growth, second of a series of six five-year plans intended to facilitate accounting for an estimated 52 percent of all economic the achievement of a vision for Uganda’s economic and social activities. However, increased construction activities also transformation by 2040. The NDPII builds on a number of significantly boosted the contribution of the industrial projects and initiatives implemented under the previous plan, sector. During FY 2015/16, the services sector grew by 6.6 with a particular focus on addressing Uganda’s infrastructure percent, with the bulk of this growth driven by activity in the deficit and on preparing for the production of oil. The information and technology sub-sectors. The rate of growth of beginning of the period of the new plan coincided with the the construction sector, increased to approximately 5.7 percent, preparations for presidential, parliamentary, and district-level more than doubling the rate recorded in FY 2014/15, when the election period, which took place in February-March 2016. With sector grew by a mere 2.5 percent. This development is largely memories of tensions in the area of economic management attributed to the take-off of large public construction works. during the previous election period, in 2011, there were With a deceleration in the rate of growth of all other subsectors, concerns regarding the possible re-occurrence of similar particularly manufacturing, the overall rate of growth of the events. With additional challenges created by the volatile industrial sector during the year was significantly lower than in external environment, policymakers had to manage these the corresponding period in the previous year (see Figure 1). concerns carefully while remaining focused on an economic management drive intended to address structural issues to sustain overall growth and economic development over the The agricultural sector grew at a rate of 3.2 percent longer term. during the year, after benefitting from favorable weather conditions, particularly during the first half of the year. This is a higher rate of growth than the rate of 2.3 percent 1.1 Growth slowed down due to recorded during the corresponding period in FY 2014/15. The impact of low commodity prices at the international market, uncertainties the sector’s performance during the year was better than might have been expected. This is because the average global prices During FY 2015/16, Uganda recorded a rate of growth for Uganda’s major export commodities, particularly coffee, tea, of 4.6 percent (preliminary estimate) as a result of both maize and fish, were generally lower than in the corresponding domestic and external uncertainties. This was lower than period in the previous year. A positive factor was the weather 5.4 percent, the rate which had been forecast in our previous conditions during the first half of the year, before the El Nino economic update released September 2015, with the largest set in with more volatile and unfavorable patterns during the shortfall in growth coming from private investments. On the latter part of the year. Figure 1: Construction and Services drive economic recovery Preliminary estimates of annual GDP growth by sectors Source: Uganda Bureau of Statistics, 2012 and World Bank Staff Estimates 3 The economic growth recorded in FY 2015/16 was result that private sector investment did not achieve the same primarily driven by the accelerated rate of execution level of momentum as in the previous year. Economic activity of public investments in energy infrastructure, with was also constrained by the regional insecurity and the weak private investment constrained by both domestic and global economy which resulted into generally low commodity external factors. The value of public expenditure on energy prices, with all these factors reducing demand for Uganda’s infrastructure doubled to reach around 3.0 percent of GDP, up exports, FDI inflows and remittances. In particular, Uganda’s from 1.5 percent in the previous year. Earlier in the year, the merchandise exports were adversely affected by the instability increased availability of credit, the bulk of which went to the in South Sudan and the Congo (DRC); the slow recovery in construction sector, is also expected to have driven an increase Europe; and the deceleration of economic growth in China. in the level of private investment. However, as uncertainty In total, including both public and private investment, the related to the elections increased, economic volatility, combined value of public and private investments is estimated characterized by a sharp depreciation in the value of the to have increased by 6.3 percent in FY 2015/16, compared to Shilling and intensified inflationary pressures, increased. This the increase of 1 percent recorded in the previous year. prompted policymakers to tighten monetary policy, with the Figure 2: Economic growth in East Africa 5.2 5.0 4.6 3.9 3.6 Source: World Bank / IMF Overall, Uganda’s economic growth in recent years has 1.2 Heightened inflationary pressures been significantly lower than the rates recorded earlier and induced monetary policy tightening lower than regional peers (Figure 2). As such, other countries in the East African Community (EAC) achieved significantly higher levels of growth performance from the rest of the sub- Domestic prices tended to increase throughout the first Saharan (SSA) region, which experienced a general economic half of FY2015/16, with the rate of inflation increasing to a slowdown, with the average rate of growth declining from 4.5 peak of 8.4 percent in December 2015. In the previous year, percent in FY 2013/14 to 3.0 percent during FY 2015/16. the rate of inflation reached its lowest levels for the past five years, mainly due to low food prices resulting from bumper 4 harvests and from low international commodity prices. Even the second half of the year. By April 2016, the headline inflation with some pass-through effect from the depreciation in the rate had declined to 5.1 percent. Uganda’s regional peers also value of the Shilling to domestic prices, the average rate of experienced volatile rates of inflation over recent months. For inflation for FY 2014/15 still stood at only 3.0 percent. During example, Kenya recorded an average annual rate of 6.6 percent FY 2015/16, the annual headline inflation rate more than in FY 2014/15, with this increasing to 7.8 percent in January tripled, from 1.8 percent per annum in December 2014 to a 2016, before declining to 5.3 percent in April. In Rwanda, the peak of 8.4 percent in December 2015, according to the new rate increased to an average of 6.4 percent in the first half of rebased Consumer Price Index (CPI) launched in January 2016 the financial year and had declined to 4.7 percent by April 2016. (see Box 1). The rebasing resulted in an index that generated Surprisingly, Burundi, which has experienced a civil insurgence a slightly lower rate of inflation for this period, together with over the past two years, managed to record a rate 5.6 percent other moderating factors to the inflationary pressures during for FY 2014/15, down from 18.2 percent in FY 2011/12. Box 1: Re-basing Uganda’s CPI: What does it mean? The Consumer Price Index (CPI) is designed to measure changes in the prices of a basket of goods and services consumed by an average household. To facilitate measurement, such prices are based on a basket of consumption goods and services commonly purchased by the households within an economic territory and in reference to a particular point in time, normally referred to as the ‘base period’. The pattern of consumption is captured through weights derived from a household survey for the base period. Changes in patterns of consumption can arise due to changes in the socio-economic characteristics of the population; government policies; technological advancement; innovations; evolution in consumer products which leads to disappearance of some products and the appearance of new ones; and changes in tastes and preferences; an increase in the consumption of previously marginal products; previously dominant products slipping into decline or vanishing off the markets as a result of changes in technological innovation driving productivity and hence patterns of consumption; or new products changing these patterns. These changes require frequent adjustments in the key parameters used to measure the CPI to ensure it accurately measures consumer price movements. What did the 2016 Uganda CPI re-basing involve? During FY 2015/16, the Uganda Bureau of Statistics rebased the CPI to ensure it correctly measures the price movements, and to comply with international standards, including under International Labor Organization, International Monetary Fund, East African Community, Common Market for Eastern and Southern Africa and the Free Trade Area, among others. The key adjustments included: i. Changing the base period from 2005/06 to 2009/10; ii. Changing CPI classification from “Country Product Classification” to “Classification of Individual Consumption according to Purpose” (COICOP), in line with international good practice; iii. Adjusting the weights of the CPI to ensure consistency with the expenditure patterns described by the 2009/10 Household Survey. This adjustment required updating the coverage of goods and services in the basket; changing the weights of the goods and services; adjusting the geographical coverage of the CPI by extracting another urban center (i.e. Fort Portal) out of western region; and stratifying the Kampala index further into low; middle and high income baskets; and changing scaling from 100 to 1000. What are the implications of the 2016 Uganda CPI re-basing? The rebased CPI yields an average inflation rate of 7.0 percent during the first half of FY 2015/16. This rate is only slightly lower than 7.4 percent before the rebasing. It is critical to note that the rebasing did not result into a systematic lowering of inflation. In fact the average inflation over a longer period of 12 months to December 2015 shows a figure of 5.8 percent, which is higher than 5.2 percent without rebasing. The resultant adjustment was minimal because the CPI has been aptly rebased regularly in the past. Nonetheless, the rebasing allowed for systematic adjustments, including in the methodology to measure better movements in cost of living for individual locations and products. Key of these include education, health, transport, food; and the electricity, fuel and utilities sub- groups while locations are also better measured with Kampala divided into high, middle and low income indices. Source: Uganda Bureau of Statistics 5 The inflationary pressures in Uganda resulted from June 2015 to 17 percent in October 2015, a level that has been both weather-induced seasonal factors and external maintained until April 2016. In addition, margins on the bank developments. As has often been the case in the recent past, rate and rediscount rate were widened to make it more difficult during the first half of FY 2015/16 food crop prices increased, for commercial banks to access funds from the BOU. In addition with prolonged droughts reducing the supply of weather- to these interest rate actions, the BOU reduced the level of sensitive agricultural food crops. At the same time, the rate of currency in circulation through net sales of its short-term core inflation (a measure that eliminates volatile components) instrument, the repurchase agreement security, and through had remained on an upward trend since September 2014, sales of foreign currency to a value in excess of US$ 400 million reaching a peak of 7.7 percent in February 2016. In particular, within a period of six months, with this latter measure also the rate for the energy, fuel and utilities sub-category relieving pressure on the Uganda shilling. accelerated at a higher rate than the average due to inflationary pressures on components such as charcoal and firewood The tight monetary policy stance increased the cost of resulting from the prolonged spell of dry weather. Moreover, borrowing for both the Government and the private sector. with the Shilling declining in value against the dollar by 27 However, this policy stance realized the objective of lowering percent, this depreciation had a significant inflationary impact, inflation. Continuing the trend from the preceding year, the especially given that tradable goods contribute to up to 60 yields on government securities increased sharply during percent of the basket of goods in the CPI. The Bank of Uganda the first half of FY2015/16 (see Figure 2), with these increases has previously estimated that a depreciation in the value of the possibly related to increases in market uncertainty in the period Shilling can be transmitted into domestic inflation by a factor of prior to the election. The 91-day monthly Treasury bill rate rose 0.4 to 0.5.1 For the same reason, there was little pass-through of to 18.3 percent by November 2015, up from 12.8 percent in July the effect of low global commodity prices (particularly for oil), 2014. While this increase may have resulted in a strengthening to domestic prices. of Ugandan currency by attracting inward portfolio flows as a result of increased investor appetite for government securities, In an anticipated response by policy makers to these it also increased the cost of borrowing for the Government. increased inflationary pressures, monetary policy was As a result, the Government reduced its borrowing from the tightened to curb demand pressures, before being eased financial system by 10 percent over the first half of FY 2015/16. later in the year. After the experience of 2011, when elections Commercial banks also sharply increased their lending rates as were followed by runaway inflation, the Central Bank adopted of April 2015, with the average rate reaching 25.2 percent by a highly precautionary stance during the 2016 election year. February 2016, compared to 20.8 percent in the corresponding During the first half of FY 2015/16, the Bank of Uganda (BOU) period in 2014. However, these tight monetary conditions, intensified measures to forestall the inflationary pressures together with the low commodity prices, reduced inflation that it had foreseen in its inflation forecasts. In particular, the pressure and the rate of inflation had declined to 5.1 percent by Central Bank raised its key policy rate (CBR) from 13 percent in April 2016. A Bank Counter at Fina Bank a commercial bank in Uganda margins on the bank rate and rediscount rate were widened to make it more difficult for commercial banks to access funds from the BOU. The central bank also reduced the level of currency in circulation through net sales of its short-term instrument 1. Okello , A. J. and Brownbridge , M., 2013; Exchange Rate Pass-through and its implications to Monetary Policy in Uganda. Bank of Uganda Working Paper No. 10/2013, The impact of the tight monetary policy stance on credit until it reached 8.7 percent per annum by March 2016. The eventuated only much later. During the first half of FY largest proportion of the credit was utilized to finance activities 2015/16, financial institutions had accelerated the supply of in building, mortgage, construction and retail estate, which credit to the private sector, with the rate of growth standing at accounted for 23 percent. This was followed by trade, which an average of 24 percent, almost double the average rate of 13 accounted for 20 percent; by the personal and household percent recorded during the same period in FY 2014/15. The sector (14.8 percent); and by the manufacturing sector (15 impact of the high interest rates began to be felt in October percent). 2015, when the rate of growth of credit began to decelerate Figure 3: Inflation pressures led into tighter monetary policy and cost of credit Source: Bank of Uganda Contrary to expectations, the volatility in the value of the borrowers whose earnings are shilling-denominated, as would Shilling did not deter agents from increased borrowing particularly be the case for entities operating in non-tradable in foreign currency. The total value of credit denominated in sectors. In the case of a depreciation in the value of the local foreign currency grew by 38 percent during the first quarter currency, it would become increasingly expensive for those of the year, compared to a growth of 21 percent during the sectors to service their foreign currency denominated debt. corresponding period in FY 2014/15. This is a very significant increase, particularly when the Shilling was witnessing the highest level of volatility, with a rate of depreciation reaching 40 percent per annum in September 2015. The shilling- financial denominated credit recorded much lower rates of growth, increasing from 8 percent to 15 percent over the same period. institutions With this growth, dollar-denominated credit accounted for 45 accelerated the percent of the total value of credit by March 2016. Borrowing in supply of credit to the foreign currency creates opportunities for borrowers to access private sector IN the first lower cost credit; to diversify loan portfolios; and to hedge the risks associated with the volatility of the local currency. On the half of FY 2015/16, with the financial institutions side, prudential limits set by BOU forbid rate of growth standing at financial institutions from expanding their foreign currency an average of 24 % denominated loan portfolios to a value in excess of 20 percent of the total value of the portfolio. This requirement has been broadly met by banks over the past two year. However, the increase in the proportion of loans denominated in foreign currencies also creates a significant exchange-rate risk for 7 Figure 4: Acceleration of credit to private sector cut short as monetary tightening catches up with financial institutions activities Source: BOU and World Bank staff calculations In Uganda, the bulk of credit denominated in foreign increase of five percent in the case of the former and a decrease currency is provided to businesses in the building, of seven percent in the case of the latter compared to the mortgage, construction and real estate sector and in the corresponding period in FY 2014/15.The manufacturing sector manufacturing sector, which combined, account for 50 exports some of its produce, and thus generates revenues in percent of all of this credit. The value of the credit provided foreign currency, and similarly, some categories of real estate to these two sectors has grown rapidly over the first half of collect their rent in foreign currency. However, a significant the year, at 57 percent in the case of the building, mortgage, proportion of the borrowers operate domestically and have construction, and real estate sector and at 53 percent in the revenues solely denominated in shillings, exposing these case of the manufacturing sector. This compares to an average businesses to significant exchange rate risk. Figure 5: Private sector credit: Construction, Trade and Personal Loans get the lion’s share as borrowers prefer dollars Source: BOU and World Bank staff calculations 8 Overall, the financial health of the banking sector has of GDP to 1.6 percent. The revenues from external grants remained sound, despite the significant risks associated have been declining after Uganda achieved mature reformer with exchange and interest rate movements. In particular, status, which it has had only very limited access to grants from increases in interest rates could increase the risk of default multilateral institutions. Revenues from external grants declined on commercial bank loans, given that most loans are based even further in 2012 following the governance-related scandals, on variable rates. At the end of December 2015, the banking which has resulted in a number of donors revising their overall system maintained an acceptable capital adequacy ratio, assistance strategy to the Government over the past five years. although these ratios were a percentage point lower than was Therefore, the value of the overall fiscal deficit was projected the case during the corresponding period in 2014. Relative to to increase, from 4.6 percent of GDP in FY 2014/15 to 6.4 the total value of loans, the proportion of non-performing loans percent in FY 2015/16. It was expected that this deficit would momentarily decreased to 3.9 percent, but was back to 5.3 be partially funded by external loans, the value of which would percent in December 2015, which was the same ratio reached reach 4.8 percent of GDP, and partially by domestic resources, in the corresponding period in 2014. The rate of return on the value of which would reach 1.6 percent of GDP. assets improved to 2.7 percent, up from 2.2 percent. Liquidity indicators also improved. During the first half of FY 2015/16, policy makers were assisted in their endeavors to implement prudent fiscal 1.3 Cautious fiscal policy management management by good performance in the area of revenue out performed by election spending collection, which in turn was assisted by the depreciation in the value of the currency. The budget estimates for pressures the first half of the year indicated that the Government had been able to collect domestic revenues which exceeded the In FY 2015/16, fiscal policy managers strived to balance established targets by UGX 218 billion (or 4 percent above the the achievement of a high level of prudence in the context pro rata target for this period). While this is largely attributable of election-related expenditure pressures with the need to the high value of non-tax revenues, the total value of to maintain efforts to boost growth. In line with the tax revenues collected by the Uganda Revenue Authority revised budget timetable mandated by the Public Financial exceeded targets by UGX 59.5 billion, with all major categories Management Act (2015), the Parliament approved the budget of taxes delivering at least the targeted level of revenue, except for FY 2015/16 in June 2015. This represented a significant in the case of indirect taxes, for which there was a shortfall improvement in the budget process, with this expedited of around UGX 86.7 billion in the first half of the FY 2015/16. approval expected to contribute to a reduction in delays to Underperformance in the collection of excise duty and VAT on the absorption of the public investments budget. While the domestic products during this period was largely attributable authorities have remained committed to moving forward to the slow economic activity, while collections on international with fiscal policies intended to boost growth by addressing trade-related activities benefited from the depreciation in the constraints on economic growth, particularly those related to value of the domestic currency. The value of overall domestic Uganda’s infrastructure deficit, they have also been determined revenues is projected to reach 13.9 percent of GDP, which is to prevent the types of fiscal slippages that occurred around 0.4 percentage point above the original target. Uganda’s level the 2011 election. Therefore, while the Parliament approved of performance in this area is still significantly lower than that an expansionary budget for FY 2015/16, with a projected of its peers in the EAC. On account of the depreciation in the increase in the value of public expenditures to 22.1 percent value of the Shilling, the revenues from external grants are of GDP (up from 19.4 percent of GDP in FY2014/15), the bulk expected to reach UGX 1,461 billion during FY 2015/16. This of this increase was earmarked for investments in public value is equivalent to 1.7 percent of GDP, which is higher than development projects intended to address key infrastructure the originally budgeted level of 1.6 percent of GDP. constraints and to establish a workable public infrastructure to facilitate oil production. This is consistent with trends observed During the first half of the year, the overall government over the past five years, during which the Government has expenditure (including net lending to investment projects) substantially increased its allocations for the development was more or less on target, with the execution of some budget, with these allocations increasing from 32 percent of key projects progressing quickly. However, the level of total expenditure in FY 2010/11 to 51 percent in FY 2015/16. expenditure later began to exceed budgeted allocations due to election related pressures and security related operations. The With significantly increased expenditure and only modest total value of expenditure was estimated to exceed targets by improvements in revenue collections, an increase in UGX 155 billion during the first six months of the financial year. the value of the fiscal deficit is inevitable. The value of The rate of execution of public investments was relatively good, revenues was projected to increase from 13.0 percent of GDP with 34 percent of the budget being absorbed during these in FY 2014/15 to 13.6 percent in FY 2015/16, while the value months. Some key investments, including the Karuma and of external grants was projected to increase from 1.1 percent Isimba hydro power projects, which had been carried over from 9 the previous year and had been expected to be frontloaded absorbed, putting these projects significantly behind schedule. into the first half of the year, performed well. By the end of In the case of roads, execution has been affected by setbacks December 2015, the rate of execution for the Karuma Hydro related to contract management and social safeguards, which power dam project had reached 54 percent and the rate for the meant that the sector was under-executing its budget by the Isimba hydro power plant project had reached 89 percent, both end of the third quarter of the year.  In contrast, most recurrent well ahead of schedule. Meanwhile, the rate of execution for expenditures have reached levels in excess of the established the Albertine region oil refinery has only reached 31 percent, targets. while only 25 percent of the thermal energy subsidy has been Figure 6: Performance of the recurrent budget in Figure 7: Performance of the development budget in three quarters of FY 2015/16 (approved vs. released) three quarters of FY 2015/16 (approved vs. released) Source: Ministry of Finance, Planning and Economic Development Source: Ministry of Finance, Planning and Economic Development To a significant degree, overspending has been driven by in February 2016, for instance, the non-wage defense budget expenditures related to the heightened security measures had been over-executed by 125 percent by the end of the third during the elections. By the end of the first half of FY 2015/16, quarter of the year and required an additional UGX 253 billion up to 70 percent of the planned budget had been spent. While in the form of a supplementary budget. It is forecast that the the slow execution of the development projects left space in defense budget will be over-executed by 152 percent by the the budget, it also heightened the risk of tilting the balance end of FY 2015/16. The restructuring of the Uganda National of expenditure towards recurrent expenditures, particularly in Roads Authority (UNRA) has been another significant cause the non-wage category. Unfortunately, the spending pressures of over-execution in the non-wage budget, with its budget continued into the second half of the year, during which period having over-executed by 154 percent by the third quarter, but a supplementary budget to a value of at least UGX 1,000 billion expected to reach 174 percent beyond the budgeted level by was approved by the Parliament As a result of the heightened the end of the fiscal year. security measures in the run-up to and during the elections 2. A supplementary budget worth a total of UGX 1,041 billions, equivalent to 4 percent of the budget, was tabled in Parliament in April 2016. The bulk (33 percent) was allocated to security spending (Defense and Police), followed by wages and pensions (15 percent), Education (11 percent), Presidency (8 percent), Parliament (6 percent) and Electoral Commission (5 percent). Except for the component for Education, which was financed by additional financing accruing to finalization of external financing project requirements, the rest of the supplementary was financed through budget reallocations within the original budget. The supplementary was largely due to weak planning as the majority of expenditures, with exception of exchange rate depreciation pressures, could have been foreseen at the time of budgeting. 10 Table 1: Central Government Operations: FY2010/11 – FY2013/14 FY2015/16 FY2015/16 In percent of GDP FY2012/13 FY2013/14 FY2014/15 App. Budget Proj. Revenues and grants: 12.9 13.0 14.8 15.1 15.7 Domestic revenues 11.4 11.9 13.5 13.6 13.9 o/w Tax revenues 11.0 11.5 12.8 12.9 13.4 External Grants 1.5 1.0 1.2 1.6 1.7           Total expenditure 16.5 17.1 19.4 22.1 22.1 Recurrent 9.1 9.8 10.3 10.4 10.8 Development & investment 6.6 7.2 7.0 11.3 8.3 External 3.4 2.7 2.6 4.0 4.1 Domestic 3.2 4.5 4.4 7.3 4.2 Arrears & contingencies 0.1 0.0 0.3 0.2 0.1 Overall balance -3.6 -4.1 -4.6 -7.0 -6.4           External Financing 2.2 1.3 1.2 5.0 4.8 Domestic Financing & residual 1.4 2.8 3.4 2.0 1.6 items o/w Petroleum Fund withdrawals 0 0 0.6 0.1 0.2 o/w Domestic Borrowing 1.2 0 1.2 1.6 ... Memorandum items:         Nominal GDP (Shs billions) 63,905 68,371 74,765 83,596 84,984 Source: Ministry of Finance, Planning and Economic Development, IMF, and World Bank Figure 8: Performance of the domestic revenues in the first half of FY 2015/16 Source: Uganda Revenue Authority 11 The overall fiscal deficit in FY 2015/16 is expected to be support construction. The oil import bill is estimated to have slightly lower than had been planned, being financed declined to US$ 671 million during FY 2015/16, down from mainly with externally borrowed resources. By the end US$ 933 million in FY 2014/15. Even as demand for petroleum of the year, total expenditure is expected to reach a value products continues to grow, particularly to support the of 22.1 percent of GDP, which was the level projected in booming construction and transport industry, the unit price the budget. However, the outturn for the level of collected of oil imports has continued to decline drastically. However, revenues is higher than projected, and so the fiscal deficit is the postive impact of this decline has been more than fully projected to reach 6.4 percent of GDP. This would be lower by offset by increases in the Government import bill, with this bill 0.6 percentage points of GDP than the level in the approved increasing by 96 percent to US$ 335 million, mainly as a result budget, although still at the highest level in more than a of the need for inputs for major infrastructure projects, and for decade. Originally, Uganda’s authorities had planned to finance security and election related materials. With a sizable decline 80 percent of the fiscal deficit through external borrowing. in the prices of most of Uganda’s commodity exports over the This is consistent with the Government’s policy to use external past two years, the value of exports of merchandise recorded a resources to finance large infrastructure projects. Hence, while modest rate of growth, with this growth being primarily driven the Karuma project will continue to draw on government by a growth in non-traditional exports, mainly going to regional savings accumulated from the oil related capital gains tax,3 markets. At the same time, the impact of low commodity prices the value of net external financing is projected to reach 4.8 on Uganda’s traditional commodities, including coffee and tea, percent of GDP. With the decline in concessional donor inflows, was significant. These commodities remain the most significant the value of loans from commercial sources (non-concessional contributors to the overall value of exports, accounting for 30 loans) will reach 3.6 percentage points of GDP. The value of percent of the total value of export earnings during the last domestic financing is forecast to decline to around 1.6 percent fiscal year. Consquently, the trade deficit is estimated to have of GDP, compared to the budgeted level of 2.0 percent after the widened, increasing from a value of 8.9 percent of GDP during Government adjusted the modalities for financing its budget FY 2014/15, to 9.3 percent in FY 2015/16. to manage the high cost of borrowing recorded during the first half of the year. In addition, the current account has been negatively affected by the decline in the net value of inflows of 1.4 Uganda’s external position services, income, and transfers. The impact of lower oil weakened further prices on freight charges was to reduce the net value of foreign outflows related to services. However, the value of tourism receipts declined as a result of the impact of terrorist During FY 2015/16, Uganda’s external position continued incidents on consumer perceptions; lower global incomes; to weaken due to the combined impacts of the weak and the impact of election-related uncertainties. The value of global economy and domestic factors. The current account net transfers also estimated to have declined, with the value deficit is estimated to have reached a value of 9.6 percent of of these transfers envisaged to reach US$ 1,217 million, down GDP in FY 2015/16, significantly higher than the figure recorded from the figure of US$ 1,312 million recorded in the previous in the previous year, when it stood at 9.2 percent. This is year, as income sources for these flows adjusted to the weak largely due to the continued weakness of the global economy economic environment abroad and as domestic uncertainties leading into the sustained decline in commodity prices, and increased due to the elections. a decline in inflows related to exports, income, transfers, and foreign direct investment. Therefore, a stronger capital and financial position wil have been achieved only through the The capital and financial account is estimated to have disbursement of public loans. Thus, the overall balance of improved by about 15 percent in FY 2015/16, mainly due payments deficit is estimated to have declined from US$ 353 to disbursements to finance public projects. In addition million in FY 2014/15 to US$ 139 million in FY 2015/16, with to almost doubling the value of disbursements for project the deficit being financed through a reduction in international grants to US$ 337 million, it is estimated that an additional reserves from US$ 2,895 million to US$ 2,745 million. This level US$ 946 million worth of funds derived from non-concessional of reserves will have been sufficient only to cover 3.9 months borrowing has been disbursed to finance construction work on of import of goods and services, compared to reserves of 4.0 the Karuma and Isimba projects. Nevertheless, the value of FDI months of import cover in FY 2014/15. inflows is estimated to have declined to US$ 838 million, from US$ 1,153 million over the year, as investors adopted a ‘wait and see’ approach with respect to oil production related flows, The reduced cost of oil imports should have resulted in a particularly in the context of the uncertainties related to the decline in the goods trade deficit. However, this was more election and its aftermath. than offset by the increased volume of imports required to 3. These revenues arose from the taxes levied on the US$ 1.5 billion sale of oil exploration rights between Heritage and Tullow oil companies. 12 Figure 9: Uganda’s external current account, direct investment and international reserves worsen in the face of uncertainties Source: IMF and bank of Uganda The weak external position was accompanied by rate of depreciation since 1993, when the forex market was depreciation in the value of the local currency, with liberalized. A significant driving factor was the negative market this depreciation being marked by a significant degree sentiments in the run up to the elections and the related high of volatility. The deterioration of the balance of payments level of currency speculation (see Box 2). These pressures position during FY 2015/16 resulted in a continuation of the on the currency were alleviated when the Bank of Uganda adjustments to the value of the Shilling that commenced in the tightened monetary policy and as the private sector demand previous year (in September 2014). During the first nine months for foreign exchange declined as the election approached. of the year, the value of the currency had depreciated by an In real terms, the value of the Shilling has depreciated at an average of 24 percent. The bulk of the depreciation occurred average of 10 percent over the 10 months to March 2016, with during the first three months, with the currency losing value such depreciation expected to allow for an adjustment of the by 40 percent over a 12 months period, an unprecedented real economy to the balance of payment shock. A Total E&P fuel staition the impact of lower oil prices on freight charges was to reduce the net value of foreign outflows related to services 13 Box 2: Lower commodity prices is a double edged sword for Uganda Over the past five years, commodity prices have experienced sharp commodity prices has improved Uganda’s terms of trade by about swings, generally declining on account of the slowdown in the 2.5 percent. global economy. Uganda imports oil and a significant number of food items, with oil constituting 19 percent of the country’s imports bill during FY 2014/15. A reduction in the unit price of these imports can result in a positive balance of payments shock. However, Uganda is also a commodity exporter, with 39 percent of the total value of its exports being derived from commodities. Thus, a decline in commodity prices may result in lower export receipts, which results in a negative balance of payments shock. The domestic effects of lower commodity prices can be varied, depending on the transmission channels. Lower oil prices can be expected to assert downward pressure on the costs of production, particularly within the industrial and mechanized agriculture sectors. They also result in lower costs for lighting for the more than five million Ugandans who rely on kerosene for lighting; and generally reduce the cost of transporting goods and services. These effects have been less pronounced because of imperfect transmission from the international market price to the fuel pump prices. Indeed, while the average crude oil price declined by 71 percent in the period from June 2014 to February 2016, the As the global price of a barrel of crude oil plummeted from US$ pump prices of petrol declined by only 25 percent, kerosene by 108 in June 2014 to US$ 31 by end of February 2016, the oil import 26 percent and diesel by 30 percent over the same period (see bill also declined from an average of US$ 90 million per month Figure 1). The failure for the decline in fuel pump prices to reflect during FY 2013/14 to US$ 55 million in FY 2015/16, even though the decline in global crude oil prices can be partially explained the volume of imported oil is estimated to have increased by by depreciation in the value of the shilling against the US Dollar, more than 50 percent over this period. While the price of other which declined by 30 percent during the first half of FY 2015/16. commodity imports did not fall as steeply, they too have been on It is estimated that the exchange rate explains 7 percent of the a declining trend since 2011. The decline in global commodity variation in petrol pump prices, 11 percent in pump kerosene prices has resulted in a decline in Uganda’s import bill by at least prices, and 12 percent in diesel pump prices. Other factors 16 percent, which is equivalent to about US$ 800 million, despite constraining this transmission include the taxation and domestic an increase in the volume of imports by 20 percent. In terms of supply issues, with the latter comprising inefficiencies such as exports, the price declines were less significant, with the price of inadequate storage capacities and non-standard commercial coffee declining by 25 percent, tea by 17 percent, and maize by 21 practices due to weak regulation. According to a World Bank percent, in the period from June 2014 to Febarury 2016. Thus, on (2010) report, such inefficiencies contribute 50 percent of the retail balance, Uganda received an average of US$ 213 million per month price, higher than any other country included in the study, except during FY 2015/16, which is US$ 15 million lower than the average Madagascar. level recorded over the past two years. Overall, the decline in 14 Box 3: Accounting for the Uganda shilling depreciation during FY 2015/16 By November 2015, the Shilling had lost 32 percent of its value economies. In the period from January to December 2015, against the US dollar relative to the position at the beginning the Food, Beverage and Agriculture raw materials price indices of FY 2015/16. This rate of depreciation was far higher than the declined by 29 percent, 16 percent and 29 percent respectively. depreciation of 3.8 percent recorded over the same period in FY2014/15. Many other currencies across the world also weakened against the US dollar during this period. Within the region, the Uganda Shilling depreciated in value relative to the Rwandan franc by 25 percent; to the Kenyan Shilling by 14 percent; and to the Tanzanian Shilling by 3 percent, with these rates of depreciation being significantly higher than those recorded in the corresponding period in FY2014/15 (1 percent, 2 percent and zero percent respectively). This was because the value of Kenya’s currency depreciated by 4 percent; Tanzania’s by 4 percent; and Rwanda’s by 8 percent against the US dollar over the same time period. Country specific, domestic shocks became even more important in the case of Uganda. It is estimated that these domestic shocks accounted for an average of 10 percent of the volatility in exchange rate in 2015, compared to about 3 percent in 2014. The most significant factors propagating these domestic shocks were the negative market sentiment and the outbreak of speculative behavior driven by memories of currency fluctuations during the previous election in 2011, even though the latter had resulted from a combination of exogenous shocks and policy slippages that also fueled inflation. This time, the external position remains weak on account of weaknesses in the global economy. Meanwhile the implementation of pre-emptive monetary policy and deflationary pressures from the external environment prevented the emergence of a vicious cycle that could have been sparked off speculative External shocks were a major driver of the currency’s depreciation. transactions and resulted in more significant depreciations in the As a result of the weak global economy, mainly driven by with a value of the currency to levels that did not reflect the true state of deceleration of growth in China, Brazil and the US, commodity the economy. prices declined and weakened the external accounts of regional Oil mining in the Albertine region lower oil prices can be expected to assert downward pressure on the costs of production, particularly within the industrial and mechanized agriculture sectors 15 2. Economic Outlook The outlook for the Ugandan economy is broadly favorable. With uncertainties arising from the February 2016 elections having dissipated, the low energy prices and the stimulus effect from large public investments intended to address infrastructure constraints and prepare Uganda for oil production should boost investment and drive an increased rate of growth, higher than those recorded over the past five years. Despite the adverse impact of a weak external sector, with the impact of low oil prices on investments in the oil sector being particularly significant, the rate of growth for the Ugandan economy is projected to accelerate to 5.9 percent in FY 2016/17 and to remain on an upward trajectory into the medium term. However, there are risks to these growth prospects, including risks related to the protracted weak global economy, volatile weather, regional insecurity, and poor implementation of the huge investment program. In particular, this latter risk could reduce the ability of the planned investments to facilitate the achievement of the intended growth acceleration. 2.1 Economic growth prospects prepare for oil production. Together, these factors should boost investment, and thereby drive a greater momentum for growth. improve as Uganda returns to its investment path The domestic policies have to be managed alongside a T volatile global economy, with the ongoing possibility of he World Bank forecasts that Uganda’s rate shocks that could have a significant negative impact on of economic growth will accelerate from the Uganda’s growth outcomes. The global environment remains estimated 4.6 percent recorded in FY 2015/16 to unstable, with a possibility that the global rate of growth will about 5.9 percent in FY 2016/17, as short-term remain low, possibly lower than the 2.9 percent that has been domestic uncertainties recede. With the completion of projected by the World Bank for 20164 if a more protracted the current electoral cycle, the purpose of domestic policies slowdown across large emerging markets spill over to other is expected to be to create a more conducive economic developing economies. Under such a scenario, Uganda’s environment, as policymakers balance the need to reduce the external position would be further constrained by the lower cost of borrowing; the need to avoid exacerbating upward level of demand for merchandise exports, tourism, remittances inflationary pressures; and the need to build the confidence of and FDI. However, this forecast assumes that a modest recovery investors in the post-election period. It is envisaged that the in the advanced economies will continue and that activity will looser monetary conditions, together with the reduced use stabilize among major commodity exporters, resulting in some of domestic borrowing to finance large public investments, upward pressure on commodity prices. Indeed, the World Bank will increase the availability of credit to the private sector is raising its 2016 forecast for crude oil prices to US $ 41 per and reduce the crowding out of private investment that has barrel from US $ 37 per barrel in its latest Commodity Markets occurred in recent years. At the same time, there will be gains Outlook5, as an oversupply in markets is expected to recede. from low energy prices and from the construction boom, with This could resuscitate export growth and lead to an increase in this boom expected to result from the continuing high level of FDI, especially in oil related sectors, which would compensate public investment to address infrastructure constraints and to for the gradual decline in official aid. 4. World Bank, 2016. Global Economic Prospects ‘Spillovers Amid Weak Growth’; January 2016. 5. http://www.worldbank.org/en/news/press-release/2016/04/26/world-bank-raises-2016-oil-price-forecast-revises-down-agriculture-price-projections 16 Table 2: Summary Assumptions for the Medium Term Outlook, Baseline Scenario         2013 2014 2015 e 2016 f 2017 f 2018 f Real GDP growth, at constant market 3.2 4.8 5.0 4.6 5.5 5.9 prices  Private Consumption 0.1 3.2 12.3 13.2 8.7 8.8  Government Consumption -5.1 -5.8 3.7 10.3 5.3 2.5  Gross Fixed Capital Investment 9.2 3.3 1.1 4.0 8.0 10.0  Exports, Goods and Services 6.7 0.0 -5.4 0.9 8.0 9.0  Imports, Goods and Services 0.0 -6.4 14.5 25.5 16.2 16.0 Real GDP growth, at constant factor 3.4 3.9 4.8 4.5 5.0 5.1 prices  Agriculture 1.8 3.0 2.3 3.2 4.3 4.0  Industry 4.3 3.9 7.8 3.0 7.0 9.0  Services 3.9 4.3 4.8 5.7 4.6 4.1 Prices: Inflation              Inflation (GDP Deflator)   4.1 2.3 3.5 7.6 4.2 5.0  Inflation (CPI period average) 5.5 4.3 2.7 7.7 6.3 5.0 Current Account Balance (% of GDP) -8.1 -10.5 -9.2 -9.6 -10.0 -10.3 Financial and Capital Account (% of 6.1 7.4 8.1 7.2 8.3 9.6 GDP) Net Foreign Direct Investment (% of GDP) 4.5 4.2 4.5 3.7 4.6 4.2 Fiscal Balance (% of GDP) -4.2 -4.2 -4.6 -6.4 -6.5 -6.3 Debt (% of GDP) 26.2 29.1 33.2 36.9 40.2 44.3 Primary Balance (% of GDP) -2.2 -2.6 -2.8 -4.6 -4.7 -3.8 Poverty rate ($2.5/day 2005 PPP terms) a,b,c 33.3 33.0 32.6 32.2 31.6 30.9 Poverty rate ($5/day 2005 PPP terms) a,b,c 63.1 62.8 62.5 62.2 61.6 60.9 Source: Compiled by World Bank staff using historical data from official sources. Notes: f = forecast (a) Calculations based on 2009-UNHS and 2012-UNHS. | (b) Projection using annualized elasticity at the regional level with pass-through = 1 based on GDP per capita constant PPP. | (c) Actual data: 2012. Projections are from 2013 to 2017. It is expected that patterns of growth will remain roughly it will remain sufficiently flexible to enable policymakers to similar to those that have characterized Uganda’s economy manage the impacts of exogenous shocks. According to the over the past decade and a half. The predominant source of FY 2016/17 National Budget, the total value of expenditure growth will continue to be an increase in the economic activity is forecast to increase to 22.4 percent of GDP, up from the of the construction and services sectors, with manufacturing level of 22.1 percent recorded in FY 2015/16. The major driver continuing to grow from a small base. Growth in the output of this increase is the perceived need to implement priority of the agricultural sector will remain subdued, largely due infrastructure projects to facilitate private sector development to supply-side constraints. Though still accounting for only a and to enhance the productive capacity of the economy. small share of GDP, the mining and quarrying sector could be These projects include the Karuma, Isimba and Ayago hydro a significant source of growth in coming years, as the sector’s projects; a number of electricity transmission projects; the proven potential begins to attract increased attention from construction of a standard gauge railway; the construction of investors. the Kampala-Jinja and Kampala-Entebbe Express Highways; and the rehabilitation of the Entebbe Airport. Among other Fiscal policy will continue to be used as the key instrument benefits, these projects are expected to increase the rate to stimulate growth. As mandated by the second NDP and of electrification by doubling Uganda’s power generation by the resource allocation framework and the charter of fiscal capacity; enhancing its transmission capacity; and easing responsibility required by the Public Finance Management Act the transportation of goods, services and passengers, both (PFMA 2015), fiscal policy during FY 2016/17 will continue on internally and across borders. In total, the value of resources an expansionary path, with the key intent being to continue allocated to the transport sector will reach 19 percent of the with the construction of key infrastructure. At the same time, total budget, while that to the energy sectors will be 12 percent (see Figure 10). 17 Meanwhile, the budget aims to continue allocating to finance new administrative units and the increased size resources to improve the quality of social services, even of parliament, amongst other perceived needs. The overall as these are being squeezed by the increasing pressures administrative burden reaches a level of 2.1 percent of GDP, from the security and public administration sectors. It which is far higher than the level recorded in most other is expected that 12 percent of the budget will be allocated to countries around the world. the education sector in FY 2016/17, with this allocation taking up the third largest share of the budget. With 66 percent of With increased pressure for exemptions in the context the allocation for education going to pay teacher salaries, a of modest revenue collection efforts, the authorities significant amount of resources will have to be sought off face a significant challenge in their endeavors to finance budget for other non-salary requirements that can support proposed expenditures while maintaining debt at a the sector’s key priority of improving the quality of primary reasonable level. To some degree, the recently implemented education and of ensuring a higher rate of transition to measures to boost the performance of revenue collection6 secondary education. Without this, Uganda will not be able to have had a positive impact, with the actual revenue collections equip the rapidly expanding labor force with the requisite skills exceeding budget for two consecutive years. However, if to facilitate the achievement of higher levels of productivity. the Government is unable to resist a new wave of demands The health sector, which takes up seven percent of the total for exemptions, it may be difficult for the Uganda Revenue value of the budget, has also received a large portion of its Authority to collect revenues to the budgeted value of 14.4 funding off budget. This trend towards off budget financing percent of GDP in FY 2016/17. If revenues collected fall below raises serious concerns regarding planning within the affected this level, the fiscal deficit will exceed 6.4 percent of GDP in FY sectors. At the same time, off budget financing can enable 2016/17, with more than 80 percent of the fiscal deficit funded the Government to close critical gaps in cases where it is not through external borrowing. The value of net external financing possible to allocate sufficient resources under the national is projected to reach 5 percent of GDP. With the decline in budget. With increased regional security and terrorism concessional donor inflows, the value of loans from commercial concerns, the value of budget allocations to the security sector sources (non-concessional loans) will amount to 3.9 percent of have increased rapidly over the recent past, with this allocation GDP. Domestic financing is forecast to amount to 1.3 percent amounting to 8 percent of the total value of the budget in FY of GDP, with the Government drawing on the petroleum 2016/17. On the other hand, the wider public administration fund to support and modestly increase the level of domestic sector, including the legislature and public sector management borrowing, with lower interest rates reducing the Government’s agencies, continues to require increasingly large allocations cost of borrowing. Figure 10: Proposed sector allocations maintain same priorities into FY 2016/17 Source: Ministry of Finance, Planning and Economic Development 6. Government of Uganda National Budget Speech for Financial Year 2015/16 18 In FY 2017/18, Uganda’s economic growth should improvements in the productivity of the economy to sustain increase by an additional percentage point to reach higher growth in the medium to long term. approximately 6.8 percent. Thereafter, it should remain on an upward trajectory into the medium term, perhaps The fiscal deficit is likely to remain high into the medium facilitating a further reduction in poverty levels by around 1 to term, but with an increasing proportion of expenditure 2 percentage points per year. The negative effects of a possible being allocated towards capital investments and with an protracted slowdown in the global economy notwithstanding, increasing proportion of financing being derived from the continuation of a fiscal strategy focused on removing external sources. It is expected that capital expenditures will constraints to growth and proceeding with key oil projects gradually increase to around 11 percent of GDP by FY 2019/20. is expected to boost economic activity, particularly in the With only modest improvements to revenue collection, the construction sector. In addition to completing major energy overall deficit is projected to decline only marginally, to around and transport projects that have already commenced, a 6.2 percent of GDP by FY2017/18. It is then expected to remain number of projects within these areas will continue to pre- at around the level of 6.5 percent of GDP in subsequent years. occupy the Government over the next three years. And with To finance the deficit, it is expected that there will be a reduced key decisions related to the development of infrastructure to emphasis on domestic sources of financing and an increased support the oil production, distribution, and the transportation emphasis on external sources, with most of the external of its products to the Indian Ocean having been made (see Box borrowing contracted on non-concessional, but still favorable, 3), it is expected that upfront investments to a total value of terms. If the Government manages to reduce the deficit US$ 8-12 billion could be undertaken over the next five years. following the implementation of its planned large infrastructure It is assumed that these investments will boost construction projects, Uganda is likely to remain on a fiscally sustainable activity to accelerate the rate of economic growth in the near path, consistent with the charter of Fiscal Responsibility term, and if managed well should to be expected to lead to mandated by the PFM Act (2015). Pregnant women attending an antenantal clinic in Mukono HC iv the Uganda National budget aims to continue allocating resources to improve the quality of social services, even as these are being squeezed by the increasing pressures from the security and public administration sectors 19 Box 4: Key Decisions are Moving Uganda’s oil Sector The oil sector is a critical element in supporting Uganda attaining the key objectives of achieving middle income status by 2020 and transforming into a modern economy. Uganda’s 6.5 billion barrels of proven reserves could support the proposed production of 100,000- 200,000 barrel per day (BPD) over a 20 to 30 year period, depending on the speed of extraction. If oil prices remain low, the expected stream of revenues in the medium term could be lower than forecast. Nonetheless, if oil production starts in the next two years and investment accelerates over the next decade, the real rate of GDP growth is expected to reach an average of 8.8 percent annually in the period from 10 years after production starts. This is 2.2 percentage points higher than in a scenario without oil and/or with a more limited investment surge. In per capita terms, the emergence of the oil sector and the continued emphasis on public investment will allow Uganda to reach the US$ 1000 GDP per capita mark by 2019/20. This level of per capita income is 32 percent higher than for a scenario without oil and with lower levels of public investment. Realizing these impressive scenarios would depend on a number of factors: i. Preparing for production - Infrastructure investments taking shape, must be executed efficiently First, the construction of the refinery with an initial capacity of 30,000-60,000 barrels per day (BPD), a capacity considered sufficient to cater for the region’s demand for refined petroleum products commenced in 2015. This task was assigned to a consortium led by RT Global Resources, which is owned 100 percent by Russian defence conglomerate Rostec, and including among others South Korean conglomerate GS Group. Located in Kabaale Township, in Hoima District, along the eastern shores of Lake Albert, the refinery capacity is expected to increase to 120,000 bpd in the mid-term and 180,000 bpd in the long-term, if more reserves are discovered in the country. Building a refinery in Uganda was jointly decided by the East African heads of State in the Northern Corridor infrastructure project. It is mainly aimed at boosting petroleum production in the sub-region and serving as a back-up to the aging one in Mombasa. The refinery will be funded as a Public Private Partnership (PPP) involving a 60 percent equity share by the private sector. This implies the EAC governments will be the minority shareholder with 40 percent of the equity. The Governments of both Kenya and Tanzania have proposed holdings in the project amounting to 2.5 percent and 8 percent, respectively. Rwanda and Burundi are still evaluating their position. Second, for landlocked Uganda, decisions reached in April 2016 related to the location of the export pipeline was a major milestone in terms of progress towards addressing the logistical challenges to tapping Uganda’s oil resources. Issues related to the location of the export pipeline have been a source of uncertainty and delay, contributing to the postponing of the commencement of the production of Uganda’s oil, with the dates for this commencement being a moving target over the past few years. Now that Uganda has opted to use the Southern route through Tanga port of Tanzania to export its crude oil to the coast, processes to allow for the construction of pipeline should be hastened. Estimated to involve the sum of US$ 3.55 billion for its construction, the 2.2 Risks are mainly downward exempted members of parliament from taxes on allowances. If assented to into law by the President, this amendment alone will reduce the expected tax collections by at least 0.3 percent There are several downside risks to the growth outlook, of GDP, pushing the expected amount of taxes during FY a number of which have been present for some time. 2016/17 down to 13.3 percent of GDP. In the short to medium The most important of these relates to weaknesses in the term, the other source of fiscal management risk relates to area of fiscal management. In the near future, fiscal policy the sequencing, financing and management of the public still faces a challenge of remaining prudent in the context infrastructure development program. Moreover, with only of political pressures to fulfill election promises related to an meager improvements to domestic revenue mobilization and expanding size of parliament and to increasing emoluments with a considerable degree of uncertainty regarding when oil for its members, both of which would significantly increase production and the subsequent flow of revenues will actually the cost of public administration. In April 2016, the Parliament commence, there remains a considerable degree of risk related hastily passed an amendment to the Income Tax Bill 2016 that to the financing of investments. Financing risks may become 20 Tanga port option was considered to be the least costly option, significantly cheaper than the Northern route, which would have cost around US$ 4.20 billion. The Southern route is 400 kilometers longer than the Northern route, but other factors, such as weather and environmental risks; adjustments required to the supporting infrastructure such as rail and roads; terrain; and security concerns, make the Southern route much more favorable. With financing already secured (from Total), it is expected that the construction of the pipeline could take 3-4 years, which implies that oil export revenues will start to flow no sooner than 2020 . However, at a regional level, this development distorts the original aspirations of the “Coalition of the Willing” group of countries to connect South Sudan and Kenya to Lamu, Kenya. However, if Kenya goes ahead with the construction this pipeline, it would provide an alternative route in the long run. ii. Expanding the horizons reap further from Uganda’s rich natural resource base With more than 60 percent of the oil rich Albertine Graben region unexplored and with the formal production of other valuable minerals yet to commence, Uganda should continue its exploration efforts. In line with the new legislative and regulatory framework approved in December 2012, the Government announced its first competitive bidding round for exploration in six blocks, these being Ngassa (410 Km2) in Hoima District; Taitai and Karuka (565 Km2) in Buliisa District; Ngaji (895 Km2) in Rukungiri and Kanungu Districts; Mvule (344 Km2) in Moyo and Yumbe Districts; and Turaco (425 Km2) and Kanywantaba (344 Km2) in Ntoroko District). Together, these six blocks cover 3,000 square kilometers. A number of firms submitted bids, including Armour Energy Limited of Australia; Walter Smith Petroman Oil Limited of Nigeria; Oranto Petroleum International Ltd of Nigeria; Niger Delta Petroleum Resources Ltd of Nigeria; Rift Energy Corporation of Canada; Glint Energy LLC of USA; and Swala Energy Ltd of Australia. It is hoped that this higher level of competition in the sector will result in increased efficiency. iii. Managing the challenges for efficiency and effectiveness of investments Three main challenges that must be managed. First, the granting of production licenses take an abnormally long time. Given that the bidding process has already commenced, the next milestone is to issue the production licenses. Previous experience suggest that this can take an excessive amount of time. While production licenses applications that were submitted by three companies, CNOOC (1); Tullow (3); Total (5) in 2012, only one license has been issued. Secondly, projects do not seem to be properly sequenced. While efforts toward the construction of a refinery has progressed well, with the commissioning of the project to a Russian Firm, its construction also needs to be fast-tracked, as in the case of the pipeline. Third, oil development projects should be synchronized with regional development. The commitment of regional countries to take equity shares in the refinery project is critical for its viability. Rwanda and Burundi need to indicate their interests in the project while Kenya is yet to indicate whether it will increase its participation to the average 8 percent. Source: World Bank, Country Economic Memorandum, 2015 more critical if the rapidly expanding list of investments confirmed that Uganda continues to be at a low risk of debt including hydro projects, oil refineries, oil pipelines, a standard distress. Beyond the planned fiscal expansion to support the gauge railway and numerous road transport infrastructure infrastructure investment program, sustainability was judged projects, is not properly managed and sequenced. Even if these against a lower threshold, following the downgrading of projects are taken on by the private sector, there remains risks the Uganda’s CPIA rating from ‘strong performer’ to ‘medium related to the financing component expected to come from performer.’ The downgrading of this rating was mainly due the public sector. to the limited improvements in the areas of transparency, accountability and corruption in the public sector since 2012. Uganda is currently assessed to be at a low risk of The implication was that Uganda had moved into a category of debt distress. However, continued failure to collect countries considered to have a much lower capacity to borrow revenue in the context of a rapid fiscal expansion could and manage their debt than is the case for strong reformers. increase this risk. The update of the Joint World Bank/ However, based on these assumptions, including that of a IMF Debt sustainability analysis undertaken in March 2016 growth dividend, all debt burden indicators are projected 21 to remain below Uganda’s country-specific debt burden could have significant negative effects on consumption and thresholds7 under the baseline scenario and the standardized livelihoods and could complicate the management of inflation. stress tests. However, if the investments in infrastructure do not result in an improved rate of growth or if they are delayed Lastly, the Government’s enormous infrastructure development significantly, as has been the case with several energy projects, program has the potential to generate massive benefits, which this could also result in rapid increases to the debt-to-GDP justify increased levels of the fiscal deficit. However, this is ratio, most likely to a level in excess of 50 percent. This is a key contingent on the investment program delivering its intended convergence criteria agreed upon in the East African Monetary results, which would ensure that the fiscal position can be Union Protocol last December by all East African Community reconsolidated and debt serviced sustainably. The increase member states. in development expenditure can be justified on the grounds that it mainly involves one-off investments necessary to In terms of external risks, downside risks are becoming address Uganda’s significant infrastructure gap. Any short-term increasingly significant. While low oil prices are beneficial to destabilizing effects on the macroeconomy may be mitigated Uganda’s balance of trade in the short term, such benefits could by the high level of import content for these planned projects, easily be offset by the negative impact on Uganda’s exports which should prevent upward pressures on domestic prices.8 (see Box 2), which impact will be even more significant if oil However, in the absence of improvements to public investment prices remain at extremely low levels. Furthermore, if oil prices capabilities, the increase in expenditure on infrastructure could take a long time to recover from the current levels of around rapidly lead to the build up of the debt stock. The question US$ 30 per barrel, compared to the estimated breakeven then is whether the expansive fiscal policy intended to facilitate price of US$ 60 per barrel for production in Uganda, it may the building of infrastructure can generate the intended results. require a re-evaluation of the phasing of refinery and pipeline The next chapter turns to this questions. investments. With China still rebalancing its growth towards consumption and services, its economy may decelerate much sharper than has been forecast, leading to further declines in the commodity prices, with negative effects on exports. a Furthermore, a decline in the Chinese economy could adversely Debt impact Uganda’s planned investments in its infrastructure development program generally. It is forecast that China will sustainability account for about 37 percent of Uganda’s investment program analysis continues to in the period from FY 2016/17 to FY 2019/20. The impact would confirm that Uganda is at be particularly significant for investments in the development of the oil sector. a low risk of debt distress Uganda’s CPIA rating was Uganda remains vulnerable to risks associated with downgraded from ‘strong volatile climatic conditions and volatile food prices. performer’ to ‘medium Although the overall rate of inflation is expected to decline gradually as a result of good macro-economic management, performer’ food prices are expected to remain volatile due to unstable food production patterns, particularly given the limited availability of mitigation measures involving irrigation systems. Thus, food price volatility is likely to remain a significant issue. Moreover, there is a strong divergence in food price developments across Uganda, largely due to the insufficient integration of food value chains. With agriculture remaining the primary source of livelihoods for more than 69 percent of the population, supply disruptions resulting from climate change 7. These thresholds indicate the maximum level to which a country can increase its debt with no major concern about with respect to solvency. For ‘medium reformers’, this suggests that the ratio of the present value of external debt should not exceed 40 percent in total exports, 150 percent in GDP, and 250 percent in domestic revenues. With respect to ability to service debt, the thresholds for this group of countries stand at a ratio of 20 percent for the debt service both in domestic revenues and in exports. 8. It is assumed that 90 percent of such projects are used to finance imports, leaving a mere 10 percent to be spent in the local economy. 22 23 2 Part Moving beyond spending to creating productive assetS Uganda can increase the rate of GDP growth from 6.5 percent to 9.2 percent per year, if the efficiency infrastructure investments was raised by a percentage point over the next decade. Uganda has recently pursued expansionary fiscal policies, driven by the desire to improve the country’s infrastructure, increase the production of assets, and facilitate accelerated growth and productive exploitation of oil resources. Challenges related to budget execution could prevent Uganda from achieving its objective of accelerating growth in the short-term and raising productivity to be able to sustain a high rate of growth of its economy in the medium to long term. Overcoming these challenges and related investment inefficiencies will require addressing issues related to political interference, haphazard project selection, poor project preparation, and weaknesses in implementation processes such as procurement. To varying extents, all of these factors have affected Uganda’s capital investment program. Uganda’s public investment management system contains good elements, but needs to improve with respect to project preparation. As it is, the quality of projects at entry is poor; and project implementation is delayed ; cost escalated; resulting in the poor quality of completed projects; and poor operation and maintenance of completed assets. To convert its large investment program into productive assets, Uganda would need to strengthen the current system of PIM across all MDAs to ensure it maximizes value from public investments and eliminates waste. A systematic process of reform is required to strengthen institutions; to promote a common understanding of reforms that need to be implemented and how; and to strengthen mandates and incentives through legal reform. A sequenced action plan should first and foremost focus on the most binding constraints, namely better preparation of projects. Once this is addressed, further actions can be implemented to achieve ongoing improvements over a five year period. 25 3. Can Uganda’s fiscal policy deliver its ambitions? Uganda’s fiscal policy has generally been ambitious and expansionary over the past decade in support of the National Development Plans and the Vision 2040 aimed at transforming the country to middle income status. The fiscal deficit almost reached over six percent of GDP by FY 2005/16, with over 40 percent of the resources allocated to the infrastructure sectors. The expansionary fiscal policy stance is expected to be sustained into the medium term as the Government continues its plan of addressing the key binding constraints to growth and building production capacities to exploit oil. Meanwhile, up to 36 percent of budgeted resource have not been released to the implementing agencies in the past. As a result, consumption has remained the key driver of growth in economic activity, and there are indications of a decline in the efficiency in utilization of public capital. These challenges have constrained the efficacy of fiscal policy in attaining the stated national objectives. O ver the past 15 years, Uganda’s fiscal policy The past four years, fiscal policy has been highly ambitious has passed through a number of significant and extremely expansionary as also demonstrated by transitions. Following an expansionary the significant size of both Uganda’s overall and primary phase in the period from FY 1999/2000 to FY deficits. In fact, Uganda’s fiscal policies have almost been 2002/03, policies intended to facilitate fiscal consolidation the most expansionary of any country within the region. were implemented in the period from FY 2003/04 to FY Uganda’s fiscal deficit is estimated to have reached a value 2008/09, with the intention to crowd in the private sector. of 6.6 percent of GDP in the FY 2015/16 budget. At this level, From the beginning of FY 2008/09, fiscal stimulus policies in regional terms, the size of the fiscal deficit is second only were implemented in order to address Uganda’s significant to that of Tanzania’s, which was projected to reach a value of infrastructure constraints and to mitigate the impacts of 6.9 percent of GDP in the same year, while Kenya, which has the global financial crisis that was beginning to become also been in a worse position over the past five years sought apparent. However, policy makers continued to implement to reverse it (see Figure 11). The increased fiscal deficits have expansionary policies, particularly during the 2011 election come with a corresponding increase in the stock of debt, year, representing a departure from the principle of prudence with the value of this debt increasing from 24.9 percent of and, in turn threatening macro stability. GDP in FY 2009/10 to an estimated value of 37.3 percent in FY 2015/16. Figure 11: Uganda’s fiscal policy becomes one of the most expansionary within the region in recent years Source: Ministry of Finance 26 Jinja Road the major gateway to and from Kampala City to the East Uganda plans to increase its expenditure to support a huge public investment program to address the country’s infrastructure deficit and to build production facilities to enable it exploit its oil resource Expansionary fiscal policies are not necessarily ill- an ambitious public investment program, without advised or unjustifiable. It is an established principle of corresponding increases in terms of revenue collection. economic theory that deficit-financed public investment Over the period from FY 2008/09 to FY 2014/15, the value of projects can be justified as a corrective response, acting both total expenditures increased from 15.0 percent of GDP to 19.4 as a countercyclical stimulus and potentially enhancing the percent. Uganda’s average annual expenditure amounted to a value of 17.4 percent of GDP over this period, which was at stock of public assets, which in turn serves to stimulate the least 10 percentage points lower than that of any of its regional private sector and thus facilitate the achievement of long- peers, with Kenya’s average expenditure standing at 29 percent; term economic growth. However, to appropriately assess Rwanda’s at 28 percent; and Tanzania’s at 27 percent (see and provide recommendations for the Government’s fiscal Figure 12). However, over the same period, the average annual policy, this Economic Update discusses how the Government is value of Uganda’s collected revenues amounted to only 11.8 spending its resources, on what, and if this expenditure is resulting percent of GDP, which resulted in the rapid increase in the fiscal in the creation of the intended economic value. deficit. As discussed in Chapter 2, Uganda plans to increase its expenditure to support a huge public investment program that is intended to address the country’s significant infrastructure 3.1 Fiscal strategy almost consistent deficit and to build production facilities to enable exploiting with national development priorities the country’s oil resource. Under this scenario, Uganda may catch up with and even surpass its regional peers before the Recent fiscal expansion in Uganda is largely the result requirement to limit fiscal expenditures, which is part of the of significant increases in expenditure to implement EAC convergency criteria, is implemented. Figure 12: Uganda lags regional peers in level of public expenditure Source: IMF 27 The Government is increasingly emphasizing allocations The fiscal policy implemented over the recent past is to the development budget, the value of which has generallly supportive of the Government’s Vision 2040 grown by 126 percent in nominal terms over the past four and the National Development Plans. Consistent with years. This shift in emphasis reflects the Government’s efforts these plans, the budget framework allocates the most to build its capital base as a means of facilitating accelerated significant proportion of financial resources to the public economic growth and transformation. Correspondingly, the works and transportation sector, and the allocation has share of allocations for recurrent expenditure has declined increased from an average value of 1.9 percent of GDP in the from an average value of 64.6 percent of total expenditures period from FY 2004/05 to FY 2008/09 period to 3 percent in the period from FY 2003/04 to FY 2007/08, to 58 percent in over the past seven years (see Figure 13). The sector receiving the period from FY 2008/09 to FY 2014/15. As a share of GDP, the second largest proportion of financial resources is the the value of development expenditures has almost doubled, energy and minerals sector, where the budget allocation has from 4.3 percent to 7.6 percent over that period. The value increased from an average value of 1.2 percent of GDP in the of recurrent expenditure has grown at a much slower rate, period from FY 2004/05 to FY 2008/09, to 2.3 percent over the increasing from 7.9 percent of GDP to 10.2 percent over the seven years prior to FY 2015/16. same period. Figure 13: The shift in infrastructure spending has exploded and will continue to be significant Source: Ministry of Finance The Government’s medium-term fiscal framework figure of UGX 4.2 trillion recorded in FY 2014/15 to UGX 38 targets the total value of expenditures to be below 22 trillion FY 2020/21 in oder to finance a number of flagship percent of GDP for the next five years to FY 2020/21. projects identified in the NDPs. Over the next five years, However, the proportion of budgetary resources allocated allocations for investments in infrastructure are estimated to to the infrastructure sectors, including works and transport, reach a value of approximately US$ 9 billion. These planned and energy and water, will increase to an aggregate value of projects include rehabilitation of Entebbe airport, and the 41 percent of the total budget by FY 2017/18. It is expected construction of a standard-gauge railway line; three large that the proportion will gradually decline from FY 2018/19 dams for hydropower generation; an oil refinery; and two back to its current level of approximately 31 percent. In highways to improve the connection between Kampala and nominal terms, the aggregate value of the allocation to Jinja (the main eastern gateway for the country) and Entebbe both the roads and energy sectors will increase from the (the main air gateway) respectively. 28 3.2 smart budgetING IS undermined by can be determined is in terms of the proportion of funds released to implementing agencies. In FY 2003/04, 86 implementation challenges percent of overall budgeted resources to implementing While Uganda’s fiscal policies appear to have been well agencies were released. However, this figure declined to planned and appropriate, the ability of these plans 64 percent by FY 2014/15, even if some improvement was to facilitate the achievement of the Government’s recorded in the period from FY 2007/08 to FY 20009/10. objectives has been undermined by significant Furthermore, in the past, the execution of the recurrent deficiencies in execution. These deficiencies have been budget was generally better than for the development particularly apparent in the execution of the development budget. However, for FY 2013/14 and FY 2014/15, the level budget. The first measure by which the level of deficiencies of execution seems to be roughly the same for both types of expenditure (see Figure 14). Figure 14: The share of budgeted resources that is actually used has declined Source: MFPED BOOST Data base, 2014/15 Deterioration of budget releases has been recorded administration sector, which includes Police, State House, in all sectors, but it is most pronounced in the President’s Office, among others, has over-released by an infrastructure and human capital development sectors. average figure of 33 percent in the same period. Compared to the level of performance in the period from FY 2003/04 to FY 2007/08, budget releases have worsened in all sectors except tourism, trade and industry; accountability; public administration; and justice, law and order (see Figure 15). If the proportion of budgeted resources released indicates the extent to which implementing agencies the development of have actually executed planned projects, then overall implementation performance has deteriorated. For the infrastructure has been priority infrastructure sectors, the level of budget releases the Government’s stated has declined from an average figure of 73 percent recorded priority for at least the in the period from FY 2003/4 to FY 2007/8, to 55 percent in the five years to FY 2014/15. The level of performance past eight years. of the energy sector has been particularly bad, with an average of 36 percent of its budget released each year in the period from FY 2008/9 to FY 2014/15. By contrast, the public 29 Figure 15: Worsening gap between ex post budget allocation and funds released Source: MFPED BOOST Data base, 2014/15 Another measure by which the execution of fiscal of 3.7 percent of GDP, significantly higher than the value of policy may be assessed is in terms of the proportion 2.3 percent recorded in the periom FY 2004/5 to FY 2008/09. of released resources spent to support investments However, these priority sectors are also the sectors in which that actually facilitate the achievement of the stated the most significant deterioration in performance in terms goals of the fiscal policy. According to data provided by of the level of execution of public investment projects has Uganda’s public investment plan, which maintains a data been recorded (see Figure 16). Overall, both the energy and base for all projects that are publically funded, investments in transport infrastructure sectors have not been able to realize infrastructure, particularly energy and transport, have been over two percentage points of GDP due to issues related to the Government’s top priority for the past five years, with the execution. value of these investments reaching an average annual value Figure 16: Energy and transport sectors have largest execution gaps Source: MFPED BOOST Data base, 2014/15 30 The significant under-execution of the infrastructure make decisions, to implement projects, and to maintain budget has contributed to a huge backlog of them after completion. This underscores the need to build infrastructure investments and has significantly capacity to implement projects to realize full value from the weakened the impact of the Government’s fiscal investment program. The value of donor financing (excluding policy and overall development program. During the non-concessional loans) has declined from 3.4 percent of GDP implementation of the first NDP from FY 2009/10 to FY in the period from FY 2004/05 to FY 2009/10 to 2.9 percent in 2014/15, the level of actual development expenditure the period since. The value of public investments financed by remained well below the levels envisaged under the plan. the Government’s own resources has meanwhile increased According to the Public Investment Plan (PIP), only 78 from an average of 3.5 percent of GDP to 5.4 percent over percent of planned investments were actually realized in this the same time period (see Figure 17). A similar trend can be period. While there was no change in the composition of seen in the proportion of investments funded through the planned expenditure over the period, domestically-financed use of non-concessional borrowing (NCB), with a particularly development budgets were under-executed by an average significant increase occurring in FY2015/16. This may also be rate of almost 30 percent. This rate of under-execution regarded as a positive development, as the use of this form was particularly significant in the area of infrastructure of finance increases the Government’s autonomy to select, investments, for which the actual average value of appraise, manage and evaluate PIP projects. However, the expenditure was lower than planned levels by around a full capacity to implement these projects may not have increased percentage point of GDP. As a result, the value of the backlog in tandem. As such, the rate of execution of the donor-funded of planned infrastructure investments had increased by more component of PIP improved from 46 percent to 80 percent for than US$ 1 billion by the end of the first NDP. As a result of the the periods in question, whereas the rate for the Government failure of planned infrastructure investments to materialise, or component deteriorated from 86 percent to 72 percent. This at least only after significant delays, the objectives of the fiscal calls for further improving the capacities in the area of public policy as well as its overall development objectives were not investment management at central level as well as on local achieved. government level, given the significant value of investments managed at the local level. The Government’s increased use of own resources to finance public investments provides it more autonomy to Figure 17: GOU own financing of public investments increasing, as deviation of actual expenditures from budget increases Sources on financing for the public investment plan Deviation of actual expenditure from budget in PIP percent of GDP percent of GDP Source: World Bank Computations based on MFPED DATA 31 3.3 Fiscal under-execution matched capital development. However, it is not clear if the invested resources are generating actual value. In fact, the rate by inefficiencies in investments and at which the value of the Government investments are the economy generating increases to the rate of growth of GDP is declining. In the period from FY 2010/11 to FY 2014/15, the There is little evidence that public investments have Government’s total investments contributed to 26 percent contributed to improvements in the productivity of the of the total rate of GDP growth. This is a much lower rate economy with consumption contributing the largest than the figure of 40 percent recorded in the period from share to economic growth. Over the past decade, the FY 2005/06 to FY 2009/10. Instead private consumption has Government facilitated the achievement of accelerated been the most significant contributor to increases in the rate economic growth through the fiscal policy by significantly of economic growth of (see Figure 18). increasing the value of its budget for investments in Figure 18: Uganda’s investment contributing less to economic growth in recent years Source: World Bank staff computations, using UBOS Data The efficiency of the Government’s investments also leaves been able to leverage further private investments to generate room for improvement given the value of the output that faster economic growth. Examining the trends for Uganda’s has been generated through public investment. Increases Incremental Capital Output Ratio (ICOR)9, a rough indicator of in the ratio between capital inputs and productive outputs this type of efficiency, shows that there has been a significant can be seen as a measure of efficiency. Considering the recent increase in this ratio in recent years , which suggests declining increase in the value of the Government’s investments, it efficiency. Moreover, over the past decade, the average level of is noteworthy that even when these investments have not the ICOR has been significantly above the ideal average for a been impacted by the execution issues described in the developing country using capital inputs efficiently (see Figure previous sections, they have not resulted in significant levels 19). of increased growth. In short, these investments have not 9. The incremental capital output ratio (ICOR) is defined as the ratio between investment in a period and the subsequent growth in output. The higher the ICOR is, the lower the efficiency. Since, growth in output can arise from other factors beyond investment in new capital (e.g. productivity enhancements or increased capacity utilization rate), and the lag between investment and increased output varies, reliable measure of ICOR should be over a long period of time, say three decades. Therefore, estimations over shorter periods are only rough estimates. 32 Figure 19: Additional capital generating less output over past decade World Bank staff computations, using UBOS Data The decline in the level of efficiency in the utilization Fiscal policies will only facilitate the achievement of their of public capital is a cause of significant concern. The intended objectives and economic value if well-designed extent to which Uganda’s public investments will contribute budgets are effectively executed. The challenges related to to increases in the rate of economic growth and productivity budget execution could therefore easily prevent Uganda from is determined by the extent to which they improve the level achieving its objective of accelerating growth in the short- of the public capital stock, thereby reducing the cost of term, and raising productivity to be able to sustain a high rate production for the private sector and thereby enabling it to of growth of its economy in the medium to long term. engage in increased levels of economic activity and to create a greater number of productive employment opportunities. In the USA, for every dollar invested in the development of the interstate highway network in the period from 1954 to the rate 2001, six dollars of economic productivity was generated. If of returns on Uganda maintains its ICOR at the levels recorded over the last Uganda’s public eight years, then for every dollar invested in the development investments depends of public capital stock, it would generate only 0.8 dollar worth of economic activity. Thus, the rate of return (economic on how effectively and and social) on Uganda’s public investments depends on efficiently the public how effectively and efficiently the public investments are investments are managed. managed. 10. Fiscal policies will only facilitate the achievement of their intended objectives if well-designed budgets are effectively executed. It is only in this manner that the investment of resources will facilitate the delivery of the intended economic value. The issues related to the execution of the budget that have been described in this section of the update could easily prevent Uganda from achieving its objective of accelerating growth in the short-term, and raising productivity to be able to sustain a high rate of growth of its economy in the medium to long term. 33 4. Why is Uganda not generating good returns on its investments? Addressing the binding constraints to growth in Uganda and building production capacities to exploit oil requires managing investments effectively. Currently, the ability of the Government’s fiscal policy to achieve its planned objectives is to some extent constrained by inefficiencies in public investment management. Uganda is currently ranked in 46th position out of 71 countries in terms of quality of institutions for public investment management. Among the issues affecting the effectiveness of public investments are implementation challenges that result in delays, cost overruns, and perpetuity. Based on lessons from other countries, the systems in Uganda could particularly be improved in the area of project appraisal and ex-post evaluation to establish minimum conditions to support efficiency. T he discussion above indicates that there is average difference between the ideal value of efficiency of a clear need to enrich fiscal policies with investments and the realized values (efficiency gap) stands policies and strategies that acknowledge the at a 27 percent. The gap for countries in the Sub-Saharan weaknesses in the management of public Africa Region is significantly higher, with the average figure investments. It recognizes that these can derail public estimated to be 38 percent. At this level of inefficiency, spending and weaken the growth process, with adverse even very high levels of investment in the development of consequences for fiscal solvency and stability. In this respect, a country’s infrastructure stock will produce disappointing global lessons abound, but these can only offer guidance results (see Figure 20). In other words, whatever the level of where own capacities have been assessed and workable input, the degree of inefficiency prevents the investments approaches adopted. from being converted into productive assets and hence achieving the overall objective of an accelerated rate of 4.1 Inefficiencies in investment economic growth. On the one hand, the selection of the investments may be based on badly formed criteria. On the result in failed capital accumulation other hand, implementation may be weak, characterized by efforts across the world waste, corruption and misappropriation. Finally, even if the Global evidence shows that public investments can be investment does result in the production of a potentially affected by a range of different types of inefficiencies, any useful public good, it is often not operated or maintained one of which can have costly economic implications. The well, which again reduces the level of return on the International Monetary Fund (IMF) estimates that the global investment. Kampala CBD which houses a number of government ministry offices there is a clear need to enrich fiscal policies with strategies that acknowledge the weaknesses in the management of public investments 34 Figure 20: The large efficiency gap in public investments costly to public capital Source: IMF (2015); “Public Infrastructure Trends and Improving the Quality of Investments” The tools to manage public investments have evolved Over the past two decades, many governments have significantly over the past decades, but this has adopted an increasingly strategic approach to both the not necessarily led to efficiently managed capital management of public investment projects and public investments. In the 1970s and 1980s, the management of financial management (PFM), with these two areas being public investments focused mainly on Public Investment two sides of the same coin. This often involved moving Programs (PIP). These programs were originally designed towards a more integrated approach, with investment to put together capital investments intended to facilitate decisions increasingly delegated to line ministries. Although the construction of physical assets. However, over the past this approach resulted in some initial successes, especially two decades, there has been a paradigm shift, with the in the area of budgeting, it did not place sufficient emphasis integration of a range of projects and programs under PIPs on the strategic importance of public investment to the to match them with government’s medium term financial economy. Thus, costly decisions with long-term implications frameworks. This shift meant that the PIP became a database may be undermined by short-term political considerations. to organize a range of projects and programs that are not The realization of the inherent dangers of this approach necessarily intended to build capital assets. The PIP enabled has led to the resurgence of a different approach to public the centralized collation of plans for the development of investment management, with the more systematic affordable projects and programs to support the spending identification of long-term priorities. allocation process. Once such assets were constructed, they ceased to be part of the PIP, with the resources required for However, unless accompanied by measures to strengthen their operation and maintenance being allocated through the framework and capacities of institutions involved in the recurrent budget. However, because of the link between PIM, the new integrated approach did little to facilitate the PIP and the budget, the PIP could only include projects the achievement of higher levels of efficiency. It was that had been already included in the budget. These projects expected that within the new integrated process, there could also be characterized by varying degrees of quality, would be a centralized framework to guide the management depending on the prevailing regulations for appraising of projects, including selection and screening processes. projects for financing. Therefore, the PIP did not fulfill the It was also expected that PIPs would serve as a means to purpose of collating a bankable, ready-to-finance pool of manage overall public expenditure. Unfortunately, there were capital projects, a process required to ease implementation many cases in which institutional capacities to handle these and to improve the overall level of efficiency of public processes became overstretched, both within the Ministry of investments Finance and within the line ministries. This was particularly true in the case of ministries of finance and planning, 35 which are usually expected to scrutinize all projects and high level of institutional capacity, such as the UK, the cost programs, even when they do not include a significant level and duration of construction may exceed initial estimates of capital expenditure. In some countries, the share of capital by an average 7-10 percent. The contrast with nations with expenditure within the PIP is less than 50 percent. Moreover, weak PIM systems can be startling. For example, in Tanzania, if there is no designated process for the preparation and it is not unusual for the construction of a project to cost implementation of projects, projects are sometimes included more than 60 percent in excess of the original estimate, or into the PIP before these projects are ready to move to the to be completed in more than twice the original planned investment phase. In some instances, this results in delays to time. In the case of Ethiopia, these overruns can be twice as implementation, with feasibility studies only conducted after high again.10 In circumstances such as these, investments funds have been allocated to the capital budget. In others in the establishment of effective systems to manage public cases, the quality of the projects may have been undermined investment are likely to yield high returns. by the failure to implement pre-appraisal or feasibility studies. While consistent data to measure sector specific waste As a result of these factors, the quality of PIM has often are not available, indices that measure the overall remained poor, with many national administrations quality of the institutional environment on which public failing to realize their intended objective of developing investment management is based indicate that the their stock of physical capital in a manner that facilitates management of public investments in Uganda does not increased economic growth. The causes of these failures facilitate the achievement of optimal value. According to are many and varied, including undue political interference the Public Investment Management Index (PIMI),11 Uganda and corruption in the management of public investments; ranks in 46th place out of the 71 countries that were assessed. haphazard project selection, with no objective selection While this ranking indicates that Uganda’s performance is criteria; unclear lines of responsibility and accountability; comparable to those of its neighbors, including Kenya (which skill and capacity gaps in the areas of project appraisal, ranked in 44th place) and Tanzania (in 48th place), it places it procurement and management; perverse incentives well behind the best performers in the region, such as Ghana for project managers to underestimate risk; and lack of (in 27th place) and Rwanda (in 12th place) (see Figure 21). coordination between different levels of government, across jurisdictions. Meanwhile, efficient management of public investments will become even more important for Uganda in the As a result of weaknesses of this nature, the level of coming years. With the prospect of significant revenues wastage in public investments is often significant. On the from the exploitation of oil, Uganda is also expected to one hand, there are numerous recorded cases of countries increase its investments to use these revenues for the investing huge amounts of resources in “white elephants”, intended purpose of transforming its economy. When or projects that just simply do not generate a significant oil production begins to generate substantial additional return on investment. Such cases are usually characterized revenue for the Government, new challenges will emerge. by significant weaknesses in the areas of fiscal and overall The most critical objective may no longer be to further economic management. In particular, countries that generate accelerate the implementation of public investments, significant revenues from the export of natural resources but rather to slow down the growth of public spending, but that have weak institutional capacities may be afflicted including public investment, in order to mitigate the by the so-called “resource curse,” which refers to the paradox negative impact of the sudden inflow of revenue from oil that countries with an abundance of natural resources tend production. In this context, the top priority should be to to have less economic growth, less democracy, and worse increase the absorptive capacity of the Government in terms development outcomes than countries with fewer natural of the size of its executed public investment program and resources. On the other hand, there are many cases of projects to improve the structure of this program, including through that run well over their planned costs and completion dates improvements to project selection processes and practices. not only as a result of bureaucratic delays and the diversion of resources, but also from the underestimation of costs as Implementation of the PIM reform program designed a result of over optimism. In many developed nations with a by the Government will develop Uganda’s absorptive 10. Construction Sector Transparency Initiative (2011). 11. The PIM index is based on the four categorization of elements of public investment management: i) strategic guidance and project appraisal; ii) project selection; iii) project management and implementation; and iv) project evaluation and audit; as an attempt to measure the efficiency of the public investment management process across 71 countries, of which 40 are low-income countries. 36 capacity. It will also prevent overspending (at least initially), its public investment management systems, with these as it will take time to develop a pipeline of sound, high- improvements particularly crucial for the achievement of priority projects and to complete all the necessary feasibility stability and prudent management with the prospect of and pre-investment studies for these proposed projects. increased revenues. Thus, now is the critical moment for Uganda to revamp Figure 21: Uganda fairs poorly in public investment management in relation to peers PIM Index Score (0-lowest, 5-highest) Madagascar* FYR Macedonia Mozambique Sierra Leone Cote d’Ivoire Burkina Faso Kazakhstan Mauritania El Salvador Philippines Montenegro Afghanistan Azerbaijan Bangladesh Source: IMF (2014), The Public Investment Management Index data base 4.2 Global Experience: How are PIM With the growing recognition of the need for the systematic identification of long-term priorities, systems being improved around the global experience suggests that good PIM systems are world? characterized by a number of common features.12 For countries in varying conditions and with varying levels of Global experience demonstrates that the establishment development, these features emphasize the minimum basic of an efficient PIM system involve significant challenges. processes and controls that are likely to generate optimal In particular, it involves building institutional capacities to levels of efficiency in decision-making processes related manage the wide range of technical aspects of investment to public investments and to the implementation of these management. It also involves coordinating these processes investments. In situations where traditional budgetary across many institutions in a range of different sectors financing and capacity have been recognized as insufficient to ensure the achievement of a common objective. to meet a country’s development goals, governments have Depending on the specific characteristics and backgrounds developed a range of new institutions, such as private-public of the country involved, the approaches to institutional partnerships, sovereign funds, and others semi-autonomous arrangements, processes and outputs expected out of a PIM entities to undertake large investments on behalf of the system can differ. The desired outcome is to match these Government. However, it is still critically important to establish specific characteristics with systems to design and implement the conditions that ensure the efficiency of investments projects in a manner that will maximize economic value for each country. and maximize the value for money that these investments 12. Rajaram, A., Le, T.M., Biletska, N., Brumby, J. (2010). A Diagnostic Framework for Assessing Public Investment Management. World Bank Policy Research Working Paper 5397, Washington, DC. 37 generate. This approach focuses on the identification of the and the preliminary screening process. The key aim at institutional features that would minimize major risks and this stage is to ensure that investment choices are justified provide an effective systemic process for the management in terms of the country’s development objectives. Many of public investments. It also defines indicators for inputs, countries, including most countries within the East African processes and outputs to enable a meaningful assessment region, have developed both a national vision and a framework to provide such guidance. However, the challenge of the functioning of public investment systems. These is to ensure that these frameworks are sufficiently specific and indicators are linked to institutional features with eight key coherent. They should have sufficient authority to effectively stages that characterize a good practice PIM system and are guide the PIM process, including defining the criteria for intended to provide objective measures to identify sub- the rejection of some projects at the point of preliminary optimal processes (see Figure 22). screening. Chile, which has one of the most effective PIM systems in the world, uses a screening system that rejects The first stage, the guidance stage, involves the provision between 5-8 percent of project proposals at this stage. of guidance for the development of the project concept, Figure 22: The Eight Stages of the Public Investment Management Cycle Source: World Bank (2015): “The Power of Public Investment Management: Transforming Resources into Assets for Growth”, Washington DC The second stage, the appraisal stage, involves define a clear, standardized approach to economic, social an assessment of the quality of project proposals and environmental evaluations. It should also ensure that presented for investment in terms of their social and the technical capacities of the Government agencies are economic value, with this assessment being used adequate to handle these responsibilities. The technical as a basis for preliminary acceptance or rejection of guidance provided should be appropriate to the scale the concept. A key component of this assessment is a and scope of the project, with projects of higher value rigorous cost-benefit analysis, which ensures the cost- requiring more rigorous tests to determine their degree of effectiveness of the proposed project (see Box 5). For financial, economic, social and environmental feasibility and project appraisal to be effective, technical guidance should sustainability. 38 It is good practice at this stage to also generate an circumstances change so that these rejected projects become inventory of appraised projects. This inventory, with likely to generate net positive benefits. The key element of each appraised project ranked and prioritized for budget efficient PIMs is the provision of formal, standardized, clear consideration, will facilitate the selection process. As has been guidance to all MDAs, with the provision of this guidance implemented by Chile, the inventory should also be used to for all projects of defined economic value, including those track projects that have been selected for implementation and implemented as public private partnership. enables policymakers to revisit rejected projects if underlying Box 5: Cost-benefit analysis is not just about the profitability of the project! Cost-benefit analysis (CBA) assesses the costs and benefits of a project and reduces them to a common denominator. If benefits exceed costs, with both expressed in terms of present value, then the project is acceptable. If not, the project is rejected. Benefits are defined relative to their effect on the fundamental objectives, while costs are defined relative to their opportunity cost, which is the benefit forgone by not using these resources for the best alternative use. By doing so, cost-benefit analysis seeks to ensure that no alternative use of the resources consumed by the project would secure a better result from the perspective of a country’s objectives. In contrast to the concept of financial profit, this CBA seeks to measure both the economic and social profit, which in turn demonstrates the effect of the project on the fundamental economic and social development objectives. These different concepts are reflected in the different items considered to be costs and benefits and in their valuation. Thus, a money payment made for wages is by definition a financial cost, but it will be an economic cost only to the extent that the use of labor in this project implies some sacrifice elsewhere in the economy with respect to output and other objectives. Conversely, if the project has an economic cost which does not involve a financial flow—for example, because of environmental costs—this does not constitute a financial cost. The key requirements for cost-benefit analysis are: (i) specification of the costs and benefits; (ii) valuation of costs and benefits; (iii) choice and formulation of constraints; (iv) treatment of risk and uncertainty; (v) choice of the rate of interest for discounting future costs and benefits; and (vi) choice of a decision rule for accepting or rejecting projects. Economic costs and benefits are measured by “shadow prices” which may approximate market prices in well-functioning market systems. However, measuring these prices within imperfect markets-like those characterizing Uganda – can be a big challenge. This underscores the need for clear guidance on how such inputs into the CBA are derived. Source: World Bank report “Russia: Towards Improving the Efficiency of Public Expenditures” (2001) The third stage involves the independent review entity responsible for developing the project proposal. In of the project appraisals. The key element of an many countries, this function is performed by the ministries independent review is to provide the basis for checking any of finance or planning. However, the use of independent subjectivity or optimism bias that may be reflected through entities, such as research institutes or universities, can give underestimated costs or overestimated benefits. Therefore, even higher credibility to the process, and some countries the independent review should be conducted by an entity also undertake public hearings (see Box 6). that is as detached and independent as possible from the 39 Box 6: Lessons on independent review in PIM systems The United Kingdom: Since 2001, business cases for projects have been subject to independent review under the so-called “Gateway process”, which embodies a series of short, focused, independent peer reviews at key stages of a project. These reviews highlight the risks and issues that need to be addressed to ensure the successful delivery of the project. However, more attention is paid to larger projects, with Treasury approval required for road projects of a value of more than £500 million. However, the level of Treasury involvement in reviewing the appraisal of other transport projects varies widely depending on the project’s scale and complexity. In addition, major infrastructure projects are subject to a public hearing before the end of the appraisal stage. Chile: Project appraisal is conducted by the planning ministry rather than by the sponsoring ministry. To subject these appraisals to independent review, a separate unit was created within the planning ministry. Korea: The Public and Private Infrastructure Investment Management Center (PIMAC) was established in 1999 in the Korea Development Institute (a semi-autonomous agency under the umbrella of the Ministry of Strategy and Finance) to conduct pre-feasibility studies of large projects independent of the sponsoring ministry. In practice, PIMAC conducts all appraisals for projects above a defined threshold. Source: World Bank 2015; “The Power of Public Investment Management” Washington DC. The fourth stage is the selection and budgeting stage, haphazardly, simply not implemented, or subjected to at which point a project is formally selected and political influence. However, these stages form a strong entered into the budget cycle as a capital expenditure. foundation for the effective implementation of any project. This stage is the most critical intersection between the Countries such as China and Brazil have been growing fast budget and project cycles, even though budget must be and investing heavily, with investment rates reaching to flexible to allow for recurrent expenditure incurred prior to a value of 50 percent of GDP over the past two decades. this stage, to prepare the project, and after this stage, to However, the weaknesses in these countries’ PIM systems, maintain and operate the asset. Therefore, this stage is a key particularly in the area of screening and preparing projects determinant of the level of efficiency of budget execution for investment, may negatively affect both nations’ growth and overall fiscal policy management, and thus serves as a prospects. With the increasing tendency of governments “gate keeping stage.” At this stage, the pressures to include to formulate comprehensive national development plans, projects on the basis of political considerations, including many countries have in place a relatively solid basis for the pressures exerted by MDAs, development partners, private identification of projects at the national level. However, lobbyists and contractors, can be enormous, regardless of despite the vital role that these plans play, they do not the results of an effective appraisal. Therefore, it is absolutely necessarily prevent the inclusion of poorly designed and essential that a strong “gate keeper function” exists, with poorly conceived projects into a public investment program clear, formally defined criteria for the selection of projects, nor allow for a process that scrutinizes a new concept for with such criteria legally backed and publicized amongst consideration. all stakeholders. In many countries with good practice PIM systems, including the United Kingdom and Chile, this gate The pre-investment phase is followed by the investment keeper function is exercised by the Ministry of Finance or phase, with the first of the four stages that characterize National Treasury. this second phase being the project implementation stage. This stage involves the planning, procurement, In summary, these first four stages discussed above fabrication, civil work construction, installation, and the take place during the pre-investment phase and formulation of the terms and conditions of contracts in determine whether the projects being implemented will order to develop detailed schedules and plans for the be executed efficiently and will deliver the expected construction or implementation of the project. During economic value. In many countries, many of the processes the processes related to the execution of the project, the that characterize the pre-investment phase, particularly construction team operates on the basis of the prepared those during the first three stages, are implemented schedules, procedures and templates. 40 In a good PIM system, the defining characteristic of this widely depending on the level of development of the stage is the availability of the appropriate capacities, country and the nature, size and complexity of the projects including the capacities to disburse funding, procure being executed. The project and procurement planning materials and undertake engineering and construction capacities necessary for the implementation of a relatively works on the project. If the pre-investment phase works simple project, such as a straightforward road development effectively so that projects that reach implementation project, will clearly be different from those required for the are indeed ‘ready-to-go’, with designs that include clear implementation of a project involving the development of organizational arrangement and a realistic timetable, multi-part technological systems, concessional contracts implementation of such projects will be easier. However, or public-private partnerships. Clearly, mechanisms for the failures can still result from weak capacities within the selection and procurement of contractors can influence agencies responsibility for the implementation of a project price and quality and can either exacerbate or mitigate or a failure to coordinate across many agencies. In practice, the risk of fraud and corruption. On the other hand, if such projects are implemented by a range of different MDAs mechanisms are accompanied by excessively stringent or sub-governments. This calls for a clear delineation of regulation or lack of capacities, they can result in delays to responsibilities and functioning coordinating arrangements implementation. based on a consideration of the institutional capacities required to manage and monitor project implementation In many countries, where core PFM functions such as timelines, project costs, multi-year budgeting processes and contact management and cash management are not effective procurement.13 functioning well, procurement processes are often prone to significant efficiency losses. This is because Procurement is a core aspect of the execution of procurement processes involve large, discrete contracts, investments and is often forming the most significant with an associated risk of abuse and corruption, facilitated challenges to the implementation of a project. In by poor accounting practices and collusion within and many countries, the procurement function has evolved between political elites. A recent review of around 500 significantly over recent years due to technological World Bank funded projects around the world concluded innovations, although capacity requirements can vary that unsatisfactory performance in the area of procurements The Nothern Bypass, built to reduce traffic congestion from the city center after a project is fully operational, the final stage involves a comprehensive process of evaluation to determine the quality of all previous phases 13. In a number of countries, including the UK and Malaysia, centralized units, known as delivery units, have been established to coordinate and monitor all processes related to implementation of priority projects or programs, including the identification of constraints and a determination of the means to address them to ensure the efficient implementation of public projects. However, even under such arrangements, the capacities of implementing agencies within the sectors remain critical. 41 significantly affected the development outcomes of a high projects. During this stage the ex post collection of data related proportion of these projects, with poor outcomes being three to the total expenditure involved in the project compared to to five times more likely in cases involving unsatisfactory projected expenditure at the commencement of the project procurement performance. Poor procurement practices are also and a selective evaluation of project results, all of which can associated with poor design and appraisal and cost overruns. serve as input for the planning and implementation of future The level of implementing agencies’ technical capacities can projects. have major implications on how the project is delivered, even if these agencies are merely responsible for the oversight of the 4.3 Uganda’s PIM system: Works to construction of projects. some extent, but leaves room for Somewhat overlapping with the project implementation improvement stage, the next stage of the investment phase is the project adjustment stage. This stage involves processes There is room for improving public investments in Uganda related to monitoring and adjusting implementation to ensure to better facilitate the achievement of increases to the the achievement of development objectives. Adjustments rate of growth of GDP and to the achievement of the to implementation are almost inevitable because the cost country’s development objectives. A number of factors, of materials may fluctuate; the cost of funding may change; including a non-conducive regulatory environment and physical and social conditions may evolve; providers might external shocks, can hinder the effectiveness of investments not perform as expected; and political demands might evolve in these terms. However, it is also clear that the public sector as the project is implemented. The need for adjustment is has not performed at optimal levels. For public investments often exacerbated if projects are not appropriately prepared to be considered effective, the resources invested must result and designed to standard during the initial stages. The key in increases to the value of public capital stock, thereby processes related to adjustment include project monitoring, facilitating improvements to the level of productivity at the contract management, management of contract variations, national level. Public investments have this effect if they create and the evaluation of budget and funding arrangements. This capital that lowers the cost of production and distribution, and phase of project execution is also sometimes referred to as hence enable the private sector to achieve higher levels of “project execution and control.” 14 The current construction of productivity, thereby facilitating increased economic growth the Karuma dam, a mega hydro project which has attracted and the creation of productive job opportunities. major attention because of what appears like the construction defects in the dam walls, will provide a good example if it is Over the past 30 years, the Government of Uganda has handled professionally. developed systems and processes to ensure a higher level of efficiency throughout its operations.15 One measure The next stage of the investment phase is the operation implemented to achieve these improvements was the sector- of facilities stage. The realization of value is also determined wide approach (SWA) introduced in FY 1999/2000 to ensure by the degree to which it is operated efficiently and effectively that institutions delivering related services cooperated to to deliver the intended services. Thus, it is vital that sufficient achieve higher levels of synergy and allowed the stakeholders financial resources are allocated to ensure appropriate from cluster sectors16, through sector working groups (SWG), operations and maintenance of the project as a means of to participate in decision making processes to facilitate the ensuring that it continues to deliver value. achievement of Uganda’s strategic objectives. The SWA was implemented to improve systems to examine and review The final stage of the investment phase involves the basic policies and plans; to identify priorities; to assess resource completion review and evaluation stage. After the project requirements and cost implications, including proposed is fully operational, the final stage involves a comprehensive medium term budget allocations; to review performance process of evaluation to determine the quality of all previous targets and outcomes; and to facilitate the identification and phases, with this evaluation providing inputs to policymakers approval of development projects. The SWGs are accordingly for future interventions and for the development of new responsible for the formulation and delivery of sector 14. The term “control” is utilized because execution does not refer merely to the implementation of previously formulated plans, but involves a watchful process in which the project manager should understand what is being done, how circumstances surrounding the project evolve, whether there are significant changes that require adjustments to the project and how he or she should adjust to these circumstances. 15. A detailed assessment of the PIM in Uganda along the eight stages of project cycle can be found in “Strengthening Public Investment Management in Uganda: A Diagnostic Report”, an output of the technical assistance to strengthening Uganda PIM System. 16. These sectors include: Agriculture; Lands, Housing and Urban Development; Energy and Mineral Development; Works and Transport; Information and Communication Technology; Tourism, Trade and Industry; Education; Health; Water and Environment; Social Development; Security; Justice, Law and order; Public Sector Management; Accountability; Legislature; and Public Administration. 42 investment plans; sector budget framework papers; annual to ensure that there are no unused resources remaining at budget estimates; annual procurement plans; quarterly the end of the fiscal year. At the end of this phase, the project monitoring reports; reviews of existing/ongoing projects; is commissioned and handed over. This process involves annual budget performance reports; and proposals for new performance tests, hand-over, close down, or decommissioning projects. and disposal. More recently, as Uganda has continued to streamline Uganda has an elaborate procurement process, the national planning process to facilitate longer term underpinned by the Public Procurement and Disposal of planning for the country. This involved the establishment Public Assets Act of 1996 and as subsequently amended. of the National Planning Authority (NPA), as mandated by The process is supervised by a semi-autonomous authority, the National Planning Act of 1999. The NPA is tasked with the Public Procurement and Disposal of Public Assets the preparation of the National Vision and an associated (PPDA) Authority. All public projects are supposed to be roadmap to guide national development. After the end of handled by the Contracts Committee, which is chaired by the the period of the first NDP in June 2015, the NPA launched Permanent Secretary of the Ministry of Finance. This committee the current five-year development plan, which is intended to provides oversight over the entire procurement process, which guide development processes for the period until FY 2019/20. starts with the implementing agency sending a statement The NDPs are formulated with reference to the National of requirements to the PPDA. Ideally, the statement includes Vision 2040, which defines Uganda’s overall development all information pertaining to the procurement requirements objectives, and which provides broad guidelines as to how for the project, including the technical specifications of the this vision will be achieved. On the basis of lessons learnt from project, the terms of reference and any other supporting the implementation of the first NDP, a significantly greater information from the user department. It is this information emphasis has been placed on aligning the medium term that the Contracts Committee assesses in order to guide the expenditure framework with the priorities identified in the agency on the most appropriate method of procurement to second NDP. be used. It is then that the PPDA then, with support from the implementing agency, processes the contract by preparing the MDAs and local governments are responsible for activities bidding document, issues solicitation documents, receives bids, related to implementation of a project in the investment nominates evaluation team, recommends award and prepares phase. Depending on the modalities of execution, some or all contracts for submission to Solicitor General for clearance. of these responsibilities may be delegated to and/or shared After the contract has been signed, it is handed over to the with the private sector. Funding for the implementation of implementing agency for contract management. The contract a project is incorporated into the Sector Budget Framework manager is required to provide regular reports to PPDA on Paper (SBFP) and eventually into the annual budget. Once the performance of the supplier/contractor or consultant, and to funds allocated to the approved projects have been released advise when an amendment to the contract is required. The to the MDAs, procurement and implementation processes user department is responsible for providing all the technical are effected by MDAs responsible for the construction input throughout the procurement cycle. and operation of the project. In Uganda’s case, this phase sometimes also includes the design of the project. In addition, Overall, Uganda’s PIM system is intertwined with a number the Ministry of Finance sometimes still has to make decisions of other public processes, including planning, budgetary, related to which of the bankable projects within the PIP are to procurement, and monitoring and evaluation. The be funded and what the source of funding for these projects institutions and processes that currently constitute Uganda’s will be. The sources of funding could include the fiscal budget, PIM closely match the country’s planning and budgetary as is traditionally the case, or other alternatives, such as PPPs. system (see Figure 23). The question is how or whether these different processes are coordinated to effectively and efficiently Typically, this is the phase in which the vast majority implement the projects. The aim is not just to align processes of budgetary resources are utilized. In this regard, the and institutions to design and select projects for financing Ministry of Finance ensures that allocated funds are by public resources, but to ensure that existing technical and released effectively during the budget year to ensure administrative capacities are sufficient to implement and efficient implementation of the capital investment budget. operate the project. The Ministry of Finance monitors the disbursement of allocated funds and can also provide incentives or implement penalties 43 Figure 23: Uganda’s PIM System closely follows the budget process Source: Compiled from “Strengthening Public Investment Management in Uganda: Diagnostic and General Recommendations”, 2015. 4.3.1 Great ideas and plans Second, each sector is required to prepare and submit sectoral budget framework papers according to the undermined by weak appraisals and budget guidelines developed by the Ministry of Finance. political considerations This is intended to facilitate the provision of public resources to fund proposed initiatives in the following fiscal year. The Uganda’s current processes for identification of projects SBFP defines a budget strategy for a specific sector, specifying and for ensuring alignment with national priorities the sector’s objectives and performance targets for the contain many features that characterize good practice PIM financial year. It defines sectoral objectives, performance systems. The first phase of the cycle is identifying potential targets, planned actions and outputs, strategies to improve public sector projects, which is mandated by the NDP. The NDP applies both a bottom-up approach to capture sectoral performance and draft work plans with outputs for spending priorities and a top-down approach that expresses national agencies. The Ministry of Finance, Planning and Economic aspirations as outlined in the Vision 2040. The purpose of the Development (MFPED) consolidates the SBFPs from the 16 processes implemented at this stage is to determine the basic sectors and prepares the National Budget Framework Paper desirability of a proposed project and to identify high-priority (NBFP), which is presented to the Parliament no later than projects that are the mandated responsibility of the public March 31 each year. The NBFP is the Government’s overall sector. The NDP is required to inform and be informed by budget strategy document and is intended to link the sector investment plans, defined as the detailed statement Government’s overall policies, as identified under the National of performance, issues and opportunities, development Development Plan, with the annual budget. This document objectives, policies and strategies that support development describes macroeconomic policy and plans; overall fiscal in specific sectors. These provide a framework, which should strategies, including revenue projections; the overall medium- be aligned with the NDP, for the identification of initiatives term resource envelope; and priority interventions, as identified and projects for government agencies, the private sector, civil in the proposed sectoral expenditure plans. society, development partners and academia. 44 Third, the MFPED implements a number of processes implementation process. First, at the project identification associated with the independent review stage of the stage, many projects are introduced into the cycle without any public investment management system. The preparation process to determine whether they are aligned with national of studies, including the profile study, the pre-feasibility and priorities or to appraise their effectiveness (see Box 7). In part, feasibility studies, and the identification, preparation and this is because projects identified under NDP are very broadly evaluation of the project, begins with the MDA submitting defined. This creates space for unwarranted interventions the proposal to the SWG to ensure it is consistent with sector from various stakeholders during the implementation process. investment priorities; to avoid duplication; and to develop In addition, with the national planning process occurring synergies. The approved proposal is then submitted to MFPED, only every five years, there is no systematic framework for where the Development Committee appraises the project on continuously collecting project ideas and concepts in between the basis of established guidelines to determine the degree the planning cycle. Ideally such new concepts should be to which it is aligned with national priorities and to which it submitted to the responsible MDAs for appraisal to ensure their will generate value for money and thereby determining its economic viability and value to the economy, and for possible suitability for inclusion in the public investment plan (PIP). inclusion in the sector and national plans. Furthermore, The PIP is intended to serve as a central data base covering it would appear that the SWGs do not perform their all active public investments in the development budget. The responsibilities in terms of scrutinizing the project proposals, projects that meet the minimum requirements for inclusion due to weak capacities or as a result of political pressures. in the PIP are also considered suitable for funding through the As a result, the public investment plan includes a number budget. In recent years, the composition of the Development of projects that are poorly aligned with national priorities, Committee has been expanded to include the NPA and Office including many that are also poorly planned. Other challenges of the Prime Minister (OPM), to strengthen the linkage between are the low level of ownership by implementing agencies the appraisal and planning processes and the monitoring and and the inclusion of projects not clearly aligned with normal evaluation functions of the Government. planning process. Therefore, while the PIP plays a positive role in centralizing data related to government projects, it is not an Fourth, the Parliament exercises its oversight role to optimally effective tool because of the poor quality of many ensure that proposed projects are consistent with proposed projects; because it includes projects of a recurrent national priorities and scrutinizes detailed expenditures. nature; and because it does not provide a pipeline of ready- This process represents another layer of scrutiny to ensure to-go projects (see Box 8). Moreover, given that only projects that funded initiatives will facilitate the achievement of with identified sources of funding are included in the PIP, a development objectives. number of potentially beneficial projects are excluded. For the purpose of this Update, it was not possible to estimate how Meanwhile, despite the positive aspects of the process, many projects in the PIP had been subjected to an economic Uganda’s pre-investment phase is still affected by assessment, due to the poor quality of information. significant weaknesses, with severe consequences for the Uganda Parliament, where most government policies are sanctioned the preparation of studies, identification and evaluation of a project, begins with the MDA submitting the proposal to the SWG to ensure it is consistent with sector investment priorities 45 Box 7: Lessons of project ideas differ and projects enter budget process in variant form 1. Private sponsors, enterprises or development partners: In this case, a private partner usually proposes a specific investment project to an MDA. In most cases, this project involves a productive sector (for instance, infrastructure) rather than a social service sector (health or education). In general, these projects come with a proposal for funding by the private partner. 2. National needs identified by high level authorities: This category entails the identification of projects by executive representatives of public institutions, such as the ministries and the president’s office. It includes local government agencies that have a direct contact with the area and its people. It also includes regional investment projects involving the participation of other countries, such as energy and pipelines projects. 3. National needs identified by MDAs: In this case, a technical team from MDAs identifies projects conceived as a possible solution to a specific problem and then In addition, it may include regional investment projects that might involve the participation of other countries, such as energy and pipeline projects. 4. Complement projects: This category includes projects identified by sectors that require a project to be implemented to support another, bigger project in order to optimize benefits. An example of this case is a road project (complement project) which is needed to provide connectivity to a mine project (principal In addition to limited capacities and resource constraints, Finance, imputed from the broader aspects of the PFM Act the most important weakness in Uganda’s PIM system 2015. Thus, its authority is constrained, which potentially is the lack of a comprehensive framework that can be undermines its sustainability. Without a clear, legally adopted across sectors to facilitate project proposal mandated framework, the overlapping mandates create assessments. This weakens the requirement set by the additional confusion. Under NDP II, it has been found that Development Committee that the sectors undertake there is often duplication between the roles of the NPA and detailed pre-feasibility and feasibility studies to guide the Development Committee in the identification of tasks decision-making processes. Without a solid legal mandate, such as project appraisal and analysis. Another source of the Development Committee is not currently empowered weakness emanates from the inconsistencies between the to operate effectively. At present, the Development development partner requirements and the country’s PIM Committee derives its authority from the administrative processes for investment projects funded by development powers of the Permanent Secretary of the Ministry of partners. Construction of the Malaba one border post the key element of an independent review provides a basis for checking any subjectivity or optimism bias that may be reflected through underestimated costs or overestimated benefits 46 Box 8: Public Investment Plan: It should do what its name says! form As in many other countries, the Government of Uganda maintains a public investment plan (PIP), which was first established in 1994/95 to support the management of public investments. The PIP replaced the Rehabilitation and Development Plan (RDP) Volume 11, and is intended to serv P captured only priority projects, with these being mainly donor funded projects. It is estimated that as of FY 2008/09, the PIP covered only about 30 percent of all public investments, with most of these involving counterpart funding. Later, the PIP was restructured with the intention of including all projects and programs receiving support from the development budget. However, not all expenditure included in the development budget was utilized for investment, partly because not all budgeted development expenditure is converted on a one-for-one basis into additional public investment. In addition, the development budget included some expenditure items of a recurrent (i.e. consumable) nature, with these items being included in the development budget because they were associated with specific projects. This was mainly the case for donor funded projects. The PIP also included programs that were judged to have a long term growth impact, even if their capital expenditure component was low or non-existent (e.g. National Agricultural Advisory Services). By FY 2008/9, the PIP covered 295 projects. Of these projects, 58 percent had a defined closing date, with the average lifespan of these projects being six years. The remainder had no defined closing date, suggesting they were being funded and implemented in perpetuity. In fact, the actual investment component of the PIP was still quite small, estimated at about 40 percent of all the projects. Over the last five years, the PIP has undergone a number of refinements, including the development of clear guidelines related to the inclusion of projects. These guidelines mandate that an included project must involve a capital expenditure component of at least 70 percent for new projects and at least 50 percent for existing projects, with this provision intended to distinguish capital investments from recurrent expenditure. The assessment of projects is intended to be an ongoing process, with an annual review to exclude projects that do not conform to the requirements. As a result, while the total number of projects in the PIP increased to 410 by FY 2014/15, the investment component of the PIP had also increased to 60 percent. To improve accountability, the PIP was revised so that expenditures were tagged to vote functions. In line with the overall fiscal framework and the NDP, the bulk of investments are in infrastructure sectors. However, the PIP still focuses on the affordability of projects, since projects that fit within the Medium Term Expenditure Framework (MTEF) ceiling are included. While this ensures that resources are not wasted on projects for which there are no MTEF allocation, it undermines the development of a culture of planning and preparing bankable projects that can be funded once resources become available. Secondly, because the process of preparing projects starts after they have been included in the budget, no feasibility and/or pre-appraisal studies are conducted for many of the projects included in the PIP. This exacerbates the low levels of budget execution and other weaknesses in the management of public investments. Thirdly, government and externally funded projects are still managed under separate data systems, leading to difficulties in timely reconciliation of the full PIP database, as well as variant quality standards for the two sets of data. Therefore, while the PIP currently provides the most comprehensive database of public sector investment projects, it still has a long way to go before it becomes an effective tool for public investment management. Efforts ae underway to include additional project information and data to develop the list of projects that have been appraised and are bankable but that do not have allocated financing, and to subsequently introduce an Integrated Bank of Projects (IBP) will be very useful. This will furnish the PIP with information and have a priority list of future projects to be implemented. In addition the IBP will assist in tracking implementation of the project from commencement to closure, easing multi-year budgeting, cost tracking, and project adjustments monitoring, among others. So far, a manual has been development and some capacity building for preparation and appraisal of projects initiated. 0.5 2009/10-2014/15 2004/05-2008/09 11 Security 0.1 0.1 16 Public Administration 0.1 0.3 12 Justice and Order 0.1 0.1 06 Tourism and Trade 0.1 0.1 02 Lands 0.2 0.4 09 Water and Environment 0.3 0.5 07 Education 0.3 0.5 01 Agriculture 0.4 0.5 08 Health 0.4 0.6 13 PSM 0.5 0.3 14 Accountability 0.5 0.9 03 Energy 0.6 1.6 04 Works and Transport 1 -0.1 0.1 0.3 0.5 0.7 0.9 1.1 1.3 1.5 1.7 47 4.3.2 Implementation challenges is generally poor. This results from poor appraisals in the pre- investment stage and the bypassing of established procedures, result in delays, cost overruns and and also from delays that are so protracted that designs and perpetual projects feasibility studies become outdated. In Uganda, most projects enter the investment phase Another significant issue is the frequency of budget before they are ready for implementation. These projects overruns and delays in procurement and implementation require additional time for preparation through processes processes. Weaknesses in the project design also sometimes such as planning and drawing designs, with these processes result into redesigning of plans or even constructing being conducted only after resources have been allocated or completely new works during the course of construction, when disbursements are ready to begin. As discussed earlier, resulting in the need for the allocation of additional financial rather than start off with projects that are ready to execute, resources and delays to delivery. Institutions responsible for the investment phase in Uganda begins with the preparation project execution state that many construction companies of a full feasibility study and the drawing of designs, following involved in implementation do not have the necessary which procurement, fabrication, construction, and other technical and financial capacities, which leads to additional processes commence. Thus, Uganda’s investment phase starts implementation challenges. Due to issues related to the off on a default of a longer project life span than would be quality of data within the PIP, it is not possible to estimate the case under a more efficient system. Within the current the overall completion rate, or the extent of cost overruns and delays with public projects. Nonetheless, evidence from PIP, projects have an average life span of five years, although a sample of World Bank funded projects currently active or many of them have remained in the PIP for more than 10 completed over the past 10 years confirm that significant years. The Karuma dam project has been budgeted to start challenges remain in project execution. World Bank projects implementation every year since 2012, but significant progress accounts for a small proportion of (about 0.1 percent) of the in construction was only visible starting in FY 2014/15. In some approximately US $ 1.8 trillion stock of Government active instances, implementing agencies face challenges related infrastructure projects. However, the level of performance to inadequate funding, particularly counterpart funding for has been declining over the past three years to the point externally funded projects, acquisition of right of way, and that out of a project portfolio of a value of US$ 2.3 billion, less poor quality of designs. These inevitably lead to a failure than 6 percent of these funds has been disbursed. Almost to deliver projects on time and on budget. This was in fact all the reasons explaining the low performance relate to the the experience of the Transport Corridor Project, which the ineffective PIM systems. According to this project profile, Government conceived and budgeted for in FY 2008/09, but project life extends to approximately seven years, which is with construction only starting three years after. much longer than the average for sub-Saharan Africa. Cost overruns are frequent, partly resulting from delays to project The quality of projects included in the investment plan is implementation. In some cases, cost overruns amount to a often poor. As discussed above, because of non-adherence to value of up to 50 percent of the original cost of the projects. the established PIM system, the quality of the projects in the PIP National semi arid resources research institute, Serere to ensure that investments generate better value for money, a higher level of scrutiny should be applied to ensure that these investments actually improve public welfare 48 Box 9: Lack of communication and coordination of public investments costly to the economy In August 2016, Uganda expects to commence construction of its part of the more that 1300 km of East Africa’s first standard gauge railway (SGR) linking Kampala to Mombasa. Work on the Kenya side began in 2013. In Uganda, the contract for the stretch covering at least 40 km between Malaba and Kampala has been awarded to China Habour Engineering Company. This portion of KYOGA NAMUTUMBA BUTALEJA LUUKA th SGR is expected to be completed by December 2020. TORORO IGANGA JINJA The SGR project has broad benefits, key among which is to reduce the cost and time taken for goods to be transported between Kampala and Mombasa. This development should KAMPALA MUKONO BUIKWE MAYUGE also enhance the potential for Uganda to leverage its unique WAKISO geographical location to become a regional transport and VICTORIA logistics hub. However, while the SGR project is generally viewed positively, government communication with the transport and logistics industry and coordination across the industry remains insufficient. Key stakeholders like the Inland Container Depot (ICD) at Mukono, managed by Rift Valley Railways (RVR), have limited information with respect to the SGR project, with implications that it may not sufficiently benefit from it. If the ICD Mukono is not connected to the SGR, it may become uncompetitive with the potential effect of future investment in the facility declining. This scenario cannot come to reality as is confirmed by information from the Ministry of Works and Transport. However, lack of information to key stakeholders can result in sub-optimal investment decisions. In this scenario, the container depot could still remain uncompetitive, even if it is connected to SGR, if the investors continue to base decisions on misinformation. Source: World Bank In the monitoring and ex post analysis phase, some Systems for the monitoring and evaluation of service institutions have specific units and systems to monitor delivery quality during project operation are weak. This progress during execution. These institutions, which issue is exacerbated by a poor maintenance culture in the exist both within the Ministry of Finance and within other management of public assets, resulting from the inefficient line ministries, evaluate budget execution, overruns and use of available resources, capacity constraints and a failure compliance with schedules, among other matters. The to implement ex post evaluations of completed projects. operation, maintenance and ex post evaluation of the Uganda’s budget allocations to operations and maintenance performance of the public asset is usually the responsibility have increased from about 3.4 percent of the total budget of the project sponsoring agency or in other designated in the period from FY 2004/05 to FY 2008/09 to 8.4 percent entity. However, a number of public sector institutions over the past five years. However, this level of spending on are also responsible for the evaluation of the execution operations and maintenance is still far lower than the level process. These institutions focus on the overall progress of of 20 percent suggested by global good practice, and hence investment projects implemented by the Government, with leaves many agencies with inadequate resources capacities examples of such institutions including OPM and NPA. to maintain assets. 49 Overall, existing processes and programs are marred Inefficiencies resulting from poor inter-agency by weaknesses that undermine project management coordination lead to delays in evaluating projects and result in failures to achieve good value for money. and poor project selection, which together result in a The current public investment program involves the ad failure to produce productive public capital. According hoc identification of projects, with an analysis of projects to the IMF PIMA index, Uganda is ranked lowest among conducted only after they have been earmarked for its peers in the area of project appraisal selection and ex financing. There are insufficient mechanisms to ensure post evaluation. While it is ranked highly for its selection of the efficient management of implementation of the projects, the score for the management of these projects construction of assets, let alone the operation and is also lower than its peers. As a result, the overall score for maintenance of these assets. The current process results in public investment management is worse than that for all significant economic and social costs. other countries, except Tanzania (see Figure 24). Figure 24: Uganda’s largest challenge lie in appraisal, managing and evaluation of projects PIM Index Score (0-lowest 20-highest) To ensure that investments generate better value for money, a higher level of scrutiny should be applied to ensure that these investments actually improve public welfare. In addition, the Government should implement According measures to ensure that investment projects are managed to the IMF PIMA effectively and completed on schedule; that projects are index, Uganda is operated efficiently and sustainably; that there is a process of learning to improve future project selection, implementation, ranked lowest among and operation; and that risks are allocated appropriately its peers in the area to ensure efficient and effective implementation of the of project appraisal project, especially the risks between the public and private selection and ex post entities. As Uganda embarks on a road to reform the way public investments are managed, it should draw from global evaluation. good practice while taking stock of its own capacities for implementation. 50 5. How can Uganda maximize value from its public investments? To convert its large investment program into productive assets, Uganda needs to improve its public investment management system. The Government has already initiated key reforms in this area, but given the complexity, particularly related to governance and political economy issues, this requires sustained efforts and commitment. The Government may therefore adopt a systematic approach to streamline and strengthen institutions for managing public investments, including building capacity of Ministries, Departments and Agencies; promote a common understanding of what is required to do through the process, and how it should be done, through clear guidance and standard criteria on key processes; and close gaps in the legal and regulatory framework to clarify and strengthen mandates and incentives. B uilding effective public investment systems can to make a careful assessment of who will win and who will be a complex undertaking, given the various lose as a result of the reforms and formulate an appropriate institutions, processes and mandates that have strategy to manage vested interests. Third, public projects to come together to form a system that is able present opportunities for politicians to engage in pork- to manage investments efficiently. If any part of it does barreling, which allows them to claim delivery of benefits not function properly, then the entire system can be rendered for their constituents. Unfortunately, political pressures to ineffective. For example, it is not sufficient to build efficient locate and build projects to meet these needs are normally budget allocation systems, if projects being funded cannot limited to seeing these projects commence, as opposed to be properly appraised to ensure that they meet criteria following them through to completion to deliver economic for economic return. Nor is it useful to build capacities for value to society. Therefore, designing an effective reform appraisal when there are no mechanisms to enforce the strategy needs to ensure that (i) easy to implement, low-cost results of these appraisals, or if procurement challenges will reforms have been identified and implemented to create raise costs well above the original estimates from the cost- a demonstration effect; (ii) timing coincides with periods benefit analysis, sometimes making the project economically within the political cycle when political leaders can push for unviable. politically challenging reforms; (iii) display a certain level of political realism by providing some visible benefits to political Perhaps most important to recognize is the fact that leaders; and (iv) identify champions, even where a reform is implementing changes to the PIM systems can also be widely supported, while strategizing on how more difficult affected by political and governance challenges. First, parts of reform can be implemented. These challenges the reform of any public management function requires a notwithstanding, improving efficiency of public investments protracted commitment and a high level of discipline. For can bring considerable benefits to the country. It has been reforms to succeed, the approach adopted should recognize estimated that if Uganda increased spending efficiency in the environment in which the reform will be implemented, infrastructure, it could use the same amount of resources including the technical feasibility of the reform, capacities to generate a rate of growth of GDP over the next 10 years to implement it, and political economy dynamics. Secondly, reaching 9.5 percent per annum17 . This rate of growth is some parts of the project cycle, especially during the 3 percentage points higher than the forecasted rate of 6.5 implementation phase, may generate benefits for well- percent over this period and can allow the country to reach connected interests. Reforms that threaten the status quo coveted ‘middle income status in much less time that what can be met with public or covert resistance. Thus, it is vital the current average rates of growth imply. 17. Agenor, P-R., and J-P. Nganou. 2014. “Expenditure Allocation and Economic Growth in Uganda: An OLG Framework.” Uganda CEM Background Paper. 52 5.1 Reforms to Uganda’s PIM system: A included a new audit tool and a framework that focuses on 15 critical entities to improve the efficiency of procurements. great start, but a continued effort The Government also commenced the e-Government still needed! Procurement Strategy, which was launched in 2014. It also opened regional offices in two towns to place procurement Recently, the Government has implemented a number services closer to the implementing entities. A Public of measures intended to start a reform process that may Procurement Policy is expected to professionalize the improve Uganda’s PIM system. First, a number of reforms procurement cadre and to streamline the framework for high to budgeting and overall public financial management have value contracts. This policy is awaiting Cabinet approval. been initiated through the promulgation of the PFM Act (2015), with these reforms expected to result in improved 5.2 Moving forward with reforms efficiency to the management of public finances. Second, the Ministry of Finance has embarked on measures to strengthen In many cases, it is clear what needs to be done to its gate-keeping function by creating a department in improve Uganda’s PIM systems. However, actually charge of Project Analysis and Public-Private-Partnerships implementing these measures will require a strong effort, (PAPP) in 2015. This creates a systematic structure with given the nature of the reforms needed. To achieve clearly defined mandates to manage the project cycle, a genuine improvement in the efficiency of public and project quality assurance. Among other matters, the investments, a systematic approach to close gaps must PAPP Department is expected to ensure that technical and address the following three issues: (i) streamlining the economic analysis of public investment initiatives at the institutional arrangements for the management of public national and/or regional level is conducted thus acting as investments across the project cycle; (ii) ensuring a shared an independent reviewer of the projects. Therefore, it is understanding across institutions regarding what needs responsible for analyzing, appraising and recommending to be done and how it should be done. This involves or rejecting public investment projects for financing and standardizing the information and documentation needed execution; defining and updating general and sector rules, to guide the identification, formulation, preparation, guidelines, circulars and norms that inform the formulation appraisal, investment decision, operation, monitoring and and appraisal of investment projects; providing technical evaluation of projects across all implementing agencies; support to MDAs and local government evaluation teams and (iii) determining where gaps in the legal and regulatory or planning units; coordinating the provision of nation-wide environment exist and how they should be closed to training on issues of project preparation and project appraisal; strengthen mandates and the incentive structures. The providing the secretariat to the Development Committee, actions already implemented by the Government are a with the latter mandated to approve or reject submitted significant step forward in this regard. The establishment projects for project execution by granting a seal of approval; on a department for the appraisal and analysis of projects and undertaking selected monitoring and ex post evaluation and measures to build capacity in project preparation and for selected key projects. With technical assistance, the unit appraisal for the PAPP department and other selected MDAs, has developed public investment guidelines and manuals are certainly steps in the right direction. In addition, the and started building capacity in the area of project appraisal formulation of simplified guidelines for the preparation within the Ministry and in other MDAs.18 Amongst other and appraisal of projects to be used by MDAs is a good measures, it has developed a simplified manual for public example for the drafting and formulation of other investment appraisal. This department can indeed champion documentation that guides the PIM process. Meanwhile it the strengthening of the overall PIM system, while remaining is necessary to maintain momentum to address remaining cautious not to overburden the MFPED with roles that should challenges to make a lasting positive impact on the way be undertaken by other agencies along the PIM cycle. public investments are managed in Uganda (see Table 3). If there is no follow through on these reforms, then issues In recent years, there have also been major resulting from inadequate oversight, poor projects, delayed improvements to the procurement function. Closely implementation, cost overruns, neglected assets, and following the amendment to the PPDA Act in 2014 March, corruption, among others; will continue to erode value form the PPDA Strategic Plan 2014-2019 was developed, with Uganda’s public investments. this plan providing for initiatives to improve the manner in which public procurements are managed. These changes 18. Through funding from DfID trust fund, the World Bank provided a technical assistance to the Government of Uganda to support it to strengthen its PIM system. 53 Table 3: Reforms in public investment management: Addressing key gaps PRINCIPLE SOME REMAINING CHALLENGES IDENTIFIED CONSEQUENCE Guidance: Some projects included in the NDP are too broad and others not fully Projects not aligned with owned by sector MDAs. Some projects from sectors are weak and/or not consistent national priorities with national priorities. No process exists to ensure that new project ideas and proposals are taken through the same screening process as those in NDP to ensure consistency with the national priorities. Appraisal: Overlapping mandates, weak capacities and the lack of coordination Poor quality projects between the different institutions lead to poor quality projects, sometimes without Delays in implementation pre-feasibility or feasibility studies. They also lead to major differences between donor- and government-funded projects. The NDP2 also indicates some tasks related to project appraisal and selection, which clearly overlaps the work being done in MFPED. In addition, Uganda is yet to develop a database of ready-to-go projects and is yet to decide on the model for management of PPPs. Institutional Independent review: The new unit established within the MFPED to appraise and Poor quality projects streamlining and select projects for financing may in some cases serve as the independent reviewer. strengthening Lack of clarity on mandate, thresholds, and other aspects, for which projects should along the project be subjected to independent reviews leaves different projects being subjected to cycle different standards. Implementation: Projects are implemented by a range of MDAs with varying levels Cost and time overruns of capacity. In addition, poor project preparation, delays in the disbursement of resources, acquisition of right of way, social safeguards, and procurement, among others, lead to chronic under-execution and to cost and time overruns. Operation and ex post evaluation: The systems for monitoring execution of No tracking of projects are weak and not coordinated across different MDAs. Even after they are performance completed, monitoring and evaluation of value created by public investments is Inappropriate erosion of non-existent because Uganda does not undertake a systematic follow-up on project public assets completion reports; it does not maintain an asset management strategy; and it does Increase in cost of capital not carry out impact assessment reports. This is further complicated by the poor maintenance culture. Enforcement and gate-keeping role has to be strengthened for these frameworks to Poor quality projects be binding. High cost of projects In addition to the simplified manuals that have been created, other critical documents that should be prepared include: (i) Standard criteria for formulating Document project performance indicators, with this criteria also emphasizing the strategic fit standardization with national priorities; (ii) Standard national parameters to use in project assessment (e.g. shadow prices, unit costs, discount rate, among others); (iii) a comprehensive framework for PPPs, SOEs and local governments; (iv) a framework for the monitoring and evaluation of all public capital assets. Legal and There is no explicit legal provision for a PIM framework. Clarity of mandates of Political interference Regulatory institutions would require legal provisions to remove overlaps as is the case for the Poor quality project Framework appraisal function within the PAPP department, but claimed by NPA. Projects not consistent with national priorities 54 The strategy to reform Uganda’s PIM system should 2. Build the capacities of Ministries, Departments and prioritize addressing the most binding constraints Agencies (MDAs) and other implementing agencies, preventing good investment. With the current poor particularly in the area of project preparation, execution of projects in Uganda, there is a temptation to appraisal, approval and monitoring phases (Action A2 apportion the problem to be solely due to the way projects in the PIM Reform Action Plan) are implemented and to prioritize reforms related to project execution. However, as the previous sections have made In the short term, training should be focussed on capacitating clear, most delays in the execution of projects result from a core group of technicians across the different MDAs the poor quality-at-entry of these projects. Moreover, as involved in the preparation and appraisal of projects within the contribution of external donors to financing of projects their own agencies. Building and sustaining the range of declines, the Government puts greater emphasis on non- skills required for effective PIM system can be accelerated concessional funding, and with the expectation that oil through the establishment of linkages with higher education revenues will eventually finance a large component of centres. Susequently, building capacities at all levels of the projects, it becomes vitally important to improve capacities Government, would require developing training programs to manage investments. Building capacity is in the area of the targetting officials and staff at the basic, intermediate and preparation of projects and their appraisal and selection could advanced levels for all agencies, particularly those involved in generate the most rapid gains. Thus, the proposed action preparing and implementing projects. plan consists of some actions that should be implemented 3. Document and implement good practice operational as soon as possible, while other actions can be implemented processes, starting with project preparation and over the next five year period. A PIM reform action plan that appraisal (Action B1 in the PIM Reform Action Plan) has been carefully calibrated along the three dimension of strengthening institutions, document standardization, and This action relates to standardizing the information and closing the gaps within the legal and regulatory framework documentation that guide the PIMs. This should focus on is summarized in Figure 25. It recommends that the reform developing manuals that support the different processes and could move as follows: ensure that they are implemented. To improve the capital investment project design, appraisal and selection processes, I. Immediate actions to progress PIM reform the procedures for preparing and presenting projects for The Government can pursue the following six actions final appraisal and approval must be streamlined. To achieve immediately: this, guidelines and manuals must be prepared for MDAs and other implementing agencies to ensure that they implement 1. Formalize and strengthen independent review of new the appropriate measures to achieve the meaningful project proposals (Action A1 in the PIM Reform Action Plan economic evaluation of projects. below) The integrated project appraisal can be a key technical tool Currently, the role of independent review of project proposals to facilitate decision-making processes and to ensure the is partially being handled by the PAPP Department within the efficient allocation of public resources. To ensure that project Ministry of Finance, Planning and Economic Development. appraisals fulfil these functions, a range of project appraisal This department is new and would need to be nurtured methodologies need to be developed. This will involve the and groomed to fully perform the role of an independent development of templates and applied case studies, with reviewer. This would strengthen the role of the Ministry as the priority given to sectors and project types that have the gate-keeper with respect to spending of public resources to highest budgetary impact. The process of developing these generate value. To fulfill its mandates, the PAPP department methodologies should involve periodic training activites for must prepare clear procedures and guidelines to define how a range of different types of users. There is a need to develop the economic analysis of projects should be conducted, with capacities to use the various methods of analysis for all these guidelines defining the norms, standards and rules to projects, incluidng those executed in cooperation with the be followed. The unit must also determine how it will be able private sector through PPP arrangements. to provide support to other MDAs and local governments, including through training, and what criteria it will use to A key component of this exercise will be to establish a set approve or reject projects. of standard national parameters, including shadow prices, unit costs, and the discount rate, as well as standard criteria 55 for project performance indicators, aimed at ensuring that thereafter be the basis for legal and regulatory changes for its projects are aligned with national strategies priorities. The implementation. MFPED has already begun to prepare a number of such manuals. However, it is also necessary to create incentives to II. Medium term actions to gradually reform the PIM ensure the compliance of all parties involved, including the process MDAs, hired consultants and donor agencies. To achieve this, As previous sections have made clear, it will not be possible project profiling criteria should include qualitative criteria to implement comprehensive reforms to Uganda’s PIM system based on strategic priorities and linkages; a mapping with through a single action. Rather, it will involve an ongoing expected outcomes; a determination of the impact in terms process in which the most binding constraints are addressed of the achievement of final objectives; and a prioritization first, with later actions intended to build and refine upon of projects in accordance with qualitative and quantitative earlier achievements. In the medium term, Government criteria that stresses the achievement of efficiency and cost should consider implementing further improvements in effectiveness in the implementation of the projects. efficiency and effectiveness in PIM. Four actions to achieve Furthermore, the standard framework for the management of this include: PPPs should be documented, as should the framework for the 1. Clarify roles, mandates and responsibilities of various management of projects by SOEs and local governments. entities within the PIM process (Action A3 in the PIM 4. Create a technical fund to facilitate feasibility studies Reform Action Plan below). during the pre-investment stage (Action B2 in the PIM To support the proposed changes, it will be necessary to Reform Action Plan) determine how the new paradigm for the management of This is a prerequisite for ensuring that agencies can actually public investments can fit into the Government’s existing undertake the required feasibility studies. Similar modalities structure. With PIM system decentralized to different could be adopted for both GOU and externally funded entities, each of which has specific roles to play within the projects to ensure projects are properly prepared by the project cycle, it will be critical to re-evaluate the different MDAs before they are submitted for consideration in the entities to remove redundant, un-coordinated, overlapping medium term fiscal framework. responsibilities, which leads to wastage and inefficiency. The outcome should be a mapping and re-engineering of the PIM 5. Establish a standard framework for the monitoring processes to support the better implementation of projects. and evaluation of all public capital investment projects under implementation (Action B3 in the PIM 2. Develop an integrated bank of projects (IBP), to Reform Action Plan) constitute a central database and depository for public projects, including pipeline projects, with clear While MDAs currently undertake this function to some extent, criteria and a systematic approach for their inclusion and monitoring and evaluation is being done both by the (Action A4 in the PIM Reform Action Plan below) MoFPED and Office of the Prime Minister, there needs to be a single entity and standard framework that can ease tracking Such a data bank directly corresponds to the function of and ensure remedial actions. The immediate step under improving the quality-at-entry and having ready to go this action could be to re-assess the existing portfolio of projects for implementation. It should contain information projects already under implementation and take action where related to beneficiaries, sector statistics, technical parameters, financial and technical risks are highest. demographics, information on poverty, social indicators, and other matters relevant to project formulation. In order 6. Formulate a policy framework for PIMS (Action C1 in the to manage the IBP effectively, it will be necessary to build PIM Reform Action Plan below) focussed systems capacity in technical (such as software management, data collection for project formulation at sector This will create the background for overall understanding of level) and in non-technical matters (such as the interpretation the PIM system across the various institutions of government, of information from the IBP to ensure it is used efficiently and including the executive, parliament and the judiciary, and will appreciation of usefulness of the process to PIMS. 56 Therefore, development of the the IBP will involve the amendments or the enactment of new laws to strengthen development of software components structured around the system. While this update has focused on the need to four sub-systems that regulate the entire process of public strengthen institutions and streamline their mandates, it investments: (i) the identification (technical economical is likely that implementation of the proposed reforms will analysis) sub-system; (ii) the pre-investment (capital budget uncover the need for changes to the legal and regulatory formulation) sub-system; (iii) the implemention (budget framework. The proposed policy framework suggested in execution) sub-system; and (iv) ex post evaluation sub- the action 6 among the immediate actions, will provide the system. As an integral part of the IBP, a data collection module background for required legal reforms. should be developed to support project formulation at the sector level. The purpose of this module should be to collate 4. Develop a system for monitoring and ex post project information that improves project formulation at the sector evaluation of projects (Action B4 in the PIM Reform Action level. Plan below) Capacity building should also involve training of trainers to Usually, ex post assessment and evaluation is conducted facilitate the rapid and effective transfer of knowledge. In the by funding agencies as a required process for compliance medium term, selected local universities should be involved with their funding arrangements. In general, particularly for in the delivery of these courses, with training sessions open to projects using the Government’s own funds, the ex post staff of central and local government agencies. assessment of public investment projects is weak, with basic comparison of project costs, timelines and deliverables 3. Enhance the legal and regulatory framework required against budgets and plans being rarely conducted. For the to support PIM (Action C1 in the PIM Reform Action Plan development of an effective PIM system, a comprehensive below) system to facilitate the evaluation of past project experiences and to formulate lessons learned to serve as input for future Implementation of the PIM system may expose gaps in the project designs and implementation is vital. To achieve this, it existing legal and regulatory framework that may warrant is equally vital to build capacities for managing the system. Figure 25. The PIM Reform Action Plan 57 annexes 59 Table A1: Key Macroeconomic Indicators Indicator Unit measure 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 60 Population Millions 31.0 31.9 32.9 33.9 34.9 35.9 37.0 GDP USD millions 20,181.4 20,262.5 23,237.3 24,624.3 26,953.1 26,898.4 27,392.1 Per capita GDP USD 578.9 562.4 652.0 670.0 709.0 748.6 740.9 GDP growth % 5.2 9.7 4.4 3.3 4.5 5.0 5.0 Gross Domestic Savings as % of GDP 19.7 19.5 17..7 21.7 19.9 21.9 24.3 Gross Investments as % of GDP 12.5 12.3 28.2 29.5 29.0 31.5 24.3 Inflation (period average) % 9.4 6.5 23.4 5.8 6.9 2.7 7.7 Exchange Rate (end-year) UGX/USD 2,283.3 2,623.2 2,484.4 2,630.6 2,599.7 2,918.8 3,102.5 External Sector Exports - Goods and Services Million USD 3,470.1 3,828.6 4,698.3 5,051.5 5,048.6 4,974.3 6,327.6 Imports - Goods and Services Million USD -5,757.2 -6,839.9 -7,684.4 -7,579.3 -7,745.4 -7,965.6 9,696.8 Current Account Balance Million USD -1,631.0 -1,984.0 -2,219.0 -1,856.0 -2,363.0 -2,430.0 -2,187.0 Balance of Payments (overall balance) Million USD 235.0 -597.0 759.0 337.0 509.0 -356.0 -239.0 Gross Foreign Reserves Million USD 2,384.7 2,044.0 2,643.8 2,912.3 3,394.0 2,895.0 2,645.0 External Debt Million USD 2,343.4 2,904.9 3,067.3 3,742.9 4,339.5 5,103.1 7,058.1 Foreign Direct Investment Million USD 693.0 719.0 1,244.0 940.0 1,225.0 1,153.0 838.0 Monetary Sector Average Deposit Rate % 2.0 2.1 3.2 3.0 3.1 3.3 3.2 Average Lending Rate % 20.7 19.8 24.6 24.8 22.1 25.2 23.7 Growth in Money Supply (M3) % 23.6 25.7 26.1 17.4 15.7 16.6 15.2 Government Finance Total Domestic Revenue as % of GDP 10.5 13.6 11.2 11.4 11.9 13.6 13.9 Tax Revenue as % of GDP 10.3 10.9 10.1 11.0 11.4 12.8 13.4 Non Tax Revenue as % of GDP 0.3 0.2 0.4 0.5 0.5 0.6 0.5 Grants as % of GDP 2.1 1.9 1.9 1.5 1.0 1.2 1.7 Total Expenditure and net lending as % of GDP 16.7 19.1 15.6 16.5 16.7 19.4 22.1 Recurrent Expenditure as % of GDP 10.5 12.7 9.4 9.1 9.8 10.3 10.8 Development Expenditure as % of GDP 6.1 6.1 5.8 6.6 6.9 7.0 8.2 Fiscal Balance (overall) as % of GDP -4.0 -3.6 -2.5 -3.6 -3.8 -4.6 -6.4 2008/9 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 Monetary Aggregates M3 as % of GDP 18.3 15.1 13.4 10.6 10.0 9.4 9.0 7.9 M2 as % of GDP 14.3 11.7 10.4 8.3 7.9 7.5 7.2 6.2 M3 growth rate (%) 25.0 23.6 25.7 26.1 17.4 15.7 16.6 15.2 M2 growth rate (%) 26.3 22.7 22.2 24.3 21.2 17.6 17.9 16.1 Domestic Credit Total domestic credit (% of GDP) 9.2 7.8 7.3 5.2 5.2 5.2 4.7 4.2 Private sector credit (% of GDP) 10.4 9.2 7.9 6.3 6.2 5.7 5.4 4.7 Total domestic credit growth (%) 64.1 52.4 50.6 32.7 27.8 19.7 17.8 27.9 Private sector credit growth (%) 31.3 30.7 26.8 21.5 23.9 18.6 17.3 17.0 Interest Rates Structure Average TB rate (period average, %) 8.4 5.3 7.6 17.2 10.3 9.3 18.7 14.0 Average lending rate (%) 20.9 20.7 19.8 24.6 24.8 22.1 25.2 23.7 Average deposit rate (%) 2.1 2.0 2.1 3.2 3.0 3.1 3.3 3.2 61 62 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 3.3 4.8 5.0 5.0 Agriculture 3.2 2.9 1.1 1.8 3.0 3.0 2.8 Industry 7.8 11.4 3.0 4.4 3.9 7.9 7.8 o/w manufacturing 4.5 7.8 2.7 -2.5 2.2 11.0 9.7 o/w construction 12.5 15.0 3.9 10.8 5.3 2.7 5.5 Services 5.9 12.4 3.9 4.1 4.3 5.3 5.5 GDP Shares (% of constant GDP) Agriculture 26.2 24.6 23.8 23.5 23.1 22.6 22.1 Industry 18.1 18.4 18.2 18.4 18.2 18.7 19.2 o/w manufacturing 8.5 8.4 8.2 7.8 7.6 8.0 8.4 o/w construction 5.8 6.0 6.0 6.5 6.5 6.3 6.4 Services 48.5 49.7 49.9 50.3 50.2 50.2 50.4 Fish and net taxes 7.2 7.3 8.1 7.9 8.7 8.2 0.0 GDP Shares by expenditure type (% of nominal GDP) Final Consumption Expenditure 83.2 84.2 86.6 82.0 82.6 86.5 Households 73.8 74.6 73.9 74.1 74.1 76.9 Government 9.4 9.6 12.7 8.0 8.5 9.6 Gross Capital Formation 27 27 28 28 27 24.9 Gross fixed capital formation 26.6 26.5 28.1 27.4 26.5 24.4 Charges in inventories 0.4 0.3 0.3 0.4 0.5 0.5 Net exports -10.1 -11.0 -15.1 -10.3 -10.1 -11.9 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 22.0 Table A3: Central Government Fiscal Framework (% of GDP) Approved Ushs Billions Outturn Outturn Outturn Outturn Outturn Outturn Outturn Projection Budget Budget 2008/9 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2015/16 2016/17 REVENUE & GRANTS 13.5 12.7 15.5 13.1 12.9 13.0 14.8 15.1 15.7 16.2 Revenue 11.0 10.5 13.6 11.2 11.4 11.9 13.6 13.6 13.9 14.4 URA Revenue 10.6 10.3 10.9 10.1 11.0 11.4 12.8 12.9 13.4 13.9 Other Non Tax Revenue 0.4 0.3 0.2 0.4 0.5 0.5 0.6 0.6 0.5 0.5 Grants 2.6 2.1 1.9 1.9 1.5 1.0 1.2 1.6 1.7 1.8 Budget Support Grants 1.5 1.1 1.1 1.0 0.3 0.3 0.3 0.3 0.4 0.3 Project Grants 1.0 1.0 0.8 0.9 1.2 0.7 0.9 1.3 1.3 1.5 EXPENDITURE 15.0 16.7 19.1 15.6 16.5 16.7 19.4 22.1 22.1 22.5 Recurrent Expenditure 9.5 10.5 12.7 9.4 9.1 9.8 10.3 10.4 10.8 10.4 Wages & Salaries 3.4 3.2 3.5 3.1 3.4 3.5 3.7 3.5 3.6 3.6 Non Wage 4.4 5.4 8.2 5.3 4.3 4.9 5.0 4.9 5.2 4.7 Interest Payments 1.0 0.9 0.9 1.0 1.4 1.4 1.6 2.0 2.0 2.2 Development Expenditure 4.8 6.1 6.1 5.8 6.6 6.9 7.0 8.6 8.2 9.7 Net lending and investment -0.2 -0.1 -0.1 -0.1 0.6 0.0 1.8 3.0 2.9 1.9 Others 0.8 0.2 0.4 0.5 0.1 0.0 0.3 2.7 0.1 0.4 OVERALL DEFICIT Including grants -1.5 -4.0 -3.6 -2.5 -3.6 -3.8 -4.6 -7.0 -6.4 -6.2 Excluding grants -4.0 -6.1 -5.5 -4.5 -5.0 -4.8 -5.9 -8.6 -8.1 -8.0 FINANCING 1.5 4.0 3.9 2.0 3.3 3.6 4.6 7.0 6.4 6.2 External Financing (net) 1.6 1.9 1.5 2.0 2.2 1.3 1.2 5.0 4.8 5.0 Domestic financing (net) 0.0 1.7 2.3 0.0 1.0 2.3 3.3 2.0 1.6 1.3 memoranda items 63 GDP at market prices (Ushs billions) 34,504 40,946 47,078 59,420 63,905 68,407 74,565 83,596 84,306 92,878 64 Table A4: Balance of Payments (percent of GDP unless otherwise stated) Variable 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 Current Account (incl transfers) -8.1 -9.8 -9.5 -7.5 -8.8 -9.2 -8.0 Exports of goods 11.5 11.3 11.4 11.8 10.1 10.3 10.8 o/w coffee 1.3 1.8 1.9 1.7 1.5 1.5 1.4 Imports of goods -20.4 -23.1 -22.6 -20.4 -18.8 -18.8 -18.6 o/w oil imports -2.5 -3.4 -4.1 -4.2 -4.0 -3.5 -2.5 Services (net) -2.1 -3.4 -1.7 -1.7 -1.2 6.6 -2.5 Trade balance -8.9 -11.8 -11.1 -8.6 -8.7 -8.5 -7.7 Income (net) -1.7 -1.7 -2.0 -2.2 -2.9 -2.9 -2.5 Current transfers (net) 4.6 7.1 5.3 4.9 4.0 5.0 4.7 Capital and Financial Account 8.8 5.3 10.1 7.3 8.4 6.4 7.1 Capital account 1.0 0.8 0.8 1.2 0.8 0.7 1.2 Financial account 7.9 4.5 9.3 6.1 7.6 5.7 5.9 o/w direct investment 3.4 3.5 5.4 3.8 4.5 4.4 3.1 o/w portfolio investment 0.2 0.0 -1.1 0.2 0.0 -0.6 0.0 Overall Balance 1.2 -2.9 3.3 1.4 1.9 -1.3 -0.9 Gross International Reserves (million USD) 2,384.67 2,043.98 2,643.77 2,912.34 3,394.0 2,895.0 2,645.0 Gross international reserves in months of imports 4.4 3.2 4.3 4.5 5.1 4.3 3.6 For more information, please visit: www.worldbank.org/uganda Join the discussion on: http://www.facebook.com/worldbankafrica http://www.twitter.com/worldbankafrica 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