The Uganda Economic Update released by the World Bank today shows the country currently with a shortfall of nearly $1.4 billion in financing per year, equivalent to 6.5 percent of its Gross Domestic Product (GDP). Uganda needs to explore raising capital from the private sector to finance its infrastructure investments, which are key to driving growth, creating jobs and reducing poverty.

The report, “Infrastructure finance deficit: Can public-private partnerships fill the gap?”, shows Uganda’s economy growing at an annual rate of 2.5 percent by the of end March 2017. While this falls significantly short of earlier projected annual growth of 4.5 percent, GDP is still expected to rise to 5.2 percent in FY 2017/18, and to 6 percent in the following year. This is likely to be propelled by the development of oil-related infrastructure following the issuance of long-awaited oil exploration agreements.

This infrastructure includes an oil pipeline that will be jointly developed with Tanzania, an oil refinery in western Uganda, and a Standard Gauge Railway to the Indian Ocean. The construction and services sectors will continue to be the main drivers of growth, the Update says.  

Its renewed tendency to grant tax exemptions and the low rate of collecting taxes – now at 13.5 percent of GDP – could undermine the government’s ability to provide services and support faster growth, notes the Update. Combined with poor return on public investments, this could make it difficult to service the country’s growing debt. Other risks include unpredictable weather that could affect agriculture, uncertainty over the Kenyan elections, and continued strife in South Sudan, all of which could affect the economy significantly.

The Economic Update recommends the establishment of robust institutions and procedures to manage Public-Private Partnerships. It says Uganda adopted the Public-Private Partnership Policy Framework in 2010 while the Public-Private Partnerships Act was approved in 2015. However, a lack of implementation means public-private partnerships have been slow to take off. “Public-private partnerships have the potential to offer many benefits for the Government and the people, but their management requires strong structures and policy frameworks,” said Rachel Kaggwa Sebudde, World Bank Senior Economist.

In addition to strengthening the legal and regulatory frameworks, the report also calls for transparency and accountability to allow citizen engagement and involvement in decision making.

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Leveraging Public-Private Partnerships to Plug Uganda’s Deficit in Infrastructure Finance

Public-private partnerships possess the potential to help Uganda raise the money it needs to fund investment in its infrastructure. The ninth edition of the Uganda Economic Update analyses public-private partnerships’ (PPPs) potential to mobilize private capital to bridge the gap in financing, something which would also help tackle poverty and improve the lives of Ugandans.

Traditionally, governments have been the main provider of public infrastructure and other public goods. Budgetary constraints, however, have made alternative options for financing necessary to supplement government resources. And, in this, experience shows that the private sector can successfully finance and manage investment in public infrastructure efficiently and profitably to supplement government-led public spending.

Uganda currently has a financing gap of about US$1.4 billion a year for infrastructure investment, but the cost of inefficient infrastructure is also high, estimated at US$300 million a year, due mainly to corruption – especially underpricing – and the sector’s inability to complete projects within budget and on time.

The country’s most successful PPP, the Umeme concession has distributed electricity more efficiently. Since March 2005, the company has increased the collection of sales revenue from 65 percent in March 2017 to 98 percent in June 2017, and improved people’s access to power in areas within reach of its services. But, despite its success, it has been tainted by operational and governance problems. A parliamentary assessment found irregularities and manipulation in the procurement of the concession, and the power distribution agreement had to be revised to minimize costs to the government.

“The success of public-private partnerships depends on the government’s ability to establish a framework with laws, systems, processes, and contracts that promote financially viable PPPs, especially where there are natural monopolies or market failures,” notes Rachel Sebudde, World Bank Senior Economist and lead author of the Update.

“To maximize the benefits of PPPs, the government must allocate sufficient resources to make sure projects are prepared well,” she said. “The selection of PPP projects should involve analysis to verify that a project is feasible, attractive to the private sector, and provides value for money.”

Uganda has instituted legal and regulatory reforms, including the PPP Policy Framework (in 2010), and the PPP Act (approved in 2015), but as a country it still lacks the institutions to implement these policies. Based on experience in Uganda and global best practices, the Update recommends areas of improvement to allow PPPs to achieve their intended objectives:

• Establish appropriate institutions to put existing legal and policy frameworks into practice. This can be done by building the capacity of the central PPP unit and other contracting authorities to enable them to prepare, appraise, and provide better oversight.

• Improve the mobilization of budgetary and non-budgetary resources, including from our own domestic resources and from bilateral and multi-lateral donors. Setting up a Project Development Facilitation Fund would help fund project preparation and a robust PPP pipeline, as well as act as a liquidity reserve to serve as a backstop for liabilities.

• Key information related to both operational and pipeline projects, including the PPP database, should be publicly disclosed in a timely manner to ensure greater transparency and accountability, enhance competition, stimulate investor interest, and allow better stakeholder and citizen engagement and involvement in decision-making.

• While the government is expediting the development of the pension sector and implementing the Capital Markets Master Plan, it should also mobilize domestic currency financing by establishing syndicates of commercial banks and large surplus institutions to finance PPPs, such as pension funds, particularly the National Social Security Fund (NSSF). Innovative mechanisms such as infrastructure debt funds can also be formed.

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» Download: Uganda Economic Update, ninth edition: Infrastructure finance deficit – can public-private-partnerships fill the gap? (PDF, 1.27 MB)