Financing Infrastructure Development In Uganda

Uganda’s progress towards achieving inclusive sustainable growth is curtailed by large deficits in infrastructure
stock, particularly in the transport and energy sectors. This study explores options for financing the scaling up of
infrastructure development in Uganda. The methodological approach involved a review of literature and a survey
of key stakeholders whose views guided the analysis. Findings point to the opportunities and risks of scaling up
domestic resource mobilization, improving efficiencies in public investments, leveraging new sources of external
development financing, options in private financing and the potential role of the natural resource sectors as
summarized below.
Improving domestic revenue mobilisation is the primary available option for financing infrastructure
development in Uganda. However, efforts in this area have been hampered by, among others, weaknesses
in the legal and regulatory frameworks; the narrow tax base; a large informal sector; tax exemptions; and
institutional weaknesses. The study highlights two interventions that can support improved domestic resource
mobilization efforts to support infrastructure development: leveraging the contribution of non-tax revenues (NTR)
and curtailment of capital flight. With respect to enhancing the contributions of NTR, the study proposes that
collection of NTR by self-accounting bodies and spending it at the source should be reviewed because the practice
undermines efforts to improve revenue mobilization. Innovative ways of controlling capital flight involve reviewing
government public procurements and local content provisions. The study proposes reforms to strengthen the
capacity of the local private sector and to develop policy and regulatory frameworks to deepen local content in
government procurement.
Improving public investment efficiency can free up funds and create opportunities for enhanced
infrastructure investments. Currently, Uganda loses up to one-half of public resources allocated to various
infrastructure projects due to challenges in public investment management. This loss is caused by a number of
weaknesses including inefficient planning, absorptive capacity constraints, poor project selection and execution,
inflated unit costs, issues with compensation and fraud. These challenges lead to delays and delivery of substandard
works. When projects are delivered, provisions for operations and maintenance are often neglected,
leading to faster depreciation. Another challenge affecting public investment management is the lack of
coordination between the different agencies and local governments. The costs of these inefficiencies are huge,
and eliminating them could easily double the stock of delivered infrastructure for the same cost. We propose
reforms to improve capacity for public investment management. In addition, we propose carefully crafted land
reforms that would allow government compulsory land acquisition but ensure that any rightful owners are fairly
and expeditiously compensated and/or resettled. This arrangement would circumvent the current challenges with
respect to compensation for land and property.
The changing external development financing landscape implies that cheaper and patient concessional
funds that can be invested in infrastructure are no longer readily available. Development financing from
traditional donors, particularly grants, has significantly decreased. New partners such as China are willing to
provide Uganda with the funds required for major infrastructure developments significantly beyond what the
traditional partners have been willing to offer, but at terms that are more commercial. Leveraging the larger pool
of development partners offers Uganda an opportunity to negotiate for better loans. Otherwise, the dwindling
concessional financing could complicate the debt sustainability position for Uganda. What is required is for
the government to diversify possible sources of financing but also to improve capacity for public investment
management to better utilize the additional available non-concessional financing and offset the associated higher
Financing Infrastructure Development in Uganda
Private financing opportunities from both the domestic and international markets remain unexploited.
However, addressing such opportunities would require Uganda to build capacity in project management as an
important first step. Various options exist for harnessing public-private partnerships (PPPs), pension funds,
remittances, diaspora bonds and sovereign/Eurobonds. These options offer ready credit but on commercial terms.
Funding infrastructure projects using commercial loans requires projects that 1) can pay back; 2) are ready-togo;
and 3) are free from bureaucratic, institutional and political inefficiencies. Uganda continues to struggle in
these areas and should initially build capacity in the various elements of project execution to avoid wastage and
debt distress from non-performing commercial loans. Considering the high appetite for credible investments, we
propose that the government considers floating a domestic infrastructure bond as a means of attracting long-term
infrastructure financing.
Using natural resource revenues to ramp up investments in infrastructure is well articulated in Uganda’s
policy documents. Oil for infrastructure will boost the productivity of the economy by unleashing the productivity
of capital and labour and mitigate any Dutch Disease effects by harnessing idle productive capacity to unlock
the productive potential of the economy and satisfy any resource-induced demand. However, using oil revenues
is subject to risks, particularly price volatility, that could result in investment uncertainty. Another risk relates to
political capture. Mitigating these risks requires that Uganda focusses on building and strengthening the requisite
institutional and policy space, ensure strict adherence to the rule of law, and eliminate rent seeking, political and
elite capture to ensure transformative gains from expenditures of natural resources wealth.
In summation, the best available options for financing infrastructure are enhanced domestic resource
mobilization and improved efficiency of public investment management. The dwindling availability of
concessional financing and options in private financing could complicate the debt sustainability dynamics if
challenges in public investment management and execution are not addressed. Although the oil economy presents
good opportunities, there are significant risks of investment uncertainty that could arise from unfavourable price

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Created Date: 02-21-2017
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