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BRIEF July 25, 2017

Infrastructure Finance Deficit: Can Public-Private Partnerships Fill the Gap?

1.    What is the current state of Uganda’s economy?

The economy grew at a rate of 2.5 percent through the first nine months of FY 2016/17. This is lower than the long-term average rate for the two decades ending in 2010, which stood at around 7 percent. In the past nine months, the agricultural sector’s output has been 3.0 percent lower than it was during the same period of Financial Year (FY) 2015/16. The services sector, which has been Uganda’s principal driver of growth in recent years, grew by a lower rate of 4.2 percent compared to the 5.2 percent of the previous five years, and was mainly supported by strong growth in the information and communication subsectors. With the retail and trading sectors starting to recover from disruptions to Uganda’s main market—South Sudan—growth in the industrial sector was mainly driven by an increase in manufacturing. The current rate of industrial growth is far below the range of 4 percent to 5 percent anticipated in the previous Economic Update in February 2017.

2.    What is the outlook for the economy?

The economic growth rate is forecast to accelerate to no more than 3.5 percent to 5.2 percent in FY 2017/18, and to 6 percent the following financial year. Private investment may still be constrained by low levels of business confidence, the South Sudan conflict, and the high cost of credit. However, overall investment growth is expected to be boosted by foreign direct investment in the extractives sector, following the issuance of long-awaited oil exploration agreements. The signing of the East African Crude Oil Pipeline Inter-Governmental Agreement between Uganda and Tanzania to facilitate oil exports should fuel better growth margins. The construction and services sectors will remain the main drivers of growth. The stimulus from Uganda’s public investment program is likely to offset the effects of the weak external sector on the Ugandan economy. Other notable risks include poor fiscal management, low revenue collection (made worse by renewed tax exemptions), an increased number of poorly planned investment projects, and an increased debt to gross domestic product ratio beyond the 50 percent threshold.

In view of Uganda’s investment-driven agenda, the financing of public investments must be managed well and use new innovative funding approaches, such as Private–Public Partnerships (PPPs)—the special focus of this ninth Uganda Economic Update.

3.    What is the significance of focusing on PPPs?

Uganda has an estimated infrastructure deficit of about US$1.4 billion a year and loses nearly US$300 million per a year, too, in inefficient infrastructure spending, mostly through underpricing and the inability to complete projects within cost and on schedule. The government needs to leverage private resources to enable it close financing gaps and achieve higher levels of efficiency. PPPs can help minimize the risks related to inadequate funding of the government’s infrastructure program, and to longer term aspects of ensuring the efficiency of investments for the economic and socio-economic transformation of Ugandans.

4.    Why should the government contract services to private sector?

The private sector is more efficient at mobilizing capital and at building, managing, and delivering infrastructure services. It tends to deliver services at a minimum cost and on time, hence avoiding delays and cost overruns that normally characterize the delivery of public goods. However, the success of PPPs depends upon the government’s commitment to building the appropriate frameworks and institutions to overcome these limitations. Uganda adopted the PPP Policy Framework in 2010 and the PPP Act was approved in 2015, but the country lacks the institutions, human resources, processes and methodologies to implement the framework. As a result, the PPP program has been slow to take off.

5.    What has been the experience of the PPP model in Uganda?

Uganda’s experience with PPPs is primarily in the energy sector. The Umeme concession has been by far the most successful PPP, helping distribute electricity more efficiently in the areas it services. System losses have been reduced from 38 percent to less than 20 percent over a period of 10 years, and revenue sales collection have increased from 65 percent to 98 percent since February 2017. This success notwithstanding, a parliamentary assessment noted that there were irregularities and manipulations in the procurement of the concession, and in the power distribution agreement, which had to be revised to minimize costs for government. The 25-year-old, Rift Valley Rail joint concession that has been operating the railway in Kenya and Uganda provides important lessons. Launched in 2006, the concession appears to have failed to meet specifications for quality and safety, and to have defaulted on concession fees. The concession had to be restructured because the consortium failed to meet its financial obligations.

6.    What actions are needed for PPPs to successfully finance infrastructure and other development programs?

Lessons from Uganda’s experience and global best practice recommend key areas of improvement to guarantee the success of PPPs, including: i) establishing appropriate institutions to put the existing legal and policy frameworks into practice; ii) providing resources to build capacity and finance project preparation to ensure a robust PPP pipeline; iii) improving transparency and accountability to improve competition and allow better citizen engagement and decision-making; iv) using innovative means to mobilize domestic resources alongside domestic financial markets to reduce the financing risk for PPPs.