Uganda’s mega projects key to growth but spark renewed debt fears
Karuma Rapids on the River Nile. Inset: Signpost to the Karuma hydro project in western Uganda. PHOTOS | FILE
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Questions are beginning to emerge over the cost of financing these expensive projects, the growing pile of debt to pay for them, the lack of transparency in some of the contract awards, and whether other sectors of the economy are being neglected.
Debt is expected to rise more rapidly as more projects reach financing stages (the oil and railway projects, for instance) and as the government turns to more expensive non-concessional loans to finance infrastructure and plug funding gaps left by donors cutting aid.
A few hundreds of metres from the Owen Falls Dam in Jinja in eastern Uganda, trucks roar back and forth, carrying away earth dug from the banks of the River Nile.
They are part of crews working on a new $130 million bridge over the River Nile. About 45 kilometres downstream, more trucks roar next to the river, this time at the site of the 140MW Isimba hydropower dam.
Head a 100 or so kilometres farther downstream and the same hive of activities is visible at Karuma, where a 600MW dam is being built.
In the past five years, Uganda has undertaken or signed off more infrastructure projects than it has in all the years since the country’s Independence in 1962.
In Kampala, a new toll highway is under construction linking the capital to the airport in Entebbe, while another highway is planned between the capital and Jinja.
In addition, there is a planned standard gauge railway to run to the border with Kenya and on to the Indian Ocean, repairs to the existing railway network, an oil pipeline and refinery, a new airport in the west of the country, as well as a slew of internal road works.
All the projects are desperately needed. The dam at Karuma will, for instance, almost double the country’s installed hydroelectricity potential. The new bridge over The Nile will provide an alternative to the cracking Owen Falls Dam commissioned in 1956.
However, questions are beginning to emerge over the cost of financing these expensive projects, the growing pile of debt to pay for them, the lack of transparency in some of the contract awards, and whether other sectors of the economy are being neglected.
“I am not against infrastructure but when it is put forward as the only thing, as it were, then it is not the only thing; there are other equally important areas of public policy, for example employment,” said Ezra Suruma, a former central bank governor and finance minister who is now a visiting fellow at the Brookings Institute in Washington, DC. “Infrastructure should be one of the policies of creating employment.”
Dr Suruma said not only is most of the money spent on infrastructure externalised by the foreign firms that invariably get awarded the contracts, the growing pile of debt, a lot of it hinged on future oil earnings, is shunting much needed capital away from other sectors of the economy.
“We shouldn’t say that all the oil money should be put in 20 per cent of the economy and ignore the 80 per cent,” he told The EastAfrican. “Capital is a major constraint to our development; let us solve the capital problem for the whole economy.”
Mega infrastructure projects do not come cheap. The Kampala-Entebbe highway will cost at least $350 million; Karuma $1.7 billion; Isimba $570 million; the new Jinja bridge $130 million while the oil infrastructure alone is estimated to cost between $15 billion and $20 billion. The standard gauge railway is conservatively estimated at around $3 billion.
The bulge in public debt is already showing. Uganda was the first beneficiary of the Highly Indebted Poor Countries debt-forgiveness programme in 1998 that, together with the Multilateral Debt Relief Initiative, saw its public debt drop from $3.7 billion to $1.6 billion.
However, the debt has been rising steadily since then and has accelerated since the discovery of commercial oil deposits from 2006.
By June 2012, the debt was $4.3 billion but Finance Minister Maria Kiwanuka said in a policy document that it had grown to $7 billion in March this year, up from $5.6 billion a year earlier.
The World Bank and African Development Bank, which are key lenders, and the IMF, which is a key policy advisor, say the debt, which is now around 33 per cent of GDP and rising, is still within manageable levels.
“Uganda’s external and total public debt-to-GDP ratios have remained substantially below other low income and post-Multilateral Debt Relief Initiative countries,” IMF resident representative to Uganda Ana Lucía Coronel said.
“However, Uganda’s debt levels have increased faster than its peer countries in recent years. IMF does not view this as a concern since debt levels remain low and new debt has been used primarily to finance infrastructure projects, which is expected to enhance long-run growth.”
The debt is expected to rise more rapidly as more projects reach financing stages (the oil and railway projects, for instance) and as the government turns to more expensive non-concessional loans to finance infrastructure and plug funding gaps left by donors cutting aid.
“It is not so much the amount as the speed at which it is growing,” said Dr Suruma. “I am concerned about the rate at which it is growing, especially as we move from concessional loans to non-concessional Chinese loans with two, three, even five per cent interest rates and very short repayment plans. We may be quickly getting into dangerous waters where we will be facing what Ghana is facing, or countries like Zambia, which will very soon be facing the same problem.”
Like Uganda, Ghana had most of its debt forgiven in 2005, discovered oil, and went on a spending spree that has seen its current account deficit exceed 10 per cent of GDP and its currency lose 36 per cent against the dollar as investors lose faith in the government’s ability to curb spending.
While Uganda has borrowed mostly for infrastructure, recurrent expenditure has also been rising. The public wage bill increased from Ush919.3 billion ($367.2 million) in 2011/12 to Ush1,105.4 billion ($441.5 million) from a projected Ush1,071.4 billion ($427.9 million) in 2012/13, representing a 20.2 per cent year-on-year jump, analysis from the AfDB shows.
With an election coming up in 2016, promised wage increases for civil servants, a census and the issuance of national identity cards, this is only likely to rise further.
Louis Kasekende, the Deputy Governor of the Bank of Uganda said that while borrowing for infrastructure projects is inevitable, it must be tempered with caution and proper project planning.
“We should not get into the habit of dreaming up projects and borrowing for them. Everyone is issuing a sovereign bond, trying to do every infrastructure project they ever wanted to do. All borrowings should be done with a medium term macroeconomic framework of debt sustainability,” said Dr Kasekende.
“We must ask, what are the terms? What are the implications for servicing the loans? We should be concerned.”
Many government officials, including some in the Finance Ministry, privately share these concerns, in particular the off-budget loans, which only appear in the debt stock once the project is completed and handed over, and the nature of the contract awards.
“Increasingly, a Chinese company is awarded a contract, by way of a memorandum of understanding, with a promise for funding from China Exim Bank, often at the political level,” said a senior official in the ministry, who asked not to be identified.
“We are then told to implement a foregone conclusion, which gives the lender the upper hand since they have the political go-ahead, the money, and are keen to start as soon as possible, whether you are ready or not, so they can get their money and their bank can start earning interest.”
IMF’s Ms Coronel said that while the power dams at Isimba and Karuma will add at least a percentage point to GDP during construction and more thereafter, there is a need for more transparency and some of the major infrastructure projects in the pipeline may have to be spread out over longer periods to avoid macroeconomic shocks to the country.
In addition, she said, there is a “key need to avoid domestic debt being used to finance expenditure that does not have a clear repercussion on growth and poverty reduction.”
The parliamentary committee on the economy has also noted that while Uganda is not under debt distress at current levels, the country is “sensitive to high amounts of non-concessional borrowing.”
Originally, Karuma and Isimba were to be sequentially financed from government savings and domestic debt. However, after a bitter battle for Karuma, President Yoweri Museveni awarded it to Sinohydro and gave Isimba to China Water and Engineering, with both firms now expected to bring 85 per cent financing from the China Exim Bank.
Apart from the external loans, the Ugandan government has started borrowing from the domestic market to finance the budget, borrowing the equivalent of 0.7 per cent of GDP after donors cut aid over corruption and human-rights concerns.
Domestic borrowing almost doubled in the year to March 2014, from Ush565 billion ($217.8 million) to Ush1,042 billion ($401.8 million), according to Finance Ministry figures.
This is non-concessional debt and analysis from Uganda Debt Network, an NGO, shows that interest payable on domestic debt in 2012/13 of Ush714 billion ($275.3 million) was higher than the total budget for agriculture, water and environment, as well as the justice, law and order sectors combined.
The largest public infrastructure investment programme in Uganda’s history is built on at least four assumptions: One, that oil production will start around 2018; two, that tax revenues as a percentage of GDP will increase; three, that the projects will come in on time and budget, and four, that the rest of the economy continues to tick, without the shocks of political risk and governance disruptions.
Large infrastructure projects rarely conform to assumptions. When the Uganda Electricity Board commissioned the Owen Falls Dam and power plant on the River Nile in Jinja in 1949, the original project cost was £3.6 million ($6 million at current exchange rates).
By the end of the project the costs had soared to £22 million ($36.4 million). The difference between then and now was that the original dam was mostly built out of local revenues.
In addition, wrangling in the oil industry makes the 2018 projection very ambitious, tax revenues remain stagnant with the government reluctant to reform away exemptions to its big business backers, continuing violence in South Sudan keeps a key export market largely inaccessible, while the Anti-Homosexuality Act, though since struck down, corruption, and restrictions on political and civil liberties, have left donors with a bitter taste in the mouth.
At the bottom of the Karuma Falls, guides on boats like to show tourists a spot where giant Nile crocodiles bask during the day.
Nicknamed Nile Grill after a once famous restaurant in Kampala, it is not a place one would like to find oneself in the water. As dam contractors delicately balance their equipment over the River Nile, public finance policy wonks in Kampala will also be walking a tightrope, weighed down by heavy debt.
Whether in Karuma or Kampala, in the water or the debt markets, mistakes are likely to be heavily punished.
