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Ugandan economists divided over infrastructure bonds

Infrastructure bonds could be issued for works on electricity dams in Uganda

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By Nelson Mandela Muhoozi

The idea of introducing infrastructure bonds that the Government of Uganda is mulling as one of the mechanisms to generate resources to finance the country’s infrastructure, remains contentious amongst economists. While some of them say it is a good new product that will supplement government sources to fund infrastructure projects,  others argue that the bond will eat into the already bad credit atmosphere for the individual  borrowers in the country. 

Godfrey Dhatemwa,  the Commissioner department of Policy and Issuance at the Ministry of Finance Planning and Economic Development affirmed to The Infrastructure Magazine that the government is considering diversifying its investment products,  and infrastructure bonds will be one of them. He said the Ministry of Finance recently embarked on identifying alternative financing options through the capital markets. Issuing infrastructure bonds is one of the options on the table.

Ramadhan Ggoobi, an economics lecturer at Makerere University Business School, has however argued that introduction of infrastructure bonds in a situation where commercial banks already inject a lot of money in investing in government paper, will only serve to drain resources from the commercial market, as most commercial banks will prefer to invest their money in the relatively more secure government bonds, as against lending the high risk ordinary borrower. This, he said,  will make money more scarce and more expensive for the ordinary borrower, thereby starving the economy of money for growth.

Infrastructure bonds are debt instruments issues by governments that can be used to raise money to finance projects like roads, energy, etc. They are government products to raise local resources.

Prof. Emmanuel Mutebile, the Governor Bank of Uganda is also on record for saying that there is no need for government to issue another product in the market, and that all is needed to be done, is strengthening already existing mechanisms.

The multi-trillion worth National Social Security Fund (NSSF) has in the past not hidden its appetite for infrastructure bonds. Last year, Richard Byarugaba, the Fund’s managing director told the media in Kampala that such bonds would be a welcome development for the social security entity whose deep purse was running out of local investment options.   

“We believe infrastructure bonds will provide a real opportunity to diversify NSSF’s investments given the dearth of opportunities in the Ugandan market that can absorb the Fund’s cash flows,” Byarugaba told.

Joseph Mawejje, a research analyst at the Economic Policy Research Centre in Kampala, told this Magazine that there are various options available to the Government to generate resources to finance infrastructure development. The first option is to improve domestic revenue mobilization, thereby finance projects from budgets.  

He was however quick to observe that it is a well-known fact that for long, Uganda’s tax base has stagnated due to, among others, the narrow base; a large informal sector; tax exemptions; and institutional and regulatory weaknesses. Nonetheless, he argued that some innovations can support improved domestic resource mobilization efforts to support infrastructure development.

“Leveraging the contribution of non-tax revenues is key. Unlocking the potentially large contributions of non-tax revenue will require reforms that will mandate self-accounting bodies to collect non-tax revenue and remit it to the centre rather than spend it at source. This strategy can mobilise an additional UGX 130 billion per annum if well handled,” Mawejje told The Infrastructure Magazine.

He said, currently, Uganda loses up to half of resources allocated to various infrastructure projects due to challenges in public project management. This loss according to Mawejje is caused by an inefficient planning, absorptive capacity constraints, poor project selection and execution, inflated unit costs, issues with compensation and fraud.

He said remittances could be another feasible window for improving Uganda’s external financing flows in the country. Mawejje explained that Uganda can draw lessons from Ethiopia, where a diaspora bond was successfully issued in 2011 to finance the Grand Renaissance dam, whose project cost was estimated at US$ 4.8 billion.

“This experience shows that diaspora bonds could be an important fundraising vehicle critical to the successful mobilization of revenues for infrastructure investments.”

He, however, said that considering the high domestic appetite for credible investments, as evidenced by the recent oversubscription to initial public offers for Umeme, Stanbic and Safaricom, “Government should consider, as a first step, floating a domestic infrastructure bond as a means of attracting long-term infrastructure financing.”

Paul Bwiso, the CEO of Uganda Securities Exchange, said that capital markets in Uganda can be positioned as an alternative source of long-term capital as well as an alternative investment avenue for the public, to take advantage of the expected structural changes in the economy.

He said market challenges like companies not being prepared to undergo due diligence, fear of dilution and control of business, time and costs of coming to the , not being aware of opportunities, among others,  contribute to the low performance and participation in capital markets.

Jet Tushabe , director Tax at Audit Firm BDO East Africa   Tax Practice, told The Infrastructure Magazine that long-term benefits are greater if the government give tax holidays, reduces withholding tax. He said Uganda’s withholding tax is still high compared to other countries in the region. In Kenya,  its 5 per cent and 10 for residents and nonresidents respectively. “Issues lie more in the structure of the market than in the capitalization side,” he said.

 “People need to know that there is a tax advantage in investing with Capital Markets or else people will buy land and other dead assets.”

While appearing before the Parliament Committee on the Economy at the beginning of November, David Bahati, the Minister of State for Planning argued that while internal borrowing will affect the local market, the impact is not as bad as some economists argue. He said the government has invested nearly Shs 2 trillion into domestic borrowing through the Uganda Development Bank, the Uganda Microfinance Centre, among other vehicles.

Dr. Michael Atingi-Ego the deputy Governor of the Bank of Uganda however also recently told the same committee of Parliament that  government internal borrowing could shrink lending space to the private sector by  up to 3 per cent by the end of the financial year (2020/21).

Although Uganda has made progress in infrastructure development, the country still faces huge deficits across most sectors, including tnrasport, energy and water and sanitation that require financing beyond the public budget offerings.

Infrastructural deficits affect the climate and  the cost of doing business with implications for enterprise growth and job creation. Additionally, infrastructural deficits exacerbate poverty and inequality and could therefore hinder the attainment of the sustainable development goals (SDGs).

In general, Africa’s infrastructure has been lagging behind others in the developing world. Approximately 60 per cent of the continent’s population according to estimates from the UN’s Office of the Special Adviser on Africa (OSAA), lacks access to modern infrastructure, which isolates communities, prevents access to health care, education and jobs, and impedes economic growth.

According to OSAA, 75 per cent of Africa’s road network is unpaved and poor port facilities add 30-40 per cent to intra African trading costs. Other research shows that transportation volumes on the continent will increase by up to 6-8 times and or higher for landlocked countries by 2040. The African Development Bank estimated in 2019 that, the continent requires between US$130 -170 billion annually to plug its infrastructure deficit.  

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