By DANIEL K. KALINAKI The EastAfrican
Posted Saturday, August 23 2014 at 17:21
Posted Saturday, August 23 2014 at 17:21
In Summary
- 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.
No comments :
Post a Comment