In Summary

Uganda has been receiving money from the World Bank to finance various projects in the country in agriculture, education, health and infrastructure. However, an assessment report by World Bank points to another problem: Low absorption capacity, meaning government is not using the borrowed money. Mark Keith Muhumuza analyses how delays in such projects eventually double the cost, among other implications, and what government is doing to reverse this trend

Uganda’s reputation from international lenders and financiers is at risk especially after the World Bank suspended any new funding to Uganda to a tune of $1.5b (Shs5.3 trillion).

The result has been occasional shuttle diplomacy of Uganda government officials from the ministry of finance to Washington in order to negotiate with the World Bank to lift the suspension of the funding.

The implications have already been projected, with the International Monetary Fund (IMF) revising Uganda’s growth from 5.5 per cent to 5 per cent in 2016/17.

In part, the IMF reveals that this reduction in the projection is partly because of the World Bank decision.

Low absorption capacity
At the heart of Uganda’s problem, is the poor absorption capacity some of the ministries and agencies have had over the years. The World Bank estimates that there is about $1.8b (Shs6.4 trillion) in unspent money meant for several projects. The money lies idle, with implementation taking about three to five years after the money has been approved.

According to the 2015/16 Budget Performance Report, the absorption capacity of the government has improved from 2014/15.

“In FY 2015/16, there was a high release of 103.8 per cent of the Approved Budget for FY 2015/16 and a high absorption of 98.6 per cent of what was released, this is an improvement from 92.9 per cent at the time of the half-year performance and is similar to the 98.5 per cent absorption of last year,” the report reveals.

It points out that the higher absorption rates were mostly due to supplementary expenditure on Pension and Gratuity payments, election-related expenditures under Electoral Commission, ministry of Defence and Uganda Police for Security related expenses in managing the 2016 General elections. This is spending mostly geared towards recurrent activities and not development expenditure.

Infrastructure funding suffers

It is development expenditure where the government is crying foul.
“Through government’s routine monitoring and evaluation, slow implementation of programmes and projects has emerged as a major obstacle to national development and the transformation process,” Prime Minister Ruhakana Rugunda told development partners recently.
The financing geared infrastructure and other projects have been weak especially those funded with borrowed money. The government blames slow procurement procedures for the low uptake.

“When compared to the budget for FY2015/16, overall external loan disbursements fell short by Shs1.8 trillion due to low absorption capacity arising from slow procurement procedures,” the performance report reads.

When one takes out the recurrent expenditure that has been performing almost at 100 per cent, analysis of the budget for the last five years shows development expenditure has only delivered 63 per cent of successful projects. This affected timely commencement of government projects across the economy.

With all the rush to spend on infrastructure in the energy and works sectors, the government is also underutilising funds and at some point ends up paying the price of the delays including interest payments and sometimes suspension of the funding.

“These challenges are not limited to projects funded by development partners but also those funded by domestic revenues,” says Ms Jennie Barugh, the head of UK’s Department for International Development (Dfid) and head of the Local Donors Group in Uganda.

Inadequate funding levels especially those in local government.
“In this way, service delivery can improve and the return on public sector investment can be improved thus enabling government to achieve its goals and Ugandans to have an opportunity to reach their potential,” Ms Barugh says.

Cart before the horse
The absence of counterpart funding is partly to blame for project commencement. For instance, the construction of the Karuma and Isimba dams delayed by almost two years after the Chinese government insisted that counterpart funding for the two projects first be remitted before construction can start. On several road projects, contractors want the government to deal with compensation before they can even commit to starting work.

Recently, the Shs200b expansion of the Northern Bypass is behind schedule with the contractor, Mota Engil, in part blaming the compensation and removal of structures along the proposed expansion areas.

Over the last 10 year, the World Bank has funded at least 22 per cent of all government projects. This is the highest financing from any international agency. In that same period, the government has accessed about $7.3b (Shs25.8 trillion) from external sources. The performance of this has also been rather low with an unsatisfactory at a rate of 72 per cent.

This means that even when money is absorbed, the work is mostly not delivered as planned. The low and slow absorption of funds resulted into unnecessary costs incurred in servicing those loans including penalties and commitment charges. Commitment charges greatly impact debt sustainability and result in poor service delivery.

Assurances from government
The government has sought to make assurances to external partners about sorting out the issues causing delays.

“The government has created a Project Appraisal Department in the Ministry of Finance, Planning and Economic Development to improve the quality, design and implementation of Projects,” reads the 2015/16 performance report.

The government is also planning to enforce Key Performance Indicators (KPI’s) for government officials. Additionally, all government sectors are being told to focus on actions if they to achieve the Middle Income status by 2020.

Together with the Office of the Prime Minister and Finance Ministry, they are stating that project preparation should be complete before an external loan is disbursed. The admission from the government is that many loans come before the project planning has been completed. Furthermore, the government has been looking to undertake legal and administrative reforms to enable government to acquire land at a much faster pace. Also, Ministries Departments and Agencies that carry out projects are now required have project planning and design units whose outputs are kept in a repository at the Ministry of Finance.
To deal with counterpart funding, the requirement is now for the government to raise the money and ring-fence it.

Inflated costs, fewer returns
A few months before the World Bank halted new funding to Uganda; it had released a report that highlighted that the government was not generating returns for what it invested.

“Over the past decade, for every Shilling invested in the development of Uganda’s infrastructure, less than a shilling (only seven-tenths of a shilling) of economic activity has been generated,” the World Bank highlights.

The Uganda Economic Update, “From budgets to smart returns: Unleashing the power of public investment management,” faults the government for the poor execution of infrastructure projects, right from inception to delivery of the project.

“Endemic delays in implementation, cost overruns and corruption mean that sometimes projects come in at twice the original report. For example, a road project worth $100m (Shs354 billion) could end up being delivered at $200m (Shs708 billion). This means that although the planning and budgeting process is doing a fair job in identifying the right projects that should transform the country and allocate resources to them, they are not efficiently implemented to deliver the expected benefits,” the report

Oil money could make it worse

One of the concerns for oil producing nations is that oil money tends to distort the overall performance of the economy. According to Dr Mohammed Amin Adam from the Africa Centre for Energy Policy, countries that often suffer low absorption capacity – even without oil revenues – would show signs of weakness if the oil revenue comes in.

“When revenue from extractive industries are not efficiently spent, they introduce excess liquidity in the economy, inflation, and output deceleration,” Dr Amin explains.

Uganda already has indicated that oil revenues will not directly fund any direct government expenditure.

The Public Finance Management Act, 2016, indicates that oil revenues shall only be used to finance expenditure that is approved by Parliament and it shall be included in the budgeting process. Dr Amin, however, says absorption capacity can exist, even when the rules are in place.

“Low absorptive capacity can be seen when there is weak public financial management. The result is weak budgetary systems that are often exploited by off-budget expenditure. When off-budget expenditure persists, then there will be poor value for money and corruption takes over,” he explains.