Uganda: Developing Infrastructure in Emerging Markets

By Brian Kaggwa

Posted: 22nd November 2012 10:05

Given the state of public sector resources around the world, governments seek to enhance resources by attracting private sector participation and Uganda is no exception.  Such participation may be somewhat unstructured but there is a changing trend with the establishment of formal systems.  Presently the Uganda Public Private Partnerships Bill is tabled before parliament awaiting formal implementation upon passing.  Be that as it may, Uganda has already successfully executed a couple of public-private partnership developments, for example the 250MW Bujagali Hydro Power Station and the Kampala Serena Hotel (five-star hotel) through the informal structures.
 
The current frailties of the global economy have forced governments to reduce costs and limit risks.  It must be said that Africa for the most part, weathered the storm remarkably well and was not devastated by the global financial melt down.  Indeed, despite a small dip in growth during the crisis period, Africa has staged a quick and strong comeback.  Between 2001 and 2011, growth in gross domestic product (GDP) on the continent averaged 5.2 percent annually, with the African Economic Outlook (AEO) projecting 5.2 percent growth in 2011 as well, higher than the global average of 4.2 percent projected by the International Monetary Fund (IMF).  The key challenge for the continent is how to turn the ongoing recovery into strong, sustained, and shared growth that will lead to notable improvements in people’s lives.  The average gross domestic product for East Africa and Uganda specifically in the last two decades has been about 7 per cent.  Uganda’s present population is in excess of 34million people and the capital city Kampala has about 5million commuters each day.
 
The World Bank states that 48 countries in Africa, 22 states with a combined population of 400 million people have officially achieved middle-income status; while another 10 countries representing another 200 million people today would reach middle-income status by 2025.

Reverting back to infrastructure, the majority of the countries in the region have set up units to manage Public Private Partnership as a means of accelerating infrastructure development namely Tanzania through the Tanzania Investment Centre, Rwanda through the Rwanda Development Board, Zambia under its Ministry of Finance, South Africa under its ministry of Finance and Ghana under the Ministry of Finance and Economic Planning to mention but a few.
 
There is every inkling therefore that it is only a matter of time before there is a large and organised roll out of infrastructure projects in the region.
 
Having said that and while it is not the issue in discussion on this instance, the other opportunity in developing infrastructure lies in raising capital through international bond markets.  Zambia for example enjoyed a stunning debut on the international bond market, when it became the ninth sub-Saharan African country outside South Africa to sell debt to overseas investors.  It was warmly received.  Investors placed about US$12bn of orders for the African country’s maiden dollar bond, allowing it to increase the size of the issue from the proposed $500m to $750m, while lowering the cost to just 5.63 per cent – lower than the equivalent borrowing cost of Spain.

This goes on to confirm that Africa is one if not the most significant and interesting economic development propositions as a competitive region for business going forward.  The World Bank has reported in its forecast to the effect that while Africa is the next frontier, the business growth in East Africa is predicted to experience the highest economic growth rate estimated at a minimum average of 7 per cent but if all things remain constant it is likely to surpass that.  Africa is the fastest reformer in terms of easing business entry.  It is now easier for private foreign firms to do business in Africa on a variety of grounds. 
 
Uganda has made substantial progress on its infrastructure agenda in recent years.  The early and successful ICT reform detonated a huge expansion in mobile coverage and penetration resulting in a highly competitive market.  Power sector restructuring has paved the way for a rapid doubling of power generation capacity.  Uganda is doing well on the water and sanitation MDGs, and has made effective use of performance contracting to improve utility performance.
 
However, a number of important challenges remain.  Despite reforms, the power sector continues to hemorrhage resources due to under-pricing and high distribution losses, while electrification rates are still very low.  Providing adequate resources for road maintenance remains a challenge, and further investment is needed to increase rural connectivity and improve road safety.
 
Addressing Uganda's infrastructure challenges will require sustained expenditure of around $1.4 billion per year over the next decade, strongly skewed towards capital expenditure.  Uganda already spends approximately $1 billion per year on infrastructure, equivalent to about 11 percent of GDP.  A further $0.3 billion a year is lost to inefficiencies, the bulk of which are associated with underpricing and distribution losses in the power sector.  Uganda's annual infrastructure funding gap is about $0.4 billion per year, most of which is associated with irrigation as well as water and sanitation infrastructure.
 
The construction industry in Uganda is the key driver of economic growth in the country over the next few years, with industry value real growth forecast to average around 12% between 2010 and 2014, with stellar growth of 15% forecast for the sector in 2010.  In light of this we expect construction output as a percentage of Uganda’s GDP to increase further from an already sizeable 13% GDP; a figure we believe could rise above 19% of GDP (US$6.27bn).

Commercially viable oil and gas deposits have been established literally all over East Africa and Uganda has become Africa’s latest oil producer.  Ugandan preliminary figures with the levels of explorations so far conducted expect the reserves to be estimated between 2-6 billion barrels.  It ought to be mentioned that the exploration success rate has been about 98%.

The world's biggest oil companies as well as state-owned operations from China are trying to muscle their way into the world's largest new oil region.  A number of international oil companies have already expressed interest in investing in Uganda's oil sector following the discovery of commercial oil reserves along the country's western border.  The companies include China's CNOOC, France based Total SA, Italy based Eni Spa and UK’s Tullow. 

Uganda’s recent oil discovery will no doubt reshape the countries gross domestic product.  The recent discovery of oil reserves promises significant fiscal and development gains to the country.  Even under conservative price assumptions, oil production could increase annual government revenues by about 10 percent of GDP within 6–10 years as per the World Bank.  Higher oil income presents greater economic opportunities as well as challenges.  Increased oil income can be expected to have positive repercussions in the economy as a whole, but evidence across the world points to a mixed story.  In particular most cases of increased oil wealth and dependence on natural resources have produced outcomes of increased income disparity, often resulting in political instability (Angola, Bolivia, and Nigeria provide clear examples).  Through a phenomenon known as Dutch Disease, oil booms can also have adverse consequences for the nonoil sectors of the economy, as an appreciating exchange rate caused by surging oil exports renders other products uncompetitive.  It will therefore be critical for Uganda to capitalise on oil revenues—particularly during boom periods—and use them to make investments in assets such as infrastructure that will help to promote economic diversification into more sustainable sectors.
 
Why Infrastructure Matters
 
Uganda is a landlocked country but which is geographically located as the natural regional hub with access to nearly all the east African countries on its boarders.  To address the high cost of doing business in a landlocked country, the government needs to invest heavily in transport, energy and skills development.
 
Uganda has recently been listed as one of the freest economies in sub-Saharan Africa based on factors such as the ease of doing business, openness to trade, political stability, property rights and fiscal and monetary policy (with a free movement of capital regime).

Adequate infrastructure is key for economic growth and competitiveness in Uganda.  The country’s current inadequate infrastructure is impeding faster growth.  Empirical evidence between the 1900s and early 2000s shows that infrastructure improvements in Uganda contributed over 1.5 percentage points to Uganda’s per capita growth rate.  The ICT sector made the strongest impact on growth followed by power as a distant second.  Looking ahead, if Uganda could improve its infrastructure to the level of Africa’s best performing country—Mauritius—growth performance could be enhanced by as much as 3.8 percentage points per capita, with the most significant contributions coming from upgrades to the power and ICT infrastructure.  This is the outlook before taking into account the petroleum sector related requirements and inputs.
 
Infrastructure as an Enabler of Regional Integration
 
For the first time, Africa has a coherent blue-print for the transformation of the continent’s infrastructure, the Programme for Infrastructure Development in Africa (PIDA) approved by the African Heads of State and Government at their 18th Summit in Addis Ababa, Ethiopia in January 2012. 

According to PIDA, Africa will require US$360 billion in infrastructure investments in the next 30 years.  Using an average GDP growth rate of 6.2% per year, PIDA has estimated that Africa’s energy demand will grow six fold to 700GW, traffic through the major maritime ports by 6 to 8 times to 2 billion tonnes, and demand for ICT services to grow twenty fold.  I may state that Uganda’s present energy deficit is in excess of 1400MW and a pipeline to transport its petroleum products to the Mombasa coast among other things.
 
A total of 51 priority regional infrastructure projects (worth US$67.9 billion) in energy, transport, ICT and trans-boundary water constitute the PIDA Priority Action Plan to be implemented by the year 2020.

Intra-African Trade and Regional Integration
 
The Lagos Plan of Action of 1980 envisaged that trade and regional integration would be key to Africa’s economic transformation, bringing scale economies in the drive toward industrialisation.  Regional integration also enables countries to take part in production sharing.  Regional integration is already helping countries in East and Southern Africa to develop robust service industries, including transport and telecommunications, by expanding markets, logistics and supply chains. 

The recent Tripartite Free Trade Area agreement between COMESA, EAC and SADC is a good example.  It brings together 26 countries, nearly 600 million people, 57% of Africa’s population, and a GDP of US$700 billion, 58% of Africa’s GDP. 

Economic transformation continues to be an aspiration of the Uganda and the continent at large and the challenge remains as valid as ever.  The possibilities of realising this have never been closer to reality than in these times.  In addition to the key imperatives such as quality education, improving efficiency and productivity and regional integration, the role of infrastructure development in ensuring economic transformation is equally important in attaining middle income status. 

Uganda is shooting for first World in the next 50 years and this is not impossible because the resources and the manpower to achieve these objectives are available, Equatorial Guinea for example already enjoys a per capita income of more than US$30,000. Like many others have said, I strongly believe that the 21st Century is the African Century and I would not swap places to be anywhere else other than in Africa and most especially East Africa today.
 

Brian Kaggwa can be contacted by phone on +256 414 234519 or alternatively via email at bkaggwa@impalalegal.com

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