Uganda: Why Government Should Be Cautious About PPP Deals

12 January 2021

The country's ability to negotiate favourable public private partnerships deals is being affected by the "least developed countries" label under which Uganda is categorised.

The least developed countries (LDC) is a list of developing countries that are yet to attain proper economic well-being and desirable quality of life as per targeted goals.

Uganda, an LDC, does not get treated fairly in boardrooms while negotiating for foreign financing deals such as public private partnerships.

Finance minister Kasaija Matia says although PPPs are great financing option, Uganda has a low bargaining power.

He said: "The problem is we are poor. That is why we must fight poverty because it is a very bad thing. If you are poor you may be taken where you do not want to go. So with PPPs, you are partnering with somebody who has more money or experience than you in terms of capacity to put up a project."

He continued: "We may be weak in terms of funding and manpower capacity and as a result we may give in more than we should. But that should not mean we don't try our level best to cut the best deal."

Gaps

Although Mr Kasaija says the country has capacity to negotiate PPP deals, Uganda and the entire East African community states should be more cautious when entering PPPs or risk shouldering the burden that should have been fairly spread among the parties involved.

A policy brief by SEATINI Uganda indicates that by end of 2018, PPP projects in Uganda were valued at $815 million (about Shs3 trillion).

In Rwanda, they accounts for about $618 million (about Shs2.2trillion), in Kenya $2476 million (about Shs9 trillion) was injected and in Tanzania $1,488 million (about Shs5.4 trillion) was spent.

Civil Society Oranisations that have invested time in understanding PPPs, have noticed that there is keen interest to leverage private finance through PPPs to finance health, education and large scale infrastructural development and energy projects across regional governments.

A PPP emerged years ago and has been viewed as an important way to help developing governments to raise resources to finance their development goals including the Sustainable Development Goals, among others.

Consequently, the EAC partner states (among them Uganda, Tanzania, Rwanda and Kenya) have put in place PPPs laws, policies and regulations to tap into this new public sector financing mechanism.

However, they contain several gaps.

For instance, some of the legal frameworks define PPPs as a commercial transaction yet PPPs in the context of African states and other developing countries are meant to provide public/ social services.

The laws don't include a provision that curtails or regulates private parties' activities for example in terms of prices, production capacity and/or quality of services. Some legal frameworks allow the private investor to sue the public sector if they feel their rights have been violated.

Cost

Specifically, the CSOs and some experts are concerned that under the PPPs, projects often cost the host countries almost twice the amount they would have otherwise had to spend if the contract was directly awarded to the public sector works and not to a private entity.

For example, although the average cost of road construction reduced from $2 million in 2010 to $800,000 per Kilometre in 2016, it is mindboggling for two major road projects namely; Kampala- Entebbe Expressway constructed at the cost $9.3 million per Km and Kampala Northern Bypass -$ 8.5 million per Km - to be exception to the rules in terms of cost.

While they are viewed as more efficient, this financing and investment model risks causing these countries fiscal distress in the future. The costs that are often associated with PPP funded projects include capital, profit expectations by the private partners and transaction costs associated given that PPPs involve the negotiation of complex contracts.

The reason for these high costs stems from the fact that unlike the national governments, private sector borrowing from international financial institutions/ development financial institutions are sought at higher interest rates due to greater default risks.

Consequently, because national governments sometimes guarantee private sector loans under PPPs, poor countries are attracting higher rates on loans and increasing their debt distress.

Liabilities

The cost of PPPs also comes with some indirect-contingent liabilities. For example, if there is a fall in the exchange rate of a host state's currency, or if the demand for a requested service or facility falls during economic crises, it reduces the demand for a certain service or product supplied by the PPP project.

PPPs lack transparency and public scrutiny which can lead to poor decision-making resulting from less oversight and accountability. They can also increase opportunities for corrupt behaviour.

Most PPP contracts contain the Investor State Dispute Settlement (ISDS) provision. It is thus easy for a dispute to arise during the implementation of a given project, even in circumstances where it may be a result of an action by the public sector to regulate the private sector in the public interest.

Proposals

CSOs and independent experts propose a halt on the aggressive promotion of PPPs for social and economic infrastructure financing, and publicly recognise the financial and other significant risks that PPPs entail.

Uganda and her regional peers need to find the best financing methods for public services in social and economic infrastructure, which are responsible, transparent, environmentally and fiscally sustainable.

This should be in addition to prioritising tax revenues, while augmenting them with long-term external, and domestic, concessional and non-concessional finance, where appropriate.

PPP projects should be subject to democratic governance and control. This should be done through informed consultation and broad civil society participation and monitoring, including by local communities and trade unions.

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