Blending Grants, Loans to Finance Infrastructure in Uganda

Infrastructure development financing in Africa, and Uganda, has been dominated by donor and government financing for many decades, with quite reduced participation of the private sector and commercial banking system. As such, despite infrastructure development being a key priority in every year's budget, Uganda is still characterized by large and longstanding infrastructure deficiencies in transport and energy. This highly inhibits economic growth and poverty reduction efforts.

Inadequacy of infrastructure is still significant, as developing it requires sustained investment over a very long time. Under-investment in infrastructure has negatively affected developments in other areas.

The European Union's development assistance to Uganda has focused, over the last four decades, on financing road transport infrastructure, supporting important interventions on the Northern Corridor connecting Mombasa with Nairobi, Kampala, Kigali and Bujumbura.

But with the grant money available it was possible to build only few hundreds of kilometres of quality roads. It is clear that the demand far exceeds the ability of available donor grants and government budget resources for investment in infrastructure.

Following the new policy of the European Union: Agenda for Change, it is time we begin thinking differently and adopt new approaches to financing infrastructure development through blending grants with government budget resources and loans from the international financing institutions and the domestic and international private sector banking system.

The EU's new approach is to use the grant funds available as a way to attract, leverage and multiply the total investments in the country (blending). The new approach foresees frontloading of loans blended with a well thought grant scheme to generate an acceleration of infrastructure investment, based on the assumption that these infrastructures are serving a strategic plan of 20 years plus for allowing the development of socio-economic structure in the country and equitable growth.

In this approach, the grant element from development partners like the EU in a given loan can be made in different ways: it can make the interest rate cheaper, or assisting making the grace period longer and allowing for a longer duration of the repayment period to make payments more affordable, allowing the expected generation of revenues from oil exploitation to become reality.

Related guarantee schemes and a substantial decreasing of the costs of due diligence by development partners and strong partnership (technical leverage) are additional ways how to profitably use the grant funds in order to multiply the resources available for investment.

It can be considered that with a Euro 100 million grant, the EU can facilitate a first class road of between 120 and 160km long, depending on hydrogeology or other factors. The same amount of grant money can instead service and assist lending capital to finance investment for about 3/5 times (financial leverage) more.

For example, if we consider that Uganda requires about 20bn Euros to develop a modern infrastructure that includes a properly functioning railway network, first class roads around the country, waterways, hydro and solar electricity generation stations, transmission and distribution lines, etc, Uganda will require over 30 years of annual provisions in the budget to finance these infrastructures.

In 30 years, the initial infrastructure will already be requiring upgrading and therefore a cycle of inefficiency and incomplete infrastructure will continue. Under the new approach, Uganda would require about 4bn Euros, which can be blended with 16bn Euros of loans from both official and private sector financing institutions to put in place a total infrastructure required to strengthen the economy for 20 to 30 years.

In this case, all this investment will be front-loaded and repaid by the government over a twenty to thirty year period, drawing only a small portion of expected future extra revenues.

This will enable the people of Uganda to enjoy good infrastructure, reduce transaction costs, therefore increase productivity and promote economic growth and development. The growth of the economy will generate more resources to the government in the form of taxes and user charges that will be used to pay back the loans, even besides counting the prospects of oil revenues.

The surest way for all Ugandans to benefit from the oil money is to adopt this approach and implement it now, not in 10 years time. Indeed, part, and only part, of the future oil money can specifically be targeted to finance these infrastructures by repaying concessional loans.

This will also contribute to avoiding the 'Dutch-disease' that has affected most African countries producing oil, by reducing the appreciation effect on the currency of oil exports. There's need to plan for oil revenues well in advance, trying to transform a volatile and temporary wealth of a few years into a long-term richness for many.

Oil delivers economic growth but hardly many jobs. Agriculture does and to do it, it must be competitive by the reduction of transaction costs. This approach will constitute a major inter-generational solidarity pact, where an effort today to prioritize and adequately prepare feasible and bankable projects and the courage and intelligence to access loans appropriately blended with the available grants and government funds, will benefit the next generation and absorb one of the highest population growths in the world, giving the necessary time to gradually manage the transition into a mature modern society.

The author is EU Ambassador/Head of Delegation to Uganda.
The Observer Newspaper
25-October-2012