Mobilise local finance for capital projects

By Allan Katwalo Mulengani

Lately, there has been renewed interest in the nation's capital projects such as the stalled oil pipeline, the not so clear oil refinery project, the Standard Gauge Railway, Jinja Kampala expressway and the list goes on. I picked more interest in the matter after reading a few articles in the media but was incensed when I read Andrew Mwenda's  "How Museveni built and Killed Uganda's oil industry", which appeared on social media, the other was the one on Opera news about Uganda borrowing sh1.2 trillion from some lender so that we can build a road. 

Whereas I agree with some of Mwenda's observations, what I do not agree with is the practice of simply pointing out problems without helping to point to their solution.  I, therefore, think that such an article would have moved us forward had the author also spent some time to suggest to us a way forward. 

I come from the school of thought which posits that "the behaviour of a state should always be conditioned and governed by its national interests both long and short term." If we all agree that our overriding national interest is survival, which means the protection of physical, political and social-cultural identity against encroachment by other nation-states or even none state entities", why on earth then have we decided and are hell-bent on borrowing our way into allowing others to encroach on and even threaten our survival as a nation?

Why borrow?

There are several reasons why we as a nation have decided that borrowing, particularly from foreign lenders, is the most ‘prudent' option that we have despite all the evidence pointing us to the contrary. I will let the politicians address the political and confine myself to one particularly intriguing issue which has spent many years in the vanguard of building an investment culture among the general population in Uganda, I believe holds the key out of this self-destruction journey of borrowing. 

I take que from a couple of examples where we borrowed only a small portion or did not borrow at all but used our own money raised internally to undertake capital or infrastructure projects. The first example is from an article by Daudi Migereko in the New Vision of March 9, which pointed to the creation of the energy fund many years ago at the height of power rationing in the country. I do not know if this is still operational and if so what else it has helped to build other than the power generation dam for which it was created. If it is no longer operational maybe someone at the ministry ought to help explain to us why not? The second was the re-establishment of ‘Uganda airlines' as well as the now-famous CHOGAM which were funded to a large extent by our own treasury. 

Herein lies the answer to the conundrum that Mwenda raises. The absurdity of promising the nation some oil production by 2009 and getting to 2020 with not even a faint smell of the juice in the air is bordering on a betrayal of national interest. In today's global political-economic environment as well as the fragility of the oil sector owing to technological development and a push away from fossil fuels, only the truly blind or totally misguided would insist on looking for a foreign financier to grow the sector. 

The dangers of public borrowing

The adverse record of public debt especially public foreign debt is well documented by economists and none economists alike.  It is in fact common knowledge that excessive use of foreign borrowing does create major challenges for any economy and may indeed lead to a total surrender of national assets and possibly economic sovereignty of a nation.   It is therefore imperative that we as a nation examine a little more carefully what we stand to gain versus what we might lose ultimately by continuing to rely almost exclusively on foreign debt to finance our capital and infrastructure development. Perhaps we might also want to ask ourselves why we appear to have rejected the option of building policy and legal framework to guide the management of local finance mobilisation models. 

In my opinion, the biggest disadvantage we are exposing ourselves to in both the short and long term is the continuous haemorrhage of national wealth out of the country. All public debt acquired from external sources is ordinarily expected to attract huge interest either in foreign exchange or in terms of goods and services whereas any attempt at repaying in cash inevitably leads to valuable foreign exchange being flown out of the country. 

I understand that there may even be instances where we have had to repay in terms of goods and services such as the sand mined from Lake Victoria and some of our major wetlands being shipped off to China.  In the case of the oil sector where the global players are honestly not interested in moving away from the raw material export model that has kept Africa backward, the odds of getting good foreign financing become even more precarious. This then becomes a major contributor to environmental degradation, a failure to transition the local economy to value addition from the supply of raw materials, possible reduced availability of certain goods within the country as may be the case of sand for the construction industry or glass manufacturing and yes inflationary pressures on the economy. 

Secondly, we appear to have built a culture which views foreign debt as "easy money". The culture of "easy money" makes public official careless and easily leads to "easy spending" or Extravagance without any due consideration for the probable returns. Easy money is said to give incentive to extravaganza which we are not short of from exorbitant pecks for the negotiators to luxurious living for the implementers such as the famous project vehicle fleets that we see on our roads. All of which simply increases the loan burden on the population without substantial and sustained improvement on its social-economic wellbeing. 

Thirdly a country that stays in a mode of continuous debt repayment will have very limited room for manoeuvre in its fight for development and prosperity. This leaves only a small window of options for the government which then resorts to more and more taxes to collect money for the repayment of debt thus reducing the ability of the people to produce and to save more and as a result their ability to prosper. The current state of consistent government revenue shortfalls from taxes is indicative of this phenomena. 

Finally, heavily depending on foreign borrowing increases the likelihood of others impinging on a nation's Political Freedom.  It is argued that external debt is usually made available to the government but with a political or diplomatic motive behind it. The west, for example, has been accused of meddling in the national or foreign policies of the debtor countries thus highlighting the danger of foreign debt dependency.  

Domestic Financing Mechanisms 

There are merits for public borrowing, but in all these the key argument is that it is in the larger interest of the nation if the development expenditure is met out of public borrowings. The simplistic and often misleading reason given is that public borrowing does not adversely affect the capacity of the population to work and to save neither does it stop production and trade. It is also built on the false premise that the only alternative to public borrowing is taxation.

If indeed it were entirely true, that the process of capital formation remains unaffected, then one wonders why the impact of this does not result in accumulated profit which the nation can then turn to for capital and infrastructure investment. 

The only viable explanation one can find for this contradiction is a failure or refusal to firmly consider the option of mobilising local financial resource for deployment in capital and infrastructure development. I shall not explore the detailed analysis of available local financing models for infrastructure projects such as public-private partnership (PPP) in particular but will leave you with the idea that most fast-developing countries today and in the past have one thing in common they all relied on local financing to a greater extent for their capital and infrastructure development. 

The writer is the Dean School of Business and Applied Technology at Clarke International University