2007/2008 Budget: What should Uganda's next budget tackle?
Businessmen want roads improoved.

2007/2008 Budget: What should Uganda's next budget tackle?

Private sector indicate their Budget expectations.

By Gerald Businge
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First published: May 29, 2007

Sections in the article:

  • Introduction
  • Reducing Energy deficit shocks
  • Improving Transport infrastructure
  • Providing for more suitable access to credit
  • Streamlining Public expenditure
  • Fighting graft
  • Concerns about taxes
  • Changing the curriculum
  • Donors for infrastructure, more efficiency

  • Introduction Back to top

    As Uganda's 2006/2007 financial year winds up, the private sector, civil society organizations and numerous government bodies are in the process of outlining what the next financial year's budget preparation/reading should tackle to ensure a consistent move towards development that will benefit the majority of Ugandans. The Minister of Finance, Planning and Economic Development, Dr. Ezra Suruma is expected to read the budget for the next (2007/2008) financial year on June 30th, 2007.

    The private sector, in a recent meeting under the Private Sector Foundation Uganda (PSFU) asked the Government of Uganda to solve the energy crisis, develop transport infrastructure, prioritize fighting corruption in public procurement and provide ways of easy access to credit. The Uganda Manufactures Association (UMA) has also highlighted addressing power shortage and infrastructural development in Uganda as priorities. The local business community also wants the Ugandan government to cut expenditure on public administration as well as revise the national education curriculum to ensure the training of skilled manpower, in line with current market demands.

    According to a PSFU paper titled Private Sector Platform for Action, these measures will help local producers, manufactures, traders and employers to improve their productivity and enhance market competitiveness by reducing the cost of doing business in Uganda. Uganda's ranking in the Global Competitiveness Surveys has been declining over the last two years due to poor performance in public institutions and the relatively high cost of doing business in this country. This has been occasioned by shocks like power outages, prohibitive taxes, unexpected harsh weather conditions, huge administrative spending and volatile oil prices among other factors.

    The energy shortage characterized by country-wide load shedding programmes has hit the economy hard, while many business people continue to be hampered by ever increasing corruption in departments that handle the procurement of public goods and services. Apart from making business expensive, all these factors create a disincentive for any investor engage in business in Uganda. Uganda has witnessed a slip in its Gross Domestic Product (GDP), from 6.5% in 2004/2005 to about 5.4% in 2005/2006 while industrial production has dropped from 10.6% in 2005/2006 to 5.2% in 2006/2007. This is mostly due to chronic power shortages.

    The business community, through PSFU and UMA has already presented its expectations in the 2007/2008 budget to the Ugandan government. These expectations revolve around:

    Reducing Energy deficit shocks Back to top

    According to the PSFU paper mentioned above, manufacturers continue to lose work hours and profits despite efforts by the government to install and run thermal generators whose output has recently risen from 50MW to 85MW to combat the acute power shortage. The PSFU says the trade sector is producing at 25% of its capacity, the service sector (which includes telecommunication and finance) at 46%, the manufacturing sector at 65% and the 'jua kali' sector (metal workshops, carpentry workshops, etc) at 85% due to shortage of electricity. The Ministry of Energy and Mineral Development estimates that the national electricity demand is between 370MW and 430MW. This contrasts very sharply against current the current national generation capacity of about 230MW (megawatts).

    The Ugandan government has outlined a long-term strategy to solve the power crisis through building Bujagali power dam (to generate about 280MW) within the next three years. Uganda has already secured funding and guarantee loans from the World Bank for this project. In addition, smaller dams in different parts of the country are planned and the use of solar and biomass energy is encouraged. The Minister of Energy and Mineral Development, Daudi Migereko says that the government is to continue extending incentives to investors who use biomass and bio-diesel besides the normal diesel fuel used by many industries to run heavy generators for production. Migereko says the government has already procured transmitters and is updating the national grid to reduce loss of electricity during transmission and is supplying energy saving bulbs to all households connected to the same grid in order to reduce the power load wasted by domestic consumption.

    Power shortages irk Uganda's investors
    Power shortages irk Uganda's investors.

    While the private sector appreciates the government's long term strategy, they maintain that in order to inject vigour into the economy, the government should invest in fast tracking the process of reducing system losses in energy transmission and billing in order to increase the efficiency of power supply from the national grid. They also want more incentives extended to investors employing biomass and bio-diesel energy as well as expediting the procurement process for the 50MW Mutundwe thermal power project. These, they believe will help meet the energy needs in the short and medium terms as the long term strategy slides into in place.

    UMA wants the Ugandan government to review its power purchase agreements with the electricity generation and distribution companies Eskom and Umeme. The review, according to the manufacturers, should aim at deleting the provisions that allow the companies to demand technical and operational losses which constantly push up power tariffs.

    Improving Transport infrastructure Back to top

    While energy is a pre-requisite for production, physical infrastructure like roads and railways are also important if the private sector is to grow, create jobs and wealth as well as ensure further investment. The PSFU says most rural and feeder roads are dilapidated and impassable during the rainy season, which hinders delivering farm produce to markets.

    In the same vein, UMA accuses South Africa's Rift Valley Railways (RVR) which took over the moribund Uganda Railways last year of maintaining virtually all the inefficiencies that ruined the past operator (Uganda Railways Corporation). Traders had hoped that the frequent and enormous losses they suffered in cargo pile-ups at Mombasa Port for lack of transport would end. "At the time Uganda Railways Corporation was concessioned to the Rift Valley Railways, it had over 120 wagons. But since the concession, most of the wagons are no longer available, leading to a high turn around time when moving goods from Mombasa to Kampala and vice versa," UMA says in its proposals. 
    The manufacturers add that as a result of the continued deterioration in railway services since 2004, the cost of transporting cargo has increased from $75 (Shs130,500) to $92 (Shs160,000) per tonne from Mombasa to Kampala.  
    According to UMA, this worsened the impact on one of the poorest road networks in the region and has made the cost of production rise by 35%, eroding the competitiveness of Ugandan products in the East African region. The cost for transporting a 20ft container from Mombasa to Kampala has shot up to more than $2,400 (Uganda Shs 4.1 million) while that for a 40ft container has risen past $4,100 (Uganda Shs 7m). Kenyan businesses pay $600 per 20ft container for their cargo from Mombasa to Nairobi, making Ugandan businessmen rather uncompetitive in the region.  
    UMA suggests that the Ugandan government sets strict performance benchmarks for RVR so that the railway company can quickly reduce delays at Mombasa and also bring down the transport costs in the hinterland. The PSFU is also calling for the completion of the Jinja - Bugiri highway and the improvement of the Kabale-Kisoro-Bunagana road to boost regional trade with neighbouring countries such as Rwanda, Burundi, Kenya and Southern Sudan. Other roads that UMA wants to be given priority are Kyanika road up to Katuna border post as well as the Kampala-Arua-Koboko-Yei road and the Adjumani -Yumbe route.

    Providing for more suitable access to credit Back to top

    Access to credit for business financing purposes remains a major factor in propelling economic growth in the country. The Ugandan government promised to start the Bona baggagawale (prosperity for all) scheme in this (2006/2007) financial year, which would have ideally seen many people in organised groups access low interest credit to pursue economic activities, especially in the agricultural sector. But the promise did not materialise. The Ugandan government is still making promises as regards starting the scheme, citing technical bottlenecks that need to be overcome.

    According to the PSFU, micro, small and medium enterprises (MSMEs) lack collateral and capacity to secure credit from the commercial banks and need government intervention. "Although some micro-finance institutions used to bridge the financial gap in rural areas where agribusiness is dominant, they are yet to realise substantial benefits due to low levels of investment in these areas. Commercial banks are reluctant to venture into rural banking because of the high overheads," PSFU says in the paper.

    Apart from providing credit directly, the business community is calling upon the Ugandan government to set up clear fiscal incentives like reduced costs for banks to extend services to rural areas as well as facilitate credit guarantee schemes to improve access to finance. PSFU also wants the process to re-capitalise Uganda Development Bank expedited so that businesses can access medium and long-term credit, which is normally not readily available in commercial banks.

    Streamlining Public expenditure Back to top

    Amplifying the incessant demands by Uganda's donors, the private sector is calling for "budget discipline" in the coming year. The Ugandan government should respond by channeling most of the resources to sectors that create jobs, wealth and generate income instead of investing too much in public administration. According to the 2005/2006 annual budget performance, 46% of the Ugandan government's supplementary expenditure went into funding public administration. Uganda is reported to have a very large number of members of parliament and cabinet per capita (333 MPs and 66 cabinet ministers plus about 100 Resident District Commissioners and their deputies) all drawing hefty monthly salaries and allowances funded by the 26 million strong population. The PSFU wants the government to stick to its budget on public expenditure, unless it is promoting social services like health and education.

    Fighting graft Back to top

    In a related concern, the PSFU wants more financial resources made available to the Auditor General's office, the Inspectorate of Government and the Criminal Investigations Department of the Uganda Police to enhance these departments' effectiveness in the fight against corruption. This follows reports of a high incidences of graft especially in public procurement.

    According to the Public Procurement and Disposal of Assets Authority (PPDA), about 150 billion Uganda shillings are lost every year through corrupt deals in public procurement. "And the culprits, mostly officials in local governments, enjoy their loot with impunity due to the inability by the investigating and prosecuting agencies to effectively handle the cases," the PSFU paper to government reads in part. The PSFU also wants the Parliament of Uganda to enact appropriate anti-corruption legislation to punish corrupt officials.

    Concerns about taxes Back to top

    While it is expected for the business community to always ask for tax reductions, most manufacturers are requesting for special consideration in the coming year which includes allowing them use of duty-free diesel for their business operations. The PSFU too, demands for a reduction in excise duty on carbonated soft drinks from 13% to 10% so as to attain harmony with other manufacturers in the East African Community member states.

    The private sector also wants the Ugandan government to consider reducing corporation tax from 30% to 25% so as to boost investment through retained earnings as well as reductions in excise duty on mobile telephone airtime from 12% to 8% so as to enable more Ugandans access telephone services. The PSFU is concerned about reports that Uganda levies the highest telephone tax in Africa, a move that has undermined growth in the telecommunication sector because it results in high telephone calling rates. While telecommunication companies continue to post high profits, it is the local consumers who bear the tax burden, which apart from making the services expensive, limits access and the use of such telecommunication services by the majority.

    But the Government of Uganda in its National Budget Framework Paper (NBFP) 2007 says it will resist any "pressures to destabilise" the current tax system through reducing tax rates or giving more incentives to investors in order to avoid loss of revenue. The paper particularly singles out pressure from the private sector to raise the PAYE threshold beyond the current 130,000 Uganda shillings, arguing that this would result in annual revenue losses of more than 93 billion Uganda shillings.

    The Ugandan government has actually set what it calls a modest 0.5% increase in revenue collections per annum and in order to achieve this target, the Ministry of Finance and Economic Planning has warned against any tax reductions that could undermine this target. "It is important to resist these pressures if we are to achieve the tax revenue/GDP ratio target of 0.5 percentage points per annum. There is need to carry out proper analysis and evaluation of the impact of tax proposals on revenue, equity and attraction of investment before implementation," the 2007 NBFP paper states.

    The government paper calls for tighter tax measures to achieve revenue targets. "...we need to raise an additional 63 billion and 147 billion Uganda shillings in the 2007/08 and 2008/09 financial years respectively from additional tax measures. However, there are limited tax handles (options) to fill this gap," the paper reads in part. Given the recent standoff between the Ugandan government and some donors, aiming at an improved domestic tax base not only assures it of economic independence, but is also a more stable and reliable source of financing government spending.

    The PSFU however says that Uganda's tax system is highly inelastic and does not treat tax payers equally. The business community accuses the Uganda Revenue Authority (URA) of failing to spread its tax net to more income earners, leaving the few loyal taxpayers to shoulder the country's tax burden. They cite the booming entertainment industry and rental income from property.

    The PSFU advises that the URA should bring on board informal traders as well as landlords earning un-taxed rental income across the country. "Even with the restructuring of URA that has brought some success, more capacity is needed to collect revenue for national development," the PSFU recommends.

    Changing the curriculum Back to top

    In what should be a new demand, the PSFU says that there's need to realign the education system to match the labour market. While it commends the introduction of Universal Secondary Education, the PSFU says that many students leave school without the skills required to establish their own enterprises and thus remain job seekers.

    PSFU wants the Ugandan government to involve the private sector in designing a curriculum that is responsive to the country's labour market and needs by introducing subjects like entrepreneurial skills and tax education. The PSFU also stresses the importance of improving productivity through internships, industrial training and apprenticeships in order to enhance the relevancy of Uganda's labour market to its demand.

    Are Uganda's university/college leavers relevant to the nation's needs?
    Are Uganda's university/college leavers relevant to the nation's needs?

    Yet the success of this kind of programme is very likely to depend on how much revenue the Ugandan government manages to collect, or access from its donors. More than 45% of the country's budget continues to be funded by donors, and this is unlikely to change in the coming year.

    Donors for infrastructure, more efficiency Back to top

    The Resident Representative of the International Monetary Fund, Abebe Aemro Selassie says the next (2007/2008) budget needs to sustain the currently stable macro-economic framework thus avoiding excessive spending and/or tax adjustments; allocate more resources to infrastructural development; as well as link increased allocation of resources to the elimination of waste and inefficiency in government spending. "The road links to southern Sudan and the Democratic Republic of Congo come to mind. These are natural hinterlands for Uganda, and there is a strong potential to increase exports to these areas. There is also of course the need to improve roads and other links along the Uganda - Mombasa corridor. I would like to stress that it is not just about spending more money on infrastructure but also ensuring that the money is well spent. Institutions have to be strengthened to achieve this. There are the many road projects that have stalled due to procurement delays and contracting disputes. Again my view is that there is a need to speed-up project implementation in the road sector," he said in a recent interview.

    Selassie says the IMF is supporting the Ugandan government's economic policies through the Policy Support Instrument (PSI), which focuses on facilitating increased infrastructural spending and deepening financial sector reforms as prioritized by the government in its Poverty Eradication Action Plan and other similar government policy documents.

    Civil society organizations are expected to present their expectations in the next budget, which will most likely centre on the improved provision of social services, especially healthcare. It has been said by great minds that you can not create wealth without health. You also cannot develop unless you have the knowledge and skills required to produce products and/or services. Many civil society organizations are thus likely to lobby the Government of Uganda to provide enough funds to boost health care and education services in the country, in order to guarantee a healthy and able population that can effectively engage in developmental activities.

    By Gerald Businge
    more from author >>
    First published: May 29, 2007
    To learn more about Ultimate Media Consult go to www.ultimatemediaconsult.com.

    Gerald Businge is a media practitioner and features Editor at Ultimate Media Consult in Uganda. He is a graduate of Mass Communication and several journalism and leadership certificates. He has been a practicing journalist since March 2001 and has worked at The New Vision as features writer, and has written extensively for different newspapers, magazines, newsletters in Uganda and internationally. He currently does fulltime media communication consultancy work as well as writing and editing at Ultimate Media Consult (U) Ltd where he is a founding member and CEO. You can get his attention so long as you are interested in and you are working for a better world.