Financing Instruments and their Fiscal Implications: EAC Countries Perspective

By: Annette Nabayi, 22 September 2021

Overview

EAC governments are looking towards public-private partnerships (PPPs) and bonds issuance in an effort to mitigate against their financial shortages. In this blog, I will discuss these two forms of financial access and evaluate their fiscal implications.

Public-Private Partnerships (PPPs)

PPP is a long term cooperative agreement between a private company and the national or regional government.

Some of the models applied in PPPs entail service contracts, management contracts, lease contracts, concession, build-owner transfer contracts, and privatization. The models vary in terms of contract purpose and length as well as private sector risk. PPPs are regarded by most EAC states because of the restricted fiscal space for governments to development needs, low public sector ability to enhance the degree of investment in development demands, providing better efficiency, and presenting better value for money. The PPP actors in EAC involve the G20 compact for Africa, EU, World Bank, Chinese overseas investments, AU, EAC, ECOWAS, and different national development plans. Chinese overseas investments engage with African countries through PPPs as private-public partnerships and public-public partnerships.

The effects of PPPs entail undermining democratic accountability, limited access to services by ordinary citizens, the commodification of public goods, and immense user fees and out-of-pocket expenses for public goods.  Examples of adverse influence of PPPS in EAC include Kenya’s SGR whose revenue generation has not covered the costs experienced and Lubowa Hospital in Uganda where the government is already paying for its interest rate at the hospital’s foundation. Kenya and Ethiopia are the states in EAC with high-risk debt distress while Uganda and Tanzania are low-risk debt distress.

Bonds

A bond is a loan from an investor such as a company or government. Bonds, specifically Eurobonds help EAC states to integrate with the global financial market. According to 2019 statistics by AFRODAD, Kenya among EAC states leads in outstanding Eurobonds of $4.8 billion while Ethiopia, Rwanda, and Tanzania have outstanding Eurobonds of $1.0 billion, $0.4 billion, and $0.2 billion respectively. Risks linked with bonds include interest rates varies increasing the costs, repayment is at maturity and not amortized, and bonds tend to be complex to restructure. Most EAC nations encounter corruption and lack of accountability that creates social injustice while allocating the funds borrowed in various government sectors. The governments have increased the user fees and expenses related to the infrastructure to pay the debts.

Kenya and Uganda have engaged the domestic market in 2020 and 2021 through treasury bonds, bills, overdrafts from the central bank, and many more. Uganda easily accesses treasury bonds rather than treasury bills or other market financing instruments. The difference between bonds and bills entail the length of maturity. Treasury bills tend to be a secure short term investment that presents investors with returns after short commitment of funds while bonds tend to be a secure medium or long term investment that gives an investor interest compensation every six months of the bonds’ maturity. The fiscal implications on bonds aligns with income of the investor. The investor is taxed on the period the income is received.

Way forward

PPPs and bonds are less sustainable forms of financing budget deficits for EAC. It is assumed that they tend to increase the long term debt of EAC nations as well as discarding the public sector provision of services. In most cases, PPPs and bonds tend to target profitable projects rather than the needs of EAC citizens and tend to be a relatively costly way of gaining funds hence the need for the inclusion of the private sector by the government to ensure responsible borrowing and loan contraction and the need for domestic resource mobilization. EAC governments assume the concept of risk transfer when performing the contracts. The risk transfer concept is dismissed by IMF since most EAC nations have weak ability to negotiate PPP and bonds contracts hence the anticipated influence is ambiguous. The long term service and techniques of delivery should be determined at the initial stage as a form of project constructions and decision making approach. The elements regarded include the capacity, measures, and functionality. PPP and bonds model should be regarded cautiously to ensure smaller modifications are embraced.