Multilateral Financing in Uganda: A Case Study of the Albertine Region Sustainable Development Plan

By Bakampa Brian Baryaguma

[Dip. Law (First Class)–LDC; Cert. Oil & Gas–Mak; LLB (Hons)–Mak]

bakampasenior@gmail.com; www.huntedthinker.blogspot.ug

August 2022

1.                  Introduction

The Albertine Region Sustainable Development Plan (hereinafter ‘the ARSDP project’) is a public works project in Uganda. A project is a, ‘(plan for a) scheme or undertaking’.^[1] For example, a plan to upgrade roads in a city or build a new airport. A project can be either public or private. A public works project is one that is funded using public resources, while a private works project is funded using private resources. Public projects refer to the wide range of facilities, public services, utilities and installations that are essential for the effective functioning of an economy and society such as roads, bridges, railways, airports, public transport, telecommunications, sewerage, healthcare, education facilities, electricity and water supply, etc.^[2] On the other hand, examples of private projects include factories, shopping malls, leisure parks, etc. – as long as they are owned by individuals and private associations like companies, partnerships and other firms. Whereas both public and private projects may be undertaken to benefit the general public, proceeds obtained from a public works project are used for public purposes, while profits from a private works project are enjoyed by the individual owners.

Public projects can be financed in many ways. The commonest ones are direct government revenue, public-private partnerships, loans and grants. In emerging economies like Uganda, the latter two (loans and grants) are usually obtained from external sources notably friendly governments and international financial institutions in which they are members. Jonathan Maizel and Alexander Borisoff characterize these as export credit agencies and multilateral development banks which they recognize and analyze as official funding sources.^[3] These institutions are important sources of the financial resources that are helping Uganda address its revenue shortfall and to meet development needs.

2.                  Understanding Multilateral Financing

Multilateral financing denotes funding obtained from international financial institutions, which are usually banks. Hence, the term multilateral here means multilateral development banks (hereinafter ‘MDBs’). According to Jonathan Maizel and Alexander Borisoff,

Multilateral development banks are bodies or agencies created by international agreement among multiple nations whose purpose is to promote development among all or certain member states. These development goals focus primarily on the economic and social benefits to be achieved through the investment, as well as corollary matters such as protection of the environment and sustainability. Unlike ECAs,^[4] multilaterals are generally funded or financed by contributions from member states party to the multilateral agreement or other arrangement creating such multilateral.^[5]

Multilaterals are either global or regional banks. Maizel and Borisoff state that,

The World Bank Group is the principal globally active multilateral, providing private sector financing through the International Finance Corporation (IFC) and political risk insurance through the Multilateral Investment Guarantee Agency (MIGA). Other multilaterals function on a more regional basis. Examples of regional multilaterals include the European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD), the African Development Bank (AfDB), the Inter-American Development Bank (IADB) and the Asian Development Bank (ADB). Common among each of these multilaterals is a desire to leverage their capital with that of the private sector, through co-financings or otherwise, while at the same time taking care not to displace or ‘crowd out’ private capital which might be available for a given use or project in the absence of multilateral participation.^[6]

Multilateral financing terms to countries are normally, ‘… determined on the basis of several factors, including the borrowing country’s risk of debt distress, the level of GNP per capita, creditworthiness, as well as project-specific parameters where loans go to financing development projects.’^[7] MDBs or similar regional development finance institutions are instrumental in financing projects which entail substantial civil works component that renders export content insufficient for ECA financing or where political risks are significant.^[8] The ARSDP project easily attracted World Bank funding because, first, any political risks associated with it are not significant since Uganda is a peaceful and largely politically stable country; and second, the project entails substantial civil works component in form of upgrading long stretches of roads, building markets and other economic infrastructure as well as upgrading business, technical and vocational education and training facilities.

3.                  About the Albertine Region Sustainable Development Plan

The name or phrase Albertine region refers to the areas around Lake Albert, situated in western Uganda. The region is alternatively known as Albertine Graben, Albertine Rift or Africa's Western Rift Valley. It is situated in the northern area part of the western part of the East African Rift Valley System, 500 km long, averaging 45 km wide and 23,000 square km.^[9] The Albertine region became more pronounced after Uganda discovered commercially viable oil in 2006, with expected lucrative investments covering drilling of about 500 wells and development of associated infrastructure such as roads, oil pipelines and refineries.^[10]

The ARSDP project was conceived by the Government of Uganda to develop the Albertine Region. The Ministry of Lands, Housing and Urban Development says this about the project:

The discovery of oil in the Albertine region has generated high expectations for economic development and the project Albertine Region Sustainable Development Project (ARSDP) was initiated by the Government of Uganda with a World Bank funding of USD 145 million to facilitate a more orderly, sustainable and inclusive transformation of the Albertine Region.

The project consists of three project components as follows:

·         Component 1- Regional Access and Connectivity (National Roads)

·         Component 2- Local Access, Planning and Development

·         Component 3- Skills Access and Upgrading

The project is multi-sectoral and as such, the implementation is done by three different government institutions; the Uganda National Roads Authority, Ministry of Lands Housing and Urban Development and The Ministry of Education and Sports.

The first component, implemented by UNRA aims at improving overall accessibility to the Albertine region, reducing travel times, and improving access to markets and services. This will be done by upgrading the road stretch from Kyenjojo to Kabwoya, connecting the districts of Kyenjono, Kibaale, Hoima, Masindi and Kiryandogo.

The second component implemented by the Ministry of Lands Housing and Urban Development aims at increasing rural accessibility to markets and services, preparing selected key urban centres for growth, and providing economic infrastructure targeted to key sectors in the region.

The third component implemented by the Ministry of Education and Sports is designed to upgrade business, technical and vocational education, and training (BTVET) quality in the oil and gas sector, make it more in line with private sector demands, and provide greater access to the BTVET system to people living in the Albertine region.

The project key impacts areas will include:

Regional transport infrastructure that will improve connectivity and access within and to the Albertine Region and facilitate an economy centred not only on oil, but also agriculture, fishing and tourism;

Local area development for orderly and planned growth and improvements in the infrastructure and services of districts and rapidly urbanizing centres in the region; and

A more skilled workforce that is able to respond to employment opportunities that are emerging in the region.^[11]

The World Bank Board of Executive Directors approved the credit for the ARSDP project on 4 March 2014 and the Financing Agreement was signed on 24 August 2015.^[12] The Project became effective on 7 December 2015, nearly 22 months after World Bank Board approval, due to nearly 18 months delay in getting clearance through the Parliament of Uganda.^[13] It should be noted that the World Bank is Uganda’s largest financier, providing the highest volume of loans and is the country’s biggest donor.^[14] For instance, between January 2018 and June 2021 alone, the Bank advanced a total of United States Dollars one billion, four hundred million only (US$1.4 billion) to the country.^[15]

4.                  Advantages of Multilateral Financing

Multilateral development banks present many benefits to sponsors and project companies.

1.                  Affordable and Cost Friendly Funds

MDBs offer more affordable and cost friendly funding to financing applicants than do commercial lenders, especially for projects being developed in more challenging markets^[16] i.e. countries that are conflict ridden or easily prone to violence. Their loans are more competitive because they are significant amounts of money, payable over a long period of time and at fairly little interest. For example, the loan of US$ 145m extended by the World Bank to the Government of Uganda for the ARSDP project is very difficult to get from any ordinary commercial lender anywhere in the world.

2.                  Providing Secure Funding to Sovereign and Non-sovereign Clientele

MDBs principally extend credit to sovereigns i.e. governments of their member states. For example, the World Bank availed a credit facility of USD 145m to the Government of Uganda, a sovereign entity, for the ARSDP project. But there are some MDBs that extend credit to non-sovereign borrowers. Moreover, the funds availed are well secured from significant risks. This is because, ‘… multilaterals are—at the most intrinsic level—government-backed suppliers of financing and other credit support,’^[17] implying that, ‘… these types of institutions find their roots in politics, rather than commerce …’.^[18] This,

… means that they possess a variety of tools that are not available to commercial entities alone. Among the most important of these tools are the ability to offer financial terms that are more generous than their commercial counterparts, as well as the ability to provide both ‘hard’ and ‘soft’ political protections for the projects in which they invest. These agencies have of late also been recognized for their ability to provide a stable flow of fresh capital during both good and bad times, making them attractive market participants in all types of credit environments.^[19]

World Bank Group affiliates are good examples of multilaterals that lend securely to both sovereign and non-sovereign clients. The International Finance Corporation promotes growth in the private sector of the economies of developing countries by mobilizing domestic and foreign capital and making loans and equity investments to private corporations or investment funds that have projects in such countries, without requiring direct state support.^[20] Then, the Multilateral Investment Guarantee Agency provides both debt and equity guarantees against losses caused by non-commercial risks, including currency transfer restrictions, expropriation, war and civil disturbances and, in certain cases, breach of contract.^[21]

3.                  Promoting Best Practices

MDBs promote best practices by highly scrutinizing financing applications, subjecting applicants to increased documentary and sourcing requirements, and ensuring stricter covenant packages when negotiating the terms of their credit.^[22] The World Bank, for instance, has an elaborate procedure (technically known as a project cycle in the World Bank Group) for approving loan applications covering six stages i.e. identification, preparation, appraisal, negotiation/approval, implementation and completion/validation and evaluation.^[23] The project cycle is the framework used by the World Bank to design, prepare, implement and supervise projects.^[24] The World Bank even has an Investigation Panel which,

… was created in September 1993 by the Board of Executive Directors of the World Bank to serve as an independent mechanism to ensure accountability in Bank operations with respect to its policies and procedures. The Inspection Panel is an instrument for groups of two or more private citizens who believe that they or their interests have been or could be harmed by Bank-financed activities to present their concerns through a Request for Inspection. In short, the Panel provides a link between the Bank and the people who are likely to be affected by the projects it finances.

Members of the Panel are selected “on the basis of their ability to deal thoroughly and fairly with the request brought to them, their integrity and their independence from the Bank’s Management, and their exposure to developmental issues and to living conditions in developing countries.”^[25] The three-member Panel is empowered, subject to Board approval, to investigate problems that are alleged to have arisen as a result of the Bank having ignored its own operating policies and procedures.^[26]

One of the best practices through which the World Bank safeguards the interests of people who are affected by its financed projects is the Policy on Involuntary Resettlement, now set out in Operational Policy 4.12 of December 2001. The policy,

… is triggered in situations involving involuntary taking of land and involuntary restrictions of access to legally designated parks and protected areas. The policy aims to avoid involuntary resettlement to the extent feasible, or to minimize and mitigate its adverse social and economic impacts.

It promotes participation of displaced people in resettlement planning and implementation, and its key economic objective is to assist displaced persons in their efforts to improve or at least restore their incomes and standards of living after displacement.

The policy prescribes compensation and other resettlement measures to achieve its objectives and requires that borrowers prepare adequate resettlement planning instruments prior to Bank appraisal of proposed projects.^[27]

Having appreciated that, ‘Involuntary resettlement may cause severe long-term hardship, impoverishment, and environmental damage unless appropriate measures are carefully planned and carried out,’^[28] the World Bank Group devised the involuntary resettlement policy with the overall objectives being the following:

Involuntary resettlement should be avoided where feasible, or minimized, exploring all viable alternative project designs.

Where it is not feasible to avoid resettlement, resettlement activities should be conceived and executed as sustainable development programs, providing sufficient investment resources to enable the persons displaced by the project to share in project benefits. Displaced persons should be meaningfully consulted and should have opportunities to participate in planning and implementing resettlement programs.

Displaced persons should be assisted in their efforts to improve their livelihoods and standards of living or at least to restore them, in real terms, to pre-displacement levels or to levels prevailing prior to the beginning of project implementation, whichever is higher.^[29]

The policy highlights the important relationship between property rights, human settlement and the need to maintain people’s source of livelihood.^[30] The Government of Uganda undertook to comply with it in implementing the ARSDP project, stating, in its final draft report on resettlement policy framework for the project, that, ‘The World Bank’s safeguard policy on involuntary resettlement, OP 4.12 is to be complied with where involuntary resettlement, impacts on livelihoods, acquisition of land or restrictions to access to natural resources, may take place as a result of the project.’^[31] The Government observed that the involuntary resettlement policy, ‘… compliments existing law in Uganda related to property rights and land ownership by recognizing the socio economic value this presents to persons affected’ and pledged that, ‘The higher of the two standards will be followed in this policy framework, since that procedure also satisfies the requirements of the lesser standard.’^[32]

4.                  Provision of Guarantee Products against Commercial Risks

MDBs offer private sector investors a variety of guarantee products against commercial risks. The World Bank, for instance, has partial risk guarantees covering private sector lenders against loss resulting from default by a sovereign under one or more key project documents between the sovereign and a private sector project, such as a concession agreement, a power purchase agreement, or any sovereign guarantee of the same.^[33] One significant condition to a partial risk guarantee is that an indemnity agreement between the project’s host country and the Bank will be required, pursuant to which the host country sovereign agrees to indemnify the Bank against payments made under the partial risk guarantee.^[34]

5.                  Assistance with Equity Investments

MDBs are increasingly departing from their traditional business of extending or supporting financing to borrowers and are now focusing on expanding their efforts to include assistance with equity investments, typically focusing on providing start-up capital, early stage capital and/or expansion capital, in each case where equity funds are needed to assist companies with their product development and commercialization efforts.^[35] Prominent examples of multilaterals that provide this type of assistance include the Inter-American Development Bank, African Development Bank and the Asian Development Bank.^[36] The ARSDP project funded by the World Bank has an element akin to this under the third component that is designed to upgrade business, technical and vocational education, and training (BTVET) quality in the oil and gas sector, make it more in line with private sector demands, and provide greater access to the BTVET system to people living in the Albertine region.^[37] In this regard, the World Bank aspires to partner with and fund targeted education institutions that will enroll learners for training in identified trades / occupations.^[38] Further, the Bank aims to partner with and fund support centres to take on students from targeted programs for internship, placement and industrial training.^[39]

5.                  Alternative Sources of Funding

Multilateral financing is not the only way through which an extensive public works project like the ARSDP could be funded. There are other viable alternatives in form of export credit agencies, Islamic financing and other ‘official’ funding sources.

1.                  Export Credit Agencies

To understand what export credit agencies (ECAs) are, one must first know what export credit means. According to the Glossary of Statistical Terms, ‘Export credits are government financial support, direct financing, guarantees, insurance or interest rate support provided to foreign buyers to assist in the financing of the purchase of goods from national exporters.’^[40] These are loans extended to finance a specific purchase of goods or services from within the creditor country.^[41] Since export credits are government financial support designed to promote exportation, it follows that, ‘An ECA is an arm or agency of a national government, created for the purpose of promoting or facilitating exports from that nation to other countries, and by so doing, contributing to national employment and overall national economic wellbeing in the ECA’s home country.’^[42] As government arms or agencies, ‘ECAs are generally funded by the national treasury of their home nation …’.^[43] In addition to promoting or facilitating exports, an ECA can also, ‘… promote or facilitate national investment overseas and/or the exchange of commodities between its home country and other nations.’^[44]

ECAs, ‘… are—at the most intrinsic level—government-backed suppliers of financing and other credit support.’^[45] Being government-backed, ‘… these types of institutions find their roots in politics, rather than commerce …’,^[46] which,

… means that they possess a variety of tools that are not available to commercial entities alone. Among the most important of these tools are the ability to offer financial terms that are more generous than their commercial counterparts, as well as the ability to provide both ‘hard’ and ‘soft’ political protections for the projects in which they invest. These agencies have of late also been recognized for their ability to provide a stable flow of fresh capital during both good and bad times, making them attractive market participants in all types of credit environments.^[47]

The relevance of ECAs in public project finance cannot be overemphasized as they,

… are an essential source of capital for the financing of cross-border trade, including for the financing of major infrastructure projects worldwide. Historically, the role of these institutions in capital-intensive project financings has been to facilitate sponsors’ access to capital in regions where commercial and political risks were deemed to be the greatest and where commercial credit providers were either unwilling or unable to make loans without some element of political or country risk mitigation.^[48]

ECA financing presents sponsors and project contractors with the following benefits.

(a)                Affordable and cost friendly funds

ECAs offer more affordable and cost friendly funding to financing applicants than do commercial lenders, especially for projects being developed in more challenging markets^[49] i.e. countries that are conflict ridden or easily prone to violence. Their loans are more competitive because they are payable over a long period of time and at fairly little interest. Consider, for instance, the CEXIM bank loan for Karuma HPP that will be repaid over a period of 25 years, at an average interest rate of 3%.^[50]

(b)               Promoting best practices

ECAs promote best practices by highly scrutinizing financing applications, subjecting applicants to increased documentary and sourcing requirements, and ensuring stricter covenant packages when negotiating the terms of their credit.^[51] Wang Jihong and Wu Peng write that, ‘The process of application for overseas investment loans of the Export-Import Bank of China is relatively complex, with higher compliance requirements, and in which a legal due diligence report is required.’^[52] The learned writers say that CEXIM bank’s conditions of application for overseas investment loans include:

1.      The borrower shall have viable operational management and financial conditions, good credit standing, and the ability to repay the loan principal and the interest accrued thereon;

2.      Relevant projects shall have good expected economic returns;

3.      The country where the project is located shall have a good investment environment, and a stable economic and political situation;

4.      If the borrower is an overseas Chinese-funded enterprise, the overseas investment project concerned shall feature relatively low overall risks, stable investment returns, and full guarantee for the repayment of the loan principal and the interest accrued thereon;

5.      If the borrower is an overseas Chinese-funded enterprise not controlled by a domestic enterprise (except for newly established SPV or project companies), the use of and guarantee for the loan shall comply with relevant requirements of China’s foreign exchange management regulations;

6.      A repayment guarantee recognized by the Export-Import Bank of China shall be provided (normal guarantee measures for overseas investment loans will be described in our next article);

7.      Overseas investment insurance shall be purchased as deemed necessary by Export-Import Bank of China; and

8.      Other conditions as deemed necessary by Export-Import Bank of China.^[53]

Failure to comply with some of these requirements caused delays in finalizing the formal loan agreement for construction of the Karuma hydroelectric dam, apparently because Uganda had problems supplying the necessary documentation and in establishing an escrow account.^[54] Sticking to the same guidelines has so far caused the denial of financing for the Standard Gauge Railway in Uganda and Kenya because,

… the China Exim Bank is ensuring that this project is a worthwhile investment and is setting requirements that are similar to the normal conditionalities that most traditional lenders would typically apply. Proper compensation of project-affected persons is an essential requirement of all project financing. A ‘bankable feasibility study’ is a normal expectation in project development. The fact that the China Exim Bank has declined loan applications by Uganda and Kenya is proof that they are exercising appropriate oversight and not just funding any ill-considered loan request.^[55]

Project sponsors and contractors can benchmark these best practices of ECAs and incorporate them in their firms or companies to improve their own systems and procedures.

There are many objectives for ECA financing because ECAs are created for different reasons and to achieve different purposes. Majority of ECAs are meant for enabling trade and investment. This is known as the ‘pure’ ECA purpose.^[56] Others are ‘dual’ because they, ‘… have a dual existential purpose—to serve the home economy through the promotion and facilitation of trade and investment … while at the same time also having a developmental mission more akin to that of a multilateral [development bank]^[57] (even if such developmental mission is ultimately tied to fostering a trade environment that is intended to support the domestic economy).’^[58] A dual purpose ECA has the objective of contributing to the sound development of the home country and the international economy and society, with its credit products either being tied to exports (to support home country industry) or imports (to obtain commitments of strategically important materials to the home country), or be altogether untied (to support overseas business environments to facilitate home country trade).^[59]

(a)                Securing raw materials

Some ECAs are created for securing raw materials, by especially resource-constrained countries.^[60] China, a country that has many ECAs some of which are far bigger than the World Bank and other multilaterals,^[61] is known to be a resource-constrained country, so much so that it is in fact said that its, ‘… default setting is resource scarcity.’^[62] In order to fill its resource deficit, the country is investing heavily in Uganda to exploit much needed resources. China is the leading foreign direct investor in Uganda with United States Dollars four billion (US$4 billion) worth of assets — more than any other country.^[63] As a result, China is now among the priority countries earmarked by Uganda Investment Authority for investment promotion.^[64]

One of the resource constraints China faces is oil and gas. The country has therefore committed itself to helping Uganda develop its oil and gas sector, with development of oil fields in the Albertine Rift and aid contributions to the Government of Uganda. on 13 February 2020, China Global Television Network (CGTN) reported that on 11 February 2020, the government of Uganda confirmed it would be borrowing around 118 million U.S. dollars from the Industrial and Commercial Bank of China to facilitate the construction of 700 kilometers worth of roads across the country to accelerate the creation of its national oil industry, by upgrading and constructing national oil roads that will facilitate the efficient development of strategic national oil resources.^[65] CGTN added that as a positive role of China's Belt and Road Initiative, the China National Offshore Oil Corporation (CNOOC), working with a number of African firms, has helped oversee the creation of a pipeline from the oilfields in Uganda to Tanzania's Indian Ocean port of Tanga.^[66] Chinese investments in Uganda will enable China obtain the resources it needs for its about 1,450,993,132 strong population as of Wednesday, 10^th August, 2022, based on Worldometer elaboration of the latest United Nations data.^[67]

(b)               Promotion of domestic producers

Countries also establish ECAs focusing singularly on the promotion of domestic producers.^[68] This is done by providing preferred lines of credit to state-owned enterprises and foreign governments wishing to purchase the ECA’s home country made goods. This way, the ECA supports the overseas expansion of home country firms in line with the country’s international aspirations. For example, China has a “Go Global” strategy, whose long-run goal is to increase the productivity and competitiveness of its enterprises vis-à-vis their global competitors.^[69] This amounts to subsidized risk investment – courtesy of the ECA’s home country tax payer.

Many Chinese ECAs, for example, are funding Chinese companies involved in the development of oil and gas in the Albertine region, which is the focus of the ARSDP project. Some of these ECAs are Agricultural Bank of China, Bank of China and China Construction Bank, which have all been recent financiers of China’s CNOOC, a minority investor and shareholder in the East African Crude Oil Pipeline and the oil fields that will feed it.^[70] These Chinese state-owned ECAs, whose primary mission is promoting their domestic producers of goods and services, now have a footprint in Uganda through the ARSDP project.

(c)                Harmonizing global trade with national economic wellbeing

Other countries may view national objectives in a broader light and instead focus on encouraging an environment of global trade that is conducive to the over-arching goal of promoting national economic well-being.^[71] They therefore establish ECAs that are designed to harmonize global trade with their national economic wellbeing. Jonathan Maizel and Alexander Borisoff give a good and direct example of this i.e. the Japan Bank for International Cooperation (JBIC), which has the purpose of contributing to the sound development of Japan and the international economy and society and its credit products may either be tied to exports (to support Japanese industry) or imports (to obtain commitments of strategically important materials to Japan), or be altogether untied (to support overseas business environments to facilitate Japanese trade).^[72] Article 1 of JBIC’s constitutive document, the Japan Finance Corporation Act, No. 57 of 2007, states that,

The Japan Finance Corporation . . . has the purpose of contributing to the sound development of Japan and the international economy and society and to the improvement of the quality of national life, by taking responsibility for (i) the financial function to provide for procurement assistance to the general public . . . and (ii) the financial function to promote the overseas development and securement of resources which are important for Japan.^[73]

Unfortunately, these cannot be said of the Chinese ECAs involved in oil development in the Albertine region, which is the focus of the ARSDP project. I have traversed their English websites (Agricultural Bank of China – https://www.abchina.com/en/; Bank of China – https://www.boc.cn/en/; and China Construction Bank – http://en.ccb.com/en/home/indexv3.html), but not seen such undertaking anywhere. Their mandates are unapologetically inward looking; and any ventures abroad are purely for profit making, motivated by the “go global” strategy and aspirations of the government of the People’s Republic of China.

Perhaps harmonization of global trade with national economic wellbeing can be inferred from the ECA’s common mission of reducing and eradicating poverty. Therefore, one can argue that by sponsoring oil and gas developments in the Albertine region, those ECAs are indirectly addressing one of the root causes of poverty in Uganda by providing infrastructure that is crucial for production and efficiency, thereby helping people increase confidence in their own ability to lift themselves out of poverty. Then China benefits by these now financially empowered people buying and consuming more Chinese-made products.

(d)               Promotion of exports

Some ECAs focus primarily on the promotion of exports with each of their primary credit products being strictly tied to the home country content of the goods or services being acquired.^[74] The China Export-Import Bank, for instance, under its trade finance business mandate, has a product called export order financing which is,

… a short-term trade finance service where CEXIM, after the seller (exporter) receives valid orders from the buyer (importer) by remittance or collection documents, provides the seller (exporter) with working capital for purchase of raw materials, production, storage and transportation of goods, etc. before shipment, and gets repayment from sales revenue and other sources of funding of the seller (exporter).^[75]

Export order financing enables Chinese domestic exporters to alleviate financial strain by obtaining capital for purchases in advance.^[76] This facility enables Chinese firms and companies like CNOOC to get lucrative business opportunities like the East African Crude Oil Pipeline and the oil wells that feed it.

There is another ECA called Swiss Export Risk Insurance (SERV), a Swiss state-owned organization that insures political and del credere (belief or trust) risks involved in exporting goods and services.^[77] SERV helps Swiss companies obtain low-interest loans or higher credit limits in order to conserve cash when exporting goods and services and its (SERV) insurance and guarantees protect Swiss exporters from default and facilitate export financing.^[78] Swiss companies like AFRY Switzerland Limited^[79] (which is the Owners Engineer in the construction of Karuma dam on River Nile), enjoy patronage from Swiss ECAs like SERV.

(e)                Funding beneficial to host country projects and sectors

Some ECAs provide funding with a focus that is more related to the potential benefit of the applicable investment to the home country (as measured by research and development potential, market share maintenance or growth and the number of primary / lead contractor designations for projects).^[80] Therefore, it makes economic sense for Chinese ECAs to fund CNOOC’s construction of roads, oil pipeline and other related infrastructure in the Albertine region (and indeed the whole of Uganda) where China has natural resource and investment interests, particularly in oil and gas exploration and development.

The reverse is true however, where the project sought to be funded is not beneficial to the ECA’s home country in terms of boosting its business or other interests. That project will not be financed. Uganda experienced this with the standard gauge railway, the construction of which the Chinese government (through CEXIM bank) refused to fund, concerned that it is not economically viable and fearing that Uganda will not be able to pay back the loan.^[81]

2.                  Islamic Financing

The other alternative source of funding for a project like the ARSDP is Islamic financing.^[82] This financing modal is concerned with the conduct of commercial and financial activities in accordance with Islamic law. Islamic financing has moved from being a mere niche to the mainstream, thanks to the economic prosperity of Middle Eastern countries where it is prevalent, but also the growing trend of governments, financial institutions, and individual Muslims worldwide investing in a manner which is consistent with Islam.

Islamic financing is sourced from Sharia’a law which reflects a compilation of the values, norms and rules which govern all aspects of a Muslim’s life (such as family life and economic activities), as manifested in the divine will of Allah and expressed in the Qur’an and Sunnah (words or acts) of Prophet Muhammad.

Islamic financing is achieved using different techniques. The bedrock of Islamic financing is profit and loss sharing since Islam perceives that the ideal relationship between contracting parties should be that of equals where profit and losses are shared. According to John Dewar and Mohammad Munib Hussain,

Mudarabah (investment fund arrangement) and Musharaka (joint venture arrangement) are two finance techniques which facilitate this priority. With the need for diversity in risk/return profiles and conventional lender reluctance to enter into a profit and loss arrangement where the lender would otherwise expect the client to remain liable for the principal and interest regardless of how the venture performs, certain traditional Islamic trading techniques have been adapted which, to an extent, are Sharia’a-compliant versions of conventional finance products. These include Murabaha (cost plus financing), Istisna’a (commissioned manufacture of a specified asset), and Ijarah (lease purchase finance). Finally, a key source of Sharia’a-compliant financing is the Sukuk (trust certificates), which have similarities to conventional bonds.^[83]

For a huge construction project like the ARSDP, Istisna’a would be the most appropriate Islamic financing technique. An Istisna’a is a construction and procurement contract for the commissioned manufacture of a specified asset and can be used during the construction phase of a project financing. Here, following a request from the client, the financier procures the contractor to manufacture an asset which meets the specifications of the client for delivery by a specified date. Sharia’a requires that the price payable for the asset is fixed at the outset (but not necessarily paid in full at this point) and only altered if the specification of the asset is amended by the client.

Relating this technique to the ARSDP project, the project implementers i.e. the Uganda National Roads Authority (UNRA), Ministry of Lands, Housing and Urban Development (MoLHUD) and the Ministry of Education and Sports (MoES) (acting on behalf of the Government of Uganda) would approach the World Bank with a proposal to finance the development of the Albertine region. Upon being satisfied that the proposed project does not offend the principles of Islamic financing, the Bank would appoint each of the implementers as its Wakil (agent) to enter into contracts with selected bidders to execute the necessary engineering, procurement and construction (EPC) works. Although the agents (UNRA, MoLHUD and MoES) contract under the EPC contracts as agents, there is no privity of contract between them and their selected EPC contractors once the ARSDP project has been completed. So the warranties given by the EPC contractors to the World Bank in respect of the project concerning defects in the works, for example, will be assigned to the agents, UNRA, MoLHUD and MoES. The project works must be accepted by the agents if the work done meets the given specifications. Once the project works have been done, title to the project must be transferred by the EPC contractors to the World Bank, which will then either sell the project works to the Government of Uganda outright or alternatively lease the works to Government pursuant to Islamic finance principles.

It was stated that a project like the ARSDP should comply with principles of Islamic financing if it is to be financed under this modal. But what are these principles? In Islam, there is a presumption that everything is permissible (halal) unless there is an express law which rebuts that presumption by declaring it as forbidden (haram). The pertinent Sharia’a principles that relate to Islamic finance are that the following are avoided in any transaction:

(a)                riba (excess or increase) –

This means any excess paid or received on the principal or an additional return received on the principal derived by the mere passage of time. It includes interest as charged in conventional loans because Sharia’a regards money as having no intrinsic value in itself (unlike commodities such as gold, silver, dates and wheat) and is merely a means of exchange to procure goods and services such that it cannot therefore derive a profit either from the exchange of money of the same denomination or due to the passage of time. Riba is forbidden in Qur’an, Surah Al Baqara 2:275, Qur’an, Surah Al Baqara 2:276-280, Qur’an, Surah Al-Imran 3-130, Qur’an, Surah An-Nisa 4:161, and Qur’an, Surah Ar-Rum 30:39. It is also forbidden in the Sunnah Majma al-Zawa’id, Ali ibn Abu Bakr al-Haythami (vol. 4, 117). Using the ARSDP project scenario, it follows that the World Bank cannot charge interest for money it gives to UNRA, MoLHUD and MoES to hire the EPC contractors.

It should be understood however, that Sharia’a does not prohibit the making of profit per se; it only scrutinizes the basis upon which profit is made as, for example, charging interest could exploit the client in a time of hardship whilst the financier’s wealth is increased by no effort of its own. Islam instead empowers the financier to derive a profit by investing its money or other consideration directly (or indirectly through a joint venture arrangement, for example) in real assets – in this case the ARSDP project works.

(b)               gharar (uncertainty) –

Gharar can be defined as the sale of probable items whose existence or characteristics are uncertain or speculative (maisir), the risk of which makes it akin to gambling (qimar). The rationale for prohibiting gharar and maisir stems from the belief that bargains should be based upon contractual certainties as far is possible in order to bring about transparency and avoid conflict over key terms of a contract such as the object, the quality of goods, the time for delivery and the amount payable. Contemporary examples of gharar include: the sale of an object prior to it coming into existence, which subject to certain exceptions, would render the contract as void; where the object is unknown; where the specifications of the object are unknown; and where the price or rent cannot be ascertained with certainty. Using the ARSDP project scenario, that undertaking would be void and unqualified for financing if, for instance, the roads to be upgraded were unknown.

(c)                maisir (speculation) –

This is the same as uncertainty and therefore similar to (b) above.

(d)               qimar (gambling) –

This is also similar to (b) above.

(e)                prohibition on investing in or being involved with haram products and activities (such as alcohol, pork and gambling establishments); and

(f)                prohibition of becoming unjustly enriched.

Therefore, Islamic financing is truly a viable alternative to multilateral financing, even for extensive public works like the ARSDP project. On this note, it should be pointed out that in Uganda, the Financial Institutions Act, 2004 was amended to cater for Islamic Finance in January 2016. The amendment became effective on 4 February 2016. Bank of Uganda, as the financial services regulating body, is mandated to promote and ensure stability in the Islamic financing domain. Islamic financing, however, is not yet operational and rolled out in the country because there is preparatory work still going on.

3.                  Other ‘Official’ Funding Sources

There are other ‘official’ financing sources that could have been resorted to in financing the ARSDP project. These sources operate through private players in their home countries and so the extent to which they are official is somewhat hazy. These programmes and entities cannot cleanly be categorized as multilaterals or even ECAs because they are not directly tied to exports or development.^[84] They provide project developers with other options for officially backed credits where the requirements for ECA or multilateral funding may not otherwise be met.^[85] Neither do they conform to Islamic principles so as to be categorized as Islamic financing. Maizel and Borisoff give good examples of these programmes and entities.^[86]

One, there is the Overseas Private Investment Corporation (OPIC), a development finance institution that is an agency of the United States government whose purpose is to promote economic development in new and emerging markets through US private sector investment in a manner that is complementary with US foreign policy objectives. Title IV, s 231, Foreign Assistance Act of 1961 (P.L. 87-195) that establishes OPIC states that the purpose of it is to ‘mobilize and facilitate the participation of United States private capital and skills in the economic and social development of less developed countries and areas . . . thereby complementing the development assistance objectives of the United States’. This authorizing statute limits OPIC to participating in projects that meet specific eligibility criteria, including substantial US person participation in the relevant project. Much like an ECA, OPIC provides two primary forms of support to projects: (1) financing support, where OPIC provides either a loan guaranty or a direct loan; and (2) political risk insurance.^[87] The ARSDP project is an economic and social emancipator because upgrading of road stretches, growth of urban centres and upgrading BTVET facilities in the region will enable business growth, improve livelihoods and uplift people from poverty, thus fulfilling the requirements for OPIC funding.

Two, in France, there is Promotion et Participation pour la Coopération Économique’s (PROPARCO) whose mission is to be a catalyst for private investment in developing countries which target growth and sustainable development. PROPARCO is a bilateral agency partly owned by Agence Française de Développement and private shareholders. It finances operations which are economically viable, socially equitable, environmentally sustainable, and financially profitable, and it tailors its operations to the level of a country’s development, focusing on infrastructure and equity investments. PROPARCO’s products include a range of financial instruments for private investors in developing countries, including direct loans and equity guarantees.^[88] The ARSDP project would qualify for ROPARCO financing because according to the Ministry of Lands, Housing and Urban Development, the project is oriented towards sustainable development, since it aspires, ‘… to facilitate a more orderly, sustainable and inclusive transformation of the Albertine Region.’^[89]

Three, the Millennium Challenge Corporation (MCC) is a development finance institution whose purpose is to provide large-scale grants to less developed countries to fund projects aimed at reducing poverty. MCC is a bilateral United States foreign aid agency established by the U.S. Congress in 2004, as an independent agency separate from the State Department and United States Agency for International Development, to tackle some of the most pressing challenges people face in developing countries, like supplying electricity so businesses can operate and students can study after dark.^[90] The Millennium Challenge Act 2003 (P.L. 108-199), which establishes the Millennium Challenge Corporation states that the purpose of the Corporation is to provide assistance in a manner that promotes economic growth and the elimination of extreme poverty and strengthens good governance, economic freedom, and investments in people. Grants given by MCC fall into two categories: ‘compacts’, which are five-year grants for countries meeting MCC’s eligibility requirements, and ‘threshold programs’, which are generally smaller sized grants awarded to countries that substantially meet MCC eligibility requirements (and undertake to fully meet those requirements). For a country to be selected as eligible for an MCC assistance program, it must demonstrate a commitment to policies that promote political and economic freedom, investments in education and health, the sustainable use of natural resources, control of corruption, and respect for civil liberties and the rule of law as measured by 17 different policy indicators. MCC selects countries for the Threshold Program based on the country’s overall performance on all 17 MCC policy indicators, the country’s commitment to improving their scores on each of the 17 MCC policy indicators that they have failed and the country’s ability to undertake reform.^[91] The three project components of the ARSDP project satisfy MCC eligibility requirements in so-far-as they aspire to attain regional access and connectivity, ensure local access, planning and development and guarantee skills access and upgrading. The components boost business growth and personal productivity, hence promoting economic growth and elimination of extreme poverty, thereby strengthening economic freedom – hence complementing MCC objectives.

6.                  Conclusion

Being an emerging economy, Uganda suffers perennial budget shortfalls. As such therefore, foreign funding sources remain extremely vital for meeting the country’s expenditures and development needs. Multilateral development banks are indispensible allies in achieving the country’s infrastructure demands. But where multilaterals are unable or unwilling to cover the budget deficits, regard may be had to other official funding sources as analyzed above.

 

References

1.                  A.S. Hornby, A.P. Cowie and A.C. Gimson, Oxford Advanced Learner’s Dictionary of Current English (1983), at 679.

2.                  Tom Ogwang and Frank Vanclay, ‘Resource-Financed Infrastructure: Thoughts on Four Chinese-Financed Projects in Uganda’ 13 Sustainability (2021) 3259, at 2.

3.                  Jonathan Maizel and Alexander Borisoff, ‘Official Funding Sources: Export Credit Agencies and Multilateral Development Banks’, in John Dewar (ed), International Project Finance: Law and Practice (2022) 213.

4.                  ECAs standards for Export Credit Agencies. They are distinguishable from multilaterals as will be discussed shortly below.

5.                  Jonathan Maizel and Alexander Borisoff, supra note 3, at 218.

6.                  Ibid.

7.                  Moses Owori, ‘Uganda’s loans from international financial institutions (IFIs), 2018–2021’ development initiatives (2021). Accessed online at https://devinit.org/resources/uganda-loans-international-financial-institutions/, on Tuesday, 16^th August, 2022, at 04:08 hrs.

8.                  Jonathan Maizel and Alexander Borisoff, supra note 3, at 232.

9.                  See abstract to Wahab Kassim, ‘Land Conservation in the Albertine Graben Region of Uganda: A Critical Analysis of the Legal Regimes’ in Hadijah Yahyah, Harald Ginzky, Emmanuel Kasimbazi, Robert Kibugi and Oliver C. Ruppel (eds), Land Conservation in the Albertine Graben Region of Uganda: A Critical Analysis of the Legal Regimes (2020), 79–99. Accessed online at https://link.springer.com/chapter/10.1007/978-3-030-36004-7_5, on Tuesday, 16^th August, 2022, at 11:15 hrs.

10.              Ibid.

11.              Ministry of Lands Housing and Urban Development, ‘Albertine Region Sustainable Development Plan (ARSDP)’ (2021). Accessed online at https://mlhud.go.ug/albertine/, on Tuesday, 16 August, 2022, at 04:40 hrs.

12.              The World Bank, ‘Albertine Region Sustainable Development Project (P145101)’ (2014), at 4.

13.              Ibid.

14.              Moses Owori, supra note 7.

15.              Ibid.

16.              Jonathan Maizel and Alexander Borisoff, supra note 3, at 221.

17.              Ibid., at 214.

18.              Ibid.

19.              Ibid.

20.              Ibid., at 232.

21.              Ibid.

22.              Ibid.

23.              The World Bank, ‘World Bank Project Cycle’ (2022). Accessed online at https://projects.worldbank.org/en/projects-operations/products-and-services/brief/projectcycle, on Tuesday, 16^th August, 2017, at 21:15 hrs.

24.              Ibid. In practice, the Bank and the Borrower work closely throughout the project cycle, although they have different roles and responsibilities.

25.              Per International Bank for Reconstruction and Development Resolution No. 93-10; and International Development Association Resolution No. 93-6.

26.              The Inspection Panel, Investigation Report – Uganda: Private Power Generation (Bujagali) Project (Guarantee No. BOl30-UG) (2008), at ii. (Emphasis in the original).

27.              The World Bank Group, ‘Involuntary Resettlement’ (2004). Accessed online at http://web.worldbank.org/archive/website00515/WEB/OTHER/INVOLUNT.HTM, on Sunday, 14^th August, 2022, at 07:17 hrs.

28.              The World Bank Operational Manual, ‘Involuntary Resettlement’ (2001. Accessed online at http://web.worldbank.org/archive/website00515/WEB/OTHER/CA2D01A4.HTM?OpenDocument, on Sunday, 14^th August, 2022, at 07:34 hrs.

29.              Ibid.

30.              Government of Uganda, Resettlement Policy Framework for ARSDP (2013), at iv.

31.              Ibid.

32.              Ibid.

33.              Jonathan Maizel and Alexander Borisoff, supra note 3, at 232.

34.              Ibid.

35.              Ibid.

36.              Ibid.

37.              Ministry of Lands Housing and Urban Development, supra note 11.

38.              The World Bank, ARSDP, supra note 12, at 19.

39.              Ibid.

40.              Glossary of Statistical Terms, ‘Export Credits’ (2003). Accessed online at https://stats.oecd.org/glossary/detail.asp?ID=909, on Sunday, 14^th August, 2022, at 11:29 hrs.

41.              Ibid.

42.              Jonathan Maizel and Alexander Borisoff, supra note 3, at 214.

43.              Ibid.

44.              Ibid.

45.              Ibid., at 214.

46.              Ibid.

47.              Ibid.

48.              Ibid., at 213.

49.              Jonathan Maizel and Alexander Borisoff, supra note 3, at 221.

50.              NS Energy, ‘Karuma Hydropower Project’. Accessed online at ttps://www.nsenergybusiness.com/projects/karuma-hydropower-project-uganda/#, on Tuesday, 9^th August, 2022, at 18:55 hrs.

51.              Jonathan Maizel and Alexander Borisoff, supra note 3, at 221.

52.              Wang Jihong and Wu Peng, ‘Applying for Exim Bank of China’s overseas loans’ China Business Law Journal (2019). Accessed online at https://law.asia/applying-chinas-overseas-loans/, on Tuesday, 16^th August, 2022, at 22:30 hrs.

53.              Ibid.

54.              Tom Ogwang and Frank Vanclay, supra note 2, at 10.

55.              Ibid., at 14.

56.              Jonathan Maizel and Alexander Borisoff, supra note 3, at 217.

57.              The term ‘multilateral’ refers to multilateral development banks (such as the World Bank), which according to ibid., at 218,

… are bodies or agencies created by international agreement among multiple nations whose purpose is to promote development among all or certain member states. These development goals focus primarily on the economic and social benefits to be achieved through the investment, as well as corollary matters such as protection of the environment and sustainability. Unlike ECAs, multilaterals are generally funded or financed by contributions from member states party to the multilateral agreement or other arrangement creating such multilateral.

58.              Ibid., at 217.

59.              Ibid., at 218.

60.              Ibid., at 217.

61.              Perhaps the most prominent ECA in China is the China Export-Import Bank (CEXIM). But according to Japan External Trade Organization, CEXIM is just one out of many Chinese state-backed banking institutions that are supported by massive national reserves of accumulated liquidity of over US$2 trillion, ready to be shifted into the global market at a moment’s notice. Other Chinese ECAs include the China Development Bank (the largest quasi-commercial bank in the world, with assets of US$350 billion, bigger than the World Bank and the Asia Bank), Industrial and Commercial Bank of China, China International Trade and Investment Corporation, China Export and Credit Insurance Corporation and Sinosure. All these are ECAs that have vast resources at their disposal and are able to provide discounted loans to Chinese corporations on the overseas acquisition trail. They are part of a golden triangle that exists between Chinese companies, the state and quasi-commercial lending institutions (i.e. ECAs) that provide Chinese companies with cheap finance to undercut other competitors in the world and have been critical to China’s economic successes in the world, more especially Africa, largely because most Chinese loans are tied to the procurement of Chinese goods and services.. See Japan External Trade Organization, ‘China in Africa’ (2022). Accessed online at https://www.ide.go.jp/English/Data/Africa_file/Manualreport/cia_11.html, on 11 August 2022, at 21:50 hrs.

62.              China Dialogue, ‘China’s future will be defined by resource constraints’ (2014). Accessed online at https://chinadialogue.net/en/business/6685-china-s-future-will-be-defined-by-resource-constraints/, on Thursday, 11^th August, 2022, at 18:10 hrs.

63.              ACODE, ‘Chinese investment in Uganda: new impetus for sustainable development?’ (2019), at 2.

64.              Obwona Marios, Guloba Madina, Nabiddo Winnie and Kilimani Nicholas, ‘China-Africa economic relations: The case of Uganda’ ECONSTOR (2007), at 5.

65.              Tom Fowdy, ‘China's role in Uganda's oil development strategy’ CGTN (2020). Accessed online at https://news.cgtn.com/news/2020-02-13/China-s-role-in-Uganda-s-oil-development-strategy-O3doloqTzq/index.html, on Sunday, 14^th August, 2022, at 15:40 hrs.

66.              Ibid.

67.              Worldometer, ‘China Population (2022)’. Accessed online at https://www.worldometers.info/world-population/china-population/, on Thursday, 11^th August, 2022, at 17:32 hrs.

68.              Jonathan Maizel and Alexander Borisoff, supra note 3, at 217.

69.              Japan External Trade Organization, ‘China in Africa’ (2022). Accessed online at https://www.ide.go.jp/English/Data/Africa_file/Manualreport/cia_11.html, on 11 August 2022, at 21:50 hrs.

70.              StopEACOP, ‘Who will finance the East African Crude Oil Pipeline?’ (2021). Accessed online at https://www.stopeacop.net/our-news/who-will-finance-the-east-african-crude-oil-pipeline, on Sunday, 14^th August, 2022, at 13:12 hrs.

71.              Jonathan Maizel and Alexander Borisoff, supra note 3, at 217.

72.              Ibid., at 217-218.

73.              See ibid., at 218.

74.              Jonathan Maizel and Alexander Borisoff, supra note 3, at 217.

75.              The Export-Import Bank of China, ‘Export Order Financing’ (2022). Accessed online at http://english.eximbank.gov.cn/Business/TradeFB/TradeF1/202110/t20211021_34890.html, on Sunday, 14^th August, 2022, at 15:25 hrs.

76.              Ibid.

77.              Swiss Export Risk Insurance, ‘ABOUT SERV’ (2022). Accessed online at https://www.serv-ch.com/en/organisation/about-serv/, on Saturday, 13^th August, 2022, at 08:55 hrs.

78.              Ibid.

79.              For more about AFRY, visit https://afry.com/en/offices/switzerland.

80.              Jonathan Maizel and Alexander Borisoff, supra note 3, at 217.

81.              Tom Ogwang and Frank Vanclay, supra note 2, at 13.

82.              For an in-depth discussion of this financing model, please refer to John Dewar and Mohammad Munib Hussain, ‘Islamic Project Finance’, in John Dewar (ed) International Project Finance: Law and Practice (2011), at 269-298. This presentation is derived therefrom.

83.              John Dewar and Mohammad Munib Hussain, supra note 82, at 275.

84.              Jonathan Maizel and Alexander Borisoff, supra note 3, at 221.

85.              Ibid., at 220.

86.              Ibid., at 220-221.

87.              Ibid., at 220.

88.              Ibid.

89.              Ministry of Lands, Housing and Urban Development, supra note 11.

90.              Millennium Challenge Corporation, ‘About MCC’ (2022). Accessed online at https://www.mcc.gov/about, on Monday, 15^th August, 2022, at 12:25 hrs.

91.              Jonathan Maizel and Alexander Borisoff, supra note 3, at 220.