Log in

Balanced tax policy key to success of Uganda’s infrastructure agenda

In its bid to meet the country’s infrastructural needs, the government of Uganda has been exploring the use of Public Private Partnerships (PPPs) and an all-inclusive legislation to regulate PPPs was enacted in 2015.

A number of ongoing and planned capital projects are currently being developed as PPPs. Uganda’s crude oil infrastructure, comprising production facilities, pipeline and refinery, will also be developed as PPPs but under different legislation.

Although the enactment of the Public Private Partnership Act in 2015 was a significant step in the right direction, the successful initiation and implementation of PPP projects needs more than an operational regulatory framework. Tax is critical and this article makes the case for a balanced tax policy as being key for the success of Uganda’s capital projects envisioned under the PPP framework.

The public and private sectors collaborate to provide public services and infrastructure under PPPs. The private sector funds and operates such projects for a profit, while the public partner defines and monitors compliance with the project objectives.

Uganda needs to invest heavily in key infrastructural projects such as roads, railway, airports and electricity to sustainably meet the needs of its growing population and PPPs provide an alternative avenue to finance such ventures.

Big-ticket capital projects require huge investment beyond the reach of domestic investors. The global pool of capital available for capital ventures is scarce and intensely competitive. Such funds are only available to ventures that provide the most returns in the shortest payback period. The rate and timing of tax impositions on these projects can impact project viability.

Although government can increase its tax collections in the short run, some taxes can kill planned projects. A favorable tax policy is one that creates a competitive balance between the government aspiration of revenue collection and the investor’s objective of a return for its shareholders, which is commensurate with the risk undertaken.

There is a sustained campaign by some organizations criticizing the tax incentives extended to capital projects. However, such projects require special tax incentives given their long lead times from construction to completion and production.

Taxes imposed on materials and services during the construction and investment phase of such ventures can increase project costs to unsustainable levels, partly the reason such ventures may abort. Uganda needs these targeted tax incentives and exemptions for capital projects.

In 2015, Uganda reviewed some aspects of its Value Added Tax regime to eliminate the VAT suffered on services and inputs procured during the investment and construction phase of capital projects related to the extractive sector. These, however, need to be expanded to cover all the capital intensive projects developed under the PPP framework.

It is common for investors to enter into investment agreements with governments to formalize projects under the PPP framework. These agreements can provide for tax incentives.

The uncertainty around whether these incentives are enforceable by state agencies can increase the risk profile of the country and the cost of doing business. As policymakers put together their tax proposals for inclusion in this year’s budget, a key question they should ask is whether the current tax regime in relation to PPP projects strikes a balance between the early taxes imposed during the investment stage and the latter taxes when the project becomes operational or profitable.

The country must also benchmark its tax regime with its peers in order not to price itself out of the competition for the limited global pool of investment capital.
The opportunities that fully functional capital projects will create for Ugandans are vast.

Developing Uganda’s crude oil infrastructure is, for instance, estimated to cost in excess of $8 billion, which is nearly a third of Uganda’s current Gross Domestic Product. A balanced tax policy cognizant of the investor’s pursuit of profit and government objective of tax maximization and economic development is critical to the realization of Uganda’s infrastructure development agenda.

The author is a senior manager, Tax / Energy and Resources, at Deloitte & Touche.

Comments are now closed for this entry