Document of The World Bank FOR OFFICIAL USE ONLY Report No. 62013-UG INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR FINANCIALSECTOR DEVELOPMENT POLICY CREDIT IN THE AMOUNT OF SDR 30.9 MILLION (US$50 MILLION EQUIVALENT) TO THE REPUBLIC OF UGANDA May 31, 2011 Finance and Private Sector Development Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. UGANDA – GOVERNMENT FISCAL YEAR July 1 – June 30 CURRENCY EQUIVALENTS (Exchange Rate Effective as of May 27, 2011) Currency Unit Uganda Shillings US$1.00 = 2,387 UGS Weights and Measures Metric System ABBREVIATION AND ACRONYMS ACGC Audit Committee and Governance Committee AG Auditor General AGO Accountant General‘s Office BoU Bank of Uganda CAS Country Assistance Strategy CFAA Country Financial Accountability Assessment CMA Capital Market Authority CPAR Country Procurement Assessment Report CPI Consumer Price Index CRB Credit Reference Bureau CSD Central Securities Depository DFID Department for International Development (UK) DPC Development Policy Credit EAC East African Community EFT Electronic Fund Transfer FIA Financial Institutions Act FMDP Financial Market Development Plan FSAP Financial Sector Assessment Program GDP Gross Domestic Product GNI Gross National Income GoU Government of Uganda GIZ Gesellschaft für Internationale Zusammenarbeit HIPC Heavily Indebted Poor Countries IDA International Development Association IFAD International Fund for Agricultural Development IFRS International Financial Reporting Standards IMF International Monetary Fund IPSAS International Public Sector Accounting Standards JAF Joint Assessment Framework JBS Joint Budget Support JSAN Joint Staff Assessment Note KfW Kreditanstalt fur Wiederaufbau LIS Land Information System M&E Monitoring and Evaluation MDIs Micro Deposit Institutions i MFI Micro Finance Institutions MoFPED Ministry of Finance, Planning and Economic Development MoPS Ministry of Public Service MoTTI Ministry of Tourism, Trade and Industry MSCL Microfinance Support Center Limited MTEF Medium Term Expenditure Framework NDP National Development Plan NGO Non-Governmental Organization NIMES National Integrated Monitoring and Evaluation Strategy NPS National Payment System NSSF National Social Security Fund OAG Office of Auditor General OPM Office of the Prime Minister PCC Policy Coordination Committee PEAP Poverty Eradication Action Plan PERD Public Enterprise Reform and Divestiture PFM Public Financial Management PPDA Public Procurement and Disposal of Public Assets Act PPP Public Private Partnership PROST Pension Reform Operational Strategies and Tools PRSC Poverty Reduction Support Credit PRSP Poverty Reduction Strategy Paper PSI Policy Support Instrument PSIA Poverty and Social Impact Assessment PSPF Public Service Pension Fund PUSRP Privatization and Utility Sector Reform Program RFSS Rural Financial Services Strategy ROC Regional Operations Committee RTGS Real Time Gross Settlement SACCOs Savings and Credit Associations SCP Small Claims Procedure UBOS Uganda Bureau of Statistics UCSCU Uganda Credit and Savings Cooperative Union UPSPS United Public Sector Pension Scheme URA Uganda Revenue Authority Vice President: Obiageli Katryn Ezekwesili Country Director: John Murray McIntire Acting Sector Manager: Michael Fuchs Task Team Leader: Javier Suarez ii   THE REPUBLIC OF UGANDA FINANCIAL SECTOR DEVELOPMENT POLICY CREDIT TABLE OF CONTENTS CREDIT AND PROGRAM SUMMARY ...................................................................................... 1 I. INTRODUCTION ............................................................................................................... 3 II. COUNTRY CONTEXT ...................................................................................................... 3 RECENT ECONOMIC DEVELOPMENTS IN UGANDA .................................... 3 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ................... 6 III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES.......... 8 IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ....................................... 9 LINK TO CAS AND NEW AFRICA STRATEGY ................................................ 9 COLLABORATION WITH THE IMF AND OTHER DONORS .......................... 10 RELATIONSHIP TO OTHER BANK OPERATIONS ........................................... 10 LESSONS LEARNED ............................................................................................. 11 ANALYTICAL UNDERPINNINGS ....................................................................... 12 V. THE PROPOSED FINANCIAL SECTOR DEVELOPMENT POLICY CREDIT ..... 12 OPERATION DESCRIPTION ................................................................................ 12 POLICY AREAS ..................................................................................................... 12 VI. OPERATION IMPLEMENTATION ............................................................................... 30 POVERTY AND SOCIAL IMPACTS .................................................................... 30 ENVIRONMENTAL ASPECTS ............................................................................. 30 IMPLEMENTATION, MONITORING AND EVALUATION ........................ 30 FIDUCIARY ASPECTS .......................................................................................... 31 DISBURSEMENT AND AUDITING ..................................................................... 33 RISKS AND RISK MITIGATION .......................................................................... 34 ANNEXES ANNEX 1: LETTER OF DEVELOPMENT POLICY ................................................................................ 36 ANNEX 2: FINANCIAL SECTOR DEVELOPMENT POLICY MATRIX ............................................. 61 ANNEX 3: FUND ASSESMENT LETTER .................................................................................................. 63 ANNEX 4: UGANDA AT A GLANCE ......................................................................................................... 66 ANNEX 5: MAP UGA33504 .......................................................................................................................... 69 TABLES Table 1: Selected Macro Indicators 2008/09-2013/14 ........................................................................ 5 Table 2: Ugandan Pension Schemes ................................................................................................. 14 Table 3: Sequencing of actions for pension reform ........................................................................ 17 Box 1: Prior Actions for Uganda First Financial Sector Development Credit ............................ 28 Box 2: Good Practice Principles for Conditionality ....................................................................... 31 This operation was prepared by an IDA team consisting of Javier Suarez (Task Team Leader) and Moses Kibirige (AFTFE); Manush A. Hristov ( LEGAF); Antony Randle and Simon Walley (GCMNB); Rachel Sebbudde and Jos Verbeek (AFTP2); Rajiv Sondhi (CTRFC); Howard Centenary (AFTPC); and Paul Kamuchwezi (AFTFM). The team benefited from extensive preparatory work done by Ravi Ruparel (AFTFE). Peer reviewers were Dino Merotto (ECSP3) and Heinz Rudolph (GCMNB).   CREDIT AND PROGRAM SUMMARY THE REPUBLIC OF UGANDA FINANCIAL SECTOR DEVELOPMENT POLICY CREDIT Borrower The Republic of Uganda Implementing Agency Ministry of Finance, Planning and Economic Development. Financing Data IDA credit, standard IDA terms. 40 years maturity and 10 year grace period. Amount: SDR 30.9 million (US$50 million equivalent). Operation Type Programmatic, (1st of 2), single tranche. Main Policy Areas Financial Sector Development; Pension Reform Key Outcome For Pillar 1 – Market for term finance: (i) effective, well Indicators resourced, and efficient regulator is in place; (ii) public sector pension scheme is sustainable; (iii) mortgage market growth accelerates; (iv) increased capacity to manage and coordinate Public Private Partnership (PPP) arrangements is established. For Pillar 2 – Improving access to financial services: (i) increased lending to private sector; (ii) increased variety of financial products; (iii) strengthened oversight of micro finance institutions; (iv) enhanced efficiency of money transfers; (v) improved accessibility to payment services. Program Development Support financial sector deepening, with special focus on: Objective(s) and (i) Supporting the development of the market for term Contribution to Country finance Assistance Strategy (ii) Furthering access to financial services (CAS) Fully congruent to CAS commitment to support GoU‘s financial sector and pension system reforms. Risks and Risk The main risks identified relate to: Mitigation (i) Political risk –. Over several decades, there has been political stability and progress towards multi-party democracy, although Uganda has not yet experienced a change of power through elections. Recent civil disturbances caused by political opposition and concerns about price increases reveal fractures in the political landscape. Mitigating this risk are Government‘s strong commitment to its National Development Plan, third party monitoring arrangements, and efforts to strengthening accountability institutions. (ii) Economic Management - The recent deterioration of fiscal policy stance has threatened to erode Uganda‘s track record of sound macroeconomic management. To mitigate this risk, the World Bank will continue, in 1 close coordination with the International Monetary Fund (IMF), its monitoring and policy dialogue on economic policies. (iii) Public Financial Management and Procurement – While Uganda‘s budget is published, the absence of an integrated accounting to capture projects outside the consolidated fund, and the variance of actual expenditure to original budget, undermines budget transparency. This situation is compounded by insufficient capacity in the procurement oversight body and procuring entities and lacking compliance with procedures in oversight and procurement audit and effective planning and conducting procurement. To help mitigate this risk, the World Bank is supporting efforts to address the weaknesses in the Public Financial Management (PFM) system. The World Bank is also engaged in coordination with other development partners to help strengthen procurement regulations and procedures. (iv) Fraud and Corruption - Petty and high-level corruption is prevalent. The World Bank is working with the GoU to reinvigorate institutions and accountability systems, rethinking decentralization policies, and re- launching stalled public service reform processes. Operation ID P117979 2 IDA PROGRAM DOCUMENT FOR A PROPOSED FINANCIAL SECTOR DEVELOPMENT POLICY CREDIT TO THE REPUBLIC OF UGANDA I. INTRODUCTION 1. This program document presents a proposed Financial Sector Development Policy Credit to the Republic of Uganda for an amount of SDR 30.9 million (US$50 million equivalent) for the period FY10-FY11. This would be the first in a programmatic series of two operations supporting Government of Uganda‘s efforts to further financial sector development. The proposed operation is fully congruent with the National Development Plan for 2010/2015 and the Financial Markets Development Plan for 2008-2012 which the authorities have started to implement. II. COUNTRY CONTEXT RECENT ECONOMIC DEVELOPMENTS IN UGANDA 2. Over the last two decades, Uganda’s economy has achieved noteworthy growth supported by a prudent macroeconomic framework and propelled by consistent policy reforms. Annual growth in real GDP averaged 7.4 percent over the 10 years ending in 2009/10, compared with 6.5 percent recorded in the 1990s. This was achieved in spite of consecutive exogenous shocks including: oil price shocks; prolonged drought conditions with adverse effects on energy generation and agricultural production; and volatile and increasing food prices. The translation into similar gains in per capita income, however, has been less pronounced due to high population growth. Consequently the gross domestic product (GDP) per capita grew merely 4.0 percent per year over the last decade. 3. The global economic slowdown has been felt in Uganda, as reflected in the deceleration of GDP growth, but medium-term growth prospects remain solid. GDP growth in 2009/10 was 5.2 percent, 2.0 percentage points lower than in 2008/09 (Table 1). This relatively weaker performance was explained by lower external and domestic demand, demonstrating itself in particular through a slowdown in the construction sector. Economic activity has rebounded in 2010/11, supported by a strong recovery in credit to private sector and faster growth in the services sector, resulting in a projected GDP growth of 6.4 percent. Fueled by persistent weak current account balances and uncertainty related to Presidential Elections, the Uganda shilling depreciated significantly in the first half of 2011. Inflation increased and has reached double digits in March 2011, driven by high food and fuel price inflation. As of April 2011, consumer price index (CPI) inflation stands at a non-seasonally adjusted 14.1 percent. 4. Fiscal policy stance deteriorated in the run up to the election of February 2011. Overall spending is estimated to increase by 3.7 percentage points of GDP this FY10/11, compared to FY09/10. Of this increase, 1.6 percentage points was above the originally approved budget by parliament for this FY. The main cause of this increase was unplanned security related expenditures amounting to 2.6 percent of GDP alone in FY10/11. Even though revenues performed better than planned, the overall deficit after grants is now 3 expected to reach 6.3 percent of GDP for FY10/11, well above the 4.7 percent of GDP last FY. 5. Two supplemental budgets had to be issued amounting to 4.6 percent of GDP, up from an already large 2.8 percent of GDP in FY09/10, and below 1 percent the year before. This was to allow for the unplanned security related expenditures and the re- composition of expenditures to accommodate un-programmed election related outlays. As not all of the supplemental authorization has led to increased spending, this has led to an adjustment in the composition of expenditures. The priority sectors, health education, water, and works and roads, have also been affected. Their releases are down by 0.5 percent of GDP for the first three quarters of this FY. The main priority sector affected has been ‗works and roads‘ which has received only 66 percent of its original allocation. 6. The IMF Executive Board decided in February 2011 not to complete the first review of the Policy Support Instrument (PSI) program due to the first supplementary budget passed in early January which put the PSI program objectives at risk. However, since then the IMF mission, who visited Uganda in March/April this year and the authorities, reached an understanding on macroeconomic and structural policies that are consistent with the objectives of the PSI. The agreed stance of fiscal policies aims to bring the budget, in particular for FY11/12, back in line with the original PSI. The program focuses on rebuilding the cushions in fiscal balances and international reserves of which the latter had declined significantly to allow for the security related expenditures. Foreign reserves are projected to fall to 3.4 months of imports by end of FY10/11, down from a comfortable 4.7 in FY09/10. On the basis of the understanding reached during the discussion with the authorities, the IMF mission is recommending to its management to complete the second review of the PSI by the end of June 2011. 7. Uganda’s banking sector remains sound and well-capitalized despite the international financial crisis. In Uganda, there were two main channels through which the global financial crisis could have impacted the financial sector: through direct contagion and through the indirect impact of global downturn on domestic economic activity. Ugandan financial sector was relatively immune from direct contagion given the minimal exposure of banks to toxic assets. Banks‘ holdings in foreign assets amounted to only 12 percent of total assets at the end of 2008, and most of these assets were deposits in correspondent banks which remained in sound conditions. Moreover, Ugandan banks‘ reliance on short term finance from foreign institutions to fund their asset portfolio is limited; at the end of 2008, liabilities to foreign institutions stood at about 4 percent of total liabilities. Ugandan banks were, therefore, largely immune from losses of liquidity when global credit crunch triggered a reversal of financial flows to emerging markets. Nonetheless, the economic slowdown had, and is still having, an impact in the financial sector, though. The rapid growth in assets and profitability which characterized the banking sector in 2007 and 2008 slowed markedly in 2009. Growth in total assets fell from 35 in 2008 to 16 percent in 2009, and the share of nonperforming loans almost doubled, reaching 4.4 percent at the end of 2009. The profitability of the banking system, as measured by the average return on assets, fell from 3.5 percent in 2008 to 3 percent in 2009. The banking system remained profitable on aggregate and generated sufficient profits to maintain its core capital to risk weighted asset ratio at close to 19 percent. Preliminary figures for 2010 show an improvement of performance indicators 4 with share of nonperforming loans back to 2.1 percent. Overall profitability remained low, at about 2.7 percent, partly explained by new bank entries. Table 1: Selected Macro Indicators 2008/09-2013/14 2008/091 2009/101 2010/112 2011/122 2012/132 2013/142 Indicators (Annual percentage change) Domestic prices Headline inflation 14.2 9.4 6.4 12.5 6.4 5.2 National income accounts Agriculture 2.9 1.8 2.7 3.0 3.0 3.8 Manufacturing 10.0 7.4 5.8 5.7 7.0 7.0 Services 8.8 6.6 7.3 7.6 7.0 7.8 Total GDP at market prices 7.2 5.2 6.4 6.6 6.8 7.0 GDP per capita 3.9 1.9 3.1 3.3 3.7 3.7 (As percentage of GDP at market prices) Real Sector Gross domestic investment 23.5 24.3 25.4 27.9 29.4 28.5 Public investment 5.4 6.6 7.8 10.3 11.6 10.4 Private investment 18.0 17.7 17.6 17.6 17.8 18.0 Gross domestic savings (excl. grants) 13.1 13.1 12.5 15.5 18.0 17.4 Public 0.6 -0.8 -2.9 2.6 3.2 3.5 Private 12.5 13.9 15.4 12.9 14.8 13.9 External Sector Current account balance (incl. grants) -7.8 -8.8 -4.3 -9.9 -9.3 -9.2 Current account balance (excl. grants) -10.4 -11.3 -12.9 -12.4 -11.4 -11.0 Exports of goods & nonfactor 19.6 20.3 22.2 21.3 21.8 22.4 services Imports of goods & nonfactor 34.1 33.7 38.3 36.6 36.2 36.5 services External Debt to GDP ratio 19.6 20.1 23.3 25.7 26.3 26.4 Debt service to exports ratio 3.5 4.4 6.1 6.6 7.6 8.2 Public debt service to exports ratio 0.7 1.6 1.5 1.7 2.0 2.1 Foreign reserves (in months of imports) 5.1 4.7 3.4 3.1 3.3 3.5 Government Finance Domestic Revenue 12.5 12.4 13.2 13.8 14.0 14.2 Total expenditure and net lending 17.3 19.8 23.9 21.4 22.4 21.1 Overall balance (excl. grants) -4.8 -7.4 -10.7 -7.7 -8.4 -6.9 Overall balance (incl. grants) -3.1 -4.7 -6.3 -3.5 -4.6 -3.3 Domestic borrowing 0.2 2.2 -0.5 2.1 1.8 1.4 Net Foreign financing 2.0 2.2 2.5 3.1 4.5 3.6 Notes: 1. Estimate. 2. Projection. Sources: Ugandan Authorities; and staff estimates and projections. 8. A large portion of the Ugandan population does not have access to any kind of financial services. Despite considerable progress in the expansion of Uganda‘s financial services, 28 percent of Ugandans (18 years old and above) remain unserved by any kind of financial institution, formal or informal. The proportion of the population served by formal 5 institutions is only 28 percent.1 Uganda suffers from a low savings rate, low levels of lending, and high intermediation costs and margins. While liquidity within the system is considerable, banks prefer to invest in treasury securities rather than servicing a broader segment of the enterprise sector. 9. The local market for term finance remains underdeveloped. The financial system is able to provide bank financing for segments of the enterprise sector, however financing for maturities longer than seven years is largely unavailable. This is a major constraint to the financing of much-needed infrastructure investment and severely curtails the development of finance for the housing market. The dearth of investment in infrastructure has repeatedly been identified as a major constraint to economic development. Despite the increase in private sector activity over the last decade, few private sector companies have accessed the capital markets in Uganda to meet their term financing needs. The majority of businesses in Uganda rely on internal funds to meet their term financing needs. The bond market is dominated by the Government. There are currently 21 government bonds on the market for a total value of UGX 984 billion, while the five corporate bonds represent about UGX 100 billion. The average maturity for government bonds is 3.8 years, while corporate bonds have a longer average maturity – 8.2 years. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 10. Uganda’s macroeconomic framework is deemed appropriate to support the proposed operation. The authorities are committed to return to prudent fiscal management and to ensure budget allocations are in line with National Development Plan (NDP) priorities. The envisaged budget for FY11/12 will figure a significant adjustment, as well as expansion of infrastructure spending. The overall balance is expected to shrink by close to 3 percent of GDP (including grants) as exceptional security-related spending winds down. Banking system financing of the deficit will be limited to drawing down deposits (including from exceptional oil exploration tax earnings) to finance initiation of a large hydropower project. The proposed medium term expenditure framework for FY11/12 to FY15/16 appears sound and coherent. It features moderate fiscal deficits and maintains significant expenditures in infrastructure to address key biding constrains to growth. The effectiveness and efficiency of the implementation of government‘s policies will hinge on the quality of Public Financial Management (PFM) and procurement systems. The authorities are committed to strengthen accountability and efficiency of these systems and are engaged with donors, including in the context of general budget support and its related Joint Assessment Framework which details specific performance indicators. 11. Uganda’s medium term growth prospects remain solid. In the medium term growth is projected to remain robust, averaging about 7 percent in the next few years. A critical part of the government‘s economic development strategy is to focus on eliminating infrastructure constraints and strengthening competitiveness in export markets, in particular for processed agricultural products as a means to sustain growth. In the short to medium term Uganda‘s growth is expected to remain robust as agricultural production in the northern region continues to rebound with the return to peace and as regional demand for Uganda‘s exports grows. The focus on improving productivity – supported by more effective financial 1 FINSCOPE Uganda 2009, Final Report. 6 intermediation - will also be critical to help mitigate the adverse impact of possible real exchange rate appreciation brought on by oil sector investment and production. 12. In the medium to long term, growth will for a large extent depend on the ability of the authorities to harness effectively the anticipated resources from oil exploration. Growth will hinge on prudent macroeconomic management in the presence of oil revenue inflows, the ability to channel the fiscal resources from oil to the most productive public investments, the management of the fiscal revenue streams from the oil sector, and the pace of productivity growth and skills development in the labor force. Related medium term challenges to be addressed to sustain Uganda‘s economic growth and poverty reduction include monitoring and if possible addressing Uganda‘s demographic dynamics, addressing inefficiency in public service delivery, and tackling emerging skills gaps as the economy continues to transform. 13. Uganda’s oil discoveries promise significant increases in domestic revenues in the longer-term. Even though production is anticipated to begin in 2013, peak production, which is likely to be roughly 175,000 barrels per day, is to be reached in 2017. This rate of exploration could be sustained for 10-20 years. Although oil price volatility makes it difficult to predict the revenue stream from oil, public revenues are projected to increase by 10 percentage points of GDP at the height of production i.e. in six to ten years. Based on an oil price of US$80 per barrel, export receipts will reach close to US$4 billion when production peaks to slowly decline as domestic demand increases and to decline more drastically when oil exploration declines towards the end of the 2020. Large supportive investments in infrastructure will be needed between now and 2017 to produce, transport, export and refine the oil so there remains considerable uncertainty regarding the time frame for reaching peak oil production and revenue generation.2 14. The Government will continue to require external financing to maintain its fiscal policy for growth. Domestic revenue mobilization remains low, at 13 percent in FY10/11 and is not expected to increase beyond 15 percent in the medium term. Therefore, further external financing, concessional as well as non-concessional, will be required to sustain fiscal policy. The non-concessional borrowing is to mainly address the infrastructural deficit in roads and energy. These investments will be effective if Government also addresses absorption capacity and implementation problems in the infrastructure development programs, particularly in the roads sector. The fiscal deficit (including grants) is projected to decline to 3.3 percent of GDP by FY13/14 through increased tax revenues, partly due to elimination of various tax exemptions, and containment of recurrent expenditures (see Table 1). 15. The external financing requirements are driven by the needed investments in the oil sector and in public infrastructure. Imports are projected to increase significantly to provide for the goods needed to prepare the oil sector for production and for the planned public investments in energy and roads. The oil sector investments are anticipated to be financed through direct foreign investments while the imports needed for the public investments in infrastructure are financed through grants and concessional as well as non- 2 A detailed analysis of impact of oil sector in Uganda is included in the Annex 6 of the Country Assistance Strategy for Uganda for FY11/15 (World Bank Report No. 54187-UG). 7 concessional borrowing. Additional external resources are needed to rebuild Uganda‘s foreign reserves. Foreign reserves remain relatively low compared to overall imports. 16. Uganda’s risk of debt distress is low as a result of international debt relief and prudent macro management. The authorities intend to continue to rely on concessional assistance to finance their public infrastructure investment in the coming years, but increase gradually their use of non-concessional funds as they build up their debt management capacity. The preliminary results of the 2011 Joint Debt Sustainability Analysis update suggest that all parameters for sustainability are within the prescribed thresholds and the risk of debt distress is low.3 Even as the non-concessional limits are increased to US$800 million, the debt service ratios remain robust under most of the standard stress tests. The sensitivity of Uganda‘s debt indicators to a growth shock suggests that careful selection of public investment projects have a key role to play in the maintenance of debt sustainability over the near and medium term, requiring continued attention from the Ugandan authorities to improving investment planning processes and strengthening implementation capacity. As domestic financial market develops, improved availability and allocation of savings will help satisfy Uganda‘s investment needs. III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES 17. The authorities completed the preparation of the National Development Plan for 2010/11-2014/15 (NDP) in March 2010. The NDP succeeds to the third Poverty Eradication Action Plan and broadens its strategic focus to structural transformation to raise growth and living standards sustainably. During implementation of the third PEAP, the government‘s strategy began to shift towards a greater focus on economic growth and reduction in income poverty. Building on achievements under the Poverty Eradication Action Plan (PEAP), the NDP aims at fostering skilled employment growth and a sectoral shift to higher value-added activities. The NDP identifies four priority targets: (i) human resource development through health, education and skills building; (ii) boosting up physical infrastructure, particularly in the energy and transportation areas; (iv) supporting science, technology and innovation; and (iv) facilitating private access to critical production inputs, particularly in agriculture. 18. The National Development Plan was developed through an extensive and broad- based country-driven consultative process. Consultations have been held at local and sector level, and have included representatives from the public sector, private sector and civil society organizations. They combined a bottom-up and top-down approach through active consultations with the grass-root stakeholder, including at the local government level. Cabinet discussions helped build further ownership within Government. The NDP reflects, therefore, a broad national consensus on country‘s strategy for growth, social progress, and governance. As part of the NDP monitoring and evaluation strategy, Government is launching sub-county level barazas - an annual forum for communities to hold public officials to account for public service delivery. Local governments, civil society and the private sector have broadly expressed consent and support for the NDP‘s focus on growth-enhancing investments, social equity and improved governance, while cautioning Government to ensure that the growth agenda does not compromise goals in the social sectors, particularly health and education. 3 Uganda: Joint IMF/World Bank Debt Sustainability Analysis, 2011. 8 19. The NDP identifies three objectives for the financial sector. The first one is to promote a sound, vibrant and deep financial system. Areas of interventions under this objective include: strengthening of regulatory environment; strengthening of payment systems; promoting competition and prudence in the sector; encouraging product innovations; promoting expansion of banking services to rural areas; strengthening property and land rights legislation; and strengthening anti-money laundering framework. The second objective is to increase access to affordable long term finance. Specific areas of intervention are: strengthening institutional arrangements for mobilizing long-term funds; and reforming the pension sector and promoting savings mobilization. The third objective is to attain further integration of financial services within the East African Community (EAC), focusing on the harmonization on financial sector policies across the Community. The objectives and areas of interventions outlined in the NDP are fully congruent with the Financial Markets Development Plan for 2008-2012. Implementation of the Financial Market Development Plan started in 2008, supported notably by Bank‘s second Private Sector Competitiveness Project. 20. Government’s efforts to reform financial sector have made tremendous strides in establishing a sound, profitable, and growing financial system. Financial sector reform has been at the core of Government‘s economic reform program since the late 1980s. The first generation of financial sector economic reforms focused on liberalization of financial markets, institutional reforms to the prudential regulatory framework, and divestiture of government owned financial institutions. These reforms were supported, notably, by a Financial Sector Adjustment Credit which focused on strengthening Bank of Uganda, and the banking system as a whole, to increase the efficiency of financial intermediation and contribute to sustainable growth and mobilization of domestic savings over the long term. These reforms have led to a stronger and more efficient financial sector, which performs relatively well a number of crucial tasks, such as banking for medium to large corporations and providing payments and savings services to sizeable segments of the population. Since the removal of the moratorium on the licensing of new banks in 2007, the sector is also showing signs of increased competition, notably through marked branch expansion and the introduction of new products such as mobile phone financial services.4 21. The authorities acknowledge that further efforts are needed to increase intermediation and savings mobilization in support of higher and more diversified economic growth and increased poverty reduction. Much needs to be done to improve the depth and breadth of the financial sector while maintaining stability, and allowing the financial sector to fully play its role of catalyst for economic growth. IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM LINK TO CAS AND NEW AFRICA STRATEGY 22. The proposed operation is congruent with the Country Assistance Strategy (CAS), presented to the Board of Executive Directors in May 2010, and to the new Africa Strategy. The CAS supports GoU‘s medium-term goals of accelerating economic growth, transforming the structure of the economy, raising employment and ensuring prosperity. As underscored in the NDP, the development of a resilient, competitive, and 4 Since 2007, the Bank of Uganda has licensed seven new commercial banks and one credit institution, raising the number of banks to 21 and credit institutions to 4. 9 effective financial system constitutes a critical, though not sufficient, enabling element to achieve Uganda‘s economic and social development objectives. Countries with higher levels of financial development experience better resource allocation, higher GDP per capita growth, and faster rates of poverty reduction. In congruency with the CAS, the proposed operation would support Government‘s efforts to further financial sector development, including through pension system reforms. The proposed operation will support pension reform by improving the regulatory framework and strengthening both public and private pension schemes; and it will complement current Bank‘s support to the implementation of government‘s 2008-2012 Financial Market Development Plan (FMDP) to improve access to financial services and the availability of term finance.5 This operation is fully aligned with the first pillar of Africa Strategy, namely the competitiveness and employment pillar. COLLABORATION WITH THE IMF AND OTHER DONORS 23. Collaboration between the Bank and Fund in Uganda is strong. Government‘s macroeconomic program has been supported in recent years by successive three year IMF Policy Support Instrument (PSI) arrangements; the current one started in July 2010. The IMF Executive Board decided in February 2011 not to complete the first review of the PSI due to a supplementary budget passed in early January which put program objectives at risk. During subsequent discussions in March 2011 the authorities and the IMF mission reached understandings ad referendum on macroeconomic and structural policies that are consistent with the objectives of the PSI. The second review of the program is expected to be presented for consideration by the IMF Executive Board before the end of June 2011. The Bank and IMF collaborate on fiscal and financial support issues, including in the follow-up to the 2005 Financial Sector Assessment and the preparation of the planned Financial Sector Assessment (August, 2011). 24. This operation was prepared in consultation with other Development Partners active in the financial sector, notably the International Monetary Fund and the German cooperation agency (Gesellschaft für Internationale Zusammenarbeit - GIZ), and United Kingdom Department for International Development (DFID). RELATIONSHIP TO OTHER BANK OPERATIONS 25. World Bank Group engagement is aligned with NDP and covers the main strategic axes of Uganda’s development strategy. It uses harmonized instruments such as programmatic development policy lending, investment lending, and joint analytical and advisory services. The Second Private Sector Competitiveness Project comprised a component to support financial sector deepening, which enabled targeted activities, including support for the drafting of commercial and financial legislation and the establishment of the Credit Reference Bureau. This project directly financed implementation of specific activities of government‘s FMDP. The proposed Financial Sector Development Policy Credit (DPC) complements these efforts. Sector-specific development policy operations are useful instrument to support countries with strong commitment to medium-term reform in a specific sector which require focused attention. This operation also complements Banks efforts to 5 This operation was discussed during CAS consultations and included in the lending pipeline at the Regional Operations Committee (ROC) stage of the CAS, albeit it was dropped from the final CAS version at the request of the authorities during the 2010 Spring Meetings. The authorities reversed their decision subsequently and requested the Bank to resume the preparation of the operation. 10 support the development and integration of financial sector in the EAC, notably the EAC Financial Sector Development and Regionalization project. Finally the operation will benefit from parallel targeted TA financed by various trust funds, notably supporting the establishment of the pension regulator. 26. This operation also complements the PRSC series, the main vehicle for Bank’s budget support in Uganda. PRSC series focus on Government‘s reforms to improve access to, and greater value for money in, public services. They are being prepared and monitored jointly with ten other Joint Budget Support (JBS) donors and Government, and place a strong emphasis on performance-based management through tools such as output-oriented budgeting and results oriented management. This joint approach reduces Government transaction costs, increases the predictability of disbursements, and creates mutual accountability. Financial sector reforms are not covered under the JBS, as authorities and partners have agreed to circumscribe the scope of this general budget support to four sectors, namely health, education, transport and water and sanitation for the time being. The authorities consider that adding specific sectoral reforms to the JBS framework would introduce unnecessary complexity and would entail the risk of jeopardizing predictability of disbursements in case progress in the specific sector is slower than anticipated. LESSONS LEARNED 27. Strong ownership and strengthened capacity of the institutions involved in the reform are key factors of success. Ensuring ownership at all levels of government, from the technical to highest level, is essential for reinforcing commitment to achieving development objectives and facilitating implementation. Complementary technical assistance and capacity building activities will also be critical. 28. The political economy of reform needs to be taken into account. In designing a development policy operation, political factors and the legislative needs of the client need to be understood and included in the dialogue with the client, particularly if the implementation of the reform program will involve a future administration. In preparing this operation, the World Bank understood that some of the policy reforms needed, notably with respect to pension reform, could not be implemented within the current political cycle. The proposed programmatic approach combines the discipline of a medium-term framework with triggers for subsequent operations that offer the flexibility to accommodate the unpredictability and uncertainty of complex policy reforms. This approach would also strengthen the basis for a continued policy dialogue with the Ugandan authorities to take office in 2011. 29. Ambitious objectives require a pragmatic approach. The deepening of financial sector and pension reform is a long-term and ambitious goal that involves difficult decisions. In designing this operation, the World Bank understood that under current constraints, it is more realistic to focus on institutional development (improving the legal and regulatory framework and the capacity of the supervisory agencies), and to leave the restructuring of the pension schemes for a second stage. This would allow building further momentum for completion on the reform. 11 ANALYTICAL UNDERPINNINGS 30. The design of this operation is underpinned by various diagnostic work completed in recent years. These include World Bank report on Making Finance Work for Uganda (2009); a consultant report on Development of PPP frameworks in Uganda (2010); FINSCOPE survey report (2010); a policy note on Reform Options for the Public Service Pension Fund in Uganda (2011); a review of National Social Security Fund investment policies (2011); and the Financial Sector Assessment Program (FSAP) (2001) and its first update (2005). A new update of the FSAP is scheduled to take place in late August 2011; its outcomes will inform further authorities‘ financial sector reform program and help refine and identify specific triggers for the subsequent operation under this programmatic series. This analytical work was fed into policy dialogue and contributed to Government‘s policy formulation. V. THE PROPOSED FINANCIAL SECTOR DEVELOPMENT POLICY CREDIT OPERATION DESCRIPTION 31. The proposed Development Policy Operation for the sum of US$50 million would be the first in a series of two programmatic single-tranche operations. The proposed operation will support the implementation and consolidation of Government‘s financial sector reforms as outlined in the National Development Plan and the Financial Markets Development Plan for 2008-2012. The programmatic approach defines the medium-term framework for policy reform while accommodating the unpredictability and uncertainty of these complex policy reforms. 32. The overarching development objective of the operation will be to help build a more efficient, robust and deeper financial sector which can support broad-based private sector growth. The specific reforms supported by the operation will be organized around two main objectives: (i) supporting the development of the market for term finance; and (ii) improving access to financial services. Under the first area, the operation would support the pension system reform, and the strengthening of institutional arrangements for mobilizing long-term funds, including through Public Private Partnerships and the development of the housing finance market. Under the second area, measures supported would seek in particular to improve the lending environment and strengthen payments and settlement systems. Proposed prior actions for this operation and their current status are presented in Box 1 at the end of this section; the expected specific results and proposed triggers for second operation are contained in the policy matrix in Annex 2. POLICY AREAS Pillar 1: Supporting the development of market for term finance (i) Pension System reform Overview of the pension sector 33. The Ugandan pension system serves a relatively small portion of the population. For private sector employees, the mandatory fund is the National Social Security Fund (NSSF). Many private sector employers have also set up occupational schemes to accumulate 12 additional pension benefits for their employees. For public sector employees, the scheme is the Public Service Pension Fund (PSPF). The armed forces have a specific scheme, the benefit payments of which are administered through PSPF. Workers in formal firms with less than five employees, self-employed, and informal workers are not covered. The characteristics of the major pension schemes in Uganda are described in Table 2. 34. The Public Service Pension Fund covers civil servants in both central government and local authorities. Pensions for traditional civil servants, primary and secondary school teachers, police officers, prison officers, doctors and public employees in the judiciary are provided for under the Pensions Act (Cap 281). The Pensions Act also covers civil servants in local authorities - until 1994 local authorities had their own provident funds established under the provisions of the Municipalities and Public Authorities Provident Fund (Cap 291). After the 1994 amendment to the Pensions Act, all local authorities were required to provide pensions to their workers under the Pensions Act. The Armed Forces is covered under the Armed Forces Pension Act, 1939, Cap 295 and is partly administered through PSPF. 35. The PSPF is a generous, non-contributory, defined benefit scheme funded by the budget. The scheme provides for normal retirement age at 60 years with a benefits vesting period of ten years. The covered population in this scheme is approximately 260,000 and currently pensions of approximately 130 billion Ugandan shillings per annum are paid. The scheme has a generous full pension based on gross salary with an accrual factor of 2.4 percent multiplied by the number of years in service capped at 87 percent of final gross salary. The scheme rules allow commutation of up to a third of the pension at commutation factors that are double what is considered to be actuarially fair. Commuted pensions are restored after 15 years. The unique policy of indexing pensions provides a rate of indexation that is higher than wage indexation. With regard to survivors‘ pension, the pension payable is 100 percent of the pension entitlement of the deceased public officer. The guaranteed period for the survivors‘ pension is 15 years. The scheme also provides an array of other gratuities such as contract gratuities, death gratuities, short term gratuities, and marriage gratuities. 36. The Armed Forces Pension Scheme is also a non-contributory defined benefit scheme. As noted, the benefits payable by the scheme are administered through PSPF. Data about the active contributors and pensioners is maintained by the Minister of Defense and are not publicly available. 37. The National Social Security Fund (NSSF) is the compulsory fund for workers in the formal sector in enterprises with five or more employees other than those persons employed as teachers or in the Civil Service and Armed Forces. NSSF is a defined contribution provident fund which is financed by compulsory contributions of 15 percent of wages divided between employers and employees in the ratio of 2:1. NSSF operates on a defined contribution basis, that is, as an investment fund where accrued balances can only be withdrawn at retirement. As such, its assets and liabilities are by definition matched. The fund does not guarantee a rate of return on the contributions it collects. While there are no explicit contingent liabilities that would need to be covered by the scheme sponsors or a pension administrator, if the fund were to face shortfalls the government would most likely have to step in. The fund has 450,000 active contributors and its total assets stood at UGX 1.6 trillion (end of June 2010, unaudited), equivalent to about 5 percent of GDP. 13 38. The Board of NSSF has recently approved an investment strategy. There are no counterparty limits or limits to its exposure to particular industries. Assets are currently structured as following: 30 percent in fixed interest investments; 30 percent in equities; and 40 percent in real estate. The strategy recently approved by the Board is 40 percent fixed interest, 30 percent equities (both listed and unlisted) and 30 percent real estate. A more conventional mix would be: cash and bank deposits in the range of 10 to 15 percent; fixed interest of 25 to 30 percent; equities of 25 to 30 percent and for real estate, a maximum of 20 percent. Table 2: Ugandan Pension Schemes National Social Occupational Public Service Armed Forces Security Fund Provident Schemes Pension Fund (PSPF) Pension Scheme (NSSF) Legal NSSF Act 1985 Not regulated Pensions Act (CAP Armed forces pensions Framework 286) Act (CAP 295) Specific All private sector Employees of private Civil servants (central Armed forces Population employees of formal sector firms that elect government, police and Served sector companies with to contribute funds in prison officers, more than 5 employees addition to NSSF judiciary, doctors, funds primary and secondary school teachers Population About 450,000 About 50-60 schemes, About 228,000 active N/A covered members - number of members members and 32,000 unknown retirees Financing of Mandatory Voluntary (generally Non-contributory Noncontributory Benefits contribution (15% of employers‘) (budget-financed) (budget-financed) gross salary) contributions Scheme design Defined contribution Defined contribution Defined benefit Defined benefit and defined benefit Type of Benefit Lump sums Annuities and lump Annuities and lump Annuities and lump sums sums sums Funding status Funded (about UGX Believed to be funded Unfunded Unfunded 1.3 billion) 39. There are believed to be more than 50 private sector occupational schemes established by private sector employers. There is currently no consistent practice or structured regulation for these schemes. Some take the form of provident funds, others are pension arrangements based upon the final earnings of members and their length of service. The estimated total asset value of these funds is UGX 120 billion. Most large employers, such as the Bank of Uganda and the telecommunications companies, operate such schemes. In addition to the single-employer schemes, there is also one multi-employer pension fund, organized and operated by an international company. Challenges for the pension sector reform 40. Several constraints are hampering the development of a mature and well functioning pension sector. These can be grouped around three dimensions: (i) the overall pension regulatory framework; (ii) the private pension schemes; and (iii) the public pension scheme. The Government has started to take concrete steps to address these challenges. 41. There is no comprehensive regulatory framework for the pension sector, although steps have been taken to address this. Currently, NSSF and PSPF are regulated 14 under separate laws. NSSF is governed by a board and reports to the Minister of Finance, while PSPF is under the direct control of the Ministry of Public Service. A small number of occupational pension schemes operating as deposit administration funds are subject to the Insurance Act. The passage of the URBRA Act in April 2011 has provided for the establishment of a regulatory authority to supervise the whole pension sector. Additionally, the Retirement Benefits Sector Liberalisation Bill (the Liberalisation Bill) has been introduced into Parliament. Under the envisaged new regulatory framework, both NSSF and PSPF are subject to the supervision of the regulatory authority, which is yet to be appointed. 42. The Liberalisation Bill presented to Parliament late April 2011 has significant gaps. This submission, requested by Parliament to have a broad view of envisaged pension reform before considering the URBRA, was made before wider consultations had concluded. The authorities acknowledge that the submitted Liberalisation Bill has significant gaps and have indicated that these will be addressed at the Parliamentary Committee Stage. The authorities have requested Bank‘s inputs, as they complete consultations and ensure that gaps in the Bill are corrected. 43. Government’s commitment to public service and armed forces pension payments is unsustainable. The government‘s commitment to provide public sector employees pension benefits through the non-contributory PSPF has resulted in a large contingent liability, estimated at 63 percent of 2011 GDP at a conservative real discount rate of 5 percent. Although the Government has embarked on an accelerated amortization of historic arrears, according to the Ministry of Public Service, new arrears are being accumulated every year due to under-budgeting of the government's commitments. Data were not provided for members of the Armed Forces to enable an actuarial evaluation to be undertaken. However, it is certain that the arrangements for members of the Armed Forces are more unsustainable due to higher parameters applying to the benefits to these members compared with the Civil Servant and Teacher groups. The Liberalisation Bill, when passed, will substantially address the issues in relation to PSPF. Under the proposed Bill, PSPF will become a contributory defined contribution fund, to which employees in the Civil Service and Teacher groups will contribute five percent of their wages and the government will contribute 10 percent. The scheme will be known as the Unified Public Sector Pension Scheme (UPSPS). Existing active members with fifteen years of service or less will be provided with a redemption bond which is redeemable at retirement. The current arrangements for active members with more than fifteen years of service and existing retirees will be grandfathered. The future obligations of the government will be reduced significantly. 44. Governance issues in National Social Security Fund (NSSF) need to be addressed durably. Although not directly under government management, the composition, selection, and rules of accountability of NSSF‘s board make it a de facto publicly managed provident fund. This kind of structure has often failed in other countries, and NSSF‘s record to date is certainly less than stellar, with a history of alleged fraud and poor investment decisions related to shortcomings in its governance structure. The recent independent review of NSSF revealed a number of issues that need to be resolved, including the valuation practices in relation to assets for which there is no readily available market price, an inadequate investment strategy and inequitable practices in crediting scheme earnings to the accounts of individual members. Further, other available information suggests that there are issues with the internal procedures of NSSF that have resulted in un-reconciled accounts, lost data and a failure to pay pension 15 benefits in a timely fashion. The envisaged new regulatory framework will help address these issues. The URBRA Act requires that the investment management function needs to be outsourced to a licensed and qualified investment manager, which cannot be a party related to the trustees or the administrator of NSSF. The regulator will have the power to set, for all licensed schemes, regulation and prudential norms, and minimum standards covering corporate governance, investments, valuation and operations. 45. NSSF’s monopoly over mandatory pensions is hindering the emergence of alternative schemes. The progressive opening of this market is expected to foster financial market development, notably with respect to mobilization and allocation of long term fund. The passage of the Liberalisation Bill will, after a transition period, allow workers to choose any scheme that is licensed by the regulatory authority in which to make mandatory contributions. Currently, only a few asset managers have been licensed by the Capital Markets Authority (CMA) to manage assets of occupational pension schemes. One of these, African Alliance, has begun to manage and distribute retail investment funds as well. Two banks (Barclays and Stanbic) provide custody services to these pension funds. The insurance market, especially life insurance, is also underdeveloped. No annuity products are available commercially, and the life insurance market consists of group term life policies. There is a severe shortage of qualified actuaries, which is particularly problematic for the government. Whereas private sector entities can always find and hire such experts abroad, this constraint is particularly serious for the Uganda Insurance Commission. Government’s reform program 46. Pension reform has been at the forefront of public debate and GoU’s agenda for the past decade. A significant amount of public consultations and analytical work has been undertaken over that period, ranging from comprehensive approaches embracing broad social security considerations to more focused analysis for specific schemes. The authorities‘ emerging vision for pension reform emphasizes the capital market development objective, rather than considerations relating to the provision of adequate, affordable and sustainable retirement insurance for the Ugandan population. 47. The authorities have adopted a staged approach for pension reform, focusing in the first steps on the regulatory framework and the two largest pension schemes, NSSF and PSPF. The passage of the URBRA Act is a major achievement which needs to be followed by the appointment of the Board and staff to the authority, and activities to make the authority functional. Trust fund resources have been provided to assist with the set-up of the authority. The next stage in the reform process is to pass the Liberalisation Bill, which will ensure that PSPF is made contributory and becomes more financially sustainable and provide for the progressive introduction of competition in the pension sector. Table 3 presents the planned sequencing of pension reform; all actions under stage one have been completed. Specific measures to be undertaken as part of the proposed operation 48. This first operation will support the initial stage of pension reform. The following prior actions have been agreed with the authorities and have been completed: (i) the conduct of an independent review of NSSF investment policies and practices; (ii) the conduct of an 16 actuarial evaluation and simulation of reform options for the PSPF; (iii) submission of URBRA Bill to Parliament. Indicative measures for the preparation of the second operation 49. The second operation would support actions indentified in the second stage of pension reform sequence. The set of possible triggers for the second operation would include: address gaps in Liberalisation Bill introduced to Parliament before it is enacted; appoint URBRA Board and staff; URBRA to adopt regulations, prudential norms and guidelines; license NSSF; and Cabinet to approve policy paper on PSPF reform. Expected results 50. The overarching objective of the actions supported in this area is the emergence of a regulated, competitive and sustainable pension industry catering for both mandatory and voluntary pension savings. This overall objective will require an effective, well resourced and efficient regulator, and the transition of the public sector schemes towards a sustainable scheme. Table 3: Sequencing of actions for pension reform Stage Regulatory Authority NSSF PSPF Occupational Other Schemes 1 Submit URBRA Bill to Assess NSSF Undertake actuarial Parliament Investment policies evaluation and and Practices simulation of reform options 2 Appoint URBRA and License NSSF Take Policy URBRA to review Address gaps assist in resourcing the decision on options OPS identified and in agency for reforms license where Liberalisation warranted Bill introduced Prepare regulations Appoint trustees to in Parliament prudential standards and PSPF by laws Enact License PSPF Liberalization Adopt internal policies Bill and procedures Conduct training Commence licensing (ii) Developing housing finance market Overview of housing finance market 51. Uganda mortgage market is relatively small and underdeveloped. Mortgage debt to GDP stands at some 1 percent (2007). Based on the incomes of 5.2 million households in the country, only 0.6 percent would theoretically be able to access mortgage loans through commercial banks, while 19.9 percent of households could access a housing microfinance 17 loan through microfinance deposit taking institutions, 7.2 percent could access loans from microfinance institutions and savings and credit cooperatives, 10.3 percent access loans from a savings and credit cooperatives only, and 62.3 percent would not have a sufficient level of income to access any form of housing finance under the current system. 52. The range of mortgage products is varied. They are typically offered for up to 20 years to maturity and at variable rates. Interest rates are still relatively high at between 16 and 18 percent. Loans are available for construction, for house purchase, for incremental construction (10-year loan only and for shorter term, less than 10 years) and equity release mortgages. Land loans are also available with a maturity of just four years and a rate of 20 percent. Finally, buy-to-let loans are also available, which allow prospective landlords to invest in rental properties. 53. Housing demand is growing and a large housing gap exists. Uganda has a very low level of urbanization of just 13 percent compared to an African average of 40 percent. The annual housing need is around 200,000 units with 80 percent of this required in rural areas. This does not take account of the housing backlog which has accumulated over the years. The pattern of housing demand is expected to shift gradually as urbanization accelerates. The formal housing construction sector could contribute significantly to closing this gap if it were able to better service groups further down the income distribution scale. Housing supply is increasing but still lags behind demand. The growing urbanization and rising cost of land has resulted in a drop of owner occupancy rate. In rural areas, however, the home ownership rate is still around 90 percent. 54. The market is responding to this growing demand. New real estate developers have entered the market, including some developers backed by foreign capital. These developers vary in size and are mainly focused on the high end spectrum of the market, but are expected to enter the other segments as the market expands. The banks are also responding and getting involved in mortgage business. Some banks, including the Housing Finance Bank have issued corporate bonds to finance their mortgage activities. Finally, the supply response also comes from microfinance institutions, with the introduction of new housing microfinance products (e.g. small loans targeted at incremental construction without the need for collateral), albeit further development is constrained by BoU regulations limiting the lending tenure to five years. Challenges 55. Obstacles for housing finance development are present at every stage of the lending process, from obtaining collateral, registration process, obtaining long-term funding, assessing credit risk, and foreclosure process. 56. There are some legal and regulatory constraints related to the implementation of the new Mortgage Act and uncertainties regarding the Land Act Amendment Bill. The implementation of the Mortgage Act is pending the adoption of regulations. Discussions about the Land Act Amendment Bill are highly sensitive and it is critical that the outcome is reached by high level of consensus and establishes transparent and fair processes to resolve claims. 18 57. There are also important information constraints, notably slow and unreliable property registration, and difficulties to assess credit risk. 58. Finally there are a set of constraints on the housing supply side, with high cost of infrastructure for development, few credible developers and builders, and limited large-scale development. Government actions 59. Government has acknowledged these constraints and taken action to start addressing them. The first important step was the enactment of the Mortgage Act in October 2009, which consolidates the laws relating to mortgages, revamps the mortgage industry and harmonizes it with the Land Act. The regulations to facilitate implementation of the Mortgage Act have being prepared and are ready for signature. To increase the flow of investment into housing and encourage development of large scale, well planned residential areas, the Government has decided to provide fiscal incentives and reduced the Value Added Tax rate charged on housing from 18 percent to 5 percent. Government has also started addressing the information constraints, notably through the implementation of the Land Information System (LIS), and the Rehabilitation and re-opening of the Survey School in Entebbe. The LIS will help speed up and secure property title registration. The establishment of the Credit Reference Bureau will also contribute to improve information gaps. 60. The Government is committed to further actions in the housing sector. At the policy level, the immediate priority areas of reform include: resolving issues associated with the Land Amendment Act to clarify ownership issues with a view to facilitating land development in general and housing finance in particular; and strengthening consumer protection rules. At institutional level, the reforms will focus on: strengthening the capacity of the Chief Government Valuer; improving knowledge and information flow about mortgage lending including in the Judiciary; supporting the development of professional bodies in the sector; and strengthening the technical capacity of housing lending institutions. Specific measures supported under this operation 61. This operation will support government’s effort to implement the Mortgage Act. The Act consolidates the laws relating to mortgages and will be instrumental in revamping the mortgage industry. The act addresses key uncertainties which were hampering further resources commitments in mortgage products. Most notably, it addresses clauses that could give courts unilateral rights to change mortgage contract terms for a borrower in default. With respect to the length of mortgage foreclosure process, until the new law is tested through the courts, it is difficult to fully know the impact on the time and cost of foreclosing on a property. The Act as passed will double the time between serving a notice of default and being able to take further action (from 21 to 45 days), however, the Act provides for a strong power of sale mechanism which should make foreclosure a straightforward process. The key priority now, to be supported under this operation, is to prepare the necessary regulations for the act and to begin implementation. The prior action retained for this operation is to put in force the Mortgage Act regulations. 19 Indicative measures for the preparation of the second operation 62. The set of possible triggers for the second operation under this area could include: the revision of valuation policy and procedures; establish a Mortgage Market Development Committee tasked with the setting up of a liquidity facility; and further issuance of long term bonds. The current difficulties and delays in property registration are largely attributed to the requirement that every transaction needs to be independently valued by the Government Value‘s Office for the purposes of levying stamp duty. The authorities could consider the introduction of the transactional value for tax purposes, with adequate safeguards to prevent under declaration of value. The introduction of a liquidity facility would allow banks to overcome some of the maturity issues and provide investors – including pension funds – with a supply of simple bonds yielding a better return than treasury bills without a significant increase in risk. This ―liquidity safety net‖ for banks would allow lenders to engage in higher levels of maturity transformation. Finally, the introduction of longer term Government bonds would help build sufficient liquidity in long–term debt to get pricing points for a long term yield curve, hence providing the market with a price for longer term funds. Expected results 63. The measures under this area will contribute are expected to improve confidence in the mortgage market and foster mortgage market growth. (iii) Developing Public Private Partnership framework for infrastructure financing Overview 64. Uganda has had a generally positive experience with PPPs. They have been used to manage existing Government assets and provide infrastructure services as part of Uganda‘s Privatization and Utility Sector Reform Program (PUSRP), a program supporting the implementation of the Public Enterprise Reform and Divestiture (PERD) policy and Act. These PPPs, such as the electricity distribution and railway concessions, were implemented under a relatively well-defined institutional structure and set of rules. The Government has also used PPPs to develop new assets, particularly in the energy sector. These have been more ad hoc, and in some cases driven by unsolicited bids. Challenges 65. The framework under which these projects have been developed does not apply to the majority of the potential PPP pipeline. The poorly-defined current PPP framework is likely to restrict further development of the PPP pipeline for providing new assets and services. Without a coherent policy structure, line ministries and entities not already familiar with the PPP concept—which includes much of Government—lack both the understanding of PPP and the mandate to pursue PPP in their infrastructure development planning. In turn, developing and transacting projects is slow and inefficient without a basic level of in-house capacity in structuring deals, and defined responsibilities and procedures to coordinate the process. Integrating PPP development and assessment with existing public financial management processes will be important, to ensure the use of PPP does not create a route around the budget process, debt or fiscal targets. 20 Government’s reform program 66. The GoU recognizes that PPP can make an important contribution to the development of infrastructure facilities and services in Uganda and is committed to promoting its use. In March 2010, the GoU approved PPP framework which defines the extent, objectives, and guiding principles of its PPP program. The key objectives of the policy are: to establish an enabling environment that will foster investment in public infrastructure and related services; to encourage private sector investment and participation in public infrastructure and related services; to streamline PPP procurement process; and to articulate accountability of outcomes. The adopted PPP policy is based on the following core principles: (i) value for money; (ii) public interest; (iii) risk sharing; (iv) output oriented; (v) transparency; (vi) accountability; and (vii) competitive bidding process. 67. The GoU has developed a detailed road map to implement Cabinet decision. Key milestones ahead include: the drafting of PPP Bill and submission to Cabinet; the establishment of PPP unit (on a non statutory basis until PPP Bill is enacted) with core staff already familiar with PPP policy; and the preparation and adoption regulations and procedures for developing and implementing PPPs in congruency with the PPP Bill. The draft Bill was submitted to Cabinet, albeit it has been returned for revision and will be resubmitted. The successful implementation of this PPP framework will also hinge on the identification and selection of pipeline of viable projects. The authorities have started developing a pipeline of priority projects with support from donors, including through the Public Private Infrastructure Advisory Facility. Specific measures supported under this operation 68. This operation will support the adoption of PPP policy, the establishment of the non statutory PPP unit and the preparation and submission of PPP Bill to Cabinet. The GoU opted for the establishment of a dedicated central PPP unit within the MOFPED. Given the generally poor understanding of PPP throughout the administration and the potentially broad pipeline, the creation of a center of expertise and experience will help addressing capacity and coordination gaps. The draft of the Bill was submitted to Cabinet in May 2011. Indicative measures for the preparation of the second operation 69. Under this area, a possible trigger for the second operation could be the adoption of PPP Bill regulations and guidelines. Expected results 70. The ultimate objective is an increased delivery of cost effective quality infrastructure services, in particular leveraging domestic sources of longer-term financing. This is particularly important as the services rendered by domestic utility providers in many cases use largely locally produced materials (e.g. for roads, water and sanitation) and provide services to local users. Intermediary outcomes will be an increase of private sector investments in public infrastructure and related services and development of government capacity to complete and manage effectively relevant PPP transactions. Pillar 2: Improving access to financial services 21 (i) Improving intermediation environment Overview 71. Ugandan financial sector is sound and has been growing steadily in recent years, it remains, however, relatively shallow and inefficient. Banks are well capitalized and the nonperforming loans ratio is low. Deposit levels are growing but remain low. Despite growth in asset levels, Uganda remains a low intermediation banking system. Banking sector soundness indicators compare favorably within the region. Uganda‘s capital adequacy ratio and share of nonperforming loans are respectively the highest and lowest compared to those of its two largest EAC partners, as well as Ghana, Nigeria and South Africa. Development and efficiency indicators, on the other hand, compare negatively, with lower levels of deposit and private sector credit (as share of GDP), higher lending to deposit interest spreads, and higher interest margin. Uganda‘s ratio of overheads to total assets stands at some 6 percent and is higher than in all comparators but Ghana. 72. A large portion of the Ugandan population does not have access to any kind of financial services. According to 2009 Finscope results, about 28 percent of Ugandans older than 18 years remain unserved by any kind of financial institution. This represents a significant improvement since 2006, when the proportion of financially excluded was estimated at 43 percent. Despite the concomitant increase in number of bank branches and the upgrading of Micro Deposit Institutions (MDIs) to commercial banks, the improvement in financial inclusion has come mainly from informal service providers. The most recent Finscope report indicates that the differences in figures between 2006 and 2009 are likely to be largely explained by a better measurement of the informal services market in the latter exercise than an actual improvement in access. The survey also revealed that one fifth of the population uses both, formal and informal financial services providers. These results confirm that the scope and variety of formal financial services offer need to be furthered. The increasing importance of informal financial services also calls for a strengthening of the supervision of informal institutions as well as further efforts to deepen financial literacy of the population. Challenges 73. The key constraints to the expansion of financial intermediation have been identified. Factors hampering the expansion of financial intermediation have been identified in a variety of studies conducted over the past years by the authorities as well as development partners.6 74. The legal system remains inefficient and ineffective. Despite improvements in the functioning of the legal system as a result of the establishment of separate commercial courts, creditors still face long delays in being able to enforce debt contracts. Erratic decision making by judges often necessitates appeals of what should be routine debt enforcement decisions to higher courts. Even at the highest levels, judges make decisions which appear to reflect a lack of understanding of the role of debt contracts in the economy and the need for firm precedents to create certainty for lenders. Commercial courts are becoming clogged by a shortage of 6 Relevant studies include the 2005 FSAP update, the 2007 CEM, the 2008 Lending Survey conducted by the Bank of Uganda, and the 2009 Making Finance Work for Africa study. 22 judges, the lack of a small claims court system to hear low value cases, and a lack of computerized case management systems. 75. Financial sector legal framework has not kept up to date with technological advancements. The ability of banks to expand access to financial services using technology (for example, telephone and Internet) is limited by the lack of a legal framework for electronic transactions. Furthermore, the regulatory framework for advancements in branchless banking - in particular the use of banking agents - or other innovative products is missing. 76. Banking institutions also point to regulations on minimum provisions and core deposits and security norms for branches as additional constraints hampering intermediation expansion. By nature, defining the optimal level of prudential and security regulations is a normative issue and it is not surprising that the regulator and the regulated have different viewpoints. BoU has adopted a cautious stance on prudential and security regulations. Provisioning requirements exceed International Financial Reporting Standards (IFRS) and banks are required to mechanically calculate provisions based on the number of days a credit is overdue, and also to exclude the realizable value of collateral, potentially increasing the cost of lending to higher-risk borrowers. Regulations and supervisory practices also encourage match-funded balance sheets. Given a system-wide paucity of term deposits, this encourages banks to only lend short-term (many banks classified any lending over 12 months as long term). This negatively impacts the availability of appropriately structured lending products for business investment, construction, and housing. 77. Obtaining land title information is difficult. Improvements are starting to be made in the operations of the land registry, but banks still face delays in getting title information, particularly because of the centralization of the registry in Kampala and a requirement to value each transaction for tax purposes. Computerization of the companies register has not yet started, and banks described it as slow and prone to fraud and incomplete information. 78. Credit information remains insufficient. The establishment of the Credit Reference Bureau (CRB) has helped bridge the information gap. Stakeholders underscore the need to expand the scope of CRB, to capture nonbank credit and payments data (such as utility payments) that could provide individual borrowers with bankable credit histories, and thus improve their access to credit. 79. Financial literacy is limited. Micro, Smalle and Medium Enterprise (MSME) access to credit is limited by a severe lack of basic business skills on the part of entrepreneurs. Banks highlighted the need for extensive outreach programs to develop skills in the areas of bookkeeping, accounting, business plan preparation, and borrower education. Banks identified these issues as the driving force behind the high real rejection rate for loan applications discussed above. Furthermore, the increasingly critical shortage of trained bank staff reinforces this constraint by limiting the availability of staff to work with potential borrowers. The need for furthering financial literacy promotion efforts is compounded by the relative importance of the informal – hence poorly or not regulated – financial institutions. Government’s reform program 23 80. The government has acknowledged these challenges and started addressing them through the implementation of the Financial Market Development Plan 2008-2012. Key measures target the financial sector regulatory environment, the extension of the CRB commercial dispute resolution system, the computerization of land and companies registries, and the strengthening of financial consumer protection and financial literacy. 81. The authorities are committed to amend and complete the financial sector regulatory environment in line with market developments and technological innovations. The envisaged reforms include enactment of completely new laws and significant amendments to existing ones, as well as gazetting of complementary financial sector statutory instruments and regulations. 82. Amendments to the 2004 Financial Institutions Act (FIA) and the 2003 Micro- Deposit taking Institutions (MDI) Act are being prepared for submission to Cabinet. The proposed amendments seek to foster financial depth and breadth by allowing the introduction of new products while maintaining an adequate level of prudential regulations. Amendments include provisions for:  Islamic Banking – grounded on the requirement that all financial transactions must be supported by real economic activity and transactions are based on profit sharing;  Bancassurance – allowing provision of insurance related to financial products;  Mobile Banking and Money Transfer – providing a regulatory framework for the supervision and development of mobile financial services.  Credit Reference Bureau – expanding its scope of activities;  Deposit Protection Fund – established from the merging of the two separate deposit insurance funds currently established under the 2004 FIA and 2003 MDI Acts;  Regulation of Savings and Credit Cooperatives (SACCOs) – bringing the large SACCOs under the aegis of the 2003 MDI Act to ensure these deposits are covered by the Deposit Protection Fund. 83. The authorities have also adopted a set of Financial Institutions Statutory Instruments to complement and consolidate the regulatory framework. The adopted instrument include regulations for:  Anti-Money Laundering – seeking to stem the negative social and economic effects of money laundering and the financing of terrorism;  Foreign Exchange Business – aimed at strengthening internal controls and overall foreign exchange risk management systems;  External Auditors – aimed at strengthening transparency and accuracy in reporting, ensuring that external auditors of financial institutions have adequate standards of competence and independence;  Consolidated Supervision – enabling BoU to evaluate the entire group to which a financial institution belongs, taking into account all the risks which may affect the institution, regardless of whether such risks arise in the financial institution, its parent 24 undertaking, subsidiary company, affiliates, associates or other undertakings in which it has a relationship;  Mortgage Banks and mortgage lending activity – establishing clear requirements and performance criteria to supervise and regulate mortgage banking and ensuring that all financial institutions operating in the sector have adequate financial strength, management and the integrity;  Capital Adequacy Requirement – establishing and incorporating capital adequacy requirements for market risk in addition to the capital adequacy requirements for credit risk as defined and called for in the Capital Adequacy Regulations;  Revision of Minimum Capital Requirement – increasing its level from the current UGX 4 billion to UGX 12 billion in a first stage, and to UGX 25 billion subsequently. 84. The authorities have established a Small Claims Procedure within the Commercial Court Framework. This measure is embedded in the broader Commercial Justice Reform Programme initiated in the early 2000s. Small Claims Procedure (SCP) has been identified as one of the priority interventions to help addressing some of the constraints to accessing justice in Uganda which include limited access to professional legal services, delays and case backlog, complexity of procedures, and corruption. The introduction of SCP will facilitate the development of a fast tract mechanism where small commercial claims are resolved in a simple and less costly manner. The SCP will be set up within established institutional framework to avoid fragmentation of the judicial system, and ensure cost effectiveness and sustainability. The SCP will take advantage of existing institutions, structures and human resources, and will operate as another track in the magistrates‘ courts system. The SCP rules were signed on March 31, 2011; implementation will now start with a pilot phase in five jurisdictions. 85. The authorities are determined to consolidate and expand the role of the Credit Reference Bureau. The establishment of the Credit Reference Bureau and concomitant biometric financial cards has been a major step to bridge the information gaps which have hampered further expansion of intermediation. The CRB covers all commercial banks, credit institutions and microfinance deposit taking institutions. The scope of the CRB has been expanded to include institutions outside of the financial sector. Data from utility providers can now be included in borrowers‘ records as well as records from public institutions such as the Registrar of Companies and Courts. To engrain the use of financial cards, effective July 2010, borrowers are required to have a financial card to be able to obtain a loan credit. As of September 2010, more than 400,000 financial cards had been issued (free of charge) to borrowers. 86. The authorities are preparing financial sector specific guidelines to protect participants in the financial sector and foster the credibility of the sector. The envisaged guidelines will introduce a set of rules and principles in line with international best practice, which will help to appropriately structure the relationship between provider and consumer. The guidelines will be grounded on four key principles, namely accountability, fairness, reliability and transparency. The authorities also expect that the consumer protection guidelines will dovetail with the substantial efforts being made to increase financial literacy across the country. A number of projects in both the public and private sectors have been 25 implemented to offer financial education to those Ugandans that are currently unable to adequately manage their finances. The consumer protection guidelines are one pillar of a financial education strategy as they clarify exactly what a consumer or potential consumer is able to expect from their relationship with a financial services provider. The guidelines will not be legally binding but will constitute an important step, while a comprehensive consumer protection framework is developed and adopted through the legislative process. Specific measures supported under this operation 87. The measures supported under this operation focus on the financial sector regulatory environment, the commercial dispute resolution system, and consumer protection. The following prior actions have been agreed with the authorities: (i) adoption of complementary Financial Institutions Statutory Instruments; (ii) preparation of amendments to 2004 FIA and submission to Cabinet; (iii) put in force the Small Claims Procedure rules; and (iv) publish Consumer Protection Guidelines. Indicative measures for the preparation of the second operation 88. In addition to the transversal financial access issues supported under the proposed first operation, further and specific attention is required with respect to access to finance in rural areas. The GoU has launched a new Rural Financial Services Strategy (RFSS) seeking to expand rural financial services through SACCOs. This initiative intends to create new SACCOs and strengthen existing ones in every sub-county. The GoU has also increased funding to rural areas through the Microfinance Support Center Limited (MSCL), which provides wholesale lending to SACCOs, who then retail the funds to their members. While furthering access to financial services in rural areas is a commendable objective, it raises daunting challenges with respect to managing this expansion without jeopardizing the soundness of this sub-sector and undermining the confidence of consumers in microfinance institutions. 89. The second operation would support GoU’s efforts to improve operational performance in the SACCO subsector and strengthen prudential regulations. Improvements could be achieved by establishing basic, mandatory prudential standards, by enforcing governance and transparency requirements, and by providing technical assistance to help meet those standards within an established strategy. This strategy is being spearheaded by the Rural Finance Services Programme (RFSP), funded by the International Fund for Agricultural Development (IFAD). The Uganda Credit and Savings Cooperative Union (UCSCU) is responsible for the self-regulation and supervision of SACCOs, but lacks institutional capacity to carry out these duties. The authorities are also considering the introduction of a legal and regulatory framework for Tier 4 institutions.7 The envisaged approach would consist in segmenting Tier 4 by size (in terms of share capital and savings portfolio) for regulation by: (i) Bank of Uganda; (ii) a Microfinance Regulator to be established. The upcoming FSAP update will provide an opportunity to take stock of the 7 The MoFPED held a Consultative Workshop in July 2010 on the draft Microfinance Policy and presented the conclusions at a meeting on October 19, 2010 of the newly reconstituted Microfinance Forum. It also presented the Proposed Principles for a Tier 4 Microfinance Bill. A Cabinet paper is now to be prepared for enacting the long-awaited legislation needed to institute more effective regulation and supervision of SACCOs and other Tier 4 MFIs. 26 situation in the sector and indentify specific recommendations for authorities‘ consideration. Indicative triggers for the second operation could be: preparation and submission of Tier 4 regulatory Bill to Parliament; and rolling out of the Small Claims Procedure in five jurisdictions. Expected results 90. Main expected results under this area include: increased lending to private sector and increased availability of financial services and products. (ii) Improving national payments system Overview of payments system 91. Uganda’s National Payment System (NPS) has undergone significant developments in recent years. Key milestones include the promulgation of a national cheque standard in 1999, the implementation of electronic cheque clearing in 2002, and the launching of the Electronic Fund Transfer (EFT) and Real Time Gross Settlement (RTGS) system respectively in 2003 and 2005. The RTGS allows secure electronic interbank and third party customer transfers with immediate finality across the counterpart accounts at the BoU. The system is integrated with the Central Securities Depository (CSD) for government and BoU securities, ensuring the settlement of government security transactions on a delivery versus payment basis. The Government is the single largest user of the payments system. The use of electronic payment services as grown steadily in recent years, especially after the introduction of cheque capping in 2007. Mobile payment services have registered a spectacular growth since inception in 2009. Challenges 92. There is no comprehensive payments system law. In the absence of a comprehensive law to support payments, remittances, and securities settlement arrangements, the BoU is relying mostly on the Contract Law. This is generally inappropriate, given that contract law does not provide the level of legal protection necessary to secure payment and settlement arrangements. Furthermore, contract law does not address important issues such as (i) clarity of timing of final settlement, especially when there is an insolvency; (ii) legal recognition of (bilateral and multilateral) netting arrangements; (iii) recognition of electronic processing of payments; (iv) absence of any zero-hour or similar rules; (v) enforceability of security interests provided under collateral arrangements, and of any relevant repossession agreements; (vi) protection from third-party claims on securities and other collateral pledged in a payment system; (vii) payment system oversight powers of the central bank; and (viii) regulation of the remittance market and RSPs. Another consequence is that the BoU does not have formal and explicit powers to perform payment system oversight. 27 Box 1: Prior Actions for Uganda First Financial Sector Development Credit Priori Actions Status of prior Actions Pillar 1: Supporting the development of market for term finance Prior action 1: Conduct an independent review Completed – Review took place in March 2011. of NSSF investment policies and practices. Prior action 2: Conduct an actuarial evaluation Completed – Preliminary results were presented to and simulation of reform options for the PSPF. authorities in March 2011; Policy Note being finalized. Prior action 3: Submit URBRA Bill to Completed – Bill was enacted in April 2011 and is Parliament. pending President’s assent. Prior action 4: Put in force the Mortgage Act On track – Regulations have been drafted; signature regulations. scheduled by mid June 2011. Prior action 5: Adopt policy paper on PPP, Completed – Policy paper was adopted March 2010; prepare and submit the PPP Bill to Cabinet and draft Bill was submitted to Cabinet on May 11, 2011; Establish the non statutory PPP unit. and the non-statutory PPP unit has been established within MoFPED. Pillar 2: Improving access to financial services Prior action 6: Adopt complementary Financial Completed – Proposed amendments to the 2004 FIA Institutions Statutory Instruments and submit have been submitted to Cabinet on November 26, amendments to 2004 FIA to Cabinet. 2010; Complementary Regulations were adopted on November 12, 2010. Prior action 7: Put in force Small Claims Completed –Signed by Chief Justice on March 31, Procedure rules. 2011. Prior action 8: Issue Consumer Protection Completed – Guidelines were issued on May 27, Guidelines. 2011. 93. Access to the electronic funds transfer system is inequitable. Licensed deposit- taking institutions have different levels of access to the interbank settlement systems. Only Tier 1 institutions have direct access to these systems, with all other institutions participating through them. Tier 2 and Tier 3 institutions, though supervised by the BoU, are not permitted to operate accounts with the central bank. The tiered access to the core payment infrastructures gives Tier 1 institutions an unfair advantage over Tier 2 and 3 institutions. In addition, this system may be hindering competition, limiting consumer access to payment services, and keeping the price of payment services high. 94. Charges for electronic payment services remain high. BoU provides the interbank settlement infrastructure that allows final settlement for the key retail systems in central bank money. In an effort to encourage migration from checks and to promote the use of the RTGS system for interbank and third-party payments, BoU has reduced the charges for commercial banks. This reduction has, however, failed to translate in lower charges for the end customer, as commercial banks continue to charge up to 100 times the BoU charge. Government’s reform program 28 95. The authorities acknowledge the need for further modernization of the national payments system to keep abreast with market developments and innovations. The primary objectives of reforming the NPS include: (i) strengthening risk management of the NPS; (ii) enhancing efficiency in the transfer of monetary value between transacting parties; (iii) expanding the payment instrument base by introducing new instruments; (iv) extending modern and cost-effective payment services to rural areas and the unbanked; and (v) improving accessibility and convenience of payment services to the general public. 96. Government is also working on the introduction of a new Central Securities Depositary. This more robust and sophisticated CSD will replace the current one, which is only accessible by the BoU and depends largely on manual transactions in government security trading. The new CSD will provide online services and enable electronic bidding for government securities. It will also be linked to the CSD system used at the Uganda Security Exchange and to the RTGS system, allowing delivery versus payment. Specific measures supported under this operation 97. This operation will support initial steps towards the modernization of the NPS legal and regulatory framework, albeit no prior action has been retained. This reform has been delayed for many years. A NPS bill was prepared in 2002/03 and submitted to Cabinet in 2005/06 together with a NPS policy paper, but no further action was taken. The government is now committed to revive this process and expedite the adoption of a modernized NPS regulatory framework. The preparatory work has started; in particular a diagnostic study on branchless banking and mobile payment systems was launched in April 2011. The forthcoming update FSAP will further inform this reform process and support Government‘s efforts to revamp NPS legal and regulatory framework. Indicative measures for the preparation of the second operation 98. Under this area, possible triggers for subsequent operation are: the effective implementation of the Central Securities Depositary system, including its linkage to USE and RTGS system; and submission of overhauled National Payments System Bill to Parliament; and the adoption of mobile money strategy, including regulatory framework to support use of banking agents. Expected results 99. Main expected results are an enhanced efficiency of money transfers and improved accessibility to payment services. 29 VI. OPERATION IMPLEMENTATION POVERTY AND SOCIAL IMPACTS 100. The measures supported by this operation are expected to have a positive poverty and social impact. The operation focuses on reforms aimed at: promoting financial inclusion; promoting SME access to finance; fostering the development of term finance market; strengthening financial sector regulations and supervision, including for pension schemes; and strengthening consumer protection. As such, the series is expected to yield direct benefits to lower income segments of the population. Supported policies under this first operation will not have a significant distributional impact, however, the policy measures on the reform of the Public Sector Pension Fund envisaged for the second operation will likely have a negative distributional impact on civil servant. The authorities are still at the early stages of assessing the different reform options, and the Bank has been providing analytical support to help evaluate the different options, including their distributional impact. A first policy note was prepared simulating two basic reform options, and estimating in particular the reduction of replacement rates and the transfer rates from general budget to civil servant. As options are refined in coming months, the Bank will continue to provide analytical support, including performing a more detailed analysis of the redistributive effects. 101. The Government remains committed to monitor the distributional impact of its policies. Impact assessments are conducted on a regular basis through the national monitoring system, which relies notably on periodic surveys such as the biannual Household Survey. ENVIRONMENTAL ASPECTS 102. This operation does not pose any significant direct environmental risk. None of the supported policy reforms are likely to pose any significant risk for the environment and natural resources. Complementary World Bank operations specifically address environmental risks. The World Bank maintains a diversified investment lending portfolio of operations, which, as deemed necessary, include sector-specific measures for enhancing environmental management capacity. The PRSC series is also expected to have an overall positive indirect impact through its emphasis on good governance, improved procurement, financial management, and other aspects of civil service reform, believed to contribute positively to authorities‘ capacity to deliver public goods and services while addressing environmental concerns. IMPLEMENTATION, MONITORING AND EVALUATION 103. The Ministry of Finance, Planning and Economic Development will be responsible for implementing and monitoring progress under the program, in collaboration with the Bank of Uganda. The financial sector reform will be monitored through Government monitoring framework for its National Development Plan, as provided for under Uganda‘s National Integrated Monitoring and Evaluation Strategy (NIMES). The OPM manages a quarterly reporting mechanism at sector level that feeds into an annual government wide performance report. The Bank of Uganda will also be directly involved in the monitoring as part of its follow up of Financial Markets Development Plan (FMDP) 2008- 2012, including through the publication of annual progress reports on the implementation of the FMDP. 30 104. This operation will not fall under the Joint Assessment Framework (JAF) developed for multi-donor general budget support. The Joint Assessment Framework has a central objective: improving value for money and equity in public service delivery. It supports reforms in cross-cutting areas such as public financial management and public service management that affect the quality of service delivery, as well as targeted sector reforms in four key service sectors: health, education, transport and water and sanitation. The authorities consider that the reforms supported under this operation are largely orthogonal to the main focus of the JAF and their inclusion would introduce unnecessary burden. Box 2: Good Practice Principles for Conditionality Principle 1 — Reinforce ownership The design of this operation has been fully client driven and builds on Uganda‘s traditional strong ownership of its development strategy. In 1997, Uganda‘s first Poverty Eradication Action Plan (PEAP) provided the model for PRSPs worldwide. Building on achievements under the PEAP, the authorities prepared a National Development Plan which aims at fostering skilled employment growth and a sectoral shift to higher value-added activities. In the financial sector the government has developed a Financial Market Development Plan for 2008- 2012, which is being implemented and supported by various donors, including the Bank. Principle 2 — Agree in advance with the government and other financial partners on a coordinated accountability framework The accountability framework delineated in the policy matrix is fully congruent with government‘s NDP objectives and the Joint Assessment Framework (JAF) developed for general budget support operations. The sector specific focus needed for this operation, including the level of detail of the intervention called for sector specific policy program. This program was developed and is closely coordinated with other development partners active in the financial sector, including the IMF and GIZ. Principle 3 — Customize the accountability framework and modalities of Bank support to country circumstances The operation and associated policy measures are specifically tailored to Government‘s needs. Principle 4 — Choose only actions critical to achieve results as conditions for disbursement The number of policy actions is limited and focused on critical steps towards deepening of financial sector development. Retained actions have been identified through extensive consultations with key stakeholders, including MoFPED and BoU. Principle 5 — Conduct transparent progress reviews conducive to predictable and performancebased financial support The PEAP policy matrix served as the basis for the first Annual PEAP Implementation Review, conducted in February 2007, and guided policy analysis, budget prioritization, work planning, performance assessment, and development partner dialogue. The development of the NDP benefitted from these assessments. GoU has established procedures to monitor and assess its performance. FIDUCIARY ASPECTS 105. Foreign exchange system. The Safeguards Assessment of the Bank of Uganda (BoU), which was completed by the IMF on April 13, 2003 identified both strengths and vulnerabilities of BoU financial systems. Under a review carried out in 2006, the IMF noted additional vulnerabilities, particularly with regard to external and internal audits, that have 31 since been mitigated through various measures taken by BoU. In particular, a directive to implement a formal mechanism to monitor and report on the implementation of external audit recommendations has been fully met. Audited financial accounts are put before the legislature within the statutory period of three months after the end of the financial year; an Audit Committee and Governance Committee (ACGC) of the Board has been appointed, and procedures have been put in place to ensure that both internal and external audit findings/recommendations, as well as follow up actions taken, are appropriately communicated to the Governor and the Audit Committee of the Board. On a continuous basis, Internal Audit Function monitors these recommendations and reports to the ACGC of the Board, which then takes further action. 106. Economic and financial data are reconciled on a quarterly basis, and an audit plan assessing the risk of BoU operations and the related control environment has been created. Since the institution of a risk management framework in 2005, BoU conducts a risk management review on an annual basis. However, the BoU Act (1993) has yet to be amended to clarify whether BoU can make advances to GoU to cover capital expenditures and to confirm the BoU role as the sole manager of official reserves of Uganda. 107. Overall, the current set of PFM and procurement systems and reforms are deemed adequate to support the proposed operation. Under the Joint Assessment Framework (JAF) agreed upon between the authorities and the development partners providing joint budget support, the authorities have committed to ensure that preparation and implementation of the budget, internal budget accountability and external budgetary control satisfy basic conditions for good Public Financial Management (PFM), including transparency, accountability and effectiveness of use of resources. In addition authorities are committed to progress with their program to improve PFM and procurement systems. Performance indicators retained under the JAF include PFM and procurement related PEFA indicators. The latest PEFA assessment available, released in June 2009, notes improvements in budget classification and budget document comprehensiveness and oversight of aggregate fiscal risk from other public sector entities. It also indicates improved stock and monitoring of expenditure payment arrears, though some commitments are not captured by the Government IFMS system in various MDAs. Transparency of taxpayer obligations and liabilities, together with taxpayer registration and assessment, has also improved, as has the availability of quality data and timeliness of budget reports and annual financial reports. Progress is also noted on the use of the International Public Sector Accounting Standards (IPSAS) framework, and training and capacity building for staff in central and local governments in this regard has been conducted. While special audits and payroll cleaning exercises have been undertaken, follow up remains insufficiently transparent. Internal controls exist, but audit reports show that they are violated or ignored. Systemic controls in the IFMS prevent any commitment that would take cumulative expenditure above the cumulative quarterly limits, but the IFMS is sometimes bypassed and commitments are made outside the IFMS, so some government units continue to accumulate arrears. Remedies to some of these risks are being considered in the current review of the multi donor funded Financial Management & Accountability Program (FINMAP). 108. Fiduciary risks related to inadequate legislation and regulatory framework in PFM and Public Sector Management (PSM) are being addressed through the JBSF. In the medium term, progress on the highlighted indicators in the JAF together with other PFM 32 reforms will continue to be guided by the Public Expenditure Management Committee (PEMCOM) and implemented through FINMAP. Public Sector Management (PSM) reforms regarding the payroll and pension system are being guided by the Public Service Reform Program (PSRP). 109. Oversight institutions are being strengthened. Government passed the 2008 Audit Act, which gives the Office of the Auditor General (OAG) full autonomy in terms of budgeting and operations. The OAG has been sufficiently funded by government in 2009/2010 to increase his audit scope, staffing and execution of audits to include VFM audits. In the current Parliament, the Public Accounts Committee (PAC) and the Local Government Public Accounts Committee (LGPAC) have improved their follow up on irregularities identified in the Auditor General‘s reports; while most backlog of audit reports (up to 2006/2007) have been cleared. 110. The national legislation on public procurement as laid out in the Public Procurement and Disposal of Public Assets Act (PPDA) is broadly consistent with World Bank guidelines with a few exceptions. Exceptions include the following provisions: (i) negotiation of contracts under competitive bidding; (ii) the use of merit point evaluation for the procurement of goods; (iii) pre-qualifying bidders and then inviting only a few on a rotational basis and; (iv) the inadequacy of procedures for selection of consultants. These provisions are being addressed during the ongoing exercise of revising the law as part of the PRSC. The major country procurement risks are (i) limited compliance with the Act as indicated in PPDA‘s Audit Reports, (ii) inadequate capacity and experience in the procurement entities to conduct procurement, and (iii) weak procurement planning, which causes results in delays in procurement. These risks are being addressed under the JBSF and FINMAP program to (i) build capacity of procurement staff at Central and Local Government, (ii) strengthen procurement planning, (iii) track as one of the JBSF indicators, the proportion of PPDA audit recommendations implemented, and (iv) strengthen the capacity of the Procurement Regulatory Agency. DISBURSEMENT AND AUDITING 111. The borrower is the Republic of Uganda. A single tranche credit of SDR 30.9 million (US$50 million equivalent) would be made available upon credit effectiveness. The closing date of the operation would be June 30, 2012. 112. The proposed credit will follow the IDA’s disbursement procedures for development policy credits. Once the credit is approved by the Board and becomes effective, the proceeds of the credit will be deposited at the request of the Borrower by IDA in a designated account that is part of the country's foreign exchange reserves accounts, acceptable to the Bank. The Borrower will ensure that upon deposit the foreign exchange amount will immediately be converted to Uganda shillings and credited to the Uganda Government Consolidated Fund Account, within 10 working days of receipt, to be used subsequently for budgeted public expenditures. The Borrower will acknowledge receipt to IDA of the amount deposited in the foreign currency account and credited in local currency to the Consolidated Fund Account. If, after deposit in the foreign reserve account, the proceeds of the credit or any part thereof are used for excluded expenditures as defined in the Financing Agreement, IDA will require the Borrower to either: (i) return that amount to the foreign reserve account for 33 use for eligible purposes; or (ii) refund the amount directly to IDA. Amounts refunded to IDA upon such request shall be cancelled. 113. The following arrangements also support the requirements related to fiduciary assurance: (i) Foreign reserve account. The GoU will acknowledge receipt to IDA that the money has been deposited in the foreign reserve account and the amount was credited in local currency to the GoU Consolidated Fund Account. While no audit is required, it is expected that confirmation of receipt will be signed off by both the Accountant General and the Auditor General. IDA reserves the right to request an audit of the account as provided for in the financing agreement. (ii) Public (government) accounts. The Auditor General is required by law to produce his/her annual report to Parliament on the public accounts within nine months of the fiscal year end, and the report for the year ended June 30, 2008 was issued in March 2009 to comply with this statutory requirement. IDA has always had access to those audited accounts. (iii) Bank of Uganda. The annual entity financial statements of the Bank of Uganda, audited in accordance with international auditing standards as promulgated by the International Federation of Accountants, will be publicly available. RISKS AND RISK MITIGATION 114. Political Risk. Over several decades, there has been political stability and progress towards multi-party democracy, although Uganda has not yet experienced a change of power through elections. The incumbent President won his fourth term in February 2011, and has been in power since 1986. Recent civil disturbances caused by political opposition and concerns about price increases reveal fractures in the political landscape. To mitigate political risk, Government prepared Uganda's five-year National Development Plan using a broad based consultative process. Government has reiterated its commitment to adhere to the key priority areas and policy directions spelled out in the NDP. Third party monitoring arrangements are being designed and political economy assessments are underway to inform and to guide Bank interventions. The World Bank is also working to strengthen accountability institutions. 115. Overall Macroeconomic Policy Management. For over two decades, Uganda has maintained a consistent program of prudent macroeconomic management and structural reform. The recent deterioration of fiscal policy stance has, however, threatened to erode Uganda‘s track record of sound macroeconomic management. The risk of deterioration on macroeconomic policy stance could be compounded by the future availability of oil resources and possible frustration over the slow pace of structural transformation, which could lead some policy makers to question pro-market policies and advocate for more state intervention and policy reversals. Uganda is also vulnerable to exogenous shocks, including weather conditions which have a strong influence on domestic food prices. To help mitigate economic risks, the Bank will continue, in close coordination with IMF, its monitoring and policy dialogue on economic policies. Authorities are also preparing a policy framework for oil revenue management with inputs from various donors, including the World Bank. 34 116. Public Financial Management and Procurement. Uganda‘s budget is published and relatively transparent. However, the divergence between approved and executed budget, as illustrated this year, undermines the confidence in the budget as a statement of government intent. There is insufficient capacity in the procurement oversight body and procuring entities, resulting in limited compliance and oversight of procurement processes. To help mitigate this risk, the World Bank is supporting an FINMAP to address the weaknesses in the PFM system. A project accounting module is being developed in IFMS to capture and report donor funding outside the consolidated funding. The World Bank is also engaged under Joint Budget Support Framework to (i) revise the law to close loopholes and enhance enforcement mechanisms; (ii) strengthen monitoring and oversight functions of procurement oversight body; (iii) strengthen enforcement and compliance of procurement entities with procurement regulations; and (iv) strengthen the government‘s procurement skills building program through capacity building initiatives. Procurement staff is being trained under the Local Government Management and Service Delivery. 117. Fraud and Corruption. Petty and high-level corruption is prevalent and is most rife in procurement, administration of revenues and public expenditures, and public service delivery. The Government has a zero tolerance policy on corruption, however, few if any high-level officials involved in major corruption scandals have been tried, hindering attempts to raise the bar and address lower level corruption. To mitigate this risk, the World Bank is working with GoU to reinvigorate institutions and accountability systems, rethinking decentralization policies, and re-launching stalled public service reform processes. GAC is a cross-cutting pillar in the 2011 – 2015 Country Assistance Strategy and plans are being built into new operations and the value for money agenda is supported across the portfolio, including in analytical work, notably Public Expenditure Reviews. The recently developed Data Tracking Mechanism provides the Government with a self-assessment tool for corruption and governance and identifies areas where key reforms to address governance have failed. This will help provide pointers for better governance arrangements in investment projects. 35 ANNEX 1: LETTER OF DEVELOPMENT POLICY 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 ANNEX 2: FINANCIAL SECTOR DEVELOPMENT POLICY MATRIX Area Prior Actions for Triggers for Second Expected outcomes Outcome indicators First Operation Operation Pillar 1: Supporting the development of market for term finance Pension Conduct an Address gaps in Development of a Share of Independent Liberalisation Bill regulated and Occupational review of NSSF introduced to competitive pension Schemes licensed by investment policies Parliament before it is industry catering for URBRA (Baseline and practices enacted both mandatory and 2011: 0%; Target voluntary pension 2014: 33%) Undertake an Appoint URBRA savings actuarial board and staff URBRA Staff evaluation and An effective, well appointed; internal URBRA to adopt simulation of resourced, and efficient procedures adopted; regulations, prudential reform options for regulator is in place and investment norms and guidelines PSPF guidelines issued A more sustainable License NSSF Submit URBRA to public sector scheme is PSPF becomes Parliament Cabinet to approve in place contributory policy paper on PSPF No accumulation of reform. pension arrears NB: MoFEP to collect Data Housing Put in force Revision of valuation Mortgage market Ratio of Mortgage Market Mortgage Act policy and procedures growth Debt to GDP regulations (Baseline 2010: 1%; Establishment of a Increased tenor of Target 2% 2014) Mortgage Market mortgages Development Yield curve for Availability of pricing Committee tasked with Government for long term funds the setting up of a securities becomes liquidity facility less inelastic for longer maturities Further issuance of (Baseline 2010: longer term bonds Yield curve virtually flat beyond 80 months; Target 2014: yield curve becomes elastic beyond 120 months) NB: BoU to collect data. Public Private Adopt policy paper Adoption of PPP Bill Increased capacity to Share of private Partnerships on PPP, prepare regulations and manage and coordinate financing in for and submit the PPP guidelines transparent PPPs infrastructure infrastructure Bill to Cabinet, investments Increased private – financing and Establish the (Baseline, 2009: particularly domestic - PPP unit on a non 17% ; target, 2014: sector investments in statutory basis 30%. public infrastructure and related services 61 Pillar 2: Improving access to financial services Improving Adoption of Prepare and submit a Increased access to Share of formally intermediation complementary Tier 4 regulatory Bill financial services served population environment Financial to Parliament (Baseline 2009: Increased variety of Institutions 28%; Target 2014: Roll out of the Small financial products Statutory 47%) Claims Procedure in Instruments Improved performance five jurisdictions Share of formally and soundness of Tier 4 Preparation of served in rural areas institutions amendments to (Baseline 2009: 2004 FIA Act and 22%; Target 2014: submission to 40%) Cabinet. Share of Excluded Put in force Small population (Baseline Claims Procedure 2009: 30%; Target rules 2014: 10%) Publish Consumer Protection Guidelines Improving Submit overhauled Enhanced efficiency of Share of population National National Payments money transfers engaged in money payment System Bill to transfers (Baseline Improved accessibility systems Parliament 2009: 35%; Target to payment services 2014: 47%) Effective Mobile money makes implementation of the Number of mobile enhanced contribution Central Securities money services to increasing access to Depositary system, subscriptions financial services including its linkage to (Baseline March USE and RTGS 2011: 2 million; system Target 2014: 6 million Adoption of mobile money strategy, NB: Indicators including regulatory under this Pillar are framework to support derived from use of banking agents. FINSCOPE Survey conducted at a frequency of 3-4 years 62 ANNEX 3: FUND ASSESMENT LETTER UGANDA: ASSESSMENT LETTER FOR THE WORLD BANK May 31, 2011 This letter provides an assessment of macroeconomic developments in Uganda in FY2010/11, and prospects for FY2011/12 and beyond. Relations between the IMF and the Ugandan authorities remain strong, and the authorities have expressed their firm commitment to the objectives of the program supported by the Policy Support Instrument (PSI). IMF Relations In February 2011, the IMF Executive Board conducted but could not complete the first review under the PSI. A supplementary budget was passed in early January that had not been discussed with staff in advance, and which was inconsistent with the agreements reached in the context of the first review. Because of the fixed review schedule—a defining feature of the PSI—there was no time to entertain the possibility that agreement could be reached on remedial measures that might have allowed the review to be completed. A mission in late March agreed ad referendum on a package of measures to enable completion of the second PSI review. The understanding includes agreement that the draft budget submitted to parliament on June 8 will be consistent with the program‘s macroeconomic targets, as well as elimination of some tax exemptions. The IMF Executive Board consideration of the second review is tentatively expected in late June. Waivers will be requested for two assessment criteria that were missed for end-December (net domestic assets and net international reserves) because exceptional security-related spending took place in the first half of the fiscal year rather than the second half as had been envisaged. Recent Economic Developments and Macroeconomic Outlook Economic growth seems to be recovering, but inflation has accelerated. Growth will likely be in the neighborhood of 6½ percent this year and next, rising to about 7 percent in the following years. Headline inflation, however, reached 14 percent in April, with core inflation also rising to 9.7 percent. The pick-up in inflation was mainly driven by sharp increases in food prices, caused in part by dry conditions in the region as well as strong demand from neighboring countries. Higher international fuel prices have played a role, but relatively loose monetary policy in late 2010 and early 2011 was also a factor. The authorities are in the process of tightening monetary policy, both to contain the second round inflationary effects of recent food and fuel price shocks and to wind down the countercyclical loosening of 2010. Short-term interest rates have risen significantly, and growth rates of monetary aggregates are slowing down. 63 Fiscal policy has been tightened relative to authorized spending levels. The government offset the additional spending authorized in the January supplementary budget with reductions in spending for other items—notably development spending for projects that were being implemented slower than originally planned. Nevertheless, the shift in spending priorities, coupled with less-than-fully effective commitment controls and weak forecasting of spending needs for pensions and utility payments, raises the risk that expenditure arrears have accumulated in FY2010/11 that will need to be cleared in FY2011/12. The overall fiscal deficit in FY 2011/12 is expected to narrow significantly, as exceptional security-related spending winds down. With these savings and other reductions in current spending, as well as some one-off early oil revenues, infrastructure spending can be significantly expanded. At the same time, banking system financing of the deficit will be limited to drawing down deposits in earmarked accounts to finance initiation of work on the Karuma hydropower project. Repayment of loans the central bank had provided to finance the exceptional security-related spending and rebuilding of international reserves is expected over the medium-term. The Ugandan shilling came under some pressure earlier this year, but has since remained broadly stable. The Bank of Uganda intervened modestly in November-January, as some institutional investors withdrew in advance of the elections. The rapid turnaround in capital flows expected after the elections has not materialized, owing mainly to investor skittishness from events in North Africa, and the recent ―walk to work‖ protests in Uganda. Recent progress in structural reforms has been encouraging. Reforms to strengthen public financial management and enhance transparency were introduced, including the implementation of an integrated personnel and payroll system in 10 pilot agencies, streamlining of government accounts in commercial banks, preparations for the introduction of direct payments (―straight-through payment‖) for utilities, and publication of a work plan for the introduction of a National Identification System (which will help strengthen tax administration). Looking forward, the authorities are expected to bolster their tax effort and strengthen public financial management. Initial steps are likely to be outlined in the FY 2011/12 budget—which the Minister will read out to Parliament on June 8. The authorities may also signal their desire to undertake additional tax policy reforms beginning in 2012/13, possibly in the context of an EAC-wide effort. The authorities are setting up an appropriate oil revenue management framework. The authorities have established a subaccount at the Bank of Uganda to save windfall capital gains revenues from sale of an oil exploration license, earmarking them for use on infrastructure spending. The intention is to ensure that appropriate mechanisms for transparency and accountability are put in place before large scale oil revenues begin to flow. 64 Overall, the outlook for the economy is broadly positive. Medium-term forecasts envisage real GDP growth of 7 percent, inflation of 5 percent, a fiscal deficit (including grants) below 3 percent of GDP, and a gradual rebuilding of international reserves. Achieving these objectives depends on the authorities‘ ability to tighten monetary policy, expand fiscal space—including by reducing tax exemptions—and accelerate structural reforms, particularly as regards public financial management and financial sector modernization. 65 ANNEX 4: UGANDA AT A GLANCE 66 67 68 IBRD 33504R3 U GA N D A DISTRICT CAPITALS DISTRICT BOUNDARIES UGANDA NATIONAL CAPITAL INTERNATIONAL BOUNDARIES RIVERS MAIN ROADS RAILROADS This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. 30°E 32°E 34°E 0 25 50 75 100 Kilometers SUDAN 0 25 50 75 Miles To Juba To Faradje 4°N 4°N Moyo KA ABO NG KAABONG KOBOKO YUMBE KITGUM K E N YA Yumbe Kaabong YO Koboko Adjumani Kitgum MO Maracha I MARACHA AN M A D le KOTIDO KOTID O JU Ni Arua PAD ER Kotido To t Ac r Lodwar Albe G ULU ch UA ARUA Kilak Ok o k wa Gulu ABIM O ra AMURU Abim Moroto an D E M. R E DE M . RE P. Nebbi BB I NE BBI Nile LIR A LIRA Lo ch om OYAM Victoria Lira MO ROTO MOROTO OF CO NGO ON G O O F C O N GO Bulisa Oyam AMURIA APAC KATAKWI 2°N DOKOLO Nakapiripirit 2°N BULISA Apac Amuria Katakwi To MASIND I MA SIN DI Dokolo Beni Lake Kaberamaido Lake NAKAPIRIPIRIT Kwania Lake Salisbury Opeta AMOLATAR rt Masindi KABERA- be Soroti Siti Amolatar NAK MAIDO SOROTI Kumi KAPCHORWA AS Al Hoima ON Lake Kyoga Kapchorwa Kafu G KUMI ke HOIMA O BUKWO La Nakasongola PALLISA K AY U N G A Sironko Bukwo KAMULI LA i Nkus Pallisa SIRONKO KIBOGA NAKASEKE KALIRO Budaka Mbale Kamuli Mt. Elgon (4321 m) To K I BA A LE KIB AA L E Kiboga NAMU- Kaliro GA Bunia BUNDIBUGYO TUMBA MANAPWA A Kibale Luwero Butaleja Fort Bubulo BUDAKA LUWERO Kayunga IGANGA Busiki LE Bundibugyo Portal Nakaseke MBALE Kyenjojo Tororo ARO Mubende To JINJA Bugiri TORORO Nakuru KYENJOJO Iganga M U BE N D E MITYANA Wakiso UB END BUTALEJA KAB Busia Margherita Peak Mityana Mukono Jinja (5110 m) KAMWENGE KAMPALA BUSIA KASESE Kamwenge Mpigi KAMPALA Kasese To Katonga MP IG I IGI Kisumu Lake SEM 0° George IBANDA B A Sembabule WAKISO 0° KIRUHURA B BU Ibanda MASAKA MAYUGE BUGIRI BUGIRI BUGIRI LE Lake Masaka MUKONO BUSHENYI Kiruhura Edward Kalangala RU K R To Beni Bushenyi MBARARA K E N YA UNG Mbarara G Isingiro Rakai KALANGALA IRI KANUNGU I Rukungiri Ntungamo RAKAI Kanungu ISINGIRO NTUNGAMO KISORO KABALE Kisoro Kabale Lak e Vic toria To Goma TANZ ANII A TAN Z AN IA To Kigali To Nyakanazi TA NZA NIA TANZANI A RWAND RWAN D A RWA N DA 32°E 34°E AUGUST 2008 The original had problem with text extraction. pdftotext Unable to extract text.