Public choices for private initiatives : prioritizing public expenditures for sustainable and equitable growth in Uganda (Vol. 2 of 3) : Volume two

Report No. 9203-UG Public Choices for Private Initiatives Prioritizing Public Expenditures for Sustainable and Equitable Growth in Uganda (In Three Volunesi VolUnme 11 February 12, 1991 (ourntrv ( Operations Dvivsion I ,,stern Atri(a D)efartment Afri(a Region FOR OFFICIAL USE ONLY Document of the World Bank 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.  FOR OFFICIAL USE ONLY TABLE OF CONTENTS PUBLIC CHOICES FOR PRIVATE INITIATIVES ,Prioritizing Public Expenditures for Sustainable and Equitable Growth in Uganda CHAPTER 1: AGRICULTURE .................................... 1 Background ............................................. 1 Sectoral Objectives and Strategy ................................ 3 Issues in the Sectoral Public Expenditure Program .................... 9 New Directions for Public Expenditure ............................ 16 Cost Recovery and Efficiency ................................. 18 CHAPTER 2: INDUSTRY ........................................ 19 Overview . ............................................. 19 Sector Description ......................................... 20 Sector Objectives and Strategy ................................. 23 Review of Investment Expenditure ............................... 28 Annex A Summary of the Recommendations for the RDP Projects ................. 31 Annex B Detailed Analyses of Investment Projects ....................... 33 CHAPTER 3: TRANSPORT ...................................... 43 Description of the Transport Sector .............................. 43 Sector Strategy ... ....................................... 48 Issues in the Transport Sector Expenditure Program .................... 49 Proposed Sectoral Expenditure Program ........................... 55 Impact on Government Expenditure Levels in FY91-1992 for Transport-Related Activities .......................... 61 Cost Recovery ........................................... 61 Institutional Issues ......................................... 63 CHAPTER 4: ENERGY ......................................... 69 Sector Description ......................................... 69 Sector Strategy ........................................... 71 Energy Sector Public Expenditure Program .......... ............... 72 Electricity Sector Cost Recovery and Efficiency ........ .............. 74 CHAPTER 5: HEALTH ......................................... 77 Sector Description ................. 77 Sector Strategy ........................................... 81 Issues in Sectoral Public Expenditure Program ......... .............. 83 Proposed Sectoral Expenditure Program . .......................... 95 Cost Recovery and Efficiency ................................ . 95 Institutional Issues ................................ 97 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.  CHAPTER 6: EDUCATION .................................... 101 Sector Description ..................................... 101 Definition of Sector Strategy .................................. 102 Issues in Public Expenditure for Education ............. .. .. .. .. .. . . 106 Cost Recovery and Efficiency .............................. . . 109 Institutional Issues. ................................... 111 CHAPTER 7: WATER .................................... . . 115 Description of Water and Sanitation Sector ............. .. .. .. .. .. . . 115 Sector Strategy.. ................................... 116 Issues in the Water and Sanitation Sector Expenditure Program. ....................... . 118 Cost Recovery. . . .......................... 119 Institutional Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 TEXT BOX Box 1.1: Historical Export Patterns: Implications for Future Export Diversification TEXT TABLES Table 1.1: Average Yield Under Current and Improved Technology Table 1.2: Summary of the Recurrent Expenditure for the Ministry of Agriculture, 1988/89 Table 1.3: Recurrent Budget Ministry of Animal Industry and Fisheries, 1988/89 Table 1.4: Summary of Recurrent Expenditure for the Ministry of Cooperative and Marketing, 1988/89 Table 2.1: Index of Industrial Production Table 2.2: Structure of Manufacturing Production Table 2.3: Effect of PEs on Government Finances, 1986-1988 Table 2.4: Rehabilitation and Development Plan - Industrial Projects Cumulative Disbursements Table 2.5: Transfers from Government to Largest Parastatals - Capital and Development Expenditure Table 2.6: Major Outstanding Loans to Parastatals by Three Major Banks Table 3.1: Directional Imbalance in International Dry Cargo, Northern Corridor, 1987 Table 3.2: Actual or Budgeted Transport Expenditures, 1987/88 to 199V/91 Table 3.3: Expenditures and Budget - Transport Sector Table 3.4: Proposed Government Road Program - Annual Physical Targets and Resulting Road Inventory Program Unconstrained by Finance Table 3.5: Proposed Government Road Program - Projected Road Expenditures - Program Unconstrained by Finance  - 3 - Table 5.1: Hospital In-Patient Mortality and Morbidity, 1981-88 Table 5.2: Maternal Mortality Rates per 1,000 Deliveries in Five Kampala Hospitals, 1972-86 Table 5.3: Distance to Nearest Health Unit by Region, 1984 Table 5.4: Financing of Local and Foreign Expenditure on Health, 1988/89 Table 5.5: Total Public Expenditure on Health, 1987/88 - 1989/90 Table 5.6: Total Real Public Expenditure on Health, 1987/88 - 1989/90 Table 5.7: Central Government Expenditure on Health, Actual versus Budgeted, 1987/88 - 1989/90 Table 5.8: Composition of Recurrent Health Expenditure, 1987/88 Table 5.9: Health Sector Vehicles, early 1990 Table 5.10: Donor Expenditure by Le.vel, Type and Program, 1988/89 Table 5.11: Total Public Expenditure on Health by Program, Local/Foreign Expenditure and Financing Source, 1988/89 Table 6.1: Historical and Projected Enrollments and Numbers of Institutions Table 6.2: Central Government Expenditure by Program  A GRICUL TURE Background 1.1 Agriculture dominates Uganda's economy. It accounts for 66 percent of GDP, 99 perent of merchandise exports and it provides a livelihood for almost 90 percent of Uganda's population. Its contribution to the economy is even larger if one considers that agriculture is the economic base for much of the manufacturing and service industries. Agricultural growth is therefore the key determinant of economic growth, employment and welfare of the population. The sector is, however, recovering from the impact of two decades of turmoil, macroeconomic instability and in several areas, physical destruction. Little technological improvement has taken place over the last two decades; indeed, production and yields of many crops are lower today than they were in 1970. Ugandan agriculture at present is characterized by low yields on account of traditional technology. Yet, with some of the finest natural resources in Sub-Saharan Africa, and two excellent growing seasons in most of the country, Uganda's agricultural sector offers tremendous potential for sustained growth. Improved incentives, infrastructure, inputs and technology will be required for the realization of this potential. This chapter investigates the role of the Government, and public expenditure policy in particular, in the development of the agricultural sector. 1.2 At independence, Uganda had one of the strongest agricultural sectors in Sub-Saharan Africa, and possessed a well-established agricultural infrastructure, including extension services to the farmers. Between 1960 and 1970, agricultural GDP grew by close to 5.5 percent per annum. As Box 1.1 shows, Uganda had a diversified export base which generated considerably higher export earnings than today in real terms; coffee accounted for only about 40 percent of export earnings at that time. 1.3 The Drastic Impac: of Declijie and Devastaiion. The agricultural sector, like the rest of the economy was severely damaged during two decades of upheaval, civil war and gross mismanagement. In several areas of the country, farms were abandoned or destroyed; for instance, the Luwero triangle, once among the richest agricultural areas in Uganda, had been reduced to wasteland, with most of its inhabitants either dead or displaced, and all infrastructure destroyed. Agricultural production and yields declined across-the-board at a time when the agricultural sector in most other parts of the developing world benefitted substantially from increased production and higher yields brought about by the adoption of new technology. Though there have been fluctuations from year to year, the figures on the overall deterioration of agricultural performance in Uganda are striking: between 1970 and 1986, agricultural GDP had declined by close to 20 percent in real terms, foodcrop production and yield declined by 20 percent and 12 percent respectively, coffee export volume had declined by about 30 percent, and tea and cotton export  2 C,uapter 7: Agriculture Box 1.1 Historical Export Patterns: Implications for Future Export Diversification In the 1950s and 1960s, Uganda had a diversified export base, encompassing a broad range of agricultural and agro-based commodities. The country was actively involved in exporting fish and fish products, maize and maize flour, beans and pulses, coffee cotton, tea animal feed, hides and skins, oil seeds as well as a few mineral products. Cotton used to be the principal foreign exchange earner in the early 1950s, accounting for over 60 percent of export earnings. Coffee exports started picking up after 1955, and by 1962, had supplanted cotton exports as the dominant export crop. Since the collapse of the cotton industry in the early 1970s, coffee came to dominate exports completely, and now accounts for as much as 95 percent of foreign exchange earnings. In addition to cotton, the decline in the range of other exports is striking: whereas in the 1950s and 1960s, they accounted for about 25 percent of export earnings, these had declined by over 90 percent in real terms by 1986. As noted elsewhere in this report, there is a danger in attempting to replicate the past when it is clear that domestic and international economic conditions are very different from what they were twenty or even ten years ago. For instance, in the not-so-distant past, the East African Co"'munity took 15 to 20 percent of Uganda's exports. Nearly all of Uganda's processed or manufactured exports went to these markets. In addition, Uganda and Kenya were each other's principal African trading partners, with Uganda supplying 60 percent of Kenya's imports from Africa; at present, Uganda supplies less than 10 percent. Moreover, international prices now are very different (e.g., cotton). These caveats notwithstanding, the bulk of agricultural exports were sold in markets outside the East African Community. Indeed, the past does show Uganda's capacity for a competitive and diversified agricultural-export base. In this light, it is imperative to study potential exports (traditional/nontraditional from the past as well as new products that have emerged), and identify and address the constraints to production and exports. For inscance, while it may not be possible to restore cotton o its former pre-eminent position because of changed conditions, some of the lost markets can be recaptured with competitive production and exports provided key structural impediments are addressed. The contraction of exports in meat products is also of concern given the dwind.ing of herd sizes on account of physical destruction as well as a breakdown of disease control programs; a strengthening of disease control programs and measures to increase the livestock population are called for. Two USAID-funded studies have pointed to the export potential for fish products, beans, lentils, edible oil, hides and skins, etc. Also promising are some high-value non- perisbable exports such as cardamom, cashewnuts, vanilla and black pepper. In addition, Uganda has the opportunity to develop new exports that were not traded in the past: sunflower, pineapples and passion fruits. The whole chain of infrastructure (e.g., storage, refrigeration, air freight), incentives (in addition to 100 perceot retention, streamlining of regulations, attractive package for efficient investment) ar I information (e.g., researcl, and extension) required to facilitate these exports needs to be rehabilitated or created.  fnlapter 1: AgrIcuIture 3 respectively, coffee export volume had declined by about 30 percent, and tea and cotton export volume had declined by over 90 percent. The country's research and extension system virtually ceased w function as research stations, extension training centers and agricultural colleges were left with diiaoidated structures, empty laboratory facilities, and a huge cadre of personnel without any transportation and other means to operate. The country lost almost all of the 400 well- established commercial dairy and beef farms, and 84 milk cooling and collection centers were completely wiped out. Contagious animal diseases reemerged, and the cattle population declined by almost 30 percent. 1.4 Recent Performance. In the last three years, the sector has achieved recovery; however, the gains are quite modest compared to the devastation experiereed in the past and tlhe considerable potential of the sector. Agricultural GnP has grown by 4.8 percent per annum over the past four years in real terms. While cash crops have shown marginal growth during this period, food crops grew at an average rate of 5.5 p .rcent since 1986. The growth registered over the last four years has come primarily from the improved security situation and an imp,oved transport system. It also reflects better availability of agricultural inputs, brought about by the liberalized trade and foreign exchange allocation regimes and increased external assistance in the form of import support. 1.5 The recovery of food crop production since 1986 represents an expansion in the area cultivated rather than increased yields. It was facilitated by the rural population settling back to rehabilitate and cultivate abandoned or new lands, restoration of rural marketing services and the removal of obstacles to trade in food crops through the simplification of lizensing regulations and the opening up of export trade to the private sector. Also, distortions in the producer incentive structure (paras 1.11-1.13) have drawn labor from cash crops into food crop production. The slow recovery (2.6 percent) of production in the livestock subsector is explained by the sharp decline in the animal population over the last fifteen year., caused by looting and deteriorating disease control. 1.6 Cf the cash crops, coffee, sugar and tobacco production has grown over the last four years, while cotton and tea have stagnated. The reactivation of the once flourishing cotton industry in Uganda has been hampered by the late return of security to the north, lack of incentives, inadequate seed supply and distribution systems, and an inefficient and financially weak processing sector, whose -icompetence has served to discourage primary production. Under these circumstances, the government's decision to liberalize internal marketing of lint has had li.tle impact. Production of tea remained stagnant until 1989 when Government introduced trade incentives through foreign exchange retention privileges for exporters, and international tea prices simultaneously started to recover. Tea production and exports are still a fraction of the subsector's potential. 1.7 The impressive recovery of agriculture in recent years must therefore not lull policymakers and donors into complacency. Many underlying structural impediments remain and must be addressed if growth is to be sustained. Sectoral Objectives and Strategy 1.8 The governments's objectives in the Qgricultural sector are to diversify agricultural production, processing, and the export base, while achieving food self sufficiency and improving the well being of the rural population. The main emphasis for increasing agricultural production should be on improving yields. So far, the increase in crop production has mainly been achieved through area expansion. Presently, however, almost 80 percent of the cultivable area is under  4 Chapter 1: Agriculture cultivation and expansiori of crops in marginal and poor land could not be justified on bcth economic and environmental groundF. Projections indicate that if agricultural technologies currently practiced in Uganda (which have remained virtually unchanged over the past two decades) were to prevail, the country would by the year 2C00 rmn short of arable land to support domestic food crop demand, leaving little or no room for producing export crops to earn foreign exchange. In view of the dominance of foodcrops in Uganda's agriculture, accounting for 75 percent of agricultural GDP and 90 percent of area cultivated, improved yields in this subsectur are critical to future growth of agriculture. It is imperalive, however, that improved yields are tied to Uganda's comparative advantage in peasant and smallholder agriculture using labor-intensive appropriate technology and refraining from high cost, capital intensive mechanization. Export diversification is a related critical component of the agricultural sector to reduce the dependence on coffee which accounts for 95 percent of export earnings, and hence redu'-e the vulnerability of the economy to the vagaries of the international coffee market. In this process, however, it is essential that traditional exports are not overlooked, in view of the considerable untapped potential for increasing cotton and tea exports in particular. Mloreover, while other exports develop, the coffee subsector needs to perform strongly, but given its intricate linkages with financial stability, subsector policies need to be made consistent with the objective of lowering inflation further. Sources of Growth and Principal Constrainits 1.9 Several crops can contribute to fulfilling agriculture's role as the main engine of growth in the short term as well as the long run. Recent studies have found that given prevailing and projected international prices and given costs of production (not only under improved technology but in many cases, under existing technology as well), Uganda is internationally competitive in a wide range of cash and food crops.' Short- to medium-term sources of growth include recapturing parts of lost export markets for traditional export crops (coffee, cotton and tea), import substitution (tobacco, sugar and dairy products), production of nontraditional export products, and accelerated foodcrop production. 1.10 In the case of coffee, the sources of growth are increased market penetration and exports through more aggressive and competitive marketing; and improvements in production based on bettez husbandry practices, enhanced quality and rejuvenation of the trees. The main constraints are the non-competitive export trade and inadequate producer incentives. In order to stimulate exports, the Government has eliminated the marketing monopoly of the Coffee Marketing Board (CMB), and licensed three cooperative unions to export coffee. Since the present fixed margins per ton of coffee for marketers fails to reward quality improvements and maximization of sales value, the Government intends to move away from the present residual tax arrangement and introduce an ad-valorem tax designed to reward exporters for export quality while safeguarding the government's revenue objective. 1.11 The Government has also taken steps to improve the incentives for coffee producers, though more needs to be done in this area. In this regard, it is importart to note that the Government did not adjust coffee producer prices for two years (i.e. July 1988-June 1990). Prices were increased marginally by 25 percent at the end of June 1990. An increase in producer prices earlier than this was not considered prudent because of the collapse of international coffee prices and the need to reduce crop financing requirements and inflation. It was nevertheless viewed as a short-term imperative that would be corrected over the medium term to improve incentives. Recent developments, however, have necessitated a re-examination of this policy stance. In Uganda: Accelerated Foodcrop Production Stratevy. Ministry of Agriculture and Manpower for Agricultural Development Project (Kampala, April 1990) and The Preliminary Export Strategy for Non-Traditional Export Commodities, EPADU Policy Paper No. 1. Ministry of Planning and Economic Dcvclopmcnt (Kampala, Nlarch 1990).  Lnaprer I: -griculture particular, cofttee deliveries to the CMIB slumped during the first four morahs of FY90/91, resulting in a shortfall in cot'tee export shipments, W'hile some other factorc (e.g., build-up of stocks by three co-operative unions in anticipation of receiving licenses) could Lave contributed to the decline in deliveries, a principal factor is deemed to be the impact ot'ftaIling real producer prices. The real producer price is estimated to have dropped by 60 percent since July 1988, returns to family labor are reportedly negative, and gross margins and returns per man-day for robust are estimated to be lower than those for nearly all competing crops. Recognizing this, the Government increased the producer price of coffee by about 60 percent in November 1990. In the absence of a commmensurate adjustment of the exchange rate, this large correction in producer prices has led to a t'all in the rate of coffee taxation. In addition, gross returns per man-day are still very low for coffee compared to other crops. In view of this, the Government will have to continue to take more aggressive action on the exchange rate, and thus make it possible to increase producer prices further; the need and scope for doing this will have to be deternmined in the context of trends in coffee deliveries and targets for revenues and crop tinancing requirements within the macroeconomic framework. Upward adjustments in coftee producer prices will provide adequate incentives to induce farmers to adopt yield-improving husbandry practices and engage in replanting to replace over-aged coffee trees, including wherever possible replacing robust coffee with the higher-value arabica coffee. 1.12 Even though estimates indicate that Uganda is potentially competitive in tea production, tea exports in 1989 represented about .(0 percent of annual exports in the early 1970s, with less than half of the couitry's 20,000 ha planted with tea in productioni. Improved international price prospects and recent actions to liberalize tea exports and grant foreign exchange retention privileges should encourage rehabilitation of tea estates and smallholder gardens and reintroduction of known yield-improving husbandry practices. The remaining constraints center on inadequate incentives and services to smallholders. Specifically, there is a need to: pass on to the smallholders the benefits of applying the open market exchange rate to tea exports; improve leaf collection and extension services for smallholders; restructure or privatize inefficient and financially bankrupt parastatals owning and managing teas factories; resolve ownership issues affecting expropriated tea estates; and reopen tea roads, many of which have become impassable. The tea subsector is thus in need of major restructuring, despite the progress that has been made in rehabilitating tea factories. 1.13 The potential for growth in cotton production lies in increasing the present low average yield (around 400 kg/ha), and expanding the area under cultivation. Yield improvements are achievable with existing cotton seed varieties, provided the farmer's price for cotton is raised relative to those for competing food crops. The benefits of 100 percent export retention have yet to be translated into significantly improved incentives for cotton producers; indeed, the continued monopoly of the Lint Marketing Board with regard to cotton exports constrains both improved incentives and exports. Other constraints are a seed distribution system that has ceased to function, and the financially weak and inefficient cooperative unions that control ginning and remain tied to the Lint Marketing Board for sale of their lint. The development of improved seed variet.es that offer the prospect of raising yields above 1000 kg/ha and better husbandry practices represent an additional longer term source of growth. To realize it the necessary adaptive research needs to be initiated now. 1.14 Sustained sectoral growth depends on the adoption of improved production technologies and development ofthefoodcrop sectorand nontraditional exports. Improved technical messages are already availal,le for some crops, such as maize and beans; the adoption of thlese messages can contribute substantially towards raising yields provided the extension system is made more efficient. To this end, constraints related to funding, fragmentation of extension services, and the  6 Chapter 1. Agricultue dilapidated statt ot' supporting tacilities will have to be addressed. Also. an expanded program for .ood crop .esearch is essential to help producers raise productivity flurther. Such a program needs to develop appropriate technologies and praictices for seeds and planting material, soil management, weed management, pest control, post-harvest hanidling, storage, and marketing. The main impediment to such research is the absence ot' an organizational structure within which a prioritized national agricultural research plan can be cost-effectively implemented. Incentives for nontraditional exports have been considerably improVed through the 100 percent retention scheme. Improvements in the regulatory system and an attractive investment climiiate tor private investors will provide the necessary enabling policy environment. With supp( ting infrastructure (including storage, ret'rigcration, air freight capacity, etc.) there is potential fi. quick response in this area. .15 Growth with diversification involves import substitution as well as export diversification. Prospects for import substitution lie with dairy, sugar, tobacco, and edible oil production. In dairy, the key constraint is the inefficiency ot' the present milk collection and processing system, controlled and operated by a parastatal agency. Growth in sugar production is dependent on continued rehabilitation of sugar estates, supported by private sector management within the already established joint venture arrangements between Government and private investors and continued access to the necessary foreign exchange. T'he development of domestic production of edible oil depends on increased domestic production of oilseeds and Government resolving issues of ownership of oilseed mills thereby paving the way for rehabilitation of these factories. 1.16 Finally, higher growth needs to come from the livestock subsector, which accounts for 15 percent of agricultural GDP, but has been growing at only 2.6 percenlt per annum over the past few years. It is estimated that during the 1980s the livestock population declined by 30 percent on account of deteriorating disease control and looting. A key imperative for this subsector is therefore to reverse the decline in livestock numbers by dealing with the animal epidemic disease situation and to improve animal nutrition. The Role of Public versus Private Sectors 1.17 In devising strategies to address these constraints, it is essential to str' v for an efficient utilization of limited overall resources available within the economy. This in turn requires that the roles of the public and private sectors be defined so that the costs to the economy of achieving the desired objectives are minimized. Since the private sector in Uganda and elsewhere has shown much greater efficiency in production, processing and marketing, the implications are that public sector interventions should aim to: (a) create a policy environment that mobilizes and facilitates efficient use of private sector resources for producing, processing and marketing of agricultural commodities, including divesting to the private sector or terminating direct public sector involvement in such activities; and (b) through public expenditure policy provide support for infrastructure, technical advisory services such as agricultural research and extension, control of epidemic and contagious animal diseases, and preservation of natural resources. 1.18 Mobilization and efficient use of private sector resources in the agricultural sector depends inter alia on the Government's overall economic reform program as well as provide for prices of agricultural outputs and inputs to be determined by the forces of market. An administered system of agricultural pricing remains in effect for traditional cash crops, which amount to less than 10 percent of total agricultural production. The Government, however, intends to gradually abolished  tnapwer i: '4gnrcutrure / these controls as the procurement and marketing systems for crops like coftee, tea, and cotton become more competitive. Market liberalization also involves the abolishment of export monopolies and the ancillary program of restructuring the agricultural marketing hoards. Virtually all export monopolies have now been abolished -- the latest one to go being that for coffee. Restructuring of the agricultural marketing boards in line vith the Government's trade liberalization objectives has started with the Coffee Marketing Board, and is expected to continue with the Lint and Produce Marketing Boards. A further essential element of the policy environment is the allocation of property rights to some 100 ahanjoned private agricultural estates, now managed by the Custodian Board (Chapter 1, Volume 1). The assets, which represent some of the most fertile lands in Uganda, will remain unused or severely underutilized as long as the issue of their ownership is unresolved. Role of Public Expenditure Policy in Agriculture 1.19 Further to an enhanced policy environment, as discussed above, improved efficiency in the allocation and use of private sector resources in the agricultural sector relies on the public sector to provide technical support services and infrastructure to help carry agricultural products to markets. 1.20 Research and Extension. Agricultural growth in the short- as well as long-term is critically dependent on increasing yields and, hence on effective and sustainable research and extension systems. A recent study funded by USAID shows that crop yields can be doubled by moving from present technology used in agriculture to improved technology (Table 1.1). The study concluded that such improved yields may be largely attained using available improved technological packages, or by engaging in adaptive research. However, effective use of such improved technology depends on the establishment of an effective extension service, as well as efficient agricultural credit, marketing, input distributic.i ind other support services. This possible doubling of yield will, however, depend on the effe.:v on farm incomes aid risk, of moving to a higher output/input technolory. Overall, the enhanced yield shown below may not reflect themselves in raised national averages until ten years from now. 1.21 Strengthened research and extension services must therefore play a key role in facilitating agricultural growth. The effectiveness of such services, however, has been eroded by destruction of infrastructure, serious overstaffing in the unskilled ranks, loss of skilled manpower due to inadequate wage incentives, and totally inadequate operating funds to support transportation, field services or maintenance of equipment and facilities. In brief, neither research nor extension has functioned in any meaningful sense in Uganda for the past two decades. The challenge is to create a lean and sustainable organization for research and extension to cost-effectively address the main technical constraints facing farmers. 1.22 Control of Animal Diseases. During the period of upheaval, veterinary services deteriorp4;d and Government's disease control programs broke down. Looting and epidemic diseases during the 1980s have led to a 30 percent reduction in the numbers of livestock. Moreover, diseases like rinderpest and CBPP are spreading. The reinvasion of tsetse fly in the west and the south is causing a serious incidence of trypanosomiasis among unprotected stock, and there is a high probability that this will spread further. These developments pose risks for human beings as well. Yet Uganda's disease control program remains ineffective because of weak government policy formulation, lack of equipment and transport for field services, a weak tse-tse control unit, recurring shortages of drugs, uncoordinated disease surveillance, absence of disease monitoring, and shortage of skilled or trained staff.  8 C)hapter 1. AgrlciUlture Table LI.: Average Yields Urnder Current and Imnprned T'echtnology (Kilograms per hectare) Crops Present ImproveAl __ __ _ __ _ __ _ __ _ __ _ __ __ _ __ _ __ _ ___._ _ ____ l'e chnolog y lec nolg y'R 1. Bananas 5,000 12,000 2. Cassava 8,800 18,000 3. Sweet Potatoes 4,000 8,500 4. Maize 1.500 2,800 5. Sorghum 1,200 2,500 6. Millet 1,000 1,650 7. Beans 800 1,000 8. Groundnuts 550 1, 12 3 9 Robust Coffee Kiboka 1,200 2,500 10. Seed Cotton 500 2,500 Source: Crop Productiorn Hanidbook, Miti.itry of Agriculture, Enitebbe East Afiican Crops, January%, 1990 as presented in Ug.anda: Accelerated Food Production Stratey, Ibid. 1.23 Preserving Natural Resources and the Environment. While .he pressure on the environment is not as high in Uganda as in other Sub-Saharan countries, it is increasing and needs to be addressed to sustain economic growth. The benefits from environmental conservation tend to be "public goods" in nature. As a result, the private sector typically fails to prevent expanded resource utilization from resulting in environmental degradation. Hence the rationale for intervention by the public sector. In Uganda, the priorities f; - such interventions are to preserve and manage the country's forest, fish, and wildlife resources, and in promoting, through extension work, agricultural cultivation techniques that reduce the pressures on soil erosion. The gradual depletion of forest resources caused by industrial exploitation (indiscriminant logging) as well as encroachment by landless farmers needs to be arrested through a combination of appropriate government policies, monitoring, and enforcement of management regulations. Exploitation of the fish resources in the country's extensive lakes need to be monitored and managed to sustain a traditional protein supply to the population. The country's wildlife resources require protection to support a potentially growing tourist industry. As a first step to address these priorities, the Government proposes to prepare an Environmental Action Plan, including the strengthening of public institutions involved in environmental management and monitoring. 1.24 Infrastructure. Despite progress made over the last few years in the rehabilitation of roads, power, water supply and sanitation, further improvements in this infrastructure are necessary to support agricultural growth. Of primary importance is improving the acces .hility of feeder roads linking the farmer with nearby markets (Chapter III of this Volume).  Issues in the Sectoral Public Expenditure Program 1.25 While there are these imperatives for public expenditure policy, expenditures in the agricultural sector are spread over a wide range of production, marketing, and s;rvice activities. As a result, limited resources are dissipated on activities which are better performed by the private sector, and the effectiveness of public sector programs is seriously reduced. Several such programs suffer from poor design and organization. loreover, the allocation of recurrent expenditures heavily favors salary costs over other operations and maintenance requirements. Also expenditures are skewed toward meeting headquarter staffing and overheads. Consequently, essential support services, such as research and extension, are rendered virtually inoperative. Fundamentally, neither recurrent nor development expenditures are geared toward meeting sectoral objectives and strategies as outlined above. The Government, however, has begun to take steps to rectify this shortcoming as a basis for further reform. The patterns and issues of public expenditures in the agricultural sector are reviewed below in some detail. Actions to address the issues are discussed subsequently. Overview 1.26 The Government executes its policies and programs in the agricultural sector mainly through four line ministries, namely Agricultu-e (MOA), Animal Industry and Fisheries (MAIF), Cooperatives and Marketing (MCM), and Environmental Protection ana Forestry (MEPF). This proliferation of ministries in the sector constitutes a key problem underlying the ineffectiveness of government support for agriculture. Also, there are a number of statutory boards and public enterprises involved in processing and marketing of agricultural crops or products. These parastatal agencies are administratively connected with the sectoral ministries. 1.27 The sector's recurrent budget is thinly distributed over a wide range of programs (Tables 1.2 and 1.3). The MOA IN FY88/89 allocated its recurrent expenditures among eight programs, namely the Office of the Minister (27 percent), Agriculture Department (5 percent), Field Services (27 percent), Farms and Schemes (12 percent), Research (12 percent), Training (8 percent) other Field Activities (2 percmt), the Coffee Rehabilitation Program (7 percent). These programs involved the operation of 17 farms and schemes, 4 research stations, 12 research substations, about 40 research trial stations, 18 district farm institutes, 3 agricultural training colleges, and farm machinery repair services. 1.28 MAIF finances nine programs. The Veterinary, and Tsetse Control departments, two priority programs, spend 55 percent of the ministry's recurrent budget, the fisheries department 16 percent, research 4 percent, training and extension 8 percent, operation of state farms 7 percent, and the Office of the Minister 10 percent. The recurrent budgets of MCM and MEPF are small compared to those of MOA and MAIF. More than 50 percent of MCM's recurrent budget is directed toward financing the cooperative department and its associated field organization. Other programs include training colleges, licensing and registration (coffee, cotton and produce processing and marketing), and a small dairy development project. As a new ministry MEPF has yet to become fully operational in the discharge of its responsibilities; presently most of its recurrent budget is targeted towards supporting forestry activities. Further work is required to assess the adequacy of current funds to enable the ministry to fulfill its responsibilities in the forestry subsector as well as in environmental protection.  i O Chapter 7: Agriculture Table 1.2: Summnary of the Recurrent Expenditure for the Ministry of Agriculture, 1988/89 Approved Actual Percent of Estimate Expenditure Total (Actual) 1. Office of the Minister 177,454 258,783 27.2 2. Agriculture Department 25,566 48,005 5.1 3. Field Sirvices 206,981 257,993 27.2 4. Farm and Scheme 72,229 117,099 12.3 5. Research 231,746 111,577 11.7 6. Training 74,010 71,215 7.5 7. Other Field Activities 22,400 15,300 1.6 8. Coffee Rehabilitation Program 85,562 69,874 7.4 TOTAL 895,948 949,846 100.0 Table 1.3: Recurrent Budget Ministry of Animal Industry and Fisheries, 1988/89 (in million U Sh) Program Approved Actual Percent of Total Provision Expenditure (Actual) Office of the Minister 86,797 85,724 9.4 Veterinary Department 382,699 381,477 41.8 Veterinary Research 18,019 18,019 2.0 Operation and Maintenance of 64,617 63,361 6.9 Department's Farm l Departmental Training 21,911 21,911 2.4 Extension Activities and Development 40,626 39,082 4.3 Scheme _ _ l Tsetse Control Department 129,286 128,103 14.0 Fisheries Department 48,286 47,687 5.2 Fisheries Training Institute 12,145 11,753 1.3 Fisheries Research 20,604 20,326 2.2 Department of Fish Industry 9,458 8,892 1.0 U.F.R.O and Jagela 42,726 40,400 4.4 U.F.T.R.O. Jinja 45,381 45,369 5.0 TOTAL 923,118 912,104 100.0  Issues in Recurrent Expenditures 1.29 Dispersion of Expradu;ares. The dispersion of limited budgets over too many activities is most serious in the cases of MOA and MAIF. As a result individual programs are underfunded, and those that are essential to promote sectoral growth have little if any impact. Both MOA and MAIF fund programs involving production, marketing and other services which can and should be undertaken by the private sector. Release of these activities to the private sector or outright termination of iion-profitable activities would free up resources to ensure improved level of funding for essential activities such as agricultural researtL, extension, preventive ve-terinary services, and appropriate public sector programs in the area of natural resource conservation and management. 1.30 Recurrent budget support for state farms is substantial and not matched by revenues. Much of the support takes the form of sustaining large numbers of government "group" employees. In the case of MOA, operational support for some 17 state farms absorbed 12 percent of the FY88/89 recurrent budget plus substantial funds from the development budget. While MOA does not keep any income statement for these farms, it is doubtful that any of them is able to recover its operating costs. The MAIF manages and operates 20 beef ranches and dairy farms. In FY88/89 these farms were operated with an overall deficit (total recurrent expenditure allocations in FY88/89 of U Sh 63 million in 1988/89 compared to budget revenues of only U Sh 24 million). In the absence of budgetary support for state farm schemes in MOA and MAIF, their respective budgets for research in FY88/89 could have been increased by over 100 percent. Hence, the negative economic returns of maintaining suppe.t for these farms not only includes the operational deficit, but also the foregone benefits from a rnore operational research and extension service. 1.31 Both MOA and MAIF are currently operating agricultural services which the private sector is well suited to take over. In the case of MIOA, its vehicle repair service (the main organizational entity being Namalere Agricultural Mechanization Center) has absorbed substantial separate budgetary allocations and provided its services at subsidized rates. The Government is taking steps to privatize the service. Within MAIF, clinical veterinary services including veterinary drug distribution services have been major departmental activities which the Government now has decided to transfer to the private sector. 1.32 Biases in Expenditure Allocations. The allocation of recurrent expenditures heavily favors salary costs, primarily because of serious overstaffing in the unskilled ranks. Although, basic salary is very low, it forms between 30 to 40 percent of the recurrent budgets of the agricultural sector ministries, as each ministry maintains a huge cadre of personnel on its payroll. There are a total of 30,000 employees in the four ministries: 24,000 group employees and about 6,000 regular staff. Although group employees are viewed as temporary staff, they have remained on the payroll of these ministries for years. Since salary differentials are small and the number of group employees is almost four times that of regular employees, the expenditures for group employee salaries are almost 180 percent of that for regular employees. 1.33 Given the overall budgetary constraints, the heavy wage expenditure bias leaves insufficient funds to pay employees' field allowances, operate and maintain vehicles, repair buildings and equipment, and ensure an adequate level of other logistics support. To enhance incentives for field work and compensate for low salary levels, the Government tripled the per capita night allowances in 1989, but failed to provide the necessary budgetary resources to implement the measure. Past data indicate that in the case of a bu.dgetary squeeze the maintenance budget, which is grossly inadequate to begin with, is the first to he cut or suspended. While MOA's recurrent budget increased by 20 percent from FY88/89 to FY89/90, its budget for maintenance and upkeep of buildings budget was cut in half. Wages and salaries and purchases of materials and supplies claim  1 2 Chapter 1 Ag,licWtwtre more than 60 percent of the budget, and thereffore little resources are left to covei technical tield operations and repair and maintenance costs. 1.34 Almost 20 percent of the sector's recurrent expenditure are used to finance the head offices of the four ministers. Expenditure data reveal that actual expenditures connected to headquarters usually exceeded their budgetary allocation at the expense of' reduced budgets for field operations. For instance in FY88/89 the inland travel budget of the Oftfice of the Nlinister in MOA was budgeted at about U Sh I million, while actual expenditures exceeded U Sh 8 million. In contrast, the travel expenditures of the tfield service sat'af were reduced to 70 percent of theil budgetary provisions. 1.35 The above allocation patterns in combination with the dispersion of expenditures, as discussed above, have implications impacting sLibstantially onl the ability of the public sector to support agricultural sector growth. To illustrate, extet,sion workers cannot reach farmers who continue to employ largely unimproved technologies, researchers cannot maintain their laboratories and pursue their research projects, veterinarians cannot maintain vaccines under a cold-chain and are unable to stop the further decimationi of the animal herd, office supplies are unavailable, and equipment keep breaking down. Professional staff, already severely underpaid, become further demoralized and ineffective. 1.36 Inefficient Organization of Governrent Programs. Fragmentation of the public sector's work programs and recurrent budget among four ministries is a major factor responsible for the misallocation of resources and duplication of effort. At present, all four ministries undertake research and extension activities under a hierarchical management structure from the central level down to the district level (for MOA to the parish level). Inter-ministerial coordination of research and extension activities is poor to non-existent, and there is considerable duplication in coverage and effort. The effectiveness and overall costs of the sector's research and extension programs, as well as of its policy and planning activities, could be considerably improved if the present four ministries would be merged into one organization. 1.37 The dissipation of resources, combined with the deficiencies in the design of some of these programs, limit further the effectiveness of the technical field operations. Fo; instance, MOA's research and extension received less than 40 percent of the total recurrent budget in FY88/89. Due to the dispersion of these meager resources in support of an ineffective network of extension and research facilities inherited from the 1960's, the actual resources available for focused, high- priority research and extension activities are extremely limited. At the district level instead of concentrating the resources on well-coordinated extension programs, the resources are dispersed on a number of schemes such as the Young Farmers of Uganda, Village Technology, Vertebrate Unit, Family Living. While adequate resources are not available to carry out and succeed in this wide range of field programs, they divert resources from technical extension field operations. Similarly, the research budget is thinly distributed over an extensive network of research farms which has been inherited from the past and may not be viable under the country's present situation. 1.38 The Government recognizes the institutional weaknesses and the poor state of research and extension services, and is taking action toward strengthening these activities. In particular, the Agricultural Policy Committee has established two working groups and charged them with the task of preparing action plans for reorganization of research and extension services. As part of these activities, the Government, with technical assistance from the International Service for National Agricultural Research and financing from IDA, is preparing a national agricultural research plan. It intends to establish a semi-autonomous national agricultural research organization, designed to cost-effectively manage the implementation of the research plan. Detailed arrangements for the  tridper i: Aiyricuiure I I establishment of such an organization are expected to be finalized by August 1991. In the context of establishing this organization it will be necessary to critically examine how best to use the extensive existing agricultural research infrastructure. UJganda cannot afford to operate and maintain the numerous research stations, substations, and trial centers which have been inherited from the colonial era. Based on identified research priorities (to be set out in the national plan) hard decisions need to be made on which facilities to selectively retain and rehabilitate, so as to minimize the overall costs of implementing the research plan. 1.39 The Government also intends to adopt and implement a strategic plan for reorganizing and managing sustainable agricultural extension services. Proposals for such a plan are currently being prepared with assistance from UNDP, FAO and IDA. Also, there is a need to review the scope, organization, and staffing of MCM's cooperative extension program to ensure that it is cost- effective, and without duplicating the cooperative movement's own extension work, implements the reduced mandate of the public sector in this field as outlined in the new Cooperatives Societies Bill. In the meantime, a Headstart Facility for Agricultural Research and Extension is being launched with IDA financing under the Agricultural Sector Adjustinent Credit. The Facility will strengthen research and extension on a targeted basis, focusing on dissemination of available or easily adaptable technology to improve yields for a number of crops. 1.40 Under the agricultural training program, MOA's expenditures cover the headquarter's training cost plus that of the three training colleges: Bukalasa, Arapia, and Busitema. In addition, MAIF has three training institutes, one each for dairy, veterinary, and fisheries, and MCM maintains coileges at Bukalasa, Toro and Kigumbu. Due to civil war and mismanagement, these colleges are all in a dilapidated state. To be operational they require major rehabilitation work. Before any such work is initiated, a plan for effective use of training facilities to achieve defined training needs and objectives should be established. Such a plan should aim at minimizing the cost of training by merging colleges, providing for interministerial coordination in the use of training infrastructure, and ensuring high capacity utilization in institutes selected for rehabilitation. 1.41 In summary, the above review points to the need to enhance the sector's recurrent budget to enable the Government to play an effective role in the revitalization of agriculture. At the same time, however, there is considerable scope for enhancing the effectiveness of the present recurrent budget by transferring some services and activities to the private sector, by redesigning programs, unifying the sectoral ministries' administrations, eliminating redundant staff and operations, and targeting the resources saved on priority programs. Issues in Development Expenditure 1.42 Since the early 1980's, considerable investments have been made in the agricultural sector. In the wake of the civil disturbances and devastc )n of the liberation war of 1979/80, Uganda received extensive support for investments in th .overy of the sector from the international donors including, the African Development Bank, i,^NIDA, the European Economic Community, UNDP/FAO, other bilateral donor agencies, and the World Bank Group. The magnitude of investments made cannot be determined with any reasonable level of accuracy due to unavailability of project disbursement data (para 1.48 below). However it is roughly estimated to be in the order of US$300 million over the period 1980-89. 1.43 The investment program over the last ten years has emphasi--d the physical rehabilitation processing and marketing infrastructure, such as coffee processing, ( Lton ginning, tobacco curing, tea and sugar manufacturing, and milk collection and processing. The bul: )f these investments involved rehabilitation of the crop processing infrastructure controlled by the parastatal agencies  14 Chaote, 1: Agriculture or the cooperative sector, and only to a limited degree support for private sector investment. Development expenditures have also provided for the importation of agricultural tools and implements, and inputs for agro-processing and marketing, to be distributed by the agricultural sector ministries or the cooperative unions. 1.44 The above emphasis of the public investment program reflects the perception that the restoration of the physical infrastructure for processing and marketing agricultural products and the provision of inputs to farmers were necessary conditions for stimulating recovery of output. In hindsight it may now be concluded that they have proven not to be sufficient conditions. The utilization of rehabilitated capacity remains low, particularly in the tea and cotton subsectors. The reasons are twofold. First, farmers have had inadequate and falling incentives to produce crops for processing because of the impact of an overvalued exchange rate and delays in government actions to liberalize pricing and marketing. Actions on these fronts are now being taken. Second, the government's agricultural support services, and in particular the extension service, have broken down. Investments to restore them should now be the first order on the agricultural sector public investment agenda. 1.45 Public development expenditures in the agricultural sector fall into two categories. Projects in Section I are fully locally funded. Section 2 projects are jointly financed by the Government and donors. Expenditures under Section 1, with the exception or those for the Namalere Mechanical Services (NMS) involve small purchase requests primarily for government's production and research farms. Most Section 2 proJeZio are supported by feasibility studies and project documentation. In contrast, the feasibility of investments under Section I projects are generally not evaluated. This is due to lack of consistent application of feasibility criteria in determining development expenditures and of professional expertise within the agricultural sector ministries to evaluate individual investment requests for Section 1. Because of such skill gaps, the feasibility analysis of Section 2 projects are typically done by the donor agencies with little if any involvement by staff from the line ministries. In this sense, the sectoral investments are donor driven, rather than generated through government initiatives coordinated within a comprehensive sector strategy. 1-.46 Of the total project expenditure by the agricultural sectoral ministries and parastatals for FY88/89, MOA received 36 percent; MAIF 33 percent; MCM and MEPF, each 7 percent; NMS, 6 percent; and the agricultural parastatals 4 percent. In the FY90/91 budget, a total of U Sh 29,576 million (or about US$62 million) was allocated for the four sectoral ministries. Virtually all of it is for Section 2. A comparison between the past sectoral budget and FY90/91 budget reveals that the Government has undertaken a number of changes consistent with the findings of this review. First, the budgetary allocation to Section I projects has been reduced from 20 percent to less than I percent of the sectoral budget, thus de-emphasizing allocations to state farm operations. Second, unlike in the past, most of the current year's expenditures under Section I are directed at rehabilitation and maintenance work. Finally, the allocation for NMS has been reduced trom U Sh 220 million to U Sh 37 million. While these changes in budgetary allocations are generally considered to be an improvement over the past allocations, the major challenge ahead is to ensure that actual expenditures do not diverge markedly from the budgetary allocations. There is also the need to take further steps to free the Government from production and marketing activities, while strengthening and channeling resources to improve technical advisory services. 1.47 Accurate data are not available to properly assess the performance of individual projects. The information contained in the RDP is not kept up-to-date, and some of its investment proposals do not properly reflect the government's present sector strategy. For example, in the crop subsector, out of 16 projects and 5 feasibility studies quoted in the RDP, only 11 projects are  c;napter 7: Agricu,ture I D funded in the FY90/91 development budget. As most of these projects started with a delay of several years, expenditure projections are out of proportion to actual project cost and expenditure data. Although, the Draft Estimates of Development Expenditure (DEDE) for FY90/91 indicate budgeted expenditures for individual projects, they fail to include comparative data for past expenditures. This state of affairs is in itself indicative of a fundamental weakness in the management and monitoring of the public investment program in the agricultural sector. 1.48 Priorty Areas of Investment. In the crop subsector, projects such as the integrated rural development project for Eastern and Northern Uganda, and Southwesterr. Region, and commodity specific projects such as coffee and tea projects which focus on increasing crop yields through improved cultural practices and greater input usage are indeed priority projects. However, a major part of these expenditures (almost 30 percent) are allocated for the importation and distribution of farm inputs, handled by individual project entities. Such institutional arrangements for importation and distribution of agricultural inputs are, however, inconsistent with the government's policy to encourage the private sector to expand its involvement in agricultural input trade and distribution. Most of these projects either concentrate their activities to a specific region or a specific crop; similar efforts, however, have not gone into improving national research and extension. Consequently, the overall institutional setup for research and extension has not been strengthened as yet. The proposed Headstart Program for Agricultural Research and Extension is a first step to address this need. 1.49 A number of donors (EEC, GTZ, North Korea, USAID) are presently assisting in the production and provisionofimprovedseed. The Rehabilitation of the Seed Industry Project (EEC funded), with its focus on the rehabilitation of MOA's Masindi Seed Multiplication Farm, is the major project in this subsector. At this farm, breeder seed obtained from the research system, goes through different multipli-ation cycles. At the registration stage, seed is sold to contract farmers around Masindi District for further multiplication. The improved seed is then purchased by the project for processing and reselling to the farmers. Due to enormous transportation and administration costs and lack of improved breeder seeds, the project is incurring substantial losses. For instance, the project's FY88/89 profit and loss account shows that the project made a net loss of U Sh 112 million, compared to its cash sale of U Sh 24 million. Various donors are investing in seed production; yet, as discussed further, it is imperative to study the possible rationalization of marketing and transportation, and coordinate donor efforts. 1.50 In the livestock subsector control of animal diseases is a priority alea. Out of MAIF's 22 ongoing projects, 12 projects, which received more than 65 percent of the ministry's FY90/91 budget, are concerned with the control of animal disease. These projects generally focus on controlling endemic animal diseases, including Rinderpest , CBPP, Trypanosomiases, ECF, Rabies, and FMD. Furthermore, the Livestock Services Project, and Strengthening Diagnosis of Animal Diseases promote gradual privatization of curative veterinary services, artificial insemination, and the government farms. 1.51 A number of donors are providing financial and technical support in revitalization of the dairy industry, although DEDE does not provide appropriate accounts for these contributions. The WFP has provided skim milk powder and butter oil totalling US$24.5 million since 1976 and has already signed a contract to provide another US$29 million to continue this assistance. Funds generated by this project through recombining and selling these commodities are earmarked for dairy industry development. FAO/UNDP has provided US$2.8 million to stimulate and improve the local supply of milk, develop collection centers, and process and market the milk. ADB provides US$15 million for rehabilitation of milk cooling centers, purchase of processing  16 Chapter 1 AUric(ilture equipment for the Kampala and Nihale milk plants, and rehabilitation of two of the miinistry's dairy stock farms. DANIDA is providing US$10.5 million, supplying milk cans and buckets and upgrading the Entebbe Dairy Training School. So far 26 cooling centers have been developed; however, 22 of these are located in the district of Busheny Mlbarara, and Kabale some 240 km from the main consumption centers of Kampala, Jinja. and Mahale. A maJor part of the fund which is generated fiom the WFP project is subsidizing the transportation and marketing costs of locally produced milk. New Direction1s for Public Expenditure Recurrent Budget 1 .52 In order to maximize the contribution of the sector, the recurrent budget must be enhanced and properly targeted at priority field and technical advisory services. The first step toward that objective should be to shift recurrent resources away from state farm-type production, and commercial marketing and service activities. Programs such as Farm and Schemes, Other Field Activities, and NMS under the MOA as well as Department's Farm under the MAIF, should be considered for privatization and commercialization. Both IOA and MAIF should review the status of each farm and make a time-bound action plan towards its privatization and commercialization. However, until such privatization could he accomplished, it is advisable to establish proper farm budget and accounting systems for each farm. 1.53 Considerable savings in the recurrent budget could also be accomplished -vith proper adjustment in the extension and research facilities and their organization structures. There is surplus land under research which could not be used in the medium-term research program. This is a burden on the research budget which has to carry the maintenance, staffing and security costs of these farms. Similarly, the extension services should be reviewed and it should be determined whether their activities require rehabilitating and maintaining all the 18 district training centers or whether it would be more cost effective to have a training center for each agro-ecological zone or one per region. Also, the present number of research trial stations seems excessive; one trial station may be adequate for each district. In the absence of a district training center, the trial station should be housed on the training center lands. The above questions are expected to be addressed under the preparation of the nationial agricultural research plan, the establishment of a national research organization and the adoption of a strategic plan for reorganization of the agricultural extension services. 1.54 Savings could also be made in the sector budget if the Government succeeds in privatization or commercialization of the Namalere Agricultural Mechanization Scheme. Until such objectives could be achieved, the Government should introduce a rigorous cost recovery policy and should at least try to recover its recurrent costs from this activity. 1.55 The allocations for field operations. repair and maintenance generally are inadequate. For instance, based on rough estimates of the staff that should carry out the field activities and based on the present rate of day and night allowances, the sector's travel and transportation requirements are calculated to be U Sh 5,173 million. However, the budgetary allocation for travel and transport allowance in FY89/90 was only about 6 percent of the requirement. While part of the gap is met through externally-financed projects, even taking these into account, it is estimated that the budgetary allocation for travel and transportation would need to be increased from present levels by a factor of two or three. Of course, significant institutional rationalization and strengthening of extension and research must go hand-in-hand with this increase in allocations. A  (Lt?dpter 7. Agricuttute I / gradual hut significant increase would he appro)priate because this gives the line ministries the opportunity tn upgrade their techinical advsisory capabilities to be able to properly justify increased field expenditures. 1.56 Another item needing considerably increased allocations is the repair and maintenance budget. Although the size of this budget depends on the nurnber of physical structures the Government is planning to keep in the sector and the transportation tacilities that would be provided for the field staff, a rule of thumb would be to allow ;.5 percent ot the replacement cost for structures as ordina v repair and maintenance budget, and tfr vehicles about 8 percent of their replacement costs. Recent allocations, not to mention actual releases, fell far below these norms. Development Budget 1.57 The development budget, just like the recurrent budget, requires modification and in some areas, reorientation to meet sectoral objectives. Since the government's financial and skilled manpower resources are limited, it has to concentrate on key projects which cannot be properly undertaken by the private sector. Therefore, the emphasis in the investment program should be on improving research, extension, control of contagious animal diseases, safeguarding of natural resources, rural marketing and infrastructures, and planning and policy analysis. Attention also needs to be paid to the major factors impeding agricultural and export diversification and growth, focusing on particular crops. This will require taking stock of the project portfolio and ensuring that the design and sequencing of projects will enable the restructuring of coffee and tea subsectors, and development of infrastructure and support services for accelerated foodcrop production and nontraditional exports. 1.58 As discussed earlier (paras 1.50 and 1.52), some projects (such as investments in the provision of improved seed and in the revitalization of the dairy subsectors) suffer from lack of coordination and proper investment strategy to ensure their sustained growth. In the seed subsector the investment commitments have been made without a unified government strategy which donors can support. The high cost of present investments has prevented the country from establishing any private self-sustaining, improved seed operation. It is recommended that for revitalization of the seed subsector, a USAID funded study, "Private Seed Industry Development in Uganda", completed in 1988, which provides a good starting point for the proposed seed investment strategy be updated. 1.59 Similarly, as stated earlier, a number of donors are engaged in revitalization of the dairy industry. These investment commitments are pursued without a proper investment strategy, and some of them are done without consideration for least cost alternatives. Fortunately, the Government with the assistance of UNDP/FAO is working on formulating a National Dairy Development Plan. It is recommended that the Plan, which should identify the respective roles for the private and the public sector, should be completed as soon as possible. 1.60 On-going projects suffer from a lack of local funds. During FY88/89 and 89/90, only about half of the local counterpart funds required from the Government to implement the project portfolio were budgeted. In addition, actual disbursement turns out to be a fraction of this allocation. For instance, in FY88/89 the bid for resources n respect of the Northeast Agricultural Development Project was U Sh 317 million (based on project's local fund requirements); U Sh 269 million were approved, but only U Sh 130 million were actually released. It is recommended that the Government pay utmost attention to the provision of local funds for the projects; in addition, the likely recurrent costs of completed projects need to be assessed and budgeted.  18 Chapter 1: Agticulture Cost Recovery and Efficiency 1.61 The sector's services could he improved, and additional funds could be generated for the sector, if it tollows a viable user charge and cost recovery policy. 'The direct user charge and cost recovery policy needs to be adopted for the services, whose beneficiaries could be readily identified and recovery charges would justify the collection and administration costs. Establishing revolving accounts from proceeds of these recovery charges would permit the continuation of the services and the individual account size and recovery rate gauges the magnitude of demand for particular services. 1.62 In the livestock subsectors, provision of clinical veterinary services and veterinary drugs should be provided with full cost recovery, as envisaged under the Livestock Service Project. The same should be done for the artificial insemination services. The Government has been pursuing the user charge policy in the case of veterinary drugs with a nominal recovery rate of about 75 percent. The Government fixes the veterinary drug prices on the basis of CIF prices converted to local currency through the prevailing official exchange rate and tops it by adding a 15 percent service charge. However, the selling price embodies a subsidy element because of currency overvaluation. Furthermore, MAIF subsidizes its artificial insemination services. The rehabilitation of the Artificial Breeding Center started in 1982, and currently the MAIF inseminates about 2,000 cows yearly. As this service has already completed its demonstration stage, a full cost recovery mechanism should be adopted. 1.63 In the crop subsectors, the Government in the context of different development projects provides inputs and implements at prices which contain a hidden subsidy because the goods are imported at the overvalued official exchange rate. However, the Government plans to commercialize and introduce a competitive system in marketing of these inputs. Toward that end, the Government plans to carry out a study of input marketing inputs under the Southwest Region Agricultural Rehabilitation Project. It is recommended that the findings of, and the actions arising out of, the study should be applied on a national scale. Table 1.4: Summary of Recurrent Expenditure for The Ministry of Cooperative and Marketing, 1988/89 (in million U Sh) Program Approved Actual Percent of Total Estimate Expenditure (Actual) 1. Office of the Minister 78 75 40.5 2. Cooperative Department 8 8 4.3 3. Bukalasa/Tororo College 16 16 8.6 4a 8 21 11.4 5. District Coop Office 53 50 27.0 6. Regional Coop Office 7 5 2.7 7. Marketing Department 7 5 2.7 8. Regional Marketing Offices 5 5 2.7 Total 12 1.85 100.0  INDUSTRY Overview 2.1 The preceding chapter sketched out a vision of agriculture as the primary engine for growth in Uganda over the next decade or longer. An efficient and rapidly growing industrial sector can be an important partner in this growth, providing the necessary forward and backward linkages, including exports and import substitutes which Uganda can produce competitively. The industrial sector, though predominantly small-scale in nature, is vibrant and resilient. It has a wide scope for undertaking domestic-resource-based processing, and hence holds out the promise of making a bigger contribution to growth. There are, however, a number of larger plants in the sector with substantial unutil ized capacity, some of whom have been able to achieve rapid growth in production mainly because of increased imports of inputs under the OGL. However, much of today's unutilized capacity was set up before 1970 under different domnestic and international conditions. With a few exceptions, the existing plants are characterized by outdated technology and equipment, and are in the hands of a largely inefficient parastatal sector. Indeed, significant public resources are being inefficiently utilized in the parastatal sector, when there are pressing demands elsewhere. The critical requirements for the Government in the sector are to create an enabling environment for private sector participation and investment, while pursuing divestiture and closure or restructuring of enterprises that remain. 2.2 There are difficult challenges here. First, there may be a conflict between the short-run supply response and long-run viability. Specifically, the short-run supply response can come from increased capacity utilization of firms currently benefiting from subsidized imports under the OGL and SIP. Some of these may not be viable under a more liberalized exchange and trade regime; that is not to deny that many firms have adapted very well to the changing policy environment. Second, regarding the public enterprise sector, while the Government's preferred option is for divestiture to indigenous entrepreneurs, the scope for doing so is limited because there are relatively few large indigenous groups with the financial and managerial capacity to absorb some of the large enterprises. At the same time, financial instruments which would facilitate the pooling of the resources of large numbers of small savers for long term investment are practically non- existent. Some foreign investors have expressed interest, but the Government's success in divesting to them will be a function of its progress on improving the business climate significantly, including settling claims on expropriated properties. In the meantime, bold actions will be needed to liquidate non-viable enterprises; limit ongoing or planned investment in parastatal projects, many of which are of dubious or unproven economic viability; and limit the number of parastatals that would remain in the public domain and restructure these in such a way that they become viable business operations. The restructuring of parastatals will make its own demands on scarce financial  20 Chlapter 2. Industry and managerial resourc:es. Moreover, restructurin^g is unlikely to yield significant benetits in the shoit run. Ihere are. JiereuOie, grounds tir taking a medium-term, or even longer-tcrm, view of parastatal restru:cturin:g. Sector Description Background 2.3 In the initial years tollowing independence, the industrial sector played an important role in supporting the strong economic pertortnance ot the economy. Between 1962 and 1970, the industrial sector, although small, helped to sustain a GDP growth rate of 5.8 percent per annum by supplying the econonmy with a wide range of basic inputs and consumer goods, and contributing foreign exchange through exports of textiles and copper. It was the fastest growing sector of the economy and by 1970 accounted for over 12 percent of GDP, 17 percent of formal sector employment, and almost 20 percent of export earnings. A number of factors, both external and internal, facilitated industrial development during the 1960s including: (a) use of tariffs and import quotas to protect infant industries from foreign competition and provide incentives for import substitutions; (b) encouragement provided to the private sector, both local and foreign, to invest in industry including joint ventures with the Uganda Development Corporation (UDC); and (c) access to export markets in Kenya and Tanzania through Uganda's participation in the East African Community. 2.4 The prolonged period of political turmoil and gross economic mismanagement that engulfed other sectors inflicted heavy damage on the industrial sector as well. By 1986, the general decline in the economy, foreign exchange scarcity, the deportation of non-national entrepreneurs who dominated the industrial and commercial sectors, and large-scale government confiscation of enterprises had reduced capacity utilization and output to negligible levels. Industrial contribution to GDP had gone down to 3 percent, a fourth of its contribution in 1970. 2.5 Recent Industrial Performance and Current Assessment. The decline of the industrial sector has been partially reversed by an impressive 14 percent growth per annum during the last three years. While food processing grew on account of increased agricultural output (Table 2. 1), growth of other manufacturing came mainly from 'drinks and tobacco' and 'chemicals and soap' - - subsectors that have benefitted from increased! foreign exchange availability for imported inputs under OGL and SIP and improvements in the incentive framework, principally the removal of price controls. A significant issue, however, is whether this supply response has come from subsectors where Uganda may not have comparative advantage in the medium term. After all, these firms have benefitted from a significant implicit subsidy by importing inputs at the overvalued official exchange rate while pricing their products at the parallel market rate. A recent UNDP-World Bank study has estimated the effective subsidy enjoyed by these firms to be high, and has pointed out that some of these firms may not be economically viable.2 This is largely an empirical question; the economic viability of these firms will be sorely tested when the remaining distortions in the economy (such as preferential treatment provided through the official exchange rate and the OGL) are removed. 2 UGANDA: An Agenda for Trade Liberalization. UNDP-World Bank Trade Expansion Program (May 1990). See Chapters 4 and 5.  Ctwpte O 2 odustty 2'1 I le l2.1: Index (if Iu(iustrial Prnductiun difl. IWO 1: 1(K11 I .xI 1) lhnks I CxtIle I.Cath & -I-lliiil'c. (Ch,r n. . Is,. - ,,, I and Ni1acl rTxAa N'Xs. g & & Fkk,(tv.ar I'apeX palilt. & stecl Iobah;-c (Clhiing soanp cement productEa 19X2 106.7 48 6 196.7 77.9 68 2 (4 6 163 7 81.6 87 6 97 4 1981 13 7 59.8 177.6 152 8 79 6 68 i 177 4 I1s S 124 3 103 7 1904 99 8 79 4 136 9 175.5 88 7 61 2 156 5 110.7 139.5 101 1 1985 93 9 84 8 98.9 86 9 76.8 38.6 122 7 133.1 139.1 91 1 1986 85 3 82.2 92.9 90.0 72 0 58 8 120 6 105.9 141.0 86 1 198 ) 100.0 100.0 100.0 100 0 100 0 100 0 100.0 100 0 100 0 100.0 1988 128.0 139.6 121.8 62.0 135 1 1I 2 94.4 87.2 134.0 123.7 1989(a) 160.4 149.1 135.0 52.8 1605 1562 9235 929 1999 1454 (a) projectiona hased on data for the nine months January to Septenmber Source. Statsticral BulletiA No. IP13 - Index of Industrial Produc-on. 2.6 The rest of the larger enterprises in the industrial sector have continued to petform poorly even during the past few years. Indeed, capacity utilization remains low, and most of the larger public enterprises (PEs) continue to make losses. While average capacity utilization of Pes increased from 20 percent in 1983-86 to about 30 percent as of middle of 1990, net profits have not improved in tandem with increased output. The aggregate loss of 31 of the manufacturing Pes in 1988 was US$8.3 million on an annual turnover of US$48.3 million. In fact, in each of the last four years, about 60 percent of manufacturing PEs made losses. 2.7 Although the contribution of the industrial sector to GDP has increased from about 3 percent to 5 percent over the past three years, this is still less than half the share of GDP in Sub- Saharan African countries. Present Structure of the Industrial Sector 2.8 Most of the plants in the industrial sector today were established before 1970, and consist mainly of "first stage" import substitution industries producing consumer goods such as textiles and beverages, and agro-processing export industries that originally exported to the East African Community. These light industries producing consumer goods contribute the largest share (74 percent) of industrial production today and are engaged in turning out mainly domestic-resource- based products (food processing, tobacco and beverages, textile and clothing, leather and footwear, timber and paper products). Economic linkages within the manufacturing sector, however, are weak, and the production of intermediate and capital goods is marginal. Export-oriented activities are negligible.  22 Chapter 2. Industry Tahle 2.2: Structure of Mlanufacturing Production (1989) Weight (%) Food Processing 20.70 Tobacco and Beverages 26.10 Textile and Clothing 16.30 Leather and Footwear 2.30 Timber, Paper, etc. 9.00 Chemicals, paint and soap 12.30 Bricks and cement 4.30 Steel and steel products 5.30 Miscellaneous 3.70 Index - all items 100.0 Source: Statistical Bulletin No. IPi3 - ItJdex of Industrial Production 2.9 Ownership in the Industrial Sector. Total employment in the industrial sector (estimated roughly at 40,000) is about equally split between large scale manufacturing and small scale enterprises. Public enterprises, however, dominate the large manufacturing sector, accounting for 70 percent of its employment. The bulk of the private sector consists of small and medium enterprises. 2.10 Specifically, 45 public enterprises (PEs) are involved in manufacturing. Government owns 100 percent of the shares in a third of these. The rest are joint ventures with private partnership or mixed ownerships, though Government is the majority shareholder in most (75 percent) of these as well. Private partners of joint ventures and other mixed companies are principally western foreign enterprises (such as BAT; Chillington; Mitchell and Cotts; Pepsi) and some Asian groups (Mehta, Madhvani, Patel). PEs dominate domestic resource-based sectors, such as production and processing of sugar, tea, meat, dairy products and cement products. They also account for a large share of manufacturing plants in metal working, textile and garment, beverages, paper and paper products. 2.11 Among large private enterprises, there are a few foreign-owned manufacturing companies that have retained the full possession of their assets such as Berger Paints, BATA Shoes and Lonrho. Fully private joint ventures are very few and the only recent case is the joint venture set up by the foreign-owned General Machinery and private Ugandans. Large Ugandan-owned private companies are few, and have developed only in recent years. The largest groups are Sembule Steel Mills, Ship Toothbrush Industry (Mulwana group), and Mukwano Industries.  Lnapter 2: nUUstry 2.12 The small scale private enterprises have proven particularly resilient through the civil strife and economic instability, producing goods for domestic consumption based on locally available inputs. Sector Objectives and Strategy 2.13 Government's objectives for the manufacturing sector, as stated in the Rehabilitation and Development Plan (RDP) are: (i) rehabilitation of existing industries especially those producing essential goods for local consumption; (ii) creation of self-sufficiency in basic consumer goods; (iii) restructuring of the sector in a manner consistent with the government's goal of building an independent and self sustaining national economy; (iv) harnessing the existing indigenous scientific capability; (v) laying the foundation for the development of other industries in line with Uganda's resource base; and (vi) broadening the industrial base by establishing enterprises which utilize local materials. 2.14 Some key elements of this objective -- facilitating manufacturing growth in areas of comparative advantage, particularly industries based substantially on local resources -- are valid and appropriate for Uganda. However, other elements of the Government's objectives -- rehabilitating existing industries or achieving self-sufficiency in basic consumer goods irrespective of explicit consideration of costs or Uganda's relative efficiency in these commodities -- warrant re-examination. Indeed, as noted earlier, the existing industrial structure was developed when trade within the East Africa Community was expanding, when Uganda played a preeminent role in the community and when other countries faced greater transport and financial barriers to trade. Rehabilitation of some of these enterprises may not be economically justified under present circumstances. Similarly, the commitment to self-sufficiency in consumer goods may not be justified; the country may gain by exporting some of these goods while importing others. 2.15 In keeping with its stated objectives, the Government's strateg) ,s to: (i) continue the rehabilitation of the projects contained in the development plan; (ii) r.i ionalize the role of the parastatal sector in industry, with the objective of selling off or winding up .nose enterprises which have no commercial potential; (iii) improve management in those public s,cvor companies where mismanagement remains a problem; (iv) expand the coverage of the C(i. to include additional industries, both large and small-scale; and yv) promote the exports ef ; idustrial commodities, especially to the PTA and other African states 2.16 While most elements of this strategy are valid, the explicit incorpe- ation of economic viability as a screening mechanism for any rehabilitationor investment is critica. The Government has recently adopted criteria for project selecton, which incorporate tht ecnrnomic viability criterion explicitly. In addition, it is recommended that the central thrust of the Government's strategy in the industrial sector be to stimulate growth thiough the private investment, and in doing so, focus on creating a business environment to make this happeti. Concomita-itly, scarce public resources can be channelled into other areas of pressing need. The strategy wouid t.herefore entail divestiture of parastatal industrial enterprises -- not just those without commercial potential. For those remaining under public sector control, increased efficiency should be the goal. Enabling Environment for Private Sector Growth 2.17 The primary emphasis in the Government's industrial sector strategy should be to create an enabling environment for private investment. As discussed earlier in the report, this requires:  24 Chapter 2 Industry * political and firnancial stability, including turther pr(ogress in rCducing intlation; * continued improvenent in the incentives framework; most significantly, further continued liberalization of the exchange and trade regimne t o permit efticient producers access to toreign exchange at prices that rell *ct scarcity Values; * improvements in the financial system, including restructuring of commercial banks, to permit efficient mobilization and allocation of domestic savings, including term finance; * improvements in critical infrastructure (e.g., transport and power) to remove existing or potential bottlenecks; v speedy settlement of unresolved claims associated with expropriated properties and payment of the (relatively small) backlog of remittable profits, dividends, fees and salaries; * improvements in the legal and .egulatory framework to permit easier entry and operation of businesses, including an Investment Code that attracts efficient investment by local and foreign investors; and * mobilizing bilateral assistance for the upgrading of management and technical skills (such as accounting) through training and strengthening of local institutions (including facilitating return of expatriate Ugandans). The Public Enterprise Reform Program 2.18 While striving to improve the business climate for private sector growth, the Government has embarked on a public enterprise reform program. The objectives of PE reform are to (i) increase enterprises efficiency; (ii) reduce financial losses of PEs; and (iii) wherever feasible and desirable, reduce Government's own role in management and control of PE and enhance private sector participation. 2.19 The program covers all 146 public enterprises (PEs), 45 of which are in manufacturing; 20 in utilities, infrastructure and services; and 15 in trade. As mentioned earlier, over the last four years, about 60 percent of PEs made losses, and average capacity utilization is around 30 percent. The upshot of this is that the PE sector has imposed a heavy financial burden on Government. Table 2.3 shows that financial flows from Government to PEs in 1986, 1987 and 1988 were about 9.4 percent, 10.1 percent and 4.0 percent of total government expenditure respectivelv. This makes no allowance for likely calls on government guarantees of U Sh 2.8 billion (Lake Katwe Salt Project and Uganda Cement Industry) nor on other loans by or through Government which may not be repaid. There is a lack of basic financial discipline which is exacerbated by the lack of adequate records at the Ministry of Finance and the absence of accurate and up-to-date information at individual enterprises. In particular, there is no central record of subventions and capital grants provided to the PEs. In many cases, there is doubt as to which are loans and which are grants. Based on incomplete information, it is estimated that there were 13 loans to PEs covered by government guarantees, amounting to U Sh 11.9 billion (US$60 million) in December 1989.  Chapter 2 Industry 25 Table 2.3: EfITect of PEs on Government Finances, 1986-1988 (U Sh million) 1986 1987 1988 'I ows to Govcrnment Corporation T ax 28 142 478 Dividends 12 62 380 40 204 858 Flows to PEs - Loans (net of repayments and interest payments) 471 751 77 - Subventions NA NA 937 - Equity contributions 25 485 15 496 1236 1029 Net Flows to PEs 456 1032 171 As % of Total Government Expenditure 9.4 10.1 4.0 2.20 The Government's strategy for PE reform consists of: * definition of a clear policy regarding Government participation in the PE sector based on a delineation of Government's role vis-a-vis the private sector in specific areas of economic activity; * based on the above, implementation of a defined program of divestiture and liquidation of industrial public enterprises; * targeted management and technology assistance to retained industrial enterprises; * preparation of a comprehensive program for rationalizing the rest of the PEs; * definition of longer-term legislative and administrative framework for the sound management of PEs; and * institutional strengthening of the Ministry of Finance and the Ministry of Industry and Technology to monitor progress under PE reform. 2.21 The over arching framework for the Government's future participation in the PE sector is presented in the recently completed Public Administrative Sector Reform and Planning Study (SARAPS); the report is presently being reviewed within Government. SARAPS recommends that the rationalization of the PE sector should ultimately reduce the government's direct ownership role  26 Chapter 2: Industry to a minimum number of strategic/essential enterprises. Accordingly, and in view of the financial and administrative burden imposed by the large industrial PEs, SARAPS has recommended that the Government should substantially reduce its involvement in commercial activities. 2.22 In this context, it has recommended that the Government should confine its equity participation to PEs that cover information and broadcasting, security, essential services and natural monopolies. The report suggests that the only area for continued government involvement in industrial PEs would be in resource-based projects with proven economic viability, whose capital costs are very large and thus stand little or no chance of obtaining the required investment capital from the private sector at this stage of Uganda's development. In all cases, alternatives to retaining enterprises with government equity participation need to be explored. 2.23 Based on these criteria and detailed firm-specific analysis, SARAPS has categorized all 110 PEs reviewed into four classes. The implications of this analysis are that 50 percent of the PEs be privatized; another 30 percent be liquidated; 5 percent be retained by Government with minority share; and 15 percent be retained by Government with majority shares.3 2.24 While the divestiture/liquidation process will have to be carried out over a number of years, during the transition period and for retained PEs, the Government needs to set up proper guidelines, rules and institutional structures. In this respect, Government should ensure autonomy of boards of directors of PEs; hold boards of directors and managers accountable for performance by monitoring operations; eschew political and ministerial interference in the operations of PEs; and improve management capability. For retained enterprises, options for organizational and financial restructuring, including use of technology and management contracts, will need to be investigated. Feasibility of Divestiture 2.25 The role of the private sector in divestiture has recently been assessed in the context of a Divestiture Design Study conducted in the context of the Public Enterprise Project. A survey conducted amongst the Ugandan private sector indicated the lack of resources, both equity and foreign exchange, as the main constraint to purchasing government enterprises as far as Ugandan businessmen were concerned. A second identified constraint was the lack of technical experti:e to run the company. The Study also reported that: "In general, foreign investors are, at present, uninterested in investing new hard currency in Uganda, with the exception of foreign shareholders who, in some cases, are willing to consider an increase in their holdings .... Other potential investors include foreign holders of company debt, who are interested in debt equity conversions and the original companies' owners, who are keen to either repossess their companies or to receive forms of compensation. The final group of possible investors are company employees and managers who, in a few cases, would be the ideal buyers." 2.26 The Pnrvate Sector Assessment offers greater optimism about the interest of foreign investors (both western and Asian). Indeed, a number of foreign companies are willing to consider expanding their a-tivities either by new investments or buying public assets provided changes took place in the general business environment (examples are BATA and Lonrho). Other multinationals 3 The classirication did not cover banks, etc. (12 PEs); education sector (3 PEs); Ministries of Justice, Labor and Local Government (6 PEs); and NEC (14 PEs).  Table 2.4: Rehabilitation and Development Plan - Industrial Projects Cumulative Disbursements 1980-88 1980-88 (US$m) (%) Rehabilitation Steel (E.A. Steel Corporation) 9.21 3.53 Textile (Nytil, African Textile Mill, Uganda Spinning Mill) 33.52 12.83 Tobacco (BAT) 7.79 2.98 Beverages (lake Victoria Bottling, Nile Brewery, African Dist) 11.22 4.29 Cement (Hima and Torro plants) 18.73 7.17 Ind. Sector Dev't Loan (UDB and UCB) 73.38 28.09 Edible Oil (ten oil and soap factories) .. 0.00 Ind'l Management and Training 2.69 1.03 Sub-Total (Rehabilitation) 156.54 59.92 New/Major Projects _ __ Sugar (Kakira, Lugazy and Kinyala) 92.67 35.47 Lake Katwe Salt 7.69 2.94 Phosphat E 4.36 1.67 Sub-Total (New/Major) 104.72 40.08 Total 261.26 100.0 Source: Rehabilitation and Development Plan. (e.g., Unilever) and foreign-based enterprises (e.g., the Four-Way Group) were also found to be cautiously interested in undertaking or expanding investments in agriculture and agro-processing, but they are awaiting significant improvement in the business environment. 2.27 While the effective demand for divested enterprises may therefore rest mainly with foreign companies, the Government would rather sell to domestic entrepreneurs. Though this stance is understandable, it may render the whole exercise abortive, since the absorptive and financial capacity of the indigenous entrepreneurs is weak. There are only a few large groups (Sembule, Mukwano, Mulwana) that may have the resources to absorb and manage large industrial PEs, and the role that Ugandans abroad could play in this process seems largely unknown. The situation is complicated and constrained by the undeveloped nature of the financial system, which for instance, will not be able to bring together capital from a large number of smaller investors. The only scope for significant divestiture therefore lies in attracting foreign capital and technology,  28 Cha/pter 2 Industry Table 2.5: Transfers from Government to Largest Industrial l'arastatals - Capital and Development Expenditures released 1987/88 released 1988/89 budgeted 1989/1990 ('000 U Sh) ('000 U Sh) ('000 U Sh) Kakira Sugar Work 109,047 351,600 50,000 (a) Uganda Spinning Mill 13.385 180,295 690.713 (a) E.A. Steel Corp. _ 172,985 400,000 (a) Uganda Fisherv In. __ _ Sugar Corp. 125,000 . Kilembe Mines 22,499 79,744 50,000 (b) UGMA Engineering 53,000 Uganda Livestock 5,825 50,979 150,000 (a) Kinyala Sugar Works 31,864 31,632 75,000 (b) ULATI 30,000 _ Hima Cement 1,500 647,620 (a) Tororo Cement 350.000 (a) I otal transfer 936,693 1,619,018 2,484,333 (a) investment (b) contribution (c) other classifications Source: Section I of the Budget. perhaps made more palatable by joint ventures with local entrepreneurs, by improving the climate for investment and operation of business enterprises, including settling claims on expropriated enterprises and unsettled repatriation of dividends and fees. Review oW Investment Expenditure 2.28 In the context of PE reform and the recommendations of the SARAPS study, there would be very limited need for direct public investment in industry. Nevertheless, this kind of re- appraisal has yet to be fully accepted and internalized within the Government. Indeed, during the past few years, investments have continued to take place in PEs. Some of these are recorded in the budget; others do not go through the budget, and one must rely on the RDP but even the RDP does not provide full coverage of puolic industrial investments. These accounting problems, notwithstanding, it is important to identifv the principal PE industrial investments, their rough orders of magnitude and their economic viability.  Table 2.6: NMajor Outstanding Loans to Parastatals by 'rhree lajor Banks UCB (1989/90) UDB (1989/90) EiADB (1988) ('000 U Sh) ('000 U Sh) ('000 SDR) NYTIL 252,233 713,916 2,178 United Garments 456,006 Victona Bottling 450,423 - 2,244 ULATI 3,156 189,170 Uganda Brewenres _ 96,614 Tumpeco 96,239 _ | Kiira Saw Mill _ __ -__ 79,901 1,133 Uganda Cement 6,133 61,667 1,177 Lake Katwe _I - 2,023 Source: UCB Credit Control & Debt Recovervy UDB Status on Lines of Credit and data base from the Management Information Svstem, EADB Annual Report 1988 and interviews. 2.29 Investment Expenditure as Shown in the RDP. It is important to note at the outset, as stated in Chapter 111, Volume I, that there are problems in recording development expenditure in the RDP, and that disbursements are probably overstated. With this caveat, the RDP estimates that US$260 million have been invested in the manufacturing sector since 1980 (see Table 2.4). It is estimated that 60 percent was spent on rehabilitation focused mainly on: textiles (NYTIL, ATM, USM), US$34 million; beverages (Lake Victoria, Nile, East African Distilleries), US$11 million; steel (East African Steel), US$9 million; and lines of credit to Uganda Development Bank for public and private small and medium scale enterprises, US$74 million. The new projects utilized US$104 million mainly for the sugar project (US$93 million), with the rest going to two projects under implementation: Lake Katwe Salt Project (US$8 million) and Phosphatic Fertilizers Project (US$4 million). 2.30 Development Expenditure forIndustry as Shown in the Budget. Transfers from the MOF have been classified as investment in parastatals (usually equity contribution) as well as contribution to parastatals (direct loans from the Treasury).4 In FY88/89, the three largest rehabilitation projects (Kakira sugar Works, Uganda Spinning Mills and East African Steel) accounted for 50 percent of total development expenditure amounting to about US$4 million (Table 2.5). In FY89/90, USM, EASCO and Hima Cement accounted for the bulk of Section I (or locally financed development expenditure) amounting to about US$6 million; in addition, under Section II, ATM 4 In some cases, 'contribution to parastatals' finances current costs For instance, the FY89/90 budget transferred funds to enterprises whose rehabilitation had been postponed and production discontinued. In these cases, transfers are likely to finance the salary of workers still employed to providc hasic maintcnance of equipmcnt and security against looting (e.g., Kilembe Mines).  30 Chapter 2 Intdustry received US$1 million through a loan from BADEA. In FY90/91 LISM and IASCO were allocated about US$1.3 million, while US$0.2 million were allocated to the National Enterprise Corporation (NEC) under Section 1. In addition US$6.5 million in the form of a loan from Spain were budgeted for NEC under Section 11. The budget provided for a BADFA loan of US$5 million to be channelled to ATMI. These figures lead to the conclusion that the chief direct beneficiaries of government budgetary investment and support have been: Kakira, USM1, EASCO, ATM and recently, NEC. 2.31 Government Guaranteed Loans through the Banking System. Indirect subsidization and expenditure in the form of bank loanis has also taken place. Many PEs have large arrears with banks (Table 2.6). Furthermore, interest rates have been negative and interest payments are sometimes waived. The development bank, itself a PE, is unable to enforce repayments by PE. PEs that would not be eligible for new loans under normal commercial lending rules can still obtain credit through government guarantees. By end 1989, government guaranteed loans were estimatud at US$60 million, with the principal beneficiaries being EASCO and NY T IL. 2.32 Overall, therefore, the Government has made large investments in a number of parastatals over the past few years. In this context, it is important to assess the economic viability of these investments. In addition, the RDP lists other projects in which the Government plans to invest; the economic viability of these projects needs to be examined as well. 2.33 Annex A summarizes the results of detailed subsector and project analysis in the parastatal industrial sector contained in Annex B. Briefly, the analysis indicates that the economic viability of the following projects in which the Government has continued to invest is unproven: * Lake Katwe Salt: severe technical problems, unproven process, no assessment of viability, and potential cost of US$33 million; 3 EASCO: insufficient input supply, DRC estimate above one, investment cost likely to be 70 percent higher than a similar private company, unproven economic viability, ownership/management problems, large working capital requirement of US$10 million, and total cost of US$20 million; * Tororo Cement: inadequate availability of limestone, cost of producing cement will be twice that of Hima, unproven economic viability, total cost of US$30 million; * Uganda Spinning Mill: unproven economic viability; * National Enterprise Corporation: no information available. This is a new PE in the Ministry of Defense with the original rationale being to utilize the services of excess army manpower for productive purposes. However. 12 new PEs were set up under NEC last year just when the Government was trying to reduce its ownership and control of PEs. NEC subsidiaries are involved in normal commercial activity; it is unclear why the State, leave alone the army, should have comparative advantage in this and be expanding the scale of operations. There are apparently cash flow problems. At the very least, NEC operations need to be made transparent and subject to the same test of economic viability as other PEs, if only to stop criticism which may or may not be well founded.  Chapter 2: Inaustry ,3 2.34 It is roughly estimated that based on budgeted allocations, direct public expenditure on the above activities could amount to c!ose to US$20 million in FY89/90 and FY90/91. The total investment cost in these parastatals, however, is over US$100 million, though some of it is sunk cost by now. While about 60 percent of recent budget allocations for these enterprises has been externally financed, these have been in the form of loans. It is difficult to conceive of a situation where these loans would have no alternative uses involving higher returns; or a situation where the loans are available for these projects and these projects only. By international standards, the extent of PE industrial investment that has taken place during the last few years is not large. However, given the critical need for expenditures in other sectors and the significant underfunding of basic economic and social services, this expenditure has considerable opportunity costs. More significantly, the economy is likely to get strangled with inefficient enterprises with recurrent losses, and net requirements for foreign exchange and budgetary support. 2.35 Of all the PE projects that were examined in the context of this review (see Annexes A and B), only four had a positive economic rate of return. These are: two textile mills (NYTIL and ATM), Hima Cement, and Phosphatic Fertilizer Project. However, even with these projects, there are problems and risks regarding: * size of the investments, which is well above the capacity of Government to raise from its own equity funds (the investment in each textile mill is around US$25 million; the cost of the cement plant is about US$50 million; the fertilizer plant cost is well above US$100 million); * market risks are particularly high for the fertilizer plant; 70 percent of its sales are to go to one market -- Kenya -- which however imports the bulk of its fertilizers under externally financed commodity aid; * technical complexity of all these projects; and * managerial and financial weaknesses of the implementing PEs, NYTIL and ATM. NYTIL is potentially the best textile mill in the country, but made losses in the past five years. ATM has a private partner, but has continuing management and technical problems. 2.36 Consequently, the risks inherent in these projects are high and opportunity costs of scarce public resources high. Accordingly, pre-conditions for going ahead with these projects should be: * identifying private partners willing to take a prominent position by significantly contributing to equity and the mobilization of funds, and by providing the bulk of technical and managerial input. Equity partnership is especially important in the cement and phosphatic fertilizer plant. * ensure that NYTIL and ATM are managerially and technically strengthened (possibly through a management and technology contract) before they are allowed to implement and manage the project investments. 2.37 In summary, thie primary thrust of the Government's policy in the industrial sector should be to create an enabling environment for efficient and rapid growth by the private sector. Liquidation of non-viable PEs and divestiture of other industrial PEs are also key areas for action. While attempts need to be made to restructure remaining PEs, the process may need to be phased in view of the demands it will place on an overstretched public service and scarce resources. In the meantime, public industrial investments should be strictly limited unless economic viability is proven and private participation is available. There are many other pressing requirements for public expenditures which would have higher economic and social returns for the economy.  32 ChapteU 2' Idustry Anitex A Suunimiar of he Recommendations for the RD)P' Projects_ Projects BlIRR Mlain Rcommendations African Textile Mill 28.8 Management and tehnological strengthening conditional to any major investment Nytil Textile 25.5 Is a sector priority. Quick implementtation essential. Management and technological support reuluired. Phosphate Plant 14.0 (a) Strong private partner conditional for project implementation. Partner should contribute financial _________________ _ ._ managerially, providinig the rechnical hack-up and market ties Hima Cement 8.6- (b) Strong private partner conditional for project 12.8 implementation. Partner should cor.tribute tech financially and managerially and assist in project implementation Edible Oils/Soap Plants na Sector study and economic viability of proposed plants' rehabilitation required before any investment is undertaken. Lake Katwe Salt na Apparently not viable. Economic viability has to be proved before any new expenditure is undertaken E.A. Steel Corp. na Apparently non viable. Domestic resource cost should be estimated before operations start. If not economically viable the plant should be closed down. African Distilleries na Economic viability has to be proved before any major investment Lake Victoria Bottling na Project completed. Nile Brewery na Project completed. Uganda Spinning Mill na Economic viability has to be proved before proceeding in the I rehabilitation. Tcroro cement na Non viable. No investment should be undertaken (a) the EIRR estimated in the project feasibility study was 16.8% but seems to be on the optimistic side. (b) the two EIRRs refer respectively to the rehabilitation of line 2 alone and line I and 2 together.  Ctiap'Oro 2 ltdIu,.stty 33 Aniwex B I)etailed Atnalvscs of Investmernt Projects (a) Ieverage In(lustry 1. Tlhe Sector. 'I'he beverage industry is an important source of' government revenue and consuomer expend iture. 2. In the mid-1980s Lake Victoria (producing soft drinks) and Nile lBreweries (producing beers) had both shot-run l)RC below I. Freight costs for beverages are high and therefore there seems toi be scope fOr these products to he manutactured in Uganda. However, betore any new capacity is constructed and before any signitflant rehabilitation and modernization is undertaken: (i) a serious attempt should be maade to esn;mate current and projected demand, review the availability of' inputs (especially bottles) and marketing arrangements, (ii) estimate the EIRR of projected investments, and (iii) ensure that the project employs latest technology and provides for modern management support. 3. Further, the beverage industry poses an important issue as to what should be the role of the Government in the ownership or management of productive assets. Lake Victoria and Nile Breweries were identified as possible candidates for divestiture but in the past Government did not agree to this. Nile Breweries is expropriated from the former owner (Madhvani owned 95 percent). There is no reason to think that beverage is a "strategic" industry to be kept within the realm of public ownership. Accordingly, the Government should reconsider this strategy and reduce its direct role in the sector. 4. The Projects. With the exception of East African Distilleries (EAD) Ltd., the beverage industry rehabilitation program has experienced no difficulties in funding to-date. The EAD project has never fully taken off as some equipment had been held at the factory for several years. The main reason is that EAD has not been able to raise the finance necessary for installation of the equipment. The estimated costs of the rehabilitation and installation of new equipment (that would double the capacity to 4 million liters a year), is US$11 million. (b) The Textile and Garment Industry 5. The Sector. Textile is one of the largest industrial sectors in the Ugandan economy with an important public segment that consist of nine enterprises: Nyanza Textile Industry Ltd.; African Textile Mills Ltd; Uganda Spinning Mill Ltd; Uganda Garments; United Garment Industry Ltd; Uganda Blanket Manufacturers Ltd; Uganda Fishnet Manufacturers; Uganda Bags and Hessian Mills Ltd. There are also many private enterprises such as MULCO. 6. The Textile Sector Project Profiles include three major investment propositions for the following enterprises: Nyanza Textile Industries Ltd.(NYTIL); African Textile Mill Ltd (ATM); Uganda Spinning NMill Ltd. (USM). IJSM is not operating at present due to a leaking roof and lack of spare parts; NYTIL alone accounts for more than 50 percent of total textile and garment production (in value); ATM produces 5 percent of the total. Some mor-, enterprises (both public and private) are included in the list of enterprises which could receive loans from the "Industrial Sector Development Loan" (Project Profile IT 07) through development or commercial banks if externally financed line-of-credit becomes available.  34 Chapter 2: Industry Aninex B. 1: Summary or Proposed Investments - Textile Industry Ctirrcnt Prc s nt Future Total Addit. EIRR DRC prodution capacity capa.iy cxpendii investment (n_mtcrts/ri) (metcrs'n ) (meters/m) (USSm) (USS'm) NYTII. 11 .3 35.7 36.8 6 26 24.0 25.5 < I (d) (a) (b) (b) ATM 1.2 12.0 25.4 8.60 26.8 26.8 na _ ____,,,,,___,(a) tb) (b) USM 0.0 na. 3.5 7 00 U ShS30m na. na _________ __ ______ ________(1) (a) (c) _ _ _ _ _ _ (a) figures from RDP (b) figures from P-E Inhucon Textile Sector Study for Uganda (c) from Background to RDP (d) from 1986 World Bank Industfial Sector Report (e) tons of carded yam 7. Market Demand. The rehabilitation and extension of existing mills is justifiable in terms of market demand; the overall market is depressed and average cloth consumption per capita (1.3 meters) is less than it was in 1972 (4.3 meters). Domestic production (1 I million meters) is now equal to only 15 percent of total consumption. Demand in the year 2000 is estimated in meters at 107 million. Therefore, there is scope for significant increase in domestic production to enhance its share of the domestic market. Substantial import of second hand clothing (43 percent of the market) is allowed by the Government to meet the domestic demand. At present it would be impossible for local industries to compete with second hand clothing, but as per capita incomes rise second hand clothes will likely to be substituted by new clothes. 8. USM will be producing carded yarn only and thiE is not likely to be easily exported. It could however provide a supply of yarn to other factories and possibly as an input to other mills. USM production could obviate the need for other mills to rehabilitate their own processing and spinning sections, providing its operations are cost effective. But this is a risk and USM should not proceed wikh a project to provide yarn if market (i.e. other textile mills) do not have need for it. 9. Cotton Supply. Cotton supply recently was at an all time low of less than 10,000 bales; this compares with an output of over 450,000 bales in early 1970s. It is not ascertained, at this point in time, whether local lint production will grow suffi-iently to supply the needs of the local industry. Besides, the Government has already committed cotton export through barter agreements worth US$430 million spread over the next three years. 10. Presently, cotton ranks lowest on gross margin returns per hectares, compared with the main competing crops. It should be assessed: (a) whether the net domestic resource cost of reviving the textile industry based on imported lint would be lower than doing so depending on local supply; (b) the advantage of exporting Uganda's high quality raw cotton, for which there is  a rea.lv m,iar-ket: and, as a co nsequence, (c) import cheaper substitutes (such as synthetic tibers, for whiclh heree Is apparently consumer's preterence) tor manufacturing. 11. F'inancin^g. TIhe Italian government has committed US$17.5 million lor the rehabilitation ot NYII. . Also, Ol)A (UK) is considering providing tinancial assistance to NYTIL and to conduct managemiient audit. In the past, Abu Dhabi [und and iIADIA tinanced rehabilitation of A 1 NI but due to non-settlement of outstanding arrears, the tinal disbursement of the loans (US$2.9 million) had been held up. UStI was built by USSR, who is nowv in chiarge ot the rehabilitation (the ItSSR government has extended a loan equivalent to U1S$7 million). 12. Economic Viability. In the mid-1980s the short term D)RC for NYTII. was well below one. [rom available teasibility studies, NYTIL and AT1NM seem viable investments: the EIRR is above 25 percent ftor both projects. There are, however, some factors that could hamper the performance of these two projects. 13. T'he EIRR for both NYTIL and ATM is sensitive to price changes: a decline in sales price by 10 percent only would bring the EIRR down to) 5 percent tor NYTIL and II percent for ATM. 14, The management of the companies seems too weak to implement major development projects. ATM has been under rehabilitation since 1982; 140 new looms were delivered to the company in 1983 and have not yet been installed. 15. The cash tlow of both enterprises is weak. NYTIL had negative profits for the past five years and is carrying arrears on foreign loans on which it bears the exchange risk. 16. For Uganda Spinning Mill no economic viability indication is available. Recommendations 17. Given the uncertainty on the supply side and the lack of funds, a phased approach should be followed. Priority should be given to NYTIL which is in the least bad condition and offers the best opportunity to make an early impact on the supply. 18. NYTIL would benefit from technical assistance on textile technology and quality control to raise the quality of its products; private partners should be identified to provide management assistance. ATM has a private partner (Patel, 49 percent) but still presents management problems that need to be addressed. 19. EIRR should be estimated and the project viability proved for all textile investment as a condition for any further implementation. Also management and technology support are essential to ensure: (i) competitive costs of production, (ii) the project concept and economic viability have been realistically assessed, and (iii) the projects are implemented in time. (c) The Steel Industry 20. The Project. The metal-working sector in Uganda, of which steel is part, comprises a number of public and private enterprises. Among these East African Steel Corp., TUMPECO, UGMA Engineering Corp, Chillington Tool Corp., are the major public ones. The steel project in the RDP is the complete re-equipment of E.A. Steel Corporation, a joint venture with Government owning 51 percent of the capital and Madhvani Group 49 percent. There is a second project in the metal-working sector (UGMA second phase rehabilitation) which is not included in the RDP.  36 Chtapter 2: Industry IatIt B.2: Suiiititiarv of lProp%)%ed Investmllents: Steel CurreIIt Prcsent I uture Total Additiondl |IRR DRC Productnon C(pacity CapactyN Expenditure Invcstnilent (NIT) (NIT) (USSNM) (UJSSMl) FASCO 22,000 25.000 14.4 (a) 7 (h) na >1 (a) cqUipmcnts sutpphei hy Italianl cumpany otn ,ste (USS l2i( I)lus eCXenditures u) to JuiIe 1987. (b) civsil Aorks, installat ion and commissioning of the plant 21. Mlarket Demand. In the past, EASCO used to be the only steel rolling plant in operation in the country. Recently, a private company (Steel Rolling Mill Ltd.) has commissioned a new plant with a similar capacity to that of EASCO (20,000 MT). Given the lack of recent data on demand (the last available report on the rehabilitation of EASCO was prepared in 1980); due to lack of market study, it is impossible to assess the degree of market saturation when the two plants will be producing. 22. Input Supply. The most critical aspect for the development of the steel industrv is the availability of inputs locally. If both companies reach their rated capacity, the scrap requirement will be just under 60,000 MT a year. The local supply of readily available scrap was estimated (by a study commissioned by UNIDO) at 51,000 MT, with a potential of a further 138,000 MT. That study recommended a scrap facility with a capacity of preparing 36,000 MT a year. The implications are twofold: (a) the plant proposed by UNIDO will not be sufficient for both steel mills; and (b) if all the inputs were to be supplied locally, at the rated off-take the supply of scraps will be exhausted in three years. 23. Economic Viability. In the mid-1980s EASCO was not a viable enterprise, (with a short- run DRC well above 1). No indications are available on the economic rate of return of the rehabilitation now undertaken. However, the importation of scraps to produce billets (as planned by EASCO) is most unlikely to be an economically viable activity. 24. Financing. The total investment cost exceeds US$21 million. On the external funding side, the Italian government has funded the purchase of the equipment that is now on site. On the local funds side, shareholders (Government and Madhvani Group) failed to subscribe equity capital increase which was UDB's pre-condition for financ ng local costs. This has long delayed civil works and project completion, with an impact or tl., financial viability of the project. The steel mill operations will also require a large stock of working capital (US$10 miliion), largely in foreign exchange. The source of finance for this is also not apparent. 25. Recommendation. Investments in the sector should be stopped. The economic viability of the project is not demonstrated. The project implementation -ecord is very poor; it should be noted that the company's total investment is going to be about 70 percent higher than the costs of setting up a similar plant by the private company Steel Rolling Mill.  (d) 'I'he Salt Industry 26. The Project. Lake Katwe Salt project is an old project. The tirst plant was completed in 1978 and commissioned in 1980 to extract 50,000 MT of' common salt and 8,000 MT of potassiumL chloride a year from Lake Katwe. The corrosive properties of the lake's water had been totally underestimated and the plant operated for oriy a short period before severe technical problems forced closure. A new process was pr(oposed by a Swiss company in 1986; and a small pilot plant was set up at a cost of US$0.58 million. On the basis of the pilot plant tests, the company quoted a cost ot' US$20.9 millien for the t'ull-scale commercial plant. The same Swiss company was contracted fbi' the supply of the complete plant and received a down payment of US$3.7 million from the Government, but, thereafter, Government failed to raise the additional t'Linds to enable completion ot this plant.' 27. The current project cost estimate is US$33 million. T'he project is estimated to take 20 months to complete. The contract was awarded in June 1986; by November 1987 the supplier stopped further work due to non-payment. By November i987, the supplier had completed the heat exchanges, re-designed the plant and the processes, bringing the project to a 70 percent design-completion stage. Table B.3: Surnmary of Proposed Investmenits: Salt Actual Present Future Total Additional EIRR DRC Production Ca;acit Capacitv Expenditure Investment Lake Katwe nil 50,000 40,000 7.69 (a) 30.0 na na (a) apparently includes some of the costs of the first plant plus US$4.26m for the new project. 28. Market Demand. The country currently imports all its requirement (about 30,000 T) for common salt. The revised project is based on the production of table salt only and the original capacity has been reduced to 40,000 MT a year. Even so, there will be some surplus for export. 29. Financing. Implementation of the project is held up due to lack of funds. The cost of the new plant in 1986 was US$20.9 million but at current costs it would be in the order of US$30 million. Donors have shown no interest to finance the completion of the plant that was contracted to the supplier without a competitive bidding. It is therefore possible that investment made to-date will have to be written off. 30. Economic Viability. No measure of the economic viability of the project is available. The estimated EIRR of the original project was below 10 percent. However, the delay in project implementation has increased the project cost which affects project viability. Heavy financial burden arising from the unsuccessful first plant (with large arrears with the EADB) makes the venture unappealing to prospective private investors. I The equipment has been stored in a Gcrman port for about three years.  38 Chapter 2: Industry 31. Recommendations. The project presents too many unknowns and seems risky. As the project is domestic-resource based, the feasibility study should be updated and economic viability accurately estimated before any further funds are spent on the project. 32. There are not many plants in the world using the proposed process, which had been specially devised for the Lake Katwe Salt project. It is noted that successful pilot plant tests are not a guarantee that the up-scaled plant would be successful. To ensure that the process supplier has confidence in his own process, an equity partnership and a technology and management contract with the processes and equipment supplier would be required for successful plant operations. (e) The Fertilizer Industry 33. The Project. The Phosphate Fertilizer Project is based on the exploitation of the phosphate deposits of the Sukulu Hills near Tororo and aims at reviving the domestic fertilizer industry, whose major plant (Tororo Industrial Chemical and Fertilizers Ltd.) had been in operation since 1964 but was eventually closed down in 1978. This plant is now irre mediably affected by corrosion and long disuse, and is beyond any possible prospects of rehabilitation. 34. The feasibility study of a new plant was financed by IDA and contracted out in 1982. The study concluded that the best option for the exploitation of Sukulu Hills Phosphate was to establish a single superphosphate (SSP) plant with an annual capacity of 217,000 tons per year (or 50,000 tons of potassium phosphate). Table BA4: Summary of Proposd Investmnents: Phosphate SSP TSP Total Total EIRR (%) Total Capacity Total EIRR (%) Capacity Investment (tons) Investment (tons) (US$m) (US$m) 50,000 96.2 (a) 14.5 50,000 119.34 (a) 16.8 (a) including working capital and interest during construction. 35. In 1989 this feasibility study was updated as the Government felt that producing triple superphosphate (TSP) would be a better option in terms of market potential in the PTA countries. 36. Market Demand. Out of a total production (at full capacity) of 50,000 tons, only 10 percent will be absorbed by the (limited) domestic demand; 20 percent will be exported to Tanzania and 70 percent to Kenya. Two major uncertainties arise: (a) to export a total of 45,000 tons to Kenya and Tanzania, fertilizer imports from other sources by these countries need to be replaced. Since more than 50 percent of phosphatic fertilizers in Kenya and 90 percent in Tanzania come under aid programs, replacing existing sources of imported fertilizers will be convenient to these countries only to the extent that aid funds available to these countries are  C'hapter 2: Industry I fungible for other uses and import of fertilizers can be replaced by other products. The scope for this diversion seems rather limited; and (b) to absorb the 10 percent of production domestically, it is necessary to accelerate the extension of services to the agriculture sector and the provision of incentives to farmers to purchase fertilizers. 37. Input supply. Sukulu Hill deposit is the largest one in Africa, with reserves estimated at about 230 million tons of residual soil with an average grade of 11-12 percent P205 easily minable. On site bonification of the rock could upgrade the P205 content up to 40-44 percent, a level among the highest in the world. The removable phosphate from the ore is estimated to be 20 to 25 million tons sufficient to operate the proposed facility for about 200 years. The phosphate project would rely on the importation of 30,000 tons per year of sulfur for which the port handling capability (in Kenya and Tanzania) needs to be assessed. 38. FYnancing. In both plant configurations (SSP and TSP), investment costs are very high. Foreign exchange component is around 70-80 percent (excluding interests during construction). African Development Bank has accepted the leading role of co-financing the project and to identify equity partners but so far no financial agreements have been finalized. Government of Uganda would bear most of the local cost burden. 39. Economic Viability. According to this updated (1989) feasibility study, the EIRR for the SSP plant is 14.5 percent; in the case of the TSP it would increase to 16.8 percent. This result seems optimistic; it is more likely that the economic return of the TSP project will be below that of the SSP due to higher investment and production costs (possibly close to 12 percent). 40. The economic viability of both options of the project is critically dependent upon Kenya's market. The loss of the main market would bring the EIRR to almost zero. The TSP project appears to be even more risky than the SSP one because it is technically more complex to maintain and operate. It also has an adverse environmental impact due to higher level of emission of fluorine and sulfur dioxide. 41. Recommendations. Subject to project viability, the project should be implemented with the participation of a joint venture partner that would: (a) provide major equity contribution to fund the project; (b) provide the technical and managerial skills required to operate the plant effectively; and (c) provide market arrangement for fertilizers export. This partner would also be in a good position to evaluate the two possible options of the project (producing SSP or TSP). 42. Even when the above conditions are met, some worries remain. If the Government were to finance its share of local costs as suggested in the feasibility study, this contribution would amount to US$13.3 million (TSP option). The possibility of Government being able to raise such resources has to be carefully reviewed in light of available public resources. This is important because government failure to meet its financial commitments would hold up project implementation. (f) The Edible Oil and Soap Industry 43. T7he Project. The project aims at restoring full production capacity of the ten oil and soap factories under the Lint Marketing Board. Total installed capacity of the oil mills under LMB is 4,600 tons of oil per annum and 120,000 tons of soap. Utilized capacity is less than 5 percent for  40 Chapter 2 Industry oil and I perceint for soap. lhe estimated cost of the project is I'S$10 million mainly for maciinery and spares. 44. The Market Demand. MOIT estimated that the potential demand tor laundry soap can exceed 70,000 tons a year; production in 1988 was about 18.000 tons. Nlukwanio, a private enterprise, is the only soap produ.er so far; it has commissioned a new plant that will soon hring the total capacity of MNukwano industries to 42,000 tons. Betore any expenditure in the subsector can be planned, reliahle data on demand and supply ot soaps and culible oil are needed baced on independent and rigorous studies. 45. 7he Input Supply. The main seeds traditionally used tor crushing were cotton seed and a number of vegetable oil seeds, groundnut, simsim, and soya beans (soap stock is a by-product of oil mill operation). The availability of these materials for processing has virtually disappeared. Consequently, Mukwano is totally reliant on importing its inputs. The pr(ogranm ot increasing cotton production will make available only marginal amounts of cotton seed in the short to medium term, as seeds will be required to increase the quantity of cotton grown and not for crushing. 46. Financing and Economic Viability. There is no feasibility study of the oil mills project of LMB. Its economic viability is not known and financing arrangements have not been negotiated yet. 47. Recommendations. There is no legitimate reason for government involvement in this sector. Consistent with the findings of SARAPS, this area of investment should be left exclusively to the private sector. (g) The Cement Industry 48. The Project. The project is designed to rehabilitate the two cement factories at Tororo and Hima, whose total installed capacity is 479,000 tons per annum. Current production is very low (total of 16,000 tons) owing to age of machinery and equipment and owing to power supply problems. 49. Tororo Cement. The prospect of rehabilitating Tororo seems rather gloomy. Preliminary analysis financed by ADB (Scancem Ltd.) of the adjacent deposits reveals inadequate availability of limestone to justify the rehabilitation program. Besides, the cost of producing cement in Tororo would be twice as much that of Hima. Tororo rehabilitation cost would be close to US$30 million (mostly in foreign currency). 50. Ilima Cement. The situation for Hima is quite different. A feasibility study has been recently completed which reveals the position enunciater' below. 51. Mfarket Demand. The estimated demand for cement in Uganda is 434,000 tons/year in 1990, rising to 804,000 tons by the year 2000. Even if these figures were to he lower, the rehabilitation of the Hima plant will not saturate the domestic market. Import of cement will still be required to cover about 50 percent of the total domestic demand.  Lrndprer Z Ii?uustry I 1 52. Input supply. No problemiis are envisaged on the raw materials supply. The total amount of limestone is estimated to be 23 million tons of which 18 million tons have been proved to exist by drilling. Ihe quality of the limestone tends to the maximum acceptability for cement manutacturing by dry process method. 53. Financing. Negotiations ior fund raising are at an advanced stage with the European Investment 13ank, Atrican Development Bank, and DANIDA. EIB would provide US$6-7 million; DANIDA would tinance US$8 million of the investment costs and provide import support (cement would be imiported under the commodity program and marketed by Hima; the revenues would tinance local costs; it is understood that some 43,000 tons of cement would be made available to Hima for an estimated selling value of US$5-6 million); ADB is expected to finance the gap of about US$12 million. The Government would finance local costs largely through the revenues from (DANIDA) cement sales. 54. Economic Viability. The viability of the Hima cement project is strictly linked to the availability of adequate infrastructure and in particular: (a) a regular power supply that could only be guaranteed by means of rehabilitating the national grid from Kampala; (b) an effective railway transportation network that implies the rehabilitation of the Kampala-Kasese line. The cost of these infrastructures has been estimated as follows: (a) power grid: US$40 million; (b) railway line: US$65 million. The rehabilitation of one third of the railway line (180 km) will soon start; this is funded by Italy. 55. The feasibility study on the cement plant has been carried out on the basis of the following assumptions: a. the project will pay transport freight at a price of US$14.38/ton which reflects the "economic price" for the service; b. the project will pay electricity supply at a price of US$0.38 per kWh.; and c. the project will bear 25 percent of the costs of the railway line, at the time estimated at US$50 million. The inclusion of this cost component in the economic analysis of the cement project was justified by the assumption that the demand for railway services (other than for cement transport) might not saturate its capacity. Consequently, the railway would be overdependent on the transportation of cement. 56. Under these conditions, after financing 25 percent of the cost of the railway rehabilitation and paying the economic price for railway transportation ano power, the project is economically viable. The performance improves with the scale of operation. The EIRR is 8.6 percent for line 2 and 12,8 percent for the two lines together. (If the portion of the railway line rehabilitation costs were excluded from the economic analysis the EIRR for line 2 would be 18.7 percent). 57. Recommendations. A joint venture with a foreign company is considered a pre-condition by the prospective donors to commit their funds. The financial participation of a partner would also reduce government's financial exposure. 58. The partner would also provide essential technological support in the project implementation and during operations.  42 Chapter 2: Industry 59. The project implementation schedule should be coordinated with the railway and power rehabilitation projects; the completion of the infrastructures should be conditional to start the cement plant operations.  TRANSPORT Description of the Transport Sector Historical Perspective 3.1 In the early 1970s Uganda was comparatively well provided with transport in all modes. It had the densest road network in East Africa, one that was relatively well maintained and one that allowed effective national and international transport of goods and people. It had central, western and northern rail lines within the country, which were integrated into the multinational East African Railways Corp., and was effectively linked by rail to the ports of Mombasa and Dar es Salaam. Similarly, Uganda had effective international air transport, with Entebbe Airport a major hub for East African Airways and a node for a number of major international airlines. By 1987, however, devastation and neglect had reduced Uganda's entire transport system to a shambles. With s.gnificant exceptions, this condition persists and is a serious impediment to the growth of agricultural production and exports and to the operations of business and government. Certain key highway and railway investments have been made in the last three years, but the remainder of the transport system has continued to deteriorate. 3.2 Yet a healthy transport infrastructure is a major condition for sustained growth and development in Uganda. There are already signs of bottlenecks in certain areas impeding the ability of farmers to market and transport their crops. These bottlenecks will become all the more serious as potential surplus production grows in the interior parts of the country. Another significant challenge looming on the horizon for the transport sector is the rehabilitation of the war- ravaged districts. As security returns to more areas, particularly in the North, prioritized rehabilitation investments will be needed for economic recovery and access to social services. Overall, efficient transport in Uganda will be critical for increased production and income in all areas of the country and for export diversification, enhanced tax revenues and effective social service delivery. Because of the critical linkage with economic growth and the fact that transport infrastructure is at least in part a public good, and an expensive one at that, providing and maintaining transport infrastructure constitute among the most significant challenges for the Government. In view of implementation and resource constraints and the comparative advantages of entities other than the Central Government, it will need to rely on the private sector (e.g., contracting) and local governments (e.g., in feeder roads). Nevertheless, the onus is on the Government to ensure that the transport infrastructure facilitates efficient transport of goods and people.  44 Chapter 3. Transport 3.3 Since Uganda imports all its petroleum products, the 1990 rise in the internatioinal price of petroleum has raised the prices of all transport modes. If sustained over the medium term, these price increases could curtail the growth in demand for transport. The prospective unitication of the official and open market exchange rates would serve to further increase the price ot fuel, since it is imported at the otficial rate. In the short run, there could also be supply shortages, if foreign exchange scarcity constrains the volume of oil imports. Transport Infrastructure 3.4 Uganda's transport infrastructure consists of about 28,000 km of roads, which break down as about 2,000 km of bitumen-surfaced highways, 6,000 km ot classified gravel highways and 20,000 km of feeder roads. There are also 1,200 km of railways, ferry services on navigable sections of rivers and lakes, and an international airport at Entebbe and 13 domestic airfields. Since Uganda is a landlocked country a key challenge is to maintain low-cost, dependable transport routes for exports and imports. In addition to traditional rail and road routes over the Northern Corridor via Kenya, Uganda has since 1985 actively developed an alternative outlet by wagoit ferry from Jinja across Lake Victoria to Kisumu in Kenya and to Mwanza in Tanzania in order to achieve greater flexibility and reduce its dependence on a single outlet to the sea. The trunk route from Malaba on the Kenyan border, passing through Jinja, Kampala and Mbarara, to Katuna and the Rwandese border is Uganda's main domestic and international artery. A second international connector cuts off from this principal spine at Mbarara and proceeds through Ishaka and Equator Road to the Zairian border. Six other major roads connect the main trunk with regional centers in the north and west. An outer loop interconnecting the regional centers completes the primary highway network and is now fully paved with the exception of two graveled sections.' This primary network is supplemented by a relatively dense secondary and tertiary grid of (mostly) gravel highways. 3.5 For 1987, the modal split for total transport tonnage was estimated at 87.5 percent road transport and 12.5 percent rail. Since virtually all the rail traffic was international, the railway was considerably more important for international traffic and carried over 40 percent of these cargoes, including nearly 100 percent of coffee exports and a high percentage of bulk imports, such as sugar, salt and cement. 3.6 The ultimate origin or destination of 70 percent of dry (i.e. non-petroleum) imports and exports is the Kenyan port of Mombasa, Uganda's major outiet to the sea. Like dry cargo, petroleum imports also travel primarily via Kenya but by truck from the Nairobi terminus of the Nairobi-Mombasa pipeline rather than directly from Mombasa. In addition to Ugandan traffic on the northern corridor, transit traffic to and from "ZBR locations" in Zaire, Burundi and Rwanda constitutes about one half of total international traffic. Kenyan vehicles provide most of the heavy truck capacity in the corridor although significant numbers of ZBR and Ugandan vehicles also participate. There was a 13.6:1 ratio of import to export tonnage for Uganda dry cargo carried by trucks across the Kenya border (3.7:1 when ZBR transit traffic is added in) (Table 3.1). Back- hauls to Kenya are consequently mostly empty. Fort Ponal-Hoima and Soroti-Lira.  Ta' e 3.1: Directional Imbalance in International Dry Cargo, Northern Corridor, 1987' Uganda Uganda t ZBR Road Rail Both Road Rail Both Imports ('000 tons) 177 119 296 381 102 484 Exports ('000 tons) 13 112 125 104 112 216 Ratio l/E 13.6 1.1 2.4 3.7 0.9 2.2 Distribution of dry cargo between road and rail is based on the estimate that 90 percent of petroleum imports were transported by truck and 10 percent by rail. The Present Condition of the Road Network 3.7 Three quarters of the 2,000-km bitumen-surfaced highway network has been restored to maintainable condition in the last few years, a major accomplishment largely carried out with donor funding. It now allows relatively efficient freight carriage (except for long customs waits on the Kenyan side of the border) among Kampala, the larger towns of Uganda and the Kenyan road network. 3.8 In contrast, approximately 4,300 out of the 6,000 km of classified gravel highways and virtually all of 20,000 km of feeder roads are almost uniformly in a state of acute disrepair. Only about 1,600 km of major gravel h.ghways (and 600 km of feeder roads) had been rehabilitated by October 1990. Many segments of the unrehabilitated highways and feeder roads are impassable either throughout the year or after periods of rain, and those that are passable impose high vehicle operating costs on their users. Ironically, the accomplishments of recent years in rehabilitating most of the major bitumen and some of gravel highways now add an extra element of jeopardy to the transport system, because a major maintenance crisis for Uganda is looming on these rehabilitated roads. Without a large increase in expenditures for routine and periodic maintenance, they will inevitably revert to their previous poor, often impassable condition. Rail 3.9 The Uganda Railway Corp., the country's parastatal rail operation, inherited 1,232 km of meter-gauge track and some of the facilities of the East Africa Railways Corp. upon its breakup in 1977 (with certain rolling stock reverting only after 1984). Its major operation is now to provide Uganda with international ferry-rail services across Lake Victoria, which connect with the Kenyan and Tanzanian rail systems at Kisumu and Mwanza, respectively. Ultimately, URC wagons reach the alternative seaports of Mombasa, Kenya and Dar es Salaam, Tanzania after  46 Chapter 3: Transport transiting these systems. When administrative and/or technical difficulties in one of the two transit countries constrain capacity oln the route through that country, the Government regards it now as a strategic option to increase tratfic on the other. Under this diversification policy, the Government is attempting to increase traffic on the higher-cost route to Dar es Salaam by requiring that a major part of coftee exports and petroleum imports use this route. The Government's goal is that 50 percent of petroleum imports will he routed through Tanzania, but this has not been achieved; during the first eight months of 1990, the actual Kenyan-Tanzanian split was 74:26. 3.10 Technical considerations (as well as reputedly more expeditious and less costly border procedures) have resulted in the ferry routes displacing all hut petroleum traffic on the now lightly used overland central rail route that crosses into Kenya at Malaba. By 1991, when the Port Bell ferry terminus just east of Kampala reopens to rail traffic, the remaining use of the domestic network for international traffic may all but cease. Prior to then, the main ferry terminus will remain at Jinja, necessitating the transit of a short, but difficult 75-km section between there and Kampala. 3.11 In addition to the three rail ferries, the URC owns a rapidly expanding stock of wagons and locomotives for its international operations; it hopes to increase its mid-1990 internationally usable rolling stock of approximately 1,100 wagons and 60 locomotives and shunting engines by about new 450 wagons and 11 rehabilitated locomotives in the next two years. Uganda's dependence on neighboring-country rail syswte.as is indicated by the fact that at any one time most of its wagons and some of its locomotives are physically operating outside Uganda. The new rolling stock has been deemed necessary to increase total tonnage given the poor wagon turnaround times in Kenya and Tanzania. Significant progress was made between 1986 and 1988 in improving turnaround times, with total tonnage carried increasing from 160,000 tons to just over 400,000 tons, but capacity limitations kept 1989 carriage at roughly the 1988 level. Despite the increase in activity, staffing levels have declined from 7,200 to 5,700 since 1988. This is probably still far too high, but the appropriate staffing level should be derived from a strategic analysis of URC's operations. 3.12 In contrast to the continuing importance of the lake-ferry operation, the internal rail network, much of which remains in a seriously dilapidated state, is increasingly irrelevant to Uganda's international dry cargo freight carriage because virtually all international cargo is loaded or discharged at the Kampala or Jinja rail heads. ZBR international transit traffic to Kenya is all by road, and any future ZBR rail traffic would probably use the Kampala or Jinja rail heads6. 3.13 The central line from the Kenya border to Kampala is the only one of the three internal lines that carries any significant traffic, and almost all of this is on the section between the Jinja ferry terminus and Kampala. Most of this will cease with the opening of Port Bell. URC hopes to restore very limited traffic on the northern Tororo-Pakwach route, which has been closed for several years, and has plans to upgrade the collapsing 335-km western Kampala-Kasese line (with a Phase I cost of about US$65 million for 85 kim) in step with the proposed Hima cement factory rehabilitation. Minor repairs are meanwhile keeping the line open for very low speed carriage. 6 It is doubtful that moving Rwanda or Burundi truck cargoeF onto URC at the Kasese rail head would prove economic, but the Burundi government has recently expressed interest in this option.  3.14 A, present URC continues very limited passenger operations on the Kampala-Jinja line, on the Nasagali spur along the Victoria Nile River and elsewhere on the domestic system, but the extremely poor line speeds resulting from the dilapidated state of the tracks and roadbed prevent efficient use of equipment and result in operating losses. Air 3.15 Air transport in Uganda serves three functions: (i) domestic business and administrative travel and tourism, (ii) regional transport to neighboring countries, and (iii) long-haul international passenger and cargo transportation primarily to Europe. 3.16 Domestic air traffic is now being lightly serviced by Uganda Airlines (UA) and two small private airlines, which provide mostly charter flights; one of the private airlines, Katatumba Air provides a scheduled domestic flight, a twice weekly Cessna service to Mbarara. Uganda Airlines has a minimal domestic schedule, to Arua and Kasese using its Fokker 27, which it also uses for international service. The present virtually non-existent domestic air service deprives outlying districts of effective administrative and business contact with Kampala. Nonetheless, lack of demand, due to depressed government, trade and tourism, is believed by UA management to be the major factor now limiting the development of domestic service to these outlying districts. Other factors, which may be as important or more important, are: (i) poor maintenance of and services at 13 upcountry airports, with the minimal needed repairs delayed by an overambitious rehabilitation program, (ii) the security situation in certain northern districts, (iii) inappropriately large UA aircraft (two-pilot, 42-seat F27s), when Twin Otters or smaller aircraft would allow lower cost operations and higher flight frequency at more airports, and, finally, (iv) an uncertain regulatory environment, which inhibits private entry into scheduled service. 3.17 Uganda continues io have significantly deficient regional air service to neighboring countries as well. The service it does have is heavily dependent on a single airline under the control of a neighboring country. Uganda also lacks daily service to its key regional trading centers Nairobi, Mombasa and Dar es Salaam. Kenya Airways provides only thrice weekly flights on Boeing 707 or widebody aircraft, and even then, transfers are necessary in Nairobi for Mombasa and Dar es Salaam. UA also uses its Fokker 27 to provide a twice weekly flight to Nairobi and service to Dar es Salaam. 3.18 In contrast to the domestic and regional arenas, long-haul service to Europe and Asia is a relatively bright spot and may get brighter. Passengers to Europe now have a choice of a once-weekly Sabena Airlines non-stop to Brussels (with an additional weekly frequency through Rwanda and Burundi); a twice-weekly Ethiopian Airlines flight to Frankfurt and London (requiring a change in Addis Ababa); and connections in Nairobi to a large number of daily flights to Europe on airlines such as British Airways, Pan American, Lufthansa, Air France and Alitalia. UA nominally still operates a weekly flight to Rome and London, but since the tragic destruction of its Boeing 707 in Rome in late 1988, this has involved wet-charter or joint-flight arrangements with African or Middle Eastern airlines. Both British Airways and Air France have established ticket offices in Kampala and are negotiating to establish wide-body service between Entebbe and their home countries, if security and fire-service requirements can be met. Increased direct service to Europe would have the advantage of reducing Uganda's dependence on the present wcak Entebbe-Nairobi regional link to access major international service. Uganda Airlines is now considering leasing additional aircraft to use in joint operations with a regional airline.  3.19 On the air cargo tront, ground services tor horticultural and other long-haul intel national cargo are rudimentary and unreliable and constitute a major transport constraint to the development of high-value horticultural expor-ts. Despite this, a private company operates a wekly Boeing 707 produce flight to Germany. I'he lack of effective cargo services on the ground and in the air is, in fact, matched by low supplies ot' high-quality marketable prodluce. If British Airways and Air France expand total wide-body service from Entebbe, there would probably then be suit'tficient belly capacity to support emergent horti.ultural exporters. Uganda Airlines has recentlv leased a 1B707 freighter to resume cargo operati(on to Europe and the Middle East. Sector Strategy 3.20 The Government's transport sector strategy is firmly linked to its overall economic strategy in several crucial ways: efticient transport of export crops increases export competitiveness and conseqLlently exports and tax receipts, and thereby supports macroeconomic stabilization and economic growth. Etficient transport also promotes economic growth by providing least-cost import of productive inputs and internal movement of goods and people. Beyond its effect on growth, et'icient transport helps to alleviate poverty by increasing the efficiency of goods and labor markets used by the poor and by facilitating social service delivery in remote places. 3.21 Although Uganda did introduce rail lake ferries as a new modality, there has been a general tendency in transportation and other sectors to try to restore the situation as it was in 1970. This approach risks unresponsiveness to major macroeconomic changes since 1970, such as the doubling of population, changing production and export patterns and opportunities and the country's severe resource constraints. Within the overall strategy of restoration, the Government has given priority to rehabilitating the main international road and rail corridors, secondarily the principal internal trunk highways and the western rail line, and lastly, the lesser highway and feeder road network. However, as discussed further below, two elements of the Government's transport strategy: rehabilitation of entire domestic rail service and of entire feeder roads network requires careful rethinking in the context of present realities. The Government's strategy toward air transportation is less well defined. With the grounding of Uganda Airlines in early 1990 as background, the Government is in process of determining its overall strategy in tile sub-sector. 3.22 The major difficulties in translating the Government's transport strategy into programs and policies replicate its problems in all other sectors - low level of public resources, unreliable budgetary releases, and weak administrative capability. These difficulties are, in fact, overwhelming in the transport sector and, despite the high priority accorded the sector by the Government, they may force both a revision of the present road strategy and a restructuring of institutional arrangements in the sector.  Issues in the TIransport Sector Expenditiire Program Roads 3.23 Economic Benefits of Road Improvements. The preponderant benefit to be gained from maintenance and rehabilitation of highways and larger roads is the reduction in vehicle operating costs (VOCs). Improved road conditions can often reduce VOCs by 100 percent or more, and because on heavily trat'1icked roads, these costs are usually a large multinle of highway rehabilitation anad maintenance costs, even small percentage reductions in VOCs by decreasing road roughness may be economically justitiable. This applies particularly to roads with average daily traft'ic counts above 200 vehicles per day. Many teeder road segments, however, with low average vehicle coLunts (below 15-20 vehicles per day) cannot justit'y rehabilitation expenditure whose purpose is to reduce vehicle operating costs, since the total potential reduction in VOCs is small. 3.24 Accessibility of feeder roads is a second economic benefit separate from reduction in VOCs. Accessibility to trucks (or bicycles) that transport agricultural produce and to the vehicles of agricultural extension workers are examples of economically important accessibility. Improved communications is another benefit of improved accessibility. Since drainage problems rather than surface quality are the main threats to accessibility, action to correct the most serious drainage problems rather than full, expensive rehabilitation is the optimal means to achieve the benefits of accessibility on low-traffic feede. road segments. 3.25 Competilion for Road Resources. Due to institutional i imitations, the Government's road strategy -- namely, rehabilitation and maintenance of the whole road network -- cannot be carried out in the near term. Priorities need to he selected that are different from those that have been selected to date in the road program. Choices should be made to emphasize maintenance rather than rehabilitation, so that waste of resources and the need to repeat investments within a short timespan can be avoided, and to invest in road investments that have the highest net economic benefits. The situation of the country has changed since the feeder road network was established. Full rehabilitation of much of the feeder road network will not be economically justified even in the medium term, and scarce institutional resources should be used to achieve more important objectives, including accessibility of the feeder road network. 3.26 Maintenance Crisis. Uganda will almost inevitably encounter a serious maintenance crisis in the next few years on the roads already or scheduled to be rehabilitated. This crisis can be moderated but not avoided, since by June 1991 only about 1,300 km out of 3,400 km of rehabilitated roads are likely to be receiving regular routine and periodic maintenance. Serious disinvestment in the road network from lack of maintenance can be limited but not entirely avoided by maximum increase in maintenance performance starting from the current limited performance. Gravel highways are particularly prone to deterioration from lack of maintenance and can revert to a condition where rehabilitation is again required in 1-3 years depending on the traffic. At this point the investment in the prior rehabilitation is largely lost. 3.27 The prior practice of most donors of financing investment but not maintenance has set up perverse incentives for the Government. A shilling of budget effort on rehabilitation funding typically commands ten times the resources that a shilling of budget effort on maintenance commands. Donors should eliminate this perverse incentive by financing rehabilitation and  maintenance at the same percentage level. Due recognition should also be given to the fact that the toreign exchange requirements of even routine highway maintenance are two thirds or more of total expenliture in the cases of both gravel and bitumen roads, and even feeder road maintenance has a foreign exchange requirement of about 40 percent under Ugandan conditions. 3.28 Most ot the gravel highways and virtually all of the feeder roads are in an unrehabilitated state and will remain that way for many years. They exact very high VOCs from users but nevertheless provide valuable transport services even in their present state. Some level of routine maintenance an I spot improvements of these roads would generate high economic returns and should be provided for quite apart from any eventual rehabilitation. The most important of such spot improvements are corrections for very poor drainage, which is responsible for most instances of impassability, and the installation of well-chosen culverts is the most important of the mneasures that can be widely and economically taken. 3.29 The Need to Upgrade Heavily Trafficked Pails of the Highway Network. Significant lengths of highway network will need to be upgraded within the next several years in response to increased traffic loads. These include segments of the main bitumen trunk spine that are receiving significant heavy vehicle traffic, which is causing cumulative damage to the base course of these roadways. To avoid such damage, they need to be strengthened with an asphalt-concrete overlay. It is an expensive process (some US$60,000/km) but less expensive than the reconstruction of the highway once it has failed (some US$250,000/km). Increased traffic above a certain level (250 average vehicles per day) also makes the bituminization of gravel highways highly economic. Without bituminization, the roads would either require very expensive maintenance or at certain traffic levels would be unmaintainable. In the next 5-10 years, it is projected that more than 300 km of existing bitumen and 1,700 km of gravel roads should be upgraded. 3.30 New Strategy For the Road Program 7. A practical long-run road strategy that is designed to be carried out within the Government's institutional constraints might involve (1) the rehabilitation and continuous maintenance to at least good-to-fair condition of all major highways, (2) the upgrading, as required by traffic, of significant portions of the primary highway network, (3) the rehabilitation and maintenance of the country's major feeder roads to a good-to-fair condition (approximately 6,000 km may be economically justified in terms of savings in VOCs) and (4) spot improvement, but not rehabilitation. of most feeder roads to keep them passable to heavy vehicles but generally only in fair-to-poor condition. Tfhe : ads kept passable by spot improvements, principally culverting, would typically allow all-season use, bnt under this strategy it would not be economically worthwhile to keep some segments of some roads accessible to large vehicles during rainy periods because the costs would outweigh the benefits.8 The physical targes for road rehabilitation and maintenance will be further finetuned together with government in the context of a Transport Sector Memorandum being prepared by IDA. Even if large vehicles would not be able to access all feeder roads at all times, bicycles and motorcycles could. A rocent traffic survey in Southwest Uganda found that bicycle traffic was 22 percent of average daily traffic. Goods transported by bicycle were matoke, other crops, poultry, liquids in jerrycans, and charcoal. The Dairy Corporation reports that almost all the milk delivered to its collection centers is by bicycle.  3.31 'I'he most important benelit of this road strategy would he that the Government could use it to detfine and plan the execution of a viable program to as quickly as possible gain the transport benetits ot having all the nation's major highways in good-to-fair condition and most of its feeder road network able to carry agricultural traffic. The key difference between this and the present strategy -- to rehabilitate the whole network -- is that scarce resources would be applied to the most economically important road transport infrastructure. Rail 3.32 Curreta Governmient Rail Strategy. The Government's long-run goals for rail are to continue to incre Mfe the etfficiency and capacity ot' the presently international rail-ferry service to Kenya and Tanzania and to restore the roadbed, commurications and fac;lities of the now dilapidated internal railway so that it can serve as the "backbone" of Uganda's within-country transport system. With tirst priority going to the improvement of the ferry services across Lake Victoria, the Government also aims in the long-run to reestablish volume freight service on the central and western lines (Kampala-Malaba and Kampala-Kasese, respectively). Less well defined is what to do about the Tororo-Pakwach line, currently out of service due to insecurity, and about rail passenger operations, which are probably not viable without subsidy from other operations or from the budget. 3.33 The Export Tariff Issue. A key issue in international rail service is the rail export tariff and, by implication, the level of investment in rolling stock. The grant of monopoly transport of the coffee crop to URC by presidential directive has had a benefit of allowing the country to accomplish the important national security goal of shipping a significant part of its coffee crop via Tanzania. Thus, some restriction on shipping mode for coffee is iound to continue in order to maintain diversification of shipping routes. This can only be done by rail, s.nce for the foreseeable future truck transport will be 100 percent through Kenya. Nevertheless, by preventing the developm'nt of a free market in export transport services, the Government has been depriving coffee ex u.ers of the opportunity to bid down current transport rates charged by URC and KR and retain a larger proportion of the internationally fixed coffee price. There is some indication that the Government is rethinking the monopoly role of URC in coffee transport. With, the elimination of Coffee Marketing Board's monopoly on coffee marketing, on August 31, 1990, three cooperatives (Masaka, Mbarara and Gugisu), were given the right to directly export coffee, which "shall be transported using the most effective means, be it road or rail or both." This approach may well allow the Government to meet its needs for diversification of routes while encouraging completion and cost reduction. 3.34 The large imbalance in the import and export tonnage of dry cargo through Kenya destined for Uganda (70 percent import tonnage vs. 30 percent export tonnage - Table 3.1 above), creates a large backhaul problem for transport companies. If URC (and Kenya Railways whose tariff constitutes two-thirds of the present combined tariff Kampala-Mombasa) had to compete with trucks for export freight, its export rates would probably fall and its import rates rise. If both URC and KR responded flexibly under full pricing freedom, with lower backhaul marginal costs than trucks, they could probably compete effectively for non-reserved coffee and other traffic to  52 Chapter 3: rransport Mombasa.9 Nevertheless, the demand for rail services might be reduced over present projections once the market tor transport services had fully adjusted to a free market and the rates for both import and export traffic were established.'0 Thus, transport pricing policy, which has important obvious implications for the profitability of coffee and other export production, may also have important implications for the rail investment program and should be fully studied to avoid over investment. As long as KR is not in a position to pursue an autonomous and commercially oriented tariff policy, URC cannot offer flexible backliaul rates. Continued consultation with KR is in order. 3.35 The Economics of Domestic Rail Service. The major medium-term issue in domestic rail service is whether to continue to strive to rehabilitate it to serve in the longer run as the transportation backbone of the country or to abandon it entirely. Because of its present moribund state, restoration of the domestic rail network would require very large rehabilitation investments. In the years 1986-1988, the western line to Kasese carried only between 25,000 and 30,000 tons per annum. The reason for considering abandoning this line is that the concept of rail as a transportation backbone is probably obsolete in the context of present-day Ugandan transport. Rail investments should be weighed against investment in other transport corridors, and it is doubtful that investment in more than one transport corridor to Kasese and Ft. Portal can be economically justified. There is now one competitive highway in existence, which may be all that is economically justified considering the other investment needs of the country, and there is another one under construction. It has been suggested that the combined rehabilitation of the Hima cement factory, associated power lines and the western rail line (to carry the cement) might result in a combined operation that is economically justified even when considered in the highway context, but the economic analysis has not been carried out, Much is at stake, because rail rehabilitation is very costly. 3.36 Investing in or even continuing operation of the northern and central lines is also problematic. Neither line would appear to have economic justification in terms of cargoes or passengers currently or potentially carried. The lake ferries now carry all but a minor percentage of total international rail freight traffic and could easily carry it all. The difficult Kampala-Jinja section of the central line, which connects Kampala to the Jinja ferry terminal, will also lose its principal function in 1991, -""en the Port Bell terminal near Kampala reopens to rail ferry traffic. Consequently, the rehabilitation of the central line needs to be economically evaluated. The potential of the central line to carry petroleum products, however, and its strategic value must be assessed within this context. The reopening of the northern line also needs to be subjected to economic analysis before action is taken, in view of existing road corridors, such as Kampala- Karume Falls-Gulu and others being studied for rehabilitation, such as Soroti-Lira and Jinja- Budaka-Mbale. Considering the efficiencies of bus transportation (even taking account of induced highway maintenance cost), it is doubtful tihat significant investment in passenger rail service can be justified on economic grounds. If the activities are found to be nonviable, a phase-out of operations (or their non-reestablishment in the case of the northern line) should be considered. 9 Presumably, some export cargo would be rcscrved for the Tanzanian route under national security reasoning. How this would be financed would be an important aspect of the policy. t0 Apparently feeling market pressure, URC only asked for a small U Sh tariff increase in its recent tariff application, which in fact would amount to U.S. dollar decrease of 32 percent. Moving in the other direction in contrast, KR increased its dollar coffee tariff for Uganda coffee (Kisumu-Mombasa) by 15 percent in 1990.  3.37 Rail Investments and the Budget. The questions raised here about rail investments suggest a reform in budget procedure. URC's investment program is currently carried off budget, but as a government entity attached to the Ministry of TIransport and Communications, the Government is ultimately responsible for its debt. Its capital purchases should consequently be entered in the development budget and subjected to analysis of the same rigor as other national investments. Bus 3.38 Turning to the bus transpoirtation sub-sector, the Government's long-term vision of the role of parastatal firms within the bus subsector is not well defined. Road passenger transport is now predominantly private. Private vehicles are mostly minibuses, but there is also a significant private fleet of larger buses. If not in a dominant position, two parastatal bus companies are nevertheless carrying signiticant numbers of long-distance passengers. Neither receives budgetary subsidies. If the Government wishes to end its role in the subsector, which seems wise considering that the competitive character of the industry is well established, both parastatals would be active candidates for privatization (one as a firm -- PTC -- and the other as a collection of assets -- UTC). In any case, action may have to be taken to keep UTC from either going bankrupt or becoming a drain on public funds. One practice Government should discontinue is the purchase of buses for the parastatals without the involvement of their managements. Fleet decisions such as bus purchases should be fully delegated to them. The companies have had difficulty in absorbing the Chinese and Leyland (Kenya) buses recently purchased for their account, and the result has been unnecessary fleet diversity and the associated maintenance problems. Air Transportation 3.39 The major issues in air transportation involve the future structure of the subsector, the Government's policies, and the role of Uganda Airline_. There are important issues in each of the three air services -- long-haul international, regional and domestic -- that need to be resolved, and the temporary grounding of Uganda Airlines presented a rare opportunity for the Government to analyze the structure of the industry and set effective policies in place to increase the ability of air transportation to contribute to economic development. The potential role for Uganda Airlines in each of the three air-service areas should be derived from economic analysis. 3.40 Long-Haul Air Service Issues. In long-haul international service, the main issues are ultimately concerned with how effectively Uganda passengers and cargo can access the main international airline networks to Europe, Asia and beyond. Entebbe Airport can be bound effectively into these networks mainly by attracting additional major airlines (e.g., British Airways and Air France) to provide direct European service. Investments in airport navigation,fire control and security services are the priority investments that must be made to make effective bids for these services, and the significant provision for them in the proposed FY90/91 MOW budget should be retained and perhaps expanded. Major terminal rehabilitation, apart from the modifications necessary for security, however, is of much lower priority. A second major means to improve Uganda's long-haul international transportation is to improve regional air service to the Nairobi hub, which will remain the principal East African hub for the foreseeable future. This would require more frequencies, better provision for cargo transfers in Nairobi and greater attention to scheduling.  54 Chapter 3. Transport 3.41 Pending fuller analysis, the potential role for Uganda Airlines in direct long-haul air transportation to and from Entebbe appears problematic. While UA could add a minor amount of (probably) lower-quality capacity to the market, there is considerable potential for harm from regulatory efforts to bolster its market position. A case can be macie that investment in wide-body air.:raft or aircraft leases -- US$50 million and up for purchase and just as costly under long-term lease -- can access sources of private finance that would not be transferable to other development investments because of the superb collateral constituted by commercial aircraft. Even considering this argument at face value, the commercial and economic viability of a small UA long-haul operation would be in great doubt. An upcoming study should clarify this qiestion." The harm to long-haul transportation from regulation favoring UA could come from market restrictions like the following: (i) a requirement that government officials and others fly only on UA, (ii) a festriction on frequencies or capacity for foreign airlines in order to force passengers to patronize UA, or (iii) the continuation of the ground monopoly to UA that would require other airlines to use its passenger, baggage or cargo services. In light of these potential problems, the Government should carefully consider whether to allow UA to reestablish independent long-haul service to Europe. 3.42 If a gap continues to exist in providing regional connecting flights to Nairobi, UA could improve the quality of long-haul services by providing Uganda passengers and cargo improved access to the international airline network at Nairobi, especially to Asian destinations in case direct Europe-Entebbe service and connections expand. 3.43 The Role of Uganda Airlines in Regional Service. In regional service, there are major unfilled air transportation needs to Nairobi and possibly other regional trade centers (e.g., Mombasa and Dar es Salaam). A potential prima facie case can be made for UA investment in aircraft for regional service, the need for this would be obviated by attracting international airlines into this service. Like that of URC, UA's investment program (including aircraft leases of all kinds) also should be included in and subject to the discipline of the development budget. 3.44 The Structure of Domestic Aviation. When UA was still flying in early 1990, it did not have effective domestic service and provided only two domestic destinations at low frequency. It may be that demand was the major problem, but UA had only two relatively costly F27s to test the demand, and these were also used on its regional flights. What would seem to be needed for domestic service are smaller aircraft, e.g., Twin Otters and Cessnas, which can take off and land on 1,000 ft. grass and murram airstrips. Regional airlines such as UA, particularly state-owned ones, often have difficulty in competition with smaller commuter-type operations unless favored by regulation. The Government should prevent this kind of regulatory bias in domestic aviation by keeping it open for private operators. If the advantages of air over road transportation for administration and business travel to outlying districts do not exist, as indicated by effective demand for private air scrvices, domestic aviation would stay small and restricted largely to tourism. During the initial period, central government investment in domestic aviation should be restricted to providing minimal air navigation services and runway maintenance. Investment in cargo, shortage and refrigeration facilities might best be left to private operators. However, in view of the importance of these facilities and services particularly for export diversification the Government will need to focus attention on identifying and removing constraints to efficient private sector investment. 1 The terms of reference of the forthcoming revised PSWAIR study financed by the Bank cover an analysis of this scope.  3.45 Transitional Status of Uganda Airlines. There are two other notable expenditure issues in air transportation, one a very short-term issue. The short-term issue is, should the Government continue its current financial support to UA despite non-operation? While shut down, UA continues to meet its full 640-person payroll, despite lack of revenues or budgeted subventions from the Government. Its source of funds nevertheless is the Government, which is reportedly providing funds to UA by partial payment of large unpaid agency accounts receivable. Since UA's present work force is probably inappropriately structured for a scaled-down primarily regional mission, many of the staff should probably receive termination allowances rather than continued salary. The de.ision to continue funding UA prior to reorganization should therefore be promptly reviewed. 3.46 Out-of-Proponion Expenditure on Aviation Instruction. The remaining expenditure issue concerns the Soroti Flying School. A disproportionately large share of total budgeted funds for aviation have been spent on this training activity in recent years -- 22 percent of actual expenditures in FY88/89'2, 29 percent of the approved budget for FY89/90 and 40 percent of the much larger proposed budget for FY90/91. It is doubtful that Uganda can afford to support this type of infrastructure at the expense of major shortfalls in capability at Entebbe and other airports and in the context of general budgetary stringency.'4 A consultant's study is needed to analyze the future training needs of aviation agencies, UA and private domestic airlines in the light of the Government's emerging air transportation strategy, and to recommend whether or not the residential institution at Soroti is or can be made to be a cost effective way of meeting the industry's skill needs, in comparison with recruitment, non-residential training at Entebbe or training abroad. Improved cost recovery should also be effected at Soroti. Proposed Sectoral Expenditure Program Transport Expenditures 3.47 In the last four years, according to actual or budgeted data, the Government's transport expenditures have been heavily oriented toward the development budget (Table 3.2 below), with between 48 percent and 84 percent of actual or budgeted expenditures from government resources being spent from the development budget. In U.S. dollar terms, total expenditures display no clear trend. Over 87 percent of expenditures were or are budgeted to be spent on the road subsector (or on mostly road-related general expense categories), with the remainder spent on airport-related expense. Airline and railroad expenditures are not carried in the budget. 12 Includes expenditure on the East African Civil Aviation Academy in FY88/89. 13 These percentages refer to the combined aviation-related budgets of the Ministries of Works and Transportation and Communications. The aviation school's percentages of the parent MOTC's aviation budget were or are considerably higher, 64 percent, 77 percent and 72 percent in the three years. No provision has been made for revenues from students, which in any case were zero in FY88/89. 14 If international commitments are involved, they may r,eed to be reevaluated.  56 Chapter 3 Transport Table 3.2: Actual or Budgeted Transport Expenditures 1987/88 to 1990/91* 1987/88 1988/89 1989!90 1990.'91 Actual Actual Actual Actual Total Expenditures (U Sh bil). 1.6 3.5 9.1 14.5 Total Expenditures (US$ mil.) 27.3 _ 17.7 2L.5 30.6 Recurrent 23.7 49.9 20.1 38.4 Development i_ 76.3 50.1 79.9 61.6 Road and General 92.3 87.8 93.9 88.1 Air Transpertation 7.7 12.1 6.1 11.9 * Locally financed expenditures of the Ministries of Transport and Communications, Works and Local Govemnment (Engineering Department). I Includes locally financed projects and local counterpart of jointly financed projects. Source Table 3 3 Road Expenditures 3.48 Financial Requirements for the Proposed Road Program. The proposed road program for the 1990s (para 3.30) aims to accomplish four core tasks: (i) Nlaintain all rehabilitated roads continuously in good-to-fair condition to avoid the waste of resources used to rehabilitate them and prevent damage to the economy from costly vehicle operations. (ii) Achieve near-universal accessibility to trucks throughout the unrehabilitated road system as quickly as possible by routine maintenance and spot improvements in order to support the recovery of the national economy and the delivery of social services.  (iii) tUpgrade major bitumen and gravel highways when increased traffic threatens to destroy the roads in question or when savings in VOCs is large. (iv) As resources permit, complete prioritized rehabilitation of the classitied highway system (and other heavily trafficked roads now classified as feeder roads). 3.49 In specific terms, the proposed road program, when fully phased in 1994/9515, would maintain in good-to-fair condition all of the 2,200 km of primary bitumen highway, over 60 percent (3,700 km) of rehabilitated gravel highway and 2,500 km of rehabilitated feeder roads (15 percent of total feeder roads) (Table 3.4). In that year it would also maintain in poor-to-fair condition 70 percent (12,000 km) of unrehabilitated roads of all kinds, including about 2,000 km of feeder roads in which 1-2 culverts per km had been placed. By the year 2000, the road system would consist of 3,700 km of bitumen highways, 4,100 km of rehabilitated gravel highways, 6,000 km of rehabilitated feeder roads. all of which would be maintained in good-to-fair condition. In addition, 10,000 km of culverted feeder roads would be maintained in accessible (poor-to-fair) condition, and 4,500 km of unrehabilitated, unculverted feeder roads would offer some degree of accessibility to agricultural and commercial vehicles because of minimal routine maintenance. Consequently, the entire network of feeder roads will be accessible. 3.50 Maintenance. The financial requirements for the maintenance component start at considerably more than current maintenance expenditures and then rise rapidly in inflation-adjusted terms to U Sh 12 billion (constant 1990) in 1994/95 after the phase-in period and levels , ff at U Sh 14-15 billion after 1996/97 (Table 3.5). The rapid increase comes because a phase-in period is required by institutional constraints before the full length of rehabilitated roads can be brought under maintenance. There is also a significant grace period at the beginning of the period for maintenance of the newly rehabilitated bitumen roads. The fact that the network of rehabilitated roads is continuously increasing in size also contributes to the growth of maintenance expenditures. This U Sh 12 billion financial requirement contrasts with the Government's approved FY90/91 recurrent road budget of U Sh 4.6 billion in 1990/91 (Ministries of Works and Local Government non-aviation categories combined - Table 3.3))6 Only U Sh 1.2 billion of this is specifically identified as for maintenance of roads. Comparing this to the 1994/95 U Sh 12 billion figure is a measure of the build up that will be required in the next few years for road maintenance.'" 5 The phase in of maintenance of unrehabilitated feeder roads, however, would not be comp!ete until 1995/96. 16 An additional U Sh 1.7 billion and 1.2 billion were approved for gravel road 'periodic maintenance' under the 3rd Highway Project in 1989190 and 1990/91, but this was a misnomer, since these funds were intended and used primarily for rehabilitation. 17 Much of the remaining U Sh 3.4 billion in the recurrent road budget (4.6-1.2 billion) is for employee and transport and plant costs that may be related to road maintenance, but it is not clear how much of this was expended on road maintenance, and the lower figure is probably best indicative of the expected 1990/91 maintenance performance, in any case.  58 Chapter 3: Transport 3.51 The figures for the proposed maintenance progran for the next four years are as follows (in U Sh billion - from Table 3.5): Year 91/92 92/93 93/94 94/95 3.0 6.2 10.1 11.7 Unless total road maintenance expenditures are more than doubled in 1991/92 (in constant shillings) over the approved level of 1991/90 and increased by a factor of 10 over that level in 1993/94, when the new policy would be fully phased in, Uganda's newly rehabilitated roads will rapidly deteriorate. Rehabilitated gravel highways in particular require continuous maintenance and deteriorate rapidly without it. 3.52 Construction. In the early years of the proposed road program, the largest expenditure would be for road construction rather than maintenance -- for upgrading, rehabilitation and culverting -- U Sh 17.9 billion (86 percent of the total) in 1991/92 rising to U Sh 25.8 billion (69 percent of the total) in 1994/95. These are projects that would be carried out by international and other contractors and in the first two years include largely those already under preparation. After a short delay, the proposed road program schedules the rehabilitation of 100 km of bitumen and 1,000 km of gravel highway per year until the network is fully rehabilitated in 1995/96. For projects not in the pipeline, there are considerable startup delays but no major institutional constraints, except in the case of smaller contractors who might participate in the culvert program. It is expected, although calculations for each project need to be carried out, that the economic rates of return to rehabilitation of highways will be high. When they are not, the projects should be reconsidered. 3.53 In contrast to highways, the justification for 600 km/yr of feeder road rehabilitation, which is contained in the program, depends on the development of traffic over time. When traffic increases beyond a threshold, rehabilitation becomes economic because of the increased potential for savings in VOCs. Preliminary calculations are that rehabilitation is justified for Ugandan feeder roads when average daily traffic exceeds 15-20 vehicles. No comprehensive traffic count information exists for the feeder road network, but based on the partial information available, probably about one-quarter of the total length of feeder roads in Uganda will exceed this traffic threshold by the year 2000. There is also little quantitative information available on the economic role of Uganda's feeder roads, but, based on what is known about the economic role of feeder roads in Southwest Uganda, the program provides for a culvert component, which, after a phase-in period in which local contracting capacity is developed, would install 1-2 culverts per km at a rate of 2,400 km/yr and would nearly complete culverting of the feeder road network by the year 2000. The preliminary judgement here is that few of the feeder roads listed by MOLG would not merit culverting - either because they serve too few people, provide too closely duplicate service or require too costly additional improvements. This leads to a working assumption that those listed roads that do not merit culverting for these reasons are probably matched by an equal length of unlisted feeder roads that would merit culverting. The program therefore provides for a culverting component equal in length to the length of listed feeder roads.  3.54 Analysis of the foreign exchange versus the Uganda shilling requirements of the proposed road program (Table 3.5, second panel) shows that in various years the program would require 72- 81 percent foreign exchange. Even maintenance, where the heaviest expenditures would be for the highways, would require foreign exchange in the range of 69-71 percent. The heavy foreign exchange requirements of maintenance point toward the opportunity for donors to finance a greater proportion of the maintenance budget. In previous years, donors have almost exclusively funded construction, but a number are now considering funding maintenance. Despite the donor bias toward construction, the Government has also shown the tendency to concentrate most resources on rehabilitation and neglect maintenance. 3.55 As rehabilitation effort shifts from bitumen toward gravel highways, this neglect could have particularly disastrous results. Using the accounting categories of the budget, U Sh 7.9 billion is budgeted in the FY90/91 development budget mainly for rehabilitation projects, compared to the U Sh 1.2 billion budgeted in the recurrent budget for maintenance.'8 By FY95/96, allocation for maintenance should be 65 pe.cent of allocation for construction. It therefore becomes clear that a major reorientation of expenditure toward maintenance would be required if the proposed program is implemented. Because the highway and feeder road maintenance organizations are still being rebuilt, it would take a significant effort for the Government to spend even the amounts specified for maintenance in the phase-in program in the FY90/91-FY92/93 period, which rise from U Sh 3.0 billion to U Sh 10.1 billion (Table 3.4) and major contracting of maintenance should be undertaken. 3.56 Reallocation From the Mityana-Foil Portal Road As a Source of Funds. While this reorientation is taking place, one potential source of near-term funds for maintenance is a radically scaled back appropriation for the reconstruction of the Mityana-Fort Portal Road for which the Ministry of Works has an approved budget of U Sh 3.3 billion in FY90/91, after a projected U Sh 3.3 billion expenditure on the road in FY89/90. It is a particularly expensive undertaking for the Government, since unlike other road construction projects, it is not receiving donor financing. 3.57 It has also not been subjected to rigorous economic analysis to determine whether the net return to society is positive and greater than other high priority investments ". If continuing the construction of the Mityana-Ft. Portal road does not turn out to be economic, Mubende would be a feasible stopping point for the current bitumen highway. The core of the economic analysis of the 160-km Mubende-Ft. Portal section would be to evaluate the least-cost solution to the Mubende-Fort Portal route entailing an evaluation of the future saving in total vehicle operating costs (VOC) on the Kampala-Mubende-Ft. Portal route compared with the longer Kamnpala-Bushenyi-Ft. Portal route to the south. IDA has proposed that the Government carry out an economic analysis of total traffic supply and demand to Western Uganda, including in its purview the western rail line to Kasese, a second alternative investment. Both the Mubende-Ft. Portal route and the western rail line have potential for passengers and freight, and only an effective technical analysis can determine whether either one is an economic addition to the transportation network.' IS Even this latter undoubtedly includes a large proportion of rehabilitation expenditure. '9 An analysis was done over ten years ago, but clearly, traffic demand and supply as well as other economic circumstances have changed drastically since ti.en. D Rehabilitation of the existing Mubende-Ft. Portal section as a gravel highway should also be evaluated in the analysis.  60 Chapter 3: Transport Rail Investments 3.58 Domestic Rail Investments and Continuation of Service. Fundamental questions have been raised about the economic viability of the domestic rail operation and about public investment in it (para 3.35). All domestic passenger and freight service should be screened for economic and financial viability, the unecononmic lines and likely financial losses defined and a decision reached with the Government as to discontinLuation or continuation of service's (in which latter case there would be noneconomic reasons for doing so) coupled with a financial arrangement which would indemnify URC for running loss-making services. Further, only those rehabilitation investments that have favorable economic rates ot return (taking into account alternative existing and potential roads) should be made. 3.59 Investment in International Rolling Stock. The implications for railway investment needs which would result from allowing freer modal transport choice to coffee exporters should be studied without delay. Reduced requirements for rolling stock may be found and should be quantified in time for the preparation of URC's 1991 calendar-year investment plan and the Government's FY91/92 development budget. Air Transportation Expenditures 3.60 Investment in Aircraft. The analysis above suggests that no widebody investments should be made, in or out of the development budget, without firm economic justification. An artificially supported UA long-haul operation might actually harm Uganda's long-haul air transportation capability. 3.61 Reallocation of the Aviation Budget. Approximately U Sh 1.5 billion in recurrent expenditure for Entebbe Airport Services (ir.cluding upgraded air navigation, security and fire control services) have been included in the proposed recurrent budgets of the two ministries responsible for aviation for FY90/91. This would be a six-fold increase over FY89/90. A strong case can be made for a large increase over FY89/90 considering the utility to Uganda of upgraded direct long-haul service.2' Little data exist on which to base a precise recommendation, however. A 50 percent increase over the FY89/90 total budget for non-training aviation-related activities, however, could be financed simply by suspending all investment in the Soroti Flying School (SFS) in FY90/91, including the proposed investment in three light Cessna aircraft (10 percent), and increasing the overall aviation-related budget allocation by 28 percent over the FY89/90 level. In the years beyond FY90/91, possible closure, privatization, operation under 100 percent cost recovery or restructuring of SFS could free up significant further resources for aviation-related activities. 21 Surprisingly, the ministries made only a U Sh 348 million development budget request for aviation-related investment, other than the U Sh 439 million requested for the Soroti Flying School.  Impact on Government Expenditure Levels In FY91-1992 for Transport-Related Activities Ministry of Works 3.62 The major impact for FY91/92 of the proposed road program would be to reallocate MOW road construction funds in the development budget to recurrent road maintenance expenditures and to airport-related expenditures. As indicated in Table 3.5, U Sh 2.8 billion (rising to U Sh 9.4 billion in 1994/95) would be required for highway maintenance. Ministry of Transport and Communications 3.63 The major impact for FY91/92 would be to reallocate the development funds allocated to the Soroti Flying School to air navigation services. Ministry of Local Government 3.64 Because developing the capability to maintain both rehabilitated and unrehabilitated roads in MOLG and in the district administrations will be difficult, MOLG may not be able to effectively spend more in FY91/92 on feeder road maintenance than the U Sh 600 million allocated in FY90/91 budget. The proposed road program targets are for only 400 km of rehabilitated and 500 km of unrehabilitated feeder road to be under effective maintenance in FY91/92. Following on FY90/91, additional funds need to be allocated to designing and planning the feeder road program. Designing and planning the proposed culvert component will also require a significant lead time, and only U Sh 160 million (100 km) is projected for construction in FY91/92, but expenditures would grow rapidly in subsequent years. Uganda Railways Corp. and Uganda Airlines 3.65 The investment programs of these governmenw corporations, currently carried off budget, should be included in the development budget of MOTC. Planned investments in the western rail line and hoped-for investments in aircraft should proceed only in case of clear economic justification. Cost Recovery Road User Charges 3.66 In uncongested Ugandan highway conditions, cost recovery for road use should attempt to recover from vehicles the costs of repairing the road damage they cause. Such cost recovery would fall primarily on heavy trucks in a non-linear schedule according to actual axle loads and distances. Although theoretically closest to this ideal, all of the more or less direct road fees -- tolls, border charges and license fees -- have deficiencies as instruments, primarily because it is hard to levy them in proportion to vehicle use, let alone road damage. Considering the difficulties with the direct charges, the indirect diesel fuel tax is not clearly inferior to the direct charges, since it is proportional to road use and roughly related to road damage. It also has the advantage of ease of administration.  62 Chapter 3: Trantsport 3.67 The March 1990 study on "Road user charges in Uganda" found that actual road user charges collected were well above the level of the short-run marginal costs attributable to various vehiclas. These costs were derived from the maintenance costs estimates for highways and 1eeder roads. According to the study, road user revenues were generated from: - taxes on vehicle ownership - taxes on vehicle importation - annual license fees - miscellaneous charges/fees - taxes on vehicle use - road tolls - taxes on fuel/oil - taxes on spares/tyres - taxes on foreign vehicles - temporary road licenses - transit goods licenses. 3.68 A rough projection of the road user charges for FY91/92 to FY93/94 is shown below. This suggests that road user charges can provide the necessary financial resources for maintenance over the next few years. Scopc fj rost Recovery (in billions of U Sh) 1990/91 1991/92 1992/93 Road User charges 13.5 15.0 15.1 Maintenance Costs 1.8 4.7 9.5 Source: Road User Charges Study and IDA 's Transport Sector Mission Rail, Bus and Air User Charges 3.69 Government transport operations in these three subsectors have straightforward cost recovery through transport charges. The Government's policy is that all parastatal transport operations will have no claim on the budget. URC has been successful, by dint of its coffee export monopoly, in financing its current operations, although it has received concessional financing from foreign donors via the Government in its investment program. So have the bus companies (but UTC now faces serious financial difficulties). The Government's policy of requiring transport parastatals to finance their operations from revenues was tested recently in the case of UA, which was grounded rather than bailed out. UTC may provide a further test for the Government's parastatal policy in the not-too-distant future. 3.70 Airport cost recovery is more complex. Optimal aircraft charges may differ from full cost recovery charges because of the declining cost characteristic of airports like Entebbe. If full cost recovery is enforced on the airport operation, currently high aircraft and passe-ger fees may need to move even higher, and undesirable efficiency effects may ensue, such as the deterrence of long-haul service and high-value exports. Widebody charges per aircraft at Entebbe are now twice the level at Nairobi and will not bear major increases. There is probably some scope for increasing  charges on direct long-haul passengers even from their currently high level, because the charge would be a small percentage of the ticket price and long-haul air transport is probably price inelastic. Nevertheless, the current narrowness of the aviation revenue base should severely inhibit major terminal expansion plans, if the cost of these expansion plans is to be recovered from airport charges. Institutional Issues Implementation of Highway Programs 3.71 The need to implement an expanded maintenance and construction program for highways will clearly tax the implementation capacity of an already weak Ministry of Works (MOW). It is therefore proposed that MOW rely on subcontracting tasks to private contractors to the maximum extent and focus attention on monitoring and supervision. Nevertheless, a major effort at institutional strengthening will be required. It is proposed that Government focus attention on satisfactory implementation of the road program, and that the Project Monitoring Unit in MPED monitor implementation. Feeder Road Maintenance 3.72 Another major institutional issue in the transport sector concerns the maintenance of rural feeder roads. Under the strategy proposed here, only about 30 percent of feeder roads would be rehabilitated over the next decade in line with the judgement that economic rates of return to the investment based on traffic volumes (and on the assumption that the roads would be maintained continuously in good-to-fair condition) would not justify a greater percentage. Rather than rehabilitation, the major thrust of the proposed feeder road strategy is to keep virtually the whole network open to agricultural and other transport vehicles by carrying out a country-wide program of culverting as rapidly as possible over the next decade. This would be complemented by a program to improve service quality of the unrehabilitated feeder roads with a minimal program of routine maintenance and spot improvements. The proposed program allocates US$200-US$400 per km/yr on average for this purpose, and the length of the (unrehabilitated) roads receiving this level of maintenance and spot improvements would rise rapidly to 16,000 by FY95/96. At the same time, the feeder road component of the proposed road program provides for an increase to 2,500 km in the length of rehabilitated feeder roads that would be receiving standard maintenance by the same year. 3.73 Organizing to carry out this program will be as complex a task as any the public sector has faced, since the scope will be nationwide and several different levels of government will necessarily be involved. The Ministry of Local Government issued a position paper on the feeder road programn in 1990, which confronts many of the issues involved. The rehabilitation and culverting components of the proposed road program are designed to be carried out largely by contractors working largely under central direction. The maintenance activities, however, would require a more complex organization. 3.74 The major principles for the maintenance effort should be: (i) small private contractors using as labor-intensive methods as possible should be employed for most of the work, (ii) the responsibility for carrying out the spot improvements and for financing them should as much as  64 Chapter 3: Transport possible rest with the smallest local jurisdictions tha! gain major benefiLts from them, (iii) tor at least the medium term, however, major cost sharing from the center will be necessary, since local revenue sources will be inadequate. 3.75 The MOLG paper is currently being revised further so as to present a proposal ior a clear division of labor between MOLG, district administrations and elected officials at the various RC levels as well as private contractors. Delegation of responsibility for prioritizing activities, initiating work by contractors and supervising them for the simpler activities on feeder roads should go to the lowest possible levels of local authority. MOLG would retain a role ill policy formulation, planning, supporting and overall monitoring.' 3.76 While the RC5s (district), RC3s (subcounty) and RC2s (parish) are impressively strong as political institutions and at lower levels are close to the farmer beneficiaries of the feeder road system, their administrative and technical weaknesses suggest: (i) that private, local contracting should be required as the universal norm; and (ii) that MOLG should supervise to ensure high contracting standards and provide technical assistance to help local communities establish bidding procedures and technical standards. MOLG could also have a role in building up the expertise of the local contracting industry by conducting training courses for actual and potential contractors and helping districts do the same. The fact of cost sharing also points to a MOLG supervisory role to ensure fiscal integrity. To carry out these roles, MOLG would also require considerable strengthening. 3.77 The proposed road program requires the phasing in of maintenance of feeder roads according to the following schedule in the early years: Year: 91/92 92/93 93/94 94/95 95/96 Kilometers (rounded): Rehabilitated 400 1,000 2,000 2,500 3,000 Unrehabilitated 500 2,000 6,000 10,000 16,000 This may be fairly optimistic. Effective institutional analysis and planning, and the implementation of an extensive program of training and institutional strengthening, would need to be given immediate attention for this schedule to have any hope of being implemented. 2 There is general agreement that the community roads beneath the feeder road system would be the responsibility of the RCI (village) level.  Table 3.3: EXPEND1IUJRES AND 8IJGET - TRANSPOT S[iT3R$ 1987/88 1988/89 1989/90 1990/91 1987/88 1988/89 1989/90 1990/91 Actual Actual Actuial Approv Actual Actual Actual Approv RECURRENT --(mi i on shi I I ings)--- --(mi l lon JS rol lars&)- Ministry of Transort and Communications Off ce of tn)e Mrn,ster 17 32 105 214 0.3 0.2 0.3 0.5 Transport Serv:ces 8 22 7 18 0.1 0.1 0.0 0.0 Aviation Re;ated 32 88 149 243 0.5 0.4 0.5 0.5 Cojucations Department 0 1 0 4 0.0 0 0 0.0 0.0 Totai 57 142 260 479 1.0 0.7 0.8 1.0 Ministry of Works Office of tne Minister 40 122 69 341 0.7 0.6 0.2 0.7 Road Maintenarce & Constriuction 111 634 354 1,362 i.8 3.2 1.1 2.9 Area Engineers 103 265 423 1,335 1.7 1.3 1.3 2.8 Other Road Related 37 228 293 675 0.6 1.1 0.9 1.4 Airport Related 37 186 216 468 0.6 0.9 0.7 1.0 Total 327 1,436 1,355 4,182 5.5 7.2 4.2 8.8 Ministry of Local Governiment Engineering Department 4 188 212 904 0.1 0.9 0.7 1.9 TOTAL RECURRENT 389 1,768 1,827 5, 565 6.5 8.8 5.7 11.7 DEVELOMENT6 Ministry of Transport and COmilcatlons Office of the Minister 1 8 15 0 0.0 0.0 0.0 0.0 Transport ServIces 0 9 2 16 0.0 0.0 0.0 0.0 Aviation Related 0 57 19 0 0.0 0.3 0.1 0.0 Commnications Department 0 0 0 0 0.0 0.0 0.0 0.0 Total 1 73 37 16 0.0 0.4 0.1 0.0 Mlnistry of Works Office of the MinisterS 3 17 0 5 0.0 0.1 0.0 0.0 Road Malntenarce & Constructlonr 982 1,187 6,426 5,208 16.4 5.9 20.1 11.0 Area Engineers 0 0 0 0 0.0 0.0 0.0 0.0 Other Road Related 89 74 69 53 1.2 0.4 0.2 0.1 Airport Related 58 101 166 1,009 1.0 0.5 0.5 2.1 Total 1,112 1,379 6,661 6,275 18.5 6.9 20.9 13.2 Ministry of Local Goverrment Engineering Department 137 319 573 2,648 2.3 1.6 1.8 5.6 TOTAL DEVELOPENT 1,250 1,771 7,271 8,938 20.8 8.9 22.8 18.8 TOTAL RECIRRENT AND DEVELOPMENT Mlnistry of Trainsport and Cmwnications Office of the Milnister 19 40 120 214 0.3 0.2 0.4 0.5 Transport Services 8 30 9 34 0.1 0.2 0.0 0.1 Avlatlon Related 32 145 168 243 0.5 0.7 0.5 0.5 CcATm ications DeDartment 0 1 0 4 0.0 0.0 0.0 0.0 Total 58 216 297 495 1.0 1.1 0.9 1.0 Ministry of Works Office of the MInister 43 139 69 346 0.7 0.7 0.2 0.7 Road MaIntenare & ConstrLctlon. 1,092 1,821 6,780 6,570 18.2 9.1 21.3 13.8 Area Engineers 103 265 423 1,335 1.7 1.3 1.3 2.8 Other Road Related 106 302 361 728 1.8 1.5 1.1 1.5 Airport Related 95 287 383 1.477 1.6 1.4 1.2 3.1 Total 1,439 2,815 8,017 10,456 24.0 14.i 25.1 22.0 Ministry of Local Government Engineering DePartment 142 506 784 3,552 2.4 2.5 2.5 7.5 TOTAL TRANSPORT" 1,639 3,537 9,099 14,503 27.3 17.7 28.5 30.6 * I nc I udes I oca I I y f I nared and oca I couiterpart of Jo I nt I y f I nanced deve I mt projects. I Excanrge rate (UshAUSS) used: 60 (FY88), 200 (FY89), 319 (FY90) and 475 (IFYS91. * ircludes expenditures of Ush 3.3 bn In both FY90 (actual and FY91 (aonroved) on the Mityana-Ft.Portal road. e Consists of develowment exPeiture on accomcatIon In rfl (Y39. 00Rrod-related expenditure was 92% (FY88), 88% (FY89),. 94% .-s., a:,, 8& (FY90) of the totai.  66 Chapter 3: Transport Table 3.4. PROPOSED GOVERNMENT ROAD PROGRAM - ANNUAL PHYSICAL TARGETS AND RESULTING ROAD INVENTORY PROGRAM LNCONSTRAINED BY FI NANCEO ANNUAL RGAD PROGRAM 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 _ - - -(kilometers) -- BITLNEN Maintenance of RehabIlItated 711 1,319 1,918 2,318 2,668 2,968 3,268 3,568 3,668 HIGHfAYS Maintenance of UnrehabilIitated 83 117 150 50 0 0 0 0 0 Lpgrading 0 10 20 40 50 50 50 50 50 Rehabilitation 134 100 100 50 0 0 0 0 0 GRAVEL Maintenance of Rehabilltated 1,168 1,752 2,965 3,665 4,365 4,820 4,520 4,220 4,120 HI MAYS Maintenance of Lnrehabilitated 1,500 2,250 2,755 1,755 755 0 0 0 0 Upgrading 20 40 300 300 300 300 300 100 40 RehabilitatIon 400 1,000 1,000 1,000 755 0 0 0 0 FEEDER Malntenance of Rehabilitated 407 975 1,921 2,521 3,121 3,721 4,321 4,921 5,521 ROADS Malntenance of Unrehabllltated 500 2,075 5,656 9,956 15,656 16,613 16,013 15,413 14,813 Rehabilitation 450 600 600 600 600 600 600 600 600 Culvert Installatlon 100 800 1,600 2,000 2,400 2,400 2,400 2,400 2,457 TOTAL Malntenance of Rehabilitated 2,286 4,045 6,804 8,504 10,154 11,509 12,109 12,709 13,309 ALL Malntenarnce of Unrehabilitated 2,083 4,442 8,561 11,761 16,411 16,613 16,013 15,413 14,813 ROADS Upgrading 470 650 920 940 950 350 350 150 90 Rehabilitatlon 634 1,900 2,700 3,050 3,155 600 600 600 600 Culvert Installation 100 800 1,600 2,000 2,400 2,400 2,400 2,400 2,457 RESULTING ROAD INVENTORY 6/30/91 6/30/92 6/30/93 6/30/94 6/30/S5 6/30/96 6/30/97 6/30/98 6/30/99 6/30/00 (kilometers) BITUEN Rehabilltated-Maintalned 184 881 1,475 2,318 2,668 2,968 3,268 3,568 3,668 3,708 HIGHMAYS -Not Malntalne 1,408 881 443 0 0 0 0 0 0 0 Unrehabilitated 384 250 150 50 0 0 0 0 0 0 TOTAL 1,976 2,012 2,068 2,368 2,668 2,968 3,268 3,568 3,668 3,708 GRAVEL Rehabilltated-Malntalned 879 1,532 2,696 3,665 4,365 4 820 4,520 4,220 4,120 4,080 HIGMAYS -Not Malntaine 779 489 269 0 0 0 0 0 0 0 ikrehabilltated 4,155 3,755 2,755 1,755 755 0 0 0 0 0 TOTAL 5,812 5,776 5,720 5,420 5,120 4,820 4,520 4,220 4,120 4,080 FEEDER Rehabllitated-Malntalned 329 857 1,575 2,521 3,121 3,721 4,321 4,921 5,521 6,121 ROAD6 -Not Malntalne 542 464 346 0 0 0 0 0 0 0 Culverted 0 75 656 1,956 3,656 5,756 7,856 9,956 12,056 14,213 LUnrehabilitated/unculvertedl9,463 18,938 17,757 15,857 13,557 10,857 8,157 5,457 2,757 0 TOTAL 20,334 20,334 20,334 20,334 20,334 20,334 20,334 20,334 20,334 20,334 TOTAL Rehabliltated-Malntalned 1,391 3,270 5,745 8,504 10,154 11,509 12,109 12,709 13,309 13,909 ALL -Not Maintaine 2,729 1,834 1,059 0 0 0 0 0 0 0 ROADS Culverted 0 75 656 1,956 3,656 5,756 7,856 9,956 12,056 14,213 UnrehabilltatedVurculverted24,002 22,943 20,662 17,662 14,312 10,857 8,157 5,457 2,757 0 TOTAL 22,122 28,122 28,122 28,122 28,122 28,122 28,122 28,122 28,122 28,122 S Unconstrained case Is (1) a 10-year program of full bitumen and gravel hlway rehabilitatlon, (2) a program of traffic-re- qulred iWading, and (3) 600 km/yr of feeder road rehabIlltation and extensive culverting of unrehabliltated feeder roads.  Table 3.5. PROPOSED GOVERNMENT ROAD PROGRAM - PROJECTED ROAD EXPENDITURES - PROGRAM UNCONSTRAINED BY FINANCE@ TOTAL EXPENOITUNE 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 - (billion constant 1990 Ush)------ -- BITUMEN Maintenance 1.2 2.7 4.1 4.9 5.2 5.7 6.2 6.7 6 HIG0AYS Upgrading 0.0 0.3 0.6 1.1 1.4 1.4 1.4 1.4 1 Rehabilitation 10.4 7.1 7.1 3.6 0.0 0.0 0.0 0.0 0 Total 11.5 10.1 11.8 9.6 6.6 7.1 7.6 8.1 8 GRAVEL Maintenance 1.6 2.9 4.5 4.6 4.7 4.6 4.2 3.8 3 HIGHAYS LUgrading 0.5 0.9 7.1 7.1 7.1 7.1 7.1 2.4 0 Rehabilitation 4.4 10.1 9.7 9.3 6.9 0.0 0.0 0.0 0 Total 6.4 13.9 21.3 21.0 18.7 11.7 11.3 6.2 4 TOTAL Malntenance 2.8 5.6 8.6 9.4 9.9 10.3 10.4 10.5 10 HlGMAYS Upgrading 0.5 1.2 7.7 8.3 8.5 8.5 8.5 3.8 2 RehabilltatIon 14.7 17.2 16.8 12.9 6.9 0.0 0.0 0.0 0 Total 18.0 24.0 33.1 30.6 25.4 18.9 19.0 14.3 12 FEEDER Maintenance 0.2 0.7 1.5 2.3 3.2 3.7 4.1 4.4 4 ROADS RehablIltation 2.6 3.4 3.4 3.4 3.4 3.4 3.4 3.4 Culvert Program 0.1 0.6 1.2 1.4 1.7 1.7 1.7 1.7 Total 2.9 4.7 6.1 7.1 8.3 8.8 9.2 9.5 TOTAL Malntenance 3.0 6.2 10.1 11.7 13.1 14.0 14.5 15.0 15.4 ALL Upgrading 0.5 1.2 7.7 8.3 8.5 8.5 8.5 3.8 2.4 ROADS Rehabilitation 17.3 20.6 20.2 16.3 10.4 3.4 3.4 3.4 3.4 Culvert Program 0.1 0.6 1.2 1.4 1.7 1.7 1.7 1.7 1.7 TOTAL Total (bil. 1990 Ush) 20.8 28.7 39.2 37.7 33.7 27.7 28.1 23.8 22.9 (millon constant 1990 US $) -- Total (mul. 1990 US $) 43.9 60.4 82.6 79.5 70.9 58.3 59.2 50.2 48.1 FOREIGN EXCHANGE/UGANDA SHILLING REQUIREMENTS % of Total (Range)- (million constant 1990 US) FOREIGN Malntenance 69-71% 4.5 9.1 14.7 17.2 19.1 20.5 21.1 21.8 2 EXDiANGE' Constructlon 79-83X 31.2 38.6 50.4 44.8 35.2 23.5 23.5 15.0 1 Total 72-81% 35.7 47.7 65.1 62.0 54.3 44.1 44.7 36.8 3 UGANDA Maintenance 29-31% 1.8 4.1 6.5 7.5 8.5 9.0 9.4 9.7 1 SHILLINGS Construction 17-21% 6.4 8.7 11.0 10.0 8.1 5.2 5.2 3.7 ($ EOJIV.) Total 19-28% 8.2 12.8 17.5 17.5 16.6 14.2 14.6 13.4 1 TOTAL MaIntenanCe 100% 6.3 13.1 21.2 24.7 27.6 29.6 30.5 31.5 - Construction 100% 37.5 47.3 61.4 54.8 43.4 28.7 28.7 18.7 Total 100% 43.9 60.4 82.6 79.5 70.9 58.3 59.2 50.2 e Uiconstralned case Is (1) a 10-year program of full bitumen and gravel hlhay rehabIlitation, (2) a program of traffic-r qulred upgradlng, and (3) 600 km/yr of feeder road rehabilitation and extensive culverting of unrehabilltated feeder roac * The high forelgn exchange requlrem3nts (FEXR) result from the high FEXR of both construction and periodic maintenance, all In the range of 80-85%, with culvertlIg somewhat lower (at 70%). Even routine maintenance, as practIced In Uanda, has FEXRs of 40% (feeder roads) to 65-70% (hlihways).  ENERGY Sector Description Sector Performance and Facilities 4.1 Uganda's total energy consumption is estimated to have declined by over 50 percent from 0.4 ton of oil equivalent (toe) in 1970 to about 0.19 ton of oil equivalent (toe) per capita in 1989 In 1989, commercial energy, consisting mainly of petroleum products, electricity and marketed woodfuels, accounted for only about 0.02 toe per capita, i.e. 95 percent of the energy used in Uganda came from woodfuels gathered as a free good. Uganda's energy consumption per capita is much lower than that used in other African countries, which by the 1970s had reached similar levels of development. In 1988, Kenya used 0.37 toe, and Zimbabwe 0.83 toe per capita. 4.2 Uganda's commercial energy consumption, is exceptionally low by any standards (0.02 toe for Uganda; 0.1 toe average for sub-Saharan Africa; about 0.3 toe for middle income countries; and about 5 toe for Europe and North America). This low level of commercial energy consumption reflects not only the country's low per capita income but also the dominance of the subsistence sector and the significant decline in the industrial and transport sectors during the civil strife, which has resulted in energy consumption being concentrated in the household sector and supplied mainly from woodfuels. In 1989, traditional fuels (woody biomass) accounted for about 45 percent of commercial energy consumption, with the balance principally coming from imported petroleum products (45 percent) and electricity (10 percent) -- only about 6 percent of the population has access to electricity. 4.3 With the introduction of reform programs, economic activity is beginning to pick up, and the trend of commercial energy consumption, which was declining during most of the period of civil strife, has started to reverse. In 1989 Uganda imported 251,000 tons of petroleum products compared to 450,000 tons in 1970 -- although this is a marked reduction it shows a significant increase on the worst year for these imports which was 1983 when they fell to 189,000 tons. While levels of consumption are low, the average annual growth rate of consumption in the last five years is estimated to have been between 4 and 5 percent per annum. Even by conservative estimates commercial energy consumption, including electricity, is expected to grow by seven percent per annum during the 1990-1995 period. 4.4 Such relatively large increases in demand for energy will create major public energy sector issues, which will need to be addressed by Government. These will be mainly in the electricity sub-sector, and include:  (a) the inadequate electricity generation and distribution facilities, which have resulted from a twenty-year period during which virtually no investments were made for maintenance and expansion. These shortcomings have produced frequent power outages and high unserved demand -- prime causes of stagnation in commerce and industry; (b) the need to ensure least cost and adequate supplies to meet the growing demand for electricity; (c) the resulting large, especially when related to Uganda's other sectors, and inevitably lumpy investments, which will have to be made, if these shortcomings are to be corrected; (d) electricity tariffs set at levels to ensure adequate cost recovery and cash generation for investment purposes; (e) the minimizing of Uganda's currently heavy dependence, for commercial energy needs, on imported petroleum products which are expensive and which need to be transported long distances over-land and stored in unu:,ual quantities because Uganda is land-locked and its nearest sea-port is Kenya's Mombasa, over 1,000 km from Kampala; and (f) insufficient supplies of fuelwood, especially in the Kampala/Entebbe areas, and the regeneration and preservation of Uganda's forests and woodlands, which are critical to the well being of the country. Status of Sector's Public Facilities 4.5 Petroleum Subsector. Uganda imports all of its petroleum requirements by direct purchase from the Kenyan and Middle East markets. White products are transported from Mombasa to Nairobi by pipeline and on to Kampala, via Jinja in the east of the country, by rail and by road. Some petroleum products are also imported through Dar es Salaam via Mwanza to Jinja in Uganda. The six oil companies operating in Uganda maintain their own storage facilities to cater for any possible bottlenecks in the supply system. In line with Uganda's pattern of economic activity, distribution and consumption of petroleum products is currently mainly concentrated around Kampala and Jinja, but up-country demand is rising. Uganda has recently acquired over 100 rail tanker-wagons, and by the end of 1989 had increased from 10 percent (1982) to 60 percent the amount of its white products transported by rail from Nairobi. To encourage efficiency and reduce bottlenecks, priority has also been given to local transporters who are reimbursed with payments 50 pei-cent in foreign exchange and 50 percent local currency. The Goverrnment and oil companies operating in Uganda have diversified supply routes, and a second route through Tanzania in addition to the Kenyan route has been tried and found viable. Uganda's minimum strategic stock- pile is equivalent to five weeks based on present consumption levels. 4.6 Eledricity Subsector. Uganda's public installed electricity generating plant, which is operated by the Uganda Electricity Board (UEB), has a capacity of 153 MW, of which 150 MW is installed at the Owen Falls hydroelectric station. The station and the 10,000 km transmission and distribution system, most of which are more than 30 years old, received little maintenance during the fifteen years of civil strife. By 1984 only six of the generators were operational, and much of the transmission system outside of the Kampala/Jinja/Entebbe area had ceased to function.  Chapter 4: Energy 71 These problems are being addressed by UEB staff, and by contracts for the rehabilitation of the station and system, as part of the IDA's Second Power project. The project was slow to take-off, because of the conditions in Uganda around the time of credit effectiverness, and as a result the project will run about two years behind the appraised plan. Nevertheless the project has already improved electricity supplies to urban and rural areas. By 1989 UEB had nine generators in operation, and had reconnected to the system Soroti, Gulu and Lira in the North, and had made some temporary repairs to the line to the West to improve supplies to Masaka and Kasese. The balance of UEB's generating capacity is made up of small diesel stations (total 3 MW) in the northern and western regions, and a 1-MW hydroelectric station at Kabale which is not operable due to major flood damage. The Kilembe Copper Mine Corporation operates a hydroelectric power station consisting of two 2.0 MW and two 0.5 MW generators. Some small diesel generators are privately owned and operated in locations currently not reached by the public utility system. 4.7 The country's average annual electrical energy generating capacity is about 850 GWh and this is almost wholly produced at the Owen Falls hydroelectric station (150 MW). Electricity production at Owen Falls mirrors the economic volatility which has occurred during the past two decades. From a peak of 816 GWh in 1971, Owen Falls production fell by almost 50 percent to 459 GWh in 1979 and has since risen to 660 GWh in 1989. Production has also been hampered by Owen Falls equipment problems caused by a lack of routine maintenance for more than ten years during the period of civil strife. Ugandan maximum demand also declined substantially from 126 MW in 1971 to 99 MW in 1982, but has steadily increased in recent years to 122 MW in October 1990. 4.8 Demand patterns have also shifted greatly. In 1971 64 percent of sales were to medium and large industry with 18 percent to households. This pattern has reversed such that households are now estimated to constitute 46 percent of energy consumption and over 50 percent of peak demand. The other consumer categories have not shifted their relative positions substantially. The Ugandan system load factor fell from 65 percent in 1970 to 42 percent in 1983 before rising to the current level of 56 percent. This recent increase reflects a recovery in the industrial sector. On a daily basis, the peak demand occurs between 19:00 to 21:00 hours, which is approximately the same time as the Kenyan peak; therefore, currently Uganda is not able to meet its peak hour supply commitments to Kenya. If this were done, maximum demand would be 152 MW, more than the current capacity of Owen Falls with all 10 units operating. Recent sales to Kenya have been as much as 60 MW but at Uganda off-peak periods. Sector Strategy 4.9 Government's strategy in the energy sector, which was outlined in the Ministry of Energy submission to the National Resistance Council in September 1989, is to formulate, periodically update, and follow, an economic least-cost plan aimed at meeting the energy demand of the recovery program as well as Uganda's future requirements by rehabilitating existing facilities; constructing new ones; setting fuel prices; and monitoring and controlling imported energy. 4.10 Further longer term objectives include aims to ensure stable and sufficient supplies of petroleum products capable of matching the economic demand; expanding the electricity system by exploiting Uganda's ample hydro resource; increase exports of electricity; replace, where possible, the use of petroleum products in industry and by the railway system and replace the use of other fuels by hydroelectricity; accelerate the program for rural and urban electrification; accelerate the development and use of alternative new and renewable sources of energy, where  these are economic. and encourage research and studies towards efficient use of woodfuel and overall energy conservation. Energy Sector Public Expenditure Program 4.11 Petroleum Subsector. In the petroleum industry, the Government plans to actively encourage exploration for oil and gas at an annual average investment ot about $0.6 million over the next five years (RDP Code ME-12). Rehabilitation of the Governmenlt's strategic storage facilities undertaken by the Ministry of Energy is nearly complete and would require only modest additional expenditures in 1990. As demands grow, additional storage capacity will he required probably at Nakasongola, where there is a partly completed storage tacility with a potential capacity of 40,000 cubic meters. Since maintenance of strategic reserves is not a normal commercial activity, it is assumed that financing for additional petroleum stock would also be provided by the Government. There are currently no other signitficant public investments envisaged in the petroleum subsector. The Minister of Energy is recruiting an expert in petroleum matters to act as his adviser in the areas of petroleum produe-t procurement, transportation and strategic storage. 4.12 Eectricity Subsector. In order to meet the medium to long-term electricity demands of a growing economy, it will be essential to further expioit Uganda's considerable hydroelectric power potential and to repair, rehabilitate, strengthen and extend the country's transmission and distribution facilities. This strategy is incorporated in the proposed IDA Third Power Project which will consist of a five-year development program in Uganda's electricity subsector. The programr is heavily capital intensive, reflecting lack of investment in the past in a sector which is usually demanding on resources. The essence of the program (US$312 million) is described below. 4.13 The main component (US$196 million) of the proposed project will be the development of extension by 104 MW of the Owen Falls plant to utilize that portion of the flow of the Nile which, for the last 30 years, has flown unharnessed through the Owen Falls dam sluice gates. The long-run marginal cost (LRMC) of electricity generation and distribution is estimated to be U.S. cents 7/kWh, and the economic rate of return for the program is estimated to be 17.2 percent. The only technically feasible alternative to hydrogeneration for Uganda would be generation by diesel power. Such an alternative would have a LRMC of about U.S. cents 20/kWh and to replace the capacity of the proposed extension by this form of generation would increase Uganda's diesel oil imports with a recurrent and rising charge of about US$70 million in 1996, the hydrostation's first year of operation. 4.14 Several components of the proposed project will address the shortcomings in the transmission and distribution networks caused by lack of maintenance and by minimal investments in the last twenty years. Supply and erection contracts for the rehabilitation of transmission and distribution systems in and around Kampala and several substations on the UEB grid throughout the country, and a pole treatment plant, will thus form components of the project. Critical deterioration has taken place on the nearly 30-year old line to the western region (including Nkenda, Kasese, and the Hima cement factory), to the extent that by 1989 supplies to the region could be sustained for less than half the days of the year. The lack of maintenance and uncontrolled termite attack and rot, between 1970 and 1985, has so weakened most of the line that it is not economic to rehabilitate it to its original status, and the least cost solution should its replacement by re-routing the line via Masaka and Mbarara. A further component if demonstrated  Chapter 4 tinergy 73 to be economnically viable and the least cost method of supplying electrical power, consist of the electrification of some rural and semi-urhan areas. Government is awaiting the recommendations of the National Electrification Planning Study which will advise on the economics of rural electritication in Uganda. An important component of the proposed project will be a link with an established electricity utility to provide UEB with a technical assistance in modern techniques of utility managenment and operations. 4.15 Financing. The project costs are estimated to be about US$306 million, of which about US$28 million are local costs, which would be funded by UEB from its own generated resources. At a donor confeiencr. in June 1990 tentative indications of financing were made; nevertheless, a funding gap of about US$60 million currently exists. The Government will need to make extra etforts to mobilize turther donor support for the project, and to this end, the Ministry of Energy is convenirng a turther meeting of donors in London on January 31, 1991. 4.16 UEB's Recurrent Expenditure. UEB's salaries are reviewed regularly and to the extent feasible adjusted to maintain competitiveness with other parastaals in Uganda such as Uganda Posts and Telecommunications Corporation and Uganda Railways. However, despite these efforts, the remuneration packages provided are not adequate, especially to the lower-level staff, and increases become insignificant due to the rates and levels of taxation. In addition, UEB salaries have fallen behind those paid by similar utility companies in the neighboring countries. Because of the low salaries, many staff are very unmotivated, resulting in poor performance and low productivity. This situation has resulted in an inability to attract properly qualified staff, so that some incumbents are ill-equipped to handle their functions effectively. But despite poor remuneration in the past UEB's staff have worked reasonably well. 4.17 A proper rationalization of UEB's compensation to its staff, consisting of a well-balanced salary and benefits package, is necessary. In the short term, salaries need to be doubled in order for UEB staff to be able to maintain a reasonable standard of living. The salary adjustment is also essential if UEB's staff is to be properly motivated and to be more productive. Other Components of the Public Investment Plan 4.18 Rural Power Distribution. In 1985, EEC provided, via a grant, materials for several system extension schemes at 33kV to be constructed by UEB using its own resources including the provision by UEB of locally procured and treated wooden poles. Under the circumstances which prevailed thereafter UEB was unable to carry out this work. EEC has since agreed to meet the costs of transport and labor for UEB to complete the schemes either by using its own staff or by contract, and thus this component is fully funded. 4.19 Extension of Power Grid to Tanzania. In 1989 Government/UEB agreed to construct, using an Italian government concessional loan, a transmission link with a capacity of 16 MW for exports to Tanzania along the west side of Lake Victoria to Bukoba, via the Masaka substation. Uganda has negotiated a tariff of US cents 5.0/kWh with Tarzania, and UEB is expected to begin supplying the area in 1992. 4.20 Rehabilitation of Mini-hydro Power Stations and New and Renewable Resource Systems. The small (500 kW) Kabale power station at Maziba is not operable due to major flood damage. Its electrical and mechanical equipment has recently been overhauled .hrough funding from GTZ, and a request (about US$2 million) has been made to EEC to finance the outstanding repairs to the civil works; meanwhile the locale, which is currently remote from UEB's system, is being supplied from expensive to operate diesel generators.  74 Chapter 4: Energy 4.21 Government (Ministry of Energy) is planning to establish a new and renewable energy demonstration center in each of the 34 districts throughout the country. At each center there will be a community-sized biogas digester, a 10-kW solar-photovoltaic generator, and a solar water pump. Government is also intent on promoting programs in wind applications and power alcohol. The Ministry of Energy has constructed a family-size biogas digester at Makerere University as a pilot scheme and plans to disseminate information on methods of how to construct with indigenous materials similar digesters through much of Uganda in the next five years. 4.22 The Kilembe Copper Mine Corporation operates a hydroelectric power station (Mobuku river at Ibanda) consisting of two 2.0 MW and two 0.5 MW generators. Although the mine has not been worked for several years, the electricity generated is used for pumping to prevent the workings from flooding, in the eventuality that it becomes economically viable for Government to re-work the mine. The station was rehabilitated and the generators re-commissioned in 1990 under an EEC-financed project. When the overhead line to the western region is out of commission, UEB purchases supplies from the station, and provides ttese through its local network to consumers in the area. UEB has plans to eventually purchase the station, which can generate about 40 GWh per year, and operate it in parallel with the country-wide network. 4.23 Geothennal Exploration Project. Several studies and the resulting reports since 1970 have indicated that, in addition to the use of geothermal energy for expanding the capacity of the national grid system and for direct use where the heat is for industrial drying and agro-industry applications, geothermal energy should be considered suitable for small power plants (1-2 MW) located in areas not served at present from the national grid. Because development of this resource could fit in with Uganda's future least-cost power development plan, Government has recently requested that UNDP/Iceland/OPECF jointly fund a reconnaissance study of the geothermal potential in the western region. Electricity Sector Cost Recovery and Efficiency 4.24 Uganda has had a tradition of low power tariffs compared with other countries in the region. For a number of years, the average tariffs remained at around US cents 1.5/kWh. Recently (January 1990), the tariffs were doubled but are still inadequate to provide a reasonable rate of return to UEB. The revised tariffs are also well below the estimated long-run marginal cost, estimated at about US cents 7/kWh. The bulk tariff for supplies to Kenya under a 50-year supply agreement signed in 1955, despite a 100 percent increase in 1988, is very low. Uganda needs to re-negotiate the tariff with Kenya with a view to arriving at a price of about U.S. cents 5/kWh, which would split the benefits of the export 50/50 with Kenya. The long-run-marginal cost of supply to Uganda is negligible because the supply is generated at night with water which would otherwise be spilled to waste, but its benefit to Kenya is estimated by the consultants to be about U.S. cents 10/kWh. With the proposed 200 percent tariff increase and the proposed increase in the price of exports to Kenya, UEB's financial performance over the medium term is satisfactory to meet the performance indicators. 4.25 Non-technical Losses. Serious problems existed for several years prior to 1989 in UEB's metering, billing and the collection of revenues resulting in heavy financial losses. Accounts receivable were equivalent to 207, 225 and 174 days of sales in FY87, FY88 and FY89 respectively. The poor condition and technical characteristics of the transmission and distribution lines including overloaded transformers and inappropriately sized conductors led at the same time to an unreasonable level of economic losses. A significant proportion of UEB's losses has resulted  r;napter 4: tnergy /D from unauthorized connections by consumers who have circumvented the billing system. Many of these consumers resorted to this course of action in desperation as the only alternative left to them to obtain electricity supply. There is a long list (in the region of 30,000) of outstanding applications for services as a result of UEB's lack of funds for the requisite materials, or because in many cases UEB has declined to connect consumers because the local power lines have reached or exceeded their load limits and cannot take any extra load before major rehabilitation and reinforcement works are carried out under the on-going Second Power project and under the proposed Third Power project. A large number of consumers are directly connected to the system without meters and, while some consumption has been estimated and billed, many are suspected to have remained un-billed for two or three years - some even longer. 4.26 These problems in billing were partly caused by UEB's lack of adequate facilities especially computing capacity. In late 1988, UEB procured a modern computer, printing equipment and associated software in order to improve its billing and collection operations. As a result UEB has gradually brought about improvement in its processing capacity. The customer master files have been now been fully transferred to the system and management information reports are being designed to provide relevant information needed to efficiently monitor the activities. 4.27 In order to increase collections from domestic consumers which account for most of the outstanding receivables, UEB formed a task force in 1989, which is currently concentrating its efforts in the Kampala area where the amount of outstanding arrears is large, i.e. between December 1989 to June 1990, the total collection was about 41 percent of total billing. The task force will later be extended to outlying regions if needed, and after completion of the Kampala campaign. Si:ce this exercise began, the number of meters read has greatly increased and many illegal connections have been discovered and registered.  5 HEAL TH Sector Description 5.1 During the 1950s and 1960s, Uganda established one of the finest public health systems in Africa, combining preventive disease control programs with an expanding network of clinics and hospitals. Together with modest parallel efforts by NGO facilities, mainly mission hospitals, this resulted in a steady improvement in Ugandans' health. This progress was dramatically interrupted by the disruption of the economy and the collapse of social services during the late 1970s and early 1980s. The infant mortality rate, which had fallen from 200 per 1,000 in 1948 to 92 by 1973-77, rose to 115 in 1978-82. Economic recovery and the resumption of social services has now begun to reverse this negative trend but the current rate of 101 remains well above that of the early 1970s, the average for low income countries (76) and neighboring Kenya (72). A similar trend characterizes child mortality (Table 5.1). Much of the successful reversal is due to immunizations, especially against measles; 48 percent of 12-23 month children are now fully immunized against the six major childhood diseases. 5.2 The breakdown of the health information and statistical system, which has still to be restored, means that normal health data are not available in Uganda. All the partial evidence that does exist is consistent, however, in pointing to patterns of mortality and morbidity that are dominated by a resurgence of diseases I ike diarrhea and malaria that are relatively easily prevented, compounded by high population growth, malnutrition and the emergence of HIV infection as a very serious new threat (Table 5. 1). Total fertiiity has increased from 5.9 children per woman in the 1950s and 1960s to 7.4 in the 1980s and shows no sign of decline; while 33 percent of married women surveyed in 1988 wanted to space their children by at least two years and another 19 percent wanted no more children, only 5 percent used modern forms of contraception. In addition, the rate of maternal mortality is increasing rapidly even in Kampala hospitals, where the best care in Uganda is provided, implying a much worse situation in the country as a whole (Table 5.2). Anemia and malnutrition accounted for 7 percent of recorded hospital deaths in 1981 but 17 percent in 1988; several studies in the 1980s show 21-30 percent of 0-5 year old children to be chronically malnourished and a 1988 survey indicates a figure as high as 45 percent. Malnutrition also contributes to the morbidity and mortality of pregnant and lactating mothers. By the government's figures, 1.3 million of Uganda's 17.0 million people are HIV-positive and there are over 12,000 cases of AIDS. HIV/AIDS-related illnesses are now said to account for over 30 percent of all hospital admissions; the present level of HIV infection alone will generate 12,500 new cases of AIDS each month by the mid-1990s. Finally, the breakdown of disease control programs has led to the reappearance of diseases that had virtually been eliminated from Uganda, such as trypanosomiasis, sometimes to epidemic proportions.  Tahle 5.1: lHospital Inpatient Mortality and Morbidity, 1981-88 __o rtality M rltbidity _1981 1988 1988 Measles 25 4 3 Respiratory Infections = 16 8 8 Diarrhea 9 10 8 Malaria 7 10 _ _ Trauma 6 .. 7 Anemia 5 8 5 Tetanus 5 4 4 Tuberculosis 3 4 3 Malnutrition 2 9 4 HIV/AIDS 5 2 Other 22 38 42 Note: Outpatient and survey data presented in the same two reports point toward a general morbidity pattern including much higher incidences of diarrhea, malaria, respiratory infections, worms, skin and eye infections than shown by inpatient data. Sources: UNICEF, P. 34 (1981), Ministry of Health, Health I,iformation Quarterly, Dee, 1989 5.3 Uganda has 81 hospitals (48 public and 33 NGO), 105 health centers (97 public) and 765 lower level facilities (601 public). Hospitals are staffed with doctors; health centers encompass a wide range of facilities with varying services, some staffed with doctors and some not; lower level facilities do not have doctors. While both Government and NGO health services and facilities deteriorated during the years of disruption, the NGOs have largely rebuilt and expanded, due particularly to external assistance and higher staff morale and are important for both preventive and curative services. In Mbale district, for example, NGO facilities expand hd by 71 percent from 1985 to 1990 and primary health is estimated to account for over 30 per-ent of their total expenditure. Most government units remain in a state of severe disrepair, however, with relatively unmotivated staff who are only very poorly paid, as elsewhere in the public sector. In terms of population per hospital bed, for example, Uganda is typical of low income countries; however this masks that the bed is usually just a frame, without a mattress and without supporting supplies. The decline of the public sector has led an increasing proportion of the population to seek care at both NGO and private facilities; indeed the latter, ranging from small doctor-run clinics to commercial pharmacies, have mushroomed all over Uganda, delivering care of highly variable quality and creating a culture in which good care has come to be associated by the patients w ith the availability of injections and of drugs, regardless of their medical appropriateness. Recent surveys indicate  Table 5.2: Maternal Mortality Rates per 1,000 Deliveries in Five Kampala Hospitals, 1972-86 Non-Abortions Abortions Deliveries Deaths Rate Abortions Deaths Rate 1972* 20,531 26 1.14 1,884 5 0.30 1980 22,615 48 2.12 4,680 12 2.65 1981 22,158 48 2.17 4,700 13 2.77 1982 22,623 54 2.39 3,951 14 3.54 1983 27,128 51 1.88 4,300 13 3.02 1984 30,751 87 2.83 4,900 22 4.49 1985 24,144 91 3.77 4,675 23 4.92 1986 21,504 84 3.91 5,522 20 3.62 * Mulago Hospital Only Source: Makerere Medical School, Clinical Report 1970-72, Kampikaho, Maternal Mortality in 5 Kampala Hospitals, 1988 that 17-35 percent of people seek care at government facilities compared to 30-53 percent at NGO and private ones; the remainder patronize traditional healers. While private, NGO and traditional health providers are thus very important in Uganda, a particular difficulty in carrying out this review is the complete lack of any data on their expenditure. 5.4 Access to both public and private services is uneven; nationally, 27 percent of the population are within 5 km of a health unit and 57 percent are within 10 km. The situation is particularly severe in the North, however, where only 43 percent are within 10 km. (Table 5.3); in addition over 50 percent of all hospitals and most health centers are in or near trading centers, so access is much more difficult for rural than for urban Ugandans. Almost all family planning services, including those provided by NGOs, are located in urban areas. 5.5 Uganda is worse off than other low income developing countries in terms of its population per physician (about 22,000, compared to 14,000), particularly striking as Uganda was so much better off in 1965 (about 11,000 compared to 28,000). Thus the ratio of physicians to the population has halved in 25 years, largely due to emigration which continues, reducing the social returns to medical education provided by Makerere University. That of nurses has improved, from one nurse per 3,000 people to one per 2,100. However, the bulk of health personnel remains in the urban areas and in hospitals; in 1988, 74 percent of all public sector health staff were located in urban areas and 76 percent worked in hospitals. Yet Uganda's population is 90 percent rural.  80 ChIaptef Health 1lahle 5.3: D)i-tanve to Nearest health Uinit by Region, 1984 5% of' __opulation 'Within Regiotn 5 Kmn 10 Km R egio n _________________________~ ~~~~~~~~~~~~~~~~_ . _ __ . __ _. _ _ 7 __ ___ ___ __ Easterm 2 8 66 9 Northern 187c 43 % South/Central 32 % 60()X Western 27 % 56% National 27% 5 7 %c Source: Alnwick et al., Population Accevs to fJospitak, lealth (Centers and DispensarN Mfatettuv Units in Uganda, 1985, p.6 5.6 Not only are many public facilities in poor physical condition, there is little effective management and their staff are inadequatelv paid. This has in itself contributed to the development of the NGO and private sectors; it is now common for government health workers both to hold second jobs at NGO and private facilities and to practice private medicine out of public premises. Indeed de facto charging has become the norm at theoretically free government units. The management issue is partly a matter of training but mainly one of motivation. It is also a reflection of the poorly coordinated structure of responsibility for health services in Uganda. The Ministry of Health makes health policy, runs national donor-funded vertical primary programs, runs all public hospitals but one, and seconds staff to local governments as District Medical Oflicers and as primary health care workers. Districts and municipalities are responsible for primary and preventive services under the overall guidance of the Ministry of Local Government. Mulago Hospital has been semi-autonomous since 1986 but functions more as a primary and secondary care facility for Kampala than as the national referral, teaching and research hospital as which it was designed. As an example of the deteriorated quality of the health system, Makerere University's Degree in Medicine -- which uses Mulago as its teaching hospital -- was derecognized by the General Medical Council of the United Kingdom, a severe blow for what was once known as the finest medical school in Africa. 5.7 As part of this public expenditure review, a special study was carried out of health services in two districts, Hoima and Mlbale, in order to confirm and expand on broad findings at the national level. Neither district has a health plan or even a work plan for the various programs run in it. Both have NGO and private as well as public facilities, with the NGOs operating in an entirely uncoordinated and unregulated manner. The broad morbidity and mortality patterns are similar to those at the national level. Public sector buildings in both districts are in a poor state of repair and no funds are set aside for maintenance; in some cases, communities and exterpal agencies have repaired health centers but they have not since been maintained. Staff salaries are very low; the highest paid worker earns less than US$15 a month. Delays in being paid of up to two months are quite normal and staff in poorer counties tend not to be paid for up to two years. While services are theoretically free in public facilities, there is extensive de facto charging in both districts.  Chapter 5 /loealth 81 5.8 Ilhe supplp ot druggs at district hospital outpatient depa,iments has improved since these departmewits Acre included in the donor-funded Elssential l)rugs Nianagement Program (EIDMP). (Ho%ever, it remrains inadCequate in some other districts, for reasons that are not clear as all districts participate in the i)NiP. The inpatient drug situation is not so good in Mlbale but is adequate in 1loima. At smaill dispensaries an,! healthi centers, the diruig supply is also sa.isfactory but that at the litiger health centers is inadequate; shortages are ]litIicult to assess because there is clear overprescription of stome items like pro.aine penicillin and probably also chloroquine. In a number of kinits, untrained staf't' continue to see patients and prescribe. The supply of consumiiables, especially glove,. and ot' c -ntraceptives, particularly injectahles, is seriously inadequate in hoth districts. Both had an appropriate number otf vehicles, motorcycles and bicvcles. mririly supplied throtugh the vertical programis and run uAith tunds from the vertical immunization program, although there is no transport control and coordinition and no maintenance system . 5.9 Progress on child immnunlization is ve-v good (74 pe-cent ccverage for measles, polio, BCG and DP't' in Nibale and 45 percent in (loima). u ith measles ever less of a problem. Drop out rates remain high, however, and tetanus toxin coverage t'or "onlen of c:iildhearing age is very low (22 and 18 percent. respectively). Neither the diarrheal disease ontrol program nor the information system is functioning in either district. Neither has clear plans for AIDS control activities. In Hoima. 51 percent of women. interviewed in a survey did not know that there was HIV infection in the district; teaching about AIDS in Mlbale is concentrated on the schools. Health workers do not all know enough about needle sterilization to prevent HIV transmission through injections. While the commonest cause of morbidity and mortality in both districts is now malaria, very little is being done about it. Yet low cost environmental strategies, which worked in Uganda in the 1960s, remain teasible. Sector Strategy 5.10 Since 196i tihere have been various commissions and workshops which have developed approache I uealth policy. Rarely, however, have their recommendations been translated into specific actions. In 1978 Uganda became signatory to the Alma Ata Declaration on Primary Health Care but no action followed. In 1983 the then Government again endorsed Primary Health C(are but did nothing to formulate a specific implementation policy. With the National Resistance Movemenit's len Point Program and Rehabilitation and Development Plan, howexer, Uganda has made a stronger commitment to communitv participation in the planning and implementation of basic social services through the Resistance Committees. In 1987, the Government appointed a Health Policy Review Commission to develop a health policy of "availing primary health care for Uganda through the health strategy of prevention of d'\ease and promotion of health and through popular participation and establishment of functional health units at all levels." Following the Commission's report, the Government in 1989 adopted a national health policy, reconfirming primary health care, based on the health cciiicr as the basic health delivery unit with the hospitals playing an essential referral function. 'This policy r..mains essentially non-operational, however, and has neither been translated into a set'es of specific actions nor used in health budgeting. The Ministry of Health is at present engagad in prodlucing a National Health Plan through the year 2000; the first draft, completed in early 1990, has no, been accepted by the Ministry of Planning and Econromrc Development because, while it calls for a system based on primary health care, it proposes th- continued concentration of resources on hospitals. It has no explicit priorities and takes no account of either the financial resources lik-ely to be available to the public system or the role of the private and NGO sectors.  5.11 The effective absence of a practical health policy thus continues the situation deplored by the Health Policy Review Commission in 1987: "there s uncertainty as to what specific policy the Ministry is pursuing across a wide range of its activities. Hence, even senior officers are not clear as to the Ministry's policy on specific issues. The absence of clear policies in turn leads to inadequate determination of priorities for the Ministry as a whole. Consequently the external donors take advantage of the apparent policy vacuum to lobby high political and top civil circles .hus prejudicing the policy decisions in their favor but not necessarily in the national interest." 5.12 Moreover, the Government's de facto policy is to concentrate resources on hospitals and not on primary health care through health centers (para 5.21 below). This general pattern of resourrce allocation is not unique to Uganda but is rather typical of many African countries; what is peculiar to Uganda is the degree of concentration of resources on hospitals. The same conclusion can be drawn from the organizational structure of health services. Consistent with NRM policy, the District should be the principal implementation unit for health services. Yet there is no clear accountability. The District Medical Officer (DMO), a Ministry of Health appointed and paid official seconded te the district, reports variously to the Regional Medical Officer, the District Executive Secretary, the Ministry of Local Government and the Ministry cf Health. His staff, the District Health Team (DHT), are employees of the District. Based on a survey of two districts and consistent with impressionistic evidence from others, the DHT controls only about 10 percent of health resources in the District (8.5 percent in Hoima and 11.5 percent in Mbale). The bulk is controlled by the Ministry of Health, which runs the District hospital(s) and also the donor- funded vertical programs such as immunizations and essential drugs, though the latter falls to the DHT to implemert; donors are unwilling to decentralize financial functions because of relatively poor accountability at the District level. The DHT has no authority over the public hospitals or over any NGO or private health services. Almost no districts have health plans, although some are now trying to develop them with NGO assistance. 5.13 While the Government's general objective of primary health care is thus entirely consistent with the community participation and poverty alleviation goals of the Economic Recovery Program, it has as yet little practical content. A particular difficulty is the lack of a long term vision for the sector and the lack of an explicit definition of the role of the public sector compared to the NGO and private health services. The pattern of government-controlled spending appears to reflect not so much its avowed policy of primary health care but rather a very understandable, but unaffordable, attempt to rebuild the public health system of which Uganda was justifiably proud in the 1960s. 5.14 Health is both a public and a private good. As a public good, there is a prima facie case for government intervention to achiev.- the social returns from preventive services. As a private good, there is also a ca.,e for direct government provision in terms of both equity and basic needs, to ensure access to services to those who cannot afford it at private and NGO facilities or who have no such facilities near where they live. Thus, a pragmatic health policy for the 1990s would be for the Government to ensure initially that cost-effective primary and preventive health services are supplied to the maximum number of Ugandans, with a secondary objective of rehabilitating the hospitals necessary for referrals. Such a policy would mean accepting that it is not necessarily the government's obligation itself to provide services but rather to ensure that they are provided. It would also imply increasing the public sector's resources through cost recovery at the most  unapuet O Heai(nl J expensive points ot the system: drugs, hospital inpatients and private patients at public facilities. It would mean that nuhlic health expenditures financed out of' general revenues would be concentrated on preventive services such as immunizations, family planning and AIDS education and on the provision of' primary curative servit es in areas like the North where NGO and private facilities are inadequate. It could also mean the contracting or subsidization of NGOs to provide services in certain regions where this would be onore cost-effective than public provision. Modest experiments along these lines are currently underway in Uganda but they have not as yet been integrated int) a coherent approach. Some have suggested that the government should confine its ac.tivities to prevention, hut this is not practical given the history ot' public health in the country, the distribution ot NGO and private facilities, and the very urgent need to maintain and improve prima-y curative services at a time of economic adjustment. Evidence is scanty but would seem to indicate the importance ot simple cura0ive services in order to keep people healthy enough to continue to w(ork and generate ircome. An untreated bout of malaria, for instance, can ruin a small farmer's attempt to bring in a harvest. 5.15 Given the weak capacity of the existing public health system, such a policy could be implemented only by building on the system's strengths and overcoming its weaknesses. There are four main strengths. Foremost among these is the quality and number of Uganda's health personnel, both inside and outside the country, who are actually and potentially available for the svstem. The second is the - istence and increasing number of NGOs. The third is the success of two donor-funded vertical programs: child immunizations and essential drugs. The fourth is the public's willingness and ability to pay for services, as evidenced by official charging by NGO and private providers and de facto charging at many public facilities. The chief weaknesses of the system are the poor salaries of all public sector health personnel; overstaffing; the serious shortages of consumables: the urban and hospital bias of most services; the poor physical condition of most public facilities and their relative lack in the North; the lack of managerial capacity and work planning; and the fragmented administrative structure which results in almost no accountability. Issues in Sectoral Public Expenditure Program 5.16 Requirements and Phasing. Over time, the Government should consider moving toward a system in which all health expenditures and facilities in a defined geographical area, presumably the district, conme under the direction of the DHT, headed by the DMO or a professional manager. It will take time to move toward such a system, however, and this will involve the consolidation of resour ces currently spent under several different budgets ald the training of district health teams in management practices. 5.17 Meanwhile the priorities for public expenditure should be to improve the functioning of the present system, taking account of tne existence of alternative facilities run by NGOs and the prihate sector and focusing on one or two types of standardized health centers as the crucial point in the system for delivery of primary care. Once this is done, the higher levels of the system can be improved, starting with district hospitals and then moving up to referral hospitals. There is, however, little point in rehabilitating hospitals beyond the minimum necessary to keep them functioning until the lower levels of the system are operating better, and until provision is made to meet the hospitals' recurrent costs. 5.18 Overall Fxpenditure. The absolute minimum recurrent expenditure necessary for effective primary and secondary health care is equivalent to about US$3-4 per capita per annum; a more reasonable level would be twice this - Kenya spends US$6, Zimbabwe US$14 and Botswana  Table 5.4: Financing of Local and Foreign Expea.diture on liealth, 1988/89 (U Sh million) I-ocal Foreign Total Expenditure Recurrent 3237 2501 5737 Capital 533 1337 1871 Total 3770 3838 7608 Financing Central Govemment 1844 1078 2922 Local Government 630 630 Donors 1296 2760 4056 Total 3770 3838 7608 US$29, all countries which also have significant NGO and private health providers in addition to the public sector. At a minimal level of US$3.5 per capita, Uganda should spend about U Sh 22 Lillion on primary and secondary care, before including both recurrent costs at the tertiary level and capital costs. In fact, total public health expenditure on all purposes in FY89/90 will be about U Sh 17 billion, less than the minimum recommended for primary and secondary recurrent care alone. Recurrent spending on that seems likely to he equivalent to about US$1.7 per capita, or only one half of that minimally necessary. Furthermore, largely as a result of the government's dependence on aid, only one third of this (US$0.6 per capita) is funded by the Ugandan central and local government, the bulk is financed by donors. The Government is financing only about 43 percent of total foreign recurrent expenditu7.s (Table 5.4) and, as discussed in the next section, these expenditures are well below those minimally necessary. 5.19 The overall level and financing of recent expenditure is summarized in Table 5.5. There are three levels and five principal sources of expenditure: central government (NMinistry of Health, Mulago Hospital, and Ministry of Local Government), local government (Districts and Municipalities) and donors. Hard data were collected for the central government and the donors; expenditure by local government was estimated on the basis of the historical 65 percent of their health budgets that has actually been spent by Districts and by taking four times the Kampala City Commission expenditure for municipalities; data for FY89/90 are extrapolated from mid-year results. Overall expenditure has increased from U Sh 2.4 billion in FY87/88 to about U Sh 17.4 billion in FY89/90, a real increase of 96 percent, largely reflecting expanded donor financing as a result of both increases in aid and the depreciation of the shilling. The donors' share in total spending has risen from 47 to 70 percent. Total public expenditure on health has gone up from US$2.5 to US$3.0 per capita, from 4.8 to 8.7 percent of public expenditure, and from 0.7 to 1.3 percent of GDP.  Chapter 5 Healtth 85 Table 5.5: Total Public Expenditure on Health, 1987 88 - 1989 90 (U Sh million) 1987 88 1988 89 1989/90 (est.) By lunding SourLe .inistrv of Health: recurrent 573 1728 2565 development 12 302 160 Mlulago Hospital: ____ recurrent 205 588 900 development 29 156 230 Miniktry of Local Government: development 104 148 220 Districts: recurrent 214 398 800 Municipalities: recurrent 120 232 360 Donors: development 1102 4056 12142 Total 2359 7608 17377 By Purpose Recurrent Primary 1025 3222 7936 Other 796 2515 4324 Total 1821 5737 12260 Capital Primarv 392 1046 2881 Other 146 825 2236 Total 538 1871 5117 Total Primary 1417 4268 10817 Other 942 3340 6560 Total 2359 (7608 17377 5.20 According to the financing, one would expect recurrent spending to consist of that under recurrent budget heads and capital spending to be that under development budget heads, including all donor funding. On such a budget head basis, recurrent expenditure w(ould represent about half the total. In practice, however, some government development expenditure and much donor expenditure is for recurrent purposes; when the data are corrected for this, the proportion of total spending accounted for by recurrent expenditure rises to about three quarters.  86 Chapter 5: Health Table 5.6: Total Real Public Expenditure on Health, 1987/88-1989/90 (constant 1987/88 - U Sh million) 1987/88 1988/89 1989/90 (est) Central Govemment 923 1207 1087 Local Government 334 260 309 Govemment 1257 1467 1396 Donors 1102 I 1676 3238 Total 2359 3144 4634 Memo item: Current US$ million 18.4 1 23.8 7 35.0 5.21 Just over 60 percent of total expenditure went for primary health care. The pattern is very different when a comparison is made of the composition of central government, local government and donor expenditure, however. On average in FY87/88 and FY88/89, expenditure on primary health care accounted for only 33 percent of that financed by central and local government but for 83 percent of that funded by donors. When it is considered that all local government expenditure is only for primary health, it can be seen that a very low proportion of locally-financed central government expenditure is for primary care. By contrast, the one tertiary hospital, Mulago, alone accounted for 20 percent of total government-financed expenditure on health in each year and for 10-1 I percent of total spending from all sources. 5.22 Thus not only is the total level of health expenditure very low indeed, it is increasingly financed by donors. Donor funding has risen steadily during the 1980s from about US$5 million in FY82/83 to US$35 million in FY89/90 and indeed is expected to rise to US$46 million in FY90/91 simply on the basis of existing commitments. While government funding of health did increase in real terms from FY87/88 to FY88/89, it will fall in FY89/90 (Table 5.6). The low government share reflects not only low budgeted amounts but also a consistent pattern of realized expenditure falling well short of that budgeted. The recurrent budget of the Ministry of Health in FY88/89 was only 17 percent of its real level in FY70/71. Moreover, actual recurrent spending by the Ministry of Health in FY88/89 was about 65 percent of that budgeted. Overall central government spending on health in the same year was equivalent to 64 percent of that budgeted, rather higher than the 55 percent achieved in FY87/88 and the 44 percent that seems likely in FY89/90 (Table 5,7). Comparisons of budgeted versus actual expenditure by donors are essentially impossible to carry out, because the development budgets do not even roughly reflect estimated donor disbursements on existing projects, much less new ones. (This is not a problem peculiar to the health sector, however.) ILocal governments spend about 65 percent of their health budgets. 5.23 The consistent pattern of the Government failing to spend its health budget was largely due to "suspensions" by the Ministry of Finance, as discussed in Chapter III of Volume 1. The health sectof is particularly susceptible to suspensions in its capital budget; in FY89/90, for instance, development spending by the Government will likely equal only about 19 percent of that budgeted. But the health sector, which depends on imported drugs and supplies, is also vulnerable to suspensions on its recurrent budget due to shortages of foreign exchange. In March 1990, for  Table 5.7: Central Government Expenditure on Health, Actual versus Budgeted, 1987/88-1989/90 1987/88 1988/89 1989/90 Budget Actual Budget Actual Budg Actual _________________I_I_ (est) Ministry of Health Recurrent 1148 573 2671 1728 4974 2565 Development 106 12 613 302 1347 160 Total 1254 585 3284 2030 6321 2725 Mulago Recurrent 271 205 600 588 1009 900 Development 65 29 155 156 1575 230 Total 336 234 755 744 2584 1130 Ministry of Local Government _ _ Development | 89 1041 1881 148 3401 220 Central Government Recurrent 1419 778 3271 2316 5983 3465 Development 260 145 956 606 3262 610 Total 1679 923 4227 2929 9245 4075 example, or nine months into the fiscal year, Mulago Hospital had not been authorized by the Ministry of Finance to spend any of its FY89/90 budget for drugs and consumables. If donors were not funding the bulk of the drugs necessary for primary health care, there would be a very serious situation. 5.24 Recurrent Expenditure. As Table 5.8 shows, the effect of these suspensions is that wages, salaries and allowances dominate government-funded recurrent spending (57 percent) while drugs and consumables dominate that funded by donors (48 percent). Overall, personnel accounts for 42 percent of recurrent expenditure and drugs and consumables for 33 percent. This distribution is reasonable. Yet in practice its results are not; as overall expenditure levels are too low, the level of spending on both personnel and supplies is seriously inadequate. 5.25 In the case of personnel, the situation is greatly complicated by massive overstaffing. This, plus the overall low level of expenditure, results in excessively low average salaries, as is typical of the Ugandan public sector as a whole (Volume I, Chapter 4). A District Medical Officer, for example, received in March 1990 a salary of about U Sh 7,000 per month; a mid-level manager in the private sector with equivalent responsibilities earned about U Sh 150,000 per month, or 21 times as much. Similar ratios apply at all levels of staff. The very low salaries are frequently paid very late, especially those paid by local governments in the poorer counties. The result is a poorly motivated staff at all levels, reflected by high attrition rates (40 percent for nurses and 50 percent for medical assistants in one year, 1986, alone); the de facto charging in many places for nominally free services, and, as reported by many officials, high levels of corruption, ranging from stealing of office and medical supplies to kickbacks on construction and other contracts.  88 CNliptet 5 Health r I ahlbe 5.8: Conip,.' sith'n ot Rc:.urrent Health Expcndtiuic. 1987 88 l Sh million) Prirniir Sccondar- 1ri IMF% lGl Donors Total G(os, Donors Toital Govt Donors To.tal Pers.i.oil 355 99 454 168 2_ 8 196 49 49 Drugs &_ Con|(sumahle 20 337 35 7 133 3 136 105 - 105 Buildiiig O &dM -- 4 4 13 2 15 15 - IS Ti-transport 0 <K Nt 20 20 4 3 7 . Training - . 54 54 .- 2 2 24 24 Other 70 134 204 2 24 26 10 10 lrotali 445 648 1093 320 62 382 205 . 205 Ccntral Administration rotal Govt Donors Total Govt Donors Total Personnel 54 . 54 626 127 753 Drugs & Consumable I l 259 340 599 Building O & N1 17 17 45 6 51 Transport O & N1 I I l l 17 23 40 Training 28 28 52 56 108 Otlier 14 14 96 158 254 Total 125 i 125 1095 710 1805 5.26 Because public sector health personnel are employed by so many bodies, there is no accurate inventory of their numbers, especially at the critically important local government level. Approximate figures are available for the Mlinistry of Health but not for other public sector health employers: they indicate that about 8,300 of the 9,200 established posts are curiently filled, with 5,900 staff confirmed or on probation, and 2,400 unconfirmed. In health as in other sectors (see Volume 1. Chapter 4), steps are being taken to regularize the established positions, but about 30 percent of the staff, including most people hired within the last five years, have yet to be confirmed in permanent and pensionable status, further dampening morale. 'I'he present iegularization is only on the basis of the payroll, however; urgently needed Is.) is a comparison of positions against requirements. There are no staffing norms in Uganda's public hialth sector, although the Health Policy Review Commission recommended some. These norms were applied at the district level in Hoima and Mtbale and indicated overstaffing of 70 and 27 percent, respectively. In both cases, 60 percent of this was due to group employees. Indeed, group employees have increased in number throughout the health sector. There are currently 13,200 paid by the Miinistry of Health; figures are unavailable for earlier years but it is clear that the numbers have increased very substantially. 5.27 Resolving the salary issue cannot be done in the health sector alone but must be part of a wider solution at the level of the public sector as a whole. This will clearly have to involve reducing the numbers of group employees. Of the Ministry of Health's 13,200 group employees,  Chapter 5 Health 89 tu,r inwtancwe, ahout 4,000 are performing important health functions, as nurses' aides and similar. It the Nlin strv %.re to reduce the remainder by half, it would realize salary savings of U Sh 15 million per month. This would be three times as much as is needed to pay DM,Os the equivalent of private sector middle management salaries. Other actions can be taken by the health sector alone. Most important among these is, first, the establishment of staffing norms and their compar-ison with the current actual situation and, second, increasing the salaries and operating budgets of those A ith supervisory responsibilities at all levels. 5.28 'I'The Centra! Medical Stores (CMS), located in the Ministrv ol Health, is the main procurer ot druos and consurmables tor Ipublic sector health institutions, with the exception of hlulago Hospitld. I)ruL s and conslulmables are largels imported and may be considered a foreign expenditure. Located w ithin the CNIS is the Essential Drugs Management Program (EDMIP) which provide2ls c'AciAl diu- kits ft'r lealth centers and hospital outpatient departments, funded by DAN'ID)A at an avx rage level ot' about US$3 million per annum, and has been a reliable source of supply. T'he unavailahility ft' ftoreign exchange has made the funding of the remaining drugs for district and Mulago inpatients very dilfticult. Total drug expenditures including those by Mulago are currentls running around US$10 million per annum, but foreign exchange is not made available when needed and barter agreements, including dubious valuations of drugs, have frequently been used wkhich has likely not been a cost-effective method of procurement. A spot check by the CMS on two common items from a barter shipment, for example, found one to be valued at twice and the other at four times its price in private pharmacies in Uganda. There have also been long delays in receiv ing a number of barter shipments, with significant proportions arriving after their expiry date with imiplications tor eft'ficacy and safety. 5.29 Opinions differ on tl e adequacy of the drug supply. Field work during the mission did not indicate any severe problemi, though hospital inpatient departments and especially Mulago were relatively poorlv stocked. Annual expenditures of US$10 million compare with a 1988 WHO estimate of public sector requirements, excluding Mulago, for essential drugs only of US$6.1 million and a CNIS estimate, also excluding Miulago, of US$10 million for all drugs including those for hosp;tal inpatients. Mlulago's needs have yet to be properly estimated but are likely of the order of US$2 million. It would therefore seem that about US$10 million of Uganda's total public sector requirements of about US$ II million is being made available, but, except for essential drugs, the supply is not consistent and there are long periods when drugs can be in short supply in hospitals. 5.30 WN'hile the bulk of drug funding requirements are met, the picture is very different for consumables - surgical materials, dressings and other medical supplies. The CMIS estimates requirements at about US$5 million, plus perhaps another US$1 million for Mlulago. Yet only about US$0.2 million has been spent in each of the last two years. The result is evident: serious shortages of supplies throughout the system, from Mlulago down to small health centers. This is particularly serious for supplies associated with MICH such as gloves, forceps and catgut, all of which are virtuallv nonexistent at present. Consumables suffer even more than drugs from the Ministry of Finance's failure to release suspended items; their absence may not secm as dramatic to those outside the health system but is striking to those within it. 5.31 Field work in Hoima and Mbale also indicated that there was a serious supply problem with regard to f'amily planning supplies. Demand for injectables was very high in both districts but supplies have not been available since August 1989; the method used in 80 percent of cases was thus pills. Oniv two types of pills were available in Mbale and only one in Hoima.  Table 5.9: Health Sector Vehicles, early 1990 Condition: Good Fair Poor Total Ministry of Health 16 38 76 130 Headquarters 13 26 35 74 Hospitals 3 12 41 56 Districts 30 100 70 200 Total 46 138 146 330 Sources: Ministry of Health Districts estinmated on basis of sample districts. 5.32 The distribution system within Uganda for the essential drugs under EDMP is very effective. Those for other drugs, consumables and family planning supplies is less so. The CMS makes two distribution rounds each quarter, the first for essential drug kits and the second for bulk drugs and supplies. The second round is typically subject to long delays, often of months, because of both a lack of fuel and of allowances for drivers, funds for which are both in the suspended category, and a shortage of lorries as a result of their poor condition and shortages of spare parts. The Government should consider expanding the use of the highly efficient EDMP distribution system to cover all drugs and supplies. 5.33 The other principal components of recurrent expenditure are training (about 6 percent of the total), and operations and maintenance of buildings (3 percent) and vehicles (2 percent). Training is equally funded by the Government and donors. Very high attrition and emigration rates of clinical personnel do raise questions about the returns to training. The Government may wish to consider a moratorium on clinical tra.L:ing to channel training resources toward improving quality and supervision, the redeployment and reorientation of some medical cadres, and management training, for which there is a serious need at all levels of the public health system. Operations and maintenance responsibility goes along with operating responsibility i.e. the Ministry of Health is responsible for hospitals, Mulago for itself, and local governments for health centers and lower level facilities. Almost all operations and maintenance expenditure has gone for operations, e.g. utilities for buildings and fuel for vehicles. Spending on maintenance has been minimal, with the result that even recently rehabilitated facilities have begun to deteriorate. There is urgent need for a physical facilities maintenance program. It is striking that there is neither a program nor a budget for equipment maintenance. 5.34 The situation regarding vehicles (Table 5.9) is more complicated and varies at the district, hospital and national level. There is an adequate supply of vehicles in the districts, indeed perhaps an excessive supply, as a result of vertical projects funded by donors. Each district has at least three vehicles; Hoima and Mbale each had six, of which four were functioning. Yet the very provision of vehicles by different vertical programs preciudes the rational use of transport; in general all vehicles in the districts are being run by immunization program funds, regardless of the vehicles' supposed purpose. There is no transport control and coordination and very little maintenance. New vehicles are provided regularly by donor projects so that non-operational vehicles are fairly quickly replaced. At the Ministry of Health hospitals, 73 percent of the vehicles are in poor condition and there are only 56 vehicles for the entire country, making patient transport  Table 5.10: Donor Expenditure by Level, Type and Program 1988/89 (US$ million) Recurrent Development Total Percent By Level and Type_ _ Primaiy 14.0 5.3 19.3 81 Secondary 1.7 I1.9 3.6 15 Tertiary 0.4 0.5 0.9 4 . _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ Total 16.1 7.7 23.8 100 By Program Essential Drugs 5.0 0.81 5.81 30 AIDS 2.1 !.5 3.6 19 Immunization 2.3 0.2| 2.51 13 almost impossible on referral or in emergency. Ministry of Health headquarters has 74 vehicles, one half in poor condition. One third (24) are assigned to individuals and not to programs or departments. Ministry operations and maintenance expenditure is inadequate for the 130 vehicles it runs, therefore, as evidenced by the high proportion that are in poor condition and that only 15 are in "good" condition. It is noticeable that the majority of both total Ministry vehicles and of the better functioning vehicles are held at headquarters rather than assigned to the hospitals which have a greater need. Some reallocation could have very high returns, though the operations and maintenance expenditure would still have to be increased. 5.35 The pattern of recurrent spending across levels of care is illustrated in Tables 5.4 and 5.5 and mirrors that of spending as a whole (para 5.21). Almost 60 percent of the total goes for primary health, including 100 percent of that by local government, almost 90 percent of that by donors but only 9 percent of that by the central government. Overall, Government is fuinding only about a quarter of total recurrent expenditure on primary health. The bulk of central government recurrent expenditure goes for urban secondary hospitals (44 percent), Mulago Hospital (25 percent) and central administration (22 percent). Yet Uganda's population is overwhelmingly rural. Donor funding of recurrent expenditure, by contrast, includes only 11 percent for secondary hospitals and 2 percent for Mulago. Thus, as with total spending, the overall allocation of recurrent expenditure by program fits the government's priorities only because of donor expenditure and not because of that by the Government itself. In saying this, it must be recognized that both the tertiary level Mulago is at present also providing primary and secondary care and the secondary level district hospitals are providing primary care. 5.36 Public Investment Plan. There are serious problems of consistency among the information contained in the government's Rehabilitation and Development Plan (RDP), in its annual development budgets, and in donors' data on expenditures. The RDP, for instance, lists 10 priority projects in the sector yet donok project names and components straddle these. The IDA First Health Project, for example, includes elemc'int. in support of six of the ten projects. This makes matching of the projects as defined by the Government and as defined by the donors very difficult. Despite this, broad conclusions are pos,ible, although detailed ones are difficult. A further complication is what is included in the p'an. In theory, the public investment program should correspond to development expenditure and should consist only of capital formation and technical assistance. In practice, while development expenditure (defined as that by the Government under  its development budgets plus that by donors whether budgeted or not) appears to account for about 50 percent of sector spending, one half of this is on recurrent items. Thus capital and technicai assistance expenditure account for only about one quarter of total sector spending. 5.37 Donor funding dominates both true capital (70 percent) and total development (90 percent) spending. This section thus concentrates on analyzing donor expenditure in recent years and as anticipated in the tuture on the basis of the government's plans and donor intentions. Essentially, nine major projects/progranis carl be identified: Physical Rehabilitation and New Construction (i) Nlulago Hospital (ii) Secondary Hospitals (iii) Primary Health Care Facilities Vertical Primary Programs: (iv) Immunization (UNEPI) (v) Essential Drugs (EDMP) (vi) AIDS (ACP) (vii) Population (viii) Other (CDD, etc.) Training (ix) Health Training and Planning 5.38 While donor spending is largely donor determined, it has generally corresponded with government's stated priorities, although no explicit criteria appear to have been used by either Government or donors to arrive at this situation. Table 5. 10 shows spending for FY88/89, which was broadly similar in its distribution to that in both FYS7188 and FY89/90. Over 80 percent has gone for primary care, most channelled through three vertical programs: the Essential Drugs Management Program (EDMNIP), the AIDS Control Program (ACP) and the Expanded Program on Immunization (UNEPI). Within these three programs, the bulk (80 percent) of expenditure has been for recurrent items. Remaining donor support at the primary level has been both for other vertical programs and for health center rehabilitation. 5.39 The 20 percent of donor funding that has gone to levels above the primary has been split roughly equally between recurrent expenditures and physical rehabilitation at both secondary and tertiary levels (there has been very little new construction). The very low levels of government funding for development expenditure have largely been to provide counterpart funds for the donors' vertical programs and also for very modest physical rehabilitation at all levels of the public health system. 5.40 The volume and pattern of donor spending looks likely to change, however, on the basis of disbursements from existing comnmitments and government intentions regarding the future public investment program. On the basis of existing commitments, funding for the vertical primary programs is likely to continue at around its present level. That for physical rehabilitation of health centers should increase slightly. Basic rehabilitation of secondary hospitals and Mulago is set to increase very significantly. Pending completion of its health plan through the year 2000, the government's longer term intentions remain to be determined.  Chapter 5: Health 93 5.41 The nine major projects are briefly considered below: Physical Rehabilitation and New Construction (i) Mudago Hospital functions as the primary and secondary care facility for Kampala and as the national referral, teaching and research hospital. Some basic rehabilitation of Mulago is currently underway which should prevent further deterioration. Much of Mulago's patient load could be met in a very cost-effective manner by rehabilitating and possibly expanding the number of primary health care centers run by Kampala City Commission. All further expenditure on Mulago must therefore be placed into both the Kampala and also the broad sectoral context. (ii) Secondary Hospitals. Eight of these are to be rehabilitated and one new one is to be constructed in Rakai district. In general the rehabilitation will be appropriately basic. The Government will wish, however, first to assure the rehabilitation of the primary health care centers in the nine districts and elsewhere. As with Mulago, it must also develop a program to fund the hospitals' recurrent costs. Without such funding, the rehabilitated facilities are in danger of rapid renewed deterioration. The Government intends to introduce user charges throughout the public health system (paras 5.47-5.49). Recovering at least some of the costs of drugs and consumables and of inpatient stays would likely make the hospital recurrent cost financing problem more manageable. Priority for hospital rehabilitation and, ultimately, for new construction, should go to those districts which have no adequate NGO facilities. (iii) Primary Health Care Facilities. These should be the priority for physical rehabilitation and for new construction in areas such as the North, Rakai and Kampala where their number is inadequate. As with secondary hospitals, priority should be given to geographical areas without adequate NGO and private facilities. Plans must be set up to maintain the facilities, once rehabilitated. At about US$1 million per annum, fu-nding for the rehabilitation and construction of health centers is currently inadequate. Vertical Primary Programs General Comment. Vertical programming in and of itself need not be a bad thing and indeed has resulted in two very successful programs (EDMP and UNEPI). However vertical programming has very high costs in terms of administration and duplication unless different vertical programs are at a minimum coordinated and preferably integrated. Unfortunately the health sector abounds with instances of both duplication of effort and administrative overload. Nowhere is this more apparent than in Information, Education and Communication (IEC) activities. Each major donor has an IEC component, including UNICEF (AIDS; primary/maternal health including immunization), IDA (general health; AIDS), USAID (family planning, family health), UNDP (AIDS) and WHO (AIDS). Similarly the existence of the different vertical programs in each district drives the funds available to the DHT and does not permit their allocation to the highest priorities in each district.  (iv) Immunization. The UNEPI program has been very successful with regard to child immunizations, particularly for measles, though there are high dropout rates. It is seriously deficient, however, with regard to tetanus toxoid protection of pregnant women, as evidenced by both immunization and maternal death rates. The program should be continued and improved for tetanus toxoid. Consideration could be given to using its effective IEC channels to deliver other IEC messages. (v) Essential Drugs. EDMP has been a very successful program, costing LUS$34 million per annum for drugs and US$1 million in technical assistance for management support. The principal funder (DANIDA/Danish Red Cross) intends to discontinue the management support after 1993. It seems unlikely, however, that CMS will have adequate capacity to fully manage the procurement and distribution of drugs and consumables for the public sector by that date, and technical assistance for this should be a priority for continued donor funding. Consideration should also be given to utilizing the very effective EDMP distribution system for drugs not on the essential drugs list (or for redefining the list to include them), for family planning supplies and for consumables. (vi) AIDS. The AIDS Control Program has not been effective at the critical district level, judged from the mission's findings in Hoima and Mbale. Even though the AIDS problem is more grave in some oihi districts, the Government also has serious concerns about the effectiveness of the AIDS Control Program and has recently adopted a multisectoral approach to AIDS. An AIDS program is clearly of very high priority, given the extent of HIV infection in Uganda; urgently necessary work has only just begun, however, to determine its scope and costs. (vii) Family Planning. As noted, demand for family planning outstrips the availability of supplies and contraceptive prevalence is very low. This appears to indicate that the very modest current program has been effective in stimulating demand through its IEC activities but has not done enough to supply contraceptives. The mission did not examine this program in any detail and so this conclusion must be considered tentative, though suppotted by the Hoima and Mbale field work. There would seem to be a case for a major expansion on the supply side, possibly using the effective EDMP distribution system. Nor should there be any diminution of demand-stirnulation. (viii) Other Vertical Programs. These programs, including Control of Diarrheal Diseases and various Health Education efforts, do not appear to have been very successful, although they have not accounted for much sector expenditure. Consideration should be given to reexamining them as vertical programs and integrating some of their activities into DHTs' routine activities. In addition, it is critical also to establish effective malaria control and STD programs. Training (ix) Health Training and Planning. The mission did not examine these programs in any depth, especially on the clinical side. As with government-funded training (para 5.33), however, it notes that high attrition rates raise questions about the returns to these programs and that there is an urgent need to improve the training of management and planning staff and that current efforts are ill coordinated and inadequate. Prerequisites are some reorganization of responsibility in the sector, as discussed below (paras 5.49- 5.55).  unapter 0: tiealtn V0 Proposed Sectoral Expenditure Program 5.42 The discussion in the previous section indicates the priorities for the medium term. To reach minimum levels for effective primary and secondary care, recurrent spending at these levels should be doubled in real terms. Within this, primary care should have priority as it is the most cost effective. Equally, it is not feasible to close secondary and tertiary facilities, even if they are of lower priority, and a minimum level of expenditure is necessary to keep them functioning. At all levels, it is essential to raise salaries to increase health workers' morale and productivity, to ensure a minimum supply of drugs and consumables (about US$16 million per annum), and to make provision for building and vehicle operations and maintenance. The Government hopes to meet some increased recurrent expenditure through the formalization of user charges in the sector (paras 5.47-5.49). Increased recurrent spending from the budget will be necessary in addition, however, at least at the primary level. It is clear that local governments do not have adequate resources to pay even a slimmed-down primary health work force. This may mean rethinking the present block grant concept from the Ministry of Local Government to the districts; at present there is no block grant component for health while there is for other expenditure categories like education; alternatively, if ministerial responsibilities are reorganized (para 5.50), it could be done through the Ministry of Health's budget. 5.43 Similarly, for development expenditure, the priority should be the primary subsector, including the maintenance of effective vertical programs, the expansion of the family planning and AIDS programs, and the rehabilitation and construction of health centers and lower level facilities in areas not well served by NGOs and the private sector. This means especially the North and Rakai district. Hospitals also require rehabilitation but this should proceed slowly until primary facilities are adequate and until provision has been made to cover their recurrent costs. The rehabilitation of Mulago beyond those basic works currently funded is not a high priority, whereas the provision of primary facilities for the rapidly expanding Kam.pala area is critically important. Cost Recovery and Efficiency 5.44 Cost Recovery. The Government intends to introduce user charges throughout the public health system; it did so for private hospital patients in March 1990. No timetable has yet been established for introducing charges. As there is de facto charging in many, if not most, public health facilities at present, the formal introduction of charges will to a very large extent represent a rationalization of existing practice. Present thinking among those preparing for the introduction of formal charges is that general charges will be levied for all curative outpatient and inpatient services on a sliding scale according to the level of the facility. Documents under discussion in early 1990, for instance, suggested a general outpatient charge at a health center of U Sh 200 compared to U Sh 300 at a district hospital and U Sh 500 at a general referral hospital; a similar scale was under consideration for inpatients. Outpatient reattendances would be charged at one half the rate for a first attendance. Preventive services such as immunizations would be free, as would all services for children under 5 years of age and reattendances for the treatment of certain communicable diseases such as tuberculosis. There will be exemptions for those unable to pay; these will be granted by the Resistance Committees at local level following general guidance from the center.  5.45 Increasing charges al h1gher levels ot the system will encourjiage patients to tirst seek treatment at lower levels ot the hialth system. The Government intends to charge those referred to higher level facilities only the dlifference between the fee levied at the tirst tacility and that for a first attendance at the second facility. The le% -ls of charges under consideration tor out.atients are said to be determined as 20 percent of the estimated costs of personnel, drugs and maintenance at each facility. Yet this is an arbitrary percentage; moreover, in general such cost data do not exist at the facility level. Similarly, without cost data, it is hard to assess the possible levels of inpatient charges relative to costs. No decisions hiave been taken on the utilization-i of revenues from charges ;,ut a likely scenario is that 50 percent of them will be utilized for staff "welfare" (i.e. to increase salaries), 30 percent to improve the health facilities themselves, 10 percent for a common fund at the district level, and 10 percent to cover the administrative costs of operating the u.ser charge system. Health expenditure finanlced from general revenues is not to be reduced as a result of charges being introduced which will thus supplement existing resources. 5.46 Comprehensive revenue projections based on the proposed charges have not been drawn up. In general they are expected to approximately quadruple health center eniployees' earnings and triple those of hospital workers. Reviewing the likely revenues was beyond the scope of the public expenditure mission. However, several observations are relevant. First, the intention to introduce charges is a sensible one, from the perspective of both the overall level of resources in the sector and the allocation of those resources. Second, more thought might be given to charging, including a prepaid capitation fee, at the community level for basic primary services. Third, without a systematic study of household budgets, it is impossible to estimate whether or not the poor will be able to pay even the fairly low charges under consideration and thus it will be important that the exemption system be operated very flexibly until such data are obtained. Alternatives could include exemptions determined by the local RCs, or using proxies for income such as ownership of land, livestock, etc. Fourth, given that more pecdle diready seek tieatment from NGOs, which charge for their services, than do from the public sector, it is possible that the introduction of charging throughout the system wil! divert more people to the NGOs. Fifth, the fees now in place for private patients are clearly too low to even cover co,its and should be raised as quickly as possible and then regularly revised to keep up with inflation; this should be done even in advance of the wider introduction of user charges as there is no case for private patients being subsidized by public ones. Sixth, on the basis of experience in other countries, the Government would be advised to delay the introduction of charging until it is certain that it has proper systems set up for collection of fees (including the exemption of those unable to pay) and referral of patients and until the supply of drugs and consumables is in good shape. Seventh, the allocative efficiency goal of the system is somewhat offset by the charge proposed for referrals; to encourage people to enter the system at the lowest level, referrals should be free. Finally, charging at all facilities may be attractive in terms of raising health workers' income but it both raises questions of wage equity with other parts of the public service and avoids concentrating cost recovery on the three areas where costs are highest: drugs/consumables, hospital inpatients, and private patients. Thie Government may wish to start with charging for these services and only later move to more general consultation fees. The most expensive hospital inpatient services, which are largely utilized by relatively more affluent urban dwellers, should be the ones where future cost recovery is focused. These include particularly the "hotel" functions such as food. Once such charges were in place, a greater portion of hospitals' recurrent costs would be funded and their rehabilitation would be more justified. It would be advisable also as soon as possible to introduce a separate charge for drugs in order both to recover some portion of costs and to deter overprescription which at present appears to be widespread.  Cthapter 5 i.eIatIi 97 5.47 C'ost Effecti,eness. "IHealth" :s an outconme is not readily measurable in any country. In otlher countries, however, it is possible to measure the cost ot intermediate outputs such as number of patienits and number ot days, although these do not reflect quality. In Uganda, however, the collapse of the health intormation system means that e-en such intermediate output data are not available. A limited amount of data was collected in Hoima and Mhale districts which suggests that the unit cost per outpatient visit at a public health center is lower than that at a private or NGO clinic. Hlowever this does not at all mean that the public facility is more efficient; rather it pays very low salaries to its workers anid, unlike the private unit, usually has no support services such as a laboratory. Wthen the data are corrected for quality, therefore, and when labor is properly shadow priced, it may well be that the private facility is more efficient. More work is needed in this area. It will not be useful, however, until the underfunding of recurrent expenditures is corrected. 5.48 Given the perceived quality of NGO services, however, the Government should experiment with contracting with NGOs to provide not only for-fee curative services but also free preventive services. Very close monitoring of such experiments would provide useful information to guide the future provision of such services; would he necessary in order to prevent NGOs from becoming overloaded and losing effectiveness; and would be essential to protect the poor. Institutional Issues 5.49 Overall planning and policy work is the clear responsibility of the Ministry of Health. Its planning unit is weak, however, as evidenced by the first draft of a health plan through the year 2000 which takes account neither of disease priorities ncr of likely resource availabilities but rather consists of a very mechan'al projection of facility and personnel needs. The unit should be strengthened through the assignment of skilled Ugandans supported by external assistance. Over time, the unit could move not only to provide planning services at the national level but also to assist districts with planning. At present only a very few districts have any sort of health plan. NGOs could possibly also prove helpful in sector planning at the district level and the experiment currently underway in Masindi should be closely monitored. 5.50 Both budgeting and implementation are impeded by the complex organization of the sector, discussed in paragraph 5.6. Not only are the Ministries of Health and Local Government, Mulago Hospital, districts and municipalities engaged in service delivery, their budgets are considered separately from each other. Mulago became semi-autonomous of the Ministry of Health in 1986; while this is very desirable in terms of giving it operating aut(,nomy, it has also resulted in the Ministry of Finance considering the Hospital's budget quite separately from that of the Ministry of Health. They should be considered together. Similarly, as Mulago currently performs primary and secondary as well as tertiary functions, it would be advisable to coordinate decisions concerning it with those of other agencies involved in service delivery in the Kampala area i.e. the Ministry of Health and the Kampala City Commission. The financial year for local governments runs from October-September, or three months different from that for central government, which makes financial coordination very difficult. District and municipal budgets are submitted to the Ministry of Local Government for review but no special attention is paid to the health sector, even though it is usually the largest single component after "general administration". This is probably because there is little direct funding of local health services by the Ministry of Local Government, except for development expenditure.  5.51 Over time, it would be desirable to focus all health activities on the district and, for the large towns, the municipality. Tnis would involve a major change, however, including strengthening district health management and giving it control of all health resources, including for hospitals, spent in the district. The Government may wish to consider moving toward such a pattern, ultimately reducing the role of the Ministry of Health to one concerned witn national guidance and functions such as training that require economies of scale, and integrating the vertical programs at the district level. Pending such a reorganization, or a similar one, urgent steps are needed to incruase the coordination of activities at the district level. The Government may wish to experiment with this in a few districts. 5.52 The process of budgeting is similar in the Ministry of Health, Mulago and the Ministry of Local Government. Basically, individual departments submit "wish lists" to the central part of the ministry which then cuts them back largely by comparison to the previous year's budget. There is no forward budgeting. There is no systematic basis for estimating counterpart requirements for donor funds under the development budget. Relative allocations in most budgets tend to look like those of the year before with only minor variations, preserving a historical pattarn of spending and making change very difficult. There is almost no program budgeting, although the Ministry of Health does use six semi-programmatic budget heads e.g. Hospitals, Training, etc. To further complicate budgeting, recurrent budgets are reviewed by the financial sections of the ministries whereas development budgets are reviewed by the planning sections. There is thus no scope for integrated budgeting. No evaluation techniques are used to determine the effectiveness of particular programs. Once budgets are approved, they are not fully implemented because the Ministry of Finance suspends the greater part of them, as discussed in paragraph 5.23. 5.53 Accounting in the Ministry of Health is of reasonable quality but very delayed because of a lack of simple computer equipment. It was, for example, difficult for the mission in March to obtain results for the first half of the current fiscal year i.e. July-December. The Ministry has submitted the accounts for FY88/89 to the Auditor-General who is responsible for auditing them as for the rest of the public sect, r. The Auditor-General is well behind in doing so; the latest audit received by March 1990 was for FY86/87. Accounting has virtually broken down at the local level where there are almost no up-to-date records; as noted, this is one reason why donors are loath to decentralize financial aspects of vertical programs. Accounting was not examined at either Mulago or the Ministry of Local Government.  CtHotUfet 5 tHodlith 99 Tahle 5.1 1: Total Public Expenditure on htialtli by Program. Local/Foreign Expenditure and Financing Source, 1988/89 (U Sit million) Local Foreign Total ILocal Foreign Total Recurrent 1538 825 2363 630 . . _ 630 Prunarv 106 100 206 630 630 Secondarv 644 400 1044 -- -- Tert iary 38S 200 588 _ C cntral Administration 400 125 525 - Capital 306 253 559 Primary 100 48 148 - Secondary 96 96 192 ._ Tertlarv 78 78 156 - Cenitral Administration 32 31 63 -- Total 1844 1078 2972 630 _ Primary 206 148 354 630 Secondary 740 496 1236 . . . Tertiarv 466 278 744 _ Central Administration 432 156 588 Donors Total Local Foreign Total Local Foreign Total Recturrent 1069 1676 2744 3237 2501 5736 Primary 899 1488 2386 1635 1588 3222 Secondary 170 124 293 814 524 1337 Tertiary - 64 64 388 264 652 Central Administration -- -- - 400 125 525 Capital 227 1084 1312 533 1337 1871 Primary 121 776 897 221 824 1046 Secondary 106 226 332 202 322 524 Tertiary - 82 82 78 160 239 Central Administration - - - 32 31 63 Total 1796 2760 4056 3770 3838 7608 Primary 1020 2264 3284 1856 2412 4268 Secondary 276 350 626 1016 846 1861 Tecriary - 146 146 466 424 891 Central Administration _ _ _ 432 156 588  w EDUCA TION Sector Description Importance of the Sector 6.1 Education provides an investment in future productive capacity through its medium- and long-term impacts. In the former case, education and training fill requirements for a qualified labor force that contributes directly to productivity. In the longer term, basic education, in addition to being recognized as a human right, has been shown to bring benefits through increased earnings, higher agricultural productivity, improved knowledge of health and nutrition, and reduced fertility rates. In Uganda the important role of education has long been recognized. Historically this was provided by mission schools and later by communities, for schooling at the primary and secondary levels. Higher education has instead been a government function. This legacy has a profound effect on the existing issues of educational expenditure. Attention to the sector is of particular importance at this time because of the need to recover from physical and institutional decay in order to restore the level of quality and operational capacity required to maximize the potential for development of human capital. Recent Sector Performance 6.2 Education has suffered from the political and economic tragedies of the past two decades no less than have other sectors. Remarkably, however, schools have continued to function and even to increase in number and enrollment. Concurrently, there has been a substantial drop in quality, as measured by material inputs, teacher qualifications, internal efficiency and performance on examinations. These problems have been accompanied by deteriorating administrative control and support services, by staff demoralization and by increasing cases of misappropriation of funds. If the proportion of the population which achieves a meaningful level of education is used as a measure, rather than merely the percentage of age groups enrolled, as is the more common case, the situation is particularly stark, and a decay through the years can be clearly seen. Though as many as 70 percent of children enter school at some time, their ranks have thinned, by the time they compete for university entrance, to about one percent who are not only highly capable but are also privileged by sex, geographical location and family background.  102 Chaptei 6: Education Current State of Affairs 6.3 Physical devastation, deterioration and decay are the rule for older educational facilities at all levels. The newer ones are generally poorly built and inadequate. Similarly, furniture and instructional equipment are neglected in the established schools and generally nonexistent in the newer ones, except for ubiquitous blackboards. Books and teaching materials are similarly scarce, except those supplied by recent IDA projects, and they are often misused or (worse) held back from use because they cannot be easily replaced. Meanwhile, teacher training goes forward without benefit of the selfsame books. Salaries are so low as to make the teaching a poor last choice as a profession, and teachers are often correspondingly unmotivated. At all levels of schooling, government support is grossly insufficient and there is little hope for change in the foreseeable future. In brief, the current state of affairs is dismal and generally does not provide even minimal conditions for an education of acceptable quality. Things are kept going only through private and community support, and there are a host of problems which afflict the system. 6.4 The Government, and particularly the Ministry of Education (MOE), is well aware of the problems which exist. An Education Policy Review Commission (EPRC) was convened by the Minister of Education in 1987 and issued its report in 1989. This is now being reviewed and prioritized by the MOE, and will be issued in due course as a government white paper. It is expected that future donor assistance will be developed on that basis. Meanwhile, the Planning and Statistics Unit (PSU) of the MOE is preparing a survey of equipment and facilities in the schools, and the Ministry of Local Government (MOLG) proposes to carry out a school condition census in 1990. This is expected to reveal as many as two thousand "subgrade" primary schools which offer less than the officially prescribed seven grades of instruction. Derinition of Sector Strategy Sectoral Objectives 6.5 These can be stated definitively only once government policy has been enunciated in its white paper. Meanwhile, the main thrusts of policy can be summarized as physical rehabilitation, eventual universalization of primary education (UPE) and revision of educational practice at all levels to reflect better the realities of Uganda. UPE can reasonably be targeted only for 2010. It responds to the Economic Recovery Plan (ERP) objective of poverty alleviation by its status as a basic right, through improving the human capital potential of the poor, and as a contribution to their meeting the requirements of citizenship. Education can contribute to the objective of economic growth by helping to provide a trained labor force and to meet the prerequisites for further training and education. It is intended that schooling at all levels will become more practical in orientation, both in a general sense and in meeting the ne.ds of employability. Though there must be short-term subordination to ERP stabilization objectives, the role of education and training as an investment in the future cannot be long delayed. 6.6 President Yoweri Museveni, in his address to the 1990 Makerere University commencement exercises, recognized education as a partner with capital and labor in providing the foundation for economic development. He endorsed the spread of general education, in particular functional literacy and science. He also noted the value of knowledge of health and hygiene in the elimination of 'diseases of ignorance" which afflict Uganda. The relation of education to development was further recognized in the need to build up management skills. He accordingly stated the Government's intent to increase investment in education and health as soon as resources  Ctlapter o: taucation Iva become available. Derivative from these general intentions are the needs to increase the effectiveness of resource use in education, to use any savings to the improvement of instructional quality at all levels, to improve management of educational institutions and of the system as a whole, and to rationalize the provision and financing of higher education. Long-term Vision of the Education Sector 6.7 Resource shortage is the dominant feature of the education sec.or in Uganda. The Government budgeted less than U Sh 1,900 per pupil for primary education in FY89/90, while devoting U Sh 430,000, almost 225 times as much, per student at Makerere University. Even so, the University cannot be said to be well provided for and operates under very constrained conditions. Primary education, however, would be in collapse were it not for parental contributions, which are said to make up from 80 to 90 percent of combined recurrent and capital expenditures, and the quality of services ranges from mediocre to abysmal. It is therefore essential that Government significantly increase its support to primary education, as well as to other activities under the MOE, while necessarily continuing to rely heavily on private resources. In the long term, basic education for all children would be sought, with appropriate further education and training to provide for meaningful entry to productive employment. This would be financed through the shared efforts of the Government and private sources, with additional government support to assure equity for the disadvantaged. Government efforts and resources would also be directed toward the assurance of quality and good management throughout the system. At the same time, government resources would gradually be withdrawn from provision of non-instructional services. such as student housing and boarding. Higher education institutions would increase in self reliance and in the relevance to national development of their programs. There is no way Government can take all this over fully in the near future. It must therefore concentrate on provision of complementary inputs (e.g., physical inputs, support services, teacher training). Efforts at the same time need to be made to provide equity among districts and between urban and rural schools. This will be a long-term process, but one that should begin soon and be well planned. Strengthening of institutional capacities within the sector should therefore be started immediately. 6.8 Government must continue to play a key role in all aspects of the education sector, despite its present weakness. In addition to high social returns, this is required on grounds of equity and enhancing quality. At the primary and secondary levels, Government should provide overall administration, standards of performance, curriculum, textbooks and other scholastic materials, increased salarik. of teachers and supervisory services. These are essential to provide a unified point of reference and basis for improvement through the years. The direct role of Government in provision of instructional services should also gradually be enhanced, as financial conditions permit. On the other hand, in areas where a degree of institutional autonomy offers a payoff, as at the university level, that should be allowed for. Private resources also have a role to play, particularly in those aspects which do not relate directly to instruction, as in the case of boarding facilities. Operational Issues Within the Sector 6.9 General. A confluence of circumstances makes the time ripe for comprehensive consideration of the many, complex and interrelated issues which beset the education sector in Uganda. They arise from nearly two decades of chaos and gradual recovery. They will not soon go away, nor do they admit to hasty solutions. Nonetheless, there are hopeful signs. First, the white paper will provide a basis for government thinking and discussion. Secondly, President Museveni has publicly recognized the need to address the needs of the education sector, once more  104 Clapter 6. EfJucation immediate and general economic problems are under control. Third and finally, there is broad concurrence among IJgandan and donor agencies s to the nature of the problems, and a growing interest among do'nors in addressing them. 6.10 The overall challenge is how to plan, promote and assist national development through actions in the education sector, combining inputs from public, private and donor resources, and making use ot the comparative advantages offered by each. Questions of finance and especially of salary levels arise immediately, but these exist generally throughout the ecotnotmly, Essential for keeping the schools going are the contributions mandated by the parent-teacher association (PTA) at each individual school. At the same time, these funds are open to misuse, being under loose local control, and they foster inequities in tae provision of educational services. Not surprisingly, administration is weak in all parts of the education system, which has grown, during a period of great political and economic stress, from relatively small size, to now encompass 2.5 million primary school pupils, 270 thousand secondary school pupils, about 12) thousand teachers, plus thousands of others (Table 6. 1). The administration has not grown in capacity to meet the demands upon it, and it needs help. 6.11 Primary Schools. Discrimination against pupils from poor families because of fees levied through PTAs is particularly burdensome here, this being the foundation for all other education. Headmasters are dependent upon those levies for operation of their schools, however, and they have little choice but to exclude pupils who cannot pay. That source of funding would quickly dry up otherwise, and it is essential to the operation of these schools (Government presently provides only 2 percent of per capita GDP for each enrolied primary school pupil, compared to 11 percent in Kenya and 30 percent in Ethiopia.) Visits to even the most fortunate schools show them to be in great need, and diminishing physical quality is evioent as one travels farther from urban into rural areas. In the latter, conditions can be strikingly poor, often revealing a complete lack of furniture, instructional materials and even roofing. In physical terms, the situation could often hardly be worse. It is hard to imagine education of substantial value taking place under such circumstances. The gross rate of enrollnient in primary schools is variously stated as between 60 and 70 percent, with a net enrollment rate about 10 percent below that. Overstatement of net enrollments is the most likely case because of the influence of inflated reports on government-paid fees, because of the abundance of over-age pupils, and because of the possibility that population totals are underestimated. 6.12 Other Responsibilities of the MOE. Secondary schools, technical schools, teacher training institutions and all post-secondary institutions except Makerere University fall under this heading. Secondary schools are subject to the same system of official and PTA fees as are primary schools and suffer from similar problems and inequities. The other MOE institutions receive, in theory at least, full government support, which means that they operate under deprived circumstances. Many secondary schools, as well as most of the others, are boarding institutions. This means that as much as 60 percent of the government funds devoted to them are spent on feeding (school often ends artificially early when food runs out near the end of the term). Boarding schools are a tradition which militates against equity in the provision of secondary education. Boarding is perhaps unavoidable at higher level institutions, though it is a private function rather than a government one. 6.13 The number of primary teacher training colleges (TTC) had at one time grown to 94 through the politically motivated proliferation of institutions, often established in facilities originally built for secondary, or even for primary, schools. These new TICs are often understaffed, underprovisioned and too small to be operationally efficient. The MOE has subsequently reduced  Gfidp(w tY. tulCf'.diIvI? I VUJ the number ot such institutionis to 70, a trend which must be applauded. At the same time, it will be importanit to go turther toward making teacher training an efficient operation as soon as is feasible, by closing additional small institutions and by strengthening those which remain. 6.14 higher Education. Makerere University is the predominant institution under this category, though the new university at Mharara and the Islamic University at Mbale (private, with external donor support) exist as well. President Museveni has addressed the issue of university admissions, noting that these have an elitist bias and effectively exclude applicants who have not graduated froim the most p rivileged of the country's secondary schools. He urges that steps he taken to increase participation by women and by members of other disadvantaged groups. That trend deserves encouragement, as does the gradual move by Government and by university authorities toward more operational and financial self-sufficiency. Makerere University appears to be coming to the realization that it must operate within tight budgetary constraints and that it must seek more of its own sources of funding. The recent elimination of certain student allowances, small though they were, established further such moves in principle. Even so, the university receives virtually complete support from the Government, and nearly 40 percent of its budget goes for boarding and student allowances. Meanwhile a newly created second university at Mbarara has started operation and will require increasing support from future education budgets. Role of the Public and Private Sectors 6.15 Primary and Secondary Schools. With as much as 90 percent of costs being paid from private sources, schooling at this level has been aptly dubbed a "private system under public administration". That was not always so, however, the level of public support having dwindled in the course of time while private funds moved in to take up the slack and keep the schools going, however inadequately. The system only works at all because there exits such private support. Particularly poignant is the dilemma of low teacher salaries. Teachers can officiaily make as little as U Sh 2500 per month, equivalent to less than US$7 at the official exchange rate. To this, community resources may add salary supplements, various allowances, housing and garden plots. Evidently the teachers manage to survive somehow, though these conditions affect job choice, school stafring, and therefore the diversity of teaching quality teaching among schools. Some resources also come from local government sources, though the exact nature of this support is low, variable and not well known. The school management committee in each case defines how the PTA monies will be used. This state of affairs can lead to abuse and also obscures who really is calling the tune. It is clearly not the MOE in many cases. In addition, there exist purely private schools, about 10 percent of them at primary and about 20 percent at secondary level. Some of these (perhaps as many as 20 percent of them by one estimate) are of high quality, but the others are substandard institutions which have been set up in the hope that the MOE will eventually take them over. This situation, though it speaks well for the attitude of Ugandan parents toward education, is hardly helpful to the already straitened financial circumstance of the MOE. 6.16 Post-Secondary Education. The situation here is diametrically reversed. Until recently, public sources paid everything, including transportation to and from the students' homes, room, board, books and pocket money (albeit only U Sh 265 per term at Makerere University). This situation has begun to change gradually, as was mentioned above. In any event, the situation in post-secondary education is far from lavish, and there is little opportunity to tap community resources because these institutions do not have constituencies in the sense that primary and secondary schools do. The challenge here is to find more private support, whereas at the lower levels it is to increase and make more meaningful public involvement.  106 Chapter 6: Education Summary 6.17 In the long term, it will be important for the MOE to regain control over the primary and secondary schools by again providing a meaningful portion of their operational costs. At the same time, the Government should get out of the business of housing and feeding students. Higher education should seek to improve itself by moving onto a more self-supporting basis for its operations. First ar.ention should be given to reforming and strengthening the administrative capacities of the MOE and all its parts, and those of individual institutions and universities. This would include due attention to district administration, and to central services such as curriculum, supervision, inspection and examinations. Issues in Public Expenditure for Education Phased Requirements for Public Expenditure 6.18 Recurrent Expenditure. This accounts for 76 percent of government spending in the sector. Even so, present government financial inputs are totally inadequate to meet reasonably realistic costs of education. In those activities falling under the MOE, therefore, increases must for the time being be limited to: gradual expansion of primary education; and provision of complementary inputs of high leverage on the quality of instruction, e.g., scholastic materials, better school management, improved examinations and strengthened inspection services. Such inputs, which clearly fall within the scope of public action, will need to be supplied in increasing quantities whenever possible, using both savings from operational improvements and increased resource levels when they become available. The gradual elimination of student boarding expenses would be among the former. At the same time the operations of teacher training, vocational/technical and higher education institutions should be carefully reviewed in terms of national development needs, and their operations rationalized in the light of those findings. 6.19 At Makerere University, there is a need to phase out of financing noninstruction expenses. Improved university operations and increased self reliance should be sought through greater institutional control of its budget, creative use of university resources for income generation, and eventual withdrawal from provision of student subsistence. The long-term goal of these reforms would be to restore the University to a position of strength while providing it with a sound financial base. 6.20 Development Expenditure. With only about five percent of the government capital budget available to provide for rehabilitation, expansion and qualitatively improved infrastructure (e.g., laboratories, furniture, equipment), increased support from government budgets will be important. The heavy capital costs of Mbarara University must be viewed with concern under present circumstances, as must the high future recurrent costs which would be required for that institution, even as other education sector operations remain in great need of resources. At Makerere University continued and creative use of donor funding for rehabilitation and modernization of facilities, together with emphasis on activities deemed most relevant to national development, is essential. Analysis of Recent Patterns of Expenditure 6.21 Recurrent and capital expenses in recent years are summarized in Table 6.2. For the three years ending FY89/90, these amounts represent 14.4 percent, 13.9 percent and 12.9 percent  -niprer o: cuucation IV/ :espectively of total government budget. Current data on actual expenditures are not readily available, but it appears that at least 80 percent of the recurrent budget is utilized. Government budgets for education are low in comparison with those of other countries (compare 24.1 percent for Kenya and 14.9 percent for Malawi), and are especially so for primary and secondary schools. They would be about 24 percent less if the costs of student boarding and higher education allowances were not included, so actual educational ^ rvices use up less than ten percent of government budget. Some few additional government resources are provided through the MOLG and from local governments themselves. Though good information on the amount and use of those resources is not available, they would likely add no more than half a percent to the ;hare of governmrnnt resources going to education. The MOLG inputs pav for the government portion of school fees and assist communities to pr- ide and maintain facilities and furniture. 6.22 When compared to GDP, government budgets for education are correspondingly low, at about 1.6 percent in FY89/90. If private contributions are included, however, the picture changes and the share going to education becomes about 4.3 percent (necessarily a very loose estimate, and probably a somewhat conservative one). This is somewhat below the median for Africa. It is thus evident that, when all resources are considered, Ugandans spend a substantial part of their income on educating their children. That income is of course relatively low, even in African terms, and there are great variations among districts. Review of Recurrent Expenditure 6.23 Examination of the allocation of recurrent budgets show that two features dominate: employee expenses (40 percent) and transfers (45 percent). Of the latter, 30 percent relate mainly to maintenance of pupils in boarding schools at the secondary level and higher, principally feeding. Otherwise, most expenditure goes to staff costs. Very little is used for material inputs such as books, stationery and other instructional materials, most of which comes from school fees. An experimental scheme under which parents contribute funds for textbook purchase is being tried in four districts, but its practicality will not be known for several years. Meanwhile, the supply of these crucial materials is inadequate, much of what there is coming from donor agen-ies. There can be no norms for these expenditures in a hand-to-mouth situation where schools u,d pupils get what they can, how they can, and when they can, virtually none of it adequate for an acceptable standard of instruction. Inequities among schools are particularly troublesome here, and the less fortunate operate under exceptionally deprived circumstances. 6.24 Student allowances (in addition to boarding costs) in vocational and higher education range from U Sh 15,000 annually in the TTCs to U Sh 173,000 in the Uganda technical colleges, about US$40 and US$470 at present exchange rates, respectively. Together they account for 7 percent of the sector budget. Recurrent costs throughout the education sector draw mainly on local currency, though a few require foreign exchange. This may come to as much as US$1.5 million, the bulk of which goes to payment for preparation and printing the standard national examinations for use at the end of primary and secondary schooling cycles, for payments made through international organizations such as UNESCO, and for travel abroad. Review or Capital Expenditure 6.25 Relatively small though it is, government recurrent spending on education is far greater than capital expenditure, accounting for 22.5 percent of the comparable government budget, in contrast to 5.4 percent for capital. The latter is of two kinds, designated as Section 1 and Section 2 of the capital budget and accounting for 35 and 65 percent of capital spending for education in FY89/90 respectively. The former relates to capital expenses which are wholly born by the Government.  108 Chapter 6: Education The Section 2 capital budget is supported by donor funds. There is in addition corsiderable discrepancy between the budgeted amounts and those actually spent. This arises both because of shortages of fuilds and because of delays in capital project implementation. For example, the actual expenditure of capital budgets by Makerere Unversity has varied from 39 percent to 87 percent of approved budget over the past five years. Capital expenditures are summarized by program in Table 6.2, where considerably variability among years can be noted. 6.26 Special mention must be ma(le of the capital costs incurred by the new second university at Mbarara. This used U Sh 50 million in 1-Y88/89 and U Sh 986 million in FY89/90. This is but the beginning, given that this university has only rvcently openied its doors and is said to have an enrollment of 50 students. So far, there has bet only minimal donor support, and the entire capital expenditure has been borne by Governmen.. There evidently has been no planning or projection of total capital and operating costs or of how these would fit into the operational budget of the education sector. A more considered integration of Mbarara University into the budgetary program of the Government is urgently needed. Review of Public Investment Plan 6.27 The donor supported portion of the Government's capital budget derives principally from the projects of the Rehabilitation and Development Plan (RDP). To these should be added an expected project from the African Development Fund (AfDF) which would cover rehabilitated physical facilitie: and new equipment at the Polytechnic and at Makerere University, particularly for science and computer technology. Some of the listed RDP projects, like those addressing primary schools, secondary schools and teacher training, are continuing efforts to gain support for standard elements portions of the education sector. These are funded on a catch-as-catch-can basis when funds become available, in an effort to upgrade the admittedly needy facilities of the system. Others are more focused, and a comment-tv un a few of these follows. Actual support to this program in Sectioo 2 of the FY89/90 capital budget bears little relationship to the RDP project list. More than half the budgeted amount comes from the IDA Fourth Education Project, which 'iovides primarily for books and instructional materials. In another substantial input the World Food Program (WFP) is providing food commodities to TTCs and secondary schools. This is classified as a capital development project because it relates to efforts to improve school curricula and conditions, though the actual donor input is of a recurrent nature. 6.28 With reference to certain of the RDP projects, that directed at improvement of the National Curriculum D-v"elopment Center indeed addresses a real need of the education system. As such, it must be considered to be underfunded, though the quality and thoroughness of planning which have gone into it suggest that a strong conceptual foundation has not yet been laid. Finally, two projects seem to be responses to donor interest earlier expressed by not realized. The first relates to a disince learning study. Enticing though Lhat concept is, one must question the priority of such - ,tudy at the present time, because realities would make early establishment of an effective distance learning system difficult. The amounts suggested for this, however small, could surely be better used. Distance learning may well have an important future role, and should be considered in due course as a part of the overall program for upgrading the education sector. The same is true in the second case, that of a computer literacy study, which has now appeared in the RDP list for at least three years. 6.29 An evident fact is the lack of planning and coordination in selecting and defining projects to be included under the RDP. The projects do not represent a program of activities so much as a list of needs and wishes gathered from various sources. Therefore, beginning as soon as  Lrldwper 0; CUUGC[1Ol -I V possible, this list should he reviewed and rationalized to fit with the objectives and priorities to be established for the sector. Some projects would then be modified, some perhaps eliminated, and surely many added, upon which basis the search for appropriately coordinated donor support could start. Such a set of projects is potentially the pivot about which capital development in the sector would operate. 6.30 In light of the above, the overall expenditures for education need to be increased, and priorities within education reversed. The Government therefore needs to significantly improve wages and salaries, complementary inputs, training and supervision, and where essential, rehabilitation of facilities for primary and secondary education, focusing in p:,rticular on areas where the quality is severely lacking and/or where children from poorer familie-s are excluded. At the same time, the Government will need to phase out of paying for boarding, feeding and living expenses. Rough estimates from the Ministry of Education indicate that to provide even a mini,num reasonable quality of basic ins.ruction, total expenditure (by parents and Government) will need to be increased five times for primary education and three times for secondary education. If Government seeks to increase its share of primary education from the present 10 percent to even one third, it will need to increase its allocation by 20 times: clearly, this reflects the rather marginal existing contribution. 6.31 Once it is capable of doing so, the MOE should or a regular basis establish standard costs, prepare projections and budgets and carry out monitoring functions based thereon. This would include estimates and allocations based on projected enrollments and on norms for the shares needed for employee expenses, services, physical inputs and maintenance. Such norms are not possible under present conditions of extreme scarcity, where a starved system consumes whatever it can get from any source with little planning or reflection. That situation will change only with tiry.,. The costing which has already been done in association with the EPRC report provides useful indications of the needs for future expenditures, both recurrent and capital, but the major message is one of unrelieved scarcity. Clearly it will take a long time to reach these levels, and a great deal of detailed programming effort will be required. In addition, non-government inputs of two to three times as much as the above figures are postulated by the EPRC report, which would put great additional stress on those resourc.es. 6.32 In addition to gradually increasing availability of government budgets to cover the expanding needs of the education sector, savings can be expected from any progress made in improving efficiency, in eliminating payment of nonexistent ("ghost") employees, in reducing student allowances, in transferring boarding costs to private responsibility, and in reducing losses from corruption. Real increases in government funding are needed at the same time, of course, as outlined above. The pace of these will depend both on the availability of budgetary resources and on the ability of the Government to bring more rationality into the budgetary process. Finally, there is the issue of teacher incomes, which must be addressed last, because the magnitude of their deficiency exceeds any ability to relieve them in the short term. Cost Recovery and Efficiency Existing Cost Recovery Measures 6.33 The existing situation is not so much a case of "measures" as it is a reflexive response to existing circumstances. Even conservative estimates show private contributions well in excess of total government support to education. Existing cost recovery takes place principally in primary and secondary education, where parental funds pay for one half of mandated school fees (the other  1 10 Chapter 6: Education half being supplied by Government) and for contributions through the PTAs which exist at each school. The latter provide by far the greatest part of recurrent costs, and they vary considerably according to wealth, location and whether the school provides hoarding facilities. They pay for virtually all construction and other capital costs in primary and secondary educat'>n, and for a varying degree of support to recurrent expenditures. At these levels, therefore, cost recovery is substantial and essential to the operation of the schools. However deficient their material outcome may be, it is only through private support that the schools operate at all. In teacher training, vocational schools, higher education and at Makerere University, the situation is different, and private support is not evident, though some undoubtedly takes place. The almost total lack of cost sharing at these levels stands in stark contrast to the situation in primary and secondary schooling, and defines a condition of inequity which should be addressed at the earliest possibility. 6.34 The implications of this state of affairs are clear and inevitable. The quality of services is generally poor, and within that envelope is highly inequitable. The few schools which serve parents who are able to pay for an adequate education are supplied with the better teachers, the more adequate physical conditions, and produce the bulk of students who proceed to meaningful places in higher education. There is no possibility at the present time for the system to be anything but elitist. Remarkably, many poor families find a way to provide some schooling for their children, but in most cases this results in a second rate product or even a complete dead-end through early drop out. There is, however, no feasible alternative to continuing roassive private support to primary and secondary schooling, aiid the inequities must there.ore continue. At most, it can be hoped that government efforts will begin to redress the situation by providing services and supplies to compensate and begin to equalize things. This would include both a general increase in quality enhancing resources, and a targeting to them to the schools and locations where need is greatest. Measures of Efficiency 6.35 Standard measures of educational etficiency show a discouraging picture. Even though as many as 70 percent of children enter school at some time in their lives, only about half of those reach grade P7, half of whom pass the Primary Leaving Examination (PLE). This then represents some 18 percent of the population, of whom about 25 percent pass the 0-level examinations at the end of four years of secondary school (5 percent of population). Thirty-nine percent go on to complete their A-level examinations (slightly more than one percent of the population). By the time these compete for university entrance, their ranks are thinned to those who are not only capable but also privileged by circumstance. 6.36 This situation, though discouraging in the face of limited resources to change it, does admit to some possibilities for improvement through measures which are not too costly. The key is reduction of loses through dropout, and improvement of performance on key examinations through increasing the quality of instruction. These are, fortunately, areas in which central action can have some effect, through improved curriculum, ins'ection services, teacher training and material inputs. More appropriate examination practices would also help. 6.37 Of equal and even primary importance is the establishment of management capabilities at the MOE, and at individual educational institutions. The MOE is at present ill prepared to provide these functions, and immediate steps to improvement are called for. The budget projections which have been made in this paper reflect that need, and strengthened of central services are maintained even in the pessimistic budgetary scenario. The cost is small in comparison with the day-to-day cost of school operation, which must for the time being remain primarily the responsibility of  unapJrer o: cuucarion I I I private resources. Within the ambit of government expenditure, however, redistributions from boarding costs to those in support of instruction would be help"ul. The budget projections given here presume such changes, but only a strengthened managerial structure can carry them out. It would be unrealistic to propose norms or standards at this time. Suffice it so say that the process will be lengthy and costly, and that its beginnings should be made without delay. Institutional Issues Organizational Framework 6.38 Secdoral Planning. Planning hardly exists in the MOE as a needs-based process with long- term horizons. Instead, and to a large extent because the severe shortage of resources makes real forward planning practically impossible, planning consists mainly of receiving want lists from the several functional departments, combining and paring them down for submission to the Ministry of Finance (MOF), and then cutting them further based on the reactions received. In recent years there has been some improvement in the statistical base, partly as a result of technical assistance from AfDF, but planning continues to be ad hoc and reactive. At Makerere University, the situation is hardly better, though the recent appointment of an energetic planning director officer gives some prospect of future improvements. 6.39 Budgeting. The budgeting process at the MOE is an extension of planning, which means it is piecemeal and mainly in the hands of accountants. Capital budgeting is done by the PSU and recurrent budgeting by the Ministry's Financial Under Secretary. In the former case, the PSV solicits and receives requests from the operational units and institutions, compiles and prioraizes them for presentation to and negotiation with the Ministry of Planning and Economic Development (MOPED). The capital budget is cut at least in half by this process, and then sent to MOF for final action. The process for recurrent budgeting is similar. After individual negotiations with agency heads regarding their needs, the list is consolidated, trimmed and sent to the MOF for further review and submission to cabinet. Overall, these processes appear more inertial than thoughtful. They are driven by immediate need and not by reflection and analysis. Perhaps it cannot be otherwise under present conditions, though a more proactive process would be encouraging to prospective donors. It is interesting here to note that the FY90/91 MOE recurrent budget request for the higher education subsector will be for U Sh 2,057 million, with U Sh 518 million of that for Mbarara University. Public Accounting in the Education Sector 6.40 Education sector accounts are audited by the Auditor General. In the case of the MOE, there is a team from his office permanently iocated at the Ministry headquarters. The latest audit received was that for FY86/87, and the one for FY87/88 "will come any time.' The FY88/89 accounts have been submitted. The audit report itself is essentially a list of queries and possible irregularities. It is on the basis of a recent such report that a permanent secretary, a chief education officer, a chief accountant and four education officers were dismissed. This was but one of the more visible cases of abuses and diversions to which the system is vulnerable. Many of these are rumored, especially at the district level and lower, where the district education officers are responsible for payment of primary and secondary teacher salaries and for deli *ery of those few supplies which reach the schools. In one publicized recent case, a district education officer was found to be collecting salaries for nonexistent teachers. The case is now in the courts.  112 Chapter 6: fducatioti Table 6.1: liistonoal and Proje.ted Enrollments and Numbers of lnstitutiooas 1986/87 1987'88 1988'89 1989/90 1990,91 1991'92 1992/93 Primary schools - Institutions 7,350 7,95 5 7,905 8,949(l) 9,000 9,100 9,200 Enrollment 2.203,824 2,430.000 2,563,000 2,550,700 2,700,000 2,865,000 3,000,000 Secondary Schools l Institutions 508 515 605 925 (1) 950 975 1,000 Enrollment 196,010 226,875 240.834 270,000 300,000 3,300,000 360,000 Teacher Training (2) l Institutions 92 92 94 70 58 46 34 Enrollment 12,551 13,179 13,173 13,200 13,200 13,200 13,200 VocationalfTechrical Institutions 56 55 52 52 52 52 52 Enrollment 9,798 10,073 6,556 7,500 8,500 9,500 10,500 Higher Education (3) Institutions 25 24 23 23 23 23 23 Enrollment (4) 5,961 5,901 5,313 5,500 5,800 6,100 6,100 Makerere University Enrollment 5,500 5,500 5,500 5,500 5,500 5,500 5,500 (1) Primary and secondary school enrollments include private schools commencing in 1989/90. There are some 050 private primnary schools (predominantly small and sub-standard, with about 10% of the primary enrollment) and some 325 private secondary schools (predominantly substandard with a few outstanding exceptions, and about 20% of secondary enrollment). (2) Teacher training for primary schools. (3) Includes Institute of Teacher Education. Uganda Polytechnic, National College of Business Studies, National Teacher Colleges (10), Uganda Technical Colleges (5), Uganda Commercial Colleges (5). (4) Makerere University enrollments are estimates. They run between 5,000 and 6,000 students. Sources: Ministry ofEducation and other government stantsuical sources.  I~~~~~~~~~~~~~~~ -- 'Iable 6.2: Central Goiernment Expenditure By Program (U Sh millions) 1986'87 1987/88 1988i89 1989/90 Rveurrent Total 690 6,188 10,686 17.754 Prnmarv Schools 130 1.241 3,263 4,738 Sekondary Schools 84 2,708 3,274 3,866 Teacher Training/Vocational 204 1,040 1,859 4,200 HSigher Elducation' 198 801 252 652 Other linistry of Education2 74 397 722 1,935 Makerere University n.a. 3 n.a. 1315 2,363 Capital Total - 1,528 1,457 5,595 Primary Schools 105 6 2,167 Secondary Schools 184 145 280 Teacher Training/Vocational - 735 360 480 Higher Education - 123 146 1,003 Other Mlinistry of Education - 124 102 392 MakerereUniversit- 257 698 1,273 Sector Grand Total _ 7.7164 12,142 23,349 Includes Mbarara University, Institute of Teacher Education, Uganda Polytechnic, National College of Business Studies, National Teacher Colleges, Uganda Tcchnical Colleges, Uganda Commercial Colleges. 2 Includes headquarters administration, school inspectorate, Teaching Service Commission, 1 other centralized expenses. Makerere University was budgeted together with other higher education institutions prior to 1988/89. This is a 'revised estimate'. (Foreign Exchange component of capital budget (donor funded): 1987/88 USS 11.7 million 1988/89 USS 4.9 million 1989/90 US$ 8.6 million Projections are in 1989/90 Uganda Shillings. Some 950 private primary schools (about 10 percent of total enrollment) and some 325 private secondary schools (about 20% of total enrollment are not included her, for lack of reliable data.  Description of Water and Sanitation Sector 7.1 Water Resources. Ninety-five percent of Uganda lies within the White Nile River Basin, which with high rainfall provides the country with ample surface water. At Lake Victoria, the major source of river flow, the minimum rate is 680 m3/s; the other six major lakes in the country contribute additional flow. In contrast, groundwater resources are generally poor, with limited yields from fissures and other breaks in the basement complex of pre-cambrian rocks. Because of this geology, accessing groundwater is not always simple. Although springs are common in some parts of the country, they are scarce in others, and borehole placement is frequently difficult. Despite this, most rural (and local urban) water supplies depend on groundwater from springs, shallow wells and low-yield boreholes. For urban systems, the country's ample surface sources allow relatively simple systems without major technical difficulties, but the investment costs of these systems are significant. 7.2 Present Institutional Responsibilities. Responsibility for water and sanitation services is divided by type of system. The major urban water and sewerage systems (7 towns including Kampala) are the responsibility of the National Water and Sewerage Corporation (NWSC), a self-sustaining (for current costs) parastatal attached to the Ministry of Water and Mineral Development (MWMD). All other towns are under the jurisdiction of the Water Development Department (WDD) of the ministry.' Responsibility for rural water supply is also formally under WDD, which provides technical assistance plus certain services such as borehole drilling. The Ministry of Health (MOH) also has formal responsibility for spring protection and well digging, and Resistance Councils in villages and other local conimunities, along with local officials seconded by the Ministry of Local Government (MOLG), hav- operational responsibility for the construction and maintenance of rural water supplies. MOH a' )as formal responsibility for rural sanitation and health education, but, as in water supply, stance Councils and MOLG's Community Development (CDD) officials have operational responsibility for community mobilization and the construction of community latrines. 23 WDD has formal responsibility for 52 of the 59 urban places in Uganda (the 34 c ..rict capitals and other towns with a population over 5,000). (NWSC is responsible for the other 7.) In actual fact, WDD is resv :sible for the operation of 23 existing urban and 14 existing rural water systems or installations. Of the 23 urban sybwms, 13 have a sewerage system of some kind. Most of the systems are out of operation, or operation is so ir ermittent as to amount to the same thing. Coverage is low in any case, especially for sanitation.  7.3 Coverage. Only a small minority of Ugandans have access to clean, safe water. Data on coverage are unreliable, but there is general agreement that considerably less than 20 percent of the total population (15 percent of the rural population) has this access. In the seven larger towns served by NWSC, coverage is the highest, approximately 50 percent overall, but less than one third of the poorest three quarters of the population in these towns now have convenient access to stand posts or yard taps. In the rest of the country, aside from a small percentage of the population in smaller urban places having intermittent access to a few poorly functioning municipal water systems, or to a few institutional systems, the remainder of the population, both urban and rural, depends primarily on springs, wells and boreholes, most of which are unprotected or subject to contamination. Most of the boreholes constructed in earlier years are out of operation because of inoperative pumps or sand intrusion. 7.4 The coverage of sanitation systems is even lower than that of water systems. About 16 percent of the population in six of the NWSC towns, or roughly 1 percent of the total population of the country, are served by sewer connections. Aside from a few septic tank users, the other 99 percent use latrines, mostly unimproved, or even more informal sanitation practices. Sector Strategy 7.5 The Government's long-term goals for the water and sanitation sector are well defined at a very general level: safe water, effective sanitation and health education for all who can be practically serviced, full cost recovery or at least fuill recovery of current costs for services provided, and poverty alleviation by provision of subsidized safe water and sanitation services to low income groups. As economic growth resumes, the government's goal is also to provide a reliable supply of water and disposal services to industry. But, while these long-term goals are reasonably clear, strategic plans to relate goals and resources are fragmented and incomplete. Urban Water and Sanitation Strategy 7.6 The Government does not have a full strategy for providing safe water to all urban residents. It does have a long-terin investment program for Kampala and six of the larger towns, which has been developed by NWSC with the assistance of several donors. Under this program, the NWSC will continue the rehabilitation and development of the water and sewerage systems of these urban centers and provide piped water under cost recovery and with some cross subsidy to those poor urban dwellers served by the system. 7.7 The water investment program aims by the year 2000 to provide household or commercial connections or stand posts or yard taps to about 75 percent of the population of Kampala and Jinja, 85 percent of the population of Entebbe, and 100 percent of the populations of Mbarara, Masaka, Mbale, and Tororo. For the seven towns it would increase the percent of population served from 50 percent to 78 percent. No equivalent plan or program has been adopted for the 52 other urban centers under WDD. The Government's Action Plan states that WDD would remain responsible on an interim basis for these towns but that eventually they would be turned over to the NWSC for operation on a cost recovery basis. At this point, WDD would be developed into an planning, technical and regulatory body serving the whole sector. The Action Plan's proposal to give responsibility for small urban systems to NWSC was not spelled out in any detail, and the issue will be revisited in a study of small town water supply that is proposed for IDA financing.  7.8 The strategy for urban sanitation is that only limited sewerage services will be provided and that urban users will provide the bulk of the nation's urban sanitation services for themselves in the form of user-financed, on-site sanitation. NWSC's investment plan would provide sewer connections to 22 percent of the population of six of the seven larger towns (not including Mbarara) by the year 2000. WDD has no comprehensive plan for the other 52 cities. Some 13 have inoperative sewerage systems. NWSC provides some septic-tank and latrine emptying services, hut the bulk of such services are expected to be provided by private contractors. A donor-assisted pilot project for low-cost sanitation in an urban slum is about to begin, but as yet there is no comprehensive program to bring health education and latrine promotion to all urban residents. Rural Water Supply and Sanitation Strategv 7.9 The Government's long-term goals for rural water and sanitation are clear: provide protected water sources to most rural residents within 1500 meters of their homes (on average, much closer), assistance in constructing improved latrines, and health education on how to avoid water- and fecally-transmitted disease. But no formal strategy or plan has been adopted to bring this about within any determinate time frame. The Government's Action Plan states a preference for an integrated approach to water, sanitation and health education. WDD, MOH and MOLG share jurisdiction over rural water and sanitation development but, like most government agencies, they do not have the capacity to carry out effective programs in the districts, let alone integrated ones. Contributing to this situation are the low salaries of civil servants, the small number of district-level officials, and the lack of sufficient supplies, functioning equipment and vehicles. 7.10 Because of the importance of water and sanitation to rural public health, the subsector has attracted some but not sutficient donor support. Donor funding for rural water activities is currently only about US$12 million. The institutional arrangement that has evolved is a three-way partnership between donors and NGOs on one side, WDD, MOH, and CDD district officials on a second, and local communities on the third. Donors and NGOs are typically the executing agencies controlling project funds. WDD contributes borehole drilling teams and specialists whose salaries, as well as those of some officials from other agencies, are augmented by the projects. Local communities provide labor, partial cost recovery and water source protection. 7.11 This system appears to be working in that steady progress has been made in the last several years in community mobilization, health education, spring and well protection, and borehole drilling and rehabilitation. Nevertheless, though progress has been steady, it has been slow; coverage is still below 15 percent. With UNICEF's rural water and sanitation project in the PAPSCA program, almost all districts are to be nominally covered by a donor or NGO program, but coverage within the supposedly covered areas is limited. The new East Uganda Project (assisted by DANIDA) will go a step further and program full coverage over a period of 10 years for the non-dispersed population of seven districts. Its goals are: maximum distance of 1500 m to a protected source and average distances of 150 m to a protected spring or well and 500m to a borehole. The non-dispersed population is estimated at 70 percent of the total population of the region. Despite the spotty overall coverage of the donor/NGO-driven system, it constitutes the Government's provisional medium-term strategy for rural water and sanitation. A consultant's report on rural water and sanitation strategy is expected to be completed in mid-1990.  Issues in the Water and Sanitation Sector Expenditure Program Water Supply and Sanitation in Major Towns 7.12 There is an ongoing program of rehabilitation and expansion of water supply and sanitation in the seven major towns under the responsibility of the NWSC. NWSC has been strengthened in the past, and it is envisaged that with continued improvements in its operations, it will become financially independent for the operation and routine maintenance of the schemes in the seven towns and will meet its financial obligations to the Government for the repayment of loans. The Second Water Project, funded by IDA and other donors, is designed to assist in this area; it is critical, however, that Government meet its counterpart fund obligations to prevent delays in project implementation. 7.13 NWSC's investment program will resui. in a much improved urban water situation. Nevertheless, the unserved population in the year 2000 is projected to equal 35 percent of the 1990 population in the gazetted areas of the seven towns, and under the same projection, about half of low-income consumers will still not have access to stand posts a decade from now. Urban sanitation is addressed by the program in six of the seven towns (all but Mbarara) but coverage will reach only 22 percent of the expected six-town population in 2000.' Even this figure may be overstating tkze coverage, since urban growth areas outside the gazetted area are not included. All in all, projected coverage is far short of universal coverage. 7.14 While fiscal realities and weaker water organizations suggest conservatism in attempting to provide full coverage, the objective of e4uitable access for this basic need points to the imperative to reach the large group of uncovered urban residents. Under the Government's present strategy, NWSC has been given jurisdiction over all water and sewerage services in the seven towns; it should therefore formulate a plan to provide some measure of residual coverage to the uncovered water and sanitation population in its service area, and its service area should be defined on the boundaries of settlement rather than restricted to the formal gazetted area. However, NWSC does not now have a policy of residual coverage. This needs to be rectified, and residual coverage should be designed to assist the uncovered population to obtain safe water and effective sanitation when piped water and sewers are not provided. The corporation might also provide technical assistance and perhaps limited services in spring protection, borehole rehabilitation and drilling and on-site sanitation. 7.15 The need for residual coverage within NWSC's service area might also be reduced by a change in its present passive policy on stand pipes, which is to provide stand pipes only when customers such as urban Resistance Councils (RC) and private water vendors apply for connection and pay for communication pipe. More outreach sales effort might result in an increase in piped coverage of low income people and, thus, reduce the need for residual coverage. Small Towns Water and Sanitation 7.16 Similarly, progress needs to be made in the rehabilitation and expansion of water and sewerage installations in small towns. Both public expenditure and supporting donor assistance is therefore required in this subsector, but should be guided by a comprehensive plan, which will shortly be prepared by WDD. The plan needs to describe the extent and type of coverage to be 24 These projections would oversate the coverage in 2000 if the population of Kampala grows by more than S percent per annum.  Chapter 7: water Ila provided for different segments of the population and the institutional and financial management of the schemes once they are completed. Some elements of the policy framework for these plans already exist, including the resolve that the beneficiaries should pay at least for the operation and maintenance of the schemes. Rural Water Supply Program 7.17 Important improvements in rural water supply are in progress in designated areas in the southern half of the country, mainly through the construction of improved springs and wells with handpumps. These have thus far been heavily dependent on donor assistance. Gov&nment and donors however place strong emphasis on community participation in the hope that the operation and maintenance of the completed schemes will be carried out and financed by beneficiaries through local governments (i.e., the RC system). Results from the pilot projects have shown that this may indeed be feasible. The role of the Government will mainly be to: provide back-up and supervision for the operations and maintenance of rural schemes; continue the capital construction program, mainly in areas not covered up to now by donor agreements; and provide overall planning, research and training. WDD's recurrent budget needs to be increased in these areas; however, a major effort at institutional strengthening of WDD will be concomitantly required. The core spending priorities for MWMD/WDD should be: to assist the rural water and sanitation programs by posting and supporting an increasing number of district engineers and field officers, and to fully fund counterpart expenditures for externally-financed projects. 7.18 Donors are urged to increase support for scaling up the rural water programs. Existing UNICEF- and NGO-directed water and sanitation programs are easily accessible through the Government's PAPSCA program, and donor involvement in project planning is welcomed by the Government. The Government's PAPSCA document and the forthcoming rural water strategy paper are also useful guides to prospective donors in this area. Cost Recovery 7.19 NWSC Rates. The government's policy, recently reiterated, is to approve prompt water tariff adjustments in line with the rate of inflation so that NWSC can maintain financially sound operations. In the past there have been serious delays in government approval. NWSC requested a rate increase in mid-1988 but received it only in March 1989. It applied for another increase in July 1989 and did not receive it until December 1989. These delays were financially disruptive for the corporation. The latest rate increase however was approved promptly by GOU and went into effect in June 1990. 7.20 User Chargesfor WDD Muncipal Services. While cost recovery should ultimately be the basis of WDD's municipal operations (or of those of NWSC, town water corporations, or other potential operators of the small urban systems), WDD does not now have the capability to manage a program of water rate collection. Moreover, charges cannot effectively be made for the inferior services. Revenue increases need to go hand-in-hand with investment and the increased and improved services that result from it. For the future, planning for cost recovery of municipal services should be a major aspect in the overall planning aiid financing of the subsector. 7.21 User Chargesfor Rural Water Services. Full recovery of all investment charges involved in spring and well protection and borehole rehabilitation and drilling may not be feasible or desirable in most instances. Experience in other countries is that full self finance or recovery of amortization charges on these investments (particularly new boreholes) is beyond village-level  social organization even if it were desirable on social policy grounds. Imposing user charges in any case is rare in Uganda. Nevertheless, in some instances RCls have been able to impose water charges. Collecting them is the job of the villager appointed as caretaker of' the water source. This revenue is used to compensate the caretaker and the out-of-village pump mechanic when needed. While water charges are rare, in many cases local communities do contribute a portion, perhaps 10 percent, of the investment cost of constructing or rehabilitating the water source, e.g.,labor, building materials and food for work crews. The forthcoming studies on rural water will clarify the feasibility of cost recovery at the village level. Institutional Issues 7,22 The most difficult problem in the water and sanitation sector is its weak institutional structure; all water and sanitation efforts are undercut by it. These include poorly remunerated and motivated staff and serious financial constraints. The only partially effective elements in the sector are (i) the recovering NWSC, and (ii) the donor/NGO-driven rural water programs, which build on the abilities of Resistance Councils and other sources of community participation. 7.23 A serious impediment to improving the effectiveness of WDD is the lack of staffing of WDD's local offices. The anticipated local staffing level of WDD is an engineer in each district and a field office in each county. At present, however, the post of district engineer does not formally exist, and most districts do not in fact have an engineer. There also is not even one field office in every district. What field organization exists in WDD is at the level of a region; there are ten regions each comprising two to five districts. While WDD's engineers and other technical staff were at 59 percent of authorized strength in 1989, and its technicians at 46 percent, most of the vacant posts were in the districts, and some UNICEF/NGO programs were unable to obtain the services of needed WDD staff. The main problem appears to be the unwillingness of staff to be assigned to the districts because of poor incentives. 7.24 A recently completed management study of WDD has concluded that there is no short-term possibility of overcoming these constraints. One of the possible solutions may be that NWSC be given responsibility for all urban systems and that rural water organizations be developed from the bottom up. They would be self-sustaining for local funding. Local water committees and organizations would form District Rural Water Associations, which in turn would form a National Rural Water Association to represent them at the national level. MWMD/WDD's role would then be restricted to being the Government's lead agency in water and sanitation matters and would concentrate on strictly governmental functions, such as legal and regulatory action, monitoring of the sector, data collection, water resource administration and conservation, investment planning, donor coordination, and provision of technical assistance and training. It would no longer carry out operations and maintenance; these functions would be performed by NWSC and the new rural water structure.Y- 7.25 A number of institutional issues would remain to be addressed even if the sector were reorganized along the lines suggested in the management study. 25 Further studies are recommended to evaluate in detail the feasibility of self-sustaining rural water organizations, to make detailed recommendations on the long-term structure and organization of the sector, and to recommend how the transition from the present structure and organization should take place.  Lriapter /. vvater 1 x 1 7.26 Should the NWSC own and operate all urban systems? The corporation is reluctant at present to mnove beyond its present seven towns, in any case. Perhaps alternative more decentralized forms should be experimented with, such as regional systems or independent municipal water and sewerage systems like those that have existed in the past. It is also not clear what type of institutional set-up would be best able to deal with the issue of residual coverage within urban areas. 7.27 In addition to the question of whether the proposed local water organizations and District Rural Water Associations can succeed as self-sustaining entities is the question of whether water associations would tend to undercut the sanitation and health education components of donor programs and thereby lose the health focus and perhaps some donor funding. This is an important question, because the provision of safe water alone does not pBrovide significant health benefits and that an integrated approach is required. 7.28 The very low coverage of urban sewerage systems makes it inevitable that on-site sanitation will be the prevailing niode of sanitation in both urban and rural areas; how should the Government organize to deal with sanitation; what role should a reorganized WDD play in sanitation? More broadly, how should ..oordination among WDD, MOH, CDD, NWSC, District Administrations, the RC system, and the proposed Rural Water Associations be structured in both water and sanitation?