Uganda will draw on the private sector to help finance and build part of the standard gauge railway (SGR).

Finance Minister Maria Kiwanuka said the government is preparing a bankability report, which it will use to seek a public-private partnership for the project.

The new arrangement would be a departure from the path taken by Kenya, that opted to finance the construction using public funds. Uganda’s option could help Kampala put a lid on public sector debt.

“We are receiving assistance from the World Bank and ADB in preparing the project, not just for costing but also a financing package that will be presented to private investors with the appropriate safeguards for their investments, for them to come into what will be an extended public private partnership arrangement,” Ms Kiwanuka told a press conference of African finance ministers in Washington two weeks ago.

Facing a financing challenge and strict deadlines, the government is counting on the private sector to fund the project through a PPP arrangement. Rwanda, Uganda and Kenya have set a deadline of March 2018.

Under the terms of the agreement, each country is expected to build the section inside its territory, with Kenya tasked with implementing the Mombasa-Nairobi-Kisumu/Malaba lines.

Kenya is financing the Ksh327 billion ($3.8 billion) line using a concessional loan from China, pushing up the country’s public debt.

The decision by Kampala comes just weeks after it announced that it had terminated an MoU with China Civil Engineering and Construction Company (CCECC), the firm that was supposed to construct the railway.

In an April 8 letter to the president of the construction firm, Junior Minister for Works John Byabagambi served the Chinese contractor with a three-month notice of intention to terminate the MoU entered into by the parties in March 2012.

“CCECC has shown unwillingness to resolve differences with the government of Uganda amicably, even before we sign formal contracts for the projects.

Instead, the company has resorted to threats of court action. I am convinced that CCECC shall not be a reliable partner in the execution of the projects, should the government go ahead to sign contracts with them,” Mr Byabagambi wrote.

The Mombasa-Kigali line is expected to cost $13 billion, and the Malaba-Kigali portion is projected to cost $6 billion, much of which is expected to be paid for by Uganda.

Last year, Uganda signed a financing deal with the IMF whose terms included a cap of $1.5 billion. This implies that the country is unlikely to turn to a non-concessionary loan for the financing like Nairobi.

“We urge the IMF and our development partners and other international financial institutions and the private sector to partner with us in terms of technical and financial capacity building and other forms of assistance,” Ms Kiwanuka said.

Lowered rating

In January, rating agency S&P lowered Uganda’s long-term grading to B, five levels below investment grade, on concerns that the nation’s budget deficit could widen as spending increases and after donors withdrew financial support in 2012 because of corruption.

The agency projects that the country’s budget deficit will rise to an average of 5 per cent of GDP over the next three years, compared with an average of 3.6 per cent in the two-year period through 2012.

The IMF projects that the deficit will rise to 7.5 per cent in 2013/14, but will average 5.75 per cent in the medium term as oil revenues start trickling in.

According to global rating firm Moody’s, the deficit will rise as the government increases public borrowing to bankroll a series of investment projects in roads, rail and power.