Challenges of using project finance approach by UDB in financing road infrastructure developments in Uganda

Abstract

The purpose of the study was to examine the challenges of using project finance approach by UDB in financing road infrastructure development in Uganda. The study is focused road infrastructures in Uganda financed by UDB through project finance approach the study also includes all road project constructed through the project financing approach for example Mbale Tirinyi road and the Entebbe express highway. The study was carried out using a cross-sectional research design. This method was used because it is effective when gathering data of a sample population at a particular point in time (Amin, 2005). It was revealed that project finance, with its principle of tailor-making for the specific needs of the projects, is particularly effective and useful in managing political and country risks, certain business risks, and principal-agency risks, in spite of the high transaction costs and longer time. Findings also indicate the benefits of using project finance as the source of funding outweigh the extra costs associated. The effectiveness of project finance in reducing political and country risk is confirmed and highly recognized in this research. However regardless of the benefits of project financing as evidenced in the findings there are a number of challenges faced by UDB through the use of project financing and if not addressed can cause big problems. Besides, the risks and returns of the projects are no longer borne solely by the project sponsors or equity providers. Such arrangement enables better risk allocations among the stakeholders who are best in handling the corresponding risks and also points out that the combination of lowering the probability of default and lowering the actual costs of default facilitates the use of high leverage, which in turn creates value by reducing incentive conflicts and by increasing tax shields. This study was limited to challenges of using project finance in financing road infrastructure construction further study can be carried out on the same in other areas and sectors like agriculture, health, energy and mineral development. Key words: infrastructure development, project finance, Uganda, Uganda Development Bank