Uganda has published the Public Finance Management (Amendment of Schedule 4) Instrument 2023. The instrument restricts the pledging of certain national assets to secure loans for Government and exempts such assets from any form of execution process.

The instrument amends Schedule 4 of the Public Finance Management Act, which prescribes the terms and conditions for the raising of loans by the Minister of Finance, Planning and Economic Development. It introduces a list of protected assets that are not to be earmarked, pledged, committed, loaned out or otherwise encumbered by any person or entity. The protected assets include property of diplomatic, consular, military, or cultural character, public health or social service facilities, natural resources in their natural form and assets of the Central Bank of Uganda wherever held.

The instrument also forbids the waiver of immunity in respect to the protected assets and voids any contract, agreement or arrangement that encumbers a protected asset in any way. It further exempts the protected assets from execution, attachment or similar process of any judgment or order made against the government or any agency of government.

This protection is similar to that given to the assets of the Petroleum Fund under the Public Finance Management Act. Taking note of the challenges faced by neighbouring Air Tanzania whose planes have been attached in some jurisdictions, our emerging airline, Uganda Airlines, has had their aircrafts and aircraft parts designated as protected assets which are not to be pledged or encumbered and are also immune from execution or attachment.

Why this is important?

Sovereign immunity and immunity of national assets from execution process is a common negotiation point in commercial contracts with governments. Stories abound of countries that have lost or have been on the brink of losing national assets to lenders upon defaulting on their loan repayment obligations.

At the height of the COVID-19 pandemic, Zambia became the first African country to default on a sovereign debt. Media reports indicated a likely seizure of national assets by its creditors, however government officials remain in protracted negotiations to agree on a restructuring deal. As of November 2023, a proposed restructuring deal between the Zambian government and bondholders has been rejected by creditors leaving the country's economic outlook in limbo.

In Zimbabwe, the government entered an undisclosed deal with a commodities trader for the control and benefit of a portion of the nation's mines as repayment for debts.

In 2019, South African authorities impounded an aircraft belonging to Tanzania's national airline. This followed a court order authorising attachment of the aircraft in satisfaction of an award granting compensation to a farmer from the government of Tanzania. The plane was later released on a ruling from a South African court on a legal point. A similar attachment of Air Tanzania planes took place in the Netherlands and in Canada.

In Uganda, the Attorney General's Chambers have insisted on including clauses to protect national assets, in commercial agreements such as loan agreements or power purchase agreements entered into by government or government agencies.

Ultra vires

There are concerns however on the validity of the instrument. It is arguable that the Honourable Minister of Finance Planning & Economic Development does not have power under the Public Finance Management Act to make such a list of protected assets. The section under which Schedule 4 is made, gives the Minister authority to raise loans. Schedule 4 sets out terms and conditions for the raising of loans. The concept of protected assets is not in the main body of the Act nor is there a reservation of power to the Minister to make such a list of protected assets. Similarly, the protection of government and national assets from legal enforcement process is dealt with under the Government Proceedings Act, not the Public Finance Management Act.

Therefore, to the extent that the Minister purports to make regulations outside the ambit of the Public Finance Management Act, the instrument is ultra vires and invalid.

There is also concern on the weakness of the language exempting protected assets from the legal enforcement process. The exemption is merely implied and not express. Protected assets are defined as those protected from legal enforcement process, however there are no express provisions in the instrument that create this protection. In other words, the definition is not anchored on any provision of the instrument creating the protection of the national assets.

Constitutionality

More troubling is the question of the constitutionality of any protection of national assets from execution. In some jurisdictions, the prohibition of execution against government has been held to be discriminatory and an unjustified restraint on the right of judgment creditors to an effective remedy against government, undermining the rule of law and violating the national constitution and international conventions.

Financing of Uganda Airlines

It is common practice for financing of airlines that the aircraft themselves comprise the security for the financing. The new prohibition against encumbering the aircraft of Uganda Airlines may therefore pose challenges for the financing of Uganda Airlines. While the current aircraft were all purchased outright, given the dynamics of the airline industry, it is well within reason to anticipate that Uganda Airlines will need financing soon. It may be some comfort though that the instrument, permits the Minister responsible for finance to give exemptions to the application of the instrument in consultation with the Attorney General and with Cabinet's approval.

Conclusion

While the intentions of the Minister to protect our national assets are laudable, there remains a cause for concern in the manner in which the protection has been done. There is certain risk of challenge to the Public Finance Management (Amendment of Schedule 4) Instrument and therefore it is best that the instrument be reviewed and corrected now before too much reliance is placed upon it.

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