The Public Finance Management Act (Cap. 171) ("the PFMA") is an important Act governing how public monies are collected, spent and accounted for. Among its numerous provisions is a prohibition on government entering into financial commitments that go beyond one financial year without the approval of Parliament. Such authorisation may be done in the annual budget. The rationale for this provision is that the power to appropriate national resources is vested in Parliament. Where a government agency enters into a multi-year contract, it usurps the powers of Parliament.
The courts have considered this provision twice with mixed results.
In Initiative for Social Economic Rights v Attorney General, the Constitutional Court considered a challenge to the contracts between the government and Finasi for the development of a multi-million dollar specialised hospital at Lubowa. The original terms for the deal were that government would pay Finasi directly upon completion of project milestones. In December 2018, the terms of payment were changed by a Direct Agreement between the government, Finasi and its financiers, under which government instead of immediate payment upon completion of project milestones, agreed to issue promissory notes, maturing over six years starting in November 2020. The approval of Parliament for the multi-year commitment was only sought in March 2019, on the eve of the issue of the promissory notes.
On tabling the motion for the approval of the commitment and issue of the promissory notes, the Minister of State responsible for Finance informed Parliament that the Attorney General had revoked an earlier opinion and had advised that Parliamentary approval was now required. Both the majority and the minority reports of the Parliamentary Committee that considered the motion state that Government breached the PFMA by contracting for multi-year payments, without the approval of Parliament. The motion to issue the promissory notes was nonetheless passed under immense pressure as, by then, Finasi had achieved the first completion milestone and had given government a notice of default.
The petitioners claimed that the Direct Agreement violated the PFMA prohibition on multi-year commitments as it was done without approval of Parliament.
The Court found that although the Direct Agreement was made in December 2018, it did not come into operation until Parliamentary approval was given in March 2019. The PFMA provision was therefore, according to the Court, not violated.
Respectfully, this finding was in error as the PFMA prohibition is on 'entry' into multi-year commitments. Under the rules of statutory interpretation, the word 'entry' must be given its plain and ordinary meaning and in this context, it would mean the signing of the agreement and not its implementation or operationalisation.
The requirement of the law is for the approval of the multi-year commitments prior to the making of the commitments and not retrospectively. The Direct Agreement should have been approved prior to its execution in December 2018, and not in March 2019, when the promissory notes were to be issued under it.
The Allies DBT decision was better reasoned on this point. The plaintiff sued the Uganda Police for breach of contract for the supply of goods in three phases over three years. Only the first phase was ordered, delivered and paid for. The plaintiff claimed that the Police failed to make further orders thus breaching the contract and causing the plaintiff loss.
The Court ruled that the contract violated the PFMA for making a multi-year commitment without the approval of Parliament and was therefore illegal and unenforceable. The Court found that if government enters into commitments that go beyond one financial year, the government in effect appropriates those funds thus usurping the powers of Parliament. The suit was accordingly dismissed.
Parties making long-term contracts with the government should be mindful of the PFMA requirements and the danger that violation of it could pose to a transaction. A party should ensure that Parliament has either expressly approved the transaction or budgeted for it.
An exception to Parliamentary approval of loans to the government
The ISER decision has two more points of interest to public finance management. First, the Court held that the Attorney General had conceded that the promissory notes under the Direct Agreement were a loan, not a guarantee. The Constitution defines a loan to include any money lent or given to or by the government on condition of return or repayment, and any other form or borrowing or lending where monies from the Consolidated Fund or any other public fund may be used for payment or repayment. A promissory note is a form of credit instrument representing an unconditional promise to pay a specified sum of money on demand or at a fixed or determinable time. It can be paid to a specified person, their order or to the bearer of the promissory note. In so far as the government was procuring the construction of a hospital and paying for it later, it was borrowing from Finasi (and their financiers). The financing arrangement was therefore a loan.
The second finding of the Court was that this loan did not require the approval of Parliament under the PFMA. The Court relied on the PFMA permission to the Minister responsible for finance to raise a loan by the issue of government bills, bonds or stock or using any other method the Minister deemed expedient. The Court found that promissory notes were one such method that the Minister was empowered to use to raise a loan. Further, again under the PFMA, loans raised in such a manner did not require the approval of Parliament. We agree with the Court on this conclusion based on the clear language of the PFMA.
However, the Court went too far when it held that such loans did not need the approval of Parliament until the loan 'was being enforced'. The proper reading of the PFMA provision on authority to raise loans is that with the exception of certain loans such as the instant one, a loan raised without the approval of Parliament shall not be enforceable.
It is impractical to read the provision as requiring approval of Parliament when the loan is being enforced. What happens if Parliament rejects the loan at that point? Would a lender to the government then be without remedy for a loan already taken? A more sensible interpretation is that the approval of Parliament is required at the time the loan is being taken and that if there is no such approval, then the loan becomes unenforceable.
We can well expect to see more litigation on the PFMA given that it holds the key to public finances. A challenge is pending to the recent amendment of a schedule to the Act that creates a blanket immunity from execution of all government assets This presents a real quandary when government entities are negotiating financings or other contracts where their counterparties require some minimum protections such as recourse to the entities assets. Indeed, the Bank of Uganda has already obtained an exemption from the constraints of this instrument.
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