17th Africa Oil Week 1- 5 November 2010 Cape Town , South Africa
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Uganda: Transition to Oil Production and Donor Independence? Print E-mail
Wednesday, 29 April 2009
Revenues from oil production can provide a way out of Uganda’s extensive donor dependence. But governance weaknesses are likely to limit the transformative potential of the hydrocarbon sector, and can exacerbate existing tensions and political risk. By Andrea Bohnstedt.
For a great many years, donors have funded around half of Uganda’s national budget. And even though they renamed themselves ‘development partners’, the partnership has not always been entirely cordial: Unsurprisingly, aid agencies wanted to have some say over what their money goes into, and whenever disagreements arose, President Yoweri Museveni bristled at such ‘interference’ with Uganda’s sovereignty. But the dependence was, and is, mutual: Uganda could not do without the external support, and donors were eager to maintain their country portfolios, jobs, and their share in the country’s success story.

Over the years, it has become a well-worn routine. But this dynamic is about to change: In the past few months, exploration at wells operated by Tullow Oil and Heritage in Uganda’s west at Lake Albert have consecutively yielded positive results and with current estimates of 1bn barrels of reserves, the commercial viability of the oil field now seems assured. The exploration firms have begun to assemble teams for a commercial development plan. Uganda is on the brink of becoming an oil producing country – a far-reaching transformation that has several risks to its undoubtedly enormous potential for revenue generation and overall economic development: 

Managing the Oil Sector 
In the ongoing exploration activities, Ugandan officials have been described as conscientious and keen to learn, even if sometimes a little too conservative. But the impending transition means that existing management capacity for the hydrocarbons sector needs to be beefed up, and quickly so: Extensive policy, regulatory and institutional developments have become a lot more urgent. To create this overall sector framework, the government plans to set up a number of new institutions, including the Petroleum Directorate within the Ministry for Energy and Mineral Development, the Petroleum Authority of Uganda, a national oil company, and a petroleum fund.  

This is an enormous task under the best of circumstances, and to manage the sector and its revenues sensibly, it is important that these institutions are not just set up in name, but draw on global best practices and are staffed with competent people. Such institutional capacity is a sore point in Uganda: The economic authorities – Ministry of Finance, central bank – have often gained the respect of their counterparts at the IMF and the World Bank for employing skilled technocrats. But power in Uganda is still very much concentrated around the presidency, and years of civil service reforms have not been able to create a meritocratic, independent civil service. Even independent-minded technocrats have reached limits when it came to prioritising and defending technical decisions against ad-hoc interference from the presidency. 

The lure of oil cash is clear, and so it is open whether the new institutions in Uganda’s hydrocarbon sector will be able to avoid being drawn into the system’s overall entrenched corruption. Such governance concerns also play out on several other levels, even though Uganda’s need to attract significant foreign investment in order to develop the petroleum sector in the first place will help to mitigate some of the risk factors.  

Economic Transformation and Investment Potential 
President Museveni had been adamant on his policy decision to not export crude, but to refine locally, arguing that the demand in East Africa was substantial enough, and that this approach would ensure the security of supplies – the interruptions of fuel supplies brought in by road during Kenya’s post-election violence in early 2008 are a recent memory. He also argues that keeping value addition in the country will drive the development of an entire petrochemical sector in Uganda. 

As the country expands oil exploration, and moves into production, Uganda will offer investors a broad range of opportunities. These will lie not only in the ongoing exploration and licensing of new acreage, but also, if government pursues its current plans, in the downstream industry. Moreover, several infrastructure development projects, including plans to extend the Kenya-Uganda pipeline to Western Uganda and the rehabilitation and modernisation of the Kenya-Uganda railway, have now become even more pressing.

However, in recent months, the global economic environment has become more challenging, and as a consequence, investors may be more difficult to find as long as the oil price remains low, and the world economy struggles with the impact of the financial crisis. This may be temporary, but Uganda’s government is keen to proceed as quickly as possible with its plans. In addition to the possible difficulties of finding new investors, Duncan Clarke, the Chairman and CEO of Global Pacific and Partners, in an interview with Ratio Magazine also questions whether such a rigorous emphasis on local refining is really the best decision: 

“Much will depend on reserves, the total volumes of which are not yet fully known, and long term oil production profiles, as well as crude qualities. To take a dogmatic view that no crude will be exported is unwise, short term in outlook, and cannot be justified by mere politics or ideology, as it needs an economic evaluation to support such claims. The reality is that there are probably several options: A small domestic refinery for local product demand, and so on, might work and find some justification, but scale mitigates against efficiency and costs. A large refinery to absorb all crude means heavy investment, and potential delay in crude exports, while no-one really knows how the profile might or might not be influenced by future discoveries and their size. Then there is the need to solicit a refinery investor of substance. This takes time and costs for investment can be substantial, while the investor must take a view on sovereign risk as well. I think crude export initially is the way to go, to realise early benefits, allow time for more exploration, permit a small plant to maybe become a local facility for the domestic/regional market, and avoid the possible risk of a refinery white elephant which would need to compete with imported products.”

Speaking at the East Africa Petroleum Conference (EAPC09), the Permanent Secretary in the Ministry for Energy and Mineral Development, Fred Kabagambe Kaliisa, noted that oil revenues set aside in the petroleum fund were intended for infrastructure investments. In principle, this should give another boost to Uganda’s growth. Again, governance problems may limit the full impact of such spending, since infrastructure is notorious for its corruption – just take a look at the barely finished roads for the 2007 Commonwealth Heads of Government Meeting (CHOGM), partly funded with money that had been diverted from the rural road development budget. 

Kabagambe-Kaliisa also stated that the government intends to focus on investing in, and developing, other sectors in the economy in order to prevent a distorting dependence on the oil sector. Which sectors this would be focused on is not yet clear: Certainly the agricultural sector, the mainstay of the vast majority of the population, is known for its low productivity and growth rates regularly remain below the population growth rate, despite much government rhetoric about rural development. Similarly, Museveni speaks at length about Uganda’s need to industrialise, but while little is done to address the structural obstacles like corruption, related to this, infrastructure weaknesses, many pilot initiatives as e.. TriStar, a textile venture, have collapsed over mismanagement and outright corruption. Some of the oil revenues will also be directed towards social priority areas as healthcare and education. Again, here it is not the quantity of spending that matters, but the quality – and this is where Uganda had consistently fallen short of its potential. 

Political Risks 
Ugandan officials have repeatedly brushed off warnings that oil production may also act as a trigger for restive communities, stating that they had sought advice from Nigeria on how to avoid a situation similar to the protracted and deeply entrenched conflict in the Niger Delta. Local communities in Western Uganda have enormous expectations what impending oil production should bring them: This reaches from revenue sharing to employment and investment opportunities to infrastructure development in their long marginalised areas. A clear and transparent communication strategy is, above all, important to ensure that these expectations are managed, said Kabagambe Kaliisa.

It is important, however, to see potential for tensions in conjunction with the political risk: After removing the presidential term limits, President Museveni is now ruling in his third term (or fifth, if you count along with Charles Onyango Obbo, one of East Africa’s most prolific journalists, who likes to include the 10 years that the former rebel leader ruled unelected). And there is no sign that he intends to leave, or would just be willing to hand over to a selected and malleable successor anytime soon. Ruling the country since 1986, his popularity has been falling steadily, and frustration with his entourage’s tight grip on business opportunities and general corruption has been growing. For Museveni, the oil finds are an obvious boon for his next election campaign: plenty of PR material to counter growing criticisms. In addition, the fast developments in the oil sector are also useful to generate cash for an undoubtedly costly election campaign. But if parts of an already frustrated population perceive that money and opportunities from the oil sector are, as usual, finding their way towards a small group of people, this could exacerbate already existing tensions and frustrations that there is no perspective of succession in Uganda’s highest political office. 

Over the past two decades, Uganda has clearly made enormous progress in moving on from civilian conflict and economic ruin. But the country has not been able to curtail its extensive donor dependence to build an economy that thrives without such external support. Oil production provides an opening for such a transformation – but the same reasons that have held Uganda back so far will also limit oil’s transformative potential. 


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Comments (1)Add Comment
Mr
written by aluma-matenga, May 02, 2009
With such high degree of corruption, patronage, cronyism and other evils at play in this regime's deplorable political high-handedness and frustration by President Museveni's entourage’s tight grip on business opportunities and ever-growing indignation and resentiment among the ugandan population, it so far- fetched to believe that the impending oil production will bring any genuine gains to many a Ugandan population. The discovery of oil, let alone its production is already formenting discontent among the communities surrounding the oil fields simply because people no longer have trust and faith in this regime's tactical illusion. Just watch if Uganda will not be another Nigeria.
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