Invest oil revenues carefully

By Deus Mukalazi

Should the US$ 331.4 million budgeted for the Karuma Power project and the purchase of military jets have been our first

During her budget speech this year, the Minister of Finance, Maria Kiwanuka allocated US$ 331.4 million for the Karuma Hydro Power Project. The minister was only confirming what the President had earlier announced in May.

It’s important to note that the US$ 331.4 million for the Karuma project is the second substantial amount to have been allotted to capital investment since Uganda starting earning money from its oil. The other substantial amount was used to purchase military jets.These two scenarios raise a critical issue on how Uganda as a natural resource-rich country should use the natural resource rents to generate sustainable wealth.

As a rule of the thumb, using natural resource wealth for military hardware is a recipe for disaster and only confirms how natural resource wealth can be used by those in power to create situations for regime survival and longevity.

Of course, investing oil revenues in a project like Karuma is good. But then, due to the uniqueness of oil revenues, that’s just part of the story. For this capital investment project to create sustainable wealth, a number of conditions and processes must be in place. I am afraid these processes and conditions are inadequate in Uganda’s situation.

There is need to systematically understand the patterns through which resource-dependent governments interact with their societies and extractive industry developers in making decisions about natural resource extraction and the use of natural resource rents. Case studies have shown that in boom periods and at the beginning stages of production, rents become highly visible and social expectations rise.

Large rents provide public officials with the opportunity to increase their political capital by delivering infrastructure projects and resources to their constituents. This results in strong incentives to concentrate decisions about rent allocation at the highest levels of government and to bypass the regular budget cycle and procedural rules. This sounds true for the Karuma and fighter jets projects.

The quantity and quality of public physical assets a country produces is determined by the intersection of a set of aggregate “top- down” budget allocation processes and “bottom-up” project selection, implementation, and completion incentives and capabilities. The budget allocation process typically engages executive, legislative, sectoral, and subnational actors including citizens.

Considering the timing and cost of the Karuma project, it’s not hard to see why this project may not be the best idea after all. The ultimate effects of investments depend on the quality of the projects selected and value for money with which they are implemented. Estimated to cost US$2.2 billion, the 700 Mega Watts project is one of the most expensive in world history.

Experts say the cost of hydropower construction per megawatt usually ranges between US$1M and US$1.5M. At this estimate, the Karuma project would at most cost US $ 1.2 billion.  In Sudan, the 1,200MW Merowe Dam on the Blue Nile cost only US$760M.  The controversial Ilisu hydroelectric dam being built in Turkey will cost US$1.6B but will generate 1,200MW of electricity.

Given the nature of the Karuma falls, experts have noted that at most it can generate 400 Megga Watts but the government disputes this. With the Bujagali capacity controversy still fresh in our minds you would expect our government to listen to expert advice.  We need to be reminded also that the original cost of the Karuma project was US$ 900 million. Why the sudden surge in the cost? Could it be because we have the oil money after all?

It’s only logical that resource rich countries weigh decisions on intertemporal consumption versus saving, while considering politically charged, present day demands as well.

While the allotment of over US$ 300 million for Karuma is laudable, its timing, when teachers are on a silent strike for a deserved salary increment worth a mere US$ 40 million and the country’s leading University closed for over a month over a paltry demand of US$ 4 million, shows how we are not getting our priorities right.

Yes we need power for industries but who will work in those industries if we don’t invest in the social infrastructure?

The promise of Uganda’s oil being used to build modern infrastructure is one that is most likely to capture the imagination of politicians and populations. Given Uganda is a capital-scarce developing economy, domestic capital creation promises high economic and social returns compared to other resource allocation options.

From a normative point of view, moreover, it is difficult to contest the desirability of more effective public investment. However, in practice, translating this desire into practice is more tenuous.

The barriers to greater asset creation and preservation for Uganda have not been resource constraints per se, but the inadequate institutional mechanisms and capabilities by which public investment is prioritised, sequenced, and implemented. Administrative capacity for public investment is weak.

Uganda should invest proactively in the processes and systems needed to yield the very best projects as a result of political incentives and the features of the oil sector. And that’s why it’s important to have Revenue Management Laws in place to avoid oil revenues being invested on the whims and discretion of a few people in a non-consultative manner.

Deus Mukalazi is the Coordinator of the NGO, Publish What You Pay (Uganda Chapter).