Tough choices over oil

By Ronald Musoke

Politicians disagree over oil money as businesses face bankruptcy

During a meeting on securing Uganda’s oil revenue on Sept.13 in Kampala, disagreement erupted among top politicians and national economic planners on how best to spend the expected bounty. But business people and civil society leaders had a different view: Let’s get the oil out of the ground first, before we fight over how best to spend the oil money.

Tullow Oil Uganda President and Director, EllyKarunhanga, told the meeting that the stagnation that appears to have engulfed the oil and gas sector for about six years now is hurting investors.

He said everything in Uganda, which should be the hub of oil and gas in the eastern Africa region, seems to be moving at a slower pace. He said companies that borrowed money to finance their Uganda oil prospects are running bankrupt.

“So many borrowed on the back of early oil production,” Karuhanga said.

Although it is six years since the first oil discovery was announced, there is no clear production date on the horizon.

The Commissioner for Petroleum exploration and production department, Ernest Rubondo, told the meeting that following the recent appraisal of three oil wells; Gunya, Mpyo, and Jobi East in Exploration Areas 1 and 2 in the north of Lake Albert, Uganda’s inventory had gone up 40%, to 3.5 billion barrels of oil.

No solution

But the oil production date is once again being pushed ahead. Depending on who you speak to, oil will now flow earliest in either 2015 or 2017.A recent study published by the Oxford Centre for the Analysis of Resource Rich Economies noted that Uganda’s oil revenue will take at least a decade to arrive.

Whenever the oil revenue eventually flows, it will eclipse Uganda’s annual budget, which is US$4 billion (Approx.40 million barrels at the Sept.17 price of US$100 per barrel). Will the government be able to use this money to benefit the majority of Ugandans?

Tullow Oil and its partners, Total and CNOOC plan to be producing 10,000 barrels of crude per day by 2015. At US$100 per barrel, that will fetch US$ 1 million per day of which Uganda will earn only 30% at best estimates in royalties, profit sharing and taxes. In a year, that is approximately Shs300 billion (Equivalent to just half of what Uganda Revenue Authority collects every month). Therefore,as the Oxford Centre for the Analysis of Resource Rich Economies study showed, oil money will not by itself transform the country.

The study noted that the oil revenue will probably grow no more than five percent of GDP over a thirty year period. The researchers, Mark Henstridge of Oxford Policy Management and John Page of Brookings Institute, say domestic investments from oil money should be oriented towards improving agricultural productivity, developing the manufacturing industry, and growing trade corridors to the coast.

To achieve this, it will be essential to improve domestic electric power supply, road and railway networks. Ideally, infrastructure should be developed on a regional basis and Uganda should work with Kenya and Tanzania to create well-linked special export zones.

The Oxford researchers warned that making the best use of the windfall will require careful investment and public policy decisions. The Sept.13 debate in Kampala focused on how best to achieve that.

Welfare versus Investment

Is Uganda better off channeling a huge chunk of its oil revenue into infrastructure development and science and innovation as seems to be the official government position? Or should some of the money go into direct relief to help Ugandans who are wallowing in poverty as Dr Ezra Suruma, the senior presidential advisor on finance and economic planning proposed at the meeting?

Suruma says the government needs to be careful over these strategic issues because of Uganda’s checkered history.

“We’ve been rather naïve in our approach of whether oil money will not turn into a curse,” he told an attentive audience at a Konrad Adenauer Stiftung and Uganda National Chamber of Commerce and Industry organized conference on oil on Sept 13 in Kampala.

Suruma said the prospect of oil money mixing with the severe political instability that has characterized most of Uganda’s 50 years of self-rule is frightening. He said, with oil money in the mix, poverty, unemployment, and income insecurity which have remained sticking points for the better part of the NRM Government’s 26 years of rule, could easily undermine the country’s future stability.

“Oil frightens me as a possible source of instability if it is not carefully managed,” Suruma said.

Reeling off a catalogue of financial scandals by government officials: the 2007 Commonwealth Head of Governments Meeting (CHOGM) scandal, the national ID project, and the Global Aids and Vaccines Initiative funds, Suruma said it is easy to think that the oil money will be wasted.

The threat of corruption is real and let us not pretend that it cannot happen with the oil windfall,” he said.

The oil sector was shaken last November when MP Gerald Karuhanga (Youth Western) accused three senior government officials—Prime Minister Amama Mbabazi, the former Foreign Affairs Minister Sam Kutesa and the former Energy Minister Hillary Onek—of receiving billions of shillings in bribes from Tullow Oil Uganda. A commission of inquiry was then instituted to investigate the allegations and the issue remains unresolved.

Ezra Suruma advised the government to shift focus from high spending on defense, security, law and order to a 50:50 ratio, where more money goes into infrastructure development. He says the switch will directly benefit ordinary Ugandans.

Suruma says although roads, railways and power dams—which government is putting emphasis upon are good,  there is no point in investing in these projects when a big number of the population are hungry, children are malnourished, and mothers are dying in hospitals.

Suruma fears the resurgence of strong government in the economy and the emergence of totalitarianism with the sudden influx of oil money.

“With the private sector led economy as it is today, we have to make sure that the economic power remains in the hands of the private sector,” he said.

With the agriculture sector employing up to 80 percent of Ugandans, Suruma does not want to see people abandoning maize or coffee production to join the booming oil and gas sector.

To nip the problem, government would do better by investing in the agriculture sector, starting with a fertilizer industry. If a fertilizer industry were to be built, fertilizer use would be popularized and provided to farmers at subsidized fees.

“By doing this, we could see productivity improving from the current 1,000kg of maize per hectare to 4,000 kg,” he says.

Suruma also wants some of the oil funds to go into a Universal Health Insurance Scheme, a Universal Housing Scheme, and improving the welfare of the population, especially the most vulnerable such as the old and disabled.

“The construction industry would employ a lot of people because employment generated by the housing sector is enormous,” Suruma says.

Suruma says oil money should be used to ensure social economic security. This, he says, would curb corruption among civil servants who steal public funds out of desperation about their uncertain future.

“If we have oil revenues, why can’t we address some of these needs especially in the absence of a credible pension system?”

But Trade minister Amelia Kyambadde and others have a different plan. Kyambadde says Suruma’s proposed welfare system cannot work in Uganda because of the high and expanding population, and high unemployment. She says if the government creates a welfare state, people will not have an incentive to work and the few who do will drown in taxes.

“You can see it now with the introduction of Universal Primary Education in rural Uganda. People have stopped working because there is free education,” she says, “A big section of the Ugandan public thinks that with oil they will not need to work.”

She instead advocates for more industrial growth in other sectors with linkages to the oil sector. It is crucial to look for ways for SMEs to penetrate the oil and gas industry, she says.

She also agrees with Suruma that the government should find resources to mechanize agriculture to curb rural urban migration and invest in infrastructure.

Wilberforce Kisamba Mugerwa, the Chairperson of the National Planning Authority, says Uganda’s economy will remain unattractive to investors if the railway network is non-existent, roads are bad, and electricity supply is erratic. He says oil money should be invested here.

Drunken sailors

Many hopes are being banked on oil money, including the Government’s Vision 2040, a master plan to make Uganda a middle-income economy by 2040. The plan will be officially launched on Uganda’s Independence Jubilee anniversary on Oct 9.

It reveals that the government hopes to harness the opportunities in the oil and gas sector through the construction of a refinery and support infrastructure, industrialization, tourism and commercialization of agriculture. The government also hopes to exploit the country’s huge mineral deposits, ICT business and create jobs for the abundant youthful labour force.

Petter Nore, the director of the Department of Energy and the Private Sector in the Norwegian Agency for Development Cooperation (NORAD) and a leading expert on the international petroleum sector, was on hand to share some of Norway’s experiences with the Ugandan leaders. He said much as Norway may be feted today as a model country when it comes to oil management in the world, they too made mistakes before they got it right.

“In the late 1970s, Norway was spending oil money like a drunken sailor,” he said, adding that if Uganda must learn from the Norwegian experience, putting in place a proper system to control the saving/spending of oil revenues is important.

“Do not act like a drunken sailor in the event of an oil boom,”Nore advised.He said an oil curse will only be averted if Uganda becomes more politically stable with consensus built around the legitimacy of the state with institutions that clearly distinguish government roles.

“This is the core of the core,” Nore said.