Oil in Uganda: The Curse Within

Large-scale Ugandan oil deposits, described as Africa’s biggest on-shore oil discovery in 20

years, were announced in 2006 and subsequently proven by the drilling of numerous successful test wells. Estimated reserves are about 2.5 billion barrels, a figure that may increase with new exploration and a projected maximum daily production rate of some 125,000 barrels per day (bpd) – though some place this as high as 200,000 bpd. These figures mean that Uganda stands to join the ranks of mid-sized oil producers, roughly comparable to Gabon, the Republic of Congo, Chad and Trinidad and Tobago. Proven reserves place it in 40th place in global rankings.

Current reserves are estimated to have the potential to generate over $2 billion in annual

Revenue for more than 20 years. To put this into context, according to the OECD, Uganda’s

State revenues for 2012–13 are estimated to be $4.5 billion, and receipts of development aid

for 2010 were $1.7 billion.2 So while the contribution of oil to the economy will be considerable, it will not be immediately transformative – it is not on the same scale, for instance, as the $340 billion in oil revenues collected by Nigeria since it began production. Nevertheless it will present significant opportunities, and if used well can usher Uganda into a new era of economic prosperity.

However, Uganda’s oil is difficult to access and challenging to transport and process. It

will require significant investment – estimated at $10 billion – to develop its oil fields and

many years to come on-stream. When commercial volumes of oil were confirmed in 2006, it

was hoped that production could begin by 2009. To date, production has yet to commence,

delayed by disputes between the government and oil companies, controversies over the terms

of production-sharing agreements (PSAs) between them, and disputes over taxation. It is not

expected that commercial-scale production will begin until 2016, and delays to beginning

development of the field could push this back still further. Full production will not be reached

until the early 2020s at least.

There have been some steps forward in 2012, notably the signing of agreements with new

Players in Uganda’s oil – Total and the China National Overseas Oil Corporation, which

have taken one-third stakes in the oil blocks as partners with Tullow, the company that

has played the central role in the development of Uganda’s oil to date – key legislation put

before parliament, and agreement for the construction of an oil refinery. However, actual

On-the-ground development remains stalled.

Technical challenges: rising expectations or time to prepare?

Uganda has waited a long time for oil. The first explorations took place in the 1950s, and were re-launched in the late 1980s, but plans for exploitation were interrupted by political and economic circumstances, as well as the difficulty and expense of extracting oil from a land-locked country.

Uganda’s oil is also of a type that is difficult and costly to process and transport. The region where oil is found, the Albertine Graben, will need significant investment in facilities before oil can begin to flow. In contrast to Ghana, where light oil and off-shore facilities meant that revenues have begun to flow into the country just three years after the beginning of development, Uganda will need a decade and more than $10 billion of investment to reach peak production.

Thus, though debate around oil management has been intense in Uganda in recent years, the start of full production remains relatively remote. Expectations are high that oil will bring immediate improvements to the country, but this will not happen. Therefore the first challenge that Uganda needs to meet is to manage the expectations of the population, politicians and stakeholders alike.

Unless this is undertaken, there is a real risk that the debate around oil becomes clouded by

Rumour, disappointment and anger – for instance, if it is felt that revenues are not being shared fairly, or that oil companies are benefiting more than the population. A 2012 survey revealed that more than 50% of Ugandans believe that none of the oil revenues, or only a small proportion, will be used for the benefit of all.

There is also a serious risk that the debate on management of oil becomes defined by immediate political dynamics. Oil will be a vital feature of Uganda’s politics and economy for decades. A future generation will take over the mantle of leadership from President Yoweri Museveni before the oil era comes to a close, but the decisions taken now will do much to secure Uganda’s economic future as a regional and global player, and will shape the legacy of the current generation of leaders.

So it is incumbent on stakeholders to transcend day-to-day divisions, and instead work

Collectively to ensure the greatest long-term benefit flows to the population. And the relatively slow pace of oil development means Uganda has the luxury of time for a real national debate on oil. Unlike countries that move swiftly into production, it can ensure that all sectors of society have the chance to be heard, and that the necessary preparations are undertaken. Oil is a technical business, but it is social and political issues that will decide if it is a blessing or curse for Uganda.

Much has been written about the impact of oil, gas and other natural resources on the countries that produce them. It does not make for happy reading. There is a long list of counties that have been damaged by the discovery and exploitation of oil, from Nigeria to Equatorial Guinea, Angola, Gabon and Sudan, to Turkmenistan and Venezuela. The symptoms of the ‘resource curse’ have been forensically detailed.5 They include the erosion of politics and increased popular alienation from the state, more corruption and economic distortions. The result is that, despite greater income and GDP growth, the development of non-oil sectors slows or is reversed by the overvaluation of currencies, worsening social outcomes and rampant unemployment.

Environmental damage can harm livelihoods and social structures alike, notably in resource-producing areas themselves. The cumulative impact can be deepening social and political divisions that can, ultimately, lead to conflict.

These effects are widely recognized. An array of policy responses has been elaborated to

tackle them, with an industry dedicated to translating hard-learned lessons into best-practice

guidelines.

Above all, it is the governance conditions in any given country at the time

exploitation begins that determine whether resources will be a blessing or a burden.6 Divided

countries and those with authoritarian leaders, weak institutions or significant incidence of

corruption and patronage will more than likely be dragged further downwards by significant

resource flows. Conversely, well-governed and relatively unified states will be able to avoid the pitfalls and maximize the benefits.

Good governance and natural resources

Governance, therefore, is vital. Reflecting this, much of the ‘resource curse’ literature offers

guidance on how to build an effective management framework for natural resources, insulating governance from the damage that resource revenues can bring. Economic distortions can be avoided through the careful control of spending, notably through the establishment of sovereign wealth funds or imposition of binding rules for saving. Independent oversight bodies, a clear role for civil society and educating the public can help achieve transparency in accounting for financial

flows. The list is long.

There is a great deal of value that can be drawn from this accumulated

analysis and experience, particularly for stakeholders in countries, such as Uganda, facing newly discovered reserves and the hopes and challenges these bring. Political mobilization and hostility, particularly if exacerbated by unscrupulous politicians or perceptions of inequality – Uganda’s people are more united than divided by their shared experiences of conflict.

Therefore, despite social, political and economic frustrations, there is currently little willingness among Ugandans to see a return to violence. As Stefan Lindemann writes, a new civil war ‘is widely considered unlikely’.17 There is also a common desire to see progress towards economic growth, notably in the creation of jobs and addressing poverty.18 Though Uganda faces clear challenges, notably in managing its latent divisions, a robust framework of shared objectives puts the country in a strong position as it enters its oil-producing era.

A capable civil service Likewise, Uganda is able to call on a capable and effective civil service.

The quality of the country’s administration was badly damaged during the war years. Corruption is a serious problem, as is the overstaffing of many layers of the administration, particularly at local levels. But the successes of the 1990s and early 2000s have left a legacy of relative administrative strength across many departments. Uganda scores in the 34th percentile in the World Bank government effectiveness index, better than Africa’s large oil producers – Nigeria, Equatorial Guinea and Gabon, for instance – and comparable to its neighbours in the East African Community. It ranks 98th out of 142 countries in the World Economic Forum Global Competitive Index – only marginally lower than successful oil producers such as Trinidad and Tobago (82nd).

However, the overall assessment carried out by the World Bank has Uganda’s overall regulatory quality declining from approximately the 50th to the 60th percentile of global rankings between the late 1990s and the present day – a small but significant reduction in overall effectiveness. Uganda also has specialists in the oil industry. The relatively slow development of the oil sector has allowed sector-specific knowledge to build up. This is particularly the case for the Petroleum Exploration and Production Department in the Ministry of Energy and Mineral Development, which has received significant government investment and has been instrumental in successfully managing the exploration phase of oil development.

In addition, Ugandan stakeholders – from parliamentarians to journalists – have been able to learn about oil. The NGO sector is also well developed. But while the formal structures of government in Uganda are robust, in many ways real decision-making bypasses these official channels. The executive exercises strong influence over some key policy areas, including oil, to some extent bypassing line ministries. And in addition, Uganda’s decentralization programme has devolved some power to the local level, where a lack of capacity has resulted in poor-quality management, and widespread allegations of corruption and inefficiency. These dual dynamics, of power simultaneously moving upwards to the executive  and downwards to local levels risk isolating and undervaluing the specialist expertise built up in government, particularly on oil.

Strong social voices.

Despite the legacy of social cohesion from the shared experience of conflict, Uganda’s fractious history also means that there are few groups outside formal politics with a strong voice in shaping a national conversation. While the National Resistance Movement (NRM) began as an inclusive organization that united much of the country’s disparate society, it became a political party on the restoration of a multiparty system in 2005, one of a wide range of active political organizations.

Uganda has had two competitive multiparty elections, in 2006 and 2011, and although there has yet to be a democratic transition of power, the principle and practice of democracy are increasingly entrenched. However, while this is positive, the central point for the good management of natural resources is that formal democracy is not enough. Political leaders everywhere are subject to intense pressures to maintain popular support or react to crises.

There is thus a perpetual temptation to use the revenue from natural resources to meet short-term goals rather than taking a long view. This is where strong voices outside politics can be vital, able to counsel caution and moderate the polarized debate that multiparty democracy often brings. Such voices are not fully developed in Uganda. The business community was decimated by the abuses of the Idi Amin era and the chaos of the war. Although private-sector development has accelerated in recent years, it has experienced infrastructural bottlenecks, notably in transport and power generation. Uganda ranks in 120th place in the most recent World Bank ‘Doing Business ‘survey, reflecting the considerable challenges, particularly infrastructural barriers, still faced by the private sector.

Traditional rulers, particularly those of Uganda’s constituent kingdoms, are extremely important and command both loyalty and respect. But their role in politics is indirect and limited, by law as well as custom. Likewise, media and civil society are well developed, but frequently are part of the political debate rather than standing above it. Churches and religious leaders are also important, but are divided along regional and political lines. Civil society will have a vital role to play in the successful management of Uganda’s oil, but does not yet have sufficient capacity to truly balance the views of government or opposition.

Widely understood spending priorities

Finally, though the Ugandan government has a number of development frameworks in place,

notably a high-profile National Development Plan, and more recently a draft ‘Vision 2040’, its decisions remain relatively opaque to many. The population is largely rural, and many are still poorly educated and therefore disengaged from national politics, despite sharp increases in the rates of literacy and education since the end of the war. Though the media are relatively strong, notably with a number of independent printed publications, the majority of Ugandans remain reliant on local radio stations of mixed quality and impartiality for their information.

Perhaps more importantly, decision-making, particularly around the allocation of money, is

often unclear even to the educated, urban elite.

As argued above, the power of the executive can undermine formal decision-making, notably on spending relating to defence, political campaigning or capital-intensive infrastructure projects. The president has made it clear that he intends to shape the use of oil-related investments. The purchase of fighter jets in 2011 – costing some $740 million

withdrawn from the Central Bank without the prior approval of parliament22 – or the use of $430 million in taxes from oil companies to fund a new hydro-electric dam at Karuma23 illustrate this pattern. The risk is that resource flows from the oil sector will be used piecemeal, with little public consultation and hence minimal popular buy-in.

Uganda’s starting point at the dawn of the oil era is therefore relatively positive.

The country has significant governance strengths that must be recognized, and that can offer a robust foundation for meeting the challenge of oil. But judged against the aspects of governance identified as key to the management of natural resources outlined above, there are also issues of concern.

Having sketched the starting point from which Uganda will move towards oil production, it is

possible to begin to trace how the impact of oil can best be managed to improve the country’s

chances of reaping meaningful long-term benefits, with particular reference to the four key

issues identified. The challenge is not just to ensure that oil does not undermine governance; it is also to identify ways in which oil could become a catalyst for strengthening it.

Recommendations for Better Oil Management

Transparency is a watchword of much literature on the resource curse. But why transparency is important is seldom spelled out. It is all too frequently seen as a goal in itself or as a mechanism to discipline government. Of course, transparency of budgeting and resource flows is a vital aspect of preventing corruption, which will be made all the more important by the influx of money that comes from oil production. It is also key to preventing ill-informed public opinion from driving government to use resources unwisely. As two analysts note: ‘In many cases, the discovery of oil and other resources creates unrealistic expectations about future income, leading to increases in current expenditure, often on large and impractical projects.

But transparency is also vitally important in maintaining social cohesion. Rumour flourishes in the absence of accurate, timely information. And rumour – of advantages given to certain sections of society or resources unfairly distributed – is the fuel of social division, particularly in a country with the latent social cleavages of Uganda. As the Extractive Industries Transparency Initiative (EITI) notes: ‘Affected communities and ordinary citizens often assume that the government and companies are trying to keep the resource wealth for themselves and are undermining the economic development of the country through corruption and mismanagement.’ So while Ugandans are currently unified by the imperative of avoiding conflict, and the shared goal of economic growth, there are real risks that this consensus will be put under considerable strain by oil revenues, particularly if communities feel that others are gaining more benefit.

Contract transparency

Unfortunately, the oil debate in Uganda has been marred by rumours and a lack of clear information. This has been the case particularly in relation to the production-sharing agreements signed by the government, and associated allegations of bribery.

Access to information

Access to information more generally can also be enshrined in law, covering more than just

contracts. It is here that EITI can play an important role. Launched in 2002, it has developed a methodology to impose a globally recognized standard on the publication of payments, bringing together companies, governments and civil society.30 there are currently 14 countries assessed as compliant with EITI principles, including Nigeria, Ghana, Mongolia and Azerbaijan, and a further 22 are candidates. In Liberia, EITI is credited as having enabled discussions between government and local communities to discuss issues of concern, and it has also helped the Cameroonian government build capacity in monitoring and managing industry. In Nigeria, EITI has led to audit reports that have ‘have placed immensely rich data and information in the public domain thereby strongly empowering civil society to hold government to account.’

Though Uganda has legally recognized the right of citizens to see information held by government, enshrined in the Access to Information Act (2005), this has not been fully operationalized, and is in any case contradicted by the provisions for confidentiality

of information envisaged in new oil-related legislation. Uganda has also in principle committed itself to EITI membership, but has not yet taken the necessary steps for inclusion.

Independent oversight mechanisms

Another option for ensuring transparency is the establishment of an independent body to exercise oversight of the sector, along the lines of Ghana’s Public Interest and Accountability Committee (PIAC) or Chad’s Collège de Contrôle. Ugandan legislation on oil production and revenue management currently before parliament does not foresee the creation of any form of independent accountability mechanism. Instead, oversight of production is given to the Petroleum Authority or the minister for energy, depending on the issue, and through them to parliament. Likewise, the Ministry of Finance is foreseen as having a pre-eminent role in management of resource flows, in conjunction with the Bank of Uganda. This brings clear risks that information about oil might become subsumed in the wider business of government or that disclosure of sensitive information is hampered.

Empowering experts: listening to specialist advice

There are experienced and capable technocrats in Uganda, both in the specialist oil and energy ministries, notably the Petroleum Exploration and Production Department, and in financerelated bodies. There are also impressive individuals in Ugandan civil society able to make positive contributions to oil management. Despite the steep learning curve, the slow pace of oil development will allow expertise to develop in Uganda, which has a relatively strong base and is moving in the right direction. The more important question is whether their voices will be heard.

The structure that has governed Uganda’s oil sector to date, run largely by the Ministry of Energy, has proved relatively effective, despite controversies over the detail of PSAs (see above). But, as Uganda moves towards production, this will be replaced by a new and much more extensive structure to complement the ministry’s role. And of course, increased revenues resulting from oil production, signing bonuses and related payments will pose an additional challenge to finance related structures.

Though some of the relevant legislation is still being debated, the Petroleum (Exploration,

Development and Production) Bill was passed in December 2012, and gives a clear indication

of the direction that Uganda’s leaders are likely to take. The 2012 legislation foresees the

establishment of an independent Petroleum Authority, charged with oversight of the sector in

exploration, development and production phases, and a National Oil Company (NATOIL).

The legislation proposes that NATOIL should ‘handle the state’s commercial interests’ and ‘manage the business aspects of state participation’ in oil. But the government retains clear overall control. The energy minister is foreseen as having final say on policy relating to production issues, including the issuing of licences, and the minister of finance on decisions related to the spending of resulting revenues. These will first flow into a holding account before being separated into a Petroleum Investment Reserve, managed by the Bank of Uganda, or allocated directly to the national budget, and therefore subject to normal budgetary oversight procedures, including parliamentary approval.

Ensuring impartial oversight

But though the formal decision-making structures envisaged seem relatively robust, there are some possible concerns over their design. First, the bills lay out a structure for oil management that gives a great deal of power to the relevant ministers, and by extension, the president, with little formal oversight from parliament – described in one report as ‘virtually nil’42 – or opportunity for challenge from specialists within the system. The Petroleum (Exploration, Development and Production) Bill spells out the minister’s powers, including the issuing of licences, drafting legislation and developing regulations.

Independent financial advice

The risks of politicized decision-making are also clearly present in the proposed structure for

management of financial flows from oil. The model proposed by current draft legislation will see revenues from oil moved first into a holding fund and from there into either a Petroleum Investment Reserve (PIR), or directly into the government budget. The amount allocated to budgets or the PIR is to be decided annually, by the minister and parliament, according to a planned Allocation Act. There are some positive points in the current legislation. There are clear rules prohibiting the use of PIR funds as collateral for borrowing – which has been the route to the build-up of significant  debt in other oil producers in the past – and the minister is required to provide regular audited financial statements to parliament. The act also foresees the constitution of an Investment Advisory Committee (IAC) charged with advising on investment decisions.

This follows states such as Ghana, which set up a new investment advisory committee in early 2012, and Chile, where a cross-party financial advisory committee was created in 2007. But the IAC is envisaged as having a membership that is appointed and determined by the minister, which may limit its independence from government. A further option would be to engage an outside agency to take investment decisions; East Timor, for instance, has appointed the Bank for International Settlements to invest its oil surplus in government bonds.

Engage the population in spending decisions

Making the right decisions on how to spend or save oil revenues is vitally important. But this

is only half the picture. Given the stakes involved, the manner in which decisions are taken

is also extremely important, notably to ensure that a majority of ordinary Ugandans feel

involved in political decision-making, particularly around oil. However, recent survey data

have highlighted some issues of concern. Even though a majority of Ugandans say they trust

President Museveni, as well as their MP and local officials, 74% also said that politics and

government were too complicated for them to understand.

As noted above, more than 50% of Ugandans say that none of the oil revenues, or only a small proportion, will be used for the benefit of all.48 Unless steps are taken to bring the population on board with a collective vision for the spending of these revenues, divisions between the political elite and the majority of the population may widen. In technical terms, the most persuasive reason for this is the breakdown of the relationship between citizen and state – government access to resource revenues lessens the need to rely on tax receipts, progressively eroding the connection between people and state. Tax is currently estimated to make up just 13% of GDP, a low rate even in comparison with the rest of Africa, making Uganda particularly vulnerable to these effects. As one commentator has written about oil-producing states:

Set clear spending priorities

There is therefore a pressing need to implicate as much of the Ugandan population as possible in the overall direction the country is taking. One preliminary step would be to forge a legal link between oil revenues and specific development priorities, something not foreseen in current draft legislation. According to Revenue Watch, Currently the PRM chapter in the public finance bill does not offer guidance on how the money

that flows to the budget should be used. It does not make explicit that oil revenues should be

used for capital investments, nor does it link the investment priorities to long term national

development plans.

Uganda has already taken some positive steps. The government has elaborated a variety of

overarching development visions, from a five-year National Development Plan,51 intended to be the first of six, which has been simplified into a ‘citizen’s guide’ and translated into local languages, to the draft ‘Vision 2040’ set out by the National Planning Authority. There are also sector-specific development visions, including for the development of agriculture and trade. They provide a clear framework through which the development path that Uganda will pursue can be widely communicated and understood.

But all too often in the past, government plans have not been implemented, leaving the population confused by ad hoc decision-making. And though the government has established a communication department in the Ministry of Energy and has conducted public outreach, to date this has been on a relatively small scale. Unless the reasoning behind the allocation of resources is widely understood, public unhappiness with the government’s performance may lead to pressure on it for increased spending determined by short-term political priorities rather than long-term goals.

Botswana offers an interesting illustration. There, an explicit link was created between resource incomes – from diamonds – and spending decisions. The Botswana ‘Vision 2016’ development plan was formulated, in part, to ‘to create the conditions where all people can feel that they have some stake in both the present and the future’.52 Mineral revenues were reserved for capital projects, and all new projects, each of which had to be approved by parliament, had to be included in a National Development Plan. Botswana has been able to profit from its natural resources, recording one of the highest consistent growth rates in Africa, at the same time as maintaining its social cohesion. The involvement of the public in spending decisions has been one important factor in this success.

The importance of public consultation

However, even if spending is linked to clearly defined priorities, the decisions thus taken

need to be communicated to the public, and feedback mechanisms established to allow the

communication of popular views back into government. It is important to note that this is not the same as transparency – simple access to information is not enough to drive meaningful popular engagement. As one expert has pointed out: transparency is a necessary, but not sufficient component of informed public participation in a democracy. To have an active voice, the public, or at least a representative body of the public, needs to have a legitimate and formalised role overseeing and interacting with industry and government.

One way to do this is through regular public consultation. There are a number of examples of

public consultations related to the oil industry. In São Tomé and Príncipe, community meetings were held to allow civil society and the population an opportunity to discuss the impact of  oil and how revenues should be used. In 2012, Liberia’s national oil company launched a programme of national consultation on oil policy, which will see officials and civil society representatives visit all political sub-divisions of the country. Trinidad and Tobago offers another instructive example of an oil-producing state that has taken steps to strengthen the buy-in of the population to development programmes, in the context of booming oil-related spending.

Empower parliament

A second and more formal way of ensuring public understanding and buy-in is through elected representatives. The key institution is of course parliament. As the World Bank Institute has noted, ‘Parliaments are uniquely positioned to understand and monitor the effects of extractive industries on the citizens and act as a bridge between the government, private sector and civil society. ‘Uganda’s parliament has taken an active role in the debate on oil, notably since the institution of the 9th parliament after the 2011 elections. Most controversially, this included the establishment in late 2011 of an ad hoc committee on oil and gas, set up to investigate allegations of corruption around the signing of contracts with oil companies, which imposed a temporary moratorium on new agreements.

The parliament is currently working on legislation on oil production and public

finance, and, as noted above, passed the Petroleum (Exploration, Development and Production) Bill (2012) in early December 2012. A Parliamentary Forum on Oil and Gas has also been set up, bringing together interested parliamentarians from all parties and regions to more effectively share information and communicate with government.

But the role parliament is able to play is perhaps somewhat lessened by the preponderance of

NRM members, along with popular reservations about how elections are conducted, allegations of corruption and the difficulties of clear communication between members and constituents. MPs may also lack sufficient specific knowledge on oil issues to fill the communication gap effectively. And, as noted, the role of parliament in the management of the oil sector foreseen under the current draft legislation may not place members at the centre of the debate. Of course, the Ugandan parliament approves both the national budget and individual policy areas, and it is important to note that Uganda’s position as an established formal democracy puts it in a relatively strong position. But oil will increase the stress on the system – and has a long track record of undermining governance. As one commentator has noted, ‘The heart of the resource curse is that resource rents make democracy malfunction.’

Listen to local voices

The need for real public understanding of spending decisions will perhaps be most acute in

managing local tensions. It is populations in the oil-producing region that will suffer the deepest and most immediate changes to their lives, and there is already a great deal of concern that they will not receive sufficient compensation for the impact that oil production will have. These tensions have already begun to emerge in Uganda, as reflected in lobbying conducted by the traditional rulers of the Bunyoro kingdom – which covers much of the oil-producing region – for the allocation of 20% of revenues leading to increased local demands.

The impact of oil production on local communities is predictable. The influx of money that

natural resources bring can distort local economies, raising the cost of living, accommodation

and land. Ghanaians in the oil-producing Western region are already concerned that prices

have risen beyond the reach of many, particularly in urban centres. There have been significant purchases of land by wealthy investors, leaving little for traditional agricultural production.

Primary production can also bring about significant environmental damage, which in turn can

hit traditional livelihoods, particularly farming and fishing, and newer income streams such as tourism. Ghanaian fishing communities have clashed with security forces protecting offshore installations, and have reported depleted fish stocks. The situation is made more difficult when the new industry generates few new jobs for local people. Oil, as a technical and complex industry, does not demand the kind of mass labour that mining does. In fact, estimates are that Uganda’s oil industry will directly create just 3,000 jobs.

Many will be taken by expatriates with the necessary specialist skills. The resulting unemployment can, in a context of increased scarcity caused by rising prices, lead to political protest and even armed mobilization – the experience of violence in the Niger Delta offers a worst-case scenario of environmental degradation and local resentment leading to chronic conflict. The importance of these local issues has been acknowledged by the Ugandan government, notably in the proposed allocation of 7% of oil royalties to the oil-producing region, though questions remain about what percentage of overall revenue will be made up of royalties,61 and how these funds will be spent.

In Chad, 5% of revenues were allocated to communities in oil-producing

regions, but have reportedly either not arrived or not been used effectively – one report states that only 3% of villages affected by production have seen benefits, despite the widespread disruption of agricultural production. Consultation is one way in which local tensions can be managed.

In Ghana, NGOs and donors have worked together to develop a framework bringing together local civil society, oil companies and government for regular consultations – allowing accurate information to be disseminated, questions to be asked, and local tensions dissipated. In Chad, a Framework for Consultation and Dialogue has been launched to bring together oil companies and affected communities. As noted above, initiatives run through EITI have also had success in opening space for local dialogue. These initiatives, though only nascent, also offer Uganda an interesting model for how local issues – from land to employment, environmental damage or the cost of living – could be addressed. Local content (defined as ‘local recruitment, training, purchases of local goods and services – that are designed to develop the industrial infrastructure and skills of the people in countries that host

oil and gas projects’) will also be vital.

The establishment of oil-specific training facilities, most importantly the Uganda Petroleum Institute, is a positive step towards building technical skills, key to ensuring that oil-related jobs are taken by Ugandans. But it will only result in the training of a comparatively small number of technical specialists, and cannot hope to match the demand for jobs, particularly among communities whose livelihoods have been directly affected by oil production.

The risks for Uganda of poorly understood spending decisions, both locally and nationally, are twofold. Most obviously, as highlighted above, the resulting popular disengagement from the political sphere increases the distance between the majority of the population and government, undermining the social contract and weakening the incentives for the governing elite to act for the long-term benefit of the majority. Secondly, in the absence of a widely understood, coherent programme of spending, all groups in society are likely to feel disadvantaged, particularly in a society with the latent ethnic and regional divides of Uganda, and to demand the ad hoc allocation of resources to meet their particular needs. As noted above, this could be particularly acute at the level of local communities in the oil-producing region.

The result could be increased inter-group tension, friction and even violence. The factors identified throughout this report are interrelated. A lack of transparency can increase

public discontent. The resulting pressure on policy-makers to meet expectations can lead to

spending on short-term or politically expedient projects rather that to meet long-term needs,

resulting in waste and increased public discontent.

The worst-case scenario for Uganda would be a downward spiral of popular confusion and unhappiness, a weakened economy, politically dominated management and deepening inter-group competition for a share of the take, particularly at a local level. It is a path that has been trodden by many oil-producing states, most notoriously perhaps Nigeria. Most Nigerians are significantly poorer today than they were at the start of the oil boom, despite the receipt of some $340 billion in revenues. Average incomes are less than one-third of what they were in 1980, and per capita GDP remains at about 1965 levels.

But Uganda has time on its side. It is unlikely that production will start before 2016, with full

capacity not reached until 2020 or later. Though oil has already begun to influence politics and society, the stresses that production and revenue flow will bring with them will not be fully felt for a decade. The debate on oil must move beyond the politics of the present.

Instead, lessons must be learned from those countries that have successfully managed natural

resources, as well as those that have suffered as a result. Transparency matters if Uganda’s social cohesion is going to be maintained.

A well-informed national conversation on how to balance spending with saving is vital to the health of Uganda’s agricultural sector, which is key to a positive future. The need to protect technical advice from political influence is vital in Uganda, as it is for all governments. And a population that understands how revenues are being spent is more likely to work with government rather than against it, building a positive feedback mechanism between

People and the state that can act as a bulwark against future abuses.

Options for oil revenue management

Uganda therefore faces a difficult balancing act, between spending wisely – on agricultural

development, infrastructure and so on – and saving enough to maintain economic stability. In

other words, spend on developing agriculture, but ensure that progress is not undermined by

spending too fast. A mechanism that automatically allocates a proportion of income to savings can be extremely helpful in this regard, and could be key to the fulfilment of a development vision  that has agriculture at its heart.

Most commonly, this takes the form of some type of sovereign wealth fund. But the current draft of the relevant Ugandan legislation does not envisage the creation of a fund, or even the stipulation of a formal fiscal rule laying down in law the percentage of revenues to be invested. Instead, the division of funds between the regular budget and the Petroleum Investment Reserve will be decided on a year-by-year basis by the minister and parliament. There is a clear risk that political pressures will result in revenues being spent rather than invested. This would in turn risk macro-economic instability and currency appreciation – which would be fatal to agriculture-led development.

There are many options for how such a mechanism might function. The most common is

a sovereign wealth fund, such as the Norwegian Government Pension Fund, Trinidad and

Tobago’s Heritage and Stabilization Fund, or the Kuwait Investment Authority. Even Nigeria

has now instituted a stabilization fund, the sovereign wealth fund launched in 2011, though

recent controversy has highlighted the imperative of clear rules and broad political consensus in establishing a fund.40 Funds have a wide variety of roles, purposes and management structures, the most important of which are to protect oil revenues from political pressures, and act as a buffer against oil price volatility. Their reserves range from nearly $600 billion held by Norway to less than $3 billion in Trinidad’s fund.

There are also many options for binding fiscal rules that govern how much money is released to the budget annually, and how much withheld. In Norway, 100% of oil revenues are transferred to the fund, and budget spending is restricted to interest earned on the fund holdings; whereas Trinidad and Tobago deposits all earnings that exceed estimated oil revenues by more than 10% in its fund, and may withdraw from it if earnings drop more than 10% below estimated receipts. Nigeria’s sovereign wealth funds41 will be topped up to a given percentage of gross domestic product decided every two years. Ghana will save 30% of its oil revenues in Heritage and Stabilization funds. Balancing between spending and saving is a delicate and complex decision, particularly in a country with significant development needs.

Offering specific advice on the type of fund or fiscal control mechanism that might be most suitable for Uganda is beyond the scope of this report. But it is clear that how much to spend and how much to save is fundamental to generating sustainable growth, particularly on agricultural development. And real growth in the rural economy is vital to both overall  Ugandan development and the future governance of oil – it will allow the growth of an entrepreneurial class able to moderate the excesses of future generations of politicians. One of the key factors of Uganda’s post-conflict success has been  macroeconomic stability, a success that can contribute to  long-term success in oil management if it creates the conditions for the emergence of an agricultural commercial class. Oil can be the key to fuelling growth – but should not be allowed to disrupt it.

International lessons for Uganda

Norway, Chile, Botswana and Indonesia are often cited as countries that have been able to

exploit their natural resources sustainably and to the benefit of all. Despite the deep and obvious differences between them, there seem to be four broad points of commonality. They are;

•     A widely shared commitment to stability and growth; 
•         A capable and empowered cadre of technical advisers and specialists;
•         Strong social constituencies able to moderate and inform political debate; and
•         Widespread popular buy-in to spending priorities.

These four dynamics offer a useful starting point for discussion. First, how does Uganda measure up? Its painful past experiences of conflict and social division mean that there is a widespread commitment to a peaceful and harmonious future. Ugandans are likewise united by a shared desire for growth and prosperity. Uganda also has an effective civil service, and has built up a reservoir of knowledge on oil issues during the initial phases of oil exploration. Thus the first two dynamics may offer significant points of strength for the country.

The second two dynamics are perhaps less well developed. Though Uganda has an active and

vocal civil society and media, one less positive legacy of past conflicts has been to undermine the position of social actors able to offer a moderate, non-political perspective on questions of national importance, such as traditional leaders, religious authorities or business associations. Equally, while Uganda is now a multi-party democracy, its institutions and traditions are still relatively young. Combined with the reality of a scattered and largely rural population, this means that many may feel remote from the process of decision-making, and therefore not necessarily fully engaged in a shared vision for spending oil revenues.

So while Uganda in many ways has relatively strong foundations for meeting the challenges of the coming oil era, there are also areas in which progress is needed. More importantly, these four dynamics also offer a constructive lens through which to assess the options open to Uganda in managing its oil. It is here that lessons can be drawn from international experiences of natural resource management, through an assessment of the likely impact of  various policies on the four broad dynamics identified above.