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.
