An early review of the oil sector by the Auditor General has revealed that Uganda will pay millions of dollars to foreign companies in recoverable costs, some of which expenses have not been adequately ascertained.
A new report containing the latest detailed assessment of the sector, paints a worrying picture of state affairs in the future handling of the oil revenues.
Ernest & Young has previously audited accounts for the foreign oil companies. However, to ensure accountability in the sector, the Auditor General decided to review all the accounts, including firms which have since left the country.
The Auditor General, Mr John Muwanga, in his report, points at a possible failure to protect the public interest in the drafting of oil contracts. The same accusation was made by a group of outspoken legislators in Parliament, who backed the highly-emotive emergency oil debate in Parliament last year.
For instance, because officials in the Ministry of Energy did not monitor the costs to weed out the possibilities of inflated bills, the Auditor General says recoverable costs occasioned by expenditures by the firms, have now hit $492,544,876 (more than Shs1.2 trillion) as of June 2011 when the report was drafted.
The AG has forwarded his report to the Speaker of Parliament, Ms Rebecca Kadaga who has asked the House Public Accounts Committee to take up the matter.
Oil experts who looked at the existing Production Sharing Agreements (PSAs) have argued that Uganda could have settled for relatively unfavourable terms from agreements she signed with the companies working in mid-western Uganda.
For countries using PSAs, recoverable costs are mandatory expenses to enable oil companies recoup the costs they incur during exploration, development and production of oil.
This means that if the petrol dollars were to flow today, before the country benefits, the oil companies would first deduct Shs1.2 trillion.
Under the provisions of the PSAs, the licensee is required to submit audited accounts showing details of contract expenses and revenues, within 90 days of expiry of the calendar year.
In addition, the PSA gives the government the authority to review and audit the licensee’s books and records (with respect to petroleum operations) either directly or through an independent accountant of international standing designated by government.
While officials in the Ministry of Energy have already certified the amounts, the Auditor General says the oil companies submitted doubtful supporting documents to prove the costs incurred.
For instance, some of the supporting documents presented are scans of the original documents. These mainly relate to time writing costs and expenses incurred by affiliated companies domiciled abroad on behalf of the licensees.
“There are no explicit guidelines in the PSAs on whether scanned documents presented by the licensees would suffice to act as support for recoverable expenditure,” Mr Muwanga said. “Also, Uganda does not currently have a law on use of scanned documents. Some of the scanned documents such as the time writing costs invoices and timesheets are internally generated and hence the benefit of original documents is limited.”
Though Article 21 of the PSA on Training and Employment provides that the licensee agree to train and employ suitably qualified Ugandan citizens in its petroleum operations as well as undertake the schooling and training of Ugandans for staff positions, the AG says there are no explicit provisions on the implications for not complying with the requirement to satisfy the Advisory Committee.
The PSA provisions indicate that labour and associated costs are recoverable irrespective of the salary structures and levels, including bonuses. However, in the PSAs the government signed with oil companies, there is no cap on the level of labour and associated labour costs that are recoverable, nor are there requirements to have salary structures approved by government. Therefore, experts suggest that there is no motivation for the licensees to pay reasonable and competitive labour costs.
The PSAs further stipulate that costs of the affiliated companies should not include profits but rather only the amount which is the direct cost of providing services concerned. If necessary, certified evidence regarding the basis of prices charged may be obtained from the auditors of the affiliated companies. For the periods under review, there is no indication that the licensees were required to demonstrate or certify that charges by the affiliated companies included no profits.
However, not all the services rendered by the companies affiliated to the licensees are offered to third parties. For example, the licensees are charged for the time spent by the staff of their affiliated companies on the affairs of the licensee. These time-writing expenses are a function of the time spent and charge-out rates.
Article 5.1 of the PSA provides for the establishment of an Advisory Committee (AC) consisting of four members, two of whom shall be appointed by the government and two by the licensee. The PSAs empower the ACs to make most of the decisions related to the exploration activities including recoverable costs.
The meeting minutes for the ACs are critical since most of the decisions affecting exploration activities are made by the ACs. The meeting minutes therefore act as the evidence of the decisions made.