KAMPALA- After denying countless times that they cannot borrow against future oil revenues, the government at long last has admitted staking the country’s oil as a “guarantee” for receiving the first batch of loan from China’s EXIM Bank for the much hyped Standard Gauge Railway (SGR) project.
Details available to Sunday Monitor indicate that Attorney General William Byaruhanga gave a no objection to ministry of Finance, the principal signatory to the loans, arguing that “nothing prohibits the government from using oil revenues directly as guarantee for the payment of loan for the SGR project.”
Mr Byaruhanga, in a correspondence dated September 29, 2016, to the Finance ministry and also copied to President Museveni and Solicitor General Francis Atoke, further indicated that “accordingly, it shall be prudent to ensure that under the loan agreement the commencement of the payment period is explicitly tied to the commencement of production –in order to mitigate the risk of the government being found in default in the event that production does not start within the projected period.”
No objection response
The no-objection legal opinion was in response to a correspondence dated September 5 from Finance minister Matia Kasaija seeking advice on how to proceed on getting money from EXIM Bank to jump-start construction of the first phase of the SGR project running from Malaba to Kampala (273km) pegged to a cost of $2.8b (Shs8 trillion).
The Attorney General, citing legal provisions that authorise government to raise loans from any source, however reiterated, as advised earlier by the former ministry of Energy Permanent Secretary Kabagambe Kaliisa in a correspondence dated September 26, that availability of oil revenues shall be dependent on the commencement of oil production.
Commencement of oil production, Mr Kaliisa in his correspondence also advised, shall be dependent on the completion of the crude oil export pipeline and the Greenfield oil refinery.
“The completion schedule for the pipeline and refinery projects is/shall be largely outside the control of government (and in the hands of the international oil companies and other private players.”
The entire SGR project is estimated to cost $12.8b (Shs45 trillion), according to a report released this week by Parliament’s Committee on Physical Infrastructure. The multi-billion dollar railway line was agreed to in 2011 by regional leaders dubbed as a Coalition of the Willing, who included President Museveni, Kenya’s Uhuru Kenyatta, Rwanda’s Paul Kagame and South Sudan’s Salva Kiir.
Although conceived under the East African Community, but with Tanzania excluded at the time, the plan was to have the railway run from Mombasa port to Kigali via Kampala with a connecting line to Juba.
Preparations for construction of the first (eastern) route running from Malaba to Kampala, whose tender for construction was awarded to China Harbour Engineering Corporation (CHEC) in 2014 after a questionable protracted procurement, is ongoing with acquiring the proposed right of way.
Plans and studies, are ongoing as well on the western route from Kampala to Ntungamo District at the border with Rwanda and the northern route from Tororo to Packwach en route to South Sudan.
The SGR coordinator, Mr Kasingye Kyamugambi, however, told this newspaper yesterday that it is premature to reach conclusion that the entire project will cost $12.8b as the parliamentary committee put it.
“That was a planning figure that we had to give to government so that various preparations can be made,” Mr Kyamugambi argued. “But before feasibility and engineering studies on both the western and northern routes are completed and their reports assessed, one cannot come out and rush with figures like that; the cost could be actually much lower.”
The SGR is just one of the ambitious infrastructural projects the government is pursuing with “cheap” or “soft” funding (loans) from EXIM Bank so far to a tune of Shs7.5 trillion, according to Finance ministry records.
According to the Public Finance Management Act, money in the fund will be invested in accordance with the petroleum revenue investment policy issued by the Finance minister after consultation with the Secretary to the Treasury, and on the advice of the Investment Advisory Committee. The members of the Investment Advisory Committee shall be appointed by the minister after approved by Parliament.
Earlier projected oil revenues, according to the Uganda National Oil Company (Unoc) that is in charge of the country’s commercial interests, are in the ranges of Shs5 trillion ($1.5b) annually; on assumption oil prices will have picked up when the country expects to start commercial production by 2020 but this could delay until 2022.
The priority sectors to which future oil revenues will be funnelled, President Museveni and his technocrats usually list infrastructure development, human capital development, agriculture, science and technology and only a small component to education.
But there is also a long-standing concern of huge spending on defence, especially for governments with bad records as they seek to entrench themselves.
For Uganda, there is already a precedent when in 2011, the Bank of Uganda Governor Emmaniuel Mutebile confessed before Parliament on November 12, 2011, that the President asked him to release $ $740m (Shs2.6 trillion) from the national forex reserves to buy fighter jets on the promise that they would be replenished when the Capital Gains Taxes off the Tullow-Heritage deal were paid eventually.
“This was not mismanagement,” Mr Mutebile said. “I was assured of how the money would be got and this is a good management position because I saw that getting money from oil was a good way of replenishing the reserves and that’s why I accepted.”
Sunday Monitor understands that a group of MPs led by former Leader of Opposition in Parliament, Mr Nandala Mafabi (FDC, Budadiri West), are working on a petition to Parliament, accusing the government of mortgaging expected oil revenues for the SGR deal without parliamentary approval. The MPs, who have also accused government officials of inflating the railway deal, are expected to present their motion to Parliament next week.
Risks of borrowing
Uganda’s domestic and external borrowing has been rising steadily over the years, especially after prospects for oil production shone a glimmer of hope.
By the end of last year, public debt stock stood at Shs29 trillion ($7.8b); of which Shs18 trillion ($4.88b) is a result of external debt, while Shs11 trillion ($2.92b) is attributed to the domestic debt stock.
Ghana, which discovered commercial oil a year after Uganda in 2006 and commenced production in 2010, is lately the commonest example of the downside of borrowing against oil.
Towards starting production, the country went into a spending binge including a cocktail of increased borrowing with prospects that its oil revenues will help clear the debt.
A few years into oil production came the turbulence of the dramatic plunge of global oil prices.
Last year, Ghana on which most Uganda’s activities have been modelled, turned to and secured a Shs4t ($1b) credit facility from the International Monetary Fund (IMF) to help breathe life into its foreign-exchange reserves and help stabilize the economy; which before starting to rake in oil revenues in 2010 had been thriving on gold and cocoa exports.
Tumbling oil prices have left many crude-exporting countries with budgets that simply won’t balance. Saudi Arabia, the world’s biggest oil producer with 12.58 million barrels a day, according to the Paris-based International Energy Agency, in 2015 alone recorded a budget deficit of $98b.
All oil exporting Middle East nations, according to IMF lost a combined $390 billion in revenues due to bad prices and this is expected to surge to $500b by end of this year.
Luckily, for some because they don’t have any other alternative productive sectors like agriculture or mining to turn to, they had stashed away cash in what are called stabilisation Funds for a rainy day. Saudi Arabia alone had more than $100b stashed away which is being used in neutralising the deficit.
In total, the government needs at least Shs75 trillion ($20b) by 2020 for its several planned infrastructural projects.