Can Uganda survive the oil resource curse?

Friday January 17 2020



Cyrus Kabaale

Cyrus Kabaale 

By Cyrus Kabaale

Recently, the Minister of State for Planning, Mr David Bahati, while appearing before the Parliament’s finance committee to defend the Budget Framework Paper for the financial year 2020/2021 informed the public that government has exhausted resources in the Petroleum Fund.
Since 2008, government has collected more than $1 billion in Capital Gains Tax (CGT) and signature bonuses. It should also be noted that companies have also invested more than $3.5 billion in oil exploration and may invest up to $20 billion before oil production.

The government in the previous financial years since the establishment of Petroleum Fund by the Public Finance Management Act (PFMA), 2015 has been withdrawing funds to finance the national budget. The fund has two objectives including financing the budget and saving or investment for the future.

In the financial year 2017/2018, government withdrew Shs125.6b from the fund to support the budget and also transferred another Shs200b to the Consolidated Fund to finance the budget for the financial year 2018/2019. However, as evidenced by the withdrawal of Shs200 billion oil revenues in March 2019 before parliamentary approval, the Shs6 billion oil cash presidential handshake and other scandals, the above oil revenues are at risk of abuse.

In the presence of such abuses, it is clear that unless fundamental reforms in government are undertaken as part of the Extractive Industries Transparency Initiative (EITI) process, there is little hope, if any, that joining EITI will help address the problems of lack of transparency and accountability for Uganda’s oil revenues.

In addition, Production Sharing Agreements (PSAs) that government signed with oil companies operating in Uganda remain secret in violation of Article 41 of the Constitution.

Government hides behind the excuse that confidentiality clauses in the PSAs stop it from sharing the agreements with the public yet this is against the Constitution. Can such a government survive the oil curse?

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In 2008, the Early Production Scheme (EPS) failed and since then, government has had to shift timelines for oil production several times. The production deadline was pushed from 2018 to 2020 and today, government says that first oil will be produced by 2021. However, it is not clear when Uganda will produce it first oil.

Yet the above is not the only failure. In the oil refinery project, government failed to successfully negotiate with Russia’s RT Global Resources -negotiations collapsed in 2016- and South Korea’s SK Engineering & Construction to construct an oil refinery.

There have also been disagreements between government and major oil companies in Uganda resulting from Tullow’s intension to sale its stake to French Total E&P (U) B.V and China National Offshore oil Corporation where the government insisted that Tullow must pay the Capital Gain Tax while the companies prefer not pay the tax.

This has delayed oil production and will see oil projects estimated to cost the country more than $20 billion procured through loans failing to be profitable to benefit Ugandans. It should also be noted that if oil production commenced today, the sector would be operated in a system that lacks transparency and good governance. As a result, loans acquired for the oil refinery and pipelines would only worsen the already bad situation regarding the national debt.

Therefore, government needs to urgently carry out a national audit on the money invested in the oil sector. This will enable it appreciate the existing accountability and transparency challenges and public attitude that may affect the success of EITI in Uganda. Besides it will help leaders to plan well before joining EITI.

Mr Kabaale is the extractives Programme’s Officer at AFIEGO

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