The roll-out of the local content fund for the oil sector has been delayed for four years. The fund, which was approved in 2018 by Cabinet, faces uncertainties on whether it will take off with the ongoing award of contracts, writes Martin Kitubi.

The finance ministry has delayed the roll-out of the Local Content Development Fund for the oil and gas sector, sources have revealed.

According to senior government officials, the finance ministry has delayed the issuance of a certificate of financial implication to implement the fund.

The certificate of financial implication is required to embark on the process for the development of a Local Content Bill for the oil and gas sector.

According to a source, the energy ministry has already developed the principles of the Bill and that they cannot progress without the finance ministry approval.

“Yes, the rollout of the Local Content Fund for the oil sector has been delayed. But we have to have the approvals from the finance ministry. I do not know whether we will have it implemented this financial year (2022/2023),” the source said.

According to the source, the finance ministry is against the idea of having a separate local content fund for the oil sector. Instead, the source added, the finance ministry wants all revenues collected from the oil and gas activities consolidated.

Tilenga oil industrial area construction taking shape

The source, who asked to be protected, said this, too, has delayed the roll out of the local content fund.

The source asked our reporter to get in touch with the energy ministry or the Petroleum Authority of Uganda (PAU), the sector regulator, for an official explanation.

THE POLICY, WHAT IS AT STAKE?

The Local Content Development Fund is provided for under the Local Content Policy for the oil and gas industry in Uganda.

The policy was approved in 2018 and provides for a 1% deduction on each contract’s value for the Local Content Development Fund (LCDF).

According to the policy, the contracts will be for both goods and services offered by oil and gas companies in the country.

The latest report by PAU indicates that contracts worth $6.85b (sh26.4 trillion) have been reviewed to date.

According to PAU, at least $1.65b (sh6.16 trillion) has been earmarked for local companies through Tier One Contracting and Tier Two subcontracting.

With more investment expected next year, the authority says more contracts will be awarded to Ugandans. With the current reviewed contracts alone, it implies that the country would have collected at least $68.5m (sh261b) to the Local Content Development Fund.

With more contracts expected next year, it implies that more will be lost if the fund is not operationalised.

PURPOSE OF THE FUND

The fund was proposed by the Government with the aim of helping financially handicapped local entities to borrow at lower rates and boost their capacities in the oil and gas sector.

The fund will also be used by small-scale companies in the lucrative sector to procure the required equipment and also compete for the available opportunities.

A Cabinet Memorandum CT (2018) 51 on the Local Content Policy highlighted that the fund is meant to finance the implementation of local content development in the country’s oil and gas industry.

The memorandum further noted that the LCDF is proposed as a levy of 1% from the value of all upstream contracts.

It added that levy shall be deducted at source and paid into the fund held with the Uganda Development Bank (UDB).

The policy seeks to increase the participation of Ugandans and their enterprises in the oil and gas industry in Uganda from about 30% to 80% by 2040.

MANAGEMENT OF THE FUND

The key features of the fund are that the loan will be disbursed directly by UDB at favourable interest rates and repaid from one to 10 years.

According to the Cabinet memorandum, only contributors to the LCDF with bankable proposals in the oil and gas industry can approach the participating banks for the financial facility.

Cabinet also resolved that a committee dubbed “Local Content Steering Committee” will be established. The committee will provide oversight over the management and performance of the fund.

WILL UGANDA CLAIM THE MONEY?

When contacted, Irene Batebe, the energy ministry permanent secretary, confirmed that there has been a delay, but noted that they are working on it. In her explanation, Batebe said her ministry has held several engagements with the finance ministry on the subject and that a lot has been achieved.

“We have held several meetings with the finance ministry on the roll out of the local content fund. However, we are working on it. We will communicate when the time comes,” she said.

In a separate interview, Ali Ssekatawa, the director legal and corporate affairs at PAU, the sector regulator, said: “As stakeholders, we have participated in the formulation and we gave our recommendations.”

Although the policy was passed, to implement the recommendations, he said the country requires a law, which the energy ministry is working on.

When asked whether the oil contractors will be required to pay for the ongoing contracts towards the fund, he said: “The proposed law will be a progressive law. We cannot impose a financial obligation retrospectively.”

“So, when the law is in place, the contractors will be required to pay from the time it is in place. Anything behind will have to be foregone,” he added.

FINANCE MINISTRY’S TAKE

Jim Mugunga, the finance ministry spokesperson, noted that the ministry understands the importance of the oil and gas sector.

However, he said, when entities apply for a certificate of financial implications, it goes through processes by experts before it is granted.

“Both ministries (finance and energy) have engaged on the subject, and we will communicate as and when the certificate is approved and granted,” he said.