Why not start a national oil company

By Prof. Semakula Kiwanuka

IN an interview in one of Uganda’s dailies of March 3, Dr. Ezra Suruma, the former minister of finance raised very important issues to which I would like to respond. First of all I would like to persuade myself that the banner head line attributed to Dr. Suruma that the Government cannot be trusted with oil money was a misquote.

He is also quoted to have voiced objections to investing oil money in dams and roads because according to him that would be a donation to foreigners. In this two part article, I argue that the Government can be trusted with the management of oil revenues and to use those revenues to finance infrastructure development.

In this article, I recommend that Ugandas oil revenues should be managed by a national oil company and should be used to build dams to generate electricity and to build transport infrastructures especially roads. It is agreed that abundant supplies of electricity and developed road sectors are major drivers of economic growth, and are magnets for FDI, all of which are necessary to reduce poverty.

On Suruma’s article, let me start with the management of the oil money. He proposed the creation of a permanent fund like the one in Norway and Alaska whereby only the profits would be distributed to the people in the form of pensions. He emphasised that the people would be the owners of the fund and I agree with him.

When he refers to a fund I presume he meant what are commonly known as Sovereign Wealth Funds (SWF). They are the government investment vehicles whose job is to hold, administer and manage public funds and invest them in a wide range of assets. 

Such funds, I must say, are just one model of managing national wealth because they do not have a monopoly. The example of Abu Dhabi shows that in spite of currently having the wealthiest SWF in the world under the name of the Abu Dhabi Investment Authority, (valued at $627b, followed by China with SWF of $567.9 b) the government established an oil company called The Abu Dhabi National Oil Company (ADNOC) which operates in all areas of the oil and gas industry and has broadened its activities by establishing companies and subsidiaries and creating an integrated oil and gas industry.

As a government owned company, ADNOC is supervised by the Supreme Petroleum Council chaired by H.H. Sheikh Khalifa Bin Zayed Al-Nahyan, President of the UAE and Ruler of Abu Dhabi. 

Given the spectacular socio-economic transformation of Abu Dhabi and the country's ability to provide world class physical, social, and financial infrastructures plus super cities and a world class quality of life, the Abu Dhabi government has shown that it can use oil revenues for the benefit of its people.

Uganda can do the same and as a country, Uganda can also learn from other examples, of national oil companies such as of PETROBRAS of Brazil and PETRONAS of Malaysia. Like ADNOC these are successful oil companies which have struck a balance between being state-owned entities and fully fledged commercial organisations.

As state-owned, these companies are responsible for the effective management of the national oil and gas resources for the sustainable development of the nation's petroleum industry. As business entities, they conduct their operations aggressively to compete effectively in the increasingly challenging global business environment.

It is my view that what the government of say, Abu Dhabi and Malaysia have done and achieved can also be done by Uganda. 

Concern that oil revenues can become a cash cow have been expressed. To avoid that kind of development, the sooner appropriate laws are enacted the better. As a finite resource, oil can serve the present and future generations provided there are proper plans for its management and use.

But if not properly handled and used extravagantly, oil will become a curse for the present and future generations. But that need not happen because there are many best practices in other countries Uganda can learn from. They include friendly countries like Malaysia and Abu Dhabi. Urgently important for Uganda is to invest in the oil infrastructure including the building of a refinery which will facilitate the management of this valuable resource.

Equally important is to invest in strategic human resources to build skills which will support the mid and downstream of the oil sector. 

In its quest to enact the most appropriate laws, Uganda should not feel handicapped because it can source technical assistance from the World Bank or from OPEC, or from friendly oil countries such as Ghana, Trinidad and Abu Dhabi, Norway etc. In the same way when it comes to building management capacity especially in the early days, Uganda can source once again from friendly countries to create and effective and competent national oil company.

The sooner such laws are in place and the sooner an oil national company is incorporated the better for the country which has been waiting for too long. Uganda should to take advantage of the current high oil prices.

By proposing the creation of a Sovereign Wealth Fund (SWF), Dr. Suruma probably feared that Uganda's oil wealth can become a cash cow and thereby become a curse for the present and future generations. Nevertheless, I do not believe that it is possible to institute 100% proof against systems.

What is important is to ensure transparency and good governance and capacity building. By insisting on good governance and transparency, the laws so enacted will be observed provided there is political will.

In saying all this, I am not oblivious of Uganda and Africa's human capacity constraints which forced the Blair Commission to conclude that whereas Africa has an abundance of natural resources, it lacks human resource capacities. This is a very serious weakness in Uganda when it comes to the absorption capacity of huge amounts of money to execute big projects especially when big oil revenues will begin to glow.

Weak absorption capacity has been a characteristic of the Ministry of Works and Transport. In spite of years of agitation for big budgets, when the budgets were increased in 2007, the ministry has been unable to absorb all the budgeted funds and build the roads on time.

However, weak absorption capacities and weak governance are not destiny because they can be over come through deliberate government policies of human capacity building especially of strategic skills depending on the sector and its demands.

The Arab oil countries which used to be so exploited by the oil majors of the western governments (called the Seven Sisters) have built competent human capacities in their oil and gas industries. Because I believe that bad management is not destiny, I have no hesitation in entrusting the management of our oil revenues to the Government.

I recommend, therefore, that the Government should urgently enact the necessary laws and incorporate a national oil company vested with powers to own and control the oil and gas resources in Uganda. Such a company should be the custodian of all the oil and gas resources and be run on business principles despite being state owned.

Writer is Uganda’s Ambassador to United Arab Emirates