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Why local content is not a done deal yet

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Added 2nd May 2017 12:09 PM

Protectionism has its role and justification but must be tempered to benefit all stake holders in a sustainable way.

Patrickbitature 703x422

Protectionism has its role and justification but must be tempered to benefit all stake holders in a sustainable way.

OPINION

By Patrick Bitature

This year’s “Oil and Gas Convention and Regional Logistics Expo2017” has just concluded after three days of discussion, exploration and soul searching.

First oil in Uganda is expected by 2020 and this Expo, among other efforts, is targeted at getting our local businessmen ready to take advantage of this historical development. At the risk of sounding like a broken record, the discovery and eventual exploitation of our oil resource is one of those once-in-a-generation events that can transform this nation not only on a macro level but also in our individual lives.

For starters, at least $20b will be spent over the next three years in infrastructure development and other things that will ensure we are ready to pipe and refine our oil. During the exploration phase, about $3b was spent by the international oil companies, with only three in every $10 being retained here.

That was an exploration phase and one hopes that we have learnt enough from that period to be able to retain more of the money that will be spent in coming years. There is a law in place that makes some provision specifically for local content as far as suppliers, employment and training and technological transfer.

The Petroleum (National Content) Regulation 2016 for both the upstream – exploration, development and production and the mid-stream – refining, conversion, transmission and mid-stream storage, were passed last year. Further encouragement will come from evaluation of companies involved in the industry and their commitment to promoting local content.

According to the law, 10% of the evaluation score will depend on this. In the same law, it is provided that in joint ventures between local businessmen and foreigners in the industry the Ugandan partners must control at least 48% of the joint venture equity.

Speaking from my experience in working with foreign companies, while the spirit of this clause was good, it is not very practical in our current circumstances. For example, if a business requiring an equity injection of $2m (sh7.3b) there are very few people with the financial muscle or needed capacity locally to manage a project of that magnitude.

This has negative implications for the sector in that it may frustrate investors and delay exploitation a bit longer.

No one is going to dish out 48% of their company equity for free. At best they may give us a carry stake of at most three to 5%, just to satisfy some local participation requirements and for the benefit of local knowledge.

There are a few things that mitigate against such generosity from investing companies. In other countries like Angola, Nigeria, Gabon, Ghana and Equatorial Guinea, Libya for that matter which have a shore line, evacuating the oil is less costly than it will be for us.

The higher costs cuts down investor margins and make it less likely that they will entertain freeloaders. The reality is, we are entering a pretty competitive market. We are not like Saudi Arabia, Qatar, UAE, Brunei, Russia and Norway.

These countries have huge reserves and have recovered most of the sunkin costs in infrastructure. We are indeed a country gifted to have an economically viable quantity of good quality oil but must not lose sight of the fact that we are landlocked and in the very early stages of developing an oil and gas industry.

Protectionism has its role and justification but must be tempered to benefit all stake holders in a sustainable way and create the much needed jobs for our country.

In South Africa, because of their unique history, more leeway was given to local investors under the Black Economic Empowerment (BEE) programme.

The realistic thing is for our businessmen to look to creating meaningful linkages where they can benefit not only from the returns from the business but also from technology transfer and benchmarking their business processes against best practice.

For me, the key will be how these laws are operationalised by the technocrats and regulators. For instance, already incorporated in the law but a company’s fitness for a contract should be judged on a sliding scale on its commitment to local content promotion.

The more local content a company has in terms of local equity partnership, employment of Ugandans, utilisation of local goods and services and technological transfer, the better chance it will have to win contracts in the industry.

But also in addition, some smaller projects such as waste management and basic logistics should be ring-fenced for local businessmen. However, there should be encouragement for local business to increase their local content participation to the magic 48% over time without impinging on the overall business.

The point is that whereas we have a relatively progressive law on local content, we need to cut our coat according to our cloth, bite what we can chew so that we do not frustrate inward investment but at the same time grow our capacity to take up more stake in the industry.

The writer is an entrepreneur and the chairman of the Private Sector Foundation of Uganda

 

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