Lessons for the rest of Uganda’s economy from the local content rules enforced in our oil sector
THE LAST WORD | Andrew M. Mwenda | For over thirty years now, Uganda government generally and President Yoweri Museveni specifically, have promoted an open-door policy on Foreign Direct Investment. Foreign firms are given freedom to invest in Uganda without regulations.
There is no requirement for local shareholding, no limit on the profits they can repatriate, they can bring in as many expatriate staff as they deem fit, there are no requirements for technology and skills transfer, no minimum wage, etc. Instead, they are given free prime land, tax exemptions and subsidies on utilities like electricity and water.
A large cross section of Uganda’s elites in academia, civil society, mass media and bureaucracy support this overall policy thrust. I have always been suspicious of this extreme because foreign companies have deep pockets, long experience, advanced technology, access to cheap credit, enjoy huge economies of scale, etc.
These advantages allow them to either displace existing local firms (simply because they cannot compete) or they stifle their growth. Consequently, most of the major sectors in Uganda today such as banking, insurance, manufacturing, construction, telecommunications, etc. are controlled by foreign capital.
Museveni has always argued that this foreign control of the economy is not a problem because these firms actually create jobs for Ugandans, pay taxes to government, bring modern technology, capital, skills (both technical and managerial) and open our country to foreign markets.
Yet these benefits must be weighed against the costs. Foreign firms use local labour educated in schools and treated in hospitals at government expense. They use [for free] roads and ports built at government cost, enjoy security environment provided and a justice system paid for by government.
Therefore, if foreign firms do not pay their fair share of taxes, if they do not transfer technology or train local staff, and if their presence displaces or stifles the growth of local firms that can in future grow into our Samsung, Toyota, Nissan, etc, their net contribution to the country may be negative – they take out more than they give.
Recently, I was invited by the Uganda National Oil Company (UNOC) with its partners Total and CNOOC to visit the oil fields. I was greatly impressed by what is happening in the Albertine Graben – I mean the scale of investment taking place: the number of people employed there, the oil production facilities being constructed including an entirely new airport that has been finished in Kabale, near Hoima. Such investments have taken place in African countries without local people benefiting much.
I was therefore keen to know how Ugandans are benefiting in this bonanza. Uganda’s economic reforms of the late 1980s and 1990s were driven largely by Americans and the British at the IMF and the World Bank with their penchant for free market fundamentalism. This explains the extremely liberal approach to economic reform that gave little or no consideration to local participation in the economy.
However, from the beginning of the development of the oil industry, Uganda government got close to the government of Norway. Norwegians believe in a heavy government role in the economy as a regulator. So, they helped Uganda develop a policy framework to regulate investment in oil that emphasized local participation and value retention.
The regulator, Petroleum Authority Uganda (PAU), decided on four pillars of value retention. The first is local content rules. It emphasized that International Oil Companies (IOCs) and their subcontractors must employ Ugandans – unless those skills are not available in the country.
In fact, the ministry of energy working with the donors sponsored many Ugandans to be trained in highly technical skills abroad. They also sponsored local polytechnics to upgrade and get certification to produce skilled and semi-skilled people to work in the oil sector. Today, Ugandans working in the oil sector constitute more than 95% of the workforce.
Beyond employment, PAU has emphasized capacity building. If you are a foreign firm, you are required to train local staff or partners to be able to take over from you and your expatriates. You are also required to subcontract local firms to work with you or enter joint ventures with them and also to transfer technology. This way, PAU is helping promote local enterprise development. Firms are also required to use local goods and services.
Of course, the biggest source of value retention is the revenue the government will get through the fiscal regime. As I have written before, Uganda has some of the best Production Sharing Agreements (PSAs) with IOCs in the world. There are many sectoral linkages between the oil sector and other sectors such as housing, food, medical, professional services etc. International firms also indulge in Corporate Social Responsibility activities, a factor, albeit a small one, that contributes to value retention.
PAU is supposed to ensure optimum recovery of oil. This is because IOCs could choose to recover less oil and make windfalls. PAU also ensures that costs by IOCs are reasonable and specific to oil production. The IOCs must present a work plan and budget for their investment.
PAU keeps an eye on all their costs. Foreign firms, especially Chinese, would prefer to subcontract fellow Chinese firms to do the work. The Chinese have a strategy for Chinese content, a policy promoted by their government in Beijing. For instance, when getting money from the Chinese government, Sinosure, a government sponsored insurance company, have instructions from the government to ensure local content for Chinese.
The difference between Uganda and many other countries especially in Africa, is that Kampala focused on local content. Others were interested in getting their fingers on oil revenue. So, they did little on local content. So, locals got little during the investment phase. Uganda has focused on local content to ensure that a significant share of benefits come to nationals even before oil is produced.
These come in form of employment, contracts to supply goods and services, a good tax regime etc. The law has ring fenced particular sectors to be done by Ugandans only. For non-ring-fenced areas, there is a requirement that priority be given to Ugandans. Then there is a requirement that they enter joint ventures with Ugandan firms.
Uganda’s oil sector shows the things our country lost during its liberal economic reforms. We have banks, telecommunication, construction and other industries where foreigners hold sway and are not required to ensure local retention of value through sub contracts or joint ventures and other local content rules. However, all is not lost since Uganda can now use the lessons from the oil sector to ensure local participation in other sectors.