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The paradox of Uganda’s oil curse

 

How our government built and has now almost destroyed the country’s oil industry

THE LAST WORD | ANDREW M. MWENDA | Uganda’s upstream oil industry is dead. Ok, let me admit this is a bit of an exaggeration. It is more appropriate to say it is in a coma and will be very difficult to resuscitate. This conclusion is paradoxical because Uganda has spent years painstakingly building the best and most patriotic institutional and oil policy infrastructure in Africa – and one that meets best international practice. How can an ‘A’ student in institutional and policy design turn into an ‘F’ student in turning such advantage into a viable business?

I had been skeptical of Uganda’s oil, predicting disaster. But this was largely because of my ideological convictions. I believe natural resource windfalls tend to corrupt governments, turning obvious revenue advantages into a curse. How? Governments need money to survive. Money is an important political resource because it allows governments to perform their basic function – the maintenance of law and order.

But money also allows them to deliver public goods and services to their citizens, which buys them legitimacy. Finally, governments use revenues to rent political support (reward loyalists, buy off real and potential opponents) and in non-democracies to train and equip the army and police to coerce those who resist.

When governments rely on the entrepreneurial ingenuity of their citizens to raise money, they are driven by self-interest to govern in a more enlightened fashion. They forge productive relationships with those whose wealth they seek to tax. If they tax them heavily, such enterprising citizens can withhold their productive effort, causing the economy to decline and thereby reducing the revenues collectable. This reduces the ability of government to serve the aforementioned functions that ensure its survival. If governments cannot provide better infrastructure for transport and electricity, economic (and hence revenue) growth is stifled.

Rich mineral resources turn this incentive structure on its head. Here, a government can sit on a hole in the earth, pump large quantities of God’s (or nature’s) bounty – oil or diamonds – and sell it abroad for a handsome profit. It doesn’t have to negotiate with citizens about public policies and political institutions necessary to increase their productivity. Such governments lack the aforesaid enlightened self-interest; economists call them rentier states.

But President Yoweri Museveni personally and his government generally consistently proved me wrong. They made a decision that Uganda would not go the way other oil producing countries in Africa had gone i.e. handed most of the benefits from oil to international oil companies (IOCs) and their local allies. So they negotiated long and hard. Internationally, the average revenue share between IOCs and governments in newly oil producing countries is 48:52 in favour of IOCs. In mature oil producing countries, the average is 70:30 in favour of host governments. In Uganda (please hold your breath) it is 78:22 in favour of our government.

How did this happen? Museveni personally did three critical things, which were fundamental for Uganda’s oil industry. First, he created and/or backed a highly competent team of top civil servants at the Ministry of Energy led by its former permanent secretary, Fred Kabagambe Kalisa, working with Earnest Rubondo, Reuben Kashambuzi, etc.

With donor support, they helped train Ugandan oil industry experts of high caliber. Second, Museveni insulated this team from political pressure, allowing them to do technical work without fearing political wheeler-dealers that clutter his government. Finally, and as a consequence of the first two, they developed a high degree of self-confidence, incorruptibility and patriotism unusual in our bureaucracy.

But these advantages were to become a major handicap when the country began moving from exploration and discovery to production. Here, the president and his team lacked the skills of a businessperson. They feared that IOCs were out to cheat Uganda. This became a chain around their negotiating heads. They saw in every effort by IOCs to limit state demands an effort to cheat the country.

They approached negotiations with a zero-sum attitude i.e. every concession to IOCs is a loss to Uganda and every compromise is surrender to bullying by IOCs. So negotiations had to go Uganda’s way or nothing would work. This destroyed the spirit of give and take that lies at the heart of business negotiations.

9 comments

  1. If then no side wants to lose then nothing will happen. How about the oil simmering underneath? Why can’t the government take heed president magufulis advice. Accept some small loses and forge ahead. Half a bread is better than no bread at all. This scepticism is leading us no where, and we can’t all win at the same time.

    • Biggness Lebowski

      Local investment in tourism is probably more feasible and can be a great employment generator.

      There is too little for a visitor to do. How about a series of guided walking tours within convenient travel distance of Kampala, cannot rely on game parks all the time?

      As for the oil, probably nothing will happen for a couple of years, then the whole project will have to be revisited and downsized, but most likely it will never be produced at all.

      The URA staff panicked when they realized that everyone else was going to be able to steal the oil revenues before they could and imposed all these new taxes to collect their usual ‘bonus’.

      Countries like Uganda and Nigeria are simply too risky for large scale foreign investment.

  2. When Mr. Museveni eventually decides to start production, firewood may have more value than oil.

  3. That was brilliant but the HE as usual failed to balance on regionally ,Our HE thinks only the pipo in the West shd take all the cake. Please read , is Obote victim or vilian

  4. I appreciate M7 fighting for our oil,. But I agree with Mwenda that over protection while nice on paper will be our own undoing. Even western governments sometimes have to give in to corporations. The trick is to let them come in and once they are heavily invested we change the rules

    • ejakait engoraton

      YOU can be a fool or an idiot by design or by default.

      YOU can have eyes and choose not to see, and have ears and choose not to hear.

      WHATEVER it is that one means when they say “our oil” I am inclined to believe that they are a relative of M 7.

      M7 said very clearly, and not just once, that he is NOT anyone’s servant, and that all he does is for HIMSELF and his family. IT was not a rumor or something brought up by the hapless press or the opposition.

      SO when you start to imagine that whatever he is doing is to protect “our oil”, the same oil that he has called “my oil”, the same oil that is making him superglue himself on us, my best advise to you is to make a visit to BUTABIKA or some such institution.

  5. @Ogora:You think oil business is like selling cassava?Once we begin producing oil we shall be required to sign binding agreements with other oil producing nations. Please read about OPEC,International Energy Agency,the Seven Sisters.

    Oil is one of the products that can be classified as oligopoly products;this means there are few producers and they control the market price of their products.

    Laws are meant for clarity; I personally think that Uganda is not in a hurry to process her oil because we simply dont click the dynamics of the oil market;There is a difference between experience and having qualifications.i want to hear of Gaffeny and Cline Associates in Uganda,

  6. ejakait engoraton

    OUR bunch of rulers are just bumbling and clueless 949ots!!!!!!

    I have said it countless number of times, and indeed did warn in one of my posts on this very forum that this is what would happen.

    OIL companies , and indeed most multinationals, for the reason that Wiinnie has mentioned above, OLIGOPOLY, act as a CARTEL and even when they are in competition, they each protect their backs,if you mess one up , you have messed them all and you can not play one off against another.

    MOST of the heads of these corporations went to the same schools, belong to the same clubs and their interests are the same, and most importantly they have VERY DEEP pockets (the corporations) and are also aware of the GREED of our rulers, in addition to knowing most if not all of their dirty secrets.

    A RULER or third world country can not hold a multinational corporation, which most times has also the backing of its own country, to ransom.

    WHAT they WANT, they WILL GET. (end of).

    M7 can dance and do all the gymnastics he wants, at the end of the day he will pander to what the multinationals want.

    THE rulers are left to make all the noise they want, especially if they want to impress their hapless citizens, but the bottom line is you DEAL or you are DOOMED.

  7. What a curse when a country leader can accept a “gift” 🎁 presented to him by his foreign affairs minister and he doesn’t question for which good deed is it for?

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