LOCAL CONTENT IS NOT A DONE DEAL, WE NEED TO DO MORE

This year’s “Oil & Gas Convention & 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 are 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 on three in every ten dollars 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.

For starters 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 percent 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 percent 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 required 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 percent of their company free. At best they may give us a carry stake of at most three percent, just to satisfy some local participation requirements.

There are a few things that mitigate against such generosity from investing companies. 

In other countries like Angola, Nigeria and Equatoria Guinea 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 making it less likely that they will entertain freeloaders.

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

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 are these law 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 percent 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, bit what we can chew so that we do not frustrate inward investment but at the same time grow our capacity to take up more of a stake in the industry.

(APRIL 2017)