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Local content rules unclear and impractical, say business analysts

  • SOURCE: | qwesa2big
  • olSections of Uganda’s new Petroleum Act which are meant to maximise oil-related opportunities for Ugandan businesses are hard to interpret and may be impossible to implement in practice, according to business analysts consulted by Oil in Uganda.

    Section 125 (1) of the 2013 Petroleum (Exploration, Development, Production) Act states that:

    “The licensee [an oil company that receives an oil exploration or production licence] its contractors and subcontractors shall give preference to goods which are produced or available in Uganda and services which are rendered by Ugandan citizens  and companies.”

    This looks at first sight like a clear statement of the principle that the oil industry must, wherever possible, buy goods and services in the local market.

    However, Professor Jenik Radon of Columbia University’s School of International and Public Affairs says that “preference” needs to be properly defined.   “If the prices [a Ugandan company charges] are 10% more, does preference have to be given?” he asks.  The section, he says, needs “clarification in terms of comparable quality, comparable prices, etc.”

    Albert Ouma, Director of the Small and Medium Enterprises Division at the Uganda Investment Authority, points out that neither is it clear what the clause means by “Ugandan company.”

    “Is the Ugandan company that which is registered in Uganda or that which is owned by a Ugandan?” he asks.

    Allan Katwere, who is Policy Research Officer with the Uganda National Chamber of Commerce and Industry, underlines the same point.

    He believes the law “makes the erroneous presumption that a company locally registered in Uganda is a ‘Ugandan company’ rather than taking into account the nature of ownership, the actual degree of in-country value addition and the levels of Ugandan participation in the company’s management, ownership and employment.”

    In short, the law appears to leave the door open for foreign companies to register local subsidiaries in Uganda—as the international oil companies have themselves done—and for these  subsidiaries to qualify as “Ugandan companies.”

    ‘48 percent’ clause

    Uncertainty also surrounds Section 125 (2) of the Act, which stipulates:

    “Where the goods and services required by the contractor or licensee are not available in Uganda, they shall be provided by a company which has entered into a joint venture with a Ugandan company provided that the Ugandan company has a share capital of at least forty eight per cent in the joint venture.”

    Bringing Uganda’s oil on-stream requires costly, specialist equipment and services—ranging from conducting seismic surveys to building oil refineries—that no Ugandan company is able to offer at present. This clause appears designed to ensure that Ugandan companies get a share of the profits and gain valuable experience through joint-venture partnerships with international companies.

    However, business analysts suggest this is like a mouse partnering with an elephant.  Ugandan companies, they say, just don’t have the money to buy 48 percent shares in such capital-intensive businesses.

    “When you talk of 48 percent ownership by Ugandans, where will they get the money to invest?” Albert Ouma asks. “This limits many companies.”

    “Not many Ugandan companies can afford to own the 48 percent stake in a foreign company worth say US$1 billion (about Shs 2.55 trillion),” agrees Allan Katwere.

    “Many of these foreign companies are listed companies [on international stock exchanges] so entering such joint ventures would require jumping over complex, exhausting and expensive regulatory hurdles,” he adds.

    These concerns are shared by Rogers Segawa, Managing Director Nexus Uganda limited, a construction company. “The minimum requirements for a joint venture with an international company are beyond Ugandan medium companies like us,” he says.

    Professor Radon agrees with this assessment.  The clause, he says, “is simply not workable across the board.”  He notes that it lacks a legal definition of “joint venture” and adds that the clause appears to “impose a sharing of profit without [the Ugandan partner] necessarily having the competence.”


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