Uganda Oil and Gas Management Regime Implementation Starts on Wrong Foot

These revenues consist of a capital gains tax and stamp duty arising from the sale of Heritage Oil interests to Tullow Oil, as well as a farm out of Tullow interests to Total and CNOOC.

Uganda’s Public Finance Management Act (PFMA) in 2015 was designed to ensure sound administration of its petroleum revenues. The PFMA set up a Petroleum Fund, into which all revenues from the sector are deposited. But three recent government decisions related to oil and gas development seem to go against the spirit of the PFMA.

Members of parliament and citizens have called out the decisions before production—expected to bring annual revenues of USD 3.3 billion at its peak.

Financing oil and gas road infrastructure

The minister of finance, planning and economic development sought to withdraw UGX 116.6 billion (USD 36.4 million) from the country’s Petroleum Fund to finance road infrastructure in the oil belt. Though an allowed expenditure, the government’s request did not follow PFMA’s Section 58, which stipulates that withdrawals can only be made under authority granted by an appropriation act of parliament and a warrant from the auditor general.

Abdu Katuntu, a member of parliament, urged the government to follow correct procedure for withdrawals from the Petroleum Fund. Parliament rejected the minister’s request for the money.

“At least we have seen a parliament that stands their ground in order to protect the law from being broken in the withdrawals from the Petroleum Fund,” said Gerald Byarugaba, a research fellow at the Advocates Coalition for Development and Environment.

Questions around payments in a complex Heritage Oil arbitration case

The public was then infuriated with a reported decision to award UGX 6 billion (USD 1.9 million) in oil tax money to 42 government officials for their alleged role in a case against Heritage Oil. Details around the payment are the subject of much confusion and dispute, and no one has admitted any wrongdoing. (NRGI experts have written about the issue of taxation on the sale of extractive licenses as well as the complexity of the case.) A payoff, if there was one, would reinforce the public’s skepticism of oil sector governance, often perceived to be unconstitutional and opaque.

In the resulting public uproar, a Supreme Court judge placed an injunction on further debate on the issue. The speaker of parliament then suspended any further parliamentary business until the injunction was dismissed, demonstrating the legislature’s capacity to improve sector governance.

While it is not uncommon to reward officials on merit, using petroleum revenues this way without parliamentary approval would contravene the provisions of Section 59 (3) of the PFMA. It states that petroleum revenue will be used to finance infrastructure and development projects–not for recurrent government expenditure.

Parliament appointed a select committee to assess the propriety of the transactions and make appropriate recommendations. Ugandans await the committee’s recommendations, but there is already a clear need to operationalize penalties for offenses as outlined under Section 79 of the PFMA.

Loan guarantees for the Standard Gauge Railway

More recently, the attorney general announced that the Ministry of Finance, Planning and Economic Development will use oil revenue as a guarantee for the payment of a loan to China’s EXIM Bank for the construction of the Standard Gauge Railway (SGR).

“Nothing prohibits the government from using oil revenues directly as guarantee for the payment of loan for the SGR project,” Uganda’s attorney general was quoted as saying.

Constructing the USD 2.8 billion Uganda section of the SGR, which connects the Kenyan coastal city of Mombasa to the landlocked hinterlands of Uganda, Rwanda, South Sudan and the Democratic Republic of Congo, was a major campaign commitment of the ruling National Resistance Movement Party in last year’s general elections.

This funding scheme contradicts PFMA’s Section 74 (4), which stipulates that any contract, agreement or arrangement that encumbers a financial asset of the Petroleum Fund is null and void. While petroleum revenue was earmarked for infrastructure and development projects, borrowing to finance these projects might leave the government with excessive debt if oil production fails to materialize in 2020 or if the oil price remains lower than expected.

Uganda should learn from Ghana’s experience. Future oil revenue expectations there precipitated a large increase in spending and debt levels, which exacerbated already fragile public finances. The subsequent oil price fall has made repayment of this debt significantly more difficult for Ghana. This highlights the need to consider the wider public finances and to ensure broader budget responsibility as part of any strategy for prudent petroleum revenue management.

Uganda has at least three years to establish foundations for more effective petroleum revenue management. In order to do so, the government of Uganda should:

• Implement the provisions in the PFMA that provide for a robust petroleum revenue management regime and introduce fiscal rules and safeguards on withdrawals and expenditure.
• Ensure oil revenues are used for development and infrastructure projects that generate long-term benefits for both current and future citizens and not recurrent expenditure, such as bonus payments for public civil servants.
• Ensure the regime addresses the need for broader budget responsibility, preventing petroleum revenues from directly or indirectly causing a weakening in wider public finances.